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

Part 5

Additionally, in the past, ASEAN neither sought to regionalise the financial system nor to strengthen intra-ASEAN capital flows, to facilitate economic flows within the region. There was no objective of facilitating the free movement of capital, one of the main production factors(29) . Only after AFTA was established was there a policy of implementing the free movement of capital provided in the aforementioned Framework Agreement for enhancing economic co-operation(30) . Only after the financial crisis took place in Asia, did ASEAN countries think about the launching of an ASEAN currency exchange and payment system for intra-ASEAN trade(31) This policy would help promote regional currencies and enhance financial stability in the region, and also help cushion the negative impact of financial turmoil from outside the region. It will also facilitate and stimulate intra-ASEAN trade and investment by reducing risk from the loss caused by the fluctuation of currency exchange rates in world markets. All these new policies are dictated by current circumstances, which further influence political support from each member.


In legal terms the ASEAN Free Trade Area is a preferential trading arrangement(32) . AFTA was not established under the provision of Art. XXIV of GATT(33) . Rather, AFTA was based on the permission given to developing countries to enter into preferential trading arrangements by the Tokyo Round "enabling clause"(34) . The Enabling Clause provides in its paragraph 1 that:

"Notwithstanding the provisions of Art. I of the General Agreement, contracting parties may accord differential and more favourable treatment to developing countries, without according such treatment to other contracting parties".

Paragraph 2 further clarifies that "The provisions of paragraph 1 apply to the following:

"(c) Regional or global arrangements entered into amongst less-developed contracting parties for the mutual reduction or elimination of tariffs and, in accordance with the criteria or conditions which may be prescribed by the Contracting Parties, for the mutual reduction or elimination of non-tariff measures, on products imported from one another".

ASEAN members have been regarded as developing countries so that they can accord among themselves differential and more favourable treatments, without according such treatment to other GATT/WTO contracting parties. This preferential treatment provision is different from the free trade area arrangement under Art. XXIV(35) , under which the members of the free trade area are subject to the obligation not to apply higher duties or other regulations more restrictive to non-members than the ones applicable prior to the formation of the free trade area. Therefore, from its legal basis, currently AFTA is not obliged to conform to Art. XXIV of GATT. However, ASEAN's practice does raise questions concerning GATT/WTO compatibility, paradoxically because in practice AFTA does not create any higher barriers to trade from non-members but rather implements an open and outward-looking policy towards outsiders. Furthermore, the CEPT under AFTA encompasses all new ASEAN industrial co-operation schemes(36) . Under the AICO scheme, ASEAN could even grant favourable treatment to non-members(37) if they reached the requirements and conditions set forth under various schemes(38) ; now its preferential arrangements were transferred to and encompassed by the CEPT for AFTA(39) in order to qualify for the available preferences, as AFTA covers all trade in manufactured products in ASEAN(40) . Moreover, the ASEAN rules of origin also allow up to 60% of non-members' originating input(41) incorporated in the ASEAN products entitled to the CEPT under AFTA. Also ASEAN applies a cumulative ASEAN original input for CEPT products, so that in practice the 'net' cumulative regional content may be lower than the 40% and the eligibility for ASEAN-origin is still valid(42) . Hence, ASEAN is indirectly able to grant preferences to non-members in practice. ASEAN is able under AFTA to grant preferences to non-members including even developed countries, although under GATT such preferential treatment has to be accorded among member countries that are developing countries only. Although AFTA is legally based on the "Enabling Clause" but it practically complies with Art. XXIV.

Part 6


(29) The principle of free movement of capital is included in the preamble and objectives of the Framework Agreement for enhancing economic co-operation, which facilitates and strengthens liberalization of trade and investment in the region. ASEAN Free Trade Area is one of the objectives of this Framework Agreement.

(30) Section C. 2 of the Framework Agreement provided that "2. Member States shall encourage and facilitate free movement of capital and other financial resources including further liberalization of the use of ASEAN currencies in trade and investments, taking into account their respective national laws, monetary controls and development objectives".

