PTA in Intra-ASEAN Trade: Issues of Relevance to SAARC 9789814345774

Citation preview

PTA IN INTRA-ASEAN TRADE

The Institute of Southeast Asian Studies (!SEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern 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.

PTA IN INTRA-ASEAN TRADE Issues of Relevance to SAARC

NIRMAL K. BIST A

Field Report Series No. 25 ASEAN ECONOMIC RESEARCH UNIT INSTITUTE OF SOUTHEAST ASIAN STUDIES

1991

Acknowledgement The author is grateful to the Ford Foundation for the funding of the Research Fellowship in South-Southeast Asian Relations which enabled him to complete this research at the Institute of Southeast Asian Studies.

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang 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 expressed in this publication rests exclusively with the author and his interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

Cataloguing in Publication Data Bista, Nirmal K. PTA in intra-ASEAN trade : issues of relevance to SAARC. (Field report series/Institute of Southeast Asian Studies; no. 25) I. Tariff preferences-ASEAN countries . 2. ASEAN countries-Commerce. 3. South Asia-Economic conditions. 4. South Asia-Commerce. 5. South Asia Association for Regional Cooperation. I. Title. II. Series. sls91-204555 1991 OS 50 I 1594 no. 25 ISBN 981-3016-19-1 ISSN 0217-7099 Printed in Singapore by Yetak Services.

CONTENTS

Li st of Tables

vi

Introduction

II

Structure of ASEAN and SAARC Trade

3

III

ASEAN Preferential Trading Arrangements

13

IV

Prospects for Trade Expansion through PTA in the SAARC Countries: Lessons from ASEAN

17

Notes

22

References

24

LIST OF TABLES

2.1

Selected Economic Indicators

4

2.2

Sectoral Share of GOP

5

2.3

Share of World Exports

6

2.4

Total Foreign Trade of ASEAN and SAARC and Share of Intra-Regional Trade for Individual Countries

7

2.5

Structure of Imports

8

2.6

Structure of Exports

9

I

INTRODUCTION

The Association of South East Asian Nations (ASEAN) and South Asian Association for Regional Co-operation (SAAR C) are two Asian regional groupings striving for the speedy development of member countries. The ASEAN member states, Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand, are economically better off compared to their SAARC counterparts- Bangladesh, Bhutan, India, Maldives, Nepal , Paki stan and Sri Lanka. A late starter, the SAARC is organizationally less mature than ASEAN. As in the case for most regional groupings, fast changing global economic scenarios have prompted these Asian economies to form a group to help absorb the occasional shocks and enhance their economic capabi lities. Even though free trade is obviously the best policy from the point of view of world welfare , preferential trading within a group to promote intra-regional trade is regarded as a "second best" policy inherent in customs union theories. 1 Tariff reduction - considered as one of the many aspects of preferential trading - is generally aimed at achieving greater competition within the region, as well as increasing the size of markets, and using economies of scale eventually to lower costs. Preferential Trading Arrangements (PTA) have been adopted as one of the measures to promote intra-regional trade in ASEAN. This paper highlights the operation of ASEAN PTA , and identifies issues which could be of relevance to SAARC that has yet to incorporate trade co-operation in its sphere of activities.

II

STRUCTURE OF ASEAN AND SAARC TRADE

ASEAN'S Economic Features The total population of ASEAN member states reached 314.9 million in 1988. Extreme disparity exists in the level of income among these countries. The lowest per capita Gross National Product (GNP) was US$490 for Indonesia while Brunei was placed at the top with US$17 ,000 mainly due to its abundant oil resources. Singapore, recognized as a Newly Industrializing Economy (NIE) , had the second highest per capita income with US$1 0,450 and has since attained developed country status (Table 2.1 ). Indonesia and Malaysia, both rich in natural resources , are fast expanding their manufacturing capabilities. Thailand is also rapidly developing as an exporter of manufactures with a solid agricultural base; it has registered the highest growth rate in the region . The situation is not similar for the Philippines which is constrained with a host of socio-economic and political problems. The region as a whole was considered a high-growth area during 1971-80 and has carried the momentum into the nineties. GOP growth in Thailand in 1990 was the highest in A SEAN- at I 0 per cent- and is expected to be maintained in 1991. The GOP growth rate of the Philippines on the other hand was 2.5 per cent in 1990, the lowest in the region, together with highest inflation rate at about 15 per cent. However, the average growth rate in the region is well above that of many developing economies outside the region . Singapore has been maintaining the economic pace with its usual role as an "entrepot" for trade and a centre of production and investment with increased emphasis on hightechnology activities. A look into the sectoral share of GOP shows an increasing role of the industrial and service sector implying a continuing transformation of the economy from a primarily agricultural base to an industrial and serv ice sector base. In 1989 the agricultural sector in the Philippines contributed 26.9 per cent to its GDP with the domination of the service sector (40%) and industry (33 .1 %). Singapore's GOP is predominantly

4

PTA in Intra-ASEAN Trade

TABLE 2.1 Selected Economic Indicators

Population (In millions) mid 1988 Brunei Darussalam Indonesia Malaysia Philippines Singapore Thailand A SEAN Total

Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka SAARC Total

0.2 179.1 17.4 60.0 2.7 55 .5

Per Capita GNP (US$) 1989

GDP GNP (Growth Rate %) 1990

Changes in Consumer Price(%) 1990

17,000 490 2,130 700 10,450 1,160

4.5 7.0 9.4 2.5 8.3 10.0

2.3 10.0 3.1 15.0 3.4

180 180 350 470 170 360 430

6.2 5.6 4.3 9.3 2.0 5.3 5.1

8.1 9.1 8.5 5.0 9.3 9.0 21.3

314.9 109.1 1.4 811.1 0.2 18.4 108.7 16.8 1,065.7

SOURCES: ADB , Asian Development Outlook 199/ Asiaweek, 27 July 1990 World Bank, World Development Report 1990

from the service sector (63% ), then industry (36.7% ), whilst agricu lture is a negligible 0.4 per cent (Table 2.2). Foreign Trade

