Chairman, Australian APEC Study Centre
This report is based on a paper delivered at a Conference "Indonesia and the World" which was hosted by the Indonesia Forum in Jakarta on 18 October 1996
The ASEAN Free Trade Agreement (AFTA) will not create significant opportunities for Australian business in general. AFTA will create additional export opportunities for Australian companies which have manufacturing facilities in ASEAN countries. But more Australian companies supply products to ASEAN by exporting from Australia than by manufacturing in ASEAN markets. They face significant competitive disadvantage.
Manufacturers in ASEAN countries will face much lower tariffs when exporting to other ASEAN countries than Australian exporters. New arrangements to create preferential tariff levels for multinationals that invest in the AFTA area may also disadvantage Australian exporters.
It remains to be seen if this is the outcome. Disadvantages which AFTA creates would be obviated if the ASEAN countries reduced trade barriers with non-ASEAN trading partners in parallel with reductions with AFTA countries.
Current efforts to establish linkages between AFTA and the trans Tasman free trade area which was created by the Closer Economic Relations Agreement between Australia and New Zealand (ANZCERTA) have an institutional value, but they are not likely to reduce discrimination against Australian exporters.
AFTA seeks to create the benefit for which all free trade agreements are formed - to improve the economic welfare of the participating economies. AFTA aims to create pan - ASEAN markets to win a better return from the comparative advantage which each ASEAN economy enjoys.
Economics underpins the idea of free trade agreements. The greatest economic benefit is won when the agreements create the largest markets and secure the participation of the largest number of economies. This is why many economists argue that agreements to reduce barriers through the WTO, which nearly has universal membership, create better benefits than regional arrangements.
Conversely, agreements which open only a few markets among a few countries can have a negative economic impact on the participating countries. The comparative advantage in each economy can be suppressed.
From this we can identify two limitations which might inhibit AFTA from providing the optimum benefits to ASEAN economies.
So how does AFTA rate against these criteria?
Trade Intra ASEAN Extra ASEAN Percentage 12 88 of total
AFTA does not cover a large part of the traded goods sector of the ASEAN countries. The ultimate destinations of the great majority of exports from each ASEAN country are not other ASEAN countries. Singapore is a major trading partner of Indonesia, Malaysia and Thailand. But a high percentage of that trade is transhipped onto the ultimate destination, usually the US or Japan. The ASEAN Secretariat puts intra ASEAN trade at 20 percent of the total trade of the ASEAN countries. However Secretariat officials put the level at 12 percent if trade transhipped through Singapore is discounted.1
The impact of AFTA may be that by 2003, the year by which under the Agreement, most trade barriers are to be reduced to tariffs between zero and five percent, perhaps 12 to 15 percent of the trade of the ASEAN countries will be duty free, allowing for growth of trade.
Country Av AFTA Av or
tariffs on projected
imports from tariffs on
ASEAN by 2003 non-ASEAN
imports
Singapore 0 0
Malaysia 0 - 5 9
Indonesia 0 - 5* 21
Philippines 0 - 5 22
Thailand 0 -5 43
*except source:
agriculture APEC/PECC
How high will the average trade barriers be on the remaining 80 odd percent of the trade? It is difficult to make generalisations. But today average trade barriers of ASEAN countries range between 16 and 40 percent. According to a recent study by PECC2, average tariff barriers for Malaysia in 1996 were 16 percent, 26 percent for Indonesia, 26 percent for the Philippines and 40 percent for Thailand. Since that report was prepared, tariff cuts have been announced in the Philippines which should bring average tariffs down to the Malaysian average and should reduce Thai averages somewhat. It should be noted that in some very important sectors, such as automobiles, tariffs are so high as effectively to prevent trade.
If this situation does not change, AFTA is unlikely to create important economic benefits for the ASEAN economies. But if the ASEAN countries reduce their trade barriers with non-ASEAN economies, their major trading partners, real benefits will be won. What do current policies and attitudes tell us about future trends in ASEAN trade policy?
There are positive signs. A number of ASEAN countries have steadily cut trade barriers over the last 10 years. And all have accepted the APEC targets of removal of all barriers to trade and investment by 2020. This suggests that there might be steady reductions in trade barriers with non-ASEAN countries.
But the history of trade liberalisation is replete with unfulfilled promises. Trade liberalisation is very hard. The APEC Leaders are going to learn in November that most APEC countries have been able to make little headway in committing to unilateral liberalisation since Bogor.
There is evidence that the ASEAN countries find trade liberalisation as hard as anyone else. Not all ASEAN countries have a tradition of steady, unilateral reduction of trade barriers over the last decade. Thailand has been the most obdurate about reducing trade barriers.
The APEC 2020 target is also not binding, unlike the 2003 target in AFTA which is now a formal, legal obligation. Finally, there is a long period between 2003 and 2020 during which trade barriers with non-ASEAN trading partners might be significantly higher than trade barriers among ASEAN countries.
