Asia-Pacific Trade and Investment Review, December 2006

ESCAP is the regional development arm of the United Nations and serves as the main economic and social development cent...

Author: United Nations

12 downloads 749 Views 5MB Size Report

This content was uploaded by our users and we assume good faith they have the permission to share this book. If you own the copyright to this book and it is wrongfully on our website, we offer a simple DMCA procedure to remove your content from our site. Start by pressing the button below!
Report copyright / DMCA form

DOWNLOAD PDF

ESCAP is the regional development arm of the United Nations and serves as the main economic and social development centre for the United Nations in Asia and the Pacific. Its mandate is to foster cooperation between its 53 members and 9 associate members. ESCAP provides the strategic link between global and country-level programmes and issues. It supports Governments of the region in consolidating regional positions and advocates regional approaches to meeting the region’s unique socio-economic challenges in a globalizing world. The ESCAP office is located in Bangkok, Thailand. Please visit our website at www.unescap.org for further information.

The shaded areas of the map indicate ESCAP members and associate members.

ASIA-PACIFIC TRADE AND INVESTMENT REVIEW Vol. 2, No. 2

New York, 2006

ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

i

ASIA-PACIFIC TRADE AND INVESTMENT REVIEW Vol. 2, No. 2

United Nations publication Sales No. E.06.II.F.33 Copyright c United Nations 2006 All rights reserved Manufactured in Thailand ISBN: 978-92-1-120491-9 ISSN: 1815-8897 ST/ESCAP/2436

The designations used and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area, or of its authorities, or concerning the delimitation of its frontiers or boundaries. The views expressed in this publication are those of the authors and do not necessarily reflect the views of the United Nations. Mention of firm names and commercial products does not imply the endorsement of the United Nations.

ii

AIMS AND SCOPE The Asia-Pacific Trade and Investment Review is a biannual, peer-reviewed journal for the dissemination of timely information and research analysis on new, emerging issues of trade, investment and enterprise development in Asia and the Pacific. Primarily aimed at government policymakers, researchers and representatives of the private sector, the Review imparts information on the latest trends in trade and investment policy issues facing the region. The Review emphasizes implications for policy relevance and operational research rather than academic research on theoretical and methodological issues. Articles are drawn from research work conducted by outside researchers and consultants as well as the staff of the Trade and Investment Division of ESCAP.

ADVISORY BOARD MEMBERS Mohamed Ariff Malaysian Institute of Economic Research Kuala Lumpur, Malaysia Razeen Sally London School of Economics London, United Kingdom of Great Britain and Northern Ireland Karl P. Sauvant Columbia Law School - Earth Institute Columbia University, New York, United States of America Rajah Rasiah Asia-Europe Institute University of Malaysia, Kuala Lumpur, Malaysia John S. Wilson The World Bank Washington, D.C., United States of America Patrick Low World Trade Organization Geneva, Switzerland

iii

EDITORS Chief Editor Xuan Zengpei Director, Trade and Investment Division Managing Editors Marc Proksch Trade Policy Section Trade and Investment Division Yann Duval Trade Policy Section Trade and Investment Division Sarah Mueller Trade Efficiency and Facilitation Section Trade and Investment Division Gehendra Dhakal Investment and Enterprise Development Section Trade and Investment Division

iv

ASIA-PACIFIC TRADE AND INVESTMENT REVIEW Vol. 2, No. 2, December 2006

CONTENTS

Page Research articles ...................................................................................................... S.K. Mohanty and Sachin Chaturvedi

1

Impact of SAFTA on trade in environmentally sensitive goods in South Asia: emerging challenges and policy options ........................................

3

Institute for International Trade, University of Adelaide

The relationship between liberalization in the logistics sector and trade facilitation .............................

27

Zamroni

Thailand's agricultural sector and free trade agreements .....................................................................

51

Tereso S. Tullao, Jr. and Michael Angelo A. Cortez

Enhancing the movement of natural persons in the ASEAN region: opportunities and constraints ......................................................................

71

Sasatra Sudsawasd and Santi Chaisrisawatsuk

Tigers and dragons against elephants: does the rising Chinese and Indian share of trade and foreign direct investment crowd out Thailand and other ASEAN countries? .........................................

93

v

CONTENTS (continued) Page Policy briefs .................................................................................................................

115

Role of technological capabilities in enhancing FDI flows in developing Asia-Pacific economies ...................................

117

Agricultural liberalization in preferential trading agreements: – the case of the ASEAN FTA .............................................. 127 Is there a need for “market access” plus indicators? ................................ 135 How promising is SAFTA? .....................................................................

143

Executive summaries of recent studies on trade and investment published by the ESCAP secretariat ...........................................................................................

151

An exploration of the need for and cost of selected trade facilitation measures in Asia and the Pacific in the context of the WTO negotiations .........................................................................

153

vi

Research Articles

1

Asia-Pacific Trade and Investment Review

Vol. 2, No. 2, December 2006

This page intentionally left blank

2



Impact of SAFTA on Trade in Environmentally Sensitive Goods in South Asia: Emerging Challenges and Policy Options S.K. Mohanty and Sachin Chaturvedi*

ABSTRACT

W

ith the launch of the South Asian Free Trade Area (SAFTA), trade integration in the South Asian subregion is likely to expand. However, not enough attention is being paid to the environmental implications of the Agreement. This is a feature of most free trade agreements (FTAs) being implemented in Asia despite the precedence established in some other FTAs. In the context of SAFTA, trade in environmentally sensitive goods (ESGs) assumes considerable significance, as the subregion is markedly dependent on these products for trade. Using a new approach, this paper analyses trade patterns in the subregion in the context of regional liberalization. Currently, intra-SAFTA trade accounts for close to 5 per cent of the total trade of SAFTA member countries. With regard to ESGs, intraregional trade is almost double that of the total trade in such goods. Although the subregion has a critical problem in terms of bilateral trade deficits, this matter can be addressed effectively with augmented intra-SAFTA trade in ESGs. The implications for ESGs after three rounds of trade liberalization measures under the South Asian Association for Regional Cooperation (SAARC) Preferential Trading Arrangement (SAPTA) are examined separately. Under that arrangement, trade in 3,612 (continued on page 4) * Fellows, Research and Information System for Developing Countries (RIS), New Delhi, E-mail: [email protected], [email protected]. An earlier version of this paper was presented at a meeting of the Global Biodiversity Forum organized by RIS and the International Union for the Conservation of Nature and Natural Resources (IUCN) in New Delhi. Any errors are the responsibility of the authors; the views expressed are those of the authors and do not necessarily reflect those of the United Nations.

3



(continued from page 3)

products has been liberalized under SAPTA at the harmonized system (HS) 6-digit level and about 18 per cent, or 653 of them are ESGs. Of the total intra-bloc trade in ESGs, about 21.5 per cent was liberalized during the first three rounds of SAPTA and the level of liberalization was almost equally spread in each of the rounds. There is still great potential for further liberalization of trade in ESGs under SAFTA. The subregion has a large market for high- and medium-technology ESGs; such products account for nearly 22 per cent of the total ESG market in the subregion. The present study proposes a road map for sectoral trade liberalization which would promote intra-SAFTA trade in ESG products. An effort has been made to suggest counter-balancing measures to minimize the negative environmental implications of possible trade expansion once SAFTA is implemented. It is suggested that liberalization of three important sectors in the first round of SAFTA could ease restrictions on nearly 70 per cent of the trade in the ESG sector. To make SAFTA effective, it is in the subregion's interest to take a holistic approach towards liberalizing ESGs and other trade sectors simultaneously in the first phase of liberalization. Taking into account the growing demand for environmentally safe products in both the domestic and export markets of industrialized countries, SAFTA needs to incorporate environmental regulations. Environmental standards should be enforced simultaneously at the subregional level in order to gradually expose subregional small and medium-sized enterprises (SMEs) to high environmental standards before they are exposed to competition from global suppliers.

1.

INTRODUCTION

SAARC had a slow start, but gained momentum with the launch of SAPTA in the mid1990s. Since the implementation of SAFTA at the beginning of the new millennium, it has begun to perform robustly (Mohanty and Chaturvedi, 2006). Four rounds of trade liberalization have been completed since the mid-1990s. However, there has been little discussion about the fact that the growth in subregional trade has been accompanied by much faster growth in trade in environmentally sensitive goods. The South Asian subregion has traditionally engaged in the production of ESGs, as well as their consumption and trade. Intensification of the subregional integration process may add further impetus to intra-subregional trade in ESGs, especially as SAFTA currently seems to pay little attention to ensuring the inclusion of, and follow-up of, environmental provisions. This also raises a point concerning measures to ensure the incorporation of concerns expressed at the multilateral level on issues related to the environment. ESGs play a dominant role as major foreign exchange earners for South Asian countries. Since these countries have adopted targets for maintaining high GDP growth, it may be inevitable that they rely on both export-led growth and domestic demand-led growth simultaneously (Asian Development Bank (ADB), 2005). In this context, countries in the subregion may regard ESGs as a fundamental part of their long-term development strategy to boost trade performance. 4



In the past, some attempts have been made to identify ESGs based on the “dirty industry” and “pollution haven” hypotheses (Low and Yeats, 1992; Chaturvedi and Nagpal, 2001), but these attempts are too broad and general to have relevance for current trade negotiations (Steenblick, 2005; Kumar and Chowdhury, 2005).1 Even single-criterion-based approaches such as focusing only on emission intensity, or multiple-criteria approaches such as those measuring the degradation of natural resources, biodiversity and ecosystems, have limited relevance for capturing data on environmentally sensitive goods. While ESGs are discussed in various forums, there is no convergence on views on the identification of ESGs. In this paper an effort is made to identify ESGs on the basis of a list of goods which face non-tariff measures (NTMs) based on environmental considerations (whether real or not) by any major global trading country. South Asia assumes a certain importance in this respect. The recent trend shows that absorption (i.e., import and production) of ESGs in the domestic economy is growing steadily. This trend has gained momentum in South Asia following rapid economic growth in most countries of the subregion. However, the market for ESGs is still very small compared with the subregion’s traditional export markets, despite the fact that intra-subregional trade in such products is subject to relatively less stringent environmental measures as compared with measures imposed in developed countries. Some policy-oriented issues and empirical evidence are discussed in the present study. Section 2 presents various environmental provisions adopted in different regional trade agreements while section 3 discusses different approaches towards ESGs. Section 4 presents some of the methodological issues of the paper while results are discussed in section 5. The final section provides broad conclusions and a set of policy recommendations.

2.

OVERVIEW OF ENVIRONMENTAL ISSUES IN REGIONAL TRADE AGREEMENTS

Concerns are growing that the environmental issues raised at various multilateral forums are likely to be marginalized by the conclusion of free trade agreements (FTAs), especially by Asian developing countries (Chaturvedi, 2003; Polaski, 2003). It is a matter of concern that environmental provisions are not being included in many of the FTAs involving developing countries. This is particularly troublesome when empirical evidence has established that in countries where Governments have weak or non-existent environmental protection policies expanded economic activity may be harmful to the environment and undermine the achievement of long-term sustainable development goals. In North America, a special agreement under the North American Free Trade Agreement (NAFTA), that is, the North American Agreement on Environmental Cooperation (NAAEC), covers environmental issues in the North American subregion. Under this agreement, environmental concerns would prevail over trade rules in cases of conflict. Most trade 1

Industries that incur a high level of abatement expenditure per unit of output are identified as dirty industries. The pollution haven hypothesis is explained as follows: if free trade occurs between countries with different environmental standards, countries with lower environmental standards will tend to develop a comparative advantage in environmentally sensitive industries, which will result in “havens” for the world’s dirty industries. See Cropper and Oats (1992).

5



agreements involving Canada, Mexico and the United States of America are largely in the spirit of the NAFTA provisions. The Canada-Costa Rica agreement is modelled on NAFTA and allows both countries to develop their own environmental laws for sustainable development. The United States-Jordan bilateral trade agreement of 2000 is the first agreement of its kind to include provisions for environmental protection (Audley, 2003). Similarly, the Chile-Mexico Free Trade Agreement takes a different and interesting position with regard to environmental issues. In case there is incompatibility between the agreement and specific obligations under any multilateral environmental agreement to which any of the two countries is a party, such as the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES); the Montreal Protocol on Substances that Deplete the Ozone Layer and the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, the party should choose a course of action which shows the least level of incompatibility with the regulations included in the trade agreement. Studies have also been undertaken to analyse environmental aspects of bilateral trade agreements involving the United States (Audley, 2003; Polaski, 2003). According to these studies, the United States-Chile Free Trade Agreement proposes to strengthen cooperation on projects including capacity-building for wildlife protection and resource management. The Agreement has a provision for reducing the use of methyl bromide and for developing a pollutant release and transfer register in Chile. This Agreement also refers to cooperative projects for capacity-building for eliminating the use of methyl bromide (Audley, 2003). This is important. According to the Montreal Protocol, one of the core multilateral environmental agreements, the use of this chemical has to be phased out by a certain date; originally, it had been 1 January 2005. However, the United States in a recent Meeting of Parties to the Protocol demanded a two-year extension of the deadline. Bilateral FTAs are also being analysed on the basis of their impact on natural resources. Some studies have identified adverse impacts caused by the United States-Mexico Free Trade Agreement (1997) (Quiroga and Ozuna, 1991). It is believed that increased demographic and economic growth along both sides of the United States-Mexico border, as well as increased economic integration of those countries, has led to severe natural resource and environmental problems which often spill across borders (Quiroga and Ozuna, 1991). The implementation of the United States-Mexico Free Trade Agreement, along with the expected additional investment that could flow into Mexico, would exacerbate these problems. This, in turn, may lead to environmental problems in non-border areas as well. The environmental provisions in the official texts of various FTAs in Asia are generally not very clear. The study on a proposed FTA among East Asian economies, including China, Japan, Republic of Korea and ASEAN (ASEAN+3), makes brief reference to environmentrelated issues.2 It mentions joint monitoring of dust and sand storms and monitoring of watermarine pollution, employing a regional perspective. Similarly, the India-Thailand FTA briefly refers to the need for exploring possible cooperation in the environmental sector (India, Ministry 2

6

ASEAN, "Joint Declaration on the Promotion of Tripartite Cooperation among the People's Republic of China, Japan and the Republic of Korea, Bali, Indonesia, 7 October 2003" <www.aseansec.org/15284.htm>.



of External Affairs, 2003). This per se does not include precautionary management of environment-related issues. The Singapore-Japan FTA contains no reference to environmental issues. The FTA in Asia which has probably received the most comments from an environmental point of view is the United States-Singapore FTA. Singapore has long been a major entrepot for importing and exporting wildlife to and from Asia, including illegal items such as tiger bones and tiger-bone medicines (Nowell, 2000). The current text of this FTA makes no mention of the environment, but following severe criticism of this shortcoming, a group has been nominated to propose relevant policy instruments to safeguard the environment.3 While there is a need for a clearer understanding of environmentally sensitive goods, FTAs have included, or in some cases, tried to circumvent environmental concerns covered in multilateral environmental agreements. They somehow have failed to address the issue of environmental standards, which may best be classified as sanitary and phytosanitary/technical barriers to trade concerns. Therefore, ESGs need to be redefined to ensure that real environmental concerns are being addressed effectively and that non-tariff barriers are not used as a pretext for environmental protection.

3.

CONCEPT OF ENVIRONMENTALLY SENSITIVE GOODS

The debate on the proper definition of ESGs has intensified over the last few years; it has yet to lead to a consensus on this matter (Mohanty and Manoharan, 2002; Chaturvedi and Nagpal, 2001). Based on a review of existing studies on this issue, three categories of ESGs may be identified: (a) those using abatement (i.e., a reduction of pollution) cost as a criterion, (b) using emission intensity as a criterion and (c) using multiple criteria, such as degradation of natural reserves, ecosystems and biodiversity.

(a) Abatement cost approach Under this approach, industrial activities are classified according to pollution intensity based on abatement and control costs. Some of the highly polluting industries are those producing cement, chemicals, pulp and paper, ferrous and nonferrous metals, as well as certain wood industries and petroleum refineries, among others. Tobey (1990) defined a pollutionintensive industry as one for which the pollution abatement cost in the United States was 1.85 per cent or more of total costs. Low and Yeats (1992) also identified some industries on the basis of pollution abatement costs in the United States. According to their definition, environmentally sensitive industries are those for which pollution abatement and control expenditure costs account for approximately 1 per cent or more of the total sales. The World Bank, in collaboration with the United States Environmental Protection Agency and United States Census Bureau, identified some sectors as pollution-intensive in the United States, using the actual emission intensity method (Mani and Wheeler, 1997). Lucas, Wheeler and Hettige (1992) identified as dirty industries, metals, cement, pulp and paper, and chemicals on the basis of aggregate toxic releases per unit of output. Letchumanan (1998) arrived at similar results using the United States toxic release data. 3

See website of Carnegie Foundation <www.carnegieendowment.org>.

7



(b) Emission intensity approach In this category, those sectors are identified in which actual emission intensity is high. Mani and Wheeler (1997) argue that the regulatory gap between developed and developing countries could, in principle, produce “pollution havens” analogous to “low wage havens”. In their study, they identify pollution-intensive industries, i.e., those with low elasticities of substitution between the use of the environment and other productive factors, which could join labour-intensive industries in the migration from the Organisation for Economic Cooperation and Development (OECD) countries to open developing economies, if the latter remained unregulated and environmental pricing were a significant determinant of comparative advantage. Some South Asian countries have tried to identify polluting industries rather than hazardous products covered under normal trade practices. India has classified 64 polluting industries as “red category” industries on the basis of their emissions, discharge of pollution potential or generation of hazardous wastes. Similarly in Pakistan, the Environmental Standard Committee has classified domestic industries into three main categories based on the hazardous nature of industries. Under another approach, the effects of industrial products on the degradation of natural areas or loss of biodiversity are used as criteria for identifying hazardous industries (World Bank, 1998). Using this approach, timber and wood products, fish and other seafood, and endangered species are identified as environmentally sensitive. Jha, Markandya and Vossenaar (1999) include marine products, wood, and wood and timber products under this category.

(c) Multiple criteria approach There are other products that may influence the balance of plant species or the biodiversity of wildlife, such as genetically modified foods. Several issues are raised with respect to these products in the context of WTO rules. For instance, one issue is whether or not genetically engineered fruits should be regarded as “like products”; another is whether, in the context of the Biosafety Protocol, the labelling of products using genetically modified organisms (GMOs) is desirable.4 While some countries believe that such labelling would be entirely consistent with the WTO rules on the grounds of public health concerns, other countries argue that their exports may be affected by such labelling as several European Union countries along with Japan and the Republic of Korea have banned the entry of various GMO products due to consumer sensitivity in those countries (Chaturvedi, 2003). On several counts, there is a need for choosing an alternative approach to identify ESGs other than the “dirty industry” approach. Identification of such products on the basis of their origin of industry, using the criterion of pollution abatement cost, may not be appropriate for various reasons. For instance, most of the tradable items produced by an industry may not involve a similar level of technology and levels of pollution abatement cost. In other words, an industry may produce different products of varying technology-intensity. In a study, Mohanty 4

8

In 2000, more than 170 Governments adopted a supplementary agreement to the Convention on Biological Diversity (CBD) known as the Cartagena Protocol on Biosafety, which came into force in 2003. The Protocol seeks to protect biological diversity from the potential risks that could be posed by living modified organisms produced by modern biotechnology.



and Manoharan (2002) have examined this aspect and found that several tradable products do not fall under the category of ESGs, despite the fact that their originating industry is recognized as a polluting industry. Secondly, the current practices in global trade indicate that several products are subject to various forms of NTMs on the basis of similar grounds as those used in the “pollution heaven hypotheses”, though in practice NTMs imposed on these products under NTMs is based on other (scientific) considerations. Therefore, the “dirty industry approach” may lead to an overestimation of ESGs as many of them would not qualify as environmentally sensitive in some countries.5 Thirdly, the definition of ESG needs to be based on specific international classifications, which could guide both regional and multilateral trade negotiations.

4.

METHODOLOGICAL ISSUES

UNCTAD (1996) has provided a detailed classification of non-tariff measures (NTMs), which include various groups of measures covering economic, environmental and other considerations. Such measures are commonly used in global trade practices and are identified to examine those products which are subject to single or multiple forms of environment-based NTMs in an ordinary trade transaction. This paper proposes a new approach to identify ESGs, which are commonly traded in the global market. For this purpose, two criteria are used: (a) A product classification based on the harmonized system (HS) should be used to make the classification useful for multilateral and regional trade negotiations. (b) Identified ESGs should be subject to environment-based NTMs by at least one of the major global trading powers. The resulting list of ESGs may have practical relevance, because they are chosen based on current trade practices in the global market. In order to identify ESGs in the global economy, the TRAINS database provides some useful information.6 It provides lists of products which are subject to different forms of NTMs in a number of countries. For each country, the products are listed at their national lines7 and the nature of an NTM is provided for each product separately.8 Because of difficulties in data reporting, the number of reported NTMs differs from one country to another. UNCTAD (1996) has evolved a new taxonomy of NTMs, covering economic and environmental measures which are uniformly used for reported countries. 5

6

7

8

The UNCTAD database (TRAINS - Trade Analysis and Information System, 2001) provides lists of products subject to different environmental and health-related non-tariff measures for selected countries. These countryspecific lists do not support production-based products as the basis for imposing such measures. TRAINS is a comprehensive electronic database which provides information on tariffs, para-tariffs, non-tariff measures and import flows for more than 140 countries using the harmonized system trade classification, . Product specialization by a country beyond the 6-digit HS codes is a national line for the country. National lines, in terms of level of product disaggregation, differ from one country to another. We have noticed from domestic exporters that most countries in the developed world impose a larger number of NTMs than the number that they report to UNCTAD. By not reporting domestic NTMs, several developed countries have concealed information about NTMs in their countries despite the fact that they use them for protecting their domestic markets.

9



For analytical purposes, certain assumptions are used while identifying ESGs using TRAINS data. We have assumed that most of the environment-based NTMs are applied on the basis of scientific evidence concerning human, animal and plant health. Taking into account the “law of transitivity” we assume that any NTM based on scientific findings adopted by an industrialized country will be adopted by other countries as well.9 For the present analysis, we begin with six major economies, namely, Australia, Canada, the European Union, Japan, New Zealand and the United States, in order to understand their trade practices with respect to the use of NTMs. An analysis of the types of NTMs used in these countries reveals that four types of environment-based NTMs exist, namely, prior authorization relating to CITES (110),10 Montreal Protocol (113),11 prohibition for environmental protection (114) and product characteristic requirements on health grounds (116).12 In order to make this classification relevant for multilateral and regional trade negotiations, a final list of ESGs at the 6-digit HS level codes has been prepared using the consolidated list13 of ESGs. On the basis of the above considerations we can now define ESGs as those globally tradable products which are subject to one or more environmentally sensitive NTMs in industrialized countries based on either scientific or precautionary principles. We use this new definition of ESGs to analyse environmental issues in the regional trade liberalization programme within the framework of SAARC based on the United Nations Conference on Trade and Development taxanomy of NTMs (UNCTAD, 1996). In the SAPTA Charter there is no reference to environmental issues. As trade liberalization in SAPTA follows a “positive list” approach, member countries are free to liberalize their trade with their SAPTA partners without any binding commitment on the coverage and depth of trade liberalization. Offers of goods for tariff cuts by individual SAPTA members are usually made on goods which range between the 2-digit and 8-digit HS code levels. The SAARC Secretariat14 has compiled a list with respect to the results of trade liberalization under the first three rounds of SAPTA, which may not be appropriate for understanding the extent to which each country has offered concessions to subregional partners, unless country offers are presented at a uniform level of commodity disaggregation. In an earlier study, Mohanty (2003) examined the impacts of liberalization under SAPTA on India’s trade sector, but did not include the environmental dimension of trade. In the present study, our intention is to map individual country offers to least developed countries (LDCs) and non-LDCs separately at the 6-digit HS code level15 for ESGs under different SAPTA rounds. 9

10

11

12 13

14 15

According to the law of transitivity if A=B and B=C then A=C. Therefore, if one norm is adopted in, say, country A and B follows the norm, then C follows the same norm too. The Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) entered into force in 1975, and provides a legal framework for regulating trade in endangered and other species globally. The Montreal Protocol on Substances that Deplete the Ozone Layer came into force in 1989; it is aimed at protecting the ozone layer through the control of substances that would contribute to depletion of the ozone layer in a manner that is likely to result in adverse effects on human health and the environment. Figures in parentheses refer to UNCTAD NTM codes. After selecting products which are subject to environmentally sensitive measures at the national line for each country separately, we have pooled them to prepare a consolidated list at the 6-digit HS code level. For details of trade liberalization in the first three rounds of SAPTA by the SAARC Secretariat, see RIS (2002), p. 173. In some cases where offers are made at a higher level of disaggregation than the 6-digit HS code level, suitable adjustments are made to accommodate such variations.

10



(a) Technology intensity of products It is apparent from the relevant literature that very few efforts have been made so far to classify tradable ESGs in terms of their technology intensity. Since the technology content of ESGs is also relevant for evaluating the quality of trade, the technology intensity of ESGs needs to be examined in the context of global trade. Lall (2000) classified tradable products in 10 broad technology-intensity groups using the Standard International Trade Classification (SITC), while Mohanty (2003) has extended the classification to HS for making it compatible with multilateral and bilateral trade negotiations. In the present study, the trade-technology classification is again extended to ESGs. This classification may shed some light on the size of subregional markets for different types of ESGs, so that the SAFTA process could widen the scope of intra-subregional trade in ESGs.

(b) Trade database for South Asian countries In the current economic literature, trade-related studies on South Asia are poorly represented in comparison with other subregions owing to data constraints for certain important South Asian countries. While many empirical studies have used domestic databases16 for conducting an impact analysis, others have used disaggregated data for certain countries17 without covering all countries of the subregion. In the present study, the Personal Computer Trade Analysis System (PC-TAS) has been used for undertaking a subregional analysis to compensate for the lack of data for Bangladesh and Pakistan.18 For generating trade data for these countries, a data-mirroring technique19 is used by taking a series of bilateral trade data on 150 countries and making suitable adjustments in these series.20

5.

SAPTA TRADE IN ENVIRONMENTALLY SENSITIVE GOODS: EMPIRICAL ANALYSIS

South Asia has passed through a phase of rapid expansion during the last decade following comprehensive economic reforms in a number of countries. High growth in the subregion is supported mostly by expansion in the manufacturing and services sectors. The subregion has displayed comparative advantages in the production of and trade in ESGs. In particular, Mohanty and Chaturvedi (2006) have found that there is great potential for intra-subregional trade in ESGs. 16

17

18

19

20

Some of the studies have used domestic databases such as Mukherjee (2004), Mohanty (2003) and Bhattacharya (2001). These studies have used multiple regional countries in their analyses such as Mehta and Bhattacharya (2000) and Mohanty and Chaturvedi (2006). The PC-TAS trade database was developed by the International Trade Centre (ITC). It provides information on international trade flows in HS and SITC at the disaggregated level <www.intracen.org/mas/pctas.htm>. When trade data are not reported for a country, we extract bilateral trade data for that country from all countries that reported in PC-TAS separately. For compiling export data for the countries that have not reported such data, we used import data from individual countries at the 6-digit HS code level, and used a similar approach for generating the export series. For adjusting the export and import series of non-reporting countries, we have used cost, insurance and freight (c.i.f.) and free on board (f.o.b.) deflators, respectively, to make them compatible with the trade data series of other reporting countries in PC-TAS.

11



Although South Asia contributes comparatively little to global trade, ESGs account for a significant proportion of its regional trade. Even global dependence on these products is very high. The results show that appropriate one in every five tradable products is found to be an ESG in global trade, according to the definition evolved in this paper. Based on this definition, we have identified 1,053 ESGs that are traded globally, and several of them are subject to one or more environment-based NTMs. The export basket of ESGs for South Asia is smaller than that of the world as a whole. The size of the overall trade of individual countries is highly divergent in the subregion, and the trade contribution of individual members to the subregion differs significantly depending upon each country's level of trade openness and overall economic activity. In the subregion, trade is dominated mostly by India, Pakistan, Bangladesh and Sri Lanka, as shown in table 1.21 The results show that the share of exports of individual SAARC member countries in the subregion's total exports ranges from 0.1 per cent (Bhutan) to 77.6 per cent (India), and the pattern is similar for imports. Table 1. Pattern of trade in environmentally sensitive goods in South Asia, 2002 (Percentage) South Asian countries/ subregion Bangladeshc Bhutan India Maldives Nepal Pakistanc Sri Lanka South Asia

Exports Share Total ESGs a

7.2 0.1 77.6 0.1 0.6 9.4 5.0 100.0

3.5 0.1 78.1 0.3 0.6 12.3 5.0 100.0

ESGs to totalb 10.3 14.5 21.2 61.5 23.6 27.6 21.1 21.1

Imports Sharea Total ESGs 7.9 0.2 73.9 0.4 1.5 8.9 7.1 100.0

16.8 0.3 50.2 0.9 2.5 15.5 13.7 100.0

ESGs to totalb 36.5 28.1 11.7 39.4 27.9 29.9 33.4 17.3

Sources: PC-TAS (2004), Personal Computer Trade Analysis System: 1998-2002 CD-ROM, International Trade Centre UNCTAD/WTO, Geneva <www.intracen.org/mas/pctas.htm>. a b c

21

Share in subregion’s total exports/imports. For country/subregion. Databases for Bangladesh and Pakistan were generated by the authors based on the trade of these countries with 150 other countries. The export and import databases were created for each country separately. Underestimation of the trade figure for these two countries is a possibility.

In table 1, the size of the external trade of Bangladesh and Pakistan is very small because disaggregated data were not reported by UNCTAD. The possibility of error existed while collecting information from around 150 countries.

12



The empirical results show that the subregion is critically dependent on ESGs for both exports and imports. The contribution of ESGs to the total exports of the subregion was 21.1 per cent while its contribution to imports was 17.3 per cent in 2002. The share of ESGs in total trade, varies significantly across the subregion. For instance, about 61.5 per cent of the exports from Maldives is dominated by ESGs. Countries such as Bangladesh and Bhutan have shown less dependence on these products in their export baskets. The import dependence of the subregion as a whole on such products has been relatively lower than that of exports. However, at the individual country level, the picture is somewhat different. Unlike exports, a large share of the imports of South Asian countries, with the sole exception of India, consists of ESGs.

(a) Intra-subregional trade in ESGs The SAARC process is very often described as a non-starter because trade linkages and complementarities among the member countries are limited. RIS (2004) estimated that the share of intra-subregional trade of total trade in the subregion is close to 5 per cent, whereas the corresponding ratio of intra-subregional trade in ESGs is close to 10 per cent, as shown in table 2. There are considerable variations in the level of intra-subregional trade among the individual countries of the subregion. For instance, most of the LDCs in the subregion have a high level of ESG trade links with other countries in the subregion. One of the reasons for the proliferation of trade in ESGs is the rapid liberalization of trade through the SAPTA process.22 Table 2. Intra-subregional trade in environmentally sensitive goods in South Asia, 2002 (Thousands of United States dollars) ESG exports

ESG imports

South Asian countries/ subregion

World

Intrasubregional

Intrasubregional to total (%)

World

Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka South Asia

678,853 16,612 15,107,991 55,305 120,052 2,385,012 974,261 19,338,086

15,724 16,510 1,435,167 13,854 104,690 82,013 84,029 1,751,987

2.3 99.4 9.5 25.1 87.2 3.4 8.6 9.1

2,385,364 48,243 7,131,467 131,649 353,440 2,202,048 1,950,618 14,202,829

IntraIntrasubregional subregional to total (%) 600,934 41,754 177,249 34,850 173,270 69,390 437,014 1,534,461

25.2 86.5 2.5 26.5 49.0 3.2 22.4 10.8

Source: PC-TAS (2004), Personal Computer Trade Analysis System: 1998-2002 CD-ROM, International Trade Centre UNCTAD/WTO, Geneva <www.intracen.org/mas/pctas.htm>.

22

SAARC had been perceived by some as a non-starter because trade among the subregional partners is not expanding significantly. This perception has changed recently as intra-bloc trade is growing at a much faster rate than the subregion’s trade with the rest of the world since 2002.

13



(b) Trade liberalization in ESGs under SAPTA Liberalization of trade in ESGs occurred in the natural course of events during the different SAPTA rounds. As discussed previously, there is no exclusive provision in SAPTA on trade and the environment. Based on considerations of competitiveness and other criteria, many products have been discussed in early efforts to liberalize trade in the subregion. The coverage of such products under the first three rounds of SAPTA are presented in table 3 at the subregional and country levels. The efficacy of the various SAPTA rounds as discussed in the literature shows that the various SAPTA rounds were not equally effective in terms of liberalizing trade within the subregion (Mohanty, 2003). In fact, the later rounds of SAPTA appear to be more effective than the earlier rounds with regard to the extent of trade liberalization achieved. In this paper, we examine the pattern of ESG trade liberalization in different SAPTA rounds and their implications for individual countries in the subregion. The results show that 3,612 products have been liberalized under SAPTA at the 6digit HS section level including 653 goods classified as ESGs based on the definition evolved in this paper. Some of the broad commodity groups (i.e., at HS section level) which are subject to significant trade liberalization are: animal and vegetable products, chemicals, skins and leather products, wood products, textiles and footwear. So far SAARC members have not reached any consensus on a common view of the liberalization process in the region. The level of ESG trade liberalization in the first three rounds of SAPTA is on par with the level of trade liberalization in general in the subregion, as shown in table 4. There is evidence that individual countries have received inequitable market access under the first three SAPTA rounds. For example, India and Sri Lanka achieved better market access in ESGs in the first round, whereas the Maldives and Pakistan benefited the most in the second round. In the third round, Bangladesh, Bhutan and Nepal secured higher market access than the other SAPTA members with regard to ESGs. Two broad observations emerge from the preceding analysis. First, the South Asian region is sourcing only 9.1 per cent (as shown in table 2) of its import requirements from within the subregion. As a result, there is considerable scope within the subregion to increase intra-subregional trade. Second, trade liberalization in ESG trade is not complete in the subregion. Only 21.5 per cent of intra-subregional trade in ESGs was liberalized under the first three rounds of SAPTA. Therefore SAFTA, as the successor to SAPTA, has a lot of potential to advance the current process of trade liberalization in ESGs.

14



Table 3. Liberalization of environmentally sensitive goods under different rounds of SAPTA (Number of product lines) Section Description

BGD BHU IND MAD NEP PAK LNK SAC

I

Live animals and animal products

82

24

56

0

6

31

54

94

II

Vegetable products

55

21

63

8

53

102

37

141

III

Animal or vegetable fats and oils, etc.

IV

Prepared foodstuffs, beverages, etc.

5

0

34

24

0

8

1

34

33

13

15

1

5

14

0

33

V

Mineral products

VI

Products of chemical or allied industries

VII

Plastics and articles thereof, etc.

0

0

0

0

0

1

0

1

VIII

Raw hides and skins, leather, etc.

38

18

15

25

9

17

7

47

IX

Wood and articles of wood

26

0

41

39

44

8

9

44

X

Pulp of wood or of other fibrous cellulosic material, etc.

0

0

0

0

0

0

0

0

XI

Textiles and textile articles

9

0

71

0

67

71

1

81

XII

Footwear, headgear and umbrellas, etc.

0

9

13

15

11

0

1

15

XIII

Articles of stone, plaster, cement, etc.

0

2

2

0

2

0

0

2

XIV

Natural or cultured pearls, jewellery, etc.

0

0

0

0

0

0

0

0

XV

Base metals and articles of base metal

0

0

8

0

0

0

0

8

0

0

0

0

0

0

0

0

20

28

81

7

17

45

6

89

XVI

Machinery and mechanical appliances, etc.

0

0

40

0

1

0

0

40

XVII

Vehicles, aircraft and vessels, etc.

0

0

0

0

5

0

5

5

XVIII

Optical, photographic and cinematographic instruments, etc.

0

0

5

0

0

1

0

5

XIX

Arms and ammunition, etc.

