AN ASSIGNMENT ON INTERNATIONAL BUSINESS MANAGEMENT ASEAN FREE TRADE AREA

TEAM MEMBERS PONMALAR RAJESWARI R ROLL NO: 2011201041 PRADEESH CHOWRAA P ROLL NO: 2011201042 PREETHI G ROLL NO: 2011201043 PREMA K ROLL NO: 2011201044

Introduction
Since the 1990s, Free Trade Agreements have been diffused throughout the world, and numbers over 150 at present. In Asia, the AFTA(Asian Free Trade Area) has been organized by ASEAN; Japan made an agreement with Singapore in January 2002, and this tendency seems to be accelerating. While these agreements are aspired to by both developed and developing countries, it is necessary to analyze carefully, the influence that they have on developing countries. In this article, the AFTA will be examined to show that its perverse effects may actually result, in the long run, in the distortion of the social systems of ASEAN countries. Both classical and neo-classical theories of free trade conclude that through specialization, all countries gain from trade and world output is increased: that is, if a country specializes in the export of products in an industry where they have a comparative advantage in terms of natural abilities and/or resources endowments, free trade is said to bring about the following positive effects: 1) Free trade enables countries to move outside their production possibility frontiers; 2) Free trade secures capital as well as consumption goods from other parts of the world In this way, free trade can increase static efficiency. However, this does not mean that there are no negative effects upon trading countries, because it may produce dynamic inefficiencies as follows. First, in general, free trade results in unemployment in industries that are comparatively disadvantageous. This effect arises in every trading country, at least in the short term, necessitating certain institutions to rearrange unemployed workers: market governmental policy, vocational training, etc. Secondly, and more importantly, any initial condition of unequal endowments - physical capital, scientific capacities, entrepreneurial abilities, and the capacity to carry out technological research - may be reinforced and exacerbated by free trade. The negative effects of this

cumulative process are greater for less developed countries (LDCs) than for developed countries (DCs). If rich countries (the North), as a result of historical forces, are relatively well endowed with the vital resources of capital, entrepreneurial ability, and skilled labor, they can continue their specialization in the industries using these resources. These processes in turn, create the necessary conditions and economic incentives for further growth. In contrast, LDCs (the South) may suffer from a vicious circle. Endowed with abundant supplies of unskilled labor, they specialize in products that intensively use unskilled labor (for these products, the prospects of world demand and terms of trade may be very unfavorable). These LDCs often find themselves locked into a stagnant situation that perpetuates their comparative advantage in unskilled, unproductive economic activities. This in turn inhibits the domestic growth of elements -capital, entrepreneurship, and technical skills - which are indispensable for future development2. It thus follows that static efficiency becomes dynamic inefficiency. There are several noteworthy theories that elaborate this paradoxical phenomenon.

ASEAN Free Trade Area [AFTA]

The ASEAN Free Trade Area (AFTA) is a trade bloc among the Member States of the Association of Southeast Asian Nations (ASEAN). In January 1992, ASEAN Member States signed the Singapore Declaration, an agreement that mandates the creation of AFTA within 15 years. This involved a comprehensive program of tariff reduction in the region, which was to be carried out in phases through the year 2008. This deadline was subsequently moved forward and AFTA became fully operational on 01 January 2003. Over the course of several years, the initial program of tariff reductions was broadened and accelerated and other "AFTA Plus" activities were initiated. This includes efforts to eliminate non-tariff barriers, harmonization of customs

nomenclature, valuation, and procedures and development of common product certification standards.

