09 September 2016

Realising the ASEAN Economic Community and Trans-Pacific Partnership for Malaysian Manufacturers

The introduction of two initiatives, designed to spur trade and investment between countries within and beyond the Asia-Pacific, can help create growth opportunities for Malaysian manufacturers, both at home and abroad. Dato’ Dr Ir Andy Seo, Vice President of the Federation of Malaysian Manufacturers, discusses the latest outlook and market opportunities for the two programmes.

General enquiries

The economics and demographics of the Association of Southeast Asian Nations (ASEAN) make it one of the most attractive growth markets for businesses and economies looking to expand. Furthermore, its appeal is not only significant to nations that reside beyond Southeast Asia – it is equally as attractive to each of the association's 10 member states, namely Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

With a combined GDP of USD2.6 trillion in 2014, the ASEAN economy is the seventh-largest in the world and third-largest in Asia1 – by 2050, according to the Asian Development Bank2, it could become the world's fourth-largest. Housing a population of more than 620 million, the association is the third-largest in the world, and boasts a rising middle-class that is expected to double between 2010 and 2025, from 67 million households to 125 million households3. The region's trade and investment story is just as impressive, having facilitated almost USD1 trillion in trade between 2007 and 2014, and attracted more than USD135 billion in foreign direct investment during 20144.

"With its huge population and interconnectivity to the world's and the region's foremost economies, manufacturers have an opportunity," enthuses Dato' Dr Ir Andy Seo, Vice President of the Federation of Malaysian Manufacturers, at a recent forum hosted by HSBC Malaysia and staged in Kuala Lumpur.

"The launch of the ASEAN Economic Community [AEC] has done much to help nations across Southeast Asia capitalise on each other's strengths – Singapore is a services hub; Indonesia, Malaysia, the Philippines, Thailand and Vietnam are production bases; and Brunei, Cambodia, Laos and Myanmar focus on resources. However, barriers to trade and investment nonetheless remain," he says.

AEC 2015 – Key Characteristics
Dato' Dr Ir Andy Seo highlights the core aspirations of the AEC 2015 framework, which was launched in December 2015. These include:

  • A single market and production base, encompassing free flow of goods, services, investment and skilled labour, and freer flows of capital.
  • A competitive economic region, including competition policy, consumer protection, intellectual property rights, infrastructure development, taxation and e-commerce.
  • A region of equitable economic development, driving the development of small and medium-sized enterprises (SMEs), and initiatives for greater integration among member states.
  • A region fully integrated into the global economy, with a coherent approach towards external economic relations and enhanced participation in global supply networks.

He points out that of the above goals – all of which are expanded in greater detail in the AEC 2015 Blueprint (AEC 2015)5 – more than 90 per cent have been realised, and many of those remaining are currently being finalised. The vice-president highlights two fundamentals he believes member states must amend further in order to realise ASEAN's potential to local manufacturers: labour laws and trade barriers.

Core Challenges
"Companies are finding it difficult to hire the workers they need in order to be productive, as well as meet their production needs," the vice-president explains. "Although quotas for foreign workers have generally increased across ASEAN, they nonetheless remain somewhat restrictive – especially for the construction, manufacturing and plantations sectors – and need to be further liberalised."

In order to facilitate this, Dato' Dr Ir Andy Seo suggests the pledge of free flow of "skilled labour" be amended to include all workers, not just those who are have a recognised skill. Furthermore, ambiguity also surrounds use of the word "skilled", as this is not defined in the AEC 2015 Blueprint.

He observes that skill standards in the manufacturing industry are not yet harmonised across the 10 member states, and hopes that this will be addressed soon. In the near-term, however, he points out that manufacturers in frontier economies can leverage the expertise of ASEAN countries that boast accreditations in line with those in the West, such as Brunei, Malaysia and Singapore.