0

0

0

0

0

0

0

0

XX

Miscellaneous manufactured articles

0

0

13

0

1

0

0

13

XXI

Works of art, collectors' pieces and antiques

1

0

0

0

0

0

0

1

269

115

457

119

221

298

121

653

Total lines

Source: PC-TAS (2004), Personal Computer Trade Analysis System: 1998-2002 CD-ROM, International Trade Centre UNCTAD/WTO, Geneva <www.intracen.org/mas/pctas.htm>. Abbreviations: BGD: Bangladesh; BHU: Bhutan; IND: India; MAD: Maldives; NEP: Nepal; PAK: Pakistan; LNK: Sri Lanka; SAC: South Asian countries. Note: The figures represent the number of product lines at the 6-digit HS section level.

15



Table 4. Distribution of exports of environmentally sensitive goods by SAPTA round (Percentage) South Asian countries/ subregion Bangladesh Bhutan

SAPTA round I

II

III

Total

35.5

8.3

56.2

100

0.5

3.4

96.1

100

40.1

44.6

15.3

100

Maldives

0.0

99.1

0.9

100

Nepal

1.4

7.2

91.4

100

Pakistan

30.6

48.3

21.1

100

Sri Lanka

67.6

32.2

0.1

100

South Asia

33.5

37.2

29.3

100

India

Source: PC-TAS (2004), Personal Computer Trade Analysis System: 1998-2002 CD-ROM, International Trade Centre UNCTAD/WTO, Geneva <www.intracen.org/mas/pctas.htm>. SAARC Secretariat database is used for country schedules. Note: Figures are percentages of the total ESG exports of individual member countries.

(c) Technology intensity of ESGs South Asia has a large market for various categories of technology-intensive ESGs.23 As mentioned previously, about 17.3 per cent of subregional imports consists of ESGs. For South Asia, the largest ESG market consists of resource-based products, followed by primary products, as presented in figure 1. These two product categories jointly cover 71 per cent of the total market in ESGs in the region. However, the market for high and medium technologyintensive ESGs is also large, covering nearly 22 per cent of the total ESG market in the region. Figure 1. Market access in South Asia: by technology intensity of environmentally sensitive goods

23

ESGs could range from primary/resource-based products to high technology products. For details, see Lall (2000) and Mohanty (2003).

16



The size of the market for technology-intensive ESGs differs from one country to another in South Asia. When one ranks the lead countries in terms of imports of ESGs, India comes first followed by Bangladesh, Pakistan and Sri Lanka. Among the imported ESGs, the demand for resource-based products is sizeable, with India being the largest market for such products. Similarly, the market for medium-technology products is quite substantial in most countries in the subregion, while the demand for low-technology ESGs is rather uniformly spread across the subregion. Bangladesh, India, Pakistan and Sri Lanka have almost identical market size for primary, resource-based and low-technology ESGs. Bhutan, Maldives and Nepal have small markets for ESGs.

(d) Towards the integration of ESGs in SAFTA liberalization Although the countries in the subregion hold great expectations of SAFTA, they have failed to do their homework; as a result comprehensive trade liberalization in the subregion has been at a low level. With the start of SAFTA implementation in June 2006, the first phase of liberalization started in India and Pakistan. Some concern has been expressed in the subregion regarding the efficacy of the new phase of liberalization by countries such as Bangladesh among other LDCs. Further delays in the implementation of SAFTA would have severe cost implications for individual countries and the subregion as a whole. It may be observed that, in the wake of the failure of the WTO Ministerial Conference in Cancun in 2003, there has been a surge in regional trade agreements and other arrangements for regional, subregional and bilateral economic cooperation. The South Asian region is no exception with regard to this trend. For instance, India and Pakistan have formed FTAs with Sri Lanka, and Bangladesh has adopted a two-pronged approach to deal with regional cooperation.24 The country is also actively pursuing FTAs with Pakistan and Sri Lanka. India can look forward to advancing its prosperity as its neighbours further develop. During the last three decades,25 India has been deeply engaged in different forms of RTAs. India's engagement with ASEAN, an outcome of its “Look East Policy”, has been highly rewarding.26 India is also associated with various other initiatives such as India-SACU, IndiaGCC, India-MERCOSUR, India-Brazil-South Africa, SACU-India-MERCOSUR, IndiaSingapore CECA, India-Thailand FTA, India-China FTA, India-Republic of Korea CECA, India-Japan CECA, India-Malaysia FTA and India-Chile Preferential Trade Agreement.27 If 24

25

26

27

The national Bangladesh trade policy dialogue tends to be dominated by the issue of trade imbalances with India. Bangladesh is highly optimistic about the gains from a bilateral trading arrangement with India, but it is not yet sure about the appropriate approach to be adopted in this regard. India became associated with the regional process with the signing of the Bangkok Agreement in 1975; it was subsequently amended and in 2005 became known as the Asia-Pacific Trade Agreement. India's trade linkage with South-East Asia has improved further in the new millennium following India's signing of an FTA with ASEAN. India’s export share to the region increased significantly from 5.8 per cent in the period 1999-2001 to 9.3 per cent in the period 2003-2004 and exports to the region grew at the rate of 31.1 per cent per annum between the periods 1995-1997 and 2003-2005. SACU: Southern African Customs Union; GCC: the Gulf Cooperation Council; MERCOSUR: South American Common Market; and CECA: Comprehensive Economic Cooperation Agreement.

17



SAFTA does not yield concrete results, it is possible that India would continue to pursue alternative arrangements with other economies in and outside the subregion.28 In a recent study, the implications of three scenarios, i.e., India’s continued and discontinued association with SAFTA, for the subregion and for individual countries of the subregion, are examined (Mohanty, 2005). The results based on the application of the Computable General Equilibrium model indicate that India's association with SAFTA would generate welfare gains for India in the amount US$ 344 million per annum. If India prefers to go along with a few alternative partners, the welfare gains for India could increase further to US$ 2.8 billion per annum. The study suggests that there is a gain for the South Asian region if liberalization under SAFTA deepens. With the launch of SAFTA, there is optimism in the region that it may fulfil its mandate of comprehensive subregional trade liberalization. In order to foster this process, the liberalization of trade in ESGs should be an integral part of the overall trade liberalization process. SAFTA has adopted the “negative list” approach for faster sectoral liberalization. Under sector-by-sector liberalization, those sectors whose liberalization would lead to significant market access in the subregion should be chosen, while the entire liberalization process could be segmented in a few phases to make the process sustainable and efficient. Taking into account issues related to the liberalization of trade in ESGs, we have estimated the volume of subregional trade in ESGs in different sectors and made a ranking on the basis of the size of ESG trade in the subregion, as shown in table 5. The schedule of liberalization should be aimed at liberalizing the important sectors first followed by low ranking sectors in order to realize the best effects of the FTA. It is recommended that trade liberalization in ESGs proceed in three phases. We propose that sectors such as vegetable products, mineral products and vehicles be liberalized in the first round. These three sectors put together would liberalize 69.6 per cent of the trade in ESGs in the subregion.

28

It is the timing and sequencing of liberalization which matters for the success of SAFTA. If SAFTA follows its agreed liberalization schedule, then the gains for the subregion would be optimum for the contracting parties. If SAFTA implementation is delayed, India’s potential gains from SAFTA may be replaced by gains it derives from the FTAs it is pursuing simultaneously with SAFTA implementation, while welfare gains for SAARC partners will be less than optimum. In other words, the longer SAFTA implementation is delayed, the lower will be the welfare gains for the subregion, except for India. See Mohanty (2005) for details.

18



Table 5. Subregional exports of environmentally sensitive goods and road map for liberalization under SAFTA (Thousands of United States dollars) HS section

Description

I

Live animals and animal products

World

Share of SAARC in

47,505

2,336,607

global trade (%) 2.0

SAARC

Sectoral distribution in

SAARC (%) 2.7

Ranking of sectors

Phasing out

in SAARC (N)

period (N)

9

3

II

Vegetable products

578,523

4,513,534

12.8

33.0

1

1

III

Animal or vegetable fats and oils, etc.

57,411

148,040

38.8

3.3

7

3

IV

Prepared foodstuffs, beverages, etc.

78,692

353,211

22.3

4.5

6

2

V

Mineral products

234,422

2,312,798

10.1

13.4

3

1

VI

Products of chemical or allied industries

134,488

1,757,153

7.7

7.7

4

2

VII

Plastics and articles thereof, etc.

59

1,584

3.7

0.0

18

3

VIII

Raw hides and skins, leather, etc.

8,391

1,926,503

0.4

0.5

11

3

12,051

37,891

31.8

0.7

10

3

0

0

0.0

0.0

9

3

133,704

1,846,308

7.2

7.6

5

2

755

659,938

0.1

0.0

15

3

IX

Wood and articles of wood

X

Pulp of wood or of other fibrous cellulosic material,etc.

XI

Textiles and textile articles

XII

Footwear, headgear and umbrellas, etc.

XIII

Articles of stone, plaster, . cement, etc

1,249

19,062

6.6

0.1

14

3

XIV

Natural or cultured pearls, jewellery, etc.

66

25,433

0.3

0.0

17

3

XV

Base metals and articles of base metal

1,646

5,704

28.9

0.1

13

3

XVI

Machinery and mechanical appliances, etc.

52,022

410,279

12.7

3.0

8

3

XVII

Vehicles, aircraft and vessels, etc.

405,707

1,093,094

37.1

23.2

2

1

XVIII

Optical, photographic and cinematographic instrumental, etc.

104

29,026

0.4

0.0

16

3

XIX

Arms and ammunition, etc.

XX

Miscellaneous manufactured articles

XXI

Works of art, collectors' pieces and antiques

0

6,256

0.0

0.0

20

3

5,192

102,300

5.1

0.3

12

3

0

1,378

0.0

0.0

21

3

Source: PC-TAS (2004), Personal Computer Trade Analysis System: 1998-2002 CD-ROM, International Trade Centre UNCTAD/WTO, Geneva <www.intracen.org/mas/pctas.htm>.

19


6.


CONCLUSIONS AND SOME POLICY RECOMMENDATIONS

Environmental concerns in trade are slowly being incorporated into various regional and bilateral trade agreements following their inclusion in NAFTA in 1992. While NAFTA has given priority to environmental issues over trade issues in cases of conflict, the United States-Chile FTA has gone further and included provisions for capacity-building and resource management. A broad consensus is emerging from these regional agreements that environmental issues are likely to be the dominant issues in various regional trade agreements in the near future. In several prominent regional agreements in which environmental policies have been included, various trade policy documents have also detailed elements of different multilateral environmental agreements such as CITES, and the Montreal Protocol, but do not cover other dimensions such as standards related to labelling, packaging, etc. New regional agreements need to be broad-based to cover elements from both multilateral environmental agreements and sanitary and phytosanitary/technical barriers to trade-related measures in these regional agreements. The inclusion of such measures is important, as the issues become more complicated, in particular if account is taken of the entry of biotechnology goods into trade. The present study attempts to identify certain ESGs based on NTMs in global trade, as no previous effort was made to identify ESGs based on trade data. Identification of such products may be useful for both regional and multilateral trade negotiations. Trade data analysis, based on such a concept, demonstrates that South Asia is largely dependent on both exports and imports of ESGs within the subregion and with the rest of the world. With the growing importance of trade-related environmental issues at regional and multilateral forums, the South Asian region has to prepare itself to meet these challenges, and seriously consider this aspect while negotiating and concluding any new agreement following SAFTA. This needs to be done in a phased manner as these ESGs currently play an important role in the economies of the subregion. In particular, the subregion is critically dependent on ESGs for both exports and imports. The dependence of the region on ESGs amounted to 21.1 per cent for exports and 17.3 per cent for imports in 2002. Certain countries in the subregion, such as the Maldives, Nepal, Pakistan and Sri Lanka, are significantly dependent on ESGs both for exports and imports. Moreover, India’s exports also largely depend on ESGs. The intra-subregional trade ratio in ESGs is almost double that of overall intra-subregional trade. In 2002 intra-subregional exports of ESGs was 9.1 per cent while the figure for imports was 10.8 per cent. The high level of intra-subregional trade in ESGs may be a result of the liberalization process under SAPTA. Our re-examination of SAPTA schedules indicates that South Asia liberalized 3,612 actually traded products in the first three rounds of SAPTA at the 6-digit HS level in 2002. Of the total number of concessional products under SAPTA, 653 of them fall under the category of ESGs. The results show that under SAPTA the liberalization of trade in ESGs is more equitable than overall trade liberalization. While India and Sri Lanka attained better market access in ESGs in the first round, Maldives and Pakistan received similar market access in the second round. In the third round, other SAARC members also received wider market access in the subregion. In this context, the South Asian countries should consider further expanding intra-subregional trade in ESGs.

20



Since the launch of SAFTA, national Governments need to ensure that they liberalize trade in ESGs with utmost precaution, especially ESGs for which subregional standards are still to be identified. Implementation of SAFTA is currently proceeding; however, the subregion has not made adequate preparations for a new phase of trade liberalization. If the subregion fails to make SAFTA successful, it is possible that individual members may choose alternative paths to pursue their trade policy goals. Under that scenario, South Asian economic integration would likely suffer further setbacks.

21



Acknowledgements The authors would like to thank participants for the comments they received, particularly from Nagesh Kumar, Sanjay Kumar and Balakrishna Pisupati.

22



REFERENCES Asian Development Bank (2005). Asian Development Outlook (Manila). Association of Southeast Asian Nations (ASEAN) (2003). “Joint Declaration on the Promotion of Tripartite Cooperation among the People's Republic of China, Japan and the Republic of Korea, Bali, Indonesia, 7 October 2003” <www.aseansec.org/ 15284.htm>. Audley, John (2003). “The art of the possible: Environment in the free trade area of the Americas,” Issue Brief (Washington D.C., Carnegie Endowment for International Peace), November. Bhattacharya, S.K. (2001). “Regional trading arrangements among SAARC countries and India’s imports”, South Asia Economic Journal, vol. 2, No. 2, pp. 281-312. Chaturvedi, Sachin (2003). Environment Issues in Free Trade Agreements in Asia and the Post-Cancun Challenges: Issues and Policy Options, RIS Discussion Paper No. 67 (New Delhi, Research and Information System for Developing Countries). Chaturvedi, S. and G. Nagpal (2001). Product Standards and Trade in Environmentally Sensitive Goods: A Study of South Asian Experience, RIS Discussion Paper No. 22 (New Delhi, Research and Information System for Developing Countries). Cropper, M.L. and W.E. Oats (1992). “Environmental economics: A survey”, Journal of Economic Literature, vol. 30, No. 2, pp. 675-740. Jha, Veena, Anil Markandya and Rene Vossenaar (1999). Reconciling Trade and the Environment: Lessons from Case Studies in Developing Countries (Cheltenham, United Kingdom, Edward Elgar Publishing Ltd.). Kumar, Sanjay and Nupur Chowdhury (2005). Trade and Environment in the WTO: Negotiating Options for Developing Countries, RIS Discussion Paper No. 103 (New Delhi, Research and Information System for Developing Countries). Lall, S. (2000). The Technological Structure and Performance of Developing Country Manufactured Exports, 1985-1998, QEH Working Paper No. 44 (Oxford, Queen Elizabeth House, Oxford University). Letchumanan, R. (1998). Trade, Environment and Competitiveness: Testing the “Pollution Haven” Hypothesis from Technology Perceptive, UNU/IAS Working Paper No. 43 (Tokyo, United Nations University/Institute of Advanced Studies). Low, P. and A. Yeats (1992). “Do ‘dirty’ migrate?”, in Patrick Low, ed., International Trade and the Environment, World Bank Discussion Paper No. 159 (Washington D.C., World Bank).

23



Lucas, R.E.B., D. Wheeler and H. Hettige (1992). “Economic development, environmental regulation and the international migration of toxic industrial pollution: 1960-1988”, in Patrick Low, ed., International Trade and the Environment, World Bank Discussion Paper No. 159 (Washington D.C., World Bank). Mani, Muthukumara and David Wheeler (1997). “In search of pollution havens? Dirty industry in the world economy”, in Per G. Frederiksson, ed., Trade, Global Policy, and the Environment, World Bank Discussion Paper No. 402 (Washington D.C., World Bank). Mehta, Rajesh and S.K. Bhattacharya (2000). “The South Asian Preferential Trading Arrangement: Impact on intra-regional trade”, Asia Pacific Journal of Economics and Business, vol. 4, No. 1, pp. 92-111, June. Ministry of External Affairs, Government of India (2003). Framework Agreement for Establishing Free Trade Area between the Republic of India and the Kingdom of Thailand (New Delhi), October. Mohanty S.K. (2003). “Regional trade liberalization under SAPTA and India’s trade linkages with South Asia: An empirical assessment”, paper presented at the ESCAP Expert Group Meeting on Regional Trading Agreements in Asia and Pacific, Bangkok, 3031 January. _______(2005). “Is South Asian economic cooperation sustainable?: Strategy for meaningful transition from SAPTA to SAFTA”, paper presented at the Eighth GTAP Conference .. held in Lubeck, Germany, 9-11 June. Mohanty, S.K. and Sachin Chaturvedi (2006). “Mainstreaming environment, biodiversity and development concerns: Lessons for SAFTA”, in Trade, Biodiversity and Multilateral Environmental Agreements (MEAs): A Report of the South Asia Biodiversity Forum (New Delhi, Research and Information System for Developing Countries). Mohanty, S.K. and T.R. Manoharan (2002). Analysis of Environment Related Non-Tariff Measures in the European Union: Implications of South Asian Exports, RIS Discussion Paper No. 38 (New Delhi, Research and Information System for Developing Countries). Mukherjee, I.N. (2004). Towards a Free Trade Area in South Asia: Charting a Feasible Course for Trade Liberalisation with Reference to India’s Role, RIS Discussion Paper No.86 (New Delhi, Research and Information System for Developing Countries). Nowell, K. (2000). Far from a Cure: The Tiger Trade Revisited (Cambridge, TRAFFIC International). Polaski, Sandra (2003). “Serious flaw in U.S.-Singapore Trade Agreement must be addressed”, Issue Brief (Washington D.C., Carnegie Endowment for International Peace), April.

24



Quiroga, R.G. and Teofilo Ozuna (1991). The U.S.-Mexico Free Trade Agreement: Natural Resource and Environmental Issues, TAMRC International Market Research Report No. IM-8-91 (Texas, Texas Agribusiness Market Research Center). Research and Information System for Developing Countries (RIS) (2002). South Asia Development and Cooperation Report 2001-02 (New Delhi). _______(2004). South Asia Development and Cooperation Report 2004 (New Delhi). Steenblick, Ronald (2005). Environmental Goods: A Comparison of the APEC and OECD Lists, OECD Trade and Environment Working Paper No. 2005-04 (Paris, OECD). Tobey, James (1990). “The effects of domestic environmental policies on patterns of world trade: an empirical test”, Kyklos, vol. 43, No. 2, pp. 191-209. United Nations Conference on Trade and Development (UNCTAD) (1996). A User’s Manual for TRAINS (Geneva). _______(2001). Trade Analysis and Information System (Geneva). World Bank (1998). World Development Report 1998/99: Knowledge for Development (Washington D.C.).

25




The Relationship between Liberalization in the Logistics Sector and Trade Facilitation

Institute for International Trade, University of Adelaide*

ABSTRACT

L

ogistics services, which include activities required for the transportation, storage and handling of production inputs and finished products from producer to consumer, play a critical role in international trade. Consumers of logistics services are typically suppliers of products themselves. Consequently, the efficient supply of logistics services helps to facilitate international trade in a whole range of other products. The more timely, reliable and efficient the logistics supply chain, the more efficiently and reliably goods can be delivered from the point of production to the point of consumption. Using the export of tuna from South Australia to Japan as an illustrative example, this study demonstrates that the improvement in the performance of logistics services through domestic liberalization may generate a virtuous cycle, whereby international trade is increased and that this, in turn, may increase the demand for logistics services. This study also supports the view that the benefits of improved performance of logistics services could be enhanced through governmental measures that assist the flow of trade across national borders. Further, trade facilitation measures instituted by a Government, including but not limited to more efficient, well-coordinated border control mechanisms, may promote greater demand for logistics services. Indeed, the respective extent and pace of measures taken by Governments to liberalize the supply of logistics services and to facilitate trade (continued on page 28) * See Acknowledgements at the end of the paper for details. This study was conducted as part of the implementation of the Asia-Pacific Research and Training Network on Trade (ARTNeT) research programme and carried out with the aid of a grant from the Asia-Pacific Trade and Investment Initiative (APTII), UNDP Regional Centre, Colombo, and the technical support of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). Any errors are the responsibility of the Institute; the views expressed are those of the Institute and do not necessarily reflect those of the United Nations. An extended but unedited version of this paper is available as ARTNeT Working Paper No. 16 at <www.artnetontrade.org>.

27




will determine whether or not a virtuous cycle will be generated and the extent of the benefits that will accrue from that cycle. This study emphasizes that a regulatory framework which can balance the need to foster the liberalization of logistics services, while at the same time maintain the requisite degree of control at national borders to protect against security, safety and health threats, will lay the foundation for such a virtuous cycle. Consultation with all the relevant stakeholders – governmental bodies, suppliers of logistics services, and exporters and importers dependent upon logistics services – will help to realize the known benefits of logistics liberalization.

1.

INTRODUCTION

Logistics can be broadly defined as the range of activities required for the transportation, storage and handling of production inputs and finished products from producer to consumer. The various activities that may be involved in the “logistics supply chain” play a critical role in international trade. More specifically, exporters of many goods heavily depend upon logistics services for the efficient, cost-effective and timely delivery of those goods to consumers in the import market.1 Further, in a recent report prepared by the United States International Trade Commission (USITC) on the global market for logistics services, it was suggested that improving the performance of logistics services through liberalization may generate a virtuous cycle, whereby international trade is increased, which, in turn, increases the demand for logistics services.2 In theory, the liberalization of logistics services and other governmental efforts aimed at facilitating international trade could be mutually reinforcing. In particular, the benefits of improved performance of logistics services could be enhanced through governmental measures that assist the flow of trade across national borders rather than hindering such trade. Nevertheless, the converse could also be true. In its report, the USITC considered the effects on logistics services of trade impediments. It found that the benefits that could potentially accrue to suppliers of logistics services as well as to international traders from measures aimed at enhancing the efficiency of logistics services could be undermined by governmental trade barriers.3 Indeed, such obstacles might result in delays, which, in turn, may erode the comparative advantage of products being exported or imported. 1

2

3

This tends to be supported by empirical studies, which suggest that a robust statistical link exists between transport costs and international trade flows, see Lim o and Venables, “Infrastructure, geographical disadvantage, transport costs and trade”, World Bank Economic Review (Washington D.C., 2001), vol. 15, pp. 451-479. United States International Trade Commission, Logistic Services: An Overview of the Global Market and Potential Effects of Removing Trade Impediments, Investigation No. 332-463, USITC Publication 3770 (May 2005), p. ix. Ibid., p. 3-1.

28



Whether or not a virtuous cycle can be generated will ultimately depend upon the respective extent and pace of measures taken by Governments to liberalize the supply of logistics services and to facilitate international trade. This study seeks to examine the changing nature of the domestic market for logistics services in Australia over the past 10-15 years with a view to determining the relationship, if any, between the progressive liberalization of logistics services and trade facilitation.4 The export of tuna from South Australia to Japan is used as an example to illustrate this relationship.

2.

TRENDS IN THE AUSTRALIAN MARKET FOR LOGISTICS SERVICES

(a) The importance of liberalization The services sector plays an important role in any domestic economy.5 A number of benefits are touted as flowing from domestic liberalization of the services sector. For example, it is generally considered that regulatory reform of services markets will create opportunities for firms to develop new services, meet emerging global demands and increase employment. Further, liberalization spurs competition, which improves efficiency and innovation.6 Theory also suggests that liberalization results in lower prices, better quality and increased choice for consumers. Evidence in the telecommunications7 and financial8 sectors tends to bear out this theory. The precise impact and size of the gains resulting from services liberalization will depend upon the market structure of the sector in question, the nature and extent of the liberalization measures adopted, as well as the broader regulatory framework within which the services in question are being supplied. The logistics sector is a particularly important services sector for all domestic economies and, therefore, the rewards of domestic liberalization can be especially significant.9 Notably, consumers of logistics services are typically suppliers of products themselves. Consequently, the efficient supply of logistics services, which is enhanced through liberalization, helps to facilitate the supply of a whole range of other products. The more timely, reliable and efficient the logistics supply chain, the quicker and more reliably goods can be delivered from the point of production to the point of consumption. In this regard, globalization has highlighted the need for and importance of liberalization of logistics services. As a result of globalization, a vast range of products – perishable and non-perishable alike – can be sourced from all over the world. It is in this context that the 4

5

6 7

8 9

For the purposes of this study, the term “trade facilitation” is interpreted as the simplification and harmonization of international trade procedures that apply at the border to exported and imported goods while also encompassing broader governmental measures to facilitate trade, which reduce traders’ transaction costs and thereby promote trade. See Department of Trade and Industry, United Kingdom, <www.dti.gov.uk/files/file23412.pdf> and OECD, Growth in Services: Fostering Employment, Productivity and Innovation, Meeting of the OECD Council at Ministerial Level, Paris, 3-4 May 2005, p. 2. See footnote 5. See, for example, International Communication Union, World Telecommunication Development Report 2002 (Geneva, March 2002). See, for example, International Financial Services, Impact of Liberalising Financial Services (London, January 2002). The global market for third-party logistics services was valued at about $130 billion in 2002; United States International Trade Commission, see footnote 2, p. 2-1.

29



“cost of time” has become a critical factor from the perspective of exporters, importers and suppliers of logistics services. The time it takes to get a product to market may determine whether or not a product gains entry into a foreign market. The cost of time becomes all the more pressing if the product is perishable and has a short shelf life and/or if the product is needed for just-in-time production. Additionally, perishable products must be safe and edible to consume upon arrival in the destination market. These combined pressures have driven changes in the logistics sector throughout the world, including in Australia. Logistics activities represent approximately 9 per cent of Australia’s gross domestic product (GDP), comparable with 12 per cent for mining, construction and utilities, 11 per cent for wholesale and retail trade and 12 per cent for manufacturing. Australia’s large geographic dimensions coupled with the breadth of products that are exported abroad, ranging from heavy commodities to delicate perishables, pose important challenges to the supply of logistics services in Australia. A number of different types of logistics services may be necessary to transport and deliver the product from Australia to the export market in the form or state required by consumers. The efficient and cost-effective supply of multi-modal logistics services may be compromised if there are significant differences between the suppliers of each type of service along the logistics supply chain in terms of infrastructure, organization and service standards. Poor performance of just one aspect of the logistics supply chain could affect the competitiveness of the exported product. In the long term, instances of poor performance associated with the supply of logistics services may permanently damage an exporter’s reputation abroad.

(b) The logistics supply chain The performance of logistics services can be analysed in the context of the logistics supply chain. The supply chain represents the sequence of logistics activities involved in the transportation, storage and handling of products while en route to the destination market and illustrates the interdependencies between those activities. Swift and seamless delivery is the primary objective along the entire supply chain. In order to achieve that objective, the supply of a specific logistics service must be undertaken in coordination with the supply of the other interdependent logistics services in the supply chain. Third party logistics suppliers (3PLs) are external parties that perform all or part of logistics activities involved in the supply chain for a particular product on behalf of the producer. These suppliers, which exclusively specialize in the supply of logistics services, may provide benefits such as lower costs, improved quality and better integration of logistics activities. Freight forwarders are a type of 3PL. They organize the dispatch of cargo by road, rail, ship or sea on behalf of producers or on behalf of other 3PLs that have been engaged to manage the entire logistics supply chain. Apart from securing cargo space on the relevant mode of transport, freight forwarders may also deal with documentary and other formalities associated with shipments. Private sector logistics firms operate in many segments of the Australian logistics supply chain. However, such firms may be legally precluded from operating in particular segments where the supply of the logistics service implicates public or quasi-public infrastructure and/ 30



or where safety or security concerns exist. An example is the ownership and operation of railway lines, ports and airports. In such cases, Governments may choose to own, control and operate the underlying infrastructure rather than entrusting such activities to private enterprise. Figure 1. An overview of the logistics supply chain

Inputs

Logistics services

Production

Logistics information systems

Logistics services

Logistics infrastructure and resources

Distribution

Logistics services

Consumption

Source: Australian Bureau of Transport Economics, “Logistics in Australia: A preliminary analysis”, Working Paper 49, October 2001, p. xii.

31



(c) Market dynamics The Australian market for the supply of logistics services has been the subject of much study, comment and reform over the past 10-15 years. In general terms, reform has been the result of a mix of public and private initiatives aimed at enhancing efficiency in the supply of logistics services in Australia. The main aspects of these initiatives will be discussed immediately below, particularly those that have an impact on international trade.

(i) Market access commitments A potent tool to liberalize a sector in a country is through the grant of market access to suppliers from other countries, whether on a bilateral, regional or multilateral basis. Depending upon the characteristics of the sector in question, liberalization through market access commitments may imply the arrival of more foreign suppliers, which could translate into lower costs, but not necessarily a reduction in the number of domestic suppliers. During the Uruguay Round of WTO trade negotiations, Australia made commitments to grant market access to foreign suppliers with respect to a number of sectors that cover services included in the logistics supply chain. These commitments have resulted in the arrival in Australia of significant foreign players supplying road and maritime transport services and storage services.

(ii) Domestic regulatory reform Regulatory reform in the Australian logistics sector has been driven by changes in regulatory philosophy, dissatisfaction with the service provided by government or monopoly suppliers and a desire on the part of federal and state governments to reduce expenditure on infrastructure or to fund infrastructure improvements. Reform has seen major changes in the market environment for both public and private suppliers of logistics services in Australia predominantly with respect to the transportation components of the logistics supply chain, transportation being the most significant component of the supply chain in terms of dollars spent.10 Prior to such reforms, state monopolies owned and operated the railways, interstate road transport was heavily regulated, irregular and slow and relatively few shipping lines and airlines serviced Australia. Since then, liberalization and/or privatization have taken place in virtually all segments of the transportation components of the logistics supply chain. Broadly speaking, the result of the reform efforts has been increased efficiency and broader consumer choice, which, in turn, has facilitated the more efficient movement of freight from Australia through national and international logistics chains.

10

An international study of logistics activities found that transportation contributed between 40 and 45 per cent of the total logistics costs of a business. See Davis and Drumm quoted in the Bureau of Transport and Regional Economics (BRTE), Logistics in Australia: A Preliminary Analysis, BRTE Working Paper 49 (Canberra, October 2001), p. 31.

32



Rail freight Rail freight in Australia is used predominantly for the transportation of bulk commodity items such as minerals, coal, crude oil, petroleum, natural gas, fertilizers, grains and forest products. Demand for rail freight services in respect of products destined for export is largely confined to grain, coal and iron ore. Rail freight is not an option where express delivery is required. In the past, Australian rail freight services suffered from a reputation for poor quality. Reforms in the 1990s transformed Australia's railways through commercialization, corporatization and, in some instances, privatization of government enterprises that had formerly owned and controlled the railways. The number of public and private sector providers of rail freight services has since grown. Notably, the principle of competitive neutrality, which lies at the heart of many transportation reforms, requires that in areas where both public and private sector entities are operating, government businesses should not be advantaged nor disadvantaged relative to the private sector competitors simply by virtue of government ownership. This principle has had particular importance for private sector operators' access to rail infrastructure, which continues to be within the ownership and control of public sector entities. Thanks, at least in part, to the railway reforms, real freight rates have fallen significantly over the last two decades.11 Operators of rail freight services have largely been price-takers given shippers' preference for other modes of transport, especially road, which tends to be cheaper for low volume, short-haul journeys. The competitive nature of the market for rail freight services is likely to be further enhanced as large freight transport service providers offer multimodal services.

Road freight Road freight is the mode of transport most commonly used for the movement of nonbulk freight within Australia, particularly from and to rural and regional communities where rail, air and sea freight are not economically or physically viable. Road freight is also often used in combination with the other modes of transportation for goods that are exported from Australia. Road freight is typically preferred to rail freight because it is cheaper, quicker and the routes are more flexible. The regulation of road transport is linked to externalities such as car accidents involving heavy vehicles, noise emissions, air pollution and traffic congestion that may damage roads and the environment in the long term. These externalities imply social, environmental and economic concerns that have been addressed in Australia through a variety of safety and technical standards, rules on traffic and driving conditions and charges on the use of road infrastructure, such as freeways.

11

Bureau of Transport and Regional Economics, Department of Transport and Regional Services, Australian Government, Freight Measurement and Modelling in Australia, Report No. 112 (Canberra, May 2006).

33



Under Australia’s Constitution, the states and territories are primarily responsible for the regulation of road transport.12 In the past, the states had each enacted their own laws dealing with road rules, vehicle standards and driver licensing. Over time, differences between those laws became an impediment to the transportation of road freight across state and territory borders. In 1991, the National Road Transport Commission was established to develop uniform arrangements between the states and territories and has made considerable progress in harmonizing vehicle registration requirements, vehicle standards and road rules, including those relating to the carriage of dangerous goods. The market for road freight services, in which a significant number of small owneroperators are incumbent, is fiercely competitive despite the existence of heavy regulation. The barriers to entry are low given the relatively low start-up capital that is needed (to buy a truck, for example). Inter-modal competition between road transport and other modes of transportation, such as rail, air and sea, has also served to heighten the level of competition in the market. Available evidence indicates that competition in the market for road freight has resulted in downward pressure on prices.13 Such evidence also suggests that competition between incumbents is based largely on specialized service (e.g., vehicles tailored for a particular industry or type of cargo) and reliability, rather than on price. Significantly, increased competition has not seen a concomitant reduction in safety standards. Further, there is evidence of a decline in the incidence of heavy vehicles involved in fatal accidents. Nevertheless, it is notable that the industry is gradually becoming more concentrated as a result of a competitive disadvantage faced by the smaller truck owner-operators – namely, the difficulties associated with maximizing truck use 24 hours a day, 7 days a week. Large, foreign freight companies have become prominent in the industry through capitalizing on this disadvantage. It is yet to be seen whether Australian competition law, which is discussed in more detail below, will have a role to play in addressing increasing concentration in this sector.

Sea freight Shipping by sea freight dominates Australia’s international freight activity, particularly with respect to long-haul, high-volume movements of cargo. The capacity of Australia’s ports directly affects the supply of sea freight services. Historically, government-owned ports in a number of Australian states developed in isolation from one another and were insulated from competition due to the absence of adequate land transport connections between them. Since then, the various ports have been reformed through corporatization and privatization and, in some state jurisdictions, third party access regimes 12

13

The Australian Government comprises three main parts. The first is the federal government, which has jurisdiction over and responsibility for the entire Commonwealth of Australia. The second are the state and territory governments, which have jurisdiction over and responsibility for only the relevant Australian state or territory they have been elected to govern. The third are the local governments, which have responsibility for certain matters within subareas within the Australian states and territories. See footnote 11.

34



have been established to facilitate the supply of auxiliary port services. Improved rail services and enhanced competition in the market for road freight has resulted in increased competition between the ports. Port reforms have delivered savings to suppliers of sea freight services. Ports have progressively moved away from basing charges on the value or volume of cargo handled and have, rather, introduced charging that is based on cost. However, inadequate port infrastructure at a number of Australian ports may constitute an impediment to the further realization of efficiencies and cost savings. With respect to the sea freight services themselves, reform has been relatively limited, due in part to the existence of international bodies that play a role in determining the global regulatory framework for the supply of such services, such as the International Maritime Organization. Nevertheless, during the 1990s, several State-owned shipping lines were privatized, including Australian National Lines. The sea freight industry in Australia is now characterized by a high degree of globalization and is relatively concentrated, with foreign flagged ships carrying the majority of goods in and out of Australia. The speed and nature of the services offered by air freight poses a competitive threat to sea freight, particularly in respect of low volume, time-sensitive and valuable freight as well as for inputs needed for just-in-time production. A formidable barrier to entry is the costly acquisition of equipment in particular, ships. Further, prices for shipping services to and from Australia are largely determined by international freight rates14 and are known to be the subject of price-fixing.

