RTA in Asia: South East Asia and India

1. RTA in Asia: South East Asia and India Jim Rollo CARIS University of Sussex

2. outline • Covers • Dynamics of RTA formation • Some likely effects on participants • and on those left out & specifically the EU • For India and ASEAN

3. Background • Based on two studies carried out by CARIS for the European Commission (DG Trade) • Qualitative Assessment of an EU-India FTA (2007) • The impact of economic integration in South East Asia on Europe • Both available on DG Trade website

4. ASEAN

5. Background • 600 m people • 1,500 billion USD GDP (2.6% of the world) • 8.5% of global trade • 4.6% of total extra-EU exports (2.7% without Singapore) • Diverse: • Singapore, Brunei (50k USD GDP per capita) vs Myanmar, Cambodia, Laos (2k USD) • Indonesia (238m people) vs. Laos (7m) & Brunei (0.4m)

6. Background • 600 m people • 1,500 billion USD GDP (2.6% of the world) • 8.5% of global trade • 4.6% of total extra-EU exports (2.7% without Singapore) • Diverse: • Singapore, Brunei (50k USD GDP per capita) vs Myanmar, Cambodia, Laos (2k USD) • Indonesia (238m people) vs. Laos (7m) & Brunei (0.4m)

7. Dynamics of SEA FTAs –agreements in force in 2005, 2010 and possible future agreements

8. Geography of ASEAN/ASEAN countries’ FTAs in force as of end-2010

9. Objectives & approach • Analyse economic integration processes involving South East Asia (ASEAN+) • Assess the potentialimpact on the EU • Methods / approaches: • Descriptive analysis: current / planned FTAs • Legal analysis of provisions • Impact on an outside party (EU) • Sussex Framework • Partial equilibrium model • General equilibrium model

10. ‘Noodle Bowl’ Fast growing FTA formation, from 11 in 2005, to 31 in 2010 to an expected 70... Mix of plurilateral and bilateral Many still in infancy and have significant variation in coverage... RoO nightmare? May serve to explain mixed messages on preference utilisation... Time will tell?

11. SE Asia FTAs: issues • Limited progress on non-tariff issues • Low take up of tariff preferences • growing • large differences between products & trade directions • Reasons: • low preference margins • complicated RoO • …

12. ASEAN +1 plurilateral FTAs • Country-specific provisions – complicated picture (1=10) • China (2005-) • 90% of tariffs: 0 since 2010 - ASEAN6, 2015 CLMV; sensitive till 2020 • Korea (2007-) • 90% of tariffs: 2012 –ASEAN6; 2016-18 for CLMV; till 2024; limited sensitive commitments • Japan (2008-) • Half of lines 0 immediately – limited & complicated other schedules • Australia & New Zealand (2010-) • ASEAN6 – much liberalisation till 2013; schedules till 2025 • India (2010-) • ASEAN6 (ex Phil) – 2013; 2018 for others; many exclusions

13. ASEAN +1 plurilateral FTAs • Country-specific provisions – complicated picture (1=10) • China (2005-) • 90% of tariffs: 0 since 2010 - ASEAN6, 2015 CLMV; sensitive till 2020 • Korea (2007-) • 90% of tariffs: 2012 –ASEAN6; 2016-18 for CLMV; till 2024; limited sensitive commitments • Japan (2008-) • Half of lines 0 immediately – limited & complicated other schedules • Australia & New Zealand (2010-) • ASEAN6 – much liberalisation till 2013; schedules till 2025 • India (2010-) • ASEAN6 (ex Phil) – 2013; 2018 for others; many exclusions

14. Why dual track (bilateral & plurilateral)? • Plurilateral after bilateral – (was) easier to start with bilateral [e.g. Japan - ASEAN] • Bilateral before plurilateral – ability to keep some relative preferences/discrimination [e.g. Thailand in FTAs with Japan] • Plurilateral after bilateral - bringing some more order to the system [e.g. Japan – ASEAN (?)] • Bilateral after plurilateral – going further on some dimensions [e.g. Singapore-China; services]

15. Impact on the EU - approach • FTAs are about discriminatory preferences • Excluded countries may lose • When? • significant preference margins • significant export flows • significant competition between excluded and FTA partners in a given product market

16. Effects on the EU: summary • Small aggregate effects on EU exports to ASEAN • Potential for more significant effects in some sectors: vehicles & parts (HS 87) consistently indicated by all approaches • ASEAN-Japan potentially most detrimental to the EU • due to tariff structures & export similarities with the EU • Doha completion as a partial remedy

