The Uruguay Round: ASEAN Trade Policy and Options 9789814377058

Table of contents :
CONTENTS
LIST OF TABLES
EDITORS AND CONTRIBUTORS
FOREWORD
I. MULTILATERAL TRADE NEGOTIATIONS: ASEAN PERSPECI'IVES
II. TRADE POLICY OPTIONS FOR INDONESIA
III. TRADE POLICY OPTIONS FOR MALAYSIA
IV. TRADE POLICY OPTIONS FOR THE PHILIPPINES
V. TRADE POLICY OPTIONS FOR SINGAPORE
VI. TRADE POLICY OPTIONS FOR THAILAND
VII. ASEAN TRADE POLICY OPTIONS: AN OVERVIEW

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THE URUGUAY ROUND

ASEAN TRADE POLICY OPTIONS

The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the multi-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. The day-today operations of the Unit are the responsibility of the Co-ordinator. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

THE URUGUAY ROUND

ASEAN TRADE POLICY EDITED BY MOHAMED ARIFF University of Malaya

TAN LOONG-HOE Institute of Southeast Asian Studies

. . . . . ASEAN Economic Research Unit - - - INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore OS 11 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the pfior permission of the Institute of Southeast Asian Studies.

© 1988 Institute of Southeast Asian Studies The responsibility for facts and opinions expressed in this publication rests exclusively with the af-lthors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

Cataloguing in Publication Data

The Uruguay round: ASEAN trade policy options j editors, Mohamed Ariff and Tan Loong-Hoe. 1. ASEAN countries--Commercial policy. I. Mohamed Ariff. ll. Tan, Loong-Hoe. III. Title: ASEAN trade policy options. 1988 HF1591 U82 ISBN 981-3035-04-8 (soft cover) ISBN 981-3035-05-6 (hard cover) Printed in Singapore by General Printing Services Pte. Ltd.

CONTENTS

List of Tables Editors and Contributors Foreword I.

Multilateral Trade Negotiations: ASEAN Perspectives Mohamed Ariff

vii xi XV

1

II.

Trade Policy Options for Indonesia Suhadi Mangkusuwondo, Djisman Simandjuntak, and Sumarno Surono

38

III.

Trade Policy Options for Malaysia Kamal Salih, Mohd. Haflah Pie~ and M Sahathavan

65

IV.

Trade Policy Options for the Philippines Florian Alburo, Erlinda Medalla, and Filologo Pante, Jr.

104

v.

Trade Policy Options for Singapore Chng Meng Kng, Linda Low, and TohMunHeng

132

VI.

Trade Policy Options for Thailand Juanjai Ajanant, Suthiphand Chirathivat, and Chalermpoj Iamkamala

169

VII.

ASEAN Trade Policy Options: An Overview Narongchai Akrasanee

199

LIST OF TABLES

I-1

Structure of Production and Growth Rates of Selected ASEAN Countries, 1984

2

I-2

GATT Articles of Agreement

4

I-3

Major Developed Countries MFN Tariffs.

11

I-4

GATT Illustrative List of Non-Tariff Barriers

12

I-5

Actual Level of Tariffs Faced by ASEAN Exports

18

I-6

Comparison of Average Levels of Import Duties in ASEAN

30

II-1

Indonesia's Current Account 1981-86

40

II-2

Indonesia's External Trade 1981-86

40

II-3

Indonesia's External Trade According to Major Trading Partners, 1986

43

II-4

Post-Tokyo-Round Tariff Averages

52

III-1

Tariff and Non-Tariff Barriers in Industrial Countries

72

III-2

Malaysia's Export Projection of the Textile Industry, 1981-95

78

III-3

Value of Malaysian Exports under GSP, 1980-85

81

viii

List of Tables

ill-4

Malaysia: Major Commodity Items Exported through GSP, 1984

83

ill-5

Net Trade Position in Traded Non-Factor Services by the Major Developed and Developing Country Exporters of Non-Factor Services, 1974 and 1981

87

ill-6

Malaysia Current Account (Credit or Debit) in 1985

88

ill-7

Merchandise Balance, Non-Factor Service Balance, and Current Balance for Malaysia, 1975-85

89

ill-8

Malaysia: Exports of Non-Factor Services

90

ill-9

Malaysia: Imports of Non-Factor Services

90

III-10 Malaysia: Net Long-Term Capital Flow, 1975-85

94

III-11 Percentage Growth or Decline of DFI in Malaysia, 1970-85

95

Export St~cture by Commodity Group Classified as Traditional and Non-Traditional, 1976-86

108

IV-2

Imports by Commodity Groups, 1976-87

110

IV-3

Frequency Distribution of Nominal Tariff Rates by Sector, 1988

112

IV-4

Unweighted Average Nominal Tariff by Production and End-Use Sector, 1988

112

IV-5

EPR by D- 0 Sector, 1979 and 1985

113

V-1

Sectoral Distribution of Gross Domestic Product

133

V-2

Singapore's External Trade

135

V-3

Structure, Composition and Direction of Singapore's Total Exports

136

V-4

Composition and Direction of Singapore's Total Imports

137

V-5

Structure of Production and Growth Rates of Regions, 1984

143

V-6

Selected Statistics of Services, 1982

144

IV-1

List of Tables ix

V-7

Singapore: GSP and Domestic Exports, 1978-86

150

VI-1

Estimated Increase in Annual Exports of ASEAN and Asian NICs from 60 Per Cent Cut in Tariffs and Agriculture Non-Tariff Barriers (NTBs)

171

Per Capita Increase of ASEAN and Asian NICs Excluding Textile Foil

172

Estimated Increase in Annual Export of ASEAN and Asian NICs from U.S. GSP

173

Average Rate of Tariff Before and After the Tokyo Rouhd: ASEAN Countries

174

Trade Creation of Non-GSP Items

176

VI-2

VI-3 Vl-4

VI-5

VI-6 Trade Diversion of GSP Items

177

VI-7

Summary of Total Effect on Thai Exports to Japan

179

VI-8

Effects of the EEC and U.S. Trade Liberalization on Thai Exports

180

VII-1 Growth Rates of ASEAN Countries

201

VII-2 Evolution of the Parity of Currencies in Yen, 1980-87

202

VII-3 Trade Pattern of ASEAN

203

EDITORS AND CONTRIBUTORS

Editors Mohamed Ariff, a specialist in International E.conomics, is Professor of Analytical Economics in the Faculty of Economics and Administration, University of Malaya, Kuala Lumpur. Tan Loong-Hoe is Senior Fellow at the Institute of Southeast Asian Studies. He is also Co-ordinator of the Institute's ASEAN Economic Research Unit. Contributors Narongchai Akrasanee is Executive Vice-President, Thailand Development Research Institute. He was formerly Senior Vice-President of the Industrial Finance Corporation of Thailand and Dean, Faculty of Economics, Thammasat University. Indonesia

Suhadi Mangkusuwondo is Professor of Economics at the Institute for Economic and Social Research, Faculty of Economics, University of Indonesia. He was the former Director-General, Department of Trade, Government of Indonesia. Djisman Simandjuntak is presently Senior Fellow at the Centre for Strategic and International Studies, where he was the former Head, Department of Economic Affairs. He is also part-time Lecturer at the Faculty of Economics and the Faculty of Social and Political Science, University of Indonesia.

xii Editors and Contributors

Sumarno Surono is Researcher at the Instit~te for Economic and Social Research and Lecturer at the Faculty of Economics, University of Indonesia.

Malaysia Kamal Salih is Executive Director, Malaysian Institute of Economic Research, Kuala Lumpur. Mohd. Hallah Piei is Associate Professor, National University of Malaysia, Bangi. He is also Research Associate at the Malaysian Institute of Economic Research, Kuala Lumpur. Sahathevan Meyanathan is former Associate Professor, Faculty of Economics and Administration, University of Malaya, Kuala Lumpur. Presently he is a staff member of the Economic Development Institute, World Bank, Washington, D.C.

Philippines Florian A. Alburo, Professor of Economics at the University of the Philippines, is currently Deputy Minister of Economic Planning. He was also a Research Fellow at the Institute of Southeast Asian Studies. Filologo Pante, Jr., is President, Philippines Institute of Development Studies, Manila and Deputy Minister of Economic Planning. Erlinda Medalla is Research Fellow at the Philippines Institute of Development Studies and Consultant to the Tariff Commission of the Philippines.

Singapore Chng Meng Kng is Senior Lecturer, Department of Economics and Statistics and Vice-Dean, Faculty of Arts and Social Sciences, National University of Singapore. From 1980 to 1983 he was Director of the Economic Bureau at the ASEAN Secretariat in Jakarta. He has published on a wide range of economic issues in various books and international journals. Linda Low is Senior Lecturer at the Department of Economics and Statistics, National University of Singapore. She was Research Fellow, Economic Research Centre, University of Singapore between 1975 and 1978. She is one of the authors of Policy Options in Singapore. Toh Mun Heng is Lecturer at the Department .of Economics and Statistics, National University of Singapore. He is one of the authors of Policy Options in

Singapore.

Editors and Contributors xiii

Thailand

Juanjai Ajanant is Associate Professor, Faculty of Economics, Chulalongkorn University, Bangkok, Thailand. He has been an Adviser, Ministry of Commerce, Government of Thailand and Consultant, International Trade Division, UN-ESCAP, Bangkok. Suthiphand Chirathivat is Lecturer at Kasetsart University and Project Consultant at the Industrial Management Co. Ltd., Bangkok, Thailand.

The late Chalermpoj Iamkamala was Senior Consultant at the Industrial Management Co. Ltd., Bangkok, Thailand.

FOREWORD

While ASEAN economies are vulnerable and subject to external pressures over which they have little control, the ASEAN countries will have themselves to blame if they fail to take appropriate policy measures to improve the situation or to safeguard themselves against the vagaries of the intermttional system. This is certainly the case with regard to the arena of international trade. Here the ASEAN countries have the opportunity to act collectively and effectively to achieve results beneficial to all of them. For instance, a move in this direction would be a review and re-evaluation of the possibilities presented by GATT. What exactly can and does ASEAN expect out of, say, the Uruguay Round? How is it going to achieve this goal? Acting on such possibilities, the Institute of Southeast Asian Studies in 1986 launched a study on "ASEAN Trade Policy Options", that is, optimal options open to ASEAN in the context of GATT. It forms part of a series of similar studies focusing on Mexico, Brazil, India, Korea, and southern Africa as well. "ASEAN Trade Policy Options" accordingly has several objectives. The first of these is to understand, from the ASEAN perspective, trends in the world's trading environment and to assess the strengths and weaknesses of the present international trading system, especially those of international institutions such as GATT. Secondly, it seeks to identify various policy options that would be open to ASEAN countries and to examine the implications of these policy options, including dangers of policy conflicts and scope for policy trade-offs. Thirdly, given the available policy instruments and constraints, the study evaluates the optimum trade level for individual ASEAN countries. In this context, the pertinent question is whether individual ASEAN countries need to change gear and settle for something less than the idea or to change course and goals.

xvi Foreword

Fourthly, given the heterogeneity of the regional grouping, it investigates the extent to which policy options tend to differ between ASEAN countries especially since what may be desirable and feasible in one country may not necessarily be so in another. Finally, it explores new avenues for joint and collective policy action on the part of the ASEAN member countries, both extra-regionally vis-a-vis third countries and intra-regionally with respect to one another. Towards this end, a number of papers were commissioned and discussed in several workshops in the ASEAN member countries. The final versions of these papers were then presented at an international conference held in Singapore on 7-9 March 1988. In addition to the researchers, participants in this conference included senior ASEAN officials and specialists in trade matters. The discussions were lively and pertinent, with the researchers finding the various suggestions and comments useful in terms of revising the papers. It is these revised papers which comprise the present volume. We would like to record our thanks to the researchers for their co-operation and to the Rockefeller Foundation for its financial support for the study as well as the various meetings and conferences associated with it. In thanking all of the foregoing, and wishing the collection of papers that follows all the best, it is clearly understood that responsibility for statements made and for the accuracy of the information provided rests exclusively with the individual authors.

Professor K.S. Sandhu Director Institute of Southeast Asian Studies

I. MULTILATERAL TRADE NEGOTIATIONS: ASEAN PERSPECI'IVES

MohamedAriff

Introduction ASEAN 1 represents a group of market economies in which the external sector plays an important role. The ASEAN economies are among the most open economies of the Asia-Pacific region, with exports contributing over one-third of the aggregate ASEAN GDP, and imports accounting for a slightly smaller proportion of the aggregate expenditure in the region. Hence, it is hardly surprising that the external sector plays a catalytic role in stimulating economic growth in ASEAN countries. However, openness also iinplies high degree of vulnerability of ASEAN economies to external fluctuations. Thus, the economic performa.nce of ASEAN countries is very much influenced by international market forces. This, however, does not mean that ASEAN countries' own policies are of no consequence. Indeed, ASEAN countries have been adopting measures that would help them exploit new opportunities in the international economy and minimize the adverse impact of externally induced downturns on their domestic economies. There is little doubt that ASEAN countries owe their current level of economic prosperity and affluence to the outward-looking developing strategy they have boldly adopted. Table 1-1 provides a profile of five ASEAN economies. Agricultural products form nearly 30 per cent of ASEAN exports and 13 per cent of ASEAN imports. The share of manufgctures in ASEAN exports and imports are, on the average, in the order of 28 per cent and 60 per cent, respectively. Fuels, minerals and metals account for 42 per cent of ASEAN exports and 28 per cent of the region's imports. The bulk of ASEAN exports are directed at the developed country markets, especially the United States, the EEC 2 and Japan, which are also the major sources of ASEAN imports. Structural changes in ASEAN economies have brought about significant

a

2 Mohamed Ariff

TABLEI-1 Structure of Production and Growth Rates of Selected ASEAN Countries, 1984

Percentage Distribution ofGDP

Indonesia Philippines Thailand Malaysia Singapore

Per Capita GNP (US$)

Agr

Ind

Mfr

540 660

26 25

40

34

860 1970

20

28

21 1

35 39

na 25 na 19 25

7260

Average Annual Growth of Production

Ser GDP

34 41 52 44 60

100 100 100 100 100

Agr

Ind

Mfr

Ser GDP

3.7 4 3.7 4.2 1.4

8.3 5.3 8.7 8.6 8.6

14.9 4.3 10 87.7 7.6

8.6 4.8 7.5 8.1 8.1

6.8 4.8 6.8 7.3 8.2

SOURCE: World Bank, World Development, 1986.

changes in the composition of exports and imports. Manufactures now account for a growing proportion of ASEAN exports, while the share of capital goods and intermediate goods in total imports has also been increasing. ASEAN countries (with the notable exception of Brunei) have been reorientating their industries from the inward-looking import substitution phase towards that of outward-looking export orientation. Accordingly, industrial policies and investment incentives systems in ASEAN countries have been geared to promote manufactured exports, while the traditional primary commodities have continued to remain important export earners. Fiscal incentives such as tax holidays, investment tax credits and accelerated depreciation have been designed to favour export-oriented industrial activities. In addition, export incentives such as export allowances, import duty exemptions and export credit financing have all helped the ASEAN export drive. All this notwithstanding, import substitution activities continue to coexist with export-oriented industries under mild protectionist policies. The above brief outline only serves to underscore the importance of trade to ASEAN countries and would enable the reader to come to grips with the ASEAN stance with respect to the multilateral trade negotiations (MTN). It is no secret that protectionist policies and restrictive trade practices adopted by third countries, both developed and developing, have increasingly tended to impinge upon ASEAN countries' export efforts. Although the adverse impact of these measures have been generally more serious for manufactured exports

ASEAN Perspectives 3

than for primary exports, the fact remains that processed primary products have been particularly vulnerable to protectionist forces in the developed country markets. The effective rates of protection often exceed 100 per cent in primary processing activities in advanced countries, as tariffs fall largely on the value-added component in processing. A disturbing aspect of the incident of this tariff escalation is that effective protection tends to be higher in those industries in which ASEAN countries claim to have comparative advantage. Processing of vegetable oils and timber are the two outstanding examples of resource-based activities penalized by the trade barriers, both tariff and nontariff, in developed countries. The exports of ASEAN countries have also been hurt by their own policy measures. Thus, for example, the domestic tariff structure has tended to create an anti-export bias in some ASEAN countries, while the exchange rate regime has also tended to discourage manufactured exports. In the case of primary commodities, exports are penalized by export taxes (for example, rubber) and export quotas (for example, tin). It is against the above backdrop that the importance of the multilateral trade negotiations to the ASEAN countries would become readily clear. There are many issues which can be effectively dealt with multilaterally rather than bilaterally. Hence ASEAN's interest in the GATT system. GATT has been in existence for forty years. Its main role has always been to function as a forum where member countries get together and negotiate trade liberalization for their mutual benefit. However, GATT represents no more than an agreement to which contracting parties bind themselves. The structure of the general agreement, as shown in Table I-2, is found in four parts comprising a total of 37 articles. Between its inception in 1947 and 1986, GATT had mounted seven rounds of multilateral trade negotiations. 3 The eighth round, dubbed as the Uruguay Round, was launched on 15 September 1986. ASEAN countries played no more than a passive and peripheral role in the previous MTN rounds. It is no secret that ASEAN countries, like many other developing countries, were disappointed with the outcomes of the earlier rounds, as major items of export interest to them had received little or no attention in the negotiations. There was a mood of despair and disillusion following the Kennedy and Tokyo Rounds. However, the launching of the Uruguay Round seems to have given rise to fresh hopes and rekindled old fears in ASEAN countries which nonetheless seem determined to seek a more active participation in the negotiations. This paper attempts to (a) explain the change in ASEAN countries' attitudes towards the GATT system, (b) identify some of the key issues that are of immediate interest and high priority to ASEAN countries and (c) discuss trade policy options open to ASEAN countries and the strategies that they might adopt in the Uruguay Round.

TABLE 1-2 GATT Articles of Agreement

Articles

Part

Remarks on Parts

I II

Objectives General most-favoured-nation treatment

I

Basic obligations

III IV

Schedules of concession National treatment and internal taxation and regulation Freedom of transit Anti-dumping and countervailing duties Valuation for customs purposes Fees and formalities connected with importation and exportation Marks of origin Publication and administration of trade regulation General elimination of quantitative restrictions Restrictions to safeguard the balance of payments Non-discriminatory administration of quantitative restrictions Exceptions to the rule of non-discrimination Exchange arrangements Subsidies State trading enterprises Governmental assistance to economic development Emergency action on imports of particular products General exceptions Security exceptions Consultation Nullification or impairment

II

Code for fair trade; general rules for customs valuation procedures, marks of origin, etc; conditions for antidumping duties, duties to protect balance of payments or duties to safeguard domestic industries

v VI VII VIII IX X

XI XII XIII XIV

XV XVI

XVII XVIII XIX XX XXI XXII XXIII

XXIV XXV

Customs unions and free trade areas The organization for trade co-operation

III

Procedures for amendment of Articles

XXVI XXVII XXVIII XXXIX XXX XXXI XXXII XXXIII XXXIV XXXV XXXVI XXXVII XXXVIII

Acceptance, entry into force and registration Withholding or withdrawal of concessions Modifi~tion of schedules Tariff negotiations Amendments Withdrawal Contracting parties Accession Annexes Non-application of the agreement between particular t;ntracting parties Trade and development: principles and objectives Undertaking relating to commodities of special export interest to LDCs Outline of joint action on trade and development

IV

New code of conduct and principles of trade with LDCs

SOURCE: Greenaway (1983), p. 86.

6 "fohomed Arilf

Perceptions and Attitudes

If the past experience of ASEAN countries with previous MTN rounds were

anything to go by, one must conclude that there is very little basis for expecting an active ASEAN participation in the Uruguay Round. As mentioned earlier, the ASEAN countries got very little out of the preceding rounds of multilateral trade negotiations. Arguably, however, ASEAN countries had only themselves to blame, as they chose not to play an active role in the negotiation process. One may therefore hypothesize that ASEAN could have benefited more from the past multilateral trade negotiations, had they opted for a more active participation. Besides, one may also argue that the current conditions are much more conducive to serious negotiations, as the world economy has become so increasingly integrated that only a multilateral approach can provide solutions to problems that threaten to disrupt the global economy. ASEAN countries, whose stake in the international economy has increased over time, are painfully aware of the need to prevent a collapse of the multilateral trading system. ASEAN countries' attitudes towards the MTN have changed markedly in recent times. Previously, the ASEAN perception of GAIT was that it was essentially a "rich men's club" where there was little room for developing countries. ASEAN countries seemed to have regarded themselves as "secondclass" members of GATT which was dominated by advanced countries. Therefore, ASEAN countries could not figure out for themselves any useful role to play in the game which seemed too complex and strange for them to come to terms with. Perhaps it was thought appropriate that ASEAN countries should remain at the periphery and join the ranks of so-called "freeriders". Such negative perceptions now seem to have given way to more positive feelings about GAIT as a multilateral institution and their own role in GAIT-initiated trade negotiations. For the first time, ASEAN countries, both individually and collectively, are taking the multilateral trade negotiations seriously and are gearing themselves to actively participate in the negotiation process. This is evident from the flurry of activities going on in the region. There are a number of pointers which suggest that ASEAN countries will take a positive stance on the Uruguay Round. First of all, the importance attached by ASEAN countries to the latest MTN initiative is clearly shown by the fact that there were high-level ASEAN representations at Punta del Este for the launching of the new round. Secondly, in several ASEAN countries, task forces have been established to study the various issues involved, parallel to the fourteen groups formed in Geneva. Thirdly, the meetings of ASEAN Senior Trade Officials (ASTO) have become frequent and regular. Fourthly, ASEAN countries have participated in the regional meetings together with Australia, New Zealand, Japan and Korea. Fifthly, four ASEAN countries, namely Indonesia, Malaysia, the Philippines, and Thailand, have played an active role in the

ASEAN Perspectives 7

Cairns Group which was formed to protest against the U.S.-EEC subsidy war in agriculture. Last but not the least, ASEAN countries have sought technical assistance from developed countries and international organizations so that they can be better prepared for the negotiations. In this regard, UNDP4 assistance given to ASEAN countries to improve negotiating skills deserves special mention. Reference must also be made to the Canadian invitation (with all expenses paid by the host) to a team of ASEAN trade officials to visit Canada and observe how the Canadians are preparing themselves for the new MTN. On the cards is also a visit by a U.S. team of experts to ASEAN countries that would help them train ASEAN officials. ASEAN's new-found interest in GATT affairs is motivated partlyby an outright fear of what might happen to the world economy in the absence of trade talks and partly by the realization that the trade interests of ASEAN countries might not be addressed in the trade negotiations, if left entirely to the major actors. ASEAN countries have high stakes in the Uruguay Round as their long-term goal of transforming their economies from that of primary producers to modern industrial entities hinges precariously on the results of the trade talks. The message is loud and clear: ASEAN countries mean business in the Uruguay Round. An attempt is made to explain the attitudinal changes taking place in ASEAN countries insofar as these concern the GATT system in general and the MTN in particular. External Shocks

One important explanation for ASEAN countries' keen interest at present in the MTN lies in the economic downturn experienced in recent times. In the seventies, ASEAN countries registered high growth rates of 6 to 10 per cent per annum. The growth rates did not slump until one year after the world recession, following the second oil crisis of 1979/80. In 1982, for the first time after almost two decades, ASEAN economies registered growth rates below 5 per cent (Akrasanee 1983). The first half of the eighties proved to be an extremely difficult period for ASEAN countries. Growth experience varied from country to country, with some countries posting much slower growth than others. Oil-rich Brunei with huge accumulated reserves was able to withstand the recessionary spell. But it was Thailand which seemed most resilient of all, with growth rates not falling below 4.0 per cent (1985) throughout the early eighties. All other ASEAN countries suffered not only declining but also negative growth rates. Thus, the Philippines experienced cumulative declines of 9.2 per cent in its real GDP during the period 1984-85. Singapore registered a negative growth of 1.8 per cent in rcral terms in 1985. Malaysia, too, experienced negative growth of 1.0 per cent in its real GDP in 1985. Indonesia also suffered -2.0 per cent real GDP growth in 1986. Although the poor economic performance of ASEAN countries in the

8 Mohamed Arilf

eighties thus far cannot be attributed entirely to external factors, there is little doubt that the economic slow-down was triggered by declining external demand for ASEAN exports. To be sure, the export slump has been exacerbated by growing protectionist trends in developed countries, as protectionist and recessionary forces have always tended to reinforce each other. The ongoing severe recession has hammered home the point that ASEAN countries' economic prosperity is heavily influenced by events that take place outside the region. As a result, ASEAN countries have realized that it would be folly to be apathetic and indifferent to international happenings that have global ramifications and that it would be dangerous to take a back seat allowing others to steer the course. Internal Adjustments

Another important reason for ASEAN's new-found interest in the MTN seems to be one associated with the kind of internal adjustments and economic restructuring taking place in the ASEAN region. ASEAN economies are undergoing significant structural changes, and it has become increasingly evident that no long-term plans can be undertaken in isolation, independent of the international constraints within which open economies must operate. Accordmgly, trade policy reform is now considered an important ingredient of economic restructuring and economic growth in the future. Although ASEAN economies are essentially primary producers, the manufacturing sector accounts for a sizeable proportion of the GDP and the total exports of ASEAN countries. The level of industrialization varies considerably among ASEAN countries. The variations may be attributed to differences in domestic market sizes, resource endowments and the general level of economic development. Thus, Singapore, with a small domestic market, sparse national resources and a long tradition of entrepot trade, has become the most industrialized. Conversely, Indonesia, which has a huge domestic market, rich resource endowments and a strong primary production base, is the least industrialized, if we exclude Brunei from the analysis. The oil-rich Brunei has too severe domestic market and human resource constraints to have any industries apart from oil refinery activities. However, it is the Philippines which has the longest industrial experience in the region, as it began to industrialize seriously from the early 1950s, with Malaysia, Singapore, and Thailand lagging behind by almost a decade, and Indonesia by nearly two decades. It is no accident that all these countries followed the familiar path of import substitution before adopting export orientation in their manufacturing when it became evident that import-substitution policies could not generate sustained manufacturing and employment growth. ASEAN countries opted for export-oriented industrial strategies. Singapore made the switch in the mid-1960s, followed by Malaysia, the Philippines, and Thailand, while Indonesia began to reorientate its industries only in the early 1980s.

