The Social Dimension of Trade in ASEAN: A preliminary Analysis of the Issues involved A Paper prepared for the ILO’s Integration Department (March 2004) By Gijsbert van Liemt This is a Draft. Do not quote. Comments Welcome at gbvanliemt@compuserve.com

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Index Introduction 1. Economic Integration in ASEAN

1.1 The ASEAN Free Trade Area (AFTA) 1.2 The ASEAN Investment Area (AIA) 1.3 AIA and AFTA change the nature of ASEAN decision-making 1.4 How to measure the economic impact of AFTA(and AIA)? 1.5 The 1997-98 Asian crisis and the challenges ahead 1.6 Singapore and two-speed integration

2. Gender, International Trade and Fragmentation 2.1 Gender and Trade 2.2 International Production sharing 3. The Social Dimension of Regional Integration

3.1 Introduction 3.2 The Economics of Regional Integration 3.3 The Social Dimension

3.3.1 Typical Concerns related to the Social Dimension 3.3.2 Establishing the Social Agenda at the Regional Level 3.3.3 Some key elements of a Social Dimension

4. The Social Dimension of AFTA 4.1 Introduction 4.2 The gap in levels of development complicates ASEAN decision-making 4.2 How to bridge the gap? Annex 1 ASEAN: Key data in the process of economic integration Bibliography Boxes:

1. The AFTA Common External Effective Preferential Tariff 2. AICO and automotive investments in ASEAN 3. Women in ASEAN export processing 4. The China factor 5. Regional Integration and the WTO

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Introduction This paper on the social dimension of the ASEAN Free Trade Area consists of four parts.

Chapter One discusses the economic integration process of ASEAN. Chapter Two introduces

two key dimensions of trade-related developments in ASEAN: Gender and Trade; and

International production sharing. Chapter Three deals with some generic issues related to the

social dimension of regional integration. Chapter Four makes some preliminary observations

on the social dimension of AFTA.

The reader is asked to keep in mind that this is a work in progress. Further work is needed to

deepen and broaden the analysis. Above all, the findings of the case studies undertaken in

different AFTA member countries are expected to contribute empirical evidence. In view of

the preliminary nature of the paper, readers are asked not to quote it. Comments are welcome

at gbvanliemt@compuserve.com.

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1. Economic integration in ASEAN

Regional integration is undertaken for political and economic reasons, which are meant to

reinforce each other. ASEAN -the Association of Southeast Asian Nations- is no exception.

At first, political considerations were paramount. Since the early 1990s, it has been the turn of

the economic considerations.

For a long time, political and strategic considerations were the main force driving ASEAN

integration. ASEAN was formed shortly after the collapse of the non-communist governments

in Cambodia and South Vietnam. There was much instability in the region with conflicts

between some member countries and the threat of communist-inspired insurgencies. The

founding fathers of ASEAN considered that political co-operation would help solve conflicts

and ensure peace and stability in the region. And it did. After much instability and hostility

ASEAN became a haven of peace, tranquility and prosperity.

To be sure, ASEAN had an economic component right from the start. In the 1970s and 1980s,

ASEAN introduced several initiatives to expand intra-regional economic co-operation (see

Annex 1). The ASEAN Industrial Projects (AIP) scheme was launched in 1976; the ASEAN

Preferential Trading Agreement1 (PTA) in 1977; the ASEAN Industrial Joint Ventures (AIJV)

in 1983, and the ASEAN Industrial Complementation Scheme (AIC) in 19882. But progress

on economic collaboration in the first two decades of ASEAN’s existence was “slow” (Gates

at al. 2001, p.5), ”insignificant” (Thongpakde, 2001, p.62), “played no more than a cosmetic

role” (Ariff, 2001, p.45), “produced meagre outcomes” (Yoshimatsu, 2002, p.130)3

The 1990s saw drastic change. The political and strategic raison d’être for ASEAN became

less obvious. The Cold War and the Cambodian conflict came to an end. In fact, Vietnam,

Cambodia, Laos and Myanmar shifted from earlier antagonism towards ASEAN to a desire

for membership. “Vietnam no longer saw the ASEAN countries as members of a foreign-led

1. In a Preferential Trade Area (PTA), lower tariffs are being applied to intra-regional trade in goods and services originating in member countries than to extra-regional trade 2 The Industrial Projects Scheme (AIP) aims to establish large-scale industrial projects in response to regional demand. The Industrial Complementation Scheme (AIC) wants to facilitate the region-wide production, specialization and exchange of automotive components. The Industrial Joint Venture Scheme (AIJV) covers a wider range of industries (Thongpakde, 2001) 3 However, Yoshimatsu makes an exception for the Brand-to-Brand Complementation (BBC) scheme, ‘an exceptionally successful arrangement” in his view

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anti-Communist alliance but rather as natural allies against a resurgent China”. Long-isolated

regimes in Cambodia and Myanmar sought international respectability (Pomfret, 2001, p.

227). For their part, the ASEAN-6 (Brunei, Indonesia, Malaysia, Thailand, the Philippines,

and Singapore) saw the potential strategic advantages and political and economic benefits of

expanding the organization to the whole of South East Asia. An enlarged ASEAN would

increase its diplomatic and economic weight in the international community; beef up

ASEAN’s strategic credibility; and enable a more efficient regional division of labour (Gates

and Than, 2001, p.2).

At the same time, economic factors pressed for attention. Intra-regional trade as a percentage

of total trade had hardly increased. ASEAN’s share of world foreign investment inflows

declined. China became an ever more formidable competitor for foreign investment and on

export markets. Labour-intensive manufacturing activities started to relocate to China. And

although, theoretically, with 500 million people as a market ASEAN has nothing to be shy

about, it is far from an integrated market. Economic co-operation was intensified through the

ASEAN Free Trade Area (1992) and the ASEAN Investment Area (1998).

