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Launch of the ASEAN Economic Community Expanding economic corridors and production and distribution networks Director Economic Integration Studies Group, Inter-Disciplinary Studies Center Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO) [Date of Issue: 29/February/2016 No.0252-1001]

Date of Issue: 29/February/2016

Launch of the ASEAN Economic Community
Expanding economic corridors and production and distribution networks

So Umezaki
Economic Integration Studies Group, Inter-Disciplinary Studies Center
Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO)

The ASEAN Economic Community was formally launched at the end of 2015. De jure economic integration along the lines of the AEC Blueprint has created a virtuous cycle between further galvanizing regional trade and investment and expanding production and distribution networks. ASEAN is committed to deepening its economic integration even further to achieve the goals recently set in the AEC Blueprint 2025, but this will also bring to the fore difficult issues such as distribution and redistribution of the benefits of economic integration.

Since the mid-1980s, the original members of the Association of Southeast Asian Nations (ASEAN) have been proactively absorbing direct investment from Japan and elsewhere to achieve rapid industrialization and economic development while forming regional production and distribution networks. Entering the 1990s, however, factors such as the rise of China and the Asian financial crisis caused ASEAN leaders to become increasingly concerned about the future. To address this concern, they developed the concept of an ASEAN community, positioning at its heart the ASEAN Economic Community (AEC).

It was around the same time that the economic corridor concept began to take hold. At the Eighth Ministerial Meeting of the Greater Mekong Subregion (GMS) Economic Cooperation Program in 1998, the Asian Development Bank (ADB) proposed developing these corridors as a catalyst for breaking free of the region's deepening financial crisis (Ishida, 2007: 25). The aim is to stimulate economic activity by developing key transport infrastructure such as roads, rail and ports in order to facilitate the cross-border movement of goods, services, capital and people.

The AEC Blueprint adopted in 2007 defined the AEC's four characteristics as (1) a single market and production base, (2) a competitive economic region, (3) equitable economic development, and (4) integration into the global economy, while also laying out a roadmap through to the establishment of the AEC in 2015. In addition to the liberalization of trade in goods which ASEAN has been addressing since 1992 toward establishing the ASEAN Free Trade Area (AFTA), the AEC seeks a deeper level of economic integration including services liberalization, investment liberalization and facilitation, harmonization of various economic institutions, development of wide-area infrastructure, and regional economic and technical cooperation. These measures are highly consistent with the above-mentioned goals of economic corridors, while substantially expanding the range of policies and geographic regions targeted.

The ASEAN Community inclusive of AEC was officially launched at the end of 2015. While not all the measures planned in the AEC Blueprint have been implemented, major progress has been achieved in certain areas such as the liberalization of trade in goods. The trade liberalization rate of the original members of ASEAN went from 40.1 percent in 2000 up to over 99 percent in 2010. In Cambodia, Laos, Myanmar and Vietnam (CLMV), the same rate was only 9.6 percent in 2000, but reached 72.6 percent in 2010 and 90.9 percent in 2016, while in January 2018 when the grace period granted to CLMV countries ends, it will be lifted still further to 97.8 percent. Given that the trade liberalization rate in Japan's economic partnership agreements (EPAs) concluded to date has been less than 90 percent, while even the Trans-Pacific Partnership (TPP) achieved a rate of only 95 percent despite Japan's original ambition to “eliminate all tariffs without sanctuary”, it is apparent that ASEAN has achieved very "clean" trade liberalization with few exemptions. In addition to trade liberalization within the region, ASEAN has also concluded free trade agreements (FTAs) with neighboring countries, including China (2005), Korea (2007), Japan (2008), and India, Australia and New Zealand (2009), emerging as the hub of an FTA network in the Asian region. At the same time, measures to realize deeper economic integration, such as developing the ASEAN Single Window for trade facilitation, eliminating non-tariff barriers, and facilitating and liberalizing trade in services and investment, are proceeding more slowly than agreed in the AEC Blueprint. ASEAN's economic integration accordingly still has some way to go, and wide reference is being made to AEC 2015-in other words, the 2015 version of AEC.

The production and distribution networks which have been built since the 1980s through the medium of direct investment have served as the platform for the dramatic economic development and industrialization of ASEAN and neighboring countries. While de facto economic integration has therefore preceded de jure economic integration in East Asia, the establishment of AEC has seen steady progress with the latter, and a virtuous cycle is emerging whereby de jure integration in turn deepens de facto integration.

