ASEAN Free Trade Area

The ASEAN Free Trade Area (AFTA)^[1] is a trade bloc agreement by the Association of Southeast Asian Nations supporting local manufacturing in all ASEAN countries.

The AFTA agreement was signed on 28 January 1992 in Singapore. When the AFTA agreement was originally signed, ASEAN had six members, namely, Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. Vietnam joined in 1995, Laos and Myanmar in 1997 and Cambodia in 1999. AFTA now comprises the ten countries of ASEAN. All the four latecomers were required to sign the AFTA agreement to join ASEAN, but were given longer time frames in which to meet AFTA's tariff reduction obligations.

The primary goals of AFTA seek to:

• Increase ASEAN's competitive edge as a production base in the world market through the elimination, within ASEAN, of tariffs and non-tariff barriers; and
• Attract more foreign direct investment to ASEAN.

The primary mechanism for achieving such goals is the Common Effective Preferential Tariff scheme, which established a phased schedule in 1992 with the goal to increase the region’s competitive advantage as a production base geared for the world market.

The Common Effective Preferential Tariff (CEPT) scheme

Unlike the EU, AFTA does not apply a common external tariff on imported goods. Each ASEAN member may impose tariffs on goods entering from outside ASEAN based on its national schedules. However, for goods originating within ASEAN, ASEAN members are to apply a tariff rate of 0-5 %(the more recent members of Cambodia, Laos, Myanmar and Vietnam, also known as CMLV countries, were given additional time to implement the reduced tariff rates). This is known as the Common Effective Preferential Tariff (CEPT) scheme.

ASEAN members have the option of excluding products from the CEPT in three cases: 1.) Temporary exclusions; 2.) Sensitive agricultural products; 3.) General exceptions. Temporary exclusions refer to products for which tariffs will ultimately be lowered to 0-5 %, but which are being protected temporarily by a delay in tariff reductions.

For sensitive agricultural products include commodities such as rice, ASEAN members have until 2010 to reduce the tariff levels to 0-5 %.

General exceptions refer to products which an ASEAN member deems necessary for the protection of national security, public morals, the protection of human, animal or plant life and health, and protection of articles of artistic, historic, or archaeological value. ASEAN members have agreed to enact zero tariff rates on virtually all imports by 2010 for the original signatories, and 2015 for the CMLV countries.

Rule of Origin

The CEPT only applies to goods originating within ASEAN. The general rule is that local ASEAN content must be at least 40% of the FOB value of the good. The local ASEAN content can be cumulative, that is, the value of inputs from various ASEAN members can be combined to meet the 40% requirement. The following formula is applied:

( Raw material cost

+ Direct labour cost

+ Direct overhead cost

+ Profit

+ Inland transport cost )

x 100 % FOB value

However, for certain products, special rules apply:

• Change in Chapter Rule for Wheat Flour;
• Change of Tariff Sub-Heading for Wood-Based Products;
• Change in Tariff Classification for Certain Aluminum and Articles thereof.

The exporter must obtain a “Form D” certification from its national government attesting that the good has met the 40% requirement. The Form D must be presented to the customs authority of the importing government to qualify for the CEPT rate. Difficulties have sometimes arisen regarding the evidentiary proof to support the claim, as well as how ASEAN national customs authorities can verify Form D submissions. These difficulties arise because each ASEAN national customs authority interprets and implements the Form D requirements without much co-ordination.

Administration

Administration of AFTA is handled by the national customs and trade authorities in each ASEAN member. The ASEAN Secretariat has authority to monitor and ensure compliance with AFTA measures, but has no legal authority to enforce compliance. This has led to inconsistent rulings by ASEAN national authorities. The ASEAN Charter is intended to bolster the ASEAN Secretariat’s ability to ensure consistent application of AFTA measures.

ASEAN national authorities have also been traditionally reluctant to share or cede sovereignty to authorities from other ASEAN members (although ASEAN trade ministries routinely make cross-border visits to conduct on-site inspections in anti-dumping investigations). Unlike the EU or NAFTA, joint teams to ensure compliance and investigate non-compliance have not been widely used. Instead, ASEAN national authorities must rely on the review and analysis of other ASEAN national authorities to determine if AFTA measures such as rule of origin are being followed. Disagreements may result between the national authorities. Again, the ASEAN Secretariat may help mediate a dispute but has no legal authority to resolve it.

ASEAN has attempted to improve customs co-ordination through the implementation of the ASEAN Single Window project. The ASEAN Single Window would allow importers to submit all information related to the transaction to be entered electronically once. This information would then be shared with all other ASEAN national customs authorities.

Dispute resolution

Although these ASEAN national customs and trade authorities co-ordinate among themselves, disputes can arise. The ASEAN Secretariat has no legal authority to resolve such disputes, so disputes are resolved bilaterally through informal means or through dispute resolution.

An ASEAN Protocol on Enhanced Dispute Settlement Mechanism governs formal dispute resolution in AFTA and other aspects of ASEAN. ASEAN members may seek mediation and good offices consultations. If these efforts are ineffective, they may ask SEOM (Senior Economic Officials Meetings) to establish panel of independent arbitrators to review the dispute. Panel decisions can be appealed to an appellate body formed by the ASEAN Economic Community Council.

The Protocol has almost never been invoked because of the role of SEOM in the dispute resolution process. SEOM decisions require consensus among all ASEAN members, and since both the aggrieved party and the alleged transgressor are both participating in SEOM, such consensus cannot be achieved. This discourages ASEAN members from invoking the Protocol, and often they seek dispute resolution in other fora such as the WTO or even the International Court of Justice. This can also be frustrating for companies affected by an AFTA dispute, as they have no rights to invoke dispute resolution yet their home ASEAN government may not be willing to invoke the Protocol. The ASEAN Secretary General has listed dispute resolution as requiring necessary reform for proper administration of AFTA and the AEC.