17. Caveats for policy lessons • Only tariff liberalisation analysed • Non-tariff issues important in these FTAs in the future • although limited progress so far • Different studies might be needed to assess the effects of non-tariff aspects of SE Asia integration

18. Impact on the EU - approach • FTAs are about discriminatory preferences • Partners outside may lose • When? • significant preference margins • significant export flows • significant competition between excluded and FTA partners in a given product market

19. Deep Integration Provisions

20. ASEAN: Caveats Implications of ‘Noodle-bowl’ remain uncertain. All models assume full utilisation of preferences. If onerous and non-harmonised RoO regimes then utilisation may be low. Whilst little evidence of deep integration, which faces substantial obstacles, the evolving nature of the process may reduce NTBs. These are not taken into account in analysis. Implications of changing comparative advantages remain unclear. Particularly how fragmentation of production structures can be an opportunity or not for the EU.

21. Impact on the EU: assumptions • Simplifying assumptions needed: • ASEAN is one region with a CET calculated as the product weighted average of all country MFN tariffs (excluding Singapore). • Singapore left out of analysis as tariffs already zero hence no shallow integration effect on the EU • Full utilisation of preferences (but need to bear in mind that RoO and fragmentation in the region may affect ability to utilise preferences offered) • Tariffs: Detailed 6-digit schedules. Final tariff is that which applies at the end of agreement. Hence we incorporate sensitive products.

22. Impact on the EU: assumptions • Simplifying assumptions needed: • ASEAN is one region with a CET calculated as the product weighted average of all country MFN tariffs (excluding Singapore). • Singapore left out of analysis as tariffs already zero hence no shallow integration effect on the EU • Full utilisation of preferences (but need to bear in mind that RoO and fragmentation in the region may affect ability to utilise preferences offered) • Tariffs: Detailed 6-digit schedules. Final tariff is that which applies at the end of agreement. Hence we incorporate sensitive products.

23. Impact on the EU: assumptions • Simplifying assumptions needed: • ASEAN is one region with a CET calculated as the product weighted average of all country MFN tariffs (excluding Singapore). • Singapore left out of analysis as tariffs already zero hence no shallow integration effect on the EU • Full utilisation of preferences (but need to bear in mind that RoO and fragmentation in the region may affect ability to utilise preferences offered) • Tariffs: Detailed 6-digit schedules. Final tariff is that which applies at the end of agreement. Hence we incorporate sensitive products.

24. Impact on the EU: assumptions • Simplifying assumptions needed: • ASEAN is one region with a CET calculated as the product weighted average of all country MFN tariffs (excluding Singapore). • Singapore left out of analysis as tariffs already zero hence no shallow integration effect on the EU • Full utilisation of preferences (but need to bear in mind that RoO and fragmentation in the region may affect ability to utilise preferences offered) • Tariffs: Detailed 6-digit schedules. Final tariff is that which applies at the end of agreement. Hence we incorporate sensitive products.

25. Impact on the EU: assumptions • Simplifying assumptions needed: • ASEAN is one region with a CET calculated as the product weighted average of all country MFN tariffs (excluding Singapore). • Singapore left out of analysis as tariffs already zero hence no shallow integration effect on the EU • Full utilisation of preferences (but need to bear in mind that RoO and fragmentation in the region may affect ability to utilise preferences offered) • Tariffs: Detailed 6-digit schedules. Final tariff is that which applies at the end of agreement. Hence we incorporate sensitive products.

26. Sussex Framework • Detailed analysis of disaggregated (HS 6-digit) trade and tariff data... • Use of Descriptive stats and diagnostic indicators to identify the potential for negative effects for EU exports. • For Third country effects (and at product level) : • High tariffs (hence potential for strong preference margins) • Size of EU exports in these tariff lines • Competitors and size of competitive pressures on EU

27. SF: Exports by tariff height 15.9% of EU exports to ASEAN face Tariff above 10%. Low Preference Margin High Pref. margin 27

28. Sussex Framework (cont.): competitive pressures Japan, China and Korea most similar export structures to the regionbased on Finger Kreinen

29. Sussex Framework: Sensitive products Products of potential concern (sensitive): motor vehicle parts, motor vehicles, electric generating sets, other articles of iron and steel... Competition most likely to come from Japan and China. However... Competitive pressures likely to arise progressively due to tariff liberalisation schedules; hence time for adaptation. If utilisation levels are low, impact on EU attenuated

