|Title:||Asia Association of Southeast Asian Nations-Korea Free Trade Area (AKFTA) sectoral real output impacts by industry in percent deviations from the base calculated for 2011|
|Source:||Asean Economic Bulletin|
Start of full article - but without data
Sectoral Real Output Impacts of AKFTA
(% Deviations from the Base)
Total Agricultural Food Extractive output products products industry manufacturing
Indonesia X.XX X.XX X.XX X.XX Malaysia X.XX -XX.XX XX.XX X.XX Philippines -X.XX X.XX X.XX X.XX Singapore X.XX X.XX XX.XX X.XX Thailand X.XX X.XX -X.XX X.XX Viet Nam X.XX -X.XX -X.XX -X.XX CLM -X.XX -X.XX -X.XX X.XX Korea, Rep. of -X.XX -X.XX -X.XX -X.XX
Light Heavy Technology- manufacturing manufacturing intensive
Indonesia -X.XX X.XX X.XX Malaysia X.XX -X.XX -X.XX Philippines -X.XX X.XX X.XX Singapore X.XX X.XX -X.XX Thailand -X.XX X.XX X.XX Viet Nam X.XX X.XX XX.XX CLM X.XX -X.XX -X.XX Korea, Rep. of -X.XX X.XX X.XX
Indonesia X.XX Malaysia X.XX Philippines X.XX Singapore X.XX Thailand X.XX Viet Nam -X.XX CLM -X.XX Korea, Rep. of -X.XX
NOTES: CLM = Cambodia, Lao People's Democratic Republic, and
SOURCE: Compiled by authors based on simulations using the GTAP
The Republic of Korea (Korea) and the countries of the Association of Southeast Asian Nations (ASEAN) have been integral to the miracle that has transformed East Asia from a group of typically poor Third World countries into the world's most dynamic economies. More precisely, Korea and ASEAN's Indonesia, Malaysia, Singapore, and Thailand have sustained rapid growth in the post-war era, alongside Hong Kong, Japan, and Taipei, China to put East Asia firmly on the world map as an economic powerhouse. The success of these countries has been based on export-oriented industrialization and is a powerful tribute to the potential benefits of globalization.
But that same globalization turned against these countries with a vengeance in the 1997/XX Asian financial crisis. The massive capital inflows that had helped fuel rapid economic growth and subsequent "sudden stop" in capital inflows wreaked financial havoc, (X) which eventually spread to the real economy. There is a widespread perception throughout the region that external forces, such as investors from the United States and Europe, were largely responsible for the Asian crisis. Regardless of their accuracy, such perceptions gave rise to a region-wide sense of vulnerability to and suspicion of external forces, which, in turn, fostered a greater sense of regional identity and gave a strong impetus to regional economic integration. (X)
In the immediate aftermath of the Asian crisis, the focus of economic regionalism lay in promoting regional financial cooperation, best exemplified by the Chiang Mai Initiative (CMI) among the ten ASEAN countries, the People's Republic of China (PRC), Japan, and Korea. (X) The focus of regionalism has more recently been shifting towards the expansion of intra-regional trade. The current global financial and economic crisis rooted in the U.S. subprime mortgage crisis is likely to further stimulate efforts and initiatives to promote intra-regional trade.
The ASEAN-Korea Free Trade Area (AKFFA) is a concrete example of efforts and initiatives to promote intra-regional trade. In May 2006 the two sides signed a free trade agreement that would lead to a flee trade area by 2016. (Thailand joined only in February 2009 after resolving issues on the rice trade.) While economic integration refers to the removal of barriers to the cross-border flows of goods, services, capital, and labour, economic integration between ASEAN and Korea realistically means only more trade between the two sides before they can contemplate moving towards deeper levels of integration. The central objective of our paper is to examine the extent to which economic criteria favour AKFTA's prospects. To address this question, we use qualitative analysis based on the theory of economic integration pioneered by Viner (1950) and quantitative analysis using the CGE model.
In section H, we review the theory of economic integration. In section III, we explore the issue of whether AKFTA would be beneficial for ASEAN and Korea through the prism of this theory. In section IV, we present a CGE model and its quantitative estimates of AKFTA's trade and welfare impact, and in section V, we summarize our key findings.
II. Theory of Economic Integration
The key feature of regional economic integration is that the component economies of a region or trading bloc agree to undertake a progressive removal of barriers to free movement of goods, services, capital, and labour. In the context of AKFTA, economic integration at this point in time by and large refers to the expansion of trade between ASEAN and Korea. Removing all barriers to the movement of goods and services, capital and labour between Korea and the ten ASEAN states is at best a long-run goal. Substantial and concrete progress has already been made so far. In 2006-XX, ASEAN and Korea signed free trade agreements on goods and services, including a dispute settlement accord. In June 2009, both parties completed their Framework Agreement on Comprehensive Economic Cooperation with the signing of the ASEAN-Korea Investment Agreement.
II.X Theory of Customs Union
The theory of economic integration is anchored in the theory of customs union, formally developed by Viner (1950). The theory of customs union was subsequently examined by Meade (1955), Gehrels (1956), and Lipsey (1957, 1960). The vast literature on economic integration is surveyed by Krauss (1972) and Kowalczyk (1992), among others.
Under a customs union, member economies of a region agree to phase out tariffs and quantitative restrictions on imports from the region, and impose a set of common external tariffs on imports from non-member countries. Viner (1950) developed the theoretical foundation for the concepts of trade creation and trade diversion. Theoretically, a customs union entails both positive and negative welfare effects. The positive effect, referred to as trade creation, arises from the replacement of higher cost domestic products with lower cost imports from member countries. The negative effect, trade diversion, occurs when a member country replaces low-cost imports from non-members with higher cost imports from member nations.
