ASEAN Countries Find Joy in Unity

Global Finance, Jul/Aug 2005 by Hawser, Anita

South East Asia's regional trade alliance is looking for ways to promote intra-regional cooperation without reducing its members' competitiveness.

Global trading volumes have sky-rocketed in the past 50 years since the World Trade Organization first began its quest to demolish trading barriers. As developing countries such as China, India, Cambodia, Laos and Vietnam open their markets to foreign investment, trading volumes will continue to rise. The Association of South East Asian Nations (ASEAN) is hoping it can drive further growth in regional trade and integration.

The driving force behind free trade agreements is usually the idea that free trade promotes higher levels of economic integration and cooperation between regions. In reality, however, free trade agreements (FTAs) are often difficult and time consuming to implement, and there are questions around who really benefits from them.

Opponents often claim it is the larger developed countries with more sophisticated and powerful industrial conglomerates while supporters assert that it is the developing countries looking to make it onto the first rung of the ladder in their bid to become global market-based economies. The 2002 trade dispute over the United States' imposition of tariffs on steel imports in an effort to stem local job losses is a reminder that countries are only willing to open their markets so far and that the political will needs to exist for FTAs to be faithfully applied.

Implementing FTAs may be challenging, but they are considered to deliver clear economic benefits for those countries that can make them work. Studies by the Centre for Economic Policy Research show regional free trade deals between EU countries, for example, or the US, Canada and Mexico (NAFTA) can boost trade and economic growth. In the EU, consultant McKinsey says less-developed countries such as Ireland, Portugal and Spain gained more from EU membership in terms of higher levels of economic growth. Similarly, studies indicate that Mexico's economic growth has accelerated since it joined NAFTA.

ASEAN countries have been watching other regions' progress with interest. Now, the six original signatories, Brunei, Indonesia, Malaysia, the Philippines, Thailand and Singapore, and the newer entrants, Cambodia, Laos, Vietnam and Myanmar, are hoping to emulate their success. Combined, the 10 member countries constitute a market of 500 million people with a combined GDP of $600 billion, the largest Asian consumer market in terms of value outside of China. In addition, ASEAN is also home to 40% of the Asia-Pacific's oil and gas resources.

Caught Napping

ASEAN came into being in 1967 as a means of promoting peace, progress and economic prosperity across the region. At its fourth summit in Singapore, in 1992, the ASEAN Free Trade Area (AFTA) was born, with the aim of promoting the gradual phasing out of regional trade tariffs. The agreement has since been extended to include elimination of non-tariff barriers, liberalization of trade in services and intraregional cooperation on intellectual property rights.

But almost 40 years after the birth of ASEAN, the global economic landscape is much altered. Low-cost manufacturing centers in China and India have emerged, which means ASEAN can no longer compete on labor costs alone. In addition, the region is still reeling from the economic crisis of 1997, which, says McKinsey, caused FDI to fall by 66% and aggregate economic growth to decline by 50%. According to the ASEAN Surveillance Co-ordination Unit, from 1996 to 2002 the former Asian "tiger" economies' average annual growth of GDP was 1.8%, compared to 7.8% for China. Exports grew at an annual average rate of 1.5% in the "tiger" economies, compared to 13.1% in China. While China surges ahead, ASEAN has been caught napping.

In terms of increasing productivity, reducing costs across the region and increasing foreign investment, Adam Schwarz and Roland Villinger, consultants in McKinsey's Bangkok and Singapore offices, believe that further trade liberalization and regional economic integration is needed. "ASEAN must find the political will to reduce further the tariffs and non-tariff barriers that raise the cost of doing business across the region's borders," Schwarz and Villinger reported.

Free Flowing

ASEAN has not been resting on its laurels, though. Since the 1997 crisis, the original six AFTA signatories agreed to speed up tariff reduction. At Phnom Penh in September 2003, the AFTA Council announced that, after a decade, AFTA had been "virtually realized," with regional tariffs on 99.6% of products in the Common Effective Preferential Tariff (CEPT) Inclusion List in the ASEAN-6 countries being reduced to within the 0%-5% range.

Only 247 tariff lines within the region remained outside the remit of CEPT. The Council also announced that uptake of CEPT in the newer ASEAN member countries (Vietnam, Cambodia, Laos and Myanmar) was keeping pace with the original members, with inclusion lists comprising 72.22% of the total number of tariffs, compared to 64.27% in 2002. More than 60% of products they traded within the region were within the 0%-5% tariff band. The target for all ASEAN-6 countries to reduce tariffs on imports to zero is 2010. The newer ASEAN countries have until 2015.