What Lessons Can ASEAN Learn from the EU?

Europe

Does the European Union (EU) offer any lessons to the ASEAN nations as they explore closer economic integration? In this opinion piece, Rolf J. Langhammer, a professor at the Kiel Institute for the World Economy, draws parallels between the two to explore that question.

ASEAN was founded in 1967. In that year, the European Economic Community (EEC), which was established in 1957 through the Rome Treaties, had almost finished its first stage of regional integration. It had abandoned tariffs on most industrial goods in intra-EEC trade in five consecutive steps (between 1957 and 1968). At the same time, it had agreed upon a common external tariff on these goods, which was the average between higher external tariffs in Italy and France and lower tariffs in Germany and the Benelux countries.

Hence, parallel to a free trade area, the EEC had set up a customs union with a common policy in trade and a mandate from the EEC Commission to negotiate with third countries on trade issues. The customs union could have raised problems of impairment of benefits accruing under GATT-membership for non-EEC countries (Art. 24 GATT), as these countries would have faced less favorable entry conditions in the German/Benelux markets compared to the pre-1957 period. Yet, parallel to the formation of the free trade area in industrial goods in the EEC, the two GATT multilateral rounds (Dillon and Kennedy Round) resulted in a 40% tariff cut on the EEC external tariff, so that no non-member countries had reason to invoke Art. 24 GATT.

That procedure had been textbook-like and in the aftermath of 1957 spurred the ambition of many developing countries to replicate the EEC model, characterized as stepwise: from a free trade area via a customs union and common market to an economic community; legalistic: every step is embedded in binding and lawful obligations; and top-down: the electorate, though being the principal, waives its rights in favor of the agents, the executive.

Latin American and African countries tried to replicate the EU and experienced all kinds of disenchantment; from remaining “paper tigers” (most West African schemes) to stagnation and crises (Latin American Free Trade Association), disintegration and dissolution (East African Economic Community) and even a “soccer war” (Central American Common Market in 1969). East and Southeast Asia, however, stayed far away from any attempt to follow the European way.

For a long time, due to the enormous heterogeneity, including political rivalry, among its countries, any form of institutionalized integration proved to be a non-starter in Asia. What was lacking was not only the rule of law. The region lacked the overlap between a trade bloc and a capital bloc, essential for integration steps beyond trade; the stabilizing element of a leading regional currency like the DM in Europe; a benevolent hegemon as in Germany and France in Europe; and the synergy of sector-specific cooperation projects supporting integration steps, as with the European Atomic Energy Community (Euratom) and the European Community for Coal and Steel on the one hand and the EEC on the other.

Deep vs. Shallow Integration

Given these different roots, it is easy to understand why ASEAN was initially founded as a security-oriented cooperation grouping, not as a trade-promoting integration scheme. Without doubt, the path towards “shallow” integration via the dismantling of tariffs in intra-regional trade would have been possible earlier than 1992, when the ASEAN Free Trade Area (AFTA) was established and the Common Effective Preferential Tariff Scheme was implemented. But the transition to “deep” integration would have required a customs union as a minimum requirement, with a common trade policy towards non-member countries and a mandate from the common institution to negotiate with third countries on behalf of the member states.

“East and Southeast Asia … stayed far away from any attempt to follow the European way.”

Such a transition was, and still is, not feasible in ASEAN. Averaging between the external tariffs of Singapore and Indonesia (as the EEC did it) was “mission impossible,” given the quasi free-trade port status of Singapore, which it will never give up. The Secretariat could not and will not follow the role of the EU Commission as a guardian of treaties and the representative of the EU in negotiations with third countries on external relations. The latter function is most important for understanding the stumbling blocks in EU negotiations with third countries. For the EU, trade policy is an imperfect substitute for foreign policy, and thus is embedded in all other elements of a foreign policy, including policy dialogues on human rights.

Whenever the EU sees elements of the so-called political dimension of cooperation unfulfilled, even if only one EU member state takes this view, negotiations on the mutual dismantling of trade barriers will not be pursued. The problems of negotiations between EU and ASEAN, as in the case of the very critical view of Portugal on human rights violations in Myanmar in the 1990s, exemplify the importance of the political dimension for EU external relations.

These different dimensions of integration between ASEAN and the EU also explain why the ASEAN Secretariat is not “weak” compared to the EU Commission, as many have suggested. It simply has a different function due to the understanding of integration in ASEAN which is, as long as members insist on the sovereignty of national bodies in decision-making, confined to “shallow integration.” This understanding has not changed in spite of numerous attempts in the past to broaden ASEAN’s involvement in regional industrial coordination, for instance, through the ASEAN Industrial Cooperation Scheme which superseded the ASEAN Industrial Joint Ventures and the Brand-to-Brand Complementation Scheme.

