AFTA in the Changing International Economy 9789814377805

This timely volume reviews the rapidly changing international economic environment and raises a range of issues and conc

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AFTA in the Changing International Economy

Table of contents :
List of Tables
List of Figures
1. AFTA in the Changing International Economy
2. ASEAN Economic Integration with the World through AFTA
3. AFTA and After
4. AFTA and Uruguay Round of Multilateral Trade Negotiations
5. From ASEAN-Six to ASEAN-Ten: Issues and Prospects
6. Foreign Direct Investment in ASEAN: Can AFTA Make a Difference?
7. Regional Integration Arrangements: AFTA from a Comparative Perspective
8. AFTA, NAFTA, and U.S. Interests
9. AFTA and Japan
10. AFTA and the European C nion
11. Should AFTA and CER Link?

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The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute's research programmes are the Regional Economic Studies Programme (RES), Regional Strategic and Political Studies Programme (RSPS), Regional Social and Cultural Studies Programme (RSCS), and the Indochina Programme (ICP). The Institute is governed by a twenty-two-mem ber Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit, within the RES, is an integral part of the Institute, coming under the overall supervision of the Director, who is also the Chairperson of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.


in the.




Mohamed A riff Heinz W Arndt Robert Curry, jr Kunio Igusa Pearl Imada-Iboshi P.j. Lloyd ]ayant Menon

F de Nadal De Simone Michael G. Plummer Prema-Chandra Athukorala Hiromitsu Shimada Suthipand Chirathivat Toh Mun-Heng joseph Tan, editor

Published by Institute of Southeast Asian Studies l1eng Mui Keng Terrace Pasir Panjang Road Singapore 119596

Internet e-mail: [email protected] World Wide Web: httjJ.'//www. iseas. a c. sg/pub. htrnl All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 1996 Institute of Southeast Asian Studies, Singapore

First reprint 1997 Cataloguing in Publication Data AFTA in the changing international economy/edited by Joseph L.I-1. Tan. (ISEAS current economic affairs series, 0218-2114) l. Free trade-ASEAN countries. 2. ASEAN countries-Commercial policy. 3. ASEAN countries-Economic conditions. 4. ASEAN countries-Foreign economic relations. I. Tan, Joseph Loong Hoe. II. Series. I-IF 1591 A84 1996 sis 95-96231 ISBN 981-3055-15-4 ISSN 0218-2114 The responsibility for facts and opinions expressed in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the Institute. Typeset by Superskill Graphic Pte Ltd Printed in Singaport' by Stamford Prt'ss Ptt' Ltcl

Contents List of Tables


List of Figures






INTRODUCTORY OVERVIEW 1. AFTA in the Changing International Economy Joseph L.H. Tan



2. ASEAN Economic Integration with the World through AFTA


Suthiphand Chirathivat


AFTA and After Heinz W Arndt



AFTA and Uruguay Round of Multilateral Trade Negotiations Toh Mun-Heng



From ASEAN-Six to ASEAN-Ten: Issues and Prospects Mohamed A riff



Foreign Direct Investment in ASEAN: Can AFTA Make a Difference? Prema-Chandra Athukorala and jayant Menon




Regional Integration Arrangements: AFTA from a Comparative Perspective Francisco de A. Nadal De Simone



AFTA, NAFTA, and U.S. Interests Michael G. Plummer and Pearl /mada-Iboshi



AFTA and Japan Kunio Igusa and Hiromitsu Shimada


AFTA and the European C nion



R.ohnt Curr'V, Jr


Should AFTA and CER Link? !'f. Uo1•d




DOCUMENTATION Fourth ASEAN Summit, Singapore, 27-28January 1992 Annexe I. Singapore Declaration of 1992 Annexe II. Framework Agreement on Enhancing ASEAN Economic Cooperation Annexe III. Agreement on the Common Effective Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area(AFTA)

194 202


List of Tables


1.2 1.3 2.1 2.2

Foreign Direct Investment in Selected Asian Economies, 1988-93 Foreost of Real Economic Growth and Export Growth of Nineteen Economies, 1993-96 Selected Indicators: The World Economy

3 4 5

ASEAN: Production and Exports Summary of the Original AFTA from the Fourth ASEAN Summit Competitiveness of Thai Industries under the Fast-Track Tariff Reduction Scheme Process of ASEAN Economic Integration with the World Policy Options for ASEAN Economic Integration with the World Summary of CEPT Product Lists: Accelerated Tariff Reduction, Normal Tariff Reduction, and Exclusion List New AFTA Programme after the Twenty-sixth ASEAN Economic Ministers' Meeting in Chiangmai, 22-23 September 1994


4.1 4.2 4.3

Basic Economic Indicators in ASEAN and East Asia, 1993 What GATT Means for Asia Growth Triangles in Southeast Asia

56 57 58

6.1 6.2

Inward Flows of Foreign Direct Investment, 1982-92 Recent FDI Flows to ASEAN Countries by Major Investing Countries Share of lntra-ASEAN Trade in Total Multilateral Trade of ASEAN Countries, 1981 , 1986, and 1991 Share oflntra-ASEAN Trade in Total Multilateral Trade of ASEAN Countries, Bilateral and Regional, 1991 Contributions of Growth in Intra-Industry and Net Trade to Growth in Total Trade for Intra- and Extra-ASEAN Tracie, and Cruhel-Liovrl Inrlcxes, l9H6-9l


2.3 2.4 2.5 2.6 2.7

6.3 6.4 6.5

22 25 28 31 32 34

79 81 82


List of Tables


7.1 7.2 7.3 8.1 8.2

9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11

11.1 11.2

RIAs, Exchange Rate Arrangements, and Payments Restrictions Selected Basic Indicators of ASEAN Countries Real Effective Exchange Rates of ASEAN Countries, 1968-93 Growth Rate of Real GDP in East Asia Trade Bias of U.S. Exports and Imports with Asia-Pacific Countries and the European Community Economic Relations between ASEAN Countries and Japan, 1992 Structural Change of GDP in ASEAN Economies Exports of Manufactured Products in Asia Foreign Investments in ASEAN-Four Indicators for Export Matrix of Asia and the World ASEAN-Five Trade Matrix by SITC Commodity Classification Japanese Exports to ASEAN Countries by Selected Commodities, 1991 Japanese Imports from ASEAN Countries by Commodity, 1991 Japanese Foreign Direct Investment Factors Determining Overseas Production by Japanese Manufacturing Companies, by Region Advantageous Effects of AFTA- Survey of Japanese Manufacturing Companies Trade between AFTA and CER Countries Post-Uruguay Round MFN Tariff Rates on Non-Agricultural Products for ASEAN and CER Countries

97 107 109 125 131

140 142 143 144 145 147 150-51 152-53 154 160 161 184 186

List of Figures

App. 1.1a Growing Interdependence in Intra-Regional Trade App. 1.1 b Increasing Self-Reliance in Intra-Regional Trade App. 1.2 East Asia and World Growth Performance, 1971-92

14 14 15


Intra-ASEAN Trade, 1970-92



Regional Real Effective Exchange Rates, 1967-93


9.1 9.2 9.3 9.4 9.5

Economic Growth Rates ofNIEs, ASEAN, and Japan Indonesia: Export Trends by SITC Classification, 1970-90 Foreign Investment Trends in ASEAN, 1986-90 Economic Linkages in the Asia-Pacific Region Regional Integration of Matsushita Electric Company in ASEAN Countries

141 148 155 156 158

Acknowledgements The ten articles in this volume are obtained essentially from two sources: •

those prepared by Heinz Arndt, Mohamed Ariff, and Toh Mun-Heng are revised versions of papers first presented at the ASEAN Roundtable: The Deepening and Widening of ASEAN in the Post-Cold War Era, 22-23 September 1994, in Singapore. the other contributions from Robert Curry, Jr; Prema-Chandra Athukorala and Jayant Menon; Kunio Igusa and Hiromitsu Shimada; Michael Plummer and Pearl Imada-lboshi; Francisco de A. Nadal De Simone; Suthiphand Chirathivat; and Peter Lloyd are solicited specially for this volume.

We are particularly indebted to these friends and colleagues for graciously volunteering time and effort in preparing these papers. We are, indeed, most grateful for their scholarly service and encouragement. Together they share the belief that this is a worthwhile endeavour in the light of the importance of AFTA and the Fifth ASEAN Summit in Bangkok in December 1995. We hope the issues and substantive coverage on the subject matter of this volume are helpful to the discussions and debate on AFTA in the midst of the rapidly changing world economy.

Contributors Mohamed Ariff, a specialist in international economics, is the Dean of the Faculty of Economics and Administration, University of Malaya, Kuala Lumpur. He also holds the Chair of Analytical Economics. He has published widely. His book The Malaysian Economy: Pacific Connections, published by Oxford University Press, won the prestigious Tun Razak Award in 1993. H.W. Arndt is Professor Emeritus (Economics) at the Australian National University and a Visiting Fellow in its National Centre for Development Studies. He edits Asia-Pacific Economic Literature. Robert L. Curry, Jr is Professor of Economics and Coordinator, Graduate Program in International Mfairs, California State University, Sacramento. He taught economics at the National University of Singapore and Ho Chi Minh City University in Vietnam and was Senior Fulbright Research Fellow at the Institute of Southeast Asian Studies in Singapore. Kunio Igusa is Senior Research Officer at the Institute of Developing Economies, (IDE), Tokyo, and works as Senior Lecturer for its Advance School (IDEAS). He is presently the Co-ordinator of Japan's APEC Economic Development Network for Human Resource Development (APEC EDN-HRD). His research interests include Southeast Asian economic policy affairs, especially pertaining to Indonesia. Pearl Imada-Iboshi is Chief Economist with the Department of Business, Economic Development, and Tourism, State of Hawaii. She was a Fellow at the East-West Center from 1983 to January 1995. She has written numerous articles on ASEAN economic co-operation, APEC, and trade and investment issues in Southeast Asia. Peter John Lloyd is the Ritchie Professor of Economics and the Director of the Asian Business Centre at the University of Melbourne. He has a B.A. and M.A. (First Class Honours) from Victoria University of Wellington in New Zealand and a PhD from Duke University in the United States. His main areas of specialization are international economics and Asian economics and microeconomics in general. He has been a consultant to the OECD, GATT, UNCTAD, and a number of government departments and authorities in Australia and New Zealand. He was ajoint editor uf the journal of the Economic Society of Australia, ThP Hr:onmnic &cord, for five years and has served on



numerous committees for the Economic Society, the International Economic Association, the Academy of the Social Science~ in Australia, and other bodies. Jayant Menon is Research Fellow at the Centre of Policy Studies and The IMPACT Project at Monash University. Previously, he has worked at the University of Melbourne, LaTrobe University, and Victoria University. He is the author of two books and numerous articles in the fields of international trade, foreign investment, and economic modelling. Francisco de A~is Nadal De Simone is with the Economics Department of the Reserve Bank of New Zealand as an adviser. He has previously worked in the Economic Analysis and Research Unit of the former General Agreement on Tariffs and Trade (GATT), Geneva, and as a Senior Lecturer at the Department of Economics and Statistics in the National University of Singapore. His current areas of research interests include monetary theory and policy, exchange rate determination and fiscal policy and interest rates. Michael G. Plummer is Assistant Professor of Economics and Director, Lemberg M.A. Program, Graduate School of International Economics and Finance, Brandeis University. For the 1994-95 academic year, he was a Pew Fellow of International Mfairs at Harvard University. Prior to joining Brandeis, Dr Plummer was a Fellow at the East-West Center. He is author of numerous monographs and articles dealing with international economic integration (with a focus on ASEAN) and Asian economic development. Prema-Chandra Athukorala is Senior Fellow in the Department of Economics and Australia-South Asia Research Centre in the Research School of Pacific and Asian Studies at the Australian National University. His current research interest is economic development and international economics. Hiromitsu Shimada is Visiting Fellow at the Institute ofSoutheastA~ian Studies, Singapore, and Research Fellow at the Institute of Developing Economies (IDE), Tokyo, since 1994. He was formerly an economist at the Economic Planning Agency of the Japanese Government. His research interest includes industrial development in the ASEAN regional economy. Suthiphand Chirathivat is Director of the Centre for International Economics at the Faculty of Economics, Chulalongkorn University, Thailand. He has a PhD in Economics from the University of Paris l (Patlwon) Sorbonne. He has published cxtensi\'cly on the subject ofThaibnd's economy and its relationship with the rest of the world.



Joseph L.H. Tan is Senior Fellow at the Institute of Southeast Asian Studies, Singapore, where he has served as the Institute's Co-ordinator, ASEAN Economic Research Unit, since 1985. He has been Editor-in-charge of the A.\1'AN Economic Bulletin since mid-198 7. Toh Mun-Heng is Senior Lecturer at the Department of Business Policy, National University of Singapore. His research interests and publications are in the areas of econometric modelling, input-output analysis, international trade and investment, human resource development, household economics, and development strategies for emerging economies in the Asia-Pacific.