1.1 The ASEAN Free Trade Area (AFTA)

In 1992, the ASEAN Free Trade Area4 (AFTA) was established to eliminate tariff barriers

among the Southeast Asian countries with a view to integrate the ASEAN economies into a

single production base; create a regional market; enhance ASEAN’s competitiveness in the

world market; and encourage specialization. A Common Effective Preferential Tariff (CEPT)

Scheme was established as the main vehicle for achieving trade liberalization (see Box 1).

Tariff rates levied on a wide range of products traded within the region were to be reduced to

no more than five percent. Quantitative restrictions and other non-tariff barriers were to be

eliminated.

4 In a Free Trade Area (FTA), no tariffs are levied on goods and services from other members. Each member continues to apply its own regime of tariffs to goods and services imported from outside the FTA

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Box 1 The AFTA Common Effective Preferential Tariff (CEPT) The Agreement on the Common Effective Preferential Tariff (CEPT) Scheme is the core mechanism for the implementation of intra-ASEAN tariff reductions on products originating from ASEAN members states. A product is regarded as originating from ASEAN, if at least 40% of its value originates from one or more members states. The goal is to reduce all tariffs on intra-ASEAN trade to a maximum of 5% according to an agreed schedule. Tariff reduction is to be achieved in two ways: Normal Track and Fast Track. The new, less-developed members (Myanmar, Laos, Cambodia, Vietnam) are given more time to reduce their tariffs than the original members. Tariffs make up a significant share of their total revenue; lower tariffs can have drastic consequences for their State budget. Member states must submit lists with products for liberalisation and the dates by which this will take place. Products ready for tariff reduction are placed on the Inclusion List (IL). Products that are not yet ready for liberalisation are placed on the Temporary Exclusion List (TEL), to be subsequently placed on the IL. Products on the Sensitive List (subdivided into ‘Normal Sensitive’ and ‘Highly Sensitive’) enjoy even longer protection. Products and industries whose tariffs will not be reduced for reasons of national security, protection of human, animal or plant life and health, and of artistic, historic and archaeological value are placed on a General Exceptions List (GEL). As usual, progress on trade liberalisation can be measured in several ways. The number of product lines on the IL (and their share of the total) is an oft-used way. Another would be to relate the number of these lines to actually traded volumes. A third would focus on progress (or lack of it) in sensitive areas such as automobiles and automotive parts and components, and unprocessed agricultural products. The focus on tariff reductions under the CEPT risks distracting attention from non-tariff barriers which, on occasion, may be as important if not more important impediments to intra-regional trade. Source: various

1.2 The ASEAN Investment Area (AIA)

The factors that led to the adoption of AFTA (declining share in world investment flows; the

China factor) were also behind the ASEAN Investment Area (AIA) initiative. In addition, due

to the worldwide adoption of more investor-friendly policies, competition for investment

increased also with countries other than China. In 1998, the Framework Agreement on the

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ASEAN Investment Area (AIA) was signed. AIA wants to attract greater Foreign Direct

Investment (FDI) flows into the region from both ASEAN and non-ASEAN sources, with the

goal of a liberal and transparent investment environment for ASEAN investors by 2010, and

all investors by 2020 (Heinrich et al 2001)5.

Box 2: AICO and automotive investments in ASEAN6 The ASEAN economic ministers adopted the Brand-to-brand Complementation Scheme (BBC) in 1988. This scheme allowed an approved auto part to enjoy a minimum of 50 percent margin of tariff preference and local content accreditation if it was a component for the manufacture of any product in the participating countries (Yoshimatsu, 2002, p.130). This made it attractive for auto producers to concentrate production of individual parts in one country (and thus benefit from scale economies) and then export these to plants in other countries. The BBC was applied to assemblers only, much to the chagrin of auto parts suppliers. Even more than assemblers, autoparts producers need volume to be profitable. BBC’s successor agreement AICO (the Basic Agreement on the ASEAN Industrial Cooperation) that was signed in 1996 was declared open to any ASEAN-brand company provided it had a minimum of 30 percent ASEAN national equity. The 30% rule was controversial. While governments saw it as a way to maintain some degree of local control and give priority to local initiatives, the multinational auto companies saw it as a hindering factor (where to find a local partner?). Different ASEAN member states were also found to have different expectations of AICO; some intended to promote one or more ‘national champions’; others relied heavily on multinational investments. The 1998 economic crisis changed all that. Production and demand in ASEAN declined drastically. Worried about their continued attractiveness to foreign investors, ASEAN governments dropped the 30 percent national equity requirement. This had a significant, positive effect on the number of applications and approvals. Total applications, which stood at 17 by October 1997 jumped to 89 by march 2000. By that date 52 out of the 89 had been approved (Yoshimatsu, 2002, p. 138). The crisis also weakened local competitors, many of which came to face financial difficulties. The relative weight of foreign multinationals increased and so did their intra-ASEAN trade. 1.3 AIA and AFTA change the nature of ASEAN decision-making

The creation of AFTA and AIA affect the nature of ASEAN collaboration. Economic

cooperation is receiving a higher priority. Unavoidably, this is having an impact on the way

5 The differences made between ASEAN and non-ASEAN investors raises the thorny question of who is classified as an ASEAN investor and who is not. It can also be interpreted as discouraging investments from outside ASEAN. 6 Source: Yoshimatsu, 2002

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ASEAN countries do business with each other. From the earlier goal of pursuing peace and

stability in the region through decision-making based on consensus, the new, intensified

economic co-operation promises economic and social gains but also opens the way to discord.

