Does AFTA continue to be relevant in the aftermath of the Asian financial crisis?

First, I will give ASEAN's response. And then I will take a look at some Philippine answers.

The financial crisis presented ASEAN with two choices. Backslide on regional economic integration or abort it altogether. That was one. Or deepen and accelerate it. The usual instant analysts predicted early in the crisis that ASEAN would retreat into isolationism and protectionism. They proclaimed that ASEAN had fallen into disarray and that AFTA was dead.

It did not happen. ASEAN made the other choice. From the beginning, ASEAN's leaders re-affirmed their commitment to regional economic integration. They called for the deepening and acceleration of AFTA. They instructed their ministers to extend trade liberalization to services, and to begin the next round of negotiations on trade in services immediately and complete them by 2001. They called for the dismantling of barriers to investment from ASEAN investors, initially in the manufacturing sector.

In compliance with the ASEAN leaders' collective decision, the date for the formal completion of AFTA has been advanced to the beginning of 2002. However, ASEAN has also agreed to ensure that tariffs on at least ninety percent of tariff lines in the inclusion list drop to 0-5 percent by the beginning of next year, with each individual country committing itself to at least 85 percent of its tariff lines. Thus, in a little more than six months, AFTA will have been substantially achieved, at least for the original six signatories, with some exceptions and with some flexibility.

Meanwhile, under the ASEAN Industrial Cooperation scheme, or AICO, products of cooperative production processes between companies operating in two or more ASEAN countries receive full AFTA treatment immediately. As of the beginning of this month, sixty-two applications have been received, twenty-eight have been approved, and twenty-two are being processed. The companies involved have names like Matsushita, Denso, Toyota, Honda, Volvo, Sony, Nestle, Isuzu, Mitsubishi, Hitachi, Nissan, and Ford.

Not only are tariffs going down. AFTA is getting rid of quantitative restrictions and other non-tariff barriers to trade. These barriers have to do with technical and physical obstacles as well as with policy measures. Thus, trade is being made easier and smoother by the standardization of customs procedures, the harmonization of product standards, the conclusion of mutual recognition arrangements, and similar measures.

As with trade in goods, so will it be for trade in services. ASEAN is now laying the conceptual framework and negotiating parameters for the start of the next round of negotiations oil trade in services. In previous rounds, mutual commitments were made in the seven areas of air, transport, business services, construction, financial services, maritime transport, telecommunications and tourism. In the next round, all sectors and all modes of supply will be open to negotiation.

Barriers to investments are also being brought down. Under the ASEAN Investment Area, for instance, ASEAN countries are committed to open their manufacturing sectors to ASEAN investors and extend national treatment to such investments. Exclusions are to be phased out by 2003.

It is clear that ASEAN's leaders have made regional economic integration a primary component of the region's response to the economic troubles that have hit it. They know that ASEAN needs investments for the recovery of its economies, and that a large integrated market can attract investments much more effectively than small, fragmented ones. The economies of scale made possible by larger markets make for more efficient production and marketing. Regional integration fosters competition within the region before regional industries and firms face the inevitable competition brought on by globalization.

AFTA and other forms of regional economic integration heighten competition in the Philippines and intensify competitive pressures on firms catering to the domestic market. But they also open other Southeast Asian markets to competition from Philippine goods and thus offer immensely larger, regional opportunities for Philippine companies. There is a market of half a billion people with a gross domestic product of more than US$700 billion out there.

In any case, we can be quite confident of the ability of Philippine companies to compete on the same playing field as those of Indonesia, Malaysia, Singapore and Thailand, particularly at home, where conditions and markets are familiar.

My confidence, which I know you share, rests not on national loyalty but on solid experience. Since the AFTA process started in 1993, the Philippines' trade with the rest of ASEAN has expanded more than three-fold, from US$2.7 billion in 1993 to US$8.2 billion in 1998. This is faster than the expansion of the Philippines' total global trade, which itself has been growing at a torrid pace. The result is that the share of ASEAN in the Philippines' foreign trade has risen from 9.2 percent in 1992 to almost 14 percent today.

Contrary to the fears spread by some in the Philippines, this shift is accounted for more by the rise in Philippine exports to ASEAN than by the influx of ASEAN goods into the Philippines. Philippine exports to ASEAN expanded almost five-fold from US$795 million in 1993 to US$3.8 billion last year, while imports from ASEAN grew from US$1.9 billion to US$4.4 billion in the same period. Thus, since AFTA's implementation started, Philippine exports to ASEAN have grown at 39.5 percent a year, much faster than the growth of Philippine imports from ASEAN, which has been recorded at 21.1 percent a year. In fact, imports from ASEAN actually fell from US$4.9 billion in 1997 to US$4.4 billion in 1998.

This has resulted in a significant drop in the Philippines' trade deficit with the rest of ASEAN, from about US$1.1 billion in 1993 to around US$600 million last year. So much for the damage to Philippine industries from so-called "cheap imports" from ASEAN!

