The ASEAN Economic Community - on the cusp of integration
The long journey to economic integration of the Association of South East Asian Nations (ASEAN) will reach an important milestone by the end of 2015 with the establishment of the ASEAN Economic Community (AEC).
ASEAN is a market of 600 million people with a combined GDP of almost US$3 trillion. The ten countries it comprises plan to launch a single market - the ASEAN Economic Community (AEC) - for goods, services, capital and labour by the end of this year. It has the potential to be one of the largest economies and markets in the world.
The road to integration
The blueprint for the AEC was adopted in 2007 as a roadmap towards achieving a free flow of goods, services, investments and skilled people within the region by 2015. The AEC is essentially built on the following four pillars:
1. A single market and production base
2. A competitive economic region
3. Equitable economic development
4. Integration with the global economy
The single market
Significant progress has been made on the first pillar. Tariffs have been substantially reduced, with more than 70% of intra-regional trade in ASEAN enjoying zero tariffs and less than 5% of goods trade being subjected to tariffs of more than 10%. These developments will encourage intra-ASEAN trade in manufacturing and agricultural goods. In terms of trade facilitation, the five original member states of ASEAN are already implementing national 'single windows', with planned full rollout to all significant ports and airports by the end of 2015.
As for investment liberalisation, the original ASEAN member states are near to achieving international best practices, with the newer members expected to play catch-up.
On the services liberalisation front, mutual recognition agreements or their equivalent have been agreed for three types of goods and seven professions, and a 'framework agreement' has been concluded. Separately, the formation of the ASEAN Exchanges collaboration between the ASEAN-5 countries (Indonesia, Malaysia, the Philippines, Singapore and Thailand - the biggest economies in South East Asia) and Vietnam, as well as the launch of the ASEAN Trading Link in 2012, which linked up the three major stock exchanges of Singapore, Malaysia and Thailand, are significant steps aimed at promoting a freer flow of capital across the region.
Competition and economic development
On the second and third pillars of the AEC, progress has been made towards the strengthening of regional intellectual property institutions, enhancements of the region's transport connectivity and energy security as well as actions centred on promoting the development of regional small and medium-sized enterprises (SMEs).
Integration with the global economy
The fourth pillar is also progressing well. ASEAN has, in effect, emerged as a hub for Free Trade Agreement (FTA) activity in Asia, playing a leading role in the negotiation of trade rules connecting Asia. ASEAN countries, for instance, are part of negotiations on the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP), a comprehensive network of multilateral FTAs with the largest economies in the world.
All in all, more than 90% of the key deliverables targeted for completion by 2015 have been implemented. This is an impressive achievement that underlines the deep commitment among ASEAN's member states towards regional integration.
Despite these achievements there are a number of shortfalls and the pace of integration could be faster.
While tariffs may have been largely reduced, many non-tariff barriers to trade remain and indeed have been rising in the largest ASEAN economies since the global financial crisis. For instance, from 2009 to 2013, a total of 186 non-tariff barriers were implemented by the larger economies.
It is estimated that only 50% of businesses in ASEAN have taken advantage of tariff reductions under the regional FTA, as governments have not been active enough in encouraging the private sector to do so.
In addition, trade in services remains hobbled by several restrictions in most member countries. While progress has been made with the signing of mutual recognition agreements in seven professions, the political will for implementation of the trade in service agreements is much weaker. This is partly due to active lobbying against such measures.
But the biggest hurdle may well be the slow pace of financial integration. Despite the substantial progress that has been made towards economic integration, the pace of financial integration has, in the words of the Monetary Authority of Singapore's Managing Director Ravi Menon, "lagged behind trade integration". This is somewhat disappointing, given that the "key to higher growth lies in both economic and financial integration". Having said that, policymakers acknowledge that the slower pace of financial integration is deliberate in some ways, given that financial integration is more complex than trade integration and that the financial systems of member countries are at different stages of development and sophistication.
The implications for regional tax competitiveness
While the AEC blueprint does not provide for the co-ordination or harmonisation of tax policies, there are action points to enhance the withholding tax structure to promote the broadening of the investor base in ASEAN debt issuance. It also looks to complete the network of bilateral agreements on avoidance of double taxation among all member countries. With an ASEAN single market in goods and services, taxation inevitably becomes an attractive policy tool that is still available for national governments to compete for investment. As it stands, ASEAN member countries have corporate rates of taxation ranging from 17% in Singapore to 30% in the Philippines. The push for integration could spur a reduction of corporate tax rates in the region, resulting in a greater convergence towards more competitive rates closer to 20% in the near future.
Although that remains a distinct possibility, member countries will continue to monitor and improve their tax competitiveness through more conventional policies centred on long term tax holidays, specific tax incentives, easing of burdensome administrative requirements and by concluding international treaties for the avoidance of double taxation.
This is only the beginning
As the 2015 deadline looms, it is worth noting that the AEC will not be the end of ASEAN's integration efforts. Apart from meeting the remaining targets, bigger challenges over the year ahead lie in amending national laws and constitutions to allow the AEC to take effect. Enforcing the AEC will also be a key challenge if it is to achieve the goal of creating a single common market that promotes the free flow of goods, services, capital and labour. In many ways, 2015 may ironically mark the real beginning of this great sojourn on which ASEAN has embarked.
For more information, contact:
Lam Fong Kiew
Nexia TS, Singapore
T: +65 6534 5700