Trade effects of regional co-operation: the case of ASEAN.
Sarmad, Khwaja ; Mahmood, Riaz
INTRODUCTION
Much interest has recently been shown in the effects of regional
trade co-operation among developing countries on their trading patterns.
This interest stems from the potential for facilitating development in a
group of developing countries through preferential arrangements and from
the expectation of significant mutual trade gains. However, the
experience of the implementation of discriminatory policies among the
developing countries has, in general, not yielded significant gains in
trade. An important exception is the Andean Pact, which provided an
important stimulus to the regional movement in Latin America.
The ASEAN experience also seems to be quite successful if measured
by the yard stick of the growth in intra-ASEAN trade--during the period
from 1970 to 1984 intra-ASEAN trade expanded almost seventeenfold from
898.5 million US dollars to 15.3 billion ,US dollars at an annual
compound rate of growth of 22.4 percent--which suggests that trading
patterns may have responded well to discriminatory policies. Of even
more significance for the long-run viability of the ASEAN integrative
formation is the distribution of gains from trade participation among
the co-operating countries. In this paper, an iterative statistical
model is used to measure relative trade gains and losses arising from
integration in terms of the rise (or fall) in a specific measure of
trade intensity. Regional trade flows are adjusted by removing the
trade-size effect so that the remaining differentials can be attributed
to regional policies. The impact on trade patterns of the measures
adopted to strengthen economic co-operation among ASEAN countries in the
late Seventies and early Eighties has also been investigated. (1)
THE ITERATIVE TRADE-INTENSITY MODEL
In recent economic literature, predictive models have been used to
analyse the effects of integration on trade. See, e.g., Savage and
Deutsch [2] and Carney [1]. In such models, the emphasis is only on
measuring the impact of discriminatory policies on changes in trading
patterns rather than on measuring the welfare effects of such changes An
iterative model, on the other hand, can be used to quantify trade values
for a hypothetical situation that would have prevailed in the absence of
a regional (e.g. ASEAN) co-operation and to analyse the effect of
discriminatory policies on the pattern of intra-regional trade. Thus,
the combined static and dynamic effects of integration on trade are
measured under the assumption that trade imbalances are met from the
flow of regional resources The main features of our iterative model are
outlined below.
T = [[x.sup.t.sub.ij]] is a (n x n) matrix of trade flows among n
countries for the year t whose diagonal elements, [x.sub.ij], are
assumed to be zero for i=j. The rows of the matrix represent the exports
of the countries, so that X = RT, where R is a (1 X n) vector of unit
elements.
From T a theoretical trade matrix T = [[x.sup.t.sub.ij]] is derived
in which every element of [??] = [[[??].sup.t.sub.ij]] represents the
country i's tendency to export in proportion to the size of its
trade on the assumptions that
1. trade among countries is the aggregation of consignments whose
money values, denoted by [c.sub.1], ......., [c.sub.m], are
statistically independent with finite mean C and variance
[[sigma].sup.2.sub.c] and
2. traded consignments [c.sub.i] for i = 1, ...., m are independent
of [P.sub.ij], the probability that a consignment goes from country i to
country j.
Then
[P.sub.ij] = o for i = j [P.sub.ij] = [SP.sub.i] [Q.sub.j] for i
[not equal to] j ... ... (1)
where S = [(1 - [[summation].sub.k] [P.sub.k] [Q.sub.k]).sup.-1] is
an adjustment factor for the diagonal elements such that R[??]R = 1 and
[P.sub.i] and [Q.sub.j] are the probabilities to import and export of
the ith and jth countries.
The [P.sub.i] and [Q.sub.j] are obtained by solving the following
two n-equations iteratively:
[K.sub.i] = [SP.sub.i] (1 - [Q.sub.i]) (i=1, ........, n)
[1.sub.i] = [SQ.sub.i] (1 - [P.sub.i]) (i=1, ........, n) ... ...
(2)
and [summation over (j)] [P.sub.j] = 1, [summation over (j)]
[Q.sub.j] = 1
where [K.sub.i] = f([X.sub.i]) and [1.sub.i] = f([M.sub.i]).
