8 September 2013
ASEAN's appetite for pursuing a variety of regional or bilateral free trade agreements continues unabated. Negotiations on the ASEAN Economic Community 2015 continue to move forward, as does work on the Regional Comprehensive Economic Partnership, which brings together ASEAN with China, Japan, South Korea, India, Australia, and New Zealand. Several ASEAN members have joined, or are considering joining, the Trans-Pacific Partnership (TPP), and most ASEAN members have one or more bilateral FTAs in place. Thailand, for example, is in the process of negotiating an FTA with the EU.
Of course, legitimate questions can be raised over the extent to which these agreements will actually produce anything approaching true free trade. ASEAN's preference for voluntary compliance and less-than-stringent monitoring and enforcement – to say nothing of the wide discrepancies in development levels amongst ASEAN members -- means that a variety of barriers and restrictions are likely to remain in place. Realistically speaking, one should not expect to see an actual "economic community" in ASEAN any time in the foreseeable future.
But setting aside that issue, it is safe to say that we will see some level of progress towards greater trade and investment liberalization and regional integration. The stage will be set – at least in theory – for trade within ASEAN (and beyond) to continue to expand.
The primary stumbling block, however, to further integration will not be the tariff and non-tariff barriers which are likely to remain in place. The real "sticking point" will be the lack of capacity to actually take advantage of whatever degree of liberalization is ultimately achieved.
Capacity is lacking both in terms of the "trade readiness" of the private sector, and the infrastructure upon which it must rely.
The simple fact of the matter is that the ASEAN private sector is overwhelmingly SME. While there are a small handful of large regional players which capture the headlines – companies like CIMB Bank, Air Asia, Siam Cement, DBS Bank, etc..– these companies are actually in the minority, and their overall economic significance pales by comparison to that of the SME sector. To a large degree, when you are talking about business in ASEAN, you are talking about SMEs.
According to the ASEAN Secretariat, 95% of all enterprises in the region are SMEs. SMEs provide between 50% and 85% of all employment, and in most countries they contribute well over 50% to national GDPs. Unfortunately however, SMEs typically lack the staff, resources, and capacity to take advantage of international trade and investment opportunities. The complexity of unraveling the infamous "noodle bowl" of multiple rules of origin, as well as a myriad of other technical or regulatory issues, is simply beyond the capacity of most SMEs. And even understanding the basic parameters of FTAs and the opportunities they create is also frequently beyond most SMEs.
As a consequence, the sad reality is that only 25% of firms in ASEAN utilize preferential agreements (according to a CIMB report), and a recent survey reported in the Bangkok Post indicates that only 30% of SMEs in ASEAN understood or believed they would benefit from the ASEAN Economic Community.
The private sector's lack of readiness is compounded by infrastructure shortcomings, which leaves large swaths of the region likewise ill-equipped to support and facilitate higher levels of integration.
Of course, this is not an issue for ASEAN's wealthier members. Singapore, for example, certainly has world class infrastructure and highly efficient customs procedures. But here's the point: If the idea is to integrate the ASEAN region into a single market and production base, then the chain is only as strong as its weakest link. The CLMV countries of Cambodia, Lao, Vietnam, and Myanmar continue to be constrained by infrastructures which are bursting at the seams to accommodate current levels of trade. And even for larger and wealthier ASEAN members – Indonesia, for example – infrastructure development has not kept pace with year after year of sky-rocketing growth rates.
It's not just an issue of inadequate roads, ports, railways, and airports. Understaffed border-crossing posts, dependent on out-dated technologies and over-burdened with excessive paper-work requirements which must be painstakingly processed all serve to further to slow – and discourage – trade.
All of these inefficiencies have the effect of raising costs, which thereby crimps further integration and growth. According to the ADB, by simply making reasonable and feasible reductions in the cost of transport and delays in processing trade at the border could increase the GDP of the Greater Mekong Sub-region by 7%.
It should be noted that there are a number of initiatives underway to address these shortcomings – the GMS economic corridors, for instance – but concrete progress has not yet been equal to the magnitude of the challenge.
As governments in the region continue to move forward with FTAs and other trade opening initiatives, they need to be equally mindful of the more fundamental question: does the private sector have the capacity to actually access the benefits of these agreements, and can our regional infrastructure satisfactorily accommodate the trade we hope to promote? If the answer is anything less than an emphatic "yes", then capacity building, and trade and transport facilitation should occupy a higher place on the regional agenda.