Impact of AFTA on Indonesia

I. Introduction
The ASEAN Free Trade Area (AFTA) is a trade bloc agreement by the Association
of Southeast Asian Nations supporting local manufacturing in all ASEAN countries.
The AFTA agreement was signed on 28 January 1992 in Singapore. When the AFTA agreement
was originally signed, ASEAN had six members, namely, Brunei, Indonesia, Malaysia,
Philippines, Singapore and Thailand. Vietnam joined in 1995, Laos and Myanmar in 1997 and
Cambodia in 1999. AFTA now comprises the ten countries of ASEAN. All the four latecomers
were required to sign the AFTA agreement to join ASEAN, but were given longer time frames in
which to meet AFTA's tariff reduction obligations.

The ASEAN Free Trade Area (AFTA) has now been virtually established. ASEAN
Member Countries have made significant progress in the lowering of intra-regional
tariffs through the Common Effective Preferential Tariff (CEPT) Scheme for AFTA.
More than 99 percent of the products in the CEPT Inclusion List (IL) of ASEAN-6,
comprising Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and
Thailand, have been brought down to the 0-5 percent tariff range.
ASEANs newer members, namely Cambodia, Laos, Myanmar and Viet Nam, are not
far behind in the implementation of their CEPT commitments with almost 80 percent
of their products having been moved into their respective CEPT ILS. Of these items,
about 66 percent already have tariffs within the 0-5 percent tariff band. Viet Nam has
until 2006 to bring down tariff of products in the Inclusion List to no more than 5
percent duties, Laos and Myanmar in 2008 and Cambodia in 2010.
Following the signing of the Protocol to Amend the CEPT-AFTA Agreement for the
Elimination of Import Duties on 30 January 2003, ASEAN-6 has committed to
eliminate tariffs on 60 percent of their products in the IL by the year 2003. As of this
date, tariffs on 64.12 percent of the products in the IL of ASEAN-6 have been
eliminated. The average tariff for ASEAN-6 under the CEPT Scheme is now down to
1.51 percent from 12.76 percent when the tariff cutting exercise started in 1993.
II.Goal of AFTA
The AFTA program was initiated in 1992 to create an integrated market among
ASEANs close to half a billion people making the ASEAN economies more efficient
and competitive, and attract investments into the region. The ultimate objective of
AFTA is to increase ASEAN's competitive edge as a production base geared for the
world market. A critical step in this direction is the liberalization of trade in the region
through the elimination of intra-regional tariffs and non-tariff barriers. This will have
the effect of making ASEAN's manufacturing sectors more efficient and competitive
in the global market. At the same time, consumers will source goods from the more

efficient producers in ASEAN thus expanding intra-ASEAN trade. As the cost

competitiveness of manufacturing industries in ASEAN is enhanced and with the
larger size of the market, investors can enjoy economies of scale in production. In this
manner, ASEAN hopes to attract more direct foreign investments into the region. This
will, in turn, stimulate the growth of support industries in the region for many direct
foreign investments.
The Common Effective Preferential Tariff Scheme, or CEPT, is a cooperative
arrangement among ASEAN Member States that will reduce intra-regional tariffs and
remove non-tariff barriers over a 10-year period commencing January 1, 1993. The
goal of the Scheme is to reduce tariffs on all manufactured goods to 0-5% by the year
2003. This will benefit Philippine exporters to ASEAN. The lower CEPT rates make
the countrys products cheaper in these markets, thus stimulating greater demand. The
increase in exports to ASEAN would depend on the price elasticity of demand.
The CEPT Scheme is the main instrument for making ASEAN a free trade area in ten
(10) years. This means that ASEAN Member States shall have common effective
tariffs among themselves in AFTA but the level of tariffs vis--vis non-ASEAN
countries shall continue to be determined individually.
III. The Common Effective Preferential Tariff (CEPT) Scheme
Unlike the EU, AFTA does not apply a common external tariff on imported goods. Each
ASEAN member may impose tariffs on goods entering from outside ASEAN based
on its national schedules. However, for goods originating within ASEAN, ASEAN
members are to apply a tariff rate of 0-5%(the more recent members of Cambodia,
Laos, Myanmar and Vietnam, also known as CMLV countries, were given additional
time to implement the reduced tariff rates). This is known as the Common Effective
Preferential Tariff (CEPT) scheme.
ASEAN members have the option of excluding products from the CEPT in three
cases: 1.) Temporary exclusions; 2.) Sensitive agricultural products; 3.) General
exceptions. Temporary exclusions refer to products for which tariffs will ultimately be
lowered to 0-5%, but which are being protected temporarily by a delay in tariff
reductions.
For sensitive agricultural products include commodities such as rice, ASEAN
members have until 2010 to reduce the tariff levels to 0-5%.
General exceptions refer to products which an ASEAN member deems necessary for
the protection of national security, public morals, the protection of human, animal or
plant life and health, and protection of articles of artistic, historic, or archaeological
value. ASEAN members have agreed to enact zero tariff rates on virtually all imports
by 2010 for the original signatories, and 2015 for the CMLV countries.
IV. Trade

