How to further a win-win relationship with Asean: EU-AEC strategic opportunities

March 8th, 2016

By Sarah de Geest – Junior Fellow

Will the new AEC[1] (Asean[2] Economic Community) evolve towards an “Asian Union” in the image of the European Union (EU), what are the challenges it faces and how can the EU build an economic and diplomatic win-win relationship? The AEC is the newest economic platform on which Asean hopes to expand[3] and eventually build a borderless community.[4]  In the short term its goals are to establish a single market among seven of the ten most developed countries in the region.[5]

Introduction 

The EU and Asean enjoy a longstanding friendship dating back to 1972, when the European Economic Community (EEC) was the first entity to establish informal relations with Asean, as such the two regions look at back at more than 40 years of friendship and cooperation. In more recent times the EU and Asean cooperate in many areas such the war on terrorism, political and security issues, human rights, regional integration and disaster management. Despite the EU being the second largest trading partner and biggest provider of Foreign Direct Investment (FDI), the two regions have yet to conclude a comprehensive Free Trade Agreement (FTA).[6] In the wake of its increased cooperation with Asean region as a whole, the EU did conclude FTAs with Singapore (2012) and Vietnam (2015), while negotiations continue with Thailand and Malaysia.[7] Most recently a NYT journalist recalls his time in Southeast Asia: “It is often no secret who is committing abuses in Southeast Asia, whether they are illegally cutting down forests, trafficking drugs, skimming a percentage from government transactions or shooting protesters. Unusual wealth, the euphemism for suspected graft, is everywhere.”[8] It is not difficult to see why some tensions persist between  the EU and some Asean members states as they struggle with high levels of corruption[9] and political instability,[10]. Moreover, EU commissioner Cecilia Malmström’s new trade and investment policy, ‘trade for all’, puts emphasis on values (human rights, labor rights, fight against corruption, sustainable development), effectiveness (focus on opportunities European SMEs) and transparency (opening up negotiations to public scrutiny).[11] These principles should be communicated consistently if they are to shape the evaluation of strategic opportunities with Asean and the new AEC.

Despite persisting issues with regards to dictatorial rule and popular malcontent[12] significantly decreasing the attractiveness of the region for investors and businesses, negotiating better access to the Asean market is clearly a priority for the EU. To this point, in 2015 the EU and Asean issued a joint statement claiming ‘new momentum’ in the relationship and the desire for a formal ‘strategic partnership’.[13] As January 1st 2016 marked the official launch of the AEC, EU immediately reaffirmed the relationship by the official inauguration of the EU mission to Asean on the 26th of January 2016. This mission establishes a permanent ambassador of the EU to Asean in Jakarta, again, indicating the clear resolve to further enhance cooperation between the two trade blocs. On an economic level the EU is not giving up on closer cooperation – continuing to pursue bilateral relations with Asean member states as well as a show of renewed interest in a regional FTA. [14]

As for most of us the creation of the EEC and the evolution from this economic community to a single market with modern institutions and an ever closer economic cooperation within the union is recent history – hearing the Asians talk of aspiringly of a ‘borderless community’ no doubt rings familiar, but what does this mean for the EU-Asean relationship?

The scope of this brief does not extend to the interaction of the AEC with this affect other regional initiatives – is there synergy with One Belt One Road[15] (OBOR), or with the Asian Investment Bank (AIB)? As OBOR remains a fluid and amorphous project – it moves at a fast pace and touches upon of Asean’s key-priority of “connectivity”. Also, the Asian Development Bank (ADB) has shown great interest in developing the borderless community and will likely play a role backing its development as well as the potential investment/funding pool that is China’s new Asian Investment Bank.