Fore ign trade has been the backbone of ASEAN economies. The export of primary products has been graduall y declining in favour of more val ue-added items like processed goods and manufactures. Except for Indonesia and the Phi lippines, the share in world export of individual countries in the region is constantly on the increase (Table 2.3). This manifests the increasing importance of the ASEAN economies as a force to be reckoned with. Industrial countries have been the main destination for the ASEAN exports and the source for ASEAN imports, too. Each nation has traded more than half of its exports or

Structure of ASEAN and SAARC Trade

5

TABLE 2.2 Sectoral Share of GDP (Percentages) Agriculture

Industry

Services

1970 1980 1989

1970 1980 1989

1970 1980 1989

46.0 32.0 28.8 2.3 30.2

20.9 24.7 29.4 29.8 25.7

33.1 43.3 41.8 67.9 44.1

A SEAN Indonesia Malaysia Philippines Singapore Thailand

23 .3 22.9 25.6 1.1 20.6

20.5 20.2 26.9 0.4 15.9

42.0

37.4 51.0 30.9 58.6 26.0 22.0

41.6 40.3 35 .8 41.0 36.1 33.1 38.8 36.6 30.8 33.7

35.1 41.3 38 .3 60.0 48.6

39.3 38.7 40.0 63.0 50.5

SAARC Bangladesh Bhutan India Nepal * Pakistan Sri Lanka

44.5 67.5 38.9 31.8

38.0 6 1. 8 30.6 26.5

15.3 24.0 11.4 22.7 16.0

25 .9 11.9 25.6 27.4

17.1 20.0 30.8 15.0 24.7 28.9

42.4

31.5 21.0 38.4 52.2

45 .5 32.0 36. 1 40.3 26.3 26.4 43 .8 49.3 46.1 49.1

* Computed on the basis of current price data. SOURCES: ADB , Asian Development Outlook 1990, Mani la, April 1990 (Tab A6 , p. 227) World Bank, World Development Report (WDR) 1989 for Bhutan. imports with industrialized countries indicating a low degree of complementarities among themselves and other developing economies. Japan has been the top trading partner, followed by the United States and the European Community (EC). 2 Intra-regional trade has not been substantial despite the continuing efforts and decisions at vario us meetings including summits. Malaysia trades more goods with partner countries, with exports to and imports from other ASEAN countries accounting for about 24 and 19 per cent of its total exports and imports respectively in the year 1988 (Table 2.4). Trade orientation towards developed countries is mainly faci litated by the structure of economies and the industrialization policies adopted by these countries. Except for Singapore and Brunei, all other countries in the region have huge trade barriers in favour of domestic industries. However, the process of liberalization has started, indicating the departure from an earlier stance and a relative improvement in the competitive capabilities. The new entrant intoASEAN , Brunei, has its external trade predominantly in mineral fuel

6

PTA in lntra-ASEAN Trade

TABLE 2.3 Share of World Exports (Percentages) 1981

1987

1988

1989

ASEAN (excluding Brunei) Indonesia Malaysia Philippines Singapore Thailand

3.738 1.284 0.635 0.309 1.131 0.379

3.445 0.730 0.762 0.242 1.220 0.491

3.799 0.716 0.780 0.260 1.452 0.591

4.050 0.749 0.866 0.262 1.479 0.694

SAARC (excluding Bhutan and Maldives) Bangladesh India Nepal Pakistan Sri Lanka

0.626 0.043 0.368 0.005 0.155 0.055

0.833 0.046 0.546 0.007 0.177 0.057

0.845 0.048 0.566 0.010 0. 167 0.054

0.832 0.044 0.575 0.006 0.157 0.050

SOURCE: ADB , Asian Development Outlook 1990, Manila, Table A 15 , p. 236.

exports (98.5% in 1985) , whilst imports are of machinery and transport equipment (34% ), manufactured goods (21 %), miscellaneous manufactured goods (11 %) and food and live animals (14%}_3

SAARC Economies The SAARC region represents heterogeneity in size and population with 811 million in india alone- about 76 per cent of the total SAARC population (Table 2.1). The per capita GNP has been one of the lowest in the world ranging from US$170 (Nepal) to the maximum of US$470 (Maldives) in 1990. The GDP growth rate has been quite moderate except for the late eighties when economic downturns were observed for countries like Nepal (1.5%), Sri Lanka (2.5%) and Bangladesh (2.4%) in 1989. However, GOP growth rates were higher in all South Asian countries in 1990 except in Nepal. 4 A maze of constraints like natural calamities, political problems and mismanagement of the economy are considered the main reasons for these countries not being able to keep up with the global trend . The continuing ethnic discord in Sri Lanka, and the impasse over trade and the transit agreement between Nepal and India are some of the many deterrents.

Structure of ASEAN and SAARC Trade

7

TABLE 2.4 Total Foreign Trade of ASEAN and SAA RC and Share of Intra-Regional Trade for Individual Coun tries Imports

Exports

1988

1986

1987

1988

1986

1987

1,797.5 (16.9) 14,809 (10.2) 13,977 (21.9) 4,807 (7.2) 22,501

1,804.6 (21.6) 17,170 (9.9) 17,934 (24.2) 5,696 (8.9) 28,703

8,864 ( 14.3)

11 ,564 ( 13.7)

1,255 .8 1,229.8 6,53.3 1,986.9 (43.4) (40.2) (14.5) (35.6) 13,489 12,850 10,724 19,376 (9.8) ( 10.7) (13.0) ( I 0.4) 16,567 21 ,125 12,701 10,828 (18.8) (24.4) (20.8) (21 .5) 8,721 6,937 5,211 7,034 (9.8) (9.5) (10.0) (6.9) 43,870 32,626 25,513 39,322 (22.0) (23 .7) 16,292 13,003 9, 166 15,992 ( 14.1) (15 .0) (11.6) (15.6)

