EH446: Economic Development in East and Southeast Asia.

Week 19 Essay
Ian Tay

Has Asia moved towards an EU type of economic union? If so, what has been or will be the main
consequences?

The fall of the Soviets brought an end to the bipolar system of global politics.
Although this led many observers to conclude that this inevitably means that the United
States of America was the sole power in a unipolar world, a perspective that is more focused
on economic factors would say that the bipolar system actually transformed into a multipolar
one. This is even more evident today with the existence of not only the North American Free
Trade Agreement (NAFTA) which is clearly led by the United States, but other entities such
as the European Union (EU) in Europe, Southern Common Market (MERCOSUR) in South
America, and the ASEAN Free Trade Agreement (AFTA) in Southeast Asia, to name a few.
However, as of today, the only regional entity that has been able to reach the highest stage of
the economic integration is the EU, with the establishment of a common currency in the form
of the Euro, the adoption of common economic policies, and the setting up of overarching
institutions.1 In Asia, an economic integration that comprehensive is still far away from
materializing – even the first stage of economic integration, a Free Trade Agreement (FTA)
has not been achieved yet. This essay, therefore, will trace how far Asia has gone towards
achieving some sort of regional integration and the consequences of having such regional
arrangements by using the Association of Southeast Asian Nations (ASEAN) as the starting
point of this analysis and then moving on towards the ASEAN + initiatives.

ASEAN

The political rationale for ASEAN took center stage during the years of its formation
when relations were strained between neighboring countries, Malaysia, Indonesia,
Philippines, Singapore, and Thailand due to new political landscapes after decolonization and
during the Cold War.2 The formation of Malaysia, which incorporates Sarawak and North
1
This observation follows the argument that economic integration starts with a Free Trade Agreement (FTA)
where there is zero tariffs between member countries and reduced non-tariff barriers, moves on to a Customs
Union (CU) where there is a FTA plus common external tariff, then a Common Market (CM) where there is a
CU plus free movement of capital and labour and some policy harmonization, and then finally an Economic
Union which is a CM plus common economic policies and institutions. Tham Siew Yan, “ASEAN Economic
Cooperation: Moving Towards an ASEAN Economic Community,” Community in ASEAN: Ideas and Practices
eds. Tham Siew Yan, Lee Poh Ping, and Norani Othman (Malaysia, 2008), p. 36.
2
For Indonesia and Malaysia, it was the means to restore amicable relations and to close the file on President
Sukarno’s Konfrontasi policy on Malaysia. For Thailand, which was a front-line state in the Vietnam conflict,
Borneo (and Singapore for two years) evoked dissatisfaction by Indonesia and the Philippines
to the extent of an invasion by paratroopers supported by President Sukarno of Indonesia at
that time. As Tan (1996) mentions, “its formation, in 1967, came at the end of a turbulent
period, when political differences between several countries in Southeast Asia threatened to
degenerate into full-scale armed conflict, and when the major world powers, the UK and the
USA, began to signal their disengagement from the region”. 3 Therefore, the formation of
ASEAN, which was preceded by the short-lived Association of Southeast Asia (ASA) and
MAPHILINDO, was clearly intended to solve the animosity between neighboring countries,
and return normalcy to this volatile region.

In addition to that, there was also an economic rationale for the establishment of
ASEAN. Ever since 1971, numerous attempts have been made to form a Free Trade Area
(FTA) or a more comprehensive economic agreement amongst the original six ASEAN
countries namely Brunei Darussalam4, The Republic of Indonesia, Malaysia, The Republic of
the Philippines, the Republic of Singapore, and the Kingdom of Thailand. The idea of a
limited FTA and customs union was first mooted during the ASEAN ministers meetings
(AMM) in Manila in 1971.5 However, the lack of direct involvement of ASEAN ministers in
or even their knowledge of-regional cooperation schemes in the early years restrained the
impact of efforts for closer economic cooperation albeit the United Nations report on ASEAN
Economic Cooperation in 1972, also known as the Robinson (or Kansu) report, providing a
major spur to regional cooperation by recommending regional import substitution, limited
trade liberalization, and a coordinated industrialization policy, failed to get the agreement of
the ASEAN governments to go all out into forming a FTA. 6 Nonetheless, once again, at the
first meeting of the ASEAN economic ministers in Jakarta in 1975, Singapore initiated a
campaign to create an ASEAN FTA. Former Prime Minister of Singapore, Lee Kuan Yew,
visited Jakarta in 1975 to solicit support for an agreement between himself and the leaders of

