20 May 2014

EY outlines challenges hindering an effective AEC

Political, legal and organisational complexities and regulatory burden, as well as the lack of uniform and harmonised 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, says EY.

A new EY report, Trade Secrets: ASEAN economic community and inward investment, explores the progress of the AEC through the eyes of business, 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,” said Tan.

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are amendments to important legislations with little notice, arbitrary interpretation of laws or policies, and outdated rules and regulations.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, legalisation 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.”

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 four 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 harmonised 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 said.