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Southeast Asia enhances economic integration with challenges ahead

KUALA LUMPUR -- The Association of Southeast Asian Nations declared Sunday the establishment of an ASEAN Community as it continues to grapple with different levels of economic development and protectionism as well as territorial disputes with China.

     "We have now raised the bar and the expectations of our peoples," Malaysian Prime Minister Najib Razak told his counterparts at the 27th ASEAN Summit after inking the Kuala Lumpur Declaration to declare the establishment of the community on Dec. 31. The grouping also adopted an ASEAN 2025 roadmap that will chart the course for integration over the next 10 years.

     One of the key pillars of the ASEAN integration initiative is the ASEAN Economic Community, which aims to turn the bloc into a single market and unified production base. So far, ASEAN's 10 member countries have managed to achieve nearly 90% of the 611 measures adopted since 2007, including removing duties and streamlining business procedures. Import duties have been eliminated on almost 96% of all goods traded within the bloc. Companies in some countries have begun implementing a "self-certification" system that gives traders the freedom to declare that their products have met the rules of origin, which will give them preferential treatment.

     The AEC will also allow service sector professionals from the engineering, nursing, accounting, medical and tourism sectors to work freely anywhere within the region. Major airports in ASEAN cities have also set up special lanes for citizens of ASEAN countries to expedite immigration procedures.

     Even so, challenges in the form of non-tariff barriers remain due to national interests and development gaps between the more economically advanced countries of Brunei, Indonesia, Malaysia, the Philippines, Thailand and Singapore, and the less developed ones of Cambodia, Laos, Myanmar and Vietnam. High capital requirements and caps on foreign equity, for example, still discourage regional financial institutions from setting up operations. The current frameworks in place only allow for banks to operate based on reciprocal bilateral arrangements.

     "I am not seeing any signs on the horizon that [the arrangement] is going to change very rapidly," said Piyush Gupta, chief executive of Singapore's DBS Group Holdings, the region's largest lender by assets. Liberalization of the banking sector under the AEC does not commence until 2020, he added.

     Countries that are less competitive in strategic sectors such as telecommunications and banking are less keen to open up.

     "Whether ASEAN does achieve a barrier-free community by 2025 will depend on political will," said Manu Bhaskaran, chief executive of Centennial Asia Advisors in Singapore. "Personally, I think it will be difficult to see a barrier-free ASEAN by 2025."

     The slump in commodities prices and the economic slowdown in China, the region's major trading partner, add further challenges to the AEC.

     "With exports for many countries in deep slump, I think the global headwinds have distracted the focus away from regional integration," said Chua Hak Bin, an economist with Bank of America Merrill Lynch in Singapore. He added that it will be difficult to push for aggressive liberalization with lower trade volume and job growth.

     Chua also observed that companies, such as Malaysia's budget airline AirAsia and Malayan Banking, which tried to capitalize on the AEC by setting up units across the region, have been affected by the current headwinds. "[The] regionalization of local players has fallen short of the aspirations when the AEC was formulated," he said.

     The region is also facing one of the most serious geopolitical challenges in recent times over escalating territorial disputes in the South China Sea. China lays claim to almost the entire sea area, where Brunei, Malaysia, the Philippines and Vietnam have overlapping claims.

     President Benigno Aquino of the Philippines told regional leaders during a Sunday meeting with China's Prime Minister Li Keqiang that Chinese land reclamations in the sea were in "total disregard" of international laws. "The world is watching and expects no less from a responsible global leader," he said, referring to China.

     Observers said ASEAN's policy of non-interference in each other's affairs prevents a collective stance on disputes. "Most political and foreign relations issues will remain as bilateral issues and have to be discussed by the countries concerned," said Wan Saiful Wan Jan, chief executive of the Institute for Democracy and Economic Affairs in Kuala Lumpur.

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