The acceleration toward regional economic integration is a significant development in the global economy.  The pragmatic motive behind any FTA has been that the agreements inked to promote freer trade within regions will produce more benefits from trade for all member countries. While the ASEAN members are still negotiating on how they operate their AFTA (ASEAN Free Trade Area) on key products (including steel), many of them have signed bilateral FTA with non-member countries instead.  Two countries can make an agreement to reduce trade barrier easier than a group of countries, let alone freer trade in a global perspective under WTO.

Historically, steel has always been a political product for a long time.  For example: in 1951, France, Italy, West Germany, Netherlands, and Luxembourg established  the European Coal and Steel Community (ECSC).  This powerful body has the power to take decisions about the coal and steel industry in these countries.  This is a beginning of the most notable regional economic integration in the world, the European Union.  In contrast, steel is among the last products to be settled under AFTA.

ASEAN is still in an early stage of integrating its economies.  A free trade area, in which all barriers to the trade of goods and services are removed, is the first stage of economic integration.  In the next stage the region can go further by establishing a custom union in which the members adopt common external trade policy.  The third stage of economic integration is a common market where factors of productions (e.g. labour and capital) are allowed to move freely between members.  In the next stage, an economic union is formed, by adding a common currency, harmonised tax rates, and a common fiscal and monetary policy.  The final end is a political union in which they have a central governing body who makes wide range of common political decisions.  The European Union has managed to establish an economic union and is in its way to be a political union.   

AFTA
The ASEAN members have agreed to established AFTA and lowering the intra-ASEAN tariff through the Common Effective Preferential Tariff (CEPT) Scheme for AFTA. Therefore the CEPT rates are mostly lower but can be equal to the MFN (Most Favored Nation) tariffs.  MFN tariff rates are the normal tariff levels charged to goods imported from most countries.  More than 99% products in the ASEAN-6 (Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, and Thailand) have been brought down to 0 – 5% tariff.  However, settling the steel products has not been a smooth journey. 

This AFTA establishment with a CEPT scheme may give new hope of growth for ASEAN steel industry.  Conceptually, the regional integration shall stimulate regional trade, attracting investment in steel industry, stimulate greater demand and ultimately boosting economic activities in ASEAN countries.  Why is it difficult for AFTA when it comes to steel?  Steel industry in ASEAN members has some structural differences.

The structural differences lead to a debate on when a steel product qualifies as a local (or ASEAN) product and eligible for maximum 5% tariff in AFTA.  Since AFTA will discriminate steel products by favouring local/ASEAN products, it is very important to set the 'rules of origin' of the steel products.  It is not an easy task as the structural differences lead to different proposed criteria of where the steel product was made.  One would say that a hot rolled sheet which is a product of an imported slab from non-ASEAN country would sufficient to be considered as ASEAN product and eligible for CEPT concession.  Other countries who have integrated steel industry would say that hot rolling only is not enough to be qualified.   There has been series of negotiations among the ASEAN member countries to settle this 'rules of origin' issue and hopefully they will come out with a compromise. 

Bilateral FTA
Perhaps it is easier to understand if we use one example of a bilateral FTA: Japan – Philippines Free Trade Area.  Who is the real winner? In this case, it is clearly the Japanese steel mills.  Tariffs on 26% Japanese steel exports including slabs and electro-galavanised are removed immediately; another 37% parts of steel for autos, appliances, shipbuilding, and machinery will be subject to quota; and the tariffs of the rest (including bars and shapes) will be removed over 5-10 years (SBB, 12 September 2006).  The other beneficiaries are the steel users such as auto industry, construction industry, shipbuilders, etc who will get cheaper imported steel from Japan. 

On one hand the domestic steel users will obviously benefit but on the other hand it will be very difficult for the steel producers not only from the Philippines but also from other ASEAN members to compete with the Japanese steel products in the Philippines's market.  When Japan and the Philippines signed the FTA agreement, Japan will be literally treated the same as ASEAN members by the Philippines.  The superiority of the Japanese mills in quality and cost over the ASEAN mills will prevent new investments in ASEAN. The FTA has created an effective barrier to entry for both existing steel company and new investors to enter many steel market segments.  In short, the government has chosen to develop downstream steel users and not the upstream steel industry.

On one hand the domestic steel users will obviously benefit but on the other hand it will be very difficult for the steel producers not only from the Philippines but also from other ASEAN members to compete with the Japanese steel products in the Philippines's market.  When Japan and the Philippines signed the FTA agreement, Japan will be literally treated the same as ASEAN members by the Philippines.  The superiority of the Japanese mills in quality and cost over the ASEAN mills will prevent new investments in ASEAN. The FTA has created an effective barrier to entry for both existing steel company and new investors to enter many steel market segments.  In short, the government has chosen to develop downstream steel users and not the upstream steel industry.

Uncertain Future
AFTA was designed to stimulate intra-ASEAN trade and attracts new investment in the region's steel industry.  However, the proliferation of bilateral FTAs between ASEAN members (individually) and non-ASEAN countries may send ASEAN steel producers into a more difficult business model.  Similarly, an extension of AFTA as a group with another country (e.g. ASEAN-China FTA) will also corner the local ASEAN steel producers.   

Recommended Websites

www.aseansec.org
The official website of ASEAN with extensive and up-to-date contents.

www.apectariff.org
Very useful and user friendly tariff database of APEC member countries.

www.wto.org
Providing almost all we need to know about the only global organisation dealing with the rules of trade between nations.