Export

It is argued that economic integration will largely benefit Indonesia considering the
number of multinational companies like Unilever relocating their factories to
Indonesia for the reason of cheaper labor costs. Multinational companies like Unilever
can export goods to ASEAN countries, which in turn will increase the value of
Indonesias exports.

Import

Indonesia, through its Ministry of Finance (MOF), has implemented its AFTA
commitment by imposing certain tariff rates on imported goods based on the ASEAN
Trade in Goods Agreement (ATIGA). This can be seen in MOF Regulation No.
20B/PMK.011/2012 regarding Determination of Import Duty Tariff in the Context of
ATIGA (PMK ATIGA). PMK ATIGA regulates the gradual tariff adjustment from
January 1, 2013, until December 31, 2015. Most of the tariffs on the goods are 0%,
except for cane or beet sugar and chemically pure sucrose, in solid form.
V.Financial Sector (Banking, Insurance, and Investment)
Indonesias banking sector needs to gear up to compete with banks in other ASEAN
countries. AFTAs schedule, which has been accelerated, requires the Indonesian
banking sector to step up efforts to compete with other banks in the region. One issue
concerns interest rates on loans employed by Singaporean, Malaysian, and Thai
banks, which are lower than those of Indonesian banks.
With the implementation of AFTA, the Indonesian banking sector will have more
responsibility in helping small and medium enterprises. Bank Indonesia, the central
bank, has drawn up four main policies to prepare for AFTA, i.e., improving banking
system durability, increasing banking intermediation, increasing the role of Shariah
banking, and increasing the role of rural banks in providing micro- financing.
For the insurance sector, according to Edi Subekti, President Director of PT Asuransi
Jasa Indonesia (PT Jasindo) from 2001 to 2008, there are consequences to the
implementation of AFTA, i.e.:

An influx of foreign capital and technical skills;

Globalization

may

accelerate

product

innovation

and

marketing

diversification;

The presence of new capital will increase competition in the domestic market;

and

Globalization will open opportunities for insurance companies to go

international.
Antonius Anton Lie, Chairman of the Education Commission of the Indonesian
Insurance Council, said one of the consequences of the implementation of AFTA was
that more foreign insurance companies, especially from ASEAN countries, would

enter Indonesia. If local insurance companies are not ready to compete with these
foreign companies, in terms of capitalization, products, marketing, and human
resources, they will find themselves pushed to the edges of the industry.
The current Insurance Law and its implementing regulations have placed limits on the
entrance of foreign insurance companies into the local insurance market by limiting
foreign share ownership in Indonesian insurance companies. The participation of
Indonesia in AFTA does not require Indonesia to abolish such restrictions on foreign
ownership in the local insurance sector. While the entrance of more foreign insurance
companies to the local market could have positive impacts in terms of capitalization
and technical skills, there is no indication that limits on foreign investment under the
Insurance Law and its implementing regulations will be liberalized due to AFTA.
In the investment sector, AFTA, as a free-trade system in Southeast Asia, will result in
an interdependency and integration of investment and will impact investment and
economic management, including in Indonesia, by making trade free of tariff and nontariff barriers; meaning that goods produced by ASEAN countries will be free to enter
each ASEAN member country.
Foreign investment in Indonesia is regulated and limited under Indonesias Negative
Investment List, or Daftar Negatif Investasi(DNI). A new DNI was issued this year
and, according to Mr. Hatta Rajasa, who was Indonesias Coordinating Minister for
Economic Affairs at the time, one of the reasons for revising the DNI was to
accommodate ASEAN economic integration to allow the free flow of investment.
VI.Agriculture
The implementation of AFTA will affect the export and import of Indonesian
agricultural commodities. The net export of Indonesian agricultural products has
increased since the implementation of AFTA in 2003. It might be advisable for
Indonesia to focus on the production and export of rice, corn and soybeans,
commodities for which it has the advantage of plentiful land and low production
costs. Indonesia was the top rice-producing country in ASEAN from 1990 to 2008.
Countries with low production costs may want to specialize in a few products and
increase their exports of these products. Countries can import those goods for which
high production costs mean it does not make economic sense to produce the goods
domestically.

