Over recent years, free trade has become
a new trend in Asia. Asian countries have been focusing on ways to expand
intra regional trade that include: the establishment of Regional Trade
Agreements (RTAs) in the form of Free Trade Agreements (FTAs) and
Economic Partnership Agreements (EPAs).
As from the
basis of comparative advantage, every country in the world cannot fulfill
all of its needs. Trade then emerges as a means of fulfilling the needs
of a country.
Each country
has specific resources, but even though it may have abundant resources it
cannot meet all of its internal needs and demands, therefore it needs to
rely on other countries.
But along the
way, several obstacles depress the trend toward an integrated market.
These obstacles are fueled by strong opposition challenges that lead
public opinion toward misconceptions about free trade. According to
Krugman and Obstfeld (2000), there are at least three mythical values
that are used to argue against free trade. The first myth is about
resiliency to cope with foreign competition.
For a less
competitive country like Indonesia, the opposition argue that our country
may not be able to produce more efficiently than anyone else, given
competitive pricing. But as we learn from the traditional trade theory,
the differences in resource and factor endowments, production structures
and productivity lead to a complementary relationship.
Data from the
rapidly growing intra-industry trade in electronic products and
components, in the case of ASEAN China FTA (ACFTA), shows that at high
levels of disaggregation, product differentiation creates complementarity
in production and trade.
Even in
non-manufacturing, such complementarity can be found: Fruit and
vegetables produced in China’s temperate region are complementary to
those produced in ASEAN’s tropical region. My own research in 2009
revealed that there was relatively little evidence that showed a huge
Chinese product inflow to Tanjung Priok, as one of Indonesia’s main ports
after the ACFTA was in force.
When tracing
the data, I found that there was a statistical discrepancy between the
CEIC database in Hong Kong with trade data that we had in Indonesia. The
discrepancy was quite huge and revealed that illegal Chinese products had
overwhelmed the Indonesian market. However, since the ACFTA in 2010, the
discrepancy has become smaller over time. This implies that the ACFTA
eliminates the black market, which eventually diminishes illegal income
for the black traders.
The second
myth is about free trade hurting low income countries. The opposition
argue that trade liberalization will continue oppressing the already low
wage country. This is followed by the third myth that says free trade
exploits a country and makes it worse off if its workers receive lower
wages than workers in other nations.
These
arguments are often expressed in emotional terms with very little data
backing the evidence. My research in 2011 showed that free trade
equalizes the wage rates between the trading countries in the long term.
We see that free trade improves welfare in two ways.
First, it
increases the wage rate in Indonesia where labor is a relatively abundant
production factor.
Second, the
development of fragmentation raises productivity through a realization of
the scale economy. Even if we assume that free trade is induced by FDI,
and that a part of the benefit from FDI is refluxed to the investing
country as a reward of capital, the fragmentation still contributes to a
rise of income through the increase in wage rates and job opportunities.
Or to put it in a colloquial manner, as the production networks expand in
the region, the income gap is expected to diminish in the future.
Unfortunately
for Indonesia, the wage for labor is increasing in a very deviant manner
since it is now becoming a function of labor strikes. This will
eventually lead to a decreasing level of inward FDI, causing massive
unemployment.
To conclude,
in a world polluted with voluntary export restraints, administered
protection and a strong tendency toward the formation of trading blocs,
the difference between discriminatory and nondiscriminatory
liberalization may be blurred.
Thus, free
trade agreement may be the key to achieving regional trade
liberalization. This trade liberalization would be deemed to promote
international specialization and to increase regional output.
Moreover, it
is also seen to promote efficient use and allocation of regional
resources, thus facilitates the working of the international market
system and the working of price signals to ensure efficient allocation of
resources, international competition and the associated benefits to all.
In ASEAN,
intraregional labor mobility, foreign direct investment, and
financial-capital flows will play an increasingly important role in the
coming years. To the extent that harmonization of policies across
countries can help facilitate such movements, regional integration can
offer unique gains. Thus, regional trade integration can help reduce
political tension and promote political harmony among former enemies. ●
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