ASEAN STUDIES (ASEANST)

Lecture # 3

ASEAN FREE TRADE AGREEMENT (AFTA)

Prepared by
Ambassador Monina Estrella G. CALLANGAN RUECA
 INTRODUCTION
• In the first ASEAN Summit in Bali in Feb. 1976, economic cooperation was
brought firmly into the ASEAN Agenda.
• The Declaration of ASEAN Concord and the Joint Communique of the
Summit called for the establishment of large-scale industrial projects in
ASEAN countries that would use available materials, increase food
production, augment or save foreign exchange and create jobs.
• Preferential trading arrangements for ASEAN industrial projects, food and
energy products were to be established in the form of long-term quantity
contracts, financing at preferential rates, privileges and tariff preferences.
• They proposed dialogues with Australia, New Zealand, Canada, the US,
Japan, West Asian countries, the EEC and other regional groups.
• In their second meeting, the forum was officially named the ASEAN
Economic Ministers or AEM.
 EARLY ECONOMIC ARRANGEMENTS
ASEAN Preferential Trading Arrangements (ASEAN PTA) signed by the Foreign
Ministers and ratified in July 1977. The main purpose was not economic integration
but an assured market for the products of the large industrial projects and of the
industrial complementation operations that the ASEAN countries were allocating
among themselves. Implementation started in 1978.
• The vital link between production and market has been forged with the
ratification of the Agreement on ASEAN Preferential Trading Agreements.
Preferential treatment is assured for the products of these large-scale industrial
projects. The PTA agreement would cover “basic commodities” particularly food
and energy, the products of ASEAN Industrial projects and ASEAN Industrial
Complementation Schemes.
• Still, intra-ASEAN trade did not grow much. Tariff rates were not brought down.
The PTA accounted for an “insignificant” proportion of total intra-ASEAN trade.
ASEAN INDUSTRIAL COMPLEMENTATION (AIC) – This scheme was formalized in
1981 providing allocation of “complementary” industrial products for manufacture
in at least 4 ASEAN countries and to be traded among them.
 TALKS ON REGIONAL ECONOMIC INTEGRATION
• Up to late 1980s, ASEAN economic cooperation was preoccupied with the
usual developing-country concerns – access of commodity exports to
developed-country markets, the prices and competitiveness of those
commodities, assured access of member countries to critical needs like rice
and crude oil.
• Talks of regional economic integration was taboo.
• Although as early as March 1971, the ASEAN Ministerial Meeting quoted
Pres. Marcos suggestion that “the ultimate dream of ASEAN countries
would be to evolve into a Common Market whose benefits would reach the
masses of Southeast Asian countries”.
• Marcos proposed “ASEAN Free Trade” as “our real goal”. If we resolve today
to establish it, perhaps we should need all of the next ten years to stage it.
• “Unfortunately, the record of ASEAN achievements particularly on
economic cooperation has been dismal” (PM Mahathir)
 REASONS FOR THE ‘DISMAL”
• ASEAN cooperation in the earlier years based on preferential trading
arrangements and industrial complementation collapsed under the weight of
unreconciled national interests.
• The PTA granted margins of preference on tariffs on lists of products negotiated
among ASEAN members, rather than reducing tariffs on all products.
• Guided by protectionist ideology and nationalistic sentiments, the member
countries made a mockery of the system by throwing into it products in which
they expected little or no intra-ASEAN trade.
• Unlike Japan and Korea, Southeast Asian countries were extremely diverse
ethnically and economically and were driven largely by often conflicting national
interests, ASEAN being a collection of independent sovereign states.
• No regional authority ensured compliance with regional agreements .
• Confronted with these realities and mounting challenges, ASEAN in the early
1990s decided to take a different approach.
 FACTORS THAT LED TO THE ASEAN FREE TRADE AREA
• By the late 1980s, two trends were gathering momentum in the world economy –
globalization and regionalization on parallel tracks. In addition, the reorganization
of WTO from the GATT, the creation of the EU, the NAFTA; the radical economic
reforms in the Chinese economy laid the groundwork for rapid growth.
• Against this backdrop, ASEAN seemed convinced that it had to move onto the
path of regional economic integration, the path that a unifying Europe,
MERCOSUR, North America and other regions were treading.
• In 1991, Anand Panyarachun, Thai PM proposed the establishment of the ASEAN
Free Trade Area, an idea that the ASEAN foreign ministers welcomed at their