888 .9 (6.1) 10,489 (2.2) 29.0 (18.3) 145.3 (40. 1) 3,383 (3.2) 1, 162.7 (5.0)

1,076.8 (4.1) 12,841 (2.1) 23 .2 (21. I) 170.8 (33.1) 4, 168 (3.9) 1,334.3 (4. 1)

1,291.0 (5.0) 13,312 (2.1) 66.2 (5.7) 261 .6 (24.5) 4,509 (5.0) I ,463.4 (6.3)

A SEAN Brunei Indonesia Malaysia Philippines Singapore Thailand

SAARC Bangladesh India Maldives Nepa l Pakistan Sri Lanka

NOTE:

2,550.4 (3.6) 18,421 (0.5) 79.0 (8.5) 289 .3 (27.9) 5,367 (1.8) I ,829 .4 (7.9)

2,988 .9 2,730.3 (5.4) (4.3) 24,310 20,439 (0.6) (0.5) 126.2 100.2 (7.6) (7.6) 543.8 465 .8 (19.5) ( 19.4) 6,590 5,8 19 (1.6) ( 1.9) 2,261.7 2,056.4 (8.2) (6.7)

a) Figures in US$ millions and figures inside parentheses indicate share of intra-regional trade

in percentage to total trade. b) In the absence of Singaporean data on trade with indonesia, intra-regional trade of Singapore has been calcu lated for 1988 by taking Indonesian exports to and imports from Singapore as Singapore 's imports from and ex ports to indonesia respectively. SOURCE:

IMF. Direction of' Trade Srorisrics 1989.

8

PTA in lntra-ASEAN Trade

TABLE 2.5 Structure of Imports (Percentages) Others Machinery Other & Transport Primary Commodities Equipment Manufacturers

Fuels

Food 1965

1987

1965

1987

1965

1987

1965

1987

1965

1987

Bangladesh Nepal India Pakistan Sri Lanka

22 22 20 41

16 6 8 16 17

5 5 3 8

9 8 11 19 17

14 14 5 4

6 7 8 7 3

37 27 38 12

28 22 24 31 27

22 22 34 34

42 57 48 37 37

Indonesia Philippines Thailand Malaysia Singapore

6 20 6 25 23

3 8 15 10 8

3 10 9 12 13

16 17 13 6 18

3 7 9 4 5

39 33 31 22 14

39 28 32 50 39

50 30 49 32 30

39 40 40 30 30

2 7 6 10

19

SOURCE: World Bank , World Development Report 1989, p. 193.

Sectoral distribution of GOP indicates that the agricultural sector constitutes a major component for each country of the region. Indu strial growth has been relatively slow. India, considered as having the strongest industrial base, accounts for around 31 per cent of GDP. Nepal on the other hand has the weakest industrial base in terms of contribution to GDP (15 %) while the service sector has registered a continuous growth in the region. Foreign Trade Foreign trade has not grown substantially over the years in the SAARC region. In a global context, South Asia represents a virtual economic non-entity despite its huge domestic market. India, the largest economic and political force in the region, exports the equivalent of about one-third of Singapore's exports (Table 2.3). Industrial countries a constitute major group in terms of export and import trade of South Asian nations except Maldives and to some extent NepaJ.5 Trade within the region in negligible. Nepal was the single exception to this because of India 's dominant role in its trade structure. India 's external trade with other members, however, has been just 2.1 and 0.6 per cent of its total exports and imports.

Structure ofASEAN and SAARC Trade

9

TABLE 2.6 Structure of Exports (Percentages) Fuels, Minerals and Metals

Machinery Other Primary & Transport Commodities Equipment

1965

1987

1965

Bangladesh Nepal India Paki stan Sri Lanka

0 10 2 2

16 2 9 I 8

Indonesia Philippines Thailand Malaysia Singapore

43 II 11 35 21

54 14 2 25 17

Others & Manufactures

Textiles & Clothing

1987

1965

1987

1965

1987

1965

1987

1 0

41 62 97

33 26 22 32 52

l 0

17 2 10 3 2

22 48 35

33 70 59 64 38

36 29 0

37 16 41 25

53 84 84 59 44

18 24 45 36 11

3 0 0 2 11

3 6 12 27 43

1 6 4 4 24

24 56 41 13 29

0 1 0 0 6

5 6 18 3 6

78

SOURCE: World Bank, World Development Report 1989. Intra-Regional Trade in the ASEAN Region Intra-ASEAN trade constitutes a significant proportion of total trade of this region. The individual trade flows between ASEAN countries in 1985 were greatest in Singapore's exports to Malaysia, Malaysia's exports to Singapore, Singapore's exports to Indonesia, and Indonesian exports to Singapore, together comprising 65 per cent of intra-ASEAN trade. Including Singapore's trade with Thailand it would come to about 75 per cent. These four types of flows comprised 63 per cent of total ASEAN trade in 1988 suggesting an increasing role of other flows. This evinces the prime role of Singapore in intra-regional trade, without whom intra-ASEAN trade is small. 6

Composition Predominance of petroleum products (SITC 3) has been a regular feature of intra-ASEAN trade especial ly with regard to Singapore's role in intra-regional trade.7 Singapore, often referred as the "Houston of Asia", imports crude oil from partner countries like Indonesia, Malaysia, and Brunei, processes it, and exports to partner countries and other non-members (Table 2.5). Export of primary products like crude oil and crude rubber have been main items for Malaysia and Indonesia in intra-ASEAN trade (Table 2.6). Thailand and the Philippines

10

PTA in lntra-ASEAN Trade

export substantial volumes of primary products falling under SITC 0. Exports of manufacturing goods have been quite significant for all members except Brune i. The principal items under thi s are wood and non-ferrous metal s for Indonesia, cork and wood for Malaysia, and textiles for Thailand. Electric and non-electric machinery comprised 25.3 per cent of Singapore 's total export in 1985 , second only to petroleum exports. Electric and non-electric machinery constitute a considerable proportion of individual country 's exports to other ASEAN countries for Indonesia, Malaysia, Thailand , and even Philippines. This shows that intra-regional trade in primary as well as manufac tured goods is quite significant.

