ASEAN's Key Role in our Future

Date: 14 April 2010 Publication: Australian Financial Review By: Menon, Jayant; Hill, Hal Hal Hill is the H.W. Arndt Professor of Southeast Asian Economies at the Australian National University. Jay Menon is Principal Economist at the Asian Development Bank.

The 10-member Association of South-East Asian Nations is central to Australia's economic, political, diplomatic and strategic future. In 2008, this durable grouping, established in 1967, accounted for about 16 per cent of our international trade, slightly more than either China or Japan, and about 60 per cent greater than the US share. ASEAN will be the key to determining the role we playin the region's emerging economic architecture, the East Asian Summit. It will also have veto power over Prime Minister Kevin Rudd's Asia Pacific Community proposal. Three of the six preferential trading agreements (PTAs) we have signed with ASEAN, and our defence, migration and international education policies are heavily ASEAN-centered. Yet ASEAN's inner workings are poorly understood, especially its trade and commercial policies, a factor of considerable relevance to the current Productivity Commission enquiry into regional trade agreements. Consider this: ASEAN's free-trade agreement, known as AFTA, looks on the surface to be a preferential trading agreement, that is, like the European Union and North American Free Trade Agreement, according preferential trade access to its members over countries outside the region. But it does not work this way. Until recently, most of its concessions were "multilateralised", in the sense that they were offered to all its trading partners on a most favoured nation (MFN) basis. This has been modified in recent years, as AFTA bites into more sensitive products. In practice, ASEAN has been practicing 'open regionalism', e only association of its kind in the world to do so. Its rules of origin arrangements, that is, the percentage of value added required to qualify as "local production", are also among the least restrictive. As a result, ASEAN will not be a EU-style trade bloc (and much less a monetary union) in the foreseeable future. More than 70 per cent of its trade is extra-regional, whereas about 70 per cent of EU trade occurs within its boundaries. ASEAN's distinctive political economy irrevocably shapes its trade patterns and policies. Singapore is absolutely central to its commerce, with about three-quarters of intraASEAN trade passing through, or with it. As Singapore is avowedly free trade, it sets the trade policy parameters for the entire region. Further diminishing any trade-distorting effects of AFTA, less than 10 per cent of intra-ASEAN trade avails of the concessional rates. This is because the margins of preference are now generally low, as its members have liberalised extensively. So more than any other region, ASEAN is deeply integrated

into the multi-currency production networks centered on electronics, and increasingly automotives and machinery and equipment. These parts and components now account for almost half of ASEAN manufactured exports. Recognising the futility of trying to superimpose any kind of trade agreement on these export-import facilities around the globe, there is now free trade in these products under the International Technology Agreement. All these initiatives are some way off and the ASEAN economies are much smaller in aggregate than either China or Japan. But the grouping derives its balancing power owing to the rivalry between its two large northern neighbours. As an institution, ASEAN's approach is cautious and consensus-driven. It is prone to issuing declarations and charters that may be implemented more in spirit than substance. Its secretariat is deliberately under-powered. There is great diversity within it: the richest economy has a per capita income 50 times the poorest, while its political systems range from vibrant democracies to totalitarian states. But these countries matter more to Australia than to any other Orgranisation for Economic Cooperation and Development country, so we need to ensure we understand its modus operandi.