RESEARCH AND ANALYSIS
A Closer Look at East Asia’s Free Trade Agreements
Masahiro Kawai, Asian Development Bank Institute, Tokyo, and Ganeshan Wignaraja, Asia Development Bank, Manila
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 means to liberalise trade and investment and sustain economic recovery in the region. A closer look at the region’s free trade agreements is warranted. The surge in the number of FTAs — from three to about 50 in the last decade (see figure 1), 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.
As the dearth of empirical evidence on the impacts of FTAs on business made it difficult to resolve this debate and explore policy implications, the Asian Development Bank (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?’ (Kawai and Wignaraja, ed. 2011). 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, among them: 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, the Asian noodle bowl has not unduly affected SMEs at least at this time. However, as the number of FTAs grows over time, SMEs become capable of exporting to multiple markets, and firms increasingly use FTA preferences, concerns about the Asian noodle bowl 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, primarily due to: 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, 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 the use of FTAs.
To avoid 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 reducing 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. 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. For now, there are two competing processes that could form the future basis of a region-wide FTA: first, 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 second, the Trans Pacific Partnership (TPP) agreement. To realise the ASEAN+3 or +6 FTA, a trilateral FTA among China, Japan and 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 is an early step toward a larger APEC-wide FTA, which would require a more challenging prerequisite 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 would strengthen 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 liberalization 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.
Masahiro Kawai and Ganeshan Wignaraja (2011 ed.), Asia’s Free Trade Agreements: How is Business Responding? (Cheltenham, UK: Edward Elgar).
Figure 1. Growth in the Number of FTAs in Effect in Asia
Notes: FTAs in Asia covers all FTAs with at least one Asian economy. Here, Asia includes the 16 economies included in the figure; An FTA is in effect when the provisions of an FTA become effective.
Source: Authors’ computations based on ADB, Asia Regional Integration Center, FTA Database (www.aric.adb.org), data as of 22 February 2011.
Masahiro Kawai joined the Asian Development Bank Institute (ADBI) in January 2007 after serving as special advisor to the ADB President in charge of regional economic cooperation and integration. He started his professional career as a research fellow at the Brookings Institution, and taught at The Johns Hopkins University as an associate professor in economics and at the University of Tokyo as a professor of economics. He then served as chief economist for the World Bank’s East Asia and the Pacific Region and as deputy vice minister of finance for international affairs in Japan. He provided consulting and advisory services for the Board of Governors of the Federal Reserve System, the International Monetary Fund, the Policy Research Institute in Japan’s Ministry of Finance, the Bank of Japan’s Institute for Monetary and Economic Studies, and the Japanese Cabinet Office’s Economic and Social Research Institute. Dr. Kawai has published numerous books and more than 120 academic articles on international economics and finance, with a recent focus on regional economic integration and cooperation in Asia as well as the international monetary system. He has a BA in economics from the University of Tokyo as well as an MS in statistics and a PhD in economics from Stanford University.
Ganeshan Wignaraja, has been on the staff of ADB since 2004 and is presently Principal Economist in the Office of Regional Economic Integration. He also represents the ADB on the WTO Director-General’s Advisory Group on Aid for Trade, the WTO Committee on Trade and Development, APEC Senior Officials Meetings and ASEAN Senior Officials Meetings. Formerly, he was in London as Head of Competitiveness and SME strategy at Maxwell Stamp PLC and Chief Programme Officer at the Commonwealth Secretariat. He has also held research positions at Oxford University, the Organisation for Economic Co-operation and Development, the Overseas Development Institute, and the United Nations Institute for New Technologies. Dr. Wignaraja has published 12 books on international trade, regional integration, economic competitiveness, and macroeconomic forecasting. His books include: Competitiveness Strategies in Developing Countries; Pan-Asian Integration: Linking East and South Asia, 2009 and Asia's Free Trade Agreements: How is Business Responding? 2011. He has been a consultant to the World Bank, Department for International Development, International Labour Organization, and United Nations Industrial Development Organization. He has a doctorate in economics from Oxford University and a BSc in economics from the London School of Economics.