Association of Southeast Asian Nations Foreign Trade Area - Essay Example

ASEAN Foreign Trade Area Table of Contents ASEAN Foreign Trade Area Table of Contents 2 3 Introduction 3 Regional Integration 4 ASEAN Free Trade Area 4 Association of South East Asian Nations (ASEAN) 5 Significance of AFTA for ASEAN 5 The objective of AFTA 6 AFTA speeds up 6 The Framework of AFTA 9 Trade Liberalization 12 The challenges: Lessons from European Union 14 Conclusion 14 Reference 16 Bibliography 19 Abstract The recent financial crisis has lent additional importance to the regional efforts towards the economic integration and has raised its charm as an enhanced area of trade and investment. The process had been initiated in the 1990s and has gained tremendous momentum which reflects the effectiveness of the intra and extra regional agreements. The ASEAN vision 2020 was partly inspired by the existing initiatives like ASEAN Foreign Trade Area. The effectiveness of ASEAN Foreign Trade Area (AFTA) is not only reflected in the network of arrangements, but also in the manner they complement the other regional agreements. Findings suggest that certain pressing issues are yet to be addressed to ensure success in the free trade area. Lack of political will and consensus dependent negotiation are two significant impediments in the path of development and enhancement of ASEAN foreign trade area. Inadequate strategies to implement and harmonize the initiatives have been the major obstacle in the successful execution of AFTA. Innovation in the agreement design, concentration on shared concerns, implementation of appropriate monitoring strategies, specification of the roles of secretariat and establishment of specialized bodies as sub-units and working groups can boost up the development process through AFTA. Introduction The establishment of ASEAN Free Trade Area (AFTA) cannot be seen in isolation from the group’s drive for economic integration. In the year 1992, the latter phenomenon gained momentum with the establishment of AFTA, which reached its peak in the year 1997. At the end of 1990s, regionalism in ASEAN and East Asia propelled the development and enhancement of the trade market. This report aims to trace the evolution of regional economic integration in ASEAN with special emphasis on AFTA. After the establishment of AFTA, the total trade volume in regional trade area had increased. The report is an effort to look into the objective and framework of AFTA. Regional Integration The increased significance of regional groups in the field of politics, money and trade has boosted the establishment of regional integration schemes. However, regional integration is not a new phenomenon. Examples of such associations are found in unions, commonwealth, leagues, associations, councils which have been formed in different periods of history (Mattli, 1999). Each of them aimed to integrate countries, regions, people and activities. AFTA is surely not an exception. However, with the establishment of this trading environment, the intensity of the above mentioned activities have increased manifold. A number of political and economic requirements have influenced the creation of AFTA involving the ASEAN countries. ASEAN Free Trade Area Back in the year 1992, a milestone was set during the fourth ASEAN Summit in Singapore (Cuyvers & Pupphavesa, 1996, p.2). The ASEAN Free Trade (AFTA) was established in the like of other stronger integrated trading blocs, such as the North American Free Trade Agreement (NAFTA) and European Community (EC). Few months prior to that, the foundation was laid for free trade area by the ASEAN economic ministers, henceforth initiating the Common Effective Preferential Tariff (CEPT) scheme, the first step towards a successful implementation. CEPT offers ways to harmonize the internal tariff rates. This indicates that a quarter of a century was taken by the ASEAN to originally envisage economic cooperation program in the form of AFTA. Association of South East Asian Nations (ASEAN) ASEAN was launched in the month of August of 1967 (ASEAN, 2010). Until the year 2008, ASEAN had been the one and the only formal organization which practiced regional economic integration in East Asian region. The ASEAN aims to accelerate social progress, economic growth, and cultural development to encourage regional peace and constancy. The association has boarded a number of economic integration initiatives; one significant initiative being the establishment of ASEAN Free Trade Area (AFTA). Despite the slow pace of the trade liberalization, AFTA has been in effect among the first six participants - signatories—Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, and Thailand since the month of January, 2002. The six signatories have successfully reduced tariffs on a number of products, existing in the inclusion list. The tariff has been reduced to 0- 5 % range. The implementation of the reduced tariff has been delayed for the newer members. For instance the implementation for Vietnam in the year 2006, Myanmar and Lao People’s Democratic Republic (Lao PDR) and the implementation of Cambodia in 2010 have been delayed. Significance of AFTA for ASEAN Various political as well as economic reasons can be given to explain the necessity of AFTA for ASEAN. “Many in ASEAN felt that the regional association was at crossroads because of the Cold War imperative that had helped forge and sustain regional cooperation” (Than, 2005, p30). The necessity to enhance and sustain regional cooperation led to the birth of the concept of AFTA. Apart from this, there is economic justification in the establishment of AFTA. AFTA was introduced at a time when the United States established agreements for NAFTA while the European Union stepped up to initialise “Maastricht Treaty”. These initializations motivated ASEAN to take bolder steps in the regional cooperation. In