Global Business Environment Project Report
On
Bilateral Trade Agreements In
Asia
Submitted To: Prof. Ms. Savita Gautam
Dr. Mohit Anand
Submitted By: GROUP 5
Abhisht Narain Sinha (08305)
Madhav Goel (08326)
Praneet Samir Mehta (08335)
Samiksha Arora (08340)
Sunil Joshi (08348)
Swati Singh (08350)
Vikas Pasricha (08355)
Rahul Kumar (08361)
CONTENTS
Topics Covered
1. Bilateral Trade Agreements – An Introduction
2. How does WTO support BTA/RTAs
3. Development of BTA in the framework of WTO
4. Bilateral Trade Agreements in Services, Intellectual Property Rights,
Non-Tariff Measures etc.
5. Opportunities of BTAs
6. The India–Sri Lanka Free Trade Agreement
7. Korea-USA Free Trade Agreement
8. Challenges posed by BTA
9. Future Avenues
10.References
Bilateral Trade Agreements – An Introduction
What are Bilateral Trade Agreements or BTAs
Bilateral Trade Agreements are between two countries at a time, providing them favored trading status with one another. The objective is to provide for them increased access to one another's markets, and expand each nation's economic growth and development. Most bilateral trade agreements, either explicitly or implicitly, provide for (1) reciprocity, (2) most-favored-nation treatment, and (3) “national treatment” of nontariff restrictions on trade. Generally BTAs are between two countries but a BTA can vary in nature of the members involved and by nature of the agreement. A BTA can also be signed between a country and a PTA (Preferential trade agreement), a BTA and a PTA, or between two BTAs or PTAs. Furthermore, one or even both members to the BTA need not be a country or a BTA or PTA. The most common type of bilateral agreement is a free trade agreement (FTA), although it can also take the form of a Customs Union (CU) or a services agreement.
Reasons for the Popularity of BTAs
BTAs are immensely popular over their counterparts such as MTAs (Multilateral Trade Agreements). This is because they are less demanding to negotiate than multilateral trade agreements, since they just include two nations. This implies they can become effective speedier, harvesting exchange profits all the more rapidly. Bilateral trade agreements can also help minimize trade deficits.
Historical Background
The history of the world trading system and international trade agreements is characterized by shifts between bilateralism, regionalism and multilateralism. The critical turning point came in the wake of unprecedented economic hardships for the small and medium-sized economies in the region during the last years of the 1990s. Many of them came to recognize that tighter institutionalization—rather than loosely-structured regional production networks—might be a better commitment mechanism for providing economic security, and, therefore, began to actively weave a web of bilateral trade arrangements. Bilateralism has recently returned, having gained momentum following the failed WTO negotiations at the 1999 Seattle Ministerial Conference following fears that the multilateral trading system would not continue to function smoothly.
Examples of BTAs
Singapore has signed FTAs with New Zealand, Japan, Australia, US, European Free Trade Association and Jordan.
Differences between various types of Trade Agreements
Preferential Trade Agreements: A Preferential Trade Agreement (PTA) is a trading agreement between two or more countries that gives special and preferential access to certain products from among the participating countries.
Regional Trade Agreements: Regional Trade Agreements (RTA) can be said to be a groupings of countries which are formed with the objective of reducing difficulties of trade between them. These groups of countries may or may not contain nations which belong to the same geographical area.
Multilateral Trade Agreements: Multilateral Trade Agreements are between more than two countries at a time, providing them favored trading status with one another.
Plurilateral Trade Agreements: Pluriltaeral Trade Agreements is a special type of Multilateral Trade Agreement. A PTA is between more than two but limited number of nations with a particular interest in the subject of the agreement.
Free Trade Agreements: A Free Trade Agreement (FTA) is an agreement between two or more countries to liberalize trade and bring about closer economic integration. Free trade agreements eliminate tariffs, import quotas, and preferences on most (if not all) goods and services traded between the member countries.