ASEAN was a means of aligning itself with, and cultivating the support of, its non-Communist neighbors to the
south. For Singapore, it was a means of safeguarding its viability and sovereignty in a potentially hostile Malay
world. For the Philippines, it was seen as a forum through which its territorial claim to North Borneo could be
discussed and resolved, and from which the Philippines could not afford to be excluded. In addition, all ASEAN
member countries were aware that the old colonial order in Southeast Asia was quickly coming to an end and
saw merit in facing the uncertain future collectively, in a regional grouping which emphasized consultation,
dialogue, and co-operative endeavours. Gerald Tan, “ASEAN Economic Development and Co-operation”
(Singapore, 1996), p. 8.
3
Tan, p. 4.
4
Brunei joined ASEAN when it attained independence from the British in 1984.
5
Teofilo C Daquila & Le Huu Huy. 2003. Singapore and ASEAN in the Global Economy: The Case of Free
Trade Agreements. Asian Survey, Vol. 43, No. 6. (Nov. - Dec), p. 920.
6
Ibid, p. 921.
the Philippines and Thailand.7 Wary of Singaporean access to its domestic market, Indonesia
effectively removed this proposal from the agenda of the second ASEAN leaders' summit in
Bali in 1976.8 Two years later, a Preferential Trading Arrangement (PTA) was signed as
regional effort to promote intra-ASEAN trade but due to various political, economic, and
social challenges, the PTA had little effect on intra-ASEAN trade. Then, again in 1986, there
was a suggestion by the Philippines to reduce tariff gradually and create a customs union but
this was rejected by Indonesia and Singapore.

The idea of an AFTA was revived again in 1991 by Thailand’s then Prime Minister
Anand Panyarachun. At the ASEAN Foreign Ministers Meeting in Kuala Lumpur in 1991,
this proposal received enthusiastic support due to the changing global economic conditions
and the domestic need to react to it, with only Indonesia and the Philippines expressing
reservations and following the ASEAN Economic Ministers Meeting in 1991, the initiative
toward the creation of AFTA was formally launched at the leaders' summit held in Singapore
in 1992.9 On the 28th of January 1992, the ASEAN Free Trade Area was established to
eliminate tariff barriers among the Southeast Asian countries with a view to integrating the
ASEAN economies in a single production base and creating a regional market of 500 million
people with the signing of the Singapore Declaration and the Framework Agreement on
Enhancing Economic Cooperation.10 The elimination of trade barriers among member states
is expected to promote greater economic efficiency, productivity, and competitiveness.
Through Article II Section A of this declaration regarding Cooperation in Trade, “All
Member States agree to establish and participate in the ASEAN Free Trade Area within 15
years” and “The Common Effective Preferential Tariff (CEPT) Scheme shall be the main
mechanism for the AFTA”.11 Along with this, the ASEAN Framework Agreement on
Services (AFAS) which aims to eliminate restrictions to trade in services and enhance
cooperation in services and the ASEAN Investment Area (AIA) which encourages investors
7
Ibid.
8
Ibid.
9
Ibid.
10
AFTA Reader 1993, ASEAN Secretariat, 2009, [accessed March 9 2010]
<http://www.aseansec.org/9103.htm>; Chinese University of Hong Kong, 2000, [accessed March 9 2010]
<http://intl.econ.cuhk.edu.hk/rta/index.php?did=1>
11
The CEPT is an agreed effective tariff, preferential to ASEAN, to be applied to goods originating from
ASEAN Member States, and which have been identified for inclusion in the CEPT Scheme in accordance with
the agreement. As Article III of the Agreement on the Common Effective Preferential Tariff Scheme for the
ASEAN Free Trade Area stipulates, “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”. A product is deemed to be originating from ASEAN Member States if at
least 40 percent of its content originates from any Member State.
to adopt a regional investment strategy and network of operations and which provides a
greater scope for division of labour and industrial activities across the region, creating
opportunities for greater industrial efficiency and cost competitiveness, complements the
efforts of AFTA towards achieving greater economic integration between the Southeast
Asian nations. These are all definitely an important step taken towards the formation of the
ASEAN Economic Community (AEC) which envisages the creation of (a) a single market
and production base, (b) a highly competitive economic region, (c) a region of equitable
economic development, and (d) a region fully integrated into the global economy. 12 However,
it is important to note here that even the economic integration under the ASEAN Economic
Community is not about creating any supranational bodies with executive, legislative, and
judicial functions.13

