Comments by Iikka Korhonen, on The ASEAN Economic Community (AEC): Myths and Realities

Abstract

Iikka Korhonen: The paper assesses the proposal to create the ASEAN Economic Community (AEC) from several different angles. The paper examines existing trading arrangements in both merchandise and services trade. It is obvious that although average tariff rates have declined substantially over the years, many obstacles to fuller trade integration remain, especially non-tariff barriers to trade. Furthermore, restrictions on service trade and barriers to immigrations remain even more pronounced. Therefore, the author concludes, correctly in my opinion, that the ambitious plans regarding introduction of the AEC will not materialize anytime soon.Regarding the proposed AEC, it is perhaps instructive to compare it with the European Union (EU), the only existing example of a truly deep economic union, where goods, services, capital, and labor are allowed to move freely.1 For example, even the proposed AEC (which is unlikely to take place in the proposed schedule) sees no introduction of common technical standards and does not force countries to consult or even notify other members about introduction of non-tariff barriers to trade. In the EU, technical standards are set at the EU level.Whereas trade in services in the EU has been completely liberalized,2 the AEC is—at most—taking only baby steps toward more comprehensive service integration. Moreover, significant barriers to foreign direct investment remain in almost all ASEAN member countries and the proposed AEC does not seem to change this. Such an environment does not foster significant integration among ASEAN members.Although the paper provides an interesting examination of the current situation and future prospects of economic integration, it remains silent on how important the ASEAN members are to each other, for example. Using OECD–WTO data on trade-in-value-added3 would provide an enhanced understanding of the economic linkages. Perhaps the plans for the AEC are not terribly radical because the member states are not important enough for each other in economic terms?Looking at Figure 1 we can perhaps discern a reason why economic integration in the region has not progressed. For practically all countries, the United States and Japan remain more important in terms of domestic value-added embodied in exports to different countries. For most ASEAN countries, Indonesia is the most important country in the region in this regard, but its share is nowhere near the larger countries. Obviously, one could also argue that this tells how much potential there is for deepening economic integration.