AEC is on the way

The Cambodia Herald, November 30, 2013

Kuala Lumpur (The Star/ ANN) -- What’s this AEC (Asean Economic Community) all about? If it’s that important, why do we know so little about it? Can you help explain?

Here goes. Asean kicked off as a political entity some 52 years ago. It has since evolved over time, standing today on 3 pillars: (i) political-security (ii) economic and (iii) social-cultural. Experience from the 1997/98 financial crisis highlighted the necessity for closer economic collaboration to protect mutual national interests.

This is reinforced by the recent rise of China and India, strengthening Asean’s determination to create a stronger and more cohesive community. The 1997 Asean Summit in Kuala Lumpur brought this into sharper focus with the Asean 2020 Vision Declaration to transform the region into a stable, integrated and competitive region. By 2003, the Bali Summit committed the group to accelerate the establishment of the AEC from 2020 to 2015. Since then, the 2007 AEC Blueprint sets out clear timelines for Asean members to strive towards becoming an integrated economic community by 2015 with: (i) a single market and production base (ii) a highly competitive economic region (iii) increasingly more equitable and inclusive economic development and (iv) a region fully integrated into the global economy.
The end-game will finally revolve around (a) a core Asean centre (b) an inclusive Asean (c) an efficient and transparent operational framework (d) harmonised rules and regulations and (e) a strong linkage to the global supply and value chains. These characteristics are inter-related and mutually reinforcing.

At the heart of AEC is the overarching objective to promote the free flow of goods, services, investment and skilled labour; the free flow of capital; and the free and open integration of clearly identified priority sectors as well as in food, agriculture and forestry.

To help deepen Asean market integration are clear commitments to formulate milestones under the Roadmap to Monetary and Financial Integration as well as the Operationalisation of the US$485mil Asean Infrastructure Fund Ltd to facilitate sustained economic growth and address poverty alleviation in the region.

Asean

Asean’s uniqueness needs to be highlighted; it has:

·A combined GDP of US$2.2 trillion, with a capacity to grow at 5%-6% p.a.

·A population exceeding 600 million, with relatively young demographics and a per capita income averaging US$3,800.

·A young work force (age 15-64) exceeding 310 million in the face of a contracting working population in China; this labour force totals 115 million in Indonesia, 50 million in Vietnam, 40 million each in the Philippines and Thailand, 27 million in Myanmar and 12 million in Malaysia – most now hit the demographic “sweet-spot”.

·A vast difference in their stages of development and levels of income:

Under rich are Brunei and Singapore, Middle-income ... Indonesia, Malaysia, the Philippines and Thailand; and Poor ... Cambodia, Laos, Myanmar and Vietnam.

·Rich resources, attracting continuing inflows of foreign direct investment-FDI (US$110bil in 2012).

·An external trade totalling US$2.5 trillion in 2012; but trade among themselves (intra-Asean trade) remains small – at only 26% of the total, against 75% to 80% in the 28-nation European Union (EU) and 55% under the North America Free Trade Area (Nafta).

·Relatively open borders among themselves, allowing vast numbers of young workers to move within Asean seeking higher wages and better employment opportunities, helping to level the playing field across the region. But domestic political pressures reflecting growing nationalism and social infrastructure constraints are working against fuller and faster integration anytime soon, limiting progress to only baby-steps.

AEC scorecard

According to Datuk Dr Rebecca Sta Maria, secretary-general of Miti (International Trade and Industry Ministry), nearly 80% of the targeted measures have already been implemented (Malaysia: 88%). Details include: (i) on elimination of import duties: it’s 88% completed; what’s left involves making the flow of trade seamless through smart trade facilitation and faster Custom’s integration; (ii) on liberalisation of services: 9th package was finalised in 2013 and 10th package is on track for 2015; equity ownership of 70%-100% is now allowed for most sectors; (iii) on investment flows: ACIA (Asean Comprehensive Investment Agreement) is already effective in 2012; it provides investment protection and transparency in investment regimes; and (iv) on labour mobility: agreement on the movement of skilled persons was signed in 2012.

The report card looks good – but only on paper; it merely records meeting compliance matrices and do not reflect actual outcomes, which really matter. At best, they simply reflect work-in-progress as Asean continues to engage, consult and interact. Much more needs to be done at the ground level. As the measures begin to take hold (and slowly to bite) adverse effects will emerge – most serious being the effects of Schumpeter’s “creative destruction”, with inefficient businesses checking out as they fail to effectively compete; victims of innovation by their competitors. And with it, the wreckage it leaves behind – unemployment, bankruptcies and fortunes lost, together with their dire social consequences.

Global trade

World trade is expected in 2013 to grow – for a second time in a row – at about the same pace as in 2012 (2%-2.5%), that is, below this year’s rate of global output growth (estimated at 2.9%, compared with 3.1% in 2012). This is unusual – indeed an anomaly.

Historically, going back to the late 19th century, global trade had expanded at about twice the rate of world GDP growth. It remains uncertain if this phenomenon will happen a third time this year. Forecasts by WTO (World Trade Organisation) and IMF (International Monetary Fund) suggest the numbers are close. Since the industrial revolution, the only time world trade lagged behind global growth was in 1913-1950 – a period between two world wars which saw the disastrous impact of the Great Depression. Some even dubbed this the “era of de-globalisation.”

The Financial Times recently asked if the world is merely “experiencing a blip or a more fundamental structural twist in global commerce.” It’s just too early to tell – no one knows for sure.

