Surge of Plurilateral and Bilateral FTAs

Figure 1 [ PDF 23.7KB | 1 page ] shows RTAs notified to the GATT/WTO up to the end of 2008. There has been a surge in the number of notified RTAs since the early 1990s. It should be noted, however, that the surge is in part due to the number of RTAs in services reported under General Agreement on Trade and Services (GATS) V since January 1995.

4.1 Recent Surge in FTAs in East Asia

Before 1992, East Asia had no FTAs,³ unlike the situation in Africa, the Americas, and Western Europe. The ASEAN Free Trade Area (AFTA) came into force in January 1993 and since the late 1990s the number of FTAs has rapidly increased.

Several factors have been at play in the growth of regional, plurilateral, and bilateral FTAs.

• First, there has been a thawing of political relations among East Asian countries with the end of⁴ the Cold War, particularly between the PRC and the rest of East Asia. Increasingly, entering into FTAs with countries inside and outside the region has become common foreign policy.
• Second, East Asia will eventually require a policy framework to support and further the deepening of market-driven economic integration. Properly designed FTAs could expand trade and foreign direct investment (FDI) and deepen production networks and supply chains; eliminate cross-border barriers; facilitate trade and FDI; and harmonize various trade-related rules, standards, and procedures.
• Third, Asian governments and business firms are concerned about emerging European and North American blocs that discriminate against Asian exporters and investors. Businesses in Japan and other East Asian countries lobby their governments to enter into plurilateral and bilateral FTAs to improve market access. The success of the EU and NAFTA economic integration also had a demonstration effect on East Asia. At the political and policy level, there is also a demand for a stronger and cohesive Asian voice in international fora and in international negotiations.
• Fourth, the Asian financial crisis of 1997–1998 highlighted the need for East Asia to strengthen regional economic cooperation for resilience, sustainable economic growth, and stability. This led to the ASEAN+3 (ASEAN plus the PRC, Japan, and Korea) financial and monetary cooperation that resulted in the Chiang Mai Initiative, with central bank swap arrangements, a regional surveillance mechanism, and the Asian Bond Market Initiative.
• Fifth, the slow progress in Doha Round negotiations and the APEC liberalization process is pressuring Asian governments to seek plurilateral and bilateral FTAs as an insurance policy.
• Sixth, some countries, such as Japan, seek FTAs to promote domestic reforms (as is the case of Mexico joining NAFTA).
• Seventh, a domino effect is also evident. The economic rivalry between the PRC and Japan led both countries into FTAs with ASEAN and the individual ASEAN countries as well as with other trading partners. Other countries also rushed into FTAs for fear of being left out of FTA markets. Thus, Korea signed an FTA with ASEAN and some individual ASEAN countries, and then when Singapore pursued bilateral FTAs with a number of regional and extra-regional countries (including India and the US) it put pressure on competing ASEAN countries to do likewise.
• Finally, it appears easier to achieve plurilateral and bilateral agreements among likeminded countries on various WTO and WTO-Plus issues than to achieve consensus within the WTO.

Table 4 [ PDF 25.9KB | 1 page ] shows the number of FTAs in East Asia as of January 2009.⁵ Singapore⁶ led with 32 agreements, followed closely by India (31), Thailand (24), PRC (23), and Korea (23). The Cambodia, Lao PDR, Myanmar, and Viet Nam (CLMV) sub-group has the least agreements.⁷

Table 5 [ PDF 35.1KB | 1 page ] is a matrix of plurilateral FTAs by country and status. The ASEAN countries have the largest number of plurilateral FTAs, as they are members of ASEAN (AFTA/ASEAN Framework Agreement on Services [AFAS]/ASEAN Investment Area [AIA] and ASEAN Economic Community [AEC]) as well as the ASEAN-Plus agreements with PRC, India, Japan, Korea, Australia-New Zealand, and EU. In addition, Brunei Darussalam, New Zealand, and Singapore are members of the Trans-Pacific Strategic Economic Partnership (also known as TPP or P4); PRC, India, Lao PDR, and Korea are members of the Asia Pacific Trade Agreement; India, Myanmar, and Thailand are members of the Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation; and India is a member of the South Asian Free Trade Area.

