ASEAN & EU: Forging New Linkages and Strategic Alliances 9789814377256

Table of contents :
Contents
List of Tables
List of Figures
Acknowledgements
Contributors
1. An Overview
2. ASEAN's Policies Towards the European Union
3. A Bond in Search of More Substance: Reflections on the EU's ASEAN Policy
4. Macroeconomic Framework for Sustaining ASEAN's Outward-oriented Growth
5. Obstacles to Closer Trade and Investment Links: An EU Perspective
6. Obstacles to Closer Trade and Investment Links: An ASEAN Viewpoint
7. Emerging Business Opportunities from ASEAN and European Integration: An ASEAN Perspective
8. Emerging Business Opportunities from European and ASEAN fntegration: An EU Perspective
9. Strategic Alliances Between Europe and ASEAN: A Firm-Level Perspective
10. What Can ASEAN Learn from the Experience of European Integration? An ASEAN Perspective
11. What Can ASEAN Learn from the Experience of European Integration? An EU Perspective
Index
The Editors

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ASEAN EU

The Development Centre of the Organization for Economic Co-operation and Development was established by decision of the OECD Council on 23rd October 1962 and comprises twenty-four member countries of the OECD: Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Norway, Poland, Portugal, the United States, Spain, Sweden and Switzerland, as well as Argentina and Brazil from March 1994. The Commission of the European Communities also takes part in the Centre's Advisory Board. The purpose of the Centre is to bring together the knowledge and experience available in member countries of both economic development and the formulation and execution of general economic policies; to adapt such knowledge and experience to the actual needs of countries or regions in the process of development and to put the results at the disposal of the countries by appropriate means. The Centre has a special and autonomous position within the OECD which enables it to enjoy scientific independence in the execution of its task. Nevertheless, the Centre can draw upon the experience and knowledge available in the OECD in the development field. 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 multi-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 ofticer.

edited by

Chia Siow Yue Joseph L.H. Tan

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Published jointly by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 119596

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OECD Development Centre 94 Rue Chardon-Lagache 75016 Paris France

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. © 1997 Institute of Southeast Asian Studies

Cataloguing in Publication Data ASEAN and EU: forging new linkages and strategic alliances/edited by Chia Siow Yue and Joseph L.II. Tan. 1. Investments, European--ASEAN countries--Congresses. 2. Investments, Asian--European Union countries--Congresses. 3. European Union countries-- Foreign economic relations--ASEAN countries--Congresses. 4. ASEAN countries--Foreign economic relations--European Union countries--Congresses. 5. ASEAN countries--Commercial policy--Congresses. 6. European Union countries--Commercial policy--Congresses. I. Chia, Siow Yue. II. Tan, Joseph Loong Hoe. III. Institute of Southeast Asian Studies. IV. Organization for Economic Co-operation and Development. Development Centre. V. ASEAN Roundtable (1996: Singapore). HC441 A843 1996 ISBN 981-3055-63-4

1997

The responsibility for facts and opinions 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. Typeset by International Typesetters Pte Ltd. Printed in Singapore by Seng Lee Press Pte Ltd.

Contents

List of Tables List of Figures Acknowledgement s Contributors 1. An Overview Chia Siow Yue and Joseph L.H. Tan

vii ix X

xi

1

2. ASEAN's Policies Towards the European Union Chee Peng Lim

11

3. A Bond in Search of More Substance: Reflections on the EU's ASEAN Policy Jacques Pelkmans

33

4. Macroeconomic Framework for Sustaining ASEAN's Outward-oriented Growth Kiichiro Fukasaku

58

5. Obstacles to Closer Trade and Investment Links: An EU Perspective Hans Ekdahl

86

6. Obstacles to Closer Trade and Investment Links: An ASEAN Viewpoint Teofilo C. Daquila

103

vi Contents

7. Emerging Business Opportunities from ASEAN and European Integration: An ASEAN Perspective Sieh Lee Mei Ling

135

8. Emerging Business Opportunities from European and ASEAN fntegration: An EU Perspective

Charles Oman 9. Strategic Alliances Between Europe and ASEAN: A Firm-Level Perspective Patrick Gibbons and Toh Thian Ser

154

187

10. What Can ASEAN Learn from the Experience of European Integration? An ASEAN Perspective Suthiphand Chirathivat

206

11. What Can ASEAN Learn from the Experience of European Integration? An EU Perspective Rolf Langhammer

Index

234 257

List of Tables

2.1 2.2 2.3

4.1 4.2 4.3 4.4

6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8

ASEAN's Trade with the World, 1993-95 Breakdown of Tariff Lines by the Difference Between MFN and CEPT Major EU-funded Co-operation Projects with ASEAN, 1986-95 Openness, Growth and Inflation in Selected Asia- Pacific Economies Net Private Capital Flows to Developing Countries, 1990-95 Volatility of Consumer Prices and Exchange Rates in Selected Asia-Pacific Economies Macroeconomic Indicators for Selected ASEAN Economies ASEAN-EU Trade ASEAN Trade with the EU Countries Composition of ASEAN-EU Trade EC-12 Trade with ASEAN-5 in Machinery and Equipment Foreign Direct Investments in ASEAN-5 by the EU, the United States and Japan Geographical Distribution of EU Investments in ASEAN Industrial Distribution of Foreign Equity Investments in Singapore according to Capital Intensity Industrial Distribution of EU Investments in Malaysia

14 15 28

60 62 70 72 105 106 108 109 111 112 114 115

viii

List of Tables

6.9

Industrial Distribution of Approved EU Investments in the Philippines 6.10 Industrial Distribution of FDI in Thailand from the EU Countries, by Sector 6.11 Singapore: Returns on Equity by Country 6.12 Singapore: Returns on Equity by Industry

7.1

9.1

9.2

Real GDP of Selected Regions and Economies: Average Annual Growth Rates Trade Dependence of the Member States of the European Community: Exports as a Percentage ofGDP Exports of the Member States to Other Member States: Percentage of GDP

116 117 120 121

138

192 192

List of Figures

3.1 3.2

Why a New Asia Strategy? ASEM Follow-up Activities

37 48

4.1

Exchange Rates and Real Effective Exchange Rates for Selected ASEAN Economies

73

10.1 ASEAN-type Organization; EU-type Organization 10.2 Organizational Structure of ASEAN 10.3 The Inter-relationship of Community Institutions

218 219 221

Acknowledgements

The papers in this volume were first presented at the ASEAN Roundtable "ASEAN & EU: Forging New Linkages & Strategic Alliances", which was jointly sponsored by the Institute of Southeast Asian Studies, Singapore, and the OECD Development Centre, Paris, and held on 17-18 September 1997 in Singapore. The objective of the ASEAN Roundtable series of discussions is to review major developments in ASEAN and to explore new ways or directions for ASEAN economic co-operation in the light of the changing global economic environment, as well as the emerging domestic situation and needs in the region. The editors are grateful to all the contributors for their generous help and co-operation in the preparation of this volume.

Contributors

Dr Chee Peng Urn is Director of the Bureau of Economic Co-operation at the ASEAN Secretariat, Jakarta. Professor Chia Siow Yue is Director of the Institute of Southeast Asian Studies, Singapore, and was previously Associate Professor of Economics at the National University of Singapore. Dr Teofilo C. Daquila is Senior Lecturer, Master's Programme in Southeast Asian Studies, National University of Singapore. Mr Hans Ekdahl is Assistant Director in the Trade Policy Department, Federation of Swedish Industries, Sweden. Dr Kiichiro Fukasaku is Senior Economist and Principal Administrator at the OECD Development Centre, Paris. Dr Patrick T. Gibbons is Senior Lecturer in the Division of Strategy and Information Systems, Nanyang Business School, Nanyang Technological University, Singapore. Professor Rolf J. Langhammer is Head of the Development Economics and Global Integration Department, The Kiel Institute ofWorld Economics, Germany. Dr Charles P. Oman is Senior Economist and Principal Administrator at the OECD Development Centre, Paris.

xii Contributors

Dr Jacques Pelkmans is Research Director of the European Institute of Asian Studies, Belgium. Professor Sieh Lee Mei Ling is Chairman and Professor of Business Administration in the Faculty of Economics and Administration, University of Malaya, Malaysia. Associate Professor Suthiphand Chirathivat is Director, European Studies Programme, Chulalongkorn University, Bangkok. Dr Joseph L. H. Tan is Senior Fellow and Co-ordinator of the ASEAN Economic Research Unit, Institute of Southeast Asian Studies, Singapore. Associate Professor Toh Thian Ser is with the School of Accountancy and Business, Nanyang Technological University, Singapore.

1] An Overview CHIA SlOW YUE and JOSEPH L.H. TAN

ASEAN and the European Union (EU) and relations between the two regions are increasingly attracting the attention of policy-makers, scholars and analysts, and the business community. This volume attempts to contribute to a better understanding of these relations and their prospects. The Association of Southeast Asian Nations (ASEAN) is the most successful regional grouping in the developing world. ASEAN was founded in 1968 and has grown from strength to strength, as the founding members of Indonesia, Malaysia, Philippines, Singapore and Thailand, joined by Brunei in 1984 and Vietnam in 1995, found mutual interest and benefit to co-operate in the political, strategic and economic areas. The ASEAN member states have been able to collectively achieve regional peace and security, as well as individually achieve domestic political stability and social cohesion. On the economic front, ASEAN is characterized by the economic dynamism of the member states, and its increasingly important role on the world stage. The ASEAN group is part of the "East Asian economic miracle", and in the past decade has achieved the highest economic growth rate in the world. Sustained and high economic growth rates have propelled Singapore into the top decile of countries in the world in terms of per capita

2

Chia Siow Yue and Joseph L.H. Tan

income, and Indonesia, the least economically advanced ASEAN member (until the entry of Vietnam in 1995), into the ranks of lowermiddle income countries. ror over a decade, the ASEAN economies have been actively undertaking economic reforms aimed at liberalization, deregulation, privatization, and economic restructuring and upgrading in order to improve their competitive strengths to meet the challenges of globalization and rapid technological change. Most of these efforts have been undertaken unilaterally by individual countries. But ASEAN has also collectively shaken off its earlier inertia to pursue economic cooperation more vigorously. A milestone was reached when the ASEAN governments agreed in 1992 to the establishment of the ASEAN free Trade Area (AFTA) with free regional trade to be achieved within fifteen years, and subsequently shortened to ten years, that is, by the year 2003. ASEAN is also pursuing liberalization in foreign investment and services. The ASEAN-7 will also soon become the ASEAN-10 when membership is extended to the remaining countries of Southeast Asia, namely Cambodia, Laos and Myanmar. The ASEAN economic grouping plays a not insignificant role on the regional and world stage. The ASEAN-7 ranks fourth in world trade, after the United States, the European Union, and Japan. Even more significant is the fact that ASEAN's trade is growing much faster than that of the Triad countries. ASEAN has also been playing a not insignificant role in setting the agenda of the World Trade Organization (WTO). Until recently, ASEAN had also been the largest host to foreign direct investment (FDI); only since 1990 has ASEAN's pre-eminence in this area been overtaken by China. Having been major recipients of FDI for many years, ASEAN is now increasingly also becoming investors in other countries, with the latter role being spearheaded by Singapore and increasingly followed by the other more developed ASEAN economies. ASEAN and its member-states are not inward-looking. The grouping has been actively seeking dialogue and linkages with major countries and other regional groupings. Most ASEAN members are also members of the Asia-Pacific Economic Co-operation (APEC) forum.

I . An Overview

3

Some ASEAN members have also joined the newly-formed Indian Ocean Rim Initiative (lORI). Collectively, ASEAN is exploring linkages with the Australia-New Zealand Closer Economic Relations (CER) grouping and the North American Free Trade Area (NAFTA). It is also seeking to widen and deepen its relations with the European Union (EU). The EU is the most successful regional grouping in the developed world. The political and economic objectives of the European Community was laid down by the 1957 Treaty of Rome. Since then, the EC and its successor, the EU, has grown from strength to strength, both in the enlargement of its membership and in the deepening of economic integration. As shown in the chapter by Teofilo Daquila, as an economic grouping, ASEAN is very small when compared to the EU. In population size, however, ASEAN is larger than the EU, with a population of 412 million versus the EU's 370 million. However, in GNP (gross national product), ASEAN's US$443 billion is only 6 per cent that of the EU. Likewise, in per capita GNP, ASEAN's average of US$1,075 in 1993-94 is a fraction of the EU's US$18,546. The ASEAN and EU countries have been linked historically through colonial ties. Malaysia and Singapore were former British colonies, Indonesia was under the Dutch, and Vietnam was under the French. In the post-colonial era, the ASEAN region's ties with Europe have grown much slower than its ties with the other economic powers of the United States and Japan, reflecting in part the rapid growth of the American and Japanese economies and in part the European pre-occupation with economic integration. Recent ASEANEU economic relations may be illustrated by bilateral trade and investment flows. ASEAN's trade with the EU accounts for a very significant share of its global trade, averaging 13-14 per cent during 1980-94. This bilateral trade, however, accounts for only about 5 per cent of the EU's trade in 1994. Likewise, while EU investments are very important to ASEAN, they form a much smaller fraction of the EU's global investments, while ASEAN investments in the EU are negligible.

4

Chia Siow Yue and Joseph L.H. Tan

The recent impetus to thB strengthening of ASEAN-EU relations was provided by the Asia-Europe initiative, which led to the first Asia-Europe Meeting (ASEM) in Bangkok in 1995 to forge a "New Comprehensive Asia-Europe Partnership for Greater Growth". The strategy for forging such a partnership was subsequently outlined in the ASEAN-EU Eminent Persons Group Report. This volume examines several themes and issues in ASEAN-EU economic relations from both the ASEAN and European perspectives. The first pair of contributions provide insights and analyses of the official policies of ASEAN and the EU towards each other. Chee Peng Lim examines "ASEAN's Policies Towards the European Union". He notes that ASEAN's external economic policy objectives are to enhance ASEAN's global and regional market access and to promote a sustained inflow of foreign direct investment. Such policy objectives are basically similar, whether directed towards the EU or towards the United States and Japan. With specific reference to ASEAN's relations with the EU, he notes that it has matured from the earlier donor-recipient relationship in development co-operation to one based on partnership between equals. As ASEAN will face new challenges arising from the extension of membership to the remaining Southeast Asian states of Cambodia, Laos and Myanmar, it can learn from the EU's experience with enlargement to include the less developed Mediterranean countries and the transitional economies of Central and Eastern Europe. Chee offers several specific recommendations on strengthening ASEAN-EU co-operation and stimulating trade and investment flows, including co-operation to ensure an open and transparent multilateral trading environment with increasing trade liberalization on a mostfavoured-nation (MFN) basis; co-operation in the mutual promotion of investment flows; EU assistance in building a joint centre for entrepreneurship development among small and medium enterprises; and new institutional arrangements to facilitate greater private sector participation at meetings of government ministers and officials. In his "A Bond in Search of More Substance: Reflections on the EU's ASEAN Policy", Jacques Pelkmans examines a number of EU policy initiatives towards ASEAN and the latter's responses, in

1 . An Overview

5

particular, the EU's New Asia Strategy which attempts to highlight Asia in an overcrowded EU agenda, and ASEAN's response in proposing ASEM; the European Commission's July 1996 paper advocating a "new dynamic in EU-ASEAN relations"; and the report of the ASEANEU Eminent Persons Group. He notes that the substance and "vision" of these four official initiatives show considerable overlap. The various recommendations on trade and investment facilitation and other measures to promote bilateral public and private partnerships and strategic alliances "may flourish more easily" in an environment of an increasingly favourable EU official and corporate view of a more attractive and dynamic ASEAN. However, while not denying that the EU official documents hold good prospects for the deepening of EUASEAN relations, Pelkmans cautions that clearer details on implementation plans and "strong political impetus and adequate budgets" would be necessary if not crucial. Kiichiro Fukasaku provides the chapter on "Macroeconomic Framework for Sustaining ASEAN's Outward-oriented Growth". He argues that openness to trade and investment has the double beneficial effect of sustaining high economic growth and serving as an effective incentive for governments to maintain sound macroeconomic policies. However, in the 1990s a number of ASEAN countries have also experienced the negative fall-outs of liberalized capital movements and increased financial integration, such as international interest-rate shocks and speculative capital flows. The risks arising from these macroeconomic disturbances should not be overlooked. He emphasizes that ASEAN's continuing pursuit of the twin goals of macroeconomic stability and rapid growth will pose challenges for lower-income and less open ASEAN members. He argues that to stimulate trade and investment interactions with the EU, "maintaining macroeconomic stability, along with human resource development, continues to be critically important as a policy goal for the ASEAN economies, in order to stay competitive as a location of FDI." The next two chapters zero in on the policy and institutional obstacles to closer trade and investment linkages between ASEAN and the EU. Hans Ekdahl's chapter gives the European perspective of how

6

Chia Siow Yue and Joseph L.H. Tan

the Asian markets continue to frustrate EU traders and investors with various types of barriers, such as rule of law, trading rights, tariffs and taxes, import quotas and licences, customs procedures, technical impediments to trade, intellectual property rights, government procurement, trade in services and FDI-related hindrances (local content, trade-related performance criteria, restrictions of profit remittances, and so forth). Ekdahl calls for freer trade and investment and a more competitive environment in ASEAN. He also cautions that an exportpromotion strategy based on an undervalued currency may produce economic growth but could generate negative responses, including growing pressures in the importing countries for protection from sectors suffering firm closures and job losses. He exhorts policymakers in both ASEAN and Europe to work harder to remove policy and institutional barriers so as to facilitate the flow of trade and investment. Teofilo Daquila examines the same theme as Ekdahl but from an ASEAN perspective. First, he looks at the trends and patterns in ASEAN-EU trade and investment flows. Then he identifies and analyses the various EU policies, and rules and regulations which pose disadvantages to ASEAN traders and investors, and highlights the problems of ASEAN exporters in market access and penetration. lie argues that if these obstacles are overcome with better understanding of the increasing economic interdependence (as extensively discussed in Charles Oman's contribution), both ASEAN and the EU will reap mutual gains from the economic opportunities that would arise from the enlarged regional markets in ASEAN and the EU. The next three chapters shift the focus from the macroeconomic to the microeconomic concerns of bilateral ASEAN- EU economic relations. What are the possibilities and problems of building ASEAN-EU business linkages? And what role can strategic alliances play? The chapter by Patrick Gibbons and Toh Thian Ser argue that ASEAN-EU alliances can benefit through joint project activities, particularly in chemicals, road and rail transportation, environment protection technologies, and air transport and forestry, in which several European firms have unique competitive advantage as industry world leaders.

1. An Overview

7

They recommend that new European firms operating in ASEAN should develop business networks with their ASEAN counterparts in the private sector and with government-linked companies. ASEAN firms in two or more countries can also form strategic alliances with EU partners in subregional projects in the different ASEAN "growth triangles" and in the Mekong Basin region. Non-ASEAN multinationals should be more proactive with an "investor" mindset to develop jointly the subregions with ASEAN partners. In "Emerging Business Opportunities from European and ASEAN Integration" from an ASEAN perspective, Sieh-Lee Mei Ling provides an insight into the changing economic, political and security challenges facing business enterprises as a result of the end of the Cold War, the collapse of COMECON, the transformation ofthe former communist command economies, the proliferation of regional trading arrangements, as well as opportunities from the growth and dynamism of the East Asian economies. She then focuses on the new business opportunities as well as challenges which may arise with closer ASEAN-EU economic relations. She identifies many possibilities for joint business activities, both at the bilateral level and subregional programmes in ASEAN's "growth triangles" and in the Greater Mekong Subregion. Sectoral projects suitable for business co-operation include infrastructure projects, oil and gas industry, telecommunications, information technology, electronics, automotive and transport equipment. However, a number of threats to the freer flow of trade and investment could come from obstacles posed by the EU's "multilayered network of associations and preferential arrangements", its Common Agricultural Policy, and its new protectionistic instruments, such as ceo-labelling campaigns and anti-dumping actions. Charles Oman examines the same theme as Sieh-Lce, but from the EU perspective. Adopting a different approach, Oman focuses on the implications and impact of globalization and regionalization of production and argues that for European business, the challenge is not so much one of a "threat" of Asian exports "invading" Europe, as it is one of European firms contributing more actively to and profiting from growth in Asia. Noting that globalization has led to the blurring

8

Chia Siow Yue and Joseph L.H. Tan

of "domestic" and "international" policies, Oman warns that European integration should not become "a tool for regional protection", a point which Chee, Sieh-Lee and Pelkmans would be comfortable to endorse. As for ASEAN, Oman calls for policies to stimulate competition to complement the ongoing processes of liberalization, privatization and deregulation; in particular, the free trade and investment initiatives under AFTA (ASEAN Free Trade Area) and AlA (ASEAN Investment Area) should serve to strengthen competition within ASEAN. The last pair of contributions address the question: "What Can ASEAN Learn from the Experience of European Integration?" Suthiphand Chirathivat offers an ASEAN perspective by first presenting a comparative analysis of the progress in ASEAN regional integration with the EU's achievements in integration. He argues that once AFTA is completed, the creation of an ASEAN Economic Community might be an issue for consideration. However, he cautions that the move towards a customs union might pose problems and that "negative spill-over effects" might arise with deeper steps of the integration process. Nonetheless, as ASEAN moves towards the deepening and widening of its integration process, Suthiphand posits that ASEAN can learn much from the EU's more advanced and complex integration experience thus far, particularly with regard to the following: maintaining economic and social cohesion with membership enlargement; reconciling various national and regional issues and agendas made more complicated by enlargement; and institution building. In contrast, Rolf Langhammer, writing from a European perspective, argues that ASEAN has very little to learn from the EU's "deep" integration and the EU style of implementing and enforcing integration. He bases his conviction on his appraisal of the strengths and limitations of European and ASEAN integration. He argues that the EU integration process is unique, forced by the exceptional circumstances of war and the reconciliation efforts of charismatic European political leaders - circumstances which are very different from those prevailing in ASEAN. However, Langhammer does identify some areas which ASEAN can benefit from the EU's experience, the most significant being the parallel movement of integration deepening and

1. An Overview

9

widening on the one hand and trade liberalization with non-EU countries on the other. ASEAN can also learn from the EU's other areas of achievements such as mutual recognition of national standards and rules; and across-the-board liberalization in manufacturing. As for AFTA, Langhammer argues that the experience of the European Free Trade Area (EFTA) would be more relevant than that of the European Community (EC) as the latter became a customs union after 1968. Langhammer cautions that learning from the European integration experience is a "second-best alternative" and exhorts the ASEAN countries to press on with their relatively successful unilateral liberalization efforts on an MFN base. ASEAN should co-operate regionally if the first option of national solutions are economically unsuccessful or ineffective. With like-minded countries, ASEAN should contribute to strengthening the WTO multilateral framework and discipline; on this point Langhammer probably has the endorsement of many fellow contributors in this volume. In sum, it is our hope that the diversity of topics relating to ASEAN-EU economic relations, and in particular the offering of different EU and ASEAN perspectives will contribute to the growing body of knowledge on ASEAN and EU and stimulate further debate and analysis on the many issues in and proposals for furthering ASEAN-EU economic relations. References A Strategy for a New Partnership. Report of the Eminent Persons Group ASEAN-EU. Brussels/Jakarta, June 1996. "Chairman's Statement at the Asia- Europe Meeting, Bangkok, 2 March 1996". ASEAN Economic Bulletin (July 1996): 129-34. European Commission. EU-ASEAN Relations: A Growing Partnership. Brussels, 1996a. European Commission. HU-ASEAN Relations: The Facts. Brussels, 1996b. Fukasaku, Kiichiro, ed. Regional Cooperation and Integration in Asia. Joint publication of the ADB and OECD. Paris: OECD, 1995. Jayakumar, S. "The Southeast Asian Drama: Evolution and Future Challenges". Georgetown University Inaugural Distinguished Lecture on Southeast Asia. Washington, DC, 22 April 1996a.

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Jayakumar, S. Statement by H.E. Prof S. Jayakumar, Minister for Foreign Affairs of Singapore at the ASEAN-EU Dialogue Session, ASEAN Secretariat. 25 July 1996b. Oman, Charles et al., eds. Investing in Asia. Joint publication of the ADB and the OECD Development Centre. Paris: OECD, 1997.