ASEAN Perspectives 9

Although the high growth rates of ASEAN economies in the seventies were in no small measure due to the outward-looking industrial policies pursued by ASEAN countries, it would be inappropriate to characterize the ASEAN experience as "export-led" industrialization. For one thing, primary exports still play a dominant role. For another, import substitution continues to coexist with export orientation. The latter observation has important policy implications. Policies designed to protect import-substituting activities have tended to penalize export activities (Ariff and Hill 1985). The tariff regimes and the regulatory systems of ASEAN countries which were designed under the import-substitution phase have remained intact despite the industrial reorientation in favour of export production. Singapore is the only outstanding exception to all this, as it has abandoned import substitution altogether. Although nominal tariffs in ASEAN countries have been generally mild, the effective rates of protection have been quite high (Ariff and Hill 1985). The strong anti-export bias in the tariff structures has been inimical to the growth of manufactured exports. ASEAN countries have attempted to neutralize this anti-export bias present in their restructure of protection by providing fairly generous export incentives (Ariff 1984). This, however, would amount to superimposing one distortion on another. The first-best solution would, of course, be to eliminate the distortions (tariffs) at the source and not to redress it by introducing further distortions (export incentives). ASEAN countries have long been aware of the fact that their tariffs have been out of line with their export drive. Indeed, efforts have been made in some ASEAN countries to unilaterally lower the tariff level so as to inject greater efficiency and competitiveness. Some of these tariff reforms, however, have been put off either because of difficult recessionary times or because of unfavourable political conditions at home. Thus, the Philippines shelved its tariff reform in view of the domestic political uncertainties, while Malaysia and Indonesia have decided to go slow in the wake of the recessionary impact. The point is that the new MTN provides an opportunity to lower their tariff levels which would benefit these countries not only in terms of better resource allocation unilaterally but also in terms of greater concessions multilaterally. In addition, it has become increasingly clear to ASEAN countries that they cannot reorientate their economies towards the global market, unless the world trading system remains reasonably free. It is therefore in the interest of ASEAN countries that the GATT initiatives succeed. Threat to the Multilateral Trading System

ASEAN policy-makers are painfully aware that the multilateral trading system is at a critical turning point and that the alternative to more open trade is really immiserizing protectionism of the kind experienced in the thirties. It is obvious that the world trading system is threatened by protectionist forces almost everywhere. The trend towards reduced tariffs, thanks to the Kennedy

10 MohamedArifl

and Tokyo Rounds (see Table I-3), has been overtaken by the upsurge in nontariff barriers (NTBs). Tariffs now constitute only a minor source of protection. NTBs, which take various forms such as bilateral import quotas, voluntary export restraints (VERs) and orderly marketing arrangements (OMAs), are far more dangerous than tariffs in that they are extremely difficult to measure and detect and they constitute a return to bilateralism. Table I-4 presents a summary of the major NTBs. According to GATT, non-tariff measures applied in advanced countries exceed 600 in number. Overt import restrictions, especially in clothing, textiles and footwear, have grown while covert protectionist measures such as VERs and OMAs have also been on the increase. Administrative protectionism, mainly in the EEC, Japan and Sweden, and legal protectionism in Australia and the United States have become more active. Unless all these trends are arrested and reversed, bilateralism will soon replace multilateralism as the basis of international trade. The looming threat to the multilateral trading system has drastic implications for ASEAN countries' long-term plans and strategies for transforming their economies from primary production towards manufacturing. It is no secret that ASEAN countries intend to follow the footsteps of the East Asian newly industrializing countries (NICs). But, then, the relatively liberal trading regimes of the fifties and sixties which enabled the East Asian NICs to take off the ground no longer exist in the eighties. It is certainly in the interest of ASEAN to have a freer world trading system that is multilateral in character. ASEAN countries are concerned that their interests are often sacrificed when advanced countries resort to bilateral solutions. A special case in point is the differential tariff treatment accorded by Japan to American plywood, discriminating against Southeast Asian substitutes. What is particularly frightening to ASEAN is the growing number of bilateral trade disputes among Japan, the EEC, and the United States. ASEAN is worried that this will erode the confidence in the GATT system which might trigger off trade wars among the major actors. The danger is that ASEAN countries will get caught in the crossfire. These fears have been compounded by the growing incidence of bilateral solutions to trade disputes in recent times. These solutions have taken a number of forms. One is the market-sharing agreement on machine tools and semiconductor chips between the United States and Japan. Another variant is the recent voluntary export restraint agreement by Japan to limit the number of cars exported to the United States. Reference must also be made to the EEC pressure on Japan to limit its exports of photocopiers, video cassette recorders and telecommunication equipment to the EEC market. What is particularly distressing is that some of these bilateral agreements took place subsequent to the Punta del Este meeting. This has led many observers in the ASEAN region, as indeed elsewhere, to wonder whether the major actors in the arena were at all in favour of global trade liberalization.

TABLEI-3 Major Developed Countries MFN Tariffs (In percentages)

Industry

Products

Depth of Cut

Post Tokyo Round Average MFN Rates

Textiles and clothing

total semi-manufactures finished manufactures

19 22 19

11.8 11.5 16.7

Leather, rubber, footwear travel goods

total semi-manufactures finished manufactures

14 35 11

6.3 4.4 10.2

Electrical, machinery, equipment, goods

total

34

6.1

Chemicals

total semi-manufactures fmished manufactures

38

36 43

5.3 5.0 6.0

Transport equipment

total

36

5.0

Non-electric machinery

total

47

4.1

Base metals

total semi-manufactures finished manufactures

31

2.7 3.2 5.9

Wood, pulp, paper furniture

Manufactures, n.e.s.

26

37

total semi-manufactures finished manufactures

38

41

1.7 1.9 4.2

total

42

5.5

40

Notes: Countries covered are Australia, Canada, EEC, Finland, Japan, Norway, Sweden, Switzerland and United States. Total comprises raw materials as well as semi-manufactures and finished manufactures. SOURCE: GATT (1980).

TABLEI-4 GATT Illustrative List or Non-Tariff Barriers

Barriers

Group

1

Government participation in trade which either restrict imports from, or subsidize exports to Third World countries Trade diverting aid Export subsidies Countervailing duties Government procurement State-trading in market-economy countries Other restrictive practices

2

Customs and administrative entry procedures to discriminate against foreign products Valuation Anti-dumping Customs classification Consular and customs formalities, fees and documentation Samples requirements

3

Standards which apply non-market quality or "safety" standards as a "cover" for inhibiting products Standards Packaging, labelling and marketing regulations

4

Specific limitations on trade on particular countries Quantitative restrictions (e.g. numerical import quotas) Discriminatory bilateral agreements (e.g. licensing requirements) Export restraints Minimum price regulations

5

Charges on imports Prior deposits Variable levies Fiscal adjustments at the border or elsewhere Restrictions on foreign wines and spirits Discriminatory taxes on automobiles Statistical and administrative duties Special duties on imports

SOURCES: Adapted from Golt (1974), p. 31; and Girling (1985), p. 127.

ASEAN Perspectives 13

Nevertheless, ASEAN as a group is hopeful that the Uruguay Round will lead to some positive results, now that the major actors seem more willing to make compromises to save the situation. In this regard, reference may be made to the compromise struck in Punta del Este where the EEC agreed to include agriculture in the agenda of the new round, whereas such an inclusion had long been an anathema to the EEC. In the same vein, mention must also be made of the compromise between the United States and the group of ten hardline developing countries (G-10) --led by India and Brazil-- to include services trade in the agenda, with services trade being relegated to a negotiation distinct from goods trade negotiation. All this has given rise to fresh hopes in ASEAN circles that the Uruguay Round will contribute towards establishing a better world trading system that is both relatively free and reasonably fair to all. Major Trade Issues

Given the heterogeneous nature of the ASEAN grouping, one may well expect considerable diversity with regard to issues that ASEAN countries would like to bring up in the Uruguay Round. Weights attached to the various issues which are included in the MTN agenda tend to vary from country to country. Thus, for instance, issues of utmost importance to the small city-state of Singapore are quite different from issues of immediate interest to Indonesia. Be that as it may, unanimity with respect to some issues of common interest to all ASEAN countries is not totally absent. The official stands in each of the ASEAN countries on what should be articulated in the new round have not been clearly defined yet. Nonetheless, it is quite obvious that old unresolved issues relating to primary commodities, market access for resource-based products, and manufactured exports will remain a major priority. In the past, ASEAN exhibited a preference for commodity issues to be handled by UNCTAD 5 and regional commodity groupings such as INRA6 and ITA. 7 Although there are some misgivings about these avenues, ASEAN does not think that GATT can replace them insofar as commodities are concerned. However, GATT is seen as the right body for handling the question of market access for all ASEAN exports, be they primary commodities or manufactures. Among the old unresolved issues, apart from the problem of market access, are the questions relating to special and differential treatment, safeguards and selectivity. Among the new areas three seem to be receiving considerable attention in the ASEAN circles, namely services trade, trade-related investment measures (TRIM) and protection of intellectual property rights. The attention given to these issues is not entirely due to the strong U.S. pressure, since ASEAN countries are of the general view that it will also be in their own interest to have these issues closely examined within the framework of the new MTN round.

14 Mohamed Ariff

The ASEAN countries' emphasis, however, is unambiguously-on the old unresolved issues. While they are not averse to discussing the new issues at length, they are against any move that would make solutions to the old issues conditional upon solutions to the new ones. Old Issues

The trade liberalization process, which began very much under the U.S. initiatives with the establishment of GATT and which have gone through seven previous rounds, has left a lot of backlog which needs to be cleared. By the third MTN (Torquay) round in 1951, over 58,000 individual items had tariff concessions negotiated. However, in the two subsequent rounds in 1956 (Geneva) and 1960-61 (Dillon) little was accompli~hed. Under the Kennedy Round (1964-67) trade liberalization negotiated affected only industrial goods with lots of exceptions, while agricultural protection remained almost intact. The Tokyo Round (1973-79) was unquestionably by far the most complex round in terms of coverage of issues, and far-reaching in terms of tariff cuts. Even so, the Tokyo Round concessions were limited largely to industrial products of export interest to developed countries, with agricultural protection being once again sidestepped. ASEAN countries, like other developing countries, were disappointed with the Tokyo Round since many items of export interest to them, such as textiles, clothing and footwear, were treated as "sensitive" items which were subject to zero or lower-than-average tariff cuts. Although NTBs were discussed, very little was done to dismantle them during the Tokyo Round. In what follows, we shall examine some of the old unresolved issues of major concern to ASEAN countries. The order in which they are presented does not necessarily reflect the order of priority. Trade in Agriculture. Not all ASEAN countries have much stake in the export of agricultural products. Brunei virtually has none, while Singapore's interest in it is somewhat indirect only to the extent that it is involved in the entrepot trade. The latter has become less and less important over time, so much so that issues relating to agricultural trade hardly cause any ripples in Singapore. Indonesia's exports of agricultural products consist mainly of fish, coffee, tea, cocoa and spices, which together constitute 86 per cent of the total agricultural exports. The implication is that what is understood as agricultural trade issues is not of much relevance to Indonesia at present. An important exception is Indonesia's export interest in vegetable oils, especially palm oil. Conversely, Indonesia's agricultural imports are dominated by items (for example, cereals which account for 44 per cent of total agricultural imports) which have become central to the discussion of agricultural trade in recent times. In other words, Indonesia's interest in agricultural trade issues in the current MTN round is the interest of an importer rather than that of an exporter.

ASEAN Perspectives 15

The ambivalence in Indonesia's stance with respect to agricultural trade is reinforced by the widely held hypothesis that the country has "latent comparative advantage" in a wide range of activities, given its diverse and vast natural resources. There are many in Indonesia who strongly argue in favour of protection for Indonesia's agricultural sector on infant industry grounds. The fact that Indonesia has emerged as a net exporter of rice, thanks to protectionist measures, after having been the biggest importer of rice in the ASEAN region in the 1970s is often cited as an empirical support for the hypothesis. That domestic prices of agricultural products exceed world prices, it is often argued, does not necessarily indicate comparative disadvantage, as world prices have been distorted by the subsidy war among major exporters. Malaysia exports a variety of agricultural products. The major agricultural export items, excluding rubber, are palm oil, cocoa and pepper. Of these, it is palm oil which is by far the most important agricultural item in terms of both export earnings generated and protectionist barriers encountered. Like Indonesia, Malaysia had shown hardly any interest in agricultural trade issues in the past. The recent threat by the EEC to impose additional levy on palm oil imports and the proposed U.S. legislation to classify palm oil as saturated fat have forced Malaysia to reconsider its position. The growing protectionist pressures against palm oil in developed countries is posing too serious a threat for Malaysia to remain complacent. In addition, Malaysia is also deeply concerned over the unfair competition that soya bean provides to palm oil in international markets. Soya bean, a close substitute for palm oil in many end-uses, is heavily subsidized by developed countries. Thus, Malaysia's new-found interest in issues related to agricultural trade centres on palm oil. Malaysia will raise the issue of protection against palm oil imports and subsidy for soya bean production in the multilateral trade talks. It is of interest to note in this regard that Malaysia has played an active role in the new activism undertaken by the Cairns Group. 8 For the Philippines, the exports of agricultural products.are by no means unimportant. Among the Philippines agricultural exports, coconut oil, bananas, sugar, pineapples, coffee and shrimps figure prominently. However, the Philippines, like Indonesia, has kept a somewhat low profile in the regional activism against agricultural protection in advanced countries. An important explanation for this is that the bulk of the Philippines' agricultural exports are directed at the U.S. market. The main implication is that the Philippines could resort to bilateral solutions without having to bring its agricultural trade grievances to the multilateral forums such as GATT. This, however, does not mean that the Philippines has no interest in MTN issues relating to agriculture. It is relevant to note in this context that the Philippines was a member of the Cairns Group with 14 countries. Thailand, unlike other ASEAN countries which have either marginal or peripheral interest in agricultural trade issues, pays a lot of attention to agricultural trade in the MTN. Agricultural protection in export markets has

16 MohomedAriff

affected Thailand's exports of agricultural products, especially rice, cassava, sugar, and maize. Thus, in the case of rice, Japan applies a 15 per cent tariff and a global quota, while the EEC has imposed a variable levy. The most serious threat to Thai rice, however, comes from the United States where the U.S. Government has invoked the Food Security Act that is aimed at protecting the U.S. rice farmers at home and the U.S. share of the world rice market. Thailand's cassava exports to the EEC, used as animal feed, are subject to VERs which limited cassava exports to the EEC to 19.95 million tons between 1982 and 1986, with the quota being increased to 21 million tons from 1987 to 1990. Thailand's sugar exports to the United States have declined sharply since 1982 due to the GSP exclusion and the imposition of quotas by the U.S. Government. Thailand's sugar exports elsewhere have also been affected by subsidies given to sugar producers in the United States under the 1985 Farm Act. Another casualty of the U.S. Farm Act is Thailand's maize. Thailand's maize exports are aimed at developing countries where the heavily subsidized U.S. maize exports have undermined Thailand's market share, especially in Korea and the Middle East in recent years. Thai exports of agricultural products have been badly hurt by unfair trade practices of sorts that were outside the scope of GATT and the successive MTN rounds. It is thus clear that Thailand has an axe to grind insofar as agricultural trade is concerned. Regardless of the possible outcomes, Thailand seems determined to put its case across. It is in this spirit that Thailand played a key role in the formation of the Cairns Group and persuaded Indonesia, Malaysia, and the Philippines to lend support.

Trade in Manufactures. As mentioned earlier, ASEAN's trade in manufactures has grown in importance during the last fifteen years, mainly thanks to the export-oriented industrialization efforts. Again, generalization will be dangerous, as there are important inter-country variations. Brunei has no interest in manufactured exports, as its factor endowments are not conducive to such industrial pursuits. Indonesia, as an exporter of manufactures, is a newcomer. It was only in the wake of declining oil prices and falling external reserves in the early eighties that Indonesia seriously resorted to manufactured exports. For the other four ASEAN countries, manufactures figure prominently in their total exports. Thus, issues relating to trade in manufactures are of greater importance to Malaysia, Philippines, Singapore, and Thailand than for Brunei or Indonesia. Protectionist forces are most vicious in the realm of manufactures. However, as mentioned earlier, tariffs as a protectionist device have declined in importance. The trade-weighted average tariff rate for Japan is 7 per cent, while the corresponding figures for the United States and the EEC are 4.3 and 2.9 per cent respectively (Ariff and Hill 1985). Nonetheless, there are considerable inter-country and inter-commodity tariff differences. Of immediate concerr. to ASEAN are the tariffs on textiles, footwear, wood

ASEAN Perspectives 17

products and electronics/electrical goods. Table 1-5 provides an insight into the tariff schedules faced by ASEAN's major manufactured exports. As Can be seen from the table, the highest U.S. tariffs are applied on footwear, while the highest EEC and Japanese tariffs are imposed on woven-textiles and furniture, respectively. Electronic components face no tariffs in industrial country markets. But, consumer electronic and electrical appliances (for example, television and radio sets) do encounter high tariff barriers, as they are considered "sensitive" items. It is NTBs which pose the greatest threat to ASEAN manufactured exports. NTBs are far more dangerous than tariffs as they involve administrative discretion rather than open rules of protection and they are based on bilateralism rather than multilateralism. Although Japan and the EEC are seen in the ASEAN circles as the main villains in this regard, it is the United States which has been turning on the heat in recent times. There is scarcely any doubt that the protectionist tide is rising faster in the United States than elsewhere. The Omnibus Trade Bill recently passed by the U.S. Congress is a testimony to the growing strength and power of the protectionist lobby in the United States. The question of tariff escalation in industrial countries also represents a major trade issue for most ASEAN countries which have stepped up further processing of raw materials so as to increase the value added. In EEC, for example, crude palm oil for edible purposes faces a low 4 per cent tariff while processed palm oil is penalized with a high 12 per cent tariff. Likewise, in Japan, tropical logs are duty-free while semi-processed tropical wood products encounter high tariffs in the order of 17 to 20 per cent. In addition, there are NTBs such as quotas which limit ASEAN exports of processed raw materials. Thus, for instance, plywood exports are subject to quota restrictions in the Japanese market. The escalation issue which implies greater protection for a higher degree of fabrication is given a lot of emphasis in Indonesia, Malaysia, the Philippines, and Thailand. The ASEAN stance with respect to GSP 9 appears to be somewhat ambivalent. Several manufactured export items are subject to preferential treatment under the GSP scheme in several countries especially the United States, the EEC, and Japan. While ASEAN countries have benefited from such preferential treatments, there are severe GSP constraints which limit their market access. Likewise, there are pros and cons to ASEAN countries' access to the textile/clothing markets of developed countries through MultiFibre Arrangements (MFAs). 10 Hence the ASEAN ambivalence with respect to these two instruments of trade interventions. The GSP represents the most visible form of speCial and differential treatment accorded by developed countries to LDCs.U About 60 per cent of the ASEAN exports under the GSP schemes belong to the agricultural category. ASEAN manufactured exports have therefore benefited less from GSPs than primary commodities. Despite periodic reviews and revamps, the

TABLEI-5 Actual Level of Tariffs Faced by ASEAN Exports

EEC

USA

SITC

Commodities

851 653 841 651 652 729 621 51/55

Footwear Woven textiles Clothing Textile, yarn & thread Cotton fabrics, woven Electrical machinery, NES Materials of rubber Fresh & preserved fruits & vegetables Veneers, plywood, etc. Electric power machine, switchgear Wood manufactures Furniture Other machinery Wood and cork Domestic electric. equip.

631 722 632 821 741 241/243 725

SOURCE: IBRD.

PreTokyo

Post- Reduction Tokyo (%)

23.1 21.0 19.7 16.3 11.0 5.8 4.6

23.1 20.6 9.8 12.0 7.9 4.0

2.9 2.7

1.0 2.6

0.8 0.1 0.1

0.8

-

-

-

0.1

-

0.1

-

PreTokyo

Post- Reduction Tokyo (%)

11.0 15.7 1.8 10.8 0.1 0.4

11.0 10.8 1.3 8.8 0.1 0.4

65.5 3.7

14.7 12.4

100.0

3.9

1.9 50.3 26.4 28.2 31.0 100.0

-

-

13.7 0.1

Japan

PreTokyo

Post- Reduction Tokyo (%)

-

10.0 5.0 8.9 6.9 3.0 4.5

10.0 5.0 7.8 5.7 3.0 1.6

14.7 9.6

19.7 0.6

16.8 0.6

14.7

22.6

2.3

41.0

-

-

5.4 10.0 10.1

2.6 5.7 4.8

51.9 43.0 52.5

11.7 0.1

14.6

0.1

0.1

31.2 27.8 18.5

.

12.4 17.4 64.4

.