In the six years between 2008 and 2014, compared to 11.6 percent rise in total world trade, intra-ASEAN trade has expanded by 24.9 percent, while ASEAN+3 (Japan, China and Korea) trade has recorded even higher growth of 33.1 percent. Direct investment into ASEAN has also grown from US$85 billion in 2007 (a world share of five percent) to US$136 billion in 2014 (11 percent). Moreover, 17.9 percent of the direct investment in ASEAN countries in 2014 came from within ASEAN. This increase in trade and investment is indicative of the way in which production and distribution networks in ASEAN and the surrounding region have been expanding and deepening.

“Thailand+1” investment—a popular corporate strategy in recent years—is one such example. Major industrial clusters have formed in the Bangkok metropolitan area, particularly in industries such as cars, electronics and electrical machinery, and textiles and apparel, turning the area into a hub of the production and distribution network in ASEAN. Recently, however, against the backdrop of rising wages and other production costs along with economic development and increasingly fierce competition in global markets, "second unbundling" a la Richard Baldwin has become observable whereby labor-intensive production processes are transferred to less-developed neighboring countries such as Cambodia, Laos, and Myanmar. One factor promoting this trend has been the lower cost of linking geographically-dispersed production processes (service link costs) resulting from the deeper de jure economic integration realized through AEC. The reduction of not only monetary costs such as freight charges and tariffs but also time-related costs such as transport time and the predictability of this have made cross-border production activities much easier to conduct—think, for example, of raw materials procured at a main factory in Thailand being sent to a factory in Laos for labor-intensive processes such as cutting and sewing before being returned to Thailand for the next production process. In addition, following Myanmar's transition to civilian rule in March 2011, the Myawaddy-Kawkareik section of the ASEAN (also the Asian) Highway Network linking Myanmar and Thailand has now been built with assistance from Thailand. This road is also part of the East-West Economic Corridor being constructed through the GMS Economic Cooperation Program. Such improvements in physical infrastructure are expected to trigger further expansion of production and distribution networks and economic development along the economic corridors.

The 27th ASEAN Summit held in Kuala Lumpur in November 2015 adopted AEC Blueprint 2025, which looks ahead over the next decade. While taking its direction from the previous blueprint, AEC Blueprint 2025 includes several innovations in terms of implementation methods. First, it does not include a strategic plan with specific measures and dates, which was the highlight of the previous AEC Blueprint. Instead, action plans will be drawn up for transport, information communications, energy and other individual areas. Second, it emphasizes strengthening the functions of ASEAN institutions, the ASEAN Secretariat included, as well as enhancing sectoral cooperation. The aim appears to be to have the relevant ministerial meetings take responsibility for drawing up and implementing detailed action plans for sectoral cooperation, while facilitating inter-sectoral coordination by enhancing the functions of the ASEAN Secretariat and the AEC Council, etc. Third, more emphasis has been placed on the role of the private sector as a source of funds for infrastructure development and as a source of information for improving the investment environment. Fourth, consideration will be given to developing a certain discipline in evaluating domestic institutions that could hamper the further deepening of economic integration. Given that ASEAN as a highly diverse community has always emphasized the principle of non-interference in government in order to maintain its cohesiveness, here it appears to be taking a new step forward in order to realize the deeper economic integration envisioned by the AEC. These innovations could also be viewed as a practical approach to boosting the feasibility of AEC Blueprint 2025 and the sectoral action plans which are expected to be completed in 2016.

Economic integration per se is expected to facilitate the allocation and reallocation of production processes according to comparative advantage and enable more effective utilization of production factors, increasing the economic welfare of all participating countries. However, the process also requires participating countries to undergo structural adjustment, while there will be social demand for a redistribution of income in some form. With economic development also driving forward democratization in the ASEAN countries, there will doubtless be a growing public call for protection of domestic companies and domestic industries. ASEAN member countries will have to face a difficult challenge in the new economic environment created by AEC as they seek to avoid becoming excessively protectionist, adopt appropriate redistribution policies and steadily implement their commitments as ASEAN members.

Ishida, Masami (2007), "Greater Mekong Subregion Economic Cooperation and the Three Economic Corridors" in Masami Ishida and Toshihiro Kudo (eds), Greater Mekong Subregion Economic Cooperation: Realizing Three Economic Corridors [in Japanese]. Chiba: Institute of Developing Economies

(original article : Japanese)
(For the Japanese version of this article)

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