ASEAN Beat | Economy | Southeast Asia

Time for ASEAN to Revive its Customs Union Vision

An idea rejected in 1986 deserves a second look.

As tariffs once again become bargaining tools for major powers, one of ASEAN’s key weaknesses is the fragmentation of its market across national tariff regimes. The revival of the Common External Tariff (CET) proposal, rejected four decades ago, raises a fundamental question: can ASEAN move beyond a mere “collection of assembly hubs” to become a higher-value-added economic region and a negotiating actor in its own right?

A Customs Union Proposal Rejected 40 Years Ago

ASEAN’s economic integration has been built on the ASEAN Free Trade Area (AFTA), agreed in 1992 and implemented through the Common Effective Preferential Tariff (CEPT) scheme from 1993. The CEPT lowered intra-ASEAN tariffs on goods originating in the region. A CET, by contrast, would require member states to apply a common external tariff schedule to imports from outside ASEAN. Its adoption would take ASEAN beyond a free trade area and towards a customs union.

The CET is not a new idea. In August 1986, exactly 40 years ago, the Philippines, then ASEAN chair, proposed a customs union at the ASEAN Economic Ministers’ Meeting. The proposal called for intra-regional tariffs to be reduced gradually within a fixed time frame and for a common tariff to be imposed on imports from outside ASEAN. No consensus emerged: Indonesia opposed the deadline, while Singapore objected that the proposal could result in higher external tariffs. Intra-ASEAN trade then accounted for only about 20 percent of member states’ total trade, and their heavy dependence on external markets made a CET difficult to accept.

AFTA’s Success—and the Borders That Remain

ASEAN instead chose AFTA. This flexible form of integration eliminated most intra-regional tariffs while preserving each member state’s discretion over external tariffs. It supported ASEAN’s model of open regionalism – welcoming foreign investment and imported intermediate inputs while producing for global markets – and helped expand regional production networks. Yet many member states remained concentrated in assembly operations and dependent on external suppliers for key components, advanced materials and research and development. As a result, the value added retained within ASEAN did not rise commensurately with the value of its exports.

Under a fully functioning customs union, goods imported from outside the region could, after paying the common external tariff upon entering ASEAN, circulate freely within the bloc in principle. Certificates of origin and customs clearance procedures currently required for preferential intra-ASEAN trade would, in principle, no longer be necessary. With national tariff borders and rules of origin removed, companies could source the most suitable mix of parts and materials from across ASEAN and allocate production stages accordingly. Lower border costs would encourage intra-regional sourcing, the consolidation of production, and investment in higher-value activities.

Yet the flexibility that was once ASEAN’s strength is becoming a weakness amid intensifying geoeconomic competition. As tariffs, export controls, subsidies, and scrutiny of circumvention become increasingly intertwined with economic security, individual ASEAN members risk accepting different terms in separate negotiations with major powers. If this continues, companies may find it increasingly difficult to treat ASEAN as........

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