ASEAN Perspectives 19

GSP schemes still exclude manufactures of prime interest to ASEAN countries, such as textiles, clothing and footwear. In addition, quantitative limits have been imposed on GSP imports. 12 The rules of origin, despite some relaxation to permit cumulative treatment for ASEAN countries, are still restrictive. Limitations notwithstanding, there is no denying that ASEAN countries have benefited from the GSP which proved to be a shot in the arm for ASEAN's export-oriented industrialization. It was the untapped GSP facilities of ASEAN which attracted foreign investors into the region. However, it appears that ASEAN countries would gain more from Most-Favoured-Nation Treatment (MFN) 13 tariff reductions as they are fairly competitive in the products currently covered by the GSP schemes. In other words, ASEAN countries might be better off without the GSP provided that the GSP facility is replaced by generous MFN tariff reductions without quantitative restrictions. In any case, ASEAN's GSP days seem numbered. That the Asian NICs, including Singapore, have been recently graduated out of the U.S. GSP scheme suggests that other ASEAN countries will have to follow suit sooner or later. Other Areas. The MFA represents a grey area measure that falls outside the ambit of GATT; It provides a sheltered albeit limited market for ASEAN's exports of textiles and clothing. MFA I (1974-77) allowed a quota increase of 6 per cent per annum. MFA II (1978-81) left quota increases to bilateral negotiations between exporting and importing countri~s. MFA III (January 1982- July 1986) was even more restrictive than the preceeding ones. The current MFA IV has widened the coverage of MFA, which means that more and more textile and clothing items are now subject to greater control. However, quota adjustments for ASEAN countries, although restrictive, are less onerous compared with those for the so-called dominant suppliers like Korea, Taiwan, and Hong Kong. While distortions caused by MFA quotas are far more serious than those inflicted by tariff equivalents, ASEAN exporters of textile and clothing clearly prefer bilateral agreements to open competition. Evidently, bilateral quotas have given rise to rent-seeking activities. Trade cartelization has tended to prevent new entry. While all this is in the interest of the existing exporting firrns, it does not serve the long-term interest of the industry in the region. It appears that MFA penalizes rather than protects the less developed among exporting countries (Spinanger 1987). ASEAN countries do recognize the need for bringing textiles and clothing trade within the GATT rules and discipline. The issue of "selectivity" that underlies the Multi-Fibre Arrangement in the area of textiles and apparel is also pertinent to a host of other trade agreements on steel and steel products, footwear and colour television sets. It is fairly obvious that selectivity does not always work to the advantage of

20 Mohamed Ariff

ASEAN countries in bilateral trade agreements. Another area of grave concern to ASEAN is the safeguards issue. As is well known, Article XIX of GATI permits import restrictions if imports cause or threaten "serious injury to domestic producers". Application of such restrictions is supposed to be non-discriminatory and temporary. Although safeguard measures are taken on a product basis and not on a country basis, in practice products are defined with such specificity to make safeguard actions discriminatory. 14 Neither are such measures temporary, since safeguard measures taken in 1958 and 1961 in the United States are still in operation. Attempts to negotiate a new Safeguards Code in the Tokyo Round fell through. The principle of selectivity tends to run counter to the GATT spirit of non-discrimination. The consensus among ASEAN countries seems to be that safeguard measures should be set on a degressive scale under the surveillance and scrutiny of GATI. Issues relating to subsidies, countervailing duties (CVD) and dumping activities are also of considerable concern to ASEAN countries. Although ASEAN countries have so far been spared severe CVD and anti-dumping actions -- quite unlike the East Asian NICs -- they are sensitive to the potential threat of such punitive action. In fact, in April 1988, a 17.7 per cent rate of CVD was imposed on Malaysia's steel wire rods exported to the United States. Malaysian export products under CVD investigations include thermoplugs and welded carbon steel pipe and tube products. In early 1985, Malaysian textile exports were threatened by the U.S. countervailing duties which are imposed whenever the exporting country's subsidy on textiles and apparel exceed the trigger point of 0.5 per cent. However, investigations by the U.S. Department of Commerce showed that Malaysia's export subsidy was only of the order of 0.22 per cent for textiles and 0.27 per cent for apparel. In late 1985, the U.S. Rice Millers' Associations brought a CVD action against Thai rice and it was found that the Thai Government had subsidized it by 0.745 per cent. The irony is that the United States itself is guilty of subsidizing its own rice production. However, U.S. trade policies with respect to rice are not considered violations of GATT provisions as they hide behind the "grandfather" clause. Indonesia, too, was recently accused of subsidizing its textile exports to the United States. ASEAN countries have found CVD investigations bothersome, and are concerned that protectionist forces in developed countries may intensify such investigations in the future. While ASEAN countries may have no cause to fear such investigations, the latter do have a nuisance value. The fact that a large number of investigations have proved groundless, warrants more discipline in initiating such investigations. ASEAN countries are afraid tqat an investigation once initiated can lead to bilateral agreements that would restrict ASEAN exports, irrespective of the final finding of the investigation. ·

ASEAN Perspectives 21

New Issues The agenda for the eighth MTN (Uruguay) round includes a number of new issues which have not been hitherto brought under the ambit of GATT. These issues have become extremely controversial even before they could be discussed. There has been opposition from hardline LDCs to have such issues included in the MTN. lt was argued that GATT could not effectively handle the old issues let alone the new ones, and that new issues will distract attention away from the old unresolved issues of utmost importance to LDCs. Fears were expressed that developed country concessions on old issues might be traded off for LDC concessions on new issues. There was also conjecture that trade liberalization on the new areas would only benefit the developed countries at the expense of the developing countries. Nonetheless, the new issues have been placed on the MTN agenda with the understanding that negotiations on new issues were distinct and separate from those on old issues relating to merchandise trade. Trade in Services. There is no consensus among LDCs on issues relating to trade in services. The LDC position ranges from the hardline stance of India and Brazil, which have called for total exclusion of services from the MTN round, to the more accommodating stance of Hong Kong and Singapore which could see new opportunities for themselves in the liberalization of services trade. The ASEAN position on services trade has been very much influenced by Singapore, resulting in the rejection of the stance of the hardliners. The above observation, however, conceals of lot of variations among ASEAN countries in terms of country perspectives on services trade in the MTN round. Brunei does not seem to have any strong views. Indonesia, Malaysia and the Philippines which have substantial deficits i9' fervices account are understandly quite cautious about negotiations in the realm of services trade. Banking, insurance, and transportation and telecommunication probably represent the most important segments of the highly protected services industries in these countries. It is feared that liberalization of services trade at the present juncture would result in bigger deficits which these countries can hardly afford. Thailand, despite its deficits in the services account, appears to be enthusiastic about liberalization of services trade. The main explanation for this is ihat Thailand sees in it new opportunities for its tourist industry and labour-intensive service industries, especially construction services. It is Singapore which seems to be particularly keen on services trade negotiations. This is scarcely surprising, as it enjoys sizeable surpluses in the services account. The importance of the services sector to Singapore's economy can hardly be exaggerated, for services contribute as much as 60 per

22 MohamedAriff

cent of Singapore's GDP. It is believed that liberalization of services trade will lead to significant gains for Singapore as it possesses comparative advantage in certain service industries. All this does not mean that Singapore is ready for an open-door policy with respect to services trade. Singapore already has a fairly liberal regime of financial services. Foreign financial institutions are welcome in Singapore subject to the regulatory conditions set by the Monetary Authority of Singapore. Of concern in Singapore is the possible effects of liberalization of financial services trade. Such a liberalization may impinge upon macro-economics management policies causing dents in the country's sovereignty itself. Singapore is more keen on liberalizing trade in professional and technical services such as engineering consultancies, artificial intelligence, medical services, and computer software. It is clear from the preceding analysis that there is considerable divergence among ASEAN countries with respect to services trade negotiations in the next MTN round, even though they have all agreed to services trade being on the MTN agenda for purposes of in-depth discussion, if not actual negotiation. At the Punta del Este meeting, ASEAN countries supported the so-called "dual track" compromise proposed by Switzerland and Columbia. However, ASEAN countries do not seem to be too hopeful about the outcomes of the negotiations, as the whole issue is beset with a host of conceptual and practical problems which cannot be easily resolved. For one thing, an internationally acceptable definition of services trade is hard to arrive at, as different countries have different axes to grind. For another, there are severe data constraints on services trade that would impede meaningful negotiations. Countries like Thailand are more interested in liberalization in factor services, while countries like Singapore have a greater stake in non-factor services, mainly due to differences in their resource endowments and in the level of economic development. Liberalization of trade in those services which involve international factor movements, especially labour, are perceived to be a lot tougher to negotiate than those which do not involve such movements. It will be extremely difficult for any country to make any commitment to liberalize in the absence of a valid theoretical framework. Trade theories view international movement of goods as a substitute for the movement of factors, whereas in the case of trade in services, factor movements have a complementary role to play. Thus, standard goods trade theory models are not applicable to services trade. Besides, it is not easy to separate or disentangle services trade from goods trade in certain cases. Intellectual Property Rights. The protection of intellectual property rights represents a burning issue in developed countries, especially the United States. The moral and legal aspects of this issue however still remain unclear. The developed country position on this is quite unambiguous. They seem to

ASEAN Perspectives 23

consider violation of such rights as immoral and unjust. They have claimed that they have lost billions of dollars in foregone incomes due to impingement of such rights in the form of imitations, counterfeit, and piracy in LDCs. While it cannot be denied that LDCs have been "free riders" for too long in the sense they had access to foreign technology without having to pay for it, the line between what constitutes infringement and what does not is by no means easy to draw. From an economist's point of view the whole issue revolves around the question of pricing. Infringement of intellectual property rights may be attributed to "overpricing" by the developers of new ideas. Arguably, there will be less copying if "monopolist" pricing policies are not pursued by the producers. Moreover, it can also be argued that all intellectual properties sooner or later will become public goods to which anyone can have free access. In other words protection for intellectual property rights cannot be given indefinitely. There is thus a need for a time frame with which protection of such rights can be considered and negotiated. Furthermore, there are enforcement problems which may render such negotiations an exercise in futility. The position of ASEAN countries seems a little ambivalent. On the one hand, protection of intellectual property rights will imply an increased outflow of payments in the invisible trade account. On the other hand, ther~ is also concern that in the absence of protection of intellectual property rights, their own R&D activities will not be encouraged, while multinationals will also remain hesitant to transfer their technology and technical know-how. In recent years, both the United States and the EEC have stepped up their efforts to enforce the protection of intellectual property rights. The United States, in particular, has been quite successful in pressuring many countries including South Korea and Taiwan to adopt protective measures. The United States has been linking its GSP concessions to assurances from the beneficiaries on the protection of intellectual property rights. It thus appears, for instance, that the recent generous revisions in the U.S. GSP scheme offered to Singapore was in no small measure a reward for Singapore's Copyright Law, although the United States announced seven months later that it was gradually phasing Singapore out of the U.S. GSP scheme. As alluded to above, some ASEAN countries view the protection of intellectual property rights as being in their own self-interest. Indeed, some of them have taken unilateral actions already. Thus, Malaysia and Singapore have recently enacted copyright laws, while Indonesia had passed a law on Manufacturer's Marks and Trade Marks as early as 1961 and enacted a law on copyright in 1982 (Suhartono 1987). Indonesia is currently formulating a patent law as well as amendments to the laws on trade marks and copyrights with a view to strengthening the protection of foreign firms with regard to intellectual property rights. The United States has been urging Thailand to revise its patent and copyright laws in line with the U.S. laws so as to grant protection to foreign

24 MolwmedAriff

interests. In this regard, the Americans and Thais are not on the same wavelength. For instance, the Thai pharmaceutical industry holds the view that it paid the full price for the intellectual property when it bought the equipment used in drug processing and that it is free to use any close substitutes of generic ingredients, while from the American R&D industry's standpoint specified ingredients are part and parcel of the processing. Major changes in the patent and copyright laws in Thailand are unlikely under the present circumstances. It is of interest to note in this regard that a recent attempt to table an amendment bill in the Thai Parliament was met with such severe opposition that it was quietly withdrawn. The issue almost brought down the Thai Government.

Trade-Related Investment Measures. The question of trade-related investment measures or TRIM refers to regulations governing foreign investment and trade-related performance requirements imposed on foreign investors in the host countries. The position of the United States, the main sponsor of this issue, is quite clear-cut. It is argued that some elements of the industrial policies of many countries tend to restrict the international flow of foreign investments which cause distortions in production and trade patterns. Investment restrictions and performance requirements amount to denyiug access by foreign corporations to the host country's domestic markets and subsidizing exports, both of which subvert the underlying principles of GATT. These measures were outside the purview of GATT as they were not considered explicit border taxes or subsidies. The U.S. stance is that the effects of these measures are similar to those of border taxes and subsidies and therefore they should be included in the present MTN agenda. All ASEAN countries have regulations of one kind or another governing foreign investments. Some of these limit foreign equity participation to certain activities, while some others specify the extent of foreign ownership in various industries. Thus, domestic market-oriented activities are more or less closed to foreign investors in most countries, while generous fiscal and other incentives are given to foreign investors to go into export-oriented manufacturing. In this regard, Singapore seems to be most liberal among ASEAN countries, primarily because all its activities are aimed at the global market, as its own domestic market is too tiny to be the object of any contention. Domestic markets in other ASEAN countries are either so small or growing so sluggishly that they have become saturated. Further import substitution activities have thus been heavily constrained. Regulations that keep foreign investors away from the domestic market appear somewhat redundant in many industries, as the foreigners themselves might not be really interested in investing in those activities. The first-best solution would be to reduce the extent of protection given to such industries. The higher the MFN tariff cuts under the MTN round in ASEAN countries, the less the incentive for foreigners to invest in import substitution activities

ASEAN Perspectives 25

aimed at the domestic markets of host countries. Thus "discrimination" against foreign investors in terms of the market orientation of the investment project may well become a non-issue, especially if significant tariff reductions take place in ASEAN countries. Performance requirements for export-oriented activities in ASEAN, however, pose a different set of problems. Performance requirements in ASEAN countries are not hard to document, but their influence on investment decisions and trade patterns with respect to an investment project is hard to assess. Problems in ascertaining the effectiveness of performance requirements arise from the fact that not all performance requirements are really binding and it is impossible to know what investing firms would have done in the absence of performance requirements. Besides, there is no standard definition of trade-related performance requirements. They may be broadly defined to include almost every form of government restrictions on an enterprise but more often than not btoad definitions would encompass specific proportional requirements for local ownership and labour, and domestic content. A narrower definition of performance requirements would comprise only those government restrictions that seek to reduce foreign exchange cost or to raise foreign exchange earnings. ASEAN countries' emphasis on export-oriented industrialization has led to the formulation of incentives schemes which are designed to reward those firms which export more than a minimum proportion of their output. In some cases, export minima may not be binding in the sense that the firms are required to do what they would have done anyway without the need for explicit requirements. It even appears that incentives offered are sometimes a windfall to the firms and a loss to the host country. Nonetheless, incentives conditional on export performance are trade-distorting, as their effects are similar to export subsidies. In ASEAN countries, however, export incentives are seen as compensation for the anti-export bias present in their tariff regimes and not as subsidies as such. The first-best solution would call for the elimination of the bias against export rather than the introduction of distortions in the opposite direction in the form of export incentives. Again, the need for such incentives would diminish if there. are substantial tariff reductions which would eliminate the anti-export bias found in the existing tariff structures in some ASEAN countries. Trade distortions are also caused by domestic content requirements. The main rationale for imposing a local content requirement is either that it will reduce foreign exchange cost of investment in the case of an import substitution project, or that it will increase net foreign exchange earnings in the case of an export-oriented investment. Nevertheless, export-oriented manufacturing activities in general tend to have a much higher import content than do import-substituting ones, since the former often have access to dutyfree imports of raw materials and intermediate inputs or duty-drawback facilities. This is especially the case for firms operating in the Export

26 Mohamed Ariff

Processing Zones where local content in manufacturing is negligible (Ariff 1987). In ASEAN countries, the local content requirement has not been strictly enforced in export-oriented activities, as it tends to raise production costs and render the exports uncompetitive internationally. Local equity provisions exist in all ASEAN countries but it is not clear to what extent they are really trade-distorting. They vary not only from country to country but also from industry to industry. Generally speaking, the more export-oriented the activities, the greater the foreign equity shares permitted. Thus, more often than not, 100 per cent foreign equity is permitted in manufacturing activities that are 100 per cent export-oriented. In ASEAN countries, the local equity proportion represents a highly sensitive issue. Any multilateral move to constrain domestic investment policies is seen as a frontal attack on their sovereignty. In the plural society of Malaysia, there are additional considerations based on ethnic sensitivities. The New Economic Policy (NEP) aims at an overall equity structure of 30:40:30 for the bumiputeras (indigenous people), other Malaysians, and foreigners, respectively, notwithstanding considerable inter-firms variations. Of late, Malaysia has not been enforcing these requirements strictly. In fact, the NEP equity guidelines have been put on hold in the wake of the current recession. While ASEAN countries may be justified in jealously guarding their sovereignty in respect of their domestic investment policies, they stand to lose from the intense competition among themselves for attracting foreign investments. They have been outbidding one another by giving all sorts of generous incentives. Some discipline in this regard will prove beneficial to all ASEAN countries.

Objectives and Strategies ASEAN countries are in the process of conducting detailed studies on what they want to bring to the Geneva meetings. Several task forces have been set up in each country to handle the various trade issues in their own national interest. ASEAN countries seem to have a clearer understanding of what they want in older areas, although they are not quite sure of what should go on the so-called "fast track". On the newer issues, they are prepared to keep an open mind. As regards strategy, it appears that ASEAN countries will be prepared to make concessions only if there are clear gains for their respective countries. There are severe domestic policy constraints which ASEAN negotiators will have to take into account when they make any trade concession in the multilateral framework. Major Goals ASEAN ~ountries realize how important the Uruguay Round is to them. They

ASEAN Perspectives 27

see in it a golden opportunity to carve out a bigger slice of the world trade for themselves than what the present system will let them. While they are entering the MTN round with fresh hopes, they are also aware of the constraints within which the multilateral trade talks will have to be conducted. Specific objectives aimed at in the next MTN round may differ from country to country. Thus, for instance, Thailand will focus on agricultural trade, while Singapore will concentrate on services trade. Such variations notwithstanding, one major aim of all ASEAN countries in the next MTN round is greater access to developed country markets. ASEAN countries would like to see substantial reductions in tariff and non-tariff barriers in advanced countries on items of export interest to ASEAN. While ASEAN countries do realize how difficult it is to dismantle NTBs, they would like to have them at least converted into tariffs which will be subject to the GATT discipline and scrutiny. ASEAN countries will seek a commitment on "standstill" and "rollback" so that there will be no new protectionist measures, accompanied by a gradual phasing out of all trade restricting and distorting measures that are inconsistent with the GATT principles. A firm commitment on standstill in itself will amount to a major achievement under the present circumstances. ASEAN countries may also seek more tightly defined conditions for the application of safeguards so that selectivity is shelved. On tropical products, ASEAN's main concerns are high tariffs and consumption taxes, tariff escalation, sanitary regulations and labelling requirements and subsidized production of export products, especially oilseeds and sugar, and the erosion of preferential margin. Agriculture is a more difficult area. Nonetheless, ASEAN countries, especially Thailand and Malaysia, appear determined to pursue the question of developed country subsidization of agricultural exports and the issue of better market access for ASEAN's agricultural products. The ASEAN concern is largely over rice, sugar, and vegetable oils. It is not clear what ASEAN countries will aim at with regard to textiles and clothing. These items have long been considered "sensitive" by developed countries and are subject to loose discipline. ASEAN countries are not quite sure that they will gain from multilateral liberalization of textile and clothing. The MFA have provided market assurance for ASEAN countries which are small exporters. In the absence of the MFA, ASEAN countries may find it difficult to compete with more efficient, large exporters like Korea and Taiwan. It therefore seems likely that ASEAN countries will keep a low profile in the trade negotiations on textiles and clothing. Other areas in which ASEAN countries are likely to maintain a relatively low profile in the course of the negotiations are trade in services, protection of intellectual property rights, and trade-related investment measures. However, Singapore and Thailand seem enthusiastic about liberalization of services trade. Singapore's main stake is on non-factor services while Thailand will

28 Mohamed Ariff

probably focus on labour services. Other ASEAN countries do not seem to have any definite objectives in these areas, and will presumably play it by ear. One area iii which ASEAN countries seem to have taken an almost unanimous position, along with the Group of 77, is the principle special and differential (S&D) treatment. ASEAN countries subscribe fully to the S&D principle, even though it may have to be redefined to accommodate some reciprocity on the part of the developing countries.

of

Scope and Limitation To what extent ASEAN countries will achieve their objectives in the Uruguay Round will depend in no small measure on the strategies they adopt individu.ally and collectively. In any case, it is readily clear that unless ASEAN countries are prepared to play an active role in the multilateral trade negotiations, they will not get much out the next round. The term "active role" implies all the responsibilities that go with it, namely the willingness and the ability to make concessions while receiving concessions, and to abide by the rules ofthe game all the way. Apparently, ASEAN countries, like many other developing countries, have been receiving concessions without giving any. ASEAN countries are painfully aware that further concessions may not be forthcoming unless they are willing and able to reciprocate in one way or another. ASEAN countries now seem bold enough to make concessions in the realm of goods trade. This is not necessarily inconsistent with ASEAN's stance of being in favour of continued special and differential treatment from developed countries. Reciprocity, in ASEAN's view, need not necessarily amount to a one-to-one relationship between concessions and counter-concessions. ASEAN countries will probably insist that differences in the levels of economic development among contracting countries ought to be taken into account in any negotiation process. Unequal treatment of unequals is seen not only as prudent and fair, but also consistent with the basic principles of equal treatment of equals. It cannot be denied that ASEAN countries, by staying on the sidelines in the previous round, have managed to get what is sometimes termed as a "free ride", although the ride itself was a rough and bumpy one. It has become increasingly clear that there will be no such thing as a "free ride" anymore for ASEAN countries. For one thing, advanced countries are reluctant to make one-way concessions. For another, ASEAN represents a group of middleincome countries with fairly high per capita incomes compared with many other developing countries. Realizing this, ASEAN countries seem prepared not to take a free ride, but at the same time they cannot afford a "full fare" for the ride in the form of complete reciprocity. As one ASEAN official has put it, ASEAN will be seeking a "cheap fare" and not a·"free ride" in the Uruguay Round. That ASEAN is not quite ready for graduation is fairly evident. They have a long way to go before they are classified as advanced developing

ASEAN Perspectives 29

countries (ADCs). No doubt, Brunei is the richest among the Third World countries in terms of per capita income, but much of it is heavily concentrated in the hands of a limited few so much so that an average Bruneian is not far better off than his counterpart elsewhere in the region. Singapore, which is industrially and economically more advanced than any other ASEAN member, has claimed that its per capita income overstates the country's economic standing, as a sizeable proportion of the aggregate income is repatriated overseas as profit remittances. It is of interest to note that while the United States has given notice that it was graduating Singapore out of the U.S. GSP scheme, Japan and other countries are not following suit. This calls for a clear set of criteria for graduation. However, in a scheme like the GSP, there is little doubt that such a graduation is not far away for most ASEAN countries. ASEAN countries will find their incongruent position with regard to MFN concessions vis-a-vis preferential treatment increasingly untenable. ASEAN countries have enjoyed GSP concessions for certain exports while seeking MFN tariff cuts elsewhere. Thus, it will become increasingly difficult for ASEAN countries to complain about erosion in the margin of preferences while actively soliciting for MFN tariff reductions. There are indications that ASEAN countries will seriously consider bringing down their own trade barriers within the frame of the Uruguay Round. It has dawned on the policy-makers in the region that such tariff reductions are in the interest of their home countries. The strong bias against exporting, found in the tariff regimes of some ASEAN countries, can be reduced significantly through tariff reforms. It is mainly considerations such as this and concern for a more efficient allocation of resources that have led the eclectic countries in the region to take a hard look at their own structure of protection (see Table 1-6). In fact, some countries have been making unilateral tariff reductions from time to time, as was already seen. The process was, however, interrupted by the prolonged economic recessions in these countries. That the launching of the Uruguay Round has coincided with the end of recession and the beginning of economic recovery in the ASEAN region augers well for ASEAN's active and meaningful role in the next MTN round. Thus, there is a basis to believe that ASEAN countries will be able to offer MFN tariffs cuts. Having said all this, one must not lose sight of the fact there are domestic constraints which would tend to limit the width and depth of tariff cuts that ASEAN countries can offer. Indonesia has a high tariff profile. Indonesia's manufacturing sector is so new, inward-looking and inefficient that the powerful groups with vested interests in Indonesia would resist significant tariff liberalization attempts. Malaysia and Thailand have mild tariffs and their manufacturing industries seem mature enough. It is important to note that the outwardlooking posture of their manufacturing sector makes it relatively easy for the governments to bring about tariff reforms, especially if these are accompanied

TABLEI-6 Comparison of Average Levels of Import Duties in ASEAN (by Broad Economic Categories (BEC]) Country UN-BEC Code No.

