Trade

Policy challenges posed by Asian FTAs

Policy Challenges Posed by Asian FTAsAsian economies face important policy challenges regarding the use of free trade agreements (FTAs): primarily their scope and their impact on regionalization trends. These topics are the front line of contemporary negotiations and of interest to policymakers. This column examines these challenges based on new data on the business impacts of FTAs and contents of existing FTAs. It also discusses political economy considerations of FTA consolidation in Asia and its potential connection with North America and Europe.

Spread of Asian FTAs

Asia’s rise as the “global factory” over the past several decades was underpinned by outward-oriented development strategies and multilateralism. FTAs, as trade-policy instruments in the region, were largely absent until the 1990s. The Asia-Pacific Trade Agreement (APTA) of 1976 was the region’s first agreement and the Association of Southeast Asian Nations (ASEAN) Free Trade Agreement (1993) was another prominent one among a very small number of Asia’s early FTAs. Today, Asia is a world leader. Between January 2000 and April 2013, the number of concluded FTAs increased from 3 to 76 and more are under development.

The region’s largest economies (Peoples’ Republic of China [PRC], India, and Japan) as well as a few advanced ASEAN economies (e.g., Singapore and Thailand) have become key players in FTA activity. Smaller neighboring economies are now also actively involved in such efforts. Reflecting the growth of FTAs, the importance of FTAs to Asia’s trade and investment has also increased.

The spread in FTAs is attributed to factors including the need to remove impediments to broadening the market-led integration of regional supply chains, the intensification of FTA activity in Europe and the Americas, and the stalled World Trade Organization (WTO) Doha Round trade talks.

Concerns over such agreements have increased as FTAs have spread across Asia (e.g. Banda and Whalley 2005; Bhagwati 2008; Drysdale and Amstrong 2010; and Manchin and Pelkmans-Balaoing 2007). Several key challenges associated with Asian FTAs are examined here, from a pragmatic perspective, with a view to providing better informed policy decisions.

Challenges of Asian FTAs

Raising FTA preference use. While well-designed FTAs can provide demonstrable benefits to FTA member economies, previous studies document that the historic use of FTAs in Asia has been relatively low. These studies, however, relied on data for the 1980s and early 1990s, before the major spurt in Asian FTAs. Using new data from certificates of origin, we computed average FTA preference use for four Asian countries (Republic of Korea [Korea], Thailand, Viet Nam, and Malaysia). A significant increase is visible in this figure from 24 percent to 37 percent of total exports between 2008 and 2011. Korea (49%) and Thailand (42%) emerge as outliers with particularly high FTA use in 2011 compared with Viet Nam (33%) and Malaysia (24%).

The enterprise surveys conducted by the Asian Development Bank (ADB) and ADB Institute (ADBI) in the PRC, Japan, Korea, Malaysia, Philippines, Singapore, and Thailand also indicate higher-than-expected FTA use at the enterprise-level with 32 percent of enterprises utilizing FTAs and more planning to do so (see Kawai and Wignaraja, eds. 2011; Kawai and Wignaraja 2013). The surveys also reveal that FTA use entails fixed costs and that large enterprises are better able to muster the requisite financial and human resources than small- and medium-sized enterprises (SMEs).

A lack of information on FTAs is identified as the most significant reason for non-use of FTAs. Low margins of preference, administrative costs and delays associated with rules of origin (ROOs) and other export documentation, and non-tariff measures in partner economies were the other reasons cited for non-use of FTAs.

Tackling multiple rules of origin. Existing literature suggests that multiple ROOs in overlapping FTAs constitute an Asian “noodle bowl” which raises transaction costs for SMEs. ADB-ADBI surveys indicate that multiple ROOs are a future risk to Asian enterprises rather than a present issue (Kawai and Wignaraja, eds. 2011). These surveys also reveal that, contrary to our usual expectations, larger enterprises in Asia have more negative perceptions of multiple ROOs than SMEs. Large established enterprises export to multiple markets and adapt their business strategies in response to FTAs. They are, therefore, more likely to express concerns regarding multiple ROOs. In contrast, SMEs tend to export to single markets and hence have little basis for complaint. However, as SMEs grow and start exporting to multiple markets, they will more likely express concerns about the Asian noodle bowl of complex, multiple, overlapping ROOs.

Liberalizing agricultural trade. The literature shows that the coverage of agricultural trade differs markedly among current Asian FTAs. Agricultural trade tended to be excluded from most of the early agreements due to pressure from powerful farm lobbies or social concerns regarding poverty in rural areas. Review of tariff-line coverage of agricultural products in current Asian FTAs shows that, over time, these agreements are becoming more comprehensive in their coverage of agricultural trade. Of the 69 FTAs for which data were available as of December 2012, 46 percent had comprehensive coverage, another 28 percent had some coverage, and 26 percent had little or no coverage of agricultural products.

Reducing restrictions to services trade. FTAs can contribute to reducing the significant regulatory barriers to services trade currently present in the region. Review of criteria covering key sectors of the General Agreement on Trade in Services (GATS) similarly indicates a trend in Asian FTAs towards progressively liberalizing the services-trade sectors of participants and providing, again over time, for increased regulatory cooperation on services trade. Of the 69 FTAs reviewed, 41 percent had comprehensive coverage, another 36 percent had some coverage, and 23 percent had little or no coverage of services trade.

