AEJ 3:517–535 (2005) DOI 10.1007/s10308-005-0030-6

ORIGIN AL PAPER

Paul Vandoren

Regional economic integration in South East Asia

Published online: 7 December 2005 © Springer-Verlag 2005

1 Executive summary

1.1 Regional economic integration in Asia ASEAN has been in existence for nearly 40 years. It expanded from five to ten members, but only after about 25 years did it take some concrete measures to move towards an integrated regional organisation. This process of integration—through the elimination of tariffs, customs cooperation, mutual recognition of standards, the liberalisation of services, the creation of an investment zone and the setting up of a regional digital framework—towards an ASEAN Economic Community is still in progress and may not reach the phase of maturity until 2020. Institutionally, ASEAN’s level of ambition remains fairly low because there is no political will to transfer, even partially, sovereignty to supranational organisations nor to take decisions other than on the basis of consensus, although it is worth noting that recently a dispute settlement mechanism similar to that of the World Trade Organisation (WTO) has been put in place. Meanwhile, ASEAN generally does not speak or negotiate with one voice. The drafting of a “Charter” for ASEAN during the next few years is an excellent opportunity for launching a wide debate on these important aspects. The work in the context of a Charter should, however, not be to

The views expressed are those of the author and cannot be attributed to the European Commission. The article is the result of research undertaken, with a fellowship from the European Commission, at the Lee Kuan Yew School of Public Policy, National University of Singapore, Singapore. P. Vandoren (*) Delegation of the European Commission to Russia, Kadashevskaya Nab. 14/1, 119017 Moscow, Russia E-mail: [email protected]

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the detriment of progress in specific areas where work towards economic integration has already started. Hence, it is questionable whether a fully integrated regional organisation and single market will ever emerge. ASEAN has currently no desire or intention to expand its ambitions beyond economic integration to pursue closer political integration. Moreover, the principle of non-interference in internal affairs remains one of the strongest founding principles of ASEAN. In addition, there appears to be a significant degree of scepticism with regard to the current implementation of the members’ commitments in several areas. It is, furthermore, difficult to exactly assess the current state of affairs. The recent developments in ASEAN cannot be dissociated from the trend towards ‘ASEAN plus 3’ or the East Asia Community, comprising important initiatives in the monetary sphere. This is expected to reach momentum at the first East Asia Summit in December 2005, in Kuala Lumpur, in which the leaders of ASEAN, China, Japan, Korea, India, Australia and New Zealand are likely to take part with a view to defining the milestones of an integrated East Asian region, including an East Asia Free Trade Area. The rise of China, the Asian financial crisis, terrorism and the tsunami can be seen as factors leading towards more cooperation among the key players in Asia not only in economic/trade/financial matters, but also in security and socio-cultural matters. Such a trend in East Asia seems a natural development because of the increasing trade flows and Foreign Direct Investment (FDI) amongst economic undertakings in this region. However, there are a number of reasons to doubt that a deep form of integration will emerge in East Asia in the foreseeable future, including, for example: – the longstanding political difficulties between Japan and China and Korea, respectively; – the prevailing sentiments of nationalism in the countries concerned; and – the competition among, as well as the sheer size and ambition of, these players. It has already been foreshadowed that the Summit will take place in the form of a “fireside chat”. The extension of cooperation on trade, energy, environment, transport and monetary matters seems to be desirable and feasible. In addition, ASEAN should seize this opportunity to move, at an accelerated pace, to a deep form of regional integration, if it wants to effectively defend the interests of its members against the other big players, such as China, India and Japan. 1.2 Assessment of free trade agreements in South East Asia Since the financial crisis in the late 1990s, ASEAN has negotiated and is negotiating ‘Framework Agreements’ with Asian partners such as China, India, Japan, Australia/New Zealand and Korea. These Framework Agreements, the contents of which remain, to a large extent, to be agreed upon in subsequent sectoral/ specific negotiations, are meant to be comprehensive in that they should not be

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limited to goods, but generally also cover services, investment and economic cooperation. The framework agreements seem to be driven primarily by political considerations and, in many cases, require additional negotiations with individual ASEAN members. They are also meant to be World Trade Organisation (WTO) compatible and, to some extent, ‘WTO plus’. For future implementation, special and differential treatment will be applied to Cambodia, Laos, Myanmar and Vietnam (CLMV), largely, in the form of extended deadlines for implementation. Given that these negotiations will extend over the next few years, it is premature to assess whether or not they will lead to trade liberalisation or rather create trade diversion. Meanwhile, they undoubtedly divert the time of trade negotiators from the Doha Development Agenda (DDA) negotiations in the context of the WTO. It would be useful for ASEAN to adopt a Common Framework Agreement, which could be the basis for negotiations of these framework agreements with its trading partners and which would contribute to a higher degree of consistency on content, and to a more harmonious implementation. In 1999, Singapore initiated a process of negotiations of Free Trade Agreements (FTAs) with trading partners around the world. This led other members of ASEAN, in particular Thailand and Malaysia, to follow this trend, even if they originally considered this as contrary to the integration character of ASEAN, as well as to their prevailing commitment to the multilateral negotiations, as shown during the Uruguay Round negotiations. By the middle of 2005, Singapore had become the frontrunner in the negotiation of FTAs (nine concluded and 11 under negotiation). Although Singapore’s Free Trade Agreements are generally considered to be ‘WTO consistent’ and ‘WTO plus’, they are seen by most, if not all, academics to set a regrettable trend by undermining regional and multilateral trade liberalisation. They are likely to lead to a patchwork of agreements lacking the transparency and legal security the business community needs, for instance because of different Rules of Origin (ROO) in each FTA. The negotiators consider this multi-track approach as the way forward towards further trade liberalisation in light of the slow progress of the DDA negotiations. The Singapore–USA FTA is currently being used by the USA as the basis for its negotiations with other ASEAN members. Statistics have shown that the implementation of this bilateral agreement has probably led to a significant increase in the bilateral trade between the two partners and, almost by definition, has worked to the detriment of trade between Singapore and other trading partners. However, because of the high level of ambition reflected in the substantive provisions of this bilateral agreement, it is likely to lead to difficulties for other ASEAN members, whose national interests differ from those of Singapore. Thailand and Malaysia are now following this trend and Indonesia is expected to start the process soon. 1.3 European interests in South East Asia The share of European FDI in and trade with ASEAN has been substantial in the region for many years, mainly in the industrial goods sector and lately, in the first place, to Singapore. However, this trend has recently developed to the benefit of