When the Singapore Declaration was signed, ASEAN was only composed of six members, Brunei, Indonesia, Malaysia, Philippine, Singapore and Thailand. Viet Nam joined in 1995, Lao PDR and Myanmar in 1997 and Cambodia in 1999. These four countries, collectively known as CLMV, were required to adhere to the AFTA Agreement but were given longer time frames in meeting all liberalization commitments. Asean Free Trade Area [AFTA] is a trade bloc agreement by the Association of Southeast Asian Nations supporting local manufacturing in all ASEAN countries. The ASEAN Free Trade Area (AFTA) was implemented in 1993 by ASEAN-6 countries (Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand) and is aimed primarily at integrating member countries into a single production base and creating a regional market of approximately 550 million people. To this end, member countries agreed to lower or eliminate tariffs and non-tariff barriers within 15 years of its implementation. The main instrument of the tariff reduction scheme has been the Common Effective Preferential Tariff (CEPT), which covers both manufactured and agricultural products. However, following the Asian financial crisis in 1997, the member countries decided at the sixth ASEAN summit in December 1998 to accelerate trade liberalization by revising the timetable to 2002. In the mid-1990s, four more countries (CLMV) joined ASEAN: Vietnam (1995), Myanmar, (1998), Laos (1998), and Cambodia (1999). These countries are also participating in the AFTA under the following deadlines: Vietnam in 2006, Myanmar and Laos in 2008, and Cambodia in 2010. Korea is a major trading partner of ASEAN countries. ASEAN countries have proven to be important markets for Koreas manufactured products, and Korea has relied heavily on raw materials and light manufactured products from ASEAN countries. Nevertheless, Koreas exports to ASEAN countries have declined steadily in recent years; the exports, which accounted for 5.2% of Koreas total exports in 1988, rose

to 15.7% in 1996 and then declined steadily to 9.6% in 2005 (KITA, 2007). From the Korean perspective, trade diversion is likely because of the preferential treatment granted by ASEAN countries to their members. As discussed in Section II, the intensity of bilateral trade between Korea and ASEAN has decreased, and the degree of the regional trade orientation of both Korea and ASEAN to their respective market has weakened in recent years. The AFTA agreement was signed on 28 January 1992 in Singapore. The primary goals of AFTA seek to:

Increase ASEAN's competitive edge as a production base in the world market through the elimination, within ASEAN, of tariffs and non-tariff barriers; and

Attract more foreign direct investment to ASEAN. The primary mechanism for achieving the goals given above is the Common

Effective Preferential Tariff (CEPT) scheme, which established a schedule for phased initiated in 1992 with the self-described goal to increase the "regions competitive advantage as a production base geared for the world market". In general, the FTA (Free Trade Area) is an area that satisfies two contrasting conditions. External tariffs against outside countries differ among member nations. The share of LDCs exports going to other developing countries has increased dramatically since the 1960s, from about 17% to nearly 40%. Explicit developing-country policy including FTA such as ASEAN in South East Asia and Mercosur in South America are at least partly responsible for this trend. Unfortunately, once again, Africa has been left out of the game. whereas internal trade is free, leading to a shift in the geographic location of production from higher-cost to lower-cost member nations (the trade creation effect) as well as to a shift in the locus of production of formerly imported goods from lower-cost non-member nations to higher-cost member nations (the trade diversion effect). The FTA is thought to stimulate intra-area trade and obstruct extraarea trade through these two static effects. NAFTA is one such case. The relevant

statistics about NAFTA from 1994 (effectuation year of NAFTA) to 2000 shows that intra-area trade increased from 364 to 676 billion dollars (86%). In contrast, extra-area trade increased 59.4%. The share of intra-area trade within total trade rose from 42% to 46%. However, similar trends were not detected in AFTA. First, the construction process of AFTA will be briefly explained. For the ASEAN6 (Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand), the reduction of tariffs began in January 1993. Since January 1 2003, tariffs on 99.55 percent (44,160 tariff lines out of total 44,361 tariff lines) of products in the 2003 Inclusion List of the ASEAN-6 was reduced to the 0-5 percent tariff range. The initial foundation of AFTA was completed with these conditions in place. The newer members of ASEAN must also comply with the 0-5 percent tariffs for intra-ASEAN trade Viet Nam in 2006, Lao PDR and Myanmar in 2008, and Cambodia in 2010.

