Sounds Business

THE ASEAN FREE TRADE AREA (AFTA)

by CHNG MENG-KNG, Former, Deputy Secretary General, ASEAN

The ASEAN region has been one of the fastest growing in the world. Despite a sharp recession in the mid 1980s the ASEAN member countries have been able to grow at an average rate of 5.4%, p.a. from 1981-1991, almost twice the average world rate. And growth for the rest of the decade is expected to be sustained at an average of 7-8% per annum.

A significant business development, and by far the most important regional economic endeavour of ASEAN in recent years, is the decision of the Fourth ASEAN Summit in Singapore in January 1992 to set up an ASEAN Free Trade Area (AFTA) within 15 years beginning I January 1993.

Under the Common Effective Preferential Tariff (CEPT) scheme, designed as the main mechanism for AFTA, tariffs on all manufactured and processed agricultural products will be brought down to 0-5% within the 15 year time-frame. All quantitative restrictions and other non-tariff barriers restraining intra-regional trade will also be removed. While member countries are allowed up to 3 years before reducing tariffs as of 1 January 1993, a Fast Track Program initially covering 15 product groups and accounting for almost 40% of ASEAN trade, should bring tariffs for wide areas of intra-ASEAN trade to less than 5% within 7 to 10 years. Exclusions on specific products at HS 8-9 digit level are allowed under the CEPT scheme but these are temporary and member countries have a moral commitment to phase in all exclusions at the end of the eighth year.

A combination of internal and external factors have helped to bring about the decision to create AFTA. Internally, industrialisation in the last 2 decades have greatly increased the scope for complementary trade among ASEAN member countries. Further, the positive growth effects of the deregulation and liberalisation measures embarked upon by various member countries since the mid-1980s have made ASEAN member countries more receptive to AFTA. Externally, the end of the Cold War has brought forth many new competitors to ASEAN for the increasingly scarce foreign investment which has been its engine of growth – in Latin America, Eastern Europe, South Asia and, in particular. China and Vietnam. With the increasing trend towards regionalism and a threatened segmentation of the world economy, there is also a feeling that AFTA can better protect ASEAN’s interests and amplify its voice in international forums.

As a regional economic entity, AFTA is often lumped together with NAFTA and the European Community in one breath. AFTA, however, is a much smaller entity. In 1990 NAFTA accounted for 27.8% of world output and 18.1% of world trade while the EC accounted for 26.9% of world output and 42.1 % of world trade (or about 23% of world trade if one excludes intra- EC trade). In contrast, ASEAN. while having a comparable population, accounted for only 1.5% of world output and 4.5% of world trade. Furthermore, unlike NAFTA or the EC-12. ASEAN economics are Generally much more outward oriented, with a combined foreign trade (i.e. imports plus exports) to GDP ratio of almost 100% (96.4%) compared with 46% for the EC-12 and 19.1% for NAFTA. Also, while intra-regional trade in the EC-12 is almost 60% and in NAFTA about 40%, intra-regional trade in ASEAN is less than 20% [and that becomes even less if we discount the entrepot oriented intra-regional trade of Singapore].

The attraction of AFTA and the rationale for AFTA cannot therefore be the enlargement of an internal market in itself, i.e. there is little scope for AFTA to become in any way a credible protected internal market like Fortress America or Fortress Europe – though with a high and sustained rate of growth the internal market may in time become increasingly important. Rather, given ASEAN’s external orientation, the attraction and rationale for AFTA are that through regional market integration, it allows ASEAN to improve its competitive edge as an international production centre, enabling it in particular to attract the foreign direct investment (FDI) which has been ASEAN’s engine of growth (especially since the mid 1980s) and the prime factor in the dynamism of East Asia in recent years.

The need for ASEAN to improve its competitive strength to attract FDI and integrate itself into the world economy means that ASEAN cannot be protectionist. Even while barriers to trade within ASEAN are falling, ASEAN must increasingly open itself up to the rest of the world. AFTA, thus, by conception is outward-looking. And. being so, it will contribute to the wider process of trade liberalisation within East Asia. the Pacific, and globally. There is, for example, a unique provision in the CEPT Agreement Which allows a member country which reduces its tariffs to 20% and below, even on an MFN basis, to enjoy CEPT tarrif preferences given by its partners. This means that all member countries are encouraged to lower their tariffs on an MFN basis, though, of course, if there are no CEPT preferences given by any member at all, there will be no incentive for any tariff reduction, preferential or MFN, by the others. What is envisaged is that all tariffs will be reduced, with intra-ASEAN tariffs being reduced faster and leading the reduction in MFN tariffs. This, together with the very liberal 40% ASEAN content rule, will enhance industrial networking within ASEAN and between ASEAN and other countries, particularly those in the region. AFTA is therefore an instrument for the structuring of a wider and more productive division of labour within the Asia-Pacific region. Open regionalism is hence not just an empty boast or a pious word in AFTA. It is built into the very mechanism of the CEPT scheme.

