What does it really mean?

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.