Sometime after I left government ten years ago, I attended a dinner of ex-cabinet members and a former colleague commented that it was a gathering of HBS. Before those of us who did not go to the Harvard Business School could protest, the speaker said that he was actually referring to the Has Been Society. After all, we were now out of the limelight and we had gone on to blaze new trials, some in corporate endeavors, and others in heavily wooded golf courses.

It was therefore quite a surprise to get an invitation to speak at an ASEAN gathering, especially on what now seems like esoteric issues like trade and AFTA. I checked with Ambassador Rod Severino who I suspected has just gotten desperate and could not find a speaker. He expressed that ten years had passed since the signing of AFTA, and because I was “present at the creation”, I should address this gathering. So here I am, with memory fading, clearly out of touch with the data, but interested enough to pause and reflect on a trade agreement that six governments signed ten years ago.

AFTA AND ITS BACKGROUND

Let me first provide some background especially to those of you who were much too young during that time. AFTA was launched in January 1992 in Singapore after about two years of discussion among the six ASEAN governments then — Brunei, Malaysia, Indonesia, Singapore, Thailand and the Philippines. It planned to reduce tariffs to zero to 5% in 15 years among the six nations through a “common effective preferential tariff”. Why the 5% option? To help some member countries cover the administrative costs of government in handling trade. The Philippines set its bottom at 3% and Indonesia at that time targeted 5%. A mid-phase target of 20% tariffs within 5 to 8 years was also set. The agreement included all manufactured products including capital goods and processed agricultural products. The major exclusion was basic agriculture or unprocessed agricultural products. The agreement also called for the removal of quantitative restrictions, or in the argot of trade specialists, to “tarrify” all QRs. That actually meant that countries which had quotas or some other restriction on manufactured goods could start AFTA by doubling the tariffs, as the Philippines did in the first month of President Fidel Ramos’ term.

ASEAN then was a regional grouping of about 300 million people, equivalent to the European Community (as it was called then) certainly with much less economic muscle. However, a number of countries, the Philippines not one of them, had started to show the vigor that would earn them the phrase “tiger economies”. AFTA was proposed by Thailand, whose Prime Minister, Anand was a much-respected businessman, a friend and partner to many Chamber of Commerce luminaries in the region. However, AFTA was initially resisted in varying degrees by Malaysia, the Philippines and more strongly, by Indonesia, who at that time had separate Trade and Industry Ministries. But eventually an agreement was forged in Singapore, the last meeting of ASEAN heads of sate that would be attended by Prime Minister Anand and President Corazon Aquino.

AFTA was one of a number of regional trade agreements that had started to emerge around that time and ran parallel to the global initiatives of the Uruguay Round. Aside from the EC, there were among others the Andean Pact and the Caribbean Community. Later there would be the North American Free Trade Area, Mercosur in Latin America, and, I am told, a Southern African Development Cooperation. Were there larger aspirations for AFTA? There must have been some hopes harbored by AFTA’s framers that the Agreement would fortify other areas of economic cooperation and would graduate into other initiatives such as in investments. Our own President Joseph Estrada even talked about a common ASEAN currency. Moreover, there were expectations that as the economies grew and new members (Vietnam, Laos, Cambodia, and Myanmar) joined ASEAN, the political and economic clout of the regional grouping would expand.

The Agreement, which had its lofty aspirations, would be the object of a number of critical questions raised particularly by the non-ASEAN partner governments, the foreign business community, and the press. Why so slow at 15 years? Thailand had actually proposed 10 years, but other countries concerned about objections from their domestic industries, particularly the small and medium-scale business sector, decided to stick to a 15 year program. A second concern was why the exclusion of agriculture? Obviously, agricultural products such as rice would encounter strong political resistance especially in the face of formidable competition from Thailand who was well known as an efficient exporter. That would influence Malaysia, Indonesia, and the Philippines to exclude agriculture.

A third matter was how AFTA would fare in the face of worldwide trade liberalization. After all, discussions were ongoing following the Uruguay Round, and though talks broke down in Brussels, the creation of the World Trade Organization was clearly in everybody’s tarot cards. Wouldn’t it be awkward if concessions in AFTA, even in selected sectors were much less and much slower in their effectivity than those granted in the WTO? Would the WTO which was rule-based and enforced sanctions dominate over an AFTA? Or put differently, if AFTA took 15 years, excluded and important sector like agriculture, and ran parallel to agreements in WTO, would AFTA be of any consequence?

A fourth concern involved details of implementation that would affect industry sectors in varying ways. One matter was the fear that non-ASEAN companies would use a member country such as Singapore, with low tariff rates as the jump off point for their exports thus, the requirement that 40% of product content had to originate from the member state. Another was the grumbling over how the combined impact of AFTA and the margin of preference would result in larger gaps in tariff rates in specific industry sectors.

