A Free Trade Area: Implications for ASEAN 9789814379601

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FREETRADE AREA Implications for ASEAN

The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modem Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit (AERU) is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. The day-to-day operations of the Unit are the responsibility of the Co-ordinator. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

/SEAS Current Economic Affairs Series

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FREE TRADE AREA Implications for ASEAN

Pearl Imada Manuel Montes Seiji Naya

I5ER5

ASEAN Economic Research Unit INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Road Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 1991 Institute of Southeast Asian Studies

The responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters. Cataloguing in Publication Data lmada, Pearl. A free trade area: implications for ASEAN I Pearl Imada, Manuel Montes and Seiji Naya. (ISEAS current economic affairs series) l. Customs unions. 2. ASEAN countries - Commercial policy. 3. ASEAN countries - Economic integration. I. Montes, Manuel. II. Naya, Seiji. III. Title. IV. Series. HFI713 131 1991 s1s9l-196872 ISBN 981-3016-16-7 ISSN 0218-2114 Typeset by International Typesetters. Printed in Singapore by Prime Packaging Industries Pte. Ltd.

Contents

List of Tables

vi

Acknowledgements

vii

1. Introduction 2. An ASEAN Free Trade Area: Will It Be Economically Feasible? Static Gains and Costs

3 3

Dynamic and Other Gains and Costs

14

What Economic Theory Tells Us

15

3. A Partial Equilibrium Analysis of Intra-ASEAN Trade

16

Methodology

16

Results

17

4. An Econometric Analysis of Intra-ASEAN Trade

24

Description of the Model

24

Results of a 50-per cent Preferential Tariff Reduction

25

Some Insights and Caveats

33

5. Conclusion: A Time for Rethinking

34

Notes

36

Bibliography

37

The Authors

40

List of Tables

Intra-ASEAN Trade with and without Singapore

5

2 ASEAN Manufactured Exports and Imports

6

3 ASEAN Non-oil Trade

7

4 Nominal and Real Gross Domestic Product and Gross Domestic Product Per Capita

9

5 Manufacturing and Industrial Production in ASEAN

10

6 Structure of Exports of ASEAN Countries

12

7 Summary Results of a 50-per cent Tariff Reduction in ASEAN

18

8 Intra-ASEAN Trade, Base Period and Post-tariff Cut

19

9 Summary Results of a Free Trade Area in ASEAN

22

10 Macro-economic Effects

26

11 Annual Mean Difference in Export Values from

Baseline for SITC 0-9, 1989-92

28

12 Shares of lntra-ASEAN Trade

29

13 Import Shares of SITC 0-9, 1989-92

30

14 Export Shares of SITC 0-9, 1989-92

31

Acknowledgements

This paper was originally presented at the ASEAN Roundtable on "ASEAN Economic Co-operation in the 1990s", jointly organized by the Institute of Southeast Asian Studies (ISEAS) and the Institute of Policy Studies (IPS) in Singapore on 27-28 June 1991. The dedicated research assistance of Ms Sakulrat Montreevat is gratefully acknowledged. ISEAS would like to thank the Konrad Adenauer Foundation and the International Development Research Centre (Canada) for providing funding for the ASEAN Roundtable.

1J Introduction

The Association of Southeast Asian Nations (ASEAN) is often considered to be the most successful of all regional co-operation groupings among developing countries. The past two decades have shown that regional co-operation among developing countries is difficult; many of the groupings are now defunct or have been reorganized with fewer members. ASEAN, however, has established a strong spirit of co-operation and has made considerable progress in establishing a framework for consultation and co-operation. Yet, despite the fact that their co-operative efforts in trade and investment have continually improved since they were initiated in 1976, it is generally acknowledged that these efforts have had little impact on their growth or structure. ASEAN's efforts at economic co-operation are often criticized on two basic, and somewhat contradictory, grounds. Some observers bemoan the slowness of progress and often blame the institutions or mechanisms used to promote integration as being flawed or ineffective. Another group of observers believe that economic integration is not feasible or desirable in ASEAN because of inherent structural problems. They argue that integration is likely to be trade-diverting and welfare-reducing. In responding to the first group, the problems of the present trade and industrial co-operation programmes are many and have been enumerated in a number of studies (Rieger 1985, Naya and Imada 1987). These problems include the large number of exceptions and the low preference margins in the present Preferential Trading Arrangements (PTA). Few would argue, however, that to a large degree these problems and the slow progress of the ASEAN PTA result from the fact that ASEAN leaders elected to maintain a marginal rate of integration. In other words, the slowness was essentially by design. The implementation and mechanical problems of ASEAN economic co-operation will not be discussed here. Instead, this study will focus on what ASEAN can expect to achieve with greater integration. Presently, ASEAN stands ready to make a major step towards economic integration. ASEAN Ministers have indicated that it is time for a bold, innovative approach to economic co-operation. While ASEAN leaders eschewed the word "integration" in the past, there is a new determination to

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A Free Trade Area: Implications for ASEAN

integrate the economies through increased trade and investment. At this juncture, therefore, it is important to go back to basics and examine the second set of criticisms carefully. What is the likely outcome of a free trade area in ASEAN? Are the critics correct in concluding that ASEAN would at best have little to gain and at worst may be negatively affected by regional integration? If so, then on hindsight