The consequences of delaying AFTA

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.