Side Views

Can ASEAN achieve economic community? – Kiki Verico

December 25, 2012

Dec 25 - The history of regional economic integration in Europe tells us that an economic community is an essential stage prior to achieving a common market (CM).

Economic community begins with the free flow of goods (trade integration) to the free flow of capital (investment integration), then service sector liberalisation and the free flow of people.

These are all necessary conditions for a common market. ASEAN is attempting to achieve comprehensive regional economic integration through its economic community scheme, ASEAN Economic Community (AEC) 2015.

ASEAN is in the early stages of regional economic integration, which is in intra regional trade with the role of AFTA (ASEAN Free Trade Area).

Although ASEAN intra-regional trade increased from 17.5 per cent in 1990 (before the implementation of AFTA) to 24.5 per cent in 2009 (after the implementation of AFTA), average ASEAN intra-investment share is still fairly small at around 14 per cent of total FDI inflows in ASEAN.

To achieve economic community, ASEAN needs to enhance its trade and investment integration. The EU needs a custom union (CU), but ASEAN does not have a custom union.

Yet, an ADBI study on the Asian-wide economic community highlights an attainable option for ASEAN: “Once a region-wide FTA is formed, it may also be easier for Asian Countries to establish a custom union […] as the European Economic Community did in 1968” (ADBI, 2010)

This shows that regional economic organisations in Asia could achieve economic community throughout the “region-wide frameworks”.

ASEAN has two frameworks: the ASEAN Plus and AFTA Plus One.

Could these be ways for ASEAN to achieve economic community as the EU did?

There are two essential differences between ASEAN and the EU that explains why ASEAN’s economic integration pattern is dissimilar to the EU’s.

But despite the differences, ASEAN could still attain economic community. First, ASEAN economic integration is slightly market-driven, while the EU is government-driven.

The fact that ASEAN is market-driven makes it feasible for it to adopt “open regionalism” framework, which widens ASEAN’s economic cooperation to non-member states, whereas the EU’s custom union is an exclusive trade liberalisation among its member states.

Second, ASEAN’s decision making process model is bottom-up with an intergovernmentalism mechanism known as soft regionalism, while the EU’s is top-down with a supra national body mechanism known as hard-regionalism.

It is believed that the latter model helps accelerate the decision making process in the region.

Yet the soft-regionalism model is compatible only with open-regionalism, therefore it is feasible for ASEAN to widen its regional economic cooperation to non-member states.

In Asia, trade creation effects are higher than trade diversion effects (Urata and Okabe, 2007). Trade creation is effective in the enhancement of intra regional investment. Recent data also shows that intra ASEAN investment has demonstrated significant growth, particularly after the Asian economic crises and the implementation of the CEPT in 2003.

Since ASEAN’s trade creation is higher than trade diversion, the enlargement of ASEAN’s economic cooperation to non-member states will, in the long-run, increase FDI investment inflows in ASEAN.

Moreover, this will increase the effectiveness of AFTA in attracting FDI inflows. Recently, AFTA has only been effective in enchancing intra regional trade.

The combination of AFTA and the enlargement of ASEAN regionalism to non-members using the “ASEAN Plus and AFTA Plus One” will help ASEAN achieve comprehensive trade and investment integration in the economic community.

In addition, this ASEAN-wide regionalism will create a “win-win solution” for the member states, non-member states and the multilateral agreements (WTO). For its member states, regional enlargement under the “ASEAN umbrella” will defunct the complicated direct individual Bilateral FTA (BFTA) among ASEAN’s members and non-members.

ASEAN enlargement will also protect ASEAN member states from the “hub-spoke” problem that can emerge when a member state deals directly with non-member states (BFTA).

In ASEAN’s case, BFTA also substitutes the role of AFTA in attracting FDI inflows while weakening ASEAN’s intra regional trade. The latter proves that a “noodle-bowl” exists in ASEAN (Verico, 2011).

For non-member states, regional-wide FTA will minimize discriminative action against non-members (Drysdale, 2006; Garnaut, 1994; Yamazawa, 1990). This effect is in line with the main objective of non-dicriminative action among countries (Most Favored Nation), and this confirms that a regional-wide arrangement is complementary to the

WTO multilateral agreements (Lamy, 2007).

The world will see that a regional economic organization can achieve economic community through either the utilization of a custom union like the EU or the implementation of regional-wide frameworks such as ASEAN-wide regionalism.

The latter will complete the WTO’s main purpose of reducing trade discrimination among countries and shifting the ASEAN economic integration from regional free trade area to regional economic community.

Back to my initial question, is it possible for ASEAN to achieve economic community without facing major difficulties?

* This artcile was first published in the Jakarta Post.

** This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.