AFTA: The Way Ahead 9789814379199

Table of contents :
Contents
List of Tables
List of Figures
Preface
Introduction: In Search of Success for AFTA
1. Shaping factors and business conditions in the post-Fourth ASEAN Summit period
2. The political economy of the ASEAN Free Trade Area
3. The long and winding road ahead for AFTA
4. Policy issues and the formation of the ASEAN free trade area
5. Institutional requirements of ASEAN with special reference to AFTA
The editors
The contributors

Citation preview

~IFTI~

The Way Ahead

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 is governed by a twenty-two-member 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 (AERU) is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman 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.

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The Way Ahead edited by Pearllmada and Seiji Naya

I5ER5

ASEAN Economic Research Unit INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 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.

© 1992 Institute of Southeast Asian Studies

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 or its supporters. Cataloguing in Publication Data AFTA (ASEAN Free Trade Area): the way ahead/edited by Pearl lmada and Seiji Naya. (!SEAS current economic affairs series, 0218-2114) I. Free trade - ASEAN countries. 2. ASEAN countries- Commercial policy. I. lmada, Pearl. II. Naya, Seiji. III. Series. 1992 sls92-l 03733 HFI591 A84 ISBN 981-3016-50-7 (soft cover) ISBN 981-3016-51-5 (hard cover)

Typeset by Superskill Graphics Pte Ltd Printed in Singapore by Singapore National Printers Ltd

Contents

List of Tables

vii

List of Figures

viii

Preface

ix

Introduction

xi

Chapter 1 Shaping Factors and Business Conditions in the Post-Fourth ASEAN Summit Period ROLF J LANGHAMMER

Commentary on Chapter I

23

TAN KONG YAM

Chapter 2 The Political Economy of the ASEAN Free Trade Area

27

NARONGCHAI AKRASANEE and DAVID STIFEL

Commentary on Chapter 2

48

MOHAMED ARIFF

Chapter 3 The Long and Winding Road Ahead for AFTA

53

SElf! NAYA and PEARL IMADA

Commentary on Chapter 3 LEE TSAO YUAN

67

vi

CONTENTS

Chapter 4 Policy Issues and the Formation of the ASEAN Free Trade Area

71

SREE KUMAR

Commentary on Chapter 4

95

CHIA SlOW YUE

Chapter 5 Institutional Requirements of ASEAN with Special Reference to AFTA

99

JACQUES PELKMANS

Commentary on Chapter 5

134

CHNG MENG KNG

Commentary on Chapter 5 PI DAVIDSON

Contributors

139

143

List of Tables

2.1

ASEAN Export Matrix

34

3.1

Manufactures as a Share of Total Exports

57

4.1

ASEAN Trade, 1985 and 1990

73

4.2

Total Intra-ASEAN Trade, 1985 and 1990

75

4.3

ASEAN Trade Share, 1985 and 1990

76

4.4

CEPT Product Groups

77

4.5

CEPT Import Trade, 1990

78

4.6

CEPT Exports: Intra-ASEAN, 1990

79

4.7

Structure of lntra-ASEAN CEPT Trade, 1990

80

4.8

Average Unweighted Tariffs with Margins of Preference for Selected Items

81

4.9

Some Large Intra-ASEAN Imports, 1990

88

5.1

Policy Functions of ASEAN in the 1990s

117

List of Figures

5.1

Panel of Eminent Persons Option I

107

5.2

Panel of Eminent Persons Option 2

110

5.3

Panel of Eminent Persons Option 3

112

Preface

This volume of collected writings on ASEAN is in honour of Professor Kernial Singh Sandhu, Director of !SEAS for 20 years since 1972. His sudden death on 2 December 1992 was truly a great loss to all of us. A few days before his demise, Professor Sandhu, Dr M. Sadli and I attended an IDRC conference, which Kernial helped organize, in New Delhi and Bombay to look at how India can learn from the success stories of the Newly Industrialized Economies (NIEs) and member countries of the Association of Southeast Asian Nations (ASEAN) He is remembered as a person with incredible energy and enthusiasm, bringing together technocrats, government officials, and scholars to promote and foster regional consciousness, an outlook captured aptly in the phrase "Southeast Asian studies for Southeast Asians". He is a key figure in linking the Asian intellectual community with their counterparts all over the world. Professor Sandhu devoted his professional life to working tirelessly to propel greater ASEAN co-operation. His dream was to see active regional co-operation and economic integration in ASEAN. Through annual ASEAN Roundtables, he gathered together officials, scholars and business people to examine the problems and prospects for ASEAN co-operation. His efforts were not in vain; in January I 992, ASEAN countries agreed to form an ASEAN Free Trade Area (AFTA). The papers in this volume were presented at the ASEAN Roundtable "25 Years of ASEAN - AFTA The Way Ahead" that was held in Singapore, 3-5

x

PREFACE

September 1992. This volume- unlike past volumes where the concern was on what ASEAN should do to achieve greater economic cooperation - is most appropriate and timely for it deals with how ASEAN should proceed to achieve the goals of AFTA in 15 years. Professor Sandhu led the Institute of Southeast Asian Studies (ISEAS) for 20 years and was the first Asian director of the institute since its inception in 1968. I knew him for 15 years as he often invited a few outsiders like myself to work with him on ASEAN-related issues. I am honoured to have worked jointly with him in urging ASEAN to take the steps toward greater economic integration. AFTA came into being not by accident, but through the hard work and sheer determination of men like Professor Sandhu, who are always giving it the needed push to move forward. In the process, he has turned !SEAS into a worldrecognized institution, attracting technocrats, scholars, and officials not only from Asia but also North America, Europe, Latin America, and Africa. Finally, on behalf of my co-editor, Dr Pearl lmada, I would like to thank all the writers and participants in the Roundtable who contributed to this volume to chronicle the compelling issues facing ASEAN countries as they meet the challenges of the 1990s and beyond. The generous financial support of the Konrad Adenauer Foundation is gratefully acknowledged. We would also like to extend our appreciation to Joseph Tan for his substantial contribution, and Janis Togashi for her excellent editorial assistance. SEl)l NAYA Adviser, ASEAN Economic Research Unit of !SEAS and Chairman, Department of Economics University of Hawaii at Manoa 18 December 1992

Introduction: In Search of Success forAFTA

The Association of Southeast Asian Nations (ASEAN) has announced that it will create a free trade area in 15 years. This decision, made in January 1992 at the Fourth ASEAN Summit. is seen as a bold decision, despite the fact that ASEAN is regarded as one of the most successful regional groupings among developing countries. All of the papers in this volume agree that although ASEAN's accomplishments in the political arena have been significant. its achievements in the area of economic co-operation have been limited. Neither its preferential trading arrangements nor its attempt at industrial co-operation have done much to increase intraregional trade and investment. In fact, until a few years ago, open discussion of the possibility of a free trade area was discouraged by ASEAN leaders What are the factors responsible for the remarkable transformation? And will ASEAN be able to integrate their economies although other developing countries generally have not? Are there any changes in the institutional structure of ASEAN that will contribute to the success of the ASEAN Free Trade Area (AFTA)? What actual mechanisms are being used and are these appropriate and workable? These questions are discussed in the papers in this volume and at the annual ASEAN Roundtable where they were first presented. In answering these questions, it is appropriate to start with Rolf J. Langhammer's contribution entitled, "Shaping Factors and Business

xii INTRODUCTION

Conditions in the Post-Fourth ASEAN Summit Period". The paper provides a comprehensive panorama of the international political economy and ongoing developments - exogenous and endogenous "shaping factors" - that are impinging on rapid economic changes within the ASEAN region. Global and social economic issues including the increasing trend toward regional rather than multilateral trading systems, world-wide disarmament. capital shortages in the world economy, new markets in Eastern Europe and former Socialist Asia, international migration, environmental problems, and technological innovations in communication industries, have all had an effect on ASEAN. Regional economic and political issues include a systematic consideration of China's economic liberalization, changes to ASEAN's internal cohesion, and the equity and efficiency dilemma facing ASEAN policy-makers Langhammer's major conclusion is that the ASEAN private sector, as well as the government. should take the lead in dealing with these shaping factors He adds that regional co-operation and integration policies within the ASEAN framework should provoke pragmatic innovations from private sector efforts The performance, indeed the very survival and prosperity of the private sector, are dependent upon their adept and efficient response to the opportunities within the international market. While Langhammer describes the broadest picture of the shaping factors and challenges confronting the ASEAN region, Narongchai Akrasanee and David Stifel concentrate more narrowly on "The Political Economy of the ASEAN Free Trade Area". They briefly discuss the emergence of a new environment in Southeast Asia, and the changing perceptions of the governments and private sectors of the costs and benefits of regional economic co-operation and integration in ASEAN. Like Langhammer, they recognize the crucial role of foreign direct investment (FDI) and the globalization of production by multinational firms, and of the pressures upon ASEAN arising from the emerging Single Singapore European Market 1992 and the North American Free Trade Area (NAFTA) in stimulating the adoption of economic liberalization policies and growth strategies amongst the ASEAN countries. Their key question, however, is a politico-economic one: is AFTA an aberration from the slow and reluctant progress of ASEAN economic cooperation over the past 25 years? In answering the question, they suggest that economic co-operation and integration is becoming less of a political burden or constraint to ASEAN leaders and therefore may attenuate problems relating to weak political will which has slowed

INTRODUCTION xiii

ASEAN economic co-operation in the past. Using an argument based on the politico-economic dynamics of interests groups and lobbies, they depict ASEAN leaders as being engaged in a "situation in which all can gain through co-operation; if one party pursues its narrow national interests outside of a regional context, however, the others may lose relatively and absolutely". At the micro level, they find diminishing resistance from many urban-based industrialist coalitions supporting AFTA because they have benefited from freer access to international markets and gained confidence in their abilities to compete in AFTA. Indeed, there has been a general shift in thinking, with the private sector making tangible moves away from import substitution. However, the strong agro-industrialist lobbies continue to fight to exclude their products from tariff reductions. Under this framework, Narongchai and Stifel conclude that effective implementation and the success of AFTA will depend on a few ASEAN countries - more specifically, they suggest Thailand and Malaysia- taking the initiative and leadership role. Our paper, "The Long and Winding Road Ahead for AFTA", concentrates on the mechanics of regional integration. The paper first examines the vision of AFTA and the diverse essential rules and measures that need to be considered in a free trade area, such as rules of origin and content; rules of competition and tariff reduction; the exclusionist and safeguard measure; dispute settlement; and AFTA. Then, we pose critical questions: what are the internal and external changing circumstances leading to the momentous breakthrough in the agreement to establish AFTA (and with a clear I 5-year timetable)? What are the major obstacles that need to be cleared and issues that need to be resolved in the successful implementation of AFTA? We believe that the ASEAN nations have indeed taken an impressive step forward in strengthening their economic bonding with the commitment to establish AFTA. However, there are many substantive and technical matters that require immediate and careful attention, although these problems and difficulties are solvable. Among other things, we explicitly call for the creation of an "ASEAN Experts' Convention" to be organized to promote consensus and adopt the necessary agreements to implement ASEAN's "Free Trade Area Plus", thereby enhancing ASEAN's movement toward a higher level of regional co-operation and integration. In additicm, we believe that AFTA will render ASEAN a greater cohesive force in its negotiations with other regional groupings and trading blocs as well as strengthen ASEAN's collective position in its negotiations in the

xiv INTRODUCTION

ongoing Uruguay Round of GATT, given the fact that preservation of the multilateral system of international trade is precious to ASEAN. A similar sentiment is shared by Sree Kumar in his contribution entitled, "Policy Issues and the Formation of the ASEAN Free Trade Area". Kumar's contribution identifies the various bottlenecks hindering the effective formation of AFTA and possible ways to get around these barriers. His analysis of ASEAN's trade and growth in recent years serves as useful background to evaluate the trade items in the proposed CEPT scheme and the structure of tariffs. Concrete views of the private sector interests in ASEAN on current issues facing intra-ASEAN trade are professed in fifteen corporate interviews. He observes that if ASEAN can surmount its narrow nationalist interests and move to dismantle some of the barriers to cross-border trade and investments, this would be confidence-enhancing for the private sector and improve their ability to take advantage of the opportunities presented by AFTA Additionally, he recommends three measures which, if adopted, may do much to promote AFTA First, the CEPT list should be increased considerably to generate more substantive intra-ASEAN impact. Second, non-tariff barriers to trade should be dismantled simultaneously with tariff cuts on a broader range of goods. A sector-by-sector approach should replace the present product-by-product approach to tariff reductions. Third, greater harmonization of investment policies amongst the ASEAN countries should be pursued This point is consistent with, and reinforces, the advocacy of AFTA-Pius by Seiji Naya and Pearl lmada. Finally, Kumar calls for an effective system, for example institutional mechanisms for addressing the various problems and issues raised by the formation of AFTA, in order to enhance the credibility of the governments' commitment to AFTA in the eyes of the ASEAN private sector. With the perspective of the next l 0 to 15 years, Jacques Pelkmans comprehensively examines the institutional mechanism for ASEAN in general and AFTA in particular. He sets the stage by reviewing the recent institutional decisions of the Singapore ASEAN Summit and the Group of Five proposal concerning the strengthening of the structure and mechanism of ASEAN, with special reference to the ASEAN Secretariat His cautious yet critical review leads him into a cut-and-thrust debate with the paper by Chng Meng Kng, who was also given fair and equal time to respond with his discussant's comments; this opened up new terrain for mutual clarification and agreement. Drawing from the strength of his expertise on EC integration. Pelkmans next positions

INTRODUCTION

xv

himself more dispassionately and addresses the fundamental question of what "policy functions" ASEAN might be expected to fulfil in the decade of the 1990s and beyond. He identifies eight policy functions which are carefully distinguished at four levels: national, intra-ASEAN, the dialogue partners level, and global. Specific to the institutional aspects of AFTA, he observes that "AFTA will fundamentally change ASEAN, economically, in terms of political economy, administratively and institutionally". For instance, he argues in detail that political economy and bargaining will tax the ASEAN institutions with such "core questions" as credibility with businesses, customs, procedures, legal security, and dispute settlement In conclusion, he warns that even if ASEAN may be relatively uninterested in establishing a legal mechanism, and even less so in building a "litigation society", unless ASEAN is able to "come up with any other method, or variation of judicial review. to guarantee implementation so as to provide credibility to business the extent to actually realizing AFTA, and its gain, may turn into an anti-climax". Other contributors agree that much remains to be done. Sree Kumar concludes that ASEAN should "unshackle itself from the pressures imposed by protected domestic industries" Otherwise, AFTA will remain "a fiction". We are more confident and sanguine about "the ASEAN way", which is consultative and less amenable to a legalistic framework. Nevertheless, ASEAN can do better. We also believe that the time has come for ASEAN to develop a formal. transparent. dispute settlement mechanism, so that the obligations of participating members are clear. The road ahead is long and winding, but there is much that ASEAN can do to ensure that the journey is smooth and the final destination is reached.

jJ

Shaping factors and business conditions in the post-Fourth ASEAN Summit period

Rolf J. Langham mer

1. Introduction For several reasons it is likely that the two years of 1991 and 1992 will receive more than a footnote in economic and political history later on. During these two years important political decisions were taken in virtually every part of the globe, thereby moving countries and economies away from a stalemate situation of uncertainty. In Europe, the Maastricht agreements signalled the further deepening of both political and economic integration while the agreements on the European Economic Space and the so-called Europe Agreements with Hungary, the Czech and Slovak Federal Republic (CSFR), and Poland fixed the conditions for integration widening. At the same time the Soviet Union was dissolved and replaced by an extremely fragile, heterogeneous and probably non-durable construction called the Commonwealth of Independent States (CIS). In the Americas, the foundation of a "regionalist" economic strategy was laid with the beginning of negotiations on the Southern enlargement of the North American Free Trade Area (NAFTA) between the

2

AFTA: THE WAY AHEAD

United States and Mexico. In the Middle East, the UN-supported military engagement to end the occupation of Kuwait reflected a renaissance of global political co-ordination. It has found its economic counterpart in the annual G-7 meetings as well as in the endeavours to cope with global environmental problems (such as the United Nations Conference on Environment and Development [UNCEDJ) by setting world-wide binding limits to the use of the earth as a sink. Finally, in East and Southeast Asia the need to co-ordinate macroeconomic policies on a broad regional level was felt more strongly than ever before. Such co-ordination will come to new horizons when China begins to implement what it declared in 1992, that is to further deepen and widen the opening of its market On a subregional level in Asia, the Association of Southeast Asia Nations (ASEAN) brought an end to its 25-year rule of not committing itself to binding economic targets and schedules. It announced a Free Trade Area that was to be finalized within 15 years. All these decisions are exogenous issues setting the framework in which the political and economic systems will operate in the years to come. But there are endogenous variables as well which evolve out of the systems and themselves have an impact upon other endogenous variables in the systems. At the economic forefront, we have ongoing process innovations, product innovations, and locational innovations (foreign direct investment). They are often summarized as the globalization of production though they are not really global in the sense that they include all parts of the world population A sizeable part that is unable to keep up the pace of structural change is left behind. Such divergences inevitably result in increasing poverty gaps that threaten international cohesion. Innovations and rapid structural change do not only shape the economic and political environment They also challenge the stability of important cultural factors like lifestyles, the role of the family and business mentality The list of such exogenous and endogenous issues (or shaping factors) cannot be exhaustive, but highlighting some of them briefly under the question of how they are likely to affect the business conditions in one of the most vibrant economic regions in the world might be a useful exercise at the beginning of a new stage of ASEAN. This is the objective of this paper

SHAPING FACTORS IN THE POST-FOURTH ASEAN SUMMIT

3

II. Classification of the major shaping factors relevant for all ASEAN countries

Global socio-economic issues Muftifateralism versus regionalism Apart from the overall importance of the multilateral trading system, two factors are seen as important in the context of ASEAN and the ASEAN Free Trade Area (AFTA): first, a success of the Uruguay Round is likely to facilitate the intra-ASEAN agreement on a Common Effective Preferential Tariff (CEPT) which forms the nucleus of AFTA. This can be expected as, after having cut the ASEAN countries' tariffs multilaterally, the competition-increasing effects of removing intra-ASEAN tariffs (so-called trade creation) will be more moderate than under the preUruguay Round tariff leveL That means that domestic suppliers would not face a shock adjustment to stronger competition with suppliers from other ASEAN member states. Trade diversion effects will also be smaller and therefore will not easily provoke retaliatory actions by non-member countries who might feel discriminated against ASEAN-originating goods. Origin requirements are also much easier to handle if the absolute margin of preference is not high. Second, a success of the Uruguay Round will bring an end to the fallacy of seeing AFTA as a countervailing force against EC 1992 or NAFTA. Instead, those would then see their position strengthened who argue that AFTA should be pursued because of its own economic merits (so-called natural integration) and not because of the imperative to form a strategic alliance against a third party. 1 AFTA standing on its own with one partner country seriously economically lagging behind (the Philippines) and two others which are virtually free trade areas (Singapore and Brunei) is no bargaining chip in trade policy disputes with the ASEAN Dialogue Partners. The pragmatic approach of implementing AFTA through consecutive tariff cuts over 15 years suggests that the "own merit" view is prevailing in ASEAN policy-making. Irrespective of the outcome of the Uruguay Round, the multilateral trading system has lost much of its credibility during this Round as many of the expectations raised in 1986 when the Round began were not met. Furthermore, General Agreement on Tariffs and Trade (GATT) widening (services, trade-related investment policies JTRIMSJ, and trade-related intellectual property rights JTRIPSJ) did not coincide with

4

AFTA: THE WAY AHEAD

GATT deepening, that is doing the "old tasks" properly (agriculture, textiles, antidumping and countervailing duties). Two of the three leading trading partners among the Contracting Parties, the European Community (EC) and the United States, have obviously converged as far as regionalism is concerned. This is an important global issue for ASEAN because the EC is a "regionalist" player by definition, and since the end of the eighties the United States has also become a proponent of "regionalism" 2 If one extrapolates trends which can be observed today already, regionalism both in the United States and the EC spawns from the old issues like tariffs or quantitative restrictions to a new "corporate" regionalism. This new form includes policies like competition policies, and environmental and industrial policies to differentiate between EC-based or NAFTA-based companies and other companies. Local content requirements and rules of origin are some of the other, more traditional tools of "corporate" regionalism. Should ASEAN-based companies in the near future consider direct investment in these two groupings, they will be confronted with "corporate" regionalism. To escape from discrimination and to diffuse protectionist threats, a potential foreign investor will have to be associated with a strong domestic company in the EC and NAFTA. As far as ASEAN exports to the big trading partners are concerned, export success will take its toll. "Gifts" in terms of unilateral trade preferences (under the GSP) will be eroded as a result of the multilateral tariff cuts, and donor countries will also "graduate" some ASEAN countries either (I) by not lifting tariff quotas (EC) so that an increasing part of trade in GSP-eligible items will no longer receive preferential treatment; or (2) the countries will be fully removed from the list of GSP beneficiaries. In the EC, this will bring the graduated ASEAN countries on par with Taiwan which never received preferential treatment but nevertheless performed extraordinarily well in its exports.

Changes in the world monetary system During the past few years there has been a renaissance of pegged exchange rates, exchange rate targets and currency zones, turning the tide against the flexible exchange rate device. There are several reasons for this renaissance. To mention two of them, developing countries plagued with inflation try to borrow policy credibility from an "anchor" country by pegging exchange rates while OECD countries try to accelerate the speed of integration in goods and factors markets by pushing currency zones forwc:nd

SHAPING FACTORS IN THE POST-FOURTH ASEAN SUMMIT 5

Within ASEAN, national exchange rate policies and exchange rate regimes seem to have become increasingly decoupled from each other (for instance, between Malaysia and Singapore) 3 They are directed to stabilize national output but not a regional output. To what extent will the ASEAN business environment as well as the ASEAN integration process be influenced if this renaissance of currency zones continues? Will all ASEAN countries approach a currency zone dominated by an anchor currency, or will they continue to go different ways given their different affiliations to export markets (Philippines to the United States, Singapore to the EC)? 4 Answers to these questions also have to consider the direction of future private short-term capital flows between the United States and Europe The latter is largely determined by the sustainability of high real rates of interest in Europe against U.S. pressure.

Capital shortage in the world economy High real rates of interest are necessary in order to provide incentives for mobilizing domestic savings in the absence of easy access to external savings. 5 Yet. such high rates are not without cost. They contribute to accelerate rates of depreciation of the old physical capital stock generated under conditions of low real rates of interest. and therefore require more rapid private capital formation. The recent development of private investment-GOP ratios in ASEAN countries, however. shows increasing disparities among ASEAN countries in private capital formation. Leaving the exceptional case of Singapore aside, 1990 ratios rose in Indonesia, Malaysia, and Thailand compared to 1989 while the ratio declined in the Philippines (according to estimates of the International Finance Corporation) 6 When ratios continue to diverge, this may signal more demand for exemptions from intra-ASEAN trade liberalization (see the recent plea made by the Thai industry). How can such a trend be prevented from being established? Continued pressure towards globalization of production When more international investors emerge from newly industrialized economies (N!Es) and when distance-related transaction costs (transport costs, costs of communication) decline as a result of technological innovations and shrinking language barriers, globalization of production is going to continue 7 So will the new methods of production (moduletype of production, lean production. and just-in-time production) The

6

AFTA: THE WAY AHEAD

consequences for individual countries seeking to host foreign direct investment (FDI) like ASEAN member countries are ambiguous. On the one hand, NIE investors may take the place of OECD investors who prefer investing more in the OECD area. On the other hand, however, competition among hosts of FDI exacerbates. Globalization of production is accompanied by shorter pay-off periods, more footloose investment, and less indivisibilities as far as binding of capital is concerned. In short, foreign investment is going to become a suppliers' market with more options, more flexibility, shorter amortization periods, and shrinking costs of exit available to capital exporters. With new technologies facilitating globalization, the pressure on providing the appropriate infrastructure becomes stronger. There will also be more demand for excellent logistic networks. Some ASEAN countries which are already fighting against infrastructural bottlenecks could run the risk of being left aside if such bottlenecks prevent the introduction of just-in-time production techniques, for instance. Furthermore, an ASEAN country like the Philippines with permanently high political and macroeconomic instability will try to import stability from its neighbours in order not to be placed off-side the investment flows. This might be one of the major future roles of regional groupings like ASEAN in which there is a majority of macroeconomically stable and prosperous member states.

Emergence of new input markets and export markets in Eastern Europe and the Russian Federation New markets mean both chances and risks for ASEAN private business. Chances are export outlets for low-income manufactures and food products supplied by ASEAN countries. In addition, lower world market prices for primary commodities will be possible once the current supply constraints in countries like the Russian Federation have been removed. Barter trade arrangements may be sometimes necessary during the early part of the transformation process. Risks result from new potential competitors on world markets and privileged access of Eastern European suppliers to OECD markets especially in Western Europe. Such privileges may place ASEAN suppliers in a less favourable position than before the end of central planning. Such risks have already materialized in some cases. For instance, today EC clothing imports, after having undergone outward processing (also called offshore assembly). come primarily from Eastern Europe and no

SHAPING FACTORS IN THE POST-FOURTH ASEAN SUMMIT

7

longer from East and Southeast Asia, partly because of lifted quotas for

the former group Such shifts, however, should be seen as a price to be paid for offering the former Socialist countries a solid base of export earnings. With binding balance of payments constraints because of high debt burdens in most of these countries, imports of capital goods and consumer goods cannot be paid without exports. Further challenges of adjustment- though not yet evident- could include the diversion of transport around Northern Siberia at the expense of cargo movements through the Straits of Malacca.

International migration Lower costs of bridging distances may fuel international migration. The dimension of the problem is enormous as half of the population in low-income developing countries is below 15 years old. Job prospects are gloomy. Population growth rates could not be lowered significantly in these countries. Even free trade and lack of restrictions on capital transactions are unlikely to generate enough capital and jobs in labourabundant economies to induce potential migrants to stay at home 8 Compared to capital mobility, labour migration is seen in most host countries as a second-best alternative of factor mobility because of social and political costs involved. This view does not lack political rationale given the short "planning period" of politicians and the strong reservations of the domestic population against inflows of migrants. However, seen from an inter-generation point of view, a cost-benefit analysis might bring brighter results as migrants in the medium run are expected to add more net value added to an ageing society than in short run. In general. cross-border migration has two major aspects for ASEAN as a group; first. allowing more labour mobility for ASEAN citizens and, second, finding a solution to handle the very likely pressure of inflowing migrants from Indochina. Irrespective of sequencing (the former probably first. the latter later). higher inflows of migrants might be digestible under a more authoritarian rule than under Western multi-party systems with the representatives' strong dependence on their electorate. Nevertheless, the inflows might be higher than ASEAN governments are prepared to accept. Furthermore, there are some direct implications for individual ASEAN economies. First, as long as they are among the countries exporting labour (basically the Philippines). they have to assess the cost

8

AFTA: THE WAY AHEAD

and benefits for the economy. There are costs involved as a relatively skilled and mobile part of the labour force is no longer available to the national economy. On the other hand, there are benefits in terms of remittances, perhaps also of upgrading of skills. Such skills could be tapped later provided that the migrants return to their homebase. Second, the majority of cross-border migrants in the world will head for the OECD countries. If such inflows were to be partly allowed, the erosion of the international competitiveness of the OECD suppliers in relatively labour-intensive industries may decelerate to the detriment of relatively low-cost suppliers from developing countries, some of which are the ASEAN economies. Third, more inflows of migrants into ASEAN economies that are relatively short of labour (primarily Singapore, but perhaps also Malaysia) could lead to higher social expenditures in their budgets (housing, education, training), but perhaps to a slower speed in the introduction of labour-saving technologies as well.

International environmental degradation The international community increasingly has to cope with a number of negative cross-border externalities arising from environmental degradation. Such externalities imply that the standards of living in a country y decline because of pollution in country x. Some of these externalities arise from regionally limited problems, such as river pollution, while others are global ones (deforestation, greenhouse effect, ozone layer destruction). It goes without saying that so-called consumer externalities (consumers in country y face physical damage when consuming a product coming from country x) are legitimate reasons for interventions into free trade. The problem lies with so-called producer externalities. Here the damage does not materialize during consumption but arises from the method of production or the production itself. Urged by unholy alliances of environmentalists and protectionists, rich countries with stringent environmental standards have increasingly been tempted to apply unilateral trade measures against producer externalities in order to force suppliers from poorer countries to comply with their environmental standards. The GATT, while accepting restrictions against consumption and non-discriminatory measures against domestic production and imports (as long as they are necessary and commensurate with the effects), rejects unilateral trade measures 9 It recommends either waivers under the GATT (two-thirds majority is necessary) or international self-restraint agreements Both options are difficult to nchieve

SHAPING FACTORS IN THE POST-FOURTH ASEAN SUMMIT 9

with sufficient participation given the strongly divergent vested interests among the countries concerned. Where ASEAN is concerned, the region as a whole (perhaps with the exception of Singapore) is likely to face two challenges: first, major export markets in the United States, Europe and Japan will continue to impose their increasingly tougher standards and norms on imports from ASEAN. Parallel to that, in order not to collide with GATT principles, "voluntary" actions launched by domestic industries may result in information conveyed to consumers that the domestic products unlike the imported goods - meet certain self-imposed conditions. In Germany, for instance, the textile industry has recently launched a campaign for so-called eco-labels suggesting that the products bearing such labels are manufactured under environment-friendly conditions. Such campaigns can easily discredit those imports which do not bear such labels as environment-damaging. Exporters may incur losses in market shares if consumers believe in such information. Second, as ASEAN countries dispose of non-renewable resources such as rain forests and marine resources, OECD countries will continue to exert pressure on the ASEAN countries' governments not only to protect them but perhaps also to stop managing them at all. If interests of resource owners and the OECD countries diverge, then conflicts are unavoidable. They could be solved by applying the so-called victim pays principle (VPP) if the polluter is a sovereign state. 10 Under the VPP, the OECD countries would compensate the resource owners for losses incurred by not exploiting the resources. Yet, dissenting views on the face value of the resources and the compensation amount to be paid might not be easy to bridge especially if more than two parties are involved and if free-rider problems come up. The issue can be further generalized. ASEAN countries can become increasingly confronted with campaigns spreading in OECD countries to voluntarily sacrifice income growth by leaving human and natural resources partly untapped, that is not to do what would be possible in principle (apart from natural resource extraction, this can be observed also in biotechnologies, for instance). Pressure may arise to comply with such a view by signing voluntary self-restraint agreements. In doing so, countries trying to catch up in economic development would be penalized.

Technological innovations in communication industries One of the most remarkable sets of innovations has been in the communications industries These innovations have implications for the

10 AFTA: THE WAY AHEAD

hardware (and thus for merchandise trade) as well as for the software (and thus for trade in services) Innovations in hardware (in television technology, for example) can make old product standards widely obsolete and drastically reduce the economic lifespan of installed communication equipment. Unless protectionist measures counteract, fresh demand for new hardware can abruptly rise in OECD countries. To benefit from such demand requires access to such innovations. Instead, preferably, ASEAN suppliers themselves should be the innovators. As for the second aspect, satellite TV and world-wide radio broadcasting have made communication and information a global service for which the major OECD suppliers demand free access to domestic markets. In many countries, including ASEAN member countries, such demand has not been fully appreciated as it may clash with the protection of cultural values and vested interests. As communication services are internationally mobile, consumers cannot be easily prevented from receiving them even if a government has such reservations. In multiethnic societies, this issue can cause additional frictions if the views of the different ethnic groups toward free access to communication and information are widely different.

Bridging increasing poverty gaps There is world-wide consensus that, by all standards, gaps in living standards within the so-called Third World have strongly widened in the past. Calling the eighties a "lost decade" has become common for some Latin American countries, but is particularly apt for Sub-Saharan Africa. There is no evidence that these gaps will close and that the international community has more solutions in its toolbox other than to increase technical and financial assistance. OECD countries pretend to have already shouldered an additional burden in Eastern Europe and the former USSR. Therefore, some ASEAN countries that have rapidly advanced in their per capita income levels will face claims to apportion larger parts of their budgets to development aid, perhaps preferably to be spent in neighbouring Indochina. By doing so, ASEAN countries together with other Asian N!Es and Japan could be called by the international community to assume special responsibility for certain groups of backward countries in Indochina as the EC does with the African, Caribbean and Pacific countries (ACP group) and the East and Central European countries or the United States with Latin America Such bilateral

SHAPING FACTORS IN THE POST-FOURTH ASEAN SUMMIT 11

"trusteeship" will very likely be supported by multilateral organizations and will raise the level of international political acceptance of ASEAN.

