Economic integration in Southeast Asia: Making AFTA work

Puspa Delima Amri Centre fore Strategic and International Studies (CSIS) Jakarta

The year 2002 marked an important era for the Association of Southeast Asian Nations (ASEAN) members, as they embarked on the long evolving plan to realize the ASEAN Free Trade Area (AFTA).

However, the event did not arrive in the arms of the most enthusiastic audience, at least not for Indonesian spectators. For some reason, the use of a single currency in the euro zone, which also began at the dawn of 2002, received greater portion in most of the media coverage earlier of this year.

Perhaps the lack of enthusiasm can be traced back to the fact that AFTA does not offer much novelty. Indeed, AFTA has been a realization of an idea that evolved more than a decade ago, when 6 ASEAN member countries signed an agreement to create a borderless Southeast Asia.

In January 1992, at the fourth ASEAN Summit in Singapore, ASEAN leaders decided to establish a free-trade area. With the aim of reaching a "borderless" Southeast Asia, whereby the ASEAN economies would be integrated into one single production base, the six signatories of AFTA (Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, Thailand) originally agreed to reduce tariff barriers to between 0 percent and 5 percent by 2008. ASEAN member countries began to gradually lower their average tariffs in 1993. To add more weight, quantitative restrictions and other non-tariff barriers will also be removed.

From a quick glance, the idea of a Free Trade Area in Southeast Asia sounded simple, catchy and sexy. However, developments that followed the signing of the agreement tell us otherwise.

It seemed that the people who originally conceived this grand idea did not realize that entering into an agreement to establish a free-trade area involved numerous preparations, whereby the main preparations should have been aimed at developing the most suitable mechanism to meet the final goals of the free-trade area. Worse yet, the grand idea lacks a solid vision as to what its final goals are and by how fast it should be realized.

As a result, the AFTA process was dominated by contradicting events. At one point, we saw that all the parties involved were very keen on speeding up the plan, thus the tariff reduction schedule was accelerated to 2003, and then to 2002, following the Asian financial crisis in 1997. On the other hand, some countries have opted to backtrack on the liberalization process for their own convenience -- the AFTA process enables them to do so.

Thus far the sole mechanism of putting AFTA into effect is the Common Effective Preferential Tariff (CEPT) Scheme. According to this scheme, goods traded within the ASEAN region, which meet a 40 percent ASEAN content requirement, will have a tariff rate of no more than 5 percent by the year 2002/2003 (effective for the 6 original signatories of AFTA). Goods that fall within this category are classified as the Inclusion List (IL). Dangerous goods like ammunition and environmentally hazardous materials are agreed upon to remain in the General Exception List (GEL). What appears to be the ultimate drawback of this scheme is the fact that member countries are allowed to temporarily remove products from the IL.

At first it was sensitive agricultural products. Tariff reduction for unprocessed agricultural products such as rice and sugar were put off until 2010, primarily bowing down to objections from Indonesia and the Philippines. Later on, as an attempt to protect its automotive industry, Malaysia invoked the Protocol Regarding the Implementation of the CEPT Scheme Temporary Exclusion List (TEL), which allowed member states to temporarily exclude products, which they deem as still in need of protection, from the IL.

Some people blame it on ASEAN "values" such as tolerance and compromise for the numerous allowances being given to these delays. After all, AFTA is an economic association that is politically driven. When governments regard the economic integration as politically beneficial, they are encouraged to move faster than its "natural" path. When the opposite is true, they resort to backtracking on their initial commitments.

What they apparently do not realize is that delays in tariff reduction commitments could actually jeopardize the benefits of the free-trade area. Despite being devoid of detail, the CEPT- AFTA scheme has managed to increase intra-ASEAN trade by more than 50 percent over the past nine years (see Figure 1). Intra- ASEAN exports grew as a result of the tariff reductions by an average of 9.97 percent per annum during the same period, reaching US$84.4 billion in 2001. At this juncture, December 2002, the average AFTA/CEPT Tariff Rates stand at 3.25 percent (See Table 1), quite a bit lower as compared to when AFTA was launched in 1993 (12.76 percent).

But AFTA does not stop at that. After all, the ultimate aim of AFTA is not to promote intra-ASEAN trade, but mainly to make the ASEAN economy more competitive and ASEAN countries more attractive to global investment. Backpedaling on AFTA would be detrimental to these purposes, as it would send a bad signal to foreign investors.

With or without the sounds of trumpets blaring to welcome the birth of this new creature, AFTA still bears a large amount of significance. It is recognized as the first step towards integrating ASEAN economies into the world economy. China realizes this, as does Japan, South Korea, Australia and now India, all of whom have recently entered the picture. For the last couple of years there have been ongoing talks of integrating ASEAN with the rest of East Asia. China has, for the most part, led the way by becoming the first to sign a bilateral agreement with ASEAN.

With the rest of the region waiting in line to propose marriage to ASEAN, it is instrumental that ASEAN leaders find a way to refine the soft spots of AFTA.

Longer term issues such as, ratification of quantitative restrictions and non-tariff barriers removal need to be worked out in detail. At the national level, "behind the border" issues, such as lack of law enforcement, high economic costs (customs, smuggling), and inadequacy of the necessary institutions to support AFTA need to be seriously dealt with. A general consensus on the country's stand on AFTA between the government, the people and the business community needs to be strived for.

Just as cosmetics function to highlight a pretty girl's features, AFTA has highlighted the attractiveness of ASEAN countries. It is now up to us, the ASEAN member countries, to fill in the holes and to refine the tune of AFTA, in order for ASEAN to maintain its attractiveness.