Adjusting Towards AFTA: The Dynamics of Trade in ASEAN 9789814379144

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ADJUSTING oowards

The Dynamics of Trade inASEAN

The Institute of Southeast Asian Studies (I SEAS) 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's research programmes are the Regional Economic Studies Programme (RES), Regional Strategic and Political Studies Programme (RSPS), Regional Social and Cultural Studies Programme (RSCS), and the Indochina Programme (ICP). 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, within the RES, is an integral part of the Institute, coming under the overall supervision of the Director, who is also the Chairperson 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. 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

I

"

towards The Dynamics of Trade inASEAN

JAYANT MENON

I5EA5 INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 119596 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. © 1996 Institute of Southeast Asian Studies, Singapore

The responsibility for facts and opinions in this publication rests exclusively with the author and his interpretations do not necessarily reflect the views or the policy of the Institute. Cataloguing in Publication Data Menon, Jayant. Adjusting towards AFTA: the dynamics of trade in ASEAN. (ISEAS current economic affairs series, 0218-2114) 1. Free trade-ASEAN countries. 2. ASEAN countries-Commercial policy. 3. ASEAN countries-Commerce. I. Title. II. Series. 1996 HF1591 M54 sls 95-94970 ISBN 981-3055-13-8 ISSN 0218-2114 Typeset by Superskill Graphics Pte Ltd Printed in Singapore by Prime Packaging Industries Pte Ltd

For rny mother, Mrs. V V V Menon, on her sixtieth birthday, and rny nephew, Scott Narain Sarnwell, on his first!

Contents Acknowledgements 1.

Introduction

2.

ASEAN Trade and the CEPT: An Overview The Pattern of Intra-ASEAN Trade: An Overview The CEPT: An Overview

3.

xi

1 11 13

21 27

Method and Data Decomposition of Total Trade: Contributions of Net Trade and Intra-industry Trade Decomposition of Total, Net and Intra-industry Trade: Contributions of Imports and Exports Data Issues

32 35

4.

Results Singapore Thailand Malaysia Indonesia Philippines Overview of Results and Determinants

41 43 52 55 58 62 65

5.

Conclusion

75

Appendix A: Status-Switches Appendix B: Categorical Aggregation and the Measurement of Intra-industry Trade Appendix C: Sectoral Aggregation of Contribution Measures Bibliography About the Author

29

81 87 95 97 103

List of Tables ---

2.1

2.2

Intra-ASEAN Imports as a Share of Total Multilateral Imports, 1981, 1986 and 1991

14

Intra-ASEAN Exports as a Share of Total Multilateral Exports, 1981, 1986 and 1991

15

2.3 Intra-ASEAN Total Trade as a Share of Total Multilateral Trade, 1981, 1986 and 1991

16

2.4 Intra-ASEAN Imports of Manufactures as a Share of Total Intra-ASEAN Imports, 1981, 1986 and 1991

18

2.5 Intra-ASEAN Exports of Manufactures as a Share of Total Intra-ASEAN Exports, 1981, 1986 and 1991

19

2.6 Intra-ASEAN Trade in Manufactures as a Share of Total Intra-ASEAN Trade, 1981, 1986 and 1991

20

2.7 Intra-ASEAN CEPT Exports, 1990 (in US$ millions)

22

3.1

4.1

Relationship Between Industry Status and Import and Export Contribution to the Growth in Total, Net and Intra-industry Trade

33

Singapore: Contribution Measures and GL Indexes, 1981 to 1986 and 1986 to 1991

44

4.2 Thailand: Contribution Measures and GL Indexes, 1981 to 1986 and 1986 to 1991 4.3

Malaysia: Contribution Measures and GL Indexes, 1981 to 1986 and 1986 to 1991

45

46

4.4 Indonesia: Contribution Measures and GL Indexes, 1981 to 1986 and 1986 to 1991

47

4.5 Philippines: Contribution Measures and GL Indexes, 1981 to 1986 and 1986 to 1991

48

4.6 Summary of Contributions of Net Trade and Intra-industry Trade to Total Trade Growth for Intra and Extra ASEAN Trade

49

4.7 Intra-firm Trade of US Majority-owned Foreign Affiliates (MOFAs) in ASEAN, 1989 to 1992 (in US$ millions)

68

4.8 Intra-firm Trade of US Majority-owned Foreign Affiliates (MOFAs) in ASEAN, 1989 to 1992 (as a percentage of trade)

69

List of Figures 4.1

The ASEAN Automobile "Factory"

71

AI

'Switch' and 'No Switch' m 1 - x l Combinations whenM. >X

84

'Switch' and 'No Switch' m.- x. Combinations whenX >M.

85

1

A2

'l

I

l

l

l

Acknowledgements - - - -

This study was funded by an Institute of Southeast Asian Studies (ISEAS) Research Fellowship within the ASEAN Economic Research Unit (AERU). Most of the research was conducted during my stay at ISEAS from May to July 1994. I am particularly grateful to Joseph Tan, Co-ordinator of AERU, for his constant support and encouragement, and for valuable discussions. While at ISEAS, I benefited greatly from discussions with various staff, both permanent and visiting. I would like to thank Pearl Imada, Sree Kumar, Reza Siregar, Ng Chee Yuen, Mehdi Krongkaew, Anggito Abimanyu and Mya Than for sparing the time to assist me with my work I also thank Toh Mun Heng and Jose Tongzon from the National University of Singapore, and Lam San Ling and Wong Fot Chyi from the Monetary Authority of Singapore for valuable discussions. I am also grateful to three anonymous referees for their detailed comments. Parts of this study were presented at seminars at ISEAS, National University of Singapore, Australian National University and Monash University. I am grateful to participants at these seminars for their comments. Finally, I would like to thank Peter Dixon, Director of the Centre of Policy Studies and IMPACT Project at Monash University, for releasing me from normal duties to allow me time to complete this monograph on my return to Monash. Peter's role in this project extends beyond just this, however, as much of the methodology employed in this study draws upon earlier work done jointly with him.

1 Introduction

Introduction

0

n 27-28 January 1992, Heads of State of the Association of Southeast Asian Nations (ASEAN) met in Singapore for the Fourth ASEAN Summit Meeting, at which they agreed to the establishment of an ASEAN Free Trade Area (AFTA) by the year 2008. This deadline has subsequently been moved forward to the year 2005. The backbone of AFTA is the c;:;ommon Effective Preferential Tariff (CEPT) Scheme, which aims to reduce tariffs to 0-5 per cent for 15 product groups (fast track) within 5 to 7 years, and the remainder (normal track) within 10 to 15 years. Although much has been said about "open regionalism", an important objective of AFTA is to promote intra-regional trade. This objective is evinced by the fact that the tariff reductions within AFTA are strictly preferential in nature. The importance of intra-ASEAN trade has been heightened following the establishment of the North American Free Trade Area (NAFTA) in 1993, and the European Economic Community (EEC) in 1992. With markets external to the region becoming more traderestricting, and given East Asia's preoccupation with its accessibility to the North American market, the region will have to increase intra-ASEAN trade if it is to offset some of these losses (Kumar 1992, p. 74). In light of these developments, it is not surprising that the initial response to the creation of AFTA was nothing short of euphoric. The initial enthusiasm has begun to wane in recent months, however. Fearing a flood of imports, producers in Thailand and, more recently, in Malaysia have called for greater protection at least in the short term (see Kumar 1992, p. 72). This response is particularly concerning since these two countries have been promoted "to play a leading role in ensuring relatively exclusion-free implementation of AFTA" (Chirathivat 1993, p. 8). As recently as April 1994 for instance, Malaysia implemented the Approved Permit System (APS) which places new import restrictions on petrochemical products. 1 In criticizing this decision, Singapore's Trade and Industry Minister, Yeow Cheow Tong, voiced the concerns of many when he described the move as contradicting the spirit of AFTA, and providing an excuse for other ASEAN countries to erect new barriers. 2 The severity of

4

Adjusting towards AFTA

the conflict has resulted in Singapore seeking redress through the World Trade Organization (WTO), claiming that the protection afforded to the petrochemicals industry is not GATT trade-consistent. Concerns have also been raised by the two most protected countries in ASEAN, Indonesia and the Philippines, who fear that their firms will not be able to compete with the more efficient producers in other ASEAN states (see DeRosa 1993). Indonesia is also widely expected to protect a soon-to-open petrochemicals plant that would severely injure Singapore exporters of these resins. 3 These sorts of concerns are not new to ASEAN; in fact, they lay behind the rejection of the Rieger Proposal (Rieger 1985), which recommended the formation of a customs union between Malaysia, Thailand, Indonesia and the Philippines, and a free trade area between Singapore and these countries. The current concerns relating to adjustment costs take on a certain degree of potency when one bears in mind that the AFTA agreement contains "exclusion lists" and "emergency measures" (see ASEAN 1992b). The provision to exclude items in any free trade agreement is always suspicious to the freetrade exponent, as they often lead to exploitation of a provision designed as a safeguard. Emergency measures are explicit in allowing member countries to suspend preferences if CEPT imports cause serious injury to domestic producers. In extreme situations, member countries are allowed to impose or increase quantitative restrictions to stop a serious decline in its monetary reserves. In relation to the exclusion list, its criteria and safeguard measures, Nasution (1993, p. 15) states: "It is true that these measures are necessary to give ample time for industries to adjust to AFTA. Liberal use of these measures, however, can easily hamper the implementation of the CEPT for AFTA." Given that member states have already begun raising concerns regarding AFTA, and, more importantly, given that the facility exists for countries to act on these concerns by taking defensive actions that would undermine its original objectives, one is lead inevitably to question the likelihood of AFTA materializing in its originally proposed form. A recent analysis by Toh and Low (1993) suggests that AFTA is more symbolic

Introduction

5

than substantial, and that it is unlikely to succeed as an effort in economic co-operation. Is AFTA destined to fail, even before it has got off the ground? Even if it does not "fail", will it only survive in a modified form that is so constrained that it will be of little consequence to its member states? Will it suffer the same fate as the Preferential Trading Arrangements (PTA), which is renowned only for its remarkable lack of success in promoting intra-regional trade? To answer these questions, we need to understand what these concerns are based on. That is, we need to step back and look more closely at the factors that underlie these concerns. While it is almost universally accepted that free (or freer) trade is beneficial in the long-run, there can be significant adjustment costs in the short to medium run. That is, the expansion in trade in response to barriers coming down can often involve the re-allocation of resources across industries, resulting in a temporary (but sometimes prolonged) period of unemployment of both capital and labour resources. The pain can not only be prolonged in certain instances, but might involve the eventual demise of certain industries as the process of specialization in response to a liberalized regime sets in. Some of the industries threatened with imports in the liberalized regime might have incurred substantial sunk costs in their setting-up. All in all, the extent of the costs incurred will depend on the pattern of trade that is likely to emerge in the post-reform era. Crucial to this issue is the extent to which the expansion in trade takes the form of inter-industry or net trade versus intraindustry trade. Inter-industry trade refers to international exchange of different products, eg. exports of tin and imports of machinery. That is, an industry engages in pure inter-industry trade if all its trade is either imports or exports, but not both. Intra-industry or "two-way" trade 4 involves the simultaneous import and export of a "product", eg. exports of Proton Sagas and imports of BMWs. Intra-industry trade usually involves trade in differentiated products (horizontal specialization) or trade in intermediate goods (vertical specialization). Trade in the former is often driven by preference for variety in con-

