Several critical problems may arise during the implementation stage of AFTA. Areas of concern include the effect of AFTA on members' trade, production and investment patterns as well as the welfare of its population. Questions which arise are whether AFTA would be trade-creating or trade-diverting. Essentially, a country would participate in AFTA if it results in net trade creation since this enhances the welfare of her population.
As far as the ASEAN automotive sector is concerned, AFTA will create a more competitive environment through the reduction and eventual elimination of intra-regional tariffs and non-tariff barriers. This has the effect of creating a regional market where consumers will source automotive products from the more efficient producers in ASEAN. Emerging/start-up/less competitive firms will face the crunch as they can no longer operate under protective governmental policies. With the expertise, experience, brand acceptance and economies of scale which the larger and more established players enjoy, the smaller/less competitive players may not only face depletion in market share, but also their very survival. Research conducted on the effects of the Asian economic crisis on AFTA revealed that the ability of ASEAN members to honor AFTA commitments is doubtful as they commence to adopt nationalistic policies to facilitate recovery from the recent economic meltdown. Malaysia had announced in 1999 that it cannot meet the 2000 deadline to slash tariffs on motor vehicle parts as previously agreed. Currently, it has obtained an extension of a further 5 years to liberalize the industry, i.e. in 2005.
Therefore, the future of the automotive industry in each ASEAN country will be determined by their ability to increase efficiency and competitiveness, widen the existing product range, expand into regional and global markets, and to solicit alliances with other regional and global automotive manufacturers. In Malaysia and other ASEAN countries, the possibility that competition will become stiffer in the future cannot be ignored especially since several global manufacturers are already pondering over the idea of developing an "Asian Car" to meet the specific needs of a liberalized market. The regional financial crisis has badly affected the ASEAN automotive industry that it would take three to four years for the industry to recover and attain the pre-crisis level in 1996. Auto sales in the southeast Asian region nevertheless is expected to improve to 3.5% of the total global sales in the year 2008 or eight years from now from a measly 1% Amid a slow economic recovery in the region, it remains apparent that time would be an integral factor towards the building up of adequate purchasing power.
Opportunities for greater automotive growth in the ASEAN region would come from the effects of liberalization combined with the cost advantages of firms in this industry. As seen, cost advantages include lower labor cost and relevant labor skills, reinforced by access to e-commerce and other technology. The argument is supported likewise by the recovery in demand in the region and the prospects for further growth, leading to a relatively large market. In the final analysis, signs are present of a more rapid recovery than expected.
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