The ASEAN Economic Community Begins – what should be in the next phase for 2025?

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The ASEAN Economic Community Begins – what should be in the next phase for 2025?

*A/Prof Rob Preece

The ASEAN Economic Community or AEC officially came into effect on the 31st of December 2015. The 31st of December itself will actually be ‘business as usual’ as a lot of the changes agreed to for closer economic integration have been achieved and thus some observers call the 31st of December a ‘milestone in a long journey’ rather than a beginning.  With over 99% of import tariff lines already reduced to ‘zero’ in the six main economies of Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand, and around 98% of import tariff lines in the lesser developed economies of Cambodia, Laos PDR, Myanmar and Vietnam (who have until 2018 to complete tariff removals), the ASEAN Free Trade Area (AFTA) was largely established.

In addition to intra-regional trade in goods being largely tariff free, small but essential steps are being taken each year in relation to trade facilitation so as to ensure that goods can move speedily across national borders through the regional supply chain to consumers.  Projects such as: the ASEAN Harmonised Tariff Nomenclature; Electronic Origin Certificates; ASEAN Customs Transit System; and the ambitious ASEAN Single Window which will sit over many of these projects, all serve to enhance customs procedures over the import and export of goods which once hindered the movement of these goods.

There are four goals which underpin the AEC with the key goal being the creation of a ‘single market and production base’.  This requires the ‘free flow of goods’ – achieved through AFTA and the trade facilitation projects outlines above, as well as the ‘free flow’ of services, of labour and capital.  A lot more needs to be achieved in these other areas, although ASEAN nationals already enjoy Visa free travel across ASEAN countries, and businesses in some sectors are starting to find it easier to operate in neighbouring countries.

The other three goals are somewhat dependent on the success of the single market, and include: creating a region which is highly competitive; greater economic equality amongst all 10 ASEAN members: and a region which is more integrated with the rest of the world.  A successful single market will certainly increase the likelihood that all member countries will be able to increase their incomes and thus better share the benefits of the closer economic integration, and of course makes ASEAN more attractive to the rest of the world.

There has actually been some notable movement on the global integration front with regional FTAs signed between ASEAN and Australia, New Zealand, China, Japan, India, and Korea with talks underway with potential partners like the European Union.  ASEAN is also in the middle of negotiations with all six current trade partners on a Regional Comprehensive Partnership which will create a ‘super free trade area’ by bringing all these partners together in a 16 country bloc comprising 45% of the world’s population.

However, all these benefits of economic integration do need to start with a strong single market and production base which creates the ability for ASEAN businesses to both access their inputs efficiently and cost effectively and of course to be able to sell freely into a market of over 620 million consumers. With a base of that many potential customers, ASEAN businesses can manufacture sufficient volumes to attain the cost efficiencies to be able to then compete in the global market, taking advantage of those bi and multi-lateral FTAs.

So when does the ‘single market and production base’ start?  Surprisingly, for a region which has committed to closer economic integration, the import tariff barriers removed as part of AFTA have actually been replaced by various non-tariff measures.  These include measures such as increased licensing or permit requirements, import fees and charges and domestic tax arrangements.  In fact, NGO’s like the Asian Development Bank have found that between signing the agreement to form the AEC in 2008 and studies in 2013, some 186 new non-tariff measures have been put in place across ASEAN.  This is also despite the requirement to remove such barriers to free trade in the AFTA agreement, the ASEAN Trade in Goods Agreement (ATIGA) and the AEC 2015 Blueprint document which supported implementation of the AEC.

Whisky Production

Recent research by CCES has focused on one particular aspect of this, namely the redesign of excise and similar taxes applied at the border in response to the loss of customs import duty revenues from the AFTA agreement and the ASEAN agreements with its FTA partners.  Customs duties have traditionally been an important source of revenue in many ASEAN countries, in some cases pre-AFTA contributing up to 40% of total tax revenue in the lesser developed economies and so the concept of restructuring excise and border taxes to replace that revenue became policy in many places.  Whilst it is a legitimate policy to raise excise and other taxes to raise revenue, what is not legitimate is to redesign such taxes to fall more heavily upon imports than on locally produced goods – domestic taxes must apply equally to all ‘like goods’ otherwise the effect is to ‘close’ the market to those imported goods in the same way import tariffs used to pre FTAs.  Notwithstanding, for WTO members, to apply a domestic tax more heavily upon an imported like good is in breach of Article III (National Treatment) of the GATT and risks a dispute process with trading partners which in the long term can do more harm than good.

Discriminatory excise and border taxes, and other forms of non-tariff barriers have the potential to undermine the good work achieved under the AEC to date, and could prevent the benefits of economic integration being unlocked as the effect of such measures is to deny the true ‘single market and production base’ needed.  ASEAN also has to remember that it is now in competition for Foreign Direct Investment with nearby markets of a billion plus consumers like China and India.  Investment decisions that directly link to the desired objectives of ASEAN for greater economic growth and raising of living standards could hinge on whether investors see the region as one market of 620 million or 10 markets of differing size.

However, to finish on a positive note it would appear the issue is understood at the highest levels.  The ASEAN leaders at their annual summit in Kuala Lumpur last November have ‘signed off’ a new AEC Blueprint 2025 document which over the course of the next 10 years again calls for the completion of the requirement from the last Blueprint document around the removal of non-tariff measures.  Significantly, the document also calls for the region to better collaborate on excise taxation across those goods commonly subject to excise such as automobiles, alcohol, tobacco, fuels and soft drinks.

ASEAN has a busy 10 years ahead as it works through the requirements of the AEC Blueprint 2015 and some countries will have to make some hard policy decisions on trade and tax, however, the benefits will be worth the hard work!

AEC Blueprint

*A/Prof Rob Preece is the Course Director of Excise Studies at CCES, Charles Sturt University and has contributed regularly to the regional discussion of excise tax policy in the AEC