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AEC SPECIAL REPORT - THAILAND: Community 'is a process not an event'

Publication Date : 30-12-2013

 

When the clock ticks at 00.01 on Dec 31, 2015, the Association of Southeast Asian Nations (Asean) will officially turn into a community, but 600 million people will see nothing dramatically change in their normal lives. They can celebrate New Year as usual. No flood of goods and people from other Asean members to their markets and homes. 
“Community is a process not an event. We would see things change and evolve continuously, but we don’t know where and when it would end,” said Thai Foreign Ministry’s director of Asean Affairs Arthayudh Srisamoot.

Asean members have the ambition to liberalise and integrate their economies by promoting free movement of goods, investment, service and manpower by the end of 2015. Tariffs and non-tariff barriers are being reduced and will be eliminated eventually.

In Thailand these days, nearly all schools are decorated with the Asean flag and national flags of 10 Asean members to remind the public that the country is on its way to becoming part of an integrated community.

The AEC could be many things in people’s perception. It might be opportunity as well as risk for their business. It could be hope for prosperity as well as fear over the loss of jobs to competitors from other members.

“Look at the bright side, the single market and production base that AEC tries to create is expected to expand the small and medium-sized markets in individual members to a bigger one with a combined 600 million population. Its size is bigger than European Union and half the Chinese market. Thai businesses were told that their markets are no longer just 65 million population, but it will be 600 million in the next three years. The single market makes a logical economy of scale. It’s set to reduce business cost and create a multiplier effect to economies of the regional grouping,” Arthayudh said.

Zero tariff
Trade liberalisation in Asean has begun long ago since the beginning of 1990s when the group agreed to create the Asean Free Trade Area (AFTA) in 1992 to eliminate import tariff among them.

The majority of Asean members such as Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand have already eliminated tariff down to zero for 99.5 per cent of their import items since 2010. The rest is expected to bring the import duty down to 0 per cent by 2015.
Low import duty within Asean has some good side effect to trade with countries outside Asean, as it puts pressure on trade with outsiders to have low tariff in order to be competitive, according to Arthayudh.
As Asean puts its tariffs down, Japan and China have taken the move to cut tariffs aggressively.

“A major task that Asean has to do now is to eliminate non-tariff barriers among the members. Non-tariff barriers could be seen in many forms such as complex trade regulations, sanitary and hygiene measures. These barriers highly cost business and investment. If the Asean single market could eliminate all or at least minimise the non-tariff barriers, the cost for doing business in this region will be reduced and become competitive,” Arthayudh said.

However, there is good news for trading with Asean as cost of export and import per container is not relatively high, when compared to other countries or trade bloc. The cost of trading in Asean is close to that in the countries of North America Free Trade Agreement (Nafta), according to a World Bank survey.

Investment, trade facilitation
The Asean single market is poised to lure foreign investment to flock to the region. The investors will enjoy more accessibility to other nine markets. Japanese automobile producers in Thailand will significantly benefit from AEC by taking Thailand as a bridge to sell more cars to other Asean member countries freely.

In practice, the Asean single market has not yet functioned well enough as intra-Asean economic transaction is quite low.
Former Asean Secretary General Surin Pitsuwan said: “The trade and investment among members of other regional grouping such as European Union or Nafta is relatively high compared to the intra-Asean one. The EU and Nafta trade and invest among themselves much more than with outsiders, perhaps as much as 80 per cent of total trade, while Asean members trade only accounts for one-fourth of total trade.”

Of the US$2.3 trillion of Asean’s total trade volume, only 25 per cent is traded among the 10 members. Intra-Asean investment makes up of only 23 per cent of a total $114 billion foreign direct investment in the region.

But Arthayudh argued: “The share of 25 per cent of the Asean’s total trade was a dramatic improvement, when compared to only 13 per cent since Asean began its free trade agreement in 1992.”

The intra-Asean trade has showed a positive trend as it grew continuously. Thailand, for example, has traded with Asean more than the world’s big three markets: United States, Europe and Japan. “Asean is our biggest trade partner now, while each of the big three markets accounts for only 10 per cent of Thailand's total foreign trade,” he said.  

“While the US economy is in crisis and the EU is also in crunch, we have Asean market to substitute,” he said.

“But we are not saying that the intra-Asean trade and investment will increase at the expense of other regional and global trade,” he said. “I mean the volume of our trade with other markets outside Asean is still high, but the proportion of trade in Asean is increasing.”

Asean is looking for ways to increase trade among them by making attempts to boost trade in service sector, Arthayudh noted: “Liberalisation in the sector is an uphill task.”

No strong commitment
With only a 25-per-cent share of total trade of the entire group and 23 per cent of intra-Asean investment, it is pretty clear that the figure shows no strong sense of economic community.

Readiness, development gaps, protectionism and some technical problems are reasons for such low economic transaction within Asean.
Former Malaysian Prime Minister Mahathir Mohamad pointed out that none of the Asean members except Singapore is “really ready for economic integration into the AEC”.

“European Union, which is an inspiration for Asean integration, has a very long history in building community, but failed due to inequality," he said. Asean is urged to learn from the European model and avoid such failure, he suggested.

Aside from barriers to adopting a single currency market, there are many other problems to integration.

Singaporean Prime Minister Lee Hsien Loong, whose country is regarded as the most ready member, said: “The poor countries might need to bite the bullet if the group really wants to deepen the integration.”

There are differences among Asean members in terms of economic development, policy and strategy. The gap between rich and poor members is very wide. Singapore’s GDP per capita is $50,130 while it is only $879 in Cambodia and $875 in Myanmar respectively. Even among countries in mid rank, gaps extremely vary. GDP per capita in Malaysia is $9,941, Thailand $5,116, Indonesia $3,563, the Philippines $2,341, Vietnam $1,403 and Laos $1,279. This might lead to Asean being an unequal community.

Relaxation for poor members
Many countries heavily depend on import duties as their national revenue and tariff elimination might cause economic difficulties for them.

Mahathir suggested relaxation for poor Asean members such as Cambodia, Laos and Myanmar, giving them more time and conditions to adjust their economies before integration.

Indeed, Asean is well aware of the difference and development gap from the beginning. Only six original members of the group cut their tariff for all products, except sensitive and highly sensitive to 0 per cent since 2010. The rest like Cambodia, Laos, Myanmar and Vietnam which joined the group later would cut their import duties to 0 per cent in 2015.

“Being a less developed country is not necessarily equivalent to being at a disadvantaged. The new members of Asean also have their comparative advantage for economic development and competitiveness. Their stage of development might be far behind some members, but they are rich and abundant in natural resource as well as cheap labour,” said Thai Foreign Ministry’s Director of Asean Affairs Arthayudh.

Some least developed countries like Cambodia, Laos and Myanmar also enjoy trade privileges from developed markets in Western countries and Japan.

On top of that, they also obtain abundant international assistance from developed countries and international organisations.

The World Bank and International Financial Cooperation in their latest survey on Doing Business ranked Myanmar 82nd out of 189 economies for investment environment. Yet despite the poor ranking, foreign investors are flocking to Myanmar as the new economic frontier these days.

“However, that should not be an excuse for doing nothing to improve and develop the economies among Asean members. The AEC score card 2008-2013 suggested that the group has done the task to liberalise its economy towards integration, and 79.7 per cent of all tasks needed to be done. That is not good enough,” said former Asean chief Surin.

“Asean members have ratified 75 per cent of agreements to form the community. It needs to do more to implement them in order to push forward integration,” he said.

More thresholds
“The members of Asean have agreed upon many things to liberalise their economies and integrate into the community, but it seems many national governments have no strong commitment to enforce them,” said Arthayudh.

