Download Non-tariff measures on the automobile industry

Non-tariff measures on the automobile
industry: Quantifying the impact on
the ASEAN economy
A report for General Motors International
August 2015
Content s
Executive summary .......................................................................................... 5
1
Introduction ....................................................................................... 10
1.1
1.2
1.3
2
Formation of the ASEAN Economic Community....................................10
The use of Non-Tariff Measures ..........................................................11
Report structure .................................................................................12
NTMs and their impact on trade...................................................... 14
2.1
2.2
2.3
2.4
3
What are NTMs? ................................................................................14
A brief history on NTMs under GA TT ...................................................16
NTMs in ASEAN.................................................................................17
The impact of NTMs on international trade ...........................................18
The ASEAN automobile sector ....................................................... 27
3.1
3.2
4
The current status of the automobile sector in ASEAN ..........................27
The automobile sector after the AEC ...................................................31
Economic impact of automobile NTMs in ASEAN ........................ 43
4.1
4.2
4.3
4.4
Methodology ......................................................................................43
Scenarios...........................................................................................44
The economic impact of the reduction in NTMs: partial liberalisation ......45
The economic impact of the reduction in NTMs: full liberalisation ...........50
5
Conclusion ........................................................................................ 52
6
Appendix............................................................................................ 54
6.1
6.2
6.3
7
General Trade Analysis Project (GTAP ) Model .....................................54
Global Economic Model ......................................................................55
Baseline and modelled tariff and output tax rates ..................................56
References......................................................................................... 57
2
Tabl e of Figur es
Figure 1: NTM implemented in ASEAN, 2009 -2013....................................................................... 5
Figure 2: World car owners hip and GDP per capita, 2012 .............................................................. 6
Figure 3: GDP impact of reducing NTMs in ASEAN automobile industry, 2025 ............................... 8
Figure 4: Impact of partial liberalisation on key macroeconomic variables, 2025 .............................. 9
Figure 5: Impact of full liberalisation on key macroeconomic variables, 2025 .................................. 9
Figure 6: World trade and MFN trade-weighted import tariffs, 1960-2013.......................................16
Figure 7: Value of ASEAN trade (exports + imports), 1995-2013 ...................................................18
Figure 8: Frequency index of NTMs ............................................................................................19
Figure 9: Frequency index of NTMs, 1999 and 2010 ....................................................................20
Figure 10: NTM implemented in ASEAN, 2009-2013 ....................................................................21
Figure 11: Brazil Motor Vehicle Production and Exports, 1980-2014..............................................22
Figure 12: Overall Trade Restrictiveness Index ............................................................................23
Figure 13: Global automobile production and value-added output, 2014 ........................................28
Figure 14: ASEAN real GDP growth, US $ ...................................................................................28
Figure 15: Motor vehicle penet ration levels in ASEAN ..................................................................29
Figure 16: ASEAN GDP per capita, 2014 and 2030 ......................................................................30
Figure 17: World car ownership and GDP per capita, 2012 ...........................................................31
Figure 18: Progress on ASEAN integration by Sector (%) .............................................................33
Figure 19: CEE automobile value-added growth, 2000-2014.........................................................34
Figure 20: Core EU aut omobile value -added growth, 2000-2014...................................................35
Figure 21: ASEAN output and trade in Motor Vehicles, 2005-2013 ................................................35
Figure 22: Motor vehicle production in Thailand, 2000 -2019 .........................................................37
Figure 23: Motor vehicle production and sales in Malaysia, 1980 -2014..........................................39
Figure 24: Motor vehicle production in Thailand and Indonesia, 1997-2014 ...................................41
Figure 25: Schematic overview of the modelling approach ............................................................44
Figure 26: Distribution of static GDP gains, 2025 .........................................................................45
Figure 27: Impact of partial liberalisation on key macroeconomic variables, 2025 ...........................46
Figure 28: GDP impact of partial liberalisation scenario, 2025 .......................................................47
Figure 29: Ratio of Exports plus Imports to GDP, 2014 .................................................................47
Figure 30: Employment impact of partial liberalisation scenario, 2025 ...........................................48
Figure 31: Impact of full liberalisation on key macroec onomic variables, 2025 ................................51
Figure 32: Employment impact of modelled scenarios, 2025 .........................................................51
3
Figure 33: GDP impact of reducing NTMs in ASEAN automobile industry, 2025 .............................53
Figure 34: Overview of the Global Economic Model .....................................................................55
Figure 35: Tariff rates applied to GTAP model .............................................................................56
4
Executi ve summ ar y
ASEAN member states have taken significant steps towards regional integration…

In 2003, the ASEAN member states committed to the formation of a single economic market,
the ASEAN Economic Community (AEC). This process was accelerated in 2007 with the
signing of the AEC Blueprint, which set a deadline for completion by the end of 2015.

Although the AEC falls short of achieving a fully functional single market, significant progress
has been made in advancing regional integration. Official estimates suggest that over 82% of
all prioritised measures contained within the AEC Blueprint have been adopted. Importantly ,
import tariffs have fallen dramatically, with zero rates now applied to 99% of all intra-ASEAN
tariff lines for Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and
Thailand, with special dispensation allowed for the less developed partners to reduce tariffs at
a more gradual pace.
… but progress in removing import tariffs has not been matched in other areas.

While import tariffs have fallen, there has been less progress in other policy areas.
Specifically, there has been little progress in eliminating non-tariff measures (NTM), defined by
the UNCTAD as “policy measures, other than ordinary customs tariffs, that can potentially
have an economic effect on international trade”.

Instead, evidence suggests that since the financial crisis, there has been an increase in the
use of NTMs, with nearly 190 additional NTMs implemented across ASEAN members in the
period 2009-2013.
Figure 1: NTM implemented in ASEAN, 2009-2013

Difficult to identify, and even harder to quantify, the consensus view in the literature is that
NTMs are detrimental for economic output and welfare, and that free trade is the first best
solution for economic development. For example, Hoekman and Nicita (2011) estimate that a
reduction in the ad-valorem equivalent of NTMs by half would increase world trade by as
much as 2-3%.

As such, the continued use of NTMs remains a significant impediment to achieving the
fundamental objectives of the AEC Blueprint to “transform ASEAN into a region with free
5
movement of goods, services, investment and freer flow of capital” and to establish a single
production base.
The automobile sector remains a key pillar of economic growth in ASEAN…

The automobile sector is often earmarked by governments in developing economies as a key
pillar of industrialisation and economic development, encouraged in its infancy through various
import substitution and other incentive programs.

The ASEAN region is no exception. The regional automobile sector has experienced rapid
growth in recent decades, fuelled by robust economic growth, favourable government policy
and an increasing level of regional co-operation and integration.

Considered in isolation, the ASEAN automobile market is now the eighth largest automobile
market in the world based on the total production volume of cars, with large scale assembly
undertaken in Thailand (Toyota, Isuzu, Honda), Malaysia (Proton, Perodua) and Indonesia
(Toyota, Suzuki, Daihatsu).
…with excellent prospects for growth within the AEC single market.

Vehicle penetration levels remain relatively low by world standards, with an estimated 75 cars
per 1,000 inhabitants across the region. This compares with a world average of 170 and an
OECD average of more than 560.

However, real GDP is forecast to grow by a robust 4.6% p.a. over the long term, which will lift
millions of households towards income levels associated with a rapid increase in vehicle
ownership. As such, the average number of cars per 1,000 inhabitants in ASEAN could rise to
as much as 220 by 2030, although it is recognised that rapid urbanisation, congestion and
under-developed infrastructure networks could constrain the growth in vehicle ownership.
Figure 2: World car ownership and GDP per capita, 2012

The formation of the AEC nevertheless represents a significant opportunity for the region to
develop an internationally competitive automobile sector with a fully integrated supply chain
that leverages the strengths of individual members.
6

McKinsey Global Institute estimates that greater regional integration could realise efficiency
savings of between 12-18%, primarily through increasing economies of scale in production.
Consumers would also benefit through lower prices and greater choice.

Modelled on the experiences of the automobile sector in the EU and North America (under
NAFTA), ASEAN could become a single production base from which vehicles are exported all
over the world. In particular, the region is strategically located between two of the world’s
largest and fastest growing automobile markets, China and India.
However NTMs represent a significant and growing constraint to future growth in the sector.

Estimates by McKinsey Global Institute suggest that progress in the removal of NTMs in the
automobile sector is significantly lagging that of other sectors as we approach the deadline for
AEC formation.

And recent policy measures suggest that if anything, NTMs are increasing in the main
automobile markets in the ASEAN region. Indonesia, Malaysia, Thailand, the Philippines and
Vietnam (hereafter known as the ASEAN-5) have all in recent times initiated and/or
announced new policies with the explicit aim of boosting domestic production and exports.

One of the key policy areas is the use of excise taxation policy to further national aims and
support domestic ‘favourites’. Excise tax policy can be used to implicitly or explicitly
discriminate against imports, for example through the application of differential rates or
thresholds that favour domestically produced vehicles, or via reference to different tax bases
(for example CIF prices for imports vs. ex-factory prices for domestic producers) that create an
un-equal playing field. Such policy is removed from the guiding principles of excise tax design
as outlined in the ASEAN Excise Tax Reform: A Resource Manual.
…the effects of which are illustrated through a quantitative analysis…

Oxford Economics constructed two scenarios to simulate the potential impact of reducing
NTMs in the automobile sector on GDP and trade flows in the region.

Each scenario involved a reduction in the ad-valorem tariff equivalent (AVE) of NTMs in the
automobile sector in the ASEAN-5. The baseline AVE rates and scale of the tax shocks were
calibrated with reference to the academic literature. To the extent that governments also use
the excise tax regime to discriminate against imports, domestic output taxes on the automobile
sector were also reduced.

Simulations were modelled based on a two-stage process. Stage 1 was conducted using the
Global Trade Analysis Project (GTAP) trade model; a well-known general equilibrium model
that is ideally suited for static analysis of trade policy (i.e. the impact of trade on output via the
reallocation of resources across countries). Stage 2 uses the outputs from stage 1 as inputs to
the Oxford Economics Global Economic model, in order to capture both static and dynamic
effects. This takes into account the impact of increased trade on economies of scale, capital
accumulation, technology transfers and innovation, and competition.
…demonstrating potential positive economic benefits from further liberalisation.

Scenario one, a partial liberalisation scenario where the AVE of NTMs in the automobile
sector were cut by 50% in the ASEAN-5 markets, as well as a 10% cut in output taxes,
generated an additional $9.8 billion (in today’s prices) in economic output by 2025, equivalent
in real terms to nearly 0.3% of GDP.

The scale of the impact varied across countries, with Thailand experiencing the most
significant boost to the level of real GDP of over 0.6% by 2025. Malaysia too would experience
7
a strong boost to GDP following further liberalisation of the automobile sector. By contrast, in
Indonesia and the Philippines the impact of liberalising NTMs is more muted.

The model results indicate that exports, investment and private consumption will all receive a
boost under a partial liberalisation scenario. Employment also increases, with an estimated
284,000 extra people employed across the region not only in the automobile sector, but also
other sectors that benefit either directly or indirectly from trade liberalisation.
While difficult to achieve, full liberalisation and free -trade remains the first-best policy
approach.

While scenario one, the partial liberalisation scenario, represents the most likely scenario
given the difficulty in reducing NTMs completely, a full liberalisation scenario was constructed
in which NTMs were completely removed and output taxes were cut by 20%.

Under scenario two, the full liberalisation scenario, real GDP in the ASEAN-5 would be around
0.5% higher in 2025 than Oxford Economics’ current forecasts, with Thailand again leading
the way. In terms of employment, there would be nearly 554,000 additional jobs in the region.
Figure 3: GDP impact of reducing NTMs in ASEAN automobile industry, 2025
8
Figure 4: Impact of partial liberalisation on key macroeconomic variables, 2025
% Difference from base, local currency in real terms, unless otherwise stated
Partial liberalisation
scenario
GDP
Exports, Goods Imports, Goods Fixed
and Services
and Services
Investment
Private
Consumption
Total
Current account
Employment balance
(000)
(% GDP)
Indonesia
0.1
0.8
0.7
0.1
0.1
74
0.0
Malaysia
0.6
0.5
0.5
0.4
0.8
12
0.1
Philippines
0.1
0.5
0.6
0.2
0.1
20
0.0
Thailand
0.6
0.3
0.2
0.5
0.8
110
0.3
Vietnam
0.3
0.1
0.0
0.3
0.4
68
0.1
ASEAN-5 (US$)
0.3
0.5
0.4
0.2
0.3
284
n/a
Source: Oxford Economics
Figure 5: Impact of full liberalisation on key macroeconomic variables, 2025
% Difference from base, local currency in real terms, unless otherwise stated
Full liberalisation
scenario
Exports, Goods Imports, Goods Fixed
and Services
and Services
Investment
GDP
Private
Consumption
Total
Current account
Employment balance
(000)
(% GDP)
Indonesia
0.2
1.6
1.5
0.2
0.2
124
0.0
Malaysia
1.2
1.0
0.9
0.7
1.5
26
0.2
Philippines
0.1
1.1
1.2
0.2
0.2
27
0.0
Thailand
1.4
0.7
0.5
1.0
1.8
238
0.6
Vietnam
0.6
0.2
0.2
0.6
0.7
139
0.0
ASEAN-5 (US$)
0.5
0.9
0.8
0.4
0.6
554
n/a
Source: Oxford Economics
9
1 Introdu cti on
1.1
Formation of the ASEAN Economic Community
1
In 2003, the Association of Southeast Asian Nations (ASEAN) agreed to the formation of a single
market, the ASEAN Economic Community (AEC), as part of a wider initiative to promote and
enhance the development of the region that also included the formation of the ASEAN PoliticalSecurity Community and the ASEAN Socio-Cultural Community.
According to Holden (2003), there are four key stages of economic integration:
1. A free trade agreement or preferential trade agreement in which members reduce tariffs and
non-tariff measures on intra-regional trade.
2. A customs union, which is a free trade agreement with a common external tariff applied, but
where members largely retain control over economic policy.
3. A common market, which builds upon the provisions of a customs union by extending the
principles of free trade to the movement of mobile factors of production – labour and capital –
which necessitates some greater harmonisation of economic policy.
4. A full economic union, the deepest form of integration, which is a common market with
formally coordinated economic policies and institutions.
Following the initial agreement in 2003, each member state subsequently adopted the AEC
Blueprint in 2007, in which the signatories committed to “hasten the establishment of the AEC by
2015 to transform ASEAN into a region with free movement of goods, services, investment and
freer flow of capital”. As outlined by Preece (2012), analysing these stages in the ASEAN context,
the formation of the AEC represents an attempt to reach the third stage in economic integration on
the way to a full economic union, skipping stage two and transitioning straight from a free trade
agreement (the ASEAN Free Trade Area or AFTA) to a common market.
The formation of the AEC is underpinned by four characteristics, or pillars of integration, namely :

