Bilateral trade pacts not best way for ASEAN

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.