When the vectors P and Q have been estimated, the elements of the
matrix of expected trade flows Tare derived as follows:
[[??].sup.t.sub.ij] = S[P.sub.i][Q.sub.j] for i [not equal to] j
[[??]sup.t.sub.ij] = 0 for i=j ... ... (3)
The matrix of trading intensity N = [[[delta].sup.t.sub.ij]],
[[[delta].sup.t.sub.ij] = ([x.sup.t.sub.ij]/ [x.sup.t.sub.ij] -
1)].sup.-1] with -1 [less than or equal to] [[delta].sup.t.sub.ij] [less
than or equal to] [infinity], gives the relative deviations of the
expected trade values from the observed ones, while [DELTA] N =
[[[delta].sup.t.sub.ij] - [[delta].sup.o.sub.ij]] indicates an
intensification of trade when ([[delta].sup.t.sub.ij] -
[[delta].sup.o.sub.ij]) > 0 and the opposite of it when
([[delta].sup.t.sub.ij] - [[delta].sup.o.sub.ij]) < 0.
GROWTH OF ASEAN TRADE
The ASEAN region experienced a significant trade expansion during
the late Seventies and early Eighties. The years from 1970 to 1984
witnessed a compound rate of growth of almost 20 percent per annum in
commodity trade among the ASEAN countries, which was slightly higher
than the growth of the ASEAN trade with the rest of the world. As a
result, by 1984 regional trade accounted for a little over 20 percent of
the total, which was almost the same as in 1970 but represented a
substantial gain when compared with its relative importance in the early
Seventies.
Intra-regional trade has grown exceptionally fast since 1976, when
a detailed programme of action for promoting economic co-operation was
adopted by the ASEAN countries. The share of intra-regional trade in
total trade grew from only 16.3 percent in 1976 to 17.5 percent in 1980
and 20.4 percent in 1984. The impetus to the growth of intra-regional
trade during the Eighties, averaging 11.5 percent per annum as compared
with the 8.1-percent trade with the rest of the world, was provided by
the operation of relatively free trade regimes and additional measures
to promote regional trade.
Among the ASEAN countries, the country which registered the highest
annual growth rate (30.5 percent) of trade with other ASEAN countries
during the 1970-84 period was the Philippines. In 1984, the trade of the
Philippines with ASEAN countries was as much as 9.7 percent of that
country's total world trade. An interesting aspect of this trade is
the negative trade balance with all ASEAN countries, except with
Singapore, which is the largest single regional trade partner of the
Philippines (See Table 1).
Other ASEAN countries also attained impressive growth rates in
their regional exports during the same period, even though the growth
tempo was much slower during the years from 1979 to 1984. During the
same period, the regional trade of Malaysia, Philippines and Singapore
grew faster than their trade with the rest of the world, and in 1984 the
regional trades of those countries accounted for 26.7 percent, 9.7
percent and 28.6 percent respectively of their total trades as compared
with 20.1 percent, 4.1 percent and 23.7 percent respectively in 1979.
By far, the greatest contribution to the ASEAN trade is provided by
Singapore which receives an overwhelming proportion of the regional
exports of the member countries. In 1984, Singapore absorbed 86 percent
of the regional exports from Indonesia, 76 percent from Malaysia, 66
percent from the Philippines, and 59 percent from Thailand. Except with
Thailand, Singapore has consistently had a negative trade balance with
fellow ASEAN countries.
Changes in Trade-Intensity Coefficients
The matrix of the differences in relative deviations of the
expected trade flows from the actual ones, [DELTA] N. has been computed
for three different periods and reported in Table 2. Each [MATHEMATICAL
EXPRESSION NOT REPRODUCIBLE IN ASCII] indicates changes in
intensification in the aggregate volume of trade. For the period
1970-84, the changes in relative trade intensities indicate overall
gains or losses in aggregate intra-area trade arising from intergration;
the [DELTA] Ns for the sub-periods 1976-1980 and 1979-84 represent
shifts in relative trade intensities within the ASEAN area arising from
the implementation of discriminatory policies during the late Seventies
and early Eighties.
