Clothes without an Emperor: Analysis of the preferential tariffs in ASEAN

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Abstract

This paper examines the current state of intra-ASEAN trade under the preferential regime of the AFTA. It partly addresses some data problems and employs a gravity model to arrive at alternative ways of gauging the importance of preferences in the absence of data on the actual utilisation of AFTA preferential tariffs. Our results show that although the range of products where AFTA might have an influence is limited, preferences seem to matter when the differential margin between the MFN and preferential tariff rates reaches a critical amount, allowing regional exporters to cover the costs of requesting preferences. However, at very high differential margins, the significance of AFTA preferences seems to wane. This indicates either the presence of non-tariff measures which prevent traders from exploiting the huge tariff discounts offered by the AFTA, and or, the propensity of ASEAN to extend high preferences on products where little or no intra-ASEAN trade takes place.

Introduction

Ambitions of regional integration are steadily increasing in Southeast Asia, especially after having seen the completion of an ASEAN1 Free Trade Area (AFTA) in January 2002.2 The next project is no less than the establishment of an ASEAN Economic Community (AEC) by the year 2015. Yet, the view is wide-spread that the most basic of instruments offered by AFTA, namely, the preferential tariffs, are hardly ever used in practice.3 The significant fall of MFN tariffs, partly explains the diminished importance of preferences, while others point to the high administrative costs of utilisation and other non-tariff measures (NTMs) which raises the effective price of intra-regional imports.

Unilateral liberalisation can favour the creation of more trade, reveal the strong intent of transforming the region into an attractive production base, and indeed, gives substance to the rhetoric of open regionalism. On the other hand, the hurdles posed by NTMs, and other high costs implied by administrative and rules of origin compliance, are obviously more malign, casting doubts on the sustainability of future regional efforts.

While considerable work has been done on estimating the probable impact of AFTA, as well as its possible trade diverting and creating effects,4 there is no study known to the authors which sought to evaluate the actual impact of preferences and the extent of the NTMs on intra-ASEAN trade. This is hardly surprising given the numerous data problems that would draw against any such attempt. Data sharing is merely voluntary in ASEAN, and so is the reporting on the incidence of preference utilisation. According to the Bureau of Economic Integration of the ASEAN Secretariat, there is not one single year since the CEPT Scheme began in 1993, where data from the so-called Form D5 is available for all six original AFTA countries,6 and if some data exist for some countries, the information is often on a quarterly basis and incomplete for the relevant year. This means that existing estimates, such as the 5% utilisation rate often quoted in the literature (i.e., Baldwin (2006), Severino (2006), The Economist (07/29/04), Cuyvers et al. (2005)) is based on interviews or extrapolation but not on actual utilisation data. It is in fact not at all clear exactly where this estimate originated, as one observes a somewhat circular quotation of sources, with not one of the authors being able to refer to the original study producing this estimate.7

Another problem stems from the fact that product codes or the nomenclature used in the submission of trade and tariff data are inconsistent, and even differ across some member countries, making the actual trade coverage of various rates of preferential tariffs impossible to track and compare across all AFTA participants.

The evaluation of AFTA's success or failure is thus often based on the number of tariff lines covered by the liberalisation scheme, and on the extent of tariff reduction under the preferential scheme. On both grounds, a rather positive judgement could be rendered. From the very start of the Common Effective Preferential Tariff (CEPT) Scheme in 1993, product coverage was already as high as 88.1%, and at present, preferences are applicable to 98.8% of the tariff lines. In terms of tariff liberalisation, average tariff rates imposed on ASEAN imports, fell from an average of 12.76% in 1993 to 1.87% at present, while unilateral tariff reduction among ASEAN-6 has also been substantial, as seen from the drop of MFN tariffs from 20% in 1994 to 8.16% in 2003 (ASEAN Secretariat, CEPT tariff database).8

The trends in intra-regional trade and intra-regional trade intensities could also be seen as indicators for increasing integration within ASEAN. The rising share of intra-ASEAN trade of 21% in 1993 to 28% in 2005, is accompanied by a similar increase in trade intensity indices of 3.7–5% during the same period.9 The question, of course, is whether such gains are attributable to regional preferentialism or to unilateral and multilateral liberalisation.

