Unlocking Potentials for Regional Supply Chains in ASEAN

The ASEAN member states seek to reduce logistics costs and to attract cross-border production networks to the region by abolishing physical, institutional and mental barriers. Due to its central location, Thailand has the potential to advance to the gateway to ASEAN. But to unlock these opportunities the member states have to – above all – step up their commitment to regulatory alignment.

With the establishment of the ASEAN Economic Community, the member states seek to leverage their economic diversity to attract international investors to establish production and sourcing networks in the region. In fact, the countries can be roughly grouped in four categories of production sites according to their levels of wage, education and economic devel - opment: Singapore stands out as innovation hub in the region with excellent conditions for Research & Development and specialized high-tech production; Malaysia, Thailand and to a lesser extent the Philippines are endowed with the assets for technology pro duction so that they advanced to the regional manufacturing hubs for automotive, electronics and semiconductors.

Indonesia and Vietnam strengthened their profiles as assembling sites; Cambodia, Laos and Myanmar are competitive in labour-intensive production. This hetero-
geneity provides for excellent conditions to establish cross-border supply chains to which each country can contribute according to its specific strengths. Yet, in order to make regional production networks competitive, the reduction of the still high logistic costs is essential. The ASEAN Master Plan of ASEAN Connectivity (MPAC) pursues this exact goal: by abolishing physical, institutional and mental barriers, the member states seek to facilitate the free movement of goods and services across borders.

Being located in the centre of Southeast Asia, Thailand is particularly privileged to become the gateway to the region. And the country is eager to seize this advantage. Although the ASEAN region is about to profit from the ASEAN Economic Community as a whole, some areas might benefit more. A geographical simulation by Thammasat University and JETRO highlights that Myanmar, Lao PDR, Northern Sumatra in Indonesia, Eastern Malaysia and Southern Vietnam will reach the highest additional economic growth rates if the MPAC is properly implemented.

Excellent conditions for corss-border suppy chains

What has been achieved?

But how interconnected is the ASEAN region? What has been achieved so far and what needs to be done in order to tap ASEAN’s potential as production base?

The ASEAN region has launched massive infrastructure development projects which aim at overcoming the infrastructural backlog, integrating peripheral areas and building a dense regional network of roads, railways, air- and seaports, broad bands and power grids. Being aware that Thailand’s fortune lies in the connectivity with its neighbours, the funding of roads in the neighbouring developing countries of Cambodia, Lao PDR and Myanmar are part of its national development strategy. Maritime transport plays an outstanding role for international trade so that the entire ASEAN region seeks to link and expand the capacities of the ports in the region.

Accordingly, Thailand is planning to build a deepwater port on the Andaman Sea and to expand the capacities at Laem Chabang port to enhance maritime connectivity. Air transport has grown exponentially in the region and is still expanding. Thailand keeps pace with this development and is currently in the process of building a third runway and new cargo facilities at Suwanabhumi airport. Equally in the railway segment, the ASEAN member states have launched a considerable number of projects.

Yet, due to funding shortages some of the projects, including the rail flagship project in ASEAN, the Singapore to Kunming Rail Link (SKRL), lag behind schedule.

More far-reaching agreements required to unlock the growth potential

Apart from funding problems, the member states have to make progress in the ratification and implementation of key ASEAN transport facilitation agreements. With the help of harmonized regulations, procedures and standards as well as strengthened capabilities, border crossing time is to be reduced to 30 minutes, the border crossing costs to be halved. Yet, persistent national inconsistencies complicate cross-border processes:
(i) restrictions on the entry of motor vehicles; (ii) different standards requirements (vehicle size, weight and safety requirements and driver qualifications); (iii) inconsistent procedures related to customs inspections, customs clearances and assessment of duties.

The ASEAN member states adopted various ASEAN trade and transport facilitation agreements at the regional level, but their implementation at the national level is still pending in some countries. At the same time it is predictable that more far-reaching agreements will be required to unlock the whole growth potential that slumbers in cross-border transactions. The facilitation agreements include quotas for transit licenses so that market access will remain limited. In fact, the agreed quota system allows each ASEAN member state to issue not more than 500 licenses for transit vehicles.

In the absence of a feasible regional system, the ASEAN member states negotiate bilateral agreements with their neighbours in order to facilitate cross-border move-
ment. Thailand has so far concluded transport facilitation agreements with only two of its four neighbouring countries, namely Cambodia and Lao PDR, yet at completely different terms. Whereas the number of transit permits issued for Cambodian passenger and freight service providers is limited to 40, such a restriction does not exist for Lao PDR.

This rag rug of bilateral, sub-regional and regional facilitation agreements creates some confusion at the national borders and prevents the acceleration of border pro-
cedures. The hitherto half-hearted approach to trade and transport facilitation has fallen short in creating conducive conditions for cross-regional business. It would be necessary that the ASEAN countries substantiate, streamline and fully implement the set of facilitation agreements.

However, at the moment the political instability in Thailand sidesteps the pressing ratification and implementation of regional policies. Likewise, some of the other ASEAN member states also lag behind in building regulatory bridges to their neighbours.

Need to substantiate, streamline and implement the facilitation agreements

In a nutshell, in order to strengthen ASEAN’s profile as production base the countries have still quite a way to go. While they can win half the battle with infrastructure, it is the common regional rules that will make them champions. The ASEAN member states therefore have to invest more commitment and resources into regulatory align-
ment: it will be rewarded by economic prosperity.

Ruth Banomyong

Ruth Banomyong, PhD, is Associate Professor and Head of the Department of International Business, Logistics and Transport Management at Thammasat University in Bangkok.

ruth@banomyong.com