FORMOSO, CHRISTOPHEREcon401SUCase Study #3 - ASEAN Economic Community: What is it to SMEs?

Introduction

It has been almost fifty years since the establishment of the Association of

Southeast Asian Nations (ASEAN) yet most people know little to nothing about

this association. The founding members Indonesia, Malaysia, Thailand,

Singapore and the Philippines, established the ASEAN on August 8, 1967.

Eventually other neighboring countries joined, in 1984 Brunei Darussalam, 1995

Vietnam, 1997 Laos and Myanmar, and 1999 Cambodia, making up today’s 10

member States of the ASEAN.

The ASEAN’s aims and purpose according the ASEAN Declaration (Bangkok

Declaration) include cooperation in the economic, social, cultural, technical,

education and other fields, and regional peace and stability through justice and

rule of law and adherence to the principles under the United Nations Charter.

Taking this further, the establishment of the ASEAN Economic community to

unify and integrate the region’s nations, we can begin to see more participation in

the region from the professional and small and medium enterprise industries.

All of the above sound well and good but what does it really mean for us ordinary

citizens? As business owners how does it affect our trade? This paper explores

the aims of the ASEAN Economic Community and its foundations to get a better

understanding of how the business environment will. And with this information,

hopefully inspire the creation of new strategies to adapt to these changes.

The ASEAN Economic Community

In 2003, the Association of Southeast Asian Nations (ASEAN) set 2020 as the

target date for the establishment of the Asean Economic Community (AEC). But

in 2007, the target was moved up to this year December 31, 2015. In the same

spirit of the North American Free Trade agreement (NAFTA) and the European

Union (EU) was to establish a single and uniform economic entity, the ASEAN

agreed to establish the AEC to create a stronger and more unified economic

environment for all member nations to uphold peace and increase economic

growth.

The vision for the AEC is to be accomplished through its four pillars. The first of

which is the transformation of the ASEAN, of all 10 member countries, into a

single market and production base. Through the free flow of goods, services,

investment, capital and labor, the AEC creates a single territory for consumption

and production.

The second pillar is the creation of a competitive economic region utilising an

interconnected network of related policy making agencies. This would also cover

the creation of consumer protection standards and the establishment of an

ASEAN intellectual property system.

The third pillar is equitable economic development through the reduction of

development gaps among member nations and the development of small and

medium enterprises. The association has identified that growing SME innovation

networks and capacity building projects is key to equitable economic

development or inclusive growth. Reducing development gaps between member

nations through technical assistance programs are being strengthened as well

especially for the CLMV countries (Cambodia, Laos, Myanmar and Vietnam).

The fourth pillar is the unified integration of the AEC into the global economy

including external economic relations and strengthening linkages to the global

supply chain. In pushing for the 3 pillars above, we put ourselves in a stronger

position in developing ties with the big nations who play critical roles in the global

market place. The creation of trade agreements with the ASEAN+3 (China,

Japan, Korea), India, and Australia New Zealand seek to establish the ASEAN as

a unified consumer and producer ripe for investment and trade opportunities.

Basic Facts about SMEs in the Country

According to the latest data from the Department of Trade and Industry (DTI),

Small and Medium Enterprises (SME) in the Philippines account for 99.6% of all

registered businesses, employ more than 60% of the labor force and contribute

16% to 35% of exports. These types of statistics can be seen throughout the

ASEAN. But despite the weight of the collective small and medium enterprises in

the economy, not much has been done toward a concerted major development of

a roadmap for SMEs.

 

On one hand the Philippines has been hailed as the top in Asia and third in the

world for financial inclusion by the Economist Intelligence Unit (EIU) mainly due

to the development of the microfinance industry. While on the other hand, we see

reports on the absolute wealth increase of the Philippines 40 wealthiest ($13B)

accounting to 76% of our absolute GDP increase ($17B). The statistic indicates a

very top heavy growth of the nation with minimal trickle down effect and ought to

be a concern especially when compared to other countries like Japan (2.8%) and

Malaysia (5.6%).