Introductory Overview: AFTA in the Changing International Economy Joseph L.H. Tan

I. Global Trends and Regional Economic Interdependence To sustain its rapid economic growth and development into the decade of the 1990s, the Association of Southeast Asian Nations (ASEAN) has to respond to the external challenges of maintaining strong economic relations with its major trading partners, thereby ensuring its market access to the United States, japan, and Europe. ASEAN, as a whole and for its constituent member countries, also has to sustain international competitiveness in terms of attracting the flows of foreign direct investment and to maintain production costs and other advantages. The ASEAN Free Trade Area (AFTA) is such a collective strategic response to pursue ASEAN's goals of stimulating intra- and extraregional trade, improving the investment climate and enhancing the competitiveness of industrial performance of its member countries. This introductory overview attempts to provide a substantive background on the global and regional trends and issues concerning the rapidly changing international economic environment as well as highlight the increasing international economic interdependence, particularly in the Asia-Pacific region. Then, recent developments pertaining to AFTA are discussed from the perspective of policy concerns with regard to regional trade co-operation in the broader context of economic co-operation beyond tariff issues to cover non-tariff issues and traderelated concerns. After these, the summaries of the various chapters will be presented. AFTA as an international entity was formulated in January 1992 at the Fourth ASEAN Summit in Singapore. 1 ASEAN 2 declared then that it would establish a free trade area~ in fifteen years (by the year 200R), beginning on 1 January 199~, by means of the Common Effective Preferential Tariff (CEPT) scheme. In the years prior to 1992, there were a number of fundamental chang('s in the global and r('gional economic environment which stimulated the formation of AFTA. These include: (I) the emergence and consolidation


Joseph L.H. Tan

of economic blocs in Europe and North America; (2) within the Southeast Asian region, the adoption of trade/ economic liberalization policies since the mid-1980s and the growing emphasis on growth strategies based on attracting foreign direct investment; and (3) the more favourable perceptions of regional governments and the private sectors in the need for forging deeper economic co-operation in the light of greater competitive pressures coming from outside the region. From an even broader perspective of global and regional trends, inclusive of economic and non-economic trends or driving forces operative in the fastchanging international economy, one can discern five 'mega-trends': 4

1. Beginning in the 1980s, the emergence of a more competitive global economic environment with the progressive integration of the former socialist command economies in Asia and Europe, transforming themselves into market-oriented economies through economic reforms of privatization, deregulation, and liberalization; 2. The electronics revolution, which ushers in the information age of increasingly sophisticated telecommunications and computer, has brought greater global economic interdependence and faster transmission of the business cycles; 3. The 'corporate revolution' as manifested in the internationalization of value-added or commodity chains with implication for "an unprecedented supercompetitive era and global shakeout" can affect any industry or country; 4. The proliferation of global socio-cultural networks, arising from the "revival of global tribes" and ethnic ties and networks, which have facilitated cross-border transactions and stimulated economic performance within and across countries; hence, magnifYing the three preceding global trends; and 5. Growing regionalism - as reflected in the increasing number and configurations of regional integration arrangements. These mega-trends, possibly, have affected significantly the economic developments in the ASEAN region and stimulated greater international economic interdependence. Economic interdependence in the world's most dynamic Asia-Pacific region has progressed at a phenomenal pace, driven by the forces of rapidly increasing international trade and investment flows (Appendix Figures, 1.1 b, and 1.2; Table 1.1). Asia-Pacific economic interdependence has been propelled by market forces, which have been able to overcome official and private barriers to trade and investment. /t~ia-Pacific market integration evolved and prevailed "dramatically even in the absence of any preferential institutional arrangements".'• As can he seen in Appendix Figure 1.1 a, intra-Asian trade increased ovn the 14Hh-42 period from~ I per cent to 4~ per

Introductory Overview


cent whereas Asian exports to the United States dropped sharply from 34 per cent to 24 per cent. How did this come about? Several major factors were operative: (1) the substantial income expansion arising from sustained economic growth has caused the increase in trade; (2) unilateral trade liberalization resulting in the reduction of official and private trade (and investment) barriers in Japan, South Korea, Taiwan, ASEAN, and China; (3) the complementary formation of economic structures through foreign direct investment; and ( 4) the emergence and elaboration of various forms of subregional cooperation schemes (for example, growth triangles such as SIJORI [SingaporeJohor-Riau] in ASEAN and the Hong Kong-Southern China-Taipei nexus).

TABLE 1.1 Foreign Direct Investment in Selected Asian Economies, 1988-93 (In US$ million) 1988







Newly Industrializing Economies South Korea Singapore Taiwan

5,485 871 3,655 959

5,249 758 2,887 1,604

7,620 715 1,330

7,275 1,116 4,888 1,271

8,159 550 6,730 879

8,262 516 6,829 917

42,050 4,526 30,564 6,960









Southeast Asia Indonesia Malaysia Philippines Thailand

3,336 576 719 936 1,105

4,688 682 1,668 563 1,775

6,399 1,093 2,332 530 2,444

8,038 1,482 3,998 544 2,014

8,590 1,777 4,469 228 2,116

8,739 2,004 4,351 763 1,621

39,790 7,614 17,537 3,564 11,075


SOURCE: Abstracted from Asian Development Bank (1995), Table 1.3, p. 17.

The developing countries of East Asia have been largely the driving force since 1986, generating the Asia-Pacific trade expansion and increasing economic interdependence (Appendix Figure Hence, Asian economic growth is currently powered by exports to markets in newly industrializing economies (NIEs), China, and ASEAN, which have been able to achieve high growth performance (Table 1.2) despite continuing recession in Japan and Europe, and sluggish growth in the United States6 (Table 1.3). Indeed, the momentum of East Asian economic growth has become self~generating and not as overwhelmingly dependent on the U.S. market. In sum, the increased regional integration of A~ian economies has protected or cushioned them from some of the less favourable influences of the world economy while helpful in contr·ibuting to the improved growth and economic efficiency. Trade within Asia has grown at a much faster rate than

TABLE 1.2 Forecast of Real Economic Growth and Export Growth of Nineteen Economies, 1993-96 (In percentages) Export Growth


1993 ASEA:-> Indonesia .\lalaysia Philippines Singapore Thailand Vietnam

6.5 8.0 1.7 9.8 7.7









6.9 8.7 4.3 10.1 8.4 8.8

7.3 8.4 5.2 8.0 8.6 9.0

7.1 8.2 6.1 7.0 8.2 9.5

10.1 14.1 9.0 13.4 12.8


9.9 24.0 19.5 23.3 20.5 21.1

8.0 22.0 18.5 14.5 16.6 22.2

12.6 20.0 18.0 12.0 n.a. 23.5


:->IEs Hong Kong Tai"·an South Korea

5.5 5.9 5.3

5.5 6.5 8.5

5.5 7.0 7.6

5.8 6.9 6.7

12.9 6.7 8.4

10.4 9.4 15.7

14.1 8.1 12.8

14.5 7.1 11.4

:->AFTA l'nited States Canada 'dexico

3.0 2.4 0.4

4.0 4.5 3.5

3.3 3.7 -4.9

2.0 3.0 2.4

3.2 9.6 3.4

9.0 14.4 17.2

12.7 13.1 16.0

9.0 4.3 15.1

CER .'..mtralia :-> e"· Zealand

3.1 3.2

5.5 5.4

4.1 3.4

3.1 3.2

8.0 13.4

9.1 8.0

10.9 3.2

9.9 3.5

0.2 13.4 6.0 5.2 6.8

0.6 11.8 4.2 5.7 12.9

1.2 10.2 5.7 5.2 7.7

2.8 9.3 6.0 4.5 6.8

1.2 8.0 4.0 5.0 5.5

8.9 31.8 8.2 3.3 30.0

7.8 19.5 9.7 12.0 12.1

7.7 17.5 9.1 4.3 17.0

3.8 5.8 3.8

4.7 7.0 4.7

4.1 6.0 4.3

4.0 5.8 4.0

5.8 9.5 5.9

12.4 16.0 12.3

12.1 13.6 12.0

9.5 10.6 9.4

Othe1s Japan China Chile Colombia Peru Weighted average* Weighted average excluding United States and .Japan Weighted average excluding Latin America

'C' "' ~


nerates tension ~.

within the region as the sharing of costs and benefits is affected." "The current AFTA agreement does not contain the minimum pre-

Introductory Overview


reqms1tes that both the theory and the practice of RIAs suggest as necessary for a successful achievement of AFTA's declared objectives." He also identifies six important policy implications, some of which are essentially not dissimilar with what others like Arndt, Athukorala and Menon, and also Toh have indicated, though with some difference in emphasis and scope. However, his distinctive suggestions are: ( 1) unilateral trade liberalization in contrast to an FTA- would reduce conflicts when it comes to differentiating between trade-impeding subsidies and neutral subsidies in order to remove non-tariff barriers (NTBs), as the common ground for removing them is not necessary; and (2) ASEAN countries should enhance market integration in (factor and non-factor) services and capital mobility as a more efficient way of promoting trade. Indeed, placing AFTA in a wider comparative perspective serves to set the stage for the discussion of the 'bilateral' approach of examining the relationships of AFTA vis-a-vis the major trading partners of ASEAN, namely the United States (and more broadly NAFTA- encompassing the United States, Canada, and Mexico),Japan, the EU, and CER. In their joint contribution "AFTA, NAFTA, and U.S. Interests", Michael G. Plummer and Pearl Imada-lboshi insightfully examine the implications of regional economic integration in ASEAN and the wider Asia-Pacific "with a view towards developing closer U.S.-ASEAN and AFTA-NAFTA ties". They propose a possible NAFTA-AFTA framework of economic integration- after a comprehensive discussion of existing (that is AFTA) and proposed (for example, an East Asian economic bloc) agreements in Asia in the context of regional economic growth and development trends. They note that "U.S. exports to ASEAN have been growing at over 30 per cent per annum, a trend that is likely to continue given the forecasts for continued robust growth in the region over the 1990s". In 1992 U.S. manufactured exports to Indonesia, Malaysia, the Philippines, and Thailand (ASEAN-Four) were valued at nearly US$12 billion, exceeding five times that of intra-ASEAN-Four trade. Plummer and lmada-Iboshi conclude that: ( 1) as both ASEAN and the United States consider one another as key economic partners, it is important to strengthen their relations through either AFTA-NAFTA or U.S.-ASEAN dialogue-partner bonding; and (2) free trade agreements (such as AFTA and NAFTA) tend to be less complicated if fewer countries participate within a narrow and welldefined agenda. They advocate that an 'open' regionalism strategy - to expedite the reduction of trade barriers within the group and to trade with non-partners and open to the possibility of new members - "could be an excellent tool to achieve U.S. and global commercial policy goals". On this point of advocacy of open regionalism, there is some agreement on the part of Kunio Igusa and Hiromitsu Shimada. In theirjoint contribution o11 "AFTA and)apan" they provide these observations:


Joseph L.H. Tan

1. Japan welcomes free trade arrangements of any shapes and sizes (whether AFTA, NAFTA, or EU) only if they are open to the participation of outsiders. They believe that such open regionalism, including AFTA (which in July 1995 admitted another member, Vietnam), should be able to increase imports from members of the grouping and from outsiders too as regional income levels rise with greater outputs and efficiency stimulated by competition; 2. The regional integration of AFTA and NAFTA or the EU, however, has different implications for Japan. Relative to AFTA, NAFTA and EU economies are much larger markets to Japanese exporters - hence Japan is understandably more concerned whether the EU and NAFTA are in effect protectionist trading blocs; and 3. AFTA is welcomed by Japan "since it enables many Japanese subsidiary companies located in ASEAN to procure intermediate goods from sources within the region more easily at a lower cost as a result of reduction of tariffs". Will AFTA be detrimental to Europe? Is trade (and related investment) diversion a likely consequence of AFTA? In "AFTA and the European Union" Robert Curry, Jr addresses these questions and advocates a broader EUASEAN economic collaboration for two reasons: (1) problems arising from trade diversion because of AFTA being damaging to EU members need cordial settlement among partners of long standing; and (2) AFTA members have more extensive mechanisms - such as the ASEAN Dialogue Partnership System (ADPS), APEC, and Pacific Economic Co-operation Council (PECC) -for dispute settlement with Pacific Basin neighbours than with EU members. He emphasizes and argues that ADPS is a strategic instrument yet "an underutilized asset within the array of ASEAN features so that trade creation and expansion is maximized, and trade diversion is minimized". Hence, the EU should increase its efforts to strengthen its ADPS with ASEAN. Additionally, the EU and ASEAN should work co-operatively to seek out creative ways of mutual assurance of continuing and effective access to one another's markets and investment opportunities. As for Australia and New Zealand, together with the ASEAN countries as a whole, undoubtedly significant gains could be reaped from a linkage between AFTA and CER (Closer Economic Relations) - through reciprocal trade liberalization and also trade facilitation. Besides, both groups of countries can learn much from the experiences of the other regional trading arrangement as both are progressing to a high degree of regional integration. Yet another benefit could be that both an AFTA-CER link and the liberalization of investment rules would also assist in countering investment diversion in favour of the Americas and the EU (consequent on the development of preferential treatment within those regional groups). In affirming these major points of

Introductory Overview


conclusions or observations in the final contribution of this volume, entitled "Should AFTA and CER Link?", Peter Lloyd also draws attention to a number of problematic areas, including: 1. the asymmetry of trade relations bilaterally; 2. marked differences in the tariff structures of Australia and New Zealand and those of the ASEAN countries causing some difficulty in the trade component of the link; 3. non-tariff border barriers posing additional problems; and 4. service trade needing to be included in the link. But this will depend on how AFTA progresses with the liberalization of the service sector. Lloyd cautions that "this link will be redundant if the Bogor Declaration of APEC is implemented after the Osaka meeting of APEC leaders in November 1995. If, instead, multilateral trade liberalization through the World Trade Organization and APEC falters, an AFTA-CER link becomes an important possibility". This volume should also have included chapters pertaining to AFTA relations or implications for economic interactions with ASEAN's newer dialogue partners, namely India and South Korea. And given the rapidly growing importance of economic exchanges between China and the already considerable Taiwanese nexus ofFDI-trade activities in ASEAN, AFTA's implication, no matter how significant as the case may be, should also be worthy of study. But, given diverse constraints- limitations of space, inability to have appropriate contributors, and the timing- these glaring gaps of research contribution on AFTA in the broadest span of the changing world economy are best left to others to fill. 11 Or, we may do so in the Institute of Southeast Asian Studies' triannual ASEAN Economic Bulletin - to which prospective contributors are very much encouraged to submit such articles as they may be stimulated in the reading of this modest volume.

APPENDIX FIGURE Growing Interdependence in Intra-Regional Trade -f:'~



= ,, _. 5:-

~ ,-







___ ''



E) --1.; ~


/ /


/ I . --~-1 -l








_ _ _ _..



45h· t g_ >< U..l 4-
ing marginalized in the wake of the emergence ofpovwrful regional groupings in North America and Europe. ASEAN's credibility is also injeopardy, due to the slow pace of regional economic in tcgration. A widening


From A SEAN-Six to A SEAN-Ten

of ASEAN membership from six to ten by admitting the SEATEs into the organization would refurbish its image internationally and strengthen its bargaining position vis-a-vis its Dialogue Partners, not to mention the geopolitical stability that it would engender. The procedure for admission of the SEATEs into ASEAN itself is simple, once the various criteria discussed above are met. They need only to apply for ASEAN membership and admission will be through a Joint Declaration between the existing members and the new members.

