ECONOMIC INTEGRATION
When the east asian financial crisis broke out in July 1997, many people thought the Southeast Asian countries would retreat into isolationism and protectionism-ending ASEAN’s vision of regional economic integration. The opposite happened.
Even at the height of the crisis, in December 1997, ASEAN leaders had spelled out their vision of an integrated ASEAN economy in the first two decades of the new century. As their ASEAN Vision 2020 put it, the leaders committed themselves to “closer cohesion and economic integration.” The Declaration reads: “We will create a stable, prosperous and highly competitive ASEAN Economic Region in which there is a free flow of goods, services and investments, a freer flow of capital, equitable economic development, reduced poverty and socio-economic disparities.”
And ASEAN did not restrict itself to long-term plans. At their Summit Meeting in Ha Noi in December 1998, the ASEAN heads of state and of government issued a “Statement of Bold Meas-ures”-bold in that these measures met head-on the crisis that was still raging. Without waiting for the financial storm to clear, they decided to accelerate ASEAN’s programmes to liberalise trade and investment and to integrate the region’s econo-mies. The measures also moved forward the programmes to make Southeast Asia a free-trade area from the then 2003 target date to 2002-so that, even now, most of the goods traded in the region enjoy tariffs of no more than 5 percent. ASEAN also reaffirmed its goal of extending the free-trade concept to include services, and scheduled a round of negotiations on this. It called for the continued implementation of the ASEAN Industrial Cooperation scheme, under which the products produced by and traded between at least two ASEAN companies would be given a preferential tariff of 5 percent or less. It even waived the 30 percent national equity requirement for firms participating in the scheme if they apply by the end of 2000. (This deadline has been subsequently extended to the end of 2001.)
The ASEAN leaders also called for accelerating the realisation of an ASEAN Investment Area, in which investments are to flow freely in most sectors. They gave political impetus to ASEAN’s programme for developing infrastructure linkages among its members, including the Trans-ASEAN Gas Pipeline Network and the ASEAN Power Grid.
Meanwhile, the ASEAN finance ministers set up a “collective surveillance process” that would conduct periodic “peer reviews” of the economies of member countries, to ensure the transparency of monetary and fiscal conditions throughout the region. Periodic analyses of macroeconomic trends in the region would raise early-warning signals of any recurrence of the sudden, massive and simultaneous pullout of foreign portfolio capital that caused the Asian crisis.
Evolution. ASEAN’s path to economic integration has evolved over the years. The very first sentence of the Bangkok Declaration, which set up the organisation in 1967, spoke of “mutual interests and common problems among countries in Southeast Asia” and called for a “firm foundation for common action to promote regional cooperation.” Economic cooperation at the time dealt with programmes for joint ventures and complementation schemes among ASEAN governments or companies, such as the 1976 ASEAN Industrial Projects plan, the 1981 ASEAN Industrial Complementation scheme, and the 1983 ASEAN Industrial Joint Venture programme.
In the 1980s and 1990s, though, countries all over the world began to dismantle the economic barriers they had set up from the 1950s to the 1970s. The protectionist economic-development model-of a country shielding its enterprises from foreign competition-had, in most cases, resulted only in inefficiency and underdevelopment. As the phenomenal growth of several Asian nations showed, a country’s calculated opening to competition and international markets is the best path to development in our time. What is more, the acceleration of technological developments facilitated-and made inevitable-the flow of people, capital, goods, and services around the world-making isolationism anachronistic and even impossible.
Because of their geographic proximity and their roughly similar level of development, the ASEAN countries realised that the best way for them to cooperate for their development would be to open up their economies to one another, and eventually to integrate them. Indeed, all over the world, the forces of globalisation and the increasingly rapid advances in technology have been impelling nations to coalesce in va-rious combinations. They have to coalesce to be competitive in today’s world-to enlarge their markets, attract investments, cut costs, increase efficiency, improve productivity and thus generate jobs and raise people’s incomes.
The most important move towards this new model was made at the Fourth ASEAN Summit in 1992, at which member countries agreed to create the ASEAN Free Trade Area. A market of close to half a billion people would allow corporations in ASEAN to take advantage of economies of scale. They would also have access to the best prices for the raw materials they require, even as competition among them would stimulate their productivity and efficiency. An integrated ASEAN economy would be a potent attraction for in-vestors outside the region-who generally prefer large, integrated and efficient markets to small, fragmented and inefficient ones.