annual meeting in July.
• At the 4th ASEAN Summit in Singapore in Jan. 1992, ASEAN Leaders put their
stamp on the approval of the ASEAN Free Trade Area as a separate initiative.
 ASEAN FREE TRADE AREA
• Malaysia’s PM Mahathir laid down its rationale: “In the short run, AFTA
could result in initial losses of government revenue. Inefficient sectors
would become vulnerable to competition. The over-all long-term benefits
of AFTA will compensate for any short-term loss. Besides free flow of trade,
AFTA would lead to a larger ASEAN market of 360 million people which
would surely be more attractive for investments, both within and without.
• The economic ministers signed the Agreement on the Common Effective
Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area (AFTA).
The agreement required the signatories to drop tariffs on intra-ASEAN
trade, in specified stages, to 0-5 per cent by 2008. The staged reductions in
tariff were to be the subject of annual legislative enactments.
• The CEPT agreement committed ASEAN member states not only to drop
tariffs to minimal levels, but also do away with non-tariff barriers as well.
 ASEAN FREE TRADE AREA (AFTA)
• ASEAN Free Trade Area (AFTA) is a trade bloc agreement by the Association of
Southeast Asian Nations supporting local trade and manufacturing in all ASEAN
countries and facilitating economic integration with regional and international
allies.
• Considered one of the largest and most important free trade areas (FTA) in the
world, and together with its network of dialogue partners, drove some of the
world’s largest multilateral forum and blocs including APEC and EAS.
• Signed on 28 Jan. 1992 in Singapore originally by 6 member countries. The
remaining 4 signed later.
• Unlike the EU, AFTA does not apply a common external tariff on imported goods.
Each ASEAN member may impose tariffs on goods entering from outside ASEAN
based on its national schedules. For goods originating within ASEAN, member
countries are to apply a tariff rate of 0-5%. This is known as the Common
Effective Preferential Tariff (CEPT) scheme.
STUMBLING BLOCKS TOWARDS REGIONAL INTEGRATION
• Lack of knowledge. Despite the fact that AFTA has been around for more than a
decade, little is known about it in the international business community.
• Lack of credibility – the apparent irrelevance of AFTA in investment decision show
the low credibility of ASEAN integration measures.
• The fundamental problem is that most ASEAN governments do not feel a
sufficient identification of the national interest with regional economic
integration.
• Most ASEAN companies do not see how their businesses benefit from such
integration.
• The result is that the governments feel no pressure from ASEAN businesses to
move faster on regional economic integration.
• In most ASEAN governments, there is no sign that ASEAN initiatives are
incorporated in national planning.
• Most of the member countries do not see the advantages of regional economic
integration, thinking that the others gain more from it.
 TOWARDS THE ASEAN ECONOMIC COMMUNITY
• Thereafter, ASEAN Leaders decided at the Phnom Penh Summit in 2002 to
move on to the next stage of regional economic integration called the
ASEAN Economic Community, per suggestion of Singapore’s Goh Chok
Tong.
• Building a genuine ASEAN Community is difficult, long-term endeavor. As
ASEAN moves on, the world is not standing still. ASEAN’s competitors are
surging.
• Political leadership is very important considering that ASEAN economic
integration is not imposed by a comprehensive, detailed and legally binding
treaty like NAFTA or driven by a supranational authority like the European
Commission or pushed by a regional business sector eager for the benefits
of a regional market.
• ASEAN declarations, joint statements, agreements can set common goals,
establish norm and standards but without a NAFTA-like treaty or an EC-like
authority, ASEAN commitments will only be made on voluntary national
action.
 CONCLUSIONS
• As mentioned, ASEAN started as a scheme to prevent conflict, build mutual
confidence and promote political stability with economic cooperation,
serving as a cover to dispel notions of ASEAN as a military alliance.
• However, by the turn of the millennium, ASEAN economic cooperation with
regional economic integration as the stated aim, had acquired an
imperative life of its own.
• ASEAN’s economic component is increasingly regarded as a vital element in
its political cohesion and the stability of the region and ultimately in the
creation of an ASEAN Community.
• Hence, ASEAN has to move more smoothly and rapidly on the road to
regional economic integration, and for the leaders to lead.
Reference/Source: Severino, Rodolfo. Southeast Asia in Search of an ASEAN
Community, 2007.