Trade, Investment and Interdependence

4 Trade, Investment and Interdependence MOHAMED ARIFF

Introduction ECONOMIC regionalism in Southeast Asia rests on a foundation that is arguably far more solid than is the case with any other regional arrangements in the d~veloping world. ASEAN .has evolved gradually from a small grouping of five to a large grouping of ten within a span of three decades, transforming foes and adversaries into friends and partners. It has also progressively deepened through increasingly closer economic integration among member nations. ASEAN is a unique experiment that has no close parallels. It came into being at a time of extreme regional turbulence, primarily for geopolitical and security reasons, with economic cooperation playing no more than a cosmetic role. However, over the years, especially after the end of the Cold War with the demise of the Soviet Union, economic cooperation has become increasingly important in ASEAN affairs. ASEAN had to find a new rationale for its own existence in the post Cold War era, when developed country dialogue partners have shown diminishing interest in ASEAN in the new geopolitical. equation. It has dawned on the ASEAN member states that they need ASEAN now more than ever before: Peace and stability in the region, necessary for economic growth and development, cannot be ensured if ASEAN was to be weak or non-existent. There is certainly too much at stake for every country In the region to treat ASEAN lightly. ASEAN has been essentially a loosely-knit organization with a penchant for informality, flexibility and pragmatism. In the initial stages,

46

A New ASEAN in It Nn. Millflniu,"

ASEAN had quite wisely concentrated on areas in which consensus was possible, steering away from areas where disagreements and differences might cause problems. ASEAN has nurtured what is often termed "the ASEAN way" which, at the risk of ambivalence or ambiguity, has enabled ASEAN countries to stick together through thick and thin. ASEAN is painfully aware that the new millennium is going to be a completely different ball game. ASEAN needs to reas~ess itself, rethink its strategies. and reposition itself to face the challenges of globalization and liberalization. ASEAN also has to learn to relate itself to other regional entities such as NAFTA. CER, MERCOSUR and SAARe. In this context, opportunities and challenges provided by APEC are unique, given the overlapping interests of various subgroups where not all ASEJ\N countries are represented . ASEAN also has to come to terms with new' internal realities brought about by the inclusion of the Indochina countries as new members. ASEAN has become even more heterogeneous than before as a result of its widening. In particular, the gap between. the n~ and old members of ASEAN is too wide to he ignored. At the same time. it does appear that the exp'a nded ASEAN has introduced greater complementarity within the ASEAN economy. This augurs well for ASEAN economic integration and the international competitiveness of ASEAN products. To meet the challenges of the 21st century. ASEAN will have to seek new ways and means for economic cooperation. Principles and practices which worked well in the past may not work in the future. ASEAN will a lso have to go beyo nd preferential trading schemes which has been the main effort to date. ASEAN needs to integrate itself mo re aggressively into the increasingly borderless global economy.

Economic Regionalism Regional economic "integration" was never mentioned as in ASEAN objective by the founding fathers. ASEAN has only talked about regional economic "cooperation". This too was with admittedly much hyp e and litt1e action . It was only recently in December 1998 that the term "regional integration" was used somewhat formally in the Hanoi Plan of Action. Nonetheless, regional economic cooperation among ASEAN countries has increased. albeit gradually, over the years since the Bali Summit in 1976. ASEAN trade cooperation initially took the form o f Preferential Trading Arrangement (PTA). This was based on a cumbersome item-by-

Trade, In'H:stmtnt and Interdependence

47

item approach which did not res,u lt in any significant increase in intra-regiohal trade. ASEAN industrial cooperation through ASEAN In''festmen t Projects (AlPs) and ASEAN Industrial Complementation Programmes and ASEAN Industrial Joint Ventures (AIJVs) have also failed to live up to the great expectations that were o riginally raised when the schemes were announced. The main drawback of all these initiatives was that they had smacked of ad hoc or piecemeal attempts at forging closer regional economic coope ration. What ASEAN needed was a ho listic approach. This did no t and could not materialize until the ASEAN Free Trade Area (AFTA) and ASEAN Investment Area (AlA) ideas become politically acceptable to ASEAN members. The advent of AFTA was announced in 1992, to be completed by the year 2008 with tariffs of zero to five per cent. ASEAN has moved closer to the realization of that objective by moving the deadline in 1994 forward from 2008 to 2003 and once again in 1998 to 2002. This, in itself, marks a breakthrough for ASEAN, as it is a manifestation of the growing political will in favour of economic regionalism. It is important to take stock of what has been achieved, in terms of commitments if not accomplishments, thus far, before one could identify areas where more needs to be done. AFTA is to be implemented through the Common Effective Preferential Tariff (CEPT) Scheme. which was initially riddled with exclusions of sorts. It is heartening to no te that the CEn scheme is far more comprehensive now than it originally was. Thus. unprocessed agri cu ltural produ cts which we re originally excluded from the CEPT Scheme are now scheduled to be included by the year 20 10. What is more. products which were temporarily excluded from the CEPT Scheme have been phased in graduall y since 1996. The last tran che of manufactured items was phased in recently at tariffs o f no more than 20 per cent. One the notable exception was made for automotive components and parts, the inclusion of which was postponed for another two years.

