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48. AFTA = Another Futile Trade Area?
- ISEAS–Yusof Ishak Institute
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226 Mohamed Ariff By: ROS Size: 7.5" x 10.25" J/No: 03-14474 Fonts: New Baskerville 48. AFTA = ANOTHER FUTILE TRADE AREA? MOHAMED ARIFF Excerpted from Mohamed Ariff, AFTA = Another Futile Trade Area? (Kuala Lumpur: Universiti Malaya, 1994), by permission of the author. In discussing intra-ASEAN trade, we need to exercise some caution. The role of Singapore as an entrepot port tends to distort the picture somewhat. A large proportion of Singapore’s exports to the ASEAN neighbours are really re-exports of products from outside the region. By the same token, a significant share of Singapore ’s imports from its ASEAN partners are re-exported to third countries. It is in this sense that trade statistics seem to overstate the importance of intra-ASEAN trade, especially since Singapore accounts for the lion’s share of intra-regional trade. If Singapore is excluded, intra-ASEAN exports would only represent much less than onetenth of total ASEAN exports, (8.4 per cent in 1991). Seen from another angle, however, it does appear that intra-ASEAN trade may well be substantially larger than what trade statistics would suggest. This is so because trade statistics do not capture the thriving “illegal” trade flows among the ASEAN countries. Illegal trade links are particularly strong between Mindanao and Sabah, between Cebu and Singapore, between Peninsular Malaysia and Southern Thailand, and between Singapore and Java. Given the secret nature of the entire operation, it is extremely difficult to quantify its extent. Nonetheless, it does seem that it is embarrasingly large. It is so embarrasingly large that Singapore does not publish statistics relating to its trade with Indonesia. It is quite obvious that Singapore’s figures will not tally with that of Indonesia, with a huge margin of discrepancy. It may well be argued that there is nothing wrong with all this. In economics, legality is a non-issue. What is illegal today can be rendered legal tomorrow or the other way around by an act of parliament. Illegal activities may be viewed as market responses to unrealistic rules and regulations . Illegal trade has a useful role to play, as it can help allocate resources optimally by circumventing policy barriers which defy economic logic. This is why economists prefer to brand it as “informal trade” or as 048 AR Ch 48 22/9/03, 12:49 PM 226 AFTA = Another Futile Trade Area? 227 By: ROS Size: 7.5" x 10.25" J/No: 03-14474 Fonts: New Baskerville “cross-border transactions” rather than as “illegal trade”, to make it more palatable. It is perhaps no exaggeration to state that “informal” trade may have contributed more significantly to regional cohesion within ASEAN than formal cooperation. Informal trade seems to be integrating the ASEAN region in a borderless fashion, while the formally orchestrated trade cooperation scheme seems to have paid just lip service, judging by the fact that only 2.6 per cent of the items in the preferential trade list or 19.0 per cent in value terms was actually utilised in the formal intra-ASEAN trade as of 1987 [Pengestu, et at., 1991]. This line of reasoning would lead us to the inescapable conclusion that it will pay the ASEAN countries to simply legalise this cross-border trade. Viewed in these terms, AFTA is clearly a move in the right direction. Under AFTA, we can expect intra-ASEAN trade to rise sharply in absolute terms, simply because what was left out by trade statistics previously will be recorded in the future, once such trade flows are legalised. But, this will amount to a one-shot increase only. In addition, AFTA can have a stimulating effect on intra-ASEAN trade, if it results in lower prices and higher incomes. All this notwithstanding, the percentage share of intra-ASEAN trade in total ASEAN trade is unlikely to increase markedly, given the high degree of economic openness of its members and the lack of complementarity of the ASEAN economies — which is not a bad thing. As alluded to earlier, economic openness exposes domestic industries to external competition so that they have no choice but to remain efficient and competitive. Complementarity is not necessarily a good thing. Of course, it would be politically easier for complementary economies to cooperate with one another, because regional imports will not threaten domestic industries, but it will not make much economic sense. Perfect complementarity would mean pure trade diversion with virtually no trade creation. The main reason why regional cooperation in...