Impact of AFTA towards the growth and development in ASEAN

By | May 16, 2013

This Assignment Is Published With Permission From The Author For Online Review Only
All Rights Reserved @ ChinaAbout.Net

i Abstract

 

AFTA (ASEAN Free Trade Area) is a well known successful regional grouping among the developing countries, and with the rise of the Asian economies in particular when the developed countries are growing in a slow speed within the current economy crisis, we can expect that the AFTA will be playing a more and more important role in the future global business practices. This assignment will study the AFTA in the current economy conditions through the introduction of the background, and driving forces for the release of the AFTA in the 1990s and how it is functioning by affecting the ASEAN and Asia. In the field of the impact on the ASEAN, we will examine the topic by discussing the two major impacts on ASEAN: Further internationalizing the ASEAN local companies and Increased collective bargaining power of ASEAN. And about the impact of AFTA to Asia, we will examine the topic by discussing the three major impacts on Asia: Speed up the accession of Asian countries into the word economy, AFTA-plus led regional integration and cohesion and Strengthening ASEAN and China relationship. In the final phrase of this assignment, a conclusion will be drawn on the topic questions and also two short recommendations though not comprehensive will given to topic of how to improve the AFTA in the current and future economy conditions: Simplify and standardize documentation procedure   and More involvement of AFTA in a global context.

ii List of tables, figures and charts

 

Table 1 ASEAN Production and Export………………………………………………………. 4

Table 2 Foreign Direct Investment (FDI) in China, Singapore & Southeast Asia. 6

Table 3 GDP of the major economies in Asia in 2010…………………………………….. 8

Table 4 Utilization of FTAs by the Chinese firms………………………………………… 13

Table 5 Benefits and costs of AFTA and ASEAN-PRC preference……………….. 14

 

Figure 1 The growth of the number of the regional trade agreements from 1948 to 2002      7

 

iii Content page

i Abstract………………………………………………………………………………………………………… 1

ii List of tables, figures and charts……………………………………………………………………… 2

iii Content page……………………………………………………………………………………………….. 3

1.     Introduction of AFTA………………………………………………………………………………… 4

1.1      Research objectives………………………………………………………………………….. 5

1.1.1     How AFTA was built up (background, driving forces)?……………….. 5

1.1.2     What are the advantages and disadvantages of AFTA on ASEAN development?     5

1.1.3     What are the advantages and disadvantages of AFTA on Asia and the world economy development?……………………………………………………………………………………. 5

1.1.4     How AFTA could be improved in the future?…………………………….. 5

2.     Findings through review of the building of AFTA…………………………………………. 5

3.     Analysis……………………………………………………………………………………………………. 9

3.1      Impact of AFTA towards the growth and development in ASEAN………… 9

3.1.1     Further internationalizing the ASEAN local companies……………….. 9

3.1.2     Increased collective bargaining power of ASEAN…………………….. 10

3.2      Impact of AFTA towards the growth and development in Asia……………. 10

3.2.1     Speed up the accession of Asian countries into the word economy 10

3.2.2     AFTA-plus led regional integration and cohesion………………………. 11

3.2.3     Strengthening ASEAN and China relationship…………………………. 12

4.     Concluding remarks…………………………………………………………………………………. 15

5.     Recommendations……………………………………………………………………………………. 15

5.1      Simplify and standardize documentation procedure……………………………. 15

5.2      More involvement of AFTA in a global context………………………………….. 16

iv Reference………………………………………………………………………………………………….. 17

 

1.        Introduction of AFTA

 

The decision of creating a Free Trade Area in the ASEAN which is considered as the most successful regional grouping among the developing countries (Imada & Naya 1992) was made at the Fourth ASEAN Summit and it was regarded as a bold decision. Right before decision was made, the annual growth of production and export of the ASEAN members were apparent (sees the table below) but the intra ASEAN trade had been rather limited. The potential benefits of promoting the intra ASEAN trade created the basis for the building of the Free Trade Area within the ASEAN scope.

 

 

Table 1 ASEAN Production and Export

Source: World Bank, World Development Report 1995 (New York: Oxford University Press, 1995)

 

Through near 20 years’ development, the ASEAN Free Trade Area (AFTA) does prove to the world that it is a successful trading agreement when the economic regionalism has become more and more important in different parts of the world (Ariff 1996, p.21) and the members of ASEAN are having more and more momentums to integrate under the ASEAN and use AFTA as a rules based multilateral trading system while doing international business in the changing global economic environment (Adhikari & Athukorala 2002, p11).