ASEAN +
Nevertheless, as AFTA arguably takes the form of an “open regionalism” or a “new
regionalism”, it is flexible, outward looking, and dynamic. 14 Especially after the turn of the
century, the proliferation of bilateral and plurilateral FTAs outside ASEAN shows that
ASEAN or AFTA does not in any way restrict or forbid these FTAs. ASEAN as a group has
forged closer trade relations through various ASEAN-led FTA’s and also bilateral FTA’s
between individual member countries and those outside the region. One of the most
successful FTA between ASEAN and an external economy so far is the ASEAN-China Free
Trade Area (ACFTA). As of August 2009, all the agreements for the full implementation of
AFTA has been signed with the final agreement, the Investment Agreement, inked. This
means that the ACFTA already has a regime for trade in goods, in trade in services, dispute
settlement, and investments.15 When completed, the ASEAN-China FTA will be the largest
FTA in the world, with a combined market of 1.9 billion people and a GDP of USD5.3
trillion (See Table 1). Besides that, ASEAN member countries have also completed a FTA

12
ASEAN Secretariat, “ASEAN Economic Community,” ASEAN Secretariat, 2009, [accessed March 9 2010],
<http://www.aseansec.org/>.
13
Tan Lay Hong, “Will Asean Economic Integration Progress beyond a Free Trade Area?,” The International
and Comparative Law Quarterly, Vol. 53, No. 4 (Oct., 2004), p. 966.
14
Ian Tay, “AFTA, Malaysia, & Singapore: A Case of New Regionalism,” MSc Thesis, Universiti Kebangsaan
Malaysia (National University of Malaysia), Malaysia, 2009.
15
Even more impressive is the speed of the reduction in tariffs and duties between these entities – besides the
normal track which requires the original ASEAN members to gradually reduce or eliminate tariff rates by 2010
and the newer members by 2015, there has also been a early harvest program which successfully reduced tariffs
and duties for certain products by 2006. MATRADE [Malaysian External Trade Development Corporation],
“Malaysia’s Free Trade Agreement,” Ministry of International Trade and Industry, 2008, [accessed March 9
2010], <http://www.matrade.gov.my>
with the Republic of Korea as of June 2009 and with Japan as of August 2009 (See Table
2).16

The importance of the China, the Republic of Korea, and Japan, to ASEAN countries,
therefore, cannot be doubted. These three countries comprise ASEAN’s largest trading
partners and even as models of development that they can emulate. 17 China, South Korea, and
Japan, too sees ASEAN as a region of great importance to them with the huge amount of
trade investment flowing across their borders. Therefore, it is not surprising that an East and
Southeast Asian-wide cooperation has been suggested ever since the 1970’s given the
common recent historical experiences and some key common traits, similar distinctive
economic institutions and approaches to economic development, cross-cutting patters of FDI,
increased intra-regional trade, and a specific form of capitalism. South Korea called for an
Asian Common Market in 1970, Japan suggested for the creation of an Asian Network in
1988, while Malaysia put forward the creation of an East Asian Economic Grouping (EAEG)
which was later renamed the East Asian Economic Caucus (EAEC). 18 Today, however, the
East and Southeast Asian countries have come under a grouping called the ASEAN Plus
Three Grouping. Although a comprehensive free trade between all these countries is still far
from being achieved, it is definitely not out of the question. 19 However, it is important to note
here that there are some other noteworthy efforts by the APT grouping that could pave the
way for a comprehensive Asian Economic Union as the European Union has managed to
achieve. The APT, for example, has sponsored an expanding set of currency swap agreements
designed to help deal with any future currency crisis is a major reason to keep the whole
process moving forward, hinting towards steps of a monetary union.20

