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Asian FTAs and the Noodle Bowl
By way of background to the analysis of firm survey results, this section briefly undertakes several inter-related tasks: (i) discusses the spread of FTAs in East Asia (including the five East Asian countries surveyed) and explanations; (ii) traces the origins of the Asian noodle bowl phenomenon in the economics literature and subsequent work: and (iii) examines key elements associated with the Asian noodle bowl—particularly ROOs and administration systems—in the five surveyed countries.
2.1 Proliferation of FTAs in East Asia
2.1.1 East Asian FTA initiatives
The spread of FTAs in the last decade has been the most important trade policy development in economically important East Asia, from which came just under one-third of world exports in 2007. For much of the post-war period, East Asia supported the multilateral GATT/WTO approach and the trans-regional APEC forum as a means of trade liberalization. The region came late to FTA initiatives in comparison with other regions of the world, but it has seen an unprecedented increase in these agreements since the millennium (Kawai and Urata 2004; Crawford and Fiorentino 2005; Feridhanusetyawan 2005; United Nations Conference on Trade and Development [UNCTAD]-JETRO 2008). In 2000, there was hardly any FTA activity in the region—only three FTAs were in effect in East Asia (including the ASEAN Free Trade Agreement (AFTA), one was under negotiation with another three proposed. However, in just nine years, these figures increased more than tenfold; in January 2009, East Asia emerged at the forefront of Asia's FTA activity, with 37 FTA initiatives in effect and another 72 at various stages of preparation—equivalent to more than half of Asia's total FTA initiatives (ADB Asia Regional Integration Center FTA database).2
The region's largest and richest countries are leading players in the spread of FTAs. Japan has implemented bilateral economic partnership agreements (EPAs) with eight countries3 and a plurilateral FTA with ASEAN. In addition, Japan is negotiating agreements with Korea, Viet Nam, India, Australia, and Switzerland. The PRC implemented an FTA on goods with ASEAN and is now negotiating agreements on services and investment. Korea has implemented an FTA with Chile, an FTA on goods with ASEAN, and has reached an agreement on an FTA with the United States (US). ASEAN is even more aggressive. Having enacted FTAs with the PRC, Korea, and Japan, ASEAN recently concluded FTA negotiations with India, Australia, and New Zealand, and is considering negotiating with the European Union (EU). Some ASEAN members, such as Singapore and Thailand, are actively pursuing a host of bilateral FTAs. And recently, Australia, New Zealand, and India have joined this bandwagon.
Table 1 [ PDF 15.1KB | 1 page ] profiles the five countries surveyed in the paper. The countries represent an interesting mix of development and FTA experiences. Japan, Singapore, and Korea have high per capita incomes and are among the world's richest economies. Thailand and the Philippines are middleincome countries. While all five countries have pursued outward-oriented development strategies over several decades, Japan and Singapore have liberalized the most and have lower average tariffs than the other three countries. Singapore is the most active of the five in terms of concluded FTAs, followed by Thailand, Japan, and Korea. The Philippines has been much less active and, as an ASEAN member, has relied heavily on ASEAN FTAs. Singapore presently has 14 FTAs in effect, while Japan has 9, Thailand has 8, and Korea and the Philippines each have 5 (Table A.1 [ PDF 11KB | 2 pages ]). With several agreements either under negotiation or proposed, FTAs are likely to remain an integral part of commercial policy in all five countries.
2.1.2 Factors underlying FTA initiatives
The spread of FTAs in East Asia has been accelerated by slow progress in the WTO Doha Round of trade talks. Three other factors underlie recent East Asian FTA initiatives:
First and foremost among these is market-driven economic integration through trade, foreign direct investment (FDI), and the formation of East Asian production networks and supply chains. Market-driven economic integration has begun to require further liberalization of trade and FDI, as well as harmonization of policies, rules, and standards governing trade and FDI. East Asia's policymakers are increasingly of the view that FTAs, if given wide scope, can support expanding trade and FDI activities through further elimination of cross-border impediments and facilitation of trade and FDI. Thus, FTAs can be regarded as part of a supporting policy framework for deepening production networks and supply chains formed by global multinational corporations (MNCs) and emerging East Asian firms.