Air freight Air freight is typically used for the transportation of low-volume, high-value products. In Australia, air freighted imports consist mostly of high-value, high-tech manufactured goods such as computers and other electronic goods, whereas exports are dominated by perishable primary products of lower market value, particularly fresh seafood. Air freight services can only be accessed through the use of freight forwarders. The domestic Australian market for air freight services can now be described as vigorously competitive following the introduction of competition during the past two decades. As a result of increased competition, the air freight industry is now serviced by a number of different airlines, both domestic and foreign. Previously, air freight cargo rates were negotiated and fixed at traffic conferences convened by the International Air Transport Association (IATA), which is an international body responsible for the regulation of international air transport, and were subsequently approved by Governments under air services arrangements. However, indicative “reference fares” have since replaced the fixed rates, leaving airlines with some price flexibility. Demand tends to be highly price elastic with respect to low value-to-weight cargo (i.e., those products typically imported into Australia via air freight) whereas cargo rates on outbound journeys from Australia for high-volume, low-value goods tend to be higher.15 14 15

Sea freight trends can be found in Bureau of Transport and Regional Economics; see footnote 11 for details. Air freight trends can be found in Bureau of Transport and Regional Economics; see footnote 11 for details.

35



Infrastructure capacity has been and will continue to be a constraining factor with respect to the supply of air freight services. In the longer term, airlines are expected to invest in larger dedicated freight aircraft to take advantage of this rapidly growing sector.

(iii) The role of domestic competition policy In 1995, the State and Federal Australian Governments agreed to a domestic reform package called the National Competition Policy. It was pursuant to this policy that many of the reforms referred to above concerning the supply of transportation services in Australia were undertaken. Competition policy continues to play a role in respect of a number of the market segments along the logistics supply chain. In particular, competition policy has a bearing upon access to publicly and privately owned infrastructure, particularly with respect to rail freight. It may also be relevant to mergers, alliances and cooperative arrangements that have been struck between companies supplying services within and/or between segments of the logistics supply chain.

3.

GOVERNMENTAL MEASURES THAT MAY HAVE AN IMPACT UPON THE SUPPLY OF LOGISTICS SERVICES

(a) Introduction As noted previously in this study, non-tariff governmental measures have the potential to undermine the benefits of logistics liberalization. Indeed, in its report on the global logistics market, USITC found that border customs procedures and inspections pose the most significant obstacles to the supply of certain logistics services, the principal objective of which is to move freight expeditiously, reliably and at the lowest cost possible.16 Nevertheless, in appraising governmental border measures that may have an impact upon the supply of logistics services, their rationale needs to be considered, particularly in the light of the globalized context in which such services are supplied, where real security threats at national borders exist. Indeed, tighter border controls over freight movement, handling and storage throughout the world are being implemented in the face of increasing security concerns. Furthermore, while the removal of certain governmental measures might facilitate trade, it could also seriously jeopardize the health and safety of citizens on both sides of a country's border. Therefore, a balance is needed between furthering the trade facilitation objective and ensuring that borders are secure against terrorist, health and safety threats. Australia’s international trade is subject to a number of customs and quarantine requirements, which are relevant to the logistics supply chain. The government institutions that administer such requirements are the Australian Customs Service (ACS) and the Australian Quarantine and Inspection Service (AQIS). Generally speaking, exporters and importers must provide ACS and AQIS certain information about movements of products between Australia and overseas origins or destinations primarily for the purposes of collection of customs 16

United States International Trade Commission; see footnote 2, p. 3-2.

36



duties, the prevention of the entry of pests and diseases into Australia, the quality certification of some exports, and for national security reasons.

(b) Export controls Under Australian customs law, goods may not be exported nor loaded on a ship or aircraft for export unless they have been entered for export on the Customs Export Integration System (EXIT). EXIT is an electronic data interchange clearance and reporting system for exports, which automates procedures for the reporting of exports; accelerates and simplifies the clearance of outward bound air and sea cargo; and enables the ACS to monitor high-risk exports without impeding the majority of exports, which pose no risk. The EXIT system links the ACS with exporters, freight forwarders, airline and shipping companies and the Australian Bureau of Statistics for the recording of Australia's export statistics. Exporters that have been registered in the EXIT system apply for export clearance by transmitting information to the ACS electronically. EXIT verifies the data and, if valid, an export clearance number will be issued with a turnaround time of approximately 10 minutes. A similar system for the clearance of cargo by AQIS exists. The Export Documentation System (EXDOC) was developed by AQIS to facilitate export approval and health certification by AQIS. The purpose of the EXDOC system is to process electronically and produce government-to-government documentation required for the exportation of certain prescribed goods. This system expedites the clearance of cargo and helps to minimize delays by automatically generating a sanitary and phytosanitary certificate required by importing customs authorities. EXDOC is available 24 hours a day and 7 days a week. EXDOC and EXIT are linked, providing a single electronic window through which exporters may access the ACS as well as AQIS. The single electronic window allows exporters to lodge one message requesting clearance of cargo by both ACS and AQIS. Currently, around 98 per cent of export entries are lodged electronically directly into the EXIT system.

(c)

Import controls

Goods imported into Australia must be cleared by both ACS and AQIS. Import declarations are used to obtain ACS clearance for security, health and safety reasons. Import declarations must be filed in the electronic Integrated Cargo System. On occasion, the ACS will examine the imported goods to verify that they correspond to the description of the goods in the import declaration or to ensure that the goods are not prohibited, restricted or pose a quarantine risk. High-risk food is subject to mandatory inspection and testing whereas low risk food may be randomly tested. Rapid quarantine clearance is available for cargo accompanied by documentation demonstrating that the entry requirements have been met. An electronic entry request may be lodged with AQIS via the Joint Entry Management System.

37


4.


THE RELATIONSHIP BETWEEN LOGISTICS LIBERALIZATION AND TRADE FACILITATION: AN ILLUSTRATIVE EXAMPLE FROM THE SOUTH AUSTRALIAN SEAFOOD INDUSTRY

(a) Introduction So far in this study, general trends in the Australian market for logistics services have been examined. In addition, governmental measures that may have an impact upon the supply of logistics services have been considered. What remains to be discussed is the interrelationship between logistics liberalization and trade facilitation. The evolution of the logistics supply chain for the exportation of tuna from Port Lincoln, a coastal town in South Australia, to Japan will be considered with a view to determining the impact, if any, that the liberalization of logistics has had on trade for this product. The role of governmental measures will also be considered in this context. The Australian seafood industry is worth in excess of A$ 2 billion. One of Australia’s states, South Australia, accounts for 20 per cent of total seafood production in Australia, a significant proportion of which is exported. Despite the existence of a quota limiting the amount of tuna that can be fished in Australia,17 tuna is the fastest growing and most lucrative type of seafood exported from South Australia. In 1991, the first experimental tuna farm was established in Port Lincoln and, by 1992, the export of tuna from South Australia had commenced. The vast proportion of tuna produced in Port Lincoln is being exported to Japan for consumption in the premium sashimi market. The total export value of the industry grew from about 2,000 tonnes worth approximately $40 million in 1994 to 10,000 tonnes worth about $264 million in 2006. There are numerous tuna producers based in Port Lincoln. The industry body representing them, the Australian Tuna Boat Owners Association, has played a critical role in the evolution of the tuna industry in South Australia. Through the Association, producers have jointly adopted initiatives to nurture, market and preserve the reputation of South Australian tuna abroad. They have also worked closely with Japanese purchasers (who are heavily involved in the tuna production process in South Australia) to achieve advances in fishing and aquaculture techniques, which advances have contributed to the quality and value of South Australian tuna in export markets.

(b) The logistics supply chain for the export of tuna from South Australia to Japan Perishable products are prone to deterioration and spoilage. Tuna is one such product. The role of logistics services for the delivery of tuna from the point of production to final destination where the tuna is consumed, and for that matter all perishable products, is critical. 17

38

The quota is imposed pursuant to an agreement reached between Australia, New Zealand and Japan under the auspices of the Commission for Conservation of Southern Blue Fin Tuna, which was established in 1994 to restore the global population of southern blue-fin tuna, which had been significantly depleted due to overfishing in the early 1980s.



The speed and manner in which perishables are delivered to consumers will have an impact upon the condition of the product at the point of consumption. The better is the condition of the product at the point of consumption in terms of its colour, taste, appearance and safety for consumption, the higher will be the price paid and the greater the likelihood of repeat business. Delays in transportation and failure to transport, handle and store in a manner that inhibits the deterioration of product throughout the logistics supply chain could mean spoilage of the product with a consequent mark-down of the price payable for the product, outright rejection of the entire consignment of the product and possibly even refusal to accept future consignments from the producer concerned as well as other producers of the product from the same geographical area. In other words, deficiencies in the logistics supply chain may have widespread and profound repercussions for an industry. The logistics supply chain for the export of tuna from South Australia to Japan depends upon the form in which the tuna is being exported, i.e., chilled or frozen. Currently, 3,000 tonnes of South Australian tuna are exported fresh and 7,000 tonnes are exported in frozen form. Generally speaking, the longer and more circuitous is the route from Australia to Japan, the cheaper is the cost of delivery. However, lower costs may come at the expense of quality. The longer the delivery path, the greater is the likelihood of breaks in the so-called “cold chain”18 and the more vulnerable will the product be to spoilage. Temperature control along the entire supply chain and minimization of breaks in the cold chain is of critical importance for the exportation of both chilled and frozen tuna. In every case, a balance must be struck between the need to get the tuna to market as soon as possible, the cost associated with achieving that objective and the requirement that the tuna be fit for consumption when it finally reaches its destination.

(i) Chilled tuna The speed of delivery is critical for the exportation of chilled tuna.19 The only manner in which chilled tuna can reach the Japanese market in a safe, edible form is by air freight. Thanks to increased competition and capacity among airlines carrying cargo as well as the establishment of direct routes from Australia to the destination export markets, air freight is an increasingly viable option for South Australian tuna producers exporting their product to Japan. South Australian tuna is sent by air freight from Adelaide, Sydney or Melbourne airports. In all cases, the tuna must be transported by road freight from Port Lincoln to the relevant airport. Road freight reforms have resulted in incremental efficiency improvements with respect to the transportation by truck of tuna from Port Lincoln, which have led to lower costs. In addition, tuna exporters have witnessed quicker transportation times. Competition has also led to the emergence of road freight companies with particular expertise in the transportation and handling of perishable goods, such as tuna. Specialist road freight companies 18

19

The cold chain refers to the supply or demand chain for cooled or frozen produce. It requires the continual maintenance of the correct temperature for the product concerned from the point of production/harvesting through all stages of packaging, transport, storage and retailing. The shelf life of a tuna fish is attenuated by a day for every hour it is left unrefrigerated.

39



are now able to supply trucks fitted with polarized decks to minimize handling while loading and unloading the tuna onto the trucks. The trucks are also refrigerated and triple-insulated to maintain the temperature of the fish. Once the tuna arrives at the relevant airport, it must be stored in a cold facility. The cold facility at Adelaide Airport has been identified as a potential weak link in the logistics supply chain for the export of tuna from South Australia to Japan. The costs associated with operating the facility, even for small quantities of tuna, are so high that it has proved uneconomical for many producers to transport their chilled tuna via Adelaide Airport. The result has been diversion of tuna from Adelaide Airport to Sydney and Melbourne airports, which has increased transportation time and costs. Further, there is a heightened risk of product spoilage because of additional breaks in the cold chain.

(ii) Frozen tuna The combination of nitrogen and blast freezing, which rapidly freezes tuna while maintaining uniform fresh quality of the fish, has meant that tuna may be exported frozen to Japan by sea freight, defrosted and then used fresh for the sashimi market. While the speed of delivery is not as pressing as for the exportation of chilled tuna, it is still an important consideration for frozen tuna. The longer the period of freezing, the more susceptible the tuna is to alteration, deterioration and, ultimately, spoilage. Port reform in Australia has facilitated the export of frozen tuna from South Australia to Japan in two ways. First, such reform has directly translated into lower costs for tuna exporters using port services to export their product. Second, such reforms have had a major impact on efficiencies and costs at Australian ports associated with storing and handling of imported feed that is used for tuna aquaculture in South Australia. The supply of sea freight services for the exportation of tuna from South Australia to Japan is usually undertaken by Japanese flagships, whose crews are experienced in the processing, preparation and transportation of tuna to Japan. Global expansion of the shipping sector has led to the emergence of massive shipping companies that have the capacity and facilities to efficiently ship perishable products in refrigerated containers. While it is not obligatory to use freight forwarders for sea freight, they have proved useful for small fish producers that do not have the volume to secure cargo space on large shipping liners without the intervention of an intermediary.

(c) Governmental measures affecting the export of tuna from South Australia to Japan (i) Export controls Members of the South Australian tuna industry have commended the fact that they face relatively few governmental impediments in the export of their tuna to Japan. Indeed, the electronic, automated export clearance procedure on the Australian side (discussed earlier in 40



this study) has helped to preserve the tuna producers’ comparative advantage. There are a number of other more specific mechanisms implemented by Australian governmental authorities that have served to strengthen further this advantage. AQIS bears responsibility for ensuring that the systems implemented in Australia result in the production of fish and fish products that are safe to eat and are as free as possible from hazards that are potentially harmful to humans. To this end, fish producers are required to develop, implement and maintain “approved arrangements”. Once implemented, AQIS must then decide whether or not to authorize an approved arrangement. Initially, a desk audit will be conducted to evaluate the control system that is proposed by the producer and will then be followed by a site audit. If and when changes to the operations of a fishing establishment occur, an application for approval of the variation must be made to AQIS. Approved arrangements have been an important mechanism through which governmental impediments to the export of tuna have been minimized in three distinct ways. First, the approved arrangements essentially seek to ensure that the wholesomeness and integrity of fish are maintained during their preparation for export. In other words, such agreements amount to instruments to control the quality of tuna, which helps reduce the likelihood of the tuna being blocked at the border in Japan on health and safety grounds. Second, while the establishment and implementation of such arrangements involve governmental input at the outset, once authorized, governmental intervention is significantly reduced. Third, the approved arrangements may be a vehicle through which logistical issues confronting exporters may be addressed.20 The Australian Government has also facilitated the export of tuna to Japan through its indirect involvement in a body promoting South Australian food abroad. Specifically, “Food Adelaide” is a government-funded body, which provides direct trade-promotion services in export markets. In addition, this body collects and disseminates market intelligence regarding export markets of particular importance to South Australian exporters, including Japan.

(ii) Import controls Japanese governmental controls that apply upon importation of tuna include tariffs21 as well as health and safety regulations. As is the case for the importation of goods into Australia, an import declaration must be submitted in order to obtain import clearance of South Australian tuna in Japan. 20

21

For example, an important issue that has arisen regarding AQIS involvement in the exportation of tuna from South Australia to Japan concerns the point in time at which the minimum temperature of tuna must be established prior to exportation for safety reasons. Initially, AQIS required the minimum temperature to be attained ex-factory. However, following discussions with the tuna producers, AQIS has authorized establishment of the minimum temperature just prior to exportation. This means that, in the case of chilled tuna, which is usually transported by road from Port Lincoln to Melbourne or Sydney from where it is delivered by air freight to Japan, the truck journey from Port Lincoln to Melbourne and Sydney airports may be used to cool the tuna down to the required minimum temperature. This minimum temperature requirement has been formalized in the approved arrangements reached between AQIS and South Australian tuna producers. These were reduced from 5 per cent to 3.5 per cent during the Uruguay Round of WTO trade negotiations.

41



Notably, in a report prepared on the impact of the information technology revolution on cross-border movement of goods, the Japanese Government explicitly stated that increased efficiency in the logistics supply chain meant that it was ever more incumbent upon customs authorities to ensure shorter cargo clearance times through, for example, computerized systems. Accordingly, the Nippon Automated Cargo Clearance System (NACCS), which was originally established in 1978, has been continuously expanded and further developed to facilitate speedy customs clearance by streamlining procedures and making the customs clearance process more user-friendly. It is a comprehensive electronic interface system, which establishes a single-window system so that all necessary import, export or portrelated procedures may be completed electronically, by a single communication through NACCS. A pre-arrival examination system that has been established by the Japanese Government may dispense with the need for inspection of goods by customs authorities when the goods actually reach Japan. Further, in cases where the quality of the imported product is assured, this may dispense with the need for any inspection or examination. In fact, with the cooperation of the South Australian Department of Primary Industries and Resources, the tuna industry has imposed upon itself certain quality controls, which have obviated the need for testing for dioxin and mercury residues by Japanese quarantine officials. This has translated into cost savings for tuna producers and has served to further enhance the reputation of South Australian tuna in Japan.

(d) General observations It is evident from the foregoing that the logistics supply chain for the export of tuna from South Australia to Japan is complex, involving a number of different players and transactions. The South Australian tuna producers have, in general, successfully navigated this complex maze through a profound understanding of the market environment and regulatory requirements regarding the supply of tuna in Japan. They have been so intent upon preserving the positive image of South Australian tuna in Japan that they have imposed upon themselves certain quality standards that are not demanded by law. These self-imposed standards reduce the risk that the product will be blocked for health and safety reasons in Australia prior to export as well in Japan following importation. In addition, the success of the South Australian tuna producers can be linked to the effective efforts they have made to establish and manage relationships between all the relevant players in the supply chain, with a view to ensuring customers' expectations are met and that the price payable for their tuna is the highest possible. Their success is evident from export statistics, which indicate a marked increase in exports of tuna to Japan over time. In particular, in the year 2000, tuna exports were worth $214 million, 18 per cent more than in the previous year and 196 per cent more than in 1997. Such export success on the part of South Australian tuna producers is attributable not just to the tuna producers themselves. It is also attributable to initiatives taken by suppliers in the logistics supply chain to improve customer satisfaction as well as by government bodies in Australia at the state and federal levels (and, of course, by the Japanese Government in terms of speedier, more efficient clearance of tuna imports through customs). In Australia, 42



air, sea and land freight councils have been established to address issues such as process and control issues concerning the logistics supply chain, public policy as it concerns the supply of logistics services as well as cultural change. These councils have been useful forums in which to identify, discuss and address issues that have hindered the supply of seamless, integrated logistics services in the past. Moreover, the domestic reform measures adopted to liberalize the market for the supply of logistics services in Australia appear to have played a role in the South Australian tuna producers’ success. Liberalization measures in the air sector have increased air freight capacity and, consequently, have made air freight of chilled tuna to Japan more economically viable. There has been a marked increase in the use of air freight for the export of southern blue-fin tuna from South Australia.22 Moreover, heightened competition in the road freight sector has contributed to the development of specialist service providers. Significantly, the tuna industry considers that the involvement of ACS and AQIS in the export of tuna from Australia to Japan has served to enhance its comparative advantage rather than to hinder trade. Minimal documentary requirements coupled with rigorous quality standards have helped to support the reputation of South Australian tuna abroad without imposing unduly onerous obligations on exporters. Furthermore, computerized single windows in both Australia and Japan for the processing of export and import requests respectively, have minimized trade barriers. On the negative side, intense competition in the Australian logistics market has, on occasion, led freight forwarders, desperate for business in a market of declining margins, to accept delivery contracts for the export of tuna to Japan, despite their lack of experience with tuna. This lack of experience could mean that the conditions needed to ensure the delivery of a high quality product in Japan are not maintained, which could put the sale of the tuna producers’ product in Japan at risk. Accreditation systems for freight forwarders for quality control purposes of a kind similar to those in place in Europe would minimize such risks.23 Additionally, the practical limitations associated with utilization of the cold facility at Adelaide Airport discussed above, which have led to certain inefficiencies in the logistics supply chain, highlight the need to ensure that infrastructure matches the needs of participants in and users of the logistics supply chain. Industry consultation is essential to ensure that the development of infrastructure takes into consideration all the relevant interests at stake. 22

23

Exportation of southern blue-fin tuna by air freight increased from about 100 tonnes in 2001/2002 to about 3,000 tonnes in 2004/2005. Exportation of southern blue-fin tuna from South Australia to Japan by sea freight has also seen a marked increase, rising from close to 400 tonnes in 1997/1998 to about 5,000 tonnes in 2004/2005. Information obtained from MariTrade of the Australian Bureau of Statistics. The International Air Cargo Association states only that freight forwarders should be able to provide services if they are properly trained and certified. It further states that national associations should create standardized training and certification requirements for forwarders, and the Government should endorse them. The Association notes that, for example, in Germany, Austria and Switzerland, accreditation may be obtained following a three-year apprenticeship and business administration programme, followed by an examination. While these training programmes are not mandated by the Government, they are nevertheless encouraged. Furthermore, Switzerland's Federal Office for Professional Education and Technology grants diplomas in International Freight Forwarding and Logistics, <www.tiaca.org/articles/2006/06/26/DE79CF63C2FB4D4390714753009FBCD8.asp>.

43


5.


IMPLICATIONS FOR DEVELOPING COUNTRIES AND POLICYMAKERS

(a) The importance of efficient logistics for economic growth The cost of logistics services typically amounts to between 12 and 17 per cent of GDP. Estimates indicate that logistics costs may reach 20 per cent of total production costs in developed countries and, for certain landlocked developing countries, freight costs alone could represent up to 40 per cent of export values. Efficient logistics supply chains may enhance international competitiveness whereas inefficiencies may undermine a country’s comparative advantage. The sources of inefficiencies in the logistics supply chain may stem from a mix of action or inaction on the part of governmental authorities as well as private players involved in the supply of logistics services. More specifically, such inefficiencies may be the product of procedural red tape, inadequate infrastructure that may result in delays, or overly intense competition, which may deter suppliers of logistics services from working together to provide a seamless, integrated supply chain. On the basis of the Australian experience, it would appear that addressing such inefficiencies in a consistent and coherent fashion will yield productivity and competitiveness gains for developed and developing countries alike.

(b) Acknowledging the relationship between the supply of logistics services and trade facilitation This study has illustrated that there is a clear relationship between logistics services and trade facilitation. Specifically, governmental measures that hinder the efficient supply of logistics services may, by extension, impede trade in goods. Any benefits that might accrue through the liberalization of logistics services to enhance efficiency and thereby expedite the export or import of products could well be undermined by governmental export and import controls that unduly delay the delivery of such products to their destination. Conversely, measures or conditions that facilitate and/or promote trade may stimulate greater demand for logistics services. The example of the export of tuna from South Australia to Japan highlighted the fact that minimal and, at best, actively positive governmental intervention may improve an industry’s competitive standing in an export market. This may result in an increase in trade of that industry’s product, which will entail the consumption of more logistics services. Given the close interrelationship between logistics and trade facilitation, it is important that the liberalization of the logistics supply chain and more general efforts by Governments to facilitate trade be undertaken on a complementary basis. An initial step of recognizing and acknowledging the role logistics may play in fostering international trade is essential. Such recognition and acknowledgement will help to ensure that, to the extent possible, Governments establish the appropriate physical and regulatory framework to maximize the efficiency of the logistics supply chain. Ideally, the framework should ensure the adequacy of and reasonable access to relevant infrastructure; cohesion at inter-modal transfer points in transport networks; and a level of competition in the various segments of the logistics supply chain that promotes 44



innovation and specialization without undermining the ultimate objective of ensuring a seamless, integrated supply chain. Such a framework will not necessarily compromise Governments’ ability to ensure trade that is safe, secure and sustainable. Obviously, measures to facilitate trade must be subject to controls to safeguard these concerns. However, these should be the least trade-restricting controls possible. In this regard, it is essential that the measures adopted to establish such a framework be undertaken in a balanced, prudent fashion, bearing in mind all the interests and issues at stake.

(c) The need to consult all relevant stakeholders Logistics services involve a multitude of different institutions and concern a broad range of sectors. The various stakeholders affected by the supply of logistics services include relevant government ministries and regulatory bodies, multinational or national suppliers of logistics services, and exporters and importers dependent upon logistics services. The concerns and interests of these stakeholders are varied but, at least to some extent, interdependent. Therefore, it is essential that all stakeholders be consulted during the establishment of the framework for the supply of logistics services to ensure that synergies are realized. Effective dialogue between public and private sector players will help to secure coherence between private and public sector initiatives. Such dialogue may also result in public/private partnerships, which will facilitate the regulatory reform process. Cooperation between private sector players in this process will not necessarily preclude competition between them. Rather, relationship-building between stakeholders may yield benefits for individual firms as well as for the industry as whole.

(d) Issues concerning the establishment of the regulatory framework This study has referred to a number of tools that might be useful in liberalizing the logistics sector. Commitments to provide market access to foreign suppliers of logistics services, corporatization or privatization of government utilities owning and/or operating the infrastructure upon which the supply of logistics services is dependent and the application of competition law to the market for the supply of logistics services are but a few of the available tools. The study has also highlighted the importance of balancing competitive liberalization in logistics services with sustainable industry practice and quality control systems. The existence of unbridled competition, as was the case with freight forwarders, may lead to increased risk for traders. Prudent regulation can contribute to the quality, safety and reliability of the exported product while simultaneously abiding by the principle of minimizing tradedistorting barriers. Consultation of the various stakeholders affected by the supply of logistics services will assist the national Government in identifying the nature of and priorities for regulatory reform. The establishment of a framework for the efficient supply of logistics services may involve a clear sequence of discrete steps to be taken; it may also indicate that certain steps should ideally be undertaken in tandem. Ultimately, the prioritization of steps in the regulatory reform 45



process and the sequencing of those steps will depend upon the domestic regulatory environment and the dynamics in the local market for the supply of logistics services.

6.

CONCLUSIONS

Developed and developing countries have much to gain from the liberalization of logistics services. The benefits that may accrue to suppliers of logistics services, exporters and importers that are dependent upon such services and nations as a whole are clear. Logistics liberalization facilitates international trade, which in turn drives economic growth and development. Trade facilitation measures that promote trade (including but not limited to more efficient, wellcoordinated border control mechanisms), may also consequently promote greater demand for logistics services, thereby generating a virtuous cycle. This study has shown that a balanced regulatory framework to achieve liberalization of logistics services, while at the same time maintaining the requisite degree of control at national borders to protect against security, safety and health threats, will lay the foundation for such a virtuous cycle. Consultation with all the relevant stakeholders – governmental bodies, suppliers of logistics services, and exporters and importers dependent upon logistics services – will help to realize the known benefits of logistics liberalization. The interplay between liberalization of logistical services on one hand, and trade facilitation on the other, is equally clear and should be borne in mind in the context of WTO negotiations on services and trade facilitation, when they are pursued in the future. At the minimum, negotiators should explicitly recognize the potential for mutual reinforcement of liberalization of the logistics sector on one hand and trade facilitation on the other.

46



Acknowledgements The Institute for International Trade would like to acknowledge the following people for their contribution to this study: Dariel De Sousa, Visiting WTO fellow at the Institute for International Business, Economics and Law while on leave of absence from the Legal Affairs Division of the WTO, as the primary researcher and author of this study; and Christopher Findlay, Head of the School of Economics at the University of Adelaide, Jim Redden, Adjunct Senior Lecturer for the Institute for International Trade and Andrew Stoler, Executive Director for the Institute of International Trade for developing the basic conceptual framework and as editors of the study. Thanks are also extended to the following individuals and institutions, who provided information regarding the impact of logistics liberalization on the export of tuna from South Australia to Japan: Mark Cody (Seafood Council of South Australia); Donna Edwards (South Australian Department of Trade and Economic Development); Roger Edwards (Seafood Council of South Australia); Richard Hunt (Australian Customs Service); Brian Jeffries (Australian Tuna Boats Association); Mike Milln (Aviation and Planning Coordination, Transport Planning Agency); Julian Morrison (EconResearch); Mark Moss (Jets Transport); Matthew Muggleton (Seafood Council of South Australia); Neil Murphy (South Australian Freight Council); Michael Rettke (South Australian Research and Development Institute).

47



BIBLIOGRAPHY ALPHA Research Consortium (2004). Characteristics, Strategies and Trends for 3PL/4PL in Australia (Sydney), 30 March. Arblaster, Margaret (2005). “Regulating rail access & competition”, speech delivered at the Australian Rail Summit, Sydney, 19 July. Australian Customs Service (2003). Australian Customs, Protecting Our Borders (Sydney). _____(2005). Documentary Import Declaration Comprehensive Guide (Sydney), December. _____(2006). Export Control, vol. 12 (Sydney), accessed at <www.customs.gov.au>. _____. Import Control, vol. 7 (Sydney), accessed at <www.customs.gov.au>. Australian Industry Commission (1991). Rail Transport, Report No. 13 (Canberra), 21 August. Australian Logistics Assured. Freight Logistics Performance Quality Standards for the Export of Fresh Chilled Tuna from Australia to Japan via Air. Australian Productivity Commission (1998). International Air Services, Inquiry Report, Report No. 2 (Melbourne), 11 September. _____(2005). Modelling Impacts of Infrastructure Industry Change over the 1990s, supplement to Review of National Competition Policy Reforms, Productivity Commission Inquiry Report No. 33 (Melbourne), 28 February. _____(2006). Road and Rail Freight Infrastructure Pricing, Productivity Commission Issues Paper (Melbourne), March. Australian Quarantine and Inspection Service (2004). Electronic Export Documentation System – Plain English Information Paper for Prospective EXDOC Users, Version 8.2 (Sydney), January. _____(2005). Approved Arrangement - A Guideline to Compliance with the Export Control (Fish and Fish Products) Orders 2005 (Sydney), October. Aviation and Planning Coordination Unit, Transport Planning Division, Government of South Australia (2006). Air Freight Summaries – SA Exports by Air, March Quarter Report. Boylaud, Olivier and Giuseppe Nicoletti (2001). Regulatory Reform in Road Freight, OECD Economic Studies No. 32 (Paris, OECD). Bureau of Transport and Regional Economics (BRTE), Department of Transport and Regional Services, Australian Government (2001). Logistics in Australia A Preliminary Analysis, BRTE Working Paper 49 (Canberra), October. _____ (2005). Australian Transport Statistics (Canberra), June.

48



_____ (2006). Freight Measurement and Modelling in Australia, Report No. 112 (Canberra). Craig, Thomas (2003). “4PL versus 3PL – A business process outsourcing option for international supply chain management”, World Wide Shipping, December/January. Department of Industry, Tourism and Resources, Australian Government (2002). Freight Logistics in Australia: An Agenda for Action, Freight Transport Logistics Industry Action Agenda (Canberra), May. Departments of Transport: The Northern Territory, South Australia, Tasmania and Western Australia (2000). “Freight trade logistics”, based on interviews conducted in Tokyo, Osaka, Taipei, Shanghai, Singapore and Hong Kong, China, 21 January. Findlay, Christopher (2002). Multilateral Liberalisation of Services Trade and Investment in a Globalising World: Scope and Limitations, Technical Report NEC Paper No. 56 (Canberra, National Europe Centre, Australian National University), December. Hausmann, Warren, Hua L. Lee and Uma Subramanian (2005). Global Logistics Indicators, Supply Chain Metrics and Bilateral Trade Patterns, World Bank Policy Research Working Paper 3773 (Washington D.C., World Bank), November 2005 Institute of Applied Logistics (2001). “Road transport of perishable food, product skills audit”, paper prepared for the Transport Training Advisory Board SA Inc., May. International Communication Union (2002). World Telecommunication Development Report 2002 (Geneva), March. International Financial Services (2002). Impact of Liberalising Financial Services (London), January. King, Stephen and Rohan Pitchford (1998). “Privatisation in Australia: Understanding the incentives in public and private firms”, The Australian Economic Review, vol. 31, No. 4, pp. 313-328. Lim o, Nuno and Anthony Venables (2001). “Infrastructure, geographical disadvantage, transport costs and trade”, World Bank Economic Review, vol. 15, pp. 451-479. Luo, Wenping and Christopher Findlay (2002). “Logistics in China: implications of accession to the WTO”, December. McGuire, Greg (2002). Trade in Services – Market Access Opportunities and the Benefits of Liberalization for Developing Economies, Policy Issues in International Trade and Commodities, Study Series No. 19, UNCTAD/ITCD/TAB/20 (Geneva, UNCTAD). Organisation for Economic Co-operation and Development (OECD) (1999). “Chairman’s summary”, Workshop on Regulatory Reform in International Air Cargo Transportation, 5-6 July 1999 (Paris).

49



_______(2005). Growth in Services: Fostering Employment, Productivity and Innovation, Meeting of the OECD Council at Ministerial Level (Paris). _______(2006). Logistics and Time as a Trade Barrier, OECD Trade Policy Working Paper No. 35 (Paris), 30 May. Owens, Helen (2003). Rail Reform Strategies: The Australian Experience, NBER Working Paper No. 9592 (Cambridge, United States, National Bureau of Economic Research), March. South Australian Freight Council (2006). South Australia’s Freight Transport Infrastructure: Moving Freight – Setting a Strategic Framework for the Future, March. United Nations Conference on Trade and Development (UNCTAD) (2005). Trade Facilitation as an Engine for Development, Note by the UNCTAD Secretariat, TD/B/COM.3/ EM.24/2 (Geneva), 29 June. United States International Trade Commission (USITC) (2005). Logistic Services: An Overview of the Global Market and Potential Effects of Removing Trade Impediments, Investigation No. 332-463, Publication 3770 (Washington D.C.), May. World Trade Organization (WTO) (2004). Logistics Services – Communication from Australia and others, Council for Trade in Services, Special Session, TN/S/W/20 (Geneva) 25 June. _______(2005). Joint Statement on Liberalization of Logistics Services – Communication from Australia and others, Council for Trade in Services, Special Session, TN/S/W/ 34 (Geneva), 18 February. _______(2005). Australia – Revised Services Offer, Council for Trade in Services, Special Session, TN/S/O/AUS/Rev.1 (Geneva), 31 May.

50



Thailand’s Agricultural Sector and Free Trade Agreements

Zamroni*

ABSTRACT

T

he agricultural sector has played an important role in developing the Thai economy and the Thai Government has opened up the sector to international competition. As a major agricultural exporting country, Thailand among other Asian countries is relatively ready to open its markets in order to obtain benefits from the liberalization of the agricultural sector. Thailand has been the most active Asian country in promoting its international trade since the Asian financial crisis erupted in mid-1997. Intensive talks have been held with many developed and developing countries, such as Australia, China, India, Japan and the United States. When signing bilateral free trade agreements (FTAs), the Thai Government should not undermine the bargaining power of countries belonging to the Association of Southeast Asian Nations (ASEAN) as a single entity. In order to improve the terms for free trade, the following considerations should be taken into account: (a) regional deals are more efficient and have more advantages than bilateral ones; (b) steps should be taken on a gradual basis to empower the agricultural production sector and farmers; and (c) FTAs should have comprehensive coverage and depth, and include non-tariff barriers, (continued on page 52)

* PhD Candidate, Graduate School of International Development (GSID), Nagoya University, Japan; and Economic Researcher, the Research Centre for Economics, Indonesian Institute of Sciences, Honji-Sho 11-209 Honjigaoka 1701 Moriyama-Ku, Nagoya-Shi, Japan, 463-0031, E-mail: [email protected]. This paper is based on research funded by the Nippon Foundation, under the Asian Public Intellectuals Fellowships Program, 2004. The study was conducted at the Institute of Asian Studies, Chulalongkorn University, Bangkok in 2004. Any errors are the responsibility of the author; the views expressed are those of the author and do not necessarily reflect those of the United Nations.

51




investment, human resources development, intellectual property rights protection and the environment.1 As an open developing country, Thailand should be aware of the importance of its agricultural sector and yet its farmers have received relatively few benefits from trade liberalization so far and are often poor. In order to maximize the potential benefits of existing FTAs and minimize the possible negative impacts, the Thai Government needs to satisfactorily make the necessary adjustments to its economy and develop the competitiveness of its enterprises in emerging free markets. Restructuring and adjustment processes in the Thai agricultural sector, especially for the empowerment of Thai farmers, are critical in order to keep pace with the rapid changes brought about by globalization and increased trade and to gain more benefits from FTAs for society at large. In addition, Thailand has to be aware of the distribution of benefits to each domestic sector involved. A balanced distribution would create a better-off society and improved acceptance of FTAs by the public. Developing productivity and increasing competitive ability will empower farmers and improve their business potential. The central Government has to pay due attention to these circumstances prior to the liberalization process and adopt policies which would make farmers more competitive and preserve the sustainability of agricultural development as a whole. The benefits of free trade should be measured first in the national context or in terms of national benefits. For those already suffering losses as a result of free trade, the Government should assist them to improve their productivity and competitiveness.

