The 2nd ASEAN Reader

46. Intra-ASEAN Economic Co-operation

Intra-ASEAN Economic Co-operation 211 By: ROS Size: 7.5" x 10.25" J/No: 03-14474 Fonts: New Baskerville 46. INTRA-ASEAN ECONOMIC CO-OPERATION MARI PANGESTU, HADI SOESASTRO, and MUBARIQ AHMAD Reprinted in abridged form from Mari Pangestu, Hadi Soesastro, and Mubariq Ahmad, “A New Look at Intra-ASEAN Economic Co-operation”, ASEAN Economic Bulletin 8, no. 3 (March 1992): 344–52, by permission of Mari Pangestu, Hadi Soesastro and the Institute of Southeast Asian Studies. There are two approaches to strengthen intra-ASEAN economic co-operation. First is the encompassing idea of a free trade area, with the understanding that all else will follow. Second is the question whether the free trade area is sufficient to enhance the larger market forged through intraASEAN trade and investment, i.e. are specific or new programmes necessary in addition to the free trade area. THE ASEAN FREE TRADE AREA Before analysing the prospects of the free trade area in strengthening intra-ASEAN economic co-operation, the basic net benefits from economic integration still stand as a strong argument for having such a concept. The static welfare gains from integration will result from net increases in production and consumption.1 The size of the gains will depend on the size of the union, the higher the level of intra-regional trade, and the higher the differences between pre- and post-integration tariffs. In the case of ASEAN, intra-regional trade is small (lack of complementarity); present market size is small; and the differences in pre- and postintegration tariffs is substantial but narrowing due to unilateral liberalization. Differences in the level of development could also lead to unequal distribution of gains. Imada et al. (1991) estimates that reducing tariff barriers will have a positive but not substantial effect on trade and production in the region. However, while the net static gains are likely to be small, what is more important is the potential dynamic gains from the change in production structure and more efficient resource allocation; economies of scale; scope for intra-industry trade; increased investments; and technological and innovative developments due to increased competition. Furthermore, differences in development are narrowing as each country experiences robust growth; the size of the ASEAN market in terms of 046 AR Ch 46 22/9/03, 12:48 PM 211 212 Mari Pangestu, Hadi Soesastro, and Mubariq Ahmad By: ROS Size: 7.5" x 10.25" J/No: 03-14474 Fonts: New Baskerville population and purchasing power will become substantive; and the potential for inter-industry trade is great. Towards a Free Trade Area The idea of a free trade area is closer than ever to being attained. At the Manila Summit, the concept was still unacceptable, but discussions in anticipation of the coming summit have gone quite far in formalizing the concept. Renewed support for the ASEAN Free Trade Area (AFTA) began in 1991. The idea was revived by Thai Prime Minister Anand Panyarachun in early 1991 and was endorsed by Prime Minister Goh Chok Tong of Singapore. In the ASEAN Foreign Ministers meeting in Kuala Lumpur, July 1991, the AFTA proposal received enthusiastic support. The position of various countries at the time can be summarized as: “... Singapore and Malaysia had wholly supported the FTA proposal. Indonesia and the Philippines had some reservations on how fast they should go”.2 The latter two countries point to the differences between the two countries as leading to the possibility of dumping. Agreement over AFTA came much earlier than expected at the October 1991 ASEAN Economic Ministers Meeting (henceforth the AEM agreement). Official acceptance will only occur at the ASEAN Summit meeting, but endorsement at the ministerial level already provides a strong indication that agreement will be reached. AFTA will be the main vehicle to strengthen intraASEAN economic co-operation. In considering the prospects and problems of the ASEAN free trade area (AFTA), several aspects need to be analysed. These include the transition period, the scope of the free trade area, and the mode to reduce trade barriers. Transition Period Prior to the AEM agreement, there was already much discussion on the need for a deadline to indicate the political commitment to the objective of a free trade area. In June 1991, the ASEAN-ISIS suggested 2007, the 40th anniversary of ASEAN.3 At the Foreign Ministers Meeting in July 1991, achievement of AFTA in ten years was suggested by Thailand. A shorter deadline is preferable or it may be too far away to be meaningful...