Home .International Trade Free trade agreements in Asia
Free trade agreements in Asia
Sunday, 04 July 2010 03:33

 

In the post-World War 2 period, the progressive move towards freer trade has taken place mainly through multilateral negotiations under the GATT/WTO and regional integration arrangements like the European Union and the North American Free Trade Agreement.  Before 1992, East Asia had no regional or bilateral free trade agreements (FTAs), in sharp contrast to Africa, the Americas and Western Europe.

 

In January 1993, the ASEAN Free Trade Area (AFTA) came into force.  And over the past decade, East Asia has rushed into a vast number of FTAs.  In fact, in recent days China and Taiwan signed the Economic Co-operation Framework Agreement which removes tariffs on hundreds of products, and reportedly could boost bilateral trade that already totals $110bn.  These agreements are perhaps the most concrete manifestation of proposals to create an East Asian Community.

 

So what is exactly happening?  Is it a good thing?  And where should this be heading?

 

As of January 2010, the Asian Development Bank calculates that Asia had some 221 FTAs (compared with just 54 a decade before), including 114 concluded, 48 under negotiation and 49 proposed.  Most of these (some 170) are bilateral, that is, between only two countries, while 51 are “plurilateral”.  The leading countries involved in FTAs are Singapore (34), India (33), Pakistan (26), China (24), Korea (24), Thailand (24), Japan (20) and Australia (20).

 

These agreements are a real hodge-podge, with ASEAN acting as a hub for many FTAs.  For example: ASEAN’s own FTA; FTAs between ASEAN and other economies like China, India, Japan, Korea, Australia-New Zealand and the EU; FTAs between individual ASEAN countries and other countries; Trans-Pacific Strategic Economic Partnership (TPP or P4); Comprehensive Economic Partnership for East Asia; Free Trade Area for Asia-Pacific; and so on.

 

These FTAs also have different product coverages, with agriculture usually being left out.  There are many phase-in clauses.  But many include “WTO-Plus” and “Doha Plus” elements like trade facilitation, investment, government procurement and competition policy, as well as intellectual property, environment and labour.  Some even cover the temporary movement of natural persons and commitments on cooperation.  Indeed, many are known as economic partnership agreements, rather than FTAs.

 

So why more specifically has East Asia made so many FTAs?  There are a number of factors: (i) the Asian Financial Crisis of 1997-98 highlighted the need for better cooperation among East Asian countries; (ii) there was a demand for more open markets to facilitate the continued growth of intra-regional trade and investment, which started taking off following the 1985 Plaza Accord revaluation of the yen; (iii) perceptions of emerging regional blocs in Europe and North America certainly gave a push;  (iv) relations have thawed between former communist countries (like China or Vietnam) and other countries in the region;  (v) as the WTO Doha trade negotiations got bogged down, and its level of ambition is now very low, the countries turned to regional FTAs as an easier way to keep opening markets.  (vi) eventually a process of competitive rivalry developed as some countries tried to outdo others in negotiating FTAs (China and Japan being the region’s biggest rivals).

 

Is this rush FTAs in Asia a good thing or a bad thing?  This is a tired old debate, with some arguing that they could be a building block for the multilateral trading system and others arguing that they are a stumbling block.  A more modern view is that it is important to keep pushing trade liberalization forward, no matter where, especially at a time when the Doha negotiations seem stuck and not very ambitious.

 

Then there is the old argument from customs union theory as to whether FTAs result in costly net trade diversion or trade creation.  A customs union may cause “trade diversion” if a member is induced to switch imports from a low-cost non-member to a high-cost member, while trade creation occurs if a member imports more from another member who is already a low-cost supplier.  These static welfare effects must be considered, although they become less and less relevant the more that tariffs are reduced.  Also, they are most likely outweighed by the dynamic gains from trade through greater competition and economies of scale.  Moreover, FTAs usually include may other elements of co-operation and these benefits will certainly outweigh any trade diversion effects.

 

There are other questions too.  Do firms actually use FTAs, or are they too little known and mysterious?  While earlier evidence suggested “no”, the latest signs are that “yes, indeed” the FTAs are well used and increasingly so.  Are Asia’s FTAs a messy “noodle bowl” with complex rules of origin and large transactions costs?  Again, business surveys suggest that this is not such a problem.

 

Fundamentally, it is important to see FTAs in a dynamic, long term and political perspective.  Most FTAs are work-in-progress, which continue to be improved upon over time.  FTAs can also push economic reform more generally, not only trade liberalization, and can also be a mechanism for locking in reform.  They promote co-operation and integration between neighbouring countries, and they create the dynamic for possibly very close integration and thus can be the basis for more peaceful relations.

 

And lastly, notwithstanding the rush to negotiate FTAs, the evidence shows that economic integration within Asia is still weak.  Many Asia economies may be better integrated with the US and Europe than with their neighbours (much of this trade is in reality free because it passes through export processing zones or special economic zones).  A lot of intra-regional trade is in parts and components, with over 60% of final products being exported outside of the region.  With the prospect of weak US and EU demand in the period ahead, FTAs in Asia could provide an important boost to local and regional markets.

 

What should be the next steps?

 

The ASEAN countries have their own FTA and are working towards an Economic Community, and they also have FTAs with most countries in the region.  So far the missing link is an FTA between the bigger countries of North East Asia – China, Japan and Korea – each of which have FTAs with ASEAN, but not between themselves.  China has proposed an FTA amongst these Big 3 countries, and a study group is now preparing a report on this.  But Japan is worried about the rising competitiveness of China’s manufacturing sector and also its agricultural products.  Korea is concerned about excessive dependence on the Chinese market.

 

Beyond that, it would be highly desirable to create a region-wide FTA by consolidating the plethora of bilateral and plurilateral FTAs.  A region-wide FTA would generate much greater benefits than the existing FTAs by increasing market size and therefore specialization and economies of scale, facilitating investment and technology transfer, and simplifying tariff schedules, rules and standards.  Pessimists argue that the countries of East Asia are too diverse to be able to agree on an FTA.  But the theory of comparative advantage tells us that it is these very differences between countries which provide the gains from trade.

 

There are various proposals for a region-wide FTA including an East Asia Free Trade Area among the ASEAN+3 countries and a Comprehensive Economic Partnership for East Asia (CEPEA) among the ASEAN+6 countries.  And there is the issue of whether the US, which provides a security umbrella for much of the region, should be included.

 

There are many scenarios through which one could imagine building up a region wide FTA.  But ultimately immense political will and vision would be required.  So, although the potential benefits are enormous, it is difficult to see what would push these countries to move close together.

 

References:

Asia Regional Integration Center.  Trade and Investment.  FTA Trends

http://aric.adb.org/ftatrends.php

Chia, S.Y. 2010.  Regional Trade Policy Cooperation and Architecture in East Asia.  ADBI Working Paper 191.  Asian Development Bank Institute.

http://www.adbi.org/working-paper/2010/02/02/3450.regional.trade.policy.east.asia/

Kawai, M., and G.Wignaraja. 2009.  Asian FTAs: Trends and Challenges.  ADBI Working Paper 144.  Tokyo: Asian Development Bank Institute.

http://www.adbi.org/working-paper/2009/08/04/3256.asian.fta.trends.challenges/

 

 


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