Rather than derailing ASEAN’s programme for an integrated region, the Asian crisis may have been a blessing in disguise. ASEAN’s growing closeness in the past decade meant that one country’s problems affected the others with increasing and accelerated impact. That message was driven home by the Asian financial crisis, which some called the “Asian contagion” for the way it moved swiftly from one country to another to engulf the whole region. But the closeness of the ASEAN countries’ economies cannot be reversed; nor can isolationism be an option in an era of irreversible globalisation. The Asian crisis, therefore, has made ASEAN move closer together still-towards the ultimate goal of economic integration.
Through the years ASEAN has taken a number of important decisions to achieve economic integration. These have included establishing the re-gion as a free-trade area and an open investment area, and encouraging industrial cooperation.
The ASEAN Free Trade Area
The 1992 agreement to set up the ASEAN Free Trade Area (AFTA) was the organisation’s first breakthrough towards creating an integrated ASEAN economic region. The main implementing mechanism for AFTA is the Common Effective Preferential Tariff (CEPT) scheme, also adopted in 1992.
Under the CEPT, tariffs on a wide range of products traded within the region are progressively either lifted totally or limited to a maximum of 5 percent. Quantitative barriers-limits on the volume of certain products a country imports-and other nontariff barriers-such as outright prohibition and unnecessary technical requirements are being eliminated.
AFTA’s final goal is to eliminate altogether import duties on all products, to create a truly free-trade, or tariff-less, region. The Third ASEAN Informal Summit in Manila in 1999 advanced the timetable for this goal to 2010, ahead of the original schedule of 2015, for the six original signatories to the CEPT scheme-Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand. The newer ASEAN members-Cambodia, Laos, Myanmar and Viet Nam-have committed themselves to eliminating all import duties by 2015, with some sensitive products to follow these members’ original target of 2018.
This year-in compliance with the Bold Measures-85 percent of the Inclusion List of the six original signatories is already in the zero-to-5-percent zone.
Product classifications. For the orderly reduction and eventual lifting of tariffs, the CEPT classifies products into three lists-Inclusion List, Temporary Exclusion List and Sensitive List, stipulating tariff-cutting schedules for each.
Those on the Inclusion List make up the bulk of ASEAN products. By 2002, all quantitative and nontariff restrictions on these products will be removed, and tariffs will be either eliminated or limited to a maximum of 5 percent. Rates on at least 85 percent of each of the first six signatories’ Inclusion List must be no more than 5 percent by 1 January 2000. This objective has already been achieved. By next year, 90 percent of tariff lines on the Inclusion List will have rates in the 0-to-5-percent range. The newer ASEAN members have been given more time for this: 2006 for Viet Nam, 2008 for Laos and Myanmar, and 2010 for Cambodia. Those on the Inclusion List make up about 85 percent of the tariff lines of all ten ASEAN countries.
Products on the Temporary Exclusion List are exempt from tariff reduction for a temporary period. However, they have to be gradually moved to the Inclusion List, and their tariffs eventually reduced to the 0-to-5-percent range. Next year, 8,660 tariff lines will be on this list, representing only 13 percent of ASEAN countries’ total tariff lines.
In October 2000 the ASEAN economic ministers endorsed a protocol allowing a member country facing real difficulties in meeting its CEPT obligations to delay the transfer of products from its Temporary Exclusion List to the Inclusion List or suspend the concession on products already transferred.
The same protocol, however, limits the application of the modification to manufactured products that were on the Temporary Exclusion List on 31 December 1999 or other applicable dates in the case of Cambodia, Laos, Myanmar and Viet Nam.
Items on the Sensitive List are some un-processed agricultural products. These will not be included in AFTA’s coverage until 2010. New ASEAN members are given even more time: 2013 for Viet Nam, 2015 for Laos and Myanmar, and 2017 for Cambodia. The 360 tariff lines on this list constitute a small 0.6 percent of ASEAN’s total tariff lines.
The CEPT, however, permanently excludes from AFTA’s coverage 829 tariff lines, which represent only 1.3 percent of ASEAN’s tariff lines. Class-ified on the so-called General Ex-ception List, these are products ASEAN excludes from the free-trade programme for reasons of national security, public morals, public health or environmental protection.
The CEPT agreement has already brought down the average tariff among ASEAN countries to 4.43 percent this year, from 12.76 percent in 1993, when AFTA was launched. The average intra-regional tariff is expected to go down to 3.96 percent next year, and to 2.9 percent in 2003.
As one measure to ensure the smooth implementation of the CEPT agreement, ASEAN in November 1996 adopted a dispute-settlement mechanism to cover not only the CEPT agreement but also all other ASEAN economic agreements.