How does WTO support BTA/RTAs
The WTO agreements are cover a wide range of activities viz. agriculture, textiles and clothing, banking, telecommunications, government purchases, industrial standards and product safety, food sanitation regulations, intellectual property, etc. There are certain principles which are the foundation of the bilateral trading system, they are as following:
1. Most-favored-nation (MFN):
Most favored nation status with another country means that it will grant the same trade advantages to the country that it has extended to any other country. One of the key principles of the WTO is that all member countries must extend MFN status to each other. The idea being that this prevents any preferential treatment or discrimination between member countries. Despite incorporating a general principle of MFN between member countries, the WTO does allow certain exceptions. Together with preferential treatment for developing countries, the establishment of bilateral and regional trade agreements is one such exception.
It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS) (Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4), although in each agreement the principle is handled slightly differently. Together, those three agreements cover all three main areas of trade handled by the WTO.
Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group — discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. And in services, countries are allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions under strict conditions.
2. National treatment:
Imported and locally-produced goods are to be treated equally after the foreign goods have entered the market. The same applies to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. This principle is also found in all the three main WTO agreements (Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS
National treatment only applies once a product, service or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax.
3. Free trade:
Reducing trade barriers is one of the means of encouraging trade. The barriers concerned include customs duties or tariffs and measures such as import bans or quotas that restrict quantities selectively.
GATT’s rounds of trade negotiations have focused on lowering tariffs (customs duties) on imported goods. As a result of the negotiations tariff rates on industrial goods have fallen steadily.
Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow countries to introduce changes gradually, through “progressive liberalization”. Developing countries are usually given longer to fulfill their obligations.
4. Predictability:
Promising not to raise a trade barrier is equally important as lowering one, because the promise gives businesses a clearer view of their future opportunities. With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition — choice and lower prices. Thus the business environment is stable and predictable.
Development of BTA in the framework of WTO
A BTA usually takes the form of a FTA between two countries. Earlier the countries used to enter into Preferential Trade Agreements. Between 1983 and 1999, the interest in forming BTAs was growing at a slow but steady pace. Initially after establishment of WTO in 1995 the growth of BTA’s remained slow. However, 2000 onwards, this growth started to accelerate. Figure 1 provides a chronological summary of BTAs and PTAs involving at least one country from the Asia-Pacific region.
A complete list of the BTAs that involve at least one country from the Asia-Pacific region, together with their status, is provided in Table 2. We can infer from the graph that the number of BTAs have doubled between 1995 and 2000, but has increased more than four-fold between 2000 and 2006. The number of BTAs in the Asia-Pacific region had more than tripled over the past 5 years, from 57 in 2002 to 176 in October 2006. Every country, except Mongolia, is involved in at least 1 BTA. India heads the list with 22 BTAs, although most of these have yet to be implemented. The US comes in second with 20 BTAs, half of which are already under implementation. Singapore and Pakistan are tied in third place with 19 BTAs each.
As of July 2011, there were 245 BTAs involving at least one country from the Asia Pacific region. About half (123) being implemented, 27% (65) being negotiated, and 23% (57) at proposal stage and close to 400 world-wide.
Growth of concluded FTAs in ASIA
Number of FTAs by economy:
Singapore is the most active Asian economy in terms of the number and geographic coverage of FTAs. Due to its strategic location, the region’s most open economy, and world-class infrastructure and logistics, the country is the regional headquarters for many leading MNCs. Singapore is seeking access to new overseas markets, particularly for services and investments. The country is a founding member of the ASEAN Free Trade Area (AFTA) and has implemented bilateral agreements with the largest Asian economies—the PRC, India, Japan, and the Republic of Korea—as well as economies outside the region, including the United States (US) and Australia.
The two giant ASIAN developing economies, China and India, are forming FTAs toensure market access for goods & services and expand regional coverage for outward investment. India is a member of APTA and has a comprehensive agreement with Singapore. It also has agreements with its South Asian neighbors.
Middle-income countries such as Malaysia and Thailand have emerged as regional Production hubs for the auto and electronics industries, respectively. As one of the founding members of ASEAN, Thailand has entered into bilateral agreements with Australia, the PRC, India, Japan, and New Zealand.