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other trading partners of ASEAN. Hence, the call of the European industry in favour of the EU negotiating an FTA, at least with various ASEAN countries, notably Thailand, Malaysia, the Philippines and Singapore. In 2003, the EU decided to maintain its top priority in international trade negotiations: the successful completion of the DDA as soon as possible, with no major new initiatives at bilateral/bi-regional level. However, an action plan, called the Trans-Regional EU–ASEAN Trade Initiative (TREATI), was set up with the aim at expanding trade and investment flows and of establishing a framework for dialogue and regulatory co-operation. The implementation of TREATI started during 2004. Furthermore, negotiations for a partnership and co-operation agreement have started with Thailand and Singapore and similar negotiations are expected to be initiated with Indonesia in the very near future. Vietnam, Cambodia and Laos already have such agreements. The negotiation of FTAs has become the top trade priority in the region (in all, approximately 40 FTAs concluded or under negotiation). This is a reality, whether one likes it or not. Although it may be premature to definitively demonstrate that these negotiations and agreements work against regional and multilateral trade liberalisation, it is clear that they distract the attention and availability of a significant part of the human resources available for trade negotiations in the region. Ideally, a moratorium should be introduced, but this is unlikely to happen. Many negotiations will continue and others will start and last for a considerable period of time. 1.4 The way forward What should the EU do? Should it change its current policy vis-à-vis ASEAN? If so, in what way? This author has reached the following preliminary conclusions and recommendations: 1. the continuation of the DDA should not stand in the way of the strengthening the EU’s ties with ASEAN and the East Asia Community in the near future; 2. because of the inherent preference of the EU for region-to-region co-operation and as an encouragement to ASEAN towards further regional integration, an FTA or Framework Agreement between the EU and ASEAN should be considered, provided that: – the ASEAN side commits itself to making available adequate negotiating capacity, which currently is overstretched because of already on-going negotiations, and – ASEAN commits itself to be in a position to effectively implement, upon its conclusion, a comprehensive FTA within a set timeframe. The EU would need to examine which minimum conditions need to be fulfilled by ASEAN in order to make a bi-regional FTA with a minimum degree of reciprocity possible, in light of the integrated character of the EU (single market, common commercial policy, etc). The negotiation and implementation of such a bi-regional agreement is likely to be time consuming and should be seen in light of ASEAN’s internal work towards a community by 2020.

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3. In order to safeguard the immediate interests of the EU industry on the ASEAN market in the meantime, the EU should consider negotiating bilateral FTAs with those individual ASEAN members interested in such negotiations. Singapore, Thailand and Malaysia appear to be the obvious candidates. In order to ensure consistency, such bilateral negotiations could be part of an overall EU-ASEAN FTA. Irrespective of the preparation of any negotiations, the European Commission will, when appropriate, tackle specific problems calling for an urgent solution. 4. The recently reached agreement between EU and ASEAN in the context of the Vision Group to undertake joint studies is the right way forward. When these studies are concluded by the Spring 2006 and depending on their contents, additional work may be required on both sides, unilaterally or on a bi-regional basis. Too many negotiations have been started on FTAs in the region without prior adequate collection of the relevant facts and information. 5. The governments of the ASEAN members should be advised to opt for unilateral trade liberalisation and domestic regulatory reform, given that multilateral and regional liberalisation is slow. Bilateral negotiations often put governments in a vulnerable position. On the other hand, unilateral policy changes may be difficult to sell to a domestic constituency. 6. The trade negotiations between the EU and ASEAN need to be complemented with co-operation on other matters in order to strengthen the presence of the EU in the region. In such a framework, both partners could agree to do more together in order to enable ASEAN to learn more from the European process towards regional integration. In addition to this institutional cooperation, more people to people exchanges and academic cooperation on regional integration need to be set up. 2 Where does regional economic integration in South East Asia stand? 2.1 State of play in ASEAN ASEAN (Association of South East Asian Nations), a regional intergovernmental organization with Indonesia, Malaysia, the Philippines, Singapore and Thailand, as original members) was set up nearly 40 years ago, more precisely in 1967. The initial objective was to foster regional stability and to promote political and economic cooperation. ASEAN has undergone a gradual enlargement: Brunei Darussalam joined in 1984, and, subsequently, Vietnam became member in 1995, Laos and Myanmar in 1997 and, ultimately, Cambodia in 1999. The accession of the new members was the result of fundamental changes inherent to each individual member. Even today, the political and economic situation differs significantly from country to country with a marked difference in the level of development between the CLMV members (Cambodia, Laos, Myanmar and Vietnam) and the other six members. National priorities also continue to differ significantly from member to member. The association was set up with no transfer of sovereignty from the members to a supranational body, with no decision-making process enabling decisions to

