Road to AEC will be difficult

 
AseanAffairs     17  August 2011

On January 1, 2015 the Asean Economic Community (AEC) is set to take off- a mere 3.5 years from now. However, on a daily basis reports arrive at Asean Affairs headquarters in Bangkok providing examples of how difficult that journey will be.

The essential problem is reconciling economic sectors and interests within each country to the free trade provisions of the AEC by replacing a domestic market mindset with a more international view.

A current case from the Philippines provides a good case study. Like its fellow member state, Thailand, the Philippines has a large and profitable beverage alcohol business. In the Philippines, three groups control the domestic spirits market.

Both in Thailand and the Philippines, the market has been developed through protectionist tariffs on imported alcohol products. This week the World Trade Organization (WTO) ruled that the Philippines taxes and duties were illegal as they violated the principle of non-discrimination in the General Agreement on Tariffs and Trade.

The US and the EU filed the complaints in the dispute and offered strong data to support their contention. The EU said the taxes applied on imported distilled spirits are 10 to 50 times higher than those applied on domestic spirits in the Philippines.

This resulted in only a 2.5 percent market share for imported spirits with imports declining by about half from 2004 through 2007 due to the Philippines tax policies.

The counter argument is that the domestic production employs a large number of citizens and a slowdown in sales could cost jobs and harm the domestic economy. However, that argument is the same one used when groups of nations take up a case against a particular country on almost every discriminatory tariff issue.

Although the WTO decision will be appealed, the appeal’s prospects are dim.

The Philippines argument was that domestic spirits were made from different base materials than the imports. However, what went against the Filipino case was that the products were marketed as whiskey, gin, vodka, and tequila just like the foreign products, regardless of what materials were used in production.

Like many captains of industry, “liquor barons” are important and influential people within a country and a good source of political funding. Expect more cases such as this as Asean countries advance toward the AEC startup.