other words, the creation of AFTA has been more defensive and reactive, provided the global uncertainties. The objective of AFTA According to the EAAU report of the year 1994, AFTA primarily has three objectives. Firstly, AFTA was established to liberalize trade in ASEAN by gradually eradicating intra-regional tariffs and eventually the non tariff barriers. Secondly, AFTA is supposed to attract foreign investors to this region by establishing a superior coordinated market. Lastly, AFTA will be responsible for changing ASEAN with the changing economic conditions. With the inception of AFTA, ASEAN was supposed to adopt the regional trading arrangements (RTA) in the developed world. By this year, six original signatories are supposed to eradicate tariffs altogether, while the rest of the participants are expected to achieve the same by the year 2015. By that period, all ASEAN are expected to become a tariff free foreign trade area (FTA) (Kawai & Wignaraja, 2008). AFTA speeds up Overall the objective of AFTA was to create an integrated ASEAN market to trade in various goods. Such a boosted market is expected to draw more attention for trade than other smaller national domestic markets. Eventually, this would result in further motivation for growth. “It would also raise, for ASEAN members, the stakes in one another’s purchasing power and economic progress” (Severino, 2000). At the starting, from the year 1993 to the year 1997, the intra ASEAN trade value almost doubled. In the year 1993 the value was around US $ 44 billion and it moved to above US $ 85 billion in the next four years. The value rose from less than 21 percent to around 25 percent of the total trade. In the year 1998, the figures dropped to US $ 71 billion which accounted for 22 percent of the total trade. This slowdown can be attributed to the financial crisis of that period. However, the very next year experienced an increase in trade volume. The figures are quite above pre-AFTA level. Many researchers argued that the dramatic rise should not be attributed to AFTA alone. Nonetheless, the contribution of AFTA cannot be ignored altogether as because after its establishment many of the large companies, around the globe, have displayed unexpected interest in the progress of AFTA. Later on, ASEAN took up ASEAN Industrial Cooperation scheme, or AICO. According to it, the products of organizations operating in two or more ASEAN countries would be able to take the advantage of the full AFTA treatment instantly. In 1997- 98, Southeast Asia was struck by global financial crisis. Many predicted that this would lead the ASEAN countries to retreat into isolation and result in dismal condition. Some of these speculations were made in the absence of logic and without the support of proper data. At the time of financial contraction and diminishing investment amount, ASEAN was required to regain the confidence and boost up the investment. In the wake of this situation, accelerating and expanding the regional economic integration, instead of hollowing it out, slowing it down or constricting it, was very much significant. At the end of the year 2000, above 85 percent of tariff lines for the goods traded under AFTA were in the minimal 0 to 5 percent zone, which represented over 90 percent of the total value in the intra ASEAN trade (Severino, 2000). Eradicating tariff barriers was not the sole objective of the ASEAN countries. By the year 2000, the average tariff rates for the trade goods within AFTA was reduced to as low as 4.4 %. In 1997-98, financial crisis hit some specific industries in the individual ASEAN countries. Though the organization was ready to offer relief benefits to these industries, they were limited by scope, timeframe and other such conditions. Dismantling the trade barriers alone was not enough; trade was required to be made more uncomplicated and trouble-free. Harmonization of tariff framework, mutual recognition arrangements, compatibility of product standards and the streaming of custom procedures were also equally significant for ASEAN. ASEAN is still in the process of implementing progressive activities to enhance its attractiveness for investments. All its activities are directed to project itself as an integrated market for goods and services. Exclusive focus on goods may not be a good idea for ASEAN; rather they are required to move into services as this contributes a major chunk to the ASEAN economy. Service is comparatively a complex area to operate in, as it is subjected to liberalization negotiations. According to the ASEAN investment agreement, each of the ASEAN countries would not only allow other ASEAN countries to invest but would also offer a national treatment to those investments. AFTA was attempting to remove the impediments to investments. ASEAN also projected itself as a significant investment area in Japan, Europe and United States. One significant advantage of ASEAN is that its economies are quite similar to each other. This has proved to be an advantage for AFTA. The economies are more closely bound through infrastructure linkages. ASEAN had been working on an expansion program that attempted to intensify road network in Southeast Asian region. The implementation is done to facilitate the transit of goods. Agreement on multi-modal transport and interstate transport are also taken into consideration. Some other projects have been initiated as a cooperative measurement among the ASEAN countries. Cooperative measures have also been taken to ease the process of telecommunication interconnectivity in ASEAN. ASEAN’s newest members like Laos, Myanmar, Cambodia and Vietnam, are not far away from the implementation of CEPT commitments, since around 80 % of their products have been moved to their CEPT inclusion list, of which around 66 % already has achieved the tariff rate within the tariff band of 0- 5 %. After signing the