ASEAN's Policies Towards the European Union CHEE PENG LIM 1

Introduction The European Community, which later became the European Union (EU), was the first Dialogue Partner to establish informal relations with ASEAN in 1972. ASEAN-EC relations were formalized in 1975 with the creation of an ASEAN-EC Joint Study Group. to look into trade and related matters. This was followed by the inaugural ASEAN-EC Ministerial Meeting (AEMM) in 1978 in Brussels. Under the direction of the AEMM, the ASEAN-EC Co-operation Agreement was formulated and signed in 1980 to promote economic and development cooperation between the two regions. The Agreement also led to the establishment of the ASEAN-EC Joint Co-operation Committee (JCC) to promote and review co-operative activities. (For an earlier study on ASEAN-EC relations, see Chee Peng Lim 1982. See also N. Akrasanee and II.C Rieger, eds. 1982). Since 1980, ministers and officials from the two regions have been meeting regularly to discuss and consult on issues of mutual interest and concern. These meetings take place at various levels and involve different bodies: 1. Ministerial Level:

a) ASEAN -EU Ministerial Meeting (AEMM)

12

Chee Peng Lim

b) ASEAN Ministerial Meeting-PostMinisterial Conference (AMM-PMC) c) ASEAN Regional Forum (ARF) 2. Senior Officials Level: a) ASEAN-EC Joint Co-operation Committee (JCC) Meeting b) ASEAN-EU Senior Officials Meeting (SOM) 3. Others: a) ASEAN-EC JCC Sub-Committees (on Trade, Economic and Industrial Co-operation, Science and Technology, and Forest) b) ASEAN-EU Business Conference At the initiative of ASEAN, there were also two occasions, in 1980 and 1991, when special meetings of the Economic Ministers were convened to discuss issues relating to trade and industrial cooperation. The meetings at various fora between ASEAN and EU officials during the past two decades were beneficial for both regions, particularly in the area of economic co-operation. They promoted better understanding and helped to resolve outstanding issues between ASEAN and the EU in a speedy and amicable manner. An important step in the evolution of ASEAN-EU relations took place with the inauguration of the ASEAN-EU Senior Officials Meeting, which was held in Singapore on 2-4 May 1995. This inaugural meeting was a follow-up to the Meeting of ASEAN and EU Foreign Ministers Meeting in Karlsruhue, Germany, in September 1994 where both parties adopted a Joint Declaration and agreed to set new directions for ASEAN-EU relations. Both ASEAN and the EU recognized that rapid political and economic developments as well as the economic integration which was taking place in the respective regions were bringing about significant changes in ASEAN-EU relations. Thus, both ASEAN and EU Ministers agreed to seek new impetus to the existing relations. The Ministers also agreed that in view of international developments, it was imperative to provide a forward-looking visionary approach

2. ASEAN's Policies Towards The European Union

13

to enhance ASEAN-EU co-operation towards the year 2000. In this regard, ASEAN and the EU decided in January 1994 to form an ad-hoc Eminent Persons Group (EPG) to study and recommend appropriate programmes for co-operation to advance ASEAN-EU relations in the 1990s. The EPG completed its report "A New Strategy for a New Partnership" in June 1996. The changes in ASEAN-EU relations are reflected in ASEAN's policies towards the EU. However, despite these changes, the main thrust of these policies remain anchored on economic issues. Thus, the main focus of this chapter will be on the economic aspects of ASEAN's policies towards the EU, particularly in relation to trade, investment and development co-operation. ASEAN's Trade Policies

Trade lies at the heart of ASEAN-EU relations. This was true in the mid -1970s when the ASEAN countries individually established formal relations with the then nine-nation EEC (European Economic Community); it remains true today, when the fifteen-nation EU ranks third (after Japan and United States) among ASEAN's trading partners in total trade, and second as far as imports are concerned. The EU has more trade with ASEAN than with the seventy developing countries linked to the EU through the Lome Convention. The EU accounted for about 10 per cent of ASEAN's total trade in 1995 (Table 2.1). ASEAN's two-way trade with the EU has quadrupled since 1980. During the five-year period between 1989 and 1994, ASEAN-EU trade grew at an average rate of 15.9 per cent. This growth rate is higher than ASEAN's trade with its largest trading partner, Japan, at 13 per cent over the same period. The value of ASEAN's total trade with the EU amounted to about US$63 billion in 1995. The trade balance has tilted in favour of ASEAN, with a trade surplus of US$2.0 billion in 1995 (Table 2.1). In keeping with ASEAN's rapid industrialization, some threequarters of its exports to the EU now consist of manufactured products, including garments and electronic products. (For details, see

TABLE 2.1 ASEAN's Trade with the World, 1993-95 (In thousand US$) Export

Import Region

7993

%

1994

%

1995

%

1994

%

1995

%

3.8 1.0 5.9 2.7 0.7

20.7 0.2 2.3 6.1 0.4 8.4 2.9 0.3

58,309,376.6 467,518.7 5,787,972.2 15,002,148.0 1,425,121.6 26,798,219.8 7,991,373.2 837.023.1

23.2 0.2 2.3 6.0 0.6 10.7 3.2 0.3

68,832,738.1 529,637.2 fd34,003.6 18,158,542.6 2,361,315.2 :10,727,808.1 10.721,431.4 NA

23.2 0.2 2.1 6.1 0.8 10.4 3.6 NA

137,280,878.9 5.769,669.8 1,758,816.9 30,546,558.4 52,928,078.9 10,322,977.3 665,972.8 35,288,804.9

42.2 1.8 0.5 9.4 16.3 3.2 0.2 10.8

94,159,682.6 3.178,185.3 1,434,017.9 24,427,7 43.3 24,573,045.2 6,125,939.2 501.626.8 33,919,125.0

44.9 1.5 0.7 11.7 11.7 2.9 0.2 16.2

107,111,782.0 :l,RiiR,Ii7:l.2 1 ,585, 763.8 27,627,283.2 21i,55R,49R.R 7,005,134.4 624,575.1 39,841,853.5

42.7 1.5 0.6 11.0 10.6

42.6 1.5

0.2 15.9

126,294,261.0 4,401.238.9 1,631,771.7 32,559,168.4 33,373.334.7 8,574,935.5 671.317.2 45,0R2,494. 7

0.1 0.6 0.2 2.1 3.5

19,409.1i:l7.R 240,301.5 1,737,369.8 702,898.9 6,479,568.9 10,249,498.7

li.O 0.1 0.5 0.2 2.0 3.1

13,682,833.0 IH0,309.2 1,483,953.0 716,2:10.2 4,528,694.3 6,143,626.3

6.5 0.4 0.7 0.3 2.2 2.9

16,684.791.1 1,065,892.9 1,989,531.7 931,140.1 5,303,820.8 7,394,405.8

6.7 0.4 0.8 0.4 2.1 2.9

19.748,040.6 1,048,599.0 2,821,051.5 915.203.9 6,201,918.9 8,761,267.3

6.7 0.4 1.0 0.3 2.1 3.0

78,701,518.7

28.8

117,913,483.6

36.2

58,483,314.4

27.9

68,712,992.7

27.4

81,821,645.3

27.6

273,067,383.3

100.0

325,494,254.1

100.0

209,626,395.4

100.0

250,818,942.4

100.0

296,696,6~5.0

100.0

15.6 0.3

7,079,022.6 1.688,424.6

50,890,253.8 1.012,615.6 4,109,535.4 12,476,296.3 3,120,837.5 19,105,063.4 8,905,286.0 2,160,619.6

46.5 1.9 0.5 9.9 1S.4 3.2 0.2 12.5

128.493,321.8 5,367,106.8 1.327,154.4 28.542,764.4 50,833,802.9 9,035,509.6 ()41,699.2 32,7 45,2~4.5

47.1 2.0 0.5 10.5 18.6 3.3 0.2 12.0

14,398. 79h.6 211,556.2 1,391.920.8 317,987.8 4,336,363.9 8, 140,%8.0

6.4 0.1 0.6 0.1 1.9 3.6

17,537,834.3 166,701.2 1.547,006.7 534,645.5 5, 758,986.7 9,530.494.1

(),4

REST OF THE WORLD

67.152,330.2

29.7

ASEAN + non-ASEAN

225,953,838.1

100.0

17.4 0.4 1.2 3.7 0.8 8.2 2.5 0.6

48,334,708.5 983.368.1

10.1,041\,750.6 4,290,937.2 1,106,900.9 22.:1:10,342 0 41.484,374.9 7,125,490.5 544,942.1 28,165,763.1

SFCfORAL PABTNERS Pakistan India Russia PRC Taiwan

DIALOGUE PARTNERS Australia Canada EC Japan Korea New Zealand USA

%

43,300.565.4 487,236.4 4,917,427.3 12,869,896.3 795.185.5 17,693,044.5 6,008,401.4 529,374.0

17.7 0.4 1.2 4.0 0.9 8.1 2.6 06

39,353.960.6 886,282.1 2,642,231.1 8.374,620.8 1,882,637. 7 18,627,937.6 :;,671.232.2 1.269,019.1

ASEAN Brunei Indonesia Malaysia Philippines Singapore Thailand Vietnam

1993

3,2:~0,S35.5

10,891,228.7 2,462,440.3 21,999,:~S8.7

1.3

1\ote: For Thailand: no data available for sectoral and consultative partners for all quarters. Source: ASEAI\ Secretariat.

2.S

0.5

11.0 11.2 2.9 0.2 15.2

2. ASEAN's Policies Towards The European Union

15

Daquila 1996, p. 10. See also EC 1996c). The EU is now ASEAN's second largest export market for manufactures, after the United States. The extent and pattern of ASEAN-EU trade provides a useful perspective for considering ASEAN's trade policies towards the EU. In some ways, ASEAN and the EU pursue similar trade policies. For example, both regions share a common willingness to lower barriers to trade and a shared adherence to the principles of the World Trade Organization (WTO). Thus, ASEAN and the EU have been strong advocates of the Uruguay Round of Multilateral Trade Negotiations and both parties welcomed the agreement on the Final Act Embodying the Results of the Uruguay Round. (See, for example, S.Y. Chia and L.H. Tan, eds. 1995). ASEAN can be expected to follow open-market policies even as it puts into place the ASEAN Free Trade Area (AFTA). It is significant to note that when AFTA was proposed there was hardly any fear that an ASEAN fortress would emerge. In any case, a comparative analysis shows that about 50 per cent of ASEAN's CEPT (Common Effective Preferential Tariffs) rates correspond to the MFN (most-favoured-nation) rates (Table 2.2). Differences in the trade policies pursued by ASEAN and the EU may be attributed to their different levels of development. While the seven-member countries of ASEAN have a population of over 400 million, greater than that of the fifteeen-nation EU, their per capita income on average is less than one-tenth of the EU. TABLE 2.2

Breakdown of Tariff Lines by the Difference Between MFN and CEPT

%

Import Value (NonASEAN)

%

Tariff Line

%

Import Value (ASEAN)

MFN=CEPT MFN>CEPT

24,032 24,165

49.86 50.14

34,525 6,576

84.00 16.00

142,823 37,694

79.12 20.88

TOTAL

48,197

100.00

41,102

100.00

180,517

100.00

Source: AFTA Unit, ASEAN Secretariat.

16

Chee Peng Lim

In the past, the two major irritants in EU-ASEAN trade relations were the EU's anti-dumping procedures and voluntary export restraints (VER), and member-states protection policy (Treaty of Rome, Article 115) against ASEAN. Fortunately, the total number of antidumping cases initiated by the European Commission shows a declining trend. The creation of the Single European Market is unlikely to change this, especially because the European Commission decided in 1993 to propose to the Council a major streamlining of the procedures for anti-dumping, anti-subsidy, and safeguard inquiries. This streamlining effort intends to bring EC procedures more closely into line with the major trading partners. It will imply mandatory time limits within which the services of the EC will have to begin and end inquiries, the splitting of the inquiries into injury from that into dumping, a greater participation by the consumers, increasing the number of staff members for the services, and reducing the number of complicated cases per investigator. This overhaul of the existing system should allow for better preparation, and to some extent reduce the power of protectionist lobbies. Like its anti-dumping investigations, the EU's recourse to VERs and national restrictions have also declined over time. Since 1991, because of the creation of the Single Market and market adjustment, many of these measures have been converted into non-restrictive surveillance. Among the VERs against the ASEAN countries, special mention may be made of the arrangement between Singapore and the United Kingdom on colour TV sets, which the European Commission considered at the exporting country's initiative. In relation to the above, and particularly in view of the importance of the agricultural sector in the ASEAN economies, ASEAN has taken a special interest in encouraging the EU to liberalize its trade in agriculture. Thus, ASEAN welcomed the agreement on agriculture at the conclusion of the Uruguay Round. ASEAN has called for full commitment and immediate implementation of the agreement on agriculture by the developed countries, in particular, the EU so as to achieve the objective of liberalizing the world agricultural trading system. ASEAN hopes that with liberalization, the member countries

2. ASEAN's Policies Towards The European Union

17

will be able to improve their market access for processed agricultural products. Presently, the EU's Common External Tariff (CET) protects domestic palm oil refineries, and the high tariffs of 11-12 per cent imposed on processed palm oil and processed palm kernel oil have given an unfair advantage to other producing countries to export the commodity in crude form. In addition to palm oil, ASEAN would like the EU to provide better market access for other processed products, in particular, rubber, timber and cocoa products. In the oleochemical sector, ASEAN would like the EU to reconsider reclassifying oleochemicals from agriculture to chemical. The reclassification will reduce the competitiveness of palm oil/palm kernel oil-based oleochemicals in the EU because of the higher tariffs imposed on products under the chemical category, and this will result in reducing the demand for such products. In addition, sentiments against palm oil-based oleochemicals have surfaced in the EU, which consider such products as non-renewable/biodegradable and are hazardous to the environment. ASEAN urges the EU not to link palmbased oleochemical products to environmental degradation and not to create a technical barrier to trade for these products. ASEAN is particularly concerned with the U.S.-EU Agreement on Agriculture which is a major setback to efforts undertaken to liberalize world trade in agriculture because subsidies still remain and are not eliminated. Recent changes in the regulations administering the CAP (Common Agricultural Policy) were not substantial as oilseed farmers continue to be heavily subsidized even though subsidies are no longer based on the quantities produced, but on the area sown. The Blair House Agreement allowed the EU to produce oilseeds up to 10.7 million tonnes in 1995. On the whole, vegetable oils exported from ASEAN will still have to contend with competition from the surplus production of vegetable oils in the EU which are exported to third countries. EU farmers still receive huge subsidies and direct payments. In addition, the 15 per cent set-aside scheme has not been effective in cutting down oilseed production. ASEAN urges the EU to reduce its farm subsidy practices, as such a policy will continue to prevent fair trade in oils and fats.

18

Chee Peng Lim

ASEAN is also concerned with the health and safety legislation on nitrosamine levels in rubber products that will be imposed by member states of the EU. The only latex products currently affected by this legislation outside Germany are baby bottle teats and soothers. Meanwhile, Germany has passed a legislation with regard to nitrosamine in natural rubber products recommending that all products such as toys, balloons and condoms should be included. In ASEAN's view, the hazard of using rubber products made of natural rubber is negligible and studies have shown that other organic substances are also hazardous to health. The replacement of natural rubber by synthetic rubber will pose even more environmental problems. In this regard, ASEAN urges the EU to provide proper information and to educate users of such rubber products and not through labelling which gives a negative connotation and implies that these products have to be avoided. ASEAN's other concerns relate to various forms of trade barriers which have emerged in the EU in respect of tropical timber. For instance, there is now a trend towards ceo-labelling of processed and manufactured products in timber, including furniture, which has been implemented in many countries in the EU. Despite efforts to provide more information on sustainable development of the forestry sector in this region, the campaign against tropical timber continues unabated. The non-governmental organizations (NGOs) continue to exploit the issue of tropical rainforest at international fora as well as in the mass media, to the detriment of timber and timber-related industries in ASEAN. They have strengthened their efiorts to generate support from the public by widening the issue to include indigenous rights of the forest dwellers. As a result, the governments of member countries in the EU are considering policy guidelines and administrative procedures as well as regulations to restrict, boycott, or even ban importation, sale and utilization of tropical timber and timber products, including furniture from these countries. ASEAN member countries are fully aware of the need to balance trade and the environment, particularly in forest management and conservation. However, co-operation from other countries and regions

2. ASEAN's Policies Towards The European Union

19

in environmental technology and financial support is vital for ASEAN to succeed in such efforts to manage its forests. The EU's current efforts to formulate regulations on eco-labelling and its early implementation will undoubtedly have the effect of restricting trade and utilization of tropical timber and non-timber forest products, thereby adversely affecting the development of this sector as well as the growth of timber producing countries in the region. The situation has worsened even further with the signing of the Maastricht Treaty through which the European Parliament will be able to apply more legally based political pressure on the Commission to initiate legislative proposals, including a complete ban on the import and usage of tropical timber and timber products. ASEAN is of the view that the issue of certification and labelling of timber and other forest products should be conducted in an objective, rational and fair basis, and on condition that no certification or labelling should be effected before the Sustainability Target Year 2000 as set by the International Tropical Timber Organization (ITTO). In addition, certification and labelling regulations, if deemed desirable and practical, should be made applicable to all types of timbers and should be based on internationally agreed guidelines, criteria and standards. In this regard, ASEAN urges the EU to adhere to its commitment made at the ITTO on Sustainable Forest Management by the year 2000. Meanwhile, it is noted that an increasing number of local authorities, municipalities and other local government bodies in the EU have unilaterally resorted to restrictive actions on the use of tropical timber either in the form of regulations or directives, prohibiting or restricting the use of tropical timber. Not only are these restrictive unilateral actions discriminatory and based on the notion linking tropical timber trade with deforestation, they also deprive tropical timber of its inherent value and subsequently discourage investments in long-term forest renewal, leading ultimately to the abandonment of the forest itself. Thus, such restrictive actions will only undermine and reverse the whole process of sustainable forest management which many tropical countries arc striving for.

20

Chee Peng Lim

ASEAN views with grave concern the unilateral actions taken by some local government bodies in the EU to restrict the use of tropical timber. In this regard, ASEAN appreciated the understanding expressed by the EC at the second meeting of the ASEAN-EU JCC SubCommittee on Forest in Surabaya on 14-15 June 1995, that member states of the EU will honour and uphold commitments made by their national governments at international fora. At the seventeenth Meeting of the ASEAN Ministers of Agriculture and Forestry held in Singapore on 24-26 August 1995, an agreement was reached on the proposal to ensure that local authorities in the EU lift their unilateral actions on tropical timber and abide by their international commitments, particularly at the WTO, ITTO, and United Nations Conference on Environment and Development (UNCED). More recently, the ASEAN Ministers of Agriculture Meeting in Manila on 26-27 August 1996 expressed their concern over the new Generalised System of Preferences (GSP) for agricultural products introduced by the EU which would be effective on 1 January 1997. This would have an adverse impact on the export of agricultural products from ASEAN to the EU. ASEAN is concerned that the net effect of the EU's trade policies for ASEAN will not only depend on the direct measures (that is, measures explicitly aimed at EU-ASEAN trade flows) but also on the evolution in its trade policies towards other countries and regions. Although the liberalization of trade policies towards Eastern Europe, for instance, is not an example of discrimination stricto sensu, but a normalization of trade relations, similar adverse trade diversion effects can be expected, as in the case of genuine discriminatory trade policies. Similarly, the expansion of the EU to include new members has also exerted an adverse impact on ASEAN, albeit unintended. For example, when Austria joined the EU it reduced its textile imports from Thailand to keep in line with its EU partners. While the decline in anti-dumping investigations and VERs has allayed ASEAN's fears, two emerging issues threaten to complicate ASEAN-EU trade relations. The first concerns the EU's new GSP which was introduced on 1 January 1995 to replace the previous GSP

2. ASEAN's Policies Towards The European Union

21

introduced in July 1971. Unlike the previous scheme, the new GSP has no preferential limits, which is a considerable simplification. However, the ASEAN countries are concerned with the tariff modulation and graduation mechanisms incorporated into the new GSP. The latter, for example, will take into account, for each major sector of production, the level of industrial capacity reached by each beneficiary country, in order to determine whether, depending upon its level of development, that country still needs the GSP in order to maintain its export performance. (For details, see EC 1996b.) ASEAN is concerned that with the incorporation of the above mechanism in particular, the graduation mechanism will have an adverse impact on some of its member countries. Another concern relates to the supplementary objectives of the new GSP scheme, particularly the social and environmental incentive clauses. This should be seen in the wider context of the new global trading arrangements embodied in the Final Act and brings us to the second potentially divisive trade issue between ASEAN and the EU. At the eleventh ASEAN-EU Ministerial Meeting (AEMM) at Karlsruhue, Germany, on 22-23 September 1994, the ASEAN Ministers stressed their concerns over certain elements, such as "Social Incentives", in the EU's proposals on the review of the GSP. The ASEAN Ministers requested that the new scheme should take into account the need for smooth industrial development in the ASEAN countries and the multilateral principles. More generally, ASEAN has taken a strong stand against any attempt to introduce social clauses as conditionalities in any trading arrangement. ASEAN is concerned that the developed countries, including the EU, are intent on seeking greater harmonization in labour standards and the environment. While the developed countries may have good intentions, such a move will hit developing countries like ASEAN in products where their comparative advantage is greatest. In resisting pressures for greater harmonization in labour and environmental standards, ASEAN has many good arguments on its side. First, most careful empirical studies have found that the quantitative impact of social and environmental dumping, if it exists at all,

22

Chee Peng Lim

is quite small. Secondly, as the advocates of free trade never cease to point out, nothing works in enhancing labour standards and environmental protection as well as an increase in income levels, which is of course what free trade is designed to achieve. Thirdly, trade restrictions are a very blunt and often counterproductive instrument for achieving their states' moral objectives. Fourthly, the experience within the United States and the European Union demonstrates that a high degree of economic integration can coexist with widely varying labour practices and institutions at the level of states or member countries. Fifthly, many environmental concerns can be adequately covered with appropriate labelling of imported goods. Finally, since labour and environmental questions go beyond trade relations, these issues should be discussed in their own appropriate multilateral forum and not in the WTO. ASEAN's Foreign Direct Investment Policies The balance of payments statistics of the International Monetary Fund (IMF) show that the fifteen member countries of the EU are responsible for about half of the global outflow of foreign direct investment (FDI). Their PDI outflow is substantially larger than that of the two largest OECD (Organization for Economic Co-operation and Development) member countries, Japan and the United States. In the last two years, the European outflow appears to have stabilized at about US$1 00 billion, probably because of the relatively slow economic growth in the region (UN 1995). Most of the EU's FDI outflows are destined for other EU countries. The extra-European FDI outflows appear to be smaller than those from the United States but substantially larger than those from Japan. ASEA:'-J has traditionally accounted for a low share of the outward FDI from the EU. Moreover, the EU's share of FDI in ASEAN has declined since 1985. For example, investments from the EU amounted to US$4.78 billion in 1993, compared to US$7.3 billion in 1991. In 1993. the EU accounted for 20 per cent of the total inflows of FDI into ASEAN. Thailand ranked first among the ASEAN countries as the largest ASEAN host for FDI from the EU, followed by Indonesia,

2. ASEAN's Policies Towards The European Union

23

Singapore, the Philippines and Malaysia. The EU became the second largest investor in Indonesia in 1993, contributing a cumulative amount of nearly 4 billion ECU in 236 projects in the country. (For details, see EC 1996 b and c.) ASEAN has a relatively small share of the FDI from the EU because during the 1980s European companies focused mainly on opportunities within the EU, offered by the European integration process. More recently, European attention has primarily concentrated on the nearby markets in Central and Eastern Europe. In addition, European companies have underestimated the growth potential in ASEAN. They have preferred to rely more on direct exports to ASEAN than on building up extensive sales networks there. In view of the above, ASEAN's policies have been to encourage the EU to increase its FDI in ASEAN. The Association has taken steps to further improve its conducive environment for investment. More specifically, it is now trying to implement the ASEAN Investment Area (AlA) concept. Briefly, AlA will try to encourage more FDI flows to ASEAN by reducing barriers to the free flow of capital and adopting simpler and more transparent rules on FDI. AlA will also encourage foreign investors to perceive ASEAN as a single investment region rather than a collection of different investment destinations. Although ASEAN is aware of the need to improve its investment climate to attract more FDI from the EU, it is unwilling to accept the EC's suggestion to introduce the multilateral investment agreement (MIA) in the WTO. The EC's version of the MIA would give rights to foreign companies to establish themselves with 100 per cent equity in all sectors (except security) in any WTO country, without restrictions, and to be given "national treatment" (that is, to be treated equal to or better than local firms). National policies or laws which favour local enterprises or facilities would be deemed discriminatory and thus illegal in the view of the WTO. The EC plan has been outlined in several speeches by the EC Commissioner Sir Leon Brittan and systematically set out in an EC paper, "A level playing field for direct investment worldwide", informally circulated to WTO diplomats in Geneva.

24

Chee Peng Lim

ASEAN is opposed to the MIA. and many of the reasons are those outlined by Martin Khor (1996), editor of the Third World Network. Developed countries have already introduced other instruments or concepts for controlling rivals and decreasing their competitiveness, such as TRIPs (trade in intellectual property rights), TRIMs (traderelated investment measures), social clauses (trade measures linked to labour standards and human rights), and environmental standards (such as in PPMs, or process and production methods). There is a fear that the investment treaty would be another powerful instrument for preventing the emergence of competitors in the South. The investment treaty is designed to erode or significantly remove the rights of Southern governments to regulate foreign investors and reduce their ability to build up local enterprises, which will not be able to compete with the bigger foreign firms. It would also prevent local firms from developing the capacity for manufacturing exports. ASEAN, like most other developing countries, welcome foreign investment but experience shows that for foreign investment to play a positive role, governments must have the right and power to regulate their entry, and terms and conditions of operations. Many developing countries such as ASEAN also have policies that favour the growth of local companies. Such policies are justified on the grounds of sovereignty (that a country's population has to have control over at least a minimal but significant part of its own economy), or national development (that local firms need to be given a "handicap" or special treatment at least for some time so that they can be in a position to compete with more powerful and better endowed foreign companies). If ASEAN accepts the EC's position that the MIA should be applied within the WTO's framework, then the obligations will be binding. In any case, ASEAN has already reached a consensus that no new issues should be introduced into the WTO at this stage of its development. More specifically, the Singapore Trade Minister has put forward a suggestion that before any new issue is brought into the WTO for negotiations, it should be able to meet three criteria: that it be substantially trade-related, that the WTO (and not some other agency)

2. ASEAN's Policies Towards The European Union

25

is the appropriate forum, and that the issue is already "mature". On all three counts, the MIA or "trade and investment" fails to meet the test. Despite ASEAN's opposition to the MIA, the prognosis for attracting more FDI from the EU looks promising since the latter has also realized the importance of increasing its investment to ASEAN. In this connection, mention should be made of the European Investment Bank (EIB) and the European Community Investment Partners (ECIP). The EIB finances investment projects in non-member countries in addition to its contributions to balanced development within the Union. Since 1992, the EIB has extended its lending operations to Asia and Latin America on an experimental basis. The scheme is open to countries there which have a co-operation agreement with the Union. An allocation of 250 million ECUs per year over three years is available for these countries. During the first year of operation, loans worth 100 million ECU were made to projects in Asia. In ASEAN, the EIB is financing natural gas transport in Indonesia and Thailand as well as the extension of Davao Airport in the Philippines. The total value of loans provided by the EIB in the three ASEAN countries amounts to 89 million ECU (BIB Information, February 1996). The European Community Investment Partners facility promotes joint ventures in Asian, Latin American and Mediterranean countries between local and European operators. Between 1988 and the end of 1933, 292 projects for a total ECIP financing of about 30 million ECU have been approved for Asia. More than 150 projects had been approved in the ASEAN countries by mid-1994 under the EU-funded scheme set up to provide seed money to EU and ASEAN companies wanting to enter into joint ventures and other forms of collaboration. More recently, ASEAN and the EU are co-operating in implementing the Partenariat Project. The ASEAN-EU Partenariat is designed to establish strategic alliances between small and medium-sized enterprises (SMEs) from the EU and ASEAN through pre-arranged business match-making and the meeting is scheduled to be held in November 1997 in Singapore.

