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ASEAN Free Trade Area and Economic Development


ASEAN Free Trade Agreement (AFTA) opened new opportunities for Eats Asian countries to stabilize their economies and improve the financial performance of the region. ASEAN is a major player in geo-economics in Southeast Asia. It has a history of its own. Since 1967 its leaders have enjoyed a high comfort level as they continue to cooperate for a shared intraregional agenda. ASEAN has evolved into a regional economic forum only recently in the 1980s, beginning with the Bali Summit in 1976. In recent years, economic cooperation among its member states has received priority and intra-ASEAN trade has recorded an upturn. Adoption of an agenda for an ASEAN free trade area within ten years, beginning on January 1, 1993, is an important step.

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A common effective preferential tariff (CEPT) scheme makes the AFTA agenda operational. To this end, a twofold program involving the fast track and the normal track, each track with its two subtracts, has been adopted. On the fast track, tariffs at 20 percent are the borderline: tariffs on products above the 20 percent limit will be reduced to between 0 and 5 per cent in ten years and those on products below the limit will be so reduced within seven years. In the normal track, tariffs above 20 per cent will be reduced again in two stages; first, to 20 per cent in five to eight years by January 1, 2001, and then, further, to between 0 and 5 per cent in the next seven years by January 1, 2008 (Acosta, 1998).

The CEPT scheme covers all manufactured products inclusive of processed agricultural products, and the list of products published by the ASEAN Secretariat in November 1993 covered about 41,000 tariff lines, approximately 88 per cent of the total tariff lines of ASEAN. It is stated that about 36,000 tariff lines, about 87 per cent of the above list, will have 5 per cent or less tariff in ten years, five years sooner than the 15-year target. For ASEAN, the sovereign member-states have much earlier proclaimed that their regional compact is in conformity with global order as embodied in the United Nations Charter. The regionalism of any form must be matched into globalizing (Athukorala & Menon 1997). For AFTA, with its agenda for intra-ASEAN trade liberalization, three specific issues remain to be addressed.

AFTA prospers economic development of the region because it is operational and its effective functioning addresses the set of problems common to any form of economic regionalization, such as rules of origin, standardization of tradables, and dispute mediation (Acosta, 1998). Given the goodwill and mutual understanding among the participating sovereign member states, each one of these problems will have a mutually acceptable solution. True, it has been overemphasized that AFTA is not modeled on the EU. A supranational common economic policy regime alone can provide long-term support to a free trade regime.

If each ASEAN member-state is too anxious to exercise its unlimited sovereign authority to formulate its own individual economic policies, then the foundation of an intraregional economic regime will collapse. Second, ASEAN membership to non-member sovereign nation-states in Southeast Asia must remain open. Belonging an economy to a specific geographic region is a necessary condition. Of course, there will be a set of well-defined terms for membership, and a member-state belonging to a region, able and willing to satisfy those conditions, should be welcome to join ASEAN (Ariff, 1993). The principle of inclusion, not exclusion, should be the governing principle. Vietnam’s becoming a member of ASEAN, as of July 28, 1995, will remain a benchmark in this regard. Next, Laos, Cambodia, and Myanmar are expected to be candidates for ASEAN membership. It is expected that there will be occasions to revisit the question for other non-member regional economies in the near future (Baldwin, 1997).

AFTA does maintain an intraregional economic structure by agreements among member governments with its headquarters in Singapore. The prospectus of economic data at the present time based on the rates of growth of real GDP, savings/GDP, and investment/GDP ratios, however, point to the call for a progressive widening of the market system in the Asia Pacific region (Baldwin, 1997). Two sets of factors brought APEC to its present status. One was the pull factor and another a push factor. First, the pull factor – the fast industrialization and the relatively high growth rates of real GDPs of most of these economies present them as an attractive, profitable market. The pull factors of Asia’s new capitalism are rooted in the profitability of these economies and have been responsible for competitive attention for both trade and investment flows.

