Roadmap to an ASEAN Economic Community

7. Role of AFTA in an ASEAN Economic Community

Role of AFTA in an ASEAN Economic Community 127 7 Role of AFTA in an ASEAN Economic Community Jose L. Tongzon 1. Introduction The Asian financial crisis of 1997 and 1998 has significantly stalled the economic progress experienced by the ASEAN countries and set back the economic and social gains they have achieved in the past decades. The tragic terrorist attacks of 11 September 2001, the Iraq war, and the Severe Acute Respiratory Syndrome (SARS) outbreak have further exacerbated their postcrisis economic malaise and dampened the outlook for greater trade liberalization and economic integration, as envisioned under the ASEAN Free Trade Area (AFTA). Despite these unfavourable external events, the ASEAN countries have remained politically committed to the vision of transforming ASEAN into an economically integrated grouping within the framework of an ASEAN Economic Community (AEC). This AEC concept, which was first proposed in the 2002 ASEAN Summit, is based on the ASEAN Vision 2020, which foresees a more economically integrated ASEAN. The ASEAN Vision 2020 envisioned “… a stable, prosperous and highly competitive ASEAN economic region in which there is a free flow of goods, services and investments, a freer flow of capital, equitable economic development and reduced poverty and socio-economic disparities” (ASEAN 1999, p. 12). 07 Roadmap2AEC Ch 7 7/9/05, 3:43 PM 127 128 Jose L. Tongzon The AEC, whether it is envisaged to be a customs union or viewed to be more of a “free trade agreement plus” arrangement (with the inclusion of some common market elements such as the free movement of factors of production, for example, capital and labour), certainly requires the success of ASEAN’s existing economic integration programmes (ISEAS 2003). In particular, a successful AFTA can provide an important building block for the establishment of an AEC. In this context, this chapter will try to assess the progress made in the implementation of AFTA, and identify and evaluate the key challenges and obstacles faced by the ASEAN countries in the process of implementation. This chapter will also suggest strategies and policies to deal with these challenges and thus contribute to the realization of the AEC. 2. Progress of the Implementation of AFTA When the ASEAN founding members decided to establish AFTA in 1992, it was meant to be a rallying point for greater economic integration within the member countries and as an instrument for making their economies more internationally competitive and an attractive place for foreign direct investments. Over the years since its establishment, despite the significant differences in economic development levels and different degrees of readiness in facing the forces of global and regional competition, significant progress has been made in the area of tariff reforms, liberalization of investment regimes leading to more efficient allocation of foreign direct investments, and in attracting new members to the fold. These factors have greatly contributed to the continued economic growth and dynamism in the region, at least before the 1997–98 Asian financial crisis. With the admission of the transitional economies of Southeast Asia to the fold, the organization is now made up of the older and more developed economies of Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand (ASEAN-Six) and the younger and less developed economies of Cambodia, Lao PDR, Myanmar, and Vietnam (CLMV). Their admission has further exacerbated the significant differences in economic development and degrees of readiness for trade liberalization within the grouping. To allow more time for these new members to be ready for AFTA, they have been given different deadlines and timetables for the implementation of their AFTA commitments. 2.1. ASEAN-Six With few exceptions, the 2002 accelerated deadline for reducing tariffs to a maximum of 5 per cent for the ASEAN-Six countries was met. It was earlier 07 Roadmap2AEC Ch 7 7/9/05, 3:43 PM 128 Role of AFTA in an ASEAN Economic Community 129 agreed that 2002 was the target year for the final implementation of the ASEAN-Six countries’ tariff reduction commitment to between 0 and 5 per cent. Interestingly, by 1 January 2002 only the following tariff lines, as listed in their respective Inclusion List (IL), did not have their duties reduced to 0–5 per cent: 16 items (0.25 per cent) of Brunei’s 2002 IL; 66 items (0.92 per cent) of Indonesia’s 2002 IL; 922 items (9.2 per cent) of Malaysia’s 2002 IL; 199 items (3.57 per cent) of...