protocol to modify the CEPT- AFTA agreement, on 30th January 2003, six signatories aimed to eliminate the tariff rates on 60 % of their products present in the inclusion list. The amendment was done to eliminate the import duties. As of now, 64.12 % of the products in the inclusion list of the six ASEAN six signatories have been eliminated. The tariff cutting exercise started back in the year 1993. However, as of now, the average tariff according to the CEPT scheme was reduced to 1.51 % from 12.76 % in the year 1993 (ASEAN, 2009). The Framework of AFTA The primary aim of AFTA is to develop and “increase ASEAN’s competitive edge as a production base geared for the world market” (Lim & Xun, 2008). The prime objective is to liberalize the trade by eradicating intra ASEAN tariff as well as non tariff barriers. This, in turn, is expected to enhance the efficiency and cost effectiveness of business and investments in a way which is consistent with the General Agreement on Tariffs and Trade (GATT). This implies that raising the intra regional trade is secondary. After the establishment of AFTA, intra ASEAN trade had experienced a rise in their volume. However, the proportion is quite low when compared to the total trade amount of the country. The significant part of the agreement is Common Effective Preferential Tariff (CEPT) Scheme. The scheme is unique in its flexibility. According to the scheme, each member is supposed to allocate goods which are subjected to tariff as per one of the four lists. These are, Inclusion List (IL), General Exception List (GEL), Sensitive List (SL) and Temporary Exclusion List (TEL). Goods listed on each of the above mentioned lists have different tariff reducing deadlines. There even exist different deadlines for various countries. The less developed signatories like Cambodia, Laos, Myanmar and Vietnam have comparatively more time to liberalize than the original six signatories. Questions have emerged whether this flexibility is good or bad for AFTA. “The flexibility had proven to be a double edged sword” (Lim & Xun, 2008). The flexibility, on one hand, services the wide development gap among the ASEAN countries and defines different treatment for each of them thereby easing framework negotiations. On the other hand, this has lead to back tracking due to the unique flexibility in CEPT. For instance, Vietnam has put more than average portion of products in its General Exception List. The amount accounted for 5.9 % of its total tariff lines which is more than three and a half times the average proportion in ASEAN. The country’s General Exception List consists of some 165 product categories. These include automobiles, motorcycles, computers, food and beverage products and telecommunication and information technology equipments. To add to it, liberalization process has been slowed down because of gradualism. Some other shortcomings of AFTA are quite similar to the other reasons leading to previous breakdown at economic cooperation. In the month of January, 2004, the implementation of CEPT – AFTA scheme was considerably boosted when Malaysia declared its tariff reduction for the completely knocked down (CKD) and completely built up (CBU) automobile units to eventually meet its commitments a year earlier than the scheduled period. Earlier, the nation was allowed to delay the transfer of 218 tariff lines of CKDs and CBUs until January, 2005. Products, those would not be included within the CEPT AFTA scheme, are the products like rice which are listed either on highly sensitive list or ‘General Exception’ list. The coordinating committee on the CEPT scheme implementation for AFTA was responsible for reviewing the entire General Exception list for the ten participants to ensure consistency within the respective regulation. In an effort to enhance and strengthen a number of rules governing the execution of the CEPT scheme, the CEPT rules of origin and operational certification procedures have been reviewed and implemented since 1st January 2004, to make the scheme more lucrative to regional and potential businessmen (Directorate of Trade, 2007). The features of revised CEPT framework of Origin and Operational Certification Procedures include (a) A consistent method of defining local/ASEAN content; (b) A set of principles to determine the cost of ASEAN origin and framework for costing techniques (c) Treatment of locally-procured materials; (d) Enhanced verification process which also includes on-site verification. Considerable transformation has been adopted as an alternative way in defining the origin for CEPT products to encourage greater utilization of CEPT- AFTA scheme. The task force on the CEPT rules of origin is presently working out considerable transformation framework for a number of product sectors which include wheat flour, steel and iron and some more 11 priority integration sectors. In the two years following the financial crisis in 1997-98, direction of trade in ASEAN’s export had regained thereby pushing the total export value to upward direction by US $ 408 billion. As a result of the economic downturn in the United States and Europe and the recession in Japan, in the year 2002, ASEAN export recovered its value. The six signatories continued to experience upward trend in the first two quarters of the year 2003. Intra ASEAN trade experienced an increase of 4.2 and 1.6 percent in the export and import amount for the first two quarters of the year 2003 (ASEAN, n.d., p.3). Trade Liberalization “Regional integration occurs naturally, albeit very unevenly, during the course of the development of private markets” (Devlin & Castro, 2002). The apparent way to structural reform is seen in the enhancement of the commitments towards trade liberalization. This has been the primary characteristics of the growth strategy of a number of developed countries. It will not be wrong to say that