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Lili Yan Ing, Martin Richardson and Shujiro Urata
Right after the World Trade Organization (WTO) was established in January 1995, the number of bilateral and regional agreements began to mushroom. The number of free trade areas (FTAs) grew from 44 in 1995 to 290 in November 2018. The Association of Southeast Asian Nations (ASEAN) also experienced an increase in the number of FTAs from 5 to 47 over the same period. As of November 2018, ASEAN as a group had six FTAs, of which one is among ASEAN countries, and the others are with its six main trading partners: the ASEAN Free Trade Area (AFTA), ASEAN-Australia-New Zealand FTA, ASEAN-China FTA, ASEAN-India FTA, ASEAN-Japan CEPA and ASEAN-Korea FTA. To improve the level of liberalisation in goods, services and investment, ASEAN and its six main trading partners have agreed to consider a new FTA: the Regional Comprehensive Economic Partnership (RCEP).
The RCEP has been under negotiation since November 2012. Six years later, by the time of the final stage of editing this book, November 2018, the RCEP has been through more than 20 rounds of negotiations. We hope this volume will serve as meaningful analyses to academics, practitioners and policymakers in providing not just an understanding of regional integration and cooperation in East Asia to date but also a profound base that provides insights in designing better preferential trade agreements or economic cooperation in the region. The book comprises ten chapters which analyse trade in goods, trade in services and investment.
In Chapter 2, Urata starts the book with an overview of regionalism in East Asia. East Asia has witnessed the proliferation of FTAs during the last three decades, beginning with the AFTA in 1993. A series of bilateral and regional FTAs have been discussed and enacted since around the turn of the century in a competitive pattern, involving many East Asian countries, including ASEAN member states China, Japan and Korea. Despite the active formation of FTAs, a region-wide mega-FTA involving all East Asian countries has not yet been established. The closest one is the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) agreement, which is scheduled to be enacted towards the end of 2018, but it only includes a few East Asian countries.
The RCEP agreement, which includes all 16 East Asian countries, has been in negotiation since May 2013 without concluding. The importance of establishing a rules-based trading system such as RCEP has increased because of intensifying protectionism by the US under the Trump administration and the stalemate in multilateral trade negotiations in the WTO. This chapter reviews the trend in FTAs in East Asia by referring to their competitive nature and identifying their special characteristics, and provides suggestions to overcome the challenges to reach an agreement for the RCEP negotiation.
Chapter 3 by Itakura estimates the economic effects of the integration of 16 East Asian countries in the RCEP. Itakura estimates how the formation of the RCEP will affect individual ASEAN member economies’ gross domestic product (GDP) growth, exports, imports and total welfare. By applying a recursively dynamic computable general equilibrium model of global trade, the chapter considers three policy scenarios: Scenario 1 is tariff rate reductions, Scenario 2 is this plus services trade cost reductions and Scenario 3 is Scenario 2 plus investment liberalisation.
Applying Global Trade Analysis Project (GTAP)-11, the simulation experiments of RCEP explore the potential economic gains from liberalising goods and services trade, improving logistics of merchandise goods and fostering investment in the region. The simulation results suggest that all the participating countries in RCEP will gain in terms of real GDP, ASEAN’s real GDP rising by 4.7 percent from the baseline, in 2035. For each ASEAN Member States, RCEP has varying degrees of impact, reflecting the economic size and depth of liberalisation. As RCEP commits to promoting investment, the increase in real GDP is boosted even more. Investment in all member countries rises as RCEP is implemented, and trade volumes expand for the participating countries.
In Chapter 4, Zhinhong Yu provides an anatomy of the evolution of the structure of China’s trade with Southeast Asian countries (namely ASEAN), using detailed Chinese Customs data. The analysis discovers dramatic compositional changes in ASEAN-China trade across ownership, product and the processing trade regime over the last two decades. In particular, since the late 1990s China’s active engagement in the global production network has led to the reorientation of China-ASEAN trade towards intermediate goods and machinery sectors, which are characterised by high processing trade intensities and are dominated by foreign-owned firms located in China. As a result, ASEAN’s exports to China have surged, leading to sizeable trade surpluses.
However, this trend has not continued in recent years and, if anything, has reversed. Indeed, the growth of China’s imports from ASEAN firms has slowed down since 2011, accompanied by decreasing shares of the machinery and intermediate good sectors, and declining processing trade intensity. On the other hand, non-processing exports from indigenous Chinese firms to ASEAN have risen sharply, especially in these same sectors. Taken together, these forces turned ASEAN’s trade surplus against China into a trade deficit, which might even widen in the years to come. The results imply that policymakers in ASEAN countries must make appropriate policy adjustments to cope with China’s structural transformation towards a “new normal” model of trade growth in order to achieve a healthier trade balance with China in future.