III. Prospects The SEATEs represent poor countries with enormous economic potentials. The pace of transformation from a command system into market economies has been quite rapid, especially in the ICCs. In particular, the reform process in Vietnam seems extraordinary, especially in view of the constraints imposed by the U.S.-led embargo. There is little doubt that the lifting of the embargo will expedite the process. All indications are that the policy reforms will continue to gather momentum in all three ICCs and Myanmar with very little risks of reversals. Although Cambodia, Laos, and Myanmar were less disadvantaged than Vietnam in terms of their access to international aid, their problems seem far more formidable. The main predicament for Laos is that it is small-sized and land-locked, while the constraints faced by Cambodia are largely associated with severe damages inflicted by the protracted civil war and strife. Myanmar's economy is crippled by years of self-imposed isolation. These problems will be compounded, should they decide to go it alone. The small market size of Laos and Cambodia would warrant a regional rather than a national approach. Even in the case of Myanmar and Vietnam, with a fairly large population base, the task of reform, reorientation, and development would be much less difficult with regional co-operation than without. Membership in ASEAN thus represents a tempting proposition for all the SEATEs. It is impossible to do a rigorous analysis of costs and benefits associated with the membership of the SEATEs in ASEAN and their distribution among countries, given the paucity of statistics. Not only are the data on the SEATEs scarce, the reliability of whatever statistics that are available is also suspect. Besides, many of the benefits that would accrue to the SEATEs and the present ASEAN members are simply not quantifiable. However, logical deduction and casual empiricism clearly suggest that the admission of the SEATEs into ASEAN would be mutually beneficial. The main benefit for the SEATEs injoining the ranks of ASEAN would be the new image, which is extremely critical at the present stage of their development. This will not only give them much international visibility but also


Mohamed A riff

inject substantial doses of confidence into transnational investment decisions aimed at these transitional economies. In addition, ASEAN would immediately provide a market for the raw materials of the SEATEs and serve as a source of capital, technology, and intermediate inputs. More importantly, ASEAN could act as a springboard for the SEATEs, facilitating their entry into the international market orbit. It appears that the SEATEs would benefit much more than ASEAN in the short run, especially if ASEAN were to offerS & D treatment to the new entrants without reciprocity in the initial stages in view of their disadvantaged economic position. The ASEAN-Six, too, would have much to gain, especially in the long run. In the short and medium terms, the ASEAN-Six can benefit from investment opportunities in the SEATEs. ASEAN can also participate profitably in the ODA-based projects aimed at rebuilding the economies of Myanmar and Indochina. More importantly, an enlargement of ASEAN from six to ten will add much lustre to its international stature in the post-Cold War era. ASEAN will gain much clout in its bilateral relations with its Dialogue Partners as a result of its widening, and enjoy increased bargaining power in international negotiations and forums. What is more, the inclusion of the SEATEs in ASEAN will ensure greater geopolitical stability and defuse tensions in the region, which should enable its member countries to focus on economic pursuits with renewed vigour. Perhaps, it is not an exaggeration to say that the SEATEs need ASEAN more rather than the other way around, at least in the short run. The 'price' that the SEATEs and ASEAN will have to pay for all this seems minimal. The costs to the former will include annual contributions to the ASEAN budget, 6 administrative responsibilities in handling ASEAN affairs, and some loss of sovereignty to the extent that regional interest is allowed to override national interest. The cost to ASEAN will be largely in terms of S & D treatment which should entail giving concessions without receiving concessions in the initial stages. Costs associated with trade diversion are likely to be small, as the wider ASEAN is likely to be largely trade-creating. The bulk of the ongoing trade of the SEATEs is already with ASEAN and there is little outside trade that can be diverted. This line of reasoning thus lends support to the proposition in favour of SEATE membership in ASEAN. All this, however, should not be interpreted to mean that the admission of these new members into ASEAN is a non-issue. Far from it. Not all the SEATEs are willing or ready to join ASEAN. Nor is the question of admission of the SEATEs easy for ASEAN to resolve. The issue is far more complex than it seems on the surface. Vietnam has long been willing and ready to join ASEAN. It might have joined ASEAN even yesterday, had the circumstances permitted, but it has to wait till July l99.1J. To Laos. joining ASEAN is not a question of whthn hut when. It is willing, but not ready to take on the responsibilities that its membership would entail. Cambodia seems somewhat unsure, haYingjust come out of

From ASJ. Cambodia appears to be the most eligible candidate for admission into ASEAN on the grounds that it is unambiguously non-communist, practising a multi-party political system, and implementing market economy programmes, all of which make it highly ASEAN-compatible, but it needs time to set its house in order. ASEAN can buy time by instituting intermediate steps to phase them in. The observer status given to Cambodia, Laos, and Myanmar is one such measure. Associate membership for the SEATEs may also be considered as another stepping stone towards full membership. This, however, may prove to be problematic for two reasons. First, the SEATEs may insist on joining ASEAN only as equal partners, which implies nothing less than full membership. Second, it would render ASEAN unduly complex, as it would have to define 'associate membership' and to draw demarcation lines, which are easier said than done. If associate membership for the SEATEs is neither desirable nor feasible for the time being, the observer status will have to be redefined in such a way as to provide some room for interaction beyond silent observation. It is not absolutely necessary for ASEAN to institutionalize immediately its relationship with the SEATEs in a formal fashion just for the purpose of extending economic co-operation to them. Informal co-operation between ASEAN and the SEATE observers can go a long way in supporting the policy reforms that are currently under way in these countries. The equations are likely to change over time, rendering full membership of the SEATEs in ASEAN a non-controversial matter for both sides. In any case, the SEATEs are no longer seen by ASEAN as neighbours but as members of an extended ASEAN family. Editor's Note:

The substantive issues and prospects as analysed in this chapter- pertaining to the enlargement of ASEAN from the original six countries to include Vietnam, Laos, Camhodia, and Mvanmar in continental Southeast Asia -

Mohamed A riff


remain valid despite the entry of Vietnam into ASEAN. This revised version of an earlier paper was prepared before July 1995- very much in anticipation of the reality of Vietnam becoming a member of ASEAN. The timing of this notable event in ASEAN's institutional development, as anticipated, came to pass on 28 July 1995. Vietnam, henceforth, became the seventh member of ASEAN when the Foreign Ministers of Vietnam and the other ASEAN countries jointly signed the Declaration on the Admission of Vietnam into ASEAN at a ceremony in Bandar Seri Begawan, Brunei. In joining ASEAN, Vietnam will commence the implementation of the Agreement on the Common Effective Preferential Tariff (CEPT) Scheme for AFTA on 1 January 1996, with the goal to completing the implementation by the year 2006.







ASEAN adopted this policy after Myanmar (then Burma) had turned down an ASEAN invitation to join the grouping in 1968. For insights and analyses see: Doanh and McCarty (1994); Khai (1993); Pholsena (1993); Saignasith and Lathouly (1995); Than (1993); and Thien and Than (1994). It is widely recognized that ASEAN was formed primarily for geopolitical and security reasons during the Cold War. Regional economic co-operation is seen by ASEAN countries as a means, not as an end. Even the end of the Cold War has not changed this ASEAN equation, as ASEAN is still seen as an important instrument that can ensure peace and prosperity in the region so that member countries can continue to concentrate on their economic pursuits without being distracted by intra-regional conflicts and tensions. The fifteen-year AFTA timetable has been shortened to ten years. It was decided at the Fifth Meeting of the AFTA Council, held in Chiangmai, Thailand, on 21 September 1994 that the AFTA process should be completed by 1 January 2003, instead of 1 January 2008. Observer status is generally seen as a stepping stone leading to full membership. The only exception to this is the observer status extended by ASEAN to Papua New Guinea (PNG). There exists a clear understanding that PNG will not become a member of ASEAN, as it already belongs to the South Pacific Forum. The budgetary annual contributions of US$4.1 million to the ASEAN Secretariat in Jakarta are shared equally by all six members.

REFERENCES Ariff, M. AFTA: Another Futile Trade Area? Kuala Lumpur: Svarahan Pndana, Univnsitv of Malaya, 1994. C:hia S.Y. "Singapore's Trade and InYcstment Strategy and ,\SEAN Economic Cooperation with Special Reference to the ASEAN ( :om1non Approach to Foreign Economic Relations". In AS!c>LV in a Clwnginp; l'ruijir and H!rnld Fmrwm>, edited by

From A SEAN-Six to A SEAN-Ten


R. Garnaut. Canberra: Australian National University Press, 1980. Doanh, L.D. and A. McCarty. "Economic Reform in Vietnam: Achievements and Prospects". Paper presented to the International Conference on A~ian Transitional Economies, 29 October-2 November 1994, in Osaka. Khai, T. "Emergence of Market Economy: Vietnam". In Vietnam, Laos and Cambodia: The Path to Economic Development, edited by 0. Yasuda, C. Hongladarom, and M. Than. Tokyo: The Sasakawa Peace Foundation, 1993. Naya, S. et al. "ASEAN Economic Co-operation for the 1990s". Report prepared for the ASEAN Standing Committee, Philippine Institute for Development Studies, Manila, and ASEAN Secretariat, Jakarta, 1992. Pholsena, K. "The Economy in Transition: Laos". In Vietnam, Laos and Cambodia: The Path to Economic Development, edited by 0. Yasuda, C. Hongladarom, and M. Than. Tokyo: The Sasakawa Peace Foundation, 1993. Saignasith, C. and P. Lathouly. "Transitional Economy of the Lao PDR: Current Economic Performance, Progress, and Problems". In Asian Transitional Economies: Challenges and Prospects for Reform and Transformation, edited by S.F. Naya and J.L.H. Tan. Singapore: Institute of Southeast Asian Studies, 1995. Than, M. "A Brief Survey on Myanmar's Transition Economy". Paper presented to the Researchers' Planning Meeting, 22-23 March 1993, at the Institute of Southeast Asian Studies, Singapore. Thein, M. and M. Than. "Transitional Economy of Myanmar: Performance, Issues, and Problems". Paper presented to the International Conference on Asian Transitional Economies, 29 October-2 November 1994, in Osaka.


Foreign Direct Investment in ASEAN: Can AFTA Make a Difference? Prema-Chandra Athukorala and Jayant Menon

I. Introduction

The purpose of this chapter is to examine the likely implications of the formation of AFTA on the volume and pattern of foreign direct investment (FDI) in the ASEAN region. There is a vast and grmving body of literature on ASEAN and AFTA. An important aspect that has not received adequate attention relates to the implications of AFTA for FDI in the region. This is a serious omission because FDI has acted as one of the most important sources of economic growth for all countries in the region, and therefore issues relating to the impact of AFTA on the relocation of industries in the region are likely to be important points of contention in the implementation of the proposed regional tariff preference scheme. To assess the possible implications of AFTA for FDI in the region, we adopt the following two-step approach. In the first step, potential channels through which the formation of a free trade area (FTA) could affect FDI flows are identified by reviewing the relevant theoretical literature. Thi~ is done in order to provide an objective framework for evaluating such arrangements. In the second step, quantitative evidence relating to economic and political performance of AFTA is analysed in light of the criteria established in step one to make inferences about the subject at hand. Given the ex ante nature of the analysis, we are compelled to invoke the assumption that the proposal will be fully implemented (an assumption which does not seem unrealistic, for reasons discussed later in the chapter). The formation of a FTA has implications for both the members of the arrangement (insiders) and the countries excluded from the arrangement (outsiders). \;\!e focus on the fonncr aspect only. Furthennore, we consider only the implications for the volume and composition of FDI; weiLu-e implications of such changes arc beyond the scope of the a nalvsis. 1

Foreign Direct Investment in ASEAN


The study is motivated by the desire to provide input into the ongoing policy debate in ASEAN concerning the implementation of the AFTA proposal. The analysis is also relevant to the general trade and development policy debate, given the renewed widespread interest in forming regional economic alliances (OECD 1993). In many developing countries the notion is widely held that regional integration is a precondition for long-term growth, since national markets are incapable of providing the necessary size to exploit economies of scale and specialization. The chapter is organized in five sections. Section II provides a historical overview of the foreign investment-trade nexus in ASEAN. Section III provides a brief introduction to the AITA proposal. Section IV constitutes the analytical core of the chapter. First, it develops an analytical framework to delineate the potential influences of regional economic integration for FDI. Then, the key aspects of the AFTA proposal and the salient features of FDI activities in the region surveyed in sections II and III are brought together in the context of the theoretical framework in order to make inferences from an ex ante perspective. Section V presents some concluding remarks.

II. Investment-Trade Nexus in ASEAN FDI has played an important role in the economic development of ASEAN countries. Since the late 1970s the ASEAN region has been one of the most attractive investment locations in the developing world. Its share in the total stock of FDI in developing countries increased from 9 per cent in 1980 to 24 per cent in 1992 (UNCTAD 1994). Its share in global FDI flows increased from less than 1 per cent to 9 per cent over the same period (Table 6.1). This dramatic increase in the ASEAN share has occurred in a context where the share of global FDI going to the newly industrializing countries (NICs) has remained relatively unchanged at around 2 per cent. Furthermore, recent investment flows to ASEAN countries have continued to grow at a brisk rate despite the 'world investment recession' between 1990 and 1992, and the recent dramatic increase in China's share of global FDI. In the past FDI flows to ASEAN were mainly from the Western industrialized countries, such as the United States and the United Kingdom. Since the mid-1980s, investments from Japan and the East Asian NICs have increased sharply (Table 6.2). The rapid appreciation of the yen and the subsequent appreciation of the currencies of South Korea and Taiwan have contributed to this increase. Retween 1987 and 1993, total Japanese investment in ASEAN exceeded that of any other country. While Singapore has historically been the major destination of FDI flows to ASEAN, the main recipients the~c day~ are Indonesia, Thailand, ami Malaysia. The volume of FDI flowing to the

TABLE 6.1 Inward Flows of Foreign Direct Investment, 1982-92 -1 00

(In US$ million) Host Region/Country







DeYeloped countries

52,757 (78.13) 14,752 (21.85)

131,313 (82.53) 27,772 (17.46)

168,488 (85.91) 27,376 (13.96)

176,346 (84.82) 31,266 (15.03)

120,616 (74.40) 39,060 (24.09)

102,401 (64.64) 51,485 (32.50)

3,114 (4.61) 844 (1.25) 282 (0.42) 96 (0.14) 1,605 (2.38) 287 (0.43) 1,573 (2.32) 1,014 (1.50) 253 (0.37) 306 (0.45) 1,362 (2.02)

6,991 (4.39) 719 (0.45) 576 (0.36) 936 (0.59) 3,655 (2.30) 1,105 (0.69) 4,457 (2.80) 2,627 (1.65) 871 (0.55) 959 (0.60) 3,194 (2.01)

7,461 (3.80) 1,668 (0.85) 682 (0.35) 563 (0.29) 2,773 (1.41) 1,775 (0.91) 3,439 (1.75) 1,077 (0.55) 758 (0.39) 1,604 (0.82) 3,393 (1.73)

11,662 (5.61) 2,332 (1.12) 1,093 (0.53) 530 (0.25) 5,263 (2.53) 2,444 (1.18) 3,773 (1.81) 1,728 (0.83) 715 (0.34) 1,330 (0.64) 3,487 (1.68)

12,433 (7.67) 3,998 (2.47) 1,482 (0.91) 544 (0.34) 4,395 (2.71) 2,014 ( 1.24) 2,925 ( 1.80) 538 (0.33) 1,116 (0.69) 1,271 (0.78) 4,366 (2.69)

14,222 (8.98) 4,469 (2.82) 1,774 (1.12) 228 (0.14) 5,635 (3.56) 2,116 (1.34) 3,347 (2.11) 1,918 (1.21) 550 (0.35) 879 (0.55) 11,156 (7.04)

Central and Eastern Europe

17 (2.52)

16 (1.01)

268 ( 1.37)

300 (1.44)

2,448 (1.51)

4,257 (2.86)


All countries








DeYeloping countries .-\SL\.'\J \falaysia Indonesia Philippines Singapore Thailand :'\!Cs Hong Kong South Korea Tai\\·an China

NOTE: Figures in parentheses represent percentage shares in global total. 'i>O"U~'

"U"NC"l:AD (.1.99-4.).