The Philippine economy as a whole seems to be doing quite well in the regional arena. In any case, regional competition is now the name of the game. For many industries, marketing programs must have a regional outlook. Regional integration may require a certain size for firms to be competitive. In this case, mergers and consolidations point the way. Nevertheless, there are always niches for smaller firms with imagination, talent for quality, daring, and a regional outlook. The enhancement of the regional competitiveness of exporting companies strengthens the smaller firms that supply or service them.

I am aware of the complaints of some Philippine business people about the factors that hobble their competitiveness. They say: Transport is lousy and costly. Communications are inadequate and expensive, if improving. Red tape and corruption are too much. In some sectors, labor productivity is not commensurate to labor cost.

If that is indeed the case, the thing to do is not to wall off Philippine industry against the region. This would only keep efficiency from improving, hamper the flow of new technology, constrict economies of scale, keep costs and prices up and quality down, stifle vigor and innovation, and confine the Filipino consumer to his state as a captive market.

If bad infrastructure hobbles the competitiveness of some Philippine industries, the response is to raise the quality of transport and communications and lower their cost. If the problem is red tape and corruption, then bureaucratic, administrative, judicial and political reform is in order. If it is stagnation in labor productivity, skills training and education in general have to be taken more seriously.

In the end, these are domestic political questions, the answers to which lie in political action in these areas, including political pressure from the business sector, rather than in a trade policy, of protectionism.

Here, we can take heart from the emphasis re-affirmed by President Estrada in Tokyo earlier this month on "social infrastructure capital," that is, education and job training. "We want our people," he said, "to be ready for the quickly shifting demands of the 21st century global economy." He gave particular priority to the Philippines' adaptation to what he called "the age of information technology." At the same time, the President gave assurances of his commitment to economic and political reforms, beginning with necessary changes in the Constitution.

There is also the complaint of a few that the regional liberalization of trade and investment opens Philippine industry to "unfair" competition. Often, however, "unfair competition" really means better and cheaper products. If there are specific instances of genuinely unfair competition, such as dumping, there are remedies other than erecting protectionist walls around entire industries - bilateral negotiations on the case at hand, WTO and AFTA dispute-settlement mechanisms, anti-dumping measures.

If competition really threatens national security or health, AFTA and, for that matter, WTO have provisions for dealing with it.

An integrated and, therefore, larger regional market is meant to attract investments into the region. This, of course, does not mean that investments will necessarily flow into the Philippine economy. The Philippines must compete for those investments by improving infrastructure, peace and order, governance, and labor productivity. Again, these are domestic political questions. Surely, the Philippine business community has the interest, the resources and the political connections to get the political establishment to address them.

For his part, President Estrada, in Tokyo, re-stated his commitment to the improvement of peace and order in the country as essential to economic development, and to the policy of opening up to foreign investments and a business environment hospitable to them.

The point is that regional economic integration is a reality and a gathering trend that is in the interest of Philippine business not to resist but to exploit. Last week, I spoke at a conference in Hong Kong that included the Deputy Managing Director of the IMF, Dr. Stanley Fischer, the Deputy Prime Minister of Singapore, Brigadier General Lee Hsien-loong, the Foreign Minister of Thailand, Dr. Surin Pitsuwan, academic economists, and regional money managers. A spirit of optimism pervaded the conference, an air of confidence that the recovery of Southeast Asia's economy has begun and that, this time, economic growth will be enduring, if perhaps a bit slower than before the crisis. Enthusiastic Philippine participation in AFTA and the other forms of regional economic integration would lock the Philippines into a region that is poised to resume dynamic growth on a more stable basis than in the past. It would be positioning itself strongly to catch this second wind.

In this light, a retreat into protectionism as a response to the crisis does not make much sense. Protectionism is a dead-end street. It restricts choices and increases costs for consumers. that is, all of us, as well as for companies. It will only make the country that resorts to it fall farther and farther behind its neighbors. On the other hand, an integrated market on a regional scale opens up larger opportunities for countries and industries in it, opportunities to sell their products and acquire production inputs at less cost,, for the benefit of all.

Countries and industries around the world see this. We can see it not only in the most advanced case of the European Union. We can see it also in the European Free Trade Association of non-EU members, in the North American Free Trade Area, in Mercosur, in the Closer Economic Relations between Australia and New Zealand, and in the Common Market for Eastern and Southern Africa that is emerging. The South Asia Association for Regional Cooperation and the South Pacific Forum are planning to start their own regional free-trade arrangement by 2001.

The title of this forum asks the question, "Does AFTA continue to be relevant in the aftermath of the financial crisis?" If we take AFTA here as shorthand for regional economic integration, I say that AFTA regional economic integration is not only relevant, it is more imperative than ever before for the recovery and the enduring growth of the industries and economies of Southeast Asia.

The Philippines has much to gain from it. As I earlier pointed out, Philippine industries, and the economy as a whole, have already been benefiting from it.