Free Trade Agreements in the Asia Pacific (World Scientific Studies in International Economics)

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World Scientific Studies in International Economics (ISSN: 1793-3641) Series Editor Robert M. Stern, University of Michigan, USA Editorial Board Vinod K. Aggarwal, University of California-Berkeley, USA Alan Deardorff, University of Michigan, USA Paul DeGrauwe, Katholieke Universiteit Leuven, Belgium Barry Eichengreen, University of California-Berkeley, USA Mitsuhiro Fukao, Keio University, Tokyo, Japan Robert L. Howse, University of Michigan, USA Keith E. Maskus, University of Colorado, USA Arvind Panagariya, Columbia University, USA Published* Vol. 4

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edited by

Christopher Findlay University of Adelaide, Australia

Shujiro Urata Waseda University, Japan

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Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

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FREE TRADE AGREEMENTS IN THE ASIA PACIFIC World Scientific Studies in International Economics — Vol. 11 Copyright © 2010 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher.

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PREFACE In recent years, there has been a rapid increase in the number of free trade agreements (FTAs). Concluded throughout the world, these FTAs occupy a dominant position in the international trade regime. While FTAs expand the level of trade between member countries, they are likely to divert and reduce trade with non-members, thereby affecting the economies of both member and non-member countries. This research, conducted by the FTA Study Group at the Research Institute of Economy, Trade and Industry (RIETI) in fiscal years 2006 and 2007, examined major FTAs in the world to analyse their impact on trade and domestic economies. The method used consisted of pre-FTA analysis of data from the period prior to the establishment of an FTA, and post-FTA analysis based on actual observed data. As for Japan’s FTAs, the project also analysed the utilisation rate of the FTAs by Japanese firms. The results obtained from these analyses have served to identify areas of necessary improvement in individual FTAs, while also providing useful information for the design of future FTAs. We are very pleased to see the publication of this research in book form, as this will allow a broader international audience to access the valuable results of this research. This research project was led by Professor Urata Shujiro, Faculty Fellow of RIETI and Professor of the Graduate School of Asia-Pacific Studies, Waseda University. I believe the unique organisational support provided by RIETI is indispensable to this type of research project that involves the gathering of long-term economic and trade-related data on a global scale. RIETI was established in 2001 by the Ministry of Economy, Trade and Industry as a new policy-making platform aimed at promoting the link between academia and politics. While maintaining a certain degree of independence from government agencies, RIETI makes the best use of its location in the Kasumigaseki district in central Tokyo — the heart of Japanese politics and economics — to bring together policy makers, v

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industry leaders, academic experts, and eminent researchers from Japan and overseas. For the five-year medium-term plan between 2006–2010, RIETI has set up the following four major policy research domains as an overarching framework of research themes in which individual researchers and study groups are freely engaged in research activities: (i) Maintaining Economic Dynamism under the Adverse Demographic Conditions of Low Fertility and Aging Population, (ii) Promoting Innovation and Strengthening International Competitiveness, (iii) Formulating Japan’s Strategy in Response to Globalization and Deepening Economic Interdependence in Asia, and (iv) Compilation of the History of Japan’s Trade and Industry Policy. To undertake these research projects, it is crucial to enlist a diverse array of experts to systematically examine research themes, gather and structure essential data, and form networks of researchers including those based overseas. In its role as a policy-making platform, RIETI has its greatest strength in such inter-organizational research. As Chairman of RIETI, I extend my thanks to Professors Urata and Findlay, the editors of this publication, as well as to the members of the FTA Study Group and contributors to this volume. In March 2007, the Group played a key role in organising a RIETI Policy Symposium entitled “Assessing Quality and Impacts of Major Free Trade Agreements”. I take this opportunity to note that the comments and suggestions received from the participants of the symposium were very useful in deepening the research in this project. Last but not least, I extend my thanks to the RIETI staff whose hard work facilitated the smooth progress of this research project, and to the staff members of World Scientific Publishing Co., Pte. Ltd, the publisher of this volume. Oikawa Kozo, Chairman Research Institute of Economy, Trade and Industry, IAA

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CONTENTS

Preface

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Overview

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1. Rules of Origin and Agricultural Trade Liberalisation in Major Free Trade Agreements

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I. Cheong and J. Cho 1. Introduction . . . . . . . . . . . . . . . . . . . . . 2. Descriptive Overviews of ROO . . . . . . . . . . 2.1. Theoretical survey on ROO . . . . . . . . . 2.2. Descriptive analysis of ROO in major FTAs 2.2.1. ROOs in the US and EU FTAs . . . 2.2.2. ROOs in East Asian FTAs . . . . . . 3. Empirical Assessment of ROOs . . . . . . . . . . 3.1. Analysis on index components . . . . . . . . 3.2. Assessment of restrictiveness of ROO . . . . 3.2.1. Existing studies . . . . . . . . . . . . 3.2.2. Restrictiveness of ROO in FTAs by Japan and Korea . . . . . . . . . . . 4. Agricultural Liberalisation in Major FTAs . . . . 4.1. FTAs by Western countries . . . . . . . . . 4.2. FTAs by Japan and Korea . . . . . . . . . . 4.3. ASEAN–China FTA . . . . . . . . . . . . . 5. Conclusion . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . .

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2. Services in Free Trade Agreements

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R. Ochiai, P. Dee and C. Findlay 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . 2. Form and Content . . . . . . . . . . . . . . . . . . . . 2.1. Regional characteristics of form . . . . . . . . . . 2.2. Negative-list versus positive-list approach — Contents . . . . . . . . . . . . . . . 2.3. The GATS template versus the NAFTA template 3. Domestic Regulation . . . . . . . . . . . . . . . . . . . 4. Market Access and National Treatment . . . . . . . . 5. Comparison Between Bilateral and Multiple Member Agreements . . . . . . . . . . . . . . . . . . . . . . . . 6. Rules of Origin . . . . . . . . . . . . . . . . . . . . . . 7. Overall Evaluation on Liberalisation . . . . . . . . . . 8. Summary . . . . . . . . . . . . . . . . . . . . . . . . . Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . .

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3. Analysis of the Restrictions on Foreign Direct Investment in Free TradeAgreements

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S. Urata and J. Sasuya 1. Introduction . . . . . . . . . . . . . . 2. Methodology . . . . . . . . . . . . . 3. Results and Discussion . . . . . . . . 3.1. Degrees of restrictions . . . . . 3.2. Assessment by country . . . . . 3.3. Types of restrictive measures . 3.4. Restrictions on different sectors 4. Concluding Remarks . . . . . . . . . Appendix . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . .

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4. A Comparison of the Safeguard Mechanisms of Free Trade Agreements

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A. Kotera and T. Kitamura 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . 2. Bilateral and Regional Safeguard Mechanisms . . . . . . 2.1. The basic idea and structure of safeguard mechanisms . . . . . . . . . . . . . . . . . . . . . . 2.2. The intrinsic nature of bilateral and regional safeguard mechanisms . . . . . . . . . . . . . . . . 2.3. Analysis and evaluation of the selected safeguard mechanisms . . . . . . . . . . . . . . . . 2.3.1. Indicators for analysis and their descriptions 2.4. Analysis of the selected bilateral and regional safeguard mechanisms . . . . . . . . . . . . . . . . 2.4.1. NAFTA . . . . . . . . . . . . . . . . . . . . 2.4.2. EFTA . . . . . . . . . . . . . . . . . . . . . 2.4.3. AFTA . . . . . . . . . . . . . . . . . . . . . 2.4.4. EC–Mexico . . . . . . . . . . . . . . . . . . 2.4.5. Australia–New Zealand . . . . . . . . . . . 2.4.6. US–Singapore . . . . . . . . . . . . . . . . 2.4.7. US–Australia . . . . . . . . . . . . . . . . . 2.4.8. Japan–Mexico . . . . . . . . . . . . . . . . 2.4.9. Japan–Singapore . . . . . . . . . . . . . . . 2.4.10. Korea–Chile . . . . . . . . . . . . . . . . . 2.4.11. Korea–Singapore . . . . . . . . . . . . . . . 2.4.12. China–ASEAN . . . . . . . . . . . . . . . . 3. Classification of the Selected Bilateral and Regional Safeguard Mechanisms . . . . . . . . . . . . . . . . . . . 3.1. No general safeguard type . . . . . . . . . . . . . . 3.2. Quasi-global safeguard type . . . . . . . . . . . . . 3.2.1. WTO type . . . . . . . . . . . . . . . . . . . 3.2.2. GATT type . . . . . . . . . . . . . . . . . . 3.2.3. NAFTA type . . . . . . . . . . . . . . . . . 3.2.4. European type . . . . . . . . . . . . . . . . . 4. Final Remarks . . . . . . . . . . . . . . . . . . . . . . . Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . .

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5. Assessing the Economic Impacts of Free Trade Agreements: A Computable Equilibrium Model Approach

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K. Abe 1. The Theoretical Framework and the Simulation Model Adopted . . . . . . . . . . . . . . . . . . . . . . 1.1. Surveys on the impacts of an FTA . . . . . . . . 1.1.1. Welfare decomposition of efficiency improvement . . . . . . . . . . . . . . . . . 1.2. Location effects and regional disparity . . . . . . 1.3. Other dynamic effects of an FTA on economic growth and welfare . . . . . . . . . . . . . . . . . 1.4. Framework of the adopted simulation model . . . 1.4.1. Computable equilibrium models and their advantage . . . . . . . . . . . . . . . . . . 1.5. Accumulation effect measured by a CGE model . 1.6. The global trade analysis project model . . . . . 1.7. The plan for simulations in this paper . . . . . . 2. The Simulations of Japan’s Existing and Future Bilateral FTAs . . . . . . . . . . . . . . . . . . . . . . 2.1. Trade and tariff structures of the three countries of Japan’s existing FTAs . . . . . . . . 2.2. Details of simulations and technical assumptions 2.3. Macroeconomic impacts . . . . . . . . . . . . . . 2.4. Impacts on sectors . . . . . . . . . . . . . . . . . 3. Simulations of the Future Scenarios of Japan’s FTAs . 3.1. Static simulation . . . . . . . . . . . . . . . . . . 3.2. Results of static simulation . . . . . . . . . . . . 3.3. Dynamic simulations: Model structures and assumptions . . . . . . . . . . . . . . . . . . 3.4. Results of dynamic simulation: Baseline scenario 3.5. Alternative scenarios: Expediting formation of Japan’s FTAs . . . . . . . . . . . . . . . . . . 3.6. Alternative scenarios: An FTA with the United States and liberalising agriculture . . . . 4. Implications of the Study and Remaining Research Issues . . . . . . . . . . . . . . . . . . . . . . 4.1. Implications of the study . . . . . . . . . . . . . . 4.2. Remaining research issues . . . . . . . . . . . . .

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Appendix 1: Simplified Framework for Welfare Analysis Appendix 2: Baldwin Dynamic Specification . . . . . . Appendix 3: Sector and Region Aggregation . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . .

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6. The Impacts of Free Trade Agreements on Trade Flows: An Application of the Gravity Model Approach

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S. Urata and M. Okabe 1. Introduction . . . . . . . . . . . . . . . . . . . . . 2. Intra-FTA Trade Dependency for Selected FTAs 3. The Impacts of FTAs on Bilateral Trade Flows: An Application of the Gravity Model . . . . . . . 3.1. Brief survey of the literature . . . . . . . . . 3.2. The model and the estimated results . . . . 3.2.1. Analysis of general FTA effects . . . 3.2.2. Analysis of trade creation and trade diversion effects . . . . . . . . . . . . 3.2.3. Analysis of selected products . . . . . 4. Concluding Remarks . . . . . . . . . . . . . . . . Appendix: Description of the Data . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . .

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7. On the Use of Free Trade Agreements by Japanese Firms

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K. Takahashi and S. Urata 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . 2. Use of FTAs by Japanese Firms: Survey Results . . . 2.1. Questionnaire . . . . . . . . . . . . . . . . . . . . 2.2. Utilisation rate of FTAs . . . . . . . . . . . . . . 2.3. Reasons for low utilisation rate . . . . . . . . . . 2.4. Impacts of FTAs on Japanese companies . . . . . 2.5. Attractive FTA partners . . . . . . . . . . . . . . 3. Determinants of the Use of FTAs: An Application of the Probit Model . . . . . . . . . . . . . . . . . . . 4. Concluding Remarks . . . . . . . . . . . . . . . . . . . Appendix: Characteristics of Questionnaire Respondents References . . . . . . . . . . . . . . . . . . . . . . . . . .

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8. Impacts of Japanese FTAs/EPAs: Preliminary Post Evaluation

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M. Ando 1. Introduction . . . . . . . . . . . . . . . . . . . . . . 2. Trade and FDI with EPA Partners . . . . . . . . . 2.1. Overview . . . . . . . . . . . . . . . . . . . . 2.2. Sectoral issues in Japanese trade with Mexico 2.2.1. Japanese exports to Mexico . . . . . . 2.2.2. Japanese imports from Mexico . . . . . 2.3. Gravity model estimation of Japanese trade . 3. Effects of the Japan–Mexico EPA Beyond Trade Liberalisation . . . . . . . . . . . . . . . . . . . . . 3.1. Business environment . . . . . . . . . . . . . 3.2. Government procurement . . . . . . . . . . . 3.3. Logistics . . . . . . . . . . . . . . . . . . . . . 4. Conclusion . . . . . . . . . . . . . . . . . . . . . . Appendix . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . Index

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OVERVIEW CHRISTOPHER FINDLAY and SHUJIRO URATA

1. Free Trade Agreements in East Asia East Asia was late in joining the free trade agreement (FTA) frenzy. This book comprises a series of papers derived from a research project that assesses the quality and impact of the FTAs that the East Asian region entered into in the 21st century. This chapter reviews the recent developments of these FTAs, explains the motivation and scope of the research project, and summarises some key results.

1.1. Rapid expansion of FTAs Several regions in the world other than East Asia began to look at FTAs as a means of promoting trade liberalisation in the 1990s, when the Uruguay round of multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT) was making little progress. The strong interest in FTAs increased even more after the establishment of the World Trade Organization (WTO) in 1995, which succeeded the GATT with a more comprehensive coverage and stronger legal foundation, as the new multilateral trade negotiations (the Doha Development Agenda, DDA) under the WTO became deadlocked. Indeed, the cumulative number of FTAs reported to the GATT/WTO since 1949 increased from 86 in 1990 to 165 in 1995, to 251 in 2000, and to 394 as of 20 May 2008.1 1 The figure includes those FTAs that became inactive as well as those that are active. The figures were taken from the WTO’s Web site http://www.wto.org/english/tratop e/ region e/summary e.xls on 6 July 2008.

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xiv Table 1.

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Major FTAs involving East Asian economies (as of May 2008).

In Effect

In Negotiation

In Negotiation

Bangkok Treaty (1976) AFTA (1992) Singapore–NZ (2001) Japan–Singapore (2002) Singapore–Australia (2003) Singapore–EFTA (2003) Singapore–US (2004) Korea–Chile (2004) China–Hong Kong (2004) China–Macao (2004) Taiwan–Panama (2004) Singapore–Jordan (2004) Japan–Mexico (2005) China–ASEAN (2005) Thailand–Australia (2005) Thailand–NZ (2005) Singapore–India (2005) Korea–Singapore (2006) Japan–Malaysia (2006) Korea–EFTA (2006) Japan–Chile (2007) Japan–Thailand (2007) Singapore–India (2007) Singapore–Panama (2007) China–Chile (2007) China–NZ (2008) China–Pakistan (2008) Malaysia–Pakistan (2008)

Japan–Korea Japan–Philippines∗ Japan–ASEAN Japan–Indonesia† Japan–GCC Japan–Brunei† Japan–Vietnam Japan–India Japan–Australia Korea–US† Korea–Canada Korea–India Korea–Mexico Korea–EU Korea–ASEAN (ex. Thailand∗ ) China–Australia China–GCC China–SACUFTA China–Singapore Malaysia–Australia Malaysia–NZ Malaysia–US Singapore–Canada Singapore–Mexico Singapore–Egypt Singapore–Qatar Singapore–Peru Thailand–India†

Thailand–EFTA Thailand-Australia Thailand-US Hong Kong–NZ Taiwan-El Salvador Taiwan–Guatemala Taiwan–Nicaragua Taiwan–Paraguay

∗ Indicates

that treaty has been signed and is waiting for ratification by the legislative bodies. † Indicates that the negotiation has reached an agreement. Source: WTO; respective government sources.

The major agreements involving East Asian economies as of May 2008 are shown in Table 1.2 The ASEAN Free Trade Area (AFTA), 2 In the GATT/WTO, regional trade agreements (RTAs), which violate one of its basic principles of non-discrimination, are permitted under GATT Article XXIV with several conditions, which include liberalisation of substantially all the trade of the members, not increasing trade barriers on non-members, and completing the RTA process within 10 years. For developing members, more lenient conditions are applied under the enabling clause. An FTA is considered a shallow form of regional integration because it only removes tariff and non-tariff barriers among the members, while a customs union is a deeper integration as it adopts common external tariffs on non-members in addition to the removal of tariff and non-tariff barriers on trade among the members.

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which was established in 1992, was the only major FTA until Japan and Singapore enacted the Japan–Singapore FTA (formally, the New Age Japan–Singapore Economic Partnership Agreement, JSEPA) in 2002.3 However, as the table shows, the situation has changed dramatically in recent years and many countries in East Asia have formed FTAs with countries not only within but also outside the region. Members of ASEAN began the AFTA process in 1992 to make ASEAN a competitive region for exports and to attract foreign direct investment (FDI). The 1992 agreement provided for the liberalisation of tariff and nontariff measures under the Common Effective Preferential Tariffs. The target year for achieving tariff and non-tariff liberalisation was originally set for 2008, but then brought forward to 2002. The AFTA has been in effect among the original six ASEAN members — Brunei, Indonesia, Malaysia, Singapore, Thailand, and the Philippines — since January 2002, when the tariff rates were reduced to 0–5%, though the exclusion list is long and individual country circumstances vary. Vietnam was to comply with the same tariff standards by 2003, Laos and Myanmar by 2005, and Cambodia by 2007. By 2010 ASEAN is expected to become a complete free trade area with the exception of CLMV members (Cambodia, Laos, Myanmar, and Vietnam), which have been given later deadlines. FDI liberalisation in ASEAN has been underway since the creation of the ASEAN Investment Area (AIA) in 1998. This provides coordinated investment cooperation and facilitation programs, market access, and national treatment of all industries. However, some ASEAN members continue to maintain sizeable sensitive and exclusion lists from FDI liberalisation. In 2003 the ASEAN leaders agreed to set 2020 as the target year for the establishment of an ASEAN Community to be composed of the ASEAN Security Community, the ASEAN Economic Community, and the ASEAN Socio-Cultural Community. Under the ASEAN Economic Community, free flow of goods, services, investment, and capital is to be established. The target date for the establishment of an ASEAN Community has been brought forward to 2015. Besides AFTA, in recent years ASEAN as a group as well as its members individually have become active in FTA discussions with other countries. The FTA that has received the most attention recently is that between ASEAN and China. They enacted an FTA in the goods trade in July 2005 and are currently negotiating one in the services trade. ASEAN excluding 3 For

discussions on FTAs in East Asia, see for example, Aggarwal and Urata (2006), Urata (2005), Pangestu and Gooptu (2004), Soesastro (2006), and Sally (2006).

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Thailand enacted an FTA with Korea in July 2006 and has signed an agreement with Japan. Currently, ASEAN is negotiating FTAs with India, Australia–New Zealand, and CER (Closer Economic Relations) and the EU. Many ASEAN members have become active in establishing bilateral FTAs. Singapore has enacted FTAs with New Zealand, Japan, Australia, the US, the European Free Trade Association (EFTA), and India, and is negotiating with many other countries. Thailand has also been active in establishing FTAs, implementing them with Australia, New Zealand, and Japan and is currently negotiating with the US and others. Malaysia has enacted an FTA with Japan and begun negotiations with several economies, including the US. Indonesia has enacted and the Philippines has signed FTAs with Japan. In comparison, the economies in Northeast Asia, including China, Japan, Korea, and Taiwan, were not involved in FTA negotiations until the end of the 1990s. However, China, Japan, and Korea have now become very active. China has implemented FTAs with ASEAN, Hong Kong, and Macau, and is negotiating FTAs with over 20 countries. Japan has enacted FTAs with Singapore, Mexico, Malaysia, Chile, Thailand, and Indonesia, signed agreements with the Philippines, Brunei, and ASEAN, and is currently in negotiations with Australia, the Gulf Cooperation Council (GCC), Korea, and others. Korea has implemented FTAs with Chile, Singapore, the EFTA, and ASEAN, signed an agreement with the US, and is currently negotiating with the EU, Canada, India, and Mexico. While Taiwan has sought FTAs with many countries, political problems with China have precluded success and so it has only enacted FTAs, with some small countries in Central America such as Nicaragua and El Salvador. Unlike Europe or North America, both of which have established regionwide FTAs, East Asia has established only a number of bilateral and “mini-lateral” FTAs, with no region-wide agreements. Several ideas have been floated but differences in opinion among East Asian economies have prevented them from establishing a region-wide FTA. At the Leaders’ summit of ASEAN + 3 (China, Japan, and Korea) in 1998, the leaders set up the East Asia Vision Group to develop a long-term vision for economic cooperation. The group’s recommendations included the establishment of an East Asia FTA (EAFTA). The Expert Group set up at the recommendation of ASEAN + 3 Economic Ministers presented recommendations to the Economic Ministers in 2006 to start the process in 2007 towards the establishment of EAFTA. When these recommendations

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were not adopted, the Expert Group was asked to conduct further study. It has now begun phase two of the project. At the ASEAN+3 Economic Ministers’ meeting in 2006, Japan proposed a Comprehensive Economic Partnership in East Asia (CEPEA), which is an Economic Partnership Agreement including an FTA, covering ASEAN+ 3 + 3 (China, Korea, and Japan, plus India, Australia, and New Zealand) or the ASEAN + 6 group. The ASEAN + 6 economies are also members of the East Asian Summit, which was held for the first time in 2005. It has been argued that Japan’s strategy of taking a leadership role in setting up is a key factor in the CEPEA proposal, as it was China that took the initiative in the EAFTA discussions. A study group established to examine the feasibility of CEPEA submitted a report at the ASEAN + 6 Economic Ministers’ meeting in August 2008 (CEPEA, 2008). The US proposed an FTAAP, or Free Trade Area of the Asia Pacific, covering 21 APEC (Asia Pacific Economic Cooperation) member economies, at the APEC Leaders’ Meeting in 2006. It was agreed at the leaders’ meeting in 2007 to examine the prospects of FTAAP. Behind the US proposal is a concern that the US would be excluded from East Asia, resulting in a decline in its economic activities in the region. The differences in the membership between ASEAN+6 and APEC have important implications: Taiwan and Russia, important economic players, are included in FTAAP, while India, a member of ASEAN+6, is not. 1.2. Characteristics and motives of FTAs in East Asia Some FTAs in East Asia were planned to be comprehensive in coverage and were established as Economic Partnership Agreements (e.g., JSEPA), or Closer Economic Partnership Arrangements (CEPA) (e.g., the China– Hong Kong CEPA). These types of agreement include facilitation of foreign trade, liberalisation and facilitation of FDI, and economic and technical cooperation, in addition to trade liberalisation, which is included in traditional FTAs. In this respect, these new types of FTAs share coverage with the APEC forum, whose three pillars are (i) liberalisation, (ii) facilitation of foreign trade and foreign investment, and (iii) economic and technical cooperation. However, discrimination against non-members is an important differentiating factor of these agreements compared to APEC, which adopted the principle of non-discrimination. Economic assistance has been used to gain support for FTAs from the agreements’ partners

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by China and Japan, which are eager to play a leadership role in regional integration. The contents do differ among agreements, reflecting the different motives of the countries concerned. Japan emphasises the importance of liberalisation and facilitation of investment and the services trade because such measures provide a free, transparent, and stable business environment for Japanese firms, which have invested heavily in East Asia. In particular, Japan is interested in having well-functioning intellectual property rights protection. By contrast, developing countries such as ASEAN members and China do not have strong interests in these measures. Indeed, these countries have adopted a gradual and sequential approach by dealing with trade in goods and services and investment separately with different timing, liberalisation of trade in goods being followed by liberalisation in services trade and investment. Let us discuss the motives of East Asian countries in implementing FTA strategies. Despite the differences in their importance among the countries, various common motives can be identified. First, their rapid expansion in other regions has led East Asian economies to consider establishing FTAs to maintain and expand their export opportunities. These so-called “market-seeking” FTAs are largely defensive. A case in point is Japan’s FTA with Mexico. Japanese firms were in a disadvantageous position vis-` a-vis US or EU firms in the Mexican market because the US and the EU had FTAs with Mexico, under which their firms had duty-free access to that economy. Japanese firms pressured their government to negotiate an FTA with Mexico to overcome their disadvantage. A stalemate of the negotiations under the DDA under the WTO also turned the attention of WTO members to FTAs. The market access motive played a role among East Asian economies, as trade barriers remained substantial for many sectors in these economies. Second, countries interested in promoting structural domestic reform to achieve economic growth have tried to use FTAs as foreign pressure on the domestic opposition to structural reform. Promoting domestic reform was important for Korea in pursuing an FTA with the US, for example. Sandwiched between China, a rapidly catching-up economic giant, and Japan, another highly competitive economic giant, Korea introduced structural reforms to maintain and improve competitiveness. Third, rivalry among East Asian economies over the leadership role in the region has activated their FTA strategies. Both China and Japan, which are competing to become a leader in the region, are keen on using FTAs

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to strengthen their relationships with ASEAN, Korea, and other countries. Indeed, in November 2002, Japan proposed an economic partnership framework to ASEAN one day after China agreed to start FTA negotiations with ASEAN. ASEAN, Korea, and other countries also consider that FTAs provide a way to maintain and increase their influence in East Asia. ASEAN has been rigorously pursuing FTAs with major countries so that they can take the “driver’s seat” in regional integration in East Asia, while Korea is moving ahead of countries such as Japan and China to take the lead. Fourth, the financial crisis in East Asia in the late 1990s led to the argument that regional cooperation, such as a region-wide FTA, would help avoid another crisis and promote regional economic growth. This engendered a focus on regional cooperation in financial areas. Specifically, bilateral currency swap arrangements to deal with the shortage in foreign exchange — the Chiang–Mai Initiative — were set up in 2000. Furthermore, ASEAN + 3 countries are establishing an Asian Bond Market to develop efficient and liquid bond markets in East Asia, enabling better utilisation of East Asian savings for East Asian investments. This is also expected to contribute to the mitigation of currency and maturity mismatches in financing. Fifth, countries with outward FDI use FTAs to improve the business environment in FDI-recipient countries, so that multinational corporations (MNCs) can perform efficiently. FDI liberalisation and facilitation in FTAs has furthered this motive. Indeed, this is most important for Japan because many Japanese MNCs have invested in East Asia. 2. Objectives of the Research Project The above review of recent FTA developments in East Asia shows that the number of FTAs in the region has been growing rapidly. However, despite this, these FTAs have not been analysed.4 There are two related reasons for this. One is their short history, and the other is the shortage of necessary information. Except for AFTA, only in the 21st century did East Asia become active in FTAs. Thus, the lack of data makes it difficult for researchers to pursue empirical studies. In light of their increasing importance and the paucity of analysis, our project examines FTAs from two perspectives: quality and impacts. Quality is assessed in terms of the openness of FTAs in trade and FDI, because the objective of an FTA is to liberalise trade and FDI policies between 4 Schiff

and Winters (2003) is one of the few studies on regional trade agreements.

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and among FTA members by removing trade and FDI barriers. As noted earlier, some FTAs are relatively comprehensive in their coverage; many have chapters not only on liberalisation in goods trade, but also in services trade and FDI. We examine these three items — trade in goods, services, and FDI — and assess the quality of safeguard mechanisms adopted by FTAs, based on the understanding that this factor has important impacts on trade in goods. We evaluate the quality of FTAs by establishing the appropriate criteria for each area. Our assessment of the quality of FTAs is based on the JSEPA, Japan– Mexico EPA, ASEAN–China FTA, Korea–Mexico FTA, Chile–Korea FTA, NAFTA, EU–Mexico FTA, and Australia–New Zealand CER, although the FTAs actually analysed differ depending on the issues studied because of data availability. The list of the FTAs chosen for our study also includes some not involving East Asian countries, such as NAFTA, because such a comparison is useful to evaluate FTAs in East Asia. We used ex ante and ex post analyses to examine the impacts of FTAs. The ex ante analysis examines the impacts of FTAs by using a simulation analysis. Through a computable general equilibrium (CGE) model we computed the possible economic impacts of FTAs through a simulation exercise by assuming the formation of FTAs. This type of analysis has been extensively used in the actual discussions on the formulation of FTAs.5 The ex post studies try to discern the actual impacts of FTAs by conducting empirical analysis. We conducted two types of analysis. In the first, a crosscountry analysis, we examined the impacts of FTAs on the foreign trade of FTA members and non-members by using a gravity model to explain bilateral trade flows. In the second, a study of specific countries, we used Japan as a case study because of data availability. Two types of studies are conducted. The first assesses the use of FTAs by Japanese firms. While it does not actually address the impacts of FTAs per se, it provides important information on them because they cannot be realised unless FTAs are used. The second analyses the impacts of selected FTAs established by Japan. 3. Major Findings 3.1. Quality of FTAs Four chapters in this book analyse the quality of FTAs by focusing on different issues: Cheong and Cho examine trade in goods, while Ochiai, Dee, 5 See,

for example, CEPEA (2008) for the discussions on ASEAN + 6 FTA.

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and Findlay analyse trade in services. Urata and Sasuya take on FDI and Kotera and Kitamura assess safeguard mechanisms. Cheong and Cho analyse the restrictiveness or openness of commitments made under FTAs concerning trade in goods. Restrictiveness to trade liberalisation under FTAs is measured by two indicators. One assesses the restrictiveness of the rules of origin (ROOs) adopted by the FTAs,6 and the other computes the coverage of the agreements, for example, according to the percentage shares of goods covered. The first approach is applied to an analysis of trade in manufactured goods, because in many FTAs tariffs on manufactured goods are eliminated either immediately or with a phasingin period. As such, assessing the level of restrictiveness of trade liberalisation using the second approach is not so useful. Consideration of ROOs is important because many countries try to restrict imports of manufactured goods by defining them in such a way that satisfying the ROOs is difficult. The coverage approach is applied to assess the level of trade liberalisation for agricultural products. Cheong and Cho find that developed countries such as the US and the EU use restrictive ROOs in their FTAs with developing countries to restrict imports from those countries, while East Asian countries have wide gaps in the restrictiveness of their ROOs. The ASEAN–China FTA has the simplest ROOs, while FTAs established by Japan and Korea have very stringent ROOs. Cheong and Cho argue that the presence of ROOs with different degrees of stringency for the FTAs in East Asia gives rise to the “spaghetti bowl” effect that complicates the trading system. They stress that this effect has to be dealt with if these countries are to establish a region-wide FTA. Cheong and Cho’s analysis of trade liberalisation in agricultural products finds that FTAs involving East Asian countries, especially those involving Japan and Korea, have lower levels of trade liberalisation compared with those established by the Western countries. Ochiai, Dee, and Findlay assess the quality of FTAs with respect to trade in services. They find a wide range of approaches, such as the listing of commitments and the adoption of sectoral classification schemes, adopted by different FTAs, suggesting that extension of any benefits to non-members will be difficult. The level of commitments to liberalisation and sectoral coverage differ substantially among FTAs: some that offer a wider coverage 6 The definition of ROO plays a crucial role in determining the market access under FTAs, as free market access is provided to the products produced in FTA partner countries and the definition of the nationality of the products is determined by ROOs.

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apply reservations to liberalisation, making an overall assessment difficult. These authors find that the degree of liberalisation of trade in services is relatively low in the FTAs between developing countries. However, among the developed countries it is relatively liberal compared with their agreements involving developing countries, where the sectoral exclusions are relatively large, implying that the impacts of agreements are not always significant. They found that trade in services provisions in FTAs tend to have a bias towards national treatment rather than market access liberalisation, limiting the likelihood of market opening. Urata and Sasuya analyse the quality of FDI rules for seven FTAs: US– Australia, US–Singapore, Japan–Singapore, Korea–Singapore, NAFTA, Korea–Chile, and Japan–Mexico, involving eight countries. Adopting the approach developed by the Organization for Economic Co-operation and Development (OECD), they assess the quality of FDI rules in terms of their liberalisation or restrictiveness in the following six areas: (i) restrictions on foreign ownership and market access, (ii) national treatment, (iii) screening and approval, (iv) management and composition of boards of directors, (v) entry of foreign investors, and (vi) performance requirements. Their analysis reveals the following ranking in decending order of quality: (i) US– Australia, (ii) US–Singapore, (iii) Japan–Singapore, (iv) Korea–Singapore, (v) NAFTA, (vi) Korea–Chile, and (vii) Japan–Mexico. The differences in the quality of FDI rules between and among countries belonging to the same FTA led them to further investigate aspects of “quality” at member level. This shows the following rankings: (i) US, (ii) Singapore, (iii) Australia, (iv) Japan, (v) Korea, (vi) Chile, (vii) Mexico, and (viii) Canada. The most important restriction was found to be that on foreign ownership or on the degree of participation that foreign investors can have in an enterprise. Among the sectors, the primary sector (especially, mining and agriculture) and services sector (especially, transportation, communications, electricity, financial, and insurance) are relatively highly restricted, while there are only a few restrictions in the manufacturing sectors. Kotera and Kitamura assess the quality of FTAs in terms of their safeguard mechanisms. Such mechanisms provide the importing country government with the authority to take trade-restrictive measures to deal with any negative impacts on domestic industries incurred by a surge in imports. Because of its trade-restricting nature, the safeguard mechanism is generally considered a means to pursue protectionism. However, Kotera and Kitamura warn that such a view represents only a limited understanding of the impacts of safeguard mechanisms and that such mechanisms may

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have a positive impact on trade liberalisation if they reduce protectionist pressures by providing policy makers and pressure groups with a possible recourse to restrictive measures if needed. The authors argue that these two contrasting views of safeguard mechanisms make it difficult to reach an overall assessment. They assess the restrictiveness of safeguard mechanisms adopted by 12 FTAs and classify them into the following five types in ascending order of the degree of restrictiveness: (i) no general safeguard type (Korea–Chile); (ii) NAFTA type; (iii) WTO type (US–Australia, US–Singapore, Japan–Mexico, Japan–Singapore, Korea–Singapore, China– ASEAN); (iv) GATT type (Australia–New Zealand); and (v) European type (EFTA, EU–Mexico). 3.2. Impacts of FTAs Four chapters examine the impacts of FTAs. Abe undertakes an ex ante analysis by using a simulation model, while three chapters carry out ex post analyses of FTAs. Urata and Okabe examine the impacts of FTAs on trade flows using a gravity model. Takahashi and Urata investigate the use of FTAs by Japan, while Ando examines the impacts of Japan’s FTAs on trade and investment. Abe’s simulation exercise is based on a CGE model that tries to capture all the economic activities in the world by explicitly considering market mechanisms. In other words, it mimics the actual global economy. He extends a rather standard static model and introduces a dynamic model by incorporating inter-temporal investment, obtaining a number of interesting and useful observations for both researchers and policy makers. First, Japan’s first three FTAs, with Singapore, Mexico, and Malaysia, respectively, are shown to bring about only small benefits. Much larger potential gains are expected from the bilateral FTAs with ASEAN10, China, Korea, Australia, New Zealand, and India. These observations are obtained from both static and dynamic model simulations. Second, the simulation using the dynamic model shows that the early formation of Japan’s FTAs provides both Japan and its potential FTA partners with larger increases in GDP. This pattern is particularly noteworthy in Japan’s FTAs with New Zealand and China. Third, regional FTAs including many countries will bring about larger welfare gains to all members because they reduce the negative impacts of trade diversion. Abe concludes by presenting future research agenda items. He points out the need to incorporate economies of scale and agglomeration in the simulation models, as these elements

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have become increasingly important in economic activities. He also stresses the importance of including the mechanisms through which the impacts of trade facilitation and economic cooperation may be assessed, because many FTAs cover not only trade liberalisation but also trade facilitation, economic cooperation, and other aspects. Urata and Okabe use two approaches to find the impacts of FTAs on foreign trade. They first examine the changes in trade patterns before and after an FTA is enacted by using indicators of intra-FTA interdependence. They use this rather crude approach to analyse broad trends for 11 FTAs: EU, NAFTA, AFTA, MERCOSUR, CER, Japan–Singapore FTA, Japan–Mexico FTA, China–ASEAN FTA, Korea–Chile FTA, Singapore– US FTA, and Mexico–EU FTA. They found increased intra-FTA interdependence for four FTAs (NAFTA, AFTA, MERCOSUR, and CER). The second approach, which is more sophisticated, estimates a gravity equation to discern the impacts of FTAs on bilateral trade flows, that is, trade creation and diversion effects. To do this they extended the previous studies by enlarging the sample size in terms of time period and country coverage, and also undertook an analysis by disaggregating the trade data with a presumption that the impact of FTAs is different for different sectors. In their analysis of total trade, they found a limited trade diversion effect. The results of their analysis of disaggregated trade data show different patterns among different products. They identified a trade diversion effect for many products in the case of the EU, NAFTA, and MERCOSUR but not for AFTA. Their overall assessment of trade creation and trade diversion indicates that the MERCOSUR is very closed while the EU and NAFTA are relatively more closed than AFTA or CER. Other FTAs have too short a history to reveal substantial impacts. Takahashi and Urata examine the use of FTAs by Japanese firms through information collected in a questionnaire survey. They find that the use of FTAs by Japanese firms is very limited. The proportions of the responding firms that have used FTAs in total respondents for Japan’s FTA with Singapore, Mexico, and Malaysia are 3.6%, 12.6%, and 5.5%, respectively. Many Japanese firms do not take advantage of free trade via FTAs as they think that benefits are small because their trade volume with FTA partner countries is small and because the tariff differentials between most favoured nation (MFN) rates and FTA rates are rather small for many products. Probit analysis of the determinants of the use of FTAs reveals that large rather than small firms use FTAs, reflecting the high cost of such practice. In addition, firms with close trade and FDI relationships

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with FTA partner countries use FTAs. The use of FTAs could be expanded by reducing costs by simplifying application procedures and by providing assistance through public and semi-public institutions such as the Ministry of Industry, Trade and Economy (METI), the Japan External Trade Organization (JETRO), and the Japan Chamber of Commerce and Industry. Japan’s large trading partners, including the US and China, are ranked at the top of the list of desirable FTA partners by the surveyed Japanese firms. Ando assesses the impacts of Japanese EPAs with Singapore and Mexico on Japan’s trade and investment through two types of analysis. One is descriptive, and uses detailed trade, tariff, and investment data, while the other is statistical, based on the gravity model estimation. The results from both these types of analysis are consistent in that the Japan– Singapore EPA has almost no direct impact on trade, while the Japan– Mexico EPA has positive impacts on trade, particularly on the export side, and investment. Negligible direct effects of the Japan–Singapore EPA are expected because Singapore imposes only low tariff rates, and these apply to very few products. Ando finds that the Japan–Mexico FTA contributed to an improvement in the business environment in Mexico for Japanese companies through various programs contained in the FTA. She notes substantial benefits to Japanese companies, as this agreement enables them to participate in the bidding for the contracts of government procurement in Mexico. These studies reveal several important outcomes of the EPA beyond tariff removal. Discussion on future designs of FTAs/EPAs cover the scope for abuse of provisions for phasing out tariffs, the desirable structure of EPA tariffs, the effective utilisation of EPAs beyond trade liberalisation, and the relationship of the EPA route with multilateral trade liberalisation. 4. Future Research Agenda We have analysed the quality and impacts of some selected FTAs, but this study should be expanded to deepen our understanding of the agreements. While we analysed the extent of openness in trade measures concerning goods and services, investment measures, and safeguard mechanisms, the coverage of FTAs has widened substantially to include such areas as trade and investment facilitation, intellectual property rights, competition policy, etc. Accordingly, the quality of FTAs should be evaluated in these new areas.

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Other areas could be explored. First, a study of the factors leading to the formation of FTAs would be of interest not only from an economic perspective but also from a political perspective. Such a study would provide useful information to policy makers engaged in the formulation of international economic policies. Second, theoretical analyses of various aspects of FTAs, including their welfare implications, should be pursued and empirical analyses based on those theoretical foundations conducted. Finally, the effects of FTAs on multilateral trade liberalisation should be analysed from both theoretical and empirical aspects, because the ultimate goal of trade liberalisation is global liberalisation, which gives the largest benefits to the world economy. References Aggarwal, VK and S Urata (eds.) (2006). Bilateral Trade Agreements: Origins, Evolution, and Implications. New York: Routledge. CEPEA (2008). Report of the Track Two Study Group on Comprehensive Economic Partnership in East Asia (CEPEA). Pangestu, M and S Gooptu (2004). New Regionalism: Options for China and East Asia. In East Asia Integrates, Kharas, H and K Krumm (eds.), pp. 79–99. Washington, DC: The World Bank. Sally, R (2006). Free Trade Agreements and the prospects of regional integration in East Asia. Asian Economic Policy Review, 1(2), 306–321. Schiff, M and LA Winters (eds.) (2003). Regional Integration and Development. Washington DC: Oxford University Press for the World Bank. Soesastro, H (2006). Regional integration in East Asia: Achievements and future prospects. Asian Economic Policy Review, 1(2), 215–234. Urata, S (2005). Free Trade Agreements: A catalyst for Japan’s economic revitalization. In Reviving Japan’s Economy, Ito, T, H Patrick and DE Weinstein (eds.), pp. 377–410. Boston: MIT Press.

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Chapter 1

RULES OF ORIGIN AND AGRICULTURAL TRADE LIBERALISATION IN MAJOR FREE TRADE AGREEMENTS INKYO CHEONG and JUNGRAN CHO Jungseok Research Institute of International Logistics and Trade, Inha University, Incheon, Korea

1. Introduction The factors behind the fast growth of free trade agreements (FTAs) throughout the world include economic incentives, economic reforms, and political alliances. Among these, economic incentives can play an important role in inducing countries to pursue FTAs with their trading partners. Economists, including Cheong (2005), Schiff and Winters (2003), Scollay and Gilbert (2001), and Urata and Kiyota (2003) have used simulation models to show that FTAs would bring significant economic gains to member countries. Using computable general equilibrium (CGE) models, Cheong (2005) demonstrates that East Asian countries can collect the highest gains with a region-wide FTA in East Asia rather than with any sub-regional FTA. Scollay and Gilbert (2001) forecast positive impacts on world trade through FTAs, indicating that trade creation associated with FTAs is greater than trade diversion. Regarding FTAs in East Asia, Urata and Kiyota (2003) predict that emerging economies in Southeast Asia and China gain considerably more in terms of increases in GDP from joining an East Asian FTA than other economies, such as Korea and Taiwan in Northeast Asia. However, the economic gains forecast by simulation models cannot be realised automatically from the inception of an FTA. It is important to 1

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introduce measures such as FDI liberalisation and the lowering of trade barriers to market entry to increase the benefits. All the studies are based on the assumption that tariff elimination and loose rules of origin (ROOs) will exist at the foundation. Therefore, it can be said that the quality of FTAs is critical in determining the scale of economic gains. Most countries that establish FTAs claim they are pursuing high-quality FTAs. A country cannot automatically become an FTA regional hub by simply expanding its number of FTAs but must demonstrate a strong willingness for trade liberalisation and trade facilitation by maximising market access and harmonising trade rules. As a core element for FTA negotiations, market access should be evaluated from several viewpoints, such as tariff elimination, the easing of non-tariff barriers (NTBs) such as customs clearance, the simplifying of ROOs, and the improvement of trade rules. This paper assesses the quality of FTAs in terms of tariff elimination for agricultural products and ROOs. While analysing the improvement of NTBs and trade rules is also important in determining the quality of FTAs, this cannot be easily evaluated in quantitative terms. This paper examines market access in representative FTAs such as NAFTA, the EU–Mexico FTA, Australia–New Zealand Closer Economic Relations (CER), Japan– Singapore Economic Partnership Agreement (JSEPA), Japan–Mexico Economic Partnership Agreement (JMEPA), ASEAN–China FTA, Korea– Mexico FTA and Chile–Korea FTA. Section 2 discusses theoretical aspects of ROOs, and Section 3 provides the evaluation results on the stringency (restrictiveness) of ROOs. Section 4, FTAs are assessed in the context of agricultural tariff elimination. Since most cases show that the majority of manufacturing goods are liberalised within 10 years of the implementation of an FTA, only the agriculture sector, which is the most sensitive sector in FTAs, is taken into account for the study. Finally, concluding remarks are provided in Section 5.

2. Descriptive Overviews of ROO 2.1. Theoretical survey on ROO One of the differences between a Customs Union (CU) and an FTA is the authority to change tariffs on imports from non-member countries. CU member countries introduce common tariff rates against non-member countries, and cannot change tariff rates voluntarily without consulting other member countries.1 However, FTA member countries can set tariff 1A

CU also needs a ROO during the transitional period towards the implementation of common external tariffs.

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3

rates (not higher than WTO-bound rates) independently. Because the tariff rates of the member countries of an FTA are different, trade deflection can occur.2 To prevent trade deflection, FTA member countries introduce specific ROOs that regulate that only the goods satisfying the rules can be given preferential tariffs. Three criteria define ROOs in FTAs. The first is change in tariff classification (CTC) or “tariff line shift”. CTC is widely used in regional trading agreements (RTAs), and is preferred by the World Customs Organization (WCO), which promotes the simplification and harmonisation of ROOs. CTC is based on the harmonised system (HS), classifying goods at a twodigit chapter level, a four-digit heading level, a six-digit sub-heading level or an eight- (10-) digit level. The second rule is the requirement of regional (local) value contents (RVC), implying the requirement that the product should acquire a minimum regional value in the exporting country or a region of an RTA.3 The third rule is the requirement of a specific production process (SP) for an item. Each criterion has merits as well as demerits, as shown in Table 1. The CTC approach is relatively simple in requiring a comparison between the tariff line of a final product and those of intermediate materials, but it has an intrinsic problem in that the HS system does not follow industrial classifications for many products. The RVC is widely used in most FTAs since the criterion is simple and easy to check, but the ROO of a good can be changed by manipulating the customs value. For example, increasing profits (accounting purpose) can

Table 1.

Merits and de-merits by ROO criteria.

Merits CTC

RVC

SP

Simple comparison between intermediate materials and final products Simple, transparent, easy to check Objective rules

Demerits HS is for trade classifications rather than for industrial classifications Manipulations in accounting, the effect of exchange rates, coverage of costs (logistics, trademark etc) No incorporation of technical development. Requirements are too stringent in most cases

2 Trade deflection means that a good imported via a low-tariff FTA member country is re-exported into a country with high tariffs without paying tariffs. 3 The RVC can be considered in various ways, such as export value, import value, and value of parts included in an article. However, we do not consider these separately, regarding all as RVCs.

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RVC criteria and profit rates ($, %).

VNM VOM Value Added 50 50

20 20

Profits

Customs Value

RVC (%)

ROO

9 18

99 108

49.5 53.7

No Yes

20 20

Note: ROO is 50% RVC. Table 3. Method Build-down method

Build-up method Share of nonoriginating parts

Methods for calculating RVC. Equation

AV − VNM × 100 AV

VOM × 100 AV

NAFTA Method Transaction value method: TV − VNM × 100 TV Net cost method:

NC − VNM × 100 NC

VNM + VUOM × 100 AV

Notes: AV, adjusted value; VNM, value of non-originating materials; VOM, value of originating materials; VUOM, value of materials with uncertain origin; TV, transaction value; NC, net cost.

change a non-originating good into a ROO-qualifying one, as demonstrated in Table 2. FTAs introduce multiple methods for calculating RVCs, the most common of which are build-down, build-up, and share of non-originating parts. The RVC ratio, based on build-down, is expressed as a percentage in calculating the difference between the adjusted value (AV) and the value of non-originating materials (VNMs) that are acquired and used by the producer in the production of the goods, and then divided by the difference with AV. Explanation for other methods are given in Table 3. Most RTAs employ multiple criteria for setting ROOs, rather than applying a single rule. According to the WTO (2002), while ROOs in many FTAs are based on CTC, RVC, and SP, a combination of the three methods rather than any one single method is widely used in an FTA (Table 4). Each criterion that is used for defining ROOs has advantages and disadvantages, and it is not easy to conclude which rule is the most desirable.4 However, even though a specific rule is used, the stringency of the criterion 4 Parmeter (1997, p. 342) states that “although FTAs require rules of origin, there is a problem: there is no completely satisfactory rule of origin”. Regarding merits and demerits of methods of setting ROOs, see Parmeter (1997) and Estevadeordal (2003).

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Agricultural Trade Liberalisation in FTAs Table 4.

5

Frequencies of CTC, RVC, and SP in RTAs.

RTA (No. of RTAs)

CTC

RVC

SP

CU (6) FTA and PTA (87)

6 83

4(35–60%) 75(35–60%)

— 74

Source: Modified from WTO (2002, p. 8). Note: Numbers in parentheses imply the minimum requirement ratios.

can be changed depending on a member country’s position towards trade liberalisation. For example, chapter change will be more stringent than changes in heading or sub-heading when the CTC method is employed. When the RVC criterion is used, a 60% RVCs rate will be more stringent than a 40% one. Some elements of ROOs are designed to promote intra-regional trade, although ROOs in general constitute protectionist practices. For example, cumulation5 and de minimis are commonly introduced in FTAs to facilitate producers under certain conditions to use intermediate inputs from the region of another FTA or a third country. The WTO (2002, p. 9) found de minimis, or a tolerance rule in ROO parlance, in 88 out of 93 RTAs it surveyed. In most cases, the de minimis rule is applied to less than 10% of the total value of final products to be sourced from non-member countries.6 ROOs act like trade barriers, since they cause extra costs in production and management. Producers/exporters need to pay to calculate production costs and produce bookkeeping-related documents.7 In addition, extra costs are incurred in complying with the technical and specific process and RVCs as specified in the ROO protocol, and these costs are added to the prices of export goods.8 As ROOs become more stringent, the compliance costs will rise, undermining the gains in terms of trade creation which can be obtained from an FTA. APEC (2004, p. 76) states, “The complexity and stringency of ROO employed in RTAs has given rise to concerns over the diversionary effects that ROO may have on trade and investment flows”. 5 Cumulation can be classified as bilateral cumulation, diagonal cumulation, and full cumulation. Refer to Estevadeordal (2003) regarding the classification of cumulation. 6 EC–South Africa FTA sets 15% for the de minimis rule, but this is an exceptional case. 7 Regarding empirical research on administrative costs in an FTA and costs of preparing documents for preferential treatment, see Koskinen (1983) and Herin (1986), respectively. 8 Several empirical researches on the costs of stringent ROO under NAFTA show substantial costs to intra-regional traders and producers. For example, Cadot et al. (2002) found that the utilisation rate of NAFTA preferences is as low as 64% owing in part to stringent ROO. For more information on the costs of ROO, see Estevadeordal (2003, pp. 8–9).

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2.2. Descriptive analysis of ROO in major FTAs This section provides a descriptive analysis of ROOs in major FTAs, focusing on assessing their stringency. An empirical examination of their stringency will be given in the next section. Most FTAs have several 100 pages on ROO protocol, and thus it requires much time and effort to understand the structure and technical aspects of the ROO in an FTA. Unfortunately, the existing literature on the subject is limited.9 Several FTAs were chosen as case studies for this analysis. These are NAFTA and the EU–Mexico FTA, which represent the first-generation FTAs pursued by the US and the EU. Examples of FTAs under implementation by East Asian countries are the ASEAN Free Trade Area (AFTA) and the ASEAN–China, JSEPA, US–Singapore, Japan–Singapore, Japan– Mexico, Korea–Singapore, and Korea–Chile FTAs. We will now compare the stringency of ROOs of East Asian FTAs with that of the US and EU FTAs. Before presenting the result, however, it is worth mentioning that the ROOs in the AFTA and the ASEAN–China FTA, which introduce a simple rule for ROO. But other FTAs by East Asian countries have chosen to follow more complicated ROO.

2.2.1. ROOs in the US and EU FTAs NAFTA is the first FTA with comprehensive coverage of trade, investment, services, and trade rules. In promoting FTAs, the US has imposed quite stringent ROOs based on the change of heading, specific requirements for HS chapters, and complicated criteria for the RVC. Estevadeordal (2003, p. 348) evaluated that the US specifies the ROO to be of “substantial transformation” in its FTAs. The CTC in chapter, heading and sub-heading is the most widely used, with additional requirements of specific process and regional value contents. The de minimis rule is 7% in NAFTA, lower than in other FTAs. Several countries have since followed the structure of the NAFTA ROO with minor modifications for some items.10 A stringent ROO of “wholly obtained or produced entirely” is applied to primary industries, and each of the non-originating materials used in the production of the good must undergo an applicable change in tariff classification as set out in Annex 401 of the agreement. Technical processes are required for many items. RVCs 9 Comprehensive analysis of ROO in major RTAs can be found in Brenton (2003), Estevadeordal (2003), and WTO (2002). 10 The framework of the NAFTA ROO became the basis of ROOs in FTAs concluded by Canada, Chile, Mexico, Japan, Korea, and so on.

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ratios are as high as 50–60% depending on calculation methods.11 The agreement specifies a more stringent rule for automobiles (HS8702–8704), with 62.5% under the net cost method. In other FTAs, the US introduced a lower RVCs ratio. For example, in the US–Chile FTA, 35% (build-up) and 45% (build-down) were adopted for some HS34. A similar ROO was used for the US–Singapore FTA. However, a more stringent ROO was introduced in the US–Australia FTA, especially for textiles and footwear. In the case of footwear (HS64), the RVCs ratio was set at 55% (build-down) with an additional requirement of sub-heading change. The analysis of the US’s FTAs suggests that the stringency of ROO depends on its FTA partners. The ROO of the EU heavily depends on PANEURO, which establishes a highly uniform ROO across the EU FTAs, such as the EU–EFTA FTA and the EU–Mexico FTA. The EU–Mexico FTA adopted a wide range of rules in defining the ROO. In general, EU ROOs are rather restrictive. The EU ROO is dominated by changes in heading, although RVC ratios from 20 to 50%, with 20% for HS30. One problem with the EU ROO is that the agreement imposes complicated rules for producers. For example, special requirements are specified for sugar and cocoa in defining the ROO for HS 18–22. 2.2.2. ROOs in East Asian FTAs FTAs by East Asian countries cover a wide spectrum in terms of the stringency of ROO. The simplest ROOs can be found in the AFTA, and the ASEAN–China FTA, which specifies 40% RVCs across all tariff lines, is the simplest ROO in the world.12 The criterion of 40% RVCs was first introduced by AFTA when the Common External Preferential Tariff (CEPT) scheme was agreed on in 1992. During the negotiation for an FTA between China and ASEAN, China accepted the AFTA ROO and concluded the negotiations at the end of 2004.13 Singapore has been receptive to loose ROOs, while the US has imposed stringent ROOs, as seen in the NAFTA agreement and in its recent FTAs with other countries. Singapore adopted the position of the US for the ROO 11 NAFTA has two approaches for calculating the regional contents: the transaction value method and the net cost method. 12 Similarly simple ROOs can be found in CER (Australia–New Zealand FTA), with a 50% RVC rule, although it specifies an additional requirement that the last manufacturing process should be performed in the exporting territory for some items. The 40% rule is applied in the AFTA without extra requirements. 13 China led the negotiation with ASEAN for a bilateral FTA. In 2003, China provided an Early Harvest Package to ASEAN countries to attract them to the negotiating table.

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in the bilateral FTA with the US. The US–Singapore FTA, concluded in 2003, basically follows the framework of the NAFTA ROO but is substantially less restrictive than the NAFTA. Chapter 3 of the US–Singapore FTA contains the ROOs, and the requirements for specific items are given in Annex 3A. Heading changes are required for HS27–HS48. For some HS chapters, such as HS73, 78, 81, 84, 85, and 90, RVC ratios are required at 35% in the build-up method and 45% in the build-down method. de minimis is set at 10%. Japan and Korea were predisposed to introduce complex and stringent ROOs to placate strong domestic opposition to trade liberalisation.14 However, with mounting experience in FTA negotiations, Korea is likely to relax the stringency of the ROOs in its second FTA, while Japan has adopted more restrictive ROOs in its FTA with Mexico. Japan’s first FTA — the JSEPA — specifies a “wholly obtained or produced entirely” rule. It dictates that products should undergo sufficient transformation in the member country to receive preferential treatment in the FTA. Cumulation and de minimis are accepted but the agreement specifies different shares of de minimis, with it being set at lower than or equal to 10%. Heading changes are required for HS01–24, HS38 (chemical products), HS85 (machinery), with sub-heading changes or regional contents requirements (liquor and cordials). A regional contents requirement of 60% (with a combination of sub-heading changes) is required for other chapters of HS. For textile fabrics and articles (HS59), fabric should be made with yarn from an FTA member country. The JMEPA contains less restrictive ROO than the JSEPA in several aspects. De minimis is introduced at 10% for all items. Chapter, heading, and sub-heading changes are used for HS01–63. However, a stringent ROO is introduced for Mexico’s major exports such as footwear (HS64) and natural resources like copper and zinc. The rule for these items specifies heading or sub-heading changes with a 50–55% regional contents requirement. The ROO of the Korea–Chile FTA is also a variation of the NAFTA, with stringent and complex specifications for sensitive items. In particular, heading changes are required for HS01–HS10, which are agricultural and fishery products, to prevent transhipment of agricultural products. de minimis is specified at 8%. A combination of heading change and regional value content is used for several chapters, such as HS19, 29, 30, 31, 38, etc. In general, low regional contents ratios are set at 45% for the build-down method and 35% for the build-up method. For 14 Estevadeordal (2003, p. 12) states, “The ROO of Japan–Singapore EPA are complex, as evidenced by the more than 200-page ROO protocol”. Similar comments can be found in Estevadeordal (2003, p. 12) for the Korea–Chile FTA.

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some of HS84, a 30% regional content ratio is specified when the buildup method is used in calculating the regional content ratio. However, an exceptionally high regional contents ratio is specified for HS200892– 200899 (preparations of vegetables, fruits, nuts, or other parts of plants). This is to curb the importation of non-Chilean juices and similar products. The Korea–Singapore FTA was concluded within a year of the start of negotiations in early 2004 and became effective in March 2006. Korea was worried about the illegal transhipment of goods through Singapore in the FTA and wanted to have a stringent ROO, while Singapore wanted to introduce outward processing. Korea was anxious to provide the ROO for products made in the Gaesung Industrial Complex.15 Korea could have persuaded Singapore on this issue while accepting outward processing, but not as an exchange. Both countries agreed on a 10% de minimis rule, with textiles being an exception. This latter point was considered to be sensitive in the JSEPA. Unlike the FTA with Chile, the build-down method is widely used with ratios of 45, 50, and 55%.

3. Empirical Assessment of ROOs Stringent ROOs can discourage exporters from taking advantage of tariff preferences provided by FTAs, undercutting their economic gains. As different ROOs are introduced by overlapping FTAs, the spaghetti bowl problem may be present, enforcing the dampening trade effects of the ROOs.16 ROOs may be a source of under-realisation of FTA preferences, but there is not a great deal of literature on measuring their stringency. Two pioneering works are Estevadeordal (2003) and the Productivity Commission of Australia (PC, 2004). The PC provides a comprehensive index approach for measuring the stringency and restrictiveness of ROOs and improves the Estevadeordal index, which is too simple to use for empirical works. Both approaches are designed to calculate the degree of restrictiveness of ROOs, making numerical comparison of ROOs possible in FTAs. This section measures the restrictiveness indices for selected FTAs in terms 15 Gaesung Industrial Complex is located in North Korea. The acceptance of the Gaesung products as Korean goods was a critical concern for South Korea, in terms of economic gains as well as a symbolic meaning for improving South Korea–North Korea relations. 16 Because of the experimental operating difficulties of the ROO, there is a limited amount of research on the stringent ROO effects on trade. Examples are Cadet et al. (2002) and Krueger (1995). The former shows 64% of NAFTA utilisation ratio resulting from the ROO, and the latter reveals that Canadian companies tend to pay tariffs rather than resort to tariff preferences by complying with the stringent ROO.

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of the PC and Estevadeordal approaches.17 More focus is given to the PC index than the Estevadeordal index, since the former can cover the latter. 3.1. Analysis on index components The PC approach has a bottom-up structure, requiring an initial survey of detailed components of the ROOs in the relevant appendix of an FTA and then aggregating these into relevant upper categories. Each component is valued with weights for the higher category and aggregated to the final index of the restrictiveness of ROO.18 The top level has three categories: primary criteria, supplementary criteria, and other effects of ROO. Primary ROO criteria in most FTAs have two components: “wholly obtained” and substantial transformation. To mitigate the restrictiveness of ROOs, supplementary criteria such as cumulation and de minimis are widely adopted. In particular, recent FTAs introduce outward processing in facilitating global outsourcing and the flow of intermediate goods across countries. Table 5 summarises principle ROO criteria in FTAs, showing that “wholly obtained” rules and substantial transformation rules are generally applied for all the FTAs considered in this study. CTC and RVC are commonly used for defining substantial transformation. However, the most stringent rule, technical processes (SP), is rarely applied. In defining substantial transformation with RVC, different thresholds are adopted. For example, the US sets a relatively high requirement in NAFTA but a low RVC ratio in its FTA with Singapore. Different ratios of RVC are reflected with relevant weights in calculating the restrictiveness index. CTC criterion will depend on the HS classification of ROO for transformation from intermediate goods to final products. If chapter change is required, then it will be most restrictive. This index rule is deliberately approached by Estevadeordal (2000), as shown in Table 6. His index is designed to evaluate RVC and SP in the framework of CTC requirements. Several components of RVC are incorporated into measuring the index, in addition to the RVC threshold. Important elements are calculation of the RVC, reference prices, and methodology across tariff lines. As seen in Table 7, FTAs have a wide range of specifications for RVC in terms of threshold, methodology, and reference price. European FTAs heavily use the ratio of non-originating materials in calculating the RVC while East Asian countries tend to adopt built-down or built-up methods. For 17 The index approach requires a weighting scheme for ROO criteria used in defining ROO. This research follows the PC scheme. 18 See PC (2004) for detailed rules for individual criteria and components.

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Agricultural Trade Liberalisation in FTAs Table 5.

11

Principle ROO criteria in FTA.

Wholly Obtained

Substantial Transformation CTC

RVC

SP

NAFTA EEA EFTA EU–Mexico

• • • •

• • • •

•a • • •

◦ ◦ ◦ ◦

EFTA–SGP US–SGP AFTA ASEAN–China Japan–SGP Japan–Mexico Korea–Chile Korea–SGP

• • • • • • • •

• •

• •b • •c • • •d •

◦ ◦ ◦

• • • • •

◦ ◦ ◦ ◦

Notes: •, Generally applied; ◦, Applied in small number of items. a The RVC should be not less than 60% (transaction value method) or 50% (net cost method). 62.5% under the net cost method is set for automobiles (HS 8702.xx, 8703.21–90, 8704.21, 8704.31). b 35% in the build-up method and 45% in the build-down method. c Not less than 60% (FOB price of a final good) of originating materials (CIF) from non-ACFTA. d 30% in the build-up method and 45% in the build-down method. 80% for canned juice mix as an exception.

