What does it really mean?

Gloria O. Pasadilla, University of Asia and Pacific, Manila

It seems as if ASEAN member countries are not really keen on making AFTA work. Delays in tariff reduction commitment, while used as a means to buy time, could do more harm than good particularly to the ideal of regional economic cooperation.

Consider the following scenario: Malaysia indefinitely backtracks on lowering tariffs on industries previously covered in the Inclusion List; Thailand retaliates by also increasing tariffs on Malaysia's exports of palm oil and other items; Indonesia begs for an indeterminate extension of compliance to ASEAN Free Trade Area (AFTA)'s timetable on tariff reductions because of political and economic difficulties; and the Philippines bows down to pressures, particularly from the sugar barons and other agricultural producers. Result: AFTA fizzles into thin air as a lofty but impractical ideal.

This still-hypothetical scenario isn't really too far-fetched, given post-crisis Asian political and economic realities. Already, Malaysia had set back the clock for the liberalization of its automobile industry to shield Proton, its sole car manufacturer, from foreign competition for two more years. Other original members of the Association of Southeast Asian Nations (ASEAN) are also under various domestic pressures to scale back the pace of tariff reductions in AFTA.

If these countries follow Malaysia's example, the temporary backpedaling on liberalization may extend for another two years, then another, and another, until the will to open up their economies - barring non-ASEAN foreign pressures, say from the United States or Europe-completely dissipates.

But what could be so bad about the backrolling on AFTA? How much benefit does it really give to member countries? Take the Philippine case. Despite the increase in intra-ASEAN trade from 9.2 percent in 1992 (before AFTA) to nearly 14 percent of total trade in 1997, country-by-country trade figures have shown that the Philippines appears to have gotten less out of AFTA than its ASEAN trade partners. Of the five original ASEAN, Philippine trade balance with Thailand was the only one that showed increasing surplus in 1993-96, while its trade with Malaysia, Indonesia, and Singapore showed an ever-widening trade deficit.

The trend only reversed during the Asian crisis. This means that, while other ASEAN economies managed to cash in on AFTA, the Philippines was unable to compete on the same level playing field.

Moreover, simulation studies show that the benefits from AFTA are dwarfed by the advantages from opening up ASEAN economies to more countries. For instance, by exploiting wider differences in the sources of international comparative advantage between ASEAN and its international trading partners, total ASEAN trade with the world can expand to about US$9.1 billion, over three times more than AFTA. That is, if ASEAN were to grant equal access to other countries, trade benefits would be multiplied. The implication is that AFTA is strictly small potatoes; ASEAN economies would do better to concentrate on greater liberalization with a larger number of economies.

Such simulation results, however, are good only if multilateralism truly works. But the feet-dragging of many industrial countries in bigger trading agreements like the World Trade Organization (WTO) or Asia Pacific Economic Cooperation are precisely why smaller regional trade agreements like AFTA, in which decisions are presumably faster arrived at, make sense. Thus for lack of a perfect multilateral agreement, AFTA is, in principle, a big deal.

Backpedaling on AFTA would also send a bad signal to foreign investors at a time when the ASEAN badly needs foreign capital to rebuild its crisis-torn economies. Foreign investors would take the AFTA debacle as a sign of the ASEAN's lack of regional cooperation and political commitment to truly forge greater economic integration-first, through trade, and then through more financial interlinkages.

How can talks of an Asian currency union be believable if trade integration is put back at the first sign of domestic trouble? As it is, the grandiose idea of a currency union would already take years to achieve, even assuming strong commitments from ASEAN governments.

But if AFTA were derailed, the proposed currency union would take even longer because the necessary preconditions for a workable currency area, i.e., highly integrated markets, would not be present.

Then there are other East Asian developments to take note of. If South and North Korea finally reconcile their differences, the country would be an investment magnet that could siphon off capital meant for Southeast Asia. China's impending entry in the WTO is another development that ASEAN better prepare for, lest it is caught with its pants down. All the more reason for ASEAN to show a unified and credible face to attract investors now. AFTA is an acid test for sought-after credibility.

When governments embark on greater openness in trade, they do so quite aware of the domestic distortions imposed by tariff and nontariff protection, particularly on domestic consumers, who would have to pay for a fewer variety of goods at higher prices.

It was this distortion governments sought to eliminate. The temporary benefits accorded to protected industries would only be worthwhile for the respective economies if these industries eventually become competitive in the world market and bring to the domestic market greater profits, wider resource mobilization, and improved employment. In a dynamic sense, protected industries should pay for the sacrifices imposed on consumers over the long haul.

Many countries' experiences suggest, however, that protection has a tendency to perpetuate itself, barring strong political will to stop the self-interest of protected industries. This tendency of self-perpetuation seems to reassert itself now because of crisis-related difficulties. Should ASEAN governments accede, more future compromises are not unlikely.

Of course, there are individual country ramifications to the agreement, as well as national sensitivities-on agricultural imports, for instance-that ought to be respected. It was precisely for this reason that AFTA gave agricultural industries a longer time to adjust. But for all other industries, any contemplated protection-for instance, not fulfilling the agreed tariff reduction-must be weighed against the potential harm such action would entail, not the least of which is losing credibility on regional cooperation.

Should any ASEAN member decide to postpone compliance for domestic reasons, a cap on the allowable number of deferments would enhance AFTA's credibility and prevent it from becoming a useless document.

Individual countries should, likewise, prepare strong safety nets for those sectors who will inevitably be affected by regional trade liberalization, foremost of whom are the local farmers.

(This article first appeared in theRecent Economic Indicators monthly publication of the Business Economics Club of the Manila- based University of Asia and Pacific (UA&B). The article is reprinted with permission.