For instance, AIA wants to attract more investments into ASEAN. That is of common interest

and need not lead to conflict. Member countries may be seeking different types of

investments. As Freeman puts it:

“..the sort of FDI activity that each of the AIA member countries might be seeking to attract, and can realistically support, will tend to differ. Malaysia may wish to attract foreign capital into its multisuper corridor project, whereas Laos may seek to encourage foreign capital in eco-tourism projects, or coffee processing. Similarly, the level of hi-tech industry that the Singapore economy can support is going to be ahead of what Vietnam can realistically expect to attract, at least in the short-term..”(Freeman, 2001, p. 99).

But competition for the same type of investment cannot be avoided. Trade and investment

liberalization promise to be beneficial to all in the long run, but in the short run national

interests may clash. The differences on automobiles between Thailand and Malaysia are a

case in point.

In the process, the Association’s credibility may become an issue. As Langhammer puts it:

“Having established AFTA, ASEAN is no longer a loose grouping based on consensus, mutual consultation, and co-operation. Instead, it has become a club offering services to members only. With firm commitments and timetables, there are now risks of losing credibility once commitments are ignored and timetables are missed” (Langhammer, 2001, p. 124)

1.4 How to measure the economic impact of AFTA (and AIA)?

Have AFTA and AIA made a difference? This highly relevant question is not easy to answer.

First, one would need to separate the effects of AFTA and AIA from other relevant variables

that may be in operation simultaneously; think of multilateral tariff reductions, shifts in

multinational corporate strategies, or the economic crisis, among others. Each of these

variables may have as important an impact on trade and investment flows, if not more so.

Second, AFTA trade liberalization is a work in progress. There are still many exceptions to

the goal of full liberalization. Dates for completion differ. Progress is uneven. Third, how

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sensitive are intra-regional trade flows to market opening? A considerable share of ASEAN

trade consists of categories that may not be all that sensitive to tariff cuts. Malaysia’s imports

of crude palm oil from Indonesia are processed for re-export to third countries outside the

region (Ariff 2001). Refined and unrefined mineral oils are another example. The many intra-

regional exports to Singapore, which are re-exported to the rest of the world, are intra-

regional only in appearance. Many other exports originate in Export Processing Zones or

other special zones where no import duties are levied.

Which yardstick for success should be used? It may not be so easy to select which is the best

or most appropriate parameter. Should it be the share of regional exports in world exports?

Changes in FDI inflows or in FDI stock? Changes in the share of FDI inflows, or in world

FDI inflows?

Often used parameters are the share of intra-regional exports as a percentage of all exports,

and the growth in that percentage share. Many feel that ASEAN’s 22.8 % of intra-regional

exports in all exports compares unfavorably with the 61 % for EU-15 and 56 % of NAFTA7.

The growth in that percentage share from 17.4 % in 1980 to 22.8 % in 20028 also fails to

impress many. But how important are these figures? Some may see a high percentage of intra-

regional trade as desirable, but in times of crisis this may be a disadvantage rather than an

advantage. Dynamic extra-regional markets can help ensure a speedy recovery.

Ariff has clear views on this. After having argued that the percentage share of intra-ASEAN

trade in total ASEAN trade is unlikely to increase substantially, given the high degree of

economic openness of the ASEAN member countries, he argues that it is not in the interest of

ASEAN to have a high ratio of intra-regional trade. In his view that would be at the expense

of extra-regional trade “with significant cost implications due to massive trade diversion”9

(Ariff 2001 p.52). “What matters in the final analysis is the volume and value of total trade...If

non-ASEAN countries can offer better terms of trade, extra-regional trade should be

preferred, other things being equal. ASEAN must ensure that the expansion of intra-ASEAN

trade is not at the expense of its lucrative trade with non-members...The purpose of the AFTA

exercise should not be to increase intra-ASEAN exports but to make ASEAN exports

7 Source UNCTAD-Figures for 2002 8 Source UNCTAD 9 See on this also section 2.2

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internationally competitive.” (Ariff, 2001, p.55)...Freer intra-regional trade should lead to

cheaper sourcing of intermediate inputs from neighbors so that the final product can compete

in international market on the basis of quality and price. Only then can ASEAN be described

as a truly outward –looking regional grouping (Ariff, 2001, p.56).

1.5 The 1997-98 Asian crisis and the challenges ahead

The 1997-98 crisis was a traumatic experience for the ASEAN region. The crisis has been

attributed to a variety of domestic (shaky banking systems; real estate speculation; poor macro

management; lack of transparency and accountability) and international factors (uncontrolled

speculative capital flows being the most often cited). The costs of the crisis were high. In

addition to currency devaluation, bankruptcies, and job losses it led to a lack of confidence

among (foreign and domestic) investors, uncertainty, and doubts about the true base of the

earlier success. It also forced governments to focus more on domestic problems. Attention to

further regional integration suffered in consequence. The crisis laid bare the different views

on how integration could best be accelerated. The new members have long transition periods.

But even some of the ’old’ members continue to have high trade barriers.

1.6 Singapore and two-speed integration

Impatience with the slowness of regional trade liberalization has generally been cited as a

main reason why Singapore, the country with the lowest level of protection, decided to seek

free trade agreements with countries from outside ASEAN. Singapore now has FTAs with

New Zealand, Japan and the United States. These bilateral deals with non-ASEAN partners

come on top of closer collaboration of the “growth-triangle” type within ASEAN. This gives

the distinct impression that ASEAN is heading for “multi-speed” or “two-speed” integration

as is occurring in the EU (the “Schengen’ countries; the Eurozone). To be sure, ASEAN as a

group is also holding discussions with several potential partners. Of these, the discussions

with Japan, the Republic of Korea and China (ASEAN+3) have received much attention.

The other ASEAN members have mixed feelings about Singapore’s bilateral deals. Singapore

itself has given several reasons why it is seeking these deals. Among the many cited by

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Mahani (2002, p.1272) are: It keeps the interests of foreign investors in the region alive. It

continues the momentum of liberalization. It is a way to overcome the ‘convoy’ problem

(whereby the pace of integration is held back by the’ least willing member”).