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be reached other than by consensus, and with no proper institutions to administer it being established. A Secretariat in the real meaning of the word was set up with extremely limited resources under the responsibility of a Secretary-General, in Jakarta, in 1976. Ministers meet fairly regularly in different formats. In addition, committees, sub-committees, working groups as well as some monitoring bodies have been set up. After 25 years or more, ASEAN took, in the 1990s, the following major concrete steps towards economic integration: a) as far as agricultural and manufactured goods are concerned, the members decided in 1992 to establish, over a rather long period of time, AFTA (the ASEAN Free Trade Agreement) in particular through signing and, subsequently, implementing a Common Effective Preferential Tariff (CEPT) Scheme. However, as a result of the financial crisis in the second half of the 1990’s, it was decided that the time had come for an acceleration of the AFTA, which entered in force on 1 January 2002, amongst the five original members and Brunei. By 2003, 96% of tariffs had been reduced to a level between zero and 5%, the objective being to eliminate tariffs completely amongst these countries by the end of 2010. As far as the CLMV members are concerned, the original target dates for the elimination of tariffs were also brought forward with the view to achieving a tariff free regional zone amongst the ten members by 2015. It is to be noted that there appears to be some delay in respecting these commitments. Policywise, it is important to note that the objective of ASEAN in this area is to create a “production zone attractive to domestic and foreign investors”. With regard to customs cooperation, the AAC (ASEAN Agreement on Customs) was agreed upon in 1997, as one of a number of trade facilitation measures aimed at enhancing customs cooperation and harmonisation of procedures, as well as ensuring efficient administration and clearance of goods in the region. Of importance is also the Framework Agreement on Mutual Recognition Agreements (MRAs) of 1998, which has led to negotiations in several sectors. b) In the area of services, the AFAS (ASEAN Framework Agreement on Services) was launched in 1995 with the aim of eliminating trade restrictions within the region and expanding the scope of liberalization in a GATS plus manner. Several rounds of negotiations covering a wide variety of sectors have taken place, but there are doubts as to the effective implementation of commitments. If such were case, that would be regrettable as several ASEAN members have the ambition of playing a significant role in this sector. However, there are indications that a new possible target date for realizing free trade of services in ASEAN is 2015. Sor far, the scope of AFAS is fairly limited. c) As far as investments are concerned, the Framework Agreement on AIA (Asian Investment Area) was signed in 1998. This initiative was taken in light of the declining trend in FDI from outside as well as within the region. Several programmes have been set up with a view to establishing an efficient and lowtransaction cost investment environment, providing a single investment destination in the region and eliminating investment barriers. Within ASEAN, it is planned to open up all sectors for ASEAN investors with the exception of an inclusion list for the ASEAN 6 by 2010, and by 2015 for the CLMV countries.

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d) In the digital information and communication environment, the e-ASEAN Framework Agreement, signed in 2000, targets the promotion of economic cooperation for developing, strengthening and enhancing the competitiveness of the Information, Communication and Technology sector in ASEAN, as well as the liberalization of trade in ICT products, services and investment. These facts demonstrate that ASEAN, for a long period of time, has been a regional organisation with a relatively low level of ambition. This situation has changed somewhat since the early 1990s. However, many of the initiatives taken since then are still in the implementation phase. These initiatives constitute progressive and complementary decisions aiming at enhancing the development towards further economic integration. However, their effective implementation and their effects on the market deserve a more detailed analysis going beyond the scope of this research paper. However, apparently as an indirect result of a McKinsey study on the competitiveness of ASEAN, it was decided in 2003 to transform ASEAN into a more robust AEC (ASEAN Economic Community) by 2020, enabling the region to move towards the end-goal of achieving a single market. This ambitious goal was described as ‘a stable, prosperous and highly competitive ASEAN Economic Region in which there is a free flow of goods, services and investments and a freer flow of capital, equitable economic development and reduced poverty and socioeconomic disparities’. This goal remains significantly below the goal of the economic integration in the EU. Subsequently, the following important initiatives, to be completed within specific timeframes, were taken: – the acceleration of the following 11 priority sectors for integration: wood-based products, rubber-based products, agri-based products, fisheries, automotives, textiles and apparel, electronics, e-ASEAN, healthcare, air travel and tourism; – full liberalization of services; – the elimination of barriers to trade; – the acceleration of the completion and implementation of MRAs in key sectors, such as electrical and electronic equipment, cosmetics, pharmaceuticals, telecommunications equipment and processed foodstuffs; – the harmonisation of standards and technical regulations; – faster customs clearance and simplified customs procedures. In addition, in the CEPT Scheme, ROO have been implemented since 1993 and are currently subject to further improvement. A very important decision related to the setting up of a Dispute Settlement Mechanism (DSM) enabling the adoption of legally binding decisions in trade disputes amongst ASEAN members. A further significant development took place in 2004 in this respect, when agreement was reached on a Protocol on Enhanced Dispute Settlement with detailed rules and procedures, modelled after the WTO Dispute Settlement Understanding, governing possible disputes amongst ASEAN members. This constitutes a significant change from a consensus-based approach to a ‘rules-based’ system. Currently, there is no reporting available on cases brought under this DSM.

