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49. Foreign Direct Investment in ASEAN: Can AFTA Make a Difference?
- ISEAS–Yusof Ishak Institute
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230 Prema-Chandra Athukorala and Jayant Menon By: ROS Size: 7.5" x 10.25" J/No: 03-14474 Fonts: New Baskerville 49. FOREIGN DIRECT INVESTMENT IN ASEAN Can AFTA Make a Difference? PREMA-CHANDRA ATHUKORALA and JAYANT MENON Reprinted in abridged form from Prema-Chandra Athukorala and Jayant Menon, “Foreign Direct Investment in ASEAN: Can AFTA Make a Difference?”, in AFTA in the Changing International Economy, edited by Joseph L. H. Tan (Singapore: Institute of Southeast Asian Studies, 1996), pp. 76–92, by permission of the authors and the publisher. Until 1992, regional trade preferences were not an important item on the policy agenda of ASEAN. Although ASEAN adopted a Preferential Trading Arrangement (PTA) at the Bali Summit in 1976 (becoming effective in 1977), this initiative had little impact on regional trade because of its narrow commodity coverage and the half-hearted nature of the implementation process (Ariff 1994c; Balasubramanyam 1989). At the summit meeting of ASEAN Heads of State in January 1992, the six countries of ASEAN agreed to establish an ASEAN Free Trade Area (AFTA) by the year 2008.1 This deadline has subsequently been moved forward to the year 2005. AFTA represents the most ambitious attempt at regional integration by ASEAN thus far. It is also the first political attempt to bring about regional free trade in Asia. The centre-piece of the AFTA proposal is the Common Effective Preference Tariff (CEPT). It differs from the previous PTA in that its approach is essentially sectoral, making it more comprehensive and less cumbersome than the item-by-item approach of the PTA. The objective of the CEPT scheme is to lay the foundation for the creation of a single ASEAN market. Under AFTA, tariffs are to be reduced to 20 per cent within a time frame of five to eight years (beginning in January 1993) before they are cut down to 0–5 per cent by the year 2005. The granting of tariffs and other preferences is governed by specific ‘rules of origin’ aimed at preventing third-country exporters from using a lower-tariff country as a back door through which to enter a high-tariff country. This discourages the deflection of third-country trade from high-tariff to low-tariff member countries. The formation of a FTA (or any other regional economic grouping) is usually viewed as an attempt to form an inwardlooking regional entity, since it offers its members certain privileges that are not extended to others. It also has the potential to lead to further discriminatory measures against non-members, particularly in the 049 AR Ch 49 22/9/03, 12:49 PM 230 Foreign Direct Investment in ASEAN: Can AFTA Make a Difference? 231 By: ROS Size: 7.5" x 10.25" J/No: 03-14474 Fonts: New Baskerville form of increases in tariffs over and above pre-regionalization levels. In its present form, AFTA constitutes a clear departure from this approach. It is widely regarded as a move towards open regionalism — the formation of a regional identity that would strengthen rather than weaken the members’ extra-regional linkages. Thus, as Ariff (1994c, p. 99) has aptly put it, “the cornerstone of AFTA is ‘positive’ discrimination , acting in favour of its members but not against the rest of the world”. Whether AFTA will be implemented in its originally proposed form is yet to be seen. As noted above, ASEAN’s achievements in the sphere of liberalizing regional trade over the past two decades have been lacklustre . On these grounds, one could argue that AFTA might serve more as a means to hedge against ‘regional’ efforts elsewhere in the world, or as a safety net in case the multilateral trading system temporarily falters (OECD 1993, p. 64), rather than as a serious effort at regional economic integration. On the other hand, AFTA has had a more promising start than previous ASEAN initiatives; it has been launched in an overall economic and political environment conducive to regional co-operation. There are also a number of reasons to expect this good start to continue. First, there is the strong political will in the wake of growing economic regionalism worldwide and in the face of the structural transformation in the ASEAN economies. Second, the raison d’être for the formation of AFTA has sprung from the recent closer economic tie-ups among the member countries, in particular, strengthening tradeFDI links within the region. Third, tariffs in ASEAN countries are relatively low by developing country standards, and further...