Building An ASEAN Economic Community

1.    When the Agreement for CEPT Scheme leading to AFTA first came into effect in 1993, we gave ourselves 15 years to bring all tariffs down to 5% or less. This year, after only eight years, 95% of regional trade of the ASEAN- 6 are already at tariffs of 0-5%. AFTA has thus not done badly. We are right to celebrate AFTA's effective realization year's ahead of the original schedule. However, we should not be too self-congratulatory. In a sense, we were forced to move faster by the pressure of post-Cold War globalization and the emergence of competition from China, India, Latin America and Eastern Europe. And that pressure has become more intense.

ASEAN As A Political Community

2.    When ASEAN was formed in 1967, Southeast Asia was divided by the Cold War. The primary purpose of ASEAN then was to strengthen us against the Communist threat from the North. When South Vietnam fell to the North in 1975 and Vietnam moved into Cambodia in 1978, ASEAN was galvanized into joint political action at the UN and other international forums. Indonesia's regional statesmanship in Southeast Asia was a critical factor in the success of ASEAN as a political grouping.

3.    With the end of the Cold War and the emergence of China as an economic power, the dynamics in Southeast Asia changed dramatically.  Vietnam, Laos, Cambodia and Myanmar became members of ASEAN. There was a common recognition that, individually, Southeast Asian countries were too small to deal with the major powers on any basis of equality. Combined together in ASEAN, we had more negotiating leverage vis-a-vis the US, Japan, China, India and Europe. As part of ASEAN, Vietnam could have a more normal relationship with China. Myanmar decided that it was better off being- part of Southeast Asia than being part of South Asia.

Southeast Asia in Crisis

4.    In the eighties and early nineties, Southeast Asia did very well economically.  The Plaza Accord in 1985 sharply jacked up the value of the

Japanese Yen, the Korean Won and the New Taiwan Dollar leading to a huge I outflow of investment from Japan and the NIEs to Malaysia and Thailand, and -to a lesser extent -Indonesia and the Philippines. American and European capital followed. Southeast Asia enjoyed an effortless boom, a hot emergent market everyone wanted to invest in. We became the fastest growing region in the world. However, the development of our political, economic and financial institutions did not keep pace with the inflow of hot money, and we suffered a major setback during the Asian Financial Crisis. It caused the collapse of the Suharto government in Indonesia. The sharp rebound some of us enjoyed in 1999 and 2000 proved to be temporary. Before we were able to put our house in order, we ran into the current global downturn.

5.    As if the internal challenges were not enough, the external challenges have also been growing. The rapid emergence of China as an economic power since the early 90's has moved the centre of gravity in Asia northwards. In 1990, China accounted for less than 20% of total foreign investments in

developing Asia while Southeast Asia took 60%. Today, the numbers are reversed. With the accession of China into WTO, Northeast Asia is now all the rage. The proposed FTA of the Americas (FTAA) and the inevitable eastward expansion of the EU mean that South America and Eastern Europe will remain prominent on the radar screens of American and European investors. In the battle for the investor dollar, Southeast Asia is in danger of being sidelined.

6.    The analysts who praised us in the past now criticize us. In 1998, the IHT described ASEAN as "once self-confident club that has fallen on hard times and is not sure how to react". The Washington Post reported that the "ASEAN crisis leaves ASEAN in disarray". A year later, the Financial Times

summed it up when its headline read "ASEAN ponders its modest role".

One Step Back, Two Steps Forward

7.    But, just as they were wrong to praise us in the past with little qualification, and we were wrong to believe them then, they are now wrong to write us off. In fact, ASEAN as a regional grouping has stood firm throughout this trying period. Leaders and ministers continued to meet and take tough decisions. Despite tremendous domestic difficulties, we pushed to integrate our economies further. Most importantly, unlike many other regions in the world, we kept our relations with each other warm and friendly. Although there were occasional difficulties, good sense quickly prevailed and no bilateral problem was ever allowed to get out of hand.

