ASEAN: The Tasks Ahead 9789814377096

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ACKNOWLEDGEMENTS The Institute would like to thank the Rockefeller Brothers Fund and the International Development Research Centre (IDRC) for financial support towards the Colloquium and the publication of this Report.

ASEAN

The Tasks Ahead

The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modem South~ast Asia, particularly the multi-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees compnsmg nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. The day-to-day operations of the Unit are the responsibility of the Co-ordinator. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

ASEAN

The Tasks Ahead

I~B~

ASEAN ECONOMIC RESEARCH UNIT liiil~ INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng l'vlui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior consent of the Institute of Southeast Asian Studies. © 1987 Institute of Southeast Asian Studies

Cataloguing in Publication Data ASEAN : the tasks ahead. Report of a Colloquium on ASEAN Economic Co-operation : the Tasks Ahead, organized by the ASEAN Economic Research Unit, Institute of Southeast Asian Studies, Singapore, 27-28 Feb. 1987. 1. ASEAN -- Congresses. 2. ASEAN --Economic integration-- Congresses. I. Institute of Southeast Asian Studies. ASEAN Economic Research Unit. II. Colloquium on ASEAN Economic Co-operation : the Tasks Ahead ( 198 7 : Singapore) III. Title : ASEAN economic co-operation : the tasks ahead. ]X 1979 A851 1987 ISBN 9971-988-67-4

CONTENTS

I.

THE NEED TO THINK AHEAD ........................................................................... 2

II.

FUNDAl\-IENT AL PRINCIPLES ........................................................................... 3

III.

OBJECTIVES ....................................................................................................... 5

IV.

PROPOSED SCIIEl\IES FOR INTEGRATION: AN ASEAN TRADE AREA ....... 7

V.

SUPPORTING MEASURES ................................................................................ 12

VI.

ORGANIZATIONAL AND INSTITUTIONAL SUPPORT .................................. 14

VII.

IMPLEMENTATION .......................................................................................... 15

ANNEXES .................................................................................................................... 17 I.

An ASEAN trade area ........................................................................................ 18

II.

Formula for external trade barrier restructuring ................................................ 25

III.

Promotion of

IV.

I,ist of pd 11:1 t ion:tl SJH'ci:l] i7.at ion on activities

39

of greatest comparative advantage. A gradual step-by-step and itemby-item approach was considered appropriate, with a policy of progressive movement towards a long-run goal of a limited free-trade area.

2.

Industrial Complementation Agreements. The purpose of such intraindustry agreements is to increase trade and industrial co-operation at the level of individual industries, or small groups of related industries, through ner,otiations. Such negotiations are conducted by manufacturers in different countries to produce specific industry ar,reements for government approval. Proposals may include the reduction or abolition of intra-regional tariffs, the removal of quantitative restrictions,

the establishment of joint ventures, the sharing of

markets, and so on.

3.

The "package deal" technique. This entails inter-governmental

agree-

ments to allocate certain large-scale industrial projects among member countries for a specified and limited period of time to create the conditions conducive for them to serve the whole of the ASEAN market. Such projects are expected to provide economies of scale and very substantial savinr,s in capital and production costs. These three principal areas of ASEAN Pconomic co-operation were subsequently taken up and implemented by ASEAN governments in the Preferential Trading Arrangements (PTA),

the ASEAN Industrial Complementation scheme

(AIC), and the ASEAN Industrial Projects (AlP). The ASEAN Industrial Joint Venttnes scheme (Al.JV) was introduced in

order to counteract the

difficulties

encountered in the operation of the AJC. The following sections deal briefly with each of these co-operation programmes.

40

1.1. The Agreement on ASEAN

Preferentl~l

Trading Arrangements (PTA)

The agreement on the Preferential Tradinp, Arrangements was sip,ned on 24 February 1977 and provides the basic framework

for intra-ASF.AN trade co-

operation. The instruments included in the PTA are: 1.

liberalization of non-tariff measures on a preferential basis;

2.

exchange of tariff preferences;

3.

preferential terms for the financinp, of imports;

4.

long-term quantity contracts; and

5.

preference for ASP-AN procluet s in procurement by p,ovcrnmcnt bodies.

