THE PHILIPPINES IN THE ASEAN FREE TRADE AREA

on Tuesday, 31 July 2012. Posted in Speeches & Statements of the Former Secretaries-General of ASEAN Print

Address by Rodolfo C. Severino, Secretary-General

of the Association of Sutheast Asian Nations,

before the Manila Rotary Club

Manila, 7 March 2002

When I was Philippine Consul-General in Houston, Texas, I was a member of the Houston Rotary Club. The members of that club used to boast of having the biggest Rotary Club in the world. You know how Texans are. And I would boast back that in the Philippines we had the oldest Rotary Club in Asia, the Manila Rotary Club.

I wish to thank you for inviting me to join you today, while I am on a visit to Manila. I am here to speak at the Asia-Pacific Executive Forum sponsored by the Asian Institute of Management and the East-West Center in Honolulu. The subject of my presentation at the forum this afternoon is "ASEAN in the New Business Environment." I readily accepted the invitation to speak before Rotary, because I thought that it would be a good opportunity for us to think together about the Philippines in ASEAN in the new business environment. To put it more precisely, let us look at how the Philippines is affected by ASEAN's way of dealing with the global economy and the challenges of globalization.

The first of January this year was some kind of milestone in ASEAN's history. It was the target date for the ASEAN Free Trade Area to be essentially achieved. Of course, free trade areas are never complete as long as they are made up of sovereign states; even the European Union is still a work in progress toward a more perfect union. In the case of ASEAN, the first of January 2002 was the date on which tariffs on goods traded within ASEAN – with some exceptions – were scheduled to drop to within a range of zero to five percent.

Around the beginning of the year, there were two reactions among those who were aware of AFTA's realization. One group of people asked: why was there no fanfare to mark the historic milestone? And another group asked: why did it catch us by surprise?

The answer to both questions is the same, and it is that the AFTA target of 0-5 percent tariffs on intra-ASEAN trade had been substantially achieved well ahead of schedule. This is why there was no particular observance of AFTA's formal realization, and why some people were surprised. As early as 2000, most of the tariff lines on goods traded within ASEAN, representing almost 90 percent of intra-ASEAN trade, were already in the 0-5 percent range. So, basically, nothing really happened on the first of January 2002, because what was to happen had already, in essence, happened.

Of course, the four newer members of ASEAN – Cambodia, Laos, Myanmar and Viet Nam—are given a few more years to achieve the 0-5-percent target for their tariffs on ASEAN imports. But the six older members – Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand – do most of the trading in ASEAN. In this light, we can say that AFTA is basically done.

Let us go back to the time when the AFTA process was launched, to 1992. At that time, the then six ASEAN countries were at the height of their prodigious economic surge. The ASEAN economies were looked upon as the model for developing countries – development-minded, export-oriented, open to foreign investment, private sector-driven. Nevertheless, with remarkable foresight, ASEAN's leaders decided that they must integrate their economies into a regional economy if they were to face and survive the enormously fierce competition that was to come. They agreed that they would create an ASEAN Free Trade Area by progressively cutting the tariffs on goods traded among them, beginning in 1993, until they were, with some exceptions, at a level no higher than five percent by 2008. In 1995, ASEAN decided that fifteen years was too long and advanced the target date for AFTA by five years, to 2003. In response to the 1997-1998 financial crisis, ASEAN's leaders decided to advance AFTA's end-date still further, to the beginning of 2002. This was contrary to many instant commentaries at the time, which predicted that the financial crisis would finish AFTA, as ASEAN members looked inward and turned protectionist.

An Integrated Regional Market

The idea here is that, by lowering barriers to trade among its member-countries, ASEAN is creating an integrated regional market. This makes economies more efficient through a better division of labor, through the benefits of economies-of-scale. It stimulates healthy competition, lowering costs. It enlarges the "domestic" market. The region thus becomes more attractive to investors, creating more jobs. It is, of course, not enough to integrate the regional market to attract investments. The investment climate of each ASEAN country has to be nurtured and strengthened. But an integrated ASEAN market is demanded by more and more investors, particularly in measuring the ASEAN countries' attractiveness as an investment destination against, notably, the megamarket of China.

The progressive reduction of tariffs to minimal levels under AFTA has been accompanied by a massive expansion of intra-ASEAN trade – from US$44.2 billion in 1993 to US$97.8 billion in 2000, from which, as we will see, the Philippines has benefited in terms of exports to other ASEAN countries.

As I said earlier, AFTA continues to be a work in progress. The five percent tariffs allowed under AFTA, although minimal, still constitute barriers to intra-ASEAN trade. Thus, in 1999, ASEAN agreed to abolish tariffs altogether by 2010, at least among the first six signatories to the AFTA agreement.

Market integration, however, is about much more than tariff-cutting. Other barriers have to be removed. For example, ASEAN has adopted a set of harmonized tariff nomenclatures to make the processing of traded goods easier. We have to do away with duplication of product testing and certification. ASEAN is working on mutual recognition arrangements among member-countries, so that product tests in one ASEAN country will be acceptable in other ASEAN countries. This work is being done in electrical and electronic equipment, telecommunications equipment, cosmetics, pharmaceuticals, and prepared food. Common rules on sanitary and phytosanitary measures have to be worked out.

The transportation of goods and people within ASEAN has to be made easier and less expensive. Trade in services, including financial services, telecommunications, and tourism, as well as air services, has to be considerably liberalized, at least among ASEAN countries. Because this undertaking is much more complex than the freeing up of trade in goods, the process has been rather slow.