EU – Asean interests breakdown

Despite familiar aspirations, there are clearly strong differences between the two trade blocks, ranging from regulatory frameworks, levels of integration to diverging development levels of the individual members. It is therefore warranted to say that any real comparison between Asean and EU is premature. Because of this, it is crucial to identify the different interests and fully appreciate that discrepancies could lead to more and better insight in the EU and better cooperation with Asean – serving the parties different interests. For example – by helping Asean overcome its problems it could potentially discover new ways to revive its stagnating economy. It is also important to see how EU-Asean cooperation could tie in with other initiatives in the region. EU is seen as a potential model for Asean – but how far and in what regard?

What are some of the core EU interests in the region?

1. EU regards regional stability in Asia as crucial for global peace and security. Asean has been an important factor in keeping this peace and engage with most actors in the region – including China. Overall, Asean favours neutrality and their philosophy puts emphasis on consultation and consensus. They carry both the knowledge and understanding of the region and the have a good relationship with most if not all global actors. It is pertinent for both the US and the EU to strengthen and support this political aspect of Asean, and help them to deal with any future geopolitical shifts. Moreover, Asean appears to be slowly growing more comfortable taking a political stance, as its 2015 joint communique makes specific mention of the South China Sea conflict. This is in stark contrast with 2012, when Asean failed to put out a joint communique for the first time since its beginning. At that time, Cambodia did not wish to include the matter in the document because it was supposedly ‘anti-China’. This progress is something the EU would be wise to support and strengthen.[16]
2. Our trade policy reflects principles and values such as human rights, despite some researchers calls warning the EU not to “wave the democracy flag,”[17] it is warranted to keep this as a firm standard to build upon. Hopefully as Asean takes on these values it generates more responsibility within the Asean governments and within Asean union to push for lasting reform. There is no issue bringing these values into the conversation provided they are subject to frank and open to discussion – used as a (firm) starting point but not a zero-sum condition. One possible approach could be more cooperation with Japan, an Asian nation that already adopts many Western values and remains moderately prosperous as friendlier way to introduce the notion in Asia.
3. The economic centre of gravity is shifting towards the East – while Asia is not currently the most attractive for financial markets, this shift should be taken into account as it likely produces a long-term interest in the region.[18] For example it could become one of the most attractive markets for consumer products as well as investment products. The Chairman of Securities Commission Malaysia and Chairman of ACMF[19] argues that ASEAN is the region with the highest savings rate in the world and ACMF is slowly but successfully driving greater intra-regional flows.[20] Moreover Asean markets are currently very cheap, making this the best time to initiate long term investment. One fund manager says “emerging markets have lagged behind developed markets, we should be able to find businesses with potentially better growth prospects – but significantly cheaper valuations – than their developed market peers.”[21]
4. The EU’s desire for Asia to become more sustainable, eco-friendly in the long run, reduce waste and become circular economy[22], for example by expanding on the Regional EU ASEAN Dialogue Instrument (READI). Asean is still dependent on the oil imports – and the low oil prices will be very attractive in the coming years. However it is equally important for Asean to prepare itself for the phases after that by building infrastructure to support a green economy. Several EU countries have extended experience with this and can find an export market for their technology and equipment such as wind farms and solar farms.

Since its debut on the world stage in 1967, Asean’s problem solving approach is based on informal, consensus and non-interference, dominated by its non-binding character. To arise as a more integrated regional player Asean should consider adapting this approach to boast both internal efficacy and attractiveness to FDI. This list (while not exhaustive) outlines some of the top priorities of the AEC:

1. To create a single market economy that fully integrates in the global economy, allowing for the pooling of regional resources and economies of scale.[23] This goal poses the question whether or not Asean will introduce the yuan as currency or whether it will stick to the ‘Chiang Mai initiative (CMI)’ which allows for a multilateral currency swap arrangement.[24]
2. Evolve towards a rules based structure that provides a more binding character and potentially form a customs union. This would greatly aid the region in their relationship with the global community.[25] However it is advisable to proceed with caution, since the deepening integration efforts the region has struggled with more transnational crime.[26]
3. New emphasis on micro-, small-, and medium enterprises [MSMEs] (for example through e-commerce)[27]; focus on specific sectors such as tourism development and healthcare.[28]
4. Promote good governance (for example by undertaking capacity building programmes with knowledge partners such as OECD and the Economic Research Institute for Asean and East Asia (ERIA)).[29] To this effect Asean looks to attract more FDI[30] and strengthen linkages to global and regional Research & Development networks[31];
5. Facilitate the use of green technology/development (promote biofuels, low carbon technology, food safety, etc.[32]). Another pull towards a more green and efficient economy is making the process of trade paperless and embrace digitalisation of the trade processes. This makes it more difficult to subvert rules and easier to implement the uniformity that is needed to create a borderless community, not to mention the increased efficiency and better logistics.[33]