::') ;:.-





;;:. ;::!


c ~


"' "-


~ ~





Foreign Direct Investment in ASEAN

TABLE 6.2 Recent FDI Flows to ASEAN Countries by Major Investing Countries (In percentages) Investing Country Host Country


Total (US$ million)

United States


South Korea

Hong Kong



1987 1989 1991 1992 1993

688 833 1,358 1,678 1,922

37.5 32.0 39.4 44.0 46.0

41.5 33.3 29.0 31.4 24.7

n.a. n.a n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a.


1987 1989 1991 1992 1993

2,634 7,996 4,991 9,982 4,264

6.5 6.9 22.7 12.3 10.0

36.6 44.1 35.3 19.6 63.0

19.0 25.2 n.a. n.a. n.a.

11.4 10.9 n.a. n.a. n.a.

4.7 7.0 12.5 4.8 5.4


1987 1989 1991 1992 1993 1994

818 3,194 6,202 6,977 2,442 4,300

7.9 3.7 11.4 18.1 26.0 11.2

34.7 31.1 23.5 14.7 23.5 15.7

0.2 2.2 10.7 0.6 1.8 3.6

4.3 4.1 3.5 0.4 1.5 7.8

12.6 10.6 6.5 2.5 8.3 3.2


1987 1989 1991 1992 1993

1,457 4,719 8,778 10,313 8,144

5.0 7.4 3.1 8.9 5.5

36.5 16.3 10.6 14.7 10.3

1.6 9.9 0.3 6.0 8.1

9.3 8.6 0.5 10.0 4.7

0.4 3.5 3.9 4.4 17.9


1987 1989 1991 1992 1993

167 804 857 289 574

21.6 16.3 11.1 21.8 16.6

17.4 19.7 26.8 25.6 21.1

0.6 2.1 5.7 14.9 7.7

16.8 16.5 n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a.

NOTE: Data arc based on investment approvals. The figures for total investment are higher than those in Table 6.1 for all countries except Singapore because the latter are based on balance of payments records, which also do not capture investment from domestically procured funds (retained earnings and domestic bank loans). For Singapore, the figures arc lower possibly because the bulk of capital inflows take the form of funds injected into existing ventures. SOURCES: ,\rill ( l'l'l1); l\1ini;,try oflnternational Trade ~llld Industry (MITI). lntano· tiona! Tmde and lnrlustrr Hrj){)r/ I 'JY4 (Kuala Lumpur: MIT I, 19~}4); Malaysian Industrial lkvdopment Authorit)' (Mill;\), unpublished data.


Prema-Chandra Athukorala and Jayant Menon

Philippines continues to be low, however, reflecting the relatively unattractive incentive structure and its lack-lustre economic performance. All in all, extra-regional sources of FDI are far more important than intraregional flows. In 1990 intra-regional investment accounted for 5 per cent of total FDI inflows to Indonesia, 3 per cent in Malaysia, and 10 per cent in Thailand, while Singapore and the Philippines attracted less than 1 per cent (Ariff 1994, p. 105). Intra-ASEAN flows originate almost entirely from Singapore. In recent years Malaysia and Indonesia have begun to invest in neighbouring countries, but the magnitude of such investment is still minuscule (Chia 1993). FDI flows into the ASEAN-Four (Indonesia, Malaysia, the Philippines, and Thailand) during the colonial era and the early post-war period were largely associated with primary production, while flows to Singapore were mainly in commerce·, finance, and transportation. Since the late 1950s, there has been a clear shift in investment flows away from these sectors, towards manufacturing. Among the ASEAN countries, Singapore has pursued a virtually open-door policy towards FDI. This policy stance, coupled with the small size of the domestic market, made FDI flows to Singapore export oriented throughout. By contrast, FDI in the ASEAN-Four were mostly in import-substituting industries up until the late 1970s, given the high tariffs and other trade barriers. This type of investment tended to displace international trade with local production. The investments of the 1980s, however, were typically motivated by currency changes, changes in comparative advantage at home, and policy measures that opened up economies (Athukorala and Menon 1995). Thus, a notable development is that FDI has exerted a strong presence in exportoriented manufacturing. By the early 1990s, foreign firms accounted for more than half the manufactured exports from the Philippines and Thailand, and over 80 per cent from Singapore and Malaysia (Dowling 1994; Lim and Pang 1991). It is a historical fact that extra-regional rather than intra-regional trade has been the engine of growth for ASEAN economies. The economic success of these countries has emanated from their ability in becoming increasingly integrated into the global trading system through the pursuance of outwardoriented growth policies. However, there has been some growth in intraregional trade in recent years (Table 6.3). So far, the bulk of intra-ASEAN trade is accounted for by Singapore and Malaysia (Table 6.4). The driving force behind the growth in intra-ASEAN trade is intra-industry trade propelled by efficiency-seeking, cross-border investment by multinational enterprises (MNEs) (Menon 1995). In fact, trade in ASEAN countries is already "more regionally conn·n trated that would be the case under randomly distributed trade patterns" (Petri Flq4, p. 40H). The mo~t noteworthv development relating to the FDI-tradc interrelation in ASEAN is thc enwrgetHT ;111d rapid expansion of cross-border production


Foreign Direct Investment in A SEAN

operations by MNEs. Trade liberalization in ASEAN countries has made it easier to transfer input~ and outputs across borders among the countries in ASEAN (and East Asia). In response, many foreign firms located in the region have adopted international production strategies, contributing to intensified regional trade linkages. For instance, the Mitsubishi Corporation has launched a brand-to-brand car parts complementation scheme which involves a regional division of labour among Malaysia, Thailand, and the Philippines. In this scheme, Malaysia concentrates on the production of door panels and other stamped parts, Thailand specializes in the manufacture of fuel tanks, consoles, bumpers, and windshields, while the Philippines focuses on the production of transmission parts (Ariff 1994; UNCTAD 1994).

TABLE 6.3 Share of Intra-ASEAN Trade in Total Multilateral Trade of ASEAN Countries, 1981, 1986, and 1991 (In percentages) Country

Trade Flow





Imports Exports Total trade

22.37 27.04 24.39

21.79 23.85 22.76

22.56 25.22 23.81


Imports Exports Total trade

10.48 14.60 12.18

12.19 14.14 13.15

13.87 11.22 12.73


Imports Exports Total trade

17.95 26.53 22.28

20.64 22.02 21.41

21.11 28.89 24.99


Imports Exports Total trade

12.82 12.77 12.79

10.44 9.41 9.82

9.52 10.79 10.20


Imports Exports Total trade

6.57 7.29 6.86

9.44 7.24 8.41

9.05 7.02 8.23


Imports Exports Total trade

16.30 19.32 17.77

17.11 17.44 17.28

17.55 19.86 18.65

SOURCES: COMTRADE database, United Nations: trade statistics of ASEAN conntries.



TABLE 6.4 Share of lntra-ASEAN Trade in Total Multilateral Trade of ASEAN Countries, Bilateral and Regional, 1991 (In percentages) CountrY









Imports Exports Total trade

n.a. n.a. n.a.

3.18 6.28 4.64

15.28 14.91 15.10

3.64 2.88 3.28

0.47 1.15 0.79

22.56 25.22 23.81


Imports Exports Total trade

7.95 8.22 8.07

n.a. n.a. n.a.

3.17 2.41 2.84

2.49 0.22 1.52

0.26 0.37 0.31

13.87 11.22 12.73


Imports Exports Total trade

16.57 23.35 19.96

2.59 3.20 2.89

n.a. n.a. n.a.

1.47 1.46 1.47

0.48 0.88 0.68

21.11 28.89 24.99



6.56 8.16 7.41

1.07 0.90 0.98

1.57 1.16 1.35

n.a. n.a. n.a.

0.31 0.57 0.45

9.52 10.79 10.20

Total trade

3.72 2.62 3.27

0.79 2.52 1.49

3.16 1.41 2.44

1.39 0.48 1.02

n.a. n.a. n.a.

9.05 7.02 8.23

Imports Exports Total trade

6.14 8.12 7.08

1.91 3.31 2.57

6.85 6.21 6.55

2.28 1.44 1.88

0.37 0.78 0.57

17.55 19.86 18.65


Total trade


.,;:! .,9 ;:!



Imports Export~


~ ~




.,.,~ ;:!





n.a. -

not applicable.

SOCRCES: COMTRADE database, United Nations; trade statistics of ASEAN countries.


~ ;:! a


Foreign Direct Investment in ASEAN


All major Japanese motor-vehicle producers, including Toyota, Honda, Nissan, lsuzu, and Mazda, have also undertaken similar initiatives to form affiliates and subsidiaries which span not only ASEAN but also the East Asian NICs, generating much intra-firm and intra-industry trade. Motorola has restructured production activities of its Singapore subsidiary by shifting labourintensive processes to its Malaysian subsidiaries and more recently from Malaysia to the Philippines (Crosby and Nakamori 1991). The Sharp plant in Malaysia produces some of the parts that its subsidiaries elsewhere in the region require, and sources most of the components from Sharp affiliates in the rcgwn. The growth in intra-regional, intra-industry trade is depicted in Table 6.5, which contains data on the contribution of growth in intra-industry trade to the growth in intra- and extra-ASEAN trade between 1986 and 1991. Growth in intra-industry trade over this period accounts for three-quarters of the growth in Thailand's intra-ASEAN trade (that is 268.4 7 out of 356.44), and almost twothirds of the growth in intra-ASEAN trade for Singapore and Malaysia. Intraindustry trade also plays a more important role in intra- versus extra-ASEAN trade growth in all the countries over this period. TABLE 6.5 Contributions of Growth in Intra-Industry and Net Trade to Growth in Total Trade for Intra- and Extra-ASEAN Trade, and Grubel-Uoyd Indexes, 1986-91 GL.IOO







337.02 195.09

129.62 72.77

207.40 122.33

62.60 67.34

61.78 64.27


In tra-ASEAN Extra-ASEAN

356.44 358.03

87.97 223.27

268.47 134.76

51.36 35.95

70.07 37.27



395.73 257.36

139.29 128.92

256.45 128.45

67.11 48.88

65.27 49.62



166.25 314.11

85.31 176.61

80.94 137.50

16.51 6.31

23.92 15.12


In tra-ASEAN Extra-ASEAN

177.60 204.38

127.71 164.67

49.89 39.71

26.46 26.48

40.34 39.60


Trade Flow


It ~ Cnt + Ciit, Cnt ~ (I - GL) nt, Ciit ~ GL iit, and GL ~liT+ TT ~I -I IX- Ml +(X+ M)J, where II is the g-rowth in total trade (TT) (that is exports IXl ph1.s imports I M I). Ciit is the contribution of intra-industn trade (liT) g-rowth to g-rowth in total trade, Cnt is the contribution of intcr-industr\' or net trad!' (NT) f;IO\\'th to g-rowlh in toLd tr:Hk. :md lown-c:ta provides mainly for the removal of barriers to trade in goods and services between partner countries, but it does not require them to adopt a common external tariff vi:rG,-vis third countries. FTAs do not call for the free movemen t of productio n factors or de jure harmoniz ation of members' economic policies. In the early 1990s, the average (unweigh ted) nominal tariff rate was 11 per cent in Malaysia, 14 per cent in Indonesia , 9 per cent in the Philippine s and Thailand, and close to zero in Brunei and Singapore (Akrasane e and Stifcl 1992, Table 4.8).

REFEREN CES Akrasancc , N. and D. Stild. 'The Political Economy of the ASEAN Free Trade Area". In AV/:1: /he Hln Altmd, edited by Pearl Imada and Seiji Naya. pp. ~7-4 7. Singapore : Institutl' of Southeast Asian Studies, 1992.

Foreign Direct Investment in ASEAN


Ariff, Mohamed. "Open Regionalism ala ASEAN". Journal of Asian Economics 5, no. 1 (1994), pp. 99-117. Arndt, H.W. "Anatomy of Regionalism". Journal of Asian Economics 4, no. 2 (1993), pp. 271-82. Athukorala, Prema-Chandra andJayant Menon. "Developing with Foreign Investment: Malaysia". Australian Economic Review 109 (1995), pp. 5-15. Balasubramanyam, V.N. "ASEAN and Regional Trading Co-operation in Southeast Asia". In Economic Aspects of Regional Trading Arrangements, edited by David Greenaway, Thomas Hyclak, and Robert J. Thornton. London: Harvester Wheatsheaf, 1989. Balasubramanyam, V.N. and David Greenaway. "Regional Integration Agreements and Foreign Direct Investment". In Regional Integration and the Global Trading System, edited by Kym Anderson and Richard Blackhurst, pp. 147-66. New York: Harvester Wheatsheaf, 1993. Bhagwati, Jagdish. "Regionalism and Multilateralism". In New Dimensions in Regional Integration, edited by James de Melo and Arvind Panagaria. Cambridge: Cambridge University Press, 1993. Braga, Carlos A.P. and Geoffrey Banister. "East Asian Investment and Trade: Prospects for Growing Regionalisation in the 1990s". Transnational Corporation 3, no. 1 (1994), pp. 97-136. Chia Siow Yue. "Foreign Direct Investment in ASEAN Economies". Asian Development Review 11, no. 1 (1993), pp. 60-102. Crosby, Nick and Yasufumi Nakamori. "Motorola's Business Strategy in Southeast Asia". journal of Southeast Asian Business 7, no. 1 ( 1991), pp. 63-69. Dowling, Malcolm. "Outlook and Prospects for Developing Asia". Australian Economic Review 108 (1994), pp. 5-20. Garnaut, Ross and Peter Drysdale. "Asia-Pacific Regionalism: The Issues". In Asia Pacific Regionalism: Readings in International Economic Relations, edited by Ross Garnaut and Peter Drysdale, pp. 1-7. Sydney: Harper Educational, 1994. Kumar, Sree. 'Johor-Singapore-Riau Growth Triangle: A Model of Sub-regional Cooperation". In Growth Triangles in Asia: A New Approach to Regional Economic Cooperation, edited by Myo Thant, Min Tang, and Hiroshi Kakazu, pp. 175-217. Singapore: Oxford University Press, 1994. Lee Tsao Yuan. "The ASEAN Free Trade Area: The Search for a Common Prosperity". Asian-Pacific Economic Literature 8, no. 1 ( 1994), pp. 1-7. Lim, Linda and Pang Eng Fong. Foreign Investment and Industrialization in Malaysia, Singapore, Taiwan and Thailand. Paris: OECD, 1991. Menon, Jayant. Adjusting towards AFTA: The Dynamics of Trade in ASEAN. Singapore: Institute of Southeast Asian Studies, 1995. Menon, Jayant and Peter B. Dixon. "How Important Is Intra-Industry Trade in Trade Growth?". Open Economies Review 7, no. 2 (1996). Organization for Economic Co-operation and Development (OECD). Regional integration and Developing Countries. Paris: OECD, 1993. Ozawa, Terutomo. "Foreign Direct Investment and Structural Transf(nmation:Japan as Rccvckr of Market ;md Jndmtrv". H111inn.1 and CrmfemjJI/mn• \1\'or/d IJ. no. 1 (1993).