The exchange of tariff preferences has been the most widely used measure.

A product-by-product approach ernployinp, matrix

ncp,otlations and

voluntary offers was first used. This has been complemented since April 1980 by across-the-board tariff reductions on items below a certain import value ceiling with provisions for an exclusion list of "sensitive items". While the ceiling has been successively lifted over time (from initially US$50,000 to over US$10 million), the tariff cuts have become deeper and broader. Initially, the margins of tariff preference were generally 10 per cent for most products. In May 1981 they were raised to a minimum of 20-25 per cent, and in November 1982 tariff cuts on PTA items were raised to a maximum of 50 per cent. Table 1 summarizes the exchanp,e of tariff preferences among the /\SEAN members. The

performance record of trade co-operation has

been one of much

tedious negotiation for tariff cuts. Actual intra-ASP-AN trade expansion, however, has been insignificant, despite the very impressive number of items covered by the PTA preferences.

41

Table 1: Trade Preferences Offered by Member Countries under the ASEAN PTA

Matrix/

Across-

Year

Voluntary

Bilateral

1978

751

77

828

1979

1,432

69

1,501

1980

1,945

57

569

2, 571

1981

2,198

52

3,946

6,196

1982

1,963

16

3,566

5,545

18

1,073

1,901

289

9,154

18,542

1983 (Jan-June)

Total

8,289

the-board

Total

Source: ASEAN Secretariat, quoted in Chng 1985.

The reasons for this disappointing level of achievement include the following: 1.

The product- by-product approach in the form of "matrix" negotiations or the present bilateral method has been found to be inefficient and time-consuming. Initiated in 1978, voluntary offers by each country to extend

a

specified

number of preferences at rer,ular

intervals

increased the number of items but not the actual trade flows. More

42

effort and ingenuity were expended to find irrelevant products such as snow ploughs, nuclear reactors, and so on, rather than to concentrate on finding items that could be usefully traded within ABEAN. 2.

The across-the-board approach introduced in 1980 has also met with the problem of definition of "sensitive items" which, in some country's lists, have largely removed the potentially important tradable items from intra-ASEAN trade. In the absence of a mutually ap,reed definition of "sensitive", exclusion lists have become almost all-embracing. In the case of one ASEAN country studied, the exclusion Jist contained 47 per cent of all items covered by across-the-board liberalization.

Analysis of trade flows for

I 981

covered by some 9,000 preferences in

1982 revealed that they accounted for only about two per cent of intra-ASEAN trade. Furthermore, when the rules of origin are taken into consideration, the actual amount of trade linked to preferences is much lower. Given the generally low margins of preference and often prohibitively high initial tariffs as well as difficult administrative procedures, only few traders have benefited from these preferences. Assessment of the actual economic impact of the PTA is difficult, mainly because moni taring PTA

preferences gra!lted

to member countries has been

unsatisfactory. Some indication of the trade flows involved

can be obtained

from the value of exports supported by rules-of-origin certificates (Form C) in Table 2.

43

Table 2: Exports issued with Form C by ASEAN Member Countries (US$ million est.)

1979

1980

1981

1982

Indonesia

1.2

5.6

2.1

2.4

Malaysia

2.4

4.6

7.2

7.0

Philippines

9.2

11.3

1.3

1.1

Singapore

13.5

16.4

15.6

26.2

Thailand

2.2

22.0

4. 7

8.2

28.5

60.0

31.0

45.0

Total

Source: ASEAN Secretariat, quoted in Chng 1985.

These amounts are quite insignificant when compared to the total volume of intra-ASEAN trade. The latter amounted to some US$13,800 million in 1982, so that the proportion benefiting from the preferences accorded items requiring rule-of-origin certificates is less than a third of a percentage point.