a single market and production base;

a highly competitive economic region;

a region of equitable economic development; and

a region fully integrated into the global economy.
According to official reports, there has already been significant progress in achieving the aims
outlined in the 2007 AEC Blueprint. Although difficult to verify, the official line from ASEAN leaders
2
is that member states had adopted over 82% of all prioritised AEC measures by August 2014.
Certainly in the area of reducing intra-ASEAN import tariffs, the formation of the AEC has indeed
been a success so far. Since 2010, zero rates have been applied to 99% of all tariff lines on intraASEAN trade in Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and
1
Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.
2
ASEAN Secretariat, Investing in ASEAN 2014-15 publication, dow nloaded from
http://www.asean.org/resources/item/investing-in-asean
10
3
Thailand, with special dispensation allowed for the less developed partners to reduce tariffs at a
more gradual pace. And according to Balboa and Wignaraja (2014), more than 70% of total intraregional trade in the ASEAN region is already subject to zero tariff rates, with less than 5% of
goods subjected to tariffs of more than 5%.
However, in other areas, the AEC falls short of establishing a fully operational common market as
defined by Holden (2003). For example, the AEC blueprint provides only limited concessions
towards promoting the free movement of labour within the community, facilitating the issuance of
visas and employment passes only to skilled labour who are engaged in cross-border trade and
investment related activities. Furthermore, internal border controls will remain in place between
member states, and there is no mention of the establishment of a Common External Tariff on extraASEAN trade. As Preece (2012) continues to explain, “AEC 2015 is not realistically a ‘single
mark et’ but rather an enhanced Free Trade Area with enhanced facilitation of intra-regional cross
border movements and free flows of services, investment, labour and capital”.
Nevertheless, the formation of the AEC represents one of the most ambitious ever initiatives for
regional integration, certainly in the developing world, and the potential benefits c ould be
significant. Estimates by the McKinsey Global Institute suggest that enhanced economic integration
4
within the AEC could generate some $280 to $615 billion in additional GDP by 2030. Based on
Oxford Economics forecasts, this is equivalent to around 3-7% of GDP in 2030. But this potential is
conditional on achieving the aims of the AEC in creating a fully functional single economic market.
And according to the ASEAN Studies Centre of the Institute of Southeast Asian Studies,
“Businesses still don’t see ASEAN as a regional identity, and continue a domestic approach in
conducting business in the region. Only few big multi-nationals actually see ASEAN as a regional
5
mark et”. As such, only concerted efforts towards regional economic integration will change these
perceptions and allow the region to fully harness its potential.
1.2
The use of Non-Tariff Measures
In order to credibly claim success in establishing a single economic market for ASEAN, there
remain a number of challenges ahead for the member states, including the harmonization of
regulatory standards and improving regional connectivity, and the liberalisation of trade in services.
However, one area of particular concern – and the focus of this research – is the application of
non-tariff measures (NTM). NTMs, as defined by the United Nations Conference on Trade and
Development (UNCTAD), are “policy measures, other than ordinary customs tariffs, that can
potentially have an economic effect on international trade in goods, changing quanti ties traded, or
6
prices, or both”. As such, they can take many forms, and while they all act to distort the movement
of goods and services across borders, they are not always employed for this specific purpose. For
example, stringent rules on health and safety, formulated with a desire to protect domestic
3
ASEAN Secretariat, ASEAN Community in Figures: Special Edition 2014, dow nloaded from
http://www.asean.org/resources/category/statistical-publications
4
McKinsey Global Institute, 2014a
5
See Accenture (2011), The Time for Regional Expansion is Now : Why Businesses are Gravitating towards South East
Asia as a New Grow th Destination.
6
UNCTAD, 2010.
11
residents from potential adverse effects following the consumption of a particular good, may make
the cost of compliance prohibitively expensive for international competitors who do not operate to
similar standards in their home market.
Due to their very nature, NTMs are therefore very difficult to identify. They can often be embedded
deep within legislation, rules and regulations, or safety standards. They can also be the result of
differing levels of interpretation of the rules, such that even in instances where the legislation is
consistent, differences in the way the rules are enforced at the border can have a significant impact
on the decision-making process of importers and producers. However, consensus is in general
agreement that as tariff barriers have declined across the world following successive multi -lateral
7
free-trade agreements, the use of NTMs has increased over the last 10 years. As a consequence,
the AEC blueprint explicitly targets the full elimination of NTMs in order to facilitate the free flow of
goods within the single market. Despite this, evidence suggests that there has been “little progress”
8
on reducing NTMs to intra-ASEAN trade. Free trade is a core element of any single market and
without a concerted effort to reduce NTMs across all product lines, efforts to foster a true single
market will be undermined by government policy.
The application of NTMs is no more pertinent than in the automobile industry, often identified as a
key engine for economic development and industrialisation in emerging markets. As an industry
that can benefit significantly from scale economies and integrated supply chain management, an
ASEAN single market represents a significant opportunity for the industry, already the eighth
9
largest automobile market in the world based on the total production volume of cars, to grow into a
world leader that can stimulate greater investment and create significant employment opportunities
throughout the region. In particular, ASEAN is strategically located between two of the world’s
largest and fastest growing automobile markets, China and India, and opportunities to export to
these markets will continue to grow as they open up to international trade.
However, as we approach the deadline for the formation of the AEC, many ASEAN countries are
embarking on national automobile polices with the ultimate aim of establishing a domestic
production base suitable for regional and global export. Malaysia, Indonesia, Thailand, Vietnam
and the Philippines (hereafter known as the ASEAN-5) have all in recent years announced plans
with the specific aim of fostering and protecting the domestic market at the expense of international
competition. These policies are not only out of sync with the goals agreed to by all parties in the
AEC blueprint (as well as wider WTO guidelines), but as this paper will go on to establish, they
have the potential to restrain economic growth and investment.
1.3
Report structure
The purpose of this research is to provide both a qualitative and quantitative assessment of the
macroeconomic implications of NTMs on the automobile industry in ASEAN. The full report is
structured as follows:

Section 2 opens with a summary of NTMs, their definition, application and impact on economic
development around the world, summarising the key economic literature on the subject.
7
UNCTAD, 2013b.
8
Austria, M. 2013.
9
Based on 2013 data, sourced from Oxford Economics and LMC Automotive.
12

Section 3 presents a summary of the automobile sector in ASEAN, with particular reference to
the key market participants and current government policy actions.

This leads into Section 4, in which we present results from a modelling exercise that estimates
the impact of liberalising NTMs on the ASEAN economy, by leveraging both the Global Trade
Analysis Project (GTAP) model as well as the Oxford Economics Global Economic Model.

Section 5 provides some concluding remarks.

