ASEAN Economic Integration

ASEAN Economic Integration

Outlines: History of International Trade Policy Regional Integration vs. Multilateralism Economic Integration Regional Integration ASEAN: Benefits/Costs Conclusion

I: Brief History of International Trade Policy Trade Act of 1974 also laid the groundwork for the Tokyo Round of GATT talks (1974 1979). Resulted in 30% reduction in tariffs of major industrialized economies. New policy: U.S. (and others) could reach agreements (called Codes) accepted by only a subset of GATT countries. Tokyo Round left several unresolved issues: Developed-country barriers against developing-country exports. Mutually acceptable interpretations of safeguard provisions. Conflict resolution mechanisms.

Brief History of International Trade Policy Trade Policy in 1980s and 1990s Trade and Tariff Act of 1984 Gave the president authority to negotiate bilateral trade treaties. Uruguay Round Agreements Act (GATT talks) Began 1986 approved 1994 Major results: Agricultural: reduced export subsidies; required tariffication of existing nontariff barriers; reduced existing tariffs an average of 36%; provided for minimum access for new entrants into previously-closed foreign markets.

Regional Integration vs. Multilateralism WTO Promote trade liberalization through worldwide agreements Trade liberalization by any one nation Extended to all WTO members, 153 nations Nondiscriminatory Regional trading arrangements Nations reduce trade barriers only for a small group of partner nations Discriminating against the rest of the world 5

Regional Integration vs. Multilateralism Regional block stumbling blocs to multilateralism Members not greatly interested in worldwide liberalization May not realize additional economies of scale from global trade liberalization May want to invest their time and energy in establishing strong regional linkages Rather than investing them in global negotiations 6

Regional Integration vs. Multilateralism Regional block building blocks to global free trade and investment When structured according to principles of openness and inclusiveness May achieve deeper economic interdependence among members Greater commonality of interests Simpler negotiating processes 7

Regional Integration vs. Multilateralism Regional block building blocks to global free trade and investment Self-reinforcing process Encourages the partial adjustment of workers Out of import-competing industries in which the nation s comparative disadvantage is strong Into exporting industries in which its comparative advantage is strong 8

Brief History of International Trade Policy More results of GATT: Textiles: bilateral quotas of MFA must be removed at end of 10 years; quotas probably will be replaced by high tariffs. Complete elimination of tariffs in several important sectors by industrial countries. Clarified distinction between acceptable and unacceptable subsidies. Strengthened enforcement of intellectual property rights. Established WTO Member countries must now subscribe to all rules and responsibilities.

III: Economic Integration Formation of countries into groups (EU, NAFTA) Five types or stages of economic integration shown in Figure 1 (increasing degree of unification): 1. Preferential trading arrangement (PTA) Member countries agree to erect lower barriers to trade within the group than to trade with nonmember countries (Figure 9.3). 2. Free trade area Involves eliminating barriers to intra-group trade while allowing each country to maintain its own nationally determined barriers to trade with nonmembers.

Economic Integration 3. Customs union Intra-group trade faces no barriers and members maintain a common external tariff (CET) on trade with nonmembers. 4. Common market Extends free trade among members to factors of production (labor migration and capital flows), as well as to goods and services. 5. Economic union Most extensive form of economic integration. Means common, group-determined economic policies, as well as a common currency.

Reduction of intra-group tariffs Removal of intragroup tariffs Common external tariff Intra-group capital and labor mobility Common economic policies and common currency Figure 1: Levels of Economic Integration Preferential trading arrangement Free-trade area Customs union Common market Economic union

Free trade. Tariffs (a tax imposed on imported goods) between member countries are abolished or significantly reduced. Each member country keeps its own tariffs in regard to third countries Custom union. Sets common external tariffs among member countries, implying that the same tariffs are applied to third countries. Common market. Factors of production, such a labor and capital, are free to move within

Economic union. Monetary and fiscal policies between member countries are harmonized, which implies a level of political integration. A further step concerns a monetary union where a common currency is used, such as with the European Union (Euro). Political union. Represents the potentially most advanced form of integration with a common government and were the sovereignty of member country is significantly reduced. Only found within nation states, such as federations where there is a central government and regions having a level of autonomy.

