AFTA in full force
The ASEAN Free Trade Area (AFTA) that came into effect on Wednesday has been designed to develop this region with a population of more than 500 million into an integrated market and investment area.
As a common market, the 10-member ASEAN will become a more attractive, alternative manufacturing base to China, which has been getting most of the foreign investment flows to East Asia.
This is the basic idea ASEAN governments share, fully aware that cutting intra-ASEAN tariffs to 5 percent will promote the region as an open, stable and low-cost manufacturing center. Specialization and economies of scale will set in with the removal of trade barriers to goods, services and investments.
The AFTA concept has become even more relevant after the 1997 East Asian crash and the instability that followed lowered the region's appeal to foreign investors.
In reality, though, AFTA members still do not fully trust each other to streamline the system. Quite a number of commodities that are heavily traded in the region, such as rice, sugar, petrochemicals and automobiles, are still excluded from the tariff cut regime.
Yet bigger hurdles to intra-ASEAN trade may come from the slow progress members have made in removing non-tariff barriers. The efforts to draw up shared procedures and standards for imports and industrial products have lagged far behind tariff cuts, even though such non-tariff barriers have proven to be the biggest drag on trade in the region.
The absence of an appropriate agency or mechanism to resolve disputes between members within AFTA implementation is posing another major challenge. Verification by the country of origin on the minimum 40 percent ASEAN content necessary to qualify products for the tariff cut regime could become a major source of disputes, as many manufacturing companies in the ASEAN region still depend on input, parts or components from suppliers outside the region. Businesspeople are still in the dark about how customs services in the member countries will ensure that commodities traded under AFTA fully meet the compulsory ASEAN content.
Many, therefore, do not expect much from AFTA in the way of trade expansion at least within the first one or two years of its operations, as members will still tread carefully during the learning process, observing how the arrangements would affect their domestic industries.
These issues should not, however, discourage the six founding members of ASEAN -- Brunei, Indonesia, Malaysia, Singapore, Thailand and the Philippines -- among whom AFTA initially came into full force to fulfill their commitment to abolishing tariff and non-tariff barriers to trade.
Too easily bowing to domestic industrial lobbyists who demand heavy protection not only would leave ASEAN industries uncompetitive internationally, but would also make the 35-year old ASEAN grouping less relevant to the economic interests of the peoples in the region.
Such an inconsistency would also weaken ASEAN's bargaining position to negotiate free trade agreements (FTA) with other regions and could push more ASEAN members to break rank and conclude FTAs with other countries individually, as Singapore has done with Japan and the United States.
The implementation of AFTA would surely affect ASEAN's commitments to long-term plans for FTAs with China, Japan and India that were made during the eighth ASEAN summit in Phnom Penh early November.
Indonesia, as the largest market among the six founding member countries with almost 210 million people, is especially challenged to show strong leadership by seriously honoring its commitments to AFTA.
This challenge is greatly taxing indeed, because most domestic industrial companies have been hard hit by the economic crisis and many of them are still grappling with mountains of bad debts.
Worse still, the business environment in Indonesia has deteriorated sharply due to complications and uncertainties caused by the transition from an authoritarian, centralized government to a democratic system focusing on local autonomy. An inefficient and corrupt customs service, labor regulations that are deemed to favor workers too much, and crumbling basic infrastructure in many areas due to a lack of public funding, have been eroding business competitiveness.
The Indonesian Chamber of Commerce and Industry (Kadin) has already expressed great concern over heightened competition from other ASEAN countries under AFTA and most industrial associations have simply argued that they are not yet ready for AFTA.
But while the government should work harder to improve public services, the regulatory environment and basic infrastructure to reduce the cost of doing business here, it should also be careful in responding to complaints from industrialists, and correctly analyze which grievances are legitimate and which are simply demands for protection made by inefficient businesses.