Intra-Regional Trade in the SAARC Region Trade within the SAARC region has been margina l. India's exports to other partner countries were a meagre 2.1 per cent of its total exports in 1988. It was a negligible 0.6 per cent in the case of importation of goods from partner countries (Table 2.4 ). Nepal 's position is an exception in terms of intra-regional trade. Its exports to and imports from fellow SAARC countries accounted for almost 25 and 20 per cent of its total. For other countries, exports to and imports from countries within the region were 5 and 5.4 per cent for Bangladesh; 5.7 and 7.6 per cent for the Maldives; 5 and 1.9 per cent for Paki stan ; and 6.3 and 8.2 per cent for Sri Lanka of respective total ex ports and imports in 1988. Nepal 's posi tion as a landlocked nation has resulted in overdependence on India. It is needless , therefore, to describe the overwhelming role of trade with India in terms of Nepal's total external trade in general and intra-regional trade in particular. The official Nepal-India trade figure is considered under-recorded in view of the long open border between the two countries. India alone accounts for more than 98 per cent of Nepal's exports to the region and more than 96 per cent of imports from the region. 8 Intra-regional trade statistics in 1988 show four major flows : if put in order, they rank as India 's exports to Nepal, Pakistan 's export to Bangladesh, India 's exports to Sri Lanka, and India 's exports to Bangladesh. Together they account for about 51 per cent of total exports of SAARC countries. India plays a pivotal role in the region; its imports from Nepal were to the tune of US$69 million in 1988 which is about 44 per cent of India 's imports from South Asian nations and tops the list in Indian imports from within the region. This could be attributed mainly to the preferential treatment accorded to each others ' product by India and NepaJ.9

Composition 10 Intra-regional trade in South Asia has been more or less confined to primary products. Excluding special bilateral arrangements between India and Nepal , trade in manufactures in the region is quite nominal. Exports from Bangladesh to other South Asian countries are tea, raw jute, urea, calf leather and bags , etc. About 50 per cent of Bangladesh 's tea exports is destined for Pakistan. Bangladesh 's imports from within the region include machinery and transport

Structure ofA SEAN and SAARC Trade

II

equipment, textile yarn and fabrics, rubber manufactures , sugar, fruit and vegetables, vegetable oils, etc. South Asia constitutes a small proportion of India 's export market and therefore only a few products like electrical insulating equipment, regained sugar and cotton yam , medicaments , spices, vegetables, etc. are found significant in te1ms of export to other South Asian nations. Exports like petroleum products and kerosene are under a special bilateral arrangement with Nepal and cannot therefore be generalized. On the import front, the followin g goods are imported by India from partner countries - newsprint from Bangladesh, tanning extracts of vegetable origin from Nepal (which met about 36 per cent of India 's import requirements for that product in 1982-83), fixed vegetable oils from Nepal , pig iron from Pakistan (which fulfilled about one-third of India 's import requirements) , fresh and dried fruits also from Pakistan , spices from Sri Lanka (which has accounted for about 40 per cent of India 's import needs for the product), natural rubber also from Sri Lanka. Nepal 's exports to South Asian markets mainly consist of agricultural products such as maize, dried ginger, raw jute, jute goods, etc. and are predominantly confined to Indian markets. Its imports include daily consumer goods, petroleum products, textiles, fertilizers , machinery and transport equipment. Paki stan 's exports to other South Asian countries include items like raw cotton, pig iron, cotton thread and yam, cotton clothes, medicaments, fish , parts of machinery, mechanical appliances, etc. In terms of imports, prominent are tea, raw jute, betel leaves, jute cuttings, cardamom, natural rubber, etc. Sri Lanka 's exports to the region are tea, rubber sheet, coconut oil , cloves, precious and semi-precious stones, betel leaves , etc. Importation from South Asia comprises mainly sugar, red onions , dried chillies, cotton fabrics, medicaments, etc. Bhutan's and the Maldives' trade within the region has been insignificant because of their size and population. Both economies are quite narrow-based and not competitive in relation to other SAARC products.

III ASEAN PREFERENTIAL TRADING ARRANGEMENTS

An Overview The ASEAN Preferential Trading Arrangements (PTA) were introduced in 1979 in order to move towards regional growth through an increase in intra-regional trade and investments. The PTA aimed at gradual harmonization in policies regarding trade development, moving towards economies of scale and efficient factors allocation. Following the Bangkok Declaration of 8 August 1967 (also called the ASEAN Declaration), a later Bali Summit ( 1976) modified ASEAN 's strategy by adopting a twopronged approach for co-operation. The modification of strategy was felt necessary in view of non-attainment of tangible economic achievements. Subsequently two documents were signed: (a) the Declaration of ASEAN Concord and (b) the Treaty of Amity and Co-operation in Southeast Asia. Both documents underlined the need for co-operation in various fields including basic commodities, industry, trade, a common approach on international trade issues, etc. 11 The Bali Summit recognized that co-operation in trade cou ld promote development and growth and the PTA specifically were identified as a vehicle to move towards this direction . ASEAN PTA signed on 24 February 1977 came into force on I January 1978. It was envisaged to encompass the following : 12 I. 2. 3. 4. 5. 6.

