AFTA as Real Free trade Area

Transcription

1 1 Executive Summary AFTA as Real Free trade Area Submitted to Department of Business Economics Ministry of Commerce By Kwanjai Sothitorn Nualnoi Pongsa Arunsmith Mallikamas Treerat Pornchaiwiseskul January 2002

2 2 AFTA as Real Free Trade Area Executive Summary During the fourth ASEAN Summit in Singapore from January 27-28, 1992, leaders of the six ASEAN country members (i.e., Malaysia, Indonesia, Singapore, Brunei and Thailand) signed the framework agreement on enhancing ASEAN economic cooperation, which has led to the establishment of ASEAN Free Trade Area (AFTA) and tariff and non-tariff barrier reduction plan. Later on, four additional members (i.e., Vietnam, Laos, Myanmar and Cambodia) were included. According to the latest agreement, tariffs between member countries will be reduced to zero by 2010 AD for the six original members and by 2015 AD for the new four members and by 2018 AD for some sensitive items. Objectives of the Study 1. to study the problems of ASEAN policy implementation and its impacts on economy of ASEAN as a whole, by sector and by country 2. to analyze Thailand s trade opportunity by sector after Thailand fulfills her free trade agreement 3. to recommend policies for trade negotiation with other ASEAN member countries 4. to propose appropriate guidelines for structural adjustment of Thai agricultural and manufacturing sectors to cope with trade competition and market expansion Model, Scope and Data There are three general equilibrium models used in this study. They are GTAP (Global Trade Analysis Project model), CAMGEM (Chulalongkorn and Monash Universities General Equilibrium Model) and a model for new ASEAN member countries (Laos, Cambodia and Myanmar). GTAP model is a global trade model covering 45 countries/trading blocks and 50 sectors. It is constructed to capture the linkage among 45 input-output tables of ASEAN countries through the flows of goods and capital movement. CAMGEM is a General Computable Equilibrium model for Thailand, which covers 180 sectors of goods and services. It is also based on Thailand s input-output which is revised every five years by NESDB. The model can provide more details on the sectoral impacts of ASEAN policies on Thailand. The model for Laos, Cambodia and Myanmar has to be separately created as they are not included in GTAP. The databases for this model have been kindly provided by a group of Input-Output expert from the NESDB. The model covers 50 sectors of goods and services.

3 3 Impacts of Import Tariff Removal According to Department of Customs and UNCTAD, Thailand s average tariff rate on import from other ASEAN countries in 1991 is about 6.1% while those of Indonesia, Philippines, Vietnam, Malaysia and Singapore are 2.14, 3.69, 12.17, 0.95 and 0 percents respectively. The study s result has shown that trade liberalization within ASEAN is likely to generate prosperity for the region as a whole. But of course the fruit of liberalization shall not be equally shared among ASEAN members. Singapore is likely to gain most from the implementation of AFTA policy, even though it contributes nothing to the ongoing process of trade liberalization. The analysis has shown that the benefit accruing to Singapore comes from external impact only. External impact represents benefit accruing to a country as the result of tariff reduction on the part of other ASEAN members. In contrast, the term Internal Impact represents a country s gain resulting from its own tariff elimination. The fact that Singapore could emerge as the top gainer on the strength of external impact alone is due to its unique position as the center of the regional trade in ASEAN. The model predicts that Singaporean economy would be able to add to its real GDP an extra growth of 1.34 % over the entire period of AFTA implementation. Following Singapore neck by neck are Thailand (1.09 %) and Vietnam (1.08%). In Thailand s case, its AFTA related source of growth comes mainly from an internal impact or its own tariff reduction (0.87% out of 1.09% in total or combined impact). As for Vietnam, the simulation result shows an extreme case contrasting to Singapore, that is, almost all of Vietnam s gain from liberalization is the result of its own action (1.06% out of 1.08% in combined impact). Coming up on the fourth and fifth places are Malaysia (0.69%) and Philippines (0.57%) respectively, while the main sources of their gain come from external impact of AFTA policy. The last position in this game of international trade belongs to Indonesia, which obtains only a miserable 0.16% in its extra growth from AFTA Policy Implementation. With regards to industry result for Thailand, sectors like textile, garment, leather products, food products, vehicle and vehicle parts and mineral products are likely to gain substantially from the free trade due to the significant decline in production cost. Output of textile sector is predicted to rise by 2.66 percent, with a 5.07 percent increase in export. If this gain in trade is broken down by destination, one will see some big growth in three markets i.e.,122.9, 21.9 and 12.6 percents in Vietnam, Philippines and Indonesia respectively. For garment industry, it s production and export should increase by 1.64 and 2.8 percent, respectively. Similar to the textile case, there are big gains in the same three markets, i.e percent in Vietnam, 100 percent in Indonesia and 37.2 percent in Philippines. As for leather products, industry, which has been found to be the most likely top gainer among various sectors of Thailand, it s export growth is impressive. The flow of Thai leather products to Vietnam shows an increase of 60.7 percent, while the growth of it s flow to Indonesia is as high as 170 percent. Outside the export oriented light manufacture industry, there are some impressive performance in heavy manufacture sector as well. For example, liberalization of the vehicle and vehicle parts industry could lead to an expansion of it s output by 1.57 percent, while it s export to Vietnam, Indonesia, Malaysia and Philippines is expected to rise by 597, 97, 40 and 20 percents respectively.