 

1.1    Research objectives

 

1.1.1            How AFTA was built up (background, driving forces)?

 

1.1.2            What are the advantages and disadvantages of AFTA on ASEAN development?

 

1.1.3            What are the advantages and disadvantages of AFTA on Asia and the world economy development?

 

1.1.4            How AFTA could be improved in the future?

 

2.        Findings through review of the building of AFTA

 

The idea of creating a free trade area in the Southeast Asia was originated in the First ASEAN Summit in 1976 and it was proposed formally by Singapore. But it was rejected by the other member economies and they considered creating a free trade area will be too ambitious because Singapore was already a free-trading entrepot economy with very low tariffs rate but the other ASEAN members still had high tariff rate to protect the infant industries. And instead the PTA scheme was proposed to liberalize the trade to some extent rather than a full FTA (Dent 2008, p92). The Preferential Trading Arrangements (PTA) scheme was agreed on February of the next year, 1977, to offer a range of trade concessions through provisions such as government procurement preferences and tariff preferences which was on a product by product basis and also the liberalization of nontariff trade barriers which was also on a preferential basis (Ooi 1981, p7). Since then, the idea of creating a free trade area had become a hot topic.

 

In 1986 at the 18th ASEAN Economy Ministerial Meeting (AEMM), another ASEAN member Philippines as the host country for the meeting re-summit the proposal to establish an ASEAN customs union based on a selected common external tariff. The proposal was again rejected by other members (Bowles 1997).

 

An important meeting that provided the positive conditions for the creating of the free trade area was at the 22nd Economy Ministerial Meeting (AEMM) which was held in Bali. In the meeting, an upgraded Preferential Trading Arrangements (PTA), which was called as Common Effective Preferential Tariff (CEPT) scheme was proposed but only on the particular industrial items. The CEPT scheme states that tariffs on all manufactured and processed agricultural goods need to be reduced to 0 to 5 percent before the deadline which was set in 2003 (Kreinin & Plummer, 2000 p.12). And finally after the wide discussion of the possibility of building up a free trade area, at the Fourth ASEAN Summit in 1992 help in Singapore, the host government restated the idea of creating a free trade area in the Southeast Asia but this time with the long practiced trading under the PTA the proposal was supported by all the member countries. And this summit officially announced the establishment of the ASEAN Free Trade Area (AFTA).

 

There are four major reasons why ASEAN finally come to the similar position to build up the free trade area.

 

Threat from the rising China

 

 

Table 2 Foreign Direct Investment (FDI) in China, Singapore & Southeast Asia

Source: Joseph, L. H. 1996

One commonly believed motive that drove the ASEAN to create its own FTA was the competition from the rising China for foreign investments. Since the economic reform in the 1980s, China had enacted policies to liberalize its market and create a stable economy, social and political environments to attract the foreign investments. The table above tells the fact that in 1988 the FDI inflow of Southeast Asia which measured Indonesia, Malaysia, Philippines and Thailand was USD 3,336 million and this was more than the USD 3,198 million of China. But after five years in 1993, China alone in a single year had attracted USD 26,000 million which was more than triple than that of Southeast Asia. And the rising China effect had brought hyper competition for the foreign investments and AFTA was set up to increase the ASEAN competitiveness as a region to compete with China (Narine 2002, p127).

 

Rise of trade regionalism

 

Figure 1 The growth of the number of the regional trade agreements from 1948 to 2002

Source: Guzmán & Sykes 2007, p152

 

The trade regionalism is an accelerating phenomenon globally, the figure above tells the fact that the second half of the 20 century had witnessed a proliferation of the regional trade agreements or regional integration agreements (RIAs). When these RIAs cover both FTAs and customs unions (CUs), the majority of the RIAs as seen in the figure are FTAs (Guzmán & Sykes 2007, p151). The best known FTAs beside AFTA include the North American Free Trade Agreement (NAFTA), the European Community (EC) and Central American Free Trade Area (CAFTA). Faced by the accelerating trade regionalism, ASEAN had been put under pressure to set up a FTA that will benefit the members through economic integration.

 

To add up the ASEAN’s collective bargaining power

 

A country’s bargaining power is the function of a country’s best alternative to negotiated agreement relative to the other negotiating party (Fisher & Ury 1981). And the strong the bargaining power a country has will indicate the less that the country need to concede to get to the ideal result it desires and the little the bargaining power is will means more cost a favorable change could involve. In case of reaching a trade agreement, the bargaining power is playing an important role in deciding the benefit and cost a country finally will enjoy and have to pay. And the distribution of bargaining power in reaching a desired agreement of a country will be influenced by the domestic balance of import-competing to exporting interest (Dür 2010, p40). And in other words, the large the lobbying effort by export interests, the higher the opportunity costs of foregoing an agreement will be for a country.