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With regard to the 11 priority sectors, which ‘were selected on the basis of comparative advantage in natural resource endowments, labour skills and cost competitiveness, and value added contribution to ASEAN’s economy’, it was decided in 2004 to accelerate integration. To this end, an action plan with roadmaps was adopted. Despite the adoption of an ASEAN Framework Agreement for the Integration of Priority Sectors, little progress appears to have been made. New commitments were undertaken to eliminate the tariffs on the products under these priorities by 2007 for ASEAN’s original six members and by 2012 by the CLMV countries. Another important decision was taken by the ASEAN members on 26 July 2005, when the Agreement on the establishment of the ASEAN Development Fund was signed. Only an examination and assessment of the state of the effective implementation and enforcement of these decisions will make it possible to answer the question whether ASEAN has meanwhile effectively moved towards ‘a single market and production base’ or ‘a fully integrated economic community’, going beyond a free trade zone. Intra-regional trade among ASEAN members reached for a considerable period of time only a fairly modest part (approximately one third) of the total trade in ASEAN, which is significantly lower than intra-regional trade in the European Union (approximately 60%). It is striking, though, that institution building appears to be alien to the ASEAN decision-makers, who favour a more pragmatic and consensus based decision-making process. The question is whether this approach is tenable on a long-term basis. Is deep integration possible without some transfer of sovereignty to a supranational level? Many scholars who have studied the developments in ASEAN are of the view that it is not. This author shares that view. However, there is a widespread perception in the ASEAN region that, in the present circumstances, the political leaders of the ASEAN members do not have the necessary will to change this approach. Perhaps that the “Asean” way will lead to unexpected surprises. The work which will be undertaken during the next few years on the drafting of a “Charter” in ASEAN constitutes an excellent opportunity for dealing with those important matters. It is to be hoped that civil society in ASEAN will be given the opportunity to contribute to this debate. However, even if a consensus emerges on the contents of a Charter, further progress on the work already started remains indispensable. 2.2 Developments towards an East Asia community The trend towards regional economic integration in Asia makes it indispensable to look beyond ASEAN. Indeed, since 1997, the ‘ASEAN plus 3’ (ASEAN, China, Japan and Korea) has evolved from a newly born concept to a formula for cooperation in various areas, including on economic, trade and financial matters. In this context, the following major initiatives need to be mentioned: – the ‘Chiang Mai Initiative’ (CMI), a regional financing agreement consisting of an expanded ASEAN Swap Agreement (ASA) and a network of bilateral swap arrangements among ASEAN members, China, Japan and Korea; and

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– the launching of the Asian Bond Market Initiative (ABMI) aiming at the issuance of and investment in local currency denominated bonds. The leaders of ASEAN, China, Japan and Korea agreed, in 2004, to hold an East Asia Summit in December 2005, in Kuala Lumpur, to define the milestones of what is meant to lead to an integrated East Asian region, including an East Asia Free Trade Area (EAFTA). Meanwhile, it was decided to launch a feasibility study on the EAFTA. A number of events have brought the countries in Asia closer to each other: the rise of China, the financial crisis in the second half of the 1990s, SARS, the tsunami, terrorism, etc. The recent and significant increase of trade and FDI between ASEAN and other Asian countries is likely to lead to a form of de facto economic cooperation, which could have a significant impact on global trade in the years to come. Like the integration within ASEAN does not cover only economic/trade/financial matters, but also security and socio-cultural matters, ‘ASEAN plus 3’ is therefore also destined to deal with political and security cooperation. On the other hand, there is the continuing difficult political relationship between Japan and China and Korea, respectively. As long as there is no fundamental change in this respect, the chances for a fast moving integration within the ‘ASEAN plus 3’ look rather gloomy. In addition, it is hard to imagine that the prevailing sentiment of nationalism, the competition and the sheer size and ambitions of such big economic/commercial players—and that is what they all are—can lead to a deep form of economic integration. Not only ASEAN members, but also the other countries in the region, do not take kindly to the idea of transfer of sovereignty or the creation of institutions. However, some progress can perhaps be expected at the upcoming Summit. If ever the Summit should lead to an ambitious result, ASEAN should grasp the opportunity for significantly strengthening its cohesion, including with the setting up of a supranational institution enabling the effective defence of its interests vis-à-vis its partners. Initiatives in specific areas, such as on trade, energy, environment, transport and monetary matters do seem to be desirable and realistic. A delicate debate has recently taken place concerning the possible membership of the future East Asia Community. Should it be ‘inclusive’ or ‘exclusive’? In other words, should countries like India and Australia/New Zealand also be allowed? Apparently, this matter appears now to have been settled in favour of including these three countries. In addition, the Russian Federation, Mongolia and Pakistan also approached ASEAN for being allowed at the Summit. Apparently, the latter two do not meet the criteria for membership, while the request from the Russian Federation is under consideration. The EU has expressed an interest in an observership-status at this event. It has been foreshadowed that the Summit will take place in the form of a “fireside chat”. China seems to be keen on hosting the second Summit.

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3 Assessment of free trade agreements in South East Asia 3.1 Agreements between ASEAN and Asian countries outside ASEAN In light of the evolution of ASEAN towards an integrated region, it is appropriate to look first of all at the agreements which are being negotiated or have been concluded by ASEAN as a block with other countries in Asia. Since 1998, the following initiatives have been taken in this respect: Parties

State of Play

Contents

Target dates

ASEAN–China Comprehensive Economic Cooperation Agreement (Thailand as ASEAN negotiator)

Framework Agreement signed in November 2002; agreement on trade in Goods and Dispute Settlement Mechanism in force from January 2005.

Comprehensive: Trade in Goods (negotiations finished, except on sensitive products), Early Harvest (to be completed by end 2006), Services (to be completed by end 2005), Investment (to be completed by end 2006), Dispute Settlement, Economic Co-operation.