The world’s savings-surplus richer economies in Asia, North America, Europe, and Oceana are engaged in robust competition for their respective shares of the Asian market. Asia’s capitalism has successfully experimented with a new paradigm of industrialization. Successful as it is, it has been the result of a process of adaptation of innovations, as existed elsewhere. Importation of alien technology and know-how became the key. To pay for these imports, foreign exchanges were to be earned by exporting finished products (Bowles & MacLean 1996). The inflow of foreign capital was serviced and then paid off as has been the illustrious case of Taiwan, and also of South Korea. The same model of operation has been noted in other Asian NIEs – Singapore and Hong Kong. The parallel mode of operation is progressively in evidence in most Southeast Asian economies, notably in Malaysia, Thailand, and Indonesia. Recently, China and India have made significant strides (Case, 2002).

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One notes that increasingly in the Asian economies – ASEAN, China, India, and South Asia – much more reliance has been placed on Direct Foreign Investment (DFI) which helped their sharing of risks, as they planned for accelerated economic development by way of industrialization à la importation of technology from abroad. Repatriation of profits, at least a reasonable part thereof, to the home stockholders of foreign investors became possible through an emphasis on export earnings (Hirst & Thompson 1996). Indeed, the DFI brought with it not only technology and management but also access to the world market. Thus, the term export-led growth continues to prevail in the literature.

The process involving the import of capital goods to be paid for by the export of products is truly a paradigm of import-export-led growth, an open economic policy of industrialization by way of internationalization (Case, 2002). Their exports could not have been sold in the world market if the products they manufactured with the help of imported technology failed to be competitive both in terms of unit-cost/price and its quality parameters. The process of adaptive innovation paradigm began by their skillful adaptation of the imported technology to their respective indigenous economic structures, given its comparative advantage which rested, at least, to begin with, more on relative cheap labor and low wage cost per unit of output. A key element in the success of the adaptive innovation paradigm in Asian economies has been the availability not only of cheap labor but also of cheap, skilled, engineering labor (Hirst & Thompson 1996).

The successful Asian economies rejected the much-criticized “turn-key” model and adapted the imported technology to their comparative advantage to become cost and quality competitive, and thus gain access to the world market and capture an increasing share of it. The process was more than a simple act of copying (Khor, 2001). The new paradigm worked only when the necessary macroeconomic core brought into operation coordinated monetary-fiscal policies. The one area of Asia in which Japan and the EU have been involved actively within the same forums is Southeast Asia (Menon, 1998). It is noteworthy that the EU per se has retained an independent identity in this region for some time, particularly through its dialogue with ASEAN, which began as foreign-minister level meetings in 1978 and which has come to embrace both economic and political issues of mutual concern. Similarly, Japan began its own arrangements with ASEAN at the end of the 1970s, and the institutionalization of the Post-Ministerial Conference (PMC) in 1978 added ‘gravitas’ to the processes sustaining ASEAN’s external relations (Case, 2002).

Of particular importance to Japan-EU relations, and as a result of further cooperation within a rapidly changing external environment, has been the development of the ASEAN Regional Forum (ARF) in the 1990s. Based upon a suggestion by Japanese Foreign Minister Nakayama (at the Kuala Lumpur PMC), the ARF was formed in 1993 in order to increase regional political dialogue. Japanese officials seized upon this forum as one in which new approaches to security could be raised without arousing regional concerns about renewed militarism. The other major area of resistance identifiable in the production structure has its roots in the domestic arena. As we have seen, AFTA’s economic, political and ideological strength abroad ultimately rests upon the foundations laid at home during the post-war period. Should these crumble, then it is more than likely that any thoughts of AFTA’s hegemony in East Asia and elsewhere will quickly fail. While it is true to say that society does not appear to have produced the sort of social resistance witnessed in the US during the Vietnam era, there is evidence of significant change that is either producing resistance already or appears likely to in the future in the absence of further change (Case, 2002).