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2. Gender, International Trade and Fragmentation 2.1 Gender and Trade

The effects of international trade on jobs are usually discussed in aggregate terms. How many

jobs have been created and how many lost due to international trade? How strong were the

direct and indirect employment consequences? What were the gross employment effects and

what the net effects (jobs gained less jobs lost) on employment? Can the effects of regional

trade liberalization be separated from those of overall trade liberalization?

More disaggregate types of analysis consider the effects on different types of jobs and

workers. Have jobs become more or less safe, more or less healthy, more or less stable? What

is the effect of trade on workers of different age groups, different levels of skill and education,

migrant and native workers?

Other types consider the location of jobs. It is usually assumed that areas, which already have

a high concentration of economic or industrial activity, attract more new investments because

they already have the infrastructure, a well-developed labour market, training facilities etc.

Nowadays, subcontractors are virtually obliged to locate close to their customers’ facilities.

Nonetheless, some investors prefer to start afresh at greenfield sites far away from where

established industry is located.

The gender dimension of trade and jobs cuts across the variables mentioned above, but only in

part. It can be decomposed into several sub-questions. Among these, the number of men and

women (and their skill and education level, age group) who found or lost a job (and whether

this job is stable, safe and well-remunerated) as a result of international trade is clearly a

refinement of the analysis suggested above. Other questions go well beyond this. A focus on

earnings and productivity might want to compare the situation of men and women within and

across countries. A sectoral analysis would ask which sectors make more intensive use of

male workers and which more of female workers.

When one seeks to deepen the analysis, other questions emerge. Why is the female

participation ratio different from one country to the next? Why are certain sectors dominated

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by male and others by female workers; what explains the similarities and what the differences

across countries? What is the role played by personal and family preferences, by cultural

factors, by scarcity or abundance of workers with specific skills or levels of education, by

relative earnings? Attempts at even further disaggregation would ask the same questions for

workers at different levels of responsibility.

Often the link to trade will be weak, i.e. women and men will or will not be found in certain

positions or in certain sectors regardless of whether or how much that sector participates in

international trade. When gender equality has a low political priority, when a particular

culture frowns on women performing a paid job outside the home; when as entrepreneurs

women find it hard to obtain credit or can only register their business under their husbands

name, it should not come as a surprise to find few women in paid work in any sector (traded

or not). When educational and training opportunities for girls are few it is not altogether

surprising to find a low number of women employed in responsible positions. When few

women are trade union members, this might be a reason why they have lower earnings and

less job stability. Participation in international trade would in all likelihood not be a critical

factor here.

Nonetheless, the more specific effects of gender and trade meet at at least two junctures. One

is gender discrimination. The other is in international fragmentation of production. On

discrimination Black (2002) argues that gender discrimination is costly to employers because

they forego profits in order to indulge their ‘taste for discrimination’ against women (i.e. they

hire fewer than the profit maximizing number of women, employing more men who are

equally skilled yet more highly paid). Employers with much market power may be able to

practice discrimination. But employers who operate in a highly competitive environment

cannot afford to discriminate. Participation in international trade is a way of enhancing

competition. Enhanced participation in international trade should thus lead to a reduction of

earnings and employment disparities between women and men10.

10 Black points at the case of the US to illustrate how the gender earnings gap narrows in an era of increased competition through international trade. In the US, since 1960, the gender wage ratio and the share of imports in GDP have followed similar time trends, with both series remaining fairly constant between 1960 and 1980, then increasing dramatically through the early 1990s. But she admits that the case may be less straightforward than might appear at first sight. The increases in women’s educational attainment, for example, may complicate the empirical analysis. If trade disproportionately hurts less-skilled workers and women comprise a disproportionate share of less-skilled workers, then trade will also affect the relative wages of men and women through this route. Another relevant factor may be the change in unionization rates over the period.

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Box 3: Women in ASEAN export processing

As has been the case elsewhere, the ASEAN countries have seen an increase in women’s participation in the labour force in recent years. Increased employment opportunities, better family planning and lower birth rates (fewer children to look after), the need to contribute to the family income in times of crisis, more and better education possibilities for girls, and changed attitudes towards women working outside the home are all believed to have played a role in this. Women’s enhanced participation in (labour intensive) manufacturing for export is a very visible feature of enhanced participation in international trade. Many of the workers concerned see this type of job as desirable and attractive; it is often less physically demanding and offers higher earnings than, say, working on the land. It offers the advantages of being employed in the formal sector. There is less room for abuse as in domestic services. In China, young women travel hundreds of kilometers to find work in export processing in the prosperous coastal zones, their remittances constituting an important source of income for their families back in their home provinces. Nonetheless, such work is not seen as so favorable by all. Reports mention poor and even dangerous working and living conditions (notably the fire hazards associated with “three in one” factories, which combine workplace, dormitories and the stocking of components and intermediate products in the same building) and little opportunity for advancement. Verbal and sexual harassment, long working hours, lack of career possibilities, and the implicit or explicit expectation that women leave employment after having worked for a set number of years (e.g. when they marry and/or get children) are often mentioned in this respect. Lack of employment stability is also frequently mentioned. Many are active in “footloose” industries, which by their very nature are easily relocated. Worldwide competition among workers in such industries as garments and electronics, or services such as call centers is said to be above all competition among women workers. Activists in importing countries can be critical of assembly-type jobs in export processing. Set against some global standard these may look decidedly unsatisfactory. Working hours can be long. Safety and health conditions may be below the expected standard. When local wages are translated into the equivalent of US dollars this invariably raises eyebrows. But when compared with local alternatives of either paid or unpaid work these jobs may not be so unattractive. The fact that many young women line up for them is an illustration of this. The empirical questions relevant for the purposes of this study include the following. -By how much has female employment increased; in which sectors; to what extent can this increase be explained by increased participation in international trade? -To what extent do men and women compete for the same job? When, where and why (lower pay at the same level of skill/educational /experience; higher productivity; greater dexterity; less inclined to organise) are women preferred? -What are working conditions (safety and health; working time; employment security) like and how do these compare to the likely alternatives?

