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A closer look at East Asia’s free trade agreements

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In Brief

Slow progress in global trade talks has led to a surge in free trade agreements (FTAs) across Asia. With the World Trade Organization (WTO) Doha Round trade talks stalled, Asian countries see FTAs as a means to liberalise trade and investment and sustain economic recovery in the region.

The surge in the number of FTAs — from three to about 50 in the last decade, with another 80 or so in the pipeline — has, however, sparked concerns about the Asian noodle bowl due to overlapping rules of origin (ROOs) requirements, which may be costly to business, especially small- and medium-sized enterprises (SMEs). Critics worry that this wave of agreements will undermine the multilateral liberalisation process.


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As the dearth of empirical evidence on the business impacts of FTAs made it difficult to resolve this debate and explore policy implications, ADB conducted firm-level surveys in six countries, the results of which are published in the book Asia’s Free Trade Agreements: How is Business Responding? Experts in the region looked at the issues using firm surveys in Japan, China, Korea, Singapore, Thailand and the Philippines.

This book asks four important questions concerning 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 Asian FTA noodle bowl effect are overstated and, surprisingly, SMEs are not unduly affected by them, at least at this time. As the number of FTAs grows, SMEs are able to export to multiple markets, and firms increasingly use FTA preferences; concerns about the Asian noodle bowl, however, could be more justified.

The study also reveals that the use of FTAs is higher than previously thought. About 28 per cent of firms in the sample use FTA preferences for exporting their goods and nearly 53 per cent plan to use them. Another finding is that the use of FTAs provides firms with more benefits than costs, because of preferential market access, which results in higher export sales; preferential tariffs that make it easier to import intermediate inputs; and improved business opportunities resulting from better trading environments.

The lack of information on the FTAs, and not the noodle bowl per se, is the biggest impediment to firms using FTAs, as indicated by 70 per cent of responding firms in the Philippines, 45 per cent in China, and 34 per cent in Korea. Other impediments cited by respondents are low margins of preference and 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 business support for firms — including greater use of information technology-based systems of ROO administration, financial and training support, and enhanced consultations with business during FTA negotiations — would increase use of FTAs.

To overcome the potential Asian FTA noodle bowl problem in the future, the study suggests several measures, including rationalising ROOs, adopting coequals for ROOs, upgrading origin administration, harmonising regional ROOs, consolidating multiple, overlapping FTAs into a single region-wide FTA, and multilateralising Asian regionalism. Concluding the WTO Doha Round negotiation and avoiding protectionism would also be invaluable in boosting FTA use.

A region-wide FTA could provide clear economic benefits, such as increased market access to goods, services, skills and technology; increased 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. It 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. For now, there are two competing processes — the ASEAN+3 or +6 FTA (among the ten ASEAN countries plus China, Japan and Korea in the case of ASEAN+3, and plus Australia, India and New Zealand in the case of ASEAN+6) and the Trans Pacific Partnership (TPP) agreement — that could form the future basis of a region-wide FTA. To realise the ASEAN+3 or +6 FTA, a trilateral FTA among China, Japan and Korea is needed and this should be connected with the existing ASEAN+1 FTAs. TPP aims to achieve high quality agreements and is an early step toward a larger APEC-wide FTA, which would require a more challenging task of forging a US-China FTA.

The biggest challenge lies in the political will of countries as well as geopolitical considerations in moving faster on either the ASEAN+3/+6 FTA or TPP process. Changing economic gravity — due to the rapid economic rise of China and India — would suggest that the ASEAN+3/+6 FTA is more attractive, while security considerations may convince some East Asian economies to prefer TPP as it strengthens ties with the US. But these two processes are not mutually exclusive, and the ASEAN+3/+6 approach can be complementary, and create synergy, with the TPP approach. Whichever avenue is to be taken, it is important to accelerate the liberalisation of goods and services trade and investment, reduce behind-the-border barriers, and pursue domestic reforms. A harmonious Asia Pacific would likely see a convergence between the two processes, a win-win solution for the Asia Pacific community.