From figure 11 we can see that when GATT was signed in 1947 the average tariff rate was high at 13% and there were less number of agreements between the countries. After a series of GATT rounds from 1947 to 1993 the average tariff were reduced from 13% to 9%. WTO came into existence on 1st January 1995. With establishment of WTO there was proliferation of RTAs and the world average tariffs were reduced to 6% in 2001 at the DOHA round.
Bilateral Trade Agreements in Services, Intellectual Property Rights, Non-Tariff Measures etc.
Services:The four kinds (modes) of supply under trade in services are:
Mode 1: Cross border supply (supply from the territory of a Party into the territory of the other Party). For example an architect can send his architectural plan through electronic means; a teacher can send teaching material to students in any other country; a doctor sitting in Germany can advise his patient in India through electronic means. In all these cases, trade in services takes place and this is equivalent to cross-border movement of goods.
Mode 2: Consumption abroad (consumption in the territory of a Party by the service consumer of the other Party). For example a tourist using hotel or restaurant services abroad; a ship or aircraft undergoing repair or maintenance services abroad.
Mode 3: Commercial presence of service supplier. In this case, the service supplier establishes a legal presence in the form of a joint venture/ subsidiary/representative/branch office in the host country and starts supplying services. For example a bank opens its branch in another country.
Mode 4: Presence/movement of natural persons. For example, independent service suppliers or ISS (e.g. doctors, engineers, individual consultants, accountants, etc.) who supply services in another country.
Intellectual Property Rights
Export interests and other objectives drive Bilateral Trade Agreements rather than a common goal to achieve a mutually advantageous, balanced regulation of Intellectual Property.
In the case of developing countries, it is often seen that conditions related to protection of intellectual property rights are nowhere close to the kind of protection offered in developed countries. Therefore countries use intellectual property rights as a bargaining chip to negotiate in the bilateral trade agreements to achieve lower import duties and tariff concessions.
Non-tariff Measures:
Some of the Non Tariff measures that are used by countries are:
Customs Procedures Import Licensing Procedures Trade Documentation Pre Shipment Inspections
Many Sri Lankan exporters have faced difficulties in entering the Indian market due to the maintenance of non-tariff measures (NTMs) such as state taxes, quality requirements, and administrative procedures, which are outside the scope of tariff reduction under the BTA. One example is state taxes charged by Tamil Nadu, where Sri Lankan exporters are taxed at 21% while local products are taxed at 10.5% on sales.
Bilateral Social Security Agreements
Bilateral social security agreements are being negotiated with various countries to protect the interest of expatriate workers as well as companies. These agreements help workers by:
Providing for exemption from social security contribution in case of short-term contracts. Exportability of pension in case of relocation to the home country or any third country. Totalisation of the contribution periods.
Such agreements also prove beneficial for the companies, as exemption from social security contribution, in respect of their employees substantially reduces their costs.
The Ministry of Overseas Indian Affairs has signed Bilateral Social Security Agreements with Belgium, France, Germany, Switzerland, Luxembourg, Netherlands, Hungary, Denmark, The Czech Republic, Republic of Korea and Norway.
Similar agreements have been finalized with Canada and the Federal Republic of Germany and are expected to be signed shortly. Negotiations are in progress with Bulgaria, Austria, Cyprus, Finland, Greece, Italy and Australia. Two rounds of exploratory talks have been held with the USA.
Opportunities of BTAs
The first thing to note when discussing the popularity of BTAs relates to the possibilities, or the maximum number of BTAs that are possible. In reality, it is possible to have many more BTAs simply because only two entities are involved and there are no geographical restrictions on membership. So why do countries sign BTAs? What are the needs for signing a BTA? The answer to these questions is explained below.
There are quite a few reasons to the questions above. These can be explained as follows:
1) Trade Gains : This is the most important economic benefit which a country gets on signing the BTAs. The signing of BTAs between two countries help to reduce the trade barriers. There are various trade barriers such as taxes, duties etc. which are gradually reduced as the countries sign the BTAs. This helps the country to increase the trade and eventually absorb all the gains coming out from it.
