Economists are less than enthusiastic. Reason? The arguments against "customs unions" made by Jacob Viner and others. By selectively dropping import barriers, a county may end up diverting imports to relatively high cost countries that happen to participate in the free trade area. As usual the Concise Encyclopaedia of Economics has a brief and informative treatment of the subject. The example given there is as follows:
Suppose, for example, that Japan sells bicycles for $50, Mexico sells them for $60, and both face a $20 U.S. tariff. If tariffs are eliminated on Mexican goods, U.S. consumers will shift their purchases from Japanese to Mexican bicycles. The result is that Americans will purchase from a higher-cost source, and the U.S. government receives no tariff revenue. Consumers save $10 per bicycle, but the government loses $20. If a country enters such a "trade-diverting" customs union, economists have shown that the cost of this trade diversion may exceed the benefits of increased trade with the other members of the customs union. The net result is that the customs union could make the country worse off.
Whether a bilateral or regional free trade area would end up improving a country's welfare is an empirical issue. I would endorse such agreements, but only as launching pad for multilateral approaches. Domestic political opposition may after all be softened by initial exposure to limited amounts of free trade. However it can go either way - as the example of the EU shows, resistance to dropping barriers outside the customs union may stiffen as a result of regionalized free trade. In the case of the Philippines though, I sense the ASEAN is functioning more as a stepping stone than a stumbling block. Agree or disagree? Discuss.