In Chapter 5, Okabe analyses the impacts of ASEAN’s FTAs on trade in goods in Southeast Asia using disaggregated trade data. Using overall FTA dummies and the preferential tariff margins under all FTAs that are formed by each ASEAN member, she estimates the impact of each ASEAN FTA on exports and imports in 26 sectors in a gravity model. The major findings are as follows: first, AFTA increases trade in natural resources, industrial materials and consumption goods between members, while ASEAN’s regional trade in the manufacturing sectors, which have well-developed regional production networks, decreases under AFTA. Instead, trade in these sectors increases under the ASEAN-China FTA and the ASEAN-Korea FTA.
The result suggests that the ASEAN-China FTA and the ASEAN-Korea FTA have trade diverting effects on trade among ASEAN members. Second, ASEAN FTAs have the potential to facilitate the newer members’ catching-up process by enhancing their participation in regional production networks. Third, the impact of tariff reductions under the FTA is a small portion of the overall impact of the FTA. Liberalisation measures other than tariff reductions have a much larger impact on facilitating trade among members. Fourth, new FTAs have little impact if the members already have FTAs among the same members. New FTAs should have a greater degree of liberalisation or lower utilisation costs than existing FTAs. Last, the results of the newer ASEAN FTAs suggest that FTAs need several years to have an effect on trade flows.
Chapter 6 by Kohpaiboon and Jongwanich examines in depth the uptake of FTA provisions by firms in Thailand to shed light on ongoing negotiations for the RCEP. The key finding is that while certificates of origin records significantly increased over the period under consideration, their value remained less than one-third of total trade. Utilisation on the import side was even lower (one-fifth of total imports). Products that are often traded under an FTA preferential trade scheme are highly concentrated and dominated by automotive products (both vehicles and auto parts), electrical appliances, petrochemical products and processed foods, all of which have special characteristics that place them in a better position for applying the preferential schemes.
The key policy inference is that while the use of FTAs by Thai firms suggests that the RCEP has the potential to promote trade among members, the negotiations must focus on the problems of existing agreements. The negotiations should prioritise further liberalisation of the exclusion lists of previously signed FTAs as well as the designing of the rules of origin. In addition, the scope of the negotiations for the RCEP should go beyond opening up trade in goods to eventually facilitate trade and investment among RCEP members.
Chapter 7 by Cadot and Ing estimates the cost of ASEAN’s rules of origin. Cadot and Ing use a disaggregated (product-level) gravity approach to estimate the effect of ASEAN’s product-specific rules of origin on regional trade, using original data on rules applicable at the 6-digit level of the Harmonized System. Overall, they find that the average ad valorem equivalent of the ASEAN’s rules of origin is 3.40 percent across all instruments and sectors. The trade-weighted average is 2.09 percent. This moderate estimate is in line with the existing literature. However, they also find fairly high average ad valorem equivalents for some sectors, including leather, textiles and apparel, footwear and automobiles. They also find that some rules appear more restrictive than others; in this regard, the Textile Rule seems to stand out as a relatively more trade-inhibiting rule than others.
In Chapter 8, Cadot and Ing raise a growing issue in trade in the region: non-tariff measures (NTMs). The ongoing RCEP is a critical element of regional integration in East Asia and the Pacific. While tariffs are already low in the region, NTMs remain a key issue in trade in goods.
NTMs may bring consequences for sourcing and enforcement costs, and may affect the structure of an industry. ASEAN countries have similar patterns of NTM imposition at the product level. International experience shows that regional trade agreements could reduce regulatory distance – that is, the difference among regulations across countries – by 41 percent. The RCEP could bring East Asian countries to improve the transparency of their NTMs and encourage mutual recognition.
Chapter 9 by Beverelli, Fiorini and Hoekman conducts a quantification exercise on the effects of services trade liberalisation for the ten Asian economies, including several members of the RCEP. The analysis highlights substantial heterogeneity among the covered RCEP economies. Differences exist not only in terms of the effort required to reach further openness in services markets but also with respect to the quality of governance institutions, which is likely to shape the effects of services trade policy across the partnership’s members.
The empirical exercise in this chapter consists of the quantitative assessment of the effects of services trade policy reforms on the productivity of downstream manufacturing industries. The exercise is based on a hypothesised policy reform of the complete removal of all barriers to Mode 3 services trade in four producer services sectors – finance, transport, communications and professional services. The analysis shows that good governance institutions, as captured by broad indicators of the control of corruption, regulatory quality and the rule of law, are important factors for the positive impact of services trade liberalisation on downstream economic performance.
The key implication in the context of the RCEP is that the objective of removing barriers to services trade should not be pursued in isolation or unconditionally. The existing quality of domestic economic governance and the operation of the relevant institutions across RCEP members should be accounted for. The RCEP should explicitly consider the relationships between services trade and investment restrictions, and the quality of economic governance and regulation. It should also include provisions that target the performance of economic governance institutions. The quantitative estimates of the potential gains from services liberalisation suggest that these can be substantial but are conditional on the quality of domestic economic governance: if weaknesses in the latter are not addressed, gains from services liberalisation may not materialise. Addressing economic governance weaknesses in trade agreements will enhance the gains from services trade liberalisation while at the same time improving the prospect of attaining good institutions.
