ASEAN Peoples Forum 2015 WISMA MCA, Kuala Lumpur, Malaysia

23 April 2015

Bienvenido Nonoy Oplas, Jr. SEANET Fellow

With fantastic assistance by Alan Chester Arcin,

Zaldivar Natavio, Sarah Jane Ugot, and Philip Angelo Pandan

Unilateral Trade Liberalization: Benefits to ASEAN People

The Road to AEC 2015

1967, ASEAN was formed by Indonesia, Malaysia, Philippines, Singapore and Thailand, mainly for political and security concerns.

1976, 1st ASEAN Summit, liberalization in trade and investments. ASEAN Preferential Trading Arrangement (APTA) created.

1992, Common Effective Preferential Tariff (CEPT) adopted. Became ASEAN Trade in Goods Agreement (ATIGA) in 2010.

1993, ASEAN Free Trade Area (AFTA).

1995, ASEAN Framework Agreement on Services (AFAS).

1998, ASEAN Investment Area (AIA), revised as Comprehensive ASEAN Investment Agreement (CAIA) in 2009.

1999, ASEAN expansion to 10 countries, Cambodia added.

Unilateral Trade Liberalization

Going alone, no need for reciprocity in reduction of tariff and other trade barriers (Richardson, 2001).

Two types of unilateralism: (1) sectoral or few products, and (2) multi-products. Examples of (1) was the UK corn laws removal (1846); Ex. of (2) are APEC Individual Action Plans (IAPs).

if we refuse to reduce our trade barriers just because others do not reduce theirs, we lose from our trading partners failure to reduce their trade barriers and then we lose twice over from our failure to reduce our own. J. Bhagwati

Unilateralism 1: Hong Kong

A free port which thrives on free trade. Its open door policy makes it one of the world's largest trading economies, an international financial and commercial center in the Asia-Pacific region.

Free trade policy means no barriers on trade. No tariff on importation or exportation of goods.

Import and export licensing kept to a minimum, imposed only when there is real need like obligations to trading partners. Or meet public health, safety or internal security concerns.

HK imports in thousands of container ships, and exports in millions of shopping bags. Free trade attracts lot of visitors from other countries.

Unilateralism 2: Singapore

Open, free, competitive economy. Tariffs are zero, with a few exceptions.

Import restrictions based mainly on environmental, health, and public security concerns.

Total merchandise trade almost 4x of GDP, FDI inflows are big.

Rice subject to import licensing to ensure food security and price stability.

But insufficient liberalization in services trade. FTAs with other countries include mutual recognition of standards, enhanced investment protection disciplines, protection of intellectual property rights (IPR), and elimination of anti-competitive practices, competition policy.

Unilateralism 3: New Zealand Previously export dependence

with UK. After UK joined the EU, some quantitative restrictions (QRs) were imposed to non-EU countries like NZ.

Import substitution and protectionism policy, high tariffs. Technological progress suffered.

Mid-80s liberalization, tariffs were removed in a wide range of goods without domestic competitors, reduced in others. Tariff decreased from 27% to 7% in 1997.

Import licensing was also gradually removed and other forms of export assistance were also greatly reduced (Grafton et al., 1997).

history of trade in New Zealand is that our quality of life plummets when we are shut off to the global market. We do not get rich by selling to ourselves. NZ Intl. Business Forum (NZIBF)

Unilateralism 4: Chile

Mid-80s, protectionism and price controls were imposed, resulted in economic contraction.

1985, liberalization restarted, tariff cut down to 20%, further to 15%.

* Chiles trade and investment regime continues to be characterized by openness, transparency, and predictability Since the last review in 2003 modernize customs and facilitate trade, maintained a single MFN tariff rate of 6% with a few exceptions, abolished some import taxes and export subsidies (WTO, 2009)

5. Other ASEAN unilateralism

So, ASEAN unilateral trade liberalization was good for their economies and the poor. Really? How do we check or verify that?

Gravity Model Gravity models are used in

various social sciences to predict and describe certain behaviors that mimic gravitational interaction as described in Newton's law of gravity.

Social science models contain some elements of mass and distance, which lends them the metaphor of physical gravity.

Gravity model of Trade is used here.

Gravity models of trade are econometric models between countries. Newton's law of gravity says, the force of gravity between the two bodies is positively related to the mass of the two bodies and inversely related to their distance.