The net gain of customs union depends on which effect is larger. Trade diversion can be less if member countries are already important trading partners prior to integration. As Lipsey (1957) demonstrates, trade integration is likely to be beneficial if member countries initially account for a substantial share of each other's imports. Also, integration cannot lead to trade diversion if the member countries are already the low-cost producers to begin with. Ultimately, the assessment of the costs and benefits of integration will depend on the pattern of trade flows, trade distortions, and the likely responses to trade integration (Baldwin and Venables 1995).
II.X Static Factors
Static factors are important considerations in evaluating the one-off change in welfare arising from the formation of a customs union. Among these factors are the size of the free trade area, geographical proximity of member economies, levels of economic development of member economies, and complementarity of economic structures among member economies. In addition, factors related to external trade, including tariff structures of member economies prior to customs union, are important considerations. Finally, it is also important to look at the substitutability between products of member states and products of non-member states in determining whether a customs union will be beneficial or not.
II.X Dynamic Economic Factors
In contrast to static economic factors, dynamic economic factors do not pertain to one-off changes in welfare but gradually emerge over time. The main dynamic benefits are improvements in efficiency due to greater competition and gains from greater specialization, economies of scale, and learning-by-doing.
Against these potential dynamic benefits, we must also consider the dynamic cost of polarization. Integration among countries with different levels of income and economic development could lead to an unequal distribution of gains. Any perception that the benefits or costs of integration are disproportionately falling upon a country or a subset of countries is likely to produce a backlash which will threaten the viability of the union over time.
II.X Non-Economic Factors
Besides the largely economic criteria discussed in previous sections, a large number of non-economic factors determine the success or failure of economic integration. Some examples are a common desire to put an end to violent conflicts, a shared feeling of vulnerability, and political leaders who realize there are common problems which require common solutions. By far the most important noneconomic variable is political leadership seriously committed to integration and cooperation. The political commitment of the governments of both ASEAN and Korea to AKFTA is a pre-condition for the success of AKFTA. The political commitment, in turn, depends to a large extent on whether it is in the geopolitical self-interest of both sides to strengthen their overall relationship.
III. Prospects of AKFTA
In this section, we examine whether the theoretical considerations discussed in the preceding section favour the success of AKFTA. Economic integration between ASEAN and Korea at this stage essentially means more trade between the two sides. ASEAN-Korea trade currently occurs primarily between Korea and ASEAN's richer inner core--Indonesia, Malaysia, the Philippines, Singapore, Thailand and Brunei Darussalam. But Korea's trade with its poorer periphery--Cambodia, the Lao People's Democratic Republic (Lao PDR), Myanmar, and Vietnam--is also growing rapidly.
III.X Static Economic Factors
Here we look at the various static factors that impinge on AKFTA's ability to become an effective mechanism for promoting mutually beneficial trade between ASEAN and Korea. We apply the criteria discussed above to evaluate AKFTA's prospects for success.
(a) Size of FTA. While AKFTA is much smaller in economic weight than the North American Free Trade Agreement (NAFTA) or the EU, it is by no means an economic lightweight. The eleven countries of AKFFA together had gross national income (GNI) of around US$X.XX trillion in 2007. In purchasing power parity (PPP) terms, AKFTA's GNI was about US$X.XX trillion, with Korea's at about US$X.XX trillion and ASEAN's at US$X.XX trillion. And the region is home to about XXX million people. These two factors indicate substantial potential for trade creation.
(b) Pre-FTA Tariff Structure. The level and variance of tariffs against non-members suggests some scope for trade diversion. According to World Bank data (2011), the simple average applied tariff rate of Korea (X.X per cent) in 2009 was higher than the rates in Indonesia, Malaysia, the Philippines, and Singapore, which ranged from X.X per cent to X.X per cent. Among the more advanced ASEAN countries, only Thailand had a higher average tariff rate (XX.X per cent) than Korea. For manufacturing goods, Korea's average tariff rate was X.X per cent, higher than the average for the five ASEAN countries above, at X.X per cent. Tariffs of primary goods had a higher variance--the average tariff rate for Korea was XX.X per cent while average tariff rates in the five ASEAN countries ranged from X.X per cent to XX.X per cent. Therefore, the structure of AKFTA's tariffs against outsiders does not rule out significant trade diversion.
(c) Intra-FTA Trade Prior to AKFTA. The trade creation effect is stronger the greater the size of pre-FTA trade. This means countries that trade heavily with each other stand to gain the most from eliminating impediments to trade. ASEAN and Korea are already important export and import markets for each other. In 2010, ASEAN's exports to and imports from Korea reached $XX billion and $XX billion, respectively. In the same period, ASEAN became Korea's third export destination, after PRC and the EU, while Korea became ASEAN's tenth export market. Korea's exports to and imports from ASEAN accounted for around XX.X per cent of the country's total exports and XX.X per cent of its total imports in the same period. ASEAN-Korea trade has grown rapidly in recent years, rising from US$XX billion in 2000 to US$XXX billion in 2010.
(d) Substitutability of Products. Substitutability refers to the production of similar but differentiated products. Substitutability of products of member states for those of non-member states increases the chances of trade creation. For example, Malaysia can theoretically substitute semi-conductors from Taipei, China with similar but slightly different semi-conductors from Korea. While ASEAN's trade with Korea is large and growing, most of ASEAN's exports go to other markets and most of its imports come from other markets. ASEAN's biggest trading partners are also Korea's biggest trading partners, namely, the PRC, EU, Japan, and the United States. Such a trade pattern provides stylized evidence of the limited substitutability of products.