4.2 Content and Scope of AFTA and AEC

Analysis of ASEAN and AFTA usually makes a distinction between the older members, known as ASEAN6 (Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, and Thailand) and the newer members known as CLMV (Cambodia, Laos PDR, Myanmar, and Viet Nam). This distinction is important in FTAs, which generally accord special and differential treatment to the CLMV countries.

Trade in Goods: AFTA was implemented in January 1993 to cover the trade in goods and it has the following main provisions:

• Sectoral and product coverage applies to all manufactured products (including capital goods and processed agricultural products) but excludes unprocessed agricultural products. Coverage was subsequently extended to unprocessed agricultural products. Remaining exceptions are contained in the Temporary Exclusion List, Sensitive List, and General Exclusion List.
• Initially, tariffs were to be reduced to 0–5% over a period of 15 years. These were subsequently amended—tariff reductions to the 0–5% level were progressively brought forward to 2002 for ASEAN+6 and Viet Nam, 2008 for the Lao PDR and Myanmar, and 2010 for Cambodia; tariff reductions to zero level were set with completion dates of 2010 for ASEAN+6 and 2015 for CLMV. Allowance is made for member countries to provisionally suspend the Common Effective Preferential Tariff preferences when an import surge causes damage to a domestic industry. However, some ASEAN members have sought to suspend CEPT preferences to pre-empt an import surge.
• The AFTA rules of origin state that “a product shall be deemed to be originating from ASEAN Member States if at least 40% of its content originates from any Member State.”⁸ This gives rise to difficulties in interpretation and implementation.
• Member states are to eliminate quantitative restrictions upon enjoyment of tariff concessions on products and eliminate other NTBs within five years. This has proved difficult to implement as there has been no agreed list of NTBs in ASEAN for many years.
• Eleven priority sectors (later extended to 12) were identified for accelerated integration by coordinating integration measures such as zero tariffs, rapid customs clearance, and harmonization of product standards and technical regulations.
• An ASEAN Industrial Cooperation scheme was introduced to enhance ASEAN's industrial competitiveness and investment competitiveness by promoting joint manufacturing between ASEAN-based companies. ASEAN Industrial Cooperation products enjoy immediate tariff preferences under AFTA as well as local content accreditation and investment incentives.

Trade in Services: Services liberalization is under the 1995 AFAS. Seven packages of commitments were reached through five rounds of negotiations and seven mutual recognition arrangements on qualifications of professional service suppliers. Priority service sectors identified for liberalization and cooperation are financial services, maritime transport, air transport, telecommunications, tourism, business services, and construction.

Investment: Investment provisions are contained in the 1998 ASEAN Framework Agreement on the AIA, which aims to provide an environment that will facilitate free flow of investment, technology, and skills, as well as promote inclusion in regional and global production networks. AIA grants national treatment to ASEAN investors by 2010 and to non-ASEAN investors by 2020, with some exceptions specified in the Temporary Exclusion List and Sensitive List. This discriminatory treatment makes no economic sense as most FDI in ASEAN countries originates from non-ASEAN sources. AIA also promises to provide a greater transparency to investment policies, rules, procedures, and administrative processes; a more streamlined and simplified investment process; more liberal and competitive investment regimes; and lower transaction costs for business operations.

In February 2009, ASEAN adopted an enhanced version of the AIA called the ASEAN Comprehensive Investment Agreement. It incorporates the four pillars of liberalization, facilitation, protection, and promotion. Investment liberalization is to be achieved by 2015, providing national treatment and MFN treatment for all investors with limited exceptions; removing of restrictions to entry for investments in the priority integration goods sectors; and reducing/removing (where possible) restrictive investment measures and other impediments. Investment facilitation covers more transparent, consistent, and predictable investment rules, regulations, policies, and procedures. Investment protection is accorded to all investors and investments, regardless of nationality.⁹ ASEAN also agreed to promote the following: ASEAN as an integrated investment area and production network; intra-ASEAN investments, especially from ASEAN6 (Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, and Thailand) to CLMV; industrial complementation and production networks among multinational corporations in ASEAN; joint investment missions that focus on regional clusters and production networks; and a network of bilateral agreements on avoidance of double taxation among ASEAN countries.