regional economic integration has been the third tier of a three tier process; the first two being the unilateral and multilateral opening. It would require the three tiers to work in coordination to mutually reinforce one another. Regional trade agreements such as AFTA allow ‘discriminative trade liberalization’ among the members and ‘open regionalism principle’, independently allowing the members to establish trade agreements with the non-members (Verico, 2010). The regional opening is surely facilitated by political and economic considerations and binding rules based on commitments. The primary driving source would be the possibility of liberalizing commitments to the private sector. AFTA‘s cooperative activities aims to enhance the ASEAN competitiveness by offering basic support to the private sectors. “Typical activities and projects under this programme thrust are aimed at increasing the resilience of ASEAN communities and private sectors and small and medium enterprises (SMEs) to the changing economic environment by increasing their capacities to smoothly perform self adjustment processes to adapt to the new and more competitive economic environment” (ASEAN, 2009). “By disseminating knowledge on the new challenges and opportunities in the global economy and introducing new skill and competence requirements, typical ASEAN competitiveness programme would assist community, private sector and SME groups to increase their preparedness to compete in the global economy” (ASEAN, 2009). The example of AFTA is often referred as one of the comparatively advanced region trade areas in that region. The concern regarding global free investment regulations were strongest in Indonesia and Malaysia. Both of these regions form the base for the future domestic firms. From the mid -1980s, Malaysian government has established excessive neoliberal economic reforms, till the government and the private sector assumed the foreign interest in the negotiation of global investment as one of the biggest threats to domestic organizations. Expectations are high that global rules would ultimately allow the foreign firms to get unhindered access to the domestic market. By 1990s, the Malaysian policy makers started protesting against the nation’s dependence on foreign development investments. At the same time, they pointed out the significance of nurturing the Malaysian multinationals. ”In response to moves to include investment on the inaugural WTO agenda, Malaysian trade minister Rafidah Aziz argued against the idea of full market access and national treatment privileges for foreign investors” (Nesadurai, 2003). According to her, such move has the ability to prevent the implementation of ‘national level investment policies’ that will not only contribute to the growth of the domestic firms but also helps it to compete with large and established foreign organizations. Indonesia expressed parallel concerns; the nation formally objected to the inclusion of this agenda in the WTO agenda. This was in collaboration with Malaysia and six other developing countries in the ASEAN region. In the wake of the concerns, developments arise to nurture the domestic capital by privileging the ASEAN investors in the AFTA market. The regional market, under AFTA, is supposed to offer necessary scale and learning economies to the domestic firms. Preferential market access and special treatment privileges meted out to the ASEAN investors was meant to give ASEAN organizations enough space to grow and emerge as internationally competitive. A considerable part of the project was also to motivate the ASEAN conglomerates through joint ventures and other types of consolidation to compete with the international corporate giants. “A senior official from the ASEAN Secretariat explained, the ASEAN countries saw the need to develop ASEAN multinationals using the grace period before foreign (non- ASEAN) investors would be accorded the same privileges” (Nesadurai, 2003).The requirement, although, has been extensively debated. The challenges: Lessons from European Union “Regional economic integration is very difficult to resist” (Baldwin, 2003). Once a group of countries in the same region begin to liberalize preferentially, other nations are forced to react by either joining the group or by establishing their own counterbalancing group. Trade arrangements in the European region had serious motives and uncultured constraints. Serious motives included peace and stability at the prime stage and protection against communism at the later stage. The economies of Western European nations are thoroughly entwined with the foreign trade agreements. The intensity of regional trade has made it possible to exchange ideas and thereby foster mutual understanding. AFTA did have an impact on the trade relations of this region but it is yet to match the competency of its European counterpart. Conclusion Since the early 1990s, efforts are made to renew the integration processes in the developing countries. “Even areas like Asia, which traditionally has not shown great interest in formal regional integration, have pursued important collective initiatives” (Devlin & Castro, 2002). In the month of November 2002, the ASEAN Heads of Government proposed the basis tenets of ASEAN Economic Community (AEC), the final establishment of which was expected to see the light of the day by the year 2020 (Guerro, n.d.). The proposal, however, has been diluted by a number of considerations. The desire to establish a post AFTA agenda has been significant, considering the future planning of such community. As there are a number of political and economic obstacles, the ASEAN style of decision making, which takes into account common consensus, will not facilitate legal and more developed framework similar to the ones adopted by European Union and NAFTA. 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