Assessing The Impact Of ASEAN Free Trade Area (AFTA) On Participating Countries
Features of ASEAN Free Trade Area
The developing countries of Asia have experienced development over the past few decades, especially after the era of global trade liberalization, due to the existence of various regional trade agreements (RTAs) among the countries. There are many RTAs in Asia that cover the developing countries in many ways, with the major objective of promoting the overall economic development of the signatory countries. World’s half production and consumption market is presented by the Asian countries and the RTAs play a vital role in determining the economic stability and growth of that region. The regional trade agreements have benefitted the signatory countries in economic growth and development, economic and political relations, trade, investment, services, industry and social welfare.
ASEAN Free Trade Area (AFTA) is a regional trade agreement by the Association of Southeast Asian Nations (ASEAN), established to support the local manufacturing industry in all the ASEAN countries. The agreement was signed in Singapore in January 1992. During the establishment, there were only six members in this agreement, namely, Indonesia, Singapore, Thailand, Philippines, Malaysia and Brunei. Vietnam, Laos, Myanmar and Cambodia joined the agreement in 1995, 1997 and 1999 respectively. Thus, currently, the agreement covers the above mentioned 10 countries and has contributed immensely in the growth of those countries. It created a regional market for almost 500 million people. The features and impact of the AFTA on the signatory countries is the thesis of this following essay.
Features of AFTA
AFTA is one of the major regional trade agreements in Asia. The fundamental goals of AFTA are to:
- Eliminate the tariff and non-tariff barriers within the ASEAN countries and raise the competitive edge of the countries in the global market.
- Attract more amount of foreign direct investment (FDI) to the ASEAN countries by eliminating financial barriers.
The principal mechanism to achieve these goals is the establishment of the Common Effective Preferential Tariff (CEPT) scheme, where a phased schedule was introduced in 1992 with an objective to raise the competitive advantage of the region as a base for the production, targeted for the international market.
The key features of AFTA are as follows:
- The agreement eliminates all type of tariffs for all type of manufacturing within the ASEAN countries.
- It allows back-to-back shipments of the products within the member countries.
- It allows for third-party invoicing for the products
- Allows for ASEAN Cumulation
The major difference of AFTA and EU is that, AFTA does not impose a common external tariff on the imports. However, the members are allowed to impose tariffs on the imports from countries outside ASEAN, depending on the national schedules. Goods, originated in the ASEAN, are subject to 0-5% of tariff and the newer members are given extra time for implementing the reduced rates of tariff. There are three categories for tariff reduction, namely, temporary exclusions, sensitive agricultural goods and general exceptions.
The CEPT is applied only on the products originated in the ASEAN countries. The rule of origin allows for 40% of the FOB for local ASEAN content and value of inputs from various ASEAN members are added together to meet the 40% threshold. Administration of the agreement is handled by the national trade and customs authorities in every ASEAN countries.
Impact of ASEAN Free Trade Area
Impact of AFTA on the participant countries
The ASEAN Free Trade Area (AFTA) provides many benefits for the economic welfare of the participating nations. The agreement focuses on the reformation of the tariff rates prevailing in the ASEAN countries and its considerable positive impact on the trade creation for a wide range of products in that region.
AFTA is the measure for promoting the intra-trade among the member countries of ASEAN. It is found that, the elasticity of the reduction of tariff on the imported goods is quite larger than that on the exported goods. At the same time, the effects of trade creation for the old members of ASEAN are larger than that for the new members. The primary agenda of AFTA was to promote the intra-AFTA trade by removing the tariff rates among the ASEAN members and over the years since its establishment in 1993, the purpose of the agreement was fulfilled. Expansion of the intra-ASEAN trade is helpful for the overall economic growth of the nations, as growth in exports will result in growth in domestic production and growth in imports will lead to increase in the productive efficiency as well as competitiveness of the domestic producers. Trade liberalization measures under AFTA also resulted in the benefits for the participant members of this agreement.
The benefits from this agreement are as follows:
- Elimination of tariff resulting in reduction in product price throughout the ASEAN
- It enables the ASEAN countries to gain access to regional product market, incorporating considerable advantages for the economies.
- Increase in consumer welfare for low priced products
- Lower priced raw materials leads to a fall in the production cost for all the manufacturers of the AFTA member countries.
- The trade among the countries and the investment sectors will gain benefit in the long run
The tariff elimination scheme of AFTA classified the output of the participant ASEAN countries into two broad categories, namely, Inclusion List (IL) and Exclusion List (EL). There is another subdivision of the EL into Temporary Exclusion List (TL) and the Sensitive List (SL). Products under the TL will eventually gain the tariff elimination or reduction status and will move into the IL and the SL products will be exempted from the tariff elimination. With this structure, the AFTA was established initially with 6 ASEAN members and later on with 10 members. For the first 6 members, by 2008, the tariff rates of the IL products were eliminated between 0 and 5%. By 2010, all the members of AFTA became eligible to enjoy the full benefits of the tariff reduction on their exports and imports.