Table 6. Index 1 2 3 4 5 6 7

Restrictiveness index of ROO defined by Estevadeordal. Description

Changes in HS8–10 digit (CI) More restrictive than index 1 and changes in HS6 digit (CTSH)a More restrictive than index 2. Changes in HS6 digit (CTSH) and RVCb More restrictive than index 3 and changes in HS4 digit (CTH)c More restrictive than index 4. Changes in HS4 digit (CTH) and RVC More restrictive than index 5 and changes in HS2 digit (CC)d More restrictive than index 5 and changes in HS2 digit (CC) and SPe requirement

Source: Summarised from Estevadeordal (2003). a Changes in HS subheading. b Regional (local) value contents. c Changes in HS heading. d Changes in HS chapter. e Specific production process.

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Table 7.

Method for calculation of RVC.

Value Added VNMa

VOMb

NAFTA 40%, 50% 60%, 50% EEA 40% (60%) EFTA 40% (60%) EU–Mexico 20–50% EFTA–SGP 20–60% 40–80% US–SGP 40–70% 30–60% AFTA 60% 40% ASEAN–China 60% 40% Japan–SGP 40% 60% Japan–Mexico 50% 50% Korea–Chile 55%, 70% 45%, 30% Korea–SGP 45–55% 45–55%

Method of Calculation Methodc

Reference Price

TM, NC RNM RNM RNM RNM BD, BU ROM ROM BD, BU TM BD, BU BD

FOB Ex-works Ex-works Ex-works Ex-works FOB FOB FOB FOB FOB FOB

Remarks

Auto (62.5%)

Combined with CTC

65%d Juice mix (80%)

a Share

of value added should be less than those specified. of value added should be more than those specified. c TM, transaction value method; NC, net cost method; RNM, ratio of non-originating materials; ROM, ratio of originating materials; BD, build-down method; BU, build-up method. d 65% of originating materials is required as an exception. 8544 (ex), 8703 (ex), 8704– 8707, 8708 (ex), 8716 (ex). b Share

reference prices, European countries prefer ex-works (factory) prices, but FOB prices are widely used by the US and East Asian countries. Table 8 shows the most commonly adopted specifications for FTAs, and that each FTA defines different rules across tariff lines. Major components of supplementary criteria are de minimis, cumulation, and Outward Processing.19 Most FTAs allow a 10% de minimis rule. Higher tolerance rates will be regarded as less restrictive ROO. Cumulation is also widely accepted in FTAs, and full cumulation as less restrictive than bilateral. Outward processing is rarely defined because of technical difficulties in tracing the source of intermediate goods. However, some credit is given for considering initial value added before outsourcing to third countries, since outward processing increases local content, thus making it easy to comply with ROOs. 19 Outward processing is designed to acknowledge that part of the manufacturing process (labour-intensive works) may be outsourced to less developed countries. For example, stages 1, 2, and 3 are required for production, and stage 2 is labour-intensive (outsourced). If we recognise outward processing, local content will be a total of stages 1 and 3, while the conventional approach accepts only stage 3.

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Agricultural Trade Liberalisation in FTAs Table 8.

13

Supplementary criteria for the restrictiveness of ROO by FTA. Supplementary Criteria

NAFTA EEA EFTA EU–Mexico EFTA–SGP US–SGP AFTA AFTA–Chinac Japan–SGP Japan–Mexico Korea–Chile Korea–SGP

de minimis

Cumulation

7% (FOB) 10% (ex works) 10% (ex works) 10% (ex works)a 10% (ex works) 10%, 7%b

• • • Bilateral • • • Full Bilateral Bilateral Bilateral Bilateral

d 10% 8% 10%

Outward Processing

* * *

∗e

Notes: •, generally applied; , applied in small number of items; ◦, no application; *, allowed. a Does not apply to products in HS 50–63. b de minimis in US–SGP FTA — 10% of adjusted value, 7% of weight of fibres or yarns. c Not less than 60% (FOB price of a final good) of originating materials (CIF) from non-ACFTA. d Noted in Appendix IIA (not in text). e The total value of non-originating inputs should not exceed 40% of customs value, and the value of originating materials is not less than 45% of the customs value.

3.2. Assessment of restrictiveness of ROO Based on the discussions in the previous section, Section 3.2.1 provides the empirical results of restrictiveness of ROOs by Estevadeordal and Suominen (2004) and the Productivity Commission (2004). Although these studies are comprehensive in analysing ROOs, they analyse FTAs by European and American countries. Four FTAs by Japan and Korea that are under implementation are not included in existing studies. Section 3.2.2 summarises the study results for assessing restrictiveness of ROOs in these FTAs by Japan and Korea. Rather than devising a restrictiveness index, this paper follows the approaches of existing studies. 3.2.1. Existing studies The EU prefers to define heading changes in tariff classification with other requirements (CTH+), while FTAs in the Americas almost equally depend on chapter changes (CC+) and heading changes. As an exception, the

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Table 9.

Composition of CTC criterion for ROO (%). FTAs by EUa

S. Africa

Mexico

Chile

Poland

Estonia

GSP(93)

14.24 57.65 2.37 25.74

14.47 58.34 2.37 24.82

14.24 57.25 2.25 26.26

14.08 62.43 2.34 21.15

14.08 63.62 2.38 19.92

13.93 63.70 2.36 20.01

CC+ CTH+ CTSH+ Others

FTAs in US NAFTA

CC+ CTH+ CTSH+ Othersb

54.44 40.65 4.35 0.56

G-3

42.08 46.02 7.88 4.02

FTAs by Mexico

FTAs by MERCOSUR

Costa Rica

Bolivia

Chile

Bolivia

42.77 47.19 9.66 0.38

42.68 47.15 9.21 0.96

0.00 100.00 0.00 0.00

0.00 100.00 0.00 0.00

Source: Figure 2 and Table 3 in Estevadeordal and Suominen (2004). Notes: a The EU’s FTA with Poland (1993) and Estonia (1995). b Others cover one of “wholly obtained” RVC and SP, or combinations of these requirements.

MERCOSUR adopted the CTH rule in bilateral FTAs with Chile and Bolivia.20 Thus, it can be said that the US has set more restrictive ROOs than has the EU (Table 9). The Productivity Commission (2004) provides restrictiveness indices for ROOs in FTAs based on a variety of countries. It calculates indices using the bottom-up approach, based on an aggregation scheme with weights (Table 10). The most restrictive ROO can be found in the NAFTA, with an index of 0.67 with 0.46 for primary criteria, which can be closely related with the study by Estevadeordal (2003) in Table 6. Restrictive ROOs following the NAFTA are found in the EU–Poland FTA and MERCOSUR with an index of 0.60. However, the US has adopted less restrictive ROOs in recent FTAs such as the US–Singapore FTA and the US–Chile FTA. Similar trends can be found for the EU and MERCOSUR. Some countries tend to adopt loose ROOs. For example, Australia–New Zealand, AFTA, and the Andean community chose to set relatively simple and loose ROOs.

20 MERCOSUR

is the Customs Union for South American Countries (Argentina, Brazil, Paraguay, and Uruguay).

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Criteria

ROO restrictiveness index by productivity commission. PANEURO

EU–Mexico

CER

AFTA

Primary Supplementary Others

0.15 0.11 0.10

0.33 0.12 0.15

0.30 0.08 0.15

0.31 0.08 0.13

0.14 0.07 0.13

0.08 0.11 0.13

Total

0.35

0.60

0.53

0.52

0.33

0.31

NAFTA

US–Singapore

US–Chile

MERCOSUR

Chile–MERCOSUR

Andean

Primary Supplementary Others

0.46 0.09 0.13

0.23 0.04 0.11

0.26 0.08 0.13

0.37 0.11 0.13

0.18 0.11 0.13

0.14 0.09 0.10

Total

0.67

0.39

0.46

0.60

0.42

0.33

Criteria

Source: Table A-2 (pp. 44–45) in the Productivity Commission (2004).

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3.2.2. Restrictiveness of ROO in FTAs by Japan and Korea Before looking at the restrictiveness index of FTAs by Japan and Korea, the structures of ROOs in Table 11 for Japan’s bilateral FTAs with Singapore and Mexico, and Table 12 for Korea’s FTA with Chile and Singapore provide a brief overview. Restrictiveness indices are taken from Estevadeordal (2003), and the numbers of tariff lines for each ROO category are given in terms of an HS6 or HS8 digit. In cases when it is not easy to classify the specification of ROOs for tariff lines, the closest category will be used when analysing the restrictiveness index. Japan defined the ROO in its FTA with Singapore as an HS6 digit while using an HS8 digit with its FTA with Mexico. However, we found Table 11. Summary of ROO in the Japan–Singapore Japan–Mexico FTA (number of items in HS6). JSEPA Category CC + RVC SP CC CTH + RVC + SP CTH + SP CTH + RVC CTH

Total

FTA

and

JMEPA Index HS6 Category 7 6 6 6 6 5 4

24 120 49 14 21 182 1684

CC + SP SP CC CC or CC + RVC CC or CTH + RVC CC or CTSH + RVC CC or RVC CTH + SP CTH + RVC; CC; or CTSH + RVC CTH + RVC; CC; or CTH CTH + RVC CTH CTH or CC + RVC CTH or CTH + RVC CTH or CTH; CTSH + RVC CTSH or CTH or RVC CTH or CTSH + RVC CTH or RVC CTSH + RVC CTSH; CC or CTSH + RVC CTSH or CTH or CTSH + RVC CTSH or CTH + RVC CTSH or CTSH + RVC CTSH or CTH + RVC or CTSH + RVC CTSH RVC

2094 Total

Source: Calculations based on the JSEPA and JMEPA.

Index HS8 7 6 6 6 6 6 6 6 5 5 5 4 4 4 4 4 4 4 3 3 3 3 3 3 2 1

294 12 1958 3 108 83 2 3 1 1 189 1128 1 131 8 2 661 59 17 1 4 30 37 1 472 13 5219

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Table 12. Summary of ROO in Korea–Chile FTA and Korea–Singapore FTA (number of items in HS6). Korea–Chile FTA Category CC + SP CC + RVC CC CC or (CC + RVC) CC or (CTH + RVC) CC or (CTSH + RVC) CTH + RVC CTH CTH or (CTH + RVC) CTH or (CTSH + RVC) CTH or RVC CTSH + RVC CTSH CTSH or RVC RVC Total

Korea–Singapore FTA

Index

HS6

Category

7 7 6 6 6 6 5 4 4 4 4 4 3 3 1

178 80 1287 1 27 31 322 1739 66 471 739 131 105 5 30

CC + SP CC + RVC CC CC or (CTH + RVC) CTH + RVC CTH CTH or RVC CTH or (CTH + RVC) CTH or (CTSH + RVC) CTSH + RVC CTSH CTSH or RVC RVC

5212

Index

HS6

7 7 6 6 5 4 4 4 4 3 2 2 1

292 144 874 5 278 2968 1 85 397 19 117 1 31

5212

Notes: CC, changes in HS2 digit; CTH, HS4 digit; CTSH, HS6 digit; RVC, regional value contents; SP, specific production requirement.

that the number of tariff lines with ROO in the EPA with Singapore is less than half of those with Mexico, although the former was based on an HS6 digit (an HS6 digit has a smaller number of tariff lines than an HS8 digit).21 There are substantial differences between Japan’s first and second EPA. In its first EPA with Singapore, it introduced a smaller number of categories for ROO than in its EPA with Mexico. The majority of tariff lines have a CTH requirement for ROO in the EPA with Singapore, while the EPA with Mexico has a CC criterion. This implies that the ROO in the EPA with Mexico is more restrictive than in the EPA with Singapore. Japan also heavily adopted the combined criteria of CTC and RVC in the EPA with Mexico, which enforce the restrictiveness of ROOs. On the contrary, Korea’s first two bilateral FTAs with Chile and Singapore share a similar pattern. First, the number of categories is similar in the two FTAs, although Korea reduced these in the later FTA with 21 In addition to this, Japan had narrow market access, especially for agriculture, and did not mention tariff lines for exclusion from tariff elimination. Thus, the number of tariff lines with ROO in the agreement was reduced.

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Table 13.

Composition of CTC in FTAs by Japan and Korea (%).

NAFTA

CC+ CTH+ CTSH+ Other Total

EU–Mexico FTA

Japan’s EPA with

Korea’s FTA with

Singapore

Mexico

Chile

Singapore

54.44 40.65 4.35 0.56

14.47 58.34 2.37 24.82

9.22 90.78 0.00 0.00

47.14 29.14 23.47 0.25

30.21 59.76 9.46 0.58

25.18 67.79 6.44 0.59

100

100

100

100

100

100

Source: Information on NAFTA and EU–Mexico FTA is repeated from Table 9 (originally from Estevadeordal and Suominen, 2004).

Singapore. Second, the most frequent ROO in both FTAs is a CTH criterion. Third, an HS6 digit is the tariff line for defining ROO in both FTAs. One of the differences is that the number of restrictive ROOs (tariff lines with index 6 or 7) is smaller in the Korea–Singapore FTA than in the Korea–Chile FTA. Thus, the former FTA is less restrictive than the latter. Based on Tables 11 and 12, Table 13 compares the composition of CTC criteria in the FTAs by Japan and Korea with those of NAFTA and the EU– Mexico FTA. It shows that the JSEPA has the highest share of CTH criterion, while the JMEPA has the lowest share of CTH among the six FTAs discussed. The JMEPA increased the share of CTSH criterion, reducing the share of CTH substantially. Korea has a similar ROO structure, as shown in the previous analysis. Korea’s ROOs tend towards CTH criterion by reducing shares of ROOs for CC and CTSH. This implies that Korea is moving towards less restrictive ROOs while making some items more restrictive by changing ROO criteria from CTSH to CTH. The restrictiveness of ROOs can be calculated with relevant information for primary criterion, supplementary criterion, and other criterion, as described by the Productivity Commission (2004), in addition to Tables 11–13. In general, Japan’s ROOs are more restrictive than Korea’s, and East Asian ROOs are less restrictive than NAFTA or the EU’s ROO system (PANEURO). Table 14 shows that Japan increased the restrictiveness of ROOs in its second FTA, and its ROOs with Singapore are more restrictive than Korea’s ROOs with Singapore. Korea’s ROOs in its second FTA are less restrictive than in its first FTA with Chile. Korea borrowed the framework of the ROO system for this FTA from NAFTA, but its ROOs are less restrictive. Finally, the US adopted rather less restrictive ROOs in a recent FTA with Singapore, which went into force in January 2004. Four East Asian FTAs have more restrictive ROOs than the US–Singapore FTA.

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Agricultural Trade Liberalisation in FTAs Table 14. Criteria

19

ROO restrictiveness of FTAs by Japan and Korea (%). PANEURO

NAFTA

US– SGP FTA

Japan– SGP FTA

Japan– Mexico FTA

Korea– Chile FTA

Korea– SGP FTA

Primary Supplementary Others

0.3 0.08 0.15

0.46 0.09 0.13

0.23 0.04 0.11

0.33 0.06 0.1

0.34 0.09 0.10

0.28 0.11 0.08

0.3 0.06 0.08

Total

0.53

0.67

0.39

0.49

0.54

0.47

0.44

Source: Information on PANEURO, NAFTA, and US–Singapore (SGP) is taken from Table A-2, Productivity Commission (2004).

4. Agricultural Liberalisation in Major FTAs GATT Article IVXX specifies requirements for regional trading blocs to be eligible for exemption from the GATT/WTO most-favoured nations (MFN) principle. It states that “duties and other restrictive regulations of commerce . . . are eliminated with respect to substantially all the trade between the constituent territories of the union or at least with respect to substantially all the trade in products originating in such territories”. GATT Article IVXX was the most controversial to construe. Indeed, it was difficult to achieve consensus on the meaning of “substantially all” total trade among the member states,22 and the timespan for eliminating tariffs and NTBs. Moreover, there are differences in interpretation as to whether tariffs should be totally eliminated and how many of the NTBs should be included within the trade liberalisation package. Even the Committee on Regional Trade Agreements in the WTO has not been able to resolve this controversy. Many FTA member states take conservative positions towards tariff elimination even though they recognise that trade liberalisation will benefit their economies. They have allowed exceptions from tariff elimination for sensitive items and have introduced long-term implementation for tariff eliminations. On the other hand, the Australia–New Zealand FTA (CER) and the Australia–Singapore FTA stipulated complete tariff elimination. Both agreements indicate that each party will eliminate all customs duties on goods originating in the territories of the other party that meet the requirements for the ROOs specified in the respective agreements. 22 WTO

(2002) cautiously mentions that “a threshold has been proposed at 95% of all HS tariff lines at the six-digit level, to be complemented by an assessment of prospective trade flows at various stages of implementation of the RTA, thereby allowing the incorporation of cases where trade is initially concentrated in relatively few products”.

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However, most of the agreements allow exceptions. This section analyses the content of trade liberalisation focusing on agricultural tariffs, since in most cases manufacturing sectors have been liberalised within 10 years of implementation. Tariff elimination schemes of agricultural tariff lines were analysed for two groups of FTAs: NAFTA, the US–Australia FTA, US–Chile FTA, and EU–Mexico FTA for Western countries and the JSEPA, JMEPA, Korea– Singapore FTA, and Korea–Chile FTA for East Asia. There are several ways to analyse tariff elimination depending on the purpose of the research. This study counts tariff lines according to the categories of tariff elimination provided in the appendices of the FTAs considered.23 Tariff lines in the HS chapters 01–24, except HS3 (fisheries), are regarded as agricultural products.24 It is not easy to make groups for comparison since each agreement introduces different liberalisation categories, including quota without tariff change, partial liberalisation, and future reviews. This section summarises the survey of agricultural liberalisation by calculating the number of tariff lines for three groups: items scheduled to be liberalised within 10 years after the implementation of an FTA; items scheduled to be liberalised more than 10 years after implementation; and items excluded from trade liberalisation.

4.1. FTAs by Western countries Australia and New Zealand have liberalised bilateral trade including agriculture in the CER (Table 15). The agreement started with poor market access in 1982. However, with additional negotiations, trade in goods was fully liberalised in July 1990.25 Australia also liberalised its agriculture market for US exporters in the US–Australia FTA, implemented in January 2005. Prior to NAFTA, the US, Canada, and Mexico were important trading partners, with bilateral trade among them slightly higher than trade with any other single trading partner. NAFTA was the first comprehensive agreement to include not only tariff elimination among member countries but also various economic issues such as services, investments, trade regulations, economic cooperation, the environment, and labour. Moreover, it also 23 For more accurate analysis, trade volumes need to be considered in addition to tariff lines. However, this requires substantially more work and will be done in a follow-up study. 24 Some items in HS29, 33, 35, 38, 41, 43, 50, 51–53 can be regarded as agriculture, but these are not taken into account in this study. 25 The 1988 CER Protocol on Acceleration of Free Trade in Goods.

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Agricultural Trade Liberalisation in FTAs

21

Table 15. Agricultural liberalisation in FTAs by Western countries (tariff lines, %). Importer

Exporter

Within 10 Years

After 10 Years

Exception

US US US

Mexico Chile Australia

1154 (97.0) 1364 (85.2) 876 (53.3)

36 (3.0) 235 (14.8) 434 (26.3)

0 (0.0) 0 (0.0) 336 (20.4)

US

Immediate elimination of all tariff lines for agriculture

Australia Chile EU Mexico Mexico

US Mexico US EU Average

574 (81.2) 1204 (59.3) 832 (90.6) 669 (67.9) 79

133 (18.8) 0 (0.0) 17 (1.8) 0 (0.0) 8

0 833 70 316

(0.0) (40.7) (7.6) (32.1) 13

Total 1190 (100) 1599 (100) 1646 (100) 707 (100) 2047 (100) 919 (100) 985 (100) 100

Source: Summarised from Appendices 1 to 7. Note: Numbers in parentheses are shares of the total number of tariff lines for agriculture.

represented substantial liberalisation in most traded goods. NAFTA classified almost all products into four categories, with the majority scheduled to be liberalised within 10 years, with a maximum of 15 years for importsensitive items. The US liberalised its agricultural market for Mexican exports, allowing no exception. The US recorded 97% immediate tariff elimination of agricultural tariff lines, with the final 3% scheduled to be eliminated after 10 years. A similar liberalisation structure can be found in the FTA with Chile, although a higher share of agriculture was scheduled to be liberalised compared to the US–Mexico FTA. However, the US allowed 336 tariff lines (HS8) to be excluded from liberalisation in the US–Australia FTA, with only 53.3% of agriculture to be liberalised within 10 years. Even the US, which has held strongly for trade liberalisation, showed a conservative standpoint in the FTA with Australia, one of the major agricultural exporters. Chile is one country that has actively promoted FTAs, achieving high economic growth and improvement in its business environment. It did not allow exceptions for agriculture, and 574 tariff lines (HS8, 81.2%) were liberalised within 10 years. Of 574 items, 441 (62.4%) were immediately liberalised on the implementation of the FTA with the US. The EU and Mexico began negotiations for a FTA in late 1998 and concluded these in late 1999, with the agreement coming into effect on 1 July 2000. The EU had been concentrating on enlarging and deepening its economic integration within Europe, and the EU–Mexico FTA offered it the opportunity to expand into non-European regions. The EU has protected

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22

its agriculture in the multilateral trading system and regional trade agreements. In its FTA with Mexico, it liberalised only 59% of agriculture within 10 years, allowing 41% to be excluded from tariff elimination. In responding to the EU’s tariff concession, Mexico eliminated 68% of agricultural tariff lines, withholding 32%. However, it recorded a total of 90.6% of tariff lines in the NAFTA. Thus, it can be said that the market access in FTAs is reciprocal. On average, 79% of agricultural tariff lines were liberalised within 10 years in the Western FTAs analysed in this study, while countries allowed 13% of agriculture to be excluded from liberalisation package. 4.2. FTAs by Japan and Korea FTAs in East Asia include the (AFTA), the AFTA–China FTA, JSEPA, Korea–Chile FTA, etc. ASEAN countries felt the need for a more instrumental economic cooperation program in the early 1990s, and a Common Effective Preferential Tariff (CEPT) was proposed at the 22nd ASEAN Economic Minister’s Meeting (AEM) in October 1990. It is not easy to compare the liberalisation scheme of AFTA, since the targeted tariff rates were 0–5% rather than zero tariffs for items in the liberalisation list. Similar schemes were introduced for AFTA’s FTAs with China and Korea (Table 16). Because of this problem, those FTAs were not analysed. Instead, four FTAs by Japan and Korea were reviewed for assessing agricultural liberalisation, representing FTAs by East Asian countries. More FTAs, such as the US–Singapore FTA, could be added, but this is left for future work. Japan concluded its first FTA with Singapore in January 2002. The agreement was officially entitled the Agreement between Japan and the Republic of Singapore for a New-Age Economic Partnership (JSEPA), since it is expected to promote economic partnership and linkages of the two countries in a comprehensive manner. However, Japan was very slow in liberalising its agricultural market, recording the lowest rate of tariff Table 16. lines, %).

Agricultural liberalisation in FTAs by Japan and Korea (tariff

Importer Exporter Japan Japan Korea Korea

Singapore Mexico Singapore Chile Average

Within 10 Years After 10 Years Exception 250 (39.4) 508 (51.9) 933 (65.0) 1011 (71.5) 57.1

0 75 0 12

(0.0) (7.7) (0.0) (0.9) 2.2

Total

385 (60.6) 635 (100) 396 (40.5) 979 (100) 481 (34.0) 1414 (100) 391 (27.7) 1414 (100) 40.7

Remarks HS6 HS8 HS10 HS10

Note: Numbers in parentheses are shares of the total number of tariff lines for agriculture.

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elimination within 10 years in the FTAs reviewed here. It introduced only one liberalisation category for agriculture — immediate liberalisation. MFN tariff rates for items in the immediate liberalisation category were zero; thus Japan’s agriculture has not been affected by the JSEPA. Japan improved market access for agriculture in the FTA signed with Mexico in September 2004 and operational from April 2005. During negotiations Mexico strongly requested that Japan expand access to its agricultural market. Japan provided tariff-rate quotas for agricultural products such as pork and oranges, while minimising tariff elimination for agriculture. Japan agreed with Mexico in eliminating 51.9% of its agricultural tariffs within 10 years, and a further 7.7% within 11 years. Forty items (HS8) were categorised as receiving preferential tariff treatment, under which parts of tariffs were supposed to be cut.26 Korea introduced four categories for agricultural trade liberalisation in the FTA with Singapore: immediate elimination, five-year elimination, 10year elimination, and exception. In its first FTA, Korea eliminated 65% of agricultural tariff lines and 34% were grouped for exception from trade liberalisation. Korea was more progressive than Japan in bilateral FTAs with Singapore, recording a higher liberalisation rate. Korea spent three years concluding its first FTA with Chile, and an additional 1.5 years gaining approval from the National Assembly. It liberalised 71.5% of agricultural products in the FTA within 10 years from implementation (April 2004), although most tariffs were supposed to be eliminated in the fifth year after the agreement became effective. In the FTAs by Japan and Korea, 57.1% of agricultural tariff lines were supposed to be liberalised on average, and 40.7% were categorised as exceptions. Overall, East Asian countries adopted a lower liberalisation ratio within a 10-year liberalisation period for agriculture than did Western countries, although it should be carefully interpreted in that only FTAs by Japan and Korea were considered.

4.3. ASEAN–China FTA China and ASEAN began talks on a free trade accord in early 2002 and signed a framework agreement in November that contained the general goals of the bilateral FTA. Both parties agreed to work faster towards a FTA in 2010, thus creating a large marketplace with over 1.7 billion consumers, about US$1.8 trillion in GDP and US$1.2 trillion in trade volume. After a series of negotiations, the two sides concluded the FTA on market access for 26 These

items mostly apply for HS Chapter 2 (meats).

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commodities in 2004 and implemented the agreement in July 2005 reducing bilateral tariffs; these should be zero for most products by 2010. According to Article 3(4) of the framework agreement of the ASEAN– China FTA,27 products subject to the tariff reduction or elimination program were categorised into two tracks: normal and sensitive. For products listed in the normal track, respective applied MFN tariff rates will gradually be reduced or eliminated between 1 July 2005 and 2012 for ASEAN 628 and China, and in the case of the new ASEAN member states,29 the period is from 1 July 2005 to 2018, with higher starting tariff rates and different staging. Products listed in the sensitive track will have their respective positive applied MFN tariff rates, meaning that those items would not be free of tariffs even after 2018. The number of products listed in the sensitive track is subject to a maximum ceiling to be mutually agreed among the parties. ASEAN 6 and China cannot have more than 400 HS6 tariff lines, while the sensitive track items for new member countries cannot exceed 500 items (HS6). The sensitive track items will be categorised into two groups: sensitive list and highly sensitive list. A maximum of 40% of sensitive track items only can be listed as highly sensitive goods. Since the ASEAN–China FTA involves 11 countries and special considerations are taken into account in the concession of tariff elimination, the appendices of tariff elimination are quite complicated. Figure 1 represents overall views of tariff elimination in the ASEAN–China FTA. Most tariff lines (92.4% for ASEAN 6 and China, 90.4% for new member countries) will be completely liberalised by 2012 for ASEAN 6 and China and by 2018 for new member countries. The remaining items will be categorised into the sensitive track and the tariffs for these items will be reduced to 0– 5% by 2018 for ASEAN 6 and China and 2020 for new member countries. However, a small number of highly sensitive items will have their tariffs reduced to not higher than 50% not later than 1 January 2015 for ASEAN 6 and China, and 1 January 2018 for the newer ASEAN member countries. The tariff elimination scheme in Fig. 1 covers all tariff lines, including agriculture. Since most member countries of the ASEAN–China FTA have no serious agricultural problems in FTAs, only a small number of agricultural products are classified as highly sensitive. For example, China has

27 The Framework Agreement on Comprehensive Economic Co-operation between the Association of South East Asian Nations and the People’s Republic of China, signed on 4 November 2002 in Phnom Penh. 28 ASEAN 6 refers to the original members of ASEAN: Brunei, Indonesia, Malaysia, Philippines, Thailand, and Singapore. 29 The new ASEAN member countries are Cambodia, Laos, Myanmar, and Vietnam.

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Agricultural Trade Liberalisation in FTAs

Normal Track

Sensitive Track

SL

ASEAN6 China

2015: tariff = 0% (85.6%)

New Members

Fig. 1.

2010: tariff = 0% (89.5%)

2012: tariff = 0% (2.9%)

2018: tariff = 0% (4.8%)

25

2012: tariff <20% 2018: 0–5% (5.7%)

2012: tariff <20% 2018: 0–5% (5.7%)

HSL

2015: tariff <50% (1.9%)

2018: tariff <50% (2.9%)

Summary of tariff elimination in the ASEAN–China FTA.

Notes: SL, sensitive list; HSL, highly sensitive list. Numbers in parentheses are shares of total tariff lines. 32 items (in HS6), Malaysia 38 (HS9), Philippines 41 (HS6), and Thailand 51 (HS6).

5. Conclusion To curb trade deflection, FTAs introduce ROOs, but overly-stringent ROOs will reduce the economic gains from the establishment of FTAs because of the internal characteristic of protection against imports. This paper concludes that advanced economies such as the US and the EU are likely to use ROOs more heavily than developing countries, blocking the inflow of imports from their FTA partner countries. ROOs will be maintained unless member countries of an FTA agree to revise it. However, original ROOs adopted in an FTA may not be relevant since economic structures and business environments change.30 For example, most companies depend on a wide range of outsourcing, and it will be more beneficial for FTAs to allow some forms of outsourcing, resulting 30 Australia

and New Zealand adopted a loose type of ROO in the bilateral FTA (CER) in the 1990s, but the two countries are now discussing its revision.

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in the facilitation of intra- and external trade. Also, political issues can influence changes in the structure of ROOs for specific sectors. As MFN tariffs are reduced, the importance of ROOs will decrease, since the expected net gains from satisfying the ROOs will shrink. Krueger (1985) argues that many companies give up applying for the tariff preferences of the NAFTA because of the high compliance costs. Even though tariff preferences will cover the extra costs, companies will then have incentives for satisfying the ROOs. This paper reports that FTAs by East Asian countries have a wide gap in ROOs, from the simplest ROO in the world (ASEAN–China FTA) to stringent ROOs in FTAs by Japan and Korea.31 This implies a high probability of the spaghetti bowl effect in East Asia. All East Asian FTAs are now implemented and, while no serious problems have been reported, the region will experience negative impacts from the different ROOs. East Asia has been discussing and promoting a region-wide FTA since the East Asian Vision Group (EAVG) was established in 1999, with the agreement by ASEAN+ 3 Leaders. One viable approach is to consolidate the many bilateral FTAs in East Asia into a single East Asian FTA (Cheong, 2005). Although the FTAs will bring substantial economic gains for East Asian countries, the region will need to overcome many challenges during the consolidation process. In particular, the ROO is one of the most difficult areas, since each country and each FTA has different types of ROOs depending on industrial competitiveness.

References APEC (2004). Free Trade Agreements/Regional Trade Agreements (FTAs/RTAs) in the Asia–Pacific Region. Part II. APEC Economic Outlook. Brenton, P (2003). Notes on Rules of Origin with implications for regional integration on Southeast Asia. Presented at PECC Trade Forum. Washington, DC, 22–23 April. Cadot, O, J de Melo, A Estevadeordal, A Suwa-Eisenmann, and B Tumurchudur (2002). Assessing the effects of NAFTA’s Rules of Origin, Mimeo. Cheong, I (2001). Analysis of Chile–MERCOSUR FTA. Unpublished Manuscript. Seoul: Korea Institute for Economic Policy. Cheong, I (2003a). The Korea–Chile FTA: Contents and Assessment. Seoul: Korea Institute for Economic Policy. Cheong, I (2003b). Korea’s FTA policy: Progress and prospects. In Northeast Asian Economic Integration: Prospects for a Northeast Asian FTA, Y Kim 31 ROOs

have been designed defensively by Japan and Korea, showing that they have a passive approach to FTAs and resulting in their obstructing regional trade integration.

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and CJ Lee (eds.), pp. 116–135. Seoul: Korea Institute for International Economic Policy. Cheong, I (2005). Estimation of economic effects of FTAs in East Asia. In East Asian Economic Regionalism, CY Ahn, RE Baldwin and I Cheong (eds.), pp. 139–156. Amsterdam: Springer. Estevadeordal, A (2003). Rules of Origin in FTAs: A world map, Paper presented at PECC Trade Forum. Washington, DC, 22–23 April. Estevadeordal, A and K Suominen (2004). Rules of Origin in FTAs in Europe and in the Americas: Issues and Implications for the EU–MERCOSUR Inter-Regional Association Agreement. Washington, DC: Inter-American Development Bank. Herin, J (1986). Rules of origin and differences between tariff levels in EFTA and in the EC. EFTA Occasional Paper No. 13. Koskinen, M (1983). Excess documentation costs as a non-tariff measure: An empirical analysis of the effects of documentation costs. Working Paper, Swedish School of Economics and Business Administration. Krueger, AO (1993). Free trade agreements as protectionist devices: Rules of Origin. NBER Working Paper No. 4352. Cambridge, MD: NBER. Productivity Commission (2004). Rules of Origin under the Australia–New Zealand Closer Economic Relations Trade Agreement. Canberra, Australia: Productivity Commission. Schiff, M and LA Winters (2003). Regional Integration and Development. Washington, DC: Oxford University Press for the World Bank. Scollay, R and JP Gilbert (2001). New Regional Trading Arrangements in the Asia Pacific? Washington, DC: Institute for International Economics. Urata, S and K Kozo (2003). The impacts of an East Asia FTA on foreign trade in East Asia. NBER Working Paper 10173, December. World Trade Organization (WTO) (2002). Rules of Origin Regimes in Regional Trade Agreements. Committee on Regional Trade Agreements, 5 April.

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Chapter 2

SERVICES IN FREE TRADE AGREEMENTS RYO OCHIAI AND PHILIPPA DEE Australian National University, Canberra ACT, Australia CHRISTOPHER FINDLAY University of Adelaide, Adelaide SA, Australia

1. Introduction This paper reviews the treatment of services in a sample of free trade agreements. Some of the questions motivating this review are: 1. The extent to which the agreements have a common structure and content, which will facilitate their amalgamation and the extension of their conditions to current non-members; 2. The extent to which the agreements go beyond the commitments made by their members in the GATS; 3. The likelihood that preferential agreements of the type studied here will have a significant effect on regional services trade. There are, in addition, a number of other questions of interest with respect to the specific provisions of the agreements. The agreements examined are listed in Table 1. Information is collated on the content of each agreement and transformed into scores, according to the procedures outlined in Tables A.1–A.3. A lower score is applied to an arrangement which is regarded as less liberal, and a higher score is applied to more liberal arrangements. Scores range between zero and one. Tables A.1–A.3 contain the full set of scores organised 29

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Ryo Ochiai, Philippa Dee and Christopher Findlay Table 1.

FTAs included in this study.

AFTA AFTA–China Australia–US CER Chile–Korea EFTA

EU–Mexico Japan–Mexico Japan–Singapore Korea–Singapore NAFTA US–Singapore

by modes of supply for the various elements of the agreements, under subheadings of the form and content of the agreement. Because the scoring was also undertaken for about 80 regional agreements officially permitted by the WTO, some notable findings obtained from the larger sample will also be reported in this paper. The following sections summarise some of the main conclusions with respect to form and content, the treatment of market access provisions compared to national treatment, the implications of larger membership, and the treatment of rules of origin. The final section summarises the main points, where we argue that while these agreements include some treatment of services, the “devil is in the detail” of their provisions.

2. Form and Content 2.1. Regional characteristics of form The form of agreement adopted in regional agreements varies significantly across the regions. Table 2, which refers to a larger sample, classifies the form of the sample agreements based on the region of the member countries. For example, the Japan–Singapore agreement is included in the Asia– Asia regional combination (agreement). Evidently, the agreements where an Asian economy is involved more often take a GATS-like format, namely a positive-binding (bottom-up) list for national treatment and market access. On the other hand, the agreements ratified in the North American region and Western Hemisphere are mostly based on the NAFTA template, that is, a negative-list binding (top-down). Table 2 also reveals that European countries tend to select different strategies depending on the partner region. For instance, these countries are inclined to choose a negative-list approach for national treatment in the agreements with other European countries and with countries in the Americas and Northern America, but adopt a positive-list approach in the agreements with Asia and Africa. Because the latter regions are more likely to take a negative stance for liberalisation in services, and a large number of sectoral reservations are often listed, a positive-list format is likely to

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Services in Free Trade Agreements Table 2. Region∗

Type of agreement by the region of the members. Asia

Europe

Americas

(a) National Treatment: Modes 1 and 2 Negative-list Agreement Asia Europe 4 Americas 1 1 9 North America 2 1 3 Africa Oceania 1 Positive-list Agreement Asia 3 Europe 2 Americas North America 1 Africa Oceania 2

1 1

Positive-list Agreement Asia 5 Europe 2 Americas North America 1 Africa Oceania 2

North America

1 1 3

Africa

Oceania

1 1

1

1

3

(b) Market Access: Modes 1 and 2 Negative-list Agreement Asia Europe Americas 1 1 North America 1 1 Africa Oceania 1

∗ Based

31

1

7 2

1 1

1

1 1 1

on UN regional classification.

be preferred in the agreements involving these regions. However, strategy within European agreements appears to have changed for market access, since the positive-list binding has become the mainstream approach for market access policy in most agreements, regardless of the partner region. The choice of form of binding varies among Asian countries. Whereas the ASEAN Framework Agreement on Services (AFAS) follows the GATS style, services agreements involving Korea, such as Korea–Chile and Korea– Singapore, take the NAFTA-like form (see Fig. 1 and Table A.4). Japan follows different approaches case by case. In the Japan–Singapore Economic Partnership Agreement, Japan adopted the GATS-like agreement, which is contrary to the approach that Korea took in the agreement with Singapore.

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Meanwhile, in the free trade agreement with Mexico, Japan followed a NAFTA-like negative-list approach. Figure 1, which compares the degree of liberalisation of the agreements based on the simple averages of the scorings, shows that with respect to modes 3 and 4, there are no outstanding agreements in terms of liberalisation in trade in services. The scores on modes 1 and 2 have relatively Mode 1 and 2 0.900 Negative list

0.800

Positive list

0.700 0.600 0.500 0.400 0.300 0.200

AFTA–China

AFTA

Japan–Singapore

Mexico–EU

CER

Australia–US

Chile–Korea

Korea–Singapore

Japan–Mexico

EFTA

US–Singapore

0.000

NAFTA

0.100

Mode 3 0.900 Negative list

0.800

Positive list

0.700 0.600 0.500 0.400 0.300 0.200

AFTA–China

AFTA

Japan–Singapore

Mexico–EU

CER

Australia–US

Korea–Singapore

Chile–Korea

Japan–Mexico

EFTA

US–Singapore

0.000

NAFTA

0.100

Fig. 1. The simple averages of scores. Notes: AFTA–China is still under negotiation. No commitment for market access in EFTA and Japan–Mexico.

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33

Mode 4 0.900

Negative list

0.800

Positive list

0.700 0.600 0.500 0.400 0.300 0.200

Fig. 1.

AFTA–China

Japan–Singapore

AFTA

Mexico–EU

CER

Australia–US

Korea–Singapore

Chile–Korea

Japan–Mexico

US–Singapore

EFTA

0.000

NAFTA

0.100

(Continued)

larger variations among agreements. Generally, the Australia–US agreement and CER can be regarded as more liberal than other agreements. In addition, the difference in form does not always indicate the degree of liberalisation. For example, regarding modes 1 and 2, the scoring results show that the form of the Japan–Singapore agreement is no less liberal compared to the Japan–Mexico agreement (Fig. 1). The former follows the GATS template, while the latter does not necessarily cover the liberalising measures stipulated in GATS, e.g., market access and domestic regulations (see Table A.4). With regard to air transport services, most agreements have not included more far-reaching commitments than the existing GATS and NAFTA treatments. Namely, the agreements do not apply to measures affecting traffic rights including the services directly related to the exercise of traffic rights. EU–Mexico and NAFTA explicitly exclude the commitments to liberalisation on air transport services. Therefore most regional agreements have not embarked on making a regional framework to liberalise air transport. 2.2. Negative-list versus positive-list approach — Contents More generally, it seems that whether an agreement follows a negative-list approach or a positive-list approach, it does not always indicate the extent

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of liberalisation, as is sometimes argued. The comparison of the form of agreement in Fig. 1 shows that the agreements based on a negative-list approach are not always more liberal than those following the positive-list style for modes 1 and 2. However, a more critical factor characterising the effectiveness of liberalisation measures for trade in services is the “presentation and contents” of the list, especially sectoral reservations, rather than its format. The system of sectoral classification of services is important. A positivebinding style lists all the sectors opened for the suppliers in other member countries on the basis of Central Product Classification (CPC) as in GATS. Restrictions are frequently attached even if a sector is contained in the liberalising list. Meanwhile, a negative-binding format indicates the reserved sectors, but it is sometimes based on each country’s own sectoral classification (Japan, Mexico, USA, Canada, etc.). Although concordance tables between these different classifications are available, comparisons might be misleading because there are several cases in which each country’s own classification is applied only to some sensitive sectors such as business services, while others are classified by the CPC system. Bearing in mind these qualifications, this study continues to compare agreements according to the concordance tables.1 Table 3 reveals that a great number of agreements include sectoral exclusions in their specific commitments. The agreements involving Australia, such as the CER and the Australia–US agreement generally provide a smaller number of sectoral reservations, whereas many agreements involving Table 3.

Percentages of sectoral exclusions.

Agreements

% Excluded

CER Australia–US NAFTA EFTA Chile–Korea Japan–Singapore Japan–Mexico US–Singapore Korea–Singapore Mexico–EU AFTA AFTA–China

8.0 23.6 37.2 44.7 46.4 46.7 53.3 59.4 59.8 61.2 90.1 —

Based on CPC classification: total = 138 sectors 1 http://www.osha.gov/pls/imis/sic

sangyo/

manual.html,

http://www.stat.go.jp/index/seido/

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35

developing countries, such as AFTA, more likely contain many sectoral restrictions. In general, a larger number of sectoral reservations and severe restrictions are attached to the sensitive sectors, such as financial services, communication services, and transport services, while tourism and travel services and construction services are likely to have a smaller number of reservations. Table 4 sets out the shares of the sub-sectors that are reserved and compares these shares to those in the commitments made in GATS by the Table 4.

Scoring results on sectoral exclusions (% of exclusions). Modes 1 and 2

Mode 3

GATS

Mode 4

GATS

GATS

AFTA Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

90.1 83.3 92.0 98.6 87.0 84.8 94.9 92.0 86.2 90.6 92.0

83.9 96.4 63.8 91.3 — 65.2 87.7 91.3 79.7 95.7 —

48.5 99.3 92.8 100.0 89.1 97.8 100.0 98.6 90.6 89.1 100.0

89.6 99.3 60.9 96.4 — 91.3 99.3 91.3 81.2 97.1 —

37.6 83.3 84.1 98.6 95.7 91.3 98.6 97.8 92.8 87.0 83.3

80.1 87.7 40.6 93.5 — 63.0 99.3 86.2 88.4 81.9 —

AFTA–China AFTA China

100.0 100.0 100.0

78.2 83.9 72.5

100.0 100.0 100.0

93.7 89.6 97.8

100.0 100.0 100.0

66.8 80.1 53.6

Australia–US Australia USA

23.6 22.5 24.6

51.4 51.4 51.4

29.0 34.8 23.2

58.0 52.2 63.8

23.6 22.5 24.6

44.6 47.1 42.0

8.0 6.5 9.4

55.1 51.4 58.7

8.0 6.5 9.4

56.5 52.2 60.9

8.0 6.5 9.4

47.8 47.1 48.6

Chile–Korea Chile Korea

46.4 42.0 50.7

84.8 93.5 76.1

35.5 29.7 41.3

84.4 94.9 73.9

46.4 42.0 50.7

67.8 84.8 50.7

EFTA Iceland Liechtenstein Norway Switzerland

43.7 41.3 45.7 47.8 39.9

50.9 52.2 42.8 63.8 44.9

100.0 42.4 95.7 39.1 45.7

59.4 60.1 46.4 70.3 60.9

66.7 48.6 91.2 54.3 42.8

46.0 42.8 38.4 55.8 47.1

EU–Mexico EU (avg.) Mexico

61.2 46.4 76.1

53.3 46.4 76.1

44.2 41.3 48.6

62.3 48.5 100.0

43.7 41.3 47.8

68.8 37.6 66.7

CER Australia New Zealand

(Continued)

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Table 4. Modes 1 and 2

(Continued ) Mode 3

GATS

Mode 4

GATS

GATS

Japan–Mexico Japan Mexico

53.3 48.6 58.0

62.0 47.8 76.1

42.8 30.4 55.1

77.2 54.3 100.0

53.3 48.6 58.0

52.5 38.4 66.7

Japan–Singapore Japan Singapore

46.7 44.2 49.3

63.8 47.8 79.7

53.6 55.1 52.2

67.8 54.3 81.2

62.7 25.4 100.0

63.4 38.4 88.4

Korea–Singapore Korea Singapore

59.8 70.3 49.3

77.9 76.1 79.7

55.1 60.1 50.0

77.5 73.9 81.2

49.3 59.4 39.1

69.6 50.7 88.4

NAFTA Canada Mexico USA

37.2 30.4 45.7 35.5

64.5 51.4 65.9 76.1

37.2 20.3 55.8 35.5

76.3 63.8 65.2 100.0

37.2 30.4 45.7 35.5

56.3 42.0 60.1 66.7

Singapore–US Singapore USA

59.4 49.3 69.6

65.6 79.7 51.4

39.9 74.2 47.1

72.5 81.2 63.8

39.9 52.2 45.7

65.2 88.4 42.0

member economies.2 The results at sectoral level are reported in Appendix Table A.5 at the end of the report. Most regional agreements include more far-reaching commitments than evident under the GATS. While the GATS commitments are often minimal, in the regional agreements remarkable progress appears to have been made in many sectors, especially transport services, and in many regions, with the exception of AFAS. Some members of ASEAN have made less advanced commitments under the framework of that regional trade agreement, as pointed out in Nikomborirak and Stephenson (2001), mainly as a result of the imposition of restrictions rather than an increase in the number of sectoral exclusions.3 Meanwhile, the importance of sectoral commitments is significantly affected by horizontal commitments or reservations. Table 5A lists the commonly applied restrictions on horizontal commitments, and in comparison, Table 5B illustrates some of the common sectoral restrictions. In horizontal commitments, substantial restrictions have been imposed on the supply of a service, in particular, in mode 3 for the negative-list 2 GATS

data are from http://www.wto.org/english/tratop e/serv e/serv commitments e.htm. 3 In some cases, commitments in regional agreements appear to be less than those in the GATS. This could arise from differences of the dates in which the agreements entered into force and because of different approaches in sectoral classifications.

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37

Horizontal commitments (reservations). Commitments

NAFTA

Ownership restrictions for enterprises (including both private and public enterprises (3)∗ Review on direct acquisitions of large assets (3) Limited majority of foreign board of directors (3) Residency requirements for ownership (3) Restrictions on land acquisitions (3) Requirement for local presence (all) Aboriginal affairs (all)

EFTA

Denial of benefits for enterprises with a less substantial presence (3) Considerations for a balanced proportion of national and foreign capital, the number of foreigners relative to the local population, balanced number of jobs in comparison with the size of the resident population, balanced geographic situation and balanced development of the national economy (all) Requirement for licences and qualifications (all) Residential requirement (all) Restrictions on land acquisitions (3) Restrictions on the foreign managing directors and board of directors (3) Restricted eligibility for subsidies (all)

Mexico–EU

Limitations on the categories of persons eligible for entry (4) Allowed period of stay (4) Requirements for working experience prior to entry (4) Requirements for qualifications (4) Restrictions on the number of persons (4) Restrictions on land acquisition (3) Restrictions on acquisition or sale of bonds and treasury bills (3)

US–Singapore

Restrictions on the sale of shares owned by state enterprises (3) Limitations on equity ownership (3) Nationality and residential requirement for registration of business and local manager (all) Land acquisition and usage (3) The right to adopt or maintain limitations for market access in a manner that is not inconsistent with GATS (all) The right to adopt or maintain limitations on national treatment under any international agreement in force (all) Minority affairs (all)

AFAS

Restrictions on the nationality of board of directors (3) Categories of persons allowed to enter a member country (4) Requirement for licences to establish enterprises (3) Restrictions on the type of establishment (e.g. joint venture, limited liability enterprise) (3) Restrictions on capital ownership (3) Applicability of the Labour Law and Immigration Law (4) Land acquisition (3) (Continued)

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Table 5A. Agreements

(Continued ) Commitments

Requirements for professional qualifications (3,4) Period of entry (4) Applicability of an economic needs test for intra-corporate transfer of experts (4) Discriminated profit tax for foreign enterprises (3) Restrictions on acquisitions, mergers and take-overs (3) Limitations on access to domestic credit (3) Limitations on access to incentives (3) AFTA–China Japan–Singapore

Under negotiation Restrictions on the access to subsidies and incentives (3,4) Obligations for employment of the manager and director who are locally resident (3,4) Land acquisition (3) Regulation on local currency transactions (3) Exceptions for national treatment of the privatization of assets owned by the government (3) Limitations on permanent residents (3) Period of entry (4) Categories of persons allowed to enter a member country (4) No national treatment for the mode 4 entry into Singapore (4)

Japan–Mexico

Nationality requirements for board of directors (3) Restrictions on foreign ownership (3) Restricted access to subsidies (3,4) The right to adopt or maintain any measure relating to new services (1,2,4) Restrictions on the acquisition or sale of bonds and treasury bills (3)

Chile–Korea

Land acquisition (3) Employment requirement for local residents (1,2) Residency requirement (local presence) (1,2) Aboriginal affairs (all) Restrictions on the acquisition of sold or disposed equity interests and assets of existing state enterprises (3) Required authorization for capital transactions of non-residents (3)

Korea–Singapore

Restrictions on the supply of a service through mode 4 (all) Authorization for capital transactions of non-residents (3) Restrictions on the acquisition of sold or disposed equity interests and assets of existing state enterprises (3) Land acquisition (3) Minority affairs (all)

Australia–US

All existing non-conforming measures at the regional level of government (all) Applicability of restrictions to large investments for some corporations in all sectors No horizontal reservations

CER ∗ Transaction

mode in parentheses.

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Table 5B.

39

Reservations on specific commitments for selected sectors.

Sectors

Reservations Often Applied

Business services

Restrictions on the number of services suppliers (1,2)∗ Qualifications of persons, directors or enterprises (1,2,3) Registration requirement for a service supplier (1,2,3) Restrictions on foreign ownership and board of directors (3) Minimum number of local nationality (1,2) Experience prior to entry (1,2) Local presence (1,2) Specific requirements for certifications and licences (1,2)

Communication services

Registration requirement for a service supplier (1,2,3) Monopoly by a local company for some services (3) Prior notification requirement for investment by foreigners on telecommunication services (3) Local nationality requirement for enterprises (3) Limit on foreign participation for some businesses (3) Restrictions on foreign ownership (3)

Distribution services

Local presence (1,2)

Financial services

Commercial presence (1,2) Licences for particular businesses (1,2,3) Laws for protection of confidentiality of information (1,2,3)

Health related and social services

Transport services

∗ Transaction

Qualifications of persons, directors or enterprises (1,2,3) Registration requirement for a service supplier (1,2,3) Foreign ownership and control of, and operation of vessels and air services Pollution control, barge inspection standards, water quality, pilotage, salvage, drug abuse control and maritime communications. Certification, licensing and citizenship requirements for crew members Manning requirements Monopoly by a local company for some sectors Authorization by the government Residential restrictions and nationality restrictions

mode in parentheses.

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agreements, and in modes 3 and 4 for the positive-list agreements. Although direct restrictions on entry (market access and local presence) are common in a number of agreements, indirect restrictions related to domestic regulations are also significant (such as those related to recognition of qualifications and certifications for modes 1 and 2). AFAS, for example, shows a wide range of reservations which may considerably undermine the effect of liberalisation measures. In AFAS, many limitations dismantling the effectiveness of liberalisation are imposed in horizontal commitments, for instance, restrictions on the form of establishment and the dominance of domestic labour laws are explicitly designated, so that the number of sectors committed to liberalisation may not always be a proper indicator of the degree of liberalisation. This point is more likely to be the case for mode 4 transactions where sectoral commitments in a positive-list agreement are frequently described as “Unbound except as indicated in the horizontal section” and few sectoral limitations are added, which may, in part, suggest that the regulation on this transaction mode is less sensitive to the sector involved. In horizontal commitments, the coverage of persons who are eligible to enter the market is often strictly regulated (e.g., only skilled workers, managers and directors, or intra-corporate transferees), so that the sectoral coverage of commitments may not be so important.

2.3. The GATS template versus the NAFTA template NAFTA-type agreements are likely to cover liberalisation measures more comprehensively (see Table A.4). The provisions which would be important for the conduct of trade and investment in services, e.g., those on domestic regulations, monopolies, and transparency, are more often found in this type of agreement than in the GATS type. This may be partly because of the structure of the text, since in the NAFTA template these measures are treated independently of the chapter on trade in services, and are applicable to all the goods and services traded, unlike the GATS template where most measures are generally prescribed in the services chapter.4 There are a few cases in which services are excluded from the provisions of the independent chapters, although the exclusion of services is more common in government procurement. 4 However,

recent agreements based on the GATS template tend to provide these measures in an independent chapter.

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Investment in services and the movement of people are treated in an independent chapter in more recent agreements. However, in some agreements such as the Japan–Singapore agreement and the AFAS, investment liberalisation in services sectors is treated in both the services chapter (mode 3) and in an independent investment chapter or another investment agreement. The priority of the application of the regulation is not clearly specified. Although the Agreement on the ASEAN Investment Area specifies that investment in the services sectors is regulated in the AFAS, the Japan–Singapore agreement does not always clarify the relationship between investment and the services chapter, which may thus lead to a confusion of the interpretations. In addition, the separate investment chapter is in line with the negative-list approach, and its horizontal commitments (reservations) may be applicable to the services sectors as well (this is a topic for further work).5 Generally, in most NAFTA-like agreements the future negotiation process is presented in the text, while the GATS-like agreements often appear to do no more than reiterate the bindings of the GATS. As is often pointed out, the GATS provisions are on the whole less liberal than actual policy. Countries that prefer the positive-list approach appear to have aimed at restraining liberalisation to the minimum level. For example, the ASEAN services trade agreement (AFAS) has adopted a GATS-plus approach, which aims at expanding the sectoral coverage through regular negotiation. In the sense that it establishes the minimum level of liberalisation and extends the liberalisation step by step without a setback, this approach seems to promote future liberalisation. However, an extremely limited number of sectors have been included in each member’s commitments in the AFAS at this stage. These commitments have been revised four times since the agreement was signed, that is, in 1997, 1998, 2001, and 2004. The services sectors contained in the positive list have gradually increased, but many restrictions have been attached to the liberalised items. Consequently, the current AFAS has not been so effective in promoting services trade liberalisation in this region: according to a study of AFAS at the sectoral level (Nikomborirak and Stephenson, 2001), it remains less liberal than the GATS. The ASEAN–China agreement is still under negotiation, and at this stage provisions on services have not been well stipulated, and only an endeavour for future liberalisation has been proposed. However, 5 The

treatment for the mode 4 transaction also includes a similar problem, namely, movement of natural persons is also stipulated in an independent chapter. However, the annex to this chapter usually corresponds to the horizontal commitment for the mode 4 services transaction.

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even if it is formally ratified, the experience in the ASEAN suggests that the liberalisation between China and the ASEAN would not be ambitious. To conclude, based on the observation of these agreements, the extent of liberalisation does not significantly differ between approaches to documenting commitments, but the choice may contribute to differences in the effectiveness of the future liberalisation.

3. Domestic Regulation Provisions on the regulatory conduct of a member country in a nondiscriminatory manner are essential to services trade liberalisation. However, as the scoring results in Table A.4 reveal, agreements offering this article are not popular. Although the GATS stipulates this provision and attempts to facilitate the coordination and cooperation of non-discriminatory restrictions among members, especially through the licensing and recognition of qualifications, many regional agreements appear reluctant to commit themselves to these issues. Many regional services agreements have not had the power to enforce effective liberalisation, and indirect restrictions continue to be imposed on the activities of service providers within a member country. In addition, federal states such as the USA and Canada generally have allowed each state or province to adopt their own non-discriminatory regulations, which makes the regulatory situation even more complicated. A large number of reservations or restrictions on documented commitments appear to be associated with domestic regulations. For example, the entry of foreign suppliers into the business (professional) services sector requires local (domestic) licences. On trade in services through mode 4, the domestic labour law is frequently applied to persons who enter the country to supply services. In most cases, the terms and conditions of entry must follow the rules stipulated in the domestic law. Mutual recognition, a necessary procedure for cross-border transactions of services, is offered in many agreements. The provisions seem to be generally more strictly binding than those in the GATS. However, as stated earlier, most sectoral commitments also provide restrictions on (i.e., reservations that refer to) qualifications of services providers, particularly in professional, transport, telecommunication and financial services, as illustrated in Table 5B. Regulations on transfers, payments and transparency are common in regional agreements. The former appear to be more liberal except when balance of payments problems arise, but there is a large gap between form

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and content in the latter. Some measures for maintaining transparency of rules such as publishing and notification requirements exist in most agreements, but the transparency of the contents themselves is disappointing since the format of the contents has not always been standardised. In particular, the status-quo regulatory structure, generally, is not made clear in the positive-list approach. Treatment regulating subsidies and business practices in services sectors is less prevalent in regional agreements, and only the Japan–Singapore agreement, Australia–US agreement, and CER include a provision on business practice. The possibility of discriminatory treatment on subsidies is specified in services chapters in most cases. Regulations on monopolies and exclusive suppliers are often treated in a separate chapter, which is horizontally applicable to industries other than services. Anti-competitive behaviour is in principle prohibited, but the application of this rule has been excluded in some key sectors such as telecommunications and transport services, where a few domestic providers are empowered to supply services monopolistically.

4. Market Access and National Treatment Market access and national treatment are fundamental principles in the liberalisation of trade and investment in services. While the distinction between market access and national treatment appears ambiguous in the case of services, applying the guidelines for this distinction published by the WTO, the restrictions on national treatment often found in the 12 agreements are associated with residency requirements (including prior residence) and limited access to subsidies. In many agreements, professional services suppliers are required to be residents, which is inconsistent with the principle of non-residency. According to the Japan–Singapore agreement, only Japanese firms can access R&D subsidies in Japan, and more general limitations on access to subsidies by suppliers of the other party are found in the Japan–Mexico agreement (e.g., see Table 5A on horizontal commitments). The treatment of market access and national treatment differs between the GATS approach and its NAFTA counterpart. The agreements adopting a negative-list approach, for example, Chile–Korea, Korea–Singapore, and Australia–US, stipulate the adoption of national treatment and market access in a general manner, unlike the GATS or GATS-like agreements such as Japan–Singapore, in which these provisions are treated as specific commitments and are applied only to the sectors listed by each member as sectoral commitments. In this sense, the former appear to be more liberal.

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On the other hand, a greater number of limitations on market access have been retained in many sectors, and in forms such as nationality requirements, rules on foreign ownership6 and on the form of establishment (e.g., use of joint ventures), and restrictions on the total number of service operations (quantitative restrictions). These restrictions on market access appear to have been the more serious impediments for the liberalisation of trade in services. Limitations on market access protect domestic market rents. Because most sectoral exclusions are relevant to market access, a comparison of the number of such reservations may give a picture of the difference in the extent of market access between agreements. Tables 3 and 4 reveal that bilateral agreements between developed countries, e.g., Australia–US and CER, are likely to have a smaller number of exclusions, whereas all agreements involving less-developed countries, and agreements with multiple members, tend to have many sectoral reservations. This finding may suggest that developed countries, where services suppliers are well-developed, and the market size of services is relatively significant, may have an incentive to share or exchange access to rents via a bilateral agreement while providing protection from suppliers in other regions. Developing countries in which services markets and their suppliers are still immature are more likely to protect rents within their own national boundary.

5. Comparison Between Bilateral and Multiple Member Agreements There are no clear differences between bilateral and multiple-member agreements with regard to the form or contents. The choice of the binding style with regard to sectoral commitments seems not to be dependent on whether an agreement is bilateral or multiple-member. In addition, the sectoral exclusions or reservations do not appear to be affected by this dimension of the agreement. Provisions on domestic regulations are more likely to be included in bilateral agreements (e.g., US–Singapore, Japan–Singapore, Korea– Singapore, Australia–US). Bilateral agreements tend to contain more liberal provisions on mutual recognition than does the GATS. On mode 3 transactions, bilateral agreements more often include a chapter on investment or more liberal provisions on investor–state dispute settlement mechanisms, on nationality (residency) of management and the board of directors, and on performance requirements. Although these findings might indicate 6 This

is included in the limitations on national treatment as well.

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that bilateral agreements may contain broader coverage than agreements with more than two members, restrictions remain even on these items — these are listed within the specific commitments, regardless of the type of agreement. 6. Rules of Origin Many agreements have a provision on the rules of origin. In general, this regulation provides two cases to which the denial of benefits is applied: (i) no substantive business operations in the territory of other parties and (ii) services supplied by a firm owned by persons in a non-party. Some agreements, for example, Japan–Singapore and Korea–Singapore, contain an independent article on the denial of benefits while other agreements, such as EU–Mexico, include the possibility of denying benefits for suppliers with no substantial business operations in the territory of the other parties in the article on the coverage or definition of services. Services supplied by the firms which are outsourcing to non-parties who are not eligible for the benefits under the agreement may not meet the rule of origin. However, it will often be difficult to specify the origin of the services, unlike the case of manufactured goods, in particular, in the service industries where e-commerce is an important tool for cross-border trade. 7. Overall Evaluation on Liberalisation Lastly, we evaluate the degree of services liberalisation for each agreement. One way to do this is to compute the average of the scores for each item in the scoring system, and then assess each agreement according to its average score. However, the importance or weight of each item is assumed to be the same in this procedure. This study, instead, employs factor analysis to determine the appropriate weights on each item. The factor analysis was based on the larger sample (80 agreements) and, using the scoring result for each item — common factors that may characterise the degree of liberalisation of these agreements were extracted. The first factor appears to represent an overall indicator of services liberalisation because a greater value is allocated both to the main measures of form such as national treatment and market access, and to various measures of contents. In addition, the first factor explains 50% of the total variances, thus indicating the validity of using this factor as a source of the weights. This result is valid for all modes of trade in services. The components of the first factor are then used to determine the

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weight for each scoring item. The main results of the factor analysis are reported in Table 6.7 According to this procedure, the EFTA, AFTA, Australia–US, and CER are judged as more liberal for cross-border trade. It might be surprising that the AFTA has been regarded as quite liberal, but the fundamental form may be relatively well established because it adopts a GATS-plus approach. CER, Mexico–EU, Japan–Mexico, and EFTA take a larger value for mode 3 and EFTA, CER, and Chile–Korea do for mode 4 transactions. It is evident that CER is considerably liberal for all modes of trade in services. Moreover, the results indicate that the agreements based on a negativelist binding format are not necessarily more liberal than those following a positive-list binding form. For example, the US–Singapore and Chile–Korea agreements are not so liberal even though they are built on the negative-list approach. We should note that the overall scores obtained from the factor analysis are correlated with those from the simple average value. For example, excluding the AFTA–China agreement, which is still under negotiation, the correlation coefficient is 0.22 for modes 1 and 2, 0.31 for mode 3, and 0.43 for mode 4. However, as shown in Table 7, the rank correlation of the measures is not statistically significant with the exception of mode 4. As a consequence, the question arises as to which overall indicator should be chosen. If we need to measure the degree of liberalisation more exactly, and since the importance of each item varies, each item should be differently weighted. Factor analysis can be used to provide those weights. In particular, if we are concerned about the exact ranking of regional agreements on the extent of liberalisation, this indicator will be more appropriate than the simple average. However, where we aim simply to obtain an assessment of the approximate degree of liberalisation, the simple average, which avoids the complicated estimation process of factor analysis, is preferred. In addition, this indicator avoids the problem of factor analysis where its results may change with the sample used in estimation. For example, because more recent agreements are likely to be more sophisticated and liberal in terms of the coverage of liberalisation measures, factor analysis may extract different factors depending on the sample period. Because this study covers all the past agreements notified by the WTO, this problem may not be serious, but where the sample of agreements is small and this bias is thus expected to be large, the simple average score is preferred.