CEPT Scheme
Unlike the EU, AFTA does not apply a common external tariff on imported goods. Each ASEAN member may impose tariffs on goods entering from outside ASEAN based on its national schedules. However, for goods originating within ASEAN, ASEAN members are to apply a tariff rate of 0 to 5 percent (the more recent members of Cambodia, Laos, Myanmar and Vietnam, also known as CMLV countries, were given additional time to implement the reduced tariff rates). This is known as the Common Effective Preferential Tariff (CEPT) scheme. ASEAN members have the option of excluding products from the CEPT in three cases: 1.) Temporary exclusions; 2.) Sensitive agricultural products; 3.) General exceptions. Temporary exclusions refer to products for which tariffs will ultimately be lowered to 0-5%, but which are being protected temporarily by a delay in tariff reductions. Sensitive agricultural products include commodities such as rice. ASEAN members have until 2010 to reduce the tariff levels to 0-5%.

General exceptions refer to products which an ASEAN member deems necessary for the protection of national security, public morals, the protection of human, animal or plant life and health, and protection of articles of artistic, historic, or archaeological value. ASEAN members have agreed to enact zero tariff rates on virtually all imports by 2010 for the original signatories, and 2015 for the CMLV countries.

Rule of Origin
The CEPT only applies to goods originating within ASEAN. The general rule is that local ASEAN content must be at least 40% of theFOB value of the good. The local ASEAN content can be cumulative, that is, the value of inputs from various ASEAN members can be combined to meet the 40% requirement. The following formula is applied: ( Raw material cost + Direct labor cost + Direct overhead cost + Profit + Inland transport cost) x 100% FOB value However, for certain products, special rules apply: Change in Chapter Rule for Wheat Flour; Change of Tariff Sub-Heading for Wood-Based Products; Change in Tariff Classification for Certain Aluminum and Articles thereof. The exporter must obtain a Form D certification from its national government attesting that the good has met the 40% requirement. The Form D must present to the customs authority of the importing government to qualify for the CEPT rate. Difficulties have sometimes arisen regarding the evidentiary proof to support the claim, as well how ASEAN national customs authorities can verify Form D submissions. These

difficulties arise because each ASEAN national customs authority interprets and implements the Form D requirements without much coordination.

Administration
Administration of AFTA is handled by the national customs and trade authorities in each ASEAN member. The ASEAN Secretariat has authority to monitor and ensure compliance with AFTA measures, but has no legal authority to enforce compliance. This has led to inconsistent rulings by ASEAN national authorities. The ASEAN Charter is intended to bolster the ASEAN Secretariats ability to ensure consistent application of AFTA measures. ASEAN national authorities have also been traditionally reluctant to share or cede sovereignty to authorities from other ASEAN members (although ASEAN trade ministries routinely make cross-border visits to conduct on-site inspections in antidumping investigations). Unlike the EU or NAFTA, joint teams to ensure compliance and investigate non-compliance have not been widely used. Instead, ASEAN national authorities must rely on the review and analysis of other ASEAN national authorities to determine if AFTA measures such as rule of origin are being followed. Disagreements may result between the national authorities. Again, the ASEAN Secretariat may help mediate a dispute but has no legal authority to resolve it. ASEAN has attempted to improve customs coordination through the implementation of the ASEAN Single Window project. The ASEAN Single Window would allow importers to submit all information related to the transaction to be entered electronically once. This information would then be shared with all other ASEAN national customs authorities.

Dispute Resolution
Although these ASEAN national customs and trade authorities coordinate among themselves, disputes can arise. The ASEAN Secretariat has no legal authority to

resolve such disputes, so disputes are resolved bilaterally through informal means or through dispute resolution. An ASEAN Protocol on Enhanced Dispute Settlement Mechanism governs formal dispute resolution in AFTA and other aspects of ASEAN. ASEAN members may seek mediation and good offices consultations. If these efforts are ineffective, they may ask SEOM (Senior Economic Officials Meetings) to establish panel of independent arbitrators to review the dispute. Panel decisions can be appealed to an appellate body formed by the ASEAN Economic Community Council. The Protocol has almost never been invoked because of the role of SEOM in the dispute resolution process. SEOM decisions require consensus among all ASEAN members, and since both the aggrieved party and the alleged transgressor are both participating in SEOM, such consensus cannot be achieved. This discourages ASEAN members from invoking the Protocol, and often they seek dispute resolution in other fora such as the WTO or even the International Court of Justice. This can also be frustrating for companies affected by an AFTA dispute, as they have no rights to invoke dispute resolution yet their home ASEAN government may not be willing to invoke the Protocol. The ASEAN Secretary General has listed dispute resolution as requiring necessary reform for proper administration of AFTA and the AEC.