Source: Aid for Trade Database Organization for Economic Co-operation and Development; IMF Direction of Trade Statistics 2011; Fragile states--adb (2012) Working Differently in Fragile and Conflict Affected Situations: The ADB Experience; Landlocked, LDCs and SIDS--UN-OHRLLS.

Types of Regional Trading Economic integration Arrangements Process of eliminating restrictions on international trade, payments, and factor mobility Results in the uniting of two or more national economies in a regional trading arrangement 18

Types of Regional Trading Arrangements Free-trade area Association of trading nations Members agree to remove all tariff and nontariff barriers among themselves Each member maintains its own set of trade restrictions against outsiders North American Free Trade Agreement (NAFTA) Canada, Mexico, and the United States 19

Types of Regional Trading Arrangements Customs union Agreement among two or more trading partners To remove all tariff and nontariff trade barriers between themselves Each member nation imposes identical trade restrictions against nonparticipants Benelux Belgium, the Netherlands, and Luxembourg 20

Types of Regional Trading Arrangements Common market Group of trading nations Free movement of goods and services among member nations Initiation of common external trade restrictions against nonmembers Free movement of factors of production across national borders within the economic bloc European Union (EU), 1992 21

Types of Regional Trading Arrangements Economic union National, social, taxation, and fiscal policies are harmonized and administered by a supranational institution Requires an agreement to transfer economic sovereignty to a supranational authority 22

Types of Regional Trading Arrangements Monetary union Ultimate degree of economic union Unification of national monetary policies Acceptance of a common currency administered by a supranational monetary authority 23

Types of Regional Trading Arrangements The United States - Monetary union Fifty states with a common currency Federal Reserve Single central bank for the nation Free trade among the states Labor and capital move freely 24

Types of Regional Trading Arrangements The United States - Monetary union Federal government Nation s fiscal policy National defense Retirement and health programs International affairs States can keep their identity within the union Police protection and education 25

Impetus for Regionalism Motivations for regional trading arrangements Prospect of enhanced economic growth Economies of large-scale production Foster specialization and learning-by-doing Attract foreign investment Foster a variety of noneconomic objectives Managing immigration flows Promoting regional security Enhance & solidify domestic economic reforms 26

Effects of a Regional Trading Arrangement Static effects of economic integration On productive efficiency And consumer welfare Dynamic effects of economic integration Relate to long-term rates of growth 27

Effects of a Regional Trading Arrangement Static effects Trade-diversion effect Welfare loss Imports from a low-cost supplier outside the union Are replaced by purchases from a higher-cost supplier within the union 28

IV: ASEAN History of ASEAN ASEAN Community and Regionalism ASEAN Economic Integration FUNDAMENTALS OF AEC 2015 ASEAN IN THE GLOBAL PICTURE Benefits/Costs Conclusion

INTRODUCTION After the World War II most of the developing countries adopted the State-led development where the state planned and managed economic development, allocation of resources, production of goods and services for public and private consumption. In mid 1980 s many developing countries are undertaking structural reforms aimed at encouraging private sectors to play a greater role in economic arena. Many economic policies aimed to strengthen market forces and increase competition

The Association of Southeast Asian Nations (ASEAN) is the largest and oldest organization of its kind in Asia, it was formed on August 8, 1967 by Indonesia, Malaysia, Philippines, Singapore and Thailand, when the foreign ministers of the five countries met at the Thai Department of Foreign Affairs building in Bangkok and signed the ASEAN Declaration, more commonly known as the Bangkok Declaration Its aims include the acceleration of economic growth, social progress and cultural development among its members, and the promotion of regional peace and stability by abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter

The regional bloc grew when another five Asian Countries (Brunei, Cambodia, Laos, Myanmar and Vietnam) joined At the height of the global economic crisis, in December 1997, the ASEAN leaders had spelled out their vision of an integrated ASEAN economy in the first two decades of the new century.