None of these attempts was crowned by success. Nor is it likely that the ASEAN Economic Community (AEC), launched on the last day of 2015, can be more than just the first symbolic step towards “deep integration” with elements of a common market and an economic union. So far, ASEAN remains shallow in terms of institutionalized integration while it is much stronger when it comes to market-driven regionalization of trade, driven by the “natural trading partnership” between Singapore, Malaysia and Indonesia.

It does not come as a surprise that any attempt to promote the 1980 cooperation agreement between ASEAN and the EU to a full-fledged free trade agreement between two regional integration schemes would still meet barriers today, even after the opening of Myanmar and the political détente in that country. The main reason is that the EU expects to negotiate with one party on the other side of table. This is the core of “bilateral” negotiations. However, neither with the Latin American trade agreement Mercosur (officially a customs union), nor with the Andean Community, nor with ASEAN is this possible. National governments maintain the right to co-negotiate next to the supra-national institution if national interests are involved.

Rigid, legalistic, institutionalized, and binding — a striking contrast to ASEAN’s smooth open regionalism, with less paperwork, relatively little impact upon the private sector but continuous informal institution-building between the executives of ASEAN countries’ ministries. What lessons could a shallow integration scheme draw from the deepest form of regional integration ever experienced in contemporary economic history? Surprisingly, there are some.

Post-crises Reforms

Both ASEAN and the EU have gone through genuine shocks and crises. For ASEAN, it was in July 1997 after the collapse of the financial markets of individual ASEAN countries, when fixed single country currency pegs could not withstand speculative attacks and when, unlike in Greece, no “big brother” offered a bail-out hand. ASEAN as a community of solidarity did not play any role.

“For a long time, due to the enormous heterogeneity, including political rivalry, among its countries, any form of institutionalized integration proved to be a non-starter in Asia.”

The first crisis of the EU was in the mid-1980s, when negotiations in real sector integration came to a standstill, and the term “Eurosclerosis” was coined. The responses in both cases were different, but each was successful. ASEAN launched the Chiang Mai Initiative, convinced the “Big Three” — Japan, China and South Korea — to set up financial safety networks through bilateral swap arrangements with ASEAN countries and furthered the idea of greater independence for East Asia from the IMF in times of emergency.

In short, ASEAN tried to cope with the crisis through problem-specific integration, widening without extending ASEAN membership. The EU, in contrast, deepened integration through the strategy of completing the single market and through taking the first steps to monetary integration, by fixing bilateral exchange rates among the individual currencies of EU members.

It remains to be seen whether the recent challenges in the EU — the economic disintegration between Euro North and Euro South due to the debt problem, the Brexit threat, and the influx of refugees from North Africa — will be responded to in the same way, with further and deeper integration towards a true transfer union, or by retreating to the concept of core versus periphery members: “variable geometry” or “integration at different speeds.”

Widening Membership

ASEAN started with five members, the EEC with six members. Today ASEAN has expanded to 10 members, the EU to 28. Beyond the enormous difference in pure numbers, the expansion in the two regions has one common element. On average, poorer countries with much less integration into world markets have joined the founding member states. That means that allocative efficiency, which is targeted by making markets larger and more open, has been accompanied by consideration of fairness and equity. This holds true for both regions. Yet, the ways of matching both efficiency and distribution targets have been different in ASEAN and the EU. By following the GATT/WTO procedure, ASEAN allowed the four Indochinese countries to implement internal trade liberalization later than the richer countries, while the EU set up structural funds in favor of the poorer countries in order to accelerate economic prosperity there.

Both approaches are flawed, the ASEAN way perhaps more than the EU way. The ASEAN way relies on the traditional infant industry protection concept, which has been rightly questioned time and again. The EU way could only be successful if lack of financial and physical capital were the only binding bottleneck to growth. Yet, once there were other institutional, economic and political bottlenecks, they could be not compensated just by privileged access to public funding. These other bottlenecks do exist in some Central and Southern European members.

“Viewed in the light of the current severe challenges to EU integration, ASEAN will have ever more reasons to decline any invitation or advice to take the EU as a model for its integration.”