6

Arijustinq tmuards AFTA

sumption, while the latter is associated with the globalization of (different stages of) production processes. Much of the concern that threatens the realization of AFTA boils down to uncertainty regarding the contributions of net and intra-industry trade to the expected growth in intra-ASEAN trade following liberalization. If most of the growth in trade is attributable to intra-industry trade, then the resource reallocation costs in the short to medium term are likely to be lower. 5 This is because intra-industry trade does not require inter-industry factor movements. Whereas trade expansion through net trade requires factor transfer from importcompeting industries to export-oriented industries, trade expansion through intra-industry trade requires only specialization within industries. To the extent that there is some degree of industry-specificity in the employment of factors, their reallocation between activities (or product lines) within industries is likely to incur lower costs than their re-allocation between industries. In other words, both labour and capital are likely to adapt more easily to a new environment where the change is a result of increased intra-industry rather than interindustry specialization. 6 Adjustment costs may also be lower because it is possible for all factors to gain from trade in an intra-industry setting (Krugman 1981). This contrasts with the results of conventional trade models which explain interindustry trade, where, as implied by the Stolper-Samuelson theorem, the relative price changes that accompany trade expansion must make some factor worse off (see Jones and Scheinkman 1977). Recognizing the importance of this issue, a number of studies have examined the changing pattern of intra-industry trade in the region. These studies include Imada (1990), Ariff (1991), Kwan (1994) and Ramasamy (1995). The approach taken in these studies, as well as in those conducted for other countries, has been based on the Grubel and Lloyd (1975) index of intraindustry trade. 7 The method employed has been to compare the value of the Grubel-Lloyd index at different points in time, and to infer some pattern of the changing importance of intraindustry trade from movements in the value of the index. The

Jntroduclion

7

Grubel-Lloyd index measures the share of intra-industry trade in total trade, and can provide a relatively reliable measure of the importance of intra-industry trade at any point in time. There are a number of problems associated with using movements in its value to infer the changing importance of intra-industry trade over time, however. In the first place, it does not address the relevant issue. As discussed above, the relevant issue in analysing adjustment costs in the context of formation of a free trade area is the contribution of intraindustry trade growth to the growth in trade over time. That is, we need to know how much of the growth in trade is intraindustry, as opposed to net trade. Movements in the value of the Grubel-Lloyd index over time cannot provide this information. Second, movements in the Grubel-Lloyd index may not even be indicative of the contribution of intra-industry trade to the growth in total trade. In other words, it can be misleading. The Grubel-Lloyd index can record an increase (decrease) despite intra-industry trade contributing less (more) than net trade to the growth in trade. For instance, it is possible for the GrubelLloyd index to increase from 1 per cent of total trade in 1981 (say) to 99 per cent in 1991 despite intra-industry trade contributing less than net trade to the growth in total trade. Similarly, the Grubel-Lloyd index can fall from 99 per cent in 1981 to 1 per cent in 1991 despite intra-industry trade contributing more than net trade to the growth in total trade. The potential problems with using movements in the GrubelLloyd index is compounded when we consider more than two years. For instance, say that the Grubel-Lloyd index increases from 1 per cent in 1981 to 50 per cent in 1986, and increases further to 99 per cent in 1991. Not only is it possible for intraindustry trade to contribute less than net trade to the growth in trade in each of these two sub-periods, the contribution of intraindustry trade could be lower in the first sub-period compared with its contribution in the second sub-period. Finally, an increase (decrease) in the Grubel-Lloyd index over time is compatible with a decrease (increase) in absolute amount of intra-industry trade. 8 It is clear from the discussion above that the modus

8

AdJusting lowo.nls AFTA

operandi of previous studies, the Grubel-Lloyd index, is not only unable to answer the relevant questions, but even worse, it can be misleading. In this study, we overcome all of these problems by employing a new methodology to analyse the dynamics of intra-industry trade. We derive formulas for decomposing the growth in total trade into the contributions of growth in intraindustry trade and net trade. With these contributions measures, we are able to provide explicit answers to questions such as, "How much of the growth in trade was a result of intra-industry trade (or net trade)?", or "If not for the contribution of intraindustry trade (or net trade), what would have trade grown by?". In trying to interpret changes in intra-industry trade over time, previous researchers have often alluded to underlying changes in import-export performance. To understand the factors that drive changes in the roles of intra-industry trade and net trade over time, we must come to grips with the roles played by imports and exports. Towards this end, we derive formulas that measure the contribution of imports and exports to the growth in total trade, intra-industry trade and net trade. Again, these contributions measures enable us to determine the extent to which growth in total trade, intra-industry trade and net trade depended on imports and exports. All our contributions measures are computed using data for manufacturing industries defined at the 3-digit level of the Standard International Trade Classification (SITC). Our definition of manufacturing covers about 130 industries belonging to SITC 5-8 less 67-68 (metals). Our country sample consists of the original five ASEAN members: Singapore, Thailand, Malaysia, Indonesia and the Philippines. We consider two time periods, namely 1981 to 1986 and 1986 to 1991. We consider four types of trade flows for each of the ASEAN countries: (i) bilateral (ii) intra-ASEAN or intra-regional, (iii) extra-regional, and (iv) total multilateral. The study is organized as follows. First is an overview of intra and extra ASEAN trade patterns between 1981 and 1991, and a brief summary of measures that underpin AFT A, particularly the CEPT. This is the subject of Chapter 2, and is designed to set the stage for the ensuing empirical analysis. In

Jnlmdvction

9

Chapter 3, the methodology employed to measure the contribution of intra-industry trade and net trade to the growth in total trade is presented. Here it is shown how using movements in the Grubel-Lloyd index to infer changes in the importance of intra-industry trade can lead to error. The contributions of imports and exports to the growth in total trade, intra-industry trade and net trade are also derived. The results of the analysis are presented in Chapter 4. A final section summarizes the major findings and considers some policy implications.

Notes 1. The APS requires Malaysian companies to obtain a government permit before they can import certain resins used in plastics production, even though importers are already paying a 30 per cent tariff. 2. Reported in Tan Kim Song, "Is Malaysia Undermining the Fragile Spirit of AFTA?", Stmits Times, 30 May 1994, p. 47. 3. Reported in "ASEAN: Neighbours in Row over Trade", Austmlian Financial Review, 17 January 1995, p. 4. 4. Yet another way of thinking of intra-industry trade is "overlapping" trade. That is, the extent to which imports and exports of an industry overlap, or the extent to which imports are matched by exports in an industry. See Dixon and Menon (1995) for an alternative measure of matched trade over time. 5. The reasons for lower adjustment costs when intra-industry trade dominates net trade is discussed in more detail in Dixon and Menon (1995). 6. The contributions of net and intra-industry trade are also going to be important in determining the extent of trade creation versus trade diversion effects. If intra-industry specialization plays the dominant role in the liberalized regime, then the trade creating effects will be substantial, as member countries specialize in the production of, and engage in trade in, differentiated varieties of product in which they enjoy a comparative advantage. As Naya and Imada (1992, p. 56) put it, "(t)o realize the potential for intraregional trade creation, it is necessary to develop trade patterns based on intra-industry specialization, similar to trade between

10

Adjusting towards AFTA

developed countries such as within the European Community (EC)". In this context, Imada et al. (1991) show that trade creation effects would outweigh trade diversion effects for AFT A. Furthermore, unlike inter-industry specialization, intra-industry specialization can occur without significant cost differentials existing among members of a free trade agreement. 7. The Grubel-Lloyd index measures the share of intra-industry trade in total trade at any point in time (see Chapter 3). 8. The way in which comparing movements in the Grubel-Lloyd index over time can lead to such errors is discussed in detail in Chapter 3.

2 ASEAN Trade and the CEPT· An Overview

AS'E'AN Trode all(l the CEPT Ati Ouen.·ieu

This chapter provides an overview of ASEAN trade patterns and the CEPT. This is done in order to set the stage for the ensuing empirical analysis. Intra and extra ASEAN trade patterns of the five (original) ASEAN countries for the years 1981, 1986 and 1991 are then examined. These years are chosen to coincide with the data used in the empirical analysis. Both total trade and trade in manufactures are considered. A brief overview of the CEPT follows. The CEPT is the backbone of AFTA. It is the main mechanism through which ASEAN will achieve its goal of free trade within the region by the year 2005. We also consider some of the more ambitious and wide-ranging reforms being mooted as part of a program commonly referred to as "AFTA-Plus".

The Pattern of Intra-ASEAN Trade: An Overview Tables 2.1, 2.2 and 2.3 present information on the share of intraABEAN imports, exports and total trade (imports plus exports) in total multilateral imports, exports and total trade, respectively, for each of the five ASEAN countries (and as a group) for the years 1981, 1986 and 1991. It is clear from all three tables that the share of intra-ASEAN trade in total multilateral trade is low. The share of intra-ASEAN imports in total imports in 1991 was 17.5 per cent, while the share of exports was just under 20 per cent. There is, however, a mild increase in the share of intra-ASEAN trade between 1981 and 1991. The countries with the highest share of intra-ASEAN trade are Singapore and Malaysia. For instance, Malaysia's intraABEAN imports increased from 18 to 21 per cent between 1981 and 1991, while its exports increased from 26.5 to 29 per cent over this period. Indonesia and the Philippines have very low shares of intra-ASEAN trade. The Philippines' share of intraABEAN imports in 1991 was 9 per cent, while its share of exports was only 7 per cent. 1 There are a number of factors which could account for the

TABLE 2.1 Intra-ASEAN Imports as a Share of Total Multilateral Imports, 1981, 1986 and 1991

Destination/Source

Year Singapore Thailand

Singapore

1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991

Thailand

Malaysia

Indonesia

Philippines

ASEAN

na na na 6.99 6.55 7.95 13.10 15.06 16.57 9.37 9.04 6.56 1.35 2.35 :3.72 5.08 5.40 6.14

Note: na = not applicable. Source: COMTHADE database, United Nations.

