By James Wallar
The Association of South East Asian Nations (ASEAN) will celebrate the creation of the ASEAN Economic Community (AEC) at their November summit. ASEAN has reason to be proud of its accomplishments. Virtually non-existent tariffs, measures to ease trade flows such as the “single window” to streamline border formalities, stronger investment rules, commitments for open services, and new regional transport rules, are among its notable accomplishments.
Still, ASEAN has much more to do to realize its goals of a single market and production base and a competitive region with equitable economic growth that is fully integrated into the global trading system. The U.S. Chamber of Commerce’s recent ASEAN survey reveals that while over 80 percent of respondents believe the AEC is important to their business, only 4 percent (that’s right, four) believe the AEC will be completed this year.
Adhering to the “bicycle theory” of international trade, ascribed to Fred Bergsten, that posits “continued forward motion is essential to avoid falling off,” ASEAN will set new goals in an “ASEAN Community Vision 2025” in November. A glimpse of the new goals appeared in last year’s Naypyitaw Declaration on ASEAN’s Post-2015 Vision. The Declaration’s aspirations, disappointingly, only track those of the current AEC.
Will ASEAN be able to raise the bar to push economic integration further and faster? And do so in a way to seize the attention of businesses and civil society after their disappointment with the shortfall of AEC by the end of 2015? Or will the new plans be a mopping up exercise to do things left undone? Such a tack would surely undermine ASEAN’s credibility.
The following passage in the Naypyitaw declaration leaves room for optimism: ASEAN would seek to “create a deeply integrated and highly cohesive” economy that would “support sustained high economic growth and resilience even in the face of global economic shocks and volatilities.” Vision 2025 is an opportunity for ASEAN to demonstrate that it appreciates the importance of being ambitious. To do so, the ASEAN 2025 Vision should target regionally-driven economic growth and aim for deeper integration through the creation of an ASEAN customs union.
Here is the case for ASEAN to make such a bold move.
Several studies suggest that deep ASEAN integration as envisaged in the AEC Blueprint would spur higher economic growth and create jobs. One of the more recent by the International Labor Organization and the Asian Development Bank (ADB) estimated that the AEC could achieve 7.1 percent higher growth over baseline projections by 2025 and create a net 14 million jobs. With China’s economy faltering, Japan and the EU stagnating, and the United States trying to turn the corner, ASEAN, indeed, should look to itself for growth.
In 2013 Singapore’s finance minister, surveying the dim world economic outlook, called for ASEAN countries to “explore and open up every new opportunity for growth both domestically and regionally.” He listed four priorities, one of which is accelerated ASEAN regional integration, which would help enable his other three priorities of increased investment, higher productivity, and winning competition with China.
Interestingly, the growth theme was taken up by Malaysian prime minister Najib Razak when he greeted ASEAN foreign ministers in early August. Najib cited several studies on ASEAN’s economic potential, quoting that it is “greater than commonly understood.”
Targeting growth could mean doubling ASEAN’s average per capita income from the current $4,130. After all, per capita income has doubled from 2007 to 2014. Several years ago the ADB mentioned a goal of $10,000. This might be out of reach now.
By targeting economic growth goal ASEAN could prioritize integration actions that contribute to increasing economic activity and transparently measure progress. Most importantly, progress toward the goal would help create an ASEAN economy that is less reliant on the rest of the world.
In creating a true economic community, nothing could be more natural than a customs union. A common external tariff and uniform customs procedures would allow goods to flow freely within the AEC. No need for 10 single windows, 10 trade repositories that list each nation’s trade rules, or different 10 different customs and transport regimes. The time and costs saved for business and bureaucrats would be substantial.
To date a customs union has not figured into any official ASEAN document. The obstacles are regarded as insurmountable. How would it be possible to harmonize customs regimes when the range of competencies is so extreme? Harmonizing tariffs would require duty-free Singapore to establish tariffs, and certainly harmonizing at the higher tariffs enjoyed by Cambodia and Laos is out of the question. Then there is the issue of renegotiating tariff rates bound in the World Trade Organization (WTO) and devising a formula to share revenue.
These, fortunately, are technical issues. While important, such issues can and have been overcome in customs unions. The WTO has provisions for re-negotiating tariff bindings. Singapore, while duty free, does impose a general sales tax on imports – a tariff by another name. ASEAN tariffs are generally rather low as member states have open trade regimes. In any event, there will be 10 years to address these issues by 2025. But just announcing the goal would tell the world that ASEAN is kicking it up more than a notch.
Driving economic growth through higher productivity and investment triggered by the deeper integration required of a customs union would benefit the people of ASEAN. It would supply fresh thinking that would energize regional business strategies and keep ASEAN in the center of regional architecture.