Prema-Chandra Athukorala and Jayant Menon

Petri, Peter. 'Trading with the Dynamos: East A~ian Interdependence and American Interests". Current History, December 1994, pp. 407-12. Srinivasan, T.N. "Regional Trading Arrangements and Beyond: Exploring Some Options for South Asia, Theory Evidence and Policy". Report no. IDP-142, South Asia Region. Mimeographed. Washington, D.C.: World Bank, 1994. United Nations Conference on Trade and Development (UNCTAD). World Investment Report 1994: Transnational Corporations, Employment and Work Place. New York: United Nations, 1994.

Part Two: Relations with Major Trading Partners


Regional Integration Arrangements: AFTA from a Comparative Perspective Francisco de A. Nadal De Simone

I. Introduction

In 1992 ASEAN signed the Agreement on the Common Effective Preferential Tariff (CEPT) Scheme to form AFTA. Upon implementation of the agreement by 2008, ASEAN should become a free trade area (FTA) with tariffs on all commodities covered ranging between zero and 5 per cent and with all nontariff barriers (NTBs) and quantitative restrictions eliminated. Capital goods are also included. According to member countries, the raison d'etreof AFTA is twofold: first, to sustain ASEAN's competitiveness, fostering greater efficiency as an export promotion location; and second, to respond to increased regionalism in international trade using the FTA to ensure continued market access. As with most regional integration arrangements (RIAs), the ultimate goal is to promote economic growth. The experience with RIAs among developing countries is characterized, with few exceptions, by large doses of enthusiasm injected at the beginning of the market integration process, 1 followed normally by implementation failures and meagre results in terms of increased intra-regional trade. From this viewpoint, ASEAN's experience with its preferential trading arrangement (PTA) has not been any different. Will ASEAN's experience with AFTA make a distinct difference? This chapter views AFTA from a comparative perspective. It poses two questions: ( 1) Is AFTA in its current form likely to fulfil its objectives?; and (2) What should ASEAN countries do to attain the objectives proclaimed? Section II reviews the regional integration experience of a number of FTAs and customs unions (CUs) among developing and developed nations. Section III deYclops a model that contains the major stylized factors that the experience with RIA~ has shown to matter for a successful integration process. The model is used in section IV to analyse whether AFTA, in its current f(>rm, is sufticicnt for attaining its ohjectiYcs. Section V discusses whether AFTA is


Francisco de A. Nadal De Simone

necessary while section VI contains the conclusions and policy implications.

II. Major Regional Integration Arrangements: The Evidence The preconditions widely accepted for a successful RIA refer to the structural characteristics of countries deemed necessary to make market integration optimal, inter alia, large intra-regional trade before the creation of the RIA, a low common external tariff, a comparable stage of development, and similar production and price structures (Tichy 1992). These prerequisites, however, are not sufficient to explain the experience of actual RIA~. It is also necessary to endogenize monetary, fiscal, and exchange rate policies, together with the institutional framework within which the integration of member states' policy decisions occurs. 2 Appendix 7.1 (based on Nadal De Simone 1995) contains a stylized list of the factors that the experience of most RIAs among both developed and developing countries suggests as responsible for a successful RIA. A~ the integration process works and affects the equilibrium real exchange rate, macroeconomic policy is bound to have a paramount effect in facilitating or hampering that process (Genberg and Nadal De Simone 1993). This is not normally recognized among members of RIA~, including those among developed countries, as the recent crises in the Exchange Rate Mechanism (ERM) of the European Union (EU) and the Mexican debacle within the North American Free Trade Agreement (NAFTA) illustrate so well. By increasing the cross-border effects of macroeconomic policies and decreasing their domestic effects, market integration increases macroeconomic interdependence. Policy integration and discipline become necessary. In turn, new rules and institutions are needed. 1. Exchange Rate Instability and Payments Controls Table 7.1 shows the proportion of countries in each of nine FTA~ and seven CUs that moved towards more exchange rate flexibility and the share of countries that reduced, maintained, or increased payments restrictions between the foundation of the RIA and December 1990. A number of general observations are noteworthy. 1. RIAs among developed countries have been relatively more successful than RIA~ among developing countries. With the exception of the Gulf Co-operation Council (GCC) and the South African Customs Union (SA( :u), records on the implementation and achievements of FTAs and Cll~ among rlf"veloping countries range from total failt11T to "some progress on tariffs" and "FTA rqwatedlv delayed" (de Ia Torre and Kellv

Regional Integration Arrangements


TABLE 7.1 RIAs, Exchange Rate Arrangements, and Payments Restrictions RIA's"


Year Established

Number of Members

More Exchange Rate Flexibility (%)

Payments Restrictions (%) Reduced Maintained Increased


1960 1960' 1967 1972/74 1975 1976 1981/84 1983 1988

11 7 5 7 16 3 18 2 2

81.8 14.3 40.0 14.3 43.7 33.3 16.7 50.0 0.0

10.0 16.7 60.0 0.0 18.7 0.0 0.0 100.0

40.0 50.0 20.0 85.7 64.0 100.0 100.0 0.0

50.0 33.3 20.0 14.3 18.7 0.0 0.0 0.0

20.0 50.0 0.0 33.3 0.0 25.0

20.0 50.0 25.0 33.3 33.3 58.3

60.0 0.0 75.0 33.3 66.7 16.7

Customs Unions CACM SACU AP"


1960' 1969 1969 1973' 1973 1973' 1981

5 4 5 3 6 12 6

100.0 25.0 80.0 66.7 0.0 8.3 0.0

NOTES: Sec text for full names of the RIA~, except for: CEAO - Communaute Economique de !'Afrique de L'Ouest PTA- Preferential Trade Area for Eastern and Southern Africa ANZCERTA- Australia-New Zealand Closer Economic Relations Trade Agreement b Excludes one member country for which data are not available. ' Some member countries joined the RIA later. d One member country does not have payments restrictions. e Members do not have payment~ restrictions. It comprises three members now.


1992). In contrast, RIAs among developed countries have been "broadly on schedule" or "ahead of schedule". 2. The few successful RIAs among developing countries are associated with stable exchange rate regimes and either no changes or reductions in payments restrictions over time. The six member countries of the GCC succeeded in eliminating tariffs among them, in unifying tariff schedules, and in liberalizing trade in services. During the period considered, thev enjovecl stable fixed exchange rate regimes without exchange controls or payments restrictions. On the other hand, the SACU has a


Francisco de A. Nadal De Simone

common external tariff (CET) operational and well integrated goods and factor markets. With the exception of South Mrica, which moved to independent exchange rate floating for reasons unrelated to the sustainability of the RIA, all other members maintained their currencies pegged and not only did not introduce payments controls, but two members (Lesotho and Swaziland) relaxed payments restrictions on current account transactions. 3. With the exception of the European Free Trade Area (EFTA), RIAs among developed countries do not seem to be related to the type of exchange rate regime prevailing neither at the moment of signing the agreement nor at the moment of achieving the objectives of it. EFTA was founded in a period of fixed exchange rates and continued to function well when member countries shifted to managed floating exchange rates and reduced restrictions on current account transactions. The European Economic Community (EEC), a pseudo common market (CM) until1992- thus not included in Table 7.1- moved towards a co-operative arrangement without exchange rate realignments between 1979 and 1990 (the last year covered in Table 7.1 is 1990). Mter 1992, when the EEC became a full-fledged CM without capital and exchange controls (with the exception of exchange controls in Portugal and Ireland), the ERM was subject to various crises of confidence that forced the pound sterling and the Italian lira out of the system. This was largely the result of unco-ordinated macroeconomic policies in the CM. It clearly showed that a full-fledged CM either has its members' macroeconomic policies co-ordinated or, as shown by the experience of developing countries, it faces the prospect of an unravelling of the RIA. 4. Latin American FTAs and CUs have been largely unsuccessful due to the emergence of persistent macroeconomic imbalances and the lack of policy co-ordination. In 80 per cent of trade liberalization reversals in Latin America, inconsistent fiscal policies were the cause (Edwards 1990a). The Central American Common Market's (CACM) reintroduction of quantitative restrictions in the 1980s, its failure to adopt a CET, and the move by its member countries towards payments restrictions and more exchange rate flexibility, epitomize well the fate of RIAs among developing countries. The Caribbean Community (CARICOM) did not succeed in implementing a CET either. Except in the case of three small Caribbean island-states which reduced restrictions on payments on capital account, there was a general tendency to maintain or even introduce more balance of payments restrictions, together with increased exchange rate flexibility. This pattern is even clearer in the Latin American Integration Association (LAFTA/1AIA) and in the Andean Subregional Integration Agreement (AI').

Regional Integration Arrangements


5. Mrican FTA~ and CUs have been unsuccessful largely because member countries are not natural trading partners and because of persistent macroeconomic imbalances. Monetary and fiscal indiscipline delayed the introduction of a CET in most Mrican CUs and helped to reintroduce quantitative restrictions for balance of payments purposes. Out of the nine countries not belonging to the French Franc Zone in the Economic Community of West Mrican States (ECOWAS), seven shifted away from fixed exchange rate arrangements. Recently, those members of the French Franc Zone devalued their currencies significantly. Most member countries maintained or increased payments restrictions. Similarly, members of the Customs and Economic Union of Central Mrica (UDEAC) increased payments restrictions as five out of the six member countries belonged to the French Franc Zone as well. Their fixed exchange rate regime could be maintained for a long period of time, even in the presence of significant real exchange rate overvaluation, thanks to the possibility of accessing a community's fund that compensated fiscal losses produced by the reduction of trade levies, and to the existence of a well-structured system for distributing losses and benefits in the RIA. One out of the three member countries from the Communaute Economique des Pays des Grands Lacs (CEPGL) shifted away from fixed exchange rates and none eliminated payments restrictions. Similarly, countries of the Manu River Union (MRU) moved away from fixed exchange rates. 6. The relative success of the SACU, the predecessor of which started in 1910, is characterized by the large integration of goods and factor markets of member states. Since 1969, member countries have reduced payments restrictions of current account transactions and maintained their currencies pegged to the South Mrican rand, which was allowed to float.

2. Policy Implications The experience of the RIAs reviewed suggests a number of policy implications consistent with the conventional and recent optimum currency area literature. First, as integration (openness in an intra-regional sense) increases, the benefits of fixing exchange rates also increase while the costs decrease. Successful RlAs are positively correlated with exchange rate arrangements that minimize exchange rate variability. This certainly requires a determination to consider exchange rate stability as the intermediate goal of monetary policy. Second, large real exchange rate variability has been a common feature of unsuccessful Latin American RIA-;. The magnitude or the ((JIISL'(jllellCl'~ or lll'l'l) 8,750 (I ,09•1) S, 7/S ( i,O'J/) 10.:12:1 (I .2'Hl)

1,594 (100) 3,427 (215) 9,983 (626) 17, 180( I ,0'l7) 2:1,:169( I ,4ti6) 21.:\'H( 1,:112) 7,2r,o O!l5)

731 348 153 276 923

(100) (162) (705) (623) (316) (498) (343)


AFTA andjapan

expansion. For example, total direct investments by the NIEs (South Korea, Taiwan, Hong Kong, and Singapore) in Thailand reached 52 billion baht in 1989 and 225 billion baht in 1990. These investment~ had already overtaken the Japanese investment in amount at that time. This phenomenon can be typically observed in Indonesia, where the NIEs' investment came to more than thirty times larger than the 1986 level (US$2. 7 billion in 1992). Similarly with Malaysia and the Philippines, as can be seen from the table.

IV. Main Trading Partners for ASEAN Countries Then, how has been the trade pattern among ASEAN and other countries? In Table 9.5, we can examine Asian trade development over the last two decades, especially focusing on its pattern of geographical distribution. It can be noted TABLE 9.5 Indicators for Export Matrix of Asia and the World (In percentages)

Japan Japan

1970 1980 1987 1989 1992

Asian NIEs


United States

European Community


13.7 14.8 17.2 19.1 21.4

7.2 7.0 4.2 6.0 8.1

31.1 24.5 36.5 34.2 28.4

12.0 16.0 16.4 17.5 19.7

100 100 100 100 100

28.6 26.7 24.1 23.8 23.9

100 100 100 100 100

United States 1970 1980 1987 1989 1992

10.8 9.4 11.1 12.3 10.9

4.2 6.7 9.1 10.6 10.6

2.0 2.8 2.2 2.4 3.1

1970 1980 1987 1989 1992

11.8 10.1 11.5 13.3 9.3

7.9 9.3 9.5 11.4 11.6

9.6 9.5 6.2 8.0 8.0

38.5 24.8 35.1 31.9 24.2

16.1 16.6 13.9 15.2 15.6

100 100 100 100 100

ASEAN-Four 1970 1980 1987 19119 1992

26.9 34.5 25.11 24.3 211.6

19.0 17.6 20.7 20.2 1G.4

3.4 3.2 4.0 4.1 2.9

19.2 18.8 20.3 20.5 18.9

14.9 13.6 14.2 15.1 15.G

100 100 100 100 100

Asian NIEs

SOURCES: Toshio Watanabe, "Asia Data Book"; IDE, fnlnnationaf'f'rrule MatrixjorAsiaPacijir Rrgym, vol. I (Tokvo, 19()0).


Kunio Igusa and Hiromitsu Shimada

that Japan and the United States have been prominent in the ASEAN region during this period. ASEAN's exports to the United States have attained a constant 20 per cent share and those to Japan between 25 per cent and 35 per cent, although fluctuations ofJapanese trade with ASEAN have been quite big, reflecting the price and import volume of energy resources. However, if combined, ASEAN's trade with the United States and Japan accounts for more than 50 per cent of the total volume. On the other hand, internal trade among the ASEAN countries (especially among the ASEAN-Four) has remained at a lower level, that is, 3 or 4 per cent of total trade. If Singapore is included, the figures increase to 17 or 18 per cent, but its role is still small compared to Japan or the United States. The total volume of ASEAN trade, excluding Singapore, has also not been significant so far. However, the expansion of trade of these ASEAN countries was significant in the 1980s. Moreover, the Asian NIEs, including Singapore, recorded 8.1 per cent of world commercial trade in 1990 (2.2 per cent in 1980), and the aggregated amount of exports and imports of the ASEAN countries and the NIEs had leaped from 3.8 per cent in 1980 to 10.7 per cent in 1990. It is almost equivalent to that of the United States. These figures show how dynamically the Pacific Asian economies have developed and contributed to the expansion of world trade.