Global cultural issues Reconciling Western and Asian business mentalities By and large, contrasts between Western and Asian business mentalities have often been labelled as "individual achievement" versus "team achievement" leading to weaker identification of employees with company targets in Western companies than in Asian companies. Parallel to ongoing globalization, there are hints that such contrasts are fading away. Western companies increasingly welcome extramural community commitments of their employees as qualification criteria. The social acceptance of companies within the public domain (media, consumers, public administration) is of vital concern for large companies which see themselves carefully observed on their stances to so-called soft issues. These issues comprise environmental consciousness, taking care of the physically handicapped population and sponsoring community life. Such "social performance" of companies critically hinges on the ability of the executives to encourage and activate in-house and extramural creativeness and responsibility of the staff. Team achievement has been seen as most instrumental to both social and private productivity and is reflected in changes of the organizational pattern of companies, such as decentralizing responsibilities, organizing teamwork types of manufacturing and offering more frequent in-house training. The Asian business community, on the other hand, seems to have given more encouragement to more direct participation of individuals in business affairs such as in-house contests to stimulate employees' proposals to raise productivity levels or the introduction of hotlines for individual complaints. The result of bridging gaps between different business mentalities becomes most visible when foreign direct investment penetrates into the other's zone. Efforts to be accepted in the different social and cultural environment as an integral part of this environment by not giving up the home-base identity have been very strong in Japanese and Korean subsidiaries operating in Europe and the United States. They can also be observed- perhaps rather weaker- in U.S. and European investment in Asia. Such convergence could be a stimulating element for the second-generation foreign investors from ASEAN economies as

12 AFTA: THE WAY AHEAD

it lowers those costs of transactions which the "pioneer" investors from Japan had to shoulder first in the United States and Europe. Vice versa, it may also be instrumental to attracting more Western countries' investment in ASEAN economies without provoking fears of becoming dominated by the Western business style It should be noted, however, that such convergence is a matter of human capital formation and thus has a much longer gestation period than the formation of physical capital. It will evolve slowly.

Changing lifestyles Changing lifestyles are a perpetuum mobile fuelled permanently by indigenous changes like shifts in the age structure of the population, inflows of new habits and fashions, and the emergence of new technologies. In this respect, they are hardly worthwhile to be treated as challenges ahead. They occur naturally. More important in our context are policy-induced determinants of changes in lifestyles such as incentives to have more leisure time available. Cutting the weekly working time through legislative actions and simultaneously extending the retirement age, for instance, will change lifestyles and also economic structures. These are global issues as they are pursued in all countries, with Asian countries slowly catching up to what has been already initiated long before in Europe and the United States. One of the major economic factors of expanding leisure time is a rising demand for products and services provided by flourishing leisure industries. These products and services are usually land-intensive (sports, travel, tourism) thus absorbing a factor of production which is least abundant in economies like Singapore, Japan, and Hong Kong. Removing rice protectionism in Japan would be one remedy to lower the price of land in this country and to make more land available for leisure activities but, of course, such options are meaningless for the other countries. Land-abundant countries can satisfy demand for landintensive leisure activities more easily provided that consumers are prepared to travel more. Thus, changes of lifestyles will be strongly associated with higher demand for travel services for a number of reasons. While in the past U.S. and European consumers ranked among the top travellers, Asian consumers will catch up soon and this will boost intra-Asian trade in consumer services as land-abundant countries like Australia, China and Indonesia are close neighbours to land-poor countriesJ 1

SHAPING FACTORS IN THE POST-FOURTH ASEAN SUMMIT 13

In the short run, ASEAN countries will probably range more among the net exporters of such services but governments should be prepared to see a much higher demand for such leisure activities raised also by ASEAN residents. Leaving infrastructural and logistic requirements aside, overseas travelling will again change lifestyles, thus posing the question of how cultural identities can be defended Extending the retirement age will also help to boost demand for age-appropriate leisure activities as more self-consciousness and openness can be expected from the ageing but economically active and more affluent segment of population.

The role of the family The family has always played a central role in all ASEAN societies as both a stabilizing and innovative element. It allows risks to be taken, provides insurance against uncertainties, offers investment opportunities and alleviates the hardship of rapid structural change. Economic take-off in the individual ASEAN countries as well as global influences, however, have put pressure on this role. Today, families are generally founded later than in the past due to longer periods of education. The role of well-educated women demanding equal rights and opportunities has not yet been accepted everywhere. Children are increasingly seen as a sort of luxury consumer goods absorbing the household's budgetary resources as well as income potential and not as an emotionally and also economically very valuable part of family life. Staying unmarried has not only become a matter of opportunities foregone but also a matter of individual decisions which are deliberately taken. The number of divorces is steadily increasing in some ASEAN economies and the economic pressure to be geographically mobile is a further challenge to sustaining the three-generation type of family life In Western economies, family life has already undergone massive changes accompanied by concomitant shifts in certain economic sectors (for instance, higher demand for housing and within this sector for smaller housing units, for specific household equipment. for private old age care services as well as for private old age insurance schemes supplementing public schemes) ASEAN economies will have to cope with the greater part of such challenges in future. Given the importance of the family as a central social institution, it would be misleading to define adjustment narrowly in terms of a larger amount of contractual savings, more private care

14 AFTA: THE WAY AHEAD

companies competing in the market and changes in the time profiles of investment funds of insurance companies. Instead, it is more likely that the changes will affect all parts of social, economic and political life in ASEAN countries.

Global political issues Restructuring the Western security network and ensuring non-proliferation of nuclear arms technology The end of the Cold War implies at least three crucial changes in the Western security network which are accompanied by consecutive steps of mutual disarmament between the CIS and the NATO. First, economic arguments to cut defence budgets gain more weight over the political warnings not to underrate the military potential still existing on the territory of the former USSR. The conversion of military capacity into civil use and the non-proliferation of military know-how will emerge as major issues not only in the CIS and Eastern Europe. Also in the NATO countries several programmes of costly high-tech arms production (submarines, fighters, tanks) are going to be revised and cancelled. Furthermore, exports of high-tech capital goods are increasingly restricted if "dual use" cannot be reliably excluded. As in all cases where jobs are threatened, vested interests will mobilize resources to play on time. A world-wide revision of armament strategies does not exclude that some countries, especially in the Middle East, are going to build up new large-scale military capacities after the experiences in early I99I. But the disarmament trend is likely to be stronger Second, defence will become more regionalized in the sense that the United States will keep a lower profile in providing cheap global security services outside the Americas. 12 This political decision is facilitated by technological innovations which lower the degree of indivisibilities in providing defence services. In other words, the supply of defence services can today be tailored more exactly to the domestic demand of the United States, thus changing the nature of the U S. supply from a public international good to a public national (or regional good). Free-rider practices under the nuclear shield of the United States have become more difficult. More responsibility for defence, therefore, is to be assumed by the host countries in the regions This holds for

SHAPING FACTORS IN THE POST-FOURTH ASEAN SUMMIT 15

Europe but also for East and Southeast Asia. Third. arms production will change its structure towards smaller. cheaper and multi-purpose types of battlefield weapons designed for home defence. The implications for ASEAN countries are twofold. First, defence and security become truly regional public services in the sense that neither national authorities acting alone nor an extra-regional power will be prepared to shoulder the main burden in future defence. Joint burdensharing and concerted actions by members of the region will be the main prerequisites of regional security. However, it is a delicate political task to draw border lines between members and non-members of the region especially vis-a-vis East and Northeast Asian countries. Second, structural changes in demand for small-scale and relatively cheap arms may favour ASEAN defence industries which over the years have become internationally competitive. This change might receive further impetus from the foundation of small low-income countries in Europe and Central Asia showing demand for such goods.

The upsurge of nationalism and fundamentalism The decay of the only colonial empire which survived the seventies, the USSR. has resulted in shock waves of nationalism shaking Eastern Europe, parts of the Mediterranean area and the Middle East. At the same time, Islamic fundamentalism continues to pose threats to the international community. Both nationalism and fundamentalism have very different and manifold roots, ranging from the lack of legitimacy of leaders and political systems, via rising income inequality within societies as well as between economies, to impoverishment and pauperization in absolute terms. Given such wide range of roots, it is very difficult to prevent imitation effects from spreading beyond the affected areas. Even a good national political and economic performance is not an ultimate protection against "contamination" if social inequality within an economy accelerates. But it enables governments to spend resources for fighting the social roots without neglecting other objectives. To register early indicators of possible roots carefully is again a supra-national task and a precondition for the therapy because national policies in country A can have unintended side effects by fuelling nationalist reactions in country B. As nationalism and fundamentalism are not new in the ASEAN region, there is reason for the assumption that shock waves coming from abroad will not catch ASEAN countries' governments unprepared.

16 AFTA: THE WAY AHEAD

The increasing role of international policy co-ordination The co-ordination of national policies in international fora is not a new issue. There is extensive experience of co-ordination in foreign policies (in Europe, for instance, the West European Union, the Council of Europe, the CSCE), in military policies (NATO) as well to economic policies (G-7, Louvre Accord, Plaza Agreement, OECD) or environmental policies (UNCED). In some areas (for instance, exchange rate policies), policy co-ordination has correctly been criticized as cartel policies unnecessarily suppressing competition between national policies that are not interdependent and thus do not need to be co-ordinated. 13 However, with ongoing globalization of both political and economic challenges, the need to pay more attention to the co-ordination of policies has been felt. Old institutions like the UN were revitalized while relatively young institutions (the CSCE and the G-7) both deepened and widened their scope. It should also be noted that at the same time developing countries' institutions such as the UNCTAD Conferences on Trade and Development or the Group of Non-Aligned Countries have lost much of their influence. To some extent also, the Group of 24 comprising the OECD countries is declining in importance relative to the G-7. This is the setting where ASEAN and its member states will have to find their place. Interestingly enough, ASEAN already operates an institutionalized forum with almost all G-7 countries, either directly with the United States and Japan, or indirectly through the EC. This is the ASEAN Dialogue Partner System Seen from the outside, this dialogue is a remarkable - albeit sometimes underrated - achievement. It visibly contrasts with the policy dialogues to which many developing countries have been urged by their international donors. Operating jointly vis-a-vis the G-7 countries by raising issues of mutual interest in a non-binding way is an advantage which ASEAN enjoys over Taiwan, China and Korea and which it should exploit further It might be a worthwhile attempt to bring the dialogue closer to the annual G-7 meeting to ensure that the viewpoints of the economically most dynamic region on major international issues gain the appropriate audience. To make such an endeavour more convincing, ASEAN might consider delegating the tasks of internally collecting and externally presenting the issues to the host of the annual ASEAN Ministerial Meeting As in the G-7, hosting the meeting and taking the chairmanship should be a rotating assignment

SHAPING FACTORS IN THE POST-FOURTH ASEAN SUMMIT 17

Regional Economic and Political Issues China's economic opening The most important issue concerning the East and Southeast Asian regions focuses on future Chinese policies, including its influence on Hong Kong after I 997. Should China continue to open its goods and factor markets beyond the special economic zones, this will have a number of important economic implications for ASEAN. To start with capital flows, import demand for risk capital and loans will increase. Domestic savings available in China cannot provide all the funds needed to finance capital formation. Such import demand is likely to shift incremental fapanese, Korean, and Taiwanese foreign direct investment from Southeast Asia to China while simultaneously offering profitable investment opportunities to ASEAN capital exporters Second, as for trade, China will benefit from its relatively low cost of labour and thus strengthen its position as a leading international supplier of labour-intensive manufactures. As world demand for such products is unlikely to become buoyant in the next few years, ASEAN economies facing higher labour costs will be forced to upgrade their export supply more rapidly Parts of the ASEAN export supply (in particular, intermediate and capital goods) will find new markets in China thus boosting intra-Asian trade significantly. Third, a new economic belt may arise, comprising the Pearl River Delta, Taipei, Shanghai and the Yangtze River Basin as well as Seoul/ Pusan and Tokyo Though ASEAN economies would not be part of this belt, its spread effects are expected to be more important for ASEAN than the possible short-run losses of foreign direct investment. As for intra-ASEAN distribution of net benefits due to China's market opening, it seems plausible to argue that the higher income ASEAN member states will gain overproportionately because their supply potential does not strongly overlap with the Chinese one Fourth, experience suggests that the risk of a political brake against "overshooting" market orientation can never be fully excluded in China. Nor can it be ruled out that China is tempted to seize the opportunity provided by the political and economic chaos in the USSR to acquire advanced arms technology suitable for mass destruction. But it is also true that consistently implemented economic reforms are conducive to the creation of an irreversible environment for "take-off" comprising elements of individual self-consciousness. knowledge, transparency, information and participation The depressing state of development in

18 AFTA: THE WAY AHEAD

the neighbouring Russian Federation will be instrumental to boosting such a "take-off" spirit in China.

ASEAN's internal economic cohesion: The challenge of success Sustained rapid economic growth over a long period as experienced by some ASEAN member states has not been without cost for ASEAN's internal economic cohesion. The Philippines were unable to follow and to stay in the race. It cannot be ruled out that the nineties will see a less favourable world economic environment than in the endeighties, and the income gaps between individual ASEAN member countries will become larger. While subregional initiatives like the growth triangles are market-oriented responses to such "leads and lags", they may make it even more difficult to achieve a full-fledged Free Trade Area including the "slow-go" member states. The usual procedure, which is also applied in the CEPT model. is to allow some member countries to go ahead without waiting until all member states are ready to implement the scheme. Such provisions are meant to be temporary but they can eventually become permanent thus giving the Free Trade Area a misleading labeL Different time schedules of intra-ASEAN tariff cuts in individual member states put a large bureaucratic burden on customs officials, in addition to checking the rules of origin, without bringing much benefit. Given the frustrating experiences of many FTAs with "integration at different speeds" (especially in Latin America), ASEAN would be well advised to cope with this issue early enough in order to keep its credibility. The theoretically most appealing recipe has been to pay a compensation to the backward member states for tariff revenues foregone as a result of trade diversion. But this recipe only addresses the target of protecting government revenues in the backward member states and not the more important entrepreneurial aspect of helping the declining industries in these states to adjust Allowing the currency of these states to depreciate against the forerunners (in real terms) seems to be a market-consistent tool in order to implement a uniform time schedule for intra-ASEAN tariff cuts without countryspecific exemptions. ASEAN policy-makers at the crossroads between equity and efficiency Distributional policies geared at balancing the economic potential between ethnic groups have always played an important role in national policies of some ASEAN member states. like Indonesia and Malaysia

SHAPING FACTORS IN THE POST-FOURTH ASEAN SUMMIT 19

They were less prominent in Singapore and Thailand where the dominant target of allocative efficiency was not subject to binding distributional constraints. Apart from the ethnic perspective (humiputera, pribumi), however, equity considerations also have a regional perspective in national policy-making, especially in countries like Malaysia where the federal government as well as state governments keep a sharp eye on regional imbalances. A side effect of ASEAN integration can be the accentuation of such national imbalances, either through subregional initiatives like growth triangles designed for border areas, or through sector-specific policy measures which would accentuate the contrast between regions hosting privileged industries and the rest of the country. Being confronted with the opportunity to promote regional integration at the expense of internal regional equity, national governments would probably give priority to the equity target Integration policies should therefore take the importance of national equity targets into account.

Ill. Conclusions Listing potential global and regional issues in the way given above provokes the questions of relevance (the degree of importance). of timing (when will the issues become important) and of sequencing (what comes first). Neither forecasts nor even projections are possible. This is a lesson to be learnt from the dramatic changes in the economic and political environment of the end-eighties. Another lesson is the importance of either political shocks or policy signals for the world economic environment Shocks include the collapse of seemingly well-established political systems, the upsurge of ethnic conflicts sometimes underrated as "hiccups", and the outbreak of war in the Middle East Policy signals come from the stale-mate situation in GATT. from the emergence of regionalism and from the financial engagement in the former Socialist bloc. Taken together, policy shocks and policy signals will be of overriding importance for the international economic environment and thus for business conditions in world-market oriented ASEAN countries. While shocks are exogenous events which can only be sketched in "scenarios". policy signals are endogenous variables for the business sector which should be taken seriously

20 AFTA: THE WAY AHEAD

Among the clearest signals are world-wide disarmament policies which mean to convert military capacity designed for mass destruction into civil production. This will shape business conditions in a two-way mode. While mass destruction industries will suffer. small-scale defence industries may gain. ASEAN industries might find themselves on the sunnier side, but indirectly ASEAN economies might also be affected by the adjustment problems of industries in Europe and the United States being dependent on large-scale military production Other signals come from co-ordination and security policies. Important global economic signals are high real rates of interest which are necessary to stimulate domestic savings, the increasing Jack of credibility of multilateral trade negotiations, the growing impact of domestic environmental policies on business conditions, and, finally, widening poverty gaps within the so-called South giving rise to largescale migration. Most of the issues are exogenous parameters for both ASEAN businessmen as well as policy-makers. To deal with them from the ASEAN side is basically a private sector job as well as a challenge for a sound national policy. To do the home tasks first is also the best guarantee for a credible and responsible regional policy within the ASEAN framework Within this framework, I think, global challenges will impact more upon policies of regional co-operation than on integration policies.

Notes 1. This difference between "natural" integration and "strategic" integration is stressed by Wonnacott and Lutz ( 1989) and ]acquemin and Sapir ( 1991 ). 2. Bhagwati (1991. pp. 71-75) elaborates on this important shift in U.S. trade policies 3. See, for instance, Claassen ( 1992). 4. The emergence of a Yen bloc in Asia is denied by Frankel ( 1992). 5. Private bankers argue that fears of a world capital shortage are much overdone as higher demands for capital from Germany and Eastern Europe would be offset by reduced demands elsewhere, such as in the United States and Japan (AMEX Bank Review 1992). This view implicitly assumes that in both countries there will be no shift towards accelerating domestic absorption. 6. See Pfeffermann and Madarassy ( 1992) 7. SeeReich(l991)

SHAPING FACTORS IN THE POST-FOURTH ASEAN SUMMIT 21

8. A recent survey of Russell and Teitelbaum ( 1992) discusses the dimension

9. 10. 11. 12.

13.

of migration and its impact on international trade in services and flows of remittances. See the latest GATT report on trade and environment (GATT 1992). The assumptions underlying the VPP are discussed in Siebert ( 1992, pp. 182-83) Japan runs a traditionally large deficit in its service account which, however, does not offset its surplus in merchandise trade. Fratianni and Pattison ( 1982, p. 253) have argued that in the post-war period, the United States provided the nuclear umbrella as an international public good for which the United States had to bear the costs of explicit expenditures of manufacturing weapons and maintaining weapons and troops both in North America and other parts of the world. A withdrawal from parts of the world outside the Americas would mean a shift from internationalization to regionalization in providing this good. On this issue, see the standard article of Cooper (1985).

References Bhagwati, )agdish N. The World Tradinq S(Jstem at Risk. New York: Harvester Wheatsheaf, 1991. Claassen, Emil-Maria. "Financial Liberalization and its Impact on Domestic Stabilization Policies: Singapore and Malaysia". Weltwirtschaftliches Archiv 128, no. I ( 1992): 136-67. Cooper, Richard N. "Economic Interdependence and Coordination of Economic Policies" In Handbook of International Economics, Vol. II, edited by Ronald W Jones and Peter B. Kenen, pp 1195-34. Amsterdam North Holland, 1985. Jacquemin, Alexis and Andre Sapir. "Europe Post-!992: Internal and External Liberalization". American Economic Review, Papers and Proceedings 81 (1991) pp. 166-70 Frankel, Jeffrey A. Is Japan Creatinq a Yen Bloc in East Asia and the Pacific? National Bureau of Economic Research, Working Paper, 4050. Cambridge, MA: National Bureau of Economic Research, 1992. Fratianni, Michele and John Pattison. "The Economics of International Organizations" Kyklos 35, Fasc. 2 ( 1982): 244-62. General Agreement on Tariffs and Trade (GATT). "Trade and Environment". In International Trade 1990-91 Vol. I. Geneva GATT 1992.

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Pfeffermann, Guy P. and Andrea Madarassy. Trends in Private Investment in Developing Countries.1992 Edition IFC Discussion Paper, 14. Washington, D.C.: International Finance Corporation, I 992. Reich, Robert B. The Work of Nations Preparing Ourselves for 21st-Century Capitalism. New York Knopf, 199I. Russell, Sharon St. and Michael S Teitelbaum. International Migration and International Trade. World Bank Discussion Paper, 160, 1, print Washington D.C.: World Bank, I 992. Siebert, Horst. Economics of the Environment. Theory and Policy. Third, Revised and Enlarged Edition. Berlin: Springer, I 992. The AMEX Bank Review. "Savings and the World Economy, 2, Is There a World Savings Shortage?" The AMEX Bank Review 19, no. 2 ( 1992) 4-5. Wonnacott, Paul and Mark Lutz. "Is there a Case for Free Trade Areas?". In Free Trade Areas and U.S Trade Policy, edited by Jeffrey J Schott, pp 59-84. Washington, D.C. Institute for International Economics, 1989.

Commentary on Chapter 1.

Tan Kong Yam

I found Rolf's paper very interesting but somewhat too wide-ranging It covered global and regional issues. It dealt with issues on trade, investment, technology, even the monetary system, international migrations, as well as issues of culture and enviror.ment. Because it is so wideranging, I have more or less focused my attention and discussion largely on two broad areas. First, I would like to comment broadly on the trends of regionalism and its implications for AFTA, and second, the impact of China on AFTA and the future evolution of AFTA At the outset, I would like to emphasize that my comments represent only my own personal views and do not necessarily represent those of the institutions with which I am associated. Now, if one takes a longer-term historical and broader geographical perspective, one can describe the existing trend in regionalism, i.e. AFTA, Single European Market, NAFTA, as akin to a fragmentation process which I would call the trend towards regional economic Olympics The GATT is the world Olympics and as the fragmentation of the global trading system proceeds, we are now gradually having European Olympics and American Olympics. In some sense, these are the natural responses to the dynamic challenge of Japan and the NJEs' market penetration in North America and Europe in the past 30 years. The response is a highly natural one because it basically implies that the consumers and voters are asserting their market bargaining power Before, you can enter my market freely without giving any concession; now the consumer (and the voter) is exerting its market bargaining power by asking for investments to come in, to be located where the purchasing power is, and to

24

AFTA: THE WAY AHEAD

generate more local content, employment and wages. And a.t the firm level. through restrictions on local content. rules of origin, competitive policies and others, the producers are attempting to tilt the strategic balance so as to ensure that the gains in trade are more appropriate to the host country and its firms as opposed to firms in the exporting countries. And if you see this dynamic going on, then you se e AFTA as a response of the ASEAN countries to this general trend of fragmentation in the global trading system and the emergence of a strategic bargaining process based on market purchasing power. Then, I would like to argue that if this process of fragmentation of the glob al trading system is left unchecked, one likely scenario is that the AFTA momentum will ultimately be moving towards some form of EAEC, and I will give my reasoning. Regarding the relative success of NAFTA. there is, as pointed out in the commentary on the Naya and Imada paper, the political commitment at a very high level. particularly Mexico's urgency to lock in all its reforms. This explains why Mexico was quite willing to co I1Cede on issues like procurement, telecommunications, financial sen..~ices, etc. And I venture to argue that aside from the above factors, there is an important element accounting for the relative success of the negotiation and that is because the distribution and timing of gains and pains in the inevitable dynamics of restructuring is somewhat better, much better than that of the AFTA situation. In the NAFTA case, you have an obvious hegemon in the United States with its significant. huge market attractions. So the gains to Mexico and Canada in terms of attracting direct foreign investments targeting at that market are very obvious and very direct The gains are there right away, and are able to counterbalance immediately the pains that Mexico would subsequen tly suffer because of the opening up of the service, and all the othe r sectors (which incidentally is the US. gain because of their more competitive manufacturing and services industries). So you have a situation where the dynamics, because of the hegemon and the relative distribution and timing of pains and gains, form a fundamentally stable coalition. It is a bit like the solar system where the relative weight and position of the sun and the revolving planets are in a relatively stable, dynamic equilibrium As for AFTA, I don't think there is a fundamental stability in the politico-economic dynamics The largest markets corresponding to the case of the United States are likely to suffer relatively quick pain They

COMMENTARY ON CHAPTER 1

25

are the Indonesian and the Thai markets, so the pains are there. But where are the gains? Unlike the case of the United States, Indonesia and Thailand are not highly developed countries in ASEAN which can gain through the export of high-end manufactured products and eventually services to the AFTA region. On the other hand, a country like Singapore, which can gain quite a lot on the export of competitive services and high-end manufacturing products, has no market to reciprocate, unlike the case of the United States. So the situation of AFTA could be closer to that of the Latin American Free Trade Area in the 1960s where Brazil, Argentina, Chile, etc. were trying to get together and for many years, they had no major results to show for their efforts. I would suggest that the AFTA dynamics would be very different were Indonesia to be at the level of Taiwan, for example, where the huge market will be relatively attractive and probably more willing to open up to some of the other ASEAN countries, and its own upper end exports would be able to benefit from the opening up of the Thai or Filipino markets. Based on the points just mentioned, it can be said that the present coalition of AFTA countries, the stage of relative development and the likely distribution of pains and gains could even lead to a checkmate, which means that the prediction for the AFTA road will be long, winding, and bumpy. But if you transcend the six ASEAN countries to include Northeast Asia, for example Japan and the other NIEs, then you could have a more stable coalition where the Japanese and NIEs markets would be attractive in the same way as the U.S. market is in NAFTA Like the case of Mexico becoming an attractive launching pad for direct foreign investments to enter the North American market, so would the ASEAN countries, particularly Indonesia, Thailand and Malaysia, become attractive launching pads for direct foreign investments to capture the expanding Northeast Asian market. In addition, the ASEAN countries would also become attractive to the upper end manufacturing and services export from the more developed Northeast Asian countries. This would ensure that the distribution of pains and gains would be better adjusted in this broader geographical canvas. If one sees that kind of configuration, it is quite possible that the independent AFTA dynamics would be likely to continue with some limited gains along the way, but would probably be unlikely to lead to a major breakthrough. And if the breakthrough comes, it would be in the form of Northeast and Southeast Asian coalitions. However, a lot will depend on how the

26 AFTA: THE WAY AHEAD

NAFTA and Single European Market dynamics evolve in terms of their protectionistic tendencies or the lack of it, or even the credibility of the threat of NAFTA linking up with AFTA to force open the Northeast Asian markets There are a lot of complex permutations. My second point relates to the impact of China on the AFTA dynamics. A significant factor in ASEAN economic co-operation or even the ASEAN countries' individual economic policies is the effect of external pressure. lf you look back at the liberalization, privatization and deregulatory measures that Indonesia, Malaysia, and Thailand have undertaken through the early and mid-1980s, you see the decisive role of external pressure, in the form of the commodity prices decline and the terms of trade shocks between 1982 and 1986, which gave a significant impetus to the unilateral liberalization measures in these countries, particularly on the trade regime, policies on direct foreign investments, etc. so much so that we can start to talk about AFTA today. So 1 would venture to say that the Greater China Free Trade Area, consisting of China, Taiwan and Hong Kong, emerging rapidly without any negotiations and largely driven by market forces, is likely to have a major impact on AFTA in the future. It will probably give AFTA a greater sense of urgency mainly because the configuration in Northeast Asia will not only threaten countries like Indonesia with that kind of wage rate, skill and technology and level of development, but increasingly, one senses, across the coastal regions in Zhejiang, Shanghai, Zhuhai and other regions, the threat is also spreading towards countries like Malaysia and even Singapore. For example, certain electronics companies even at the middle to upper-end, like Texas Instruments and Motorola, have moved some operations to the coastal region in China because they can get cheap skilled workers and engineers. Now, if you view that as the increasing threats and the competition found there, then this could be a blessing in disguise. It would significantly spur AFTA towards greater urgency in all the negotiations over product groups, rules of origin and content, rules of competition and tariff reduction, exclusion lists and safeguard measures, and some of the issues that we have discussed.

:!J The political economy of the ASEAN Free Trade Area

Narongchai Akrasanee and David Stifel

Introduction The Association of Southeast Asian Nations 1 (ASEAN) was founded in August 1967 in response to the threat of communism in Indochina. Although a stated goal of the Bangkok Declaration and many of the succeeding ASEAN pronouncements was to "accelerate economic growth ... through joint endeavours", and to "promote active collaboration and mutual assistance on matters of common interest in the ]field of economics]", little concrete action was taken to promote economic co-operation. In fact until 1977, regional Economic Ministers failed to meet on a regular basis; ASEAN had rotated around the annual meeting of its Foreign Ministers. Yet, despite the neglect, the ASEAN economies have all prospered This paper addresses the question of ASEAN economic co-operation and integration 2 from a politico-economic framework. The primary question asked is: is the ASEAN Free Trade Area (AFTA) the aberration that it appears to be from the slow and reluctant progress of ASEAN economic co-operation over the past twenty-five years? If so, why is this the case? The changing political and economic environments in Southeast Asia

28

AFTA: THE WAY AHEAD

are the principal factors positively affecting the attitude of the ASEAN leaders towards co-operation. Although scepticism persists over the will of ASEAN leaders to make due on their promises, evidence suggests that economic co-operation has become less of a political liability At the macro level the ASEAN leaders are in a stag hunt situation where all can gain through co-operation; if one party pursues its narrow national interests outside of a regional context. however. the others may lose relatively and absolutely ln the past the gains from co-operation were perceived to be minimaL thus the ASEAN states were not compelled to co-operate with genuine conviction. But as the gains from co-operation are perceived to increase, the opportunity cost of not participating grows and co-operation becomes more attractive 3 At the micro leveL as the political clout of the many urban-based industrialist coalitions who gain from freer access to international markets grows, the pressure on economic ministers to resist liberalization measures diminishes. Agro-industrialists, however, remain strong and tend to fight for exclusions from tariff reductions. While it is nigh impossible to claim overwhelming support for liberalization measures from the private sector as a whole, as the group's composition changed, there has been a general shift in the thinking of its members away from import substitution. Based on those points, we will first discuss the forces which have constrained co-operation efforts in the past. Given that many of these factors continue to exist today, significant changes have had to take place to warrant consideration, much less support, for ASEAN. Finally, we will examine the strengths and weaknesses of AFTA. The success of AFTA rests on the initiative of one or two ASEAN member countries to take on a leadership role to ensure the success of the agreement. As will become evident Thailand and Malaysia are best suited to take on this responsibility. During the first decade of ASEAN's existence, state leaders did not believe that national security could be guaranteed solely on an individual-nation basis. A collective voice in foreign affairs provided them the strength to ensure the peace and stability they sought in the region. Economic co-operation, per se, did not receive more than perfunctory attention despite the assertions made in the Bangkok Declaration. Political and strategic security, however, should not be underestimated for its positive impact on the health of the ASEAN economies. Peace among these disparate states with conflicting interests

THE POLITICAL ECONOMY OF AFTA

29

created an environment conducive to economic growth and prosperity. At that time, there existed a general consensus that rapid economic development could be achieved if there were few internal disturbances and little external interference 4 Hence, active efforts to promote regional economic co-operation did not receive significant attention among ASEAN member states until the mid-1970s. In 1974, pressure on ASEAN to move beyond rhetoric began to mount from external sources. That was the year that a United Nations team completed its study of the possible avenues for ASEAN economic co-operation. Their recommendations included limited preferential trade liberalization, intra-industry specialization schemes, and largescale inter-industry projects for the region. These so-called Kansu proposals eventually became institutionalized in the early 1980s in the form of the Preferential Trading Arrangements (PTA), the ASEAN Industrial Complementation (AIC) scheme, and the ASEAN Industrial Projects (AlPs) Throughout the 1970s and much of the 1980s, uncertainty persisted in the minds of many ASEAN officials over the benefits to be accrued from economic co-operation. With economies apparently lacking complementarity and competing for similar developed country markets, critics suggested that the ASEAN economies were not ready for further integration. Mechanisms which were developed to promote economic co-operation were thus designed to progress slowly. Furthermore, as a consequence of its consensual decision-making process, ASEAN had moved only as fast as its slowest member. The benefits of economic co-operation began to appear more attractive following the adjustment policies, induced by the external economic shocks of the 1980s, that were adopted in the ASEAN countries. Unilateral liberalization and outward-oriented policies became a dominant feature in the region,' creating an atmosphere more conducive to co-operation. The December 1987 ASEAN Summit held in Manila was a milestone in ASEAN history, symbolizing the determination of the national leaders to accelerate the co-operation process and to make it more effective by eliminating loopholes. Nevertheless, disappointment lingered, given the ineffectiveness of the existing mechanisms. By 199 I, however, the ASEAN countries seemed ready to take more concrete measures. After being officially endorsed at the ASEAN Foreign Ministers meeting in July, and later at the ASEAN Economic Ministers meeting in October, Thai Prime Minister Anand Panyarachun's proposal for

30 AFTA: THE WAY AHEAD

an ASEAN Free Trade Area received the full support of the heads of state at the ASEAN Summit, held in Singapore in January 1992.