2) Increased factor mobility : As the restrictions tend to decrease, it helps to increase the factor mobility. The various factors of production can be easily moved to the other country with whom the BTA has been signed. For e.g. the labor mobility can be benefitted with number of ways such as the length of stay, the skill level and the type of contracts covered etc.
3) Strengthening domestic policy reforms : Another objective countries have in seeking BTAs is the idea that a bilateral trade policy can take care of the domestic policy reform and make it better i.e. by binding the country to the standards of the bilateral policy signed.
4) Guarantees of access: BTAs signed by two countries help them to find new markets in the other respective country with which the policy has been signed. This helps the countries to get a greater market access for their products and resources.
5) Low potential of disagreement : BTAs seem quicker to conclude. Fewer parties mean that the trade agreements can be wrapped-up within a shorter period of time. The chances of disagreement on a particular policy are low as compared to that in multilateral trade agreements because there are only two countries participating in the trade agreement. This is usually very attractive to both politicians and business communities who are looking for quick results.
6) Restoring trade links : Some BTAs have developed in response to a global trading environment. The motivation behind them is to try and restore trading links that existed prior to certain issues which eventually spoil the trade relations between two countries. They generally apply to traditional trade partners where one or both members get affected due to political issues, which weakened the trade links between them as a result. These BTAs are designed to bypass, or at least reduce, the discriminatory treatment imposed upon them as a result of those issues.
7) Customer benefits : No country wants its consumer to suffer. They want their customers to get the best quality of products at the best competitive price available. BTAs as seen earlier gives greater market access to the other country with whom the policy has been signed. This helps in increasing the competitiveness which means more products on the shelves and lower prices of different products which results in increasing innovations and better product quality of different products. This in turn helps the customers to get best products at competitive price.
The India–Sri Lanka Free Trade Agreement
The India–Sri Lanka Free Trade Agreement has been in operation for more than a decade. Economic relations between countries began to pick up in the 1990s with the liberal economic regimes consolidating in both economies and, received a boost in 1998 when the two countries signed a bilateral India–Sri Lanka Free Trade Agreement (ILFTA) which came into operation in March 2000. Sri Lanka’s economic objectives were to increase trade ties with South Asia’s dominant economic power, to induce the transformation of Sri Lanka’s exports from low value added
goods to high value added goods aimed at niche markets and to provide low-income groups with cheap consumer imports from India.
Experience of the Free Trade AgreementTrade in GoodsSri Lanka’s trade with India changed dramatically following the implementation of the FTA. In the period 1995–2000, immediately preceding the agreement, average annual exports from Sri Lanka to India were US$39 million (close to 1% of Sri Lanka’s overall exports) while average imports were US$509 million (close to 10% of Sri Lanka’s overall imports). These observations suggest that the growth of the trade deficit between India and Sri Lanka is
not largely a result of the FTA between the two countries, since most of the major traded items are not subject to the FTA. Figure clearly shows that that there is hardly a deficit between the two countries for actual goods moving under the FTA. Normal trade patterns between the two countries are likely to have resulted in an even wider trade deficit since the FTA has provided some scope for Sri Lankan exports to India.
InvestmentThere have been three waves of Indian investments in Sri Lanka after opening up of the Sri Lankan economy in 1977.
The first wave saw companies such as Ashok Leyland coming in 1982 to manufacture buses for the domestic market. After the 1983 political turbulence there was hardly any Indian investment.
The second wave of investment started in the mid-1990s after India became the largest source of imports to Sri Lanka. Investments were seen in areas such as steel, cement, roofing sheets, and paint manufacturing.
The third wave was seen after the FTA in 2000 and many of the popular companies such as ICIC bank, Bharat Airtel, IOC, Apollo Hospitals, etc., starting to come to Sri Lanka. Indian investment amounted to 14% of total FDI flows to Sri Lanka in 2008. India is now the second biggest investor in the country, surpassed only by Malaysia.
