China and ASEAN’s Economic Integration: Developments & Opportunities

July 1, 2014 Posted by China Briefing Reading Time: 6 minutes

Op-Ed Commentary: Chris Devonshire-Ellis

ASEAN, a ten-country bloc including some of Asia’s largest manufacturing hubs such as Indonesia, Malaysia, the Philippines, Thailand and Vietnam, will enter into “AEC Compliance” by the end of next year. What this effectively means is that import-export duties will be dropped right across the ASEAN community. This has specific relevance to both China and India, as both have Free Trade Agreements in place with ASEAN. China will face increasing competition from all of the aforementioned big five ASEAN manufacturing nations, but specifically from Vietnam, which has indicated that it will reduce its corporate profits tax rate to 22 percent – lower than China’s rate of 25 percent. Goods from Vietnam will be shipped to China at essentially duty-free rates, while companies manufacturing in Vietnam will enjoy greater profit margins, as both income tax rates and labour costs are lower in Vietnam.

As planned, the ASEAN Economic Community 2015 (AEC 2015) will transform the entire ASEAN region into a single market and production base with free-flowing goods, services, investment and skilled labour, as well as significantly freer capital flows between member states. As with any such large-scale economic integration, certain industries are poised to benefit, even as others face new challenges. There are a number of areas in which companies and the services industry can evaluate how to reposition themselves to take advantage of this new Asian order.

Insurance services in the region will significantly benefit from the free flow of people and logistics services between ASEAN member states, as well as to and from China and India, respectively. Additionally, land, sea and air transportation will require the development of new insurance products for the ASEAN/China markets. AEC 2015 will expand the currently limited number of compulsory insurance programs to other industries, such as manufacturing.

E-commerce will play a huge role in AEC 2015, to such an extent that the development of a unified framework will strongly determine the success or failure of economic integration. ASEAN has already adopted the E-ASEAN Reference Framework for Electronic Commerce & Legal Infrastructure, which will enable products from one ASEAN member state to be sold more efficiently to other member states—and thanks to those Free Trade Agreements, to China and India as well. E-commerce will also speed up transactions through legally-recognized electronic signatures and documentation, and will facilitate smoother and faster communication in domestic financial transactions (income tax, pensions and mortgages).

It is little noted that, among all ASEAN members, China and India, only one nation has a freely convertible currency: Singapore. This means that investors managing a portfolio of operations stretching from China to India and ASEAN will need to put in place treasury functions to best manage their allocation of capital throughout the region.

Legal and tax professionals will need to acquaint themselves not just with the tax regimes of their own countries, but also with the relevant taxes for services or goods across ASEAN and its major trading partners (again including China and Hong Kong). In this regard, ASEAN Briefing maintains a list of all the Free Trade and Double Tax Agreements in place between ASEAN member states and other countries around the world.

The region’s increased participation in regional and global trade, and the resulting influx of foreign-owned businesses, will undoubtedly bring legal challenges to companies operating throughout ASEAN and its trading partners. In order to navigate the complex legal situations that will arise from deeper trade integration, such as inter-state mergers and acquisitions, transactions and joint venture agreements, it is imperative that lawyers working in the region keep up-to-date on the latest developments regarding international trade laws and agreements.

In addition, the increasing flow of workers across borders will require a deeper knowledge of immigration, visa and double tax treaty provisions to understand how they will affect an employee’s income tax status when he/she is based in another country. The requirements and implications of hiring Chinese talent in Malaysia and India, or Cambodian or Burmese talent in China or Singapore, will all need to be understood and the requisite immigration structures put in place. Managing employee payroll when they are spread across different countries is also an issue for consideration.

In addition to skilled labor, the implementation of AEC will see free movement of investment, goods and services, as well as freer movement of capital. This economic interdependence will be a fertile ground for disputes and, therefore, the creation of a targeted resolution mechanism is increasingly urgent. ASEAN countries signed the Protocol to the ASEAN Charter on Dispute Settlement Mechanisms in 2010, yet there is still much progress to be made. Alternative dispute resolution (ADR), which typically covers arbitration, mediation, and conciliation, is sure to become more prominent amongst corporations and legal firms based in Asia as a method of solving such disputes.

Disputes may also arise as the result of more contact between countries within a better-organized and more integrated maritime transport sector, which is one of the key pillars of AEC. The coming years will see more goods being transported by sea as consumer and commodity demand continues to rise among Asian countries. Against a background of simmering territorial disputes, Asian countries are focusing more and more on maritime security and the importance of adequate maritime infrastructure and resources. In this vein, the importance of maritime insurance will also increase in the coming years. In fact, China has already begun using the Shanghai Free Trade Zone as a testing ground for developing the country’s national marine insurance industry.

The need for due diligence will increase across ASEAN member states and their trading partners, as buyers look at sourcing from an ever-competitive region. Dealing with consumer protection issues and insuring businesses against claims caused by defective products will also be on the rise. In order to prevent a scandal, such as the one sparked by China’s melamine-tainted milk in 2008, from impacting upon a far wider regional base, businesses will require both due diligence and a regulatory and judicial framework to both prevent instances from occurring and adequately punishing transgressors.

There remains a tendency for foreign invested businesses to be too China-centric. With the AEC deadline of December 31, 2015 now just 18 months away, foreign investors in China need to be fully aware of what it means and how it will impact upon their operations in China. Under the China-ASEAN Free Trade Agreement, cheaper competing imports from countries such as Vietnam will become a reality. Adjusting your business to cope with this new competition, taking advantage of the new dynamics in the region and incorporating some of the issues listed above into your corporate business model is going to be a key factor determining who survives and flourishes in China and ASEAN, and who does not.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email asia@dezshira.com or visit www.dezshira.com.

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