What does it really mean?<\/p>\n
Gloria O. Pasadilla, University of Asia and Pacific, Manila<\/p>\n
It seems as if ASEAN member countries are not really keen on
\nmaking AFTA work. Delays in tariff reduction commitment, while
\nused as a means to buy time, could do more harm than good
\nparticularly to the ideal of regional economic cooperation.<\/p>\n
Consider the following scenario: Malaysia indefinitely
\nbacktracks on lowering tariffs on industries previously covered
\nin the Inclusion List; Thailand retaliates by also increasing
\ntariffs on Malaysia's exports of palm oil and other items;
\nIndonesia begs for an indeterminate extension of compliance to
\nASEAN Free Trade Area (AFTA)'s timetable on tariff reductions
\nbecause of political and economic difficulties; and the
\nPhilippines bows down to pressures, particularly from the sugar
\nbarons and other agricultural producers. Result: AFTA fizzles
\ninto thin air as a lofty but impractical ideal.<\/p>\n
This still-hypothetical scenario isn't really too far-fetched,
\ngiven post-crisis Asian political and economic realities.
\nAlready, Malaysia had set back the clock for the liberalization
\nof its automobile industry to shield Proton, its sole car
\nmanufacturer, from foreign competition for two more years. Other
\noriginal members of the Association of Southeast Asian Nations
\n(ASEAN) are also under various domestic pressures to scale back
\nthe pace of tariff reductions in AFTA.<\/p>\n
If these countries follow Malaysia's example, the temporary
\nbackpedaling on liberalization may extend for another two years,
\nthen another, and another, until the will to open up their
\neconomies - barring non-ASEAN foreign pressures, say from the
\nUnited States or Europe-completely dissipates.<\/p>\n
But what could be so bad about the backrolling on AFTA? How
\nmuch benefit does it really give to member countries? Take the
\nPhilippine case. Despite the increase in intra-ASEAN trade from
\n9.2 percent in 1992 (before AFTA) to nearly 14 percent of total
\ntrade in 1997, country-by-country trade figures have shown that
\nthe Philippines appears to have gotten less out of AFTA than its
\nASEAN trade partners. Of the five original ASEAN, Philippine
\ntrade balance with Thailand was the only one that showed
\nincreasing surplus in 1993-96, while its trade with Malaysia,
\nIndonesia, and Singapore showed an ever-widening trade deficit.<\/p>\n
The trend only reversed during the Asian crisis. This means
\nthat, while other ASEAN economies managed to cash in on AFTA, the
\nPhilippines was unable to compete on the same level playing
\nfield.<\/p>\n
Moreover, simulation studies show that the benefits from AFTA
\nare dwarfed by the advantages from opening up ASEAN economies to
\nmore countries. For instance, by exploiting wider differences in
\nthe sources of international comparative advantage between ASEAN
\nand its international trading partners, total ASEAN trade with
\nthe world can expand to about US$9.1 billion, over three times
\nmore than AFTA. That is, if ASEAN were to grant equal access to
\nother countries, trade benefits would be multiplied. The
\nimplication is that AFTA is strictly small potatoes; ASEAN
\neconomies would do better to concentrate on greater
\nliberalization with a larger number of economies.<\/p>\n
Such simulation results, however, are good only if
\nmultilateralism truly works. But the feet-dragging of many
\nindustrial countries in bigger trading agreements like the World
\nTrade Organization (WTO) or Asia Pacific Economic Cooperation are
\nprecisely why smaller regional trade agreements like AFTA, in
\nwhich decisions are presumably faster arrived at, make sense.
\nThus for lack of a perfect multilateral agreement, AFTA is, in
\nprinciple, a big deal.<\/p>\n
Backpedaling on AFTA would also send a bad signal to foreign
\ninvestors at a time when the ASEAN badly needs foreign capital to
\nrebuild its crisis-torn economies. Foreign investors would take
\nthe AFTA debacle as a sign of the ASEAN's lack of regional
\ncooperation and political commitment to truly forge greater
\neconomic integration-first, through trade, and then through more
\nfinancial interlinkages.<\/p>\n
How can talks of an Asian currency union be believable if
\ntrade integration is put back at the first sign of domestic
\ntrouble? As it is, the grandiose idea of a currency union would
\nalready take years to achieve, even assuming strong commitments
\nfrom ASEAN governments.<\/p>\n
But if AFTA were derailed, the proposed currency union would
\ntake even longer because the necessary preconditions for a
\nworkable currency area, i.e., highly integrated markets, would
\nnot be present.<\/p>\n
Then there are other East Asian developments to take note of.
\nIf South and North Korea finally reconcile their differences, the
\ncountry would be an investment magnet that could siphon off
\ncapital meant for Southeast Asia. China's impending entry in the
\nWTO is another development that ASEAN better prepare for, lest it
\nis caught with its pants down. All the more reason for ASEAN to
\nshow a unified and credible face to attract investors now. AFTA
\nis an acid test for sought-after credibility.<\/p>\n
When governments embark on greater openness in trade, they do
\nso quite aware of the domestic distortions imposed by tariff and
\nnontariff protection, particularly on domestic consumers, who
\nwould have to pay for a fewer variety of goods at higher prices.<\/p>\n
It was this distortion governments sought to eliminate. The
\ntemporary benefits accorded to protected industries would only be
\nworthwhile for the respective economies if these industries
\neventually become competitive in the world market and bring to
\nthe domestic market greater profits, wider resource mobilization,
\nand improved employment. In a dynamic sense, protected industries
\nshould pay for the sacrifices imposed on consumers over the long
\nhaul.<\/p>\n
Many countries' experiences suggest, however, that protection
\nhas a tendency to perpetuate itself, barring strong political
\nwill to stop the self-interest of protected industries. This
\ntendency of self-perpetuation seems to reassert itself now
\nbecause of crisis-related difficulties. Should ASEAN governments
\naccede, more future compromises are not unlikely.<\/p>\n
Of course, there are individual country ramifications to the
\nagreement, as well as national sensitivities-on agricultural
\nimports, for instance-that ought to be respected. It was
\nprecisely for this reason that AFTA gave agricultural industries
\na longer time to adjust. But for all other industries, any
\ncontemplated protection-for instance, not fulfilling the agreed
\ntariff reduction-must be weighed against the potential harm such
\naction would entail, not the least of which is losing credibility
\non regional cooperation.<\/p>\n
Should any ASEAN member decide to postpone compliance for
\ndomestic reasons, a cap on the allowable number of deferments
\nwould enhance AFTA's credibility and prevent it from becoming a
\nuseless document.<\/p>\n
Individual countries should, likewise, prepare strong safety
\nnets for those sectors who will inevitably be affected by
\nregional trade liberalization, foremost of whom are the local
\nfarmers.<\/p>\n
(This article first appeared in theRecent Economic Indicators
\nmonthly publication of the Business Economics Club of the Manila-
\nbased University of Asia and Pacific (UA&B). The article is
\nreprinted with permission.<\/p>",
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