Made in Asean, made in the world

Two significant economic events will be coming our way in two years’ time. First is the advent of the Asean Economic Community (AEC) unifying its 10 member-economies into a single market and production base marked by free or freer flow of goods, services, investment, capital and skilled labor across their borders. Second is the country’s hosting of the Asia-Pacific Economic Cooperation (Apec) Summit, our second since 1996, consisting of sectoral ministerial meetings that will culminate in the meeting of heads of government of the Apec member-states. AEC and Apec both aim for closer economic integration, with the latter having a wider geographical scope now covering 21 countries spanning both sides of the Pacific Ocean.

Things have come a long way in over two decades since the launch of the Asean Free Trade Area (Afta) in 1992 and the birth of Apec in 1989. In both groupings, the aim is to foster wider economic linkages, closer economic cooperation, and regional economic integration through liberalized trade and investment among member economies in goods and services. I was among the senior officials from the Philippines, led by then Trade and Industry Undersecretary Lilia Bautista, who negotiated the country’s position in Afta and the Common Effective Preferential Tariff that preceded it, back in 1991-1992. At that time, there was much doubt on the usefulness of pursuing Afta at all. The skeptics reasoned that the six member-economies then—Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand—produced largely similar products, hence limiting the scope for wider trade among them. They would be more likely to compete with each other, they argued, rather than complement one another through trade.

The skeptics were to be proven wrong. Total trade within Asean more than doubled from $161 billion to $351 billion between 1996 and 2006, and grew faster than Asean’s overall trade did within that period. For the Philippines, whose trade had traditionally been dominated by the United States and Japan, trade with Asean has similarly assumed greater prominence over the years. Such increased intra-regional trade has been the result of deliberate moves by Asean to establish international and regional production networks through cross-border investment schemes. These included the Asean Industrial Joint Venture and Brand-to-Brand Complementation schemes, among other programs deliberately established to create value chains that span across national borders within the regional group.

The theory underlying this approach is simple enough. Rather than have every member establish its own complete manufacturing industry for a complex product, say appliances or motor vehicles, each one is better off specializing in particular components, thereby being able to serve a much larger market than its own. In so doing, everyone benefits from economies of scale (that is, lower unit costs made possible by larger volumes of production). Clearly, cars or appliances would cost much less if produced under such regional or international production networks, rather than if each country insisted on having its own complete car or appliance industry where the entire value chain lies within their respective national borders.

It is therefore not surprising—and in fact perfectly logical—that, as I pointed out in a recent column, our top exports to our Asean neighbors Malaysia, Thailand and Singapore are electronics, even as our top imports from them are also electronics. We export to them electronic components such as semiconductors and circuit boards, but also certain finished products like disk drives and wristwatches. Meanwhile, we import both basic electronic components and finished consumer electronic products from the same neighbors. Similarly, our top export to Thailand is motor vehicle parts and components, while our top import from them is motor vehicles. In each case, we form with our neighbors a regional value chain or production network in a complementary trade relationship that proves to be a win-win arrangement for all.

This, then, is the new shape of international trade, both regionally and globally. It’s no longer just the textbook case of specializing in and exporting products we possess comparative advantage in and importing those where we don’t. In a world of increasingly complex products and expanding value chains, international trade is now about taking part in a production network that transcends many national borders, leading to finished products with no clear national identity. In a recent international forum in Manila, Dr. Sherry Stephenson pointed out that a Boeing aircraft is not quite “Made in America,” but more aptly, “Made in the World,” having various major components manufactured in different countries. For the same reason, neither should those ubiquitous iPhones or iPads be seen as made in China or made in the United States. These are prime examples of products arising from an international value chain that brings about active trade not only in goods, but also in services.

The latter is quite important, especially for services-dominated economies like ours. Embodied in many of these global products are services that Filipino outsourcing firms could have provided, such as product and engineering design, service support, and backroom operations like financial accounting, among others—things we are already a world leader in.

As we position ourselves for the AEC, Apec, Regional Comprehensive Economic Partnership or Trans-Pacific Partnership, the name of the game is regional and global value chains—and we must find our strategic place in these.

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