Regional trade the challenger for ASEAN's future

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".