Regional Focus

ASEAN pins hopes on digital agreements

Published: Jul 2023

South-East Asia has long been working towards economic integration, and now the region is looking to the future with a focus on digital integration. Digital trade agreements are in the process of being negotiated, and, if successfully implemented, could catapult the region to become an epicentre of digital growth.

One of the silver linings of the pandemic was a shift to the digital, where consumers who had not really engaged online soon adapted to digital alternatives in their everyday lives. For the citizens of the Association of South-East Asian Nations (ASEAN) region this was no different, and now companies are poised to benefit from a digital push that will make doing business in the single market a lot easier.

ASEAN is pursuing a digital trade agreement that will mean each market has signed up to the same rules and standards; for corporates, doing business in multiple countries will effectively be the same as a single market. And opportunities abound in the region for companies. According to figures from J.P. Morgan, the GDP of the ASEAN countries combined would mean the economic bloc would be ranked fifth in the world, after the US, China, Japan and Germany. If ASEAN was a single country, its population of over 650 million would make it the third largest in the world. There is plenty of untapped potential in this consumer market, and a digital trade agreement between the countries could potentially unlock it further.

The digital economy in ASEAN is already vibrant, with research by Bain, Google and Temasek stating the region is in a ‘digital decade’ and notes that e-commerce, food delivery and digital financial services are drivers of growth. The research estimates the internet economy will reach US$360bn by 2025. And the US-ASEAN Business Council recently noted, “digital trade will drive the next phase of ASEAN’s economic growth, as more people in the region participate in the digital economy and engage in cross-border digital transactions.”

Anthony Toh Han Yang, Research Analyst at the S Rajaratnam School of International Studies, Nanyang Technical University, Singapore tells Treasury Today Asia that the ten nations in the ASEAN community have been tackling digital integration to make the region a digital epicentre of growth. For treasury and finance professionals, Toh comments, this will make their roles more efficient as there will be more opportunity to do their tasks digitally, and there will also be standardisation and harmonisation in tax regimes and customs tariffs, for example.

This is the vision of the ASEAN Digital Economy Framework Agreement (DEFA), which sets out the standards in how the markets can be more connected, and ultimately transform the economic bloc into being a leader with its digital economy. Toh explains that DEFA has its origins in other digital agreements and declarations. He explains what is special about DEFA when compared to the others: “This is the first time in ASEAN history there has been a concretised vision of digital integration,” says Toh. He also says, this is the first time the member countries have come together to form a digital economy. “It is a huge thing for ASEAN.”

According to the Bain research noted above, the gross merchandise value of ASEAN’s digital economy is projected to be US$1trn by 2030. This, comments Toh, is without DEFA. If that regional digital agreement is implemented and takes effect, that figure could be more like US$4trn or US$5trn, he says.

DEFA still needs to be negotiated and earlier this year it was reported that the negotiations would commence in September 2023, two years earlier than initially planned. “The priority is to grease the economy. The regional economy is a conveyor belt – to use an analogy – and to make it more efficient you need to oil it,” comments Toh.

Lurong Chen, Senior Economist, Economic Research for ASEAN and East Asia (ERIA) tells Treasury Today Asia that DEFA has bigger ambitions than previous initiatives as it will cover ASEAN’s economic partners. He compared DEFA to the Regional Comprehensive Economic Partnership (RCEP) agreement, a free-trade agreement among a number of countries in Asia Pacific. “Simply put, we expect DEFA to be ‘the RCEP focusing on digital’ or a ‘RCEP-type of agreement on digital’.” This, he adds, will help ASEAN get a first mover advantage in setting the rules for cross-border e-commerce.

The DEFA negotiations will set general rules for the region as a whole – instead of allowing countries to negotiate a series of their own bilateral agreements – to simplify the terms of trade for the economic bloc. “This will significantly reduce the cost of doing business in the region,” says Chen. He adds that Asian economies are highly inter-dependent, linked via an intensive regional production sharing network. “Business, especially MSMEs [micro, small and medium enterprises], can explore foreign markets easily if DEFA can provide ‘one-stop’ regulation reference. With region-wide rules and standards on payments and tariffs, this will certainly save time for treasury and finance,” he says.