4 4 AS for the losers, most of them have one common characteristic i.e. the high protection rate. At the bottom end is the petroleum and coal industry, where its output is projected to drop by 2 percent, with an increase in import of 11.2 percent and a deficit in trade balance of 183 million US dollars. Next to the petroleum and coal industry is the meat products sector with an output drop of 1.1 percent, an import increase of 22.2 percent, resulting in the net trade loss of million US dollars. The third loser is vegetable oil and fat sector, where its output could be contracted by 0.7 percent, with an import expansion of 10 percent and the net trade loss of 8.9 million US dollars. The remaining losers are some agriculture sectors that may face the problem of shortage in input, for the factor of production tends to be diverted to those that receive some benefit from trade liberalization. Before the policy of ASEAN free trade takes effect, intra-asean trade accounted for 18.3 percent of total international trade in the region. Trade with countries outside ASEAN accounted for the other 81.7 percent. After the ASEAN free trade implementation, share of intra-asean trade would increase to 19.6 percent, with a fall in non-asean trade from 81.7 to 81.4 percent. All the ASEAN countries would experience both import and export increase in terms of trade volume. Philippines is likely to enjoy the highest rate of export increase at 24.2 percent. Singapore and Thailand are next with the rates of 10.1 and 6.9 percents respectively. Vietnam is projected to have the highest rate of import increase at 25.6 percent. Thailand is the second with an import rise of 25.6 percent, while Philippines import could increase by 15.7 percent. All these three countries still have highest protection rates. Vietnam, Philippines and Indonesia are likely to become the main export markets as the result of ASEAN trade liberalization. Thailand s export to Vietnam, Philippines and Indonesia could expand by 31.8, 16.9 and 8.5 percents respectively. Regarding the group of new members in ASEAN, average tariff rates of Laos, Cambodia and Myanmar are 11.9, 5.5 and 10.7 percents respectively. Their dependency on international trade is 1.21, and percent of GDP respectively. When tariff barrier is eliminated, Myanmar, Laos and Cambodia should have their GDP increased by 0.37, 2 and 5.6 percents respectively. Impacts of Non-Tariff Barrier Removal According to CEPT agreement, NTB will be gradually reduced to zero in 2008 AD and when tariff rate of an item has been reduced to 20 percent or below, its NTB must be removed. However, according to UNCTAD (TRAINS) databases, in 1997 AD Thailand has encountered a lot of NTB. For example, Malaysia had NTB on sugar by 98 percent, on apparel by 24 percents and on vehicle and parts by 18 percent. Singapore has NTB on Thai rice import by 100 percent and on vehicle and parts by 44.7 percent. As for Indonesia, Thailand export has not encountered NTB. The analysis on macroeconomic impact of NTB removal has shown that all the ASEAN member countries would gain. In contrast to the previous scenario on tariff reduction, where Indonesia has been found to be at the bottom end of the favorable

5 5 impact from AFTA, Indonesia has turned out to be the top gainer in this case. It is expected that as much as 7 percent growth rate could be added to its real GDP as the result of NTB removal. This is because at present, Indonesia has high protection rates in many sectors, such as, paper (600 percent), chemicals (271 percent), steel (357 percent). An elimination of NTB would result in price decrease or cost reduction of 0.42 percent, which should improve Indonesia s competitiveness. Second from the top gainer is Singapore, with it s real GDP increasing by 2.4 percent, out of which 1.77 percent is due to the other ASEAN countries action. Malaysia s real GDP would also increase by 2.3 percent, out of which 1.05 percent is due to the removal of its own NTB, while the remaining 1.24 percent comes from the combined action in other ASEAN countries. The removal of NTB would benefit Thailand in terms of extra real GDP growth of 0.28 percent. Thailand s investment and export would also expand by 0.38 and 0.43 percents respectively. At the same time, Thailand s import would rise by 0.65 percent, with an increase in net trade balance deficit of 31 million US dollars. At micro level, Thailand s sectors that would benefit most from NTB removal are processed rice, sugar, vehicle and parts and transportation equipment. Output of processed rice could rise by 4.9 percent, with an average export expansion of 10 percent and net trade balance improvement of 262 million US dollars. The markets for Thailand s export growth of processed rice are Philippines, Malaysia, Indonesia and Singapore. Thailand s sugar output is expected to increase by 5.56 percent, with an export growth of 10 percent. Net trade balance should improve by 133 million US dollars. The main export market for Thai sugar is Malaysia. Transportation equipment sector should see its output increase by 11 percent while its export could expand by 37.7 percent. Vietnam is the major export market for Thailand s transportation equipment. Its contribution to net trade balance is about 107 million US dollars. Some production sectors such as food products and crops may receive negative impacts from the removal of NTB due to an increase in factor cost, resulting from the relocation of resource to those sectors that benefit from the NTB removal. Crop sector is likely to face the contraction in it s output by 1.2 percent, while the food products output could drop by 0.91 percent. Some of Thailand s manufacturing sectors may also suffer from manufacturing efficiency improvement in other ASEAN countries, especially, Indonesia. As a result of this, the output of Thailand s textile, garment and leather products industries could drop by 0.39, 0.08 and 1.15 percents respectively. In addition, the change in international trade flow should benefit the export of Thai rice and sugar to Malaysia, telecommunication equipment to Vietnam, rice and vehicle and parts to Philippines and electrical equipment, machinery, vegetable and fruit to Indonesia.

