After a sluggish start, hopes are high that the Asean Economic Community (AEC) will become a more potent bloc in 2017 as the Philippines—led by President Duterte who favors closer ties with Asian neighbors—takes chairmanship of the regional bloc.
In a Dec. 13 research note on the AEC, economists from HSBC noted that since the AEC was created on Dec. 31, 2015, very little progress had been made while intra-Asean trade had even contracted at nearly the same rate as the total Asean exports to the rest of the world.
Intra-Asean trade contracted by 3.5 percent in the first nine months of 2016 since the implementation of the AEC, matching the 3.9 percent decline in regional exports for the period.
This economic bloc includes countries with higher per capita income like Singapore and Brunei and middle-income economies like Indonesia, Thailand, Malaysia, the Philippines and Vietnam. There are also the “new frontiers” like Burma (Myanmar), Laos and Cambodia.
“Truth be told, 2016 was a busy year for domestic politics across Asean,” HSBC said, citing the leadership transition in the Philippines, the political turmoil in Malaysia, the Cabinet reshuffling in Indonesia and the demise of long-reigning Thai King Bhumibol.
The busy political calendar is seen to extend through 2017, with Jakarta set to hold gubernatorial elections in February while general elections in Thailand and Malaysia are seen as a possibility later in the year.
At the same time, several global political events this year have affected Asean, particularly the election of Donald Trump in the United States.
“A potential upside for AEC in 2017 is that the Philippines will take over as Asean chair and policy indications suggest that Mr. Duterte may accelerate integration, particularly due to the fact that the Philippines benefits handsomely from services liberalization given its surplus workforce and large BPO (business process outsourcing) sector,” the research said.
As the Philippines takes over the rotating leadership of the Asean at a time when the regional bloc is entering its 50th anniversary, the HSBC report said there was some hope Mr. Duterte would make a strong push for further integration.
“After all, it is in the interests of the Philippines to promote services liberalization given its sizeable surplus labor force, much of which is trained in professions such as nursing, which is in high demand in other Asean economies,” it said.
Although the AEC implementation is progressing slowly, the region is moving ahead with outward trade ties.
From the start, HSBC said the onset of the AEC was unlikely to immediately provide a boost to intra-Asean trade or production especially as it had come to fruition in the midst of the most profound global trade downturn since the global financial crisis.
HSBC traced this to two phenomena. The first is low oil prices: There is a significant amount of intra-Asean trade in refined petroleum and petrochemicals, mostly involving Singapore where export values plummeted. The other factor was cited to be “more worrying” and had to do something with the fact that the intra-Asean electronics supply chain seemed to be losing competitiveness to China.
“Measuring Asean’s loss of competitiveness to China is no simple matter—after all, the two are deeply inter-linked in a broader Asia supply chain where Chinese value-add is often concentrated toward the latter stages of production and thus has a higher total export value. The Chinese government has long-identified semiconductor production a strategic industry with an investment target of $161 billion through 2025. This is aimed at reducing its huge trade deficit in semiconductors (roughly the same size as its oil deficit), and presents a direct threat to semiconductor design, production and testing operations in Singapore, Malaysia, Thailand and the Philippines,” the research said.
HSBC said that while it might take time for China to build up the necessary capacity in semiconductors to directly threaten Asean manufacturers, this is not just a semiconductor story. It said China had gained market share across the electronics and electrical machinery spectrum.
“For Asean to maintain its competitiveness in key supply chains such as electronics, much more needs to be done to reduce non-tariff barriers and improve services liberalization. On the labor front, Asean has implemented region-wide mutual recognition agreements to incentivize the flow of skilled labor, a key pillar of the AEC. However, actual implementation appears limited. Moreover, soft impediments such as onerous language or re-licensing requirements impede the flow of skilled labor,” HSBC said.
Accelerating the implementation of the MRAs to facilitate the intra-Asean flow of skilled labor will allow firms to operate more efficient supply chains and better, it said.