Asean

Get rid of obstacles—like tariffs on imports and exports—and you get more movement of products across borders. More movement of products means more production. More production requires more means of production. More means of production calls for more investment.

That’s the gospel Asean has adopted, and the Asean Free Trade Agreement, or AFTA, is fast becoming a reality. If you believe the pure-markets theory, everyone—all the residents of all the member nations of Asean and the rest of the world besides—stands to benefit.

Agence France-Presse

Thirteen-year-old Bui Xuan Manh walks back home from rice field with his family buffalo on Wednesday, Oct 9 in a village west of Hanoi. Animals still play an important role in farming in the countrysides of Southeast Asia due to their low cost when compared to machines.

“Trade is good. Period,” one Western diplomat in Phnom Penh said. “It just takes time. They can survive, they can do well, they can compete. It’s all part of the process—you don’t just start to produce computer chips.”

Over time, the diplomat maintained, Asean countries will rise to the challenges of the increased competition brought on by freer trade—and prosper as a result. “The US went through this at the turn of the century. Japan went through it after World War II. It can be done.”

But with the US’ powerhouse economy continuing to struggle and Japan entering its second decade of recession, is “it” a good thing?

Long Road to Freedom
Asean’s first six members signed the Asean Free Trade Agreement in 1992 and began implementing it in 1993. It provided for the gradual reduction of tariffs over 15 years. The aim was for all trade between the “Asean 6” countries to face tariffs of no more than 5 percent by 2007.

With the Asian financial crisis of 1997 and 1998, Asean members decided free trade was more urgent than ever. The so-called Common Effective Preferential Tariff schedule was shortened by five years, putting the target at Jan 1, 2003.

At this point, more than 96 percent of trade between Asean’s original six members is subject to tariffs of zero percent to 5 percent. The newer members of Asean have their own 10 year schedules: Vietnam is to reach the target by 2006, Laos and Burma by 2008 and Cambodia by 2010.

In five more years, the target drops to zero. By 2008, trade in goods between the Asean 6 will be tariff-free; by 2015, all intra-Asean trade will be tariff-free.
Flexibility is built into the agreement so countries can apply the provisions more gradually to industries they feel they have to protect. For example, Cambodia hopes to use such exemptions to keep its agriculture protected by higher tariffs until 2017.

Following the Leader
When AFTA was signed in 1992, regional free trade agreements were all the rage—Canada and the US came together in 1989, extending the privilege to Mexico with the formation of the North American Free Trade Agreement in 1994. Meanwhile, the European Community agreed to form a common market in 1992.

Reducing tariffs within a single region gives the countries in that region an advantage in that market that countries outside the region usually don’t have. In that sense, free trade agreements, or FTAs, are a protectionist measure, which has caused some laissez-faire enthusiasts to decry their popularity.

“A proliferation of small FTAs with little movement towards consolidation would result in an enormously fragmented and complicated trading system,” Claude Barfield, a resident scholar at the American Enterprise Institute, wrote in the Far Eastern Economic Review in July. Such agreements threaten the global multilateral trading system, exemplified by the World Trade
Organization, he warned.

Philip Levy, an expert on regional trade agreements at Yale University in the US, points out that FTAs are an obstacle to the natural efficiency of free markets. “The main potential downside to a regional trade agreement is the possibility that it will induce people to buy more expensive regional goods [that face no tariffs] rather than the cheapest goods available worldwide,” Levy wrote in an e-mail.

That is, if consumers in Mexico can buy a US-made car without paying tariffs, they are more likely to buy it than to buy a European-made car of comparable or better quality—decreasing economic efficiency, but boosting regional industries.

The same applies to a Thai-made car, or a Singaporean-made audio system. The Asean countries feared seeing their shares of the US and European markets reduced. AFTA, then, would do the same thing for the then-six Asean countries: Give them markets and investment opportunities at home instead of abroad.

However, observers note, AFTA is both a hedge against globalization—promoting regional interests over external ones—and a step toward it. AFTA’s guidelines and requirements are consistent with WTO requirements.

So regional integration hopes to allow Asean countries eventually to integrate into the global economy as a single bloc.

Bring Us Your Factories
AFTA’s main objective is to encourage domestic and foreign investment, partly by spurring intra-regional trade—for example, foreign companies that started factories in the Philippines would be able to sell the goods made there to five other countries for no extra charge.

But the EC and Nafta included large consumer markets. Asean’s countries have always specialized in production, relying on the prosperous nations of the West and Japan to consume most of what they make.

That hasn’t changed much. Exports from one Asean country to another accounted for only 17.8 percent of total Asean exports in 1980, 18.5 percent in 1990 and 23.2 percent in 2000 (counting only the original Asean 6).