Advantages to SMEs

One major advantage the AEC presents is the widening of the potential market

that entrepreneurs can serve. One of the challenges entrepreneurs face when

starting a business is being able to create a product that would fit a wide enough

market to create enough profit for long-term sustainability. And with the ASEAN’s

600 million large population now accessible due to the AEC, even the most niche

businesses will be able to find its place.

One other advantage that might take time for entrepreneurs to adjust is the ability

to source or produce components of their products or services that they before

had only the option of the local labor or producers to fulfill. This has the potential

to lower their costs of doing business and increase the capacity at which they are

able to produce qualitatively and/or quantitatively.

The above benefits are more of the direct advantages which SMEs will be able to

benefit from the establishment of the AEC but one indirect advantage would go

toward the open comparison among the association nation members. As the

saying goes, every business has a silent partner when starting his business, and

that’s the government raking in a percentage of profits as taxes. With a stronger

awareness and savvy business owners gain from doing cross border regional

trade, governments would have to also begin to reassess their policies and be

more competitive in attracting businesses.

Disadvantages to SMEs

Noting all of the advantages of the AEC is important for SMEs to take advantage

of this inevitable change but disadvantages need equal if not the most attention,

as these could be crucial to survival.

One of the most obvious disadvantages of the AEC to SMEs are the potential

new entrants to the country that might have absolute advantage over their trade

whether in the quality of their offering or economies of scale. New entrants may

come in different forms, smaller, bigger, better, cheaper or just different. Any of

them could negatively affect market shares.

Coupled with the above would be having to deal with more bureaucracy. Now

that SMEs will face not only local but regional competition, this would mean

having to consider bringing business outside or inside of their home countries.

The AEC may provide us with a single customs and certification system for

cross-border trade, but in the event of failure either in transit or otherwise, the

entrepreneur would have to deal with different national borders. This would entail

legal fees to navigate the local regulation system.

SMEs will be losers in the integration

My personal view of this is yes, SMEs in general would be losers in the

integration especially in the short-run. SMEs will be outgunned and

outnumbered. Majority of the SMEs are not even aware of the kind of change

that is taking place and despite the inevitability of this change, most are still going

on with business as usual. As economists have pointed out, there will be no

sudden change that will happen but a gradual and subtle shift in the business

environment. Some might see this as a good thing as it supposedly makes it

easier for everyone to adjust, but reality is that people usually take notice too

late.

I believe the AEC is a step toward a better economic life but for those that won’t

begin to take action immediately and create new strategies to deal with new

competition, they might find themselves blindsided and knocked out by their

regional competition. But with or without the AEC, isn’t this what we should be

doing anyhow as business owners?

Conclusion

The AEC, given all of its intricacies, features and details, is hard to fully

understand and master. We might not be able to understand the AEC in its

entirety but we need to acknowledge that these are inevitable changes to our

business environment. As SMEs, we have to look at how we will survive and

thrive on daily basis. And the only way to do this is through the mastery of our

trade recognizing our own strengths and weaknesses within and without borders.

As business owners, we do not have the luxury of labeling change such as the

AEC as good or bad. All that we have is the privilege of seeing this as a new

landscape of where we might be able to apply our trade and further our mastery.

It is up to us whether we use this change to our advantage or as something that

might permanently hurt us. We need to see this as a mere expansion of our

playing field and with it comes new players. It must serve as a wake up call to

action and not as a harbinger of doom because there really is no other more

appropriate response. At the end of the day whether or not the AEC affects us

we would have become better off.

Listings

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Philippines.

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Business: Implications and Imperatives.

ASEAN Economic Community Blueprint. (2008, January).

Galang, M. (n.d.) The ASEAN Way: A Barrier to the 2015 ASEAN Integration?

ASEAN Economic Community Chartbook 2014. (2014, December).

SME Guidebook Towards the AEC 2015. (2013, November).

Thinking Globally, Prospering Regionally. (2014, April).

Aldaba, R. (2013, January). ASEAN Economic Community 2015 SME

Development: Narrowing the Development Gap Measure.

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Community: Progress and Remaining Challenges.

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Perspective.

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The Founding of ASEAN. (n.d.). http://www.asean.org/asean/about-asean/history

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community/item/major-achievements

Economic Achievement. (n.d.).

http://www.asean.org/asean/about-asean/history/item/economic-achievement

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