1.

INTRODUCTION

Many developed and developing countries have concluded regional and bilateral FTAs in order to enhance their trade and boost their economic growth over the last two decades. These regional trends have emerged in part due to the slow progress of multilateral trade liberalization under the General Agreement on Tariffs and Trade (GATT) prior to 1995 and the World Trade Organization (WTO) since 1995 (Fabiosa and others, 2005). When WTO was established in 1995, member countries explicitly acknowledged that they needed to do more to help developing countries realize the benefits of trade in order to boost their sustainable development. They could not achieve that goal completely, even after the Uruguay round which, for the first time, led to a multilateral trade agreement on agriculture. Agriculture has long been a controversial issue, yet agreement in this area is crucial for a successful conclusion 1

While not everybody agrees that the environment should be included in FTAs, it should be noted that agricultural production processes are related directly to natural resources such as land, soil and water. The degradation of those factors because of farming activity should be reduced. The conservation of the environment, which forms the base of agricultural products, should be a priority. Involving environmental issues in the trade negotiation process could guarantee that the degradation of natural resources could be minimized through innovative production processes and investments.

52



of the Doha round. Its coverage so far in multilateral and FTAs has been limited. This is due to conflicting objectives between developed and developing countries regarding the issue of high tariffs on agricultural products, export subsidies and domestic support which led to a relatively high level of trade protection and undermined effective and fair international competition in the agricultural sector. Agriculture is the main sector in Thailand and many other Asian countries, especially in terms of its contribution to employment generation, even though its share of gross domestic product (GDP) has been decreasing over the years (Coxhead and Plangpraphan, 1998; Poapongsakorn, Ruhs and Tangjitwisuth, 1998; and World Bank, 1998). As one of Asia's developing countries, Thailand is assumed to have a well-managed and globalized agricultural sector. According to the Food and Agriculture Organization of the United Nations (FAO), Thailand, with fewer natural resources than other Asian countries such as India and Indonesia, was the second largest exporter of agricultural products among Asian countries in 2004.2 FAO statistics showed that in 2004, the largest exporter of agricultural products in Asia was China, which accounted for over US$ 17.3 billion (almost 19 per cent of the total agricultural exports from Asia to the world); it was followed by Thailand with over US$ 11.9 billion (almost 13.1 per cent of the total) in such exports. This paper discusses considerations in liberalizing agricultural trade in Thailand, in particular through the conclusion of regional and bilateral trade agreements.

2.

EMERGING FREE TRADE IN THE ASIAN REGION

Over the last few decades, countries in Asia have concluded or strengthened regional FTAs, which were basically preferential trade agreements. This process was driven to a large extent by the need for those countries to attract foreign direct investment (FDI) and to improve their competitiveness in international trade. Gaining access to overseas markets and thus achieving economies of scale in domestic production were also important driving forces (Josling, 1993). In practice, some countries are member of multiple FTAs, which leads to overlap of such agreements. The main objectives for countries to conclude multiple FTAs are, first, to broaden market access beyond their immediate subregion, especially when there are tendencies for some regional blocs to protect their markets from outsiders and, second, to gain the benefits of the globalization process (Bhalla and Bhalla, 1997; Frankel and Wei, 1998; and Page, 2000). The ASEAN Free Trade Area (AFTA) has been the most prominent FTA in the region and as such has been at the centre of discussions on FTAs. The commitments under AFTA in agricultural trade were initiated at the Meeting of ASEAN Ministers of Agriculture and Forestry in 1992. That meeting was held to encourage close cooperation in the agricultural sector not only between AFTA member countries, but also with trading partners outside the region. Then, with the adoption of the Common Effective Preferential Tariff (CEPT), ASEAN

2

Based on FAO statistics, Thailand was the fifteenth largest exporter of agricultural products in the world in 2004. Among developing countries, Thailand was the third largest agricultural exporter after China and Argentina (FAO, 2005).

53



established AFTA in 2003, with tariffs on some agricultural products ranging between 0 and 5 per cent. Also, under CEPT, member countries have been trying to gradually eliminate all non-tariff barriers and quantitative restrictions (De Simone, 1996). However, AFTA member countries excluded sensitive agricultural products from the tariff reductions while new members had extended implementation periods. Many Asian countries are currently WTO members and are active in the global economy, especially in concluding FTAs with the rest of the world. Thailand has been a leading Asian country in this respect, together with India and Singapore. Some Asian countries have also unilaterally liberalized their markets by continually reducing import requirements and tariffs. The integration of the Thai economy in the regional economy is in line with the trend of East Asian economic integration through the formation or consideration of regional agreements. Currently, ideas such as the formation of an East Asian economic community and East Asian free trade area are under consideration (Hew, 2003). The formation of FTAs is, of course, not only based on economic interests but also on the political interests of the countries concerned. Since the 1997 Asian financial crisis and the failure of WTO to launch a new round of talks on tariff reductions, ASEAN and its neighbouring countries have been promoting an ASEAN+3 regional agreement. The idea of forming ASEAN+3 appeared in 2000.3 ASEAN+3 encompasses all 10 ASEAN member countries plus China, Japan and the Republic of Korea. This regional trade agreement is expected to greatly increase the economic welfare of participating countries. Furthermore, the emergence of ASEAN+3 as a leading trade bloc would have considerable influence on the direction of the multilateral trading system. Apart from AFTA, there are many other regional trade agreements in Asia, such as the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) FTA and the South Asian Association for Regional Co-operation (SAARC) FTA (SAFTA), apart from many bilateral FTAs. These agreements were all signed to promote and improve standards of living, and to speed up economic growth through mutual trade.

3.

ECONOMIC AND TRADE PERFORMANCE OF THAILAND

Since the 1990s, the Thai Government has implemented policies for both rural and urban development with a focus on developing the competitiveness of sectors such as hightechnology manufacturing and services. Part of these policies included reducing and eliminating trade barriers to obtain optimum gains from trade. Until now, the export destinations of Thai agricultural and manufactured products have been concentrated in three regions (see table 1): North America under the North American 3

ASEAN+3 was initiated by the signing of the ASEAN-China initiative in 2002; ASEAN-Japan economic partnership was signed in 2003; ASEAN-Republic of Korea economic partnership was signed in 2004. These efforts were implemented as part of a comprehensive economic integration process among East Asian countries towards the formation of a free trade area among them.

54



Free Trade Area (NAFTA), ASEAN and the European Union (EU). These three destinations absorbed more than 56 per cent of Thai exports in 1993 worth almost US$ 20.9 billion. NAFTA absorbed over US$ 8.6 billion (23.2 per cent) followed by the EU for which the figure was almost US$ 6.5 billion (17.5 per cent) and ASEAN at almost US$ 5.8 billion (15.5 per cent) in the same year. Thai exports to NAFTA and the EU had been decreasing until the Asian financial crisis in 1997, while exports to other ASEAN countries gradually increased. However, during the crisis, which affected most ASEAN countries adversely, Thai exports going to ASEAN shrank and reached their lowest level of US$ 9.9 billion or almost 18.2 per cent of total Thai exports in 1998 but recovered after the crisis to almost US$ 13.6 billion or 19.9 per cent of total Thai exports in 2002. As a result of stronger regional economic growth and intensive policies to enhance regional integration, Thai exports to ASEAN increased to over US$ 24.1 billion or almost 21.8 per cent of total Thai exports in 2005. Table 1. Shares of Thai exports and imports with some regions (Billions of United States dollars) 2002

2003

2004

Exports NAFTA EU ASEAN Middle East Total exports

1993 1994 1995 1996 1997 1998

1999 2000 2001

2005

8.63 10.23 10.78 10.73 12.15 13.05 13.65 16.03 14.42 14.82 6.49 7.10 8.56 8.96 9.30 9.72 9.83 11.00 10.55 10.21 5.76 8.01 12.33 12.11 12.76 9.90 10.87 13.50 12.60 13.57 1.69 1.68 2.55 2.14 1.95 1.85 2.04 2.11 2.15 2.45 37.13 45.43 56.73 55.98 58.43 54.48 58.50 69.78 65.19 68.16

14.95 11.75 16.49 2.88 80.04

17.03 18.57 13.82 14.29 21.24 24.14 3.70 4.48 96.53 110.88

Imports NAFTA EU ASEAN Middle East Total imports

5.85 6.90 9.16 9.72 9.35 6.34 6.87 7.79 7.63 6.68 7.65 7.86 9.41 6.79 7.38 11.28 10.89 8.91 5.28 5.86 6.32 7.57 7.04 7.50 9.07 10.47 5.41 7.05 9.42 9.64 8.14 6.40 7.91 10.35 10.01 10.82 12.49 15.84 21.63 1.53 1.98 2.68 4.08 4.61 3.33 4.26 6.35 5.96 5.67 7.45 10.81 15.25 45.99 54.34 70.72 72.25 63.29 42.40 49.92 62.18 61.75 64.24 75.04 94.04 118.23

Source: Economic and financial statistics, Bank of Thailand, 5 October 2004 and 28 September 2006. Abbreviations: NAFTA = North American Free Trade Agreement, EU = European Union, ASEAN = Association of Southeast Asian Nations. Note: EU is the EU(15): Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom.

In examining bilateral trade between Thailand and its partner countries during the period 1993-2005, the United States was the largest export market (see table 2 for details). In 1993, the United States absorbed over US$ 8 billion or 21.6 per cent of the total Thai exports, followed by Japan and Singapore, which accounted for over 17 per cent and almost 12.1 per cent of the total, respectively. Over the years, however, the import shares of Thai products to these three countries have been decreasing; they amounted to almost 15.4 per cent for the United States, almost 13.7 per cent for Japan and almost 6.8 per cent for Singapore in 2005. The decreasing exports to those countries were partly due to increasing trade within ASEAN and China. In 1993, China absorbed only 1.4 per cent of the total Thai exports but increased to almost 8.3 per cent of the total of Thai exports in 2005. Singapore is still an important 55



Table 2. Top 20 export destinations for Thai products (Billions of United States dollars) Country or area

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

2005

United States 8.02 9.55 10.11 10.06 11.36 12.17 12.66 14.87 13.20 13.51 13.60 15.51 17.06 Japan 6.33 7.76 9.52 9.42 8.85 7.47 8.26 10.28 9.95 9.95 11.36 13.50 15.16 China 0.54 0.93 1.65 1.88 1.78 1.77 1.86 2.84 2.87 3.56 5.69 7.12 9.18 Singapore 4.48 6.19 7.96 6.78 6.52 4.70 5.07 6.07 5.26 5.55 5.85 7.03 7.50 Hong Kong, China 1.97 2.40 2.94 3.26 3.47 2.78 2.98 3.52 3.31 3.69 4.32 4.94 6.16 Malaysia 0.85 1.11 1.56 2.02 2.53 1.78 2.12 2.85 2.73 2.84 3.87 5.31 5.73 Indonesia 0.20 0.44 0.81 0.97 1.26 0.98 0.97 1.35 1.37 1.68 2.27 3.22 4.00 Australia 0.52 0.64 0.78 0.84 0.95 0.98 1.32 1.64 1.36 1.64 2.16 2.47 3.18 United Kingdom 1.19 1.35 1.63 1.85 2.07 2.12 2.09 2.38 2.34 2.39 2.58 3.03 2.81 Netherlands 1.16 1.26 1.81 1.80 1.86 2.18 2.20 2.27 2.04 1.89 2.36 2.60 2.76 Taiwan Province 0.74 0.99 1.36 1.43 1.59 1.74 2.04 2.44 1.93 1.97 2.58 2.61 2.71 of China Viet Nam 0.12 0.26 0.47 0.58 0.55 0.59 0.57 0.85 0.80 0.95 1.26 1.88 2.37 Republic of Korea 0.46 0.57 0.81 1.02 1.03 0.63 0.91 1.28 1.23 1.40 1.58 1.86 2.26 Philippines 0.20 0.22 0.42 0.63 0.71 0.77 0.93 1.10 1.16 1.28 1.62 1.84 2.06 Germany 1.49 1.60 1.65 1.62 1.45 1.56 1.46 1.66 1.57 1.53 1.79 1.80 2.00 India 0.00 0.00 0.29 0.24 0.30 0.28 0.37 0.57 0.48 0.41 0.64 0.91 1.53 France 0.78 0.81 0.98 1.00 0.93 0.88 0.83 0.90 0.84 0.82 0.95 1.21 1.30 Belgium 0.58 0.66 0.75 0.80 0.89 0.78 0.88 1.14 1.42 1.36 1.13 1.19 1.29 Italy 0.46 0.47 0.58 0.57 0.62 0.70 0.71 0.85 0.68 0.70 0.95 1.34 1.26 United Arab Emirates 0.48 0.58 1.01 0.69 0.58 0.55 0.57 0.59 0.64 0.72 0.76 0.97 1.18 Total exports 37.13 45.43 56.73 55.98 58.43 54.48 58.50 69.78 65.19 68.16 80.04 96.53 110.88 Source: Economic and financial statistics, Bank of Thailand, 5 October 2004 and 28 September 2006.

export market for Thai products in ASEAN. Other ASEAN countries that have become increasingly important markets for Thai exports are Indonesia, Malaysia, the Philippines and Viet Nam. However, the value of imports from Thailand of these countries is gradually increasing. There has also been a tendency for Thai imports to be diversified from North America and the EU to neighbouring Asian countries. After the financial crisis, Thailand imported most products, both finished goods and intermediate goods, from Japan, the United States, and ASEAN countries. However, Japan remains Thailand’s biggest trading partner in Asia largely because of its role as the leading supplier, accounting for nearly one quarter of Thai merchandise imports. As a major agricultural exporting country, Thailand among other Asian countries is ready to open its markets in order to obtain benefits from liberalization of the agricultural sector. The indicators of its readiness can be found in its product competitiveness and the position of Thailand among other exporting countries. Most of Thai agricultural products can compete in the international market and they are expected to drive Thai exports. Since 2000, the trade balance of Thai agricultural products such as rice, maize, soybean, fruit and vegetables, sugar, coffee, dairy products, tea and spices presented a surplus. Exports of agricultural products amounted to over 10.6 per cent of the total Thai exports in 2003, almost 10.3 per cent in 2004 56



and over 8.9 per cent in 2005. The decreasing amounts of Thai agricultural products over years have been compensated by the increasing export values of Thai manufactured products. For some agricultural products, Thailand has been among the top five exporters in the world (see table 3). For instance, Thailand ranked among the top five of exporters of rice, sugar and chicken in the world. In 2004, Thailand was the top exporter of rice among other major exporters such as India, Viet Nam and the United States. Thai exports of rice accounted for almost US$ 2.9 billion or 27.1 per cent of global total exports of rice. For exports of sugar, Thailand was in the second position after Brazil. Total Thai exports of sugar amounted to almost US$ 919.3 million or almost 11.3 per cent of global total exports of sugar. In the global chicken market, Thailand was ranked fifth, accounting for over 5.6 per cent of the global exports of chicken. Table 3. Top five exporters of rice, sugar and chicken (Millions of United States dollars) Rice

Value Share (%) Sugar

Thailand 2,898.65 India 1,522.31 EU 1,383.30 United States 1,234.44 Viet Nam 962.08 World 10,695.64

27.10 14.23 12.93 11.54 9.00

Brazil Thailand EU Australia Colombia

Value Share (%) Chicken 3,103.34 919.28 892.11 744.38 308.29 8,147.53

38.09 11.28 10.95 9.14 3.78

EU Brazil United States China Thailand

Value Share (%) 4,886.78 2,599.51 1,944.39 708.14 671.58 11,912.78

41.02 21.82 16.32 5.94 5.64

Source: FAO statistical database, 26 September 2006 .

Thai exporters still face difficulties in exporting agricultural products in terms of tariff and non-tariff barriers in their major markets. In 1996, Thailand was not classified as a developing country under the New Generalized System of Preferences (GSP) of the EU (Cuyvers, 1998).4 The consequence is that Thailand will lose its preferential tariff, which means that higher import taxes at most favoured nation rates will be imposed on Thai agricultural products. However, due to concerns for tsunami-affected countries, the EU has changed the status of Thai shrimp. In 2005, the EU reduced its import tariffs on Thai shrimp from 12 per cent to 4.2 per cent, at least until 2008 (EU, 2005). In addition, other developed countries, such as Australia, Japan and the United States, have applied non-tariff barriers based on food safety standards and other sanitary and phytosanitary standards (Phusadee, 2005; Athukorala and others, 2002). Those requirements could adversely affect the costcompetitiveness of Thai agricultural products, as the cost of production would increase owing to longer processing times, and the need for more labour and new technology (Athukorala and others, 2002). In addition to serious efforts to improve the competitiveness of agricultural products, the Thai Government needs to be engaged in intensive talks with such countries to verify that Thai products meet food safety and sanitary requirements and to ensure that such requirements are not overly restrictive in its free trade agreement negotiations. 4

For fishery products, Thailand did not receive any preferences under the GSP Scheme of the EU. Then, the EU increased import tariffs on Thai shrimp products from 4-4.5 per cent in 1996 to 12-14 per cent in 1999 (Cuyvers, 1998).

57


4.


THAILAND’S POSITION REGARDING FREE TRADE AGREEMENTS

Thailand has been the most active country in Asia with regard to its involvement in FTAs since the 1997 Asian crisis. Thailand is currently making efforts to improve its international competitive advantage in agricultural products, including through the gradual reduction of import tariffs and improving education, health and social welfare in both urban and rural areas. The Thai Government has argued that Thailand could not wait any longer for progress in WTO, and should go ahead with the negotiation of FTAs with potential partners. These efforts appear to have broadened international markets for Thai agricultural products. The benefits of an FTA vary according to the different development level of a participating country. There has been a sense of uncertainty whether developing countries would stand to gain any benefits from concluding an FTA with developed countries. While it is understood that the welfare of Thai people depends on the global trading system, the Thai Government must carefully manage bilateral FTAs. In South-East Asia, Thailand has worked closely with ASEAN members to create AFTA and is currently proceeding with the establishment of an ASEAN economic community. By intensifying its ASEAN commitments, Thailand would get access to a larger market consisting of 500 million people (Soesastro, 2003). In order to reduce its vulnerability in exports, the Thai Government has announced its intention to pursue bilateral FTAs with countries outside ASEAN. Intensive negotiations have been concluded or are currently being held with many developed and developing countries, such as Australia, China, India, Japan, New Zealand, the United States, and a number of countries in the Middle East and South America. As one of ASEAN's founding members, Thailand has linked up with other FTAs around the globe, such as the Asia Pacific Economic Cooperation, BIMSTEC, initiatives within the Greater Mekong Subregion and AFTA-ANZCERTA.5 In addition, Thailand has signed bilateral agreements with some trading partners. It is recommended that Thailand should adjust its free-trade negotiation strategy by pushing for a whole package deal instead of pushing for immediate tariff cuts for some selected items before completing the entire agreement. To date, the Thai Government has already signed two early-harvest agreements with China and India. The proposals are still under intensive negotiation and are still facing protest from interest groups. Thailand has been the most active developing country in Asia in promoting its international trade since the country became involved in FTAs. FTAs are concluded to liberalize trade in goods between the two countries that would benefit Thailand in terms of increased access to its counterpart's markets. More details on how this country recently managed and dealt with its trading partners are summarized as follows:

5

ANZCERTA stands for Australia-New Zealand Closer Economic Relations Trade Agreement.

58



●

Australia: Thailand’s negotiations were completed and the FTA was signed in 2004. The FTA with Australia covered all sectors, such as trade in goods, services, intellectual property and trade facilitation. It covered mostly dairy products. The Thai-Australian FTA, the first agreement Thailand has ever reached with a developed country, took effect on 1 January 2005.

●

China: Thailand’s FTA with China is a special case, as the trade agreement between Thailand and China was set up under the ASEAN-China relationship and also under the ThailandChina agreement. Under the agreement between ASEAN and China, the participating countries agreed to reduce tariffs on imports of agricultural products. China and ASEAN intend to conclude by 2010 a comprehensive trade and economic agreement (ASEANChina Free Trade Area). Thailand also signed the Closer Economic Relations Agreement with China under the Early Harvest Programme (EHP). This programme consists mainly of tariff elimination on vegetables and fruit. Import tariffs for 188 types of fruit and vegetables have been eliminated. The Agreement took effect in October 2003.

●

India: The Agreement with Thailand was signed in October 2003, with full liberalization by 2010. This agreement is an EHP Agreement covering specific items; it entered into force in September 2004. Both countries agreed to implement early harvest programmes by progressively reducing tariffs on 84 products including food, fruit and canned products. Under the EHP, tariffs would be cut gradually. The final year for eradicating all tariffs is the year of 2010. Service and investment liberalization are subject to further negotiations. The agreement includes trade facilitation such as mutual recognition arrangements and accreditation procedures, standards and technical regulations, and trade and investment promotion.

●

Japan: Thailand’s FTA with Japan is based more on strengthening bilateral strategic relations on trade and investment opportunities. Regarding trade in goods, intensive negotiations are currently still going on between the two countries, especially on agricultural products.

●

New Zealand: The Closer Economic Partnership Agreement with New Zealand was signed in 2005. Under the Agreement, New Zealand would erase duties on 5,878 Thai products, while Thailand would eliminate import duties on 2,978 products from New Zealand by 2005. New Zealand is to write off duties on another 697 items by 2010 and on 858 products on the sensitive list by 2015. Thailand will cut import levies on 1,961 remaining products within five years, while duties on 520 products on the sensitive list, such as milk and butter, will be abolished by 2015.

●

The United States: Negotiations on the Thai-United States FTA started in June 2004 and are still in progress. The negotiations cover a range of issues, not only the elimination or reduction of import tariffs but also the elimination of non-trade barriers and issues related to sanitary standards. The United States tariffs have been generally low at an average 7 per cent, compared with an average 23 per cent for Thailand.

59



●

With regard to the regional FTA between ASEAN and the Republic of Korea, Thailand postponed signing the Agreement in May 2006, since there was an unresolved issue related to farm products, especially rice exports from Thailand to the Republic of Korea. Thailand wanted the Agreement to include rice, while the Republic of Korea has strictly refused to liberalize its rice sector.

●

In addition to these FTAs, Thailand also has plans to negotiate FTAs with other countries and groupings, such as Pakistan, South Africa, Morocco, Egypt, the European Free Trade Association and the South American Common Market which consists of Brazil, Argentina, Paraguay, Uruguay, and most recently Venezuela. These agreements are intended to strengthen economic partnerships at the global level and liberalize trade in all commodities as well as in services and investment.

The conclusion of bilateral FTAs has been a major policy of the Thai Government when the CEO-style of administration was in vogue.6 Such a policy has pros and cons. Farmers, selected companies and interest groups want to postpone or reject trade liberalization in order to retain their protection as long as possible, while the Thai Government will not be able to keep on protecting them. On one hand, putting FTAs on the fast track of trade liberalization may expand market access for agricultural products but on the other, imbalances in bargaining power among negotiating partners may lead to a bias in favour of the more powerful country. As an open developing country, Thailand should be careful with its agricultural sector and indeed, its farmers, who have not been major beneficiaries of trade liberalization so far and are commonly poor. In addition, too many FTAs between individual Asian countries and developed countries will tend to undermine the goal of AFTA which is to achieve free trade among its 10 members. Action by individual AFTA members would decrease the bargaining power of ASEAN countries under AFTA in dealing with other blocs and countries outside AFTA. In negotiating and concluding FTAs, the Government should take into account the following considerations: (a) regional deals are more efficient and offer more advantages than bilateral ones; (b) steps should be taken on a gradual basis to empower the agricultural production sector and farmers; (c) FTAs should have comprehensive coverage and depth, and include non-tariff barriers, investment, human resources development, intellectual property right protection and the environment (such as water supply service for farmers), apart from tariff reductions or elimination. In addition, before concluding bilateral free trade agreements, the Thai Government has to develop the pre-conditions in the agricultural sector (as shown in figure 1). The hope is that these efforts would give greater benefits to both agricultural society in particular and consumers in general. Figure 1 provides more details on how free trade in the Thai agricultural sector should be managed firmly.

6

Farmers and non-governmental organizations (NGOs) most commonly use this term to criticize the Thai Government; it refers to the operating management style of former Prime Minister Thaksin Shinawatra.

60



In order to maximize the potential benefits of the existing FTAs and minimize their potential negative impacts, the Thai Government needs to satisfactorily make the necessary adjustments to its economy and encourage its business sector to strengthen competitiveness in the emerging free markets. The Government has to reform and restructure the public sector and expand infrastructure in both urban and rural areas. An effective public sector and good infrastructure are instrumental to facilitate business activities and to lower costs of production and trade. These are essential conditions before concluding an FTA. Figure 1. Free trade process in the Thai agricultural sector

a

This covers not only tariff elimination but also other subjects such as investment, human resources development and the environment (including water supply service for farmers).

b

Compensation to economic losers can be given through the creation of social safety nets, upgrading the educational systems and facilities, and developing a social and health-care system. The strengthening of small and medium-sized enterprises is also needed to compensate them for the conditions of free trade through practical training, technology transfer, marketing and skill development in order to raise their productivity and their international competitiveness.

Thai farmers should be prepared and be empowered through practical training in skills and technology in agricultural production, and the promotion of a modern, productive and innovative workforce. Important conditions such as open and easy access to soft loans for production, good quality seeds, easy-to-obtain and cheap fertilizers, good irrigation, cultivation and marketing processes, have to be met. The central Government has to pay great attention to these conditions prior to the liberalization of the agricultural sector.

61



In order to improve the availability of good quality seeds, agricultural research and development has to be strengthened. Historically, Thai farmers have received good will on these matters from King Bhumibol Adulyadej. To date, the Thai Government and its institutions have worked hard always to reinvent and improve technology in the agricultural sector. In the production process of any goods, including agricultural products, negative externalities always become evident. Farming activity tends to lead to the degradation of soil and land from over-use of fertilizer or irrigation. In this case, how to conserve the environment for future productive use is also a critical aspect. Investment in the agricultural sector and the environment is another aspect to consider, as this would sustain agricultural development. The degradation of soil, for example, needs new investment and technology to maintain its productivity. If the proper conditions in the Thai agricultural sector are met, then free trade negotiations in agriculture could be the next step. In addition, proper consultation with and training of farmers and other stakeholders must be carried out consistently to reduce the adverse effects of free trade and increase the legitimacy of FTAs. In doing so, the Thai Government has already created at least three bodies to manage the Thai FTA negotiations with trading partners. These three institutions are the Negotiation Committee, the Steering Committee on International Trade Negotiations, and the FTA Supporting Committee. These centres are to ensure maximum benefits from FTAs by coordinating Thailand’s interests across all FTAs. These bodies would be responsible for bilateral FTA and multilateral agreements such as negotiation under WTO and ASEAN, and trade-related legal affairs. To date, conflicts regarding Thai FTAs are related mostly to domestic problems and stem from opposition groups such as farmers and NGOs or from parliament which considers that FTAs such as the Thai-Australia Free Trade Agreement (TAFTA) and the signing process of the United States-Thai FTA are unconstitutional (Silp, 2006; Ashayagachat, 2006).7 In particular, negotiations on the free trade agreement with the United States have been subject to political pressures and public protests regarding controversial subjects contained in the agreement.8 The recent problems arising from TAFTA concern Thai tuna and canned pineapple, which suffered safeguard measures imposed by Australia (Colebatch, 2005).

5.

COSTS AND BENEFITS OF FREE TRADE AGREEMENTS FOR THAILAND’S AGRICULTURAL SECTOR

With the removal of tariffs and non-tariff measures and the creation of a more open trading environment, FTAs can greatly expand international trade and induce economic growth and other economic opportunities provided that they are broad in scope and deep in commitment and do not lead to undue trade diversion. Big companies can also expand and diversify their 7

8

This agreement was never debated in the parliament and it should have obtained approval from the parliament as required under the Thai Constitution (Silp, 2006; Ashayagachat, 2006). Sensitive subjects include financial sector liberalization, liberalization of trade in the agricultural sector including the use of genetically modified organisms, and patent requirements for medicine (Silp, 2006; Chantanusornsiri, 2005).

62



supply chains and production bases and therefore gain economies of scale, boost their productivity, and obtain specialization in order to develop their business. However, there are also costs associated with freer trade (Kawasaki, 2003; Fabiosa and others, 2005; and Beghin and Aksoy, 2003) as presented in table 4. Table 4. Benefits of selected FTAs for the Thai agricultural sector FTA

Trade effects

ASEAN-China FTA and Thailand-China FTA

Exports of processed rice and rubber to China are likely to increase significantly due to Thailand’s lower costs and currently high Chinese tariff rates. Imports of vegetables, fruit and oil seeds from China will increase, since Thailand currently has a very high tariff rate and cost disadvantages.

ASEAN-Japan FTA

Exported meat and other food products to Japan are likely to increase significantly due to Thailand’s lower costs and currently high Japanese tariff rates. Food products, tobacco, beverages and other crops are likely to benefit significantly from a reduction of Japanese non-tariff barriers.

ASEAN+3 FTA

Exports of food products, meat products and textiles to Japan and exports of processed rice to China will increase significantly.

Thailand-Australia FTA and ASEAN-CER FTA

Food products and vegetable oils are likely to benefit significantly from a reduction in non-tariff barriers in the CER. Imports of dairy products, livestock and meat products will increase substantially due to Thailand’s currently high tariff rates on these products and the competitiveness of Australia and New Zealand’s agricultural sectors.

Thailand-New Zealand FTA

Thailand is expected to gain low benefits from market access to New Zealand due to its already low tariff rates as well as its small market size.

Thailand-India FTA

Thailand will benefit from products such as rubber and plastic products, and these will significantly increase due to India’s currently high tariff rates. Imports of salt, tea, pepper, and apparel from India will increase due to currently high Thai tariff rates.

Thailand-USA FTAa

Thailand will be the winner on products such as rice, shrimp, frozen seafood, rubber, fruit and vegetables, sugar and canned fish, while the United States will get benefits from soybean, corn, potatoes and peanuts.

Source: S. Mallikamas, A Study of Thailand’s Readiness to Establish Free Trade Areas, CAMGEM Development Project, Faculty of Economics, Chulalongkorn University (Bangkok, 2002). a

Thailand Development Research Institute, Thailand-US Free Trade Agreement. (Bangkok, 2003).

During the liberalization of trade, only strong, competitive companies will survive and gain benefits from the liberalization process, while non-competitive firms are likely to collapse. Under certain conditions, liberalization could therefore entail poverty and unemployment in the uncompetitive sectors, which poses a challenge to policymakers and international institutions (Panitchpakdi, 2001). This case also applies to the Thai economy. In Asian countries farming (livestock and crops) is characterized by small farmers who are endowed land which is usually less than a hectare in size (Sharma, 2001). Farmers are the 63



main players in agricultural production, but they have been marginalized in terms of getting their fair share of benefits among other players such as companies, traders, distributors, exporters and importers. In some cases, small farmers with poor land and technology tend to get a small portion of the subsidies and other support from the Government. The opening up of trade has the potential to create better market access and increase the exports of farmers’ products, but the share of profit margins commonly is unequally distributed to farmers. FTAs including agricultural products tend to give more benefits to big or corporate agribusiness, while small farmers in rural areas are often marginalized. Most of the small farmers around the world, including Thai farmers, are worse off with free trade. The exceptions to this matter could be the farmers from developed countries such as the United States, the European Union and Japan, in which farmers have enjoyed subsidies and other non-traderelated protection from their Governments (Fabiosa and others, 2005; Raman, 2005), so that their products can compete often unfairly both in domestic and international markets. The bilateral trade agreement between China and Thailand, in which tariffs were removed on a significant number of fruits and vegetables traded between the two countries, has created a flood of cheaper imports of fruit and vegetables into Thailand (Chantasasawat, 2006). Accordingly, Thai farmers and other traders have questioned the logic of agricultural liberalization under bilateral FTAs as they have been displaced and destroyed by such deals. In the case of the FTA with Australia, for example, the highly competitive dairy industry of Australia would make Thai farmers of similar products likely to be losers. It is understood that trade and free trade agreements are based on mutual understandings and national welfare benefits derived from the resulting trade creation. However, national welfare benefits do not imply that all producers (including farmers) will be better off, as in some cases, a few of them are sometimes worse off. For those who lose as a result of free trade, the Government should assist them to upgrade their competitiveness or diversify into alternative production patterns. In fact, there was an approved proposal for a 10 billion baht (US$ 1 = about 36 baht) fund from the Thai Government in order to assist farmers to overcome their losses due to the negative impacts of FTAs. The funds would be aimed at reforming the agricultural sector and strengthening the competitiveness of small-scale Thai farmers by increasing the quantity and quality of their products within the next 10 years. The allocation of these funds would be directed to help local farmers to switch to competitive crops. However, the effectiveness of this policy remains questionable as it has not eliminated the farmers’ existing problems and it tends to protect exporters rather than local farmers from the adverse effects of FTAs.9 Other policies launched by the Thaksin Administration include the “One Tambon One Product Scheme”10 and the establishment of a small and medium-sized enterprise bank, and 9 10

The fund was approved on 20 July 2004. See “B10 bn approved for farmers hit by FTA”, Bangkok Post, 21 July 2004. The Thai Government launched the One Tambon (subdistrict) One Product (OTOP) scheme in 2001. The target of this policy was to improve incomes of villagers by developing rural communities. Villagers were encouraged to produce a unique product, so that a wide variety of products would be produced. If the scheme succeeds, it would be expanded to both domestic and international markets.

64



other microfinancial institutions in order to empower rural society (Siripunyawit, 2004 and World Bank, 1998). Even though these policies have been subject to criticism, they have been popular with the public and are still effective in increasing the productivity of the rural sector.11 Many farmers, especially small farmers in Asian countries, face difficulties in raising productivity. As in Thailand, many small rural farmers face obstacles such as availability of seed, fertilizer, irrigation, labour and cultivation. In addition, they also have conventional problems such as those related to financing and marketing, including low prices for their commodities as a result of market distortions, which are not sufficient to cover production costs. Under free trade, many small farmers are becoming worse-off as they do not have enough access to the markets or to Governments to have their voice heard in the negotiations on these matters. The agricultural sector, supported by the Government, needs modern, productive and innovative labour and production techniques, particularly for small farmers, so that farmers and rural enterprises will be able to boost their productivity and produce goods of higher quality. In doing so, innovative thinking and an outward-looking and globalized approach is required. Government policies that are directed to empower farmers and improve their competitiveness and productivity should include facilitation of access to reasonably priced inputs, research and development on seeds and cultivation, packaging, storage and marketing, skill development for a variety of products, improving infrastructure in rural areas and improvement of social and health-care systems as well. In order to help the Thai farmers and agricultural industry survive in the global economy, the Thai Government has to tackle the problem of increased enforcement by developed countries of non-tariff barriers, in particular sanitary and phytosanitary standards. Indeed, farmers need to have access to modern production technology to produce high quality farming products that meet those standards and consumers’ requirements in their export markets. These policies will enable the agricultural sector to be competitive and preserve the sustainability of agricultural development as a whole. With respect to the agricultural sector, Governments at the national and local levels have to pay due attention to the issue of “food security” for both residents in urban and rural areas and to maintain sustainability of the agricultural sector. In this context, stakeholders have to be concerned about the use of natural resources allotted for efficient production (as natural resource endowments are limited). Income distribution and social welfare are other aspects that the Government must be concerned about. The Government has to ensure that policies on income distribution and social welfare are fair and benefit everybody.

11

Criticism included observations that rural society and small and medium-sized enterprises had insufficient knowledge and skill to run businesses while access to credit was not as easy as the policies made it out to be (Siripunyawit, 2004).

65


6.