. 26

Chee Peng Lim

ASEAN's Policy on Development Co-operation The EU has been the largest source of development assistance for ASEAN after Japan and Australia. EU development aid to ASEAN has averaged 60 million ECU per year since 1991. This development aid, all of it in grant form, is now limited to Indonesia and the Philippines. Aid to Indonesia is concentrated on the forest-conservation sector and to the Philippines on rural development, family planning and environmental protection. Most of this aid is channelled through government and other official agencies but there is a growing tendency to use NGOs and local and traditional communities (EC 1996a, p. 16). Following the expansion of ASEAN's membership to include Vietnam and possibly to Laos, Cambodia and Myanmar in 1997, ASEAN now seeks to raise the living standards in those countries. One objective is to prevent the emergence of a two-tier economy in ASEAN, one which is relatively rich and the other relatively poor. Thus, ASEAN's policy is to encourage the developed countries, such as the EU, to assist in helping its new and potential member countries to make a smooth transition to market-oriented economies. Currently, Vietnam is the recipient of the largest programme of technical assistance set up by the EU in Asia in 1995. The programme follows five priorities: 1. the global reform of the accounting system, 2. the development of a framework ofreference for the insurance system, 3. assistance to the State Committee for Co-operation and Investment, 4. technical assistance in matters of standards and quality, 5. the modernization of the administration of patents. At the regional level, ASEAN and the EU are implementing more than 57 co-operation projects in the areas of trade, industrial matters, commerce, investment, environment, science and technology narcotics, human resource development, and institutional development, in which the EU will provide financial and technical assistance to ASEAN. Four

2. ASEAN's Policies Towards The European Union

27

sub-committees, namely, Trade, Economic and Industrial Co-operation, Forest, and Science and Technology, have been formed to discuss and review the progress of the co-operative projects under their respective expert areas. Proposals were also made at the last ASEAN-EC JCC Meeting (3-5 October 1995 in Brussels) to initiate two more subcommittees to deal with environmental and narcotic projects; and to establish expert group meetings in the areas of intellectual property rights and industrial standards and quality. A list of major EU-funded co-operation projects with ASEAN during the period 1986-95 is shown in Table 2.3. Among these is the ASEAN-EC Management Centre to address contemporary strategic issues of mutual concern to ASEAN and EU senior managers. With the establishment of the Sub-Committee on Science and Technology, ASEAN and the EU will formulate a list of activities with emphasis on technology transfer, research and development cooperation and the commercialization of these activities. In relation to this, ASEAN and the EU signed a financial agreement in January 1995 to implement the COGEN Programme which would facilitate the transfer of modern, efficient and environment-friendly technology in the field of energy production from Europe to the ASEAN countries. New areas of development co-operation are also being studied to promote mutual understanding and to enhance people-to-people contact. In the pipeline are the convening of a Europe-Asia Cultural Forum, the implementation of an ASEAN-EU Junior \1anagers Programme and, possibly, an ASEAN-EU Scholarship Programme. Conclusion ASEAN's economic policy objectives towards the EU are not very different from those towards its other major Dialogue Partners, such as the United States and Japan. Those objectives are to improve ASEAN's access to their markets and to attract more FDI from them. Like its other major Dialogue Partners, ASEAN's economic policies towards the EU have been largely influenced by the different levels of economic development in the two regions. At the same time, the rapid economic development in ASEAN has changed the nature of its

TABLE 2.3 Major EU-funded Co-operation Projects with ASEAN, 1986-95 Title (Objectives)

EC grant (M ECU)

ASEAN Timber Technology Centre Upgrading of design, production and making skills for the timber-processing industry, and promotion of joint ventures with European industry. Exhibition Planning Assistance for ASEAN export promotion authorities in planning participation and implementation of international trade exhibitions. Industrial Standards & Quality Assurance Programme Harmonization of industrial standards, and upgrading of institutional and private-sector capabilities in the field of standards and quality control. ASEAN-EC Aquaculture Development Programme Joint research in improved techniques of aquaculture production. ASEAN-EC Scholarship Programme Study opportunities and work experience in Europe for young professionals, in such fields as environment, business management, public administration. ASEAN-EC Energy Management Trading & Research Centre Improved methods of national and regional energy forecasting and planning. COGEN 1 & 2 Information and demonstration of improved technologies for energy cogeneration (use of in-plant energy production to supplement grid supplies). ASEAN-EC Air Traffic Control Programme Training and capability-enhancement programme in air traffic control. ASEAN-EC Port Management Programme Training and capability-enhancement programme in port management. Urban Environment Co-operation Co-operation between ASEAN and European cities in urban environmental planning issues. ASEAN-EC Patents and Trademarks Programme Upgrading of institutional capabilities and industrial awareness in the field of patents and trademarks. Radar Remote Sensing Programme Demonstration and training in practical applications of radar remote-sensing data for scientific, environmental, agricultural and planning uses. Regional Institute for Environmental Technology (Singapore) Information and demonstration of improved environmental technologies for industry. Geodetics Research Joint research in the use of remote-sensing techniques for geological and volcano-logical research. Interuniversity Co-operation Joint research in biotechnology and environmental issues linking universities in ASEAN and Europe. ASEAN-EC Business Management Centre Network linking business management schools in ASEAN and in Europe.

8.25

Period

1987-92

1988-93

1989-93

1989-94 1992-95

1992-95

1992-98

1993-94 1993-95 1993-95 1993-96 1993-96

1994-97 1994-96 1995-97 1995-98

1.09

5.00

6.77 3.97

4.19

8.97

1.27 1.50 0.58 6.50 3.90

2.70 1.20 0.89 1.97

- (/)

~ z < (jj" ~ "0 Q. ::J

.-+

..... 0

~

110 Teofilo C. Daquila

Table 6.5 shows that, based on UNCTAD data, the European Union, Japan and the United States are the three largest investors in ASEAN, with a combined stock of investments of US$12.7 billion in 1980. This rose to US$7 4.8 billion in 1993, representing an almost sixfold increase. The triad's share of total investments in ASEAN rose significantly in 1985 to 65 per cent, but fell to about 54 per cent in 1993. This shows that ASEAN has been a preferred destination of the triad's investments. How important is the EU as ASEAN's investing partner, relative to Japan and the United States? Japan is the largest investor in ASEAN with an average share of about 25 per cent during the 1980-93 period. The EU comes next with an average of about 20 per cent of the total investments in ASEAN by all countries during the same period. Investments by the European Union were more pronounced in 1993 relative to 1985, rising threefold during the period. The United States had an average share of about 15 per cent. Among the ASEAN countries, Singapore and Malaysia are the most highly dependent on the EU's investments, in terms of the average share of investments. All the ASEA~ countries, led by Thailand, Indonesia and Singapore are highly reliant on Japanese investments. The Philippines is the most dependent on U.S. investments, followed by Singapore and Thailand. The significance of U.S. investments in the Philippines can be traced to some extent to the historical relationship between the two countries. Indonesia and Malaysia are the least dependent on U.S. investments. The geographical pattern of the EU's investments, as shown in Table 6.6, reveals that the United Kingdom was the largest investor in ASEAN, as it accounted for an average share of 48 per cent in 1994, compared to 34 per cent in 1985. British investments in Indonesia more than doubled to about 90 per cent while Singapore's share rose more than fifteen times to about 64 per cent. Its investments in ather ASEA~ countries remained high although its share in the Philippines more than halved to about 33 per cent. The other leading investors in ASEAN are the Netherlands, France and Germany. each with an average share of about 15 per cent in 1994. Relating this with the

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TABLE 6.5

Foreign Direct Investments in ASEAN-5 by the EU, the United States and Japan Value (mil US$)

1980

1985

Share of FDJ, %

1993

1980

1985

1993

Average Share,%

European Union Indonesia Malaysia Philippines Singapore Thailand ASEAN

851 1720 114 1342 156 4183

2672 2264 349 2040 350 7675

9967 5842 748 5271 1484 23312

8.3 26.6 9.3 39.6 15.9 18.7

17.4 26.6 13.5 30.4 15.8 21.7

14.7 17.1 17.1 26.9 10.7 16.7

13.0 23.0 13.0 32.0 14.0 19.0

3462 1135 206 567 285 5655

5009 1602 362 1600 622 9195

13937 7435 890 6167 4579 33008

33.7 17.6 16.8 16.7 29.0 25.3

32.6 18.8 14.0 23.9 28.0 26.0

20.6 21.8 20.3 31.5 32.9 23.6

29.0 19.4 17.0 24.0 30.0 25.0

437 413 669 1001 322 2842

974 604 1461 2440 721 6200

3701 3586 1937 6851 2412 18487

4.3 6.4 54.6 29.6 32.8 12.7

6.3 7.1 56.6 36.4 32.5 17.5

5.5 10.!i 44.1 35.0 17.3 13.2

5.4 8.0 51.7 33.7 27.5 14.5

4750 3268 988 2910 762 12678

8655 4470 2172 6081 1693 23071

27605 16864 3576 18289 8476 74810

46.2 50.6 80.7 85.9 77.7 56.8

56.4 52.5 84.2 90.7 76.2 65.2

40.8 49.5 81.5 93.4 60.9 53.6

47.8 50.8 82.1 90.0 71.6 58.5

10274 6462 1225 3387 981 22329

15353 67625 8510 34091 2580 4389 6708 19581 2221 13918 35372 139604

100.0 100.0 100.0 100.0 100.0 100.0

100.0 100.0 100.0 100.0 100.0 100.0

100.0 100.0 100.0 100.0 100.0 100.0

100.0 100.0 100.0 100.0 100.0 100.0

Japan Indonesia Malaysia Philippines Singapore Thailand ASEAN

United States Indonesia Malaysia Philippines Singapore Thailand ASEAN

Triad Indonesia Malaysia Philippines Singapore Thailand ASEAN

All Countries Indonesia Malaysia Philippines Singapore Thailand ASEAN Source: UNCTAD.

TABLE 6.6 Geographical Distribution of EU Investments in ASEAN Indonesia

TOTAL EC 1985 1994 1985-89 1

z < ii)" ~

"0 0

s·

.....

Source: As for Table 6.11.

...

N

122

Teofilo C. Daquila

The EU has been one of the leading investors in ASEAN but the latter countries have minimal investments in the EU. There is therefore asymmetry in trade and investment relations. Although ASEAN's population is big, its regional income is very much less than the EU's combined income and its income per capita is therefore very much less than that of the EU. The two players are thus not equal. But does this imbalance need to continue? Does it have to be a David and Goliath relationship? Should it be merely ASEAN which needs to undertake steps and actions to improve and strengthen this relationship. The answer to all these questions is no. More importantly, the EU countries should continue to have dialogues with their ASEAN partners, sort out the obstacles, deliberate on important issues, improve on existing policies and institutions, replace ineffective policies and even create new institutions. ASEAN's trading and investment partners are the same: the UK, Germany, Netherlands and France. The UK's presence in ASEAN has some historical linkages as Brunei, Malaysia and Singapore were under British rule. These economies, including Thailand, adopted a relatively free market system because of the British influence. On the other hand, the diminishing presence of the Netherlands and Spain in Indonesia and the Philippines, respectively, reflects more an image of nationalistic attitudes departing from the colonial pattern in the past. Although Germany and France did not rule the ASEAN-6, their strong presence in the region stemmed from their business acumen. They were able to establish commercial enterprises in the very early history of ASEAN. Thus, there is some historical explanation in the important contributions of the UK, Germany, Netherlands and France in ASEAN-EU economic relations. We will now identify the different factors which have affected the economic links between ASEAN and the EU. Macroeconomic Policy The first factor is analysed in the context of macroeconomic policy, in particular, demand-management policy, including fiscal, monetary and exchange rate policy. Macroeconomic policy affects output and

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123

the real exchange rate. Changes in the real exchange rate or in output will, in turn, have an impact on exports and imports. An increase in the EU's income, or a real depreciation of the exchange rate will increase ASEA~'s exports to the EU. ASEAN's imports from the EU countries are influenced by the economic activity in the region and the real exchange rate. An increase in ASEAN's income or a real appreciation in exchange rate will increase ASEAN's imports. As prices of non-tradable goods increase because of fiscal expansion, 5 the output of non-tradables will also increase and real GDP will rise. Thus, a robust economic growth in the ASEAN countries will result in an increased demand for foreign goods, including European goods. As ASEAN citizens become more affluent, their consumption preferences change towards more expensive European goods. This will result in an increased demand for tradables and eventually a current account deficit. The current account balance then deteriorates. In the same manner, ASEAN's exports to the EU will fall if the EU experiences recession or a worsening of their economic performance. Thus, the first constraint to establishing strong links between ASEAN and the EU continue to be the need for their economies to sustain growth, which would, in turn, depend, to a large extent, on their macroeconomic policy. Trade Policies The second factor affecting ASEAN-EU trade is in the area of trade policies. Dr. Hiemenz in his discussion has noted two groups of policies. The first group is what he has termed "the old model", which includes a) the Generalized System of Preferences (GSP), b) agricultural protection, and c) the Multi- Fibre Arrangement (MFA). The second group consists of new protectionist trade measures, including a) antidumping procedures. b) voluntary export restraints, and c) regulations and standards on sanitation, environment and labour. While the first group will be phased out eventually, the second group will pose a danger to the trading relations between ASEAN and the EU. The EU grants trade privileges to developing countries under the Lome Convention through which it has established economic relations

124 Teofilo C. Daquila

with fifty-two African, Carribean and Pacific (ACP) countries. However, a pyramid-like structure of privileges can be observed. The ACP, which were former colonies of the EU countries, have received most of the benefits as they were at the top of the list. ASEAN is placed at the bottom and hence has obtained no more than GSP privileges. 6 To what extent has the GSP benefited ASEAN? Hiemenz (1988) cited the finding of Langhammer and Sapir that the GSP applied in the United States and the European Union hardly promoted manufactured export expansion in the developing countries, but rather discriminated against potential suppliers via a complex network of product and country quotas. 7 Hiemenz stated that this conclusion also applied to ASEAN as only about 42 per cent of ASEAN exports in 1985 had actually entered the EU market duty-free, or with reduced duty for some processed agricultural products. The latest European Commission figures showed that in 1993, EU imports from ASEAN reached 25,486 million ECU, out of which 21,753 million ECU were eligible for GSP. However, only 9,498 million ECU received GSP, a share of 44 per cent which reflected an increase of only 2 per cent from 1985. As Hiemenz (1988) pointed out, the GSP has been of limited relevance for ASEAN as an export-stimulating instrument as many agricultural products of export interest to ASEAN were excluded from it. 8 Moreover, Hiemenz pointed out during his discussion that the GSP has never been the central driving force of export expansion between the ASEAN countries and Europe. Ambassador Schmallenbach has also emphasized that the GSP has been used as a development policy tool rather than as a trade policy, as GSP benefits have been withdrawn from the more advanced economies. Despite the dramatic increase in ASEAN's exports of manufactured products, the member countries also want to develop their traditional export of palm and coconut oil, industrial fatty alcohol, and plywood. These goods enjoy preferential rates but ASEAN wants larger quotas or a reduction in GSP rates. 9 Thus, ASEAN is faced with an obstacle: a low GSP utilization rate and imposition of quotas by the EU. On 1 January 1995, a new GSP scheme for manufactured products was implemented and will remain in force for four years (1995-98). The

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125

new scheme allows for a graduation mechanism whereby the EU will withdraw GSP benefits for entire product sectors from more advanced countries. All the ASEAN countries, except the Philippines, will be affected by the graduation mechanism during this four-year period, except under two conditions. 10 ASEAN exports of textiles and clothing (T & C) were subjected to a bilateral agreement between individual ASEAN countries and the EU under the Multi-Fibre Agreement (MFA). The EU and ASEAN countries agreed that trade in T & C be removed from the GATT (Generalized Agreement on Tariffs and Trade) rules. The MFA was replaced by a new agreement that was decided during the Uruguay Round. The new agreement, which has been in force since 1 January 1995, intends to reintegrate trade in T & C into the WTO-GATT over a ten-year period. Thus, ASEAN will face greater competition from other T & C exporters in Asia, Central and Eastern Europe, and the Mediterranean. As Dr. Hiemenz pointed out, the Eastern European and Mediterranean countries have been granted fairly widespread preferences, resulting in trade diversion to the disadvantage of the ASEAN countries.

Industrialization and Investment Policies The third factor in ASEAN-EU trade relations is analysed in the context of industrialization and investment policies. As ASEAN's export-oriented industrialization policy depends heavily on massive inflows of foreign direct investments, this will only continue if ASEAN remains internationally competitive by way of deepening investment liberalization measures. The evolution of ASEAN's industrialization policy is traced as follows. The ASEAN countries adopted an industrialization policy of import-substitution in the 1950s and 1960s. Foreign direct investments flowed into the manufacturing industry. With import-substitution, industries were set up to produce simple and low-priced consumer goods for the domestic markets. The Philippines has the longest history of industrialization which has resulted in an inward-looking manufacturing sector, excessive reliance on imports of industrial goods from

126

Teofilo C. Daquila

developed economies, and urban-biased development. On the other hand, Singapore had the shortest import-substitution experience as its domestic market was too limited to avail of economies of scale. Singapore therefore followed an export-oriented policy, with foreign direct investments being the main driving force. During the 1960s, Singapore welcomed foreign direct investments in labour-intensive manufactures for the export market. 11 During the 1970s and 1980s, all the ASEAN countries shifted towards an export-oriented industrialization policy, with foreign direct investments. This dramatic shift was due to the limited success of the import-substitution policy, falling and volatile prices of primary commodities, and export diversification. There has been a change in the structure of ASEAN-EU trade away from primary exports towards manufactured goods, and towards increasing dependence on imports of manufactured goods from the EU. The reliance on FDI has continued and even strengthened as the ASEAN countries realize the tremendous contribution of foreign investments to their national economic development. These benefits include providing finance, management, technology and marketing expertise for industrialization. Over the years, foreign investment policies have been further liberalized, including fiscal incentives, foreign equity, rules of origin, and others. The ASEAN countries have provided generally similar investment incentives but have received different types of investments. Investment policies towards resource development arc the most restrictive and those towards exportoriented manufacturing investments the most liberal, with manufacturing investments in the local market falling in between. 12 The rising level of savings in ASEAN need to be complemented with continued dependence on foreign direct investments. Due to the differences in the pace of industrialization, the factor intensity of these investments also differ. Singapore, with the most rapid pace of industrialization, favours highly capital-intensive, high value-added and high-technology industries. The ASEAN countries themselves, in particular Singapore and Malaysia, have encouraged their citizens to globalize -that is, to invest overseas, either by themselves or through

6. Obstacles to Closer Trade and Investment Links: An ASEAN Viewpoint

127

joint venture arrangements. The ASEAN and EU countries can form partnerships in investing in third countries.

Financial Liberalization Policy The fourth factor is the financial liberalization policy. Only when the financial sector continues to be liberalized will ASEAN trading relations be boosted. Singapore and Malaysia were more open economies and had fairly well-developed financial systems in the 1960s and 1970s. Liberalization continued and their financial systems have matured. In Indonesia and Thailand, financial liberalization began in the 1980s. The Philippines has also implemented far-reaching financial reforms. 13 Liberalization of the financial system in ASEAN has certainly contributed to increased trade and investment between ASEAN and the EU. In particular, these reforms include, among others. interest rate reforms and allowing more foreign banks to enter. With more European banks in ASEAN, trade and investment transactions will be facilitated. Trade and investments will be further stimulated if the ASEAN countries allow multinational corporations (MNCs), including those from the EU, to access ASEAN's domestic markets for additional financing, either through loans or equity, or both. The ASEAN countries thus need to further liberalize their financial systems in order to increase ASEAN-EU trade and investments. The Role of Institutions The fifth factor is the role of institutions. Only when these institutions really become operational and strong will ASEAN-EU economic relations continue to be promoted. Among the various institutions, the institutionalization of the ASEAN-EU partnership is an important step towards enhancing relations. Although ASEAN-EU relations began informally in 1972, formalization took place in 1980 with the signing of the ASEAN-EC Joint Co-operation Agreement. The Co-operation Agreement established a framework for commercial, economic and development co-operation. 14 ASEAN-EC JCCs have been established in individual ASEAN countries to promote European investments in ASEAN. In 1992, the EU decided to enhance economic co-operation

128 Teofilo C. Daquila

in the ASEAN countries by creating an environment more conducive to trade and investment. favouring co-operation between firms, and promoting investment in small and medium-sized enterprises, both within the EU and in ASEAN. 15 The continuing dialogues between ASEAN and the EU reflect the growing importance of ASEAN to the EU and vice versa. Eleven ASEAN-EU meetings of foreign ministers were held between 1978 and 1994. Meetings of the economic ministers were also held in 1985 (Bangkok) and in 1991 (Luxembourg) following the ninth EU-ASEAN ministerial meeting. In addition, multilateral meetings such as the ASEAN Post-Ministerial Conference have been held each year since 1981 following the annual meeting of ASEAN foreign ministers. In September 1994, the eleventh ASEAN-EU Ministerial Meeting (AEMM) was held in Karlsruhe, Germany. At that meeting, the ministers agreed that increased EU-ASEAN co-operation is a central element in relations between Europe and the Asia-Pacific region. 16 The ministers recognized ASEAN as a cornerstone of the EU's dialogue with Asia. Consequently. in March 1996, the first Asia-Europe Meeting (ASEM) was held in Bangkok. It brought the leaders of ASEAN and the EU-15 together with the leaders of China, Japan and South Korea, aimed at increasing economic co-operation between the EU and Asia, focusing on ASEAN. This summit meeting between the leaders of the two large continents was an important step towards a more meaningful and enhanced relationship that would eventually result in the institutionalization of this summit meeting, that is, to be held once every two or three years. As in the case of ASEAN itself. the institutionalization of the ASEAN Heads of Government meeting, as provided in the 1992 Singapore Declaration, has strengthened ASEAN and put them closer together. Export Market The sixth factor affecting ASEAN-EU trade relations is the overconcentration or overdependence of ASEAN's trading relations with the United Kingdom, Germany, France and the Netherlands among the EU-12 countries. ASEAN thus needs to diversify its export markets

6. Obstacles to Closer Trade and Investment Links: An ASEAN Viewpoint

129

in the EU. It should actively participate or even initiate steps towards promoting the products of the region in the relatively untapped markets of the EU. ASEAN's commercial attaches or diplomats in Europe (and elsewhere) should be business-oriented and actively engaged in the marketing and promotion of ASEAN products. Alternatively, ASEAN as a group could set up a regional Trade, Investment and Development Board whose aim would mainly be to increase market and product shares in Europe as well as promote the ASEAN region as an investment haven in Asia. Nationals can be appointed and based in the different parts of Europe to act primarily as marketing and investment managers. These nationals could have European counterparts to assist them as the latter would have a better knowledge of and access to their own environment.

Type of Product The seventh factor lies in the type of products exported. To what extent have they met European tastes and preferences? Is the quality up to their standards? The ASEAN governments need to reconsider their educational curricula to equip students with the knowledge and skills needed by European and other foreign investors in the region. ASEAN also needs to encourage the EU governments to set up training institutes in the ASEAN region, as well as sponsor ASEAN workers to undergo training in the EU. Economic Structure The eighth factor has resulted from the structural transformation of the ASEAN economies away from the agricultural sector towards the industrial and services sectors. The manufacturing sector has received the major part of European investments. However, ASEAN now faces strong competition from newly emerging markets which can offer lower costs of production. The issue is whether government policies should promote the manufacturing sector at the expense of the agricultural sector. As ASEAN is essentially an agriculture-based economy, the agricultural sector needs to be promoted and developed as well, particularly in the labour-surplus economies. European businessmen

130 Teofilo C. Daquila

can invest in this sector through joint venture arrangements with ASEAN nationals and other foreign businessmen. Given their technological know-how on production, crop processing, storage and marketing, European investors would contribute significantly to the development of the agricultural sector. The ASEAN governments would have to provide the necessary infrastructure and incentives to boost investments in this sector. In the labour-short ASEAN economies, the financial and business services sector should be promoted and developed. Singapore has the most advanced financial and business environment. Brunei has explicitly stated that it intends to diversify its economy into a financial services hub. Malaysia is also promoting Labuan as an important financial centre. However, to encourage financial and business investors, the governments need to further liberalize this sector, and include more generous incentives and allow entry of foreign banks and institutions. The more developed financial centres in ASEAN can act as investment intermediaries for and on behalf of the ASEAN region as it continues to grow. More types of investment instruments will be sought and thus new institutions will be created as the region develops further and as ASEAN nationals become wealthier. Thus, financial liberalization should continue.

