Brick by Brick: The Building of an ASEAN Economic Community

3. The Challenge of Economic Integration for Transitional Economies of Southeast Asia

36 Jose L. Tongzon and Habibullah Khan 3 The Challenge of Economic Integration for Transitional Economies of Southeast Asia Jose L. Tongzon and Habibullah Khan 1. Introduction One of the difficult challenges facing Cambodia, Lao PDR, Myanmar, and Vietnam (usually referred to as CLMV) as new members of ASEAN is how to implement their commitments and obligations as signatories of the ASEAN Free Trade Area (AFTA). There is a real concern that, as they reduce their tariffs in accordance with the AFTA guidelines, they will suffer significant revenue losses with adverse economic and social implications. Revenues from import tariffs in these countries constitute a sizeable proportion of their government revenues (for example, the share of import tariffs in total revenue among CLMV countries has ranged between 7 per cent and 25 per cent). Reprinted from “The Challenge of Economic Integration for Transitional Economies of Southeast Asia: Coping with Revenue Losses”, ASEAN Economic Bulletin 22, no. 3 (2005): 266–83, by permission of the Institute of Southeast Asian Studies. 03 BrickByBrick Ch 3 10/30/07, 8:19 AM 36 Challenge of Economic Integration for Transitional Economies of Southeast Asia 37 In light of this concern, this study aims to investigate if there is any empirical basis of this concern and to draw out some policy implications. Except for the studies made by Fukase and Martin (1999a–d) for the World Bank and by Lao-Araya (2002), no in-depth study has yet been undertaken to assess the tariff revenue implications as a result of their participation in AFTA. Fukase and Martin (1999a–d) used a static computable general equilibrium model (CGE) based on a full market equilibrium assumption. Lao-Araya (2002) used a partial equilibrium approach but her estimates due to the lack of disaggregated data were highly aggregative and did not take into account the growth of imports. This paper uses a partial equilibrium approach and takes into account the growth of imports. Its estimates are also derived from disaggregated data which have become available. The rest of the paper is organized as follows: section 2 provides a brief review of the major aspects of AFTA and the trade liberalization commitments made by CLMV countries as new members of ASEAN; section 3 discusses the revenue structure in CLMV countries; section 4 briefly presents the theoretical basis and the methodology used for this study; section 5 discusses the revenue impact; section 6 suggests a set of policy recommendations followed by some concluding remarks in section 7. 2. AFTA and the CLMV Countries The old members of ASEAN at the 1992 Summit agreed to establish a free trade area in the region. The 1992 AFTA was a watershed, as it represented a significant change in the economic policy orientation of the ASEAN countries. A number of internal and external developments have made free trade politically acceptable for these countries.1 Vietnam became officially the first Southeast Asian transitional economy to become a member of ASEAN on 28 July 1995. At about the same time Myanmar, emerging from its self-imposed isolation, ceded to the ASEAN Treaty of Amity and Co-operation and opened up to join the rest of Southeast Asia in terms of economic orientation and objective. At the Thirtieth Annual Ministerial Meeting in Kuala Lumpur in July 1997, Lao PDR and Myanmar were admitted as full members of ASEAN. The admission of Cambodia to ASEAN in 1999 marked the fulfilment of the ASEAN founding fathers’ long-cherished dream to establish an ASEAN-10, a group covering all countries in Southeast Asia. The main objective of AFTA is to increase the international competitiveness of ASEAN industries and the ASEAN region as an investment 03 BrickByBrick Ch 3 10/30/07, 8:19 AM 37 38 Jose L. Tongzon and Habibullah Khan location. Specifically, the objectives are to increase intra-ASEAN trade by abolishing intra-regional trade barriers while allowing member countries to keep their respective trade policies towards the rest of the world, to attract local and foreign investors to invest in the region and to make their manufacturing sector more efficient and internationally competitive within a liberalizing global market. To realize these benefits, the ASEAN Free Trade Agreement (AFTA) seeks to reduce tariffs on all commodities traded within the member countries to between 0 and 5 per cent ad valorem and eliminate all trade restrictions under the Common Effective Preferential Tariff (CEPT) — the main instrument of AFTA...