2010 for China and original ASEAN-6 members, and by 2015 for the newer ASEAN members, i.e. Cambodia, Laos, Myanmar and Vietnam (CLMV).

Comprehensive: Trade in Goods, Services, Investment, Facilitation and Economic Cooperation.

At most 2012 for ASEAN-6 and five more years for CLMV countries.

ASEAN–India Comprehensive Economic Cooperation Agreement (Malaysia as ASEAN negotiator)

Framework Agreement signed in October 2003. In March 2004, an ASEAN–India Trade Negotiations Committee (AI-TNC) established to negotiate the implementation of the Framework Agreement; now working on the provision of the Rules of Origin (ROO) and the Operational Certification Procedures for the ASEAN–India FTA. ASEAN–Japan Framework Agreement Comprehensive signed in October 2003; Economic Negotiations started in Partnership 2005, to be completed Agreement within 2 years. Bilateral negotiations between (Philippines as ASEAN Japan and Singapore, negotiator) Thailand, Malaysia and the Philippines have already been completed. Bilateral negotiations with Indonesia have just been launched. Such bilateral agreements should be inserted into the overall agreement, which would constitute a common platform.

Regional economic integration in South East Asia

ASEAN– Australia and New Zealand Free Trade Area (Brunei as ASEAN negotiator) ASEAN–Korea Comprehensive Cooperation Partnership (Singapore as ASEAN negotiator)

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Negotiations started in 2005, to be completed within 2 years.

Comprehensive: liberalization of trade in goods, services and investment facilitation and economic cooperation measures.

Expected to be fully in force by 2015.

Negotiations started in 2005, to be completed within 2 years.

Comprehensive: liberalization of trade in goods, services and investment facilitation and economic cooperation measures.

Aim to have at least 80% of products with zero tariffs in 2009, and with consideration for special and differential treatment and additional flexibility for new ASEAN member countries.

SOURCE: based on table in ASEAN Economic Bulletin “Reconciling Trade Policies in Southeast Asia”, Volume 22 Number 1, April 2005, p104 and amended on the basis of contacts with the ASEAN Secretariat in August 2005. This trend towards bilateral negotiations appears to have been initiated by the perception or expectation among the ASEAN members that the multilateral trade negotiations in the WTO, in the context of the DDA (Doha Development Agenda) were not going to lead to an early conclusion. With these initiatives in respect of China, India, Japan, Australia / New Zealand and Korea, it is clearly the intention of ASEAN to cover its relations with all its major trading partners in Asia. All these negotiations are meant to be comprehensive and WTO compatible. It is premature to say whether or not this will effectively be the case, as most of them are still in the process of on-going negotiations. However, these ‘Framework Agreements’ appear to go beyond the habitual contents of Free Trade Agreements. The objective generally is to cover trade in goods, services, investment, trade facilitation and economic cooperation. In this sense, these negotiations have an important ‘political’ dimension. By definition, these negotiations reduce the negotiating capacity of these trading partners for the DDA. Perhaps they can, however, constitute useful steppingstones in the context of the trend towards an East Asia Community. All negotiations started with the target of being concluded in a relatively short period of time (often within two years). However, in many cases the deadline is not met. They also are potentially ‘WTO plus’. Whether they effectively contribute to trade liberalization or lead to trade diversion will depend on the contents of the final agreements. For their implementation, they provide—to the extent that it is already known—for relatively long transition periods and for flexibility, including special and differential treatment for the newer ASEAN members. This makes sense and is in line with ASEAN’s internal approach to integration. The suggestion that it would be useful for ASEAN to adopt a Common Framework Agreement, which could be the basis for negotiation with trading partners, is a sound one, because it could contribute to a higher degree of consistency on content and more harmonious implementation.

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The following aspects deserve being noted: – With regard to ASEAN–China, it is striking that both sides rapidly agreed on a limited Early Harvest on industrial and agricultural goods as well as a dispute settlement mechanism, both to enter into force on 1 January 2005, and that ASEAN recognized China as a market economy country. Apparently, the implementation of the Early Harvest package rapidly led to a significant increase of reciprocal trade. Future statistics will tell whether this increase took place in the products covered by this agreement. – The ASEAN–India Framework Agreement also provides for an Early Harvest on goods and a dispute settlement mechanism. 3.2 Agreements between individual ASEAN members and Asian countries outside ASEAN Since the end of the 1990s, members of ASEAN have launched a considerable number, approximately 40, of negotiations aiming at concluding Free Trade Agreements with their trading partners, in particular but not exclusively, to Asian countries. These initiatives are discussed below in the context of the trade policy of each of the major ASEAN members. 3.2.1 Singapore Singapore started this process in 1999, apparently in parallel to the preparation of the WTO Ministerial Meeting in Seattle. This change in policy, consisting of pursuing bilateral agreements in addition to taking part in the multilateral process, constituted a significant development, given that Singapore had traditionally been an advocate of multilateralism and had played a pro-active role during the Uruguay Round negotiations. It is to be remembered that Singapore hosted the first WTO Ministerial Meeting in 1996. This change can probably be best explained on the assumption that the preparations of what ultimately led to the start of the DDA negotiations in 2001 were perceived as being unsatisfactory. By the middle of 2005, Singapore had already signed FTAs with New Zealand, Japan, EFTA (European Free Trade Association comprising Switzerland, Iceland, Liechtenstein, and Norway), Australia, USA, Jordan, India and South Korea. In addition, it is conducting negotiations with Bahrain, Canada, Egypt, Mexico, Panama, Sri Lanka, Qatar, Kuwait, Peru and the United Arab Emirates. It is also engaged in a new type of quadrilateral FTA with New Zealand, Chile and Brunei. Because of the highly ambitious contents of the Singapore–USA FTA, the following aspects deserve special attention: – Singapore, already essentially a unilateral free trade zone, offered a zero tariff treatment to USA goods as of the entry into force of the FTA, whereas the USA will do so only for 92% of Singapore’s goods with the aim of eliminating 100% at the end of a period of 10 years. The major beneficiary sectors are: electronics, chemicals and petrochemicals, instrumentation equipment, processed food and mineral products. Of particular relevance is the Integrated Sourcing Initiative

