The ASEAN Economic Community: a new low-cost production powerhouse

The long-anticipated Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) was officially established this month. A recent HSBC-hosted forum explored the impacts the AEC will have on corporates in ASEAN’s 10 member countries now that it has finally become a reality, as well as implications for global companies

At a time when global trade has decelerated and ASEAN is also undergoing a period of slower growth, greater interaction between its member countries will be a boon for revival, says HSBC ASEAN economist Joseph Incalcaterra. Since the AEC is designed to solve key issues and make ASEAN more competitive, it can have a tangible impact.

One key effect will be a greater flow of capital, as the AEC will enable ASEAN to overcome inefficiencies in terms of investment. It will also accelerate improvements in customs procedures, which lowers transaction costs and can enable ASEAN to compete better against the economic powerhouses of China and India.

Customs improvements can also enable companies to source production from among a variety of countries and set up a production base in a single market, as the AEC brings down barriers and transaction costs.

One continuing challenge is the liberalisation of services, which accounts for the majority of gross domestic product (GDP) in ASEAN. While reduced tariffs on goods will largely be achieved – although there are some exclusion lists – Incalcaterra says that services investment is difficult to liberalise, because it is dependent upon standards rather than tariff barriers.

A further difficulty is that non-tariff barriers are difficult to monitor. “What AEC has done is created bodies to look at non-tariff barriers, and databases to track them. You have seen an increase in recent years. There is a lot to be done for goods and for services. We would like to see more policy efforts to tackle non-tariff barriers.”

While AEC is more than just a blueprint, he believes that its success will ultimately be dependent on political will. “It’s a government undertaking, lowering barriers. It is what each economy does individually to prepare to make the economy more efficient. It is about promoting foreign direct investment [FDI]; 2016 will be a pivotal year.”

It is also important to note that ASEAN leaders pushed backed some “goalposts” to 2025 at their summit last month and worked to temper expectations of the pace of change.

A Vietnamese perspective

HSBC Vietnam’s chief executive (CEO) Hai Pham is very excited about the AEC, pointing out that local businesses will be able to access a broader goods and services market. Since intra-ASEAN trade is only 24% of the region’s total trade – compared with 60% in the EU – the opportunity is huge. The AEC can also improve supply chain integration so that businesses can take advantage of low labour costs and set up production hubs that will enable them to increase exports. There is also significant scope for intra-regional investment.

Along with these opportunities, however, come various challenges. Local businesses in smaller countries lack access to advanced technology and may find it harder to compete. There are also issues such as the openness of the agriculture and automobile sectors, rules of origin requirements, and restrictions that mean ASEAN citizens may only look for work in eight industries, which account for just 1.5% of jobs.

While the AEC still has a long way to go and competition will increase, Pham concludes, its formation really matters and the net result is clearly positive.

An Australian perspective

Looking at the AEC from beyond the ASEAN region, HSBC’s head of commercial banking in Australia, James Hogan, expects the new business community to change the face of intra-ASEAN trade. “In Australia, we think it will do much more than liberalise trade and capital: the AEC will usher in opportunities linked to high-value manufacturing.”

He also foresees the AEC creating opportunities for Australia to extend its relationship beyond infrastructure and agriculture into services. Services really matter, accounting for 73% of Australian GDP and 80% of employment. “Australia’s strength in services is increasing,” says Hogan. “There is massive focus on innovation. From an Australian perspective, we see the next era of growth around healthcare, pharmaceuticals, and areas with innovation such as high-value manufacturing.” The key to success will be for companies to move fast.

While business headlines do tend to be dominated by China and the US, Hogan notes that ASEAN collectively is Australia’s second-largest trading partner and Australia has a strong existing relationship with its 10 members. Additionally, the AEC can be a proxy for companies to expand into India and China.

Next steps

As Pham notes, investors who have seen ASEAN as fragmented will now be more likely to see it as a single bloc with a population of 600m and a collective GDP of US$2.7 trillion. Along with recognition of what the AEC has already accomplished, leaders and policymakers will need to continue working hard so that they can bring the full potential of the new community to fruition.

208 views

Related reading