AFTA and a customs union

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.