long-term quantity contracts; purchase finance support at preferential interest rates; preference in procurement by government entities; extension of tariff preferences; liberalization of non-tariff measures on a preferential basis; and others

The goods seeking preferential treatment under PTA is to comply with content requirements under "the origin criteria", " the consignment conditions" and " the documentary requirement". The origin criteria were aimed at confining benefits to the goods

14

PTA in lntra-ASEAN Trade

produced or manufactured in ASEAN member countries. The ASEAN tariff "margin of preference" (MOP) is based on "item-by-item" concessions offered voluntarily by individual countries. The margin ranged from 10 to 50 per cent and has already covered about 14,000 items. Effects of the PTA on intra-ASEAN trade have been widely reported to be insubstantial. Indicative of its effectiveness as per earlier customs union theories are trade creation (TC) by way of shift from higher cost domestic goods to lower cost goods from member countries and the extent of trade diversion (TD) caused by union-induced shifts from the consumption of lower cost products from the rest of the world to that of high cost products from partner countries. It is pertinent here to cite Devan 's assessment of ASEAN-wide TC at around 4.8 per cent and ASEAN-wide TD at about 6.3 per cent. With the exclusion of petrol-based products, the figures are computed to be 5.2 and 4.9 per cent respectively. 13 Similarly another study finds country-specific TC on the basis of selected PTA items under the existing MOP as Indonesia 2.02 per cent, Malaysia 0.88 per cent, Philippines 0.28 per cent, Singapore 0.04 per cent, and Thailand 0.33 per cent. Even by raising MOP to the 50 per cent level , the trade expansion is estimated to be only 1.16, 0.59. 0.05 and 0.69 per cent respectively, 14 a similar assessment that was made by Ooi Guat Tin on her studies of 1981 and 1986. 15 These analyses suggest that the present level of efforts towards intra-regional trade expansion is far from being satisfactory. A mere increase in the number of items under PTA carry no meaning unless real tradables are made subject to preferential treatment. Many items of importance in terms of value and volume are still being considered as "sensitive items" and hence placed under "exclusion lists" . Many governmental and non-governmental deliberations at various levels have highlighted these issues. The Group of Fourteen (G-14) in 1987 had recommended various points towards launching an ASEAN market liberalization initiative. Some of the points were: (a) the minimum 50 per cent MOP on all non-agricultural products on a "six-minus -X principle", (b) the exchange of tariff preferences for agricultural products should continue to be on a "product-by-product" basis, (c) the Rules of Origin should be more liberal and be brought down to 40 per cent, (d) efforts to progressively lower external tariffs unilaterally and (e) efforts towards dismantling non-tariff barriers (NTB). 16 The lack lustre performance of the PTA has been acknowledged formally by the Manila Declaration of 1987 which agrees " to inten sify efforts towards significant expansion of intra-ASEAN trade, ... adopt and carry out packages ... for the improvement of the PTA ... measures include the progressive reduction in the number of items in ... exclusion lists ... deepening of MOP for items currently in the PTA ... also relax the ASEAN-content requirements in the Rules of Origin .. .. The standstill of NTB s ... be implemented .. . roll back .. . be negotiated as soon as possible .. ." 17 • The Manila Summit agreed to improve the PTA over a five-year time-frame . It has more or less endorsed the recommendations put forward by the G-14 on PTA. The Head of Government specifically directed the ASEAN Economic Mini sters to monitor the progress particularly with regard to reduction of exclusion lists of individual member countries to not more than 10 per cent of traded items and 50 per cent of the value of intraregional trade. 18 By 1989, more than two years after the Manila Summit, "economic co-operation

ASEAN Preferenrial Tradin g Arran gemen rs

15

among member countries had been rather slow and of limited success ... " . Thi s was attributed partially to the "cumbersome process adopted by ASEAN. Though the items li sted for PTA among ASEAN countries have reached an impress ive number of about 14,000, the actual impact on intra-ASEAN trade flow s has been almost negligible" . 19 Therefore, the political commitment made at the highest leve l is yet to be effectively implemented.

Factors and Policies Affecting ASEAN PTA Some of the factors and policies responsible for the state of ASEAN PTA are briefl y discussed here. Structural bottl e necks, like low degree of com plementariti es, have pl ayed a substantive role in the slow growth of trade co-operation. In the EC, principal supplies and markets are available for a product within the union and thereby increase economic interaction. This is lacking in ASEAN. The disparate income levels hi ghlighting the disparate level of economic development in the region are often principal sources of some of the unproductive competition and friction that occasionally surface.20 Economic nation ali sm is further explained by the fact that a large portion of regional trade is still untouched and remains in "exclusion lists". Furthermore, many PTA items since di saggregated to BTN digit levels could eas ily elude the preferential treatment for mostly traded items. Tariff cuts in "both item-by-item and across-the-board have been carefully designed to ensure that they make no serious inroads into tariff protection for domestic producers". 2 1 It is pertinent here to cite some of the "infamous" examples of PTA offers on non-imported items like Thailand on wood products, Indonesia on nuclear reactors, the Philippines on snow ploughs, and Malaysia on rubber products. Therefore, the lack of real political will or the predominant economic nationali sm is "still an obstructionist wall to clo se r coll aboration [and] this explains [that] willingness to sacrifice for ASEAN is subsidiary to all national priorities - [the] political reality of economic regionalism Y Though the tariff barriers of high tariff countries like Indonesia, the Philippines, and Malaysia have gradually been decreased, NTBs, with the exception of Singapore, have constrained the growth of intra-ASEAN trade. On account of relati vely low transparency, issues relating to NTBs are often not duly focused.