Description

Ind.

Mal.

Phil.

Sing.

Thai.

ASEAN

PRIMARY

illl§

~

~

.!ill

121§

.1U1

111 21 31

Unprocessed foodstuffs Raw materials Unprocessed fuels

26.48 12.64 11.56

3.20 3.50 3.75

33.78 21.95 11.25

0.00 0.13 0.00

37.18 16.90 1.75

20.13 11.02 5.66

INTERMEDIATE

~

.l1.lM

1M.5

~

26.96

20.84

121 22 322

Processed food and beverages, for industry Industrial supplies, processed Processed fuels and lubricants

44.20 24.09 5.27

72.89 14.26 7.33

36.81 26.20 16.66

27.21 7.73 0.24

37.23 26.54 10.33

43.67 19.76 7.97

CAPITAL .GOODS, INCLUDING PARTS AND ACCESSORIES 41 42

112 122 321 51 61 62 63

521 522 53

7 TOTAL

1!W

Qjl)

1121

0.28

23.72

~

Capital goods (except transport equipment) Parts and accessories of capital goods (except transport equipment)

20.50

5.88

21.55

0.33

23.44

14.34

17.25

10.41

24.54

0.00

25.44

15.53

CONSUMER GOODS

65.57

~

42.21

w

49.40

~

Food and beverages, primary mainly for household consumption Food and beverages, processed mainly for household consumption Motor spirit Passenger motor cars Durable goods Semi-durable goods Non-durable goods

56.55

11.22

48.74

0.72

52.46

33.94

60.05 10.71 76.32 45.31 71.33 82.22

257.85 7.57 71.52 11.61 18.67 21.80

45.36 24.00 37.14 32.18 44.96 42.27

21.99 11.84 7.50 0.12 0.57 17.65

67.35 25.00 76.00 35.93 58.03 37.48

90.52 15.82 53.69 25.03 38.71 40.29

TRANSPORT EQUIPMENT (EXCL. PASSENGER MOTOR CARS), INCL. PARTS AND ACCESSORIES

11..32

.12.29

20.92

2.00

22.41

1M!)

Transport equipment, industrial Transport equipment, non-industrial Parts and accessories of transport equipment

2.00 32.53 44.96

0.83 11.96 36.24

12.00 28.60 24.84

0.00 2.25 3.46

9.50 24.00 31.73

4.86 19.87 28.24

OTHERS

.l7.J9

.1QM

1J..i£J

0.00

13.12

13.72

Goods not elsewhere specified

17.16

10.64

27.66

0.00

13.12

13.72

1U2

24.99

29.18

6.41

30.66

24.77

SOURCE: Philippine Tariff Commission, Tariff Profiles in ASEAN, An Update, 1985.

ASEAN Perspectives 31

by increased market access for their products overseas. However, the fact that import substitution will coexist with export orientation implies that some protection will continue to be provided. The Philippines' position seems somewhat awkward. The Philippines has the longest industrial experience in the region. Its manufacturing sector has been protected for nearly three decades. Its industries have become so used to the protective shelter that they find it difficult to bring about a market reorientation. A major tariff reform was put off in the wake of the political crisis during the Marcos' regime. The Philippine economy, battered by nagging insurgency and economic recession, may not be able to withstand major tariff reductions that would call for painful adjustments. The Philippines hopes to capitalize on global admiration for its new democracy and invoke the unique conditions of the country to justify special arrangements whereby it would get trade concessions without reciprocity or quid pro quo. It is, however, hard to believe that such a strategy will really work. Brunei and Singapore already have almost tariff-free trade regimes, although their economies are highly regulated in other ways. Brunei is unlikely to make any concessions, as it has very little interest in the MTN outcomes in any case. Singapore's concessions may take the form of deregulation (as its tariffs are already low), for it has a high stake in the results of the MTN. While ASEAN countries are thus willing to trade concessions, they are against any trade-off between a concession in goods trade and that in services trade. The "dual track" approach will form the basis of all ASEAN negotiations, consistent with the procedural agreement of the Uruguay Round. On the non-traditional issues such as services trade, protection of intellectual property rights, and trade-related investment measures, the ASEAN countries have no game plan whatsoever. They find these issues still ambiguous and the implications of liberalization extremely unclear. It is almost like a journey into the unknown for ASEAN. Therefore, ASEAN countries may prefer sector-specific agreements on services such as the U.N. convention on shipping and International Telecommunication Union. ASEAN countries are not expected to make major concessions on such non-factor services as banking, insurance, and telecommunications which are considered sensitive. ASEAN countries will probably justify the protection for these sectors on infant industry grounds. Such a position, however, may not be unassailable unless the infant industry handicap is time-bound. Concessions in the form of protection of intellectual property rights seem possible for ASEAN countries, with the notable exception of Thailand where the resistance to such concessions looks formidable. While such rights are violated in almost all ASEAN countries, the infringement seems most blatant in Thailand. Hence the strong resistance in Thailand to legislation against copyright and patent infringements. Some ASEAN countries see such protection as necessary to promote R&D investments at home. While

32 Mohamed Ariff

ASEAN countries may not oppose GATI's involvement, they are likely to underline the adequacy of the protection provided by other avenues especially the World Intellectual Property Organization (WIPO ), a specialized agency of " the United Nations system. However, in the realm of TRIM, one can expect some concessions from ASEAN countries. Some ASEAN countries are anxious to relax the restrictions on foreign investments unilaterally. Since investment incentives and investment requirements are considered substitutable, there are possibilities for these countries to exchange concessions on a quid pro quo basis within TRIM. · ASEAN countries' strategy in the Uruguay Round will not be to go it alone. There are two principal reasons for this: (a) individually they are no more than marginal players in the entire exercise and (b) they lack the necessary experience and expertise for striking hard bargains on their own. ASEAN countries face a number of options in this regard. They may identify themselves as countries of the South and fully associate with the Group of 77. Alternatively, they may stick together and put up a separate ASEAN front. Yet another approach will be for ASEAN countries to align themselves to a distinct middle-power group that has a North-South axis. While ASEAN countries do find G-77 a source of strength in international forums, they are unlikely to get much out of this alliance insofar as GATI is concerned. For one thing, issues of immediate interest to ASEAN may be overshadowed by issues of concern to the major actors in G-77. In other words, ASEAN cannot rely on G-77 to articulate issues of concern to its member countries, although it will not do anything that would embarrass the G-77. In any case, ASEAN countries will distance themselves from the hardline group of developing countries on certain issues. There is very little in common between ASEAN and the hardline group led by Brazil and India. For one thing, ASEAN economies are outward-looking market economies with fairly liberal regimes, in contrast to countries like India which are essentially inwardlooking with very huge and highly regulated domestic markets. For another, ASEAN countries regard themselves as moderates in the Southern caucus. ASEAN's moderate stand was manifested by the willingness of its members to include new issues in the MTN agenda and their preparedness to consider giving concessions. ASEAN countries have always been middlewaders in UNCT AD. ASEAN's moderate posture is also reflected in the readiness of its members to co-operate with the moderates in the Northern caucus on may issues. ASEAN might therefore seek alliances of moderates for giving vent to the issues of great importance to ASEAN. The Cairns Group represents a special case in point, where Indonesia, Malaysia, the Philippines, and Thailand are represented along with countries like Australia, New Zealand, Canada, Chile, and Colombia. All these efforts notwithstanding, ASEAN countries find considerable

ASEAN Perspectives 33

wisdom in sticking together for better or for worse. For no other grouping can effectively present ASEAN's case across the negotiating table better than ASEAN itself. ASEAN's quest for a regional approach is expected to lead to common positions on a number of key issues. ASEAN countries are now working together to chart out strategies to be adopted on the Uruguay Round. Of course, it will be impossible for ASEAN countries to arrive at common positions on all issues, given the heterogeneity that characterizes the regional grouping. Thus, for instance, it will be impossible for Indonesia and Singapore to have a similar position on services trade or for Thailand and Brunei to have a common position on agriculture. Although each ASEAN country seems to have its own set of priorities, there is sufficient common ground to put up a united front. Already, there are common ASEAN positions on several substantive issues such as standstill and rollback, special and differential treatment, and market access. The regional spirit makes it possible for a member country to articulate issues of interest to another member of the grouping. Thus, in Punta del Este in 1986, Malaysia towed Singapore's line which was in favour of "dual track" negotiations on services. Likewise, on agriculture, Indonesia opted to play an active role in the Cairns Group in support of Thailand even though the issue was of only peripheral interest to Indonesia.

Conclusion Trade is the life-blood of ASEAN countries. Anything that affects trade flows is of great importance to ASEAN countries. It is mainly in this sense that ASEAN countries are taking a keen interest in the eighth round of multilateral trade negotiations. ASEAN countries' main trading partners are the United States, the EEC, and Japan. The EEC and Japan have pursued highly protectionists policies in spite of the seven previous rounds of MTN, while the United States has championed the cause of free trade. The U.S. position is changing rapidly due to growing protectionist pressures caused by persistent deficits in the country's balance of payments. There are dangers that the United States may become the frontrunner of protectionism, if the current spate of U.S. Congress Bills is anything to go by. The message is that the multilateral trading system is in jeopardy and that the Uruguay Round may represent one last chance to save the system from total collapse. It is considerations such as thes_e which have led ASEAN countries to pay particular attention to the Uruguay Round. ASEAN countries had gained very little from the previous MTN rounds. That may be so because they chose to remain on the sidelines. This time around, they are prepared to move to the centre stage and become active players. An active role, of course, means giving concessions to the rest of the world while taking concessions from others. The implication is that reciprocity

34 Mohamed Ariff

will be the name of the game from now on. ASEAN countries are willing to undertake trade liberalization measures, as it is in their own interest to do so even unilaterally. Some of their existing barriers are no longer in tandem with the structural changes that have been taking place in the ASEAN economies. While ASEAN countries are prepared to reciprocate, there are constraints which cannot be lost sight of. ASEAN countries are no match for the major actors. In terms of economic development, ASEAN countries are far behind the United States, the EEC, and Japan. They lack the experience, expertise, and negotiating skills. There are limits to the extent to which they can possibly make concessions, as there are domestic political, economic, and social constraints. Trade issues that ASEAN countries are likely to bring up in the Geneva talks may range from tariff escalation, which affects the processing of primary products, to subsidization of agricultural products by advanced countries. ASEAN countries attach much more importance to the old unresolved issues than to the newer ones which have been added to the MTN agenda, although they are committed to the latter as well. Among the new issues, services trade and trade-related investment measures have been singled out for a close look, although the question of protection of intellectual property rights will not be ignored. ASEAN countries are unlikely to go it alone in the forthcoming negotiations. Efforts are under way to seek ASEAN common positions on a number of issues. However, it would be impossible to arrive at ASEAN consensus on all issues, in view of the fact that ASEAN represents a heterogeneous group of•countries of different sizes and at different stages of economic development. Nevertheless, the regional spirit is strong enough to permit convergence of views on a variety of issues so that there can be a joint ASEAN approach to the MTN. At the same time, ASEAN countries have also been exploring the possibilities of other alliances. The Cairns Group has became quite handy for some ASEAN countries to voice strong objections to export subsidization in agriculture. G-77 is another vehicle which ASEAN countries may find useful. It is, however, doubtful if G-77 can become the mouthpiece of ASEAN countries, since the dominant players in the G-77 may not give priority to issues of immediate interest to ASEAN countries. ASEAN countries have distanced themselves from the hardline approach adopted by countries like Brazil and India, as ASEAN countries have very little in common with these countries. ASEAN countries tend to identify themselves as moderates in the Southern caucus who are willing to co-operate with their counterparts in the Northern caucus. The approach of ASEAN countries to the Uruguay Round is certainly positive. They are aware of the opportunities that the Uruguay Round can present and the price that they have to pay for them. At the same time they are also conscious of the sensitivities of some major countries on certain

ASEAN Perspectives 35

important issues. ASEAN's hopes in the next round are thus tainted with caution. · Judging from the amount of homework under way and the flurry of activity going on in the region, it is clear that ASEAN countries are taking the Uruguay Round seriously. They cannot afford to be silent watchers, now that far too much is at stake. It is also in ASEAN's own interest to have a strong GAIT organization that can ensure a more open trading system. Presumably, ASEAN countries will be more comfortable with a trading system based on rules than one based on power relationships. After all, ASEAN countries have open economies where market forces are relatively free to operate with limited government intervention.

1

Association of Southeast Asian Nations comprising Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand.

2

European Economic Community.

3

First Round, Geneva, 1947; Second Round, Annecy, 1949; Third Round, Torquay, 195051; Fourth Round, Geneva, 1955-56; Dillion Round, Geneva, 1961-62; Kennedy Round, 1964-67; Tokyo Round, 1974-79.

4

United Nations Development Programme.

5

United Nations Conference on Trade and Development.

6

International Rubber Agreement.

7

International Tin Agreement.

8

The Cairns Group consists of fourteen countries from North and South which claim to have the common characteristic of being non-subsidizing agricultural exporters. The participating countries are as follows: Argentina, Australia, Brazil, Canada, Chile, Colombia, Fij~ Hungary, Indonesia, Malaysia, New Zealand, the Philippines, Thailand, and Uruguay.

9

Generalized System of Preferences.

10

Multi-Fibre Arrangements.

11

Less Developed Countries.

12

Japan and the EEC have slammed both overall and individual ceilings on the use of the GSP for many products. The United States limits GSP imports by applying the "competitive need" rule specifying that a beneficiary will lose its GSP facility for a particular product if its exports to the United States exceed a certain amount which is arbitrarily fixed.

36 Mohamed Ariff

13

Most-Favoured-Nation.

14

The recent U.S. safeguard action on motorcycles was aimed at the Japanese.

REFERENCES Akrasanee, Narongchai. "ASEAN Economies and ASEAN Economic Cooperation". Manila: Asian Development Bank, 1983. Ariff, Mohamed. "Export-Oriented Industrialization in Malaysia: Policies and Responses". In Export-oriented Industrialization and Empleyment: Policies and Responses with Special Reference to ASEAN Countries, edited by Dijct and Verbruggen. Manila and Amsterdam: Council for Asian Manpower Studies and Free University, 1984. _ _ _ _ _. "Export Processing Zones: The ASEAN Experience". Paper presented at the ASEAN-China Economic Relations Seminar, Beijing, 1987. Ariff, Mohamed and Hal Hill. Export-Oriented Industrialization: The ASEAN Experience. Sydney: Allen & Unwin, 1985. Arndt, H.W. "GATT and the Developing World: Agenda for a New Trade Round". Weltwirtschaftliches Archiv, Band 123, Heft 4, 1987. Bhagawati, Jagdish N. "Splintering and Disembodiment of Services and Development Nations". World Economy 7, no. 2 (1984): 133-43. Girling, Robert Heneriques. Multinational Institutions and the Third World. New York: Praeger Publishers, 1985. Golt, Sidney. The GATT Negotiations 1973-75, Guide to the Issues. London: British North American Institute, 1974. Greenaway, David. Trade Policy and the New Protectionism. London and Basing, 1983. Kim, J.l. "Need for the Developing Countries to Play their Part in GAIT'. World Economy 7 (1984): 245-52. · Koh Ai Tee. "The Role of the Service Sector in ASEAN". In A SEAN Economies: Crisis and Response, edited by Jomo K.S. Kuala Lumpur: Malaysian Economic Association, 1985. Krause, Lawrence B. U.S. Economic Policy Towards the Association of Southeast Asian Nations: Meeting the Japanese Challenge. Washington, D.C.: Brookings Institution, 1982. --..,=--___,-· "The Developing Countries and the GAIT'. Seoul: Korea Development Institute, 1984. Pang Eng Fong and Mark Sundberg. "ASEAN-EEC Trade in Services: An Overview". In ASEAN-EEC Trade in Services, edited by Waelbroeck et al. Singapore: Institute of Southeast Asian Studies, 1985. Philippine Tariff Commission. Tariff Profiles in ASEAN: An Update. Manila, 1985. Preeg, Ernest H., ed. Hard Bargaining Ahead: U.S. Trade Policy and

ASEAN Perspectives 37

Developing Countries. Washington, D.C: Overseas Development

Council, 1985. Riddle, Dorothy I. Service-Led Growth. New York: Praeger Publishers, 1986. Sihott, Jaffrey J. "Protectionist Threat to Trade and Investments in Services". World Economy 6, no. 2 (1983). Spinanger, Dean. "Will the Multi-Fibre Arrangement Keep Bangladesh Humble?" World Economy 10, no. 1 (1987): 75-84. Suhartono, R.B. "Intellectual Property". Indonesian Quarterly XV, no. 2 (April 1987): 199-218. Tucker, K., Greg Seow, and M. Sundberg. Services in ASEAN-Australia Trade. ASEAN-Australia Economic Papers no. 2. Kuala Lumpur and Canberra: ASEAN-Australia Joint Research Project, 1983.

II. TRADE POLICY OPTIONS FOR INDONESIA

Suhadi Mangkusuwondo, Djisman Simandjuntak, and Sumamo Surono

Economic Policy

The extent to which Indonesia can actively participate in the GAIT initiatives such as the ongoing Uruguay Round of multilateral trade negotiations (MTN), is partly dependent on the economic policy which the government adheres to. To understand the position taken so far by Indonesia on the various issues listed in the agenda of the ongoing trade talks, multilateral and otherwise, one needs to feature the basic economic problems preoccupying Indonesia today and in the immediate future. Among those problems, the ones related to employment should perhaps be ranked first for various reasons. First, Indonesia's labour force is currently growing by 2.8 per cent or by 1.9 million people annually. 1 Secondly, a large number of Indonesians were underemployed in 1985, estimated at about 23 per cent of the labour force. This calls for a growth rate which is much higher than the low 1.9 per cent and 3.2 per cent recorded in 1985 and 1986 respectively and a restructuring away from agriculture and mining (which in 1986 contributed 24 per cent and 18 per cent respectively to Gross Domestic Product) towards manufacturing whose share remained as low as 13.5 per cent in 1986 despite the rapid expansion since the early 1970s. Assuming an employment elasticity of GOP of 0.32 as estimated by the World Bank, 2 the Indonesian economy needs to grow by about 8 per cent annually in order to generate sufficient employment for the new entrants to the labour force alone. The exact contribution of export performance to overall employment generation in Indonesia is unknown. Using the labour coefficient of the inputoutput table, however, one can estimate the employment in the export sector. It increased from just 2.1 million in 1980 to 5.3 million in 1986. While the share of export in employment is much lower than its share in GOP,

Indonesia 39

employment in some sub-sectors and some regions is strongly dependent on export. This export dependence is particularly high in the cases of rubber plantations, palm oil, wood processing, and recently also in the cases of the textile and garment industries. The last few years were disappointing for Indonesia. Three consecutive years have witnessed a decline of gross investment in absolute terms. Investment in 1986 was 12.3 per cent lower than investment in 1985 which in turn was 7.2 per cent lower than in 1984.3 Yet attempts to reverse this trend have not been very successful. First, there is the savings constraint which tightened rapidly following the oil price slump. Secondly, the government refuses to borrow from the Central Bank lest it sets forth an uncontrolled inflationary process, while borrowing from the public is withheld because of fear of crowding-out private investment. Thirdly, and most importantly, the revival of investment is bound to strain the current account given the dependence of investment on imported capital goods. The foreign exchange constraint has clearly overshadowed the making of economic policy in Indonesia at least since 1982 (Table 11-1). The forces behind this rapid deterioration are well-known. The prices of primary commodities in general and that of oil in particular plunged to a very low level resulting in a rapid decline of exports. 4 In fact total exports in 1986 was 41 per cent lower than the peak exports in 1981. Interest payment and amortization of public debts are expected to rise to nearly US$8 billion in 1989/90 straining both the balance of payments and the budget. Imports can no longer be suppressed, as they have reached the maintenance level. Foreign direct investment in Indonesia tends to stagnate rather than to increase with a small contribution to the financing of the current account deficit. Finally, net resource transfer from external borrowing is dwindling and is even likely to become negative in the near future. The need to generate new employment on the one hand and the need to contain the current account deficit on the other indicate the dilemma at first glance, especially at a time when a policy of no rescheduling of external debts and that of a fully free exchange system have to be maintained. However, a simultaneous improvement in employment and current account is possible, provided that economic expansion is driven by exports. The range of products which Indonesia can count on while encouraging an export-led economic recovery is, obviously, limited. Indonesia's exports are still crucially dependent on primary commodities, especially the ones belonging to SITC 2, 3, and 4, which in 1986 had a combined contribution of 67.2 per cent to total exports (Table 11-2). Yet this group of commodities is likely to remain in a depressed situation in the near future because of the weak growth performance of the major importers and the declining resource intensity of their manufacturing. Export recovery in other words is dependent on products other than primary commodities, namely a small number of food items and manufactures. The manufacturing sector is now challenged to shift

TABLEII-1 Indonesia's Current Account 1981-86 (In millions of SDR)

1981

Merchandise export Oil sectors Other sectors Merchandise import Trade balance Other goods, service, and income: Credit Debit Investment income Current account

SOURCE:

1982

1983

1984

1985

1986

19834 17879 17506 20236 18232 12314 16082 14366 12824 14595 12337 6640 5841 3514 4682 5641 5674 3751 -14802 -16170 --16559 -14672 -12532 -10191 5700 2123 1709 947 5563 5752 1305 -7790 -3531 -520

1380 -8040 -3639 -4830

1102 -8044

-4010 -5888

1368 -8909 -4767 -1816

1587 -9292 -4011 -1836

1334 -7000 -3367 -3403

International Monetary Fund, Balance of Payments Statistics 39 (January 1988).

TABLE 11-2 Indonesia's External Trade 1981-86 (US$ millions)

1981

All commodities SITe" 0 SITC 1 SITC 2 SITC 3 SITC 4 SITC 5 SITC 6 SITC 7 SITC 8 SITC 9 a b

1986

Export

Import

Export

Import

22,260

13,272 1,356 45 565 1,727 29 1,754 1,518 4,619 656 3

14,805 1,774 69 1,473 8,310 166

10,719 610 28 830 1,107 18 1,910 1,668 4,118 424 6

929 54 2,208 17,764 129 64

m

154 121 60

May not add to 100 because of rounding; Standard International Tr_ade Classification.

SOURCE: Central Bureau of Statistics.