The Word from President Arroyo

Where does the Philippines stand? Let us hear from President Arroyo. When the President visited the ASEAN Secretariat in Jakarta last November, she declared:

"Our response to renewed economic adversity should be to deepen further the economic integration of our region.

"This means several things. Maintaining, if not accelerating further, the AFTA timetable. Identifying impediments to trade and investments – and removing them. Taking effective measures to make trade and investments as easy as possible and as inexpensive as possible. Fulfilling our dream of a seamless transportation network within ASEAN for the freer flow of goods and people. Interlinking our telecommunications systems. This means opening up our services sector to one another – transportation, communications, financial services, commercial and professional services. Making a serious effort to develop our capacity to harness the power of information and communications technology, and working together in this vital area. . . .

"What we require today," she continued, "is no less than a change of mindset – to use a modern cliché, a paradigm shift. We must think regional. We must truly believe that our national or corporate or personal interest lies in the destiny of the region. This is required of our business communities no less than of policy-makers. We have to cast off the kind of thinking that continues to burden many of us – the idea that we are good only for the confines of our national boundaries, whose market is to be protected as our preserve, each nation to its own. This will no longer work in today's world, even if it ever did."

Fears have been expressed about the ability and readiness of Philippine industries, products and companies to compete in an integrated regional market. The specter has been raised of whole industries, or at least companies, being wiped out by a flood of goods more cheaply and more efficiently produced in other ASEAN countries.

I would like to make one point here. We often hear from those who fear being hurt. Those who thrive and benefit almost always stay quiet. And there are Philippine industries and Philippine firms that have gained from ASEAN and thrive in AFTA, and the Philippine economy is benefiting from it. Let the figures speak. From 1993 to 2000, the Philippines' exports to other ASEAN countries grew almost seven times, more than 650 percent. Those of Indonesia increased by about 118 percent, those of Malaysia less than 90 percent, and those of Thailand less than 80 percent. The share of the ASEAN market in the Philippines' total exports more than doubled from seven to 15.7 percent. For Indonesia's exports, the ASEAN share expanded from 13.6 to 17.5 percent and, for Thailand's exports, it rose from 16 to 21 percent, while in the case of Malaysia it dropped from 28 to less than 25 percent.

We have heard some Philippine firms plead for protection from regional competition because of the disadvantages they say they suffer, alleging bad government policies, lousy infrastructure, expensive power and telecommunications, peace and order, red tape, corruption, the low purchasing power of the domestic market.

Strengthening Competitiveness

The remedy for these alleged ills is not protection from competition, which hurts other industries as well as consumers. The remedy is to strengthen the competitiveness of Philippine industries and firms by doing something about those things that weaken their competitiveness. If policies are bad, change the policies. Build and upgrade the infrastructure. Do what it takes to lower the cost of power and communications. Improve peace and order. Remove red tape. Reduce corruption. Straighten out the extremely lopsided distribution of income. Do something about the educational system. In other words, get the government's support, not its protection. Support strengthens, protection weakens.

Surely, the Philippine business community does not lack either the political clout or the resources to take action and to apply pressure on policy-makers so that the chains hobbling the economy's competitiveness are removed – its competitiveness for markets and investments. President Arroyo cannot do it by herself.

Of course, competition has to be fair. If one's trading partner dumps goods in the domestic market, there are anti-dumping remedies available; but dumping has to be proved, and the remedy has to be against real dumping and not simply against better and cheaper products. Within the AFTA framework itself, there are provisions on safeguard measures similar to those of WTO. But it would be wise for ASEAN governments to invoke these only rarely and only with the entire economy in mind, not just the interests of a favored few.

We have to remember that regional economic integration is being pursued in order to attract investments and stimulate economic activity in ASEAN. But where in ASEAN will the investments flow and economic activity generated? Which countries in ASEAN will benefit more? It is those countries that have attractive investment environments, those that are plugged into the regional economy, not those that drag their feet on the way to an integrated regional market and are unwilling to compete.

In any case, as we have seen, some sectors in the Philippines are benefiting, even thriving, from regional economic integration, despite the alleged obstacles. Perhaps, they should speak out. As President Arroyo urged last November, the thing to do is to look outward, think regional, if not global. We need the region to hone industry's efficiency and achieve economies of scale in order to strengthen the economy's competitiveness in an increasingly competitive world.

Philippine industry has to be competitive as ASEAN integrates further, abolishing tariffs and liberalizing services; even more, as ASEAN begins to negotiate a free trade area with China. ASEAN is embarking on this, because it sees the rise of China not only as a competitive challenge but also as an enormous opportunity. Now, as soon as ASEAN's and China's leaders announced their intention, voices were immediately raised denouncing the very idea of a free trade area with China. I suggest that before leaping to conclusions we wait until the proposed free trade arrangement takes discernible shape. Negotiations have not even started, but they will soon. The Philippines certainly will have a voice in them, and the Philippine business community will have a chance to influence the Philippine position. But that influence will have to be exerted in the cause of stronger competitiveness and fairness and not on behalf of stifling competition through protection.

Judicious support is needed for stronger competitiveness and a robust economy. But protection will only weaken competitiveness, harm related industries and the workers in them, damage the welfare of consumers – that is, all of us – and sap the nation's economic strength.