ASEAN single market by 2015 highly ambitious

Friday, August 25, 2006Vincent Lingga, The Jakarta Post, Jakarta

 Past experience has taught us to welcome with qualifications the kind of agreement reached by ASEAN economics ministers in Kuala Lumpur on Tuesday. This accord is part of a push for the creation of European Union-style economic integration in the region by 2015, five years ahead of the deadline set in Bali in October 2003.

The 39-year-old Association of Southeast Asian Nations has been notorious for its stop-and-go economic-liberalization policies to create a single market. More than 13 years after the gradual phasing in of the ASEAN Free Trade Area (AFTA), intra-ASEAN trade remains very small, or still less than 35 percent of total foreign trade, due to numerous non-tariff barriers, different product standards and procedural red tape. 

The different stages of development of the 10 ASEAN-member countries have created different sensitivities and caused distrust and all too often, business sense takes a back seat to narrow-minded nationalism.

However, the reason cited by the ASEAN ministers for fast-forwarding to a single market by 2015, instead of the original 2020 schedule, could be strong enough to convince the ASEAN leaders, who will hold their annual summit in the Philippines in December. 

The ASEAN ministers rightly argued that the region would lose out to China and India in the fierce competition to attract foreign capital if the 10 member countries remained fragmented markets with different customs rules and production standards, numerous non-tariff barriers, licensing systems and red tape. 

The challenges from the two emerging economic powerhouses and the collapse last month of the Doha Round of multilateral trade negotiations could make the domestic political climate in the ASEAN countries more conducive to selling the regional economic integration concept.

The ministers also seemed to increasingly realize that the regional grouping will be rendered irrelevant in the current process of economic globalization if ASEAN does not accelerate the development of a single market and eventually full economic integration.

In fact, several members, so fed up with the disappointing pace of the economic integration process in the region, have broken ranks with ASEAN to pursue separate free trade arrangements with other major trading countries. 

Meanwhile, the laggard in the run to economic integration is Indonesia, which is the largest market accounting for 220 million of ASEAN's 560 million people, because its economy is among the least efficient and competitive among member countries. 

In fact, this country has yet to regain foreign investor confidence even after foreign direct investment flows to ASEAN reached the levels before the 1997 economic crisis, at $34 billion last year. The bulk of these investments went to Thailand, Malaysia, Singapore and Vietnam.

The main reason is that Indonesia remains outside the global supply chain because of the extremely slow pace of its economic reforms and its crumbling, basic infrastructure. 

 

The main objective of the single market concept is to develop the ASEAN region into an efficient part of the global supply chain through free trade in goods and services and a liberalized investment climate. Trade and investment are inseparable factors in enhancing specialization and economies of scale based on local competitive advantages. 

The rationale is that foreign investors will be encouraged to establish regional production networks in ASEAN countries if the region has become a reliable part of the global supply chain because better logistics will enable companies to tap local comparative advantages and economies of scale. 

Manufacturers now require an efficient supply-chain management to allow for lower warehousing costs, lean manufacturing, just-in-time delivery because they have to adjust to the changes in the whole demand cycle. Without such advances in logistics and supply capability, regional market integration through subdivision and dispersion of production processes will not be cost-effective. But Indonesia has a lot to do before it develops into a strong component of the global supply chain. This will require efficient transport, expedient and harmonized customs procedures, common production standards, an efficient licensing bureaucracy and easy visa requirements. 

National and international studies have shown that supply chains (logistical arrangements) in Indonesia are still grossly inefficient, as evidenced by the high portion of free-on-board goods.

Indonesia, as the largest market among the six founding member countries, needs to show strong leadership by accelerating its economic reforms so that it can honor its commitments to the ASEAN single market concept. 

Region-wise, if ASEAN is really serious about developing an efficient supply-chain system in the region, the grouping should make concerted efforts to facilitate smooth trade between two ASEAN countries through a third and open up air-cargo services, including express delivery firms.

Above all, ASEAN needs an independent dispute-settlement mechanism. The absence of a mechanism to resolve disputes between members within AFTA's implementation could cause major problems.

The verification of the country-of-origin certificate -- necessary if products with a minimum 40 percent ASEAN content are eligible for tariff cuts -- could become a major source of disputes.

That is because many manufacturing companies in the ASEAN region still depend on design input or components from suppliers outside the region. But manufacturers are still in the dark about how the customs services in member countries will go about ensuring that commodities traded under AFTA properly meet the compulsory ASEAN content rules. 

Even more sensitive for ASEAN, which prefers consensus and avoids confrontation, will be the likely political repercussions of any economic integration. ASEAN leaders asserted during their summit in Bali in October 2003 that economic integration will not lead ASEAN into any political union -- hence there will not be any supranational institution such as the European Commission.

But if goods, services, capital, and businesspeople begin to circulate freely around the region, the line between internal and external affairs will blur and ASEAN countries may have to open up to each other politically as well.