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p. 14 of 36 BACK | NEXT Foreword 1. Developing Asia and the world Overview Prospects for developing Asia, 2006 and 2007 Prospects for the world economy, 2006 and 2007 Subregional summaries Suspension of Doha talks and emerging trade issues Suspension of Doha Development Round negotiations Renewed momentum for preferential trade agreements Textile and clothing trade: Performance of Asian suppliers What developing Asia can now do II. Economic trends and prospects in developing Asia III. Developing Asia's imprint on global commodity markets Appendix Statistical notes and tables ADO forecasting performance for GDP growth and inflation

Asian Development Outlook 2006 Update : 1. Developing Asia and the world

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Renewed momentum for preferential trade agreements

Issues with preferential trade agreements

Trade ministers minced no words following the cessation of the Doha Round negotiations: from now on, they will focus on bilateral trade agreements to fill the vacuum left by WTO. This is worrying. Undisciplined expansion of bilateral trade agreements poses danger to the efficient development of international trade and to the multilateral trading system. Creation of hub-and-spoke systems or trading blocs consisting of bilateral FTAs that vary in degree of tariff reduction as well as in coverage of trade in goods and services, that have inconsistent rules of origin, and that are implemented over different time periods can complicate rather than facilitate commercial activity across borders. Small and isolated low-income countries are likely to be marginalized within hub-and-spoke systems or may be excluded altogether, thus facing new layers of tariff discrimination.²

Asian Development Outlook 2006 (ADO 2006) showed that Asian hub-and-spoke systems are distinctly inferior to global free trade and to an Asia-wide FTA (ADB 2006, pp. 288-9). A People’s Republic of China (PRC) hub was shown to generate only half the benefits to developing Asian countries of a regionwide FTA. An Association of Southeast Asian Nations (ASEAN) hub implicitly removes more trade distortions than a single-country hub and generates about 70% of the benefits of a regionwide FTA. If this is indeed the case, then what can be done to minimize the downside potential of bilateralism and to steer the region toward a more general and unified approach to preferential trade?

ASEAN initially planned a gradual evolution toward AEC but following its summit in 2006, it announced plans to push forward AEC from 2020 to 2015 with the ambitious goal of creating a “single market.”⁴ However, the older and newer member countries still have differences over the modalities for achieving AEC and over issues such as the ASEAN Charter (including whether it should simply codify existing agreements or should be more ambitious in providing a legal framework for the future), and these differences need to be resolved.

In addition, individual ASEAN member states are increasingly engaged in bilateral negotiations that are not entirely consistent with formation of AEC. For example, Singapore and Thailand are among the most prolific countries on the planet in engaging in bilateral agreements. Malaysia is also becoming active and has agreed to bilateral deals with India, Japan, and Pakistan. These individual bilateral FTAs will complicate the task of creating an integrated regionwide FTA as coverage, depth of reductions of barriers, and rules of origin differ from agreement to agreement.

A perusal of the different paths to notification of these agreements (see ADB 2006, p. 277) shows that there is a disconnection between the newer bilateral FTAs and existing regional arrangements. The older arrangements, including the ASEAN Free Trade Area and the South Asia Free Trade Area as well as the Asia-Pacific Trade Agreement (formerly the Bangkok Agreement), are notified under the “Enabling Clause” (by which the General Agreement on Tariffs and Trade [GATT] permitted developing countries to make preferential trade agreements that do not meet the more rigorous requirements of GATT Article XXIV).

In contrast, the new bilateral FTAs are notified mainly under GATT Article XXIV and GATS Article V, implying that the bilateral deals are more comprehensive in coverage (substantially all trade in goods and services) and are more rigorous in terms of rules, dispute settlement, and other provisions. In addition, many bilateral deals are emerging without notification—suggesting agreements that are inconsistent with GATT/ WTO requirements and that therefore may raise barriers to nonmembers and reduce the inclination of members to reduce MFN tariffs both now and in the future.⁵

A review of product-specific rules of origin in newly emerging Asia- Pacific PTAs revealed that there was no consistency across hubs or even across bilateral agreements within hub-and-spoke systems (James 2006). For example, regional content requirements differ in percentage terms across agreements as well as across individual sectors. Moreover, agreements impose various types of mixed tests that sometimes require minimum regional content, a change in tariff classification, or specific manufacturing operations to be carried out for some but not other products. Private businesses wishing to take advantage of preferential treatment would have to invest in separate production facilities for each separate bilateral agreement—not a likely prospect!

The proliferation of bilateral FTAs in other parts of the world involving the largest import markets for the products of developing Asia is also cause for concern as these agreements in the main involve more advanced countries and typically discriminate against lower-income countries in Asia. This is illustrated in the case of bilateral FTAs that the US has signed (Table 1.5.1). Import duties actually collected on shipments are divided by the customs value of all shipments to derive the effective rate of duty since some of the newer US bilateral agreements have entered into force. Typically, Asian nonmembers are at a significant disadvantage vis-à-vis FTA beneficiaries, mainly high-income or advanced developing nations. This problem would have been remedied to a large extent by a successful NAMA component of the Doha Round, but it now appears that the new tack in the direction of bilateral agreements will lead to further marginalization of some of the poorest countries in the region.

