On 28 January 1992, six ASEAN Leaders signed a framework agreement to establish the ASEAN Free Trade Area (AFTA) within 15 years, i.e. by January 2007. Their economic ministers also signed one to adopt the Common Effective Preferential Tariff (CEPT) as the mechanism to progressively reduce and eventually remove tariff on manufactured products. Apart from tariff, they agreed to eliminate non-tariff barriers, including quantitative restrictions, which effectively prohibit or restrain trade in goods among ASEAN Member Countries (AMCs).
In 1995, the Leaders decided to accelerate the implementation of the CEPT scheme for AFTA. In particular, they agreed to bring down tariff on all products in the inclusion list of the original 6 CEPT signatories (ASEAN 6) to 0-5% range by January 2003 instead of 2007.
AFTA has been virtually established four years earlier than originally targeted. The average tariff for ASEAN 6 is now down to 1.5 percent from 12.8 percent when the CEPT agreement was signed in 1992. Tariff on 65 percent of products in the inclusion list has been removed altogether. ASEAN 6 has committed to remove tariff on all products in the inclusion list by 2010. The new members have also committed to do so by 2015.
As membership of ASEAN expanded to 10, more agreements were signed to liberalise further the product and factor markets: the ASEAN Framework Agreement on Services (AFAS) on 15 December 1995, the ASEAN Industrial Complementation Scheme (AICO) on 27 April 1996, the Framework Agreement on the ASEAN Investment Area (AIA) on 7 October 1998, and the Bali Concord II on 7 October 2003 declaring the formation of an ASEAN Economic Community (AEC) as a single market and production base.
Guided by the principle of open regionalism, ASEAN has also been negotiating free trade or closer economic cooperation agreements with China, Japan, India, Republic of Korea, Australia and New Zealand, and has begun consultations with the United States and the European Union to lay the foundations for a possible FTA in the future. The most advanced is with China with whom a Comprehensive Economic Cooperation Agreement on Trade in Goods has already been signed and entered into force on 1 January 2005.
The real aim of ASEAN in establishing a free trade area and in building an economic community of ten nations is not so much to promote trade flows among member countries as to enhance the competitiveness of the entire community, and thereby its attractiveness as an investment destination, both from within and more importantly from outside ASEAN. By removing barriers to the flow of goods, services and factors of production, ASEAN would become a single market of half a billion consumers and a production base with a correspondingly huge number of workers and production input suppliers. Economic integration through product and factor market liberalisation would help reduce the cost of doing business in the community, enable firms to realise economies of scale, attract domestic and foreign investment, promote economic growth, and create jobs. That is the premise. What has actually been happening? Are jobs being created or lost in AFTA?
Studies on labour and employment implications of AFTA conducted in 4 AMCs, including Indonesia and the Philippines, along with a regional overview, yielded a number of interesting results. They were presented at a special workshop earlier this month in Cambodia in conjunction with the ASEAN Senior Labour Officials Meeting (SLOM).
First and foremost, the issue of whether and to what extent ASEAN economic integration has actually been happening had to be addressed. If trade and foreign direct investment (FDI) flows were to be used as indicators, there is evidence that AMCs have indeed been integrating not only among themselves but also between them and the rest of the world.
ASEAN Secretariat data shows that total ASEAN exports (excluding Lao PDR and Vietnam) grew by 12 percent and imports by 10 percent from 2002 to 2003 (when AFTA was virtually established). Intra-ASEAN exports increased even faster for the same period at 15 percent, reaching almost USD 100 billion in 2003. But since 1993, when the process of trade liberalisation under AFTA started but long before it was virtually established with a tariff range of 0-5 percent, intra-ASEAN exports of ASEAN 6 had been increasing. Except for a brief disruption during the economic crisis in 1997-98, it was growing at an average annual rate of 11 percent. One might ask then whether recorded increases in intra-ASEAN exports would have happened even without trade liberalisation under AFTA.
While ASEAN intra-regional trade has been increasing, it is important to note that its share to total trade is still significantly smaller than that of EU and NAFTA: ASEAN’s share in 2002 was only 23 percent compared to 67 and 56 percent for EU and NAFTA, respectively. This suggests that the extent of ASEAN integration in terms of trade flows is still relatively shallow.
With respect to FDI inflows to ASEAN, a dramatic increase of 46 percent was registered from USD 13.8 billion in 2002 to USD 20.2 billion in 2003, in the face of declining global FDI flows since 2000, and notwithstanding perceived threats in the region such as terrorism and SARS. However, review of foreign investment flows into ASEAN in earlier years would reveal that the trend was quite erratic, reaching a peak of USD 34 billion in 1997. The annual average of USD 28 billion for the period 1990-95 was even higher than the level attained in 2003.
Less encouraging was intra-ASEAN FDI inflow, which declined from USD 3.6 billion in 2002 to USD 2.1 billion in 2003, although the trend has also been erratic. The share of intra-ASEAN FDI inflows to total in 2003 was quite low at 10 percent, suggesting that ASEAN has been integrating more with the rest of the world than with each other in terms of investment flows.
Expectedly, the studies stressed the difficulty if not impossibility of isolating the impact of binding trade and investment liberalisation measures initially under AFTA and later under AICO, AFAS and AIA on ASEAN economic integration and, through that transmission mechanism, on employment.