In sum,

despite the fact that the ASF:AN PTA has existed for the past ten years, and although some I 9,000 items are now included in the list for tariff reductions, the scheme has affected no more than two per cent of intra-ASEAN trade.

44

In August 1986 the Economic Ministers ap,reed on an ASEAN Preferential Tariff Quota scheme to supplement the PTA. This again requires bilateral negotiations on a product-by-product basis.

1.2. The ABEAN Industrial Complementation Scheme (AIC) The basic agreement on ASEAN industrial complementation was signed in June 1981. Its rationale was based not only on the Kansu-Robinson Report but also on the recognition that the ASEAN industrial projects (see Section 1.4) were not progressing as smoothly as orip,inally expected. The idea of the scheme is to further industrial development in the region by permitting the private sector to decide in advance on industrial specialization, in order to eliminate "unnecessary" competition among ASEAN countries. Such complementation ap,reements can assign an integrated industrial plant coverinp, all star,es of the manufacturing process from raw materials to finished products (vertical specialization), or individual components of a given industrial product (horizontal specialization) to each ASEAN country. The AIC clearly focussed on the latter type of specialization. The agreement provides for AIC packar,es consisting of "organized complementary exchanges of specified processed or manufactured products" allocated to the individual participating countries. The respective ASEAN country would then enjoy the

privilege of exclusive

production for a specified period (two

years in the case of existing products, three years in the case of new products). The products so allocated would fall under the preferences of the PTA. In involves

practice

the

process

of proposlnv, AIC packap;es under the scheme

the ASEAN Chambers of Commerce and Industry (ASEAN-CCI). After

evaluation by the ASEAN Committee for Industry, Minerals and Enerr,y (COIME), proposals are

recommended to the ASl':AN

F~conomic

Ministers Meeting (AEM).

45

After approval by the AEM, the participating countries are given six to 12 months to negotiate preferences within the PTA. The decision to implement the scheme was by no means easy, particularly since Singapore had reservations from the start. The then Minister for Trade and Industry, Goh Chok Tonp,, put Sinp,apore's position succinctly when opening the Fifth Conference of the Federation of ASEAN Economic Associations in Singapore in 1980: "Private enterprise generally disdains government intervention in business; but when they dream up complementation schemes, they want governments to intervene and protect them from competition. In the end, it was the governments which resisted iron-clad protection for those so fortunate as to be allocated the products under the AICs"

(Chng 1985). Singapore maintained that

manufacturers should be free to produce accredited AIC products anywhere within ASEAN and offered to withdraw from the scheme under the five-minusone principle. However, a compromise was reached by restricting the exclusivity periods and providing for the exception of projects exporting more than 75 per cent of their output outside the ASEAN region. The first AIC package to be implemented was discussed by the ASEAN Automotive Federation as far back as 1976 and submitted to COIME in 1979. In September 1980 two AIC packages were finally approved by the ASEAN

Economic

Ministers:

First Package: Indonesia Malaysia

Diesel engines (80-135 hp) -

Spokes, nipples

and drive chains for motor

cycle and timing chains for motor vehicles Philippines

- Ford body panels for passenger cars

Singapore

- Universal joints

46

-

Thailand

Body panels for motor vehicles of 1 ton and above

Second Package: Indonesia

- Steering systems

Malaysia

- Headlights for motor vehicles

Philippines

- Heavy duty rear axle for commercial vehicles

Singapore

- Fuel injection pumps

Thailand

- Carburettors

The process of negotiating the trade preferences for the exchange of the allocated components turned out to be lenp,tlty, since all ASF:AN countries with the exception (by then) of Singapore had numerous automotive parts industries operating behind protective tariff walls. Chng (1985) holds the view that the automotive sector is unsuitable for industrial complementation arrangements because of the complexities not only of production but also of marketing. Because of the long decision-makinp, process involved in allocating component products to participating countries and the negotiation of preferential tariffs for their exchange the economic impact of the AIC scheme has been very modest. Not least in recognition of this fact very few new initiatives are discernible in the AIC programme at present.

