Trends in Asian Free Trade Agreements

2.1 Emergence of the Global Factory

The story of developing Asia's spectacular rise from a poor underdeveloped agricultural backwater to become the global factory over a 50-year period is regarded as an economic miracle (Stiglitz 1996). In the 1960s, developing Asian economies lacked natural resources and had high levels of poverty. There seemed to be little prospect of economic advancement. Nonetheless, Asian economies had ample supplies of inexpensive, productive manpower. They were also geographically close to an expanding high-income Japan, with efficient multinational corporations (MNCs) seeking to relocate production to less costly locations in East Asia. Multilateralism through the WTO framework and its predecessor, the General Agreement on Trade and Tariffs (GATT), and open regionalism—supported by unilateral liberalization—centered on Asia–Pacific Economic Cooperation (APEC), underpinned Asia's approach to international trade policy for several decades. FTAs were absent both internationally and in Asia. International trade policy at the national level was anchored by outward-oriented development strategies, high domestic savings rates, creation of strong infrastructure, and investment in human capital. A booming world economy hungry for labor-intensive imports from Asia, falling tariffs in developed country markets, inflows of trade-related foreign direct investment (FDI), and generous foreign aid flows also favored outward-oriented growth in Asia.

A long period of market-driven expansion of trade and FDI followed, during which Asia increasingly became the global factory. Through strategies of innovation and learning, Asian firms acquired the requisite technological capabilities to either compete internationally or become suppliers to MNCs (Hobday 1995; Mathews and Cho 2000; Wignaraja 2008). This involved developing production engineering skills to use imported technologies efficiently and successfully plugging into the advanced global production networks formed by MNCs and local suppliers. As systematic innovation and learning took place at the firm level, a shift from labor-intensive exports (e.g., textiles, garments, and footwear) to more technology-intensive exports (e.g., chemicals, ships, electronics, and automobiles) occurred in Asia. Some Asian firms built deep innovative capabilities based on investments in research and development, emerging as leading firms in production networks and supply chains. Rising economic prosperity in Asia followed in the wake of rapid industrialization. As a result, three of the world's richest economies are now in Asia: Japan, Republic of Korea (hereafter Korea), and Singapore.

In addition, intraregional concentration of trade and FDI activities rose as production networks involving Asian firms deepened regionally (Kimura 2006). Rising factor costs in core production locations were a prime driver. Falling regional trade barriers and logistics costs, as well as technological progress, spurred the decentralization of production networks to the most cost-effective locations. Accordingly, trade within Asia increased significantly from 37% of total trade to 54% between 1980 and 2007, led by trade in parts and components (ADB 2008). Toward the turn of the 20th century, this simple story of outward orientation and export success was punctuated by a change in the nature of Asia's international trade policy toward FTAs.

2.2 Growth of FTAs

Alongside multilateralism, Asia began emphasizing FTAs as a trade policy instrument in the late 1990s and the region is today at the forefront of world FTA activity (Feridhanusetyawan 2005; Fiorentino, Crawford, and Toqueboeuf 2009). Appendix Table 2 [ PDF 173.9KB | 1 page ] provides data from the ADB FTA Database on the number of concluded FTAs in Asia between 2000 and 2009 (as of June 2009). The number of concluded FTAs in Asia as a group increased from only 3 to 54 during that time. Of these, 40 FTAs are currently in effect. The proliferation of FTAs in Asia is likely to be sustained: another 78 are either under negotiation or proposed. Asia is ahead of the Americas in FTAs per country—on average Asia has 3.4 concluded FTAs per country compared with 2.2 for the Americas.² On the whole, Asia seems to be opting for bilateral agreements rather than more complex plurilateral ones because bilateral agreements may be easier to negotiate. Bilateral FTAs comprise 74% of the concluded FTAs, with plurilateral FTAs comprising the remainder.

Four main factors underlie the recent spread of FTA initiatives in Asia: (i) deepening market-driven economic integration in Asia, (ii) European and North American economic integration, (iii) the 1997–1998 Asian financial crisis, and (iv) slow progress in the WTO Doha negotiations.³

First among these is market-driven economic integration through trade, 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 and 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, facilitation of trade and FDI, and other such harmonization efforts. Thus, FTAs can be regarded as part of a supporting policy framework for deepening production networks and supply chains formed by global MNCs and emerging Asian firms.

Second, European and North American economic regionalism—including European Union (EU) expansion into central and eastern Europe, a monetary union in the eurozone, the success of the North American Free Trade Agreement (NAFTA), and incipient moves toward a Free Trade Area of the Americas (FTAA)—has motivated East Asian FTAs. Governments fear that the two giant trading blocs of Europe and North America might dominate rule-setting in the global trading system, thereby marginalizing Asia. Increasingly, policymakers have realized the need for stepping up the pace of integration to improve international competitiveness by exploiting economies of scale and strengthening their bargaining power through a collective voice on global trade issues. FTAs can help insure against the periodic difficulties of multilateral trade liberalization, such as the recent 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 Asian economies needed to work together in the area 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 individual economies' fundamentals, both of which will take time to bear fruit. With the proliferation of FTA initiatives in the region, a number of countries have begun to jump on the bandwagon of these initiatives out of fear of exclusion.

Fourth, slow progress in the WTO Doha negotiations encouraged countries to consider FTAs as an alternative. Hailed as a development round to promote trade-led growth in poor countries, the WTO Doha Development Round began in November 2001. The talks have largely focused on liberalization in two key areas: agriculture and non-agricultural market access. In essence, developed countries were being asked to accelerate the pace and scope of reductions in agricultural tariffs and subsidies, and developing countries were being asked to do the same with regard to tariffs for industrial goods. Seven years of formal negotiations eventually stalled in mid-2008 over concerns in developing countries about safeguard measures to protect poor farmers from rising food and oil prices. However, discussions have continued behind the scenes. As prospects for an early deal diminished over time, pro-business Asian countries emphasized bilateral and plurilateral FTAs for the continued liberalization of trade in goods and services, as well as the adoption of the Singapore issues (i.e., trade facilitation, investment, government procurement, and competition policy), which are currently beyond the scope of the WTO.

