Suranovic (2008) argued that, economic integration is the combining of coordination relating trade, fiscal, and/or monetary policies among countries. The claimed benefits include lower trading cost, exploiting specialization and utilizing comparative advantage concept for optimal production of goods and services.
According to Suranovic (1998), there are six types of economic integration which describing each integration level, there are preferential trade agreement (PTA), free trade area (FTA), customs union, common market, economic union and market union which stated below.
Preferential trade agreement (PTA): It is a form of tariff reduction, not necessarily elimination, to a selected group of countries in a certain range of products. This means that tariffs still apply to remaining countries and toward remaining product categories. This is the weakest form of economic integration.(Suranovic,1998)
Free trade area (FTA):It is the elimination of tariff among a selected group of partners. Nonetheless, external tariffs on imports from other countries still apply. Two examples of FTA are ACFTA and NAFTA. However, the original rules concept is placed in high consideration about preventing transship products into FTA-associated countries with the lowest tariff and then transfer to other countries with higher tariffs.(Suranovic,1998)
Customs union: This practice eliminates tariffs to selected partners and agrees to set common external tariff on imports from other countries. (Suranovic,1998)
Common market: This is another form of economic integration which is similar to customs union with additional benefit of free mobility of capital and labor across countries.
Economic union: This adds fiscal coordination to a supra-national agency beyond that of common market.(Suranovic,1998)
Monetary union: This involves the establishment of common currency among group of countries by forming central monetary authority for selected group of countries.(Suranovic,1998)
According to Chemingui and Colton(1995),international trade is one important tool that allocates resources. Trade liberalization paves way for opening trade regimes, which can generate growth by increasing worldwide knowledge exposure. In addition, Ben-David and Loewy (1995) stated that the growth impact of free trade derives from the idea that:
(1) knowledge may be characterized as a non-rivalries public good, which in many cases is non-excludable, (2) trade flows facilitate the diffusion of knowledge among countries Heightened trade will, in general, lead to greater diffusion and faster knowledge growth and hence, faster per capita income growth" (Ben-David& Loewy, 1995).
Free Trade Area agreement 自由贸易区协议
Among the Economic Integration practices, the currently applied, ACFTA is classified as a Free Trade Agreement that focuses on tariff removal among members. The essence factor of international trade is accessibility to overseas raw materials, intermediate goods and world markets as well as the transfer of capital among countries. With these advantages, organizations will have the opportunity to develop their manufacturing in terms of both quality and quantity achieving lower cost. According to the core idea of a free trade agreement, it can be seen that it directly impacts toward foreign direct investment.
As suggested by Hecksher and Ohlin in 1933, the alteration of the theory of comparative advantage is demonstrated with the factor proportion theory. The idea gives evidences on trading between different countries specialties in international market that have cost advantages over the others. In Contrasting to Ricardian model in supporting reason to the fact that variety of production factors determine cost efficiencies to the manufacturing as well as concentration in factor usage which cover land, labor, capital, knowledge, and material. However, Hecksher & Ohlin and Ricardian model are theories support in international trading and also lead to many other new theoretical approaches such as foreign direct investment theory, product life cycle theory, and many more. (Buckey & Brooke,1992; Mtigwe, 2006)
positive effects of free trade agreement 自由贸易协定的积极效应
Free trade agreement is one of the tools that enhance economic relationship among nations. According to Ken Edge (1999), free trade occurs when government set policy to eliminate trade barriers in order to promote flow of goods and services between trading countries. Some advantages are mentioned below.(Ken Edge,1999)#p#分页标题#e#
Economic growth 经济增长
The high competition in the market enables member countries to become more productive and efficient. This leads the distributors to lower the production cost to make price competition, and then people can afford to buy more products. As a result, it becomes the supporting reason that drives economic growth in nation.(Ken Edge, 1999)
Foreign exchange gains 汇兑收益
Export of products gives opportunity for country to receive payments in form of hard currency, which in turns can be used to pay for imported goods that are produced with lower cost of production from other countries.(Ken Edge, 1999)
Higher capabilities from manufacturing and service industries will increase employment rate for labor market. The labor resources will move from the lower employment demand to the higher and more productive area.(Ken Edge, 1999)
Increased production 增加生产
FTA supports product specialization for each country because it enhances comparative advantages from economies of scale benefit, increased output and size of a firms market from international trade. The results come from lower average costs and increase productivity leading to an increase in production. (Ken Edge, 1999)