ServicesMany Sri Lankan students and patients travel to India to purchase education and health services each year, approximately 70% of the Colombo Port’s income is from trans-shipment earnings from India, approximately 40% of Sri Lanka Airlines’ revenue is from the Indian market while Indian airliners, Jet and Spicejet (and sometime back Kingfisher) have operations in Sri Lanka. Sri Lankan information technology firms have provided technical solutions to Indian companies.Problematic AreasWhile the aggregate figures resulting from the ILFTA are impressive, the full potential of the FTA has not been reaped by Sri Lanka. The key question, in terms of moving forward and for lessons for the future is: why hasn’t there been a greater positive impact on the Sri Lankan economy as a result of the ILFTA? Several reasons have been identified.
First, intra-industry trade between the two countries did not grow significantly to stimulate overall trade between the two countries. It is found that Sri Lankan manufacturers have not been successful in linking up with Indian supply chains and that vertical integration of Sri Lankan industries with Indian industries is at a very low level. The explanation for this could be found in the level of industrialization in India compared to that of the ASEAN region.
Second, there were a number of impediments for market access in the Indian market. Some of them are highlighted below.
Tariff rate quotas on major exportsTea, ready-made garments, and textiles, which make up 50% of Sri Lanka’s total exports, were placed under quotas in the ILFTA. Sri Lankan ready-made garment exports to India were negligible even after the FTA. Ready-made garments were granted preferential market access of 50% for 8 million pieces per year while textiles were granted a preferential margin of 25% with no quantitative restrictions. Non-tariff barriersMany Sri Lankan exporters have faced difficulties in entering the Indian market due to the maintenance of non-tariff barriers (NTBs) such as state taxes, quality requirements, and administrative procedures, which are outside the scope of tariff reduction under the FTA.
Unilateral imposition of quotasFollowing the surge of vanaspati imports from Sri Lanka to India, the two countries entered into negotiations in 2006 to apply a quota on vanaspati exports due to the disruptions caused to the Indian domestic industry. The two countries initially agreed to a quota of 250,000 metric tons per year.
It must be noted that a country need not be overly concerned about bilateral trade deficits. Given the nature of globalization and international division of labour, it is impossible to maintain trade surpluses with all trading partners, and these are simply a reflection of the industrial specialization that is associated with trading economies. Today, as an economic crisis grips Sri Lanka’s traditional export markets and the global economy is experiencing a slow recovery, Sri Lanka should view India as an opportunity and not a threat, and strive toward more meaningful cooperation in facilitating sustainable development.
Korea-USA Free Trade Agreement
(U.S. Exports to Korea Are Down, Imports from Korea Are Up, Auto and Meat Sectors Hit Particularly Hard)In 2011, USA signed a Free trade agreement (FTA) with Korea in objective of “more exports, more jobs.” Two years after the pact went into effect, the actual outcomes are exactly the opposite, U.S. monthly exports to Korea are down 11%, imports from Korea have increased and the U.S. monthly trade deficit with Korea has ballooned 47%. The total U.S. trade deficit with Korea under the FTA’s second year is projected to be $8.6 billion higher than in the year before the
deal.
U.S. Exports Decline under the FTA despite Growth in Korean DemandIt may be argued that the fall in U.S. exports to Korea is simply part of a global decline in trade flows. It is true that in 2012, overall demand and falling international prices did put a damper on global export growth, but they did not cause global exports to. Instead, global exports in 2012 rose by 2% even as U.S. exports to Korea fell. Post-FTA Downfall in Exports to Korea Affects Most U.S. Export SectorsSince the FTA took effect, U.S. average monthly exports to Korea have fallen in 11 of the 15 sectors that export the most to Korea, relative to the year before the FTA.
Average monthly exports of machinery and computer/electronic products, collectively comprising 28% of U.S. exports to Korea, have fallen 11 and 12% respectively under the FTA.
