The AEC and Why It Matters to Australian Business
Mr Simon Merrifield
Australian Ambassador to ASEAN
Business Luncheon Address
Hosted by PwC Australia
201 Sussex St, Sydney, 7 September 2015
The ASEAN Economic Community is an enormously important development for Australia. It is very much part of the profound transition in the economic and strategic environment in Asia, and a region in which Australia has deep interests and great prospects. But the conversation about the AEC can get confusing, because while on one hand it is of momentous significance, on the other, some of the rhetoric over reaches.
I would like to start by attempting to clarify that contradiction. It’s important to do so, because if we embrace the AEC on the basis of the rhetoric, then our expectations will be all wrong. And if we dismiss the AEC on the basis that the rhetoric is misleading, then we consign ourselves to miss out on great opportunities.
There are three key reasons the AEC is a bit difficult to grasp.
- The first is that the proclamation of the AEC at the end of this year does not signal a changeover to new arrangements. It is rather a symbolic point, a milestone, in a very long transition to a more integrated ASEAN. 2016 will be just like 2015. There is no Maastricht Treaty.
- The second reason is that ASEAN’s vision does not match the EU model, which is a de facto benchmark. That is to where our minds turn when we hear the words ‘economic community’. ASEAN does not aspire to the EU model of strong central institutions, a common currency, one passport and so on. Its ambitions are far more restrained. ASEAN is not interested in powerful and intrusive central bodies and without them, you can only take integration so far.
- The third reason, closely linked to the second, is that, without supranational institutions, ASEAN achievements rely heavily on the capabilities of its member states. The AEC will only be as good as its individual members make it. So the AEC will work more seamlessly in some parts of Southeast Asia than others.
So they are the broad reasons that might make the AEC somewhat less than many expect it to be. It’s why the reality doesn’t seem to fit the rhetoric.
But the point is that the AEC is a brand name for the burgeoning Southeast Asian economies as they undergo dramatic growth and transformation. It’s also a framework for liberalisation and reform, for advancing regional economic integration, for opening up borders and for enabling value chains. Such a framework – meticulously set out in ASEAN’s blueprints – helps set the economic reform agenda among ASEAN’s emerging members.
The integration process has in fact been running since the end of the cold war. A series of agreements in the 1990s put regional integration at the centre of ASEAN’s economic agenda where it has been ever since. World Bank research shows that the integration agenda has actually gone pretty well: integration to date has been trade creating rather than trade diverting; trade has become more efficient; it has helped attract FDI; and it has stimulated development in the less well-off member states.
It has also allowed ASEAN the platform and the collective weight to develop its economic engagement with the world beyond – we have seen that through the creation of valuable FTAs such as AANZFTA and we are seeing it on a significantly greater scale through the negotiation of the RCEP.
This iterative regional economic integration is obviously important for the region’s continuing prosperity, but it is also strategically valuable because a more enmeshed, economically interdependent region raises the equities of all involved – the more we all have at stake in an enterprise, the more we care about it coming unstuck. So that underpins our strategic goals of a prosperous and stable region whose members behave in accordance with established norms.
Australia has long sought regional institutions that help manage geo-strategic and economic dynamics. This drove our early advocacy of APEC, which has gone on to deliver so much on the trade and economic front, as well as for ASEAN-led forums, initially the ASEAN Regional Forum in the 1990s, through to the East Asia Summit process, which marks its 10th anniversary this year.
These forums have already done much to build up the habits of cooperation among not just the members of the immediate region, but the big players whose interests are deeply engaged in this part of the world. ASEAN’s convening power is one of its key assets, each year drawing together leaders and senior ministers from the ASEAN 10 as well as China, the US, India, Japan, Korea, Russia and ourselves. This is an invaluable asset in a region undergoing profound change as global strategic and economic weight shifts from west to east.
So the AEC is a fundamentally important part of what ASEAN has done and continues to do in the region. ASEAN hasn’t just got lucky, being neutral ground at a time of intensifying geopolitical dynamics. Rather, it has a track record of fostering trust and building cooperation. That goes some way to explaining how ASEAN has manoeuvred itself to the centre, but it’s ASEAN’s dramatic economic performance over the last 15 or so years that clinches it.
ASEAN turns heads because it is a leading economic player. The numbers are compelling. A population of 625 million with 65% under 35. A $2.57 trillion economy, 25 per cent larger than India’s, with growth rates that have near-doubled per capita GDP in just seven years. It accounts for 7% of world trade, 15% of Australia’s trade, and is our largest trading partner after China. It’s a major investment magnet, attracting 8% of global FDI, from the EU, the US, Japan, China and ASEAN member states themselves. In 2013 ASEAN overtook China as a destination for FDI, registering $128.4 bn versus China’s $117.6 bn. And US FDI in ASEAN in that same year exceeded its combined total of FDI to China, India, Brazil and Russia. The money has been rushing in.
