Economics and finance, Trade and industry, International relations | Southeast Asia

28 June 2022

Southeast Asian economic integration is stagnating, and the ASEAN Economic Community is ceding relevance to better frameworks for regional cooperation, Wendi Wiliyanto writes.

According to data from the ASEAN Development Outlook, the aggregate economic size of Association of Southeast Asian Nations (ASEAN) member countries in 2019 was $3.2 trillion. Considered as one, this would make ASEAN the world’s fifth-largest economy, on course to become the fourth-largest by 2030.

With all of ASEAN’s economic potential, its ability to affect economic integration is a critical issue. As countries integrate more, collaboration intensifies, boosting ASEAN’s economic productivity.

This is why the ASEAN Economic Community (AEC) exists – to foster cohesiveness and economic integration, enhance competitiveness, and build resilience within ASEAN.

The AEC aims to establish ASEAN as a single market and a key production base for the world economy. The free flow of commodities, services, investments, capital, and labour within ASEAN encourages the growth of regional production networks and strengthen ASEAN’s contribution to global supply chains.

But is the AEC the most effective way for ASEAN countries to achieve this objective?

Intra-regional cooperation remains low in ASEAN compared to other partnerships in the region, and intra-regional trade has stagnated for nearly two decades. Instead of intensifying regional trade and investment with one another, ASEAN member countries increasingly rely on non-ASEAN countries as their primary partners in boosting domestic economic growth.

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The reason for this is that the markets of ASEAN member countries are not as developed as those of non-ASEAN countries, especially China and the United States, meaning opportunities outside the region may be more attractive and easier to pursue. As a result, establishing a single market – one of the AEC’s founding objectives – is challenging.

The AEC is also struggling to affect change to the region’s labour landscape.

Labour mobility, especially for the region’s most skilled workers, boosts ASEAN’s economic development by increasing productivity and efficiency and facilitates knowledge transfer and technological growth. Practically all ASEAN member states suffer a skilled labour shortage, meaning they are missing out on these benefits.

The lack of skilled labour in ASEAN member states also exacerbates wage disparities between members. In Thailand, for example, monthly earnings are three times more than neighbouring Cambodia and Laos. Likewise, Singapore offers relatively high wages, attracting skilled labour from across ASEAN member countries.

This leads to a few ASEAN countries dominating skilled labour, exacerbating shortages and creating over-migration that threatens the accessibility of labour for local workers.

Part of this problem is historical.

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The AEC was founded as a way to use economic instruments to achieve political goals. ASEAN member countries tend toward mixed trade regimes that include elements of protectionism – often due to patronage structures that shape the options of economic policy decisions, including trade policy.

This tendency in turn impacted the AEC’s initial framework, which does not include a comprehensive free flow of goods and services policy.

Despite the AEC’s success in cutting trade tariffs, non-tariff policies like quotas and technical requirements remain to protect domestic markets. As a result, the AEC’s purported purposes – to liberalise investment and stimulate capital flow – have moved slowly.

Some ASEAN member countries restrict their borders to professional services from other ASEAN countries, indicating that the AEC has been ineffective in promoting economic integration.

This is where the Regional Comprehensive Economic Partnership (RCEP) comes in.

The establishment of RCEP has been vital. Its membership includes all ASEAN member countries and five ASEAN free trade partners, Australia, New Zealand, China, Japan, and South Korea. Because of its larger scope and agreement-based ratification, RCEP has been much more successful at creating open markets, bolstering economic integration, and spurring growth in ASEAN member states.

Signatories to the most recent RCEP agreement accounted for 31 per cent of the world’s foreign direct investment. Clearly, involvement in RCEP is providing far stronger investment and liberalisation opportunities for ASEAN member countries to boost their domestic economies than the AEC has been able to provide.

Crucially, RCEP also opens cross-regional labour migration and technology transfer with non-ASEAN countries that can provide members with advanced technology and expertise to enhance their economies.

In other words, RCEP, as an instrument, may be making the AEC irrelevant.

Of course, that RCEP provides more leverage for ASEAN economic integration is important for the economies of ASEAN countries, but it creates a problem for the AEC and ASEAN itself in the process.

ASEAN’s institutions need to preserve their centrality so the region’s future is shaped by the region, but this will be very difficult to do in an environment of massive free trade and economic cooperation with non-ASEAN member countries facilitated by a partnership agreement separate to the AEC.

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