Non-tariff measures on the automobile industry: Quantifying the impact on the ASEAN economy A report for General Motors International August 2015 Contents Executive summary .......................................................................................... 5 1 Introduction ....................................................................................... 10 1.1 Formation of the ASEAN Economic Community....................................10 1.2 The use of Non-Tariff Measures ..........................................................11 1.3 Report structure .................................................................................12 2 NTMs and their impact on trade...................................................... 14 2.1 What are NTMs? ................................................................................14 2.2 A brief history on NTMs under GATT ...................................................16 2.3 NTMs in ASEAN.................................................................................17 2.4 The impact of NTMs on international trade ...........................................18 3 The ASEAN automobile sector ....................................................... 27 3.1 The current status of the automobile sector in ASEAN ..........................27 3.2 The automobile sector after the AEC ...................................................31 4 Economic impact of automobile NTMs in ASEAN ........................ 43 4.1 Methodology ......................................................................................43 4.2 Scenarios...........................................................................................44 4.3 The economic impact of the reduction in NTMs: partial liberalisation ......45 4.4 The economic impact of the reduction in NTMs: full liberalisation ...........50 5 Conclusion ........................................................................................ 52 6 Appendix............................................................................................ 54 6.1 General Trade Analysis Project (GTAP) Model .....................................54 6.2 Global Economic Model ......................................................................55 6.3 Baseline and modelled tariff and output tax rates ..................................56 7 References......................................................................................... 57 2 Table of Figures Figure 1: NTM implemented in ASEAN, 2009-2013....................................................................... 5 Figure 2: World car ownership and GDP per capita, 2012.............................................................. 6 Figure 3: GDP impact of reducing NTMs in ASEAN automobile industry, 2025 ............................... 8 Figure 4: Impact of partial liberalisation on key macroeconomic variables, 2025 .............................. 9 Figure 5: Impact of full liberalisation on key macroeconomic variables, 2025 .................................. 9 Figure 6: World trade and MFN trade-weighted import tariffs, 1960-2013.......................................16 Figure 7: Value of ASEAN trade (exports + imports), 1995-2013 ...................................................18 Figure 8: Frequency index of NTMs ............................................................................................19 Figure 9: Frequency index of NTMs, 1999 and 2010 ....................................................................20 Figure 10: NTM implemented in ASEAN, 2009-2013 ....................................................................21 Figure 11: Brazil Motor Vehicle Production and Exports, 1980-2014..............................................22 Figure 12: Overall Trade Restrictiveness Index ............................................................................23 Figure 13: Global automobile production and value-added output, 2014 ........................................28 Figure 14: ASEAN real GDP growth, US$ ...................................................................................28 Figure 15: Motor vehicle penetration levels in ASEAN ..................................................................29 Figure 16: ASEAN GDP per capita, 2014 and 2030......................................................................30 Figure 17: World car ownership and GDP per capita, 2012 ...........................................................31 Figure 18: Progress on ASEAN integration by Sector (%) .............................................................33 Figure 19: CEE automobile value-added growth, 2000-2014.........................................................34 Figure 20: Core EU automobile value-added growth, 2000-2014...................................................35 Figure 21: ASEAN output and trade in Motor Vehicles, 2005-2013 ................................................35 Figure 22: Motor vehicle production in Thailand, 2000-2019 .........................................................37 Figure 23: Motor vehicle production and sales in Malaysia, 1980 -2014..........................................39 Figure 24: Motor vehicle production in Thailand and Indonesia, 1997-2014 ...................................41 Figure 25: Schematic overview of the modelling approach............................................................44 Figure 26: Distribution of static GDP gains, 2025 .........................................................................45 Figure 27: Impact of partial liberalisation on key macroeconomic variables, 2025...........................46 Figure 28: GDP impact of partial liberalisation scenario, 2025 .......................................................47 Figure 29: Ratio of Exports plus Imports to GDP, 2014.................................................................47 Figure 30: Employment impact of partial liberalisation scenario, 2025 ...........................................48 Figure 31: Impact of full liberalisation on key macroeconomic variables, 2025................................51 Figure 32: Employment impact of modelled scenarios, 2025 .........................................................51 3 Figure 33: GDP impact of reducing NTMs in ASEAN automobile industry, 2025 .............................53 Figure 34: Overview of the Global Economic Model .....................................................................55 Figure 35: Tariff rates applied to GTAP model .............................................................................56 4 Executi ve summ ary ASEAN member states have taken significant steps towards regional integration… In 2003, the ASEAN member states committed to the formation of a single economic market, the ASEAN Economic Community (AEC). This process was accelerated in 2007 with the signing of the AEC Blueprint, which set a deadline for completion by the end of 2015. Although the AEC falls short of achieving a fully functional single market, significant progress has been made in advancing regional integration. Official estimates suggest that over 82% of all prioritised measures contained within the AEC Blueprint have been adopted. Importantly , import tariffs have fallen dramatically, with zero rates now applied to 99% of all intra-ASEAN tariff lines for Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand, with special dispensation allowed for the less developed partners to reduce tariffs at a more gradual pace. … but progress in removing import tariffs has not been matched in other areas. While import tariffs have fallen, there has been less progress in other policy areas. Specifically, there has been little progress in eliminating non-tariff measures (NTM), defined by the UNCTAD as “policy measures, other than ordinary customs tariffs, that can potentially have an economic effect on international trade”. Instead, evidence suggests that since the financial crisis, there has been an increase in the use of NTMs, with nearly 190 additional NTMs implemented across ASEAN members in the period 2009-2013. Figure 1: NTM implemented in ASEAN, 2009-2013 Difficult to identify, and even harder to quantify, the consensus view in the literature is that NTMs are detrimental for economic output and welfare, and that free trade is the first best solution for economic development. For example, Hoekman and Nicita (2011) estimate that a reduction in the ad-valorem equivalent of NTMs by half would increase world trade by as much as 2-3%. As such, the continued use of NTMs remains a significant impediment to achieving the fundamental objectives of the AEC Blueprint to “transform ASEAN into a region with free 5 movement of goods, services, investment and freer flow of capital” and to establish a single production base. The automobile sector remains a key pillar of economic growth in ASEAN… The automobile sector is often earmarked by governments in developing economies as a key pillar of industrialisation and economic development, encouraged in its infancy through various import substitution and other incentive programs. The ASEAN region is no exception. The regional automobile sector has experienced rapid growth in recent decades, fuelled by robust economic growth, favourable government policy and an increasing level of regional co-operation and integration. Considered in isolation, the ASEAN automobile market is now the eighth largest automobile market in the world based on the total production volume of cars, with large scale assembly undertaken in Thailand (Toyota, Isuzu,