Tariff discrimination is most pronounced in selected labor-intensive manufactured products—particularly clothing, footwear, and textiles. For example, in 2005 calculations show that the difference in effective duty rates on Asian non-PTA suppliers and PTA suppliers in the US market was 12% for clothing, 10% for footwear, and 10% for textile yarns and fabrics (Table 1.5.2).⁶ For individual suppliers, differences in applied tariff rates were even greater (for example over 15% in the case of clothing shipments from Indonesia and Mongolia compared with those from preferential suppliers).

In newly emerging bilateral FTAs involving Asian and non-Asian partners, there is the risk that tariff discrimination and restrictive rules of origin will disrupt efficient production networks and divert trade as Asian countries discriminate against other Asian countries vis-àvis non-Asian partners. As an example of this, Japan has entered into an economic partnership agreement with Mexico, and the agreement extends duty-free treatment to textiles and clothing on a reciprocal basis, meaning that Mexican textile products (including clothing) may enter Japan duty free, provided that these products comply with the rules-oforigin requirements. Textiles and clothing from many developing Asian suppliers (other than Malaysia and Singapore, which also have economic partnership agreements with Japan) must pay the MFN tariff, which averages 8%.

Korea has entered into FTAs with Chile and Singapore. In the case of Chile, textile products and clothing may enter duty free but tariffs will remain on Singaporean shipments of textile fabrics and yarns and for clothing over a 5- to 10-year period, during which tariffs will only gradually be lifted. Similarly, in negotiations with ASEAN, India is seeking to exclude “sensitive” products such as textiles from the agreement. Such exceptions do not bode well for the creation of efficient trade in the region. To its credit, ASEAN has resisted efforts to limit coverage of goods and services in its “ASEAN Plus” negotiations and has pushed large partners to negotiate single deals rather than bilateral deals with individual ASEAN members with vague promises to piece together a patchwork of bilateral deals with varying coverage and inconsistent rules of origin.

Wider paths to regional trade gains

The creation of a seamless ASEAN single market or customs union would reinforce regionwide integration and would avoid the isolation of spokes. In order to ensure continued openness to the world, ASEAN could undertake to avoid complex and contradictory rules of origin in its agreements with the larger East Asian and South Asian partners. It could also mimic the Pan-European Cumulation System that allows inputs from all participating partners to count in regional content requirements of preferential tariffs. Development of a cumulation system within the region, based upon the ASEAN Plus agreements, would facilitate development of efficient production networks rather than disrupting them. This will be particularly important in ensuring that industries within the region remain globally competitive.

Another innovation that would help integrate spokes into the regional and global markets would be the introduction of flexibility into rules of origin. In particular, regional content requirements might be adjusted to accommodate lower-income, smaller, LDCs. Canada’s reform of Generalized System of Preferences (GSP) rules of origin in 2000 provides a potential model in this respect (UNCTAD 2001). The general GSP rule of origin is to allow a maximum of 40% non-originating content, but for designated LDCs the maximum is raised to 60%. However, the liberalized GSP rule of origin did not provide for as much market access as hoped for due to the exclusion of textile yarn and fabric and of clothing. Beginning in 2003, however, Canada dropped this exclusion (UNCTAD 2005) by granting duty-free access to textile and clothing articles. This provision greatly assisted low-income countries such as Bangladesh and Cambodia to take advantage of Canada’s GSP scheme. The scheme allows cumulation across all Canadian GSP beneficiary countries (and Canada itself) to meet the flexible regional content rule of origin.

ADO 2006 emphasized the importance to Asia of having unfettered access to the major developed-country markets in Europe and North America and in the role that the Doha Development Agenda promised in this respect. With Doha in a state of suspension, however, Asian countries are now rushing into defensive bilateral agreements that frequently extend beyond the region and involve a complex web of discriminatory preferences that may do more to complicate commerce than to encourage it. Asia should not settle for a third-best alternative to multilateral trade liberalization that effectively amounts to discriminatory treatment favoring nonregional trading partners. A better solution would be to seek broad regional cooperation extending as far across the Asian region as possible, and at the same time to continue implementing unilateral reforms that are extended on an MFN basis.

The major gains from trade are likely to be enjoyed by those countries that open-up voluntarily and that minimize costly rules and discrimination amongst partners. As was shown in ADO 2006, reduction of behind-the-border obstacles to trade promises to deliver far larger gains than mere tariff reductions at the border. Trade costs remain extremely high in much of the region and can only be reduced by measures that are inherently nondiscriminatory and that boost effi ciency. In the coming decade, it is likely that Asia itself will become an engine of growth to rival the major industrial powers in Europe and North America, and Asian demand will contribute even more significantly to intra-Asian trade. Growth in the emerging Asian markets is much higher than in Europe or the US, and the implications of this growth for Asia’s trade should be recognized.

The outlook for global trade liberalization is distinctly cloudy, and the air is unlikely to clear until electoral processes have had an impact on the polities of the major players. New leadership in Japan, US, and Europe could make a difference. However, no one knows when—or even if—this leadership will emerge with any commitment to restarting the Doha Development Agenda round of negotiations. In the meantime, a pause in multilateral liberalization does not preclude countries from pursuing their own unilateral reforms.

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