Whether and to what extent ASEAN economic integration has been happening due to AFTA and other ASEAN agreements signed thereafter remains an issue for future empirical validation. Indeed, there are many other factors at play that could contribute to ASEAN economic integration within the broader process of globalisation, as follows: other binding liberalisation measures under WTO; voluntary ones under APEC; unilateral trade liberalisation adopted long before measures were taken by AMCs under AFTA, APEC and WTO; and decisions of multinationals to establish global and regional production networks in response to market signals. The stark reality is that it is happening albeit not as deep yet as in EU or NAFTA. Most likely, it is the combination of all those factors that make it happen.
The studies reported that thousands of workers in the Philippines and Indonesia lost their jobs as and when their employers lost their competitiveness and relocated to other countries, often to China, if they did not exit the market altogether. Big loss of jobs was disclosed particularly in textiles and garments and a number of other consumer products.
In Bandung alone, 67 textile/garment companies employing around 10,000 workers reportedly ceased operations in 2003, with many planning to relocate in other countries. With the termination in January 2005 of the Multi-Fibre Agreement (M
FA) providing a quota system on the export of textiles/garments, an official of the Indonesia Textile Association predicts that up to 400,000 workers will eventually lose their jobs.
The story of the textile/garment industry is sad enough in Indonesia. It is even worse and indeed tragic in the Philippines. Textiles and garments used to be the country’s top export earner and employer in the 80s and early 90s, providing jobs to around a million workers. Now it is a sunset industry with only a few companies surviving the onslaught of competition from other countries, especially China, which can produce and export at lower cost. The MFA termination is foreseen to wreak more havoc to the industry and to hammer the proverbial last nail into its coffin.
Loss of competitiveness as a production base for a particular industry in a particular country is of course not solely affected by binding trade liberalisation measures such as those committed under AFTA. It is mainly affected by the relative cost of doing business in the country and the real or perceived economic and political conditions therein.
The competitiveness and attractiveness of the Philippines as a place to do business has been eroded reportedly by the high cost of utilities – power and water; high transport cost arising from inadequate infrastructure, corruption at all levels of government, increasing cost of labour (at least relative to China), high propensity of labour disputes, and problems (both real and perceived) relating to political instability and peace and order. Happily, despite this handicap, a couple of industries were identified as winners: electronics and ICT-enabled service industries, i.e. call centre and business process outsourcing.
Taking comparative advantage from the country’s abundant supply of educated and highly trainable workers, electronics registered sustained growth in the 1990s, thereby becoming the top commodity export of the Philippines since then and until now. The industry is comprised of about 700 companies essentially engaged in assembly of electronic parts imported from manufacturers abroad. Even with a low value added estimated at only 25 percent, it created thousands of jobs for often college-educated and mostly female workers who would otherwise leave the country to seek alternative employment opportunities. In terms of job creation, it reached its peak in 2000 employing 315,000 workers, compared to only 74,000 in 1992.
But even as a winner, the electronics industry in the Philippines is now under pressure and grappling with declining competitiveness, partly arising from internal factors cited above. Its growth in terms of new investment, production and export has levelled off since 2000. A number of establishments have either closed or reduced their workforce since then, with annual layoffs estimated at between 5 to 10 thousand workers from 2000 to 2002. A few has already relocated to China and more are thinking of doing the same.
Electronics is one of the 11 priority sectors targeted by ASEAN for acceleration of economic integration. Measures are currently underway to remove the remaining barriers to the flow of goods, materials and people by 2010, including elimination of tariff by 2007 for ASEAN 6. Such measures could and might help the Philippines, which is the Country Coordinator for electronics, in arresting erosion of its international competitiveness in that sector.
Next to India, the Philippines now ranks as the second largest provider of outsourced customer (call centre) and business process services through information and communication technology (ICT). A former Managing Head of the Board of Investments estimates that call centres generated 20,000 new jobs in 2003 and 40,000 in 2004, from only 3,500 in 2001. For now, the problem confronting the industry is internal competition, which is manifested by rapid turnover of staff responding to offer of higher wages from competing firms. Apparently, supply of skills and talents for globally outsourced and ICT-enabled services in the Philippines has lagged behind demand. If supply does not catch up and wages continue to rise, the country’s competitiveness in this sector would also be eventually compromised.
Clearly, jobs are lost and gained as markets are liberalised and comparative cost advantages shift across sectors in response to changes in market conditions. Jobs move from one industry to another as and when losers disappear and winners emerge from an increasingly open and competitive product and labour market.
The challenge for policy makers is to maximise the net gain or at least minimise the net loss of jobs, and how best to manage the movement of jobs and workers across sectors. In Vietnam, which is one of the countries covered in the studies, it was reported that there has been an overall net gain of jobs from trade liberalisation although most of the jobs created were for unskilled and semi-skilled workers.
To the extent possible the direction and magnitude of the shift must be anticipated and planned for. Towards this end, economic, finance, labour, and planning officials should collaborate in managing the economic integration process, including and especially its employment and other social impact. One quotation worth repeating is that trade liberalisation is too important to be left alone to trade negotiators! The timing, pacing and sequencing of market liberalisation measures should be in synch with policy and institutional reforms for effectively dealing with the fiscal impact arising from loss of tariff revenues and the social impact arising from changes in the labour market.
As market liberalisation measures are committed and implemented, social policies relating to unemployment protection, social safety nets, and skills training and re-training should be carefully reviewed and accordingly adjusted. More equitable sharing of the burden of short-term adjustment between employers and workers, with the government acting as a neutral arbiter, should be one of the objectives of these policies. They should preferably be part of a comprehensive and coherent strategy whose aim is to maximise the net benefits of economic integration and more equitably share both the long-term benefits and short-term adjustment costs.