Economic Situation of ASEAN

The Association of Southeast Asian Nations (ASEAN) represents one of the fastest growing regions with a population of approximately 600 million in the developing world. As of 2009, ASEAN's collective GDP nearly equaled $1.5

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trillion. ASEAN is far from monolithic and there is a great deal of heterogeneity within the group in terms of income and development level.

The Association is making progress towards building greater economic integration through the ASEAN Economic Community which will help foster economic growth in the ASEAN countries with lower levels of development. In 1997 the ASEAN leaders agreed upon the ASEAN Vision 2020. Its goal is to create a stable, prosperous and highly competitive ASEAN economic region in which there is a free flow of goods, services, investment and a freer flow of capital, equitable economic development and reduced poverty and socio-economic disparities in year 2020. Nevertheless, the region as a whole has grown rapidly on a basis for decades.

While there are a number of reasons for ASEAN’s success, one central element has been a high-degree of openness to trade. Although the region is relatively poor by Western standards, ASEAN member states demonstrate strong GDP growth. The region did well during the global economic recession, with Brunei Darussalam, Cambodia, Malaysia, Singapore and Thailand seeing slightly negative GDP growth, while Indonesia, Laos, Myanmar, the Philippines and Vietnam showed positive growth. All countries retained positive growth rates in 2010, a trend which is expected to continue through 2015.

With regards to the global financial crisis of the late 2000s, the GDP per capita of several ASEAN member states decreased. However, the countries recovered quickly, and GDP per capitals were once again on the rise. This trend is expected to continue for the majority of ASEAN member states. The ASEAN

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economy is characterized by a stop and start cycle of demand, making the economy somewhat tumultuous. However, increasing affluence in these countries has led to slower population growth and a more stable economy .

The region is further connected by a collection of large river basins sloping south and east, a number of peninsulas and archipelagos, and seas that exist between islands and are connected by straits of various widths. The members range in physical size from the 2 million sq. km of Indonesia to the 710.3 sq. km of Singapore. Natural resources found within the region include offshore oil and gas deposits, natural gas, water, fish, timber, coal, iron ore, tin, zinc, copper, lead, manganese, phosphate, gemstones and precious stones.

Agriculture is an important and dominant sector in ASEAN countries, contributing heavily to GDP and employment. The region has a large agricultural foundation and over 60 million hectares of arable land with the largest agricultural land holders being Indonesia and Thailand. Agricultural and food trade is considered vital for ASEAN countries as many see the expansion of agricultural production and trade as essential to reducing rural poverty. Several ASEAN countries have been able to almost double their share of global agri-food trade during the past decade. Food safety, both for domestic and export markets, is an increasingly important issue among ASEAN countries. For an open market like Singapore, agricultural and food trade provides inputs for food processing industries or other value-added opportunities for export to ASEAN markets (" Agri-Food Regional Profile ASEAN ", 2011).

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3.3 ASEAN Free Trade Agreements

One possible channel for reviving the region’s economic dynamism and enhancing the region’s competitive position in the world economy is to invigorate intra-regional trade. In fact, ASEAN countries have forcefully been promoting trade with each other for quite some time. Although ASEAN economies are individually small, collectively they form the world’s ninth largest economy, which implies substantial gains from trade. The primary institutional framework for intra-ASEAN trade liberalization is the ASEAN Free Trade Area (AFTA). The AFTA laid out a comprehensive program of regional tariff reduction, to be carried out in phases through the year 2008. The requirements of the AFTA and bilateral trade agreements have contributed to lower tariffs and greater trade in the region. As of January 2005, tariffs on almost 99% of the products in the Inclusion List of the ASEAN-6 (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) member countries had been reduced to no more than 5% with more than 60% of these products having zero tariffs. The average tariff for ASEAN-6 has been brought down from more than 12% when AFTA started, to 2% today.

The Common Effective Preferential Tariff (CEPT) Agreement for AFTA requires that tariff rates levied on a wide range of products traded within the region are reduced to 0-5%. For the newer member countries, namely, Cambodia, Laos and Vietnam, tariffs on about 81% of their Inclusion List have been brought down to within the 0-5% range. The ASEAN leaders have agreed to eliminate all import duties by 2010 for the six original members of ASEAN and by 2015 for the new

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members. Products that remain out of the CEPT-AFTA scheme are those in the Highly Sensitive List (i.e. rice) and the General Exception List. On May 17, 2010, the ASEAN Trade in Goods Agreement (ATIGA) entered into force. The ATIGA is an enhanced version of the CEPT-AFTA aimed at creating a more comprehensive legal instrument. ASEAN recognizes the potential benefits of furthering co-operation amongst its trading partners and is currently working to advance its free trade arrangements with a number of them. The main objectives of these agreements are to strengthen and enhance economic, trade and investment co-operation between the parties. The ASEAN–China Free Trade Area (ACFTA) and the ASEAN–

Republic of Korea Free Trade Area (AKFTA) were already established in 2010.

There has been less progress on the ASEAN–Japan Free Trade Area (AJFTA) and the ASEAN+3 Free Trade Area (A+3FTA), which would bring together ASEAN and the Big Three, but both remain plausible and realistic avenues for intra-regional trade liberalization (Gemma Estra, 2011). Other important agreements that came into effect in 2010 were the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA), the ASEAN-India Trade in Goods Agreement and the ASEAN-China Investment. ASEAN's major trading partners in 2009 were China, representing 12.1%

of total ASEAN trade, the European Union (11.6%), Japan (10.8%) and the United States (10.1%) .

Since well before the global financial crisis, ASEAN countries have sought to promote trade with each other and with the Big Three. The contributory factors were concerns that the region was heading toward a middle-income trap between a fast rising China and the technologically-more-advanced Japan and NIEs. In

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addition, the lack of progress at the multilateral Doha Round of World Trade Organization (WTO) talks drove countries around the world to pursue bilateral and regional FTAs. ASEAN was no exception to this global trend. Finally, the 1997/98 Asian crisis served as a catalyst for regional cooperation and integration in East Asia. There was a widespread perception that the IMF mishandled this crisis and, more fundamentally, served the interests of industrialized countries outside the region. The immediate consequence was the Chiang Mai Initiative, which sought to pool the foreign exchange reserves of countries in the region in order to protect the region from a currency crisis.

ASEAN’s experience during the global crisis highlights the risks of excessive dependence on extra-regional demand for exports and growth. The global crisis did nothing to invalidate ASEAN’s outward-looking, export-oriented growth strategy, which has delivered rapid sustained growth and substantial poverty reduction. As such, the region should continue to maintain and nurture its vital trade links with the industrialized countries and the rest of the world. At the same time, however, the transformation of East Asia from a stagnant, low-income region to a dynamic middle-income region—and, in fact, one of the three centers of gravity of the world economy, along with the US and the EU—suggests that intra-East Asian trade offers the promise of a new, additional engine of demand and growth.

Strengthening intra-regional trade will enable the region’s economies to exploit potentially large but hitherto under-realized gains of trade . A complementary strategy is for each country to rebalance growth toward domestic demand .

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AFTA represents the most advanced of regional trade agreements, in which the members of the trade agreement have an intraregional agreement, but have also been able to negotiate bilateral trade agreements between the ASEAN and individual countries. Intra-ASEAN merchandise trade is around a quarter of all ASEAN trade, this represents an increase of 4.8 percentage points in intra-ASEAN exports and an increase of 8.7 percentage points for intra-ASEAN imports between 1990 (two years prior to establishment of AFTA) and 2009 .

Tariff reductions within the FTA with China started in 2005; the Regional Trade Agreement (RTA) with India is to start in 2007. ASEAN countries trade more in agricultural goods with China and India than do other countries as a percentage of their total trade in agriculture. Nine per cent of AFTA countries’ agricultural trade was with China in 2005, compared with China’s share in world agricultural trade of 3%. Trade with India is also higher than the world average. India accounts for 4% of ASEAN trade in agriculture, while accounting for only 1% of world trade (Jane Korinek,2009).