8.    What has changed is this: we now have a more realistic appreciation of our strengths and weaknesses, and an urgent sense of the task before us to strengthen ASEAN as an economic grouping. To compete against larger economies like China, we have no choice but to integrate our markets and make ASEAN a common economic space for manufacturing and other sectors. This has become the consensus view of all ASEAN leaders. Of course, the implementation is difficult because there are always domestic political concerns to address.  But at least there is a common vision and a common will to move in the direction of that common vision.

9.    Thus, while the Asian Financial Crisis forced us to take a step backwards, we are now in a position to take two steps forward to build an Economic Community in Southeast Asia. It will take time but the building blocks are now being shaped and put in place.

Buildings Blocks For An ASEAN Economic Community

10.    Let us take stock of what we already have.

11.    For trade in goods, ASEAN-6 is already an effective Free Trade Area. The only exception is the request by Malaysia to hold back on some auto products. To deal with such situations, we have, after much discussion, created a modality which affected parties have recourse to.

12.    For investments, the ASEAN Investment Area (AlA) has made good progress. For manufacturing, agriculture, forestry, mining, and fishery, and the services incidental to them, we have in place a scheme where national treatment is granted to all ASEAN companies including companies partly owned by non-ASEAN investors,

13.    In November 2000, the Leaders of ASEAN signed an e-ASEAN agreement to create a common electronic space in Southeast Asia, Countries like Myanmar, Cambodia and Laos knew that it would take years for them to participate fully but signed on nonetheless. Considerable progress has since been made in improving infrastructure, building common standards, bringing forward liberalization in the trade of  IT products ahead of  ITA1 commitments, and bringing up to speed the less developed countries of Southeast Asia.

14.    Slowly but surely, ASEAN economic integration is changing the economic structure of individual countries. Ten years ago, the ASEAN share  in Singapore's total trade was about one quarter. Today, it is about one third. Companies today do not. decide to invest in Indonesia alone, or in Singapore alone. In sectors like electronics, Southeast Asia is already a single economic space. When we analyze products like TV sets and personal computers, we see components made in various parts of Southeast Asia. To be sure, this integration is becoming Asia-wide. More than 40% (43.3%) of Japan's trade is now with Asia, much of it trade in parts rather than trade in final products.  Koichi Nishimura of Solectron estimated recently that within 5 years, if not sooner, two-thirds of electronic manufacturing will be done in Asia.

ASEAN In the Global Game

15.    China presents a huge challenge to Southeast Asia. If we do not move quickly to integrate ASEAN, we may be completely overshadowed by Northeast Asia. As an economic community, ASEAN must play the global game skillfully. As a region, we are of strategic importance to the US, Japan, China, Australia and Europe. Since we have no nuclear weapons and pose no threat to them, all of them want to be our friends. This puts us in a very good position.

16.    China does not want an unfriendly Southeast Asia. Premier Zhu Rongji's offer of an FTA between China and ASEAN in November 2000 was an important political move by China to signal its desire for long-term friendship and economic cooperation with Southeast Asia. After all, China's links with Southeast Asia go back a long time. The decision by the leaders of China and Southeast Asia in November last year to work towards an ASEAN - China FTA in 10 years is therefore of great historical significance. In population terms, the FTA will create the largest free trade area in the world with a combined market of 1.7 billion people, a combined GDP ofUS$2 trillion and total trade of  US$1.23 trillion. The potential of the ASEAN -China FTA has renewed interest in ASEAN worldwide. The process of negotiating with China as a grouping will in turn transform ASEAN.

17.    While in the short term, the rapid economic growth of China is disruptive to some sectors in ASEAN, in the medium and long term, China's

prosperity will help bring prosperity to Southeast Asia. The ASEAN-China FTA will give ASEAN preferential market access for ASEAN exports and investments into China. The Joint Study by Chinese and ASEAN academics estimated that ASEAN's exports to China will grow by 48% and ASEAN's GDP will grow by an additional 0.9%. China will also benefit. It is estimated that the FT A will increase China's GDP by 0.3%.

