RESEARCH AND ANALYSIS

Trade Agreements in Southeast Asia

Richard Pomfret (Professor of Economics, University of Adelaide, Australia) and Patricia Sourdin (Adjunct Professor of International Economics, Johns Hopkins University Bologna Center, Italy)

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In the first decade of the twenty-first century, dozens of bilateral and regional trade agreements have been signed by East Asian countries.  This is striking because during earlier post-1947 waves of preferential trade agreements the only serious East Asian trade agreement was the Association of Southeast Asian Nations (ASEAN), and ASEAN's preferential tariffs have had little impact on trade.  Around 2000, China, Japan, Korea, Mongolia and Taiwan stood out as practically the only countries showing complete respect for the MFN principle.  What has changed in East Asia, and to what extent do these trade agreements pose a threat to the multilateral trading system?

Although regionalism may be viewed as an alternative to multilateralism, in the East Asian context there may be little conflict between the two, at least in their economic consequences.  Duty payments on intra-Asian trade tend to be low as a result of trade liberalisation and of the prevalence of duty-drawback systems in response to the production fragmentation and networks which emerged over the last two decades.  To the extent that the new trade agreements include discriminatory tariffs, as in the China-ASEAN FTA, they tend to be narrow in scope and coverage, with trivial economic impact.  To the extent that bilateral or regional agreements include trade-facilitating measures, progress in reducing trade costs by improved customs operation and so forth tends to benefit all trades and in practice is non-discriminatory.

Our recent research has focused on the extent to which trade facilitating measures have reduced trade costs.  In our 2009 paper we examined the impact of ASEAN's trade facilitation measures during the 1990s by calculating these countries' trade costs.  Trade costs are measured by the gap between cost-insurance-freight (i.e. landed value in an importing country) and free-on-board (i.e. value at the point of exit from the exporting country) values of exports from each country to a common destination.  Few countries report consistent cif and fob values on trade flows; our 2009 paper used Australian import data, but the results are similar if we use data from other countries with usable data such as the USA or Brazil (as reported in our 2010 paper).

The simple average ad valorem trade costs associated with the ten ASEAN countries' exports to Australia declined from 10.3% in 1990 to 3.9% in 2007, which is a much more pronounced drop than in the global average.  The average for the five original ASEAN members (Indonesia, Malaysia, Philippines, Singapore and Thailand) fell by over fifty percent between 1990 and 2007.  Most of the improvement relative to the global average occurred before 2002 when ASEAN was busy constructing the ASEAN free trade area and there was little global movement towards implementing trade facilitation measures.

For the original five ASEAN members there is a substantial decline in trade costs during the 1990s and convergence towards the lowest-cost country, Singapore.  For the other five ASEAN members it is harder to identify a pattern; the values for Laos and to a lesser extent Brunei and Cambodia are volatile, reflecting the small number of trade items.  For the other two newer members, Myanmar and Vietnam, trade costs fell significantly after they joined ASEAN in the late 1990s.  For seven of the ASEAN countries average trade costs converged from above to a range of 4-5.5% in 2007, with Brunei, Cambodia and Laos below this level.  Note that, despite the substantial decline, trade costs remain a significant barrier to international trade, higher, for example, than the average import tariff into Australia and most other OECD countries, and hence are a plausible explanation for home bias or the “border effect” in trade.

The conclusion that we draw from our empirical work is that, although ASEAN members had little stomach for preferential tariffs, they used their association as a vehicle for concerted trade facilitation.  The driving force behind these policies in southeast Asia was the emergence of regional value chains and the desire of governments to increase the efficiency of these arrangements.  Although measures such as common documentation or single windows may have been intended to facilitate first and foremost intra-regional trade, such measures are rarely discriminatory.  The twenty-first century trade agreements in Asia show a similar pattern of limited attention to tariff cuts and greater attention to trade facilitation, reflecting the strengthening and extension of regional value chains to include, in particular, China.

In some quarters, notably in research funded by the Asian Development Bank, an emerging Asian regionalism is viewed in the traditional sense of a bloc with preferential trade among members.  Others see a reincarnation of the APEC ideal of non-preferential regionalism, in which countries collaborate in coordinated reduction of trade barriers, which in the twenty-first century means focusing on trade facilitation.  The interpretation is important, because the former implies a challenge to the non-discrimination principle underpinning the multilateral trading system, whereas the latter has a more benign implication of a multi-speed movement towards non-discriminatory trade liberalization.  Our research suggests that the ASEAN countries in the 1990s were serious about trade facilitation and that the steps taken did actually reduce trade costs.  Future research could help to establish whether this remains true of East Asian regionalism in the twenty-first century.

This contribution is based on our articles “Have Asian Trade Agreements reduced Trade Costs?” Journal of Asian Economics 20(3), May 2009, 255-68, and "Trade Facilitation and the Measurement of Trade Costs", Journal of International Commerce, Economics and Policy 1(1), April 2010, 145 -63.  Further background is provided in Richard Pomfret Regionalism in East Asia: Why has it flourished since 2000 and how far will it go? (World Scientific Publishing Company, Singapore, 2011).

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Richard Pomfret is Professor of Economics at Adelaide University.  Before moving to Adelaide in 1992, he was Professor of Economics at the Johns Hopkins University School of Advanced International Studies in Washington DC, Bologna (Italy) and Nanjing (China).  He previously worked at Concordia University in Montréal and the Institut für Weltwirtschaft at the University of Kiel in Germany.  In 1993 he was seconded to the United Nations for a year, acting as adviser on macroeconomic policy to the Asian republics of the former Soviet Union.  He has also acted as a consultant to the World Bank, UNDP, OECD and Asian Development Bank.  He has published over a hundred articles and seventeen books, the most recent of which is Regionalism in East Asia: Why has it flourished since 2000 and how far will it go?.

Patricia Sourdin is Adjunct Professor of International Economics at the Johns Hopkins University Bologna Center in Italy and Research associate at the School of Economics, University of Adelaide. She has also worked as Consultant to the World Bank, UNDP, OECD and ERIA, and as adjunct lecturer Sciences-Po in Paris.  Her current research and consulting at the OECD is on trade, transport costs and trade finance.

 

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