In order to make trading easier and thus help integrate the ASEAN market, ASEAN has moved to simplify and harmonise national tariff nomenclatures, or the technical descriptions of products traded by its member countries. ASEAN has set 1 January 2002 as the deadline for adopting the ASEAN Harmonised Tariff Nomenclatures. A large number of member countries have also adopted the WTO Valuation Agreement this year.
ASEAN has been developing product-specific mutual recognition arrangements so that product-related standards and regulations do not impede trade. Several sectors have been identified for inclusion in such arrangements, among them cosmetics, pharmaceuticals, telecommunications equipment and electrical and electronic products.
The association is also seeking to harmonise its member countries’ product standards with international standards-such as those of the International Standards Organisation, the Inter-national Electro-technical Commission, and the International Telecommunications Union-for 20 priority product groups. These 20 product groups include some of the most widely traded products in Southeast Asia, among them radios, television sets, refrigerators, air conditioners and telephones.
ASEAN has started to expand its concept of a free-trade area to include services. The “Bold Measures” announced at the Sixth ASEAN Summit called for the association to initiate a new round of negotiations from 1999 to 2001-to open up the trade in services in all modes of supply. ASEAN has adopted a set of parameters to guide the negotiations. For the short term, from 1999 to 2001, ASEAN has agreed to make commitments in subsectors where four or more member countries have already made commitments, whether under the General Agreement on Trade in Services or the ASEAN Framework Agreement on Services. These sectors include air transport, business services, construction, financial services, maritime transport, telecommunications and tourism.
ASEAN is also working to enhance the linkages among service suppliers in the region by consulting with the Coordinating Committee on Services. It is encouraging meetings among associations of service suppliers to develop a better understanding of the unique characteristics and requirements of each sector and the issues that need to be dealt with in liberalising intra-ASEAN services trade in each sector.
Data show that the AFTA programme has already made an impact on intra-ASEAN trade, which expanded from US$43.26 billion in 1993 to US$85.4 billion in 1997. Although the East Asian financial crisis contracted intra-ASEAN trade to US$68.8 billion in 1998, that trade went up to US$74.4 billion in 1999. Before the crisis, intra-ASEAN exports had been increasing at a much higher rate than the growth rate of all ASEAN exports.
The ASEAN Industrial Cooperation Scheme
For companies in the ASEAN Industrial Cooperation (AICO) scheme, the ASEAN market is almost fully integrated. In AICO, goods produced by and traded between companies operating in two or more ASEAN countries enjoy full AFTA treatment immediately; that is, 0-to-5-percent tariffs. The incentives for companies participating in an AICO scheme are economies of scale, reduction in production costs, and more efficient division of labour and industrial resources.
To illustrate: Company A in one ASEAN country supplies the raw materials or intermediate inputs of Company B in another ASEAN country. If this complementation is put under the AICO scheme, the raw materials or intermediate inputs Company A ships to Company B are not imposed the normal tariffs in Company B’s country. Instead they are levied preferential tariffs of 0 to 5 percent, as if AFTA had been completely carried out. (The 0 to 5 percent tariff represents the final CEPT rate to be reached by ASEAN by 2002.) And if the final products of Company B are exported to the country of Company A, these will also be levied duties only in the 0 to 5 percent range.
Thus the immediate application of the 0 to 5 percent preferential tariffs will give AICO products a head start on non-AICO products. Other incentives include local content accreditation, where applicable, and other nontariff incentives provided by the participating member countries.
In the AICO scheme, an approved AICO product may be in the form of a finished product, intermediate part and component, or raw material. In any AICO arrangement the AICO products are categorised as AICO Final Products, AICO Intermediate Products or AICO Raw Materials. The AICO Final Products-the final output of a specific AICO arrangement-shall have unlimited access to the markets of the participating countries. On the other hand, AICO Intermediate Products and AICO Raw Materials enjoy the 0-to-5-percent preferential tariff only if they are imported for use as inputs in the manufacture of AICO Final Products.
The AICO scheme specifies three conditions for a company to be eligible to apply for an AICO: (1) must be incorporated and operating in any ASEAN country, (2) has at least 30 percent ASEAN national equity, and (3) must undertake resource sharing or pooling, industrial complementation or industrial cooperation. Companies that do not meet this equity requirement may still take part in the AICO scheme if they meet other conditions imposed by a participating country. As part of the ASEAN Bold Measures announced at the Sixth ASEAN Summit in Ha Noi, the national equity requirement is automatically waived on all AICO applications submitted from 1 January 1999 to the end of this year. The ASEAN Eco-nomic Ministers at their 32nd meeting extended this period to 31 December 2001.