Finally, some additional information on the modelling process is contained in the Appendix in
Section 6, as well as a detailed bibliography in Section 7.
13
2 NTMs and their impact on trade
This section provides an overview of NTMs: their definition, motivations, application and economic
impact. It begins with a broad overview of NTMs, with reference to the oft-used UNCTAD definition,
before continuing with a brief history of NTMs in the context of continuing efforts to reduce trade
barriers though successive multilateral and regional trade agreements. The section concludes with
a more detailed analysis of the existing literature on the prevalence and impact of NTMs across the
world, with reference where applicable to the ASEAN region and specifically the automobile sector.
Key points
 A NTM is any government policy other than a traditional tariff that can impact trade.
 They are used to pursue either ‘welfare-enhancing’ or ‘political economy’ objectives.
However, the primary aim is not always to boost exports / restrict imports.
 The explicit treatment of NTMs under GATT is a relatively recent phenomenon due to their
very opaque nature. However, as tariffs rates have steadily fallen all over the world, focus
has switched to other practises that distort international trade flows.
 Article 5 of the ASEAN Common Effective Preferential Tariff agreement explicitly calls on
member states to eliminate NTMs, a position that was further strengthened and emphasised
in the ASEAN Trade in Goods Agreement (ATIGA) and the AEC Blueprint. However,
progress to date has been very slow.
 The impact of NTMs is difficult to quantify, but there is an increasing body of literature on the
subject. Attempts to calculate the economic impact generally focus on estimating the advalorem equivalent value and then apply a similar analysis to that used for traditional tariffs.
 The general consensus in the literature is that a reduction in NTMs boosts international
trade and economic output. In many instances, the impact of NTMs is far greater than the
impact of traditional tariffs.
2.1
What are NTMs?
The term “non-tariff measure” is used to define any official policy measure that implicitly or explicitly
distorts international trade, other than the use of traditional tariffs. UNCTAD, which has dedicated
significant resources to defining, classifying and collecting data on NTMs since the early 1990s,
probably provides the most succinct definition available, which is as follows:
“NTMs are policy measures, other than ordinary customs tariffs, that can potentially have an
economic effect on international trade in goods, changing quantities traded, or prices, or both.”
UNCTAD, 2010.
The WTO identifies many reasons why governments choose to use NTMs. These distinguish
between interventions that are welfare-enhancing and interventions that are motivated by “political
economy” goals. Welfare-enhancing NTMs may include measures to correct for market failure.
Market failure describes a situation under which, in any given market left to its own devices, the
allocation of resources is sub-optimal. In such instances, intervention is justified on the basis of
correcting these market failures to ensure a more efficient outcome for consumers. For example,
firms may fail to account for their actions on others during the production of a good or service, such
as the wider costs to society of polluting the atmosphere (known as a negative externality), and as
such governments may often use the tax/revenue channels to correct for this additional social cost.
14
In this case, the government could levy a tax on production to ensure the company pays for
appropriate clean-up costs, known as internalising the externality. NTM’s can thus materialise
through variations in regulation between countries attempting to account for perceived market
failure, which can therefore distort international trade flows. Meanwhile, political economy
motivations are often concerned with the protection of special interest groups . This includes, for
example, the infant industry argument, whereby governments seek to protect a relatively new and
strategically important industry with the hope that it will develop into an industry that is capable of
competing on a global scale sometime in the future. In particular, the infant industry argument is
strong in industries that benefits from economies of scale – cost reductions that accrue to firms
when production levels increase, for example bulk discounts on purchases of inputs and raw
materials – such as automobile production, which would struggle to compete with larger
international firms without some initial support from the government. However, although in theory
the protection of an infant industry can increase national welfare in the long term, in practi ce, most
interventions motivated by the political economy channel are made at the expense of national
welfare and social good. Furthermore, industries that grow under import protection schemes often
come to rely on those protections to stay competitive.
The distinction between the alternative government motives outlined above is important in
characterising NTMs from more traditional trade tariffs. Firstly, they can take many different forms.
They can involve the application of hard measures such as price or quantity controls (such as
import/export quotas), or softer, less explicit measures, such as technical specifications, location based incentives, or threat-based measures like anti-dumping regulation. Indeed, such is the range
of policy measures that can be considered, UNCTAD – in an attempt to aggregate NTMs into a
framework for universal classification – has produced 16 “chapters” by which to define and
segregate different NTMs, with each chapter containing up to three sub-divisions.
Further complicating the issue, NTMs can be separated into those measures applied at the border
like a traditional tariff, to exports or imports, or those measures that are applied behind the border,
such as domestic taxes or regulation. This raises a key point in so far as a NTM is not necessarily
a measure that is just applied to imports, but rather can encompass a universal system, such as an
excise tax regime, that is constructed in such a way as to discriminate against imported goods (for
example, implementing high taxes for products that are often imported, and lower taxes for
alternatives that are domestically produced).
Secondly, as suggested above, NTMs are not always employed with the direct intention to distort
international trade or protect domestic industries, but rather are sometimes used in an attempt to
correct certain market failures (welfare-enhancing argument). As such, the trade-distorting impacts
can arise as a by-product, or unintended consequence, of legislation. Such an example may
include stringent technical regulations that go beyond those in place in the home market of a
potential international competitor, thus increasing the cost of compliance of foreign competitors and
so increasing the price of imported goods. They can also be very opaque in nature, embedded
deep within rules and regulations, or merely a function of official attitudes towards foreign
competition. For example, in the Chinese automobile sector, foreign firms have in the past, through
the granting of import licences, been ‘encouraged’ to use a high degree of local content in
production.
10
In summary, while the broad-based definition of NTMs is relatively straightforward, it is clear that in
practice the definition, classification and identification is fraught with uncertainty. As we will go on to
10
Peterson Institute for International Economics, 2013.
15
explain in more detail, this makes things difficult when estimating the economic impact of removing
such measures and as such there remains a relatively limited body of literature that has attempted
to do so.
2.2
A brief history on NTMs under GATT
Since the original General Agreement on Tariffs and Trade (GATT) was signed back in 1947,
successive rounds of multilateral and regional trade negotiations and agreements have helped to
achieve a significant reduction in import tariffs around the world. The OECD estimates that since
11
the end of World War II, tariffs on industrial goods have fallen from around 40% to just 4% today ,
an observation that is backed up by time-series data from the World Bank on trade-weighted tariffs
12
(Figure 6).
In turn, the liberalisation of trade policy has been fundamental in boosting world trade flows over
the past five decades. Again, according to the World Bank, the volume of global trade has risen
from around 25% of world GDP in 1960 to nearly 60% of world GDP today. As such, it is widely
recognised that countries benefit from being more open to international competition. As the IMF
notes, “there is substantial evidence that, from countries of different sizes and regions, as countries
“globalise” their citizens benefit, in the form of access to a wider variety of goods and services,
13
lower prices, more and better-paying jobs, improved health, and higher overall living standards”.
14
Figure 6: World trade and MFN trade-weighted import tariffs, 1960-2013
11
OECD, 2009.
12
World Bank WITS database
13
IMF, 2008b.
14
Under the WTO agreements, countries cannot normally discriminate betw een their trading partners. Grant someone a
special favour (such as a low er customs duty rate for one of their products) and you have to do the same for all other WTO
members. This principle is know n as most-favoured-nation (MFN) treatment. WTO Principles of Trading System.
16
The primary focus during the early decades of the GATT was to bring about a substantial reduction
in traditional tariffs and the accession of new members. But it was not until the Uruguay round in
the 1980-90s that developing countries were included in the discussions, partly in recognition of the
potential impact of free trade as a catalyst for economic development, but also in response to the
success and growing importance of the “East Asian tigers” in international trade patterns.
In more recent times, given the increasing complexity of negotiations on GATT under the auspices
of the World Tarde Organisation (WTO), many countries have pursued bilateral or regional trade
agreements, helping to augment the process of trade liberalisation around the world. As of January
2015, the WTO has received over 600 notifications of regional trade agreements, of which nearly
400 were already in force.
15
Although initial rounds brought about significant reductions in tariffs, the WTO (2012) noted that
“the trade-opening impact was often frustrated by countries’ use of non-tariff measures”. As
pressures to combat NTMs increased, it was agreed at the Kennedy Round of the GATT, launched
in 1964, that members should begin addressing a range of NTMs. However, little progress was
made until the Tokyo round in the 1970s, when a more comprehensive regime to combat NTMs
was established, giving centre stage at negotiations to expanding rules on NTMs . These measures
were further enhanced at the Uruguay round and continue to grow in prominence in multilateral
GATT negotiations, reflecting the growing importance of NTMs and their impact on international
trade.
2.3
NTMs in ASEAN
The explicit treatment of NTMs in ASEAN can be traced back to 1992 and the signing of the
Common Effective Preferential Tariff (CEPT) agreement, which underpinned the formation of the
ASEAN Free Trade Area (AFTA). Since signing the agreement, intra-ASEAN trade has grown by
around 13% a year, faster than the 10% average for extra-ASEAN trade. However, the volume of
intra-ASEAN trade remains much lower than extra-ASEAN trade and the modest difference
between growth rates could be considered lower than what you might expect following the
implementation of a FTA. This suggests that despite a significant reduction in regional tariff rates,
there remains substantial progress on trade liberalisation and regional integration that can be
achieved.
Article 5 of the CEPT agreement called on member states to “eliminate non-tariff barriers on a
gradual basis within a period of five years after the enjoyment of concessions … and no later than
the year 2003”. However, as UNCTAD (2013) notes, despite a clear objective to eliminate NTMs ,
the pace of reduction has been slow to date. This is despite a renewed commitment to eliminate
NTMs in the signing of the AEC Blueprint. And the continued application of NTMs remains a
significant impediment to achieving the fundamental aims of the AEC to establish a single
production base and the free movement of goods across borders.
15
WTO Regional Trade Agreements Database, accessed from https://www.wto.org/english/tratop_e/region_e/region_e.htm
17
Figure 7: Value of ASEAN trade (exports + imports), 1995-2013
2.4
The impact of NTMs on international trade
Given the increase in NTMs over the past two decades, there is an increasing body of research
attempting to identify and quantify their impact on international trade, welfare and economic output.
However, unlike traditional import tariffs, NTMs are by their very nature difficult to first identify and
then model. UNCTAD (2014) put it best in noting that the impact of NTMs on trade is “at best
difficult to measure”.
Nevertheless, the basic theoretical approach, as outlined by UNCTAD (2010) and the OECD
(1997) is relatively straightforward. In summary, the economic impact of NTMs can be modelled
through a standard supply and demand framework on the premise that any NTM can be
considered equivalent to an ad-valorem tariff in the way it interacts with price and quantity. For
example, any measure that limits the quantity of imports of a particular good, such as a binding
import quota or a set of stringent technical regulations, will introduce a wedge between the price
received by producers facing the restriction and the price paid by the consumer (much like a tariff).
Therefore, independently of the nature of the NTM, this approach allows quantification of the cost
and/or price-raising impact of the policy measure and therefore the quantification of the ad-valorem
16
equivalent (AVE).
2.4.1
The incidence of NTM
There are various approaches to estimating the incidence of NTMs. Two commonly used
approaches include the frequency ratio and the coverage ratio. These are relatively simple
calculations based on an inventory approach that can facilitate cross -country and historical
comparison. More specifically, the frequency ratio summarises the percentage of products subject
16
Defined by WTO (2012) as “the level of a traditional ad-valorem tariff that would have an equally trade restricting effect as
the NTM in question”.
18
to one or more NTM, whereas the coverage ratio summarises the percentage of trade subject to
NTMs, to give an indication of the importance of NTMs to total imports.
UNCTAD has been at the forefront of collecting data on NTMs through the Trade Analysis and
Information System (TRAINS). Figure 8 illustrates the frequency ratio for five broad categories of
17
NTMs for a sample of 26 countries for which comprehensive data was collected on NTMs.
According to the data, the most commonly used regulatory measures were technical – both barriers
to trade (TBT), affecting around 30% of all products covered, as well as sanitary and phytosanitary
(SPS), affecting nearly 15% of all product lines. These are measures that necessitate stringent
safety and quality requirements on imported and domestically -produced goods, often exceeding
internationally recognised norms, which can act to inhibit imported goods that do not conform to
these norms. SPS measures are not really applicable to the automobile sector, although technical
barriers are high. This is evident in ASEAN with the numerous policies and restrictions on the
various ecologically friendly car promotion schemes, as will be discussed in more detail in section
3.
Of the non-technical barriers, price controls (such as anti-dumping and tariffs other than customs
tariffs) are relatively low as would be expected given the level of visibility and efforts to reduce price
controls through successive multilateral trade agreements. However, quality control measures
remain high, affecting around 16% of total product lines and nearly a quarter of global automobile
trade. These measures rarely involve direct quotas or export restrictions, illegal under the WTO,
although the recent agreement between Brazil and Mexico to continue operating import quotas for
automobiles is a good example where these measures are still employed (Box 2-1).
Figure 8: Frequency index of NTMs
17
For the purposes of illustration, NTMs are separated into technical regulations – sanitary and phytosanitary (SPS)
(measures affecting areas such as restriction of substances and measures for preventing dissemination of disease),
technical barriers to trade (TBT) (measures such as labelling, other measures protecting the environment, standards on
technical specifications and quality requirements) and pre-shipment inspection and other customs formalities – and nontechnical but ‘hard’ measures of price and quantity controls. UNCTAD, 2013b.
19
As previously indicated, the analysis can also be extended to include a time-series dimension.
18
Overall, UNCTAD found an increasing prevalence of NTMs over the period 1999-2010. In
particular, the use of technical measures (including SPS and TBT measures) has increased, noting
that there “appears to be a consensus that the use of regulatory measures has greatly increased in
the last 10 years” despite a lack of comprehensive time series data.
Figure 9: Frequency index of NTMs, 1999 and 2010
More recently, the WTO (2012) found evidence of an increase in the use of NTMs in the wake of
the global financial crisis. Using information contained within the WTO’s monitoring reports, they
found that in every year since 2008, the implementation of new restrictive NTMs has outnumbered
corresponding liberalising actions. This is true in the ASEAN region also. Analysis of the Global
19
Trade Alert database by Balboa and Wignaraja (2014) found a total of 186 additional NTMs in
ASEAN were implemented in the period 2009-2013, with the majority applied by the larger
economies (Figure 10). As this analysis undertakes a simple count of new NTMs implemented, it
does not necessarily align with the absolute level of trade restrictiveness. For example, as we go
on to show in section 2.4.2, analysis by Kee et al (2009) indicates that Indonesia has a relatively
low level of overall trade restrictiveness, despite installing the greatest number individual NTMs in
recent history. Nevertheless, this research does indicate a worrying trend of increasing protectionist
tendencies at a time where greater liberalisation is needed to harbour economic growth and
welfare gains, and should serve as a warning to ASEAN members as we approach the formation of
the AEC.
18
Due to data limitations, the results primarily relate to the experience of Latin American countries.
19
An independent database, co-ordinated by the Centre for Economic Policy Research, that records statistics on
government measures implemented since the financial crisis that are likely to discriminate against foreign trade.
20
Figure 10: NTM implemented in ASEAN, 2009-2013
The use of NTMs as a substitute to traditional tariffs is confirmed by research undertaken on
behalf of the World Bank by Kee et al (2009). In a global study on the size and prevalence of
NTMs, the authors found evidence of a positive relationship between the application of NTMs
and GDP per capita, but a negative relationship between GDP per capita and the overall level of
protection (NTMs and traditional tariff measures combined). This indicates that traditional tariffs
and NTMs are used as substitutes rather than complements, with NTMs employed to
compensate for widespread tariff reduction. This conclusion is consistent with our observations
for the automobile sector in ASEAN, with many countries seeking t o install significant barriers to
imports as the formation of the AEC necessitates a reduction in traditional tariffs.
Box 2-1: The Brazilian Automobile sector
The automobile sector in Brazil is a prime example of the distortionary effects of overlyrestrictive trade policy. Since the Brazilian economy was liberalised and opened in the 1990s,
the automobile market has grown rapidly into one of the largest production bases in the world.
But the growth of the industry owes a lot to protectionist policies enacted prior to this. As early
as 1956, the original state-sponsored automobile plan introduced a series of measures aimed
at fostering the development of a globally-competitive automobile sector.
High tariffs on imports and subsidies on production have been used to encourage multinational
carmakers to establish production facilities in Brazil, with high local content requirements aimed
at mopping up spillovers in the domestic supply chain. The strategy has been successful in
20
expanding local production – Brazil is now the sixth largest auto producer in the world – but
the industry has not become a globally competitive leader as originally planned.
Instead, domestic production largely goes towards satiating local demand. Exports have been
in steady decline since mid-2000s, with many Brazilian-made automobiles destined for the
beleaguered Argentinean market under the auspices of the Mercosur trading agreement. The
20
Based on 2013 data, sourced from Oxford Economics and LMC Automotive.
21
poor export performance is a consequence of years of protection against imports, which has
acted to dull competitive pressures for domestic industry. According to research by the
McKinsey Global Institute, automobile productivity lags behind that of key global peers, with
21
Mexican auto plants producing twice as many vehicles per worker as Brazil . Protection has
resulted in a highly fragmented market where a large variety of vehicle types and models are
produced below levels that would generate significant economies of scale. Ultimately, it is the
consumer who suffers, paying over the odds for new cars.
Figure 11: Brazil Motor Vehicle Production and Exports, 1980-2014
Brazil’s trade policy has come under increasing scrutiny as a consequence of the level of
protection afforded to the domestic market. In 2013, the EU (one of Brazil’s largest trading
partners) launched a case against Brazil at the WTO due to high import tariffs on cars. And in
early-2015, Brazil and Mexico renewed vehicle quotas for another 4 years, further delaying a
free trade agreement between the two nations. Mexican authorities pushed for the full
implementation of the free trade agreement, but Brazil preferred to keep quotas in place,
worried about the impact of subjecting an inefficient domestic market to international
competition.
Brazil’s current automobile scheme – Inovar Auto – aims at encouraging automakers to
produce more efficient, safe and technologically-advanced vehicles in Brazil. Running from
2013-2017, the program provides a series of incentives to the wider IPI tax depending on a
series of requirements on investment and production. But with recent moves to extend the
import quotas with Mexico, it remains to be seen whether the programme will indeed end in
2017, without replacement of similar measures to support local production.
The official justification for the continuation of import quotas is that the automobile sector needs
to deal with its competitiveness issues. But historical evidence suggests that in the absence of
international competition, trade protectionist policies only entrench these inefficiencies.
21
McKinsey Global Institute. 2014c.
22
2.4.2
Economic impact
The previous section presented evidence on the application of the use of NTMs as a tool to limit
imports. Furthermore, if anything, there appears to be trend towards increased use of NTMs. As
such, there is an ever expanding body of literature that seeks to quantify the impact of such
measures on economic growth and welfare, in a bid to inform policy decisions and encourage
further debate.
Again, much of the literature is driven by extensive work from UNCTAD, which finds that NTMs
22
greatly contribute to restricting international trade and indeed, their contribution to overall trade
restrictiveness is generally much higher than that of traditional tariffs. The WTO (2012)
corroborates this conclusion on the relative restrictiveness of NTMs vis -à-vis traditional tariffs. In a
survey of existing literature on the subject, they find that NTMs are not only twice as restrictive as
normal tariffs, but that in a number of countries, they are the dominant mechanism through which
trade flows are manipulated.
Kee et al (2009), in a World Bank research piece, went further by estimating an Overall Trade
Restrictiveness Index (OTRI), which summarises the impact of each country’s trade policies on its
aggregate imports. The OTRI takes a value from 0 to 1, where 0 is completely open and 1 is
completely closed. As illustrated in Figure 12, of those ASEAN countries included in the analysis,
Malaysia and the Philippines operate relatively restrictive trade policy in com parison to regional and
global norms. On average, the authors also found that NTMs add an additional 87% to the level of
restrictiveness imposed by tariffs, with the contribution of NTMs to trade restrictiveness actually
higher than traditional tariffs in nearly half of all countries.
Figure 12: Overall Trade Restrictiveness Index
Moving beyond estimates of the relative restrictiveness of traditional tariffs versus NTMs, many
studies have used economic modelling to estimate the potential impact on growth and welfare. In
an analysis of the European perspective on NTMs, the Economic and Social Research Institute
23
(ERSI) found substantial benefits from the reduction of NTMs. Using a Computable General
22
UNCTAD, 2013b.
23
ERSI, 2011.
23
Equilibrium (CGE) model of the global economy, the authors estimated the impact of a range of
new FTAs between the EU and other countries / regions around the world. For the purposes of the
