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AEC offers promise and pitfalls for members

The Tsubasa Bridge, paid for by Japan, spans the Mekong River on the outskirts of Phnom Penh.

BANGKOK   The Association of Southeast Asian Nations is due to launch the ASEAN Economic Community on Dec. 31. The decision by ASEAN members to forge the AEC was prompted by two developments: the Asian currency crisis of 1997 and the rise of China and India.

     The project to create the AEC, an economic zone with a population of more than 600 million, dates back to the formation of the ASEAN Free Trade Area, or AFTA, in 1993. After it ceased to be an anti-communist grouping following the end of the Cold War, ASEAN moved to cement its members' ties through economic cooperation and tariff cuts to attract foreign investment.

     Six major ASEAN countries, including Singapore and Thailand, achieved in 2003 the tariff reduction goal set by AFTA. The same year, those six and the four less-developed nations -- Cambodia, Laos, Myanmar and Vietnam -- agreed to create the AEC by creating a common market for trade in goods and services and a regional base for manufacturing. Liberalization of trade in goods has progressed further than in services.

     Intraregional tariffs have been eliminated on 96% of goods. The six major ASEAN economies have virtually abolished tariffs; the four less developed nations are due to eliminate them by 2018. These moves are already affecting manufacturers' business decisions. 

     In Thailand, which is at the center of the Mekong River region, cross-border trade is on the increase. Thailand's total international trade slumped 8% in value terms from a year earlier in the first nine months of 2015. But trade with the four countries that border Thailand -- Malaysia, Cambodia, Laos and Myanmar -- rose 2% to 738.9 billion baht ($20.5 billion). Imports of electronics parts and food, most of which are duty-free, are growing particularly fast. The Thai government plans to set up 10 special economic zones along its borders to further this growth.

     Trade in the region as a whole has also gotten a jolt from the tariff cuts. In 1992, before AFTA was set up, trade among the 10 ASEAN members was 18% of those countries' total trade. By 2014, that figure had risen to 24%, according to the Asian Development Bank. 

     Construction of roads, bridges and other infrastructure is well underway, especially in Indochina. 

     This summer the East-West Economic Corridor, a 1,500km highway that runs from Danang in central Vietnam through Laos and Thailand to Mawlamyine in southeast Myanmar, opened. It takes two weeks to ship goods from Bangkok to Yangon by sea, but the new highway has shortened the trip to just three days.

     Another artery, the 900km Southern Economic Corridor, runs from Ho Chi Minh City through Phnom Penh to Bangkok, with the Japan-funded Tsubasa Bridge spanning the Mekong on the outskirts of Phnom Penh. Those using the ferry are in for a wait; it can take four hours just to board. Other bottlenecks are bureaucratic: Immigration and customs clearance have yet to be deregulated. 

     The increase in merchandise trade has invigorated economies in the region and helped reduce disparities among ASEAN countries. In 1992, the per capita gross domestic product of ASEAN's richest country was 112 times that of the poorest. The gap had been cut in half to 52 times by 2014. While that is still a huge gulf, the Asian Development Bank predicts Asian nations will be more or less lifted out of poverty by 2022, with many joining the ranks of middle-income countries.

     The freeing up of trade in services has been much slower. Although the AEC is trying to liberalize retailing and financial services, along with the movement of skilled workers, little progress has been made. Service industries in the region are largely geared toward domestic markets and many fear cross-border competition could cost jobs.

     And although trade in goods is freer, some protectionist tendencies persist. The tariff on finished cars has been scrapped in the six major ASEAN countries, for example, but Malaysia imposes a lower excise tax on its own "national" cars. 

     "The nontariff measures and liberalization of the services sector remain the challenge to the AEC," said Hak Bin Chua, head of emerging Asia economics at Bank of America Merrill Lynch in Singapore. "A lot of these sectors are treated with sensitivity due to nationalistic sentiments."

     The program aimed at deepening deregulation and economic integration so far has been mostly talk. "An action plan on how to implement specific measures is indispensable," said Hirotoshi Ito, senior economist with the Japan External Trade Organization in Bangkok.

RIVALS OR PARTNERS?   Diplomacy and security also cast a shadow over the AEC. ASEAN members are divided over the growing tensions between the U.S. and China in the South China Sea.

     ASEAN generally falls into three camps over the issue. The Philippines and Vietnam, which claim some or all of the Spratly Islands, resent China's land reclamation and back the U.S. in its warnings to Beijing not to militarize the area. Another group is made up of relatively neutral nations such as Indonesia and Singapore. A third group includes Cambodia and Laos, and is friendlier to China. The ASEAN foreign ministers meeting chaired by Cambodia in 2012 was marred by sharp divisions over the South China Sea and failed to produce a joint statement for the first time in the group's history.

     There are also tensions within ASEAN itself. In 2011, Thai and Cambodian troops clashed along their border, leaving many dead and wounded, including civilians. Indonesia, which held the rotating chairmanship, tried unsuccessfully to mediate between the two countries and the matter was referred to the United Nations Security Council, damaging regional unity. Even among the group's richer members, there are big differences. Singapore and Malaysia have authoritarian impulses, whereas Indonesia is a vibrant democracy. Thailand has been ruled by a military junta since coming to power in a 2014 coup.

     The proliferation of economic partnerships between ASEAN countries and those outside the AEC also complicates matters. The China-led Regional Comprehensive Economic Partnership comprises all 10 ASEAN countries, along with Japan and other Asia-Pacific nations. The Trans-Pacific Partnership, led by the U.S. and Japan, will likely count among its founding members Singapore, Malaysia, Vietnam and Brunei. They may be joined by Indonesia, the Philippines and Thailand. Through these groupings, various countries are vying for leadership in forging a new international trade order.

     And in the wake of the 2008 financial crisis, the debate over liberalization has been stymied as central banks in Japan, the U.S. and Europe have pumped vast amounts of money into markets. That dulled the pain of the crisis, which had been a spur to economic integration. Unlike the tightly integrated European Union, the AEC lacks a legally binding framework to govern the actions of its members. Less developed ASEAN countries are fearful of bigger members and are bracing for new competition by tightening some regulations.

     Manu Bhaskaran, CEO of Centennial Asia Advisors in Singapore, said achieving a "barrier-free community by 2025 will depend on political will." However, that involves more competition and "not every sector in every economy can withstand competition, [and] several of these sectors have political influence, or are sectors which national leaderships want to protect."

    There are proposals to give the ASEAN Secretariat in Jakarta power to jump-start liberalization. The richer countries are to provide the bulk of the funding, but it will take time to bring this about. Less developed members are wary. ASEAN, a religiously and ethnically diverse entity, faces considerable challenges in creating a viable community.

Nikkei staff writers Wataru Yoshida in Singapore, Atsushi Tomiyama in Hanoi, Minoru Satake in Manila, Sadachika Watanabe in Jakarta, CK Tan in Kuala Lumpur, and Hiroshi Kotani and Tamaki Kyozuka in Bangkok contributed to this story.

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