In my law school class on the AEC, I often note that the ASEAN Industrial Cooperation (AICO) scheme is the paradigm for economic integration in Southeast Asia. In its birth, life and impending death, AICO serves as an example of the best and worst of how ASEAN economic cooperation works.
AICO was created in 1996 to encourage cross border investment and trade within ASEAN, serving as an early harvest of the ASEAN Free Trade Area (AFTA, which in 2010 became the ASEAN Trade in Goods Agreement, or ATIGA). Companies operating in 2 or more ASEAN members could qualify for the early application of the 0-5% AFTA rates for their production inputs and finished goods if they could demonstrate that the proposal involved resource sharing/pooling and/or industrial complementation. The inputs and outputs also had to have 40% ASEAN content. Almost all (89 of 129) approved AICO projects involved the automotive industry, as the Japanese companies used the AICO scheme to enjoy major cost savings from the reduced import duties.
The major aspect of AICO is that it created the first ASEAN-specific legal obligation (as opposed to an obligation owed by an ASEAN member state), a major step in the development of the AEC. After approval of the AICO application, the ASEAN Secretariat would issue an AICO certificate of eligibility which would allow the company to enter goods from the other ASEAN member using the reduced AFTA rates. The certificate thus created a set of rights and expectations between the company and the ASEAN Secretariat.
Unfortunately, in the days before the ASEAN Charter (and perhaps even now with the Charter in place) a company had no legal recourse should difficulties have resulted with the issuance of the AICO certificate. Fortunately, the ASEAN Secretariat was efficient in the administration of AICO and such disputes did not occur. Unfortunately, the ASEAN members were not as efficient; I worked on a four-way AICO application that took 2 years to complete, despite the AICO agreement’s stipulated 60 day deadline for processing applications. That was because each of the 4 ASEAN members insisted that the intra-ASEAN trade result in a net surplus to its own benefit, which was mathematically impossible (we had to make some difficult assumptions in each country). Despite these hiccups, AICO was quite successful and resulted in the high level of regional integration prevalent in the ASEAN automotive industry today.
With the full implementation of AFTA/ATIGA in 2010, the tariff reductions reached their final level, such that the reduced tariff rates under AICO were equivalent to the AFTA/ATIGA rate., or in some cases a little higher. This meant that AICO offered no practical advantage over using ATIGA (with the exception of the AFTA/ATIGA rates applicable to Cambodia, Laos, Myanmar and Vietnam, which were allowed a longer period to implement the final ATIGA rates, although there are only 3 AICO projects involving Vietnam).
Thus, one would think that AICO would have had no relevance after 2010. However, Thailand continued to apply AICO, particularly for the importation of complete knocked-down (CKD) automobiles from other ASEAN members. Importers of CKD vehicles into Thailand would use AICO instead of ATIGA (due to the more complicated customs valuation methodology, I am told), even in instances where the AICO rate was higher than the ATIGA rate. Furthermore, Thailand interpreted its customs law and AICO as establishing a maximum quantity for importations under AICO, based on the companies’ original AICO applications. A company importing more than this stipulated quantity would face application of the full MFN rate to the imported excess quantity. This arguably is inconsistent with the requirements of ATIGA that no import quotas be imposed on intra-ASEAN trade in goods.
Thankfully, after several months of internal pressure and ASEAN-style consensus building, Thailand agreed with other ASEAN members to terminate AICO and allow it to become superseded by ATIGA, effective later this year. That it did so without resort to the ASEAN Enhanced Dispute Mechanism or other litigation demonstrates that the “ASEAN way of consensus” can indeed work in the administration of the AEC. In this way AICO helped develop the AEC even at the end of its useful lifespan.
This is why I spend an entire class session of my AEC course on AICO. To me, it is the equivalent of Cassis de Dijon or Marbury v. Madison; it demonstrates how ASEAN can administer its single market, the AEC, in a manner unique to its own institutional environment. I hope that ASEAN can continue to apply the lessons learned from the AICO experience.