Constraints to ASEAN economic co-operation The implementation experiences of the PTA, AlP, AIC, 6 and ASEAN Industrial Joint Venture (AIJV) schemes revealed a common set of problems which have limited the effectiveness of economic co-operation in ASEAN. First, as a consequence of the excessive bureaucratic procedures at both the ASEAN and national levels, delays of a year or more for approvals have weakened the attraction of the various schemes. The success of the AIJV, the most flexible of the four approaches, was greatly affected by the lengthy bureaucratic processes, and the other three schemes were bogged down in even more red tape. Second, there was a general lack of commitment to implement these schemes. ASEAN initiatives were not followed up with thorough promotion efforts, and information was not extensively disseminated to all the parties who stand to benefit from co-operation 7 Third, there was an absence of private sector involvement in the decision-making process at a regional level. Although the ASEAN-CCI has been active in pursuing the interests of the private sector, it has run up against the interests of national bureaucracies. Finally, a dearth of political will was the most important factor impeding genuine economic co-operation in ASEAN. Government leaders were more concerned with the costs associated with co-operation than the spillover of benefits, and therefore were reluctant to pursue greater co-operation. This preoccupation with delaying the implementation of cooperation stems from the apprehension that the costs of co-operation are amplified in developing countries where the losses associated with the short-run displacement of labour and capital can seriously threaten political stability Given that the original raison d'etre of ASEAN was to counteract the communist insurgency by maintaining stability within the region, the risks of short-run market disruptions for long-term gains were much too great for these countries to overcome. The consequence of this situation was an observable leitmotif of bureaucratic instruments employed to give the perception of co-operation while at the same time limiting its impact The formative years of ASEAN were characterized by concern for national rather than regional integration Building on the legacy of the

THE POLITICAL ECONOMY OF AFTA

31

Association of Southeast Asia (ASA) and the diplomatic machinery it had created, ASEAN provided a multilateral framework for the pursuit of unilateral national interests. Talk of supranationalism was suppressed by the regional states as they developed their national identities in the post-colonial era. In the Bangkok Declaration, the founding fathers assured that ASEAN would not transcend a grouping of sovereign states which "are determined to ensure their stability and security from external interference in any form or manifestation in order to preserve their national identities in accordance with the ideals and aspirations of their peoples" 8 An altruistic sense of regionalism has not been a great strength of ASEAN, but then again, the goal of ASEAN co-operation has never been a form of integration in which supranational characteristics progressively transcend national sovereignty. Co-operation in the region was pursued as a means of assuring national independence and mutual benefit for all participants. A Southeast Asian community similar to that of the European Community (EC) is not a realistic model for ASEAN co-operation. As Pushpa Thambipillai observes, After all, ASEAN is a co-operation scheme and not an integrating one and therefore national interests supersede. What seems obvious is that there is political will to let each member follow its interests if it does not outrightly jeopardize regional co-operation 9

It was not until the Singapore Summit in January 1992 that ASEAN leaders were willing to address an issue such as the supranational nature of the ASEAN Secretary-General's mandate which had previously included responsibility only for matters of the Secretariat, not of ASEAN. At the Summit. the official's title was changed from the Secretary-General of the ASEAN Secretariat to the Secretary-General of ASEAN, and the responsibilities of the office were adjusted commensurably. Regional integration remains a difficult issue to broach.

Centrifugal nature of foreign policy objectives While common foreign policy interests, such as peace in Indochina, have contributed a unifying ingredient to ASEAN, nation-centred foreign policies have had the opposite effect. Their centrifugal nature has tended to limit regional solidarityw The differences that have inevitably arisen between the neighbouring ASEAN states- as they pursued their own sets of foreign policy objectives - have subtly undermined

32 AFTA: THE WAY AHEAD

co-operation efforts. Furthermore, since charismatic leaders often dictate policy, personalities tend to play influential roles in determining the tenor of foreign policy in the region; they tend to reflect the "style, values, and sense of national interest held by the dominant elite" 11 Although differences are glossed over to maintain solidarity, the distinct foreign policy objectives of ASEAN countries and the ambitions of individual leaders weaken the perceived and actual harmony of ASEAN. Void of a large (and sometimes amorphous) external threat following the end of the Cold War - in Southeast Asia this is reflected in Vietnam's efforts to join the international economic community- it is possible that the conflicts among the ASEAN states are less likely to be brushed aside as they were in the past. Differences in national interest can no longer be subsumed to the fight against communism. Yet the economic environment in the region is evolving in such a manner that conflicts of narrowly-defined national interests are becoming less obstructive.

The emerging economic environment and the ASEAN Free Trade Area Confidence in ASEAN economic co-operation is growing Yet, data suggest that ASEAN is fighting an uphill battle in its attempt to form a free trade area. Much seems to be going against it. First, as Table 2.1 illustrates, intra-ASEAN trade has been insubstantial. In 1988 it accounted for just over 18 per cent of total ASEAN exports This figure was actually lower than the 21.4 per cent of 1970. Although intra-ASEAN trade is high relative to the intraregional trade of other developing country groups, 12 if Singapore- a large centre for entrepot trade- is excluded, the share of intra-ASEAN trade drops to only four per cent of the region's total exports. Second, the ASEAN-4 countries (excluding Brunei and Singapore) have relatively similar production structures and compete for the same export markets. There is a greater degree of complementarity between the ASEAN economies and the industrialized and newly industrialized economies, than between the ASEAN countries themselves Although these economies are moving upstream and are producing greater quantities of light manufactured goods, natural resources and agricultural goods continue to account for large shares of their exports. For example, in 1990, 64 per cent of Indonesia's exports consisted ot

THE POLITICAL ECONOMY OF AFTA

33

primary commodities, two-thirds of which included oil exports. Similar figures are found in the other ASEAN-4 states: Malaysia (58 per cent), Philippines (36 per cent), and Thailand (36 per cent) 13 Finally, the levels of development in ASEAN differ significantly With such extremes as Indonesia (with a per capita income of US$560 in I 990) and Singapore (USSI 1,245) in the same group, market sharing is difficult at best The less developed countries in the region are reluctant to open their economies to competition from the more advanced countries. Similarly, the more advanced countries tend to be unwilling to enter into exclusive arrangements with the inefficient industries of their developing neighbours Traits of this nature have led many observers to conclude that economic co-operation is neither viable nor desirable. Yet, despite these conditions and the constraints discussed earlier, the ASEAN countries have agreed to establish AFTA within 15 years 14 The reasons for this change in thinking is due more to recent developments in the ASEAN economies than to the desire to expand intra-ASEAN trade. What is clear is that the real changes that have taken place in the international arena and within ASEAN have altered the calculus of national interest for countries in the region. The evolving nature of the costs and benefits associated with economic co-operation has undoubtedly affected the support being lent to AFTA by member countries. The first of these changes is embodied in the transformations sweeping through the ASEAN economies. The ASEAN leaders have been compelled to adopt economic reforms as a result of hardships suffered from external circumstances in the 1980s. General liberalization policies, as well as the adoption of outward-oriented industrialization strategies, have strengthened the economies in ASEAN. Their improved competitiveness stemming from these policies has instilled a sense of confidence in ASEAN national leaders. Domestic industries have gained significantly from international competition and trade, and many officials are dedicated to enhancing these gains Barriers to trade need to be reduced further and membership in the General Agreement on Tariffs and Trade (GATT) strengthened Co-operation within ASEAN, in the form of a free trade area, is seen as a first step in the process of reducing tariff and non-tariff barriers on a most favoured nation (MFN) basis. This gradualist approach allows for domestic industries to be subjected to greater competition from within ASEAN before being exposed to the rigours of the international marketplace The strength

TABLE 2.1 ASEAN Export Matrix (Percentage of total exports) To/from

ASEAN

Brunei

Indonesia

Malaysia

Philippines

Singapore

Thailand

ASEAN•

710 67.5 0.5 0.1 25.5 0.1 13.4 13.0 14.9

4,649 63.9 2.1 0.8 29.3 0.3 19.2 5.8

1970 World (US$m) Asia-Pacific Australia Canada Japan New Zealand United States NIEsb ASEAN Brunei Indonesia Malaysia Philippines Singapore Thailand ASEAN• China EC

6,254 72.0 2.4 0.9 23.7 0.3 17.0 5.6 21.4 0.6 1.3 8.0 1.0 9.5 1.1 -

0.7 13.8

101 100.0 11.9 na

1.0 4.0 0.0 1.0 83.2 -

0.0 82.2 na

1.0 0.0 82.2 na

0.0

1,108 80.5 3.6 0.0 40.8 0.0 13.0 2.0 21.1 0.0

-

1,687 68.0 2.2 1.9 18.3 0.5 13.0 5.4 25.4 0.6 0.6

3.3 2.3 15.5 0.0 5.6 0.0 14.9

1.7 21.6 0.9 3.8 1.3 20.3

-

1,043 89.8 0.5 0.3 40.1 0.0 41.6 6.1 1.2 na

0.2 0.0 -

0.7 0.3 0.5 0.0 8.0

1,605 58.8 3.3 1.2 7.4 0.4 10.7 5.0 29.4 1.6 3.2 21.2 0.3 -

3.2 29.4 1.4 16.8

na

2.3 5.6 0.1 6.9 -

8.0 0.0 19.3

0.2 0.6 3.4 1.2 12.8 0.4 5.9 0.5 12.7

1988 World (US$m)

105,651

1,987

19,376

21,125

7,034

40,137

15,992

65,514

Asia-Pacific

74.0

86.2

83.1

75.0

76.9

72.4

62.2

63.7

Australia

2.2

0.6

1.5

2.4

1.6

2.7

1.9

1.9

Canada Japan New Zealand

0.5

0.7

1.5

0.9

1.8

1.0

19.0

51.9

41.7

16.9

20.1

8.5

15.9

25.4

0.2

na

0.2 16.2

0.2

0.2

0.3

0.2

0.2

17.3

35.7

23.3

20.0

19.1

10.0

10.8

7.8 11.6

10.0

23.0

1.0

na

United States NIEsb

20.7

1.4

10.3

17.5

9.8

ASEAN

18.1

14.5

10.7

11.1 24.4

Brunei

0.5

-

0.0

0.3

6.9 0.0

1.0

0.1

0.1

Indonesia

1.1

0.1

-

3.1

0.4

2.0

0.5

0.6

13.3

3.0

1.2

1.3

0.4

0.8 11.1

Malaysia

5.8

0.1

0.9

-

1.7

Philippines

1.0

1.6

0.4

1.5

-

Singapore

6.9

5.1

8.5

19.3

3.1

-

7.7

Thailand ASEAN•

2.8

7.7

0.8

2.0

1.8

5.3

-

1.3

-

9.4

2.2

5.1

3.8

23.0

4.0

3.9

China

2.5

0.3

2.5

2.0

0.9

2.9

3.0

2.2

14.3

11.7

11.1

14.4

17.7

12.7

20.7

15.3

EC

Notes a. Not including Singapore. b. Hong Kong, South Korea, and Taiwan. Source: Seiji Naya and Michael G. Plummer, "ASEAN Economic Co-operation in the New International Economic Environment". ASEAN Economic Bulletin 7, no. 3 (March 1991), p. 267.

36

AFfA: THE WAY AHEAD

concomitant with the dynamism and flexibility of the ASEAN economies has boosted confidence among many national leaders that, although certain inefficient industries will fold under greater international competition, the economies will have the capacity to undergo adjustments and to benefit in the long run. Furthermore, ASEAN liberalization policies have been predicated on the assumption of an open international market. Thus, a successful conclusion to the Uruguay Round is essential. ASEAN solidarity as exemplified in AFTA - especially now that a general commitment has been made - will allow the group to have a greater say in the international community and to address its concerns over the trading system. The second change is related to the growth strategies adopted by the ASEAN governments in the 1990s. These policies stress the need to attract foreign direct investment which has already contributed to the economic growth and the relatively rapid rates of industrialization in ASEAN. In light of the competition from Indochina, China, Eastern Europe, and Mexico (as a result of the North American Free Trade Area [NAFTAJ) for increasingly scarce capital. an effort has been made to maintain these inflows. A multitude of incentives have been offered to foreign investors throughout the region. Incentives, however. are not the primary factor influencing the decisions of foreign investors. The general investment climate is a far more important determinant of an economy's attraction. This climate is not only positively affected by sound macroeconomic management, economic growth, a developed infrastructure, and political and economic stability, but also by the size of the market. The establishment of AFTA will form a single enlarged market with 325 million people, instead of six individual markets. This undoubtedly will be attractive to foreign investors who are looking to gain from economies of scale by producing for the region or by manufacturing truly regional products for export. Officials involved in the negotiations leading up to the summit meeting in Singapore admit that this capability of attracting foreign investment was one of the most compelling arguments for the free trade area. Third, the introduction of international production networks is beginning to affect the way business is done in ASEAN. As a consequence of technological advances which have lowered the costs of transportation and improved telecommunications networks, the locations of production are more sensitive to production cost differentials, including those of wages Following the foreign investment boom in the ICJtP-19ROs whPn invpc;tmPnt in ThCJiiCJnrl fnr PxCJm[JIP gr0w hy nvf'r 500

THE POLITICAL ECONOMY OF AFTA

37

per cent. the ASEAN member countries were exposed to these new technologies. Taking advantage of these technologies to develop production networks can help ASEAN businesses lower their costs of production and become more competitive. Although this was the basic idea behind the AIC scheme, its success was limited by time-consuming approval processes and red tape, and because it was an idea ahead of its time. The enthusiasm among foreign automobile manufacturers for the BBC scheme suggests that a more diverse production base - including all six ASEAN economies - will be attractive to firms producing on a global scale. The successful implementation of AFTA will eliminate the barriers to intra-firm trade and trade in intermediate inputs - an essential ingredient needed to facilitate intraregional production networks - on a broader scale than has been seen with the AIC and BBC schemes This will not only help to strengthen ASEAN firms but will also attract foreign investors who plan to produce regional goods. Finally, the emerging shape of the international economic environment is affecting the outlook of ASEAN officials vis-a-vis regional economic co-operation. The development of economic blocs in Europe and North America has heightened the apprehensions of leaders in the developing world. These two blocs continue to represent significant markets for the ASEAN countries; 35 per cent of ASEAN exports in 1988 were destined for these markets, and 39 per cent of ASEAN imports originated from these countries. 15 Furthermore, delays in the completion of the Uruguay Round of talks - which will affect more than ASEAN's trade with these two blocs -are primarily a result of disputes between the major industrialized economies. The international economic environment is being shaped largely by the OECD countries, and since the ASEAN countries are relatively trade-dependent. they need to ensure that their interests - maintaining open international markets - are not ignored AFTA can show the world that ASEAN is more than just a political club, and that it is a force to be reckoned with. Greater solidarity will bolster the bargaining power of ASEAN, but an esprit de corps is not enough. Genuine conviction for economic co-operation is important because it will not only show the commitment of the region's leaders to ASEAN, but will also enhance the group's bargaining power by reinforcing the dynamism of each individual economy The experiences of other regional groupings of developing countries have shown that a group's strength in the international arena is highly dependent on thP JlPrformCJncp of each individual economy 16 The cumulative

38 AFTA: THE WAY AHEAD

bargaining power of the group will be much stronger if an outcome of the formation of AFTA is greater competitiveness in the economies of the ASEAN member states.

AFTA The ASEAN Free Trade Area, which is to be formed within fifteen years by means of the Common Effective Preferential Tariff (CEPT) scheme, is a manifestation of the fundamental changes in the global and regional economies. Despite the commitment of the regional leaders, sceptics still insist that ASEAN's track record and the potential loopholes that exist do not bode well for the plan. The architects of CEPT have been responsive to this and have adapted its design to overcome past weaknesses and to minimize the loopholes. One way to assuage scepticism and to maximize the likelihood of AFTA's effectiveness is to include as broad a range of goods as possible in the initiative. According to the agreement signed in Singapore, "all manufactured products, including capital goods, processed agricultural products and those products falling outside the definition of agricultural products .. shall be in the CEPT Scheme". 17 Instead of specifically defining - at the HS seven-digit level - which goods are included in the scheme, as was the custom with the PTAs, inclusions for CEPT are made on a "sectoral basis"- at the HS six-digit level. This tactic, along with the requirement that exclusions be made at the HS eight/nine-digit level, is designed to avoid excluding significant numbers of traded goods from the agreement. This was a lesson learned from the experiences encountered in the PTAs; the list of goods eligible for preferences under the PTAs has grown significantly, yet it accounts for only a small fraction of total intra-ASEAN trade. In classifying goods by sector, the architects of the CEPT scheme have attempted to discourage the use of gimmicks such as padding the inclusion list. Questions, however, arise over the classifications for exclusions at the eight/nine-digit level since there is no accepted standard among the ASEAN nations. A solution acceptable to all parties must be reached before the exclusion list is determined. Another means employed to improve the effectiveness of AFTA is the agreement to reduce tariffs according to a pre-determined schedule to be announced by I January I 993. Tariffs on products included in the

THE POLITICAL ECONOMY OF AFTA

39

CEPT scheme are to be lowered to a range of zero to five per cent by 2008. Tariffs rates on goods presently exceeding 20 per cent shall be lowered to 20 per cent within five to eight years. Subsequent reductions of tariffs to between zero and five per cent are to be made within another seven years. Minimum rates of reduction during this period have been set at a quantum of five per cent. Similarly, each ASEAN state will design tariff reduction schedules for goods with existing rates of protection less than 20 per cent in order to lower these rates of protection to a minimum of five per cent within 15 years. The agreement allows for two or more countries to accelerate tariff reductions for specific products. Quantitative restrictions on products under the CEPT scheme are to be eliminated when the tariff rates reach 20 per cent while other non-tariff barriers are to be gradually eliminated. The benefit of adopting a pre-set schedule for tariff reduction is that the stakes of AFTA will have been raised which assures a greater chance for success. Since ASEAN's reputation for rhetoric without concomitant action would be reinforced if one of the states does not meet its obligations within the CEPT framework, the motivation to participate will be strong. Stalling tariff reductions is much easier during the process of negotiation than when a commitment has already been made. The repercussions of delays for the whole group tend to be negative rather than neutral. With hazards of this sort, there are incentives for each ASEAN state to abide by the tenor of the CEPT scheme. An issue that will not be easily overcome as ASEAN officials work to implement AFTA will be the enforcement of rules of origin. Data from the Thai Ministry of Finance show that tariff protection in ASEAN varies significantly. Among the major sectors in the list of 15 targeted for accelerated tariff reduction, tariff rates range from zero per cent in Singapore to as high as 100 per cent for certain apparel and leather products in Thailand. These disparities mean that strict rules of origin must be enforced to avoid the deflection of extraregional imports through lowtariff countries such as Singapore and Brunei to high-tariff countries such as Thailand, Indonesia, and Malaysia. As it stands now, a product is considered to be an ASEAN good if 40 per cent of its content originates in an ASEAN country. Rules such as this are sensitive because they open up a multitude of opportunities for corruption and falsification of documents. Furthermore, despite the fact that the CEPT Agreement specifically declares that "Member States shall not nullify or impair any of the concessions as agreed upon through the application

40

AFTA: THE WAY AHEAD

of methods of customs valuation, any new charges or measures restricting trade ... ", 18 a dispute over the origin of an import can be used as a pretext for stalling its delivery; this is equivalent to a non-tariff barrier. In response to the difficulties and costs inherent in enforcing fair rules of origin in ASEAN, scholars have proposed various hybrids of customs unions. 19 In the eyes of the ASEAN leaders, however. this is much more difficult to achieve than a free trade area and has supranational characteristics which are unacceptable.

Prospects for AFTA The new political and economic environment in Asia and the Pacific, created by the changes which have taken place over the past few years, has stimulated the pursuit of greater economic co-operation within ASEAN. Although sincere economic co-operation is no longer the political liability it once appeared to be, the parochial views of government officials with interests in "sensitive" sectors means that AFTA is not a forgone conclusion. While there is significant support for the free trade area from the private sector in each of the ASEAN economies, enough powerful private interests are at stake to threaten the initiative if the participating governments do not approach it with enthusiasm. Given the lethargic pace at which endeavours proceed in the consensus-based group, the zealous leadership of at least one ASEAN country is vital to the success of AFTA. The experience of the AIJV initiative shows that ardent support by a given group can facilitate the establishment of the co-operation mechanism 20 The submission of schedules for tariff reductions by each of the ASEAN governments by I January 1993 will be the first test of the group's will to proceed with the initiative. But the negotiation process has been hindered by the vague strategy for implementing the CEPT. At the senior ministerial levels of the ASEAN governments, endorsements have been forthcoming. However. at the director-general level -those responsible for implementation - the lack of a defined procedure to complete the CEPT has engendered scepticism. Since there is no clear approach to the selection of sectors to be included in the scheme, the directorsgeneral have increasingly adopted a product-by-product mentality, betraying the sector-by-sector spirit of AFTA. They have also become bogged down in other technicalities such as questions of rules of origin

THE POLITICAL ECONOMY OF AFTA

41

Without a concerted effort on the part of this group, AFTA is sure to fall to the vices of avoidance. An impetus is needed to keep them directed and to avoid unnecessary hesitation. Although intra-ASEAN trade is minimaL AFTA is a mechanism which can place mutual group pressure on each of the participants to continue with the measures already taken to liberalize their trade regimes. Constructive outside pressure can tip the balance of interests within the domestic debates over the effects of unilateral liberalization in favour of reform. This is especially the case for Indonesia, the Philippines and Thailand where tariff rates are relatively high and certain sectors will be visibly affected. By assuring a quid pro quo in which the other regional countries liberalize their trade regimes in a similar fashion, the elimination of tariff and non-tariff barriers can more easily be achieved. This outside pressure, however. is contingent on the full participation of the ASEAN members. The withdrawal of one member will undermine the dynamic of mutual group pressure. Leadership by an ASEAN country needs to be provided to ensure the commitment of each member country to maintain the pressure. Ideally, this helmsman should be either Indonesia, the Philippines, or Thailand -the countries with the greatest short-term sacrifices to make. As we shall see, Thailand is the best suited among these three to play the role. Uncertainties over the post! 3 September government's dedication to AFTA, however. make joint leadership between Malaysia and Thailand a more plausible scenario. The first question we must ask is: why is it inappropriate for Singapore and Brunei to actively advocate the implementation of AFTA? Singapore is the economy with the most to gain, which also makes it the member most resented and questioned over its motives. Singapore's efforts to initiate regional co-operation mechanisms have often been met with suspicion. While the island republic can hardly be expected to pursue an initiative which will not be beneficiaL ASEAN's less developed countries - Indonesia and Malaysia in particular - question Singapore's motives when they perceive the gains to be unevenly distributed. Although all those involved in the Singapore-Johor-Riau (SIJORI) Growth Triangle are benefiting from the scheme, Malaysia has vocally questioned the disproportionate gains accruing to Singapore 21 Such opposition to the Growth Triangle has not stopped the three countries from proceeding with the initiative, but it does illustrate the sensitive position that the Singaporean leaders occupy in ASEAN. Although they are extremely eager for greater liberalization of intra-ASEAN trade,

42 AFTA: THE WAY AHEAD

Singapore Government officials have clearly adopted a position of passive support; there is an understanding of the degree to which excessively active endorsement on their part could be counterproductive. Brunei is in a position similar to Singapore. Sensitivity to the interests of other ASEAN countries has encouraged the sultanate to maintain a low profile. With its dependence on oil revenues and small domestic market, freer trade within the region will assist Brunei to diversify its economy and maintain its economic security. As in the case for Singapore, Brunei's policy on AFTA is based on the principle that the best means of achieving its objectives is not to aggressively pursue them, but rather to count on the initiative of the less developed economies in the region. Second, despite their commitments to implementing the CEPT scheme within the 15-year time frame, why are Indonesia and the Philippines unlikely to be the countries to stimulate and maintain pressure on the others? With a GOP in 1990 of USS I 00 billion - the largest in ASEAN- Indonesia should ideally be the country to take the helm to assure the success of AFTA. The CEPT was, after all, an Indonesian proposal reflecting their awareness of the positive impact of trade liberalization on growth. Aside from rhetoric, however, the enthusiasm of the Soeharto government for the initiative, as indicated by implementation efforts, has been ambivalent. The support shown by the president and his ministers has not been clearly reflected by their subordinates who remain uncertain about how AFTA is to be achieved. The selection of a new Cabinet in 1993 also gives rise to questions about the future of ministerial support. As one Cabinet Minister stated, "the composition of the next Cabinet will be crucial in determining how the economy fares for the rest of the decade". 22 The future of certain pro-AFTA Cabinet members is far from certain and some of their potential replacements are either ambivalent towards AFTA or are "not of the free trade mode" 23 This is a manifestation of the two camps which are emerging in the Indonesian political scene. The free marketers who have been largely responsible for the liberalization programme, begun in the latter half of the 1980s, are being partially eclipsed by a faction with designs of basic import substitution. Whilst the tenor of this group is far from the more stringent, inward-oriented policies of the pre-reform era, their posturing clouds the commitment of the Indonesian officials toward AFTA. Pressure from within ASEAN can provide the necessary balance and impetus for the government to proceed with its liberalization policies

THE POLITICAL ECONOMY OF AFTA

43

Despite its enthusiasm for AFTA, 24 the Philippines in not in a position to make the voluntary concessions needed to set the pace for the rest of ASEAN. Domestic economic problems confront the newly-elected government of Fidel Ramos and many of the administration's resources will need to be diverted to handle them. High levels of international debt (around US$5.3 billion), accumulated since 1986, have forced the central bank to maintain a strong peso 25 resulting in a loss of export competitiveness. Similarly, treasury bills issued to cover accumulated central-bank losses of USS 12.7 billion have hindered growth by pushing interest rates up to 20 per cent and crowding out private investors. Central bank officials play down the seriousness of the issue for fear that it reflects a poor performance on their part. Senator Alberto Romulo, who introduced a bill to Congress in 1991 to help the central bank straighten out its finances, was frustrated by the lack of backing he received, ''I've been trying to emphasize to jcentral-bank governor Jose! Cuisia that the problem didn't arise under his watch, so he doesn't have to be defensive about it." 26 A resolution to these problems are not in clear sight. Along with conflicts over social issues such as family planning in a predominantly Cathoiic country, the Ramos administration's ability to overhaul the trade regime is being constrained by the stagnating economy. The disadvantages that Philippine industrialists face as a result of an overvalued exchange rate, high interest rates, brown-outs, and a weak infrastructure have resulted in incentives for interest groups to fight for protection. Poor economic performance provides fertile ground for those seeking protection (and rents) 27 thus making it difficult for government officials to ardently pursue reductions in tariff and non-tariff barriers. Furthermore, with taxes on international trade transactions accounting for 21.5 per cent of total government revenue in 1988, and difficulties in raising revenues through income or sales taxes, the Philippine Government is confronted by another constraint to liberalizing their tariff regime for the region 28 Pressure from the other developing economies, particularly Indonesia and Thailand, through the mutual reduction of tariff and non-tariff barriers, can counter protectionist pressures and compel the Philippine Government to liberalize its trade regime in the spirit of the CEPT Finally, why is the joint leadership of Thailand and Malaysia the most plausible means of ensuring a relatively exclusion-free implementation of the CEPT? Thailand under the leadership of Prime Minister Anand Panyarachun initiated the AFTA proposal as it exists today and followecl through with behind-the-scenes promotion It's commitment

44 AFTA: THE WAY AHEAD

was enhanced by the prime minister's pledge at the Singapore summit to reduce all of Thailand's tariffs on imports from ASEAN countries to a maximum of 30 per cent by the beginning of 1993. The Anand government. which put Thailand in a position in which it cannot undermine AFTA without losing prestige, was temporary. The uncertainty surrounding the future of the Thai Government means that ASEAN cannot depend solely on Thai leadership after 13 September although the government of Prime Minister Chuan Leekpai confirmed its full support of the AFTA agreement The newly-elected Thai Government will undoubtedly be confronted by the resistance of affected trade associations. The doubts raised by this, along with the potential for parochial behaviour on the part of the newly-elected officials, cast doubt on the leadership capabilities of Thailand. The support of powerful private interest groups, however. suggests that the adjustment process resulting from lowering barriers to trade in sensitive sectors will not be unnecessarily difficult Nevertheless, the assistance of another ASEAN country- Malaysia- could prove essential to providing the leadership necessary to maintain the spirit of AFTA. Although Malaysian Prime Minister Dr Mahathir Mohamad neglected to discuss AFTA in his opening address to the Singapore summit and instead defended his proposal for an East Asian Economic Caucus (EAEC), Malaysian support for the initiative has been strong. AFTA has indeed received much attention from Malaysian officials and intellectuals. With a per capita income of almost US$2,300 in 1990, behind only Brunei and Singapore in ASEAN, and one of the most dynamic economies in the world, Malaysia is well positioned to gain from AFTA. Yet. government energies in regional economic co-operation have been primarily devoted to the EAEC While this is indeed worthy of attention, Mahathir and his ministers could do well to redirect some of their energy to ensure the successful implementation of AFTA. Otherwise the effectiveness of the EAEC could be undermined by a weak ASEAN. It is in Malaysia's interest to ensure the implementation of AFTA, and this can be achieved through the pioneering of trade concessions. Malaysian motives, unlike those of Singapore and Brunei, are not questioned by other members of ASEAN since Malaysia's economy remains less developed. This places Kuala Lumpur in a unique position for it has domestic support for further liberalization of its trade regime, and is able to influence the other ASEAN countries without creating resentment. By working together, Malaysia and Thailand can help to

THE POLITICAL ECONOMY OF AFTA

45

shape and maintain not only the explicit agreement between all of the members of ASEAN to implement the CEPT, but also the implicit agreement to maintain mutual pressure on each other to continue with their respective liberalization policies by ensuring a quid pro quo.

Conclusion The new environment in Southeast Asia is altering the way regional governments and private sectors perceive the costs and benefits of economic co-operation in ASEAN. The adoption of liberalization policies, the turn to growth strategies based on attracting foreign direct investment, and the emergence of economic blocs in Europe and North America are the primary factors which make AFTA possible today The past constraints to co-operation have diminished in light of these changes Yet, they have not disappeared The success of AFTA will not be assured unless visionary action is taken in ASEAN. The cards as they are played now suggest that Thailand and Malaysia are in the position to accept the challenge and to lead ASEAN into a new era of closer co-operation in AFTA.

