Free Trade Areas and ASEAN

Free Trade Areas,

Many economists from all backgrounds are great advocates of free trade. Free trade is the idea that there are no barriers to trade enforced; it aims to eliminate tariffs, quotas and all other barriers. One argument for free trade is that with constant competition in markets, countries will have to focus on what they can specialize in and what they have the greatest comparative advantage in. Equally the increased competition lowers prices, makes companies strive for efficiency more and increases general living standards. Free trade is also argued to spread the value of freedom. Milton Friedman was an advocate of free trade in his book ‘Capitalism and Freedom’ stating that all trade barriers should be removed as well as an argument in favour of a floating exchange rate.

On the other hand there are many counterarguments to free trade. One of the most significant is the idea that it could negatively affect infant industries. These are industries that have only just begun, are currently under developed and weak comparatively to international competition. If free trade existed, these industries would seldom expand and grow to, in the future, gain a comparative advantage however protectionist policies could be used to help them survive for the mean time. Comparative advantage can change over time. Also, reducing imports can help the balance of payments and tariffs can raise government revenue which can be used for national services. Another important argument is protect against dumping, this can put many farmers especially (if agricultural dumping), out of work as the prices will decrease to unacceptable levels. Lastly, to follow on with agriculture, the argument that diversifying the economy creates a stronger economy is a common one. It’s basis is that the economy will be less reliant on a single product which may be effected due to famine causing fluctuating price. These goods also have a lower income elasticity which means, with economic growth, demand changes by very small amounts.

Free trade areas such as NAFTA (North American Free Trade Area) between Canada, Mexico and US or ASEAN (Association of South East Asian Nations) are some of the biggest free trade areas in the world. ASEAN was formed on the 8^th of August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Vietnam being one of the fastest economies in the world. ASEAN covers a land area of 4.46 million km², which is 3% of the total land area of Earth, and has a population of approximately 600 million people, which is 8.8% of the world's population. Therefore the ASEAN group is a very important and strong economic group.

Recently in January 2010, China signed with ASEAN an agreement to try to limit trade barriers between these countries. This is known as the ASEAN-China Free Trade Agreement. They signed this In 2002 and after joining the free trade network China and the six of the original ASEAN members, Indonesia, Brunei, the Philippines, Malaysia, Singapore and Thailand have reduced their tariff levels at around 5% per year. As of January 1 2010, 93% of the commodities exchanged between these countries had their tariff rates reduced to zero. The newest members of ASEAN are Vietnam, Burma, Laos and Cambodia and are aiming to eliminate all of their tariffs between other ASEAN groups by 2015.

Due to the rapid expansion of Chinese -ASEAN trade, China has actually, since signing the ASEAN-China Free Trade Agreement, came out on top of the US as ASEAN’s 3^rd largest trading partner behind the EU and Japan.

The road and rail networks are limited between China and ASEAN members; exchange almost exclusively takes place by sea. The Chinese government has allocated USD 25 billion to alleviate this problem, but the construction process will take years to complete. This is a reason why the rail network is currently being built in Thailand to China. So, Free Trade appears to have great advantages and many economists advocate it and yet, we have Economic Unions like the EU and Customs Unions like MERCOSUR which all aim to have trade barriers on non member countries. So, why do you think this is?