How can EU and the new AEC find synergy and win-win cooperation

The ADB has shown interest in the AEC blueprint from the start – involving itself in most of the papers and policy research[34], the AIB considers for its first investment the ambitious $13bn the Trans-Asean Gas Pipeline (TAEG) and Trans-Asean Electricity Grid (TAEG), the project is both ‘shovel ready’ and provides extensive benefits for both regional and Chinese economic initiatives.[35] Both projects would make up 23% of the AIBs initial $100bn capital. Another factor that drives the regions’ integration project is the ever more powerful big neighbour China, proving both a wealth of economic opportunity as well as a stick behind the door, the odds are good for Asean to develop into the borderless economic community by 2025.  For the EU, recognising Asean’s interests and motives  should provide fertile ground for a real win-win partnership in the future to help the region become more stable and more interactive and interconnected while providing opportunities to take EU-Asean strategic cooperation to the highest level.

As the US and China look to increase trade in the region with the Trans Pacific Partnership Agreement (TPPA) on the one hand and OBOR on the other. While both projects face hurdles – many countries eagerly look to join in and benefit from the US pivot and China’s economic expansion[36], it is likely to especially boost Chinese investment and presence in the region. If the EU does not  get seriously involved with Asean at this time it risks getting outbid by other key players. Meanwhile it is key for the EU to get involved while staying true to its core trade principles as reflected in its policies.[37] If we are proactive rather than reactive, we can still have a chance to help set the agenda – alongside TPPA. The EU will therefore have to overcome its bureaucratic weaknesses that prevent it from reacting swiftly to economic opportunities and hamper its capability to stay ahead of problems. It is easy to agree that more economic cooperation brings benefits in the short term, but how we choose to build the strategic partnership will determine whether we can create a quality strategic partnership embedded with long term sustainable growth and synergy for both the EU and Asean. Some additional practical opportunities to explore could be:

1. Increase cooperation with Asean working groups such as the (ERIA), S. Rajaratnam School Of International Studies (RSIS), the Institute of Southeast Asian Studies (ISEAS) and other stakeholders such as the ADB. This should provide the parties with clear communication and understanding how each specific interests can complement the others’.[38]
2. Cooperate with Asian Capital Markets Forum [ACMF] to help meet objectives AEC and raise Asean profile as asset class. Companies such as BlackRock push for more active investment in the region, while the region is not hugely popular at the moment they do see potential for long term well-tailored investments.

Any cooperation should be based on strong principles and common ground. In the end, it is up to the EU to take the initiative and create a serious unitary strategy and vision for EU. It needs to get involved in the region and proactively set the agenda helping Asean reach its full potential. Any bonds that it strengthens will mean long term benefits as the EU continues to link up with the world’s second largest region. A more interconnected partnership will bring prosperity for both regions and set the stage for the second part the 21st century. If we fail to recognise the momentum however, we risk being at the mercy of the economic and financial markets as well as new rising power(s).

[1] AEC Blueprint 2015-2025 consists of (i) A Highly Integrated and Cohesive Economy; (ii) A Competitive, Innovative, and Dynamic Asean; (iii) Enhanced Connectivity and Sectoral Cooperation; (iv) A Resilient, Inclusive, People-Oriented, and People-Centred Asean; and (v) A Global Asean.

[2] Asean now consists of a group of 10 countries: Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar, and Cambodia. Asean is building two parallel communities: the Asean Political-Security Community and the Asean Socio-Cultural Community.