1.12 2.89 3.18 na na na 3.42 3.96 2.59 1.10 0.67 1.07 0.:3:3 0.55 0.79 1.47 2.06 1.91

Malaysia Indonesia Phihppines A SEAN WORLD 11.86 13.33 15.28 2.10 4.20 :3.17 na na na 0.45 0.41 1.57 2.15 3.99 3.16 5.34 6.57 6.85

8.41 4.86 :3.64 0.60 0.67 2.49 0.60 0.46 1.47 na na na 2.74 2.55 1.39 3.79 2.42 2.28

0.~39

0.72 0.47 0.20 0.77 0.26 0.8:3 1.15 0.48 1.91 0.26 0.31 na na na 0.67 0.66 0.37

22.31 21.79 22.56 10.48 12.19 1:3.81 17.95 20.64 21.11 12.82 10.44 9.52 6.57 9.44 9.05 16.30 17.11 17.55

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

TABLE 2.2 Intra-ASEAN Exports as a Share of Total Multilateral Exports, 1981, 1986 and 1991

Destination/Source

Year S'ingapore Thailand

Singapore

1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991

Mala.11sia

Jndones1:a Philippines ASEAN WORLD --------

Thailand

Malaysia

Indonesia

Philippines

ASEAN

na na na 7.83 8.87 8.22 22.80 17.20 23.35 10.42 7.71 8.16 2.28 3.22 2.62 8.40 6.89 8.12

Note: na = not applicable. Source: COMTRADE database, United Nations.

4.21 :3.65 6.28 na na na 1.67 2.62 3.20 0.17 0.52 0.90 0.45 1.40 2.52 1.69 2.02 :3.31

15.59 14.79 14.91 4.55 4.30 2.41 na na na 0.21 0.51 1.16 1.84 2.o:3 1.41 5.5.3 5.89 6.21

5.93 4.31 2.88 1.92 0.65 0.22 0.49 0.39 1.46 na na na 2.72 0.58 0.48 2 ..35 1.68 1.44

1.31 1.10 1.15 0.29 0.33 0.37 1.58 1.80 0.88 1.97 0.67 0.57 na na na 1.36 0.96 0.78

27.04 2:3.85 25.22 14.60 14.14 11.22 26.53 22.02 28.89 12.77 9.41 10.79 7.29 7.24 7.02 19.-32 17.44 19.86

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

TABLE 2.3 Intra-ASEAN Total Trade as a Share of Total Multilateral Trade, 1981, 1986 and 1991

Destination/Source

Year Singapore Thailand

Singapore

1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991

Thailand

Malaysia

Indonesia

Philippines

ASEAN

na na na 7.34 7.69 8.07 17.99 16.26 19.96 10.03 8.24 7.41 1.72 2.76 3.27 6.68 6.17 7.08

Note: na = not applicable. Source: COMTRADE database, United Nations.

2.79 3.25 4.64 na na na 2.53 :3.21 2.89 0.52 0.58 0.98 0.38 0.95 1.49 1.58 2.04 2.57

Malaysia Indonesia Philippines AS£'AN WORLD 13.47 14.01 15.10 3.46 4.25 2.84 na na na 0.30 0.49 1.35 2.03 3.07 2.44 5.43 6.22 6.55

7.34 4.60 3.28 1.15 0.66 1.52 0.54 0.42 1.47 na na na 2.73 1.63 1.02 3.08 2.04 1.88

0.78 0.90 0.79 0.24 0.55 0.31 1.21 1.51 0.68 1.95 0.51 0.45 na na na 1.01 0.81 0.57

24.39 22.76 23.81 12.18 13.15 12.73 22.28 21.41 24.99 12.79 9.82 10.20 6.86 8.41 8.23 17.77 17.28 18.65

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

ASEA1V Tmclc unri tile CEPT. An Oi'CrTicu

17

relatively low share of intra-ASEAN trade. The ASEAN countries have relatively similar endowments of factors and resources. As a result of this, they produce relatively similar goods, both in agriculture and manufacturing. That is, the ASEAN economies are more competitive than complementary with respect to their trading patterns. This has certainly been the historical picture, and its remnants are present today. But the process of change is gathering pace. There is a trend towards increasing complementarity within ASEAN. The rapid industrialization in the region over the recent past has been the driving force behind the increase in the complementarity in trade (Naya and Imada 1992). 2 This is reflected in the increase in the importance of manufactures in intra-ASEAN trade. Most of the trade among ASEAN countries is in manufactures. Tables 2.4, 2.5 and 2.6 contain information on the share of manufactures in intra-ASEAN trade for the years 1981, 1986 and 1991. Table 2.4 looks at imports, while Tables 2.5 and 2.6 consider exports and total trade (i.e. imports plus exports), respectively. Starting with Table 2.4, we find that the share of manufactured imports in intra-ASEAN trade increased from 20 to 58 per cent between 1981 and 1991. The increase over this period in the share of manufactured exports in intra-ASEAN exports is equally dramatic, rising from 17 per cent in 1981 to 56.5 per cent in 1991. In 1991, the share of manufactured exports to ASEAN was higher than the share going to markets external to the region for all countries except Singapore. The importance of manufactured exports in intra-ASEAN exports is further highlighted by the fact that all countries have a share of close to 50 per cent or above in 1991. Thailand has a share close to 75 per cent, the Philippines 70 per cent, and Malaysia higher than 60 per cent. The dramatic change in the composition of intra-ASEAN exports over the period is evinced by the fact that the share of manufactures was 25 per cent or lower for all countries in 1981. Singapore's lower share is a result of two factors: (i) the netting out of re-exports, which is important in intra-ASEAN manufactures trade, and (ii) the important role played by petroleum products in intra-ASEAN trade (see Bista 1991). The fact that

TABLE 2.4 Intra-ASEAN Imports of Manufactures as a Share of Total Intra-ASEAN Imports, 1981, 1986, 1991. Destinal./i)ource

Year Singapore

Singapore

1981 1986

na

40.4:3

14.42

9.22

58.50

15.22

56.32

47.13

na

58.4:3

27.90

29.49

67.40

33.61

69.45

61.64

1991

na 40.99

82.34

55.64 8.71 15.89

54.91 4.23

68.14 44.53

59.55 :30.66

75.:35 50.80

71.78 48.69

48.67 6.:39 17.63 61.90 41.71 na na

5.64 78.35 74.77 89.50 77.12

61.17 69.59 65.46 74.89 84.33

59.22 66.85 58.:30 69.94 80.:39

1.61 57.80

45.22 49.86 25.57 50.90 65.66 18.12 46.46

65.18 70.18

59.15 67.70

Thailand

1981 1986 1991 1981 1986 1991

66.60 67.92 26.45 52.61 69.91

Indonesia

1981 1986

Philippines

Malaysia

ASEAN

Thailand Malaysia

na na

Philippines ASEAN EX-ASEAN WORLD

21.17 46.44

na 11.62 27.2:3 49.99 14.22 41.29

34.01 47.98

1991

44.60

4:3.28

54.09

na

59.50

46.51

72.54

70.06

1981 1986

122.88

11.44 18.72

1.98 :3.49

na

27.79

41.62

40.71

1.99

8.82 :3:3.09

41.00 65.57 56.72 66.47

40.03 64.09

1T72 25.71

na na :30.96 62.81

:30.69 49.21

30.53 54.56

66.08 25.05 45.96

3.:38 26.10 41.17

50.65 61.90

66.23

70.10

51.12

41.:37

85.56

74.51

71.60

1991 1981 1986 1991

84.63 88.74

NotP na = not applica!Jk. SottrcP COI\ITRADE database. United Nations.

28.27 na na na

Indonesia

19.51 39.73 57.9:3

TABLE 2.5 Intra-ASEAN Exports of Manufactures as a Share of Total Intra-ASEAN Exports, 1981, 1986, 1991 Destinat./.Suun:e

Year

Singapore

Thailand

Malaysia

Indonesia

Singapore

1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986

na na na 34.72 54.72 74.27 17.57 40.10 70.27 9.22 29.49 54.91 47.95 79.65 88.72 16.51 41.08 ()8.46

32.28 48.75 54.80 na na na 11.94 16.94 :30.65 6.79 48.67 22.42 35.20 5.98 78.35 28.02 :37.98

12.24 25.78 45.28 14.:35 :30.64 65.19 na na na 25.89 61.90 61.72 2.74 2.72 4.59 12.38 26.44

21.17 46.44 44.60 15.35 51.53 43.28 35.18 44.42 4:3.77 na na na 2.65 58.01 115.01 19.39 46.90

51.81 45.18 64.18 16.00 19.30 6:3.19 18.82 25.26 :39.42 1.79 :33.20

19.23 :33.92

43.60 na na na 20.46 :34.16

49.14

46.71

49.69

:')5.41

Thailand

Malaysia

Indonesia

Philippines

ASEAN

1991

Not: na = not applicable. Source: COMTRADE database, Unitc•d Natiom.

Philippines ASEAN EX-ASEAN WORLD

52.32 18.87 42.05 69.93 16.95 35.95

50.13 65.30 79.22 24.25 41.65 63.53 20.14 36.79 58.40 2.16 14.27 37.40 2:3.36 28.81 69.75 22.91 39.77

41.78 :57.82 71.46 24.43 42.:3:3 64.73 19.47 :36.66 59.90 2.95 15.99 39.01 23.03 29.77 69.76 21.76 :39.10

56.56

62.98

61.70

48.44 25.44 46.44 74.25 17.62 :36.20 63.60 8.:32 :32.57

TABLE 2.6 Intra-ASEAN Trade in Manufactures as a Share of Total Intra-ASEAN Trade, 1981, 1986, 1991 Destinat./Sourc:e

Year Singapore

Singapore

1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 1986 1991 1981 198()

Thailand

Malaysia

Indonesia

Philippines

ASEAN

HJ91

na na na 38.22 59.87 70.71 20.77 45.20 70.12 13.39 36.93 50.65 83.09 81.90 88.7:3 21.92 46.78 67.45

Note: na =not applicable. Source: COMTRADE database. UnitRd Nations.

Thailand

Mala:z;sia

Indonesia

:35.12 53.3:3 64.78 na na na 11.72 22.53 39.32 12.72 45.25 33.06 22.63 9.92 74.52 26.60 41.87 57.:30

13.33 26.85 50.83 11.78 2:3.23 41.74 na na na :30.44

13.39 36.93 50.65 11.96 49.84 14.83 25.65 54.96 42.74 na na na

53.69 54.65 65.4:3 30.16 9.61 73.47 37.87 46.85 52.77 1.73 :38.26 48.77

3.09 :31.48 55.25 12.76 :38.98 44.40

na na na 24.04 45.:39 65.76

56.63 57.57 2.26 3.25 2.59 13.03 26.07 49.13

Philippines ASEAN EX-ASEAN WORLD 17.14 :3:3.76 54.01 28.07 45.87 59.12 20.79 42.44 64.47 11.99 38.48 49.79 24.00 35.28 56.41 18.15 37.76 57.24

53.74 67.5:3 77.14 40.11 51.68 66.94 43.84 53.73 72.04 25.69 36.48 5:3.9:3 34.34 35.21 67.29 40.51 52.69 69.11

44.82 59.85 71.63 38.65 50.92 65.94 38.70 51.32 70.15 2:3.94 36.68 53.51 :3:3.6:3 35.21 66.39 36.53 50.11 66.90

ASE'AN Trucie anci the CEPT: An Ureruiew

21

both these factors have been decreasing in importance in Singapore's trade, however, is reflected by the rise in the share of manufactures from less than 20 per cent in 1981 to close to 50 per cent in 1991. Singapore's important role in intra-ASEAN trade is reflected in the share of manufactures in intra-ASEAN exports. Despite this share increasing from 17 per cent in 1981 to above 55 per cent in 1991, it is generally lower than the individual shares of the other four ASEAN countries.