7 The

Kaiser–Meyer–Olkin measure of sampling adequacy, reported in Table 6, supports the validity of using the sample for implementing the factor analysis.

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47

Results of factor analysis.

(1) Mode 1 and 2 (a) Kaiser–Meyer–Olkin test: 0.808 (b) Total Variance Explained Factor

Total

% of Variance

Cumulative %

1 2 3 4 5

13.2 2.3 1.9 1.6 1.3

50.8 8.9 7.5 6.1 5.1

50.8 59.7 67.2 73.2 78.3

(c) Rotated Factor Matrix 1 Form Scope MFN MFN exemption National treatment Market access Local presence Domestic regulations Transparency Recognition Monopolies Business practices Transfer and payments Denial of benefits Safeguard Subsidies Government procurement Ratchet mechanism Telecommunication Financial services Contents Excluded modes Excluded form Sectoral exclusions Regional measures Land acquisitions Minority affairs Number of domestic employees

2

3

4

5

0.770 0.693 0.087 0.649 0.474 0.192 0.144 0.072 0.547 0.319 0.302 0.367

0.233 0.356 0.122 0.594 0.536 0.876 0.120 0.436 0.555 0.072 −0.070 −0.016

0.335 0.101 0.020 0.327 0.197 −0.009 0.420 0.597 0.277 0.792 0.294 0.781

0.143 0.205 0.041 −0.007 0.289 0.062 0.800 0.169 0.294 0.180 0.462 0.297

0.207 0.103 0.555 0.121 0.253 0.141 0.261 0.330 0.021 0.226 −0.173 −0.169

0.627 −0.421 0.251 0.207

0.482 −0.208 −0.174 0.310

0.241 0.098 0.130 0.636

0.346 −0.332 0.472 0.229

0.148 0.260 0.535 0.104

0.399 0.206 0.286

0.720 0.544 0.281

0.141 0.388 0.242

−0.236 0.423 0.456

−0.178 0.067 0.063

0.811 0.840 0.408 0.819 0.871 0.891 0.777

0.271 0.225 0.077 0.197 0.250 0.017 0.257

0.358 0.256 0.335 0.299 0.273 −0.033 0.309

0.187 0.181 −0.134 0.082 0.058 0.264 0.268

0.105 0.061 0.474 0.235 0.145 0.099 0.046

(Continued)

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Table 6.

(Continued )

(2) Mode 3 (a) Kaiser–Meyer–Olkin test: 0.866 (b) Total Variance Explained Factor

Total

% of Variance

Cumulative %

1 2 3 4 5 6

11.7 2.6 1.5 1.2 1.2 1.0

48.8 11.0 6.3 5.2 4.9 4.2

48.8 59.9 66.1 71.3 76.2 80.4

(c) Rotated Factor Matrix

Form Coverage Scope MFN MFN exemption National treatment Nationality of directors Performance requirement Transparency Denial of benefits Expropriation Transfer and payments Dispute settlement Safeguard Subsidy Government procurement Ratchet mechanism Contents Excluded form Sectoral exclusions Regional measures Land acquisitions Minority affairs Prior residence Foreign participation Large investment

1

2

3

4

5

6

0.559 0.600 0.421 0.276 0.558 0.184

0.532 0.399 0.333 0.407 0.474 0.578

0.359 0.419 0.158 −0.117 0.376 0.144

0.253 0.205 0.611 0.233 0.443 0.254

0.226 0.167 0.083 0.031 0.272 −0.222

−0.196 0.323 0.435 −0.032 −0.022 −0.015

0.227

0.596

0.173

0.167

−0.029

0.212

0.061 0.405 0.085 0.550

0.125 0.502 0.929 0.162

0.859 0.107 0.184 0.388

0.024 0.208 −0.041 0.131

0.148 0.046 0.030 0.468

0.157 0.539 0.019 0.068

0.133 −0.118 0.128 0.305

0.873 0.107 −0.078 0.170

0.048 −0.046 0.136 0.541

−0.003 0.000 0.029 0.104

0.083 −0.542 0.167 −0.017

0.007 −0.146 0.493 0.103

0.199

0.581

0.191

0.415

−0.206

0.023

0.567 0.395 0.645 0.767 0.818 0.736 0.794 0.752

0.240 0.394 0.203 0.170 0.046 0.365 0.328 0.203

0.191 0.166 0.395 −0.054 0.071 0.356 0.251 0.188

0.506 −0.011 0.217 0.214 0.136 0.136 0.089 0.033

0.395 0.287 0.461 −0.118 0.262 0.144 0.067 0.182

0.307 −0.010 0.222 −0.036 0.266 0.248 0.159 0.307

(Continued)

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Services in Free Trade Agreements Table 6.

49

(Continued )

(3) Mode 4 (a) Kaiser–Meyer–Olkin test: 0.870 (b) Total Variance Explained Initial Eigenvalues Factor

Total

% of Variance

Cumulative %

1 2 3 4 5

13.2 2.3 1.9 1.6 1.3

50.8 8.9 7.5 6.1 5.1

50.8 59.7 67.2 73.2 78.3

(c) Rotated Factor Matrix Factor 1

2

3

4

Form Coverage Scope Immigration MFN mode 4 delivery MFN exemption National treatment mode 4 Market access Domestic regulations Transparency mode 4 Transparency movement of people Recognition Denial of benefits Ratchet mechanism

0.665 0.642 0.592 0.372 0.077 −0.006 0.703 0.206 0.060 0.041 0.693 0.576 0.566 0.461 0.291 0.013 0.256 0.389 0.187 0.622 0.585 0.494 0.720 0.352 0.429 0.766

0.118 0.158 −0.125 0.260 0.176 0.202 0.379 0.806 0.640 0.221 0.368 0.485 −0.102

0.253 0.392 0.476 −0.100 0.470 0.045 0.188 0.061 0.163 0.157 0.065 −0.193 −0.296

Contents Excluded form Sectoral exclusions Regional measures Skill of workers Short-term entry Long-term entry Number of quotas Labour market testing Land acquisitions Minority affairs Number of domestic employees1

0.845 0.307 0.887 0.762 0.846 0.822 0.878 0.081 0.869 0.850 0.776

0.159 0.314 0.306 −0.081 0.078 0.070 0.191 0.059 0.267 0.173 0.288

0.161 0.591 0.185 0.447 0.246 0.281 0.195 0.095 0.132 0.063 0.185

1 Extraction

0.183 0.259 0.203 0.290 0.363 0.341 0.292 0.462 0.302 0.045 0.171

method: maximum likelihood. Rotation method: varimax with Kaiser normalization.

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50 Table 7.

Comparison of ranking based on the extent of liberalisation. Simple Averages

Modes 1 and 2 1 Australia–US 2 CER 3 Japan–Singapore 4 US-Singapore 5 Korea–Singapore 6 NAFTA 7 EFTA 8 Chile–Korea 9 Japan–Mexico 10 AFTA 11 Mexico–EU

Factor Analysis

0.810 0.685 0.656 0.652 0.617 0.598 0.525 0.508 0.502 0.481 0.475

CER Australia-US EFTA AFTA Japan–Singapore Mexico–EU NAFTA US–Singapore Korea–Singapore Japan–Mexico Chile–Korea

9.085 8.601 8.296 8.048 7.924 7.445 7.234 6.958 6.645 6.370 5.471

Rank Correlation Coefficients: 0.427 Mode 3 1 Japan–Mexico 2 Australia–US 3 US–Singapore 4 NAFTA 5 Chile–Korea 6 CER 7 Korea–Singapore 8 Mexico–EU 9 EFTA 10 Japan–Singapore 11 AFTA

0.740 0.723 0.719 0.667 0.654 0.652 0.638 0.583 0.571 0.529 0.458

CER Mexico–EU Japan–Mexico EFTA Australia–US US–Singapore NAFTA Chile–Korea Korea–Singapore Japan–Singapore AFTA

7.950 7.872 7.716 7.706 7.379 7.241 6.871 6.835 6.509 6.469 5.583

Rank Correlation Coefficients: 0.409 Mode 4 1 CER 2 Korea–Singapore 3 US–Singapore 4 EFTA 5 Chile–Korea 6 Japan–Mexico 7 NAFTA 8 Japan–Singapore 9 Mexico–EU 10 Australia–US 11 AFTA

0.656 0.632 0.618 0.606 0.584 0.538 0.534 0.520 0.510 0.496 0.440

EFTA CER Korea–Singapore Mexico–EU Japan–Mexico US–Singapore Chile–Korea AFTA Japan–Singapore NAFTA Australia–US

Rank Correlation Coefficients: 0.682** ∗∗ Significant

at 5% level.

11.231 11.072 9.904 9.514 9.492 9.251 9.131 9.036 8.886 8.338 7.320

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51

8. Summary All the agreements examined include a treatment of services. However, a review of the form and content of agreement finds a wide range of approaches with respect to listing commitments, the adoption of sectoral classification schemes, the interaction of sectoral and horizontal commitments, and the treatment of investment. The variety of approaches and the variations in sectoral coverage (either through their exclusions, or through reservations, or through the overriding effects of horizontal clauses) suggest that extension of any benefits to non-members will be difficult. The processes of further steps in liberalisation are not often specified in the GATStype agreements but are more likely to be specified in the NAFTA-style negative-list agreements. Where data are available, commitments with respect to sectoral matters appear to be wider-ranging compared to those already made in the GATS, but constrained by horizontal commitments or other reservations or restrictions. With respect to other provisions, such as domestic regulation, mutual recognition, subsidies, repatriation of funds, transparency, and anticompetitive practices, there are some instances where the agreements offer a wider coverage, but also in those cases, reservations continue to be applied. The agreements adopting the NAFTA template generally seem to pursue a more liberal stance for trade in services in the form of agreement such as leeway for future negotiation, general provisions for national treatment and market access, and coverage of liberalising measures, but the actual effectiveness of agreements, influenced by the horizontal and specific commitments, has been considerably diminished by sectoral reservations, regardless of the form of agreement. The features of the agreements vary depending on the participating economies. Table 8, based on the bigger sample of agreements, indicates that the degree of liberalisation of trade in services is relatively low in the regional agreements between developing countries. The weighted score denotes the overall score on services liberalisation, where each score is summed by being weighted by the first principal component representing the extent of liberalisation on the form of agreement, as discussed in Section 7. Interestingly, the agreements between developed and developing countries are relatively liberal, even compared with the agreements between developed countries. However, the sectoral exclusions are also then relatively large, implying that the substantial impacts of agreements are not always significant. Generally, the lack of sectoral coverage, or where a sector is included, the presence of reservations reduces the impact of these agreements on regional services trade. There will be some markets where provisions are

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52 Table 8.

Comparison of liberalisation based on the development level.

Type of agreement∗

Weighted Total Score

% of Excluded Sectors (Total: 138)

4.681 3.866 4.948

57.3 86.7 73.1

4.403 4.061 5.227

58.0 87.7 71.8

6.056 5.153 6.462

63.1 86.4 69.6

Modes 1 & 2 Developed–developed Developing–developing Developed–developing Mode 3 Developed–developed Developing–developing Developed–developing Mode 4 Developed–developed Developing–developing Developed–developing ∗ Based

on the WTO classification.

made available, but where that occurs it is possible that the effect is more likely to lead to sharing of positions in a protected market rather than the introduction of competition. This situation, however, is not unique to bilateral agreements and, as noted in other work, a bias towards national treatment rather than market access liberalisation is also evident in multilateral negotiation. However, by their nature, the tendency in this direction is more likely in preferential negotiation. The extent of this bias is a topic for further work. Appendix Table A.1.

Templates for cross-border trade in services. Category

Score

(1) Form of agreement Scope Covers everything Excludes only air passenger transport or government services Excludes air passenger transport and government services (same as GATS) Excludes more than GATS (e.g., financial services, maritime transport, audio-visual, government procurement) Endeavours with unspecified scope (cooperation or no detailed provisions) No services provisions MFN Negative list bindings Positive list bindings Best endeavours No commitment

1 0.8 0.75 0.5 0.2 0 1 0.75 0.25 0

(Continued)

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Services in Free Trade Agreements Table A.1.

53

(Continued )

Category

Score

MFN exemptions None None for new bilateral agreements Some for new bilateral agreements For all existing and new bilateral agreements or no commitment on MFN National treatment Negative list bindings Negative list bindings — some sectors Positive list bindings — all sectors Best endeavours No commitment Market access (i.e., prohibition on quantitative restrictions as in GATS) Negative list bindings Negative list bindings — some sectors Positive list bindings — all sectors Best endeavours No commitment Local presence not required (right of non-establishment) Has this provision Has this provision, but with some exemptions Does not have this provision Domestic regulation General provisions as in GATS plus necessity test (or equivalent) General provisions as in GATS (transparency, not a disguised restriction) Measures in a reasonable and impartial manner Provisions for specific sectors, e.g., professions No provisions Transparency (scores additive) Prior comment Publish (as in GATS) National inquiry point (as in GATS) Recognition General provisions as in GATS (non-discrimination, based on international standards) plus provisions for all sectors General provisions as in GATS (non-discrimination, based on international standards) plus provisions for specific sectors General provisions as in GATS (non-discrimination, based on international standards) Provisions for specific sectors, e.g., legal, engineering Encouragement No provisions Monopolies and exclusive services providers Stronger than general provisions in GATS General provisions as in GATS (not act inconsistently with commitments, not anticompetitive in other markets)

1 0.5 0.25 0 1 0.75 0.5 0.25 0 1 0.75 0.5 0.25 0 1 0.5 0 1 0.75 0.4 0.25 0 0.3 0.4 0.3

1 0.75 0.5 0.25 0.2 0 1 0.75

(Continued)

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(Continued )

Category General provisions as in GATS plus some exceptions Provisions for specific sectors, e.g., telecommunications No provisions Business practices Stronger than the GATS General provisions as in GATS (consult with a view to eliminating) Provisions for specific sectors No provisions Transfers and payments No restrictions except to safeguard balance of payments Restrictions in other prescribed circumstances No provisions Denial of benefits (i.e., rules of origin) Denial only to persons that do not conduct substantial (or any) business operations in other party Tougher treatment of specific sectors Tougher treatment of all sectors Total denial if owned by third party, or no provisions to prevent denial Safeguards General provisions Provisions for particular sectors Future negotiations No provisions or banned Subsidies Provisions limiting their use Consultation Future negotiations to limit their use No provisions Government procurement in services Provisions on non-discriminatory access Provisions for access in some sectors Future negotiations No provisions, or no access Ratchet mechanism All subsequent unilateral liberalisation to be bound Sectoral exceptions to ratchet mechanism No mechanism Telecommunications (scores additive) Interconnection (access to and use of PSTN and services by service suppliers of other party) Unbundling Particular services (e.g., leased circuits, resale, number portability) Competitive safeguards Universal Service Obligations Allocation of scarce resources (e.g., spectrum)

Score 0.6 0.5 0 1 0.75 0.5 0 1 0.5 0

1 0.75 0.5 0 0 0.25 0.5 1 1 0.5 0.25 0 1 0.75 0.5 0 1 0.75 0

0.5 0.1 0.1 0.1 0.1 0.1 (Continued)

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Services in Free Trade Agreements Table A.1.

55

(Continued )

Category Financial services (scores additive) Prudential carveout Provision for recognition of prudential measures NT for access to payments and clearing systems New financial services Privacy Data transfer

Score

0.4 0.2 0.1 0.1 0.1 0.1

(2) Content of agreement Excluded modes No modes excluded by one or more parties One mode excluded by one or more parties (e.g., mode 4) Two or more modes excluded by one or more parties, or no provisions Excluded measures No measures (MFN, NT, MA) excluded by one or more parties One measure (e.g., MA) excluded by one or more parties More than one measure excluded by one or more party, or no provisions Sectoral exclusions: total sectors: 138 (based on CPC) No sectors excluded by one or more parties 25% sectors excluded by one or more parties (e.g., maritime, audiovisual) 25–50% sectors excluded by one or more parties (e.g., maritime, audiovisual) 50–75% sectors excluded by one or more parties 75–100% sectors excluded by one or more parties Measures at regional level No measures at sub-national (state or provincial) level excluded Measures at local level excluded by one or more parties Measures at state level excluded by one or more parties Measures at all subnational levels excluded by one or more parties, or no provisions on services trade

1 0.5 0 1 0.5 0 1 0.75 0.5 0.25 0 1 0.7 0.4 0

Restrictions on land purchases No Yes or no services provisions Reservations for minorities No Yes or no services provisions

1 0

Requirements on the number of domestic employees No Yes or no services provisions

1 0

Asymmetric provisions No Yes

1 0

1 0

(Continued)

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Ryo Ochiai, Philippa Dee and Christopher Findlay Table A.2.

Templates for investment. Category

Score

(1) Form of agreement Sectoral coverage Beyond services (in separate chapter) Services only (mode 3 in services chapter) Based on bilateral treaties Endeavours without specified scope None Scope of MFN, NT, etc. provisions (scores additive) Establishment (i.e., greenfield) Acquisition (i.e., merger) Post-establishment operation Resale (i.e., free movement of capital) MFN Negative list bindings Positive list bindings Best endeavours No commitment MFN exemptions None None for new bilateral agreements Some for new bilateral agreements For all existing and new bilateral agreements, or no provisions to prevent exemptions National treatment Negative list bindings — all sectors Negative list bindings — some sectors Positive list bindings — all sectors Best endeavours No commitment Nationality (residency) of management and board of directors Cannot restrict either Cannot restrict either, with sectoral exceptions Can partially restrict board of directors Can partially restrict management or both. Alternatively, sectoral promises to liberalise, but no general promise. No provisions limiting restrictions Performance requirements No local content, trade or other specified requirements (e.g. on technology transfer, or where to sell) No local content or trade requirements, i.e., as in TRIMS Provisions more limited than TRIMS No provisions Transparency (scores additive) Prior comment Publish (as in GATS) National inquiry point (as in GATS)

1 0.5 0.4 0.25 0 0.3 0.2 0.3 0.2 1 0.75 0.25 0 1 0.5 0.25 0 1 0.75 0.5 0.25 0 1 0.75 0.5 0.25 0

1 0.75 0.5 0 0.3 0.4 0.3

(Continued)

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Services in Free Trade Agreements Table A.2.

57

(Continued )

Category

Score

Denial of benefits (i.e., rules of origin) Denial only to persons that do not conduct substantial (or any) business operations in other party Tougher treatment of specific sectors Tougher treatment of all sectors Total denial if owned by third party, or no provisions Expropriation etc. (scores additive) Minimum standard of treatment Treatment in case of strife Expropriation and compensation Transfers and payments No restrictions except to safeguard balance of payments Restrictions in other prescribed circumstances No provisions Investor State dispute settlement Yes No Safeguards General provisions Provisions for particular sectors Future negotiations No provisions Subsidies Provisions limiting their use Consultation Future negotiations No provisions Government procurement Provisions on non-discriminatory access Provisions for access in some sectors Future negotiations No provisions, or completely excluded Ratchet mechanism All subsequent unilateral liberalisation to be bound Sectoral exceptions to ratchet mechanism No mechanism

1 0.75 0.5 0 0.2 0.4 0.4 1 0.5 0 1 0 0 0.25 0.5 1 1 0.5 0.25 0 1 0.75 0.5 0 1 0.75 0

(2) Content of agreement Excluded measures No measures (MFN, NT, MA) excluded by one or more parties One measure (e.g., MA) excluded by one or more parties More than one measure excluded by one or more party, or no provisions Sectoral exclusions: total sectors: 138 (based on CPC) No sectors excluded by one or more parties 25% sectors excluded by one or more parties (e.g., maritime, audiovisual) 25–50% sectors excluded by one or more parties (e.g., maritime, audiovisual)

1 0.5 0 1 0.75 0.5

(Continued)

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Ryo Ochiai, Philippa Dee and Christopher Findlay Table A.2.

(Continued )

Category 50–75% sectors excluded by one or more parties 75–100% sectors excluded by one or more parties Measures at regional revel No measures at sub-national level excluded Measures at local level excluded by one or more parties Measures at state level excluded by one or more parties Measures at all subnational levels excluded by one or more parties, or no provisions on investment Restrictions on land purchases No Yes or no services provisions Reservations for minorities No Yes or no services provisions Requirement of prior residence for establishment No Yes or no services provisions General restrictions on foreign capital participation No Yes or no services provisions Review or approvals on large foreign investments (acquisition) Not required Required Asymmetric provisions No Yes

Table A.3.

Score 0.25 0 1 0.7 0.4 0 1 0 1 0 1 0 1 0 1 0 1 0

Templates for movement of people. Category

(1) Form of agreement Sectoral coverage Beyond services and investment (separate chapter) Services and investment (in both services and investment chapters) Services only (mode 4 in services) Endeavours None Scope Allows permanent immigration Includes access to labour market Temporary movement only No clear scope None

Score

1 0.75 0.5 0.25 0 1 0.75 0.5 0.25 0 (Continued)

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Services in Free Trade Agreements

Table A.3.

59

(Continued )

Category

Score

Immigration Requires changes to immigration procedures (e.g., visa quotas or eligibility criteria) Subject to existing immigration laws and procedures, or no provisions

1 0

MFN for mode 4 delivery Negative list bindings Positive list bindings Best endeavours No commitment

1 0.75 0.25 0

MFN exemptions None None for new bilateral agreements Some for new bilateral agreements For all existing and new bilateral agreements or no commitment to MFN

1 0.5 0.25 0

National treatment for mode 4 delivery Negative list bindings Negative list bindings — some sectors Positive list bindings — all sectors Best endeavours No commitment

1 0.75 0.5 0.25 0

Market access (i.e., prohibition on quantitative restrictions as in GATS) Negative list bindings Negative list bindings — some sectors Positive list bindings — all sectors Best endeavours No commitment

1 0.75 0.5 0.25 0

Domestic regulation General provisions as in GATS plus necessity test (or equivalent) General provisions as in GATS (transparency, not a disguised restriction) Measures in a reasonable and impartial manner Provisions for specific sectors, e.g. professions No provisions

1 0.75 0.4 0.25 0

Transparency of regulations governing service delivery via mode 4 (scores additive) Prior comment Publish (as in GATS) National inquiry point (as in GATS)

0.3 0.4 0.3

Transparency of regulations governing temporary movement of persons (scores additive) Expedite procedures Publish Answer queries or comments

0.3 0.4 0.3 (Continued)

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Ryo Ochiai, Philippa Dee and Christopher Findlay Table A.3.

(Continued )

Category

Score

Recognition General provisions as in GATS (non-discrimination, based on international standards) plus provisions for all sectors General provisions as in GATS (non-discrimination, based on international standards) plus provisions for specific sectors General provisions as in GATS (non-discrimination, based on international standards) Provisions for specific sectors, e.g., legal, engineering Endeavor No provisions Denial of benefits (i.e. rules of origin) Denial only to persons that do not conduct substantial (or any) business operations in other party Tougher treatment to specific sectors Tougher treatment to all sectors Total denial if owned by a third party, or no provisions Ratchet mechanism All subsequent unilateral liberalisation to be bound Sectoral exceptions to ratchet mechanism No mechanism

1 0.75 0.5 0.25 0.2 0

1 0.75 0.5 0 1 0.75 0

(2) Content of agreement — Service delivery General reservations/exceptions No measures (MFN, NT, MA) excluded by one or more parties One measure (e.g., MA) excluded by one or more parties More than one measure excluded by one or more party, or no provisions on movement of people Sectoral exclusions: total sectors: 138 (based on CPC) No sectors excluded by one or more parties 25% sectors excluded by one or more parties (e.g., maritime, audiovisual) 25–50% sectors excluded by one or more parties (e.g., maritime, audiovisual) 50–75% sectors excluded by one or more parties 75–100% sectors excluded by one or more parties Measures at regional revel No measures at subnational level excluded Measures at local level excluded by one or more parties Measures at State level excluded by one or more parties Measures at all subnational levels excluded by one or more parties, or no provisions on movement of people

1 0.5 0 1 0.8 0.6 0.4 0.2 1 0.7 0.4 0

(3) Content of agreement — Facilitation of mobility Skill coverage (least generous treatment among members of FTA) All groups (including unskilled) All business persons, traders and investors, intracorporate transferees, and professionals

1 0.5 (Continued)

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Services in Free Trade Agreements Table A.3.

61

(Continued )

Category A subset of the above (e.g., specialists, managers, and intracorporate transferees) No groups Short-term entry (least generous treatment among members of FTA) Over 90 days or no time limit mentioned Up to 90 days Up to 60 days Up to 30 days No short-term entry, or in the case of unbinding service provisions (e.g. endeavours) Long-term entry (least generous treatment among members of FTA) 5 years or more or no time limit mentioned Up to 4 years Up to 3 years Up to 2 years Up to 1 year No long-term entry, or in the case of unbinding service provisions (e.g., endeavours) Quotas on numbers of entrants No (or not mentioned) Yes, or in the case of unbinding service provisions (e.g., endeavours) Needs test Prohibited Can be applied (or not mentioned or in the case of unbinding service provisions (e.g. endeavours)) Local labour market testing or other criteria All such tests prohibited or not required Some such tests prohibited or not required No prohibitions (or not mentioned or in the case of unbinding service provisions (e.g. endeavours)) Restrictions on land purchases No Yes or no services provisions Considerations for minorities No Yes or no service provisions

Score 0.25 0 1 0.75 0.5 0.25 0

1 0.8 0.6 0.4 0.2 0

1 0 1 0

1 0.5 0

1 0 1 0

Requirements for the number of domestic employees No Yes or no service provisions

1 0

Asymmetric provisions No Yes

1 0 (Continued)

Mexico– EU

US– Singapore

AFTA

AFTA– China

0.75 1 0 1

0.5 1 0 1

0.5 1 0.5 0.5

0.75 1 0.5 1

1 1 0 0.5

0.2 0.25 0 0

0

0

0.5

1

0.5

0.5 0 0.7 0.75

0 0 0.4 0.5

0 0 0 0.5

1 0.75 0.7 0.75

1 0

0.75 0

0 0

1

1

0.5 1 0

0 0.25 0

Japan– Singapore

Japan– Mexico

Chile– Korea

Korea– Singapore

Australia– US

CER

0.5 0 0 0.5

0.5 1 0 1

0.5 0 0 1

0.5 0 0 1

0.75 1 1 1

0.8 1 1 1

0

0.5

0

1

1

1

1

0 0 0 0.5

0 0 0 0

1 0.75 0.7 1

1 0 0.3 0.2

1 0 0.7 0

1 0.75 0.3 0.75

1 0.75 1 0.75

1 0.75 0.4 0.5

1 0

0 0

0 0

0.75 0.75

0.75 0

0.75 0

0.75 0

1 1

0

0

1

0

0

1

0

0

1

0.5

0

1 1 0

1 1 0

1 1 0

0 1 0

0.75 1 0

1 1 0

1 1 0

1 1 0

1 1 0

1 1 1

b763-ch02

(Continued)

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NAFTA

Ryo Ochiai, Philippa Dee and Christopher Findlay

Form of agreement Scope MFN MFN exemptions National treatment Market access (i.e., prohibition on QRs) Local presence not required (right of non-establishment) Domestic regulation Transparency Recognition Monopolies and exclusive services providers Business practices Transfers and payments Denial of benefits (i.e., rules of origin) Safeguards Subsidies

Cross border trade (modes 1 and 2).

November 17, 2009 14:4

62

Table A.4.

NAFTA

US– Singapore

AFTA

AFTA– China

Japan– Singapore

Japan– Mexico

Chile– Korea

Korea– Singapore

Australia– US

CER

0.75 1

0 0

0.75 0

0 1

0 0

0.75 0

0.75 1

0.75 1

0.75 1

0.75 1

0 0

0.5 0.2

0 0

0 0.6

1 0.8

0 0

0 0

0.8 0.3

0 0.6

0 0

1 0

1 0.9

0 0

1

1

1

0.5

1

0

1

0.5

0.5

0.5

1

1

0

1

1

0.5

1

0

0.5

0.5

0.5

0.5

1

0.4

1

1

0.7

1

0.5 See Table A.5 0 1

0.7

1

1

0.4

1

1

1

1

0

1

0

1

1

1

1

1

1

0

1

1

0

1

0

1

0

0

0

0

1

1

1

1

1

1

1

1

1

1

1

1

1

Simple average

0.598

0.525

0.475

0.652

0.481

0.094

0.656

0.502

0.508

0.617

0.810

0.685

Total score

7.234

8.296

7.445

6.958

8.048

−0.094

7.924

6.370

5.471

6.645

8.601

9.085

63

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(Continued)

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0.75 1

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Content of agreement Exclusion of modes: Models 1 and 2, 3, 4 Exclusion of measures: MFN, NT, MA Sectoral exclusions Regional exclusions Restrictions on land purchases Reservations for minorities Symmetry of provisions

Mexico– EU

(Continued )

Services in Free Trade Agreements

Government procurement in services Ratchet mechanism Telecommunications Financial services

EFTA

November 17, 2009 14:4

Table A.4.

NAFTA

Mexico– EU

US– Singapore

AFTA

AFTA– China

Japan– Singapore

Japan– Mexico

Chile– Korea

Korea– Singapore

Australia– US

CER

1

0.5

0.5

1

1

1

1

1

0.5

1 1 1 1

0.8 1 0 1

1 1 0.5 0.75

1 1 1 1

1 1 0 0.5

0 0.25 0 0

1 0 0 0.75

1 1 0 1

1 1 0 1

1 0 0 1

1 1 0.25 1

1 1 1 1

0.25

0

0

0.5

0

0

0

0.5

0.5

0.5

0.75

0

1 0.7

0 0.4

0 0

1 0.7

0 0

0 0

1 0.7

1 0.3

1 0.7

1 0.3

1 0.7

0 0.4

0.5 0.4

1 0

1 0

1 0.6

1 0

0 0

0 1

1 1

0.5 1

1 1

1 1

1 0

0.5

1

1

1

0

0

0.5

0.5

0.5

1

0.5

0

0 1 0

0 0.25 0

0 1 0

1 1 0

0 1 0

0 1 0

1 0 0

1 1 0

0 1 0

1 1 0

0 1 0

0 1 1

0.75 1

0.75 0

0 0

0.75 0

0 1

0 0

0 0

0.75 1

0 1

0.75 0

0.75 1

0 0

(Continued)

b763-ch02

0.5

B-763

1

9in x 6in

1

Ryo Ochiai, Philippa Dee and Christopher Findlay

Form of agreement Sectoral coverage Scope of MFN, NT, etc. provisions MFN MFN exemptions National treatment Nationality (residency) of management board of directors Performance requirements Transparency Denial of benefits (i.e., rules of origin) Expropriation etc. Transfers and payments Investor state dispute settlement Safeguards Subsidies Government procurement Ratchet mechanism

EFTA

(Continued )

November 17, 2009 14:4

64

Table A.4.

NAFTA

Mexico– EU

US– Singapore

AFTA

1

0.5

1

0.4

1

1

0.7

1

0

1

0

1

1

0

Japan– Singapore

0

Japan– Mexico

Chile– Korea

Korea– Singapore

Australia– US

CER

0.5

1

0.5

0.5

1

1

0.5 See Table A.5 0 1

0.7

1

1

0.4

1

0

0

0

0

0

0

0

1

1

1

0

1

0

1

1

0

0

0

1

1

1

1

0

0

1

1

1

1

1

1

1

1

1

1

0

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

Simple average

0.667

0.571

0.583

0.719

0.458

0.115

0.529

0.740

0.654

0.638

0.723

0.652

Total score

6.871

7.706

7.872

7.241

5.583

0.267

6.469

7.716

6.835

6.509

7.379

7.950

B-763

1

AFTA– China

9in x 6in

1

(Continued )

Services in Free Trade Agreements

Content of agreement Exclusion of measures: MFN, NT, MA Sectoral exclusions Regional exclusions Restrictions on land purchases Reservations for minorities General restrictions on foreign capital Review or approvals on large foreign investments (acquisition) Symmetry of provisions

EFTA

November 17, 2009 14:4

Table A.4.

(Continued)

b763-ch02

65

Mexico– EU

US– Singapore

AFTA

AFTA– China

Japan– Singapore

Japan– Mexico

Chile– Korea

Korea– Singapore

Australia– US

CER

1 0.5 0

0.5 0 0

0 0 0

0.5 0.5 0

1 0.5 0

1 0.5 0

1 0.5 0

0.5 0.5 0

0.5 0 0

0 0

1 0

1 0.5

1 1

1 0

0 0

0 0

1 0

0 0

0 0

1 0.25

1 1

0

1

0.5

1

0.5

0

0.5

1

1

1

1

1

0 0

0 0

0.5 0

1 0.75

0.5 0

0 0

0.5 0.75

0 0

1 0

1 0.75

1 0.75

1 0.75

0.7

0.4

0

0.7

0

0

0.7

0.4

0.7

0.3

1

0.4

1 0.75

0 0.5

0 0.5

1 0.75

0 0.5

0 0

0.7 0.5

0.4 0.2

0.7 0

0 0.75

0 0.75

0 0.5

0 0

1 0

0 0

1 0

1 1

0 0

0.75 0

1 1

1 1

1 1

1 1

1 0 (Continued)

b763-ch02

0.5 0.5 0

B-763

1 1 0

9in x 6in

1 0.5 0

Ryo Ochiai, Philippa Dee and Christopher Findlay

Form of agreement Sectoral coverage Scope Immigration MFN for mode 4 delivery MFN exemptions National treatment for mode 4 delivery Market access (i.e., prohibition on QRs) Domestic regulation Transparency of regulations governing service delivery via mode 4 Transparency of regulations governing temporary movement of persons Recognition Denial of benefits (i.e., rules of origin) Ratchet mechanism

EFTA

November 17, 2009 14:4

NAFTA

Movement of people (mode 4) (Continued )

66

Table A.4.

NAFTA

EFTA

Mexico– EU

US– Singapore

AFTA

November 17, 2009 14:4

Table A.4.

(Continued ) AFTA– China

Japan– Singapore

Japan– Mexico

Chile– Korea

Korea– Singapore

Australia– US

CER

Content of agreement

1

1

0.5

1

0.4

1

1

0.7

1

1

1

0

1

1

0.5

0.5

1

0.7

1

1

0.4

1

0

1

0

1

1

1

1

1

1

1

0

1

0

1

0

1

0

0

1

1

1

1

0

1

1

1

1

1

1

1

0.5 1 1

1 0.75 1

0.5 1 1

0.5 0.75 0.8

0.25 0.75 0

0 0 0

0.5 0.75 0.6

0.5 1 1

0.5 1 0.2

0.5 1 1

0 0 0

0.5 1 1

1 0

1 0

1 0

1 0

1 0

0 0

1 0

1 0

1 0

1 0

0 0

1 0

0 0.510 9.514

0 0.618 9.251

0 0.440 9.036

0 0.040 0.000

0 0.520 8.886

0 0.538 9.492

0 0.584 9.131

1 0.632 9.904

0 0.496 7.320

0 0.606 11.231

0 0.656 11.072

67

b763-ch02

0.5

B-763

0.5

1

0.5 See Table A.5 0 1

1 0.534 8.338

0

9in x 6in

1

Services in Free Trade Agreements

(a) Service delivery General reservations/ exceptions Sectoral exclusions Regional exclusions Restrictions on land purchases Considerations for minorities Symmetry of provisions (b) Facilitation of mobility Skill coverage Short term entry Long term entry Quotas on number of entrants Needs test Local labour market testing or other criteria Simple average Total score

Business Services

Communication Services

GATS

Construction Services

GATS

Distribution Services

GATS

Educational Services

GATS

Environmental Services

GATS

GATS

83.3 100.0 61.9 85.7 — 42.9 100.0 100.0 85.7 90.5 —

25.0 0.0 0.0 100.0 50.0 0.0 100.0 0.0 0.0 0.0 0.0

75.0 100.0 100.0 100.0 — 0.0 100.0 100.0 0.0 100.0 —

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

96.9 100.0 75.0 100.0 — 100.0 100.0 100.0 100.0 100.0 —

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

92.5 100.0 40.0 100.0 — 100.0 100.0 100.0 100.0 100.0 —

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

87.5 100.0 0.0 100.0 — 100.0 100.0 100.0 100.0 100.0 —

AFTA–China AFTA China Australia–US Australia USA CER Australia New Zealand

100.0 100.0 100.0 7.1 9.5 4.8 0.0 0.0 0.0

71.1 80.4 61.9 31.0 28.6 33.3 41.7 28.6 54.8

100.0 100.0 100.0 23.8 23.8 23.8 4.8 0.0 9.5

82.1 83.3 81.0 23.8 38.1 9.5 35.7 38.1 33.3

100.0 100.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0

7.5 75.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

100.0 100.0 100.0 37.5 50.0 25.0 0.0 0.0 0.0

85.9 96.9 75.0 25.0 25.0 25.0 25.0 25.0 25.0

100.0 100.0 100.0 10.0 20.0 0.0 0.0 0.0 0.0

96.3 92.5 100.0 70.0 40.0 100.0 40.0 40.0 40.0

100.0 100.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0

43.8 87.5 0.0 50.0 0.0 100.0 50.0 0.0 100.0

29.8 28.6 31.0

82.1 100.0 64.3

76.2 71.4 81.0

64.3 71.4 57.1

50.0 0.0 100.0

75.0 100.0 50.0

0.0 0.0 0.0

87.5 100.0 75.0

10.0 0.0 20.0

100.0 100.0 100.0

0.0 0.0 0.0

100.0 100.0 100.0

Chile–Korea Chile Korea

(Continued)

b763-ch02

89.0 71.4 100.0 100.0 61.9 61.9 100.0 100.0 95.2 100.0 100.0

B-763

80.4 88.1 52.4 100.0 — 42.9 100.0 100.0 61.9 97.6 —

9in x 6in

90.0 83.3 85.7 100.0 92.9 88.1 92.9 85.7 78.6 95.2 97.6

Ryo Ochiai, Philippa Dee and Christopher Findlay

AFTA Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

November 17, 2009 14:4

Sectoral exclusions — cross-border trade. (% of sub-sectors excluded: total sub-sectors = 138)

68

Table A.5.

Business Services

Communication Services

GATS

(Continued )

Construction Services

GATS

Distribution Services

GATS

Educational Services

GATS

Environmental Services

GATS

GATS

58.3 66.7 71.4 61.9 33.3

0.0 0.0 0.0 0.0 0.0

37.5 0.0 100.0 0.0 50.0

43.8 0.0 75.0 75.0 25.0

6.3 0.0 0.0 25.0 0.0

40.0 0.0 40.0 80.0 40.0

55.0 100.0 40.0 20.0 60.0

33.3 0.0 33.3 100.0 0.0

25.0 0.0 0.0 100.0 0.0

EU–Mexico EU (average) Mexico Japan–Mexico Japan Mexico

39.6 19.6 59.5 31.0 26.2 35.7

34.8 19.6 59.5 53.6 47.6 59.5

71.4 76.2 66.7 73.8 76.2 71.4

52.4 76.2 66.7 45.2 23.8 66.7

50.0 0.0 100.0 37.5 50.0 25.0

0.0 0.0 100.0 50.0 0.0 100.0

28.1 6.3 50.0 12.5 25.0 0.0

3.1 6.3 50.0 25.0 0.0 50.0

23.8 27.5 20.0 0.0 0.0 0.0

63.8 27.5 20.0 10.0 0.0 20.0

50.0 0.0 100.0 0.0 0.0 0.0

0.0 0.0 100.0 50.0 0.0 100.0

Japan–Singapore Japan Singapore

33.3 38.1 28.6

54.8 47.6 61.9

31.0 14.3 47.6

54.8 23.8 85.7

0.0 0.0 0.0

0.0 0.0 0.0

37.5 0.0 75.0

50.0 0.0 100.0

30.0 40.0 20.0

50.0 0.0 100.0

50.0 0.0 100.0

50.0 0.0 100.0

Korea–Singapore Korea Singapore NAFTA Canada Mexico USA

46.4 59.5 33.3 19.0 14.3 28.6 14.3

63.1 64.3 61.9 48.4 52.4 59.5 33.3

78.6 81.0 76.2 68.3 61.9 71.4 71.4

71.4 57.1 85.7 46.0 61.9 66.7 9.5

50.0 100.0 0.0 0.0 0.0 0.0 0.0

25.0 50.0 0.0 33.3 0.0 100.0 0.0

75.0 50.0 100.0 0.0 0.0 0.0 0.0

87.5 75.0 100.0 50.0 75.0 50.0 25.0

70.0 100.0 40.0 0.0 0.0 0.0 0.0

100.0 100.0 100.0 73.3 100.0 20.0 100.0

66.7 100.0 33.3 0.0 0.0 0.0 0.0

100.0 100.0 100.0 66.7 0.0 100.0 100.0

63.1 26.2 100.0

47.6 61.9 33.3

92.9 95.2 90.5

47.6 85.7 9.5

0.0 0.0 0.0

0.0 0.0 0.0

25.0 50.0 0.0

62.5 100.0 25.0

50.0 100.0 0.0

100.0 100.0 100.0

50.0 100.0 0.0

100.0 100.0 100.0 69

(Continued)

b763-ch02

54.8 90.5 66.7 28.6 33.3

B-763

26.8 23.8 42.9 16.7 23.8

9in x 6in

22.6 0.0 42.9 23.8 23.8

Services in Free Trade Agreements

EFTA Iceland Liechtenstein Norway Switzerland

Singapore–US Singapore USA

November 17, 2009 14:4

Table A.5.

Health Related and Social Services

GATS

GATS

GATS

GATS 53.3 100.0 66.7 33.3 66.7 33.3 33.3 66.7 33.3 66.7 33.3 100.0 100.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

54.2 100.0 0.0 33.3 — 33.3 33.3 66.7 66.7 100.0 — 43.8 54.2 33.3 16.7 33.3 0.0 16.7 33.3 0.0 0.0 0.0 0.0

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 0.0 0.0 0.0 12.5 0.0 25.0 25.0 25.0 25.0

78.1 100.0 0.0 100.0 — 50.0 100.0 100.0 75.0 100.0 — 89.1 78.1 100.0 25.0 50.0 0.0 75.0 50.0 100.0 100.0 100.0 100.0

GATS 92.1 81.8 100.0 100.0 90.9 93.9 93.9 100.0 90.9 81.8 87.9 100.0 100.0 100.0 16.7 6.1 27.3 27.3 27.3 27.3 47.0 42.4 51.5

84.8 100.0 81.8 100.0 — 90.9 57.6 66.7 90.9 90.9 — 84.8 84.8 84.8 81.8 78.8 84.8 72.7 78.8 66.7 97.0 100.0 93.9

GATS 90.1 83.3 92.0 98.6 87.0 84.8 94.9 92.0 86.2 90.6 92.0 100.0 100.0 100.0 23.6 22.5 24.6 8.0 6.5 9.4 46.4 42.0 50.7

83.9 96.4 63.8 91.3 — 65.2 87.7 91.3 79.7 95.7 — 78.2 83.9 72.5 51.4 51.4 51.4 55.1 51.4 58.7 84.8 93.5 76.1

(Continued)

b763-ch02

91.7 100.0 66.7 100.0 — 66.7 100.0 100.0 100.0 100.0 — 95.8 91.7 100.0 83.3 100.0 66.7 100.0 100.0 100.0 100.0 100.0 100.0

Total

B-763

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 33.3 33.3 33.3 0.0 0.0 0.0 16.7 0.0 33.3

Transport Services

9in x 6in

93.0 100.0 93.8 56.3 — 100.0 93.8 100.0 100.0 100.0 — 87.1 93.0 81.3 100.0 100.0 100.0 100.0 100.0 100.0 96.9 100.0 93.8

Recreational, Cultural, and Sporting Services

Ryo Ochiai, Philippa Dee and Christopher Findlay

AFTA 99.4 Brunei 100.0 Cambodia 100.0 Indonesia 100.0 Laos 93.8 Malaysia 100.0 Myanmar 100.0 Philippines 100.0 Singapore 100.0 Thailand 100.0 Vietnam 100.0 AFTA–China 100.0 AFTA 100.0 China 100.0 Australia–US 100.0 Australia 100.0 USA 100.0 CER 3.1 Australia 0.0 New Zealand 6.3 Chile–Korea 100.0 Chile 100.0 Korea 100.0

Tourism and Travel Services

November 17, 2009 14:4

Financial Services

(Continued )

70

Table A.5.

Financial Services

Health Related and Social Services

GATS

GATS

83.3 100.0 33.3 100.0 100.0 100.0 100.0 66.7 66.7 66.7 66.7 83.3 66.7 100.0 100.0 100.0 100.0 77.8 100.0 66.7 66.7 83.3 100.0 66.7

8.3 0.0 33.3 0.0 0.0 52.1 37.5 66.7 0.0 0.0 0.0 16.7 0.0 33.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

33.3 0.0 100.0 0.0 33.3 68.8 37.5 66.7 33.3 0.0 66.7 33.3 0.0 66.7 33.3 0.0 66.7 44.4 66.7 66.7 0.0 33.3 66.7 0.0

43.8 0.0 50.0 75.0 50.0 62.5 25.0 100.0 25.0 0.0 50.0 37.5 25.0 50.0 37.5 75.0 0.0 16.7 0.0 25.0 25.0 0.0 0.0 0.0

50.0 25.0 50.0 75.0 50.0 62.5 25.0 100.0 50.0 0.0 100.0 37.5 0.0 75.0 87.5 100.0 75.0 66.7 100.0 100.0 0.0 37.5 75.0 0.0

GATS 43.2 66.7 9.1 54.5 42.4 89.4 81.8 97.0 75.8 60.6 90.9 66.7 69.7 63.6 53.0 60.6 45.5 46.5 54.5 54.5 30.3 39.4 24.2 54.5

69.7 69.7 81.8 81.8 45.5 78.8 81.8 97.0 83.3 69.7 97.0 80.3 69.7 90.9 92.4 93.9 90.9 88.9 84.8 97.0 84.8 87.9 90.9 84.8

GATS 43.7 41.3 45.7 47.8 39.9 61.2 46.4 76.1 53.3 48.6 58.0 46.7 44.2 49.3 59.8 70.3 49.3 37.2 30.4 45.7 35.5 59.4 49.3 69.6

50.9 52.2 63.8 44.9 42.8 53.3 46.4 76.1 62.0 47.8 76.1 63.8 47.8 79.7 77.9 76.1 79.7 64.5 65.9 76.1 51.4 65.6 79.7 51.4

71

(Continued)

b763-ch02

75.0 0.0 100.0 100.0 100.0 83.3 100.0 66.7 33.3 33.3 33.3 16.7 0.0 33.3 83.3 100.0 66.7 33.3 33.3 33.3 33.3 66.7 100.0 33.3

Total

B-763

81.3 100.0 100.0 25.0 100.0 68.8 37.5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 96.9 93.8 100.0 89.6 68.8 100.0 100.0 100.0 100.0 100.0

GATS

Transport Services

9in x 6in

100.0 100.0 100.0 100.0 100.0 68.8 37.5 100.0 100.0 100.0 100.0 93.8 100.0 87.5 90.6 93.8 87.5 75.0 25.0 100.0 100.0 100.0 100.0 100.0

Recreational, Cultural, and Sporting Services

Services in Free Trade Agreements

EFTA Iceland Liechtenstein Norway Switzerland EU–Mexico EU (average) Mexico Japan–Mexico Japan Mexico Japan–Singapore Japan Singapore Korea–Singapore Korea Singapore NAFTA Canada Mexico USA Singapore–US Singapore USA

(Continued )

Tourism and Travel Services

GATS

November 17, 2009 14:4

Table A.5.

Communication Services

GATS

91.1 100.0 61.9 100.0 — 95.2 100.0 95.2 85.7 90.5 — 93.2 91.1 95.2 59.5 71.4 47.6 85.7 71.4 100.0 78.6 100.0 57.1

18.8 100.0 0.0 100.0 100.0 100.0 100.0 100.0 0.0 0.0 100.0 100.0 100.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0 50.0 0.0 100.0

75.0 100.0 0.0 100.0 — 100.0 100.0 100.0 0.0 100.0 — 87.5 75.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 100.0 100.0

GATS 14.1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 12.5 25.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

96.9 100.0 75.0 100.0 — 100.0 100.0 100.0 100.0 100.0 — 98.4 96.9 100.0 12.5 0.0 25.0 12.5 0.0 25.0 100.0 100.0 100.0

Environmental Services

GATS 25.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 10.0 20.0 0.0 0.0 0.0 0.0 50.0 0.0 100.0

92.5 100.0 40.0 100.0 — 100.0 100.0 100.0 100.0 100.0 — 96.3 92.5 100.0 70.0 40.0 100.0 40.0 40.0 40.0 100.0 100.0 100.0

GATS 0.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

87.5 100.0 0.0 100.0 — 100.0 100.0 100.0 100.0 100.0 — 93.8 87.5 100.0 50.0 0.0 100.0 50.0 0.0 100.0 100.0 100.0 100.0

(Continued)

b763-ch02

77.7 100.0 100.0 100.0 52.4 100.0 100.0 100.0 95.2 100.0 100.0 100.0 100.0 100.0 57.1 90.5 23.8 4.8 0.0 9.5 76.2 71.4 81.0

GATS

Educational Services

B-763

86.6 97.6 52.4 100.0 — 76.2 100.0 100.0 66.7 100.0 — 90.9 86.6 95.2 32.1 26.2 38.1 41.7 26.2 57.1 66.7 92.9 40.5

GATS

Distribution Services

9in x 6in

13.5 97.6 85.7 100.0 92.9 92.9 100.0 100.0 83.3 78.6 100.0 100.0 100.0 100.0 3.6 4.8 2.4 0.0 0.0 0.0 4.8 2.4 7.1

Construction Services

Ryo Ochiai, Philippa Dee and Christopher Findlay

AFTA Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam AFTA–China AFTA China Australia–US Australia USA CER Australia New Zealand Chile–Korea Chile Korea

Sectoral exclusions — investment (Continued )

November 17, 2009 14:4

Business Services

72

Table A.5.

Business Services

Communication Services

GATS

59.5 66.7 71.4 66.7 33.3 72.2 77.7 100.0 76.2 52.4 100.0 69.0 52.4 85.7 71.4 57.1 85.7 71.4 66.7 100.0 47.6 66.7 85.7 47.6

100.0 0.0 70.0 0.0 0.0 6.3 0.0 0.0 12.5 0.0 25.0 50.0 100.0 0.0 50.0 100.0 0.0 33.3 0.0 100.0 0.0 25.0 59.4 0.0

43.8 0.0 100.0 0.0 75.0 59.4 18.8 100.0 50.0 0.0 100.0 0.0 0.0 0.0 50.0 100.0 0.0 41.7 25.0 100.0 0.0 0.0 0.0 0.0

100.0 25.0 100.0 0.0 50.0 43.8 0.0 75.0 12.5 0.0 25.0 12.5 0.0 25.0 75.0 50.0 100.0 8.3 0.0 25.0 0.0 25.0 57.0 75.0

43.8 0.0 50.0 50.0 75.0 32.0 14.1 100.0 50.0 0.0 100.0 50.0 0.0 100.0 100.0 100.0 100.0 58.3 50.0 100.0 25.0 62.5 100.0 25.0

GATS 100.0 50.0 100.0 0.0 100.0 40.0 0.0 80.0 40.0 0.0 80.0 60.0 80.0 40.0 80.0 100.0 60.0 20.0 0.0 60.0 0.0 0.0 62.5 80.0

80.0 100.0 100.0 100.0 20.0 22.5 25.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

GATS 100.0 50.0 100.0 0.0 100.0 25.0 0.0 33.3 0.0 0.0 0.0 50.0 0.0 100.0 66.7 100.0 33.3 0.0 0.0 0.0 0.0 33.3 50.0 33.3

33.3 66.7 33.3 33.3 0.0 50.0 0.0 100.0 66.7 33.3 100.0 66.7 33.3 100.0 100.0 100.0 100.0 66.7 0.0 100.0 100.0 100.0 100.0 100.0

73

(Continued)

b763-ch02

100.0 92.9 94.8 90.5 95.2 54.8 90.5 28.6 38.1 9.5 66.7 45.2 42.9 47.6 76.2 76.2 76.2 68.3 61.9 71.4 71.4 33.3 88.8 66.7

GATS

Environmental Services

B-763

34.5 26.2 50.0 33.3 28.6 36.5 13.5 100.0 67.9 35.7 100.0 51.2 35.7 66.7 53.6 40.5 66.7 57.9 35.7 100.0 38.1 52.4 66.7 38.1

GATS

Educational Services

9in x 6in

100.0 10.7 93.1 0.0 21.4 25.6 0.0 31.0 7.1 4.8 9.5 28.6 31.0 26.2 28.6 28.6 28.6 7.1 7.1 4.8 9.5 28.6 56.8 42.9

Distribution Services

Services in Free Trade Agreements

EFTA Iceland Liechtenstein Norway Switzerland EU–Mexico EU (average) Mexico Japan–Singapore Japan Singapore Japan–Mexico Japan Mexico Korea–Singapore Korea Singapore NAFTA Canada Mexico USA Singapore–US Singapore USA

(Continued )

Construction Services

GATS

November 17, 2009 14:4

Table A.5.

Health Related and Social Services

GATS

GATS

95.8 100.0 66.7 100.0 — 100.0 100.0 100.0 100.0 100.0 — 97.9 95.8 100.0 83.3 66.7 100.0 83.3 66.7 100.0 100.0 100.0 100.0

12.5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 66.7 66.7 100.0 100.0 100.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

91.7 100.0 66.7 100.0 — 100.0 100.0 100.0 66.7 100.0 — 95.8 91.7 100.0 33.3 0.0 66.7 0.0 0.0 0.0 16.7 0.0 33.3

29.7 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 12.5 25.0 0.0 12.5 0.0 25.0 12.5 0.0 25.0

84.4 100.0 0.0 100.0 — 100.0 100.0 100.0 75.0 100.0 — 92.2 84.4 100.0 37.5 50.0 25.0 75.0 50.0 100.0 100.0 100.0 100.0

GATS 79.0 100.0 100.0 100.0 93.9 100.0 100.0 93.9 100.0 97.0 100.0 100.0 100.0 100.0 21.2 15.2 27.3 27.3 27.3 27.3 30.3 27.3 33.3

91.7 100.0 81.8 100.0 — 100.0 100.0 66.7 90.9 93.9 — 95.8 91.7 100.0 83.3 72.7 93.9 72.7 72.7 72.7 98.5 97.0 100.0

GATS 48.5 99.3 92.8 100.0 89.1 97.8 100.0 98.6 90.6 89.1 100.0 100.0 100.0 100.0 29.0 34.8 23.2 8.0 6.5 9.4 35.5 29.7 41.3

89.6 99.3 60.9 96.4 — 91.3 99.3 91.3 81.2 97.1 — 93.7 89.6 97.8 58.0 52.2 63.8 56.5 52.2 60.9 84.4 94.9 73.9

(Continued)

b763-ch02

22.9 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 66.7 100.0 33.3 0.0 0.0 0.0 0.0 0.0 0.0

Total

B-763

92.2 100.0 81.3 68.8 — 93.8 93.8 100.0 100.0 100.0 — 96.1 92.2 100.0 100.0 100.0 100.0 56.3 100.0 12.5 100.0 100.0 100.0

GATS

GATS

Transport Services

9in x 6in

87.5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 3.1 0.0 6.3 100.0 100.0 100.0

Recreational, Cultural, and Sporting Services

Ryo Ochiai, Philippa Dee and Christopher Findlay

AFTA Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam AFTA–China AFTA China Australia–US Australia USA CER Australia New Zealand Chile–Korea Chile Korea

Tourism and Travel Services

November 17, 2009 14:4

Financial Services

(Continued )

74

Table A.5.

Financial Services

Health Related and Social Services

GATS

GATS

83.3 100.0 33.3 100.0 100.0 44.8 22.9 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

100.0 0.0 93.3 0.0 0.0 8.3 0.0 0.0 0.0 0.0 0.0 16.7 0.0 33.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 56.3 33.3

58.3 66.7 100.0 0.0 66.7 39.6 12.5 100.0 50.0 0.0 100.0 33.3 0.0 66.7 50.0 33.3 66.7 88.9 100.0 100.0 66.7 66.7 66.7 66.7

100.0 0.0 100.0 0.0 0.0 43.8 0.0 75.0 37.5 0.0 75.0 37.5 25.0 50.0 25.0 50.0 0.0 33.3 0.0 50.0 50.0 50.0 64.8 50.0

68.8 100.0 50.0 75.0 50.0 64.8 29.7 100.0 50.0 0.0 100.0 37.5 0.0 75.0 87.5 100.0 75.0 75.0 100.0 100.0 25.0 50.0 75.0 25.0

GATS 100.0 37.9 98.5 54.5 21.2 41.7 66.7 54.5 80.3 63.6 97.0 78.8 78.8 78.8 56.1 60.6 51.5 51.5 21.2 100.0 33.3 36.4 89.5 9.1

71.2 78.8 81.8 78.8 45.5 88.0 79.0 100.0 86.4 72.7 100.0 81.8 72.7 90.9 95.5 100.0 90.9 91.9 81.8 100.0 93.9 92.4 90.9 93.9

GATS 100.0 42.4 95.7 39.1 45.7 44.2 41.3 48.6 42.8 30.4 55.1 53.6 55.1 52.2 55.1 60.1 50.0 37.2 20.3 55.8 35.5 39.9 74.2 47.1

59.4 60.1 70.3 60.9 46.4 62.3 48.5 100.0 77.2 54.3 100.0 67.8 54.3 81.2 77.5 73.9 81.2 76.3 65.2 100.0 63.8 72.5 81.2 63.8

75

(Continued)

b763-ch02

100.0 33.3 100.0 33.3 33.3 75.0 0.0 100.0 33.3 33.3 33.3 100.0 100.0 100.0 83.3 100.0 66.7 33.3 33.3 33.3 33.3 100.0 61.5 100.0

Total

B-763

100.0 100.0 100.0 100.0 100.0 93.8 87.5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

GATS

Transport Services

9in x 6in

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 90.6 100.0 81.3 93.8 100.0 87.5 75.0 25.0 100.0 100.0 100.0 93.8 100.0

Recreational, Cultural, and Sporting Services

Services in Free Trade Agreements

EFTA Iceland Liechtenstein Norway Switzerland EU–Mexico EU (average) Mexico Japan–Singapore Japan Singapore Japan–Mexico Japan Mexico Korea–Singapore Korea Singapore NAFTA Canada Mexico USA Singapore–US Singapore USA

(Continued )

Tourism and Travel Services

GATS

November 17, 2009 14:4

Table A.5.

Business Services

Communication Services

GATS

70.2 66.7 28.6 85.7 — 28.6 100.0 81.0 100.0 71.4 — 49.4 70.2 28.6 26.2 38.1 14.3 35.7 38.1 33.3 45.2 66.7 23.8

6.3 100.0 0.0 100.0 100.0 0.0 100.0 100.0 0.0 0.0 100.0 100.0 100.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0 50.0 0.0 100.0

75.0 100.0 0.0 100.0 — 0.0 100.0 100.0 100.0 100.0 — 37.5 75.0 0.0 50.0 0.0 100.0 0.0 0.0 0.0 50.0 100.0 0.0

9.4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 37.5 50.0 25.0 0.0 0.0 0.0 0.0 0.0 0.0

90.6 100.0 25.0 100.0 — 100.0 100.0 100.0 100.0 100.0 — 45.3 90.6 0.0 12.5 0.0 25.0 12.5 0.0 25.0 50.0 100.0 0.0

GATS 31.3 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 10.0 20.0 0.0 0.0 0.0 0.0 10.0 0.0 20.0

92.5 100.0 40.0 100.0 — 100.0 100.0 100.0 100.0 100.0 — 96.3 92.5 100.0 50.0 40.0 60.0 40.0 40.0 40.0 100.0 100.0 100.0

GATS 0.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

75.0 100.0 0.0 100.0 — 100.0 100.0 100.0 100.0 0.0 — 37.5 75.0 0.0 50.0 0.0 100.0 50.0 0.0 100.0 66.7 100.0 33.3

(Continued)

b763-ch02

76.2 57.1 76.2 100.0 100.0 100.0 100.0 100.0 95.2 85.7 33.3 100.0 100.0 100.0 23.8 23.8 23.8 4.8 0.0 9.5 76.2 71.4 81.0

GATS

Environmental Services

B-763

82.1 85.7 45.2 100.0 — 42.9 100.0 100.0 100.0 83.3 — 70.8 82.1 59.5 32.1 23.8 40.5 39.3 23.8 54.8 59.5 85.7 33.3

GATS

Educational Services

9in x 6in

10.7 90.5 76.2 100.0 95.2 85.7 95.2 97.6 90.5 81.0 95.2 100.0 100.0 100.0 7.1 9.5 4.8 0.0 0.0 0.0 29.8 28.6 31.0

GATS

Distribution Services

Ryo Ochiai, Philippa Dee and Christopher Findlay

AFTA Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam AFTA–China AFTA China Australia–US Australia USA CER Australia New Zealand Chile–Korea Chile Korea

Construction Services

November 17, 2009 14:4

Sectoral exclusions — movement of people (Continued )

76

Table A.5.

