Roadmap to an ASEAN Economic Community

2. ASEAN Economic Community: Concept, Costs, and Benefits

ASEAN Economic Community: Concept, Costs, and Benefits 13 2 ASEAN Economic Community: Concept, Costs, and Benefits Hadi Soesastro 1. Introduction At the 2003 ASEAN Summit in Bali, the ASEAN leaders agreed to establish an ASEAN Economic Community (AEC) by 2020. The idea of an AEC was first proposed by Singapore’s Prime Minister Goh Chok Tong a year earlier at the 2002 ASEAN Summit. As with any other idea, its acceptability depends on how each ASEAN member assesses the benefits and costs, or the gains and pains, of a much deeper regional economic integration. The essence of the idea is about deepening ASEAN economic integration. In that sense it can be seen as a logical extension of the regional economic integration project that ASEAN has embarked upon with the historic decision in 1992 to form an ASEAN Free Trade Area (AFTA). However, the idea of establishing an AEC by 2020 also requires the drafting and crafting of an overall economic blueprint. The end goal will definitely be much broader and deeper than the removal of barriers to trade and investment through the AFTA and the ASEAN Investment Area (AIA) projects. And this end goal must be clearly spelled out. The process to achieving it will need to be clearly defined as well. In this sense, ASEAN may see a break with the past in terms of how it manages the process of regional economic integration. 02 Roadmap2AEC Ch 2 7/9/05, 3:31 PM 13 14 Hadi Soesastro In the recent past, ASEAN economic integration has been driven by the process itself. When the ASEAN leaders decided in 1992 to form AFTA, they initially agreed to complete the integration project within fifteen years, from 1993 to 2008. Not long thereafter they agreed to accelerate the implementation and set 2003 as the completion date. In response to the 1997/98 financial crisis, the ASEAN leaders agreed to bring the completion date forward to 1 January 2002. ASEAN’s new members must also take part in the AFTA integration project, but they have been given ten years to fulfil their commitment to bring down most of their tariffs to 0–5 per cent. Now, a zerotariff AFTA has been adopted by ASEAN, to be achieved in 2010 by the older members and in 2018 (2015 for most products) by the newer members. The above developments show that ASEAN has progressively advanced AFTA’s completion date. It has also moved to a zero-tariff AFTA. A number of factors account for this progressive development. Perhaps some comfort level with the process has been achieved over time, leading to a greater willingness by the participants to move faster. The need to enhance the region’s economic competitiveness as a way to overcome the financial crisis and to face increased competition from China was another major factor. It should be noted, however, that the implementation of this integration project has been less impressive. Moreover, only a very small percentage of intra-ASEAN trade is in fact utilizing the lower AFTA preferential rates. While this may have been caused by the declining margin of preference as MFN (most-favoured nation) rates have also come down, such factors as lack of private sector awareness, lack of clarity in the application of the Rules of Origin (RoO), problems with customs authorities, and lack of dispute settlement mechanisms may be equally important. Most worrying, however, has been the backtracking from the original commitment by some members, for example, Indonesia on agricultural products and Malaysia in the automotive sector. The costs and benefits of an AEC can only be properly assessed when there is a blueprint. In fact, the blueprint itself will be the result of a process of negotiations that will have to incorporate the interests and concerns of the members along the way. This chapter therefore suggests that ASEAN should adopt a process to come to an agreement on the AEC that is different from the one that produced AFTA. AFTA is a narrowly focused project: the removal of trade barriers, specifically tariffs. It is also supposed to remove non-tariff barriers (NTBs), but this is not happening because there was no clear understanding about what this entails and how to do it. Some have correctly (and sarcastically) described AFTA as “Agree First, Talk After”. This 02 Roadmap2AEC Ch 2 7/9/05, 3:31 PM 14 ASEAN Economic Community: Concept, Costs, and Benefits 15...