Masahiro Kawai is Dean and CEO of the Asian Development Bank Institute, Tokyo and Ganeshan Wignaraja is Principal Economist, Office of Regional Economic Integration, Asian Development Bank, Manila.

2 responses to “A closer look at East Asia’s free trade agreements”

  1. Some concerns on the potential costs of multi FTAs are clearly overstated, as the current technologies and management systems can clearly cope with complex situations without too much difficulty.
    Information technologies and softwares have the capability to reduce the different ‘regulations’.
    And one should never ignore that firms will use whatever means to increase their sales and maximise their profits.
    The ‘regulations’ from multi FTAs are likely to be a sub set of the market information that firms closely gather, process and use in marketing and sales.

  2. “Noodle/spaghetti bowl” metaphor has long been labeling any debate on FTAs. It emerged as a hypothesis that lacked empirical proof and required immediate recognition. The complication arising from diverging trading rules and in particular RoOs was to be adopted as an axiom.
    Mr. Kawai and Mr. Wignaraja did a great service by interviewing some of the principal FTA clients, firms that may be in the best position to gauge the costs and benefits of the overlapping trade regimes. So, based on the sample studied, costs were found to be not larger than benefits. Firms tend to view FTA regimes as giving wider choice to explore rather than incurring inevitable burden.
    The authors quote the inventor of “spaghetti bowl” metaphor Mr. Bhagwati saying that “we can virtually eliminate PTAs by reducing MFN tariff itself to zero”. Do the FTAs critics know that this is exactly what is happening? In a recent post to the VoxEU Carpenter and Lendle communicate the results of an amazingly statistics-intensive study designed to calculate how much of global trade is really subject to preferences. Based on 2007/2008 data, the main result is that around 30% of world imports were eligible for preferential treatment (including intra-EU trade) while the rest 70% were subject to MFN regulations. Most importantly, 47% of world imports entered the reporter markets under MFN duty of 0%!
    The relative value of world MFN zero-duty imports is more than informative. It represents the upper limit estimate of the importance of preferential trade. So, even in the extremely unlikely case that all the biggest players in the international trade (US, EU, Japan, China) conclude bilateral FTAs, it is the MFN-zero-rate ceiling that would matter!
    Although this indicator is heavily dependent on MFN tariff rates, prices and structure of imports, it tends to increase over time, wiping out FTA and other preferences. According to my rough calculations, based on the WTO data at hand, in the Asia Pacific duty-free MFN imports stood at 54% of total imports in 2008. Imports that were subject to tariff rates not exceeding 1% that is very unlikely to provide meaningful preference margin constituted additional 5%. Based on fragmented data for 2009 (missing China among others), the said indicators were 62% plus 8%. It means that an average country anywhere in the world will have around 60% of its exports to an average Asia Pacific country entering duty-free irrespectively of any FTAs. The FTA regimes in fact account for only a fraction of the remaining 40%.
    Hence, it is the MFN that governs and will govern the international trade not the “noodle bowl” of FTAs. So I applaud the efforts by the authors mentioned to show this through different quantitative techniques. “Noodle bowl” seems an alarmist metaphor rather than realistic image of regionalism trends.
    I also have to observe that this is true for tariff policy the importance of which as a trade policy tool has been declining from a worldwide perspective. In terms of other typical FTA chapters, like non-tariff measures, services, IPR, it’s difficult to quantify the departure from MFN. This may be a topic for further studies.
    Finally, next interesting question may arise. The studies by the authors mentioned make clear that WTO is a fundamental of global trading system, a starting point for any FTA negotiations. However, while basic trade regulating provisions are secured in the WTO, more advanced and specific provisions, WTO+ are increasingly dealt with at a regional/bilateral level. Does this mean that de facto WTO+ is emerging in the form of a plethora of FTAs? Where are the limits of this de-facto WTO+? It will be no surprise if this process is limited by the compatibility of the “big four” US, EU, Japan and now China.

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