ASEAN’s 2015 AEC Compliance Deadline – What It Actually Means

A much publicized feature of ASEAN’s development is the so-called “AEC Deadline” which is due at 31^st December 2015. The AEC (Asean Economic Community) deadline is rather a misnomer and has led to a great deal of misunderstanding about what it actually means.

As at these pre-deadline days, where we stand is that the entire ASEAN community – meaning all members – have agreed to reduce their tariffs as concern import-export across borders. Of these ten nations however, four of them – Cambodia, Laos, Myanmar and Vietnam asked for additional time to get prepared for this. That deadline is the one that expires at the end of 2015. All the other nations – Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand – are already in compliance and have reduced tariffs accordingly. As these include the biggest members of ASEAN, the AEC deadline is something of a moot point. Of the six nations above five are major trade and manufacturing players in their own right. Here is a brief snapshot:

Indonesian manufacturing contributes 24 percent of the country’s GDP, and its primary manufacturing industries include automotive, electronics, textiles, footwear, food & beverage, palm oils, metal products, and chemicals. The country is due to have the world’s largest demographic dividend by 2020. As the new government focuses on infrastructure reform to link up the archipelago of over 17,000 islands, much effort is also being made to open up the business environment by measures including tax breaks for manufacturing exporters.

Malaysia‘s manufacturing industry constitutes approximately 25 percent of GDP. Its leading manufacturing sector is electrical and electronic products, which constitutes 32.9 percent of exports. Other key export sectors include petroleum products, chemicals and chemical products, machinery, appliances, and parts, and optical and scientific equipment. Malaysia created schemes to help manufacturers deal with GST, which was brought in on April 1, 2015.

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In the Philippines, manufacturing contributes approximately 23 percent of national GDP. In Q2 of this year, manufacturing grew by 10.8 percent. A mix of high- and low-tech manufacturing. The food industry is current the biggest manufacturing sector, but higher end industries, such as electronics and chemical products, are on the rise. These members are already in compliance with duty and tariff reductions, meaning that ASEAN Free Trade Agreement terms entered into with Australia, China and India already apply to them.

Singapore‘s manufacturing accounts for approximately 21 percent of GDP. In 2013, chemicals made up 33.4 percent of total manufacturing output; electronics, 27.8 percent, precision engineering, 11.4 percent; transport engineering, 11.1 percent; biomedical manufacturing, 8.2 percent; and general manufacturing 8.1 percent. Its government offers significant incentives for productivity-driven growth, including cash payouts for training and R&D. Singapore maintains a favorable corporate tax rate of 17 percent – the lowest of any ASEAN nation.

Thailand – With a value of around US$120 million, manufacturing constituted approximately 33 percent of GDP in 2013 – the highest percentage of any ASEAN country by a significant margin. Key manufacturing industries include jewelry, electronic appliances, garments, computers and parts, furniture, petrochemicals, and automobiles. As well as a strong export industry, Thailand has a growing consumer market.

These members are already in compliance with duty and tariff reductions, meaning that ASEAN Free Trade Agreement terms entered into with Australia, China and India already apply to them. Of the four countries still to follow through, I can make the following comments:

Cambodia has been trying hard to update its systems and educate officials over aligning its economy and administration to ASEAN mutual standards. Recently for example it has been working with the Government of Singapore over introducing local IP and patent procedure measures. However, it faces an already significant trade imbalance with China, and AEC compliance may swing that even further to China’s favor, causing potential political issues. Cambodia is already close to Beijing, but may baulk at signs of being treated as a vassal state. Given not all administrative procedures are in place and the Government has been wary of signing any bilateral tax treaties with other nations, it may be that Cambodia decides the 2015 deadline may be too optimistic to allow free trade to the detriment of its fragile domestic manufacturing capacity at this stage.

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Laos is in a similar position to Cambodia, yet politically closer to Thailand, with whom it conducts much of its trade. The Government has also been more willing to embrace bilateral agreements. With a pre-existing healthy trade balance with Thailand and the Laos economy better integrated as a result, it may be easier for Laos to accept the 2015 deadline.

Myanmar also has specific problems with the 2015 deadline. It possesses some of the lowest human capital rankings in the world, and would likely be swamped by cheap Chinese imports upon the implementation of AEC compliance to the detriment of local industry. Its current relationship with China has also been rocky, with billion dollar infrastructure project cancellations taking place. Myanmar’s potential is assured, being sandwiched between China and India, but a national policy on how best to absorb this has not yet been thought out, and accordingly the 2015 deadline may also be considered too early to allow the country to adapt.  

Vietnam meanwhile is positively champing at the bit for the deadline to arrive. It has strategically positioned itself as a light manufacturing competitor to China, and has already taken large amounts of Chinese investment from its neighbor. A mooted corporate income tax rate reduction to possibly 22% – three points below China’s CIT rate of 25% can be seen as a Vietnam both expectant and viewing investment from China to flow in given reduced tariffs. China-Vietnamese trade can be expected to boom.    

The AEC deadline assumes all the four countries above will all be compliant and able to take on the burdens and advantages of complete free trade by the year end. Time will tell which ones will. However, should any of the four countries miss that deadline, it is hardly the end of the world, and impact will be minimal. Cambodia and Myanmar especially simply need more time to adjust, and if that is how they end up then longer term, this would be preferable to having them enter tariff free areas too soon for their own domestic manufacturing good.  

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