Indonesian intra-industry trade with Asean

Abstract

ASEAN was established on August 8, 1967 in Bangkok Thailand as an association' among South East Asian' countries (hereafter ASEAN). It cooperates in various aspects such social Cultural, politic, education and. economic aspect. After ending the cold world and growing economic regionalism across the world such as European Common Market and NAFT A, all members of ASEAN agreed to establish economic integration among the members. The ASEAN heads of government met in January 1992 in Singapore and declared the ASEAN Free Trade Area (AFTA) known as the Singapore Declaration. The Singapore declaration announced that a free trade area would be established within 15 years from January 1993. To reduce the tariff among the members, the AFTA will use the common Effective Preferential Tariff (CEFT). Existing tariff rate will be reduced to 20% within 5-8 years. and then for following seven years it will be reduced to -5%. Therefore by year 2008, Intra-ASEAN trade will have a tariff of maximum 5% or below (Ramasamy. 1994). What are the possible welfare implications of regional trading arrangements for its member? There are some benefits of economic integration. According to Meier (2000). Economic integration can create some benefits such as: (1) opening a new market for manufacture product (trade creation): (2) increasing gain of trade; (3) improving efficiency through increasing competition among the industry; and (4) stimulating investment. The CEPT covers all product both agricultural and non-agricuituralproduct. To faster reducing tariff. a fast track was established to allow 15 product categories to go through an accelerated pace, of tariff reduction. The product categories consist of cement, chemical, pharmaceuticals, fertilizer, plastic, rubber products, leather products, pulp, textiles, ceramic and glass products, gem 'and jewellery, copper cathodes, vegetable oil, electronic and wooden and rattan furniture. When time passed, however, all members agreed to accelerate AFTA in 2003 rather in 2008. This study will investigates Indonesia's bilateral trade with ASEAN member by examining intra-industry trade. In the trade literature, the amount of intra-industry trade (lIT) or trade in similar goods. is often taken as a measure of the diversity, degree of specialization and degree of technical sophistication of its industrial sector (Hvrylshyn and Kunzel. 1997). Then intra-industry trade can be used to infer the country's ability to compete in a changing environment. The study will analyze lIT changes and evolution over the period 1995-2003 to shed light on the level of industrial specialization and the competitiveness of industrial sector for Indonesia in the AFT A started in 2003. This paper is organized as follows: Section II presents an overview of Indonesia's trade relation with the ASEAN. Section III will explain underlying the theoretical concept of intra- Industry trade; section IV reviews the methodology and data used in calculating lIT indexes. Section V presents and discusses the results: Finally section VI will draw conclusion s from the results obtained in this study. 2. AN OVERVIEW OF INDONESIA'S TRADE RELATION WITH THE ASEAN Japan and the US have been Indonesian most important trading partners. Indonesia's trade share with those three countries was over 40010 of its total trade. However, Indonesia's trade with the ASEAN' market has been increased since establishing APTA. Until now, it accounts for approximately 25% of its total trade and Singapore is important destination of Indonesia's export.