Increasing WTO-plus elements. Studies demonstrate that Asian FTAs vary considerably in scope in terms of coverage of issues going beyond the WTO framework. Review of criteria covering the four “Singapore issues” (competition, intellectual property, investment, and public procurement) shows that of the 69 FTAs reviewed, 23 percent had comprehensive “WTO-plus” coverage, another 54 percent had partial WTO-plus coverage, and 23 percent were goods-and-services agreements only.

Policy implications

Several recommendations may be made for the future. These include strengthening national support systems for enterprises, especially SMEs, using or wishing to use FTAs; rationalizing ROOs and improving their administration; ensuring better coverage of agricultural trade; facilitating services-trade liberalization; forging comprehensive WTO-plus FTAs; and multilateralizing regional FTAs. Reducing protectionism through enhanced international surveillance of non-tariff measures and concluding the WTO Doha Round trade talks would also be invaluable in boosting FTA use. In the medium term, a WTO agenda on supply chains and FTAs would be necessary to encourage convergence of regional and global trading rules (Baldwin 2011).

Multilateralization of regional FTAs—through liberal cumulation rules and eventually a merger of various overlapping FTAs in Asia—would provide economic benefits such as: greater market access for goods, services, skills, and technology; larger market size permitting increased specialization and realization of economies of scale; easier foreign direct investment and technology transfer by multinational corporations and SMEs; simpler trade and investment rules; inclusion of small, low income economies in the region’s wider trade agreement; and insurance against protectionist sentiments.

Convergence of RCEP and TPP?

A region-wide FTA could arise from a series of linked agreements covering varied issues and participants (Kawai and Wignaraja 2013). Two competing processes are emerging as the future basis for a region-wide FTA: a Regional Comprehensive Economic Partnership (RCEP) among the ASEAN+6 countries (the 10 ASEAN economies plus Australia, the PRC, India, Japan, Korea, and New Zealand); and the Trans-Pacific Strategic Economic Partnership (Trans-Pacific Partnership, or TPP) agreement among the 11 economies (Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, United States [US], and Viet Nam) currently in negotiations as well as Japan which is expected to join the negotiations as early as July 2013.

To realize the RCEP, a trilateral FTA among the PRC, Japan, and Korea should first be concluded and then be connected with the existing ASEAN+1 FTAs—that is, ASEAN’s five FTAs with Australia-New Zealand, the PRC, India, Japan, and Korea. The TPP aims to achieve a high-quality agreement and includes four ASEAN members and Japan, from Asia. These two mega FTAs are key processes to create a larger Asia-Pacific FTA, which however would require successfully addressing the difficult task of forging a US-PRC agreement.

These two processes are not mutually exclusive and will likely prove to be complementary. The changing center of global economic gravity—given the rapid economic rise of the PRC and India—suggests that a RCEP is attractive to many Asian economies, including developing ones. Countries that are ready to accept high standards required for the TPP and wish to strengthen existing ties with the US will likely join the TPP.

Whichever path or paths may be taken, it will be important to accelerate the liberalization of goods and services trade and of investment, reduce behind-the-border barriers, and pursue domestic reforms. A harmonious Asia-Pacific would likely see a convergence of the two processes being considered. This would be a win-win solution for the Asia-Pacific community.

Asia’s next step would be to strengthen its trade relationships with other parts of the world, starting with Europe. A mega Asia-Europe FTA would be another important building bock, along with the Asia-Pacific FTA, to connect Asia with the global economy and support global trade integration in a way to complement the WTO Doha Round trade talks.
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References:

Baldwin, R. 2011. “21st Century Regionalism: Filling the Gap between 21st Century Trade and 20th Century Trade Rules.” CEPR Policy Insight No. 56. London: Center for Economic Policy Research.

Banda, O. G. D., and J. Whalley. 2005. “Beyond Goods and Services: Competition Policy, Investment, Mutual Recognition, Movement of Persons, and Broader Cooperation Provisions of Recent FTAs involving ASEAN Countries.” NBER Working Paper Series 11232 (March). Cambridge: National Bureau of Economic Research.

Bhagwati, J. N. 2008. Termites in the Trading System: How Preferential Agreements Undermine Free Trade. Oxford: Oxford University Press.

Drysdale, P. and Armstrong, S. 2010. “International and Regional Cooperation: Asia’s Role and Responsibilities.” Asian Economic Policy Review, 5(2), 157-73.

Kawai, M. and Wignaraja, G. 2013. Patterns of Free Trade Areas in Asia. Policy Studies No. 65. Honolulu: East West Center.

———, eds. 2011. Asia’s Free Trade Agreements: How Is Business Responding? Cheltenham (UK): Edward Elgar.

Manchin, M., and A. O. Pelkmans-Balaoing. 2007. “Rules of Origin and the Web of East Asian Free Trade Agreements.” World Bank Policy Research Working Papers 4273 (July). Washington, DC: World Bank.

Masahiro Kawai

About the Author

Masahiro Kawai is Dean and CEO of the Asian Development Bank Institute (ADBI) and previously served as special advisor to the ADB president on regional economic integration and cooperation. Before joining ADB, he was a professor of economics at the University of Tokyo. Dr. Kawai has published a number of books and numerous academic articles on regional economic integration and cooperation in Asia, including lessons from the Asian financial crisis and Asian free trade agreements, and on the international currency system.
Ganeshan Wignaraja

About the Author

Ganeshan Wignaraja is Advisor in the Economic Research and Regional Cooperation Department at the Asian Development Bank, and prior to that was Director of Research at Asian Development Bank Institute.
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