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(ISI) allowing Singapore to export certain products, such as in the IT sector produced in Bintang and Batan and, assembled in Singapore, to the USA without import duties being levied. – fairly comprehensive provisions on services assuring each side fair and nondiscriminatory treatment and market access, except for special exemptions (‘negative list’ approach); – substantive provisions on competition, government procurement, technical barriers to trade and transparency, but only general references to phyto-sanitary measures and trade defence instruments; – far reaching provisions on intellectual property rights. The implementation of this FTA was assessed after one year and was considered by both sides to have been satisfactory. Singapore’s trade policy orientations are generally described as being underpinned by its small size with limited raw materials and lack of agricultural interests, its dependence on the regional and global economy and its dependence on free access to world markets. One of its major characteristics is its autonomous liberalization policy both with regard to goods and services, which enables Singapore to conclude FTA negotiations relatively easily and in a short period of time. Singapore’s ROO in the FTAs are designed to recognise the integrated nature of modern manufacturing processes. This means that production is outsourced abroad to low cost manufacturing sites, but initial Research & Development and the final stages of high-tech processing are conducted domestically. The ROO differ in each FTA. This is far from helpful to the business community. Because of Singapore’s ambition to become a regional hub for services, its FTAs contain fairly ambitious provisions on services. Singapore’s FTAs are generally considered to be ‘WTO consistent’ and ‘WTO plus’. They cover in principle ‘substantially all trade’, as required by the WTO, as well as a very wide number of issues: goods, services, contingency measures, trade facilitation, investment, government procurement, competition policy, intellectual property, dispute settlement and wider economic cooperation. With this track record, Singapore undoubtedly has become the frontrunner of FTAs in the region. It is understood that it also wishes to negotiate an FTA with the EU. However, FTAs with Singapore should not be used as a template for FTAs with other ASEAN members, because the basic conditions and policies of Singapore significantly differ from those of other ASEAN members. This policy is said to be based on the belief that FTAs can provide an impetus to regional and multilateral trade liberalization. Singapore’s policy has certainly had spillover effects on several of its ASEAN members, which after hesitation decided that they had no choice but to follow the example of Singapore. Whether or not this policy will have the allegedly beneficial results on the regional and multilateral trading system remains to be seen. 3.2.2 Thailand Thailand’s priority for FTAs appears to be market access on goods, in particular agricultural products, textiles and clothing, automobiles and electrical parts. On this basis, it has selected the partners with which to negotiate FTAs, which it prefers

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to be comprehensive. Apparently, the Thai government adopted this policy in early 2003 and reviewed it at the end of 2004 with a view to being in a position to better respond to demands expressed by domestic interested parties. The internal machinery for preparing and conducting the negotiations has undergone a reorganisation. Negotiations have been concluded with Bahrain, Australia and New Zealand, India (by way of an Early Harvest) and China on agricultural products. The ThailandChina FTA apparently led to a rapid and significant increase of reciprocal trade in the products covered. Thailand concluded very recently an FTA with Japan. In addition, Thailand continues negotiations with the USA, India, Peru, BIMST-EC (Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan, Nepal-Economic Cooperation) and EFTA. The negotiations with the USA are the most challenging, because the Singapore–USA FTA is used as a template for the negotiations with Thailand. In addition, it intends to negotiate with Mexico, Russia, South Africa and South Korea. As such, Thailand has become the second most active ASEAN member involved in FTA negotiations. For Thailand, this policy of negotiating FTAs allegedly goes hand in hand with ASEAN regional integration, in particular the implementation of the AFTA, and the AEC. Like Singapore, Thailand takes the view that these bilateral agreements are complementary with those negotiated by ASEAN. 3.2.3 Malaysia Malaysia, reportedly, did not sympathise with Singapore when the latter launched bilateral negotiations with Japan in 1999, on the grounds that this move was counter to regional integration in ASEAN and the multilateral negotiations. However, like others, Malaysia decided over the last few years to follow the example of the other ASEAN members. Hence, it started bilateral negotiations because of the fear that it would lose out on the preferential agreements agreed upon by competing ASEAN members. At this moment in time, Malaysia has started negotiations with Japan, India and Australia and is considering starting negotiations with other countries. The FTA with Japan is expected to have a significant impact on Japan’s agricultural sector (a number of sensitive products remaining excluded) and Malaysia’s automotive and steel sectors. It calls for the removal of tariffs in these two sectors in the next 10 years. The core of the agreement is modelled on the Japan–Philippines FTA and covers a wide number of areas (essentially all goods), agriculture and forestry products (most), services, customs, IPR, competition, standards and conformity assessment, sanitary and phyto-sanitary measures, co-operation and the improvement of the business environment. 3.2.4 Indonesia Indonesia has just launched bilateral negotiations with Japan. Although there are undoubtedly other countries in the pipeline, it apparently was, until recently, still in the process of doing its homework in terms of analyzing and assessing the possible impact on its sectors. Reportedly, more pro-active policy on FTAs can soon be expected. Apparently, the country has no choice, but to follow the example of other

