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

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.