THE BACKDROP OF PHILIPPINE TRADE

The year prior to the signing of AFTA was not a great year for the Philippine economy. Economic growth was flat in 1991 and it was standard fare to blame many things we could not control—the 1989 coup, the killer earthquake and typhoon, and the Mt. Pinatubo eruption. Exporters hadn’t broken the US$10 billion marker (while other ASEAN countries had hit over US$20 billion), and there was heavy dependence on the US market. A few were even casting doubts over future prospects, the country having just ended the treaty allowing US bases in the Philippines.

Businessmen then, as they still do, complained about the costs of doing business which were rooted in the lack of infrastructure, the frustrations in dealing with the bureaucracy and the difficulties of managing the labor force. Because all other ASEAN countries were growing vigorously and their flagship industries and corporations were increasingly more efficient, there was concern among Philippine industries that they would hurt even more as we opened up our markets. Especially if we did not have adequate safeguards by way of anti-dumping measures —after all, the practice of exporting at slightly above variable costs was widespread among Asian countries.

Let me say a little bit about developments in Philippine trade at that time. Economic historians often depict the Philippine economy prior to 1992 as protectionist. By the time of the signing of the AFTA agreement, there was some liberalization particularly with the signing into law executive order, E.O. 470 by early 1992. Some of you may recall that an attempt at lowering tariffs had been made in 1990 with the signing of E.O. 413. At that time, the Department of Finance targeted a scheme that would eventually lead to 30% tariffs for finished goods, 20% for intermediate goods, and 10% for raw materials. Of course, problems would ensue because somebody’s finished goods were somebody else’s raw material. Anyway, E.O. 413 drew heavy flank and a new initiative was pursued this time with more consultations with the legislature and with industry and that effort was led by then DTI Undersecretary Gloria Macapagal-Arroyo. Largely because the political minefields had been adequately dodged, E.O. 470 was passed by early 1992.

In sum, AFTA was signed to polite applause and limited grumbling in the Philippines. Maybe, the winds of trade liberalizations were gathering strength and the CEOs of industries were adjusting, if not yet accepting of these trends. Maybe, the unions in these industries had yet to understand what all these would mean and the street battles of Geneva, Seattle, Prague and Washington D.C. were not yet in the horizon. Besides, while there was the prospect of increased competition, the AFTA program was “gradualist” in its approach and was not the “big bang” scheme that was proposed by some economists. At that time, the more progressive stance was to volunteer the Chilean model which called for liberalization in many sectors. Those initiatives, started during the authoritarian regime of President Augusto Pinochet, had delivered strong growth rates.

Moreover, liberalization in trade was expected to usher in fresh and novel initiatives in ASEAN cooperation. Already there were industrial complementation schemes that were pursued by multinationals like Nestle and the automotive companies. Intra-ASEAN trade which constituted about 10 to 15% of total trade was expected to kick up. Regional tourism was on the increase. More interaction among ASEAN industrialists would lead to joint ventures in new investment areas. Increased competition, it was hoped, would also be accompanied by increased economic cooperation.

WHAT HAS HAPPENED TO AFTA SINCE

Since 1992, many developments have transpired. The Philippines ratified the WTO Treaty in 1996 two years after it was agreed upon in Marrakesh in 1994. It might be worth annotating that the passage of the WTO was helped by the emergence of a number of regional trade agreements. ASEAN had expanded and new deadlines were given to the new entrants, Vietnam (in 2006), Lao PDR and Myanmar (in 2008) and Cambodia (in 2010). The original signatories agreed to accelerate the full implementation of AFTA. Instead of 2008, it was advanced to 2003 in the ASEAN Summit of 1995 and even faster to 2002 in the ASEAN Summit of 1998.

I understand from my DTI friends that the Inclusion List now constitutes 98% of all tariff lines in ASEAN. Moreover, the average tariff rate is down from 12.76% in 1993 to 4.43% in 2000. Unprocessed agriculture products were to be phased in starting 1997 in seven equal installments, although products in the sensitive links like rice, sugar, garlic, meat was to be phased in at a later time starting 2001 to 2003. Again, it is noteworthy to recall that the EEC and the GATT also did not include agriculture, but the later WTO agreement covered agriculture, and as usual called for all QRs to be tarrified. And there remains a general exception list of products for reasons of national security, public moral, historical and archaeological value, etc. but these constituted only 1% of all tariff lines.

In review, did AFTA contribute to increased intra-Asean trade? As this seminar’s brochures indicated, there has been a significant increase in value of about US$95.2 billion by the year 2000 and a respectable increase in market share of up top 23.3% of total ASEAN exports. ASEAN trade grew by 30%, much larger than the 19% for total exports of the region. Did it increase the region’s competitive edge as a production base and did it attract more foreign investments? Certainly, in electronics, the region has attracted a lot of investments but it is not very clear to me that it was AFTA that provided the advantage.

