Distinguished Participants to the PROCURECON Asia 2003
Ladies and Gentlemen,
It gives me great honour to be invited to this significant event and to address its distinguished participants on the ASEAN Free Trade Area – its objectives, the progress it has made so far, the challenges and what else needs to be done.
More than ten years ago, in January 1992 to be exact, in this very same city-state of Singapore, the ASEAN Heads of Government made a bold decision on ASEAN economic integration. The ASEAN Leaders agreed to establish the ASEAN Free Trade Area (AFTA) within 15 years. Back then, ASEAN, with the dynamism of its Member Countries, was already regarded as a model for regional economic cooperation among developing countries. Yet, it was still imperative for the ASEAN Member Countries to explore and move towards a higher plane of economic integration.
Several factors led to the decision to create the AFTA. First was the emergence of new competitors for foreign direct investments (FDIs), particularly China, India and Viet Nam. Then the Uruguay Round of Multilateral Trade Negotiations, which after six years of intense negotiations, seemed to be on the verge of collapsing at that time. And finally, there were the sweeping forces of globalization and the rising trend towards regionalization which threatened to fragment the global economy. For ASEAN, only a higher level of economic integration could cushion the region against these challenges and safeguard the interest of its members in the international fora. Back then, ASEAN was prepared to take on the challenges and take the leap towards an FTA, gradual though it may be, for the dynamism achieved by individual ASEAN members through unilateral trade liberalization has given them a certain level of economic maturity which geared them up for regional trade liberalization.
Ladies and Gentlemen,
AFTA’s primary objective was “to increase ASEAN’s competitive edge as a production base geared for the world market.” In simple terms, AFTA was meant to be the vehicle to further enhance the competitiveness of ASEAN Member Countries and facilitate their integration into the global market for trade and investment. The Common Effective Preferential Tariff Scheme, or commonly known as the CEPT Scheme, became the main mechanism to move ASEAN towards the direction of the AFTA. And under this Scheme, Member Countries are committed to bring down intra-regional tariffs to within the 0-5 percent tariff band within a specified period of time.
The AFTA timelines have become dynamic, their acceleration always being ASEAN’s response to emerging challenges. The first one came in 1995, when the ASEAN Leaders adopted the Agenda for Greater Economic Integration and accelerated the deadline for realizing AFTA from 2008 to 2003. Along with this came the Economic Ministers’ decision to gradually phase-out the Temporary Exclusion Lists and include in the tariff liberalization unprocessed agricultural products. What was the global situation that time? Countries continued to be infatuated in regional trading arrangements despite the conclusion of the Uruguay Round and the formation of the World Trade Organization (WTO); globalization also continued to sweep across continents; NAFTA and EU agreed to forge a New Trans-Atlantic Agenda; and China intensified its efforts to accede to the WTO and be a part of the multilateral trading system. Again, these challenges propelled ASEAN to move faster lest it be left out in the global competition.
The second wave of acceleration came at the height of the Asian financial crisis in 1997. Instead of backtracking from their CEPT-AFTA commitments, the ASEAN Leaders felt that the only way to cushion the impact of the crisis and speed up the region’s recovery is to reduce reliance on global demand and increase intra-regional trade. Thus, the end-date for the actualization of the AFTA was further accelerated from 2003 to 2002. Subsequently, in another bold move, the Leaders agreed to completely eliminate tariffs for products covered by the CEPT Scheme by 2010 for ASEAN 6 and 2015, with flexibility for ASEAN’s new members.
The implementation of the CEPT Scheme was a challenge in itself as the original ASEAN members differed in their levels of economic development. Also intra-ASEAN trade is relatively low as Member Countries produce similar products and compete for the same markets. There were also quite a number of industries in Member Countries, industries which have been so used to tariff protection, which pressure governments to relax their commitments to free trade.
Then there was the institutional challenge of ASEAN’s expansion. Mid-way through the implementation of the AFTA, Viet Nam, Lao PDR and Myanmar, and Cambodia were admitted into ASEAN. These countries have different political and economic systems. They are economies in transition and their levels of development are significantly lower than that of the original members. Therefore, while the original six were integrating their economies, they also have to adjust to the membership of Cambodia, Laos, Myanmar and Vietnam (CLMV).
There were quite a number of skeptics who thought that, by engaging the lesser-developed economies in the region’s integration progress, the more developed members not only risk the group’s cohesion but also take to task the development of these four countries and their subsequent integration into the multilateral trading system. For these skeptics, failure to gain substantial progress in developing the economies of these four countries would most likely undermine the whole AFTA process.
Ladies and Gentlemen,
The vast opportunities offered by greater economic integration, not only for industries located in the region but also for investors and consumers as well, have propelled ASEAN Member Countries – old and new members alike – to go for the AFTA. Freer trade eases the burden of procuring raw materials and intermediate goods elsewhere and this, for one, would drive manufacturing companies in ASEAN to be more cost competitive and likewise enjoy economies of scale. There is no denying that as a competitive manufacturing sector attracts foreign direct investment, the growth of supporting industries in the region would be stimulated as well. But this does not mean that we are in any way inward looking. We believe in open regionalism.
AFTA is also for the consumers. Under a free trade environment, consumers are offered more choices; broader range of better quality products are made available in the market; purchasing power increases; and eventually, the cost of living is substantially reduced.
AFTA spurs economic growth by increasing trade, creating jobs and increasing income. But of course, these gains would not be possible without the pain – the pain of liberalizing tariffs and opening-up markets.
