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Sunday, November 23, 2014

What will happen in ASEAN in 2015?

I think to understand the AEC you need a degree in international business. It's complicated. It's an "economic" community so economic and business terminology was used when designing the AEC. It was designed by business experts and not politicians. This is why everyone is confused. 

The 2008 AEC Blueprint (click here to download) is a road-map of objectives to the end goal of economic integration consisting of 4 main characteristics: (1) A single market and production base (2) A highly competitive economic region (3) A region of equitable economic development (4) A region fully integrated into the global economy. 

It does not matter in the slightest amount what your definition of these characteristics are because ASEAN has defined them in the AEC Blueprint. It also does not matter what objectives you think ASEAN should include in order to reach economic integration because ASEAN has already listed them in the AEC Blueprint. Finally, it really doesn't matter if you believe or don't believe ASEAN will accomplish these objectives because the Action Points listed in the AEC Blueprint give ASEAN a way to measure itself and that alone determines the level of success or failure of the end goal of economic integration. 

The characteristic that matters the most to people is the Single Market and Production Base. This particular characteristic has five core elements that impact people directly: (1) Free flow of goods (2) Free flow of services (3) Free flow of investment (4) Freer flow of capital (5) Free flow of skilled labor.
  1. Free flow of goods: This is pretty straight forward and deals with importing and exporting products in and out of all the ASEAN countries. It deals with tariffs, non-tariff barriers, rules of origin, trade facilitation, customs integration, and standards and technical barriers to trade.
  2. Free flow of services: This is extremely misunderstood by the politicians. Most associate it with 8 professions that can move freely between ASEAN countries. While this is part of it, it is not the entire story. Trade in services is governed by the ASEAN Framework Agreement in Services (AFAS) which is modeled after the General Agreement in Trade in Services (GATS) from the World Trade Organization (WTO). Countries trade one of twelve service sectors in which are 4 modes of supplying a service to a final consumer: (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons. These 12 service sectors and 4 modes cover every job that foreigner can enter a country and get paid to do. This is the untold story that ASEAN politicians don't understand and are unable to explain to their citizens. When a country trades in services it means they are removing restrictions that prevent foreigners from entering the country and working. To date, hundreds of jobs across ASEAN have been liberalized in preparation for the AEC in 2015. ASEAN has posted all of the liberalization measures online free for anyone to download and review.
  3. Free flow of investment: This deals mostly with protecting Foreign Direct Investment (FDI) in 5 production type industries (1) manufacturing (2) agriculture (3) fishery (4) forestry (5) mining and quarrying sectors as well as services incidental to these sectors. 
  4. Freer flow of capital: This deals with capital markets across ASEAN. In this instance, capital refers to how business raise money to continue or expand their operations such as with stocks or bonds. 
  5. Free flow of skilled labor: This has nothing to do with hiring high skilled workers but everything to do with entering another ASEAN country faster. 
This information is what business need to know in order to be able to make decisions. For example, for most products, tariffs have been eliminated and now may be a good time to export to a city on the other side of a border where there is less competition and where the tariff free market makes shipping affordable.  A different business may invite foreigners to bid on a joint venture opportunity in order to raise more capital to make improvements on plant and equipment needed to increase their competitiveness. Still others may want to invest in a neighboring ASEAN country with a wholly owned subsidiary or joint venture to help establish different supply chains in a new market. One thing to keep in mind, there are provisions in the trade agreements that allow foreign investment to bring in foreign labor as I mentioned above describing trade in services.

Based on the news story there will be new economic zones to attract more business. So if I was a factory owner producing a product this might mean a new competitor is moving into my market which I'm already competing in and I could lose my market share. Or, worse case scenario, the tax holiday that will be offered for foreign business to set up in these new economic zones may lower their cost of doing business and thus their prices of the products or services and this may put me out of business all together. 

If I'm a factory owner and I want to lower my cost of doing business (because of new business competition) I may consider closing my business in my country and reopening it in the neighboring country in which the cost of doing business is considerably less. This means I would fire all my employees. 

These are the 2015 realities facing all ASEAN countries. This is what people need to know.