Quipped economics Nobel laureate Paul Krugman: “Ever growing trade relative to GDP isn’t a natural law.” It’s quite clear the world has changed. I sense the low lying fruits of global trade expansion have been plugged. WTO’s recent World Trade Report concluded that many of the “big factors that had driven trade growth over the past three decades had been exploited, like an exhausted mineral resource.” It would appear even globalisation has lost much of its steam. Nations, including the US and Europe, have begun to turn inwards. Who is to champion globalisation? There is also the issue of whether real reform in China – now the world’s biggest trading nation – will really take place; on it rests the question whether China’s market will remain open to the outside world since any setback in reform would slow down the process of globalisation, and with it world trade.

Beyond Asean

At the same time when AEC is being actively pursued, resources are distracted and re-directed at negotiations on three other large trade arrangements:

(i) The Trans-Pacific Partnership (TPP) negotiations involving 12 countries (including the United States and Malaysia) to form a vast free-trade market for 800 million people in the Pacific Rim, with a combined GDP of US$27 trillion or about one-third of world GDP. This partnership has been called a 21st century free trade pact, providing a blueprint for global economic engagement by facilitating foreign investment with transparency, and environmental and intellectual property safeguards beyond traditional free trade.

(ii) The Regional Comprehensive Economic Partnership (RCEP) or Asean+6 (China, India, Japan, South Korea, Australia and New Zealand). It envisages broadening and deepening Asean’s AEC with its large Asian trading partners to create a free trade zone that would cover over one-half of the world’s population. If both RCEP and TPP were to come together, they would be similar in economic size to the EU. They will begin to form the building blocks over the long run to meet the goal of the 21-member Asia Pacific Economic Co-operation (Apec) group to deepen trade liberalisation, bringing US and China together into a single Asia-Pacific free trade region, succeeding in putting together beyond a mere “spaghetti bowl” deal, where 10 years of talks at the WTO have since failed to do.

(iii) The old story of the long-stalled 2001 Doha Round, now trying to sign a last-ditch “slimmed-down” deal to clear red-tape at world borders, focused on “trade facilitation”. Indications are that talks have again stalled.

All three arrangements have set the year-end as the deadline. It’s a challenge, particularly for US which needs “fast track” Trade Promotion Authority (to prevent US Congress from amending prospective trade deals) to assure trade partners that any agreements will not be re-opened. Under such a mechanism, Congress could only vote “yes” or “no” on the deal. In addition, the US is also trying to conclude a historic US-EU deal to forge by late-2014 the world’s largest free trade accord – covering some 40% of global GDP and 50% of world trade.

EU estimates that such a deal would generate annual benefits of US$200bil to 500 million Europeans; and slightly less for US. The deal would also cover services, investment, energy and raw materials; but its key aim is to harmonise regulatory regimes to further reduce barriers to trade.

I sense much of the lethargy in growth of world trade can be traced to the impact of recent US financial crisis and the prolonged recession in Europe (especially collapse of imports) as well as effects of business slowdown of multinational companies dependent on global supply chains. As growth regains normalcy in the face of heightened activity in regional trade integration, global trade can be expected to regain its former dynamism over time.

Granted, globalisation has retreated and there has been a steady increase in “stealth” protectionist measures (including non-tariff barriers) since 2008.

Granted also world trade has since veered into unchartered waters. Be that as it may, the quickening pace of regional trade will expand market access, draw-in investment and capital, and help build capacity and expand global supply chains.

What then are we to do?

What’s missing so far is that the world has avoided the surge in protectionism that marked the Great Depression during the inter-war years. But worries of competitive devaluation have assumed a different form – a consequence of a series of quantitative easing (QE) measures by the Fed in recent years, followed by the adoption of a similar policy stance by the European Central Bank (ECB) and this year, by the Bank of Japan (BoJ), leading to the debasement of currencies. Global currency wars are heating up again as central banks embark on a new round of QE to combat slowdown in growth. The ECB cut interest rates in early November in a move interpreted by many as intended (in part at least) to curb the euro after it soared to its highest level since 2011. The ECB had been talking down the euro for some time. On the same day, Czech policymakers intervened for the first time in 11 years to weaken the koruna. Both New Zealand and Australia publicly noted that their dollar was “uncomfortably high.” With IMF downgrading global growth, countries are revisiting policies to boost competitiveness through weakening currencies.

In Asia, emerging currencies skidded and shares tumbled following mixed signals from the Fed raising fresh concerns about imminent “tapering” (roll-back) of its asset-buying stimulus, and from the recent QE measures of ECB and BoJ.

The Indonesian rupiah hit its weakest in 4½ years, while the Indian rupee sagged to a 2-month low. Most other Asian currencies (including the ringgit) weakened across the board, except for the Chinese yuan (or RMB) which held steady. Both the rupiah and rupee had remained weak throughout the entire month. In recent days, the Philippines peso and Thai baht have weakened further. While the coming-on of AEC is welcome and contributes to the easing of global trading conditions, the rising risk of competitive devaluation is much more serious. Bear in mind intra-AEC trade remains relatively small. What’s of real concern and is becoming increasingly more worrisome are: (i) the persistent withdrawal of capital (on the rising risk of Fed tapering) which in turn places at risk, future FDI flows and the availability and cost of funding especially of up to US$1 trillion of Asian major infrastructure projects; (ii) continuing QE flows of cheap money - raising risks on the prospect of “currency wars” and rising protectionism (especially “stealth” protectionist barriers); and (iii) growing political pressures emanating from nationalist vested interests to water-down regional integration and liberalisation efforts, especially on the free flow of skilled labour. Viewed in this perspective, AEC is really no big deal!

Former banker, Tan Sri Lin See-Yan is a Harvard educated economist and a British Chartered scientist who speaks, writes and consults on economic and financial issues.