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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
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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.
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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
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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.
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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.
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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)
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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)
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5. Other ASEAN unilateralism
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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.
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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.
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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).
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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.
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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.
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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
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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.
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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.
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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.
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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%
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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.
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Table 3. Exports loss if there was no unilateral trade lib.
Top 5 Major
Trading Partners
Potential Export Loss
(000,000 US$) % of GDP
(PHILIPPINES)
1. China 4972
3681
5437
4256
6681
2.49%
1. Japan 1.84%
1. USA 2.72%
1. Hong Kong 2.13%
1. Singapore 3.35%
(MALAYSIA)
1. Singapore -32909
13094
24264
12351
6062
-13.29
5.29
9.80
4.99
2.45
1. Japan
1. China
1. USA
1. Thailand
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Top 5 Major
Trading Partners
Potential Export Loss
(000,000 US$) % 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
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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.
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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.
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Source: AEC Chartbook
Chart 1: Additional benefits of economic liberalization: more
internet access, more mobile phones
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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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