ASEAN and Regional Free Trade Agreements
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ASEAN and Regional Free Trade Agreements

Christopher Findlay, Christopher Findlay

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ASEAN and Regional Free Trade Agreements

Christopher Findlay, Christopher Findlay

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About This Book

Efforts to use existing trade agreements to build a larger regional agreement face many challenges. This book considers this problem with reference to ASEAN's current agreements with key partners and the interest to build the Regional Comprehensive Economic Partnership (RCEP). The analysis of the options is framed by a focus on the use of supply chains in international business. Issues considered include those related to reductions in tariffs, trade facilitation, the treatment of investment and of services and the definition of rules of origin. The work is informed by case studies of supply chains in automobile and electronics, and in a professional service sector. The book provides a set of priority actions for better progress in taking a bottom-up approach to building RCEP.

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Information

Publisher
Routledge
Year
2015
ISBN
9781317496571
Edition
1

1 Overview1

Christopher Findlay

1.1 Introduction

ASEAN economies, as a group, have signed free trade agreements with China, Japan, Korea, India and Australia/New Zealand (see Table 1.1). There is now an interest in forming a larger regional agreement. One reason for this is that the gains from integration are greater across wider areas and with deeper coverage. Another is that there is a concern that the proliferation of trade agreements adds to the costs of decision making in international business. The immediate goal is, therefore, to achieve wider and deeper integration with lower costs to business; the ultimate goal is to operate economies more efficiently, to achieve higher growth and to reach higher standards of living.
A new wider economic agreement could be constructed within a new set of negotiations or using a top-down approach, but the track that is preferred by ASEAN is to build up from the ‘+1’ agreements into a new structure. There are certain advantages to this approach, given the degree of common membership of the agreements under consideration. There is also a significant risk that any attempt to adopt a top-down approach of constructing a new region-wide agreement could add yet another element to the existing ‘noodle bowl’, and possibly one which is less liberal, given the difficulty of reaching an agreement across a larger number of participants. Such an outcome would not contribute to the goals of wider and deeper integration with lower costs to business. However, the bottom-up process is not without these risks either, and a set of principles is important in order to enable appropriate management of those risks.
The Regional Comprehensive Economic Partnership (RCEP) members have indeed adopted a set of principles to guide their work, which are reproduced in Appendix 1.1. The principles were adopted by leaders in November 2012. Some features of those principles include the following (and are reviewed again at the end of this chapter):
  • Reference to an ‘agreement’, but one which is a ‘partnership’ that supports economic integration, ‘equitable development’ and strong economic cooperation among participants;
  • Expectations of a wide coverage, including goods, services, and investment, intellectual property and ‘other issues’;
  • Expectations of significant improvements over the existing +1 agreements, while those agreements will continue to exist;
  • The adoption of appropriate forms of flexibility, given the different levels of development of the participants;
  • The use of an open accession clause;
  • The provision of capacity building that allows all to participate in the negotiations and implement the obligations (in a later section, comments on ‘economic and technical cooperation’ suggest that this activity is not restricted to activities linked to the economic integration focus of the agreement itself, but could be directed at ‘narrowing development gaps’ or to development cooperation);
  • Negotiations to be conducted in parallel to ensure a ‘balanced outcome’.
Great attention in the work in this volume is paid to the design and operation of supply chains in the East Asian region. An example of this perspective is the production of the iPhone, which is discussed by Xing and Detert (2010). When deriving relevant methods for the consolidation of agreements, these features of the way that business actually works could then be taken into account, with the expectation of producing richer insights for the goals of designing a low-risk path to wider and deeper integration and to lowering the costs of doing business. Not every element in each of the agreements necessarily has a strong connection to the supply chain perspective, but the proposal here is that attention to its implications should be retained.2
Discussions of options for the development of the RCEP are taking place in the context of the development of other multi-member agreements, including the Trans-Pacific Partnership (TPP). Further development of integration among the ASEAN economies is also in progress, and ASEAN is central to the implementation of RCEP. There is clearly an interaction between these arrangements and some discussion of how they might be joined to form a region-wide arrangement. These issues are discussed in the collection of papers edited by Tang and Petri (2014), with more detail on ASEAN in Intal et al. (2014). Other studies document the negative impact on non-members of preferential commitments made in RCEP (Kawasaki, 2014), which would lead to a reaction by those economies and further feedback on the development of RCEP itself. While these are important questions, our focus in this volume is the RCEP itself and the application of the principles of its design in the context of the features of its current membership. Kawasaki (2014) also highlights the importance of gains from the reform of non-tariff measures compared to tariffs, gains from arrangements with larger membership and gains to each economy owing to changes in their own policies rather than those of their trading partners.
Table 1.1 ASEAN free trade agreements and dates of entry into force
Date of entry into force
ASEAN-Australia-New Zealand
January 2010
ASEAN-China
July 2005 (G), July 2007 (S), August 2009 (I)
ASEAN-Japan
December 2008
ASEAN-Korea
June 2007 (G), May 2009 (S), September 2009 (I)
India-ASEAN
January 2010 (G)
Source: Various Ministry websites.
Note: G=goods, S=services, I=investment.
In the work reported in this volume, the authors also accept that the foundation of the RCEP itself is a series of existing agreements, and the focus of their work is upon how those agreements might evolve or be built up to produce a more liberal set of commitments which are consistent across the larger membership. Another pathway to such an outcome is the multilateralisation of existing commitments, as Menon (2013, 2014) has pointed out; instances of its relevance are also discussed in this collection.
This chapter begins with a discussion of the supply chain perspective.

