In the past, initiatives by developing countries to establish regional economic integration – called the ASEAN Free Trade Area – were coordinated and stimulated by governments and international organizations, without any involvement by the private sector.
AFTA (ASEAN Free Trade Area) is an agreement between the ASEAN countries to form a free trade area in order to increase the economic competitiveness of the ASEAN region and make the ASEAN a market union with more than 500 million inhabitants. The AFTA Council agreed that the target dates for achieving this objective would be 2010 for the six original ASEAN member countries and 2015 for the newer members.
ASEAN members are focusing on totally eliminating import duties on all products to achieve the ultimate objective of a free trade area. The elimination of import duties is expected to create an integrated market with a free flow of goods within the entire region. The main implementation mechanism for AFTA is the Common Effective Preferential Tariff (CEPT) agreement. The CEPT requires that tariff rates levied on a wide range of products traded within the region be reduced to 0% or 5%. Quantitative restrictions and other non-tariff barriers will be eliminated.
The purposes of AFTA is to support products produced within the ASEAN, make these products competitive in the global market, attract more Foreign Direct Investment to the region, and increase intra-ASEAN trade.
According to Indonesia’s Center of State Revenue Policy – Fiscal Policy Agency (Pusat Kebijakan Pendapatan Negara – Badan Kebijakan Fiskal), there are several benefits of AFTA for Indonesia, such as: greater and wider market opportunity for Indonesian products, lower production costs for Indonesian businesses that require capital goods and raw/auxiliary materials from other ASEAN member countries, more diverse product options in the domestic market for consumers, and greater opportunity to enter into alliances with businesses from other ASEAN member countries.
The next step is the establishment of the ASEAN Economic Community (AEC), including AFTA, with the main objectives of creating a single market and production base, a highly competitive economic region of equitable economic development, and a region fully integrated into the global economy by 2015. AEC would transform ASEAN into a region with free movement of goods, services, investment, skilled labor, and capital. A key characteristic of AEC is a single market and production base.
“There is no reason to doubt whether Indonesia is ready to join the ASEAN Free Trade Area (AFTA) as its competitiveness is quite good,” said Foreign Minister, Hasan Wirayuda.
The formation of AFTA by 2015, will certainly have an impact on opportunities for the ASEAN countries, especially Indonesia. Among them is the benefit of economic integration. Indonesia will be a global potential market, export country, and investor destination country. The AEC and AFTA will have more specific impact on various industries in Indonesia, such as the investment sector.
In the investment sector, AFTA, as a free-trade system in Southeast Asia, will result in an interdependency and integration of investment. It will impact investment and economic management, including in Indonesia, by making trade free of tariffs and non-tariff barriers, meaning that goods produced by ASEAN countries will be free to enter each ASEAN member country.
Foreign investment in Indonesia is regulated and limited under Indonesia’s Negative Investment List, or Daftar Negatif Investasi (“DNI”). A new DNI was issued this year and, according to Mr. Hatta Rajasa, who was Indonesia’s Coordinating Minister for Economic Affairs at the time, one of the reasons for revising the DNI was to accommodate ASEAN economic integration to allow the free flow of investment.
This demonstrates that the ASEAN, especially Indonesia, is a large market with a substantial production base that encourages increasing foreign investment in each member’s domestic market as well as the intra-ASEAN market. All these factors create a good climate for foreign investors to evaluate the opportunities and benefits of establishing a legal entity in Indonesia.
According to the Indonesian government, implementation of AEC and AFTA will also have some negative effects in Indonesia. Small enterprises, in particular, and poorly educated laborers cannot compete fully and fully benefit from an open market.
The Indonesian Government will play a pivotal role in reconciling this gap with comprehensive and clear regulations regarding the implementation of AFTA and AEC.