Open
Regionalism and Deeper Integration: The Implementation of ASEAN Investment
Area (AIA) and ASEAN Free Trade Area (AFTA)
Dr.
Lawan Thanadsillapakul
Part
5
Additionally,
in the past, ASEAN neither sought to regionalise the financial system
nor to strengthen intra-ASEAN capital flows, to facilitate economic flows
within the region. There was no objective of facilitating the free movement
of capital, one of the main production factors(29) . Only after AFTA was established was there a policy of implementing the
free movement of capital provided in the aforementioned Framework Agreement
for enhancing economic co-operation(30) . Only after the financial crisis took place in Asia, did ASEAN countries
think about the launching of an ASEAN currency exchange and payment system
for intra-ASEAN trade(31) This policy would help promote regional currencies and enhance financial
stability in the region, and also help cushion the negative impact of
financial turmoil from outside the region. It will also facilitate and
stimulate intra-ASEAN trade and investment by reducing risk from the loss
caused by the fluctuation of currency exchange rates in world markets.
All these new policies are dictated by current circumstances, which further
influence political support from each member.
AFTA
and the GATT/WTO
In legal terms the ASEAN Free Trade Area is a preferential trading arrangement(32) . AFTA was not established under the provision of Art. XXIV of GATT(33) . Rather, AFTA was based on the permission given to developing countries
to enter into preferential trading arrangements by the Tokyo Round "enabling
clause"(34) . The Enabling Clause provides in its paragraph 1 that:
"Notwithstanding
the provisions of Art. I of the General Agreement, contracting parties
may accord differential and more favourable treatment to developing
countries, without according such treatment to other contracting parties".
Paragraph
2 further clarifies that "The provisions of paragraph 1 apply to
the following:
"(c)
Regional or global arrangements entered into amongst less-developed
contracting parties for the mutual reduction or elimination of tariffs
and, in accordance with the criteria or conditions which may be prescribed
by the Contracting Parties, for the mutual reduction or elimination
of non-tariff measures, on products imported from one another".
ASEAN
members have been regarded as developing countries so that they can accord
among themselves differential and more favourable treatments, without
according such treatment to other GATT/WTO contracting parties. This preferential
treatment provision is different from the free trade area arrangement
under Art. XXIV(35) ,
under which the members of the free trade area are subject to the obligation
not to apply higher duties or other regulations more restrictive to non-members
than the ones applicable prior to the formation of the free trade area.
Therefore, from its legal basis, currently AFTA is not obliged to conform
to Art. XXIV of GATT. However, ASEAN's practice does raise questions concerning
GATT/WTO compatibility, paradoxically because in practice AFTA does not
create any higher barriers to trade from non-members but rather implements
an open and outward-looking policy towards outsiders. Furthermore, the
CEPT under AFTA encompasses all new ASEAN industrial co-operation schemes(36) . Under the AICO scheme, ASEAN could even grant favourable treatment to
non-members(37) if they reached the requirements and conditions set forth under various
schemes(38) ; now
its preferential arrangements were transferred to and encompassed by the
CEPT for AFTA(39) in order
to qualify for the available preferences, as AFTA covers all trade in
manufactured products in ASEAN(40) . Moreover, the ASEAN rules of origin also allow up to 60% of non-members'
originating input(41) incorporated
in the ASEAN products entitled to the CEPT under AFTA. Also ASEAN applies
a cumulative ASEAN original input for CEPT products, so that in practice
the 'net' cumulative regional content may be lower than the 40% and the
eligibility for ASEAN-origin is still valid(42) . Hence, ASEAN is indirectly able to grant preferences to non-members
in practice. ASEAN is able under AFTA to grant preferences to non-members
including even developed countries, although under GATT such preferential
treatment has to be accorded among member countries that are developing
countries only. Although AFTA is legally based on the "Enabling Clause"
but it practically complies with Art. XXIV.
Part
6
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(29)
The principle of free movement of capital is included in the preamble
and objectives of the Framework Agreement for enhancing economic co-operation,
which facilitates and strengthens liberalization of trade and investment
in the region. ASEAN Free Trade Area is one of the objectives of this
Framework Agreement.
(30)
Section C. 2 of the Framework Agreement provided that "2. Member
States shall encourage and facilitate free movement of capital and other
financial resources including further liberalization of the use of ASEAN
currencies in trade and investments, taking into account their respective
national laws, monetary controls and development objectives".