ASEAN Economic Community: In 2003, in response to the challenges of globalization and the economic rise of the PRC and India, ASEAN agreed to establish the AEC¹⁰ by 2020. This was later brought forward to 2015. The AEC aims to transform ASEAN into a single market and production base, a highly competitive economic region, a region of equitable economic development, and a region fully integrated into the global economy. The AEC Blueprint of November 2007 sets out a strategic schedule of timelines up to 2015 for the implementation of various integration measures. The plan of action has four components:

• First, regarding existing economic integration programs, clear timelines to remove all NTBs by 2005 were adopted, including harmonization of product standards and technical regulations, and mutual recognition agreements in five priority sectors. Although tariff reductions and eliminations are nearing completion, removing NTBs has been a slower process. For example, the ASEAN Single Window was only established in 2008.
• Second, new initiatives for the AEC include fast-track vertical integration in 12 priority sectors identified as agro-based products, fisheries, wood-based products, rubber-based products, automotives, textiles and apparel, electronics, e-ASEAN, medical equipment and instruments, aviation services, tourism, and logistics services.
• Third, measures will be taken to strengthen institutions, streamline decision-making processes, and ensure the effective implementation of all ASEAN initiatives. A unit will be established to provide legal advice on trade disputes and oversee an enhanced ASEAN Dispute Settlement Mechanism. ¹¹
• Fourth, ASEAN6 will continue to help the less developed CLMV in capacity building and technical and development cooperation to narrow the development gap.

4.2.1 PRC–Japan–Korea FTA?

The PRC has proposed an FTA among the PRC, Japan, and Korea. Considering the high concentration of intra-regional trade among the three countries and the complementarities of their industrial structure and geographic proximity, there is high probability of an emerging trade agreement—barring political constraints. Japan and Korea could take advantage of the huge market and low-priced natural and human resources of the PRC, while the PRC could benefit from the transfer of technology and FDI from Japan and Korea. However, the PRC's applied tariffs on imports from Japan and Korea are still high, so there is currently little interest in this option. Overcoming historical animosity and securing public consensus remains a challenge. Urata¹² notes that if Japan opened market access to the PRC, and the PRC opened FDI access to Japan, it would be a win–win situation for both countries.

4.2.2 ASEAN-Plus Agreements

An integrated ASEAN has a smaller nominal gross national product (GNP) than either the EU or NAFTA. Hence, ASEAN has to be outward looking and readily accept proposals for FTAs from major and rising economic powers. ASEAN is currently engaged in ASEAN+1 agreements with Australia–New Zealand, the PRC, India, Japan, Korea, and EU, making ASEAN a de facto FTA hub. There is no ASEAN–US agreement, as the US has preferred to pursue bilateral FTAs and trade and investment framework agreements with individual countries under its Enterprise for ASEAN Initiative.

Table 6 [ PDF 28.7KB | 1 page ] shows the comparative sizes of ASEAN and its ASEAN-Plus FTA partners, and the possible future ASEAN–US agreement. The agreements vary widely in size. In terms of population size, ASEAN–PRC is the largest with 1.8 billion, ASEAN–India is next with 1.6 billion, while ASEAN–CER is the smallest. However, by market size (GNP), ASEAN–US is the largest, followed by ASEAN–Japan and ASEAN–PRC. The PRC, Japan, and US have larger economies than the collective ASEAN+10, while the economies of India, Korea, and Australia–New Zealand CER are smaller. By volume of trade, ASEAN–US is largest. The trade volume of Japan is comparable to ASEAN, but the trade volumes of India, Korea, and Australia–New Zealand CER are considerably smaller.

A domino effect is evident. The PRC's proposal for an agreement with ASEAN was rapidly followed by similar offers from India, Japan, Korea, Australia-New Zealand CER, and EU, with the latest being the EU. Japan chose both an ASEAN-wide framework umbrella and bilateral FTAs with selected ASEAN countries. India and Korea embarked on bilateral FTAs with Singapore prior to their ASEAN-wide initiatives. The PRC embarked on a limited bilateral FTA with Thailand after initiating the ASEAN-wide agreement and has since negotiated a bilateral FTA with Singapore. The US has concluded a bilateral FTA with Singapore and has ongoing negotiations with a few others.