Concluding Remarks This chapter has highlighted several points. First, ASEAN exports to the EU represented an average of about 13 per cent of ASEAN's global exports while its total imports from the EU constituted about 14 per cent of its global imports during the 1980-94 period. Secondly, the EU shared an average of about 20 per cent of total foreign direct investments in ASEAN by all countries during this period, with Japan being the leading investor, accounting for 25 per cent of global FDI in ASEAN. Thirdly, ASEAN's major trading and investment partners in the EU are essentially the same countries, that is, the UK, the Netherlands, Germany and France. In 1994, these countries had about 61 per cent ofthe total EU-12 (or 57 per cent ofEU-15) population, and 69 per cent of total EU-12 (or 64 per cent of EU-15) GNP. There is thus plenty of room for improvement and expansion of ASEAN- EU

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131

trade and investment relations. The different factors affecting trade in terms of policy and institutional framework have been discussed, namely, macroeconomic policy, trade policy, industrialization and investment policy, financial liberalization policy, institutional cooperation, export markets, type of products and economic structure. ln addition to overcoming the obstacles related to these factors, the improvement and strengthening of economic links between ASEAN and the EU depend on their actions as a group. ASEAN will expand its membership to include the other Southeast Asian countries of Laos, Cambodia and Myanmar in the near future. The same is true with the European Union. With an expanded membership, both ASEAN and the EU would have a larger consumer market base. In 1994, the year following the creation of the Single European Market, ASRAN exports to the EU rose by 16.3 per cent, a significant improvement over the 8.3 per cent increase in 1993. The creation of a free trade area in ASEAN by the year 2003 (from AFTA-7 to AFTA-10) will be a plus factor for both the EU and ASEAN. More trade and investments be generated. The relationship has to be one of interdependence- ASEAN needs the EU as much as the EU needs ASEAN.

will

Notes * For providing him with data and other information, the author would like to thank Ms. Ghyliane Coste-Paul of the European Commission and some government officials from the Board of Investments and the Central Bank of the Philippines and Thailand, Malaysian Industrial Development Authority, Economic Development Board of Singapore, and ASEAN Secretariat. He is also grateful for the constructive and insightful comments of this paper's discussant, Dr. Ulrich Hiemenz, as well as the comments of Dr. Joseph Tan, Ambassador Klauspeter Schmallenbach and other participants in the conference. 1. The author acknowledges Dr. Hiemenz's point and thanks him for allowing the use of his data. 2. Northeast Asia refers to Japan, Taiwan, Hong Kong, South Korea and China. The massive foreign direct investments from Northeast Asia, particularly during the post-1985 period, was due to the appreciation of the yen in September 1985. Japanese investments, for instance, have

132 Teofilo C. Daquila

come into ASEAN with the aim of relocating its production processes as domestic industries began to lose their competitiveness. As the Japanese yen appreciates, wages in the manufacturing sector rise and hence increase the costs of production and eventually reduce profits. It is therefore in their best interest to transfer their production overseas (for example, ASEAN) where costs of production are lower. Investors from other countries such as South Korea and Taiwan followed the moves of Japan in order to remain competitive. Following the revaluation of the Taiwanese dollar and the Korean won, investments from Taiwan and South Korea have also markedly risen. See Daquila (1996, pp. S-6). 3. See Chia (1986, pp. 292) for 1977 investment data by MIDA. 4. See Daquila (1996, pp. 10-13) for a discussion of this relationship. 5. The analysis of a pure fiscal expansion is as follows. Assume that ASEAN is a small open economy and that, initially, there is both internal and external balance. The government increases its expenditures on nontradables (or home goods). In the presence of capital mobility, the increased spending on non-tradables increases the price of non-tradables and, hence, its price relative to tradables also increases. The real exchange rate appreciates and this will result in an increased demand for tradables, giving rise to a current account deficit. Employment and output in the non-tradable sector will increase as relative wages in terms of non-tradables decline. Employment and output in the tradable sector will decline, given the high capital mobility, since relative wages in terms of tradables increases. As money wages adjust in the medium run, the relative wage in terms of tradables will increase so that employment and output in the tradable sector will decline. The relative wage in terms of non-tradables will decline so that employment and output in the non-tradable sector will increase. In the long-run, the same qualitative effects will be seen in the medium run except that the current account balances, so that in the transition from the medium run to the long run, the tradable sector will expand a little while the non-tradable sector contracts. Thus, a permanent increase in government spending with flexible exchange rates will result in real exchange rate appreciation and a current account deficit in the short to medium run. The current account will balance in the long run. Employment and output in the tradable sector will decrease, but they will increase in the non-tradable sector. See Daquila (1989a), pp. 92-94 for a full discussion of fiscal and monetary expansion under a flexible exchange rate system.

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6. The GSP is a scheme which came into effect in 1971 whereby imports from the developing countries, including ASEAN, entered the EU either duty-free or at preferential or reduced rates. See European Commission (1994), p. 14. 7. See Hiemenz (1988), p. 353. 8. Ibid. 9. See European Commission (1994), p. 23. 10. The first condition: a country which accounts for more than 25 per cent of GSP imports of a given product sector will lose GSP benefits for that sector. The second condition: a country which should be graduated, but whose share does not exceed 2 per cent, will still enjoy GSP benefits. Those affected are Brunei (jewellery and precious metals), Indonesia (wood, footwear), Malaysia (plastics and rubber, wood, clothing and consumer electronics), Singapore (electro-mechanical equipment) and Thailand (plastics and rubber, articles of leather and fur skins, clothing, footwear, jewellery and precious metals). See ibid., pp. 21 for details. 11. See Chia (1982, 1986) for discussions of the different investment policies in ASEAN. 12. See Chia (1982), pp. 94. 13. For a discussion of financial liberalization in ASEAN, see Lian and Lee (1994), pp. 242-44. 14. See "Europe in Figures", Eurostat, p. 417. 15. See European Commission (1995b), pp. 5-6. 16. See European Commission (1994), pp. 9.

References ASEAN Secretariat. ASEAN: An Overview. Jakarta, 1995. Chia, Siow Yue. "EC Investment in ASEAN". In ASEAN-EEC Economic Relations, edited by Narongchai Akrasanee and Hans Christoph Rieger, pp. 256-313. Singapore: Institute of Southeast Asian Studies, 1982. - - . "EC Direct Private Investment in ASEAN States: A Southeast Asian View". In ASEAN-EC Economic and Political Relations, edited by R.H. Taylor and P.C.I. Ayre, pp. 91-110. London: School of Oriental and African Studies, University of London, 1986. Daquila, Teofilo C. "Macroeconomic Policy and Its Impact on the Philippine Economy". Ph.D. thesis, Australian National University, 1989a. Published by University Microfilms International, Michigan. - - - . "The Real Exchange Rate in the Philippines". ASEAN Economic Bulletin 6, no. 1 (1989b): 71-80.

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Daquila, Teofilo C. "The Role of Japan and Other Northeast Asian Countries in Southeast Asia". Paper presented at the Asian Studies on the Pacific Coast Conference, University of Alberta, Canada, June 1996. Department of Statistics. Foreign Equity Investment in Singapore. Singapore, 1980-89 and 1990-92 issues. - - - . The Extent and Pattern of Foreign Investment Activities in Singapore. Occasional Paper Series No. 64. Singapore, November 1995. European Commission. EU-ASRAN Relations: The Facts. Brussels, 1994. - - - . Europe - Partner of Asia: European Community Instruments for Economic Cooperation. Brussells, Sept 1995a. - - - . The European Union and Asia. Luxembourg: Office for Official Publications of the European Communities, 1995b. Hiemenz, Ulrich. "Expansion of ASEAN-EC Trade in Manufactures: Pertinent Issues and Recent Developments". Developing Economies 26, no. 4 (1988): 341-66. International Monetary Fund. Direction of Trade Statistics. Various issues. Langhammer, Rolf. "Competition among Developing Countries for Foreign Investment in the Eighties - Whom Did OECD Investors Prefer?". Weltwirtschaftliches Archiv 127, no. 2 (1991): 390-403. Lian, Daniel and Leo Tsao Yuan. "Financial Development in ASEAN". In ASEAN-China Economic Relations, edited by Joseph Tan L.IL and Z. Luo, pp. 240-72. Institute of World Economics and Politics and Institute of Southeast Asian Studies, 1994. Luhulima, C.P.F. "ASEAJ\-European Community Relations: Some Dimensions of Inter-regional Cooperation". Paper prepared for a conference on ASEAN and the European Community in the 1990s, organized by the Singapore Institute of International Affairs and Friedrich Ebert Stiftung, May 1992. Pelkmans, Jacques. "ASEAN-EC Relations in the 1990s". InASHAN and the European Community in the 1990s, edited by Lee Lai To and A. Wehmhoerner, pp. 46-7S. Singapore Institute of International Affairs and Friedrich Ebert Stiftung, 1993. Wagner, Norbert. ASEAN and the EC- European Investment in ASRAN. Singapore: Institute of Southeast Asian Studies, 1989.

Emerging Business Opportunities from ASEAN and European Integration: An ASEAN Perspective SIEH LEE ME/ LING

The Asia-Europe Meeting (ASEM) in March 1996 marked the significant beginning of a new era in relations between the two regions. Unlike in the past when colonialism formed the basis of all transactions and between unequals, not only in politics and economics but also in business, today ASEM constitutes one of the three sides of a world triangle in international relations. The two other sides are relations between Asia and North America, notably within the framework of APEC, and between Europe and North America. ASEM is the most recent development, which will hopefully complement and balance rapid changes along the other two sides. When contemplating business opportunities that will arise from closer ASEAN-Europe ties partly because of ASEM, it is necessary to review the wider context in which businesses operate in order to understand the issues that will affect future traders and investors. Some of these issues are reviewed below. International Politics and Relations Issues The frame for major business policies and strategies on a global basis has always been set by changes and anticipated shifts in

136 Sieh Lee Mei Ling

international relations and security. The last two decades witnessed several key events that cannot be ignored by businesses. First, the lifting of the bamboo curtain, that is, the end of Chinese isolation when the People's Republic of China (PRC) adopted an open-door policy in 1978, followed by its socialist market economy policy in 1991/92, signalled immense potential and vast opportunities for businesses in a large, albeit undeveloped, economy. Secondly, the reunification of Germany, which undoubtedly has technological superiority, strong financial institutions and a large economy, meant that much business benefits could be forthcoming if opportunities are properly pursued. Thirdly, the breakdown of the USSR and the Eastern European command economies was also a source of economic activities that offered new business horizons. Fourthly, the abolition of apartheid in South Africa allowed opportunities for building a new business axis with an already well-developed part of the world which had been cut off economically. Fifthly, the agreements that have been slowly and painstakingly reached in the Arab-Israeli conflicts, if executed, will require economic development effort, know-how and skills which in turn may be translated into business openings. An underlying trend in international relations has been a blurring of ideological lines, especially with the termination of the Cold War. But the global scene began to see the emergence of new forms of alliances, often in the name of economic co-operation or regional trading arrangements (RTA). The tendency towards protectionism within trade blocks, to the relief of the world, was somewhat curtailed by the success of the Uruguay Round of the multilateral GATT (General Agreement on Tariffs and Trade) talks and the formation of the World Trade Organization (WTO). Nevertheless, there are reportedly close to a hundred of such regional groups. This phenomenon has apparently caused some concern about possible disadvantages when compared with the expected benefits of multilateralism. This is because such economic arrangements often go well beyond their deClared intentions. Among the key RTAs at the corners of the world triangle whore the major part of the world's businesses take place are the European Union (EU) which evolved from the European

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Economic Community (EEC) and EC (European Community), NAFTA (North American Free Trade Area). APEC (Asia-Pacific Economic Cooperation) and ASEAN (Association of Southeast Asian Nations).

International Business and Economic Issues Four areas of change that have bearings on business opportunities, as stronger links are built between Europe and Asia, may be considered: first, world output; secondly, trade and the WTO; thirdly, investment, particularly foreign direct investment (FDI); and fourthly, the linkages between trade and investment. Each will be discussed briefly.

World Output The size of the Asian economy has become a force that cannot be ignored. Within a span of about a generation or so, the gross domestic product (GDP) of ASEM-participating Asian countries 1 together, valued at US$7. 7 trillion in 1994, exceeded those of either the EU members/ at US$6. 7 trillion, or of the United States and Canada combined, at US$7.4 trillion. In 1965, Asia accounted for only 9 per cent of world output compared with Europe's 25 per cent and North America's 37 per cent. By 1994, Asia's GDP share had expanded to 23 per cent while that of Europe increased slightly to 29 per cent and that of North America declined to 28 per cent. 3 The changing pattern of world output is attributed to the phenomenal growth of the Asian economies during the eighties and the nineties. Asian countries in the Pacific Basin, including the NIEs (newly industrializing economies) and ASEAN exhibited average real GOP growth rates of 7.2 per cent between 1984 and 1989, and 6. 7 per cent between 1989 and 1994. 4 Their rates of growth were more than double those of Europe and North America in the same periods, as shown in Table 7.1. Of greatest interest to businesses is the expected continuation of the trend right through to the dawn of the new millennium. Some have expressed doubts on the sustainability of Asia's growth which they perceive as input driven rather than productivity driven. Recent

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empirical work has attempted to dispel such arguments and bolstered the growing confi~ence of a sustained Asian growth through improvements in total factor productivity. 5 The momentum achieved by the Asian economies is anticipated to result in an average real growth of 7.0 per cent for the next five years, and 6.7 per cent during the latter half of the decade. These rates will be significantly higher than those of Europe and North America and well above the world average. 6 The projections for the ASEAN countries remain strong, as shown in Table 7.1. ASEAN as a region, with a population of 403.5 million, is comparable to the EU, whose population totals 347.3 million. Until now, the

TABLE 7.1 Real GDP of Selected Regions and Economics: Average Annual Growth Rates (In per cent)

1984-89

1989-94

1994-99*

1999-2004*

World United States Europe Latin America

3.4 3.1 3.2 2.3

1.1

2.0 1.9 2.8

3.8 2.5 2.8 4.6

3.9 2.5 2.6 4.8

Japan Pacific Basin Hong Kong Indonesia Korea** Malaysia Philippines Singapore Taiwan Thailand China

4.5 7.2 7.1 5.3 9.8 4.6 2.5 5.9 8.7 9.0

3.7 7.0 5.2 7.3 7.2 8.1

3.1 6.7 4.5 7.0 6.6 7.9 6.0 7.4 6.1 7.5 8.7

9.4

2.2 6.7 4.7 6.8 7.2 8.6 1.8 8.2 6.2 8.6 10.0

.'i.3

7.8 6.4 8.5 9.9

*Projected figures **A longer-term projection of the Korean economy (KIEP, 1996) Source: World Rconomic Outlook: 20-Year Extension (WEFA Group, March 1995).

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EU is by far the bigger economy in terms of GOP and trade volume. But the changing trend in Asia and ASEAN is expected to continue into the early part of the next century. Before long, the demarkation of countries by their stage of economic development, gauged by real GDP, will not be as clearly defined as before, as income disparity begins to narrow.

Trade and the WTO Hailed as the most comprehensive set of international trade rules ever negotiated and agreed to by 128 countries that handle more than 90 per cent of world trade, the WTO combines twenty-one pre-WTO activities with twenty-five new ones covering agriculture, manufacturing and services. The world expects a greater volume of free trade based on the principles ofMFN (most-favoured-nation), national treatment, transparency, reciprocity, and so forth, effective from January 1995. Some have estimated that in a decade, world trade will expand by 12 per cent from pre-WTO days. About two-thirds of the trade will go to the developed economies, which is not surprising as TNCs (transnational corporations) mainly from the OECD (Organization for Economic Co-operation and Development) economies already account for over 70 per cent of the value. In the last two decades, Asia's share of world trade has almost doubled, from 10 per cent in 1970 to 19 per cent ln 1993, while the shares of both Europe and North America decreased from 46 per cent to 37 per cent and from 20 per cent to 18 per cent respectively. Asia's trade record was more impressive than its economic growth between 1980 and 1994. As world exports and imports more than doubled in the eighties and early nineties, to US$4.2 trillion and US$4.3 trillion respectively in 1994, the Asian NIEs correspondingly recorded a 5. 7 times increase in exports and 5.1 times rise in imports. ASEAN exports grew by 3.8 times while imports increased by 4.2 times between 1980 and 1994.' As Asia's share of merchandise trade continues to increase, some market analysts expect Asia to account for nearly one-third of world trade in goods by the turn of the century. During the first decade of

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the twenty-first century, Asia is likely to account for 34.8 per cent of world merchandise trade vis-a-vis the EU's expected share of 39.1 per cent then. 8 With the establishment of the WTO, regional trading arrangements are no longer matters which concern members of the arrangements only. As signatories of the WTO, countries have to abide by the clauses on economic integration, such as Article 24 of the Final Act of the Uruguay Round and Article 5 of the General Agreement on Trade in Services. ASEAN as a group of developing countries is able to draw concessions from the enabling clause for relatively less advanced economies. Basically, RTAs must be WTO consistent although they may allow more favourable treatment among members of the region compared with other WTO members. For instance, the raising of existing trade barriers to non-RTA WTO members will not be acceptable, and other WTO members must be notified of any enlargement or modifications to the regional agreement. World-wide tariffs will eventually be reduced to an average of 5 per cent on goods, and ASEAN, like other signatories, will benefit from the expansion of world trade, estimated at US$200 billion a year. The tariff cuts in ASEAN's major export markets, ranging between onethird and 45 per cent imply possible increases in export orders if the challenges of meeting quantitative and qualitative demands of the international market at competitive prices can be met. Despite the rise of new markets, Europe will remain one of the top traditional markets for ASEAN. Industries of developing countries such as ASEAN, that are competitive and open to foreign trade are poised to reap benefits, though the gains will not be evenly distributed within the region. For example, the cut of between 21 per cent and 36 per cent for farm subsidies on both sides of the Atlantic which rendered agricultural exports from other countries uncompetitive, including palm oil from ASEAN, will benefit those ASEAN members which produce, process or trade in palm oil. On the other hand, ASEAN like the rest of the world will have to pay more for food, roughly estimated at 10 per cent worldwide, as the United States is a major food producer for the world.

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Similarly, with the exception of Singapore, ASEAN has a long way to go in developing its services trade. Apart from tourism and labour services from selected countries, member states have few services that can be competitively exported, while the demand for imports especially of technology-intensive services is ever increasing. Unlike the EU, which has nearly four decades of development and co-operative experience since the 195 7 Rome Treaty, ASEAN is younger and looser in structural form. As a group, ASEAN has made more political progress than economic ones. Since the 1990s, new strides have been achieved. The enlargement of ASEAN to include Brunei and Vietnam testifies to the confidence and hope of sharing in the region's potential economic advancement. Prospective members are Laos and Cambodia, followed by Myanmar. This will mean a combined ASEAN market of more than 462.6 million consumers by the turn of the century. 9 The ten Southeast Asian countries in 1994 already recorded exports worth US$257 .3 million, and imports of US$284.1 million. Another important change is that intra-ASEAN trade expanded from US$24.4 billion in 1980 to US$63.9 billion in 1994. Between 1988 and 1994, intra-ASEAN trade increased at an average rate of 9.4 per cent per year compared to an average of 5 per cent per year in the 1970s. In 1995, intra-ASEAN trade accounted for a quarter of total ASEAN trade. Corresponding figures for intra-EU trade came close to two-thirds of total EU trade. Intraregional trade in 1995 grew faster than extraregional trade for Asia, Europe and Latin America (MERCOSUR). 10 To some extent, the Uruguay Round has been pushing ASEAN together faster. But intensive regional co-operation effort is also beginning to bear fruit, notwithstanding competition for common extra-ASEAN trading business. Another factor that has contributed to increasing intra-ASEAN trade is the growing intra-industry trade, including intra-firm cross-border transactions among affiliates of multinationals in several ASEAN countries. The relocation of Japanese and Taiwanese multinationals and some of their suppliers to the region to take advantage of lower land and labour costs, particularly after the yen appreciation, is well known. 11

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Perhaps the most important achievement for trade and ASEAN economic co-operation is the formation of the ASEAN Free Trade Area (AFTA). The determination to accelerate the lowering of tariffs for a large number of products to a range of between zero and 5 per cent by 2003 is remarkable. The unilateral removal of tariff items and the reduction to the Common Effective Preferential Tariff rates began in 1993. AFTA will certainly be a critical learning ground for Southeast Asia to try out new modes of trade and economic co-operation among a group of countries and to be better prepared for co-operation with other regions and eventually with WTO members multilaterally. As the economies of ASEAN grow individually and as a region, and as trade expands both within and outside the group, national boundaries for trade will blur through regional integration. For instance, the four modes of services trade which cover movement of consumers, movement of producers, commercial presence in the importing country, and conventional cross-border transactions, will certainly contribute to the fading of country boundaries. Vast opportunities will be opened for businesses, and buyers will have more options as trade expands. However, the extent that interregional trade between ASEAN and the EU will develop as a result of closer linkages between the two areas, will also be dependent on the investment behaviour of firms. Investment-led trade, particularly among affiliates located in different host countries, as well as trade between affiliates and the parent firm, has become increasingly important.

Investment and Foreign Direct Investment It has been mentioned that TNCs account for 70 per cent of world

trade. Undoubtedly, in the last twenty years, the number of TNCs has increased fivefold and those from the OECD countries, including the EU, are well positioned to take advantage of the new trade rules, the improved market access, GATS, TRIPS, TRIMS and the impending competition rules that will likely be in their favour. As joint ventures and other forms of association with national firms of the host economy, TNCs are wooed through various investment incentives and are generally very well treated in ASEAN. Let us review the recent

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pattern of foreign direct investment, which is largely attributed to TNC behaviour, to better understand the issues and possibilities offered by greater EU-ASEAN co-operation in investment. Since the mid-eighties, FDI has not only grown at unprecedented rates 12 but has shown a new pattern compared to the first half of the eighties. In the latter part of the eighties, despite the fact that three-quarters of world-wide FDI continued to land in developed countries, with the United States accounting for 37 per cent and EU, 30 per cent, and 25 per cent was directed to the developing economies, the Asia-Pacific region 13 overtook Latin America and the Carribean as the largest recipient of FDI flows among the developing countries. Approximately half of world-wide FDI to the developing countries went to the Asia- Pacific region, of which ASEAN accounted for 50 per cent, or a quarter of all FDI inflow to developing economies. ASEAN's share of FDI inflow into developing countries seemed to have peaked in the early 1990s. In 1990, the figure was 34.6 per cent compared to 23.2 per cent for 1994. ASEAN's share of FDI flow to Asia declined from 62 per cent in 1991 to 31 per cent in 1994. 14 In response, ASEAN is working towards joint investment promotions through the ASEAN Investment Area (AlA) programme, to aggressively market the region as an attractive regional investment destination in addition to the individual country attempts which have been very successful. While Japan and the United States remained the two largest sources of FDI, investment flows from the Asian NIEs, especially from Hong Kong and Taiwan, cannot be ignored despite their propensity of landing in North America and Europe rather than in Asia and ASEAN. Intra-ASEAN investment will also be targeted by ALA, growth triangles and through the ASEAN Industrial Co-operation (AICO) Scheme established in April 1996. ASEAN member countries individually are also paying more attention to domestic investment. Meanwhile, host economies in the original ASEAN countries have shifted structurally from having manufacturing industries serving domestic markets to serving export markets, and also from labourintensive to more sophisticated and even high-tech industries. Some have also started to emphasize investment in intermediate services,

144 Sieh Lee Mei Ling

especially those related to telecommunication services, information technology services, transportation services, and business and professional services. The more economically advanced ASEAN countries have begun outward investment, particularly in the Asia-Pacific region. For example, firms from Singapore and Malaysia have begun operating their own foreign subsidiaries, especially for activities requiring relatively simple technology. One such firm is Fraser and Neave, a Singapore soft-drink manufacturer, which has moved into Vietnam and Myanmar to tap the fast developing consumer goods markets there. Hualon Corporation of Malaysia is building a US$24 7 million spinning and textile mill in the Nhon Trach industrial city of Vietnam. Since 1986, Malaysia and Singapore have directly invested a total of US$34 7 million and US$258 million respectively in Vietnam. However, they will find difficulty when moving into higher technology industries without the help of others, such as European, North American or Japanese firms. Little is known of the extent of such co-operation although examples of joint pluri-national investment in third countries, such as China and Indochina, may be cited. 15

Nexus between Trade and Investment Observations of business behaviour show that the argument that trade and investment are alternative international business strategies is weakening. Increasingly, FDI does not just lead to import substitution. They are becoming more export-oriented, that is, forward linked to trade, and they are also increasingly import-generating, or backward linked to trade, especially importation of capital equipment, parts, components and intermediate products. A case study of Sony's operational shifts in the ASEAN region in recent years demonstrated the remarkable web of cross-border transactions within the same corporate group, with investments strategically sited to take advantage of differential resource costs and the comparative advantages of different member countries, including financial services and the benefits of having a regional headquarter in Singapore. 16 Clearly, much of the changes can be attributed to technological innovations in communication and information processing. With more

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conducive trade rules for services, intermediate services will also be traded more than ever before to support the highly splintered manufacturing and trading strategies of corporations aimed at achieving the highest standards of international competitiveness. Greater globalization of businesses will lead to a narrowing of differences between trade and investment as cross-border intra-firm activities among affiliates located in different countries intensifies to complement strategies of the parent firm. The different forms of joint-business activities between TNCs and local firms, including linkages with small and medium enterprises, also contribute to the blurring of the line between trade and investment. Along with the changes discussed earlier, ownership identities like ideological differences, appear to receive less prominence compared to the early post-independence decades. Within the dynamics of a situation where several axis are emerging, characterized by a multiplicity of dimensions, new business threats and opportunities will present themselves as a result of closer ASEAN-EU ties.

New Business Opportunities from ASEAN-Europe Integration Closer linkages between ASEAN and the EU will mean that the latter will be able to participate in the growing prosperity of ASEAN and the Greater ASEAN region. Apart from individual country projects, especially for infrastructure which are already massive, the EU will be able to tap into the immense business opportunities derived from intra-ASEAN projects such as the growth triangles (between Indonesia, Singapore and Malaysia in the south, between Thailand, Indonesia and Malaysia in the north, and between the Philippines, Indonesia and Malaysia in the east). The door will also be open for Europe to participate in sub-regional programmes such as the Greater Mekong Subregion (GMS) involving the Yunnan province of China, Myanmar, Thailand, Laos, Cambodia and Vietnam. Joint efforts by EU and ASEAN corporations to exploit such opportunities through trade, investment and other strategies appear extremely promising.

