Bilateral trade pacts not best way for ASEAN

Purbaya Yudhi Sadewa, Senior Economist Danareksa Research Institute, yudhi@danareksa.com

ASEAN has successfully increased collaboration among its member countries. ASEAN has succeeded this year in putting into effect free trade agreements (FTA) between member countries.

ASEAN, however, has not been successful in negotiating trade agreements with other countries or regions. As such, some ASEAN countries are taking the bilateral FTA approach, which is not likely to result in optimal benefits for the ASEAN economy.

The removal of trade barriers would promote trade and improve the welfare of its participants, and create a more competitive climate that would force companies to improve their resource allocation and to seek the most efficient means of production. Furthermore, trade liberalization would bring about productivity gains and increase the range of products available to consumers at lower prices.

Increased trade activities would also boost economic activities in the countries -- new jobs would be created and their economies could grow at a faster rate. Countries across the world are therefore encouraged to liberalize their trade, either multilaterally, regionally and even bilaterally.

Efforts to liberalize trade was initiated by the General Agreement on Tariffs and Trade (GATT), which later evolved into the WTO (World Trade Organization). However, there have been increasing concerns over GATT's effectiveness to sustain multilateral trade liberalization, as seen at the last WTO meeting in Cancun, Mexico, at which developing and developed countries failed to reach an agreement in trade liberalization in the agriculture sector.

Concerns over the effectiveness of an FTA on a multilateral basis have led to the births of regional FTAs. For instance, Pacific Rim countries have agreed to set up the Asia-Pacific Economic Cooperation (APEC) forum, whose members have adopted a long-term goal of free and open trade and investment.

In January 1992, ASEAN countries decided to establish the ASEAN Free Trade Area (AFTA), aimed to transform the region's economy into a single production base, with a regional market of 500 million people. ASEAN countries have agreed to eliminate barriers to trade by requiring tariffs levied on a wide range of products within ASEAN to be reduced to no more than five percent. ASEAN countries have also agreed to eliminate quantitative restrictions and other barriers.

Although AFTA was initially planned to be realized by 2008, the target date has continuously moved forward, with the five original members to reduce their tariff barriers to 0 percent to 5 percent by 2003.

Trade data suggests that AFTA will boost trade activities within the region. Although a full-fledged AFTA was not in effect prior to 2003, import tariffs among ASEAN countries have been lowered gradually since 1997. As of Jan. 1, 2001, the tariffs of 92.8 percent of products in the Inclusion List of the six original signatories to the FTA had been lowered to between 0 percent and 5 percent.

As such, it is reasonable enough to assess trade activities in 2001 against those in 1993 to assess the likely impact of AFTA on regional trade.

Intra-ASEAN exports rose from US$43 billion in 1993 to $84 billion in 2001, up by more than 90 percent in eight years; this increase was not caused solely by an increase in the market size of the region due to population and growth of gross domestic product. Even adjusting for relative market size, the significant increase in trade intensity within the region is still evident.

The intra-ASEAN trade intensity index, which measures the trade intensity within the region adjusted for relative market size, rose from 2.5 in 1993 to 4.2 in 2001. This means the ASEAN market has become more important for its members, suggesting that AFTA will further spur on trade activities in the region.

Yet ASEAN's failure in creating FTAs with other regions or other countries have led to some countries resorting to setting up bilateral FTAs with individual ASEAN countries.

For example, the Singapore-United States FTA will enable all U.S. exports to Singapore to enjoy zero tariffs immediately, while the U.S. will phase out most of its tariffs within eight years. However, only exports with substantial transformation and value-added work done in Singapore can qualify as products originating from the island-state. For textiles and apparels, Singapore exports will enjoy immediate tariff elimination in the U.S. if they satisfy certain rules of origin.

The signing of the Singapore-U.S. deal has triggered other ASEAN members to seek similar agreements with the U.S. and other countries outside ASEAN, such as Japan. Thailand is in the process of setting up its own FTA with the U.S., while Malaysia has decided to proceed with initial negotiations for a U.S.- Malaysia FTA. Indonesia is also expected to follow the same path after its presidential elections in 2004.

However, chances are quite slim for countries like Indonesia, Malaysia and Thailand to establish a bilateral FTA with the U.S. as quickly and as smoothly as Singapore has done. One main reason is that the agriculture sector is not an important sector in the Singaporean economy, unlike most of the other ASEAN countries.

The agriculture sector usually hampers free trade negotiations because the U.S., the world's largest exporter of agricultural products, protects its agriculture sector through preventing farm products from Indonesia and other ASEAN countries from expanding their presence in the U.S. market. As such, these bilateral free trade negotiations will be much more difficult.

Another factor is the difference in the approach to trade liberalization. Countries like Indonesia, Thailand and Malaysia generally prefer a gradual approach to liberalization, while the U.S. usually prefers to reach a comprehensive FTA in a single round of talks.

These ASEAN countries realize that trade liberalization will also cause losses. Inefficient companies that and cannot increase their competitiveness in a more aggressive market will have to be closed down, which may push up unemployment. Thus, these countries must adjust the trade liberalization process so as to minimize its negative impacts.

By this point, learning from the WTO negotiations, ASEAN negotiators should be more aware of certain bargaining tactics. For example, the U.S. will allow broader market access for some manufacturing products for Indonesia, only if Indonesia gives more market access to U.S. agricultural products. Also, it is clear that a single ASEAN country will have less bargaining power than if several ASEAN countries joined together. As such, bilateral trade negotiations between a single ASEAN country with another country or region will not result in an optimal trade agreement for the concerned ASEAN country.

ASEAN has succeeded in raising the level collaboration among its members with the AFTA, and should maintain this high level of collaboration in trade negotiations with other countries and regions. Bilateral free trade negotiations may be easier to achieve, but are not likely to bring about optimal benefits for ASEAN countries.