ASEAN FREE TRADE AREA : GAINS, DISTRIBUTION AND STRATEGIC ALLIANCES

Abstract

The international trading system has been characterized by a new proliferation of Regional Trading Agreements (RTAs) in the past decade, of which the formation of the ASEAN Free Trade Area (AFTA) is an example. As a classic demonstration of the theory of the second-best, it is impossible to ascertain a priori whether a RTA will be welfare-improving or welfare-diminishing. Despite the substantial volume of empirical literature on AFTA, the issues of the direction of welfare changes for each constituent member country, the distributive pattern of the welfare changes, and the "optimal" strategies for ASEAN vis-a-vis its external trading partners remain unresolved. This thesis employs the Global Trade Analysis Project (GTAP) Model, a multi­ region Computable General Equilibrium (CGE) model, in a re-examination of these issues. We perfonn three counterfactual experiments: trade liberalization within ASEAN, unilateral import liberalization by ASEAN towards the European Union (EU), and cooperative market opening between the two blocs. The results indicate that the raison d'etre of AFTA is neither underpinned by the static welfare gains of trade liberalization nor by increased collective bargaining power in the international trading arena given the modest welfare changes generated under the alternative policy counterfactuals. At the same time, AFTA is not undermined by sectoral "sensitivities". The distributive pattern of welfare gains is also highly asymmetrical in favor of Singapore and Malaysia, while Thailand suffers relatively heavy losses. We also find that the policy of unilateral liberalization towards the EU 1s unambiguously welfare-diminishing for ASEAN. Although import prices are lowered, the specific configuration of trade between ASEAN and the EU results m the substitution of EU goods for ASEAN goods, particularly in machinery equipment, depressing export prices and deteriorating the terms-of-trade of the ASEAN countries. Finally, an ASEAN-EU Free Trade Area is untenable in the contexts of the output losses in the agriculture sector of the EU and the marginal static and dynamic welfare benefits accrued to the two blocs. (The simulation results reported are also qualitatively robust to alternative closure specifications and to sensitivity tests). Based on the results, we argue that the governments of the more protectionist ASEAN countries must accelerate, broaden and deepen domestic economic reforms to improve their economies' competitiveness before the full implementation of AFTA. At the regional level, ASEAN must integrate regional investment schemes with AFTA to attract both ASEAN and non-ASEAN investments to realize the dynamic gains from AFTA more fully. At the international level, ASEAN should continue to participate fully in reciprocal trading arrangements on a multilateral basis under the auspices of the World Trade Organization.