New Year, New Economic Bloc – the AEC

Ring out the old, ring in the new, so the saying goes. Indeed, because while 2015 was fading out this last December 31, the new ASEAN Economic Community (AEC) was being born. But if you live much beyond the shores of Southeast Asia it is likely news of this particular birth passed you by. So let me explain, because this region of 632 million people and combined GDP of $2.5 trillion is set to become an ever more important production/consumption node and contributor to the world economy over the next few decades.

The Vietnam War was at its height and the security of the region fragile when Indonesia, Malaysia, Philippines, Singapore, and Thailand came together in 1967 to form the Association of Southeast Asian Nations (ASEAN). As political and military tensions eased following the end of the war, coupled with quite dynamic growth in the 1970s and ‘80s, the grouping started looking beyond peace and stability to boosting trade and economic ties. It grew larger too, with the addition of Brunei (1984), Vietnam (1995), Laos (1997), Myanmar (1997), and finally, Cambodia in 1999.

ASEAN Map

The new ASEAN Economic Community is a logical extension of the efforts these countries have made over the last few decades to make ASEAN a more cohesive and useful entity. These efforts notably include 1993’s AFTA (ASEAN Free Trade Agreement), which has eliminated virtually all tariff barriers between member states, boosting intra-regional trade. Externally, ASEAN now has FTAs with China, India, Japan, South Korea, and Australia-New Zealand.  Other markers on the road to the AEC include the ASEAN Framework Agreement on Services (AFAS) IN 1995 and ASEAN Investment Area (AIA) in 1998.

A key pillar (one of four) of the AEC is a single market with free flow of goods, services, capital, investment, and skilled labor. However, while it may indeed be an official entity as of December 31, 2015, the AEC is still very much a work-in-progress in terms of making this and the other pillars a reality.

Take the free flow of goods. While tariff barriers are indeed history in Southeast Asia, non-tariff barriers remain a significant impediment to businesses trading within the region. Cumbersome customs processes especially in those countries with less sophisticated logistics infrastructure and practices, like Indonesia, Philippines and Vietnam, can leave goods stuck for weeks at entry points awaiting clearance.

Accordingly, on the AEC agenda is an agreement to identify non-tariff measures and eliminate those identified as protectionist by 2018. And there are ongoing and much-needed efforts in several countries to improve infrastructure. Indonesia, for example, is spending tens of billions of dollars to construct new roads, railways, airports and seaports. In Vietnam, where the government estimates logistics costs to have taken away 25 percent of the country’s potential GDP, initiatives include the $1.2 billion Lach Huyen International Gateway Port, which will greatly boost connectivity to the north of the country.

The free movement of skilled labor is also a challenging goal. Southeast Asia is a highly disparate region in terms of not only populations and development levels, but also languages, business practices and professional certifications. And with each country retaining its own immigration policy, irrespective of the AEC, moving to another country to work is not going to be as straightforward as it is in the EU, for example.

AEC Pillars

Still, while full economic integration and its benefits may be some way down the road, the launch of the AEC takes place against the backdrop of a region that is clearly rising. While many areas of the world face low or even negative population growth, with consequent adverse economic effects, Southeast Asia’s population is set to increase by more than 100 million over the next 20 years. Crucially, this is accompanied by a demographic dividend in the form of an increasing working-age population, which is set to reach 68 percent of the total population by 2025. It is this segment that works, earns and consumes in an economy, and is thus critical to growth. (In contrast, China’s working-age population peaked in 2010 and is now declining.)

As such, the region will become an increasingly active production base to serve Asia and beyond, and also an increasingly important consumer market. And while the phrase “journey not destination” is frequently used to describe the December 31 launch, the AEC is an undoubted milestone in ASEAN’s evolution and in the growth and global relevance of Southeast Asia.

Reaching out to some of the logistics players in the region for their own thoughts on the AEC, here’s what Richard Strollo, managing director, South Asia, BDP International, told me:

Creating a common market among its nations is the most exciting initiative ASEAN has ever undertaken. Liberalizing the flow of goods, services and investment and reducing restrictions on skilled labour and capital will dramatically transform the region over the next 20 years. Economic integration will make Southeast Asia a powerful trading bloc with increased trade flow both in and out of the region, and the logistics and transport industry will benefit from this increase.

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Bob Gill is the General Manager for Southeast Asia at ARC Advisory Group.  Bob has a background in editing industrial trade publications including those covering Asian logistics and supply chain management.​

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