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The Asian Noodle Bowl of FTAs: Is It Serious for Business?

The Asian Noodle Bowl of FTAs: Is It Serious for Business?. Evidence from Japan, Singapore, Korea, PRC, Thailand and Philippines. Ganeshan Wignaraja Principal Economist, ADB gwignaraja@adb.org Bangkok November 2009. Messages.

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The Asian Noodle Bowl of FTAs: Is It Serious for Business?

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  1. The Asian Noodle Bowl of FTAs:Is It Serious for Business? Evidence from Japan, Singapore, Korea, PRC, Thailand and Philippines Ganeshan Wignaraja Principal Economist, ADB gwignaraja@adb.org Bangkok November 2009

  2. Messages With the spread of FTAs, many East Asian firms are responding to new opportunities. Firm-level evidence grants little support to view that the Asian Noodle Bowl has harmed business over the last 8 years. As more FTAs take effect and complexity of the “Noodle Bowl” increases, a more intense, negative impact on business is expected. Implementing key policies can help to mitigate negative effects and facilitate a more SME-inclusive response to FTAs.

  3. Contents • Setting and Research • Firm Survey Findings – Japan, Singapore, Korea, PRC, Thailand and the Philippines • Policy Implications and Conclusions

  4. I. Setting and Research

  5. Rapid Growth of FTAs in Asia* Note: * Includes concluded FTAs, FTAs under official negotiation, and proposed FTAs in Asia and the Pacific. Source: ADB Asia Regional Integration Center (ARIC) FTA Database www.aric.adb.org; data as of 1 September 2009

  6. FTAs by Country and Status Note: * At current prices, World Development Indicators online (accessed June 2009). ** 2007 applied rates, World Tariff Profiles. Average MFN for ASEAN-10 is 7.4%; and ASEAN-6 is 5.3%. *** As of November 2009, ADB FTA database (www.aric.adb.org). Future FTAs refers to FTAs that are signed (but not yet under implementation), under negotiation and proposed.

  7. Varying Rules of Origin in FTAs Note: CTC= Change in Tariff Classifications, VC= Value Content, LDCS= Least Developed Contracting States Sources: Official texts of FTAs (status as of January 2009).

  8. Spread of FTAs triggered concerns about crisscrossing FTAs – (Bhagwati’s “spaghetti bowl of trade deals”, 1995, 2008). Discriminatory trade liberalization with multiple FTAs means different tariffs and ROOs for same commodity. With FTA growth, international trading system chaotic and raises transaction costs for SMEs. ADB President Kuroda (2006) referred to same phenomenon as the “Asian Noodle Bowl” effect of FTAs – one that could present challenges for broader regional and global integration. Origins of the Asian Noodle Bowl

  9. Analytical Work on Asian Noodle Bowl Four lines of inquiry: • Asian Noodle Bowl as a chaotic mass of preferential trading arrangements (eg. Dent, 2006; Petri, 2008). • Comparison of ROOs across FTAs according to “best practices”, building a map of ROOs graded by levels of restrictiveness (eg. Estevadeordal & Suominen, 2006; Plummer, 2007). • Gravity and CGE model-based studies analyzing economic effects of various FTA scenarios and region-wide FTAs as means to increase economic welfare (eg. Gilbert et al., 2004; Lee & Park, 2005; Francois & Wignaraja, 2008; Hufbauer & Schott, 2009). • Noodle Bowl solutions including deepening transparency mechanism for FTAs, WTO advisory services (eg. Baldwin & Low, 2009). Little empirical evidence on impact of Noodle Bowl on firms to shed light on debate…

  10. About This Research • Aims: • Inform debates on East Asian FTAs with new firm-level evidence on the business impact of FTAs • Focus on market access issues of FTAs to assess the severity of the Noodle Bowl effect on goods • Offer suggestions for tackling Noodle Bowl effect • 6 enterprise surveys in 2007/2008 - Japan, Singapore, Korea, PRC, Thailand, Philippines • Mix of development levels and FTA experiences • Large, diverse dataset (841 manufacturing firms) • ADB and different partners involved in surveys

  11. Sample Profile % distribution of firms Note: Data is provisional for PRC; therefore, cross-country distribution for all firms may not add up to 100. * Other sectors include chemicals/pharmaceuticals, food, and metals/machinery/sundries. ** Based on the number of permanent employees: SME (100 or less), large (101 to 1,000), and giant (over 1,000). *** Foreign firms are defined as firms with at least 10% foreign equity share.

