ASEAN and free trade areas

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.