Table 1: Progress of the Regional Tariff Elimination in the ASEAN by 2010
(Source: DeRosa 2012)
The above table shows the level of the extent of tariff elimination of the participant members of AFTA over the years. Singapore eliminated the tariffs entirely by 2010. The AFTA members showed significant progress under the CEPT scheme of tariff elimination for the ASEAN products, rather than under the most-favored nation (MFN) scheme. The most significant impact is seen for energy materials and the outputs, machinery and equipment. Thus, the impact of AFTA is much better for intra-AFTA trade intra-ASEAN trade.
Benefits from ASEAN Free Trade Area
Figure 1: Average AFTA Tariff, 1993-2012 (%)
(Source: Itakura and Lee 2012)
The above diagram depicts the progress of average tariff elimination for the participating countries under AFTA. It is seen that, by 2012, all the 10 members successfully reduced the rates of tariff as well as formal restrictions on trade. As the level of tariff was reduced over the years, the level of trade of the 10 participating countries under the AFTA increased significantly. The regional economic integration became advanced among the ASEAN members
Figure 2: Trends in Export, Import and total trade of ASEAN in USD, 1993-2012 (%)
(Source: Medvedev 2012)
1993 onwards, the level of ASEAN trade grew rapidly with an average annual rate of 10.5%, with an increase in the total trade six times, from US $430 billion in 1993 to US $2.4 trillion in 2012. Along with AFTA, implementation of other initiatives such as, ACIA and ATIGA by the ASEAN, also improved the trade competitiveness, investment and facilitation.
Figure 3: Top 10 Trade partners of ASEAN
(Source: Baldwin and Jaimovich 2012)
Over the years, the share of countries, outside the ASEAN, has decreased in the trade with ASEAN and that of the ASEAN members has increased, indicating the increase in the total as well as the individual trade level of the ASEAN countries, especially after AFTA. There is also increase in the per capita income of the 10 participating countries after the complete implementation of AFTA.
Table 3: FDI Inflow to the ASEAN (US$) after AFTA, 2000-2012
(Source: Aggarwal and Govella 2012)
Economic development also depends heavily on the inflow of foreign investment. After the implementation of AFTA and other measures by the ASEAN, the flow of direct investment has increased considerably in those countries, which have been beneficial for increasing the level of production by reducing the production costs. In 2011, the inflow of FDI was USD 17.6 billion while it increased by 13.6% in 2012, reaching to USD 20 billion. As the production of these countries increased, the level of trade increased too and coupled with the implementation of AFTA, the tariff reduction and elimination of the 10 countries gave the growth of intra-AFTA trade a big boost. The manufacturers could buy cheaper and better quality raw materials from the ASEAN members due to reduction and elimination of the import duties. This also boosted the economic growth of these countries. As highlighted by Asean.org (2017), the AFTA has made the system of doing business faster and easier in all the ASEAN countries, and made the businesses profitable, created more job opportunities and more choices of products, and gave the much needed support to the local producers to become more competitive and produce products of international standard.
Conclusion
However, as stated by Puig and Tsun Tat (2015), the implementation of AFTA was not the only factor that brought economic growth to the participant countries. The other regional trade agreements, such as, Asia-Pacific Trade Agreement (APTA), ATIGA etc. are also contributory factors in the growth of trade and economy of this region. Reduction and elimination of tariff are combined with the reduction of other trade barriers, such as, non-tariff barriers and trade liberalization policies by the ASEAN, which helped in enhancing the trade conditions of the developing countries of Asia.
Conclusion
AFTA was introduced for two major purposes: first, to raise the competitive edge of the production base of the ASEAN Member States to cater to the world market, and second, to draw more foreign investors or companies to invest in any one of the 10 ASEAN Member States. After more than two decades of its establishment, AFTA was successful in its purposes. As the total economy of the ASEAN member countries holds the third position among the largest economies of the world due to the high level of trading and business activities among their own economies. The medium and small businesses in those countries got a boost after this agreement. The reduction in the tariff and the non-tariff barriers enabled the businesses to become more profitable. Hence, companies got more money in their hands and invested in expanding their businesses. This has led to creation of more jobs in the domestic as well as multinational businesses. People also got the access to larger amount of products due to the creation of single market and ASEAN products reached the international market at a reasonable price. Thus, AFTA has contributed greatly in the development of the economies of the developing countries of Asia.
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