Liberalization is surely not for inefficient industries. For ASEAN Member Countries, however, no industry in the region was regarded as inefficient; there were only those which were not ready for competition. It was in recognition of this un-preparedness that these industries were given more time to undertake competitiveness-enhancing measures and gear up for regional competition; their inclusion into the CEPT Scheme was made only at the later stages of the Scheme’s implementation. Certain safety nets, like the safeguards provision in the CEPT Agreement, have also been made available to them.
Ladies and Gentlemen,
I have just given you a peek at ASEAN’s economic integration and how the Member Countries regard AFTA as a means to enhance the region’s competitiveness. But AFTA is not just about bringing down trade barriers, both tariff and non-tariffs; for what good would trade liberalization bring when not complemented by trade facilitation measures. ASEAN Member Countries fully recognize this and has taken steps in this direction.
In the area of customs, for example, Member Countries are now completing domestic procedures in order to implement the ASEAN Harmonized Tariff Nomenclature, or the AHTN, by January 2004. Under the AHTN, the tariff classification of say, microchips, in Singapore will be the same in Viet Nam or any other Member Country for that matter. Several measures are also taken to harmonized customs valuation and simplify customs procedures.
Trade facilitation measures are also being undertaken in the areas of standards and conformity assessment, where the main thrust of work has been on mutual recognition arrangements (MRA) and harmonization of technical regulations and product standards. Progress of work done in this area includes the completion of a number of MRAs, particularly on Electrical and Electronic Equipment, Cosmetics and telecommunication.
Harmonization of standards has also gained some significant progress as 59 standards for 20 priority products have been aligned with international standards of the ISO and the International Electro technical Commission. Work on accelerating the harmonization of another 72 standards for safety and 10 standards for electromagnetic compatibility is also underway and Member Countries hope to complete the process by 2004.
Just recently, at the 17th Meeting of the AFTA Council in Cambodia earlier this month, the Ministers endorsed a revised CEPT Rules of Origin and the revised Operational Certification Procedures for CEPT Rules of Origin in an effort to promote greater utilization of the CEPT Scheme. The 40% local content requirement has not been changed. Yet its calculation has been standardized and certain principles and guidelines have been adopted to provide more certainty in its application. Substantial transformation has also been adopted as an alternative criterion in determining origin and the Task Force on the CEPT Rules of Origin shall be working on this.
Ladies and Gentlemen,
ASEAN have proven the skeptics wrong. AFTA has now become a reality as about 98.9% of all the products traded by ASEAN 6 in the region are already in their CEPT Inclusion Lists and 99.6% of all these products have tariffs falling within the 0-5% band. About 53.3% of the products can move around the region duty free. Current average CEPT rate for these countries now stands at 2.3%, down from 12.7% in 1993. ASEAN’s new entrants are not far behind either. Although given different end-dates, depending on when they were admitted to ASEAN, the region’s new entrants now have 72.2% of all their products in the CEPT Inclusion List and 60.6% of these have 0-5% tariffs.
AFTA has also contributed in the expansion of ASEAN’s trade, both within and outside the region. Statistics show that, over the last ten years, total ASEAN trade increased by 64.3%, from US$ 429.9 billion in 1993 to US$ 706.7 billion in 2002 Intra-ASEAN trade grew even faster by 93.6%, from US$ 82.4 billion to US$ 159.5 billion, during the same period.
Nonetheless, the path leading to AFTA was not at all rosy. Some countries still have sensitivities in a number of sectors vital to them and their economic development. I wish to underscore however that these sensitive sectors are quite limited in number and covers only a small percentage of intra-regional trade. This is not to say that ASEAN countries give little importance to these issues. But rather, in the time-tested spirit of ASEAN brotherhood, other members extended their utmost support and understanding and gave them the avenue, the leeway, within which to address their difficulties.
ASEAN has gone a long way in its economic integration process but, despite the achievements, ASEAN Member Countries cannot afford to be complacent especially when economic integration is moving beyond the borders of ASEAN. Thus, ASEAN is exerting more effort to add breadth and depth to its own economic integration.
Also recently, at the meeting of the ASEAN Economic Ministers, they have approved the recommendation of the High Level Task Force (HLTF) on Economic Integration to formalize the ASEAN Economic Community (AEC) as the end-goal of ASEAN economic integration. Under an AEC, ASEAN would be a single market and production base, characterized by the free flow of goods, services, investment and skilled labour, and freer flow of capital by year 2020. This would be achieved by building on existing initiatives, strengthening them, and coming up with new initiatives to progressively enhance economic integration. Clear timelines will be provided.
Deeper integration is imperative. Regions across the globe are also integrating, opening up their markets and making available bigger markets in order to be more attractive to investors. Each of us, you especially – the prime movers of your respective companies – have a stake in this whole exercise.
Allow me conclude by saying that ASEAN, despite the diversity among its members, had withstood and continue to withstand the challenges – both global and regional – because they share one common vision and cohesively they move towards this vision. Now the challenge is on you, Ladies and Gentlemen. We need you to support this process. Opportunities abound and we need you take on these opportunities. Soon it would not just be AFTA, the ASEAN-China FTA and possible FTAs with Japan and India are all waiting on the wings. What better way of preparing your businesses to wider competition than by availing yourselves of the opportunities in AFTA. Use AFTA as your springboard to penetrate even bigger markets, that of China, Japan and India.
Once again, my sincerest gratitude for the kind invitation and let me close by wishing you all a fruitful exchange of ideas and a successful conference.