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-Do these women workers compete with women in other countries doing the same job and what is the effect of this competition on labour relations? -To what extent is enhanced participation of women the result of an explicit policy goal and to what extent is it an unexpected side-effect of a more general export promotion policy? 2.2 International production sharing (a.k.a. international fragmentation of production, or

global sourcing)

There is a growing tendency for production processes to be split up in stages

(fragmentation/segmentation) and to have these different stages performed by different actors

in different places and, increasingly, in different countries (international production sharing).

Technically, for many products it has become easier to break up the production process into

stages and to have each stage performed at different locations. Lower transportation costs and

advanced communications facilitate the trend towards international segmentation of

production.

In certain sectors this international production sharing has reached a high level of

sophistication and refinement. Examples are clothing, footwear, and certain types of

electronics. Typically, East Asian (but also North American and European) companies have

final assembly done in China, South East Asia (and, to a lesser extent, Mexico, Central

America and the Caribbean) for export to OECD markets. These arrangements have in

common that- all other things equal- they seek to have the most labour intensive activities

done where –internationally- the labour cost/ productivity relationship is particularly

favorable. Much of this assembly is performed by young women.

The quality of these jobs is the subject of much debate. International production sharing has

significant effects on labour law and labour relations. As one observer put it “...Whereas

employees used to work for an identifiable common employer, today they occupy an often-

uncertain location on a global production and distribution chain... Whereas...“employees’

used to be pretty much identifiable as such for statutory and social purposes, today more and

more workers around the world are self-employed, are reluctant parties to the “new

psychological contract” of discontinuous, serial and sometimes contingent jobs, ...that leave

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their legal status unclear, their economic future uncertain, and their sense of solidarity greatly

attenuated” (Arthurs, 2001, p.282-83).

Some argue that production sharing is above all a regional phenomenon. Enhanced trade in

components is taking place within the same regional grouping (NAFTA, AFTA) because

participating countries share the same institutional regime and because external trade barriers

place outside suppliers at a disadvantage. Others play down these factors and stress the

significance of global sourcing. In both cases, however, the share of parts and components

(intermediate products) in all trade appears to be growing at the expense of that of final

products. The production of parts and components, which is often a capital intensive

operation, generally is undertaken in wealthier economies. They are then exported to lower

labour cost countries such as Thailand and Indonesia for further assembly, which is generally

a labor intensive operation (Ng and Yeats, 2003). In the second half of the 1990s fully one-

half of China’s imports and exports were processing-related in traditional industries (textile

and garments; leather and shoes) and “new” industrial sectors (machinery and electric

machinery) (Lemoine et al, 2002).

In sum, a gender-oriented trade analysis should thus approach the issue from two angles:

nationally, questions need to answered such as why is access to training and education easier

for men than for women, and what can be done to remedy it? Why is it easier for men than for

women to set up their own business, and what can be done to remedy it? What would be the

effect of a gender equality policy on women’s participation in the economy and how can this

be brought about? Internationally, a different set of questions is relevant, such as why have

assembly-type industries, which make intensive use of female labour become so important in

the recent past?

Box 4 The China factor11 China is now a WTO member. The world garment trade is governed by the Agreement on Textiles and Clothing (ATC- the successor to the Multi Fibre Arrangement MFA). The quota system established under the MFA and the ATC has generated a structure of exporting countries, “which has less to do with comparative advantage than with market sharing, based on the availability of quotas”. All textiles and clothing quotas under the ATC are to be phased out by 1 May 2005. Will all or most traded garments come from China after 2005? This is the

11 Source: Spinanger and Verma, 2003

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highly relevant question that Spinanger and Verma (2003) address in a recent paper. They believe that there are indications that this might indeed happen. But they also believe that the underlying assumption (complete liberalization of trade by the agreed date) is unlikely to come about. Given the slow pace at which trade barriers in this industry have come down until now12 the possibility that some protection is likely to persist after 2005 can not be excluded. They point at four recent instances of trade liberalization to illustrate their case for a possible shift of production to China. -When Canada in 1997/98 lifted its quotas on woven shirts, blouses etc. sourcing almost immediately shifted to China, out of countries like Bangladesh, South Korea, Thailand and Indonesia. -The toy industry. This industry is just as labour intensive as the clothing industry but unaffected by quotas. It is highly concentrated in China and Taiwan, with Hong Kong acting as a service center and source of human and physical capital inputs. These three economies account for close to 75 percent of the toys exported by developing countries. -Brassieres. When the US liberated the importation of brassieres China’s share of the market shot up from roughly seven percent in early 2001 to over 20 percent by the end of 2002, much to the detriment of Mexico. -Suitcases. When the US liberated suitcases and similar luggage of textile fabrics China more than doubled its share to 60 percent, relegating Thailand to a distant second place. Spinanger and Verma attribute China’s success to a variety of factors ranging from the country’s good transportation, energy, financial and communications infrastructure, to its ability to tap the “overseas Chinese’ connection, and to it being able to produce most components domestically thus reducing the cost, time and risks involved in international sourcing.