All the ASEAN+1 agreements are comprehensive and have been dubbed FTA-Plus and WTO-Plus. The scope of these comprehensive economic partnerships (CEP) and comprehensive economic cooperation (CEC) agreements extend beyond trade liberalization in goods to include liberalization of trade in services and investment, trade and investment facilitation, government procurement, intellectual property rights, competition policy, and wide-ranging economic and technical cooperation (such as the development of agriculture, industry, fishery, forestry, and energy; human resources; infrastructure; small and medium enterprises; science and technology; and information and communication technologies; and labor and environment). Additionally, they include special and differential treatment, flexibility, and capacity building for the CLMV. Framework agreements were reached prior to negotiations on the various components of the CEP/CEC. Only ASEAN–PRC has implemented an Early Harvest Program. Trade in goods agreements are usually negotiated and implemented first, followed by agreements on services and investment, although some ASEAN+1 agreements are single undertakings.

Table 7 [ PDF 23.5KB | 1 page ] shows the different time frames for the ASEAN and ASEAN+1 agreements. The time frames for the elimination of tariffs, with built-in flexibility allowing for some countries or some sectors to be realized later, are shown below:

• AFTA: Start: January 1993; End: 2010 for ASEAN6 (Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, and Thailand) and 2015 for CLMV
• AEC: Start: October 2003; End: 2015
• ASEAN–PRC: Start: June 2005; End: 2010 for ASEAN6 and PRC, and 2015 for CLMV
• ASEAN–India: Start: 2009; End: 2011 for ASEAN5 (that is, ASEAN6 minus the Philippines) and India, 2016 for the Philippines and CLMV
• ASEAN–Japan: Start: January 2009; End 2012 for ASEAN6 and Japan, 2017 for CLMV
• ASEAN–Korea: Start: July 2006; End: 2010 for ASEAN6 and Korea, no end-date indicated for CLMV

The rules of origin (ROO) for the various ASEAN and ASEAN+1 agreements are

• AFTA: 40% value added; amended to include change of tariff classification (CTC); product specific
• ASEAN–PRC: 40% value added (same as AFTA)
• ASEAN–India: 35% value added plus CTC
• ASEAN–Japan: depends on bilateral negotiations, some still ongoing
• ASEAN–Korea: product specific

A common template for the various ASEAN+1 agreements would make it easier for them to become building blocks or to be amalgamated into a region-wide arrangement. For ASEAN to become a production base, it needs to minimize business transaction costs by having similar schedules of tariff reduction and rules to ensure use of the most efficient supplier. A common ROO could facilitate the spread of full cumulation and the development of regional production networks.

4.2.3 ASEAN–PRC Framework Agreement and Comprehensive Economic Cooperation:

The PRC first proposed an FTA with ASEAN in November 2000 as part of a process to build confidence and allay ASEAN concerns over the PRC's challenge in export markets and in attracting FDI. The PRC offered an Early Harvest Program, special and differential treatment, and flexibility for the CLMV as incentives. In turn, ASEAN began to view the PRC as a rapidly growing market for its products and services (including tourism), and as a new engine for growth. Major components of the CEC are:

• An Early Harvest Program of tariff reduction and elimination, primarily in agricultural goods, was implemented in January 2004 and lasted for three years. There was an Exclusion List and different time frames for ASEAN6 and for the CLMV.
• The Agreement on Trade in Goods was implemented in June 2005. It provides for tariff reduction and elimination along two tracks. For products on the normal track, tariff reductions will be completed by 2010 for ASEAN6 and the PRC, and by 2015 for CLMV. For products on the sensitive track, the tariff reduction schedule is determined by mutual agreement. ROO are based on 40% value added. Countries are committed to abide by provisions on WTO disciplines on non-tariff measures, technical barriers to trade, and sanitary and phytosanitary measures subsidies and countervailing measures; anti-dumping measures; intellectual property; and safeguards. In addition, ASEAN member states agree to recognize the PRC as a full market economy.
• The Agreement on Services was implemented in July 2007, while the Agreement on Investment was signed in August 2009.

4.2.4 ASEAN–Japan Framework Agreement and Comprehensive Economic Partnership

Japan proposed an economic partnership agreement with ASEAN in January 2002, soon after the ASEAN–PRC CEC proposal. The formalized partnership will anchor Japanese economic interests in ASEAN and balance the rise of the PRC. In turn, ASEAN recognizes Japan as the second largest economy in the world and recognizes Japan's roles as the regional growth engine in recent decades, a major source of FDI and technology transfer, and the largest source of technical and development assistance.