1.2 Supply chain perspective

A key feature of the region is the presence of supply chains. East Asia has achieved economic growth through the formation of such chains by multinational firms; consequently, the desirable region-wide economic integration should be a system that provides opportunities and captures benefits from these regional global production and sales networks.3
The supply chain perspective adds value to existing research by raising new questions. It is supported by research on component trade and final goods trade and research on business strategy. It applies to goods and services: goods activities include assembly and processing activities; services have their own supply chains, while they also facilitate other chains.
He and Findlay (2014) review the empirical studies of the growth of supply chains and identify key results in the literature, particularly in the work of Nordas (2008), Baldwin (2012) and Athukorala (2014), including the following:
a)From Nordas (2008)
  • The share of intermediate products4 in total world trade by 2006 was approximately 48 per cent compared to 46 per cent in 1996.
  • This share in both exports and imports was much higher in Asia, at around 60 per cent.
  • The share of intermediate products in intra-Asia trade was higher than in Asia’s trade with the rest of the world.
  • The growth in trade in intermediate products was particularly notable in intra-Asia trade, in the category which includes electronic machinery.
  • The growth in trade in intermediates appears to be concentrated in the 1990s, and its share in world trade shows less change in the 2000s. She suggests that the extent of vertical specialisation for goods may even have levelled off, although for services she suggests that the extent of offshoring could be continuing to increase.
b)From Baldwin (2012)
  • The chains are actually regional, not global, with concentrations of these chains in Asia, North America and Europe.
  • They are organised around hubs (China and Japan in Asia, the US in North America and Germany in Europe).
  • The organisation of particular chains may actually be led from other locations or headquarter economies (Korea and Chinese Taipei are examples in Asia).
c)From Athukorala (2014) (who defines ‘network trade’ as trade in production networks and includes both parts and components, which are carefully defined not to include normal intermediate products like steel or wood, and the related final assembly; this is a different concept from that used by Nordas)
  • Network trade was just over 50 per cent of world trade in 2007–08, approximately double their share in 1992–93.
  • Network trade is more important in East Asia compared to the world and more so in ASEAN than in East Asia.
  • Generally more than half of the network trade in East Asia is component trade, and these shares apply to both exports and imports.
  • Network trade in the world is concentrated in machinery and transport – in East Asia it is especially concentrated in electronics and electrical machinery, and within ASEAN especially in electronics.
  • The shares of automotive and transport products in network trade are relatively low in East Asia, which is attributed to the consequences of policy to protect local industry and the costs of transporting those items.
Athukorala emphasises that East Asia’s reliance on world markets for finished products remains high and observes that the apparent growth in the concentration of regional trade is a consequence of the growth of component trade. This observation has implications for the design of a structure such as the RCEP, since its participants retain a strong interest in a strong global trading system that would support their access to world markets.
According to Athukorala (2014), China’s participation in the world economy has led to the rapid growth of component trade from the rest of East Asia into China, for the purpose of final assembly. The interaction of China with ASEAN in particular is the topic of Chapter 2 (Yamashita) in this volume, which provides an overview of the different ways of measuring network or supply chain trade and in relation to itself reviews research that uses trade data rather than input-output data. The focus of Chapter 2 is the impact of the rise of China on trade patterns. The chapter provides an overview of the patterns of trade of ASEAN members, which are reviewed in more detail in some of the case study chapters to come. It also:
  • Identifies what has been China’s dominant strategy of importing components, particularly those of electrical machinery, and then assembling and exporting final products;
  • Reports that the majority of China’s component imports are sourced in East Asia and exported to the US and the EU;
