Business

Saturday November 21, 2009

Trade pacts boom

By IZWAN IDRIS


Bilateral FTAs are more palatable deals for Asian exporters

COME Jan 1, which is not too long from now, the Asean Free Trade Area (Afta) arrangement will be implemented.

What this means is, the six older members of the Association of Southeast Asian Nation (Asean) namely Malaysia, Indonesia, Singapura, Thailand, Phillipines and Brunei will become a free trade area where duties on most products are eliminated, or at the least, reduced.

But if you are hoping for massive reduction in local prices of Toyota and Mitsubishi cars and trucks imported from Thailand from next year onwards, you’re in for a disappointment.

According to the International Trade and Industry Ministry (Miti) most import duties from the region have already been cut to comply with Afta.

Also from next year onwards, Asean free trade agreements (FTAs) with China, South Korea, Australia and New Zealand would also come into effect.

Meanwhile, the Asean-India FTA will see a gradual reduction in tariff by 2013, and will be fully in place in 2016.

A late comer to Asian FTA party, Malaysia to date, had concluded and signed two bilateral FTAs with Japan and Pakistan.

Talks are on-going for a preferential trade link with Chile, but the FTA between Malaysia and the United States may not happen as the latter was said to be more interested to sign a trade pact that entails a bigger group of countries.

Last week, leaders at the Asia Pacific Economic Cooperation (Apec) issued a joint statement saying their intention to “continue to explore building blocks towards a possible Free Trade Area of the Asia Pacific (FTAAP) in the future.”

On the other hand, the US Ambassador to Malaysia James Keith said on Thursday that the United States would focus its energy on a smaller less-known grouping called the Trans-Pacific Partnership (TPP).

The current members of TPP are Singapore, Chile, New Zealand, and Brunei.

The TPP members are also part of the much larger 21-member economies under Apec that includes Canada, China, Hong Kong, Indonesia, Japan; South Korea, Malaysia, Mexico, Papua New Guinea, Peru, Philippines, Russia, Taiwan, Thailand, Vietnam and the United States.

In total, Apec members economies accounted for 40% of the world’s population and slightly more than half of global gross domestic product.

About 15 years ago Apec members had agreed to liberalise trade and investment among developed economies by 2010 and the rest would follow suit by 2020.

It was reported that Apec officials are working to get the FTAAP framework ready by 2011.

The idea for Afta was mooted in 1992, and originally targeted for implementation in 2008. The regional trade pact will cover newer members, namely Cambodia, Laos, Myanmar and Vietnam in 2015.

FTA mania

Asia is relatively newcomer to using FTAs as trade policy instrument, but is now in the forefront in concluded new deals.

According to the Asian Development Bank (ADB), there were only three FTAs concluded in Asia as at 2000, but the figure had since surged to 54 as at June of this year.

Bilateral FTAs comprise 74% of the concluded agreements, with the more complex plurilateral ones making up the rest.

Several factors had contributed to recent spread of FTA inititives in Asia. One of them is to consolidate its position as the undispute status as the global factory.

The growth in global supply chain means components made in one Asian country from raw material sourced from another can be shipped to an assembler based in a third country.

“FTAs can be regarded as part of supporting policy framework for deepening production networks and supply chain formed by global multinational companies (MNCs) and emerging Asian firms,’’ ADB said in a report on FTA trend in Asia.

With freer flow of goods and services around the region, Malaysia may need to adjust its position in Asia’s massive factory space.

“We are already positioning ourselves to benefit from the emergence of the large economies as well as to minimise the negative implications from their rise,’’ says the Economic Planning Unit (EPU) director-general Datuk Noriyah Ahmad.

Malaysia may have to play a smaller role where China and India will have dominating positions, while at the same time reap the benefit of potentially higher demand for agriculatural and natural resources-based products.

Noriyah says competition is not new for Malaysia, as the country has always has a global export-oriented development strategy since the seventies.

Hubs and spokes

FTA activity in Asia evolved around a classic hub and spoke arrangement. The regions’s five largest economies have become hubs, while smaller neighbours emerged as spokes.

Today, Asean has become the hotbed for FTAs with links to China, Japan, South Korea and Australia. There are plans to for an Asean-EU FTA in the work.

The development of FTA hubs and spokes can be related to factors like economic size, per capita income, levels of protection, economic geography and MNCs production strategies.

Well designed and comprehensive FTAs provide numerous benefits, including preferential tariffs, market access and new business opportunities.

A survey conducted by ADB in 2007 and 2008, showed that companies in five countries – South Korea, Japan, Thailand, Singapore and Philippines have plans to increase usage of their FTA preferences.

The finding also revealed that exporting firms tend to utilise FTA preferences more frequently than previously thought and may even have been increasing their utilisation rate.

A Bernama report earlier this week quoted a top local trade official as saying that the utilisation of FTAs measures by Malaysian firms was considered low.

Malaysia External Trade Development Corporation (Matrade) deputy chief executive officer Mohd Kamarudin Hassan says although most companies knew the benefit of FTAs, many exporters still has the perception that utilising the measures under them was a hassle.

About 20% of the country’s total trade revenue comes from FTAs participating countries.

Today, FTAs are not confined to liberalisation and market opening measures. The agreements are comprehensive and include investment, trade facilitation, intellectual property rights as well as economic cooperation in various areas.

Information from MITI’s website says Malaysia continues to place high priority to the rule-based multilateral trading system under the World Trade Organisation (WTO).

At the same time, the country will pursue regional and bilateral trade arrangements to complement the multilateral approach to trade liberalisation.

The explosion of FTAs in Asia came as WTO’s Doha round multilateral trade talks stumbles into its ninth year of negotiation with no end in sight.

FTAs can be seen as a substitute as Asian manufacturers seek to cut tariffs and boost trade among themselves.

Bilateral ties and increased integration would also improve Asian policymakers bargaining power through collective voice on global trade issues. This is a direct response to regionalism in the West under the EU banner and North American Free Trade Agreement (NAFTA).

Essentially, bilateral FTAs anywhere are still about preferential trading arrangement.

Each FTAs varied and consists of complex web of trade-off and bargains.

For example, the Asean-China FTA may actually consisted of ten separate deals with individul countries setting different timeline to cut tariff and so forth.

The spread of FTAs in Asia and elsewhere has sparked “systemic” concerns about crisscrossing FTAs, which gave raise to the phase “spaghetti bowl” of trade deals.

In Asia, the phenomenon was aptly called the noodle bowl effect.

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