The expansion of ASEAN from six to ten members has not impaired AFTA. In stead, it has provided a mechanism for th e. traflsition economies of Myanmar, Cambodia, Laos and Vietnam to be integrated into regiona1 and global trade. Nor has the 1997-98 economic crisis derailed the AFTA process. On the contrary. the crisis appears to have strengthened the political will and res olve for closer economic cooperation among the ASEAN countries. The advancement of the AFTA deadline by one year from 2003 to 2002 in the midst of the financial crisis is a clear testimony to that political resolve. Moreover. in September 1999, the ASEAN Eco-

48

A New ASEAN in A New Mil/enium

nomic Ministers accepted zero tariff as the ultimate target of AFTA with 2015 and 2018 as deadlines for the old and the new members, respectively. The four newer members pf ASEAN are now committed to complete their transition to AFTA in ten years from the date of entry into ASEAN. Thus, Vietnam will complete the process in 2006, Laos and Myanmar in 2008 and Cambodia in 2010. Vietnam has agreed to maximize the num. ber of tariff lines whose rates could be reduced to 0-5 per cent by 2003, while Laos and Myanmar have agreed to do likewise by 2005. There had been talks in the past about reducing all tariffs to zero without stopping at 5 per cent for some. However, it was not until the Singapore meeting in September 1999 that the target of zero tariffs was formally adopted, albeit with an extended time frame. Thus, there is now a firm commitment to zero tariffs as the ultimate goal to be achieved by 2015 for the six bid members (the ASEAN-6) and by 2018 for the four new ones (the ASEAN-4) . The former will set an example by ensuring that 60 per cent of their tariff lines will carry zero tariffs by the year 2003. This is an improvement over the original deadline for reducing tariffs to '0-5 per cent. In fact, both Brunei and Singapore have already met the target. However, it appears that the Philippines and Thailand have a long way to go. Some issues relating to the width or breadth of tariff cuts, in addition to the depth, have also been resolved . In addition to a Temporary Exclusion List (TEL), there are unprocessed agricultural products (UAPs) and products that could threaten national security, public morals, life and health and the like, and these were also excluded from the CEPT Scheme. In 1994, ASEAN decided to widen the CEPT coverage beyond manufactured and processed agricultural products. Thus, UAPs are to be phased in gradually,- while TEL products would get into the CEPT Scheme in five equal instalments between 1996 and 2000. The latter has been accomplished with some exceptions. Some progress has also been made with respect !o UAPs. Out of a total of 1,995 UAP tariff lines, 1,358 tariff lines (68 per cent) were phased into the Inclusion List in 1996; another 402 tariff lines (20 per cent) were given TEL status to be phased into the CEPT Scheme in seven equal installments between 1997 and 2003. Reference must also be made to ASEAN efforts at shortening the General Exception List (GEL) which consists of items which pose a threat to national security, public morals, human life etc. A thorough review of

49

Trade, Investment and Interdependence

the .Article 9 of the CEPT Scheme which governs the GEL has led the 13th AFTA Council meeting in September 1999 to transfer some 230 tariff lines (29 per cent) out of the GEL. As a result, the Inclusion List now covers over 98 per cent of all tariff lines for the ASEAN-6 (Table 1). This ratio is much smaller but still significant around 50 per cent for the ASEAN -4 (Table 2). That ASEAN is well on its way towards the completion of the AFTA process is also evident from other trade-related developments. Of particular interest among these are the signing of the Protocol on ASEAN Dispute Settlement Mechanism in 1996. This will provide an expeditious and transparent means of settling disputes arising from the implementation of intra-regional economic agreements. A Protocol on Notification ProTable I CEPT PRODUCT LIST FOR THE YEAR 2000 ASEAN-6 Inclusion List

Country

Brunei Darussalam Indonesia Malaysia Philippines Singapore

Thailand ASEAN Total

6,276 7,158 9,092 5,571 5,739 9,103 42,939

98.4

Percentage

Temporary

Exclusion List

General Exclusion List

Sensitive

List

Total

202 69 63 27 120

14 4 73 62

56

481

7 160

6,492 7,252 9,228 5,695 5,859 9,110 43 ,636

0.13

1.10

0.37

100.0

21 35

Source: ASEAN Secretariat.