Will ASEAN succeed in creating AFTA? Yes, I think so. And for 3 reasons :

1. Since the mid 1980s, ASEAN member countries have individually deregulated and liberalised their economies and greatly improved their investment climates although on a non- synchronised basis. AFTA will allow member countries to do what they have felt nationally compelled to do but on a regionally harmonised basis. By creating a single trade and investment region, AFIA will greatly improve the productive efficiency of each and every ASEAN member country at a much lesser cost in terms of short term domestic structural adjustment than if each were to liberalise separately.
2. ASEAN is fully committed politically to the creation of AFTA. Despite past structural difficulties in efforts at market sharing, ASEAN Governments have not only persisted in their efforts but are willing, in creating AFTA, to make a quantum leap forward. Enough flexibility has been built into the CEPT scheme to accommodate the specific difficulties of member countries. Those that require more rope have been given more rope. But like a climbing team, once on the mountain side, everybody depends on everybody else in reaching the top. No one can and will want to cut loose half-way.
3. Since the late 1970s ASEAN has been engaged in market- sharing efforts through a loose open-ended scheme called the ASEAN Preferential Trading Arrangements (PTA). While the achievements of the scheme have been modest, ASEAN has learnt much from the exercise, in particular the need to avoid a cumbersome product by product approach that appears to maximise political resistance, for a broad based and time-bound commitment.

Will AFTA succeed in its objectives? Yes, I think so. And for 2 reasons :

1. The ASEAN region is intrinsically highly competitive in terms of its natural and human resource endowment as well as institutional strength. Even without the framework of AFTA, market integration, especially of production, has been proceeding apace, driven largely by spontaneous market forces. A good case in point is the development of cross-border, so called “triangles of growth”, in particular that between Singapore, Johor state of Malaysia and Riau province of Indonesia, as international production bases. The removal of institutional and other man-made barriers to cross border flows under AFTA would greatly add impetus to such a development on a pan-ASEAN basis, with the additional attraction of a fast growing regional consumption market.
2. ASEAN knows that the success of AFTA depends not just on the specific provisions of the CEPT scheme but also on various other measures to complement and supplement the removal of tariffs and other border barriers. Such measures have been called AFTA-Plus. The CEPT Agreement mentions, for example, harmonisation of standards, reciprocal recognition of tests and certification of products, removal of barriers to foreign investment, macroeconomic consultations, rules for fair competition and promotion of venture capital. The Framework Agreement on Enhancing ASEAN Economic Cooperation concluded at the 1992 Fourth ASEAN Summit also contains areas of cooperation in Finance and Banking and Transport and Communication which are important for realising the objectives of AFTA. Work has already been initiated in some of these areas. Thus, on technical barriers, an ASEAN Committee on Standards and Quality had been set up. It met in early February and drew up a programme of work. Heads of ASEAN Boards of Investment also met in February 1993 to begin a process of investment cooperation in support of AFTA. Other areas of AFTA-Plus will be developed pari passu with the implementation of AFTA.

What are the dangers to AFTA? As mentioned earlier, all ASEAN economies are, and intend to remain, outward-looking. As such, AFTA has been conceived of as an outward-oriented scheme. Needless to say, such a scheme could hardly succeed in its objectives if the international economic environment is hostile. As small players in the international economy there is not much that ASEAN member countries can do regarding the health of the international economy. This is determined largely by the actions of the mega-economies of the world – America, the EC and Japan. The G-7 is meeting once again in Tokyo in early July. It ‘s hoped that they will take heed of the recent calls of various ASEAN leaders to exercise the necessary leadership in restoring and sustaining the health of the global economy. The primal act in this regard is to decisively bring the Uruguay Round to a successful conclusion.

We have the stated conviction of Mr. Arthur Dunkel this morning that open regionalism is inconceivable without the 6 multilateral system provided by GATT. We also have his statement that there are no technical reasons holding up the conclusion of the UR; and that the obstacles are at the political level. Let us therefore hope that the G-7 generate the political will to conclude the UR before the end of the year. For, as Mr. Dunkel warned us, this may really be the last window of opportunity.