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Theoretically, business opportunities are plentiful whenever needs, demands or shortfalls can be fulfilled at mutually acceptable terms and conditions. The most obvious strategy of exploiting EU-ASEAN integration is to match the relative strengths and surpluses of one region against the relative weaknesses and inadequacies of the other in terms of markets and production. Clearly, EU firms are well positioned to fulfUl ASEAN's need for new technology, skills and innovations in virtually all sectors of the ASEAN economy. The continued growth of ASEAN is highly dependent on the region's ability to meet technology deficiencies. Gaps between the two regions mean potential opportunities; and they exist in several areas. As long as ASEAN is struggling with research and development (R&D), the region will need to rely on foreign technology to keep abreast with the demand for speedy, reliable and efficient services. The large number of small and medium industries (SMis) in Europe should be sensitized, urged or motivated to change their attitude, outlook and strategy towards doing business in Asia. While the SMis may be more inclined to transfer technology, they may also be more ready to adapt to the needs of ASEAN which may result in better improvements in productivity than the large EU firms. Attempts should be made to develop EU-ASEAN business networks through the various events organized by commercial and industry bodies. Besides the established ASEAN Business Forum, contacts can be initiated and nurtured through the ASEAN Chamber of Commerce and Industry, which is organizing the First ASEAN Business Leaders Summit in March 1997 in Jakarta. Entry efforts of SMis from the EU can also be made easier through facilitative organizations such as business schools and other private-sector consultants, where people-to-people interaction can result in concrete business transactions. At the level of specific industries, EU-ASEAN business cooperation can be effected in many sectors. The development of transportation systems and equipments has already started in massive domestic projects within several ASEAN countries. Plans are being finalized or are already being implemented to build multi-billion dollar

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airport and port facilities to cope with air traffic and sea cargo congestions. Highway construction linking ASEAN to Kunming in China through Indochina is being considered, besides the East-West road link between Bangkok and IIo Chi Minh City via Phnom Penh, and similarly massive domestic projects within several countries themselves. Malaysian firms have reached agreements to participate in such highway projects in different provinces of China and in India. The surge of economic growth in ASEAN, which has caused serious traffic congestion in the main ASEAN cities, has also given the impetus for rail development. Existing intercity lines will be upgraded and new intracity networks are expected to be built. There is also a proposal to construct a multi-country rail link from Singapore northwards through Malaysia, Thailand, and Laos to southwest China. These will open up opportunities for competitive EU engineering consultancy and transportation equipment manufacturing firms to work with local firms. In the oil and gas sector, the major multinationals are already heavily involved in the region. However, the rise of ASEAN national firms in these industries means that partnerships or joint undertakings with EU firms through pluri-national entities can be expected. Joint exploration and exploitation of petroleum and natural gas in the South China Sea and in Indochina will offer as much opportunities for EU and ASEAN companies to work together as in oil and gas pipeline construction and distribution. An example is the thirty-year contract between Myanmar Oil and Gas, Unocal of USA and Total of France where one billion dollars worth of investment is involved. Similarly, the Petroleum Authority of Thailand is working jointly with Myanmar Oil and Gas to supply gas to Thailand for electricity production. Petronas of Malaysia is also providing equipment and expertise in oil and gas exploration for a joint venture with Myanmar in the Andaman Sea. In energy production, joint ventures in operating independent power producers arc possibilities for EU-ASEAN cooperation wherever they are permitted to complement or supplement public power authorities.

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In telecommunications, apart from the existing co-operative effort with France in satellite launching, the great demand for telecommunication services to support the host of economic activities means that the ASEAN market is ready for efficient and competitive suppliers of mainly value-added services, including those from Europe. While Malaysia has one of the most rapidly deregulated telecommunication subsectors among the developing countries, Singapore is ahead in announcing intentions of liberalizing even some basic telecommunications services. Demand for land mobiles and PCN is expected to remain strong in the region for the next few years. European telecommunication technology has been highly regarded in the region. It is interesting that a Malaysian company has already entered into a venture with Tri Cellular Communications Cambodia Ltd to provide cellular phone services in a country with one line to 1,212 persons. Similar discussions and illustrations can be proffered for information technology planning and management and for environment management. It is clear that the lack of indigenous technology will remain an inherent weakness of ASEAN for some time, and assistance from reliable sources is needed. ASEAN businesses are also aware of their advantage of proximity, cultural affinity and in some cases experience with their rapidly developing neighbours. EU firms, particularly SMis, will find it beneficial to work with ASEAN partners to break paths and to build bridges in the Greater ASEAN business environment. Seeking linkages, cementing relations and sealing contracts are as crucial as the technologies themselves in ensuring successful transactions. Many European firms that have been in ASEAN for a long time have started to use established operations in the region to extend into the greater ASEAN market. For example, Novo Nordisk of Denmark has successfully entered the Vietnamese market for enzymes used for detergent manufacturing, from its Kuala Lumpur office. The East Asiatic Company is using its Bangkok company to serve the emerging markets arising from the liberalization of trade along the borders of Myanmar, the Yunnan province of China, and Thailand. . Apart from technology embodied in plant, machinery and equipment, ASEAN has started to invest in human resource development

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(HRD) and in R&D as ways of narrowing the technology gap between itself and the advanced economies and, more importantly, for leapfrogging in productivity. The member countries of the EU have always been recognized as excellent sources for education and training, and they can certainly contribute to ASEAN's aspiration for manpower development. EU-ASEAN co-operation in such HRD activites will be mutually beneficial. The establishment of technical and engineering training institutes by Europeans in the region, such as those in Singapore and more recently in Malaysia, should be pursued further; while ASEAN nationals training in European establishments either in firms or in training organizations especially for higher technology, for example, in aerospace and automotive industries, should be enhanced as ways of tapping EU expertise. As for research, ASEAN's R&D effort is in its infancy, with minor exceptions in a handful of traditional agriculture-based industries. EU firms interested in carrying out research, design and development work in the region, especially in industries that are important to the various ASEAN economies- such as for electronics, automotive and transport equipments, petroleum and gas, and telecommunication equipments - will be welcomed as avenues for raising productivity. Furthermore, despite the high economic growth in recent years, the ASEAN region will need to rely on foreign direct investment for financial resources to sustain its pace of development, at least until domestic savings reach a level where the savings-investment gap is substantially narrowed, if not closed. Steps have been taken by some ASEAN countries to push for more domestic investment so as to reduce dependence on FDI. Although EU firms have been overtaken by U.S. and Japanese TNCs as leading foreign investors in the region in the last twenty years, EU firms have always been pursued to invest in the region. Closer ties between the two regions will result in new business ventures and even new forms of strategic alliances between the firms from both areas. Besides conventional joint ventures, more equitable and active business partnerships are expected in marketing and trading activities, and in investment and production along value chains spread across several countries. Synergestic effects can also be obtained through joint European-ASEAN ventures in financial

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market development and in other business and professional services, for example, in advertising, market research, management consultancy, engineering consultancy, environment consultancy and in newer areas of scientific services. Constraints to EU-ASEAN Economic Relations 17 Finally, the shortcomings or risks in closer EU-ASEAN integration for businesses need to be mentioned. Despite the fact that Europe remains an established traditional market for ASEAN, trade between the two regions has been hampered by the EU's multi-layered network of associations and preferential arrangements. While a substantial share of ASEAN's trade with the EU is conducted within this network, ASEAN is not part of it. The EU's Common Agricultural Policy gives rise to barriers against some of ASEAN's agricultural produce, for example, palm oil and tapioca. The new Generalized System of Preferences (GSP) for industrial and agricultural products, in which products are categorized according to levels of sensitivity, means that products may be graduated from the scheme even as the producing country continues to remain. ASEAN exports such as rubber, plastics, wood, clothing, selected electronic products and palm oil which fall under the GSP will now be sensitive to the EU's domestic production of similar items. While recognizing that the GSP concessions are tools for development, the realities of economic disruptions that will be caused by their withdrawals, which will upset ASEAN-EU relations should be considered. The recent directive on food hygiene which requires palm oil to be shipped in vessels which had carried foodstuffs as their two previous cargoes will affect adversely interregional trade in agricultural products, which had already suffered under the antitropical timber and eco-labelling campaigns, regardless of whether the moves were initiated by the public or the private sector. The use of anti-dumping action against some of ASEAN's exports, such as consumer electronic products like television sets and microwave ovens, and allegations regarding rules of origin, for example, for floppy disks production in Malaysia, also hinder economic integration between the two regions through trade. 18 Attempts by the EU

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to include non-trade issues into the multilateral WTO agreements such as labour-related social clauses, environmental standards, investment and competition policies, and even corrupt practices - have cast doubts throughout ASEAN about the possibility of the EU as an economic partner. Businesses which find it costly to trade with Europe may divert their attention elsewhere. On investment, FDI from the EU headed for ASEAN will understandably be threatened by the risks of economic overheating that accompanies strong growth. For instance, the rising cost of production in the region, if not properly managed against productivity, may render ASEAN uncompetitive and no longer suitable for siting FDI. Investments in the new members of the Greater ASEAN region will also need to take into account the inadequate legal infrastructure and other constraints in those countries. Time will be needed to put into place investment guarantee agreements, provision for repatriation of profits, guarantee against nationalization, and entry requirements for expatriates. These changes will require commitment to economic and political reforms. Bureaucracy and wayward business practices must also be contended with. As for ASEAN investments destined for Europe, it is recognized that business will be confined to relatively low technology consumer products, probably for niche markets. The limitations include the general apathy of ASEAN businesses to invest abroad. Recent demands from their domestic markets have either kept them too busy to think beyond their home markets or have brought prosperity that does not require them to seek opportunities overseas in an unfamiliar environment. Some are also hampered by their relatively poor market knowledge and their inadequate marketing skills. Many are still struggling to develop appropriate branding, trademark and distribution strategies even in the domestic markets. Venturing abroad is also difficult because of the shortage of managerial manpower from ASEAN and time is needed to build trust and mutual understanding in order to engage managers from the host country. Co-operation with EU businesses will alleviate these shortcomings while bringing gains to the various parties.

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A deeper understanding of EU-ASEAN relations at the firm level is needed to better predict the behaviour of businesses in the light of the new trading and investment environment within the larger global economy. Further research is necessary to pinpoint specific types of business that allow for real co-operation between the two regions. Notes 1. ASEM members comprise the seven countries of ASEAN (Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam) plus China, Japan and Korea. 2. The EU comprises fifteen countries. 3. World Bank, World Development Report, 1992; and World Bank Atlas 1996. 4. World Economic Outlook: 20- Year Extension (WEFA Group, March 1995). 5. Frank S.T. Hsiao, and Hsiao Mei-chu, "Miracle or Myth in Asian NIC Growth: The Irony of Numbers" (Paper presented at the 20th ACAES Conference on Asian Economics, 7th Biennial Conference on US-Asia Economic Relations, Kuala Lumpur, 14-17 May 1996). 6. See note 2. 7. IMF, International Financial Statistics Yearbook. 1995; and February 1996. 8. World Markets Executive Overview, First Quarter 1996 (DRI!McGrawHill, 1996). 9. The figure refers to the combined population of the ten countries in mid1993. 10. M. Ariff, Star, 13 May 1996. 11. Sieh L.M.L. and Yew S.Y., "The Trade-Investment Nexus in a Rapidly Industrialising Economy: The Case of Malaysia", in Multinationals and East Asian Integration, edited by Wendy Dobson and Chia Siow Yue (IDRC and ISEAS, 1997). 12. The nominal growth rate was 34 per cent per annum compared with 12 per cent per annum nominal GDP growth, and 13 per cent per annum merchandise export growth. 13. Comprising ASEAN before the entry of Brunei and Vietnam, as well as China, Hong Kong, Korea and Taiwan. 14. Star, 5 July 1996.

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15. Mohd Nazari, Tan L.P., Yew S.Y., Sieh L.M.L., "Foreign Direct Investment by Malaysian Companies: Structure, Motives and Implications" (IRPA 1995 Research Report, 1996). 16. Motoshige, Itoh, "Foreign Direct Investment, International Trade and Transfer of Technology: A Case Study in South East Asia" (Paper presented at the International Economics Association Roundtable Conference, Sydney, Australia, July 1996). 17. Some of the trade issues are drawn from the Star, 22 July 1996.

Emerging Business Opportunities from European and ASEAN Integration: An EU Perspective CHARLES OMAN

European perspectives on business opportunities in Europe and Asia are conditioned by trends in globalization and regionalization in those regions, and elsewhere. This chapter focuses on those trends, and on the interaction between globalization and regionalization. It argues that in the current context of globalization, interregional investment increasingly aims to serve markets in the region hosting the investment. European firms must invest more in Asia, including the ASEAN countries, if they are to share in the benefits of developing Asia's remarkable dynamism. Sharing in those benefits can in turn help Europe overcome the serious "structural" unemployment problems that now plague EU countries; raising barriers to imports from Asia cannot. The chapter argues, for example, that while it makes sense today to speak of a globalization of inter-firm competition, and globalization of many corporate functions - including investment, finance, networking, and the management of corporate systems - it is wrong to speak of a globalization of production stricto senso. Production, insofar as it is becoming more international (in the sense of more

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cross-border flows of intermediate goods and services), is internationalizing more within each of the major regions- Asia, the Americas, greater Europe (including Central and Eastern Europe and perhaps North Africa)- than it is between regions. It makes more sense, in other words, to speak of a regionalization of production than of a globalization of production. One reason why production is regionalizing more than it is globalizing is that relatively large and volatile exchange-rate fluctuations between the major currencies have led, and are leading, globally active firms to seek to match revenues and outlays more closely within each of the major currency areas, and thus to produce within each of these regions. Another reason is the growing importance of proximity between firms and their customers ("global localization") as well as between firms and their suppliers under the new "lean" or flexible post-Taylorist approaches to organizing production. A further result - which runs counter to popular perceptions of "globalization" in Europe- is that the growth of investment in cheaplabour "export platforms" for shipping output to the investor's home market (what the French call delocalisation, that is, the relocation of production destined for high-wage markets to low-wage sites in developing countries) is not accelerating but decelerating, especially the relocation of production outside the region of the intended market. 1 The declining trend in the share of variable low-skilled-labour costs in firms' total operating costs - crudely estimated to have fallen from an average of around 20 per cent in the mid-1970s to between 5 and 10 per cent by the late-1980s~ - also tends to weaken developing countries' ability to attract export-platform-type investment by OECDbased multinationals. Compared to the 1970s, multinationals' investment in the developing countries is increasingly market-driven, as opposed to cost-driven - although compared to the 1960s, the relevant market is increasingly regional rather than national. All these phenomena illustrate the fact that globalization and regionalization tend, today, to be mutually reinforcing. Before looking at the policy implications - one of the challenges for policy-makers, in Europe and elsewhere, is to ensure that

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regionalization policies do, in fact, promote globalization, because that outcome is far from automatic - it is important to take a closer look at the forces currently driving and shaping globalization and regionalization. The rest of this chapter is divided into two parts. The first looks at the main factors driving and shaping globalization, giving special attention to the microeconomic forces; it also looks at regionalization and the interaction between globalization and regionalization. The second part highlights certain implications of globalization and regionalization for European and ASEAN business managers, and for policymakers.

Globalization and Regionalization "Globalization" is a term used by many but defined by few. It can be defined as the growth, or more precisely the accelerated growth, of economic activity that spans politically defined national and regional boundaries. "Regionalization" can be defined as the movement of two or more economies - two or more societies - towards greater integration with one another; it can involve de jure agreements between governments to enhance the process, or it can be a de facto process. Defined in these generic terms, globalization is not a new phenomenon. The last one hundred years alone have witnessed three major periods, or waves, of globalization. We are in the midst of one today, since the late 1970s and early 1980s. The previous wave of globalization was in the 1950s and 1960s. Then, as now, barriers to international trade fell significantly, trade grew rapidly, and international investment, led by the phenomenal proliferation and growth of U.S. multinationals, grew significantly faster than trade. That wave of globalization tapered off in the 1970s, when productivity growth slowed markedly in the leading economies and stagflation emerged in the latter half of the decade in the United States and Europe. Prior to the 1950s and 1960s, it was the fifty years or so before World War I that witnessed a big wave of globalization. Then, as now, trade grew rapidly, and the size of international and intercontinental

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investment, mainly financial flows, was as great or greater, relative to output, than today. That wave of globalization ended in the war and the beggar-thy-neighbour policies that led to the collapse of globalization and the economic disasters of the 1920s and 1930s which in turn led to World War II. What, then, is so special about globalization today? Is there anything very important, in policy terms, that distinguishes it from past waves of globalization? Or is the term more of a journalists' slogan, as some of our most respected OECD colleagues have argued? There are, I believe, several features that distinguish globalization today from past waves, and that are important for policy. One, in particular, remains poorly understood, and is also especially important for both business leaders and policy-makers: the new flexible post-Taylorist approaches to organizing the production of goods and services, both within firms and in the way firms co-operate and compete with other firms. I shall return to this phenomenon below, which I see as the principal microeconomic force driving and shaping globalization today. First, however, a few words on four other features of the current wave of globalization which have been more widely discussed in the literature. All have helped to stimulate and facilitate the new wave of globalization since the late 1970s.

Deregulation One is the move to deregulate markets in the OECD countries. Launched in the late 1970s by the Carter administration as the principal U.S. policy response to stagflation and stagnant productivity growth- combined with monetary "shock treatment" to cut inflation, which squeezed corporate profits and brought on the recession of the early 1980s (and was also the catalyst of the so-called Third World debt crisis that erupted in 1982)- the U.S. move to deregulate was quickly followed by Margaret Thatcher in the United Kingdom, and after 1980 in the United States by the Reagan administration. Focusing mainly on services- financial markets, air and surface transportation, telecommunications (and energy in the United States) -Anglo-Saxon

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deregulation sought to improve the functioning of markets by stimulating competition. It put strong pressure on continfmtal Europe to follow suit. That pressure, and the combined effects of "Eurosclerosis" in the late 1970s (exacerbated by recession in the early 1980s) plus widespread perceptions in Europe that the centre of global economic gravity was shifting from the North Atlantic to the Pacific Basin, led the European Community, in 1985, to launch the Single Market programme (complemented seven years later by the Maastricht Accords seeking to strengthen political unification and create a single European currency, which created the European Union). The EC's Single Market programme can thus be understood as continental Europe's deregulatory policy response to stagflation in Europe, to Anglo-Saxon deregulation, and to the perceived need to stimulate competition in Europe as the best means to strengthen European competitiveness in the global economy. In response to the EC's announcement of the Single Market programme - and to its refusal, prior to that announcement, to support the U.S. proposal to initiate a new round of multilateral trade negotiations- the United States also decided, for the first time, to pursue regional integration. It did so first with Canada (the 1988 CanadaU.S. Free Trade Agreement), then with Mexico (which led to the signing of the North American Free Trade Area [NAFTA] in 1992) and has announced its intention to do so with all countries in the hemisphere (Bush's "Enterprise for the Americas" initiative and the Clinton administration's proposed "Free Trade Agreement for the Americas"). The EC, and especially the U.S. regional initiatives were in turn an important stimulus to the South American Common Market agreement (Mercosur), the ASEAN Free Trade Agreement (AFTA), the APEC (AsiaPacific Economic Co-operation) process, Malaysia's proposal to create an East Asian Economic Caucus (EAEC) and many smaller regional groupings among non-OECD countries - many of which seek above all to attract FDI, if they are not openly a response to fears of a diversion of investment and trade that could exclude them from the benefits of globalization.

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Deregulation in the OECD countries has thus been a major stimulus to the current wave of globalization, but also to the new wave of regional agreements. It has significantly increased competition and thereby helped to lower prices (thus, user costs) and to improve product quality, especially in transportation, communications and financial services. Financial deregulation, in addition to facilitating the globalization of financial markets (see below), has also stimulated the development of new financial instruments that have been crucial to financing the explosive growth of non-financial corporate mergers and acquisitions since the mid-1980s. And deregulation has given impulse to regionalization, whether as a vehicle for collective deregulation, as in Europe, as a means to lock-in unilateral policy liberalization, as in Mexico, or as a response to regionalization elsewhere.

New Technologies Much has been written about the sweeping impact, across sectors and across countries, of the new microelectronics-based technologies. Suffice it here to warn against two sweeping generalizations that have gained widespread currency but are largely mistaken. One is that because of the new technologies we have reached the age of truly global, "borderless" production: this statement, though valid for some firms in a few sectors, is largely untrue, as noted earlier. 3 The other mistaken generalization is that the new technologies have greatly increased productivity levels across manufacturing and service industries: the truth is that though the new technologies arc indeed widely applied by firms across manufacturing and service sectors. it is flexible post-Taylorist enterprises and networks, much more than Taylorist firms, whose productivity levels and competitive strength have significantly benefited from the advent and rapid diffusion of the new technologies since the late 1970s. Financial Globalization It was only in the 1960s that international financial activity began, slowly, to pick up again- after its collapse during the inter-war period -with the creation of the Eurodollar and other unregulated "offshore"

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financial markets. It gained considerable momentum after the collapse of the Bretton Woods system of fixed-but-adjustable exchange rates in 1971-73 (speculative activity in the offshore markets was itself a major catalyst of that collapse) and with the recycling of petrodollars after 1973. Its growth has been most spectacular since the late 1970s, to which the deregulation of financial markets and the application of the new information and communications technologies have given strong impetus. The value of cross-border assets held by banks more than tripled between 1983 and 1993, for example, and global foreignexchange transactions, which tripled between 1986 and 1992 alone, now amount on average to more than $1,200 billion per day- over 100 times the value of total world-wide trade in manufactures and services combined - even after allowing for double counting due to local and cross-border inter-dealer transactions. One result is that it has contributed to amplifying the size and volatility of exchange-rate fluctuations among the major currencies, which became far greater in the 1980s and 1990s than anticipated at the time of the demise of the Bretton Woods system. These fluctuations have affected the physical location of production, as noted earlier - that is, they are an important reason why globally competitive firms have increasingly sought to develop production capabilities within each of the major regions. Financial deregulation and the globalization of financial markets, much more than the globalization of non-financial corporate activity, are also largely responsible for the widely perceived weakening of national economic policy sovereignty. It has become more difficult for central banks to control exchange rates, of course, but in policy terms this is the tip of the iceberg. As governments increasingly use interest rates to try to stabilize exchange rates - a stabilization which gains importance as economies become more open to trade and financial flows - interest rates correspondingly decline as a tool to facilitate or stimulate growth (indeed, the effect is often the opposite, as all but the strongest open economies are under pressure to raise or maintain high interest rates). It has also become much more difficult to tax capital, which tends to shift the fiscal burden more heavily onto the

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less mobile factor of production (labour) while governments' attempts to sustain their revenue base by increasing consumption taxes have tended to have a regressive impact on income distribution as well. Events in one country can also very quickly affect other countries, and "mood swings" in global financial markets tend to affect all countries, whether or not they reflect underlying economic conditions in a particular country. Because highly mobile financial capital is responsive to regulatory differentials as well as to interest-rate differentials among countries, there has also been some tendency towards competitive deregulation - compared by some to the competitive devaluations of the 1930s4 - which further weakens governments' sovereignty over economic policy. While this weakening of national policy sovereignty arguably contributes, along with financial globalization per se, to enhancing the efficiency of financial markets - some also see it as a useful discipline on governments, such as reducing politicians' and government bureaucrats' ability to tax and spend, and to distort markets - it means that countries without efficient and profitable financial markets tend to suffer.

Opening ofnon-OECD Countries In a little more than a decade, most of the non-OECD world, comprising four-fifths of the world's population, have begun to privatize, liberalize and deregulate, and are moving to compete actively on world markets. Most striking, perhaps, is the fact that until the 1980s only a handful of relatively small economies - the East Asian newly industrializing economies (NIEs) - successfully pursued strategies of export-oriented industrialization, and were relatively protected and regulated (Hong Kong and to some extent Singapore were more the exceptions than the rule, even among the NIEs). Today, Korea and Chinese Taipei are also moving to deregulate and liberalize their economies, while most non-OECD countries hope to emulate the manufacturing export success of the NIEs as they open up to global markets. The ASEAN countries are no exception in this regard, though there are significant differences among them (Indonesia, in particular, appears to be opening more slowly).

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The shift of non-OECD countries to greater reliance on, and exposure to, global markets is accompanied in many of these countries by democratization or political liberalization. This means, in some cases, not only greater economic but also domestic political vulnerability to events in the global markets. Widening domestic income disparities, which often accompany liberalization, can exacerbate political vulnerability as well. The opening up of non-OECD countries also increases their exposure to protectionist pressures in the OECD countries - heightening concern about exclusion from the major regional schemes as well - at a time when those pressures have risen. And the process of deregulation and liberalization can generate fierce resistance internally from powerful special-interest groups, to which governments may find it difficult to stand up. The combined result can be political instability that threatens not only democratization, where it is occurring, but economic reform itself. From a European perspective, the massive opening-up of the nonOECD countries is seen by some as creating vast new areas for profitable investment and growth. Unfortunately, many others see it mainly as a threat, especially insofar as they believe - largely mistakenly - that trade with and investment in those countries, especially delocalisation, cost jobs and undermine living standards at home 5 .