It would be prudent to be cautious about the prospect that ASEAN countries will reduce significantly trade barriers with non-ASEAN trading partners.
There are two perspectives to assess. First, that of Australian companies which have ASEAN based manufacturing subsidiaries. Then there are Australian companies which export to ASEAN markets from Australia.
For companies inside ASEAN, the creation of pan - ASEAN markets should create business opportunities to export to other ASEAN economies. The ASEAN countries have agreed to eliminate non-tariff restrictions and to cut tariffs on trade to between zero and five percent. The ASEAN Secretariat reports that this will extend to eighty percent of trade among the ASEAN countries. Sectors to which these obligations will not apply are agriculture and automobiles. However, there is general obligation to apply the AFTA program to those sectors by the year 2010.
Some Australian companies will benefit. But as a generality, most which export to the ASEAN economies will not. The dominant feature of Australia's trade performance over the last 15 years is strong growth in exports of manufactures. This is the result of greater competitiveness as protection of Australia's manufacturing sector has been removed. In 1994, for the first time, Australia earned more from exports of manufactures than from exports of agriculture or mining.
Asia is the fastest growing regional market for manufactures exports. This is Australia's fastest growing export sector. Leading manufacturing export industries are iron and steel, computers and office equipment, transport equipment, automotive products and electrical machinery. ASEAN is a key market for most of these sectors.
However the level of Australian investment in manufacturing in Asia is still relatively low. Some analysts have argued that this is a deficiency in Australia's global business planning. However, this is a simplistic judgement, made by those who do not face the reality of boardroom decisions about investment. There is a simple explanation. Exporting, while rising steadily, is still a secondary activity for most Australian manufacturers. It is still a relatively new activity for Australian manufacturers. As they increase export activity and build international business, investment will increase. There is ample anecdotal evidence that this is happening. But companies will not do it before they can afford it.
Most Australian companies therefore approach ASEAN as exporters. For them, the picture presented by AFTA is ominous. They will face tariff levels that grant significant advantages to competing exporters inside the ASEAN economies.
When the ASEAN Free Trade Agreement was announced, the impact on Australian exporters was analysed by the Department of Foreign Affairs and Trade3. It concluded that the discriminatory effect of AFTA would be felt particularly by Australian exporters of electrical machinery, telecommunications equipment, office machinery and non-ferrous metals.
It went on to conclude that the specific disadvantages would be offset by the trade-creating effect benefits which would flow from the larger markets which AFTA would create in the ASEAN countries. There is not a basis for this conclusion in the report, other than economic theory. In fact the conclusion would seem to be against the odds given that AFTA is going to affect only 12 percent of the trade of the ASEAN economies. Any serious assessment would need to examine closely how the AFTA cuts will impact.
Suggestions have been made that AFTA and ANZCERTA should be linked. Sometimes the idea is put forward that the two free trade areas should be merged. This is a radical idea. And it is difficult to think of practical approaches to achieve such result, in the medium term, anyway.
The AFTA and ANZCERTA Governments have begun a dialogue over linkages and have started cautiously. Initial talks have focussed on collaboration in areas which are not controversial, such as harmonisation of standards and mutual recognition of processes to accredit standards.
While there will be some benefits in this work to Australian business, they are not likely to offset the negative impacts of the discriminatory trade barriers which AFTA will create in the short term.
Respective experiences with liberalisation might profitably be put to study. Australia and New Zealand obviated the problem of potentially serious discrimination against trading partners as by-product of reducing barriers to bilateral trade by each independently commencing processes of systematic reductions of trade barriers with non-ANZCERTA trading partners.
There are general strategic benefits to be won from establishing institutional linkages between AFTA and ANZCERTA.
The desire of most ASEAN governments to maintain global competitiveness and to reduce trade barriers to do so is evident. If the ASEAN economies steadily reduce their trade barriers with non-ASEAN countries in parallel with the AFTA program, this would yield the greatest economic benefit to ASEAN and create even greater opportunities for trade and investment for Asian's trading partners. It would mitigate the discriminatory effects of the AFTA tariffs. And it may also lay the basis for building a significant free trade zone between AFTA and ANZCERTA.
If the impact of AFTA is perceptible trade discrimination, this opens up the possibility that some of AFTA's trading partners may challenge the consistency of the Agreement with the provisions of the WTO. American and Japanese complaints that Indonesian trade measures in the automobile sector breach WTO rules may be a foretaste of what is to come.
Endnotes
1 Presentation by Suthard Sethbonarong, APEC Secretariat, Indonesia Forum Conference 18 October 1996.
2 PECC, 1996, "Survey of impediments to trade and investment in the APEC Region", APEC Secretariat, Singapore
3 Australia. Department of Foreign Affaris and Trade, 1995 "AFTA, Building Block or Trade Bloc?" Canberra
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Http://www.monash.edu.au/ausapec/iss5.htm Last update: 26 November1996