Notes I. The original members include Indonesia, Malaysia, the Philippines, Singapore, and Thailand. In I984, Brunei became the sixth member. 2. A distinction is made here between co-operation and integration. According to the Third College Edition of Webster's New World Dictionary, co-operation is defined as "the association of a number of people in an enterprise for mutual benefits", as well as "working together ... for a common purpose". Integration, on the other hand, is defined as "making whole or complete by adding or bringing together parts" In other words, integration has more of a supranational quality than co-operation 3. In stag hunt terms, this can be visualized as the size of the stag growing considerably relative to the hare. In such a situation the gain derived from co-operation and catching the stag far outweighs the gain from noncooperation and catching the hare. 4. Hans Indorf, Impediments to Regionalism in Southeast Asia: Bilateral Constraints Among ASEAN Member States (Singapore Institute of Southeast Asian Studies, I984). p. 6.

46

AFTA: THE WAY AHEAD

5. See Rachain Chintayarangsan, Nattapo11g Thongpakdee, and Pruttiphon Nakornchai, "ASEAN Economies: Macro-Economic Perspective", ASEAN Economic Bulletin 8, no. 3 (March 1992) for a discussion of these policy changes and their effects. 6. This was adapted through a private sector initiative into the present Brandto-Brand Complementation (BBC) scheme. 7. Mari Pangestu, Hadi Soesastro, and Mubariq Ahmad, "A New Look at lntraASEAN Economic Co-operation", ASEAN Economic Bulletin 8, no. 3 (March 1992) p 335. 8. The ASEAN Declaration (Bangkok Declaration). 8 August 1967. 9. Pushpa Thambipillai and j. Saravanamuttu, ASEAN Negotiations: Two Insights (Singapore: ASEAN Economic Research Unit, Institute of Southeast Asian Studies, 1985), p 23. 10. See lndorf, op. cit. (1984), pp. 10-32. II. Zakaria Haji Ahmad, "Malaysian Foreign Policy and Domestic Politics Looking Outward and Moving Inward?" in Asia and the Major Powers Domestic Politics and Foreign Policy, edited by Robert Scalapino, Seizaburo Sato, )usuf Wanandi, and Sung-joo Han (Berkeley: Institute of East Asian Studies, University of California, 1988). p. 257. 12. The average share for all intra-group exports among developing countries, including ASEAN, was less than I 0 per cent in 1988. See Pearl lmada, Manuel Montes, and Seiji Naya, A Free Trade Area Implications for ASEAN (Singapore ASEAN Economic Research Unit, Institute of Southeast Asian Studies, 1991). p. 4. 13. World Bank, World Development Report 1992. 14. That is, 15 years from I january 1993, the date in which the Common Effective Preferential Tariff (CEPT) schedule to reduce ASEAN tariff levels, becomes effective. 15. United Nations, International Trade Statistics Yearbook, 1991. 16. R. Langhammer, "Fallacies of Transposition: What ASEAN Should Learn from other Integration Efforts," in ASEAN at the Crossroads Obstacle, Options and Opportunities in Economic Co-operation, edited by Noordin Sopiee, Chew Lay See, and Lim Siang )in (Kuala Lumpur: The Secretariat of the Group of Fourteen, Institute of Strategic and International Studies, 1987). pp. 53550. 17. Agreement on the Common Effective Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area (AFTA). Singapore, 28 january 1992, Article 2. 18. Ibid, Article 5, Section D. 19. See Hans Christoph Rieger, "ASEAN · A Free Trade Area or a Customs Union", Far Eastern Economic Review, I May 1986, pp. 58-59. 20. In the case of the Al)Vs, it was the private sector through ASEAN-CCI. 21 "Johor Would Gain More From Better Facilities Than From Growth Triangle", Straits Times, I September 1990.

THE POLITICAL ECONOMY OF AFTA

47

22. Suhaini Aznam, "Closer to Power", Far Eastern Economic Review, 6 August 1992, p. 20. 23. Mari Pangestu. Institute of Strategic and International Studies. Jakarta, telephone interview, 30 July 1992. 24. The Philippines were actually the first to propose an ASEAN free trade area in 1986. 25. The peso appreciated from P27.60 to US$1 in june 1991, to P26.32 to US$1 in June 1992. 26. Tiglao, Rigoberto, "A Nettle to Grasp Remedies May be Politically Unpalatable", Far Eastern Economic Review, 23 July 1992, p. 46. See also Tiglao. "Manila's Black Hole: Losses at Central Bank Undermine Economy," and "Embarrassment of Riches: Bigger Reserves Will Increase Losses," Ibid., pp. 44-47. 27. See comment by Sergio de Ia Cuadra in Politics and Policy Making in Developing Countries: Perspectives on the New Political Economy, edited by Gerald M. Meier (San Francisco: ICS Press, International Center for Economic Growth, 1991). p 149. 28. It is worth noting, however, that only 9.8 per cent of Philippine imports are from other ASEAN countries (5.8 per cent if Singapore is excluded)

Commentary on Chapter 2

Mohamed Ariff

The paper by Akrasanee and Stifel is an extremely timely contribution to the growing literature on AFTA. It deals with issues that tend to be swept under the carpet because they are usually considered "sensitive". I have no basic disagreement with the tenor of the paper, especially on the evolution of ASEAN from the inception to the Fourth ASEAN Summit in Singapore in January I 992. One should not lament the fact that there had been little substance in ASEAN economic co-operation until recently Without a doubt, ASEAN is the most successful regional grouping in the Third World Regional groupings in Latin America, Africa, the Middle East, the Caribbean and South Asia pale in comparison with ASEAN .1 Hindsight tells us that it was wise of ASEAN to have spent its early years just laying the political foundations as a prelude to regional economic co-operation. Evidently, ASEAN countries have benefited much from such political cooperation because it helped defuse tensions and conflicts in the region so that member states could successfully concentrate on their economic pursuits ASEAN has thus contributed significantly, albeit indirectly, to the prosperity of its members. The low and declining proportion of intra-ASEAN trade in the total trade of ASEAN need not be viewed negatively Indeed, the success of regional economic co-operation cannot be accurately measured by the share of intra-regional trade because it fails to capture many positive elements that are not easily quantifiable The share of intraregional tri1de is essentially a function of the ni1ture. chi1racter and structure of the regional economy Undeniably, ASEAN economies owe their

COMMENTARY ON CHAPTER 2

49

prosperity largely to their extra-regional trade and investment linkages It is not in the interest of ASEAN countries to re-orientate their economies. It is unlikely that intraregional trade will have a high profile even under AFTA, although it will grow in absolute terms. Clearly, ASEAN's most lucrative markets lie outside the region. The value of AFTA lies not in the increased share of intra-ASEAN trade in total trade but in the improved competitiveness of ASEAN products in the international marketplace. Free trade among ASEAN countries would inject greater efficiency into the production structure, with member countries learning to compete among themselves in their own regional market before they could compete with others in the world market. AFTA should render the ASEAN region attractive to foreign investors. Foreign investment will help ASEAN enormously, not only to grow rapidly and advance industrially, but also to strengthen its extraregional linkages. Additionally, foreign investment networks in the region can integrate the ASEAN economies through intra-industry and intra-firm trade flows. The notion that economic complementarity is a precondition for regional economic co-operation should be questioned. This is not to deny that it is politically easier for complementary economies to cooperate with one another than it is for the competing ones since regional imports would pose no threat to domestic products, given the high degree of complementarity But then, one should not lose sight of the fact that perfect complementarity would imply pure trade diversion without an iota of trade creation. The main reason why regional economic co-operation in the past has not led to any significant increase in intra-ASEAN trade is because trade liberalization through the Preferential Trading Arrangements (PTA) was not extended much to products that compete with one another. The overemphasis on complementarity has done a great disservice to ASEAN by forcing many important items to be excluded from tariff concessions and by preventing a new pattern of regional complementarity, through intraregional specialization, from emerging. There is considerable room for optimism about AFTA As mentioned earlier, ASEAN has laid a fairly strong political foundation for it during the last two and a half decades. The political will supporting it is not in doubt. More importantly, policy reforms undertaken unilaterally by ASEAN countries since the mid-1980s should facilitate the AFTA process. What is more. the fact that the CEPT fast-track sectors account for

50

AFTA: THE WAY AHEAD

nearly 40 per cent of the intra-ASEAN trade flows should give AFTA a jump start. It is almost certain that the trade creation effect of AFTA will outweigh that of trade diversion 2 All this, however, does not mean that AFTA will be able to take off easily and fly smoothly without any hitches. There are many daunting practical problems - such as rules of origin, local content requirement and dispute settlement mechanism - which ASEAN will have to come to terms with. Fortunately, these problems are not insurmountable. AFTA needs leadership, as pointed out by Akrasanee and Stifel. The authors have argued that Brunei and Singapore cannot play this role because these low-tariff countries have nothing to offer by way of tariff concessions. The Philippines is not counted, mainly because it has to set its own house in order first before it can take on any leadership role in the region The authors do not think that Indonesia can provide this leadership role, primarily because "free marketers" in the archipelago may not be able to hold back the forces that are opposed to the recent wave of liberalization. Thailand, which surrogated the AFTA proposal. cannot effectively lead it. all by itself, given the uncertainties in the post-Anand era. The authors, therefore, have suggested that Thailand and Malaysia should jointly play the leadership role in AFTA Curiously enough, they do not discuss the possibility of Malaysia providing the leadership on its own. The question of who should lead AFTA is a tricky and sensitive one. That Brunei, Singapore and the Philippines are not the prime candidates is quite obvious. It is unlikely that Thailand can lead it. now that the pressure groups in the kingdom are unenthusiastic about the AFTA fast-track It is doubtful that Malaysia can effectively play the leadership role, for two important reasons. First. Malaysia is also a lowtariff country and it is remarkable that. in the I 993 budget. tariffs on over 600 items have been either reduced drastically or eliminated altogether. In this regard, Malaysia is not too far behind Brunei or Singapore, which means that Malaysia has more to gain from tariff reductions in the other three countries than what it can offer by way of tariff concessions. Second, Malaysia is likely to be the biggest beneficiary of the CEPT fast-track, not only because the average tariffs on the CEPT sectors are the lowest among the ASEAN-4, but it is the biggest supplier of fast-track items 3 It is important to recognize that Indonesia has always been playing a "Big Brother" role in ASEAN. Indonesia, primarily because of its huge size, is able to exert considerable influence

COMMENTARY ON CHAPTER 2

51

on ASEAN policy formulation. All said and done, the fact remains that ASEAN can only go as far as Indonesia would let it AFTA will be no exception. For, after all, over half of the ASEAN market belongs to Indonesia.

Notes I. Mohamed Ariff, "Economic Regionalism: The Third World Experience", paper presented at the National Seminar on Economic Globalisation: Issues, Challenges and Responses, organized by the Universiti Utara Malaysia, at Langkawi, I6-I7 August I992. 2. See Pearl !mada, Manuel Montes, and Seiji Naya, A Free Trade Area: Implications for ASEAN (Singapore: Institute of Southeast Asian Studies, I99I) 3. Tariffs on CEPT products average 1 1 per cent in Malaysia compared with I4 per cent in Indonesia, and I 9 per cent in both the Philippines and Thailand. Malaysia is the biggest source of CEPT imports, contributing 60 per cent of the total, while its share of CEPT imports is only I 2. 5 per cent. See Sree Kumar's contribution. this volume.

:#]

The long and winding road ahead forAFTA

Seiji Naya and Pearl lmada

I. Introduction On 27-28 January 1992, Heads of State of the Association of Southeast Asian Nations (ASEAN) met in Singapore for the Fourth ASEAN Summit and agreed to the creation of an ASEAN Free Trade Area (AFTA) in I 5 years. After more than 20 years of slow progress in ASEAN economic co-operation, the commitment to create AFTA is a tremendous step forward. The ASEAN Preferential Trading Arrangements (PTA), which has thus far been the main vehicle for its trade co-operation efforts, has contributed little to the promotion of intra-ASEAN exports. Likewise, its industrial co-operation programmes have had limited success. Yet, the gradual process of moving toward substantial economic co-operation can be seen as a blessing in disguise. The slow pace of ASEAN economic co-operation in the past was necessary because of the large divergences in the trade policy regimes and levels of economic development of the member countries. ASEAN was wise to have methodically and gradually built up the integration environment, institutions, and channels of communication upon which future co-operation can flourish. A more rapid attempt at integration may have

54

AFTA: THE WAY AHEAD

led ASEAN to the fate of most other Less Developed Countries' (LDCs) efforts: abandonment. For example, the Latin American Free Trade Area (LAFTA) abandoned their grandiose scheme of economic integration in favour of a slower pace similar to the early years of ASEAN co-operation. Market reforms and trade liberalization in the more inward-looking countries have reduced the disparities and allowed ASEAN to move forward more rapidly. To a large degree, the present commitment by ASEAN governments to form an ASEAN free trade area is now possible with the unilateral tariff reductions in the ASEAN countries, especially Indonesia and Thailand. Although AFTA represents a clear determination to transcend past forms of economic co-operation, the lack of success of previous ASEAN economic agreements has led to scepticism about AFTA and doubts as to whether the vision can be turned into reality. The very vague nature of the Singapore Declaration which forms AFTA reinforces the scepticism. In other free trade areas, the initial negotiation and study period normally take years and the agreement, when signed, spells out exactly what is to be covered, how reductions are to be scheduled for specific products, and so on. The details for AFTA, in contrast, have not yet been worked out. This paper will look at the vision of AFTA and the elements that will lead to success. What are the factors, internal and external, which led to the agreement to form AFTA? Considering the fact that the current nearly I 5-year-old Preferential Trading Arrangements have not been effective at all in integrating intraregional trade, what are the major issues that require to be addressed and resolved for a successful implementation of AFTA?

11. Overview of ASEAN economic co-operation ASEAN is now a quarter century old. Over the past 25 years, it has been successful in promoting peace and stability in the region, cultural development and better personal interrelations, and, indirectly, economic growth of its member states. Although the peace and stability that ASEAN co-operation brought about have had an important influence on the rapid economic growth of the individual countries, ASEAN member states have not been able to internalize ASEAN economic co-operation for growth. 1

THE LONG AND WINDING ROAD AHEAD FOR AFTA

55

There were three major phases of ASEAN economic co-operation. The first stage was its first ten years of existence, from 1967 to the first Summit in 1976, when the member countries basically tried to get to know each other and lay the foundations for future co-operation. During this period, no initiatives were taken to implement the vaguely stated intentions (in the Bangkok Agreement which formed ASEAN) to promote economic co-operation. The second stage spanned the subsequent 15 years from 1976 to the Fourth Summit of january 1992. Active co-operation and formal agreements for economic co-operation were initiated among the member states, focusing primarily on building institutions for co-operation The ASEAN PTA and three industrial co-operation agreements were put into place and continuously refined over time. None of these schemes, however, were successful in actually promoting intra-ASEAN trade or investment. The third stage, from 1992 to 2007, will be one of consolidation in building AFTA and other forms of regional co-operation, characterized by much more active and productive economic co-operation in the region. The endorsement of the AFTA vision is a very positive development. Large benefits can accrue to member nations from the pooling of resources and sharing of markets, with dynamic effects reinforcing such benefits.

Ill. Factors leading to AFrA Both internal and external factors have led to the creation of AFTA. First, as mentioned earlier, internal economic conditions within ASEAN are more appropriate now for the implementation of a free trade area than they were previously. In the past, the economic structures of the ASEAN countries were weak with several countries following inward-looking economic policies. Tariff levels were relatively high in Indonesia, the Philippines, and Thailand, and ranged widely within each country. Malaysia, on the other hand, had relatively low levels of protection and Singapore has been virtually a free trade port since the 1960s. The recent unilateral liberalization which has been occurring has harmonized tariff structures to a considerable degree. Indonesia's average tariff rates in particular dropped from more than 30 per cent in 1980 to about 20 per cent in

56

AFTA: THE WAY AHEAD

1990. Consequently, the disparities in tariff structures have been reduced, facilitating further regional integration efforts. Manufactures comprised only a small share of total intra-ASEAN exports until recently, with Singapore playing a dominant role in the largely primary product and entrepot trade of the region. The rapid industrialization, which took place in the 1980s and 1990s in all of the countries, has caused the percentage of manufactured exports to rise dramatically. For Indonesia, manufactures accounted for only seven per cent of its trade with ASEAN in 1980 and a remarkable 47 per cent in I 990 (Table 3.1 ). The increase from 3 I per cent in 1980 for Thailand to 64 per cent in 1990 is equally impressive. This rapid industrialization has increased intra-industry trade in manufactured products in the region, making trade more complementary than competitive between the ASEAN nations 2 To realize the potential for intraregional trade creation, it is essential to develop trade patterns based on intra-industry specialization, similar to trade between developed countries such as within the European Community (EC). Recent studies have shown that trade creation would outweigh trade diversion for AFTA. 3 There is also increasing external pressure on ASEAN countries to come together economically. Developing countries in other regions are undertaking economic reforms and opening their economies to trade and investment with great success. For example, Latin American countries have recovered from the so-called lost decade of the 1980s; economic reforms have spurred economic growth and these countries are now beginning to attract export-oriented investment. Similar developments in Eastern Europe and South Asia accentuate the trend. Competition from these other developing areas make it critical that ASEAN's attractiveness to investors be enhanced. One way of doing so is to create a large single regional market through AFTA. Large economic groupings taking shape in the world, such as the European Community and the North American Free Trade Area (NAFTAL present a challenge to ASEAN. The inclusion of Mexico in the US.Canada Free Trade Area and possibly other developing countries, especially Chile, in the future, may divert trade and investment away from ASEAN. The emergence of several Asia-Pacific organizations - the AsiaPacific Economic Co-operation (APEC). the East Asian Economic Caucus (EAECL etc. -has also pushed ASEAN to seek more cohesion to enhance its effectiveness in these groupings AFTA will be a major

TABLE 3.1 Manufactures as a Share of Total Exports (Percentages)

-Destination Country

Year

Indonesia

Philippines

1980 1985 1990 1980 1985 1990 1980 1985 1990 1980 1985 1990 1980 1985 1990 1980 1985 1990

na na na

4.6 18.1 62.8

5.9 79.3

na na na

Singapore

Thailand

ASEAN

World

7.3 49.4 48.6 16.1 17.9

6.8 22.8 46.1 20.7 17.0

21.4 65.5 36.7 15.3 18.2

6.8 25.1 46.7 14.4 19.6

2.2 12.9 34.5 20.2 25.9

na

na

na

na

na

17.5 27.3

14.5 7.9

18.3 23.5

18.6 26.8

na

na

na

na

na na na

33.7 41.3 49.0

44.9 57.8 75.4 15.3 28.6 60.2

na na na

50.5 51.5 63.9 31.4 41.8 63.9 28.2 35.8 61.3

45.6 50.3 70.8 24.2 37.1 62.6 21.8 31.8 59.8

Malaysia

-------

Indonesia

Philippines

Malaysia

Singapore

Thailand

ASEAN

na

59.6 35.4

25.1 13.0

na

na

na na na

53.8 42.9 63.9 37.0 12.8 51.2 31.7 21.8 61.6

55.1 54.8 71.6 25.3 22.2 38.4 50.6 50.3 68.3

19.0 51.1 53.6 9.5 29.0 46.6 13.0 39.5 46.6

Source: United Nations, Commodity Trade Statistics, data tape.

29.1 30.4 48.3

58 AFTA: THE WAY AHEAD

step in building this internal cohesion so that ASEAN's role as a single bargaining block will be enhanced. The ASEAN countries explicitly acknowledged this reason for promoting greater regional economic co-operation in the Singapore Declaration of 1992. It is well understood that each member state will benefit from acting as a unit; in fact, the whole will be greater than the sum of its individual parts.

IV. Critical elements for the success of AnA Other integration schemes have concentrated on step-by-step implementation procedures before an agreement was reached. The EC negotiated many years before a consensus was reached to form a Single Market 1992, and the United States and Canada took nearly two years of careful preparation, meetings, and negotiations to expand the U.S.Canada Free Trade Area to include Mexico. The General Agreement on Tariffs and Trade (GATT) is on its eighth round of negotiations with countries still negotiating, and its completion is yet to come. Quite differently, ASEAN countries have not worked out the details of AFTA, choosing instead to outline the vision and worry about the details later. The AFTA documents cover almost every important area included in other co-operation schemes but only briefly touched upon the procedures for implementing the concept. Eventually, when member states start to move toward AFTA, the large potential impact on trade and investment will necessitate clear implementation procedures and rules. Some of the prime candidates for controversy and road-blocks include the following: (I) determining rules of origin and other rules of the game; (2) establishing an institution or process for monitoring; (3) identifying, providing clearer definition, and enforcing AFTA rules; and (4) offering a mechanism for the settlement of disputes

Rules of origin and content Rules of origin and content requirements are important in any free trade area to avoid trade deflection, that is goods entering ASEAN through the port with the lowest tariff, for example Singapore, and then shipped duty-free anywhere within ASEAN. Since each member country in a free trade area keeps its independence over external tariffs, trade deflection may constitute a critical stumbling block if specific measures to prevent

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59

trade deflection are not undertaken. An ASEAN content requirement of 40 per cent, as endorsed in the Common Effective Preferential Tariff (CEPT) agreement for ASEAN in January 1992, seems to be low enough so as not to unduly restrict trade and yet high enough to limit trade deflection. In fact, it is lower than the local content requirement of most other free trade areas, 4 which is reasonable considering the high trade linkages of the ASEAN economies. The origin of a product, however, is no longer a simple thing to determine because the increasing internationalization of production complicates this determination. Further, determination of origin can be a cumbersome process, requiring extensive documentation and increasing transaction costs which effectively nullify the benefits to businesses of freer internal trade. Care must be exercised, therefore, in drafting and implementing rules of origin and content requirements to minimize transactions costs. What can be done to ensure that the local content rule does not hamper trade? Other trading groups like the European Free Trade Association (EFTA) can show an example of how a combination of Basic Materials List and the Process or Substantial Transformation Approach can be used. 5 In EFTA. commodities which are extracted, grown, or processed in the country will have no question of origin; these will automatically qualify under the rules. The Basic Materials List, on the other hand, includes all industrial raw materials which are not produced in sufficient quantity or are not at all produced within the EFTA. All items in this list can be imported from non-EFTA sources and treated as though they were I 00 per cent of internal origin as long as they have undergone further processing within the FTA. This increases the margin of effective preference for manufactures of EFTA trading partners and allows the local content rule to work more liberally. The substantial transformation approach is also used in EFTA and the U.S.-Canada FTA. not just as an alternative to the content criterion, but as the principal benchmark. Basically, this criterion requires that products from non-partner countries undergo sufficient processing within the group such that the goods produced will have a different tariff heading (at the four-digit harmonized standard ]HS] classification) from the tariff headings of each of the materials processed This is sometimes referred to as the "change of tariff heading" criterion. This criterion is an attractive alternative to the content criterion because it does not require detailed accounting records of non-partner component materials and, hence, is less administratively costly to producers and exporters than

60 AFTA: THE WAY AHEAD

the content criterion. The only control measure required is the determination that the goods are of ITA origin as declared without keeping a check on costs and without revealing anything about the cost structure. ASEAN countries have worked with the process criterion in the Generalized System of Preferences (GSP) arrangements and can base their own agreement upon this scheme. The adoption of this type of process or transformation criterion will be more transparent and will reduce the time and cost of determination of origin. At the same time, it will require a significant initial investment in preparatory work by government negotiators to develop a good, workable list. But this investment will pay off in the medium run by reducing the transaction costs for day-to-day trading by businesses. Speedy development of a substantial transformation rule, especially in some of the more obvious cases, should be a high priority. Another issue to be resolved is, what constitutes local content? There is some controversy over whether the agreement specifies 40 per cent national or ASEAN cumulative content. Using the national content rather than a cumulative ASEAN content definition is simpler to administer, but will have less of a trade-expanding effect. Promoting ITA using the national, instead of an ASEAN, content treatment will limit the ability of the individual member country both to export and import to other ASEAN countries due to the high national content requirement. On the other hand, cumulative ASEAN content can promote more highly developed division of labour and greater intra-ASEAN trade but will also induce more imports than the 60 per cent limit; thus, the real ASEAN local content may amount to less than the required 40 per cent limit 6 Therefore, ASEAN will have to design and agree on a precise formula for the domestic content requirement when using cumulative content if they strictly want to limit local content to 40 per cent.

Rules of competition and tariff reduction The rules of competition will be critical for ASEAN to avoid unfair competition. The beneficial effects of reductions in tariffs can be overwhelmed by other measures if the grouping is not careful to avoid them. Such measures include duties and drawbacks on duties on imported inputs; government supports, such as tax credits and subsidies; procurement procedures; treatment of revenue tariffs: and dumping Rules covering each of these areas will need to be developed and understood

THE LONG AND WINDING ROAD AHEAD FOR AFTA

61

The backbone of AFTA is the concept known as the Common Effective Preferential Tariff. The CEPT scheme calls for ASEAN member states initially to harmonize internal tariffs to 20 per cent (or less) within a time frame of five to eight years. Each member state decides upon its own schedule for reduction, with a suggested annual rate of reduction through the formula (X- 20 per cent/5 or 8) depending on the country, where X represents the existing tariff rate. A schedule for tariffs already below 20 per cent should be determined by the country and announced at the onset of the programme. The concept is sound in ensuring a uniform tariff of 20 per cent at a given time. The agreement is vague on how to phase out tariffs of less than 20 per cent. The lack of definite guidelines allows low-tariff countries (those with existing tariffs of 20 per cent and below) eight years before further reducing tariffs to five per cent or zero. In contrast. high-tariff countries will not automatically enjoy concessions on a product until its tariff is dropped to 20 per cent despite its compliance to the CEPT formula of tariff reduction. The resultant effect becomes discriminatory to higher-tariff countries while treatment is uncertain to low-tariff countries. There is a need to make tariff reduction guidelines more definite and clear so that no gray areas are left to the interpretation of individual member states upon implementation. Clarification is also needed for the definition of the agreed upon "accelerated reductions" in I 5 broad industrial product groupings 7 These I 5 groupings comprise about one-half of total tariff lines in manufacturing. At present. there is no consensus among the member states as to what exactly "accelerated" means. Does "accelerated" mean: (I) reduction of tariffs to zero or five per cent in less than I 5 years; (2) faster rate of reduction in the first few years which goes to zero to five per cent over I 5 years; (3) countries with tariffs of less than 20 per cent in these products will begin by reducing only these items immediately; or (4) the first batch of reductions to be acted upon? There is again a need to agree on a clear definition of what accelerated means and an evaluation of options available, as some member states are already talking about not offering some of these I 5 selected commodity groupings.

The exclusion list and safeguard measures Another critical area will be how the ASEAN countries avoid the "number game" in implementing tariff cuts and internal trade expansion.

62 AFTA: THE WAY AHEAD

The experience of the Preferential Trading Arrangements serves as a clear warning. A large number of trade preferences were exchanged under the PTA, but most of the items had little relevance to intra-ASEAN trade, and the margins of preference were set mostly at 25 per cent, a rate too low to be effective. Along with the increased number of items included in the PTA, the exclusion list became very lengthy, limiting the trade expansion effect of the PTA. In order to avoid the weakness of the PTA experiences, as mentioned earlier, AFTA enumerated the 15 industrial product groupings for immediate consideration. The inclusion list consists of six-digit items. This is a great improvement over the PTA since six-digit items are well defined. The exclusion list, on the other hand, is specified at the eight- and nine-digit HS classification. It has been decided that the new exclusion list should be temporary and an improvement over the exclusion list under the PTA. But the eight- and nine-digit level represent country classifications which are not harmonized. This means that exclusion lists will be difficult to compare Moreover, member states are supposed to examine the exclusion lists after eight years, which is a very long time. ASEAN may have to come up with a common eight- and nine-digit classification so that items excluded and included are comparable. Every effort should be made to limit the number of items on the list. Emergency measures are likewise needed to protect firms from injury caused by massive flows of imports and to allow some industries more time to make necessary adjustments. Decalage or "getting out of step" may be necessary to add flexibility to the implementation of AFTA and CEPT. 8 However, the emergency measures specified in the AFTA agreement do not give specific timetables for phasing out these safeguards and place limitations on the use of the safeguards. It is necessary that some limitations for use of safeguards be set; having a clear rule will give domestic industries a timetable to improve their efficiency Industrial co-operation should be expanded and linked more closely with trade co-operation. One problem is that the links between investment and trade under AFTA have been left vague. The vagueness of the linkage between industrial co-operation leaves much to be desired in terms of concrete proposals for facilitating such linkages.

Dispute settlement With the anticipated increase in intra-ASEAN trade and increased economic interaction, it is inevitable that disagreements concerning the

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63

interpretation of rules and regulations will arise. Since the ASEAN way has been consultative and is less amenable to a legalistic framework, the time has come for ASEAN to develop a formal dispute settlement with a transparent mechanism, so that obligations of participating members are clear.

AFTA-plus Probably the single most important factor will be the extent to which member countries recognize that a successful free trade area requires going beyond the traditional definition of a free trade area. Since many experiences have proven that cutting tariffs alone is not effective, AFTA should go beyond a free trade area to include non-border issues of economic co-operation and integration, creating "AFTA-plus". The effectiveness of tariff cuts depends on other complementary measures, ranging from non-tariff barriers (NTBs) to investment policies, industrial co-operation, and macroeconomic consultation, all of which should be included in AFTA-plus. Under AFTA-plus, attention should be paid to such issues as trade-related investment policies (TRIMs); product standards and other technical barriers; and trade-related intellectual property rights (TRIPs), including patents, copyrights, and trade marks. This would align ASEAN co-operative efforts with multilateral integration under GATT, which is also tackling these issues at the Uruguay Round. Dealing with quantitative restrictions will be another key challenge for AFTA. In the January 1992 Agreement on the CEPT scheme for AFTA, Article 5, Section A, which deals with "quantitative restrictions and non-tariff barriers", contained vaguely worded sentences. The AFTA agreement's slim coverage of such a large issue (about 40 words in total) may lead to problems if some of the ideas are not fleshed out more thoroughly and monitored in their implementation

V. Conclusion The commitment of the ASEAN nations to set up AFTA is impressive and should be applauded. The Singapore Declaration and the Agreements on the CEPT for AFTA do include statements on most of the issues discussed from investment issues to non-tariff and non-border

64

AFTA: THE WAY AHEAD

areas. However, implementation is not spelled out; the Singapore Declaration establishing AITA remains very vague. Many of these issues, for example rules of origin, content requirement. rules of competition, exclusion list, safeguard measures, and dispute settlement, require careful preparatory work. Other issues such as reciprocity should also be considered. In theory, reciprocity is not necessary because comparative advantage shows that a country can get welfare gains by unilateral tariff reductions. In practice, however, trade negotiations such as GATT, EC, and NAFTA use reciprocity as a basic guiding principle, though it is not explicitly required Politically, it is common to assume that tariff and other barriers would be reduced on a mutual and equivalent basis. For example, the present systems may allow low-tariff countries to stall in their tariff reductions and in any case, higher-tariff countries may not be eligible to receive preferences for certain products if their tariffs are higher than 20 per cent even if they are in the process of reducing their tariff rates. Moreover, Singapore has virtually no tariffs to reduce and should come up with other concessions to be able to reciprocate tariff reductions being offered by other countries. Singapore can offer other concessions in the areas of services such as telecommunications links and management expertise, or provide additional support for logistical or statistical activities, possibly additional funding for the ASEAN Secretariat to maintain the free trade area. Singapore can spearhead the elimination or reduction of non-tariff barriers in ASEAN. In return, Singapore can avail of the markets, labour, and raw materials of its ASEAN partners. In conclusion, there are many technical matters requiring immediate attention, but these problems can be solved. And the ASEAN working committees have been meeting to accomplish these tasks It is also time for an expert group to support the effort and examine the technical problems presented earlier, including government procurement issues, industrial standards and safety regulation, investment rules and regulations, rules governing competition such as antitrust laws, subsidies and duty drawbacks, and co-ordination of macroeconomic and exchange rate policy among member countries, among others. It is timely and appropriate that an ASEAN Experts' Convention be held to reach consensus and adopt the necessary agreements to implement ASEAN's "Free Trade Area Plus". Given the strong political commitment to move forward, the "bold and innovative" concept of AFTA and attention to important

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65

technical issues at such an ASEAN convention, ASEAN will definitely move forward in its plans for regional integration. Perhaps most important of all, AFTA will allow ASEAN to act more as a group in regional and international fora in pursuing mutual interests as well as in playing a leadership role. By speaking with one voice in the Asia-Pacific Economic Co-operation process, for example, the clout of ASEAN more than proportionately increases. Moreover, the most important negotiations affecting ASEAN today relate to the ongoing Uruguay Round of GATT, as the stakes are very high in preserving the multilateral system of international trade. By grouping together, ASEAN can better advance its cause of freeing international markets in the face of rising protectionism and bilateralism in the West. The Heads of State have already taken the initiative in this regard in the Singapore Declaration by stressing the need for a successful and effective conclusion to the Uruguay Round.

