Challenges in Completing AEC 2015 and RCEP

Negotiations

Chia Siow Yue

Conference on The Establishment of the AEC and

RCEP: Challenges and Opportunities

CIER, Taipei

29 July 2015

The AEC: What is It?

The AEC is the successor to ASEAN’s AFTA, AFAS and AIA. The AEC

Blueprint was formulated in 2007. Completion of AEC was originally set at

2020, later advanced to January 2015 and then delayed to December 2015.

The AEC has the following objectives:

Single market and production base: with free flow of goods, services,

investments and skilled labour, freer flow of capital, priority integration

sectors.

Competitive economic region: with competition policy, consumer

protection, IPR, infrastructure development, taxation, and e-commerce

Equitable economic development: with SME development and Initiative

for ASEAN Integration

Integration into the global economy: with coherent approach towards

external economic relations, and enhanced participation in global supply

networks.

Benefits from the AEC…1

Benefits from liberalisation of trade in goods and services

A single market and production base enables economies of scale and

efficiency in production, boosting ASEAN competitiveness.

Elimination of intra-ASEAN tariffs and NTBs boosts intra-ASEAN

trade, contributes to economic growth and employment, improves

productivity performance, lowers business costs, encourages inflows of

FDI, lowers consumer prices and widens consumer choice.

Improved trade facilitation and transport and communications

connectivity encourage growth of production networks and plug ASEAN

countries into global supply chains

Services liberalisation ---efficient service inputs improves

competitiveness of goods production; services liberalisation lowers costs

and improves quality of consumer services such as education, healthcare,

public sector services

Benefits from the AEC…2

Behind-the-border competition policy, IPR, improve competitiveness

and inclusiveness, reduce business costs and uncertainties

Benefits from liberalisation of investment and skilled labour flows

FDI brings benefits of financial, technological and managerial resources,

participation in regional production networks and global supply chains,

resulting in improved efficiency in production and marketing

Skilled labour mobility essential for effective implementation of services

and FDI liberalisation as well as for deeper economic integration

Benefits of financial and capital market development

More efficient markets to finance trade, investment and corporate

development. ASEAN+3 financial initiatives such as CMIM, ABMD and

AMRO improves regional financial resilience

Welfare Gains of AEC in 2015

US$billion (2004 prices) % of baseline (2004) GDP

Brunei 0.5 7.0

Indonesia 27.6 6.2

Malaysia 5.7 3.0

Philippines 4.5 3.2

Singapore 15.1 9.7

Thailand 12.2 4.9

Cambodia 0.6 6.3

Laos 0.2 3.6

Myanmar 0.6 4.4

Vietnam 2.4 2.8

ASEAN10 69.4 5.3

Source: Plummer-Chia 2009

AEC 2015: Assessing Its Progress

Is the glass half-full or half-empty? The glass as half full: The AEC has come a long way in

ASEAN economic integration, since the tentative steps of the 1977

ASEAN PTA and its progression to AFTA, AFAS and AIA in the 1990s.

and finally to the AEC scheduled for completion by end-2015.

The glass as half empty: The strategic actions and measures outlined in the AEC

Blueprint would not be fully implemented by end-2015. Further, even if these

actions and measures are fully implemented, the AEC will still not have achieved

its objectives.

Assessment of progress Implementation of policies and commitments, that is, process

Utilisation of FTA preferences; implementation of cooperation programs;

ASEAN meetings of leaders, officials and legislators, business and professional

groups, media groups, academics and students

Integration outcomes – intra-ASEAN trade, intra-ASEAN investment, intra-

ASEAN tourism, economic growth and narrowing development gaps

ASEAN: FDI Net Inflow by Source Country

Challenges in Implementing the AEC…1

AEC Scorecard shows the results of implementing the AEC Blueprint and its

schedule of measures Of the 4 AEC pillars, the implementation rate was

highest for integration into the global economy and lowest for single market

and production base

(see next table)

Realising the single market and production base:

Implementing tariff reduction/elimination is generally on track, except

for sensitive agricultural products such as rice and sugar.

Difficulties with removal of NTBs, including problematic customs

procedures, ASEAN single window, standards and TBT.

Cumbersome and uncertain customs decisions and difficulties with rules

of origin have resulted in limited utilisation of ASEAN preferential tariffs

under AFTA and ATIGA.

Difficulties with services liberalisation include carve-outs of sensitive

sectors and limited commitments on Mode 3 (right of establishment) and

Mode 4 (movement of natural persons)

AEC Scorecard 2008-2011

2008-2009 2010-2011 2008-2011

Single market and production base 93.8% 49.1% 65.9%

Competitive economic region 68.7% 67.4% 67.9%

Equitable economic development 100.0% 55.5% 66.7%

Integration into global economy 100.0% 77.8% 85.7%

AEC, all 4 pillars 67.5%

Source: ASEAN Secretariat AEC

Scorecard

Challenges in Implementing the AEC …2

Difficulties with investment liberalisation include large exclusion lists and

caps on foreign ownership

Difficulties with free flow of skilled labour --- MRAs of professionals do

not ensure market access as host countries have constitutional and

regulatory restrictions on inflow and employment of foreign professionals

and skilled workers

Limited progress in realising the competitive economic region:

Country competitiveness still show wide variations, with poor rankings

for CLMV in the WEF’s Global Competitiveness Index

Effective implementation of IPR an uphill task.