1.3. The ASEAN Industrial Joint Venture (AIJV) Scheme The unsatisfactory rate of pror.ress in 1\SEAN industrial and economic cooperation and the difficulties encountered in af~reeinr. on the principles to be followed in

1980

led to the proposal of the

ASF:AN Industrial Joint Venture

scheme (AIJV). On the one hand It was recop,nized that the number of industrial

47

projects permitting the allocation of component production to all ASEAN member countries was severely limited. On the other, obtalnlnr, ar,reement to a scheme from all five ASEAN members was recognized as cumbersome. The AIJV scheme therefore requires the participation of only two private sector partners.

Thus

AIJVs can be launched as comparatively small packages with less capital Investment. In addition, AI.IV investors are free to locate their enterprises In any of the participating countries. While tariff preferences granted in the AIC scheme must be in accordance with the provisions of the ASEAN PTA -- that is on an tariff preferences on AI.IV products apply

MFN-basis for all member countries only

to

participating countries

for

a

four-year period, durinr, which non-

participating countries waive their PTA rlp,hts. Approved AIJV products initially enjoyed a 50 per cent tariff preference, but this level was Increased to 75 per cent In August 1986. While other ASE:AN countries can choose to opt out from particular AIJVs,

their own products that compete with the AI.JV product are

excluded from the preferential tariff treatment. AIJVs carry obvious advantages over the AlC scheme. They are more flexible to implement, and a far greater number of lnrlu~trial products lend themselves for regional co-operation of this sort. It Is therefore not surprising that the number of AlJVs already accepted and in the pipeline is large and growing compared to A!Cs. The followinr, ASEAN industrial joint ventures are currently approved or being implemented, while others are In the process of preparation: Mechanical and power rack and pinion steering (Malaysia, Philippines); Constant velocity joints (Malaysia, Philippines); Frit (Indonesia, Malaysia, Thailand); Motorcycle electrical parts (Malayslrl, Thai land);

48

Security paper (Brunei, Malaysia, Thailand); Potash feldspar quartz (Indonesia, Thailand); Slaughtered meat (Indonesia, Thailand).

1.4. The ABEAN Industrial Projects (AlP) The Declaration of ASEAN Concord states that member countries "shall cooperate to establish large--scale ASEAN industrial plants, particularly to meet regional requirements of essential commodities", and that "the expansion of trade among member states shall be facilitated through co-operation in ASEAN Industrial Projects." Industrial projects using raw materials available in ASEAN and contributing to expansion in employment, to increased food production and to increased foreign exchange savinp,s or earninr,s will receive prlorlty. According to Wong (1983), regional industrial projects have a number of advantages: 1.

Compared to national

projects,

regional industrial

projects actually

require not only less investment but also less labour per unit of output. 2.

On the basis of cost differentials, regional co-operation is superior to non-cooperation. Should there be supply deficiency, the cost incurred is significantly less with industrial co-operation than without it. Cost savings would also arise from

regional co-operation rather than

resorting to imports from third countries. 3.

A larger positive trade balance could be more easily obtained from industrial co-operation than

from

the alternatives of reliance on

third-country imports or national self-reliance.

49

Using the packap,e-deal approach of the Kansu-Robinson Report, the ASEAN Economic Ministers Meeting in Kuala Lumpur immediately after the Ball Summit In March 1976 launched the first package of AlPs: (a) a urea project each for Indonesia and Malaysia; (b) a superphosphate project for the Philippines; (c) a diesel engine project for Singapore; and (d) a soda-ash project for Thailand. These five industrial projects required an Investment of m>$2fl0-300 million for each project. The host country had to commit up to 60 per cent of the total equity, and the remaining 40 per cent were to be shared equally among the other member countries. The private sector in the host-country could invest up to 40 per cent. The ap,reement also specified that up to 70 per cent of the infrastructural costs of the projects could be financed by foreign loans. In 1977, Prime Minister Fukuda committed the Japanese Government to provide US$1 billion soft loans to fund the AlPs. Initially, the above allocation of the AlPs appeared rational

to be technically

with regard to location, factor endowment, industrial structure, raw

material avallability and market potential, but as implementation was approached a number of difficulties were encountered in most of the projects.