Notes I. For a more detailed background on ASEAN economic co-operation, see John Wong, "The ASEAN Model of Regional Co-operation", in Lessons in Development: A Comparative Study of Asia and Latin America, edited by S. Naya et al. {San Francisco: International Center for Economic Growth, 1989); ASEAN Secretariat, I 0 Years ASEAN (Jakarta: ASEAN Secretariat, 1978); and Seiji Naya and Pearl Jmada, Toward an ASEAN Trade Area (Malaysia: Institute of Strategic and International Studies, 1987). 2. For a discussion of intra-industry trade in ASEAN, see Pearl Imada, Evaluating Economic Integration in Developing Countries (Ann Arbor: UMI, 1990). 3. Pearl Imada, Manuel Montes, and Seiji Naya, A Free Trade Area: Implications for ASEAN (Singapore Institute of Southeast Asian Studies, 1991 ). 4. In the European Free Trade Association (EFTA) and the Australia-New Zealand agreement, at least 50 per cent of the export price of the goods must represent value added in the area. The U.S.-Canada FTA is somewhat more restrictive and requires that 50 per cent of the value of the materials and that the direct cost of processing be from the area (does not include general overheads and profits). In the free trade agreement between the United States and Israel, it is less restrictive at 35 per cent local content. All of these agreements also require that the last process be done in the region Thus, the ASEAN content requirement of 40 per cent is very reasonable by international standards. Victoria Curzon, The Essentials of Economic Integration Lessons of EFTA Experience (New York. St. Martin's Press,

66 AFTA: THE WAY AHEAD

1974): and Maureen Irish and Emily F. Carasco, The Legal Framework for

Canada-United States Trade (Toronto Carswell, I 987). 5. For a good description of the European Free Trade Association, see Curzon, op. cit 6. For example, EFTA used two criteria: bilateral cumulation and multilateral cumulation. In the case of bilateral cumulation (where only two countries are involved, for example the yarn is made in country A, made into garments in country B, and exported back to country A). it applied a 60 per cent local content requirement (rather than the normal 50 per cent) based on the value of the final product If the processing rule was used, then it was applied in the normal fashion. See EFTA Secretariat, The European Free Trade Association (Geneva: EFTA Secretariat, 1987). In the case of multilateral cumulation, stringent rules should be enforced as it likely results in a higher import content For example, if a good is 20 per cent Indonesian-made, with imports from Singapore accounting for another 20 per cent and imports from Korea accounting for 60 per. cent, then this good should qualify ( 20 per cent Indonesian and 20 per cent Singaporean) as long as at least 40 per cent of the input which is imported from Singapore is Singaporean. A slightly more cumbersome approach (though similar in terms of documentation required) would be to take the local content of the imported input and add that to the national content In the above example, the 20 per cent Indonesian content would be added to the 8 per cent Singaporean content (40 per cent of 20). and therefore would not qualify for it falls short of the 40 per cent cumulative ASEAN content Thus, the use of cumulative ASEAN content requires unambiguous rules that either look at value added or Jowers allowed import content 7. The I 5 product groupings are: vegetable oils, cement, chemicals, pharmaceuticals, fertilizer, plastics, rubber products, leather products, pulp, textiles, ceramic and glass products, gems and jewellery, copper cathodes, electronics, and wooden and rattan furniture (Singapore Declaration, p. 3). 8. Decalage has been partly utilized for PTA and probably will be necessary for the smooth implementation of AFTA. In the PTA, the Philippines and Indonesia were given a longer transitional period (seven years instead of five years) for the implementation of the Third Summit agreements. See Seiji Naya et al., ASEAN Economic Co-operation for the I990s (Manila Philippine Institute for Development Studies, 1992).

Commentary on Chapter 3

Lee Tsao Yuan

l agree with most of the issues that were discussed in Seiji Naya and Pearl lmada's paper. What l would like to do in the spirit of the Roundtable is to add a different dimension to the discussion by comparing the recent AFTA agreement with the proposed North American Free Trade Agreement (NAFTA). I have two broad comments to make. The first is the fact that the proposed NAFTA is much more comprehensive, both in terms of scope of coverage as well as details of the scheme. Briefly, what is actually is covered in NAFTA are: 1. Rules of origin, discussed by the paper. 2. Schedule of tariff reductions. In NAFTA, it is stated that the tariff reductions for most goods would be phased down in five or 10 equal annual stages, and that 65 per cent of U.S industrial and agricultural exports will be eligible for duty-free treatment in Mexico immediately or within five years. For AFTA, there is, as Pearl has mentioned, some ambiguity regarding the schedule of tariff reductions. 3. NAFTA also includes discussions on sanitary and phytosanitary measures, technical standards, safeguards, countervailing duties and so on. These are still rather vague in AFTA. 4. NAFTA opens up markets in terms of government procurement. cross-border trade and services, investments as well as intellectual property, where it is stated that the principle of national treatment will be upheld within the NAFTA countries. For example, the Mexican market for telecommunications will be opened up to American

68

AFTA: THE WAY AH£40

companies This is incorporated in the concept of AFTA-plus that Seiji mentioned, but it is not really discussed in the AFTA agreement itself. 5. Institutional arrangements. In NAFTA, a trade commission comprising ministers will be established, as well as a Secretariat to serve the Commission and other bodies to provide administrative and technical support In AFTA, a somewhat similar institutional structure will exist, with the Council of Ministers established by the AEM, and the ASEAN Secretariat and the SEOM providing support to the Council of Ministers. But I can't quite help having the view that the Trade Commission and the Secretariat in NAFTA will probably be much stronger in terms of their administrative clout than their counterparts in AFTA 6. Dispute settlement procedures Pearl has mentioned that, for AFTA, there really is no dispute settlement process in place at the moment But in NAFTA, this is quite clearly outlined first of all, there will be consultation for about 30-45 days, which can be followed by an appeal to the Trade Commission, and after that an initiation of panel proceedings. So the procedure for dispute settlement is quite clearly laid out in NAFTA, but not yet in AFTA That is my first broad comment In other words, there is already a great deal of coverage in terms of scope, exact details of implementation, etc. in NAFTA My second broad comment is, why is this so? Why is the proposed NAFTA scheme more comprehensive than AFTA? I would like to suggest two reasons. The first is that NAFTA comprises only three countries, two of which already have an FTA agreement - the United States and Canada. So considerable expertise on free trade agreements already exists within the United States and Canada, and it is merely a matter of extending this to Mexico. But AFTA comprises six countries, and free trade agreements are new to the ASEAN region. My second point is to echo what Pearl has already highlighted that there was really a need at the ASEAN Summit to achieve a visible and high profile commitment to increase economic co-operation, for political as well as economic reasons. The framework agreement for the CEPT scheme, which was reached rather late in the day, was really intended merely to lay out the framework rather than to flesh out the details. On the other hand, if we look at NAFTA, we find that both Presidents Bush and Salinas endorsed the concept of a Free Trade Area between the United States and Mexico

COMMENTARY ON CHAPTER 3

69

in June 1990. Their Trade Ministers were directed to begin preparatory work two years ago, and Canada joined the talks in February 1991. Formal negotiations took 14 months from June 1991 to August I 992, and there will probably be more fine tuning before the final text is produced, and even more final tuning before the countries actually ratify this in their various parliaments and congresses. ASEAN has not yet gone through the same kind of formal negotiations in the detail that NAFTA has gone through. Probably what is going to happen in the next few months is precisely this fleshing out of the details on the schedule of tariff reductions, etc. What is also very important in the NAFTA case is that everybody knew that both Presidents Bush and Salinas took direct interest in the progress of negotiations. And because of the fact that it came from the very top, negotiators down the line were under great pressure to come up with something It is important that there be this very high level commitment which is visible, so that the negotiators do actually have the mandate and the commitment to achieve progress in the negotiations. I, therefore, see this as a positive step. We have gone a long way in terms of getting AFTA actually off the ground at the ASEAN Summit Now is the time to go through the detailed negotiations. I like the theme of the paper: that there is a long and winding road ahead. The usual ASEAN style, it seems to me, is three steps forward, one step backward; nevertheless, we will reach the end of our destination.

tfJ

Policy issues and the formation of the ASEAN free trade area

Sree Kumar

I. Introduction In January I 992, at the Fourth ASEAN Summit in Singapore, a framework agreement for the formation of an ASEAN Free Trade Area 1 was signed This called for the ASEAN countries to reduce tariffs on all manufactured items over a I 5-year period. In order to have accelerated tariff reductions, items were to be brought onto a Common Effective Preferential Tariff (CEPT) scheme and enjoy significant margins of preference over five to eight years. Fifteen product groups were identified for accelerated reductions in the CEPT Scheme. The scheme excludes agricultural products and services. Agriculture is expected to continue on the existing Preferential Trading Arrangements (PTA) scheme. The agreement to create AFTA must be seen as one of considerable political will in the wake of less successful ASEAN economic ventures in the past. 2 The initial euphoria over the agreement, however, has become less so in the months following as industries in Thailand and, more recently, in Malaysia have called for greater protection at least in the short term. This has brought into sharp relief the question whether AFTA will actually take shape in the years to come or whether it will falter as the other ASEAN economic efforts have in the past.

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AFTA: THE WAY AHEAD

The recent initial agreement to create a North American Free Trade Area (NAFTA) has been a cause for concern in ASEAN. The possibility of trade diversion resulting from closure of the North American market has made ASEAN more cognizant of the need for a ballast to overcome the loss of some of the trade with North America. Similarly, growing fears about the creation of a European Economic Area (EEA) have been voiced within ASEAN. These developments in ASEAN's traditional markets must now be analysed and understood. More importantly, ASEAN has to seek alternative markets for many of its products Market diversification has to take place in the short term to prevent significant revenue losses as the EEA and NAFTA roll out While the commitment to GATT and multilateralism must be uppermost in the designs of ASEAN, it has to seek a second-best solution for its own short-term survivaL AFTA is seen as this possibility: the creation of a market in its own region. For AFTA to become a reality, ASEAN must now set in motion a series of policies designed to facilitate greater regional trade. These policies cannot be seen in isolation. They must be congruent with investment and industrial polices being pursued by the member countries. In a region that has been dominated by foreign direct investment, much of which has been export oriented, the creation of other trade blocs may result in investment diversion. It is still too early to predict the level of this investment diversion. While ASEAN will continue to be important to many investors because of its productive capabilities, there are already signals for changes in investments resulting from the formation of NAFTA 3 This change in investment flows must be filled by domestic capital within the region. Hence, the backbone for AFTA's survival will be the degree to which domestic capital can replace the decreasing levels of foreign investment in the years to come. In order to offset this potential decline in foreign investments, ASEAN will have to improve and create new "pull factors" such as superior infrastructure, better human capital, and more favourable investment regimes. For this reason, measures to reduce intra-ASEAN trade barriers should not be seen in isolation. It has to be seen in the light of domestic investment decisions and regional capital flows. Thus, changes in trade policies must be consonant with investment co-ordination and industrial policies. Given the changes in the world trading system, ASEAN has to re-appraise and, perhaps, accelerate the implementation of AFTA. Current attempts in forming AFTA may he inadequate given the urgency

POLICY ISSUES AND AFTA'S FORMATION

73

with which other regions seem to be forming regional trading blocs. From a policy perspective, therefore, ASEAN must now accelerate some of the implementation steps set forth at the last summit This paper attempts to identify the bottlenecks which can impede the formation of AFTA and seeks to set forth areas where policy-makers can act effectively to ensure that AFTA becomes reality sooner rather than later. The paper is divided into the following sections: Section II looks at ASEAN's trade and growth in recent years. Section Ill analyses the trade in items on the proposed CEPT scheme and the structure of tariffs. Section IV draws together views from the private sector on the current issues facing intra-ASEAN trade. Section V raises some of the wider issues which must be considered in line with trade policy while Section VI concludes with a brief summary.

11. An overview of ASEAN trade ASEAN's trade has grown by an impressive I 7 per cent over five years to reach US$300 billion in 1990. Of this, the fastest growing trade was with the EC at 23 per cent (Table 4.1 ). However, in overall market share terms, ASEAN's largest trading partner was East Asia, which took up 34 per

TABLE 4.1 ASEAN Trade, 1985 and 1990

1985

1990

Growth(%)

EC Rest of the world Total

19.7 33.8 11.5 16.2 100.0

17.7 34.4 14.8 15.0 100.0

14.8 17.7 23.4 15.5 17.3

US$ billions

135.5

301.6

-~-------

Breakdown by region (%) lntra-ASEAN East Asia

Sources: IMF, Direction of Trade Statistics 1991; Taiwan, Republic of China, Trade Statistics 1991.

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AFTA: THE WAY" AHEAD

cent of total ASEAN trade in 1990. Trade with North America and the EC were comparable at about 18 and 15 per cent, respectively. Japan is the leading trade partner of the region from within East Asia. The interesting feature of ASEAN's trade was the marginal decline in the share of intra-ASEAN trade although in absolute terms it has grown by 15 per cent It is clear that if NAFTA and the EC become more trade restricting, then ASEAN will have to seek new markets and improve its share of trade with the rest of the world, within itself, or in the East Asian region. If indeed the external markets of the region are difficult to penetrate and if East Asia becomes preoccupied with its own accessibility to the North American market, the region will have to significantly increase intra-ASEAN trade to offset some of the losses incurred. In fact the East Asian preoccupation with NAFTA may act to spur intra-ASEAN developments as countries in the region grapple with changes in capital flows. As Table 4.2 shows, the major growth in total (export and import) intra-ASEAN trade over the last five years came from Thailand, Malaysia and Singapore respectively. Singapore continues to be the largest contributor to intra-ASEAN trade followed by Malaysia. This pattern has not changed over the last few years. Of more concern is the decline in market share of intra-ASEAN trade for Indonesia and the Philippines While there was growth in intra-ASEAN trade in absolute terms, each country, with the exception of Brunei, has had a secular decline in the proportion of its intra-ASEAN trade share compared to its overall trade with the world (Table 4.3). These trends have to be reversed if AFTA is to become an effective instrument in taking up the losses from trade diversion elsewhere. It is also apparent that most ASEAN states have now become more dependent on the European Community and East Asia as trading partners although NAFTA has become more important to Malaysia and Thailand. No doubt these are the results of the flood of foreign direct investments to Malaysia and Thailand when they liberalized and implemented favourable foreign investment measures in the mid-1980s. Nevertheless, taken as a whole, ASEAN trade relationships are dominated by East Asia (especially Japan), North America, and the EC. The secular decline in trade with the rest of the world is cause for concern particularly if the EC and NAFTA become more protective in the years ahead. Viewing this as a backdrop to ASEAN's trade relationships, it is now clear that ASEAN has two clear choices ahearl The first relates to its

POLICY ISSUES AND AFTA'S FORMATION

75

TABLE 4.2 Total lntra-ASEAN Trade, 1985 and 1990

1985

1990

Growth(%)

Singapore Thailand Total

3.0 11.0 25.2 4.9 45.6 10.2 100.0

2.1 8.1 26.4 3.5 47.1 12.8 100.0

6.7 8.0 15.9 7.2 15.6 20.1 14.8

US$ billions

26.7

53.3

Breakdown by country (%) Brunei Indonesia Malaysia Philippines

Note: Singapore-Indonesia trade figures obtained from Trade Statistics 1990, Indonesia. Sources: IMF, Direction of Trade Statistics, 1991; Taiwan, Republic of China, Trade Statistics, 1991. commitment to GATT and multilateralism so that. at the least, its existing markets will not shrink The second must be its concerted effort at developing its own regional market As a first step in this direction. the product groups on the CEPT need to be analysed and their impact evaluated. The next section looks at the CEPT product groups and the tariff structure underlying intra-ASEAN trade in those items.

Ill. CEPT scheme and structure of tariffs At the ASEAN Summit in January 1992. 15 product groups were designated to be on the CEPT Scheme for accelerated tariff reductions. These product groups are listed in Table 4.4. Clearly these product groups embrace a large number of individual items and consist of varying tariff rates. Nevertheless. if a broad categorization of all these items is taken. a rough estimate of the intra-ASEAN trade in these items can be made On this basis. the total intra-ASEAN

TABLE 4.3 ASEAN Trade Share, 1985 and 1990 (Percentages)

ASEAN East Asia NAFTA EC Rest of the world Total US$ billions

Brunei

Indonesia

Malaysia

Philippines

Singapore

Thailand

28.4 (22.8) 39.7 (58.1) 6.1 (8.8) 20.3 (3.1) 5.5 (7.2) 100.0

9.1 (10.2) 48.9 (46.7) 13.7 (20.8) 15.0 (8.0) 13.2 (14.2) 100.0

24.0 (24.3) 31.7 (33.6) 17.9 (14.8) 14.8 (14.4) 11.6 (12.9) 100.0

8.7 (13.1) 32.9 (28.6) 28.3 (31.3) 13.8 (11.1) 16.3 (16.0) 100.0

22.1 (24.8) 28.6 (26.8) 19.3 (18.5) 13.6 (11.0) 16.4 (18.8) 100.0

12.0 (16.6) 36.6 (30.6) 17.0 (16.4) 17.2 (16.6) 17.1 (19.8) 100.0

3.9 (3.5)

47.6 (28.9)

58.7 (27.7)

21.1 (10.0)

113.7 (49.0)

56.5 (16.4)

Note: Figures in parentheses refer to 1985. Singapore-Indonesia trade figures obtained from Trade Statistics 1990, Indonesia. Sources: IMF, Direction of Trade Statistics, 1991; Taiwan, Republic of China, Trade Statistics, 1991.

POLICY ISSUES AND AFTA'S FORMATION

77

TABLE 4.4

CEPT Product Groups Vegetable Oils Cement Chemicals Pharmaceuticals Fertilizer Plastics Rubber products Leather products Pulp Textiles Ceramic and glass products Copper cathodes Electronics Wooden and rattan furniture Source: Singapore Declaration, 1992, ASEAN Summit.

trade in CEPT items was about US$9.3 billion in 1990 (Table 4.5). This translates to around 37 per cent of total intra-ASEAN imports in that year. Furthermore. if CEPT trade is set against total ASEAN imports from around the world, it would appear minuscule at about six per cent. Not surprisingly, the largest contributor to CEPT trade is Singapore which sustains welt over half of such trade. This is a pattern which is similar to overall intra-ASEAN trade. Detailed examination of CEPT trade at a broad level of definition for the items in each product group indicates that the largest contributors to such trade are textiles and electronics (Table 4.6). This should not be a surprise as these are two areas of export-oriented production in which the region has been specializing. The interesting feature of this. however. is that the largest supplier of both products to the region is Malaysia, with the largest absorber being Singapore. This implies that Malaysia-Singapore trade is the linchpin of CEPT trade as it is currently

78 AFTA: THE WAY AHEAD

TABLE 4.5 CEPT Import Trade, 1990 CEPT imports (US$ mn)

lntra-ASEAN imports (US$ mn)

As% of intra-ASEAN imports

Thailand

331 1,160 215 6,851 744

1,812 5,482 1,258 12,272 4,164

18.3 21.1 17.0 55.8 17.8

Total

9,301

24,988

37.2

Indonesia Malaysia Philippines Singapore

Note: Singapore-Indonesia trade figures obtained from Trade Statistics 1990, Indonesia. Sources: Based on 1990 trade statistics of the ASEAN countries.

constituted. It is likely that the crucial Malaysia-Singapore trade link will continue to be pivotal to regional trade. Singapore's access to shipping lanes and the rapid throughput in its physical infrastructure will have a dominant role in trade emanating from, and destined for, other parts of the region. Table 4. 7 gives the structure of CEPT trade as it was in I 990. A more pertinent question which arises is why intra-ASEAN CEPT trade amongst the other, partners, excluding Singapore, is small? As can be seen from Table 4.7, in almost all cases, CEPT trade excluding Singapore is less than three per cent for each member country. It may well be possible that such inter-country trade actually takes place through Singapore. Nevertheless, there is a fundamental issue as to whether such intraregional trade is being constrained by tariffs, other restrictions, lack of transportation channels or even competition with nonASEAN countries. On an overall ASEAN basis, the average tariffs, after applying the relevant maximum margins of preference offered by each country, range from a low of zero per cent for fertilizer into Indonesia to a high of 80 per cent for furniture imports into Thailand It is readily discernible from

TABLE 4.6 CEPT Exports: lntra-ASEAN, 1990 (In US$ millions) From Product Pulp Textiles Vegetable oils Chemicals Pharmaceuticals Fertilizer Plastics Leather Rubber Cement Glass, Ceramics Gems, Jewellery Electronics Furniture

Brunei

Indonesia

Malaysia

Philippines

Singapore

Thailand

Total

0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.2 0.1 0.0 0.0 0.0 0.5 0.1

12.3 396.4 17.7 31.1 4.2 94.2 37.1 2.1 11.5 35.6 20.5 15.5 39.0 11.1

2.7 2,008.4 359.9 61.7 20.5 38.4 43.5 3.1 34.1 41.6 44.4 0.2 2,872.0 53.1

0.0 4.6 7.4 37.2 4.6 49.7 2.5 0.2 2.2 0.0 5.0 0.4 149.8 0.9

8.2 95.2 30.9 197.8 20.5 9.8 349.6 2.8 20.8 12.8 19.2 9.2 878.9 1.5

0.9 59.4 1.7 27.3 8.6 2.7 25.3 7.4 25.6 0.7 13.3 10.9 874.1 7.8

24.1 2,564.0 417.5 355.2 58.3 194.9 458.0 15.7 94.3 90.7 102.4 36.2 4,814.3 74.5

Sources: Based on 1990 trade statistics of ASEAN countries.

TABLE 4.7 Structure of lntra-ASEAN CEPT Trade, 1990 To

Indonesia

Malaysia

Philippines

Singapore

Thailand

Total

1.2

0.8

5.1

0.7

7.8

0.2

58.0

1.4

60.0

1.6

0.7

2.8

5.2

17.8

-----

From(%) Indonesia Malaysia

0.4

Philippines

0.4

0.2

Singapore

2.5

9.1

1.1

Thailand

0.3

2.1

0.2

8.9

Total

3.6

12.5

2.3

73.7

8.0

100

US$ mn

331

1,160

215

6,851

744

9,301

Sources: Based on 1990 trade statistics of ASEAN countries.

11.5

POLICY ISSUES AND AFTA'S FORMATION 81

TABLE 4.8 Average Unweighted Tariffs with Margins of Preference for Selected Items (Percentages)

Pulp Textiles Vegetable Oils Chemical Pharmaceuticals Fertilizer Plastics Leather Rubber Cement Glass Gems Electronics Furniture Average

Indonesia

Malaysia

Philippines

Thailand

Average

9 19 13 4 5 0 15 3 9 15 20 11 24 50 14

3 6 1 0 0 0 13 9 8 55 15 5 15 24 11

7 26 21 7 9 3

5 30 10 10 8 0 25 24 22 5 18 0 25 80 19

6 20 11 5 5 1 18 14 15 26 18 10 21 47 16

17

19 23 30 20 24 18 33 19

Sources: Tariff and customs documentation, various ASEAN countries.

Table 4.8 that each country has sectors which it attempts to protect through higher tariffs. The unweighted country averages show that Philippines and Thailand are the most protected followed by Indonesia and Malaysia. If. for reasons of argument. 20 per cent is taken to be the average cutoff rate for protection of domestic industries. it is apparent that very few CEPT items are actually being protected by each country. At this average rate. Malaysia protects cement and furniture; Philippines protects six product groups- cement. furniture. textiles. vegetable oils. rubber, gems and jewellery; Indonesia protects electronics, furniture and glass products. and Thailand protects six groups - textiles, plastics, leather. rubber. electronics and furniture

82 AFTA: THE WAY AHEAD

In generaL it is difficult to discern any direct relationship between the levels of trade and the tariff rates currently being applied. However, it can be noted that, overalL the level of tariffs is not high enough to significantly restrict trade. In fact, studies have found that the level of tariff redundancy is such that tariff reductions may not increase import demand significantly (Langhammer 1988). A more cogent argument for improving intra-ASEAN imports may hinge on the co-ordination of monetary policy which will reduce the divergence amongst the various exchange rates within the region since this can, to some extent, affect tariff redundancy. It has to be remembered that a number of ASEAN countries had undervalued currencies in the past so that exports could be encouraged. This then raises other structural issues relating to factors which have actually impeded cross-border trade amongst the ASEAN neighbours

IV. Views from the private sector In order to obtain the views of the private sector on the implementation and impact of the CEPT Scheme, I 5 interviews with trading companies and manufacturers were done in Kuala Lumpur, Singapore and Jakarta. Of these, four were multinational corporations from outside the region while the others were regional companies. All the companies had business dealings in the products which have been slated for accelerated tariff reductions on the CEPT scheme. This section does not attempt to generalize but merely to show some of the possible impediments to the formation of AFTA Confidentiality prevents the disclosure of the companies which participated in the survey.

Lack of information Lack of information on the nature of the CEPT scheme, in generaL and the manner in which AFTA is to come into existence were commonly voiced sentiments. While the details of the CEPT scheme were being discussed and finalized at the bureaucratic level, less information has been forthcoming to the parties who would eventually be affected by the changes in tariffs - the manufacturers and trading companies Although most of the companies were in favour of tariff reductions, they

POLICY ISSUES AND AFTA'S FORMATION

83

were not convinced that tariff reductions would. by themselves. result in greater intra-ASEAN trade. Besides the existence of non-tariff barriers (NTBs) to trade. other reasons for this view were (I) the lack of market sophistication; (2) inelastic demand for products which were reputable and of high product quality; and (3) that major markets continue to be outside the region. Overall. the interviews indicated a general sentiment that the attempts to form AFTA were not credible given the recent calls for protection in selected industries in Thailand and Malaysia.

Non-tariff barriers These were stated to be the single most important deterrent to increased trade amongst the ASEAN countries. These include standards testing procedures. customs classifications and valuation procedures, subsidy schemes for domestic producers and purchasers. local content rules. and health and safety standards. Most of these non-tariff barriers are Type II NTBs as classified by UNCTAD. that is measures which are not directly related to commercial policy but which are intentionally employed to restrict imports or to stimulate exports. Customs practices often hinge on inefficiencies. long bureaucratic procedures and attempts at "rent-seeking" by authorities. Many of these structural impediments to intra-ASEAN trade have effectively dissuaded many exporters from increasing exports of a multitude of items within the region. In some cases. Type I NTBs such as licensing requirements and monopoly positions of state trading companies have been instrumental in preventing the expansion of trade. Some cases of NTBs are discussed below. Case A: Standards testing procedures (Thailand) The company exports sophisticated electronic instruments to a number of countries within the region. Although tariffs on electronic items are high in Thailand. the real impediment to increasing exports is the testing procedure by the authorities. Three different ministries are involved in this exercise. The first ministry considers applications and gives a three-month probationary period during which the second ministry processes and tests the equipment. The second stage may often take longer than three months and this leads to the whole process being declared null and void since the testing exceeds the probationary

84 AFTA: THE WAY AHEAD

period. So, the item goes back into the queue at the first ministry and the whole cycle repeats itself. After numerous experiences of this sort. the company has disbanded any attempt at increasing its sales in Thailand.

Case B: Distribution channel restrictions (Indonesia) A producer of vegetable oils has plants in various ASEAN countries. Only licensed importers are allowed to distribute vegetable oils within Indonesia. The distributor in Indonesia had to undertake intensive lobbying and pay-offs to obtain licences for the import of vegetable oils from other ASEAN countries. This raises the overall cost of imports, delays market access, and reduces competitiveness when the item is eventually brought into the market. The producer, therefore, has not attempted to pursue further market expansion since the costs of doing business in Indonesia far outweigh the benefits from the marginal increases in market share. Case C: Customs classification (Malaysia) An exporter of semi-processed chemicals had difficulties in classifying its products. Customs authorities at the point of entry had often reclassified the products and thereby subjected them to higher tariffs Subsequently appeals were lodged and waivers obtained. Nevertheless, these ad hoc measures had caused numerous delays in supplying their customers in the different industrial zones in Malaysia.

Domestic regulations Domestic regulations were singled out as being effectively restrictive in promoting trade with other countries in the region. These include local investment regulations which prevent the use of one country as a base from which to service another. For example, Malaysian Government restrictions do not facilitate the use of industrial areas in Malaysia as a base to serve markets in Thailand. Industries which are export-oriented have to use bonded warehousing, and the bureaucratic procedures for movement of goods, including spare parts, are so cumbersome as to make the operations uneconomical. A major manufacturer of electronic testing equipment. therefore, had to locate its service facility in Singapore rather than in Penang to service its customers in the Bangkok area

POLICY ISSUES AND AFTA'S FORMATION

85

despite locational disadvantages. This highlights the divergence in trade and investment policies which must be overcome if greater cross-border transactions are to take effect.

Subsidy schemes In some essential sectors, subsidy schemes have distorted market prices significantly such that entry of other ASEAN producers has been curtailed. In Indonesia, fertilizers are subsidized heavily by the government based on the needs of the user rather than on the size of the buyer Although the scheme tends to favour small-scale users, it is often difficult to distinguish between the different buyers. The net effect of this is that more sophisticated manufacturers in other ASEAN countries find it cheaper to buy in the Indonesian market than to produce elsewhere and sell there. As this example illustrates, the spillover effects of income and industrial policies may have an untoward impact on trade. Just as trade policies cannot be seen in isolation, the same argument holds for income and investment policies. These examples of non-tariff barriers to trade in ASEAN are not new. Previous studies have shown the extent and depth of such barriers in the various sectors (Rahman and Mansor I 987; Ooi I 987; Lutkenhorst 1984). Unless wide-ranging steps are taken to remove non-tariff barriers in line with the tariff reductions, overall intra-ASEAN trade and investments may not increase significantly. In fact. ASEAN may have to consider the wider implications of AFTA and act on all fronts to ensure that the formation of AFTA can proceed smoothly. The next section addresses some of the issues surrounding the formation of AFTA, the implementation of the CEPT scheme, and highlights the policy implications of these issues.

V. Some policy issues The previous sections have highlighted the probable inadequacy of tariff reductions alone for improving intra-ASEAN trade. Commitment toward the creation of AFTA must now be maintained without losing its direction. At the implementation leveL a number of technical issues have been highlighted as potential bottlenecks (Pangestu et a!. 1991)

86 AFTA: THE WAY AHEAD

Nevertheless, from a policy perspective there are clear directives needed for improving regional trade. These are not limited to commercial policies. A wider perspective must now be taken by all concerned if AFTA is not to suffer the ignominy of failure. Some of these policy issues are discussed in the following paragraphs.

Non-tariff barriers An unwavering commitment to removing non-tariff barriers is now essential if AFTA is to become reality. The ASEAN Summit in Singapore called for a discussion of NTBs at the next summit, Further, recognizing the importance of non-tariff and non-border areas of co-operation to complement tariff liberalization in increasing regional trade and investment, ASEAN shall further explore co-operation in these areas with a view to making recommendations to the Fifth ASEAN Summit (Singapore Declaration of 1992, ASEAN)

While this is a commendable step, it does not address the problem of NTBs which exists today and has inhibited trade in items on the Preferential Trading Arrangements. NTBs must be redressed in this phase of implementing the CEPT rather than just become an issue for discussion at the next summit Unless policy-makers are prepared to remove some of the more obvious Type II NTBs which plague intraASEAN trade, tariff reductions by themselves may not achieve the targets hoped for. A complementary NTB reduction plan must now be worked out amongst the member states and applied concurrently with tariff reductions on the CEPT scheme. These may have to be monitored and enforced by the member countries through a sound and credible mechanism. Current committee structures such as the Committee on Tourism and Trade may, therefore, have to be empowered with these enforcement capabilities or new institutional mechanisms may have to be designed with such capabilities. A first step in reducing the potential for NTBs would be to standardize technical product specifications across the different countries. Harmonizing technical standards or adhering to a given international standard will remove the ambiguities associated with product classification, and reduce the potential for uncertainties in valuation. The role of the standards testing authorities should, therefore, now be the prime

POLICY ISSUES AND AFTA 'S FORMATION

87

focus in ensuring consistent standards amongst all the member states. Rather than lowering standards, ASEAN member countries should attempt to reach the quality, health and environmental standards of the member with the highest levels, over a period of time. This will allow industries to upgrade in a phased manner. The key consideration in harmonizing standards is the pace of reform. For greater trade linkages, these technical reforms must be accelerated somewhat. Alternatively, companies may choose, in the short term, to produce items for each segmented market in the region according to the specifications set by the authorities in each country This would be similar to the agreement reached in NAFTA.