260 1,984 63 678 29

Percentage Distribution 1986a

Export

100 12 0.5 10 56 1 2 13 0.4 5 0.2

Import

100 6 0.3 8 10 0 18 16 38 4 0

Indonesia 41

away from import substitution to export orientation, putting an end to the phase in which the manufacturing sector could rely on foreign exchange earned or borrowed by other sectors. To enhance the growth of non-oil exports in general and that of manufactured exports in particular, the government has in recent years initiated a large number of policy packages. First of all, as part of the Export Promotion Package of 1 January 1982, a limited counter-trade was introduced and the existing Scheme of Export Certificate was improved. To increase the attractiveness of export among others, the rupiah currency was devalued by 27 per cent in March 1983 and by another 31 per cent in September 1986. Through Presidential Instruction No. 4/1985 the government seeks to accelerate the transborder flow of goods by introducing a pre-shipment inspection scheme, to increase the supply of shipping services by allowing foreign shipping companies to enter an increased number of Indonesian ports, and to improve the poor port management which contributed significantly to the higher transportation costs borne by Indonesian exports as compared for instance with Malaysian exports.5 To minimize the costs of imported intermediates required in the production of exportables and to promote export-oriented investment, the May 1986 package of measures, the October 1986 package, and the January 1987 package were announced. Through these packages of policy measures, barriers to imports in general and intermediate imports in particular were cut. Import bans, quotas, and highly restrictive licensing systems were replaced by less restrictive non-tariff measures or even tariffs, though one has to note here that this trade liberalization was initiated with the main purpose of providing every possible support to export activities. 6 The tariff schedule, too, has undergone significant changes. The share of items with tariff rates of over 40 per cent declined from 29 per cent in 1980 to only 10 per cent in 1987. Finally, these export-promotion measures could stimulate improved performance into major markets, especially the American market which in 1986 accounted for 19.6 per cent of Indonesia's total exports. Indonesia has become increasingly sensitive to trade policy preoccupations of its major trading partners. In short, the dramatic change in the economic environment has necessitated a change in economic orientation away from an inward-looking policy towards an increasingly open policy. Indonesia has liberalized its trading system by necessity as many other developing countries have done in recent years. Whether or not it is possible to offer this liberalization as concessions in the course of the Uruguay Round is another but important question. It is still too early to judge the outcome of the recent policy changes. In a country with a vast archipelagic territory and a large population size, the need to rely on external markets is hard to believe, notwithstanding an apparently weakening growth of domestic demand. But one should admit that there is a considerable time lag not only between policy announcement and

42 SuJuulj Mangkusuwondo et al.

implementation but also between policy implementation and its impact on the economy. Nevertheless, there are signs that export performance is improving. While total export declined by 8 per cent annually between 1981 and 1986, export of manufactured products (SITC 5, 6, 7 and 8) grew by no less than 21.7 per cent annually, presumably due to the policy reforms of the last few years. 7 The most important contributors to this high growth of export of manufactured products are plywood and clothing both of which grew by 41 per cent in 198186, with textiles and fertilizers ranking third and fourth, respectively in 1986. Fortunately, these happen to be the industries with substantial contributions to manufacturing employment. The high growth of export in manufactured products cannot obscure the fact that Indonesia's current account is still showing an unfavourable trend. This points to the need for further steps of liberalization. In fact, together with other ASEAN countries, Indonesia has committed itself to a substantial target of intra-ASEAN liberalization following the Manila Summit in December 1987. The increasingly favourable stance of Indonesia's government with regard to trade liberalization notwithstanding, many problems remain to be solved. The level of protection is still high despite the recent reductions. 8 Secondly, the areas in which the country is supposed to have comparative advantage has so far remained unclear. This is not a plea for an "industrial targeting" which currently draws a growing attention in both trade talks and trade policy studies, apparently because of a wrong interpretation of Japan's success. 9 Nevertheless, the lack of focus in export policy can ironically result in an active policy in all areas, assuming that in a dynamic world a country can achieve international competitiveness in any economic activity regardless of factor endowments. If this is the case, the country concerned will find it very difficult to participate actively in international trade talks which seek to reduce, if not to eliminate, barriers to trade. Thirdly, it takes time to recognize fully that a country, such as Indonesia, with a vast territC'lry and a population of approximately 170 million, currently needs to rely on external markets. Finally, the Indonesian experience in trade liberalization is limited. In spite of these problems, which imply a resistance to trade liberalization, the course of policy reform in favour of exports initiated in the early 1980s is likely to continue.

Indonesia's Interest in the Uruguay Round

Changing Perceptions The previous section argues that the various changes in the economic environment facing Indonesia have necessitated a new policy direction. A strategy which relies heavily on an import-substituting industrialization is, at least for the time being, unsustainable as the necessary foreign exchange can no longer be made available by the primary sector or the government. Given

Indonesia 43

the unemployment problems and the tight foreign exchange constraint, the logical policy to be pursued is one of export-led development, though some people recommend a return to an inward-looking policy precisely because of the unfavourable balance of payments position. And the response of the government in the last six years of policy reform clearly indicates a preference for an export-led strategy. This shift in development strategy makes the issues of trade liberalization increasingly relevant to the making of economic policy in Indonesia. Indonesia export trade is going to be increasingly GAIT-relevant. The greater the shares of textiles, garments, footwear, and electrical appliances in total exports, the more urgent an active participation in GATT. At the same time, the relative importance of each of the major trading partners of Indonesia is likely to change, given the existing tendency of the export of a particular product to concentrate on certain markets. The most important destination of Indonesia's export of manufactured products in 1985 and 1986 was the United States followed by ASEAN-6, East Asian NICs, EC12 and Japan (Table 11-3). This is not immaterial in view of the different importance attached by each of these countries to the individual trade policy issues dominating the current trade talks or negotiations. The greater the reliance on export of manufactured products, the more important it will be for Indonesia to be sensitive to issues which are perceived to be important by the United States, the EEC, the East Asian NICs, and Japan. TABLE 11-3 Indonesia's External Trade According to Major Trading Partners, 1986 (In percentages)

All countries Japan United States A SEAN Singapore Asian NICs2 Hong Kong European Communities Other 1

2

Total Export

Manufactures Only1

Total Import

100 45

100 7

20

26

10 8 7 2 9 9

21 15 16 10 15 15

100 29 14 10 9 6

SITC 5 to 8 minus SITC 68. Hong Kong, South Korea, Taiwan.

SOURCE: Central Bureau of Statistics.

17 23

44 Suhadi Mangkusuwondo et al.

Trade liberalization, which is necessary for the success of the export-led strategy, can proceed unilaterally, bilaterally, regionally, and multilaterally. Each of these approaches has a role to play in the overall trade liberalization. Increased globalization of economic phenomena does not make unilateral, bilateral and regional efforts redundant. In fact, Indonesia has initiated unilateral liberalization to support its new policy orientation. ASEAN countries have also agreed on a substantial liberalization of intra-ASEAN trade .. However, to mobilize the necessary support for trade liberalization, it is important that similar progress takes place elsewhere. To use the mercantilistic vocabulary of GATT, the extent to which the Indonesian Government can maintain the present positive attitude towards a more open trade depends partly on the improvement of market access Indonesia can enjoy elsewhere. Seen from this perspective, multilateral negotiation in the framework of GATT is superior to unilateral or regional initiatives as it offers the possibility of exchanging "concessions" under the principles of reciprocity. Indonesia joined GATT as early as 1949. However, it did not participate fully in the negotiations that followed partly because of the very narrow range of products exported by Indonesia in the early years of its membership in GATT, and partly because Indonesia was not represented in Geneva. The first time Indonesia was seriously involved in GATT l)egotiations was in 1961 when it had to negotiate the postponement of the implementation of Tariff Schedule XXI. Re-negotiation of Tariff Schedule XXI was completed in 1984 resulting in bilateral agreements with the United States, Western European countries, Japan, New Zealand, Czechoslovakia, Finland, and Australia. The second important involvement of Indonesia in GATT took place during the Kennedy Round. Indonesia's exports at this stage consisted nearly exclusively of primary commodities, notably petroleum, timber, tin, bauxite, rubber, and tea. The rates of tariff on these commodities in the developed countries ranged from zero to 5 per cent. The result of the Kennedy Round was basically immaterial to Indonesia's exports in the 1960s. The period between 1964 and 1967 was a period of economic chaos in Indonesia. Selfreliance was promoted vehemently and relations with the capitalist countries were under great stress. What the Government of Indonesia propagated was a new world where the trade system was supposed to be totally different from GATT. Immediately after President Soeharto came to power in 1967 Indonesia launched a rehabilitation programme which included the restoration of relations with the developed countries of the West as well as multilateral institutions including GATT. A "Trade Promotion Centre" was set up in Geneva in 1968 with the primary mission of representing Indonesia in multilateral trade negotiations. Again, Indonesian involvement in GATT remained at a minimum -- this was not only because of the fact that the Kennedy Round had been concluded but also because of the country's concentration on the activities of UNCTAD.

Indonesia 45

The period covered by the Tokyo Round was one of highly favourable commodity prices for Indonesia. There seemed to be no reason at all for Indonesia to be concerned about market access. The sellers' market prevailed in commodity trade, resulting in further radicalization of developing countries' proposals in UNCTAD. The manufacturing sector expanded rapidly with the support of revenues from oil and the government's generosity in granting protection to import-substituting industries. There was no need for the Indonesian manufacturing sector to rely on export, implying that questions of access to markets was basically irrelevant. In other words, the urgency to actively participate in the Tokyo Round was not felt. The belief was still very much alive that UNCTAD rather than GATT was the appropriate forum in which Indonesia should pursue its trade policy interests. The situation has changed dramatically since 1982. The adjustments initiated in subsequent years have resulted in a rapid increase of manufactured exports, especially apparel with a strong reliance on the American market. The scheme of Export Certificates which actually was a drawback system with a subsidy content, was seen by the U.S. Government as an important ingredient of the good performance of export of manufactured products in the American market. Accordingly, Indonesia was asked to phase out the Export Certificates scheme and to accede to the Code on Subsidies. Thus, for the first time, Indonesia was challenged to make a substantive decision as part of its participation in GATT. Refusing to sign the Code on Subsidies would enable the United States to impose unilaterally countervailing measures against imports from Indonesia without the obligation to prove that American industry was injured by Indonesian imports. Although, the replacement of the Certificate of Export by a pure drawback was seen with some concern in Indonesia -- it meant less incentive to export and an erosion in the country's competitive edge against subsidized export from other sources-- the government decided to accede to the Code on Subsidies. This accession marked the beginning of an active participation of Indonesia in the GATT negotiations. While it was primarily aimed at protecting access to the American market, it set forth a process of discovering the merits of GATT, ending the long period where GATT was merely seen as a club of rich countries. A Review of GAIT The primary issue of interest to all GATT signatories relates to the review of GATT norms, both the substantive and the procedural ones as they are grouped by Finlaysqn and Zacher. 10 One of these substantive norms is known as the principle of unconditional non-discrimination. The world today is full of discriminatory trading arrangements. From the outset, the European Economic Community has had an external trade policy which in reality is nothing but a collection of preferential arrangements with varying margins of preferences. Newcomers in trade in textile have

46 Suhadi Mangkusuwondo et a/.

suffered from discriminatory treatment, and there is no sign in sight that this discrimination will come to a halt. Preferential treatment has always been among the instruments of "benefaction" employed by rich countries to secure the "friendship" of certain countries. It is used by the European Communities in their relations with countries around the Mediterranean Sea and with former colonies in Africa, the Caribbean, and the Pacific. Only recently the United States announced its "Caribbean Initiatives". Thus, there is the supply side Of preferential treatment. Finally, the developing countries themselves argu~ that the conditions they are facing are "special" as compared with the conditions prevailing in the developed countries of GAIT. On this basis, they ask for differential treatment which they got first in the form of Part IV of GAIT in 1965 and in the form of a "Generalized System of Preferences" (GSP) since early 1970_11 The extent to which Part IV of GAIT and the GSP have benefited developing countries more than a strict non-discrimination would have, is likely to remain controversial. An across-the-board reduction of barriers to trade applicable to all products is likely to be more beneficial to developing countries than the present GSP which is highly restrictive precisely in respect of the items in which the developing countries have acquired comparative advantage vis-a-vis the developed countries. A GSP which is more liberal in terms of its product coverage, on the other hand, is certainly more beneficial than the existing GSP and, depending on the specific terms, can even outweigh the benefit emanating from a strict non-discrimination from the viewpoint of the recipient. A comparison between GSP and reduction of barriers on a nondiscriminatory way requires a precise knowledge about what the specific elements of the two choices are. Suppose that during the Uruguay Round barriers to trade are to be cut in a progressive way (that is, the higher the existing rate the higher the reduction) developing countries need not insist on special and differential (S&D) treatment in order to benefit from this liberalization. Such a formula is bound to have a greater liberalizing effect in items of particular interest to developing countries due to the fact that it is precisely these items on which the developed countries impose the highest level of protection. This issue of non-discrimination versus S&D is of crucial importance to the Uruguay Round and future works of GATT. The participation of developing countries in GATT is attached a great importance by the Seven WisemenY In the words of Gilbert Winham, the greatest problem of the world trading system is how to integrate the developing countries fully into that system. 13 Yet, S&D is seen by these countries, including the most advanced among them, as a condition for full participation in GATT, in spite of the obvious success of an increased number of developing countries to outcompete the developed countries in an increased number of cases. This position is untenable in the long run. The fact that some developing countries

Indonesia 47

have now been called "newly developed" countries implies that the special conditions on which the differential treatment is based, have improved. This brings us to the issue of graduation which de facto has taken place in that the developed countries attenuate the preferences granted to this group of developing countries. Such a graduation is also in the interest of the less developed members of the Third World as it will lead to a distribution of whatever benefit the differential treatment produces. A question then arises as to when the special conditions enjoyed by a product or a country end and when the respective countries should start to assume the role which a developed country is expected to play, including the role of providing differential treatment in favour of less developed countries. Similar to most governments of developing countries, the Government of Indonesia attaches great importance to S&D in accordance with the "development norm" as stipulated in Part IV of GAIT. Indeed, among the main objectives pursued by Indonesia in the Uruguay Round is the strengthening of Part IV of GAIT, reflecting partly the increased importance of market access to Indonesia's export which in turn is shifting more and more in favour of manufactured products as described earlier. The extent to which this particular type of treatment has benefited Indonesia is so far unclear as it was supply constraint rather than restriction of market access that until recently ranked highest among the problems afflicting Indonesia's export. The improved performance of Indonesia's export of manufactured products at a time when import restriction in major markets is tightening rather than loosening indicates, however, that a reduction of barriers on a nondiscriminatory basis can turn out to be more beneficial than a differential treatment of the type of the present GSP which tends to benefit the more advanced developing countries than the less advanced ones. The practice of the GSP has, in fact, demonstrated how developed countries can misuse the GSP as an ambush for hidden protection. In short, there is not enough evidence to suggest that Indonesia's participation in GAIT should be made conditional on a continuous willingness of the developed countries to grant S&D treatment. Closely related to the GAIT principles of non-discrimination is the principle of reciprocity which recently emerged as one of the burning issues in international trade policy debates, following the world-wide campaign led by the United States for a "fair trade" which is supposed to include reciprocity. Compared to non-discrimination, reciprocity is less essential to the functioning of GAIT. It is the clearest trace left by mercantilists in GAIT, because asking for reciprocity is tantamount to saying that the reduction of trade barriers produces losses rather than gains to the country concerned. Indeed, some observers argue that the inclusion of reciprocity as one of the substantive principles of GAIT was the work of the Americans who, unlike the British, had a long tradition of reciprocity before they designed GATT. 14 Nevertheless, Americans, too, were flexible enough to compromise in respect

48 Suhadi Mangkusuwondo et a/.

of the principles of reciprocity when the United States offered, practically in a unilateral way, reductions of tariffs in the early days of GATI and when it endorsed the establishment of the EEC. That "reciprotarians" (those who subscribed to the principles of reciprocity) are now dominating the making of trade policy of the United States is of far-reaching consequence to the future of GATI. Some regime theoreticians maintain that the willingness of the United States as the hegemony to lead GATI and to bear the costs arising therefrom in the form of markets opening in favour of the "followers" in GATI, is a necessary condition for the functioning of GATI as a regime of free trade. 15 Now that the United States is abandoning this role of a hegemony and is becoming the firmest proponent of reciprocity, GATI is somehow deprived of the "locomotive" of negotiation. The campaign of the United States for aggressive reciprocity which implies "an-eye-for-an-eye" principle, in contrast to the general reciprocity in which the equality of concession and compensation is of secondary importance, especially vis-a-vis the East Asian countries, has produced to some extent the intended results. In one way or another, these countries have responded positively to the various elements of the reciprocity sought by the United States, lest the failure to do so will cost a great deal in terms of erosion of access to the American market. What is more, positive response alone is becoming insufficient. Increasingly, the United States insists on bilateral balance as a sign of a fair trade. Should the United States stick to this version of reciprocity, world trade is likely to decline rapidly as all American trade partners are forced to suppress their export to the United States to the level of their respective import which in turn is constrained by the limited supply of export on the side of the United States. In that it attaches too great an importance to reciprocity, which is unlikely to work as a panacea to the American trade deficit, the United States has ironically undermined its credibility as the country that urged impatiently the launching of the new MTN round. Nevertheless, there is an urgent need to create the awareness among all signatories of GATI that the reduction of trade barriers is in the long-run interest of the initiating country itself. As mentioned. earlier, Indonesia has in fact initiated some market-opening steps in recent years without bothering about reciprocity. Tariff rates have been reduced considerably, while nontariff barriers have been relaxed in terms of their restrictiveness. The third principle that deserves special attention in the review of GA TI relates to the applicability of GA TI to all merchandise. This is sometimes called "the principle of totality" in the sense that GATI rules apply equally to all commodities. In reality, however, GATT has never fully covered all commodities trade by its signatory countries. Agricultural products have never been seriously covered in the previous seven rounds of GATI. Textiles and products thereof have practically been "ousted" from GATT since the mid1950s to be governed by arrangements which in many aspects contradict the

Indonesia 49

GAlT principles and rules. Trade in consumer electronics especially TV sets and video recorders, trade in cars, footwear, integrated circuits, and trade in iron and steel have all suffered from the same disease of selectivity. Given the tendency of export to concentrate on several commodities and the fact that selectivity is granted first and foremost to industries which are perceived to be sensitive, selectivity is very likely to be discriminatory at the same time. 16 Developing countries are indeed the ones who suffer most from the present selectivity, because the composition of export from these countries is dominated precisely by those items which enjoy extra-ordinarily high protection in the developed countries.

Trade in Agriculture: The Need for More Discipline Agriculture, livestock and fishery contributed 24 per cent to Indonesia's GOP in 1986_17 The contribution of the agricultural sector to overall employment in Indonesia in 1985 was no less than 53 per cent. 18 Yet, Indonesia does not belong to the group of major agricultural exporting countries. Trade in items belonging to SITC 0 and SITC 4 is exhibiting a small but growing surplus. However, Indonesia's export of agricultural products consists mainly of fish, coffee, tea, cocoa, spices which, together, constituted 86 per cent and 78 per cent of total export of agricultural products in 1985 and 1986, respectively. In other words, what is understood as agricultural trade issues is hardly of relevance to Indonesia at present, with the notable exception of palm oil exports. Indonesia's agricultural imports, on the other hand, are dominated by items which are central to the discussion of agricultural trade in recent years. Most important among them are cereals which contributed 44 per cent and 49 per cent to total agricultural imports in 1985 and 1986 respectively. These figures suggest that Indonesia's interest in negotiating trade in agriculture is really the interest of an importer rather than that of an exporter. Nevertheless, Indonesia's position on trade in agriculture will be shaped by the following considerations. First of all, many Indonesians believe that the country possesses "latent" advantages in a wide range of agricultural activities, thanks to the country's climatic conditions and abundant labour force. Accordingly, farming and breeding are treated as infant industries. Self-sufficiency is sought in a number of crops with a reliance on government support in some cases. The result seems to confirm the existence of "latent" advantages. Indonesia has changed its position from the world's biggest rice importer in the 1970s to a minor exporter in the 1980s. A substantial increase in export is also demonstrated in sugar, soya bean, fruits and vegetables, chicken, eggs, bovine meat, and milk. The drive towards self-sufficiency reflects a strong preference for food security. Yet it is difficult to determine the level of production that ensures enough food security. In this connection, it is important to take note of problems that arise from import dependence. In the early 1970s, Indonesia

50 Suhadi Mangkusuwondo et a/.

had a bitter experience when traditional exporters of rice cut their export following an extraordinarily bad harvest. However, problems of this kind are global rather than national in nature. The third argument in favour of a protectionist policy relates to unemployment. Serious problems of underemployment, a rapidly growing labour force, and the relative immobility of agricultural labourers constitute, indeed, a serious obstacle to liberalization, particularly if liberalization does not occur globally. The situation is not hopeless. Indonesia has also some reasons to seek freer trade in agriculture. Palm oil, for instance, contributed 2.23 per cent and 1.1 per cent to Indonesia's total export in 1985 and 1986, respectively. Its employment contribution is more crucial in certain regions. Production and export are expected to increase rapidly as new plantations are maturing and the country's labour cost advantage vis-a-vis its major competitor, Malaysia, is widening. The drive towards self-sufficiency is further constrained by the worsening resource position of the government. Subsidies to agricultural inputs have, in fact, been consistently cut. While the self-sufficiency programme in rice is likely to continue, other crops such as sugar and soya bean have to live with dwindling support. Finally, there is the question of ASEAN solidarity. Indonesia's participation in the Cairns Group is partly intended as a show of support for Thailand's position. In return, Indonesia expects Thailand and other member of the Cairns Group to support Indonesia's position on tropical products. It follows from the above that the position of Indonesia on the various issues of trade in agriculture is likely to contain some inconsistencies. Overall, however, Indonesia endorses the idea of integrating trade in agriculture into the GATT sytem. It is willing to offer some concessions in the form of pricesupport cuts. The Old Issues of Protection Escalation

Commodity trade has always been of crucial importance to Indonesia's economic development. Coffee, tea, cocoa, and spices are well known among the traditional commodities exported by Indonesia. Of much greater importance in terms of export value are, however, mineral-based commodities. Inedible raw materials (SITC 2), crude petroleum and natural gas (SITC 3), and basic manufactured goods (SITC 6) contributed nearly 86 per cent to total export in 1985. Notwithstanding the abrupt decline in oil price, Indonesia's export continues to depend strongly on primary commodities. The products in SITC 1, 2, 3, 4 and 6 constituted 80 per cent of Indonesia's export in 1986. Among the most important items are crude, rubber, wood, lumber and cork, metalliferous ores, in addition of course to petroleum and gas. The last few years have witnessed a shift in the structure of Indonesia's export of primary commodities. The share of SITC 2 declined from 16 per