Second, European and North American economic regionalism—including EU expansion into central and eastern Europe and the Baltic countries, a monetary union in the Euro area, and the success of the North American Free Trade Agreement (NAFTA) and its developing move toward the Free Trade Area of the Americas (FTAA)—has motivated East Asian FTAs. Governments fear the two giant blocs might dominate rule-setting in the global trading system and marginalize Asia. Increasingly, they have realized the need for stepping up integration to improve international competitiveness through exploitation of scale economies, strengthen their bargaining power, and raise their voice in global trade issues. FTAs can help ensure against the periodic difficulties of multilateral trade liberalization, such as the slow progress in the WTO Doha negotiations and a perceived loss of steam in the APEC process.
Third, the 1997–1998 Asian financial crisis made it clear that East Asia needed to work together in the areas of trade and investment in order to sustain growth and stability by addressing common challenges. This need has not yet been fully met by either regional initiatives to strengthen the international economic system or by national efforts to strengthen fundamentals, both of which take time to bear fruit. Once FTA initiatives began in the region, economies started to collaborate on trade and FDI out of fear of exclusion.
2.2 The Asian Noodle Bowl Phenomenon
The growing literature on the spaghetti bowl and the Asian noodle bowl—which together cover economic, political, and legal perspectives—are too vast to be done justice here. Several useful surveys of early economics literature are available. Bhagwati, Greenaway, and Panagariya (1998) and Panagariya (2000) surveyed the theoretical economics literature on FTAs and the spaghetti bowl, which pre-dates the rise of Asian FTAs and the noodle bowl. Baldwin (2006) reviewed some developments connected with Asian FTAs.
2.2.1 Origins of the Noodle Bowl
The spread of FTAs in East Asia and elsewhere has sparked "systemic" concerns about crisscrossing FTAs—which Jagdish Bhagwati famously called a "spaghetti bowl" of trade deals (Bhagwati 1995, 2008). He argued that discriminatory trade liberalization occurs under multiple, overlapping FTAs and that the systemic aspect is due to the same commodity being subject to different tariffs, tariff reduction trajectories, and ROOs for obtaining preferences. With a growing number of FTAs, the international trading system is likely to become chaotic. Bhagwati also suggested that coping with multiple tariffs and ROOs in FTAs can raise transaction costs for enterprises, particularly SMEs.
More recently, ADB president Haruhiko Kuroda referred to this phenomenon as the Asian noodle bowl effect of FTAs and warned that it could present future challenges for broader regional and global integration (Kuroda 2006a, 2006b).5 The phrase has caught on in the last couple of years and stimulated a growing industry of analytical work on East Asian FTAs along four major lines.
First, the Asian noodle bowl of FTAs has been sketched as a map of chaotic lines representing an intertwined mass of preferential trading arrangements (for graphical examples, see Dent 2006; Petri 2008), which conveys a powerful visual impression of complex preferential trade relationships. Quite strangely, these summary diagrams are sometimes put forward as evidence of an actual (rather than a potential) problem for business.
Second, the technically difficult task of trying to compare ROOs across FTAs according to "best practices" has been attempted with some success (for examples of comparisons, see Estevadeordal and Suominen 2006; Plummer 2007; World Bank 2007). This on-going and dataintensive exercise is working towards developing a world map of ROOs, graded by different levels of restrictiveness.
Third, gravity and computable general equilibrium (CGE) model-based studies have analyzed the economic effects of alternative FTA scenarios and underscored region-wide FTAs as a means to increase economic welfare (e.g., Gilbert, Scollay, and Bora 2004; Lee and Park 2005; Francois and Wignaraja 2008; and Hufbauer and Schott 2009). While such studies are useful in highlighting the economic effects of various FTA options and unintended consequences, they are yet to fully incorporate multiple ROOs.
Fourth, various solutions to the noodle bowl have been proposed. Following formal theoretical modeling of Bhagwati's insight, the early theoretical economics literature concluded with the suggestion that MFN liberalization is a panacea to eliminate the spaghetti bowl problem.6 A more comprehensive approach is offered by Baldwin and his collaborators who proposed a "WTO Action Plan on Regionalism," including deepening the transparency mechanism for FTAs, WTO advisory services on FTAs, and several measures for taming the ROOs tangle (Baldwin 2006; Baldwin and Thornton 2008; Baldwin and Low 2009). The more comprehensive approach is due to Baldwin's (2006) political economy framework for trade liberalization, which is based on three mechanisms—a juggernaut effect for multilateral trade liberalization, a domino effect for regional trade liberalization, and a race-to-the-bottom unilateral trade liberalization.
