Part 1 of 2: ASEAN: A single market and production base

Romeo A. Reyes, Jakarta

At their Bali Summit of October 2003, ASEAN Leaders declared the establishment of an ASEAN Economic Community (AEC) as one of the three pillars of a broader ASEAN Community. The other two pillars are ASEAN Security Community and ASEAN Socio-Cultural Community.

In particular, they declared AEC as the realization of the end-goal of economic integration as outlined in the ASEAN Vision 2020. It is characterized as a single market and production base, with free flow of goods, services, investment and skilled labor, and freer flow of capital by 2020.

ASEAN Leaders also declared the acceleration of regional integration in 11 priority sectors as recommended by a High Level Task Force (HLTF) on ASEAN Economic Integration.

At the ASEAN Economic Ministers (AEM) Retreat on April 21 in Singapore, the Ministers set 2010 as the ultimate deadline for economic integration in those sectors.

Towards that end, roadmaps are to be prepared by countries designated to coordinate accelerated integration in those sectors, as follows: Indonesia for Wood-Based Products and Automotives; Malaysia for Rubber-Based Products and Textiles and Apparels; Myanmar for Agro-Based Products and Fisheries; Philippines for Electronics; Singapore for Information and Communications Technology (e-ASEAN) and Health Care; and Thailand for Air Travel and Tourism.

These roadmaps are to be presented to the ASEAN Economic Ministers at their September 2004 meeting.

One useful way to facilitate understanding of the characterization of AEC as a single market and production base is to make a distinction between the product market and the factor market, and the nature of goods and services traded in those markets between buyers and sellers.

In the product market, goods and non-factor services, e.g. air transport service produced by Garuda International or insurance service produced by Manulife, are traded (sold or bought) between producers on the one hand and consumers and investors on the other. They are recorded as consumption or investment expenditure in the accounting of economic activities. If the seller and the buyer are from different countries, they are recorded as exports and imports.

As a single market, there would be no barrier, tariff or non- tariff, to the flow of these goods and services within the community and across the 10 countries. With full implementation of the Green Lane system for products covered by the ASEAN Free Trade Agreement (AFTA), electronic processing of trade documents, harmonization of standards, implementation of Mutual Recognition Agreements, no visa entry and exit, and removal of all other non- tariff and technical barriers, there would be free movement of goods and people, e.g. Garuda staff, rendering non-factor services.

Take one of the 11 priority sectors as an example. By 2010, a car produced in the Eastern Seaboard of Thailand can be moved freely across the border and sold to Malaysian consumers in Penang almost as easy as moving and selling it to Thai consumers in Chiang Mai.

Likewise, by 2010, tires produced in Penang can be moved and sold to investors (car manufacturers) in the Eastern Seaboard of Thailand or to consumers (car owners) in Bangkok almost as easy as moving them to Kuala Lumpur.

In the factor market, labor and capital rather than goods and non-factor services are traded between producers (or users) and factor owners. As a single market, there would be a free flow of these factors of production within the community and across the 10 countries. With no visa entry and exit, a commercial bank in Jakarta, for instance, can hire an accountant (owner of skilled labor) from Manila almost as easily as from Bandung.

With free entry and exit of capital (often referred to as relaxation of the capital account) Singaporean owners of capital (capitalists?!) can buy stocks or bonds in Vietnam through their financial intermediaries almost as easy as buying them from the local stock exchange or bond market.

Entrepreneurs in search of opportunities for making profit can set up and do their business anywhere in the community where profit can be made most as if it is just one country.

ASEAN would thus become a community of 10 countries, functioning as a single market for goods, (non-factor) services and factors of production. The AEC can be seen from this perspective, which is from the demand side.

There is of course another perspective from the supply side. In order to supply goods and services, producers buy intermediate goods from others in the product market and primary production inputs from the factor market.

Taking the automotive sector once again as an example, a car manufacturing company that has chosen Thailand as a production base can import the tires produced in Malaysia and batteries produced in the Philippines, employ skilled labor from Vietnam, and borrow working capital from Singapore, depending on where those intermediate and primary inputs could be procured at least cost, taking account of transportation, communication and other transaction costs.

The latter refers to costs incurred to link and coordinate the sourcing of production inputs from different countries. Devoid of tariff, non-tariff and other technical barriers to the movement of goods and factors of production, those transaction costs would become minimal by 2010. By then, ASEAN composed of 10 countries would become a single production base.

The writer is an Adviser of The ASEAN-UNDP Partnership Facility. The views expressed herein are personal and do not necessarily reflect those of ASEAN Secretariat, any of its member countries, or UNDP.