[3] AEC Blueprint 2025 (2015), [Link].

[4] Asean 2030, Towards a Borderless Economic Community (2014), [Link].

[5] The EU and Asean in 2016 – EUISS, 10 February 2016, [Link].

[6] A practical way forward for EU-Asean relations, 13 March 2014, [Link].

[7] Mission of the European Union to Asean, Trade: Facts and Figures, [Link].

[8] The author mostly points towards the culture of impunity – with examples from Thailand and Laos. see Reporting on Life, Death and Corruption in Southeast Asia, 21 February 2016, [Link].

[9] The missing piece in the fight against corruption, 25 February 2016, [Link].

[10] EU suspends Thailand FTA while country is run under military dictatorship. Meanwhile the Malaysian govt shows a worrisome trend towards more Sharia laws and more suppression of religious minorities. Malaysia eyes a trade pact by the end of 2016 – feeling pressure from EU-Vietnam FTA. It would be advisable for the EU to take a consistent stance against the national governments’ practices as it did with Thailand in the past. Malaysia’s evolvement in TTP on the other hand is proving to be a positive weight in the balance towards reaching a bilateral FTA.

[11] EC Press Release, Trade for all: European Commission presents new trade and investment strategy, 14 October 2015, [Link].

[12] Reporting on Life, Death and Corruption in Southeast Asia, 21 February 2016, [Link].

[13] Joint Communication To the European Parliament and the Council,

The EU and Asean: a partnership with a strategic purpose, 18 May 2015, [Link].

[14] Ibid.

[15] One Belt One road represents the new foreign ecumenic policy of the CCP, looks to infrastructure development but also in economic integration East-Asia, South East Asia to Europe. Infrastructure is one driver that appeals to ASEAN.

[16] For example Indonesia opened up its automotive industry – Indonesia Lunch Dialogue, Davos 2016, [Link].

[17] A practical way forward for EU-Asean relations, 13 March 2014, [Link].

[18] Chart shows the centre of GDP moves East, predicting it to land just above India by 2025. While this is not a literal shift towards Asean, the regional pull should be taken into account. See: Daily Chart, The world’s shifting centre of gravity, 28 June 2012, [Link].

[19] Asean Capital Markets Forum, [Link].

[20] Greater opportunities: The Q&A with Datuk Ranjit Ajit Singh, 2 March 2015, [Link]

[21] Ross Teverson, see [Link]

[22] Jyrki Katainen, European Commission Vice-President responsible for jobs, growth, investment and competitiveness, [Link].

[23] Greater opportunities: The Q&A with Datuk Ranjit Ajit Singh, 2 March 2015, [Link]

[24] Discussion see [Link 1] & [Link 2].

[25] The Feasibility of an ASEAN Customs Union Post- 2015, 4 March 2015, [Link].

[26] Transnational crime booming across S-E Asia, aided by rapid economic integration: UN, 25 February 2016, [Link]

[27] Ibid, p. 1.

[28] Ibid, p. 26.

[29] Ibid, p. 19.

[30] AEC Blueprint 2015, p. 6.

[31] AEC Blueprint 2015, p. 17.

[32] Ibid. p. 20.

[33] See for example the same trend in the UAE’s [Link]. Saudi Arabia most notably is profiting from the digitalisation [Link].

[34] See for example AEC Blueprint 2025 (2015). Asean 2030, Towards a Borderless Economic Community (2014).

[35] China’s Asian Infrastructure Bank First Loan Analysis, 9 February 2016, http://www.eurasiareview.com/09022016-chinas-asian-infrastructure-investment-bank-aiib-first-loan-analysis/.

[36] Especially India, see [Link].

[37] The US under the Obama administration seems to have abandoned its human rights centred narrative as it keeps silent on some core issues in the region: see [Link] .This could be due to recent military interests in South China Sea see [Link]

[38] AEC Blueprint 2025, p. 1.