ASEAN+3/+6 or TPP? Pathways Towards East Asian FTA Consolidation

1. ASEAN+3/+6 or TPP? Pathways Towards East Asian FTA Consolidation Ganeshan Wignaraja Principal Economist Asian Development Bank gwignaraja@adb.org Washington, D.C. February 2011

2. Messages • Asia’s trade rebounding; regional integration picking up • Firms see net FTA benefits and more FTA use in East Asia but challenges remain. • Asia-wide FTA can increase market access, reduce noodle bowl risk & facilitate Doha deal. • Different reasons make either ASEAN+3/+6 or TPP more attractive • Reality may be a series of linked agreements with variable coverage of members and issues

3. Asia Rebounding from Crisis (GDP growth rate, % per year) Note: 2010 and 2011 data are forecasts. Developing Asia refers to 44 developing member economies of the Asian Development Bank and Brunei Darussalam, an unclassified regional member Sources: ADB, Asian Development Outlook 2010 (September 2010 Update); Asia Economic Monitor (December 2010) 3

4. Rapid Spread of FTAs in East Asia* (Number of concluded FTAs by country)** 49 FTAs in effect Source: ADB’s Asia Regional Integration Center (ARIC) FTA Database (www.aric.adb.org), data as of January 2011. Note: *East Asia refers to the 10 ASEAN countries, PRC, Hong Kong,China, Japan, Korea, Taipei,China. **Concluded FTAs include those that are in effect and those that have been signed but are not yet in effect. 4

5. Sample • 841 firms in 6 countries (PRC, Japan, Korea, Singapore, Thailand, Philippines) • Sectors: electronics, automobiles, textiles and garments and country specific sector • Simple random sampling method • Size - 33% SMEs • Ownership – 40% foreign-owned

6. Key questions • Are FTA preferences being used? • What are the benefits and costs of FTAs for firms? • Are multiple rules of origin (ROOs) a burden on firms? • Is there enough business support for domestic firms to utilize trade preferences under FTAs?

7. FTA use higher than expected (28.4%) and may increase in future (53.2%).

8. Profile of Users and Non-Users of FTAs* Firm size: Users in all five countries are significantly larger than the non-users 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 Notes: * 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.

9. Firms report more benefits than costs from major FTAs in effect * excludes Korea

10. Impediments to Using FTA Preferences (% of responding firms)

11. Multiple ROOs impose limited burden (% of responding firms that reported multiple ROOs add to costs) Only 20.1% of firms find multiple ROOs costly to business.

12. Huge demand for FTA support services 12

13. A Possible Way Forward? • Rationalize ROOs, adopting co-equals for ROOs, upgrade ROO admin. Harmonizing regional ROOs • Improve business support for FTAs • Consolidate FTAs into a comprehensive region-wide FTA (either ASEAN+3 or +6) • Multilateralizing Asian regionalism • Concluding Doha Round and avoiding protectionism 13

14. A Region-Wide FTA would ….. Increase market access for goods, services, skills and technology. Increase market size – specialization and economies and scale. Easier FDI flows by MNCs and technology transfer. Simpler tariff schedules, rules and standards. Offer an insurance against protectionist sentiments that pose a risk to Asia’s trade and recovery. 14

15. Larger Grouping, Increasing Gains Change in income compared to 2017 baseline, % • Region-wide FTA offers larger gains to world income than the current bilateral FTAs. • CEPEA scenario offers larger gains than the EAFTA scenario. • Third parties lose little from being excluded from a region-wide agreement. CEPEATotal Gains: 260 $BN EAFTA Total Gains: 214 $BN ASEAN-PRC Total Gains: 82 $BN Source: Kawai and Wignaraja (2009) ), estimated from CGE model in Francois and Wignaraja (2008). 15

16. ASEAN+ vs. TPPGoods Market Liberalization (EV/GDP %) Note: *TPP 11 = Brunei, Chile, New Zealand, Singapore, Viet Nam, Malaysia, Peru, Australia, USA, Japan, Korea 16 Source: Wignaraja and Mirza (forthcoming)

17. Likely Scenario Any region-wide FTA – series of linked agreements with variable coverage of members and issues. For now, 2 competing processes ASEAN + 3 or +6 Trans Pacific Partnership (TPP) agreement For ASEAN+3/+6 FTA, a PRC-Japan-Korea FTA needed and connected with ASEAN+1 FTAs. TPP – early step towards APEC-wide FTA, but will unlikely include a US-PRC FTA 17

18. Way Forward Biggest challenge lies in political will and geopolitical considerations in moving forward on ASEAN+3/+6 and TPP. Different reasons make either ASEAN+3/+6 or TPP more attractive. Whichever taken, integration should be deepened and domestic reforms pursued. A harmonious region will likely see convergence between two processes as building blocks– win-win for Asia-Pacific Community. 18

19. Selected References 1. Masahiro Kawai and Ganeshan Wignaraja (eds. 2011) Asia’s Free Trade Agreements: How is Business Responding? Cheltenham (UK) Edward Elgar . Read-only PDF of is available at: http://www.adbi.org/files/2011.01.31.book.asia.free.trade.agreements.pdf 2. Masahiro Kawai and Ganeshan Wignaraja, (2011), “Asian FTAs: Trends, Prospects and Challenges”, Journal of Asian Economics, February. 3. Masahiro Kawai and Ganeshan Wignaraja, (2010), Free Trade Agreements in East Asia: A Way Toward Trade Liberalization?: http://www.adb.org/documents/briefs/ADB-Briefs-2010-1-Free-Trade-Agreements.pdf

20. Masahiro Kawai Dean and CEO, ADBI Ganeshan Wignaraja Principal Economist, OREI - ADB