18.    But the impact goes beyond numbers. Provided East Asia remains at peace, which the ASEAN-China FTA should help to achieve, the connectivity

between China and Southeast Asia will multiply - air, sea, river, road, rail, and electronic. Within a few years, one can drive on reasonably good roads all the way from Singapore to Vladivostok. Out of all this, a different pattern of life will emerge in East Asia.

19.    However, for reasons of geopolitical balance, it is essential for Southeast Asia to diversify its external links. To have good relations with China, we must also have strong links to Japan and the US, and to Europe and India as well.

20.    In the case of Japan, its strategic interest in Southeast Asia goes back to the period before the Second World War. Japan has played a vital economic role in ASEAN and will continue to do so for a long time. Shortly after Zhu Rongji's offer to ASEAN, Japan proposed a joint expert group with ASEAN to study the possibility of a closer economic partnership. Prime Minister Koizumi, in a speech delivered in Singapore two weeks ago, proposed an Initiative for a Japan-ASEAN Comprehensive Economic Partnership. The ASEAN-China FTA has sparked intense discussion in Japan on ways to strengthen its own links with ASEAN. These are positive developments for us.

21.    Japan is ASEAN's largest source of imports and our second largest export market. Japan is one of ASEAN's largest sources of FDI. Southeast

Asia can be Japan's alternative manufacturing base to China. We have energy and other resources which Japan needs. The benefits of a FTA between Japan and ASEAN would be of even greater benefit to Southeast Asia than an ASEAN-China FTA in the short and medium term. Unfortunately, agriculture is politically sensitive in Japan and, for that reason, Prime Minister Koizumi did not see a FTA with Southeast Asia in the foreseeable future.

22.    But even leaving out agriculture, there is much that can be done to make Southeast Asia an attractive alternative location to China for Japanese

manufacturing investments. The ASEAN-Japan CEP Experts Group is looking into various possibilities. It should be possible to work on maquiladora type initiatives for Japanese investments in various Southeast Asian countries. A waiver from the WTO may be needed for this. Singapore hopes that its recently concluded FTA with Japan will help to blaze the trail for other Southeast Asian countries to enter the Japanese market more easily.

23.    South Korea is also interested in closer links with Southeast Asia. At the recent ASEAN Summit in Brunei, President Kim Dae Jung agreed to set up a study group to review a possible ASEAN-ROK FTA. In an interesting way, Southeast Asia and the various ASEAN-plus meetings help to pull together all of East Asia.

24.    Some of us in Southeast Asia agree with Prime Minister Koizumi that Australia and New Zealand should also be considered core countries in East Asia. The reality is, however, more important than the words. ASEAN agreed with Australia and New Zealand last year to formalize negotiations for a Closer Economic Partnership (CEP) when our trade ministers meet later this year. Indeed, our officials will be meeting next week in Melbourne to work out the text of this CEP. The improvement of relations between Australia and Indonesia in the last year has been helpful.

25.    ASEAN's relationship with the US is of particular strategic importance.  Both politically and economically, strong links to the US enable us to diversify our portfolio and give us more manoeuvring space internationally. An unexpected result of September 11 is the increased strategic interest by the US in Southeast Asia not seen since the end of the Vietnam War. We should build on this. We welcome the efforts by USTR Robert Zoellick to develop closer links with ASEAN. He is keen to widen the benefits of the US-Singapore FT A, which both sides expect to conclude by the middle of this year, to other Southeast Asian countries. In fact., this was an item Minister Rini and I spent some time discussing this morning.

26.    It is also in our collective interest to strengthen our links to the EU. ASEAN and the EU already have an on-going dialogue at the trade-ministers level that we should develop into concrete action plans.

ASEAN Economic Community

27.    To strengthen our hand in the global game, we must broaden and deepen our economic integration. We should work towards the idea of an ASEAN Economic Community of independent nations. Although much progress has been made, much remains to be done. Let me highlight a few areas of concern.