1.4.1. Indonesia and Malaysia: Urea Projects The appropriateness of allocating a urea project for both Indonesia and Malaysia stemmed from the following rationale: Both countries were net food importers to some extent. Fertilizers are critical inputs to increase agricultural performance. Also, natural gas, the main raw material for urea manufacturing, is available in abundance in Indonesia and Malaysia.

50

The aggregate demand for nitrogen fertilizer in ASEAN was expected to increase from 0.3 million nutrient tonnes in 1975 to 1.9 million nutrient tonnes in 1985, exceeding the region's existing production capacity. When the urea project was adopted, Indonesia's nitrogen fertilizer production amounted to 71 per cent of ASEAN's total output. The additional two AlP urea plants in Indonesia and Malaysia would create substantial excess supply in the future. The Philippines had made plans for a urea factory in !.\may capable of supplying 390,000 tonnes annually,

while Thailand was

expected

to

phase out its urea and

ammonia sulphate production by the Mae Noh Industries. The estimated total output was therefore expected to increase from 0.5 million tonnes in 1976 to 3. 7 million tonnes in 1985. Unless ASEAN was able to find extra-rer,ional markets, a considerable oversupply of urea soon

after

I 985 would become a problem.

Malaysia's Bintulu (Sarawak) project, with a planned annual output of 530,000 tonnes of urea and 360,000 tonnes of ammonia, also has a serious problem of excess capacity. The alternative of choosinr, smaller AlPs would have involved higher unit cost, resulting in Malaysia's output being uncompetitive even in the ASP-AN m:uket. In the 1985-86 period, the Indonesian Acheh Fertilizer Project commenced exports to Thailand and the Philippines, in addition to domestic sales. In September/October 1985, the Malaysian Urea Project started production of ammonia and urea granules, becominr, the second ASF;AN AIP to commence production. The total output of the Malaysian

projr~ct

amount0d to

125,994 tonnes of ammonia

and 174,367 tonnes of urea as at 31 May 1986.

1.4.2. The Phlllpplnes In I 976 a superphosphatf' project was allncatf>cl as an AlP to the Philippines. A plant costinr, US$124 million

was found

feasiblf>

anr! ace0ptable by

51

other ASEAN members. To maximize the advantnge of available raw materials and the ASEAN market, the Philippines proposed enlarging the project to US$321 million in 1979. The major difficulty of the Philippines AlP was cost, not excess capacity, as in the Indonesian and Malaysian urea projects. For instance, the estlma ted cost per tonne of superphosphate ranged from US$308 to US$379 whereas the world price was merely around US$180 in 1977. The project was then replaced by a proposal for an integrated pulp and paper project in April 1980. But problems concerning raw materials

cropped up almost immediately,

threatening the viability of the pulp and paper project. So a copper fabrication plant was substituted and approved in .Tune 1981. The project Supplementary Agreement in November 1982 agreed to the expansion of the plant capacity from 80,000 to 100,000 tons per annum. However, the economic difficulties and financial stringency in the Philippines since mid-1 9R4 have created new uncertainties regarding the feasibility of the project. The most recent annual report of the ASEAN Standing Committee (1985-86) reports that "there has been no development"

on

the

Philippines

AlP

"primarily

br•c1.use no meaningful commercial

proposals had been submitted by bidders durinr, the year". 1.4.3. Singapore Perhaps the most controversial in the first AlP Package was Singapore's diesel engines project, allocated in 1976. Feasibility studies indicated that a 1-1000 horsepower (hp) diesel engine project was commercially viable. Most of ASEAN's diesel-engine production capacity was limited to Jess than 300 hp and was concentrated In Indoncsb, Malaysia and the Philippines. But these countries had firm plans to expand their existing production capacity of enp,ines below 500 hp. Since Thailand was rnovinr, into

