The Upcoming AEC Compliance Deadline
The ASEAN Economic Community (AEC) compliance deadline is due at the end of December this year. Although the ASEAN bloc has agreed tariff reductions and also signed off Free Trade Agreements with other countries – most notably the ASEAN-China, ASEAN-India and ASEAN’s agreement with Australia and New Zealand, four of the ASEAN countries have been given an extended period of time to come into trade reduction compliance and be fully integrated with the rest of the union.
The countries concerned – Cambodia, Laos, Myanmar and Vietnam have weaker economies than the big ASEAN hitters and have also been less sophisticated in their tax regimes. The issue for these four nations is to do with the movement away from their traditional fiscal tax collection based on raising revenues from duties on imported goods, to raising revenues based upon VAT. It is not an easy transition to make. Firstly, the power base this gives the Customs and Excise regime – which are also responsible for border control – needs to be wrested away and placed back in the hands of the Central Government. Secondly, this is because such a regime traditionally protects local industry from cheap imports. This phenomenon is especially true in the AEC case, where many local industries are woefully inefficient; while the well-organized Chinese manufacturers are very close by and armed with a free trade agreement.
In addition to this, AEC compliance brings with it not just commitments to free trade, but the opening up of other industry sectors, such as banking, finance, medical care to ASEAN standards. The free movement of labor is also an issue. Nonetheless, the deadline is 31st December this year. What is likely to happen?
In my opinion, we can expect to see Vietnam make great strides to getting into alignment on most issues. They have already strategically positioned themselves as a direct competitor to South China’s manufacturing hub by reducing corporate income taxes to rates 3% less than that of the PRC. A further reduction to 20% CIT against China’s 25% is expected in 2020 – by the time of AEC compliance just four years away. In addition to this, Vietnam is part of the recently announced Trans-Pacific Partnership (TPP) agreement, which opens up the massive North American and Japanese markets to Vietnamese products. That will manifest itself in the form of a large increase of FDI into Vietnam and especially from the US and Japan in the textiles industry. Raw materials manufactured in these countries will be processed in Vietnam then re-exported back to those wealthy consumer markets. This will also be true in some respects to other industry sectors as well. Vietnam then has strategically positioned itself well to absorb the China trade threat by agreeing free trade deals that China doesn’t have, and by deliberately making itself a direct, cheaper competitor. Although certain structural reform issues within the AEC agreement will need to be worked on, the free trade aspect should be complied with.
Of more concern are Cambodia, Laos and Myanmar. To give an indication of their economic strength, all of these nations either directly border, or are very close to China’s Yunnan Province, yet collectively possess a GDP value of less than half of Yunnan’s capability. Of these three, Laos has been making considerable efforts, partnering with Singapore’s Government for assistance over customs and IP reforms. It can reasonably expected to partially meet the AEC deadline, although may only get half way there. Cambodia has good diplomatic ties with China and doesn’t share a border. It has also on occasion been somewhat militant towards ASEAN as a member, and cannot be entirely relied upon to absorb many of the AEC obligations. It may yet be embarrassed by a rather more progressive, yet smaller Laos. The situation in Myanmar is politically uncertain at present, with Aung San Suu Kyi having just won the national elections. It will take time for her to assess the reality for getting much needed reforms into place, and deal with a nasty insurgency in the north of the country. Yet given Myanmar’s extremely low human capital value – many of the potential workforce members are in fact illiterate subsistence farmers – not much can be expected from the country in terms of AEC compliance, and it remains, for now, the development laggard of ASEAN. That will change, but getting reform and seeing results there will be a decade long process.
So all in all, a mixed bag. But one message is clear. Vietnam will be powering ahead, and investors should start looking seriously at that market as a counterweight to increasingly expensive Chinese production.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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