THE IMPACT OF THE CRISIS ON ASEAN TRADE:
A PRELIMINARY ASSESSMENT

This is a preliminary assessment of the impact of the currency turbulence on the trade of the ASEAN member-countries – both among themselves and with the rest of the world.

It seeks to address the following questions:

1. How has the devaluation of ASEAN’s currencies affected ASEAN’s exports and imports?

2. Is there a difference between its effects on intra-ASEAN trade and its impact on extra-ASEAN trade?

3. How have ASEAN’s exports fared in its major markets -- the United States, Japan, and the European Union?

4. How is ASEAN’s trade balance?

Figure 1 shows the sharp fall in the values of ASEAN’s currencies in the months following the devaluation of the baht on 2 July 1997. By the fourth quarter of 1997, most ASEAN currencies had fallen by 30 to 40 percent from their levels at the end of June 1997.

Since the currency devaluations started only during the 3rd quarter of 1997, we should expect their impact on trade to have been felt during and immediately after that period. We need to determine whether the values of the variables in the second half of 1997 represent a change from their average values in the past. As of the writing of this paper, the Secretariat has received trade-value figures for the whole of 1997 from seven of the nine ASEAN countries: Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. In addition, the Secretariat has received trade data for the first quarter of 1998 from these countries except Thailand.

These figures lead us to the following observations:

Total ASEAN exports grew from US$ 330.6 billion in 1996 to US$ 351.6 billion in 1997, an increase of 6.34 percent. This represents a significant slowdown from the average annual growth of 16.5 percent during the 1993-96 period.

TABLE 1A
ASEAN EXPORTS, 1996-97
(US $ Million)

The countries that recorded the highest growth rates in exports were the Philippines (29.4%), Vietnam (22.7%) and Singapore (9.2%). In absolute terms, Singapore achieved the highest gain (US$ 10.8 billion), followed by the Philippines (US$ 5.69 billion) and Malaysia (US$ 3.2 billion). Indonesia suffered an absolute decline in her 1997 exports, which fell to US$ 51.3 billion from US$ 53.8 billion in 1996.

Most of the export growth took place in the first half of 1997. Exports in the second half of 1997 were almost flat compared to the second half of 1996. Since the currency turmoil started affecting ASEAN only in mid-1997, there appears to be a direct relationship between the turmoil and the slowdown in export growth.

The slow growth of total ASEAN exports continued in the first quarter of 1998. Total exports¹ rose from US$ 70.1 billion in the first quarter of 1997 to US$ 73.7 billion in the first quarter of 1998, or by only 5.17 percent.

TABLE 1B
ASEAN EXPORTS, FIRST QUARTER 1997-98
(US $ Million)

Intra-ASEAN exports (in US dollar terms) grew by only 4.65 percent, from US$ 82.4 billion in 1996 to US$ 86.3 billion in 1997. Lower than the expansion of total ASEAN exports, this growth rate was a big comedown from the 28.8 percent average growth of intra-ASEAN exports achieved during the 1993-96 period. In 1997, intra-ASEAN exports accounted for about 24.6 percent of total ASEAN exports.

TABLE 2A
INTRA-ASEAN EXPORTS, 1996-97
(US $ Million)

The countries that accounted for the highest growth rates in their exports to the rest of ASEAN are the Philippines (15.7%), Thailand (12.6%) and Brunei Darussalam (11.2%). In absolute terms, Thailand had the greatest expansion (US$ 1.48 billion), followed by Singapore (US$ 1.39 billion) and Indonesia (US$ 0.55 billion).

Contributing most to this increase were Antiques and Works of Art (119.4%), Machinery and Electrical Appliances (2.3%) and Chemicals.

The slowdown in intra-ASEAN exports was felt even more strongly in the first quarter of 1998. Intra-ASEAN exports declined dramatically from US$ 19.2 billion in the first quarter of 1997 to US $ 15.5 billion in the first quarter of 1998, a drop of nearly 19.3 percent. The biggest reductions were experienced by Malaysia (-40%), Vietnam (-39.6%), and Brunei Darussalam (-35.8%).

TABLE 2B
INTRA-ASEAN EXPORTS, FIRST QUARTER 1997-98
(US $ Million)

Using figures for the seven biggest ASEAN importers, we find that imports in US dollar terms grew by only 3.13 percent from US$ 362.1 billion in 1996 to US$ 373.5 billion in 1997. In fact, the slowdown in ASEAN imports started in the third quarter of 1997. This trend continued up to the fourth quarter of the year. Brunei Darussalam and Thailand both experienced a contraction in their imports. This probably resulted from the higher cost of foreign goods because of the depreciation of domestic currencies, the slowing down of economic activity, and the significant rise in the cost of credit.

TABLE 3A
ASEAN IMPORTS, 1996-97
(US $ Million)

While total imports in dollar terms grew from 1996 to 1997, the slowdown in economic activity in 1998 dampened import demand. Total imports contracted from US$ 73.3 billion in the first quarter of 1997 to US$ 66.0 billion in the first quarter of 1998, a decline of 9.9 percent. Major contractions were felt in Brunei Darussalam (-39.7%), Indonesia (-32.4%) and Malaysia (12.6%).

TABLE 3B
ASEAN IMPORTS, FIRST QUARTER 1997-98
(US $ Million)

In 1997, ASEAN exports expanded in three important markets: the United States, the People's Republic of China and the Republic of Korea. However, exports contracted in two other significant markets: Japan and the European Union.

ASEAN exports to the United States grew by 17.7 percent from US$ 59.5 billion to US $ 70.0 billion in 1997. Exports to China expanded even more – by 62 percent, from US$ 18.0 billion in 1996 to US$ 29.2 billion in 1997. In spite of the economic crisis in Korea, ASEAN exports to that market expanded by 12.9 percent, from US$ 9.4 billion in 1996 to US$ 10.7 billion in 1997.