 

CountryGDP (millions of USD)World ranking
People’s Republic of China5,745,0002
Japan5,391,0003
India1,430,00011
South Korea986,30015
Indonesia695,10018

Table 3 GDP of the major economies in Asia in 2010

Source: CIA world factbook, 2010

And certainly the market size of a country compared to other economies will also decide the distribution of the bargaining power. As the table shows, according to the most recent GDP data released by CIA World Factbook, among the largest five economies by GDP only Indonesia is the ASEAN member and it occupied the ranking position of 18th in the world and the other five economies have more GDP than Indonesia. And this indicates that Indonesia as the largest economy in ASEAN is still relatively a small market compared to the other major Asian economy entities. The market size different will later on decide the bargaining power. So a single country in the ASEAN will be too weak to compete with the other major economies in term of bargaining power, it will be necessary for the ASEAN to integrate into a group and increase the collective bargaining power through market integration effort.

 

3.        Analysis

 

3.1    Impact of AFTA towards the growth and development in ASEAN

 

3.1.1            Further internationalizing the ASEAN local companies

 

For long, the ASEAN business community especially the ASEAN Chambers of Commerce and Industry had supported the building up of FTA in the region (Bowles 1997) because a regional market covering several countries could help the ASEAN local companies to get familiar with the international business with the regional competitors before they could be ready for the global competitors. As proposed by Tongzon (2002), companies that involved in the operation of Southeast Asia’s cross border manufacturing networks had an extra interest in the market liberalization and integration by creating a free trade area.

 

 

 

3.1.2            Increased collective bargaining power of ASEAN

 

The release of the AFTA agreement in 1992 in Singapore showed the world that ASEAN is more than just a political hub, it is a grouping that could strengthen the region’s tie and bargaining power with the rest of the world (Yip 2000, p330) and other major economic groupings such as North American Free Trade Agreement (NAFTA). The increasing bargaining power of ASEAN not only comes from the economy integration within the ASEAN scale but also a higher level of the regional integration: the regional cohesion. The ASEAN-PRC CECA (Comprehensive Economic Cooperation Agreement) which took effect in 2005 is the showcase of the first kind of such regional cohesion. And it is followed by similar trade partnerships in term of AFTA plus. Through using the FTA Plus framework, ASEAN managed to utilize a collective bargaining power to get access to the foreign market with equal market status to negotiate the agreements with other major Asian and western economies and trading blocks in the world.

 

3.2    Impact of AFTA towards the growth and development in Asia

 

3.2.1            Speed up the accession of Asian countries into the word economy

 

As discussed earlier that one of the incentives to set up a free trade area inside the ASEAN framework is to further internationalize the ASEAN local companies, and in the country level, the AFTA also provide positive momentums for the Asian countries to internationalize their economy. This part of the study will check how the AFTA help the Asian countries to speed up their process of economy integration into the global economy system using the example of Vietnam. In order to speed up the process to get integrated into the global business, there were four major steps that the Vietnam government had taken through efforts in signing trade agreements. In 1995, Vietnam joint ASEAN at the twenty-eighth ASEAN AMM held in Brunei (Agnelli 1997, p132)and it also participate APEC since 1998, what’s more a bilateral trade agreement with the United States was also reached in 2000 and the most important steps seemed to be the accession into WTO in 2007 after 12 years’ appeal.

 

As the first major step, it is claimed by Fukase and Marti (2001), Vietnam’s accession to AFTA had significant importance to its integration into the work economy system. But they also gave a conclusion that the economy wide effects through joining the AFTA agreement had been rather small. This conclusion is based on the finding that the discriminatory nature of AFTA will divert the Vietnam’s trade from the non-ASEAN members which mean that when intra-ASEAN will be increased by the lower tariffs according to the AFTA agreement but it was achieved at the cost of trade diversion because of the discriminatory to the non-ASEAN economies. But with the increasing number of bilateral trade arrangements in term of AFTA plus being reached in the recent years, the effect of the trade diversion should be able to be reduced significantly. And besides the discussion in the field of trade, Pouyan (2006, p20) suggested that the lower tariffs will help expose domestic firms to international competition and will be the first important step to achieve a broader liberalization for Vietnam.