6 6 Policy Policies and measures for both public and private sectors to cope with the forthcoming impacts of ASEAN free trade can be divided into 6 groups. 1. Trade negotiation There are two types of negotiation tactic i.e. Proactive and Reactive. The proactive tactic requires an initiation on the Thai side in persuading other ASEAN countries to cut down a certain type of their non-tariff barriers for Thailand or, if possible, to remove them all. On the other hand, the reactive tactic is focused on the measure that Thailand should prepare in order to protect those sectors that may suffer from the negative impact of tariff reduction as well as the existing practice of NTB in other ASEAN economies. With regard to the proactive type of negotiation, priority should be given to agricultural products, garment, vehicle and transportation equipment. The target countries are Malaysia, Philippines and Vietnam. As for the reactive tactic, sectors such as electronic equipment, machinery, vehicle parts, chemicals, petroleum products, iron and steel and food products cloud be the main target group. 2. Export Promotion. Export promotion should be designed for both the existing markets and new market penetration. Existing Market. The policies should focus on those sectors where Thailand has already had comparative advantage Short-term. In short-term, export promotion should be emphasized on the sectors which Thailand already has competitiveness and may benefit from the tariff barrier reduction. These sectors are mineral products, sugar, processed foods, textile, apparel, leather products, iron and steel, electrical equipment and transportation equipment. In addition, some sectors that are likely to receive large benefit from the free trade, such as, vehicle and parts, should be included even though they still don t have enough export capability. Medium-term. In medium-term, export of rice, sugar and mineral products, vehicle and parts, transportation equipment should be promoted. New Market Penetration. Short-term. Both public and private sectors have to aim at the new possibility in Indonesia, Philippines and Vietnam. The emphasis should be placed on the following sectors: vehicle and parts, mineral products, textile, apparel, leather products, processed food, vegetable and fruit and fisheries.

7 7 Long-term. In longer terms, rice, sugar, beverage and wearing apparel sectors in Malaysia and Singapore could be the main target. 3. Investment Promotion There are two priority areas of investment promotion, namely, industrial linkages and efficiency improvement. Some downstream industries with high forward linkage should be promoted, so that the upstream industries can become more competitive. For example, leather products industry should be promoted to support husbandry. In order to absorb the potential gain from the AFTA establishment, investment promotion in capital goods manufacturing is necessary. As the economy grows, labor factor will be more expensive compared to capital goods factor which can be imported. Therefore, there will be substitution of capital for labor in various manufacturing sectors. 4. Labor Policy At macroeconomic level, economic growth will drive up the price of input factors (labor, land and capital). Factor owners will generally benefit from the price hike. At sectoral level, some manufacturing sectors may gain from the removal of trade barrier more than the others. For example, the reduction of tariff barrier could lead to an increase in labor demand in some sectors such as textile, leather products, electric appliances and machinery, while a reduction of NTB would result in the rising of labor demand, particularly in paddy, processed rice, sugar and telecommunication equipment. The implementation of AFTA policy may send negative impact to manufacturing sectors in two different ways. First, import from the other ASEAN countries could reduce the domestic labor demand. Second, scarce labor is likely to be substituted by capital goods. Certain manufacturing sectors such as meat products, vegetable oil and fat, processed rice, paddy have been predicted to suffer negative impacts from tariff reduction. NTB removal could also induce capital substitution for labor in some sectors like fiber plants, food products, chemicals and plastics. The main labor policies are as follows: 1) Timeframe and related information on AFTA policy must be made known to both manufacturers and workers well in advance 2) Re-training for re-located workers should be provided. 3) Study results on both positive and negative impacts should be made known to workers so that they can efficiently adjust themselves. 4) AFTA free trade might have to be postponed for those sectors in which labor are highly affected and workers cannot adjust themselves to the new environment. For those sectors in which workers suffer a huge and sudden loss from the

8 8 policy of free trade, and employers cannot provide enough help, the government must intervene to alleviate unemployment problems. 5. Policy relating to Efficiency Improvement in International Trade and Investment This could be achieved by accelerating both the remaining tariff and non tariff barriers, speeding liberalization in service sectors to support trade expansion, improving infrastructure such as transportation and telecommunication system, speeding up ASEAN Investment Area, and supporting AICO. 6. Policy on an Improvement of Market Supervision Mechanism This policy could be carried out by setting regional standard for non tariff measures, improving monopoly laws, rule of origin, and dispute settlement mechanism. 7. Policy on an Expansion of Regional Trade Opportunities This policy implies an acceleration of sub regional cooperation, particularly in Indochina sub region. **************************