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Tariff Troubles
Exemption requests are undermining AFTA

'We Must Stick Together': ASEAN's top minds consider how to keep the organization relevant
Southeast Asia Adrift: But the powerhouse economies of the region's Northeast may provide a lifeline

In July, Yoshimi Fumio got a term extension as an alternative director of Malaysian automaker Perusahaan Nasional Bhd, or Proton. But less than a month later, the Mitsubishi Motors general manager for Southeast Asia was suddenly recalled home. Headquarters needed him urgently, his company said. That wasn't the whole story. Just days after his reappointment, Yoshimi had told a group of Japanese manufacturers of his doubts about Proton's long-term prospects. After 2005, when Malaysia opens its vehicle market to foreign competition under the ASEAN Free Trade Area (AFTA) scheme, Proton would be in trouble, he reportedly said: "Proton needs to cut costs and improve its products to compete with the giants." His comments highlighted the dilemma facing Malaysia and other Southeast Asian nations worried about the survival of key local industries amid AFTA-mandated liberalization. They know that they must open up, but are loathe to stomach the consequences.

Without tariff protection, Yoshimi had warned, Proton's share of the local car market would drop below 30% from its current 60%-plus. Under AFTA, duties on automobiles and parts imported from neighboring countries would be capped at just 5%, down from the 70% tariff imposed on some components and assembly kits. Locally made Protons can cost less than half of what comparable Japanese locally assembled vehicles or imports do. Yoshimi's assessment stirred a controversy in Malaysia, prompting a pointed rebuttal from International Trade Minister Rafidah Aziz. "I'm sure Proton, knowing full well what AFTA is, is doing what it needs to do to cut costs," she said.

The national car is a project close to the heart of Prime Minister Mahathir Mohamad and a source of pride for Malaysians. Kuala Lumpur regards the continued success of the local auto industry as so crucial that it indicated last year its resolve not to cut tariffs on autos until January 2005, two years beyond the 2003 AFTA kick-off. At a meeting of ASEAN economic ministers in May, Malaysia won postponement of the sector's inclusion.

ASEAN critics were quick to cite that as fresh evidence of backtracking. Thai Foreign Minister Surin Pitsuwan acknowledged that other countries were reluctant to block Malaysia's bid. "If we confronted [the issue], the whole AFTA scheme might be affected," he said. Singapore Trade Minister George Yeo insisted the extension for Malaysian cars was an exception. He warned against allowing it to "become precedent-setting in an unlimited way."

Still, speculation is growing that other countries may now seek to help pet industries or ignore some of their AFTA commitments, amid pressure from their business sectors. After the May meeting, Thailand, which hosts several foreign carmaking operations poised to take advantage of AFTA to build export markets in the region, was said to be weighing retaliation by delaying cuts in palm-oil duties. Still, Bangkok promised not to take any counter measures. Jakarta also asserted it would not seek a similar extension for its auto sector because "unlike Malaysia, we have no national car products to protect," said trade official Agus Cahyana. Manila, meanwhile, is considering extended protection for certain types of petrochemicals. As ASEAN ministers get ready to discuss the exemption mechanism for Malaysia in October, some members may be preparing to make their own cases.

AFTA boosters argue that the case of Malaysian autos has been overblown. "It's unfair to jump on that," says ASEAN Secretary General Rodolfo Severino. While he admits "in a way it is an example of backtracking," he noted Indonesia's response. And if ASEAN had insisted on K.L. meeting its commitment, regardless of the financial crisis or the consequences anticipated by the Malaysians, "then ASEAN would be said to be inflexible, rigid and in disarray." In fact, says Severino, "AFTA has been accelerated a couple of times so that now it will be substantially completed by the start of 2002. Today, 85% of tariff lines for goods traded within ASEAN are subject to no more than 5% duty." Severino reckons that even poorer countries like Cambodia would be able to meet its AFTA commitments, given the grace periods accorded newer ASEAN members.

The commotion about AFTA timetables may obscure the real challenge for ASEAN: how to reverse the flagging investor interest in the region. Tariff reductions just aren't enough any more. And bigger economies in Asia — China, Japan, South Korea and India — are all opening up to foreign investment, providing stiff competition. Southeast Asia needs to invest more in infrastructure, technology and human capital resources, particularly as New Economy industries emerge. "We should not just look at tariffs," notes Severino. "That is the easiest part." He has urged ASEAN to tackle non-tariff barriers such as product standards and customs procedures. Severino also calls for deeper cooperation in science and information technology. The message: If ASEAN wants to succeed amid the pressures of globalization, it must go far beyond tariff cuts.

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