While these are all valuable exercises, there is little empirical evidence on the extent of the Asian noodle bowl effect on enterprises in East Asia. The two existing studies based on relatively large enterprise samples are limited to one country—Japan (JETRO 2007; Takahashi and Urata 2008). Both studies focus on the issue of multiple ROOs; however, contrary to expectations, the evidence also seemed mixed. JETRO (2007) showed that around 30% of 97 Japanese firms using (or planning to use) FTA preferences thought that multiple ROOs in East Asian FTAs complicated procedures to prove country of origin and led to increased business costs. In contrast, data provided in the Takahashi and Urata (2008) study suggest that only 5% of 229 responding Japanese firms thought multiple ROOs were a problem. There is a lack of cross-country firm-level evidence on FTA impacts and the Asian noodle bowl to corroborate these early inconclusive findings.
2.3 FTA Elements of the Asian Noodle Bowl
The proliferation of FTAs in East Asia has meant that the region's trading arrangement has acquired the noodle bowl feature discussed above.
First, different FTAs contain varying modalities and timeframes for tariff concessions.7 More specifically, many FTAs adopt a negative list approach while some adopt a positive list approach with exclusions. In the case of AFTA and ASEAN+1 FTAs—such as the ASEAN-PRC FTA, ASEAN-Korea FTA, and ASEAN-Japan Comprehensive Economic Partnership Agreement (CEPA)—tariff elimination is to be achieved by 2010 for developed countries and advanced ASEAN members, while longer periods are allowed for less advanced members.
Second, tariff preferences vary across products and FTAs. Electronics face negligible MFN tariffs, while higher margins of preference are observed for other non-electronic sectors. For example, under the Japan-Thailand EPA, preference margins for clothing (25%) and transport equipment (4%) are high, providing incentives for firms to utilize FTA preferences in these products.
Third, ROOs and administrative systems differ across FTAs and products (Table 2 [ PDF 14.2KB | 1 page ] and Table 3 [ PDF 15.1KB | 1 page ]). The simplest ROO can be found in AFTA which specifies a single regional value content (VC) across all tariffs (i.e., 40% of the value added of a good has to originate from within ASEAN). But AFTA is also moving towards more liberal alternatives, including the change in tariff classification (CTC) rule. The ASEAN-PRC FTA uses the simple VC rule, while the US-Singapore FTA has restrictive ROOs on textiles. The Japan-Singapore EPA allows alternative ROOs. Origin administration differs significantly across East Asian countries, with some countries relying on efficient electronic systems administered by private sector bodies and others on cumbersome paper-based systems administered by public institutions (Table 3 [ PDF 15.1KB | 1 page ]).
2.3.1 A realistic way forward?
There are both benefits and costs associated with the formation of FTAs. Given that almost all East Asian economies are pursuing FTAs, a realistic approach would be to encourage them to design and implement FTAs in a way that would maximize benefits and minimize potential costs. This requires that FTAs induce domestic structural reforms and be made consistent with WTO rules.
One of the most serious costs of FTAs is that they discriminate against non-members, particularly small, poor, developing economies that cannot join FTAs as they do not have much to offer and hence cannot attract the interest of others. The costs of FTA negotiations could also be large for small, poor economies with limited negotiation capacity—such as Cambodia, Lao People's Democratic Republic (Lao PDR), Myanmar, and Viet Nam—particularly when gains from FTAs are perceived to be unevenly distributed across various participating countries. For this reason, some argue that, in the absence of a WTO Doha deal, FTAs may be a second-best tool of regional liberalization. An important question is whether FTAs can—or can be made to— strengthen the multilateral process or not.
The spread of many different, overlapping FTAs in the region has also triggered concerns about potentially harmful, noodle bowl effects. The issue is whether the Asian noodle bowl can raise trade-related business costs for using FTAs due to complexity and, hence, reduce incentives for utilizing the intended FTA preferences, especially for SMEs which may face higher administrative and business costs as their capacity to deal with them is limited. It is hoped that new, firm-level evidence on FTA impacts can provide some insight into the debate.
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