The ASEAN Economic Community (AEC) has just marked its one-year anniversary after it officially came into effect on 31 December 2015.
The open economy initiative among the 10 ASEAN members aims to create a single market and production base to improve their competitiveness. Similar to the establishment of the EU, it also seeks to create free mobility of goods, services, investment, capital and skilled labour. Free mobility of labour is a significant element, as all businesses and economies rely on manpower.
Under the pact, six countries – Malaysia, Brunei, Indonesia, the Philippines, Thailand and Singapore – agreed in 2010 to waive import tariffs on 99.2 percent of all items except for certain sensitive products. Cambodia, Laos, Burma [officially known as Myanmar] and Vietnam (CLMV), meanwhile, are set to follow suit, waiving import tariffs on 90.9 percent of all items in 2018.
Sensitive products include rice, sugar, vegetables and certain types of fruits and meat, coffee and tapioca.
Since the ASEAN blueprint was signed in 2007, its members have also tried to create a single standard for professional qualification screening to serve the free flow of labour for seven key professions (medicine, dentistry, nursing, engineering, architecture, surveying and accounting) and one sector (hotels and tourism).
Work has already begun to establish longer-term goals set out in the AEC Blueprint 2025 endorsed by leaders at the ASEAN Summit in Kuala Lumpur in November 2015. The blueprint sets a path for regional progress after economic integration, focusing on opening up the service sector, tackling trade and investment barriers, and upgrading product standards.
At the summit, ASEAN and China agreed to upgrade the ASEAN-China Free Trade Agreement (ACFTA) to streamline and enhance economic cooperation. The protocol includes amendments to the agreement on goods, services, investment and economic and technical cooperation.
China vowed to open its construction, engineering, securities, travel agency and tourism operator sectors, while ASEAN members promised to open their service sectors to China, including commerce, telecommunications, construction, education, finance, tourism and transport. Both sides will be allowed to establish solely owned or joint venture companies via reduced restrictions.
But a year after establishing the AEC, Sanan Angubolkul, vice-president of the Board of Trade of Thailand, says the country has seemingly gained little from the regional economic integration, with border trade expected to see only a slight increase of 2 percent in 2016.
Even worse, Boonyarit Kalayanamit, director-general of the country’s Trade Negotiations Department, adds that the number of non-tariff barriers and technical trade barriers among ASEAN members had actually increased.
Based on the Thai Commerce Ministry’s report, Thai exports to ASEAN shrank 1.8 percent in the first 11 months of 2016 to US$49.8 billion (1.8 trillion baht). Key exports included vehicles and parts, finished oil, chemicals, machinery and parts and plastic pellets.
The prospects for 2017 are also uncertain, thanks to US President-elect Donald Trump’s trade policies, which are forecast to be protectionist, and plans to charge 10 percent repatriation taxes on profits for US corporate foreign subsidiaries.
Mr Trump’s tax measures are also expected to affect decision-making of new US investors, he said.
The Commerce Ministry also reported Thailand’s border trade in the first 11 months of 2016 totalled 1.33 trillion baht, up 1.27 percent from the same period last year.
For the whole year, the border trade value is estimated at 1.47 trillion baht in 2016, up 2.8 percent from a year before.
The Foreign Trade Department forecast Thailand’s border trade to continue growing by at least 3 percent in 2017, driven by the growing economies of CLMV and the popularity of Thai products in those markets.
While the poor global economy has also attributed, in part, to falling ASEAN exports, the Thailand Development and Research Institute (TDRI) notes that the country’s public and private sectors have both been slow to cash in on opportunities available in CLMV regarding expanded trade and investment.
Thai small-scale private companies are still complacent at home, while support strategies from the government have been lacking, it said.
According to the TDRI, as of 2014, 123 companies on the stock market held shares in more than 600 firms in ASEAN, of which 81 firms operate in CLMV.
They are mostly giant firms such as PTT Plc, PTT Exploration and Production Plc (PTTEP), PTT Global Chemical Plc (PTTGC), Thai Oil, Italian-Thai Development Plc (ITD), Ch. Karnchang Plc (CK), the Electricity Generating Plc (EGCO), Charoen Pokphand Foods Plc (CPF), Minor International Plc (MINT), Berli Jucker Plc (BJC), and Home Product Center Plc, the operator of HomePro hardware stores.
Thai foreign investment in ASEAN almost tripled over the past 10 years to $24.9 billion as of 2015, 34.1 percent of which was in CLMV. Foreign direct investment from ASEAN to Thailand doubled during that period to US$10.3 billion.
TDRI research has found that companies doing business in CLMV make net profit margins of up to 11.1 percent and are worth a combined 50.8 billion baht, while local firms staying in Thailand fetch a margin of only 6.2 percent and are worth a combined 9.7 billion.
According to TDRI president Somkiat Tangkitvanich, the four countries have enjoyed economic growth of 6-8 percent with a younger workforce and increasing purchasing power, while their policymakers are actively developing infrastructure and attracting foreign direct investment.
“Vietnam, for example, has an ambitious goal of becoming a manufacturing hub of Asia to beef up its export sector,” he says, adding that between 2008-11, the country secured domestic value added in gross exports at 42 percent of GDP, against Thailand’s 40.4 percent.
Singapore and Malaysia had domestic value added in gross exports as a share of GDP of 57.6 percent and 54.4 percent, respectively.
Somyod Tangmeelarb, vice-chairman of the Federation of Thai Industries, attributed Thailand’s lower domestic value-added in gross exports to the country’s heavy reliance on technology from Japan and Europe.
“The country does not have a clear-cut strategy to support information technology or the Internet of Things in business and the industrial sector,” he says.
Mr Somyod says Thai SMEs in particular are not comparable in terms of efficiency with Japanese SMEs, which own technology.
Nopporn Thepsithar, president of the Thai National Shippers’ Council, says the government should have a more ambitious long-term strategy in a bid to maintain its competitiveness in ASEAN.
“Economic growth over the next few years will hit a dead end without private-sector positioning in the AEC,” he says.