(31)
Paragraph 13 of the Hanoi Declaration of 1998, at the sixth ASEAN Summit
Meeting, in Hanoi on 16th December 1998. The paragraph states that "We
encourage wider use of ASEAN currencies in intra-ASEAN trade settlement".
It has been emphasized in the Hanoi Plan of Action to introduce an ASEAN
currency and exchange rate system. The Hanoi Plan of Action is the blueprint
covering the first six years of the ASEAN Vision 2020 that the ASEAN leaders
issued at the Meeting in Kuala Lumpur, Malaysia.
(32)
The Common Effective Preferential Treatment (CEPT) under AFTA is also
preferential trading arrangement. However, the CEPT mainly differs from
the initial PTA in its applicability that is on across the broad basis
while the PTA was applied on a product-by-product basis and specified
by agreed terms.
(33)
AFTA was not notified by ASEAN to GATT under Art. XXIV but the Agreement
on ASEAN Preferential Trade Arrangements was notified under the Enabling
Clause on 1st November 1977, examination concluded in 1979. Http://www.wto.org/develop/webrtasb.htm.
(34)
Differential and More Favourable Treatment Reciprocity and Fuller Participation
of Developing Countries, Decision of 28th November 1979 (L/4903), paras
1 and 2 (c). The Preferential Trading Arrangement was approved initially
by the GATT CONTRACTING PARTIES in Decision of 29th January 1979 (L/4768):
Agreement on ASEAN Preferential Trading Arrangements; notification under
Enabling Clause in 1982 (L/5243). The protocol on Improvements on Extension
of Tariff Preferences Under the ASEAN Preferential Trading Arrangements
was approved by notification in 1989 (L/6569) See GATT (1995) Guide to
GATT Law and Practice. 2 Volumes. Geneva: World Trade Organization.
(35)
Art. XXIV paragraph 5 (b) of GATT provided that "with respect to
a free trade area, or an interim agreement leading to the formation of
a free trade area, the duties and other regulations of commerce maintained
in each of the constituent territories and applicable at the formation
of such free trade area or the adoption of such interim agreement to the
trade of contracting parties not included in such area or not parties
to such agreement shall not be higher or more restrictive than the corresponding
duties and other regulations of commerce existing in the same constituent
territories prior to the formation of the free trade area, or interim
agreement, as the case may be".
(36)
The new form of ASEAN Industrial Co-operation (AICO scheme) will replace
the BBC and AIJV schemes and shall be based on the CEPT under AFTA. The
Basic Agreement for the ASEAN Industrial Cooperation Scheme was signed
on 27th April 1996 in Singapore.
(37)
Although the national equity condition is imposed as a criterion; under
the AICO Scheme, a national equity holding of one ASEAN member country
in each of the participating company is sufficient. Since two companies
are required to form an AICO Arrangement, each company must have its own
national equity holding. For companies that cannot meet the equity condition,
a waiver is possible if the proposing company meets other criteria imposed
by the participating country in lieu of the 30% national equity.
(38)
Preferences granted under the ASEAN Preferential Trading Arrangements
now transfer to the ASEAN Common Effective preferential Treatments under
AFTA, and other preferences granted under AICO, AIJV, AIP, AIC also now
come under the CEPT scheme for AFTA.
(39)
The AICO agreement stated that "The new ASEAN industrial cooperation
scheme shall be based on the CEPT Scheme for AFTA".
(40)
Art. 3 of AFTA provided that "This Agreement shall apply to all manufactured
products, including capital goods, processed agricultural products, and
those products failing outside the definition of agricultural products
as set out in this Agreement
".
(41)
Rule 3 (ii) of the ASEAN Rule of Origin provides that "(ii) Subject
to Sub-paragraph (i) above, for the purpose of implementing the provisions
of Rule 1 (b), products worked on and processed as a result of which the
total value of the materials, parts or produce originating from non-ASEAN
countries or of undetermined origin used does not exceed 60% of the FOB
value of the product produced or obtained and the final process of the
manufacture is performed within the territory of the exporting Member
State".
(42)
For instance, if product A has a value of 100, of which 40% is local content
in Singapore, it may be exported to Malaysia at a CEPT rate, where 5%
local content is added for a total value-added in Malaysia of 100. Upon
export to Thailand it is considered to have 45% ASEAN content even though
"net" cumulative content is 22.5% of 200. Example adapted from
Pelkmans, 1997, p. 211. |