study, the authors modelled a partial reduction (50%) of NTMs on a range of industrial goods
including motor vehicles, simulated through a reduction in trade costs, as well as the full elimination
of tariff barriers. As might be expected, the authors found that the implementation of new FTAs
between the EU and its trading partners was beneficial to all countries involved. Overall, the boost
to long-term GDP ranged between 0.5-2.3% depending on the country in question (those ASEAN
countries included in the research experienced a boost to GDP of between 1-1.4%). More
interesting, however, was that the impact of NTM reductions on GDP was consistently greater than
tariff elimination. This was particularly evident in ASEAN member countries where the ratio was
around 3:1 in favour of NTM reduction. Consistent with this is a paper by Hoekman and Nicita
(2011), which concludes that a reduction in the AVE of NTMs by half would increase world trade by
as much as 2-3%.
In another study that attempts to quantify the economic impact of reducing NTMs, which leveraged
the GTAP CGE model in a similar methodology to that proposed in this report, Andriamananjara et
al (2004) found that in general, a liberalising economy experiences substantial welfare gains
following trade liberalisation, implying that “the allocative efficiency impact of liberalisation far
outweighs any adverse terms of trade impact”. This conclusion was supported by a simulation of
unilateral and full liberalisation of NTMs by region (i.e. a region, acting as an individual country,
abolishes all NTMs considered for all countries). The authors found global welfare gains in the
24
region of $90-92 billion were achieved through a unilateral reduction in NTMs . Treating Southeast
Asia as a single region, full liberalisation of NTMs would bring about welfare benefits that were
more modest, but nevertheless positive, equivalent to $500 million.
Finally, referring back to the work by Kee et al (2009), the authors found evidence that as
international or bilateral trade agreements restrict the ability of governments to set traditional tariffs,
some countries choose to replace them with more restrictive NTMs. This supports previously
outlined research that found NTMs and traditional tariffs to be substitutes rather than complements
in international trade policy. Overall, the authors found that that the average AVE for core NTMs
(i.e. including price control measures, quantity restrictions, monopolistic measures and technical
regulations) for 78 countries and some 5,000 tariff lines (products) sampled was 12%. However,
when including only those products that are subject to NTMs, this rises significantly to 45%. In
those ASEAN countries sampled, this figure ranges from 32% in Malaysia, to 41% in Indonesia. In
over half of the sampled products subject to core NTMs, the AVE was higher than the traditional
tariff.
2.4.3
Local content requirements
A particular area of concern in relation to NTMs in the automobile sector is the application of Local
Content Requirements (LCR). A LCR is a requirement on producers to source a pre-specified
proportion of intermediate goods from local suppliers in preference to imported goods. They can be
considered NTMs in so far as they fit within the WTO Agreement on Trade-Related Investment
24
Welfare is a w ider measure of benefit that includes social ‘w ell-being’ factors as well as economic and monetary factors.
The w elfare impact is measured using Equivalent Variation, w hich measures the impact of a policy change in monetary
terms by estimating the amount of income that w ould have to be given to (or taken aw ay from) the economy to leave it as
w ell off as before the policy change.
24
Measures (TRIMS), namely a policy measure that impacts the volume, sectoral composition and
geographical distribution of investment. On top of this, they provide an advantage for domestic
producers with already established supply chains and often necessitate more traditional trade
restrictions due to the inefficiencies that normally accompany such measures. In principle, LCRs
are inconsistent with the rules of the WTO and regional free trade agreements.
In theory, there are numerous arguments supporting the imposition of LCRs. Primarily, the aim is to
generate growth and development in domestic production levels – and hence employment – at the
expense of imports and therefore can be politically very powerful policy tools. LCRs are often
justified with a similar argument as the infant industry argument – protectionism, in so far as
countries impose restrictions to encourage growth in a strategically important sector with
aspirations to become globally competitive in the future. In the case of the automobile sector, this
would be in the manufacturing of parts and components for final assembly. They are also used in
an attempt to ensure countries benefit from FDI inflows, not only directly through supply chain
demand, but also indirectly through spillovers such as technology diffusion and learning effects.
This is particularly attractive to ASEAN member states, many of which are actively promoting a
move up the value chain to drive forward economic growth, from simple assembly and labour
intensive manufacturing, to higher value-added production that is knowledge or skills intensive and
export orientated, such as ICT and electronics, renewable energy and R&D. As such, all the big
ASEAN automobile producers have at some point in the past employed LCRs as part of a wider
strategy to foster growth in the domestic automobile sector.
In practice, however, the evidence overwhelmingly suggests that the distortionary impacts of LCRs
outweigh any positive benefits that could accrue to the domestic economy. In a study by the
Peterson Institute for International Economics for example, a review of empirical evidence of the
impact of LCRs on FDI in general concludes that “the empirical record of the contribution of
domestic-content requirements of the economic development of the host countries that have
25
adopted them, whatever the aim and whatever the purported justification, is decidedly negative”.
This sentiment is echoed by the WTO, which found that “as far as resource allocation is concerned,
the overwhelming evidence is that production and consumption decisions at world prices reflect a
more positive outcome for any country”.
26
The impact of LCRs is well explained by Moran (1998), who outlined that attempts to improve the
functioning of markets by imposing LCRs tend to reinforce production techniques towards
inefficiency and stasis rather than lead to dynamic learning or enhanced efficiency. Instead, the
imposition of LCRs on foreign firms generates economic, technical, managerial and political
restraints for investors. Therefore, a significant and adverse by-product of LCRs is that they
increase the costs of production. This is partly because they make it difficult for projects to capture
full economies of scale to become globally competitive, as it leads to smaller more specialised
production and assembly plants. This is especially pertinent for the automobile sector, where it is
generally considered that the production of cars and associated components only start benefitting
from scale economies when production levels hit 200,000 units p.a.. In a World Bank policy paper
27
looking at the experience of LCRs in the Australian automobile industry, it was found that without
25
Peterson Institute for International Economics, 2008.
26
WTO, 2002.
27
World Bank, 2001.
25
exception, locally produced models were produced at scales that were lower than those levels
sufficient to exhaust economies of scale.
The primary cost-raising impact of LCRs is that firms have to purchase higher cost domestic
components rather than importing cheaper alternatives. In a survey of the automobile sector in 16
different countries, Bale and Walters (1986) found that LCRs as low as 20% generated price
differentials of around 1.5/2 times between domestically -produced vehicles and imports. The
implication of this is that domestic producers, whether foreign-owned or not, need to be
compensated by an import tariff or equivalent NTM that restricts the access of cheaper, more
competitive imported goods. This is supported by Krueger (1975) with reference to the Indian
automobile sector, and the Peterson Institute for International Economics (2013), with reference to
China.
But LCRs have negative implications over and above those that impact costs of production. One
key argument for the application of LCRs is the idea of enhanced technology diffusion from
international competitive firms and the domestic supply chain. However, there is evidence in the
automobile sector that contradicts this. Instead, LCRs can act to insulate high-cost domestic
production, free from competition, leading to monopolistic market structures that can reduce
incentives to invest and innovate in new technology. For example, Doner (1995) found evidence of
significant delays in the introduction of new technology in the high domestic content (80%)
automobile market of Malaysia, with similar outcomes evident in the Latin American market.
Furthermore, the World Bank (2001) found that LCRs actually retarded rather than promoted
technological change in reference to the Australian automobile market. LCRs can also “act as a
deterrent to inflows of mark et-seek ing and efficiency-seek ing FDI” (UNCTAD and World Bank
(2002)), while historical experience suggests that once entrenched, they are difficult to remove.
26
3 The ASEAN autom o bil e sector
This section provides an overview of the ASEAN automobile sector, its growth and prospects for
the future, which are encouraging considering the potential for the region to experience rapid
growth in household incomes over the medium-long term. This is especially pertinent as the
ASEAN members move towards greater economic integration through the formation of the AEC.
For the regional automobile sector – an industry that benefits from large scale operations and
integrated supply chains – this is an important development. However, domestic policies are being
pursued that contradict the aims of the single market and threaten the continued development of
automobile production in the region. This section will consider these policies in the context of the
wider formation of the AEC, identifying contradictions and potential threats to development.
Key points
 Considered in isolation, the ASEAN automobile sector is already the eighth largest in the
world.
 Despite this, ASEAN remains a low-income region with relatively low levels of vehicle
penetration. However, economic growth in the region is expected to be robust over the
medium-long term, which in turn should lead to a rapid increase in vehicle ownership.
 There is significant potential for the automobile sector to make a large contribution to
regional industrialisation and economic growth. However, policies that protect incumbent
producers and restrict intra-regional trade threaten the development of the industry.
 The three largest markets – Indonesia, Malaysia and Thailand – operate a variety of policies
favouring domestic production over international competition, contradicting the objective of
the AEC to produce a ‘single production base’ like that existing in the EU.
 Recent policies include incentives supporting the production of eco-friendly cars, with the
aim of satisfying local demand and boosting exports.
 Although much smaller markets, Vietnam and the Philippines are also engaged in
discriminatory trade policies as they too look to develop automobile production facilities.
3.1
The current status of the automobile sector in ASEAN
The foundations of the automobile sector in the ASEAN region can be traced back to the 1960s,
with Thailand leading the way in actively encouraging a domestic manufacturing base. Other
countries have followed suit, such as Malaysia in the 1980s through their ‘national car’ programme,
and later Indonesia. Indeed, considered in isolation, the ASEAN region is now one of the largest
automobile markets in the world. Based on production levels, the ASEAN region is estimated to
have produced around 3.5 million passenger cars in 2014, making it the eighth largest market in
28
the world. However, including more broadly the manufacturing of parts and accessories, as well
as the manufacturing of commercial vehicles and trucks, the contribution of the sector is much
greater than this. According to Oxford Economics, the gross output of the motor vehicles & parts
sector in ASEAN in 2014 was nearly $125 billion. Furthermore, it generated around 5.3% of global
28
LMC Automobile, Oxford Economics
27
th
value-added output in the sector, making it the 5 largest automobile market in the world based on
this broader definition. At a regional level, the market is dominated by three countries, Thailand,
Indonesia and Malaysia, who combined account for over 85% of total car production in the region
and a similar figure in terms of sales, with some smaller operations in countries such as Vietnam
and the Philippines.
Figure 13: Global automobile production and value-added output, 2014
Underpinning this growth in the automobile sector has been the recognition by governments in the
region of the substantial contribution that the automobile sector can make to economic
development, which has led to a series of polices aimed at encouraging a domestic production
base. Concurrently, the ASEAN region has experienced a rapid pace of economic growth in its
recent history, enabled by greater regional co-operation, a rich supply of natural resources, and an
expanding working-age population. In the period between the Asian financial crisis in 1997/98 and
the global financial crisis of 2008/09, the ASEAN economy, considered in isolation, grew by an
average of 5.3% a year in real US$ terms (Figure 14). This has boosted household incomes and
driven strong growth in car ownership levels.
Figure 14: ASEAN real GDP growth, US$
28
However, despite this rapid pace of growth, the ASEAN region, with the exception of Singapore
and Brunei, remains a low-income region, with average GDP per capita of around $4,000 p.a. in
2014. As a consequence, vehicle penetration levels are relatively low by advanced economy
standards. Based on the latest available data from the World Bank, car ownership rates range from
around 380 cars per 1,000 inhabitants in Malaysia, to just 7 in Myanmar. The weighted average for
the ASEAN region as a whole is an estimated 75 cars per 1,000 inhabitants. This compares to a
world average of around 170 and an OECD average of more than 560 (Figure 15).
Figure 15: Motor vehicle penetration levels in ASEAN
More generally, with the exception of Singapore, where government policy makes owning a car
extremely costly, the pattern of car ownership in ASEAN is highly correlated with per capita income
levels, a relationship that extends beyond ASEAN to the rest of the world. As shown in Figure 17,
this is illustrated by the logarithmic relationship between GDP per capita and the number of
vehicles per 1,000 people. In other words, higher levels economic development and growth
supports higher levels of vehicle ownership. Furthermore, analysis by Dargay et al (2007) suggests
that the income elasticity of vehicle ownership peaks in the per capita income range of $5,000 to
29
$10,000 (in 1995 PPP prices ), suggesting growth in vehicle ownership is greatest in countries
that fit into this income bracket.
At present, four ASEAN countries currently exceed this criteria: Singapore, Brunei, Malaysia and
Thailand, while Indonesia sits in the middle. However, the economic recovery since the global
financial crisis has been encouraging, and even though we expect growth momentum to slow
across the region, we still expect the ASEAN economies to collectively experience robust economic
growth of around 4.6% p.a. (real US$) over the long term, and continue to easily surpass global
growth in the process. As such, by 2030, forecasts by Oxford Economics indicate that Cambodia,
Lao, Vietnam and the Philippines will all join the aforementioned countries that meet the criteria
and reach this threshold that leads to a rapid increase in car ownership (Figure 16). As a
consequence, based on the relationship illustrated in Figure 17, the average number of cars per
29
Purchasing Pow er Parity (PPP) represents an adjustment to exchange rates such that the purchasing pow er of each
currency is identical, i.e. the implied exchange rate such that equivalent goods and services cost the same in each country.
29
1,000 people in ASEAN could rise to as much as 220 by 2030, representing a near 200% increase
from current levels.
It must be noted that there are a number of factors that will conspire to hold back growth in vehicle
ownership levels in the ASEAN region. For example, as evidenced in Dargay et al (2007), the
continued pace of urbanisation and increasing population density across the region will encourage
the development and greater use of public transport and therefore reduce the need for car
ownership, as the distance needed to travel to purchase goods or get to work diminishes. Levels of
congestion are also a deterrent, especially in countries such as Indonesia where poor infrastructure
development has led to increasing problems in the largest cities, most notably in Jakarta which has
recently been ranked as the most congested city in the world according to a recent survey
30
conducted by Castrol. Nevertheless, although it is possible that saturation levels across ASEAN
may be lower than historical relationships predict, there is still significant potential for growth in car
ownership over the longer term that can support a strong automobile sector.
Figure 16: ASEAN GDP per capita, 2014 and 2030
30
Castrol Magnatec Stop-Start Index, 2015, accessed via http://www.castrol.com/en_au/australia/products/cars/engine-
oils/castrol-magnatec-brand/stop-start-index.html
30
Figure 17: World car ownership and GDP per capita, 2012
3.2
31
The automobile sector after the AEC
As outlined above, ASEAN is already the eighth largest automobile market in the world and the
potential for rapid economic growth and increasing car ownership in the future suggests it could
quickly rise up the standings. An important driving factor behind growth in the region has been an
increasing level of regional co-operation through the formation of ASEAN and later AFTA. In 2003,
the ASEAN member states choose to further the level of integration and form the AEC, with the
ultimate aim of establishing a single market and production base that encourages the free
movement of goods, services, labour and capital. In anticipation of the formation of the AEC,
individual member states have been liberalising trade barriers in a bid to promote greater intra32
regional trade and development. The most developed six ASEAN economies have already
dramatically reduced intra-regional import tariffs in the automobile sector to the point where they
are effectively non-existent, with the remaining ASEAN members allowed a special dispensation to
reduce tariffs over a longer time period.
In theory, this represents a significant opportunity for the region to develop an efficient and
internationally competitive automobile sector with a fully integrated supply chain that leverages the
strengths of individual nations. The McKinsey Global Institute estimates that greater ASEAN
integration could realise efficiency savings of between 12-18% in the automobile sector, much of
33
which would be achieved through increasing economies of scale. This would benefit the whole
region. Individual countries would be able to specialise in the manufacturing of components in
which they have comparative advantage in production, allowing appropriate scale efficiencies to
increase productivity and reduce costs. Likewise, assembly would be conducted in a limited
31
For a more detailed analysis of the relationship betw een vehicle ow nership and GDP per capita, see Dargay et al (2007)
32
Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand.
33
McKinsey Global Institute, 2014b.
31
number of locations and at large scale. The overall efficiency of local production across ASEAN
would be further enhanced through an increase in availability of cheaper imported components and
materials from across the region. Significant benefits would also accrue to consumers, as prices fall
and international competition brings about a greater choice in products and additional technological
advancement.
Comparative Advantage is an economic theory that underpins the benefits of free trade. In its
simplest form, a country has a comparative advantage in the production of a particular good if it
34
can produce that good at a lower cost relative to its international trading partners. As such, under
free trade, countries specialise in the production of goods in which they have a comparative
advantage, and trade for other goods on the international market, to the benefit of all countries.
There are many factors that determine comparative advantage. These include supply-side factors –
the relative factor endowments of land, labour (skilled/un-skilled) and capital – with traditional trade
theory suggesting that a country will export goods that use the country’s abundant factors of
production relatively intensively, and import goods that use the country’s scarce factors of
production. However, there are other factors that influence comparative advantage, for example,
the size of the domestic market and presence of supporting industries, transportation costs, the
business climate and other policy and institutional factors also play an important role.
There are strong international precedents to support these claims in the automobile sector.
Economic integration in Europe has enabled automobile manufacturers to fully exploit the
comparative advantages of the different member states, leading to a strong and internationally
competitive industry that contributes positively to the EU trade balance (Box 3-1). In North America
too, the North American Free Trade Agreement (NAFTA) has been instrumental in shaping the
automobile sector in the region over the last two decades. This is apparent not only in Mexico,
which has developed a large manufacturing base that exports all over the world, but also in the US
and Canada through greater cross-border supply chain integration. As outlined by Hufbauer and
Schoot (2005), trade has allowed firms in each country within NAFTA to specialise in the areas of
the automobile industry where they are most efficient, to the benefit of all three countries.
In turn, a more efficient and internationally competitive automobile industry will provide
opportunities to boost exports to the rest of the world as well as within the ASEAN region. In
particular, ASEAN is strategically located between two of the world’s largest and fastest growing
automobile markets, China and India. By 2030, nearly half of all new cars registered in the world
35
will be in either China or India. As these economies gradually open up to international markets in
the future, enhanced ASEAN integration will provide an ideal opportunity for expansion and export
growth, modelling the experience of the automobile sector that has developed in the EU and
NAFTA. This is particularly pertinent in China, where rising employment costs will create new
opportunities for lower-income countries in ASEAN to directly compete with domestic producers,
providing they adopt best practise in international trade policy and regulatory environment.
However, with the removal of traditional tariffs, there remains the sizable problem on NTMs. As
illustrated in Figure 18, research by the McKinsey Global Institute suggests that the automobile
sector lags a long way behind other sectors when it comes to the removal and integration of non-
34
The theory of comparative advantage extends beyond the theory of absolute advantage in allow ing benefits to accrue
from international trade even w hen one country can produce all goods and services at a relative cost advantage to trading
partners. For an explanation, please see https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact3_e.htm
35
LMC Automobile, Oxford Economics
32
tariff measures, particularly in relation to ‘other non-tariff measures’, which refer to administrative
charges, certificates of approval, import licensing, quantity control measures, internal taxes and
other prohibition measures. This is further supported in research by Austria (2013), who calculated
that over 70% of imports of motor vehicles and parts & accessories in Indonesia, Malaysia,
Philippines, Singapore and Thailand were subject to some form of NTM. As outlined in Section 2,
the evidence is virtually unanimous in agreement that the application of NTMs restrict s international
trade and therefore undermines the potential economic benefits that accrue from free trade.
36
Figure 18: Progress on ASEAN integration by Sector (%)
Tariffs
NTMs
Tariffed Tariffed Standards & Other
goods
amount regulations NTMs
Goods
Trade performance
Single
Single
window window
Trade
status
trade
Customs speed
Services
Trade
cost
Investment Labour
Services FDI
Labour
restrictions restrictions mobility Average Lowest
Agriculture, fisheries
91
88
57
70
71
75
57
Rubber
93
98
98
96
71
82
58
Wood
94
99
96
75
68
80
58
Textiles
96
99
99
73
81
82
58
Auto
94
94
94
39
81
77
39
Electronics
98
99
57
62
81
76
57
Consumer
94
99
60
56
81
76
56
Resources
84
93
79
89
61
78
58
70
58
61
85
94
Box 3-1: EU economic integration and the automobile industry
The economic integration of Europe has led to numerous benefits that have boosted the
automobile sector. Through heightened competitiveness, greater economies of scale and
structural reforms, the European automobile sector has become one of the jewels of E uropean
37
manufacturing, contributing over €129bn to the trade balance in 2014. Whereas many
policymakers in developing countries have been wary of the implications of an open industrial
trade policy, European policymakers embraced it as a core precept of EU wide growth. This has
