Effects of AFTA-CEPT on ASEAN Member

Many years ago, many initiatives of developing countries to establish regional economic integration, such as ASEAN Free Trade Area were taken by heads of government, or stimulated by international organizations, without any involvement of the private sector. AFTA is a trade bloc agreement by the Association of Southeast Asian Nations in order to support local manufacturing in all ASEAN countries. When it is originally signed, ASEAN had 6 members, which are Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand. Vietnam joined in 1995, Laos and Myanmar in 1997 and Cambodia in 1999. By now, AFTA consist of 10 countries of ASEAN. All of them had signed the AFTA agreement and for the 4 latecomers (CLMV) they had been given longer time to meet AFTA’s tariffing reduction obligations.

The ASEAN Heads of Government hope economics in ASEAN become more effective and competitive in era of globalization by increasing the ASEAN’s production through the removal of non-tariff barriers and low intra-regional tariffs (range from 0 to 5%). Thus, companies within ASEAN region (free trade area) can enjoy advantage of the economics of scale. To achieve those, an implementing mechanism called the Common Effective Preferential Tariff (CEPT) scheme was established and being signed in 1992. AFTA is a collective effort by ASEAN members to reduce or eliminate tariffs on intra-ASEAN trade. The objective of AFTA is to create an integrated domestic market within ASEAN and increase the region’s competitive edge as a production base in the world market.

Enhanced CEPT Agreement 2007

In August 2007, ASEAN agreed to review and update the CEPT Agreement to become a comprehensive Trade in Goods (TIG) Agreement for AFTA. The reasons are to update some provisions to accommodate the current development in ASEAN as well as to amend all past amendments in CEPT agreements in different protocols to be merged into new comprehensive agreement. Besides, the past agreements are found to have some inconsistencies between the provisions in the CEPT, so these problems can be solved. However, how far the AFTA-CEPT helps in liberalization of the market region and what kind of impacts of AFTA-CEPT can bring to ASEAN in social and economic aspects?

Advantages of AFTA-CEPT for ASEAN Member

The main advantage of AFTA is increased intra-regional trade and investment and improved resource allocation within the region. These benefits can be captured as tariffs and other trade barriers are reduced and markets are integrated. But what kind of tariffs or trade barriers stated in CEPT scheme?

2 categories of tariff reductions in CEPT scheme:

The fast-track schedule for tariff reduction applies to 15 product groups. Fast track reduction aims at reducing tariffs on items currently above 20% or lower to 5% by the year 1998. Products on fast track scheme are vegetable oils, cement, pharmaceuticals, chemical fertilizers, plastics, rubber products, leather or hide products, pulp and paper, textiles and apparel, ceramic, glass products, gems, copper cathodes, electrical appliances, and wooden and rattan furniture. Actually, the sectors covered by the Fast Track program are more than 15 products that had been originally agreed in the 1992 Singapore Declaration. The additional products are mechanical appliances and mineral products.

For normal track schedule applies to other manufactured goods and it will face tariff reductions in 2 steps. Tariffs currently above 20% must be reduced to below 5% by year 2003, while tariffs currently at 20% or less than it will reduce it to below 5% by the year 2000.

Non Tariffs Barriers (NTBs) mean measures other than tariffs which effectively prohibit or restrict import or export of products within Member States.

Sources: Article 1 Agreement on the Common Effective Preferential Tariff Scheme for the AFTA

Example of NTB can be import bans, product standards, import licenses, “Buy National” policy, and Intellectual property laws like patents or copyrights, restrictive licenses, seasonal import regimes, bribery and corruption.

Quantitative restrictions means restrict or prohibit on trade on other member states through quotas, licenses, and requirements. For example the most common is import quota.

Foreign exchange restrictions are the measurements taken by the member states in the form of restrictions and other administrative procedures in foreign exchange and thus believe can be effective in restricting trade.

Through greater market integration and trade liberalization, AFTA will contribute to achieve higher income per capita and economic welfare, and greater economic resilience for the regional economies. AFTA facilitates specialization on the basis of comparative advantage, technology transfer among businesses, and improved resource pricing and management.

Intra-ASEAN trade has been increasing steadily by 100.33% from US$89.7 billion in 1993 to US$179.7 billion in 2000 (Table 1). At the same time, the total global trades of ASEAN countries contribute to US432.0 billion in 1993 to US$782.7 billion in 2000. This shows that percentage of intra-ASEAN trade has been increasing from 20.76% in year 1993 to 22.96% in 2000. We can thus see that intra-ASEAN trade is playing increasing important role in promote the economy development of ASEAN countries.