IV PROSPECTS FOR TRADE EXPANSION THROUGH PTA IN THE SAARC COUNTRIES Lessons from ASEAN

Overview Trade expansion has been an integral constituent in almost all of the regional groupings. The SAARC on the other hand has so far identified 12 sectors for mutual co-operation which excludes trade co-operation. A total of 270 activities 23 relating to seminars, workshops, technical committee meetings, training, etc. have not incorporated any trade related issues. The apprehension that co-operation in trade may be difficult to achieve under divergent political and economic systems adopted by the regional countries has so far precluded this vital aspect from its framework. However, there have been interactions among academics and businessmen focusing on trade related issues. In September 1988, an SAARC group of experts in its meeting held in Islamabad initiated a move to prepare the groundwork on SAARC co-operation in trade , manufacturing, and services. Trade co-operation in the SAARC region by no mean s is a smooth process . Economic and trade co-operation in trade expansion in the SAARC region is largely dependent upon political situations. The ethnic problem in Sri Lanka and the IndiaPakistan di spute over Kashmir are some of the burning political problems in the process of regionalism in South Asia. South Asian trade is marginal in relation to world trade. That it has not been increasing over the years indicates that prevailing arrangements are not effective enough to trigger the process of development through trade co-operation in the region . The countries in the region are operating highly protected trade regimes. Tariffs and NTB s are considered quite high in India, Pakistan and Bangladesh while they are relatively low in Nepal and Sri Lanka. 24 Even in the absence of the SAARC multilateral framework , most SAARC countries can exchange tariff preferences among them under the Bangkok Agreement within the framewrok of ESCAP. The Bangkok Agreement initially had three South Asian countries, viz., India, Bangladesh, and Sri Lanka apart from other non-SAARC nations. With Nepal and Pakistan also joining the Agreement in its second round in 1985, a multinational

18

PTA inlntra-ASEAN Trade

framework exists for most of the South Asian countries. Apart from this, South Asian countries have bilateral trade agreements with each other to promote trade. Most of the items are traded under MFN terms. Few primary products like Sri Lankan cloves and Indian dried fish get preferential treatment in each other's place. The case is different for Indo-Nepal trade which is governed by the Treaty of Trade , Treat of Transit, and Agreement on Co-operation to control unauthorized trade signed in 1978. This provides a framework under which Indian goods enjoy tariff preference through additional customs duty exemption in Nepal. India on reci procity exempts primary products from Nepal from basic c ustoms duties and from any quantitive restrictions. All Nepali manufactures containing not less than 60 per cent of Nepali material s or Nepali and Indian materials get access to the Indian market free of basic customs duty and quantitive restrictions .25

Impediments to Trade Co-operation 26 Structural Impedim ents Structural impediments of various kinds tend to discourage trade co-operation in South Asia. Experience with other regional groupings including ASEAN has shown that trade co-operation among countries at different levels of development, more often than not, favours the more developed countries to the detriment of the less developed ones. Although most of the regional countries have agrarian structures, some like India and Pakistan have a strong industrial base, while others are in the infancy of industrial development and have a very fragile industrial base. Under the operation of normal economic forces, the more industrially advanced members become the major beneficiaries of regional cooperation. It may be pertinent here to mention that ASEAN countries have relatively far more complementarities in their activities and resources. The countries like Indonesia, Thailand , and Malaysia have vast natural resources in contrast to Singapore 's capabilities in technology and its strategic location. Even smaller countries having comparative advantages over their big partners in some of the areas and sectors as in ASEAN, but this is not prevalent in the SAARC.

Trade Barriers Trade liberalization with gradual dismantling of the trade barriers is a prerequi site for meaningful economic co-operation in the SAARC region. Trade liberalization basically implies the mutual relaxation of all tariff and non-tariff barriers on intra-regional trade. Some of the constraints to liberalization of trade in the South Asia region are summarized here. l. The South Asian countries have diverse trade regimes. With trade liberalization, the presently low tariff partner countries like Nepal and Sri Lanka may be forced to divert imports from low-cost world sources in favour of high-cost partner products thereby entailing loss in consumer welfare or TD overwhelming TC.

Trade Expansion Through PTA in SAARC CounTries

19

2. Customs revenue accounts for a substantial share of total revenues collected by all South Asian countries. For instance, customs duties alone accounted for about 27 and 21 per cent average total tax revenue and total current revenue of Nepal in 1985-86_27 Trade liberalization would imply some loss in revenue resulting in the problem of funding the development programmes. 3. The import substitution strategy followed by most of the South Asian countries has made their production structure highly similar and competitive. Trade liberalization would at least in the short run lead to contraction of output and employment especially in infant industries. 4. The South Asian countries have disparate levels of development and competititveness of their industrial sections. In this context, the weaker partners face the possibility of domination by their stronger partners. Given this condition , no country will be willing to enter into any regional agreement and surrender some of its economic power and sovereignty, unless a net gain is perceived by it.

Transport and Transit Impediments Efficient and effective transportation networks and uncomplicated transit formalities are prerequisites for meaningful trade co-operation. In the SAARC community, Nepal, Bhutan and the Maldives are geographically disadvantaged countries and face many transport and transit problems in international trade. Nepal and Bhutan are landlocked while the Maldives is a sealocked nation . The insufficient underdeveloped overland transportation network in the region is a major impediment for the smooth flow of goods and services in the region . The major problem for the development of regional trade is the absence of road and rail links between the SAARC countries. For instance, Bangladesh which is just 16 kilometres away from Nepal is almost inaccessible by road due to the underdeveloped transportation network. There is a greater need for expansion of the transportation network particularly overland. India can play a pivotal role in the expansion of the regional transportation networks and make the flow of goods and services smoother. Any contraction in transportation and transit facilities by any country in the region becomes an obstacle in the development of the regional trade. Nepal and Bhutan face transit problems of a great magnitude. Nepal has been extensively using the land route- a combination of road and rail transport- and to reach the port of Calcutta has to confront many problems relating to transhipment. The problem is aggravated when political aberrations develop between transit provider and receiver countries 28 - the trade and transit impositions during April 1988 to June 1990 between Nepal and India is an example.