The CEPT: An Overview The main mechanism for the actualization of AFTA is the CEPT scheme. It is through this scheme that ASEAN will move towards the goal of free trade within the region by the year 2005. The design of the CEPT scheme is basically sectoral, and thus provides a more comprehensive product coverage than previous attempts at liberalization that have employed the item-by-item approach (Ariff 1994a, p. 15). The CEPT Products List released by the ASEAN Secretariat in November 1993 covers about 41,000 tariff lines, which account for about 88 per cent of the tariff lines in ASEAN. It is also worth noting that the CEPT, once successfully implemented, will equalize tariff rates across ASEAN countries. This also reflects the strictly preferential nature of the tariff reductions, since AFTA does not deal with any aspect of multilateral tariff reform in member countries. There are two main tariff reduction programmes under the CEPT scheme: Fast Track and Normal Track. The Fast Track will apply in the first instance to the fifteen product groups agreed to at the Fourth ASEAN Summit for accelerated tariff reductions. These fifteen product categories are listed in Table 2. 7, and together accounted for roughly US$9.3 billion from 37 per cent of intra-ASEAN trade in 1990 (Kumar 1992). For CEPT products with tariff rates of 20 per cent or below, the Fast Track programme will reduce them to 0-5 per cent by 1 January 2000 (seven years from the decision to establish the AFTA). Tariffs on CEPT products that were above 20 per cent in 1993 will be reduced to 0-5 per cent by 1 January 2003. Tariffs on products

TABLE 2.7 Intra-ASEAN CEPT Exports, 1990 (In US$ millions) Indonesia

Malaysia

Philippines

Singapore

Thailand

TOTAL

-----

Pulp Textiles Vegetable Oils Chemicals Pharmaceuticals Fertilisers Plastics Leather Rubber Cement Glass, Ceramics Gems, Jewellery Electronics Furniture Source: Kumar (1992).

12.3 396.4 17.7 31.1 4.2 94.2 37.1 2.1 11.5 35.6 20.5 15.5 39.0 11.1

2.7 2008.4 359.9 61.7 20.5 38.4 43.5 3.1 34.1 41.6 44.4 0.2 2872.0 53.1

0.0 4.6 7.4 37.2 4.6 49.7 2.5 0.2 2.2 0.0 5.0 0.4 149.8 0.9

8.2 95.2 30.9 197.8 20.5 9.8 349.6 2.8 20.8 12.8 19.2 9.2 878.9 1.5

0.9 59.4 1.7 27.3 8.6 2.7 25.3 7.4 25.6 0.7 13.3 10.9 874.1 7.8

24.1 2564.0 417.5 355.2 58.3 194.9 458.0 15.7 94.3 90.7 102.4 36.2 4814.3 74.5

ASEAN Tmde and the CEPT: An Oc·en•iew

28

that are not included in the CEPT scheme will be dealt with under the Normal Track programme. For products with tariff rates of 20 per cent or below, the Normal Track programme will reduce them to 0-5 per cent by 1 January 2003. Tariffs on nonCEPT products that are above 20 per cent will be reduced in two stages: first, to 20 per cent within 5 to 8 years (i.e. between 1998 and 2001) and, subsequently to 0-5 per cent in 5 years according to an agreed schedule ending 31 December 2005. The granting of tariffs and other preferences is governed by specific "rules of origin" aimed at preventing third country exporters from using a lower-tariff country as a back-door through which to enter the high tariff country. This discourages the deflection of third-country trade from high-tariff to low-tariff member countries (Athukorala and Menon 1995b). These tariff reduction programmes also include provisions for the removal of quantitative restrictions such as prohibitions, quotas and restrictive licensing, once the CEPT concessions for the product sets in, and the elimination of other non-tariff barriers (NTBs) gradually within five years from commencement of CEPT concessions (Lee 1994). Furthermore, "AFTA-plus" has been mooted to increase trade and regional integration. The measures contained within AFTAplus include the harmonization of standards, reciprocal recognition of tests and certification of products, harmonization of customs procedures, removal of barriers to foreign investment, macroeconomic consultations, rules of fair competition and promotion of venture capital. It is also expected that AFTAplus will deal with issues such as trade-related investment policies (TRIMs) and trade-related intellectual property rights (TRIPs), as well as the protection of copyrights, patents, and trade marks (Naya and Imada 1992). The Framework Agreement on Enhancing ASEAN Economic Cooperation concluded at the Fourth ASEAN Summit contains provision to increase cooperation in banking, finance, transport and communications. It is clear from the discussion above that AFT A is an ambitious project. Given ASEAN's previous lacklustre performance in the arena of regional trade liberalization, is it perhaps too ambitious? How likely is AFTA to be implemented

24

Ac~just?>ng

towards AFTA

in its originally proposed form? As mentioned in the Introduction, it would appear that the major threat to the successful realization of AFTA is coming from concerns expressed by individual industries with respect to adjustment pressures associated with trade liberalization. This is a formidable problem, and it is the object of this analysis to assess these concerns in the light of evolving patterns of net and intraindustry trade in ASEAN. Apart from this problem, however, there are a number of other recent developments in ASEAN that suggest grounds for optimism with regard to the AFTA's prospects. First of all, it is pertinent to note that AFTA has had a more promising start than previous ASEAN initiatives; it has been launched in an overall economic and political environment conducive to regional co-operation. Second, there is the strong political will in the wake of growing economic regionalism worldwide and in the face of the structural transformation in the ASEAN economies. In this respect, some critics have even alleged that AFTA would serve primarily as a means to hedge against 'regional' efforts elsewhere in the world, or as a safety net in case the multilateral trading system temporarily falters (OECD 1993, p. 64). Even if this is true, it nevertheless provides the requisite motivation for a group of countries (limited in their bargaining power as individuals) to stick together to increase their collective bargaining position. Third, the raison d'etre for the formation of AFTA has sprung from the recent closer economic tie-ups among the member countries, in particular, strengthening trade-FDI links within the region. Fourth, tariffs in ASEAN countries are relatively low by developing country standards, and further tariff cuts and removal of non-tariff barriers on a unilateral basis has become an integral part of the market-oriented policy stance of all member countries. Fifth, as a result of economic integration and the formation of intraregional company networks, most of the existing non-tariff barriers have become less binding (porous) and therefore their removal is unlikely to generate strong opposition. Finally, the commitment to realizing AFTA is evinced by the recent move to bring forward the deadline for the completion tariff reduction

AS'EAN Trade awi tile CEPT. An Oi'CITieu

25

on intra-ASEAN trade from the year 2008 to 2005. On the basis of these points, commentators such as Mohamed Ariff (1994b) have voiced their optimism with respect to AFTA's prospects.

Notes 1. The low share of intra-ASEAN trade could be partly due to the fact

that official trade statistics understate the actual level of intraASEAN trade. Apparently, it is an open secret that the illegal trade traffic between Singapore and neighbouring islands is heavy (Ariff 1991, p. 164). There are well organized bases for smuggling in Sumatra (Indonesia) and Mindanao (the Philippines). The strongest illegal trade links are between Mindanao and Sabah, between Cebu and Singapore, between Peninsular Malaysia and Southern Thailand, and between Singapore and Java (Ariff 1994a, p. 28). 2. In a recent analysis, Petri (1994) finds that trade in ASEAN countries is already more regionally concentrated than would be the case under randomly distributed trade patterns.

3 Method and Data

Method and Data

2,9

This chapter presents the methodology used in this study, and discusses issues relating to data. Formulas for decomposing the growth in total trade into the contributions of growth in net and intra-industry trade are presented. These contribution measures enable us to provide answers to questions such as, "How much of the growth in trade was a result of intra-industry trade, as opposed to net trade?". With these contribution measures, problems associated with using movements in the value of the Grubel-Lloyd index to infer the importance of intraindustry trade over time are avoided. This section also shows how using movements in the value of the Grubel-Lloyd index can lead to error. Formulas for decomposing the growth in total, net and intra-industry trade into the contributions of import and export growth are presented. These decompositions help us understand the factors underlying changes in the importance of net and intra-industry trade over time. The final section considers the data used in this study. Perhaps the most controversial issue in the measurement of intra-industry trade relates to the definition of "industry" employed in compiling the data base. Indeed, sceptics of the intra-industry trade phenomenon have argued that almost all measured intra-industry trade is a statistical artefact brought about by trade data having been grouped in heterogeneous categories. In light of this, a detailed analysis of the data and justification of the level of disaggregation chosen to carry out the computations is provided. The issue boils down to one about the motivation behind analysing intra-industry trade.

Decomposition of Total Trade: Contributions of Net Trade and Intra-industry Trade We begin by presenting some basic identities. Total trade (TT) for commodity i in any year is the sum of net trade (NT) and intra-industry trade (IIT): TT.l

(1)

Adjusting towards AFTL1

80

where and

TT.I NT.I liT.I

(2) (3)

xi+ Mi' IX.-M.I ' - I Xi - Mi I (Xi' + M) 2 . { minimum (Xi, M) }

(4)

Xi and Mi are exports and imports of commodity i valued in base period free on board (f.o.b.) prices. The percentage growth in variables over a period of time is denoted in lower-case letters (eg. tt. = ((I::.TT.I TT.). 100)). The percentage growth in total trade of commodity i (tt) over any period is given by: l

tt. Cnt. Ciit.' GL. I

where

I

I

l

I

(5) (6) (7) (8)

Cnti + Ciiti, (1- GL) nti, GLi iiti, liT./ TT.I

'

and nti and iiti are the percentage changes over the period in NT.I and liTI.. Note that

GLi

1-{IXi-Mii/(Xi+M)),

which is the Grubel-Lloyd index of intra-industry trade at the beginning of the period. In the study of ASEAN trade reported in Chapter 4, growth rates in net trade are largely uncorrelated with growth rates in intra-industry trade. 1 Under the assumption that nt. is determined independently of iit ., Cnt. is the contribution' to ' net 'trade, while Ciiti is the growth in total trade of growth in contribution of growth in intra-industry trade. With these contributions measures, we are able to provide explicit answers to questions such as, "How much of the growth in trade was a result of intra-industry trade (or net trade)?", or "If not for the contribution of intra-industry trade (or net trade), what would have trade grown by?". A common practice is to use movements over a period in Grubel-Lloyd indices as indicators of the importance of growth in intra-industry trade. Examples in the ASEAN context include Imada (1990), Ariff (1991), Kwan (1994) and Ramasamy (1995). GL. will increase over a period whenever iit. > nt .. However, '

l

'

Method anrl Data

81

even under this condition, growth in iit; may make a relatively minor contribution to growth in total trade of product i. Consequently, in this study we prefer to use our contribution measures (Cnt. and Ciit.). These take account not only of growth rates in intra-industry and net trade, but also of their shares in total trade. More formally: l

iit. but if GL. and nt. + iit. then Ciit. Similarly, nt; but if GL. and nt. + iit. then Cnt. l

l

l

l

l

l

l

l

l

l

> < > < > > >


iit.