12 They point at the ‘back loading’ of the actual elimination of quotas to the final tranche and cite a recent WTO report that notes that thus far merely 15 per cent of the quotas have been eliminated

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3 The Social Dimension of regional Integration 3.1 Introduction The case for a social dimension is based on the fact that regional integration has benefits and

costs. The benefits are usually spread widely across the population (more choice; lower prices

to consumers) and take time to make themselves felt (more efficient use of resources;

economies of scale; higher productivity; new ventures and new job openings). The costs, on

the other hand, can be highly concentrated (plants or lines of production close; redundancies

take place in concentrated geographic areas) and be felt relatively quickly (accelerated pace of

production; pressure on wages and working conditions). This chapter will briefly consider

some relevant economic dimensions of regional integration and then discuss some generic

aspects of the social dimension.

3.2 The economics of Regional Integration

Economists distinguish static and dynamic effects of Regional Integration (RI). The static

effects or once-and-for-all effects arise from a shift in trade and consumption, and in the way

production factors are allocated. Regional integration aims to liberalize trade, which should

lead to higher levels of welfare. But because of its discriminatory nature this need not be the

case. A Regional Integration agreement facilitates trade among members but discriminates

against trade with non-members. Consumers stand to gain when local supplies are being

replaced by cheaper imports from another member country (‘trade creation’) but they lose

when the agreement leads to a shift in a country’s imports away from low-cost non-members

to higher cost producers from a member country (‘trade diversion13’). Increases in intra-

regional trade thus need not be an indication of higher welfare levels.

13 The costs of trade diversion are borne by those non-members who see their markets disappear despite being the lowest cost producer, and by those within the RIA who are forced to buy more expensive goods. Consumers pay higher prices because they buy from the lowest cost producer within the region (and no longer from the world’s lowest cost supplier). There is thus an intra-RIA redistribution effect as these consumers subsidize these producers from within the region. This redistribution effect is part of a larger, and politically sensitive set of distribution-related issues. Prominent among these is that, all other things being equal, new industrial activity tends to gravitate towards those countries and areas, which are already the most highly developed. However, for regional integration to be widely accepted it should lead to less rather than to more regional imbalances. This is why an equitable distribution of costs and benefits is usually seen as an essential component of economic integration.

19

The dynamic effects are the principal motive for countries to engage in economic integration

agreements. Regional Trade Agreements (RTAs) are seen as beneficial because they lead to

more competition, higher levels of productive efficiency, specialization, and to cost savings

due to the exploitation of economies of scale. Greater exposure to new ideas and foreign

markets should result in companies producing more efficiently, adopting new techniques and

organizational practices, reaching higher levels of quality and flexibility, and investing more

resources in staff training14.

Nevertheless, closer economic integration does not just result from government initiatives.

‘Spontaneous’ factors also play a role. Cheaper and faster telecommunications and

international transport have reduced the impact of physical distance-related costs, and

encouraged companies to internationalise their activities by engaging more in international

trade, in subcontracting, and in relocation. These ‘spontaneous’ factors will continue to be

influential regardless of the progress (or lack of it) made in official negotiations (making it

more difficult to assess the social and economic impact of regional integration agreements).

Box 5 Regional Integration and the WTO

At first sight, the discriminatory nature of Regional Integration Agreements would seem to

violate the GATT/WTO principle of non-discrimination. Nonetheless, the GATT/WTO

permits contracting parties to enter into regional trade agreements on condition that these

meet specific conditions (transparency; commitment to deep intra-regional trade

liberalization; neutrality vis-à-vis non-parties trade). The WTO takes the view that Regional

Integration Agreements (RIAs), through closer integration between the economies parties to

the agreement, can make a contribution to the expansion of world trade. It considers,

however, that the purpose of such agreements should be to facilitate trade between the

constituent territories and not to raise barriers to the trade of other members with such

territories; and that in their formation or enlargement the parties to them should to the greatest

extent possible avoid creating adverse effects on the trade of other members.

14 Nonetheless, it must be kept in mind that these benefits are expected, potential benefits, which need not or need not automatically materialize. Trade liberalization strengthens the motivation for firms to modernize, but they may lack the means to do so successfully. In certain cases, Regional Integration Agreements (RIAs) can even result in less competition, for instance, because members allocate control of different sectors to different countries (‘agreed specialization’).

20

3.3 The Social dimension

Trade and capital liberalisation demand adjustments in the structure of production and

employment. Labour and capital need to move from slow to fast growing activities and sectors.

Roughly speaking, this occurs either within companies or through the market. For workers, the

flow to expanding activities can be problematic. Labour markets are often not particularly

transparent. It takes time for information about new job opportunities to reach workers. Some

may need to be retrained and that also takes time

The above is relevant for all types of market opening. However, regional integration differs from

unilateral and multilateral market opening in that it offers the possibility of establishing

supranational structures and organisations to cope with, among others, the social dimension.

How effective and how comprehensive these structures are depends on many factors, including

the resources available and the underlying political commitment. Which aspects of the social

dimension should be set (and executed) at the regional level and which should be typical national

responsibilities (‘subsidiarity’) is a further matter for consideration.

3.3.1 Typical concerns related to the Social Dimension

Regional integration can give rise to a number of concerns. The jobs created thanks to RI-

induced higher economic growth are a principal reason why governments enter into RI

agreements. Nonetheless, the net number of jobs created as a result of Regional Integration

(RI) can be hard to establish with much precision. Some people will find a job whilst

others may lose theirs. Yet others may experience an erosion in their wages or working

conditions. Trade and capital liberalisation enable large companies to make a more rational

use of productive capacity across the region. How the ensuing efficiency gains are

distributed among the parties concerned depends on the market power of each. Workers are

concerned that trade and capital liberalisation weakens their bargaining position.