Table 2 CEPT PRODUCT LIST FOR THE YEAR 2000 Country

Inclusion List

Cambodia

3,114 1,247 2,356 3,573 10,290 49.78

Laos Myanmar Vietnam

ASEAN Total

Percentage Source:

ASEAN Secretariat.

Temporary Exclusion List

General Exclusion List

Sensitive

List

. Total

3,523 2,126 2,987 984 9,620

134 90 108 219 551

50 88 21 51 210

6,821 3,551 5,472 4,827 20,671

46.54

2.67

1.02

100.00

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A New ASEAN in A New Mil/onium

ally. increase investment flows from ASEAN and non-ASEAN sovrces by making the region a competitive, open and liberal investment area.

,cedures has also been agreed in 1998, obliging each member to 'provide early nOllficallon of acllons or measures that may nullify existing benefits enjoyed by other members. Additionally, the Interpretive Notes of Article 6 on Emergency Measures were streamlined to make them consistent with the relevant provisions of the wro Agreement on Safeguards. . There is also some progress with regards to the inclusion of sensitive Items. Some UAPs are classified as, "sensitive" or "highly sensitive" which called for a special arrangement. The 31st ASEAN Economic Ministers Meeting in October 1999 endorsed the Protocol on the Special Arrangement for Sensitive and Highly Sensitive Products. This paved the way for the mtegrallon of sensillve products into the CEPT Scheme by 2010 with 0-5 per cent tariff rates and without any quantitative restrictions (QRs) or non-tanff .barners (NTBs). However, rice, a highly sensitive product for Indonesia, Malaysia and the Philippines, is allowed an end-tariff of ov~r 5 per cent but with no QRs or NTBs. It is of interest to note that both Indon~sia and Malaysia are committed to an end-tariff' rate of 20 per cent on nce. Understandably, rice is a sticky item. Almost all member states in ASEAN would like to have a fairly high degree of self-sufficiency in rice production, gIVen Its statllS as' a staple product for their people. This is therefore not so much a question of economic cooperation and trade, as an issue of economic and human security. Individual ASEAN member states cannot be expected to compromise on this issue, unless a full-blown food security system is put in place. . Recognizing that trade and investment are inter-linked, with one reinforcing the other, ASEAN has also paid attention to the question of promotmg mcreased mtra-ASEAN investment. Singapore is the lynchpin of mtra-ASEAN trade by virtue of the fact it has the most extensive investment linkages with other countries in ASEAN, and enjoys the status of a free port. The investment-trade nexus is also manifest in ASEAN's external trade structure where the ,major trading partners are also the major sources of foreign direct investment (FDI). All this suggests thaf ASEAN should promote intra-regional investment in order to increase intra-regional trade flows. A call for the establishment of a regional investment arrangement to enhan'ce the attractiveness and competitiveness of the region for investment flows in the form of ASEAN Investment Area (AlA) was made in the Fifth ASEAN Summit in 1995 in Bangkok. The inaugural meeting of the AlA. Council was held in October 1998 in Manila with the objective of realIZing the AlA by 2010. The primary purpose of AlA is to substanti-

51

I

I I

I.

I

AlA envisages active private sector p.articipation, freer flow of capital, skilled labour and technology among member countries, transparency of investment policies, rules, procedures and administrative processes, and coordinated ASEAN investment cooperation, facilitation and promotion . Under AlA, all industries, with some exceptions as specified in the Temporary Exclusion List and Sensitive List, will be open to ASEAN investors by 2010 and to all investors by 2020. The preceding time table is also valid for the granting of national treatment to ASEAN and non ASEAN investors. AlA, together with AFTA, upon completion, will render the region borderless for trade and investment flows.

