Integrating ASEAN economies

It is too early to expect much from the ASEAN Free Trade Area (AFTA) in terms of trade expansion within the first eight months of its implementation, as its members are still treading carefully during the learning process, observing how the arrangements would affect their domestic industries.

Nevertheless, the current meeting of ASEAN finance ministers, which opened in Phnom Penh on Tuesday, is a good forum for the economic policymakers to evaluate and to decide on the next steps toward the final goal of AFTA -- that is, to develop this region of more than 500 million people into an integrated market and investment area.

The Phnom Penh meeting is even more opportune in view of the upcoming ASEAN summit in Bali on Oct. 7, because the ministers' recommendations can immediately be brought to the attention of government leaders.

AFTA itself is an intermediate, yet very important, objective to the ultimate goal of creating an integrated ASEAN economy through the establishment of a 500 million-strong market.

The removal of tariff and non-tariff barriers to trade in goods and services, and to investment, will make the 10-member ASEAN more competitive to foreign direct investors, who have increasingly turned to China as a better, alternative manufacturing base.

In fact, several foreign investors have begun to tap the benefits of AFTA for production efficiency. Major carmakers such as Toyota, Isuzu, Honda, Nissan and Ford, and electronics companies such as Samsung and Sony have established -- or are preparing -- regional production networks in ASEAN countries, capitalizing on local comparative advantages and economies of scale.

Yet, most businesspeople in ASEAN have conceded that the AFTA process has not run as smoothly and as quickly as expected. At the current pace of progress in intra-ASEAN trade, an integrated ASEAN economy with a current market size of US$600 billion might still be a dream a decade from now.

The core problem is that even though most member countries have fulfilled the tariff-cutting schedules, traders are still hesitant about taking advantage of the preferential tariffs, due to the host of non-tariff barriers they have to grapple with.

Take, for example, the area of trade-support services such as customs, transportation, telecommunications and product standards.

Traders often encounter problems in customs verification and clearance procedures, because customs officials in member countries are still learning to implement the ASEAN tariff nomenclatures that were harmonized only a few weeks ago.

The verification of the country of origin -- with regard to the minimum 40 percent ASEAN content to make products eligible to the tariff-cut regime -- has yet to be streamlined.

Businesspeople also have to face a complex variety of quality standards, because the mutual recognition arrangements that were concluded in 1998 do not cover all widely traded goods within ASEAN.

In spite of the conclusion of a framework agreement in 1995 to liberalize intra-ASEAN trade in services such as transportation and telecommunications, which are vital to facilitate trading activities, many technical details have yet to be ironed out for its smooth implementation.

Likewise, intra-ASEAN telecommunications, another vital support service for trade, needs to be harmonized and streamlined. As former ASEAN secretary general Rodolfo C. Severino noted recently, a telephone call from Singapore to the U.S. was much cheaper than one from Singapore to the Philippines.

ASEAN finance ministers should renew their strong commitment to implementing all the framework agreements already concluded, in order to strengthen the legal and policy foundations for integrating ASEAN economies, and submit bold recommendations to the coming ASEAN summit.

Too easily succumbing to domestic industrial lobbyists who demand heavy protection would not only leave ASEAN industries uncompetitive internationally, but would also make the 36-year ASEAN grouping less relevant to the economic interests of the region's peoples.

The challenge for Indonesia, as the largest market in ASEAN with more than 220 million people, is to show strong leadership by setting an example in honoring all its commitments to AFTA.

Lack of leadership would only weaken ASEAN's bargaining position to negotiate free trade agreements (FTAs) with other regions, and could push more ASEAN members to break rank and establish FTAs with other countries individually, as Singapore has done with Japan and the U.S.

The progress of AFTA also will support ASEAN's long-term plans for FTAs with China, Japan and India, which were made during the 8th ASEAN summit in Phnom Penh last November.