Flexible Production and the Crisis of Taylorism The preceding features of globalization - deregulation in the OECD countries, new technologies, globalization of financial markets, the opening-up of the non-OECD countries - all facilitate and spur the process, and contribute to its specificity relative to earlier waves of globalization. For business leaders and policy-makers, however, it is particularly important to understand the microeconomic forces that are driving and shaping the process, and how they differ from those that drove globalization in the 1950s and 1960s. Put simply, the microeconomic foundation of globalization in the 1950s and 1960s was the ongoing development and rapid international diffusion, at that time, of Taylorism or what Frederick Taylor himself liked to call

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"scientific management". Today, Taylorism is in crisis, and it is the ongoing development and international diffusion, despite resistance, of flexible post-Taylorist organizations that is driving and shaping globalization. It was during the 1950s and 1960s that Taylorism and "scientific management" first spread widely outside the United States, notably to Europe (it also spread during that period to the so-called "modern" manufacturing sector in many developing countries, and was widely implemented in the centrally planned economies). As an approach to organizing activity, Taylorism combined three main features (all well illustrated in Charlie Chaplin's movie Modern Times): a) a tendency to separate "thinking" and "doing", that is, to separate the responsibilities of conception from those of execution, throughout an organization; b) a tendency towards a very high degree of specialization, which meant narrowly defined job responsibilities, at all levels of an organization; and c) belief in "one best way" of doing things (whence the term "scientific"). Taylorism served greatly to raise productivity levels, world-wide, as well as to drive globalization during the 1950s and 1960s. Over time, however, it built serious rigidities into the organization of production (and the fabric of society) especially in the OECD countries where it was most developed and widespread. These rigidities were a major cause of the slowing of productivity growth in the 1970s, and of the emergence of stagflation in the latter half of that decade in Europe and the United States. At the same time, in the 1970s, a growing number of European and Japanese firms were rapidly closing or had closed the "technology gap" with their U.S. counterparts, and began successfully to compete in the U.S. market. More and more U.S. firms, squeezed between slow productivity growth and growing competition at home, moved to relocate some of the more labour-intensive segments of their production for their home market, to production sites in a few low-wage countries, mainly in Asia, Mexico and the Caribbean. Japanese firms' relocation of some of their more labour-intensive production to lowerwage countries in Asia also grew rapidly during this period, though

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much of it was for the U.S. market, and later also for Europe; this relocation occurred largely in response to rapid wage increases in Japan, revaluation of the yen, and growing U.S. and European nontariff barriers against Japanese exports. 6 To a lesser degree, European firms, especially German firms, followed a pattern similar to U.S. firms, with production going mainly to North Africa and the Mediterranean, Central and Eastern Europe (under communism), and Asia. This relocation of production destined for OECD consumers, via FDl but also via sub-contracting and other "new forms" of investment/ contributed substantially to the rapid growth during the 1970s of U.S. and European imports of manufactures from a few lower-wage nonOECD countries, notably in Asia- countries which, as a result, gained the appellation "NICs" in 1979. 8 These imports became a source of concern in the latter half of the 1970s, especially in the United States but also in Europe, because just as they reached a level that was no longer trivial (and U.S. trade with the NICs turned to a deficit) stagflation and high unemployment hit both the U.S. and European economies. The accelerated relocation of production for OECD consumers to non-OECD countries carried into the 1980s, but with flagging momentum. 9 Thus, contrary to popular perceptions in many OECD countries, and notwithstanding both a few well-publicized cases to the contrary - for example, Swissair's relocation of back-office operations to Bombay- and China's phenomenal growth of manufactured exports in the last decade, the relocation of production for OECD markets to low-wage production sites in other regions has not accelerated, overall, but has actually decelerated since the early to mid-1980s. 10 One reason for this deceleration is the OECD countries' partial recovery of productivity growth in manufacturing at home (though it must be stressed, productivity growth remains far below the levels attained in the 1950s and 1960s). Another reason is the very strong recovery, overall, of OECD corporate profits. A third is the downward trend in the share of variable low-wage labour costs in the OECD firrns· t 0 t a l operating costs, noted earher. · A fiourt h an d very Important · ·

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reason is the growth of flexible post-Taylorist organizations, the increased importance of proximity between firms and both their customers and their suppliers - particularly in assembly-type production, which is most prone to relocation - and advances in automation technologies that give a new measure of flexibility to production in the OECD countries (especially when they are used in flexible organizations). The rigidities of Taylorism are still a problem in the OECD countries. They are a major cause of the severe "structural" labour-market problems both in the United States (where they take the form of stagnant average wages, growing inequality and rising numbers of working poor) and in Europe (where they take the form of high longterm unemployment). Taylorist organizations still account for a large share of activity in the OECD countries, and resistance to change in these organizations can be very strong_II That resistance and the very real effects of domestic labourmarket problems, particularly when growth slows, feed protectionist pressures in the United States and Europe. Combined in some cases with perceptions of diminished national economic policy sovereignty, a further consequence has been to nourish mistaken perceptions that "globalization" in general, and imports from low-wage non-OECD countries in particular, are a major threat to U.S. and European jobs and living standards. OECD policy-makers, business leaders and, hopefully, economists have a responsibility to correct these mistaken perceptions, which cannot simply be ignored. To correct these perceptions, and from a broader policy perspective, it is therefore crucial to distinguish between the crisis of Taylorism, on the one hand, and the microeconomic forces that are driving globalization today, on the other. Since the 1980s, a growing number of firms in OECD countries - across manufacturing and services - have moved to adopt flexible post-Taylorist forms of organization. These organizations take many forms - ranging from industrial "clusters" that comprise large numbers of relatively small firms to large firms like Toyota, Motorola and Hewlett Packard which often involve complex networking arrangements among firms

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that compete and co-operate simultaneously. These organizations nevertheless have a common denominator, which is that they invert the logic of Taylorism: a) they tend to integrate thinking and doing in production; b) they tend to define job responsibilities broadly, and to use much more teamwork; and c) they emphasize continuous improvement and innovation in the way things are done, as well as in what are produced. They are learning organizations which, compared to Taylorist organizations, more successfully exploit the human intelligence, knowledge based on experience, creativity, and flexibility of their workers. Successful flexible post-Taylorist organizations can thus achieve productivity levels (of labour and capital) far superior to those attainable by Taylorist firms. It is this competitive strength of flexible post-Taylorist organizations which, at the microeconomic level, is driving and shaping globalization today. That competitive strength, not exports from lowwage countries, is "changing the rules of the game" in global competition across manufacturing and modern services.

Regionalization Economists sec globalization - understood by most as the lowering of policy and technical barriers to international economic activityas enhancing global welfare both by giving freer rein to the forces of competition world-wide and by increasing the possibilities for efficiency gains through greater international specialization. They see de jure regionalization, on the other hand, as capable of being either good or bad, with the outcome largely dependent on the action of policy-makers. It is perhaps for this reason that international policy debates in the last ten years have focused more on regionalization than on globalization per se. Globally active multinational firms, on the other hand, have tended in recent years (notably during the prolonged period of difficulty in concluding the Uruguay Round) 12 to show markedly more interest in the reduction of policy barriers to intraregional activity, than they have shown concern about the danger of increased interregional barriers to trade. n The apparent reason, in a nutshell, is that

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the stronger, globally active multinationals have moved or are moving to consolidate production capabilities within each of the major regions, as noted earlier. Weaker firms, on the other hand, are more likely to be among those seeking to block de jure regional integration, or to transform it into an instrument for regional protection. 14 This dichotomy - between the strong multinationals' tendency to push hardest for liberalization within regions, and weaker firms' tendency to try either to limit or to transform internally liberalizing regional schemes- illustrates both the potential strengths or advantages of de jure regionalization as a policy tool, and its potential risks or disadvantages. Two of the strengths arc that it increases the size of the member countries' market- which can also attract FDI to the region- and, because bargaining power in multilateral trade negotiations depends heavily on market size, it can increase members' collective bargaining power vis-a-vis non-members. A third advantage is that it can be an efficient vehicle for responding to the growing pressure engendered by globalization for more international harmonization or integration of traditionally "domestic" policies - on rules of competition, public procurement, protection of the environment, labour standards, product standards, and so forth - in a way that is difficult or impossible to achieve among countries, and peoples that do not share a strong sense of cultural or historical as well as geographic proximity. Indeed, the pressure for "deep" international policy integration or harmonization engendered by globalization, to which regional integration can be an important response, has also led in recent years to a blurring of the very distinction between domestic and international policy instruments. With its strong focus on trade (including "border" and "nonborder" measures, and the question of "trade creation" versus "trade diversion") the debate over regional integration agreements has nevertheless tended to overlook what is perhaps the single most important potential feature of those agreements as a policy tool: their potential to weaken, disrupt or dilute the often considerable growthretarding and rigidifying powers of domestically entrenched special-

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interest groups, oligopolies, rent seekers, what Mancur Olson has called "distributional cartels", whose actions, both in the market and through politics, tend to dampen afl economy's competitiveness at home and abroad. 15 Whether or not diluting or disrupting the powers of such groups is a declared objective of regional agreements - often it is not - weakening those powers is normally required to stimulate the forces of domestic competition. Doing this through regional integration can thus be a key to strengthening domestic growth and competitiveness, as well as to strengthening the economy of the region vis-a-vis the rest of the world.

The Relationship Between Globalization and Regionalization De jure regionalization can thus be a response to globalization and, at the same time, it can help to strengthen the microeconomic forces that drive globalization in the region by stimulating internal competition, as well as by significantly enlarging the domestic market. At the national level, de jure regionalization can give impetus to much needed reform legislation that otherwise might not overcome domestic opposition, and in doing so help open the economy to globalization. It can enhance member states' policy stability and credibility, because it can lead to needed reform legislation, and because an international agreement is more difficult to change than domestic legislation, which can in turn be good for macroeconomic stability and to attract foreign investment. Indeed, the principal motivation behind many of the recent regional agreements, certainly in developing countries, has precisely been to attract FDI, more than to promote trade per se. 16 Policy-makers must nevertheless recognize that the same specialinterest groups that are most likely to oppose de jure regionalization, if it threatens to undermine their domestic rent-seeking powers, are also among the political forces most likely to seek, if they are unable to block the process, to transform it into a tool for regional protection. The inter-war period provides a dramatic illustration of what can happen when there is an escalation of national and regional protection and globalization collapses.

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When de jure regionalization becomes a tool for regional protection and loses its internal competition-enhancing effects - by failing adequately to disrupt or dilute the rent-seeking powers of domestic oligopolies and special-interest groups - regional integration loses its value as a policy tool for strengthening regional growth and competitiveness in the global market. Indeed, whatever limited benefits it may still bring are not likely to justify their cost to member states in terms of the reduced national policy autonomy that comes with increased de jure regional integration. On the other hand, insofar as de jure regionalization strengthens internal competition, by enhancing "deep" policy integration among member governments and/or by weakening the rigidifYing powers and growth-retarding effects of entrenched distributional cartels, it can enhance member states' collective policy sovereignty vis-a-vis the market - hence the potential effectiveness of their policy measures -while strengthening the region's competitiveness vis-a-vis the rest of the world. In short, globalization and regionalization tend today to be mutually reinforcing, insofar - but only insofar - as policies to promote regionalization seek above all to stimulate competition within the region, and to weaken, rather than protect, the rent-seeking powers of domestically entrenched oligopolies.

Regionalization in Europe, the Americas and Asia Concretely, regionalization is taking very different forms in each of the major regions, in each of the "poles" of the emerging tripolar world economy. Europe has opted for "deep" policy integration among the members of the European Union. The logic of the Single Market is clearly not one of protectionism, but of promoting competition within the region to strengthen the competitiveness of European firms at home and abroad. The costs to some of adjusting to the Single Market, and perhaps even more so of preparing for the single currency, especially when growth is slow, nevertheless feed protectionist sentiments. But for non-Europeans, the main challenge of European integration is to take advantage of whatever opportunities, and stimulus

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to European growth, the Single Market ultimately provides. For developing countries and NIEs, including the ASEAN countries, the main competitive challenge probably comes from the Central and Eastern European countries, which benefit from physical and cultural proximity to the EU countries, some preferential access to EU markets, and can be expected to develop competitive strengths in manufactures that compete directly with those of developing and newly industrializing economies outside the region. North America has followed a path of relatively shallow de jure integration under NAFTA, certainly from the U.S. perspective, preceded by substantial de facto integration between the United States and both the Canadian and Mexican economies. For Mexico, a major motivation for NAFTA was to "lock in" the country's far-reaching unilateral policy reforms, and to attract foreign investment. For countries outside the region, NAFTA's significance lies primarily in the risk of diminished U.S. commitment to multilateral trade liberalization and, for some countries, the agreement's potential to divert trade and investment to Mexico. It has also added to incentives for other developing countries to form subregional groupings among themselves, including AFTA (and perhaps the newly decided ASEAN Investment Area as well) in Southeast Asia. In Pacific Asia as a whole, regionalization is basically a de facto process, driven by strong economic growth, particularly in the region's developing countries and NIEs. The main challenge for those outside the region- countries and firms- is to share in the benefits of that growth, which looks likely to continue, by pursuing policies and strategies to develop their own competitive strengths in the region. We return to the implications of this for European business perspectives below. Implications for Business and for Policy The specific features of globalization and regionalization today raise important questions, and challenges, for both business managers and policy-makers. One is the challenge for European firms of Asia's economic dynamism. Contrary to popular perceptions in Europe, that

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challenge is not so much one of a "threat" of Asian exports "invading" Europe, as it is one of European firms more actively contributing to, and profiting from, growth in Asia. Together, the countries of the European Union arc the world's largest suppliers of foreign direct investment. Since 1990 they have supplied slightly more than half of global FDI outflows, compared to the U.S. share of 20 per cent and Japan's share of about 12 per cent. 17 A significant share of the EU countries' FDI, however, goes to other EU countries- intra-EU FDI amounts to 18 per cent of global FDI - and, significantly, only 2 per cent goes to all of Asia (compared to 12 per cent of Japanese and 11 per cent of U.S. FDI). By the same token, the EU countries' combined share of developing Asia's FDl inflows since 1990 is only 10 per cent, compared to 16 per cent from Japan and 11 per cent from the United Statcs. 1 R Moreover, the EU countries' share of FDI flows going to the ASEAN countries, and to China (together these countries host over 80 per cent of all FDI flows into Asia), have actually declined in recent years. While that decline partly reflects the rapid growth of FDI coming from the Asian NIEs, EU FDI into the ASEAN countries has also failed to keep pace with the flows coming from Japan and the United States. EU firms' relatively poor investment performance in the ASEAN countries appears to have several causes. One set of causes relates to regionalization in Europe: the Single Market process ("EC 1992"), successive enlargements of the European Community and Union, and the remarkable changes, still under way, in Central and Eastern Europe; these transformations have undoubtedly diverted European managers' attention to some extent from business opportunities in Asia - though apparently not from the United States, where EU investment has grown substantially. More worrisome are two further causes: European managers have underestimated the growth potential of the dynamic Asian developing countries; and even today, many fail to appreciate the extent to which developing Asia, especially the ASEAN countries, is opening up. 19 That opening is creating a "window of opportunity" which, so far, European managers in general have been slow to grasp.

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The time is thus ripe for the EU and ASEAN countries to make more determined efforts to strengthen business and investment ties between their two regions. Prospects for EU firms to increase their exports to the ASEAN countries and, more broadly, to profit from developing Asia's dynamism, will depend largely on their willingness to invest there. Globalization is increasing, not decreasing, the importance of proximity between firms and their customers. Trade liberalization and deregulation in the ASEAN countries, and among those in AFTA (and perhaps the newly announced ASEAN Investment Area, AlA), reinforce that importance. Another challenge stems from the microeconomic dynamics of globalization and regionalization today, in particular the spread of flexible production and the crisis of Taylorist enterprises in the OECD countries. These dynamics raise important questions about the longterm viability of growth strategies in developing and _newly industrializing economies, including the ASEAN countries, based on an expansion of Taylorist, low-skilled, low-wage labour-intensive production of exports to OECD markets. The point is not that Taylorism has exhausted its potential for raising productivity levels in developing countries; indeed, the robustness of Taylorist organizations, compared to flexible organizations, means that they may be better able to adapt to conditions in many developing countries. 20 The point is that comparative advantage in low-wage, unskilled-labour-intensive products is of decreasing value as a basis for developing competitive strength in global markets, relative to such assets as well-functioning modern infrastructure, a large pool of highly trainable labour, a large domestic market (which for all but the largest countries points to the potential value of effective, open, regional integration) and a sizeable or growing middle class, competitive domestic markets, flexible institutions, and political and macroeconomic stability. Clearly related is the possibility, and desirability, for developing countries, including the ASEAN countries, to develop their own flexible post-Taylorist production capabilities. The answer, on both counts, is mixed. As regards desirability, the good news is that compared to Taylorist organizations, flexible organizations are generally able to

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produce efficiently a much wider range of products in a single plant, and their minimum-efficient scale of production of any given product is often significantly lower. 21 Smaller minimum-efficient output levels can in turn enhance the scope for healthy domestic price competition in smaller markets, thereby stimulating greater domestic productivity growth as well. Flexible organizations also offer considerably greater possibilities than do Taylorist firms to adapt product features. as well as output levels, to the demand requirements of specific groups - or small markets - without sacrificing quality or cost efficiency (as was so widely the case of Taylorist firms producing in relatively small, but necessarily protected, developing-country markets under import substitution). Moreover, because the key to achieving flexibility is organizational. not technological per se, the basic changes required in firms, and countries, that seek to develop flexible production capabilities or to make the transition from Taylorist to flexible production are neither capital-intensive, nor therefore, for developing countries, foreignexchange intensive. Indeed, flexible firms' much greater ability to produce in response to actual demand (because of their speed and adaptability). as opposed to Taylorist firms' production to (unreliable) demand forecasts, combined with flexible producers' much smaller inventory requirements, and their much smaller waste, are important cost- and foreign-exchange-saving features that add to the significant competitive advantages for developing as well as for OECD countries. As for the possibility for developing countries to develop their own flexible production capabilities, one should not underestimate the extent to which developing countries may benefit from greater flexibility than exists in most OECD countries, both in the economy and in prevailing attitudes. which could prove the most valuable for the successful development of flexible post-Taylorist organizations in those countries. There are, however, caveats and bad news too. First, while minimum-efficient output levels may be significantly lower for flexible than for Taylorist firms, for many products they still remain high relative to effective market size (purchasing power) in many developing countries. Export-oriented strategies and access

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to OECD markets thus remain important for successful flexible producers, though the advantages to be gained from proximity also point to advantages for the ASEAN countries to pursue greater liberalization and integration among themselves, as a complement to, or as a means to help strengthen greater trade and investment integration with the OECD countries. Secondly, lower minimum-efficient scales of production do not mean there is a reduction in the advantages to be derived from large firm-size. A comparison of firm size between Taylorist and flexible organizations is made problematic by the importance of networks for flexible organizations which blur the boundaries and in important ways change the very nature of the firm (networks can be understood as an alternative to the dichotomy between markets and "hierarchies", that is, an alternative to the traditional ownership-based command structure of Taylorist firms). But the importance for flexible organizations of economies of scope- which is often amplified by high fixed costs in research and development (R&D) or in gaining access to technology, in marketing, in worker training, and so forth - means that the advantages of large size accruing to networks can be significant, especially for flexible organizations in ASEAN as well as OECD countries, particularly in the spheres of finance and marketing, while the essence of flexible organizations is to avoid the internal rigidities typical of Taylorist organizations and large bureaucracies in general. While industrial "dusters" (including in "growth triangles") may provide a solution in some cases, for many firms that aspire to become, or remain, successful international competitors, the solution may lie in establishing tie-ups with or attracting investment by flexible organizations in the OECD countries. Thirdly, and perhaps most importantly, successful flexible production demands both well-functioning modern transportation and communications infrastructure, and human resources. Regarding the latter, however, the importance in flexible organizations of relatively firm-specific skills and more or less permanent on-the-job training means that the constraint on the development of flexible production capabilities is less likely to come from a shortage of skilled labour in

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developing countries, than from a shortage of workers with strong, basic literacy and numeracy skills ("trainability") - a problem which for many countries, over time, is not insurmountable. The more binding constraint, certainly in most ASEAN countries, is likely to be the underdevelopment of infrastructure, relative to the needs of flexible organizations. A final challenge for ASEAN firms is that of doing business in Europe. Suffice it here to point out that while the Single Market process is not protectionist, there are problems of protection in Europe, and severe unemployment problems today are feeding protectionist pressures in Europe. Those pressures, combined with the growing importance of physical proximity between firms and their customers and suppliers, help to explain the growing dichotomy faced by the ASEAN countries between those firms which have the means to invest in Europe in order to serve the European market, and the many that are unable to do so and are threatened with exclusion. This challenge is amplified by the process of change in Central and Eastern Europe. As noted earlier, those countries benefit from physical and cultural proximity to the EU countries, and at least some degree of preferential access to EU markets; they are also developing competitive strength in manufactures that directly affects exports from the ASEAN countries. This only increases the pressure on ASEAN firms to invest in Europe.

Policy Implications Europe. For Europe, the main imperative of globalization is to increase domestic flexibility, and to do so in ways that strengthen, rather than weaken, social cohesion. This is first and foremost a task for firms and managers, but governments face it as well (not least because they too are often organized along Taylorist lines). The need is to move beyond Taylorist management and organizational precepts (and the dichotomy of markets and hierarchies) in order to embrace the transition to flexible, post-Taylorist ways of thinking and organization. Resistance to change, and blindness to the type of change required, slow the transition and make it more difficult; and the difficulties of

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the transition prolong and exacerbate the severe structural labourmarket problem. The regrettable, but predictable, tendency to look for scapegoats often leads people in Europe, mistakenly, to blame "globalization" and imports from the developing countries, notably in Asia. The main policy imperative is therefore to facilitate and encourage the transition from Taylorist to post-Taylorist ways of thinking and organization, to do so in ways that promote social cohesion, and, during the transition, to help voters better understand the nature of the problem. EU policies should facilitate and promote microeconomic flexibility rather than succumb to pressures to resist change through protection or other measures to restrict competition. They should promote social cohesion, not only because the cost of rapid change without it can be high (demotivation, social instability), but because it fosters creativity and innovation, which facilitate change both in firms and in the fabric of society. Weak or declining social cohesion, in contrast, increases resistance to much needed change, feeds protectionist pressures, and prolongs and exacerbates the crisis of Taylorism. Policies to facilitate and stimulate needed change at the microeconomic level start with macroeconomic policies that favour low interest rates and strong growth with low inflation. Such policies are conducive to investment and new-firm start-ups, hence flexibility as well as employment-creation, and can create a virtuous circle because microeconomic flexibility also makes macroeconomic policies more effective. (Such policies may in turn call for throwing some "sand in the wheels" of international finance, if only to restore a modicum of autonomy to public monetary authorities). 22 High interest rates and slow growth, in contrast, retard change and slow the development of flexible organizations while aggravating the already serious difficulties of Taylorist firms. "Structural" policies should focus on the development of human capital, on the creation and diffusion of both technological and organizational know-how, and on nurturing an entrepreneurial climate. Governments can, for example, facilitate firms' absorption of new

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technologies and nurture an entrepreneurial climate through measures that promote investment in new information infrastructures (for example, remove the regulatory barriers to market access and establish adequate standards to stimulate the creation of new and more effective services) and through measures that make better use of public procurement (for example, encourage innovation through performance requirements, break-up contract size, and encourage supply consortia of small firms). Governments, especially local governments, often have a critical role to play in facilitating the development of industrial "clusters"; governments should also ensure that industrial assistance does not unduly favour large established firms at the expense of small new ones. And governments can change financial accounting practices to allow skills to be treated as long-term assets, thereby improving incentives for firms and workers to invest in education and skill formation. The important "public good" features of investment in education and human capital formation can, of course, justify direct government investment in public education, and the increasingly knowledgeintensive nature of competition today probably justifies increasing that investment. However, just as globalization is blurring the boundary between manufacturing and services, between inter-firm competition and co-operation, and even the boundary of the firm itself, so is globalization and the spread of flexible organizations changing both the boundary between public and private responsibilities in education, and the kind of public training and education systems that are most needed. Since flexible organizations tend to require workers with multiple skills, many of which are rather firm-specific, such organizations tend both to treat at least a core group of workers as long-term assets (rather than as variable costs) and to provide them with much more on-the-job training, and continuous skill formation, than do Taylorist organizations. What they need most from public education systems, therefore, is not so much investment in the formation of skilled but narrowly defined specialists, or in vocational training, but much more in the formation of people with broadbased problem-solving skills, and the social and interpersonal

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communications skills required for teamwork, along with the "trainability" (preferably lifelong) required for flexibility. Europe's "international" policies should be guided by the same spirit of openness to change. Its trade policies should of course embrace trade with non-OECD countries, as well as with Japan and North America, not only because it stimulates competition and growth at home, and promotes global development- and because the contrary ultimately leads to sclerosis - but also because non-OECD markets are fast-growing and will account for a large share of global demand growth. Even more importantly, perhaps, is the fact that globalization today is blurring the very distinction between "domestic" and "international" policies as it increases pressures on governments to engage in "deep" international policy integration. European integration can be a useful policy instrument in this regard, and can also be a valuable means to enhance domestic competition, hence efficiency and productivity growth, by weakening the rent-seeking powers of entrenched oligopolies and special-interest groups. It may not, however, shelter members from the volatility of global financial markets, as the 1992-93 European monetary crisis illustrated. In addition, policy-makers must ensure that European integration - deepening or widening - is never transformed into a tool for regional protection. ASEAN. For non-OECD countries, the challenge of globalization is even

greater than it is for OECD countries, not least because it is a double challenge: first, to open up to the global economy, and secondly, to deal with the repercussions of globalization and the crisis of Taylorism in the OECD countries. For the ASEAN countries, opening-up includes further reductions in barriers to imports and capital flows along with far-reaching, and sometimes painful, domestic reforms. It means increased economic and political vulnerability to events in the global economy, including in global financial markets. '

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is looking for principles to apply, the principles adopted should have some flexibility and strength in practice to allow the continuity of the ASEAN process to flow without too much rigidity. Another issue concerns national and regional interests at the country level: as each country would have to consider intra-regional affairs as well as domestic matters, it is important to make provisions in these areas. The building-up of capabilities to work within the new institutional framework has to be harmonized and co-ordinated among members. In the case of the EU, the "Eurocrats" in Brussels are much greater in number than the "ASEANcrats" in Jakarta. The linkages between the EU and member institutions are important in many aspects of EU legislation and ratification. There are obviously different scenarios in ASEAN where its institutions are still not performing effectively to link regional and national issues together. However, it is not wise for these regions pursuing institutionalized integration to copy too much from each other. This is because there are different facets of integration as each region has tried to develop its own approach. For some, the different facets are unique in giving special characteristics to the experiences gained from regional integration. Therefore, although ASEAN can learn from the EU, ASEAN should retain its pace and alertness as it moves forward. New Dynamics in ASEAN Integration The renewed interest in ASEAN integration has been in part a response to the rising trend of regionalism world-wide. However, this current interest has also been brought about by the success of unilateral trade and investment liberalization in individual ASEAN countries, leading to the viability of an intra-regional liberalization plan. At this stage, ASEAN has undergone changes which favour gains to be made from economic integration. 17 In this process, ASEAN has emerged as the most developed example of regional integration in Asia. To understand the new dynamics in the process of ASEAN integration, reflecting as well as reshaping the above-mentioned changes in ASEAN, one has to focus not only on the AFTA programme but

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also to take future developments 18 not specifically included in AFTA into account. Again, one has to understand that AFTA must be regarded as a step towards greater economic integration. Of course, the overall gains are supposed to be greater than losses, which helps each member country to compromise with their own national interests. ASEAN Economic Community?

The grouping is of the view that the viability of enhanced economic integration should be in line with the growing convergence of views within ASEAN (ASEAN Secretariat 1991: VI). To create a greater sense of an ASEAN economic community, ASEAN needs a general cooperative framework to guide its vision, as well as specific areas of endeavor to operationalize its vision.

