The Future of the ASEAN Economic Integration Kiki Verico The Future of the ASEAN Economic Integration Kiki Verico Th e Institute for Economic and Social Research (LPEM), Faculty of Economics and Business , University of Indonesia , Jakarta , Indonesia ISBN 978-1-137-59612-3 ISBN 978-1-137-59613-0 (eBook) DOI 10.1057/978-1-137-59613-0 Library of Congress Control Number: 2016957799 © Th e Editor(s) (if applicable) and Th e Author(s) 2017 Th e author(s) has/have asserted their right(s) to be identifi ed as the author(s) of this work in accordance with the Copyright, Designs and Patents Act 1988. Th is work is subject to copyright. 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Th e registered company address is: Th e Campus, 4 Crinan Street, London, N1 9XW, United Kingdom In memory of my late father, Ma’as Sary (1943–1988) -- You have always been my inspiration To my mother, Nahdiar Ma’as, -- Without you none of this would be possible Pref ace Empirical experiences from the European Union’s (EU) economic integration, which has been adopted as theory in regional economic integration studies, show that neighboring countries within a region can achieve economic integration having undergone phases from trade (Free Trade Area/FTA) to investment ( Custom Union and Common Market ) before fi nally achieving fi nancial integration (Single Monetary Union and a Single Currency). Th is theory was fi rst proposed by Jacob Viner in 1950 and continued by Bela Balassa in 1961 who argues that this process requires formal institutionalization at the regional level. Southeast Asian countries have a similar formal institution at regional level, ASEAN (Association of Southeast Asian Nations) , established in 1967. Currently ASEAN’s commitment is to transform Southeast Asia ’s economic integration from free fl ows of goods (FTA) to that of invest- ment, services, and capital at the end of 2015 and afterwards named the ASEAN Economic Community (AEC) . Th e center point of this regional economic integration process is intra-regional trade, which connects both trade and investment at the regional level. Intra-regional trade is created by ASEAN Free Trade Area (AFTA) and in turn aff ects long-term invest- ment and free fl ows of people. Th e latter is part of the AEC. It is, there- fore, essential to observe the impact of AFTA on intra-regional trade and further the impact of intra-regional trade on the long-term investment infl ows ( Foreign Direct Investments/FDI ). vii viii Preface Historical perspectives prove that ASEAN’s economic integration process has been largely infl uenced by the international dynamic situ- ation, which includes, for example, the end of the Vietnam War, which led to the fi rst ASEAN summit taking place in 1976, almost ten years after ASEAN’s establishment in 1967. ASEAN commitments on AFTA in 1992 had been decided just after the end of the Cold War in 1989. Th e ASEAN enlargement to the APT was also aff ected by the dynamic changes aff ecting the ‘Greater East Asian’ ( Bowles and MacLean 1996) region after China adopted a market economy, joined the WTO, and became one of the largest economic entities, in terms of nominal GDP, in the world. To some extent, ASEAN needs external factors to stimulate its internal reform and cooperation. Given its open regionalism, which contrasts with that of the EU’s closed regionalism, ASEAN has several other economic cooperations that involve its members, such as direct bilateral trade agreements between members and non-members of ASEAN; sub-regional economic cooperation which involves limited member states of ASEAN; then regional cooperation involving ASEAN members as well as regional-plus which incorporates all ASEAN members with non-members under the so called “ ASEAN umbrella. ” Th is study attempts to analyze the impacts of bilateral, sub- regional, and regional economic cooperation to investment (FDI infl ows). Th is objective is essential for ASEAN if it is to shift its economic integra- tion from trade to investment. As for the regional- plus framework, this study will analyze the impact on not only shifting ASEAN’s economic inte- gration from trade to investment but also the impact from investment to fi nancial integration afterwards. In sum, this study will discuss all relevant arrangements of economic cooperation that could integrate trade, invest- ment, and fi nancial aspects in Southeast Asia from various level of coop- erations of bilateral, sub-regional, regional, and regional plus frameworks . ASEAN in Descriptive Data View Data of the World Trade Organization (WTO) in 2006 show that Asian regional trade depends more on the Asian region itself than from any other region. Th is can be seen through Asia’s intra export in which 50 percent Preface ix of Asian total trade goes to Asian countries while the remaining 50 percent goes to the rest of the world, as shown in Table P.1 (Appendix) Table P.1 shows Europe as the most prominent region for regional economic cooperation as their intra-regional merchandise trading achieves 73.6 percent in 2006. North America’s intra trade is around 53.9 percent. Africa depends more on Europe in which 40.8 percent of their export in 2006 went to Europe, while Latin America depends more on North America with 31.4 percent of their export going to North America. Meanwhile the Middle East depends more on the Asian mar- ket with 52.6 percent of their exports in 2006 going to Asia. Naturally, most of the region’s countries rely on their trade activities to their own region given the closer distance, lower cost in trade-related services such as export import insurance and transportation cost, as well as similarities in demand factors within countries in the region. In Asia, one of the regions with a potential bright future for strong regional economic integration is ASEAN with its ASEAN Free Trade Area (AFTA), which completed its 0 percent tariff rates among members in 2015 and will enter the economic community afterwards. Given this, it is essential to understand the potential capacity of AFTA in terms of enhancing trade liberalization and its connection to investment creation . According to Table P.1 in terms of trade Asia depends more on its region. Historically in Asia, Southeast Asian countries have good trade relations with East Asian countries. Th ey both are very close to each other and have had a long history of interdependent relations. Regional economic integration can promote FDI infl ows and eco- nomic development in individual countries of the region ( Aggarwal , 2008). Th erefore, the role of FDI infl ows becomes important to see the connectivity between ASEAN and East Asian countries. Th is is useful to assess potential interconnection between Southeast and East Asian countries. From a historical perspective, Japan, China, and South Korea have played an important role in promoting Southeast Asia economic networks. Japan established a Regional Production Network (RPN) in Southeast Asia to produce automotive and electronic products in several ASEAN countries in the 1930s ( Akamatsu 1944; Kojima 1978; Urata 1993). China had Guanxi , a traditional business network within ethnic Chinese in Southeast Asia ( Wang 2001). Th is network is also known as x Preface ECBN ( Ethnic Chinese Business Network ) and works based on trust and usually avoids formal agreements between them. China holds a non- formal yet solid business network in Southeast Asia ( Peng 2002). A regional production network producing fi nal goods has been established between South Korea and Southeast Asian countries. South Korea estab- lished production networks in Southeast Asia originally in Cambodia, Laos, Myanmar, Vietnam (also referred to as CLMV), and Th ailand, then to other Southeast Asian countries (Cheong 2011). Korea’s largest trading partners in Southeast Asia are the ASEAN-6, ASEAN’s found- ing members with the largest share starting from Singapore, Indonesia, Malaysia, Th ailand, and Philippines; while among the ASEAN-4, which are its CLMV members, the largest Korean trading partner is Vietnam. Korea’s exports to ASEAN are mostly of heavy industry, chemical prod- ucts, and light industries while Korean’s dominant imports from ASEAN are primary products, raw materials, and energy sources. China, Japan, and South Korea play important roles in promoting and enhancing production networks between East Asia and other Asian coun- tries especially Southeast Asian countries. Global production networks (GPN) in Asia have promoted more intermediate goods transaction than that of consumption and capital goods.