The ASEAN Economic Community (AEC) has achieved significant formal progress. Tariffs on trade in goods were largely eliminated by 2018, marking a major milestone in regional integration. Yet intra-ASEAN trade still accounts for only around 20 to 30 percent of total trade, far below levels seen in more deeply integrated and internally self-sustaining markets such as the European Union, where intra-regional trade reaches 55 to 60 percent.

This gap between institutional achievement and economic reality points to a structural issue. At its core lies the design of ASEAN’s rules of origin (ROO).

The ASEAN Trade in Goods Agreement (ATIGA), the backbone of the AEC, has expanded its practical usability by adopting the Change in Tariff Classification (CTC) standard alongside the more traditional Regional Value Content (RVC) approach. This flexibility has lowered barriers for firms seeking to qualify for preferential treatment.

However, it has also produced unintended consequences. Under the current system, products can qualify as ASEAN-originating even when most of their components are sourced from outside the region. In extreme cases, goods composed entirely of imported parts – for example, from China – can obtain ASEAN origin status simply through final-stage processing that alters their tariff classification.

This weakens incentives for intra-regional procurement. Since the introduction of these rules, the share of intra-ASEAN trade has declined, rather than increased. Instead, reliance on imported intermediate goods, particularly from China, has increased.

Thailand’s emergence as an electric vehicle manufacturing and export hub illustrates this dynamic. New factories have been established, yet many rely heavily on imported components, generating limited domestic economic spillovers. These so-called “zero-baht factories” contribute little to local value creation and do not significantly deepen regional production networks.

If this pattern continues, it could fuel dissatisfaction that the gains from free trade are not adequately spreading within domestic economies, thereby deepening distrust over distribution and social division, as seen in many advanced economies.

Geopolitical Pressures and the Case for Reform

The need to revisit ASEAN’s rules of origin is no longer purely technical. It is increasingly shaped by geopolitical considerations.

The United States has begun to view ASEAN as embedded within Chinese supply chains and has applied pressure under Section 301 of the Trade Act. From Washington’s perspective, parts of Southeast Asia function as channels for the circumvention of trade restrictions, particularly in relation to excess industrial capacity originating in China.

In this context, the design of rules of origin has direct strategic implications. They influence not only trade flows, but also how ASEAN economies are positioned within global supply chains.

Rules of Origin as Industrial Policy

Reform should therefore treat rules of origin not simply as administrative criteria, but as instruments of industrial policy. Three directions are particularly important.

First, ASEAN should move toward an “intra-regional value-added” approach. The current CTC-centered system emphasizes processing rather than value creation. Strengthening RVC requirements — or combining CTC with minimum value-added thresholds — would encourage deeper regional sourcing. This is especially relevant for supply chain-intensive industries such as automobiles and electronics.

Second, rules of origin should be differentiated by strategic sector. A uniform, flexible system risks encouraging low value-added assembly operations. By contrast, stricter standards could be applied in priority industries to strengthen regional cumulation and tighten origin requirements, while more flexible rules could be retained for labor-intensive sectors involving small and medium-sized enterprises.

Third, stricter rules must be accompanied by more efficient implementation. Compliance costs can rise as standards become more demanding. Digitizing certification systems, enhancing the e-Form D platform, and improving supply chain traceability through technologies such as blockchain could reduce administrative burdens while strengthening credibility.

From “Quantity” to “Quality” of Integration

ASEAN has largely succeeded in reducing tariffs and building the institutional framework for market integration. The next phase requires a shift in focus, from the quantity of trade to the quality of production.

Rules of origin will play a central role in this transition. The rules must be redefined: from customs requirements to a tool of industrial policy. Properly designed, they can promote deeper intra-regional division of labor and strengthen ASEAN’s industrial base. Poorly designed, they risk entrenching dependence on external supply chains.

The AEC2025 assessment shows that ASEAN is moving beyond system-building toward ensuring real economic outcomes. The key test now is reforming rules of origin. The challenge is to increase regional value creation while maintaining openness, a balance that in an era of geopolitical uncertainty will not only shape ASEAN’s economic integration but determine whether it can establish its own industrial base.