 

3.2.2            AFTA-plus led regional integration and cohesion

 

The idea of AFTA Plus which could be referred as the initiatives to reduce tariff barriers and NTBs (Non-Tariff Barriers) in goods traded under the CEPT to investment and services liberalization (Soesastro 1995), could date back to the mid 1990s. And since then, a number of suggestions had been given to the agenda of the ASEAN’s economic co-operation such as the AIA (ASEAN Investment AREA) and the ASEAN Framework Agreement on Intellectual Property Co-operation. It is mentioned earlier that the AFTA-plus could lead to regional cohesion, and it is believed that through developing a coherent AFTA Plus framework, the goal of achieving a single Southeast Asia market through the effort of further regional cohesion and market liberalization could be achievable. There are three major targets which could be identified in the AFTA Plus framework: economy scale, increasing MNE (Multinational Enterprises) and open regionalism. By involving more economies in term of various kind of economic and trade partnerships, one direct target and result will be a bigger economic scale that involves a bigger common market. And also through the measures of removing the barriers to trade in a larger scale, a more competitive investment environment could be created to involve more MNEs which represent a major source of capital, technology, and expertise that could have great impacts in the regional development (Thakur & Srivastava 1997 p.491). Moreover, by using the AFTA-plus, the regionalism would become a more open regionalism.

 

3.2.3            Strengthening ASEAN and China relationship

 

As China has become an increasing market, ASEAN signed up an ASEAN-PRC CECA (Comprehensive Economic Cooperation Agreement) which took effect in 2005. And it is believed that the ASEAN-PRC CECA was a natural extension of increasing interest in trade and economy connections between the two parties (Kawai 2011, p114, p107). According to the result of the survey (seen in table below), among the surveyed firms, the ASEAN-PRC CECA was by then the most frequently used trade agreement with 65.7 percent firms used the agreement and 22.1 percent companies were planning to use the framework in doing cross border business.

 

Table 4 Utilization of FTAs by the Chinese firms

Source: Kawai 2011, p114

 

 

 

Table 5 Benefits and costs of AFTA and ASEAN-PRC preference

Source: Gugler 2010, p.181

 

In another survey which concluded the information on the perception of the firms about the benefits and costs of AFTA and ASEAN-PRC preference, again the strengthening ASEAN and China relationship in trade could be found in term of the usage preference and actual perception of the agreement. In term of the AFTA usage preference, like what expect the preferential tariffs is the most considered benefits of AFTA in term of 71% of the surveyed firms considered it as the major benefit and motivation for them to use the AFTA agreements. And the two most mentioned costs of using AFTA will be the increasing competition and the cost of the relocation of the production. And for the Chinese firms to use the ASEAN-PRC agreement, the top two benefits as perceived by the Chinese companies are market access in term of 83.9% of the participants considered it as the largest benefit and net business opportunities as 51.8% of the participants (who were using or planned to use the agreement) made it the benefit of the ASEAN-PRC agreement. And in term of the cost of Chinese firms to use the ASEAN-PRC agreement increased competition is also the top reason of costs and documentation costs was also high as perceived by the Chinese firms. But in sum, we can still see that the overall benefits in case of AFTA or ASEAN-PRC are both exceed the costs suggesting that the AFTA-PRC agreement is contributing to the strengthening ASEAN and China relationship so far and in the near future.

 

4.        Concluding remarks

 

Now we can answer the research questions that we have mentioned in the beginning. AFTA was not built up easily, and its release are driving by many forces not only include the matured market conditions internally but also pushed other the external forces such as the rise of China as a powerful competitor for the foreign investments that made the ASEAN members to make up the decision to stand together to create the integrated market with greater bargaining power than any single economy of the member country. And in term of the impact of AFTA on the development of ASEAN and Asia, many statistics have come to the similar conclusion that AFTA did not boost the intra-trade of AFTA but ASEAN managed to use the AFTA framework to benefit its members and other trade partners in term of AFTA Plus agreements create regional cohesions that make both the members and the non-members could contribute and get benefits from the ASEAN’s regional economic integration process (Ariff 2000).

 

5.        Recommendations

 

5.1    Simplify and standardize documentation procedure

 

As mentioned earlier, in the given survey in term of the cost of Chinese firms to use the ASEAN-PRC agreement increased competition is also the top reason of costs and documentation costs was also high as perceived by the 43% of the participating Chinese firms. And for a cooperation relationship, the documentation cost should not be a major source of cost to the firms who are to use the cooperation framework. As like what the many single investment driven economy does, ASEAN as a collective region could increase the attractiveness of the AFTA plus agreement such as ASEAN-PRC CECA by simplifying and standardizing the documentation procedure to the other major partner economies such as China and India.

