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The Asian Noodle Bowl
of FTAs:Is It Serious for Business?
Ganeshan WignarajaPrincipal Economist, ADB
BangkokNovember 2009
Evidence from Japan, Singapore, Korea, PRC,
Thailand and Philippines
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.
Contents
I. Setting and Research
II. Firm Survey Findings – Japan, Singapore, Korea, PRC, Thailand and the Philippines
III. Policy Implications and Conclusions
I. Setting and Research
216 FTAs
113 in effect
0
50
100
150
200
250
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
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
FTAs by Country and Status
CountryGNI per capita * (US$, 2007)
Simple Ave MFN **
(%, non-agri)
Status of FTAs ***
FTAs In FTAs In EffectEffect
Future Future FTAsFTAs
Japan 37,790 2.6 11 9
Singapore 32,340 0.0 16 14
Korea 19,730 6.6 5 17
PRC 2,370 9.9 9 12
Thailand 3,400 8.2 9 14
Philippines 1,620 5.8 5 6
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.
Varying Rules of Origin in FTAs
PRODUCT (HS
CODE)
AFTA ASEAN-China FTA
ASEAN-Korea FTA
ASEAN-Japan FTA
Japan-Thailand
EPA
US-Singapore
FTA
Electronic integrated circuits (85.42)
CTC or 40% RVC
40% RVC CTC or 40% RVC
CTC or 40% RVC
CTC or 40% VC CTC
Parts and accessories for motor vehicles (87.08)
40% RVC 40% RVC 45% RVC 40% RVC CTC or 40% VC 6 digit CTC or CTC plus 30% RVC (build-up)
Woven fabrics of cotton (52.09)
CTC; or 40% RVC; or Process Criterion for Textile Products
40% RVC; or Process Criterion for Textile and Textile Products
CTC or 40% RVC
CTH or CTC plus material is dyed or printed in either Party; or non-originating is woven entirely in any party
CTH or CTC plus fabric/yarn is dyed or printed in either Party
CTH
Men’s or Boy’s suits, blazers, etc. (62.03)
40% RVC; or CTC plus good is both cut (or knit to shape) and sewn in any party; or Process Criterion for Textile Products
40% RVC; or Process Criterion for Textile and Textile Products
40% RVC; or CTC plus good is both cut and sewn in any party
CTC plus non-originating material is woven entirely in any party
CTC plus non-originating material is knitted or crocheted in either party or any ASEAN member
CTC plus good is both cut (or knit to shape) and sewn or otherwise assembled in the territory of one or both of the PartiesNote: CTC= Change in Tariff Classifications, VC= Value Content, LDCS= Least Developed Contracting
States Sources: Official texts of FTAs (status as of January 2009).
• 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
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…
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, PhilippinesMix of development levels and FTA experiencesLarge, diverse dataset (841 manufacturing firms)ADB and different partners involved in surveys
Sample Profile All
Firms Japan Singapore Korea PRC Thailand Philippines
No. of exporting firms 841 38 75 120 232 221 155
By sector, % distributionBy sector, % distribution
Electronics 32.3 42.1 66.7 14.2 17.2 33.0 49.0
Auto 20.7 34.2 … 14.2 10.3 38.0 23.2
Textiles/Garments 17.6 23.7 21.3 14.2 18.1 29.0 …
Other * 21.5 … 12.0 57.5 25.9 … 27.7
By size**, % distributionBy size**, % distribution
SMEs 32.9 15.8 69.3 5.8 18.4 48.4 41.3
Large 44.2 18.4 25.3 75.0 40.4 38.5 52.3
Giant 21.8 65.8 5.3 19.2 41.3 13.1 6.5
By ownership***, % distributionBy ownership***, % distribution
Foreign 39.5 13.2 50.7 0.0 38.8 44.8 64.5
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.
% distribution of firms
Asian Noodle Bowl:Key Questions
1. Are FTA preferences being used?
2. What are the perceived benefits and costs of FTAs?
3. Are multiple rules of origin a burden on SMEs?
4. Is there enough support for domestic firms to export under FTAs?
II. Firm Survey Findings Japan,
Singapore, Korea, PRC, Thailand and Philippines
Q1. Utilization of FTA Preferences
% of responding firms
Note: Data for PRC is provisional.
20.824.9
20.0
47.4
28.0
54.2
77.9
45.740.7
29.0
17.3
45.1
0
10
20
30
40
50
60
70
80
Japan Singapore Korea PRC Thailand Philippines
Use FTA Use and plan to use FTA
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.
Impediments to Using FTA Preferences
% of responding firms
Note: . . . Indicates topic was not covered in the survey questionnaire for that country.
Reasons for Reasons for ImpedimentImpediment
ss
JapaJapann
SingaporSingaporee
KoreaKorea PRCPRC ThailanThailandd
PhilippinPhilippineses
Lack of information
33.3 25.0 34.2 36.2 … 70.1
Delays and admin costs
53.3 60.0 10.8 9.5 22.2 30.6
Small margin of preference
33.3 60.0 35.8 13.8 16.7 13.4
Use of EPZ schemes/ITA
… … 25.8 7.8 … 26.9
Confidentiality of information
26.7 30.0 … 9.1 … 12.7
NTMs in FTA partners
… … 4.2 6.0 36.1 9.0
Too many exclusions
… … … 3.5 25.0 14.9
Rent-seeking … … … 3.9 … 23.1
Number of respondents
15 20 120 232 36 134
5
6
6
6
9
7
11
14
17
30
48
67
145
0 20 40 60 80 100 120 140
ASEAN-PRC FTA **
AFTA
Japan-Thailand EPA
US-Thailand FTA
Thailand-Australia FTA
ASEAN-Japan EPA
Thailand-India FTA
Singapore-India FTA
Japan-Philippines EPA
Japan-Korea EPA
Japan-Indonesia EPA
Japan-Mexico EPA
US-Singapore FTA
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.