:s;

l

l

X.l

0, Mi' 0 0.

These equations imply that during periods of negative growth in trade, the Grubel-Lloyd index will increase as long as the percentage decrease in net trade is greater than the percentage decrease in intra-industry trade. We can see from the equations above that this includes the case where there is no change in intraindustry trade (i.e. iiti = 0). With our contribution measures, however, reductions in net trade and/or intra-industry trade make (or are measured as) independent negative contributions to the growth in trade (see Menon 1995b). Examples include Petri (1991) and Park and Park (1991). The assumption of independent determination of mi and xi is supported by the fact that the correlation coefficients for all types of trade flows relating to our ASEAN countries range between -0.30 and 0.45 for both periods. The detailed results are available from the author on request. This is commonly referred to in the literature as "categorical aggregation". See Appendix B for a discussion on how categorical aggregation can affect the measurement of intra-industry trade. Disaggregation at the 3-digit level of the SITC is standard in studies on intra-industry trade (see Greenaway and Milner 1983; Greenaway and Tharakan 1986). The fact that we find a very low number of status-switches at this level of disaggregation might be further evidence of the appropriateness of using 3-digit SITC industries to analyse intra-industry trade from the point of view of our resource-

40

Adjusting towards AFTA

movement criterion. Menon and Dixon (1994) show that statusswitches may be indicative of opposite-signed imbalances at a lower level of disaggregation. A 3-digit industry has opposite-signed imbalances at the 4-digit level if it has at least one 4-digit component with imports exceeding exports and at least one 4-digit component with exports exceeding imports. Opposite-signed imbalances may be evidence of significant heterogeneity within the 3-digit industry (see Greenaway and Milner 1983), casting doubt on the assumption that intra-industry resource movements are relatively costless. See Appendix B for a discussion of categorical aggregation an its effect on the measurement of intra-industry trade.

4 Results

Res11lts

4

,,

,)

This chapter presents the results of the analysis. These results are contained in Tables 4.1 to 4.5. These tables contain all the contributions measures for each of the ASEAN countries covering the periods 1981 to 1986 and 1986 to 1991. A summary table containing only the contributions of intra-industry trade and net trade to the growth in total trade for intra and extra ASEAN trade is presented as Table 4.6. The results for each country are discussed. For each country, bilateral trade with other countries in the region, intra-regional trade, extra-regional trade and multilateral trade is considered. Since interest lies mainly with intra-regional trade, results for industries are also reported, grouped according to their import-export status (i.e. net import or net export industries), and at the 1-digit level of the SITC. By considering net import and net export industries separately, we are able to better understand the contributions of imports and exports to the growth in intra-industry trade and net trade (see Table 3.1). The SITC 1-digit groupings, on the other hand, should provide useful information regarding the performance in broad sectors. The tables also contain GrubelLloyd indexes for 1981, 1986 and 1991. This is to facilitate the analysis of the reliability of using movements in the GrubelLloyd index over time to infer contributions. A broad overview of the results is presented, and the factors that may be responsible for these findings are considered.

Singapore 1981 to 1986 (?:)

Intra-ASEAN trade

From Table 4.1, we find that Singapore's intra-ASEAN trade grew by 82.10 per cent between 1981 and 1986. The contribution of intra-industry trade growth to the growth in total trade is 60.09 per cent, while the remaining 22.01 per cent is a result of growth in net trade. In other words, Singapore's intra-ASEAN

TABLE 4.1 Singapore: Contribution Measures and Grubel-Lloyd Indexes, 1981 to 1986 and 1986 to 1991 HJ81 to 198G

tt(j)

Clll(j)

Ciit(j)

-----

lntra-ASEAN \let Import lnrlustries l\et Export Industries Chemicals (SITC i)) ~latcrials (SITC 6) Madtinery (SITC 7) ~liscdlaneous (SITC 8) Thailand ~Ialaysia

Indonesia Philippines Extra-ASEA!'; Total Multilateral

82.111 4R.il8 !Ol.'iG 12ll2 89.14 79.18 Fi5.94 74.-±fi 1U7.2fi 70.92 1:3.61 27 :)7 :12 01

2201 9.26 '11.98 97.11 25.7fi -2.9il 87.57 -±2.21 2:3.2/ 77.02 17.60 6.10 ::,:]i)

GL(J),l,

GL(J),s"'

Cmtt(j)

------

fill OD :JtU2

tiD HI 24.111 n:38 82 16 G8:38 :32.25 8:3 fl8 -(ill -Jml 21.27 26.69

Cxtt(])

nt(j)

II(/)

Cnt(j)

Ci?t(jj

G2.GO 64.94 47.:35 27.10 4Ul6 lf.II:J 48.:)] 42.fiD 70 02 14!35 28.28 G7.34 72.50

4fi.Oil 27.42 :l-±.79 21.80 40.G7 42.40 127.81 f10.27 54.77 31.74 29.87 9.55 12.55

:36.10 18.16 ti6.77 99 :]1 -1.53 :J7.:J8 28.1:3 24.18 52.48 :1917 -Hi.27 17.82 19.52

:19.:l8 23.97 52.99 153.84 5G.22 -26fi4 17/.G:l 4Un D1.48 159.07 4.80 Ull 2.88

2.69 71.00 -57.64 42.fi0 -35.88 200.05 28.38 40.45 62.20 26.22 9.56 15.83

GL(j)rkh-,

GL(f),,, 11

Cmtt(j)

Crtt(j)

nt(j)

Cmnt(j)

:J;J7 02 129.G2

Net Import Industries Net Export Industries Chemicals (SITC 5) '.latcrials (SITC G) '.!achinery (SITC 7) Miscellaneous (SITC 8)

3G2.1 4 290.GG HiU.ti9 261.79 3D8.27 :iGG.96 :3:)3.25 4:32.58 1'iG.l6 172.:38 195 Ofl 212.4:3

Thailand \!alaysia Indonesia Philippines Extra-.-\SEAN Total Multilateral

129.25 12154 il9.8f, ):3:) 7:) 122.54 214.71 9!)8;3 174.8:3 118.70 109.12 72.77 fl7.77

207.40 2:J:J.4D 169.12 70.il4 12[)(14 27:).7:3 141.24 25:3.42 267.76 :)(i.-±7 (j:327 122.:33 154.66

:36.fi9 -47.02 110.6:3 160.R9 12.6:3 9.24 -22.42 12.65 5Url 96.87 -21.92 -7.65 -12.95

-0./G

----

-----

Intra-ASEAN

C.mt(J)

62.60 G4.fl4 4U5 27.10 41.86 79.7:3 48.:ll 42.59 70 02 14.:)5 28.28 67.:34 72.50

61.78 G4.49 GG.41 :37.57 46.41 71:)4 41G7 GG.31 61.55 19.92 33.61 G4.27 72.71

iii(J)

----

53.90 6!:3/l :39.ti4 35.92 4-±86 60.51 55.26 42 06 61.14 :]11.64 :36.n 64.fl0 li9 06

------

1986 to JD'l1

Cmnt(j)

----

96.26 Sfl.18 175£)0 61.82 82.42 115.77 91.42 21.09 9UJ1 8fU5 -21.fill 17.87 22.58

Ctmlt(j)

C:ri it(j)

----

5G.9-1

11.00 175.50 flil.04 :311:38 64.9ii 16.05 2158 :39.72 85.111 -0.88 :lilD 5.G:l

411 :j2 fi!Jl8 0.00 :j_/8 2.04 50.81 75:37 -04fl 51.29 4.:34 20.7:3 119il 16.95

----

C.rnt(j)

iit(J)

Cmiit(J)

C.ziit(J)

104:34

254.51 35[) 55 0.00 18.72 177.87 290.26 198 01 322.98 211.26 4:].74 155.20 14Ull 15R.57

-----

190./2 245.99 84.56 G4.65 17:l27 217.95 255.21 156.99 269.46 117.47 35.38 100.48 110.90

146.:)() 116.74 206.10 I 06 04 88;)1 180.32 10074 196.26 173.12 37.69 ]:37 110 94.61 101.5:3

305:34 :]05.49 :368 (i5 701.62 280.85 -160.61 110.:30 -22.lH:i 226.43 198.94 ;,:)9 71 71101 413.92 417.52 1.5506 72.34 580.28 447.57 142 01 108.63 172.82 2ii.18 218.77 19G.61 204.24 22fJ:36

-0.15 -:B2.98 :391.46 nz.:36 27.49 -17!:31 -3.60 il2.72 1:32.70 33.:18 147.63 22.16 -25.12

35il.85 :359.55 :357.16 256.70 30807 :380.69 277.03 5:33.93 378.80 178.43 256.83 200.18 214.21

Note: The aggregatwn formulas are presented in Appendix C. Note that the Grubd-Llnyd (GL) indexes are reported as percentages.