Digital trade agreements are necessary because they account for the changing nature of trade. One digital trade expert, who has a deep understanding of such trade negotiations and was speaking to Treasury Today Asia in a personal capacity, explains that digital trade is a subset of trade. There are many definitions of what counts as digital trade, but many refer to the Organisation for Economic Cooperation and Development’s (OECD) definition that it “encompasses digitally-enabled transactions of trade in goods and services that can either be digitally or physically delivered, and that involved consumers, firms and governments.” This, the expert explains, could cover digital goods such as a download of a digital audio book. Or, it could be a physical service that has been booked online via a digital platform like Airbnb.

Digital trade, the expert explains, is growing exponentially and is the future of trade. While merchandise trade has been declining, digital trade – and its accompanying data flows – have been rising. There is a need for digital agreements because existing trade rules are outdated and don’t address many of the issues that arise with digital trade, he says. This includes the issue of tax. With the digital economy, for example, it is possible for a digital nomad to live in various countries, earn a living from their laptop – with their earnings going into their bank account back home – yet they pay no income tax to the countries where they stay and physically do the work. Governments have also taken issue with companies providing digital services to their citizens without having any tax obligations. France, for example, has targeted big tech firms with a digital services tax regime, which it first announced back in 2019.

Another example of how traditional trade agreements are not fit for purpose relates to how the shipping of goods has also changed. Fifty years ago, there would have been fewer, larger items – such as cars – but now a shipment is more likely to contain 100,000 small packages. “Customs around the world were built to expect 100 items, not 100,000 things,” says the digital expert. For this reason, agreements need to consider changing the minimum limits on what will be inspected on arrival.

Another important rule, which could actually ‘break the internet’, the expert explains, is the moratorium on tax for data that crosses borders. In the early days of the internet, there were no tariffs for such transactions – such as a cross-border email – and that has since continued. If that were to change, it could seriously disrupt the nature of digital trade. The expert questions, if every Zoom call were to be taxed, for example, how would that even be tracked? Unravelling one of the basic assumptions of doing business across borders could potentially wreak havoc among countries, hence the need for the terms of digital business to be clarified.

Many current trade rules are outdated, and the digital trade expert points out that the World Trade Organisation’s (WTO) rules about e-commerce were first made before the iPhone was invented. The WTO, as a multilateral body, is still working on its standards, which are viewed as complementary – and not in conflict – with other digital agreements that have already been signed.

These other digital agreements include those that Singapore has signed with a number of countries. For example, in June 2022, the city state announced that it had signed a Digital Economy Agreement with the UK (UKSDEA), which covered issues like tariff-free flow of digital content; free flow of trusted data and guaranteed protections for personal data and intellectual property. As the agreement went into force, a number of corporates made comments about the impact it would make. For example, Zakir Ahmed, Senior Vice President and General Manager of Asia Pacific and Japan, for software company Kofax said, “Currently, due to the lack of commonly agreed standards and fragmented systems, companies have to rely on legacy processes that are paper-based. This leads to inefficiency and results in higher costs to companies – for example banks, insurers, logistics – and government agencies – for example customs – repeating the digitisation, extraction and validation in the processing of common documents.”

Noah Pepper, Asia Pacific Business Lead, of payments company Stripe says, “Stripe serves millions of businesses worldwide, giving us front-row seats to understand how important it is for firms, regardless of their size or location, to easily and quickly participate in the global internet economy. We’re optimistic that agreements like the UKSDEA will set clear, equitable and predictable rules for folk building cross border businesses. Ultimately this can create more opportunity, prosperity and entrepreneurs in the communities Stripe serves.”

Meanwhile, Singapore has signed other bilateral agreements with other countries, and has also been involved in the multilateral Digital Economy Partnership Agreement (DEPA), which was signed in June 2020 by the city state, as well as Chile and New Zealand. Since then, other countries have applied to join, including Canada, China and South Korea. When DEPA was first signed, the Singaporean government stated that the agreement was the first of its kind and represented a new form of economic engagement and trade in the digital era. It also noted that DEPA will facilitate seamless end-to-end digital trade, enable trusted data flows and build trust in digital systems.

