The ASEAN Economic Community (AEC)

Author: Edmund W Sim, Hunton & Williams, Singapore

The Association of Southeast Asian Nations (ASEAN), made up of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam, is working to create an economic community by 2015. The AEC would have a population of over 566 million and a GDP exceeding US$ 1.173 trillion.

Through the ASEAN Charter signed in 2007 and agreements on goods, investment, services and non-tariff barriers, members are attempting to build a single market but without either a strong central executive or a well-developed body of laws and dispute settlement. Members fear impinging on ASEAN's principles of non-interference and consensus. Yet failure to achieve market integration will mean ASEAN will lose investment to competitors. This tension between the need to integrate and the reluctance to yield sovereignty is the main factor affecting the AEC's development.

Structure of ASEAN

The supreme authority in ASEAN is the ASEAN Summit of national leaders. Formerly held annually; the Charter establishes semiannual summits, along with special meetings when necessary. A member serves as chair for a year, with the rotation based on alphabetical order.

The Charter establishes the ASEAN Economic Community Council of economic ministers to meet semiannually and coordinate the AEC's development. It is supported by the Senior Economic Officials Meeting (SEOM), a grouping of national government bureaucrats which meets more frequently.

The Charter also establishes that each member station a permanent representative in Jakarta, home of the ASEAN Secretariat which provides administrative support. A committee of permanent representatives will liaise with the secretariat, ministerial councils, and national secretariats to be established within the members' governments.

The ASEAN Secretary General heads the secretariat and is appointed for a five year term. The nationality of the secretary general rotates among members based on alphabetical order.

ASEAN Free Trade Area

Each member may impose tariffs on goods from outside ASEAN based on its national schedules. However, for goods originating within ASEAN, members now apply a rate of 0-5%, and are to apply zero rates on virtually all imports by 2010 (Cambodia, Laos, Myanmar and Vietnam have additional time to implement the reduced rates). This is known as the Common Effective Preferential Tariff (CEPT) scheme.

Members may exclude products from CEPT as follows: 1.) Temporary exclusions for products for which tariffs will be lowered to 0-5% by 2010; 2.) Sensitive agricultural products which have protection until 2010; and 3.) General exceptions for national security, public morals, health, and articles of artistic, historic, or archaeological value.

CEPT only applies to goods originating within ASEAN. The general rule is that ASEAN content (materials, labour, overhead and profit) must be at least 40% of FOB value. The value of inputs from various members can be combined to meet the 40% requirement. Special rules exist for a limited number of products.

The exporter must obtain a Form D certification from its national government attesting that the good has met the 40% requirement. The Form D must be presented to the customs authority of the importing government to qualify for CEPT. Difficulties among the national customs authorities have arisen regarding evidentiary proof and verification of Form D submissions.

National authorities have been reluctant to share sovereignty with authorities from other members. Unlike the EU, joint teams to investigate non-compliance have not been widely used. Instead, national authorities must rely on the enforcement efforts of other national authorities, which often results in disagreements.

The ASEAN Secretariat monitors compliance with AFTA measures, but has no legal authority to resolve disputes among the national authorities. Most disputes are resolved through informal means. An ASEAN Protocol on Enhanced Dispute Settlement Mechanism governs formal dispute resolution in AFTA and other aspects of ASEAN. Members may seek mediation and consultations. If these efforts are ineffective, they may ask SEOM to establish an arbitration panel. Its decisions can be appealed to an appellate body formed by the ASEAN Economic Community Council. However, the Protocol has never been invoked because of the continuing if informal requirement for consensus. The ASEAN Secretary General has identified dispute resolution as needing reform.

ASEAN Comprehensive Investment Agreement (ACIA)

The ACIA is to encourage the free flow of investment through pursuing the following:

• Industries are to be opened up for investment, with phase-out of exclusions
• National treatment for investors with few exclusions
• Elimination of investment impediments
• Streamlining of investment procedures
• Enhancing transparency
• Undertaking investment facilitation measures

Negotiations on the ACIA are underway.

ASEAN Framework Agreement on Trade in Services

Under the Framework Agreement, members are negotiating liberalisation in sectors including aviation, business services, construction, financial services, shipping, telecommunications and tourism. Some sectors have liberalised faster, such as aviation, but others remain subject to continued negotiation.

Conclusion

Many key foundations of an integrated market, such as predictability, transparency and the right to seek dispute resolution, are not as well grounded in ASEAN as they are in nations or other regional blocs. Nevertheless competitive pressures will force ASEAN to refine its economic integration. Thus the AEC is a work-in-progress that will bear watching.