Further trade facilitation efforts

Efforts to close the development gap and expand trade among members of ASEAN are key points of policy discussion. According to a 2008 research brief published by the World Bank as part of its Trade Costs and Facilitation Project,^[2] ASEAN members have the potential to reap significant benefits from investments in further trade facilitation reform, due to the comprehensive tariff reform already realised through the ASEAN Free Trade Agreement.

This new analysis suggests examining two key areas, among others: port facilities and competitiveness in the Internet services sector. Reform in these areas, the report states, could expand ASEAN trade by up to 7.5% ($22 billion) and 5.7% ($17 billion), respectively. By contrast, cutting applied tariffs in all ASEAN members to the regional average in Southeast Asia would increase intra-regional trade by about 2% ($6.3 billion).^[3]

Membership

Countries that agree to eliminate tariffs among themselves:

•  Brunei
•  Indonesia
•  Malaysia
•  Philippines
•  Singapore
•  Thailand
•  Myanmar
•  Cambodia
•  Laos
•  Vietnam

Regular Observers

•  Papua New Guinea
•  Timor-Leste

The most recent ASEAN meeting was observed also by:

•  China
•  Japan
•  South Korea
•  India
•  Russia
•  Australia
•  New Zealand

ASEAN Plus Three

Members of the ASEAN Plus Three

ASEAN Plus Three (APT) is a forum that functions as a coordinator of co-operation between the Association of Southeast Asian Nations and the three East Asia nations of China, Japan, and South Korea. Government leaders, ministers, and senior officials from the 10 members of the ASEAN and the three Northeast Asian states consult on an increasing range of issues.^[4] The APT is the latest development of East Asian regional co-operation. In the past, proposals, such as ROK’s call for an Asian Common Market in 1970 and Japan’s 1988 suggestion for an Asian Network, have been made to bring closer regional co-operation.^[5]

The first leaders' meetings were held in 1996 and 1997 to deal with Asia–Europe Meeting issues, and China and Japan each wanted regular summit meetings with ASEAN members afterwards. The group's significance and importance was strengthened by the Asian Financial Crisis. In response to the crisis, ASEAN closely cooperated with China, Japan, and ROK. Since the implementation of the Joint Statement on East Asia Cooperation in 1999 at the Manila Summit, APT finance ministers have been holding periodic consultations.^[6]

ASEAN Plus Three, in establishing the Chiang Mai Initiative, has been credited as forming the basis for financial stability in Asia,^[7] the lack of such stability having contributed to the Asian Financial Crisis. The Asian Currency Unit (ACU) is a proposed weighted index of currencies for ASEAN+3. The ACU was inspired by the now defunct European Currency Unit, replaced by the Euro. The Asian Currency Unit's purpose is to help stabilise the region's financial markets. The ACU as it is proposed is a currency basket and not a real currency, i.e., a weighted index of East Asian currencies that will function as a benchmark for regional currency movements.^[8][9]

The Asian Development Bank is currently reviewing different options concerning the technical aspects related to the ACU calculation, including the nature of the basket, the choice of fixed weights vs. fixed units, the selection of currencies to be included in the basket, the choice of weights, the criteria for their periodical revision, and other aspects as well. The Asian Development Bank was to announce the details of the ACU in March 2006 or later.^[10] However external pressures delayed this announcement although the concept was still being studied in detail.^[11] A panel discussion in February 2007 cited technical and political obstacles as having prevented the project from advancing.^[12] The unit, limited to ASEAN+3, was said to be still moving forward by mid-July 2007.^[13]

Since the process began in 1997, ASEAN Plus Three (APT) co-operation has broadened and deepened to also focus on subjects other than finance too in the discussion such as the areas of food and energy security, financial co-operation, trade facilitation, disaster management, people-to-people contacts, narrowing the development gap, rural development and poverty alleviation, human trafficking, labour movement, communicable diseases, environment and sustainable development, and transnational crime, including counter-terrorism. APT co-operation in the area of political and security co-operation has been deepened by regular dialogue and exchange of views through existing APT mechanisms, such as the APT Summit, APT Foreign Ministers’ Meeting, APT Senior Officials’ Meeting (SOM) and as well as through track 1.5 and track two dialogue, including East Asia Forum and Network of East Asia Think-tanks.In combating transnational crime in the region, the APT Work Plan on Cooperation in Combating Transnational Crime was adopted in 2006.^[14]

With the aim to further strengthening APT co-operation, East Asia Vision Group (EAVG) II was established by the Leaders of APT at the 13th APT Summit on 29 October 2010 in Ha Noi to stock-take, review and identify the future direction of APT co-operation.

Related free trade areas

• Regional Comprehensive Economic Partnership
• ASEAN–Australia–New Zealand Free Trade Agreement (AANZFTA) is a free trade area between ASEAN and ANZCERTA that was signed on 27 February 2009 and came into effect on 1 January 2010. Details of the AANZFTA agreement are available online.^[15]
• ASEAN–China Free Trade Area (ACFTA), in effect as of 1 January 2010^[16]
• ASEAN–India Free Trade Area (AIFTA), in effect as of 1 January 2010^[16]
• ASEAN–Japan Comprehensive Economic Partnership (AJCEP)
• ASEAN–Korea Free Trade Area (AKFTA), in effect as of 1 January 2010^[16]
• Comprehensive Economic Partnership for East Asia

References

• ASEAN Free Trade Agreement