Government procurement and curbing monopolies by SOEs not included

Infrastructure development has a long gestation period and massive

investment needs.

Challenges in Implementing the AEC…3

Limited progress in narrowing the development gap

There has been a catch-up in economic growth between CLMV

(particularly Vietnam) and ASEAN6, but the absolute income gap and

other development indicators remain wide. While Vietnam has graduated,

CLM remain as least developed countries.

(see Table )

CLMV countries accorded special and differential treatment in meeting

its economic integration obligations --- longer time frame to implement

commitments; economic and technical cooperation and assistance from

ASEAN and from Dialogue Partners

SME development a long-term process, while various improvements

have been made to the IAI. However, these 2 measures are not enough to

narrow the development gap between and within countries.

Although poverty incidence falling, income inequalities rising within

countries.

Challenges in Implementing the AEC…4

ASEAN has no equivalence of the EU structural/cohesion funds. The

ASEAN Development Fund based on voluntary contributions could be

expanded. ASEAN6 countries could offer more technical and financial

assistance and promote more FDI flows to CLMV.

CLMV must persist with reforms to improve governance, economic

efficiency and attract FDI

Integration into the global economy:

ASEAN has successfully negotiated and implemented various ASEAN+1

FTAs and is negotiating the RCEP

Expansion of production networks and integration into global supply

chains have progressed. The challenge is to integrate the CLMV into

these regional production networks and global supply chains and move

middle-income ASEAN up the global value-chain.

Beyond AEC 2015?...1

Deeper economic integration?

A customs union? This would involve a common external tariff ---not

feasible at present with wide differences in MFN tariff levels among the

ASEAN10; feasible only if ASEAN countries multilateralize their intra-

ASEAN zero tariffs. As ASEAN countries participate in an ever-

widening circle of bilateral, sub-regional and regional FTAs, the

percentage of their trade with zero tariffs will continue to increase

Common market with free flow of labour? Implementation of services

and investment liberalisation would necessitate free flow of professional

and skilled labour across ASEAN. Free flow of low-skilled and

unskilled labour is politically and socially sensitive currently but given

the huge de facto intra-ASEAN low-skilled migration, it would be

necessary to have these flows better managed by ASEAN governments.

More behind-the-border measures? AEC could include government

procurement, competition policy covering SOEs, labour and environment

Beyond AEC 2015?...2

Financial integration? Given the economic and financial development

diversity of ASEAN countries, financial integration leading to a common

currency is not an option in the near future, particularly given the lessons

of the Eurozone. Instead, ASEAN is better served by financial

cooperation in the ASEAN+ framework

Wider economic integration?

More ASEAN+1 FTAs – ongoing negotiations with EU and GCC;

possible with NAFTA and SAFTA.

The ASEAN-centric RCEP:

Eventual convergence of RCEP and TPP to form FTAAP

RCEP Negotiating Challenges…1

RCEP first mooted in Nov 2011 to reconcile the ASEAN+3 and ASEAN+6

proposals for East Asian economic integration. ASEAN has 5 ASEAN+1

FTAs – with China, Japan, South Korea (forming ASEAN+3) and also with

India and Australia-New Zealand (forming ASEAN+6). The RCEP bridges

the two proposals by adopting an open accession scheme. Negotiations

among the 16 countries began in 2013 and scheduled to conclude by end-

2015.

RCEP will contain 49% of world population,30% of world GDP, 29% of

world trade and 26% world FDI inflows.

Goal of RCEP: to achieve a modern and comprehensive trade agreement

covering trade in goods, services, investment, economic and technical

cooperation, and dispute settlement.

RCEP Negotiating Challenges…2

Benefits of RCEP for ASEAN: could help regionalise production networks in Asia. It could harmonise rules and

regulations across the multiple and overlapping FTAs in the region and minimise

the noodle bowl effect; rules of origin could be rationalised and made more

flexible, and be better administered through electronic means.

will promote easier FDI flows and technology transfers by MNCs.

Challenges in negotiation: Wide differences in development stages among negotiating countries: Less

developed countries concerned over the social costs arising from structural

adjustments and the risks of falling into a low-wage trap, where there is little

incentive for domestic industries to move up the value chain. To address this

issue, RCEP would include a flexibility principle and provide special and

differential treatment to less developed ASEAN members.

As RCEP is expected to consolidate the various ASEAN+1 FTAs, a big

challenge is agreeing on a common template. Among the ASEAN+1 FTAs,

ASEAN-India FTA has the most restrictive features

RCEP Negotiating Challenges…3

RCEP will need to improve its coverage of new trade issues such as competition

policy, environment and labour standards. These problems are increasingly being

addressed by the most comprehensive trade agreements in Asia and

internationally.

RCEP and TPP are competing for dominance of Asia-Pacific regionalism. The

RCEP is an ASEAN-led initiative while the TPP is a US-led initiative. There is

need for ASEAN centrality in RCEP negotiations. The rivalry between China and

Japan and issues on the South China Sea are divisive for RCEP. And competition

between RCEP and TPP could be divisive for ASEAN. TPP is scheduled to

complete negotiations in 2015. Can RCEP do likewise?

.

END OF PRESENTATION

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