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.