Featured Image

May 7, 2024 — No Comments

Expanding AANZFTA: Unlocking Trade and Investment Opportunities for a Better Future

Author: Dejvi Dedaj - South East Asia and Oceania team

Introduction

AANZFTA - the ASEAN-Australia-New Zealand Free Trade Agreement - is proof of the dedication of its member countries to achieving more integrated and interconnected economies. Indeed, there still is a dialogue on the expansion of the AANZFTA to include new member countries or additional agreements with other regional blocs and individual nations in AANZFTA’s pursuit of broader economic benefits and regional stability. However, what are the consequences of extending AANZFTA’s coverage, particularly concerning  trade and investment possibilities and the promotion of sustainable development for participating countries?

Paving the Way for Regional Economic Advancement

Bringing new member states under the AANZFTA umbrella can generate new opportunities for growth and development in the region. The region becomes more dynamic as the trade and investment levels are maximised. Such market expansion allows businesses to extend their market and thus increases market demand, entrepreneurial spirit, and innovation. Accordingly, AANZFTA can benefit from each economy's strengths by admitting new members with varying potentials and resources. This would, in turn, create a more robust economic environment.

Additionally, AANZFTA could deepen its ties with other regional blocs and individual countries by entering into more bilateral or multilateral agreements, further strengthening its connection to global value chains. The expansion of AANZFTA could help the community members become more competitive in the world market by opening up their inputs, technologies, and distribution mechanisms. 

Fostering Economic Dynamism

AANZFTA enlargement would be the key to the advancement of trade, investment, and economic growth in the member countries. AANZFTA not only puts an end to tariffs and other non-tariff barriers but also reforms the regulations that are in place, which makes trade across borders more efficient. This results in increased exports and imports, as well as increased capital inflows, boosting in turn the whole region's economy as well as creating more jobs in the region.

Besides, through the widening scope of AANZFTA, member states can decrease their dependence on long-term partners by trading within new markets and diversifying their trade and investment portfolios. This diversification, on the other hand, not only shields the economy from external shocks but also leads to a more competitive and dynamic nature of business. Thus, AANZFTA, by providing broader market access and trade diversification, enables member countries to discover new options and handle global economic turbulence with greater confidence and agility.

Strengthening Regional Integration

The expansion of AANZFTA can also facilitate the regional integration of the participating countries. Through the harmonisation of trade and investment policies, the member states can gradually unify their economic relations, which in turn can strengthen cooperation and collaboration among them. Such an alignment boosts the collective bargaining power of member countries in international negotiations; hence, they can conclude better trade deals and investment agreements to the advantage of their economy.

Moreover, AANZFTA contributes to the creation of regional supply chains and the establishment of value-added production networks. This sets the ground for the most efficient allocation of resources and the transfer of technology and know-how across borders. Hence, industries can combine their strong suits and use complementary resources, culminating in further innovation and productivity growth. Accordingly, the promotion of a collaborative platform for knowledge sharing and joint technology transfer is conducive to the stimulation of economic growth and development in the region, ultimately resulting in the joint prosperity of all member countries.

Empowering SMEs 

Small and medium-sized enterprises (SMEs) play a crucial role in economic growth and job creation across many economic systems. Nevertheless, SMEs, despite their centrality, frequently face severe difficulties that limit their ability to grow. Indeed, financial access barriers, market opportunity limitations and technical expertise shortage are some of the problems faced by SMEs on a regular basis. However, if the member countries rely on the various provisions within the AANZFTA framework to support the growth of SMEs, they will be creating a productive environment for such enterprises to thrive.

In particular, SMEs can be empowered by AANZFTA as it undertakes various administrative procedures, decreasing the level of red tape and simplifying legal requirements. These strategies, in return, save SMEs valuable time and resources which can then be directed to the SMEs’ core business activities, as well as to investments in innovation and expansion. Additionally, AANZFTA can be a vehicle for financial aid, such as credit facilities and venture capital, which are aimed at resolving financial constraints potentially encountered by SMEs. Financial aid constitutes another important source towards further investments in technology, infrastructure and human capital development.

Source: photo by @dead____artist (https://unsplash.com/photos/world-map-with-pins-TrhLCn1abMU)

Navigating Challenges 

Despite the numerous benefits that AANZFTA may bring about for the economic development and integration of the region, it also poses a set of challenges and considerations that require careful handling. Mainly, AANZFTA’s expansion may result in conflicting positions on issues that are sensitive and even vital to the member countries due to their differing interests and priorities. Indeed, every member state has unique economic goals, manufacturing needs or social issues that it will bring to the table. The desire to meet the needs of all these players will inevitably result in a lot of dialogue, compromises and consensus-building among the countries involved.

Furthermore, the process of accession of prospective new countries is not an easy feat. For instance, one of the most time-consuming and challenging tasks of the EU is concluding new agreements with the new member countries or the other regional blocs as negotiations necessarily pass through different legal, regulatory, and institutional frameworks. The task of bridging the gaps between different legal systems, regulatory standards and administrative procedures can be overwhelming and thus involves a high level of precision and efficient cooperation among all stakeholders. What is more, the condition that negotiations must adhere to AANZFTA’s international commitments and obligations whilst providing a platform for new participants to have their say renders the negotiation process even more complicated.

