Deep free trade agreements (FTAs) are key to trade-led growth in Asia. Deep FTAs can support a comprehensive regional agenda for liberalization covering reductions in barriers to goods and services trade as well as opening new areas beyond the current purview of WTO negotiations (like investment, trade facilitation, competition, government procurement and intellectual property). Deep agreements can also help lock in structural reforms at national-level and promote implementation of second generation reforms. Accordingly, deep FTAs are useful for opening markets and removing obstacles to the spread of production networks throughout Asia and the Pacific.
The depth of FTAs among Asia’s developing giants—the People’s Republic of China (PRC) and India—is a topical issue. The trade strategies of the giants are increasingly relying on FTAs to gain market access. However, questions have been raised about the shallow coverage of both goods and services trade in the two giants’ FTAs (e.g. Dent 2006; Suominen 2009). It is argued that the giants’ FTAs liberalize a limited number of goods sectors and are thin and vague on liberalization of services sectors. It is also suggested that the giants’ FTAs do not cover many new issues (such as investment, trade facilitation, competition, and government procurement), unlike most agreements in the Americas.
Are these concerns valid? Are some agreements deeper than others (e.g. the PRC-Costa-Rica FTA, and the India-Republic of Korea and India-Japan CEPA)? Are the giants pursuing FTAs as a means to achieve political and diplomatic ends? And what should be done to achieve deep FTAs among the giants?
Growth of FTAs in the giants
FTAs involving the giants are growing rapidly with economies in and outside Asia. With 12 FTAs in effect in the PRC and 13 in India as of June 2012, these two giants are among the FTA leaders in the Asia and Pacific region. This trend is linked to several factors including the impasse in WTO Doha Round trade talks, signs of protectionism internationally, the pursuit of FTA-led regionalism in other regions, and the need to support the development of production networks and supply chains. Both giants are pursing increasingly ambitious trade deals and it seems likely that more agreements will be concluded in the near future. The PRC is in talks with Japan and Korea on a trilateral FTA, which is seen as a rival to the United States led Trans-Pacific Partnership process. India has been in negotiations with the European Union (EU) since 2007 on an FTA, which seeks to sharply reduce tariffs on goods and liberalize services and investments provisions.
Assessing the Giants’ FTA Strategies
Assessing the depth of the PRC’s and India’s FTAs against existing (or future) global rules is an interesting but largely unexplored exercise. Simple legal and economic evaluation criteria provide useful insights on the depth of FTAs according to tariff elimination on goods trade, coverage of services sectors, and coverage of new trade issues (Wignaraja 2011 and 2012).
The overall depth of the giants’ agreements varies greatly from deep to shallow FTAs. Of the 25 FTAs in effect, 13 have a relatively rapid approach to tariff liberalization, four comprehensively cover services, and three cover all four new issues.
More recent FTAs are deeper than earlier agreements. The giants’ deepest agreements have a relatively rapid approach to tariff liberalization, comprehensively cover services, and cover three or four new issues. This category includes the 2011 PRC–Costa Rica FTA; the 2011 India¬–Korea Comprehensive Economic Partnership Agreement (CEPA); and the 2011 Japan–India CEPA. The conclusion of these deep agreements suggests a move by the PRC and India toward the comprehensive liberalization standards for new issues visible in good FTAs in Asia and the Pacific, such as the Korea-EU FTA. This is a step in the right direction.
Goods and Services Liberalization
On the speed of tariff liberalization, the PRC’s FTAs adopt a faster approach than India’s FTAs. Eight (67%) of the PRC’s FTAs have a relatively rapid approach to tariff liberalization compared with only five (39%) for India. For instance, under the PRC–Singapore FTA, 95% of the PRC’s tariff lines are eliminated within one year. Singapore has virtually zero tariffs for most items, and tariff elimination is not considered a major trade policy issue. Meanwhile, the India–Korea CEPA liberalizes 75% of India’s tariff lines within eight years and 93% of Korea’s.
Services coverage appears better in the PRC’s FTAs, but India is making progress. The PRC–Singapore FTA allows for comprehensive coverage of services, while nine other PRC FTAs partially liberalize services. The PRC–Singapore agreement significantly builds on the ASEAN–PRC Comprehensive Economic Cooperation Agreement (CECA) by allowing for the movement of natural persons. Otherwise known as “Mode 4,” this covers the international supply of services through the movement of service suppliers (e.g., independent professionals) or those who work for a service supplier. Many of India’s early agreements placed little emphasis on services, with eight of its FTAs excluding provisions on services. Nonetheless, India’s newer agreements have sought to rectify this. India’s FTAs with major East Asian economies (Japan, Korea, and Singapore) provide for comprehensive services coverage while the agreement with Malaysia provides for partial coverage. Furthermore, to extend services coverage to the South Asian level, the South Asian Association for Regional Cooperation Agreement on Trade in Services was signed in April 2010.