In its latest report, 19 it has called for greater economic integration through several bold economic measures. The ASEAN Free Trade Area has to be seen as a concrete step in integration aimed at the creation of an ASEAN economic community. However, more measures are required should ASEAN decide to go beyond a simple free trade agreement. As for the AFTA plan, the Fourth ASEAN Summit in Singapore had decided to establish it in fifteen years, but this was later shortened to ten years. The member countries had agreed to reduce their tarifTs to the level of 0-5 per cent together with the elimination of most nontariff barriers by the year 2003. The programme now covers most sectors, with the service sector included as the last sector to be negotiated in the next three years. Overall, the gains from AFTA liberalization seem to be positive, especially seen from the perspective of trade creation. Somehow, the results from this intra-regional programme have not been substantial, compared to the overall most-favoured nation (MFN) liberalization (Ariff 1994). However, AFTA is a positive development in ASEAN as it will lead the grouping to a faster pace consistent with the expectations of global trade liberalization within the World Trade

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Organization. Within the AFTA scheme, all members should be aware of the economic costs of diverting imports from major industrial countries to intra-regional trade. This effect can be strong if differences in each member's tariffs compared to quasi-zero tariffs within ASEAN remain high. In this case, the ASEAN countries would feel the necessity to narrow down differences in their extra-regional structure of tariffs imposed on outside countries. A natural development would be that intra-regional trade liberalization within ASEAN would be accompanied by the convergence of ASEAN countries' external tariff structures. In this case, discussions on policy in ASEAN should focus on this particular issue. The EU member states formed a customs union in the 1960s. The ASEAN countries have actually entered into a similar arrangement of a customs union in conjunction with the AFTA programme. Sooner or later, this issue will have to be addressed among its members, so that these regional trading arrangements can continue to support the ASEAN efforts in multilaterial free trade. The possibility of having a real free trade area may be seen as an impetus, encouraging spillover effects from the trade integrating modalities to other fields of integration. With this success, the grouping may start to make plans to push through an initiative to create an ASEAN Economic Community (AEC). Because the concept is relatively new to much of Asia, its introduction has to be carried out carefully. Of course, this process would involve greater market sharing and resource pooling of the group. Interested parties such as those in business, consumers, and producers who might be directly affected by the changes will have to adapt to the implications that may arise once this scheme is considered for implementation. An ASEAN Economic Community would allow much more than the flow of goods and include cross-border flows of capital, labour and services. In fact, the flow of factors such as labour and capital are already increasingly interdependent at the intra-regional level. Hence, with the creation of a reasonable and workable Community, there would be harmonization and co-ordination of policy at various levels and institutions.

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Including New Dimensions It is true that by creating an atmosphere where there is a free flow of factors, the ASEAN Economic Community would further reinforce ASEAN as a trade and investment area for the whole of Southeast Asia. In fact, the realization of this Community should not be a far distant dream. If this initiative is put in place by the turn of the century, it could be completed one to two decades later. Of course, to realize such an endeavour for ASEAN, tremendous tasks and efforts would be required as the European Union had and continue to experience. Hence, ASEAN would greatly benefit from a thorough study of the EU's difficulties in its current pursuit of this ambitious endeavour. As for ASEAN, the work of its collective regional agenda within each national country has to be divided more clearly. The interactions between the national governments and ASEAN institutions and among the national governments themselves in ASEAN affairs would be crucial in this process. The question of national sovereignty is one of the major issues that would be linked to this exercise. The monetary integration in the EU, for example, could be a good lesson for ASEAN if the grouping decides to create its own monetary system. It is important therefore for all nations to work together within this framework of harmonization and co-ordination at the national level. ASEAN cannot allow the least fortunate (that is, the economically and institutionally weakest member, such as Vietnam) to suffer from the integration process as well. Up to this point, apart from political/ strategic interests, economic concerns remain at the core of its works. In the future, ASEAN cannot leave out the social issues in its attempt at deeper integration. The EU, in this respect, has its own programme on social chapters and a cohesion fund to correspond to such concerns while the grouping is moving further ahead. For ASEAN, contributions in this area are still minimal. But as each country progresses, there should be some discussion and concrete decisions made about what should be done in the field of regional social co-operation. Another important issue in the future for the grouping is how to manage well its collective interests and co-operative work in the agricultural sector. The EU experience in this area has not been

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smooth. ASEAN can learn not to repeat the EU's mistakes. The agricultural sector continues to support a major part of the populations in several ASEAN countries, particularly Indonesia, Vietnam, the Philippines and Thailand. This sector has helped to cushion the shock of high prices caused by inflation in other sectors. So the question is how to stabilize the sector as progress continues. In fact, in the ASEAN countries, unemployment has been absorbed and there is no problem of budget deficit arising from this sector. Presently, agricultural products are not in high demand, but the situation may change in the next ten to fifteen years as more and more people from the rural areas move to the cities. Indonesia, the Philippines and Thailand have seen such a development. In fact, this trend puts pressure on both the agricultural sector and the rest of the economy. The rural areas, if not developed well in the integration process, can be inefficient and thus would demand more subsidies from the central government. ASEAN has to find a way to address and solve this problematic issue presently as well as in the future.

Implications of an Expanding ASEAN The end of the Cold War has opened up the imminent possibility for the countries in Southeast Asia to unite under one ASEAN flag for the first time in its recent history. ASEAN already included Vietnam, a country in transition, as its seventh member in 1995. The Fifth ASEAN Summit Declaration in Bangkok in 1995 charted the course and set the directions and goals that would see ASEAN moving to the establishment of an ASEAN community of ten countries. In the years ahead, ASEAN will further expand to include Cambodia, Laos and Myanmar. 20 This broadening process leaves numerous issues related to economic implications open for discussion. The grouping, when compared to the EU, is different in terms of physical size, resource endowment, development levels, and per capita income, institutional set-up, and government. In order to carry out successfully the broadening process, ASEAN would need to assess its implications at the regional and national levels when new members are to be brought in.

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It is obvious that there is a need for ASEAN to set out firm

conditions and understanding before admitting new countries. It is worth noting that this has occurred prior to every round of enlargement in the European case. The normal deadline for AFTA, for example, cannot be fulfilled by new members and so ASEAN must be flexible in the case of those countries. The EU had applied the asymmetrical approach to those prospective new members in Eastern and Central Europe with strict conditions. ASEAN has to work out its own approach, but must be firm in its practices so that new members can integrate accordingly within the group. It is important that the admission of these new members should not dislodge the so-called "ASEAN way" built in place after a few decades of cooperative efforts. Common goals and future directions perceived and shared among old and new members should promote a common understanding of mutual interests. In fact, the EU has always made clear that enlargement should proceed in line with the economic strength and political maturity of candidates rather than as a single leap into a union. ASEAN should make these criteria known to new members in the integration process. Their inclusion would have minimal impact in the short run, but economies of scale and scope can be added, especially by multinational corporations and their direct foreign investments. This can be done through the electronic and automobile industries. These industries have demonstrated their comparative advantage in an enlarged ASEAN, with their affiliates, parts and components being operated from within and outside the region. An enlarged ASEAN can be interpreted differently when seen from each country's perspective. Overall, the end of the Cold War has given an opportunity for ASEAN to help those Indochinese countries in transition to integrate within the grouping. Vietnam is already its seventh member. Laos and Cambodia are expected to join soon. These countries in transition look to ASEAN as a model for growth and prosperity. The economic implications of being closer to ASEAN are that they would be able to link their economic development and

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resources to the outside world at the same time, thus benefiting from the progress of the rest. In the longer term, the addition of the Indochinese states to the rest of ASEAN can change the existing landscape of complementarities among the existing members. The Philippines, Indonesia and Thailand may feel the impact of this change greater. Singapore and Malaysia who are better prepared in their policy towards Indochina will continue to advance themselves in ASEAN. Thailand is too close to Indochina to let this opportunity slip by. The country could ask more of the other ASEAN countries in order to join together in a common effort. The ASEAN-Mekong Basin development co-operation is one example which would benefit the Indochinese states and the whole of Southeast Asia. Generally, geographical proximities and physical distance are becoming more important today in Southeast Asia. It depends on how ASEAN would like to explore this possibility of broadening the scope to achieve its goal of integration in the years to come (Low 1994). Conclusion ASEAN economic growth and prosperity has been remarkable from the 1980s to the present. The export-led industrialization in the region has been reasonably well implemented and most of the ASEAN countries are much closer to the beginning of this development process than to the end. This success has been achieved by the individual countries by remaining open to the global economy. In fact, ASEAN market integration has been multilateralized with a number of countries involved. The end of the Cold War turned ASEAN's attention to economic issues, with the Fourth Summit in 1992 setting the objective of an AFTA within fifteen years, and subsequently accelerated to ten years through the mechanism of a common internal tariff. This has given rise to ASEAN regionalism and the new dynamics in its integration. The grouping is definitely moving towards the deepening and broadening process of its integration and this gives rise to much speculation about what ASEAN's future integration would be like. The Fifth

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Summit in Bangkok in December 1995 showed political leaders to be ahead of their officials and established a tone of change for greater integration. If ASEAN moves in this direction towards more institutionalized integration, the EU is a case in point where ASEAN can gain insight and knowledge from their experience. Of course, this does not mean that ASEAN should duplicate the European model. On the other hand, there are some common elements related to institutionali~ed integration which ASEAN can learn from the EU, for example, the economic and social cohesion among members, the guiding principles. flexibility and strength in practice, the handling of national and regional issues. the shape of different facets of integration, the role of particular institutions, and so forth. The new dynamics in ASEAN also raises the issue of the creation of an ASEAN Economic Community, once AFTA is completed, together with the harmonization of ASEAN's common external tariff structure. ASEAN must also take into consideration the negative consequences arising from the spillover effects of the integration process. Finally, the broadening of ASEAN (from seven to ten members) is a useful and important exercise for old and new members, who can look forward to exploring new opportunities for trade, growth and development open to them at the regional and global level. Notes *The author would like to express his sincere thanks to Jacques Pelkmans, Joseph Tan, Richard Sinnott and Chitriya Pinthong for their constructive comments on an earlier draft. Any errors and imperfections remain solely with the author. 1. At the Fourth ASEAN Summit in 1992. 2. Discussed for the first time in Bangkok in 1993. 3. Narongchai Akrasanee and David Stifel, "The Political Economy of the ASEAN Free Trade Area", in AFTA: The Way Ahead, edited by P. Imada and S. Naya (Singapore: Institute of Southeast Asian Studies, 1992), p. 31.

4. Especially the volatilities of exchange rates and interest rates in the first half of the 1980s.

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5. Suthiphand Chirathivat, "ASEAN Economic Integration with tho World through AFTA", in AFTA in a Changing International Economy, edited by Joseph L.H. Tan (Singapore: ISEAS, 1996). 6. For example, the AFTA recommendation of 0-5 per cent tariff is far greater than unilateral tariff practices to outsiders, and therefore trade diversion caused by AFTA can be high. 7. "The Protocol Amending the Agreement on the Establishment of the ASEAN Secretariat, signed in Manila on 22 July 1992, provides that the Secretary-General is responsible to the Heads of Government Meeting and to all Meetings of ASEAN Ministers when they are in session and to the Chairman of the ASEAN Standing Committee". Cited from ASEAN: An Overview (Jakarta: ASEAN Secretariat, 1995). 8. The last time was the Fifth ASEAN Summit in Bangkok in December 1995. 9. This change reflected tho spirit and goals of the Fourth Summit: "Towards strengthening and intensifying intra-ASEAN cooperation". 10. The policy decisions of the AEM are carried out, implemented and monitored by tho Senior Economic Officials Meeting (SEOM) which is required to moot at least four times a year. SEOM is supported by the strengthened ASEAN Secretariat which assists, among other things, in co-ordinating, monitoring and implementing economic co-operation activities. 11. Pelkmans (1992), p. 101. 12. And so do markets which finally become one single market-place. See R. Langhammer (1993), p. 33. 13. As Langhammer puts it: "institutionalized integration combined with some loss favourable prerequisites for AFTA may be a step towards intensified economic integration". See Langhammer (1993), p. 45. 14. For a full discussion on this subject, see below. 15. The European Commission, in this sense, has been directing policy initiatives and ensuring the implementation of the treaties of the European Union. 16. On the ASEAN way, soc Noordin Sopiee, "The ASEAN Way" (Paper prepared for the Sixth Southeast Asia Forum on "One Southeast Asia: Political. Economic and Security Implications", organized by ASEAN-ISIS, 10-13 December 1994, Kuala Lumpur), mimeographed. 17. Hans Christoph Hieger reiterates that in the 1970s the EC tended to be seen as a model worth emulating. Then, in the 1980s, Europe's growth potential and its own problems raised doubts among ASEAN circles about

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the gains to be obtained. Now the pendulum seems to be swinging in the other direction once more. Rieger (1991), p. 160. 18. The ASEAN Secretariat has termed this the "AFTA Plus Program". ASEAN Standing Committee, "ASEAN Economic Cooperation for the 1990's" (Report prepared with the assistance of the UNDP, October 1991). 19. ASEAN Secretariat, ASEAN Update 3/96 (May-June 1996), p. 12. 20. At the Fifth ASEAN Summit in 1995, the meeting of all the leaders of the Southeast Asian states saw the signing of the Southeast Asia Nuclear Weapons Free Zone Treaty. The Treaty represents the first step forward in the creation of a Southeast Asia that is free of nuclear weapons, as well as the prevention of tho proliferation of nuclear weapons in the region (ASEAN Secretariat 1996, p. 11).

References Akrasanee, Narongchai and David Stifel. "The Political Economy of the ASEAN Free Trade Area". In AFTA: The Way Ahead, edited by Pearl Imada and Seiji Naya. Singapore: Institute of Southeast Asian Studies, 1992. Ariff, Mohamed. "Perspective on AFTA and Beyond: Progress, Issues and Problems of Liberalization for Malaysia". Paper prepared for the Conference on "AFTA and Beyond: An ASEAN Perspective", organized by TDRI, Queen's University, and ESCAP, Bangkok, 27-28 April 1994. Mimeographed. ASEAN Secretariat. ASEAN Update, Vol. 3/96, May-June 1996a. - - . ASEAN Update, Vol. 2/96, March-April 1996b. - - . ASEAN: An Overview. Jakarta, 1995. - - . "ASEAN Economic Cooperation for the 1990's". 24 October, 1991 (unpublished). Chirathivat, Suthiphand. "ASEAN Economic Integration with the World through AFTA". AFTA in the Changing International Economy, edited by Joseph L.H. Tan. Singapore: Institute of Southeast Asian Studies, 1996. - - . "A Step Towards Intensified Economic Integration?" In ASEAN Future Economic and Political Cooperation, edited by Wolfgang Moellers and Rohana Mahmood. Malaysia: Institute of Strategic and International Studies, 1993. Dosch, Jorn and Manfred Mols. "Why ASEAN Co-operation Cannot Work as a Model for Regionalism Elsewhere - A Reply". ASEAN Economic Bulletin 11, no. 2 (November 1994): 212-22.

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Green, David J. "Convergence and Cohesion within ASEAN 4". Asia-Pacific Economic Community? edited by Du Ha. New Jersey: J. Press Inc., 1995. Jmada, Pearl and Se_iji Naya, eds. AFTA: The Way Ahead. Singapore: Institute of Southeast Asian Studies, 1992. Keohane, R.O. and S. Hoffmann. "Conclusions: Community Politics and Institutional Change". In The Dynamics of European Integration, edited by W. Wallace, pp. 276-300. London, New York: Routledge, 1990. Langhammer Rolf J. "AFTA-A Step Towards Intensified Economic Integration?". In ASEAN Future Economic and Political Cooperation, edited by Wolfgang Moellers and Hohana Mahmood. Malaysia: ISIS, 1993. - - . "ASEAN Economic Co-operation: A Stock-Taking from a Political Economy Point of View". ASEAN Economic Bulletin 8, no. 2 (November 1991): 137-50. Low, Linda. "An Expanded ASEAN: The Economic Implications". Paper prepared for the Sixth Southeast Asia Forum on "One Southeast Asia: Political, Economic and Security Implications", organized by ASEAN-ISIS, Kuala Lumpur, 10-13 December 1994. Mimeographed. Mistry, Percy S. "Regional Integration and Development: Panacea or Pitfall?" Paper prepared for a Symposium on "The Future of Regional Economic Integration", organized by FONDAD in The Hague, 4-6 September 1994. Nugent, Neill. The Government and Politics of the European Union. Third edition. London: Macmillan Press Ltd., 1994. Pelkmans, Jacques. "Institutional Requirement of ASEAN with Special Reference to AFTA". In AFTA: The Way Ahead, edited by Pearl Imada and Seiji Naya. Singapore: Institute of Southeast Asian Studies, 1992. Rieger, Hans Christoph, compiler. ASEAN Economic Cooperation: Handbook. Singapore: Institute of Southeast Asian Studies, 1991. Singh, Dato Ajit. "The Evolution of ASEAN Institutions". Paper presented at the Sixth Southeast Asia Forum on "One Southeast Asia: Political, Economic and Security Implications", organized by ASEAN-ISIS, Kuala Lumpur, 10-13 December 1994. Mimeographed. Soesastro, Hadi. "ASEAN Economic Cooperation: The Long Journey to APTA". Paper presented at the Sixth Southeast Asia Forum on "One Southeast Asia: Political, Economic and Security Implications", organized by ASEAN-ISIS, Kuala Lumpur, 10-13 December 1994. Mimeographed. Sopiee, Noordin. "The ASEAN Way". Paper presented at the Sixth Southeast Asia Forum on "One Southeast Asia: Political, Economic and Security Implications", organized by ASEAN-ISIS, Kuala Lumpur, 10-13 December 1994. Mimeographed.

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Sopiee, Noordin et al. ASEAN at the Crossroads. Malaysia: ISIS, 1987. Tan, Joseph, ed. AFTA in the Changing International Economy. Singapore: Institute of Southeast Asian Studies, 1996. Wallace, H. and Wallace W., eds. Policy Making in the European Union. Third edition. Oxford: Oxford University Pross, 1996.

7171 What Can ASEAN Learn from the Experience of European Integration? An EU Perspective ROLF J. LANGHAMMER*

Introduction: Limits to Learning Learning involves both adopting what forerunners have proven as workable and successful and avoiding what they have experienced as costly and inefficient. Applied to the EU-ASEAN context, this gives rise to the following questions: Can the European Union (EU) be regarded as a forerunner in regional integration (and ASEAN as a latecomer)? Furthermore, can regional integration per se be regarded as something to learn from, given the availability of better alternatives to integrate internationally? Finally, in general, what can dynamic countries which are trying to catch up learn from the experiences of ageing high-income countries which started integration from an entirely different economic and political environment? With regard to the first question, the EU in fact represents the pace-setter in regional integration, implementing a step-by-step pattern of intra-area liberalization of goods markets first, and factor markets la~cr. In institutional terms, this implies going through four stages of integration: free trade area, customs unions, common market, and finally, economic union. For a long time, this approach represented the only model for other integration schemes in developing countries.

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In this respect, the EU was indeed a forerunner. However, after the late eighties other models of regional integration combining the concept of a free trade area and elements of the common market became popular (see North American Free Trade Area [NAFTA] and the European Economic Space). ASEAN, however, followed a different path. From the very beginning, ASEAN was a co-operation rather than integration scheme. Joint projects and collective bargaining with third countries were at the heart of ASEAN co-operation. Such co-operation was externally oriented whereas intra-area liberalization, such as the ASEAN Preferential Trading Arrangements (PTA) played a minor role. It was the decision to form an ASEAN Free Trade Area (AFTA) that brought ASEAN closer to the regional integration path exemplified by the EU in its early stages. In this respect, AFTA can be regarded as a latecomer, relative to EU integration. The second question relates to the second-best character of regional integration vis-a-vis unilateral liberalization or multilateral liberalization within the GATT/WTO framework (Bhagwati and Panagariya 1996; Frankel, Stein, and Wei 1995). Initially, the deviation of the second-best alternative from the first-best alternative would have been greater for ASEAN than for the EU, which in .the fifties already showed a much higher share of economic activities concentrated within its territory than ASEAN. Greater initial inward-orientation of the EU also meant lower costs of trade diversion whereas ASEAN would have incurred high costs of trade diversion had it really pursued inwardorientation more vigorously. Fortunately, ASEAN waited for more than twenty-five years before it started to shift its political priorities towards inward -oriented integration. In spite of AFTA, however, ASEAN still represents more a co-operation agreement than a clear-cut regional integration scheme. Finally, with regard to the third question, the starting points of the two approaches could not have been more different. The EU is a highly legalistic institution approaching the state of a confederation (but not of a federal state). Its Treaty contains clements of a constitution. Throughout its entire history, political integration was always in the background of economic integration in Europe. In this respect, economic integration served as a vehicle to tic EU members to each

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other and thus facilitate the shift in political sovereignty to the supranational level, as it is envisaged today by a common foreign and security policy. ASEAN, on the other hand, never had political integration or confederationist fine-tuning on its agenda. Nor is it likely that the ASEAN member countries will be prepared to surrender political sovereignty in future. In spite of these deeply rooted differences in regionalism between the two groupings, there are lessons to be learnt from both virtues and vices of European integration. Some of them are discussed in the following section. Such learning, however, is constrained by ASEAN's specifics, which will be highlighted next. Following this, the net result of positive learning for ASEAN will be discussed, while the results will be presented in the conclusion.

Virtues and Vices of European Integration VIRTUES

Complete Internal Liberalization in the Manufacturing Sector, 1957-68 When the EEC started to liberalize intra-area trade in 1958, liberalization among the six member states was subject to controversies about the procedure. France (and Belgium) opted for industry-level planning and programming and would have preferred industryspecific liberalization with forerunning and lagging industries within the manufacturing sector. However, for this approach they failed to find compatriots among the other member states. The resistance from France against across-the-board liberalization was finally broken by creating specific legal frameworks (such as the Common Agricultural Policy or CAP, and the Economic Coal and Steel Community or ECSC) for sensitive sectors such as agriculture and steel (including shipbuilding). As a result of across-the-board liberalization, the elimination of customs duties and quantitative restrictions on manufacturing trade among the member countries was accomplished in July 1968, one and a half years ahead of the original schedule. Much of the sixfold increase in intra-area trade in the twelve-year period following the ratification of the Rome Treaty represented trade creation, while trade diversion remained relatively small (Balas sa 197 5;

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Sapir 1992, pp. 1498-99). Across-the-board liberalization, instead of product specific liberalization, contributed to small spreads in effective rates of protection between industries and gave member states with average levels of protection no chance to maintain high tariff borders. Welfare effects were positive both for France and the other member states as well as for third countries which could benefit from the erosion of protection differentials within the Community.

Choosing the Customs Union as the Appropriate Initial Level of Integration Removing trade barriers among the member states was the main target of integration and it was complemented by a parallel strategy to harmonize the external level of protection against non-members. Thus, in 1968, the EEC introduced a customs union. The advantage of a customs union relative to a free trade area lies in preventing rules of origin from becoming protectionist instruments (Krueger 1995) and minimizing trade diversion effects in groupings with large spreads in external tariffs among member states (Bhagwati 1991, p. 77). Admittedly, this customs union was far from being perfect (Donges 1981). There were still controls at the inner borders because of differences in value-added taxes on products and the application of the country of destination principle in allocating value-added tax revenues. Secondly, technical standards differed between member states and so did government procurement policies and subsidization policies. Moreover, the entire services sector was excluded from the customs union. Finally, controversies over a common external level of protection could not be bridged for individual products such as cars, some agricultural products, and textiles and clothing. For these products, EU member states quotas were established, which lasted until 1992 when the internal market was completed. Link between Internal and External Liberalization Parallelism between internal and external liberalization has proven to be one of the most beneficial strategies of the EU. External liberalization was essential to avoid discrimination against third countries

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caused by internal liberalization. This would have been possible because some member states such as Germany and the Benelux countries had to raise their national tariff's to a common external level in 1968 in order to compromise with other member states, such as France and Italy which had to lower their initially much higher national tariffs (Resnick and Truman 197 5). It was only due to the parallel lowering of the external tariff in the GATT- Kennedy Round that third countries found no reason to complain about a less favourable treatment in the German and Benelux markets than before the external tariff was implemented. A 40 per cent reduction in external tariffs after the Kennedy Round led to a common external tariff which was at the same level as the lowest national tariff (Germany) in 1958. Some twenty years later, the EU followed a similar procedure by liberalizing internal trade in services and the sensitive products listed above while at the same time committing itself to the average tariff cut of about one-third agreed upon at the Uruguay Round. Lawrence (1991) and Petri and Plummer (1996) suggest from a political economy point of view that the European Customs Union strengthened pro-trade interest groups and thus pushed external liberalization more than it would have been possible had member countries retained their individual economic policies. The hypothesis that the overall welfare effect of EU integration was only possible in combination with external liberalization finds strong support from the failures of many integration schemes in developing countries. These schemes delinked internal liberalization from external liberalization and found themselves rapidly in a trap of inefficient regional import substitution. Only by pursuing both liberalization initiatives simultaneously can discrimination effects of internal liberalization be contained and reduced. Accountability and Signalling Keeping deadlines to maintain credibility has been one of the most demanding challenges of regional integration. Many schemes in Latin America and Africa failed to meet liberalization deadlines and time·tables and thus fuelled self-fulfilling prophecies that integration would finally fail. The EU is a notable exception to this rule. Two timetables

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of liberalization were ex ante announced: first, the simultaneous approach of forming a free trade area and customs union in 1957-68 and the completion of the Single Market between 1985 and 1992. Both schedules were kept. Keeping a third timetable, the start of the Monetary Union in 1999, is still uncertain. It is true that there were periods of setbacks and stagnation, for instance, in the 1970s. Yet, it is one of the virtues of European integration that the political will to commit itself to the new deadlines was not weakened by failures to implement decisions which were adopted. The major proof that accountability and signalling exerted a positive effect on private economic actors can be seen by the unprecedented growth of intra-European foreign direct investment (FDI) after 1985. Early steps to implement the four principles of freedom of establishment, movement of persons, capital and goods and services led to a rapid increase in intra-EU FDT based on mergers and acquisitions. By 1990, a large part of the expected effects of liberalizing trade and services and capital on foreign direct investment had materialized. On the other hand, the existing uncertainty about the implementation of a monetary union in 1999 is equivalent to unclear signalling, which contributes to a wait-and-see attitude by investors.