Consequences

16
ASEAN has also signed Free Trade Agreements with India and Australia-New Zealand, but as this paper
focuses on East and Southeast Asia, discussion on the non-East Asian trade agreements will be disregarded.
17
Japan and China, for example, are ASEAN’s two largest trade partners, recording more than 10% of the total
trade value each in 2008.
18
Richard Stubbs, “ASEAN Plus Three: Emerging East Asian Regionalism?,” Asian Survey, Vol. 42, No. 3
(May - Jun., 2002), p. 441.
19
The ASEAN Plus Three (ASEAN+3) Economic Ministers Meeting held in Jakarta on the 14th of September
2004 have endorsed a proposal to set up an Experts Group, comprising scholars and researchers to study the
feasibility of an East Asian Free Trade Agreement that would comprise of the ASEAN countries, South Korea,
China, and Japan (ASEAN Secretariat 2009). In the 11th ASEAN Plus Thee Summit, the Republic of Korea
informed the progress of the 2nd Phase of Study of the East Asia Free Trade Area (EAFTA) that focused on a
sector-by-sector analysis.
20
Stubbs, p. 454.
 For the ASEAN countries, AFTA was implemented due to:
(1) The expanding marketization and liberalization of the international
economy based on Neo-liberal ideas pushed by multilateral institutions
such as the IMF, World Bank, and the WTO;
(2) The entrance of new players in the international economy such as China
and other ex-Soviet states;
(3) The proliferation of trade blocs around the world
(4) The fear of trade and investment diversion away from ASEAN countries to
other economies outside the region
(5) The need to look for new niches to continue attracting investments and
maintaining a favourable trade balance as some ASEAN countries can no
longer rely on their initial strengths that first brought investments into the
country.21
So, when AFTA was introduced, it was hoped that by integrating, they could all face these
new challenges together. The creation of an ASEAN Economic Community, for example, is
capable of creating a “stable, prosperous, and highly competitive ASEAN economic region to
which there is a free flow of goods, services, investments and a freer flow of capital,
equitable economic development and reduced poverty and socio-economic disparities”. 22 But,
although this is a step towards strengthening ASEAN, leaders have it in their mind that this
strengthening is needed so that the ASEAN region will be more capable of actively engaging
in international trade and reap more gains from it for the development and prosperity of
everyone in the region.

The same rationale can be used for the formation of a more comprehensive integration
agreement between all the economies of East and Southeast Asia. As Angresano (2004) has
argued, there is a correlation between the deepening and widening of integration and dynamic
economic benefits. By combining their resources, the governments of East Asia would be in a
better position to mitigate the adverse impact that the forces of globalization have on their
relatively open economies.23 In addition, East Asian states see their deeper integration as
giving them a voice in global trade negotiations and a forum in which to discuss regional

21
Tay, p. 75.
22
extracted from Lee Poh Ping, “AFTA, the New Regionalism, Globalization, and the ASEAN Community,” in
Tham Siew Yean, Lee Poh Ping, & Norani Othman, eds., Community in ASEAN: Ideas & Practices (Malaysia:
Penerbit Universiti Kebangsaan Malaysia, 2008).
23
Stubbs, p. 454.
economic issues.24 As a group, their weight would definitely be heavier while negotiation
with the EU and NAFTA in international forums, for example (See Table 1). This will enable
the emergence of APT as a major regional and international player.25

Conclusion

East Asia has definitely not reached an EU type of economic union. However, there
have been initiatives towards economic integration that could prospectively lead to an
economic union. The ASEAN initiative for the creation of the ASEAN Free Trade
Agreement in 1992 paved the way for economic cooperation between the Southeast Asian
nations. However, as ASEAN leaders realized that to truly stay competitive and continue
developing their economies, the reach of economic integration should not be limited to
Southeast Asia and integration with their neighbors to the north is an important key. This was
mutual as China, South Korea, and Japan too realized the importance of their southern
neighbors. Therefore, the ASEAN + 3 grouping was formed. There have been significant
successes through the APT grouping but it is still too early to tell how much leverage it will
provide for the development of the Asian countries. However, there is no doubt that the
positive effects of successful integration between East Asian countries is abundant and
prospectively plays an important role for continuous development for all these countries,
pulling the center of international economic wealth to the east, and cementing the 21st century
as the Asian century.