Average monthly exports of agricultural products have fallen 41%;
a decline of $125 million per month.In contrast, of the four critical export sectors that have seen increases in average monthly exports to Korea under the FTA, none has experienced an increase of greater than 2%.
Surge of Auto Imports Swamps Auto Exports to Korea under the FTAIt was claimed by the US govt. that the deal would bring “more job-creating export opportunities in a more open and fair Korean market for America’s auto companies and auto workers,” while U.S. average monthly automotive exports to Korea under the FTA have been $12 million higher than the pre-FTA monthly average, average monthly automotive imports from Korea have soared by $263 million (19 % increase) under the deal. In January 2014, monthly automotive imports from Korea topped $2 billion for the first time on record. About 125,000 more Korean-produced Hyundai and Kia were imported and sold in the United States in 2013 (after the FTA) than in 2011 (before the FTA), while sales of U.S.-produced Fords, Chryslers and Cadillacs in Korea increased by just 3,400 vehicles. The post-FTA flood of automotive imports has provoked a 19% increase in the average monthly U.S. auto trade deficit with Korea.
U.S. Meat Exports to Korea Go Bad under the FTATariff eliminations on Korea’s existing 40% tariff will further boost beef exports, saving an estimated $1,300 per ton of beef imported to Korea, savings that would total $90 million annually for U.S. beef producers at current sales levels. Ironically, U.S. meat exports to Korea have plummeted even faster than many other exports. Compared with the exports that would have been achieved at the pre-FTA average monthly level, U.S. meat producers have lost a combined $442 million in poultry, pork and beef exports to Korea in the first 22 months of the FTA; a loss of more than $20 million in meat exports every month.
Since the FTA, U.S. average monthly exports of poultry to Korea have fallen 39 % below the pre-FTA monthly average. U.S. poultry exports to Korea have been lower than the pre-FTA monthly level in every single month since the FTA’s implementation. Compared with the exports that would have been achieved at the pre-FTA average monthly level, U.S. poultry producers have lost $96 million in exports to Korea in the first 22 months of the Korea deal.
U.S. average monthly exports of pork to Korea since the FTA have fallen 34 % below the pre-FTA monthly average. Compared with the exports that would have been achieved at the pre-FTA average monthly level, U.S. pork producers have lost $277 million in exports to Korea in the first 22 months of the Korea deal – a loss of $12.6 million in pork exports every month.
U.S. average monthly exports of beef to Korea since the FTA have fallen 6 % below the pre-FTA monthly average. Compared with the exports that would have been achieved at the pre-FTA average monthly level, U.S. beef producers have lost $69 million in exports to Korea in the first 22 months of the Korea deal.
One thing remains clear from the Korea FTA track record, the govt.’s argument that FTAs provide the path to increased exports; a claim used to push the Korea FTA is simply not supported by the evidence. The official U.S. government trade data documenting a decline in U.S. exports, a ballooning trade deficit and related U.S. job loss plainly undercut the administration’s tired and counterfactual FTA sales pitch. As the disappointing results of the Korea FTA become manifest, the utility of that pitch is likely to diminish with its veracity.
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Challenges posed by BTA
Now a day, Countries are more interested in BTAs because of several advantages, but at the same time, Countries should not ignore the losses and costs associated with BTAs. The five major challenges associated with Asian BTAs are (i) underutilization of BTA preferences, (ii) tackling the Asian noodle bowl problem, (iii) promoting comprehensive coverage of agricultural trade, (iv) forming a region wide BTA.