meant the lifting of both standard import tariffs as well as NTMs within the common market.
The reduction in trade barriers within the EU has enabled manufacturers to fully exploit the
competitive advantages of the different member states. With the integration and accession of
the Central and Eastern European countries (CEE), car manufacturers have benefitted from the
injection of a low wage and high skilled workforce. Significant automobile investments in the
CEE region followed, most notably in the Czech Republic, Hungary and Poland and later
Slovakia after the 1998 elections brought in a more market-orientated government. Meanwhile,
the western European nations, centred on Germany, focused on high value added processes
and investment in technology to boost productivity. The number of full-time R&D personnel
within the German automotive industry reached 93,000 in 2014, one of the highest in the world,
while surveys of automotive industry decision makers puts Germany ahead of all other
countries in terms of innovation.
38
36
McKinsey Global Institute, 2014a.
37
Eurostat
38
Germany Trade & Invest, the economic development agency of the Federal Republic of Germany .
33
The unified regulatory approach from the EU has been a key driver for growth in the automobile
industry. Given the large number of market externalities in car use, for example, environmental
and road safety concerns, countries will typically have a raft of regulatory measures in
operation. Often disjointed and idiosyncratic, complying with the standards of foreign countries
adds significant costs to manufacturers that can eclipse those costs incurred from traditional
import tariffs. Furthermore, governments would often deliberately use NTMs as an unofficial
means to stifle international competition, but the long-term effects were to inhibit growth in the
domestic industry as reduced competition dis-incentivised firms to invest in new production
processes. Harmonisation of regulatory and technical standards is particularly important for the
automobile industry, with the average car consisting of 30,000 parts, the majority of which will
be provided by subcontractors, both foreign and domestic. The common market within the EU
ensures that these components can move freely across borders, enabling a richer, more
diverse supply chain for EU vehicle production.
The EU’s scale provides advantages when negotiating with foreign car manufacturers, for
instance, in pushing for the location of production plants within the EU (this has been
particularly evident with the major Asian producers). As such the majority of cars,
approximately 85%, sold in the EU have been manufactured in the EU. The focus of the
European automobile industry now lies with the growth of developing markets, where the lion’s
share of consumer demand growth is expected to occur over the coming years. The European
Commission – under the CARS 21 consultation – is pushing for greater harmonisation of
regulatory and technical standards with other major markets in Asia and the Americas, in the
hope that the success of the integrated European model can be extended globally.
Figure 19: CEE automobile value-added growth, 2000-2014
34
Figure 20: Core EU automobile value-added growth, 2000-2014
As outlined previously, although trade in motor vehicles and parts is conducted virtually tariff free
across the ASEAN region, in practice there are still significant barriers to trade through the
application and proliferation of NTMs. As a result, despite significant growth in the ASEAN
automobile sector in recent years, intra-regional trade has noticeably lagged in performance
(Figure 21).
Figure 21: ASEAN output and trade in Motor Vehicles, 2005-2013
As we will detail below, several ASEAN countries continue to utilise an array of government
policies in order to foster the development of a domestic manufacturing base for automobile
production and support industry as it transitions to a zero-tariff environment. Malaysia, Indonesia,
35
Thailand, Vietnam and the Philippines have all recently announced policies to actively encourage
FDI and domestic growth, with each country harbouring ambitions of exporting at scale.
In particular, the three main manufacturing bases of Thailand, Malaysia and Indonesia are all
seeking to become a regional hub in the production of energy efficient ‘green cars’, providing a
range of investment and tax incentives to encourage FDI in this area. These policies are not only
designed to boost production to serve the domestic market, but are all target ing future growth in
exports. Clearly, each market cannot be successful in achieving their goals to export large
quantities to the rest of the region simultaneously. And exports to the rest of the world will only
succeed in a low-cost, large scale production environment where an integrated and efficient
ASEAN automobile sector leverages the comparative advantage of each member state for a
mixture of components and assembly. By employing nationalistic trade policies independently,
ultimately both individual members and the whole ASEAN region will suffer from a fragmented and
inefficient automobile sector.
Before exploring quantitatively the economic potential of liberalising the automobile sector in
ASEAN in section 4, we provide a brief summary below of the different policies that are currently
being pursued in each major market.
3.2.1
Thailand
The development of the automobile sector in Thailand can be traced back to the 1960s, when a
combination of government incentives through the newly established Board of Investment of
Thailand (BOI), as well as import substitution policies, were employed to encourage the growth of a
domestic manufacturing base. These incentives encouraged an influx of FDI into Thailand and in
particular from Japan, with major global automobile firms choosing to locate regional production
bases in Thailand. This policy was supplemented in the 1970s with stringent LCRs to encourage
further development of the domestic supply chain.
Since then, benefitting from first-mover advantage, the industry has grown rapidly into what is often
dubbed the ‘Detroit of Southeast Asia’, with the major Japanese firms taking a leading role in this
development. In 2014, Thailand produced over 1.9 million vehicles, over half of which were trucks,
39
making it the 12th largest country in the world in terms of vehicle production. On top of this,
Thailand has been much more successful in generating export growth than many regional peers,
40
with around 60% of total production exported.
39
Oxford Economics and LMC Automotive.
40
Thai Automobile industry Association statistics, downloaded from http://www.taia.or.th/Statistics/ .
36
Figure 22: Motor vehicle production in Thailand, 2000-2019
The government remains committed to growing the domestic automobile sector further. The BOI
has openly communicated a desire for Thailand to become “a hub for small, fuel-efficient cars” with
a “focus on exports”. In 2007, the BOI announced the first investment promotion scheme for ‘EcoCar’ manufacturing in Thailand. This was supported by a range of tax and investment incentives to
encourage further FDI in the automobile sector. Signatories to the scheme had to commit to
investing nearly THB 5 billion in Thailand and agree to minimum production levels of 100,000 units
within five years of joining the scheme. In compensation, the government provided a corporat e tax
holiday for eight years, as well as other incentives such as a duty-free exemption for the
importation of machinery and equipment and reduced excise tax rates. In total, there were five
manufacturers who participated in the scheme, with production capacity amounting to over 650,000
units at full scale.
In 2014, the BOI announced a second investment promotion scheme ‘Eco-Car 2’, with broadly
similar conditions as ‘Eco-Car’ (but with an initial investment commitment of THB 6.5 billion
required for new participants not in the original scheme). The aim is that at full operation, the
combined production capacity of Eco-car and Eco-Car 2 will be nearly 1 million units, of which 70%
are earmarked for export.
In addition to supporting the development of low-emission vehicles, Thailand also operates an
excise tax regime that penalises larger engine sizes, with additional benefits for preferred vehicles .
So whilst Thailand’s automobile excise structure does not explicitly discriminate between domestic
production and imports, it does provide an environment for implicit discrimination by providing
considerably lower excise rates on domestically-produced vehicles in comparison to international
competitors. For example, the applied excise rate on a single cab passenger pick-up truck in
Thailand with engine size less than 3,250cc is just 3%. This compares to a rate of between 30-50%
applied to passenger cars depending on engine size. Customs duties on a MFN basis are 80% for
41
CBU units, 30% for pick-up trucks, and between 10-30% for parts and accessories. In January
41
Completely Built Unit (CBU) is the terminology used w hen an automobile is imported or exported as a complete car fully
assembled.
37
2016, Thailand is moving towards a more uniform excise tax regime that is based on CO2
emissions rather than vehicle size.
3.2.2
Malaysia
Malaysia was the first country in South-East Asia to actively encourage the development of its
domestic automobile sector through the concept of a “national car” programme, as part of a wider
goal to develop the high-value manufacturing sector. In the early 1980s, the government
established Proton, the development of which was encouraged by large public investment and high
customs tariffs to protect the newly establish company from cheaper imports. The industry
experienced rapid growth over the 1980s-1990s as a consequence, with car ownership buoyed by
robust economic growth and rising household incomes. However, the national car programme
remained exactly that, as despite some efforts to sell the Proton abroad, it remained largely a
Malaysian car for Malaysian residents, unable to develop an internationally competitive edge in an
environment of high levels of domestic protection and government support.
Recognising this shortcoming, the government implemented the National Automobile Policy (NAP)
in 2006 in an attempt to “transform the domestic automobile industry and integrate it into the
increasingly competitive regional and global industry network ”. Among the primary objectives of the
plan included a desire to develop Malaysia as a regional automobile hub and to increase exports of
vehicles and automobile components. It has subsequently undergone two revisions, first in 2010,
and more recently in January 2014, when the government unveiled new plans to develop a regional
automobile hub for “Energy Efficient Vehicles (EEVs)”, again with an explicit aim to increase
exports of both vehicles and parts.
To date, however, the plan has had a limited impact on developing the automobile sector in
Malaysia. After a rapid period of growth in the 1980s and 1990s following the national car
programme (through Proton, and later Perodua), total production of both passenger and
42
commercial vehicles increased at just 2.2% p.a. since the NAP was first introduced in 2006.
Meanwhile, exports remain virtually non-existent despite proliferation of regional trade flows and
reduced barriers following the formation of AFTA. According to Malaysia’s submission to the APAC
Automobile Dialogue in 2014, only 20,000 units were exported in 2013, equivalent to just 3% of
43
total production. Indeed, domestic production has primarily focused on satisfying local demand,
with government policy continually promoting “national” vehicles over “non-domestic” vehicles
through the application of high tariff and non-tariff measures, effectively closing the market to
foreign competition. This level of protectionism, coupled with high local c ontent requirements which
have been a feature of government policy since the 1960s , “has promoted inefficiencies among the
local producers in terms of production, quality, insufficient research and development programme,
diseconomy of scale, as they were more complacent of their performance in the local mark et than
the global mark et”.
44
42
Malaysian Automobile Association, compound annual grow th rate of total vehicle production, 2006-2014.
43
Malaysian submission to 20th APEC Automotive Dialogue, dow nloaded from http://www.apec.org/Groups/Committee-on-
Trade-and-Investment/Automotive-Dialogue.aspx
44
Department of Statistics, Malaysia, dow nloaded from
http://statistics.gov.my/portal/download_journals/files/2004/Volume2/Contents_AUTOMOBILE.pdf
38
Figure 23: Motor vehicle production and sales in Malaysia, 1980-2014
Given the recent level of subdued growth in the sector, the NAP 2014 is an attempt by the
government to reinvigorate the domestic automobile sector in Malaysia. The underlying goals for
production and exports are certainly ambitious. By 2020, the aim is for total production of
passenger cars to reach 1.25 million units a year, more than double current levels of production. Of
this, the hope is that around 250,000 units, or 20% of total production, will be exported (up from 3%
now). In addition, the government is also seeking to develop the domestic supply chain, with an
explicit target to double the export of parts and components over the same time frame and
establish a new industry for recycled materials and remanufactured components.
In order to achieve these objectives, the government has introduced a range of incentives to attract
FDI and boost local manufacturing, with a particular focus on EEVs. They have also introduced a
scheme through the Ministry of International Trade and Industry (MITI) to reduce domestic car
prices. The Car Price Reduction framework is expected to see a gradual reduction in the cost of
cars of between 20-30% by 2017. However, the degree to which this will drive the necessary
domestic demand is questionable. Unlike most of the ASEAN region, car ownership is already
relatively high in Malaysia.
On top of the higher levels of domestic support, Malaysia has comparatively high excise duties on
the automobile industry compared to the rest of the region. Excise taxes range from a low of 60%
to as much as 105% depending on the vehicle type and engine size. Furthermore, the current
45
regime provides excise exemptions for CKD imports which in some cases can reduce the excise
burden by more than half. This explicitly discriminates against competing CBU imports. Import
duties are by comparison relatively low – 30% on a MFN basis for vehicles and between 0-30% on
parts and accessories. Intra-ASEAN tariffs have been reduced to zero since 2014. Furthermore,
Malaysia operates a non-transparent import permit system (Approved Permits), and the value of
imported vehicles is based on an official gazette price which serves as the basis for the
assessment of import taxes and excise duty.
45
Completely Knocked Dow n (CKD) is the terminology used w hen an automobile is imported or exported as a kit containing
the parts needed for final assembly in another country.
39
3.2.3
Indonesia
Like many other countries in ASEAN, the Indonesian domestic automobile sector has evolved from
government policy interventions, ranging from the operation of restrictive trade tariffs to outright
import bans. The result was an influx of foreign manufacturers in the 1980-90s who imported most
of their parts and components for final assembly in Indonesia. Not satisfied with this, the
government introduced a series of measures in the 1990s to develop the domestic industry further,
such as stringent local content requirements and compulsory divestment rules to ensure greater
technology and skills transfer to local companies.
More recently, following the failure of a ‘national car’ program and collapse of the industry during
the Asian financial crisis in 1997-98, the protectionist policies have been broadly replaced by a
more open policy through the implementation of the ‘Automobile Policy’ of 1999 that involved
important liberalising steps in compliance with WTO guidelines. As a consequence, the Indonesian
automobile sector has exhibited relatively strong growth in the 2000’s, and in 2014, overtook
Thailand as the largest producer of cars in ASEAN (Figure 24). Around 14% of total production is
exported (CBU).
46
More recently, Indonesia has expressed a desire to become the ‘Low Cost Green Car’ (LCGC) hub
of ASEAN, aiming to make Indonesia the largest production base in Southeast Asia. The scheme
provides a series of incentives and relief on domestic taxes in exchange for commitments on direct
investment and production, as well as stringent local content requirements that need to hit 80% by
th
the 5 year of the scheme. In addition to the LCGC program, Indonesia operates additional
programs that provide incentives to domestic low-emission vehicle production through the ‘Low
Carbon Emission Program’.
More generally, the Luxury Sales Tax (LST) system, in effect an excise tax regime, heavily
penalises cars with larger engine sizes. For example, a 3,000cc passenger vehicle is subject to a
125% excise tax, while a similar vehicle type with engine size less than 1,999cc is subject to an
excise tax of just 20%. In addition to implicit discrimination through the excise tax system,
Indonesia operates a number of other NTMs including quotas on permits for the import of vehicles
that do not have an original equipment manufacturer based in Indonesia, as well the application of
costly special import certifications for parts and accessories. Other measures include regulation
from the Ministry of Trade mandating all vehicles to include a permanent label detailing safety
requirements in the Indonesian language. Import tariffs on a MFN basis are 40% for CBU and 10%
for CKD units, with parts and accessories generally subject to a 10% duty.
46
Gaikindo Indonesia, 2013
40
Figure 24: Motor vehicle production in Thailand and Indonesia, 1997-2014
3.2.4
Philippines
The Philippines has experienced rapid growth in vehicle sales in recent times. In 2014, total vehicle
47
sales rose by around 30% to reach nearly 235,000 units , making it the fastest-growing automobile
market in the region. In terms of government policy, the automobile sector is covered by the Motor
Vehicle Development Program (MVDP). Early versions of the program included stringent local
content requirements and the outright prohibition of vehicle importation in order to encourage the
development of a domestic industry. However, greater regional economic integration has
necessitated a phasing-out of these more visible restrictive trade policies, as well as traditional
import tariffs. Despite this, recent manifestations of the MVDP continue to exhibit protectionist
tendencies that explicitly or implicitly discriminate against free trade and the import of CBU
vehicles. Reflecting this, the Philippines was subject to a trade dispute through the WTO following
a complaint by the US in 2000.
The current program, introduced in 2010, provides a series of incentives for local assembly
activities, including the reduction of import tariffs to just 0-1% for CKD units, the provision of
‘credits’ to exports which can be applied against import tariffs , and a ban on used vehicle imports,
all in a bid to encourage domestic production and exports. The government also provides a series
of incentives for FDI through the wider Investment Priorities Plan (IPP) and the Philippines
Economic Zone Authority. The excise tax structure in the Philippines divides the market into four
value based segments, penalising the higher value segments with significantly higher excise tax
rates. Import tariffs on a MFN basis are 30% for all vehicles, but have been completely rem oved for
all automobile goods under the auspices of AFTA (as well as other regional trade agreements).
The automobile industry is already a major contributor to the wider economy in the Philippines.
However, the market is still predominantly served by imported vehicles despite government efforts
47
Chamber of Automobile Manufacturers, Philippines.
41
otherwise, with around 70% of the domestic market served by imports. As such, the government is
currently working on a long-term ‘Comprehensive Automobile Resurgence Strategy’ (CARS) in an
attempt to boost domestic production and develop a regional automobile hub. The final details of
the CARS program are expected to be unveiled in the 2016 budget later this year. However, the
scheme is expected to last six years and involve a mix of tax incentives and around $600 million of
government funds earmarked for companies willing to set up a domestic production base. In
exchange, automakers are expected to invest in excess of $60 million in assembly facilities
capable of producing more than 40,000 units a year in the Philippines. The ultimate aim is to create
an industry producing around 500,000 units a year by 2022 (more than double current capacity),
able to serve both the domestic market and, crucially, to export.
3.2.5
Vietnam
Vietnam’s automobile industry is relatively immature in comparison to the other main producers in
the ASEAN region, but owes much to the government-led “Doi Moi” economic restructuring and
liberalisation program in the mid-1980s, which encouraged some small scale foreign investment in
Vietnam of the early 1990s. Since the beginnings Vietnam has employed a series of measures to
support the domestic automobile industry. These include some of the highest import tariffs in the
region – around 74% on a MFN basis – and a Special Consumption Tax (excise tax) structure that
rises to 60% depending on the category of vehicle. However, the sector remains relatively small
and uncompetitive on account of the small scale to which local assembly is undertaken. In total,
48
only 130,000 vehicles were manufactured in Vietnam in 2014, a fraction of the level of production
in the more mature markets of Thailand, Malaysia and Indonesia. Furthermore, localisation rates
are limited, with many assembly plants sourcing imported intermediate goods.
With the formation of the AEC, Vietnam is due to cut import tariffs to intra-regional trade by 2018 in
agreement with the CEPT. However, there are concerns that the domestic industry will struggle to
compete when this is done. In response, the government last year passed the ‘Automotive
Development Plan’ covering 2015-2020, with a vision to 2030. Together with the ‘Automotive
Development Strategy’, the ultimate objective is to establish an automobile industry capable of
becoming a significant supplier of parts and components to meet bot h domestic demand –
targeting a localisation rate of around 40-50% – as well as growing exports and integrate Vietnam
within the global automobile supply chain. Vietnam will also prioritize the manufacture of trucks and
passenger cars of 10 seats or more. In order to support this growth, the government plans to
continue protecting the domestic industry, despite the limited success to date, with a range of high
import taxes, export credits, investment incentives and preferential access to credit. On top of this,
the government has recently announced plans to reform the Special Consumption Tax by changing
49
the base on which the tax is calculated. Instead of using the CIF value, the tax base from the
beginning of 2016 will include domestic sales costs, including services such as advertising,
transportation and warranty provision that will increase the price of imported vehicles by a reported
5%.
48
Central Statistics Office of Vietnam via Haver Analytics.
49
The tax base of an imported good is often calculated on the price of Cost, Insurance and Freight (CIF) .
42
4 Economi c impact of autom o bil e NTMs in ASEAN
The application of restrictive trade policy is negative for overall economic growth. This conclusion is
well-established in the literature, some of which is summarised in section 2. Despite this, a number
of ASEAN economies are clearly pursuing industrial policy that restricts international trade and
competition in the automobile sector, even though the same countries are supposedly well advanced in the formation of a single economic market which in theory should enable the free
movement of goods across borders and encourage a ‘single production base’. This section builds
on the qualitative analysis presented in sections 2 and 3 by presenting the results of a quantitative
assessment of the potential of free trade in the automobile sector in the ASEAN region.
Key points
 Based on a 2-stage modelling process that incorporates both static and dynamic
consequences from the liberalisation of trade policy, Oxford Economics can estimate the
impact of reducing NTMs in the ASEAN-5 countries.
 Under a partial liberalisation scenario where NTMs are cut by half and output taxes cut by
10% in the automobile sector, the economic output in the combined ASEAN-5 economies
could be expected to be around 0.3% larger by 2025 in real terms.
 The impact is not only reflected in the improved trade balance, but also in business fixed
investment and private consumption. Employment too will rise, with an estimated 284,000
additional jobs created in the region over the next decade.
 Although difficult to achieve, a full liberalisation scenario generates an even greater boost to
both output and employment, a result that underscores the principles of free trade as a first
best principle for international trade policy.
 Individual country results indicate that Thailand, and to a lesser extent Malaysia, stand to
gain the most from greater trade liberalisation in the automobile sector. By contrast, the
impact in Indonesia and the Philippines is relatively small, reflecting to a degree the relative
openness of these economies to international trade.
4.1
Methodology
The following analysis of the economic impact of trade liberalisation in the ASEAN automobile
sector is based on a two-stage approach in order to fully account for both static and dynamic gains
from trade.