0.00

857J[i 237.98 Ll0.19 90.4:] 79.02 2HHl5 167.55 1:34.69 101.63 5il.27 58.64

TABLE 4.2 Thailand: Contribution Measures and Grubel-Lloyd Indexes, 1981 to 1986 and 1986 to 1991 1981 to 1986

tt(J)

Cnt(J)

Ciii(J)

GL(j) 1"

1

nt(j)

Cmnt(J)

Cxnt(J)

i?t(J)

Cmiit(J)

GL(J) 1"' 1 Cmii(J)

Cxtt(J)

1ntra-ASF:AN Net Import Industries Net Export In dust rics Chemicals (SITC 5) Materials (SITC 6) Machinery (SITC 7) Miscellaneous (SITC 8) Singapore -'v!alaysia lndonesict Philippines F:xtra-ASEAN Total Multilateral 1986 to 1991 Jntra-ASEAN Net Import Industries Net Export Industries Chemicals (SITC 5) Materials (SITC 6) :.1.achinery (SlTC 7) Miscellaneous (SITC 8) Singapore Malaysia Indonesia Philippines Extra-ASEAN Total Multilateral

8/.:33 ~39.51 45.84 18.75 60.61 40.32 127.45 76.95 64.14 12.01 76.88 32.:30 171.22 111.23 74.4:) 42.21 156.86 75.07 201:3:3 178.16 -21.16 -14:36 37.0:3 12:35 39.9ti 12.85

47.8:1 27 09 20.:10 50.50 52.1:3 44.58 59.99 32.25 81.79 z:u7 -6.80 24.68 27.11

Cnt(j)

Ciit(j)

GL(j) 1"" 1

:356.44 87.97 4:31.87 157.43 274.41 :31.82 227.8:3 106.69 241.27 115.00 447.51 78.56 2117);3 72.11 35:3.25 99.83 Tl9.64 152.07 156.91 100.72 2:397.81 2009 06 :358.03 22:3.27 ;373.82 211.91

268.47 274.44 242.5il 12114 126.27 :368 94 1%02 25342 187.57 56.19 :388.74 1:34.76 161.91

51:16 40.00 55.04 37.19 59.20 55.91 :3315 42.59 51.70 11.75 17.37 35.95 37.80

tt(j)

48.38 :J0./0 63.60 34.08 45.03 fi4:31 29.90 42.06 51.00 "12.24 211.49 24.58 25.80

:32.00 :32.29 10.15 93.39 :]288 19.62 34.90 24.18 54.48 1()2.79 -40.48 6 99 8.92

55.34 l:l54 50.47 34.06 31.26 57.26 rl6.32 50.27 102.38 38.G4 HJ:32 30.04 3105

59.54 27.05 110.76 137.02 25 60 31.76 164.48 41.03 5:u-;o 86.50 -14.78 18.72 19.19

17.69 46.59 -27.88 161.36 2.10 -6.0:3 -25.70 12.65 9.10 33.16 -:39.50 -0.76 0.71

41.85 -19.G5 r38.64 -24.34 2:3.49 37.79 190.19 28.38 44.39 53.33 24.72 19.49 18.4il

48.00 88.24 :JUJl 14l.:l5 :J2.fil 31.57 199.25 21.09 75.83 35.66 -15.85 99.:38 lll760

22.80 () 00 :31.91 2.88 17.41 16.48 1/9.71 -0.49 78.19 9.64 -11.75 3:3.66 36.28

25.20 88.24 () 00 138.47 15.10 15 09 19.54 2U">8 -2.36 26.02 -4.10 65.72 7U:J

GL(J) 1" 11 Cmtt(j)

Grlt(J)

nt(j)

Cmnt(j)

C:rnt(j)

i/t(j)

Cmiit(j)

C:riit(j)

Gl.36 40.00 55.04 :)719 59.20 6G.91 :3:3.15 42.59 51.70 11.75 17.37 :35.95 :l7.il0

70.07 59.12 79.49 48.30 54.:35 77.50 54.75 65.31 fi4.42 26.45 16.26 :37.27 42.15

192.45 294.65 121.29 150.99 155.16 227.63 112.16 196.26 154.72 27.75 176:3.82 208.49 214.39

C:nit(J) ---

· - - - ·

163.99 1:37.22 153.11 76.85 86.11 219.87 94.97 156.99 184.92 129.16 6:33.99 14954 159.42

150.36 46.19 262.41 491.12 70.79 -269.80 17:383 210.12 166.29 127 ()f) 152.:37 -:lfl.81 102.16 87.46 155 06 82.72 274.89 -77.92 111.56 -49.77 3630.56 3022.10 336.85 257 03 :322.70 259.80

104.17 509.1:3 :317.80 -228.71 686.0:3 0.00 :l40.59 440.71 440.71 -:36.30 364.:18 77.24 39.20 312.84 142.59 192.18 580.44 403.58 14.70 :387.92 150.78 72;34 5:33.93 :l22.98 :352.81 324.84 :31216 161:3:3 621.34 fi34.42 608.46 4442.16 1717.84 60.88 79.82 286.38 62.90 :3:3527 62.09

Note: The aggregation formulas are presented in Appendix C. Note that the Grube!-Lloyd (GL) indexes are reported as percentages.

191:33 686 03 0.00 2il7 14 170.25 176.85 2:37.14 210.\!5 12.68 86.92 2724.:)3 225.50 273.18

TABLE 4.3 Malaysia: Contrib ution Measure s and Grubel-Lloycl Indexes , 1981 to 1986 and 1986 to 1991 1~811o

19Rfi

tt(j)

Cnt(j)

Ciit(j)

106.40

39.44

Net Import Industries Net Export Industries Chemicals (SITC 5) Materials (SITC 6) Machinery (SITC 7) Miscellaneous (SITC 8)

93.88 85.02 134.67 15.23 144.23 89.21

Singaporp Thailand Indonesia Philippines

GL(f),"'

GL(j) 1ec,

66.96

71.56

67.11

56.24

97.54

47.86 24.05 72.31 -2.95 54.85 24.27

46.03 60.98 62.36 18.18 89.39 64.94

73.10 57.90 70.87 46.79 83.70 63.87

63.82 64.05 56.77 56.38 70.87 68.08

70.87 30.49 103.68 2.86 76.16 27.00

23.01 177.89 54.54 57.12 30.99 232.26 12.36 14.96 68.07 246.57 62.21 27.43

107.26 23.27 156.86 75.07 129.47 121.60 63.21 85.78

83.98 81.79 7.87 -22.57

61.14 51.00 16.49 28.54

70.02 51.70 10.61 3.66

52.48 !02.38 118.47 37.55

54.77 54.48 11.00 25.66

91.48 53.50 96.59 88.00

1.05 -1.15

29.92 40.88

34.10 40.:17

48.88 58.15

2.89 9.26

28.09 30.47

1.72 -0.88

Cnl(j)

Ciit(J)

(;LUJ,., 1 , C111tt(j)

Cxtt(J)

Intra-ASEA.\1

395.7:3 139.29

256.4fi

67.11

65.27

162.86

232.87 607.66

Net Import Industries Net Export Industries Chemicals (SITC 5) Materials (SITC 6) Machinery (SITC 7) Miscellaneous (SJTC 8)

446.69 468.79 183.00 282.92 427.79 610.24

172.02 246.33 98.32 122.87 126.93 328.69

274.67 222.46 84.67 160.05 300.86 281.54

6:1.82 64.05 56.77 70.87 68.08

61.92 50.37 49.98 56.52 70.43 49.2:1

309.:35 111.23 114.61 141.37 175.20 161.28

137.33 357.56 68.38 141.56 252.59 448.96

Singapore Thailand Indonpsia Philippines

432.58 3:39.64 476.91 41.11

174.83 152.07 364.35 -24.41

257.76 187.57 112.55 6!i.52

70.02 51.70 10.61 3.66

61.55 54.42 21.85 49.02

173.12 184.92 214.48 8.82

259.46 154.72 262.43 :12.28

580.28 274.89 217.51 -32.7!)

132.70 :352.81 139.59 -3.18

Extra-ASEAN Total 'vlultilateral

257.36 128.92 282.40 122.95

128.45 159.50

48.88

fJIU.S

49.62 fi6.9J

158.16 159.28

99.20 243.42 12:317 276.16

2:3~).83

Intra-i\BEAN

Extra-ASEAN Total Multilateral

30.97 :39.73

HJ86 to 1D91

tt(J)

56.38

Cmti(J)

Crtt(J) 50.16

nt(j)

nt(])

Ctnnt(j)

Cxnt(j)

iit(j)

Cmiit(j)

39.98

57.55

84.21

52.82

31.38

263.44 -72.42 274.98 10.78 -15.65 18.22

-85.55 129.54 -42.72 4.18 262.22 9.22

62.97 105.31 75.92 23.18 131.39 60.93

0.00 105.31 16.59 18.05 96.00 10.04

62.97 0.00 59.34 5.13 ,50.88

51.03 44.39 102.90 52.53

40.45 9.10 -6.31 35.47

91.01 75.83 28.22 -86.04

51.29 -2.36 -23.33 4.33

39.72 78.19 51.56 -90.37

-19.08 -15.82

20.80 14.94

82.97 97.60

46.61 49.06

36.36 48.54

Cmut(j)

C:nti(J)

C:riit(j)

:35.39

iit(j)

Cwiit(j)

C.riit(j)

121.05

486.62

377.84

219.74

158.10

475.51 855.13 685.15 -309.38 255.44 280.87 281.21 107.59 809.73 26.41 1349.18 271.78

-:379.62 994.53 -25.43 173.61 78:3.33 1077.40

430.36 347.34 179.57 351.86 415.23 413.12

0.00 347.34 31.79 192.78 279.43 125.35

430.36 0.00 147.78 159.09 135.79 287.77

447.57 378.80 -77.92 324.84 77.92 552.45 -29.57 4921.19

211.26 12.68 367.07 233.71

167.55 312.16 185.38 4687.48

104.35 94.1!)

138.74 159 .f(

205.05

38.37 %.32

243.09 25:) 66

Note: Tlw aggregation formulas arc presr•nted in Appendix C. Note that the Grubci-Llo,·d (UL) indexes arc reported as pert'enlage s.

TABLE 4.4 Indonesia: Contribution Measures and Grubel-Lloyd Indexes, 1981 to 1986 and 1986 to 1991 1981 to 1986 Intra-ASEAN Import Industries Net Export Industries Chemicals (SITC 5) Materials (SITC 6) lllachinery (SITC 7) .\!iscellaneous (SITC 8) Singapore Thailand :\!alaysia Philippines Extra-ASEAN Total 'v1ultilateral Net

HJ86 to 1991 lntrc\- AS~:AN Net Import Industries Net Export Industries Chemicals (SITC ii) Materials (SITC 6) .\!achinery (SITC 7) Miscellaneous (SITC: 8) Singapore Thailand Malaysia Philippines Extra-ASEAN Total Multilateral

tt(j)

Cnt(j)

8fi 99 S715 112.62 92.41 :30G.71 :J04.5S 20S.80 178.44 ll8A6 120.:l2 -:JS:l 1505 :30185 252.41 70.92 77 02 20133 178.16 129.49 121.62 :335.76 18:3.66 10.75 7.67 15.52 !HI

Ciil(j)

-116 20.22 2. J:l 30:36 -Ulfi

-18.88 49.44 -6.11 2:317 7.87 152.10 :308 2.05

CLUJ,,,, :3187 19.81 10 92 20.42 24.8:3 40.99 2127 JO 64 12.24 H\.49 1.69 :3.!)2

7 9S

lt(j)

Cnt(J)

Ciit(j)

GL(j)""'

177.60 129 :)I) 201.91 122.07 232.58 209 04 119.91 155.16 156.91 476.89 1:3:135 20-U8 201.72

127.71 82 03 186.48 66.40 196.90 126.54 108.81 118.70 100.72 :364.:34 il:JOG 164.67 1W65