Regarding trade barriers among member states, Dato' Dr Ir Andy Seo notes the majority of these have been eliminated. He also pinpoints items that are labelled by ASEAN as "sensitive products", which include rice, sugar and other commodities that are significant contributors to economies throughout the region. According to the vice-president, manufactured goods produced in certain ASEAN countries are cheaper and of an inferior quality when compared to those produced in other member states. While on one hand this encourages companies to be more competitive, he notes that it is also counterproductive to the goal of having a coherent approach to towards intra-ASEAN and external trade.

It is his belief that a means of ensuring products are within the same price bracket and of the same quality is necessary to roll out region-wide quality assurance standards. This will also ensure that the region is recognised as a premium manufacturer in the global marketplace.

Towards AEC 2025
Dato' Dr Ir Andy Seo recognises the vital role the successor to AEC 2015 will play in alleviating many of the current challenges impairing ASEAN's advancement. Building on the goals and policies of its predecessor, the ASEAN Economic Community 2025 Blueprint (AEC 2025) consists of five interrelated and mutually reinforcing characteristics, including:

  • A highly integrated and cohesive economy
  • A competitive, innovative and dynamic ASEAN
  • Enhanced connectivity and sectorial cooperation
  • A resilient, inclusive, people-orientated and people-centred ASEAN
  • A global ASEAN

While all of the above are important to businesses and governments across ASEAN, the vice-president places particular emphasis on the first characteristic. "If we want ASEAN to be a single market and command better bargaining power, we need to find greater alignment among ourselves, and ensure that we work as a single entity and not as 10 individuals, each with their own agenda," he asserts.

Trans-Pacific Partnership
It is hoped that Malaysia's inclusion in the Trans-Pacific Partnership (TPP) will also create overseas opportunities for Malaysian manufacturers. Indeed, the pact is one of the most ambitious trade agreements to have been signed.

Involving 12 countries – the USA, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru – the pact encompasses a collective population of around 800 million and currently accounts for around 40 per cent of world trade6. Similar to the objectives of the AEC 2015, the TPP aspires to enhance trade and investment between member states through the removal of tariffs and other policy barriers. While the TPP was signed by partner countries in February 2016, it will undergo a two-year ratification period7 where specifics of the deal's 30 chapters will be reviewed and amended if requested by member nations8.

Malaysian manufacturers stand to gain much from the partnership. Out of the nation's top-10 export destinations, almost one-quarter are TPP member countries – excluding those also covered by AEC, which account for a further 24 per cent9. The introduction of the TPP will therefore see a significant reduction in export tariffs to places like Australia, Japan and the USA, which are prominent trade partners. It will also create opportunities to grow trade with countries like Canada, Mexico and Peru, leveraging the removal or a reduction in tariffs with these countries.

Dato' Dr Ir Andy Seo cautions against the full implementation of the deal however, citing anti-TPP sentiment in both member and non-member countries. Nonetheless, he remains optimistic that – when ratified – the deal will significantly benefit Malaysian trade.

Future Potential
The facilitation of multilateral agreements with other nations is key to helping grow Malaysian manufacturers overseas and expanding the Malaysian economy. The AEC and TPP, notably at different stages of development, present platforms upon which trade and investment deals can be struck with other nations, both within Southeast Asia and elsewhere across North Asia, Oceania and the Americas.

While valiant, both initiatives nonetheless face on-the-ground implementation challenges. Foremost among these are the ability to freely import foreign workers, the harmonisation of international standards that are among the highest globally, and the complete removal of tariffs, particularly those relating to what the ASEAN nations deem "sensitive" goods.

Dato' Dr Ir Andy Seo calls for all countries that are part of both the AEC and the TPP to address these issues; not only to assist Malaysian manufacturers to grow their businesses, but also to ensure all nation members reach their full economic potential and capitalise on the wealth of opportunities multilateral agreements present.

Debbie Mak, Head of Global Trade and Receivables Finance, HSBC Malaysia, concludes: "Member countries might consider to harmonise standards in areas like tariffs, accounting, foreign direct investing, and the movement of workers from one country to another, in order to leverage each other's strengths and create a more equitable and sustainable economic bloc".

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