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The potential of AFTA to further increase intra-regional trade cannot be ignored. As a single market, AFTA has an estimated population of 513 million and an increasing combined national income from US469.011 billion in1998 to US$580.2 billion in 2000 (Table 2).

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With the enlarge market, AFTA provides an opportunity for ASEAN enterprises to benefit from larger economies of scale. Businesses are in a better position to review their operational structures by taking into consideration of a larger market potential than they used to. It is a chance for them to modernize their operations by investing in modern technologies and larger plants to cater for a larger market. Thus, technologies can be exchange and enhanced as the labors can become even more skillful. Moreover, there can be help to promote research and development (R&D) in certain sectors as well.

AFTA also provides an opportunity for businesses to further benefit from lower cost inputs. Costs of inputs are expected to reduce due to increased competition among suppliers. The competition will not only enhance the efficiency of input suppliers, but will also benefit other industries by boosting their competitive edge as competiveness is the positive impact for improve the efficiency of the sectors. To compete with other country, each country will upgrade their production. So, the productivity is better with the implementation of AFTA. Therefore we can conclude that competiveness is the positive impact to make ASEAN sectors become better in future as they will produce quality goods in large economics scale. This can lead to opportunities for businesses to expand their market. As a result of improved efficiency and competitiveness, it opens the window of opportunity for many domestic enterprises, especially those in the small and medium-sized categories, access to international market.

On the other hand, increased intra-regional trade due to AFTA will enhance ASEAN as an attractive investment location for regional and international investors, by providing the expected lower costs of doing business in the region. As had been agreed, AFTA does not apply a common external tariff on imported goods. At most, that is only 0 till 5 percent of tariff will charge among ASEAN country. When there are low or no tax in-charge in those imported item, foreign investors will feel attractive to invest because of the low investment cost. Those foreign investor will earn more profit if invest on ASEAN sectors and thus this can help in allocation of resources more effectively. For example, once an investor invests on Malaysia oil palm industry, there will be more funds to develop oil palm industry. They can use better technology to extract latex from oil palm tree. Puncture tapping or micro tapping which can result in an increased production of latex is an example of improvement in technology. In long term, this will further increase the role of ASEAN in contributing to global growth. At the same time, it helps ASEAN country to reduce dependence on their traditional trading partners. Thereby, increase the bargaining power of ASEAN countries.

As intra-regional trade in goods or merchandise increases, it will also have a trickle-down effect on the services sector. The demand for services such as shipping, transport, storage and warehousing, packaging, telecommunications, finance and insurance will expand accordingly. Thus, we can infer that AFTA will promote and boost the development of the services sector and further foster the economics growth of the country. Hence this can help to decrease unemployment rate in the country as there is a high demand for labor to work in variety of the service sectors. So, this can help the country to achieve full-employment and reducing the social problems like robbery cases.

Last but not least, we believe that the CEPT scheme will serve its purpose to achieve AFTA ultimate goal where to ensure intra-regional trade and investments are enhanced and facilitated where CEPT scheme trying to let products exported to qualify as AFTA products and eligible for preferential tariff treatment where ASEAN has simplified the rules and procedures for CEPT Scheme to encourage trade among ASEAN. This is implemented to specific products through the application of Product Specific Rules (PSR) in addition to the existing requirement of 40% local content.

But what is local content and PSR? Products content also can be called as “Regional Value Content”-RVC that originate from any ASEAN country.

The formula to calculate the local content is:

RVC= Raw material cost + direct labor cost + direct overhead cost + profit + other cost x 100% FOB value

While, PSR is included Change in Chapter (CC), Change in Tariff Heading (CTH), Change in Tariff Sub Heading (CTSH) and Process Rule. Both are actually under CEPT rules of origin. Manufacturers must prove that the non-originating materials in producing the final product have undergone substantial transformation through any of the following methods:

CHANGE IN CHAPTER RULE (CC): Final product classification changes at the first two digit level of non originating materials. The raw materials from non-ASEAN countries are derived from other CHAPTER in order for the final product to enjoy the CEPT rate.