Firstly, we estimate the static economic impact of removing NTMs to trade in the automobile
sector in ASEAN on the allocation of resources across different economies and different
industrial sectors. This exercise is conducted using the model of the General Trade Analysis
Project (GTAP) centre at Purdue University (see Appendix for more details).

Second, the output from this model is used as an input into Oxford Economics’ Global
Economic Model to quantify the overall (both static and dynamic) effects of trade reform. This
43
takes into account the impact of increased trade on economies of scale, capital accumulation,
50
technology transfers and innovation and competition.
Figure 25: Schematic overview of the modelling approach
Stage 1
Stage 2
Static gains
Trade
liberalisation
GTAP
Model
Static gains
Oxford
Economic
Model
Dynamic gains
Overall impact:
GDP
Prices / input costs
Trade volumes
Productivity
Knowledge spillovers
In order to estimate the economic impact of reducing NTMs in the ASEAN automobile sector, it was
first necessary to update the baseline data on intra-regional tariffs and domestic taxes within the
GTAP model. Although intra-regional import tariffs have been reduced to near zero for trade in
automobiles between the six most developed economies in ASEAN, estimates of the implicit import
taxes inclusive of AVE estimates of NTMs were incorporated in order to appropriatel y model the
results of removing all barriers to trade. This was done with reference to Kee et al (2009), who
estimated AVE tariff rates for core NTMs for 78 countries and 5,000 products (updated in 2012),
classified according to the World Customs Organisation Harmonised System (HS) product
categories (including HS87 – Vehicles other than railway or tramway rolling stock). For those
countries without appropriate coverage within Kee et al, we estimated AVE tariff rates with
reference to the wider OTRI measure to produce comparative market based estimates of NTMs .
Appropriate domestic tax rates were incorporated with reference to data on the current tax
structure in operation in each country (see section 6.3 for details of tax rates assumed).
4.2
Scenarios
Oxford Economics developed two scenarios in order to illustrate the potential economic impact of
liberalising trade in the automobile sector in ASEAN. Each scenario incorporates a reduction in the
AVE level of NTMs applied to the automobile sector in each of the ASEAN-5 markets, the size of
which are calibrated based on similar exercises performed in the academic literature. In addition to
this, both scenarios include a reduction in the domestic tax rate applied to the automobile sector.
As detailed in section 3.2, the automobile excise tax regime is often used either explicitly or
implicitly to discriminate against international competition, weighted in favour of local production. As
such, in constructing each scenario, Oxford Economics have incorporated a partial reduction in
domestic taxes in an attempt to simulate the implementation of a fairer excise tax regime. The
premise is that each scenario involves a reduction in the higher excise tax rate thresholds in order
to reduce the overall spread across vehicle types (and hence the average excise rate falls in each
country). The scale of changes to the domestic tax rate are calibrated to be much lower than those
for NTMs, partly reflecting the feasibility of such large changes to the excise tax regime vis -à-vis
NTMs in these countries, and partly to ensure focus remains on the reduction of NTMs as per the
scope of the report. The primary assumptions that underpin each scenario are:
50
With the exception of Vietnam, all countries are fully covered w ithin the Oxford Economics’ Global Economic Model. For
Vietnam, it w as necessary to estimate the overall dynamic effects by scaling the impacts relative to the GTAP outcomes.
44