For trade purpose we use the Gross Domestic Product (GDP) to represent the mass of the countries and the trade cost to represent their distance.

The model predicts that GDP Increases the volume of trade between countries and trade costs decreases it. Did this happen?

For a better fitting model, other explanatory variables are used such as population and land area of both countries and control variables such as common borders, language and membership in regional trading arrangements.

Regression model

()

= 0 + 1 + 2 + 3 + 4 + 5 + 6 +

Adapted from Achakzai (2010). - trade flow between country i and country j, GDP - sizes of the two trading countries represented by GDP i and j respectively. Thus it can be written as:

= +

Or the sum of factor incomes and directly affects trade (Dixit and Stiglitz, 1977) through Egger (2002).

The level of development is proxied by per capita income (PCI) of country i and j.:

= () () Higher PCI for a country creates larger demand for imports (Ramezzana, 2000). Other variables,: proxies of barriers-to-trade (Carrerre, 2002), and proxy for transport costs (Egger 2002). * DIST - distance between countries i and j. * CONTIG - value of 1 when countries i and j share a common border and 0 otherwise. * CSL - common spoken language, 1 when the population of countries i and j speak a common language and 0 otherwise. Serve as proxy for cultural similarity (Carrerre, 2002). * UNI - indicates whether country i has unilaterally liberalized. 1 if yes and 0 otherwise.

Description of Data The model was estimated for the year 2010.

Trade data (most preferably exports) were taken from UN

COMTRADE.

The sample covers 1788 observations for the 10 member countries of ASEAN and all of their trading partners.

Data for GDP and PCI (per capita GDP) are from World Bank database in the aforementioned year.

Data for distance, common borders and language were obtained from Centre d'Etudes Prospectives et d'Informations Internationales (mentioned in Achakzai, 2010.

Table 1. Regression Results

_cons -10.89402 1.732706 -6.29 0.000 -14.29414 -7.4939

contig 1.845164 .448667 4.11 0.000 .9647364 2.725591

csl .4294381 .1521713 2.82 0.005 .1308296 .7280466

uni_trd .667114 .1882911 3.54 0.000 .297627 1.036601

ln_dist -.9461703 .1262944 -7.49 0.000 -1.194 -.6983405

ln_pci .7959355 .0286817 27.75 0.000 .7396529 .8522181

ln_gdp .6828134 .02429 28.11 0.000 .6351487 .7304781

ln_trd_flow Coef. Std. Err. t P>|t| [95% Conf. Interval]

Robust

Root MSE = 2.2991

R-squared = 0.5277

Prob > F = 0.0000

F( 6, 1009) = 190.67

Linear regression Number of obs = 1016

Which means: 1. A percent increase in GDP leads to a 0.68 percent increase in

trade flow.

2. A percent increase in PCI leads to a 0.79 percent increase in trade flow.

3. A percent increase in distance leads to a 0.94 percent decrease in trade flow.

4. If there is country i is unilaterally liberalized, trade flow increases by 0.67 percent.

5. If countries i and j share a common spoken language, trade flow increases by 0.42 percent.

6. If countries i and j share a common border, trade flow increases by 1.84 percent.

Furthermore, the above table has an explanatory power, the partial slope coefficients are all significantly different from zero.

The p-value from the F-test of the regression is approximately 0.00 which is less than the level of significance (=0.05).

Hence, we reject the null hypothesis that the model has no explanatory power.

Top 5 Major

Trading Partners

Actual

Exports

(000,000 US$)

Predicted

Exports

(000,000 US$)

Predicted:Actual

Ratio

(PHILIPPINES)

1. China 5724

7841

7570

4336

7319

752

4160

2133

80

638

13.14%

2. Japan 53.05%

3. USA 28.17%

4. Hong Kong 1.84%

5. Singapore 8.72%

(MALAYSIA)

1. Singapore 26553

20611

25057

18981

10628

59462

7517

793

6630

4566

223.94%

2. Japan 36.47%

3. China 3.17%

4. USA 34.93%

5. Thailand 42.96%

Table 2. Predicted Exports of ASEAN 4 if there was no unilateral trade lib.

