Introduction

The purpose of AFTA is to promote the export-led growth of member countries by creating and expanding trade which, in turn, will induce more direct foreign investment (DFI) into the area. It is presumed that, when coupled with local resource generation, more DFI will lead to increased productivity and enhanced competitiveness. AFTA intends to assist ASEAN members in ways that conform to GATT principles and therefore to refrain from purposefully injuring external parties, including economic entities of European origin. While it is not the intent of AFTA to be injurious to European and other parties outside Southeast Asia, it could cause them economic harm by inadvertently diverting sources of exports from ‘outside’ to ‘inside’. That is, trade diversion will likely shift some production (and therefore investment) away from lower cost and more competitive foreign producers, including Europeans, to more costly and less efficient suppliers inside Southeast Asia (Curry 1994).

From the perspectives of both external interests and the rational allocation of global resources based on comparative advantage, minimizing trade diversion and maximizing trade expansion and creation are reasonable goals for ASEAN and its global partners to pursue. The goal can be pursued via the ASEAN Dialogue Partnership System (ADPS), which offers an opportunity for Association members and their European and other ‘outside’ economic partners to resolve conflicts to which trade diversion leads. In focusing on this opportunity, the approach offered herein is (1) to reiterate the features of AFTA; (2) to discuss the economic principles that reveal AFTA's external impact; and (3) to point out how the ADPS can be used to maximize the beneficial nature of that impact. In effect, the effort is to argue that AFTA should not be viewed in isolation from the rest of ASEAN's procedural features, particularly the ADPS, and lo proceed within a Southeast Asian-European framework (Curry 1991; Chug 1990; Naya and Plummer 1991).