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ASEAN members. The Singapore–Japan Economic Partnership Agreement is likely to be used as a reference by Japan. Indonesia is expected to start negotiations with Australia in the near future. 3.2.5 Philippines The Philippines did not actively negotiate FTAs until recently and has criticized all the ASEAN members for having embarked on this process, because it took the view that this process could undermine the economic integration of the region. However, it has essentially completed negotiations with Japan, although a few outstanding issues remain to be resolved before formal signature. 4 What of the interests of the European union in South East Asia? 4.1 The current situation For a significant period of time, the FDI inflows from the EU into ASEAN accounted for 20 to 35% of the total inflows of FDIs into ASEAN. Over the last few years, these FDIs from the EU were primarily destined to Singapore. EU–Singapore bilateral trade represents about one quarter of total EU–ASEAN trade. The commercial presence of European companies has mainly been in the industrial goods sector. The European industry has recently strongly pleaded in favour of an EU– Singapore FTA. This position is based on the EU industry’s perception that the bilateral trade relations between the USA and Singapore improved significantly immediately after the conclusion of this FTA. The industry fears that it may lose ground in particular in the banking, telecom and manufacturing sectors, where Singapore allegedly acts as a hub for the region as well as a gateway to China and India. Equally, in recent months, the EU industry in Thailand, Malaysia, and the Philippines has become much more concerned about the erosion of their position due to the bilateral FTAs being negotiated with Japan, as well as the US, and to a lesser extent, China. In July 2003, the European Commission adopted the Communication entitled ‘A new partnership with South East Asia’ aiming at revitalizing the relations of the EU with ASEAN. It identifies six strategic priorities and outlines actions for the improvement of EU–ASEAN relations, including ‘injecting a new dynamism into regional trade and investment relations’. The Commission underlined the need to rebalance the overall relationship between the EU and ASEAN by reinforcing the bilateral relationships with individual countries, whilst confirming at the same time the EU’s strong commitment to region-to-region cooperation and to supporting the process of ASEAN integration. The Communication called for an action plan, the Trans-Regional EU–ASEAN Trade Initiative (TREATI), which is meant to expand trade and investment flows and establish an effective framework for dialogue and regulatory cooperation on trade facilitation, market access, and investment issues. The process would aim to inform partners about each other’s regulatory systems, seeking to identify areas of common interest on which to deepen co-operation. In 2004, it was decided to adopt

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a more sectoral approach and align priority areas for co-operation under TREATI with certain ASEAN priority sectors; TREATI priorities, therefore, include the agro-food and fishery sectors, electronic and wood-based products, as well as trade facilitation and investment as horizontal issues. It was also the intention of the Commission to strengthen the EU–ASEAN co-operation in the context of the DDA negotiations. Meanwhile, the implementation of TREATI effectively started in the course of 2004, with a significant number of activities. In practice, this initiative comes down to a regional trade action plan based upon mutual interest, without requiring a formal bi-regional agreement. However, if the EU and ASEAN were to agree on the launch of negotiations of a bi-regional FTA, the two processes could be complementary. Although the action plan relates to economic and trade aspects, it sends a political signal about the EU’s commitment to working with this part of the world and contributing to its integration efforts. The Council of Ministers endorsed this approach. Additionally, the Commission was authorized to offer the possibility to negotiate non-preferential individual framework agreements on partnership and co-operation agreements with several members of ASEAN, i.e. Thailand, Singapore, Indonesia, the Philippines, Malaysia and Brunei. Thailand was the first country to take up this opportunity, closely followed by Singapore; Indonesia is expected to follow soon. The EU had negotiated agreements with Vietnam, Cambodia and Laos before their accession to ASEAN. 4.2 The future For a long time, the cornerstone of the trade policy of the European Union has been and remains the multilateral approach to trade liberalization. After the failure of the Cancun Ministerial Meeting in September 2003, the EU confirmed that the successful conclusion of the DDA remains its prime objective and indicated that it would, for the time being, not take new initiatives on the bilateral level. It would only work towards the conclusion of ongoing bilateral and bi-regional negotiations. Since then, the number of negotiations on FTAs has continued to mushroom in different parts of the world and the bilateral agenda is now very much in vogue, in particular among Asian countries. This is the reality and, on the basis of numerous contacts, the author is of the view that this will not change in the foreseeable future. Even if the outcome of the next WTO Ministerial Meeting in December 2005 in Hong Kong is satisfactory and the DDA can be concluded in the next year or two, the Asian countries are so much committed to these bilateral negotiations, that nothing is going to stop them. A number of agreements have already been finalized, many negotiations are scheduled to go on for a considerable period of time, and new negotiations are expected to start. A number of the FTAs which individual ASEAN members have negotiated appear to be ‘WTO compatible’ and even ‘WTO plus’. The jury is still out on whether or not they will in practice contribute to trade liberalization and to regional integration within ASEAN or whether they will lead to trade diversion. They certainly constitute a labyrinth of agreements, which is unlikely to provide a transparent and clear legal framework for the business community concerned. In addition, it is unlikely that the remaining ASEAN members will be able to deliver