The Framework Agreement was signed in October 2003 with the following principles and provisions: comprehensive coverage of countries and sectors; special and differential treatment for ASEAN states and greater flexibility for CLMV; flexibility for sensitive sectors of ASEAN and Japan; early implementation of cooperation in areas that could provide more immediate benefits such as technical assistance and capacity building for ASEAN, especially for CLMV; trade and investment promotion and facilitation; trade and investment policy dialogue; business sector dialogue; mobility of business people; trade data compilation and exchange; and facilitation and cooperation programs covering a wide field. A big obstacle in the negotiations is Japan's protectionist stance towards its agricultural and labor markets. Japan wants the CEP to be a single undertaking but negotiations on services and investment are not yet completed. Both sides agreed to incorporate common features of Japan's bilateral FTAs with ASEAN economies into the ASEAN-wide CEP; this will essentially be an umbrella agreement. The CEP should be realized by 2012 for ASEAN6 and 2017 for CLMV. A notable feature of the bilateral economic partnership agreements is the capped entry into Japan of certain categories of professionals from Indonesia, Philippines, and Thailand. This is seen as a major concession from Japan's normally strict restrictions on labor inflows.

4.2.5 ASEAN–Korea Comprehensive Economic Partnership

Korea proposed a comprehensive partnership with an FTA. The Framework Agreement came into force in July 2006. Korea and ASEAN6 started cutting tariffs from July 2006 and aim to be completed by 2010. The target date for CLMV is to be determined at a later date. Korea and individual ASEAN countries may choose up to 40 items that could be excluded from tariff reductions. Talks became ensnared over tariffs on food products for ASEAN; and automobiles, steel, and mobile phones for Korea. Tariffs on 97% of about 4000 categories of goods will be cut by 2010 with the rest being cut by 2016. ASEAN agreed to treat goods produced at the Kaesong Industrial Complex in North Korea as made-in-Korea. Disagreements between Korea and Thailand on agricultural products led to a delay by Thailand in ratifying the agreement. Negotiations on trade in services and investments have been concluded.

4.2.6 ASEAN–India Comprehensive Economic Cooperation

India offered ASEAN a trade pact in November 2002, presumably as part of its Look East strategy. ASEAN welcomed the initiative as India is a rising economic power in the region. The Framework Agreement was signed in October 2003 and entered into force in July 2004. It was envisaged that tariff concessions in the FTA should cover at least 80% of trade between ASEAN and India. India, with high agricultural tariffs of 70–100%, and many small and marginal farmers, resisted tariff cuts on a range of products of strong export interest to some ASEAN members, especially rice, palm oil, plantation crops such as coffee and tea, and spices such as pepper. At the same time, India was worried about imports of manufactures from Thailand. Initially, India presented an exclusion list of 1,414 products (including textiles, rice, vegetable oil, and petroleum products) that represented 44% of ASEAN's total exports to India in 2004, of which vegetable oil and petroleum products accounted for 27%. In particular, the exclusion of palm oil, tea, pepper, and textiles would affect 80% of Malaysian exports to India. Subsequently, India's negative list was reduced to 850. Considerable differences also existed over the ROO; the eventual compromise agreed on is at least 35% domestic value added plus CTC. The FTA on goods was signed in August 2009. Negotiations on services and investment are ongoing.

4.3 Bilateral FTAs

There is a dense network of plurilateral and bilateral FTAs among the East Asian (ASEAN+6) countries. Table 8 [ PDF 30.3KB | 1 page ] shows FTAs that are under negotiation, have been implemented, or have been concluded. The FTAs have been classified into plurilateral and bilateral FTAs, and either intra-regional (among ASEAN+6 countries) or cross-regional (with other regions). The incidence (number of members x number of FTAs) of intra-regional bilateral FTAs is higher than that of cross-regional bilateral FTAs. While Northeast Asia (PRC, Japan, and Korea) is active in bilateral FTAs with individual ASEAN countries, there are as yet no trilateral or bilateral FTAs among themselves.