Did AFTA lead to increased economic cooperation such that intra-ASEAN investments grew? Investments definitely grew and in the Philippines, our ASEAN neighbors invested in high-profile projects in industries like steel, infrastructure like telecommunication and toll roads, and in services like banking. The financial results of these investments provide a mixed story, but that is perhaps another matter. Did Philippine industries suffer from more competitive imports? The anecdotal evidence I have come across suggests that the answer is “Yes”, though one must add that formidable competition has come not just from ASEAN but from other Asian countries, particularly China, Taiwan and South Korea.

Were there any major weaknesses in the AFTA agreement? The mot striking drawback was the lack of safeguard measures. Other trade agreements allowed for sanctions or countervailing measures, like anti-dumping responses. Was the Philippines at a disadvantage in its implementation? The one area that has been highlighted is that in our tarrification program, we set the ceiling at 100% while other countries set initial maximum tariffs for a contentious product like sugar at 200 to 300%. But of course, as is often in trade policy, a lower tariff is greeted with applause by the consumers and complaints by the producers.

SOME REFLECTIONS

The traditional paradigm for more liberalized trade argues that industries will be more efficient in the face of competition from abroad, the consumer who will be better off with lower prices and better quality products will buy more, and more jobs will be created as access to markets improve. As profits and income add up, taxes increase, and infrastructure spending and investments in education multiply. This virtuous cycle continues to propel economic growth, not just in the Philippines but in ASEAN.

In reflecting over the past 10 years, on the impact of AFTA and other trade liberalization schemes, the consumer has been better off. It shows in the single-digit inflation statistics, but more eloquently, it show s in the shelves of our ever-expanding shopping malls. If our McKinsey friends are correct, the benefits to the consumer will show even more as the full impact of allowing foreign retailers set in — better and standardized products, improved linkages between producers and marketers, and more competitive pricing. In fact, it has been argued that the major sector in which the consumer has not better off is in food, particularly rice, which even with AFTA has been slow to liberalize. Comparisons have been made about prices of rice in the Philippines versus Thailand (about double) which gives us pause when workers argue for an improves minimum wage.

But we do have to worry that because of trade liberalization, Philippine manufacturing may not have been better off. A number of industrial firms have closed shops or are struggling. Electronics which has been one outstanding exception is now even weakened, with the global downturn. In garments, we have lost share and in a category like canned tuna, we encounter problems of market access. We have broken the US$20 billion marker in exports a few years back, but electronics constitute too large a share.

As with many issues in our country, there is no shortage of real or imaginary villains to blame. For one, there is a lack of basic industries, in steel, petrochemicals, pulp and paper, just to name a few that might have provided us a cost-competitive edge, as they do in other ASEAN countries. Not that we did not try to build up our basic industries in the early ‘80’s — with sad results. Not that we did not try again to build a major industry like petrochemicals in the late ‘80’s only to be thwarted over a location issue in the Supreme Court. The Malampaya Gas to Power Project totaling almost US$5 billion represents a major Greenfield project that has been successfully completed, but the jury is still out as to whether the endeavor will deliver satisfactory returns to the project sponsors and their lenders. There are few takers for Greenfield industrial projects, and we still have to prove that our checkered history on big projects is behind us.

Then there is infrastructure. Because of the country’s island geography, our infrastructure needs are much bigger than that of a more contiguous country — more airports and seaports and the transport to utilize them, and more submarine cables and bridges. And because government is constantly in deficit, most infrastructure, except in telecommunications is inadequate, and the private sector has to step in. But they will do so only if the returns are satisfactory and are assured that contracts will remain honored over a long time horizon.

Then there is labor whose productivity and manageability has been of increasing concern. Recently, the electronics sector has rang the alarm bells that there are pressures from their head offices to close down Philippine plants in favor of alternatives in China and other countries like Vietnam. This lament has been echoed for some time now, and no immediate relief is in sight. True, there are alternative jobs in the service sector, but except for prospects in some Internet and communications technologies, work in the service sector is part-time and not so skilled. We must remember that trade liberalization may be good for the consumer, but only if he has a good job and his disposable income is improving.

Looking back on AFTA’s past decade, the trade numbers look good, the programs have even accelerated, the inclusion list now has agriculture, and the consumer is much better off. And ASEAN cooperation, be they in the councils in Geneva or New York, or in solid investments in each other’s countries, has been good. There is a temptation to expand trade liberalization, to include even China, as our President reaffirmed in her Japan visit, adding even more worries to our industrialists.

But now as we celebrate the 10th year of AFTA, we should pause and reflect, on the deteriorating competitiveness of our industries and the disappointing numbers of new investments, be they foreign or local. It is not easy to find the correct answers and we should not expect that the best policy moves will deliver overnight results, but we have to address the major challenge of free trade — our competitiveness. For if we fail and do not produce enough goods for our local and foreign markets, we will end up exporting more of our people, some of them our best and our brightest. And that would be a setback to the overall achievement of AFTA and other trade liberalization programs.