Two general observations can be made on the basis of the figures in
Table 2. Firstly, in general the [DELTA][[delta].sub.ij]s do not show
that ASEAN trade has intensified significantly in the wake of
discriminatory policies. In many cases, intensification of trade with
one country has been accompanied by disintensification of trade with
another ASEAN country. In other cases, changes in trading intensity are
only minimal. Secondly, the two sub-periods from 1976 to 1980 and from
1979 to 1984 are characterized by contrasting changes in trading
intensities resulting from the implementation of discriminatory
policies.
Various factors can explain this pattern of changes in trade
intensities. Firstly, the relative importance of intra-ASEAN trade has
changed only slightly because of the minimally faster growth as compared
with the growth of the ASEAN trade with the rest of the world. ASEAN
economies are still heavily dependent on industrialized countries which
account for around 60 percent of the total ASEAN trade. Secondly, the
bulk of intra-ASEAN trade consists of primary products and expansion of
trade in manufactures is limited because of lack of industrial
complementarity. Thirdly, with the exception of Singapore, ASEAN
countries continue to follow restrictive trade policies in varying
degrees. This has affected intra-regional trade directly and more
seriously by creating distorted economic structures which include less
efficient industries of the import-substitution type. Fourthly, ASEAN
trade liberalization programmes have been ineffective as far as the
regional orientation of trade is concerned. Lower margins of tariff
preferences have been accepted for only around 8,000 products which have
little trade content. (2) And, finally, the more or less random
distribution of trade gains and losses, as evident from the values of
the [DELTA][[delta].sub.ij]s in Table 2, reflects the concern of ASEAN
countries regarding the problem of distributive gains. In fact, there is
much delay in implementing intra-regional trade-liberalizing policies to
ensure an equitable distribution of gains and losses.
Indonesia
The structure of intensity change in Indonesia's regional
trade during the period from 1970 to 1984 shows that except with
Thailand there was a marked intensification of trade with Malaysia and
the Philippines and some improvement in both imports from and exports to
Singapore. That exports intensified more than imports is reflected in
the positive trade balance of Indonesia with these countries. In the
case of Thailand the opposite is true. Exports
'disintensified' faster than imports during the period from
1970 to 1984 as well as during the two sub-periods, 1976-80 and 1979-84,
resulting in a negative cumulative trade balance of Indonesia with
Thailand. As compared with the early Seventies and, in some cases, the
second half of the Seventies, the Eighties witnessed a
'disintensification' of Indonesian exports to ASEAN countries,
while Indonesia's imports intensified sharply with the Philippines
and Thailand, partly as a result of the easing of import restrictions.
Malaysia
With the exception of trade with Indonesia, Malaysia's
regional trade from 1970 to 1984 was affected negatively by ASEAN
discriminatory policies. Exports to Singapore intensified slightly, but
because of the large share of Singapore in Malaysia's exports the
effect of this intensification on the cumulative trade balance was
substantial. The implementation of discriminatory policies during the
late Seventies improved the intensity of Malaysia's exports to
Singapore and Thailand. On the other hand, exports to Indonesia and
Philippines were negatively affected. The situation worsened during the
Eighties. The [DELTA][[delta].sub.ij]s for Malaysia's exports
include -2.02 for Indonesia, -2.92 for the Philippines and -0.17 for
Thailand. However, import intensity was not much effected during this
period.
The Philippines
During the period from 1970 to 1984 the intensity of the total
trade of the Philippines with Indonesia and Thailand increased but it
declined for trade with Singapore and Malaysia. Discriminatory policies
during the late Seventies and early Eighties had a contrasting effect on
the Philippines' bilateral trade with ASEAN countries. The
[DELTA][[delta].sub.ij]s for its exports from 1976 to 1980 include -0.44
for Indonesia, -2.39 for Malaysia, 1.47 for Singapore and -0.14 for
Thailand. On the other hand, the [DELTA][[delta].sub.ij]s for the period
from 1979 to 1984 are 3.82 for Indonesia, 0.02 for Malaysia, -1.01 for
Singapore and 2.96 for Thailand.
