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Visuals from The ABC of AEC: To 2015 and beyond,
Deloitte Southeast Asia Ltd 2014

The unveiling of the Association of Southeast Asian Nations (ASEAN) as an economic community will take place on December 31. When the 10 countries that make up ASEAN join forces as a common market—the ASEAN Economic Community (AEC)—there will be inevitable comparisons to the European Union.

As an integrated regional economy, the member states of the AEC—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam—will comprise the world’s seventh-largest economy.

Chief among the differences, when compared with the EU, is the AEC’s lack of plans for a common currency like the euro.

Though still behind the United States, China, Japan, Germany, France, and the United Kingdom, Southeast Asia presents enormous growth potential with its rapidly expanding consumer class, bustling international trade, youthful demographics, and strategic location at the intersection of China, Japan, and India.

Already ASEAN is referred to as Asia’s third pillar of growth after China and India, with a combined gross domestic product of $2.5 trillion, and intra-regional trade of $1 trillion.

The AEC vision is a single market and production base, where goods can be manufactured and distributed anywhere. Most regional import duties will be abolished, and trading laws will be harmonized. The AEC seeks to facilitate the free flow of goods, services, foreign direct investment, and skilled labor, as well as the “freer flow of capital.”

The dream of economic integration was far off when ASEAN was formed on August 8, 1967. But decades of growth and relative harmony eventually led to talk of eliminating tariffs on goods traded within the region, and a larger vision emerged.

In October 2003, ASEAN committed to the creation of a single market. The AEC Blueprint, setting out specific guidelines and principles, was adopted in 2007.

Despite having economies at vastly different stages of development, as well as distinct cultures, histories, languages, and currencies, the 10 member states of ASEAN are all focused on jobs and prosperity.

“Labor-force expansion and productivity improvements drive GDP growth—and ASEAN is making impressive strides in both areas,” according to a McKinsey & Company report authored by Vinayak HV, Fraser Thompson, and Oliver Tonby.

“Home to more than 600 million people, it has a larger population than the European Union or North America. ASEAN has the third-largest labor force in the world, behind China and India; its youthful population is producing a demographic dividend.”



EU comparisons
Like the EU, the AEC will strive for greater regional ties, connections, and investment. But unlike the EU, the AEC will accommodate the region’s diverse economies and political systems.

There will be no uniform ASEAN marketplace, regional economic policies, or governing authority, said Jayant Menon, an economist with the Asian Development Bank. While the EU has large-scale institutional machinery in Brussels, ASEAN maintains a relatively small secretariat in Jakarta.

Menon credits AEC framers with creating a bold vision. But the next big step, he said, is to increase public awareness, particularly among the business community, which will drive the AEC’s growth.

“The ASEAN economic community is largely about businesses participating in this singular market idea, and all of the surveys conducted so far suggest low awareness, and even lower preparedness,” he said. “Awareness of the AEC, what it is, what it might mean, is extremely low among the member countries.”

That view is backed up by surveys in multiple ASEAN countries, such as one by the Singapore Business Federation released in January that found two out of five companies were completely unaware of the AEC.

But the survey also showed that more businesses are looking for opportunities in Asia—particularly in ASEAN members and China—a finding that bodes well for the AEC’s prospects.

One country in which the private sector is actively preparing for integration is Thailand, where the business community sees the AEC as an opportunity to further strengthen ties with neighboring Cambodia, Myanmar, Vietnam, and Laos, Menon said.

Industries likely to expand at least initially, thanks to the AEC, are sectors in manufacturing, such as electronics, car parts, chemicals, textiles, and clothing. The AEC is to create a single production base, enabling components to seamlessly travel throughout the region cheaply and quickly.

The impact on services such as banking mergers and acquisitions as well as expansion to other ASEAN nations remains to be seen, Menon said.

Multinational companies and investors stand to benefit from the financial savvy and capital of developed economies such as Singapore, and the competitive costs and abundant labor and resources of the less-developed member Asean4countries. With investments in infrastructure and human-capital development, ASEAN may increase its global competitiveness in a wide range of industries.



Progress thus far
The integrated economic region will stand on four pillars, according to the AEC Blueprint: (1) a single market and production base, (2) a highly competitive economic region, (3) a region of equitable economic development, and (4) a region fully integrated into the global economy.

Progress in developing those pillars has been mixed. There have been a number of noteworthy achievements in realizing a single market and production base, particularly in the areas of tariff reduction, trade facilitation and liberalization, and global integration, according to an analysis by Deloitte Southeast Asia.

But work remains to be done on services, non-tariff barriers, capital flow, skilled labor flows, infrastructure, competition policy, and intellectual property rights protection, according to Deloitte.

The ASEAN secretariat reports that more than 80 percent of ASEAN state government goals have been achieved but, by most estimates, the private sector is relatively unprepared for a freer movement of goods, services, capital, and people.

Obstacles to the AEC include economic nationalism and resistance to foreign-owned industries in some member countries, and geopolitical tension linked to maritime disputes in the South China Sea.

Incidents of religious sectarianism from Myanmar to Indonesia have left some observers worrying that tension over faith and identity may undermine tolerance and harmony in the ASEAN community.

Asean3

Still, while it may begin with more whimper than bang, few doubt the possibilities that lie ahead for an ASEAN regional market and production base. Dr. Kazushi Shimizu, a professor at Kyushu University’s Graduate School of Economics, sees the AEC leading to increases in Japanese companies’ trade and investment in ASEAN countries.

For example, Japanese carmakers, including Toyota, Nissan, and Honda, are producing vehicles in ASEAN countries, while auto parts makers including Denso and Aisin are exporting many components to carmakers in ASEAN countries.

The free trade of vehicles and their components will improve Japanese companies’ production networks and overall business, Shimizu said.

“Many Japanese corporations have several factories in the ASEAN region, and they are producing and selling many goods including cars and electronics there,” Shimizu explained. “The region is one of the most important production bases and markets for Japanese corporations.”

According to a Japan External Trade Organization survey, released in December 2014, of the operations of Japanese-affiliated companies, about 60 percent of the respondents said they planned to expand in ASEAN countries.

The companies expressed confidence that the AEC would bring about simplified regulations and procedures concerning customs clearance, as well as other benefits.

US companies remain optimistic about business prospects in the region, as evidenced by a survey carried out by the U.S. Chamber of Commerce and the American Chamber of Commerce in Singapore. Respondents expressed support for ASEAN’s efforts to more closely integrate the economies of its 10 member nations, with 53 percent saying their companies have strategies based on the goals of the AEC.

“This is still a work in progress,” said Jeff Pirie, AEC Agenda Leader for Deloitte Southeast Asia. “Everyone is on a journey here.”

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Tom Benner is a Singapore-based journalist writing for Al Jazeera English and Nikkei Asian Review, among other outlets.

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