Business Law Assignment

Paper of ASEAN Free Trade Area (ASEAN) 1

Fellicia Imelda Kustianto
BA Wealth Planning 2012 (015201200007)
ASEAN FREE TRADE AREA (AFTA)

Free trade is an economic concept that refers to selling activities between countries
without any tax for the export and import activities or any trade barriers. Free trade can also be
defined as the absence of artificial barriers (barriers that are made by the government) between
individuals and/or induvidual and companies that are in different countries. In order to
implement the free trade concept, there should be an agreement between each respective
countries, for example free trade agreement between ASEAN countries, which is known as
ASEAN Free Trade Area (AFTA).
ASEAN Free Trade Area (AFTA) is a form of agreement between ASEAN countries to
establish a free trade area in order to enhance the competitiveness in economic field of the
ASEAN region by making ASEAN as the basic production of the world within 15 years (1993-
2008) and to create a regional market for its 500 million people. AFTA is the ASEANs free
trade area in which there are no tariff barriers (import duty around 0-5%) and/or non-tariff
barriers for all of ASEAN countries (Brunei, Indonesia, Malaysia, Philippines, Singapore,
Thailand, Vietnam, Laos, Myanmar, and Cambodia).
AFTA was formed in 4
th
ASEAN Summit or what in Bahasa called as Konferensi Tingkat
Tinggi (KTT) IV on 1992 in Singapore. At that time, heads of states announced the
establishment of a free trade area in ASEAN within 15 years ahead. The agreement then named
as ASEAN Free Trade Area (AFTA). During the implementation of AFTA, there is a system
called ASEAN Free Trade Area-Common Effective Preferential Tariffs Scheme (AFTA-CEPT)
which is used for the free trade between ASEANs countries. CEPT is a program to reduce the
tariff gradually and the elimination of non-tariff barriers which had been agreed by ASEANs
countries so that in doing the trade among ASEANs countries, the operational costs can be
pressed thus it will be more beneficial. The most recent development of AFTA is an agreement
to eliminate all the tax for importing goods for Brunei Darussalam in 2010, Indonesia, Malaysia,
Philippines, Singapore and Thailand; and for Cambodia, Laos, Myanmar, and Vietnam in 2015.

Business Law Assignment
Paper of ASEAN Free Trade Area (ASEAN) 2
Fellicia Imelda Kustianto
BA Wealth Planning 2012 (015201200007)
According to Douglas Irwin, a leading economical figure, the benefits of free trade can be
divided into 3 forms, which are:
1. Direct benefit
The direct benefit of free trade is the availability of more variational goods in the market.
The prosperity of the people will increase if the goods to be chosen are more variated.
Besides, it will be beneficial for the manufacturers since it will open the opportunity of
growth in producing more vary goods with the cheaper production costs. Moreover,
through free trade, there will be specialization which caused more effectiveness in
producing the goods and the improvement in trades volume of the countries. Also, with
the elimination of the tariff and no-tariff barriers in trading, the price of the goods will be
cheaper.
2. Indirect benefit
The indirect benefits of free trade is to enlarge and expand the scope of the free market,
improve the countries export rate and also increase the productivity. With the increasing
number of the productivity, thus the standard living of people in the respective countries
will also increase.
3. Moral and intellectual benefit
With those benefits mentioned above, the free trade also has potential to create the peace
by creating the interdependece between countries and also understanding and cooperation
between one and another countries. For developing countries, the international trade can
encourage the growth of regime and democratic state institutions. Even though these
benefits are difficult to be measured quantitatively, currently there are more creative
studies that are showing the benefits of free trade in non-material field.
Besides having the good impacts, AFTA can also cause bad impacts to the countries. One
of the impact that may happen is if the country can not compete well in the trade, thus its
products may lose in the trade and lose its market, for example because the price from another
country is cheaper, so the countrys products will not be sold as what it used to be. If this case
happens, that lose country may reduce its number of employees, which will cause the
improvement in the unemployement rate in that country.
Business Law Assignment
Paper of ASEAN Free Trade Area (ASEAN) 3
Fellicia Imelda Kustianto
BA Wealth Planning 2012 (015201200007)
However, Indonesia, as one of the country that established AFTA seems not ready yet to
face the free trade of ASEAN which will be started on next year, 2015. Indonesia seems still
very lack in terms of infrastructures to support the free trade itself and also the human source that
seems not capable enough to enter the battlefield of the trading. Despite of getting advantages
in some terms, the free trade may come up as the threat for Indonesia if the government do not
take fast actions to prepare its infrastructures and human source. Even the worst case that may
come up in the future is many farmers and others low-end people will lose their jobs and increse
the unemployement rate in Indonesia.
Therefore, there are some aspects that can be done by the government of Indonesia in order to
prepare Indonesia to face the free trade on 2015 ahead, such as:
1. Make a legal and strong organization to face AFTA
AFTA as the new activity in ASEAN coorperation has to be supported by the strong and
legal organization in order to control the implementation to stay in the right track and
well done as what it supposed to be so that it can be used maximumly and fair.
2. Enhance the promotion and market penetration
Based on the research, Indonesias trade volume is the second smallest (after Philippines)
if it is compared to the other ASEAN countries. One of the causes is because Indonesian
products are not being well known by the other ASEAN countries. Therefore, Indonesia
should enhance its promotion and market penetration of its products.
3. Increase the efficiency of domestic products
In order to increase the efficiency of domestic products, Indonesia needs to create a
healthy competition among companies so that there is no "price distortion" of raw
materials. In addition, non-production costs can be reduced overall. In this regard, the
deregulation policies that have been implemented since a few years ago needs to be
continued and expanded to the real sectors that directly affect production and subsequent
attempts to specifically address the provision of facilities which tend to create a
monopoly in business management conditions need to be eliminated.
4. Improve the quality of human resources
The quality of human resources in Indonesia is still very lower than the quality of human
resources in other ASEAN countries. Therefore, in order to face the AFTA, the efforts to
Business Law Assignment
Paper of ASEAN Free Trade Area (ASEAN) 4
Fellicia Imelda Kustianto
BA Wealth Planning 2012 (015201200007)
improve the quality of human resources should be improved by developing vocational
schools and polytechnics in the future.
5. Protection toward small industries
The implementation of AFTA will result in high levels of competition, so that only large
companies who are able to continue to grow. The major companies in the industry will
keep pressing small industries which are generally can not really compete with the
conglomerates. To protect such a small industry, need to amount to an anti-monopoly
legislation or form a unifying organization of small-scale enterprises.
6. Improve the competitiveness in agricultural sector
In an effort to increase the role of agricultural exports, need to develop superior products
that can compete in both domestic market and international market. Development of
superior products is carried out through a series of interrelated processes and establish an
agribusiness system that consists of a system of pre-production, production, processing
and marketing.

As the conclusion, AFTA is actually a good way to improve the economic condition in ASEAN
countries. But just like the other ways, it also has its bad impacts. For developing countries, they
should really prepare themselves to face the free trade so that the free trade can be beneficial for
them and not be a threat. Indonesia is one of the developing countries that should prepare well
for the free trade which will be started on the next year, 2015.