 

5.2    More involvement of AFTA in a global context

 

While seemingly AFTA does integrate the South East economies and stand against the other trading bloc such as North American Free Trade Agreement (NAFTA), the European Community (EC) and Central American Free Trade Area (CAFTA), still more involvement of AFTA should be witness in a global context which is in accordance with the increasing importance of the role of the Asian economies. But based on the fact that the most Asian economies are still relying largely on the market of the developed countries and most of which are from the other continents such as US and EU. So AFTA should one hand integrate the Asian economy and increase the bargaining power the ASEAN and other Asian economies in reaching trading deals with other parties but also it should also work closely with other trading bloc and reduce the trading barriers with countries outside Asia because the final globalization based on a global common market will be the best to the creation of value to the people all over the world.

 

 

iv Reference

 

Adhikari, R. & Athukorala, P. C. 2002, Developing countries in the world trading system: the Uruguay round and beyond. Northampton: Edward Elgar Publishing, Inc. p11

 

Agnelli, F. G. 1997, ASEAN in the new Asia: issues and trends, Singapore: Institute of Southeast Asian Studies, p132

 

Ariff, M. 1996. AFTA in the changing international economy, Singapore: Institute of Southeast Asian Studies, p21

 

Ariff, M. 2000. AFTA: another futile trade area? Kuala Lumpur: Inaugural lecture university of Malaya

 

Bowles, P. 1997. ASEAN, AFTA, and the new regionalism, Pacific Affairs, 70, 2: 219-33

 

CIA world factbook, 2010, COUNTRY COMPARISON: GDP (PURCHASING POWER PARITY), accessed on 17th Apr 2011, [online] available: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html

 

Dent, C. M., 2008, East Asian regionalism, New York: Routledge, p92

 

Dür, A. 2010, Protection for exporters: power and discrimination in transatlantic trade relations, 1930-2010, New York: Cornell University Press, p40

 

Fisher, R. & Ury, W. L., 1981. Getting to yes: negotiating agreement without giving in, London: Hutchinson business

 

Fukase, E. & Marti, W. 2001. ‘A Quantitative evaluation of Vietnam’s accession to the ASEAN Free Trad Area’, Journal of Economic Integration, 16:4, 545-567

 

Guzmán, A. T. & Sykes, A. O., 2007. Research handbook in international economic law, Cheltenham: Edward Elgar Publishing Limited, p152

 

Gugler, P. 2010, Competitiveness of the ASEAN Countries: Corporate and Regulatory Drivers, Cheltenham: Edward Elgar Publishing, p.181

 

Imada, P. & Naya, S., 1992. AFTA: the way ahead, Singapore: Institute of Southeast Asian Studies

 

Joseph, L. H. 1996, AFTA in the changing international economy, Singapore: Institute of Southeast Asian Studies

 

Kawai, M. 2011, ASIA’S FREE TRADE AGREEMENTS: IS BUSINESS RESPONDI, Cheltenham: Edward Elgar Publishing Limited, p114

 

Kreinin, M. E. & Plummer, M. G. 2000, Economic integration and Asia: the dynamics of regionalism in Europe, North America and the Asia-Pacific, Northampton: Edward Elgar Publishing, Inc, p.12

 

Narine, S. 2002, Explaining ASEAN: regionalism in Southeast Asia, Colorado: Lynne Rienner Publishers, Inc, p127

 

Ooi, G. T., 1981, The ASEAN preferential trading arrangement (PTA): an analysis of potential effects of intra-ASEAN trade, Singapore: Institute of Southeast Asian Studies p7

 

Pouyan, N. 2006, AFTA’s Impact on Vietnam, Norderstedt: GRIN Verlag, p20

 

Soesastro, H. 1995, “ASEAN Economic Co-operation in a Changed Regional and International Economy”, Jakarta: Centre for Strategic and International Studies

 

Thakur, M. & Srivastava, B. N., 1997. International Management, New Delhi: Tata McGraw-Hill Publishing Company Limited, p.491

 

Tongzon, J. L. 2002, The economies of Southeast Asia, Cheltenham: Edward Elgar Publishing, Inc

 

Yip, G. S., 2000, Asian advantage: key strategies for winning in the Asia-Pacific region, New York: Harper Collins Publishers, p330

 

3 thoughts on “Impact of AFTA towards the growth and development in ASEAN

    1. ricky Post author

      Hi, the full article is already available on our site, you may find the page numbers just above the category and comments… Thanks,

      Reply
  1. Andy

    I’m interested to read this article… where I can find it??

    Reply

Leave a Reply

Your email address will not be published.