30. Partial Equilibrium TAPES model, 2007 base, applied to ‘sensitive’ sectors identified using SF: 70 HS6-digit products (30% of ASEAN’s imports from the EU) Scenarios: DOHA DCK: Doha + ASEAN-China + ASEAN-Korea ASEAN-Japan ASEAN-NZAUS ASEAN-India Three above + DCK ALL ALL+DCK SPECIAL (non-discriminatory reduction in ASEAN Tariffs)

31. Partial Equilibrium: Results • Doha implemented: positive effects on the EU (exports 1.1% up on average for all 70 products) • China and Korea FTAs – reverse most of Doha gains • Japan FTA: the strongest negative effects (-2.7%); half of the decline in HS chapter 87 • 870899 (parts and accessories of the motor vehicles): -USD 116 million; 870323 (vehicles of certain type) –USD 70 million (same products as shown in earlier slides) • Small effects for Aus/NZ FTA; even less for India

32. CGE Model • GLOBE model (McDonald, Robinson and Thierfelder, 2007) using GTAP 7.1 database (base 2004). 16 regions, 22-sector aggregation. • Standard assumptions : • Imperfect substitution between domestic and traded goods and across origins • Imperfect transformation between domestic product, the exported and across destinations • Activity output is a CES composite between intermediates and value added. Leontieff for the intermediates and CES composite for the value added • Macro: • Current account balances are assumed fixed at initial levels. Real exchange rates adjust to maintain external equilibrium • Absorption shared across Households, Government and Investment demands • Households and Government saving rates adjust to keep S-I balance • Factor market closure • Elasticities: GTAP behavioural data base (Dimaran, McDougall and Hertel, 2006)

33. CGE: Scenarios ASEAN+1 FTAs with China, India, Korea, Japan and Australia/New Zealand in isolation as well as combined “All FTAs” (Tariffs are aggregated from 6-digit schedules at ‘end of agreement’). Prospective ASEAN+6 scenario where reciprocal concessions are granted across all parties These 7 scenarios are simulated for two alternative baselines i.e. ‘no-Doha’ and ‘post-Doha’. The latter is calculated using tiered and Swiss formulae.

34. CGE: Aggregate Welfare effects by Region Impact on EU negligible. ASEAN stands to gain from selective FTAs as Japan agreement carries ToT effects due to real exchange rate effects to keep external balance.

35. ASEAN Conclusions: Methodological Approaches What do we learn from the different approaches? Sussex Framework captures potential impacts whilst PE estimates the magnitudes at a high level of disaggregation. CGE confirms the results obtained but sheds light on possible important interlinkages that the other two methods miss (textiles) So is there a big impact? Net effects are very small, but gross effects could be important! Doha mitigates negative effects

36. ASEAN Conclusions: Caveats Implications of ‘Noodle-bowl’ remain uncertain. All models assume full utilisation of preferences. If onerous and non-harmonised RoO regimes then utilisation may be low. Whilst little evidence of deep integration, which faces substantial obstacles, the evolving nature of the process may reduce NTBs. These are not taken into account in analysis. Implications of changing comparative advantages remain unclear. Particularly how fragmentation of production structures can be an opportunity or not for the EU.

37. India

38. India not huge in trade

39. But more present in Services markets

40. Indian trade policy • Reluctant multilateralists • Keen Unilateralists • Promiscuous bilateralists • But often “trade-lite” (Sally 2010) and foreign policy heavy

43. Summary: benefits of an EU-India FTA • Appears easy to negotiate (but started in 2007 & still not done) • Little overlap of trade structures or revealed comparative advantage on goods • Low trade shares • Both sides have offensive interests in services liberalisation • Agriculture not a show stopper • EU to India FDI could increase by 30% as a result of an FTA • Gains for both sides from deep integration • Productivity/technological gains from FDI • High potential for integrating supply chains • FDI suggests potential from regulatory approximation • Services key to both economies • Trade facilitation and government procurement reforms offer gains to EU • Potential for regulatory convergence

44. Costs of an EU – India FTA • Potential for trade diversion significant in goods and services • goods • Indian mfn tariffs high and very substantial tariff peaks so high preference to EU suppliers • EU MFN tariffs low against India but a number of tariff peaks • May damage Pakistan in particular on EU market • Services • preferential national treatment for EU suppliers or eg higher investment caps could exclude efficient third country suppliers • Structural/policy impediments to deep integration • Differences between central and state government policies (eg FDI) • Lack of transparency (SPS,TBT, Government procurement, trade facilitation) • Significant NTBs • divergence of standards from global norms imply embedded protectionism • Trade defence a potential destroyer of benefits from FTA