Further Trade Facilitation Efforts

Efforts to close the development gap and expand trade among members of ASEAN are key points of policy discussion. According to a 2008 research brief published by the World Bank as part of its Project, ASEAN members have the potential to reap significant benefits from investments in further trade facilitation reform, due to the comprehensive tariff reform already realized through the ASEAN Free Trade Agreement. This new analysis suggests examining two key areas, among others: port facilities and competitiveness in the Internet services sector. Reform in these areas, the report

states, could expand ASEAN trade by up to 7.5 percent ($22 billion) and 5.7 percent ($17 billion), respectively. By contrast, cutting applied tariffs in all ASEAN members to the regional average in Southeast Asia would increase intra-regional trade by about 2 percent ($6.3 billion)

ASEAN Trade in Goods Agreement

The ASEAN Trade in Goods Agreement (ATIGA) was developed in an effort to consolidate all existing initiatives relevant to the movement of goods into one comprehensive document to ensure synergies and consistencies among and within these various initiatives. The ATIGA preserved the existing principles and commitments related to trade in goods under existing ASEAN initiatives and related Agreements / Protocols. The Agreement was signed at the 14th ASEAN Summit on 26 February 2009 and subsequently entered-into-force on 17 May 2010. Under this Agreement, which stays true to commitments under the Common Effective Preferential Tariff Scheme under the ASEAN Free Trade Agreement (CEPT AFTA), the six original ASEAN Member States placed 99% of all the products in their Inclusion List (IL) at zero-duty, a concession that each of the six now extends to all fellow ASEAN Member States. These countries, however, have agreed to maintain certain tariffs on selected items that make up their Sensitive/Highly Sensitive Lists. In the case of the Philippines, tariffs for selected agricultural products have been reduced, but have not fallen to zero, maintaining a level of 5%. For the Philippines, too, tariffs on rice and sugar have been maintained at previous levels of 40% and 38%, respectively as a result of the waiver for the special consideration for rice and sugar. As agreed, rice tariffs will be unified to 35% in 2015 while sugar tariff will be reduced to 5% in the same year. The ASEAN 6 have issued their respective legal enactments to implement ATIGA while the CLMV countries will be issuing their respective ATIGA legal enactments by 17 November 2010.

The Philippines has issued all the necessary legal enactments for the implementation of her tariff obligations under the CEPT AFTA / ATIGA. The legal enactment for the last tranche of IL commitments is EO 850 which was implemented on 01 January 2010. The legal enactment for rice (EO 894) was issued on 18 June 2010, while the legal enactment for sugar (EO 892) was issued on 17 June 2010.

ASEAN Comprehensive Investment Agreement

The ASEAN Comprehensive Investment Agreement (ACIA) is a more comprehensive agreement based on the ASEAN Investment Area and the ASEAN Agreement for the Promotion and Protection of Investment (IGA). It covers liberalization, protection, facilitation and promotion. It is comprised of a total of 50 Articles, 2 Annexes and 1 Schedule (reservation list of ASEAN Member States).

AGREEMENT ON THE COMMON EFFECTIVE PREFERENTIAL TARIFF SCHEME FOR THE ASEAN FREE TRADE AREA
The Governments of Brunei Darussalam, the Republic of Indonesia, Malaysia, the Republic of the Philippines, the Republic of Singapore and the Kingdom of Thailand, Member States of the Association of South, East Asian Nations (ASEAN): Mindful of the Declaration of ASEAN Concord signed in Bali, Indonesia on 24 February 1976 which provides that Member States shall cooperate in the field of trade in order to promote development and growth of new production and trade; Recalling that the ASEAN Heads of Government, at their Third Summit Meeting held in Manila on 13-15 December 1987, declared that Member States shall strengthen intra-ASEAN economic cooperation to maximise the realisation of the region's potential in trade and development; Noting that the Agreement on ASEAN Preferential Trading Arrangements (PTA) signed in Manila on 24 February 1977 provides for-the adoption of various instruments on trade liberalisation on a preferential basis;

