After 13 years, the ASEAN Economic Community (AEC) is here. But what will it mean for the region? First, while there’s an obvious instinct to compare it to the European Union, the AEC represents a much more tentative stage of integration. Flexibility is the key tenet, with no plans for EU-style central governance. And while labour mobility is increasing, the focus is on select high-skill sectors first. The most significant change? The reduction of intra-regional tariffs and trade barriers.
A coffee-drip approach to integration is shrewd. Bringing together 620 million people from 10 diverse economies at different stages of development will be a challenge. And industries that have benefited from a lack of outside competition will be forced to adjust. A more gradual transition to integration will not only help narrow these development gaps, but also give each country some time to rebalance to new competitive forces.
But that adjustment will be key to tapping the potential of the AEC. Lower-value industries driven by cheap labour will likely migrate to low-cost production centers, like the Greater Mekong Subregion (GMS). More competitive trade terms will yield better prices on raw materials or chemicals sourced from producers like Indonesia. And as is expected, Singapore’s expertise and domain knowledge in financial services will cement its status as a conduit for ASEAN investment flows.
Bolstered by strong IP protection, a trusted legal system, and a highly skilled labour force, the Lion City will also play an important role in other high-growth sectors, like logistics and infocomm technology. The skyscrapers of financial titans may dazzle, but manufacturing is the city-state’s most dominant sector—it accounted for 20% of nominal GDP last year.
Demand for Singapore’s electronic exports contracted in early 2016, as China’s slowdown resonated across the global supply chain. But the promise of tighter regional integration may actually provide insulation from these types of demand shocks. An all-ASEAN electronics supply chain could see a tablet built with high-value processor and memory from Singapore and mid-value components from Malaysia or Thailand, and then shipped to Cambodia for low-cost assembly. Not only could the product compete globally, its production would generate the jobs and the consumer wealth necessary to rev up Southeast Asian consumption.
Nurturing an innovation-friendly ecosystem will be critical to those efforts. Singapore has taken a lead in the region, with plans to increase science and research spending to nearly $19 billion Singapore dollars over the next five years. And the technology sector is doing its part: Earlier this year, Google acquired Singapore-based startup PIE to bolster its engineering presence in the region, and the Singapore Exchange is helping accelerate fledgling companies with partners like the StartupBootCamp.
On a macro scale, optimizing the regional supply chain would help address one of the long-standing quirks of the ASEAN economic community—its surprisingly low levels of intra-member trade. In 2014, just 24% of region’s $2.5 trillion trade dollars was between member-states, while trade with Greater China accounted for 22% of the total.
The AEC aims to kick-start intra-regional flows by reducing logistical barriers. The new “ASEAN Single Window” policy streamlines customs procedures and expedites cargo clearance, meaning cross-border trade will be both cheaper and faster. But cutting the red tape is not enough. Transport infrastructure across much of the GMS must be developed and modernized.
There are encouraging signs in the planned North-South Corridor connecting Southwest China to Thailand, and in the East-West Corridor connecting Myanmar to Vietnam. It will be crucial that these projects not only match the construction standards found in developed ASEAN or China, but also include similar next-generation “smart” solutions.
Luckily, much of the expertise and technology is already available within the ASEAN. In fact, IDC’s 2015 study of Asia-Pacific smart cities awarded its top ranking to Singapore-based projects. Those projects increasingly task big data analysis for decisions and strategy, rather than merely a digitization of record keeping.
Ultimately, as ASEAN’s most developed economy, Singapore should lead by continuing to foster innovation, invest in R&D, and provide upskill opportunities as it reorients to a more value-based economy. Both intra and extra-regional entrepreneurs and industry leaders should lean on Singapore’s knowledge base as they invest and grow business in neighbouring economies. That will strengthen the ASEAN and extend Singapore’s innovative practices to a valuable economic community. Despite the transitional challenges ahead, a strong AEC presents a historic opportunity to spur growth, expand and scale markets for business, and—perhaps most importantly—lift millions more citizens into a thriving middle class.
This article was produced on behalf of the Singapore Economic Development Board by the Quartz marketing team and not by the Quartz editorial staff.