Echoing Surin, he said non-tariff barrier is one of the major obstacles for liberalisation and integration. Countries have complex and complicated rules and regulations that bar the free flow of economic activities. While eliminating tariffs, many countries are putting some non-tariff barrier and obstacles into trade and investment regimes.
Previously, foreign investors could carry capital and know-how to invest in Indonesia easily, but now they are required to move all of their supply chains into the country, according to an observer.

Many additional regulations are now being created such as health and environment protection. “You are required to have many certifications from various agencies to get a license to set up a factory,” a Thai investor said. Many countries tended to create barriers to protect their local businesses.

While agreeing to allow seven professions to move freely to work among member countries in accordance with the economic community blueprint, many countries still have regulations that reserve certain professions for their nationals.

Basically Indonesia and Thailand agreed to allow medical doctors from Asean countries to work, but Indonesia has a regulation to reserve this profession only for Indonesian nationals, while Thailand requires doctors to pass an examination in Thai language to get a license.
Thailand also has a long list of occupations, including engineers, reserved only for Thais.

Many Asean agreements contradict domestic laws and regulations, but countries have not yet amended these rules to comply with such agreements.

Law, regulations and procedures themselves are barriers for economic liberalisation. Some of them are too complicated to follow. Only 15 per cent of Thai exporters and importers  that trade in Asean under the free trade scheme with zero per cent tariff really benefit from the duty free regime, while the rest don’t utilise the scheme as they cannot follow complicated paper works and procedures, according to Arthayudh.

“To utilise free trade, you have to fill up the complicated form ‘D’ and you have to prove that your products are genuine Asean goods,” he said. “Perhaps paying the five or seven per cent import duties would be cheaper than wasting time and resources to fill this form in order to get zero tariff,” he said.

Form D is a certification paper for import tax reduction under the Common Effective Preferential Tariff of the Asean Free Trade Area.
Asean countries have no common standard for their products. Some products meet Thai standards, but fail to meet Singaporean standards or vice versa. Traders find it very difficult to classify their products according to the tariff nomenclature as countries use different descriptions. Brown sugar from Thailand may be classified differently in other countries, although all members adopt the same harmonisation of custom system.

Another problem for Asean to transform into an economic community is information. The Asean Secretariat has a lot of information through papers, reports and documents, but the problem is that nobody knows where they are kept and how people could access them.

In fact, useful information for doing business such as economic data, law and regulations are not available. Different agencies in the same country might even provide different information for the same matter.
Too many complicated regulations and the lack of standard and information could obstruct trade and service transaction. A World Bank survey recently indicated that countries in Asean require long procedures and several documents for imports and exports.

Thailand requires at least five documents and 14 days to process exports and five documents and 13 days for imports. Singapore requires four documents and only five days for export processing and four documents and four days for imports. Small countries like Laos have long procedures for both, requiring 10 documents and 26 days.

These kinds of problems and barriers have been raised many times during Asean meetings. Blueprints, action plans and countless of academic papers have addressed these obstacles but they remain as national governments lack the commitment to implement them.

Critics always say that Asean members have agreed to liberalise and integrate their economies out of fear that they cannot compete with other members. The financial sector in Thailand, for example, is liberalised in principle, but it is not easy for foreign financiers to enter.
The reason behind such fear is readiness. Sometimes the private sector would claim that they are not ready to compete with other countries. Sometimes they say the governments enter into agreements without consulting them.

Arthayudh dismissed such allegations noting that state officials and private sectors have channels of communication for all matters. He stressed that officials and negotiators consult with private sectors, academics and experts every time they have to negotiate with Asean members for any agreements.

“We can say we are not ready for some time, but we have to set the date when we will get ready,” he said, noting that protection would never make the domestic industry grow. The automobile sector in some countries have been under state protection for two or three decades, but as a result they have never become competitive, he said.

SMEs invest only at home
Thai economy is generated by some 3 million business enterprises. Among them only 20,000 are big firms, the rest are small and medium-sized enterprises (SMEs).