Adhering to the principles, concepts and ideals of the Framework Agreement on Enhancing ASEAN Economic Cooperation signed in Singapore on 28 January 1992; Convinced that preferential trading arrangements among ASEAN Member States will act as a stimulus to the strengthening of national and ASEAN Economic resilience, and the development of the national economies of Member States by expanding investment and production opportunities, trade, and foreign exchange earnings; Determined to further cooperate in the economic growth of the region by accelerating the liberalisation of intra-ASEAN trade and investment with the objective of creating the ASEAN Free Trade Area using the Common Effective Preferential Tariff (CEPT) Scheme;

FRAMEWORK AGREEMENT ON ENHANCING ASEAN ECONOMIC COOPERATION

Singapore, 28 January 1992 The Sultan of Brunei Darussalam, the President of the Republic of Indonesia, the Prime Minister of Malaysia, the President of the Republic of the Philippines, the Prime Minister of the Republic of Singapore and the Prime Minister of the Kingdom of Thailand: Reaffirming their commitment to the ASEAN Declaration of 8 August 1967, the Declaration of ASEAN Concord of 24 February 1976, the Treaty of Amity and Cooperation in Southeast Asia of 24 February 1976, the 1977 Accord of Kuala Lumpur and the Manila Declaration of 15 December 1987; Desiring to enhance intra-ASEAN economic cooperation to sustain the economic growth and development of all Member States which are essential to the stability and prosperity of the region; Reiterating their commitment to the principles of the General Agreement on Tariffs and Trade (hereinafter referred to as "GATT"); Recognising that tariff and non-tariff barriers are impediments to intra-ASEAN trade and investment flows, and that existing commitments to remove these trade barriers could be extensively improved upon;

Noting the significant unilateral efforts made by Member States in recent years to liberalize trade and promote investments, and the importance of extending such policies to further open up their economies, given the comparative advantages and complementarily of their economies; Recognizing that Member States, having different economic interests, could benefit from sub regional arrangements; Conscious of the rapid and pervasive changes in the international political and economic landscape, as well as both challenges and opportunities yielded thereof, which need more cohesive and effective performance of intra-ASEAN economic cooperation; Mindful of the need to extend the spirit of friendship and cooperation among Member States to other regional economies, as well as those outside the region which contribute to the overall economic development of Member States;

COUNTRIES
CAMBODIA THE IMPACT OF AFTA ON CAMBODIAN ECONOMY AND SMALL SCALE PRODUCERS
Cambodia officially joined Association of Southeast Asian Nations (ASEAN) to become the tenth member country on 30 April 1999. As a member, Cambodia agreed to subscribe or accede, as the case may be, to all declarations, treaties, and agreements in ASEAN. Specifically, Cambodia agreed to extend on a reciprocal basis the most favoured nation (MFN) treatment to ASEAN member states; extend the national treatment on products of AESAN member states imported into Cambodia and; ensure transparency in its trade regime on good and services.

Challenges Facing Cambodia

Cambodia faces four major problems in adjusting to the requirement of AFTA:

The loss of tariff revenue: Currently, the Cambodian governments budget is overly dependent on tariff revenues. This dependency can be broken through centralization of government receipts and expenditure, and implementation of a more efficient tax collection system. Only then can any significant tariff reduction take place.

Legal infrastructure: Cambodia is in the process of developing a consistent and reliable judiciary. It is also in the process of enacting laws necessary for a stable business environment. AFTA cannot be implemented before this infrastructure is developed. English language and human resources training: Cambodia faces a shortage of English speaking officials and technical experts, who are needed for effective participation in ASEAN and AFTA. Although Cambodia is currently making tremendous effort in human resources development, it will take some time before the country is sufficiently prepared to deal with the complexities of trade agreements. It is critical that Cambodia develops and nurtures the ability to determine and implement its own policies and national objective. Information about ASEAN and AFTA: There is a lack of information and data on AFTA and its possible impact on Cambodia. In order to fully understand the implementation of the free trade area and to develop appropriate priorities for development, Cambodians must have access to accurate information about its probable effects (Kao Kim Hourn and Sarah Kanter, 1997).