Employment The employment effect of regional integration is a key component of the social

dimension. Opponents stress the job losses that might result from RI. Governments stress the

21

number of jobs that will be created thanks to regional integration. A fundamental question is

whether RI can be separated from the many other factors that determine changes in

employment and the labour market. In other words, can the effects of RI be separated from

those resulting from changes in the macro-economic situation; from other trade policy

decisions, which are unrelated to regional integration; from those corporate strategies whose

adoption is facilitated by trade and capital liberalisation; or, for that matter, from the trade and

investment integration that would have taken place regardless of a Regional Integration

Agreement (‘spontaneous integration’). In many cases the net employment effects are small.

Even so, for specific categories of workers trade liberalisation can be a major problem even

when for the workforce as a whole it is not. Job losses are often concentrated geographically,

by sector, by skill category, and by age group.

Uneven distribution of benefits. Less developed and less efficient countries are typically

concerned that their efficient, more developed trading partners benefit disproportionately. The

high levels of productivity and quality typically associated with producers from more

industrialized countries are seen as a threat to the competitive position of those in low

productivity plants in countries at lower levels of industrial development.

There is also concern over regulatory competition; i.e. that competition from countries with

light regulations might place undue pressure on high standard countries. The labour standards

of the latter countries would be undercut when they have to compete with products made by

workers in the former countries. Free trade- so the argument goes- enhances competition,

including competition between governments for desirable business investment. Together with

increased capital mobility it puts pressure on governments to constrain their legislative and

regulatory interventions that are costly to business. This restraint may occur in a variety of

areas including taxes, investment restrictions, environmental and industrial policies and in the

area of labor laws and regulations.

And there is concern about uneven bargaining power. The elimination of barriers to trade and

capital movements has given 'capital' the option of exit, whereas 'labour' is still the immobile

production factor. This would give the representatives of 'capital' an added advantage over the

representatives of 'labour' as the former's threat to relocate is more and more a real one. The

above concerns related to the imbalance between capital and labour; between high standards

22

and low standards, high productivity and low productivity, and between high wage and low

wage countries, are behind the calls to add a social dimension to economic integration.

3.3.2 Establishing the social agenda at the regional level

Many governments are receptive to the concerns of those who feel threatened by the speed

with which and the conditions under which market opening taking place. Sectors which

successfully manage to present themselves as being of strategic importance (or are

particularly well-connected to those in power) have shown to be successful in getting their

views across. To accommodate these concerns, governments have accompanied economic

integration by policies to facilitate adjustment, by transition periods, by respect for a set of

minimum standards, by compensatory schemes, and by ‘special’ treatment for sensitive

sectors. Which of these elements of the social dimension will ultimately be acknowledged as

such, what the goals of the social dimension should be, which instruments should be used,

and who should be responsible for bringing it about, is the subject of much debate.

What the social agenda of a particular integration agreement will ultimately look like is

thus not easy to predict. Different actors have different views on the desirable level and type

of social protection. At national level, employers' organizations need to find common ground

among the interests of different sectors and industries, small and large firms, essentially

nationally operating and multinational enterprises. Trade unions encounter similar problems.

By definition, the regional level complicates discussions by one layer.

A further complicating factor is that each country may be in a radically different situation at the

economic level (inflation, economic growth, budget or trade deficit), and at the social level

(unemployment levels, wages, productivity, union density, means of financing social security).

These situations determine in no small way the ambitions and the expectations of each country's

participants.

Lastly, there is the relationship between law and collective agreement. Countries differ in the

balance between bargaining and legislation for achieving the desired level of social protection. In

some countries, social protection is mainly the result of collective bargaining. Legislation

provides the framework. In others, it is the legislator who has regulated most of the social space.

23

3.3.3 Some key elements of a Social Dimension

Elements that are generally seen as part of the social dimension of economic integration

agreements are: special treatment for ‘sensitive’ sectors, transition periods, intra-regional

compensation schemes, policies to facilitate adjustment, and commitment to a set of minimum

labour standards. We will briefly discuss the last three of these elements.

Intra-regional compensation schemes have been suggested because economies with efficient

industries tend to benefit disproportionately from the integration process. Uneven growth can

further widen existing income disparities. Attempts to redress regional imbalances have taken

several avenues such as intra-regional fiscal compensation schemes; regionally differentiated

industrial development incentives; and ‘agreed specialization’.

Facilitate adjustment. Governments that want to ensure a fair distribution of the costs and

benefits of trade liberalisation can provide adjustment assistance. Adjustment policies help

ensure that workers transit smoothly from one job to another. Measures can have a labour market

information component (where are the new jobs and what do they require?), a geographic

mobility (people to jobs or jobs to people?), and professional flexibility component (modalities

of training and retraining). The promise of assistance can be a useful tool to persuade workers to

accept trade liberalisation. But it may be hard to determine decisively whether a person’s

redundancy is due to enhanced participation in international trade. It can be harder still to

determine whether increased trade with a particular country or group of countries (which is the

essence of Regional integration) is the culprit.

Minimum standards. It can be difficult to achieve agreement on a social dimension in

economic integration agreements. Progress can be slow. That is why establishing a set of

ground rules often seems the most viable option. Such a set of ‘social ground rules’, including

legislation to allow a proper system of industrial relations to function, is designed to ensure

that there is a floor below which social standards should not fall in certain key areas.

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4 The Social Dimension of AFTA

4.1 Introduction

The possibility to include a social dimension is a key feature of Regional Integration, as the

previous chapter has pointed out. What such a Social Dimension will look like is decided

through a bargaining process between the governments and the other concerned actors of the

participating countries. Analytically, the effects of regional integration on wages, employment

and working conditions may be hard to separate from other, non-RI related developments.

Governments try to cope with the social impact of RI through special treatment for ‘sensitive

sectors’, transition periods, compensatory schemes, policies to facilitate adjustment, and the

introduction of a set of minimum labour standards.

Some measures (e.g. policies to facilitate adjustment) are typically taken at the national level.