FTA Impacts More Positive than Negative*
AFTAASEAN-PRC FTA
Japan-Thailand
EPA
Japan-Philippines
EPA
Positive Impacts
Market access 36 111 24 4
Preferential tariffs 32 59 11 5
Concentration of production 16 33 13 2
New business opportunities 14 62 9 2
Negative Impacts
Increased competition 13 46 5 2
Documentation of FTA use 11 45 5 3
Competitive disadvantage 7 28 4 4
Relocation of production 10 12 1 0
Note: * Excludes Korea
No. of firms that reported on the FTAs that they use and/or plan use
Q3. Multiple ROOs Add to Business Costs
% of responding firms that reported multiple ROOs add to business costs
Note: Data for PRC is provisional.
27.726.2
6.3
15.4
37.5
31.0
0
10
20
30
40
50
Japan Singapore Korea PRC Thailand Philippines
Burden Imposed by Multiple ROOs by Firm Size: A Puzzle?*
% of responding firms in each size category
20.022.2
24.326.6
14.3
45.5
25.3 24.7
41.2
50.0
35.7
60.0
0
10
20
30
40
50
60
70
Japan Singapore Thailand Philippines
SME Large Giant
Note: * Excludes Korea and PRC. SME = 100 or fewer employees, Large = 101 to 1,000 employees, Giant = more than 1,000 employees.
% of responding firms that reported multiple ROOs add to business costs, by firm size
Puzzle of ROO Perceptions: Some Insights /a
Explanatory VariablesEst.
Coefficientsz-values
Firm size (no. of permanent employees) 0.000032 2.20 **
Age (no. of years since establishment) 0.118084 2.26 **
Dummy: 1 = foreign-owned 0.290725 1.92 *
Dummy: 1 = aware of FTA provisions that affect business 0.187310 1.05
Dummy: 1 = changed business plan in response to FTAs 0.623770 3.96 ***
Dummy: 1 = export to multiple FTA markets 0.463059 2.20 **
Dummy: 1 = located in Singapore -0.260633 -0.64
Dummy: 1 = located in PRC -1.019698 -2.05 **
Dummy: 1 = located in Thailand 0.055715 0.14
Dummy: 1 = located in Philippines 0.506967 1.23
Constant -1.701179 -3.64 ***
n 442
*** significant at 1% level, ** at 5% level, * at 10% level.
Wald 2 66.01 ***
/a Excludes Korea. Pseudo R2 0.16
Probit EstimatesDependent binary variable: 1 = firm reports that dealing with multiple ROOs
significantly adds to business costs; 0 otherwise
Benefits of Harmonized ROOs
28.6
57.1
41.7
38.9
40.4
43.9
0 20 40 60
Japan
Singapore
Korea
PRC
Thailand
Philippines
CTC27.6%
VA 24.3%
Option 48.1%
% 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)
Q4. Sources of Support
JapanSingapore
* Korea PRCThailan
dPhilippines
Public sector sources
48.9 45.5 27.5 91.9 74.3 63.3
Of which: Ministries 26.5 45.5 16.7 63.3 59.4 33.3
Of which: Customs … … … 51.6 8.4 14.3
Private sector sources
51.0 45.4 72.5 60.6 25.6 36.7
Of which: Business/industry Associations
20.4 13.6 … 10.0 18.8 21.9
Of which: Chamber of Commerce
14.3 13.6 … 46.6 6.8 3.4
Of which: Mass media/Newspaper
… … 58.4 … … …
Of which: lawyers/ consulting firms
10.2 9.1 … 27.1 … 11.3
% 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.
Consultations on FTAs
18.7
49.3
22.6
45.6
0
10
20
30
40
50
60
Thailand Philippines
With government With business associations
% responding firms that participated in consultations
Use of Support Services and Quality Level
Japan Singapore PRC
Available Services
Usage rate, % of responden
ts
Quality level
(1 to 5) *
Usage rate, % of
respondents
Quality level
(1 to 5) *
Usage rate, % of responden
ts
Quality level
(1 to 5) *
Online information on FTAs/EPAs
21.0 2.7 14.7 3.7 73.0 2.8
Business consulting services on FTAs/EPAs
10.5 3.2 1.3 … 32.0 ** 2.8
Support for issuance of Origin Certificate
10.5 3.0 14.7 3.7 54.0 3.3
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.
Big Demand for Support in PRC, Thailand, Philippines
Services Demanded by Firms
PRC Thailand Philippines%
respondents
(n=225)
% of SMEs
(n=40)
% respondent
s(n=202)
% of SMEs
(n=106)
% respondent
s(n=155)
% of SMEs
(n=64)
More awareness training on concluded FTAs
79.1 85.0 33.7 52.8 82.6 82.8
More information on the implication of FTAs on business
83.1 87.5 49.0 58.5 65.2 65.6
Upgrading of technical standards and quality
27.1 25.0 44.6 50.0 52.3 56.3
Adoption of EDI to speed up and simplify procedures for ROO certification
57.8 67.5 25.7 35.8 53.5 56.3
Financial support for upgrading technology and skills
34.7 30.0 36.1 33.0 41.9 45.3
Enhanced consultations during FTA negotiations
39.6 35.0 27.7 32.1 42.6 40.6
Improved extension services for SMEs
40.9 57.5 21.8 26.4 46.5 45.3
More effective surveillance of NTMs in FTA partner country market
42.7 42.5 19.3 29.2 38.1 42.2
III. Policy Implications and Conclusion
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
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
ResourcesOverview paper and
country studies are available on the ADBI website at:
http://www.adbi.org/preview/research.free.trade.agreements.asia/