In Chapter 10, Losari explains how International Investment Agreements (IIAs) have evolved significantly from the era of Treaties of Friendship, Commerce and Navigation. This is inevitable as the era changes – investors need more protection, and, at the same time, states need to ensure they can take measures for their own citizens. While earlier generation IIAs tended to evolve more rapidly in the West, particularly with the conclusion of the North American Free Trade Agreement, the East did catch up with a similar evolution, particularly with the conclusion of ASEAN’s Comprehensive Investment Agreement. Admittedly, a multilateral investment regime would be ideal without distinction between the West and the East. However, the current development is still a better compromise compared to the era of bilateral investment treaties. The new IIAs have taken in inputs provided by stakeholders and have attempted to incorporate more balanced provisions, namely protecting foreign investors without sacrificing public interests.
The exercise aims to provide further input for future East Asian Integration, particularly the RCEP, based on existing IIAs, which can be the building blocks for more refined provisions for addressing the concerns of the negotiating states – including lessons learned from past disputes arising from similar provisions – and ways for states to address them. In addition, inputs are proposed based on various IIAs that have been concluded recently, particularly the Comprehensive Economic and Trade Agreement, the EU-Viet Nam Investment Protection Agreement and the CPTPP.
Based on these exercises, East Asia should consider designing a much better Investment Chapter in its future integration agenda, including having deeper and broader investment liberalisation commitments, more concrete investment facilitation provisions, limitations on the applicability of the most-favoured-nation clause and improvements to the investor-state dispute settlement mechanism. With these improvements, a Preferential Trade Agreement (PTA) – in whatever form – can provide a better and more balanced legal framework for investment and eventually contribute to a better investment climate in the region.
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2 Trends of FTAs in East Asia from the 1990s to the 2010s
Defensive and competitive regionalism
Shujiro Urata
East Asia witnessed a rapid expansion of intra-regional trade in the late 1980s and 1990s, resulting in de facto regional economic integration. Behind this development was the formation of regional production networks by multinational corporations (MNCs). MNCs adopted the fragmentation strategy, under which they break up a production process into a number of sub-production processes (blocks) and locate them in a country or a region where the sub-production processes can be performed most efficiently. MNCs actively trade in parts and components by connecting subprocesses, and they produce final products by assembling parts and components procured from various locations. MNCs were able to adopt the fragmentation strategy because of the free and open business environment, which was established by liberalisation in trade and foreign direct investment (FDI) policies by East Asian countries, and because of the reduction in transportation costs due to technological progress and deregulation.
The construction and use of regional production networks contributed to economic growth, which in turn led to further liberalisation of trade and FDI policies, resulting in greater and deeper regional economic integration. Because of the increased importance of market forces, resulting from trade and FDI policy liberalisation, in the formation of regional economic integration, such integration is characterised as market-driven regional economic integration.1
In the late 1990s, East Asia began to observe the emergence of institution-driven regionalisation, which was promoted mainly by the establishment of free trade agreements (FTAs). An FTA is a trade policy through which tariffs on trade between and among FTA members are eliminated, while tariffs on imports from non-FTA members remain at the same level. East Asia was a latecomer in the FTA frenzy as other regions, including Europe, North America, and South America, began to establish FTAs in the late 1980s. Although East Asia was a late starter in the FTA race, it caught up with the rest of the world very quickly, first establishing mostly bilateral FTAs involving two countries before later moving to plurilateral and multilateral FTAs.
The objective of this chapter is to provide an overview of the FTA developments in East Asia in order to set the stage for the detailed analyses conducted in the other chapters of this book.2 Specifically, this chapter attempts to examine the patterns of FTA developments in East Asia and then identify the factors that led to the active formation of FTAs. The analysis of the developments of FTAs is performed more or less in chronological order, beginning with the 1990s, then the 2000s, and finally in the 2010s before presenting some concluding remarks. Although there are both economic and non-economic, particularly political, factors at work, this chapter focusses on the economic factors. It further attempts to analyse the implications for region-wide FTAs. The main geographical focus is East Asia, but discussions are extended to include those countries in the Asia-Pacific when such extensions are appropriate. A special focus is placed on the two region-wide FTAs. One is the Regional Comprehensive Economic Partnership (RCEP), which involves 16 East Asian countries, and the other is the Trans-Pacific Partnership (TPP), which involved 12 Asia-Pacific countries originally but later became the Comprehensive and Progressive TPP (CPTPP) with 11 countries, after the US withdrew from the TPP. In the discussion of FTAs, the competitive nature of the relationship between and among FTAs, particularly the alleged rivalry between the RCEP and TPP (CPTPP), is highlighted.
2.2 1990s: the ASEAN Free Trade Area and the emergence of discussions on bilateral FTAs
Starting in the latter half of the 1980s, the movement towards forming regional economic ...