In AFTA, industrialization and economic development have been paid for by trade. Partners in trade look for developing a vehicle toward sustaining the mutual economic gains and thus offer to cooperate on liberalization of trade barriers, tariffs, and non-tariffs, harmonization of customs laws, standardization of tradables – goods as well as services, liberalization, and facilitation of investment flows to support and enhance the economic potentials of the economies in trading partnership, mediation of trade disputes, and cooperation on intraregional human resource development by optimal management of health-care delivery, education and training, and environmental resources (Case, 2002). They also begin to appreciate that intra-regional coordination of monetary fiscal policies alone can help control inflation and adventurous public programs by heavy borrowing in a partner country, and thus effectively optimize economic gains of micro actors – households and business – in all member-economics (Menon, 1998).

AFTA member economies uniformly adopted the open economic policy, encouraging the free flow of trade and investment. The rest of the world convincingly noted that there never was an attempt to form a “fortress” in Southeast Asia. The rules of a free enterprise market economy, in general, became the norm (Stubbs, 2000). The private corporate sectors in member countries responded to the market initiative with vigor. In addition to mutual security, the intraregional economic cooperation presented a framework of a widened market for profit maximization for microeconomic actors in each member-economy (Menon, 1998). ASEAN member-governments facilitated the process and effectively reinforced the process of economic regionalization. Each member country independently managed its monetary fiscal policy to that end, albeit with varying degrees of success (Acosta, 1998).

The sovereign participating member-states of AFTA fully and straightforwardly recognized that a supranational organizational structure was in order, they resolved to act in this regard. No member-state was concerned about compromising its sovereign authority, nor was there any idle debate. Critiques, however, continue to argue that the debate should be allowed to remain open. For changes in consumer prices percent per annum, Singapore excels in its record; Malaysia and Thailand have done as well as South Korea and Taiwan, the newly industrialized economies. For the same period, Indonesia follows closely (Stubbs, 2000). The Philippines has yet to stabilize its consumer prices, and the transitional economy of Vietnam appears to have been able to come to grips with its high rate of inflation. They also have experienced a course of structural changes in their respective economies. The agriculture-based traditional economies of Indonesia, Malaysia, and Thailand have moved to industrialization with the necessary support of the service sectors. On the other hand, Singapore, given its initial conditions limiting the role of agriculture, has transformed its economy to a base of strong industry and service sectors, the latter dominating. Singapore shifted from services to industry, and then to services. Indeed, the ASEAN-4 is ready to provide a viable economic base to support and sustain economic regionalization in Southeast Asia (Case, 2002).

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The process of industrialization of AFTA economies and its consequent deepening are in place, especially in Indonesia, Malaysia, and Thailand, and less perceptibly in the Philippines; albeit its manufacturing output/GDP share compares with that of Indonesia. Foreseeably, in the near future, the export-led economic growth regimes of these four ASEAN economies are expected to present a different and more dynamic trade profile (Case, 2002). The structure of Singapore’s economy is noted for the dominance of its service sector, and Singapore is the one ASEAN member currently engaged in much intraregional investment.

Product standardization is a typical issue. In any international regime – global, regional, subregional – a given product in free trade must be properly standardized. No supranational bureaucratic regimentation can be expected to do the job. It will put a brake on the free competitive market, limiting innovation and product differentiation and progressive product-quality enhancement. Indeed, the competitive market forces will work with their full force to do the job as they do in every domestic market. The market will triumphantly force the exit of substandard products. In each national market for necessary consumer concern for health/safety, products are certified/approved for marketing by nationally accepted institutions (Case, 2002; Acosta, 1998). Each member-state must accept the product certification by institutions so approved of in each of the other member-states. Thus, the issue is one of standardization of a list of institutions authorized to approve product standards in each member-state, not one of product standardization by an intraregional authority, so appointed. Indeed, the EU has adopted this mode of operation. The issue, however, does not appear to have been a point of debate on the AFTA agenda (Bowles & MacLean 1996).

