Regional trade the challenger for ASEAN's future

By Vitit Muntarbhorn

BANGKOK: The macro-economic growth rate of ASEAN countries has been very impressive this decade with some countries enjoying a Gross Domestic Product growth of nearly 10 percent per annum. This is greatly due to increasing industrialization for export orientation and the success in exporting their goods. Yet, intra- ASEAN trade has for a long time lagged behind trade with those outside the region.

In the early part of ASEAN's history, in the late 1960s and the 1970s, ASEAN countries exported mainly commodities, but these have given way to more export of manufactured goods in recent years. ASEAN's major trading partners are the U.S., the European Union and Japan. Although the share of intra-ASEAN trade has improved during the past decades it is still much smaller than "complimentarity" between the economies of the member countries of ASEAN.

Economic cooperation in ASEAN did not progress until after the Bali Summit in 1975 and it has enjoyed a varied history. The latter part of the 1970s and the 1980s witnessed various economic and commercial initiatives, some of which were more successful than others. The idea of ASEAN preferential trading arrangements was introduced in 1977, aimed at reducing tariffs on a range of goods among member countries. Initially, this was done on a product basis but was later widened to allow reductions across the board. However, these arrangements have been underused and have suffered from the fact that too many key products are excluded from tariff reductions as part of a sensitive list.

In 1980 the regional grouping set in motion the ASEAN Industrial Projects, which aimed to establish an ASEAN Project in each country, with the host country holding 60 percent of the equity, and the remaining equity being provided by the other member countries. However, these projects faltered; only a few of these projects succeeded in getting off the ground, for lack of political will and participation.

In 1981 ASEAN experimented with another initiative: the ASEAN Industrial Complimentation Projects, whereby organized trade exchanges of specific or manufactured products were promoted, and these products were to enjoy tariff preferences under the existing preferential trading arrangements. Although slow at first, these projects gradually burgeoned to cover brand-to-brand complimentation in the automobile industry.

The most successful of ASEAN economic initiatives in the 1980s was the introduction of the ASEAN industrial joint ventures in 1983. An ASEAN joint venture has three components: it produces a product in any of the participating countries; it has equity participation from nationals of at least two participating countries; and it satisfies a minimum ASEAN equity ownership of 51 percent. Gradually, that equity requirement has been reduced so as to allow more foreign participation.

In the meantime, the idea of subregional initiatives in the form of growth triangles between three or more ASEAN countries was implemented to open the door for even more liberalization with special concessions in regard to transnational investment, export incentives and manpower flows.

In particular, the impetus for more liberalization came from the Manila Summit in 1987, and the Singapore Summit in 1992. The latter was instrumental in converting the preferential trading arrangements into a more dynamic process of economic integration. It initiated the ASEAN Free Trade Area (AFTA), which set dual tracks for effective tariff cuts as Common Effective Preferential Tariffs (CEPT) in the region, beginning in 1993, on a sector, rather than product basis. The normal track would be to cut tariffs 0 percent to 5 percent within fifteen years. The accelerated fifteen products include vegetable oil and textiles. In 1994 the timeframe was reduced to ten years and the speed of these tracks was accelerated by ministerial agreement as follows:

Normal track:

* reduction of tariff rates above 20 percent to 20 percent by Jan. 1, 1998, and then from 20 percent to 0 percent to 5 percent by Jan. 1, 2000;

* reduction of tariff rates at or below 20 percent to 0 percent to 5 percent by Jan. 1, 2000.

Fast track:

* reduction of tariff rates above 20 percent to 0 percent to 5 percent by Jan. 1, 2000;

* reduction of tariff rated at or below 20 percent to 0 percent to 5 percent by Jan. 1, 1998.

The liberalization of intra-ASEAN trade is much welcomed. The tariff reductions are already showing benefits conducive to a greater flow of trade in the region. In terms of economic and commercial progress, increasing competitiveness between ASEAN countries also makes up for the lack of "complimentarity" between various sectors.

Yet, AFTA currently suffers from various difficulties. First, the CEPT scheme allows for exclusions both temporary and long- term. Agricultural products are not covered at all by the tariff cuts. As for other products, much discretion is left to each ASEAN country to "qualify" which it considers to be an excluded product. Due to this possibility, the exclusions themselves may prove to be the rule rather than the exception. However, AFTA does provide for mid-term review of this process, and the intention should be to eliminate all exclusions by the end of the timeframe of 10 years.