To improve the situation in agriculture in view of AFTA:

Cambodia should strengthen its agricultural extension system and capacities building programme for farmers to improve productivity and reduce production cost involving agricultural inputs such as fertilizer and pesticide. With lower input cost and higher yield, Cambodian farmers will be able to get better benefits from AFTA. Cambodia must improve infrastructure (roads, bridges and small irrigation scheme) that will facilitate farmers to boost agriculture production and trade. Cambodia must rehabilitate and develop all agricultural systems in the agricultural productive areas. The Cambodia Agriculture Research and Development Institute (CARDI) should cooperate with other government agencies and NGOs working in the rice production areas, to research and classify geo-genetic identification and purification of traditional rice seeds as Malis, Neang Minh, Somali and other potential traditional rice varieties. This is important for small rice farmers as it will prevent big companies from intruding

into their rights. The concerned government agencies under MAFF should facilitate and provide good services to farmers and identify their specific problems and find solutions. They should adopt clear and sound policies and programmes to promote sustainable agriculture. The government should encourage investors to invest in Cambodia so that rice can be exported directly to demand countries without passing Vietnam or Thailand as brokers. This way, there will be more benefits for Cambodia from rice trading and it will promote independence in the international market.

Ways to improve the situation of small producers

Cambodian rice farmers should adapt the technical innovation of SRI (System of Rice Intensification) along with integrated farming such as MPF (multi purpose farm) using the organic approach as initially introduced by the Cambodian Centre for Study and Development in Agriculture (CEDAC) in 1997. These technical innovations will reduce production cost, get higher yield and can compete with rice imports, and are good for health and the environment. At the same time, the system provides diverse agricultural produces that allow small farmers to cope with market and nutrition problems.

Recommendations
To improve the situation of agriculture in view of AFTA:

The Cambodia government needs to strengthen agricultural extension system and capacities building programme to farmer to improve agricultural productivity and reduce production cost on inputs such as fertilizer and pesticide. With lower input cost and higher yield, Cambodian farmers will be able to benefit from AFTA. The government must improve infrastructure (road, bridge and small irrigation scheme) to facilitate farmers and trade. There is a need to rehabilitate and develop all agricultural systems in the agricultural productive areas. The Cambodia Agriculture Research and Development Institute (CARDI), as the government institute, should cooperate with other government agencies and related NGOs to research and classify geo-genetic identification and purification of traditional rice seeds as Malis, Neang Minh, Somali and other potential traditional rice varieties. This is important for small rice farmers who have their own licenses. The related government agencies under MAFF should provide good facilities and services to farmers in order to identify their specific problems and find solutions. They should adopt clear and strong policies and programmes on promoting sustainable agriculture.

The government should encourage investors to invest in Cambodia so that rice products can be exported directly to demand countries without passing through Vietnam or Thailand as brokers. Thus, the benefits from rice trading will be better for Cambodia and the international market will become more independent. In order to improve the situation of small producers in Cambodia: Cambodian rice farmers should practice and adopt SRI along with the organic approach. These will reduce the production cost and boost yield and enable them to compete with other rice imports. These practices are also good for health and the environment. Farmer organizations must be strengthened to enable them to network in trading as well as for policy and social development purpose. The prospects of Cambodian small producers under the AFTA: One good point for Cambodian producers is that they can participate in Free Trade Area activities in the region. This may allow Cambodia to maximize its economy of scale through increased access to regional and international markets. Cambodian producers may use opportunities created by international competition to boost its productivity and improve the quality of domestic goods and services in order to ensure their competitiveness in the world market. One alternative for them is to keep and/or turn to organic agricultural products. Cambodia has several competitive advantages in the agricultural sector: cheap labour, low population density, good local plant variety and potential for organic agriculture. However, major improvements are needed in terms of infrastructure, production techniques and input and market system. Cambodias labor market has the characteristics of a typical emerging development economy, i.e. dominance of agricultural and rural employment, higher female ratio in the population, low literacy rates, high dependency ratios and high stability. With opportunities through cheap labour, Cambodian products can compete with imported goods. A Campaign to promote organic agriculture and local products organized by CEDAC, NEDC and NGOF in Takeo province 27 28 November 2005