The expansion of AANZFTA may also pose problems for the less competitive sectors. The intensified market liberalisation and the increased competition from foreign firms in some circumstances may challenge local businesses, leading to possible job losses and disruptions in certain industries. Therefore, policymakers should take targeted measures that aim at lessening the potential negative impacts of trade liberalisation, such as providing financial assistance to the affected industries, workforce retraining programs, and social safety nets.

Lastly, the diverse regulatory regimes across member countries may create barriers to trade and investment, impeding the effective and successful compliance and enforcement of regulations. Accordingly, the institution of regulatory coherence through robust information exchange, capacity-building, and dispute-resolution mechanisms should be a key priority for existing AANZFTA members. Strengthening institutional frameworks and enhancing regulatory transparency could also address these challenges and facilitate smoother integration processes.

Conclusion

Overall, the enhancement of AANZFTA entails a great potential to make trade and investment flow easily, create regional integration and encourage inclusive development across the area. Through a wider scope of membership or the negotiation of more agreements with other regional blocs or individual countries, AANZFTA can establish a more vigorous and resilient economy which benefits all involved stakeholders. Accordingly, the challenges and opportunities that accompany the enlargement of AANZFTA should be jointly addressed to serve the region's well-being.

Featured Image

December 11, 2023 — No Comments

Enhancing Economic Unity in Southeast Asia Through a Regional Payments System

Author: Dejvi Dedaj - South East Asia and Oceania Team

Introduction

Economic unity is a collaborative state whereby different entities, particularly states, work together as if they were a single economic unit, thus contributing to the overall economic stability and development of the states involved. Economic unity is typically pursued at the regional and international levels and can take different forms, ranging from economic, monetary, or customs unions, with notable examples being the European Union or the CARICOM Single Market & Economy. Economic unity can be achieved through different policies and mechanisms, such as the establishment of a shared market, the enactment of common trade or fiscal policies, or the adoption of regional payment systems. In particular, regional payment systems comprise international mechanisms aimed at facilitating payments between the citizens of the various participating countries. Traditionally, cross-border payments are slow and expensive to carry out; however, regional payment systems facilitate cross-border transactions and reduce collateral costs, such as currency exchange costs. 

The concept of economic unity is not unknown to the area of Southeast Asia; on the contrary, in 1967, the Association of Southeast Asian Nations (‘ASEAN’) was established to promote economic unity between the participating countries. According to the ASEAN Charter, regional economic integration is pursued by advancing a market economy, adhering to trade rules as determined by different multilateral treaties or ASEAN itself, and eliminating all other existing barriers to economic integration. Recently, ASEAN made another step towards attaining economic integration by implementing a regional cross-border payments system that allows ASEAN citizens to pay in their local currency using a QR code. 

Why Should the Regional Payments System Adopted by ASEAN Be Celebrated?

The newly implemented regional payments system by ASEAN will be conducive to the growth of trade and commerce within Southeast Asia as it fosters seamless financial cross-border transactions, streamlines payment processes, and encourages economic cooperation among participating states. ASEAN's endeavour should also be expected to reduce transaction costs, cultivating a more advantageous environment for individuals and businesses alike operating within the Southeast Asian region. Additionally, such an initiative will empower entities to explore new opportunities, thus expanding their market reach and engaging in more diversified trade activities.

In addition, the adoption of QR code payments does not entail the imposition of fees on cardholders that wish to make a payment and offer better conversion rates, in contrast to traditional card-based payments. 

The adoption of the ASEAN regional payments system will also reduce ASEAN’s reliance on external currencies for cross-border transactions, particularly the US dollar. The so-called phenomenon of de-dollarisation, whereby states attempt to move away from the US dollar, is premised on concerns that the dominance of the US currency allows the US to exert significant pressure and influence on other countries, “holding them hostage”.

Source: https://unsplash.com/photos/round-gold-colored-coin-lot-9xJiXHkg-fo

Lastly, the benefits of the regional payments system for small and medium-sized enterprises should not be underestimated. Although access to the foreign exchange market has traditionally been challenging for such entities due to the high transaction costs relative to their small size, the regional payments system would enable small and medium-sized enterprises to see transaction and currency exchange costs reduced, thus facilitating their access to overseas exchange markets. 

What Are the Arguments Against the ASEAN Regional Payments System?

Importantly, several arguments against ASEAN’s initiative have been voiced to challenge its implementation. First, it is feared that economic integration within ASEAN will put pressure on certain currencies, most prominently the Singapore dollar, thus rendering it the de facto reserve currency of ASEAN. This could in turn weaken the purchasing power of other ASEAN currencies, resulting in “higher imported inflation if central banks [do not] intervene”.

Second, the new regional payments system may present novel security and fraud issues, requiring banks to implement strong measures to effectively respond to such risks. Soft security policies are known to catch the attention of hackers who can use such policies to their advantage to benefit financially, thus causing the banks, and by extension the consumers, at the receiving end to incur hefty, and sometimes irretrievable, losses. 

Third, as a novel model, the regional payments system will necessarily involve the education of the public to ensure the success of the policy. However, educating the public can be a time-consuming process, requiring the devotion of significant resources to the cause and potentially delaying the successful rollout or implementation of the system.