Growing percentages, it’s true, but not skyrocketing ones, even as trade barriers began to be dismantled during the 1990s. And many doubt that the percentages will climb much higher, even without tariffs. An average of 30 percent of intra-Asean trade is intra-company trade—between various divisions, subsidiaries and contractors of a single company, points out Francis Perez, regional trade policy adviser for the UK-based advocacy group Oxfam GB.

“This reflects a derived demand for finished products from developed countries, in this case the US,” Perez wrote in an e-mail from Bangkok. “Considering the continuous decline of the US market, this characteristic of intra-regional trade has to change if it is to become sustainable.”

AFTA is also supposed to boost foreign investment by attracting investors’ attention to a single, unified region. In a way, the Asean countries do have a common interest in attracting foreign investment. By marketing the whole bloc to the rest of the world as an attractive investment destination, they have more collective strength than any one of the mostly small countries that make up Asean.

“As an integrated Southeast Asia with many strengths and abundant resources, we can compete with China, Latin America and Eastern Europe for our fair share of foreign direct investment,” Singaporean Minister for Trade and Industry George Yeo said at a January seminar on AFTA in Jakarta.

But given the similar industries the Asean countries have developed—despite their diverse resources—in practice, every investment that lands in Indonesia is one that doesn’t land in the Philippines. “East Asian countries have always been competing against each other,” Perez said.

“The history of dependence of these countries on a singular developed country market (either US, Japan or EU) has not helped efforts toward real integration among East Asian countries,” he noted.

Yale’s Levy agrees. “The principal difficulty for intra-Asian liberalization is that Asian countries often produce similar types of products and therefore the benefits of trading amongst them are quite small relative to those from trading with the rest of the world.”

This might be different, Perez says, if Asean countries could band together for their common interests and show a united front to the rest of the world. “One immediate indicator of real economic integration...would be for instance the ability of Asean to negotiate as an economic bloc in multilateral negotiations such as in the WTO—in the interest of local [regional] capital, labor and agriculture—similar to the EU or North America.”

Protecting the Home Front
There’s evidence that the Asean countries are often competitors more than partners in the snags AFTA has encountered as it tries to reduce tariffs within the Asean 6. Malaysia, for example, has persisted in protecting its auto industry, winning extensions on its tariffs of up to 300 percent on imported cars. Malaysia and Thailand are locked in heated competition to be Asean’s main hub for car and auto-parts manufacturing.

Malaysia’s car tariffs make foreign automakers gnash their teeth as they block access to a potentially huge market. But the government is hesitant to stop protecting its Protons, whose lack of competitiveness is clearly evidenced by their absence from foreign streets.

Malaysia is not the only one—Thailand has been accused of protecting its glass industry, and the Philippines has continued to shelter its cement producers. Several countries are defending weak agricultural sectors as well.

These problems won’t last, Asean Secretary-General Rodolfo Severino said at the January AFTA seminar. Acknowledging that certain sectors were continuing to lag behind the tariff reduction schedule, he said, “These shortcomings have to do with small parts of the total trade in Asean, and they are temporary.

“Tariffs on sensitive agricultural products will still fall to zero to 5 percent. Tariffs on automobiles will drop to zero percent to 5 percent for all Asean members, although a little later than originally scheduled.... In any case, no free trade area can be free of the need for flexibility in dealing with difficult and sensitive sectors.”

Critics counter that such exceptions aren’t “flexibility”—they’re weaknesses. AFTA can’t achieve its goals, they say, unless Asean is willing to get tough. Liberalization is often painful in the short term, but if you don’t swallow the bitter pill, you’ll never get cured.

Uniting the Two Aseans
The vision of a Southeast Asia bustling with frictionless trade is, so far, only a vision. The most glaring difference between reality and this ideal is the vast “development gap” between the Asean 6 and the four newer members—Burma, Cambodia, Laos and Vietnam.

“Asean integration into an economic bloc is still a long way to go,” Perez said. “If current trends of liberalization continue, only [the US, Canada, the EU countries and Japan], and perhaps China, will continue to benefit.”

Asean is not pretending that economically integrating the region will happen by itself. In 1999, the Initiative for Asean Integration was created, producing a six-year plan targeted at the new members. This focuses on four areas: Infrastructure, human resources development, information and communications technology and regional economic integration.

To Oxfam America’s Femy Pinto, East Asia regional program officer, the initiative relies on unquestioned assumptions, such as the idea that privatization can reduce poverty. The initiative promotes privatizing services such as education, health care, electricity and water. These measures will put vital services in the hands of for-profit corporations—and out of governments’ control—thus hurting the poor, she said.

