East Asia’s attitude toward free trade agreements (FTAs) has changed. Slow progress in global trade talks has led to a surge in FTAs across Asia. With the World Trade Organization (WTO) Doha Round trade talks stalled, Asian countries see FTAs as a way of liberalizing trade and investment and sustaining economic recovery. The number of signed and implemented FTAs in the region has increased from three in 2000 to more than 60 in 2012, sparking concerns about an Asian “noodle bowl” of agreements. Critics worry about overlapping rules of origin (ROOs) requirements, which may be costly to business, especially small and medium-sized enterprises (SMEs), and argue that this wave of agreements will undermine the multilateral liberalisation process. A search for pragmatic and innovative ways to untangle the noodle bowl of Asia’s free trade agreements is needed.
To address the dearth of empirical evidence on the impact of FTAs on business, the Asian Development Bank (ADB) and the Asian Development Bank Institute (ADBI) recently conducted firm-level surveys in seven countries: the People’s Republic of China (PRC), Japan, Republic of Korea, Malaysia, the Philippines Singapore, and Thailand (see Kawai and Wignaraja eds. 2011 and a recently concluded ADB and ADBI FTA survey of Malaysian firms).
This study asks four important questions about the spread of FTAs and the Asian noodle bowl:
- Are FTA preferences being used by firms?
- What are their costs and benefits?
- Are multiple ROOs a burden to business?
- Is there enough business support for firms to use FTAs?
On the whole, the study indicates that concerns about the negative noodle bowl effect of Asian FTAs are overstated and, surprisingly, that the Asian noodle bowl has not so far unduly affected SMEs. However, as the number of FTAs grows, SMEs become more capable of exporting to multiple markets, and firms increasingly use FTA preferences, concerns about the Asian noodle bowl may become more justified.
The study also reveals that the use of FTAs is higher than previously thought. About 32% of firms in the sample already used FTA preferences for exporting their goods and 52% were planning to use them. Another finding is that the use of FTAs provides firms with more benefits than costs, primarily due to: preferential market access, which results in higher export sales; preferential tariffs that make it easier to import intermediate inputs; and more business opportunities as a result of better trading environments.
The lack of information on the FTAs, not the noodle bowl per se, is the biggest impediment to firms using FTAs, according to 72% of responding firms in Malaysia, 70% in the Philippines, 45% in the PRC, and 34% in Republic of Korea. Other impediments cited by respondents are low margins of preference, delays and administrative costs. There is significant demand for more business support for East Asian SMEs to export through FTAs. The study indicates that various types of support for firms—including greater use of information technology-based systems by ROO administrators, financial and training support, and more consultations with business leaders during FTA negotiations—would increase the use of FTAs.
The study suggests several measures to reduce the negative impacts of the noodle bowl in future, including rationalizing ROOs; adopting coequals for ROOs; upgrading origin administration; harmonizing regional ROOs; consolidating multiple, overlapping FTAs into a single region-wide FTA; and multilateralizing Asian regionalism. Concluding the WTO Doha Round negotiation and reducing protectionism would also be invaluable in boosting FTA use.
A region-wide FTA would provide clear economic benefits, such as increased market access to goods, services, skills and technology; greater market size, which would permit specialisation and realisation of economies of scale; easier foreign direct investment and technology transfer by multinational corporations; and simpler tariff schedules, rules and standards. An Asia-wide FTA could also offer insurance against rising protectionist sentiments that pose a risk to Asia’s trade and economic recovery.
Any region-wide agreement could be a series of linked agreements with variable coverage of members and issues (Kawai and Wignaraja 2011). At present, there are two competing processes that could form the future basis of a region-wide FTA: (i) the ASEAN+3 (or +6) FTA (the ten ASEAN countries plus the PRC, Japan, and Republic of Korea in the case of ASEAN+3, and plus three additional countries, Australia, India, and New Zealand, in the case of ASEAN+6); and (ii) the Trans-Pacific Partnership (TPP) agreement among the nine countries which are currently negotiating, plus Canada, Japan and Mexico which have expressed interest in joining the negotiations. To realize the ASEAN+3 or +6 FTA, a trilateral FTA among the PRC, Japan and Republic of Korea is needed first, and this should then be connected with the existing ASEAN+1 FTAs. The TPP approach aims to achieve high-quality agreements and includes Brunei Darussalam, Malaysia, Singapore and Viet Nam (and Japan if negotiations go through successfully) as Asian members. It has the potential to develop into a larger APEC-wide FTA, which would require a more challenging task of forging a US–PRC FTA first.
The biggest challenge lies in the political will of countries, as well as in geopolitical considerations. The changing center of global economic gravity—due to the rapid economic rise of the PRC and India—suggests that the ASEAN+3 or +6 FTA may be the more attractive route, although security considerations may convince some East Asian economies to prefer the TPP as it would strengthen ties with the US. But these two processes are not mutually exclusive, and can be complementary. Whichever avenue is to be taken, it is important to accelerate the liberalization of goods and services trade and investment, reduce behind-the-border barriers, and pursue domestic reforms. A harmonious Asia and Pacific would likely require a convergence between the two processes, which would be a win-win solution for the Asia and Pacific community.
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References:
Masahiro Kawai and Ganeshan Wignaraja eds. 2011. Asia’s Free Trade Agreements: How is Business Responding? Cheltenham, UK: Edward Elgar.
Masahiro Kawai and Ganeshan Wignaraja. 2011. Asian FTAs: Trends, Prospects and Challenges. Journal of Asian Economics, 22, pp. 1-22.