CONCLUSIONS

Thailand has a relatively well-managed agricultural sector and has been one of the most active developing countries in Asia to engage in FTA negotiations. These negotiations are believed to have broadened the international markets for Thai products, including agricultural products. In concluding an FTA the Government should have the wisdom not to open the market all at once, but instead adopt a gradual approach towards liberalization of its domestic market. In order to get equally distributed benefits of FTAs, it is imperative to create not only freer but also fairer trade among partner countries under the agreements. The agricultural sector consists of many players, mostly small farmers, who are impoverished and have poor bargaining power. Restructuring and adjustment processes in the Thai agricultural sector, especially for the empowerment of Thai farmers, are of the essence in order to keep pace with the rapid changes brought about by globalization, such as increased trade, and gain more benefits from FTAs for society at large. The Thai Government also needs to pay greater attention to improving the effectiveness and competitiveness of private businesses to enable them to benefit from freer trade. In addition, in efforts to develop its agricultural sector, Thailand has to be aware of the need for proper and fair distribution of benefits to each domestic sector involved. In addition, several aspects must be significantly enhanced: the bargaining power of farmers, especially small-scale ones, the development of productivity and increased competitiveness in international markets. It should be recognized that effective trade and FTAs are based on mutual understanding and that the benefits of free trade are national, involving some winners and also some losers. For the losers, the Government should help them shift to alternative means of production and/ or improve their competitiveness.

66



Acknowledgements The author wishes to thank Marc Proksch (United Nations, ESCAP) for his helpful correction and constructive comments. In particular, the author is very grateful to Prof. Shigeru T. Otsubo, Graduate School of International Development (GSID), Nagoya University, and all his Seminar Members for their helpful comments. The author also wishes to thank Prof. Somsak Tambunlertchai (Ministry of Industry, Thailand) and Prof. Abdul Rahman Embong (IKMAS, Universiti Kebangsaan Malaysia) for their outstanding ideas and comments.

67



REFERENCES Ashayagachat, A. (2006). “Court asked to throw out FTA with Australia”, Bangkok Post, 25 May. Athukorala, P. and others (2002). “International food safety regulation and processed food exports from developing countries: The policy context, and the purpose and scope of the research project”, paper presented at a Conference of International Food Safety Regulation and Processed Food Exports from Developing Countries, Bangkok, 1 October. Bangkok Post (2004). “B10bn approved for farmers hit by FTA”, 21 July. Bank of Thailand (2004). Economic and Financial Statistics: Foreign Trade and Balance of Payments, 5 October from <www.bot.or.th/bothomepage/databank/EconData/ EconData_e.htm>. _______(2006). Economic and Financial Statistics: Foreign Trade and Balance of Payments, 28 September from <www.bot.or.th/bothomepage/databank/EconData/ EconData_e.htm>. Bhalla, A.S. and P. Bhalla (1997). Regional Blocs: Building Blocks or Stumbling Blocks? (London, Macmillan Press Ltd.). Beghin, J.C. and A. Aksoy (2003). “Agricultural trade and the Doha round: Lesson from commodity studies”, paper prepared for the Annual Bank Conference on Development Economics – Europe, Paris, May. Chantanusornsiri, W. (2005). “US-Thai FTA: Framework needed before discussions on finance sector”, Bangkok Post, 8 July. Chantasasawat, B. (2006). “Burgeoning Sino-Thai relations: heightening cooperation, sustaining economic security”, China: An International Journal, vol. 2, No. 1 (Singapore, Singapore University Press Ltd.) March, pp. 86-112. Colebatch, T. (2005). “ASEAN talks hit a trade barrier”, The Age, 22 October. Coxhead, I. and J. Plangpraphan (1998). “Thailand’s economic boom and bust, and the fate of agriculture”, in B. Anderson and S. Suwanraks, eds., TDRI Quarterly Review, vol. 13, No. 2 (Bangkok, Thailand Development Research Institute), June, pp. 15-24. Cuyvers, L. (1998). The Generalized System of Preferences of the European Union, with Special Reference to Asean and Thailand, CAS Discussion Paper No. 18 (Antwerp, Centre for ASEAN Studies, Universiteit Antwerpen), March. De Simone, F.A.N. (1996). “Regional integration arrangements: AFTA from a comparative perspective”, in M. Ariff and others, eds., AFTA in the Changing International Economy (Singapore, Institute of South East Asian Studies).

68



European Union (2005). GSP: The New EU Preferential Terms of Trade for Developing Countries, 8 November from . Fabiosa, J. and others (2005). “The Doha Round of the World Trade Organization and agricultural markets liberalization: Impacts on developing economies”, Review of Agricultural Economics, vol. 27, No. 3, pp. 317-335. Food and Agriculture Organization of the United Nations (FAO) (2005). Statistical databases, 27 December from . _______(2006). Statistical databases, 26 September from . Frankel, J.A. and S.J. Wei (1998). Open Regionalism in a World of Continental Trade Blocs, IMF Working Papers No. WP/98/10 (Washington D.C., International Monetary Fund). Hew, D. (2003). Towards an ASEAN Economic Community by 2020: Vision or Reality? (Singapore, Institute of South East Asian Studies). Josling, T. (1993). “Multilateralism: A constraint on unilateralism and regionalism in agricultural trade”, American Journal of Agricultural Economics, vol. 75, pp. 803-809. Kawasaki, K. (2003). The Impact of Free Trade Agreements in Asia, RIETI Discussion Paper Series 03-E-018 (Tokyo, Research Institute of Economy, Trade and Industry). Mallikamas, S. (2002). A Study of Thailand's Readiness to Establish Free Trade Areas, CAMGEM Development Project, Faculty of Economics, Chulalongkorn University (Bangkok). Page, S. (2000). Regionalism among Developing Countries (London, Macmillan Press Ltd.) Panitchpakdi, S. (2001). “Global trade liberalization: Coordination and coherence”, The Australian Economic Review, vol. 34, No. 1, pp. 3-13. Poapongsakorn, N., M. Ruhs and S. Tangjitwisuth (1998). “Problems and outlook of agriculture in Thailand”. TDRI Quarterly Review, vol. 13, No. 2, June (Bangkok, Thailand Development Research Institute), pp. 3-14. Phusadee, A. (2005). “Japanese demand better standards”, Bangkok Post, 13 December. Raman, M. (2005). “Interactions with the market: A survey of some experiences of rural producers in developing countries”, APRN Journal, vol. 13 (Quezon City, Asia-Pacific Research Network), December. Sharma, R. (2001). Strengthening Agricultural Support Services for Small Farmers, report of the APO Seminar on Strengthening Agricultural Support Services for Small Farmers, Japan, 4-11 July.

69



Silp, S. (2006). “Thai officials dispute opposition claims on free trade with US”, The Irrawaddy News, 6 January. Siripunyawit, S. (2004). “En route to large-scale success”, Bangkok Post – Economic Review: Year-End 2004. Soesastro, H. (2003). An ASEAN Economic Community and ASEAN+3: How do They Fit Together?, Pacific Economic Papers No. 338 (Canberra, Australia-Japan Research Centre, Australian National University). Thailand Development Research Institute (TDRI) (2003). “A study on the impacts of ThailandUS Free Trade Agreement” (Bangkok). World Bank (1998). Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand, Rural Development and Natural Resources Sector Unit, East Asia and Pacific Region (Washington D.C.).

70



Enhancing the Movement of Natural Persons in the ASEAN Region: Opportunities and Constraints Tereso S. Tullao, Jr. and Michael Angelo A. Cortez*

ABSTRACT

T

he overall objective of the movement of natural persons (MNP) in the ASEAN region is to contribute to expanding trade in services and to deepening economic integration. However, the regional movement of human resources has proceeded beyond the expansion of trade and has persisted in response to labour market imbalances. Thus, movement of workers in the region can be viewed from two perspectives: trade negotiations and labour market disparities. This paper aims to describe the measures addressed by the Association of Southeast Asian Nations (ASEAN) and its 10 member countries in expanding the movement of human resources under multilateral and regional trade agreements and by responding to labour market asymmetries. From a trade negotiations perspective, numerous bilateral and regional agreements have been formulated that were aimed at enhancing intra-ASEAN cooperation in trade in commodities, investment and trade in services. However, the extent to which these agreements have realized their intended benefits depended on the degree to which regional goals prevailed over domestic political and economic interests of member countries. For instance, the impact of the ASEAN Framework Agreement on Services (AFAS) on MNP is very limited. The commitments of ASEAN members are similar to their commitments (continued on page 72) * Center for Business and Economics Research and Development, De La Salle University, 2401 Taft Ave., Manila, 1004 Philippines, E-mail: [email protected]; [email protected]. This study was conducted as a part of the implementation of the Asia-Pacific Research and Training Network on Trade (ARTNeT) research programme and carried out with the aid of a grant from the International Development Research Centre, Canada and the technical support of ESCAP. Any errors are the responsibility of the authors; the views expressed are those of the authors and do not necessarily reflect those of the United Nations. An extended but unedited version of this paper is available as ARTNeT Working Paper No. 23 at <www.artnetontrade.org>.

71




in the General Agreement on Trade in Services (GATS). Particularly, commitments on MNP are intimately linked to commercial presence and seen as simply facilitating the movement of professionals, managers and technical staff for intracorporate transfers. There are also substantial limitations on market access, national treatment and domestic regulations that restrict the movement of workers across the region. From another perspective, the movement of workers can be seen as a legitimate response to the labour market asymmetries in ASEAN. Sending countries are pressured to open up their markets or face shortages of labour. For sending countries, the teeming number of surplus workers will also pressure them to seek bilateral or regional agreements that will facilitate the entry and employment of surplus human resources in neighbouring countries. However, owing to costly restrictions in immigration, pre-employment requirements and other domestic policies, the optimum movement of foreign workers is not realized and many of these workers turn into irregular migrants and are subject to exploitation and unfavourable working conditions. Given the rising trends in the movement of workers over the years as a result of globalization, liberalization measures under AFAS and demographic asymmetries on regional markets, the movement of workers can be a potent avenue for enhancing the formation of an ASEAN economic community. To this end, there is a need for negotiating mutual recognition agreements; lifting market access and national treatment limitations; de-linking mobility of natural persons (Mode 4 of GATS) from commercial presence (Mode 3); moving towards regulatory homogeneity; and liberalizing measures or management of temporary migration. Regional cooperation in this area can help in the realization of positive contributions from the movement of foreign workers to regional output and employment.

1.

INTRODUCTION

The movement of natural persons (MNP) is one of the four modes of supply in the trade in services acknowledged by GATS, which refers to the provision of a service by an individual outside the country of his/her residence on a temporary basis. Although it may include independent professionals invited to render service in a foreign country, the common applications of MNP, however, are done through the intracorporate transfer of people consisting of professionals, technical and other related workers more often affiliated with transnational corporations (TNCs) (Tullao and Cortez, 2005). Although MNP is similar to temporary migration, since both phenomena involve people crossing national boundaries, MNP is technically different because the people do not seek employment and permanent residency in the host country.

72



For the purpose of this paper, temporary migration is used interchangeably with the movement of natural persons, keeping in mind the argument of developing countries that MNP should not be limited to skilled workers and professionals. While GATS and AFAS have an exact technical definition of MNP, the temporary movement of workers in ASEAN is influenced by other factors such as labour market asymmetries in the region. Table 1. Types of natural persons supplying services (horizontal commitments), April 2002 No. of entries Executives Managers Specialists Others Executives Managers

56 55 56 1 24 42

Specialists Commercial presence Business visitors Sale negotiations

44

Intracorporate transferees

No. of aggregate entries

Percentage of aggregate entries

168

42

110

28

93

23

41 52

Contract suppliers

12

12

3

Other

17

17

4

Totala

400

400

100

Source: Carzaniga (2002). a Total number of entries by those WTO members that have included commitments on Mode 4 in the horizontal section of their schedules.

Compared with other modes of supply in the global trade in services, the value of services generated by MNP pale in comparison with cross-border transactions (Mode 1), due to the rapid developments in information and communications technology, consumption abroad (Mode 2) and commercial presence (Mode 3). Since MNP has been linked mostly to intracorporate transfers of highly skilled professionals of TNCs, it has been interpreted as an extension of Mode 3 and favourable to the interest of capital-rich developed countries (see table 1 above). Against this backdrop, many developing countries endowed with labour resources are seeking to enhance the potential gains from liberalized global trade in services by expanding the application of MNP. If movement of capital under Mode 3 is premised on the exploitation of opportunities offered by the asymmetries in interspatial returns to capital, then Mode 4 73



could be further expanded if GATS allowed the exploitation of opportunities due to the asymmetries in interspatial labour supplies and returns. As a consequence, Mode 4 should not only pertain to intracompany transfers of professionals and highly skilled workers but should be expanded to include, among others, independent service providers, semi-skilled and unskilled workers. Although this view has the potential of expanding trade in services via MNP, it has been opposed by many developed countries as it may have adverse effects on their local labour markets. In addition, the entry of unskilled and semi-skilled temporary workers can engender potential socio-cultural problems, as demonstrated by the experience of several countries in Europe after the guest-workers schemes were introduced in the 1960s and 1970s. Given the potential of reaping the benefits of a more vibrant movement of temporary workers across national boundaries that may create greater income and employment for developing countries, on one hand, and the difficulties of implementing current proposals of expanding MNP at the global level, on the other, there is a need to study alternative avenues of expanding the application of MNP at the regional and bilateral levels. Specifically, what measures should be addressed by individual countries and by ASEAN to expand trade in services specific to the supply mode of movement of natural persons? This paper is organized as follows: section 2 discusses the framework for MNP based on trade negotiations and labour market perspectives; section 3 presents the direction of manpower movements in the region; section 4 elaborates on the trade negotiations perspective; section 5 details the labour market perspectives; section 6 shows the facilitating and restricting factors affecting MNP in the region from both perspectives; and section 7 concludes and presents recommendations for policymakers.

2.

FRAMEWORK

There are two ways of viewing MNP in the ASEAN region: (a) the trade negotiations perspective and (b) the labour market perspective. The trade negotiations perspective refers to the role of trade negotiations at the bilateral, regional and multilateral levels in facilitating or restricting the movement of human resources across the region. Since the commitments of countries incorporated in various formal trade agreements can ease or impede the movement of workers in the region, this approach can also be considered as the institutional driver of MNP (see figure 1).

74



Figure 1. Proposed framework of MNP analysis in ASEAN

75



Some countries in the region have participated in trade negotiations at the multilateral level that resulted in GATS under the World Trade Organization (WTO) while others have acceded to the requirements and disciplines of this Agreement upon acceding to WTO. Similarly, member countries of ASEAN have forged several bilateral agreements towards economic cooperation and regional integration through AFAS to facilitate the trade in services. An interesting note to consider is the extent to which the AFAS commitments of ASEAN countries are facilitative or restrictive relative to their GATS commitments with regard to MNP. On a broader regional scale, various programmes within the Asia Pacific Economic Cooperation (APEC) are intended to enhance trade in services and the movement of services via Mode 4. Some of the measures initiated by APEC to facilitate such movements are the adoption of the APEC Business Card, APEC Visa and the APEC Registry of Engineers. At the bilateral level, countries enter into free trade agreements (FTA) or preferential trade agreements to facilitate the movement of goods, capital, services and people with their major trading partners. An important component of an FTA template is a section on the mobility of labour. These agreements entered into by countries may include horizontal and sectoral commitments pertaining to MNP. In addition, part of the schedule of commitments is the listing of limitations on market access and limitations on national treatment. Market access limitations refer to qualifications and restrictions on the number and type of foreign workers in activities and economic sectors where foreign workers are allowed. National treatment limitations, on the other hand, refer to qualifications and restrictions on activities and sectors on the basis of the nationality of workers. These limitations will have a direct impact on MNP between the sending and receiving countries. For example, establishing a limit on the number of foreign chefs in the hotel industry, barring accountants from practising their profession in a foreign country and requiring an economic needs test before a foreign worker can work in a receiving country will definitely temper the global movement of workers. More often, national treatment limitations are linked with domestic regulations that restrict foreigners from practising their professions for various reasons, including the promotion of the public interest. In cases where foreign professionals are allowed to practise in a receiving territory, they have to overcome certain qualification requirements before they are allowed to practise. These requirements arise as responses to the asymmetry of information in the provision of a service. These requirements include, among others, education and training, experience, licensing procedures and other requirements. However, since these sets of qualifications vary across countries, domestic regulations can serve as a restriction on the global movement of human resources even if there are no market access and national treatment limitations scheduled in the commitments of receiving countries in trade agreements. To address these gaps in the qualification requirements across boundaries, receiving and sending countries can establish mutual recognition arrangements (MRAs). The objective of MRAs is to set up accreditation procedures and mechanisms for equivalency while recognizing the intercountry differences in education and training, experience and licensing requirements for the practice of professions.

76



The second view in the analysis of MNP is the labour market perspective that refers to the market drivers of the regional movement of human resources. This analysis stems from the responses of individuals and countries to regional economic and demographic asymmetries that produce differential impacts on the labour markets in various countries. From the side of the sending countries, lethargic economic performance and rapid population growth can create an excess supply of labour. To mitigate the growing internal underutilization of labour, the international market and overseas employment can serve as a vent for excess labour. From the side of the receiving countries, rapid economic growth, slow population growth and other effects of the “demographic dividend” create an excess demand for labour. One response to this critical labour market disequilibrium is sourcing labour from overseas. However, the entry of foreign workers can be influenced by immigration policies of receiving countries, pre-employment requirements and domestic regulations. Receiving countries may set up stringent immigration policies that limit the duration/length of stay, place restrictions on renewal of visas, make prohibitive the cost of getting visas, including the period of processing. Pre-employment requirements include security clearance, health clearance, personal and professional references and other requirements. Domestic regulation has been discussed within the context of the perspective of trade negotiations since it affects the practice of professions by citizens and foreign professionals. It is likewise included in the labour market perspective since the entry of foreign workers has an impact on wages and the employment of domestic workers. Because of this potential impact, receiving countries may require an economic needs test before allowing foreigners to enter their territory for work. Since temporary labour migration is a global phenomenon, with attending benefits and costs to the sending and receiving territories, countries have formulated various programmes to mitigate the costs and advance the benefits of the global movement of workers. The management of temporary labour migration includes the institutions/agencies involved in the management of external movements of human resources, the taxes imposed, managing the cost of temporary labour migration and programmes for the protection of overseas workers. On the other hand, one way of restricting the movement of temporary workers is to make employers shoulder the costs. A levy can also be imposed to manage the movement.

3.

DIRECTION OF MOVEMENTS OF TEMPORARY SERVICE PROVIDERS IN THE REGION

Abella (2004) of the International Labour Organization (ILO) explains that the exhaustion of labour reserves in Hong Kong, China; Japan; Republic of Korea; and Taiwan Province of China made them progressively turn to external sources of labour to meet their emerging shortages. Neighbouring Asian countries with less dynamic economies but with abundant labour supplies expectedly met their requirements. Migrant workers in South-East Asia are drawn by better paying jobs in Hong Kong, China; Japan; Malaysia; Republic of Korea; Singapore; and Taiwan Province of China. 77



In an ILO international migration paper, Wickramasekera (2002) has classified the migration status of Asian countries into net labour-sending and net labour-receiving and both labour-sending and labour-receiving. With reference to ASEAN, Wickramasekera's earlier classification could be adapted in table 2. Table 2. Migration status of ASEAN countries Labour-sending Cambodia Indonesia Lao People’s Democratic Republic Myanmar Philippines Viet Nam

Labour-sending and labour-receiving Malaysia Thailand

Labour-receiving Brunei Darussalam Singapore

Manning and Bhatnagar (2004) proposes to divide the regional economies into two geographical groups to understand the forces that link trade, investment and migration movements within ASEAN. First is the Mekong River group consisting of relatively developed Thailand and the four lower income countries, Myanmar, the Lao People’s Democratic Republic, Cambodia and Viet Nam. These countries have common borders and Thailand seems to be the favourite destination. The second group is the Malay-Filipino group, consisting of two high per capita income countries, Singapore and Brunei Darussalam, middle income Malaysia and the lower income countries, Indonesia and the Philippines. These countries have historical links based on trade and migration (Manning and Bhatnagar, 2004). In the early 1970s, migration within South-East Asia was estimated to be around 300,000. This figure doubled to around 500,000 workers in the early 1980s. This pattern can be observed from one decade to the next. As of the year 2000, migration within the region was estimated to be about 3 million workers (Manning and Bhatnagar, 2004). Labour importation to ASEAN is a function of economic growth and development. The net importers are Singapore and Brunei Darussalam. Malaysia and Thailand for their parts both receive and send workers in the region. On the other hand, the net exporters of labour in ASEAN are Indonesia, the Philippines and Viet Nam. Cambodia, the Lao People's Democratic Republic and Myanmar, to a certain extent, also export labour migrants to neighbouring Thailand.

78


4.


MOVEMENT OF NATURAL PERSONS IN THE REGION: TRADE NEGOTIATIONS PERSPECTIVE

(a) Commitments of countries in ASEAN under GATS and AFAS ASEAN countries are committed to liberalization of trade in services in various sectors under Mode 4 or movement of natural persons in GATS and AFAS. Singapore, Malaysia and Thailand have been more liberal in committing to liberalization of business services compared with the rest of ASEAN. Brunei Darussalam and Indonesia have made commitments in fewer sectors, but the Philippines and Myanmar have not made commitments in any sector. Cambodia, the Lao People’s Democratic Republic and Viet Nam have very limited commitments. The Lao People’s Democratic Republic and Viet Nam are not members of WTO, while Cambodia joined only recently in 2003. Myanmar is committed only to the liberalization of temporary labour migration with regard to tourism (Manning and Bhatnagar, 2004). GATS and AFAS commitments have been made by the more open economies of Malaysia and Singapore, followed by Indonesia and Thailand. The Philippines has made the least number of commitments. In the last five years, not much has been achieved by AFAS in terms of garnering commitments from its member countries (Manning and Bhatnagar, 2004). In terms of depth of Mode 4 commitments in AFAS, out of 104 services, Malaysia, Singapore and Thailand have shown the deepest commitments. Brunei Darussalam, Indonesia, the Philippines and Viet Nam have committed from 39 to 41 out of 104 services; while Cambodia, the Lao People’s Democratic Republic and Myanmar have registered minimal commitments. Malaysia, Singapore and Thailand also posted the highest number of services with Mode 4 commitments. The Philippines and Myanmar have the highest number of unbound services sectors followed by Viet Nam. Thailand, the Philippines and Myanmar registered the highest number of “none” commitments.

(b) Commitment of countries under the AFAS Fourth Package (2004) The first package (1997) of AFAS contained limited commitments on tourism (22), maritime (8), air transport (4), business (2) and telecommunications services (1). The second package (1998) showed remarkable improvements in business (55), construction (36) and financial services (27). Limited growth in commitments can be observed in maritime, air transport and tourism services. The third package (2001) contained more commitments in construction (77), business (65), telecommunications (40) and tourism services (32).

79



(i) Sectors committed in the AFAS Fourth Package (2004) ASEAN countries have planned to commit the earlier liberalized service sectors of tourism, telecommunication and banking/financial services to further liberalization. The next group of sectors subject to commitments is composed of construction and maritime services; business services, such as architectural, accounting and bookkeeping services; and auditing services. However, not all countries have submitted commitments on taxation. ASEAN countries are also realizing the need for liberalization of translation, market research and legal services. Other service sectors will tend to remain closed to liberalization.

(ii) Limitations on market access under Mode 4 Mode 4 horizontal commitments of ASEAN countries are limited to highly skilled and intracorporate transferees. Brunei Darussalam has been explicit in its definition that intracorporate transferees cover only managers, executives and specialists. While Cambodia and the Lao People’s Democratic Republic would allow the presence of foreign workers, they are subject to domestic laws. Malaysia allows the presence of intracorporate transferees but they are subject to specific measures related to their worker classification. Indonesia and the Philippines reserve the right to carry out economic needs tests. Indonesia sets a maximum of two years for directors, managers and technical experts and advisers.

(iii) Limitations on national treatment on Mode 4 Foreign workers would naturally be subject to the immigration and labour laws of their country of destination. Indonesia, however, has expatriate charges applied to foreign workers while Viet Nam has a specific income tax scheme.

(iv) Final list of MFN exemptions for Mode 4 Brunei Darussalam has a preference for the entry and temporary stay of workers from their traditional sources of supply. The intended duration of workers is indefinite and subject to periodic review in light of domestic policy considerations. Having a relatively small population, the Government needs to regulate the movement of foreign workers, both skilled and unskilled, to ensure social cohesion in the country. Indonesia reserves low level occupations for its citizens. The policy of the Government is to grant limited exemptions to citizens of certain countries (Australia, Brunei Darussalam, Malaysia, Papua New Guinea and Singapore) with an indefinite duration. Malaysia’s liberalization measures affecting the movement of foreign semi-skilled and unskilled workers into Malaysia are carried out in a differentiated manner based on reasons such as proximity, either contiguous or regional, religious and/or cultural compatibility. This is seen to maintain arrangements under existing bilateral agreements and to ensure that the movement of foreign semi-skilled and unskilled workers contributes to the social stability and industrial harmony in Malaysia. 80



A special visa category is provided for traders and investors of countries with which the Philippines has concluded treaties on entry rights for traders and investors. This is seen to facilitate trade, investment and related activities. Singapore allows the presence of unskilled and semi-skilled natural persons on the condition that they come from traditional sources of supply. The intended duration is indefinite while Singapore periodically reviews this policy in the light of domestic and national policy considerations. Thailand would allow the entry of audit professionals if there is a bilateral agreement based on reciprocity treatment.

(c) Features of MNP in bilateral trading agreements (i) United States-Singapore FTA The United States-Singapore Free Trade Agreement is seen as the hallmark of free movement of natural persons between the two countries. It provides for the movement of intracorporate transferees (managers, executives and specialists). The movement of professionals to perform services is also allowed provided they comply with immigration measures applicable to temporary entry. Further, the United States-Singapore FTA provides for the movement of professionals that “a party shall not as a condition for temporary entry, require prior approval procedures, petitions, labour certification tests, or other procedures of similar effect; or impose or maintain any numerical restriction to temporary entry”.

(ii) Japan-Philippines FTA As far as movement of natural persons is concerned, the Philippines requested Japan to open its health services sector. This would allow the entry of caregivers and nurses in the light of Japan’s ageing population. Japan, on the other hand, is discouraging the entry of entertainers who are not certified professionals. This FTA is seen as restructuring the movement of semiskilled migrants from the Philippines to Japan (Tullao and Cortez, 2006). The recently signed FTA provides for a numerical quota of 400 to 500 Filipino nurses that would be allowed entry in Japan annually.

(iii) Japan-Thailand FTA The Japan-Thailand FTA provisions on movement of natural persons allows a small number of Thai nurses to work in Japan, but only in exceptional cases, much like the JapanPhilippines FTA. This Agreement has yet to be signed.

(iv) Proposed United States-Thailand FTA Thailand’s priority regarding Mode 4 includes the Thai chefs and skilled culinary workers that can fall within the uniquely skilled classification of the United States. This demand favours Thailand because native-born American citizens cannot fill positions requiring expert knowledge of Thai culinary arts (Hunton and Williams LLP, 2004). 81



(d) Domestic regulations on the practice of selected professions Domestic regulations on the practice of selected professions involve educational, experience and licensing requirements, requirements for recognition of foreign professionals (such as in Thailand), scope and limitation of practice (in the case of accounting/bookkeeping, auditing, and taxation services), labour market tests requirements (as in the case of Indonesia and the Philippines) and reciprocity requirements (as in the case of Brunei Darussalam and Thailand).

5.

MOVEMENT OF NATURAL PERSONS IN THE REGION: LABOUR MARKET PERSPECTIVE

(a) Immigration policies The immigration policies of ASEAN countries vary in terms of the types of visa given to foreigners for temporary employment, duration of visas, possibility of extension, period of processing, visa fees and other requirements. Most ASEAN countries issue business visas for temporary employment. These business visas can also vary in validity depending on the preference of the applicant. Singapore, the Philippines and Thailand issue different types of visas depending on the reason for such stay. The validity of each visa issued for temporary employment varies according to the country where the applicant is coming from and where he or she is going. Some countries issue visas that are valid for only two months, while others reach a maximum of a year before the expiry date. The type of visa that will be issued must be taken into consideration when trying to compare the differences in the length of validity of a certain visa. The processing time for a visa to be completed ranges from three days to a week depending on the type of visa that is applied for and the duration of stay. Furthermore, the processing time for the visa also depends on the reception of the complete and necessary documents for the issuance of a visa. Applicants have to pay a certain amount for the issuance of their visas. The visa fee varies per country. Moreover, the size of the visa fee also depends on the intended duration of stay of the applicant. A longer term visa application means a more expensive visa fee. The visa fee may be paid in local currency or dollars. Finally, in the prerequisite entry requirements, it can be seen that there are other important things to be considered when applying for a visa. These include a passport and other important and supporting documents, such as application forms, passport photos, letter from counterpart, company letter.

82



(b) Pre-employment requirements The second component in the labour market perspective of the movement of workers regionally refers to pre-employment requirements such as health clearances, security clearances, and personal and professional references. The largest movements of workers in the ASEAN region emanate from three sectors/ categories, namely (a) the manufacturing sector, (b) intracorporate transferees and (c) shortterm business travellers. The domestic help sector also has a relatively high volume of movements from several ASEAN countries. The normal type of authority that can be observed for the issuance of work permits come mostly from the labour sector. Though different ASEAN countries refer to it with different names, its functions and objectives are parallel with each other. The average time for the issuance of work permits varies per country. Singapore and Thailand have the shortest issuance time at seven working days. On the other hand, countries such as Brunei Darussalam, Indonesia, Malaysia and the Philippines take an average of 5-6 weeks for the issuance of work permits. On the issue of validity, the average time for all ASEAN countries is between 6 and 24 months with the possibility of extension. Viet Nam, however, extends its work permit to six years before expiry. Applicants for temporary work permits must also secure several important documents to support his/her stay in a country. The other requirements include: (a) visa, (b) medical certificate and (c) police clearance. Moreover, almost all the ASEAN countries require these documents before an applicant would be allowed to work. Another consideration in applying for a work permit is the equivalent cost of his/her application. There are costs that need to be shouldered by the worker before he/she can procure a work permit. These costs include taxes, levies, bonds and other pre-employment requirements depending on the host country. There are some countries, however, that do not charge workers any tax or levies, provided that the worker must be able to comply with the standards and requirements set by the host country. In terms of concessions, there are several ASEAN countries such as Brunei Darussalam, Malaysia and Singapore which have concessions for ASEAN nationals. In Singapore for instance, the S$ 5,000 security bond is waived for Malaysian workers. Malaysia, on the other hand, indicates countries that could send only workers in the unskilled/semi-skilled bracket, while Brunei Darussalam offers exemptions to nationals of Malaysia and Singapore in their application for a work permit.

83



(c) Management of temporary migration in the region The third component in the labour market perspective of the movement of human resources refers to the management of temporary labour migration in the ASEAN region. Sending and receiving countries have different views on the overall objectives of temporary labour migration. Many sending countries use overseas employment to address growing unemployment domestically, provide an alternative for improving the standard of living of their citizens, generate foreign exchange and protect their workers. On the other hand, the objectives for receiving countries include addressing shortages in the labour market, mitigating the impact of uncontrolled movements of temporary workers, especially the unskilled ones, and supporting the skilled human resource requirements of foreign direct investment. Since the management of temporary labour migration requires a comprehensive programme that covers issues on awareness, recruitment, placement, protection and return, many government agencies are involved. Apart from the Ministry of Labour, other pertinent agencies involved are the Immigration Department, Ministry of Home Affairs and Ministry of Foreign Affairs. It can be seen that there is collaboration among various government agencies so as to help consolidate efforts for the easier management of temporary workers abroad. The third element of the management of temporary labour migration refers to the imposition of fees on the incoming and outgoing worker. Receiving countries use variable levies paid by the employers on various types of occupational categories and economic sectors. Usually, since unskilled workers are preferred less in these countries, they impose higher levies on unskilled workers and sometimes no levy on highly skilled professionals. For sending countries, there are no taxes imposed but outbound workers are required to contribute to a welfare fund for their insurance, protection and support upon return. The fourth element refers to the economic and social impact of overseas employment. The effects and issues of temporary labour migration differ whether a country is sending or receiving. For sending countries, the issue of exploitation of workers, high cost of migration and protection are very prominent. For the receiving countries, the issue of dependence on foreign workers, the economic and social impact of unskilled workers and irregular migrants and the displacement of local workers and professionals are some of the reasons why these countries impose strict rules and regulations on the entry of foreign workers. The final element of the management programme is the protection of temporary workers. It can be seen that ASEAN member countries have their own institutions and agencies that foster the welfare and protection of temporary workers. These agencies are supported either by legislation or by a consolidated effort of different welfare groups to help promote fair and equal treatment of temporary workers abroad. Furthermore, these agencies and institutions ensure that the temporary worker is given equal opportunities to those given to nationals of the receiving state in terms of health care, working environment and other social services.

84


6.


FACILITATING AND RESTRICTING FACTORS AFFECTING MOVEMENT OF NATURAL PERSONS IN THE REGION

(a) Trade negotiations perspective (i) Liberalization measures in AFAS AFAS has been forged by member countries to facilitate trade in services and contribute to greater economic integration of the region. After a decade of implementation, its performance has mixed results relative to its intended objectives. One of the encouraging contributions of AFAS is the fact that it has expanded the coverage of liberalization compared with the liberalization measures committed by ASEAN countries in WTO. In particular, ASEAN member countries have made 50 per cent more commitments under AFAS than under GATS. In addition, the level of restrictiveness in intra-ASEAN trade in services has been reduced since the implementation of AFAS (Thanh and Bartlett, 2006). Although these are positive developments that may have an impact on enhancing economic integration and hopefully the movement of natural persons, the expanded coverage of services liberalization under AFAS has to be viewed in the light of the marginal increases in preferential treatment by the key services economies in the region, including Malaysia, Singapore and Thailand. Moreover, although intra-ASEAN trade restrictiveness has fallen compared with extra-ASEAN trade restrictiveness, the extent of difference between intraASEAN and extra-ASEAN trade restrictiveness has been marginal for the three major services economies in the region (Thanh and Bartlett, 2006). AFAS has also made moderate progress in improving transparency and predictability in trade in services, especially in cross-border and consumption-abroad transactions. However, almost two thirds of the commitments made by ASEAN member countries in various sectors and under various modes are still unbound. Many restrictions are still in place under Modes 3 (commercial presence) and 4 (movement of natural persons) (Thanh and Bartlett, 2006). Future rounds of negotiations under AFAS should focus on reducing the unbound commitments in various sectors and modes of supply and in reducing the restrictions under Mode 3 and Mode 4. Since movement of natural persons is linked with commercial presence, further liberalization of Mode 3 will have an indirect effect on enhancing MNP in the region.

(ii) Measures in addressing the regulatory differences Domestic regulations are made to protect consumers in the light of asymmetric information between service providers and consumers. Since trade in services involves the transfer of either the producer or the consumer across boundaries to provide or consume services, trade may be hampered as a result of differences in the regulatory environments governing the provision of services between borders. If regulatory differences across the region are rooted in inadequate information and regulatory capture, then it is imperative that countries pursue measures towards regulatory

85



homogeneity for trade in services to expand. There are three ways of addressing regulatory heterogeneity arising from inadequate information and capture: regulatory convergence, mutual recognition and regulatory harmonization. Under regulatory convergence, countries are allowed to maintain their autonomy in pursuing different regulatory policies, but they are likewise tempered by exercising self-restraint in order to make regulations converge regionally. Specifically, regulatory convergence is made possible by any of the following measures: strict implementation of non-discrimination on market access and national treatment, application of the “sham principle” to review regulations that are suspect, transparency in the disclosure of regulations, and the application of generality requirements and the least restrictive means (Thanh and Bartlett, 2006).1 Second, mutual recognition allows for the continuance of different regulatory environments across boundaries, but countries agree to set up a system of accreditation and mechanisms for equivalence in recognizing intercountry differences in education and training, experience, standards and licensing requirements for the practice of professions. Thus, trade in services is not hampered since a qualified service provider who has been certified in his home territory can easily render service in another territory since his qualifications are likewise recognized in another territory through the process of mutual recognition. Third, for effective harmonization of regulatory frameworks, countries will have to surrender some of their autonomy in defining their national regulatory framework. Alternatively, they could all adopt an integrated regulatory framework for universal application in all member countries. This avenue is ideal if the objective is to attain transparency and predictability for enhanced trade in services. However, it may be difficult to achieve given the various factors that determine intercountry differences in domestic regulation. In particular, countries may also be reluctant to surrender their independence in crafting their regulatory policies that reflect historical, cultural, political and economic internal interests. The experience of AFAS in addressing regulatory differences is very modest. Although the Agreement has requirements for improving transparency in domestic regulations and obligates member countries to explain the reasons for restrictions and non-commitments in cross-border and consumption abroad transactions, regulatory convergence is minimal given that the generality requirements and least restrictive means are sparsely applied. In terms of mutual recognition, ASEAN member countries are very slow in concluding MRAs. Only an MRA in engineering has been established to date. The MRA in nursing is still 1

These measures on regulatory convergence fall under “policed decentralization that allows members of an international agreement to maintain their regulations while at the same time requiring them to self-impose a number of constraints on those policies to reduce their adverse impact on trade. These constraints are as follows: (1) nondiscrimination requirements based on national treatment and most favored principles, (2) the application of the sham principle in reviewing regulations for improper motive. Sham arises when the alleged objectives of regulations are found to be devious and the real intention is to be protectionist, (3) transparency requirements including requirements for notice and comment prior to the issuance and implementation of new regulations, regulations to be published promptly in an accessible forum, and establishing enquiry points where interested parties can get official information on regulations, (4) generality requirements and the least restrictive means, aim to ensure that measures relating to qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade in services” (Thanh and Bartlett, 2006).