V. Trade Structure of ASEAN and japan It is useful to examine the composition of P..SEAN trade, which has expanded substantially in recent years. Table 9.6 highlights several features of the importexport structure by examining the SITC (Standard International Trade Classification) categories. In the table we can see that manufacturing exports of Asian countries have shown significant expansion in a wide range of industrial sectors. For example, in the chemical industry and general manufacturing sector, Malaysia and the Philippines recorded more than 10 per cent increase in the 1980s (25 per cent to 38 per cent and 13 per cent to 23 per cent respectively). Indonesia also recorded advancement from only 4 per cent in 1980 to 26 per cent in 1990. For miscellaneous industries, such as home appliances, footwear, accessories, and wood-related products, Indonesia showed significant growth too. These commodities made up less than 1 per cent of exports until 1980, but soared to 11 per cent by 1990. For Thailand they expanded from 7 per cent to 23 per cent in the same period as well. On the other hand the exports of oil and other resourcc-rclatecl products were reduced during the same period. Indonesia in particular has experienced a drastic decline in oil export from the later half of the 19HOs. Malaysia


TABLE 9.6 ASEAN-Five Trade Matrix by SITC Commodity Classification (In US$ million) Malaysia



~ ~ Thailand






1980 1990

5,206 (23.8) 4, 798 (18. 7)

6,111(47.2) 8,069(38.2)

3,453 (59.7) 2,223 (31.4)

3,911(60.1) 6,957(43.6)

3, 724 ( 19.2) 4,314 (8.2)


1980 1990

15,743 (71.9) 11,239 (43.8)

3,199(24.7) 3,334(15.8)

50 (0.9) 144 (2.0)

41 (0.6) 122 (0.8)

4,882 (25.2) 9,406(17.8)


1980 1990

807 (3.7) 6,657 (25.9)

3,250(25.1) 7,952(37.6)

755 (13.0) 1,650 (23.3)

1,850(28.4) 5,028(31.5)

8,082(41.7) 32,701 (62.0)

:Miscellaneous manufactured articles


1980 1990

120 (0.5) 2,857 (11.1)

343 (2.6) 1,687 (8.0)

610 (10.5) 954 (13.5)

445 (6.8) 3,732(23.4)

1,283 (6.6) 5.608(10.6)



1980 1990

33 (0.1) 124 (0.5)

37 (0.3) 82 (0.4)

920 (15.9) 2,103 (29.7)

259 (4.0) 112 (0.7)

1,404 (7.2) 701 (1.3)

1980 1990

21,909 (100) 25,675 (100)

12,939 (100) 21,125 (100)

5,788 (100) 7,074 (100)

6,505 (100) 15,952 (100)

19,375 (100) 52,730 (100)

Commodity Food and raw materials, etc. Mineral fuels, etc. Chemicals, manufactured goods and machinery


"' ~

NOTE: Figures in parentheses indicate percentages. SOL'RCE: Calculated from IDE AID-XT Data. ...... .... --J


Kunio Igusa and Hiromitsu Shimada

has also lost a large export share for its primary products and oil, such as primary foodstuffs and raw materials ( 47 per cent to 38 per cent) and crude oil (25 per cent to 16 per cent). These facts suggest that the export composition of ASEAN countries has been clearly changing from raw materials or primary commodities to manufactured products (Figure 9.2). So it could be said that the economic strength of ASEAN has been reinforced to that extent and has been diversified through these structural changes. These changes were accelerated and mobilized by an unprecedented wave of investment initiated mainly by Japan and the NIEs following the global readjustment process of the Asia-Pacific economies. Important factors responsible for generating these changes would be as follows: 1. existence of an active industrial policy and promotion of manufacturing investment; 2. rapidly increasing FDI from japan and the Asian NIEs; and 3. expanding import of basic machinery, increasing management resources, and vigorous capital inflow, which have been nurtured along with foreign investment. FIGURE 9.2 Indonesia: Export Trends by SITC Classification, 1970-90 20,000,-----------------------------------------------~

. .I

15,000 c

.Q ·-


I ..-.., ' \

·- \ \





t/7 rJ)




- - - - 0,1, 2, 4 -------· 3


1981 Year .................. 5, 6, 7




AFTA and japan


In any case, Japan has been functioning as a sort of hub or reservoir base for these structural changes. This can be seen in the radical change in the composition of Japanese exports to and imports from the ASEAN countries. 1. Japanese Export Pattern with ASEAN Japanese exports to ASEAN increased from US$13 billion in 1980 to US$38 billion in 1991 (Table 9. 7). In these the contribution of various machinery and equipment, such as heavy industrial machinery, electronic materials, and others, is mas~ive. Their value increased from US$7.2 billion to US$26.1 billion (70 percent of total exports to ASEAN). The export of electrical machinery was particularly significant, with its share enlarged from 15.9 per cent to 27.7 per cent during the same period. These trends are peculiar to Singapore and Malaysia among the ASEAN countries, followed by Thailand and Indonesia. Increasing imports of heavy industrial machines from Japan have been especially significant in Indonesia. On the other hand, Japanese exports of processed metal and chemical products have declined. In Indonesia they decreased from 21 per cent to 12.2 per cent, and in Thailand from 8.8 per cent to 6. 7 per cent. However, imports of iron and steel products, plastic materials, and non-ferrous mineral products from the NIEs were significantly increased in these ASEAN countries in the 1980s. Their domestic productions also multiplied during this short period.

2. ASEAN's Export Pattern with Japan What about the exports of ASEAN countries to Japan? As noted before, the Japanese market has been very important for ASEAN, to which it exports 25 to 40 per cent of its total exports. However, its export structure has apparently changed. For example, exports of mineral fuels and other raw materials to Japan had drastically declined from 1980 to 1991, from 62 per cent to 41 per cent and 25 per cent to 15 per cent respectively (Table 9.8). However, exports of manufactured goods showed a striking increase. The total value of ASEAN's manufactured products exported to Japan amounted to US$9.0 billion in 1990 (it was only US$1.3 billion in 1980) though their share was still not significant. Moreover their export growth rate was impressive in the early years of 1990s. They doubled in a single year from 1990, from US$4.0 billion to US$9.0 billion. Exports of various machinery, electrical appliances, and components from Singapore, Malaysia, and Thailand, and export of textile products from Thailand and Indonesia were outstanding examples. From these data we can easily imagine that a gradual hut irreversible shift in the main export commodities of ASEAN has occurred during the past two decades.


TABLE 9.7 Japanese Exports to ASEAN Countries by Selected Conunodities, 1991 (In US$ million) Philippines









1980 1991 1980 1991 1980 1991 1980 1991 1980 1991 1980 1991 1980 1991 1980 1991 1980 1991 1980 1991 1980 1991 1980 1991 1980 1991

129,807 314,525 1,588 1,822 1,271 2,400 15,786 30,055 6,296 7,943 109,567 275,242 6,767 17,475 21,319 21,126 81,481 236.641 18,088 69,508

1,917 9,431 13 119 157 70 157 663 79 177 1,705 8,460 275 732 513 1,567 917 6,160 325 2,877

3,911 12,213 52 71 23 94 529 1,088 227 248 3,233 10,588 199 639 745 1,131 2,289 8,819 693 2,750

2,061 7,634 27 25 161 28 161 531 66 151 1,848 6,930 125 436 428 870 1,295 5,623 393 1,756

1,683 2,659 30 30 225 65 225 356 101 132 1,388 2,152 180 202 366 266 842 1,683 330 485

3,458 5,612 75 13 318 68 318 412 143 168 3,001 5,065 363 504 749 736 1,892 3,825 637 2,371







3,381 22,760 73,724

254 194 1,790

23 963 4,721

70 354 2,539

20 194 702

633 372 635

Foodstuffs Raw materials and fuels Light industry goods Textile goods Heaw and chemical industry Chemical goods \!et,t! goods \!achinerv General machinery Office machines Textile machines Electrical machinery




13,030 37,549 197 258 884 325 1,390 3,050 616 876 11,178 33,195 1,142 2,513 2,801 4,570 7,235 26,110 2,378 10,239 0 1,155 0 1,000 2,077 10,387


(100) (100) (1.5) (0.7) (6.8) (0.9) (10.7) (8.1) (4.7) (2.3) (85.8) (88.4) (8.8) (6.7) (21.5) (12.2) (55.5) (69.5) (18.3) (27.3) (0.0) (3.1) (0.0) (2.7) (15.9) (27.7)




~ "'

"'"'-"' ;:l






"' ;:,-



TABLE9.7 (Cont'd) CommoditY Hea\y electrical machinery Teln~sion


Audio machinery Semiconductor crystals Transport equipment .\lotor ,·ehicles :\fotor ,·ehicle parts Precision instruments Reimports and unclassified









1980 1991 1980 1991 1980 1991 1980 1991 1980 1991 1980 1991 1980 1991 1980 1991 1980 1991

1,503 4,254 1,660 2,188

20 251 3 16

48 412 43 143

25 162 28 10

23 74 2 4

62 77 13 7

7,411 904 9,955 34,373 77,917 23,273 54,765 2,015 11,316 6,260 15,493 1,596 5,007

32 2 257 373 1,326 233 753 34 454 25 167 17 120

342 49 1,176 499 968 173 343 79 142 134 380 74 372

33 2 566 528 1,087 411 712 25 244 19 241 15 120


10 2 9 848 683 565 162 59 433 36 136 17 54

SOL'RCE: Calculated from MIT! Trade Yearbook (Tokyo, various years).

3 173 284 434 141 304 41 69 34 63 16 55



"'::. "'-

178 976 89 180

(1.4) (2.6) (0.7) (0.5)


427 58 2,181 2,532 4,498 1,523 2,274 238 1.342 248 987 139 721

(1.1) (0.4) (5.8) (19.4) (12.0) ( 11. 7) (6.1) (1.8) (3.6) (1.9) (2.6) (1.1)





TABLE 9.8 Japanese Imports from ASEAN Countries by Commodity, 1991 (In US$ million)











1980 1990 1980 1990 1980 1990 1980 1990 1980 1990 1980 1990 1980 1990 1980 1990 1980 1990 1980 1990 1980 1990 1980 1990 1980 1990

140,528 236,736 14,666 34,473 23,760 27,167 2,393 2,456 8,480 8,777 12,937 15,933 69,991 54,756 52,763 80,181 5,088 7,633 7,671 10,479 30,568 114,700 6,202 17,412 9,843 42,851

1,119 5,252 333 1,876 511 650 1 32 17 14 493 605

1,507 3,415 27 168 40 130 0 0 15 62 25 68 1,111 1,137 81 19 1,030 1,118

3,471 6,471 61 127 1,632 2,176 14 23 128 107 1,489 2,046 1,315 2,845 1,315 720 0 95 0 1,529 455 1,590 15 161 59 1,077

1,951 2,351 526 750 1,207 604 10 5 883 490 314 108 0 67

13,167 12,770 335 889 1,852 962 0 1 54 611 1,497 350 10,779 8,768 7,567 8,905 813 763 2,399 3,974 195 2,134 12 73 11 105

Foodstuffs Ra\\' materials Textile raw materials \letallic raw materials Other raw materials \lineral fuels Crude oil Petroleum products LPG \lanufactured goods Chemical goods \iachinery

5 5 0

270 2,686 31 177 4 1,111

241 1,791 84 305 120 1,200

0 66 2 194 826 42 63 74 404


21,215 30,259 1,282 3,810 5,242 4,522 25 61 1,097 1,284 3,818 3,177 13,206 12,322 8,963 4,649 1,843 2,042 2,399 5,505 1,355 9,027 184 779 268 3,897


(100) (100) (6.0) (12.6) (24.7) (14.9) (0.1) (0.2) (5.2) (4.2) (18.0) (10.5) (62.2) (40.7) (42.2) (15.4) (8.7) (6.7) (11.3) (18.2) (6.4) (29.8) (0.9) (2.6) (1.3) (12.9)

~ ;::: :s·

~ "'"'

"'"'-;::: ~








TABLE9.8 (Cont'd) Commodity




1980 1990 1980 1990 1980 1990 1990 1990 1990 1990 1990 1980 1990

3,180 13,662 894 5,503 1,611

45 338 0 32 1

10 23 1 17 0

23,676 1,699 1,625 1,180 1,532 1,542 5,641

864 5 177 38 17 5 35

194 2 47 9 1 88 188







94 758 36 158 1 150 2,761 42 417 54 100 130 575

(0.4) (2.5) (0.2) (0.5) (0.0) (0.5) (9.1) (0.1) (1.4) (0.2) (0.3) (0.6) (1.9)

Textile Iron and steel Aluminium Other manufactured goods \\'ood chips Furniture SporL~ equipment Footwear ReimporL~ and unclassified

8 82 1

6 0 173 2 33 5 2 9 233

20 77 14 10 150 153 16 0 12 23 103




- - - -


233 20 93

1,377 33 144 2 68 5 16





SOURCE: Calculated from MIT! Trade Yearbook (Tokyo, various years).

