A New Front in the Free-Trade Wars

The ASEAN nations are slashing tariffs to compete with China

Supplying shampoo to Asia used to be a major headache for Procter & Gamble Co. Because of onerous trade barriers, each time the company wanted to launch a "new and improved" Rejoice, Pantene, or Head & Shoulders, it had to buy new production gear for separate plants in Thailand, Indonesia, and the Philippines. Now, P&G exports to most of Asia out of its single remaining shampoo factory in Bangkok, cutting its product-rollout costs by some 75%. Why? A pact by the Association of Southeast Asian Nations (ASEAN) to drop tariffs on goods traded within the 10-nation group to 5% or less.

China's entry into the World Trade Organization gets all the attention, but a new front in the free-trade wars is opening elsewhere in Asia. With little fanfare, the decade-old ASEAN Free Trade Area (AFTA) treaty is starting to reshape the Asian strategies of dozens of multinational companies as its terms finally go into effect (table). Falling tariffs have allowed consumer-products giant Unilever Group to make Indonesia its regional production base for Lipton tea bags, and South Korea's LG Electronics has focused refrigerator making in Indonesia. The biggest impact is being felt in cars, where tariffs plunged from as high as 70% to 5% on Jan. 1. In some car models, General Motors, BMW, and Ford now supply the entire region from Thailand. "AFTA opens up whole new opportunities," says Terrence Lau, Ford Motor Co.'s Asia government-relations officer.

It's still unclear whether, given the rapid rise of China, AFTA will provide the economic boost the region's leaders envisioned when they signed the agreement in 1992. Then, Southeast Asia was one of the world's most dynamic growth zones and lured twice as much manufacturing investment as China. By dismantling barriers within ASEAN, AFTA signatories figured they could spark still more investment by offering manufacturers a unified market of 500 million consumers. Local consumers and industries would benefit from cheaper imported goods and raw materials.

It hasn't yet worked out that way. Instead, China has knocked the stuffing out of Southeast Asia, which saw foreign investment drop $6 billion last year. But with most of the treaty's provisions now in effect, growth is starting to pick up. So far, it's hard to tell if AFTA or a recovery driven by higher U.S. demand is the reason. Over the next five years, however, AFTA could add at least 1% to annual growth in the region, predicts Toh Mun Heng, professor of economics at the National University of Singapore Business School.

In May, ASEAN officials held talks in Beijing on extending the free-trade pact to China. Toh predicts such a deal could lift ASEAN-China trade by 40% by 2020. If Vietnam, Laos, Burma, and Cambodia, which are already members of ASEAN, join AFTA as scheduled by 2010, that will extend AFTA's benefits. "AFTA triggers this domino effect that enables you to lower costs," says Charles V. Bergh, ASEAN president for P&G Asia.

This year, Ford started selling Thai-made Ranger pickups in Indonesia for the first time and also started shipping Lynx sedans made in the Philippines to Thailand. Foreign car sales would be even stronger if manufacturers had passed on the full savings from lower tariffs to consumers. More competition should force their hands. Honda Motor, for instance, is building a new plant in Indonesia to supply the ASEAN market with Stream minivans.

One crimp in AFTA: Malaysia has refused to open its automobile market, the region's biggest at more than 400,000 units a year, in order to protect state-owned Perusahaan Otomobil Nasional. But industry sources say the government is debating replacing tariffs with nontariff barriers. Fortunately, other ASEAN nations have not retaliated against Malaysia. If the region can stick to its free-trade agenda, and even expand it to include China, it could shake its reputation as Asia's laggard sooner than anyone expected.

By Michael Shari in Singapore

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