2.3 FTA Hubs and Spokes

FTA activity in Asia over the last decade has given rise to a classic hub and spoke arrangement (Hufbauer and Schott 2009). As Figure 1 [ PDF 43KB | 1 page ] shows, the region's five largest economies have become key hubs of FTA activity, while smaller neighbors have emerged as spokes. The number of concluded FTAs includes Singapore (18), Japan (11), People's Republic of China (PRC) (10), India (9), and Korea (6), with many more FTAs under negotiation. It is noteworthy that ASEAN—with one of the oldest trade agreements in Asia—is emerging as a major regional hub linking ASEAN members with the region's larger economies. Having enacted FTAs with PRC, Japan, and Korea, ASEAN recently concluded negotiations on bilateral agreements with India and Australia and New Zealand, and is considering negotiating an FTA with the EU. The development of FTA hubs and spokes in Asia can be related to several factors, including economic size, per capita income, levels of protection, economic geography, and the production network strategies of MNCs.

Singapore is by far the most active Asian economy in terms of the number and geographic coverage of FTAs. With its strategic location, the region's most open economy, and world-class infrastructure and logistics, the country is the regional headquarters for many leading MNCs. Singapore is seeking access to new overseas markets, particularly for services and investments.

The country is a founding member of the ASEAN Free Trade Area (AFTA) and has implemented or concluded agreements with the largest Asian economies—PRC, India, Japan, and Korea—as well as economies outside the region, including the United States (US) and Australia. The US–Singapore FTA, which has been in effect since 2004, was the first such agreement made by the US in Asia and is reputed to be a model agreement in terms of scope.

As a supporter of multilateralism, Japan was a latecomer to FTAs (Urata 2004). The region's first developed economy has the strongest base of giant MNCs involved in production networks and supply chains throughout Asia. One motivation for Japan's engagement in FTAs is to provide a market-friendly and predictable regional business environment for its MNCs. Japan has rapidly implemented bilateral economic partnership agreements (EPAs) with nine countries⁴ and an agreement with ASEAN, and is negotiating agreements with Australia, India, and Korea.

The two Asian giant economies, the PRC and India, are forming FTAs to ensure market access for goods and expand regional coverage for outward investment. To this end, the PRC implemented separate FTAs on goods and services with ASEAN and is now finalizing its negotiations on an investment agreement. The PRC has also forged bilateral comprehensive economic partnership agreements (CEPAs) with Hong Kong, China and Macau Special Administrative Region of the People's Republic of China; FTAs with Chile and Pakistan; and is a member of the Asia–Pacific Trade Agreement (APTA). In 2008, the PRC concluded FTAs with Singapore and New Zealand. India is a member of APTA and has a comprehensive agreement with Singapore. It also has agreements with its South Asian neighbors.

Korea has agreements with members of APTA and ASEAN, and Singapore within East Asia; and with Chile and the European Free Trade Area (EFTA) countries outside East Asia. It also signed an agreement with Asia's largest trading partner, the US, in June 2007.

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

Middle-income countries such as Malaysia and Thailand have emerged as regional production hubs for the auto and electronics industries, respectively. As one of the founding members of ASEAN, Thailand has entered into agreements with PRC, India, Japan, and Australia and New Zealand.

The geographical orientation of Asian FTAs is summarized in Figure 2 [ PDF 50.2KB | 1 page ]. A high degree of cross-regional orientation among some of the region's stronger economies is visible—notably for PRC; India; Korea; Singapore; and Taipei,China. The trend toward cross-regional FTAs is even more evident in Asia's proposed FTAs and those under negotiation (see Appendix Table 3 [ PDF 127.7KB | 2 page ] for details). It appears that Asia has a strong preference to maintain open trading relations with the rest of the world rather than becoming inward-looking (Kawai 2005).

2.4 Trade Coverage of FTAs

The numbers of FTAs are relatively easy to track over time, but by themselves the numbers do not indicate the importance of FTAs to economic activity or trade at the national level. It is informative to get an idea of how much of a country's world trade is covered by FTA provisions.⁵ This is difficult to measure because of exceptions and exclusions contained in many agreements. Furthermore, official statistics on utilization rates of FTA preferences in Asia are hard to come by and published data on the direction of services trade do not exist. Nevertheless, by making the bold assumption that all goods trade is covered by concluded FTAs, indicative estimates can be obtained.⁶ Accordingly, Figure 3 [ PDF 44.9KB | 1 page ] shows the share of an economy's bilateral trade with its FTA partners in its total trade with the world for 2000 and 2008. Two points are worth noting:

First, the region's larger economies have smaller shares in 2008 than ASEAN members, highlighting the latter's greater reliance on FTAs, especially AFTA. The shares for the large economies are: Korea (44%), PRC (25%), India (23%), and Japan (11%). There is some diversity within ASEAN, with Brunei Darussalum and Lao PDR having shares in excess of 75%, and Singapore, Malaysia, and Myanmar over 50%, while others range between 35% and 49%.⁷ Meanwhile, Taipei,China has the lowest trade coverage by FTAs at 1%.

Second, all Asian countries experienced a significant increase in reliance on FTAs between 2000 and 2008, reflecting the spread of FTAs throughout the region. Key Asian FTA hubs—Japan, Korea, PRC, and India—have experienced at least a quadrupling of shares over the period. Notable increases are also visible in Singapore, Thailand, and Malaysia.

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