Business Services

Communication Services

GATS

58.3 66.7 71.4 61.9 33.3 88.1 76.2 61.9 42.9 23.8 61.9 61.9 23.8 100.0 61.9 23.8 100.0 34.9 28.6 61.9 14.3 57.1 100.0 14.3

25.0 0.0 60.0 0.0 0.0 0.0 0.0 0.0 37.5 50.0 25.0 50.0 0.0 100.0 50.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0 15.6 0.0

68.8 0.0 100.0 100.0 75.0 53.1 6.3 25.0 12.5 0.0 25.0 50.0 0.0 100.0 50.0 0.0 100.0 41.7 0.0 25.0 100.0 100.0 100.0 100.0

50.0 25.0 100.0 0.0 50.0 43.8 0.0 75.0 12.5 25.0 0.0 100.0 100.0 100.0 75.0 50.0 100.0 0.0 0.0 0.0 0.0 25.0 29.7 75.0

25.0 0.0 25.0 75.0 0.0 54.7 9.4 50.0 25.0 0.0 50.0 50.0 0.0 100.0 50.0 0.0 100.0 25.0 0.0 50.0 25.0 62.5 100.0 25.0

GATS 20.0 50.0 100.0 0.0 100.0 40.0 0.0 80.0 0.0 0.0 0.0 70.0 40.0 100.0 70.0 100.0 40.0 0.0 0.0 0.0 0.0 40.0 25.6 40.0

75.0 100.0 40.0 100.0 60.0 65.6 31.3 20.0 60.0 100.0 20.0 100.0 100.0 100.0 100.0 100.0 100.0 60.0 100.0 20.0 60.0 80.0 100.0 60.0

GATS 100.0 50.0 100.0 0.0 100.0 33.3 0.0 100.0 0.0 0.0 0.0 50.0 0.0 100.0 66.7 100.0 33.3 0.0 0.0 0.0 0.0 0.0 50.0 33.3

25.0 0.0 66.7 0.0 33.3 50.0 0.0 100.0 50.0 0.0 100.0 50.0 0.0 100.0 66.7 33.3 100.0 66.7 0.0 100.0 100.0 100.0 100.0 100.0

77

(Continued)

b763-ch02

61.9 92.9 84.8 90.5 95.2 54.8 90.5 28.6 73.8 76.2 71.4 57.1 14.3 100.0 78.6 81.0 76.2 68.3 61.9 71.4 71.4 33.3 69.0 66.7

GATS

Environmental Services

B-763

33.3 21.4 50.0 26.2 35.7 55.4 10.7 47.6 40.5 33.3 47.6 66.7 33.3 100.0 66.7 33.3 100.0 46.0 50.0 47.6 40.5 70.2 100.0 40.5

GATS

Educational Services

9in x 6in

47.6 51.2 90.7 76.2 26.2 22.6 0.0 23.8 31.0 26.2 35.7 52.4 4.8 100.0 46.4 59.5 33.3 19.0 14.3 28.6 14.3 23.8 29.2 42.9

Distribution Services

Services in Free Trade Agreements

EFTA Iceland Liechtenstein Norway Switzerland EU–Mexico EU (average) Mexico Japan–Singapore Japan Singapore Japan–Mexico Japan Mexico Korea–Singapore Korea Singapore NAFTA Canada Mexico USA Singapore–US Singapore USA

(Continued )

Construction Services

GATS

November 17, 2009 14:4

Table A.5.

Health Related and Social Services

GATS

GATS

GATS

GATS 10.4 100.0 100.0 33.3 100.0 100.0 100.0 100.0 66.7 66.7 33.3 100.0 100.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

70.8 100.0 33.3 66.7 — 33.3 100.0 100.0 100.0 33.3 — 68.8 70.8 66.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

31.3 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 0.0 0.0 0.0 12.5 0.0 25.0 25.0 25.0 25.0

81.3 100.0 0.0 100.0 — 75.0 100.0 100.0 100.0 75.0 — 90.6 81.3 100.0 25.0 50.0 0.0 75.0 50.0 100.0 100.0 100.0 100.0

GATS 73.1 81.8 90.9 100.0 90.9 100.0 100.0 93.9 100.0 93.9 84.8 100.0 100.0 100.0 16.7 6.1 27.3 27.3 27.3 27.3 47.0 42.4 51.5

89.4 100.0 75.8 100.0 — 90.9 100.0 66.7 100.0 81.8 — 84.1 89.4 78.8 74.2 72.7 75.8 72.7 72.7 72.7 93.9 97.0 90.9

GATS 37.6 83.3 84.1 98.6 95.7 91.3 98.6 97.8 92.8 87.0 83.3 100.0 100.0 100.0 23.6 22.5 24.6 8.0 6.5 9.4 46.4 42.0 50.7

80.1 87.7 40.6 93.5 — 63.0 99.3 86.2 88.4 81.9 — 66.8 80.1 53.6 44.6 47.1 42.0 47.8 47.1 48.6 67.8 84.8 50.7

(Continued)

b763-ch02

91.7 100.0 66.7 100.0 — 66.7 100.0 100.0 100.0 100.0 — 95.8 91.7 100.0 83.3 100.0 66.7 100.0 100.0 100.0 100.0 100.0 100.0

Total

B-763

10.4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 33.3 33.3 33.3 0.0 0.0 0.0 16.7 0.0 33.3

Transport Services

9in x 6in

63.3 75.0 0.0 68.8 — 93.8 93.8 75.0 0.0 100.0 — 41.0 63.3 18.8 50.0 100.0 0.0 50.0 100.0 0.0 62.5 75.0 50.0

Recreational, Cultural, and Sporting Services

Ryo Ochiai, Philippa Dee and Christopher Findlay

AFTA 20.3 Brunei 75.0 Cambodia 100.0 Indonesia 100.0 Laos 93.8 Malaysia 87.5 Myanmar 100.0 Philippines 100.0 Singapore 100.0 Thailand 100.0 Vietnam 100.0 AFTA–China 100.0 AFTA 100.0 China 100.0 Australia–US 100.0 Australia 100.0 USA 100.0 CER 3.1 Australia 0.0 New Zealand 6.3 Chile–Korea 100.0 Chile 100.0 Korea 100.0

Tourism and Travel Services

November 17, 2009 14:4

Financial Services

(Continued )

78

Table A.5.

Financial Services

Health Related and Social Services

GATS

GATS

0.0 0.0 80.0 0.0 0.0 8.3 0.0 0.0 0.0 0.0 0.0 50.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.2 33.3

58.3 66.7 100.0 0.0 66.7 55.2 10.4 0.0 0.0 0.0 0.0 50.0 0.0 100.0 50.0 0.0 100.0 33.3 100.0 0.0 0.0 50.0 100.0 0.0

100.0 0.0 100.0 0.0 0.0 43.8 0.0 75.0 25.0 0.0 50.0 62.5 25.0 100.0 37.5 75.0 0.0 16.7 0.0 25.0 25.0 50.0 65.6 50.0

50.0 25.0 50.0 75.0 50.0 65.6 31.3 100.0 50.0 0.0 100.0 50.0 0.0 100.0 100.0 100.0 100.0 66.7 100.0 100.0 0.0 50.0 100.0 0.0

93.9 39.4 93.6 54.5 24.2 43.2 66.7 54.5 75.8 60.6 90.9 84.8 69.7 100.0 53.0 60.6 45.5 46.5 54.5 54.5 30.3 42.4 83.5 9.1

66.7 75.8 81.8 69.7 39.4 86.6 73.1 93.9 80.3 66.7 93.9 83.3 66.7 100.0 95.5 90.9 100.0 81.8 75.8 93.9 75.8 87.9 100.0 75.8

GATS 66.7 48.6 91.2 54.3 42.8 43.7 41.3 47.8 53.3 48.6 58.0 62.7 25.4 100.0 49.3 59.4 39.1 37.2 30.4 45.7 35.5 39.9 52.2 45.7

46.0 42.8 55.8 47.1 38.4 68.8 37.6 66.7 52.5 38.4 66.7 63.4 38.4 88.4 69.6 50.7 88.4 56.3 60.1 66.7 42.0 65.2 88.4 42.0

b763-ch02

75.0 100.0 0.0 100.0 100.0 55.2 10.4 33.3 66.7 100.0 33.3 100.0 100.0 100.0 100.0 100.0 100.0 66.7 100.0 33.3 66.7 83.3 100.0 66.7

GATS

B-763

33.3 66.7 100.0 33.3 100.0 75.0 0.0 100.0 33.3 33.3 33.3 50.0 0.0 100.0 83.3 100.0 66.7 33.3 33.3 33.3 33.3 100.0 21.9 100.0

Total

9in x 6in

6.3 0.0 0.0 0.0 25.0 60.2 20.3 100.0 62.5 25.0 100.0 12.5 25.0 0.0 25.0 50.0 0.0 66.7 100.0 100.0 0.0 0.0 0.0 0.0

GATS

Transport Services

79

100.0 37.5 95.6 31.3 43.8 100.0 100.0 100.0 100.0 100.0 100.0 50.0 0.0 100.0 0.0 0.0 0.0 75.0 25.0 100.0 100.0 100.0 60.2 100.0

Recreational, Cultural, and Sporting Services

Services in Free Trade Agreements

EFTA Iceland Liechtenstein Norway Switzerland EU–Mexico EU (average) Mexico Japan–Singapore Japan Singapore Japan–Mexico Japan Mexico Korea–Singapore Korea Singapore NAFTA Canada Mexico USA Singapore–US Singapore USA

(Continued )

Tourism and Travel Services

GATS

November 17, 2009 14:4

Table A.5.

November 17, 2009 14:4

80

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Ryo Ochiai, Philippa Dee and Christopher Findlay

References Mattoo, A and P Sauve (eds.) (2003). Domestic Regulation and Service Trade Liberalization. Washington, DC: The World Bank and Oxford University Press. Nikomborirak, D and SM Stephenson (2001). Liberalization of trade in services: East Asia and the Western Hemisphere. Presented at PECC Trade Policy Forum, Regional Trading Arrangements: Stocktake and Next Steps, Bangkok, 12–13 June. OECD (2001). Trade in Services: Negotiating Issues and Approaches. Paris. OECD (2002a). Labour mobility in regional trade agreements. Working Party of the Trade Committee Working Paper 16. OECD (2002b). The relationship between regional trade agreements and the multilateral trading system — investment. Working Party of the Trade Committee Working Paper 18. OECD (2002c). The relationship between regional trade agreements and the multilateral trade system — services. Working Party of the Trade Committee Working Paper 27. Sauve, P and RM Stern (eds.) (2000). GATS 2000: New Directions in Services Trade Liberalization. Washington, DC: Brookings Institution. Stephenson, SM (2002). Can regional liberalization of services go further than multinational liberalization under the GATS? World Trade Review, 1(2), 1–33. WTO (2001). Guidelines for the scheduling of specific commitments under the General Agreement on Trade in Services (GATS), S/L/92.

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Chapter 3

ANALYSIS OF THE RESTRICTIONS ON FOREIGN DIRECT INVESTMENT IN FREE TRADE AGREEMENTS SHUJIRO URATA RIETI and the Graduate School of Asia Pacific Studies, Waseda University, Tokyo, Japan JOHN SASUYA Graduate Institute of International and Development Studies, Geneva

1. Introduction Foreign direct investment (FDI) has become increasingly important in international economic activity in recent decades. This is because world FDI has increased much faster than the world GDP or world trade. From 1980 to 2004, world FDI increased 11 times, while world trade and GDP increased four and five times respectively. FDI has contributed to the economic growth of FDI-recipient countries because it not only generates production and employment but also transfers technology and management knowhow, both of which play important roles in achieving economic growth. Many countries in East Asia, most notably China, have been successful in attracting FDI, which in turn has resulted in rapid economic growth (Urata et al., 2006). The rapid expansion of FDI at global as well as regional or national levels is attributable to a number of factors, one of the most important being liberalisation of FDI policies. Realising its benefits, many countries 81

November 17, 2009 14:4

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Shujiro Urata and John Sasuya

have liberalised policies to attract FDI, some even providing incentives such as corporate income tax exemptions. Foreign investors claim there is substantial room for further liberalisation of FDI policies, despite the already substantial progress. Such views led to an attempt at the World Trade Organization (WTO) to include the establishment of investment rules as an agenda for multilateral trade negotiations. Developed countries supported the attempt, but it failed largely due to strong opposition from developing countries. Although countries are eager to attract FDI, they wish to maintain the right to regulate or restrict FDI for various reasons, including national security and the protection of industries and workers. Faced with regulations and restrictions on FDI, investor countries began using free trade agreements (FTAs) to liberalise FDI policies in FTA partner countries. The provisions for FDI in FTAs are meant to give investors in the contracting parties more concessions when doing business in the contracting countries of the FTAs. These include easier market access and the right of establishment, the rendering of national treatment, and the regulation of performance requirements such as local content and employment. However, FTAs contain several safeguard measures that include restrictions on FDI based on laws at the national level. This study analyses the quality of FTAs in terms of FDI rules based on seven bilateral and regional FTAs: Japan–Singapore, Japan–Mexico, the North American Free Trade Agreement (NAFTA), US–Australia, US–Singapore, Korea–Singapore, and Korea–Chile. The restrictions on FDIs considered in this study are: (i) restrictions on foreign ownership and market access, (ii) national treatment, (iii) screening and approval, (iv) management and the composition of the board of directors, (v) entry of foreign investors, and (vi) performance requirements. Section 2 explains the methodology used for the assessment of FDI rules, Section 3 discusses the results of our analysis, and Section 4 presents concluding remarks.

2. Methodology Several studies have assessed the restrictiveness of FDI policies. Golub (2003) investigated the restrictions on FDI for OECD countries in 1998/2000 by examining rules on foreign equity, screening and approval procedure, and other restrictions including those on boards of directors, movement of people, and input and operations. Golub found the United Kingdom to be the most open and Iceland the least open among 28 OECD

November 17, 2009 14:4

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B-763

Analysis of the Restrictions on FDI in FTAs

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83

member countries. The ranking of the countries in our sample is (in descending order in terms of openness): the US (14), Japan (21), Korea (22), Australia (24), Mexico (25), and Canada (27). Many western European countries are ranked highly. PECC (2002) evaluated FDI regimes of APEC economies by examining wide-ranging FDI rules on market access, examination procedures, most-favoured-nation treatment, profit repatriation, work permits, performance requirements, dispute settlement, investment incentives, and capital exports. Hong Kong was the most open and Brunei the least open member among 19 APEC sample economies. The ranking of our sample countries is: Australia (2), Japan and Korea (3), the US (5), Singapore (7), Canada (10), and Mexico (14). The PECC study shows that FDI regimes of developing countries are more restrictive compared to developed counterparts. We used a modification of the methodology adopted by Golub (2003), as shown in Table 1. We evaluated restrictiveness of FDI rules in six areas: foreign ownership or market access, national treatment, screening and approval procedure, composition of board of directors and management, movement of investors, and performance requirements. High scores indicate open FDI rules. Different areas are given different weights. In most FTAs, restrictions are imposed on ownership and control of a local enterprise through a cap on foreign-owned equities. This is given a weight of 0.4, while restriction on national treatment is given a weight of 0.2 for the computation of the overall score. Other restrictions such as screening procedures, composition of management, entry of investors, and performance requirements are given 0.1 each. This study thus avoids the limitations of Golub’s analysis, wherein some sectors received a score greater than 1, which is the highest possible coefficient for the degree of restrictiveness. In analysing subsectors or an industry within a sector, restrictions are weighted based on their importance to the whole sector. This method has its own limitations, and may be subject to random and arbitrary weights. However, this is assuaged by using standards on all restrictions and by careful analysis, in addition to comparison of the results of one FTA with another. Additionally, this study aims to capture the effect of policies such as the liberalisation of investment sectors through FTAs and therefore does not include business or non-business practices such as corruption, which may restrict the flow of investments. We evaluated FDI rules by sectors, then aggregated them to obtain an overall score by giving them equal weight. In this study, 21 sectors that include 158 ISIC three-digit sub-sectors were evaluated.

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Shujiro Urata and John Sasuya Table 1. Assessment of FDI restrictions (maximum of 1.0 = fully liberalised). Restrictions on ownership and market access No foreign equity is allowed 1–19% is allowed Reservation on ownership and market access 20–34% is allowed 35–49% is allowed 50–74% is allowed 75–99% is allowed No restrictions but unbound Commercial presence is required No restrictions

0 0.1 0.25 0.4 0.5 0.7 0.8 0.9 0.9 1

National treatment No national treatment Reservation on national treatment No restrictions

0 0.25 1

Screening and approval Objections in case the investment is contrary to national interest Investment is required to show economic benefits before approval Reservations for future limitations Objections based on the size of investment Prior or post notification No restrictions

0 0.1 0.25 0.5 0.9 1

Board of directors and management composition All members of the management should be local Reservations for future restrictions Majority should be local At least one is local Should be locally licensed No restrictions

0 0.25 0.5 0.75 0.9 1

Movement of investors No entry Less than one year Reservations for further measures on entry One to two years Three to four years More than four years, but less than 10 No restrictions

0 0.1 0.25 0.4 0.5 0.8 1

Performance requirements Local contents Others

0.75 0.9

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3. Results and Discussion Different FTAs contain different provisions for investment, However, there are some commonalities. All the FTAs under the present study contain a negative list on market access, which means that they have listed sectors that include restriction. All these FTAs provide for a national treatment pre- and post-establishment of a direct investment. While most FTAs have provisions to include local governments in providing favourable treatment, the US–Australia, US–Singapore, and Japan–Singapore FTAs do not include local governments. Some of the FTAs under review provide clauses that allow countries to impose future restrictions on investment, ranging from market access to performance requirements which will affect the flow of investment. A reservation means that while there are currently no available legal restrictions, the contracting parties are free to enact one in the future. This is considered a restriction because it gives the country the power to limit investment in any sector for safeguarding national interest or in any other circumstances. 3.1. Degrees of restrictions The degrees and kinds of restrictions on FDIs in selected countries that signed FTAs are shown in Table 2. Among these FTAs, the agreements between Japan and Mexico and those between Korea and Chile are the most prohibitive to foreign investments. The Japan–Mexico Economic Partnership Agreement has a degree of restrictiveness equivalent to 0.687, almost identical to the score obtained by the Korea–Chile FTA, at which has a 0.688 degree of restriction. Mexico has more restriction on foreign investments compared to its EPA partner Japan. The score is 0.601, which is the lowest among all countries under study, suggesting that Mexico listed one of the most prohibitive provisions on the entry of FDI. As shown in the table, Mexico has the lowest scores in the market access of foreign investments and has defined a restricted zone in which foreign ownership of land is not allowed. While Japan is not as prohibitive, it also provided restrictions on Mexican investors who would like to invest in Japan. In all sectors, Japan can prohibit or impose limitations on the ownership of interests or assets by investors from Mexico or their investments when disposing its equity interests in a state enterprise or government entity. The results suggest that the Korea–Chile FTA is almost as restrictive as the Japan–Mexico EPA, however, there is a difference in the nature of restrictiveness of the two trade agreements. Korea and Chile have almost the same degree of restrictiveness, while in the Japan–Mexico EPA Mexico is

0.048 0.050

0.095 0.098

0.767 0.750 0.784

3

0.088 0.045 0.083 0.046

0.075 0.075

0.038 0.088

0.741 0.693 0.788

4

0.082 0.095 0.009 0.023 0.092

0.025 0.089 0.094

0.100 0.095 0.100

0.049 0.089 0.096

0.710 0.621 0.654 0.855

5

0.158 0.135 0.180 0.146 0.142

0.063 0.095

0.082 0.069

0.050 0.050

0.091 0.045

0.689 0.704 0.673

6

0.271 0.272

0.162 0.142

0.084 0.024

0.084 0.065

0.048 0.048

0.090 0.088

0.687 0.773 0.601

7

0.305 0.234

Movement of People∗

Performance Requirements

US–Australia US Australia

0.340 0.273

0.174 0.164

0.098 0.047

0.097 0.089

0.100 0.100

US–Singapore FTA US Singapore

0.326 0.278

0.172 0.157

0.098 0.096

0.096 0.039

Japan–Singapore EPA Japan Singapore

0.276 0.343

0.157 0.158

0.086 0.089

Korea–Singapore FTA Korea Singapore

0.259 0.310

0.156 0.173

NAFTA Canada Mexico US

0.280 0.222 0.292

Korea–Chile FTA Korea Chile Japan–Mexico EPA Japan Mexico

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0.096 0.093

0.825 0.888 0.763

2

0.100 0.100

Board of Directors

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0.838 0.905 0.770

1

0.096 0.097

Screening and Approval

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Rank

National Treatment

Shujiro Urata and John Sasuya

Total

Limitation of Foreign Ownership/ Market Access

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86

Table 2.

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more prohibitive than its partner. In all sectors, both Korea and Chile listed reservations pertaining to market access, national treatment, composition of management, and performance requirements. Both are among the countries with highest restrictions on foreign ownership and market access. They also maintain the highest restrictions on the entry of investors and businesspeople. Both reserve the right to implement future measures regarding limitations on foreign activities when disposing of state assets. Both provide a high degree of restriction for the primary sectors. The Korea–Chile FTA allows foreign nationals to hold only less than 50% of a Korean legal entity that engages in farming beef cattle or in the wholesaling of meat. Chile’s mining sector is almost closed because any activities related to this sector are subject to the decree of Chile’s president. Both countries maintain high degrees of prohibitions in the information and communications and education sectors. In the information and communications sector, the degree of restrictions on foreign investment is the highest among FTA partners, Korea and Chile garnering respectively scoring of 0.45 and 0.43. In this sector, only Australia has a higher restriction. Both countries limit foreign ownership and market access and also require foreign investors to perform certain obligations such as the broadcast of locally-produced programs. NAFTA and the Korea–Singapore FTA are also restrictive to foreign investments. NAFTA is very restrictive because Canada and Mexico maintain a high degree of restriction whereas the US is relatively open. The latter only requires reciprocity from other countries. Canada and Mexico have very high degrees of restriction on primary sectors: the Canadian agricultural sector has an average score of 0.44 while the Mexican agricultural sector obtained an average score of 0.42. The mining sector in Mexico is closed. Canada obtained a 0.36 score in the mining sector, meaning a high degree of restriction, including a limitation on foreign ownership of the mining of metal ores (uranium and thorium) to 49% and a prohibition on increasing any investments that were made prior to 23 December 1987. There is also a similar restriction on investments in crude petroleum and natural gases. In addition, all North American countries maintain tight restrictions on the financial, transportation, and information and communication sectors. In Canada, the restriction on transportation sector is very high at 0.38, while in United States the financial sector obtained a 0.58 score for restrictiveness. In Mexico, the electricity sector is closed. In the Korea–Singapore FTA, Korea maintains most of the restrictions in many sectors on foreign investment compared to Singapore, which is relatively more open to foreign investment. In all sectors, Korea reserves the right to prohibit or restrict ownership with respect to the transfer or disposal of stocks or assets held in existing state-owned or government entities in industries such as electricity and gas. Korea also reserves the right

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to prohibit or limit the rights of Singaporean investors to control a company or an investment created in the transfer or disposal of state assets. Further, it reserves the right to adopt or maintain any measure with respect to land acquisition by foreigners. Singapore imposes restrictions on the financial sector and requires investments to have local managers. Both countries have very tight restrictions on the electricity sector and tight restrictions on the transportation, information and communications, education, public administration, defense, and compulsory social security sectors. The US–Australia FTA, US–Singapore FTA and Japan–Singapore EPA (JSEPA) have the lowest degrees of restrictions among the FTAs under study as they scored 0.837, 0.825, and 0.767 respectively. As discussed in the next section, the US is the country most open to investment among these countries. This explains why the scores of the US–Australia and US– Singapore FTAs are almost the same, but different from that of the JSEPA. Likewise, FTAs agreed on by the same country differ in scores. For instance, the US has fewer restrictions on its FTA with Australia compared to those it signed with Singapore, Mexico, and Canada. First, the principle of reciprocity is a feature of US FTAs, which means that the US opens only those sectors which its partner also opens for its own investors. As Table 3 suggests, Australia and Singapore are more open to the US than are Mexico and Canada. There is a slight difference between the US FTAs with Singapore and Australia due to the size of the economies — Australia is more important to the US than is Singapore. Further, there are more restrictions on the financial sector in the US–Singapore FTA, perhaps due to competition. Singapore’s financial sector is relatively open1 and US investors can easily penetrate it, while the US still maintains several limitations on this sector. Thus, the US has no reason to further open while it can maintain the current level of financial restrictions on the entry of Singaporean investors into the US financial market. Japan is more open to Mexico than it is to Singapore. This can be explained by the “learning experience” principle. The Japan–Singapore EPA was the first of its kind for Japan. As the learner during the negotiation with a relatively closed economy,2 Japan tried to maintain its existing restrictions. Because Singapore’s economy was already open to trade and 1 However, this does not mean that the Singapore financial market is totally open for investment. Several restrictions remain, including full license on foreign banks. There are also limitations on the kinds of services that can be provided by the bank, such as establishment of ATM networking or provisions for debit services through an Electronic Funds Transfer at Point of Sale (EFTPOS) network. 2 Being a closed economy does not mean that Japan does not trade or invest. Japan’s economy is said to be closed because the level of inward investments is low, in addition to a low trade/Gross Domestic Product (GDP) ratio.

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Degrees of restrictions of selected countries that signed FTAs by types of restrictions.

0.319 0.310 0.273 0.291 0.265 0.272 0.228 0.280

Screening and Approval

Board of Directors

Movement of People∗

Performance Requirements

Total

Rank

0.175 0.163 0.164 0.159 0.151 0.142 0.139 0.158

0.096 0.094 0.047 0.085 0.073 0.095 0.023 0.009

0.095 0.043 0.089 0.086 0.083 0.069 0.077 0.025

0.100 0.075 0.100 0.048 0.063 0.050 0.071 0.100

0.096 0.093 0.097 0.093 0.064 0.045 0.089 0.048

0.881 0.778 0.770 0.762 0.699 0.673 0.627 0.620

1 2 3 4 5 6 7 8

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US Singapore Australia Japan Korea Chile Mexico Canada

National Treatment

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Table 3.

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investment, given the size of the Japanese economy, Japan was in a better position to ask for more favourable treatment and to give less during the negotiations. In addition, Singapore has a negligible agricultural sector, which Japan has quite a large interest in. In Japan, that sector remains highly closed. The situation was very different for its EPA with Mexico. Mexico had already signed FTAs with several countries, including those in North America and Europe. Because Japan had to ask more from Mexico than it did from Singapore, such as the opening of the automobile market, Japan also had to give more. 3.2. Assessment by country Tables 3 and 4 show that Canada, Mexico, Chile, and Korea are very restrictive with FDIs, their degrees of restrictiveness being 0.62, 0.63, 0.67, and 0.70 respectively. Canada limits foreign ownership in all sectors when Table 4.

Degrees of restrictions of selected FTAs by sectors. Primary Sectors

Secondary Sectors

Tertiary Sectors

US–Australia FTA US Australia

0.920 0.805

0.940 0.850

0.901 0.761

US–Singapore FTA US Singapore

0.940 0.873

0.940 0.885

0.879 0.743

Japan–Singapore EPA Japan Singapore

0.310 0.825

0.780 0.775

0.797 0.779

Korea–Singapore FTA Korea Singapore

0.675 0.900

0.675 0.880

0.696 0.789

NAFTA Canada Mexico US

0.395 0.210 0.890

0.685 0.555 0.900

0.643 0.708 0.848

Korea–Chile FTA Korea Chile

0.695 0.520

0.750 0.650

0.702 0.691

Japan–Mexico EPA Japan Mexico

0.393 0.213

0.730 0.545

0.817 0.648

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disposing of state interests. Additionally, “constraints” can be applied when acquiring shares in federally incorporated corporations. In addition to the restrictions on the primary sectors that were discussed in the previous section, Canada imposes restrictions on other sectors such as air transportation, wherein non-citizens or non-residents, corporations incorporated outside Canada, foreign governments, and other enterprises owned or controlled by the above-mentioned entities are restricted to owning 25% of Air Canada. Only citizens, permanent residents in Canada, or enterprises that are at least 75% owned and controlled by Canadian citizens or permanent residents can operate Canadian carriers for domestic and international flights, scheduled or not. Canada also reserves the right to implement any measure that restricts the acquisition or establishment of an investment in Canada for the provision of specialty air services. In other sectors, such as telecommunications, education, finance, and insurance, Canada maintains the rights for future restrictions on ownership, national treatment, composition of management, performance requirements, and others. Canada also requires that in the case of a federally-incorporated corporation, a simple majority of the board of directors or of a committee should be resident Canadians. With a holding corporation, at least one-third of the directors should be resident Canadians, provided that its earnings in Canada (including those of its subsidiaries) are less than five percent of the gross earnings of the holding corporation and its subsidiaries. In the case of a Special Corporation Act, a simple majority of the elected directors must be residents in Canada or citizens of a Commonwealth country. In Mexico, the oil industry and related activities such as refining and distribution, the supply of electricity (including its generation, transmission, transformation, distribution, and sale), the postal service, and railway transportation are limited to the Mexican state, which means that foreign ownership is not allowed. Additionally, only Mexicans can own land for agriculture, livestock, and forestry purposes. Foreigners are restricted from owning parcels of land near the borders or in areas that Mexico deems important to national interest and security. It also limits foreign ownership in any Mexican cooperative to 10%. In other industries, such as port operations (services related to water transport), newspaper printing, and telecommunications, Mexico limits foreign ownership to 49%. The most salient restriction on financial sector activities is the screening and approval of foreign investments. For any investment in Mexico, foreign investors must show its effect on employment and training of workers, technological contribution, compliance with environmental legislation, and contribution to the Mexican production system. Approval from the Commission on Foreign Investment is needed for investments that constitute 40% equity of a Mexican enterprise. Mexico also imposes performance requirements on

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the manufacturing sector. Under the ALTEX Decree (Decree for Promotion and Operation of High Export Firms), for direct export of manufactured goods, investors are required to export annually at least 40% of total sales or US$2,000,000. For indirect export of manufactured goods, investors are required to export annually at least 50% of their total sales. Mexico also prohibits foreigners from assuming positions on the board of any cooperative enterprise. Like Korea, Mexico reserves the right to adopt and maintain rules in the future concerning market access and other limitations on foreign ownership in some sectors such as the broadcasting industry and recreational services. Chile also imposes many limitations on foreign investments. It restricts foreign investors’ access to the market when the state sells or disposes of its interests or assets in enterprises that it owns. While these limitations are present in almost all sectors, restrictions are mostly in the areas of mining, transportation, and information and communication. The government requires that any activity related to exploration and exploitation of liquid or gaseous hydrocarbons and deposits in areas classified as important to national security with mining effects be subject to the supreme decree of the President. The Chilean state has the right of first refusal when buying mineral products from mining operations in the country when significant amounts of thorium or uranium are present. In addition, the state can demand that producers separate significant amounts of economically and technically separable substances from mining products for sale or delivery on behalf of Chile. These substances cannot be granted mining concessions. In the transportation services sector there are several limitations on market access for foreign investors, in addition to limitations on national treatment. The president, manager, majority of directors, and administrators in the air transportation sector must be Chilean nationals. In addition, The president and the majority of the board members of an entity in the broadcasting sector are required to be Chilean nationals. Chile scored the highest degree of restrictiveness in performance requirements as it requires that at least 85% of employees in enterprises with more than 25 contracted workers be Chilean citizens. However, exceptions are given to expert technical personnel who cannot be replaced by national personnel, as determined by the Direcci´on General del Trabajo. Like its FTA partner Chile, Korea restricts foreign ownership and management composition in all sectors when the state sells or disposes of its assets. In addition, in the case of its FTA with Singapore, Korea requires business establishments in which foreign investors have interests to hire a certain number of disabled locals. Non-residents, are required to obtain authorisation from the Minister of Finance and Economy or from the Governor of the Bank of Korea when receiving won-denominated loans or

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borrowing won-denominated securities from a resident that exceed a certain amount; when issuing won-denominated securities with short-term maturities, or when receiving foreign currency-denominated financial credits, guarantees, or collateral from residents. Notifications are also needed for the purchase of land. Korea is restrictive on agriculture, forestry, and fishing, as well as electricity, information and communication, transportation, and education. Only Korean citizens can invest in the rice and barley industry. There are also restrictions on ownership in the Korea Electric Power Company and the Korea Gas Company and in the distribution and transmission of electricity. Foreigners are prohibited from holding an interest in any entity that deals with nuclear energy for power generation. Construction related to railways is limited to the Korean government, Korea National Railroad, or Korea Rail Network Authority. The information and communication sector has limitations on the ownership of entities that publish newspapers (30% in daily newspapers and 50% in other publications) and of entities in the telecommunication subsector (49%). NonKorean nationals are not permitted to establish radio stations. Korea’s FTA with Chile does not allow foreigners to invest in terrestrial broadcasters, general program or news program providers, and relay-only cable operators and broadcasters. However, a 33% share of foreign investment is allowed for cable television system operators, satellite broadcasters, and program providers (excluding general program providers or news program providers), and up to 49% is allowed for network operation services. Notably, these restrictions on television broadcasting activities are absent in Korea’s FTA with Singapore. Again in Korean’s FTA with Chile, non-Koreans are not allowed to be the editor of newspaper or to engage in the Yonhap News Agency. Further, there are limitations on the establishment of educational institutions, particularly in the Seoul metropolitan area. In most sectors, Korea reserves its right to adopt and maintain rules in the future concerning market access and other limitations on foreign ownership. Table 3 reveals that the US is the most open country with regard to FDI. Restrictions by the US are usually in the form of a reciprocity principle. Foreign investors are allowed to hold equities in US companies if the country where the investors originate gives the same treatment to US investors to hold interest, such as ownership and management. The US is relatively open in the primary, manufacturing, and most of the service sectors. Nevertheless, it places more restrictive measures on the financial sector and prohibits the establishment of credit unions, savings banks, or savings associations through branches of corporations organised under a foreign country’s law. Foreign banks with direct deposit-taking branches or bank subsidiaries are not permitted to establish or acquire interests in banks located in some of the US states. Some states do not allow the

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establishment of a federal branch or agency by a foreign bank. The US requires all foreign financial institutions to register as financial advisers. With regard to management, all national banks are required to be under US control. The country also received a low score in transportation, meaning it is relatively restrictive in this sector. Although it may have higher scores on FDI restrictions on FTA resulting from its unregulated market (meaning that it is relatively less restrictive), Golub (2003) concluded that the US maintains high discriminatory measures against individual foreign firms. Additionally, as the US requires reciprocity from other countries, it will not open any sector to an investor whose country of origin is restrictive to US business interests. While Singapore is relatively open to FDI, it imposes limitations on foreign ownership in state-owned assets such as the Port of Singapore Authority (PSA) Corporation, Singapore Power, Power Grid, Power Supply, Power Gas, Singapore Technologies Engineering, and Singapore Airlines. It also imposes limitations on foreign ownership of housing developed by the state, and only the Sentosa Development Corporation is allowed to manage and develop Sentosa and the Southern islands. There are limitations on financial services, and this sector is the most prone to prohibitions with countries that sign FTAs. Additionally, Singapore requires that foreigners who wish to register a business have a local manager and that at least one of the directors of the company be a local resident. All branches of foreign companies must have at least two local agents. Contrary to popular view, Japan is not overly restrictive with FDI compared to Korea or Mexico. It obtained an average 0.78 degree of restrictiveness, which makes it comparable in score to Singapore’s 0.76. Apart from mining, which is closed, Japan imposes some foreign ownership limitations on the transportation sector. In NTT Communications it requires commercial presence and prior notifications for foreign investors. Nevertheless, in most sectors, Japan is unbound in terms of market access and national treatment. The results of this study are comparable3 to those of the previous work of Golub (2003) on restriction on foreign investments of OECD countries. Both studies found Canada to be the most restrictive and the US to be least restrictive country. Both studies concluded that Mexico has a relatively high degree of restriction; it ranked second in both studies. Another similarity of the findings is that Japan is relatively open compared to Korea. However, there is a difference in the case of Australia. This study found Australia to be one of the most open economies for investment, while Golub (2003) found that its restrictiveness is comparable to that of Mexico. 3 See

Appendix 8.

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3.3. Types of restrictive measures The most salient type of limitation on FDI is in the form of restrictions on foreign ownership and market access. For instance, Mexico restricts foreign ownership in the oil and petroleum sector, while Australia restricts ownership of Qantas Airlines and Telstra. Although FTAs are expected to give the same national treatment to the investors of each party involved, the FTAs under study have certain limitations in this aspect. The United States does not allow foreigners, foreign enterprises, and foreign-controlled domestic enterprises to obtain insurance and loans from the Overseas Private Investment Corporation. Most of the countries also reserve the rights to implement future measures concerning the limitation of national treatment to several sectors, particularly the services sectors. Canada, Australia, and Mexico impose the highest degrees of restrictions on the screening and approval of FDIs. Canada requires that a review of all acquisitions of Canadian businesses with the value of assets and control of the business entity being acquired should be conducted under the Investment Canada Act. The acquisition of a business that is related to Canadian heritage or culture may be subject to review by the government in view of national interests. Investments subject to review may be required to show the net economic benefit for Canada. However, US and Mexican investors are subjected to a higher value threshold compared with countries outside NAFTA. This means that US and Mexican investors can make larger investments without fulfilling requirements. Investments from all other countries are subject to prior notifications. Australia also provides certain thresholds for foreign investment that require approval from government authorities, and the government can oppose foreign investments in existing Australian businesses or corporations with total assets exceeding A$50 million in the transportation and telecommunication sectors. In the case of movement of investors, countries in an FTA are very open to foreign investors in terms of allowing them to stay for a period of time. The Japan–Mexico and Japan–Singapore EPAs have the highest degree of restriction on 0.0375 the movement of foreign investors. Japan and Mexico allow at least one year of stay and possible extensions. However, Japan provides the shortest time of stay for Singaporean investors, which is only one year. Singapore is more open to Japanese investments in terms of the movement of its investors. Several countries require investment to meet certain performance requirements. As mentioned above, Mexico requires investors in the manufacturing sector to export a certain quantity of goods, while Chile requires employment of local people. Theoretically, most of the performance requirements are demanded by developing countries to ensure they receive the

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benefits of foreign investments such as export promotion and employment. Most of the countries under study belong to the category of more developed nations, and therefore may not need to oblige their partners to satisfy certain performance requirements. 3.4. Restrictions on different sectors As shown in Table 4, in most cases the primary and tertiary sectors have the highest number of restrictions on foreign investments. Specifically, the agriculture, mining, transportation, information and communication, and financial sectors are the most restricted. Mexico and Japan are the most restrictive countries for foreign investors in the primary sectors; they show 0.212 and 0.352 degrees of restrictiveness respectively. Mexico prohibits foreign participation in the oil industry and related activities, while foreign ownership of land for agricultural purposes is not allowed. Similarly, Japan’s mining industry is closed to foreign investment. The United States requires reciprocity in the mining sector, while Chile requires that investments be subjected to decree by its president. Australia, Canada, Chile, Korea, and Mexico are very restrictive in the tertiary sectors, which are among the most important segments of the economy of the developed countries that have joined FTAs. To avoid alienating their own investors, many countries choose to protect the sectors vital to their economy. For instance, in the transportation sector, foreign ownership — particularly of ocean-going vessels and airlines — has limitations. Australia limits ownership in Qantas and other Australian airlines flying international routes. Concessions for the domestic air transportation sector are often provided only to companies with foreign ownership exclusions. In information and communication, Korea, Mexico, and Singapore limit foreign participation in newspaper publishing activities. In addition, Korea, Chile, Mexico, the US, and Australia either provide limitations on foreign ownership or reserve the right to do so in the future. Japan limits foreign ownership in NTT to less than one-third of the total share while foreigners are not allowed to serve as directors or auditors. Australia limits ownership in Telstra and requires that the majority of board members, as well as the chairperson, be Australian nationals. The financial sector, which includes banking and insurance services, has the highest number of limitations. Apart from restrictions on foreign ownership, there are limitations on market access, such as primary dealership of government bonds in the case of the US, and provision of customer services

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such as establishment of ATM networking or provisions for debit services through an Electronic Funds Transfer at Point of Sale (EFTPOS) network in the case of Singapore. 4. Concluding Remarks Although the countries under study aim to liberalise not only trade but also FDI, several restrictions affect the flow of capital over the borders of FTA signatories. The most salient feature of the restrictions can be seen in foreign ownership or in the degree of participation with which foreign investors can influence an enterprise. Within the primary sectors, mining and agriculture are the most restricted. The same is true for the services sectors, particularly transportation, communication, electricity, finance, and insurance. Only a few restrictions relate to manufacturing sectors. The US and Singapore are among the most open to foreign investment, as the results suggest. For the most part, the US requires reciprocity by a partner to deregulate its investment sectors. Given the structure of its economy, Singapore maintains its openness to foreign investors to sustain its domestic economy. NAFTA members Canada and Mexico are restrictive in their FDI rules, which is somewhat surprising as NAFTA is seen as an FTA with comprehensive FDI rules. One area for planned future research is an assessment of the implementation of FDI rules. While we have examined the quality of FDI rules, setting rules is one thing, implementing them is another. Even if one country sets up liberal FDI rules, FDI may be restricted if these are not implemented effectively. Very often, a lack of transparency in the implementation of the rules discourages FDI. Thus, an assessment of the implementation of FDI rules should be conducted using information collected from multinationals that undertake FDI. Another item on the research agenda could be the impact of FDI rules on FDI flows. A small number of studies have examined this aspect. A country with an open FDI policy regime should successfully attract FDI. However, when the United Nations Conference on Trade and Development (1998) statistically examined the effect of bilateral investment treaties (BITs) on FDI flows, it found no evidence that BITs increased FDI. Somewhat different from these studies, Urata and Kawai (2000) found that governance, or the rules of law, of the FDI recipient had a positive impact on Japanese FDI. More studies are needed in this area.

Table A.1.

Summary of FDI restrictions contained in the Japan–Singapore Economic Partnership Agreement.

Sectors

Japan

— — — —

E —

H— I —

0.16 0 0.14 0.05

0.09 0 0.09 0.09

0.1 0 0.1 0.1

0.05 0 0.05 0.05

0.1 0 0.1 0.1

0.62 0 0.78 0.43

0.36

0.18

0.09

0.1

0.05

0.1

0.88

0.32 0.36

0.16 0.18

0.09 0.09

0.1 0.1

0.05 0.05

0.1 0.1

0.82 0.88

0.28 0.36

0.18 0.18

0.09 0.09

0.1 0.1

0.05 0.05

0.1 0.1

0.8 0.88

0.12

0.18

0.09

0

0.05

0.1

0.54 (Continued)

b763-ch03

J —

0.12 0 0.3 0.04

B-763

F — G—

Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communications

9in x 6in

A B C D

Shujiro Urata and John Sasuya

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

November 17, 2009 14:4

98

Appendix

(Continued)

Sectors

Singapore

E —

H— I — J —

0.12 0 0.22 0.04

0.06 0 0.18 0.02

0.025 0 0.025 0.025

0.07 0 0.07 0.07

0.05 0 0.05 0.05

0.1 0 0 0.1

0.425 0 0.545 0.305

0.3

0.18

0.025

0.07

0.05

0.1

0.725

0.24 0.22

0.16 0.14

0.025 0.025

0.07 0.07

0.05 0.05

0.1 0.1

0.645 0.605

0.09 0.298

0.1 0.18

0.0225 0.025

0.05 0.07

0.05 0.05

0.1 0.1

0.4125 0.723

0.15

0.1

0.025

0.065

0.05

0.075

0.465

99

b763-ch03

(Continued)

B-763

F — G—

Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communications

9in x 6in

— — — —

Analysis of the Restrictions on FDI in FTAs

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1) A B C D

November 17, 2009 14:4

Table A.1.

(Continued)

Sectors

Japan

0.14 0.18 0.14

0.09 0.09 0.09

0.1 0.1 0.07

0.05 0.05 0.05

0.1 0.1 0.1

0.76 0.88 0.77

0.32

0.16

0.09

0.08

0.05

0.1

0.8

0.36

0.18

0.09

0.1

0.05

0.1

0.88

0.1 0.36

0.18 0.18

0.09 0.09

0.1 0.1

0.05 0.05

0.1 0.1

0.62 0.88

0.36 0.36 0.36 0.36

0.18 0.18 0.18 0.18

0.09 0.09 0.09 0.09

0.1 0.1 0.1 0.1

0.05 0.05 0.05 0.05

0.1 0.1 0.1 0.1

0.88 0.88 0.88 0.88

***

B-763

0.28 0.36 0.32

9in x 6in

K — Financial and insurance activities L — Real estate activities M — Professional, scientific and technical activities N — Administrative and support service activities O — Public administration and defence; compulsory social security P — Education Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households U — Activities of extraterritorial organisations and bodies

Shujiro Urata and John Sasuya

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

November 17, 2009 14:4

100

Table A.1.

*** *** ***

b763-ch03

(Continued)

November 17, 2009 14:4

Table A.1.

(Continued)

Sectors

Singapore

0.18 0.18 0.1

0.025 0.025 0.025

0.07 0.07 0.07

0.05 0.05 0.05

0.1 0.1 0.1

0.725 0.725 0.625

0.3

0.18

0.025

0.07

0.05

0.1

0.725

0.3

0.18

0.025

0.07

0.05

0.1

0.725

0.3 0.28

0.18 0.17

0.025 0.025

0.07 0.07

0.05 0.05

0.1 0.075

0.725 0.67

0.28 0.3 0.3 0.3

0.16 0.18 0.18 0.18

0.025 0.025 0.025 0.025

0.065 0.07 0.07 0.07

0.05 0.05 0.05 0.05

0.1 0.1 0.1 0.1

0.68 0.725 0.725 0.725

***

*** *** ***

b763-ch03

101

Notes: ∗ Entry of Singaporean Investors/Traders to Japan: Permission to stay up to more than one year is allowed. ∗∗ Entry of Japanese Investors/Traders to Singapore: Permission to stay up to two years and can be extended by another three years. ∗∗∗ Although there is no particular provision on this sector to limit investments, there are general provisions regarding restrictions and limitations on all sectors, which logically include this particular sector. This is in addition to some other provisions in the agreement that may affect investments, such as clauses on research subsidies and the disposal of public assets.

B-763

0.3 0.3 0.28

9in x 6in

K — Financial and insurance activities L — Real estate activities M — Professional, scientific and technical activities N — Administrative and support service activities O — Public administration and defence; compulsory social security P — Education Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households U — Activities of extraterritorial organisations and bodies

Analysis of the Restrictions on FDI in FTAs

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

Summary of FDI restrictions contained in the Japan–Mexico Economic Partnership Agreement.

Sectors

Japan

— — — —

E —

H— I — J —

0.32 0 0.3 0.32

0.16 0 0.14 0.16

0.09 0 0.09 0.09

0.085 0 0.075 0.075

0.05 0 0.05 0.05

0.08 0 0.075 0.075

0.785 0 0.73 0.77

0.32

0.18

0.09

0.1

0.05

0.1

0.84

0.36 0.34

0.18 0.18

0.09 0.09

0.1 0.1

0.05 0.05

0.1 0.1

0.88 0.86

0.24 0.36

0.14 0.18

0.075 0.09

0.08 0.1

0.05 0.05

0.09 0.1

0.675 0.88

0.16

0.12

0.09

0

0.05

0.075

0.495

Closed

B-763

F — G—

Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communications

9in x 6in

A B C D

Shujiro Urata and John Sasuya

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

November 17, 2009 14:4

102

Table A.2.

***

b763-ch03

(Continued)

November 17, 2009 14:4

Table A.2.

(Continued)

Sectors

Mexico

— — — —

E —

H— I — J —

0.6 1 0.4 0.9

0

0.01

0.0125

0.0375

0

0 0

0.01 0.01

0.0125 0.0125

0.0375 0.0375

0.1 0

0.66 1 0.56 0.96

0.25

0

0.01

0.0125

0.0375

0

0.31

0.3 0.4

0 0

0.01 0.01

0.0125 0.0125

0.0375 0.0375

0 0

0.36 0.46

0.75 0.25

0 0

0.01 0.01

0.05 0.0125

0.0375 0.0375

0 0

0.8475 0.31

0.6

0.05

0.01

0.025

0.0375

0.01

0.7325

Closed

***

B-763

F — G—

Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communications

9in x 6in

A B C D

Analysis of the Restrictions on FDI in FTAs

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

***

103

b763-ch03

(Continued)

(Continued)

Sectors

Japan

0.18 0.18 0.18

0.09 0.08 0.085

0.1 0.1 0.07

0.05 0.05 0.05

0.1 0.1 0.1

0.83 0.87 0.785

0.32

0.18

0.09

0.08

0.05

0.1

0.82

0.36

0.18

0.09

0.1

0.05

0.1

0.88

***

0.3 0.36

0.18 0.18

0.085 0.09

0.1 0.1

0.05 0.05

0.1 0.1

0.815 0.88

***

0.3 0.36 0.36 0.36

0.16 0.18 0.18 0.18

0.09 0.09 0.09 0.09

0.09 0.1 0.1 0.1

0.05 0.05 0.05 0.05

0.1 0.1 0.1 0.1

0.79 0.88 0.88 0.88

*** *** ***

b763-ch03

(Continued)

B-763

0.31 0.36 0.3

9in x 6in

K — Financial and insurance activities L — Real estate activities M — Professional, scientific and technical activities N — Administrative and support service activities O — Public administration and defence; compulsory social security P — Education Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households U — Activities of extraterritorial organizations and bodies

Shujiro Urata and John Sasuya

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

November 17, 2009 14:4

104

Table A.2.

November 17, 2009 14:4

Table A.2.

(Continued)

Sectors

Mexico

0 0 0.05

0.01 0.01 0.01

0.0125 0.0125 0.0125

0.0375 0.0375 0.0375

0 0 0

0.31 0.31 0.36

*** ***

0.25

0

0.01

0.0125

0.0375

0

0.31

***

0.25

0

0.01

0.0125

0.0375

0

0.31

***

0.25 0.275

0 0

0.01 0.01

0.0125 0.0125

0.0375 0.0375

0 0

0.31 0.335

0.3 0.25 0.25 0.25

0.01 0 0 0

0.01 0.01 0.01 0.01

0.025 0.0125 0.0125 0.0125

0.0375 0.0375 0.0375 0.0375

0 0 0 0

0.3825 0.31 *** 0.31 *** 0.31 ***

b763-ch03

105

Notes: ∗ Entry of Mexican Investors/Traders to Japan: Permission to stay up to either one or three years. ∗∗ Entry of Japanese Investors/Traders to Mexico: Permission to stay up to one year and can be extended four times. ∗∗∗ Although there is no particular provision on this sector to limit investments, there are general provisions regarding restrictions and limitations on all sectors, which logically include this particular sector. This is in addition to some other provisions in the agreement that may affect investments, such as clauses on research subsidies and disposal of public assets.

B-763

0.25 0.25 0.25

9in x 6in

K — Financial and insurance activities L — Real estate activities M — Professional, scientific and technical activities N — Administrative and support service activities O — Public administration and defence; compulsory social security P — Education Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households U — Activities of extraterritorial organizations and bodies

Analysis of the Restrictions on FDI in FTAs

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

Summary of FDI restrictions contained in the Korea–Singapore Free Trade Agreement.

Sectors

Korea

106

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1) 0.085

0.08

0.075

0.025

0.565

B — Mining and quarrying C — Manufacturing

0.32 0.28

0.16 0.14

0.09 0.085

0.09 0.07

0.075 0.075

0.05 0.025

0.785 0.675

D — Electricity, gas, steam and air conditioning supply E — Water supply; sewerage, waste management and remediation activities F — Construction G — Wholesale and retail trade; repair of motor vehicles and motorcycles H — Transportation and storage

0.09

0.16

0.075

0.09

0.075

0.05

0.54

0.28

0.155

0.09

0.09

0.075

0.025

0.715

Relatively tight restrictions, in addition to several reservations to adopt and maintain future measures. *** Relatively tight restrictions, in addition to several reservations to adopt and maintain future measures. Too many restrictions, although not closed. Too many reservations.

0.29 0.25

0.16 0.15

0.075 0.08

0.08 0.09

0.075 0.075

0.01 0.025

0.69 0.67

Too many reservations.

0.16

0.155

0.075

0.09

0.075

0.04

0.595

(Continued)

b763-ch03

Although there are some rooms for investments, too many restrictions on the agreement would mean difficulties in establishing an investment in Korea.

B-763

0.14

9in x 6in

0.16

Shujiro Urata and John Sasuya

A — Agriculture, forestry and fishing

November 17, 2009 14:4

Table A.3.

Sectors

November 17, 2009 14:4

Table A.3.

(Continued) Singapore

0.18

0.1

0.045

0.075

0.1

0.9

0.4 0.4 0.1

0.18 0.18 0.18

0.1 0.1 0.1

0.045 0.045 0.045

0.075 0.075 0.075

0.1 0.08 0.1

0.9 0.88 0.6

0.2

0.15

0.1

0.03

0.075

0.08

0.635

0.4 0.36

0.18 0.165

0.1 0.1

0.045 0.04

0.075 0.075

0.1 0.09

0.9 0.83

0.16

0.16

0.075

0.03

0.075

0.08

0.58

*** Too many restrictions, although not closed. Too many reservations.

***

B-763

0.4

9in x 6in

A — Agriculture, forestry and fishing B — Mining and quarrying C — Manufacturing D — Electricity, gas, steam and air conditioning supply E — Water supply; sewerage, waste management and remediation activities F — Construction G — Wholesale and retail trade; repair of motor vehicles and motorcycles H — Transportation and storage

Analysis of the Restrictions on FDI in FTAs

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

(Continued)

b763-ch03

107

Korea Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1) 0.09

0.075

0.05

0.775

***

0.13

0.16

0.075

0.06

0.075

0.04

0.54

K — Financial and insurance activities L — Real estate activities

0.32

0.16

0.09

0.09

0.075

0.05

0.785

Although there is some room for investment, too many restrictions in addition to reservations on the agreement would mean difficulties in establishing an investment in Korea. ***

0.28

0.16

0.08

0.0725

0.075

0.025

0.26

0.16

0.07

0.075

0.075

0.04

0.6925 Too many reservations in addition to requirements. 0.68

0.28

0.16

0.08

0.09

0.075

0.04

0.725

0.3

0.15

0.08

0.07

0.075

0.025

0.7

M — Professional, scientific and technical activities N — Administrative and support service activities O — Public administration and defence; compulsory social security

Too high due to reservations. (Continued)

b763-ch03

0.08

B-763

0.16

9in x 6in

0.32

Shujiro Urata and John Sasuya

I — Accommodation and food service activities J — Information and communications

November 17, 2009 14:4

Sectors

(Continued)

108

Table A.3.

Sectors

November 17, 2009 14:4

Table A.3.

(Continued) Singapore

0.18

0.1

0.045

0.075

0.1

0.9

***

0.17

0.15

0.075

0.03

0.075

0.09

0.59

Too many reservations.

0.4

0.18

0.1

0.045

0.075

0.1

0.9

***

0.2 0.36

0.15 0.18

0.1 0.075

0.03 0.025

0.075 0.075

0.075 0.1

0.63 0.815

0.34

0.15

0.1

0.04

0.075

0.05

0.755

0.2

0.15

0.1

0.03

0.075

0.075

0.63

Relatively tight restrictions due to several reservations for future measures, which Singapore can adopt and maintain.

109

b763-ch03

(Continued)

B-763

0.4

9in x 6in

I — Accommodation and food service activities J — Information and communications K — Financial and insurance activities L — Real estate activities M — Professional, scientific and technical activities N — Administrative and support service activities O — Public administration and defence; compulsory social security

Analysis of the Restrictions on FDI in FTAs

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

Sectors

(Continued)

November 17, 2009 14:4

110

Table A.3.

Korea

0.15

0.075

0.07

0.075

0.025

Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households U — Activities of extraterritorial organizations and bodies

0.3

0.16

0.09

0.09

0.075

0.05

0.565 Too high due to reservations in addition to requirements. 0.765

0.28

0.16

0.085

0.09

0.075

0.05

0.74

0.32 0.32 0.32

0.16 0.16 0.16

0.09 0.09 0.09

0.09 0.09 0.09

0.075 0.075 0.075

0.05 0.05 0.05

0.785 *** 0.785 *** 0.785 ***

B-763

0.17

9in x 6in

P — Education

Shujiro Urata and John Sasuya

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

(Continued)

b763-ch03

Sectors

November 17, 2009 14:4

Table A.3.

(Continued) Singapore

0.16

0.1

0.03

0.075

0.075

0.67

Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households U — Activities of extraterritorial organizations and bodies

0.26

0.16

0.08

0.03

0.075

0.08

0.685

0.32

0.2

0.1

0.04

0.075

0.08

0.815

0.4 0.4 0.4

0.2 0.2 0.2

0.1 0.1 0.1

0.1 0.1 0.1

0.075 0.075 0.075

0.1 0.1 0.1

0.975 0.975 0.975

Relatively tight restrictions due to several reservations for future measures, which Singapore can adopt and maintain.

*** *** ***

111

b763-ch03

Notes: ∗ Entry of Singaporean Investors/Traders to Korea: Permission to stay up to two years and can be extended up to eight years. ∗∗ Entry of Korean Investors/Traders to Singapore Permission to stay up to two years and can be extended up to eight years. ∗∗∗ Although there is no particular provision on this sector to limit investments, there are general provisions regarding restrictions and limitations on all sectors, which logically include this particular sector. This is in addition to some other provisions in the agreement that may affect investments, such as clauses on financial transactions and disposal of public assets.

B-763

0.23

9in x 6in

P — Education

Analysis of the Restrictions on FDI in FTAs

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

Sectors

Korea Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People∗ Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1) 0.09

0.05

0.1

0.61

0.32 0.3 0.09

0.15 0.15 0.14

0.07 0.07 0.05

0.09 0.09 0.09

0.05 0.05 0.05

0.1 0.09 0.1

0.78 0.75 0.52

0.32

0.15

0.07

0.09

0.05

0.1

0.78

0.31 0.32

0.15 0.15

0.0525 0.07

0.09 0.09

0.05 0.05

0.05 0.1

0.7025 0.78

0.21 0.32

0.14 0.15

0.05 0.07

0.0825 0.09

0.05 0.05

0.08 0.1

0.6125 0.78

0.11

0.14

0.05

0.0525

0.05

0.05

0.4525

0.32

0.15

0.07

0.09

0.05

0.1

0.78

0.32

0.15

0.05

0.09

0.05

0.1

0.76

Too many restrictions.

(Continued)

b763-ch03

0.07

B-763

0.14

9in x 6in

0.16

Shujiro Urata and John Sasuya

A — Agriculture, forestry and fishing B — Mining and quarrying C — Manufacturing D — Electricity, gas, steam and air conditioning supply E — Water supply; sewerage, waste management and remediation activities F — Construction G — Wholesale and retail trade; repair of motor vehicles and motorcycles H — Transportation and storage I — Accommodation and food service activities J — Information and communications K — Financial and insurance activities L — Real estate activities

November 17, 2009 14:4

Summary of FDI restrictions contained in the Korea–Chile Free Trade Agreement.

112

Table A.4.

(Continued)

Sectors

Chile Board of Directors

Movement of People∗∗

Performance Requirements

Total for the Sector

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

(1)

0.24

0.14

0.085

0.06

0.05

0.05

0.625

0.04 0.29 0.26

0.12 0.145 0.14

0.08 0.09 0.1

0.075 0.075 0.075

0.05 0.05 0.05

0.05 0 0.05

0.415 0.65 0.675

0.3

0.14

0.1

0.075

0.05

0.05

0.715

0.3 0.32

0.14 0.15

0.1 0.0925

0.075 0.075

0.05 0.05

0.05 0

0.715 0.6875

0.19 0.32

0.13 0.15

0.09 0.1

0.02 0.075

0.05 0.05

0.05 0.05

0.53 0.745

0.1

0.13

0.1

0.01

0.05

0.04

0.43

0.28

0.14

0.1

0.075

0.05

0.05

0.695

0.32

0.15

0.1

0.075

0.05

0.05

0.745

***

*** 113

(Continued)

b763-ch03

Screening and Approval

B-763

National Treatment

9in x 6in

Limitation of Foreign Ownership/ Market Access (0.4)

Analysis of the Restrictions on FDI in FTAs

A — Agriculture, forestry and fishing B — Mining and quarrying C — Manufacturing D — Electricity, gas, steam and air conditioning supply E — Water supply; sewerage, waste management and remediation activities F — Construction G — Wholesale and retail trade; repair of motor vehicles and motorcycles H — Transportation and storage I — Accommodation and food service activities J — Information and communications K — Financial and insurance activities L — Real estate activities

November 17, 2009 14:4

Table A.4.

(Continued)

Sectors Screening and Approval

Board of Directors

Movement of People∗

Performance Requirements

Total for the Sector

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

(1)

0.26

0.14

0.05

0.07

0.05

0.09

0.66

0.31

0.15

0.0575

0.09

0.05

0.0875

0.745

0.3

0.12

0.065

0.07

0.05

0.075

0.68

0.17 0.28

0.14 0.15

0.07 0.0675

0.01 0.09

0.05 0.05

0.09 0.1

0.53 0.7375

0.32

0.15

0.07

0.09

0.05

0.1

0.78

***

0.32 0.32 0.32

0.15 0.15 0.15

0.07 0.07 0.07

0.09 0.09 0.09

0.05 0.05 0.05

0.1 0.1 0.1

0.78 0.78 0.78

*** *** ***

b763-ch03

(Continued)

B-763

National Treatment

9in x 6in

Limitation of Foreign Ownership/ Market Access (0.4)

Shujiro Urata and John Sasuya

M — Professional, scientific and technical activities N — Administrative and support service activities O — Public administration and defence; compulsory social security P — Education Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households U — Activities of extraterritorial organizations and bodies

Korea

November 17, 2009 14:4

114

Table A.4.

(Continued)

Sectors

Chile Screening and Approval

Board of Directors

Movement of People∗∗

Performance Requirements

Total for the Sector

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

(1)

0.27

0.145

0.08

0.075

0.05

0.05

0.67

0.31

0.145

0.1

0.075

0.05

0.05

0.73

0.3

0.14

0.1

0.075

0.05

0.05

0.715

0.3 0.3

0.14 0.14

0.1 0.08

0.075 0.075

0.05 0.05

0.05 0.05

0.715 0.695

0.32

0.15

0.09

0.075

0.05

0.05

0.735

0.32 0.32 0.32

0.15 0.15 0.15

0.1 0.1 0.1

0.075 0.075 0.075

0.05 0.05 0.05

0.05 0.05 0.05

0.745 0.745 0.745

*** *** ***

b763-ch03

115

Notes: ∗ Entry of Chilean Investors/Traders to Korea: Permission to stay up to one year and can be extended. ∗∗ Entry of Korean Investors/Traders to Chile: Permission to stay up to one year and can extended. ∗∗∗ Although there is no particular provision on this sector to limit investments, there are general provisions regarding restrictions and limitations on all sectors, which logically include this particular sector. This is in addition to some other provisions in the agreement that may affect investments, such as clauses on performance requirements and disposal of public assets.

B-763

National Treatment

9in x 6in

Limitation of Foreign Ownership/ Market Access (0.4)

Analysis of the Restrictions on FDI in FTAs

M — Professional, scientific and technical activities N — Administrative and support service activities O — Public administration and defence; compulsory social security P — Education Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households U — Activities of extraterritorial organizations and bodies

November 17, 2009 14:4

Table A.4.

Sectors

US Limitation of National Foreign Treatment Ownership/ Market Access (0.4) (0.2)

E —

F — G —

J K L M

— — — —

(0.1)

(1)

0.36 0.36 0.36 0.36

0.18 0.18 0.18 0.18

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.94 0.94 0.94 0.94

*** *** *** ***

0.36

0.18

0.1

0.1

0.1

0.1

0.94

***

0.36 0.36

0.18 0.18

0.1 0.1

0.1 0.1

0.1 0.1

0.1 0.1

0.94 0.94

*** ***

0.2 0.36

0.16 0.18

0.0525 0.1

0.06 0.1

0.1 0.1

0.075 0.1

0.6475 0.94

***

0.28 0.16 0.36 0.32

0.18 0.05 0.18 0.17

0.1 0.1 0.1 0.1

0.1 0.0475 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.05 0.1 0.1

0.86 0.5075 0.94 0.89

0.36

0.18

0.1

0.1

0.1

0.1

0.94

***

***

(Continued)

b763-ch03

N —

(0.1)

B-763

H — I —

Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communications Financial and insurance activities Real estate activities Professional, scientific and technical activities Administrative and support service activities

(0.1)

9in x 6in

— — — —

(0.1)

Shujiro Urata and John Sasuya

A B C D

Screening Board of Movement Performance Total and Directors of People Requirements for the Approval Sector

November 17, 2009 14:4

Summary of FDI restrictions contained in the US–Singapore Free Trade Agreement.

