The Social Dimension of Trade in ASEAN: A preliminary Analysis of the Issues involved A Paper prepared for the ILO’s Integration Department (March 2004) By Gijsbert van Liemt This is a Draft. Do not quote. Comments Welcome at [email protected] 2 Index Introduction 1. Economic Integration in ASEAN 1.1 The ASEAN Free Trade Area (AFTA) 1.2 The ASEAN Investment Area (AIA) 1.3 AIA and AFTA change the nature of ASEAN decision-making 1.4 How to measure the economic impact of AFTA(and AIA)? 1.5 The 1997-98 Asian crisis and the challenges ahead 1.6 Singapore and two-speed integration 2. Gender, International Trade and Fragmentation 2.1 Gender and Trade 2.2 International Production sharing 3. The Social Dimension of Regional Integration 3.1 Introduction 3.2 The Economics of Regional Integration 3.3 The Social Dimension 3.3.1 Typical Concerns related to the Social Dimension 3.3.2 Establishing the Social Agenda at the Regional Level 3.3.3 Some key elements of a Social Dimension 4. The Social Dimension of AFTA 4.1 Introduction 4.2 The gap in levels of development complicates ASEAN decision-making 4.2 How to bridge the gap? Annex 1 ASEAN: Key data in the process of economic integration Bibliography Boxes: 1. The AFTA Common External Effective Preferential Tariff 2. AICO and automotive investments in ASEAN 3. Women in ASEAN export processing 4. The China factor 5. Regional Integration and the WTO 3 Introduction This paper on the social dimension of the ASEAN Free Trade Area consists of four parts. Chapter One discusses the economic integration process of ASEAN. Chapter Two introduces two key dimensions of trade-related developments in ASEAN: Gender and Trade; and International production sharing. Chapter Three deals with some generic issues related to the social dimension of regional integration. Chapter Four makes some preliminary observations on the social dimension of AFTA. The reader is asked to keep in mind that this is a work in progress. Further work is needed to deepen and broaden the analysis. Above all, the findings of the case studies undertaken in different AFTA member countries are expected to contribute empirical evidence. In view of the preliminary nature of the paper, readers are asked not to quote it. Comments are welcome at [email protected]. 4 1. Economic integration in ASEAN Regional integration is undertaken for political and economic reasons, which are meant to reinforce each other. ASEAN -the Association of Southeast Asian Nations- is no exception. At first, political considerations were paramount. Since the early 1990s, it has been the turn of the economic considerations. For a long time, political and strategic considerations were the main force driving ASEAN integration. ASEAN was formed shortly after the collapse of the non-communist governments in Cambodia and South Vietnam. There was much instability in the region with conflicts between some member countries and the threat of communist-inspired insurgencies. The founding fathers of ASEAN considered that political co-operation would help solve conflicts and ensure peace and stability in the region. And it did. After much instability and hostility ASEAN became a haven of peace, tranquility and prosperity. To be sure, ASEAN had an economic component right from the start. In the 1970s and 1980s, ASEAN introduced several initiatives to expand intra-regional economic co-operation (see Annex 1). The ASEAN Industrial Projects (AIP) scheme was launched in 1976; the ASEAN Preferential Trading Agreement1 (PTA) in 1977; the ASEAN Industrial Joint Ventures (AIJV) in 1983, and the ASEAN Industrial Complementation Scheme (AIC) in 19882. But progress on economic collaboration in the first two decades of ASEAN’s existence was “slow” (Gates at al. 2001, p.5), ”insignificant” (Thongpakde, 2001, p.62), “played no more than a cosmetic role” (Ariff, 2001, p.45), “produced meagre outcomes” (Yoshimatsu, 2002, p.130)3 The 1990s saw drastic change. The political and strategic raison d’être for ASEAN became less obvious. The Cold War and the Cambodian conflict came to an end. In fact, Vietnam, Cambodia, Laos and Myanmar shifted from earlier antagonism towards ASEAN to a desire for membership. “Vietnam no longer saw the ASEAN countries as members of a foreign-led 1. In a Preferential Trade Area (PTA), lower tariffs are being applied to intra-regional trade in goods and services originating in member countries than to extra-regional trade 2 The Industrial Projects Scheme (AIP) aims to establish large-scale industrial projects in response to regional demand. The Industrial Complementation Scheme (AIC) wants to facilitate the region-wide production, specialization and exchange of automotive components. The Industrial Joint Venture Scheme (AIJV) covers a wider range of industries (Thongpakde, 2001) 3 However, Yoshimatsu makes an exception for the Brand-to-Brand Complementation (BBC) scheme, ‘an exceptionally successful arrangement” in his view 5 anti-Communist