Theory of (the) Second Best in the ASEAN-India Free Trade Area (AIFTA)

Economic integration is a response from the Theory of (the) Second Best from Canadian economist who coined by economist Richard Lipsey and Kelvin Lancaster Australia-America in 1956. This theory states that ideally the world economy is free trade where there is free competition and there are no barriers to trade (trade barriers). Economic integration into the second best choice (second best option) because in practice in this world is very difficult to eliminate trade barriers.

This theory assumes that in the current economic market failure in certain sectors, which caused low levels of efficiency in the sector and while in other sectors may have reached an efficient level, it is expected the economy would be better to merge the two markets different and will eliminate another level of inefficiency of the other market. Merger process is known as economic integration.

The concept of competitiveness as a comparative advantage introduced by the theory of comparative advantage by David Ricardo in 1817 through his book On the Principles of Political Economy and Taxation, known as the Ricardian model. However, comparative advantage was first expressed by Robert Torrens in 1815 in an essay published in the Corn Laws.

Measurement of the competitiveness of the most popular use is Revealed Comparative Advantage (RCA), which measures the comparative advantage. Balassa (1965) uses to measure a country's comparative advantage dengaan compile an index known as the Balassa Index. This index identifies whether a country has a comparative advantage that can be shown but not to determine the origin of its comparative advantage. This definition has undergone revision and modification so that the use of RCA as a measurement of comparative advantage vary as at the global level, sub-global/regional or bilateral between two countries as trading partners.

A study by the Fiscal Policy Board concluded that given the similarities in products which have export competitiveness, the trade policy related to exports and imports such as import duties and export taxes can affect competitiveness. Second, for items that are included in a group of products where a country's export and import, there are two possible impacts of trade AIFTA creation or trade diversion. This impact is dependent on changes in relative prices of products exported or imported by any scheme of tariff reduction or elimination AIFTA. On the product in the group that does have a very high competitiveness, then to maintain or improve competitiveness, then that can be done is product differentiation. Third, in each of the ten export products of Indonesia, India and ASEAN, with the highest competitiveness in the period 2000-2009, not seen consistency in the position of the competitiveness of products that do not show the export product specialization. And lastly, the comparison between India's exports to Indonesia with ASEAN showed differences in export market in India and ASEAN, while India's exports to ASEAN and ASEAN in addition to Indonesia is relatively the same. Indirectly, this export market differences indicate differences in access to productive resources and technology between Indonesia and the ASEAN as a whole.

Based on the above conclusion, we recommend:
1. Policies related to import duties need to consider their impact on the level of competitiveness of export products.
2. With the factors that influence and determine the level of competitiveness of export products, the trade policy on products that already have competitiveness should focus on efforts to maintain or improve competitiveness through product differentiation.
3. With the factors that influence and determine the level of competitiveness of export products, the trade policy on products that do not have competitiveness should focus on product differentiation. Within the framework AIFTA, then the scheme reduction and elimination of import duties aimed at trade strategy creation.