116

Table A.5.

November 17, 2009 14:4

Table A.5.

(Continued)

Sectors

Singapore

— — — —

E —

F — G —

J K L M

— — — —

0.18 0.18 0.18 0.05

0.1 0.1 0.1 0.1

0.045 0.045 0.045 0.045

0.1 0.1 0.1 0.1

0.1 0.075 0.1 0.1

0.885 0.86 0.885 0.435

0.3

0.14

0.1

0.0375

0.1

0.08

0.7575

0.36 0.36

0.18 0.18

0.1 0.1

0.045 0.04

0.1 0.1

0.1 0.1

0.885 0.88

0.18 0.26

0.14 0.18

0.095 0.1

0.03 0.045

0.1 0.1

0.08 0.1

0.625 0.785

0.21 0.17 0.2 0.24

0.14 0.125 0.12 0.16

0.1 0.08 0.09 0.08

0.03 0.02 0.045 0.01

0.1 0.1 0.1 0.1

0.0675 0.09 0.1 0.1

0.6475 0.585 0.655 0.69

0.34

0.16

0.1

0.04

0.1

0.09

0.83

*** ***

***

***

117

(Continued)

b763-ch03

N —

0.36 0.36 0.36 0.04

B-763

H — I —

Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communications Financial and insurance activities Real estate activities Professional, scientific and technical activities Administrative and support service activities

9in x 6in

A B C D

Analysis of the Restrictions on FDI in FTAs

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

(Continued)

Sectors

US Performance Total Requirements for the Sector

(1)

0.18

0.1

0.1

0.1

0.1

0.86

0.28 0.28

0.18 0.18

0.1 0.1

0.1 0.1

0.1 0.1

0.1 0.1

0.86 0.86

0.36 0.36 0.36 0.36

0.18 0.18 0.18 0.18

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.94 0.94 0.94 0.94

*** *** *** ***

B-763

0.28

9in x 6in

(0.1)

Shujiro Urata and John Sasuya

Limitation of National Screening Board of Movement Foreign Treatment and Directors of People Ownership/ Approval Market Access (0.4) (0.2) (0.1) (0.1) (0.1) O — Public administration and defence; compulsory social security P — Education Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households U — Activities of extraterritorial organizations and bodies

November 17, 2009 14:4

118

Table A.5.

(Continued)

b763-ch03

Sectors

November 17, 2009 14:4

Table A.5.

(Continued)

Singapore Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1) 0.03

0.1

0.09

0.77

P — Education Q — Human health and social work activities

0.23 0.2

0.18 0.145

0.1 0.08

0.045 0.0375

0.1 0.1

0.1 0.09

R — Arts, entertainment and recreation S — Other service activities T — Activities of households U — Activities of extraterritorial organizations and bodies

0.28

0.16

0.1

0.04

0.1

0.095

0.755 0.6525 Relatively high due to several reservations for future measures, which Singapore can adopt and maintain, in addition to several requirements. 0.775

0.36 0.36 0.36

0.18 0.18 0.18

0.1 0.1 0.1

0.045 0.045 0.045

0.1 0.1 0.1

0.1 0.1 0.1

0.885 *** 0.885 *** 0.885 ***

Relatively high due to several reservations for future measures, which Singapore can adopt and maintain.

119

Note: ∗∗∗ Although there is no particular provision on this sector to limit investments, there are general provisions regarding restrictions and limitations on all sectors, which logically include this particular sector. This is in addition to some other provisions in the agreement that may affect investments, such as clauses on minority rights, and preferences for disadvantaged members of the society.

b763-ch03

0.1

B-763

0.15

9in x 6in

0.3

Analysis of the Restrictions on FDI in FTAs

O — Public administration and defence; compulsory social security

F — G —

— — — —

Board of Movement Directors of People

(0.2)

(0.1)

0.36 0.32 0.36 0.36

0.18 0.18 0.18 0.18

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.94 0.9 0.94 0.94

***

0.36

0.18

0.1

0.1

0.1

0.1

0.94

***

0.36 0.36

0.18 0.18

0.1 0.1

0.1 0.1

0.1 0.1

0.1 0.1

0.94 0.94

***

0.2 0.36

0.18 0.18

0.0525 0.1

0.08 0.1

0.1 0.1

0.075 0.1

0.6875 0.94

0.28 0.24 0.36 0.34

0.18 0.05 0.18 0.18

0.1 0.1 0.1 0.1

0.1 0.0475 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.05 0.1 0.1

0.86 0.5875 0.94 0.92

(0.1)

(0.1)

Performance Requirements

Total for the Sector

(0.1)

(1)

*** ***

***

***

(Continued)

b763-ch03

J K L M

Screening and Approval

B-763

H — I —

National Treatment

9in x 6in

E —

Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communications Financial and insurance activities Real estate activities Professional, scientific and technical activities

Limitation of Foreign Ownership/ Market Access (0.4)

Shujiro Urata and John Sasuya

— — — —

US

November 17, 2009 14:4

Summary of FDI restrictions contained in the US–Australia Free Trade Agreement.

Sectors

A B C D

120

Table A.6.

November 17, 2009 14:4

Table A.6.

(Continued)

Sectors

Australia

— — — —

E —

H — I — — — — —

0.1 0.18 0.18 0.18

0.04 0.05 0.05 0.05

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.76 0.85 0.85 0.85

*** *** ***

0.32

0.18

0.05

0.1

0.1

0.1

0.85

***

0.32 0.1

0.18 0.14

0.05 0.04

0.1 0.1

0.1 0.1

0.1 0.1

0.85 0.58

***

0.12 0.32

0.14 0.18

0.045 0.05

0.05 0.1

0.1 0.1

0.08 0.1

0.535 0.85

0.04 0.12 0.32 0.28

0.1 0.13 0.18 0.16

0.05 0.01 0.05 0.05

0.025 0.045 0.1 0.09

0.1 0.1 0.1 0.1

0.075 0.1 0.1 0.1

0.39 0.505 0.85 0.78

***

(Continued) 121

b763-ch03

J K L M

0.32 0.32 0.32 0.32

B-763

F — G —

Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communications Financial and insurance activities Real estate activities Professional, scientific and technical activities

9in x 6in

A B C D

Analysis of the Restrictions on FDI in FTAs

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

(Continued)

Sectors Screening and Approval

Board of Directors

Movement of People

Performance Requirements

Total for the Sector

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

(1)

0.36

0.18

0.1

0.1

0.1

0.1

0.94

***

0.36

0.18

0.1

0.1

0.1

0.1

0.94

***

0.36 0.36

0.18 0.18

0.1 0.1

0.1 0.1

0.1 0.1

0.1 0.1

0.94 0.94

*** ***

0.36 0.36 0.36 0.36

0.18 0.18 0.18 0.18

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.94 0.94 0.94 0.94

*** *** *** ***

B-763

National Treatment

9in x 6in

Limitation of Foreign Ownership/ Market Access (0.4)

Shujiro Urata and John Sasuya

N — Administrative and support service activities O — Public administration and defence; compulsory social security P — Education Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households U — Activities of extraterritorial organizations and bodies

US

November 17, 2009 14:4

122

Table A.6.

(Continued)

b763-ch03

November 17, 2009 14:4

Table A.6.

(Continued)

Sectors

Australia

0.18

0.05

0.1

0.1

0.1

0.85

***

0.32

0.18

0.045

0.1

0.1

0.1

0.845

0.28 0.32

0.16 0.18

0.05 0.05

0.08 0.07

0.1 0.1

0.08 0.1

0.75 0.82

***

0.32 0.32 0.32 0.32

0.18 0.18 0.18 0.18

0.05 0.05 0.05 0.05

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.85 0.85 0.85 0.85

*** *** *** ***

123

b763-ch03

Notes: ∗∗∗ Although there is no particular provision on this sector to limit investments, there are general provisions regarding restrictions and limitations on all sectors, which logically include this particular sector. This is in addition to some other provisions in the agreement that may affect investments, such as clauses on minority rights, and preferences for disadvantaged members of the society.

B-763

0.32

9in x 6in

N — Administrative and support service activities O — Public administration and defence; compulsory social security P — Education Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households U — Activities of extraterritorial organizations and bodies

Analysis of the Restrictions on FDI in FTAs

Limitation of National Screening Board of Movement Performance Total Foreign Treatment and Directors of People Requirements for the Ownership/ Approval Sector Market Access (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (1)

Summary of FDI restrictions contained in the North America Free Trade Agreement.

Sectors

E —

H— I — J — K—

Screening and Approval

Board of Movement Directors of People

Performance Requirements

Total for the Sector

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

(1)

0.23 0.1 0.32 0.26

0.02 0.1 0.18 0.18

0.01 0.005 0.01 0.01

0.025 0.025 0.025 0.025

0.1 0.1 0.1 0.1

0.05 0.025 0.05 0.05

0.435 0.355 0.685 0.625

*** ***

0.32

0.18

0.01

0.025

0.1

0.05

0.685

***

0.32 0.3

0.18 0.17

0.01 0.01

0.025 0.025

0.1 0.1

0.05 0.05

0.685 0.655

***

0.11 0.32

0.1 0.18

0.005 0.01

0.0175 0.025

0.1 0.1

0.05 0.05

0.3825 0.685

0.28 0.28

0.14 0.14

0.01 0.009

0.025 0.025

0.1 0.1

0.05 0.05

0.605 0.604

B-763

F — G—

Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communications Financial and insurance activities

National Treatment

9in x 6in

— — — —

Limitation of Foreign Ownership/ Market Access (0.4)

Shujiro Urata and John Sasuya

A B C D

Canada

November 17, 2009 14:4

124

Table A.7.

***

b763-ch03

(Continued)

(Continued)

Sectors

E —

H— I — J — K—

National Treatment

Screening and Approval

Board of Directors

Movement of People

Performance Requirements

Total for the Sector

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

(1)

0.04 0 0.24 0.04

0.06 0 0.14 0.02

0.02 0 0.025 0.025

0.1 0 0.05 0.1

0.1 0 0.1 0.1

0.1 0 0 0.1

0.42 0 0.555 0.385

0.3

0.18

0.025

0.1

0.1

0.1

0.805

0.24 0.15

0.15 0.12

0.025 0.025

0.1 0.1

0.1 0.1

0.1 0.1

0.715 0.595

0.17 0.3

0.05 0.18

0.025 0.025

0.05 0.1

0.1 0.1

0.1 0.1

0.495 0.805

0.09 0.2

0.1 0.1

0.0225 0.025

0.065 0.1

0.1 0.1

0.075 0.1

0.4525 0.625

***

B-763

F — G—

Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communications Financial and insurance activities

Limitation of Foreign Ownership/ Market Access (0.4)

9in x 6in

— — — —

Mexico

Analysis of the Restrictions on FDI in FTAs

A B C D

November 17, 2009 14:4

Table A.7.

***

125

b763-ch03

(Continued)

(Continued)

Sectors

E —

H— I — J — K—

Screening and Approval

Board of Movement Directors of People

Performance Requirements

Total for the Sector

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

(1)

0.32 0.3 0.32 0.32

0.18 0.18 0.18 0.18

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

0.9 0.88 0.9 0.9

***

0.32

0.18

0.1

0.1

0.1

0.1

0.9

***

0.32 0.32

0.18 0.18

0.1 0.1

0.1 0.1

0.1 0.1

0.1 0.1

0.9 0.9

*** ***

0.19 0.32

0.18 0.18

0.05 0.1

0.05 0.1

0.1 0.1

0.075 0.1

0.645 0.9

***

0.26 0.12

0.18 0.18

0.05 0.04

0.08 0.04

0.1 0.1

0.05 0.1

0.72 0.58

*** ***

b763-ch03

(Continued)

B-763

F — G—

Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communications Financial and insurance activities

National Treatment

9in x 6in

— — — —

Limitation of Foreign Ownership/ Market Access (0.4)

Shujiro Urata and John Sasuya

A B C D

US

November 17, 2009 14:4

126

Table A.7.

(Continued)

Sectors

Canada National Treatment

Screening and Approval

Board of Movement Directors of People

Total for the Sector

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

(1)

0.32 0.29

0.18 0.175

0.01 0.01

0.025 0.025

0.1 0.1

0.05 0.05

0.685 0.65

***

0.32

0.18

0.01

0.025

0.1

0.05

0.685

***

0.28

0.17

0.01

0.025

0.1

0.05

0.635

0.28 0.28

0.16 0.16

0.01 0.01

0.025 0.025

0.1 0.1

0.05 0.05

0.625 0.625

0.32 0.32 0.32

0.18 0.18 0.18

0.01 0.01 0.01

0.025 0.025 0.025

0.1 0.1 0.1

0.05 0.05 0.05

0.685 0.685 0.685

*** *** ***

0.32

0.18

0.01

0.025

0.1

0.05

0.685

***

127

b763-ch03

(Continued)

B-763

Performance Requirements

9in x 6in

Limitation of Foreign Ownership/ Market Access (0.4)

Analysis of the Restrictions on FDI in FTAs

L — Real estate activities M — Professional, scientific and technical activities N — Administrative and support service activities O — Public administration and defence; compulsory social security P — Education Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households as employers; undifferentiated goodsand services-producing activities of households for own use U — Activities of extraterritorial organizations and bodies

November 17, 2009 14:4

Table A.7.

Mexico Screening and Approval

Board of Movement Directors of People

Total for the Sector

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

(1)

0.3 0.28

0.18 0.18

0.025 0.025

0.1 0.1

0.1 0.1

0.1 0.1

0.805 0.785

***

0.3

0.18

0.025

0.1

0.1

0.1

0.805

***

0.27

0.16

0.025

0.1

0.1

0.1

0.755

0.27 0.27

0.16 0.16

0.02 0.025

0.1 0.1

0.1 0.1

0.1 0.1

0.75 0.755

0.3 0.3 0.3

0.18 0.18 0.18

0.025 0.025 0.025

0.1 0.1 0.1

0.1 0.1 0.1

0.1 0.1 0.1

0.805 0.805 0.805

*** *** ***

0.3

0.18

0.025

0.1

0.1

0.1

0.805

***

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Limitation of Foreign Ownership/ Market Access (0.4)

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(Continued)

Sectors

L — Real estate activities M — Professional, scientific and technical activities N — Administrative and support service activities O — Public administration and defence; compulsory social security P — Education Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households as employers; undifferentiated goodsand services-producing activities of households for own use U — Activities of extraterritorial organizations and bodies

128

Table A.7.

(Continued)

Sectors

US National Treatment

Screening and Approval

Board of Movement Directors of People

Total for the Sector

(0.2)

(0.1)

(0.1)

(0.1)

(0.1)

(1)

0.32 0.26

0.18 0.18

0.1 0.1

0.1 0.1

0.1 0.1

0.1 0.1

0.9 0.84

***

0.32

0.18

0.1

0.1

0.1

0.1

0.9

***

0.28

0.18

0.1

0.1

0.1

0.1

0.86

0.28 0.28

0.18 0.18

0.1 0.1

0.1 0.1

0.1 0.1

0.1 0.1

0.86 0.86

0.32 0.32 0.32

0.18 0.18 0.18

0.1 0.1 0.1

0.1 0.1 0.1

0.1 0.1 0.1

0.1 0.1 0.1

0.9 0.9 0.9

*** *** ***

0.32

0.18

0.1

0.1

0.1

0.1

0.9

***

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Note: ∗∗∗ Although there is no particular provision on this sector to limit investments, there are general provisions regarding restrictions and limitations on all sectors, which logically include this particular sector. This is in addition to some other provisions in the agreement that may affect investments, such as clauses on minority rights, and preferences for disadvantaged members of the society.

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Analysis of the Restrictions on FDI in FTAs

L — Real estate activities M — Professional, scientific and technical activities N — Administrative and support service activities O — Public administration and defence; compulsory social security P — Education Q — Human health and social work activities R — Arts, entertainment and recreation S — Other service activities T — Activities of households as employers; undifferentiated goodsand services-producing activities of households for own use U — Activities of extraterritorial organizations and bodies

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Table A.7.

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130 Table A.8.

Australia Canada Chile Japan Korea Mexico Singapore US

Comparison of the results with Golub (2003).

These Results∗∗

Rank

Golub Results∗∗∗

Rank

0.770 0.620 0.673 0.762 0.699 0.627 0.778 0.881

3 8 6 4 5 7 2 1

0.270 0.352

4 6

0.230 0.260 0.275

2 3 5

0.169

1

∗

∗

Notes: ∗ Chile and Singapore are not OECD members; therefore they are not part of the Golub study. ∗∗ This study assumes that the higher the score, the less restrictions the country has on FDI, with a maximum score of 1 meaning that investment is totally open to foreign investors. ∗∗∗ Golub (2003) assumes that the lower the score, the less restrictions the country has on FDI, with a maximum score of 1 meaning that investment is totally closed to foreign investors.

References Golub, SS (2003). Measurement of restrictions on inward foreign direct investment for OECD countries. Economics Department Working Papers No. 357, OECD. PECC (2002). An Assessment of Impediments to Foreign Direct Investment in APEC Member Economies. Tokyo: PECC. UNCTAD (1998). World Investment Report 1998. New York. Urata, S and H Kawai (2000). The determinants of the location of foreign direct investment by Japanese small and medium-sized enterprises. Small Business Economics, 15, 79–103. Urata, S, SY Chia, and F Kimura (eds.) (2006). Multinationals and Economic Growth in East Asia. New York: Routledge.

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Chapter 4

A COMPARISON OF THE SAFEGUARD MECHANISMS OF FREE TRADE AGREEMENTS AKIRA KOTERA and TOMOFUMI KITAMURA University of Tokyo, Japan

1. Introduction This paper investigates the treatment of bilateral and regional safeguard mechanisms in selected free trade agreements (FTAs),1 and to some extent evaluate and rank them according to their preferability for achieving free international trade. The primary safeguard mechanism in the international trading system is of course the global safeguard mechanism, which was originally introduced under the GATT 19 and then succeeded by the package of the GATT 19 and the WTO Safeguard Agreement.2 However, most FTAs concluded in recent years provide special and different safeguard mechanisms that, while sharing the same or similar grounds for the invocation of trade-restrictive measures as the global safeguard mechanism, only address the effects of certain 1 Investigated FTAs include EFTA, AFTA, NAFTA, Australia–New Zealand, EC– Mexico, Japan–Singapore, China–ASEAN, US–Singapore, Korea–Chile, US–Australia, Japan–Mexico, and Korea–Singapore FTAs. 2 The negotiators clearly projected the Safeguard Agreement to be the sole set of regulations concerning the application of global safeguard measures. However, since the former GATT 19 remained effective as part of the General Agreement on Tariffs and Trade 1994 after the coming into effect of the WTO, the application of global safeguard measures is now subjected to the provisions of both GATT 19 and the Safeguard Agreement.

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bilateral or regional FTAs. Thus, they are only applicable between the contracting parties or among the member countries of such bilateral or regional agreements. These mechanisms, generally referred to as bilateral or regional safeguard mechanisms, exhibit considerable and interesting differences in their respective regulations, and are therefore a favourable research subject for elucidating and comparing the nature and background of bilateral and regional FTAs. This paper first touches on the basic idea and structure of safeguard mechanisms with reference to the provisions of the global safeguard mechanism under the GATT and the WTO, and then clarifies the different characteristics of global and bilateral (or regional) safeguard mechanisms, as well as the subsequent embodiments of such differences in some of their specific provisions. In the following section, we provide nine indicators with which to look into the selected bilateral and regional safeguard mechanisms, and explain briefly what they are and how they are important for our analysis. We then give a case-by-case analysis of the safeguard mechanisms based on the indicators, and also present some speculative remarks on their specific characteristics. We categorise the investigated mechanisms into five groups according to their overall features, and evaluate which groups and which mechanisms among them are comparatively more preferable, based on their trade-restrictive qualities. Finally, we suggest that safeguard mechanisms may, in fact, serve some positive functions rather than simply restricting trade. We conclude that the evaluation based on the traderestrictive nature of the mechanisms is essential, but comprises only half the overall analysis necessary for a complete and comprehensive understanding, since any final remarks must be based on an assessment of the level of trade liberalization facilitated by the existence of the respective mechanisms.

2. Bilateral and Regional Safeguard Mechanisms 2.1. The basic idea and structure of safeguard mechanisms The purpose of the GATT and free trade agreements, whether bilateral or regional, is to liberalize trade by reducing tariffs and non-tariff barriers for free movement of goods across borders. Conversely, safeguard mechanisms authorise the contracting parties to take trade-restrictive measures, with no unfair trade practices on the part of the exporting countries,3 and thus, 3 Anti-dumping measures and countervailing measures are, however, characterised as remedies to unfair trade practices on the part of the exporting countries, and are thus applicable only against the products of countries responsible for such practices.

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in principle, stand as obstacles to the effective execution of the agreements. Such an apparent contradiction in the existence of safeguard mechanisms is conveniently justified as an emergency measure ostensibly seeking to remedy the negative impacts on domestic industries affected by surges in imports.4 For example, the initial global safeguard mechanism articulated in the GATT 19, which to some extent provided the prototype for subsequent safeguard mechanisms, prescribed the grounds and framework of the measures by ambiguously stating: If, as a result of unforeseen developments and of the effect of the obligations incurred by a contracting party under this Agreement, including tariff concessions, any product is being imported into the territory of that contracting party in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers in that territory of like or directly competitive products, the contracting party shall be free, in respect of such product, and to the extent and for such time as may be necessary to prevent or remedy such injury, to suspend the obligation in whole or in part or to withdraw or modify the concession (GATT 19.1(a)).

Thus, a safeguard mechanism presupposes serious injury or threat thereof to the domestic industry of an importing country, which is, in turn, deemed to be brought about by a sudden increase in imports. Only when such an “exceptional situation” is considered to be present, is the importing country allowed to invoke trade-restrictive measures that are otherwise prohibited under the FTA. However, as can easily be imagined from the intensity of domestic trade politics, such trade-restrictive measures are always subject to the risk of abuse by an importing country, thus undermining the trade liberalization efforts conducted under the Agreement. In fact, the GATT 19 does not elaborate any further than the above provision as to how the grounds for the invocation of such restrictive measures are determined to be existent, nor the types of measures and length of time such measures are allowed to be applied. The ambiguities of the GATT 19 eventually gave rise to the situation where importing countries could invoke and maintain the measures to their liking.5 On the other hand, because of the obligation of 4 However, such negative impacts on inefficient domestic industries are the natural consequences of trade liberalization, and the sources of efficiency gains that trade liberalization are aimed at. The existence of safeguard mechanisms thus requires more elaborate academic rationales, which have long been controversial. 5 As early as 1963, the GATT Secretariat suggested that the regulations of GATT 19 were too lax to secure the achievement of trade concessions, and were thus in need of critical review (see GATT, L/2002, 1963).

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non-discrimination upon the application of measures,6 as well as the right of the affected exporting countries to suspend the application of substantially equivalent concessions or other obligations (GATT Article 19.3(a)), importing countries were subject to substantial economic as well as political costs. The costs invoking safeguard measures, combined with the lack of practices in settling disputes to judge an often-obvious GATT inconsistency for the legal status of grey-area measures,7 contributed to the proliferation of the infamous “grey-area measures”, as well as the severe marginalisation of the GATT 19.8 The Safeguard Agreement of the WTO, which came into effect after more than 20 years of scattered negotiations, widely responded to these structural and practical problems of the GATT 19 and provided a highly elaborate set of regulations covering a variety of aspects of law regarding its implementation (Jackson, 1997; Flory, 1995). The overall structure and the improvements of the Agreement are summarised as follows. First, grounds for the invocation of measures and the framework for their applications are provided and better elaborated than the ambiguous regulations of the GATT 19. For example, Article 4 of the Agreement specifically defines some of the conditions required for the invocation of measures, and also clearly prescribes the ways of determining such prerequisite conditions. Article 11 explicitly prohibits the invocation of grey-area measures, preceded by Articles 5 and 7 that illustrate what types of measures, the level of restrictions, how long, and to what extent such measures are allowed to be applied. Second, the Safeguard Agreement prescribes in detail the proceedings for the implementation of the mechanism, whether they are domestic or international. Article 3, for example, provides various instructions on the processes that domestic authorities need to follow upon determining the prerequisite conditions of the safeguard measures, while Article 12 elaborates the notification and obligations of consultation required to be 6 Although generally considered that the safeguard measures had to be applied nondiscriminatorily, GATT 19 provided no provisions on such an obligation and eventually gave rise to a counter-argument (see, for example, Bronckers, 1995). The Safeguard Agreement of the WTO, on the other hand, clearly articulated that the measures be, in principle, applied non-discriminatorily against different sources of imports (Safeguard Agreement, Article 5). 7 The so-called Panel Proceeding was available as long as the parties agreed on its establishment. However, since grey-area measures were taken “voluntarily” by the exporting countries upon request, whether formal or informal, by the importing countries, there were usually no contracting parties that would submit the issues to the Panel Proceeding. 8 It was estimated that by 1990 a total of 284 grey-area measures were confirmed whereas the number of safeguard measures invoked between 1970 and 1994 was less than 100 (Stewart, 1993; Industrial Structure Council, 2005, p. 239, Tables 7–2).

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compiled with by importing countries at the various stages of investigation and application. Article 13 describes the surveillance task imposed on the Committee on Safeguards,9 and Article 14 clarifies that the neutral dispute settlement procedures of the WTO are applicable to disputes arising from the Agreement. Finally, Article 8 of the Agreement clarifies the effort of importing countries that will be obliged to provide an equivalent level of compensation to the affected exporting countries,10 whereas it reserves the right of exporting countries to suspend the application of concessions or other obligations for three years when the measure has been taken as a result of an absolute increase in imports, and such a measure conforms to the provisions of the Agreement. 2.2. The intrinsic nature of bilateral and regional safeguard mechanisms Bilateral and regional safeguard mechanisms have been an integral part of most FTAs and go back to the USA’s reciprocal trade agreements in the 1940s that provided a model for the safeguard mechanism under the GATT 19. Under the earlier examples of bilateral safeguard mechanisms, contracting parties were authorised to restrict imports from other parties, either through a tariff increase or a quantitative restriction, where they found that their domestic industries were being seriously damaged by imports from the other parties. Since the conclusion of the GATT, however, bilateral and regional safeguard mechanisms in FTAs have, in theory and to a somewhat lesser extent in practice, become a remedy of special and limited nature. Under an international trading system based on the non-discrimination principle, importing countries are primarily allowed to resort to the global safeguard measures to deal with the negative impacts incurred by imports on their domestic industries. Only when such negative impacts by imports are the specific results of additional trade liberalization initiatives under FTAs can importing countries invoke bilateral or regional safeguard measures as are regulated under such FTAs. Therefore, in a case where a certain import product is an object of additional liberalization initiatives under bilateral or regional agreements, as long as the damages incurred by such an import 9 The Committee on Safeguards was established in the same Article under the authority of the Council for Trade in Goods. It is open to the participation of any Member that wishes to serve on it. (See Safeguard Agreement Article 13.1). 10 The former GATT 19 contained no provisions regarding compensation. What was deemed to be such an obligation was, in fact, developed through practices of the contracting parties.

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product are not the specific result of such additional liberalization, it is not the purpose of bilateral or regional safeguard measures to deal with such damages. In short, the global safeguard mechanism and the bilateral or regional safeguard mechanisms are two different institutions dealing with problems arising from two different free trade initiatives. This is why bilateral and regional safeguard mechanisms have their own particular foundations despite the existence of the non-discriminatory global safeguard mechanism. On the contrary, the concept of “bilateral or regional anti-dumping mechanisms” is meaningless, because dumping is a single inalienable action of exporters or producers.11 Considering such a difference in characteristics between the global safeguard mechanism and bilateral or regional safeguard mechanisms, a proliferation of bilateral and regional safeguard mechanisms per se by no means affects the integrity of the global safeguard mechanism, because those two types of mechanisms are not in a relationship where the legal principle of lex specialis derogate generali potentially applies.12 Furthermore, it does not necessarily contribute to a better institutional design of a future global safeguard mechanism because, in principle, there is no such relationship between the global safeguard mechanism and bilateral or regional safeguard mechanisms to justify judgment on their institutional preferabilities.13 These do not mean that, in practice, domestic officials and interested parties 11 In some FTAs, application of the anti-dumping mechanism is explicitly prohibited or additional requirements are attached to it between the contracting parties (see, for example, Canada–Chile FTA Article M-01 and Korea–Singapore FTA Article 6.2). However, these are not examples of bilateral anti-dumping mechanisms existing together with the global anti-dumping mechanism. Rather, they exemplify the case where global regulations are replaced by bilateral regulations between agreeing contracting parties. 12 On the contrary, non-application of the global safeguard mechanism, or non-application or additional requirements for the application of the anti-dumping mechanism observed in some FTAs (the former include, for example, the Australia–Singapore and New Zealand– Singapore FTAs — for the latter, see previous footnote) replace the worldwide regulations on such trade instruments between their contracting parties and, to that extent, affect the integrity of those regulations. These practices not only raise the question of whether they are economically preferable, but also whether they are legally permitted. As some scholars argue (see, for example, Kotera, 2000) if the WTO constitutes a “self-contained regime” in the sense that its law excludes some types of general international law, it is possible that the principle of lex specialis derogate generali does not apply in its relationship, and such bilateral and regional practices are legally unfounded. 13 Many scholars argue that FTA negotiations enable their parties to agree on more extensive and more profound international trade rules than in global negotiations, and through the pervasion of such rules among different sets of countries, they eventually facilitate the achievement of more preferable trade rules at the level of the global trading system (see, for example, Mukunoki, 2006). However, since bilateral and regional safeguard mechanisms are the institutions that are inherent to bilateral and regional free

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of an importing country suffer greater complications and thus greater implementation costs because of the proliferation of different safeguard mechanisms. As the number of bilateral and regional safeguard mechanisms increases, it will be more and more difficult to identify the cause of injury or threat thereof to be responded to by the respective mechanisms, and thus the burden on domestic officials and interested parties of an importing country multiplies.14 Given the nature of bilateral and regional safeguard mechanisms, it is only natural that their regulations exhibit some systemic differences from those of the global safeguard mechanism. For example, under most bilateral and regional safeguard mechanisms concluded in recent years, tariff increases or suspension of further tariff reduction are the only applicable measures,15 whereas, under the global safeguard mechanism importing countries are explicitly allowed to invoke other types of trade-restrictive measures such as quantitative restrictions.16 Where damages on domestic industries could be the result of both global and bilateral, or regional free trade initiatives, suspending the further tariff reduction under FTAs or increasing the tariff rate to a level not exceeding the level of the mostfavoured nation (MFN) is virtually the only possible way to exclusively address the effects of liberalization under FTAs. Under most bilateral and regional safeguard mechanisms, it is explicitly articulated that bilateral and regional safeguard measures are, in principle, only applicable during the transition period,17 while the global safeguard trade agreements, no matter how a certain type of such mechanism prevails among different sets of countries, it does not have any foundation in the global trading system. 14 These costs associated with the proliferation of bilateral and regional safeguard mechanisms are of the same nature as what is commonly called “the spaghetti bowl problem” in the context of the proliferation of different sets of rules of origin and the subsequent increases in the transaction costs associated with their implementations. For the original terminology of the “spaghetti bowl phenomenon”, see Kotera (2007). 15 See, for example, Japan–Singapore FTA Article 18.1. 16 GATT 19 provides that the contracting party shall be free to suspend the obligation incurred by a contracting party under the GATT in whole or in part or to withdraw or modify the concession (GATT Article 19.1[a]). Although tariff increases and quantitative restrictions were the most popular measures applied under the mechanism, GATT 19 did not specify what types of measures fell within the scope of such suspendable “obligations”. During the negotiations for the GATT 19 amendment, contracting parties attempted to clarify the scope of the applicable measures. However, the Safeguard Agreement concluded as the result of such negotiations essentially eluded the issue by simply stating, “This Agreement establishes rules for the application of safeguard measures which shall be understood to mean those measures provided for in Article 19 of GATT 1994 (Safeguard Agreement Article 1).” 17 For example, the Japan–Singapore FTA articulates that the bilateral safeguard measures provided therein are applicable only during the transition period (Article 18.1), which, in turn, is defined as the 10 years immediately following the agreement’s entry

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mechanism does not provide a specific time limit for the invocation of a safeguard. This difference might be because of the requirement of Article 24, para 8(b) of the GATT, which states that restrictive regulations on commerce will be eliminated on most trade (Mathis, 2006). 2.3. Analysis and evaluation of the selected safeguard mechanisms 2.3.1. Indicators for analysis and their descriptions We use nine indicators to analyse the respective bilateral and regional safeguard mechanisms, as listed in Table A.1 of the Appendix. In the followings segments, we explain these indicators and their importance for our analysis. Conditions for invocation. The first three indicators are the conditions that must be met for the invocation of safeguard measures. In any safeguard mechanism, whether global, bilateral, or regional, the requirements for the invocation of safeguard measures are basically threefold.18 First, injury to domestic industries must be apparent. Second, increase in imports of a certain product must be shown. Third, a causal relationship between injury and increase in imports must be established. The regulatory details concerning these requirements, however, differ from one safeguard mechanism to another. For example, a degree of variety is observed in the required level of injury or causation, or how such injury, causation, and increase in imports are to be determined. These varieties in the regulation of invocation significantly affect the trade-restrictive nature of the respective safeguard mechanisms. For example, if the standard of injury to domestic industries is set so high as to put the requirement of injury at an almost insurmountable level, importing countries cannot effectively invoke safeguard measures, thereby rendering such a mechanism into force (Article 11(d)). Interestingly, however, FTAs that were subsequently concluded by Japan (Japan–Mexico, Japan–Malaysia, and Japan–Philippines FTAs) do not include the concept of a transition period, and thus no predetermined period for the invocation of safeguard measures. 18 In fact, since the former GATT 19 remained effective as part of the GATT 1994 after the coming into effect of the WTO, the “unforeseen developments” requirement therein provided was judged to also remain effective as one of the conditions for the invocation of global safeguard measures (see Korea — Definitive Safeguard Measures on Imports of Certain Dairy Products: Report of the Appellate Body, WT/DS98/AB/R, paragraph 74–77; Argentina — Safeguard Measures on Imports of Footwear, Report of the Appellate Body, WT/DS121/AB/R, paragraph 79–84). Such a requirement, however, is not articulated in recent bilateral and regional safeguard mechanisms, since their provisions are normally drawn from those of the Safeguard Agreement and not from those of the former GATT 19.

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virtually unrestrictive. The impact of the mode of regulations on these requirements is considered even more significant when the recent interpretive practices of the global safeguard mechanism in the WTO dispute settlement procedures are taken into account.19 None of the cases brought to the WTO dispute settlement mechanism have been judged to meet the requirements of these conditions, thus failing to establish the grounds for the invocation of measures in the first place.20 The regulations of the global safeguard mechanism concerning these conditions are provided in the same table for further descriptions of the respective indicators, and also as a point of reference in order to inquire and evaluate the respective bilateral and regional safeguard mechanisms. Under the global safeguard mechanism, the level of injury suffered on domestic industries, for example, is “serious injury” (Safeguard Agreement Article (SAA) 2.1) that, in turn, is defined as “significant overall impairment in the position of a domestic industry” (SAA 4.1(a)). Furthermore, regarding the matter of determining cause of injury, it imposes the so-called nonattribution rule, which is articulated as “when factors other than increased imports are causing injury to the domestic industry at the same time, such injury shall not be attributed to increased imports” (SAA 4.2(b)). Each of the bilateral and regional safeguard mechanisms will be examined according to these indicators and in comparison to these regulations of the global safeguard mechanism. Conditions of application. The next three indicators concern the conditions of application of the safeguard measures. These conditions essentially regulate how those measures allowed under the respective safeguard mechanisms are to be applied, once the abovementioned conditions for invocation are deemed to have been satisfied. Such conditions include, for example, what period-of-time measures are allowed to be maintained, what period of time, and on what conditions measures are allowed to be extended, whether or not progressive liberalization is required during the initial application, and, given that such a precondition is allowed, what period of time is required to once again invoke measures on the same products. Furthermore, some safeguard mechanisms explicitly refer to the concept of adjustment in relation to, for example, the determination of the period of initial 19 For descriptions and evaluations on the interpretive practices of the global safeguard mechanism, including those on the conditions for invocation, see Araki and Kawase (2004); Lee (2003). 20 Such cases include Korea–Dairy (DS98), Argentina–Footwear (DS121), US–Wheat Gluten (DS166), US–Lamb (DS177/178), US–Line Pipe (DS202), Chile–Price Band (DS207), Argentina–Preserved Peaches (DS238), US–Steel (DS248/249/251/252/253/ 254/258/259).

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application, the allowability of the extension of the initial measures, and the purpose of the progressive liberalization of the initial measures. These referrals to the concept of adjustment are considered important, because in some cases, they are actually expected to significantly constrain the application of measures, as has been indicated in the interpretive practice of the WTO’s dispute settlement mechanism.21 The impact of these conditions of application on the assessment of the trade-restrictive nature of the safeguard mechanisms is also straightforward. For example, the longer the maximum period of application and the looser the conditions for such determinations, the longer the measures can be maintained, and thus, such a mechanism is generally considered more trade-restrictive. In fact, as stated above, the GATT 19 only articulated that countries could resort to safeguard measures “to the extent and for such time as may be necessary to prevent or remedy such injury” (GATT 19.1(a)). The ambiguous wording of the former global safeguard regulations virtually left unregulated the question of an applicable time period, thereby allowing the measures to be maintained indefinitely. This raised a call for greater specificity regarding the application of safeguard measures, leading to the formulation of the highly detailed regulations of the Safeguard Agreement. For example, in the new agreement on global safeguard measures, the maximum period of initial application and the total maximum period after extension are specified to be four and eight years, respectively (SAA 7.1; 7.3). When the expected duration of such measures is more than one year, countries are required to liberalize the measure progressively at regular intervals (SAA 7.4). The conditions of application of bilateral and regional safeguard mechanisms are generally more rigid than are those of the global safeguard mechanism. However, as certain variations exist in the regulations of conditions among different bilateral and regional safeguard mechanisms, detailed inquiries and comparative analyses of such conditions are relevant. Procedural conditions. The last three indicators are the procedural conditions that the parties must or are allowed to follow domestically or internationally to implement the safeguard mechanism. The first indicator, the “domestic investigation”, is a set of regulations that importing countries are obliged to follow when they investigate whether the invocation of safeguard measures is justified. Recent safeguard mechanisms have generally provided rigid and detailed regulations regarding the conditions for their invocation. However, if the determination of the conditions were to be made arbitrarily by the domestic authority of 21 See, for example, Korea–Definitive Safeguard Measures on Imports of Certain Dairy Products: Report of the Appellate Body, WT/DS98/AB/R, paragraph 96.

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an importing country, the value of such regulations, and thus, the rights of the affected exporting countries, would be severely undermined. This remains true even where a neutral dispute settlement is available internationally and, therefore, such determinations by the domestic authority are to be overturned afterwards. Procedures usually require a considerable amount of time and are economically costly. In the global safeguard mechanism of the WTO, detailed regulations are provided regarding the obligations of public notice, public hearing, and publication of a report (SAA 3.1), to ensure that the views of all the interested parties are sufficiently reflected. The second of this group of indicators is the notification and consultation requirements imposed on the importing countries. For the implementation of the safeguard mechanism to be legally sound, there needs to be a procedural guarantee that provides sufficient information and time so that the affected exporting countries can fully express their own views. Thus, the global safeguard mechanism specifies when and with whom such notifications and consultations are required, as well as their contents and procedures (SAA 12). Bilateral and regional safeguard mechanisms also impose such obligations in varying degrees, justifying their in-depth assessment of how the fair and effective implementation of these potentially destructive mechanisms is to be secured among different mechanisms. The last indicator is the applicability of a “neutral dispute settlement”, indicating a type of international procedure subject to an impartial thirdparty judgment comparable to an international adjudication. The importance of this indicator for our analysis is indisputable. Without a neutral dispute settlement procedure applied on a compulsory basis, all regulations regarding the implementation of the safeguard mechanism are, in principle, entrusted to auto-interpretation by the respective parties. Under the GATT, this allows the importing countries to exercise a high level of discretion concerning when and how the measures are to be applied. The WTO, however, enjoys a highly judicialised dispute settlement system (Kotera, 2000),22 wherein all interpretative issues concerning the implementation of the safeguard mechanism are subjected to — and determined in — a neutral manner. To assess how effectively the implementation of the mechanism is secured among different agreements we examine the type of dispute settlement procedures applicable in the respective safeguard mechanisms. 22 In

this context, developments such as the introduction of the negative consensus rule at the establishment of the procedures and at the adoption of their reports, the establishment of the Appellate Body, and the provision of a specific time schedule for the procedures merit special attention.

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Other possible indicators. In addition to the nine indicators detailed above, safeguard mechanisms include other regulations that could potentially influence their trade-restrictive nature, the most important of which is the effort obligation of compensation on the part of importing countries, and the right of re-balancing on the part of the affected exporting countries. However, these provisions remain essentially the same among different bilateral and regional safeguard mechanisms. For example, the mechanisms generally authorise the immediate execution of re-balancing measures by the affected exporting countries without the provision of a moratorium period stipulated under the Safeguard Agreement.23 Therefore, these regulations are excluded from the scope of our analysis despite their general importance in the overall scheme of these mechanisms. 2.4. Analysis of the selected bilateral and regional safeguard mechanisms The actual regulations of the respective bilateral and regional safeguard mechanisms on the abovementioned nine indicators are summarised in Tables A.2 and A.3 of the Appendix. Here, we analyse the respective bilateral and regional safeguard mechanisms and speculate on the backgrounds of their respective characteristics. 2.4.1. NAFTA The regional safeguard mechanism in the North American Free Trade Agreement (NAFTA) (Articles 801–805) shares a great similarity with the global safeguard mechanism of the WTO.24 Although this mechanism was adopted one year earlier than that of the WTO, the similarity comes as no surprise considering that both safeguard mechanisms refer extensively to the same domestic safeguard provisions of the US, the dominant country of NAFTA.25 Looking closely at the provisions, the regional safeguard mechanism in NAFTA provides more detailed and rigid regulations on its conditions for invocation rather than its elaborate counterparts in the global safeguard mechanism. For example, in NAFTA the increase in imports needs to be “in absolute terms” (Article 801.1), whereas the 23 See,

for example, Japan–Singapore FTA Article 18.4. safeguard mechanism provided in this agreement, however, only applies to the bilateral relationships between Mexico on the one hand and the United States and Canada on the other. Bilateral safeguard measures between the United States and Canada are subjected to the provisions of Article 1101 of the Canada–US FTA, which is incorporated into and made a part of NAFTA for such purpose. See NAFTA Annex 801. 25 The Trade Act of 1974, §201–204. 24 The

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global safeguard mechanism makes no such distinction between absolute and relative increases (SAA 8.3).26 Furthermore, concerning the standard of causation requirement, the former requires that imports alone constitute a substantial cause of serious injury (Article 801.1), whereas the global safeguard mechanism remains silent on such a standard. The most prominent feature of this regional safeguard mechanism, however, is that it explicitly articulates that no party may request the establishment of an arbitral panel regarding any proposed safeguard measures (Article 804). At first glance, such a provision seems incongruous for a safeguard mechanism with such detailed and rigid conditions. However, once the extensive and thorough nature of its regulations on domestic investigation are realised (Article 803; Annex 803),27 the inapplicability of the international neutral dispute settlement procedure can be seen as less of a lack of procedural guarantee.28 That is, the effective implementation of the safeguard mechanism is designed to be secured not so much through the interactions of the member countries representing their interested parties, but by guaranteeing sufficient due process rights at the level of domestic investigation to the affected interested parties regardless of their nationalities. 2.4.2. EFTA The Convention, Establishing the European Free Trade Association (EFTA), concluded in 1960 and amended in 2001, possesses truly unique regional safeguard mechanisms (the EFTA Convention (Consolidated Version: 2001) Articles 40 and 41). Article 40.1 of the Convention that provides the grounds and the basic framework for the measures reads “If serious economic, societal or environmental difficulties of a sectorial or regional nature liable to persist are arising, a Member State may unilaterally take appropriate measures under the conditions and procedures set out in Article 41.” Immediately obvious is that member countries are allowed to invoke trade-restrictive measures 26 However, as stated above, the Safeguard Agreement distinguishes absolute and relative increases in imports in the context of the rebalancing measures. 27 Not only are the regulations concerning the notice requirement and the public hearing better elaborated than in the Safeguard Agreement, it particularly puts forward detailed provisions on issues such as the institution of a proceeding and the contents of a petition or complaint. 28 However, it needs to be remembered that such regulations on domestic investigations concern only the determination of conditions for invocation. The determination of conditions of application, on the contrary, are not subjected to such domestic proceedings, and thus without the application of a neutral international dispute settlement procedure, the affected exporting countries and their interested parties are basically devoid of the opportunities to secure their implementation.

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otherwise prohibited under the Convention, as long as certain types of difficulties of a “sectorial” or “regional” nature are deemed existent. Since the mechanism does not further elaborate on the nature or extent of the difficulties except that they are “economic”, “societal”, or “environmental” to a “serious” degree, it can safely be said that member countries enjoy enormous discretion on the invocation of such measures. The original safeguard mechanism included in the 1960 Convention (Article 20) shared the same particularly wide range of grounds for the invocation of measures (Article 20.1(a)), but their actual application was considerably controlled because of the earlier multilateral authorisation procedure (Article 20.1), as well as the provision of a specific timeframe for the measures (Article 20.2). This unusual regression in the rigidities of the regulations observed between the 1960 and 2001 Conventions can be best understood as the consequence of change in member constitution, and thus, also the overall purpose of the organisation. At its conclusion in 1960, the organisation included seven member countries and was the largest regional free trade agreement,29 with a view to further liberalizing trade among its member countries beyond the level of the worldwide trading system. Therefore, the member countries had the incentive to control the use of trade-restrictive measures to secure the objectives and benefits of the newly established organisation. Contrarily, because of the consecutive withdrawals of its member countries, as well as the foundation of the European Economic Area between the European Community (EC) and three of the remaining four member countries of the EFTA,30 the 2001 EFTA Convention, including its safeguard mechanism, effectively applies only to the relations between Switzerland and the other three EFTA member countries. Consequently, the other three member countries had little incentive to negate the argument for more flexible safeguard mechanisms, thus leading to the unique and unusually lax conditions for the invocation and application of the safeguard measures.

2.4.3. AFTA The safeguard mechanism included in the Agreement on the Common Effective Preferential Tariff Scheme for the ASEAN Free Trade Area 29 The initial member countries of EFTA included Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom. 30 The contracting parties to the 2001 Convention include Iceland, Liechtenstein, Norway, and Switzerland. Of these four countries, Iceland, Liechtenstein, and Norway are members of the EEA.

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(AFTA) (Article 6)31 is best characterised by its strong resemblance to the former global safeguard mechanism, the GATT 19. In particular, it elaborates no further on the standard or the method of determination of the respective conditions for invocation, and remains silent on issues such as timeframe, extension, and reapplication of the safeguard measures. The lax and non-specific regulatory nature displayed by the safeguard mechanism greatly conforms to the overall scheme for trade liberalization of this agreement. As a general framework for trade liberalization among heterogeneous developing countries in the Southeast Asian region, this agreement is best understood as a collection of general principles, rather than rules of a detailed and specific nature (Satou, 2004).32 Correspondingly, the primary dispute settlement procedure available under the agreement, including the disputes arising from the safeguard mechanism, is consultation between the parties involved in the dispute, with the minor alternative of submitting the issues to a council comprised of nominees from each member country, which is, therefore, a procedure of a political nature (Article 6.3).33 2.4.4. EC–Mexico The bilateral safeguard mechanism included in the EC–Mexico FTA (Article 15) demonstrates a remarkable yet somewhat plausible imbalance between the regulations on the conditions for invocation and those on the conditions of application. Specifically, while it provides rigid and detailed provisions on how the measures are to be applied (Articles 15.2 and 15.3), it remains considerably vague on what occasions such measures are initially applicable (Article 15.1). This unique structure of the mechanism can readily be explained by the EC’s long-standing philosophy towards its safeguard policy. As was especially evident throughout the negotiating history of the GATT 19 Amendment (Stewart, 1993), the EC has championed more flexible safeguard mechanisms to address its strong political needs. Thus, its preferred strategy has been geared towards relaxing the requirements for the invocation of measures while attempting to minimise its negative 31 In a strict sense AFTA is not the agreement for establishing the free trade area under GATT 24, but is based on the Enabling Clause of the GATT of 1979. 32 Such a general and flexible nature of the agreement is clearly in line with the political motive for its establishment. It was widely recognised that the establishment of a free trade agreement was not so feasible from an economic perspective, particularly because of the enormous variety in political regimes and economic conditions as well as the similar export product lines among the countries in this region. 33 See also Articles 7 and 8 for the provisions on institutional arrangements and consultations.

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impacts on trade through rigid and detailed regulations on how such measures are to be applied. This bilateral safeguard mechanism between the EC and Mexico goes beyond relaxing the rigid and elaborate conditions for invocation of the global safeguard mechanism by providing other grounds for the invocation of measures apart from the usual “injury to domestic industries” requirements. Specifically, grounds include “serious disturbances in any sector of the economy”, and “difficulties which could bring about serious deterioration in the economic situation of a region of the importing Party” (Article 15.1(b)). 2.4.5. Australia–New Zealand The bilateral safeguard mechanism in the Australia–New Zealand Closer Economic Relations Trade Agreement (Article 17) takes on a characteristic middle ground between the GATT 19 and the Safeguard Agreement, which is only natural given that the agreement was concluded in 1983, immediately after the initial negotiations of the GATT 19 Amendment conducted during the Tokyo Round. Throughout its provisions, this bilateral safeguard mechanism abounds with the efforts of the parties to effectively address the potential negative impacts of the highly flexible GATT 19-esque regulations, though such attempts manifest themselves in ways and degrees dissimilar to those of the Safeguard Agreement. The attempts include further elaborations on the standard of injury and threat thereof (Article 17.2(a)), provisions of somewhat detailed conditions of application, including a specific timeframe for the initial application of measures (Articles 17.6, 17.7(a), 17.9(a)), and, most notably, the introduction of regulations concerning domestic investigations, namely a provision outlining the opportunity for evidence to be presented by the other party (Article 17.4(a)). However, no neutral dispute settlement procedure is provided in the agreement, and this, combined with the political nature of the consultation requirement in this mechanism, namely the requirement of consultation prior to domestic investigation with the aim of reaching a solution (Article 17.3), clearly underlines its dissimilarity to the more judicialised mechanisms of the Safeguard Agreement and the like. 2.4.6. US–Singapore The bilateral safeguard mechanism provided in the US–Singapore Free Trade Agreement (Article 7) draws extensively from the provisions of the Safeguard Agreement, except that the timeframe for the measures is more rigid (Article 7.2.6) and the reapplication of the measures is not allowed (Article 7.2.7) because of the aforementioned transitional character of bilateral and regional safeguard mechanisms.

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One particularly interesting departure from the Safeguard Agreement and the mechanism in the USA’s former regional trade agreement, NAFTA, is that it relaxes the requirement of causation by directly introducing the standard adopted in the USA’s domestic safeguard provisions (Articles 7.1 and 7.6.4). This undoubtedly deliberative modification of the key requirement for the invocation of measures is supposedly explained by the apparently strict interpretive practices of the WTO on this requirement (Abe, 2004; Lee, 2003), and the USA’s disappointment towards them (General Accountability Office, 2003). Throughout the cases submitted before it, the dispute settlement body of the WTO has systemically introduced an extraordinary textual approach to the interpretation of this ambiguous requirement, finding all cases inconsistent with the provision of the Safeguard Agreement.34 2.4.7. US–Australia The bilateral safeguard mechanism in the US–Australia Free Trade Agreement (Article 9), which was concluded a year after that of the US– Singapore FTA, shares the same provisions with its predecessor, which, in turn, drew extensively from the provisions of the Safeguard Agreement. 2.4.8. Japan–Mexico The bilateral safeguard mechanism in the agreement between Japan and Mexico for the Strengthening of the Economic Partnership (Articles 51– 56) exhibits rigid and detailed regulations on the conditions of the safeguard measures, yet to a lesser extent than those of the Japan–Singapore FTA. For instance, it only provides that the standard of causation be “substantial cause” (Article 53.1), while the period of initial application is considerably longer (Article 53.5), and the measures can be applied more than twice on the same products (Article 53.6). This difference between the two agreements concluded by Japan is likely explained by the difference in the industrial structures of the two trading partners. Specifically, a substantial proportion of imports from Mexico consist of agricultural products (Inaba, 2002; Shigeoka, 2002),35 creating concerns and fears among vulnerable yet politically strong Japanese competitors, thus leading to the advocacy of 34 Such cases include Argentina–Footwear (DS121), US–Wheat Gluten (DS166), US– Lamb (DS177/178), US–Line Pipe (DS202), Chile–Price Band (DS207), US–Steel (DS248/249/251/252/253/254/258/259). 35 Agricultural products, including fishery, accounted for 21.6% of the total imports from Mexico as of 2001 (Inaba, 2002), whereas agricultural products from Singapore accounted for only 1.9% of the total imports as of 1999 (Shigeoka, 2002).

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more flexible mechanisms to enable their remedies.36 This safeguard mechanism can be invoked with no time limit (even after the transition period elapses). This is one of the most remarkable differences from other safeguard mechanisms of the FTAs analysed in this paper.37 Additionally, this bilateral safeguard mechanism provides such extraordinarily elaborate and comprehensive regulations on domestic investigations that it has no equal among other bilateral and regional safeguard mechanisms (Article 55).38

2.4.9. Japan–Singapore The bilateral safeguard mechanism provided in the Japan–Singapore Economic Agreement for a New Age Partnership (Article 18) exhibits one of the most extreme examples of rigidified and detailed mechanisms for safeguard measures. Specifically, the mechanism requires that the increase in imports be “in absolute terms” (Article 18.1) and that such imports “alone constitute a substantial cause” (Article 18.1). Furthermore, even when such particularly rigid requirements are deemed to be satisfied, the measures are initially applicable only for one year (Article 18.3(d)). It is broadly understood that the Japanese Government was motivated to achieve a high-level free trade agreement to demonstrate that the abolition of its long-standing philosophy against bilateral and regional FTAs39 was not a shift towards an exclusive regionalism in conflict with the idea of the non-discriminatory world trading system. Rather, its intent was to show that this FTA was merely another product of its attempts to achieve the same goal of trade 36 It is not that there were no such concerns and fears concerning liberalization in agricultural products during the negotiation of the Japan–Singapore FTA. Rather, since the agricultural imports accounted for only a marginal part of the overall imports from Singapore, sensitive agricultural products were able to be largely excluded from the scope of the bilateral liberalization. In the case of the Japan–Mexico FTA, however, as agricultural products amounted to a substantial part of the total imports, they could not simply exclude all of the sensitive agricultural products since an FTA must meet the requirement to liberalize “substantially all trade”, the key requirement of the WTO concerning the conformity of free trade agreements (GATT Article 24.8[b]). 37 See note 17. 38 In addition to the detailed regulations on the public notice and the public hearing, it especially elaborates on the guarantee of access to information for the interested parties of the respective contracting parties. 39 For example, the following statement in the White Paper on International Trade 1999 clearly manifests such an opposition towards bilateral and regional free trade agreements: “As one of the few developed countries which do not participate in institutionalized regional integrations, Japan has to monitor and secure that such regional integrations will not resort to trade restrictive measures (Ministry of International Trade and Industry, 1999, ch.5,§3.3(2)).

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liberalization, and that it complements, rather than undermines, the multilateral liberalization initiatives of the world trading system. This, combined with its traditional stance against arbitrary applications of trade remedy measures, contributed greatly to the extraordinarily rigid and detailed nature of its safeguard provisions. 2.4.10. Korea–Chile Remarkably, the free trade agreement between Korea and Chile does not include any provisions on general bilateral safeguard measures. Thus, neither country is allowed to take trade-restrictive measures to address negative impacts to its domestic industries specifically arising out of this bilateral agreement. However, the global safeguard measures remain applicable between the two countries (Article 61),40 and therefore, each country is able to restrict imports from the other country as long as such restrictions are applied on a non-discriminatory basis among different countries. Finally, but most importantly, agricultural goods are deemed an exception because of the alleged “particular sensitivity of the agricultural markets” (Article 3.12.1), thus the agreement authorises special emergency measures for such goods, for which regulations are characterised by its GATT 19-esque flexibility (Article 3.12). To accurately evaluate the traderestrictive nature of this safeguard system, we need to take this structure into account. 2.4.11. Korea–Singapore The bilateral safeguard mechanism in the Korea–Singapore Free Trade Agreement (Article 6.4) widely echoes the provisions of the agreement that Singapore concluded with the United States in the previous year. Its provisions are largely characterised by the rigidity and detailed nature observed in the Safeguard Agreement. 2.4.12. China–ASEAN The safeguard mechanism included in the Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Co-operation between the ASEAN and China (Article 9) systemically introduces the provisions of the Safeguard Agreement with some minor exceptions arising mostly out of the structural differences between the global and regional mechanisms. The China–ASEAN FTA simply articulates that “the Parties 40 Korea–Chile FTA Article 6.1 explicitly articulates that “both parties maintain their rights and obligations under Article 19 of GATT and the Agreement on Safeguards, which is part of the WTO.”

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shall adopt the rules for the application of safeguard measures as provided under the WTO Agreement on Safeguards, with the exception of the quantitative restriction measures set out in Article 5, and Articles 9, 13, and 14 of the WTO Agreement on Safeguards” (Article 18.6). As a consequence of such comprehensive referral to the global safeguard provisions, this safeguard mechanism possesses one prominent feature that other bilateral and regional safeguard mechanisms lack — it reserves the right of the affected exporting countries to suspend the application of substantially equivalent concessions and other obligations for three years, a provision that marks a structural change undergone by the global safeguard mechanism from the more politically oriented GATT 19 to the legally oriented Safeguard Agreement.41 3. Classification of the Selected Bilateral and Regional Safeguard Mechanisms We have looked at the details of the respective bilateral and regional safeguard mechanisms and highlighted their prominent features and backgrounds. We now classify these safeguard mechanisms and evaluate which bilateral and regional mechanisms are comparably more trade-restrictive or less trade-restrictive (summarised in Table A.4 of the Appendix). 3.1. No general safeguard type Bilateral and regional FTAs in this category provide no general mechanisms that enable their parties to take trade-restrictive measures to address the negative impacts on their domestic industries incurred by such bilateral or regional trade liberalization. Therefore, this type is clearly the least traderestrictive (or more precisely, non-trade-restrictive) of all the general safeguard mechanisms. Among the bilateral and regional FTAs investigated, the Korea–Chile FTA is the only example that fits this category. However, the achievement of this agreement cannot be overestimated because it provides a special type of emergency measure addressing only 41 Concerning

the right of re-balancing conferred on the affected exporting countries, it is a puzzle why the importing countries need to suffer such a burden in taking bona fide temporary action (see, for example, Tumlir, 1973). The best answer is that safeguard measures were of a political nature, and the political benefits arising from the invocations of measures on the part of the importing countries were intended to be balanced with those of the affected exporting countries. It was indicative in this context that the Safeguard Agreement of the WTO reserves this right of re-balancing on condition that the safeguard measures taken by the importing countries conform to the provisions of the Agreement.

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the injury to domestic industries owing to agricultural imports. Given the highly flexible nature of this special safeguard mechanism, the overall safeguard scheme of this agreement could, instead, be evaluated as one of the most trade-restrictive. 3.2. Quasi-global safeguard type 3.2.1. WTO type The second category of bilateral and regional safeguard mechanisms has characteristics similar to the Safeguard Agreement of the WTO. These mechanisms typically possess rigid and detailed conditions for invocation and conditions of application, and have detailed domestic and international proceedings including neutral dispute settlement procedures. Because of its exhaustive regulations on when and how the measures are to be applied, as well as sufficient procedural guarantees to secure fair and effective implementation of the regulations, the trade-restrictive nature of this type of safeguard mechanism is considered significantly limited. The apparently exacting interpretive practices of the WTO in recent years further fortify such a conviction. Among the bilateral and regional safeguard mechanisms investigated, the ones under the US–Australia, US–Singapore, Japan–Mexico, Japan– Singapore, Korea–Singapore, and China–ASEAN FTAs are classified under this category. The virtual impossibility of weighing the importance of the respective indicators utilised in this analysis (for example, an evaluation of the relative importance between a rigid standard of injury and a rigid timeframe for the initial application) makes further evaluation or ranking among the six listed mechanisms basically unfeasible. However, particularly because of its regulatory thoroughness on the conditions for invocation and the conditions of application, the one in the Japan–Singapore FTA is the least trade-restrictive, while other mechanisms adopting the same “substantial cause” requirement as the United States domestic safeguard mechanism42 have alleviated the burden of proof on their conditions for invocation, and are thus considered more trade-restrictive. 3.2.2. GATT type The safeguard mechanisms under the AFTA and the Australia–New Zealand FTA are, to a different degree, characterised by their resemblance to the more flexible mechanisms of the GATT 19, thus deserving yet another 42 These

are in the US–Singapore, US–Australia, and Korea–Singapore FTAs. The Japan–Mexico FTA also provides the same “substantial cause” standard, but remains silent on its definition.

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category of bilateral and regional safeguard mechanism. These safeguard mechanisms leave the conditions for invocation and the conditions of application largely unspecific, while their domestic and international proceedings remain generally of a political nature. Therefore, their implementations are largely dependent on the political conditions present at a given time among each set of affected parties, and thus, it remains uncertain how traderestrictive such mechanisms are. However, the practices under the GATT 19 and the subsequent need for its amendment clearly signify that politically oriented safeguard mechanisms often lead to abuse, and therefore, restrict trade much more significantly than those of a legal orientation. Between the two bilateral and regional safeguard mechanisms classified in this category, that in the Australia–New Zealand FTA is much more responsive to the negative aspects of such politically oriented safeguard mechanisms, and its regulations better represent efforts to bring discipline and objectivity to the use of its safeguard measures. 3.2.3. NAFTA type The safeguard mechanism provided in NAFTA shares the same feature with the GATT-type mechanisms in that the disputes arising from the mechanism cannot be subjected to the neutral dispute settlement procedures provided in the agreement. However, classifying this safeguard mechanism under the same category as that type of mechanism would be extremely misleading. The highly rigid and detailed conditions as well as the exceptionally elaborate regulations to secure sufficient due process to the affected parties at the level of domestic investigations means this safeguard mechanism seems less vulnerable to political abuses as the aforementioned GATT-type mechanisms. Rather, as previously stated, the unavailability of international neutral dispute settlement procedures in this mechanism is better understood as the product of its state-to-business orientation rather than the state-to-state alternative in order to achieve the same purpose to secure fair and effective implementation of the safeguard mechanism. Thus, this safeguard mechanism is potentially much less trade-restrictive than the GATT-type mechanisms, not to mention those of the WTO type. 3.2.4. European type The last category of bilateral and regional safeguard mechanisms is the type observed in the EFTA and the EU–Mexico FTA. The bottom line of this type of mechanism is the different grounds that it provides for the invocation of measures other than the normal “injury to domestic industries” requirements. Technically, this type raises the question of conceptual delimitation of safeguard mechanisms, because if the essence of

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the institution is understood to be the remedy to injured import-competing industries, measures regulated under these “safeguard mechanisms”, at least partially, go well beyond the scope of such conceptualisation. Aside from the reservation, the exact assessment of the trade-restrictive nature of these mechanisms in comparison with others, particularly with the GATT-type mechanisms, is impracticable because it essentially comes down to the weighing of negative effects arising from the risk of arbitral implementations of the measures and the effects of legitimate yet exceptionally permissive regulations on the invocation of measures. However, it is worthwhile to acknowledge and stress that under these European-type mechanisms, no matter to what extent the modes of application are elaborated in the regulations and ensured by detailed and neutral proceedings, contracting parties and member countries enjoy an enormous amount of discretion on the key factor of when such measures are initially applicable, without the otherwise harsh confrontations, both political and legal, with the affected exporting countries and their interested parties. Finally, between the two mechanisms classified in this category, the one under the EC–Mexico FTA is clearly less trade-restrictive in that it is subject to more rigidity and specificity throughout its regulations.