Singapore
Among ASEAN countries, Singapore has the largest share in
intra-regional trade. The relative importance of this trade to Singapore
remained the same in 1984 and 1970 even though the relative importance
of its partners has changed. The implementation of discriminatory
policies during the subperiods 1976 - 1980 and 1979 - 1984 has had
opposite effects on its pattern of trade. The [DELTA][[delta].sub.ij]s
for the subperiod 1976-80 include 0.12 for Indonesia, 0.01 for Malaysia,
-1.44 for the Philippines and -0.01 for Thailand. For the subperiod from
1979 to 1984 the signs are reversed in three cases, and in the case of
the Philippines import intensities were not affected much.
Thailand
The effect of ASEAN integration on Thailand's regional trade
from 1970 to 1984 has been to intensify its bilateral trade with the
Philippines and Singapore while trade with Indonesia and Malaysia has
been negatively affected. Thailand's trade behaviour with respect
to other ASEAN countries has been significantly different during the two
sub-periods from 1976 to 1980 and from 1979 to 1984, as is evident from
the values of [DELTA][[delta].sub.ij]s given in Table 2. The
[DELTA][[delta].sub.ij]s lot Thailand's exports in the latter
period include 1.24 for Indonesia, -0.05 for Malaysia, -1.14 for the
Philippines, and -0.28 for Singapore, while for the subperiod 1976-1980
they are -0.07 for Indonesia, -0.14 for Malaysia, 0.75 for the
Philippines, and -0.17 for Singapore. Changes in import intensity are
also significantly different for the two periods.
CONCLUSIONS
The impact of co-operation policies on ASEAN trading patterns has
been evaluated for the period from 1970 to 1984. The effect of
discriminatory policies followed in the subperiods from 1976 to 1980 and
from 1979 to 1984 was also examined to provide some insight into the
relative effectiveness of these policies.
While there is no evidence that intra-area trade has intensified
for the ASEAN region as a whole during the 1970-1984 period, regional
trading patterns have been altered in varying degrees because of
discriminatory policies.
The ineffectiveness of discriminatory policies in promoting
intra-regional trade reflects the strength of institutional biases and
structural problems impeding the growth of intra-ASEAN trade. It is
possible that the restrictive trade strategies followed by member
countries and the heavy trade and economic dependence on the
industrialized countries also contributed to the ineffectiveness of
discriminatory policies.
Progress in intra-regional trade liberalization has been extremely
slow due to the overwhelming concern of the member countries for
ensuring an equitable distribution of benefits and costs of any
liberalization scheme before its implementation. The values of the
[DELTA][[delta].sub.ij]s are evidence that no member country has unduly
benefited from the preferential schemes. However, so far trade
liberalization has affected only a small percentage of total
intra-regional trade. More efforts are required to extend the
preferential trading arrangements so as to significantly intensify
intra-ASEAN trade.
Comments on "Trade Effects of Regional Co-operation: The Case
of ASEAN"
The fact that many less developed countries are making efforts for
the promotion of regional trade on preferential basis, similar to EEC and ASEAN, underscores the importance of such co-operation and of the
analysis presented in this paper. Utilizing a statistical model, the
paper attempts to measure the change in trade volume arising from
integration and preferential tariff policies among ASEAN countries. The
model should preferably have been provided with a theoretical basis. I
do not have anything to say on the methodology or the validity of the
model as such, because its application does offer some useful
information. There are, however, some suggestions which may prove to be
worth while.
The findings of the paper are as follows.
(i) There is no evidence that intra-area trade has intensified for
the ASEAN region as a whole, or that regional trading patterns had been
altered; and
(ii) Discriminatory policies have been ineffective in promoting
intra-regional trade.
The essence of promoting regional trade rests on the perception
that it will benefit the member countries. However, as shown in the
literature on customs unions, this depends on whether, as a result of
preferential tariff policies, increase in trade volume of the member
countries is due to trade creation or to trade diversion. Thus, simply
showing that preferential tariff policies increase trade volume does not
necessarily imply that they are conducive to the promotion of welfare.
Although an analysis of welfare aspects of preferential policies is not
the objective of this paper, it would have been interesting if the
authors had gone a step further to show trade-creation and
trade-diversion effects. The authors conclude in the paper that, owing
to preferential policies, increase in intra-regional trade is
negligible, thus suggesting that promoting regional trade on
preferential basis is not all that beneficial. If the small increase in
trade volume was due purely to trade creation, then, given the fact that
trade-liberalization policies among the member countries have affected
only a small percentage of total intra-regional trade, further
liberalization and, hence, promotion of regional trade is beneficial.