24
James Angresano, “European Union integration lessons for ASEAN + 3: the importance of contextual
specificity,” Journal of Asian Economics 14 (2004), p. 923.
25
Stubbs, p. 455.
 Table 1: GDP, Population, Total Trade, & Share of Total Trade
of Signed Trade Agreements with ASEAN.
Share of total
Total Trade trade
GDP (millions Population amongst/with amongst/with
Agreement
of USD)* (thousands)* ASEAN ASEAN
countries** countries
(%)**
ASEAN FTA (AFTA) 1,463,229 574,630 396,958,586 24.6438
Indonesia 514,389 228,249 70,809,542.5 4.3960
Malaysia 194,927 26,993 109,833,484.5 6.8186
Thailand 260,693 67,386 57,802,621.2 3.5885
Philippines 166,909 90,348 25,981,398.4 1.6130
Singapore 181,948 4,839 96,686,928.2 6.0025
Brunei Darussalam 11,471 397 2,906,750.5 0.1805
Cambodia 9,574 14,700 3,394,382.4 0.2107
Laos 5,431 6,205 2,206,964.6 0.1370
Myanmar 27,182 49,190 4,853,835.3 0.3013
Vietnam 90,705 86,323 22,482,679.0 1.3958
ASEAN-China FTA 5,323,268 1,900,270 568,076,266 35.2670
ASEAN 1,463,229 574,630 396,958,586.5 24.6438
China 3,860,039 1,325,640 171,117,679.4 10.6232
ASEAN-Republic of Korea FTA 2,392,350 623,237 458,142,625 28.4422
ASEAN 1,463,229 574,630 396,958,586.5 24.6438
Republic of Korea 929,121 48,607 61,184,038.2 3.7984
ASEAN-Japan CEP 6,372,501 702,334 570,020,605 35.3877
ASEAN 1,463,229 574,630 396,958,586.5 24.6438
Japan 4,909,272 127,704 173,062,018.5 10.7439
Total*** 13,525,061 3,242,189 887.293,570 55.0845
*2007 Data
**2008 Data
***Total is calculated by adding values from AFTA + China + Republic of Korea + India + Australia + New Zealand+
Japan
Source: Compiled from World Bank 2009; ASEAN Statistics 2009

Table 2: Time Schedule of ASEAN’s Regional Trade Agreements with China, Korea, and Japan.
Agreement Agreement Agreement
Framework Time Frame took for
Agreement for Trade in for Trade for
Agreement Completion*
Goods in Services Investment
November- November- January- August-
ACFTA 6.75 Years
2002 2004 2007 2009
December- November-
AKFTA August-2006 June-2009 3.50 Years
2005 2007
AJCEP October-2003 April-2008 April-2008 April-2008 4.50 Years
* Time frame might be longer as there might be a difference between the time when the agreement is signed and the
time the agreement is implemented
Source: Compiled from MITI 2008; MCI 2006; ARIC 2006.
References

AFTA Reader 1993, ASEAN Secretariat, 2009, [accessed March 9 2010]

<http://www.aseansec.org/9103.htm>

ASEAN Secretariat, “ASEAN Economic Community,” ASEAN Secretariat, 2009, [accessed

March 9 2010], <http://www.aseansec.org/>.

Angresano, James. “European Union integration lessons for ASEAN + 3: the importance of
contextual specificity,” Journal of Asian Economics 14 (2004), pp. 909-926.

Chinese University of Hong Kong, 2000, [accessed March 9 2010]

<http://intl.econ.cuhk.edu.hk/rta/index.php?did=1>

Daquila, Teofilo C & Le Huu Huy. 2003. Singapore and ASEAN in the Global Economy: The
Case of Free Trade Agreements. Asian Survey, Vol. 43, No. 6. (Nov. - Dec).

Lee Poh Ping, “AFTA, the New Regionalism, Globalization, and the ASEAN Community,”
in Tham Siew Yean, Lee Poh Ping, & Norani Othman, eds., Community in ASEAN:
Ideas & Practices (Malaysia, 2008).

MATRADE [Malaysian External Trade Development Corporation], “Malaysia’s Free Trade

Agreement,” Ministry of International Trade and Industry, 2008, [accessed March 9
2010], <http://www.matrade.gov.my>

Stubbs, Richard. “ASEAN Plus Three: Emerging East Asian Regionalism?,” Asian Survey,
Vol. 42, No. 3 (May - Jun., 2002), pp. 440-455.

Tan, Gerald. “ASEAN Economic Development and Co-operation” (Singapore, 1996).

Tan Lay Hong, “Will Asean Economic Integration Progress beyond a Free Trade Area?,” The
International and Comparative Law Quarterly, Vol. 53, No. 4 (Oct., 2004), pp. 935-
967.

Tay, Ian. “AFTA, Malaysia, & Singapore: A Case of New Regionalism,” MSc Thesis,
Universiti Kebangsaan Malaysia (National University of Malaysia), Malaysia, 2009.

Tham Siew Yan, “ASEAN Economic Cooperation: Moving Towards an ASEAN Economic
Community,” Community in ASEAN: Ideas and Practices eds. Tham Siew Yan, Lee
Poh Ping, and Norani Othman (Malaysia, 2008), p. 36.