Indonesia 51

cent in 1980 to 10 per cent in 1986 while the share of semi-processed raw materials or SITC 6 increased from 3 per cent in 1980 to 13 per cent in 1986, indicating success in diversification, especially in the case of wood, natural gas, and several metallic products. Given the important role of primary commodities as foreign-exchange earners, Indonesia attaches great importance to issues of commodity trade. It actively seeks the implementation of UNCTAD's Integrated Commodity Programme; it is a member of different commodity agreements; and it constantly draws attention to commodity-related issues while dealing with the major trading countries through the external dialogues of ASEAN. It is not surprising, therefore, that Indonesia wants to see commodity issues being addressed by GATT19 even though GATT practically has no experience in dealing with commodities. Protection escalation ranks high in Indonesia's trade policy agenda, now that the number of options open to the country to generate sufficient foreign exchange for the already import-dependent development is limited. Further processing of raw materials and labour-intensive manufacturing activities are thought to be the most feasible among the few options. Accordingly, the phasing-out of protection escalation is among the most important objectives of Indonesia's participation in the Uruguay Round, especially in respect of tropical products and resource-based products, such as wood products, rubber products, non-ferrous metals, and so forth. There are three main components of protection escalation. 20 The first and perhaps the best known component is the tariff escalation (see Table 11-4). In Japan, for example, the simple average rate of tariff on wood raw materials is as low as 1.4 per cent while the corresponding rate on finished manufactures is still as high as 6.4 per cent. The second component consists of non-tariff barriers which largely take the form of quotas or technical barriers as found out by the UNCTAD Secretariat. 21 While lumber can enter the Japanese market free of any trade barrier, a quota is imposed on the import of plywood. The third and least known component is international shipping rates which tend to penalize exports of processed products from the developing countries including lndonesia. 22 It is perhaps time for GATT to consider government subsidy to the development of new materials as part of the commodity issues that need to be addressed. If developing countries are often-time accused of outcompeting developed countries through unfairly low wages, the developed countries can also be accused of driving traditional materials out of the market through massive subsidization of substitute materials. Subsidized silicon fibre is likely to replace copper in the latter's most important market, namely wire, while fine or advanced ceramics may soon appear as a serious competitor for a number of strategic materials such as platinum, chrome, and cobalt. 23 Subsidies are sometimes consciously aimed at replacing imported material even though the reason may not be exclusively protectionist. The process of

52 Suluuli Mangkusuwondo et a/.

TABLEII-4 Post-Tokyo-Round Tariff Averages

Raw Materials

United States Canada Japan EC Austria Finland Norway Sweden Switzerland

Wood, pulp, paper, furniture Textiles & clothing Leather, rubber, footwear and travel goods Base metals Minerals, precious stones and metals

SemiManufactures

FinishedManufactures

WA

SA

WA

SA

WA

SA

0.2 0.5 0.5 0.2 0.8 0.3 0.0 0.0 0.2

1.8 2.6 1.4 1.6 1.9 0.5 0.9 0.4 1.5

3.0 8.3 4.6 4.2 4.7 5.9 1.4 3.3 1.2

5.7 6.6 6.3 6.2 7.3 11.7 5.4 5.1 2.8

5.7 8.3 6.0 6.9 16.1 6.1 4.2 4.9 3.1

7.0 8.1 6.4 7.0 9.1 12.0 7.8 5.1 3.0

0.2 0.8

0.7 2.9

1.9 11.5

3.7 9.6

4.2 16.7

5.1 11.8

0.0 0.0

1.0 0.2

4.4 3.2

4.5 4.6

10.2 5.9

10.2 6.1

0.3

1.4

1.1

3.6

6.9

6.5

Notes: W A ; weighted average. SA ; simple average. SOURCE:

GATT as quoted by Leslie Alan Glick in Multilateral Trade Negotiations, World Trade after the Tokyo Round (New Jersey: Rowman & Allanheld, 1984).

substitution is usually irreversible once it has been initiated as clearly reflected in the cases of synthetic rubber and synthetic fibres, though the substitution has turned out to be only partial. The logical objective of a negotiation on protection de-escalation would be the minimization of the tariff range according to the degree of processing and the phasing out of non-tariff barriers or conversion thereof into tariff. However, the extent to which such steps of liberalization can lead to higher export of the respective exporting countries, is unknown. Some observers believe that the "forgone export" due to protection escalation is considerable, implying that a protection de-escalation would lead to a substantial increase in

Indonesia 53

the export of resource-rich countries. Other observers, however, are less optimistic. 24 Yet the demand of resource-exporting countries for protection de-escalation is likely to result in a counter-demand of resource-importing countries for a freer access to supply. Elements of such a freer access can consist of rules against cartelization, rules on export duty and rules on export ban on crude materials. Indonesia's demand for protection de-escalation for instance seems to have sounded less convincing in view of its own tendency to rely on escalating restrictions on access to supply as clearly reflected in the ban on export of lumber and raw rattan. Finally, it is not only the developed countries which indulge in the practices of protection escalation. Developing countries, including fndonesia, prohibit the importation of a wide range of finished products such as "built-up" road vehicles while zero tariff is imposed on capital goods such as machinery. Protection escalation is widely practiced by both developed and developing countries, although it is the developing countries which traditionally complain about it. To what extent the developing countries can continue to hide behind their backwardness in defending their own protectionism as regards trade in primary commodities is an open question. Trade in Manufactured Products: Elimination of Grey Measures The last fifteen years or so have witnessed a rapid growth of importsubstituting industries in Indonesia for various reasons. The large domestic market with a high level of protection has worked as a strong incentive to private investors, both national and foreign, to invest in Indonesia and to create a captive market to the farthest possible extent. At the same time, the oil boom and the related improvement in credit-worthiness have made it possible for the government to embark upon a number of large industrial projects which basically are aimed at reducing Indonesia's import dependence. During this period the main, if not the only, task of trade and industrial policy was to provide protection to domestic production which is high enough to nullify the advantages possessed by foreign producers. Beginning in the early 1980s, however, it became clear that this strategy had reached its limits. First of all, the first stage of import substitution has by and large been completed. Many industries in this category are presently facing a stagnating domestic market, meaning that further grdwth has to rely on exports. Secondly, the development of the import-substituting industries in the areas of producers' goods is economically even less viable as the domestic market in most cases is simply too small in terms of the scale needed for efficient production. Furthermore, the country is confronted with tightening foreignexchange and savings constraints. Therefore, Indonesia's economic development in the years to come is crucially dependent on manufactured exports, which calls for changes in trade policy. Indonesia is a newcomer as an exporter of manufactured products. As noted earlier, the combined share of chemical products (SITC 5), machinery

54 Suhadi Mangkusuwondo et al.

and transport equipment (SITC 7) and miscellaneous manufactured articles (SITC 8) in total exports was as low as 4 per cent in 1985, despite the high growth rate of export in these categories in the ten-year period ending in 1985. Within the category of manufactured products only a few items are of export significance, namely: fertilizer, plywood, textiles and clothing. Other items such as furniture and footwear may exhibit a steady growth but have remained very small in terms of value. Interestingly, a number of products appeared for the first time in export statistics in 1985. In fact, the bulk of the exports in SITC 7 in 1985 was contributed by new items. On the other hand, some products exported in the past have disappeared from the 1985 export statistics. Among these products are machines for special industries (SITC 718) and aircraft (SITC 734 ), to mention just two examples. Indonesia's manufactured exports are thus few in number and small in terms of value. At a time when Indonesia has finally realized the relevance of manufactured exports to its economic development, the international trading environment suffers from different forms of erosion. In this regard, there are issues which rank very high in the trade policy agenda of Indonesia today and in the near future. The first issue relates to "selectivity" as reflected in the Multi-Fibre Arrangement (MFA) in the area of textiles and apparel, agreements on trade in steel and products thereof, and similar arrangements for trade in footwear, colour television sets and integrated circuits. 25 One after another, these products have been classified as sensitive products by the developed countries. Those agreements penalize newcomers more than the established ones as the importing country limits the growth of imports arresting the imports from newcomers at a low level. At present, it is only the MFA that is of immediate relevance to Indonesia. Apparel is the most important item among Indonesia's manufactured exports, if plywood is classified as a primary commodity. This situation, however, is changing. Trade statistics for 1986 suggest that, in addition to apparel exports which continue to grow, steel and electronics have been growing in importance, meaning that product-specific trade arrangements, in addition to the MFA, will become increasingly relevant to Indonesia. Selective trade agreements are condemned by the Government of Indonesia as a clear violation of the GATT rules. Behind this criticism, however, lies an ambivalence. While the imports of selectively protected products to the developed countries are expected to increase following the elimination of selective agreements, it is feared that such an increase will benefit only the more advanced countries of the Third World, such as the Asian NICs. Country quotas are therefore seen with mixed feelings. Exporters of manufactures tend to prefer the regulation of trade through country quotas as it prevents the established suppliers from out-competing the late-comers. The government position on this issue has, however, changed for

Indonesia 55

the better. The Indonesian Government currently maintains that the present MFA should be the last of its kind, and that it should be followed by a transition period at the end of which the GA1T rules will be fully restored for trade in textiles and apparel. Whether or not selective agreements of the type of the MFA have benefited the less advanced countries of the Third World is empirically unclear. It appears that the MFA is penalizing rather than protecting countries like Bangladesh. 26 That this suggestion may apply to other developing countries as well is at least indicated in some studies.27 It may be argued that the phasing-out of selective arrangements will facilitate the exploitation of comparative advantages to the fullest possible extent. This is of particular relevance to Indonesia, whose export of manufactured products is critically dependent on a few items which in turn are vulnerable to selective arrangements. The second group of issues relate to subsidies and dumping.' The United States, in particular, has initiated a large and growing number of investigations against subsidized or dumped products in recent years. 28 While Indonesia has never been the direct target of these investigations, there are signs that things may change in the immediate future. Indonesia has been accused of subsidizing its textile exports to the United States. And, Indonesia has acceded to the GA1T Code on Subsidies lest a refusal to do so might cost a great deal in terms of access to the American market. While a priori there is nothing wrong in such investigations, the fact that a large number of them have proved groundless indicates a need for more discipline in initiating such investigations. Once the process is initiated, the probability is high that it will lead to agreements which restrict trade, such as voluntary export restraint, irrespective of the final finding of the investigation. In its own market, domestic as well as overseas, Indonesia may have been facing unfair competition through subsidized or dumped foreign products without creating much noise. At a time when Indonesia has just started to export a substantial amount of fertilizer, other exporters seem to have flooded the market with the help of dumping. However, inyestigation against such practices has never been formally initiated, presumably because of the high costs involved. Nevertheless, the existing arrangements are considered inadequate to contain the practice of subsidy and dumping. Of no less importance are issues related to the GSP, which became relevant to Indonesia only recently. Indonesia has benefited little from the GSP due to the commodity composition of its exports which has little GSP relevance. Politically, however, the GSP is seen as a symbol of success of the economic diplomacy of the developing world. Being a prominent member of the Group of 77, Indonesia is unlikely to dismiss the GSP in favour of an MFN reduction of trade barriers. However, the future of the GSP is largely dependent on the "donor" countries which can withdraw the facility unilaterally. In fact, the margin of preference in the various GSP schemes has

56 Suhodi Mangkusuwondo et a/.

been eroded over the years. Tariff quotas for the so-called "sensitive" items are usually very low. Erosion of the value of GSP can also take the form of conditionality, for example, the linkage of the American GSP with the willingness of Indonesia to accept the principle of reciprocity. Furthermore, the administration of the GSP increasingly becomes burdensome, eroding further the benefit arising from the tariff preferences. Finally, the support to the GSP on the "donor" countries' side has clearly weakened. The net upshot may not be an outright rejection of the idea, but the overall gains from the GSP are likely to be negligible compared to the potential gain from a nondiscriminatory liberalization. Thus, there are strong reasons for the Indonesian Government to rethink its position on the GSP.

The New Issues: Agreement in Principle As is well known, the United States has insisted on some new issues being put on the agenda of trade talks. In fact, the United States has initiated bilateral negotiations in a forceful way using the old stick-and-carrot tactic. 29 Indonesia, with its growing dependence on the American market, has found it in its interest to respond positively to the United States' demand, but it prefers a multilateral solution to a bilateral one. Indonesia's balance of trade in services has consistently shown a big deficit. Investment income (which hardly is of relevance to GATT) is the most important among the items contributing to the services deficit. However, deficit in other services including travel, is also substantial. Unfortunately, detailed data are not available. Trade statistics relating to banking services, insurance services, telecommunication services, engineering services, and entertainment services are not available. Furthermore, the available statistics are released on a net basis apart from few exceptions such as travel. Hence, it is impossible to evaluate Indonesia's position on services based on available statistics. All that one can say is that Indonesia is a country with huge deficits in trade in services. The implication is that a cautious approach to further liberalization of its services market will be in order. The negotiation of trade in services entails many difficulties. First, the discussion has remained inconclusive as regards the coverage of services. 30 Secondly, the nature and extent of the barriers to trade in services are far more complex than they are in the case of trade in merchandise. Trade in services requires, in many cases, the physical presence of sellers in the relevant markets, meaning that it is restriction on entry rather than restriction on trade that is at issue. Thirdly, liberalization of trade in services implies in many cases improved entry to industry which in extreme cases means national treatment of foreign participants. Finally, banking, insurance, and transportation, which perhaps constitute the most important segment of the highly protected service industries, 31 are treated as sensitive areas where participation of non-nationals is subject to tight limitations. A cautious attitude does not mean a refusal to talk about trade in

Indonesia 57

services. Together with other ASEAN countries, Indonesia has in fact endorsed the idea of negotiating trade in services multilaterally, as the need for rules is also felt in Indonesia. On the other hand, negotiation on trade in services should not ignore the existence of sector-specific agreements on services such as the U.N. Convention on Shipping and the International Telecommunication Union. The various agencies dealing with services in Indonesia find it possible or even desirable to equip these sectoral agreements with sections to deal specifically with trade-related issues. Among the new issues which have been widely discussed in Indonesia, are those related to international protection of intellectual properties. The protection of intellectual properties per se is not totally new in Indonesia's legal vocabulary. Indonesia has been a party to the Paris Convention since 1950 despite the lack of a national law on patent, and to the WIPO Convention, though it prefers to stay outside the Berne Convention or the Universal Convention on the protection of copyright. In 1961, Indonesia passed a law on Manufacturers' Marks and Trade Marks, and in 1982 a law on copyright was adopted. 32 What is lacking is a strong commitment to protect foreign rights. This lack of strong commitment is not surprising in historical perspectives. It took the United States a hundred years since the enactment of its copyright law to extend the protection to foreign copyrights. Indeed, the position with respect to the protection of intellectual properties tends to correlate positively to the level of economic development. The more advanced the economy, the more favourable the attitude towards strong protection.33 The last few years have witnessed a changing perception of intellectual properties among Indonesian economists, businessmen, lawyers and government officials due to various reasons. First, competition among domestic companies for an exclusive right of production or distribution of foreign products has perhaps made it impossible for Indonesia to ignore foreign intellectual property rights. Counterfeiting is possible or has been taking place in exceptional cases only, the recording industry being the obvious example. However, the claim by the American Intellectual Property Alliance that counterfeiting on Indonesia's side has cost the American recording, software, and motion picture industries more than US$200 million of annual sales seems an exaggeration. Assuming that counterfeiting is confined to a very ~mall number of industries, the costs in terms of forgone benefits in case of a more effective protection of foreign rights appear to be small. Secondly, the view is increasingly shared that an effective protection of foreign rights can work as a carrot to technology transfers. Finally, the costs of being treated as a "pirating haven" are too high to justify counterfeiting which benefits only a very small number of counterfeiters. As a result of this changing perception, Indonesia has recently passed a new law on copyrights and is currently preparing a patent law as well as amendments to the law on trade marks with a view to strengthening the protection of foreign intellectual property rights.

58 Suhadi Mangkusuwondo et a/.

This changing perception may turn out to be short-lived if other countries, notably the United States, Japan and the European Community fail to reciprocate. In this connection, mention has to be made of the possibility of using the protection of intellectual properties as an excuse for restrictive business practices.34 A negotiation based on reciprocity would, therefore, mean a more effective protection on the one hand and a more effective containment, if not elimination, of property-rights-related restrictive business practices on the other. Furthermore, considering the technological gap and Part IV of GATT, Indonesia is also insisting on preferential treatment in respect of the international system for the protection of intellectual properties. Such preferential treatment may consist of less stringent conditions under which compulsory licensing can be enforced by the government, exclusion of certain areas from the coverage of the protected rights during a specified transition, and a lower rate of royalty in case of licensing.35 If this demand for protection against restrictive business practices and preferential treatment is recognized by the developed countries, countries like Indonesia may find it much easier to mobilize commitment to the protection of intellectual properties.

The Strategy of Negotiation The question of strategy is of no less importance than the ordering of the various issues in terms of their urgency. The suitability of a strategy and the probability of its success depend on numerous factors, some of which are clearly beyond the control of Indonesia. The success of a strategy which relies heavily on the Uruguay Round, for instance, is crucially dependent on the major players including the United States, the EEC, and JapiJ.n. However, there is no need to rely solely on the Uruguay Round. What is more likely in the case of Indonesia is a strategy which employs simultaneously unilateral liberalization, bilateral efforts, regional integration in the sense of preferential reduction of trade barriers, and multilateral negotiations. These approaches are mutually supporting, and not exclusive. Mention has repeatedly been made of the reduction of barriers to trade initiated by Indonesia on a unilateral basis especially in 1986 and 1987. While it certainly makes sense to exchange as far as possible this reduction of trade barriers with similar liberalizing measures in other countries, there is a need for further reduction even in the absence of reciprocity. Further relaxation of import licensing as regards some intermediate products, conversion of nontariff barriers, such as an import ban into tariff protection and the lowering of tariff rates, are indeed necessary in some areas if the growth of exports of manufactures is to be sustained. Otherwise, Indonesia will continue to suffer from rent-seeking activities, a shortage of exportables, and domestic prices which are higher than international prices, making exports virtually

Indonesia 59

unattractive. Unilateral liberalization or deregulation of industrial and trade policies is going to constitute an important part of Indonesia's new strategy in the years to come. It will strengthen the support for a regime of freer trade among Indonesians, if improved access to the major markets can be obtained in exchange for the unilateral initiatives. The lack of such a trade-off, however, is not seen as a prerequisite of liberalization. Indonesia is relatively a small country and a marginal player in GATI. What Indonesia can offer as a concession in the framework of the Uruguay Round cannot be as significant as that which the United States, Japan or the European Community can offer. For this reason, Indonesia needs to build a close coalition with other countries in order to improve its bargaining position vis-a-vis the major trading countries. ASEAN can play an instrumental role. First, freer intra-ASEAN trade can lead to a meaningful division of labour among the ASEAN countries, resulting in improved international competitiveness of the products originating from the region. In this regard, it is noteworthy that the Manila Summit has endorsed the adoption of a five-year target of intra-regional trade liberalization, shortening of the exclusion list, deepening of the margin of preferences, and a standstill and rollback of non-tariff barriers. Secondly, a closer integration of the ASEAN markets will improve the margining position of the ASEAN countries as their ability to offer concessions improves. Thirdly, ASEAN has accumulated a long experience iil dealing jointly with the United States, Japan, the European Community, Canada, Australia, and New Zealand through its external dialogues. This experience can be of some help in the Uruguay Round, though ASEAN has attained little in terms of market access through this external dialogue. Finally, ASEAN countries have frequently sought a common position in GATT and other multilateral institutions. 36 The launching of the Uruguay Round, for instance, was endorsed jointly by the ASEAN countries. Like other ASEAN countries, Indonesia perceives ASEAN as an important forum for dealing with trade policy issues. The common position taken by the ASEAN countries on certain general issues cannot obscure the differences that exist in respect of some specific issues. A look at the commodity composition of the external trade of the ASEAN countries will reveal how difficult it would be to seek an ASEAN position on the liberalization of trade in services or on sector-specific arrangements such as the MFA. Nevertheless, ASEAN countries do have many things in common. All ASEAN members have increasingly been dependent on the United States as their main export market and almost all of them are included in the target of the U.S. fair trade campaign. 37 Furthermore, ASEAN countries can easily agree on some substantive issues such as those related to S&D, standstill and rollback, the strengthening of GATT as regards dispute settlement, and the elimination of protection escalation.

60 Suhadi Mangkusuwondo et a/.

Other groupings can also lend support to Indonesia's goal of securing market access for its manufactured exports. Though less formal than ASEAN, the Pacific Trade Policy Forum, in which pertinent questions on trade policies of the respective participating countries are raised and discussed and the costs of no progress in trade talks are assessed, has also turned out to be useful. The same applies to the Cairns Group in which Indonesia's participation is also aimed at securing the support of the agricultural exporting countries to Indonesia's position on issues relating to tropical products. Finally, mention has to be made of the Group of 77 in UNCTAD, which is still seen by Indonesia as an important forum for dealing with trade policy issues in spite of its obvious failure in the past. As long as GATT is indifferent towards the issues which are perceived to be of crucial importance to the developing countries (such as the issues relating to trade in primary commodities and the indebtedness of developing countries) UNCTAD will perhaps even outweigh GATT as a multilateral forum of immediate relevance to developing countries. The building of a coalition constitutes only part of the elements of a strategy. Of equal importance is a clear sense of priority of issues to be covered in a negotiation. Too wide a coverage can easily lead to unmanageability of the negotiation while too narrow a coverage can make the negotiation unattractive to many countries. Yet finding the "optimum" coverage is difficult. Each participant is likely to come up with a very long list of issues. Such a long list can be counterproductive unless the issues in the list are ranked in terms of priority. Unfortunately, particularistic interests have made it difficult for the participants of the Uruguay Round to produce a clear list of priority. The lack of a clear sense of priority is one of the weaknesses of Indonesia in the Uruguay Round. The preceding analysis points out the need to attach the greatest importance to the phasing-out of protection escalation and the MFA, which in turn calls for serious talks with the United States, Japan, West Germany, and the East Asian NICs without necessarily pursuing a preferential arrangement.

Conclusions and Recommendations For a very long time, Indonesia's participation in GATT was only nominal. The ability of GATT to produce a trading environment conducive to the development needs of less developed countries was perceived to be weak or at least weaker than the ability of UNCTAD, which became the main forum for the developing countries in dealing with international economic issues. It was only recently that people have become more and more realistic as to what UNCTAD can accomplish. Perceptions of GATT constitute only part of the reasons why Indonesia has pursued a passive policy with regard to GATT. In fact, these perceptions were shaped by what happened in the domestic

Indonesia 61

economic policy and political developments. The first thirty years after Indonesia's accession to GATI were not conducive to an active participation. Dominated by primary commodities, the composition of Indonesia's export did not provide an incentive to participate in the GATI initiatives which in turn were concentrated on trade of manufactured products. The first half of the 1960s was characterized by a strong campaign for self-reliance in the course of which GATI was perceived unfavourably. Even the 1970s turned out to be a decade of weak involvement in GATf as Indonesia was preoccupied with the development of import-substituting industries. As sufficient foreign exchange could be made available by the primary commodity sector, the development of Indonesia's industry in the 1970s was designed with a view to exploiting the domestic market behind tariff and non-tariff barriers. Foreign markets had no role to play in this design and, accordingly, access to international markets was a non-issue. The Torquay Round (1951), the Geneva Round (1956), the Dillon Round (1960-62), the Kennedy Round (1963-67) and even the Tokyo Round (1973-79) were completed with little participation on Indonesia's side. In the early 1980s, various developments forced Indonesia to shift to a new development strategy. The government and the academic and business community have finally recognized the need for exports of manufactured products. To facilitate the growth of export of these products the government has implemented two major devaluations and introduced policy packages and trade deregulation measures. There is a widely shared consensus that the main obstacles facing the exports of manufactures are domestic in origin. Supply rigidities, irregularity of delivery, poor quality, high transportation costs, high cost of port services and packaging are among the main problems that have to be solved if manufactured exports are to grow at the desired rate. Nevertheless, the issue of market access is of equal importance. To secure market access, Indonesia can employ different approaches. As a country contributing a relatively small share in international trade, Indonesia now finds GATT as the most suitable forum for pursuing its trade policy interests. What Indonesia can attain through bilateral talks or even through "ganging up" with other ASEAN countries, is believed to be much less than what a multilateral negotiation can offer. Therefore, involvement in GATf is seen as a necessary component of what may be called the new strategy of economic development which Indonesia adheres to. To be more effective, Indonesia's participation in GATI in general, and in the Uruguay Round in particular, requires close co-operation with other countries, the selection of which is increasingly based on the similarity of interests. Furthermore, there is a need to concentrate on the most important issues, without dissipating the limited resources on a wide spectrum of issues. While the demand for special and differential treatment is still alive, policy-makers have realized the limited gain derived by Indonesia from the GSP. A reduction of barriers on an MFN basis with a formula that cuts barriers more rapidly in the items of particular importance to developing

62 Suhadi Mangkusuwondo et a/.

countries, would confer greater benefits. However, Indonesia should be allowed to proceed more slowly than developed countries in liberalizing trade, though the commitment needs to be specified in terms of magnitude and time schedule.