  12. Asian Noodle Bowl:Key Questions • Are FTA preferences being used? • What are the perceived benefits and costs of FTAs? • Are multiple rules of origin a burden on SMEs? • Is there enough support for domestic firms to export under FTAs?

  13. II. Firm Survey Findings Japan, Singapore, Korea, PRC, Thailand and Philippines

  14. Q1. Utilization of FTA Preferences % of responding firms Note: Data for PRC is provisional.

  15. Profile of Users and Non-Users of FTAs* • Firm size: Users in all five countries are significantly larger than the non-users • Foreign ownership:Users in Japan & Thailand have significantly higher share of foreign equity than non-users • Age of firm: Users in Thailand & Philippines are significantly older than non-users • Awareness of FTA provisions:Users in Japan, Singapore, PRC, and Thailand are significantly more knowledgeable of FTA provisions that affect their business than non-users • Responsiveness to FTAs: Users in all five countries are significantly more likely to have changed business plans in response to FTAs Note: * Findings based on t-tests between samples of users and non-users of FTA preferences excluding Korea. Only findings with significant differences between the two groups are shown.

  16. Impediments to Using FTA Preferences % of responding firms Note: . . . Indicates topic was not covered in the survey questionnaire for that country.

  17. Q2. ASEAN-PRC, AFTA, Major Bilaterals Useful* Ranking by no. of firms that use and/or plan to use FTAs Note: * Rankings exclude Korea and are not weighted. ** Includes firms that reported Thailand-PRC Early Harvest.

  18. FTA Impacts More Positive than Negative* No. of firms that reported on the FTAs that they use and/or plan use Note: * Excludes Korea

  19. Q3. Multiple ROOs Add to Business Costs % of responding firms that reported multiple ROOs add to business costs Note: Data for PRC is provisional.

  20. Burden Imposed by Multiple ROOs by Firm Size: A Puzzle?* % of responding firms that reported multiple ROOs add to business costs, by firm size % of responding firms in each size category Note: * Excludes Korea and PRC. SME = 100 or fewer employees, Large = 101 to 1,000 employees, Giant = more than 1,000 employees.

  21. Puzzle of ROO Perceptions: Some Insights /a Probit Estimates Dependent binary variable: 1 = firm reports that dealing with multiple ROOs significantly adds to business costs; 0 otherwise

  22. Benefits of Harmonized ROOs % of responding firms that see benefits from ROO harmonization % of firms that chose a particular rule * Note: * Excludes Korea. VA= Value Added; CTC= Change of Tariff Classification; Option= VA or CTC Source: Kawai and Wignaraja (2009)

  23. Q4. Sources of Support % of responses Note:* Around 10% of Singapore firms reported that they do not use available FTA-related services. For all other countries, 100% of firms responded to this issue. … indicates not covered by questionnaire.

  24. Consultations on FTAs % responding firms that participated in consultations

  25. Use of Support Services and Quality Level Note: * Rated by firms on a scale of 1 to 5, where 5 is the highest quality.** Refers to consulting services offered by business associations.

  26. Big Demand for Support in PRC, Thailand, Philippines

  27. III. Policy Implications and Conclusion

  28. Policy Implications • Reduce MFN tariffs • Upgrade ROO administration – e.g trusted trader program, private sector issuing COO, more IT-based systems • Encourage ROO rationalization – e.g. co-equality of rules and extended cumulation • Increase awareness on how to use FTAs • Improve business participation in FTA consultations • Improve institutional support systems, especially for SMEs

  29. Conclusion • Key findings from surveys: • Use of East Asian FTAs is higher than expected by previous studies • Firms report more benefits than costs from major FTAs in effect, including AFTA • Multiple ROOs impose a limited burden on firms in East Asia • Significant demand exists for more institutional support for SMEs to export under FTAs • Further research: • Firm surveys are valuable empirical research tools. • Next steps - widening sample countries and extending the scope to services

  30. Resources Overview paper and country studies are available on the ADBI website at: http://www.adbi.org/preview/research.free.trade.agreements.asia/

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