The emergence of regional value chains within ASEAN has been a key part of its recent success for both trade and investment, particularly in the manufacturing sector. These have helped spur growth and contributed to the integration agenda.
As Australians, are we making enough of this? It’s great that ASEAN is our second largest trading partner, but we are number 8 for them. Investment levels in both directions are rising, but there is significant room for growth – we are not a top-ten investor in ASEAN but in 2013 rankings Belgium, Luxembourg and the Netherlands were. We have a pretty light business presence on the ground – in Indonesia, around 250 companies are represented in country, while the figure for Dubai is 350. If Australian businesses are to realise the most attractive opportunities ASEAN has to offer, they will require an in-country platform and an investment of time and effort in developing relationships and identifying partners who will fit with their strategies.
From a government perspective, we have been hard at work on consolidating our longstanding relationship with ASEAN, which is deep and wide-ranging, and which includes our sustained efforts to improve the trading environment. We established the Australian Mission to ASEAN in 2013, joining the US, China, Japan and Korea. New Zealand, India, Canada and the EU have since followed.
Last year, in commemorating 40 years of partnership, Australia was elevated to the top-tier status of Strategic Partner. This reflected our very substantial investments in ASEAN-led processes and agendas, for promoting both regional peace and security, and greater prosperity and integration for the wider region.
This includes our free trade agreements with ASEAN members and with ASEAN as a whole. Indeed, AANZFTA is ASEAN’s most comprehensive and ambitious FTA, and its successful negotiation underpinned the ambition and confidence to pursue the RCEP vision, the negotiations for which achieved a significant breakthrough by Ministers in KL last month.
As a leading FTA partner of ASEAN, we see up close just how important this sort of technical capacity development is, especially in a rapidly changing economic environment and among the less developed members.
Which is why we have a very neat and highly-regarded set of programs specifically for trade policy development, and programs aimed at enhancing capacity towards liberalising trade and investment in support of ASEAN’s economic integration. The ACCC has come on board with this, partnering with DFAT to deliver a Competition Law Implementation Program – Rod Sims is very engaged on this. These programs are achieving important results and are a very significant component of my work as Ambassador to ASEAN. There are valuable overlays to our strong set of bilateral aid programs in the region.
Even by the standards of its own modest ambitions, the AEC has a long way to travel before we can really begin to think of it as a single market. The ASEAN claim of being 91.5 % there (that is, it has achieved 463 of 506 intended measures) might work from a rhetorical or advocacy perspective, but it’s not really a reflection of the way things are on the ground. Major ASEAN businesses are the first to say that. Banks like CIMB and airlines like Air Asia – leading champions of the integration project – are vocal advocates for a more thoroughgoing integration model, partly because they can see so much more opportunity through opening up, and feel constrained at the pace of government-led reform, which is in part dictated by ASEAN’s diverse membership.
While ASEAN’s diversity has been a constraint on integration, it also underpins its attractiveness as an investment destination. FDI has been a big part of the ASEAN story, and one that is likely to continue, given its growth prospects. Diversity with ASEAN offers an array of opportunities and the prospect to diversify risk. Covering practically the full gamut of the ‘ease of doing business’ indicators, there’s something for all risk appetites among the ASEAN ten, and options for easing in to challenging environments using pathways via more predictable jurisdictions.
Australia’s competitors are recognising the opportunities presented by ASEAN’s growth and integration journey, as reflected by ASEAN’s strong performance in attracting FDI. Australian businesses need to assess their prospective strengths relevant to ASEAN markets and tailor strategies accordingly. A presence on the ground in ASEAN markets is essential for the most attractive opportunities. Key areas will be expansion of the services sector, which in turn will be an enabler of more regional and global value chains.
As elsewhere in the world, the ASEAN economies are facing some stiff headwinds. In some ways these might slow down the AEC agenda, but in other ways, it could help galvanise action. While the end of the cold war marked the beginning of ASEAN’s integration journey, it was really the late 1990s – the wake of the East Asian Financial Crisis – that gave greatest impetus to the regional integration agenda. The crisis was an inflection point where ASEAN members realised that the creation of a large single market would draw investors, and help create better conditions for fiscal stability. ASEAN leaders not only endured quite dramatic adversity but responded to it with a new resolve. The institutions and the habits of consultation are entrenched enough now to suggest they probably would do so again.
2014 marked 40 years of the ASEAN Australia partnership, which has never been stronger, more productive or more important than it is today. But business engagement is thinner than seems right for a region of such dynamism, such international attention, such proximity and so many ready pathways to greater engagement, including deep migration and educational links.
In 2015, ASEAN’s signature year, I’d encourage you to take a closer look at what is on offer in the region and think deeply about how ASEAN might fit with your own future growth strategies. I hope that this publication will help you in doing that, and that it helps bring perspective and insights into a most compelling story of growth and economic transformation.