Production efficiencies 生产效率
Due to different resource endowment in each country, this mean that each country must allocate and develop in order to compete with other nations and respond in productivity level that corresponds to technology and innovation improvement as well as marketing and distribution development.(Ken Edge, 1999)
Benefits to consumers 消费者的利益
The more competitive suppliers are, the more benefits earned by customers in terms of varieties in options of choosing goods and services at lower prices that they have to pay. (Ken Edge, 1999)
negative effects of the free trade 自由贸易的负面影响
Despite the fact that free trade seems to bring various areas of benefits to the member countries, there are also numbers of drawbacks which include:
1. Unemployment rate
Due to the change in employment regulations and the open of international labor market, the unemployment rate in high living cost area will rise since the growing industries will choose to employ labor from lower living cost area.(Ken Edge, 1999)
2. Economic status
Due to the dependence of the economies on global markets, the insecure economic status for domestics will be caused. This may lead to the decline of export incomes, lower GDP, lower incomes, lower domestic demand and so forth.(Ken Edge, 1999)
3.International markets are not a level playing field#p#分页标题#e#
Countries that have exceeded products can make use of their cost benefits in challenging the global market, which cause drawbacks to the other countries that do not have this advantage. (Ken Edge, 1999)
4. New entry players
Free trade creates difficulties to the new entrants and developing companies because they must compete with large and well-developed players in international market.(Ken Edge, 1999)
5. Pollution and environmental problems
The high rate of competition that was led by FTA opens opportunities for market expansion, and even create higher competition situation in the market. This becomes the major reason for cost of production reduction, which lower the quality control, especially in environmental aspect. Moreover, the higher rate of production also leads to the more pollution led to the environment.(Ken Edge, 1999)
2.3 International Investment Theory
One important theory that supports "Free Trade Area" concept, core issue in this thesis, is "International Investment Theory". This part focuses especially on theory of "Foreign Direct Investment" which occurs under imperfect market. Foreign Direct Investment (FDI) can be separated into two main types of ownership and control of international investment involving with physical assets such as plants and other facilities. This theory does not relate to other types of international investment such as bonds, portfolios of stocks, or other forms of debt. According to Ball, et. Al., 2008, FDI is the establishment of production or other investments abroad including Greenfield investment (the establishment of new facilities from the ground up) or cross-border acquisition (the purchase of an existing business in other nations). Many objectives drive investors to invest abroad; for example, finding new markets, accessing new materials, achieving production efficiencies, gaining access to new technologies or managerial expertise, enhancing political safety of the firms operations, or responding to competitive or other pressures in the external circumstances. The topics below will extend more detail about "Foreign Direct Investment" approaches.(Ball, et. Al.,2008)
2.3.1 Monopolistic Advantage Theory
Hymer (1960) demonstrates that FDI favors industries that operate under oligopolistic industries to almost perfect competition. This concept demonstrates that company must own some advantages that do not exist in local firms so as to create competitive advantage to overcome some disadvantages associated with being foreigners. For example, lack of local market knowledge, high costs of operating at foreign distance, culture, language, laws and regulations or institutions. All of these factors cause disadvantages to foreign companies against local firms. However, Hymer stated that some advantages from this approach involve economies of scale, superior knowledge from local market, management skill and finance issue.(Ball, et. Al.,2008)#p#分页标题#e#
2.3.2 Product and Factor Market Imperfections
This approach supports the idea that FDI flows to countries where investing firms have superior knowledge that enables them to produce differentiated products that will be preferred by consumers over local offerings.(Ball, et. Al.,2008)
2.3.3 Financial Factors
This theory focuses on financial issue relating imperfection of the foreign exchange market. This presents the idea that companies in overvalued currency countries tend to invest in undervalued currency nations to capture benefit. Moreover, portfolio theory adds that international trade allows investors to diversify of risk in order to earn maximum expected return from investment. (Ball, et. Al.,2008)
2.3.4 International Product Life Cycle
Concept of International Product Life Cycle explains that FDI is a natural stage in the product life. One preventive method used from losing market share is that company applies exporting approach to be strategic investment. The main reason forces company to invest in overseas production facilities is that other companies start to offer similar products that occur during third and fourth stage of product life cycle.