Welfare Implications How will all these impact on ASEAN members in welfar~ terms? Under AFTA, one can expect intra-regional trade to rise significantly in absolute terms. Much of the rise will be simply because illegal trade previously left out by trade statistics will now be recorded. Beyond this oneshot increase, AFTA Can stimulate intra-ASEAN trade if it leads to higher incomes (e.g. through more employment opportunities) and lower prices (e.g. through greater efficiency). Increased regional demand and increased regional supply can augment a rapid expansion of the ASEAN economy. Welfare gains and losses in static terms, as measured by trade creation, trade diversion and consumer surplus, are not likely to be significant. The positive effects will probably more than offset the negative ones by a thin margin . Much would depend, however, on ASEAN member states' tariff regimes offered to fellow ASEAN member states, in comparison to those given to the rest of the world. If ASEAN countrtes also lower th~ir external tariffs significantly, in tandem with their intra-ASEAN tariffs, trade diversion effects will be small and the net effect will be considerably more positive. It will take a while before the full impact of AFTA can manifest itself. Thus far, the results are not impressive, if the use of Form D (the CEPT Scheme Certificate of Origin) is any measure. The use of Form D to take advantage of the AFTA concessions accounted for only 1.5 per cent of the total intra-ASEAN imports for four ASEAN countries (Indonesia, Malaysia, Philippines and Thailand) in 1998. This suggests that' the remaining 98.5 per cent of intra-ASEAN trade, in value terms, is still conducted outside the AFTA framework in these economies.

52

A New ASEAN in A New Mil/enium

The figures may not however mean that precisely. It may be because Form D is not widely in use. Its low utilization rate may be attributed to a number of facts, such as: (a) the lack of awareness of this facility, (b) the hassle associated with bureaucracy in processing the necessary paperwork, and (c) the narrow difference between the CEPT and the MFN rates on most items. Interestingly, the CEPT and the MFN rates are the same for as much as twocthirds of the tariff lines in the Inclusion List. Of the remaining 14,980 items in the Inclusion List where the ,MFN rates exceed the CEPT rates, the differential is less than 10 percentage points for 10,873 tariff lines (Robert Teh Jr. 1999). It may be surmised that the current CEPT rate is not low enough to provide sufficient incentive for ASEAN traders to make use of the scheme. If so, one may expect a greater utilization of the scheme as the CEPT rates continue to fall over the years, while MFN rates remain unchanged. This tendency may however be neutralized if the MFN rates also decline over time. . In any case, the percentage share of intra-ASEAN trade in total ASEAN trade is unlikely to increase substantiallY, given the high degree of economic 9penness of ASEAN member countries, which is not necessarily a: bad thing. It will not be in the interest of ASEAN to have a high ratio of intra-regional trade which would be at the expense of extra-regional trade, with significant cost implications due to massive trade diversion. Be that as it may, there is little doubt that intra-ASEAN trade will continue to grow faster than extra-ASEAN trade mainly due to the low base. A recent simulation analysis has used a 10-region x 10-sector Globa1 Trade Analysis Project (GTAP) model for six ASEAN countries (Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam), USA, EU, Japan and the Rest of ·the World (Robert TehJr. 1999). This has found that intra-ASEAN trade will rise by 44.2 per cent under zero tariff assumption. This expansion, however, is at the cost of reduced exports to other regions. The study also suggests that ASEAN countries wilt experience net :vel fare gains, except for the Philippines and Thailand. Welfare losses and gains are estimated in most cases to be fairly small, i.e. less than 1.0 per cent of GDP. It may be surmised that the net welfare loss for the Philippines and Thailand is primarily due to their ,high MFN tariffs. The results also shows that non-ASEAN countries would suffer a welfare loss mainly from trade diversion and terms of trade changes. The impact of . the AFTA exercise, according this model, on ASEAN exports will be, at most, no more than modest, as increased intra-regional exports are to a great extent offset by reduced extra-regional exports.


53

A word of caution, h owever, is in order. The above simulation exercise' only deals with static effects of trade liberalization without taking into account the dynamic effects which defy quantification. Similar studies undertaken for other regional groupings also suggest small net static gains or losses. If the dynamic effects are counted in, the net welfare effect is likely to be positive for all ASEAN countries, although the distri- ' bution of the gains among member countries may well be uneven. It is in this sense that AFTA trade liberalization can be seen as a positive-sum game. .