The issue of how much AFTA has benefited regional exporters and importers inevitably boils down to the question of how much of actual intra-ASEAN trade have in fact been affected by the preferences accorded by the AFTA. However, the absence of key data about the actual usage of preferential tariffs (i.e. from the Form D Certificates) presents one of the most important obstacles faced by analysts and policymakers alike. With data on tariffs and actual trade flows, one would still be able to track trade patterns in sectors where the differentials between MFN and preferential tariffs are significant. But even this exercise is made impossible not only by the lack of congruence between the product codes used in reporting trade and tariff data, but also by the different product classification standards applied in various years, by different countries. In fact, in one country, the product codes used in reporting MFN tariffs still differ from those used for preferential tariffs even up to the present. The preferential tariff rates of ASEAN are not reported in existing trade data banks (i.e., UN Comtrade, WITS), giving analysts no real alternatives to the data provided by the ASEAN Secretariat.

This paper is therefore a tentative attempt to examine the current state of intra-ASEAN trade under the preferential regime of the AFTA. It partly addresses some data problems and explores alternative ways of gauging the importance of preferences in the absence of actual data on its usage. The incidence of non-tariff measures will also be scanned, focusing on the products carrying high preferences but which are revealed to be underexploited. Our results show that although the range of products where AFTA might have an influence is limited, preferences seem to matter when the differential margin between the MFN and preferential tariff rates reaches a critical amount, allowing regional exporters to cover the costs of requesting preferences. However, preferences have a significant and positive effect only on a very small share of trade flows. Furthermore, contrary to expectations, at very high differential margins, the significance of AFTA preferences seems to wane. This hints at either the presence of non-tariff measures which prevent traders from exploiting the huge tariff discounts offered by the AFTA, and/or, the propensity of ASEAN to extend high preferences on products where little or no intra-ASEAN trade takes place.

The paper is organized as follows: the following section provides a brief overview of the literature quantifying the possible trade and welfare effects of AFTA. The third section discusses data sources and methodology, while the fourth section lays out the results. Section 5 give gives a summary and concludes.

Section snippets

Regionalism effects in ASEAN

Empirical work carried out on ASEAN is largely focused on the trade creation and trade diversion impact of preferential trade regimes in the region. While net trade creation is clearly the superior result in efficiency terms, the fact that policies are produced in the political market shifts expectations towards a trade-diverting outcome. In this context, the predominantly trade-creating result of ASEAN regionalism that emerges from various empirical studies (see Table 1) may seem unusual, but

Data sources

Although trade and tariff data are available at the most disaggregated level for ASEAN through the ASEAN Secretariat database,14 they cannot be combined for regression purposes due to frequent changes in the product codes used across countries and years. A harmonised product nomenclature in ASEAN, the AHTN, has only been recently in force,15

Empirical analysis

We conduct an empirical analysis that tests the importance of preferential tariffs and estimates approximately the costs of requesting preferences under the AFTA. Since the data at hand does not distinguish between trade flows using MFN tariffs and those that utilised preferential tariff rates, we carry out the present analysis using normal trade flows. While the obtained estimates do not provide a precise quantification of the costs of preferences because of these data constraints, we

Conclusions

While the potential gains offered by a fully implemented free trade area in ASEAN has been examined in both theoretical and empirical literature, the nature and magnitude of actual trade and production effects are unknown. This paper aims to provide some indication of the extent of influence preferentialism might have in ASEAN given the trade and tariff data converged for the years 2001–2003.

Although the empirical analysis could not be carried out using data on utilisation of preferential

Acknowledgement

We are thankful to Anne Robeniol and Ahmad Syaukat of the ASEAN Secretariat for providing us with data, and other critical information for this paper; and to Jerzy Rozanski for undertaking the concordance of the AFTA CEPT tariffs into the WITS tariff data base.

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