In Principle, Good Principles The completion of the internal market has given rise to the renaissance of two principles which arc instrumental to decentralization and competition. The first principle has been labelled "subsidiarity", meaning that public goods should be supplied whenever possible at a lower level of jurisdiction to taxpayers and consumers, and the second principle is the so-called "mutual recognition" principle based on the country of origin rule. The latter principle allows for competition between different regulation systems and for a selection process to allow consumers to choose systems which correspond to their preferences. Roth principles have been challenged by a number of factors. First, institutionally, centralization of decision-making is facilitated by a number of factors. In the Treaty, there is no separation of power

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since the Commission, as the executive organ, also has the exclusive right oflegislative initiatives. The Commission itself has vested interests to centralize decision-making. The European Parliament still lacks the essential elements of a legislative institution representing the will of the electorate. Furthermore, national parliaments cannot control the voting behaviour of their governments in Brussels. Secondly, the political economy of decision-making suggests that so-called "dirty" jobs with which decision-makers do not want to be identified by the electorate are shifted to the more remote higher level in Brussels (Hiemenz and Langhammer 1988). Thirdly, there is an inconsistency between the allocation of targets at the lower level and the allocation of budgetary sources to enable the lower levels to produce public goods. Fourthly, bureaucratic ex ante harmonization has created some sort of dependence in the sense that after harmonization, economies of scale became powerful arguments for shifting public tasks to the supranational level. Fifthly, various member countries have opposed the country of origin principle because they fear incurring budgetary losses in competition with countries having a lower tax burden and less public interference with market forces. Sixthly, some EU member countries have a strong historical tradition in centralized decisionmaking and are not prepared to reform their systems under pressure from neighbouring countries. As a result, the application of the two principles has often been watered and compromised, for instance, by negotiating a priori joint minimum standards before national standards are mutually agreed upon. In reality, implementing the two principles in their purest form has proven to be impossible.

Enlargement European integration has not been a closed event of a few countries segmenting Europe into core and periphery regions. Three enlargements ("Anglosaxon" [1973]), "Mediterranean" [1981-86]) and "Scandinavian" [1995]) were relatively smoothly accomplished and implemented. Through these enlargements, the expectations of the member countries from integration have become greater. The Anglosaxon countries were basically interested in free trade arrangements and little

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more. The Mediterranean countries sought to receive both private and public capital from the core countries while the accession of the Scandinavian countries to the Union was strongly motivated by concerns that their industries would face serious disadvantages under imperfect competition with EU companies in the internal market. From an economic point of view, one can say that all accession countries were subjected to a straightjacket called acquis communautaire (that is, accepting the entire highly legalistic framework of the EU). However, this acquis did not prevent private risk capital from flowing into the new member countries when domestic conditions were investmentfriendly. This was so in Spain and Portugal but not in Greece which, in spite of full membership and easy access to EU public funds, failed to emerge as an attractive host for private capital from the core countries. Preliminary steps for accession of future member states to the EU (for example, the Eastern enlargement) focus on both the removal of trade barriers and liberalization of trade among the candidates themselves. The positive side effect of the second enlargement was that liberalization of capital flows has regained priority on the integration agenda, supported by the multilateral commitments of the candidates. It is of course difficult to speculate what would have happened without this enlargement, but there is some evidence that the economic performance of these countries would not have been very different given that the EU had been the major trading partner for these countries and many of the economic transactions would have been with the EU anyway even without institutionalized integration.

EU Integration as a Laboratory for Multilateral Liberalization Owing to the higher degree of homogeneity and smaller transaction costs among members of a regional integration scheme compared to WTO (World Trade Organization) members, regional integration can be a pathfinder for liberalizing economic transactions in areas which the multilateral scheme has just started to deal with. The liberalization of services in the EU in 1992 was such an area. Because of the relatively broad similarity in both liberalized and excluded service sectors across the regional and multilateral agreements, EU liberalization in relation

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to the General Agreement on Trade in Services (GATS) can serve as a useful laboratory in which to experience the even more sophisticated services, rules and disciplines (Hoekman and Sauve 1994, p. 314). Such complementarity between regional and multilateral liberalization does not only exist for issues such as trade and services but also for releasing old issues from excessive and wasteful state intervention: without reforming the EU Common Agricultural Policy, for instance, there is little chance for the multilateral trading order to subject agriculture under the WTO discipline. Finally, wherever crossborder mobile resources exist which make national management ineffective, EU regional integration, having a long tradition in jointly managing such resources (for instance, fishery, environment, telecommunications services), can provide lessons (good and bad) if there is a need for multilateral treatment. VICES

Common Agricultural Policy The history of regulating agricultural production and trade in the Community is certainly one of the major failures of EU regional integration. The de-linking of internal liberalization from external liberalization, the massive internal price support and the commensurate build-up of excess capacities which are dumped on world markets, have caused internal terms of trade to become heavily distorted. The high cost of inefficiency had to be shouldered by domestic consumers and taxpayers, by domestic industries competing for resources which were absorbed by the agricultural sector and, finally, by world producers of agricultural products. The staggering costs of trade diversion as a result of the CAP remain unchallenged in all political circles. Probably, the effects of protecting the EU coal and steel industry have not been as harmful as protection for agriculture, but both sectors share the same political economy dilemma: by granting them special legal treatment (either through special agreements or by exempting agriculture from the normal treatment under the EEC Treaty), vested interests were encouraged and even sponsored to position themselves far beyond their macroeconomic importance.

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Violating Principles of Subsidiarity and Country of Origin Rule The two principles of subsidiarity and country of origin rule have often been violated. With regard to the subsidiarity principle, Article 130 of the EU Treaty after Maastricht I lists a number of areas in which both members and the Community now have joint responsibility: industrial policies, social policies, structural and regional policies (all supported by Community funds), research and technological development, environmental policies, and development policies. In many cases, the division of labour between the member states and the Community in formulating targets, financing measures and monitoring implementation is not clear. By shifting targets and responsibilities (even partly) to the Community level, the Community demand for resources to fulfil these targets has increased and conflicts have arisen among the members over burden sharing. The efficient allocation of resources has become more difficult as citizens have not been allowed to check cost-benefit assessments at the lowest level. Thus, the spirit of responsibility and ownership has been eroded at the citizen level. As for the second principle, the mutual recognition of national regulations and rules (or the country of origin principle), there is also reason for disenchantment. This principle has not been applied to indirect taxes (VAT) to abandon control over the destination of products, which is inconsistent within the internal market principle. Neither has the EU law generally accepted the superiority of this principle over the ex ante harmonization principle. On the contrary, Article lOOa of the EU Treaty postulates ex ante harmonization as the rule, and accepts the mutual recognition of national regulations only as a facultative option, which is possible only for those regulations which have not yet been harmonized ex ante (Article lOOb). External Discrimination of Trading Partners The external discrimination of trading partners by the so-called hierarchy of preferences is, in my view, a vice which ranges next to the CAP. By insisting on unequal treatment of presumably unequal

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trading partners, the EU has used unilateral trade policies (which are allocative policies in nature) as a substitute for aid policies which are targetted at changing income distribution. To put it differently, a second-best target (channelling tariff revenues foregone to the trading partners) was approached by a second-best measure (a product-related subsidy instead of a recipient-related subsidy). The consequences of this policy are high transaction costs, for instance, because of interaction between those circumventing the rules of origin (on the recipient side) and those controlling the rules of origin (on the donors side). Lack of transparency has been one of the effects of a trade diverting approach to merchandise trade. What is more important are political expectations to maintain the order of ranking, that is, not to be treated less favourably than in the past. Such expectations have been systematically created by the hierarchy of preferences. The resistance which the ACP countries showed when their banana exports after 1992 were to be released from EU-member-state specific advantages, clearly points to the zero-sum game character of such hierarchies. It has to be acknowledged that the old type of non-reciprocal-trade agreements has been recognized in community circles as widely non-performing. Ongoing discussions on costs and benefits of letting the Lome Agreement expire after the year 2000 and to replace it with another type of trade agreement provides ample evidence that there is a change in perception. Instead of non-reciprocal agreements, bilateral free trade agreements are now negotiated or prediscussed with a number of developing countries (for instance, Mexico, Chile, Mercosur, and South Africa). Yet, product-specific protectionist interests (reflected basically in agricultural products such as wine) prevent such agreements from being rapidly implemented.

Incompatibility with Multilateral Rules on Non- Tariff Barriers Bilateral "hub and spoke" agreements of the EU with third countries aimed at liberalizing trade can be criticized because they do not con-· tribute to freeing trade between the "spokes". Instead, unless the "hub" insists upon inter-"spoke" liberalization (as the EU does explicitly in

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Central and Eastern Europe with CEFTA). the "spoke" faces deterioration in trading conditions with the other "spokes" (Wonnacott 1996). Further criticism can be raised concerning the increasing number of trade-related provisions in bilateral agreements that deal with measures other than tariffs. It is argued that the EU has. for instance, fourteen different sets of preferential rules of origin (Sampson 1996, p. 89). In particular, provisions on anti-dumping, subsidies, intellectual property safeguards, and dispute settlements in such agreements may undermine the basic aims of the multilateral order by eliminating market access rights negotiated under the GATT (Roessler 1993). Even if it can be assumed that most of the provisions are consistent with GATT/WTO, they may greatly complicate the multilateral framework if conformity with this framework is sometimes explicitly mentioned in the bilateral agreements (as, for instance, in dumping and subsidies' provisions in the Europe Agreements) and sometimes not (as with safeguards in these agreements). In short, non-tariff-related measures in EU bilateral agreements at least complicate the effort to adopt a coherent multilateral framework, and raise transaction costs. A general clause in these agreements confirming the subordination of all bilateral provisions under multilateral trade law would solve this problem but this has not yet been applied by the EU.

Selectivity in Safeguards Safeguards are accepted in the GATT framework as a temporary escape mechanism from MFN (most-favoured-nation) treatment (Article 19). What the fathers of the GATT did not anticipate, however, is that such safeguards could have been sharpened by selectively denying individual suppliers of products unrestricted market access. Apart from other contingent protection measures, the EU has been the spearhead in introducing selectivity in international trade. Anchoring selectivity in the multilateral framework has to be regarded as a major instrument of the EU's general preference for external trade discrimination. To be fair to the EU, however, selectivity has been declining in recent years (WTO 1995b, p. 65).

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Insufficient Exit and Voice Conditions Participants in the market reveal their preferences through exit behaviour while participants in political communities use their voice (voting) for decision-making. The EU framework suffers from deficiencies in both ways. It does not provide options for the exit of member states nor does it give voters the opportunity to express their preferences through a powerful legislative institution. The result is that outward-oriented members and voters who have less stakes in greater integration than other groups incur losses by compromising. In other words, once countries become members they cannot revise their initial decision even if increasing inward orientation of the community prevents them from achieving sizeable welfare gains. In such a community, decisions in favour of greater integration always carry more political leverage, sometimes at the expense of third countries. A recent example of this development has been the compromise by the Community to facilitate the opening of anti-dumping investigations by the Commission, even against a formerly opposing minority in the Council, in order to "buy" the French endorsement to the Uruguay Round results. Special ASEAN Constraints to Learning from Europe Different Principles of Rule-Making Differences in rule-making and decision-taking between ASEAN and the EU are huge. Unlike the EU with its acqui communautaire, ASEAN relies on a minimum of organized rule-making. Official documents in ASEAN, for example, unlike those of the EU, do not commit member states to change their national laws. Decision-taking is based on the consensus principle and not on majority voting. Hence, relative to the EU, ASEAN is "unorganized". This means that learning from the EU would mean excluding everything which would subordinate national law to supranational law in ASEAN.

Different Integration Targets Presently, ASEAN is aiming for the implemention of a free trade area. Hence, all EU measures leading to further regional integration

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will not be relevant to ASEAN (perhaps except for the customs union stage).

Different Eras of the World Economy When the EU began to liberalize intraregional trade, neither globalization of production and markets nor the omnipresence of volatile and mobile international capital existed. The announcement of integration measures to be taken and the loss in credibility and reputation once these measures failed, became relatively meaningless to the capital markets. Trade policies were also not assessed with reference to other policies and this lack of coherence therefore had little impact on investment decisions. FDI was in its early stages and its attractiveness was of minor importance as a policy objective relative to the expansion of merchandise trade. Today, however, ASEAN is no longer in a position to further belittle the unimportance of policy announcements and policy coherence. Given that capital markets will test each policy measure and discount it if necessary, missing deadlines, delayed integration timetables and doubts on the sustainability of implemented measures can have a negative multiplier effect on the assessment of other policies. This may hold even ifthe concrete measure which was initially questioned has a limited scope only. In short, there is more coherence and credibility demanded on the ASEAN side in order to avoid the reactions of the capital markets than was the case forty years ago when the EEC implemented its free trade area. Differences in Starting Conditions When European integration started, economic interactions between member states were already relatively strong. For instance, the share of intra-area imports in apparent consumption amounted to almost 5 per cent in 1958, and intra-area trade accounted for more than one quarter of total trade (Balassa 1975, p. x). Such a relatively high degree of pre-integration intra-area trade was accompanied by distributional concerns with regard to the net benefits of integration. Financing the CAP and the existence of various redistribution funds bear witness to these early concerns. Unlike the EU, inward orientation of ASEAN

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declined after it was founded. "True" intra-trade shares adjusted by entrepot trade and trade in commodities are still fairly low.

Differences in the Level of External Protection The EEC in the early days had to cope with some degree of external tariff differentials between member states. The Benelux countries had the lowest tariffs in the manufacturing sector while Italy and France had much higher tariffs. Yet, such differentials were much lower than in ASEAN which includes two de facto free traders, Singapore and Brunei Darussalam. To minimize trade deflection and the application of trade-impeding restrictive rules of origin, ASEAN had to find innovative solutions for a problem which never existed in Europe. Proposals made in the past centred on the catch term "Six minus X" and included, for instance, the formation of a customs union among the four other countries of ASEAN (excluding Vietnam which was not a member at that time) and the establishment of a free trade area linking the customs union with the two free-trading countries (Rieger 1986; ISEAS 198 7). As an alternative way, the group of fourteen ASEAN Chambers of Commerce and Industry (ASEAN-CCI) suggested that ASEAN in departing from its PTA (preferential trading arrangements) should accord a minimum of 50 per cent margin of preference on all agricultural products based on the "Six minus X" principle (ASEAN-CCI 1987). In this proposal, the extent of exclusion lists for so-called sensitive items ranged high on the agenda of problems to be solved. Such lists and their counterparts, that is, inclusion lists, did not exist in the EEC though one can argue that the special "grandfathering" arrangements for individual products, such as bananas, cars, steel products, and textiles, represented a de facto exclusion list. Differences in Economic Dynamism The ASEAN countries are growing rapidly, while the EU countries, on the other hand, have seen slower growth. Another important difference is that regional integration within ASEAN includes the private sector as advisor and actor much more than in Europe where integration has always been predominantly a state affair. Both differences seem

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to impede institutional change in Europe more than in ASEAN, where institutional inertia is hardly visible. To some extent, this may reflect the consensus-driven profile of institutionalized integration in ASEAN, leaving breathing space for private initiatives and participation as well as for rapid public manoeuvring. Economically, time preference rates of public actors in integration seem higher in ASEAN than in Europe. What can ASEAN Truly Learn from the EU? Having discussed both vices of the EU and constraints reflecting the co-operative rather than integrative nature of the first twenty-five years of ASEAN regionalism, the question remains: where is the beef? What can ASEAN learn from the EU in positive terms? Nine years earlier, at the Kuala Lumpur Conference on ASEAN Cross-roads, I presented a view on "Fallacies of Transposition" with respect to the question of what ASEAN could learn from other integration efforts (Langhammer 1987, pp. 535-50). At that time, the answer based on the failures of integration in Latin America and Africa was straightforward: the first best solution was to liberalize alone, the second best, to form a customs union on the "Six minus 2" principle, that is, leave Singapore and Brunei Darussalam out of the regional integration process. In this chapter, I have shown that there is little to learn from the EEC and EFTA (European Free Trade Area) because of the differences in starting conditions and targets, and also because EFTA was simply a by-product of EEC formation with few trade links between the leading EFTA member states. Nine years later, this view has to be revised somewhat because ASEAN has meanwhile decided to form a conventional free trade area which includes all ASEAN member states. Still, I am not convinced that this method of integration is preferable. Yet, given that the political decision has been taken, there is now more to learn from the EEC experience than under the previous ASEAN strategy of cooperation, which had included ill-fated regional industrial planning. No Waiver For a discriminatory trading arrangement such as a free trade area whose member states are committed to the multilateral rules of MFN

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treatment and national treatment, it is vital to minimize the negative effects for non-member countries. Legally, tests on GATT consistency are only possible if resort to Article 24 of GATT is restricted to its bare minimum and if no additional waivers from GATT rules are added to this article. This was the case with the EEC. Otherwise, the exception would become the rule. Additional waivers would just act in this direction. They imply further deviation from MFN rules and make Article 24 even more permissive and porous than it is already. Since 1979, when the so-called "Enabling Clause on Differential and Most Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries" came into operation, such a waiver has existed for regional integration among developing countries. It devalues the strict rules specified for consistency of preferential trading regimes under Article 24 because it does not even contain any reference to this article. The 1995 WTO study on regionalism and multilateralism lists the common effective preferential tariff scheme for the ASEAN free trade area agreement of January 1991, among the eleven agreements which until 1994 were notified under the 1979 Enabling Clause (WTO 1995a, p. 88). Even for political reasons, examination of regional agreements with respect to GATT consistency has proven "to be one of the most unsatisfactory of all GATT procedures" (Sampson 1986, p. 90). The WTO now allows for stricter inquiries. Yet, as long as ASEAN and AFTA insist on a developing-country free-rider status by resorting to the Enabling Clause, regional integration will be difficult to reconcile with the political ambitions of the NIEs (newly industrializing economies) to negotiate on equal terms with the OECD countries. Such terms can only be achieved if AFTA is considered under the same category as the EEC, that is, under Article 24 and not under the Enabling Clause. Apart from theoretical objections, resorting to the Enabling Clause also carries the stigma of being economically more inefficient. This holds because in addition to external discrimination between trading partners, the Enabling Clause sanctions internal discrimination between those sectors which are subject to preferential treatment and those which are excluded from such treatment.

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From a first-best perspective, it would be preferable to anchor commitments to external liberalization to all intra-AFTA liberalization steps. This would rule out objections of third countries against AFTA on grounds of "nullification and impairment of GATT/WTO benefits".

"Across-the-board" Industrial Goods Liberalization Unlike the EEC which liberalized intra-regional trade in the industrial sector under an "across-the-board" formula, AfTA follows a different approach: fifteen product groups will be subject to a faster pace of tariff reductions while the remaining product groups will be included in a normal track and thus will be tariff-free later than products under the fast-track procedure. Exclusion lists for sensitive products will supplement such differentiation for a transition period. While the appeal of product group-specific liberalization tracks is rooted in facilitating a rapid implementation of the common effective preferential tariff scheme, the economic disadvantages are obvious. First, differentiation widens the spread in effective protection rates between product groups and hence may distort the sectoral structure of production. Secondly, the scheme may induce domestic producers to resort to rent-seeking activities in order to be exempted from fasttrack liberalization and to achieve even more differentiation. How such rent-seeking activities can be avoided has been shown by the Chilean example of liberalization in the second half of the seventies. Chile liberalized uniformly across-the-board and discouraged rent-seeking as every product group was equally disadvantaged (in its view), but there was an awareness among all industrialists that such uniform treatment was maintained. Admittedly, fast-track procedures may have merits in lowering the spread between nominal tariff rates if all products selected for fasttrack liberalization are initially in the high-tariff segments. Given the broad definition of product groups (comprising both intermediates and finished goods), however, this is not the case with AFTA. 1 To combine the advantages of some degree of desirable selectivity and uniformity, one could choose a non-linear "across-the-board" tariff-cutting

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formula by lowering high tariffs proportionately without picking individual product groups. An example of this procedure is the so-called Swiss tariff-cutting formula applied in the Tokyo Round, 1973-79. However, a linear across-the-board tariff cut as applied by the EEC between 1958 and 1968 still appears to be the best way of achieving results.

Liberalizing Trade in Services About twenty years after the EEC had liberalized trade in goods, the Community began liberalizing trade and services in the context of completing the Single Market. The lesson from the EEC track is that AFTA should avoid delinking goods from services but start liberalization of services immediately. This holds especially for those services which are virtually embodied in goods, for instance, aftersale services, or are an integrative part of the consumer value of goods, such as transport. However, there are good arguments for liberalizing all current account transactions in a single procedure in order to make the liberalization of the goods account more effective. This holds, for instance, for goods-related business services such as financing, insurance, and fairs. Free Capital Movements The effectiveness of liberalization of trade in services critically depends on the free movement of capital, including the rights of establishment. This is because producers often have to move to consumers across borders in order to make services tradable. Recent experiences of EU1992, NAFTA (North American Free Trade Area) and the European Economic Space strongly support the importance of capital mobility for trade in services. One can go even further and argue that in the era of globalization of markets and production, regional integration should include free capital movement as its major element from the very beginning, even ahead of cuts in tariffs for merchandise trade which after eight multilateral GATT rounds are no longer the biggest stumbling block to trade. Anchoring three freedoms within AFTA (goods, capital, services) would mean extending the major assets of

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so-called growth triangles to all member countries of AFTA. Crossborder mergers and acquisitions would be promoted and would constitute a strong signal that AFTA stands at par with the three integration movements mentioned above rather than with the narrow schemes of the late fifties and early sixties.

Concluding Remarks After assessing the vices and virtues of European and ASEAN integration, including differences in political setting and historical starting conditions, it can be concluded that ASEAN has very little to learn from European "deep" integration if the learning means following the European way of implementing and enforcing integration. 2 This way of highly institutionalized self-binding national policies was singular from the very beginning and was driven by war experiences and the charismatic will of reconciliation of the political leaders. For different reasons, this way will remain singular after further deepening and enlargement of integration to include Central and Eastern Europe. This uniqueness is exemplified by the fact that the EU hosts the only customs union which is a member of the WTO in its own right, in conjunction with its member states (WTO 1995a, p. 2). Such uniqueness carries the risk of misleadingly applying the experiences of implementing European integration to conventional free trade areas such as AFTA, which represent "shallow" integration. Yet, there is something to learn from EU achievements, whether or not they can be enforced rapidly enough. Economically, the most important achievement has been parallelism in integration deepening and widening, on one hand, and liberalizing trade with nonmember states, on the other hand. Except for agriculture, the EU is recognized for its increasing openness to trade which has largely maintained the importance of extra-regional trade to output (ibid). The EU is also recognized for being a laboratory in liberalizing trade in services since no other empirical experiences can help the GATS to learn. Enforcing free factor movement, which is indispensable for free trade in services, ranges next on the list of important achievements. Other achievements include principles such as pre-announcement,

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keeping deadlines, mutual recognition of national standards and rules, and across-the-board liberalization in manufacturing. Yet, mutual recognition in particular warrants stricter implementation before ASEAN can learn from the EU in this respect. Technically, AFTA (not ASEAN) may perhaps learn more from EFTA than from the EEC, given that the latter operated early enough as a customs union after 1968. Beyond learning from second-best alternatives, ASEAN countries should not become diverted from their successful track of liberalizing unilaterally on the basis of the MFN, but to co-operate regionally where national solutions are economically ineffective, and to strengthen the multilateral framework and discipline as the overriding principle. This is in compliance with the EU principle of subsidiarity, to see national rather than regional policies as primarily responsible for the well-being of the citizens, and to stress the responsibility of countries rather than groupings as the contracting parties of the multilateral system. Notes *The author thanks his discussant, Dr Joseph L.H. Tan, and the participants of the Roundtable for helpful comments on his paper. The usual disclaimer applies. 1. Within the Indonesian textile sec~tor, for instance, being one of the fifteen product groups in the fast track, there was a tariff range of 0-40 per cent in 1994, with a relatively high coefficient of variation (GATT, Trade Policy Review 1 [Indonesia, 19951: 153). 2. This seems to hold in particular for integration widening. EU integration widening implies that new member states meet the basic economic and political requirements of the EU. Checking compliance with these prerequisites follows a precise timetable. An ASEAN enlargement by including the Indochinese states seems to be more influenced by privatesector criteria of market prospects as well as by general political targets of making the "Southeast Asian family" complete.

References ASEAN-CCI. ASEAN: The Way Forward. The Report of the Group of Fourteen on ASEAN Economic Co-operation and Integration. Kuala Lumpur: Institute of Strategic and International Studies, 1987.

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Balassa, Bela. "Introducti on: The Common Market Experience ". In European Economic Integration, edited by Bela Balassa (Amsterda m: North-Holland, 1975), pp. i-xiii. Bhagwati, Jagdish N. The World Trading System at Risk. New York: Wiley, 1991. Bhagwati, Jagdish, and Arvind Panagariya . "The Theory of Preferentia l Trade Agreemen ts: Historical Evolution and Current Trends". American Eco-

nomic Review 86, no. 2 (1996): 82-87. Donges, Juergen B. What Is Wrong With the European Communit ies? 11th Wincott Memorial Lecture. London: The Institute of Economic Affairs, 1981. Frankel, Jeffrey, Ernesto Stein, and Shang-Jin Wei. "Trading Blocks and the Americas: The Natural, the Unnatural, and the Supernatu ral". Journal of Developme nt Economics 47 (1995): fi1-96. GATT Secretaria t. Trade Policy Review Indonesia, Vol. I. Geneva, 1995. Hiemenz, Ulrich, Rolf J. Langhamm er. ASEAN and the EC. Institution s and Structural Change in the European Community. Singapore: Institute of Southeast Asian Studies, 1988. Hockman, Bernard, Pierre Sauve. "Hegional and Multilatera l Liberalizat ion of Service Markets: Compleme nts or Substitutes ?" Journal of Common Market Studies 32, no. 3 (1994): 283-317. ISEAS. "ASEAN: The Tasks Ahead". Proceeding s of a Colloquium on "ASEAN Economic Co-operati on: The Tasks Ahead", Singapore, 27-2S February 1987. Singapore: Institute of Southeast Asian Studies, 1987. Krueger, Anne 0. Free Trade Agreemen t Versus Customs Unions. Working Paper No. 50S4. Cambridge , M.A.: National Bureau of Economic Research, 1995. Langhamm er, Rolf J. "Fallacies of Transposit ion: What ASEAN Should Learn from Other Integration Efforts". ln ASFAN at the Crossroads. Obstacles, Options and Opportuni ties in Economic Co-operation, edited by Noordin Sopiee, Chew Lay See, Lim Siang Jin, pp. 535-50. The Secretaria t of the Group of Fourteen. Kuala Lumpur: Institute of Strategic and Internation al Studies, 1987. Lawrence, Robert Z. "Emerging Regional Arrangem ents: Building Blocks or Stumbling Blocks. Finan