Second, although AFTA provides for reductions of non-tariff barriers, the definition or interpretation of what constitutes a non-tariff barrier is still unsettled, and thus open to subjective positions adopted by each member state. Currently, interpretative notes are being prepared by ASEAN and these may help to clarify matters in future. In the recent evolution of international trade negotiations, it is important to render these barriers more transparent, particularly by converting them into more identifiable tariffs, "tariffication", and to progressively eliminate them.

Third, there is still a lack of uniformity in the classification of products, which affects the various headings for tariffs and customs. This depends on more harmonization of the classification and headings in future.

Fourth, AFTA does not have a dispute settlement mechanism. Although frequent dialogue can help to prevent problems under a specially established AFTA Council, there is no final arbiter if there is a concrete dispute requiring settlement. To some extent, this loophole may be filled by resorting to extra-regional mechanisms, such as the dispute settlement panel of the newly established World Trade Organization. During the past year, an economic and commercial dispute between Malaysia and Singapore nearly ended up in the latter forum.

Despite these difficulties, there are various innovations which should help to improve the future workings of AFTA. It is likely that the services sector will be included in AFTA soon. The latest developments suggest that agricultural products are a future target to be incorporated under AFTA. ASEAN is also currently considering the adoption of a framework for the protection of intellectual property in the region. Thus there is increasing integration within ASEAN, although not along the lines of the regional model, which has a supranational body to oversee its operations, with binding powers transcending state sovereignty, such as that of the European Union.

In extra-regional terms, the most important arena for ASEAN in the past decade was the Uruguay Round of multilateral trade negotiations, leading to the Marrakesh Final Act of 1994, and the establishment of the World Trade Organization as the successor to the General Agreement on Tariffs and Trade. In the negotiations, all ASEAN countries favored the reduction of protectionism and the liberalization of trade. However, given the disparate nature of ASEAN economies -- for example, the more rural, agricultural community of Indonesia contrasted with the more urban, service oriented society of Singapore -- it was not expected that ASEAN would speak with one voice on every issue during the Uruguay Round. For instance, only four ASEAN countries -- Indonesia, Thailand, Malaysia and the Philippines -- belonged to the Cairns group which joined hands with other countries to advocate the need to reduce agricultural subsidies in developed countries, in particular in the U.S. and the European Union.

As a whole, ASEAN's impact in regard to the Uruguay Round was along the lines or latecomers, who were more passive than active until the later part of the day. In the lead-up to the Marrakesh Final act, the economic weight of ASEAN countries was middle-of- the-road, rather than substantial. If one were to compare the role of ASEAN in the extra-regional arena, in regard to the political and security dimension with its role in regard to the economic and commercial dimension, ASEAN has enjoyed much more influence in regard to the former than the latter.

In retrospect, ASEAN has shown that despite its "gradualist incrementalism", it can foster increasingly closer economic and commercial cooperation both "intra-region" and "extra-region". Yet, in reality, the achievements are of a lesser degree than in the political field and the benefits have tended to emanate from extra-regional interaction, rather than intra-regional interaction. They are also plagued by the fact that economic growth does not guarantee social equity. In regard to ASEAN's own inputs for the latest multilateral trade negotiations, the regional grouping has been less of a force than it could have been, partly due to the still disparate nature of ASEAN economies and its latecomer status to the negotiations.

For the future, ASEAN will have to prove that in the economic and commercial sphere, in the intra-regional setting, it can press for more concrete benefits for the region and broaden its scope to cover not only industrial goods but also agricultural products; not only the freer flow of goods but also the freer flow of people, services and funds; not only tariff issues but also competition rules, intellectual property, consumer protection and protection of workers, especially the increasingly sensitive area of migrant workers.

ASEAN will have to decide, in enlarging its membership to include other South-east ASEAN countries, whether to opt for one track to two tracks of integration; whether to be concentric circles or one whole. It will have to increasingly address the insular trends leading to the adoption of a regional customs, leading to liberalization "intra-ASEAN" and "extra-ASEAN" concomitantly, on the other hand. In the spirit of recent trade negotiations, it is open regionalism rather than economic bloc- building which should be preferred.

Vitit Muntarbhorn is professor at the Faculty of Law, Chulalongkorn University. He is also executive director of Child Rights ASIANET.

-- The Nation

Window: In retrospect, ASEAN has shown that despite its "gradualist incrementalism", it can foster increasingly closer economic and commercial cooperation both "intra-region" and "extra-region".