The Greater Mekong Subregion Program and ASEAN Free Trade Area: An Overview

A. The GMS Program

The origins of the GMS can be traced to the 1957 establishment of the Mekong Committee, which then comprised the four riparian countries of the lower Mekong Basin. The region was, however, racked by conflict, so there was little cooperation over the following three decades. The process gained substance only in 1992 when ADB initiated a more organized program of cooperation among its members. The original members of the GMS were Cambodia, the Lao People’s Democratic Republic (Lao PDR), Myanmar, Thailand, Viet Nam, and Yunnan Province of the People’s Republic of China (PRC). In 2004, Guangxi Zhuang Autonomous Region of the PRC also joined the GMS.

The GMS program is a classic case of market as opposed to institutional integration. While institutional integration is characterized by legal agreements and institutional arrangements that promote preferential trade among members of the agreement, market integration relies on nonofficial institutions that provide public and quasi-public goods that reduce transaction costs associated with the international movement of goods, services, and other production factors (Cooper 1968; Garnaut and Drysdale 1994).

As a program of market-based integration, the GMS agenda has concentrated on the provision of physical infrastructure that has public good characteristics, e.g., crossborder infrastructure. Indeed, essential infrastructure of all types remains underdeveloped in most of the GMS economies, and the GMS program has focused on overcoming this constraint. Initiatives such as the east-west, north-south, and southern economic corridors are creating a network of roads that connect the region, reducing the cost of transporting goods and people from one corner of the region to the other.⁵

Options for interconnections for power transmission and the development of fiber optic transmission links—both covered through the GMS flagship programs on power and telecommunications—also fall within the geographic scope of these corridors. As argued by Mussa (2000), the role that transport and communication infrastructure plays in driving economic integration should not be under-estimated. In many ways, the reductions in transport and communication costs taking place in much of the Mekong region today parallel those that took place in the industrialized world decades ago.

Apart from “hardware” in the form of physical infrastructure, the GMS program has also tried to address complementary “software” issues. The facilitation of cross-border trade and investment is another key feature of increasing subregional economic integration in the GMS. The GMS program supports a range of measures to facilitate trade and investment that are designed to promote integration. These include improving procedures and transparency for customs clearance and enhancing technical skills to improve the application of various regulatory systems. Included in these efforts is the pilot testing of single-stop procedures of customs inspection at selected border sites. Research conducted by UNCTAD and cited in the Joint Study Group (2000) suggests that customs paperwork and procedures costs add up to about 7% of the global value of trade (see also Hertel et al., 2001). This is likely to be an understatement of these costs in the case of the Mekong region given initial conditions, or the relatively poor state of such systems and procedures at present. The GMS program is also helping member economies prepare for a single GMS visa system. Besides promoting tourism and reducing the direct cost of cross-border control and management, a single-visa system would have indirect but positive effects on trade and investment.

The direct impact of interventions through the GMS program is already being reflected in trade and investment statistics for the subregion. Cross-border trade among the six GMS economies has increased sharply. For example, Thailand’s imports from its three neighboring countries, Lao PDR, Myanmar, and Cambodia has been increasing by an annual compound growth rate of almost 10% since 2000. More than two thirds of Lao PDR’s trade is with other GMS economies; more than a third is with Myanmar, and about a fourth is with Cambodia. In 2004, these three countries conducted more than 40% of their trade with each other. Nonetheless, a significant portion of trade among the GMS economies is not recorded. The nature of this type of trade makes it difficult to know its magnitude, but estimates range from about 30–50% or more of total recorded trade.

The trend is similar for intra-GMS net foreign direct investment (FDI) flows. Net FDI flows from the six GMS economies to Cambodia, Lao PDR, Myanmar, Thailand, and Viet Nam combined rose sharply from $130 million in 2000 to about $210 million in 2002, and estimates suggest that this growth trend has continued since. That trade and investment are growing hand-in-hand in the subregion is no coincidence. Early signs of a trade-investment nexus are emerging whereby trade not only encourages investment, but investment, in turn, encourages trade. This is a virtuous circle that links back to economic growth (Athukorala and Menon 1997).

B. AFTA

Although the origins of ASEAN date back to the early 1960s, it was officially launched in August 1967 as a result of the Bangkok Declaration. The original members were Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei’s accession in 1984 brought the total membership to six nations. During its early phase, ASEAN operated as a consensus-based, politico-security community with little attention paid to economic issues. On the economic front, ASEAN was dormant for its first 10 years.

The first attempt at promoting intra-ASEAN trade through institutional integration via regional trade preferences occurred at the Bali Summit in 1976 when ASEAN adopted preferential trading arrangements (PTA). Despite some initial promise and enthusiasm, the arrangements had little impact on intra-regional trade. In short, they were a failure. There were a number of reasons for this. First, the commodity coverage was narrow, and implementation was half-hearted. Second, the size of the proposed tariff cuts was too small to have any discernable effect on trade flows. On top of this, the PTA failed to deal adequately with non-tariff barriers, which were a greater impediment to trade than tariffs were (see Menon 1996 for a fuller discussion of these issues).

It took until the early 1990s before the next formal attempt was made to pursue intra- ASEAN trade liberalization. At the summit meeting of ASEAN heads of state in January 1992, the six agreed to establish AFTA by the year 2008. This deadline was subsequently moved forward to 2003. AFTA represents the most ambitious attempt at regional integration by ASEAN thus far. It is also the first political attempt to bring about regional free trade in Asia.

The centerpiece of the AFTA proposal is the common effective preference tariff (CEPT). It differs from the PTA in that its approach is essentially by sectors, making it more comprehensive and less cumbersome than the item-by-item approach of the PTA. The objective of the CEPT scheme is to lay the foundation for the creation of a single ASEAN market. Under the revised AFTA plan, tariffs were to be reduced to 20% within a time frame of 5–8 years (beginning in January 1993) before they were cut to 0–5% by the year 2003. This target has already been virtually realized for the six original members of ASEAN.

The first step in the widening of AFTA took place at the Fifth ASEAN Summit on 15 December 1995 when Viet Nam joined and acceded to the CEPT agreement. Lao PDR and Myanmar joined in 1997 while Cambodia came on board in 2000. For Viet Nam, the target date when 0–5% tariffs will apply to most intra-ASEAN trade is 2006. Lao PDR and Myanmar must adopt these tariff rates by 2008, and Cambodia by 2010.

Besides having tariff lines with strictly reciprocal preferences, the ASEAN integration system of preferences (AISP) was initiated to accelerate integration of the CLMV countries (Cambodia, Lao PDR, Myanmar and Viet Nam) into the regional market for trade in goods. At the 15th AFTA Council Ministerial Meeting in 2001, the original ASEAN members agreed to unilaterally extend tariff preferences to ASEAN's new members beginning 1 January 2002. This move is unprecedented for ASEAN, which has always operated on the basis of equal partnership. Although the AISP is implemented bilaterally and voluntarily, it is based on products that the CLMV countries themselves propose — not on those proposed by the providing countries. This provision was designed to avoid the so-called “snow-plow effect” whereby providing countries tend to extend preferences on tariff lines where there is little or no intra-regional trade.

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