Table 9 [ PDF 42.6KB | 2 page ] shows that in addition to ASEAN-wide agreements, Japan has bilateral agreements with seven ASEAN countries (Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, Thailand, and Viet Nam); Korea has implemented a bilateral agreement with Singapore and proposed bilateral agreements with Malaysia and Thailand; the PRC has bilateral agreements with Singapore and Thailand; Australia has implemented bilateral agreements with Singapore and Thailand, is negotiating with Malaysia, and has proposed a bilateral agreement with Indonesia; New Zealand has implemented a bilateral agreement with Singapore, and is negotiating with Malaysia; while India has implemented a bilateral agreement with Singapore, is negotiating with Malaysia and Thailand, and has proposed a bilateral with Indonesia. Thus, individual ASEAN countries have been entering into bilateral FTAs with the same partners as in the ASEAN+1 agreements. Some of the bilateral agreements preceded the ASEAN+1 agreements, but other bilateral agreements came later. There is no common template between ASEAN+1 and its pair-wise agreements, or among the ASEAN+1 agreements, resulting in an obvious noodle bowl.

4.4 Scope and Coverage of FTAs/CEPs/CECs in East Asia

Evaluating the impact of FTAs requires consideration of the scope and coverage of the agreements as they extend beyond the tariff barrier of customs union theory. Many of the East Asian FTAs, specifically those of the PRC and Japan, are titled as “economic partnership” and “comprehensive economic cooperation” agreements, of which tariff arrangements are only a part.

Trade in goods: Notification to the WTO under GATT Article XXIV requires coverage of substantially all trade, but many developing countries opted for notification under the Enabling Clause. For example, AFTA and the ASEAN–PRC FTA are notified under the Enabling Clause, but the PRC–Singapore FTA as well as many of Singapore's other bilateral FTAs are notified under GATT XXIV and GATS V. Also the definition of substantially all trade has led to varying interpretations.

Trade in services: Notification to the WTO under GATS Article V. FTAs have to provide for substantial sectoral coverage in terms of the number of sectors and modes of supply, the elimination of substantially all discrimination to national treatment, and prevent the raising of barriers against non-members. Developing countries have more flexibility in fulfilling the conditions of substantial sectoral coverage and eliminating discriminatory measures. GATS-type agreements adopt the positive list approach in which national schedules list service sectors and modes of supply that will enjoy market access and national treatment; trade restrictions can be imposed on all non-scheduled sectors. NAFTA-type service agreements adopt the negative list approach, where all services are up for liberalization unless otherwise indicated through lists of reservations, which can be for existing measures as well as for future measures. The GATS positive list approach can be seen in the AFAS, ASEAN–PRC, Australia–Thailand, Korea–EFTA, Singapore–European Free Trade Area, Singapore–India, Singapore–New Zealand, Japan–Malaysia, Japan–Philippines, and Japan–Singapore agreements. Negative list agreements include those of Singapore–Australia, Singapore–Korea, Singapore–Panama, Singapore–US, Korea–Chile, Japan–Mexico, and the Trans-Pacific Strategic Economic Partnership Agreement. Most of the services agreements provide for liberal ROO along the lines of GATS Article V. Exceptions include domestic ownership and control requirements as in the agreements of Singapore–India and Australia–Thailand; certain foreign policy related carve-outs; and the exclusion of branches as in the agreements of Japan–Malaysia and Japan–Philippines. A majority of the East Asia FTAs call on regulatory bodies to facilitate the recognition of professional qualifications, such as engineering and nursing services (AFAS), engineering services (Singapore–Korea) and legal services (Singapore–US).

Investment: This is covered in ASEAN and ASEAN+1 agreements as well as in developed–developing country bilateral FTAs. There is a commonality in approach, with central commitments being national treatment and/or MFN treatment of foreign investors, typically alongside commitments to create a liberal and competitive environment for investment, to improve transparency of laws and regulations, and to protect investors.

WTO-Plus issues: Many of the CEPs/CECs go beyond the WTO agenda to include provisions on a host of issues such as the four Singapore issues of trade facilitation, investment, government procurement, and competition policy; as well as issues such as intellectual property, environment, and labor. FTAs between developed and developing countries usually include such provisions, reflecting the emphasis that developed countries place on these issues. In particular, the US has a standard template for its FTA negotiations. The PRC's agreements, on the other hand, have no standard template and are seemingly customized according to their FTA partners.