Items on the CEPT There is the wider question of whether the current list of product groups being granted accelerated tariff reductions is adequate As was shown previously, although total CEPT trade on a broadly defined basis is a respectable portion (37 per cent) of intra-ASEAN trade it excludes a number of other more highly traded items. It can, therefore, be argued that the list be widened considerably or, alternatively, a list consisting of the more highly traded intra-ASEAN items be formulated and applied A quick scan of the largest imports amongst the ASEAN states in 1990 (Table 4 9) indicates that some agricultural products such as sugar and fish, and other products such as iron and steel, petroleum and vehicles should also be included if the impact on intra-ASEAN trade is to be significant. A more effective way of identifying items which should be subjected to accelerated tariff reductions, and which will have a potential impact on intra-ASEAN trade, would be to evaluate items which do not suffer large, positive tariff redundancies, or to conduct an analysis of the effective protection of the different items. Items which suffer high, positive tariff redundancies will require substantial tariff cuts in the wake of depreciating currencies if the impact on trade is to be significant. A further technique which can be used is incidence analysis which will allow the impact across industries to be analysed (Greenaway 1988) Incidence analyses should help in the sequencing of tariff cuts so as to mitigate its effects across the different industrial sectors. While the different analyses may indicate a group of products which can significantly

88 AFTA: THE WAY AHEAD

TABLE 4.9 Some Large lntra-ASEAN Imports, 1990

Petroleum and petroleum products Iron and Steel Electronics* Vegetable oils and fats* Paper and paper products Textiles* Cereal preparations Fish Sugar, molasses and honey Motor vehicles Plastics* Inorganic chemicals* Fertilizers* Electrical machinery Note: Asterisks indicate items which are on the CEPT list. Sources: Based on 1990 trade statistics of ASEAN countries.

shift intra-ASEAN trade patterns, it is clear that the CEPT scheme must widen its scope considerably and include agricultural products as well if it is to become more effective. Hence, the current product-by-product attempts at tariff reductions may be inadequate and could also cause significant distortions across sectors since changes in one industry may have repercussions in others (Thomas et al. 1990) It would, therefore, be preferable to have sector-by-sector tariff reduction on the CEPT scheme if overall distortions are to be avoided.

Tariff reform The manner in which tariffs are being reduced may also have to be assessed if revenue losses are to be minimized The aim of tariff

POLICY ISSUES AND AFTA'S FORMATION

89

reductions must be to achieve low overall protection and improve production efficiencies. However, this has to be subject to revenue constraints. The CEPT scheme attempts to have a "radial" reduction of tariffs by reducing them to a fraction of the previous level at each step This may have to be accelerated by applying a "concertina" approach as well in which the top rates are collapsed to the next highest level at each stage (Thomas et al. 1990). Such combined efforts may achieve greater uniformity and prevent revenue losses in the short term.

Industrial policies Commercial policy, while being important, cannot be applied in isolation (Baldwin 1988). Industrial policies pursued by member countries in ASEAN must be appraised critically and jointly if industrial restructuring and redistribution are not to become politically cumbersome. The fact that ASEAN countries are competitive was a major reason for the economic vibrancy of the region. Thus, while the competitive element should not be diluted, the need for an orderly and phased industrial redistribution cannot be disregarded. This is not to argue for selective industrial intervention, merely that ASEAN governments should be aware of the impact of tariff reductions on their respective industrial sectors. A loose forum for discussing and understanding the changes in the industrial structures of the different countries must, therefore, be uppermost in the designs of policy-makers. The existence of high tariffs in different sectors may well have resulted in cross-border investments so that companies could produce and sell in those protected markets. The size of the market and the oligopolistic nature of firms may actually foster greater cross-border investments in the wake of high trade barriers (Rowthorn 1992). Thus, as NTBs are removed and tariffs reduced, industries may relocate to areas where the relative factor endowments are most suited for that particular production process. If this happens across many industries, there could be industrial restructuring in the medium-term. For this reason, ASEAN cannot afford to ignore investment policies being pursued by the member countries while creating AFTA Previous studies have shown that AFTA itself may have limited gains in total trade but if it is co-ordinated with investment and industrial co-operation, the gains are likely to be higher (lmada eta! 1991)

90 AFTA: THE WAY AHEAD

Exchange rate policy While there is no conclusive evidence on the level of tariff redundancies in ASEAN, the limited success of the PTA scheme would tend to indicate that positive tariff redundancies do exist to a large extent (Langhammer 1988). Positive tariff redundancy implies that nominal protection exceeds the difference between domestic and international prices. The level of tariff redundancy is also a function of the exchange rates. If the exchange rates in ASEAN continue to depreciate against a regional anchor currency, then tariff redundancy would increase and reduce the impact of tariff cuts. Similarly, the impact of domestic inflation on tariff cuts is difficult to predict. In situations with positive tariff redundancy, high inflation could reduce tariff redundancy if exchange rate adjustments are prevented by government intervention. Alternatively, if the exchange rate realigns freely, then tariff redundancy would increase. There is, therefore, a degree of uncertainty associated with tariff cuts in the presence of varying rates of inflation and depreciating currencies amongst member countries. These factors which affect relative prices in the different member countries must be understood in light of tariff reductions if AFTA is to succeed. This means that economic linkages through trade can be more effective if co-ordinated monetary polices are also pursued by the member countries. The simple notion that tariff reductions will bring about a worsening of the balance of payments position is now being questioned (Ostry 1991 ). For developing countries, the impact of trade liberalization could be ambiguous depending on the structure of the economy and the nature of investments. Thus for ASEAN with its diverse economies, the overall impact of trade liberalization in each country could be difficult to predict.

Institutional requirements If the CEPT scheme is to become effective, there must be an institutionalized enforcement and dispute settlement procedure which is objective and unbiased. Lessons in this are apparent from the recently concluded North American Free Trade Agreement. In its case, a final arbiter of trade disputes has been formed from outside the bureaucracy. This is similar to the procedure adopted for the prior U.S.-Canada Trade Agreement (Whalley 1992) The institutional mechanism for monitoring, dispute

POLICY ISSUES AND AFTA'S FORMATION

91

handling and enforcement will be essential if NTBs are to be dismantled and the private sector be given a recourse for settling outstanding cross-border trade issues. Member governments must be willing to delegate such responsibility and powers as needed to the constituted body if unfair practices are not to jeopardize the formation of the free trade area.

VI. Conclusion The creation of AITA seems a necessary development in light of the changes in the world economic order. The wider question that ASEAN should address is the cost it is willing to bear in order to forge a free trade area. If the costs of AFTA far outweigh the benefits from increasing ASEAN's trade with the rest of the world through increasing investments from abroad, then ASEAN must continue acting on a common front to ensure access to its largest markets, improve the regional investment climate, and raise the overall international profile of the region through various political and economic institutions. The need for a multilateral approach to improving global and regional trade must. therefore, be uppermost in the efforts expended by ASEAN. This is not to detract from the creation of AFTA. Until such time that AFTA can become an important element of intra-ASEAN trade relations, the urgency for multilateralism cannot be disregarded. Nevertheless, these thrusts can change significantly if ASEAN can now overcome some of its nationalist sentiments and set about dismantling the different barriers to cross-border trade and investments. This signalling effect can have significant impact on the participants that matter- investors and consumers. There is, therefore, an imperative to address intra-ASEAN issues on a larger perspective if the gains from greater economic linkages are to accrue more equitably across all the member countries. The need for a wider approach to addressing trade issues in ASEAN has been discussed at length in previous studies (Devan 1987; Pangestu et a!. 1991). This paper has highlighted some of the policy issues which need to be addressed if AITA is to come into existence in the years ahead. The current proposed items on the CEPT list should be increased considerably if the scheme is to have a more significant intra-ASEAN impact. This is because of the generally low levels of regional trade, in

92 AFTA: THE WAY AHEAD

the first place, and an even lower proportion of trade when items on the CEPT are considered. A more profound effect on intra-ASEAN trade can be achieved if nontariff barriers to trade are dismantled concurrently with tariff cuts on a wider spectrum of goods. The present approach of a product-by-product tariff reduction may have distortionary effects on the other sectors of the economy. In order to overcome such distortions it may well be necessary to pursue a sector-by-sector approach. This also has to take into account the manner in which tariffs are reduced. A combination of radial and collapsed tariff reductions would be far more effective in minimizing revenue losses while improving productive efficiencies. A more pressing issue which has to be understood m the ASEAN context is the level of tariff redundancy Unless tariff redundancy is reduced, the impact of tariff reduction, even when NTBs are removed, could be negated somewhat. Tariff redundancy is also closely tied to exchange rates and, hence, the need for greater co-operation on monetary policies within the region becomes salient. This brings forth the need for policy-makers to address trade issues using both commercial and exchange-rate policies. The creation of a free trade area also entails industrial restructuring and redistribution. As investments flow to the areas with the highest returns and the most favourable factor endowments, traditional industrial zones in the different ASEAN countries may encounter some hollowing out. This process of change has to be managed closely to prevent income and welfare losses. Thus the need for greater harmonization of investment policies amongst the ASEAN members cannot be overlooked. In the short term, this calls for trade policy discussions to take on a wider ambit in addressing the medium-term impact of trade creation and diversion on the industrial structure of the different economies within ASEAN. The formation of AFTA, therefore, has to be addressed from a larger perspective than purely looking at the trade issues. Perhaps most pertinent to the changes being mooted within ASEAN is the level of credibility associated with the attempts at forming AFTA If tariff cuts are seen to be permanent in the wake of dismantled NTBs, then it is unlikely that the current account would deteriorate (Engel and Kletzer 1990; Sen and Turnovsky I989) This implies that for ASEAN, the commitment to AFTA must now become embedded in the political philosophy underlying the formation of the group The private sector is awaiting signals from the bureaucracy and the political leaders on the

POLICY ISSUES AND AFTA 'S FORMATION

93

level of commitment and the credibility of the declaration made at the ASEAN Summit in Singapore. The need for an effective institutional mechanism for addressing the issues raised by the formation of AFTA would be a first step in the creation of credibility. ASEAN must now unshackle itself from the pressures imposed by protected domestic industries if AFTA is to become fact rather than fiction.

Notes The author would like to thank Ng Chee Yuen and Shankar Sharma, both colleagues at !SEAS, Jacques Pelkmans, Chia Siow Yue, Seiji Naya, Lee Tsao Yuan and other participants at the ASEAN Roundtable for their valuable comments on an earlier version of this paper I. For a discussion of the theory of free trade areas, see El-Agraa and Jones (1981 ). 2. Langham mer ( 199 I) gives a review of the ASEAN economic co-operation efforts of the past 3. These views voiced were by various analysts and investors, as stated in the Straits Times, 27 August !992.

References Baldwin, Robert E. "The Inefficacy of Trade Policy" In Trade Policy in a Chanqinq World Economy, edited by R.E. Baldwin, pp. 160-77. London: Harvester Wheatsheaf, 1988 Bhagwati, Jagdish Protectionism. Cambridge, Massachusetts: MIT Press, 1988. Devan, )anamitra "The ASEAN Preferential Trading Arrangements: Some Problems, Ex Ante Results, and a Multipronged Approach to Future 1ntra-ASEAN Trade Development". ASEAN Economic Bulletin 4, no. 2 ( 1987): 197-212. El-Agraa, Ali M. and AJ. Jones Theory of Customs Unions. New York: St Martin's Press, Inc, 1981. Pp. 34-50. Engel, Charles and Kenneth Kletzer. "Tariffs and Saving in a Model with New Generations". Journal of International Economics 28 (I990): 7I91.

94 AFTA: THE WAY AHEAD

Greenaway, David. "Evaluating the Structure of Protection in Less Developed Countries". In Economic Development and International Trade, edited by D. Greenaway, pp. 77-94. London: Macmillan, I988. Imada, Pearl, M. Montes and S. Naya A Free Trade Area: Implications for ASEAN. Singapore: Institute of Southeast Asian Studies, 1991. Pp. 24-35. Langhammer, Rolf J "Tariff Reductions and Tariff Redundancy in ASEAN Countries". ASEAN Economic Bulletin 4, no. 3 (I988): 252-70. "ASEAN Economic Co-operation: A Stocktaking from a Political Economy Point of View". ASEAN Economic Bulletin 8, no. 2 (I99I): I37-50. Lutkenhorst, Wilfried. "Import Restrictions and Export Promotion Measures in Southeast Asian Countries". ASEAN Economic Bulletin I, no. I (1984): 43-69. Ooi Guat Tin, "Non-tariff Barriers to Expanding lntra-ASEAN Trade". ASEAN Economic Bulletin 4, no. I (1987): 97-113. Ostry, Jonathan D. "Trade Liberalization in Developing Countries". IMF Staff Papers 38, no. 3 (1991): 447-49. Pangestu, M., Hadi Soesastro and Mubariq Ahmad. "A New Look at lntra-ASEAN Economic Co-operation". ASEAN Economic Bulletin 8, no. 3 (1991): 333-52. Rahman, Ibrahim and Mansor Md !sa. "Non-tariff Barriers to Expanding lntra-ASEAN Trade: Malaysia's Perceptions" ASEAN Economic Bulletin 4, no. l ( 1987): 74-96. Rowthorn, R.E. "Intra-Industry Trade and Investment under Oligopoly: The Role of Market Size". Economic journal102 (1992): 402-14. Sen, Partha and Stephen J Turnovsky. "Tariffs, Capital Accumulation and the Current Account". International Economic Review 30 ( 1989): 811-31. Thomas, Vinod, Kazi Matin and John Nash. Lessons in Trade Policy Reform. Washington, D.C: World Bank, 1990. Pp I 0-17 Whalley, John "CUSTA and NAFTA: Can WHFTA Be Far Behind?" journal of Common Market Studies XXX, no. 2 ( 1992)

Commentary on Chapter 4

Chia Siow Yue

I am in basic agreement with most of Sree Kumar's analysis and conclusions. I would like to make the following points of relevance to his paper. First, ASEAN has taken a very bold step at the Fourth ASEAN Summit in January this year. The AFTA agreement is a milestone. However, the objective of AFTA should not be just to promote intraASEAN trade but, and more importantly, to improve ASEAN countries' export competitiveness and investment attractiveness vis-a-vis the rest of the world. ASEAN cannot afford to be inward looking In other words, the emphasis should be on enlarging the economic pie rather than equitable sharing of the pie, for AFTA is relatively small in terms of market size when compared with the trading blocs of EC and NAFTA. AFTA is also very small when compared to the emerging natural economic zone of South China, Hong Kong, Taiwan and South Korea. At last year's ASEAN Roundtable, Seiji Naya and Pearl Imada had shown in their paper that the static gains from trade creation in AFTA are very small. A recent World Bank conference on regional integration (April I 992) also showed that the trade creation effect of trading blocs among developing countries is very small. So we have to focus on the dynamic gains of increased export competitiveness arising from economies of scale, increased competitiveness and innovation, and increased attractiveness for foreign investors. Second, I would like to briefly discuss the issue of ASEAN's investment attractiveness or competitiveness. Investment co-operation is necessary to ensure the investment attractiveness and competitiveness

96

AFTA: THE WAY AHEAD

of ASEAN countries in the context of the global competition for foreign direct investment (FDI). In that regard, Sree argues that intra-regional investments may offset some of the FDI the ASEAN countries need to attract. But ASEAN would need to attract FDI from extra-ASEAN sources for a long time to come, and thus the regional investment climate becomes critical. FDI inflows to most ASEAN countries have slowed down significantly in 1991-92. It is a matter of concern whether this reflects a temporary phenomenon of a global downturn in FDI flows, or an emerging trend of ASEAN losing investment competitiveness. As part of the bid to remain investment competitive, ASEAN has promoted the Growth Triangle concept The (SIJORI) Growth Triangle encompassing Singapore, Johore and Riau has taken off. However, the ASEAN Growth Triangle faces strong competition from the much larger and much more dynamic subregional economic zone in Northeast Asia encompassing Hong Kong, Taiwan and south coastal China. The greater South China economic zone is thriving without government support, and in spite of government objections. It will continue to grow at an accelerated rate because of the tremendous attractions of China's huge supply of cheap labour and its huge potential domestic market, and Hong Kong and Taiwan's financial resources and industrial expertise Increasingly, ASEAN has to compete for FDI not just with Mexico because of NAFTA but with the emerging zone in Northeast Asia. To increase the investment competitiveness, ASEAN has to promote more growth triangles and co-operate in terms of infrastructural development and resource pooling and promoting cross-investments, and have more investment co-operation. A good example is the joint investment promotion missions for the SIJORI Growth Triangle Third, Sree makes a reference to industrial co-operation in ASEAN. A note of caution is necessary ASEAN needs to avoid the pitfalls of past industrial co-operation schemes such as the AlPs and AllYs Fourth, while I agree with Sree that the average tariff levels of individual ASEAN countries are not very high, it should also be noted that the statistical average masks some very high individual nominal tariff rates. And if effective rates are considered, rather than nominal rates, then the tariff protection for some industries and products would be even higher and bringing the rates down considerably is likely to meet with strong resistance from interest groups. Fifth, it is important that Sree has highlighted the fact that if we are going to achieve the objective of a free trade area in ASEAN, then tariff

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reduction alone is not enough. Non-tariff barriers are serious deterrents to intra-ASEAN trade and can take various forms, some of which are protectionistic in intent and others not. There is also the high information and transactions cost arising from inadequate information flows, communications, transportation and other business infrastructure. If ASEAN is thinking of promoting trade and investment flows by the private sectors, then there is need to reduce transaction costs. Sixth, Sree makes a reference to customs union in his presentation. While in theory a customs union removes a lot of the problems arising from trade deflection and rules of origin, ASEAN is not ready for a customs union in view of the large divergences in tariff levels among countries, notwithstanding the unilateral tariff liberalization undertaken by a number of high-tariff member countries in recent years Also, a customs union has more negative trade diversion effects as it would require low-tariff member countries to raise their tariff levels vis-a-vis the rest of the world. Seventh, I have some reservations on the management of exchange rate divergences among ASEAN countries through co-ordination of monetary policies. Even a much more integrated grouping such as the EC is having serious problems with co-ordinating exchange rates. I do not think it is very appropriate and feasible in the near future, particularly when intra-ASEAN trade is still a very small proportion of each country's trade.

[0

Institutional requirements of ASEAN with special reference to AFTA

Jacques Pelkmans

I. Introduction and purpose This paper will make some observations and comments about the institutional mechanism for the Association of Southeast Asian Nations (ASEAN) in general. and the ASEAN Free Trade Area (AFTA) in particular, in the coming I 0 to 15 years. The reader is asked for some understanding when the benefits from this exercise might not strike him/her as very great. The author, while having some knowledge about international organizations including ASEAN, is first of all a European Community (EC) specialist The European Community is not exactly the right institutional example for ASEAN to follow its much higher ambitions and supranational legal system make it inappropriate for a fruitful comparison (there are other reasons, as well). Nevertheless, there are interesting lessons or reminders for ASEAN in some of its institutional experience. I shall use them where appropriate. The other reason for prudence is that the present author iS an economist, not an institutional expert Having had the great privilege of serving ASEAN as a member of the Group of Five (G-5), in the run-up to the Singapore summit, l shall draw from our report 1 quite liberally.

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However, I shall go beyond it. too, in light of the new developments, especially AFTA. The structure of the paper is as follows. Section II summarizes the G-5 proposals about the strengthening of the structure and mechanism of ASEAN, with special reference to the ASEAN Secretariat This is followed by an overview of the institutional decisions of the Singapore summit With the basics of the institutional debate about ASEAN laid out. Section IV attempts to deepen it It does this by addressing a critical paper of Chng Meng Kng in considerable detail and discussing at some length some of the decisions of the recent summit Throughout Section IV, EC experiences are used whenever I thought they might be instructive. Section V takes a more distanced view and asks the more fundamental question of what "policy functions" ASEAN might be expected to fulfil in the I 990s. Eight policy functions are distinguished at four levels: national. intra-ASEAN, the dialogue partners level and global At this fairly general level of analysis, some tentative suggestions on the institutional requirements of an ASEAN performing these eight policy functions are provided Section VI is especially devoted to the numerous institutional/legal issues of AFTA.

II. The Group of Five Proposals The Group of Five's mandate was to concentrate on the strengthening of the ASEAN Secretariat. as the major but not the only element in strengthening the structure and mechanism of ASEAN as a whole. Three problems were identified: • • •

ASEAN's organizational structure, causing serious issues of co-ordination and moral hazard; the (de facto) mandate to the Secretariat; the internal and external challenges ASEAN faces in the 1990s, calling for an adequate institutional foundation.

The first problem has long been recognized. One of the chief sources of the co-ordination question is that of overlapping hierarchy and jurisdiction, especially between foreign and economic ministers. With a greater emphasis on economic co-operation in the course of the 1980s, the question became even more pressing Continuing to rely on the ASEAN StJnding Committee' ic; nn lnngcr viable At thP same time. it c;hnulci

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be acknowledged that placing the burden of correcting fundamental co-ordination problems on the Secretariat without improvements to the wider institutional structure will not work. Already in 1982, the ASEAN Task Force chaired by former Thai Prime Minister Anand Panyarachun had proposed the first-best solution, with the Secretariat serving a three-stage hierarchy, including a crucial element of horizontal co-ordination. The three-stage hierarchy consists of the Heads of Government Meeting (to be held regularly). a (general) Council of Ministers (not disstmilar from that of the EC) and a Committee of Permanent Representatives (again, taken from the EC example). While the Group of Five clearly supports this approach as being first-best, 3 it had to provide for, and weigh other, options for reasons of political acceptability or as a transitional measure (see below). The other important element of the first problem is moral hazard. The excessive decentralization of the ASEAN decision-making process, the neglect of the Secretariat, the lack of clear, long-run guidelines (let alone legal obligations) for economic co-operation and the emphasis on ad hoc projects led to a tendency of trying to exploit ASEAN 4 for national, committee or indeed individual "hobby-horse" purposes This tendency would never have had a chance to emerge, were it not for the "ASEAN method" of wishing not to be seen as obstructionist or impolite. The upshot is a huge backlog of undecided proposals which uselessly clog the agenda of various committees. There, the Group of Five favours an irrevocable shift to the ASEAN Secretariat. What is needed is an "ASEAN-centric" Secretariat, itself making or scrutinizing proposals before tabling them. The twin tests are regional acceptability and workability. The example to learn from, in this respect, is the Organization for Economic Co-operation and Development (OECD) Secretariat acting as a catalyst, given its capacity for intellectual persuasion It is to be noted that the (authoritative) way the OECD Secretariat works does not infringe the authority of the Member States nor does it lead to the establishment of a supranational authority I would like to add that a closer look at the OECD shows that the picture is more complicated. Insofar as the ASEAN Secretariat should function as a think-tank (and, incidentally, as a provider of ASEAN statistics and related studies). the OECD Secretariat is indeed an eminent example. However, insofar as ASEAN continues to focus on projects of development and/or economic or other co-operation, the OECD example is of marginal relevance only, simply because it does very little in this domain'

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For clarity's sake, the irrevocable shift towards the ASEAN Secretariat implies the dissolution of the five ASEAN Economic Committees with their (nationally run) Interim Technical Secretariats -even though the G-5 report only mentions this under the next problem. The resistance against this implication was one major reason why the I 982 Task Force and the 1987 Group of 14 (G-14) suggestions 6 were never adopted. The second problem is complicated in its details but simple in its essentials. The core of the problem is that the ASEAN Secretariat was entrusted with responsibilities, without the necessary decision-making powers. The immediate conclusion is to take the mandate seriously as it is, not necessarily to widen it. The Secretariat should be permitted to carry out its mandate. Hence, the dissolution of the Interim Technical Secretariats and the transfer of their functions to the Secretariat, and correspondingly (I) a higher status of the Secretary General, that is, not of the ASEAN Secretariat only, but first of all of ASEAN itself; (2) competitive, open recruitment of staff on merit and at market remunerations, be it with a (flexible) quota system; and (3) a significant increase of the capacity of the Secretariat. The third problem is new. Perhaps fortunately so, because it would seem that neither the first nor the second problem nor the two together were deemed sufficient to move ASEAN out of its "inertia-trap". Apparently, this became politically feasible only with the drastic changes in world politics (including security) and in the public organization of the world economy. There is no need to rehearse them - every paper on the future of ASEAN, written since, say, 1990 reiterates the amazing shocks to what only five years ago seemed a system with few variables and many constants 7 It is here where ASEAN could no longer remain a classic "price-taker" because the assumptions of a given world economic system, of given security provided by a highly stable bipolar structure of superpower relations, and of its exclusivity as a grouping in the Asia-Pacific arena had so clearly been invalidated. It was not in the mandate of the Group of Five to deduce and recommend the proper courses of action for ASEAN, in response to these great challenges. The report could thus do little more than to extend and improve upon tasks already undertaken or having been accepted at least in principle. This limitation is explained by timing and initial reticence in the run-up to the Singapore summit. I shall make an attempt to overcome it in Sections V and VI. As for the external challenges. the Group of Five recommends (I) a ::,hift away from the donor-recipient process at the dialogue partners

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leveL and concentration on broader policy issues as a priority; (2) be "watchful and responsive" to the advanced countries' tendency to build regional groupings (adding that credibility is served by strong, rather than ad hoc, co-operation in trade policy); and (3) policy consultation to include macroeconomic and other issues for which the Secretariat could fulfil an OECD-type policy think-tank function. As for the internal challenges, the report criticizes the ASEAN elegant rhetoric on regional economic co-operation for lack of follow-up and argues that the Secretariat can increase co-operative tendencies by setting out better regional initiatives. Let us finally look more closely at the decision-making options discussed in the report. Right from the start the Group of Five decided to go for those recommendations deliberately intended to reflect the widest area of agreement existing in ASEAN in early 1991. This ASEAN-consensual approach prevented the Group from going beyond a functional support of the Council of Ministers idea and tabling it as a politically feasible option 8 The proposals came in three categories: the highest levels, the Committee of Permanent Representatives and the ASEAN Secretariat. For the highest levels, two options are presented. The first one replaces the Annual Ministerial Meeting (AMM) by the Heads of Government Meeting9 with a clear role to make decisions and monitor their implementation. This leads the Group to recommend once-a-year businesslike informal meetings, to be distinguished from "summits". Below it a Policy Coordinating Council (PCC), comprising all foreign ministers, should feed the Supreme Council. The PCC shall examine all recommendations to be decided by the Supreme Council, may follow up the latter's decision (if instructed) and assess implementation, with the help of the ASEAN Secretariat. It is the Supreme Council which will set up permanent ministerial councils (for example economic, security). The latter can propose, but not dispose, and have to pass through the PCC. The Secretary General of ASEAN attends both the Supreme Council and PCC Meetings (non-voting), with a (circumscribed) right to speak The Secretariat serves all Councils. Note that this option requires amendment of the Bangkok Declaration as well as the Agreement on the establishment of the ASEAN Secretariat. The second option leaves the Heads of Government meeting institutionally undefined and formalizes the AMM status by unequivocally stating that a decision is an ASEAN decision only if endorsed by the AMM (and not altered or deleted by the Heads of Government). The

104 AFTA: THE WAY AHEAD

advantage of this second option is that the current ASEAN structure is not overhauled, yet a vertical clarity is obtained. The question of horizontal co-ordination is shifted to the Member States - where, no doubt most of these problems reside - by the recommendation that each Member State may designate a minister with a ASEAN portfolio The minister could be a special minister for ASEAN, the foreign minister or indeed a deputy of the head of government. The Committee of Permanent Representatives (CPR) replaces the ASEAN Standing Committee (ASC) - but now, all should have ambassadorial rank. Coupled to this, the Secretary General should become the ASEAN Secretary General and chair the CPR. The report is silent on the voting rights of the Secretary General and open on whether the permanent representatives should be stationed in Jakarta (the report foresees five meetings a year in Jakarta) For the ASEAN Secretariat, the report goes into technical details. Only the main points will be mentioned here: • • • •

•

• •

Elevate the Secretary General to Secretary General of ASEAN, for status, effectiveness, recruitment and external representation. Select an ex-minister or diplomat of international distinction. Secretary General should attend all high-level meetings and present an Annual Report of ASEAN. Secretariat should draft a (three-year) ASEAN Plan for Co-operation; should contain strategy, objectives, programmes as well as the nature and level of Secretariat support for all ASEAN Committees. The Plan should improve coherence. Secretary General should play an active role in dialogue relations with third countries and organizations (for example preparing Dialogue Reports) Tenure of the Secretary General (and of the deputy) should be five years. Secretariat should fulfil three roles: operation (on implementation, co-ordination and monitoring; servicing ASEAN Committees; drafting reports); 10 research (a kind of think-tank function; a newly accepted example is the ASEAN Macroeconomic Outlook; the section should also produce major inputs for the three-year ASEAN Plan); information resources (data base; publications- currently a serious weakness of ASEAN; statistics) A fourth department should be strictly internal- administration.

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• •

105

Recruitment of policy staff would be on merit and on the open market, subject to a flexible quota policy. Specific proposals on internal restructuring, expansion and funding were made as well; the size of the budget in the next two years was proposed to be increased to around 70 per cent (from US$1.65 to US$2.8 million).

Ill. Institutional decisions of the Singapore summit The consensual approach of the Group of Five was successful, for the spirit of its report was fully endorsed and many recommendations were turned into decisions by the Heads of Governments. Paragraph 8 of the Singapore Declaration 11 includes six 12 institutional decisions. •

•

•

"ASEAN Heads of Government shall meet formally every three years with informal meetings in between". This comes close to option I of the Group. the difference being that no formally distinct "Supreme Council" is set up and that the relation with the AMM is not explicitly altered (say, into the PCC, proposed by the Group). However. one has to judge this point in conjunction with the next one. "The ASEAN organizational structure. especially the ASEAN Secretariat, shall be streamlined and strengthened with more resources". This reflects the spirit of the report. Except for the following four items. there is no detail, however. It is therefore not a priori clear that the co-ordination issue at ministerial level is fully resolved. One might expect it to be reduced due to the greater and more frequent involvement of the Heads of Government, based on the last decision (on Senior Economic Officials Meeting [SEOM]; see below) and, finally, because of the AFTA decision (Section VI). "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". This is essentially what the Group proposed. The "enlarged mandate" is left undefined. According to the Group of Five. the critical point is in permitting the Secretariat to carry out the mandate. not to enlarge it. One could easily write a lengthy paper on the elaborate mandate in the original 1976 Agreement. ln any

106 AFTA: THE WAY AHEAD

•

•

•

event, the words "initiate" and "implementation" are explicitly mentioned in the latter Agreement but they are either vaguely worded or conditional on guidelines; co-ordination and advice are implied but the force and weight of these powers is not clear from the Agreement. It is therefore likely that "enlarged mandate" is to be interpreted as enlarged effective mandate, precisely what the Group recommended so strongly. "The Secretary-General of ASEAN shall be appointed on merit and accorded ministerial status". This is literally what the Group proposed. "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." Idem. "The five present ASEAN Economic Committees be dissolved and the Senior Economic Officials Meeting be tasked to handle all aspects of ASEAN economic cooperation". Again, this is what the Group proposed. It is implicit that the strengthened ASEAN Secretariat will effectively assist SEOM, by virtue of the third decision, above.

