AFTA known as ASEAN Free Trade Area is a free trade agreement signed between member nations of the ASEAN group to promote intra-regional trade and manufacturing while also making efforts to promote economic integration between other partners and international allies. It is one of the largest free trade area in the world. AFTA was signed originally by six members of the ASEAN on January 28, 1992 while the four members joined the area at a later stage. Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand were the original members while Cambodia, Laos, Vietnam and Myanmar joined the grouping in 1997. The main aim of AFTA is to Establish AFTA as the manufacturing unit for the world market by eliminating tax and non-tax trade barriers. Attracting more FDI to the Area Common Effective Preferential Tariff scheme was devised to achieve these aims. AFTA does not apply to the imports. ASEAN members are free to impose import tariffs as per their national requirements but only on the imports from the nations lying outside the ASEAN group. If the imports are from the ASEAN country then the importing members will have to apply tariff rate of 0-5% also called zero import duty group. Protection in certain cases is provided to the group nations through sensitive list mechanism. For goods originating in ASEAN Rule of origin are applied to distinguish the products from other categories
The benefit of AFTA is that it has an impact on economic scale. If certain products or things are produced in vast quantities with high quality, the cost of production can be reduced. For instance, because this region contains a large number of parts manufacturers and suppliers, big automobile corporations like Honda and Toyota are able to sell cars at a lower price. Economic growth will occur when things can be offered for near to their cost, which will raise demand. Businesses have the chance to get further advantages from lower cost inputs thanks to AFTA. Because of increasing supplier competition, input costs should decrease. Since competition has a favourable effect on increasing sector efficiency, it will not only benefit input providers but also benefit other industries by enhancing their competitive edge. Each nation will increase its production in order to compete with the others. Therefore, AFTA's implementation has improved production. By delivering the anticipated lower costs of doing business in the area, AFTA will strengthen ASEAN as an appealing investment site for both domestic and foreign businesses. AFTA does not impose a common external tax on imported goods in accordance with the agreement. Only 0 to 5 percent of tariffs will be charged among ASEAN nations, at most. Foreign investors will find it appealing to invest when there is little or no tax charged on those imported goods because of the low investment cost. Foreign investors will make more money if they invest in ASEAN areas, which can aid in more efficient resource allocation. For instance, more money will be available to develop oil palm if an investor invests in Malaysia's oil palm business. AFTA will promote trade and manufacturing the investors will seek most cost effective locations of the region as the domestic level has now been widened with the AFTA and there are favorable tariff terms. It will impact the less competitive firms as they are not able to install new
technologically advanced machinery for the manufacturing due to higher investment requirement. Thus less competitive firms will leave the market. This is also the main reason for local industry based on traditional means of production to oppose the free trade agreements. On the other hand with increased FDI also comes the cutting edge technology that will enhance the production capabilities of the companies and make them more competitive. Its direct impact will be on the resource usage as the more competition will lead to near perfect systems that are practically possible so the resource wastage will be reduced. The companies that are well establish will now have to compete with other regional firms for market share thus they will use efficient means. It will also enhance their profitability. The trade agreement is important to the economies of the member countries because it will help in actualization of economies of scale. That will allow the company to invest more in sophisticated technologies as the potential for profit has now widened due to large market access. It will also promote the job opportunities in the member countries thus leading to higher disposable household income that would ensure higher living standards. AFTA would promote competition in the market as stated earlier, providing benefits to the consumer in the form of competitive prices or better quality products. As the manufacturing will be competitive it will also attract interest from other regions thus earning valuable foreign currency. This area will also be attractive due to lower production costs and abundance of labour. These factors will help in attracting foreign investment thus increasing the GDP level of the economy leading to greater employment levels. If the member countries do not agree to this FTA then the local manufacturers will have no incentives to cut costs.
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