The authors have used aggregate data in their analysis which
conceal a considerable amount of important information. An important
aspect of promoting regional trade is that it should conform with the
comparative advantage of the country concerned, which is reflected in
the trading pattern. Applying the model used in this paper to
disaggregated data, it would be easy and interesting to see whether the
change in the trade volume of different goods among ASEAN countries due
to preferential policies conforms with the comparative advantage of the
country concerned.
Nadeem A. Burney
Pakistan Institute
of Development Economics,
Islamabad
REFERENCES
[1.] Carney, M. K. "Developments in Trading Patterns in the
Common Market and EFTA". Journal of the American Statistical
Association. Vol. 65. December 1970.
[2.] Savage, R. J., and K. W. Deutsch. "A Statistical Model of
the Gross Analysis of Transaction Flows". Econometrica. Vol. 28.
July 1960.
(1) During the period from 1976 to 1979, almost 4,000 product items
had been approved for zero tariff rates or preferential margins. In the
early Eighties; another 4,000 items were added to this list.
(2) Since tariff reductions are negotiated at the Seven-digit level
of commodity disaggregation, a very large number of articles on the
preferential trading arrangements list are extremely refined and have
little trade content.
KHWAJA SARMAD and RIAZ MAHMOOD *
* The authors are Senior Research Economist and Staff Economist
respectively at the Pakistan Institute of Development Economics. They
would like to express their gratitude to Syed Hamid Hasan Naqavi for his
help in making editorial changes and improvement in the paper.
Table 1
Cumulative Export Trade Balance
Country Years Malaysia Philippines
Indonesia 1970-1975 225.1 42.1
1976-1979 49.0 449.7
1980-1984 45.0 966.8
Malaysia 1970-1975 193.3
1976-1979 205.7
1980-1984 331.6
Philippines 1970-1975
1976-1979
1980-1984
Singapore 1970-1975
1976-1979
1980-1984
Country Years Singapore Thailand
Indonesia 1970-1975 1130.4 -254.8
1976-1979 2974.5 -560.3
1980-1984 3857.2 -477.7
Malaysia 1970-1975 -232.0 -311.9
1976-1979 1772.0 -352.5
1980-1984 7126.0 271.10
Philippines 1970-1975 -72.0 -100.9
1976-1979 13.7 -31.2
1980-1984 117.0 -21.8
Singapore 1970-1975 -144.2
1976-1979 228.1
1980-1984 1935.6
Table 2
Changes in Intra-ASEAN Gross-Trade Intensity
Importing Countries
Exporting Indonesia Malaysia Philippines
Countries
1984-1970
Indonesia 0.00 2.59 0.03
Malaysia 1.50 0.00 -0.48
Philippines 3.96 -46.14 0.00
Singapore 0.06 -0.01 -6.91
Thailand -1.20 -0.33 0.47
1984-1979
Indonesia 0.00 -0.59 -0.01
Malaysia -2.02 0.00 -2.92
Philippines 3.82 0.02 0.00
Singapore -0.35 0.05 1.09
Thailand 1.24 -0.05 -1.14
1980-1976
Indonesia 0.00 1.33 0.15
Malaysia -0.05 0.00 -0.06
Philippines -0.44 -2.39 0.00
Singapore 0.12 0.01 -1.44
Thailand -0.07 -0.14 0.75
Importing Countries
Exporting Singapore Thailand
Countries
1984-1970
Indonesia 0.06 -42.43
Malaysia 0.09 -0.88
Philippines -2.21 2.96
Singapore 0.00 0.36
Thailand 0.15 0.00
1984-1979
Indonesia -0.02 -1.37
Malaysia 0.06 -0.17
Philippines -1.01 2.96
Singapore 0.00 0.13
Thailand -0.28 0.00
1980-1976
Indonesia 0.03 -11.38
Malaysia 0.04 0.14
Philippines 1.47 -0.14
Singapore 0.00 -0.01
Thailand -0.17 0.00