Noms

1

Central Bureau of Statistics, Projection of the Labour Force of Indonesia (Jakarta, 1984).

2

World Bank, Report No. 3795-IND, p. 95.

3

World Bank, Indonesia: Economic Report 1987, p. 6.

4

On the underlying reasons, see for instance, Peter F. Drucker, "The Changed World Economy", Foreign Affairs, Spring 1986.

5

Alexander J. Yeats, "The Incidence of Transport Costs on Indonesian Export to the United States", Bulletin of Indonesian Economic Studies 12 (1976): 69.

6

This policy change was discussed in World Bank, Indonesia: Economic Report 1987, especially pp. 72-95. See also Mari Pangestu, "Towards Trade Reform: Slow but Sure"? Indonesian Quarterly XV, no. 1 (1987): 18-22.

7

The same conclusion can be seen in Hal Hill, "The Indonesian Economy. Survey of Recent Developments", Bulletin of Indonesian Economic Studies, forthcoming.

8

On the level of protection, see Dean A. DeRosa, "ASEAN-U.S. Trade Relations: An Overview",ASEAN Economic Bulletin 3, no. 2 (1986): 169-88.

9

On this debate, see for example, Paul R. Krugman, ed., Strategic Trade Policy and the New International Economics (Cambridge: The MIT Press, 1986).

10

See Jock A. Finlayson and Mark W. Zacher, "The GATT and Regulation of Trade Barriers: Regime Dynamics and Functions", International Organization 35, no. 4 (1981): 561-602. On the need for the review of GATT, see Gardner and Eliza Patterson, "Importance of a GATT Review in the New Negotiations", World Economy 9, no. 2 (June 1986): 153-69.

11

The word "Generalized System" is actually misplaced here. The system has always been highly selective and highly restrictive from the beginning. See, for example, Axel Boorman and Christine Boorman, Das Allgemeine Zollpraeferenzsystem der EG (Hamburg: Verlag Weltarchiv, 1979).

12

General Agreement on Tariffs and Trade, Trade Policies for a Better Future: Proposals for Actions (Geneva: GATT Secretariat, 1985).

13

Gilbert R. Winham, International Trade and the Tokyo Round Negotiation (Princeton: Princeton University Press, 1986), p. 375.

Indonesia 63

14

On this and other issues related to reciprocity see Jagdish N. Bhagwati and Douglas A. Irwin, "The Return of the Reciprotarians-U.S. Trade Policy Today", World Economy 10, no. 10 (1987): 109-30.

15

The conclusion of the Tokyo Round is frequently seen as evidence that GAIT as a trade regime can function without a hegemon. See, nevertheless, Arthur A. Stein, "The Hegemon's Dilemma: Great Britain, the United States, and the International Economic Order", International Organization 38 (Spring 1984): 355-86.

16

To illustrate the linkage between selectivity and discrimination, see Gary C. Hufbauer, Diane T. Berliner, and Kimberley A. Elliott, Trade Protection in the United States, 31 Cases (Washington, D.C.: Institute for International Economics, 1986).

17

Central Bureau of Statistics, National Income of Indonesia. Main Tables (Jakarta, 1987).

18

Central Bureau of Statistics, Population of Indonesia. Results of the 1985 Intercensal Population Survey. (Jakarta, 1987).

19

The incorporation of commodity issues into the GAIT system is sought, for instance, by using the Cairns Group which in fact made mention of t-rade distorting measures in commodities in their Ministerial Statement issued at the end of the Ottawa Meeting, 2123 May 1987.

20

See Alexander Yeats, Trade Barriers Facing Developing Countries (London: McMillan, 1979); see also from the same author, "The Influence of Trade and Commercial Barriers on the Industrial Processing of Natural Resources", World Development 9, no. 5 (1981): 485-94.

21

Quoted by Yeats (1981), op. cit.

22

See Alexander Yeats, "An Analysis of the Incidence of Tariffs and Transport Costs on Indonesian Exports", Bulletin in Indonesian Economic Studies 12 (November 1976): 6176.

23

This kind of subsidy is generally seen as a non-issue in GATT. However, subsidies to R&D activities is one example of what the United States has classified as "upstream subsidy". It is big in magnitude. In 1983 the United States Government spent US$571 million on donations to research and development in bio-technology alone. See U.S. Department of Commerce International Trade Administration, High Technology Industries: Profiles and Outlooks. Biotechnology, Assessment, Strategic Materials: Technologies to Reduce U.S. Import Vulnerability (Washington, D.C., May 1985).

24

See David Wall, "Industrial Processing of Natural Resources", World Development 8 (1980): 317-27. See also his reply to Alexander Yeats' comment on the above paper, World Development 9 (1981): 495-98.

25

These selective arrangements are described in a concise way by Dominick Salvatore in the Editor's Introduction to a Special Issue of the Journal of Policy Modelling on the "New Protectionism and the Threat to World Welfare". See Journal of Policy Modelling 7, no. 1 (Spring 1985).

26

See Dean Spinanger, "Will the Multi-Fibre Arrangement Keep Bangladesh Humble?", World Economy 10, no. 1 (1987): 75-84.

64 Suhadi Mangkusuwondo et al.

27

See for example, Bela Balassa, "The Tokyo Round and the Developing Countries", World Bank Staff Working Paper, no. 370, 1980.

28

See Annual Report of the President of the United States on the Trade Agreements Program 1984-85, Twenty-eighth Issue. Transmitted to Congress February 1986, Appendix Ron Antidumping and Appendix Son Countervailing Duties, pp. 181-97.

29

Some examples are mentioned in the Keynote Speech of Michael Smith, Deputy U.S. Trade Representative, to the First Pacific Trade Forum, 20-22 March 1986, San Francisco. See his speech, "The Pacific Basin's Stake in the New Round Pacific Trade Policy Co-operation", pp. 45-52.

30

See Jagdish N. Bhagwati, "Splintering and Disembodiment of Services and Developing Nations", World Economy 2, no. 2 (June 1984): 133-43.

31

The United States places these three areas of services in the priority area of their trade policy agenda. See the U.S. Trade Representative, Annual Report on National Trade Estimates 1985, in which the pre-occupancies of the United States vis-a-vis each of its trading partners are listed.

32

Little has been written on this topic as far as the economic aspects of it are concerned. Of the very few materials, see for example, R.B. Suhartono, "Intellectual Property", Indonesian Quarterly XV, no. 2 (April1987): 199-218.

33

On this historical perspective, see Edith T. Penrose, The Economics of the Intemational Patent System (Westport: Greenwood Press, 1973).

34

Study on Indonesian experience in this area is hardly available. The way in which restrictive business practices can take place behind patent and other rights is well illustrated in Constantine Vaitsos, Inter-Country Income Distribution and Transnational Enterprises (London: Oxford University Press, 1974).

35

This demand for preferential treatment is not new to international trade negotiations. The Group of77 has raised it, though unsuccessfully, in various UNCfAD meetings.

36

See Hadi Soesastro, "ASEAN's Participation in the GATT", Indonesian Quarterly XV, no. 1 (1987): 107-27.

37

Implications of this increased dependence on the American market is a subject of exploration in Djisman S. Simandjuntak, "ASEAN Relations with the United States: Developments in the 1980s" (Paper presented at a conference jointly organized by Instituto di Studi Europei "Alcide de Gasperi", Rome and the Institute of Southeast Asian Studies, Singapore, convened in Rome, December 1986).

III. TRADE POLICY OPTIONS FOR MALAYSIA

Kamal Salih, Mohd. Haflah Piei, and M. Sahathavan

The World Economic and Trading System and the Malaysian Economy Thanks to favourable raw material prices, Malaysia chalked up an average annual growth rate of 8 per cent (real) over the seventies. This growth was almost entirely financed from domestic savings inflated by the surpluses of the flourishing mineral and plantation sectors. The 1980s, in contrast, have brought forth a different set of circumstances. The collapse of the external sector, cut-backs in government spending, falling domestic and foreign investment, and capital flight, have all contributed to the present economic malaise. By 1985, the economy had to react to a bewildering array of external and internal pressures: the full onslaught of an across-the-board export commodity price slump, followed by a sharp decline in virtually all domestic aggregate expenditure components. These factors combined to produce the first negative ( -1 per cent) real gross domestic product growth recorded since Independence. In contrast, 1986 may best be described as a period of gradual consolidation and stabilization at the margins. Efforts have intensified to reduce deficits on the public budget, and the current and capital accounts of the balance of payments, in an effort to bridge the resource gaps. Simultaneously, attempts were being made to significantly liberalize economic activity from government control. The annual growth rate estimate for 1986 was 1 per cent, attributed mainly to the higher output of palm oil, rubber, crude petroleum, electronics and textiles. As a result of the severe loss of income over the previous two years, aggregate domestic demand declined by 8.6 per cent in 1986.

66 KanwJ Salih eta/.

Moreover, a plethora of cyclical and structural factors continue to impede the spe~d of progress towards recovery. Domestic private investment confidence has yet to recover. Real private investment fell by about 18.5 per cent between 1985 and 1986. Key commodity prices show some signs of firming, but gains made to date are still a long way off from the levels needed to increase export revenues significantly. Export revenue shortfalls are seriously threatening the smooth functioning of funds intermediation that would facilitate the process of growth recovery. Servicing of the external debt continues to remain in high profile, implying that debt-constrained growth will be very much on the cards in the next few years. On the export front, competitive trading pressures have heightened the need for the search for an appropriate level of real exchange rate. While this instrument does appear to have an inestimatable value in laying the foundation for an outward recovery, the heavy short-term economic and social costs of upward adjustment continue to make policy-makers wary of it as a growth instrument. In the world arena, OECD countries have failed to adopt sufficiently strong reflationary policies that would re-ignite growth in primary commodity exporting countries. The spectre of protectionism, particularly in the EEC and the United States, looms large on the list of possible threats to stifle the trade momentum. Over the short to medium term, the major impact of the slow-down is on employment. In the face of weak demand for labour, employment would not be able to significantly offset a labour force growth averaging 2.8 per cent per annum (compared with an employment growth of 1.8-2.0 per cent). Estimates of open unemployment have already risen from 7.6 per cent in 1985 to about 9 per cent for 1986. The generally held prescriptions on the internal side for the present circumstances include the raising of savings level, cutting back imports and encouraging exports {identified in the 1986/87 Budget). The present conditions offer the best opportunity to implement the economic reform measures aimed at economic growth. While privatization is a longer-term phenomenon, deregulation offers more scope over the medium term. Apart from reduced administrative controls and distortions, trade policy reform is essential. Consistency in macro-economic policy-making is highly desirable whereby fiscal, monetary and other policies work in the same desired direction. For example, the industrial policy is linked with export policy, investment policy and the upgrading of skills and technology; these must be co-ordinated and consolidated. The natural tendency for a country like Malaysia to secure prosperity, would be through industrialization and the export of manufactures. However, structural problems such as imbalances and sub-sector bias (narrowly based on a few labour-intensive and resource-based industries), firm bias (in favour of large establishments), trade bias (trade predominated by the electronics and

Malaysia 67

textiles products) and weak inter-industry linkages impede the growth of the sector. The manufactured exports are too narrowly based on a few products, particularly electronics and textiles (which contributed some 63 per cent of total manufactured exports in 1985, of which the semiconductor assembly alone accounted for 36.2 per cent) and are characterized by unskilled labourintensive products that entail simple assembly activities. Despite the foregoing, securing manufactured export growth is essential (which recorded an increase of over 11 per cent between 1985 and 1986). The rise in manufactured exports undoubtedly was related to the lower real exchange rate. Export policies have also exerted a positive influence on manufactured exports. Although the last few years have seen attention being paid to the formulation of an "export policy", it should be noted that export policy itself has two roles: 1. 2.

in encouraging industrial efficiency by exploiting the externality of exporting and competing in world markets, and putting domestic competitors in the domestic market on an equal footing with exporters and foreign competitors thereby preventing the development of inefficient import substitution through export incentives.

Malaysia is an "open economy" in terms of both the trade/GNP ratio and the intensity of trade barriers criteria. Export of goods and non-factor services (NFS) as a proportion of GNP is very high by international standards. It was 56 per cent during 1979-83, increasing to 58 per cent in 1984 and 59 per cent in 1985 and further to 61 per cent in 1986 (Bank Negara, Annual Report, 1986). Import of goods and NFS as a percentage of GDP was 35 during the period 1979-83, and stabilized at around 33 for the subsequent years up to 1986. Japan's leading role in terms of total trade was overtaken marginally by ASEAN as of 1982. By 1985 the role of ASEAN and Japan were about the same (24 per cent). Trade with the EEC has somewhat declined from around 20 per cent in 1975 to about 15 per cent in 1985. No major change has been observed with the United States, the percentage stabilizing around 14 during 1981-85. In terms of growth (1975-85) Japan led the way with 18.1 per cent per annum, with ASEAN trailing at 16.7 per cent per annum. Malaysia's trade with the United States grew at the rate of 14.6 per cent per annum while trade with the EEC grew at the rate of 9.5 per cent per year. Trade with other countries increased at the annual rate of 11.5 per cent (IMF, Direction of Trade Statistics). While the proportion of exports to ASEAN has increased over the past five years, Japan continues to be the next important export market followed by the EEC and the United States for the decade 1975-85. Export growth to Japan was the highest (21.4 per cent per year) followed by ASEAN (15.9 per cent), the United States (12.4 per cent), the EEC (9.6 per cent) and others (14

68 Kamul Salih et al.

per cent). On the import side, ASEAN is again prominent with an annual growth rate of 18.1 per cent followed by the United States (17.4 per cent), Japan (14.9 per cent), the EEC (9.4 per cent) and others (9.3 per cent). The structure of protection in Malaysia is circumscribed by tariff and quantitative restrictions. Import taxes appear to be uniform in their frequency across trade categories with SITC 1, 2 and 7 displaying the highest followed by SITC 4 with the other categories, stabilizing around an average of 5. Quantitative restrictions occur with greater frequency in food (0), beverages and tobacco (1) and crude materials (2) while those on SITC 7, 5, 6 and 8 appear to be lower. Other fiscal charges and advance sales taxes are uniform across all categories. The average (unweighted) ad valorem tariff for Malaysia declined from 15.3 per cent in 1978 to 10.4 per cent during the 1980-83 period. However, it went up in 1984 to 14.6 per cent and has remained at 13.7 per cent in 1985 and 1986 (Sahathevan and Ismail 1987). The overall average tariff would be lower if not for the high tariffs on beverage and tobacco, miscellaneous manufactured goods, machines and transport equipment, basic manufactures and chemicals (De Rosa 1986). In general, effective protection accorded to the major groups have exceeded nominal protection. The average effective protection rate (EPR) increased from 25 per cent in 1965 to 39 per cent in 1978. Effective protection for consumer durables increased sharply from -5 per cent in 1965 to 173 per cent in 1978. Non-durable consumer goods were second in terms of effective protection afforded to industries in 1978. In the case of intermediate products of lower fabrication levels, they received lower levels of protection compared with those with higher levels of fabrication (Ariff and Hill 1985). While studies on the post-1978 levels of effective protection are lacking, they may have increased in view of the industrial strategy pursued after 1980. Ariff and Hill (1985) reported the following additional points on the shifts in Malaysia's comparative advantage indicators: 1.

2.

Export performance ratios were high for major commodities including fuel-based chemicals (SITC 521), wood-based products (SITC 631 and 632), rubber materials (SITC 621), and electrical machinery (SITC 729). Export specialization ratios were high for primary agriculture and mineral resource-intensive products. The sharpest increase occurred in the unskilled labour-intensive manufactures.

The high export ratio exerts a tremendous impact on Malaysia. Movements in the terms of trade affect incomes, savings, investment, and overall growth. During 1984-85, the nation suffered a 5 per cent loss in the terms of trade and a massive 14.2 per cent in 1986 (Bank Negara, Annual Report, 1986). While the merchandise balance continues to improve, services

Malaysia 69

and transfers (net) balance remains an intractable problem, hovering around the M$10 billion mark since 1984, giving rise to a current account deficit. This deficit, however, has begun to decline from M$8 billion in 1983 to around M$1.2 billion in 1986. The current accounts deficit has, therefore, fallen (due to the adjustment measures enforced) from 12.3 per cent of GNP in 1983 to about 1.8 per cent in 1986. Given the structural nature of the service account, the imperatives and future orientation of the economy, as will be highlighted in the next section, trade issues assume great importance. In the past, most of the trade issues of interest to Malaysia were mainly handled through Malaysia's active participation in international and regional organizations other than GATT. In the present context, Malaysia has become increasingly aware of the importance of its active participation in the present round of GAIT's multilateral trade negotiation.

Rationale for Active Participation in the Present MTN Malaysia's active participation in the present rounds of GAIT's multilateral trade negotiation has been the product of both domestic and external factors. On the domestic front, the four-year recessionary trend which bottomedout in the last quarter of 1986 and early 1987, has exposed many structural weaknesses in the economy: heavy dependence on commodity exports; the narrow industrial base; the widening of the resource-gap; the over-extension of the public sector, and the skill and technological deficiency of human resources. Despite advances on some non-traditional export items, particularly of manufactured exports, about 60 per cent of Malaysia's export earnings still come from the commodity exports. Until recently, primary exports had been the major source of growth for the Malaysian economy. However, since 1985, the primary sector has failed to perform, following an across-the-board decline in Malaysia's major commodity prices. The price decline, unprecedented in recent history in terms of pervasiveness as well as the sharpness of the fall, had resulted in a 25.2 per cent contraction in the commodity unit value index. Commodity terms of trade which declined by 5.4 per cent in 1985 plummeted further by about 12 per cent in 1986. These prices changes have subsequently inflicted a substantial loss of about M$7.79 billion (1985: -M$2.31 billion) in commodity export earnings and a fall in Malaysia's per capita GNP for the second consecutive year by 9.8 per cent to M$4,131 in 1986 (1985: -5.7 per cent). The recessionary trend has also brought to light some of the structural problems of the manufacturing sector which has been earmarked to be the leading sector of the economy, particularly through its export-oriented industrialization strategy. However, some of the structural problems such as

70 Kamal Salih et al.

imbalances and sub-sector bias and weak inter-industry linkages, referred to earlier, have tended to impede the growth of the sector. The counter-cyclical expansionary strategy adopted during the early 1980s has given rise to large overall public sector deficits which inevitably entailed substantial increase in domestic and foreign borrowings. Federal government total outstanding debt doubled from M$20.8 billion (41.9 per cent of GNP) in 1979 to M$41.9 billion (70.1 per cent of GNP) in 1982. Such high borrowings led to a large increase in debt servicing. The latter amounted to 12.7 per cent of the total operating expenditure in 1979, increasing to 16.3 per cent by 1982. Meanwhile, the expansion in development expenditure led to a sharp increase in the imports of capital goods and of services. As a result, import intensity rose rather substantially. Imports of goods and non-factor services in proportion to GDP rose by 10 percentage points over the 1979-82 period with growing deficits in the country's balance of payment position which called for greater foreign funding, most of which were met through foreign borrowing rather than through increased foreign direct investment. Consequently, the outstanding foreign debt which stood at M$10.8 billion in 1980 increased more than twofold to reach M$24.3 billion in 1982. To remedy the above structural weaknesses and to put the economy on the road to economic recovery, it was necessary for the country to adjust some of its major economic policies. In the process of economic restructuring, new emphasis was placed on growth, productivity and competition, expansion of the industrial base, search for a niche in the world market-place, and research and development (R&D). Major strands of the strategy include the reorientation and the expansion of the structural base of the manufacturing sector and as well as an increased role of the private sector. The new industrial strategy embedded in the Industrial Master Plan (IMP), 1985-95, calls for a reorientation of Malaysia's industrial policy from that of an inward-looking import substitution stage to a more outwardoriented industrialization involving products of high value-added and technology. Towards this end, the incentive system has to be restructured to foster greater efficiency and competitiveness. Restrictions and biases against the trade sector and foreign direct investments have also to be removed. This is crucial, partly because the new strategy relies heavily on foreign capital and technology, and global marketing capabilities. For the domestic sector is still too weak to provide the main thrust. However, the strategy of export expansion is beset with problems of market penetration: a shrinking share of trade that is transparent and nondiscriminatory; increasing signs of weakening international economic order which include increased demand for protection; and the shift from transparent to opaque protective measures such as voluntary export restraints (VERs) and organized marketing arrangements (OMAs). The above analysis of the problems and prospects of Malaysia's ,_::conomic restructuring underscores the need for the country to seck active

Malaysia 71

participation in the present round of multilateral trade negotiations (M1N). It is gratifying to note that issues of concern to Malaysia are addressed in the present round, including issues relating to trade in tropical (agricultural) products, trade in services, investment regulations, and market access (tariffs andNTBs).

Issues of Concern to Malaysia Having established the rationale for a more active participation by Malaysia in the present MTN, priority issues for Malaysia need to be specified in terms of objectives, costs and benefits. To be realistic, one cannot expect Malaysia to achieve satisfactory results on all the issues in the agenda. Malaysia should therefore concentrate on those issues of immediate concern, especially the following: 1.

2. 3.

trade in agricultural products; trade in tropical products; the MFAs and GSPs.

Trade in Agricultural Products Being a major producer and exporter of agricultural products such as palm oil and cocoa, it would be to Malaysia's advantage to see that trade in these products is conducted in conformity with the GATT disciplines. Issues of major concern to Malaysia in this area include market access (tariff and nontariff restrictions) and the agricultural policies of the industrial countries (subsidies and farm support programmes). While tariff on imports of Malaysia's agricultural products in many developed countries have markedly declined, new forms of non-tariff barriers, which include quantitative restrictions, OMAs, VERs, have proliferated. High tariffs on crude and refined palm oil are still enforced in a number of countries including the EEC (4 and 12 per cent), Canada (12 per cent), Australia (10 per cent) and South Korea (20 per cent tariff-quota). The proposed EEC levy of an additional 350 ECU or US$375 per tonne on all imports of vegetable oils and fats, if implemented, would double the price of palm oil in the EEC and substantially reduce Malaysia's palm oil exports to the EEC. Annually, the EEC as a group absorbs about 10-15 per cent of Malaysia's palm oil exports. Related to tariff issues is the problem of tariff escalations. Table III-1 illustrates tariff and non-tariff rates on a range of agricultural products which are of export interest to Malaysia. The degree of escalation is such that the EPRs for semi-processed and final goods can be very high. This tends to discourage agro-processing and resource-based industrialization which are being vigorously pursued now in Malaysia.

72 Kamal Salih et a/.

TABLE 111-1 Tariff and Non-Tariff Barriers in Industrial Countries

(%)

Percentage of Imports Subject toNTBs

Vegetables Stage 1: fresh or dried Stage 2: prepared

8.9 12.4

38 48

Fruits Stage 1: fresh Stage 2: prepared

4.8 14.4

20 54

Cocoa Stage 1: beans Stage 2: processed Stage 3: chocolate

2.6 4.3 11.8

0 0 14

2.7 8.1

56

2.3 2.9 6.7

0 6 14

Product and Stage of Production

Average Tariff Rates

Oils Stage 1: seeds Stage 2: fixed vegetable oils Rubber stage 1: natural Stage 2: processed Stage 3: rubber articles

33

SOURCE: World Development Report1986.