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equally ambitious results because of their different commercial interests and different levels of development. Hence, doubts can be and are being expressed, in particular by academics, who are of the view that this is not the right way forward. As to the growing number of framework agreements which ASEAN is negotiating as a block, it is premature to predict what the outcome will be, and therefore impossible to give an indication on their ‘WTO compatibility’. However, they are likely to bring ASEAN closer to its trading partners in Asia as they have an important political dimension beyond the trade aspects. It seems reasonable to argue that, in principle, this puts the interests of EU companies in a disadvantageous position. Several FTAs have already led to a significant increase of the trade between the trading partners concerned. This should not be a surprise. After all, these negotiations clearly take place with the view to granting a preferential treatment to the companies of the partners with which agreements are being signed. The question then is whether the EU should take an initiative and, if so, which one. The EU has a clear preference for negotiating from region to region. This is a sound policy as long as there is a valuable and effective interlocutor or negotiator on the other side. Is that the case on the side of ASEAN? In the first instance, one would argue in the positive, given that ASEAN has already negotiated a number of framework agreements. However, many of these agreements remain for the time being fairly empty. Therefore, they do not really prove that ASEAN disposes of the negotiating capacity required for negotiating comprehensive agreements. The further completion of the negotiations under the existing framework agreements will constitute a major challenge on their own, regardless of whether new major initiatives are launched, such as with the EU. It appears that these negotiations between ASEAN and third countries, in reality, do not take place by ASEAN as a block, which does not dispose of a negotiating team or a mandate. Individual ASEAN members do not appear to have spare capacity for launching new negotiations. An even more difficult question is whether a full-fledged bi-regional agreement between the EU and ASEAN can effectively be implemented, given that ASEAN has neither a single market nor a common commercial policy. Apparently, positive results could be expected with regards to goods and perhaps services, but not beyond. Hence, again the question: should the EU take an initiative, and if so, which one? Unless preparatory studies demonstrate that it is not in the interest of the EU to do so, the EU could agree to enter into an overarching framework agreement, in the context of which individual FTAs could be negotiated with the members of ASEAN which are keen on doing so, and which are in a position to deliver. This could be the case for Singapore, Thailand and Malaysia. Alternatively, the ‘ASEAN-X’ or ‘2 plus X’ formula could be explored. By doing so, the EU would at least attempt to safeguard its interests on the commercial level and send the political signal that it wants to be more involved in this part of the world. Indeed, a widespread perception in South East Asia is that the EU is not really interested in such a commitment. However, the EU should not be cherry-picking, as far as FTAs with individual ASEAN members are concerned. Decisions for initiating such negotiations should be taken in the context of the overarching EU–ASEAN Agreement : both the EU and ASEAN should ensure that individual FTAs contribute to the regional integration in ASEAN.

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Apart from safeguarding its interests on a par with other trading partners, the EUs added value could be to work together with ASEAN towards a deeper integration, if ASEAN so wishes. For the time being, ASEAN members have been reluctant to consider a partial transfer of sovereignty to the supranational level and to work through a decision-making process, which is not based on consensus. However, if more weight is given to the East Asia Community, such a step would be timely. This could be done following a step-by-step approach, such as has happened and is still happening in the EU. The EU should be open-minded as far as the structures in ASEAN are concerned, as long as ASEAN can effectively implement a bi-regional agreement. The possible intensification of the cooperation between the EU and ASEAN should not be limited to trade aspects. The EU should also position itself towards all the aspects of a future East Asia Community. The ASEM experience may need to be revisited or at least subject to scrutiny as to its effectiveness. References Ahn CY (2001) A search for robust East Asian development models after the financial crisis: mutual learning from East Asian experiences. J Asian Econ 12:419–443 Ahn B-J (2004) The rise of China and the future of East Asian integration. Asia Pac Rev Vol. 11 (No.2) ASEAN free trade—a select list from ISEAS library (2004) Bersick S (2005) The EU constitution and its impact on the politics of interregional relations: strengthening Europe’s role in Asia Bird G, Rajan RS (2002) The political economies of a trade—first approach to regionalism, ISEAS working papers, visiting researchers series No.5 Chopparapu R (2005) The European union: a model for East Asia? Asia Eur J 3:133–136 Desker B (2004) In defence of FTAs: from purity to pragmatism in East Asia. Pac Rev 17(1):3–26 Economic Integration in Asia (2005) Boa forum for Asia, annual report Engammare V, Lehmann J-P (2005) East Asian regionalism—integrative versus disintegrative forces EuroCham Singapore (2005) Recommendation on EU–Singapore free trade agreement position paper Ewing-Chow M (2004) Southeast Asia and free trade agreements: WTO plus or bust? Singapore Year Book Int Law VIII:193–206 Fraser C (2004) EU and Asia, EPC working paper No.12 Goh CT (2004) Europe’s global role. Asia Eur J 2:321–325 Hew D (2005) Southeast Asia economies: towards recovery and deeper integration. Southeast Asia Affairs 45–61 Hew D, Sen R (2004) Towards an ASEAN economic community: challenges and prospect. ISEAS working paper: economics & finance series No.1 Hyun O-S (2005) The effect of new Asian regional trade groupings on the Doha round negotiations, 5 Kawai M (2004) Regional economic integration and cooperation in East Asia Kesavapany K (2005) ASEAN proves to be regional blessing. The Straits Times Lamy P (2004) Unlocking the potential of the ASEAN–EU partnership, the role of Singapore. Asia Eur J 2:485–487 Low L (2004) Singapore’s bilateral trading arrangement in the context of East Asian regionalism, rule of play, issues and prospects. Southeast Asian Affairs Mandelson P (2005) Tilting the global balance: Asia’s new trade growth. Keynote Address, Singapore Mukin M (2005) ASEAN foreign direct investment trends: implications for EU–ASEAN relations, EPC issue paper No. 31

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