(31) Paragraph 13 of the Hanoi Declaration of 1998, at the sixth ASEAN Summit Meeting, in Hanoi on 16th December 1998. The paragraph states that "We encourage wider use of ASEAN currencies in intra-ASEAN trade settlement". It has been emphasized in the Hanoi Plan of Action to introduce an ASEAN currency and exchange rate system. The Hanoi Plan of Action is the blueprint covering the first six years of the ASEAN Vision 2020 that the ASEAN leaders issued at the Meeting in Kuala Lumpur, Malaysia.

(32) The Common Effective Preferential Treatment (CEPT) under AFTA is also preferential trading arrangement. However, the CEPT mainly differs from the initial PTA in its applicability that is on across the broad basis while the PTA was applied on a product-by-product basis and specified by agreed terms.

(33) AFTA was not notified by ASEAN to GATT under Art. XXIV but the Agreement on ASEAN Preferential Trade Arrangements was notified under the Enabling Clause on 1st November 1977, examination concluded in 1979. Http://

(34) Differential and More Favourable Treatment Reciprocity and Fuller Participation of Developing Countries, Decision of 28th November 1979 (L/4903), paras 1 and 2 (c). The Preferential Trading Arrangement was approved initially by the GATT CONTRACTING PARTIES in Decision of 29th January 1979 (L/4768): Agreement on ASEAN Preferential Trading Arrangements; notification under Enabling Clause in 1982 (L/5243). The protocol on Improvements on Extension of Tariff Preferences Under the ASEAN Preferential Trading Arrangements was approved by notification in 1989 (L/6569) See GATT (1995) Guide to GATT Law and Practice. 2 Volumes. Geneva: World Trade Organization.

(35) Art. XXIV paragraph 5 (b) of GATT provided that "with respect to a free trade area, or an interim agreement leading to the formation of a free trade area, the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free trade area, or interim agreement, as the case may be".

(36) The new form of ASEAN Industrial Co-operation (AICO scheme) will replace the BBC and AIJV schemes and shall be based on the CEPT under AFTA. The Basic Agreement for the ASEAN Industrial Cooperation Scheme was signed on 27th April 1996 in Singapore.

(37) Although the national equity condition is imposed as a criterion; under the AICO Scheme, a national equity holding of one ASEAN member country in each of the participating company is sufficient. Since two companies are required to form an AICO Arrangement, each company must have its own national equity holding. For companies that cannot meet the equity condition, a waiver is possible if the proposing company meets other criteria imposed by the participating country in lieu of the 30% national equity.

(38) Preferences granted under the ASEAN Preferential Trading Arrangements now transfer to the ASEAN Common Effective preferential Treatments under AFTA, and other preferences granted under AICO, AIJV, AIP, AIC also now come under the CEPT scheme for AFTA.

(39) The AICO agreement stated that "The new ASEAN industrial cooperation scheme shall be based on the CEPT Scheme for AFTA".

(40) Art. 3 of AFTA provided that "This Agreement shall apply to all manufactured products, including capital goods, processed agricultural products, and those products failing outside the definition of agricultural products as set out in this Agreement……".

(41) Rule 3 (ii) of the ASEAN Rule of Origin provides that "(ii) Subject to Sub-paragraph (i) above, for the purpose of implementing the provisions of Rule 1 (b), products worked on and processed as a result of which the total value of the materials, parts or produce originating from non-ASEAN countries or of undetermined origin used does not exceed 60% of the FOB value of the product produced or obtained and the final process of the manufacture is performed within the territory of the exporting Member State".

(42) For instance, if product A has a value of 100, of which 40% is local content in Singapore, it may be exported to Malaysia at a CEPT rate, where 5% local content is added for a total value-added in Malaysia of 100. Upon export to Thailand it is considered to have 45% ASEAN content even though "net" cumulative content is 22.5% of 200. Example adapted from Pelkmans, 1997, p. 211.