Policy Issues and the Formation of the ASEAN Free Trade Area

Summary

Introduction

In January 1992, at the Fourth ASEAN Summit in Singapore, a framework agreement for the formation of an ASEAN Free Trade Area was signed. This called for the ASEAN countries to reduce tariffs on all manufactured items over a 15-year period. In order to have accelerated tariff reductions, items were to be brought onto a Common Effective Preferential Tariff (CEPT) scheme and enjoy significant margins of preference over five to eight years. Fifteen product groups were identified for accelerated reductions in the CEPT Scheme. The scheme excludes agricultural products and services. Agriculture is expected to continue on the existing Preferential Trading Arrangements (PTA) scheme.

The agreement to create AFTA must be seen as one of considerable political will in the wake of less successful ASEAN economic ventures in the past. The initial euphoria over the agreement, however, has become less so in the months following as industries in Thailand and, more recently, in Malaysia have called for greater protection at least in the short term. This has brought into sharp relief the question whether AFTA will actually take shape in the years to come or whether it will falter as the other ASEAN economic efforts have in the past.

The recent initial agreement to create a North American Free Trade Area (NAFTA) has been a cause for concern in ASEAN. The possibility of trade diversion resulting from closure of the North American market has made ASEAN more cognizant of the need for a ballast to overcome the loss of some of the trade with North America. Similarly, growing fears about the creation of a European Economic Area (EEA) have been voiced within ASEAN. These developments in ASEAN's traditional markets must now be analysed and understood. More importantly, ASEAN has to seek alternative markets for many of its products. Market diversification has to take place in the short term to prevent significant revenue losses as the EEA and NAFTA roll out.