Final product

HS 2105.00 Ice Cream

EXAMPLE:

Non-originating ASEAN Material

HS 0401.10Fresh Milk

CHANGE IN TARIFF HEADING (CTH): Final product classification changes at the first four digit level of non originating materials. The raw materials from non-ASEAN countries are derived from OTHER HEADING in order for the final product to enjoy the CEPT rate.

Final product

HS 1706.00 Chocolate Cream

Non-originating ASEAN Material

HS 1704.00 White Chocolate

EXAMPLE:

CHANGE IN TARIFF SUB-HEADING (CTSH): Final product classification changes at the first six digit level of non originating materials. The raw materials from non-ASEAN countries are derived from OTHER SUB HEADING in order for the final product to enjoy the CEPT rate.

Final product

HS 1701.11 Refined Sugar

Non-originating ASEAN Material

HS 1701.99 Raw Sugar

EXAMPLE:

PROCESS RULE: In this rule, the products must undergoes chemical reaction process. The chemical reaction process are known as biochemical process which results in a molecule with a new structure by breaking intramolecular bonds and forming new intramolecular bonds, or by altering the spatial arrangement of atoms in a molecule.Example of the products are textile, copper and chemical products. The Product Specific Rules currently being implemented are as follows:

Effective dates

No of lines

Sectors

1 January 1996

257

Textile, Wood based, aluminum and wheat flour

1 January 2007

1453

All sectors

1 August 2008

3514

All sectors

By doing so, this no doubt can helps to enhance rapid growth and competitiveness of the ASEAN as more products can be exported as ASEAN products and enjoy CEPT tariff scheme. Thus, together with political and economic stability of the country, as well as cooperation and partnership in ASEAN can make the entrepreneurs choose to trade and doing business within ASEAN region. The economics prospects of ASEAN can said to be bright.

Disadvantages of AFTA for ASEAN Members

AFTA, or the ASEAN Free Trade agreement, prove that is beneficial to all the ASEAN countries. However, there are pros and cons of this agreement. The main disadvantage of AFTA is the common external tariff or the CEPT. This tariff is not applicable on all import goods. There is a charge or tariff imposed on the imported goods, which is not beneficial from the point of view of customer. The goods that are imported from outside the non-participating ASEAN countries are heavily taxed.

With the larger market size, consumers in ASEAN are now offered a wider variety of quality goods produced regionally at lower prices. However, there is increasing competition for domestic industries for certain products, due to the liberalized market. This could be illustrated from the impact of implementation of AFTA on Malaysia’s automobile industry. Previously, Malaysia used local policies and charged high import duty on import cars to protect national cars, domestic assemblers and component parts makers. With introduction of AFTA, tariffs at 20 % and below will be reduced to 0-5 % within 7 years (effective by 1 January 2000). It means that all trade barriers will be removed and these have negative implications for future development of local automotive industry. As we know, last time people buy national cars because it’s cheaper than import cars, but with the reduction of tariff, price for import cars is almost the same as national cars. Thus, with the apprehension in minds that import cars are high class and quality assurance, Malaysians prefer to buy foreign cars with only a slightly higher price. Firms that are small and inefficient in operation will collapse because cannot compete with others.

All non-tariff barriers must removed parallel on products whose tariffs are being reduced. This policy has been carried out to prevent recurrence of non-tariff barriers in products facing tariff reduction under CEPT Scheme. It means that products which were previously under quota restrictions or import ban, in order to protect local good, is no more protected. In this context, all protection rules and policies are removed, such as AP, quota system and monopoly status. The countries no more competitive advantage when all products are equal from quality and price.

Implementation could cause declined competitiveness of traditional export industries. The problems are more critical in the CLMV (Cambodia, Laos, Myanmar and Vietnam). The countries are facing problems such as lack of adequately trained and skilled human resources in all areas of activities and sectors. This deficiency is pervasive. Moreover, with the rapid technological advance, many traditional industries in the ASEAN countries especially CLMV become obsolete. The technologies used cannot catch up with the pace of development of other more developed countries. Furthermore, there is apprehension in the minds of many that products from CLMV countries are relatively low quality from their more well-to-do neighbors such as Malaysia, Singapore which will result in collapse of the nascent manufacturing sector.

Very recently, ASEAN abolished nearly sixty-three percent of the duty charges on almost all the products in intra-ASEAN trade, or trading among participating Asian countries. The import taxes and duty charges have been cancelled on a number of common goods to facilitate the trade processes. Anyway, some industries that have been exempted from this rule are rice, tropical fruits, firearms, tobacco, sugar, and liquor. By excluding these industries, AFTA is having a negative impact on the local farmers in different Asian countries who are trying to keep mentioned industries alive.

