The Political Economy of the Proliferation of FTAs

The Political Economy of the Proliferation of FTAs

There has been a concerted movement toward free trade in East Asia since the early 1990s. Trade liberalization in individual countries as well as the regional movement for economic integration has contributed to a large increase in intra-regional trade in East Asia. The purpose of this paper is to analyze the causes and possible consequences of the proliferation of bilateral FTAs in East Asia. Throughout the paper, our discussion will be directed to finding clues on whether the bilateral FTAs in Asia that are completed or under discussion could be building or stumbling blocks for regional as well as global economic integration. East Asian countries have strengthened bilateral and regional economic relations through trade and investment, although the region does not have a region-wide trading arrangement. However, since the Asian financial crisis, East Asian countries have shown concern towards establishing FTAs. All East Asian countries have been involved into regionalism now, and FTAs have been one of major issues for the ASEAN+3 Leaders' meeting. The progress for an East Asian FTA has been very slow, but the discussion for a region-wide FTA in East Asia has been facilitated by establishing the ‘Network of East Asian Think-Tanks (NEAT)’ in 2003. NEAT, which is supported by the ASEAN+3, is to continue dialogue and deepen mutual understanding among the members. Meetings were held in 2003 and 2004 to discuss issues related to forming an East Asian Community, of which an East Asia FTA is an important component. Generally, it can be said that FTAs with wide coverage of tariff elimination and simple (less stringent) ROO will bring most of economic gains, which are expected from a conclusion of a FTA. Although FTAs have wide ranges of measures for increasing market access in addition to tariff elimination, this report first analyzes the coverage of tariff elimination only, because of the lack of reliable data on other liberalization measures such as improvement in non-tariff barriers. According the analysis result, NAFTA, AZCERTA (FTA between Australia and New Zealand), AFTA and China-ASEAN FTA have broad coverage of tariff elimination. However, other FTAs such as Japan-Singapore FTA and Chile-Korea FTA allow wide ranges of exception for trade liberalization. Most of the excepted goods are agricultural products, which are most sensitive in Japan and Korea, although the coverage of market access in those countries may increase with the conclusion of more FTAs. Following the analysis of coverage of tariff liberalization, the report evaluates the stringency of ROO. Trade deflection, which can occur in FTAs, distorts the trade pattern; ROOs could curb trade deflection. However, the compliance of stringent and complex ROOs increases costs for production and trade. Therefore those countries joining in FTAs would be better off by simplifying and harmonizing preferential ROOs. EU and US introduced stringent ROOs in their RTAs in 1990s. East Asian countries have heavily depended on the frameworks of existing FTAs, especially that of NAFTA. ROOs in East Asian FTAs are similar to those of Western FTAs in terms of CTC, RVC ratio, Cumulation, and De Minimis. However, AFTA and the China-ASEAN FTA have a very simple and uniform format for the ROO. This is simpler than the WTO recommends, and cannot be found in other RTAs. AFTA and the China-ASEAN FTA do not need CTC criterion since they require only one criterion of 40% RVC ratio. This report tries to assess the market access in major FTAs using coverage of tariff elimination and stringency of ROO. Our tentative assessment result for market access in FTAs. It can be said that ANZCERTA and China-ASEAN FTA have high scores (Group I) in market access with wide coverage of tariff elimination and simple ROO. NAFTA can be evaluated to be inferior to FTAs in Group I in terms of market access, since it specifies complex and stringent ROO. Three FTAs such as Japan-Singapore EPA ca