ASEAN and free trade areas

S. Pushpanathan Assistant Director for External Relations ASEAN Secretariat Jakarta

The Eighth ASEAN Summit concluded last week on a high note with the region committing to long term plans for free trade areas (FTAs) with China, Japan and India as well with East Asia. At the APEC (Asia Pacific Economic Cooperation forum) Summit in Los Cabos last month, the U.S. announced the Enterprise for ASEAN Initiative which also provides for FTAs with ASEAN countries.

The Association of Southeast Asian Nations signed a framework agreement for economic cooperation with China at the ASEAN Summit which would result in the creation of a FTA by 2010. Under the accord, tariff negotiations are to be completed by 2004 and implementation would commence by 2005.

An "early harvest" package to liberalize trade, mainly in agricultural products, will be implemented by Jan. 1 2004 to show commitment to the accord and to bring early benefits. With Japan, ASEAN signed a declaration on a comprehensive economic partnership which contains elements for an FTA in 10 years' time. India too offered ASEAN an FTA with the sub-continent that could take shape in 10 years.

The FTAs are expected to have a positive impact on the region as summed up by Prime Minister Goh Chok Tong who compared the flurry of FTAs to that of an airplane that would help the region to take off on a new economic flight path.

When the FTAs are implemented in a decade or more, the region would witness the making of a pan-Asian FTA with East Asia being the driving force. An economy worth more than US$8 trillion would be created representing more than a quarter of world's gross domestic product and more than 40 per cent of its reserves. This would rival ASEAN's major trading partners such as the European Union and provide Asia with the bargaining power in multilateral economic fora. It will also give the developing world a voice through Asia so that their aspirations could be realized in a more globalized world.

Economic liberalization under the FTAs would help to integrate the region more quickly and generate more and new economic activities. Specialization and economies of scale would also set in with the removal of barriers to trade in goods and services, and investments. Investment flows will be less discriminatory with a more harmonized region and cost of services will fall due to efficient allocation of resources. ASEAN would be seen by investors as complementary within the overall production and distribution networks in the FTAs.

Besides, more efficient infrastructural and transport networks would be an inevitable outcome of the FTAs aimed at cutting the cost of distribution crucial for pricing of goods and services. The newer ASEAN countries will certainly benefit from such linkages since they are at the crossroads of economic activities between the ASEAN-6 (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) and its partners in Northeast Asia and India.

The Singapore-Kunming railway line and the Bangkok-Singapore highway will play important roles in the FTAs as well as the transport routes being developed by China and India with the CLMV (Cambodia, Laos, Myanmar and Vietnam).

With the likely surge in energy requirements in China and India due their forecasted economic growth, ASEAN may be in a position to support their needs, including the possibility of extending its energy grid to these countries in the longer term with the financial backing of the private sector.

The political consequence of the FTAs would be the ensuring of regional peace and stability important for economic development. The consumers will be the biggest benefactors in terms of high quality and cheaper goods and services with wider choices.

While the FTAs look promising, many issues will have to be first addressed. ASEAN may have to advance the implementation of the ASEAN Free Trade Area (AFTA) to gain a fair deal out of the FTAs. ASEAN will have to improve its economic competitiveness and regional integration to better deal with its FTA partners. Customs procedures and nomenclatures will have to be simplified, product standards harmonized, transport and communication networks strengthened, rule of law, transparency and governance improved, and labour productivity raised.

While the ASEAN-6 launched AFTA in January 2002, the CLMV would be phased in by 2010. The CLMV countries may have to look at other ways of financing government spending instead of relying on custom tariffs. Some ASEAN countries may also face severe competition in the shorter term from cheaper Chinese goods, especially electronics, footwear, apparels and textiles.

Removing protection for selected industries in ASEAN countries would be inevitable with the FTAs but it is expected to be a painful process. Besides, services and investment liberalization have to be quickened if ASEAN is to implement the FTAs in a decade's time.

ASEAN would also have to tackle the sensitive issue of freer flow of labour. While ASEAN countries may be willing to accept freer movement of professional and skilled labour, many would not be comfortable with opening up completely their labour markets since the wealthier countries in ASEAN have considerably smaller labour markets, and due to possible social problems with foreign labour.

There are also issues in the FTA arrangements that need to be tackled. While ASEAN and China are committed to an early harvest package, their export structures are similar in many respects and therefore competition is expected to increase with the FTA.

However, ASEAN is fortunate in that its technological progress has been the key to its international competitiveness while China's advantage has been its low wages and huge market potential. Besides with the growing middle class population in China's coastal cities, ASEAN exports of food and agricultural products could increase. In investments too, they are competitors but ASEAN would become an important market of China for raw materials and industrial components as China develops rapidly.

The FTA with India can gain momentum when India reduces its very high tariff rates to that of ASEAN level. India is committed to bringing them down to East Asian rates in three years. Also, India would have to keep to its economic reform plans if it wishes to see the FTA taking off in 10 years.

ASEAN FTAs with Japan and the U.S. may need the fulfillment of more stringent requirements. Japan wants to sign FTAs with ASEAN modeled after its FTA with Singapore despite ASEAN's preference to negotiate a pact similar to that of China. Besides, agriculture will be a sticking point in the negotiations since unlike Singapore many of the ASEAN countries have larger agricultural sectors.

As for the U.S., signing bilateral trade and investment framework agreements (TIFAs) would be a precursor to FTA negotiations. The U.S. has signed TIFAs with Indonesia, the Philippines and Thailand. The U.S. is expected to complete its FTA with Singapore by the year's end.

It expects to sign similar high quality FTAs with other ASEAN countries which would certainly take time. Besides, the U.S. has other economic interests such as negotiating FTAs with Australia, Central America, and the South Africa Customs Union. Human rights issues and the terrorism situation in the region may also have an impact on the negotiations of the FTAs.

ASEAN intentions to forge FTAs with its partners are commendable and show ASEAN's commitment to revitalize its economies to put them on a wining flight path. However, the viability of the FTAs will be dependent on the commitment of ASEAN countries and its partners to remove the tariff and non tariff barriers as quickly as possible.

At the same time, ASEAN would have to work on its economic competitiveness and regional integration to be in a better position when negotiating the FTAs.

The views expressed in this article are those of his own.