..... Ul



Kunio Jgusa and Hiromitsu Shimada

VI. Growing Investments in ASEAN 1. Significant Expansion of Japanese Investment The impact ofjapanese investment on ASEAN economies should be examined next, while considering the peculiar role of the Asian NIEs. Japanese FDI world-wide amounted to US$57 billion in 1990 (as reported to the Department of Finance ofjapan). Asia had a 12 per cent share of that, and half this amount was allocated to ASEAN countries, about 6 per cent (Table 9.9). In 1990, according to the Yearbook of Economic Co-operation of MITI ( 1992), the foreign manufacturing investment was for 1,524 projects and half of them were allocated to Asian regions ( 759 projects). It is also estimated that onefourth were for ASEAN. In any case, the increase in Japanese foreign investment to ASEAN was so huge that even a single year's investment after 1987 was more than the total cumulative investment until 1985. It is natural that these large investments have a tremendous impact on the NIEs and ASEAN economies. TABLE 9.9 Japanese Foreign Direct Investment

(In US$ million) 1986



Asia NIEs South Korea Taiwan Hong Kong Singapore ASEAN-Four Indonesia Thailand Malaysia Philippines China North America Latin America Middle East Europe Africa Oceania

2,327(10.4) I ,531 (6.9) 436 (2.0) 291 (1.3) 502 (2.2) 302 (1.4) 553 (2.5) 250 (1.1) 124 (0.6) 158 (0.7) 21 (0.1) 226 (1.0) 10,441(46.8) 4, 737 (21.2) 44 (0.2) 3,469(15.5) 309 (1.4) 992 (4.4)

5,569 (11.8) 3,264 (6.9) 483 (1.0) 372 (0.8) 1,662 (3.5) 747 (1.6) 1,966 (4.2) 586 (1.2) 859 (1.8) 387 (0.8) 134 (0.3) 296 (0.6) 22,328 (47.5) 6,423 (13.7) 259 (0.6) 9,117(19.4) 653 (1.4) 2,668 (5.7)

7,064(12.4) 3,355 (5.9) 284 (0.5) 446 (0.8) 1,785 (3.1) 840 (1.5) 3,242 (5.7) 1,105 (1.9) 1,154 (2.0) 725 (1.3) 258 (0.5) 349 (0.6) 27,192(47.8) 3,628 (6.4) 27 (0.0) 14,294(25.1) 551 (1.0) 4,166 (7.3)


22,320 (I 00)

47,022 ( 100)

.'l6,9ll (100)

Nrum. In spf'culating about its future, scholars speculated that APEC is likely to continue to be a consultative f(>rum on economic issues, and it could progress beyond the exchange of inf(mnation and ideas to do the following. First,


Robert Curry,jr

member governments might co-operate on projects designed to promote and facilitate trade, and to develop human resource bases and improve infrastructures. Second, it could eventually undertake joint research and analysis and policy development along the lines of the Organization for Economic Cooperation and Development (OECD). Third, APEC might evolve towards more advanced forms of bargaining and policy harmonization, along with conflict resolution and management. Fourth, the group might eventually evolve towards one that seeks to co-ordinate macroeconomic management policies (Dobson and Lee 1994). The second co-operative mechanism is the Pacific Economic Co-operation Council (PECC), which is a parallel institution headquartered in Singapore, like APEC. PECC began to take form in 1980 when the late Dr Saburo Okita travelled from Tokyo to Canberra where he and Sir John Crawford floated ideas that led to PECC. The Council currently has eighteen member states from throughout the Pacific Basin. It is organized around economic sectors (for example, energy, agriculture, mineral, marine resources, and industry) and issues (for example, the environment, economic management, communications, and human resource development). PECC's focus is also on promoting trade liberalization under the GATT framework, liberalizing flows of DFI and portfolio capital, policy harmonization, the settlement of disputes, and the development and transfer of productivity-enhancing industrial technology. Like APEC, PECC is served by standing committees and annual forums wherein member states recognize their primary interest in maintaining an open multilateral system of trade, investment, and economic development. The primary objective of their effort is the reduction of trade barriers that are in advance of what might be immediately achievable through multilateral initiatives (such as GATT), and their effort is GATT-consistent. PECC is considering taking another step via a regional initiative in the form of an institutional agreement that would "strike the right balance between protection of host and investing countries". Australian Prime Minister Paul Keating suggested that the agreement could "... begin as codes of conduct, and progress, if practical, towards a treaty". Progress is also being made towards developing a sound database on which to undertake relevant and correct policy recommendations as promoting PECC. It endorses regional cooperation on data collection, and the most probable way would be through PECC-APEC initiatives on collecting relevant data on foreign investment. Within the context of a broad Pacific Basin market area, both organizations note that modern communications and information technologies are vital prerequisites to fostering regional collaborative initiative, economic cooperation, ;md, in particular, more rapid and sound national economic growth and socio-economic dc\dopnwnt. On this point, both I'EC(: and APEC working groups on td-

Should AFFA and CER Link?


relatively heavily the Textiles and Apparel industries, Transport Equipment, and the metals industries. Simple accession of CER to AFTA or of AFTA to CER is not likely to be acceptable to either group of countries and in any case there are differences between the two agreements which would make this diflicult. A~ the discussion above has shown, CER has removed almost all border trade restrictions on intra-CER trade and made substantial progress with the removal or simplification of non-border policies which restrict or inhibit intra-regional trade. On the other hand, many border barriers remain within ASEAN and the removal of non-border impediments to intra-area trade is limited to the harmonization of standards and reciprocal recognition of tests and certification. A link would probably take the form of a supplementary agreement between the two arrangements and it would probably have to be confined initially to border barriers to commodity trade. One difficulty is the asymmetry of trade. For Australia in 1993 the ASEAN group of countries accounted for 13.6 per cent of total Australian exports and 8.5 per cent of Australian imports while for New Zealand in the same year the percentages of export and import trade with ASEAN were 6.8 and 4.5 respectively (Department of Foreign Affairs and Trade, Australia 1994, Tables 2.10 and 2.18). For the ASEAN countries collectively, on the other hand, only 2.1 per cent of their exports and 2.9 per cent of their imports were traded with Australia in the same year. One cannot infer from the differences in the direction of trade that the ASEAN countries would have less interest in trade liberalization with the CER countries than they have with the ASEAN countries. ASEAN exports to CER 1 are about two-thirds the CER exports to ASEAN (see Table 11.1) . Moreover, one should examine potential trade rather than actual trade to measure the gains from trade liberalization. Potential trade depends on the levels ofrestrictions of trade, the size of the markets, and the substitutability between commodities imported from the area and the rest of the world. Existing trade barriers restrict trade between CER and ASEAN countries in both directions quite substantially for goods and services of particular interest to both groups of countries, as noted above. The aggregate gross domestic products (GDPs) of the two areas are roughly the same; in 1993 that for Australia and New Zealand was US$356 billion and that for the ASEAN countries was US$385 5 billion (Department of Foreign Affairs and Trade, Australia 1994, pp. 82-83) . Broadly speaking, the two groups of countries might expect to gain about equally. But the differences in the direction of trade do mean that the ASEAN countries might have a greater incentive to free trade with other partners if there is a conflict between the AFTA-CER proposal and another proposal. Diffnal commodity issues; - ASEAN recognises that sustained economic growth requires considera!> le inputs of energy. As member states continue to industrialise and strengthen th ~ir industrial base, ASEAN shall focus and strengthen cooperation in energy sec:urity, conservation and the search for alternative fuels; - ASEAN recognises the complementarity of trade and investment oppe>rtunities and therefore encourages, among others, increased cooperation ar11. d exchanges among the .ASEAN private sectors, and the consideration of apopropriate policies for greater intra-ASEAN investments; - ASEAN shall continue to uphold the principles of free and open trade embodied in the General Agreement on Tariffs and Trade (GATT), and work to-·wards maintaining and strengthening an open multilateral trading system; - ASEAN shall work collectively to ensure that the Uruguay Round addresses the key concerns and interests of the ASEAN economies, and adopt a pragmatic and realistic approach, in using the Draft Final Text as at 20 December 1991 as a reasonable basis for completing negotiations; and - ASEAN strongly urges major trading countries to settle their differer.ces on agriculture and other areas, and likewise use the Draft Final Text to wc::>rk towards an early and successful conclusion of the Uruguay Round.


In reviewing ASEAN's external relations, we have agreed that:

- ASEAN, as part of an increasingly interdependent world, should intensify cooperative relationships with its Dialogue partners, namely Australia, Canada, the European Community, Japan, the Republic of Korea, New Zealand and the United States, and engage in consultative relationships with interested non-Dialogue countries and international organizations; and - While ASEAN's cooperative relationships with the Dialogue partners have made significant progress, ASEAN should strengthen existing dialogue rn echanisms and develop new ones where necessary for the enhancement of economic relations with these countries, especially ASEAN's major economic partners.


In the field of functional cooperation, we han· agreed that:



-The ASEAN member countries shall continue to enhance awareness of ASEAN among the people in the region through the expansion of ASEAN Studies as part of Southeast Asian Studies in the school and university curricula and the introduction of ASEAN student exchange programmes at the secondary and tertiary levels of education; - ASEAN should help hasten the development of a regional identity and solidarity, and promote human resource development by considering ways to further strengthen the existing network of the leading universities and institutions of higher learning in the ASEAN region with a view to ultimately establishing an ASEAN University based on this expanded network; - ASEAN functional cooperation shall be designed for a wider involvement and increased participation by women in the development of the ASEAN countries in order to meet their needs and aspirations. This cooperation shall also extend to the development of children to realise their full potential; -The ASEAN member countries shall continue to play an active part in protecting the environment by continuing to cooperate in promoting the principle of sustainable development and integrating it into all aspects of development; - ASEAN member countries should continue to enhance environmental cooperation, particularly in issues of transboundary pollution, natural disasters, forest fires and in addressing the anti-tropical timber campaign; - The developed countries should commit themselves to assist developing countries by providing them new and additional financial resources as well as the transfer of, and access to environmentally sound technology on concessional and preferential terms; -The developed countries should also help to maintain an international environment supportive of economic growth and development; - ASEAN looks forward to seeing these commitments reflected in the outcome of the United Nations Conference on Environment and Development in 1992 at Rio de Janeiro; -As Non-governmental Organizations (NGOs) play an important role in social development, ASEAN shall encourage the exchange of information among NGOs in the region and help expand their participation in intraASEAN functional cooperation; - ASEAN shall intensify its cooperation in overcoming the serious problem of drug abuse and illicit drug trafficking at the national, regional and international levels; and - ASEAN shall make a coordinated effort in curbing the spread of AIDS by exchanging information on AIDS, particularly in the formulation and implementation of policies and programmes against the deadly disease.




To strengthen


we have agreed that:

- ASEAN Heads of Government shall meet formally every three years with informal meetings in between; -The ASEAN organizational structure, especially the ASEAN Secretariat, shall be streamlined and strengthened with more resources; - The Secretary-General of the ASEAN Secretariat shall be redesignated as the Secretary-General of ASEAN with an enlarged mandate to initiate, advise, coordinate and implement ASEAN activities; - The Secretary-General of ASEAN shall be appointed on merit and accorded ministerial status; - The professional staff of the ASEAN Secretariat be appointed on the principle of open recruitment and based on a quota system to ensure representation of all ASEAN countries in the Secretariat; -The five present ASEAN Economic Committees be dissolved and the Senior Economic Officials Meeting (SEOM) be tasked to handle all aspects of ASEAN economic cooperation; and -A ministerial-level Council be established to supervise, coordinate and review the implementation of the Agreement on the Common Effective Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area (AFTA). DONE in Singapore on the 28th day of january 1992. For Brunei Darussalam:

HAJI HASSANAL BOLKIAH Sultan of Brunei Darussalam For the Republic of Indonesia:

SOEHARTO President For Malaysia:




For the Republic of the Philippines:

CORAZON C AQUINO President For the Republic of Singapore:

GOH CHOK TONG Prime Minister For the Kingdom of Thailand:




Annexe II Framework Agreement on Enhancing ASEAN Economic Cooperation

The Sultan of Brunei Darussalam, the President of the Republic of Indonesia, the Prime Minister of Malaysia, the President of the Republic of the Philippines, the Prime Minister of the Republic of Singapore and the Prime Minister of the Kingdom of Thailand: REAFFIRMING their commitment to the ASEAN Declaration of 8 August 1967, the Declaration of ASEAN Concord of24 February 1976, the Treaty of Amity and Cooperation in Southeast Asia of 24 February 1976, the 1977 Accord of Kuala Lumpur and the Manila Declaration of 15 December 1987; DESIRING to enhance intra-ASEAN economic cooperation to sustain the economic growth and development of all Member States which are essential to the stability and prosperity of the region; REITERATING their commitment to the principles of the General Agreement on Tariffs and Trade (hereinafter referred to as "GATT"); RECOGNISING that tariff and non-tariff barriers are impediments to intra-ASEAN trade and investment flows, and that existing commitments to remove these trade barriers could be extensively improved upon; NOTING the significant unilateral efforts made by Member States in recent years to liberalise trade and promote investments, and the importance of extending such policies to further open up their economies, given the comparative advantages and complementarity of their economies; RECOGNISING that Member States, having different economic interests, could benefit from sub-regional arrangements; CONSCIOUS of the rapid and pervasive changes in the international political and economic landscape, as well as both cohesive and effective performance of intra-ASEAN economic cooperation; MINDFUL of the need to extend the spirit of friendship and cooperation among Member States to other regional economies, as well as those outside the region which contrihutf' to thf' 0\'t'rall economic rlcvt'lopnwnt of Mcmhcr States;



RECOGNIS ING further the importance of enhancing other fields of economic cooperation such as in science and technology, agriculture, financial services and tourism; HAVE AGREED AS FOLLOWS: Article 1: Principles Member States shall endeavour to strengthen their economic cooperation through an outward-loo king attitude so that their cooperation contributes to the promotion of global trade liberalisation .


2. Member States shall abide by the principle of mutual benefit in the implementa tion of measures or initiatives aimed at enhancing ASEAN economic cooperation .

3. All Member States shall participate in intra-ASEAN economic arrangements. However, in the implementa tion of these economic arrangemen ts, two or more Member States may proceed first if other Member States are not ready to implement these arrangemen ts. Article 2: Areas of Cooperation A

Cooperation in Trade

1. All Member States agree to establish and participate in the ASEAN Free Trade Area (AFTA) wi~hin 15 years. A ministerial-l evel Council will be set up to supervise, coordinate and review the implementa tion of the AFTA. The Common Effective Preferential Tariff (CEPT) Scheme shall be the main mechanism for the AFTA. For products not covered by the CEPT Scheme, the ASEAN Preferential Trading Arrangemen ts (PTA) or any other mechanism to be agreed upon, may be used.


Member States shall reduce or eliminate non-tariff barriers between and among each other on the import and export of products as specifically agreed upon under existing arrangemen ts or any other arrangemen ts arising out of this Agreement.


Member States shall explore further measures on border and non-border areas of cooperation to supplement and complemen t the liberalisatio n of trade.





Cooperation in Industry, Minerals and Energy

1. Member States agree to increase investments, industrial linkages and complementarity by adopting new and innovative measures, as well as strengthening existing arrangements in ASEAN. 2. Member States shall provide flexibility for new forms of industrial cooperation. ASEAN shall strengthen cooperation in the development of the minerals sector. 3. Member States shall enhance cooperation in the field of energy, including energy planning, exchange of information, transfer of technology, research and development, manpower training, conservation and efficiency, and the exploration, production and supply of energy resources. C

Cooperation in Finance and Banking

1. Member States shall strengthen and develop further ASEAN economic cooperation in the field of capital markets, as well as find new measures to increase cooperation in this area. 2. Member States shall encourage and facilitate free movement of capital and other financial resources, including further liberalisation of the use of ASEAN currencies in trade and investments, taking into account their respective national laws, monetary controls and development objectives. D

Cooperation in Food, Agriculture and Forestry

1. Member States agree to strengthen regional cooperation in the areas of development, production and promotion of agricultural products for ensuring food security and upgrading information exchanges in ASEAN. 2. Member States agree to enhance technical joint cooperation to better manage, conserve, develop and market forest resources. E

Cooperation in Transportation and Communications

1. Member States agree to further enhance regional cooperation for providing safe, efficient and innovative transportation and communications infrastructure network. 2. Member States shall also continue to improve and develop the intracountry postal and tt'lecommunications svstern to provide cost-effective, high quality and customer-oriented stTvices.