AFTA-CEPT scheme also said to bring negative impacts on food security in and out of the country. It can be proved when AFTA reduced the tariffs on thousands of ASEAN products to between zero and 5% from Jan 1 this year. As one of the world’s major farm goods exporters, Thailand is particularly concerned about the tariff cuts on 23 farm items. The Commerce Ministry expects half of the 23 farm product to suffer a negative impact from AFTA, including garlic, onions, rice, tobacco, maize and palm oil. These impacts range from an influx of cheap produce from neighboring countries to the mixing of poor-quality imported goods with high-quality farm products produced in Thailand. Organic farmer Decha Siripat, director of the Khao Kwan Foundation, said the government could safeguard Thai farmers from AFTA simply by solving existing problems they had faced for years. The most worrying problem was widespread use of farm chemicals and fertilizers which are expensive and harm farmers’ health and the environment.

In export terms, ASEAN countries will gain an estimated US$3-4bilion from liberation, but benefits from AFTA will be distributed unevenly throughout region. Although industries which adjust quickly enough will benefit from enlarged potential market in Asean, but industries which are slower to adjust will suffer because import penetration will be unstoppable. (Source: Asean free trade agreement, implications and future directions). As we know, removed barriers of entry and tariff reduction cause certain industries facing reduced competitive advantage. The industries need to make changes to adapt to the new business environment, such as tight cost control, efficient operating or cutting costs to achieve cost leadership. Those industries that are slow in response or not good in strategy management will be lag far behind and maybe will quit from the market.

Even though we can said that cooperation through AFTA-CEPT would lead an increase in trade efficiency and secure a more economical allocation of resources, but we must realize that actually AFTA involves 10 countries with different background of economics, thus it faces problems in securing internal implementation. For example, each member countries are clearer of their own large external seeking than it is about its internal objectives as well as retains the right to establish its own separate protection against imports from the rest of the world. They also have their specific sectors to be protected. Examples are the automobile industry for Malaysia, machinery and electrical appliances sectors in Brunei, chemicals sector in Indonesia, textiles sectors in the Philippines, and vehicles sectors in Thailand. Thus those products are under Temporary Exclusions, ‘the country itself may not ready to include some sensitive products in the CEPT scheme and would like to exclude it on a temporary period’. Within the current framework of AFTA, each nation is acted as individualistic rather than collaborative or complementary with one another. This non-collective planning and strategies among ASEAN members raises the possibilities of a particularly dark scenario trade deflection to take place. With the persistence of this unhealthy trend not only makes ASEAN as a whole might not gain collectively from AFTA, indeed all of them might be worse off.

Conclusion

Actually there are a number of difficulties in evaluating the effects of AFTA. As there are a number of other things happening at the same time as its implementation, it is by no means easy to isolate its effects. For instance, the Asian financial crisis of 1997/98 may have influenced trade flows during the AFTA implementation. Although the agreement came into effect in January 1992, not all tariffs between the original six ASEAN members were removed on that date. Indeed, for most commodities, there was a schedule over a 10 to 15 year period during which tariffs would be phased out. Trade liberalization both under the World Trade Organization and unilaterally by some countries are being undertaken at the same time as AFTA’s implementation, and could have undoubtedly affected trade patterns.

However, we still cannot deny where AFTA-CEPT can bring positive as well as negative impacts to ASEAN. Positive impacts of AFTA are increasing intra-regional trade and investment, improve resource allocation within the region, achieve higher income per capita and economic welfare and greater economic resilience for regional economies, facilitates specialization, lower cost inputs, increase opportunities for business to expand market, enhance ASEAN as attractive investment location for regional and international investors, and promote and boost development of the services sector.

On the other hand, AFTA also give disadvantage for some occasions or conditions. Negative impacts of AFTA on ASEAN members are increasing competition for domestic industries for certain products, and decline competitiveness of traditional export industries.

As an overall conclusion, the basic feature of the AFTA is the liberalization of trade in the region, done through the elimination of intra-regional tariff and non-tariff barriers. As well, AFTA also have their specific advantages and disadvantages. The implementation is important because the impact of AFTA will influence the future of ASEAN members.