20

PTA in lntra-ASEAN Trade

Information Gaps One of the obstacles for intra-regional trade expansion is the meagre knowledge about each other in terms of export potentialities, import need s, market forces , economic environment, investment opportunities and constraints, etc. Despite physical proximity, the SAARC members have been aloof economically and have given much greater weightage to their relationship with developed countries. The information gap has been reduced to a certain level through co-operation in various other areas of common interest. But there is still almost a complete void in market information of SAARC countries. The lacuna can gradually be filled by some programmes targeted at fostering constructive communication.

Some Lessons from ASEAN It took some 12 years for the inception of trade among ASEAN member countries because its main thrusts in earlier years were political. 29 This probably is not true for the SAAR C. The SAARC in its fonnal inception through the Dhaka Declaration 1985 got to the core of South Asian co-operation in stating that the countries of South Asia constituting one-fifth of humanity, were faced with the formidable challenges posed by poverty, underdevelopment, low levels of production, unemployment and pressure of population compounded by exploitation of the past and other adverse legacies. Regional co-operation therefore was viewed as a " logical response to these problems"J 0 The present level of low trading among South Asian countries points to the need for some arrangement which could accelerate regional trade. Therefore, SAARC countries, in addition to other measures like minimizing illegal trade and resuming trade relations with each other, should give consideration towards a PTA for selected goods in order to provide each other quota free preferential tariff treatment and marketing access. The experience of ASEAN show that gradual development of complementarity in industrial and other economic activities among partners is vital in order to develop a system of interdependence. The state of overdependence of one partner on the other, like the case of Nepal on India, in the long run would not contribute towards promotion of regional trade. Therefore, in order to create an environment of mutual trust whereby partners can trade with each other, the economically stronger partner has a bigger responsibility to help enhance the production capabi Iiti es of weaker partners. Indi a with the strongest industrial base has to come forward in the cause of a sound South Asian industrial base. The proposed "growth triangle" measures should be given consideration using the example of Singapore, Johor state of Malaysia, and Batam island of Indonesia. For instance, co-operation in development and marketing of Nepal 's immense water resource potential would benefit large segments of the population of South Asia. Lacking in the SAARC is strong political will at the highest leve l which seems to be prevalent at the moment in the growth triangle concept in ASEAN. In order to move towards a preferential trade regime, South Asian nations also need to follow the voluntary "item-by-item" approach on the PTA offer li st. The list at the beginning need not to be long but vital and sincere in the efforts from individual countries towards making more " real" tradables under it. The tariff cuts have to be pragmatic and

Trade Expansion Through PTA in SAARC Countries

21

not affect adversely any sector of the economy of an individual member. If some programme is in the larger interest of the region yet at the same time detrimental to a member, a system has to emerge in order to compensate that member. The diversities in size and economic capabilities as in ASEAN call for a "waiver period" for weaker partners in terms of the "exclusion list" and MOP. With regard to content criteria, if the stronger partner keeps insisting on minimum content requirement of say 70 to 80 per cent or even more of the individual country 's origin , the preferential offer could be of little use especially for smaller partners. ln this context the 1990 decision on the part of the Indian Government to offer preferential treatment for Nepali manufacturers of at least 60 per cent Nepali or Nepali and Indian origin is a step in the right direction. Similar arrangements can be worked out under a regional framework. Economic co-operation in general and co-operation in trade in particular is a benefit with a cost. The cost could be economic and also political. To restore the politico-economic psychology of partner countries, especially those who are smaller and weaker, a framework on the basis of Positive Sum Game has to evolve in the SAAR C. For a regional framework to be effective its "Collective impact and decision-making power will have to be slightly stronger than those of its strongest member state ... " 31•

Concluding Remarks If SAARC countries, which have a combined middle-class population of about 200 million, can begin with normal trading and if countries would not positively discriminate against each other's products, then that itself will increase trade substantially. As it is , third country trade, e.g. Pakistan 's cotton yarn or denim going to India via Singapore and Hong Kong and crossborder illegal trade, far exceeds official trade. Restoring this normalcy in trade must be the first stage. The PTA could be one of the measures in the second stage for the SAARC to promote intra-regional trade. The ASEAN PTA , although not entirely satisfactory, could be a good model for a multilateral framework for the SAAR C. The replicability, however, has to be viewed in the context of different politico-economic features of the two regions.