4. Final Remarks We have investigated 12 bilateral and regional safeguard mechanisms, and evaluated which types of safeguard mechanisms, and which mechanisms among them are, on an ordinary basis, more trade-restrictive or less traderestrictive than others. However, although it provides essential insights for understanding the respective safeguard mechanisms, as well as the FTAs in which these mechanisms are included, of utmost importance for our analysis is the knowledge that this evaluation constitutes only half the overall understanding of the significance of safeguard mechanisms. Specifically, the evaluation only addresses the negative impacts on trade of the safeguard mechanisms, while systemically dismissing the possibility of their positive functions. In fact, examinations focused solely on the negative impacts of safeguard mechanisms contend, as some scholars have argued (e.g. Krauss, 1978), that the mechanisms merely reflect the interests of politically powerful importcompeting industries and produce no significant outcomes favourable to overall free trade initiatives. Conversely, if it is believed that the mechanisms serve some positive functions other than restricting trade, the evaluation of the preferability of the respective mechanisms is fully attained only after examining the trade-offs between the negative and the positive impacts that the mechanisms bring about.

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In domestic trade politics, it is generally the import-competing industries that enjoy the most influence on policy outcomes because they have the biggest stake in the subject, and are thus politically the most mobilised. Safeguard mechanisms are considered to serve as a safety valve for this influence by the import-competing industries (Sykes, 1991; Yu, 1994). That is, by providing a mechanism that enables the policymakers to restrict trade at crucial moments, the protectionist pressures from these industries are alleviated, encouraging further trade liberalization. If parties to an FTA need a special safety valve to conciliate otherwise obstinate protectionist positions of their import-competing industries, it makes perfect sense that each bilateral and regional free trade agreement includes its own safeguard mechanism to achieve further liberalization under such an agreement.43 To this effect, that the safeguard mechanisms in the FTAs often allow an immediate execution of the re-balancing measures fortifies the opinion that bilateral and regional safeguard mechanisms are especially geared towards such a political function. Provision of compensation and acceptance of retaliatory trade measures constrain the use of safeguard measures, while the protectionist opposition of the import-competing industries is mitigated by the almost false conviction that remedies are always available when the situation becomes difficult. The importance of the political function of bilateral and regional safeguard mechanisms means that to evaluate the preferability of the respective safeguard mechanisms we have to pay special attention to the level of political function they serve. Specifically, what is required for such an evaluation is to assess and compare the potential costs arising from the mechanisms’ trade-restrictive nature and the benefits produced by the achievement of further trade liberalization through its existence. Any final remarks on the comparative evaluation or the ranking of the mechanisms come only after a cost/benefit analysis of the individual mechanisms. Thus, even when a safeguard mechanism is considered to be one of the least trade-restrictive, if it contributes little to the further liberalization of trade under its bilateral or regional free trade agreement, it may not necessarily be the most preferable from the standpoint of the overall purpose of trade liberalization. 43 Besides

the trade liberalization viewpoint we can think of other positive economic functions of the safeguard mechanisms, such as the alleviation of adjustment costs by controlling the flow of imports (see, for example, Horn and Mavroidis, 2003) and the achievement of distributive justice by preventing the expansion of income disparities arising from trade liberalization (see Deardorff, 1987). However, these functions are not relevant in the context of our analysis since its purpose is to evaluate safeguard mechanisms in terms of the achievement of free international trade and not the overall social welfare of their parties.

Table A.1.

Indicators and their descriptions in terms of Global Safeguard Clauses.

1. Injury (threat of injury)

1. Criteria for injury 2. Criteria for threat of injury

Mode of increase 1. Criteria for causation 2. Method for determination

4. Application

1. Period of initial application 2. Period of extension 3. Need for liberalization

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2. Increased imports 3. Causation

“Serious injury (Art.2.1)” defined as “a significant overall impairment in the position of a domestic industry (Art.4.1 (a))” Threat of serious injury (Art.2.1) defined as “serious injury that is clearly imminent” whose determination “be based on facts and not merely on allegation, conjecture or remote possibility (Art.4.2 (b))” “All relevant factors of an objective and quantifiable nature having a bearing on the situation of that industry, in particular, the rate and amount of the increase in imports of the product concerned in absolute and relative terms, the share of domestic market taken by increased imports, changes in the level of sales production, productivity, capacity utilization, profits and losses, and employment (Art.4.2 (a))” “Absolute or relative to domestic production (Art.2.1)” No specific regulation Non-attribution rules stated as “when factors other than increased imports are causing injury to the domestic industry at the same time, such injury shall not be attributed to increased imports (Art.4.2 (b))” “4 years (Art.7.1)”

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Indicators

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“A total maximum period of 8 years (Art.7.3)” “Progressive liberalization at regular intervals where the expected duration of a measure is over 1 year (Art.7.4)”

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Indicators

Interval for reapplication

7. Domestic investigation

Mode of domestic investigation

8. Notification and consultation

Need for notification and consultation

9. Dispute settlement procedure

Applicability of neutral dispute settlement procedure

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6. Reapplication

As the condition for determining the period of initial application (Art.7.1), as the condition for extending the period of initial application (Art.7.2), and as the purpose of progressively liberalizing the initial measures (Art.7.4) “A period of time equal to that during which such measure had been previously applied, provided that the period of non-application is at least 2 years (Art.7.5)” “Investigation shall include reasonable public notice to all interested parties and public hearings or other appropriate means in which importers, exporters and other interested parties could present evidence and their views (Art.3.1)” “Notification to the Committee at initiation of investigation, finding of serious injury, and determination of application (Art.12.1); consultation with affected parties prior to application (Art.12.3)” “Application (Art.14)”

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5. Adjustment

(Continued )

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Table A.1.

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GSC

“If serious economic, societal or environmental difficulties of a sectoral or regional nature liable to persist are arising, a Member State may unilaterally take appropriate measures”

“Serious injury”

1-2

GSC

1-3

GSC+“may also consider other economic factors, such as changes in prices and inventories, and the ability of firms in the industry to generate capital” “In absolute terms” “The imports of such good from that Party alone constitute a substantial cause” GSC “3 years” “1 year” No specific regulation As the condition for extending the period of initial application Not reapplicable More detailed than GSC, especially on the institution of proceedings, the contents of petition and complaint, and the notice requirement on the investigating authorities;

2 3-1 3-2 4-1 4-2 4-3 5 6 7

Threat of serious injury No specific regulation

No specific regulation No specific regulation

No No No No

specific specific specific specific

regulation regulation regulation regulation

No specific regulation

No No No No No

specific specific specific specific specific

regulation regulation regulation regulation regulation

No specific regulation

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NAFTA (1994)

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Table A.2. Regulations of the selected Bilateral Safeguard Clauses (“GSC” stands for the provisions of the Global Safeguard Clause described in Table A.1).

158

Indicators

(Continued )

No specific regulation

No specific regulation

Notification and consultation in the Council prior to application, notification to the Council where measures are taken, consultations in the Council every 3 months after their adoption Submission to the Council comprising the representatives from each Member State

Notification to the Council where measures are taken

EC–Mexico (2000)

US–Australia (2005)

Australia–New Zealand (1983)

1-1 1-2

“Serious injury” “Threat of serious injury”

GSC GSC

1-3 2 3-1

No specific regulation No specific regulation No specific regulation

3-2

No specific regulation

GSC GSC “Substantial cause” defined as “important and not less than another cause” No specific regulation

“Severe material injury” “An imminent and demonstrable threat” No specific regulation No specific regulation No specific regulation

8

9

Indicators

Not applicable

Submission to the minister-level Council comprising one nominee from each Member State and the Secretary-General of the ASEAN Secretariat, or submission to the ASEAN Economic Minister (AEM)

No specific regulation (Continued)

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determinations by the investigation authorities subject to review by judicial or administrative tribunals to the extent provided by domestic law Notification to and consultation with the affected parties upon institution of proceedings

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NAFTA (1994)

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Table A.2.

Indicators

(Continued )

“2 years” No specific regulation No specific regulation

No specific regulation

6 7

“3 years” No specific regulation

As the condition for determining the period of initial application, and as the condition for extending the period of initial application Not reapplicable GSC

8

Referral of the difficulties of the importing country for examination to the Joint Committee, which may take any decisions needed to put and end to such difficulties; notification to and consultation with the Joint Committee when measures are applied

Notification to the other party upon initiation of investigation; consultation with the other party prior to application

9

Applicable

Applicable

No specific regulation An opportunity for evidence to be presented from the other party be provided Consultation with the other party to seek a mutually acceptable solution before investigation and upon determining material injury; annual review with the other party of the need for continuing measures Not applicable

US–Singapore (2004)

Japan–Mexico (2005)

Japan–Singapore (2002)

GSC GSC GSC GSC

GSC GSC GSC+“prices” “In absolute terms”

GSC GSC GSC “In absolute terms”

Indicators 1-1 1-2 1-3 2

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(Continued)

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“2 years” “2 years” GSC

5

“1 year” “A total maximum period of 3 years” “Shall contain clear elements progressively leading to their elimination at the end of the set period at latest” No specific regulation

4-1 4-2 4-3

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EC–Mexico (2000)

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Table A.2.

Japan–Singapore (2002)

3-1

“Substantial cause” defined as “important and not less than another cause”

“Substantial cause”

3-2 4-1 4-2 4-3

GSC “2 years” “2 years” GSC

GSC “3 years” “A total maximum period of 4 years” “Shall present the other party a schedule leading to its progressive elimination” As the condition for extending the period of initial application

“The imports of that originating good alone constitute a substantial cause” GSC “1 year” “A total maximum of 3 years” No specific regulation

5

7

GSC

8

Notification to the other party upon initiation of investigation; consultation with the other party prior to application

“A period of time equal to the duration of the previous measure or 1 year” More detailed than GSC, especially on the procedure and the content of public notice upon initiation of investigation, and the access of information related to investigation to interested parties Notification to the other party upon initiation of investigation and prior to application; consultation with the other party prior to application

As the condition for determining the period of initial application Not reapplicable GSC

(Continued)

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Notification to the other party upon initiation of investigation, finding of serious injury, and determination of application; consultation with the other party prior to application

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As the condition for determining the period of initial application, and as the condition for extending the period of initial application Not reapplicable

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US–Singapore (2004)

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Indicators

(Continued )

160

Table A.2.

Indicators US–Singapore (2004) Applicable

Indicators Korea–Chile (2004)

3-2 4-1 4-2 4-3 5

Applicable

Korea–Singapore (2005)

China–ASEAN (2003)

GSC GSC GSC GSC “Substantial cause” defined as “important and not less than any other cause” GSC “2 years” “2 years” GSC As the condition for determining the period of initial application, and as the condition for extending the period of initial application No specific regulation GSC Notification to the other party upon initiation of investigation; consultation with the other party prior to application Applicable

GSC GSC GSC GSC GSC

GSC “3 years” “1 year” GSC GSC

GSC GSC GSC

Applicable 161

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9

Applicable

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No general bilateral safeguard clause

Japan–Singapore (2002)

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Japan–Mexico (2005)

A Comparison of the Safeguard Mechanisms of FTAs

9

(Continued )

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Table A.2.

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162 Table A.3.

Characteristics of respective Bilateral Safeguard Clauses.

NAFTA (1994)

Very rigid and detailed substantial conditions; rigid and detailed procedural conditions; very detailed and extensive domestic investigation proceedings; neutral international dispute settlement procedure not available

EFTA (1960, amended in 2002)

Unique and extremely broad grounds for the invocation of measures; lax and nonspecific procedural conditions; no specific regulation on domestic investigation proceedings; dispute settlement procedure politically oriented

AFTA (1993)

Lax and non-specific conditions both substantial and procedural; no specific regulation on domestic investigation proceedings; dispute settlement procedure politically oriented

EU–Mexico (2000)

“Serious disturbances in any sector of the economy” and “difficulties which could bring about serious deterioration in the economic situation of a region of the importing country” as additional grounds for the invocation measures; rigid and detailed procedural conditions; no specific regulation on domestic investigation proceedings; consultation prior to the application of measures; neutral dispute settlement procedure not available

US–Australia (2005)

Rigid and detailed conditions both substantial and procedural; detailed domestic and international proceedings

Australia–New Zealand (1983)

Transitional character; lax and non-specific substantial conditions; relatively detailed procedural conditions; relatively detailed domestic investigation proceedings; neutral dispute settlement procedure not available

US–Singapore (2004)

Rigid and detailed conditions both substantial and formal; detailed domestic and international proceedings

Japan–Mexico (2005)

Rigid and detailed conditions both substantial and procedural; very detailed domestic proceedings; detailed international proceedings

Japan–Singapore (2002)

Very rigid and detailed conditions both substantial and procedural; detailed domestic and international proceedings

Korea–Chile (2004)

No general safeguard clause

Korea–Singapore (2005)

Rigid and detailed conditions both substantial and procedure; detailed domestic and international proceedings

China–ASEAN (2003)

General adoption of Safeguard Agreement regulations with few exceptions arising from structural differences between FTA and WTO

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163

Classification of selected Bilateral Safeguard Clauses.

1. No general safeguard type No general bilateral safeguard clause Korea–Chile FTA 2. Quasi-global safeguard type WTO type Similarity with the Safeguard Agreement (rigid and detailed conditions; detailed domestic and international proceedings) US–Australia FTA, US–Singapore FTA, Japan–Mexico FTA, Japan–Singapore FTA, Korea–Singapore FTA, China–ASEAN FTA GATT type Similarity with the GATT 19 (Lax and non-specific conditions, politically governed implementation) AFTA, Australia–New Zealand FTA Transnational type Implementation secured through detailed domestic investigation (rigid and detailed conditions, especially detailed and thorough domestic investigation proceedings, neutral international dispute settlement procedure not available) NAFTA 3. European type Broader grounds for invocation of measures (grounds for invocation other than the normal “injury to domestic industries” requirements) EFTA, EU–Mexico FTA

References Abe, Y (2004). Sefugado kyoutei ni okeru inga kankei youken [Attribution of the safeguard]. In WTO taisei-ka no sefugado [The Safeguard under the WTO System], I Araki and T Kawase (eds.), pp. 99–120. Tokyo: Toyo Keizai Inc. Bronckers, MCYE (1995). Selective Safeguard Measures in Multilateral Trade Relations. Deventer, Netherlands: Kluwer Law and Taxation Publishers. Deardorff, A (1987). Safeguards policy and the conservative social welfare function. In Protection and Competition in International Trade: Essays in Honor of WM Corden, H Kierzkowski (ed.), pp. 22–40. Oxford: Blackwell. Flory, T (1995). The Agreement on Safeguards. In The Uruguay Round Results, JHJ Bourgeois, F Berrod, and EG Fournier (eds.), pp. 265–271. Brussels: European Interuniversity Press. General Accountability Office (2003). World Trade Organization: Standard of Review and Impact of Trade Remedy Rulings. Horn, H and PC Mavroidis (2003). United States — safeguard measures on imports of fresh, chilled or frozen lamb meat from New Zealand and Australia: What should be required of a safeguard investigation? World Trade Review, 2–3, 395–430.

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Inaba, K (2002). Nichi-boku FTA no igi [The significance of the Japan–Mexico FTA]. In FTA gaidobukku [Guidebook of FTAs], S Urata (ed.), pp. 238–244. Tokyo: JETRO. Industrial Structure Council (2005). Report on the WTO Inconsistency of Trade Policies by Major Trading Partners. Tokyo: Ministry of Economy, Trade and Industry. Kotera, A (2000). WTO taisei no hokozo [On the Structure of the WTO System]. Tokyo: University of Tokyo Press. Kotera, A (2007). FTA no ‘Spaghetti Bowl’ gensho toha? [What is the ‘spaghetti bowl phenomena’ ?]. RIETI, http://www.rieti.go.jp/en/columns/a01 0193. html, accessed on 31 March 2007. Krauss, MB (1978). The New Protectionism: The Welfare State and International Trade. New York: New York University Press. Lee, Y-S (2003). Safeguard Measures in World Trade. The Hague: Kluwer Law International. Mathis, JH (2006). Regional trade agreements and domestic regulation: What reach for ‘Other Restrictive Regulations of Commerce’ ? In Regional Trade Agreements and the WTO Legal System, L Bartels and F Ortino (eds.), pp. 79–108. New York: Oxford University Press. Ministry of International Trade and Industry (1999). Tsuusho hakusho [White Paper on International Trade]. Tokyo: Ookura sho insatsukyoku. Mukunoki, H (2006). Chiiki boueki kyoutei to takaku-teki boueki jiyuu-ka no hokan kanousei [Complementarity of Regional Trade Agreements in Multilateral Trade Liberalization]. RIETI Discussion Paper Series, 06-J-006. Satou, K (2004). AFTA wo meguru ASEAN no ikinai seiji [Internal politics of the ASEAN countries on AFTA]. In Higashi ajia keizai tougou heno michi [The Road to the Integration of East Asian Economy], T Watanabe (ed.). Tokyo: Keiso Shobo. Shigeoka, J (2002). Nihon Singaporu shinjidai keizai renkei kyotei no igi [The significance of the Japan–Singapore FTA]. In FTA gaidobukku [Guidebook of FTAs], S Urata (ed.), pp. 228–237. Tokyo: JETRO. Stewart, TP (1993). The GATT Uruguay Round: A Negotiating History (1986– 1992). Boston: Kluwer Law and Taxation. Sykes, AO (1991). Protectionism as a ‘safeguard’: A positive analysis of the GATT ‘escape mechanism’ with normative speculations. University of Chicago Law Review, 58(1), 255–303. Tumlir, J (1973). A revised safeguard clause for GATT? Journal of World Trade Law, 7(4), 404–420. Yu, H (1994). GATT dai 19 jo to kokusai tsusyo hou no kinou [Article 19 of GATT and Functions of International Trade Law]. Tokyo: University of Tokyo Press.

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Chapter 5

ASSESSING THE ECONOMIC IMPACTS OF FREE TRADE AGREEMENTS: A COMPUTABLE EQUILIBRIUM MODEL APPROACH KAZUTOMO ABE Department of Humanities and Social Sciences, Tokyo Denki University, Tokyo, Japan

1. The Theoretical Framework and the Simulation Model Adopted 1.1. Surveys on the impacts of an FTA 1.1.1. Welfare decomposition of efficiency improvement A tariff reduction of a free trade agreement (FTA) has a wide variety of economic impacts on the member countries of the agreement, as well as the rest of the world. The effects encompass welfare, production, exports, and imports in both real and nominal terms. A survey by Baldwin and Venables (1995) demonstrated a comprehensive framework to decompose formally the impacts on the national welfare into six effects, based on an indirect utility function with respect to the consumption expenditure.1 Assuming that all trade barriers give rise to rents only to domestic agents,2 one effect (trade cost effect) can be omitted from the six. Of the remaining five effects, 1 The six effects are trade volume effect, trade cost effect, terms of trade effect, output effect, scale effect, and variety effect. 2 In contrast, some trade barriers may be real trade costs incurred to the domestic agencies, or a quota under which foreigners capture the quota rents.

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three effects (output, scale, and variety) are only relevant in the models that allow for increasing returns to scale and imperfect competition.3 These effects are important for analysing the regional trade agreements between countries with similar industrial and trade structures, and where horizontal intra-industry trade is dominant, such as between the United States and Canada and among the countries in the European Union. Because the percentage share of horizontal intra-industry trade in total bilateral trade within the East Asian region is still low, we may limit our analysis to the remaining two effects: trade volume effects and terms of trade effects. The lack of necessary data for simulating welfare effects under the increasing returns to scale is also a limiting factor. The welfare decomposition of trade volume effect in formal expression is shown in Appendix 1. The two effects are in essence based on comparative statistics, that merely takes the difference of the two statuses of variables in equilibrium. Some details of these two effects are as follows. Trade volume effect This is essentially the change in tariff revenues brought about by the changes in imports. As such, the effects in terms of income are obtained as the weighted average of existing tariff rates, using the changes in import volumes as weights.4 This effect is closely related to the seminal study by Viner (1950) in which he classified the effects of the Customs Union5 (CU) into two types: trade creation and trade diversion effects. The sum of the two effects corresponds to the trade volume effect, producing ambiguous results on welfare. The trade diversion effect means reduced imports from non-FTA members, while trade creation effect means increase in the sum of increased imports from FTA/CU.6 Trade diversion results from discriminatory tariff reduction that leads private agents to import from a supplier that is not the lowest-cost source. Therefore, trade diversion reduces home welfare by raising the nation’s cost of consuming such goods. If bilateral tariffs are reduced only on imports from countries that are already the lowest-cost suppliers, trade diversion does not occur. FTAs/CUs are likely 3 The

main reference on this theoretical application is Helpman and Krugman (1989). Appendix 1 illustrates, the trade volume effects amount to tdm where t represents a vector of import tariffs and dm is the derivative of import vector. In the case of trade liberalisation, the amount is approximately equal to the sum of two triangles of the dead-weight loss under tariff in the standard textbooks of trade theory, by means of the mean-value theorem. 5 The Customs Union sets the common tariffs to the non-member countries as well as substantially abolishes all tariffs between the members. 6 According to Kowalczyk (1992), there are many other definitions of trade creation and diversion. 4 As

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to be beneficial if the partners initially account for large shares of each other’s imports, as would be the case if they were low-cost producers. Terms of trade effect Changes in the trade by Japan and other East Asian countries will probably induce changes in their border prices, with consequent effects on welfare through the change in their terms of trade. If imports to the members of the FTA from the rest of the world decrease, then the terms of trade of the members of the FTA are likely to improve, and vice versa. The terms of trade effects are supposed to have ambiguous results in general, because an FTA may or may not bring expansion of intra-regional trade and contraction of external trade. It is necessary to test the effects by means of economic models by taking into account the complex structure of complementarities in trade and other factors. 1.2. Location effects and regional disparity Researchers have identified many of the effects of an FTA other than static efficiency improvement. An important one is the location effect. There is a concern that regional integration may be associated with increased inequality between regions. In a perfectly competitive environment, regional integration reduces intra-FTA factor price differences, as was proven in the “factor price equalization theorem”. As long as the countries’ endowments lie inside the same cone of diversification, integration will equalise factor prices in the long run. For example, China and Japan have different endowments, but the virtual integration of the countries will eventually increase internationally traded goods and factors, which will in turn increase the size of the cones of diversification. In fact, wages in China have been increasing rapidly, while those in Japan have declined. Economic geography, which has recently drawn the attention of some economists, often assumes imperfect competition and scale economies which sometimes imply reverse outcomes. Scale economies and economies of agglomeration mean that firms will not locate some productive capacity in every country or region. The decision of the firm depends on the balance between production costs and trade costs. This balance changes as trade barriers are reduced and it is possible that industry will be drawn into high-wage locations, increasing inter-regional wage differences. Regional disparity has been a top concern of the Chinese government. The coastal region has enjoyed high rates of growth compared to the inland regions that have lagged. In Japan, disparity among both people and regions has become a serious political issue. Relocation of production processes and reduction of employment have long taken place in several regions of Japan. Concern

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about regional disparity sometimes materialises as political pressure to resist FTAs. The location effects are something new to trade theory, and we still need to accumulate literature and empirical data.

1.3. Other dynamic effects of an FTA on economic growth and welfare In addition to the effects above, researchers have identified the effects on economic growth of trade liberalisation under an FTA. The tariff reduction may provide an incentive (i) to mobilise inputs and to improve their quality, (ii) to increase the efficiency of management through the increased pressure of competition (the “competition enhancing” effect), and (iii) to enhance technological innovation. Most of these effects are hypothetical, and empirical studies on the growth function have tested them by the panel data estimates. In addition, the economy of agglomeration may accelerate economic growth by bringing about the freer movement of economic resources. At present, an economic model simulation may not be able to capture these effects. FTAs, especially the type of the economic partnership agreement (EPA) concluded by Japan, include many other liberalisation and cooperation clauses in the agreements, such as liberalisation in foreign direct investment, reduction of non-tariff barriers, protection of intellectual property rights, and industrial standardisation. These apparently bring about many economic effects, some of which may be more significant than tariff reduction. Some existing studies have tried to assess service sector liberalisation and other trade cost reduction measures in FTAs/EPAs. Most rely on more or less arbitrary assumptions. Our study takes a model simulation approach and, as a result, is limited to the assessment of tariff reduction.

1.4. Framework of the adopted simulation model 1.4.1. Computable equilibrium models and their advantage In spite of the huge stock of theoretical literature, it is not empirically possible to construct a simulation model to quantitatively assess all the wide-ranging effects of an FTA under the present model technology and the availability of required data. The following analysis adopts a simulation of a computable general equilibrium (CGE) model for assessing FTAs. A standard CGE model consists of equations of market demand and supply and market clearance conditions as well as input–output relations, with a foundation in the microeconomic general equilibrium theory. The CGE

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model in its international version has its theoretical foundation in neoclassical trade theory. The pattern of comparative advantage explains the causes of, and gains from, trade on the basis of the relative differences between economies in factor endowments and production functions. By specialising in products that suit local conditions, and trading these for other goods that are produced with comparatively greater efficiency in other economies, each economy will have a higher real income and welfare than in the absence of trade. This is the basic motivation behind trade and explains its pattern in the world economy. In the framework, tariffs cause distortions in the markets, which impede trade and bring about losses of trade and welfare to the economies. Tariff elimination under an FTA is therefore understood as the removal of economic distortions. Tariff cuts lower import costs that lead to pushing down the import prices in the domestic markets under a competitive environment. The lower import prices stimulate imports in the short run. Cheaper imports, in turn, lead to lower production costs for other domestic industries. Relocation of labour and capital from the formerly protected sectors to other more efficient sectors takes place in the medium-to-long run. Improved competitiveness of the export industries, led by the relocation of resources and cheaper production costs, eventually increases the exports of the economy. After the adjustment process is completed, the nation may take more benefits from the trade and production of the economy shifts towards sectors with comparative advantage. The static improvement of welfare through this efficiency gain is measured as trade volume effects, as indicated in the sub-section above. The model also measures the terms of trade effects on welfare. CGE models have an apparent advantage of possessing a multi-sector and multi-country structure. They can identify the likely impact of an FTA on some sectors of some countries, as well as on a country and/or the world as a whole. This merit favourably distinguishes the CGE model from other macroeconomic models in the context of policy analysis. Another advantage of CGE models is their concrete microeconomic foundation which enables the modellers to rigorously assess welfare changes. 1.5. Accumulation effect measured by a CGE model CGE models are inherently designed to undertake comparative statics, skipping the intermediate process of market adjustment. On the effect of trade liberalisation, the standard models can only measure the simple efficiency gains of recovering the dead weight loss. Notwithstanding this, the model builders have tried to enable the models to assess the dynamic effects of trade liberalisation in addition to measuring the efficiency gain/loss

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from external shocks. For example, recent models can incorporate a capital accumulation mechanism which is induced by trade liberalisation. This is the “accumulation effect” introduced in Baldwin (1992).7 The mechanism, which is incorporated into the CGE model, is as follows. Increased incomes caused by enhanced efficiency of the economy lead to increased savings and increased savings induce an increase in investment, and such an increase continues until the increased capital stock requires a larger amount of capital depreciation to balance the net investment. As such, the model measures the accumulation effects as medium-term transient, rather than focus on the increase in long-term growth rates. Appendix 2 provides a detailed explanation on the specification. Our study adopts the specification because of its greater reliability. The accumulation effect of the Baldwin specification is measured by comparing one set of variables to another, both on the long-run growth paths. Therefore, the model does not trace and identify the dynamic path in the transition period. However, the order and sequence of choice of FTA partners, which reflect the transitional path, matters significantly in the context of policy. Moreover, the Baldwin specification has a semi-linear nature which precludes the path-dependency of the final results. However, political consideration often requires the assessment of the difference of the final outcomes brought about by the sequence of the possible FTAs. As such, “real” dynamic models are desired for the policy analysis. In this paper, several cases of combination of the FTAs concerning Japan are simulated to illustrate the transition as a compromise. In addition, our study uses a Dynamic Global Trade Analysis Project (GTAP), which is a dynamic recursive CGE model. 1.6. The global trade analysis project model Our study uses the GTAP model version 6.2 and its database version 6.0, provided by Purdue University. The original database consists of 87 regions and 57 industrial sectors which are aggregated for the study into 24 regions and 25 sectors. Appendix 3 summarises the aggregation with abbreviation. The GTAP model provides the Baldwin accumulation specification as a standard option. One of the specific features of the GTAP model is the Armington structure which sets the fixed elasticity of substitution between imported and domestic goods resulting from changes in the relative price of those two goods8 (see Armington, 1969). The incomplete substitutability between 7 Baldwin 8 This

(1992) termed the same effects “dynamic gains”. elasticity is known as Armington elasticity.

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the imported and domestic goods, because of the international product discrimination, implies finite elasticity. The Armington structure significantly simplifies the model. 1.7. The plan for simulations in this paper The rest of this paper undertakes CGE model simulations on the effects of tariff reduction and elimination under the possible FTAs. The static model with the Baldwin accumulation specification is employed to assess Japan’s three existing FTAs. 2. The Simulations of Japan’s Existing and Future Bilateral FTAs 2.1. Trade and tariff structures of the three countries of Japan’s existing FTAs As of July 2006, Japan had three FTAs,9 with Singapore (effective November 2002), Mexico (effective April 2005), and Malaysia (effective July 2006). There also had been FTA negotiations with several countries/regions, including the Philippines, Thailand, Korea, Indonesia, Chile, and the Association of Southeast Asian Nations (ASEAN) as a whole. The sector shares of the amounts of import and tariff rates in Japan are summarised in Table 1. Japan imported from Singapore and Malaysia mainly products of mining and manufacture and almost no agriculture, forestry, and fishery products. The imports from Mexico included about 10% of livestock and 6% of crops. Japan’s import tariffs before the FTAs, which may have reflected the most favoured nation (MFN) treatments, had structures very similar to that of the three countries. The import tariff rates of agriculture and FDP (processed food) are higher,10 while those of mining and manufacturing are lower. In manufacturing sector, TEX (textiles) and WAP (apparel) have

9 The Japanese Government has tried to make its EPAs standard bilateral agreements that include all the typical components of an FTA, as well as additional agreements on economic cooperation and liberalisation measures. 10 As the GTAP tariff rates are the effective tariff rates, calculated from the sector-base tariff revenue divided by the import amounts, the imports of GRN (grain), almost all the imports which were quantitatively restricted without tariff payments, have entries of zero per cent in Singapore and Malaysia. Similar backgrounds apply to the different tariff rates in LSK (livestock).

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Table 1.

Sector shares of imports and tariffs of Japan (%). Singapore

GRN CROP LSK FRS FSH MNG FDP TEX WAP CHM MET MVH OTN ELE OME OMF Total

Mexico

Import Share

Tariff Rates

Import Share

0.0 0.1 0.0 0.0 0.1 23.1 4.6 0.0 0.1 11.3 6.4 0.1 0.1 24.2 28.9 0.8

0.0 1.6 119.2 1.0 3.4 0.0 20.8 8.6 15.4 1.8 0.4 0.0 0.0 0.0 0.1 0.5

0.0 6.1 9.3 0.2 2.8 17.2 1.8 0.2 1.3 3.0 7.1 10.3 0.0 10.6 22.5 7.6

100.0

100.0

Malaysia Tariff Rates 0.0 3.0 62.7 0.0 3.9 3.1 8.5 6.1 11.8 0.2 0.0 0.0 0.0 0.0 0.0 0.4

Import Share

Tariff Rates

0.0 0.5 0.0 0.0 0.4 33.7 2.8 0.5 0.5 7.5 3.2 0.3 0.0 25.7 11.3 13.5

967.1 0.2 9.0 0.0 3.2 0.0 3.7 4.1 6.6 0.2 0.0 0.0 0.0 0.0 0.0 2.6

100.0

Notes: See Appendix 3 for the abbreviation of sectors. Import shares are derived from the Customs Statistics of Japan, 2006. Tariff rates are taken from the GTAP database, based on 2001 data.

comparatively higher tariffs, and many of the other manufacturing sectors have zero or minimal tariffs. Tariff elimination under Japan’s FTAs would bring about almost no change in the effective tariffs in most manufacturing sectors, except for FDP, TEX, and WAP. These, together with agriculture, are the key sectors for the FTAs. The sector shares of Japan’s bilateral exports and the tariff rates of the three FTA partners are summarised in Table 2. Japan exported virtually no products from agriculture, forestry, and fisheries. The main export items are all manufactured goods. Among them, ELE (electronic equipment), OME (other manufactured equipment), MET (metal products), and MVH (motor vehicles) lead Japan’s exports. ELE invariably takes the top share. The import tariffs of the three countries from Japan sharply contrast with each other. Singapore has virtually no import tariff. Mexico levies comparatively high tariff rates, particularly on WAP and OTN (other transport equipment). Malaysia’s import tariff is particularly high in MVH, but the tariff rates of the other sectors are lower than Mexico. Protection of the automobile industry is a common policy in developing countries in Asia as well as in Mexico.

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Sector shares of imports and tariffs of Japan’s FTA partners (%). Singapore

GRN CROP LSK FRS FSH MNG FDP TEX WAP CHM MET MVH OTN ELE OME OMF Total

173

Mexico

Malaysia

Import Share

Tariff Rates

Import Share

Tariff Rates

Import Share

Tariff Rates

0.0 0.0 0.1 0.0 0.1 1.7 0.3 0.4 0.1 8.5 13.2 6.9 5.7 35.9 25.4 1.8

0.0 0.0 0.0 0.0 0.0 0.0 1.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.0 3.5 11.6 31.5 0.0 37.4 14.8 0.9

0.0 5.5 22.7 0.0 17.0 12.9 20.5 18.2 30.8 14.8 14.1 16.7 25.9 7.9 12.9 18.1

0.0 0.0 0.0 0.0 0.0 0.3 0.1 0.7 0.1 10.0 19.8 10.0 0.6 36.4 19.8 2.0

0.0 1.3 8.8 0.0 0.1 0.1 10.3 10.5 15.0 7.7 12.0 45.4 14.8 0.1 3.8 11.2

100.0

100.0

100.0

Notes: See Appendix 3 for sector abbreviations. Import shares are derived from the Customs Statistics of Japan, 2006. Tariff rates are taken from the GTAP database, based on the 2001 data.

2.2. Details of simulations and technical assumptions The simulation is implemented by applying external shocks to the model and measures the impacts from the changes of the values of model variables. In this study, the external shocks are the reduction and elimination of the import tariff rates agreed upon in the existing FTAs. Four technical points deserve note. The GTAP database reflects the effective tariff rates in 2001. The FTA partners may have changed the tariff rates between the year 2001 and the time of enforcement of the FTA. The simulation should measure the impacts of changes of the tariff rates between the periods of agreed upon and implemented points. In this study, the possible changes after 2001 are ignored, because no major multilateral or regional initiatives to liberalise trade took place in that period, except for the tariff reduction that was committed to during China’s WTO accession, which is taken into account in related simulations.

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The targeted tariff rate specified by the FTAs may be lower than, equal to, or even higher than the existing concession rates, because the existing rates may be the concession rates of the MNF treatment made after the WTO agreement, which is lower than the FTA concession rates.11 Our observation on the import shares and existing and target tariff rates of the items implies that the tariff reduction under the existing FTAs may bring about virtually no tariff reduction in agriculture, fisheries, forestry, and food-related manufacturing (FDP) in Japan, compared to the MFN concession rates. In contrast, assuming zero tariff rates in Japan under FTAs provides a good estimate for mining and manufacturing. The existing FTAs often allowed for grace periods and scheduling in the reduction of tariff rates of specific items, often over the subsequent 10 years. In this study, the transition periods are ignored and the simulation shocks simply assume the total change of target rates. The three FTA partners are committed to eliminating most of the tariffs by the end of the transition period, except for Mexico’s LSK (livestock), FSH (fishery), FDP (processed food), and WAP (apparel), for which tariff rates will be reduced, but not to zero. The simulation model specifies the Baldwin dynamic closure, as illustrated in the previous section in this paper. The simulation under the specification generally produces greater impacts in terms of welfare and product. Table 3 summarises the expected percentage changes in the import tariff rates under the FTAs as shocks to the simulation. Japan will cut the tariffs on TEX and WAP rather significantly, by 5–15% points, but will make virtually no change in tariffs for the other sectors, except for minor reductions in CHM, MET, and OMF. Singapore, because of virtually zero existing tariffs, will not change any tariffs except for a minor reduction in FDP. Mexico and Malaysia were committed to abolishing all tariffs by the end of the FTA schedules. 2.3. Macroeconomic impacts The macroeconomic impacts of the simulations of the CGE models are usually summarised in the changes in the real gross domestic product 11 To compare the FTA target rates and the existing concession rates, we classified the import items of Japan on the HS two-digit basis into the following four categories: (i) excluded (the FTA does not change the existing tariff rate); (ii) minimal (the FTA reduces the tariff rates of fewer than three tariff lines (on the six-digit basis) within the two-digit item); (iii) most (the FTA reduces the tariff rates of more than or equal to three tariff lines (on the six-digit basis) within the two-digit item); and (iv) all (the FTA eliminates all the tariff lines (on the six-digit basis) within the two-digit item).

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Table 3. Shocks to the import tariff under Japan’s FTAs (per cent changes). JSEPA

GRN CROP LSK FRS FSH MNG FDP TEX WAP CHM MET MVH OTN ELE OME OMF

JMxEPA

JMsEPA

Japan

Singapore

Japan

Mexico

Japan

Malaysia

0.0 0.0 0.0 0.0 0.0 0.0 0.0 −8.6 −15.4 −1.8 −0.4 0.0 0.0 0.0 −0.1 −0.5

0.0 0.0 0.0 0.0 0.0 0.0 −1.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0 0.0 0.0 0.0 −6.1 −11.8 −0.2 0.0 0.0 0.0 0.0 0.0 −0.4

0.0 −5.5 −11.3 0.0 −8.5 −12.9 −13.6 −18.2 −20.5 −14.8 −14.1 −11.1 −25.9 −7.9 −12.9 −18.1

0.0 0.0 0.0 0.0 0.0 0.0 0.0 −4.1 −6.6 −0.2 0.0 0.0 0.0 0.0 0.0 −2.6

0.0 −1.3 −8.8 0.0 −0.1 −0.1 −10.3 −10.5 −15.0 −7.7 −12.0 −45.4 −14.8 −0.1 −3.8 −11.2

Note: See Appendix 3 for sector abbreviations.

(GDP) and equivalence of variation (EV). Both reflect the improvement in efficiency. The EV measures the income-based welfare improvement, theoretically explained in Appendix 1. The measure means the recovery of the dead-weight loss. Table 4 shows the simulation results. Three major points characterise the simulation result. First, the FTA members, Japan and its FTA partners, tend to gain GDP and EV, and many of the other regions lose them. This results from the trade diversion effect. FTA members will import fewer of their products to non-member regions which will then be induced to produce fewer of the goods of the sectors with comparative advantage. The trade diversion effect will also take place among the FTA members, but the trade creation effect outweighs the trade diversion effects. Second, Mexico and Malaysia will gain a larger percentage of GDP, but Japan and Singapore will gain little. Theoretically, the countries that reduce tariffs more will gain more. Mexico and Malaysia will reduce tariffs by a greater percentage, but the tariff reduction of Singapore and Japan will be smaller. The existing tariff rates of Singapore are virtually zero. Japan will maintain the high tariff in agriculture and only reduce the existing tariff rates in limited sectors, i.e., TEX and WAP. Third, the EV in the world generally adds up to positive numbers. The FTAs will increase the welfare of the world, albeit by small amounts.

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Table 4. Macroeconomic impact of Japan’s FTAs (GDP in per cent change, EV in US$ million). JSEPA

AUS NZL CHN HKG JPN KOR TWN IDN MYS PHL SGP THA VNM XSE IND XSA CAN USA MEX PER CHL EU15 RUS ROW World

LMxEPA

JMsEPA

GDP

EV

GDP

EV

GDP

EV

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

−1 0 −5 0 −2 −1 −1 −1 −2 −1 26 −1 −1 0 −1 0 −1 −11 −2 0 0 −12 −1 −6 −25

0.00 0.00 0.00 0.00 0.02 −0.01 −0.02 −0.01 −0.03 −0.06 −0.02 −0.05 0.00 0.01 0.00 0.00 0.01 0.00 0.60 0.01 0.00 0.00 0.00 0.00

2 0 −71 −15 1286 −61 −69 −18 −39 −43 −18 −55 0 6 12 −5 50 −408 2837 7 0 206 21 55 3680

−0.01 0.00 0.00 0.02 0.02 −0.01 −0.01 −0.03 1.41 −0.04 −0.01 −0.04 0.00 0.01 0.00 0.01 0.00 0.00 0.01 0.01 0.00 0.00 0.00 0.00

−32 0 −69 25 1017 −63 −67 −47 862 −24 −26 −53 1 8 0 6 11 139 57 5 1 139 1 58 1948

Notes: See Appendix 3 for region abbreviations. Author’s simulation, usinig GTAP database and GEMPACK.

2.4. Impacts on sectors The CGE model simulation can assess the impacts on the sectors in each economy. The domestic groups will have greater interest in the impacts on sector production than on the macroeconomic impacts. Generally, the sectors protected by high tariff rates will lose much of their production when the tariffs are reduced under an FTA. While trade liberalisation brings about efficiency gains to increase income and production across sectors, the income gains and resulting demand increase will not generally offset the decrease of the production of the losing sectors. Table 5 illustrates the impacts on the production of the sectors.

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The impacts on the production of the industrial sectors for Japan are generally small in terms of percentage, less than 0.5% throughout the sectors. Singapore will receive some positive impact only on the production of WAP. In contrast, many sectors in Mexico and Malaysia will face larger impacts in terms of percentage changes. For Mexico, all the industrial sectors will be “winners”, with the largest gains in terms of percentage going to ELE, OME, and MVH. For Malaysia, GRN, CROP, and LSK are “losers”, but the loss will be less than 0.5%. Production in all the other sectors in Malaysia will increase, particularly manufacturing such as MVH, TEX, WAP, and OMF. The difference of the percentage changes between Japan and its FTA partners will reflect the magnitude of the economies, as well as the scales of the tariff reductions. The Total column in Table 5, Table 5.

Impacts on the industry sectors of Japan’s FTAs (%). JSEPA

Japan GRN CROP LSK FRS FSH MNG FDP TEX WAP CHM MET MVH OTN ELE OME OMF EGW CNS TRD TRS CMN FIN PRS OFS DWE

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Singapore 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.8 4.7 0.0 0.0 −0.1 −0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

JMxEPA

JMsEPA

Total

Japan

Mexico

Japan

Malaysia

Japan

−0.1 −0.1 −0.1 −0.1 0.0 −0.1 0.0 −0.3 −0.1 0.0 0.2 −0.1 −0.4 0.0 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0.1 0.0 0.4 0.5 0.3 0.1 0.4 0.5 0.5 0.4 0.4 0.9 0.5 2.0 1.1 0.5 0.5 0.9 0.7 0.6 0.5 0.5 0.6 0.3 0.8

−0.1 0.0 −0.1 0.0 0.0 0.0 0.0 −0.1 −0.1 0.1 0.4 0.3 −0.1 −0.4 −0.1 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

−0.5 −0.3 −0.4 2.2 0.3 0.3 0.3 3.6 3.7 0.7 0.0 3.8 1.7 2.4 2.9 3.6 1.2 2.2 0.8 1.3 0.7 1.3 1.2 0.3 0.1

−0.2 −0.1 −0.2 −0.1 0.0 −0.1 0.0 −0.4 −0.3 0.1 0.5 0.2 −0.5 −0.3 0.1 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.1

Notes: See Appendix 3 for region abbreviations. Author’s simulation, using GTAP database and GEMPACK.

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adding the impacts of the three FTAs, indicates that Japan will receive comparatively small impacts in terms of percentage change in production in the industrial sectors. The GTAP database includes an input–output table which simply mixes the imported and domestically-produced intermediates. In the model, all the exports from one FTA member to another can enjoy the tariff concession, even if the local contents of such exports are very low. In reality, however, the rules of origin (ROO) clauses in the FTAs may possibly block the concession to such exports.12 ROOs may function as trade protection measures when a country establishes numerous overlapping FTAs. This issue is essential in the case of the regional FTAs, which are expected to function to extend the regional production networks, but the bilateral FTAs are also affected. The effects from the efficiency improvement assessed by the GTAP model, therefore, is possibly overestimated.

3. Simulations of the Future Scenarios of Japan’s FTAs The objective of this section is to assess the scenarios of Japan’s future FTAs, making comparisons between these multiple scenarios. This section contains two groups of simulation works. The first group covers the static simulations on the effects of the FTAs relating to Japan. They are static in the sense that they measure the ultimate impacts of the FTAs without following their time paths. The second group covers the dynamic simulation by using the Dynamic GTAP model to assess Japan’s FTAs.

3.1. Static simulation The first group undertakes simulations on the following. Japan’s bilateral FTAs with possible future FTA partners. Such potential FTA partners and their combinations may include: (i) the remaining ASEAN8 countries (ASEAN10 except for Singapore and Malaysia); (ii) China and Korea; (iii) ASEAN10 countries plus China and Korea; and (iv) ASEAN10 countries plus China, Korea, Australia, New Zealand, and India. The simulations assess only the effects of the 12 Preferential trade agreements, including FTAs, require ROOs to enable a given trade good to be identified as originating in the area covered by the agreement, and thus subject to exemption from customs duties. ROOs exist to prevent imports from countries outside the scope of the agreement from taking advantage of the concessions of FTAs. Such imports are known as trade deflection.

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combinations of Japan’s bilateral FTAs, not the effects brought about by the regional FTAs which assume FTAs between the counterparts of Japan. Regional FTAs including Japan as a member are major FTAs in East Asia in the future. Such potential regional FTAs include: (i) ASEAN10 countries; (ii) China, Japan and Korea; (iii) ASEAN10 plus three (China, Japan, and Korea); and (iv) ASEAN10 plus six (China, Japan, Korea, Australia, New Zealand, and India). The simulations above adopt basically the same methodology as in the former section of Japan’s three existing FTAs, i.e., the static model with the Baldwin accumulation specification. Four points on the assumptions and model structures deserve note. First, the simulation shocks for Japan’s bilateral FTAs are such that its FTA partners will abolish all tariffs for Japan and Japan will abolish its tariffs for the partners in all sectors except agriculture, fishery, forestry, and processed food. This asymmetrical assumption reflects the past experiences in Japan’s three existing FTAs. In contrast, the regional FTAs assume, as the hypothetical simulation shocks, that all the parties, including Japan, will reduce tariff rates to zero in all sectors. Second, it should be reiterated, as in the former section, that ROOs may significantly curtail the merits of the concession under the regional FTAs by preventing the free movement of materials in the regional production networks. The GTAP simulation, which assumes simple preclusion of the existence of ROOs, may overestimate the impacts. Third, the GTAP model simulations cannot measure the scale merits from the formation of regional production networks and the economy of agglomeration, which may result from the region-wide multiple FTAs. Therefore, the simulations may underestimate the impacts. The GTAP simulations also ignore the possible effects of the FTAs to stimulate technological progress through promoting competition, i.e., pro-competitive effects. Fourth, and rather technically, China significantly reduced the tariff rates of many sectors as a commitment to its accession to the WTO after 2001. Thus, the tariff rates of the GTAP database are based on the data in the year 2001 and the GTAP tariff database is updated by incorporating the WTO commitment.

3.2. Results of static simulation Table 6 summarises the welfare gains from the potential bilateral and regional FTAs. The EV is used as the measure of the welfare improvement.

Welfare gains from the FTA scenarios (US$ million).

Partners of Japan’s Bilateral FTAs Existing FTAs

−153 −28 2965 −115 5707 628 −668 −274 −209 −223 −188 −393 −139 −61 −160 −99 −62

−224 −24 2358 −66 9838 237 −978 763 600 163 −233 3170 189 149 −253 −120 −33

340 129 2163 −115 12,161 71 −1093 706 555 111 −304 3005 180 135 352 −125 −62

ASEAN10 −9 −15 −329 85 −262 −199 −151 1167 1498 909 2143 3271 220 472 −65 −21 68

CJK −420 −46 4789 −237 5398 14,163 −779 −264 −242 −207 −199 −504 −240 18 −57 −72 27

ASEAN10 +CJK −586 −72 6186 −79 10,332 15,944 −1516 3519 3236 1562 3068 10,156 1724 719 −388 −183 156

ASEAN10 +6 8105 851 6906 −163 12,433 18,007 −1843 4078 4224 1676 3508 10,209 1726 492 4291 −323 −6

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−78 2 −621 47 4094 −400 −336 1099 827 412 −47 3698 440 211 −108 −26 21

ASEAN10 +CKANI

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ASEAN10 +CK

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AUS NZL CHN HKG JPN KOR TWN IDN MYS PHL SGP THA VNM XSE IND XSA CAN

ASEAN10 C+K

Regional FTAs

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Table 6.

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ASEAN10 C+K

ASEAN10 +CKANI

ASEAN10

CJK

ASEAN10 +CJK

ASEAN10 +6

−280 2892 12 0 332 22 107

−253 30 −6 3 18 −7 −123

−2387 −173 −42 −43 −2111 −135 −1203

−2462 −117 −45 −38 −1919 −137 −1254

−3106 −107 −52 −40 −2597 −167 −1803

679 75 −19 13 636 68 507

−1158 492 −31 −80 170 15 −343

−544 762 −78 −89 1658 94 367

−2340 768 −135 −126 333 35 −1248

World

5603

8898

434

9566

10,336

10,742

20,193

55,947

71,457

Notes: See Appendix 3 for region abbreviations. Author’s simulation, using GTAP database and GEMPACK. Japan’s existing FTAs consist of those with Singapore, Mexico, and Malaysia. Japan’s bilateral FTAs assume all bilateral tariff rates are reduced to zero except for agriculture, fisheries, forestry, and processed food. Regional FTAs assume all members of the regional FTAs eliminate all tariffs in all sectors.

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In all the cases, Japan invariably gains welfare from its own bilateral FTAs. The welfare gain of Japan expands as the number of its bilateral FTAs increases. The welfare gain of Japan from the existing three FTAs in total will be much smaller than those from the FTAs with China, Korea, and ASEAN10 countries. In particular, the FTAs with ASEAN10+5 (China, Korea, Australia, New Zealand, and India) will bring about a welfare gain of more than five times the three existing FTAs. As a standard concern on the preferential trade agreements, Japan’s bilateral FTAs tend to bring about welfare loss to the third-world countries. This is because of the trade diversion effect. In particular, the case of the combination of the Japan– China and Japan–Korea FTAs will reduce the total amount of economic welfare of the world, while other cases will not. In this case, even Korea will lose welfare because of the aggravated terms of trade. For the simulation cases of the regional FTAs including Japan, countries that are members of a regional FTA invariably gain welfare. The magnitude of welfare gains to the members expands as the members of the regional FTA increase. The largest-scaled regional FTA by ASEAN10+6 will bring about the largest amount of welfare gains to the members, as well as to the world in total. However, the welfare loss to the non-member countries also expands, because of the more serious trade diversion. 3.3. Dynamic simulations: Model structures and assumptions This sub-section assesses the time series impacts of various scenarios for Japan’s FTAs in the future by means of a dynamic recursive general equilibrium model, the Dynamic GTAP (GTAP-Dyn). The model is essentially the same as the standard GTAP model, but it explicitly incorporates foreign asset ownership and an investment mechanism. As a result, the model simulation can follow the capital accumulation process in a recursive manner (for details, see Ianchovichina and McDougall, 2000). The aggregation of the region and industry sectors is 18 times 10, reducing the scale of the model to ensure the stable convergence of the model simulation. Table 7 summarises the baseline scenario of Japan’s future FTAs, together with alternative scenarios. The baseline scenario assumes that the FTAs presently under negotiation will be concluded and their effects will materialise by 2010–2013 or earlier. The FTA with New Zealand will be put in place in the period between 2014 and 2017, and those with China and remaining ASEAN members will be between 2018 and 2020. The major alternative scenarios are (i) expediting FTAs with New Zealand, China, and ASEAN10+5 to the period between 2010 and 2013; (ii) forming an FTA with the United States; (iii) liberalising agriculture and

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183

Scenarios of Japan’s future FTAs. FTA Partners in Scenarios

Baseline

Expedite FTAs

Japan–US FTA

Agriculture Liberalisation

2006–2009

Singapore, Mexico, Malaysia, Philippines, Thailand, Indonesia

Singapore, Mexico, Malaysia, Philippines, Thailand, Indonesia

Singapore, Mexico, Malaysia, Philippines, Thailand, Indonesia

Singapore, Mexico, Malaysia, Philippines, Thailand, Indonesia

2010–2013

Korea, India, Australia

Korea, India, Australia, New Zealand, China, ASEAN10

Korea, India, Australia

Korea, India, Australia

2014–2017

New Zealand

—

New Zealand, United States

New Zealand, (United States)

2018–2020

China, ASEAN10

—

China, ASEAN10

China, ASEAN10

related industries in the FTAs under the baseline scenario; and (iv) liberalising agriculture and related industries and forming an FTA with the United States. The periods of the table indicate the approximate time when the price and quantitative adjustment brings about the impacts of the FTAs. The simulations assume the following assumptions: In the baseline scenario, Japan’s FTA partners will eliminate bilateral tariffs in all sectors to Japan, and Japan will do so except for agriculture, fisheries, forestry, and processed food. In contrast, in the Agriculture Liberalisation scenarios (scenario III and IV), Japan will eliminate tariffs in all sectors including these. The comparison of these scenarios, therefore, demonstrates the effects of the protection of these food-related sectors. Detailed information on tariff reduction schedules in the future is available only in the existing FTAs with Singapore, Mexico, and Malaysia. The simulation for these FTAs reflects the scheduled future tariff rate reductions. For the other FTAs, however, the tariff rates are simply assumed to be reduced to zero at the periods indicated in Table 7. The dynamic simulation will measure the deviations of the values of the model variables between that of an economic situation along the assumed future baseline growth path without any policy shocks and that with the tariff reductions under the FTA scenarios. The assumed future growth path

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is not critically important because the simulated impacts of the trade policy reflect only the differences of the variables and their levels will be cancelled out. 3.4. Results of dynamic simulation: Baseline scenario The simulation result of the baseline scenario is summarised in Table 8. The table uses the GDP as a measure of the effects, not the EV. This is partly because the Dynamic GTAP measures the welfare of the nations’ incomes from domestic production as well as incomes generated from overseas investment. Trade liberalisation policies, such as an FTA, may improve domestic efficiency which will attract foreign investment in the short and medium run. However, the accumulated investment inflows will result in increased payments back to foreign investors as the remittance of investment incomes in the future. The GDP measure will avoid such complication to assess the impacts of FTAs, although the GDP measures also indirectly reflect the mechanism.

Table 8. Baseline scenario: impacts of Japan’s future FTAs (percentage of real GDP).

AUS NZL CHN HKG JPN KOR IDN MYS PHL SGP THA XSE IND CAN USA MEX EU15 ROW

2006–2009

2010–2013

2014–2017

2018–2020

Static Result

−0.01 −0.01 −0.01 0.00 0.01 −0.03 −0.01 0.35 0.30 −0.08 1.11 0.00 −0.02 0.00 0.00 0.07 0.00 −0.01

0.04 −0.10 0.00 −0.02 0.05 0.12 0.38 1.21 0.86 −0.28 5.16 0.00 0.10 0.00 −0.01 0.22 −0.02 −0.04

0.04 0.17 −0.03 −0.06 0.10 0.35 0.86 1.45 2.86 −0.32 5.40 0.02 0.42 −0.02 −0.03 0.28 −0.04 −0.08

0.00 −0.08 −0.02 −0.07 0.15 0.34 0.88 1.42 3.27 −0.32 4.49 0.06 0.63 −0.02 −0.03 0.26 −0.06 −0.08

0.25 0.32 0.31 −0.06 0.21 0.31 0.61 1.16 0.51 −0.29 4.23 0.60 0.27 −0.01 −0.03 −0.03 −0.03 −0.05

Notes: See Appendix 3 for region abbreviations. Author’s simulation, using GTAP database, GTAP-Dyn and GEMPACK. Calculated as the deviation from an assumed growth path without policy shocks.

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Generally, the FTA will bring about net positive impacts to both Japan and its FTA partners, except for China, Singapore, and New Zealand. The existing tariffs of China and New Zealand are comparatively low and they will suffer from trade diversion effects from Japan’s other FTAs, leading to the negative net impacts. China will also face negative net impacts on its GDP, but the impacts will become smaller during the period 2018–2020. Non-member countries will generally suffer from Japan’s FTAs. The results of the dynamic and static simulations are generally comparable in the period 2018–2020, except for New Zealand, China and Mexico. The simulated impacts on the GDP of New Zealand and China by the dynamic model are slightly negative, but those by the static model are positive, at around 0.3%. The major difference of the model is the simulated investment process with international capital mobility. Both countries, as latecomers, will suffer from capital outflows brought about by Japan’s other FTAs before they form their own FTAs with Japan. The positive impacts on Japan increase over time as the number of its FTAs increases. As tariff reductions in Malaysia and Mexico are scheduled periodically, they also receive increasing positive impacts. Other countries will generally enjoy the largest positive impacts when they conclude FTAs with Japan. 3.5. Alternative scenarios: Expediting formation of Japan’s FTAs The second scenario represents the case in which Japan forms FTAs more rapidly (see Table 7). Under this scenario, the counterparts are to conclude FTAs with Japan in the period 2010–2013. Table 9 summarises the impact on the regions’ GDPs. In the alternative scenarios, the simulated impacts become similar to those of the static simulation. The impact on Japan will be almost the same. In contrast, China will receive a larger positive benefit in the alternative scenarios than in the baseline scenario. The earlier FTA with Japan will improve economic efficiency in China during the early stage, leading to a greater inflow of capital and investment at the end. This case underscores the importance of timing. The same discussion applies in the case of New Zealand and other ASEAN countries (XSE). 3.6. Alternative scenarios: An FTA with the United States and liberalising agriculture The third scenario (Scenario III) represents the case in which Japan forms an FTA with the United States in the period 2014–2017. The fourth scenario

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Table 9. Alternative scenario: expediting FTA impacts of Japan’s future FTAs (percentage of real GDP).

AUS NZL CHN HKG JPN KOR IDN MYS PHL SGP THA XSE IND CAN USA MEX EU15 ROW

2006–2009

2010–2013

2014–2017

2018–2020

Static Result

−0.01 −0.01 −0.01 0.00 0.01 −0.03 −0.01 0.35 0.30 −0.08 1.11 0.00 −0.02 0.00 0.00 0.07 0.00 −0.01

0.03 0.01 0.14 −0.03 0.07 0.06 0.41 1.18 0.81 −0.32 5.10 0.17 0.10 0.00 −0.01 0.22 −0.02 −0.05

0.04 0.06 0.33 −0.10 0.13 0.20 0.92 1.37 2.55 −0.41 5.14 0.31 0.41 −0.01 −0.04 0.28 −0.05 −0.10

0.00 0.05 0.35 −0.10 0.17 0.20 0.93 1.35 2.98 −0.41 4.23 0.32 0.62 −0.02 −0.03 0.27 −0.06 −0.09

0.25 0.32 0.31 −0.06 0.21 0.31 0.61 1.16 0.51 −0.29 4.23 0.60 0.27 −0.01 −0.03 −0.03 −0.03 −0.05

Notes: See Appendix 3 for region abbreviations. Author’s simulation, using GTAP database, GTAP-Dyn and GEMPACK. Calculated as the deviation from an assumed growth path without policy shocks.

(Scenario IV) will make Japan eliminate tariffs on the sectors of the agriculture, fisheries, forestry, and processed food, with other assumptions remaining the same as the baseline. The fifth scenario (Scenario V) is the combination of the third and fourth, assuming both liberalisation of agriculture and the related sectors and forming an FTA with the United States. Table 10 summarises the impacts on the GDP of the region under the third, fourth, and fifth scenarios in the period 2018–2020. Under Scenario III, the Japan–US FTA will have a minor impact. Japan and the US will increase their GDP in marginal but positive amounts, compared to the baseline. The Agriculture Liberalization Scenario will generally increase the GDP impacts to the FTA partners that export agricultural products, in particular Australia, New Zealand, and Thailand. Scenario V, compared to Scenario IV, assumes that the US will also enjoy the liberalisation of the Japanese agriculture sectors. This leads to a positive impact on the US GDP, but some trade diversion effects will reduce the positive impact on Australia, New Zealand, and Mexico. For Japan, the wider and deeper the liberalisation, the larger the positive impact on GDP. The dynamic gain of GDP under Scenario V will be more than seven times. The large increase of GDP under Scenarios III–V

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Table 10. Scenarios III, IV, and V of FTAs: impacts of Japan’s future FTAs (percentage of real GDP). Period 2018–2020

AUS NZL CHN HKG JPN KOR IDN MYS PHL SGP THA XSE IND CAN USA MEX EU15 ROW

Baseline

Scenario III US Join

Scenario IV Agriculture

Scenario V

0.00 −0.08 −0.02 −0.07 0.15 0.34 0.88 1.42 3.27 −0.32 4.49 0.06 0.63 −0.02 −0.03 0.26 −0.06 −0.08

0.00 −0.09 −0.02 −0.07 0.17 0.33 0.89 1.41 3.25 −0.33 4.46 0.05 0.64 −0.04 −0.02 0.23 −0.06 −0.09

0.16 0.19 −0.01 −0.01 0.22 0.41 −0.95 1.37 3.45 −0.18 6.53 −0.03 1.01 −0.07 −0.06 0.25 −0.08 −0.09

0.09 −0.13 −0.03 −0.05 0.31 0.32 0.61 1.34 3.28 −0.19 6.05 −0.16 0.96 −0.15 −0.05 0.08 −0.12 −0.15

Notes: See Appendix 3 for region abbreviations. Author’s simulation, using GTAP database, GTAP-Dyn and GEMPACK. Calculated as the deviation from an assumed growth path without policy shocks.

underlines the significance of liberalising the agriculture and related sectors of Japan.