ASEAN Vision 2020 The preceding analysis underscores the need for ASEAN to go beyond AFTA. ASEAN Vision 2020, adopted the ASEAN Heads of State and Government in Kuala Lumpur on 15 December 1997, speaks of peace, freedom, neutrality, justice, rule of law, national and regional resilience, development and shared prosperity, confidence-building and conflict-resolution in very broad terms. In the economic domain, the ASEAN Vision 2020 seeks to chart a new direction through Partnership in Dynamic Development to forge closer economic integration within ASEAN with accent on sustainable and equitable growth and national and regional resilience. The Vision seeks to create "a stable, prospero.us and highly competitive ASEAN Economic region in which there is a free flow of goods, services and investments, a freer flow or' capital, equitable economic development · and reduced poverty and socio-economic disparities" (ASEAN Secretariat 1999). The. Vision also underlines the importance of regional macroeconomic and financial stability, modern and competitive small and medium enterprises (SMEs), development of science and technology, food security, improved infrastructure and communicati,ons, human resource development, etc. The ASEAN Vision 2020 is certainly very laudable and promising. No one would find any fault with its goals which envision "open ASEAN societies", "socially cohesive and caring ASEAN", "a technologically co ~petitive ASEAN competent in strategic and enabling techn'o logies", "clean and green ASEAN with fully established mechanisms for sustainable development"; "an outward-looking ASEAN playing a pivotal role in the international fora" and so on and so forth. By any measure, the Vision seems complete and comprehensive. That ASEAN takes a serious view of the above long-term vision is quite evident from the fact that action plans are being drawn up to translate

54

A New ASEAN in A New Millenium

the above dream into a reality. The Hanoi Plan of Action (HPA) has been put in place with a six-year time frame (1999-2004) which represents the first in a series. Briefly, the HPA attempts to: 01. 02. 03. 04. 05. 06. 07. 08. 09. 10.

Strengthen macroeconomic and financial cooperation Enhance greater economic integration Promote S&T development and develop IT infrastructure Promote social development and address the social impact of the 1997-98 crisis Promote HRD Protect the environment and promote sustainable development Strengthen regional peace and security Enhance its role as a force for peace, justice and moderation internationally . . Promote its awareness and its standing in the world community Improve its structure and mechanism.

The HPA is only seelIlingly a tall order. It has fairly specific, practical agendi\ which ibcludes ASEAN Surveillance Process, liberalization of the firiancial setvices sector, . developme~t of regional capital markets, acceleration of the AFTA process, implementation of the Framework Agreement on AlA, liberalization of trade in services, focus on food security, intensification of industrial cooperation, promotion of SMEs, cooperation in intellectual property, development of e-commerce, promotion of ASEAN tourism, development of regional infrasttucture, development of growth areas, and establishment of the ASEAN Information Infrastructure (AlI).

Paradigm Shift ASEAN Vision 2020 appears to be quite ambitious if not awesome. No one would want to quarrel with the laudable visionary objectives of ASEANor doubt the seriousness of ASEAN's commitments to its longterm goals. If implemented successfully, all these should translate into better living standards for the people of the region. The fact, however, remains that ASEAN needs more than a vision. It needs do a lot of soulsearching to get its bearings right before it can shift gears and change directions. ASEAN cannot hope to realize its Vision 2020, if ASEAN continues to operate in the same old manner. Instruments which facilitated the ASEAN process in the past may hinder it the future .. It is time ASEAN

Trade. Investment and Interdependence

55

took a hard look at itself in the rapidly changing global economy. The relatively easy phase of regional cooperation in the bi-polar world is over. ASEAN had enjoyed the support of its Dialogue Partners who had acted partly in self interest. The equations have changed dramatically with the collapse of the Soviet Empire. Under the current globalization mode in an uni-polar system, ASEAN will have to not only formulate new policies and new strategies but also seek new alliances. This does not mean that ASEAN should have a complete break with the past. Far from it. ASEAN must build upon its past achievements and successes. ASEAN must, at the same time, also draw lessons 'from its own past policy errors and failures. Nothing short of a paradigm shift can enable ASEAN to move forward . ASEAN is by no means a homogenous grouping. Even at birth, ASEAN had to wrestle with glaring inequalities and imbalances of sorts. Over the years, ASEAN's heterogeneity has widened and deepened, partly due to the inclusion of the transition economies of ASEAN-4, which are way behind the rest of ASEAN, and partly due to the structural changes that have taken place in the ASEAN-6 economies themselves. ASEAN will, therefore, have to pay much attention to the question of equity from now on, so that the benefits and costs of economic cooperation are distributed among its members fairly equitably if not evenly. This, however, does not necessarily warrant financial compensation from those who gain more to those who gain less. Such a compensation scheme will create more problems than it can solve. Nonetheless, me chanisms and institutions will have to be put .place to ensure that the ASEAN-4 can catch up quickly with the ASEAN~6>With the world economy moving rapidly toward what is referred to as the I