Which make it imperative for Asian countries to work together to forge effective and efficient Economic cooperation and integration became the key pillar of the entire region s future development. The need to move toward a stronger marketdriven and export oriented strategies has intensified. The spheres of economic influence regionally and globally are shifting. China is now expected to become the world s third largest economy.

Nature of ASEAN as Regional Bloc The ASEAN leaders emphasize friendship, understanding, consensus, and non-intervention to promote regional peace and stability. Consultations and consensus are the most enduring features of ASEAN The leaders emphasized that the successful building of an ASEAN Community that is truly people-oriented by 2015 requires the cooperation and contribution of all sectors of ASEAN society and the participation of ASEAN peoples in all aspects of community-building

ASEAN Significant Milestone ASEAN Charter is a constitution for the ASEAN, which will guide the construction of the ASEAN Community Roadmap for the ASEAN Community -

From Economic Cooperation To Economic Integration The ASEAN Vision 2020 statement declared that The ASEAN Economic Community shall establish ASEAN as single market and production base This the large evolution step that ASEAN has taken as it now progressed to the most extensive goal, the creation of a single market

Economic Cooperation is a preferential treatment that aims to reduce tariffs and commercial barriers among its member countries Economic Integration Removal of some measures that discriminates against foreign suppliers of goods and services. Economies of its member nation is completely integrated. Which means establishment of a single market

2015 WHO? Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam WHAT? Single market and production base with the free movement of goods, services, investment, skilled labor and the freer flow of capital WHY? Increase competitiveness, narrow development gaps and improve resilience against external shocks

1977 1993 1996 1997 1998 2001 2003 2007 2008 2009 NAFTA/EEC The Evolution of ASEAN Tom Yum Kung crisis Regional conflicts Spread of communism China s WTO accession ASEAN ASEAN 1967 Community 2015 PTA AFTA AFAS ASEAN CHARTER ASEAN VISION 2020 AIA BALI CONCORD II Cebu Declaration on ASEAN Charter To achieve ASEAN Community by 2015 AEC 2015 in full steam: ATIGA AFAS 70% Equity Participation ACIA 39

ASEAN regionalism 1976 Bali Concord I formally adopted political co-operation as part of ASEAN regular activities 1992 ASEAN Free Trade Agreement 1997/98 economic crisis acceleration of economic integration initiatives ASEAN Vision 2020 2003 - Bali Concord II the launch of ASEAN Community by 2020 2005 the launch of ASEAN Charter process 2006/07 the acceleration of ASEAN Community to 2015 2007 ASEAN Charter drafting and the ASEAN Economic Community Blueprint 2008 ASEAN Charter ratification 2009 ASEAN Political Community and Socio-Cultural Community Blueprints

ASEAN Community ASEAN Political-Security Community peaceful processes in the settlement of intra-regional differences and it has the following components: political development, shaping and sharing of norms, conflict prevention, conflict resolution, post-conflict peace building, and implementing mechanisms ASEAN Economic Community - creating a stable, prosperous and highly competitive ASEAN economic region in which there is a free flow of goods, services, investment and a freer flow of capital, equitable economic development and reduced poverty and socio-economic disparities in year 2020; ASEAN Socio-Cultural Community - envisages a community of caring societies and founded on a common regional identity, with cooperation focused on social development aimed at raising the standard of living of disadvantaged groups and the rural population, and shall seek the active involvement of all sectors of society, in particular women, youth, and local communities

POLITICAL SECURITY Blueprint Rules based, shared norms and values Cohesive, peaceful, stable, resilient with shared responsibility Dynamic and Outward looking ASEAN Community ECONOMIC Blueprint Single Market and production base Competitive economic region Equitable Economic development Integration into global economy SOCIO- CULTURAL Blueprint Human Development Social Welfare and Protection Social justice and rights Environmental Sustainability ASEAN Identity ASEAN Charter - One Vision, One Identity, One Caring and Sharing Community

Three Blueprints Three integral pillars of the ASEAN Vision 2015: AEC, ASC, ASCC (work in tandem) Clear targets and timelines for implementation Pre-agreed flexibilities to accommodate the interests of all ASEAN Member Binding General Content Policy/Goals; technical, Action plan, Review mechanism Critics: No participation, even secretive process All about governments (does not address corruption and repression) Whose community is ASEAN?