86



under negotiation and plans for MRAs in other sectors such as architecture, accounting and land surveying are still under discussion, with completion scheduled for 2008 (Thanh and Bartlett, 2006).

(iii) Extension of preferential arrangements in AFAS At the bilateral level, some countries offer concessions to other member countries that facilitate MNP. In particular, the preferential treatment of Brunei Darussalam extended to Singaporean and Malaysian workers by exempting them from the requirement for an employment visa, which is necessary for all foreigners seeking employment in the sultanate, is a good example. In the United States-Singapore FTA, the United States grants immediate national treatment in substantially all services and exempts Singaporean business visitors engaging in business activities from the need for a labour market test. If these examples of preferential treatment can be extended to other ASEAN member countries, MNP can be improved. However, this may be difficult as it opens the floodgates in receiving countries, which may jeopardize their objective of tempering the movements of foreign workers. Apart from historical reasons, it is easy for Brunei Darussalam to extend its preferential treatment because Singapore and Malaysia are also net importers of labour in the region and they like to attract highly skilled professionals from Singapore. In the same light, Singapore gives preferential treatment to United States nationals because it is consistent with its Foreign Talents Policy of attracting skilled professionals.

(b) Labour market perspective (i) Economic dynamism in the region The economic dynamism in the region in past decades has significantly improved the incomes of people, improved their standard of living, expanded trade, attracted foreign investment and stimulated the movement of people across the region. Continuing this economic dynamism will further expand the movements of human resources. Apart from economic growth, the forces of globalization, the rise of ICT and stiff competition among firms are also market-driven factors that can influence the movement of human resources across the region. Countries have liberalized their trade and investment regimes as responses to these forces. A substantial rise in foreign direct investment (FDI) and global production networks in the region have been observed in recent years. The expansion of FDI has likewise brought greater traffic in skilled and professional manpower to accompany these foreign investments.

(ii) Pressures of economic and demographic asymmetries The economic dynamism in the region has heightened the economic and demographic asymmetries among the countries. In net importers of labour services in the region, apart from substantial improvements in income, the ageing population and the demographic dividends have put enough pressure on the domestic labour market to source overseas manpower, not

87



only for skilled and professional slots but also for jobs that are considered dirty, difficult and dangerous. On the other hand, workers in the sending countries are attracted by the high-paying jobs in economically advanced countries and the possibility of improving their standard of living through the remittances that they can send to their dependent families. Moreover, domestic economic problems and rapid population growth further delay the internal resolution of the chronic unemployment problem. These factors can push people to seek employment overseas.

(iii) Stringent immigration policies and pre-employment policies Although countries experiencing labour shortages have opened their labour markets to foreign workers, they tend to discriminate the type of workers that they allow to enter. To this end, they have used their immigration and pre-employment policies to limit the entry of certain types of workers. Singapore gives incentives to employers in hiring highly skilled professionals and imposes heavy levies on unskilled workers in less preferred industries and sectors. Brunei Darussalam, which is almost 75 per cent dependent on foreign workers, has to balance the need for foreign manpower and the need to maintain national security. In Viet Nam, the issuance of work permits has been rationalized to attract FDI and highly skilled foreign workers. The Government has eliminated work permit fees, extended the period of engagement and removed the requirement of local workers.

7.

CONCLUSIONS AND RECOMMENDATIONS

The overall objective of enhancing MNP in the region is to make it contribute to expanding and deepening regional economic integration. However, there are two major means of achieving expansion of MNP: through trade negotiations and through the mechanism of the labour market. From the trade negotiations perspective, numerous regional agreements have been concluded that were aimed at enhancing intra-ASEAN cooperation in trade in commodities, investment and trade in services. Sometimes, the commitments of member countries in these agreements reflect domestic interests. Thus, the extent to which these regional arrangements have realized their intended objectives depended on the degree to which regional goals prevailed over domestic political and economic interests of member countries. The impact of AFAS on MNP has been very limited. The commitments of member countries are similar to their commitments under GATS. In particular, MNP is intimately linked with commercial presence and the frequency of intracorporate transfers of managers, professionals and technical staff of TNCs. There are also substantial limitations on market access and national treatment that restrict the movement of professionals across the region. These limitations are reinforced by domestic regulations governing the practice of professions in many member countries.

88



A number of reasons have been cited for this dismal impact, including lack of transparency, continuance of regulatory heterogeneity and, to some extent, the apprehension of member countries in making bound commitments in multilateral agreements. This does not mean, however, that MNP and the regional movement of workers will not proceed because of the inadequacies of institutional drivers. Another major explanation of the regional movement of workers can be traced to the member countries’ management of temporary labour migration. These human movements are not influenced by regional agreements or by the huge movements of FDI but as a legitimate response to labour market asymmetries in the region. These market drivers will pressure countries to open their economies to workers. From this perspective, sending countries are pressured to open up or face the consequences of shortages of labour. They could become uncompetitive in the future and the sustainability of their economic dynamism experienced in recent decades could be threatened. For sending countries, the teeming number of surplus workers will also pressure them to seek bilateral or regional agreements that will facilitate the entry and employment of their surplus human resources in neighbouring countries. However, owing to costly restrictions in immigration, pre-employment requirements and other domestic policies, the optimum movement of foreign workers is not realized and many of these workers become irregular migrants and are subject to exploitation and unfavourable working conditions. MNP in the region has been substantial over the years given the impact of globalization, liberalization measures under AFAS and demographic asymmetries on regional labour markets. Regional movements of workers, whether influenced by trade arrangements or by labour market asymmetries, can be a potent avenue for enhancing the formation of an ASEAN economic community. To this end there is a need for regional cooperation to enhance the regional movement of workers in order to realize the positive contributions of the movement of foreign workers to regional output and employment. The following specific proposals are recommended that will address the issues raised in this paper.

(i) Establishment of mutual recognition agreements Since the practice of professions has domestic regulatory implications, there is a need to evaluate the capability of the service provider to render services in order to safeguard the public interest and the welfare of consumers. If a certification process is done for domestic service providers, it should also be done for foreign services providers as part of the regulatory function of Governments. Once MRA is established, it will be easier for professionals to move within the coverage of MRA. At the regional level, improvements in market access on MNP can proceed through the establishment of MRAs for specific professions and occupations. Since MRAs are difficult,

89



lengthy and tedious to undertake at the multilateral level, a bilateral or a regional MRA may be more practicable and feasible, and could contribute positively to the liberalization of MNP, at least at the regional level.

(ii) Lifting market access and national treatment limitations Limited market access, national treatment and preference for traditional sources of supply impede further trade in services through MNP. The commitments of ASEAN countries reflect various measures that limit market access and preferential treatment to traditional suppliers of labour. Since AFAS does not contain much commitment to MNP, the GATS framework could not be advanced as a result of these limitations. Future rounds of negotiations under AFAS should focus on reducing the unbound commitments in various sectors and modes of supply and in reducing the restrictions under Mode 3 and Mode 4. Since MNP is linked with commercial presence, further liberalization in Mode 3 will have an indirect effect on enhancing MNP in the region.

(iii) De-linking of Mode 4 from Mode 3 in trade accords Most of the proposed commitments by ASEAN member countries on MNP are reflective of the global notion that Mode 4 is linked to Mode 3. Developing countries have been arguing that Mode 4 should be seen and taken as a separate modality. However, developed countries have committed themselves to Mode 4 in order simply to facilitate their intra-corporate transferees at senior levels and highly skilled professionals and specialists.

(iv) Move towards regulatory homogeneity Specific sector commitments would entail liberalization of domestic regulations. As previously mentioned, this can be attained through regulatory convergence, mutual recognition and regulatory harmonization. The last option which is equivalent to regulatory integration is more difficult to achieve.

(v) Liberalization measures or management of temporary migration Most proposed commitments in AFAS contain provisions naturally subjecting foreign workers to immigration laws and labour market tests. These are already in place and regulate the movement of intracorporate transferees. However, deeper commitments and greater liberalization are challenges to facilitate the freer movement of workers from the point of view of developing countries. If trade agreements cannot enhance the freer movement of human resources, then the market perspective could be used to this end. Exploiting the opportunities offered by the labour markets, bilateral labour agreements should be pursued by the countries concerned to manage movements and protect the overseas workers.

90



REFERENCES Abella, M. (2004). “Labour migration in East Asian economies”, paper presented at the Annual Bank Conference on Development Economics – Europe, Brussels, Belgium, 10-11 May 2004. Carzaniga, A. (2002). “GATS, Mode 4 and the pattern of commitments”, paper presented at the Joint WTO-World Bank Symposium on Movement of Natural Persons under the GATS, Geneva, 11-12 April 2002 (Geneva, World Trade Organization). Manning, C. and P. Bhatnagar (2004). The Movement of Natural Persons in Southeast Asia: How Natural?, Technical Report Working Papers in Trade and Development No.2, (Canberra, Division of Economics, Research School of Pacific and Asian Studies, Australian National University). Hunton and Williams LLP (2004). Thailand-U.S. FTA: A Roadmap to Negotiations, <www.mfa.go.th/tusfta/article/roadmap.pdf>. Thanh, V.T. and P. Bartlett (2006). Ten Years of the ASEAN Framework Agreement on Services (AFAS): An Assessment, REPSF Project 05/004 (Jakarta, Regional Economic Policy Support Facility, ASEAN-Australian Development Cooperation Program, ASEAN Secretariat). Tullao, T. and M. Cortez (2005). “Movement of natural persons and its human development implications in Asia”, DLSU Business and Economics Review, vol.15, No. 2, 20042005 (Manila, De La Salle University). ______ (2006). “Movement of natural persons between the Philippines and Japan: Issues and prospects”, DLSU Business and Economics Review, vol.16, No. 1, 2005-2006 (Manila, De La Salle University). Wickramasekera, P. (2002). Asian Labour Migration: Issues and Challenges in an Era of Globalization, International Migration Papers No. 57 (Geneva, International Labour Office).

91




Tigers and Dragons against Elephants: Does the Rising Chinese and Indian Share in Trade and Foreign Direct Investment Crowd out Thailand and other ASEAN Countries? Sasatra Sudsawasd and Santi Chaisrisawatsuk*

ABSTRACT

C

hina and India are rapidly rising economies which present both opportunities and threats for trade and investment of the economies in the Association of Southeast Asian Nations (ASEAN). This study analyses the impacts of the trade and foreign direct investment (FDI) of China and India on Thailand as well as on other ASEAN countries. It shows that the complementarity of products traded between Thailand and the two countries are an important source of gains from trade. By unilaterally removing barriers to trade, tariff as well as non-tariff measures, developing economic integration agreements, and, most importantly, significantly overcoming domestic constraints will lead to a mutual benefit for Thailand and its trading partners. A standard gravity model is used to assess empirically the determinants of FDI and trade flows between the ASEAN5 countries (Indonesia, Malaysia, the Philippines, Singapore and Thailand) and 30 countries in the Organisation for Economic Co-operation and Development (OECD) over the period 1980-2002. Estimation results suggest that China and India’s rapid growth as a main destination for FDI inflows do not crowd out FDI in the ASEAN-5 countries. With regard to trade relationships, the rise of India’s exports positively affects the exports of the ASEAN-5 countries. On the other hand, China’s rise in exports diverts exports from the ASEAN-5 countries to a certain degree, as they compete against each other in the OECD market. In addition, the imports from and trade flows with the OECD countries from the ASEAN-5 countries are found to expand along with those of the exports of China and India. Finally, the effects of exports from China and India on Thailand are similar to those on the ASEAN-5 countries. * School of Development Economics, National Institute of Development Administration, 118 Seri Thai Road, KlongChan, Bangkok 10240, E-mail: [email protected], [email protected]. The authors would like to thank research assistant Kanassanant Lertlalitkul for helpful assistance and Wisarn Pupphavesa for his support. Any errors are the responsibility of the authors; the views expressed are those of the authors and do not necessarily reflect those of the United Nations.

93



INTRODUCTION Thailand is the first ASEAN country to have implemented the Early Harvest Scheme (EHS) with China and India. International trade between Thailand and its trading partners has improved significantly, especially in products under EHS. Unfortunately, the trade balance between Thailand and China has fluctuated, with Thailand enjoying the benefits of an overall trade surplus since the implementation of the Scheme. With regard to FDI, a reverse trend from ASEAN towards China can be observed. Prior to the Asian financial crisis in 1997, ASEAN economies were the major destinations for FDI but since then China has become a major recipient of FDI from all sources. In parallel with the emergence of China as a global economic power, India has been quietly picking up speed in order to rival China as a major trading and investment partner for ASEAN. After the ASEAN-India Free Trade Agreement framework agreement was accepted by Thailand and India, EHS was implemented. Under EHS, the tariff rates on 82 items were eliminated as of 1 September 2006. Since 2004, trade between the two countries has improved fourfold from about $0.5 billion in that year to $2 billion in 2005. During the same period, the Indian economy also grew at a fast pace. Similar trade and investment patterns are also found in case of Thailand and China, and to some extent even at a greater degree. These raise a crucial question of whether the rapid rise of China and India will create or destroy opportunities in the ASEAN economies both for trade and investment. An initial study of comparative advantage between Thailand and its trade negotiating partners, including China and India, is shown in table 1.1 The Revealed Comparative Advantage (RCA) indices are calculated.2 In this study, we distinguish the importance of exports and imports by calculating the RCA indices for exports and imports separately. The calculations of RCA for exports and imports, both for Thailand and its trading partners, give us the advantages of analysing the trade creation and trade diversion resulting from a free trade agreement. The RCA for exports is generally defined as the ratio of a proportion of country i's exports of a particular product k, to its total exports and the proportion of the world’s exports of the particular product to the world’s total exports. Similarly, the RCA for imports is defined by the ratio of a proportion of country i’s imports of a particular product k, to its total imports and the proportion of the world’s imports of the particular product to the world’s total imports. Thus, the RCA for exports and imports can be interpreted as how intensively the country exports and imports each of the products respectively. We compared and divided products into six different categories: (1) RCAxT > 1 and RCAmP > 1; (2) RCAmT > 1 and RCAxP > 1; (3) RCAxT > RCAxP > 1; (4) RCAxP > RCAxT > 1; (5) RCAmT > 1 and RCAxP < 1; (6) RCAmP > 1 and RCAxT < 1. It is obvious that trade creation can result from the first two cases (columns 1 and 2 in table 1) and a clear potential for trade diversion is illustrated in the last two cases (columns 5 and 6). Cases 3 and 4 are the situations in which Thailand and its trading partners have to compete more intensively as the two economies become more integrated. An overview of the results suggested that there are opportunities for trade between Thailand and the two 1 2

The table shows the numbers of products that fit into each category and the relevant import tariffs. The calculation of the RCA is based on the harmonized system (HS) classification of products at the 6-digit level and the numbers presented in each cell of table 1 are the number of products that fall into each category.

94

a

Abbreviations: AUS = Australia, NZD = New Zealand, US = United States of America, JP = Japan, CHA = China, IND = India, KOR = Republic of Korea.

b

Ranked by Thailand's import value.

c

Ranked by trade partners' import values from Thailand.

95


Note: The simple average of trading partners' tariff rate / the simple average of Thailand's tariff rate is used to calculate the percentages shown.


Table 1. Analysis of the impacts of FTAs, by product: numbers of products that fall into each category and simple averages of the respective tariff rates



economies, especially with India which has relatively higher tariff rates. There are quite a large number of products which are found to have trade complementarity; Thailand's RCA for exports is greater than one and the trading partners’ RCA for imports is greater than one or vice versa. However, the study also indicates that there is a possibility for trade diversion if Thailand and the two economies conclude a bilateral trade agreement. Columns 5 and 6 of the table illustrate the large number of products that Thailand imports intensively (Thailand’s RCA for imports is greater than one) but its trading partners do not have comparative advantages (China’s or India’s RCA for exports is less than one) and vice versa. A more detailed investigation on the impacts of the rise of China and India on trade and investment for Thailand and ASEAN is discussed in the following sections. The objective of this study is to examine empirically whether or not the rise of China and India crowds out trade and FDI in Thailand and in ASEAN. The research methodology used is the gravity model of bilateral flows which includes the effects of China and India, by using both aggregated data of all ASEAN countries and disaggregated data of each individual ASEAN country separately. Estimation results are consistent and are conclusive. The structure of this paper is as follows. The paper begins in section 1 by providing a literature review on the gravity model approach and its applications. Section 2 presents an empirical examination of the effects of the rise of China and India’s FDI inflows on ASEAN’s FDI inflows from OECD countries. In section 3, the study investigates the impact of the rise of China and India’s exports on foreign trade between ASEAN and OECD countries. Finally, concluding remarks are presented in the section 4.

1.

A REVIEW ON THE GRAVITY MODEL OF BILATERAL FLOWS

The gravity model has long been used in the empirical literature to explain bilateral flows between two countries. In the standard gravity model, the bilateral trade or investment flow variables are regressed on the gravity variables describing the bilateral trading or investing partners, including economic and geometric distances between them. In general, bilateral flows between two countries are usually greater, the shorter is the distance between them. The standard gravity model has been widely augmented with a large number of hypothesized variables that can affect bilateral flows. In a large number of studies, the standard gravity model has been extended to assess the effects of various preferential arrangements. For example, by adding a particular regional trading agreement variable in the standard gravity model, regional trading agreements are found to expand trade between member countries.3 In addition, the effect of multilateral organizations, such as the World Trade Organization and the International Monetary Fund, on bilateral trade flows has been examined by adding a dummy variable for participation in the standard gravity model. For example, Rose (2005) found that the effects of both WTO and IMF membership on bilateral trade flows are quite small. 3

Greenaway and Milner (2002) provided an extensive survey on the literature focusing on the effects of regional trading arrangements using the gravity model.

96



In addition, the gravity model has been used to assess the effects of a particular country on other countries’ bilateral trade and investment flows. Eichengreen and Tong (2005) empirically examine whether or not the rise of China, as a destination for FDI, jeopardizes FDI vis-‚-vis other countries. They found that the impact varies by region of consideration. Likewise, Eichengreen, Rhee and Tong (2004) also focus their research on the impact of China’s exports on the exports of other Asian countries. They found that China’s exports have a tendency to crowd out exports in the markets for labour-intensive consumer goods.

2.

FOREIGN DIRECT INVESTMENT

(a) Methodology The model employed in this study is a standard gravity model, where FDI is determined mainly by the distance and the economic size of the home and host countries. Following Eichengreen and Tong (2005), this study includes FDI flows from OECD countries to China, as the destination country, into a model capturing the effects of China’s FDI inflows on five ASEAN countries’ FDI inflows.4 In addition, the model is augmented to capture the effects of India's FDI inflows. The specification of the model is as follows: ln( FDI ijt )

E 0 E1 ln( FDI i CHN t ( or i IND t ) ) E 2 ln( RGDPit ) E 3 ln( RGDPjt ) E 4 ln( RGDPPCit ) E 5 ln( RGDPPC jt ) E 6 ln( DISTij ) E 7 Landl ijt İ ijt ,

where i and j denote home and host countries; t denotes time; and CHN and IND denote China and India, respectively. The following abbreviations apply: FDI

= bilateral FDI outflows from home i to host j countries

RGDP

= real GDP

RGDPPC = real GDP per capita DIST

= distance between home i and host j countries

Landl

= number of landlocked countries (0, 1 or 2)

For host countries, a country with higher income (RGDPi) tends to attract more FDI, since it indicates large potential demand in the domestic market. In the case of home countries, a large income country (RGDPi) tends to have more resources to invest abroad. Likewise, a country with higher income per capita (RGDPPC) tends to invest more and is likely to attract more FDI. The distance (DIST) and landlocked (Landl) variables measure transportation costs between country i and country j. In general, countries with high transportation costs between them are less likely to engage in bilateral FDI. However, it is possible that those countries can avoid huge transportation costs by investing or attracting more FDI. Hence, the expected signs for the distance and landlocked variables remain unclear. 4

The five ASEAN countries are Indonesia, Malaysia, the Philippines, Singapore and Thailand.

97



(b) Data and empirical issues The data on FDI outflows from 30 OECD countries are from OECD.5 Owing to the scope of this study, only data for bilateral FDI outflows over the period 1980-2002 from OECD to India, China and ASEAN-5 countries are used. Data for real GDP and GDP per capita are taken from the World Bank’s World Development Indicators. For transportation cost variables, the number of landlocked countries and the distances between home and host countries are obtained from the dataset of Rose (2005). A summary of descriptive statistics are shown in table 2. Table 2. Summary descriptive statistics

Owing to the nature of the data, in which the time coverage of the available data varies among countries, the dataset is an unbalanced panel. Since the model already includes country pair-specific effects such as the DIST variable, the random effect estimators are estimated as the benchmark estimator. However, a number of econometric issues are typically present in panel data. These issues include serial correlation, heteroskedasticity and endogeneity. In order to produce consistent covariance matrix estimates, the random effect with the White covariance matrix estimator is employed to collect hetoroskedasticity problems.6 In addition, the model possibly confronts the endogeneity of China and India’s FDI variables, such that 5

6

The data are available at <www.sourceoecd.org>. The 30 OECD countries are Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Republic of Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom and the United States. In Stata, the White covariance matrix estimator is known as the Huber/White/Sandwich variance estimator. For additional information on the White covariance matrix estimator, see Huber (1967) and White (1980).

98



the effects that increase China and India’s FDI will also increase FDI from home to host countries. To remedy this problem, instrumental variables (IV) of China and India’s FDI are used. Thus, this study also employs the random effect with the instrumental variables with the White robust standard error estimators.7 Pooling data across countries imposes identical coefficients for different countries. This could induce misspecification in the regression. Therefore, this study also disaggregates the full sample data by each individual ASEAN-5 host country and estimates regressions for each host country separately. All estimation results are presented in tables 3-8. Table 3. Gravity model regression results: dependent variable in (FDI ASEAN-5)

Note: ***, **, * denote 1 per cent, 5 per cent, 10 per cent levels of significance, respectively. Figures in parentheses are robust standard errors.

7

The instrumental variables are China/India’s GDP, China/India’s GDP per capita, distance from home countries of FDI to China or India, and the number of landlocked home countries of FDI and China or India. Although the firststage based on this specification is not reported, it is available upon request.

99



Table 4. Gravity model regression results: dependent variable in (FDIIDN)


100



Table 5. Gravity model regression results: dependent variable in (FDIMYS)

Note: ***, * denote 1 per cent, 10 per cent levels of significance, respectively. Figures in parentheses are robust standard errors.

101



Table 6. Gravity model regression results: dependent variable in (FDIPHL)

Note: ***, * denote 1 per cent, 10 per cent levels of significance, respectively. Figures in parentheses are robust standard errors.

102



Table 7. Gravity model regression results: dependent variable in (FDISGP)


103



Table 8. Gravity model regression results: dependent variable in (FDITHA)


(c) Empirical results Table 3 presents estimation results for aggregated data of ASEAN-5 countries. Host countries with higher levels of GDP and GDP per capita clearly attract more FDI. On the other hand, OECD countries with higher levels of GDP and GDP per capita tend to invest more FDI in the ASEAN-5 countries. An increase in the distance between home and host countries reduces FDI, while an increase in the number of landlocked countries expands it. The effects are statistically significant. For the coefficients of interest variables, increasing FDI in China has a positive impact on FDI in the ASEAN-5 countries. This indicates that China’s FDI inflows are complementary with ASEAN’s FDI inflows from OECD. In a standard random effect estimate, a 1 percentage point increase in the amount of FDI in China raises the amount of FDI in the ASEAN-5 countries by about 0.29 percentage points. In the case of India’s FDI inflows, it appears that the effects on the ASEAN-5 countries’ FDI receipts from OECD countries are statistically

104



insignificant in both estimators. Nevertheless, this study does not find any evidence showing increasing FDI to China and India driving away or creating more competition for FDI to the ASEAN-5 countries. To investigate the effects on Thailand’s FDI inflows, estimated results for disaggregated data of Thailand are reported in table 8. The major findings are similar to the results from aggregated data. An increase in India’s FDI inflows has a huge positive impact on FDI inflows to Thailand. In addition, the estimated coefficient of India’s FDI inflows is about three times larger than the coefficient of China’s FDI inflows. This suggests that India’s FDI has relatively strong complementarities with Thailand’s FDI.

3.

TRADE

The aim of this section is to investigate empirically the impact of the dramatic rise in exports from China and India in the world economy, in particular its impact on foreign trade between the ASEAN-5 and the 30 OECD countries, over the sample period 1980-2002. Although there have been a large number of studies on this subject, most previous studies have focused on the effects of China on other countries. The framework of this study is similar to those previous empirical works, such as that by Eichengreen, Rhee and Tong (2004), by using a gravity model of trade augmented to include China’s exports in the model in order to assess the impact on the exports of the ASEAN-5 countries. One of the contributions of this study is to extend the set of dependent variables to analyse the impact, not only on exports, but also on imports and on total bilateral trade flows between the ASEAN-5 and OECD countries. Likewise, this study also alters the model to analyse the effects of India's export growth on the ASEAN-5 countries.

(a) Methodology The formation of the model is specified below as:

ln( EX ijt ) = β 0 + β1 ln( EX CHN j t ( or IND j t ) ) + β 2 ln( RGDPit ) + β 3 ln( RGDPjt ) ln ( IM ijt )

+ β 4 ln( RGDPPCit ) + β 5 ln( RGDPPC jt ) + β 6 ln( DISTij )

ln (TRijt )

+ β 7 Landlijt + εijt ,

where i and j denote trading partners; t denotes time. The remaining variables are defined as: EX = bilateral merchandise exports of country i to country j, IM = bilateral merchandise imports of country i from country j, TR = bilateral merchandise trade flows between country i and country j.8 8

Bilateral trade flows are defined as the sum of bilateral exports and bilateral imports.

105



The variables of interest are China and India’s exports to the OECD countries. If an increase in China and India’s exports crowd out or divert the exports of the ASEAN-5 countries to (or imports from) the OECD countries, the sign of the coefficients of China and India’s exports (or imports) is expected to be negative. In contrast, if an increase in China and India’s exports induces more exports from the ASEAN-5 countries, this suggests that their exports are complementary and the sign of the coefficients is expected to be positive. Therefore, the expected signs of the parameters associated with China and India’s exports are still ambiguous. For other explanatory variables, the signs of the coefficients are expected to be the same as in the case of FDI. With one exception, the higher number of landlocked countries variable is now expected to have a negative impact on bilateral trade. As this indicates higher transportation costs for trade between two trading countries, such bilateral trade is likely to decrease.

(b) Data and empirical results Data on bilateral trade flows are from the IMF’s International Financial Statistics and Direction of Trade Statistics. In the same manner as in the previous section, this study employs the standard random effect estimators and the random effect with the instrumental variable estimators for unbalance panel data, in which both estimators use the White’s correction of heteroskedasticity. Likewise, this study estimates both the aggregated bilateral foreign trade data of the ASEAN-5 countries and the disaggregated data of each individual ASEAN-5 country. Though both estimators are estimated, only the random effect with the instrumental variables estimators are analysed in this study. Tables 9-14 show the results of estimation. As expected, estimation results confirm the underlying wisdom of the gravity model. Higher GDP and GDP per capita of exporting and importing countries expand exports, as well as imports between the ASEAN-5 and OECD countries. An increase in the number of landlocked countries and the distance between trading countries reduces both exports and imports. All of these effects are shown to be statistically significant. For the coefficient of interest variables for China and India’s exports, the results are somewhat interesting. According to table 9, China’s export expansion has a negative impact on the exports of the ASEAN-5 countries in OECD countries. The estimated coefficient from the instrumental variable estimator indicates that a 1 percentage point increase in China’s exports reduces the exports of the ASEAN-5 countries in the particular market by about 0.7 percentage points. This implies that China’s exports are, indeed, competing with the exports of the ASEAN-5 countries in the OECD market. However, the opposite results are found in the case of growth in India’s exports. An increase in India’s exports by 1 percentage point results in a more than 5.1 percentage points rise in the exports of the ASEAN-5 countries. These effects are significant and are quite remarkable, as it implies that the exports of India and the ASEAN-5 countries really complement each other in the OECD market.

106

107




Table 9. Gravity model regression results: the effects of rising exports of China and India on the ASEAN-5 countries



Table 10. Gravity model regression results: the effects of rising exports of China and India on Indonesia


108



Table 11. Gravity model regression results: the effects of rising exports of China and India on Malaysia


109



Table 12. Gravity model regression results: the effects of rising exports of China and India on the Philippines


110



Table 13. Gravity model regression results: the effects of rising exports of China and India on Singapore


111



Table 14. Gravity model regression results: the effects of rising exports of China and India on Thailand


It is interesting to analyse the effects on imports and trade flows. Estimation results clearly suggest the effects of increasing exports from China and India on those two dependent variables moving in the same direction with the effects on exports. An increase in China’s exports has a significant negative impact on the imports from the ASEAN-5 countries and also on trade flows. On the other hand, India’s export growth appears to have a positive impact on the imports of the ASEAN-5 countries and on trade flows between the ASEAN-5 and OECD countries. Finally, estimation results of disaggregated data for each individual ASEAN-5 country are presented in tables 10-14. The results are found to be very similar to those results from aggregated data of the ASEAN-5 countries. In the case of Thailand, its exports and imports increase when India's exports increase and fall when China's exports to OECD countries increase.

112


4.


CONCLUDING REMARKS

In recent years, China and India have emerged as main destinations for FDI and the two countries are now ranked among the world’s largest exporters. In this paper, the main objective is to investigate empirically the effects of the growth of FDI inflows to China and India and the growth of their exports on exports from and FDI to the ASEAN-5 countries. Several findings have been derived from the application of a gravity model. First, the study does not find that the growth of FDI in China and India crowds out FDI from the ASEAN-5 countries. Indeed, some evidence shows that an increase in China’s FDI inflows actually makes the ASEAN-5 countries more attractive as a destination for FDI, as both China and the ASEAN-5 countries enjoy good complementarities in terms of investment locations. Second, by using disaggregated data from each ASEAN-5 country, the estimation results in the case of Thailand are similar to those results from the aggregated data of all ASEAN-5 countries. Interestingly, India’s FDI inflows appear to have strong complementarities with Thailand’s FDI inflows. For the effects of increasing exports from China and India on trade flows between the ASEAN-5 and OECD countries, there is some evidence of export diversion from the ASEAN5 countries to China. This indicates that China and the ASEAN-5 countries actually compete against each other in exporting to OECD counries. On the other hand, the increase in India’s exports is found to affect positively the exports of the ASEAN-5 countries to OECD countries. Further, the imports and trade flows of the ASEAN-5 countries are found to increase with increasing exports to China and India. Finally, estimation results of each individual ASEAN5 country’s data are similar to those results from aggregated data of all the ASEAN-5 countries. Thailand’s exports and imports rise when India’s exports increase and fall when China’s exports to OECD countries increase. To answer the research question: does the rise of China and India crowd out FDI and trade?, the response can be: it depends. From the perspective of Thailand and the ASEAN-5 countries, these countries may not have to worry much about increasing FDI inflows to China and India, as such flows are shown in this study to affect them positively. However, with regard to trade, the effects of growth in exports from China and India are quite different. The rise of India’s exports positively affects the exports of the ASEAN-5 countries. On the other hand, China’s rise in exports seems to crowd out the exports from Thailand and other four ASEAN countries in the OECD market.

113



REFERENCES Eichengreen, Barry and Hui Tong (2005). Is China’s FDI Coming at the Expense of Other Countries?, NBER Working Paper No. 11335 (Cambridge, MA, National Bureau of Economic Research, Inc.). Eichengreen, Barry, Yeongseop Rhee and Hui Tong (2004). The Impact of China on the Exports of Other Asian Countries, NBER Working Paper No. 10768 (Cambridge, MA, National Bureau of Economic Research, Inc.). Greenaway, David and Chris Milner (2002). “Regionalism and gravity”, Scottish Journal of Political Economy, vol. 49, pp. 574-585. Huber, P.J. (1967). “The behavior of maximum likelihood estimates under nonstandard conditions”, in Proceedings of the Fifth Berkeley Symposium on Mathematical Statistics and Probability, vol.1 (Berkeley, CA, University of California Press). Rose, Andrew (2005). “Which international institutions promote international trade?”, Review of International Economics, vol. 13, pp. 682-698. White, Halbert (1980). “A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity”, Econometrica, vol. 48, pp. 817-838.

114

Policy Briefs




116



Role of Technological Capabilities in Enhancing FDI Flows in Developing Asia-Pacific Economies*

D

eveloping countries look forward to foreign direct investment (FDI) as a stable source of non-debt-creating capital. FDI also offers these economies access to advanced technology and global marketing networks. Similarly, foreign firms investing in developing country markets look for some conditions to be met in host countries, which allow them to produce more efficiently through better exploitation of their typical intangible assets, such as superior patented technology, management and marketing skills (Lall and Streeten, 1977; Soci, 2002). Otherwise, foreign firms have the option of serving new markets through either exports or arm’s-length arrangements such as licensing. Of course, success in capturing new markets through exports depends heavily on barriers to trade, while licensing, particularly in products involving advanced know-how, needs to overcome critical problems arising from informational asymmetry between foreign sellers and local franchisees. Nevertheless, foreign firms commit to overseas investment by “internalizing” operations once they find it cheaper to produce abroad (Buckley and Casson, 1976), given some intrinsic features of developing host countries. These features determine the capabilities of individual countries for attracting FDI. Developing countries differ widely in their abilities to attract FDI. The Asian and Pacific region is a distinct case in point in this regard. In 2005, Asian developing countries held 15 per cent of the total stock of global FDI (table 1). Among these, East Asian developing countries accounted for 10 per cent of the total global FDI stock, or 62 per cent of total FDI in developing Asia. In contrast, South-East Asian and South Asian developing countries held 4 per cent and 1 per cent, respectively, of the global FDI stocks which translated for South-East Asian countries into barely a quarter and for South Asian countries into just 4 per cent of Asia's FDI. Furthermore, within Asia, there are sharp intercountry variations in FDI flows. Almost three fourths of South Asia's FDI goes to India. In South-East Asia, again, Singapore accounts * This policy brief was prepared by Amitendu Palit, Visiting Fellow at the Indian Council for Research on International Economic Relations (ICRIER) New Delhi, India, on study leave from the Ministry of Finance, Government of India, for the Asia-Pacific Research and Training Network on Trade (ARTNeT). A version of this brief was earlier released as ARTNeT Policy Brief No. 9 (accessible at <www.artnetontrade.org>).

117



for half Asia’s total FDI. A cross-regional comparison, on the other hand, indicates that Hong Kong, China; and China are attracting more FDI inflows than Singapore, which is the leading FDI recipient in South-East Asia.1 Table 1. FDI inward stock in the year 2005 Billions of United States dollars

Share in global total (%)

10,130

100

Developed economies Developing economies, of which: Asian developing economies

7,117 2,757 1,550

70 27 15 (56)a

Asian developing economies: - East Asian developing economies - South Asian developing economies - South-East Asian developing economies

1,550 963 62 375

15 (100) 10 (62)b 1 (4)b 4 (24)b

Global stock of FDI

Source: UNCTAD, World Investment Report (2006), Statistical Annex B, pp. 303-305. a b

Share of Asian economies in total FDI stock of developing countries. Shares of East Asian, South Asian, and South-East Asian developing countries, respectively, in total FDI stock of Asian developing countries.

Why do FDI flows to developing countries vary so much? The literature on FDI, both theoretical and empirical, suggests that FDI flows into a country are significantly determined by a number of country-specific factors.2 These include the size of the domestic country market, labour costs, openness of the economy, exchange rate stability, quality of infrastructure services, availability of human capital, technological capabilities, enabling policies, investment incentives and business climate, among others. While economic factors such as market size, labour costs, human capital and technology, do explain cross-country variations in FDI flows in many cases, they alone, unfortunately, fail to provide sufficient explanations in some key cases. For example, if these were the only relevant determinants, then there is no reason why India could not have become one of the foremost emerging markets for FDI, as it fares satisfactorily in most of these indicators, including favourable policies. It is evident that economic factors alone are insufficient in elucidating why some developing countries perform better than others in drawing FDI. A substantive part of the explanation probably lies in non-economic factors influencing FDI. Research on FDI has

1

2

At the end of 2005, Singapore had a total FDI stock of $187 billion, while China and Hong Kong, China had totals of $318 billion and $533 billion, respectively. Inward FDI flows to Singapore in 2005 were $21 billion, while that for China and Hong Kong, China were $72 billion and $36 billion, respectively. See UNCTAD (2006). See, for example, Singh and Jun (1995), Nunnenkamp (2002) and Artige and Nicolini (2005) for a detailed discussion of determinants of FDI.

118



identified remoteness from source countries in terms of geographical distance between “home” and host nations, and the difficulties of doing business in foreign locations having different regulations, business practices, as well as language (Yu, 1990; Bevan and Estrin, 2001), as significant determinants discouraging FDI. While geographical distance can partly explain horizontal FDI in manufacturing, it hardly explains investment in services. Similarly, if “alien” institutional practices and linguistic differences had discouraged investment, then there would have been little United States investment in China or Japan. Such factors, indeed, matter little in a globalized world allowing free flow of capital across borders.

Does business climate matter? In recent times, much attention has been devoted to the ease of doing business in different countries as a key factor influencing incoming FDI. The ease with which companies can do business in a foreign location primarily refers to existing procedures and regulations in the latter that either facilitate or impede the growth of business ventures. The International Finance Corporation (IFC) and the World Bank have been studying various countries for assessing their procedures in this regard (table 2). Needless to say, however, business practices in different countries vary almost as widely as their structural characteristics, as can be seen from a select group of Asian nations (tables 3a and 3b). Table 2. Ease of doing business ranks for selected Asian economies

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

Afghanistan Bangladesh Bhutan Cambodia China Hong Kong, China India Indonesia Lao People’s Democratic Republic Malaysia Maldives Nepal Pakistan Phillipines Singapore Sri Lanka Taiwan Province of China Thailand Viet Nam

2005

2006

159 81 143 142 108 6 138 131 163 25 49 90 66 121 2 89 43 19 98

162 88 138 143 93 5 134 135 159 25 53 100 74 126 1 89 47 18 104

Source: Economy Rankings; ; World Bank Group.

119


120

Table 3a. Regional ranks for selected East Asian and Pacific economies in selected business practice indicators for 2006

Table 3b. Regional ranks for South Asian economies in selected business practice indicators for 2006 Vol. 2, No. 2, December 2006



The South and Eastern regions of Asia present a completely mixed picture in terms of ease of doing business. These regions include economies which offer the best climate for doing business (e.g., Hong Kong, China; and Singapore), along with countries where local systems and regulations entail high transaction costs, thereby making them difficult places for doing business (e.g., Afghanistan, Bhutan, Cambodia, India, Indonesia and the Lao People's Democratic Republic). Elsewhere, there are economies which can be labelled as “good” (e.g., Malaysia, Maldives and Taiwan Province of China) and “not so good” (e.g., Bangladesh, China, Pakistan, Sri Lanka and Viet Nam). Classifying a country as “more” or “less” attractive for doing business depends on various factors. The IFC looks at some key issues in this regard, which include time taken to start a business, number of licences and permits required and the time involved in getting them, labour market flexibility in terms of ease of hiring and firing workers, land market rigidities as indicated by the time and cost of acquiring property rights, protection available to foreign investors, effectiveness of contract enforcement mechanisms, time and cost required for resolving bankruptcies, etc.3 In all these individual aspects, again, different economies differ significantly. Hong Kong, China for example, which is among the top five economies in the world in terms of ease of doing business, fares worse than China, which is ranked 93, in acquiring property rights (tables 2 and 3a). Similarly, Viet Nam, placed as the 104th, requires much less time in completing licensing and permit formalities than Taiwan Province of China, which is ranked much higher at 47th place (tables 2 and 3a). Conventional wisdom suggests that Sri Lanka, given its long history of strife and unrest, is probably one of the most difficult places for doing business in South Asia. Surprisingly, Sri Lanka requires not only less time to start a business than India – it also does better than India in awarding licences and permits. However, India, despite such constraints, is still the largest recipient of FDI in South Asia. There is no denying that a more facilitating climate for doing business should act as a “pull” factor for FDI. However, is it the main driver behind inward FDI? Perhaps not. Indeed, had a good business climate been the key to attracting FDI, then China, ranked much below most other developing economies in the Asia-Pacific region, would not have drawn more FDI than the rest, including much “better” business locations such as Singapore and Taiwan Province of China. Arguments in favour of a good business climate will undoubtedly cite the example of Hong Kong, China in this regard. However, in recent times, FDI flows to China, averaging more than $60 billion per year, have been far more than those to Hong Kong, China; or Singapore (see UNCTAD, 2006). Similarly, India, widely considered as one of the more difficult places for doing business, received around $6.6 billion in FDI in 2005, more than that for Malaysia and Thailand, both of which are rated as much better places for doing business. It is evident that being an attractive place for doing business is not sufficient for explaining why some countries get bigger shares of FDI relative to their counterparts. However, countries with relatively easy procedures and efficient institutions certainly induce greater investor confidence. However, the manifestation of such confidence in terms of actual FDI requires 3

See Doing Business in 2006; A co-publication of the World Bank and the International Finance Corporation (IFC) (Washington D.C.) .

121



host countries to possess additional vital attributes, which offer sources of long-term competitive advantages to foreign investors.

Technological capability and its efficient application: key to FDI The development experiences of East Asian economies provide interesting evidence of the initial advantage of low-cost labour slowly giving way to developed technological capabilities as dynamic sources of competitive advantage for attracting FDI. Following Japan, the Asian “Tigers” – Hong Kong, China; the Republic of Korea; Singapore; and Taiwan Province of China – and “cubs” – Indonesia, Malaysia and Thailand – moved up the growth ladder following the popular “flying geese” pattern. All these countries, and later China, emerged as distinct hubs of labour-intensive exports owing to low labour costs (Guha and Ray, 2004) and were able to attract large volumes of export-oriented FDI. It is, however, interesting to note that in recent years, except for China; Hong Kong, China; the Republic of Korea; and Singapore, most other economies in South-East and East Asia are facing decelerations in FDI inflows. While country-specific factors might partially explain such trends, these economies might also be losing their initial advantage of low-cost labour for “pulling” FDI. Indeed, cheap unskilled labour can hardly be a source of dynamic competitive advantage, as rising wages, unaccompanied by rises in productivity, are certain to induce industrial relocation. Maintaining labour efficiency as a key determinant for sustained inflows of FDI requires active policy interventions in some key segments of the domestic economy. Indonesia, Malaysia and Thailand could attract considerable labour-intensive export-oriented FDI, as rising wages in Asian “Tigers” forces investors to look for other locations. Over time, however, the nature of FDI flows into East and South-East Asia has changed from those directed at relatively simple labour-intensive technique-based production activities to more complex, technologyintensive segments. As a result, it has become essential for domestic labour in Asian economies to upgrade in order to remain competitive. How can such a process occur? National technological capabilities assume importance in this respect. Developing countries need to graduate from the initial stages of technological capability acquisition, characterized by “learning-by-doing”, to more advanced stages of “learning by design” and the creation of new processes (Lall, 1987). The East Asian experience is critical in this regard. Hong Kong, China; the Republic of Korea, Singapore and Taiwan Province of China have retained their distinct comparative advantages as locations offering highly productive labour forces on account of the latter acquiring capabilities of efficiently applying “know-why”-based techniques in production, after progressing successfully from “know-how”-based applications.4 In contrast, Malaysia and Thailand, despite achieving success 4

Technological capabilities are often characterized into two types: “know-how” and “know-why” with respect to the stages of technological development. “Know-how” pertains to the early stages of technological development, where countries acquire capability by becoming familiar with imported techniques and systems, introducing efficient production practices and learning optimum use of different raw materials. “Know-why” follows “know-how” and pertains to acquiring capabilities for developing new technologies through extensive use of R and D. See Guha and Ray (2004), pp. 304-305.

122



in assembling technology-intensive exports, lack advanced technological capabilities, primarily on account of low research and development (R and D) (UNCTAD, 2003). Nurturing a domestic labour force capable of efficiently applying advanced technologies requires, among others, strong national emphasis on technological progress and human resource development. This is precisely where policies assume importance. The Asian evidence of FDI flows clearly indicates that countries such as Singapore and the Republic of Korea which have been able to attract big chunks of FDI possess well-qualified and technically sound labour forces. These countries, over time, have been able to successfully upgrade capabilities for maintaining their industrial competitiveness. The main drivers of such success have been technological progress and human capital formation. Indeed, Japan, the Republic of Korea, Singapore and Taiwan Province of China figure among the top economies in the world in terms of expenditure on R and D.5 At the same time, the skill-bases in these economies, particularly high-end technical skills, are also much deeper than in most other developing countries, which is evident from their higher tertiary level enrollments, as well as the fairly high share of students studying technical subjects at the tertiary level (see UNDP, 2005).

Concluding thoughts With developing countries varying widely in terms of country-specific sources of competitive advantages, their abilities to attract FDI also vary similarly. The experience of developing nations in the Asian and Pacific region clearly shows that, despite almost all economies following encouraging FDI policies, even within particular regions where geographical and cultural similarities prevail (e.g., South Asia and East Asia), the distribution of inward FDI is not uniform. The success achieved by some of the East and South-East Asian economies in consistently attracting FDI shows that it is essential to develop sound capabilities in technology and human skills for drawing FDI that generates spillover effects within the host economy in terms of further technological diffusion and other forms of “learning”. Such capabilities need to be strengthened over time, along with changes in global production systems, for remaining potent sources of competitiveness. The relative lack of success on the part of many developing countries in attracting FDI, despite liberal enabling policies, might be explained to a large extent by their inability to develop sources of dynamic competitive advantage, primarily technological capabilities and skilled labour forces. Indeed, it is worth debating whether there is much point in “chasing” FDI before acquiring such capabilities. Rather, focusing on policies aimed at developing such competencies by spending more resources on technology diffusion and creation, as well as higher education, can actually dispense with the need for having specific government strategies for drawing FDI, since these attributes act as strong “pull” factors. 5

Japan, the Republic of Korea and Singapore, spend 3.1 per cent, 2.5 per cent and 2.2 per cent, respectively, of their GDP on R and D. Corresponding ratios are much lower for other countries in the Asia-Pacific region, mostly below 1 per cent of national GDPs, except for China (1.2 per cent). See UNDP (2005).

123



How important is a good business climate in attracting FDI? It certainly is important as far as increasing investor confidence is concerned. To the extent that difficulties in doing business lead to high transaction costs, efforts to reduce such costs can significantly improve the competitiveness of host countries (UNCTAD, 2003). Removing labour and land market rigidities are particularly important in this regard. However, enabling rules and efficient institutions, while “necessary” for drawing FDI, cannot be “sufficient” for ensuring FDI inflows, unless matched with distinct economic advantages such as high labour productivity and developed technological capabilities. This probably explains why China, despite being ranked fairly low on the ease of doing business, still attracts large FDI inflows. While China arguably enjoys the advantage of a large domestic market, so does India, which has not been able to achieve as much as FDI as China has. It is evident that the Chinese success in drawing FDI has much to do with factors other than domestic market size. China is successfully converting its intrinsic advantage of possessing a large body of low-cost, but relatively unskilled labour, ideally suited for lower-end, labour-intensive export production, to a more capable and technically skilled labour force, competent to handle complex, high-end technology-intensive activities. Such success owes a lot to Chinese efforts in promoting R and D for achieving sustained technological progress along with emphasis on developing human skills.

124



REFERENCES Artige, L. and R. Nicolini (2005). Evidence on the Determinants of Foreign Direct Investment: The Case of Three European Regions, UFAE and IAE Working Paper No. 655.05 (Barcelona, Spain, Unitat de Fonaments de l'An‚lisi Econ‚mica and Institut d'An‚lisi Econ‚mica). Bevan, A.A. and S. Estrin (2001). The Determinants of Foreign Direct Investment in Transition Economies, Discussion Paper DP 2638 (London, Centre for Economic Policy Research). Buckley, P. and M. Casson (1976). The Future of the Multinational Enterprise (London, Macmillan). Guha, A. and A.S. Ray (2004). “India and Asia in the world economy: the role of human capital and technology”, International Studies, vol. 41, No.3. Lall, S. and P. Streeten (1977). Foreign Investment, Transnational and Developing Countries (London and Basingstoke, Macmillan). Lall, S. (1987). Learning to Industrialize (London, Macmillan). Nunnenkamp, P. (2002). Determinants of FDI in Developing Countries: Has Globalisation Changed the Rules of the Game?, Kiel Working Paper No. 1122 (Kiel, Kiel Institute for World Economics), July. Singh, H. and Kwang W. Jun (1995). Some New Evidence on Determinants of Foreign Direct Investment in Developing Countries, Policy Research Working Paper No. 1531 (Washington D.C., World Bank), November. Soci, A. (2002). “FDI: The current state of play”, paper presented at the 2002 EAEPE (European Association for Evolutionary Political Economy) Conference, November. United Nations Conference on Trade and Development (UNCTAD) (2003), Investment and Technology: Policies for Competitiveness – Review of Successful Country Experiences, Technology for Development Series, UNCTAD/ITE/IPC/2003/2 (New York and Geneva). _______(2006). World Investment Report, Statistical Annex (New York and Geneva). United Nations Development Programme (UNDP) (2005). Human Development Report (New York). Yu, C.M.J. (1990). “The experience effect and foreign direct investment”, Weltwirtschaftliches Archiv, vol. 126, pp. 560-580.

125




Agricultural Liberalization in Preferential Trading Agreements: The Case of the ASEAN FTA*

T

he breakdown of the Doha negotiations, due in large part to difficulties in reducing agricultural trade barriers in developed economies, while not a surprise to many observers, delivered a blow to the multilateral trading system. The setback created a dilemma concerning how much negotiating capital to continue investing in the multilateral negotiations at the World Trade Organization (WTO), even though most of them still acknowledge that open multilateral trade remains the best way to achieve the greatest benefits from trade. Yet, even before the collapse of the Doha round, the slow pace of multilateral negotiations has already led many countries to enter into preferential trade agreements (PTAs), both at the bilateral and regional levels. Several positive arguments for PTAs exist. First, a smaller set of presumably like-minded countries can come to an agreement relatively quickly in contrast to unwieldy multilateral negotiations. Fast-track agreements are also more likely to result from negotiations between similar economies, especially when trade agreements include mutual recognition and harmonization of standards. Arguably, PTAs can also be building blocks for constructing a multilateral trading system in a number of ways: first, if exposure to competition in the regional market prepares firms for global competition through “learning by doing”; and second, if it does not cause major trade diversion at the expense of non-parties to the PTAs but rather expands the regional/bilateral trade. Taking these benefits into account, the proliferation of PTAs in the past decade is not surprising. According to WTO, more than 200 agreements are currently in force, 75 of which are in the Asian and Pacific region (APTIAD – Asia-Pacific Trade and Investment Agreements Database). A majority were forged in the past 10 years, while others are still under negotiation. Among the best known preferential trade agreements are the North American Free Trade Agreement (NAFTA), ASEAN Free Trade Area (AFTA), MERCOSUR (South American Common Market) and Australia-New Zealand Closer Economic Relations Trade Agreement * This policy brief was prepared by Gloria O. Pasadilla, Senior Research Fellow, Philippine Institute for Development Studies, Makati, Philippines, for the Asia-Pacific Research and Training Network on Trade (ARTNeT). A version of this brief was earlier released as ARTNeT Policy Brief No. 8 (accessible at <www.artnetontrade.org>).

127



(ANZCERTA). The European Union, of course, is the most developed economic integration agreement to date, but it also started as a PTA. Besides these, a host of other bilateral and regional trade agreements cut across continents, making the hodgepodge of trade agreements the very likeness of a “spaghetti bowl”. However, the question remains whether PTAs deliver on their presumed benefits, a question that has become more significant with the suspension of the Doha round. Are PTAs – the so-called alternative to the multilateral trading negotiations – viable in terms of actually delivering trade liberalization outcomes? For sure, there are tangible results from the European Union, NAFTA, and, to a limited extent, from MERCOSUR. But for the majority of PTAs, especially the more recent ones, the results remain to be seen. Do the positives outweigh the negatives? Beyond manufacturing, do all sectors benefit? In particular, does agriculture?

Treatment of agriculture in PTAs Whether at the multilateral, regional, or bilateral level, agricultural liberalization is a sensitive topic for a number of reasons. Foremost are the sector’s significant share in employment, issues of food security, safety and quality, the difficult political economy affecting agriculture talks, as well as other non-trade concerns such as “rurality” as a societal preference and the population of ageing farmers, especially in the developed world. Still, for comprehensive trade liberalization, agriculture could not be left untouched in any PTA, albeit with some significant differences especially when compared with the treatment of the sector in multilateral negotiation. In the first place, whereas WTO negotiations consider three major pillars of agricultural liberalization, namely, market access, domestic support and domestic subsidies, various PTAs deal only with market access issues, rarely with export subsidies and almost never with domestic support. Moreover, negotiations usually skirt the ticklish issue of agricultural market access through exclusions of whole or parts of the sector, typically the highly sensitive products which ironically also happen to be the major export interest of the other parties in PTAs. They also treat agriculture with condescension through extended timeframes for liberalization relative to other sectors. As regard health and sanitary measures, while a few have provisions for mutual recognition of standards, they do not go substantially beyond the WTO provisions. Safeguards are also present in many PTAs but in a seemingly more lenient way than in WTO. In addition, whereas WTO negotiations begin from bound tariff rates, PTAs, at least, start from applied rates. The special treatment of agriculture has both positive and negative facets. On one hand, the bracketing of especially sensitive agricultural products enables trade negotiations to move forward and to focus on other sectors where mutual benefits could be found. It prevents lengthy stalling of trade talks on the issue of agriculture – a likely possibility in the light of the failed WTO negotiations. Scollay (2003) even argues that, for trading partners that are not

128



competitive in agriculture, such exclusion reduces the trade diversion associated with preferential trading arrangements, making PTAs more welfare-enhancing and mutually beneficial. Moreover, even with an extended timeframe for liberalization, PTAs nevertheless manage to include sensitive products for eventual liberalization, a feat that would have been virtually impossible without special extension. Unfortunately, a downside also exists. With different countries excluding different sensitive agricultural products from liberalization, future harmonization or multilateralization of different PTAs becomes more difficult. More specifically, if countries are looking at PTAs as a stop-gap measure while a multilateral trade talk is stalled, hoping that the complex “spaghetti bowl” would eventually turn into a simpler “lasagna”, then they are bound to be disappointed.

The case of AFTA Notwithstanding the “special treatment” of agriculture, was there actual liberalization of the sector from PTAs? Global analysis of the liberalization effects of PTAs exist elsewhere (see, for instance, Adams and others, 2003), but the remainder of this paper considers only the case of AFTA. AFTA was signed in 1992 by Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand to foster greater economic cooperation within the ASEAN region. Later on, four other Asian countries joined the agreement: Viet Nam in 1995, the Lao People’s Democratic Republic and Myanmar in 1997 and Cambodia in 1999. AFTA was notified under the “Enabling Clause” of WTO, instead of GATT Article XXIV, enabling it to bypass the Article’s requirement to liberalize “substantially all” sectors. Under the Common Effective Preferential Tariff (CEPT) Scheme, products are categorized under the Inclusion List, Temporary Exclusion List, Sensitive List and General Exceptions List, with respective timelines for achieving 0-5 per cent tariffs and/or eventual insertion in the Inclusion List. AFTA dealt with the issue of agriculture by initially excluding all unprocessed agricultural products (UAPs) from tariff liberalization. Subsequently, however, all UAPs were incorporated into the liberalization process. Recognizing the difficulties involved in the transition process, ASEAN allowed flexibilities such as creating new Sensitive and Highly Sensitive List categories. Certain timelines were agreed upon with regard to inserting sensitive products into either the Temporary Exclusion List or the Inclusion List. The liberalization clock only starts to tick once products are included in the Inclusion List. Currently, only a few tariff lines remain in the Sensitive List – 25 and 19 tariff lines for Indonesia and the Philippines, respectively, out of more than 11,000 in each of these countries. Unsurprisingly, almost all the remaining products on the Sensitive List belong to agriculture. In sum, AFTA proves how step-by-step tariff reductions, phased transitions and other flexibilities achieve agricultural liberalization – an accomplishment thought impossible decades ago. To date, most of the agricultural sector is already in line for ASEAN tariff liberalization.

129



AFTA and trade liberalization The feasibility and desirability of a particular trade agreement is often measured by the degree of trade creation or diversion effects it produces. Economic theory posits that an FTA that is trade-creating is good, while one that is trade-diverting reduces economic welfare. On this note, past studies on AFTA using gravity equations show net positive trade creation, which implies that AFTA does not discriminate against non-ASEAN importers, arguably making it a building bloc towards freer multilateral trade. One of the major reasons for the positive assessment of AFTA rests in the region's production structure. ASEAN countries, as a whole, have been the production base of multinational companies, with vertically integrated operations within the region, for products that are ultimately destined for extra-regional destinations such as Japan and the United States. Hence, trade volumes with non-ASEAN countries were little affected after AFTA. If at all, AFTA even facilitated trade outside the ASEAN region by lowering the transaction costs of intra-ASEAN trade in industrial inputs and by making the vertical integration of multinational corporations more seamless. More detailed analysis of tariff protection, likewise, shows remarkable progress, especially when compared with most favoured nation (MFN) treatment of agriculture in WTO. The average agricultural MFN tariff, for instance, is higher than the CEPT mean (see figure 1) even as tariff dispersion in CEPT (2 per cent) is lower than that in MFN (12 per cent). Further, 99 per cent of CEPT tariff lines are now below 5 per cent, of which half are already traded tariff-free. In contrast, the majority of MFN tariff rates continue to range from 5 to 20 per cent, with a few tariff lines greater than 30 per cent. Figure 1. Comparative tariff structure of ASEAN-6 countries in agriculture, based on MFN and CEPT rates at the HS 8-digit level

Source: ASEAN Secretriat and the World Integrated Trade Solution (WITS).

130



Yet, despite the unambiguous gains of AFTA in tariff liberalization, the figures hide the unevenness of liberalization between sectors. Between industry and agriculture, more industrial goods are traded within ASEAN tariff free, with less than 1 per cent of industrial tariff lines having tariffs greater than 5 per cent. In contrast, the percentage distribution of tariffs higher than 5 per cent in agriculture is larger than 1 per cent. Further, the record of ASEAN in intraregional trade flows is relatively less straightforward, especially in the agricultural sector (see table 1). While the share of intraregional trade to total trade increased by more than 10 percentage points, most of the increase came from industrial trade, not from greater intra-regional agricultural trade. While the share of intra-ASEAN agricultural trade to the total increased from over 1.4 per cent in 1995 to 1.9 per cent in 2003, it was a mere 0.5 percentage point increase – incomparably slight when one notes that the total ASEAN-10 trade share in total trade of ASEAN-6 countries grew by 10 percentage points from 21.4 per cent in 1995 to over 31.7 per cent in 2003. Moreover, the table shows that, while total imports of ASEAN dropped and exports increased in 2003, both intra-ASEAN-10 imports and exports increased. The reduction in total ASEAN imports is largely due to the drop in the ASEAN region’s imports from the rest of the world, while the increase in regional exports was large enough to offset the reduced export to the rest of the world. Though partial, this observation points to the existence of net trade creation, which many other studies on ASEAN have also found. Table 1. Direction of ASEAN-6 trade, 1995 and 2003 (In millions of United States dollars and percentages) Imports (1)

ASEAN-6 Trade ASEAN-6 ASEAN-10 Non-ASEAN Total ASEAN ASEAN-6 agricultural trade ASEAN-6 ASEAN-10 Non-ASEAN Total ASEAN

Exports (2)

% Share in Total ASEAN Trade

1995

2003

1995

2003

1995

2003

53,244 54,900 258,058 312,958

75,393 79,140 164,086 243,226

69,518 74,994 218,810 293,804

88,476 96,504 213,718 310,222

20.23 21.41 78.59 100

29.61 31.74 68.26 100

2,997 3,536 11,237 14,773

4,097 4,523 7,242 11,765

4,021 5,224 18,147 23,371

5,101 6,003 10,334 16,337

1.16 1.44 4.84 6.28

1.66 1.9 3.18 5.08

Source: Personal Computer Trade Analysis System of the International Trade Centre UNCTAD/WTO.

131



Deconstructing ASEAN into its member economies would show that some countries appear to have improved their agricultural trade within the region. For example, the Philippines and Thailand’s ratio of intra-/extra-ASEAN agricultural trade in 1995 were 0.11 and 0.12, respectively; these ratios expanded to 0.22 and 0.19, respectively, in 2003. Moreover, the index growth rate of intra-ASEAN agricultural trade shows that Indonesia, Malaysia, the Philippines and Thailand increased total trade in the region since 1992; however, that of Singapore decreased. In summary, the tariff and trade analysis confirms results from gravity trade equations that AFTA is not trade-diverting. More specifically, there is no clear evidence that intraregional trade had dislodged trade with the rest of the world, particularly for agriculture, where the increase in intraregional trade had been lackluster. If there was any growth in agricultural trade, most of it is due to trade outside ASEAN. That most of the growth of intra-ASEAN trade came from trade in industry is, to a certain extent, not surprising. First, ASEAN countries produce agricultural products that are broadly similar, i.e., mostly tropical products, and, hence, provide relatively little room for trade with one another. Second, AFTA itself was originally conceived to facilitate the already burgeoning intra-industry trade in manufacturing that arose from the vertically linked operations of transnational corporations in the region. It was only later that agricultural liberalization, especially of unprocessed agricultural products, was appended in the agreement. Consequently, agriculture tariff reduction was carried out only in more recent years, unlike some industrial goods which were liberalized almost from day one of AFTA.

Conclusion The suspension of the Doha negotiations may signal nations to seriously consider options other than multilateralism; PTAs appear to be the second-best choice. The effect of PTAs, in the case of AFTA, showed that it had, indeed, helped lower tariff barriers against other ASEAN countries. The average and median CEPT tariffs have gone down significantly, especially when compared with the MFN levels. Tariff distribution analysis shows that tariffs of a large chunk of agricultural products, and indeed of all commodities, have been capped within 0 to 5 per cent, while in the MFN case, a large portion of tariffs still lie between 5 and 20 per cent. Major ASEAN export interests are also not prevented entry into each other’s domestic markets by high tariffs, except for products such as rice, sugar or coffee. While agricultural products remain sensitive and are given special treatments such as a prolonged timetable for liberalization, the fact that PTAs manage to include many sensitive products in the schedule of liberalization is already a significant improvement over multilateral negotiations. It is understandable that, for political reasons, some countries would have greater difficulty opening up certain agricultural sectors. However, the flexibility afforded them in preferential trading agreements make for a less painful transition process. At the same time, the fact that these countries even commit themselves to the liberalization of difficult sectors is already a major improvement over multilateral negotiations.

132



Despite these successes, hurdles remain and both time and patience are necessary to ensure that commitments are observed and withdrawal through policy reversals is avoided. Considering that least developed economies (LDCs) tend to be excluded from liberalization through PTAs, it is also vital to continue working towards multilateral trade liberalization in parallel, since this best serves the interests of every country, especially the LDCs. In the final analysis, the assistance or obstruction of PTAs to the process of multilateral liberalization greatly depends on the design of the trade agreements, sector inclusiveness, the timetable and flexibilities agreed upon. In particular, AFTA has proven itself to be a building block as far as total trade is concerned. Whether the same holds true for agricultural trade, an affirmative answer in the case of AFTA can likewise be given, albeit less enthusiastically.

133



REFERENCES Adams, R, P. Dee, J. Gali and G. McGuire (2003). The Trade and Investment Effects of Preferential Trading Arrangements - Old and New Evidence, Staff Working Paper (Canberra, Productivity Commission). Scollay, R. (2003). “Treatment of Sensitive Issues in RTAs: The Case of Agriculture,” paper presented at the Pacific Economic Cooperation Council (PECC) Trade Forum, Washington D.C., 22 April.

134



Is there a Need for “Market Access” Plus Indicators?*

T

here are eight Millennium Development Goals (MDGs) which support the combating of poverty, hunger, disease, illiteracy, environmental degradation and discrimination against women by certain levels, by the year 2015. In recognition of the fact that those objectives cannot be pursued unless a partnership among all in the interdependent global economy is forged, Goal 8 focuses on building a global partnership for development. The achievement of such a global partnership is tracked through seven targets, four of which (targets 12-15) are more closely associated with international trade and financing. These four stipulate targets in terms of official development assistance (ODA), market access and sustainability of external debt for developing countries. This policy brief comments on the state of progress only on indicators that are linked to trade-related targets. These are called “market access” indicators, numbered 38-41. However, since indicator 40 (agricultural support estimate for countries in the Organisation for Economic Co-operation and Development (OECD)) is not applicable for regional economies, we focus on indicators 38, 39 and 41. Based on an assessment of the performance of the three trade indicators, we argue that there is a need for “market access” plus indicators to be formulated and incorporated into the global MDG indicators database. Asia and the Pacific comprises a region of trading nations. Mainstreaming trade into development strategies requires changes on both the demand and supply sides in the global market for products of interest to developing countries. On the demand side, it is crucial to improve access to markets that can absorb products and services which developing countries can efficiently produce today by removing tariff and non-tariff barriers. On the supply side, * Mia Mikic, Economic Affairs Officer and Ying Qiu, former staff, Trade Policy Section, Trade and Investment Division of ESCAP. The authors would like to acknowledge previous work developed in this area by Tiziana Bonapace and Mathias Bruckner and contained, among others, in “Achieving the Millennium Development Goals in the least developed and landlocked developing countries through trade, debt relief and aid”, ESCAP Special Body on Least Developed and Landlocked Developing Countries, seventh session, Bangkok, 10-11 May 2005, E/ ESCAP/SB/LDC(7)/1. For further information, the authors may be contacted by E-mail at [email protected] or [email protected].

135



developing countries need assistance to improve and build supply capacity in new products and services to more efficiently reach the global market.

Demand-side view of market access – assessing the performance of indicators 38 and 39 Indicator 38 measures the proportion of total imports (by value and excluding arms) by developed countries from developing countries and from the least developed countries, which are admitted free of duty. However, it should be emphasized that imports are considered as duty free whenever the statutory tariff rates for the goods are zero. This does not mean that the duties actually paid are zero.1 Indicator 38 results should be hence seen as an upper bound of the share of actual duty-free imports. Figure 1 illustrates results for indicator 38 for selected country groups. Focusing on the regional LDCs, it is striking that, while they start at the same level of about 60 per cent of duty-free access as sub-Saharan LDCs in 1996, they experience a loss of duty-free market share in the late 1990s and early 2000s, with just a 50 per cent share in 2002. Since then their access improved, but it is still 25 percentage points below the largest share captured by subSaharan LDCs. On the other hand, middle-income developing countries in Asia and disadvantaged economies in transition recorded a faster increase in their share of duty-free imports to developed countries. China and India follow a similar path, although at different speeds. While China started with very low duty-free market share prior to joining WTO, no duty was assessed on almost 64 per cent of its exports to developed countries in 2004. India follows the same trend, although with more variations over time. However, both of them are on the path to surpass the dutyfree access obtained by Asia-Pacific LDCs in the developed countries’ markets. This is not to say, as mentioned above, that duty-free imports are in fact “free” imports. Very often import tariffs are being replaced by non-tariff barriers and, in the case of China and India in particular, with anti-dumping duties. Indicator 39 measures the average tariffs imposed by developed countries on agricultural products, textiles and clothing from developing countries, three sectors of particular interest for developing countries.

1

For example, all preferential trading arrangements which in principle could offer duty-free access also include more or less stringent rules of origin. These rules deny preferential treatment for goods for which only a small part of the production process is linked to a beneficiary country.

136



Percentage

Figure 1. Proportion of imports from developing countries entering developed markets duty free

Source: Calculated by the ESCAP secretariat using data available at <www.mdg-trade.org>. Note: MI stands for the middle-income developing countries in Asia (Indonesia, Malaysia, Pakistan, the Philippines, Sri Lanka and Thailand); other groups are as defined at <www.mdg-trade.org>.

Some methodological aspects deserve a mention while more details are available at <www.mdg-trade.org>. What is important to note here is that average tariffs are obtained by using fixed weighting coefficients, called Standard Import Structure (SIS).2 Constant weights imply that changes in average tariffs over time are due to policy changes only. This is in contrast to MDG 38, where changes over time reflect both changes in policy and changes in export composition. China and South-East Asian developing economies face the highest average tariffs on these three sectors in this region. India faces somewhat lower average tariffs throughout the period but again the downward movement is not very remarkable. The levels of average tariffs on goods in these sectors exported from Pacific economies are neither low nor declining; thus, trade in these sectors can hardly be considered an engine of growth for those economies.

2

The SIS weighting scheme can be seen as a combination of the two most common tariff weighting schemes, simple tariff averages and trade-weighted averages. Simple averages may not be good measures for market access barriers, as they include tariffs on items that a country would never export to a significant amount. This holds especially for LDCs that often have a very narrow export base. Trade-weighted averages may easily understate existing barriers, as high tariffs are one potentially major reason for low exports. SIS corrects for this downward bias to the extent that there are variations among developed country tariffs.

137



Figure 2. Average tariffs in developed markets on agriculture, textiles and clothing (combined) exported from developing countries

Source: Extracted from <www.mdg-trade.org>.

Supply-side view of market access – assessing performance of indicator 41 Indicator 41 measures the proportion of ODA provided by developed countries to developing countries and LDCs to help build trade capacity.3 ODA is allocated to different sectors,4 but indicator 41 focuses on trade-related assistance (TRA). At the global level, indicator 41 can be easily tracked and monitored by analysing TRA flows from donors to developing countries and LDCs, which have increased dramatically. Total TRA increased from over US$ 30.9 million in 1992 to $154.3 million in 2004, reaching its peak of over $433 million in 2002. This rapid growth is in line with commitments formulated under MDG 8 and the Monterrey Consensus on Financing for Development.5 However, at the national level it is difficult to draw an overall pattern because ODA received by countries in the Asia-Pacific region has fluctuated greatly. A comparison between 3

4

5

There are two data sources concerning ODA, namely OECD (www.oecd.org/dac) and WTO (http://tcbdb.wto.org/) databases, respectively. This study uses the OECD database because it has longer time series and wider country coverage. ODA comprises grants or loans to developing economies on OECD and its Development Assistance Committee (OECD/DAC) list of aid recipients that are provided by the official sector with promotion of economic development and welfare as the main objective and at concessionary financial terms. Report of the International Conference on Financing for Development, Monterrey, Mexico, 18-22 March 2002 (United Nations publication, Sales No. E.02.II.A.7), chap. I, resolution 1, annex.

138



countries shows large differences. The volatility over years by a country and the variations among countries suggest that TRA into the Asia-Pacific region is unstable and imbalanced. Examination of the share of TRA in the total ODA, points to a consistently low proportion of TRA. This share in most Asia-Pacific economies is less than 0.5 per cent over most of the period 1992-2004. The main reason for this is that the rise and fall of TRA is decided mainly by the policy preferences of donor countries. The Asia-Pacific region has not been a traditional priority area for donor countries in the internationally agreed commitments for ODA. Confronted with the difficulties of tracking indicator 41 at the national level in the ESCAP region, an alternative solution is to place TRA in a relative context by comparing the absolute amount of TRA received by sub-Saharan Africa to that received by selected groupings/ economies in the ESCAP region. The finding is that this is an obviously overlooked region. In absolute terms, the growth of TRA has been far less significant than that in sub-Saharan Africa since 2000. Figure 3. Trade ODA received, by selected grouping (Value in millions of United States dollars)

Source: Calculation by ESCAP secretariat based on OECD ODA database, <www1.oecd.org/scripts/cde/ viewbase.asp?dbname=cde_dac>, accessed on 27 June 2006.

139



Limitations of the current “market access” indicators6 All market access indicators share one common characteristic: they are not target-oriented in the sense that a concrete numerical target at a certain point can be achievable. So the evaluation can be made only from the perspective of a direction of change. For example, target 12 refers to “develop further an open, rule-based, predictable, nondiscriminatory trading and financial system”. Market access indicators can be used to assess whether the change in “proportion of duty free access”, level of average tariff in relevant sectors and proportion of trade-related ODA is moving in the right direction. There are also specific limitations of the indicators on each “side of the market”.

Demand side The current market access target reflects the demand-side view through indicators 38 and 39, which address increasing opportunities for developing countries and LDCs to engage in trade in a fair manner. These two indicators however do not paint the whole picture because they fail to address: ● ●

●

services trade, which has become increasingly competitive for developing countries; non-tariff and non-border measures, which are increasingly used to prevent goods, services and factors from developing countries to access markets elsewhere;7 increasing South-South trade.

Furthermore, markets are not static in size and structure. They grow and change as constituent members change. As mentioned previously, the inclusion of imports from developing countries would pick up an increasingly important source of demand for products and services from other developing countries. The fact that the indicators are not dynamic in nature is particularly important for countries which are in process of industrial restructuring (and most developing countries are!), including export diversification. Given the tariff protection of developed markets, which is biased in favour of inputs and raw materials, this process of economic industrialization (of exports in particular) means that developing countries would be missing out on preferential access to significant markets. The result of an indicator will be pointing in the direction of “not towards meeting the target”, but in reality a country could be growing and perhaps doing well on attaining other MDGs. The fact that no price and exchange rate effects are accounted for reduces the confidence in the data even further.

Supply side The problem with indicator 41 is its lack of measurability and comparability at the national level, the reason being that TRA is decided mainly by donor countries’ policy preferences. The priorities of such policies can be different. For some, TRA should be allocated 6 7

The availability and reliability of the data are problematic, but not discussed due to space limitations. The assumption of full utilization of preferences also causes over-estimation of market access.

140



in a way that is reasonably proportionate to the number of poor people in the world. For others, “good performers” should receive more aid per capita than countries at similar poverty levels which perform less well. It seems that developing countries and LDCs can do little to affect decisions on such ODA. In fact, there are some areas where Governments can play a more proactive role in terms of resource allocation contributing to improvements in market access. In addition to being a statistical measure, a good indicator should be easily measurable, meaningful and comparable. In this sense, indicator 41 does not seem to be easily measured and compared, as least at the national level in the context of this region.

Recommendations Are there any easily and quickly available data on an internationally comparable basis that would allow the design of some new indicators related to market access? So far, national monitoring of other MDGs was extended in both targets and indicators. New (in principle), more challenging or wider targets were added in areas where national economies were easily meeting the originally imposed targets.8 Furthermore, indicators were modified in terms of quality, focus and coverage to better reflect progress towards meeting the associated targets. No further thinking however was done in extending targets 12-15, or indicators 38-41 while the Asia-Pacific regional report on MDGs so far in principle omits reporting on this goal.9 In this connection, the following three groups of recommendations are proposed for further consideration: 1. Demand side. Suggested “plus indicators” on market access may include the following: ●

●

●

Number of service sectors in developing countries scheduled for free access by developed countries; Number and extent of non-tariff barriers used by developed countries to limit imports from developing countries and LDCs; Proportion of total imports (by value and excluding arms) of developing countries, from developing countries and the least developed countries, admitted free of duty.

2. Supply side. “Plus indicators” might consider the following: ●

8

9

Proportion of resources being mobilized domestically (as a percentage of total resources) for trade capacity-building;

For example, in the area of education, universal junior high school education could be added to the target of universal primary education. The report refers to A Future within Reach: Reshaping Institutions in a Region of Disparities to Meet the Millennium Development Goals in Asia and the Pacific (2005), ESCAP, UNDP and ADB, ST/ESCAP/2376 (United Nations publication, Sales No. E.05.II.F.27).

141


●

●


Proportion of public expenditure and aid (as a percentage of total public expenditure and aid) contributing to trade capacity-building; Proportion of non-conditional borrowing (as a percentage of total non-conditional borrowing) from multilateral agencies and development banks for trade capacitybuilding.

3. The role that ESCAP could play include the following: ●

●

●

●

●

142

Organize expert group meeting(s) to assess performance with regard to MDG trade indicators and identify problems and formulate recommendations for policies, strategies and guidelines for implementation; Provide a standard set of definitions for market access indicators and other trade and investment-related indicators useful for developing “plus indicators”, as well as identify the type of data and their sources necessary to track the indicators; Advocate the allocating additional domestic funding for trade-related capacitybuilding; Play a role in identifying good practices that are being followed in the region with regard to proactively promoting trade capacity-building and engaging in (intra)regional sharing of knowledge and experience; Coordinate the activities of donors (e.g., donor countries, international agencies and development banks) associated with resource allocation for trade capacity-building.



How Promising is SAFTA?

Nilanjan Banik*

1. Introduction

D

espite the rise in multilateral trade during the last two decades, regional trading agreements (RTAs) have gained increased prominence. Repeated failures of multilateral negotiations, especially at various ministerial meetings of the World Trade Organization (WTO), has led to an increase in the number of RTAs. Also, increased internationalization of markets (i.e., globalization) and the fear of losing out to other inefficient producers have put pressure on individual countries to become part of any RTA. The South Asian Free Trade Area (SAFTA) covering an area consisting of seven countries, namely, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, is an RTA that has come into force with effect from 1 July 2006 after prolonged deliberations. The purpose of this policy brief is to analyse whether SAFTA is likely to emerge as a success story in terms of greater flow of goods and services in the South-East Asian subregion. We base our analysis on a few economic criteria of the SAFTA member countries. These economic factors are essential for sustaining a successful FTA.1

2. Why more trade? Success of an FTA is measured in terms of increased flow of goods and services. The more the economies trade among themselves, the greater the tendencies for further economic * Assistant Professor, Centre for Advanced Financial Studies (CAFS), Institute for Financial Management and Research, 24, Kothari Road, Nungambakkam, Chennai 600 034, India, For further information, please contact the author at [email protected]. 1 There are four different forms of regional trading agreements, namely, FTAs, custom unions, common markets and economic unions. In forming an FTA, members remove trade barriers among themselves but keep their separate national barriers against trade with outside nations. In a custom union, members not only remove trade barriers among themselves but also adopt a common set of external barriers. In a common market, members allow full freedom of factor flows (migration of labour and capital) among themselves in addition to having a common union. In an economic union, members unify all their economic policies, including monetary, fiscal and welfare policies, while retaining the features of a common market.

143



integration. Since trade affects growth, a greater flow of goods and services is likely to see less opposition in the way of economic integration. Trade affects growth in three primary ways. First, trade encourages the flow of resources from the low productive sectors to high productive sectors, leading to an overall increase in output. Export growth may affect total productivity growth through dynamic spillover effects on the rest of the economy (Feder, 1983). The possible sources of this positive dynamic spillover include more efficient management styles, better forms of organization, labour training and knowledge about technology and international markets (Chuang, 1998). Second, with unemployed resources, an increase in export sales leads to an overall expansion in production and a fall in the unemployment rate. As production increases, because of increases in the scale of operations (economies of scale), firms become more efficient (Helpman and Krugman, 1985). Third, international trade also enables for the purchase of capital goods from foreign countries and exposes an economy to the technological advances of the developed countries. Recent theoretical work suggests that capital goods imported from technologically advanced countries may increase productivity and thereby growth, since knowledge and technology are embodied in equipment and machinery and therefore transferred through international trade (Chuang, 1998).

3. Criteria for a successful FTA Despite these positive aspects, free trade is opposed mainly because workers and producers associated with the inefficient industries stand to loose out. Considerable lobbying pressure is applied by the inefficient producers who demand more protection. As tariffs are not allowed under an FTA framework, individual Governments try to protect their respective economies by imposing non-tariff barriers (NTBs), such as antidumping measures, import licences and sanitary standards. The answer to a successful FTA therefore lies in controlling those factors which act against FTAs, and nurturing the factors which help in forming and sustaining an FTA. Some of the factors that affect the formation of an FTA are considered below. Intra-industry trade: An FTA is more likely to be formed when trade happens in similar commodities, that is, intra-industry trade. The likelihood that industry association will demand more protection is less in cases of intra-industry trade. In the presence of intra-industry trade (for example, India exporting Tata Indica cars to the United States and at the same time importing Ford cars from that country), adjustment costs associated with removing trade barriers are lower. In this case, jobs lost due to customers shifting to more efficient foreign suppliers may, to a large extent, be offset by job-enhancing expansion in foreign demand for similar, differentiated goods produced domestically. The political opposition to liberalizing and expanding intra-industry trade tends to be far less when compared with trade involving dissimilar items, that is, inter-industry trade. Economic characteristics: Economies that are similar in terms of size are better candidates for forming an FTA. Similarities are measured in terms of economic development and geographical proximities. The more similar are the economies, the greater is the likelihood 144



of intra-industry trade. This is because geographically close economies with similar levels of economic development have access to similar kinds of technology. Consequently, they tend to produce more or less similar items and tend to trade in similar commodities (closely differentiated products as in the monopolistic competition type market structure). As the literature on the gravity model of trade demonstrates, similarities in economic structure and geographical distance between respective economies are powerful determinants of trade (Linneman, 1966; Frankel, 1997). Trade increases with economic size and the proximity of the trading partners. Prices: Low technology intensive items, such as leather footwear, garments, gems and jewellery and textile products, which are typical of any developing country’s export profile, are very sensitive to movements in price, i.e., they are price-elastic. When it comes to forming an FTA, countries analyse whether such an arrangement would enable them to realize a greater demand for their exports. From the demand-side perspective, it can be argued that sustained demand growth cannot be maintained in a small domestic market, since any economic impulse based on expansion of domestic demand is bound to be exhausted. However, export markets do not exhaust quickly. FTAs not only provide a platform for a greater market share but also enable countries to produce efficiently. As the literature on monopolistic competition suggests, a way to produce exports competitively is to take advantage of economies of scale in production, which can be realized from a greater market share resulting from an FTA (Helpman and Krugman, 1985; Leamer, 1984). Government policies: More liberal government policies are likely to be beneficial for an FTA. There is a general consensus in the literature that trade volume, for both exports and imports, increases following external sector liberalization (Agosin, 1991; Kohli, 1991). Higher trade volume, resulting from external sector liberalization, is expected to increase the likelihood of FTA formation.

4. How well SAFTA members fit these criteria? Given the discussion about the aforementioned criteria necessary to form an FTA in general, it is of interest to examine the future prospects of SAFTA. Economic characteristics: When comparing in terms of economic structure, namely, savings as a percentage of GDP, demographic profile and labour mobility, SAFTA member countries have many similarities (see table 1). The industrial sector constitutes roughly a fourth of GDP in all countries, while the share of agriculture varies from 20.1 per cent in Sri Lanka to almost 40.8 per cent in Nepal. Although a majority of the population still lives in rural areas, all of these countries are becoming increasingly urbanized. Except for the Maldives, saving as a proportion of GDP is also similar across these countries. These countries also share a similar demographic profile. The more similar are the economies, the more similar is their export profile. Greater economic cooperation among SAFTA members holds important implications in the form of larger market and economies of scale in production. These factors might act as further incentives for the smooth functioning of SAFTA.

145



Table 1. Economic structure of SAFTA member countries, 2004 Characteristics

Bangladesh Bhutan India

Maldives Nepal

Pakistan Sri Lanka

Agriculture, value added (% of GDP)

21.04

33.23a

21.13

NA

40.28

22.35

17.81

Industry, value added (% of GDP)

26.60

39.47a

27.15

NA

23.04

24.93

26.79

Fertility rate (total live births per woman)

2.99

4.18

2.88

4.11

3.54

4.31

1.94

Foreign direct investment, net inflows (% of GDP)

0.79

0.15

0.77

1.95

0.26a

1.16

1.26

GDP growth (annual %)

6.27

4.90

6.90

10.81

3.47

6.38

5.36

Infant mortality rate (per 1,000 live births)

56.40

67.40

61.60

35.40

58.60

80.20

12.00

Population aged 0-14 (% of total)

35.91

38.93

32.49

41.32

39.49

38.86

24.45

Population aged 15-64 (% of total)

60.53

56.52

62.32

55.22

56.89

57.32

68.42

Population aged 65 and older (% of total)

3.32

4.11

5.03

3.83

3.78

3.32

6.50

Rural population (% of total population)

75.37

91.17

71.47

70.73

84.58

65.54

78.95

Gross saving (% of GDP)

30.56

NA

22.87

36.04

26.80

23.05

18.63

Source: World Bank, World Bank Development Indicators, available at: , accessed in September 2006. a

Figures for the year 2003.

Trade: Trade in the SAFTA region is currently low. There are reasons for lower intraSAFTA trade. Most of the SAFTA member countries have a lower trade-GDP ratio and have initiated external sector liberalization (that is, bringing down tariff barriers), starting only in the 1990s. A large number of NTBs currently exist in the region. These NTBs include antidumping measures, procedural requirements, sanitary and phytosanitary standards, certification and technical standards (Banik, 2001). The encouraging point is that most of these economies have started to open up and have also registered healthy GDP growth. During the period 2003-2004, all SAFTA countries, except Nepal, witnessed strong economic growth 146



in the range of 5-9 per cent as well as 4-5 per cent per capita GDP growth. As McCombie and Thirlwall (1997) and Paulino and Thirlwall (2004) pointed out, robust economic growth encourages a more liberalized trade regime. With a similar export profile, trading partners are better off with less restrictions. Because countries in the SAFTA region share a similar export profile they also face the same types of NTBs; hence, they share a similar negotiating stance for removing these barriers. Recent trade data suggest that intra-SAFTA trade is on the rise. Most of the Governments in SAFTA are undertaking considerable external sector liberalization (ESCAP, 2006). Therefore, there are indications that the currently low level of intra-SAFTA trade is likely to flourish in the future. Symmetry in economic activity: South Asian countries exhibit symmetric economic activity (Banik, Biswas and Saunders, 2006). Symmetric economic activity implies that longrun movements in real output are synchronized. Such co-movements of outputs may be due to the dependence of common factors such as geographical proximity and similar industrial profile. When countries share a similar industrial profile and are located closely, then the demand shocks in one country may affect other countries in the region. This could also arise if these economies all share a common trade linkage with major import markets. For example, if all of these countries engage in trade with the European Union, then changes in the European Union’s economic performance would have a similar effect on all the countries concerned and cause them to behave synchronously. In this case, economic trends would become more similar because all the sectors and therefore all the countries would be affected in a similar way. Another reason for the presence of common economic trends and hence co-movements of output could be explained through intra-industry trade. As far as the trade structure is representative of the output structure, the cycles should become more synchronized because they would be affected by common shocks. This is the argument of Kenen (1969) who stated that when countries trade in similar commodities, this increases the synchronicity of their output. Countries in South Asia in general have a similar export profile. Symmetry in economic activity also implies that there is a lesser contradiction in terms of formulating internal and external macroeconomic policies. In fact, this aforementioned economic characteristic of South Asian countries will enable them to go beyond the FTA framework and work for deeper economic integration, such as forming a common market and economic union.

5. Challenges The challenges in the way of deeper economic integration in South Asia arise from the fact that currently there exists a lack of complementarities in tradable items produced in this region. Despite reforms in the external sector, trade among South Asian countries is still restrictive, especially considering the sectors where opportunities for trade exist (Ghani and Din, 2006). The comparative advantage of these countries lies in the low technology intensive items such as agricultural products, leather footwear, textile and clothing. As the level of economic development in some regions, such as Nepal ($241) and Bangladesh ($395), is still low, the proportion of income spent on differentiated products is less and intra-industry trade has yet to pick up. Besides, India share a porous border with Bangladesh and Pakistan, giving rise to a considerable amount of cross-border smuggling. In addition, further inroads towards 147



smoother functioning of SAFTA are not being made, as the current framework does not cover trade in services. Unfortunately, no comprehensive economic cooperation agreement (CECA) exists between India and any of its South Asian neighbours that will allow trade in services to pick up in this area. Coming up with a CECA is necessary in view of the fact that about 50 per cent of the value added to South Asian GDP originates from the services sector.

6. Conclusion As is evident from the above discussion, the SAFTA region has many characteristics for sustaining a successful FTA. We based our analysis on a few economic criteria. In general, we found that there are favourable indications for the SAFTA economies to flourish into a successful RTA. In fact, South Asian countries have many characteristics that would enable them to go beyond the FTA framework and work for deeper economic integration, such as the formation of a common market and economic union. However, this would be conditional upon working on the current challenges facing South Asian countries. Formation of an FTA would be expected to create relative advantages for the member countries. Greater economic cooperation among SAFTA members holds important implications in the form of a larger market, economies of scale in production and improved resource allocation.

148



REFERENCES Agosin, M. (1991). Trade Policy Reform and Economic Performance: a Review of the Issues and Some Preliminary Evidence, UNCTAD Discussion Papers, No. 41 (Geneva, UNCTAD). Banik, N., B. Biswas and P. Saunders (2006). “An optimum currency area in South Asia: is it plausible?”, Journal of World Trade, vol. 40, pp. 387-405. Banik, N. (2001). “An analysis of India's exports during the nineties”, Economic and Political Weekly, 3 November, pp. 4222-4230. Chuang, C. (1998). “Learning by doing, the technology gap, and growth”, International Economic Review, vol. 39, pp. 697-721. ESCAP (2006), Economic and Social Survey of Asia and the Pacific 2006 - Energizing the Global Economy, ST/ESCAP/2396, United Nations publication, Sales No. E.06.II.F.10, pp. 102-119, available at <www.unescap.org/pdd/publications/ survey2006/13-sv06-chap2-SE.pdf>. Feder, G. (1983). “On exports and economic growth”, Journal of Development Economics, vol. 12, pp. 59-73. Frankel, J.A. (1997). Regional Trading Blocs in the World Trading System (Washington D.C., Institute of International Economics). Ghani, E. and M. Din. (2006). Regional Trade Integration in South Asia: Rationale, Impediment and the Way Forward, ARTNeT Policy Brief No. 7, July, available at <www.unescap.org/tid/artnet/pub/polbrief7.pdf >. Helpman, E. and P. Krugman (1985). Increasing Returns, Imperfect Competition, and International Trade (Cambridge, MIT Press). Kenen, P. (1969). “The theory of optimum currency areas: an eclectic view” in R. Mundell and A. Swoboda, eds., Monetary Problems of the International Economy (Chicago, University of Chicago Press). Kohli, U. (1991). Technology Duality and Foreign Trade (Ann Arbor, University of Michigan Press). Leamer, E. (1984). Sources of Comparative Advantage: Theory and Evidence (Cambridge, MIT Press). Linneman, H. (1966). An Econometric Study of International Trade Flows (Amsterdam, North Holland). McCombie, J. and A.P. Thirlwall (1997). “The dynamic foreign trade multiplier and the demand oriented approach to economic growth: an evaluation”, International Review of Applied Economics, vol. 11, pp. 5-26. 149



Paulino, A. and A.P. Thirlwall (2004). “The impact of trade liberalization on exports, imports and the balance of payments of developing countries”, The Economic Journal, vol. 114, pp. 50-72.

150

Executive Summaries of Recent Studies on Trade and Investment Published by the ESCAP Secretariat




152



An Exploration of the Need for and Cost of Selected Trade Facilitation Measures in Asia and the Pacific in the Context of the WTO Negotiations

T

he first meeting of the Negotiating Group on Trade Facilitation (NGTF) held in November 2004 highlighted the necessity of identifying trade facilitation needs and priorities of developing countries and the least developed countries (LDCs). It also recognized the need to address the concerns of those countries as they related to the cost implications of proposed measures and in terms of special and differential treatment.1 In that context, the ESCAP Study on Trade and Investment No. 57 presents the findings and results of an exploratory study undertaken by the Asia-Pacific Research and Training Network on Trade (ARTNeT) on the need for and costs of implementation of selected trade facilitation measures related to GATT Articles V, VIII and X. The publication draws from six ARTNeT working papers issued between January and April 2006, including five country case studies that may be accessed at <www.artnetontrade.org>. Case studies on the implementation of trade facilitation measures in Bangladesh, China, India, Indonesia and Nepal reveal that continuous unilateral efforts have been made by the Governments of these countries to facilitate trade, although countries are often at very different stages of implementation. In many countries, various trade facilitation systems and measures have been implemented at selected border crossings or customs offices on a pilot basis, with plans to expand the systems, as resources become available, to all border crossings and relevant agencies. However, it is often unclear when these systems will be implemented on a national scale and to what extent rules and regulations will be implemented uniformly throughout each country’s territory. According to a review of existing legislation/regulations and ongoing projects and programmes often supplemented by interviews with government officials, many of the trade facilitation measures being discussed at the WTO Negotiating Group on Trade Facilitation have been at least partially implemented. The domestic private sector in these countries, on the other hand, generally point to a need for improvement in many areas. For example, the private sector often acknowledges that relevant trade information is published and available 1

153



but points to the need to make the information more easily available, in particular information on new or amended rules. Elimination of bribery and other corrupt practices of officials involved in the clearance and release of imported goods is given top priority by the private sector in all countries. Improvement of coordination between relevant agencies, particularly on documentation requirements (e.g., through the establishment of a single window for one-time submission and collection of trade documents) is also given very high priority in all the countries. Timely and comprehensive publication and dissemination of trade rules and regulations (e.g., through the Internet) is the highest priority in Indonesia and Nepal, while reduction and simplification of the documentation requirements for import/export is the highest priority in Bangladesh. Customs valuation, which is not part of the current WTO trade facilitation negotiation agenda, was the most problematic trade facilitation related area identified by the private sector in the five countries. In addition to the need and priorities of private sector stakeholders, the costs and benefits to Governments of implementing trade facilitation measures will also be considered when selecting measures to be included in the agreement. The trade research and policy literature has dwelled extensively on the benefits associated with trade facilitation. Unfortunately, very little information is available on the cost of implementing selected trade facilitation measures discussed at WTO, an issue included in the work agenda of the WTO Negotiating Group on Trade Facilitation. The international expert survey on the costs and benefits of selected trade facilitation measures, undertaken as part of the study, showed that, while long-term savings were expected to exceed costs for all measures, the initial set up costs of some of the measures could be expected to be quite high relative to the others. The cost difference between measures was mainly explained by the underlying political costs (i.e., extent to which measures might be resisted by staff members within relevant institutions; or by policymakers because of fears of losing the political support they need) and infrastructure/equipment costs. Since most of the trade facilitation measures on the negotiating table have been implemented or are planned for implementation even in the least developed countries in the region, the list of trade facilitation measures agreed upon will be less important than the accompanying terms and conditions for implementation, e.g., schedule of implementation for developing countries and technical assistance. Negotiation of an agreement on trade facilitation provides an opportunity for pushing potentially difficult regulatory reforms at home through binding commitments on small, simple but highly meaningful administrative procedures, e.g., the 30-day standard time period between the publication and implementation of regulations, the establishment of formal channels of communication with the private sector on trade facilitation issues (e.g., establishment of an inclusive national trade facilitation committee), the alignment of trade documents with specific international standards, or even an agreement to reduce the number of trade documents to a specified number (by a given date, as necessary). Agreement on measures to enhance transparency and impartiality, such as an independent system to appeal or double-check rulings on tariff classification, should be given serious 154



consideration as a result of the priority accorded by the private sector to the reduction/ elimination of corruption – “tariff classification” ranked as the second most problematic issue in the survey. Another matter that could be considered is the notification to WTO of an official webpage with a negotiated basic list of information and publications, and a complete and official list of all existing fees and charges (possibly developed in cooperation with the local chamber of commerce and/or with the support of relevant international organizations). As the ongoing unilateral trade facilitation efforts in the country studies suggest, implementation of trade facilitation measures has no downside for Governments, as it does not result in loss of customs revenue, even if trade flows remain the same. The findings on implementation costs, as well as a significant number of anecdotal evidence from inside and outside the Asia-Pacific region, also suggest that setup and operating costs are dwarfed by long-term savings. As such, special and differential treatment is only needed to shield developing countries from dispute settlement until they secure the resources and build the capacity necessary to implement trade facilitation measures. The types of costs associated with various measures may affect the type of special and differential treatment needed. Measures with high political costs may require differential treatment in terms of time of implementation. Measures with high infrastructure-related costs may require exemption until technical assistance has been received and capacity to implement has been acquired. An agreement on trade facilitation with non-binding commitments would make little sense in the context of WTO, especially since there are already a number of relatively comprehensive non-binding international conventions on trade facilitation, notably the Revised Kyoto Convention of the World Customs Organization. One essential benefit from negotiating on trade facilitation at WTO would be to agree on a possibly very small but nonetheless existing set of trade facilitation measures to be implemented by all WTO member countries. The fact that customs valuation (and sanitary and phytosanitary/technical barriers to trade) ranks as the most problematic issue(s) in all countries studied, especially some years after the WTO Customs Valuation Agreement (and of the sanitary and phytosanitary and technical barriers to trade agreements) was implemented, is an important signal to the Geneva negotiators of the discrepancies that may emerge between an agreement and its implementation in the area of trade facilitation. As such, it may be better to be less ambitious in the number of trade facilitation measures to be implemented, but more detailed in defining how compliance will be monitored and, importantly for LDCs, what technical assistance will be provided. The publication is available online in English at: <www.unescap.org/tid/publication/ tipub2426.asp>.

155




156



GUIDELINES FOR AUTHORS Articles should present issues and findings in an analytical but yet non-technical manner. The Review emphasizes policy relevance and operational aspects of trade and investment, rather than theoretical and methodological issues. Articles submitted to the journal should be original contributions and not be under consideration by any other publication. Articles will be subject to refereeing; efforts will be made to send the reviewers’ comments to authors within four weeks of an article’s submission. Articles should be submitted in English. Each article should be between 4,000 and 7,000 words in length and should be accompanied by an executive summary of 400 to 450 words. Articles are expected to be clear, concise and easy to follow. The use of headings and subheadings is encouraged to provide structure to the paper. Manuscripts must be typed double-spaced according to the following format: 1. The first page should contain the title of the article, author’s name and affiliation, complete mailing and e-mail addresses, and a suggested header (abbreviated form of the title). The author’s name or affiliation should not appear in subsequent pages. 2. The second page should contain an executive summary of 400-450 words, and a list of key words. 3. References, tables and figures should be placed on separate pages at the end of the manuscript and should be properly numbered. There should be an indication in the text where the author would prefer to have each table and figure inserted. 4. Figures should be provided in camera-ready format. 5. References in the text should follow the last name of the author-date format (e.g., Johnson, 2004). References in the reference list at the end of the article should be typed according to the following formats: Anderson, K. and R. Garnaut (1987). Australian Protectionism: Extent, Causes and Effects (Sydney, Australia, Allen and Unwin). Loungani, P. (2001). “How beneficial is foreign direct investment for developing countries?”, Finance and Development, vol. 38, No. 2, pp. 1-21. Balwin, R.E. (1971). “Determinants of the commodity structure of U.S. trade”, The American Economic Review, vol. 61, pp. 126-146. Lall, Sanjaya (1997). Attracting Foreign Investment: New Trends, Sources and Policies, Economic Paper No. 31 (Commonwealth Secretariat). Bosworth, B.P. and S.M. Collins (1999). “Capital flows to developing economies: implications for saving and investment”, Brookings Papers on Economic Activity, Spring. 157



Krugman, P. (2002). “Fire-Sale FDI”, Massachusetts Institute of Technology, , 5 September. 6. References in footnotes should follow the author-date format (e.g., Johnson, 2004), with full references included in the reference list at the end of the paper as in point 5 above. The reference list should be entitled “REFERENCES”. Electronic submissions are preferred and should be sent as an e-mail attachment in MS Word format to: [email protected]. Alternatively, articles may be sent by post, in duplicate, together with a soft copy [diskette or CD] to: Managing Editor Asia-Pacific Trade and Investment Review Trade and Investment Division ESCAP United Nations Building Rajadamnern Nok Avenue Bangkok 10200 Thailand

158

READERSHIP SURVEY Asia-Pacific Trade and Investment Review Vol. 2, No. 2, December 2006 The Trade and Investment Division of UNESCAP is undertaking an evaluation of the above publication with a view to improving its quality and usefulness. We would appreciate it if you could complete this questionnaire and return it to us, at the address printed below.

QUESTIONNAIRE Rating for quality and usefulness Excellent Very good (please circle) 1. How useful is this publication for your work? ● Provision of information 4 3 ● Clarification of issues 4 3 ● Findings 4 3 ● Policy suggestions 4 3 ● Overall usefulness 4 3

Good

Poor

2 2 2 2 2

1 1 1 1 1

2. Please indicate your assessment of the quality of this publication with respect to: ● Presentation/format 4 3 2 1 ● Readability 4 3 2 1 ● Coverage of subject matter 4 3 2 1 ● Timeliness 4 3 2 1 ● Overall quality 4 3 2 1 3. Suggestions for improvement of the publication: .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... ..........................................................................................................................................

✁

4. Your background information, please: Name: ............................................................................................................................... Title/position: ................................................................................................................... Institution: ........................................................................................................................ Office address: ................................................................................................................. Tel:..............................................................Fax:............................................................... Email:................................................................................................................................

Please return this questionnaire to: Chief Editor Asia-Pacific Trade and Investment Review Trade and Investment Division ESCAP United Nations Building Rajadamnern Nok Avenue Bangkok 10200 THAILAND Fax: (66 2) 288 1026, 288 1027 Thank you for your cooperation.


ASIA-PACIFIC TRADE AND INVESTMENT REVIEW Call for Papers The Asia-Pacific Trade and Investment Review, a refereed journal published by the United Nations Economic and Social Commission for Asia and the Pacific since 2005, is seeking submissions for its May 2007 issue, vol. 3, No. 1. Articles should have clear trade and investment policy relevance and should be pertinent to the Asian and Pacific region (including Central Asia). The submission of articles on national best practices with the potential for replication in other countries, or articles presenting regional comparative analyses and their implications are particularly welcome. We are looking for articles featuring new, innovative or insightful information with clear trade and investment policy relevance. Areas of interest include: ●

●

●

●

●

Trade and/or investment facilitation and promotion Doha Development Agenda: postCancun issues Regional vs. multilateral trade agreements Best practices on building supply-side capacity for trade Trade and ICT, including e-trade and ecommerce issues and best practices

●

●

●

●

●

Regional mechanisms for financing trade and investment Trade and the Millennium Development Goals Social and environmental aspects of trade and investment Small and medium-sized enterprise development and participation in international trade Export competitiveness

Articles submitted to the Review should be original contributions and should not be under consideration by any other publication. Articles will be subject to refereeing; efforts will be made to send the reviewers’ comments to authors within four weeks of an article’s submission. Articles should be submitted in English. Each article should be between 4,000 and 7,000 words in length and accompanied by an executive summary of 400 to 450 words. Electronic submissions are preferred and should be sent as an e-mail attachment in MS Word format to: [email protected]. Alternatively, articles can be sent by post, in duplicate, together with a soft copy in a diskette to the Managing Editor, Asia-Pacific Trade and Investment Review, Trade and Investment Division, ESCAP, United Nations Building, Rajadamnern Nok Avenue, Bangkok 10200, Thailand. For details, please visit:

<www.unescap.org/tid/aptir.asp>

Asia-Pacific Trade and Investment Review, December 2006

Turkey: A Business and Investment Review (Business & Investment Review)

World investment Report 2006

Popular Science (December 2006)

Investment Policy Review: Kenya

Investment Policy Review: Rwanda

Investment Policy Review: Zambia

Monthly Review - December 2006, Volume 58 — Number 7

Trade and Investment Rules for Energy

Trade, Investment and Competition in International Banking

Harvard Business Review - December 2009

Asia-pacific Trade and Investment Review, 2008 (Economic and Social Commission for Asia and the Pacific)

Russia During President Putin's Second Term: A Business and Investment Review (Business & Investment Review)

Kazakhstan's Dynamic Economy: A Business and Investment Review (Business & Investment Review)

Ukraine Since the Orange Revolution: A Business and Investment Review (Business & Investment Review)

Ukraine energy policy review 2006

Review of Maritime Transport 2006

Trig Review (2006)(en)(98s)

Harvard Business Review January 2006

International Accounting and Reporting Issues: 2006 Review

World Trade: Cancun, Hong Kong and Beyond: A Review of Current Wto Regulations and Practice (Business & Investment Review)

Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking

Asia-Pacific Trade and Investment Review, Vol. 3 No. 1 (June 2007)

Asia-Pacific Trade and Investment Review, Vol. 1 No. 2 (November 2005)

Asia-Pacific Development Journal, December 2006

EU investment grants review, Volumes 23-435

Role of Regional Cooperation: Business Sector Development and South-South Investment (Studies in Trade and Investment)

Building Trade Partnerships in Eastern Europe, the Caucasus, and Central Asia (Trade and Investment Guides)

Trade Mark Protection, Public Health and International Investment Law

International Trade Theory: A Critical Review

Cato Supreme Court Review, 2005-2006 (Cato Supreme Court Review)

Asia-Pacific Trade and Investment Review, December 2006

Turkey: A Business and Investment Review (Business & Investment Review)

World investment Report 2006

Popular Science (December 2006)

Investment Policy Review: Kenya

Investment Policy Review: Rwanda

Investment Policy Review: Zambia

Monthly Review - December 2006, Volume 58 — Number 7

Trade and Investment Rules for Energy

Trade, Investment and Competition in International Banking

Harvard Business Review - December 2009

Asia-pacific Trade and Investment Review, 2008 (Economic and Social Commission for Asia and the Pacific)

Russia During President Putin's Second Term: A Business and Investment Review (Business & Investment Review)

Kazakhstan's Dynamic Economy: A Business and Investment Review (Business & Investment Review)

Ukraine Since the Orange Revolution: A Business and Investment Review (Business & Investment Review)

Ukraine energy policy review 2006

Review of Maritime Transport 2006

Trig Review (2006)(en)(98s)

Harvard Business Review January 2006

International Accounting and Reporting Issues: 2006 Review

World Trade: Cancun, Hong Kong and Beyond: A Review of Current Wto Regulations and Practice (Business & Investment Review)

Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking

Asia-Pacific Trade and Investment Review, Vol. 3 No. 1 (June 2007)

Asia-Pacific Trade and Investment Review, Vol. 1 No. 2 (November 2005)

Asia-Pacific Development Journal, December 2006

EU investment grants review, Volumes 23-435

Role of Regional Cooperation: Business Sector Development and South-South Investment (Studies in Trade and Investment)

Building Trade Partnerships in Eastern Europe, the Caucasus, and Central Asia (Trade and Investment Guides)

Trade Mark Protection, Public Health and International Investment Law

International Trade Theory: A Critical Review

Cato Supreme Court Review, 2005-2006 (Cato Supreme Court Review)

Recommend Documents