Salient Characteristics of East Asian FTAs

There is a dearth of studies which have tried to systematically map trends and characteristics of East Asian FTAs.¹⁵ This gap in the literature may be due to the recent origin of many East Asian agreements and the lack of comprehensive regional databases.¹⁶ As a part of the international effort to promote transparency of FTAs in the Asia-Pacific region, the Asian Development Bank (ADB) recently launched the Asia Regional Integration Center (ARIC) FTA Database.¹⁷ This section provides an analysis of trends and characteristics of East Asian FTAs, drawing on information from the ARIC FTA Database. The following are mapped below: including coverage of trade, configuration, geographical orientation, WTO notification, scope (in terms of "WTOplus" issues), and rules of origin.

3-1. FTA Coverage of Trade

Role of richer, larger economies. The recent increase in FTAs has been driven by five of the region's richer and larger economies—Singapore, Japan, Korea, PRC and Thailand— suggesting a link between FTA growth and economic prosperity. For instance, these five economies are parties to 86% of the concluded FTAs in East Asia by the end of June 2007 (see Appendix Table 1 [ PDF 20.6KB | 3 pages ] and Appendix Table 2 [ PDF 11.3KB | 2 pages ]).

Singapore is the most active East Asian economy and has the broadest geographical coverage of agreements. It is a member of AFTA and has implemented or concluded agreements with the largest economies in East Asia (PRC [through ASEAN], Japan and Korea) as well as outside (including the US, India and Australia). Japan has implemented or concluded agreements with five East Asian countries (Brunei, Malaysia, Singapore, the Philippines and Thailand) and two outside (Mexico and Chile). Korea has agreements with APTA, ASEAN and Singapore within East Asia and outside with Chile and European Free Trade Agreement (EFTA) countries. It has also has recently signed the region's biggest agreement with the US.¹⁸ Within East Asia, the PRC has agreements with ASEAN, Hong Kong, Thailand, APTA, Macao and outside with Chile and Pakistan. Thailand is also a member of AFTA and has agreements with PRC (through ASEAN), Lao PDR, Australia and New Zealand.

With some exceptions, the region's poorer economies (notably, Cambodia, Lao PDR, Viet Nam, Philippines and Indonesia) have tended to rely on ASEAN for concluding FTAs with the region's largest economies. This may reflect weak institutional capacity and resources to undertake FTA negotiations in poorer economies. The ASEAN framework offers the possibility of pooling scarce capacity and resources.

FTA coverage of trade. It is informative to get an idea of how much of a country's trade is covered by FTA provisions.¹⁹ This is difficult to measure accurately because of exceptions and exclusions contained in many agreements. Furthermore, data on direction of services trade do not exist. Nevertheless, by making the bold assumption that all goods trade is covered by concluded FTAs, estimates can be obtained. Figure 1 [ PDF 12.2KB | 1 pages ] shows the ratio of a country's bilateral trade with its FTA partners to the country's total trade with the world for 2005. In general, ASEAN members have higher shares than the region's larger economies indicating a greater reliance on FTAs. Within ASEAN, three countries (Lao PDR, Singapore and Myanmar) have shares in excess of 70% while the others have shares in the range of 52% to 35%. Cambodia is an exception within ASEAN with a relatively low share of 26%. The shares of the region's large economies are: Korea (33%), PRC (31%) and Japan (7%). Meanwhile, the share of Hong Kong is 45% while that of Taipei,China is only 0.1%.

3-2. Configuration, Geographical Orientation, WTO Notification and Scope

Configuration: bilateral vs. plurilateral FTAs. The configuration of FTAs in East Asia can be divided into bilateral and plurilateral as in Table 5 for 2007. Bilateral FTAs refer to agreements between two countries. Plurilateral FTAs include several forms—agreements involving more than two countries, one country (or countries) and a trading bloc (like ASEAN), or two trading blocs (e.g. ASEAN-EU).²⁰ On the whole, countries are opting for simple bilateral FTA configurations rather than the more complex plurilateral ones as they may be easier to negotiate. There were 27 bilateral FTAs among 36 concluded FTAs as of June 2007 (i.e. 75% of total). Bilateral FTAs also dominate FTAs that are yet to be concluded, making up 76% of those under negotiation and 68% of those proposed.

