What’s at stake for ASEAN’s DEFA?

The Association of Southeast Asian Nations (ASEAN) has risen to become the world’s third-largest digital services exporter only behind the US and the UK. In 2023, economic ministers of the bloc set out to expand the region’s trade and investment flows by endorsing a study on the ASEAN Digital Economy Framework Agreement (DEFA). Talks are due to conclude by the end of 2025. 

Fourth, the regional market is important for regional value chains (RVCs). The share of ASEAN trade linked to RVCs is higher than trade linked to global value chains. Intra-ASEAN RVCs are most prevalent in finance, electricity, gas and water, mining, petroleum, transport services, electrical and electronic equipment, and machinery. Most ASEAN digital services exporters are also importers of digital products and services – almost 40% report that imports make up over a half of their total purchases. 

Fifth, an integrated ASEAN market is important for attracting investment. Intraregional foreign direct investment (FDI) flows reached US$28 billion or 12% of the total in 2022 and made up almost a third of inbound flows in Indonesia and Malaysia and over a third for Thailand. In addition, the regional market is also important for attracting large global companies and tech firms. Of the 3,126 office locations of the top 30 global technology companies around the world, ASEAN is home to 107 offices or 5% of the global total, with major hubs in Singapore, Bangkok, Kuala Lumpur, and Jakarta. 

The challenges DEFA can help solve 

If the DEFA were to promote ASEAN trade as much as some econometric analyses promise, it would also amplify the role of digital services in ASEAN economies from the current 7% of gross domestic product to 16.3%. But to do this, DEFA would need to help solve several policy challenges. 

First, according to UNCTAD’s Trade Analysis Information System (TRAINS) database, ASEAN economies have since 2015 put in place no fewer than 9,873 non-tariff measures that have undercut the regional value chains and created obstacles to regional trade in a host of products. These have been paralleled by digital policies that restrict digital trade in the region. According to the Digital Policy Alert, ASEAN has adopted some 333 laws and orders related to data governance, consumer protection, content moderation taxation, licensing, and more, over the past five years. 

Second, the challenge of protectionism in digital trade looms as the potential expiration in 2026 of the multilateral WTO moratorium on customs duties on electronic transmissions approaches. This creates uncertainties about the future of open markets for digital products and digital services. Indonesia has already outlined tariff lines that could be subject to a duty. Such a tariff would undermine ASEAN’s digital value chains and only increase the import costs of firms and exporters in the economies. 

Third, ASEAN economies’ digital policies are famously incompatible. With each market imposing its own rules, business that wants to scale in the region will essentially have to start from scratch with each individual market to understand relevant regulation, meet them, and engage in talks with each regulator on the unique requirements. These kinds of diverse requirements entail costs and delay deployments – which in turn limits regional SMEs’ access to interoperable services such as payments. 

Fourth, ASEAN’s regulatory landscape is said to be multispeed: economies are at various stages of adopting policies, which creates regulatory uncertainties for businesses and deters investment. In a recent study mapping the adoption of 75 policies conducive to digital trade in 14 main policy areas in ASEAN, Singapore is in a league of its own with leading digital economies such as South Korea and the UK; Philippines, Malaysia, Thailand, and Indonesia falls into the second tier;  Vietnam and Cambodia falls into the third; and finally, Brunei, Laos, and Myanmar. 

What can DEFA do? 

Lock in open markets. DEFA should lock in a regional moratorium on duties on electronic transmissions and uphold it regardless of what happens on the multilateral level. It will also need to lock in protections for partner economy businesses’ source code. Forced source code disclosure mandates would freeze intra-regional trade in vital digital services and products. Source code has been protected across digital trade agreements and provisions, such as those in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. DEFA should make space for fluid data transfer and prevent discriminatory treatment of foreign digital products. 

Promote interoperability. DEFA should encourage mutual recognition of licenses for payment providers between regional economies and champion a common AI assurance framework. It could also break new ground to seek alignment in consumer protection policies, to ensure ASEAN consumers enjoy similar rights regardless of which ASEAN market they buy from. DEFA could also facilitate the adoption of regionally interoperable digital IDs – an example of which is the European Union’s Digital Identity Wallet – to enable consumers to access services anywhere in the region.  

Craft memorandums of understanding to drive future collaboration. Leveraging DEFA, ASEAN can develop roadmaps to: 1) Establish the infrastructure for interoperability of real-time payments, taking inspiration from the European Single Euro Payments Area Framework; 2) Facilitate the movement of AI talents in the region through talent passporting; 3) Professionalize regulatory impacts assessments and promote alternatives to binding regulations, such as regulatory sandboxes.  

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