2.3.5 Follow the Leader
Knickerbocker developed "Follow the leader" theory, which explains that leader invests in market while other firms in the industry followed. This approach is considered as defensive since followers invest after the leader has invested in order to avoid risk from being initiators in that market such as lack of local knowledge and customer preference.(Ball, et. Al.,2008)
2.3.6 Cross Investment
This theory concerns FDI in multinational countries. The reason comes from many factors such as seeking knowledge and resources, following customers and taking advantages from political and economic stability from the host nation.(Ball, et. Al.,2008)
2.3.7 Internalization Theory
When firms have superior knowledge but lack of efficiency in external markets, this theory presents the idea that firms can use its knowledge to open market instead of selling to others. Investment is set up in internal organization across borders in order to perform some activities such as purchasing, supplying, distributing and manufacturing by the concept of sharing and maintaining knowledge within the firms.(Ball, et. Al.,2008)
2.3.8 Dynamic Capabilities
This perspective relates to resource-based view theory, which demonstrates the importance of ownership specific knowledge. However, due to it is insufficient for company to succeed in international FDI; somehow this theory suggests firms to develop centers of excellence to improve unique competencies in organizations to compete with other competitors in business world.(Ball, et. Al.,2008)#p#分页标题#e#
2.3.9 Dunning's Eclectic Theory of International Production
This theory is the most broadly discussed theory involved with the FDI conception and the main theme of this idea suggests is that firms aim to engage in FDI rather than perform other activities such as franchising, licensing, exporting, joint venture and strategic alliances. Moreover, when firms tend to engage wholly owned subsidiary, they have to meet three criteria of advantages that are ownership-specific advantages, location-specific advantages and internalization advantages.(Ball, et. Al.,2008)
ASEAN China Free Trade Area (ACFTA)
In 2001, at an ASEAN-China Summit in Bandar Seri Begawan, Brunei Darussalam, China came up with a proposal offering ASEAN-China Free Trade Area in a period of ten years. Chinese proposal on the meeting itself is limited only to learn more about the feasibility. In the process, negotiations continued between the two sides. Within one year, at a meeting in Phnom Penh in November 2002, ASEAN and Chinese leaders ready to sign a Framework Agreement on Comprehensive Economic Cooperation (CEC), wherein there is also discussion of the Free Trade Agreement (FTA).
There is no doubt that the Chinese proposal is very interesting. However, China and ASEAN also saw the economic significance of China's proposed initiatives. To develop an economic cooperation with ASEAN was initiated by China. With the success of China became a member of the WTO, indicating that China has been transformed into a party that was already seen in negotiating various trade agreements. Of course, ASEAN must be able to position so as not harmed in these trade agreements.
There are some objectives of ACFTA that stated in the content of Agreement;
Strengthen and enhance economic, trade and investment cooperation between the Parties;
progressively liberalise and promote trade in goods and services as well as create a transparent, liberal and facilitative investment regime;
explore new areas and develop appropriate measures for closer economic cooperation between the Parties; and
facilitate the more effective economic integration of the newer ASEAN member States and bridge the development gap among the Parties.
Early Harvest Program 早期收获计划
Trade agreement between ASEAN and China begins with an introduction to the Early Harvest program. The Framework Agreement contains an Early Harvest program that covers all products in chapters 01 to 08 at the 8/9 digit level (HS Code): live animals; meat; fish; dairy product; other animals products; live trees; edible vegetables; and edible fruits and nuts. Products under this program are divided into three categories for tariff reduction and elimination, but tariffs will have to be brought to zero for all three categories within three years. However, the program allows for an Exclusion List and different timeframes between the ASEAN-6 (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) and the CLMV (new members Cambodia, Laos, Myanmar and Vietnam), for whom zero tariffs will be reached in 2010.#p#分页标题#e#
Devadason (2009) explained, that the initial of the ACFTA is supposed to lead to major restructuring of the region's trade patterns (Gill and Kharas, 2007; Gaulier et al., 2007) through intra-industry specialization (Amiti and Freund, 2008) in manufactures. This is already evident based on past trends. There are also claims that China's influence on ASEAN is direct in that she has encouraged more exports to flow into her huge market and changed trade flows amongst member countries.