49.89 47.:n 15.43 !5:)67 :35 68 82.50 11.10 :3647 5G.lD 112.55 50.30 :39.71 44 07

Hi.fil 17.:38 78:3 16.45 10.52 22.99 17.60 14.85

11.75 10.61 :35.29 6.81 8.68

GL(j)""' Crntt(j)

C:rtt(J)

nt(J)

Gmnt(J)

C.rnt(j)

iit(j)

Cm/it(j)

C:rht(J)

28.60 :37.85 89.17 :38.54 1101 10Ll9 -10.12 -6.98

47.0il 10.11 :J05.64 72.fi2 12G.:Jo -:32.42 264.00 31.74 162.79 118.48 2:34 :3s 20.87 22.GII

172.12 1152:3 341.92 208.44 20:3.87 101.7G 236.[)7 159.07 86.50 llO.Bl :107.:37 8./r, 14.10

95.45 127.84 -119 170.61 1:346 108 01 54.99 96.87

76.67 -12.61 :34:"311 37.84 190.Rl -6.26 18Ul9 62.20 :33.16 117.:37 276.:34 16.rl

90.29 102.06 19.47 120.:37 114.20 44.21 214.:32 89.:35 :3f) 66 28.24 411.911 7U5 15.46

2.7il 0.00 19.47 -4.40 :3201 0.00 -H6 4.:34 26.02 5l:)S 261.90 -1.13 -0.94

87.51 102 06 0.00 124.77 8219 44.21 217.78 Sfi.lll 9.64 -2:U4 150.00 72.78 16.40

GL(j)w 11 Cmlt(j)

C:rtt(j)

n.t(j)

Cmnt(J)

Crnt(j)

iit(j)

Cm.iit(j)

Criit(j)

115.69 23.66 194.20 66.99 215.90 flfJ 55 1111:3 117.47 27.75 214.47 71.85 88.29 9113

149.fi9 99.28 202.32 75.65 208.87 168.27 J:l7.52 142.01 111.56 410.90 129.84 170.98 170.38

GLl8 127 9:3 -8.37 54.89 0.09 190.8:3 0.98

88.21 -28.G4 210.69 20.76 208.78 -22.56 186.54 108.G:l -49.77 118.21 48.93 55.95 57.81

251.44 272.:34 197.17 415.Hl 262.12 148.25 217 ()6

54.82

196.62 272.34 0 ()() :35243 106.:30 148.2fJ 68 08

16.:)1 17.88 7 8:) 16.4ii 10.52 22.99 17.60 14.85 11.75 10.61 :15.29 6 :3) 8.68

2:3 92 28.21 7.70 :32.47 1:389 :14.13 13 05 19.92 21:\.45 2Ll5 :3668 15.12 17.49

:18.94 102.51 !06 1:36.19 -6.84

61.92 105.69 7.72 55.08

IG.68 153.49 8.7S

:37.69 129.16 262.42 61.50 116 09 l!O.fi9

53.33 -6.7!5 :Jun -G.:37 -:3.58

:n.38 161.:3:3 292.69 80.91 115()2 l12Ei8

17.6~)

178.43 62].:]4 957.94 13:5.25 609.59 520.29

Note: The aggregation formulas are presented in Appendix C. Note that the Grubel-Lloyr! (GL) indexes are reported as percentages.

().()()

Hl7.17 62.76 155.82

0 00 149.59 4:374

l:l4.69

86.92 185.32 :32.66 142.74 114 [)()

5:34.42 772.62 102 :-,g 466.85 405 :39

TABLE 4.5

Philippines: Contribution Measures and Grubel-Lloyd Indexes, 1981 to 1986 and 1986 to 1991 tt(j)

1981 to 1986

Cnt(J)

Ciit(J)

GL(J)r"'

-----------

lnlra-ASEAN Net Import Industries Net Export Industries Chemicals (SITC 5) :vlaterials (SITC 6) Machinery (SITC 7) Miscellaneous (SITC 8) Singapore Thailand Malaysia Indonesia Extra-ASEAN Total :vlultilalnal -------

---

lntra-ASEAN Net Import Industries Net Export Industries Chemicals (SITC 5) Materials (SITC 6) \1achinery (SITC 7) Miscellaneous (SITC 8) Singapore Thailand Malaysia Indonesia Extra-ASI X; at the extra-regional and total multilateral level, we can see from equation 4 (in Chapter 3) that liT. = 2X .. Similarly, from equations 15, 18 and 19, we can see that u't. = Thus, any growth in intra-regional exports (i.e. exports t~ other ASEAN countries) would contribute to this country's intra-industry trade growth at the total multilateral level. A detailed discussion on trade diversion and intra-industry trade is contained in Menon and Dixon (1995).

x.:

Results

78

5. For East Asian investors, the need to go abroad has arisen for reasons which include currency appreciation, rapid increases in wages in the home country, and the difficulty in hiring workers at home, even at prevailing wage rates (Athukorala and Menon, 1994c). In addition to these cost considerations, the abolition of special treatment for NIC exports under the Generalized System of Preferences (GSP) by developing countries in major developedcountry markets, and the liberalization of government rules in Korea and Taiwan on outward capital movements, have also contributed to this surge of "new wave" investment (Wells 1993a; Menon and Athukorala 1995b ). 6. During periods of volatility in exchange rates, MNCs may increase their volumes of intra-firm transactions in order to avoid losses associated with currency translations associated with arms-length trade. For a discussion of the theory of exchange rate changes and intra-firm trade, see Menon (1996). 7. Even these figures may underestimate the importance of intra-firm trade, however, as they ignore possible exports of U.S. MOFAs in these countries to their affiliates located outside the United States. 8. The Malaysian state of Johor has an abundance of land, skilled and semi-skilled labour, as well as good physical infrastructure; Singapore has high quality human capital, sophisticated financial, marketing and service industries, and excellent supporting infrastructure; the Riau islands (particularly Batam) of Indonesia has low-cost land and low-skilled cheap labour. For useful discussions of the SIJORI growth triangle, see Lee (1991) and Kumar (1994).

5 Conclusion

Cunclusion

0

77

n 27-28 January 1992, Heads of State of the Association of Southeast Asian Nations (ASEAN) met in Singapore for the Fourth ASEAN Summit Meeting, at which they agreed to the establishment of an ASEAN Free Trade Area (AFTA) by the year 2008. This deadline has subsequently been moved forward to the year 2005. The main mechanism for the actualization of AFTA is the Common Effective Preferential Tariff (CEPT) Scheme, which aims to reduce tariffs to 0-5 per cent for 15 product groups (fast track) within 5 to 7 years, and the remainder (normal track) within 10 to 15 years. Since the tariff reductions within AFTA is strictly preferential in nature, an unambiguous objective is to promote intra-regional trade. The importance of intra-ASEAN trade has been heightened following the establishment of the North American Free Trade Area (NAFTA) in 1993, and the European Economic Community in 1992. With markets external to the region becoming more trade-restricting, and given East Asia's preoccupation with its accessibility to the North American market, the region will have to increase intraASEAN trade if it is to offset some of these losses (Kumar 1992, p. 74). In light of these developments, it is not surprising that the initial response to the creation of AFTA was nothing short of euphoric. The initial enthusiasm has begun to wane in recent months, however. Fearing a flood of imports, producers in Thailand and, more recently, in Malaysia have called for greater protection at least in the short term (see Kumar 1992, p. 72). The recent dispute over Malaysia's protection of its petrochemicals industry has escalated to the point that Singapore is now seeking redress through the WTO. Concerns have also been raised by the two most protected countries in ASEAN, Indonesia and the Philippines, who fear that their firms will not be able to compete with the more efficient producers in other ASEAN states (see DeRosa 1993). While it is almost universally accepted that free (or freer) trade is beneficial in the long-run, there can be significant adjustment costs in the short to medium run. That is, the expansion in trade in response to barriers coming down can

78

Acljusting totNrrds AFTA

often involve the re-allocation of resources across industries, resulting in a temporary (but sometimes prolonged) period of unemployment of both capital and labour resources. Crucial to this issue of adjustment costs is the extent to which the expansion in trade takes the form of inter-industry or net trade versus intra-industry trade. Much of the concern that threatens the realization of AFTA boils down to uncertainty regarding the contributions of net and intra-industry trade to the expected growth in intra-ASEAN trade following liberalization. If most of the growth in trade is attributable to intra-industry trade, then the resource reallocation costs in the short to medium term are likely to be lower. This is because intra-industry trade does not require inter-industry factor movements. Whereas trade expansion through net trade (net trade) requires factor transfer from import-competing industries to export-oriented industries, trade expansion through intra-industry trade requires only specialization within industries. To the extent that there is some degree of industry-specificity in the employment of factors, their re-allocation between activities (or product lines) within industries is likely to incur lower costs than their re-allocation between industries. Our results suggest that the contribution of intra-industry trade to the growth in total trade has increased in all ASEAN countries, particularly over the period 1986 to 1991. More than 75 per cent of the growth in Thailand's intra-ASEAN trade between 1986 and 1991 was a result of intra-industry trade, while in Malaysia and Singapore the figure was above 60 per cent. While all the growth in Indonesia's and the Philippines' intra-ASEAN trade was due to net trade between 1981 and 1986, over the period 1986 and 1991 intra-industry trade contributed almost half the growth in intra-ASEAN trade in the Philippines, and almost one-third of the growth in trade in Indonesia. There are a number of factors that underlie this finding. First, converging incomes and hence taste patterns has lead to an increase in the importance of intra-industry trade over time (as predicted by the "Linder hypothesis"). Second, the experience over the last decade has evinced an increase in the importance

79

of manufactured goods in the trade structures of all the ASEAN countries. Manufactured goods typically exhibit greater product differentiation, and scale economics and technological factors in their production, all of which are major determinants of intraindustry trade. Third, all the ASEAN countries have embarked upon a process of liberalizing trade. One of the consequences of a protected regime is the creation of a range of non-traded products, or varieties of product, which become tradeable when protection is reduced or removed (see, for instance, Falvey 1981). Reducing protection leads to a re-allocation of resources from import-competing to export sectors, and is usually associated with diversification in export patterns through the process of horizontal specialization. This would tend to increase the importance of intra-industry trade in the total multilateral trade of the liberalizing countries. Fourth, some of the increase in the importance of intra-industry trade may simply reflect trade diversion as a result of preferential tariffs on trade among ASEAN countries. A classic case of trade diversion occurs when an ASEAN country is a net exporter of a product to other ASEAN countries but a net importer from the world. In this instance, any growth in exports to the ASEAN countries would show up as a contribution to the growth in intra-industry trade of that country at the total multilateral level. The final and perhaps most significant factor underlying the increase in the importance of intra-industry trade relates to the globalization of production processes of firms. This involves the relocation of production activities of multinational corporations in third countries as part of the process of international vertical integration. The increase in intra-ASEAN division of labour within vertically integrated industries is reflected in the growing importance of intra-firm trade, almost all of which is aslo intraindustry trade. The emergence of "growth triangles" in the region is another important factor underlying the increase in vertically integrated trade within ASEAN. This too has led to an increase in both intra-industry and intra-firm trade. The results of this study suggest that the importance of intraindustry trade in total trade growth has increased significantly in all ASEAN countries in tandem with their rapid indus-

80

Adjusting towards AFTA

trialization over the past decade. Based on this experience, it is reasonable to expect that intra-industry trade will continue to grow in importance as these countries continue to industrialize. This past decade has also witnessed substantial reductions in protection in all ASEAN countries, and quite rapid growth in trade as a result. In light of this, the finding of the growing importance of intra-industry trade suggests that further growth in trade which will follow from reductions in barriers within AITA is unlikely to have major disruptive effects. In light of the above, it would appear that the various concerns expressed by producers in relation to perceived adjustment pressures resulting from liberalization under AFTA may be misplaced, or at least overstated. After all, lobby groups are not only proficient in overstating their claims, but often feel that it is necessary. Governments of individual ASEAN nations should be wary of these claims, and resist the temptation to intervene in an attempt to supposedly prevent perceived adjustment costs in the short run. It is now up to these governments to take on a leadership role, and ignore this potential threat to the successful implementation of AFTA.