The majority of concluded FTAs had WTO-Plus provisions in addition to goods and services provisions. The coverage of WTO-Plus provisions reflects economic interests, relative bargaining power, and negotiating capacity. Table 10 [ PDF 47.6KB | 2 page ] from Kawai and Wignaraja (2008) maps the provisions on the four Singapore issues and various categories of cooperation enhancement in 15 East Asian FTAs. Most of them cover the Singapore issues, while coverage of intellectual property, environment, and standards are less widespread, and coverage of co-operation enhancement is even less common. Many of the FTAs that contain only goods and services trade provisions are between developing countries.

Competition policy: This provision is found in many FTA agreements with developed countries, such those entered into by Australia, EFTA, Japan, New Zealand, and US, but is absent in agreements between developing countries such as in the ASEAN–PRC and ASEA–India FTAs. In the Singapore–US FTA, there are detailed commitments by both parties. In the Singapore–Australia FTA, both governments commit to apply their competition laws but allow measures or sectors to be exempt from commitments on public interest grounds if executed in a transparent manner.

Temporary movement of natural persons: This is either covered in the Services chapter (Mode 4) or the Investment chapter (intra-corporate transferees) but is sometimes contained in a separate chapter covering movement of business persons, professionals, and intra-corporate transferees. In the light of Japan's strong discouragement of inflow of foreign labor, it is noteworthy that its bilateral agreements with several ASEAN countries have allowed for the limited inflow into Japan of certain categories of professionals.

Commitments on cooperation: Agreements between developed and developing countries usually contain a range of commitments on co-operation. Typically these comprise vague statements of intent, unlike the commitments on liberalization measures. All the ASEAN+1 agreements have various co-operation commitments.

4.5 Evaluating the Benefits and Costs of FTAs in East Asia

In traditional customs union theory, a customs union can contribute to a more efficient allocation of resources within the region, but possibly at the expense of resource allocation between members and non-members, thus making the welfare implications ambiguous. Viner (1950) argued that trade diversion costs take place if the formation of a custom union causes a member to switch imports from a low cost non-member to a higher-cost member; on the other hand, trade creation benefits take place if a member imports more from another member who is also a low cost supplier. Besides the static welfare effects, customs unions also confer several dynamic benefits due to increased competition, economies of scale, stimulus to investment, and better resource utilization. However, the traditional Vinerian focus on trade creation and trade diversion in evaluating their effects often seems irrelevant as the majority of recent CEP/CEC agreements involve many investment liberalization and facilitation, and behind the border liberalization issues.

Whalley (2006) argues that use of gravity or Global Trade Analysis Project models for analysis of the impact of tariff barrier changes may yield little if the agreements are complex and elaborate. Hence, the scope and coverage of agreements raise the following questions—What is the extent of these FTAs on covered trade? What is the utilization rate of the FTA preferential tariffs? How significant are NTBs and the various WTO-Plus provisions?

Coverage of trade: First, what is the extent of these FTAs on covered trade? Measuring the ratio of a country's bilateral trade with its FTA partners against the country's total trade with the world is relatively easy from available trade data. In East Asia, ASEAN countries generally have higher trade shares than the larger Northeast Asian economies, indicating a greater dependence on FTA trade. Both plurilateral and bilateral FTAs show a high degree of extra-regional orientation. It is more difficult to measure the extent of a country's trade that utilizes the FTA preferential tariffs because of various exceptions and exclusions, a lack of data on utilization rates of tariff preferences, and a lack of data on the country direction of services trade. A study by Kawai and Wignaraja (2009) on tariff utilization in a number of East Asian countries showed that utilization rates are generally low, meaning CGE modeling results of tariff reduction/elimination may be overstated.

Margin of preference between MFN and FTA tariffs: Second, what is the margin of preference and utilization rate of the FTA preferential tariffs? A low margin of preference between MFN applied tariffs and FTA preferential tariffs indicate little incentive for businesses to utilize the FTA preferences when set against the administrative costs of obtaining ROO certification. However, for multinational corporations trading in huge volumes, even a small percentage margin could translate into large dollar amounts saved.

