2010 Mar 05
March 5, 2010

How RP fares in ASEAN-EU ties

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When ASEAN first embarked on formal engagement with the European Union 33 years ago, the relationship was typically between developed and developing economies – a carryover from colonial times. The EU represented some of the most advanced countries in the world, while ASEAN comprised struggling developing countries. ASEAN exports were predominantly raw materials, basic manufactured products, and low-end consumer goods. The EU provided manufactured goods, capital equipment and high-end consumer products. And it also provided technology and development assistance.

Today, ASEAN has become one of the most economically dynamic regions of the world. The EU remains a major global economic power. Their respective assets and clout have provided a strong basis for a dynamic relationship that has seen the EU become ASEAN’s biggest investor and its third largest trading partner.

Even so, the ASEAN-EU relationship has much farther to go to reach its full potential. The European business sector, not government, has become the principal actor in this integration not only between the EU and ASEAN but within ASEAN itself. But business can only go so far in playing this role without active encouragement from government through appropriate policies and incentives.

The onus now is on ASEAN governments to take more aggressive steps to take the relationship forward. The EU has been pushing for integration of markets, partly because of the fear that it would be left out in the cold when the ASEAN plus three free trade area becomes a reality and APEC amounts to something more than a voluntary organization. The ASEAN market has become too valuable to concede to China and Japan after decades of taking the region for granted. ASEAN too has grown in stature politically and the EU no longer views the western Pacific as an American lake. In 2001, the EU initiated the establishment of the Trans-Regional ASEAN-EU Trade Initiatives (TREATI), a policy dialogue mechanism/process for economic and trade-related issues. It included technical assistance to study the elements of an ASEAN-EU FTA. This eventually led to the start of negotiations for an ASEAN-EU FTA in 2007. After seven meetings, however, the talks were put on hold in March 2009 at the instance of ASEAN, which cited the need to reflect on the structure of such an FTA.

Bilateral FTAs

The EU, however, has not given up and has now embarked on negotiating bilateral FTAs with individual ASEAN countries, beginning with Singapore, its biggest trading partner in the region. Singapore has been the most aggressive in entering into such agreements because it has no agricultural sector to protect and a practically tariff-free regime for everything else. Malaysia, Vietnam and the Philippines are said to be on the EU’s list of future FTA partners.

Regrettably, the Philippines has been a relative wallflower in the FTA dance floor, and on the rare occasions when we got up to dance we stumbled badly – e.g. the agonizing fight to get JPEPA ratified and now the rumblings emanating from domestic industry with the implementation of the ASEAN-China FTA. There is a growing perception in Europe that we are not ready or are unwilling to be next in line to Singapore. If this perception is allowed to simmer, we could find ourselves missing out on this opportunity. There may not be a next round, or if there is one, the price of admission may be more steep.

Fortunately, regional integration – just like globalization – is accelerating even without governments consciously pushing it. While the absolute value has increased, the share of the EU to ASEAN’s total trade has declined. If we look at the share of the EU in ASEAN’s total trade, it has actually decreased from 15 percent in 1977 to 11.5 percent in 2008. This has been the result of two major developments: the rise of intra-ASEAN trade and the explosive growth of trade with China. But the critical role of the EU is not as apparent as the statistics would suggest. A close look at the commodity structure of EU-ASEAN trade shows that it has undergone a dramatic change. Where in the past the exports from ASEAN used to be dominated by raw materials, basic manufactures and low-end consumer goods, today, they consist of high value parts and components, semi-manufactures and capital goods. A large proportion of this trade is today generated within the global supply chain of multinational corporations, and, accordingly, a fair share of the EU-ASEAN trade can be characterized as intra-corporate transfers. This development is the result of ASEAN investments dependent on FDI rather than domestic sources and therefore its economic integration initiatives are oriented towards facilitating the operation of non-ASEAN multinationals rather than its own home-grown enterprises.

Indeed a significant part even of intra-ASEAN trade is driven by multinationals, many of them European. A survey conducted by the European Commission Asia Invest Programme some years ago revealed that European giants like Unilever, Siemens, Alcatel-Lucent, Nestlé, Philips, Daimler Ag, Shell, Thyssen, L’Oréal, and ST Microelectronics have shifted from plant location based on “country-targeted units (one or more production units manufacturing a range of products to be sold locally), to a product-targeted structure, where regional units are producing the same goods (with corresponding economies of scale) in dedicated plants, to be sold across the whole ASEAN market.” The survey also showed that this change in strategy includes non-ASEAN countries, notably China, as a source of inputs or as a destination for certain categories of products. Most of these MNCs have regional headquarters based in Singapore. It concludes that tariff reduction is an important driver in their location decisions but that deciding where in ASEAN is based on other factors.

Philippines must compete

So from an ASEAN-wide sense this is well and good. It’s a different story though when you look at it country by country. ASEAN is made up of economies which are different in levels of development (and more critically in infrastructure) and size. Also, significant differences remain in tax structures, labor laws, competition policies, technical standards and regulatory environment for doing business. Then there is the fact that there is no common external tariff. So now that intra-ASEAN tariffs are no longer the primary drivers for location decisions, these other factors now come into play.

When Phillips decided to consolidate its lights production in ASEAN, it made the decision based on the size of the market and labor costs. They closed their plant in the Philippines and moved it to Indonesia. On the other hand, Phillips decided that the Philippines is the best place in ASEAN for its semiconductor production. While logical, it shows why large-scale manufacturing in the Philippines is not as competitive and why we continue to lose those that we have at present. The same is true for the motor vehicle industry which is now consolidating in Thailand because the supply chain for the auto industry has developed there over time and why Malaysia with its Proton has an issue with Thailand. These factors also come into play when explaining why finance companies have consolidated their operations in Singapore and why most European multinationals have their headquarters in Singapore. You win some, you lose some.

The point is that while it is true that European multinationals are helping drive ASEAN integration, they can only do so up to a certain level. ASEAN’s level of integration has not yet reached a point where individual differences between economies are not so significant as to affect location decisions.

All this means that our government should act to: 1) make our economy competitive by undertaking deep regulatory reform; 2) be more aggressive in pushing for deeper integration in ASEAN beyond just tariffs; and 3) seize the opportunity to engage the EU in bilateral FTA negotiations at the soonest possible time. If we do not do these, we risk being left behind. –Roberto R. Romulo (The Philippine Star)