The consequences of delaying AFTA

By Bob Widyahartono

JAKARTA (JP): There has been a sudden request by the Indonesian Chamber of Commerce and Industries, backed by some legislators, for a delay in the implementation of the ASEAN Free Trade Agreement (AFTA).

Since its inception in 1992, AFTA has sought to create a single market of about 400 million customers. AFTA was more or less "accidentally" decided on, thanks to the then Thai prime minister.

That accidental decision, through a process of "agree first, talk after", generated much dynamism and confidence in the region.

From the beginning, Indonesian officials were quite confident about AFTA and entering the Asia-Pacific economy. Looking back to September 1994, the region's ministers decided to accelerate the timetable for AFTA and expand the scope of the Common Effective Preferential Trade (CEPT) scheme.

It was agreed to accelerate the implementation of AFTA from 15 years to 10 years. Under the new timeframe, AFTA would be realized by January 2003 instead of 2008, with the following two- tracked schedule: 1. The normal track: AFTA would reduce tariffs that were above 20 percent to 20 percent by January 1998, and subsequently from 20 percent to between zero and 5 percent by January 2003; 2. The fast track: AFTA would reduce tariff rates which were above 20 percent to between zero and 5 percent by January 2000, and reduce those at or below 20 percent to between zero and 5 percent by January 2000.

Since September 1994, AFTA officials have noted the importance of 2000. Except for the normal track, all CEPT programs were to reach between zero and 5 percent by 2000. In fact, the officials assumed that AFTA would be effective by 2000. They believed the ASEAN business community would think that, practically speaking, AFTA was five, not 10, years ahead in its implementation.

If AFTA were not sped up, the General Agreement on Tariffs and Trade would have been liberalized sooner.

Since 1994, members of the Association of Southeast Asian Nations were pushed to accelerate AFTA to enable it to be effective in the new environment. The wider scope of AFTA positioned ASEAN members to be more competitive.

Now that we are in 2001, it looks as if Asia is entering a new chapter following its traumatic financial crisis, which was at its worse from 1997 to the middle of 1999.

Looking back at the AFTA process, ASEAN has admittedly gained substantially in maturity, as well as integrity. Should Indonesia really worry about implementing AFTA in 2003, and decide to postpone it to 2005?

A delay would be to the advantage of other ASEAN members -- particularly Singapore, Thailand, the Philippines, Malaysia and Brunei. Moreover, Singapore seems eager to enter into a bilateral cooperation with more developed countries.

Most of our goods are already compatible with AFTA guidelines. Under AFTA, products traded within the region are grouped under an inclusion list, a temporary exclusion list, a sensitive list and a general exception list. Products in the first list are targeted for immediate liberalization, and those in the second a little later.

If we look at the sensitive list of products, which are mainly agricultural products, they are given a longer time before being brought into AFTA, while the exception list comprises items that are permanently excluded.

The tariffs of at least 85 percent of the products on the inclusion lists of Brunei, Indonesia, Malaysia, Singapore and Thailand -- the original members of AFTA -- have been reduced to between zero and 5 percent. Next year that figure will rise to 90 per cent.

If we look further at the continuing liberalization of Intra- ASEAN trade, the average common effective preferential tariff for all 10 ASEAN member states has been brought down to 4.43 percent, and will decrease further to 3.96 percent by 2002.

Competition is better than no competition. With this in mind, there are ample ways to conduct an impact analysis of AFTA, instead of asking for delays.

We must realize that AFTA's effect will be dynamic and will come from changes in the structure of business organizations according to their scale of operation.

AFTA's real impact should not be determined only through reactive analysis, i.e. tariff comparisons or cost competitiveness in the very short term by Greater Jakarta-based big businesses in trouble.

We have to look beyond Greater Jakarta, particularly to the regions outside Java, in the context of regional decentralization. Are businesses specializing in agriculture and which are very competitive in the regions anxious about the introduction of AFTA? Or do they welcome AFTA?

Malaysia requested tariff cuts for its automotive industry, namely for completely knocked-down and completely built-up automotive parts, be put of until 2005, which was agreed to by AFTA's original members. That is all Malaysia asked for.

This does not mean that we have to follow suit and ask for a delay for all AFTA tariff reductions applicable to Indonesia.

What should Indonesian companies do from now on? They should consider strategic options for their competitive position in the ASEAN market in relation to AFTA's overall impact on their respective industries. Strategic alliances could be formed within their industries, or with strategic partners from one of the other ASEAN members.

The history of Southeast Asia's regional integration could serve as a lesson here. AFTA is a 10-year process. Is it really difficult to accomplish it in 10 years, despite the crisis that hit Indonesia? Theoretically speaking, our large industries most affected by AFTA will be those for whom achieving efficiency is a critical factor in cost, quality and product standardization.

It would be better to focus on AFTA and beyond by triggering the creation of an ASEAN brand as a strategy within business alliances among companies with sound management.

By initiating this brand strategy, with prior careful research of consumer needs, ASEAN can become more confident in its economies.

A delay of the 2003 schedule would be a setback. Businesses should now begin consistent preparations for improved professionalism and entrepreneurial spirit; this applies particularly to medium-scale companies outside Greater Jakarta.

Local bureaucracies should act as service providers and facilitators and refrain from interfering in businesses, in order to create a sound and efficient climate, free from invisible "high costs", to enter the AFTA era.

The writer is an economist and lecturer at Trisakti and Tarumanagara universities in Jakarta.