Appendix A Status-Switches

83

A

mentioned in Chapter 3, the formulae for decomposing NT. and liT. into the contributions of import and export growth (i.e. equations (14) through (19) in Chapter 3) are only valid in the absence of status-switches. A status switch takes place for good i if it changes from being a net import at the beginning of the period of study to a net export at the end of the period or vice versa. In this appendix, status switches are considered in more detail. Status switches take place for net import industries (M. >X.) if and only if: l

l

l

m.l

l

(1)


M.) if and only if: l

X.1

l

(2)


X;

No Switch

0

x·l Switch

A

'S w it c h '

and 'No S w ;t

ch'

FIGURE

m - .z· i

I

A2 CombhJ ations W hen Y " M I

Switch

I

Adjusting towards AFTA

86

nt. '

-2 + (M. I (X. -M.)) m. +(X. I (M. -X))x. i" l

l

l

l

l

l

l

(3)

and ::: ((M.l I X.)1) + (M.l I X.) m., forM.> X.l initially, (4) l l l l

or ::: ((X.1 I M.)1) +(X.l I M.) x., for X.> M.l initially. (5) l l l l

On the basis of these formulas, it is tempting to consider (M j(X1 -M.)) m. as the contribution of import growth to growth in NT.; ' ' (XlJ(M. -X.) x.l as the contribution of export growth to NT.;l etc.' l l However, (MJ(X.M.)) m.,l for instance, will not normally be l l l the effect on growth of NT. of reducing m. to zero. In terms of ' ' our figures, we are dealing with xi- mi combinations below the AB lines. Moving mi from its observed level to zero will, very often, involve crossing the AB line. Once we cross this line, equations (21) through (23) are no longer valid. That is, in Figure 1, we will cross the AB line if xi > a. In Figure 2, we will cross the AB line if xi> f3. As stated in Chapter 3, there is no solution to the problem of computing import and export contributions to growth in NT1 and 1/Tr For variations in xi- m 1 combinations over our range of interest (including the (0, 0) combination), the effect of import growth on NT1 or IIT1 depends on the extent of export growth. Similarly, the effect of export growth on NT. and liT. ' ' depends on the extent of import growth.

AppendixB Categorical Aggregation and the Measurement of Intra-industry Trade

Appendix B

A

89

discussed in Chapter 3, perhaps the most controversial issue in the measurement of liT relates to the definition of "industry" employed in compiling the data base. Sceptics such as Finger (1975), Lipsey (1976) and Rayment (1976) have argued that almost all measured liT is purely a statistical artefact brought about by "categorical aggregation". In this appendix, we provide a systematic analysis of this potential problem by identifying its sources and quantifying its effect on the measurement of liT. Categorical aggregation has two conceptually distinct components, which we will call "product misclassification" and "aggregation bias". Finger (1975), Lipsey (1976) and Rayment (1976) emphasise the product misclassification aspect, arguing that the problem lies with trade data classification systems which group data within heterogeneous categories. To rectify this problem, they suggest regrouping the basic data such that the resulting categories conform more closely to the theoretical construct of an industry. The definition of an "industry" with respect to product homogeneity is still under dispute, however (Lloyd 1989). For instance, Finger (1975) defines an industry as one where the products produced are similar with respect to their factor intensities. Falvey (1981), on the other hand, concentrates on the specificity of factors and defines an industry by the range of products that a certain type of capital equipment can produce. While these definitions concentrate on the production side, Lancaster's (1980) definition focuses on consumption: "a product class in which all products, actual and potential, possess the same characteristics, different products within the group being defined as products having these characteristics in different proportions" (p. 153). It is clear from the discussion above that there is no unique criteria for regrouping the data. Furthermore, none of these definitions deal adequately with the problem of how to allocate trade in parts and components in any reclassified scheme. All in all, it is unclear if the arduous task of regrouping would yield any improvement upon established trade classification systems.

Adfasting towards AFTA

90

The aggregation bias aspect of categorical aggregation deals with the level of disaggregation at which the analysis is conducted within a given classification system. Aggregation bias occurs if sub-group or component industries at a lower level of disaggregation have offsetting trade imbalances, i.e. if sub-group trade imbalances have opposite signs (see Greenaway and Milner, 1983). To illustrate, consider, for instance, an industry defined at the 3-digit level of the SITC which is composed of two industries (a and b) at the 4-digit level. That is: Xa Ma

X1 M.1

(1) (2)

2X 2Xa

liT. I

(3) (4) (5)

I

liTa

Equations (3) to (5) show that in the absence of opposite-signed imbalances, liT measured at the 3-digit level is simply the sum of liT measured at the 4-digit level. In this instance, our measure of the contribution of liT growth to TT growth (Ciit) is: Ciit.

'

(2XJTT) 1

X./,

(2XuITT.)

X

I~

1

a

(TTaITT.) Ciit a 1

+ +

(2X/TT) xb (TT/TT) Ciitb

(6) (7) (8)

Equations (6) through (8) show that, if component imbalances are not oppositely signed, aggregating from the 4-digit level to the 3-digit level does not affect the value of our contribution measures. This is because, as shown in equation (8), our contribution measure computed with data at the 3-digit level is a simple trade weighted average of the contribution measures computed at the 4-digit level. In other words, there is no real advantage of working with data at the 4-digit rather than the 3-digit level in this instance. Now we consider the effects of opposite-signed imbalances at a lower level of disaggregation. If M > X, but M a > X a , M 1' < Xh, then our contribution measure computed with data ag1

l

91

gregated at the 3-digit level will overstate the contribution of liT to total trade growth. That is,

Ciit. l

>

Ciit a (TTaITT.) t

(9)

We can quantify the extent of the aggregation bias at the 3-digit level. In this instance, the contribution measure obtained by working with data defined at the 4-digit level is: - {(2X)TT1) xb- (2M/TT,) mb} Contribution computed at the 3-digit level

(10)

Aggregation bias from offsetting imbalances at the 4-digit level

Similarly, the GL index obtained by working with data defined at the 4-digit level in this instance will also involve a bias: GL,

{(2(Xa + Mb))I(X, + M)}lOO (11) {[(2(Xa + Mb))I(X, + M)]- [(2(Xb- Mb))/(Xi + M,)]}lOO (12) GL index computed at the 3-digit level

Aggregation bias from offsetting imbalances at the 4-digit level

(Proofs of these results are available from the author on request.) It is clear that the level of disaggregation of the data should be

chosen so as to minimize aggregation bias. In our study of ASEAN trade, we found that the 3-digit level of the SITC is sufficiently disaggregated to overcome the problem of aggregation bias in the overwhelming majority of industries. For all of the ASEAN countries, we found that only a small share of industries defined at the 3-digit level of the SITC contained opposite-signed imbalances at the 4-digit level. Of course, this does not preclude the possibility that opposite-signed imbalances may re-emerge at a lower level of disaggregation for these or any of the other industries. In fact, if one were to persist, it is almost certain that they would re-emerge at some point. It is also true tlfat if one were to keep disaggregating ad infinitum, any measured liT would also eventually disappear.

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Adjusting towards AFTA

The problem with this, as discussed in Chapter 3, is that extending the disaggregation beyond the 3-digit level may exceed the bounds placed on any reasonable notion of an industry. This point is particularly important given our interest in adjustment costs associated with trade expansion. Given this interest, the disaggregation of the data should be broad enough to accommodate some degree of factor mobility between activities within each industry, while at the same time minimizing aggregation bias. We believe that disaggregation at the 3-digit level of the SITC comes closest to matching these competing demands on the definition of an "industry".

Appendix(; Sectoral Aggregation of Contribution Measures

Appendl:r C

95

This Appendix presents the aggregation formulas. In all the formulas below, the s(j)'s are sets of industries. That is, they refer to industries grouped at either the total manufacturing level, SITC 1-digit sectors, or groupings based on the importexport orientation of industries (i.e. either net import or net export). To obtain these sectoral aggregates, we begin by defining the following:

TTU) NTU) IITU) GLU)

= = = =

LiE LiE LiE LiE

s(j) s(j) s(j) s(j)

TTi NTi J/Ti GLi (TTi I (TTU))

(1)

(2) (3) (4)

Using equations (1) to (4) above, we obtain:

ttU) ntU) iitU) CntU) CiitU) CmttU) CxttU) CmntU) CxntU) CmiitU) CxiitU)

= = = = = = = = = = =

LiE s(j) tti (TTJ TT(j)) L i E s(j) nti (NTi I (NTU)) L i s(j) iiti (JITi I (IJTU)) (1- GLU)) ntU) GLU) iitU) E

LiE

s(j)

LiE s(j) L i E s(j) L i s(j) LiE s(j) LiE s(j) E

Cmtti (TTi I TTU)) Cxtti (TTi I TTU)) Cmnti (NTi I (NTU)) Cxnti (NTi I (NTU)) Cmiiti (IITi I (IITU)) Cxiiti (1/Ti I (IITU))

(5)

(6) (7) (8) (9)

(10) (11) (12) (13) (14) (15)

Note that in equations (12) through (15), cases where a status switch occurs are excluded.

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About the Author Jayant Menon, Ph.D., is a Research Fellow at the Centre of Policy Studies and the IMPACT Project at Monash University, Australia. He is the author of two books and more than twenty articles in academic journals, including two papers in the Economic Journal. His research interests include international trade policy, exchange rate economics and general equilibrium trade modelling.