The AICO scheme also allows related manufacturing companies that are part of a bigger group of companies, or those owned or managed by the same principal, to set up AICO arrangements among themselves. That is, Company A and Company B, belonging to the same group of companies, may exchange products that they each specialise in. This is known as intra-firm transactions under the AICO scheme.
AICO arrangements have already attracted the participation of many Japanese automotive manufacturers taking advantage of the particular strengths of each ASEAN country. A Japanese conglomerate operating in several ASEAN countries has estimated it would save at least six billion yen over a five-year period using the AICO scheme. So far, 63 AICO arrangements are operating and generating more than US$700 million in trade transactions a year.
The ASEAN Investment Area
AFTA and AICO essentially lift the tariff barriers between ASEAN countries. The programme for the ASEAN Investment Area (AIA) follows the logic of economic integration by removing investment barriers and facilitating flows into the region. The Framework Agreement on the ASEAN Investment Area was signed in October 1998 at the 30th ASEAN Economic Ministers Meeting in Manila. The agreement is binding and is now in force. A ministerial-level ASEAN Investments Area Council has been established to oversee the agreement’s implementation.
The AIA promotes the inflow of direct investment into and within ASEAN by making the region an open, liberal and competitive investment area. The core of the AIA programme involves greater investment liberalisation and facilitation in ASEAN manufacturing and agriculture, fishery, forestry and mining sectors and in services related to these sectors.
The programme calls for the opening up of all industries in the region to ASEAN investors and the granting of national treatment to them. The AIA arrangement is set up on a system of exclusion lists, which specify industries and investment measures that are excluded from immediate opening and granting of national treatment, respectively.
The Temporary Exclusion List covers industries and investment measures closed or not granted to outside investors, by ASEAN countries for the time being. These exceptions for the manufacturing, agriculture, fishery, forestry and mining sectors, and services incidental to these sectors, are to be phased out by 2010, except for Cambodia, Lao PDR and Viet Nam, who are given a few more years. The Temporary Exclu-sion List (TEL) for the manufacturing sector, with the exception of Cambodia, Lao PDR and Viet Nam, will be phased out by 2003. Given their late entry into ASEAN, these three countries will have up to 2010 to phase out their TEL for the manufacturing sector. The ASEAN Investment Area Council will review the Temporary Exclusion Lists every two years. The AIA Council will also review the Sensitive Lists in 2003 and thereafter at regular intervals for the sectors covered by the AIA Agreement.
ASEAN investors. A key element of the AIA is its very liberal definition of an “ASEAN investor” as one that meets the nationality or equity requirement of the member country where the investment is made. This means a firm owned by a multinational enterprise with an investment proj-ect in a host country that meets the nationality or equity requirement will get the same privileges under the AIA as a national of that host country.
To illustrate: ASEAN Country A requires 51 percent equity ownership by nationals. Nationals of that country own only 30 percent of the equity in a manufacturing enterprise, with a Japanese multinational taking 49 percent of its shares. The other 21 percent equity interest of that manufacturing enterprise is owned by nationals of ASEAN Country B. Under the terms of the AIA, the manufacturing enterprise or the investment project will be granted national treatment-it is given the same treatment as a firm of Country A, as the ASEAN cumulative equity is 51 percent, complying with Country A’s national-equity requirements. The manufacturing firm thus qualifies as an ASEAN investor, to which all AIA privileges will be accorded.
ASEAN recognises that foreign direct investments (FDIs) have played an increasingly important role in the development of its members’ economies. The region has been a leading recipient of FDI flows. Between 1987 and 1992, ASEAN received 24 percent of global FDI flows to developing countries. In terms of value, the FDI flows into ASEAN grew from US$16 billion in 1993 to a peak of US$27.6 billion in 1997, before dropping to US$19.5 billion in 1998 and US$16.2 billion in 1999. Significantly, US direct foreign investment in 1999 soared to US$9.4 billion, from US$1.1 billion the year before, although, for various reasons, investments from Japan, from Europe and from within ASEAN itself have dropped.
ASEAN has established a Task Force on FDI Statistics which was elevated to a Working Group this year, to compile, measure and report comparable FDI statistics to support the ASEAN Investment Area process. The comparable FDI statistics will cover both balance-of-payments and administrative data. At its first meeting in March 1999 in Phuket, Thailand, the AIA Council asked the Task Force to produce a minimum set of comparable FDI statistics. A number of FDI data workshops have been organised to improve FDI data quality in the region.
Investment promotion. Other than the programme on investment liberalisation, the AIA seeks to make the region an attractive investment site through the following measures: a) carrying out coordinated investment cooperation and facilitation programmes; (b) jointly promoting investments; (c) involving the private sector; (d) promoting the freer flow of capital, skilled labour and professionals, and technology in the region; (e) improving the transparency of investment policies, rules, procedures and administrative processes; and (f) streamlining and simplifying investment procedures.