Top 5 Major

Trading Partnes

Actual

Exports

(000,000 US$)

Predicted

Exports

(000,000 US$)

Predicted:Actual

Ratio

(INDONESIA)

1. Japan 25782

15693

13723

14302

12575

2673

508

3010

2341

569

10.37%

2. China 3.24%

3. Singapore 21.93%

4. USA 16.37%

5. South Korea 4.53%

(THAILAND)

1. China 21473

20416

20231

7347

10567

537

2000

1502

244

1548

2.50%

2. Japan 9.80%

3. USA 7.42%

4. Indonesia 3.32%

5. Malaysia 14.65%

From the ratio using the values estimated by the econometric model, this means: Not having unilateral trade liberalization for the four

countries would have resulted in low amount of trade flows. For instance:

PH exports to HK would be only 9% of actual exports; MY exports to US would be only 35% of actual exports; TH exports to MY only 15% of actual exports; and IN exports to SG only 22% of actual exports.

Exception in trade between MY and SG where trade flow

increased by 123.94%. Rusdi Omar noted that there is a special relationship between Malaysia and Singapore described by their mutual dependence with each other. Mutual agreements are the ones that solve the bilateral issues between the two.

Hence, undertaking mutual agreements benefit the two countries.

Table 3. Exports loss if there was no unilateral trade lib.

Top 5 Major

Trading Partners

Potential Export Loss

(000,000 US$) % of GDP

(PHILIPPINES)

1. China 4972

3681

5437

4256

6681

2.49%

1. Japan 1.84%

1. USA 2.72%

1. Hong Kong 2.13%

1. Singapore 3.35%

(MALAYSIA)

1. Singapore -32909

13094

24264

12351

6062

-13.29

5.29

9.80

4.99

2.45

1. Japan

1. China

1. USA

1. Thailand

Top 5 Major

Trading Partners

Potential Export Loss

(000,000 US$) % of GDP

(INDONESIA)

1. Japan 23109

15185

10713

11961

12005

10.37%

3.24%

21.93%

16.37%

4.53%

1. China

1. Singapore

1. USA

1. South Korea

(THAILAND)

1. China 20936

18415

18728

7103

9019

2.50%

9.80%

7.42%

3.32%

14.65%

1. Japan

1. USA

1. Indonesia

1. Malaysia

Table 4: The Economic League in 2050, HSBC study, 2012

Four of the top 25 biggest economies in 2050 will be from the ASEAN: Philippines, Indonesia, Malaysia and Thailand.

Table 5: GDP size based on Purchasing Power Parity (PPP) valuation, in Billion Current International Dollars, ASEAN

1994 2004 2014 Multiple * 2014/1994

2016

Projected

Indonesia 769.1 1,243.4 2,676.1 3.5 3,041.3

Thailand 356.3 589.1 985.5 2.8 1,088.2

Malaysia 190.1 380.8 746.1 3.9 839.9

Philippines 188.7 339.4 692.2 3.7 804.0

Vietnam 93.9 230.3 510.7 5.4 586.5

Singapore 105.6 212.0 452.7 4.3 492.1

Myanmar 39.61 ** 91.1 242.0 6.1 291.3

Cambodia 7.9 19.9 50.0 6.3 58.8

Laos 6.2 13.4 34.4 5.6 40.8

Brunei 15.8 23.5 30.2 1.9 31.6

Source: IMF, World Economic Outlook 2015 Database * Column on multiple is not part of the IMF report, added only here. ** 1998, the earliest data available for Myanmar. Cambodia, Laos, Myanmar and Vietnam (CLMV) began economic liberalization only about 1-2 decade/s ago, experienced high economic expansion. Their low economic base in the 90s is one explanation.

Source: AEC Chartbook

Chart 1: Additional benefits of economic liberalization: more internet access, more mobile phones

CONCLUSIONS

Numerical values are large enough to warrant recommendation for this policy. All of ASEAN-4 benefitted from free trade, most notably Indonesia and its trading partners. The case of Malaysia and Singapore is unusual but the special relationship between the them might explain the reaction in their trade.

The coming ASEAN integration, being unilaterally liberalized is

a fitting, optimal choice for its member countries. And not only in tariff but also non-tariff barriers (NTBs) like strict licensing, and trade in services.

Unilateral liberalization benefits the poor more jobs and exports, more goods and services. From fruits to mobile phones to motorcycles and cars. Developing countries, big and small, should consider this policy.

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