Whatever shortcomings or drawbacks one might wish to reiterate, there can be little doubt that the Singapore Summit has considerably strengthened the Secretariat. streamlined the ASEAN structure and enhanced vertical co-ordination. This stands in sharp contrast with the inertia during the I 980s. Of course, this does not absolve us from questions such as: is it appropriate, and sufficient? To these we will now turn. In Section IV, we first discuss actual and expected responses to the Group of Five report and the summit decisions This will help deepen the institutional debate. Section V goes beyond that and tries to identify the policy functions of ASEAN in the l 990s and their institutional requirements.

IV. Deepening the institutional debate By far the most eloquent criticism of the Group of Five report has been provided in Chng ( 1991 ). as part of the Naya et al study team for ASEAN. It is worth looking at this in some detail Chng Meng Kng makes a strong plea for the first-best option when reue::,ign i ng the A SCAN fTldch i nery, e::,JJecid lly for ueci::,ion-llldki ng He

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does this by setting out the drawbacks of the two options proposed by the Group of Five (considered as falling within the range of political feasibility at the time of reporting) and contrasting them with the advantages of the Council-of-Ministers option. Consider Figure 5.1, illustrating the first option. 13 The author lists the following drawbacks:

FIGURE 5.1 Panel of Eminent Persons Option 1 Supre me Council of } ASEAN comprising Heads of Government Policy Coordinating Council comprising Foreign Ministers

SCA PCC

Meeting once a year

1

I

I Ministerial Counci I on Econo mic Cooperation

Ministerial Council on Security Cooperation

-----

1

1

1

1

Other ad hoc or Permanent Ministerial Councils

~---------1

I Senior Ec anomie Officials (SEOM)

I Econ omic Commi ttees

Committee of Permanent Representatives (CPR)

:_________ 1 ASEAN Secretariat

1-------

?

?

108 AFTA: THE WAY AHEAD

•

•

•

Heads of Government 14 may not find it in keeping with their (i.e. ASEAN) political culture to engage at working level (for example humdrum or risky diplomatic business). Interestingly, this fear also exists in the EC where the European Council (of Heads of State and Governments) faces similar issues. Over a period of 19 years since the European Council emerged, some kind of middle path has been found. On the one hand, there is wide agreement that reference to the European Council for co-ordination or overcoming a deadlock in a specific Council of Ministers (for example agriculture, transport, the budget, the internal market) must remain (I) truly exceptional; and (2) non-technical, in the sense that the fundamental choice or compromise should be politically clear and simple As soon as there was overload or technicality, the last-resort function failed. On the other hand, the European Council - not even mentioned in the original Rome Treaty or its rewrite in 1987 15 - has shown a certain eagerness to take major political initiatives, such as the European Monetary System ( 1979), the "1992" programme, starting out the negotiations for the Single European Act, the acceptance and encouragement of German unification (which implied an automatic extension of the EC!), the push for Monetary Union and, finally the preparation for the Maastricht Treaty. The EC experience, therefore, would suggest that Heads of Government may change political habits over time and that some kind of learning process may cause an ASEAN Supreme Council idea to be viable and effective. Also, the summit decision on holding three-yearly meetings as well as informal ones seems to point in the same direction. Economic Ministers would become even more subordinate to Foreign Ministers than at present. This point is well takeni 6 It attempts to solve the co-ordination issue at the ASEAN level, without at the same time solving the equality issue. Dr Chng fears that the setting up of various ministerial councils, each with subsidiary committees, will lead to "a whole series of dichotomized ministerial structure as at present, linked up only at the very top. Who is to engage in the task of day-to-day transsectoral coordination? The Committee of Permanent Representatives? It will be an impossible job" (p. 109)

Personally, I believe this criticism goes too far, for two reasons The first one is that also in a unified yet sectorally operating Council, such day-to-day trans-sectoral co-ordination is not important. The virtue of

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having one Council is that national intersectoral co-ordination must be taken seriously- once at the CounciL any national minister in sector Y or subject Z represents his government as a whole. Actually, Chng uses this argument for his plea for the first-best solution (p. Ill). The fear with respect to option I then boils down to a combination of (I) very general co-ordination at the very top (only broad guidelines); (2) insufficient co-ordination at national level; and (3) an overload for the Committee of Permanent Representatives. That is precisely why the G-5 proposed a three-yearly ASEAN Plan For Cooperation, which would very considerably reduce the problem. Also, a professional. involved and motivated Secretariat would surely make its presence felt in this respect. The summit decision to sign a Framework Agreement on Enhancing ASEAN Economic Cooperation (with the ASEAN Economic Ministers JAEMJ in charge of "review .. and coordination") represents a very important step in this respect. A second reason why the above objection may well be exaggerated is found in the role of the Permanent Representatives Although the recommendation of having a Committee of Permanent Representatives, around since 1980, is borrowed from the EC, its meaning in the ASEAN institutional context is bound to be rather different. We shall come back to this point later. Suffice it to say here that, for all the admiration one might have for the courageous "summiteers" in Singapore, nobody would claim that ASEAN's agenda is as heavy and crowded as that of the EC. Yet, with the heavy "1992" load and the accelerated speed of decision-making, few complaints of COREPER (the EC's CPR) being "overloaded" have been heard. Yet. COREPER serves up to 15 topically differentiated Councils, most of which can make laws. My conclusion, therefore, is that option I, though second-best. is viable if all is taken into account. The post-summit situation is closer to option I than before in that the very top is more involved in political impetus and broad co-operation and the bottom-up support from the Secretariat should improve. The ideas about a PCC and Permanent Representatives have been ignored, however. If anything, the position of the AEM has been bolstered, though the external aspects of co-ordination between the AMM and AEM would seem not to have been addressed. Consider now Figure 5.2, illustrating option 2. Dr Chng lists three drawbacks, while applauding its simplicity: •

The structure requires a very high level of national co-ordination; he goes on to state that, for example Economic Ministers would not

110 AFTA: THE WAY AHEAD

FIGURE 5.2 Panel of Eminent Persons Option 2

AHG

AMM comprising Ministers for ASEAN Affairs

Committee of Permanent Representatives (CPR)

Heads of Government (Meeting once every 18 months)

Annual Ministerial Meeting (Meeting once a year)

Meeting six times a year

ASEAN Secretariat

even see their counterparts, hence become demotivated about getting ASEAN co-operation off the ground This point is valid and serious. In the EC some Member States have a special EC minister (for example Italy) but never to the exclusion of any specific portfolio of a national colleague in the EC Council of Ministers. In other words, for example the Italian Minister has no ministry behind him(!) and no special EC Council he can lay claim on as "his". Many other Member States have deputy foreign ministers, charged especially with EC co-ordination; usually, these deputies alternate in the General Affairs Council (somewhat, but not fully, comparable to the AMM), frequently dlc,u

111

the lnlemdl Mdrkel Council, JJerhdps lhe bruddesl

ASEAN'S INSTITUTIONAL REQUIREMENTS AND AFTA

•

111

"technical" Council. Of course. in the EC it would be utterly unthinkable to have one minister of the EC "in the real sense": it would be physically impossible as well as dysfunctional because the technical depth of the respective files is far beyond any single person to grasp, even at the political level. But it would be almost equally odd to have a special ("EC") minister, without any substantive portfolio, who would never be part of the Brussels/Strasburg process. yet co-ordinate all at home. He would be a paper tiger. indeed One could evPn go further and say that option 2 brings home the point that co-ordination is first of all a national task and that the ASEAN machinery should not be affected by national failures. Then we are back to the discussion under option I. Driving it home in option 2 is done by the suggestion of excessive centralization at the national level. One could read it as a devil's advocacy. As all (economic and other) officials would have to report to the Committee of Permanent Representatives- rather than to their own ministers. except if she/he happens to be the ASEAN-designated one -the Committee would once again be overloaded. This objection can at least be weakened on the same grounds as before. Especially if there is a Treaty, or there are Agreements and an ASEAN Plan, many of the provisional decisions need only a marginal check - AMM endorsement need not be problematic at all. This could be ensured by laying down procedural rules. deadlines beyond which AMM endorsement is automatic (if not blocked, with reasons) and limitations of intervention by the AMM (criteria: demonstrations of inconsistency; negatively affecting "higher" ASEAN interests).

The first-best option clearly is a Council of Ministers. backed up by a Committee of Permanent Representatives. Chng underlines its broadbased participation with a coherent command structure. Indeed, it solves the co-ordination and the equality/motivation issues (Figure 53). As the author notes. the Joint Ministerial Meeting was ad hoc in ASEAN (it does not report to the Heads: in fact, it met only once). The main advantages of a Council - noted before - is that transsectoral co-ordination is forcibly shifted to the national level. The costs of national failure fall where they should on the national level. The author of the present paper would also favour the Council!CPR solution as first best. Having said that. it might nevertheless be useful to stress three non-trivial institutional differences with the EC, the source of these ideas in ASEAN ever since the ASEAN-CCI report of 1980 and the /\nand Task Force of 19R2

112 AFTA: THE WAY AHEAD

FIGURE 5.3 Panel of Eminent Persons Option 3

(Heads of Government)

AHG

Council of Ministers

I

I

I

SO M

...1....

I

I

I Third Country Committees

........,.. ~----------

CPR

I

Is E 0 M I ...1....

I

CPA

...L

I

(Committee for Policy Analysis)

I NonEconomic Committees

ASEAN Secretariat

I

...............

----------'

First, until as little as one or two years ago, the EC was an organization driven by economics. This does not detract from the fact that the underlying motives, indeed the origin of the Community, are profoundly political What is interesting for the purposes of the present paper is that ASEAN and the EC started at opposite ends of a foreign affairs spectrum ranging from economics to foreign policy: ASEAN with foreign policy and the EC with economic integration In the original Rome Treaty the Council remains undifferentiated in a legal sense; yet. it was clear that the Council would have to be differentiated topically Howl'Ver, the degree of differentiation was ultimately governed by the Treaty

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And the Treaty is about economic integration. not in the least about foreign policy Thus, the General Affairs Council (the foreign ministers or alternates) never discussed their core, domestic portfolio, that is, foreign policy, except insofar as "Europe" was a foreign policy priority Only after the Davignon report of 1970 did the EC began to "co-operate" in foreign policy, less than half-heartedly, 17 in the European Political Cooperation (EPC) EPC remained an embarrassing failure until the late 1980s. This stands in sharp contrast with (I) the effectiveness of the EC as an economic entity: and (2) ASEAN as a grouping co-operating in foreign policy with remarkable success. Note that EPC is purely intergovernmental (i.e ASEAN-type; not EEC Treaty-like), voluntary, based on a vague and non-binding "agreement" (not a Treaty, until "Maastricht", or, to a modest extent. the Single European Act. 1987), never involved "security" until 1987 (and then only "economic and technological" aspects of it) and employed as a direct means little more than classic diplomacy. Institutionally, this is no different from ASEAN. Yet. the same foreign ministers transformed into a "Council" under Treaty rules, often on the same day, with incomparably greater effectiveness. One key reason the "Council" worked was that the functional incentives for sectoral Councils to pursue market integration, common policies and co-operation, stimulated, of course, by an active Commission and, at times, by the overarching European Council. forced a permanent co-ordinating role on foreign ministers. It also forced them to "specialize" in the generalities of the Community, to remain focused and to pursue well-formulated programmes where possible. The EC experience, therefore, does not support the reservations of ASEAN foreign ministers reported by Chng, [A]s ASEAN's primal. indeed overriding, function still remains the maintenance of regional inter-state harmony rather than the forging of functional co-operation (with its possibility of sharp contention). Foreign Ministers must still have a clear final say on all ASEAN matters Putting all Ministers under one umbrella may, it is feared, not provide sufficient insulation to Foreign Ministers.

Indeed, ASEAN has to choose. If "harmony" is safely conceived of as the absence of anything but the shallowest, functional co-operation, the EC experience is irrelevant. The query then is: what is the meaning of all the urging about ASEAN's challenges of the 1990s - can they be ignored. and at what cost? Jf harmony is. more profoundly, conceived of as the continuing confirmation to work together. with give and take (durncsticdlly dnd at the /\SC/\N level). with ever-shifting interest

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coalitions among the Member States, and in a number of fields, the credibility of ASEAN in domestic politics, in the region, in Asia-Pacific, and world-wide would be greatly boosted. There is indeed no integration without tears; neither is there credibility without substance. Second, the institutional system in the EC differs fundamentally from that of ASEAN, even if an ASEAN Council had been established during the recent summit. In short, the decision-making system of the EC represents a mix of supranationalism and intergovernmentalism (unlike ASEAN), with several built-in check and balances (needed in such a system, hence, again unlike ASEAN) and with supremacy of EC law 18 (unlike ASEAN) for the outcome. However, implementation and enforcement are very decentralized, except in a few common policies. It can, therefore, be misleading to pick out the Council idea and transplant this organ into a different system. This is not to say that an ASEAN Council will not work; all it means is that it will have to have its proper institutional logic, which can only be partly derived from the EC experience. The EC Council must be seen in conjunction with the powerful, initiating role of the EC Commission (note, for instance, that the Council has no right of initiative; only the Commission holds this prerogative) and the authority of the EC Court (also over the Council itself, as a few spectacular cases have made crystal clear). In addition, working under a full-bodied and ratified Treaty significantly reduces the discretion of the Council on the core of European economic integration. This is obvious from the language in the original Treaty about the establishment of the customs union (Art 9-29, EEC): all these articles, except two, 19 are plain impositions, with strict deadlines and virtually no discretion. True, in other aspects of the "core", these impositions were vague, conditional or incomplete 20 The deadlock in the EC prior to 1985 (when the "1992" programme was adopted) was due to the incessant haggling about all these shortcomings in the Treaty. Even a few landmark rulings by the EC Court (in the 1970s) were merely necessary, not sufficient conditions. The experience shows the limits of institutional design: institutions can, and should, facilitate but they cannot replace political will Conversely, even a crippled institutional set-up like the EPC can be effective if only there is political will 21 Nevertheless, speculating on an ASEAN Council, its policy effectiveness cannot be expected, a priori, to mirror that of the EC Council by virtue of these systemic differences Third, the EC Council is mirrored in the COREPER In Chng's diagram (Figure 53), the ASEAN CPR is juxtaposed with the Senior Officials Meeting (SOM). SEOM and a Committee for

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Policy Analysis (which is not linked to the ASEAN Secretariat, although in the spirit of the Group of Five report one might link it up with the Secretariat). It is not unimportant to notice that this is a more restricted conception of a CPR than the COREPER serving the EC Council of Ministers. In the Community, SOM 22 and SEOM would be part of COREPER and the Committee for Policy Analysis would be dispersed all over the EC Commission, not the Council In short, COREPER prepares for almost all Councils. Indeed, COREPER is itself highly structured, yet headed by a uniform Committee of Ambassadorial Representatives, and supported by a large (Council) Secretariat Although final instructions do come from the capitals, every national mission with the EC comprises sectoral experts for the COREPER committees. Thus, the advantages of the uniform Council are largely guaranteed at COREPER level where specialists (in sectoral committees) must eventually work with EC "generalists" (the Ambassadors, and their deputies). Since the latter are usually career diplomats, the central role of the foreign ministries is informally guaranteed, yet without throttling sectoral incentives. To the extent ASEAN finds the EC example instructive, a possible weakness of Figure 5.3 is that the CPR is not a mirror of the Council, but is merely one of several "feeders".

V. Policy functions of ASEAN in the 1990s The world economy is undergoing rather drastic changes nowadays. This is true in markets as well as in public policy, national, regional and world-wide. The repeated stress laid on this fundamental point does not make it a platitude In markets and global competition, thus far, ASEAN enterprises and traders have been performing extremely well A European observer cannot help wondering what exactly a recession is if ASEAN business speaks about "gloom" in the presence of four per cent to six per cent real economic growth for 1992. In public policy ASEAN countries have relied extremely heavily on national development policies, followed by national economic reforms and trade liberalization, where applicable With increasing sophistication they have behaved like classical "price-takers" taking world public policy, world institutions and the global competitive environment as given, ASEAN countries have de-emphasized primary goods trade, exrloited compariltive advantilges in manufactures and certain services,

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and pursued both general and specific foreign direct investment promotion policies to accelerate OECD market penetration and to move up the ladder of comparative advantage to higher value-added products and services. Their long-standing adherence to "special and differentiated" treatment in the General Agreement on Tariffs and Trade (GATT). the at times dysfunctional commitment to the UNCTAD of five to 15 years ago and the attachment to the Generalized System of Preferences (GSP) are telling manifestations of this "public policy takers" approach. Today, ASEAN countries send important signals that this attitude is changing. Surely, as for most countries in the world - indeed, in many respects for all countries in the world - world competition is so powerful that one should never dismiss it. It is a healthy stimulus to discipline even the largest firms, to keep costs down, force quality up and assume corporate strategies about innovation and services. That said, ASEAN countries have spent the 1980s as, shall we say, a learning period for exerting effective influence on the public policy environment in which they trade and grow. The 1980 ASEAN- EC Cooperation Agreement, the gradual introduction of international economic policy issues in the annual Post-Ministerial Conferences (PMC). or, a separate "economic" gathering, as was twice organized with the EC, the US-ASEAN initiative, greatly intensified co-operation with Japan, the emergence of APEC, and the role of ASEAN countries in the Uruguay Round would seem to be the main elements in this learning process. The public policy challenge of the I 990s for ASEAN is whether it is able to capitalize on this experience and move decisively beyond the policy moulds of the 1980s, so as to effectively influence its trade, investment and technology environment where fruitful and possible. This calls forth the fundamental question: what policy functions ASEAN could usefully fulfil in response to this challenge? There would seem to be four (interdependent but distinct) levels where ASEAN could operate. Policy functions and levels, with their institutional requirements, are summarized in Table 5.1.

The national level Policy-making is purely at the national level for the greater part of (macro) economic, development, social and many other policies of ASEAN countries.

TABLE 5.1 Policy Functions of ASEAN in the 1990s

Level

Nature of policy function

Institutional requirement*

(1)

national

Mutual information and consultation

A

(2)

national

Think-tank on national policies

B

(3)

intra-ASEAN

Trade liberalization/AFTA

c

(4)

intra-ASEAN

Co-operation to control externalities

D

(5)

intra-ASEAN

Co-operation in security

(6)

ASEAN-Dialogue Partner

Joint (bilateral) foreign policy

A

(7)

ASEAN-Dialogue Partner

Project co-operation

B

(8)

global

Joint positioning on world issues

D

A or D**

-Notes

*

A: Light; little adaptation of ASEAN institutional machinery needed; Secretariat more human/financial resources. B: Light; going beyond A, a further strengthening of the resources of the Secretariat; the latter should endeavour to achieve an intellectual leadership role (on national policies, for example). C: Medium restructuring inevitable; adaptation of institutions, rules, implementation at Member States' level, monitoring, enforcement. 0: Light-to-medium; depends on the degree of jointness, and the (common) instruments chosen.

**

This function need not necessarily be part of the current or adopted ASEAN machinery; could be fully separate.

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The ASEAN role here is, almost by definition, modest This will be reflected in flexible and light-weight institutional requirements ASEAN can serve as a mechanism to improve mutual information and consultation about national policies (function I). Due to ASEAN's heavy orientation towards projects, 23 sponsored by dialogue partners or multilateral agencies, it is probable that ASEAN could usefully extend this function. The institutional requirements are light: some contribution of research and compilation by the ASEAN Secretariat with the development and funding of ASEAN networks (for example think-tanks, ministries and civil servant committees) should be adequate The OECD Secretariat and the EC Commission have reached high performance levels of this function. Given scarce ASEAN resources and a natural desire of any country to freely search for information, ASEAN will have to compete with APEC, PECC, the World Bank, UNESCAP and numerous others. It is, however, the experience of the EC that, with the OECD's excellent services already in place, there is nevertheless scope for tailormade work for the (EC) Member States as a separate group. By fulfilling function I, ASEAN should help improve national policies by imitation and virtuous policy competition The motto should be that good policies drive out bad policies by example, persuasion and experiment. In an elevated form, ASEAN could extend that principle to a thinktank role. There are economies of scale (and scope?) here. Note that this function 2 strictly refers to the betterment of national policies The points about competition and a niche for specific ASEAN work apply in this case as well. Again, the OECD Secretariat is very involved with function 2 (in fact, these two functions are a near-exhaustive description of what the OECD Secretariat does) If the ASEAN Secretariat, linked to ASEAN networks, would have to develop this function, it would need a very significant strengthening of its statistical, reporting, research and think-tank capabilities The legal basis is there, now that the Framework Agreement, signed in Singapore, provides explicit, though general, encouragement to step up (inter alia) these two functions in many fields (Articles 2 and 3).

The intra-ASEAN level Three policy functions are suggested, with a wide range of institutional rP(]U i rements rlepencJent on ilSJJi ration

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lntra-ASEAN market liberalization Besides AFTA, the Framework Agreement mentions the aim to " ... encourage and facilitate free movement of capital and other financial resources, including further liberalization of the use of ASEAN currencies in trade and investments". For the rest it speaks generally about "co-operation" Presuming that this does not imply ASEAN-led liberalization, services and (non-financial) factor mobility are therefore not at issue. The institutional requirements for trade liberalization (function 3) differ between a customs union and a free trade area. ASEAN's choice for the latter greatly reduces the political sensitivity of the common institutions (less transfer of "sovereignty", as trade policy vis-a-vis third countries remains a national prerogative). As we shall see in Section VI, however, there is an institutional price: greater administrative/legal complexity. However, AFTA is more than a classical GATT-type free trade area. This FTA-plus character significantly raises institutional demands, as shown in Section VI. More generally, AFTA throws up a most fundamental issue having thus far remained implicit in this paper what legal stringency is necessary and sufficient for regional trade liberalization to work? Can one make do with no more than GATT-Iaw, regional style? This question is critical for the credibility and confidence of ASEAN (and non-ASEAN) business. It will be briefly addressed in Section VI. Co-operation to prevent or control externalities Independent national policy-making in a region, including policy competition and imitation, can sometimes reduce general economic welfare, or worse, be outright inconsistent or conflicting. In production and consumption there may be negative externalities (for example pollution) that reduce welfare, and the national policy responses may have a beggar-thy-neighbour character, further reducing welfare. Where the market failure consists of negative externalities, policy competition or even autonomy is inferior to appropriate co-operation. Equally functional. yet harder politically, is the joint control of wasteful policy competition, for example a subsidy race in investment promotion. In ASEAN, the pressure on politicians to show a good record of incoming foreign direct investment is considerable. The problems with positive externalities are probably even more demanding It requires common policies (and often ample funding) to realize positive externalities at the regional level. Examples include infrastructure and selective, joint research and development. However, as ASFAN has begun to recognize and as the Economic Commission for

120 AFTA: THE WAY AH£40

Europe (ECE) of the United Nations has convincingly shown, purely intergovernmental, case-by-case functional instances of co-operation can actually bring worthwhile results. In the case of the ECE-UN (especially in the period up to the late 1950s before the OECD, European Free Trade Association IEFTAJ and the EC had the effect of reducing the impact of the ECE-UN), the interworking and connectivity of the European motorway system, the continental road haulage bordercrossing licences (TIR) and a number of standards and practices were achieved. ASEAN may well see a strong interest in infrastructural projectsin telecommunication, air transport, maritime shipping and road haulage. Indeed, Article 2E of the Framework Agreement says as much but in very general, non-committal language 24 It should be noted that even the EC had the greatest difficulties in getting meaningful infrastructural co-operation off the ground at EC level; the sunk costs of a nationally-oriented system (hence, implied adjustment costs "only" for regional purposes), free-rider behaviour, excessive fears of losing "autonomy", and incompatible standards, were among the reasons for this inertia. Exploiting the potential of a regional market depends in many ways on a properly integrated infrastructure and its quality Besides the problems mentioned, one could add the high initial costs, the difficulties in finding a burden-sharing formula and an acceptable distribution of the expected gains. External development agencies or a greater role for the private sector in infrastructure may help financial feasibility, but it is illusory to expect thac this will largely solve the regional co-operation problem. This function 4 can thus be conceived of at many levels of aspiration, and in many policy domains. The summit could be said to have encouraged functions in the following fields: • • • • • • • •

the industrial joint ventures, in highly general terms; minerals, co-operation in its development; energy, especially research and development, manpower training and supply (insofar as this would enhance security of supply); food security, in highly general terms; forestry, technical co-operation; transport and telecommunication; environment, transborder issues and "addressing the anti-tropical timber campaign"; fighting other negative externalities of mobility, such as drug trafficking and AIDS;

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•

121

(non-specific) research and development. (non-specific) technology transfer, tourism, human resource development (networking, and working towards an ASEAN University) 25

It is simply impossible to derive institutional requirements from this overly general list. If one were to make an impact, and not confuse functions I and 2 with 4, one would eventually have to think in terms of significant common budgets and special agencies, currently non-issues in ASEAN.

Co-operation in security To a degree, ASEAN and the EC have been riding on a free ticket for political and security stability, provided by bipolarity in general and the United States in particular The 1990s may well show a tendency towards a partial regionalization of security, as bipolarity has gone and the United States is neither willing to, nor capable of, providing military security without regional alliances and/or financial contributions. This was neither resolved nor foreclosed in the summit: "ASEAN shall seek avenues to engage Member States in new areas of co-operation in security matters" (Declaration, item 2). Again, it is impossible to derive an institutional requirement from such a statement about policy function 5. Going by the EC experience, there is nothing peculiar about the great hesitation to go for joint security arrangements. Until as late as 1987 the word "security" was literally taboo in Eurospeak. Even after the end of the cold war, German unification and a halving of US troops in Germany, the hesitations are still great. What should be considered, however, is whether a security arrangement (if any would emerge) should really be fitted into the ASEAN institutions as discussed in this paper Some separate institutional arrangement (among defence ministers) would be likely and the link with the foreign ministers need not necessarily go through the current AMM.

The ASEAN-Dialogue Partners level ASEAN deserves some admiration for having been able to develop an extensive dialogue system at ministerial level. However, emulation by others and the heavy travel agendas of foreign ministers make this increasingly more difficult to sustain, except when there is enough

122 AFTA: THE WAY AHEAD

substantial interest in the agenda. With the Cambodian problem more or less solved and the Afghanistan issue receding, EC 1992 practically finished and APEC being a competitive forum for the debate about NAFTA. external issues will eventually dry up, or emerge irregularly. The other major component of the dialogue system - projects - has been criticized both by the United Nations Development Programme (UNDP) and the Group of Five report (for example "This ODA syndrome has to go" and the clogging of the ASEAN agenda with not-yet-agreed projects for reasons discussed earlier) 26 The two aspects represent different policy functions. Function 6 is the classical. though joint. bilateral foreign policy Given the ASEAN success in this area, with a flexible and lightweight institutional set-up, there would seem to be no reason for change 27 However, "external threats" are likely to be different from the 1980s trade, human rights and possibly environment are the likely candidates. While the difficulty with the second one is intrinsic and not institutional. the other two may create serious co-ordination problems of the kind discussed before in this paper. If trade policy or a trade conflict is bilateral. does it fall in this function, and if so, how does ASEAN organize itself? At present this question is not clearly resolved in ASEAN and has already caused tension between economic and foreign ministers. While the summit has given relatively clear requirements about who runs AFTA (internally), the external issue would seem to have been ignored. Interestingly, a similar problem exists in the EC. For better or worse, the Community has never established a separate Trade Council! Trade ministers meet either jointly with the foreign affairs ministers in the General Affairs Council or take over from them for particular agenda items (this is, of course, not true for COREPER) There have also been complications in that sectoral Councils (for example agriculture) insisted on deciding their part of the trade bargain. Function 7 could be defined simply as project co-operation. Ideally, it should be a derivative of an ASEAN multi-annual plan with long-run goals and short-run specifications This is the spirit of the Group of Five report The summit has firmly come down on the side of an "ASEANcentric" approach to projects by shifting the committee work and the project proposals to the ASEAN Secretariat Logically this should mean that the Secretary General (and his staff) should acquire a much greater leeway in the dialogue process at lower levels so as to properly fulfil function 7. The desire to shift (somewhat) away from development projects to "economic ilnd technicnl" projects (cf the negotiCJtion

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between the EC and ASEAN on the new Cooperation Agreement) could be accommodated.

The global level Function 8 consists of joint bargaining or positioning in world organizations or at least on global issues. As with function 6 (bilateral dialogues). this ASEAN policy function can in principle be rationalized, but the institutional and political requirements to make it effective (that is, for joint bargaining to have greater impact than individual bargaining) are pretty ambitious. There are few costs and some shared benefits to jointly issue highly general statements on, for example the Uruguay Round, or to criticize the failure of the EC and the United States to crack the agricultural issue in GATT, but it is quite another matter to come up with, perhaps, a sufficient degree of tariff binding as a joint counter-offer of ASEAN countries once the EC and the United States would have made their deal Indeed, as ASEAN has opted for AFTA, a common stance in trade policy is not a priori to be expected. If it were possible for ASEAN to define joint offers in GATT, surely it would have been possible to go for an ASEAN Customs Union? In rejecting a common stance in trade policy, except at a fairly general, perhaps rhetorical level, the institutional requirements remain very modest. With an extended, professional ASEAN Secretariat, it can be accommodated in the post-summit institutional structure. Actually, with function 6 so well developed, although again at a fairly non-committal level as far as trade is concerned, functions 6 and 8 will mutually reinforce each other, thereby getting the most out of a lightweight institutional set-up. A possible EAEC would also seem to fit in here. Whereas APEC is a logical extension of function 6 (concerned as APEC is, first of all, with relations in Asia-Pacific). EAEC is a form of "megaphone politics" to other world players 28 The issue is to optimize the composition of the Caucus so that the world is bound to "listen". Again, once having an optimal membership and sufficient jointness in policy views, ASEAN could easily incorporate EAEC preparation in the present set-up. However, these two conditions may prove difficult to meet. Function 8 of course also interacts with functions I and 2. Table 51 summarizes the conclusions of this section

124 AFTA: THE WAY AHEAD

VI. Institutional aspects of AFTA AFTA will fundamentally change ASEAN, economically, in terms of the political economy, administratively and institutionally. This statement assumes a literal acceptance of the two key documents of the Singapore summit relating to AFTA: the Declaration and the CEPT Agreement. This "maximalist" view is taken as the benchmark for the remainder of this paper. On this basis, a provisional discussion of the institutional aspects of AFTA will be attempted. A more thorough discussion would require discussing the technicalities of how exactly AFTA is going to take shape; also, it would allow fruitful comparisons with NAFTA, EFTA, some Latin American arrangements and the EC-EFTA (countries) free trade areas (simultaneously) concluded in late 1972. A free trade area is a relatively light-weight construction once it is in place, requiring no more than a modest Secretariat,2 9 a firm Treaty (or Agreement, as long as it is binding- AFTA is binding, as is clear from Article 10) and a series of conventions or regulations with secondary law instruments. But since AFTA will only be in place in 2008, the more demanding issues of today come in two classes: establishment and implementation. With respect to establishment, political economy and bargaining play a relatively important role, constrained by the implied incentive in the CEPT agreement (enjoying market access concessions made by others and the automaticities of the agreement). Political economy and bargaining will tax the ASEAN institutions in a very different way from implementation, where the core questions are those of credibility with business, customs procedures, legal security and dispute settlement Both establishment and implementation will be affected by the potential complexity of AFTA There is a serious risk that, if political will and institutions are not strong enough, an analogy with the "GSP disillusion" may become relevant: the costs of complexity being so high, perhaps heightened by uncertainty, that the actual market response is feeble. Business might turn its back on AFTA ("one might as well not bother"). The risk is so serious because ASEAN experience with the industrial projects, AIJV and the PTA has undermined credibility Whether AFTA is going to combine the complications of the PTA and the AIJV, is a sceptical question sometimes posed. With respect to establishment, I shall briefly discuss one purely institutional issue and six substantive ones, often in the form of questions.