“[The initiative] is being billed as a way to bridge or narrow the development gap between these countries, but it doesn’t actually address that. These projects say they aim at supporting and assisting poor countries, but they don’t meet what we feel are good poverty reduction measures,” said Pinto, who attended a Jakarta workshop on the integration initiative in August.

Much of the integration talk revolves around building up infrastructure, especially transportation links. But this will only facilitate the flow of trade, not create opportunities for production, Pinto said.

“For example, the East-West corridor road will link Thailand and Vietnam, and Cambodia and Laos will be in the middle,” she said. Trucks laden with Thai and Vietnamese goods will lumber through Cambodia and Laos, polluting the air and straining public-works budgets—but otherwise bypassing the poor neighbors.

Freeing Trade and the Poor
Oxfam and other critics argue that the assumptions of classical economics—the view that trade liberalization is in itself a good thing—need to be questioned. When poor countries open up their economies, they can be used for their cheap, unskilled labor and natural resources, without ever developing industries of their own.

“The assumption is that getting rid of barriers to trade will benefit all countries,” Pinto said. “If you really want to bridge the development gap you need to increase protections for developing countries and lower the barriers for more developed countries.”

A Cambodian Ministry of Commerce official said keeping import tariffs high would only encourage smuggling—already a major challenge to Cambodian industries such as steel and gasoline—and coddle industries so that they never become competitive.

Currently, Cambodia, like Asean’s other poor members, is predominantly a rural, agricultural, subsistence economy—around 80 percent of Cambodians are rural farmers. They use centuries-old methods of small-scale farming without the benefit of modern agricultural tools.

In addition, Cambodia lacks processing facilities, so products such as rice and palm oil have to be exported, processed, and re-imported—depriving Cambodia of the vital ability to add value to its products.

Cambodia will use AFTA’s flexibility provisions to extend protections to these industries as long as possible—until 2017—so they can develop and become competitive, the commerce ministry official said.

“We don’t put that kind of product on the immediate schedule. Because of the war, our agricultural products are not able to compete with [goods from] Vietnam and Thailand,” the official said. “This will give industries and farmers time to strengthen their competitiveness.”

In the end, the official said, the poor can’t help but benefit from increased trade. “Trade makes the economy grow, so there are more jobs for people. That means more income, and that helps poverty. It’s a chain reaction.”
Yale’s Levy argues that when governments orchestrate sectoral growth—through measures such as tariffs—they shut themselves off from the creativity of the free market. Competition, he said, is what produces adjustment—not protection.

“Trade liberalization is not premature for the Southeast Asian economies,” he said. “In fact, liberalization at an early stage can be helpful since the exposure to world prices can direct investment to its best use.

“The difficulty with temporary protection is that it tends to be very difficult to remove. Governments around the world have also done very poorly at predicting which sectors will eventually take off,” Levy said. “Those East Asian countries that grew so rapidly—Korea, Singapore, Taiwan and Hong Kong—subjected their products to the test of competitiveness on world markets. In my opinion, this was a very important element of their success.”
But Oxfam’s Pinto insists that this type of rhetoric focuses only on economic growth—not on helping the poor.

Economic growth, she says, tends to favor only a select few, while the poverty-stricken masses get poorer and poorer at the expense of the rich.
“It’s no longer the time when you could easily separate discussions of trade and poverty reduction,” Pinto said. “The foundation of that thinking should be challenged.”

Plunging Forward
From internal competition to dependence on external markets to its yawning development gap, Asean faces a number of hurdles as it attempts to integrate into a single bloc of thriving, mutual, tariff-free trade. When and if that goal is achieved, a bigger one looms: Extending AFTA’s provisions to China to create the world’s largest free-trade area, starting 10 years from now.

Over those 10 years, the argument goes, Asean as a bloc will become more competitive—as a market and an investment destination—with booming, fast-growing China. But even with its shared market of more than 500 million, Asean can’t compare to China—which has a population of 1.6 billion, a vast supply of extremely cheap labor, and, since last year, membership in the WTO.
Eventually, then, Asean will be positioned to ride China’s coattails to economic success. “China has more competitive labor costs, but Singapore has technology, and so does Malaysia,” Cambodian economist Sok Hach said. “And even though China is very big, it has deficits of agricultural products. If there is free trade, Asean can find a niche. Maybe not now, but in 10 years, why not?”

Further into the future, Japan and South Korea want an overarching East Asian Free Trade Area, and everybody—including Cambodia—is clamoring for entry to the WTO. The wheels of global trade liberalization keep on turning, and only time will tell whether they carry the world’s economies forward—or squash the world’s poor underneath.