ASEAN Beyond the Regional Crisis: Challenges and Initiatives

4. ASEAN Free Trade Area: Progress and Challenges

48 Nattapong Thongpakde© 2001 Institute of Southeast Asian Studies, Singapore 48 ASEAN Free Trade Area (AFTA) in Retrospect ASEAN Economic Co-operation Before AFTA Since the establishment of ASEAN in 1967 by the five founding members — Singapore, Malaysia, Indonesia, the Philippines, and Thailand — the political view was carried through as the centre of co-operation for a decade. During the early days of the establishment of ASEAN, there were a number of factors causing political instability in the region, including an ideology revolution, internal tensions, conflicts between some countries in the region, tensions arising from the Vietnam War, as well as the threat of an expansion of communism. Hence, the formation of a regional grouping was a means of solving conflicts among members and to sustain peace within the ASEAN region. “At that time, political instability in the region was the driving force behind ASEAN, and it has been argued that much of the attraction of regional economic integration was merely its use as a ‘cover’ for political cooperation , in particular, vis-á-vis instability in Indochina.”1 Later, economic co-operation was promoted in the mid-1970s, at the first two summits. 4 ASEAN Free Trade Area: Progress and Challenges NATTAPONG THONGPAKDE* ISEAS DOCUMENT DELIVERY SERVICE. No reproduction without permission of the publisher: Institute of Southeast Asian Studies, 30 Heng Mui Keng Terrace, SINGAPORE 119614. FAX: (65)7756259; TEL: (65) 8702447; E-MAIL: publish@iseas.edu.sg ASEAN Free Trade Area: Progress and Challenges 49© 2001 Institute of Southeast Asian Studies, Singapore Co-operation among the ASEAN members during the first decade (1967–76) was clouded by differences among them. The progress of integration was significantly slow except for a number of political agreements. At the end of the Vietnam War in 1975, the ASEAN countries were concerned about the spread of the Marxist-Socialist system. This led to the first summit in Bali, in 1976, with the aim of strengthening co-operation in the region. The main discussion at the first summit still focused on political co-operation but a few points on economic collaboration were included, which became the framework for trade co-operation and led to the establishment of the Preferential Trading Arrangement (PTA) to stimulate trade among the ASEAN members. The Preferential Trading Arrangement, launched in 1977, was the principal instrument for economic co-operation. The PTA was applied to basic commodities by providing preferential tariff rates, or margin of preferences (MOP). There were weaknesses in the implementation, resulting in difficulties in increasing intra-ASEAN trade. In the early stages, the MOP was applied as a product-byproduct scheme with an exclusion list including important products that had high trade values. The MOP started at only 10 per cent for products that were either wholly produced in ASEAN or with local content of at least 50 per cent in value. Another weak point was the bureaucractic process to verify MOP eligibility, because it increased the costs of importers and made the scheme less attractive. “As the PTA progressed through time, these weaknesses were reorganized and policy pronouncements were made to improve the mechanisms. In 1980, the product-by-product scheme was substituted with an across-the-board approach where preference would automatically be given to items below a certain importvalue ceiling.”2 The level of MOP was raised in several stages. Finally, it was raised to a maximum of 50 per cent. The number of products on the exclusion list was reduced as a proportion of the products on the list was put on the PTA. Even though the PTA was revised from time to time, it was not sufficient to speed up trade among the ASEAN members. From 1970 to 1975, intra-ASEAN trade, as a percentage of total ASEAN trade, was between 12 and 16 per cent, which was the same level as in the late 1960s. 50 Nattapong Thongpakde© 2001 Institute of Southeast Asian Studies, Singapore Besides the PTA, ASEAN also initiated other economic cooperation schemes. They included the ASEAN Industrial Complementation (AIC), the ASEAN Industrial Joint Ventures (AIJV), and the ASEAN Industrial Projects (AIP). The ASEAN Industrial Projects scheme, introduced in 1976, aims to establish large-scale individual industrial projects by the founding five ASEAN members to respond to regional demand and to ensure more efficient use of regional resources. The ASEAN Industrial Complementation scheme (established in 1981), and its variant, the Brand to Brand Complementation scheme (BBC, established in...