alliance but rather as natural allies against a resurgent China”. Long-isolated regimes in Cambodia and Myanmar sought international respectability (Pomfret, 2001, p. 227). For their part, the ASEAN-6 (Brunei, Indonesia, Malaysia, Thailand, the Philippines, and Singapore) saw the potential strategic advantages and political and economic benefits of expanding the organization to the whole of South East Asia. An enlarged ASEAN would increase its diplomatic and economic weight in the international community; beef up ASEAN’s strategic credibility; and enable a more efficient regional division of labour (Gates and Than, 2001, p.2). At the same time, economic factors pressed for attention. Intra-regional trade as a percentage of total trade had hardly increased. ASEAN’s share of world foreign investment inflows declined. China became an ever more formidable competitor for foreign investment and on export markets. Labour-intensive manufacturing activities started to relocate to China. And although, theoretically, with 500 million people as a market ASEAN has nothing to be shy about, it is far from an integrated market. Economic co-operation was intensified through the ASEAN Free Trade Area (1992) and the ASEAN Investment Area (1998). 1.1 The ASEAN Free Trade Area (AFTA) In 1992, the ASEAN Free Trade Area4 (AFTA) was established to eliminate tariff barriers among the Southeast Asian countries with a view to integrate the ASEAN economies into a single production base; create a regional market; enhance ASEAN’s competitiveness in the world market; and encourage specialization. A Common Effective Preferential Tariff (CEPT) Scheme was established as the main vehicle for achieving trade liberalization (see Box 1). Tariff rates levied on a wide range of products traded within the region were to be reduced to no more than five percent. Quantitative restrictions and other non-tariff barriers were to be eliminated. 4 In a Free Trade Area (FTA), no tariffs are levied on goods and services from other members. Each member continues to apply its own regime of tariffs to goods and services imported from outside the FTA 6 Box 1 The AFTA Common Effective Preferential Tariff (CEPT) The Agreement on the Common Effective Preferential Tariff (CEPT) Scheme is the core mechanism for the implementation of intra-ASEAN tariff reductions on products originating from ASEAN members states. A product is regarded as originating from ASEAN, if at least 40% of its value originates from one or more members states. The goal is to reduce all tariffs on intra-ASEAN trade to a maximum of 5% according to an agreed schedule. Tariff reduction is to be achieved in two ways: Normal Track and Fast Track. The new, less-developed members (Myanmar, Laos, Cambodia, Vietnam) are given more time to reduce their tariffs than the original members. Tariffs make up a significant share of their total revenue; lower tariffs can have drastic consequences for their State budget. Member states must submit lists with products for liberalisation and the dates by which this will take place. Products ready for tariff reduction are placed on the Inclusion List (IL). Products that are not yet ready for liberalisation are placed on the Temporary Exclusion List (TEL), to be subsequently placed on the IL. Products on the Sensitive List (subdivided into ‘Normal Sensitive’ and ‘Highly Sensitive’) enjoy even longer protection. Products and industries whose tariffs will not be reduced for reasons of national security, protection of human, animal or plant life and health, and of artistic, historic and archaeological value are placed on a General Exceptions List (GEL). As usual, progress on trade liberalisation can be measured in several ways. The number of product lines on the IL (and their share of the total) is an oft-used way. Another would be to relate the number of these lines to actually traded volumes. A third would focus on progress (or lack of it) in sensitive areas such as automobiles and automotive parts and components, and unprocessed agricultural products. The focus on tariff reductions under the CEPT risks distracting attention from non-tariff barriers which, on occasion, may be as important if not more important impediments to intra- regional trade. Source: various 1.2 The ASEAN Investment Area (AIA) The factors that led to the adoption of AFTA (declining share in world investment flows; the China factor) were also behind the ASEAN Investment Area (AIA) initiative. In addition, due to the worldwide adoption of more investor-friendly policies, competition for investment increased also with countries other than China. In 1998, the Framework Agreement on the 7 ASEAN Investment Area (AIA) was signed. AIA wants to attract greater Foreign Direct Investment (FDI) flows into the region from both ASEAN and non-ASEAN sources, with the goal of a liberal and transparent investment environment for ASEAN investors by 2010, and all investors by 2020 (Heinrich et al 2001)5.