Utilization of preferential tariffs and its impact on intra-regional trade: The case of Asean Free Trade Area (AFTA) / Mohammed Faiz Shaul Hamid

Mohammed Faiz , Shaul Hamid (2017) Utilization of preferential tariffs and its impact on intra-regional trade: The case of Asean Free Trade Area (AFTA) / Mohammed Faiz Shaul Hamid. PhD thesis, University of Malaya.

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Abstract

ASEAN Free Trade Area (AFTA) was established in 1992 with the main objective of increasing intra-ASEAN trade. Under AFTA, tariff reduction and elimination were introduced through the Common Effective Preferential Tariff (CEPT) and ASEAN Trade in Goods Agreement (ATIGA). As a direct impact of AFTA, the study focuses on the measurement of utilization of preferential tariffs under AFTA and the impact of intra-regional trade from the angle of intra-industry trade and revealed comparative advantage for the three most sensitive industries in ASEAN. A Panel Regression Model is then developed to investigate the determinants of preferential tariff utilization, intraindustry trade and revealed comparative advantage for the three industries. The study reveals for the first time, the utilization rate (UR) of AFTA for Malaysia using actual transaction level data at HS2 level for year 2007 to 2011. The UR showed that in general, AFTA only benefitted Malaysia’s export to a very low degree and it also implies that AFTA has not directly benefitted Malaysia’s export to ASEAN in total, recording only an average UR of 13.7% that represents only 3.4% of Malaysia’s total exports to the world. The concentration of products with high UR were mostly for lower value products and high value products on the other hand mostly do not benefit from AFTA due to competing Most Favoured Nation (MFN) tariffs. The Intra Industry Trade (IIT) and Revealed Comparative Advantage (RCA) indexes examined the bilateral trade pairs of ASEAN-5 countries with a total of 1680 observations for agriculture, automotive and textile industries. The agriculture industry showed trade creation effect for products such as ground nuts, soy bean, oil seeds, coffee and tea and trade diversion effect due to high degree of competition between Thailand and Vietnam for rice. The automotive industry showed a country centric result where trade creation effect was focused between Thailand, Indonesia and Philippines, whereas Malaysia and Vietnam in most cases were isolated from the significant pairs of countries for RCA and IIT. The textile industry in general showed two types of results. The first is on the competitiveness of ASEAN countries among each other for low processed or raw products and secondly, no competition between ASEAN countries for finished products such as clothing, apparel and others, which represent higher export values. Finally, by using the Hausman-Taylor (HT) estimation, determinants of preferential tariff utilization (PTU), RCA and IIT for agriculture, automotive and textile industries were investigated. The study found that the overall margin of preference and export values did not significantly affect the utilization rate of AFTA for the three industries. However, the impact of AFTA seems to be more positive in providing comparative advantage to Malaysia in the three industries. Exports, particularly in the textile industry, have a strong positive correlation with RCA and PTU. Also, the RCA showed positive relationship with exports for the textile and agriculture industries. In respect to IIT, this study showed that a strong relationship between the margin of preference and IIT for the agriculture sector. The IIT also corresponded positively with the increase in export and utilization rates in the textile industry.

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