  • Reviews other studies and finds that the growth of imports of components from ASEAN in particular has had a positive competitive effect on China’s exports of final products;
  • Reviews the ‘China fear’ hypothesis that China’s rise will crowd ASEAN exports in third-world countries’ markets but finds little evidence of that and instead reports research results that China’s export growth appears to be complementary to export growth from lower income countries in ASEAN;
  • Finds that the formation of a free trade agreement (FTA) between ASEAN and China has had a positive effect on trade links but that the magnitude of that effect is small, which the author suggests may be the consequence of the application of rules of origin or the presence of duty-free trade in components (the direction of causality is difficult to confirm, since the growth in trade may also have prompted the signing of the FTA).
The aggregate trade data do not reveal the sequence of steps involved in production. The data can be used to identify whether a component or a final product is being traded; however, a component may already have been traded in an earlier form. Many studies have identified the networks and the sequences of steps in production. The case studies in this project report an effort to identify the different architectures involved. These include Chapters 8 to 11 on the automotive and electronics sectors and Chapter 13 on business services, the last of these being of special interest given Nordas’s aforementioned conjecture.
The development of these chains depends on: the degree to which a production process can be divided; the scope of completing different stages with different factor intensities and the differences in wage costs relative to capital costs in different locations; the transport costs involved (also affected by the value of an item relative to its weight); and the ability to communicate and coordinate between the stages. The participation of any particular economy depends on its stage of development, its ability to meet the delivery expectations of the next stage of production and the features of the production process in relation to the product involved. Baldwin (2012) provides further discussion of the prospects for the growth of supply chain trade.
This volume includes a number of chapters that examine supply chain trade in the automotive and electronics sectors.
Firstly, the automobile sector in ASEAN involves trade in components and finished vehicles. However, different economies take on different roles. The Philippines (Chapter 8, Rosellon and Medalla), for example, is linked to the regional chain through exports of standard and widely used components rather than finished vehicles, as the Philippines tends to import finished vehicles. Thailand (Chapter 9, Kohpaiboon), on the other hand, exports vehicles not only to the Asian region but also to the rest of the world. Thailand imports components but is becoming less reliant on those imports. This is owing to the nature of its domestic production system and the proximity of assemblers and component suppliers in the final stages of vehicle production.
The Philippines (Chapter 8) occupies a similar position in the electronics supply chain, both importing and exporting components. Malaysia (Chapter 10, Parinduri and Thangavelu) also imports and exports components, but its exports include a higher share of final products. While most of its trading partners are within East Asia, the US is also a major destination for Malaysian exports. The authors highlight the challenges facing Malaysia in a move to higher value production in the supply chain.
Indonesian electronics exports mainly go to ASEAN, particularly Singapore, and imports of electronics products mostly come from China. Indonesia’s main role in this supply chain is assembly (including of components themselves) and testing, according to research reported in Chapter 11 (Oktaviani and Puspitawati). A variety of indicators, however, suggest that Indonesia appears less deeply connected to regional supply chains in this sector than might be expected. The use of free trade zones has been one response to that situation. While the zone has dealt with the constraints on trade that may have been associated with tariffs, there remain other issues that constrain the contribution of the zones, including governance, institutional factors and infrastructural factors.
The authors in Chapter 11 also examine the effects on supply chains of the use of non-tariff measures (NTMs). They find that some ASEAN countries continue to apply NTMs to the electronics sector, particularly with policies related to licensing and technical regulation of electronics pr...

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