Unfortunately, they are doing business only at home and are afraid of extending their reach to foreign countries even within the Asean region. They used to go overseas in the 1980s, but many of them failed due to many factors such as the financial crisis, lack of experience and ability to do business outside their home turf.

The situation is worrisome for Thai policymakers since this will likely stand in the way of the Asean economic community.

Thai businesses are insular and focus their business only domestically.

They also lack support from concerned authorities in terms of guidance, information and financial access, according to Arthayudh.

“Unlike businessmen in our neighbours such as Vietnam, the Thai business community pays attention only to the home market, while our neighbours are talking about global markets and investing in foreign countries,” he said.

A recent survey by the Thai Commercial Bank’s Economic Intelligence Centre found that nearly 60 per cent of Thai SMEs have less understanding about AEC.  

Of the enterprises that understand AEC, 57 per cent see positive prospects and more than 85 per cent claim they could adjust their business for the integration.

Of the surveyed firms with less understanding of the AEC, 45 per cent see no impact of AEC on their business, thus they see no need to make adjustments.

Generally, Thai SMEs look at the positive side of AEC and regard economic integration as good for their businesses. SMEs in the agriculture sector are more optimistic about AEC than those in other sectors.

A total of 53 per cent expect that the economic community could pave the way for their farm products to enter the Asean market.
SMEs in the retail trade sector are mostly worried about their future after economic integration, with 25 per cent fearing they would lose market share to competitors from other Asean countries.

Thai SMEs have reformed to adjust their business to survive in AEC. Some of them have begun developing their products, improving management ability and looking for cheap materials in a bid to sharpen their competitive edge.

Only five per cent of SMEs in Thailand have investments in foreign countries and most of them are in Laos and Myanmar. About 17 per cent plan to invest overseas, mostly in neighbouring Cambodia, Laos, Myanmar and Vietnam where Thais are more familiar with the business environment.

A majority of the SMEs that have no interest in investing abroad said they find it too risky and they also lack experience, information or capital.

Pravit C. Pong, chief executive officer of Black Canyon (Thailand) is among the SMEs looking at the bright prospect of Asean integration. He  plans to expand his coffee business to other Asean countries.
Black Canyon offers franchises for its brand, with 50 shops in nearly all Asean countries, except Brunei and Vietnam. 

Pravit said he would change the business model by opening their own Black Canyon branches in Asean countries. The first phase would cover five branches in Indonesia and two in Myanmar.

Next year, Pravit said he would tag along with big petroleum firm PTT to open coffee shops in oil company PTT ‘s gas stations in Asean countries beginning with Laos, and later Cambodia and the Philippines where PTT has business.  

“We don’t want to grow only at home and we regard the world as our market. I have my target to see growth in revenue from foreign branches which now accounts for only 10 per cent of total revenue,” he said.

Thais know their coffee but they mostly go for home-made or instant. Foreign brands such as Starbucks have successfully established themselves among the new generation not only in Thailand but in other countries in Asean.

“I fear nobody whether foreign or native brands, I think we have reached the position that we are competitive enough to face the challenges in the community,” he said.

Among Asean countries, Thailand is strong in the food and beverage industry.

If the government has consistent policies to support SMEs in this sector they would have good prospects, he said.

A survey by the Siam Commercial Bank suggested that Thai SMEs with no capacity to trade and invest directly in other Asean countries should consider border trade with immediate neighbours like Laos, Cambodia and Myanmar.

The survey found that 12 per cent of Thai SMEs are doing border trade with Laos and Myanmar, and 11 per cent plan to trade across the border in the next three years when Asean becomes an economic community.

Border trade
Border trade makes up only three to five per cent of Thailand’s total foreign trade but it has good prospects with average annual growth of 20 per cent.

Some 80 per cent of trade transactions between Thailand and its neighbours are conducted through border trade with land, rather than in international trade via port or airport.

The border trade could play a significant role to bring goods, services and people to come together and truly make it an authentic integrated economic community.

 

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