Speaking at the recently concluded World Economic Forum (WEF) in Davos, Switzerland, the Malaysian low-cost carrier’s CEO Tony Fernandes called for the creation of a single aviation authority for ASEAN and expressed optimism about the future of the region.
“A superb ASEAN meeting with 10 ministers and top business leaders. Best attended meeting in Davos. Future of ASEAN looking good,” he tweeted on Jan 23.
Fernandes, who is also a member of the ASEAN Business Club, a forum for the region’s business leaders, has long been calling for more and faster regional integration.
AirAsia is well positioned as it already has the routes and infrastructure in place to benefit from the increased tourism and movement of goods that should follow the launch.
“Global or regional multinationals are on top of the AEC. It is the mid-sized firms that are not really ready,” says Ben Simpfendorfer, founder of consulting firm Silk Road Associates and author of The Rise of the New East.
Yet the AEC has been a long time coming, and even when it launches on Dec 31, it will build on a series of agreements that have been in place for years. As a group, ASEAN has had a free trade agreement (FTA) in place since 1997. The push to integrate the region into a single economic bloc picked up speed in 2007.
Almost a decade on, questions remain on whether the official launch of the AEC will significantly alter the trade and investment landscape in the region.
“The ASEAN FTA is the biggest driver of integration and it is well in place,” declares Simpfendorfer. “Labor and capital mobility are the big sticking points.”
The AEC is not a goal in and of itself, but is a key tool in the overarching goal of creating a single regional economy. The problem is that not all the countries in the bloc are equally enthusiastic about relinquishing control over their domestic regulations. While free trade is relatively easy to understand, other areas like immigration issues or the flow of capital within the region are proving harder to accept.
An example of the types of delays and complications that the AEC is facing was on display on the very last day of 2014, when the central banks of Indonesia and Malaysia reached an agreement on banking integration. But the deal is not a simple one. It is part of the ASEAN Banking Integration Framework, which is itself just one provision of the ASEAN Framework Agreement on Services.
The agreement makes clear, however, that even if the AEC kicks off as scheduled, integration of the banking system will not start in earnest until 2020.
Not even Malaysia, which currently holds the rotating chair of ASEAN, expects full integration by the end of 2015. Still, ASEAN plans to declare itself a single economic community now and sort out whatever issues remain unresolved over the next few years, Mustapa Mohamed, Malaysia’s trade minister, told reporters on the WEF sidelines.
“We don’t have complete integration or harmonization yet. 2015 is laying the stage for bigger things to come,” he said.
Part of the problem is that both the hard and soft infrastructure that ASEAN needs to better integrate is not quite in place yet. The project is being run out of the ASEAN Secretariat, which is housed in a sprawling building in the diplomatic quarters of Jakarta. Currently, it has only about 300 personnel and operates on a budget of roughly $18 million, which is about what the European Commission spends hourly.
A number of significant items remain on the AEC’s to-do list, like seamless travel within member countries in the style of the European Union, the streamlining of immigration rules and border controls, economic disparities and vastly different regulations. Most of these issues are expected to be worked out by 2020.
Yet progress toward integration has been substantial to date. Goods can move within the region with virtually no tariffs and it is becoming easier to move labor and capital across ASEAN borders.
“I think the momentum is there and the momentum will continue through the creation of the AEC,” says Bruce Hambertt, who chairs the Asia-Pacific regional practice at law firm Baker & McKenzie.
More than 80 percent of the items on the AEC Scorecard, a tool which the ASEAN Secretariat uses to track the progress toward the AEC, have been completed.
Many admit that achieving full integration is not going to be easy. But even without some of the more complex agreements in place, the AEC should usher in an era of greater intra-ASEAN trade and investment.
The whole ASEAN economy is expected to grow more than 5.6 percent yearly in the next five years, according to the Economist Intelligence Unit (EIU).
By 2018, ASEAN could emerge as the fifth-largest global economy and the third-largest exporter of goods, thanks to greater productivity and an expanding middle class that could grow to 80 million households in that period.
“The prospects for ASEAN are getting better with the realization of the AEC later this year,” says Michael Yeoh, CEO of the Asian Strategy & Leadership Institute, a think tank in Malaysia. “ASEAN is the fulcrum of Asia.”
Regional integration is well under way. Between 2000 and 2013, intra-ASEAN trade tripled to $607 billion, according to the EIU. In the same period, intra-regional foreign direct investment rose from just $900 million to more than $21 billion. Intra-ASEAN visitor arrivals grew from just 15.9 million to more than 40 million.
An EIU survey last year found that 76 percent of international companies already see ASEAN as a single economic bloc. The policies that the AEC will usher in, which will make it easier for businesses to tap into capital and financing anywhere in the region, will continue to drive this perception.
The AEC is, in many ways, well positioned to bridge the developed economies in the West with the emerging giants in the East. A new and fast-growing economic bloc with a large pool of consumers could turn into another engine for the global economy.
For China, as ASEAN’s neighbor, partner and competitor, a more integrated AEC could prove to be both a challenge and an opportunity.
If the AEC eliminates the barriers to the movement of labor, it could emerge as a powerful manufacturing hub. Already, multinationals are setting up factories in the region, where labor is considered much cheaper compared to China. Examples are electronic assembly plants in Vietnam and textile factories in Cambodia. Some of these factories are run by Chinese companies.
Since 2013, ASEAN has received more foreign direct investment than China as businesses expand their operations in the region.
The flip side of the coin for China is that the launch of the AEC will make it easier for its companies to set up their own factories in any one of the 10 countries and move their goods within the region and to outside trade partners with a minimum of friction, says Xu Ningning, executive president of the China-ASEAN Business Council.
So far, the approach has been to focus on investment. China, ASEAN’s top trade partner, is investing in infrastructure across the region and working to boost trade. There is a target for bilateral trade to hit $500 billion this year, up from $350 billion in 2013.
The AEC may be a work in progress, yet its launch will mark a significant change on the world’s economic map.
“The establishment of the AEC will be a major event for the global economy,” says Xu.