AFTA and a customs union

By Riyadi Suparno

BANGKOK (JP): Volvo Car (Thailand) Ltd recently exported one unit of its newest S80 series to Indonesia to take advantage of the lower tariffs accorded under the Common Effective Preferential Tariff (CEPT) scheme, the basis for the ASEAN Free Trade Area (AFTA).

As the Thai Volvo has met the required ASEAN (Association of Southeast Asian Nations) local content of 40 percent, the car is subject to only 20 percent import duty on entering Indonesia -- much lower than the normal duty of 65 percent Indonesia would have charged for imported built-up cars.

So Volvo Car (Thailand) Ltd plans to export more cars to Indonesia next year.

"It went very smoothly and because of this we will export more, maybe about 100 units next year," said Aroon Laowatanakul, general manager of Volvo Car (Thailand) Ltd.

Aroon noted that if all 10 member countries of ASEAN moved forward and implemented their commitments under the CEPT scheme, ASEAN would be really an attractive place for trade and investment.

Nevertheless, ASEAN and AFTA do not always evolve in the direction businesses would like to see.

This is evident from the recent move by Malaysia to delay the inclusion of their automotive sector in CEPT's inclusion list, a list of tariffs subject to liberalization by 2002 for the six original AFTA signatories -- Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand -- by 2006 for Vietnam, 2008 for Laos and Myanmar, and 2010 for Cambodia.

And ASEAN economics ministers on Thursday gave their nods to Malaysia's request. They agreed to give Malaysia a two-year reprieve before it cuts tariffs on its struggling car industry.

Malaysia's move has angered Thailand, where multinational car makers have invested heavily and are banking on increased exports to countries such as Malaysia. The two governments will meet next month to discuss compensation.

Following Malaysia's move, Indonesian automotive businesses urged the Indonesian government to delay Indonesia's commitment to automotive liberalization under CEPT.

Although the Indonesian government staunchly rejected the proposal from local automotive industries, the case served as a worrying sign of backtracking in AFTA by its members.

"When one ASEAN member country backtracks, I think it impacts the investment atmosphere and also confidence in the agreement. I think the private sector loses the opportunity," Aroon said at an AFTA roundtable discussion held here last week, organized jointly by Konrad Adenauer Foundation and ASEAN Secretariat.

Speaking at the same occasion, ASEAN Secretary-General Rodolfo C. Severino Jr. tried to reduce the impact of Malaysia's move on businesses by saying that the move would not significantly affect trade and investment in ASEAN.

He argued that Malaysia's proposal covered only completely built-up and completely knocked-down vehicles, and did not include car parts.

In addition, it would be limited to trade with Malaysia, while trade with other parties of AFTA would not be affected. And car trades with Malaysia accounted for less than 2 percent of intra- ASEAN trade, that reached US$74.4 billion in 1999.

Besides, Malaysia was still committed to liberalizing its auto industry. In the proposal, Malaysia only wanted to delay the liberalization of its auto industry from its initial target date of 2002 to a later date.

Severino contended that Malaysia's move was not against the AFTA agreement.

According to a signed protocol regarding the implementation of CEPT's temporary exclusion list, member countries are allowed to temporarily delay the transfer of products or suspend concession on the products already transferred into the inclusion list.

This protocol was signed by member countries to provide some flexibility to members facing real problems on their last tranche of manufactured products.

"This rule is patterned after Article 28 of the GATT, and therefore, it is in accordance with international practice," Severino said, referring to the General Agreement on Tariffs and Trade which was renamed the World Trade Organization (WTO) in January, 1995.

Therefore, he disagreed with the notion that the delay in the liberalization of Malaysia's auto industry would bring about a devastating effect on AFTA.

Aside from automotive, tariff reductions for products under CEPT's inclusion list would go ahead as scheduled, Severino noted.

Currently, each of the first six signatories has 85 percent of the items in the inclusion list with tariffs between 0 and 5 percent. The proportion of products in the inclusion list with tariffs of 0-5 percent will be increased to 90 percent by year 2001, then for the whole inclusion list by the year 2002. The new members of ASEAN have up to 2006 (Vietnam), 2008 (Laos and Myanmar and 2010 (Cambodia) to meet this deadline.

By the year 2001, Severino said, there would be 55,680 tariff lines in the inclusion list, representing about 85 percent of all tariff lines in ASEAN.

Nevertheless, he agreed with the argument that ASEAN needed to move forward to supplement AFTA to make the region more attractive for trade and investment activities.

The forward looking policies among ASEAN members are more important now as ASEAN seems to be losing the competition in attracting investment and boosting trade with third parties. Some experts contend that ASEAN after the crisis is less attractive, compared with, say, China.

Data at the ASEAN Secretariat shows that ASEAN exports have declined and foreign investment in the region have also dropped sharply since the advent of the financial and economic crisis in the region.

Before the financial crisis, the rate of combined ASEAN exports had been growing by an average of 18.8 percent per annum since 1993. But in 1998, ASEAN exports contracted by 5.8 percent, before they rebounded again by 7.6 percent in 1999.

Foreign investment in ASEAN also dropped sharply in the past two years, from $21.5 billion in 1997 to $16.8 billion in 1998 and $13.1 billion in 1999. This constitutes a sharp blow to ASEAN, which in the period from 1993 to 1997 received an annual average of $22 billion in net foreign direct investment.

Now ASEAN needs to find ways on how to restore and improve the attractiveness of ASEAN as a destination for investment and trade.

ASEAN leaders seem to be moving in the right direction when during their weekend informal summit in Singapore agreed to study the possibility of free trade with their three bigger northern neighbors, China, Korea and Japan.

Speaking at the AFTA roundtable discussion, Thai Deputy Prime Minister and Minister of Commerce Supachai Panichpakdi said it would be a lot more difficult and take more time to integrate ASEAN's trade and investment with the three giants altogether.

Supachai, who would take over as the new WTO chief in 2002, contended that it would be more logical for ASEAN to pursue a one-by-one approach in forging a free trade arrangement with either China, Korea or Japan, rather than taking the three giants at one time.

Besides the bigger northern neighbors, ASEAN should also look south to establish free trade arrangements with Australia and New Zealand which have their own free trade pact through the closer economic relations (CER).

Nevertheless, all those moves would still not be enough for ASEAN, Supachai said, as there would still be hindrances to the movement of goods and services as well as people within ASEAN. To eliminate all those hurdles, ASEAN should look beyond free trade and move toward establishing a customs union.

Supachai's proposal is based on the development of the European Union that took 17 years to form from a free trade arrangement to a customs union with a uniform tariff system for EU's trade with all other countries.

"I think we can do it faster than that. We can also do better than that," Supachai said.

The writer is a The Jakarta Post journalist.