The reduction in exports to Japan was expected, given the continuing stagnation of the Japanese economy. ASEAN exports to Japan fell by 2.6 percent, from US$ 43.2 billion in 1996 to US$ 42.0 billion in 1997. However, the downturn in ASEAN exports to the EU was quite unexpected, since growth in the EU, as in the United States, seemed to be strong. ASEAN exports to the EU contracted by 1.8 percent, from US$ 46.9 billion in 1996 to US$ 46.1 billion in 1997.

TABLE 4A
EXPORTS TO MAJOR ASEAN MARKETS, 1996-97
(US $ Million)

For the first quarter of 1998, ASEAN exports were up in the United States (1.57%), China (16.4%) and the EU (14%). However, the growth of exports to the US had levelled off, while exports to the EU had expanded quite strongly. Exports to Japan continued to decline, even more precipitously than before (-8.3%). Exports to Korea also went down significantly (-23.3%).

TABLE 4B
EXPORTS TO MAJOR ASEAN MARKETS, FIRST QUARTER 1997-98
(US $ Million)

The fall in imports triggered a huge improvement – if it may be called that -- in the trade balance of the ASEAN countries. The trade deficit narrowed from US$ 31.5 billion in 1996 to US$ 21.9 billion in 1997. A trade surplus accumulated, beginning in the third quarter of 1997. By the first quarter of 1998, ASEAN countries had a surplus of US$ 7.7 billion, as against a deficit of US $ 3.2 billion in the first quarter of 1997.

TABLE 5A
TRADE BALANCE OF ASEAN COUNTRIES, 1996-97
(US $ Million)

TABLE 5B
TRADE BALANCE OF ASEAN COUNTRIES, FIRST QUARTER 1997-98
(US $ Million)

After the serial devaluations of ASEAN countries started, some early, superficial commentaries stated the expectation that the devaluations would lead to strong export performance, which, in turn, would lead the economies concerned to the road to recovery. These countries, it was said, would "export their way out" of their troubles. At least, this is how the theory says it should be. After all, previous examples of large-scale devaluations -- Mexico, Sweden and Italy in the 1990s – had led to rapid export growth.

It has been more than a year since the devaluations of mid-1997, and, as we have seen in the figures cited above, there has been no similar export response from the ASEAN countries. Quite the contrary.

It is quite evident that ASEAN’s weak export performance reflects supply-side bottlenecks, weak demand from Japan, the continuing doldrums in the electronics sector, and, in some cases, the scarcity of containers. Of particular importance has been the shortage of trade financing for some ASEAN countries.

Clearly, the economic recovery of the ASEAN countries cannot depend on an export surge actuated by the mere devaluation of their currencies. Their capacity to trade has to be shored up by the stimulation of demand in their developed-country markets, in Japan above all; by internal reforms, particularly of the financial sector; by the infusion of financing for trade, including for imports of raw materials and capital goods; and by expanded flows of long-term investment into the real economy in each of the ASEAN countries.

This has to be brought about by international action and domestic policy. Collectively, as a region, ASEAN has given a forthright, forceful response; and it is the strong re-affirmation of its commitment to regional economic integration and an open trading and economic regime.

Soon after the global financial turmoil hit Southeast Asia, a surprisingly large number of people asked whether ASEAN would now retreat into protectionism. Specifically, they predicted the demise, or at least the significant slowdown, of the ASEAN Free Trade Area. For some reason this question continues to be asked, although it is obviously based on a non sequitur and, therefore, makes little sense. For, clearly, sliding back on regional economic integration and otherwise taking restrictive action on trade and investments would be the surest way of eroding business confidence and deterring investments and would thus be self-defeating.

In December last year, ASEAN’s leaders collectively re-affirmed their strong commitment to AFTA and, indeed, called for the acceleration of its implementation. Various ASEAN ministerial bodies have since reiterated that declaration.

Accordingly, in Manila last week, ASEAN trade and industry ministers, meeting as the AFTA Council, heard one another report on what they have done or committed themselves to do to in order to advance AFTA more rapidly. Most of the actions involve the faster transfer of products from various exclusion lists to the inclusion list of items covered by AFTA. They also include the identification of more products on which tariffs would be eliminated altogether by 2003 or, in some cases, as early as 1999.

As it is, about 83 percent of all tariff lines in ASEAN, some 46,000 in all, are now covered by the AFTA scheme, with tariff rates for these products down to 5.37 percent and expected to fall to less than four percent by the year 2000. The result is that the share of intra-ASEAN trade in ASEAN’s total trade has risen to almost 25 percent in 1997. ASEAN is also moving on making trade easier and more efficient through the harmonization of tariff nomenclatures and of customs rules and procedures.

Improvements have been made on the ASEAN Industrial Cooperation scheme, under which the products of companies operating in two or more ASEAN countries would enjoy full AFTA treatment, that is tariffs of at most five percent or none at all, upon government approval of their applications for inclusion in AICO.

ASEAN, too, is far along in its negotiations on trade in services, with the first package of commitments on seven priority sectors concluded last year and a second package ready for final approval this year.

Also last week, the ministers signed a framework agreement establishing the ASEAN Investment Area. Under this agreement, ASEAN countries are to open most industrial sectors to ASEAN and non-ASEAN investments to the extent of giving national treatment to such investments.

Thus, in ASEAN’s view, the only enduring and effective way of drawing in investments and invigorating trade is to hasten regional economic integration and keep open trade and investment regimes.

¹ We have first quarter 1998 trade figures only for Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Vietnam.