enr,iw~s

within the 5-50 hp range. A

52

large proportion of the region's demand for diesel enp,ines was confined to the small hp range, the potential residual market for smaller diesel engines would be extremely limited once the various national plans for diesel engines were implemented. In November I 979 Sinp,apore made it clear that it could not Implement the designated project, costinp, US$200-300 million with planned annual output of I 00,000 units mainly for ASP.AN, unless

oth~:r

members abanrloned their national

plans for diesel engines. Indonesia sought to limit Singapore's project to diesel enp,ines above 500 hp in order to protect its own diesel engine industry, which supplied about half of the ASEAN market. Eventually Sinp,apore abandoned the ASEAN diesel engine project on the grounds thnt It was no lonp,er commercially viable. In apparent annoyance over the issue, Singapore also reduced its involvement in other AlPs to a token one per cent. The issue p,ave rise to Prime Minister Lee Kuan Yew's "five-minus-one" concept, according to which economic co-operation in ASEAN should not be impederl hy a country not wishing to join a scheme, provided it agrees to the others going ahead. Over the 1982-83 period, Sinp,apore was urged to propose an AlP of its own. Indonesia was particularly concerned to bring about th0 successful implementation of the first set of AlPs. At th0

inauf~JJrat

ion of the Aeheh Fertilizer

Project in January 1984, President Suharto was a hie to announce Sinp,apore's AlP proposal, a hepatitis B vaccine production project. Singapore's hepatitis B vaccine project differs from tlw other ASEAN AlPs in several respects. Firstly, it entails a relatively low capital outlay with an estimated cost of some lJS$6-8 million, a mere fraction of the other AlPs costing as much as US$300-400 million. Secondly,

it produces health products rather

than industrial inputs like nitrop,en fertilizer or fabricated copper. Thirdly, the

53

capital involvement of the other 1\SF:J\N countries is limited to a one per cent share of equity. It may therefore appear that the motivation for Singapore's proposal of the hepatitis vaccine project as an AlP is more political than economic. In the words of Singapore's Finance and Trade and Industry Minister, Dr Hu, "this has resolved a long-standing issue".

1.4.4. Thalland: Rock-Salt and Soda-Ash Project Soda ash

is

an

important

ingredient

in

glass manufn.during. Other

industries which require soda-ash input include detergents, pulp and sodium -based

chemicals and

Philippines was the largest

scrap.

J\SI~AN

When the first

paper,

A IPs were introduced, the

consumer of soda ash, accounting for 40 per

cent of /\SEAN's total consumption. Understandably, the Philippines first showed interest in

the

proposed

soda-ash

project.

E;vcntually, it was allocated to

Thailand for the main reason that Thailand possesses hur,e rock-salt deposits estimated at 2 billion tonnes in its northeast region. The initial estimated cost of this Thai project with

annual productive capacity

at 400,000 tonnes was

US$2:33 million. There were serious doubts rer,arding the viability of this Thai J\IP even In the initial stages, despite the favourable recommendation of a Canadian consultant.

Thai economists argued that it would not make economic sense for any

ASEAN country to invest in this venture, mainly because it would be cheaper to import soda ash from outside ASEAN. Further, there would be heavy costs of infra-structural development to connect the salt mines at Bamnet Narong, about 260 km from Bangkok, and limestone quarries near Bangkok, with the port of Laem Chabung. The Thai Government agreed to construct the necessary railroad and port facilities.

54

In October 1979, the first

meetin~

of the shareholder entities for the pro-

ject, the /\SEAN Soda Ash Co. Ltd., was held at Banp,kok. The Thai Government held 2.0 per cent of the equity, with the private sector taking up 40 per cent. The next year,

serious objections to the

grounds caused further

project location on environmental

delays. A new site at Sattahip was chosen. In early

1981, a JICA feasibility study indica ted I ow profitability for the project and a controversy on pricing principles. The climax (or anticlimax) to this

trlg~ered

ASF.AN AlP is tf.at the Thai Council of F-conomic Ministers decided in 1986 to abandon the Rock-S