Similarly, trade dispute mediation and intra- ASEAN institutions can be helpful. The APEC Bogor Declaration in 1994 proposes a mediation provision while the WTO Charter provides for a more formal international judicial review. The core issue is a mutual commitment for member-states, each a sovereign nation-state, to voluntarily deny themselves the right to initiate unilateral measures to correct a trade dispute (Baldwin, 1997). Even attempts at resolution of trade disputes will challenge the foundation of the ASEAN intraregional cooperation. The resolution of all trade disputes should be multilateralized. Free trade in final products, and then in services, in an intraregional economic compact, must resolve to face the crucial issues of intraregional free flow of factors of production, both human and non-human. Free flow of nonhuman inputs involving physical capital embodying technology comes with the free flow of investments, especially with free flows of direct investments (Bowles & MacLean 1996).

Firstly, the liberalization of financial structure has been both a cause and a consequence of changes taking place in other areas of ASIAN society. The deeply rooted nature of these changes points to the fact that a return to the tight financial controls of the past will not be possible at any time in the near future. Addressing the economic and social problems unleashed by the efforts of the hegemonic class to repair the fractures in the existing historic bloc will therefore require new tools and the forging of new bargains. These efforts are themselves likely to create new sites of resistance as yet unforeseen. At one level these opportunities and dangers and other forms of investment entering the region. At another level, they relate to AFTA’s efforts at setting its financial house in order and, presumably, the subsequent reinvigoration and renewal of its credentials as an economic powerhouse upon which the Asian Way may safely be built. Given the abysmal record on financial reform thus far, the prospects do not look good. At the regional level, AFTA prospects for shifting the balance of power within the knowledge structure appear much brighter. The geographic distances are much shorter and the lines of communication correspondingly stronger (Acosta, 1998).


In sum, AFTA has promoted the economic development of the region and created new opportunities for FDI and multinational corporations to enter the region. The processes of social, economic, and political change are having often unintended knock-on effects throughout East Asia and beyond. Without a doubt, these will in turn elicit reaction at all levels and in all areas of human activity within, across, and beyond ASEAN borders. Since social and economic tension presents opportunities for political action and reaction highlights just a few of the areas – in production and finance– in which reaction and resistance are most likely to appear if they have not appeared already. Charting the development and significance of resistance and reaction in these and other areas is a task best considered elsewhere and at a later date. Starting with the production structure, it will come as little surprise given the number and depth of the economic linkages between Europe and East Asia that there exist a number of objections or sites of resistance to these linkages. The legacy of war and colonial dominance is obviously key in this regard, as is the environmental damage wreaked to a greater or lesser extent upon various countries in the region by multinational firms and/or the activities of firms with links to ASEAN and AFTA.


Acosta, L. 1998, The Impact of ASEAN Free Trade Area (AFTA) on Selected Agricultural Products in ASEAN Countries, Frankfurt: Peter Lang.

Ariff, M. 1993, AFTA: An Outward-Looking Free Trade Agreement, Private Investment, and Trade Opportunities (PITO) Economic Brief No. 14, Honolulu: East-West Centre.

Athukorala, P. and Menon, J. 1997, ‘AFTA and the Investment-Trade Nexus’, World Economy, 20(2):159-74.

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Baldwin, P. 1997, Planning for ASEAN: How to Take Advantage of Southeast Asia’s Free Trade Area, London: The Economist Intelligence Unit.

Bowles, P. and MacLean, B. 1996, ‘Understanding Trade Bloc Formation: The Case of the ASEAN Free Trade Area’, Review of International Political Economy, 3(2):319-48.

Case, W. F. 2002, Politics in Southeast Asia: Democracy or Less, Surrey, UK: Cuyrzon.

Hirst, P. and Thompson, G. 1996, Globalisation in Question, Cambridge: Polity Press.

Khor, M. 2001, Rethinking Globalisation, London and New York: Zed Books.

Menon, J. 1998, ‘The Expansion of AFTA: Widening and Deepening?’, Asia-Pacific Economic Literature, 12(2): 10-22.

Stubbs, R. 2000, ‘Signing on to Liberalisation: AFTA and the Politics of Regional Economic Cooperation’ , The Pacific Review, 13(2): 297-318.

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