There are 9 plurilaterals agreements among the concluded FTAs (see Appendix Table 3 [ PDF 21.1KB | 3 pages ]).²¹ Among these, AFTA stands out for its economic importance in the region and as a natural hub for East Asia's FTA activities. ASEAN has also become a focal point for the emergence of a new category of trading-bloc to trading-bloc agreement (e.g. the ASEAN-EU Free Trade Agreement and the ASEAN-Australia and New Zealand Free Trade Agreement). The other concluded plurilateral agreements connect various East Asian countries with others outside the region. For instance, APTA covers East Asia (PRC, Korea, Lao PDR) and South Asia Bangladesh, India and Sri Lanka). There are also 10 plurilateral agreements under negotiation and another 8 under proposal.

Geographical orientation: intra-regional vs. extra-regional FTAs. Table 5 [ PDF 22.2KB | 1 pages ]4 also shows the geographical orientation of East Asian FTAs with countries/groups within the region and those outside. The high degree of extra-regional orientation of East Asian FTAs is striking ––24 concluded FTAs out of 36 in June 2007 (67% of total) are with countries or groups outside East Asia. The extra-regional orientation of East Asian FTAs under negotiation and proposed is even higher at 88% and 84%, respectively.

Both bilateral and plurilateral FTAs exhibit high degrees of extra-regionalism in a sample of 102 FTAs (including both concluded and non-concluded)—21 of the plurilateral agreements and 60 of the bilateral agreements are with countries/groups outside East Asia. ASEAN as a group is considering negotiations with the European Union and has commenced negotiations with India, Australia and New Zealand. Singapore has concluded 8 extra-regional agreements with a wide geographical spread from Latin America to the Pacific. Korea, Thailand, PRC and Japan have concluded FTAs with Latin American countries. The PRC has concluded an FTA with Pakistan and is negotiating FTAs with Australia, New Zealand the Gulf Cooperation Council and Iceland. Thus, East Asian economies have a strong preference to maintain open trading relations with the rest of the world rather than becoming inward-looking (Kawai, 2005a).

WTO notification. The WTO notification status of concluded East Asian FTAs and the type of notification (by the Enabling Clause and the GATT/GATS provisions) is shown in Table 6 [ PDF 22.2KB | 1 pages ].²² The WTO notification rate for East Asian FTAs has been rising since 2000 and was relatively high at 53% of concluded FTAs as of June 2007 (19 FTAs). This rate is set to rise as 10 of the 17 FTAs not yet notified to the WTO were only concluded in 2006-2007. These trends indicate significant adherence in East Asia to WTO rules and procedures on FTAs. Additionally, there is a growing tendency for notification of East Asian FTAs under the GATT/GATS framework (15 concluded FTAs) while notifications under the Enabling Clause have remained static (4 concluded FTAs). All the 15 concluded FTAs notified under GATT Article XXIV are also notified under GATS Article V. One interpretation of these trends is that East Asian FTAs are getting more comprehensive in scope over time and extending beyond tariff preferences for some goods into services and regulatory issues.

Scope: "WTO-plus" elements. Studies of FTAs outside East Asia report two interesting findings on their scope (e.g. Crawford and Fiorentino, 2005 and World Bank, 2005): (i) many recent agreements frequently go beyond the WTO regulatory framework to include provisions on a host of issues (trade facilitation, investment, government procurement, competition, intellectual property, environment and labor among others); and (ii) the inclusion of such provisions often occurs in FTAs between developed and developing countries which may reflect the emphasis that developed economies give to these issues. The four "Singapore issues" (trade facilitation, investment, government procurement and competition policy) were conditionally included in the work program for the Doha Round in November 2001 but were subsequently dropped at the WTO Ministerial Conference in Cancun in 2004. Accordingly, agreements containing such provisions are sometimes referred to in the literature as "WTOplus" agreements. How prevalent are "WTO-plus" FTAs in East Asia?

Table 7 [ PDF 9.9KB | 1 pages ] breaks down 34 concluded FTAs in East Asia into four types according to increasing scope: (i) goods only; (ii) goods and services; (iii) goods, services and Singapore issues; and (iv) goods, services, Singapore issues and cooperation enhancement. ²³ Cooperation enhancement refers to additional WTO-plus provisions (such as labor standards, IT cooperation, SMEs and the environment) which are included in some agreements along with the Singapore issues. It is noteworthy that the majority of concluded East Asian FTAs in 2007—23 (or 68% of the total)—had "WTO-plus" provisions in addition to goods and services provisions. Of these, 9 had the Singapore issues only while another 14 were even more comprehensive in scope (with both the Singapore issues and cooperation enhancement provisions). This indicates that East Asian economies typically favor comprehensive, "WTO-plus" agreements rather than agreements in trade in goods and services only.²⁴