Of greater dire consequence to the trade prospects of Malaysia's palm oil is the dissemination of discriminatory and distorted information as in the case of the anti-palm oil campaign by the United States America Soyabean Association. Furthermore, two Bills, one in the U.S. House of Representatives and the other in the U.S. Senate, have also been introduced seeking to label palm oil, palm kernel oil and coconut oil as saturated fats. The campaign, effectively an unfair trade practice, might have cost Malaysian exporters some M$27 million in loss of earnings during the first quarter of the year. Annually, the value of U.S. imports of palm oil from Malaysia has been about M$200M$250 million. Another issue concerns the agricultural policies of the industrialized countries. The agricultural subsidy of the EEC's Common Agricultural Policy has resulted in the excessive supply of vegetable oils and fats at a very high cost. Similarly, U.S. grain price supports and acreage controls have encouraged over-production of soya bean. A significant proportion of the

Malaysia 73

excess supply of the vegetable oils and fats finds its way into the world market at a very highly subsidized rate, either to cut losses (in the case of the EEC) or to recapture the original market (in the case of the United States). Consequently, these moves have further depressed the world prices for vegetable oils including palm oil. The subsidized prices of soya bean well below the price of palm oil have resulted in the substitution of palm oil with soya bean from the United States. Hence, India's imports of palm oil from Malaysia which used to be about M$965 million worth in 1984, and M$815 million in 1985 declined markedly to about M$566 million in 1986. In the last two years, palm oil prices plunged by 57.3 per cent from as high as M$1700 per ton in early 1985 to about M$470 per ton in 1986. Prices in 1985 probably fell below the production cost of all but the most efficient estates in Malaysia. As a result, Malaysia suffered a substantial loss of about M$2.3 billion. Therefore, it is extremely important for Malaysia to participate actively in negotiation on this issue. Seen in this light, Malaysia's involvement in the Cairns Group of agricultural "fair traders" seems to be the right move in ensuring that agriculture is placed high on the agenda of the Uruguay Round. As far as Malaysia is concerned, the main objective is to gain freer market access for its agricultural exports. This calls for a more liberalized trade in agriculture particularly in the developed countries which are the dominant actors in most agricultural trade and the major contributors to the present disarray in the world agricultural market. Trade liberalization should not be restricted to tariff reduction only but it should also cover non-tariff and other domestic policies that may have tradedistorting effects such as exports subsidies, variable levies and other domestic policies aimed at farm income supports. Another objective of Malaysia's participation in the MTN is to see that GATT rules and discipline on agricultural trade are strengthened. A critical problem for agricultural exporters, such as Malaysia, concerns quantitative restrictions and domestic subsidies, with selective safeguards by which countries can be singled out as targets for protective measures, and the weakness of GATT mechanisms for surveillance and dispute settlement. The GATT dispute panel, which handles the enforcement of decisions reached, has no real power to put recommendations into effect. Hence, the strengthening of GAlT's capacity and authority to evaluate, expose and sanction violators of agreed-upon accord could be a very important indirect way for the developing countries to gain increased market access. In return, Malaysia may have to offer some "incentives" to the major trading powers. This could come from two fronts: 1.

2.

Malaysia must be prepared to reciprocate albeit less actively, in trade concessions on the premiss that developed countries would then be more willing to make additional concessions. Malaysia may offer a fresh approach to the issue of preferential treatment and graduation.

74 Kamal Salih et al.

With regard to reciprocity in trade concessions, the following proposal may be of interest to both parties. Malaysia may offer to put its industrial protection system up for negotiation, aiming at further liberalization of its manufacturing sectors. This may provide an attractive offer to the major trading partners and could also be used to provide additional leverage for Malaysia in agricultural negotiations during the Uruguay Round. Furthermore, in the process, Malaysia should be able to remove a few of the biases against the agricultural sector vis-a-vis the manufacturing sector that are inherent in the country's protection regime. This would in turn promote the growth of the agricultural sector of the economy. For instance, the export taxes and duties now being imposed on a number of agricultural exports may be a good candidate to be removed. This may improve the competitive edge of the agricultural exports and at the same time provide cheaper inputs for the industries of the developed countries which in turn may encourage them to give additional concession within the sector or across other sectors. In essence, Malaysia, within certain limitations, is in a position to demand greater access for its agricultural exports in return for a future prospect of freer trade in the manufacturing (and possibly in services) and better terms for foreign direct investment. Malaysia may be in the position to offer a fresh approach to the issue of preferential treatment and graduation as an incentive for activating negotiations on agricultural trade. Despite the benefits of the preferential treatment, mainly the GSP, that Malaysia has been enjoying, the hard fact is that such treatment may not easily be forthcoming even in the medium term. Malaysia may be in the next batch of countries to be forced to graduate after the recent graduation of Singapore, Taiwan, Hong Kong and South Korea out of the United States' GSP. Hence, it is appropriate for Malaysia to examine this issue critically with the aim of offering itself for graduation voluntarily on an item-by-item basis. This commitment to graduate voluntarily may hopefully dampen the desire on the part of the major preference-giving countries from taking a more drastic action against Malaysia. Trade in Tropical Products

During the Tokyo Round, the industrial countries agreed to provide tariff and non-tariff concessions on tropical products which are mainly exported by developing countries. This is one of the key concerns of many LDCs in general and Malaysia in particular. Over one-third of the requests ( 412) for concessions under tropical products made by developing countries were granted by developed countries. Most of the concessions were confined to spices, tropical fruits and nuts during the Tokyo Round. In November 1982, the contracting parties agreed to carry out "consultations and appropriate negotiations" aimed at further liberalization of trade in tropical products. Since then little progress has been made. Difficulties in the Tokyo Round related partly to the difficulties in reaching a concensus on the definition of

Malaysia 75

tropical products and the consequent restriction of their number. The term itself continues to be contentious: some countries want it to include all natural products (including processed forms), while the developed countries have limited it to agricultural products produced in the tropics. Other concerns revolve around high tariff and excise (consumption) taxes, tariff escalation, the extent of NTBs (especially sanitary regulations and technical standards such as labelling requirements), subsidized export competition by developed countries for products such as oilseeds and sugar, and the erosion of preferential margins. For a country like Malaysia (and perhaps for other developing countries as well) a choice has to be made between MFN reductions or improvement in the GSP provisions for the products. Developing countries have also wanted negotiations on the basis of nonreciprocity, but this has been opposed mainly by the United States and the EEC. The G-10 text submitted by developing countries before the Punta del Este meeting described the aim of negotiations in this sector as being the "fullest liberalization of trade in tropical products including in their processed and semi-processed form". In addition, the text sought the elimination by developed countries of internal taxes and tariff escalation on tropical products. The Uruguay Declaration noted that the sector should receive special attention in the current MTN round, both in terms of the timing of the negotiations and the implementation of the decisions. While early agreement and implementation of measures could be achieved as this sector has been accorded the "fast-track" status, pressures for reciprocity and cross linkages could be possible. There are strong reasons for Malaysia to take an active part in the present rounds of negotiations on the tropical products trade. Among the products that should be included which are of interest to Malaysia are fish products, fruits and vegetable canning, cocoa products, and wood-based and rubber-based and palm-oil-based products. The importance of other products is dealt with elsewhere in this study. The significance of tropical products to the Malaysian economy in terms of their contributions to income, employment and foreign exchange cannot be overemphasized. In 1982, the export of fish products contributed about M$244 million towards Malaysia's foreign exchange earnings, while Malaysia's share in the world trade for frozen prawns was about 2.5 per cent. In the case of cocoa butter, Malaysia's export of the product increased from 0.1 per cent of the world's total cocoa butter exports in 1975 to 2.4 per cent in 1982. Based on the abundant supply of local cocoa beans and the development strategy to promote the cocoa products industry as a major export earner, Malaysia is expected to be a significant producer of cocoa products by 1995. Accordingly, the world market share of Malaysia's export of cocoa product is expected to grow from 1.2 per cent in 1981 to 17.6 per cent in 1995.

76 Kamal Sa/ih et a/.

With regard to wood and wood products, Malaysia is currently a.major exporter, and amongst the top five exporters of plywood in the world. Malaysia's share in the world market for sawn wood and panel products was about 4.8 per cent and 5.2 per cent, respectively, in 1983. Malaysia's plywood, the major item in the panel product group, captured 10 per cent of the world market in 1984 and Malaysia has been maintaining its share since then. The medium- and long-term plan for the tropical products industry as outlined in Malaysia's Industrial Master Plan is for the industry to be rationalized and modernized. Certain products of the sector such as cocoa butter, frozen prawns, shrimps (in the case of the food products) and panel products (mainly plywood, mouldings, joinery and furniture) have been identified as priority products which are expected to make substantial contributions to the country's employment, value added and exports. Against the above backdrop, it is not difficult to appreciate the concern that the export of tropical products has been adversely affected by the increasing diversity and intensity of protectionism in the world market for the products. Malaysia's exports of cocoa and cocoa products are also facing difficulties in penetrating the international markets due to the various protectionist measures taken by the major importing countries. Cocoa products are still subjected to escalating tariffs in the industrial countries with average tariffs on cocoa beans, processed cocoa and chocolate products standing at 2.6 per cent, 4.3 per cent and 11.8 per cent, respectively. Besides, an array of NTBs, such as import inspection procedures, standard health and sanitary regulations and quotas, are still being imposed. Currently, the average tariff rate imposed by major developed countries are 1.8 per cent for semi-manufactured wood, 9.2 per cent for wood panels, 4.1 per cent for wood articles and 6.6 per cent in the case of furniture. Since 1973, Malaysia's exports of plywood to the EEC are subject to a duty-free import quota of about 86,000 cubic meters. However, Malaysia's exports of plywood to the EEC have exceeded this quota, as shown by the export volume of 168,685 cubic meters in 1986. Export volume over and above the duty-free quota is subject to a high tariff of 11 per cent which affects the competitiveness of Malaysia vis-a-vis other plywood producing countries which have higher duty-free quotas. In the Japanese market, the existing tariff structure favours imports of logs rather than processed or furnished products. For example, the import of logs is duty-free while sawn timber and veneer are subject to 10 per cent and 15 per cent tariff rates, respectively (after the quotas are fully utilized), while plywood is subject to 20 per cent tariff. Japan also practises a discriminatory tariff system which favours products of interest to developed countries. For example, tropical hardwood plywood is now subject to duties between 17 and 20 per cent, while the tariff on softwood is 15 per cent. In the Australian and New Zealand market, plywood is subject to 34 per cent and 9 per cent tariffs, respectively.

Malaysia 77

In the case of canned pineapples, Malaysia's export has not only lost the Commonwealth preference duty of 5 per cent into the United Kingdom since the latter's accession to the EEC, but has also had to face an EEC external tariff of 24 per cent. In addition, it has to compete against other suppliers from the ACP groups of countries which are enjoying duty-free access for their canned pineapples in the EEC market. Malaysia's exports of fish products to Japan, the main importer, are excluded from the Japanese GSP list and are subject to stringent import procedures. Similarly, exports to Canada are subject to 15 per cent tariff and stringent regulations and testing methods imposed by the Canadian authorities in the name of health and sanitary considerations. From the preceding discussion it is clear why Malaysia should be concerned with issues pertaining to market access, total inclusion of the agricultural sector's product, natural, processed and finished forms, into GATT code and procedures, and improvement of the GSP coverage of these products. The Multi-Fibre Arrangement (MFA) Malaysia's interest in the MFA is influenced by the role played by the clothing and textile industry in the economy. Although the Malaysian textile industry is not as large as that of the East Asian NICs, it still plays an important role in the national economy in general and in the manufacturing sector in particular. In 1981, the industry's output amounted to M$1,975.6 million, equivalent to 1.08 per cent of Malaysia's GDP, and 6.46 per cent of the total manufacturing value added. It contributed 1.4 per cent to national employment and 12.6 per cent to total manufacturing sector's employment. In relation to world trade, however, the Malaysian textile industry accounts for only a very small portion of the textile trade within the world market economy, viz., only 0.36 per cent in 1981 as compared with Japan's 7.63 per cent, Korea's 7.03 per cent and Hong Kong's 6.62 per cent. A significant trend in the development of the Malaysian textile industry in the 1970s was the setting up of a number of export-oriented textile factories. Consequently, exports of textiles and apparel have increased significantly. The value of the textile exports, including man-made fibres, increased at the rate of 26.6 per cent per annum from 1973 to 1981. Over the same period, the value of apparel exports also increased by 28.2 per cent annually. Malaysia's exports to MFA countries have fluctuated between 55 and 65 per cent of total export, by value, over the decade 1973-82. However, the pattern of trade differs in terms of products exported to MFA countries and those exported to non- MFA countries. In 1981, about 75 per cent of the exports to MFA countries consisted of do things which accounted for only 16 per cent of the export to non-MFA countries. About 82 per cent of Malaysian apparel exports went to the MFA countries, while 70 per cent of all yarn and fabric exports went to non-MFA countries.

78 Kamal Salih et al.

Malaysia has shifted from being a net importer of textile in the 1970s to be a net exporter since 1983. In 1973, the industry registered a negative trade balance of M$246.14 million, whereas in 1982 it showed a positive balance of M$91.7 million, mostly due to increased surplus of the apparel sub-sector which increased to M$388.2 million in 1983. However, the textile sub-sector is still a net importer with a negative trade balance of M$268.2 million in 1973 and M$296.5 million in 1983. In the short and medium terms, the government plan is to give more emphasis to the development of the apparel sub-sector involving the product range of medium to high value added. The apparel sub-sector's output is expected to increase from M$783 million in 1981 to M$3,301 million in 1995 while that of the textile sub-sector is expected to increase from $1,193 million to M$2,601 million correspondingly. As for exports, the value of the apparel sub-sector is expected to grow at a much faster rate than that of the textile subsector, that is, from M$369 million in 1981 to M$2,294 in 1995 (Table III-2). In view of the proposed development strategies for the industry, it is crucial for Malaysia to strive for an expanded market for its textile exports. This relates to the role and the future status of the MFA which presently regulates trade in the products. Hence, the need for Malaysia to actively participate in the present round in relation to this issue. Within the framework of the MFA, Malaysia had concluded bilateral agreements with major developed countries like the EEC, Sweden, Norway and Canada. These bilateral agreements are of considerable importance to Malaysia as the products covered by these agreements -- textiles and clothing -- represent about 15-20 per cent of Malaysia's export of manufactured goods and more importantly, it is in these products that Malaysia's comparative advantage is most pronounced. Malaysia's participation in the MFA has been most crucial in maintaining its export share in the developed country markets, mainly the EEC and United States. Without the quotas offered to Malaysia through these bilateral agreements, local production would not have developed the TABLE III-2 Malaysia's Export Projection of the Textile Industry, 1981-95 (In M$ millions)

1981

1990

1995

Textile Apparel

342 369

520 1015

697 2294

Total

711

1535

2991

Malaysia 79

way it has today in the face of increasing labour costs and relatively inferior technology compared with major suppliers of these products. The MFA, which has become more restrictive than ever especially towards the exports of the "dominant" exporters, may have somewhat benefited Malaysia, as some of the production in these countries has been relocated to Malaysia to avoid the effects of the restrictions. On the other hand, Malaysia being a "new entrant" and "small supplier" of the products in the industrialized countries' markets, was accorded a much fairer treatment and less restrictive deal in the new bilateral-restraint agreements concluded recently in the framework of the MFA IV. The basic issue which Malaysia should address is whether to stick to the present MFA or to press for negotiation on trade in textiles to commence long before the expiry of the MFA IV with the aim of the eventual return of the textiles trade to the GATT rules. Needless to say, it appears that Malaysia did gain in terms of market access provided by the quotas allocated by the MFA signatories. Without prior allocation of quotas, Malaysia's textile exports would have found it difficult to compete with the more efficient exporters. However, there are some qualifications that need to be taken into account. The MFA has become more restrictive to include all conceivable fibres in an attempt to finally control trade in all products. The bilateral agreements signed under the present MFA IV are so detailed as to restrict exports down to 7-digit SITC categories. This would make diversification into uncontrolled goods extremely difficult. Even though the existing quotas have not been fully utilized, this situation will be the reverse in the near future considering that the industry's export has been projected to double up to M$3.5 billion by 1995. The annual quota expansion of 1-2 per cent provided for in the MFA agreements might be insufficient compared to the average annual rate of growth of the Malaysian textiles exports. Even though it is possible for Malaysia to swap with or to borrow from the other ASEAN countries their unused quotas, it is very complicated and uncertain, and will be taxing on Malaysia's scarce managerial and marketing resources. If the textile trade were to be brought under the GATT rules and principles, there would be substantial redistribution of production away from the developed countries. Similarly, there would be a redistribution of production and exports among developing countries in favour of those with low cost of production and better marketing skills. Herein lies the dilemma for small exporters such as Malaysia and possibly Indonesia. For, the countries with lower production cost and better marketing skills are Taiwan, Hong Kong, Korea and Macau but not Malaysia. On the other hand, if Malaysia is to push strongly for the textile trade to be fully liberalized and placed under the GATT rules and principles, then it has to compete with the NICs for the share in production and export of the

80 Kamal Salih et al.

products. Under the present conditions, to overtake the advanced textile countries like Korea, Hong Kong and Taiwan is a formidable task. Even other low-wage countries like Sri Lanka, China, Bangladesh and Pakistan are fast catching up with Malaysia and may provide stiff competition in the near future. Under such circumstances, Malaysia's textiles exports are still in dire need for a more generous MFA, at least until such time when the development strategies envisaged for this industry have been successfully implemented. This is particularly relevant in a large market like the United States where Malaysia's quota utilization has been very high (97.3 per cent on the average in 1983). As for the non-quota items exported to the United States, Malaysia should request that they are given free entry into the U.S. market. With regard to the EEC markets, the problem has always been the inability to utilize fully the quotas for certain categories of products such as Tshirts, knitted shirts, trousers, pullovers, blouses and man-woven shirts. In this context, Malaysia should request the following concessions from the EEC member countries: 1.

2. 3.

to allow the substitution of unused quotas between product categories; to allow the substitution of unused quotas between the EEC importing countries; to give duty-free entry for non-quota items.

Systemic Issues and Problems We shall focus on the two groups of systemic issues that are of interest to Malaysia, that is, (a) special and differential treatment, and (b) safeguard and dispute settlement issues. Special and Differential Treatment. A major form of special and differential treatment, besides the MFA, accorded to the LDCs including Malaysia, has been the GSP. As far as Malaysia is concerned, it is a beneficiary of all GSP schemes except Bulgaria's. The implementation of the GSP by the developed countries has benefited Malaysia to a certain extent. Table 111-3 shows the value of Malaysian GSP exports which amounted to more than M$2 billion during the period 1980-85 or about 8 per cent of Malaysia's total annual exports except in 1985. This is an encouraging performance considering that the corresponding value registered in 1973 was merely M$113 million (1.5 per cent of Malaysia's total exports). The EEC, Japan, and the United States, in that order, have been the most important preference-giving countries, collectively accounting for more than 90 per cent of Malaysia's preferential exports. However, over the years,

TABLE III-3 Value of Malaysian Exports under GSP, 1980-85 (In M$ millions)

EEC EFfAa Socialist Countriesb Australia Canada Japan New Zealand United States

1980

1981

1982

1983

1984

1985

1,306.54 84.80 36.89 6.80 64.62 436.53

1,293.75 70.21 26.32 4.40 89.63 573.72

1,303.80 74.19 32.27

1,376.57 67.1 24.66 5.64 130.11 605.20 0.22 375.19

1,718.13 77.20 39.33 14.70 176.10 796.90 2.09 531.60

958.0 58.39 15.72 18.40 112.07 351.87 1.71 419.35

133.01

194.55

131.24

2.34

1.61

3,552.89

2.068.39

-

99.21 551.31

-

-

-

401.02

344.03

279.70

1. Singapore

-

2. Philippines

-

-

-

E2mort under ASEAN !:;umylation

-

-Total

2,337.2

Total Malaysian Export

28,171.0 8.30

Notes:

2,402.06 27,109.0 8.86

2,340.48 28,408.0 8.24

a Includes Austria, Finland, Norway, Sweden, and Switzerland. b Includes Hungary, Poland and Czechoslovakia.

2,717.73 32,771 8.29

38,647.0 9.19

38,017.00 5.44

82 Kamal Salih et a/.

the EEC's role as preference-giving countries has somewhat declined while that of the United States has significantly increased. The latter contributes 20.2 per cent to Malaysia's preferential exports. Within the EEC, the most important countries were the Netherlands, Britain, and West Germany which together accounted for more than 85 per cent of the EEC's preferential imports from Malaysia. · In 1986, Malaysian exports under the GSP to the United States amounted to US$188 million (M$470 million), placing Malaysia among the top fifteen beneficiaries of the schemes. Until 1984, Malaysia had been the second biggest beneficiary among ASEAN countries in Japan's GSP scheme, next to the Philippines. Malaysia's exports under the scheme totalled 59,886 million yen (M$605 million) in 1983, and 75,361 million yen (M$796.9 million) in 1984, but they declined to 48,334 million yen in 1985 when its second position was taken over by Singapore. In terms of overall exports to each of the major trading partners, hardly 10 per cent of Malaysia's exports to Japan was made under the GSP scheme during the 1980-84 period. This ratio declined sharply from 9.2 per cent in 1984 to only 3.8 per cent in 1985. The performance of Malaysia's GSP exports to the United States was strikingly similar to that of the Japanese market during the same period. However, Malaysia's export to the EEC under the GSP scheme has been relatively stable and far more significant, constituting about 50 per cent of Malaysia's total export to the EEC. An analysis of the composition of Malaysia's exports under the GSP scheme, as shown in Table III-4, indicates that about 60 per cent of the value of products exported belong to the agricultural group. Palm oil and oil palm products including palm kernel oil are the most important with a share of about 30 per cent of total exports in 1984. Under the EEC scheme, crude and refined palm oil are subject to preferential duty of 4 and 12 per cent, respectively. Japan is another major market for palm oil which accounted for about 40 per cent of the total preferential exports of the product in 1984. The preferential duty on palm oil under the Japanese scheme is 3 per cent. The U.S. scheme excludes palm oil but gives duty-free preferential treatment to palm kernel oil. Electronic items, wood and partially processed wood products, rubber and rubber products, cocoa and cocoa products, and textiles and garments are the other major categories of goods exported by Malaysia under the GSP schemes. Electronic products accounted for about 19 per cent of the total preferential exports in 1984. However, not all of these products enjoy dutyfree entry particularly in the major markets. For example, the export of plywood to the United States attracts a tariff rate of 9 per cent. Sawn timber, one of the products of major interest to Malaysia, is excluded from duty-free treatment under the Japanese scheme with a GSP rate of 5 per cent. Other products carrying higher average rates include cocoa beans (15 per cent), veneer (7.5 per cent), and sheet plywood (7.5 per cent).

TABLEIII-4 Malaysia: Major Commodity Items Exported through GSP, 1984

% of the Overall Product Description

Value M$ Millions

Export through GSP

A.

Agricultural Products

1. 2. 3. 4. 5.

Oil palm and oil-palm products Wood and partially processed wood Rubber and rubber-products Cocoa and cocoa-products Pepper, white and black

1317.0 313.6 192.9 162.7 18.2

39.24 9.34 4.85 4.85 0.54

Sub-total

2004.4

59.72

B.

Selected Manufactur!;