Approach to New Trade Issues
The giants’ FTAs take a selective and cautious approach to new trade issues. Seven PRC FTAs cover several new issues. For instance, trade facilitation and investment are covered in the PRC-New ZealandFTA and the PRC–Peru FTA, while the PRC¬-Pakistan FTA and PRC–Taipei,China Economic Cooperation Framework Agreement cover only investment. The newer PRC–Costa Rica FTA goes even further by including provisions on trade facilitation, investment and competition policy.
However, the more sensitive issues of government procurement and competition policy are typically absent from PRC FTAs. Meanwhile, the newer India–Korea and Japan-India CEPAs comprehensively cover three new issues. While there is no separate chapter on government procurement in the India–Korea CEPA, there is a cooperation provision on government procurement that opens the door for liberalization in this difficult area. Another four of India’s FTAs, including the South Asia Free Trade Area, only cover trade facilitation, while the India–Singapore CECA covers trade facilitation and investment. The PRC’s and India’s remaining FTAs exclude the new issues altogether.
Political and Economic Motivations for the Giants FTAs
The depth of the giants’ FTAs and the motivation of their FTA strategies reflect political and economic factors. The PRC-Costa Rica FTA is a case in point. Costa Rica, a small economy in Central America, has gained from the diplomatic competition in Latin America between the PRC and Tapei,China. In June 2007 the PRC and Cost Rica established diplomatic relations as a part of the PRC’s push to gain influence in Latin America. The PRC–Costa Rica FTA negotiations began in 2008 and concluded relatively quickly with a rather deep agreement entering into force three years later. Bilateral trade was $5 billion in 2011 and is likely to grow following the deep FTA. The PRC has rapidly emerged as Costa Rica’s second largest trading partner while Costa Rica has become the PRC’s second largest trading partner in Central America. It appears that the PRC granted notable market access to Costa Rica as a part of an incentive package to persuade it to shift diplomatic recognition from Taipei,China to the PRC. In addition, the PRC agreed to buy $300 million of Costa Rican bonds, provide $130 million in foreign aid, and invest in an oil refinery.
The India–Korea and India–Japan CEPAs also show the influence of political and economic factors. India famously initiated a “Look East” policy in 1991 as part of a strategic shift in India’s orientation in the world economy. Increasing strategic and security cooperation with democratic, market-oriented economies in ASEAN and East Asia more generally was a fundamental element of India’s Look East policy. With the opening up of the Indian economy in the 1990s and a greater role for markets, economic integration and economic cooperation has assumed even greater importance over time. The conclusion of the deep India–Korea and India–Japan CEPAs thus reflects India’s desire to attract more foreign direct investment and technology transfers from East Asia and to plug into East Asian production networks in manufacturing. It also reflects the desire of Japan and Korea to access the large and growing Indian market for trade and investment. The India-Japan CEPA also encourages exchanges of professional and skilled manpower in view of contrasting demographic trends in the two partners. Japan has an aging population and could face a shortage of skilled workers while India has a youthful population seeking productive employment. Furthermore, the India-Japan CEPA represents a long-term strategic move to diversify Japan’s trade and investment away from the PRC to other large, dynamic Asian markets. This has been prompted by a combination of rising production costs in PRC and increasing political tensions between PRC and Japan in some areas in recent years (e.g. bans imposed by the PRC on the export of rare earths which are vital for Japanese electronics firms, claims of intellectual property right infringements, the arrest of PRC sailors by Japan, and territorial disputes between the two countries),
Summary
The PRC’s and India’s FTA strategies appear to be in their formative stages. It was perhaps inevitable that the early FTA focus would be on shallower rather than deeper integration as the PRC and India were learning to manage FTAs and balance competing business interests and political motivations for agreements. The PRC’s FTAs appear to be more comprehensive than India’s agreements on goods and services trade liberalization. But on new issues, India’s latest two FTAs are more comprehensive than the PRC’s FTAs. Encouragingly, the two giants appear to have moved toward deeper FTAs over time, emphasizing services and new trade issues. Nonetheless, there is room to improve the depth of future PRC and India FTAs. Ensuring close comparability between regional and global rules, adopting international best practices (particularly in new trade issues) in future agreements, and capacity building of trade officials are key policy actions for the giants to pursue. Further research is also needed on the implications for the multilateral trading system of moves towards deep FTAs in the giants and other economies (WTO, 2011).
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References:
Dent, C.M. 2006. New Free Trade Agreements in the Asia-Pacific: Towards Lattice Regionalism. Basingstoke: Palgrave Macmillan Press.
Suominen, K. 2009. The Changing Anatomy of Regional Trade Agreements in East Asia. Journal of East Asian Studies. 9:1, pp. 29–56.
Wignaraja, G. 2011. Economic Reforms, Regionalism and Exports: Comparing China and India. East-West Center, Policy Studies No. 60. Available at www.eastwestcenter.org/publications/publications-home
Wignaraja, G. 2012. Commercial Policy and Experience in the Giants: China and India, in M. E. Kreinin and M. G. Plummer (eds.). The Oxford Handbook of International Commercial Policy. Oxford: Oxford University Press.
WTO (2011), World Trade Report 2011: The WTO and Preferential Trade Agreements: From Co-Existence to Coherence, Geneva: World Trade Organization.
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