What matters more is that heterogeneity rises with increasing membership. Costs of decision-making and enforcement have skyrocketed in the EU, and the initial idea to promote political integration via the route of economic integration has vanished. Though political integration has never been a target in ASEAN, heterogeneity also comes at a cost for decision-making in ASEAN, especially if third countries put pressure upon ASEAN to take a position and eventually even take actions against individual members. ASEAN is also weakened if negative cross-border spillovers, like haze originating from slashing primary forest in Indonesia, cannot be stopped with supra-national actions. In the EU, heterogeneity can threaten deep integration and may even trigger disintegration into shallow integration, while in ASEAN heterogeneity may prevent integration from becoming deeper.

Monetary Integration

No other integration step ever raised as much attention or sympathy as the introduction of the euro. Latin American trade economists, for instance, simply calculated the degree of business cycle synchronization in those parts of Latin America which were economically strongly linked to Brazil, Uruguay and Paraguay, and found similarly high degrees as between Germany and the Benelux countries. They suggested that this part of Latin America came close to being an optimum currency area (OCA), characterized by similar economic structures, lack of asymmetric shocks, strong internal trade and capital flows and high labor mobility.

They also suggested that this area should have a monetary union. What became rapidly forgotten after the introduction of the euro was its role in the entire integration process. There was controversy about whether the monetary union should be the final step only after completed real sector integration (the “coronation theory” supported by the German Central Bank together with German mainstream economists), or whether it should serve as a vehicle towards further integration, making it irreversible (the “vehicle” theory).

The latter view won. With hindsight, the “vehicle” theory was ill-fated. Neither did the Eurozone come close to being an OCA, perhaps with the exception of Germany, Benelux and Austria, nor were the necessary companion policies such as fiscal policies, banking supervision and sovereign debt issues taken under supra-national control. The gap between real exchange-rate movements of individual euro member states became larger and not smaller after the introduction of the euro.

For ASEAN, the lesson is as obvious as it was already before the introduction of the euro: ASEAN is very far from an OCA and should not spend a single penny trying to replicate the euro model. The structures of ASEAN member states are extremely diverse, thus cross-border labor mobility in the unskilled segment is next to impossible and fiscal transfers anathema. ASEAN has no leading regional currency that could serve as a stabilization anchor like the DM. Trade blocs and capital blocs do not overlap.

More trade is with Europe than there are capital flows from Europe. Each of these barriers would be argument enough against a trial. In total, they form an insurmountable barrier to a monetary union. Developing regional bond markets and eventually aligning all the currencies in a multiple-currency basket-peg of ASEAN countries’ exchange rate policies would be the right way to enter the thorny field of monetary integration.

“The dynamics of trade and capital flows as well as models of integration for ASEAN will have to be searched for in the East instead of to the West of ASEAN.”

ASEAN in TPP and Europe in TTIP

Beyond mounting internal challenges, the two schemes will have to cope with external challenges as well. One comes from the two mega-bilaterals, the TPP and the TTIP. The transpacific scheme TPP has been concluded but has not yet passed national legislation in the member states. The transatlantic scheme TTIP, on the other hand, has not been concluded. Given forthcoming nationwide elections in the U.S. and important EU member states, plus considerable resistance from civil society in Germany and Austria, it is far from certain that it will be concluded soon.

What is relevant for ASEAN is that the TPP splits ASEAN countries into TPP members and non-members. Could the TPP really reach its potential under joint U.S.-Japan leadership? And should China, as a non-member, be inclined to join the TPP later in order to prevent losing out on benefits from cross-border supply chains, all ASEAN countries will have to join, too. Otherwise, ASEAN integration would experience a major setback.

On the other hand, should the TTIP fail to be concluded while the TPP gets operational, EU trade policies would become marginalized in global trade talks. This is looking more likely, as the EU wants to anchor the “precautionary” principle in trade that threatens environmental and consumer damage, while the U.S. has anchored the “sound science” principle in the TPP and is fighting for it in the negotiations on the TTIP (trade is allowed if sufficient scientific evidence speaks against the likelihood of such damage). With the TTIP concluded, the precautionary principle would prevail. This is a condition sine qua non for the EU. These different scenarios spell complex conditions for EU-ASEAN trade, where exports to Europe could be impeded while being allowed into the U.S.

To sum up, viewed in the light of the current severe challenges to EU integration, ASEAN will have ever more reasons to decline any invitation or advice to take the EU as a model for its integration. In the foreseeable future, deep integration beyond free trade in goods and services, plus capital mobility, will not play a role in ASEAN integration. Nevertheless, the EU will remain an important export and sourcing market for ASEAN, and thus EU rules will have to be met by ASEAN exporters. The dynamics of trade and capital flows as well as models of integration for ASEAN will have to be searched for in the East instead of to the West of ASEAN.

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