Complexities and trade barriers challenge regional economic integration in ASEAN

  • Share
  • Policy uncertainty hampers setting up of business
  • Need for uniform and harmonized trading rules
  • Investment promotion bodies crucial to driving FDI into ASEAN

Singapore, 29 April 2014 Political, legal and organizational complexities and regulatory burden, as well as the lack of uniform and harmonized trading rules among the ASEAN nations, are hampering the progress of the 2007 ASEAN Economic Community (AEC) Blueprint, which seeks to achieve regional economic integration by 2015.

A new EY report, Trade Secrets: ASEAN economic community and inward investment, explores the progress of the AEC through the eyes of business, and in particular, at the impediments to doing business in ASEAN.  According to the “ASEAN Economic Community Scorecard 2012”, only two-thirds (67.5%) of the targets for an integrated economic region by 2015 have been met.

Mildred Tan, EY’s Asean Government & Public Sector Leader says: “This is perhaps unsurprising, given the economic diversity and varying growth maturity in each of the member countries. At the same time, we often see that national and local priorities supersede regional initiatives, obscuring wider goals. While macro problems persist, on the micro level, there are many areas where solutions can be applied.”

On the other hand, the business community has also been lukewarm towards the overall progress of the AEC. The reasons are three-fold: first, business require greater clarity on inter-government collaboration; second, the business community prefers to deal directly with each other; third, a need for stronger focus from governments on prioritizing and solving the problems, particularly those directly relating to investment and business operations.

“Businesses can be both the beneficiary and the facilitator of the AEC. Often, public-private consultation holds the key to unlock the value of any transformation. By examining the impediments to doing business in ASEAN from the business’ perspective, we hope to offer pragmatic policy and implementation recommendations to governments,” adds Tan.

The report puts forth that total foreign direct investment (FDI) attracted (among other indicators) could be regarded as an indicator of the progress and success of the AEC development, and focuses on the underlying FDI issues to reveal solutions to contribute to the 2015 goal.

Policy uncertainty hampers setting up of business

One of the biggest challenges that investors face in setting up businesses in ASEAN is the need for clarity and certainty in local laws, government policies and legal environment. Examples of such uncertainty are amendments to important legislations with little notice, arbitrary interpretation of laws or policies, and outdated rules and regulations.

Other issues that plague businesses and investors in ASEAN include complicated procedures and long delays in starting up businesses, multilayered approvals for licenses, legalization of documents, regulatory requirements, foreign ownership restrictions, politics and bilateral relations.

Sophia Lim, Director of Corporate Secretarial Services – Global Compliance & Reporting at EY shares that the most logical and effective solution is to amend policies for ease of starting business. “Simplification and clarity are key.  A three-pronged approach at the regional, national and local government is needed. ASEAN countries could look into the standardization of regulatory processes and information requirement, and having a one-stop registry exchange and an ASEAN business portal. There also needs to be continual dialogue between business and policy-makers, and among jurisdictions within the same country and across countries.”

Need for uniform and harmonized trading rules

Two of the important issues affecting intra-regional trade in ASEAN are the various entry barriers and the need for certainty in obtaining and retaining preferential tariff concessions under the ASEAN Trade in Goods Agreement (ATIGA).

Tariffs on imported goods are generally a barrier for businesses. In line with the ATIGA schedule, six ASEAN member states – Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand – have eliminated tariffs on almost all goods that are produced in the region, while newer members such as Cambodia, Laos, Myanmar and Vietnam are committed to eliminate tariffs on such goods by 2015, with some flexibility to extend the deadline to 2018.

However, the free flow of goods in ASEAN has yet to become a reality, given existing non-tariff barriers to cross-border trade. For example, while ASEAN has established a common eight-digit tariff classification system, in practice, it is still common for importing customs authorities to adopt differing product classifications and deny benefit of ATIGA preferential duties. This is on top of other gaps, including the disparity in the time taken for goods to clear customs checkpoints, which can range between 4 days and 26 days across ASEAN countries, resulting in unnecessary costs and inefficient and unpredictable supply chains.

Shubhendu Misra, Partner, Indirect Tax – Global Trade at EY in Singapore comments: “Having uniform and harmonized trading rules, as well as eliminating varying and often opaque administrative practices and protectionism, is important. This, combined with the inherent lack of trust in the trading community by pockets of customs administration, is curtailing the full benefits of free trade.”

Misra adds that the recent WTO Agreement on Trade Facilitation will provide an excellent reference for ASEAN to embrace and implement as part of the run-up to the AEC. “Many of the trade facilitation measures forming part of the WTO Agreement are in areas where ASEAN currently lacks. Early adoption by ASEAN on a unilateral basis would send a strong signal to the world that ASEAN is open for business,” he says.

Investment promotion bodies crucial to driving FDI into ASEAN

One of the intended objectives of the AEC Blueprint is to enhance the growth of inbound FDI into ASEAN.  Certain ASEAN countries such as Malaysia, Singapore and Thailand are relatively more successful in attracting inbound FDI. One of the key success factors is the presence of strong investment promotion bodies, which facilitate investors’ entry when investing into a country. For an investment agency to be effective in its role, it must have significant ability to approve or influence the workings of the government, ensuring a smooth experience that boosts the confidence of the investor.

Tan Bin Eng, Asean Leader for Business Incentives Advisory at EY observes that while all the ASEAN countries have investment agencies that administer a number of FDI incentives, several differences are clear. “Not all have the authority to approve incentives even if these are legislated with clearly specified criteria; some also frequently lack the power to influence regulatory and licensing approvals; and some do not have overseas offices to facilitate investment promotion. To that end, more can be done to share best practices across ASEAN’s investment bodies.”

While ASEAN also traditionally competes internally for FDI, there is more to gain from being allies than competitors. Tan (Bin Eng) adds: “ASEAN investment bodies can cooperate to identify areas ripe for collaboration across the region. These can include specific industries and sectors, or specific geographic locations. Bilaterally or multilaterally, these areas can then be developed further into value propositions with which  ASEAN investment agencies can approach foreign investors as a semi-collective body, providing investors with a more complete view of ASEAN and what it has to offer.”

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