4. Implications of the Study and Remaining Research Issues 4.1. Implications of the study The study provides the following implications. First, Japan’s three existing FTAs may bring about only small benefits. Much larger potential welfare gains are expected from the bilateral FTAs with ASEAN10, China, Korea, Australia, New Zealand, and India. Japan should proceed to expand its FTA partners. Both static and dynamic model simulations underscore the importance of this. Second, the earlier formation of Japan’s FTAs will provide both Japan and potential FTA partners with larger increases in GDP. The simulation

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of the dynamic model, which incorporates the mechanism of international capital mobility and capital accumulation, demonstrates the importance of the earlier formation of an FTA, particularly in the case of New Zealand and China. Third, regional FTAs including Japan will bring about welfare gains to all members in the region while minimising trade diversion. Given the benefits of forming regional production networks, which were not included in the analysis, Japan should seek the formation of FTA networks to make them regional. To do so, ROOs should be harmonised to prevent them from hindering the optimal location of the production process. Fourth, preferential trade arrangements, including FTAs, inevitably cause trade diversion, especially to non-member countries. Expansion of FTA members in the region will reduce the loss to such non-member countries and assist in achieving the goal of multilateral agreements. 4.2. Remaining research issues Model simulation inevitably faces limitations both from the model technology and the availability of data. In particular, the model adopted in this paper assumes constant returns to scale, but in reality, the large part of the effects from trade liberalisation may be brought about from the scale merits and the economy of agglomeration. The model should explore and assess such effects in the future. In addition, an FTA, particularly of the type of EPA of Japan, includes a wide range of liberalisation and cooperation measures in its clauses. The CGE models tend to assess only tariff reduction. The model should be improved to cover these effects in both the theoretical and the empirical sides. The modellers should also construct the required database.

Appendix 1: Simplified Framework for Welfare Analysis The text adopts an analytical framework that greatly simplified the formulation by Baldwin and Venables (1995). Suppose that the welfare of the representative consumer in a country can be represented by an indirect utility function V = V (p + t, E), where p is a border price vector, t is a vector of import tariff (domestically captured rent), and E is total expenditure on consumption. Total expenditure is equal to the sum of factor income, profits, and domestically accruing trade rents including tariff revenue, net of investment. Therefore, E = wL + rK + tm, where m is the net import vector.

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Totally differentiating V and dividing through by the marginal utility of expenditure and assuming perfect competition in the market for used capital, we find: dE ≈

dV = tdm − mdp. VE

The first term is trade volume effect, and the second is terms of trade effect. In the case of tariff elimination, the trade volume effect amounts to the following integral:
0
t0
0 dm 0 t mdt = mdt − t0 m0 dE ≈ dt = [tm]t0 − dt t0 t0 0 where t0 is the level of import tariff before the tariff elimination and m0 is the amount of import before the tariff elimination. In a partial equilibrium framework, the first term denotes the trapezoid s0 d0 d1 s1 , and the second term is the rectangular s0 d0 ba in the chart below. The two terms add up to the sum of two triangles s0 as1 and d0 bd1 .

P

Supply

s0 t0

d0

s1

Domestic Price d1

a

b m0

Border Price Demand

Q

Appendix 2: Baldwin Dynamic Specification According to Baldwin (1989, 1992) and Francois et al. (1996), the following specification is applied to the model of simulation. The first element is an aggregate production function linking output (Y ) at time t to the amount of capital (K) and labour (L) employed: Y = F (A, K, L),

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where A is an overall productivity parameter and the production function F is linearly homogeneous and characterised by diminishing returns with respect to capital (K) and labour (L). The relation between the stock of capital and output is plotted as YY in the figure below. Note the curvature of Y Y reflecting diminishing returns to capital when the labour force is held constant.

For a given flow of investment, the capital stock evolves over time according to Kt + 1 = (1 − δ)Kt + 1 + It , where δ is the depreciation rate of the capital stock each year, and It is the flow of gross investment. The capital stock will be higher in the next period if today’s investment is sufficiently large to both replace worn-out capital and add new units to the stock. To complete the model, we must specify the amount of current output set aside for savings and investment. We adopt the classical assumption that consumers save a fixed share (s) of income, S = sY t,

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where S is total savings. Abstracting from international capital flows, savings equal investment. Furthermore, since savings depend on income that in turn depend on the capital stock, savings depend (indirectly) on the stock of capital. The savings function is plotted as SS in the figure. The final relation plotted in Fig. 1 is DD = δK, the amount of investment needed to replace worn-out capital in each period. The capital stock grows over time if savings and investment are larger than the rate at which capital depreciates (SS > DD); it is constant if savings and investment are just enough to replace depreciated capital (SS = DD) and it falls otherwise (SS < DD ). Starting from a low capital stock with high returns on investment, income will grow over time as capital is accumulated through savings and investment. In the absence of technical progress, this process will eventually come to an end because of the diminishing returns of adding more capital per worker. In the long run, growth in per capita income will stop at the point where savings are just enough to replace depreciated capital. The “steady-state” capital stock and output (distinguished by absence of time subscripts) are eventually reached. Now, consider the impact of efficiency-enhancing changes, i.e., tariff reduction in this study. We assume that the region we are modelling is initially in a steady state, and that the changes enhance the efficiency of capital and labour by moving resources into sectors where they are more valuable at the margin. In the figure, this is represented by an increase in the economy-wide productivity parameter A, which shifts the production function from Y Y to Y
Y
for any given level of capital and labour. That is, the same amount of labour and capital can now produce more than before, as illustrated by the difference between Y
and Y in the figure. This is the short-run or static gain. Part of the additional income will be saved and invested in new capital, which in turn yields an additional income gain. (Note the positive difference between S
S
and DD for the initial capital stock K, implying positive net investments.) The economy will, over time, move up to a new higher steady state capital stock and corresponding higher output, marked in the figure by K

and Y

, respectively. Decomposing the total income gain into static and induced (mediumrun) gains we have (Y
− Y ) (Y

− Y
) (Y

− Y ) = + , Y Y Y where the first part is the static income gain and the second part is the induced (medium-run) gain. It turns out that the latter is simply a multiple

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192

of the static gain: (Y

− Y
) a (Y
− Y ) = . Y 1−a Y That is, for each percentage increase in static income there is an additional fraction in induced income gain over the medium run. (Of course, any policy change that improves productivity will induce higher incomes with a savings–investment linkage.) The size of the induced income gain depends on the curvature of the Y Y schedule, which in turn depends on the elasticity of output with respect to capital, measured by the parameter “a” in the production function. The larger the capital elasticity output, the less the curvature of the Y Y schedule and the larger the induced gain in income. Appendix 3: Sector and Region Aggregation #

Code

Contents

1. Sector Aggregation 1 GRN Paddy rice; wheat; other cereal grains 2 CROP Vegetables, fruit, nuts; oil seeds; sugar cane, sugar beet; plant-based fibres; other crops 3 LSK Cattles; animal products; raw milk; wool, silk-worm cocoons; meats; meat products; dairy products 4 FRS Forestry 5 FSH Fishing 6 MNG Coal; oil; gas; other minerals 7 FDP Vegetable oils and fats; processed rice; sugar; other food products; beverages and tobacco products 8 TEX Textiles 9 WAP Wearing apparel; leather products 10 CHM Petroleum, coal products; chemical, rubber, plastic prods 11 MET Mineral products (excluding coal, oil, gas, and other extracted minerals); ferrous metals; other metals; metal products. 12 MVH Motor vehicles and parts. 13 OTN Other transport equipment 14 ELE Electronic equipment 15 OME Other machinery and equipment 16 OMF Wood products; paper products, publishing; other manufactures 17 EGW Electricity; gas manufacture, distribution; water 18 CNS Construction 19 TRD Trade 20 TRS Transport 21 CMN Communication 22 FIN Financial services; insurance. 23 PRS Other business services; recreation and other services 24 OFS Public administration/defence/health/education 25 DWE Dwellings (Continued)

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(Continued ) #

Code

Countries and Regions

2. Region Aggregation 1 AUS Australia 2 NZL New Zealand 3 CHN China 4 HKG Hong Kong 5 JPN Japan 6 KOR Korea 7 TWN Taiwan 8 IDN Indonesia 9 MYS Malaysia 10 PHL Philippines 11 SGP Singapore 12 THA Thailand 13 VNM Vietnam 14 XSE Rest of Southeast Asia 15 IND India 16 XSA Bangladesh; Sri Lanka; Rest of South Asia 17 CAN Canada 18 USA United States 19 MEX Mexico 20 PER Peru 21 CHL Chile 22 EU15 Austria; Belgium; Denmark; Finland; France; Germany; United Kingdom; Greece; Ireland; Italy; Luxembourg; Netherlands; Portugal; Spain; Switzerland 23 RUS Russian Federation; Rest of Former Soviet Union 24 ROW Rest of the World

References Armington, P (1969). A theory of demand for products distinguished by place of production. IMF Staff Papers, 16, 159–178. Baldwin, RE (1989). The growth effects of 1992. Economic Policy: A European Forum, 9, 247–281. Baldwin, RE (1992). Measurable dynamic gains from trade. Journal of Political Economy, 100, 162–174. Baldwin, RE and AJ Venables (1995). Regional economic integration. In Handbook of International Economics, Vol. 3, GM Grossman and K Rogoff (eds.), pp. 1597–1644. Amsterdam: Elsevier. Francois, J and B McDonald (1992). Liberalization and capital accumulation in the GTAP Model, GTAP Technical Paper, no. 07. Helpman, E and PR Krugman (1989). Trade Policy and Market Structure. Cambridge, MA and London: MIT Press.

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Ianchovichina, E and R McDougall (2000). Theoretical structure of dynamic GTAP, GTAP Technical Paper, no. 17. Krueger, A (1997). Free trade agreements versus customs unions. Journal of Development Economics, 54, 169–187. Meade, JE (1955). The Theory of Customs Unions. Amsterdam: Elsevier. Viner, J (1950). The Customs Union Issues. New York: Carnegie Endowment for International Peace.

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Chapter 6

THE IMPACTS OF FREE TRADE AGREEMENTS ON TRADE FLOWS: AN APPLICATION OF THE GRAVITY MODEL APPROACH∗ SHUJIRO URATA RIETI and the Graduate School of Asia Pacific Studies, Waseda University, Tokyo, Japan MISA OKABE Wakayama University, Wakayama, Japan

1. Introduction The world has witnessed a proliferation of regional trade agreements (RTAs) which include free trade agreements (FTAs) and customs unions. By 1990, the cumulative number of RTAs reported to the General Agreement on Tariffs and Trade (GATT) since its inception in 1948 was 25.1 This increased to 91 in 2000, and then accelerated to 194 as of 1 March 2007. Several notable points should be recognised. First, many RTAs are FTAs, under which trade barriers between FTA members are removed but they maintain their own protection vis-` a-vis non-FTA members. The number of customs unions, where members not only remove trade barriers between the * An earlier version of this paper was presented at the RIETI Policy Symposium “Assessing Quality and Impacts of Major Free Trade Agreements” in Tokyo, 22 and 23 March 2007. The authors thank the participants, especially Professor Rob Scollay, for helpful comments. 1 WTO Web site (http://www.wto.org/english/tratop e/region e/summary e.xls).

195

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members but also establish common external tariffs vis-` a-vis non-members, is small.2 Second, many FTAs go beyond tariff removal to include other elements, such as the liberalisation of foreign direct investment (FDI) policies, the facilitation of trade and FDI, and economic cooperation. As such, the economic impacts of FTAs on FTA members and non-members are likely to be substantially larger compared to traditional FTAs. Third, FTAs were actively established in Europe, Africa, and North and South America through the 1990s, and starting in the 21st century the East Asian region began establishing them. The East Asian region followed suit in the 21st century, with the Association of Southeast Asian Nations (ASEAN) playing a key role in establishing the FTAs. The rapid expansion of FTAs is attributable to various factors. One important reason is the stalemate in the Doha Development Agenda, the ongoing multilateral trade negotiation under the World Trade Organization (WTO). Faced with this situation, countries interested in the promotion of trade liberalisation have pursued bilateral or plurilateral trade liberalisation under FTAs with like-minded countries. Concerned with possible exclusion from FTAs, an increasing number of countries began showing a strong interest in FTAs. The proliferation of FTAs appears to have affected economic conditions in both FTA member and non-member countries through foreign trade. There are two possible effects — namely trade creation and trade diversion. The trade creation effect refers to the creation of trade that results from the FTA’s elimination of trade barriers among members. Conversely, trade diversion refers to the replacement of imports from highly efficient non-members by imports from less efficient FTA members. Trade creation results in an improvement in resource allocation and economic welfare, while trade diversion worsens efficiency in resource allocation. In addition, trade diversion has a negative impact on non-members as they lose an export opportunity. While the welfare of consumers in FTA member countries may increase as the FTA enables them to buy imports at lower prices, an FTA member country in its totality may lose if the loss in the government’s tariff revenue overwhelms the consumers’ gain. To discern the impact of FTAs on foreign trade, we use two approaches in our analysis. One examines the changes in trade patterns before and after an FTA. Specifically, we measure the extent of dependency on foreign trade between and among FTA members. While admittedly simplistic, this approach provides useful information on the extent of trade dependency 2 As of 1 March 2007, as many as 190 out of 194 (or 93%) RTAs reported to the GATT/WTO were FTAs, while the remaining 14 RTAs or 7% are customs unions (WTO Web site). Because of the large number of FTAs among RTAs, we use the term FTAs to indicate RTAs unless otherwise noted.

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for different FTAs and any changes over time. The second more rigorous approach uses a gravity model to discern the impact of FTAs on bilateral trade flows, i.e., trade creation and trade diversion effects. The gravity model, which is built on the assumption that bilateral trade flows depend on the economic size of the two countries and the distance between them, has been used to assess the impact of FTAs on bilateral trade flows. We extend the previous studies by enlarging the sample size both in terms of the number of countries and in terms of the time period. We also disaggregate the trade data into five sub-sectors with a presumption that the impact of FTAs would be different among different sectors, mainly because the removal of trade barriers under FTAs is different for different sectors. Specifically, agricultural products are prone to be excluded from the free trade list. Furthermore, we closely examine the impacts of trade diversion of FTAs by taking account of trade between FTA members and non-members. The structure of the paper is as follows. Section 2 examines the changing patterns of international trade among FTA member countries over time to see if any discernable change such as an increase in intra-FTA member trade can be identified. The analysis in this section, which uses rather crude indicators, also provides some basic information on the international trade for different FTAs. Section 3 briefly surveys the literature before undertaking a rigorous analysis by applying a gravity model to assess the impacts of FTAs on international trade involving FTA members and non-members. Section 4 presents some concluding remarks.

2. Intra-FTA Trade Dependency for Selected FTAs FTAs are expected to promote trade among member countries, possibly at the expense of trade with non-FTA members. By using a rather crude methodology, this section examines if these expected effects are observed for a selected number of FTAs before undertaking a more rigorous approach in the next section. Thus, the analysis in this section may be considered as setting the stage for the subsequent more detailed analysis. We use two indicators to examine the extent of intra-FTA interdependence:3 the share of intra-FTA members’ trade in FTA members’ overall trade (relative share) and trade intensity index. The definitions of these two indicators are shown below. Relative share: Xii/Xiw Trade intensity index: (Xii/Xiw)/(Xiw/Xww), 3 Schiff

and Winters (2003) analyze the impacts of “regional integration agreements” by using various indicators including those used in this paper.

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where Xii represents intra-region (FTA) trade, Xiw region is i’s trade with the rest of the world, and Xww is world trade. We first examine intra-regional dependence in foreign trade for a selected number of FTAs (Table 1). This shows that, with the exceptions of the EU (European Union), Japan–Singapore, Singapore–USA and Mexico–EU FTAs, the relative share indicator rose after the enactment of the FTAs.4 For example, for ASEAN Free Trade Area (AFTA), the relative share increased from around 17% in the pre-AFTA years to 22–25% in the postAFTA years. Similar patterns are observed for many other FTAs, although the increase in the relative share is less pronounced compared to the case for AFTA. This finding indicates possible trade creation for many FTAs. The relative shares show the importance of trade with FTA members for a country or a region. According to the computed figures for 2005, intraFTA trade accounts for a large part of trade for the EU and North American Free Trade Agreement (NAFTA), as the relative percentage shares of intraFTA trade in overall trade for these two groups were 58.4 and 43%, respectively. Despite the smaller magnitude, the intra-FTA trade is important for AFTA members, as the relative percentage share was recorded at 25.5%. The relative shares for MERCOSUR and China–ASEAN were of some significance, with the figures exceeding 10%. Indeed, the relative share for the China–ASEAN FTA increased notably over time. For the remaining FTAs, the relative shares are very small, reflecting the limited importance of intraFTA trade for the countries involved. The second indicator we examine is the trade intensity index, which measures the “pure” intensification of trading relationships. An increase in trade with a country may be attributable to two factors: the expansion of trade by a trading partner, and the “pure” intensification of the trade relationship. Specifically, the trade relationship of a country with (or trade dependency of a country on) a trading partner can increase when the trading partner’s trade expands faster than other countries. Taking into account this factor, we compute the trade intensity index and its changes over time. This index captures the bias in bilateral trade relationships by considering the trade volume of the trading partner. The trade relationship is more (less) intensive (or biased) than normal if the value of the trade intensity is greater (less) than unity. The computed results in Table 1 show that trade intensity increased after the establishment of FTAs for NAFTA, MERCOSUR, CER, and AFTA (recent years). Trade intensity for Japan–Mexico increased rather

4 Schiff

and Winters (2003) analyse the impacts of FTAs (they use the term “regional integration agreements”) by using various indicators, including those used in this paper.

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Table 1.

Changes in intra-FTA dependency in foreign trade for selected FTAs. 1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

0.573 1.729

0.584 1.773

0.58 1.842

0.59 1.825

0.622 1.652

0.637 1.639

0.641 1.682

0.638 1.69

0.646 1.603

0.647 1.631

0.653 1.678

NAFTA

Relative share Trade intensity

0.332 1.922

0.348 1.952

0.344 1.965

0.37 2.02

0.379 1.852

0.383 1.871

0.359 1.849

0.361 1.954

0.363 1.935

0.367 1.936

0.372 2.092

0.389 2.156

0.397 2.192

AFTA

Relative share Trade intensity

0.156 4.327

0.158 4.269

0.182 4.525

0.192 4.57

0.178 4.388

0.179 5.067

0.164 5.334

0.171 5.212

0.165 4.468

0.163 4.003

0.166 3.804

0.175 3.631

0.177 3.543

MERCOSUR

Relative share Trade intensity

0.089 3.279

0.088 3.286

0.093 3.776

0.076 3.542

0.082 3.715

0.068 3.334

0.091 5.391

0.084 5.258

0.086 5.261

0.099 6.492

0.1 6.676

0.119 7.686

0.141 8.986

CER

Relative share Trade intensity

0.064 4.321

0.065 4.273

0.063 3.825

0.068 4.57

0.073 4.464

0.067 4.307

0.065 4.49

0.075 5.249

0.074 4.888

0.072 4.41

0.074 5.065

0.074 5.158

0.075 5.427

Japan– Singapore

Relative share Trade intensity

0.036 0.427

0.04 0.456

0.042 0.482

0.04 0.439

0.039 0.405

0.034 0.367

0.034 0.367

0.039 0.436

0.044 0.465

0.046 0.484

0.049 0.531

0.052 0.542

0.051 0.55

Japan– Mexico

Relative share Trade intensity

0.012 0.153

0.016 0.189

0.016 0.186

0.014 0.165

0.016 0.177

0.016 0.175

0.012 0.136

0.013 0.151

0.012 0.136

0.011 0.125

0.012 0.144

0.012 0.131

0.013 0.149

China–ASEAN

Relative share Trade intensity

0.046 0.542

0.048 0.492

0.051 0.51

0.054 0.389

0.054 0.538

0.053 0.754

0.049 0.726

0.05 0.769

0.055 0.721

0.059 0.644

0.061 0.582

0.067 0.536

0.072 0.479

Korea–Chile

Relative share Trade intensity

0.005 0.383

0.005 0.356

0.004 0.274

0.004 0.236

0.004 0.215

0.005 0.268

0.005 0.257

0.005 0.245

0.005 0.223

0.007 0.312

0.005 0.237

0.006 0.262

0.007 0.278

Singapore– USA

Relative share Trade intensity

0.021 0.149

0.021 0.145

0.023 0.16

0.029 0.195

0.027 0.168

0.027 0.165

0.027 0.171

0.03 0.201

0.035 0.229

0.037 0.239

0.038 0.258

0.039 0.263

0.041 0.275

Mexico–EU

Relative share Trade intensity

0.006 0.015

0.008 0.024

0.008 0.023

0.006 0.018

0.007 0.02

0.006 0.019

0.005 0.014

0.006 0.014

0.005 0.014

0.005 0.014

0.006 0.015

0.007 0.016

0.007 0.018

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Relative share Trade intensity

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(Continued )

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

0.617 1.605

0.609 1.615

0.548 1.499

0.559 1.448

0.62 1.626

0.6 1.701

0.595 1.639

0.599 1.639

0.606 1.612

0.599 1.625

0.584 1.665

NAFTA

Relative share Trade intensity

0.41 2.081

0.424 2.169

0.42 2.277

0.434 2.297

0.444 2.202

0.457 2.159

0.468 2.148

0.468 2.089

0.465 2.109

0.459 2.186

0.448 2.339

0.437 2.412

0.43 2.387

AFTA

Relative share Trade intensity

0.184 3.173

0.201 3.226

0.204 3.054

0.206 3.071

0.212 3.226

0.209 3.756

0.218 3.798

0.227 3.711

0.222 3.835

0.227 3.901

0.251 4.536

0.251 4.475

0.255 4.485

MERCOSUR

Relative share Trade intensity

0.166 9.373

0.177 9.979

0.185 10.514

0.193 10.199

0.203 9.801

0.209 10.34

0.184 10.797

0.177 9.863

0.16 9.003

0.128 8.602

0.132 9.34

0.134 8.363

0.136 7.792

CER

Relative share Trade intensity

0.081 5.584

0.087 5.88

0.087 6.204

0.089 6.055

0.088 6.106

0.077 5.722

0.085 6.336

0.074 5.867

0.075 5.992

0.078 5.976

0.083 6.35

0.082 6.255

0.076 5.618

Japan– Singapore

Relative share Trade intensity

0.058 0.573

0.062 0.608

0.064 0.64

0.061 0.642

0.057 0.625

0.05 0.616

0.051 0.613

0.054 0.618

0.046 0.582

0.043 0.563

0.04 0.545

0.04 0.549

0.038 0.529

Japan–Mexico

Relative share Trade intensity

0.013 0.134

0.013 0.137

0.011 0.115

0.012 0.131

0.012 0.129

0.012 0.145

0.012 0.137

0.013 0.137

0.014 0.161

0.015 0.182

0.012 0.155

0.014 0.184

0.016 0.217

China–ASEAN

Relative share Trade intensity

0.084 0.432

0.09 0.422

0.094 0.444

0.094 0.452

0.095 0.495

0.085 0.58

0.089 0.581

0.098 0.599

0.099 0.644

0.106 0.709

0.111 0.757

0.118 0.749

0.124 0.746

Korea–Chile

Relative share Trade intensity

0.009 0.336

0.009 0.338

0.01 0.354

0.01 0.324

0.01 0.351

0.009 0.357

0.008 0.309

0.008 0.267

0.007 0.275

0.007 0.252

0.008 0.279

0.01 0.333

0.012 0.397

Singapore–USA

Relative share Trade intensity

0.044 0.268

0.045 0.272

0.047 0.299

0.048 0.304

0.045 0.273

0.041 0.243

0.039 0.226

0.036 0.202

0.033 0.192

0.031 0.192

0.031 0.203

0.03 0.204

0.027 0.191

Mexico–EU

Relative share Trade intensity

0.007 0.02

0.007 0.02

0.005 0.013

0.005 0.013

0.006 0.016

0.007 0.017

0.007 0.018

0.008 0.021

0.009 0.022

0.008 0.021

0.008 0.02

0.007 0.019

0.008 0.022

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Table 1.

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noticeably in 2005 after the enactment of the Japan–Mexico FTA, although its magnitude is very small at 0.217. An examination of the trade intensity figures reveals wide variations in the intensity of intra-FTA relationships among different FTAs. In 2005 the MERCOSUR showed the strongest intra-FTA trade relationship, with a trade intensity index of 7.8. The MERCOSUR was followed by CER (5.6) and AFTA (4.5). In addition, the EU and NAFTA recorded a value greater than unity. These findings indicate that trade relationships among FTA members are quite strong, or above average, for the EU, NAFTA, AFTA, MERCOSUR and CER. By contrast, trade relationships among FTA members are rather weak, or below average, for the remaining FTAs — Japan–Singapore, Japan–Mexico, China–ASEAN, Korea–Chile, Singapore– USA, and Mexico–EU. Thus, some FTAs, including NAFTA, AFTA, MERCOSUR, and CER, appeared to have produced a trade-creation effect, while such an effect was not observed for other FTAs. We further found that the intra-FTA trade relationship is important and pronounced for the EU, NAFTA, AFTA, MERCOSUR, and CER, while it is not so for the other FTAs. Although the analysis in this section has provided useful information on the impact of FTAs on international trade for FTA members, it cannot isolate the impact of FTAs from other factors that influence international trade, such as the economic size of the countries involved. Furthermore, it was not precise as no statistical assessment was made. To remedy these problems and to discern the impacts of FTAs on international trade for the FTA members and non-members, we apply a gravity model in the next section. 3. The Impacts of FTAs on Bilateral Trade Flows: An Application of a Gravity Model Our analysis is based on estimating a gravity model that tries to explain the volume of trade between two countries by their market size and geographical distance. This model has its theoretical foundations in international trade theory, as discussed in Anderson (1979). We begin our analysis by presenting a brief survey of the empirical application of the gravity model to discern the effects of FTAs. Next we examine the trade creation effect of FTAs and then the trade creation and trade diversion effects jointly. 3.1. Brief survey of the literature The gravity model has been applied extensively in cross-country analysis of bilateral international trade flows for more than four decades. Tinbergen (1962) and P¨ oyh¨ onen (1963) were the first to apply the model to

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study international trade flows, and since then numerous empirical analyses have used the model to provide various verifications and implications on international trade. In the mid-1980s theoretical foundations of the gravity model were provided within the framework of international trade theory based on imperfect substitutes, increasing returns to scale, and product differentiation at the firm level. Since the 1990s the gravity model has attracted a great deal of attention in the analysis of international trade as a result of renewed interest in economic geography, which considers geographic and other kinds of “distance” as an important factor in economic activities. The gravity equation has been a popular methodology to study the effects on trade of international trading systems such as the WTO and regional trading arrangements such as FTAs and customs unions. Tinbergen (1962), the first to examine the effects of FTA on trade, found significant positive effects among members of the British Commonwealth but insignificant effects for the Benelux FTA. In the 1970s and 1980s several studies analysed the effects of major regional trade agreements and schemes, including the European Economic Community (EEC), European Free Trade Association (EFTA) and Latin America Free Trade Agreement (LAFTA) (e.g., Aitken, 1973; Braga and Mendez, 1983). To capture the effects of the FTAs on trade flows, these studies added a dummy variable, which takes the value of unity if country pairs belong to the same FTA, to the standard gravity model. This dummy variable method has since been used for many studies on this subject. In light of the rapid expansion of FTAs since the 1990s, an increasing number of studies have attempted to examine the impacts of various FTAs by applying the gravity model. Frankel et al. (1995), and Frankel (1997) examined the effects of major FTAs, such as the EU, NAFTA, MERCOSUR, and AFTA, and found significant positive effects on intraFTA trade in the cases of MERCOSUR and AFTA but not in the cases of the EU or NAFTA. Soloaga and Winters (2000) also attempted to capture the trade creation and two-way trade diversion effects of major multilateral FTAs. They found significantly positive effects on trade creation for the FTAs only in Latin American countries and significant trade diversion effects in the EU and EFTA. Endoh (1999a) analysed the trade creation and trade diversion effects of the EEC, LAFTA, and CMEA (Council of Mutual Economic Assistance, COMECON). He found both effects for these FTAs, but that the effects were diminishing in the 1990s. As these studies indicate, the estimated results regarding the effects of FTAs on trade flows found by using the gravity model are not uniform. Several attempts have been made to discern the effects of FTAs in more detail in recent years. Taking account of the improvement in the

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estimation method, Baier and Bergstrand (2002) treated FTA dummies as endogenous variables and showed that the effect of FTAs on trade flows is quadrupled. Applying Baier and Bergstrand’s specification to panel data analyses, Carrere (2003) found that FTAs generated a significant increase in trade, in contrast to previous results. Chen and Tsai (2005) constructed a modified gravity model and compared the results by using panel data. They found that the estimated values are different among different FTAs. Although the trade creation effects of FTAs are observed in many cases, numerous studies suggest that the magnitude of the effects depends on the time period and other circumstances. Based on the notion that the impact of FTAs on trade differs depending on the products, several studies have conducted analyses at disaggregated product levels. Gilbert et al. (2004) looked at the effects of major FTAs and natural trading blocs in East Asia by products and found that such blocs exist in the merchandise and manufacturing products. Endoh (2005) investigated the effects of Generalised System of Trade Preferences (GSTP) among developing countries on trade of capital goods and found that the trade between GSTP countries increased significantly.5 Following the results from the earlier studies, we extend the analyses by using a large up-to-date data sample and a disaggregated dataset to deepen our understanding of the impact of FTAs on trade flows. 3.2. The model and the estimated results We estimate the gravity model to assess the impact of FTAs on international trade flows and apply the estimation by using both aggregate and disaggregate trade datasets. 3.2.1. Analysis of general FTA effects The model. We use a standard gravity equation to discern the impacts of FTA on bilateral merchandise trade. First, we estimate the general FTA effects for total merchandise trade flows between countries i and j. ln(Tradeijt ) = α + β1 ln(Yit Yjt ) + β2 ln(yit yjt ) + β3 ln(IncomeGAPijt ) + β4 ln(Distanceijt ) + β5 Adjacencyijt + β6 Languageijt
+ φFTAijt + γt Timedumt (1) t 5 In

addition, Fukao et al. (2003) provide an econometric analysis on the trade diversion effects of NAFTA by using HS two-digit level data in a partial equilibrium framework.

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where T radejit denotes total export value between countries i and j in year t, which is the sum of the exports of country i to country j and the exports of country j to country i. Y and y denote GDP and GDP per capita, respectively. The log of the absolute value of the difference in GDP per capita is also included to estimate the effect of the difference in income between a country pair on trade flows. Distance indicates the geographical distance in kilometres between the largest cities of countries i and j. Adjacency and Language are dummy variables, where Adjacency is given the value of unity if countries i and j share a common border, and Language is given the value of unity if the countries share a common official language. FTA denotes general FTA effects and is a binary variable that is unity if country i belongs to the same FTA with country j and otherwise is zero. We construct this variable based on 22 regional trade agreements and 86 bilateral trade agreements that have been notified to the GATT and the WTO up to September 2006. Timedum is a nested dummy variable used to capture external annual time effects during the sample period. Among the explanatory variables, Y and y are proxy for economic scale and income level, respectively, and their estimated signs are expected to be positive because a larger economic scale and higher income levels promote trade. The difference in income between country pairs can have both positive and negative impacts on trade flows. A large income gap may increase vertical (inter-industry) trade, while a small income gap may increase horizontal (intra-industry) trade. The distance variable reflects both tangible and intangible trade costs. The sign is expected to be negative as the longer the distance, the larger the cost. Both dummy variables of Adjacency and Language also reflect tangible and intangible trade costs such as transportation cost and cultural similarity, so that these estimated coefficients are expected to be positive. As the binary variable FTA captures a general FTA effect on trade flows, we expect the estimated relation to be positive if the trade creation effect emerges. The data. The sample for the estimation includes 178 countries over the period 1950–2005 (Table A.2) and was constructed by expanding the dataset of Rose (2005). We use bilateral trade value, GDP, GDP per capita, distance between pair countries, and the dummy variables of common official language and adjacency between 1950 and 1999 from his dataset, and expand these variables by using Direction of Trade Statistics and the International Financial Statistics of the International Monetary Fund (IMF) and World Development Indicators of the World Bank up to 2005. Trade data are taken from Direction of Trade Statistics (DOT) of the IMF. As the data from DOT are expressed in nominal US dollars, we deflated the value by the Consumer Price Index (CPI) of the USA (2000 = 1) following Rose’s (2004)

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method. The dummy variables Distance, Adjacency, and Language are set constant during the sample period. Missing values are taken out, and thus the number of samples varies among the estimations. The estimation method. First, we conduct the structural change test because the sample has a large time series dimension. We apply the cumulative sum of recursive residual (CUSUM) test to judge whether the structural change occurred during the period. The CUSUM test for the panel data proposed by Maskus (1983) is applied using the weighted sum of residuals across cross-sectional units. Although the statistical value does not exceed either upper or lower confidence boundaries during the sample periods, the value is found to vary from zero after 1984. Therefore, we divide the entire sample period into two sub-periods, 1950–1983 and 1984–2005. In addition we produce one sub-group that consists of OECD country pair groups for comparison. We have to deal with two problems in relation to the estimation method. The first concerns heteroskedasticity and autocorrelation with disturbance for the large panel data set. We find panel-level heteroskedasticity and first-order autocorrelation by using the LR test and Wooldridge’s test for autocorrelation in panel data models.6 Based on the results of the tests, we apply the weighted ordinary least squares (OLSQ) method with corrected errors to estimate parameters for pooled cross-sectional and time series data for the benchmark result. The second problem is the bias arising from correlation between some of the regressors and the country pair-level effects included in the error term. In addition, the endogeneity of the regressors gives rise to simultaneous determination such as the relation between GDP and bilateral trade flow. Therefore, we apply the Generalized Method of Moments (GMM) technique. This technique, proposed by Blundell and Bond (1997), is the estimation of a system of two simultaneous equations, one equation in levels and the other in first differences, which are estimated with lagged levels and first differences instruments.7 In the estimation procedure, we regard GDP and GDP per capita as endogenous variables, and use the robust one-step estimation. Results. We apply the OLSQ with corrected disturbance to estimate Eq. (1) for all country pairs and OECD groups for the 1950–1983 and 1984– 2005 periods for benchmark results. In both cases the estimated coefficients of the standard set of variables, which are generally used in the gravity model estimation, are shown to have expected signs with statistical significance (Table 2). That is, the magnitude of bilateral trade is promoted by 6 We

7 We

apply the test written by David Drukker to perform STATA. use STATA’s estimator “xtabond2” provided by David Roodman.

1950–1983 All Samples

1984–2005 OECD Countries

All Samples

OECD Countries

OLS

GMM

OLS

GMM

OLS

GMM

General FTA dummy

0.7780 (0.0871)∗∗∗

0.2070 (0.0517)∗∗∗

0.1343 (0.0306)∗∗∗

0.1723 (0.0546)∗∗∗

0.2385 (0.0512)∗∗∗

0.1065 (0.0389)∗∗∗

0.1020 (0.0243)∗∗∗

0.1482 (0.0433)∗∗∗

GDP

0.8261 (0.0082)∗∗∗

0.3171 (0.0706)∗∗∗

0.7681 (0.0120)∗∗∗

0.2417 (0.0788)∗∗∗

0.9570 (0.0072)∗∗∗

0.1056 (0.0323)∗∗∗

0.8361 (0.0194)∗∗∗

0.3250 (0.0461)∗∗∗

GDP per capita

0.3560 (0.0161)∗∗∗

0.1296 (0.0334)∗∗∗

0.5262 (0.0675)∗∗∗

0.1090 (0.0924)

0.5196 (0.0130)∗∗∗

0.1477 (0.0324)∗∗∗

0.2938 (0.0839)∗∗∗

0.1485 (0.0795)∗

Difference GDP per capita

0.0581 (0.0153)∗∗∗

0.0075 (0.0182)

0.0245 (0.0253)

0.0962 −0.0142 (0.0137)∗∗∗ (0.0202)

−0.0149 (0.0058)∗∗∗

0.0138 (0.0142)

Distance

−0.0062 (0.0060)

−0.9848 −0.3497 −0.6070 −0.1813 −1.2812 −0.1917 −0.7735 −0.2554 (0.0260)∗∗∗ (0.0691)∗∗∗ (0.0300)∗∗∗ (0.0614)∗∗∗ (0.0240)∗∗∗ (0.0434)∗∗∗ (0.0445)∗∗∗ (0.0374)∗∗∗ 0.3031 (0.1275)∗∗∗

0.0688 (0.0435)

0.4799 (0.0457)∗∗∗

0.3021 (0.1093)∗∗∗

0.9751 (0.1262)∗∗∗

0.3361 (0.0853)∗∗∗

0.3603 (0.0559)∗∗∗

0.0408 (0.0671)

Common language

0.5196 (0.0490)∗∗∗

0.2023 (0.0460)∗∗∗

0.3051 (0.0417)

0.1688 (0.0865)∗∗

0.8856 (0.0455)∗∗∗

0.1002 (0.0295)∗∗∗

0.3114 (0.0359)∗∗∗

0.0861 (0.0516)∗

No. of samples Alleano–Bond test AR(2), p-value Hansen J statistics test, p-value

104,199 R2 = 0.622

77,073 0.577 0.010

5969 R2 = 0.935

5791 0.015 0.050

161,147 R2 = 0.664

118,982 0.160 0.000

4277 R2 = 0.977

4232

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206

Table 2.

0.323 0.278

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Notes: Standard errors are in parentheses. ∗ Statistically significant at 10%,∗∗ at 5%, and ∗∗∗ at 1%. All variables except dummies are in natural logs. OLS are corrected disturbances for heteroskedasticity and first-order autocorrelation for the disturbances.

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the economic size, income levels, and cultural similarities of the countries involved, while it is deterred by their geographical distance. The estimated coefficients of the difference of income levels between country pairs for all samples are shown to have both positive and negative effects with statistical significance in the case of OLSQ estimations. The estimated coefficients for the system GMM estimation are also shown to take both positive and negative signs, but they are not statistically significant. For the estimated coefficient of the general FTA effect, the estimated results of the FTA dummy variable show that FTAs promoted bilateral trade in almost all cases. Although the estimated coefficients from the OLSQ estimation tend to have upward bias, the coefficients of the GMM are also found to be significantly positive. The results also suggest that the effects of FTA on trade flows are weaker for the second half of the sample period than for the first half. Although only eight RTAs8 were formed during the first half of the sample period, these tended to be with neighbours and major trading partners. A large number of bilateral FTAs that were formed during the latter half of the sample period, particularly from the second half of the 1990s, were not between major trading partners. Therefore, it is conceivable that the relation between FTA and trade flows has weakened over time. Indeed, the motivation behind the establishment of FTAs in recent years has diversified because not only trade promotion but also non-economic factors such as political issues have played important roles in their establishment. The estimation of the results obtained by using the GMM needs to be improved because the Hansen J statistics test for over-identifying restrictions is not satisfactory for all samples for both periods or for the OECD countries for the first half period, and the Alleano–Bond test for the serial correlation does not reject the null hypothesis of the absence of autocorrelation in the case of the first half period for the OECD countries. With an improvement of the model specification, particularly concerning the problems related to the large T-panel and the unbalanced panel data, the results suggest that the general impacts of FTA on trade flows are positive and tended to weaken over the sample periods. 3.2.2. Analysis of trade creation and trade diversion effects The previous analysis examined the impacts of FTAs in general without considering specific FTAs such as the EU and NAFTA. We now analyse the impacts of specific FTAs on bilateral trade flows. In addition, we analyse 8 The

RTAs are EC, EFTA, CACM, CARICOM, PATCRA, SPARTECA and CER. See Table A.4 for the details on RTAs included in the general FTA dummy.

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not only the trade creation effect but also the trade diversion effect of FTAs. To capture the trade diversion effects, we specify the estimation equation by adding a non-FTA member dummy, which takes the value of unity if one country belongs to an FTA but the other country does not. To examine the impact of FTAs more precisely, FTA and non-FTA dummies are given the value of unity when the FTAs in question are in effect and we introduce an FTA country pair dummy variable that takes the value of unity for the entire sample period regardless of the status of FTAs. This allows us to isolate the impact of FTAs. These variables are again explained below when the specification of the estimated model is discussed. As mentioned in the previous section, our sample is unbalanced panel data and thus we apply the weighted OLSQ method for heteroskedasticity and first-order autocorrelation to obtain the results for a benchmark. In addition, we apply the fixed effect and random effect models for the estimation.9 When the null hypothesis, which states that individual effects are not correlated with the regressors, is rejected by the Hausman test, then we choose the estimation results using the fixed effect model. The specification of the estimated equation is as follows. ln(Tradeijt ) = α + β1 ln(Yit Yjt ) + β2 ln(yit yjt ) + β3 ln(IncomeGAPijt ) + β4 ln(Distanceijt ) + β5 Adjacencyijt + β6 Languageijt

+ δm FTAm εm FTAtononFTAm ijt + ijt m

+


m

m

φm FTAmemberm ijt +




ηt Timedumt

(2)

t

where Trade, Y , y, Distance, Adjacency, and Language are the same as in Eq. (1). Dummy variables related to FTA are FTA, FTAtononFTA, and FTAmember. The FTA dummy is given unity if a country pair belongs to the same FTA; the FTAtononFTA dummy is given unity if one country is a member of an FTA but the other is not. The FTAmember dummy is given unity for an FTA country pair during the entire sample period regardless of the condition of FTAs, i.e., regardless of whether or not the FTA in question is in effect. The results of the estimation are shown in Table 3. The standard variables for the gravity model including GDP, GDP per capita, and distance are generally shown to have expected impacts with statistical significance for the case of the OLSQ method; however, the estimated coefficient of the 9 We do not apply the GMM method for the estimation of Eq. (2) because of problems of the excessive diagonal conditions of large time series and a larger number of independent variables than Eq. (1).

Empirical results of regression on total trade, 1950–2005, pooled data.

OLS

EU FTAdummy

EU member

NAFTA non-AFTA FTAdummy

AFTA FTAdummy

0.789 (0.0336)∗

0.062 (0.0259)∗

−0.052 (0.1813)

CER FTAdummy CER nonFTAdummy CER member

1.790 (0.2821)∗

0.804 (0.4463)

0.337 (0.0655)∗

0.042 (0.0465)

Japan–Singapore FTAdummy

Japan–Singapore non-FTAdummy Japan–Singapore dummy

−0.531 (0.2134)∗ 0.444 (0.3187)

0.533 (0.2057)∗

0.564 (0.0845)∗

0.335 (0.0556)∗

Japan–Mexico FTAdummy Japan–Mexico non-FTAdummy

F

1.473 (0.0294)∗

0.5553 (0.7060)

0.451 (0.1021)∗

0.0132 (0.0519)

FE (2000–2005)

1.480∗∗ (0.0589) 0.526 −0.258 (0.0507)∗ (0.9410)

−0.0399 (1.1124)

1.155 −0.104 (0.0917)∗ (0.0584)

0.049 (0.0655)

3.176 (0.0375)∗ 0.161 (0.0909)∗ −0.031 (0.0906)

0.3580 (1.0603)

0.149 (0.8967)

0.0804 (0.0696)

−0.0033 (0.0578) 209

(Continued)

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AFTA non-FTAdummy

0.543 (0.0848)∗

OLSQ

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0.835 (0.0834)∗

FE (2000–2005)

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NAFTA FTAdummy

Fixed Effect

The Impacts of FTAs on Trade Flows

EU non-EU FTAdummy

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Table 3.

OLS

AFTA member

FE (2000–2005)

−0.021 (0.6296)

MERCOSUR non-FTAdummy

−0.097 (0.0718)

MERCOSUR member

−0.709 (0.3205)

ASEAN–China FTAdummy

−0.269 (0.3498) 0.631 (0.0470)∗

ASEAN–China member

0.877 (0.3519)∗

EU–Mexico FTAdummy

0.525 (0.0779)∗

−0.027 (0.0452)

Japan–Mexico dummy

0.956 (0.0426)∗

Korea–Chile FTAdummy

1.035 (0.0298)∗

0.4862 (1.0190)

0.458 (0.8625)

Korea–Chile nonFTA dummy

0.802 (0.1060)∗

0.2261 (0.0620)∗

0.207 (0.0525)∗

Korea–Chile dummy

2.830 (0.0391)∗ −1.525 −0.089 (0.1027)∗ (1.0148)

0.300 (0.3603)

0.230 (0.3231)

Singapore–USA FTAdummy

0.152 (0.0331)∗

0.054 (0.0296)

Singapore–USA non-FTAdummy

0.374 (0.0713)∗

Singapore–USA dummy

2.315 (0.0570)∗

0.150 (0.0960)

FE (2000–2005)

0.0266 (0.0633)

−0.1565 (0.8626) 0.060 (0.0524)

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0.710 (0.2362)∗

F

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OLSQ

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Fixed Effect

(Continued )

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Table 3.

−0.068 (0.2380) (Continued)

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OLS

−0.606 (0.1529)∗

−0.029 (0.0245)

FE (2000–2005)

0.1443 (0.0613)∗

OLSQ

F

FE (2000–2005)

GD

0.892 (0.0067)∗

0.482 (0.0167)∗

0.609 (0.0722)

GDP per capita

0.437 (0.0128)∗

0.295 (0.0189)∗

−0.1355 (0.0664)

Difference GDP per capita

0.023 −0.023 (0.0120)∗ (0.0059)∗

−0.0095 (0.0144)

Distance

−1.1943 (0.0233)∗ 0.692 (0.1213)∗

Common language

0.751 (0.0412)∗

No. of samples

265,34

Adjusted R2

0.659

253,90

42,73

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EU–Mexico member

0.028 (0.0337)

(Continued )

The Impacts of FTAs on Trade Flows

EU–Mexico non-FTAdummy

Fixed Effect

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Table 3.

Notes: Standard errors are in parentheses. ∗ Statistically significant at 10% and ∗∗ at 5%. All variables except dummies are in natural logs. An additional fixed effect model estimation for comparison and robustness check is applied for a sub-sample of a limited time period during 2000–2005 because bilateral FTA values are few compared to all other samples.

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difference of GDP per capita for the fixed effect model shows results that are contrary to the result of the weighted OLSQ method. Distance and Adjacency are shown to be inconsistent with the expectation. It is possible that these results are caused by correlation with individual effect. The estimated results on the FTA dummies for many FTAs are found to be significantly positive. FTAs for which positive trade creation is not found are ASEAN–China, Japan–Singapore, and Singapore–USA. These results are consistent with our previous findings using crude indicators in Section 3.1, as they showed the possible presence of a trade creation effect for several major FTAs including NAFTA, AFTA, and MERCOSUR. It is interesting to observe that for many FTAs the trade diversion effect is not identified. Specifically, the estimated coefficients on the non-FTA dummy are positive and statistically significant for all FTAs except MERCOSUR, EU–Mexico, and Japan–Mexico. An examination of the estimates of FTA country pair dummies reveals interesting observations. The FTAs with positive FTA country pair dummies can be considered to include natural trading partners, since they exhibit a larger trade value compared to “normal” or “average” levels. Specifically, the ASEAN–China, CER, Japan–Singapore, Japan– Mexico, Korea–Chile, and Singapore–USA FTAs may be regarded as consisting of natural trading partners. Coupled with these points, FTAs solidified these relationships in the cases of CER, Japan–Mexico, and Korea–Chile FTAs.10 3.2.3. Analysis of selected products We now investigate the trade creation and diversion effects in further detail. Specifically, to discern the precise impacts of trade diversion effects on FTA members’ trade, we consider the impacts of FTAs on FTA members’ exports to non-FTA members and those on FTA non-members’ exports to FTA members separately instead of combining these two to analyse trade as we did in the previous section. The specification of the estimated equation is as follows. ln(Exportijt ) = α + β1 ln(Yit ) + β2 ln(Yjt ) + β3 ln(yit ) + β4 ln(yjt ) + β5 ln(IncomeGAPijt ) + β6 ln(Distanceijt )
+ β7 Adjacencyijt + β8 Languageijt + δm FTAm ijt m

10 See

Gilbert et al. (2004) on the discussions of natural trading partners.

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+


m

+




εm FTAtononFTAm ijt + γt Timedumt


m

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φm NonFTAtoFTAm ijt (3)

t

where Exportjit denotes export value from countries i to j in year t, as before, and Y and y are GDP and GDP per capita, respectively. Distance, Adjacency, and Language are geographical distance, common border, and common official language, respectively. The FTA dummy is given the value of unity when both exporter and partner country belong to the same FTA; the FTAtononFTA dummy is given unity when the exporter belongs to the FTA but the partner does not; and the NonFTAtoFTA dummy is given unity when the exporter is a non-member but the partner country is a member of the FTA. FTA is expected to capture the trade creation effect, while FTAtononFTA and NonFTAtoFTA are expected to capture the trade diversion effect. For the case of trade creation, the estimated sign of the FTA dummy is positive, while for the case of trade diversion, the signs of the FTAtononFTA and/or NonFTAtoFTA dummies are negative. We call the first type of trade diversion “type 1 trade diversion” and the second type “type 2 trade diversion”. In the standard analysis of FTA, type 1 trade diversion is recognised but not type 2 trade diversion. We now examine the presence or absence of these two types of trade diversion. The data and the estimation method. The sample of 63 countries used in the empirical analyses for estimating the commodity trade is listed in Appendix Table A.3 and is the same as in previous studies such as Frankel and Wei (1995), Frankel et al. (1995), Frankel (1997), and Rauch (1999). Export values are taken from Commodity Trade Statistics of the United Nations. We use five types of products for the estimation — food and live animals, apparel, iron and steel, electrical and electronic machinery, and motor vehicles. Details are described in Appendix Tables A.4–A.6. We use the pooled dataset containing the export values for 1990, 1995, 2000, and 2005. Regarding the explanatory variables, we use the same dataset used for the estimation of total trade. To estimate the five export commodities, we apply Zellner’s seemingly unrelated regression because of the consideration of common external shock during the sample periods. Results. Table 4 shows the estimation results for the five different product groups in addition to those for total exports. The results for total exports illustrate the trade creation effect for AFTA, CER, and the Korea–Chile FTA. The trade diversion effect is observed for NAFTA, MERCOSUR, and the EU–Mexico FTA.

Food and Live Animals

Apparels

Iron and Steel

Electrical, Electronics Equipment

Motor Vehicles

Total Export (FGLS)

0.5967 (0.16)∗∗∗

−0.3012 (0.11)∗∗∗

1.0368 (0.19)∗∗∗

0.0207 (0.03)∗∗∗

EU to non-EU

0.7217 (0.09)∗∗∗

−0.1029 (0.13)∗∗∗

0.4286 (0.11)∗∗∗

−0.4701 (0.08)∗∗∗

0.2204 (0.13)∗∗∗

0.0651 (0.02)∗∗∗

Non-EU to EU

−0.2849 (0.10)∗∗∗

0.2918 (0.15)∗∗

−0.4295 (0.12)∗∗∗

−0.2770 (0.09)∗∗∗

−0.4221 (0.15)∗∗∗

0.0988 (0.02)∗∗∗

NAFTA

1.4850 (0.37)∗∗∗

0.2058 (0.54)

−0.0931 (0.46)

−0.1510 (0.34)

NAFTA to nonmembers

1.5258 (0.12)∗∗∗

−1.4046 (0.18)∗∗∗

−1.2998 (0.15)∗∗∗

1.3760 (0.20)∗∗∗

0.1335 (0.17) 1.1232 (0.32)∗∗∗

Non-members to NAFTA

−0.1772 (0.13) 2.1318 (0.25)∗∗∗

0.0524 (0.37)

AFTA to non-members

1.6160 (0.13)∗∗∗

0.9667 (0.19)∗∗∗

Non-members to AFTA

1.1183 (0.12)∗∗∗

0.2186 (0.17)

MERCOSUR

1.0356 (0.27)∗∗∗

−0.6756 (0.40)∗

−0.2719 (0.16)∗ 1.2926 (0.15)∗∗∗ 0.0438 (0.34)

0.1771 (0.18)

−1.3500 (0.11)∗∗∗

−1.8021 (0.18)∗∗∗

−0.3593 (0.03)∗∗∗

−0.3344 (0.12)∗∗∗

−1.0255 (0.20)∗∗∗

−0.1085 (0.03)∗∗∗

3.4151 (0.23)∗∗∗

1.2319 (0.38)∗∗∗

1.2516 (0.18)∗∗∗

2.3635 (0.12)∗∗∗

−0.0109 (0.20)

0.7403 (0.04)∗∗∗

1.3385 (0.11)∗∗∗

0.1700 (0.18)

0.4416 (0.04)∗∗∗

0.9261 (0.42)∗∗

0.6316 (0.10)∗∗∗

−0.3791 (0.25)

(Continued)

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AFTA

1.7801 (0.56)∗∗∗

B-763

0.6662 (0.18)∗∗∗

9in x 6in

0.7703 (0.12)∗∗∗

Shujiro Urata and Misa Okabe

EU

November 17, 2009 14:4

Empirical results of disaggregated and aggregated data by Zellner’s seemingly unrelated regression.

214

Table 4.

Food and Live Animals

MERCOSUR to non-members

ASEAN–China FTA to non-member Non-members to ASEAN–China FTA

EU–Mexico FTA to non-member

Electrical, Electronics Equipment

Motor Vehicles

1.9938 (0.15)∗∗∗

−2.1145 (0.22)∗∗∗

1.3123 (0.18)∗∗∗

−1.4923 (0.14)∗∗∗

−1.0371 (0.22)∗∗∗

−0.1781 (0.03)∗∗∗

−0.4971 (0.14)∗∗∗

−0.5836 (0.20)∗∗∗

−0.6750 (0.17)∗∗∗

−0.3685 (0.13)∗∗∗

−0.8025 (0.21)∗∗∗

0.0416 (0.03)

−0.0432 (0.27)

2.1472 (0.40)∗∗∗

0.7604 (0.34)∗∗

1.3423 (0.25)∗∗∗

0.2067 (0.41)

0.1498 (0.08)∗

0.0640 (0.16)

2.1038 (0.23)∗∗∗

1.2794 (0.14)∗∗∗

−0.6104 (0.24)∗∗∗

0.2288 (0.04)∗∗∗

0.3144 (0.16)∗∗

1.0161 (0.23)∗∗∗

0.7167 (0.20)∗∗∗

0.2976 (0.14)∗∗

−0.3270 (0.24)

0.0380 (0.04)

0.2638 (0.16)∗

0.1858 (0.23)

0.8860 (0.20)∗∗∗

0.6179 (0.14)∗∗∗

0.3902 (0.24)∗

−0.0861 (0.08)

0.6961 (0.18)∗∗∗

0.3844 (0.15)∗∗∗

0.4316 (0.11)∗∗∗

0.0100 (0.19)

−0.0368 (0.02)∗

0.4255 (0.17)∗∗∗

0.4807 (0.12)∗∗∗

0.4203 (0.21)∗∗

−0.0333 (0.02)

−0.0783 (0.12) 0.2692 (0.14)∗∗

−0.2322 (0.20)

−0.1525 (0.19)

Total Export (FGLS)

215

(Continued)

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Non members to EU–Mexico FTA

Iron and Steel

B-763

EU–Mexico FTA

Apparels

9in x 6in

ASEAN–China FTA

(Continued )

The Impacts of FTAs on Trade Flows

Non members to MERCOSUR

November 17, 2009 14:4

Table 4.

(Continued )

Apparels

Iron and Steel

Electrical, Electronics Equipment

Motor Vehicles

Total Export (FGLS)

1.9364 (0.58)∗∗∗

2.3646 (0.95)∗∗∗

2.3427 (0.13)∗∗∗

CER to non-member

3.0161 (0.16)∗∗∗

−0.2359 (0.23)

0.6336 (0.20)∗∗∗

−0.7938 (0.14)∗∗∗

−0.7446 (0.24)∗∗∗

0.6135 (0.05)∗∗∗

Non-members to CER

0.7683 (0.14)∗∗∗

−0.1393 (0.21)

1.3044 (0.18)∗∗∗

0.4753 (0.13)∗∗∗

0.9031 (0.22)∗∗∗

0.4626 (0.04)∗∗∗

Japan–Singapore FTA

1.2022 (1.20)

−0.7567 (1.76)

1.4972 (1.50)

0.2868 (1.10)

0.5173 (1.82)

0.1225 (0.59)

−0.2160 (0.30)∗

−0.8893 (0.44)∗∗

0.3838 (0.38)

−1.0362 (0.28)∗∗∗

0.3238 (0.46)

−0.0283 (0.08)

−0.1294 (0.33)

−0.4016 (0.49)

−0.1870 (0.42)

−0.3780 (0.31)

−0.6197 (0.51)

−0.1467 (0.08)∗

−1.4655 (1.19)

−1.4672 (1.75)

0.4236 (1.49)

1.0155 (1.09)

3.6803 (1.80)∗∗

−0.1824 (0.27)

−2.0416 (0.28)∗∗∗

−1.9406 (0.41)∗∗∗

0.2346 (0.35)

0.1822 (0.26)

1.0244 (0.43)∗∗

−0.2020 (0.08)∗∗∗

0.0029 (0.46)

−0.5253 (0.39)

−0.2546 (0.29)

1.0114 (0.47)∗∗

−0.0152 (0.07)

JPN–SGP FTA to non-member Non-members to JPN–SGP FTA Japan–Mexico FTA JPN–MEX FTA to non-member Non-members to JPN–MEX FTA

−0.2207 (0.31)

(Continued)

b763-ch06

3.3295 (0.78)∗∗∗

B-763

1.3430 (0.92)

9in x 6in

3.3772 (0.62)∗∗∗

Shujiro Urata and Misa Okabe

CER

November 17, 2009 14:4

Food and Live Animals

216

Table 4.

Korea–Chile FTA

USA–Singapore FTA US–SGP FTA to non-member

Apparels

Iron and Steel

Electrical, Electronics Equipment

−0.6473 (1.63)

2.2485 (2.40)

3.6330 (2.05)∗

2.4756 (1.51)∗

5.2033 (2.48)∗∗

1.1565 (1.01)

−0.7065 (0.22)∗∗∗

0.4424 (0.32)

1.9744 (0.27)∗∗∗

1.1568 (0.20)∗∗∗

2.4585 (0.33)∗∗∗

0.2151 (0.05)∗∗∗

0.3474 (0.24)

0.6897 (0.36)∗∗

1.7014 (0.30)∗∗∗

0.4413 (0.22)∗∗

−0.2714 (0.37)

0.0356 (0.05)

Motor Vehicles

Total Export (FGLS)

−0.3753 (1.18)

−2.9938 (1.74)∗

0.3596 (1.49)

1.7650 (1.09)

−0.9796 (1.80)

0.3007 (0.74)

−0.0237 (0.23)

0.4350 (0.34)

0.3746 (0.29)

0.0366 (0.21)

−0.3691 (0.35)

−0.2933 (0.05)∗∗∗

0.0995 (0.26)

−3.2893 (0.38)∗∗∗

0.0986 (0.32)

0.6874 (0.24)∗∗∗

0.7500 (0.39)∗

0.0888 (0.05)∗

0.6509 (0.02)∗∗∗

0.9979 (0.03)∗∗∗

1.1337 (0.03)∗∗∗

1.1226 (0.02)∗∗∗

1.5668 (0.03)∗∗∗

1.0297 (0.01)∗∗∗

GDP j

0.7460 (0.02)∗∗∗

0.5025 (0.03)∗∗∗

0.9385 (0.03)∗∗∗

0.7390 (0.02)∗∗∗

0.4776 (0.03)∗∗∗

0.9521 (0.01)∗∗∗

−0.3776 (0.03)∗∗∗

−0.6645 (0.04)∗∗∗

−0.2840 (0.03)∗∗∗

0.5173 (0.02)∗∗∗

0.4153 (0.04)∗∗∗

0.1649 (0.01)∗∗∗

GDP per capita i

217

(Continued)

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GDP i

B-763

Non-members to US–SGP FTA

Food and Live Animals

9in x 6in

Non-members to KOR–CHL FTA

(Continued )

The Impacts of FTAs on Trade Flows

KOR–CHL FTA to non-member

November 17, 2009 14:4

Table 4.

Food and Live Animals GDP per capita j

Apparels

Iron and Steel

Electrical, Electronics Equipment

Motor Vehicles

0.5737 (0.03)∗∗∗

−0.1671 (0.03)∗∗∗

0.1016 (0.02)∗∗∗

0.2228 (0.04)∗∗∗

0.0019 (0.01)

Total Export (FGLS)

−0.1092 (0.03)∗∗∗

−0.0591 (0.02)∗∗∗

−0.2624 (0.03)∗∗∗

−0.0159 (0.01)∗∗∗

−1.0530 (0.04)∗∗∗

−1.1525 (0.05)∗∗∗

−1.2607 (0.04)∗∗∗

−0.7805 (0.03)∗∗∗

−0.7398 (0.05)∗∗∗

−1.0309 (0.01)∗∗∗

Adjacency

0.3143 (0.12)∗∗∗

0.4081 (0.18)∗∗

0.5448 (0.15)∗∗∗

0.2385 (0.11)∗∗

0.6578 (0.18)∗∗∗

0.3291 (0.05)∗∗∗

Common language

0.6401 (0.08)∗∗∗

0.1547 (0.12)

0.2536 (0.10)∗∗∗

0.2873 (0.07)∗∗∗

0.5327 (0.12)∗∗∗

0.4950 (0.03)∗∗∗

Constant

−9.8376 (0.83)∗∗∗

−15.1344 (1.22)

−23.9805 (1.04)∗∗∗

−30.8073 (0.76)∗∗∗

−37.3431 (1.26)∗∗∗

−29.9456 (0.21)∗∗∗

Observations; 4571

R2 = 0.559

Distance

R2 = 0.476

R2 = 0.528

R2 = 0.641

R2 = 0.512

B-763

−0.0676 (0.03)∗∗

9in x 6in

0.0001 (0.02)

Shujiro Urata and Misa Okabe

Difference GDP per capita

0.1466 (0.02)∗∗∗

(Continued )

November 17, 2009 14:4

218

Table 4.

No. of obs. = 13, 72

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Notes: Standard errors are in parentheses. ∗ Statistically significant at 10%, ∗∗ at 5%, and ∗∗∗ at 1%. All variables except dummies are in natural logs. Sample period is 1990, 1995, 2000, and 2005. Five equations with disaggregated data are applied to Zellner’s seemingly unrelated regression, and the estimation for total exports is applied by cross-sectional time series feasible generalized squares regression with heteroskedasticity and first-order autocorrelations with disturbances.

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219

The results for the five different product groups show quite different patterns concerning the trade creation and trade diversion effects for the regional and plurilateral FTAs compared to those for total exports. Contrary to the findings for total exports, for the EU and NAFTA the trade creation effect was found for some products. For the EU, trade creation was found for food and live animals, apparel, iron and steel, and motor vehicles, while for NAFTA it was found for food and live animals and for motor vehicles. Being consistent with the results for total exports, the trade creation effect was found for many products for AFTA. For MERCOSUR, the trade creation effect was found for total exports, food and live animals, and motor vehicles. As explained above, two types of trade diversion effects, types 1 and 2, were tested. Type 1 trade diversion indicates the decline in FTA members’ exports to non-FTA members, while type 2 trade diversion indicates the decline in non-FTA members’ exports to FTA members. For the EU, type 1 trade diversion was detected for electrical and electronic machinery, while type 2 trade diversion was found for all commodities except for apparel. It is interesting to note that for apparel non-EU exports to the EU are large and the EU’s exports to non-EU members in food and live animals, iron and steel, and motor vehicles are much higher than average. These findings indicate that consumption or demand for apparel was substantially large in the EU, while the competitiveness of food and live animals and of iron and steel was very substantial. For NAFTA, type 1 trade diversion was found for all products except food and live animals, while type 2 trade diversion was found for electrical machinery and motor vehicles. These results on trade diversion possibly show that the NAFTA market for automobiles is introverted. Only one case of trade diversion with statistical significance was found for AFTA, type 1 trade diversion in the case of iron and steel. The findings for MERCOSUR are quite different, with many cases of trade diversion found. Type 1 trade diversion was detected for apparel, electrical machinery, and motor vehicles, while type 2 trade diversion was found for food and live animals, apparel, iron and steel, and motor vehicles. The findings for other FTAs reveal several interesting patterns. For ASEAN–China, trade between them as well as trade with other countries was substantially large for apparel and electrical and electronic machinery, probably reflecting active international trade in parts and components of these products under the regional production and distribution networks that have been constructed in East Asia by multinational corporations. Indeed, all the trade in electrical and electronic machinery involving ASEAN, regardless of destination or source, is higher than average, indicating that ASEAN is a hub for trade in electrical and electronic machinery.