ASEAN Economic Blueprints a single market and production base, a highly competitive economic region, a region of equitable economic development, and a region fully integrated into the global economy Priority Integration Sectors: agro-based products; air travel; automotives; e-asean; electronics; fisheries; healthcare; rubber-based products; textiles and apparels; tourism; wood-based products; and logistics (additional sector as may be identified by the Ministers after the agreement)

Liberalization Economic Blueprint: critics Only protects end-users (consumers) What about sustainability? Environment and livelihood Disregards existing bilateral economic agreements No detail on how the region acts as a whole

Socio-Cultural Blueprints promotion of human development and security narrowing the development gap ensuring environmental sustainability building an ASEAN identity Wide coverage of issues: Poverty, Health, Disaster Management, Education, Food security, Social impact of integration, Environmental sustainability, Migrant labor, Women and children s rights, Science and Technology

Socio-cultural: Critics Social justice vs. social protection; systemic vs. symptomatic Systemic solutions to address social injustice: problems of access, conflicting interests with commercial/industrial interests Participation should not be limited to this sphere. Diversity and identity of peoples within member countries

Political Security Blueprints Framework is based on political and security cooperation where countries live at peace with one another, and the ASEAN, with the world at large. Principles are non-interference, consensus, national and regional resilience, and respect for sovereignty. Elements of the Blueprint: political development, shaping and sharing of norms on counter terrorism and nuclear free zones, inter-state conflict prevention and post-conflict peace-building; combating terrorism

Political Security: Critics State-centric in perspective (national security) Existing internal conflicts should be addressed: over resources, over self-determination/identity Governments (policies) are sources of conflict Does not provide for political participation and representation of civil society No reference to international human rights standards>adherence to international standards and principles No dispute mechanism on internal conflicts, intra-state conflicts, separatism. No recognition of internally displaced people (IDPs) Cultural diversity is not addressed >recognition of diversities in ethnicity and religion, and of marginalization Strengthen and monitor existing regional instruments on migrants, women, children, and CSO and public participation in processes Promote regional civilian peacekeeping forces

VISION OF AEC

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WHO? 2015 Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam WHAT? Single market and production base with the free movement of goods, services, investment, skilled labor and the freer flow of capital WHY? Increase competitiveness, narrow development gaps and improve resilience against external shocks

Why is it happening?

A success story of ASEAN Southeast Asia has been one of the most successful economic groupings of recent times. As a bloc, it has seen its real Gross Domestic Product (GDP) increase ten-fold over the last five decades If it were a nation, it would be the 7th largest economy in the world1 with a combined GDP of US$ 2.4 trillion2. In 2013, inbound Foreign Direct Investment (FDI) for the ASEAN-5 was greater than that flowing into China3.

AEC The AEC aims to transform the economies of ASEAN s 10 member states - Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam into a single market and production base. the AEC translates diversity (often hailed as ASEAN s weakness) as a strength. With integration, ASEAN s variety becomes attractive to global investors, combining as it does the capital and skills of its more economically mature member countries (such as Singapore) with the competitive costs and abundant labour and resources of its developing ones (such as Myanmar). Integration should be interpreted to mean connectedness both within and outside the region.

the AEC translates diversity (often hailed as ASEAN s weakness) as a strength. With integration, ASEAN s variety becomes attractive to global investors, combining as it does the capital and skills of its more economically mature member countries (such as Singapore) with the competitive costs and abundant labour and resources of its developing ones (such as Myanmar). Integration should be interpreted to mean connectedness both within and outside the region.

The potential gains from implementing the AEC are enormous. Move Southeast Asia on to a higher and more sustainable growth path. Reduce vulnerability and volatility. Leveraging diversity through integration and reduce development gaps that exist both within and between member states

AEC Growth The world s seventh largest market, home to 10% of the world s population, Asean is expected to grow 5% each year by 2018, surpassing the US, EU and Japan. But the scope of each individual country in the bloc varies wildly, prompting scepticism that a single market can be successfully created by the end of the year.