Article 3: Other Areas of Cooperation

1. Member States agree to increase cooperation in research and development, technology transfer, tourism promotion, human resource development and other economic-related areas. Full account shall also be taken of existing ASEAN arrangements in these areas. 2. Member States, through the appropriate ASEAN bodies, shall regularly consult and exchange views on regional and international developments and trends, and identify ASEAN priorities and challenges. Article 4: Sub-regional Economic Arrangements Member States acknowledge that sub-regional arrangements among themselves, or between ASEAN Member States and non-ASEAN economies, could complement overall ASEAN economic cooperation. Article 5: Extra-ASEAN Economic Cooperation To complement and enhance economic cooperation among Member States, and to respond to the rapidly changing external conditions and trends in both the economic and political fields, Member States agree to establish and/ or strengthen cooperation with other countries, as well as regional and international organisations and arrangements. Article 6: Private Sector Participation Member States recognise the complementarity of trade and investment opportunities, and therefore encourage, among others, cooperation and exchanges among the ASEAN private sectors and between ASEAN and non-ASEAN private sectors, and the consideration of appropriate policies aimed at promoting greater intra-ASEAN and extra-ASEAN investments and other economic activities. Article 7: Monitoring Body The ASEAN Secretariat shall function as the body responsible for monitoring the progress of any arrangements arising from this Agreement. Member States shall cooperate with the ASEAN Secretariat in the performance of its duties.



Article 8: Review of Progress The ASEAN Economic Ministers' Meeting and its subsidiary bodies shall review the progress of implementation and coordination of the elements contained in this Agreement. Article 9: Settlement of Disputes Any differences between the Member States concerning the interpretation or application of this Agreement or any arrangements arising therefrom shall, as far as possible, be settled amicably between the parties. Whenever necessary, an appropriate body shall be designated for the settlement of disputes. Article 10: Supplementary Agreements or Arrangements Appropriate ASEAN economic agreements or arrangements, arising from this Agreement, shall form an integral part of this Agreement. Article 11: Other Agreements 1. This Agreement or any action taken under it shall not affect the rights and obligations of the Member States under any existing agreements to which they are parties. 2. Nothing in this Agreement shall affect the power of Member States to enter into other agreements not contrary to the terms and objectives of this Agreement. Article 12: General Exceptions Nothing in this Agreement shall prevent any Member State from taking action and adopting measures which it considers necessary for the protection of its national security, the protection of public morals, the protection of human, animal or plant life and health, and the protection of articles of artistic, historic and archaeological value. Article 13: Amendments All Articles of this Agreement may be modified through amendments to this Agreement agreed upon by all the Member States. All amendments shall hccorrw effectivt> upon acct>ptance hy all Memhn States.



Article 14: Entry Into Force This Agreement shall be effective upon signing. Article 15: Final Provision This Agreement shall be deposited with the Secretary-General of the ASEAN Secretariat who shall promptly furnish a certified copy thereof to each Member State. IN WIT~ESS WHEREOF, the undersigned have signed this Framework Agreement on Enhancing ASEAN Economic Cooperation. DONE in Singapore on the 28th day ofjanuary 1992 in a single copy in the English Language. For Brunei Darussalam:

HAJI HASSANAL BOLKIAH Sultan of Brunei Darussalam For the Republic of Indonesia:

SOEHARTO President For Malaysia:

DR MAHATHIR BIN MOHAMAD Prime Minister For the Republic of the Philippines:

CORAZON C AQUINO President For the Republic of Singapore:

COH CHOK TONG Prime Minister



For the Kingdom of Thailand:




Annexe Ill Agreement on the Common Effective Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area (AFTA)

The Governments of Brunei Darussalam, the Republic of Indonesia, Malaysia, the Republic of the Philippines, the Republic of Singapore and the Kingdom of Thailand, Member States of the Association of South East Asian Nations (ASEAN): MINDFUL of the Declaration of ASEAN Concord signed in Bali, Indonesia on 24 February 1976 which provides that Member States shall cooperate in the field of trade in order to promote development and growth of new production and trade; RECALLING that the ASEAN Heads of Government, at their Third Summit Meeting held in Manila on 13-15 December 1987, declared that Member States shall strengthen intra-ASEAN economic cooperation to maximise the realisation of the region's potential in trade and development; NOTING that the Agreement on ASEAN Preferential Trading Arrangements (PTA) signed in Manila on 24 February 1977 provides for the adoption of various instruments on trade liberalisation on a preferential basis; ADHERING to the principles, concepts and ideals of the Framework Agreement on Enhancing ASEAN Economic Cooperation signed in Singapore on 28 January 1992; CONVINCED that preferential trading arrangements among ASEAN Member States will act as a stimulus to the strengthening of national and ASEAN economic resilience, and the development of the national economies of Member States by expanding investment and production opportunities, trade, and foreign exchange earnings; DETERMINED to further cooperate in the economic growth of the region by accelerating the liberalisation of intra-ASEAN trade and investment with the objective of creating the ASEAN Free Trade Area using the Common Effective Preferential Tariff (CEPT) Scheme; DESIRINC to effect improvements on the ASEAN PTA in consonance with ASEAN's international commitments;



HAVING AGREED AS FOLLOWS: Article 1: Definitions For the purposes of this Agreement: 1. "CEPT" means the Common Effective Preferential Tariff, and it is an agreed effective tariff, preferential to ASEAN, to be applied to goods originating from ASEAN Member States, and which have been identified for inclusion in the CEPT Scheme in accordance with Articles 2 ( 5) and 3. 2. "Non-Tariff Barriers" mean measures other than tariffs which effectively prohibit or restrict import or export of products within Member States. 3. . "Quantitative restrictions" mean prohibitions or restrictions on trade with other Member States, whether made effective through quotas, licences or other measures with equivalent effect, including administrative measures and requirements which restrict trade. 4. "Foreign exchange restrictions" mean measures taken by Member States in the form of restrictions and other administrative procedures in foreign exchange which have the effect of restricting trade. 5. "PTA" mean ASEAN Preferential Trading Arrangements stipulated in the Agreement on ASEAN Preferential Trading Arrangements, signed in Manila on 24 February 1977, and in the Protocol on Improvements on Extension of Tariff Preferences under the ASEAN Preferential Trading Arrangements (PTA), signed in Manila on 15 December 1987. 6. "Exclusion List" means a list containing products that are excluded from the extension of tariff preferences under the CEPT Scheme. 7.

"Agricultural products" mean:

(a) agricultural raw materials/unpr ocessed products covered under Chapters 1-24 of the Harmonised System (HS), and similar agricultural raw materials/unprocess ed products in other related HS Headings; and (b) products which have undergone simple processing with minimal change in form from the original products. Article :!: Genrml Provisions l.

All Member States shall participate in the CEPT Scheme.



2. Identification of products to be included in the CEPT Scheme shall be on a sectoral basis, i.e., at HS 6-digit level. 3. Exclusions at the HS 8/9-digit level for specific products are permitted for those Member States, which are temporarily not ready to include such products in the CEPT Scheme. For specific products, which are sensitive to a Member State, pursuant to Article 1 (3) of the Framework Agreement on Enhancing ASEAN Economic Cooperation, a Member State may exclude products from the CEPT Scheme, subject to a waiver of any concession herein provided for such products. A review of this Agreement shall be carried out in the eighth year to decide on the final Exclusion List or any amendment to this Agreement. 4. A product shall be deemed to be originating from ASEAN Member States, if at least 40% of its content originates from any Member State. 5. All manufactured products, including capital goods, processed agricultural products and those products falling outside the definition of agricultural products, as set out in this Agreement, shall be in the CEPT Scheme. These products shall automatically be subject to the schedule of tariff reduction, as set out in Article 4 of this Agreement. In respect of PTA items, the schedule of tariff reduction provided in Article 4 of this Agreement shall be applied, taking into account the tariff rate after the application of the existing margin of preference (MOP) as at 31 December 1992. 6. All products under the PTA which are not transferred to the CEPT Scheme shall continue to enjoy the MOP existing as at 31 December 1992. 7.

Member States, whose tariffs for the agreed products are reduced from

20% and below to 0%-5%, even though granted on an MFN basis, shall still enjoy concessions. Member States with tariff rates at MFN rates of 0%-5% shall be deemed to have satisfied the obligations under this Agreement and shall also enjoy the concessions. Article 3: Product Coverage This Agreement shall apply to all manufactured products, including capital goods, processed agricultural products, and those products falling outside the definition of agricultural products as set out in this Agreement. Agricultural products shall be excluded from the CEPT Scheme.



Article 4: Schedule of Tariff Reduction 1. Member States agree to the following schedule of effecLive preferential tariff reductions: (a) The reduction from existing tariff rates to 20% shall be done within a time frame of 5 years to 8 years, from 1 January 1993, subject to a programme of reduction to be decided by each Member State, which shall be announced at the start of the programme. Member States are encouraged to adopt an annual rate of reduction, which shall be (X-20) %/5 or 8, where X equals the existing tariff rates of individual Member States. (b) The subsequent reduction of tariff rates from 20% or below shall be done within a time frame of 7 years. The rate of reduction shall be at a minimum of 5% quantum per reduction. A programme of reduction to be decided by each Member State shall be announced at the start of the programme. (c) For products with existing tariff rates of 20% or below as at 1 January 1993, Member States shall decide upon a programme of tariff reductions, and announce at the start, the schedule of tariff reductions. Two or more Member States may enter into arrangements for tariff reductions to 0%-5% on specific products at an accelerated pace to be announced at the start of the programme. 2. Subject to Articles 4(1 )(b) and 4(1 )(c) of this Agreement, products which reach, or are at tariff rates of 20% or below, shall automatically enjoy the concessiOns. 3. The above schedules of tariff reduction shall not prevent Member States from immediately reducing their tariffs to 0%-5% or following an accelerated schedule of tariff reduction. Article 5: Other Provisions A

Quantitative Restrictions and Non-Tariff Barriers

1. Member States shall eliminate all quantitative restrictions in respect of products under the CEPT Scheme upon enjoyment of the concessions applicable to those products. 2. Member States shall eliminate other non-tariff barriers on a gradual basis within a period of five years after the enjoyment of concessions applicable to those products.




Foreign Exchange Restrictions

Member States shall make exceptions to their foreign exchange restrictions relating to payments for the products under the CEPT Scheme, as well as repatriation of such payments without prejudice to their rights under Article XVIII of the General Agreement on Tariffs and Trade (GATT) and relevant provisions of the Articles of Agreement of the International Monetary Fund (IMF). C

Other Areas of Cooperation

Member States shall explore further measures on border and non-border areas of cooperation to supplement and complement the liberalisation of trade. These may include, among others, the harmonisation of standards, reciprocal recognition of test~ and certification of products, removal of barriers to foreign investments, macroeconomic consultations, rules for fair competition, and promotion of venture capital. D

Maintenance of Concessions

Member States shall not nullify or impair any of the concessions as agreed upon through the application of methods of customs valuation, any new charges or measures restricting trade, except in cases provided for in this Agreement. Article 6: Emergency Measures 1. If, as a result of the implementation of this Agreement, import of a particular product eligible under the CEPT Scheme is increasing in such a manner as to cause serious injury to sectors producing like or directly competitive products in the importing Member States, the importing Member States may, to the extent and for such time as may be necessary to prevent or to remedy such injury, suspend preferences provisionally and without discrimination, subject to Article 6(3) of this Agreement. Such suspension of preferences shall be consistent with the GATT. 2. Without prejudice to existing international obligations, a Member State, which finds it necessary to create or intensify quantitative restrictions or other measures limiting imports with a view to forestalling the threat of or stopping a serious decline of its monetary reserves, shall endeavour to do so m a manner, which safeguards the value of the concessions agreed upon. :\. \\'here cmcrgcmy HJca~urc~ arc taken pursuant to this Article, immediate notice of such action shall be given to the Council referred to in Article 7 of



this Agreement, and such action may be the subject of consultations as provided for in Article 8 of this Agreement. Article 7: Institutional Arrangements 1. The ASEAN Economic Ministers (AEM) shall, for the purposes of this Agreement, establish a ministerial-level Council comprising one nominee from each Member State and the Secretary-General of the ASEAN Secretariat. The ASEAN Secretariat shall provide the support to the ministerial-level Council for supervising, coordinating and reviewing the implementation of this Agreement, and assisting the AEM in all matters relating thereto. In the performance of its functions, the ministerial-level Council shall also be supported by the Senior Economic Officials' Meeting (SEOM). 2. Member States which enter into bilateral arrangements on tariff reductions pursuant to Article 4 of this Agreement shall notify all other Member States and the ASEAN Secretariat of such arrangements. 3. The ASEAN Secretariat shall monitor and report to the SEOM on the implementation of the Agreement pursuant to the Article 111(2)(8) of the Agreement on the Establishment of the ASEAN Secretariat. Member States shall cooperate with the ASEAN Secretariat in the performance of its duties. Article 8: Consultations 1. Member States shall accord adequate opportunity for consultations regarding any representations made by other Member States with respect to any matter affecting the implementation of this Agreement. The Council referred to in Article 7 of this Agreement, may seek guidance from the AEM in respect of any matter for which it has not been possible to find a satisfactory solution during previous consultations. 2. Member States, which consider that any other Member State has not carried out its obligations under this Agreement, resulting in the nullification or impairment of any benefit accruing to them, may, with a view to achieving satisfactory adjustment of the matter, make representations or proposals to the other Member States concerned, which shall give due consideration to the representations or proposals made to it. 3. Any differences between the Member States concerning the interpretation or application of this Agreement shall, as far as possible, he settled amicablY between the parties. If such diffen·nn·s cannot be settled amicably, it



shall be submitted to the Council referred to in Article 7 of this Agreement, and, if necessary, to the AEM. Article 9: General Exceptions Nothing in this Agreement shall prevent any Member State from taking action and adopting measures, which it considers necessary for the protection of its national security, the protection of public morals, the protection of human, animal or plant life and health, and the protection of articles of artistic, historic and archaeological value. Article 10: Final Provisions

1. The respective Governments of Member States shall undertake the appropriate measures to fulfil the agreed obligations arising from this Agreement. 2. Any amendment to this Agreement shall be made by consensus and shall become effective upon acceptance by all Member States. 3.

This Agreement shall be effective upon signing.

4. This Agreement shall be deposited with the Secretary-General of the ASEAN Secretariat, who shall likewise promptly furnish a certified copy thereof to each Member State. 5. No reservation shall be made with respect to any of the provisions of this Agreement. In Witness Whereof, the undersigned, being duly authorised thereto by their respective Governments, have signed this Agreement on Common Effective Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area (AFTA). Done at Singapore, this 28th day of January 1992 in a single copy in the English Language. For the Government of Brunei Darussalam:

ABDUL RAHMAN TAlB Minister of Industry and Primary Resources



For the Governmen t of the Republic of Indonesia:

DR ARIFIN M SIREGAR Ministry of Trade For the Governmen t of Malaysia:

RAFIDAH AZIZ Minister of Internationa l Trade and Industry For the Governmen t of the Republic of the Philippines:

PETER D GARRUCHO JR Secretary of Trade and Industry For the Governmen t of the Republic of Singapore:

LEE HSIEN LOONG Deputy Prime Minister and Minister for Trade and Industry For the Governmen t of the Kingdom of Thailand:

AMARET SUA-ON Minister of Commerce

SOURCE: Ministry of Foreign Affairs, Singapore.