Challenge 1: Under utilization of BTA preferences at Firm level
Improving preference use at the firm level is probably the most important challengeassociated with Asian BTAs. Well-designed BTAs provide numerous benefits, including preferential tariffs, market access, and new business opportunities. One might assume that firms would desire to avail of such benefits once a given BTA is in effect. Previous studies at the country and industry levels, however, suggest that BTA preference utilization rates—based on shares of export value enjoying preferences—are low in Asian countries and that BTAs are underutilized
Challenge 2: Tackling the Asian Noodle Bowl Effect
Rules of origin (ROO) are another potentially challenging aspect of Asian BTAs. These are devices to determine which goods will enjoy preferential tariffs in order to prevent trade deflection among BTA members. It is found that Asian BTAs have complicated ROOs that deter the use of BTA preferences, while complex ROOs raise transactions costs for firms With the rapid spread of BTAs throughout Asia, The outcome is often overlapping BTAs and PTAs which is described as the spaghetti bowl effect or, in the Asian region, the noodle bowl effect. It refers to the increased cost of doing business, and welfare losses associated with trade diversion, due to inconsistencies between various elements of the agreements. These include, for instance, different schedules for phasing out tariffs, different rules of origin, exclusions, conflicting standards, and differences in rules dealing with regulations. These overlapping BTAs pose a severe burden on SMEs, which have less ability to meet such costs.
Challenge 3: Promoting Comprehensive Coverage of Agricultural Trade
A third potential challenge for Asian FTAs may be the extent of coverage of goods trade. Some suggest that the coverage of goods trade differs markedly among Asian BTAs, while agricultural products are largely excluded due to pressures from powerful farm lobbies or social concerns over the rural sector, where poverty is predominant in developing countries. As a result, there is a suboptimal level of liberalization in agricultural products, which provides exemption to the WTO’s most favored nation clause.
Challenge 4: Forming a Region wide FTA
Finally, there is increasing recognition in Asia of the merits in forming a region wide FTA as a means to consolidate the plethora of bilateral and plurilateral agreements. Such an FTA would confer various economic benefits: (i) increase market access to goods, services, skills, and technology; (ii) increase market size to permit specialization and realization of economies of scale; (iii) facilitate the FDI activities
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and technology transfer of MNCs; and (iv) permit simplification of tariff schedules, rules, and standards. ASEAN—with the region’s oldest FTA—is emerging as an integration hub for FTAs in Asia.
Approach that would help in maximizing the benefits of FTAs while minimizing their costs:
(i) Improving the use of FTAs at the firm level through increased awarenessand strengthened institutional support systems, particularly for SMEs.
(ii) Tackling the Asian noodle bowl problem by encouraging rationalization ofROOs and upgrading ROO administration to best practice levels.
(iii) Encouraging better coverage of agricultural products in Asian FTAs and agradual approach to agricultural trade liberalization.
(iv) Facilitating the creation of a region wide agreement in East Asia—particularlya CEPEA—with appropriate sub sequencing and support for dealing with development gaps among members.
Alternative Approaches:
Multilateralization: Once a country has concluded BTAs with most, if not all, of its major trading partners, it may then make sense to: (a) equalize preferences across these BTAs; and (b) offer them to non-BTA countries on an MFN basis. This would remove the administrative burden, and eliminate distortions to country and global trade patterns. As often is the case with reversing much of second-best policies, however, it is the actual realized cost of implementation rather than any potential unrealized benefits that usually drives the process. And there are significant unrealized benefits that will accrue to the country concerned as well as the world trade system if this process of multilateralizing preferences is pursued, irrespective of the reason for doing so.
Although multilateralization of preferential accords is the most preferred approach in dealing with the problem, incentives to do so might be lacking. The least preferred approach is consolidation into region wide FTAs, because it is both impractical and potentially counterproductive. That is, it could induce a large number of Inter Regional BTAs than the number of intra regional BTAs that it may neutralize.
Future Avenues
Due to rapid increase in globalization and with the establishment of WTO in January 1995. There is an increase in number of countries under WTO from 128 to 188 at present and BTAs have been proliferating very rapidly and tariff measures are reducing. So here are the future avenues of a few of the BTAs.