Scenario 1, a partial liberalisation scenario, involves a 50% reduction in the AVE level of
NTMs in the automobile sector in each of the ASEAN-5 markets. While the analysis does not
allow for a more detailed breakdown of what this might look like, it is envisaged that partial
liberalisation would necessitate both a scaling back of current NTMs, such as LCRs, as well as
a greater degree of harmonisation in regulatory and safety standards. This scenario also
includes a reduction in domestic tax rates by 10%.

Scenario 2, a full liberalisation scenario, models the impact of a full liberalisation of NTMs
applicable to the automobile sector in each market and a 20% cut in domestic tax rates.
The results presented for both scenarios are economy-wide values and as such, do not solely
represent any benefits or otherwise that may accrue directly to the automobile sector. As such, the
outputs reflect wider macroeconomic outcomes from a distribution of resources both within
countries and industries, as well as across countries, as a consequence of a change in trade policy
for the automotive sector in each of the ASEAN-5 countries. For more details on the transmission
mechanism through which this works in the modelling process, please refer to section 6.
4.3
4.3.1
The economic impact of the reduction in NTMs: partial liberalisation
Impact through resource allocation: static gains
According to the GTAP model, the gains from the partial liberalisation of trade restrictions in the
automobile sector are relatively small. GDP in real terms is estimated to rise in the ASEAN-5 region
by around $5 billion in today’s prices. This is equivalent to just 0.1% of GDP . These gains are
concentrated in Malaysia and to a lesser extent Thailand and Indonesia (Figure 26). This reflects
the potential to gain from trade liberalisation, both in terms of the current size of the domestic
automobile sector, as well as the current level of protection applied to imports, directly through
NTMs and indirectly through the excise tax regime (under the baseline assumptions, the AVE of
NTMs in Malaysia is higher than both Thailand and Indonesia).
Figure 26: Distribution of static GDP gains, 2025
45
4.3.2
Total impact including dynamic gains
The static results of partial liberalisation from the GTAP model are small. However, that does not
take into account the dynamic effects of liberalisation. Allowing for the dynamic effects to build up
over time boosts the initial static gains of liberalising trade in the automobile sector. These impacts
are detailed in Figure 27.
Starting with the breakdown of GDP by expenditure component indicates that on the whole, the
impact of further trade liberalisation in the ASEAN-5 region is realised across all components and
not merely reflected in the trade variables. In particular, private consumption experiences a
relatively strong boost, equivalent to 0.3% of the baseline forecast in 2025. This is down to
international trade and greater specialisation driving efficiency gains, which subsequently pushes
down prices for consumers and improves product choice and technological advancement. Fixed
investment also rises by 0.2% as firms commit more resources to boosting capacity in a more open
and business friendly environment.
Overall, it is estimated that GDP in the ASEAN-5 region would be around $9.8 billion higher in
today’s prices in 2025. This is equivalent to nearly 0.3% of GDP compared to our baseline forecast,
and is nearly twice the initial static impact.
Figure 27: Impact of partial liberalisation on key macroeconomic variables, 2025
% Difference from base, local currency in real terms, unless otherwise stated
Partial liberalisation
scenario
GDP
Exports, Goods Imports, Goods Fixed
and Services
and Services
Investment
Private
Consumption
Total
Current account
Employment balance
(000)
(% GDP)
Indonesia
0.1
0.8
0.7
0.1
0.1
74
0.0
Malaysia
0.6
0.5
0.5
0.4
0.8
12
0.1
Philippines
0.1
0.5
0.6
0.2
0.1
20
0.0
Thailand
0.6
0.3
0.2
0.5
0.8
110
0.3
Vietnam
0.3
0.1
0.0
0.3
0.4
68
0.1
ASEAN-5 (US$)
0.3
0.5
0.4
0.2
0.3
284
n/a
Source: Oxford Economics
Figure 28 illustrates how the total effects of partial liberalisation are distributed around the ASEAN5 markets. When including the dynamic effects, the country that stands to benefit the most in both
absolute and relative terms would be Thailand, which experiences a boost in real GDP of $3.5
billion in today’s prices, equivalent to 0.6% of GDP relative to the baseline in 2025. This is not that
unsurprising – Thailand has the most developed automobile industry in the region, with an
extensive domestic supply chain which would be ideally placed to benefit from further liberalisation
both at home and abroad. And more generally, the Thai economy is very open – the ratio of
imports plus exports to GDP is around 143% – which facilitates greater innovation and increased
competition in the dynamic model, driving down prices and driving up underlying productivity
(Figure 29).
Malaysia, as another open economy, would also be expected to experience a relatively robust
boost to the domestic economy through greater liberalisation, with real GDP nearly 0.6% higher in
2025, although the multiplier from static to total impacts is noticeably lower in Malaysia than it is in
Thailand, suggesting the spillover effects from greater capital accumulation, innovation and
competition are limited in Malaysia. In so far as Malaysia is more developed than the other ASEAN-
46
5 countries considered in this report, this result is consistent with similar work on the contrasting
fortunes of developed and developing countries when it comes to realising additional dynamic
benefits from trade policy reform.
51
Figure 28: GDP impact of partial liberalisation scenario, 2025
Figure 29: Ratio of Exports plus Imports to GDP, 2014
51
See http://www.oxfordeconomics.com/my-oxford/projects/129089
47
By contrast, the model results indicate that Indonesia and the Philippines would realise fairly
modest benefits from liberalisation in relative terms. This is perhaps a little surprising in the case of
Indonesia, which is now the largest producer of cars in the region after recently overtaking Thailand
to claim top-spot in 2014 (Figure 24). Indeed, as outlined in section 3.1, there is significant potential
for growth in car ownership levels in Indonesia over the coming decade as household incomes
grow, especially if government plans to ramp-up infrastructure investment in the coming years
come to fruition. Some of this ‘non-impact’ on GDP can be attributed to the lower implied effect of a
50% reduction in the AVE of NTMs under the liberalisation scenario (see Figure 36). And as
illustrated by Figure 29, Indonesia is relatively closed to international trade vis-à-vis its ASEAN
rivals, limiting the potential dynamic benefits from liberalising trade policy. However, it also
suggests that when it comes to the big three producers in ASEAN, Thailand and Malaysia appear
to retain a competitive edge over Indonesia in terms of comparative advantage in production.
In the Philippines as well as Vietnam, although you would expect significant catch up potential in
both markets, the results suggest that the larger and more developed producers on the whole
retain a comparative advantage in automobile production, while spillover effects to the wider
economy are limited given the relative size of the automobile sector in these markets.
As well as generating additional economic output, the reduction in NTMs in the automobile industry
in ASEAN will help to create additional employment in the economy. Overall, the results suggest
that around 284,000 new jobs would be created by 2025. The large majority of these new jobs
would be generated in Thailand (110,000), Indonesia (74,000) and Vietnam (68,000) (Figure 30).
Figure 30: Employment impact of partial liberalisation scenario, 2025
48
Box 4-1: NAFTA and the Mexican automobile sector
The Mexican experience following the implementation of NAFTA provides a good case study on
how free trade policy can support the development of a strong and successful automobile
sector. There are many similarities in policy between Mexico pre-NAFTA and the major ASEAN
automobile producers now – in regards to the application of NTMs such as LCRs, import
controls and excise concessions for local manufacturers. However in a bid to become a global
trade and investment hub, Mexico embraced the principles of free trade and opened up to
international competition, creating an environment in which the automobile sector has since
prospered.
NAFTA entered into force in 1994 – a ground-breaking agreement at the time given the
combination of developing and developed country signatories. The agreement prescribed a
gradual elimination of tariff and non-tariff barriers on the trade in goods, the liberalisation of
trade in services, and a series of other policy measures in areas such as FDI and intellectual
property rights. Given that the US and Canada already had a FTA in place, the majority of
liberalisation efforts were concentrated on bi-lateral relations between Mexico and its two North
American partners.
The automobile sector in Mexico has always held a prominent position in domestic government
policy, recognised as a key engine of industrialisation. Traditionally, the industry was highly
regulated through a series of presidential auto decrees which controlled the production and
imports of automobiles and parts. Initially, the aim was to grow domestic capacity, through
import substitution measures and high LCRs. However the sector was gradually liberalised
during the 1970s and 1980s, driven by a desire to boost exports and encourage greater FDI
inflows. But strict controls on local content and foreign ownership levels were maintained, as
Mexico remained one of the most closed automobile markets in the world. All this changed with
the advent of NAFTA.
In 2014, NAFTA turned 20 years old. And in that time, output of the Mexican automotive
industry has more than tripled, growing at an average annual rate of 5.6%. Barriers to trade
were gradually phased out in the years following the signing of NAFTA, subjecting domestic
producers to the pressures of international competition. In response, the domestic industry
quickly adapted to the new environment. Partnerships were formed with foreign manufacturers,
facilitating knowledge spillovers and technology transfer. In turn, Mexico provided a cheap and
skilled workforce and a location base from which original equipment manufacturers could export
to the US and Canada. The once insular, domestically-orientated automobile market in Mexico
quickly switched focus towards the international marketplace following an aggressive
liberalisation policy that saw Mexico engage numerous partners in FTA’s in the 1990s and
2000s.
The automobile sector is now a linchpin of manufacturing in Mexico. In 2014 more than 3.2
million vehicles were produced in Mexico, of which over 80% were exported, primarily to US
52
consumers, but increasingly to other markets around the globe. Mexico is now the seventh
largest producer in the world after overtaking Brazil in 2014 (Box 2-1), and continued
investment in capacity promises to deliver strong growth in the future. The production of motor
vehicles and parts accounts for around 17.3% of total value-added of domestic manufacturing
in Mexico, and 3.1% GDP, as well as providing the primary source of foreign export earnings.
52
AMIA, Automobile Association of Mexico, via Haver Analytics.
49
The sector is also a significant employer, providing jobs for around 720,000 people, an increase
of more than 50% since NAFTA was signed, and equivalent to one-fifth of total employment in
manufacturing.
53
Greater competition has also benefitted consumers. The range of choice available increased
dramatically, with the number of models rising from 42 to 135 and the number of available
brands doubling. Average prices also fell. NAFTA led to a more integrated North American
market – with elements of the production process outsourced to different countries depending
on comparative advantage – driving down costs and facilitating greater economies of scale. As
a consequence, the price of a new Chevrolet Corsa in Mexico fell by around one-third in the
decade after NAFTA was implemented.
54
Figure 31: Motor vehicle output and exports in Mexico, 1990-2014
4.4
The economic impact of the reduction in NTMs: full liberalisation
As would be expected, the results of scenario one are compounded under the full liberalisation
scenario modelled in scenario two. In practise, the full liberalisation of NTMs is perhaps an
unrealistic goal. As outlined in section 2.1, NTMs are often imposed for non-trade related, welfare
enhancing motivations. As such, trade distortions in this case arise merely as a by -product of
measures seeking to correct legitimate market failures.
However, it is nevertheless instructive to model such a scenario in order to illustrate the upperbound impact of potential economic benefits from pursuing trade liberalisation policies. As
illustrated in Figure 32, scenario two generates greater economic benefits than scenario one, with
real GDP in 2025 around 0.5% higher than the baseline scenario. This is equivalent to around
$19.4 billion in today’s prices, nearly double the impact from the partial liberalisation scenario.
53
INEGI, National Statistics Agency of Mexico, via Haver Analytics.
54
General Motors International.
50
Furthermore, all countries continue to benefit under the full liberalisation scenario, proving that free
trade is necessarily the first-best approach for international trade policy design.
The impact on employment is illustrated in Figure 33. Overall, full liberalisation would help create
nearly 554,000 additional jobs by 2025. This impact is concentrated in Thailand, Indonesia and
Vietnam. Given that labour productivity is already relatively high in Malaysia, the impact on
employment is much more muted in comparison to the impact on GDP.
Figure 32: Impact of full liberalisation on key macroeconomic variables, 2025
% Difference from base, local currency in real terms, unless otherwise stated
Full liberalisation
scenario
Exports, Goods Imports, Goods Fixed
and Services
and Services
Investment
GDP
Private
Consumption
Total
Current account
Employment balance
(000)
(% GDP)
Indonesia
0.2
1.6
1.5
0.2
0.2
124
0.0
Malaysia
1.2
1.0
0.9
0.7
1.5
26
0.2
Philippines
0.1
1.1
1.2
0.2
0.2
27
0.0
Thailand
1.4
0.7
0.5
1.0
1.8
238
0.6
Vietnam
0.6
0.2
0.2
0.6
0.7
139
0.0
ASEAN-5 (US$)
0.5
0.9
0.8
0.4
0.6
554
n/a
Source: Oxford Economics
Figure 33: Employment impact of modelled scenarios, 2025
51
5 Concl usi o n
In 2003, the ASEAN member states agreed to the formation of a single market, the AEC, a goal
they remain committed to achieving by the end of 2015. In practise, the AEC will fall short of the
requirements of a single market, which necessitate the extension of the principles of free trade to
the movement of mobile factors of production, and the establishment of a common external tariff for
extra-regional trade. However, the AEC nevertheless represents one of the most ambitious ever
initiatives for regional integration in the developing world, and the potential benefits could be
significant. A key pillar underpinning the objectives of the AEC is the free movement of goods
across borders. In reducing import tariffs on intra-regional trade, members have taking significant
steps towards achieving this target already. However, as import tariffs have fallen, there remain
significant impediments to trade in the form of NTMs.
NTMs are defined by the UNCTAD (2010) as “policy measures, other than ordinary customs tariffs,
that can potentially have an economic effect on international trade”. They are relatively opaque in
nature, often embedded deep within legislature, and so are difficult to identify and quantify.
However, as import tariffs have steadily declined across the world, the focus on NTMs in FTA
agreements has increased. The academic literature is unanimous in agreement that reducing
NTMs can boost trade flows, increase economic output and improve national welfare.
Despite this, evidence suggests that the use of NTMs in ASEAN have increased since the global
financial crisis. This is especially relevant in the automotive sector, where trade-restricting policies
are being pursued at a national level that contradict the aims of the single market and threaten the
future development of the industry. NTMs represent a significant barrier in the short, medium and
long-term to fully realising the potential benefits of the AEC and the formation of a truly single
st
production base post 31 December 2015.
Removing these NTMs would have a positive impact on economic output and welfare in the region.
In order to quantitatively estimate this impact, Oxford Economics has undertaken a modelling
exercise incorporating the static and dynamic gains from trade liberalisation. Two s cenarios were
constructed, a partial liberalisation scenario, and a full liberalisation scenario.
Under the partial liberalisation scenario, GDP in the ASEAN-5 region would be around 0.3% higher
compared to current forecasts. This equates to around $8.9 billion in today’s prices. In turn, this
would generate nearly 284,000 jobs across the region, with Thailand and Malaysia realising the
greatest benefits to their domestic economies. However, the results are not bounded by these
figures. Full liberalisation could see real GDP rise by 0.5% by 2025 in the ASEAN-5 region, with
gross employment rising by 554,000 people.
Healthy economic growth in the future will boost household incomes across ASEAN towards levels
associated with a rapid increase in vehicle ownership. This presents a significant opportunity for
the automobile sector. Under a fully operational single market, individual countries would specialise
in areas where they have a comparative advantage in production, whether it be the production of
high-value added components, or more labour-intensive operations such as assembly. The result
would be a single production base that is internationally competitive, capable of exporting globally,
including to India and China, two of the largest and fastest growing markets in the world. This
would benefit all countries by boosting exports and investment in the region, as well as lowering
prices and increasing choice for consumer.
But in order to fully harness the significant potential of the automobile industry in ASEAN, member
states should be working together to reduce NTMs and harmonise standards. One of the key policy
areas that need coordinating is excise taxation, which as highlighted in this report can in effect be
considered as a NTM in so far as many countries use the excise tax system to further national
52
55
policies and support domestic ‘favourites’. Instead, current policies will hold back the
development of the industry, and therefore spillovers to the wider economy. In this regard, the EU
provides a guiding example for ASEAN to follow, where a unified regulatory approach and
harmonisation of technical standards has accompanied the removal of intra-EU tariff barriers. This
has facilitated the growth of a strong and internationally competitive automobile industry that
exploits the comparative advantage of individual member states within the single market.
Another area of concern is the proliferation of LCRs, with ASEAN member states seeking to
maximise the benefits from FDI inflows and cultivate a domestic automobile production base
through their application. LCRs are often justified as a temporary measure used to support a
fledgling industry in its infancy, until such time that it is large enough to compete internationally.
However in practice, the evidence suggests that the distortionary impacts outweigh any positive
benefits that could accrue to the domestic economy. As such, the first best solution would be to do
away with LCRs completely, however in the context of the AEC, an alternative policy option worth
considering would be a redefinition of the term ‘local’ to include the region as a whole. Such a
decision would be consistent with the aim of the AEC to create a single production base and would
allow member states to achieve a degree of specialisation in production.
Figure 34: GDP impact of reducing NTMs in ASEAN automobile industry, 2025
55
A detailed discussion on the guiding principles behind excise taxation in relation to the ASEAN automobile sector is
contained w ith the ASEAN Excise Tax Reform: A Resource Manual, available at
http://iticnet.org/images/ASEANExciseTaxReformManual.pdf
53
6 Appendi x
6.1
General Trade Analysis Project (GTAP) Model
The GTAP model is the benchmark database and model for ‘static’ analysis of trade policy and for
estimating the impact of trade on output via the reallocation of resources across countries. It is a
56
multi-region model, identifying 113 economic regions and 57 economic sectors. The sectors
covered include food and agriculture, oil and gas, metals and machinery, chemicals, financial
services and other services, at a high level of detail. For each region and sector, trade flows are
identified. GTAP also includes information on applied bilateral tariff equivalents, incorporating ad
valorem tariffs as well as ad valorem tariff equivalents of specific tariffs and tariff rate quota
measures from CPII/ITC Market Access Maps (MACMaps) database.
The standard GTAP model is a multi-region, Computable General Equilibrium model. On the
production side, perfect competition and constant returns to scale are assumed, while on the
supply side, Armington elasticities (i.e. imperfect substitution between the same product produced
in different locations) are used to capture home bias. Trade elasticities vary between sectors e.g. a
relatively homogenous product such as fossil fuels has a high degree of substitutability, but a more
heterogeneous product such as financial services has a low degree of substitutability. Across
countries the elasticities are constant, so consumers are indifferent when switching between
imports from different countries. Together, these elasticities are crucial in determining the results of
the GTAP model. Other aspects of this model include: the treatment of private household
preferences using the non-homothetic constant difference of elasticities (CDE) functional form,
explicit treatment of international trade and transport margins and a global banking sector which
intermediates between global savings and consumption.
The transmission mechanisms under a trade liberalisation policy in GTAP are:

Lower barriers to trade lead to lower import prices – country-specific impacts of liberalisation
depend on the existing level of protectionism and composition of imports.

Changes in relative prices result in households and firms switching demand from domestically produced goods to imports, as well as between importers.

Changes in demand across sectors trigger shifts in factor inputs. For static inputs such as land
and natural resources, supply remains constant but prices adjust. For flexible inputs such as
labour and capital, supply is assumed to fully adjust to changes in demand, leaving the price
unaltered across scenarios.

Changes in input prices feed through the supply chain (the economic structure is important for
relative effects across countries).

Changes in relative producer prices cause adjustments to domestic demand and export
demand.

56
Depending on whether liberalisation is multi-, bi- or unilateral, the effect is reciprocated in the
rest of the world.
Oxford Economics aggregate together some of the regions and sectors to align the GTAP outputs w ith the Global
Economic Model.
54

Terms of trade and demand shifts impact upon the current account.

Investment determined by global savings.
The final output from the GTAP model is a new structural picture for the world economy. At the
country level, there is a new pattern of exports and imports that reflects the shifts in demand (both
internal and external) triggered by the change in output prices consumers face. These changes are
then mirrored across sectors: industries that now have a comparative advantage gain and expand,
while others lose out.
6.2
Global Economic Model
The GTAP model tells us how increased trade enables economies to exploit the underlying
patterns of comparative advantage more fully. But it does not take into account a range of other
dynamic impacts of liberalisation. The dynamics effects are captured through Oxford Economics’
Global Macroeconomic Model, which currently covers 46 economies in detail, together with six
regional ‘blocs’ to account for the rest of world GDP and trade.
As well as reflecting all of the different ways in which economies interact with one another, for
example, through trade, capital flows and exchange rates, and global commodity markets etc., the
Oxford Model incorporates a dynamic treatment of the determination of potential output, and hence
long-term GDP, in each economy. The model also includes a link between openness to trade and
the behaviour of total factor productivity, to reflect the effect that trade liberalisation has on, for
example, the exploitation of economies of scale and incentives for investment in R&D. This allows
us to model explicitly the impact of trade liberalisation on, for example, incentives for investment in
each economy and hence on the evolution of the capital stock.
Figure 35: Overview of the Global Economic Model
55
6.3
Baseline and modelled tariff and output tax rates
The assumptions for tax rates are detailed in Figure 36 below. Estimates of the implicit import taxes
inclusive of AVE estimates of NTMs were incorporated with reference to Kee et al (2009), who
estimated AVE tariff rates for core NTMs for 78 countries and 5,000 products (updated in 2012),
classified according to the World Customs Organisation Harmonised System (HS) product
categories (including HS87 – Vehicles other than railway or tramway rolling stock). For those
countries without appropriate coverage within Kee et al, Oxford Economics estimated AVE tariff
rates with reference to the wider OTRI measure to produce comparative market based estimates of
NTMs. Appropriate domestic tax rates were incorporated with reference to data on the current
excise tax structure in operation in each country, weighted in favour of the lower bound rates to
account for a higher consumer demand for lower cost and/or smaller sized vehicles.
Figure 36: Tariff rates applied to GTAP model
Baseline
AVE of NTM
on intra% ASEAN trade Output tax
Indonesia
9.1
55.0
Vietnam
33.0
50.0
Malaysia
24.7
85.0
Philippines
33.0
33.3
Thailand
19.9
36.7
57
57
Scenario 1
AVE of NTM
on intraASEAN trade Output tax
4.6
49.5
16.5
45.0
12.4
76.5
16.5
30.0
10.0
33.0
Scenario2
AVE of NTM
on intraASEAN trade Output tax
0.0
44.0
0.0
40.0
0.0
68.0
0.0
26.7
0.0
29.3
Kee et al (2009), updated 2012, and Oxford Economics estimates.
56
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