ASEAN’s digital integration comes in the context of these other digital economy agreements, which have already been signed and gone into effect. For South-East Asia, however, there are particular challenges as the region enters into its negotiations. The discussions will focus on topics such as rules for e-commerce, harmonising rules for cross-border payments and the movement of skilled labour between countries.

One major issue relates to the governance of data, and the requirement by some markets that data must be stored within the country’s national boundaries. This data localisation issue has the potential to be a major sticking point. Toh comments that the increasingly divergent data policies of the member countries in ASEAN are a challenge. With the EU, explains Toh, data issues are viewed from the view of a human rights perspective (such as the ownership of personal data) whereas in ASEAN it is viewed as an issue of national sovereignty and security. Singapore and the Philippines want a more liberalised cross-border data regime, explains Toh. Meanwhile Malaysia, Vietnam, Indonesia and Cambodia have more restrictive data regulation. It is a challenge to harmonise these points of view into a single agreement, Toh explains. The data policies of the countries do not have to be the same, he says, but ultimately they have to be less restrictive and move in a more liberal direction.

Chen at ERIA also notes that data liberalisation is a major challenge, and one fundamental issue is the extent to which data can ‘free flow with trust’. In a recent paper he argues with his co-authors that the policy regime for data governance is only at a nascent stage; it is underdeveloped and fragmented across countries. Chen says it will be very difficult if DEFA requires member states to have the same position on issues – such as data localisation – but DEFA should at least increase transparency and interoperability of country regulations and requirements.

Another fundamental issue, notes Chen, is about competition. “No one wants to lag others in digital transformation. We want digitalisation to help narrow development gaps in the region, rather than adding to the digital divide,” he says.

ASEAN is also a very diverse region with great disparities in terms of the economic development of its member countries, such as that between Singapore and Myanmar. This has led to a digital divide, where there are stark differences in its basic infrastructure the access to the internet economy. The least-developed countries don’t have to be totally equipped to the same degree as the developed markets, but it is important they don’t lag behind the others, says Toh.

Since the ASEAN comprises a number of member countries, all with divergent stances on the various issues, it will be a challenge to reach agreement. While the ASEAN digital agreement has the potential to catapult the region ahead of other markets and compete with the US and China as a single economic bloc, this impact cannot be realised if the countries can’t get through the negotiations. As with any community – or consensus-seeking organisation – the agreement will move at the pace of its slowest member, and if not agreed, ASEAN could stand accused of being a ‘talking shop’ that doesn’t follow through and implement its declarations and initiatives. This has been an accusation levelled at ASEAN in the past, comments Toh. He adds that the timeframe of DEFA – considering the study groups and consultations that have been lined up as part of the negotiations – will be challenging.

The US-ASEAN Business Council put forward some suggestions regarding the digital agreements. These included accelerating the negotiation timelines; referring to and learning from other digital agreements; ensuring that commitments are binding and commercially meaningful; and building in flexibility to accommodate the region’s different stages of development.

One major hurdle is Myanmar, which has recently been beset with its own internal issues, which include a military coup in 2021. Such issues, comments Toh, are more urgent for Myanmar than the topic of digital integration. This, however, does not mean that DEFA can go ahead without Myanmar. “DEFA cannot assert its full potency with Myanmar left out,” he says.

Looking ahead to achieving digital integration, Toh points to five indicators that the pundits agree are the most helpful when fostering integration. These are logistics, cybersecurity, digital payments, digital literacy and digital infrastructure. If ASEAN is able to come together and form a digital economic bloc, with all these issues agreed upon, it has the potential to become an epicentre of digital growth.

All our content is free, just register below

As we move to a new and improved digital platform all users need to create a new account. This is very simple and should only take a moment.

Already have an account? Sign In

Already a member? Sign In

This website uses cookies and asks for your personal data to enhance your browsing experience. We are committed to protecting your privacy and ensuring your data is handled in compliance with the General Data Protection Regulation (GDPR).