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Free Trade Agreements in East Asia: A Way toward Trade Liberalization?

Free Trade Agreements in East Asia: A Way toward Trade Liberalization?

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This brief discusses East Asia's emergence as a global factory and the spread of FTAs, examines varieties of national FTA strategies, analyzes information on FTA use, impediments, and rules of origin, and explores a possible way forward.
This brief discusses East Asia's emergence as a global factory and the spread of FTAs, examines varieties of national FTA strategies, analyzes information on FTA use, impediments, and rules of origin, and explores a possible way forward.

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Published by: Asian Development Bank on Jul 10, 2013
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ree Trade Agreementsin East Asia: A ay towardTrade iberalization?
Masahiro awai Ganeshan ignaraja
ean and CE rincipal Economist$VLDQ'HYHORSPHQW%DQN,QVWLWXWH2I¿FHRI5HJLRQDO(FRQRPLF,QWHJUDWLRQAsian evelopment Bank 
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he inability to conclude the World Trade Organization (WTO) DohaDevelopment Round has spawned a proliferation of bilateral andplurilateral free trade agreements (FTAs) across the globe. While East Asiais a relative newcomer to FTAs, the region has seen a dramatic increase inthe number of such agreements in recent years. The explosion of FTAs in East Asia,led by the large economies of Northeast Asia—the People’s Republic of China (PRC), Japan, and the Republic of Korea (ROK)—is tied to the need to support sophisticatedproduction networks through continued trade and investment liberalization, while alsoserving as a defensive response to the spread of FTAs elsewhere in the world. A lively debate over the impact of FTAs on business in the region has resulted fromtheir proliferation (see Baldwin 2006, Chia 2010). Data from East Asian exporters onFTA utilization were lacking prior to an Asian Development Bank (ADB) firm-levelmulti-country survey conducted in 2007/08. The survey results suggest that FTAs areindeed bolstering trade among firms, despite some concerns expressed over restrictiverules of origin (ROOs), particularly as economic recovery takes hold in the wake of declining trade volumes and nascent protectionism triggered by the recent globaleconomic crisis. Governments can facilitate the increased use of FTAs by actively disseminating information to firms on existing FTAs and adopting best practices indesigning future FTAs, including ROOs.East Asian economies are using FTAs to aggressively pursue their individual andcollective trade strategies, leading to the expansion of advanced production networksacross the region with hubs in Japan and the PRC. Rather than complicating effortstoward a Doha Round agreement, a region-wide FTA can contribute to laying thefoundation for such an agreement.This brief is set out as follows. It begins by discussing East Asia’s emergence as a globalfactory and the spread of FTAs. It then examines varieties of national FTA strategiesin Northeast and Southeast Asia. The brief goes on to analyze information on FTA use,impediments, and ROOs based on the ADB multi-country survey. Finally, it exploresa possible way forward, highlighting short-term measures as well as a region-wide FTA for the medium term.
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2
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Global actory and the pread of TAs
East Asia’s ascent from a poor underdeveloped agriculturalbackwater to a global factory over a 50-year period iswidely regarded as an economic miracle (Stiglitz 1996,Lall 2001). By 1990, the region had already accountedfor 23% of world exports (largely manufactures) and thisfigure increased to 26% by 2008. Japan’s industrial rise hada catalytic effect on neighboring economies and the firstgeneration of newly industrialized economies (Hong Kong,China; the ROK; Singapore; and Taipei,China) emerged. A second generation soon followed including Malaysia,the PRC, Thailand, and Viet Nam. A combination of factor endowments, favorable initial conditions, nationalpolicies, and firm-level strategies contributed to East Asia’s emergence as a global factory.
FTAs were not initially part of East Asia’s dynamic growthstory and were largely absent from the region prior to the2000s. Instead, outward-oriented development strategies,high domestic savings rates, the creation of stronginfrastructure, and investment in human capital were key domestic policy ingredients. A booming world economy hungry for labor-intensive imports from East Asia, fallingtariffs in developed country markets, inflows of trade-related foreign direct investment (FDI), generous foreignaid flows, and supplies of inexpensive and productivelabor all favored outward-oriented growth in East Asianeconomies. These economies were geographically closeto an expanding high-income Japan, while efficientmultinational corporations (MNCs) were also seekingto relocate production to less costly economies inEast Asia.Toward the end of the 20th century, this simple story of outward orientation and export success was altered by a change in the nature of East Asia’s international tradepolicy toward FTAs. Alongside multilateralism, Asianeconomies began emphasizing FTAs as a trade policy instrument in the late 1990s and the region is today at theforefront of world FTA activity (Baldwin 2006, Kawai and Wignaraja 2009). In 2000, only three FTAs were in effectin East Asia, including the Association of Southeast AsianNations (ASEAN) Free Trade Area (AFTA), while another10 were in various stages of preparation. However, in justa decade, the number of FTAs in the region increased
Explaining East Asia’s FTA Proliferation
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3
ree Trade Agreements in East Asia: A ay toward Trade iberalization?
more than tenfold. By May 2010, East Asia had emergedat the forefront of global FTA activity, with 45 FTAs ineffect and another 84 in various stages of preparation.Underlining East Asia’s commitment to open regionalism,most of these agreements are with partners outsideEast Asia.
The region’s largest economies are increasingly the leadingplayers in the spread of FTAs. Japan has implemented11 FTAs; the PRC, 10; and the ROK, 6. And perhaps evenmore significant, these three economies collectively havesome 32 agreements in the pipeline. With the exception of Singapore, the smaller economies of Southeast Asia haveonly recently been aggressive in forging FTAs, mainly by taking collective action through ASEAN. In addition topreviously negotiated FTAs with the PRC, the ROK, and Japan, two ASEAN FTAs (a comprehensive agreementwith Australia and New Zealand, and a goods agreementwith India) took effect in January 2010 for most ASEANmembers and their trading partners.
arieties of ational TA trategies
FTA activity in Asia over the last decade has given rise toclassic hub-and-spoke trade arrangements (Hufbauer andSchott 2009). The development of FTA hubs and spokescan be attributed to a country’s economic size, per capitaincome, level of protection, and economic geography, as wellas the production network strategies of MNCs. As Table 1shows, East Asia’s largest and most open economies initiatedthe proliferation of FTAs and have become key hubs, whilesmaller neighbors have in some cases emerged as spokes. Asia’s cost-effective advanced production networks,initially spearheaded by Japan and now increasingly usedby the PRC, have led to spectacular global export successover the past several decades and they continue to deepenacross the region (Baldwin 2006). Falling regional tradebarriers and logistics costs, along with technologicalprogress, underlie this trend. Intraregional trade in Asia has increased significantly, particularly in partsand components, and it will continue to expand furtherthrough regional liberalization brought about by FTAs.Rising factor costs in core production locations have beena prime driver. Falling regional trade barriers and logisticscosts, as well as technological progress, spurred thedecentralization of production networks to the most cost-effective locations. Accordingly, East Asia’s intraregionaltrade increased significantly from 37% of total trade to52% between 1980 and 2008, led by trade in parts andcomponents (ADB 2008).
 Northeast Asia
 Japan has rapidly implemented bilateral economicpartnership agreements (EPAs) with 10 countries,
1
 in addition to an agreement with ASEAN, and it is
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Table 1. FTA Activity in East Asia—2010
CountryGDP
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Simple AverageMFN Tariffs
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FTAs in Effect
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FTAs underNegotiation/ Proposed
QXPEHU
Northeast Asia
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Southeast Asia
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World Development Indicators
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