The benefits of an AFTA-CER link

The benefits of an AFTA-CER link

P.J. Lloyd explains the value of such a link and the form it
should take.

In 1993, the Asean Free Trade Area (AFTA) and Australia and
New Zealand, two countries which have established a free trade
area, known as the Closer Economic Relations Agreement or CER for
short, established an informal link between these two free trade
areas. This link has taken the form of annual meetings of their
Trade Ministers.

On Sept 5 and 6, a meeting of government officials, academics
and business persons was held in Singapore, jointly sponsored by
ISEAS and the Institute of Policy Studies in Singapore and the
Melbourne Business School and the Asia 2000 Foundation of New
Zealand, to consider whether the informal linkage should be
expanded into a formal link. This is an important proposal. If it
happens, it will be the first formal link with another group of
countries for both Asean and the CER.

The annual discussions have made good progress in the areas of
information exchange and training on customs procedures,
standards and conformance. While these issues are important, they
have not covered the areas of liberalizing trade in goods and
services and capital between the two areas. The possibility of
extending the present exchange into some form of free trade link
between the two areas has now been raised. The Singapore Meeting
prepared a report and proposals which will be forwarded to the
Senior Officials of Asean and CER for their consideration. The
benefits and pitfalls of such a development deserve careful
consideration.

The existing informal link between the Asean and CER areas was
the first linkage between the Asean and another free trade group.
This is also true of the CER. It arose from a suggestion from the
Hon. Dr Supachai Panitchpakdi of Thailand. There has also been
talk of links between free trade areas in other parts of the
world; for example between the North American Free Trade Area and
the Latin American group MERCOSUR.

The Singapore Minister for Trade and Industry, Mr Lee Yock
Suan, supported the liberalization of trade between the areas
through the formation of a link. The strategy of a linkage
between AFTA and CER was endorsed by the participants at the
Singapore Conference.

Asean and CER are seen as natural partners. They are
geographically close. They have a similar mind-set. Both are
committed to the goals of open regionalism in the Apec forum.
Indeed, when compared with all other regional trading agreements
in the world, these two are the outstanding examples of areas
which have liberalized trade among the members and, at the same
time, lowered the barriers to trade in goods and services with
countries outside their areas. Both view their regional agreement
with immediate neighbors as an expression of common purpose which
should assist them in increasing their trade with the rest of the
world at the same time as it builds regional solidarity.

Before any further progress can occur, it is necessary to take
a hard look at the benefits which a linkage might confer. A study
of the possible benefits was prepared by the Canberra-based
Centre for International Economics. This estimated that free
trade between AFTA and CER would increase output by some US$9.8
billion for the Asean countries, US$5.3 billion for Australia and
US1 billion for New Zealand. This means an increase in real
consumption per capita of about 0.5 per cent for Asean, 0.2 per
cent for Australia and 1 per cent for New Zealand. No area would
lose from the linkage.

These estimates are small but they are also extremely
conservative. They covered only the removal of tariff on intra-
area trade in goods. They did not cover non-tariff barriers to
trade in goods, or the benefits of liberalizing trade in services
or freeing up capital movements or taking other measures to
facilitate trade and investment in the region.

The consensus at the Singapore discussion was that the primary
objective of the linkage should be economic cooperation between
Asean and CER. Such cooperation should be comprehensive in scope.
It should cover trade in all goods and services and, in the
terminology of Apec, should also cover trade and investment
facilitation and economic and social cooperation. For example, it
would include discussion of such possibilities as open skies in
civil aviation and free trade in maritime transport, areas which
have escaped trade liberalization in the WTO to date. It might
include the protection of intellectual property and mutual
recognition of standards. It might include ways of accelerating
the transfer of technology to Asean countries and cooperation in
the development of specific sectors such as food, tourism and
capital goods.

The scope of a link would be determined by mutual consent. As
a further example, the link might also include sub-regional
cooperation. In addition to the sub-regional cooperation which is
a distinguishing feature of Asean, Australia and New Zealand
participate in the Mekong initiatives and last year the
Australian and Indonesian governments established the Australia-
Indonesia Development Area (AIDA). Private business would also be
formally included in the proposals through joint ventures and
other business arrangements as well as business participation in
the planning of the link.

This proposal needs to be viewed in the perspective of what is
happening in other areas. Proposals to expand regional trading
arrangements are proliferating in North America and Europe. In
the multilateral trading system, the WTO will be initiating a
series of reviews of areas of trade in goods and services,
intellectual property and other rules of the international
trading system by the end of the century. Some countries advocate
a new round of multilateral trade discussions, the so-called
Millennium Round. Apec is seeking to develop a way of
liberalizing trade and investment in the Asia-Pacific region
though major differences of opinion, especially those between the
US on the one hand and Asia and Australia and New Zealand on the
other, may delay this progress. Indeed, there are more proposals
around the world for the development of policies which affect
cross-border trade and investment currently than ever before.

In this context, an Asean-CER linkage presents an opportunity
for a group of generally like-minded countries to cooperate on a
wide front in the development of policies. The general aim of
this cooperation should be to increase their ability to compete
in world markets and to accommodate the developments in policies
that originate in the WTO and other regions. Asean and CER both
played a critical role in their own regions in preparing their
members for opening their trade to the rest of the world. As AFTA
has progressed, Asean countries have increasingly opened their
borders to trade and investment with countries outside the area.
Similarly, Australia and New Zealand have found that CER has
prepared their exporters of manufactures for exporting to other
countries. Regional cooperation is confidence-building.

In this setting the small share of the total trade of the
Asean and CER countries which is trade currently conducted
between them is not crucial. The focus is on the development of
policies which will assist the members of AFTA and CER to develop
trade and investment flows with all countries.

If it proceeds, the form of the link will need to be decided.
It is not envisaged that Australia and New Zealand join AFTA (or
that the Asean countries join CER). Nor is it likely that the two
areas would form a new agreement covering all countries. Rather
the two groups would retain their identities and separate
policies but cooperate in many areas. There is a precedent for
this type of link in the European Economic Area which links the
European Union with the European Free Trade Association countries
in a new free trade linking agreement.

This form of link is simpler than merging the two areas as it
would not require rewriting the rules or changing the economic
bonds of the existing areas. It is compatible with the styles of
regional trade liberalization and facilitation which have
developed in the Asean and CER areas. It is flexible as the link
between two areas could evolve over time in the interests of the
countries involved.

It is hoped that the Trade Ministers of all the countries in
Asean and CER examine this proposal seriously. Some preparatory
work has been done in previous discussions and at the Singapore
Meeting but other studies will be required. In particular, impact
studies can estimate the benefits of specific policy proposals.
All countries will need to be persuaded that there are benefits
to be obtained from this form of regional cooperation.

Both Asean and CER are small areas compared to the emerging
giants in the European Union and North America. A link could
enhance the credibility of their strategies for trade and
investment liberalization and facilitation and their bargaining
power in global or Asia-Pacific discussions. A link between AFTA
and CER could be an important step in maintaining the dynamism
and the improvements in the standards of living in these areas.

The writer is the Ritchie Professor of Economics and the
Director of the Asian Business Centre at the University of
Melbourne.