A S Cambodia draws nearer to the date in 1997 when it hopes to become a member of

the Association of South East Asian Nations (ASEAN) it reaches a pivotal time in

its economic and political growth.

Its full acceptance into ASEAN will mark a tremendous achievement in the rebuilding

of the Kingdom.

The economic repercussions will be significant and likely painful as Cambodia gradually

moves its import tariffs into line with those required by the organization. However,

the long term importance of ASEAN membership should not be underestimated.

Regional groupings based on economics are becoming increasingly important as the

world moves toward the twenty-first century.

There are at least 32 economic groupings of some form now in existence: three in

Europe, four in the Middle East, five in Asia and ten each in Africa and the Americas.

Some of these groupings around the world have the superstructure of nation states

(such as the European Union); some (like the ASEAN Free Trade Area or AFTA), are

multinational agreements that tend to be more political arrangements than cohesive

trading blocs at present. With respect to the three major blocs - the North American,

western European and Asian - intra-bloc trade has grown rapidly, while trading between

the blocs or with outsiders has either declined or grown far more slowly.

The development of a unified trading bloc in Asia has been quite different from that

in Europe and in the Americas.

While European and North American arrangements tend to have been driven by political

will, market forces and more pragmatic considerations are what have been compelling

politicians in Asia to move toward more a formal integration.

First, European and American markets are significant for the Asian producers and

some type of organization or bloc may be needed to maintain leverage and balance

against the two other blocs.

Secondly, given that much of the growth in trade for the nations in the region is

from intra-Asian trade, having a common understanding and policies is becoming more

and more necessary.

A future arrangement will most likely be using the frame of the most established

arrangement in the region, ASEAN.

ASEAN as a regional body has grown up for various purposes.

Defense and a common foreign policy were initially more important reasons for the

formation of the grouping than the goal of economic development. But, with perceived

threats to safety receding, economic development has taken on a more important role

as the general goal of the ASEAN states.

The states now have booming economies and have attracted much attention from foreign

investors.

Traditionally, the Asian region has received more foreign investment than any other

part of the developing world.

There has been significant inter-regional investment, with capital from countries

like Singapore, Hong Kong and Taiwan moving to other countries in the region. There

is also a considerable and ever increasing flow of capital from one ASEAN state into

another in the form of foreign investment.

The states of the region have mixed economies and are inclined towards growth that

is led by foreign investment.

Within the ASEAN region, the example provided by Singapore which grew spectacularly

through foreign investment is one factor that makes states of the region more hospitable

to foreign investment than many other areas of the world.

The attraction to foreign investment, however, is balanced by nationalism and understandable

efforts to ensure that investment that is made will further the economic development

of the state and not be detrimental to local business interests.

For this reason, some control over foreign investment has been instituted in varying

degrees in all ASEAN states.

The techniques used by the ASEAN states to attract foreign investment are largely

similar. The use of tax incentives as a means of channeling investment into desired

areas has been widely prevalent and there have in the past been calls for a coordination

of efforts on a regional basis on the granting of such incentives.

Other moves to increase regional economic cooperation have included the ASEAN Industrial

Joint Venture, established in 1983 as a means of encouraging the development of intra-regional

production.

This is also a concept that promotes cooperation.

There have also been efforts to develop areas which have not been traditionally attractive

to investors through the creation of "growth areas" such as the triangle

between Singapore, Johore (a state in Malaysia) and the Riau Islands of Indonesia.

The aim for this particular area is for Malaysia and Indonesia to provide land and

other natural resources and Singapore to provide management and technical expertise

for the development of industries within the triangle. Other "growth areas"

include a triangle linking Medan in Indonesia, Phuket in Thailand and Penang in Malaysia.

Before late 1991, ASEAN had no real structures, and consensus was reached through

information consultations.

In October 1991, ASEAN members announced the formation of a customs union called

ASEAN Free Trade Area (AFTA).

A customs union is a grouping whose members dismantle barriers to trade in goods

and services among themselves and establish a common trade policy with respect to

non-members.

Typically this takes the form of a common external tariff, whereby imports from non-members

are subject to the same tariff when sold to any member country.

Tariff revenues are then shared among members according to a prespecified formula.

It is through this aspect of ASEAN membership, the adjustment of tariff rates to

conform with AFTA requirement, that Cambodia will likely enjoy the greatest long

term gain and the harshest short term pain.

Trading businesses and those importing raw materials from ASEAN nations will benefit

greatly.

However, with the bulk of the kingdom's tax revenue presently coming from customs

duties and tariffs, other sources will have be developed to allow the government

to compensate for the resulting loss of income.

- Michael Popkin is a resident partner in the Phnom Penh office of Dirksen

Flipse Doran & Le.