Asean is not likely to suffer the same debt concerns as the EU, primarily because the bloc has never planned to adopt a single currency or parliament.

Cost or Benefit? The business community wants Asean to be integrated as one entity due to there are border issues, customs, immigration and different regulations.

ASEAN Member

In this January 2013 photo, preparatory students sit for a university admissions test at the University of Tokyo. Singapore has ranked at the top of the 300 best universities in Asia, according to a new poll.

AEC 2015

Establishing the ASEAN+6 free trade area: Boon or bane? 1 June 2013 The formation of ASEAN+6 free trade area is likely to consolidate the rising bilateral agreements in East Asia and bring about intraregional trade gains. The potential trade-creating effects of tariff elimination are likely to be substantial because intraregional trade flows are large and some countries still maintain high tariff rates (Figure 1). A simple simulation analysis lends support to higher intraregional trade gains with complete elimination of tariffs (Figure 2). That said, while some countries report an improvement in the trade balance, others show deterioration.

Source: UN Comtrade, 2013. Note: CLMV includes Cambodia, Lao PDR, Myanmar, and Viet Nam. ASEAN-5 is composed of Brunei, Thailand, Malaysia, Indonesia, and the Philippines.

World Populaton

Labor in ASEAN

What Does The Rise of Manufacturing in ASEAN Mean for Multinationals? The major reasons for this drive in investments can be summarized through the ASEAN s four C s: Consumption (growth), Cost (low), Commodities (abundant), and Community (single ASEAN trade bloc)

Assess the Direct Impact of the Rise of Manufacturing Serving the market: As costs rise elsewhere and the addressable market becomes larger in ASEAN, companies should explore the viability of moving production to the region using a total factor performance analysis. It is important to make sure that the analysis looks beyond the simple math of labor-cost and considers total factor performance (labor, transport, leadership, material, components, energy, and capital) Business customers (B2B) movement: Companies serving other manufacturing and production types of businesses should be assessing what types of industries are likely to invest heavily into Southeast Asia and which are not likely to consider moving beyond China

Rising Competition from ASEANbased Corporations

Under the Radar Companies from ASEAN often do not receive much attention from Western analysts who instead focus on China and India. However, ASEAN firms are a force to be reckoned with; keeping pace with the region s growth, the number of ASEAN companies on Forbes list of Global 2000 companies has more than doubled in the past seven years. Moreover, ASEAN has more companies on the Forbes

7 Things You Should Know About ASEAN

1. Together, ASEAN s ten member states form an economic powerhouse. 2. ASEAN is not a single market. 3. Macroeconomic stability has provided a platform for growth. 4. ASEAN is a growing hub of consumer demand. 5. ASEAN is well positioned in global trade flows. 6. Intraregional trade could significantly deepen with implementation of the ASEAN Economic Community, but there are hurdles. 7. ASEAN is home to many globally competitive companies.

ASEAN is one of the largest economic zones in the world; growth has been rapid and relatively stable since 2000.

SWOT Analysis

Strenth

FDI INCREASES

Production networks that once focused on cities such as Shenzhen and Guangzhou could, over the next decade, encompass locations as diverse as Mandalay, Jakarta and Phnom Penh. With the balance of China s maturing economy shifting from exports to domestic consumption, the country s era of lowcost manufacturing is drawing to a close the rise in production costs in China s traditional manufacturing centres. Thanks to increasing urbanisation, skewed demographics and deliberate government policy, the country s once seemingly limitless supply of cheap labour is now a thing of the past.

Who gain? Chinese and foreign companies are already moving their low-cost manufacturing operations to countries such as Vietnam and Cambodia, other South-East Asian countries with low manufacturing wages are likely to benefit from this trend over the medium term, including Indonesia, the Philippines, and eventually even Myanmar.