India-Sri Lanka Free Trade Agreement (ISFTA) ISFTA was signed on 28 December 1999 and Sri Lanka’s main exports to India included pepper, scrap steel, areca nuts, dried fruit, cloves, and waste paper. At the same time, imports from India have increased considerably in recent years. In 2008, imports from India reached US$3,443 billion, a growth of 37% compared to 2007. However, the major cause for the increase in imports
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was the increased cost of petroleum products in global markets. According to the Department of Commerce, Sri Lanka’s imports under the FTA were only about 14% of the country’s total imports from India in 2007 and 13% in 2011 but the study shows that there is a scope for Indian Investment in Telecommunications, Hospitals, Software, Construction, Rail Transport. The study identifies skill shortages in various service sectors in Sri Lanka. The study shows that there is significant movement of professionals between the two countries in health, architecture, engineering services etc. and points out that Sri Lanka could gain from skill & technology transfer from India. In the area of research, particularly science and technology there is scope for collaboration between the two countries. The survey revealed that Sri Lankan professionals would benefit through collaborative ventures in science and technology and by involving Indian scientists and technologists in conducting training programmes in Sri Lanka.
India-Japan Free Trade Agreement (IJFTA)India-Japan free trade agreement was signed on August 30, 2014 but Reuters say that Indian Rare Earth (IREL), a state-owned company under Department of Atomic Energy (DAE),is poised to supply raw materials to a proposed new Japanese facility for producing rare earth materials in Vizag. The Indian collaboration is likely to reduce Japan’s dependence on China for rare earth materials. Incidentally, China has the world’s largest reserves of rare earths and controls over 90% of the global business in these minerals. A number of countries depend on it for sourcing rare earths used in advanced electronics, medical services and clean technology. India too has some 3% of world reserves of rare earths and has the potential to emerge as an alternative source, globally. Rare earths find wide range of uses in smartphones, hybrid car batteries, fluorescent TV screens, permanent magnets to energy saving CFL lamps. These projects could entail smart cities, Railways, solar Projects and the plan to clean Ganga.
Japan-Australia Economic Partnership Agreement (JAEPA)JAEPA was signed on July8, 2014 and Japan is a vital, long-standing and highly complementary economic partner for Australia. In 2013, two-way goods and services trade reached $70.8 billion ($66.5 billion trade in goods and $4.3 billion trade in services), making Japan Australia’s second-largest trading partner. Japan is Australia’s second-largest export destination (15.5 per cent of total exports) and third-largest source of imports (6.5 per cent). Despite the strong trade and investment relationship Australian exporters and service providers face high barriers for trade with Japan, including agricultural tariffs of up to 219 per cent. The Japan-Australia Economic Partnership Agreement (JAEPA) will deliver significant benefits to Australian farmers, manufacturers, exporters, service providers and consumers. More than 97 per cent of Australia’s exports to Japan will receive preferential access or enter duty-free when JAEPA is fully implemented. JAEPA guarantees Australian services suppliers access to the significant and well-developed Japanese market in financial, legal, education, and telecommunications services. JAEPA will provide Australian services exporters with the best treatment Japan has agreed with any other trading partner. JAEPA sends a clear message to Japanese investors that Australia is an attractive investment destination. It will promote further growth and diversification in the flow of Japanese investment into Australia by raising the screening threshold, at which private Japanese investment in non-sensitive sectors is considered by the Foreign Investment Review Board, from $248 million to $1,078 million.
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References
1. www.wto.org2. ADB Institute Discussion Paper No. 57-Bilateral Trade Agreements and the World
Trading System –By Jayant Menon3. SOURCE- http://www.aienetwork.org/pdfs/aug_workshop/day3/3-2_Menon.pdf4. ADB Economics Working Paper Series No. 226- Asian FTAs: Trends, Prospects, and Challenges5. Asian Development Bank’s FTA Database, August 20106. Ministry of external affairs website(www.moia.gov.in)7. Ministry of Commerce and Industry(www.commerce.nic.in)8. Intellectual Property Rights in preferential trade Agreements-Research Paper By: Pedro Roffe & Christoph Spennemann9. The India–Sri Lanka Free Trade Agreement and the Proposed Comprehensive Economic
Partnership Agreement: A Closer Look By Saman Kelegama Asian Development Bank Institute, February 201410. Korea FTA Outcomes on the Pact’s Second Anniversary Public Citizen’s Global Trade Watch, March 2014
Appendix
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