22

PTA in lntra-ASEAN Trade

NOTES l. Richard Pomfret, "The Theory of Preferential Trading Arrangements" , Weltwirtschaftliches Archiv 123, no.3: pp 439-65 2. Sahathavan Meynthan and Ismail Haron, "ASEAN Trade Cooperation: A Survey of the Issues" , in ASEAN at the Crossroads, edited by Noordin Sopiee et al. (Malaysia: Institute of Strategic and International Studies (ISIS), 1987), pp. 17-18. 3. Seji Naya, Toward an ASEAN Trade Area (Malaysia: ISIS , 1987), p. 56. 4. Asian Development Bank (ADB) , Asian Development Outlook (ADO), Manila, Table A. I, pp . 222. 5. International Monetary Fund (IMF) , Direction of Trade Statistics (Washington , D.C. : 1989). 6. Sahathavan, op. cit., p. 17. 7. (i) lntra-ASEAN trade composition (all trade flows , 1982): SITC 3, 63 %; SITC 7, 9%, SITC 0, 7%; SITC 2, 6%; SITC 6, 6%; SITC 9, 3%; Others 3%; SITC 4, 2%; (ii) SITC 3: Indonesian exports to Singapore 74 %; Malaysian exports to Singapore 55 %; Singapore exports to Indonesia 76%; Singapore exports to Malaysia 72 %; Singapore exports to Thailand 78 %; in 1983 (Rieger 1985). 8. Nirmal K. Bista, Kuandan D. Koirala et al. , lntra-SAARC Cooperation in Trade and Joint Ventures. County Study: Nepal. (Kathmandu: Centre for Economic Development and Administration (CEDA), 1989), p. 47 . 9. As per Indo-Nepal Trade and Transit Treaties 1978. 10. Information based heavily on : Indra Nath Mukherji , Trade Expansion in South Asia: Liberalisation and Me chanism (Committee on Studies for Cooperation in Development in South Asia (SDCD) study, Centre for South , Southeast and Central Asian Studies , Jawaharlal Nehru University, New Delhi, 1986), Chapters 2 and 3. II . For details see documents like Practical Guide to ASEAN Preferential Trade Arrangement (Malaysia: Mini stry of Trade and Industry, 1986). 12. Ibid ., p. v. 13 . Janamitra Devan , "The ASEAN Preferential Trading Arrangement" , ASEAN Economic Bulletin (AEB) 4 , no. 2 (Nov 87): 199. 14. Thamvit Terdudomtham , "The Effects of ASEAN Preferential Trading Arrangements on Intra-ASEAN Trade : 1978-1985". Master of Economics Thesi s, Thammasat University, 1988, p. Ill. 15. Ooi Guat Tin , Th e A SEAN Preferential Tradin g Arrangement (Singapore: ISEAS , 1989) . 16. A SEAN: Th e Way Forward, Report of the Group of Fourteen on ASEAN Economic Cooperation and Integration (Malaysia : ISIS , 1987), pp. 9-10. 17. " Manila Declaration of 1987", A SEAN Economic Bulletin 4, no. 3 (Mar 1988) : 317-18. 18. " Joint Press Statement of Meeting of A SEAN Heads of Government", in ibid., pp. 324. 19. " ASEAN Co-operation: Agenda for the 1990s", Fourth ASEAN Roundtable Summary Record 29-30 March 1990, AERU , ISEAS , Singapore, pp. 4. 20. Diam Zainuddin, ASEAN Economic Co-op eration: Agenda f or the 1990s (Singapore: ISEAS, 1990), p. 5. 21. Sahathavan, op . cit. , p. 27. 22. Dato Seri Dr Mahathir Mohamad , " Keynote Address" in ASEAN at th e Crossroads , edited by Noordin Sopiee et al. (Malaysia: ISIS , 1987), p. 6. 23. SAARC, List of SAARC Activities Held (1985-1989) . This excludes activities held under CSCD and other non-governmental organizations, universities , etc. Also not included are three Summits and joint industrial meetings.

Notes

23

24. lndra Nath Mukherji . " Economic Constra ints and Potentialities", in Regional Cooperation in South Asia: Problems and Prospects, edited by Bimal Prakas (New Delhi: Vikas Publishing House , 1989), p. Ill. 25. Under the 1978 Treaty of Trade, contents criteria require Nepali manufactures to be not less than 80 % Nepali content or Nepali and Indian content. This was reduced to 60% as per an understanding reached between the two prime ministers on I 0 June 1990 to break the current trade and transit impasse (Times of India , II June 1990). 26. This section draws heavily from Bi sta and Koirala , op. cit. 27. Nirmal K. Bista , "Foreign Trade in Nepal with Special Reference to South Asian Countries ," Ph .D. thesis , Patna University, India , 1987, pp. 224-25. 28. The trade and transit impasse between Nepal and India during April 1988 to I 0 June 1990 is an example.

29. Mahathir, op. cit., p. 5. 30. Tarlok Singh , " Perspective After the Third Summit" in op. cit. Mukherji , pp. 151-52. 31. Hans H. lndorf, Strategies for Small-si zed Surviral (Malaysia: ISIS, 1985), pp. 20.

REFERENCES

Asian Development Bank (ADB). Asian Development Outlook 1991 . Manila: 1991 (and various issues). - - . Towards Regional Cooperation in South Asia. Manila, 1987 Asiaweek. 27 July 1991. Ayoob, Mohamed. "India in South Asia: The Quest for Regional Predominance". World Policy Journal, Winter 1989-90, pp. 107-33. Crone, Donald. "The ASEAN Summit of 1987 : Searching for New Dynamism". In Southeast Asian Affairs 1988. Singapore: ISEAS , 1988. Naya, Seji. Preferential Trading Arrangements and Trade Liberalisation. UNCTAD, UNDP, ESCAP 1980, (Perfect RAS/77/015/A/40). Renshaw, G.T. Market Liberalisation, Equity and Development. Geneva: ILO , 1989. Rieger, Hans C. ASEAN Co-operation and 1ntra-ASEAN Trade. Singapore: ISEAS , 1985. Sanchez, Aurora. " Non-Tariff Barriers in ASEAN-Japan and Intra-ASEAN Trade". ASEAN Economic Bulletin 4, no. 1 (July 1987): 1-53. Sarmad, Khwaja. "Trade Flows and Regional Cooperation among the countries of West and South Asia". In The Challenge of Asia-Pacific Cooperation, edited by Fu-chen Lo and Kamal Salih, pp. 41-56. Kuala Lumpur: Association of Development Research and Training Institutes of Asia and the Pacific, 1987. Sobhan, Rehman. "South Asian Regional Economic Cooperation: Problems and Prospects". In Lo and Salih, eds. , op. cit., pp. 174-84. Wadhva, Charan D. and Mukul G. Asher. ASEAN-South Asia Economic Relations. Singapore: ISEAS , 1985. Wanigaratne, Maurice R.A .C. Economic Relations Between South Asia and ASEAN. Tokyo: In stitute of Developing Economies, 1985. World Bank. World Development Report (WDR) 1990. Washington, D.C.: 1991 (and various issues).

THE AUTHOR Nirmal K. Bista, Ph.D., is a Reader at the Central Department of Management, Tribhuvan University , Kathmandu, Nepal.