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The institutional mechanism for establishing AFTA would appear to be a problem in itself. Consider that, •

•

• •

•

•

•

•

"A ministerial-level Council" shall be established (in the meantime, the AFTA Council has been formed; it will function under the AEM in case of conflict) The ASEAN Secretariat shall provide support; but the massive work, a great deal of which must be completed before 1993, can hardly been done by a Secretariat that is short-staffed and will be restructured. the special Council "shall also be supported by SEOM"; what is SEOM's role? How does it relate to AEM and the Council? In April a Technical Working Group was established. Of course, one can argue that the automaticity of the agreement and the incentives implied in CEPT reduce the institutional problems greatly. This remains to be seen. The complexity of the set-up is a function of elements such as (I) extreme decentralization (the CEPT incentive leaves the initiatives to each Member State, also in second and third rounds, so that. for every product the CEPT may differ among ASEAN Member States as well as over time); (2) exclusion lists; (3) the remaining PTA; and (4) acceleration schemes, in addition to the usual complexity of any ITA, namely rules of origins, and so forth. A further complication is the extreme degree of product disaggregation Article 2 speaks euphemistically about a sectoral basis as HS six-digit level (it is customary to speak of sectors at two or three digits; the normal "tariff level" in GATT is four digits; EC policy never goes beyond six digits, and is "mostly conducted at four digits). But exclusions are at the HS eight- or nine-digit level! This will mean a great burden on the negotiation process, as it increases the workload arithmetically; worse, it may well invite highly targeted lobbying, which would undermine or at least retard the process ("product-by-product" mentality). The relation between the PTA and CEPT is far from clear; if I understand well there can be products excluded both from PTA and CEPT (in addition to raw agricultural goods) If this is correct, and if the "Final Exclusion List" (Article 2.3) is not controlled by political means, it would imply a tremendous loophole The origin rules are the nightmare of every free trade area (and

126 AFTA: THE WAY AHEAD

•

•

•

other preferential policies). Not having them invites a purposedefeating trade deflection; having them begs the question: how to establish- here- the 40 per cent in a world of multinationals and globalization? There is no political reward in good origin rules; they are too technical for that. For ASEAN business, however, it is an important issue; perhaps as important as a (common!) incentive to attract foreign direct investment to the region. The questions of non-tariff barriers and quantitative restrictions (Article 5A) are dealt with far too casually, and, one is tempted to say, seemingly without a grasp of the numerous problems and administrative/negotiation burden for ASEAN institutions if the language is to be taken at face value. This "if" may turn out to be a big "if". The point is not to be dismissive about the Agreement's text - i t is actually an ideal basis to make intra-ASEAN trade genuinely free. Rather, the point is that ASEAN should make up its mind about the significance of this text and major implications. What principles of "elimination" will be adopted? In this area, the EC is undoubtedly the benchmark. Has ASEAN studied the EC experience on removing technical barriers to trade? 30 Does one really wish to go so far? If so (as "eliminate" might suggest}. does one realize that the institutional and legal requirements are forbidding for the ASEAN of today? If these requirements are rejected (which is bound to happen, in my view, as it would require judicial review by a common court and highly developed co-operation among the standards bodies, to mention only two aspects), what alternative method does ASEAN have in mind? If none yet, we have gone full circle because, in that case, what does this categorical text mean. and what confidence can the trader and investor have that he is not hit by old or new non-tariff barriers of one kind or another? No trivial matter are the deadlines. Article 5.4. I instructs to "eliminate all quantitative restrictions upon enjoyment of the concessions ... " This raises some questions which. I venture to suggest. have apparently not been thought through yet Many concessions will already apply at the outset of the first stage, that is, january I 993. Must we truly expect "all quantitative restrictions" 31 to have been eliminated four months from now? Concessions differ between countries; for tariffs this is already difficult enough (see below), for ordinary quotas one could in principle conceive of similar instructions (although it further adds to the

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complexity already mentioned) but what about licences (of which there are many types) and "administrative measures ... which restrict trade" for which one needs to develop a multi-annual strategy, a lot of administrative negotiation and, eventually, some kind of accepted case law? To differentiate this between Member States, per product, solely on account of the importing Member States' interpretation is a recipe for failure. A similar provision exists on non-tariff barriers 32 except that the period is five years. Still rather short for "elimination". Interestingly, the EC (in the late I 960s) also set out rather naively and with impossible deadlines to remove these barriers. EFTA, on the contrary, did nothing, or did very little. But its initial objective in this respect was much more modest (unlike ASEAN). A catch-all article on "other areas of co-operation" is prudently formulated: Member States shall explore further measures. Each one of the list represents fully-fledged research projects. I merely wish to underline that "harmonization of standards, mutual recognition of tests and certification of products" is an issue-area which is inextricably linked with the removal of NTBs. Taking the text literally, if one merely wishes to "explore" measures in this field, it will prove impossible to remove a large number of technical barriers. It is also useful to underline that "rules for fair competition" can be developed with several degrees of ambition. This is beyond the scope of the paper. However. there is one (sensitive) case where trade and the lack of competition rules are almost invariably at odds: import and distribution monopolies The Agreement does not touch this problem at all. Again, though ASEAN may have its own peculiarities, also the EC (see Article 37, EEC) has had great problems with national distribution monopolies. However. the fact that ASEAN has not even included a generally worded principle on the compatibility of the two will inevitably create imbalances 33

With respect to implementation, let me stress only a few points at this early stage of "pre-AFTA". Besides the scepticism about the "establishment" of AFTA. referred to above, perhaps even greater scepticism prevails over implementation This is caused by the disappointing discrepancy between ASEAN's rhetoric on economic co-operation in the I 980s and what was actually executed. Taking AFTA seriously then must mean taking implementation seriously. However, the institutional. legal, and administrative requirements to ensure implementation are

128 AFTA: THE WAY AHEAD

non-trivial. I shall briefly discuss the following questions: (I) what is implementation?; (2) compliance and law; and (3) dispute settlement in AFTA. Implementation is a generic word with different meanings The only valid test when verifying whether implementation is effective is a check on the actual barriers and transaction costs encountered when shipping goods across intra-ASEAN borders. These two elements should decrease according to the expectations raised and the announcements made by the summiteers. Subsequent to ASEAN agreement about "establishment", implementation refers to, • • • • •

• •

Timely and proper execution of the provisions agreed at ASEAN level, at the Member States' level. Ensuring adequate instruction to customs and other relevant agencies. Ensuring timely and complete publication of mutual concessions/ entitlements, in accessible form. An administrative system of "redress" for importers. A smooth system for solving disputes among Member States, at various levels, the resolution of which is fed back as "case-law", so that AFTA customs clearance can become routine. Supervision at ASEAN level, technically (Secretariat) as well as with a view to correction (committee system, SEOM, AFTA Council, AEM). Stringent management of the "emergency measures" clause.

All these elements hang together. New to ASEAN will be the direct interests other Member States have in the domestic efficiency of public administration of any single Member State. Business and Member States have a right to complain; silence will pre-empt implementation at the market level. A second major issue is that of compliance and the significance of law to AFTA. The absence of joint "ASEAN law" implies a degree of risk for business networks and investment decisions. How to ensure compliance by national administration vis-a-vis business? In the case of tariffs and "classical" quotas this need not be a major problem, although the reader is referred to what was said earlier about complexity, but this issue will undoubtedly raise its head in the case of "non-tariff barriers" and "quantitative restrictions" (as defined). One needs less of law if public intervention is low, private markets are preponderant and function well, and adequate rules of competition exist, etc. Failing this, and opting to avoid "ASEAN law". one neerls to rlevise other mmplinn1e

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mechanisms which underpin business confidence. Without sufficient guarantees for legal security, one either encourages "private deals" or discourages business interest in AFTA. Neither are desirable. This brings us to dispute settlement, a term which hides the ASEAN choice for political or bureaucratic review instead of judicial review. To bring about enforcement and compliance via dispute settlement has a number of drawbacks, such as politicization of issues (business has to file complaints with the governments; civil servants take it up in ASEAN committees), unequal treatment of identical cases, softening of the law and backlogs in committees (because of a lack of case-law effects, which would have the effect of lowering transaction costs and uncertainty). The upshot may be that big business will somehow cope while AFTA will be too costly or risky for small firms. The longer AFTA proceeds the more pressure will emerge to bring some harmonization to customs procedures and to find perhaps a quasi-judicial review (for example a panel of administrative judges, advising SEOM committees, whose ruling would be published, but not final) for non-tariff barriers. It is often said that ASEAN, unlike "the West", is relatively uninterested in legal mechanisms, and even less in a litigation society. This may be so The critical point is whether ASEAN can come up with any other method, or variation of judicial review, to guarantee implementation so as to provide credibility to business. Or otherwise accept that the extent of actually realizing AFTA, and its gain, may turn into an anti-climax

Notes 1. Tan Sri Ghazali Shafie et al., "Strengthening the Structure and Mechanism of ASEAN, with Special Reference to the ASEAN Secretariat", Report prepared for the ASEAN Standing Committee, July 1991 (unpublished). 2. In actual practice (though not formally), the national Directors-General for ASEAN affairs. Note that, despite their titles, these officials are not the highest in the Foreign Ministries. Thus, SOM and SEOM- in some sense subject to ASEAN Standing Committee (ASC) co-ordination - comprise often higher officials. 3. The language used is "are still relevant today" (p. 7) 4. In fact, this is often the problem for dialogue partners, insofar as they expected ASEAN as a group to come up with project proposals. For a more detailed account, see the UNDP report 11990) on ASEAN project conrPmtinn

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5. A relatively small division is concerned with (projects of) Technical Cooperation, heavily oriented toward seminars and human capital upgrading. A separate OECD Development Centre serves again as a thinktank. 6. Group of 14 (Chairman Dato Paul Leong) 7. For a succinct overview, as the backdrop for the Singapore Summit, see Singh ( 1992) 8. " the Panel is of the view that the issue of higher level command and control, authority and power will very much determine whether a reformed machinery at the lower levels can function to anywhere near their optimal potential. And the Panel is acutely aware that the issue of decisionmaking at the highest levels is an area where a full consensus is yet to be in place" (p 20) 9. Called Supreme Council of ASEAN. 10. In the UNDP report (roughly) similar functions were proposed to be grouped in an ASEAN Cooperation Unit (ACU). This idea was adopted in general terms before the Group of Five had reported. The Operations section, suggested by the Group, can easily incorporate the ACU. II. See ASEAN Economic Bulletin 8, no. 3 (March 1992) 376-80. 12. The seventh is about AFTA and hence does not result from the Group of Five report See section 6. 13. The figures are taken from Dr Chng's contribution. 14. Especially those who are also Heads of State. 15. The so-called Single European Act, in force since I July 1987. The Maastricht Treaty has specified one of its functions only. In other words, the European Council, key as it is, cannot write laws. If anything, this is an advantage. 16. It is dependent, however, on the assumption, in Chng ( 1991 ), that, at present, the AEM reports directly to the Heads of Government meeting. This assumption is somewhat academic, it would seem, as summits were rarely held up to 1992. 17. Hence, Kissinger's sarcastic remark in 1973 (when he was criticized as talking to EC countries rather than the EC as such): "The EC has no telephone number". 18. The critical difference between integration and co-operation in the EC system hinges on the applicability of EC law (until the Maastricht Treaty) EC law, hence its overriding character, does not apply where EC countries co-operate. Given an integrative core under the Treaty, the further choice between integration and co-operation has given great political flexibility to the EC over time. 19. An article on (temporary, commonly agreed) safeguards- which was used only once for one product ( r) in 1963 - and one on co-operation among the national customs

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20. For a survey, see Pelkmans ( 1985) See also Pelkmans ( 1984) 21. The celebrated example is the 1982 Falklands war when EPC responded immediately (supporting the United Kingdom); the Council was then employed to legislate a trade embargo with Argentina in a matter of hours. 22. Except insofar as pure foreign policy co-operation is concerned, the Political Directors of the Member States serve EPC directly. More generally, there are other committees in the EC system which operate outside COREPER (such as the Monetary Committee and Economic Policy Committee) and hence blur the picture a little. 23. See, for example the UNDP-ASEAN ( I990) report and the Annual Report of the ASEAN Standing Committee 91/92. 24. An interesting sequel (Article 2E 2) endeavours to improve intra-country postal and communications systems. As far as lam aware no such provision existed in the EC before the Telecom Green Paper of I987 which revolutionized this lagging sector. 25. The functional case for co-operation at university level is strong if this implies free mobility of students and professors, research networks and agreed exchange with transfers of credit points. A common university is quite another matter, though. It may also do little for "regional identity" (Singapore Declaration, item 7) The EC's experience, dating back to 1955(!). is at best, mixed (d. the European University in Florence has never been allowed to grow to a fully-fledged university; it is an "institute") The Caribbean case (of CARlCOM) can be justified purely by economies of scale, as the Member States are all very smalL 26. ln Pelkmans ( I992). it is calculated from the Annual Report of the Standing Committee that, in I991, of the 63 projects of EC-ASEAN co-operation, no less than 37 were in the "preparatory stage" (p. 9). 27. ln Langhammer (I991, p. I45) the Dialogue Partner system (the author refers in essence to policy function 6) is theoretically justified as an ASEAN task on the basis of bargaining theory In terms of foreign policy (for example Cambodia) and disregarding the empirical measurability, this point of view can be supported. But whether the same applies to trade is far from clear. The institutional and political requirements to exploit collective trade bargaining are rather high (even the EC has the greatest problems with it) and would seem to be beyond the present aspiration of ASEAN. Langhammer appreciates this too ("ASEAN Member countries do not have economic leverage through a threat system" and there is no "mandate to ASEAN institutions to negotiate formally with third countries") 28. The expression is from Dr Noordin Sopiee. 29 EFTA Secretariat had about 70 staff in Geneva before EFTA began to intensify its special relation with the EC (ie before 1985) 30. See Pelkmans ( 1987) for an early attempt to set out the relevance of the

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"old" (pre-1985) EC experience for ASEAN. For an exploration of the "new" approaches to this removal in the EC, see Costello (1991): Bohan (1992); CEPS ( 1992); and Pelkmans and Egan ( 1992). 31 Defined in Article I. 3 as ".. quotas, licenses or other measures with equivalent effect, including administrative measures and requirement which restrict trade". This broad definition is to be applauded, but it makes the deadline problem even greater. 32. NTBs are distinguished from quantitative restrictions in a novel way: the former "within", the latter "with other" Member States. I suspect that this definition is arbitrary and untenable in actual policy making 33. Article 8.2 on impairment has the unfortunate political drawback that one Member State must openly complain about another one. It is wiser, politically, to formulate a general principle over such monopolies first

References ASEAN Economic Bulletin 8, no. 3 (March 1992): 376-90. Bohan, Niall. "Technical Barriers to Trade". ln Annual Review of EC Affairs, 1991, by CEPS. London: Brasseys, 1992. CEPS. The EC without Technical Barriers. CEPS Working Party Reports No. 5. Brussels, May 1992. Chng, Meng Kng. "Institutional Structure for Enhanced Economic Cooperation". In ASEAN Economic Cooperation for the 1990s, a report prepared by the ASEAN Secretariat, by Seiji Naya et al., Jakarta, 24 October 1991. Costello, Declan. "Removing Technical Barriers". In Annual Review of EC Affairs 1990, by CEPS. London: Brasseys, 1991. Ghazali Shafie, Tan Sri, et al. "Strengthening the Structure and Mechanism of ASEAN, with Special Reference to the ASEAN Secretariat". Report prepared for the ASEAN Standing Committee, Jakarta, july 1991, unpublished Langhammer, Rolf. "ASEAN Economic Cooperation A Stock-taking from a Political Economy Point of View". ASEAN Economic Bulletin 8, no. 2 (November 1991) Naya, Seiji, et al. ASEAN Economic Cooperation for the 1990s, a report prepared for the ASEAN Secretariat, Jakarta, 24 October 1991.

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Pelkmans, Jacques. Market Integration in the EC. The Hague-Boston: Nyhoff, I 984. "The Institutional Economics of European Integration". In Integration through Law: Europe and the American Federal Experience, edited by M. Cappelletti, I Weiler, and M. Seccombe. Vol. I, Book I New York: W de Gruyter, I 985. "Preventing a Trench-wave: Removing Technical Barriers in Europe and Lessons for ASEAN". In ASEAN at the Crossroads, edited by N. Sopiee, C.L. See, and L.S. Sin. Kuala Lumpur: ISIS, I 987. "ASEAN-EC Relations in the I 990s". Paper for the SIIA and FES Conference on ASEAN and the EC in the I 990s, Singapore, I 9-21 May 1992. Pelkmans, Jacques and Michelle Egan. "Fixing European Standards Moving beyond the Green Paper". CEPS, Working Document no. 65, Brussels, 1992. Singh, Bilveer. "The Fourth ASEAN Summit: A New Milestone in Political Will". Paper for the SIIA and FES Conference on ASEAN and the EC in the 1990s, Singapore, 19-21 May I 992.

Commentary on Chapter 5

Chng Meng Kng

For a start, I share Dr Pelkmans' general scepticism on what more we could constructively say on this matter. I have for long felt that ASEAN's preoccupation with institutional reform since the early I 980s stems largely from an overspill of frustration over what some member countries felt to be a lack of real progress in ASEAN economic co-operation. The basic reason for this lack of progress was not institutional inadequacy (or bad programmes) but a lack of "political will". (And, by that, I hasten to add, we are not casting aspersions on the character or resolve of ASEAN leaders - merely saying in a short hand way that objective circumstances, political and economic, were not yet ripe.) As Dr Pelkmans concludes from the EC experience, "institutions can and should facilitate but they cannot replace political will ... [while] even a crippled setup like the EPC (European Political Committee) can be effective if only there is political will". This, of course, is not saying that institutions are irrelevant. There must obviously be some compatibility between organizational objectives and institutional means. Good programmes may come to grief without proper implementational mechanisms. But the instrumental importance of institutions in international co-operation could be exaggerated. However, I may hasten to add that, like Dr Pelkmans, I am an economist, not an institutional expert. Lacking specialist credentials I will keep my comments general Dr Pelkmans has emphasized that as regional groupings, ASEAN and the EC exhibit vast systemic differences. These stem from two major sources

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First, as is well known, while the EC's primary programme was economic (i.e the European Economic Community or EEC), this was founded on the very strong and broad based political support of a war-weary Europe The EC can therefore start big, with highly ambitious (but realistic) economic objectives embodied in a comprehensive supranational legal frame with supranational institutions to pursue its implementation. The implementation of this economic programme (carried by the initial and underlying political support) then became an integrative political force which propelled the EC forward for almost 30 years largely without the need for further political input until the mid-1980s when the Single Market movement was launched. In contrast. ASEAN started as a fragile intergovernmental association with a need for careful and constant political nurturing. Even when the time was felt ready for more substantive economic co-operation in Bali in 1976, the economic programme adopted was very modest and open ended - an economic form of exploration into what was politically possible. The second difference is that EC members' economic transactions are primarily with each other. Economic co-operation is thus mainly implementation of an intra-regional programme on the basis of a detailed legal document. This further reduces the need for political input. As Dr Pelkmans noted, "the EC General Affairs Council (the foreign ministers or alternates) never discuss their core domestic portfolio, that is, foreign policy, except insofar as 'Europe' was a foreign policy priority". In sharp contrast. ASEAN member countries' economic dealings are predominantly (or. if Singapore's economic intermediary role is discounted, then overwhelmingly) outward-oriented. Even Economic Ministers constantly find themselves facing external issues that may be economic in form but are really political in nature (for example, the East Asia Economic Caucus, or EAEC, issue) ASEAN co-operation, including economic co-operation, is thus profoundly political in a way it is not. or was not. in the EC. ASEAN's basic function to date is thus one of political consensus building, and its approach to institution building may best be described as one of decentralized incrementalism. Whatever the political necessity and well-known political benefits of such an approach, it has not been conducive to greater progress in other and more tangible areas of cooperation - in particular, economic co-operation. The constant need for consensus, down to the lowest level of decision making, means that ASEAN can only move at the pace of the slowest member. Institutional rlecentra I ization, especially a long sector a I I i nes. on the other hand,

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constantly results in the projection to an ASEAN level of the internal co-ordination failures of the least co-ordinated member country, further dissipating the energy of economic officials and contributing to a general sense of frustration and helplessness in efforts at more meaningful economic co-operation. Despite such shortcomings, however, the decentralized ASEAN machinery has nevertheless fulfilled its primary function of promoting interstate harmony. And this, as Professor Sandhu has so appropriately reminded us, is the "bottomline" for ASEAN. As he said, though businessmen may complain about the pace of ASEAN economic co-operation, they must always remember that ultimately they are able to prosper because of ASEAN's success in maintaining regional peace. Increasingly, however, ASEAN wants the tangible fruits of economic cooperation. And this has been given added urgency by the changed international situation of emerging trade blocs. ASEAN's present efforts at institutional reform reflects, I think, differences and uncertainty on how and how far to go in this direction. That member countries wish to go in this direction is clear from the breakthrough agreement at the Fourth ASEAN Summit to create an ASEAN Free Trade Area (AFTA) and to reform the ASEAN machinery In particular, centralization and streamlining of ASEAN's command structure, regular and more frequent Summits, centralization of the machinery for economic co-operation under the Senior Economic Officials Meeting (SEOM) and a strengthened ASEAN Secretariat, should greatly improve the co-ordination and implementation capacity of the ASEAN institutional structure, especially for economic co-operation. On the other hand. the limits of the Fourth Summit's institutional reform is revealing of ASEAN's inherent caution in changing its essentially political role. First, importantly, ASEAN Economic Ministers failed to gain equality with Foreign Ministers through a formal linkup of Ministerial structures. Such a linkup would have allowed the full range of Ministerial attention to be focused on the primal task of forging consensus among the six ASEAN governments without any dissipation of energy over problems of co-ordination between different Ministerial groupings. Inter-sectoral co-ordination would have to be enforced largely at national level, and the need to do so would have the ASEAN agenda up in every country, i.e. ASEAN matters would have to be taken more seriously at national levels. More importantly, a linkup would have provided a proper mandate for Economic Ministers to participate more

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actively in the conduct of ASEAN's external economic relations - an increasingly crucial aspect of ASEAN economic co-operation which requires the close attention of Economic Ministers but which is now formally under the jurisdiction of Foreign Ministers. Further. without such a Ministerial linkup, the ASEAN Secretariat remains wholly under the Foreign Ministers' sphere of command though the basic rationale for strengthening the Secretariat is to support the needs of economic co-operation. In fact. SEOM/AEM have formally complained that the whole exercise of restructuring and strengthening the Secretariat was conducted without any input from them. True, a Joint Ministerial Meeting (JMM). comprising Foreign and Economic Ministers, was set up by the Third ASEAN Summit in Manila in 1987. This is, however, just a co-ordinating mechanism and does not report to a higher body. Foreign and Economic Ministers met prior to the Fourth Summit to present a report to the Heads of Government. Significantly, the Report of this Meeting was not called the "Report of the JMM" but "Report of the Foreign and Economic Ministers to the Heads of Government". Why have ASEAN member countries so studiously maintained the ascendancy of Foreign Ministers in its Ministerial structure? The reason must be ASEAN member countries' continued acceptance that "ASEAN's primal. indeed overriding, function is the maintenance of regional inter-state harmony rather than the forging of functional. including economic, co-operation (with its possibility of sharp contention)", a point which I made in my paper and highlighted by Dr Pelkmans. Dr Pelkmans' view of this is that if ASEAN is to have meaningful economic co-operation rather than "harmony ... safely conceived of as the absence of anything but the shallowest functional co-operation", then it must make the requisite institutional change and accept the attendant political risks. As he said, "There is indeed no integration without tears." ASEAN member countries have, however, cautiously chosen not to take the robustness of ASEAN harmony for granted and have maintained the primacy of Foreign Ministers within the ASEAN structure. To what extent this weakens ASEAN's drive for greater economic co-operation remains to be seen. Another ASEAN phenomenon which seems to so exasperate Dr Pelkmans is ASEAN's apparent preference for broadly stated political commitments rather than detailed and legally binding commitments as well as for what. in his view, are decidedly inferior political mechanisms

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of enforcement, compliance and dispute settlement over superior legal mechanisms. Dr Pelkmans tries to be polite about the text of the CEPT Agreement, though voicing doubts about its technical feasibility and legal requirements. But the CEPT Agreement is first and foremost a political document. That is why the Heads of Government have decreed the setting up of a Ministerial Council whose political task it is to "implement" the CEPT Agreement. For Dr Pelkmans, however, "implementation" in this sense is actually a process of negotiation through foreign policy means and he would strongly doubt its viability because such "implementation" would depend on the political circumstance of each moment and the uncertainty inherent in such a process as well as the lack of a legal frame would make it unlikely that there will be a favourable market response. In this regard, I must confess that I share Dr Pelkmans' views. Market efficiency requires a stable and transparent framework and a minimum of uncertainty. A regional market requires binding and clearly stated regional rules of the game if regional business is to be encouraged, and such a need for market efficiency transcends cultural difference. ASEAN should and, hopefully, would gradually move in this direction.

Commentary on Chapter 5

P.J. Davidson

I think Dr Pelkmans was being too modest when he states in his paper that he has "some knowledge about international organizations including ASEAN". Rather, his paper and presentation indicates a thorough familiarity with the ASEAN institutional organization and provides an excellent review of the proposals put forward by the Group of Five (of which he was a member) on the strengthening of the structure and mechanism of ASEAN, and of the subsequent institutional decision~ of the Singapore summit Dr Pelkmans then proceeds in his paper to deepen the institutional debate by raising some counter-arguments to the criticism of the G-5 report by Dr Chng Meng Kng (I 99 I) particularly in light of the decisions of the recent ASEAN summit and the European experience. Being a lawyer and not an economist. I was particularly interested by Dr Pelkmans' comments on the need to take implementation seriously and the need for institutional. legal. or administrative requirements to ensure implementation. As has been said, in international economic law, the economist tells us what should be done while the lawyer is left to figure out how to do it Dr Pelkmans touches on these issues briefly in the final section of his paper I agree with his comments and I would like to expand briefly on them. Constructing a free trade area is largely a problem of "managing" interdependence. In considering the problem of "managing" interdependence, governments may be limited in their policy choices by sets of rules, procedures and principles that may constrain their options Although it is arguable that. in theory, each state is free to

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regulate economic transactions which take place with it or within its boundaries as it pleases, in practice, international economic relations are governed by an international legal framework which comprises multilateral, plurilateral and bilateral agreements. International economic law forms the international legal framework which establishes the parameters within which international trade in goods and services and foreign investment is conducted. Such a framework is necessary in order to promote increased order and predictabilitiJ in international transactions. Some participants from the private sector have stressed the need for clear rules so that the private sector can know what AFTA is really about and that there is true commitment to it. If not, the private sector will have difficulty taking AFTA seriously. These rules which would form part of the framework of international law may provide the only predictability or stability to a potential investment or trade situation. One objective of AFTA is to lead to increased trade and investment in the region. However, this trade and investment will only take place if the respective governments enter into binding international agreements to establish the framework for an AFTA and then implement the agreed framework through domestic legislation. The importance of a binding legal framework for AFTA underscores the symbiotic relationship between economic and political factors in determining the success of AFTA. Although AFTA is driven by economic factors, AFTA will only materialize if the economic factors are coupled with the facilitating role played by the respective governments in enacting and implementing the legal framework for AFTA. As Seiji Naya and Pearl lmada point out in their paper, "The AFTA documents cover almost every important area included in other cooperation schemes, but only briefly touches upon the procedures through which the concept will be implemented. Eventually ... the large potential impact on trade and investment will necessitate (I) clear implementation procedures and rules ... (2) establishing an institution or process for monitoring jthe implementation! jand (3)1 offering a mechanism for the settlement of disputes". Although the Singapore Declaration sets out the beginnings of an international legal framework, much work remains to flesh out the framework. In this regard, I would like to make two points. First, in establishing this framework one must bear in mind that aspects of an international legal framework for regulating trade and investment already exist, and that the ASEAN countries are participants

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to varying degrees in this framework which may put constraints on or may assist the future development of the legal framework for economic co-operation. It is therefore necessary to look at how the emerging AFTA accords with the existing international legal framework. For example, all the ASEAN member states other than Brunei Darussalam are members of the GATT which is the primary multilateral trade agreement setting out the legal framework for the regulation of international trade (Brunei Darussalam applies the GATT on a de facto basis in its trading relations). Thus, this is the primary framework within which ASEAN trade is conducted. Member states must bear in mind these existing legal obligations when structuring and implementing AFTA The development of AFTA and the development of a legal framework to regulate it must not take place at the expense of a more open multilateral system. Second, in implementing AFTA. I would like to suggest that ASEAN should consider some of the provisions of the NAFTA We have heard it said that the ASEAN countries prefer to follow the "ASEAN way" of doing things rather than the "legalistic Western way". However. it is not necessary to follow the same process to benefit from the product of that process. While ASEAN may continue to do things in an ASEAN way, it can still benefit from considering the results of the lengthy negotiations which the NAFTA parties went through in the Western way in reaching the NAFTA For example, the need for an effective dispute settlement mechanism has also been mentioned. This is an important aspect of any institutional structure and of any legal system It is inevitable that disagreements on interpretation of rules and regulations will arise and it is important to have a mechanism in place to resolve these disputes in an efficient and effective manner so that the parties can continue their relationship. If AFTA is to become effective, there must be an institutionalized enforcement and dispute settlement procedure which is objective and unbiased. With regard to dispute settlement. NAFTA places priority on reaching an amicable settlement and therefore provides firstly for obligatory consultations by the parties with a view to settling the dispute Should consultations fail to resolve the matter within 30-45 days, the Trade Commission set up by the agreement is directed to try to settle the dispute promptly If the countries are still unable to reach a mutually satisfactory resolution, any contracting party may initiate panel proceedings. The panel may make recommendations for resolution of

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the dispute and the agreement provides for implementation of the panel's report. This dispute settlement mechanism conforms more closely to a rules-based regime where the process is automatically initiated at the request of either party and there are timetables for consultations, formation of the panel. panel deliberations and for decisions on panel reports. It provides an effective, timely and impartial method of resolving disputes which arise involving interpretation of the agreement. In addition to this mechanism for resolving disputes which may arise between parties to the agreement. the NAFTA also provides a detailed procedure for independent binational panels to review final antidumping and countervailing determinations by administrative authorities in each country and a procedure for international arbitration of disputes between investors and NAFTA governments All of these provisions could be reviewed in constructing dispute settlement mechanisms for the AFTA. Time does not permit a review of the total NAFTA agreement but those concerned with implementing AFTA may also want to look at a number of other provisions of the NAFTA such as those dealing with rules of origin, emergency action, and investment. to mention a few.

The editors PEARL IMADA is Research Associate at the East-West Center. Honolulu, Hawaii. SEIJI NAYA is Professor and Chairperson of the Department of Economics, University of Hawaii at Manoa.

The contributors CHIA SlOW YUE is Associate Professor at the Department of Economics and Statistics, National University of Singapore. CHNG MENG KNG is Deputy Director-General at the ASEAN Secretariat, Jakarta, Indonesia. P.J DAVIDSON is Research Fellow at the Institute of Southeast Asian Studies, Singapore, on sabbatical from the Department of Law, Carleton University, Ottawa, Canada where he is an Associate Professor and Coordinator of the Asian Pacific Research and Resource Centre. LEE TSAO YUAN is Deputy Director at the Institute of Policy Studies, Singapore. ROLF J LANGHAMMER is Research Division Chief at the Kiel Institute of World Economics, Germany. MOHAMED ARIFF is Professor of Analytical Economics and Dean of the Faculty of Economics and Administration, University of Malaya, Kuala Lumpur, Malaysia. NARONGCHAI AKRASANEE is Chairman of the Board and CEO of General Finance and Securities Co. Ltd , Thailand. )ACOUES PELKMANS is Senior Research Fellow at the Centre for European Policy Studies (CEPS), Brussels and Director of EUROSCOPE, Maastricht SREE KUMAR is a Fellow at the Institute of Southeast Asian Studies, Singapore. DAVID STIFEL is International Research Associate affiliated with the Economic Relations Programme at the Thailand Development Research Institute TAN KONG YAM is Director of the Research and Planning Division, Ministry of Trade and Industry, Singapore