Association of Southeast Asian Nations, ASEAN
The Association of Southeast Asian Nations, ASEAN, was formed on 8th August 1967, by Indonesia, Philippines, Malaysia, Singapore, and Thailand. Today ASEAN membership has expanded to include Cambodia, Lao PDR, Brunei Darussalam, Myanmar, and Vietnam.
It is an intergovernmental regional organization formed between ten Southeast Asian countries to promote inter-country trade, governmental cooperation, and economic, political and socio-cultural integration of the member countries, and globally. ASEAN was also formed to protect the member states’ regional stability and instill peace amongst them in times of conflict resolution.
In 2015, ASEAN organization’s nominal GDP (combined) was around $2.8 trillion. This makes ASEAN a global powerhouse. ASEAN as a single entity shares its physical borders with major apparel trade giants like India, China, and Bangladesh. ASEAN has been the foundation of several establishments like East Asia Summit, EAS, and Regional Comprehensive Economic Partnership, RCEP (FTA between ASEAN, Australia, China, Japan, South Korea, New Zealand and India).
ASEAN Free Trade Agreements
Free Trade Agreements within the ASEAN countries are led by the ASEAN Trade in Goods Agreement (ATIGA) and the Agreement on Customs. The ASEAN Free Trade Area (AFTA) is a trade bloc agreement which launched the Common Effective Preferential Tariff Scheme (CEPT). CEPT states that the tariff will be reduced to 0-5%, on the goods being traded within ASEAN region, if the goods meet a 40% ASEAN content requirement. AFTA’s main goals were to make ASEAN competitive in the global market as a production base, by the elimination of the tariff and the non-tariff barriers and to attract more Foreign Direct Investment within the ASEAN countries.
Apart from the establishment of AFTA within the member states, ASEAN trade bloc has also signed various free trade agreements with some major Asia-Pacific economies. These FTAs include the ASEAN-China FTA (ACFTA), the ASEAN-Australia-New Zealand FTA (AANZFTA), the ASEAN-Korea FTA (AKFTA), the ASEAN-India FTA (AIFTA), and the ASEAN-Japan Comprehensive Economic Partnership (AJCEP).
These FTAs aim at encouraging and promoting businesses in the ASEAN trade bloc, irrespective of their size, by enabling regional and international trade without any tariff barriers. They also offer businesses an easy access to the new export markets with simplified import and export .
The ASEAN Competitive Advantage
The ASEAN Free Trade Area competes predominantly in the trade of unprocessed products or raw material for the textile and clothing industry. For consumer and finished products the ASEAN countries do not face a high degree of competition, and product diversification has enabled ASEAN economies to aggressively export to the global textile & apparel market.
Apparel and textile industry is vital to the ASEAN economies and many ASEAN players are the front-runners in the industry globally. The ASEAN Free Trade Agreement (AFTA) and the regional integration efforts have significantly contributed to the industry’s advancement.
Within the apparel supply chain, the demand comes mainly from the developed countries and developing nations specialize in the value chain activities, mostly the ones that benefit from lower labor costs. The availability and relative cost of labor are two important determinants of success in the apparel industry. Cross-border integration is nurtured within ASEAN countries, by investment from the fabric producing countries in ASEAN like China into the lower-cost-apparel manufacturing countries of Vietnam and Cambodia. The intra-ASEAN trade is an integral part of building the value chain in the apparel industry.
The process of trade liberalization through AFTA, various FTAs and the ASEAN Economic Community’s creation in 2015, has not only led to tariff reduction and elimination but also in integration and elimination of the non-tariff barriers that ASEAN players face in the industry. As a testament to this advantage, we have seen the exports value of ASEAN5 namely Malaysia, Thailand, Indonesia, Philippines and Vietnam’s exports of apparel and textile products nearly triple from USD 24.4 billion in 2001 to USD 71.8 billion in 2014.
Vietnam amongst the ASEAN countries leaped far ahead of the pack with a 10-fold increase in the apparel and textile exports value in the same time period. Apart from the ASEAN advantage Vietnam’s accession to the World Trade Organization (WTO), 2007 was also an additional factor that allowed Vietnam to export to larger markets without tariff barriers.
ASEAN exports related to textiles and clothing, 2016
The ASEAN India FTA
1st January 2010: India achieved a milestone in pursuance of its aim to expand its economic and political relationship with its neighbors, through the ASEAN-India FTA (AIFTA). This agreement led to duty liberalization between India and ASEAN countries to enhance bilateral trade. Under AIFTA, each trading partner can keep some products out of the agreements, as far as they amount to less than 5% of bilateral traded imports.
Although, AIFTA has a bigger significance for India in political management than trade, given the economic and development strength of the ASEAN countries combined, this FTA is expected to trigger a positive trade between India and ASEAN countries. The agreement set tariff liberalization of over 90% of products traded between India and ASEAN.
Before AIFTA, India’s exports of apparels & textiles to ASEAN have virtually been constant for years and have not shown much traction. India’s competitive advantage in the industry is the presence of the entire textile value chain, but the trade of its most exported items to ASEAN like cotton fiber, yarn and fabrics did not grow, as India wasn’t able to explore and leverage its strengths to the fullest. This FTA can offer a gateway for market access to China, North East Asia and the EU for India.
Moreover, AIFTA is expected to bring investments from ASEAN textile manufacturers in the Indian manufacturing sector, catering both to the country’s domestic and export markets.
Lastly, apart from trade advantages, AIFTA offers other benefits to the trading partners. Both India and ASEAN countries posses traditional weaving styles and this FTA can help them to structure integration arrangements for the designers and institutes within the trading bloc and India to develop fusions which global markets will cherish.