The official agreement to create the ASEAN Economic Community (AEC) was signed on the 22nd of November 2015 in Kuala Lumpur, by ten leading nations of Southeast Asia including Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. Upon its full implementation, the AEC aims to transform the economies of these ten ASEAN Member States (AMS) into a single market and production base, thereby creating new opportunities and realising economic integration in the region.
This cooperation is expected to increase the attractiveness of the ASEAN market, narrow development gaps and promote fair competition between AMS. While larger Multi-National Companies (MNCs) seem ready for the launch of AEC expected to be in 2015 to 2016, Small and Medium Enterprises (SMEs) are generally less prepared, with observers highlighting a lack of awareness among SMEs regarding the AEC. This article seeks to provide a brief overview on the impact of AEC on SMEs in Singapore.
ASEAN’s Economic Outlook
ASEAN has a vast market with a combined Gross Domestic Product (GDP) of nearly SGD 4 trillion and over 600 million consumers – more populous than the European Union, hence providing huge business potential. This is reflected by increasing interest from global investors, contributing to an overall Foreign Direct Investment (FDI) of nearly SGD 200 billion in 2013. Upon successful implementation of the AEC, the ASEAN economy is estimated to enjoy rapid growth with annual growth projections of 5.4% from 2014 to 2018. Coupled with the projected deceleration of the neighbouring economies of China and India, ASEAN stands to become an appealing destination for foreign investment.
SMEs as the backbone of the ASEAN economy
SMEs play an important role in a thriving ASEAN economy, accounting for 95% to 99% of all enterprises and 51% to 97% of total employment. The contribution of these enterprises to each AMS’s GDP is between 30% and 53%, and the contribution of SMEs to national exports is between 10% and 30%. SMEs are thus a vital component of the overall national economy in terms of generating income and employment.
Potential Benefits of the AEC to SMEs
The implementation of AEC provides exciting possibilities for Singapore SMEs to invest in regional market expansion due to the following purported benefits:
Simpler customs procedures: One of the key tenets of the AEC is to ensure smoother procedures accompanied with easier and uniformed documentation for the movement of goods among the ten AMS. This will ease difficulties faced by some of our clients, such as time lags in cross-border shipment of goods through customs and uncertainty over how long it will take, which results in poor customer satisfaction and increased cost. The ASEAN Customs Transit System (ACTS), an automated system that monitors the movement of goods in transit through AMS, will facilitate a smoother cross-border shipment process. The development of ACTS is currently in progress and will be piloted between April and October 2016.
Self-certification of product origin: A Preferential Certificate of Origin (PCO) is a document that certifies an exporter’s product as qualifying for preferential tariff treatment based on its Rule Of Origin under an existing Free Trade Agreement (FTA). Upon implementation, certified SMEs can self-certify goods by declaring it on commercial invoices, instead of applying for a PCO through Singapore Customs. This saves on costs to engage agents as well as time for the approval of applications. A pilot trial involving Singapore, Brunei, Malaysia and Thailand since 2010 has shown optimistic promise.
Harmonisation of standards: The process of exporting goods are often hindered by the variations in each AMS’s national standards, ranging from safety guidelines to technical regulations. Insufficient knowledge on the difference in standards is often an unsurmountable barrier to SMEs that wish to venture out of Singapore. Efforts to harmonise these standards among AMS will make it easier for SMEs to open new markets for their businesses.
More conducive investment environment: The ASEAN Comprehensive Investment Agreement (ACIA), effected in 2012 commits AMS to facilitate, liberalise, promote and protect cross-border investment in ASEAN. More importantly, this provides SMEs with the assurance of fair and equitable treatment and protection against unlawful expropriation, thereby lowering the risk of venturing into other AMS.
In conclusion, the AEC offers SMEs a myriad of opportunities upon complete implementation, probably closer to 2018 than the official launch in 2015. In order to tap onto the regionalisation benefits conferred by AEC, Singapore SMEs need to upgrade their fundamental capabilities and internal processes to support such growth plans. SMEs may even explore the possibility of using business diagnostic frameworks, for instance the Business Excellence Framework from SPRING Singapore, for a better understanding of their company’s strengths and weaknesses. This will provide a timely catalyst for SMEs to begin the journey of building an efficient, profitable and more importantly, a sustainable business.
The World Bank, GDP Statistics for 2015
Association of Southeast Asian Nations Foreign Direct Investment Statistics, Total Net Inflow of FDI in 2014
ASEAN Economic Community: Opportunities through Economic Integration in Southeast Asia, International Enterprise Singapore; May 2015
ASEAN SME Service Center
- Roger Loo & Keith Foo from BDO Consultants Pte Ltd -