Chinese manufacturing wages, which have risen annually by more than 10 per cent for the past few years, are already significantly higher than those in Thailand, Indonesia and Vietnam. Workers wages in Ho Chi Minh City, for example, averaged US$148 a month in 2012, a third of the average figure in Guangzhou

Indian carmaker Tata Motors is also set to establish Indonesia as its manufacturing and distribution base for South-East Asia, localising assembly and at least 40 per cent of component production. While many ASEAN countries can now outcompete China on labour costs, it is those that can leverage strong infrastructure and supply chain networks that will be the main beneficiaries of China s move out of low-end manufacturing. Cambodia and Vietnam will continue to attract investment in the textile, garment and light machinery industries (garment manufacturing accounted for 85 per cent of Cambodia s exports in 2010), while Indonesia is steadily emerging as a manufacturing destination for consumer products. Taiwan s Foxconn Technology Group, the major supplier of Apple s iphones and ipads, has recently announced a decision to switch its low-end manufacturing from China to Indonesia.

Weakness: W

Threats: T

Richer Asean Nations Resist Opening Doors to Migrant Workers The disparities in income levels and economic development within Southeast Asia highlight the challenges facing the Association of Southeast Asian Nations as they try to tie their economies closer together by the end of 2015. But the differences between countries within the bloc ranging from Myanmar, a former pariah state with per capita gross domestic product of about $1,325, to the modern financial hub of Singapore, where that number is nearly $60,000 as well as recent border conflicts are making the richer Asean nations reluctant to throw open their borders

As China's working-age population begins to contract, Southeast Asia's relatively young demographic is drawing growing investment to the region Migrant labor is also a sensitive political issue in Singapore, where citizens complain that some 1.2 million foreigners more than onethird of the workforce are driving up housing and transportation costs.

domestic political pressures are working against integration. Moves so far have been little more than baby steps aimed almost exclusively at white-collar professionals, with richer Asean members fearing an influx of low-skilled migrant workers that could drag down wages and strain infrastructure.

T In Thailand, a shortage of low-skilled labor means nearly one million migrant workers from Laos, Cambodia and Myanmar are toiling in factories and construction sites. The push for labor circulation is also running up against the reality of unresolved border conflicts, which include armed militias in some areas. Thailand, Myanmar and Cambodia have all faced bloodshed or armed standoffs in border areas in recent years, while this spring a Philippine Muslim group staking a centuries-old land claim launched a bloody invasion of Malaysian Borneo.

A New Age for ASEAN Region: The AEC will boost the ASEAN growth story, and those that have an international mindset and are ready for change will not only stand to benefit from the opportunities, but will also be able to defend against new foreign competitors.

ASEAN BY THE NUMBERS

Soft drink market share of two biggest brand that has been competing in this market since forever such Coke and Pepsi.

Education

10 best universities in ASEAN 2013.

Macroeconomic Level

Cost of Living

ASEAN s Office rental rate

THE IMPORTANCE OF UPCOMING CHANGE TO THE ECONOMIC, POLITICAL AND CONSUMER CLIMATE

Asean's Infrastructure Crisis A shortage of infrastructure investment

Thailand opportunity to become a regional economic, trade, and investment hub. Geographic location Development level Size of the domestic market and land area Economic relations with ASEAN Association with the global economy

Thailand s weaknesses Lack of understanding and awareness Unfamiliar with neighbours Some inconvenience in business Higher business costs Political and administrative problems

Whatever happens, "2015 is a very tight timetable," said Sanjay Mathur, a Singaporebased analyst at Royal Bank of Scotland. "Malaysia and Thailand are somewhat close to each other in terms of development, but the others are behind, so the whole fiscal monetary mix is significantly different and will be difficult."

Opportunities and fears as Asean prepares for single market some communities and even whole countries may lose out because of the risk of human rights being sacrificed to the imperatives of big business. In the poorest member state, Burma, threequarters of the population still lack electricity after half a century of dictatorship; in the richest, Singapore, citizens are among the wealthiest in the world.

Number of Problems in ASEAN among them grave human rights violations; corruption and poor governance; statesanctioned land grabs; authoritarian and military regimes; police brutality, torture and enforced disappearances; modern-day slavery and lack of corporate responsibility and accountability.

companies are profiting from investmentfriendly protection measures at the expense of citizens with certain member states allowing corporations to sue governments over local laws that may hinder their business. conflict between governments, companies and grassroots communities all over the region.