ASEAN is actively and collectively promoting the region as a single investment site. Joint investment seminars and fairs were held on 16 June 1998 in Tokyo, organised by the ASEAN Centre and the ASEAN Secretariat conducted by the ASEAN heads of investment agencies. In Novem-ber 1999 ASEAN issued the first ASEAN Investment Report, Statistics of Foreign Direct Investment in ASEAN (1999 Edition), and Investing in ASEAN: A Guide for Foreign Investors. It has also developed the ASEAN Supporting Industry Database and the Directory of ASEAN Technology Suppliers. It has published the Compendium of Investment Rules and Policies in ASEAN and the Handbook of Investment Agreements in ASEAN to assist investors and enhance transparency.
The association has sent joint investment missions to Japan, the United States and Europe. These missions hold seminars to inform current and potential foreign investors of investment opportunities in the region and reassure them of the region’s commitment to regional economic integration and open regionalism. The first investment promotion mission this year was led by Malaysia’s Minister of International Trade and Industry, Dato Seri Rafidah Aziz, from 27 to 28 February 2000 in Tokyo. More than 700 Japanese companies took part in the event. The second mission, led by Singapore’s Minister of Trade and Industry, Brig-adier General George Yeo, covered New York, Minneapolis and San Jose in California, from 16 to 19 May 2000. The third mission, to London, Paris and Munich, was headed by Thailand’s Minister in the Prime Minister’s Office, Abhisit Vejajjiva, from 22 to 26 May 2000.
e-ASEAN Initiative
Recognising the tremendous growth of electronic commerce and the need to develop ASEAN’s ability to compete in a knowledge-based global economy, ASEAN leaders in November 1999 organised a high-level e-ASEAN Task Force, consisting of government and private-sector representatives. The Task Force aims to develop a broad-based and comprehensive action plan to promote an ASEAN cyberspace. The plan would identify the physical, legal, logistic, social and economic infrastructure needed to promote such an ASEAN cyberspace, and would cover the economy, civil society and government. During the same informal summit, the leaders agreed to establish a free-trade area for goods, services and investments for info-com industries.
The e-ASEAN Task Force has already identified pilot projects for various sectors. It is working on guidelines to spell out the policy issues relating to an electronic marketplace in ASEAN. These issues would include cyber laws, secure messaging systems, payment gateways, and on-line services and products.
To localise Internet traffic within the region-and encourage the growth of ASEAN content and services-the Task Force is also working on the proposed ASEAN information infrastructure. It has initiated consultations with the private sector to explore short- and long-term plans for it. The Task Force will prescribe measures to narrow the “digital divide” in the region-the growing gap in the involvement and capacity of individual ASEAN countries in information technology and the new economy.
The ASEAN Economic Ministers have already approved the e-ASEAN Framework Agreement, which spells out the ASEAN countries’ commitments in such key areas as development of an ASEAN information structure, facilitation of e-commerce, liberalisation of information and communications technology goods, services and investments, capacity building, e-society and e-government. The agreement, which will be signed at the Fourth ASEAN Informal Summit in November 2000, includes measures that will enable some member countries to accelerate its implementation by 2002 and help other member countries to build up their capacity in this field.
Outlook
Over the past 33 years, economic linkages among ASEAN members have grown phenomenally. In the last decade, intra-ASEAN trade has been growing faster than total ASEAN exports. ASEAN countries have all committed themselves to creating an ASEAN Free Trade Area, an ASEAN-wide manufacturing base, an ASEAN Investment Area, and ultimately a single ASEAN integrated economy. The 1997 Asian financial crisis tested this commitment-and found ASEAN steadfast in its programmes for economic integration.
ASEAN’s gains in economic integration, how-ever, have occurred in a period of rapid globalisation, leaps in technology and the phenomenal growth of huge, liberalising economies such as China and India. All over the world, continent-sized economies, regional free-trade areas and other forms of economic partnership have been organised. These developments pose new challenges for ASEAN-how to undertake economic cooperation with these blocs and countries, and how to strengthen and speed up its own integration in an increasingly competitive globe. And ASEAN must meet these challenges-while taking into account the national interests and priorities of each member country, as well as the unevenness of economic development within the region.
Fortunately, the foundations for an ASEAN integrated economy have been built-and tested through the Asian crisis. The first decade of the new century-and the new millennium-should see the completion of this work, which ASEAN’s founding fathers envisioned a generation ago.