Furthermore, "WTO-plus" provisions are common in FTAs between developed and developing countries in the region. As Table 8 [ PDF 16.9KB | 2 pages ] shows, 15 (of the 23) "WTO-plus" agreements in East Asia are between developed and developing countries. Interestingly, Japan, the US, Australia and New Zealand seem to prefer this format of agreement with developing countries in the region. However, the 8 FTAs that contain provisions of only trade in goods and services are basically between developing countries (and Korea and Singapore behave much like a developing country when they act together with ASEAN members). Otherwise, Korea and Singapore tend to form an FTA with WTO-plus elements even when their partner is a developing country. Thus, international trends toward the expanding scope of FTAs are confirmed in East Asia.

3-3. Multiple Rules of Origin

Rules of origin (ROO)—which exist to determine which goods will enjoy preferential bilateral tariffs and thus prevent trade deflection among FTA members—are a particularly interesting aspect of East Asian FTAs. For manufactured goods, ROOs may be of three types: (i) a change in tariff classification (CTC) rule defined at a detailed Harmonized System (HS) level; (ii) a regional (or local) value content (VC) rule which means that a product must satisfy a minimum regional (or local) value in the exporting country or region of an FTA; and (iii) a specific process (SP) rule which requires a specific production process for an item.

Table 9 [ PDF 23.3KB | 4 pages ] provides an overview of the main ROOs adopted by 30 concluded FTAs in East Asia.²⁵ Strikingly, the majority of FTAs in East Asia (20) have adopted a combination of the three ROOs rather than applying a single rule. Of the remaining FTAs, 3 use the value added rule only, another 3 use value added and/or CTC rule, and another 4 use value added and/or SP rule. The simplest ROO can be found in the AFTA and the ASEAN-PRC FTA, which specifies a 40 % regional value content across all tariffs. Meanwhile many agreements involving Japan, Korea and Singapore tend to use a combination of ROOs. The latter introduces complexity and additional costs for business.

Additional insights are provided by a look at the ROOs applied to the major auto and auto parts products in 11 major concluded FTAs (see Table 10 [ PDF 108.5KB | 1 pages ]). ASEAN's FTAs vary somewhat in their ROOs. For instance, the 40% value content rules applies for AFTA and for the ASEAN-PRC FTA but more stringent ROOs for some products (e.g. 45% value content applies for HS 8703, 8704 and 8708) are found in the ASEAN-Korea FTA. Furthermore, the ROOs for the same products are different in bilateral FTAs involving the same major economy. In the Japan- Malaysia FTA, the value content requirement for HS8703 and 8711 is 60% while in the Japan- Thailand FTA, it is 40% for the same two products. Similarly instances can be found in the case of Singapore-Australia FTA and Thailand-Australia FTA.

Recent studies of ROOs in East Asia indicate that complex ROOs are associated with increased transactions costs to business firms and that multiple ROOs in overlapping FTAs are particularly burdensome, giving rise to the famous "noodle bowl" effect.²⁶ The textile and garment sector is particularly affected by stringent and restrictive ROOs. Precise quantitative estimates of the magnitude of the costs of multiple ROOs (e.g. as a percentage of export sales) are hard to come by. Using a gravity model, Manchin and Pelkmans-Balaoing (2007) obtain results that suggest that the administrative costs of obtaining CEPT status within AFTA might be in the range of 10-25% and that such costs are not much reduced even when an alternative rule for origin determination is provided. One of the implications is that the presence of multiple ROOs may further increase administrative costs.

Firm surveys have begun to provide qualitative business perceptions on the effects of ROOs in East Asia. The 2006 JETRO Survey of Japanese Firm's International Operations is a useful source of such data (JETRO, 2007). Of 97 Japanese MNCs using or planning to use FTA preferences in East Asia, about 30% felt that the existence of different rules of origin complicates their trade businesses and leads to increased costs—either through dealing with complicated procedures to prove country of origin or changes to productions processes—while another 33% expected to see increases costs in the future. Furthermore, 64% of firms thought that rules of origin should be harmonized, with the largest number (24.7%) wanting to be able to choose either the value content (VC) rule or the change in tariff classification (CTC) as the common rule. Thus, it seems that multiple ROOs are beginning to manifest themselves as a problem in East Asia.

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