They are the responsibility of national governments. Others (special treatment for ‘sensitive’

sectors; transition periods) are the subjects of bargaining among participating countries. The

different lists (General Exclusion list; Sensitive List) and the different dates by which tariffs

should be eliminated are examples in the case of ASEAN. Typical region-wide arrangements

such as intra-regional compensation are more complex and controversial.

The ASEAN Free Trade area is a ‘shallow’ type of integration. Its impact on member

economies is thus less than that of such deep forms of integration as the European Union. By

implication, socio-economic developments in member countries are likely to be determined

more by non-AFTA related developments than by AFTA.

This chapter deals with the ways in which AFTA countries are coping with the social

dimension. Much of the information for this chapter –and that on individual country

experiences, in particular- will be provided by the country case studies. What follows is a

brief, preliminary discussion of some of the key region-wide issues involved.

25

4.2 The gap in levels of development complicates ASEAN decision-making

The huge disparity in the level of economic development inside the ASEAN-10 is bound to

complicate decision-making. The new members are at a much lower level of development

than the old members. The per capita income of Laos is only one percent of that of Singapore.

This is bound to make decision-making more difficult; countries at different levels of

development tend to have different types of concerns. It may be difficult to reach consensus

and to agree on priorities. For instance, for the new members infrastructure development or

the orderly transition to a market economy may have a higher priority than trade or capital

liberalization. Also, lower tariffs can have immediate and drastic fiscal consequences for

these countries.15

On the social side, a comparable story can be told. Singapore citizens are accustomed to

having a sophisticated social safety net; its workers to good secondary benefits. These are

levels of social protection that workers in the least developed member states can only dream

of. Region-wide discussions of the social dimension must find a way to cope with these huge

differences in the expectations and aspirations of workers.

4.3 How to bridge the gap?

The gap in socio-economic development between the old and the new members raises

questions of intra-regional equity and concerns about the emergence of a two-tier or dual-

track system. Gates and Than (2001) argue that the older members have recognized that they

must help the new members to accelerate the processes of growth and structural change. They

welcome the initiatives that have been taken by the organization and its older members to

establish training and assistance programmes to integrate the new members (Gates and Than,

2001, p.4). Ariff (2001) considers that ASEAN must ensure that the benefits and costs of

economic co-operation “are distributed among its members fairly equitably if not evenly”. But

this does not necessarily warrant financial compensation from those who gain to those who

gain less. “Such a compensation scheme will create more problems than it can solve” (Ariff,

2001, p.55). Rather, efforts should be made to reduce the “digital divide’ or “knowledge gap”

15 In Cambodia, customs duties made up 70% and in Laos 31% of the government budget in 1996 (Gates, 2001, p.18)

26

within ASEAN. Langhammer (2001) also sees little scope for intra-regional financial

compensation. The funds are simply not there. “In ASEAN, there is no CAP [Common

Agricultural Policy- a major redistributive instrument in the EU]. Nor is there structural

spending for poor regions. In this respect, nothing can be learnt from the EU and its

distribution targets” (Langhammer, 2001, p.108).

But Langhammer thinks that calls for compensation could well crop up on two other fronts:

migration and rice. The new members will raise pressure to relax the ASEAN-5 countries’

barriers against migration, and to include rice and other sensitive agricultural products in the

ASEAN FTA liberalization process. “ASEAN-5 rice farmers, producing under marginal

conditions, will have to adjust to the superior competitiveness of Indochina in these

agricultural items” (Langhammer, 2001, p.109).

The ASEAN-5 may yield to the pressure to relax barriers to migration, and they may not. In

the latter case, the relocation of activities may offer a way out. Ariff (2001) foresees a process

of relocation of marginal activities from the old to the new members whereby relocation

(partially) replaces migration. “Economic restructuring...will cause unskilled labour-intensive

industries and plantations to migrate from less competitive locations to more efficient ones.

This will also mean taking factories and plantations to where the workers are, instead of

bringing immigrant workers to factories and plantations, which has, in recent times, given rise

to considerable social problems’ (Ariff, 2001, p.61).

27

Annex 1 ASEAN: Key data in the process of economic integration

1967 Association of Southeast Asian Nations (ASEAN) created by Indonesia, Malaysia, the Philippines, Singapore and Thailand

1976 ASEAN Industrial Projects Scheme (AIP) adopted 1977 Preferential Trade Agreement launched

1981 ASEAN Industrial Complementation (AIC) scheme adopted

1983 ASEAN Industrial Joint Venture (AIJV) scheme adopted 1984 Brunei Darussalam joins ASEAN

1987 ASEAN Agreement on the Promotion and Protection of Investment signed

1988 Brand-to-Brand Complementation (BBC) scheme adopted; replaces AIC

1992 ASEAN Free Trade Area (AFTA) adopted

1995 Vietnam joins ASEAN

1996 ASEAN Industrial Co-operation Scheme (AICO) adopted; replaces BBC

1996 Agreement for the Promotion and Protection of Investment amended

1997 Laos and Myanmar join ASEAN 1998 Framework Agreement on the ASEAN Investment Area (AIA) signed

1999 Cambodia is admitted to ASEAN

Sources: Various

28

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Further Questions to collaborators

• Which products are on your country’s Temporary Exclusion List, and which on the Sensitive and General Exclusion Lists? Why are they placed on these lists? Have products moved from one list to another and if so, why? How important are tariffs as compared to non-tariff barriers as impediments to achieving more intra-ASEAN trade?

• Which are main products in your country’s trade with other ASEAN members; and which in trade with the rest of the world? Which have proven to be particularly dynamic products in recent years?

• How important are parts and components in total trade, and in regional trade?

• What, in your view, is likely to happen to the economy and to

employment if tomorrow all intra-ASEAN trade barriers were removed? What would happen if all trade barriers were removed?