28.    First, we must reduce non-tariff barriers to trade. Basically, tariffs on goods are not a major problem anymore. We need streamlined custom procedures and more business-friendly administrative processes.

29.    Second, we should push for the liberalization of services. This has not kept pace with our liberalization efforts in goods and investments. We cannot be internationally competitive in manufacturing if our services are not competitive. Manufacturing efficiency depends on an economy's total efficiency, and services contribute a major part to that total system efficiency.

30.    Third, we must make special efforts to help the less developed member countries of ASEAN. The Initiative for ASEAN Integration (IAI) is intended to reduce the gap between the newer and the older members of ASEAN. The economic integration of China and Southeast Asia will accelerate the development of infrastructural connections running through Cambodia, Laos, Myanmar and Vietnam. The development of the Greater Mekong Basin will be of great help to them.

31.    Fourth, we need to strengthen the institutional basis of ASEAN. In September, the ASEAN Economic Ministers in Hanoi commissioned an

ASEAN Competitiveness Study. A well-known international consulting firm is being engaged to help us do this. The key is our common willingness to share information and plan our economic development together. We must take a hard look at our strength  and weaknesses as a group relative to China, India, Latin America and Eastern Europe, and develop the clusters that we enjoy an advantage in. For example, in our negotiation of the FTA with China, all of us must take into account the interest of Southeast Asia as a whole, and not just that of our own country. This means that we will need a coordinator of one form or another for the whole of ASEAN. In creating an ASEAN Economic Community, we are unlikely ever to move as far as Europe but there will be lessons that we can draw from the European experience.

Political Will

32.    Political will is a precondition to all our efforts at economic integration. The leadership of Indonesia remains critical. In 1994, it was the leadership of Indonesia that gave APEC the Bogor Goals, an achievement that no one had expected. Also, with ten quite diverse members, it is often hard to forge a consensus in ASEAN. One positive development in recent years is the regular meeting of Leaders which helps to establish common views on the challenges which confront us collectively.

33.    One problem which must be urgently addressed is that of global terrorism. After September 11, it has become clear that some parts of

Southeast Asia are also affected by this cancer. We must cooperate to solve this problem because, without law and order, sustainable economic development is not possible.

34.    Happily, on trade liberalization and economic integration, there is now broad political consensus. At the WTO Ministerial Meeting in Doha last

November, ASEAN countries played a positive role in launching the new Development Agenda.

35.    This morning, Minister Rini and I jointly announced new measures to boost our cooperation in the Riaus. In addition to Batam, we are taking

steps to boost Bintan as a safe and an attractive location for international investments. In consultation with Indonesia, Singapore is discussing with the US the possibility of extending market access benefits of the US-Singapore FTA to Batam, Bintan and other parts of Indonesia in the IT sector. Both Minister Rini and I have also proposed to Minister Hiranuma of Japan the selective extension of the Japan-Singapore Economic Partnership Agreement to Indonesia.

36.    Necessity is the mother of invention. The difficulties which Southeast Asian countries are now facing have encouraged us to do things that we did not want to consider in the past. We have many strengths to tap on, not least our abundance of natural resources. Investments through the years have created a good industrial base in Southeast Asia, sound infrastructure and a reservoir of skilled workers. Education is emphasized in all of ASEAN and English has become our common language. At the maritime crossroads of East and West, the countries of Southeast Asia have always been outward-looking and open to trade. We are not only diverse, we accept diversity as a way of life. Our receptiveness to foreign cultures distinguishes us from Northeast Asia. All these advantages are for us to exploit and build on.

37.    The Asian Financial Crisis and this global economic downturn will either strengthen or weaken us as individual countries and as a regional grouping. While we face many problems, compared to Latin America, South Asia and Eastern Europe, we have not done too badly. Given the tremendous growth potential of East Asia as a whole, there is every prospect that Southeast Asia will be able to do well if do not make serious mistakes.  Compared to a year ago, the political leadership in ASEAN has strengthened considerably.  Now is the time to follow up on our economic efforts to integrate ASEAN and strengthen our links to the major economies of the world.