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Open Regionalism and Deeper Integration: The Implementation of ASEAN Investment Area (AIA) and ASEAN Free Trade Area (AFTA)

Part 3

The New Framework Agreements of ASEAN

Although ASEAN has been established for three decades, since 1968 (just ten years after the creation of the EEC), it has not yet reached any significant level of regional integration. It could hardly be claimed that the economic co-operation programs implemented in ASEAN were a full success. ASEAN remains just a loose regional grouping, with no supranational institutions to provide common policy, or to stipulate any laws and regulations governing ASEAN economic activities. Each member country still maintains its own independent law and policies, its legal system, and its sovereign right to control and regulate internal activities as well as conduct external relationships, except those mutually agreed in the economic, social and political co-operation programs. Every program implemented in ASEAN has been agreed among the member countries on a consensus basis.

It was only in 1992 that ASEAN began to develop the idea of establishing the ASEAN Free Trade Area, a scheme for strengthening intra-regional economic co-operation to respond to global change(9) . Resulting from the Fourth Summit Meeting, the Framework Agreement on enhancing economic co-operation, better known as the Framework Agreement on ASEAN Free Trade Area, was signed on 28th January 1992.

ASEAN Free Trade Area (AFTA)

The 1992 framework agreement of AFTA bound ASEAN states to the establishment of an ASEAN Free Trade Area initially within 15 years, beginning 1st January 1993. The implementation of AFTA was subsequently accelerated(10). ASEAN recognises the close interdependence of trade and investment, and is aware that it can only attract inflows of trade and investment into the region by its sound economy. Therefore, to strengthen intra-ASEAN trade by accelerating the elimination of tariff and non-tariff barriers to trade within the region to gain economies of scale would also help to induce inflows of investment as well. It has been claimed that the AFTA scheme conforms to the GATT(11). However, the practical legal issues of GATT compatibility of AFTA must be carefully considered, and will be further discussed below.

Under AFTA, the Common Effective Preferential Tariff (CEPT)(12) is the main instrument to encourage intra-ASEAN trade. The CEPT Agreement allows ASEAN member Countries to reduce their tariffs to 0-5% on a MFN basis among ASEAN members. Although this establishes a preferential arrangement within ASEAN, it may nevertheless be acceptable to other countries because of the benefits the larger regional market will create. So AFTA encourages not just intra-ASEAN trade but also trade and investment from other countries. From this point of view, AFTA can be regarded as "Open Regionalism", i.e. economic integration within the region while welcoming outsiders.

However, at the outset, the implementation of AFTA to ensure closer regional economic integration was still far from real(13) . It was more like a special scheme for mutual economic co-operation than a general regional economic integration. Even though in 1994 ASEAN adopted the acceleration of the AFTA time frame, it was only at the 6th ASEAN Summit, in Hanoi in 1998, that the ASEAN leaders adopted measures to accelerate the region's economic integration and the completion of the AFTA even faster(14) . Initially only fifteen categories of products(15) identified in the AFTA Frame work Agreement to be included in the CEPT scheme(16)were subject to the fast track(17) tariff reduction towards a nil tariff. The time frame(18) for fully implementing AFTA has been set at 10 years for the more advanced economies of ASEAN(19)and 15 years for the new ASEAN members.

Part 4


(9) This was clearly stated in the preamble of the Framework Agreement on enhancing economic cooperation: "conscious of the rapid and pervasive changes in the international political and economic landscape, as well as both challenges and opportunities yielded thereof, which need more cohesive and effective performance of intra-ASEAN economic co-operation".

(10) See ASEAN Update vol.1/1999, 1st quarter of 1999. See also Statement on Bold Measures, the Heads of ASEAN countries agreed to accelerate the AFTA, the original six countries would advance the implementation of AFTA by one year from 2003 to 2002. They also agreed to achieve a minimum of 90% of their total tariff lines with tariffs of 0-5% by the year 2002, which would account for 90% of intra-ASEAN trade.

(11) "AFTA is a GATT-consistent and an outward looking arrangement. No trade barriers are raised against non-ASEAN economies as a result of the formation of AFTA. Give the open structure of ASEAN economies, the expansion of production in an ASEAN regional market would enhance ASEAN's linkages with the world and generate greater opportunities for exporters outside the region". Press Statement, The Third AFTA Council Meeting, Indonesia, 11th December 1992.

(12) Art. 1 of the Agreement on the Common Effective Preferential Tariff (CEPT) scheme for ASEAN Free Trade Area states that "CEPT" means the Common Effective Preferential Tariff, and it is an agreed effective tariff, preferential to ASEAN, to be applied to goods originating from ASEAN Member States, and which have been identified for inclusion in the CEPT Scheme in accordance with Arts. 2 (5) and 3.

(13) There were so many categories of products excluded from the list as an exclusive list. Agriculture has been regarded as sensitive and therefore been put aside. There were also protests from within the affected countries where products were included in the list for tariff reduction by the affected producers. For instance, the palm growers and palm oil industry in the South of Thailand and in Malaysia feared to lose their dominant market share, and their tariff protection to the free entry of product from neighboring countries once AFTA is fully implemented.

(14) See Statement on Bold Measures in Annex 11.

(15) They are vegetable oils, cement, chemicals, pharmaceuticals, fertilizer, plastics, rubber products, leather products, pulp, textiles, ceramic and glass products, gems and jewellery, copper cathodes, electronics, and wooden and rattan furniture.

(16) Agreement on the Common Preferential Tariff (CEPT) scheme for the ASEAN Free Trade Area (AFTA), ASEAN Documents series 1991-1992 (Notified to the GATT in L/7111). CEPT is the primary instrument for implementing AFTA. However, all products under the PTA (Preferential Trading Arrangement) which are not transferred to the CEPT Scheme shall continue to enjoy the MOP (Margin of Preference) existing as at 31st December 1992 (CEPT Agreement, Art. 2 (6). PTA was the initial agreement providing for economic cooperation in ASEAN. This agreement provides that the member states of the ASEAN are to extend trade preferences to each other in accordance with the provisions of the agreement and the rules, regulations and decisions agreed within its framework.

(17) The fast track is to reduce tariff rates above 20% to 0-5% by 1st January 2000, and to reduce tariff rates at or below 20% to 0-5% by 1st January 1998. The normal track is to reduce tariff rates above 20% to 20% by 1st January 1998 and subsequently from 20% to 0-5% by 1st January 2003, and to reduce tariff rates at or below 20% to 0-5% by 1st January 2000.

(18) The time frame of 15 years for implementing AFTA specified in the original framework agreement adopted in 4th ASEAN Summit has been changed at the Meeting in September 1994. AFTA members agreed to implement AFTA over 10 years instead and to include unprocessed agricultural goods, which were originally excluded from the agreement. See "Ministers accelerate implement of AFTA", ASEAN UPDATE, October 1994, pp. 1-3.

(19) Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand.