AFTA and the Global Track

Abstract

The trade negotiations of the 1990s, and ASEAN's trade initiatives in particular, are proceeding on multiple tracks -- regional (AFTA), super-regional (APEC) and global (WTO). This article explores why parallel tracks seem to be necessary and how they might be better co-ordinated. A key factor behind these trends is the competition for foreign investment. Countries are attempting to attract regional production systems that require large markets and draw on diverse factors of production by pursuing joint liberalization with regional partners. At the same time, they are also trying to avoid costly trade diversion and to maximize market access for their exports by participating in larger regional and global liberalization efforts, and by liberalizing unilaterally. These multiple objectives find expression in open regionalism, which aims to achieve close regional integration but also extends liberalization to extra-regional partners. Evidence from quantitative modeling and from ASEAN's policy experience is used to support these observations. The ASEAN Free Trade Area (AFTA) represents a novel and important development in the international trading system. Taken in isolation, AFTA would be a bad idea - another example of a free trade agreement among developing countries that are too small and too similar to make up an efficient economic union. Many such agreements signed in Africa, Latin America and the Middle East in the 1950s and 1960s languish unimplemented, primarily because they could not offer their members sufficient benefits from specialization to overcome the costs of trade diversion. But AFTA is not an isolated policy; it forms part of a broader framework of marketoriented policy initiatives that Southeast Asian countries are pursuing to strengthen their trade relationships nationally, regionally and globally. Such parallel regional and multilateral efforts to improve the trade environment are emerging as the hallmark of the trading system of the 1990s. While the competing merits of regionalism and globalism continue to be debated in the academic literature, in practice they are now both fixtures of economic life. The key questions are why these tracks are parallel, and how they could be better co-ordinated. ASEAN's experience can help to provide answers to both questions. These trends in the international trading system result ultimately from technological and policy changes that have made it easier to conduct business across distances. The increasing mobility of capital, management and technology are changing the dominant strategy for growth and development. Some decades ago, the largely isolationist, continental model of development pursued by the United States in the nineteenth and early twentieth centuries was supplanted by outward-oriented industrialization strategies commonly associated with Japan, Korea and Taiwan. But this model, which emphasized export development and the acquisition of foreign technology through licensing and reverse engineering, has now also given way to what might be called the ASEAN model - an even more intensive integration strategy based on foreign direct investment, outward processing and other types of partnerships with foreign firms. By opening markets and actively recruiting foreign investors, Singapore and Malaysia were the first practitioners of the ASEAN model. By the late 1980s, in the wake of the appreciation of the yen, all major ASEAN economies had essentially adopted this strategy. The ASEAN model is now widely imitated, most importantly by China. The economies following the model today typically go well beyond opening their economies to international linkages and are aggressively seeking to insert themselves into so-called regional and global production systems. The ASEAN development model calls for a strategic blend of national and international policies. On the one hand, an economy needs to pursue the familiar mix of market-friendly policies at home, and on the other, it needs to create or join integrated, diversified regional groupings that offer good opportunities for international production systems. …