VII.Construction and Infrastructure

In a report prepared by the ASEAN Constructors Federation (ACF), ASEAN
countries in general are seen experiencing robust growth in the construction industry.
Indonesia had the largest construction industry among ACF member countries in
2002, valued at US$9.92 billion. The adoption of AFTA benefits the region in terms of
better procurement of construction materials, allowing the materials to move through
the region more freely than before. The abundance of land outside Java that remains
undeveloped makes Indonesia an attractive destination for foreign investment.
Further, the need for infrastructure development and cheaper land present a tempting

opportunity for foreigners entering the Indonesian construction industry. Expansion of

infrastructure, particularly the construction of highways, also provides opportunities
to contractors from ACF member countries. In addition, the Indonesian government
has worked to open up its market to foreign firms to form joint ventures with local
construction firms for such projects. These foreign firms are issued a three-year
construction license.
With AFTA, the reduction in import duties could facilitate the expansion of the
regional steel market, lowering the price of steel products and enhancing the pace of
construction projects.
VII.Manufacturing
While AFTA promotes the liberalization of trade, for Indonesia, which has adhered to
its commitments, some manufacturing sectors are expected to face difficulties as a
result of AFTA implementation. One of the biggest and most prominent regards the
impact on workers.
Most manufacturing sectors in Indonesia still use less advanced technology and are
labor intensive. This is to say that many manufacturing sectors in Indonesia,
particularly textiles and wood products, depend on low-cost labor. The
implementation of AFTA will require manufacturers to ensure the sustainability of
their businesses by moving away from low-cost labor and improving the quality of
their goods or finding some other advantage. This will allow Indonesian products to
stand alongside products from other ASEAN countries.
VIII.Labor
In an ILO/ASEAN Joint Study on the Social Implications of AFTA on Labor and
Employment, free trade is seen leading to greater efficiency and cheaper products.
The idea is that removing trade barriers would bring huge benefits to the people of
ASEAN, lead to greater specialization and division of labor as each country
concentrates on producing goods and services in which it has a competitive
advantage. On the downside, however, the greater levels of competition unleashed by
AFTA will lead to the collapse of inefficient companies that have been operating
behind protectionist barriers. Therefore, for countries, the key to taking advantage of
trade liberalization is very much determined by the competitiveness, or quality, of its
labor force.
Unfortunately, a low-quality labor force is still a problem for Indonesia. This is
reflected by the relative lack of education of Indonesian workers compared to other
Asian countries. This will hinder the process of industrial transformation that would
otherwise take place at a faster pace due to trade liberalization, because workers are
not flexible enough to change jobs and move into more advanced sectors. Indonesia
also has a relatively high unemployment rate, which will prevent it from reaping the
full benefits of trade liberalization. As the economy opens up, Indonesian workers
could find it difficult to compete with workers from neighboring countries.
The implementation of AFTA will result in the free flow of skilled labor in the
ASEAN region. To facilitate such free flow of skilled labor, ASEAN is working to
improve the issuance of visas and employment passes for ASEAN professionals and

skilled workers who are engaged in cross-border trade and investment-related

activities.

IX.Conclusion
There are positive and negative impacts from the implementation of AEC and AFTA
in Indonesia. While businesses may benefit from the highly competitive market as a
venue to expand their production and networks, small enterprises and poorly educated
laborers may find it difficult to compete with the free flow of goods, services, and
skilled workers.
The Indonesian government will play a pivotal role in reconciling this gap.
Comprehensive and clear regulations regarding the implementation of AFTA and AEC
could help all of Indonesia benefit from an integrated market of high-quality goods,
services, and human resources.

X.References
1.ASEAN Free Trade Area - Wikipedia, the free encyclopedia
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COMMUNITY
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4.Background and objectives Of Afta - Info All Search
5.Economic Analysis Of Asean Free Trade Area; By A Country Panel Data
6.FREE TRADE AREAS AND INTRA-REGIONAL TRADE: THE CASE OF ASEAN (World
Scientific)
7.Understanding trade bloc formation: The case of the ASEAN free trade area - Review of
International Political Economy - Volume 3, Issue 2
8.Impact of ASEAN Economic Community and ASEAN Free Trade Area on Indonesia | SSEK
Corporate/Commercial Indonesian Law Firm
9.Effects of AFTA-CEPT on ASEAN Member