South-South free trade agreements: A work in progress?

Ganeshan Wignaraja 20 October 2011

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The last two decades have seen an unprecedented surge in free trade agreements (FTAs) as part of efforts to promote regional trade and investment. According to WTO estimates, 300 agreements were in force worldwide in 2010 compared with only 70 in 1990 (WTO 2011). Developing countries have driven the hike with South-South FTAs presently making up two thirds of FTAs in force. While the factors motivating their global spread have been carefully scrutinised (see Bhagwati 2008, Baldwin 2011), little attention has been devoted to studying the evolution and anatomy of South-South and North-South FTAs, or the extent to which they are compatible with global rules and each other. Our research on Asian FTAs attempts to fill this gap and provide policy suggestions (Wignaraja and Lazaro 2010).

South-South FTAs: Where we are

FTAs have surged in Asia as regionalism intensifies and production networks flourish. Typically, they provide market access and lay the groundwork for deeper integration. The number of concluded FTAs (signed and in effect) has grown from only 3 to 61 between 2000 and 2010 (Figure 1). Increased South-South trade has accompanied the region’s economic development as intraregional and inter-regional trade expands. The proportion of Asia’s South-South FTAs to North-South FTAs (39 to 22) reflects these evolving trade patterns (see Figure 1). But quantity does not necessarily equal quality. In five key areas under review – tariff liberalisation, rules of origin, liberalisation of trade in services, WTO notification, and deep integration – North-South FTAs were generally more compatible with WTO and other global rules.

Figure 1. Growth of Asian FTAs (signed and in effect) 1995–2010


Source: Wignaraja and Lazaro (2010)

Beginning with tariff liberalisation, Article XXIV of the General Agreement on Tariffs and Trade (GATT) states that “duties are eliminated [on] substantially all trade…within a reasonable length of time.” Yet over one third of all Asian South-South FTAs have only limited goods coverage, while another 40% eliminate tariffs on substantially all trade over a period lasting more than five years. In contrast, roughly one third of North-South FTAs eliminate tariffs upon entry into force, while an additional 25% do so within two to five years.

Rules of origin determine the goods that enjoy preferential tariffs in order to prevent trade deflection (the entry of imports to a low-tariff member of an FTA, when their ultimate destination is a higher tariff member) among FTA members. In practice, such rules can actually raise transaction costs for firms and generate confusion over compliance. This is especially the case with rules of origin included in Asian South-South FTAs. According to firm-level data from Kawai and Wignaraja (2011), over 30% of firms view rules of origin as an impediment to using South-South FTAs, compared with only 13% for North-South FTAs.

Conformity with Article V of the General Agreement on Trade in Services (GATS) requires FTAs not to include restrictions on the liberalisation of such key services as business and professional, communications, financial, transport, and labour and business persons’ mobility. Nearly three quarters of Asian North-South FTAs liberalise trade in these five services – less than 20% of South-South FTAs do, while nearly half exclude services or have limited coverage of services at best. (The notable exceptions among South-South agreements are the Association of Southeast Asian Nations FTA and other agreements involving Singapore.)

Some GATT provisions essentially require a member country to notify and submit details to the WTO with regard to FTAs and related interim agreements. The intent is to improve transparency in the global trading environment. Roughly two thirds of South-South FTAs comply with these notification requirements, compared to 95% of North-South FTAs.

A thorny issue in the early days of the Doha Round concerned the depth of economic integration as measured by the so-called Singapore issues – investment, competition policy, government procurement, and trade facilitation. While these issues were later dropped, they still remain important for future trade-policy negotiations. More than 80% of Asian North-South FTAs have at least some coverage of the Singapore issues, compared with only about 20% of South-South FTAs.

How to improve South-South FTAs?

To harmonise North-South and South-South FTAs, new Asian FTAs should adopt the following good practices for core areas, with modifications made to existing FTAs where reviews are possible:

  • Tariff liberalisation. Eliminate a minimum of 85% of all tariffs within 10 years.
  • Rules of origin. Design and administer rules that are guided by Asia–Pacific Economic Cooperation principles of simplicity and consistency, as well as WTO requirements of transparency and prospective application.
  • Services liberalisation. Incorporate at least five key services sectors – business, communications, financial, transport, and labour and business persons’ mobility – and pursue reform of competition policy.
  • WTO notification. Include procedural requirements to promote greater transparency and improve consistency with global rules.
  • Deep integration. First incorporate good practices on investment and trade facilitation, and then address the more difficult issues of competition policy and government procurement.

In addition, the quality of FTAs in Asia can be enhanced by setting up a regional advisory centre to address limited institutional and human resource capacities among some countries in the region (see Baldwin and Thornton 2008). This centre would engage legal advisors, train officials, and lead studies to prepare countries to better design, negotiate, and implement WTO-compliant and WTO-plus FTAs.

In the medium to long term, a regionwide FTA would be an important means to better align compatibilities in global and regional rules among Asia’s North-South and South-South FTAs. Depending on its scope, the basis for such a regionwide FTA might be either ASEAN+3 (ASEAN plus People’s Republic of China, Japan, and the Republic of Korea); ASEAN+6 (ASEAN+3 plus India, Australia, and New Zealand); or a Free Trade Agreement of the Asia–Pacific (APEC members). A practical first step might be to take the best features from current ASEAN FTAs and design a template consistent with global rules. Finally, concluding the WTO Doha Round and avoiding protectionism would further allow South-South trade and FTA activity to flourish.

References

Bhagwati, J. (2008), Termites in the Trading System: How Preferential Trade Agreements Undermine Free Trade, Oxford: Oxford University Press.

Baldwin, R. (2011), “21st Century Regionalism: Filling the Gap Between 21st Century Trade and 21st Century Trade Rules”, CEPR Policy Insight No. 56, May.

Baldwin, R. and Thornton, (2008), Multilateralizing Regionalism: Ideas for a WTO Action Plan on Regionalism, London: Centre for Economic Policy Research.

Kawai, M. and Wignaraja, G. (ed. 2011), Asia’s Free Trade Agreements: How is Business Responding? Cheltenham: Edward Elgar .

Wignaraja, G. and Lazaro, D. (2010), “North–South vs. South–South Asian FTAs: Trends, Compatibilities, and Ways Forward”, UNU-CRIS Working Papers W-2010/3 Bruges: United Nations University Comparative Regional Integration Studies

World Trade Organization (2011), World Trade Report 2011: The WTO and Preferential Trade Agreements. Geneva: World Trade Organization. 

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Topics:  International trade

Tags:  trade liberalisation, Asia, free trade agreements

Director of Research of the Asian Development Bank Institute (ADBI)

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CEPR Policy Research