Table 11 [ PDF 94.9KB | 1 page ] shows the tariff profiles of ASEAN+6 countries. The simple average MFN applied tariffs are generally much lower than the simple average MFN bound tariffs. There is a wide variation in the average MFN applied tariffs among East Asian countries, ranging from double-digits for Cambodia, India, Korea, and Viet Nam at one extreme, to zero for Singapore at the other extreme. For each country, there are wide variations in individual tariff rates. The percentage share of HS 6-digit subheadings with MFN applied tariffs of zero, range from highs of 100% for Singapore, 79.9% for Brunei Darussalam, and 63.2% for New Zealand, to under 6% for Cambodia, PRC, India, Lao PDR, Myanmar, and Philippines. There are also instances of prohibitive tariffs, with MFN applied tariffs exceeding 1000%. The coefficients of variation of MFN applied tariffs are very high for Brunei Darussalam, Korea, Japan, and Singapore. Hence, simple average MFN applied tariffs give little guidance on margin of preference at the HS 6-digit tariff lines.

Table 12 [ PDF 142.5KB | 2 page ] shows the MFN applied tariffs and imports by product groups for five ASEAN countries (Indonesia, Malaysia, Philippines, Thailand, and Viet Nam). These countries all have moderate average MFN applied tariffs, except for Viet Nam. Also, Thailand and Viet Nam still have a highly protectionist agricultural sector, with average agricultural tariffs of over 20%. The other high average tariff groups are found in beverages and tobacco (except Philippines), clothing, textiles (Viet Nam), and transport equipment (except Philippines). Electrical machinery (including electronics), which is a major import of Malaysia, Philippines, and Thailand, has low average tariffs. Table 12b shows the MFN applied tariffs and imports by product groups of ASEAN's partners in the ASEAN + 1 agreements. The PRC has an average MFN applied tariff of 9.9%, with 15.8% in agriculture and highs of 16.0% in clothing, 13.5% in leather and footwear, and 11.5% in transport equipment. Major import groups are minerals and metals, petroleum, chemicals, non-electrical machinery, and electrical machinery with average tariffs of under 10%. Australia and New Zealand have very low average MFN applied tariffs, both in agriculture and in manufactures. Japan has a low average MFN applied tariff but a very high average agricultural tariff (21.8%) and 11.2% in leather and footwear. Korea has a relatively high average MFN applied tariff (12.2%), but an extremely high average tariff for agriculture (49.0%), as well as a high average tariff of 12.6% for clothing. India has a high average MFN applied tariff (14.5%), the highest among ASEAN's partners, a very high average agricultural applied tariff of 34.4% and very high tariffs of over 20% on textiles, clothing and transport equipment. However, as qualified above in the ASEAN tariffs, simple average tariffs of FTA partners may give little indication of the prohibitive heights of some individual tariffs at the HS 6-digit level.

Significance of Non-tariff barriers (NTBs) and WTO-Plus provisions: Third, how significant are the NTBs for trade in goods and in new areas such as services, mutual recognition, investment, intellectual property, competition policy, and movement of persons? As tariffs have fallen over the years, NTBs (such as customs valuation and procedures) have become more prominent; they are less transparent and quantifiable, and often act as a more serious trade barrier than tariffs. Also, trade in goods is only part of the CEP/CEC agreements; of growing importance are the liberalization of services and investments.

Kawai and Wignaraja (2008) proposed criteria and measures to maximize the benefits and minimize the costs of FTAs. These are (i) consistency with Article XXIV and GATS V by adopting lowest tariff rates among members, (ii) a large membership, (iii) comprehensive coverage of liberalization measures (goods, services, and investment), (iv) simple and non-restrictive ROO; and (v) harmonized regulatory and institutional frameworks. Well-designed FTAs can maximize dynamic gains by generating greater trade and FDI through trade and investment liberalization and facilitation for goods, services, and FDI. WTO-Plus provisions in areas such as investment, intellectual property, competition policy, regulatory harmonization, labor mobility, and environment issues can also deepen economic integration. Greater inflow and outflow of FDI allows the transfer of technologies and promotes trade and economic development. The benefits are larger if the FTAs can induce difficult domestic structural reforms; once reforms are pursued it is much easier for the country to provide greater market access to non-members as well.

A good balance must be sought between the breadth of participating countries and the depth of measures to be addressed in an FTA. On the cost side of FTAs, one serious cost relates to discriminatory treatment of non-members, especially small and low-income countries that have little ability to join FTAs. The cost of FTA negotiations could also be large for small, poor economies with limited negotiation capacity. Proliferation of many overlapping FTAs with different ROO and standards can create the risk of noodle bowls, thereby reducing incentives for businesses to use the FTAs.

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