AFTA in full force

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.