November 17, 2009 14:4

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Shujiro Urata and Misa Okabe

Bilateral trade between the EU and Mexico is substantially large in iron and steel and electrical and electronic machinery while non-members’ exports of iron and steel, electrical and electronic machinery, and motor vehicles to EU–Mexico are shown to be quite large, probably reflecting the large amount of trade in auto parts with the US under NAFTA. Similarly, EU–Mexico exports to non-FTA members are large for apparel, iron and steel, and electrical and electronic machinery, reflecting substantial Mexican exports to the US. Trade between Australia and New Zealand under CER is shown to be higher than the normal volume in food and live animals, iron and steel, and electrical and electronic machinery. For the Korea–Chile FTA, trade in apparel and motor vehicles is found to be promoted/created. 4. Concluding Remarks We examined the impacts of FTAs on trade flows, and, more specifically, attempted to discern the trade creation and trade diversion effects of FTAs by using two methodologies. One approach computed the importance of intra-FTA trade in the overall trade of FTA members, and the other estimated a gravity equation by introducing FTA dummies. The results of the analysis reveal several interesting observations. An analysis of the aggregate data, or total trade or total exports, strongly indicates that FTAs bring about a trade creation effect and that a trade diversion effect is limited. These findings, based on aggregate data, have to be modified as the analyses for different product categories show different patterns among different products. Our analysis of trade diversion tends to show such an effect for many products in the case of the EU, NAFTA, and MERCOSUR but not for AFTA. Our overall assessment of the results on trade creation and trade diversion tends to indicate that MERCOSUR is very closed while the EU and NAFTA are relatively more closed or introverted than AFTA and CER. Some FTAs have too short a history to demonstrate substantial impact. Finally, we would like to point out the limitations of our study and indicate our future research agenda on the impacts of FTA on international trade. To begin with the limitations, we could not include some variables that would have an impact on bilateral international trade. Foreign direct investment (FDI), which has been expanding rapidly, is shown to have substantial impact on foreign trade. Multinational corporations (MNCs), which are major suppliers of FDI, dominate international trade.11 Indeed, MNCs 11 Kiyota

and Urata (forthcoming) showed that MNCs dominate international trade in the case of Japan.

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The Impacts of FTAs on Trade Flows

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221

are actively engaged in intra-firm trade, or trade inside MNCs. These observations attest the importance of FDI in explaining bilateral trade, but a lack of reliable information on bilateral FDI precluded us from including it in the analysis. The construction of a reliable FDI database is a very important task for our future research. Another priority is to find a better indicator of the economic cost of bilateral foreign trade. We used geographical distance as a proxy for economic distance, but a better indicator reflecting actual cost, such as the cost of transportation, is needed. Third, the precise contents of FTAs should be carefully considered. For many FTAs tariff removal/reduction is pursued over time according to a schedule rather than immediately after the enactment of the FTA. Such a phasing schedule has to be incorporated into the analysis of the impact of FTAs on foreign trade. Appendix: Description of the Data Trade values at the aggregated level are from the expanded dataset provided by Rose (2005) up to 2005, taken from the Direction of Trade Statistics (DOT) of the IMF. These values denote nominal US$ and thus we deflated them by the US CPI (2000 = 1). Export values at the commodity level are from the UN’s Commodity Trade Statistics database (COMTRADE, available at http://comtrade. un.org/db/). We used five commodity data, namely “food and live animals” of SITC code 0, “articles of apparel, accessories, knit or crochet” of HS code 61, “iron and steel” of HS code 72, “electrical and electronic equipment” of HS code 85, and “motor vehicles for transport of persons” of HS code 8703. We also deflated these export values by the US CPI. Real GDPs and population data are taken from the World Bank’s World Development Indicators (WDIs). Real GDPs are deflated by GDP deflator (2000 = 1) and denote US$. Real per capita GDP is real GDP divided by population. We defined Adjacency as a case where countries share common land border, and Language as a case where two countries have the same official language. Information on these two variables is obtained from the “regional basic data” provided on the website of the Ministry of Foreign Affairs of Japan. The Comprehensive FTA dummy variable is based on the enforcement date of the notified RTAs to the WTO. Regarding the EU and AFTA, the number of signatory countries has increased during the sample periods; thus the EU and AFTA dummies reflect this enlargement.

Empirical studies on FTA effects by gravity equation. No. of Countries

Dependent Variable

Explanatory Variables and Results

Frankel et al.(1995)

1965–1990

Overall

63

Exports + Imports

East Asia(+,∗∗∗ ), EC(+), NAFTA(+) MERCOSUR(+,∗∗ ), Andean Pact(+,∗∗ )

Frankel (1997)

1965–1994

Total merchandise

63

Exports + Imports

EU15(+−), NAFTA(+−), MERCOSUR(+,∗ ), Andean(−,∗∗ , +) ASEAN(+∗∗ ), AUS–NZ(+∗∗ )

Soloaga and Winters (2000)

1980–1996

Overall

58

Imports

b763-ch06

(Continued)

B-763

EU(−∗∗∗ ), EU–import(+∗∗∗ ), EU–Export(+∗∗∗ ) EFTA(−), EFTA–import(+∗∗∗ ), EFTA–Export(+∗∗∗ ) ASEAN(+−), ASEAN–Import(+−), ASEAN–Export(+∗∗∗ ) GULFCOOP(+), GULF–Imp(+−), GULF–exp(−∗∗∗ ) NAFTA(+), NAFTA–imp(+∗∗ ), NAFTA–exp(+ − ∗ ) CACM(+∗∗∗ ), CACM–imp(−∗∗∗ ), CACM–exp(−∗∗∗ ) LAIA(+∗∗∗ ), LAIA–imp(−∗∗∗ ), LAIA–exp(−∗∗∗ ) ANDEAN(+∗∗∗ ),ANDEAN–imp(−∗∗∗ ), ANDEAN–exp(−∗∗∗ ) MERCOSUR(+∗∗∗ ),MERCOSUR–imp(−∗∗∗ ), MERCOSUR–exp(+−)

9in x 6in

Sector

Shujiro Urata and Misa Okabe

Period

November 17, 2009 14:4

Reference

222

Table A.1.

Reference

Endoh (1999)

Period

Sector

No. of Countries

Dependent Variable

1960–1995

Overall

80

Exports

1996

Overall

53

Exports + Imports

1962–1996

Overall

130

Imports

Explanatory Variables and Results ASEAN1(+,∗∗∗ ), ASEAN2(+,∗∗ ), ASEAN3(+∗∗ , −) APEC89-1(+−), APEC89-2(+,∗∗∗ , −), APEC89-3(+−) EAEC1(+∗∗∗ ), EAEC2(+∗∗∗ ), EAEC3(+∗∗∗ ) APEC951(+ ∗ ∗, −), APEC952(+, ∗∗∗ ), APEC95-3(+, ∗∗∗ , −) FTA∗ GDP(−, ∗∗ ), FTA∗ Pop(+,∗∗ ), FTA∗ Distance(−) FTA∗ Border(+), FTA∗ Hazard(−), NFTA∗ Hazard(−, ∗∗ )

223

b763-ch06

(Continued)

B-763

EU(+, ∗∗∗ ), EU–im(+, ∗ ), EU–ex(+, ∗∗∗ ) ANDEAN(+, ∗ ), ANDEAN–im(−, ∗∗∗ ), ANDEAN–ex(−, ∗∗∗ ) CACM(+, ∗∗∗ ), CACM–im(−, ∗∗∗ ), CACM–ex(+−) LAFTA(+, ∗∗∗ ), LAFTA–im(−, ∗∗∗ ), LAFTA–ex(−, ∗ ) MERCOSUR(−), MERCOS–im(−, ∗∗∗ ), MERCOS–ex(−) NAFTA(+), NAFTA–im(−, ∗∗∗ ), NAFTA–ex(+, ∗ ) ASEAN(+, ∗∗∗ ), ASEAN–im(−, ∗∗∗ ), ASEAN–ex(+, ∗∗∗ )

9in x 6in

Carrer (2003)

(Continued )

The Impacts of FTAs on Trade Flows

Baier and Bergstrand (2002)

November 17, 2009 14:4

Table A.1.

Reference

(Continued )

Period

Sector

No. of Countries

Dependent Variable

Explanatory Variables and Results

Martinez-Zarzoso and NowakLehmann (2003)

1988–1996

Overall

20

Exports + Imports

Elliot and Ikemoto (2004)

1982–1999

Overall

35

Imports

ASEAN(+∗∗∗ ), imASEAN(+∗∗∗ ), exASEAN(+∗∗∗ ) EEC(+, ∗∗ ), imEEC(+∗∗∗ ), exEEC(+∗∗∗ ) NAFTA(+∗∗∗ ), imNAFTA(−∗∗∗ ), exNAFTA(−∗∗∗ )

Nguyen and Yoshizo (2005)

1988–2002

Overall

39

Exports

AFTA(+∗∗∗ ), imAFTA(+∗∗∗ ), exAFTA(+∗∗∗ ) EU(−∗∗∗ ), imEU(−∗∗∗ ), exEU(−∗∗∗ ), MERCO(+∗∗∗ ), imMERCO(+∗∗∗ ), exMERCO(−∗∗∗ ) NAFTA(+∗∗ ), imNAFTA(+∗∗∗ ), exNAFTA(−∗∗∗ )

Cheng and Tsai (2005)

1981–1997

Overall

44 + 57

Exports

EEC(+−, ∗∗ ), EFTA(+, ∗∗ ), EU(+, ∗∗ ), CUSFTA(+, ∗∗ ), NAFTA(+∗∗∗ ) EEC–exp & imp (+−, ∗∗ ), EFTA–exp & imp (+−, ∗∗ ), EU–exp & imp (−∗∗ ), CUSFTA–exp & imp(−, ∗∗ ), NAFTA–exp & imp(+−, ∗∗ ), LAFTA-exp & imp(+−, ∗∗ ) MERCOSUR–exp & imp(+−, ∗∗ )

November 17, 2009 14:4

224

Table A.1.

EU(+, ∗ ), MERCOSUR(+, ∗ )

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Shujiro Urata and Misa Okabe

b763-ch06

(Continued)

Reference

November 17, 2009 14:4

Table A.1.

(Continued ) Explanatory Variables and Results

Rose (2005)

1948–1999

Overall

175

Exports + Imports

FTA(+∗∗∗ ), GSP(+∗∗∗ ) WTO1(−, ∗ ), WTO2(−∗ ) IMF1(−∗∗∗ ), IMF2(−,**) OECD1(+∗∗∗ ), OECD2(+∗∗∗ )

Gilbert et al. (2004)

1984–1998

4 sectors

38

Exports + Imports

EU(−, agriculture−∗∗ ), NAFTA(−), AFTA(+∗∗ ), CER(+), MERCOSUR(+−), Andean Pact(−∗∗ , agriculture+−) APEC(+∗∗∗ ) EU(+−), NAFTA(−∗∗∗ ), AFTA(−∗∗ ), CER(−∗∗∗ , agri−∗∗ ), MERCOSURopen(−∗ , agri+∗∗∗ ), Andean Pact open (−∗∗∗ , agri+−), APEC open(+)

Jayasinghe and Sarker (2004)

1985–2000

6 agrifood sectors

59

Exports + Imports

NAFTA bloc effects are significant on vegetable and meat. NAFTA trade diversion are on meat, vegetable, fruits, sugar, but diminishing over time.

Endoh (2005)

1970–1995

3 sectors;

63

Exports + Imports

GATT(+∗∗∗ ), GSTPbase(−∗∗∗ ), GSTP85,90,95(+∗∗∗ ) GSTP9095(+∗∗∗ ), GSTP95(+) Africa(−∗∗∗ ), Americas(+∗∗∗ ), Asia(+∗∗∗ ) Europe(−, ∗ ), Oceania(+, ∗ ) 225

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Dependent Variable

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No. of Countries

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Sector

The Impacts of FTAs on Trade Flows

Period

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226 Table A.2. Albania Algeria Angola Antigua and Barbuda Argentina Armenia Australia Austria Azerbaijan, Rep. of Bahamas, The Bahrain, Kingdom of Bangladesh Belarus Belgium BelgiumLuxembourg Belize Benin Bhutan Bolivia Bosnia & Herzegovina Botswana Brazil Bulgaria Burkina Faso Burundi Cambodia Cameroon Canada Cape Verde Central African Rep. Chad Chile China, P.R.: Mainland China, P.R.: Hong Kong Colombia Comoros Congo, Dem. Rep. of Congo, Republic of Costa Rica

Sample economies; Estimation 1.

Cˆ ote d’Ivoire Croatia Cuba Cyprus Czech Republic Denmark Djibouti Dominica Dominican Republic Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Fiji Finland France French Polynesia Gabon Gambia, The Georgia Germany Ghana Greece Grenada Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras Hungary Iceland India Indonesia Iran, I.R. of Iraq Ireland Israel Italy Jamaica Japan Jordan Kazakhstan Kenya

Kiribati Korea Kuwait Kyrgyz Republic Lao People’s Dem.Rep Latvia Lebanon Lesotho Liberia Libya Lithuania Luxemburg Macedonia, Fyr Madagascar Malawi Malaysia Maldives Mali Malta Mauritania Mauritius Mexico Moldova Mongolia Morocco Mozambique Namibia Nepal Netherlands New Caledonia New Zealand Nicaragua Niger Nigeria Norway Oman Pakistan Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Romania Russia (Continued)

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The Impacts of FTAs on Trade Flows

Table A.2. Rwanda Samoa Sao Tome and Principe Saudi Arabia Senegal Serbia and Montenegro Seychelles Sierra Leone Singapore Slovak Republic Slovenia Solomon Islands South Africa Spain Sri Lanka St. Kitts and Nevis

Table A.3. Algeria Argentina Australia Austria Belgium Bolivia Brazil Bulgaria Canada Chile China, Mainland China, Hong Kong Colombia Denmark Ecuador Egypt Ethiopia Finland France Germany Ghana Greece

St. Lucia St. Vincent and Grens. Sudan Suriname Swaziland Sweden Switzerland Syrian Arab Republic Tajikistan Tanzania Thailand Togo Tonga Trinidad and Tobago Tunisia

(Continued ) Turkey Turkmenistan Uganda Ukraine United Arab Emirates United Kingdom United States Uruguay Uzbekistan Vanuatu Venezuela, Rep. Bol. Vietnam Yemen Arab Rep. Zambia Zimbabwe

Sample economies and the largest city; Estimation 2. Hungary Iceland India Indonesia Iran, I.R. of Ireland Israel Italy Japan Kenya Korea Kuwait Libya Luxemburg Malaysia Mexico Morocco Netherlands New zealand Nigeria Norway Pakistan

Paraguay Peru Philippines Portugal Romania Saudi Arabia Singapore South Africa Spain Sudan Sweden Switzerland Thailand Tunisia Turkey United Arab Emirates United Kingdom United States Uruguay Venezuela

227

FTAs included in “general FTA” dummy. Enforced

E

Belgium, Germany, France. Italy, Luxemburg, Netherlands Denmark, Ireland, United Kingdom, Switzerland, Iceland, Norway Algeria (1976), Syria (1977), Greece (1981), Portugal, Spain (1986), Romania (1993), Bulgaria (1993), Austria, Finland, Sweden (1995), Turkey (1996), Tunisia (1998), South Africa, Morocco, Israel, Mexico (2000), Croatia, Jordan (2002), Chile, Lebanon (2003), Egypt (2004)

195

EFTA

United Kingdom, Austria, Sweden, Switzerland, Denmark, Norway, Portugal Iceland (1970), Turkey (1992), Israel, Romania, Bulgaria (1993), Morocco (1999), Yugoslavia FR, Mexico (2001), Jordan, Croatia (2002), Singapore (2003), Chile (2004), Tunisia (2005)

196

CACM

Guatemala, El Salvador, Honduras, Nicaragua

196

CARICO

Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Surinam, Trinidad and Tobago

197

197

Australia, Papua New Guinea,

197

SPARTECA

Australia, New Zealand, Cook Islands

198

LAI

Argentine, Bolivia, Brazil, Chile, Colombia, Ecuador, Chile, Mexico, Paraguay, Peru, Uruguay, Venezuela

198

Australia, New Zealand

198

Colombia, Ecuador, Peru, Bolivia, Venezuela

198

GST

Algeria (1990), Argentina (1990), Bangladesh (1989), Benin (1989), Bolivia (1989), Brazil (1991), Cameroon (1992), Chile (1989), Colombia (1997), Cuba (1989), DPR Korea (1989), Ecuador (1990), Egypt (1989), Ghana (1990), Guinea (1990), Guyana (1989), India (1989), Indonesia (1989), Iran (1992), Iraq (1989), Libya (1989), Malaysia (1989), Mexico (1989), Morocco (1997),

198

(Continued)

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CE CA

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PATCR

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Member Countries and Accession

Shujiro Urata and Misa Okabe

Agreement

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228

Table A.4.

Agreement

November 17, 2009 14:4

Table A.4.

(Continued )

Member Countries and Accession

Enforced

Argentina, Brazil, Paraguay, Uruguay, Venezuela

199

Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand Vietnam (1995), Laos, Myanmar (1997), Cambodia (1999)

199 199

Angola, Burundi, Comoros, Djibouti, DR Congo, Egypt, Eritrea, Ethiopia, Kenya, Lesotho, Libya, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Tanzania, Uganda, Zambia, Zimbabwe

199

CI

Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Ukraine, Uzbekistan, Azerbaijan (1993), Georgia (1993)

199

SAPT

Bangladesh, Nepal, Bhutan, Pakistan, India, Sri Lanka, Maldives

199

CEFT

Hungary, Poland, Czech, Slovak, Slovenia, Romania, Bulgaria

199

CEFTA accession of

Romania (1997), Bulgaria (1999), Croatia (2003)

CEMA

Cameroon, R Chad, R Congo, Equatorial Guinea, Gabon

199

WAEMU/UEMO

Benin, Burkina Faso, Cˆ ote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal

200

EA

Kenya, Uganda, Tanzania

200

SAD

Angola, Botswana, Lesotho, Malawi, Mozambique, Swaziland, Tanzania, Zambia, Zimbabwe, Namibia, South Africa, Mauritius, DR Congo, Madagascar, Seychelles

200 (Continued) 229

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Canada, Mexico, USA

COMES

B-763

NAFT

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MERCOSUR AFT

The Impacts of FTAs on Trade Flows

Mozambique (1990), Myanmar (1997), Nicaragua (1989), Nigeria (1989), Pakistan (1989), Peru (1989), Philippines (1992), Rep. Korea (1989), Romania (1989), Singapore (1989), Sri Lanka (1989), Sudan (1991), Thailand (1990), Trinidad and Tobago (1989), Tunisia (1989), Tanzania (1989), Venezuela (1999), Vietnam (1989), Zimbabwe (1989)

B-763 b763-ch06

(Continued)

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2003 1991 1985 1993 1993 1994 1995 1995 1995 1995 1995 1995 1996 1996 1996 1996 1997 1997 1997 1998 1998 1998 1998 1998 1999 1999 1999 2000

Shujiro Urata and Misa Okabe

ASEAN–China Laos–Thailand United States–Israel Armenia–Russian Federation Kyrgyz Republic–Russian Federation Georgia–Russian Federation Romania–Moldova Costa Rica–Mexico Faroe Islands–Switzerland Kyrgyz Republic–Armenia Kyrgyz Republic–Kazakhstan Armenia–Moldova Georgia–Ukraine Georgia–Azerbaijan Kyrgyz Republic–Moldova Armenia–Ukraine Canada–Israel Turkey–Israel Canada–Chile Kyrgyz Republic–Ukraine Romania–Turkey Kyrgyz Republic–Uzbekistan Mexico–Nicaragua Georgia–Armenia Bulgaria–Turkey Georgia–Kazakhstan Chile–Mexico Georgia–Turkmenistan

Enforced year

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(Continued )

230

Table A.4.

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Table A.4.

(Continued )

Agreement

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231

2000 2000 2000 2001 2001 2001 2001 2001 2001 2001 2001 2002 2002 2002 2002 2002 2003 2003 2003 2003 2003 2004 2004 2004 2004 2004 2004 2004 2004

The Impacts of FTAs on Trade Flows

Bulgaria–Former Yugoslav Republic of Macedonia Israel–Mexico Turkey–Former Yugoslav Republic of Macedonia New Zealand–Singapore Guatemala–Mexico El Salvador–Mexico Honduras–Mexico Romania–Israel India–Sri Lanka United States–Jordan Armenia–Kazakhstan Bulgaria–Israel Chile–Costa Rica Chile–El Salvador Canada–Costa Rica Japan–Singapore Panama–El Salvador Croatia–Albania Turkey–Croatia Singapore–Australia Albania–Bulgaria China–Macau, China China–Hong Kong, China United States–Singapore United States–Chile Republic of Korea–Chile Moldova–Croatia Albania–Moldova Moldova–Bulgaria

Enforced year

Definition

Expected Signs

GDP

Log of real GDP

+

World Bank, WDI, IFS, IMF

per capita GDP

Log of per capita GDP, real GDP divided by total population

+

World Bank, WDI, IFS, IMF

Distance Adjacency Language FTA EU1 EU2

Log of distance in km between the largest city of country i and j Dummy variable if a country pair has common languages. Dummy variable if a country pair share a land border Dummy variable if a country pair belongs to the same FTA. Dummy variable if a country pair belongs to EU Dummy variable if country i is a member of EU and country j is not a member. Dummy variable if country i is not a member of EU and country j is a member. Dummy variable if a country pair belongs to NAFTA Dummy variable if country i is a member of NAFTA and country j is not a member. Dummy variable if country i is not a member of NAFTA and country j is a member.

− + +

NAFTA3

(Continued)

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Export value of country i to j Food and live animals Apparel Iron and steel Electrical and electronic equipment Motor vehicles for the transport of persons

B-763

Export

NAFTA1 NAFTA2

Rose (2005), IMF, Direction of Trade Statistics UN, COMTRADE SITC code 0 HS code 61 HS code 72 HS code 85 HS code 8703

9in x 6in

Average of bilateral trade flows ((Exportij + Exportji + Importij + importji)/4), deflated by US

Shujiro Urata and Misa Okabe

Trade

EU3

CPI

Source

November 17, 2009 14:4

Variables

List of variables.

232

Table A.5.

Variables AFTA1 AFTA2 AFTA3

MERCOSUR3 ASEAN–China 1 ASEAN–China 2 ASEAN–China 3

EU–Mexico 2 EU–Mexico 3

Source

Dummy variable if a country pair belongs to AFTA Dummy variable if country i is a member of AFTA and country j is not a member. Dummy variable if country i is not a member of AFTA and country j is a member. Dummy variable if a country pair belongs to MERCOSUR Dummy variable if country i is a member of MERCOSUR and country j is not a member. Dummy variable if country i is not a member of MERCOSUR and country j is a member. Dummy variable if a country pair belongs to ASEAN–China FTA Dummy variable if country i is a member of ASEAN–China FTA and country j is not a member. Dummy variable if country i is not a member of ASEAN–China FTA and country j is a member. Dummy variable if a country pair belongs to EU–Mexico FTA Dummy variable if country i is a member of EU–Mexico FTA and country j is not a member. Dummy variable if country i is not a member of EU–Mexico FTA and country j is a member. Dummy variable if a country pair belongs to CER Dummy variable if a country pair belongs to Japan–Singapore FTA

233

(Continued)

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CER Japan–Singapore FTA

Expected Signs

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EU–Mexico 1

Definition

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MERCOSUR2

(Continued )

The Impacts of FTAs on Trade Flows

MERCOSUR1

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Table A.5.

Variables Japan–Mexico FTA Korea–Chile FTA Singapore–USA FTA

(Continued )

Definition

Expected Signs

Source

Dummy variable if a country pair belongs to Japan–Mexico FTA Dummy variable if a country pair belongs to Korea–Chile FTA Dummy variable if a country pair belongs to Singapore–USA FTA

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Table A.5.

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The Impacts of FTAs on Trade Flows Table A.6. Variable ln Trade ln GDP ln GDP per capita IncomeGAP ln Distance Adjacency Common language General FTA EU 15 NAFTA AFTA MERCOSUR CER ASEAN–China EU–Mexico Japan–Singapore Japan–Mexico Korea–Chile US–Singapore

Table A.7.

235

Basic statistics of variable of Eq. (1). Obs.

Mean

Std. Dev.

265,522 265,414 265,414 265,414 265,522 265,454 265,454 265,522 265,522 265,522 265,522 265,522 265,522 265,522 265,522 265,522 265,522 265,522 265,522

10.01241 49.14773 17.15873 8.53369 8.17534 0.02828 0.21627 0.08790 0.00681 0.00014 0.00101 0.00056 0.00009 0.00009 0.00198 0.00017 0.000004 0.000008 0.000008

3.43835 2.63304 1.54378 1.37245 0.80596 0.16578 0.41170 0.28315 0.08224 0.01164 0.03181 0.02376 0.00931 0.00951 0.04442 0.01287 0.00194 0.00274 0.00274

Basic statistics of variable of Eq. (2).

Variables ln Export Food and live animals Apparel Iron and steel Electrical and electronic equipment Motor vehicles ln GDP i ln GDP j ln GDP per capita i ln GDP per capita j IncomeGAP ln Distance Adjacency Language EU NAFTA AFTA MERCOSUR ASEAN–China EU–Mexico CER Japan–Singapore Japan–Mexico Korea–Chile Singapore–USA

N

Mean

Std. Dev.

11,686 7,879 7,345 9,450 5,737 15,689 15,689 15,689 15,689 15,689 15,876 15,876 15,876 15,876 15,876 15,876 15,876 15,876 15,876 15,876 15,876 15,876 15,876 15,876

15.3921 12.8962 14.5908 15.5264 14.1710 25.4445 25.4445 8.5393 8.5393 8.7674 8.6719 0.0340 0.1051 0.0453 0.0015 0.0050 0.0050 0.0053 0.0265 0.0003 0.0003 0.0003 0.0003 0.0003

2.9395 3.4430 3.2123 3.5669 3.6134 1.5942 1.5942 1.5164 1.5164 1.4551 0.8778 0.1813 0.3066 0.2079 0.0389 0.0708 0.0708 0.0725 0.1607 0.0159 0.0159 0.0159 0.0159 0.0159

ln GDP 1 0.5281

ln GDP per cap

ln Distance

Adjacency

Language

FTA

EU

NAFTA

AFTA

1 −6E-04 −4E-04 0.0036 −9E-04 −2E-04 −1E-04

1 −0.001 0.004 −0.002 −5E-04 −2E-04

1 1 −0.383 −0.174 −0.182 −0.207 −0.019 −0.072 −0.04 −0.004 −0.095 −0.013 −3E-04

1 0.1484 0.1134 0.0816 0.0586 0.0634 0.0885 −0.007 0.0339 −0.002 −8E-04

1 0.0731 −0.017 0.0076 −0.012 0.0379 −0.016 −0.009 0.0279 −0.002

1 0.2646 0.0411 0.1164 0.084 0.0514 0.1555 0.0329 0.0137

1 −0.002 −0.004 −0.003 0.0036 0.4906 −0.001 −5E-04

0.0073 0.0053 0.0091

0.004 0.0037 0.0077

0.002 0.0049 0.0041

−4E-04 −6E-04 −6E-04

−0.001 −0.001 0.0082

0.0069 0.0097 0.0097

−2E-04 −4E-04 −4E-04

0 0 0

B-763

0.0407 −0.089 −0.134 −0.008 0.1826 0.0241 −0.025 0.0106 0.0125 0.1123 0.0185 0.0109

9in x 6in

0.1273 −0.023 −0.201 0.1085 0.1731 0.0419 0.0145 0.0218 0.0218 0.1027 0.0123 0.0113

Shujiro Urata and Misa Okabe

ln GDP ln GDP per capita ln Distance Adjacency Language FTA EU NAFTA AFTA MERCOSUR ASEAN–China EU–Mexico CER Japan– Singapore Japan–Mexico Korea–Chile Singapore–USA

Correlation matrix of explanatory variables of Eq. (1), pooled data.

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Table A.8.

−1E-04 −1E-04 −1E-04

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(Continued )

EU–MEX

CER

1 0.0033 −0.002 −3E-04 −1E-04

1 0.071 −9E-04 0.0078

7 −7E-04 −3E-04

1 −1E-04

−1E-04 −1E-04 −1E-04

0.0056 0.0079 0.0079

−1E-04 −2E-04 −2E-04

0 0 0

JPN–SGP

JPN–MEX

KOR–CHL

SGP–USA

1 0 0 0

1 0 0

1 0

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ASEAN China

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MERCOSUR

The Impacts of FTAs on Trade Flows

ln GDP ln GDP per capita ln Distance Adjacency Language FTA EU NAFTA AFTA MERCOSUR ASEAN–China EU–Mexico CER Japan– Singapore Japan–Mexico Korea–Chile Singapore–USA

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Table A.8.

1

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References Aitken, ND (1973). The effect of the EEC and EFTA on European trade: A temporal cross-section analysis. American Economic Review, 63, 881–892. Baier, SL and JH Bergstrand (2002). On the endogeneity of international trade flows and free trade agreements. American Economic Association annual meeting, Atlanta, January. Braga, JC and JA Mendez (1985). Economic integration among developed, developing and centrally planned economies: A comparative analysis. Review of Economics and Statistics, 67(4), 549–556. Blundell, R and S Bond (1997). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87, 115–143. Carrere, C (2003). Revisiting the effects of Regional Trading Agreements on trade flows with proper specification of the gravity model. Working Paper, CERDI, 2003.10. Chen, IH and YY Tsai (2005). Estimating the staged effects of regional economic integration on trade volumes. Working Paper, Department of Applied Economics, National University of Kaohsiung. Elliot, RJ and K Ikemoto (2004). AFTA and the Asian crisis: Help or hindrance to ASEAN intra-regional trade? Asian Economic Journal, 18(1), 1–23. Endoh, M (1999a). Trade creation and trade diversion in the EEC, the LAFTA and the CMEA: 1960–1994. Applied Economics, 31(2), 207–216. Endoh, M (1999b). The transition of postwar Asia Pacific trade relations. Journal of Asian Economics, 10(4), 571–589. Endoh, M (2005). The effects of the GSTP on trade flow: Mission accomplished? Applied Economics, 37(5), 487–496. Fukao, K, T Okubo, and RM Stern (2003). An econometric analysis of trade diversion under NAFTA. Discussion Paper No.491, Research Seminar in International Economics, University of Michigan. Frankel, JA (1997). Regional Trading Blocs in the World Economic System. Washington, DC: Institute for International Economics. Frankel, JA, E Stein, and SJ Wei (1995). Trading blocs and the Americas: The natural, the unnatural, and the super-natural. Journal of Development Ecohnomics, 47(1), 61–95. Gilbert, J, R Scollay, and B Bora (2004). New regional trading developments in the Asia Pacific region. In Global Change and East Asian Policy Initiatives, S Yusuf, M Altaf and K Nabeshima (eds.), pp. 121–190. Washington, DC: The World Bank. Jayasinghe, S and R Sarker (2004). Effects of regional trade agreements on trade in agrifood products: Evidence from gravity modelling using disaggregated data. Working Paper 04-374, Center for Agricultural and Rural Development, Iowa State University. Kiyota, K and S Urata (Forthcoming). The role of multinational firms in international trade: The case of Japan. Japan and the World Economy.

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Martinez-Zarzoso, I and F Nowak-Lehmann (2003). Augmented gravity model: An empirical application to Mercosur–European union trade flows. Journal of Applied Economics, 6, 291–316. Maskus, KE (1983). Evidence on shifts in the determinants of the structure of U.S. manufacturing foreign trade, 1958–76. Review of Economics and Statistics, 65, 415–422. Nguyen, TK and H Yoshizo (2005). Economic analysis of ASEAN Free Trade Area; By a country panel data, Discussion Papers in Economic and Business, 5–12, Osaka University. P¨ oyh¨ onen, P (1963). A tentative model for the flows of trade between countries. Weltwirtschatftliches Archiv, 90(1), 93–100. Rose, A (2005). Which international institutions promote international trade? Review of International Economics, 13(4), 682–698. Schiff, M and LA Winters (2003). Regional Integration and Development. Washington, DC: The World Bank. Soloaga, I and LA Winters (2000). Regionalism in the nineties: What effect on trade? CEPR Discussion Papers 2183. Tinbergen, J (1962). Shaping the World Economy: Suggestions for an International Economic Policy. New York: The Twentieth Century Fund.

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Chapter 7

ON THE USE OF FREE TRADE AGREEMENTS BY JAPANESE FIRMS∗ KATSUHIDE TAKAHASHI Department of Economics, Kokugakuin University, Tokyo, Japan SHUJIRO URATA RIETI and the Graduate School of Asia-Pacific Studies, Waseda University, Tokyo, Japan

1. Introduction This chapter evaluates Japan’s existing free trade agreements (FTAs) from a user’s viewpoint. The paper analyses data based on a questionnaire survey concerning the use of preferential tariff schemes under FTAs. In addition to making some observations on the use of FTAs by Japanese firms, we try to identify the determinants of this use by conducting an econometric analysis. As of July 2007, 143 FTAs were in effect worldwide. In the 1990s, 48 agreements were formed and 76 new agreements have been created since 2000. Such acceleration in new FTAs is because WTO negotiations * An earlier version of this paper was prepared for and presented at the RIETI International Symposium, Assessing Quality and Impacts of Major Free Trade Agreements on 22–23 March 2007. The authors would like to thank Hidehiro Okayama and other participants at the symposium and Masahisa Fujita, Ryuhei Wakasugi, and Masahiko Ozaki at RIETI study workshops for their helpful comments. The authors would also like to acknowledge Ryoji Asano and the Osaka Chamber of Commerce for providing useful information.

241

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have been slow to bear fruit and thus an increasingly large number of countries started to pursue FTAs as a supplement (Japan External Trade Organization, 2007b). As of November 2007, Japan had concluded several FTAs. The Japan– Singapore FTA went into force in November 2002, Japan–Mexico in April 2005, Japan–Malaysia in July 2006, Japan–Chile in September 2007, and Japan–Thailand in November 2007. The Japan–Singapore FTA is historically important, as Munakata (2006) pointed out, in that it was clear that unless Japan could conclude an FTA with Singapore, it would not be able to implement any further FTAs. Now that five years have passed since the enactment of the Japan–Singapore FTA, and more than two years since the Japan–Mexico FTA, the time has come for an assessment. According to The Economist (23 August 2007), Japan’s FTAs with East Asian countries are no doubt intended to lessen Japan’s dependence on the US economy. But it is also aimed in part at counterbalancing a similar campaign by China to improve its regional influence and its access to Southeast Asian markets. However, recently some critics have questioned whether FTAs are being fully utilised by Japanese firms, especially by small- and medium-sized companies. The tariff preferences offered by FTAs have reportedly been eroded by the complicated rules of origin and the related compliance costs. In response to these questions, several questionnaire surveys have been conducted to analyse the use of FTAs by Japanese firms. For example, the Japan Bank for International Cooperation (2005) reports that 13.5% of Japanese firms used the ASEAN Free Trade Area (AFTA), 6.6% used the China–ASEAN FTA, and 5.5% used the Japan–Singapore FTA. According to a survey by the Japan External Trade Organization (2007a), 5.1% of exporters (37 of 729) utilised preferential tariff schemes under FTAs already in effect in the Asia-Pacific region (AFTA, Japan–Malaysia FTA, Thailand– Australia FTA, etc.). When firms were asked to name the FTA(s) under which preferential tariff scheme(s) were being utilised, the AFTA was cited most (24 firms), followed by the Japan–Malaysia (15 firms) and Thailand– Australia (8 firms) FTAs. These results show the low utilisation of FTAs by Japanese firms. As mentioned, this paper analyses the use of FTAs by Japanese firms based on the results of a questionnaire survey. Section 2 gives a brief description of the survey before examining its results concerning use, difficulty in utilising FTAs, etc., while Section 3 conducts an econometric analysis to identify the determinants or characteristics of the firms using FTAs. Section 4 presents some concluding remarks.

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2. Use of FTAs by Japanese Firms: Survey Results 2.1. Questionnaire In November 2006, the Osaka, Kobe, and Kyoto Chambers of Commerce and Industry, along with the JETRO Osaka branch, jointly conducted a survey on the use of FTAs by Japanese firms.1 They did this because they suspected that the application for certificates of origin, which is required to take advantage of preferential tariffs under FTAs, had been less active than expected in some areas. A questionnaire was e-mailed to 4204 member companies, of which 469 responded, with a response rate of 11.2%. The attributes of the responding companies are described in detail in the Appendix. This survey was designed to reveal the behaviour of Japanese firms in their use/non-use of FTAs. Therefore, some questions in the survey are very straightforward, such as “Have you used FTAs?” and “If not, why?” 2.2. Utilisation rate of FTAs Table 1 shows the utilisation rate of three FTAs: Japan–Singapore, Japan– Mexico, and Japan–Malaysia. In the case of the Japan–Singapore FTA, which went into effect in November 2002, only 17 of the 469 responding firms reported using it, for a utilisation rate of merely 3.6%, which is comparable to the 5.5% in the JBIC survey. To grasp the utilisation rate more accurately, it was considered better to exclude the firms that reported no trade relationship with Singapore as they had no reason to use the FTA. After making this adjustment, the utilisation rate increased only slightly to 4.6%. The low utilisation was probably because there was no reason for Japanese firms to use the Japan–Singapore FTA since most products imported to Singapore from Japan enjoyed a tariff-free treatment. In the case of the Japan–Mexico FTA, 59 of the 469 firms reported using it, a rate of 12.6%. This went up to 17.6% after we excluded the firms with no trade relationship with Mexico. Many companies use the FTA for export to Mexico and only one company uses the FTA for import from Mexico. This observation reflects the fact that Japanese export-oriented automobile and steel companies were actively using the FTA with Mexico. In the case of the Japan–Malaysia FTA, 26 of 469 firms reported using the FTA, a rate of 5.5%. This rose to 7.0% after excluding the firms with 1 Those

who wish to apply for a certificate of origin, regardless of the type of application, corporation, or individual, need to follow the procedure for “registration of applicants for certificates related to international trade”. Completion of the procedure is required for all applicants, regardless of membership or non-membership in the Chamber of Commerce.

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244

Table 1.

Utilisation of FTAs.

Classification Have used FTAs (total) Both export and import Export Import Others Have heard of FTAs but have not used any Never heard of FTAs but have interest Never heard of FTAs and have no interest No answer Total

Singapore

Mexico

Malaysia

17 3.6% 8 1.7% 5 1.1% 3 0.6% 1 0.2% 246 52.5% 57 12.2% 119 25.4% 30 6.4%

59 12.6% 8 1.7% 45 9.6% 1 0.2% 5 1.1% 205 43.7% 21 4.5% 150 32.0% 34 7.2%

26 5.5% 8 1.7% 10 2.1% 7 1.5% 1 0.2% 237 50.5% 56 11.9% 121 25.8% 29 6.2%

469

469

469

no trade relationship with Malaysia. Utilisation may be biased downwards because of the relatively recent enactment of the agreement. It is interesting to note that around half the respondents reported hearing of the FTAs but had no experience in using them. Approximately a quarter (Japan–Singapore and Japan–Malaysia FTA) and a third (Japan– Mexico FTA) of the total respondents reported never having heard of the FTAs. These findings indicate the need for the Chamber of Commerce and JETRO to promote the use of FTAs to Japanese companies.

2.3. Reasons for low utilisation rate Table 2 shows some of the reasons for firms not using FTAs. As was shown in the previous section, many companies have heard of FTAs but never used them, and the questionnaire addressed this issue. Many firms have no incentive to use FTAs. A large number of respondents answered that their trade with these three countries was so small they could not see that paying the cost of obtaining the documents necessary for using the relevant FTA would yield them any profit. This answer gets to the heart of the problem. Although these three countries are important trading partners for some Japanese companies, in

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On the Use of FTAs by Japanese Firms Table 2.

Reasons for not using FTAs.

Reasons Lack of knowledge/do not know how to use Complicated procedures to acquire the certificate of origin Tariff preference by FTAs is too small and have no incentive to use EPA Already have preferential treatment with trading partners without FTAs Trade volume with trading partner is very small and have no incentive to use FTAs Other No answer Total

245

Singapore

Mexico

Malaysia

56 22.8% 2 0.8%

33 16.0% 3 1.5%

57 24.1% 7 3.0%

9 3.7% 2 0.8%

2 1.0% 0 0.0%

5 2.1% 0 0.0%

125 50.8%

112 54.6%

111 46.8%

43 17.5% 9 3.7%

37 18.0% 18 8.8%

37 15.6% 20 8.4%

246

205

237

terms of volume of trade they are not necessarily as important as countries such as China and the United States. Mexico accounted for a mere 1.4% of Japan’s overall exports in 2006, with Singapore and Malaysia each at 2.0%. Almost one-fourth of the companies answered that they did not use FTAs because they did not know them in detail or know how to use them.2 These findings indicate that existing FTAs are not attractive to many Japanese companies. Mexico and Malaysia are not necessarily major trading partners for many Japanese companies. Singapore is a different story, as will be discussed below. Asked about the important trading partners, the respondents indicated China as the most important trading country (Table 3); 129 companies ranked China highest, while 81 firms chose the United States and 40 firms placed Korea at the top. Following in perceived importance were Taiwan, Singapore, Hong Kong, Indonesia, and Thailand. Traditionally, Mexico and Malaysia have not been regarded as important trading partners for Japanese firms. Singapore is cited as a major trading partner by some companies. Therefore, the question arises as to why Japanese firms do not use the Japan–Singapore FTA. This is because Singapore has a low tariff protection 2 Contrary

to expectations of the researchers, few companies answered that complicated application procedure is an obstacle.

129 71 46 30 32

United States United States Korea Taiwan United States

81 44 43 29 17

Korea Korea United States China Singapore

40 43 33 24 17

Taiwan Taiwan Thailand Thailand Thailand

27 34 29 22 15

Hong Kong Thailand China Singapore China

24 29 28 22 15

Indonesia Hong Kong Singapore United States Indonesia

13 27 27 14 14

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China China Taiwan Korea Taiwan

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First Second Third Fourth Fifth

Major trading partners of respondents (multiple answers).

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Table 3.

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on imports from Japan, reducing the need for Japanese companies to use the FTA.3 2.4. Impacts of FTAs on Japanese companies Do FTAs have positive effects on businesses? The results of responses regarding the Japan–Mexico and Japan–Malaysia FTAs are shown in Table 4.4 Approximately 20% of respondents indicated an increase in sales, while a majority indicated no change in sales or no clear effects. It seems that FTAs have positive effects on businesses, but it is still too early to make a conclusive assessment. Regarding difficulty or ease of using FTAs, some companies complained that because the procedure of completing application forms is timeconsuming and costly, they do not use FTAs. Many respondents indicated no major problems, but a few of them appeared to have some sort of issue (Table 5). The proportion of respondents with complaints was larger in the Table 4.

Effects of FTAs with Mexico and Malaysia on business.

Classification

Mexico

Rate (%)

Malaysia

Increase of sales Increase of sales but no change of profit No change of sales Increase of cost and decrease of profit No clear effect thus far No answer

7 5 16 2 28 1

11.9 8.5 27.1 3.4 47.5 1.7

3 2 8 0 13 0

11.5 7.7 30.8 0.0 50.0 0.0

Total

59

100.0

26

100.0

Table 5.

Mexico (%) Malaysia (%)

Rate (%)

Assessment of the use of FTAs.

No Problem

No Major Problem

Small Problem

Should be Revised

No Answer

Total

8.5 3.8

50.8 34.6

25.4 50.0

10.2 3.8

5.1 7.7

100.0 100.0

3 In addition to trade, overseas bases are concentrated in China, the United States, and Thailand. In terms of production, China, Thailand, the US, and Indonesia are the important bases for Japanese firms. Singapore is utilised as a base for sales and local headquarters (see Table A.10). 4 Note that Singapore was ruled out from the analysis in this section because the number of respondents was so small and contains some extraordinary figures.

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case of the Japan–Malaysia FTA than the Japan–Mexico FTA. This difference may be due to the longer time in which the Japan–Mexico FTA has been in operation compared to the Japan–Malaysia FTA.

2.5. Attractive FTA partners Respondents were asked about their interests in future FTA partner countries (Table 6). This question was asked about the two groups of countries: one group with which Japan is currently negotiating FTAs (Table 6) and the other with which it is not (Table 7). Among the countries in the first group, many companies are eagerly expecting the conclusion of FTAs with Vietnam, ASEAN, Korea, India, and Indonesia. For future FTAs, Japanese companies have a very strong interest in an FTA with China, followed by the one with the US.

3. Determinants of the Use of FTAs: An Application of the Probit Model In this section we examine the determinants of the use of FTAs by Japanese companies. We are interested in modelling the decision of a firm on whether or not to use an FTA. For the analysis we apply the probit model, where the dependent variable, y, may take on only two values, zero or unity. If the firm chooses to use an FTA, then y is set to unity. If the firm decides not to use an FTA, then y is given zero.5 A set of explanatory variables, x, include the characteristics of the firms and industries (Table 8). As the explanatory variables related to firm characteristics, we choose the size of a firm, measured by the amount of paid-in capital (CAP), and the number of employees (EMP). We also include the information on overseas activities of a firm: the overseas sales ratio (ROS), defined as the ratio between overseas sales to overall sales (domestic and overseas sales), the ownership of an overseas affiliate in an FTA partner country (BSG), and information on the importance of an FTA partner country as a trading partner (TSG). For industry characteristics, we include a manufacturing industry dummy (MAN). Based on our recognition that large companies have abundant resources such as labour and capital to make use of FTAs, we expect the estimated coefficients on CAP and EMP to be positive. We expect the signs of the 5 On

the probit estimation, see Greene (2007) for an example.

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Table 6.

Attractive FTA partner countries (currently under negotiation).

Fairly

Not Very

89 62 9 98 94 86 69 22 48 47 23

175 145 38 165 183 172 205 54 103 134 77

81 86 106 73 77 68 74 102 82 88 112

No Export Interest 48 87 207 58 30 53 52 188 134 89 153

226 187 80 186 217 195 197 94 153 168 104

Import

Investment

Human Capital

Others

141 81 21 116 132 107 126 23 32 51 45

12 17 10 54 36 33 39 5 9 14 8

13 11 3 32 27 22 23 2 5 8 7

12 16 14 19 20 18 16 11 14 15 16

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Korea Indonesia Brunei Vietnam ASEAN India Asian community Chile GCC Australia Switzerland

How interested are you?

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250

Table 7. Attractive FTA partner countries (not currently under negotiation). Countries

Numbers

Fields of Interest (Multiple Answers) Export Import Investment Human Capital Others

China United States Taiwan Brazil

Table 8.

55 27 14 14

41 24 14 13

39 7 9 4

15 3 1 4

8 1 2 0

6 1 1 0

Definition of explanatory variables and expected sign.

Name Variable

Definition

Assigned Values

Expected Sign

MAN

Type of industry

= 1 if firm is a manufacturer, = 0 otherwise

?

CAP

Scale of capital

= 1 if firm’s capital is more than 1 billion, = 0 otherwise

+

EMP

Number of employees

= 1 if firm employs more than 100 workers, = 0 otherwise

+

ROS

Ratio of overseas sales

= 1 if firm’s overseas sales is more than 50%, = 0 otherwise

+

BSG

Owning business bases in Singapore, Mexico, or Malaysia

= 1 if firm has a business base (production, sales, or other) in Singapore, Mexico,or Malaysia = 0 otherwise

+

TSG

Is Singapore, Mexico, or Malaysia a major trading partner?

= 1 if firm has strong trade relationship with Singapore, Mexico, or Malaysia = 0 otherwise

+

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coefficients on ROS, ESG, and TSG to be positive, because a company that depends on its business in an FTA partner country is likely to use an FTA. To statistically discern the determinants of the use of an FTA, we conducted a probit estimation by applying several specifications. The results are shown in Table 9. The results show that large companies tend to use FTAs because the estimated coefficients on size, either measured by magnitude of paid-in capital (CAP) or by employment (EMP) are positive and statistically significant for all cases. As we postulated above, the use of FTAs requires a certain amount of human, financial, and other resources for obtaining certificates of origin. Furthermore, economies of scale are likely to play an important role in the use of FTAs. More concretely, a single copy of a certificate of origin can be used for exporting a product regardless of its quantity. As such, it may be profitable for an exporter to export a large quantity of the same product because one certificate of origin can be used for any quantity of exports for the same product. A comparison of the magnitude of the estimated coefficients on CAP and EMP for different FTAs reveals that large-sized firms are most significant in the case of the Japan–Malaysia FTA, while firm size matters least in the case of the Japan–Mexico FTA. The Japan–Singapore FTA resides somewhere between the other two. An examination of the utilisation of FTAs by large and small firms for the three FTAs shows consistent patterns. Specifically, FTA utilisation rates for large firms for the Japan–Mexico, Japan–Malaysia, and Japan–Singapore FTAs are 16.3%, 16.3%, and 10.5% respectively, while the corresponding rates for small firms are 11.7%, 2.5%, and 1.9%. Tests of the differences in these rates between large and small firms reveal a statistically significant difference for the Japan–Malaysia and Japan–Singapore FTAs, but no statistical difference for the Japan–Mexico FTA. These findings may indicate that a certificate of origin for the Japan–Mexico FTA is easier to obtain than others, enabling even small firms to utilise it. We need to investigate this issue further. The findings on the estimated coefficients on BSG show that a firm owning an affiliate in an FTA partner country tends to use the corresponding FTA in the case of the Japan–Singapore FTA, while such a relationship is not found to be statistically significant in the case of the Japan–Mexico or Japan–Malaysia FTAs. This finding may reflect that FTAs are used for intra-firm trade. Indeed, if both the exporter and importer belong to the same firm, the benefits of using an FTA may be more easily reaped. For TSG, we found that a firm with a strong trade relationship with an FTA partner country tends to use that FTA, as expected.

Mexico









−1.46∗∗∗ −1.57∗∗∗ −1.46∗∗∗ −1.57∗∗∗ −1.41∗∗∗ −1.48∗∗∗

0.26 0.19 0.26 0.19 0.23 0.15









−2.06∗∗∗ −2.19∗∗∗ −2.06∗∗∗ −2.22∗∗∗ −2.10∗∗∗ −2.22∗∗∗

−0.17 −0.27 −0.17 −0.27 −0.15 −0.27

1.04∗∗∗









−2.11∗∗∗ −2.24∗∗∗ −2.08∗∗∗ −2.18∗∗∗ −2.04∗∗∗ −2.11∗∗∗

−0.16 −0.26 −0.18 −0.28 −0.15 −0.23

0.77∗∗∗

Statistically significant ∗ at 10%,

∗∗ at

CAP 0.34∗ 0.34∗ 0.33∗

1.06∗∗∗ 1.07∗∗∗

0.77∗∗∗ 0.76∗∗∗

5%, and

EMP

0.41∗∗ 0.41∗∗

ROS

BSG

MacFadden R2

Obs.

1.90∗∗∗ 1.93∗∗∗ 1.9∗∗∗ 1.92∗∗∗ 1.93∗∗∗ 1.96∗∗∗

0.09 0.09 0.09 0.09 0.09 0.09

452 452 452 452 452 452

0.09 0.30

0.79∗∗∗ 0.71∗∗∗ 0.83∗∗∗ 0.81∗∗∗ 0.81∗∗∗ 0.81∗∗∗

0.18 0.14 0.18 0.13 0.18 0.13

456 456 456 456 456 456

0.70∗∗ 0.63∗∗∗ 0.70∗∗ 0.64∗∗ 0.80∗∗∗ 0.76∗∗∗

0.33 0.31 0.25 0.30

0.14 0.12 0.14 0.12 0.13 0.11

452 452 452 452 452 452

0.10 0.00 0.16 −0.11 0.10 0.15

0.38∗∗ 0.83∗∗∗ 0.94∗∗∗

−0.08 0.02 −0.09 0.02

0.93∗∗∗ 0.72∗∗∗ 0.70∗∗∗ 0.66∗∗∗ ∗∗∗ at

0.05 0.65

TSG

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MAN

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c

Katsuhide Takahashi and Shujiro Urata

Malaysia

Determinants of the use of FTAs.

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Table 9.

1%.

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This relationship is statistically significant in the cases of the Japan– Mexico and Japan–Malaysia FTAs. Though a positive sign for TSG was found for the Japan–Singapore FTA, the relationship is not statistically significant. 4. Concluding Remarks An examination of the use of FTAs by Japanese firms through a survey revealed that only 3–13% of the responding firms have used Japan’s FTAs with Singapore, Mexico, or Malaysia. One reason for this limited use is the low volume of trade with these FTA partner countries. Another reason is the limited benefits of using FTAs for many products because of the very low tariff rates on such products. Asked about attractive FTA partners, many firms indicated China, the US, and Korea. Statistical analysis of the determinants of the use of FTAs using firmlevel data shows that large firms are likely to use FTAs while small firms are not. This indicates that the use of FTAs requires labour and other resources to prepare the necessary documents such as certificates of origin. Firms with close trade and FDI relationships with FTA partner countries were found to be using FTAs. Our findings indicate the need to reduce the costs of using FTAs in order to expand their use. This is especially important for small firms, as they cannot afford to spend great resources to obtain necessary information and/or documents. It is important to simplify the application procedure and provide assistance for the use of FTAs through public and semi-public institutions such as the Ministry of Industry, Trade and Economy (METI); the Japan External Trade Organization (JETRO); and the Chamber of Commerce. Finally, it should be pointed out that the Japanese government should establish FTAs with Japan’s large trading partners, including the US, the EU, and China. Appendix: Characteristics of Questionnaire Respondents Table A.1.

Number Rate (%)

Location of respondents.

Osaka

Kyoto

Hyogo

Other Kansai Area

Others

Unknown

Total

347 74.0

24 5.1

40 8.5

7 1.5

31 6.6

20 4.3

469 100.0

Trade and Commerce

Finance

Transportation

Service

Others

Unknown

Total

205 43.7

191 40.7

0 0.0

13 2.8

15 3.2

27 5.8

18 3.8

469 100.0

Paid-in capital.

Less than 100 Million

101 Million–500 Million

501 Million–1 Billion

More than 1 Billion

Unknown

Total

239 51.0

66 14.1

11 2.3

86 18.3

67 14.3

469 100.0

Number Rate (%)

Number of employees.

Less than 20

20–49

50–99

100–499

500–999

1000 or More

Unknown

Total

125 26.7

58 12.4

63 13.4

116 24.7

37 7.9

51 10.9

19 4.1

469 100.0

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Table A.3.

Katsuhide Takahashi and Shujiro Urata

Manufacturing

Number Rate (%)

Number Rate (%)

Type of industry.

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Table A.2.

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Major commodities (multiple answers).

Metal

Machinery

Electronics

Transportation Machinery

Textile

Chemical Products

Food

Sundries

Others

Total

64 13.6

135 28.8

85 18.1

58 12.4

75 16.0

106 22.6

43 9.2

56 11.9

125 26.7

469 100.0

Conducting Foreign Trade

Domestic Trade Only

Unknown

Total

435 92.8

33 7.6

1 0.2

469 100.0

Number Rate (%)

Proportion of foreign trade in total sales.

90% and Above

75–89%

50–74%

25–49%

10–24%

Below 10%

Unknown

Total

71 15.1

36 7.7

57 12.2

72 15.4

79 16.8

117 24.9

3 0.6

469 100.0

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Table A.7.

Number Rate (%)

Foreign trade.

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Table A.6.

On the Use of FTAs by Japanese Firms

Number Rate (%)

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Table A.5.

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255

129 71 46 30 32

United States United States Korea Taiwan United States

81 44 43 29 17

Korea Korea United States China Singapore

Table A.9.

40 43 33 24 17

Taiwan Taiwan Thailand Thailand Thailand

27 34 29 22 15

Hong Kong Thailand China Singapore China

Overseas affiliates. Rate (%)

Owning overseas affiliates Planning to establish overseas affiliates No concrete plan No interest Unknown

246 67 103 48 5

52.5 14.3 22.0 10.2 1.1

Total

469

100.0

Indonesia Hong Kong Singapore United States Indonesia

13 27 27 14 14

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First Second Third Fourth Fifth

Trading-partner countries of respondents (number, multiple answers).

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Table A.8.

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On the Use of FTAs by Japanese Firms Table A.10. Number of Affiliates

China United States Thailand Singapore Hong Kong Taiwan Korea Indonesia Malaysia Vietnam Philippines

166 95 68 37 36 32 31 27 26 14 5

257

Overseas affiliates and their functions. Types of Business Activity (Multiple Answers) Production

Sales

Local Headquarters

Procurement

Others

102 34 41 9 0 16 8 21 14 10 3

92 75 48 34 31 22 26 15 19 5 3

9 16 6 7 3 1 1 1 2 0 0

21 7 10 4 2 3 5 1 2 1 0

24 15 9 3 7 6 6 3 4 4 1

References Greene, WH (2007). Econometric Analysis, 6th Ed. Prentice Hall: Upper Saddle River, NJ. Japan Bank for International Cooperation (2005). Report on Japanese Manufactures’ Overseas Business Operations FY 2005 Survey: Outlook for Japanese Foreign Direct Investment. Japan External Trade Organization (2007a). FY 2006 Survey of Japanese Firms’ International Operations. Japan External Trade Organization (2007b). White Paper on International Trade and Foreign Direct Investment. Munakata, N (2006). Transforming East Asia. Washington, DC: Brookings Institution Press.

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Chapter 8

IMPACTS OF JAPANESE FTAs/EPAs: PRELIMINARY POST EVALUATION∗ MITSUYO ANDO Keio University, Tokyo, Japan

1. Introduction Free trade agreements (FTAs) or regional trade agreements (RTAs) have been negotiated, established, and studied with increasing frequency and intensity. As of 1 March 2007, GATT/WTO has been notified of 396 FTAs/RTAs, 194 of which are in force. Of these, 150 have been in effect since the late 1990s.1 FTAs/RTAs are likely to have significant economic impacts on their members and non-members. The impacts may be greater when FTAs/RTAs also cover contents other than trade liberalisation such as foreign direct investment (FDI) liberalisation, trade and FDI facilitation, and economic cooperation. The global surge in interest in all aspects * This paper was published in The International Economy, 11, 2007, 57–83. The first version of the paper was presented at the RIETI Symposium, Assessing Quality and Impacts of Major Free Trade Agreements and appeared as RIETI Discussion Paper No. 07-E-41. It is published with the kind permission of the author and the Japan Society of International Economics. The author would like to thank Jeffery Schott and other participants at the symposium and Masahisa Fujita, Ryuhei Wakasugi, and Masahiko Ozaki at the RIETI seminar for helpful comments and suggestion. The author also thanks the Japanese Maquiladora Association (particularly Kazuaki Kawamura, Masato Murakami, and Masahisa Maeno), Takuya Takahashi, and Jose Castanuela for useful information on Mexico, and Shujiro Urata, Fukunari Kimura, and anonymous referees for excellent comments and suggestions. The author greatly acknowledges the financial support from Seimei-kai. 1 The information on FTAs/RTAs notified to the GATT/WTO is available from the WTO Website (http://www.wto.org/english/tratop e/region e/region e.htm).

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of FTAs/RTAs raises the need for closer evaluation — involving proassessment and post-evaluation — of their economic impacts.2 Japan has been actively involved in the development of bilateral/plurilateral trade agreements. This is particularly true of recent years. As of July 2007, Japan has three bilateral Economic Partnership Agreements (EPAs) in effect with Singapore, Mexico, and Malaysia: the Japan– Singapore Economic Partnership Agreement (JSEPA) was signed on 13 January 2002 and enforced on 30 November 2002, the Japan–Mexico EPA on 17 September 2004/1 April 2005, and the Japan–Malaysia Economic Partnership Agreement (JMEPA) on 13 December 2005/13 July 2006. In addition, as of July 2007, Japan has four bilateral EPAs signed with the Philippines on 9 September 2006, Chile on 27 March 2007, Thailand on 3 April 2007, and Brunei on 18 June 2007; and one substantive agreement for bilateral EPA with Indonesia. Further, negotiations have started on EPAs/FTAs with a number of other countries, including ASEAN as a whole, Australia, the Gulf Cooperation Council (GCC), India, Korea (suspended from November 2004), Switzerland, and Vietnam. Most empirical works estimating the effects of Japanese EPAs or hypothetical RTAs involving Japan have been based on simulation analyses, typically using computable general equilibrium (CGE) models.3,4 This is largely because Japanese EPAs/RTAs are so new that statistical data to estimate their impacts are not yet available, or because agreements themselves have not yet been concluded. Detailed post-assessment, however, is important, considering Japan’s active involvement in developing bilateral/plurilateral trade agreements, particularly in recent years.5 In this paper, we assess the impact of existing Japanese EPAs in their initial years and analyse the policy implications for possible future EPAs/RTAs. Given the recent enforcement of EPAs and the limited availability of data in the post period, our paper focuses on two existing EPAs: Japan–Singapore and Japan– Mexico. 2 There is a huge amount of empirical analysis on the economic impacts of the more than 10-year-old North American Free Trade Agreement (NAFTA), for both ex ante and ex post assessment. See, for instance, Hufbauer and Schott (1992, 1993) for pre-NAFTA analysis, Krueger (1999, 2000) for a preliminary assessment of its early years, Burfisher et al., (2001) for a survey of the impact of NAFTA on the United States, Fukao et al., (2003) for an analysis of trade diversion under NAFTA, and Hufbauer and Schott (2005) for the achievements and challenges of various aspects of NAFTA. 3 See Ando and Urata (2007) for a survey of the impacts of East Asian FTAs, including Japan. 4 Sazanami et al., (1995) and Kataoka and Kuno (2003) estimate the cost of trade protection in Japan within a framework of a partial equilibrium model, though their focus is not necessarily on trade liberalisation by FTAs. 5 See Kuno and Kimura (2007) for evaluation of trade liberalisation in Japanese EPAs, based on the number of tariff lines.

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The rest of the paper is organised as follows. Section 2 investigates patterns of Japanese trade and FDI with EPA partners. Section 2.1 provides an overview of patterns of Japanese trade and FDI with Singapore and Mexico to understand the overall structure of their relationship with EPAs. Section 2.2 investigates sectoral issues of Japanese trade with Mexico to assess in greater detail the effects of the EPA on trade and FDI. Section 2.3 examines the impact of Japanese EPAs on trade with Singapore and Mexico, using gravity model estimation.6 Section 3 discusses the effects of the Japan–Mexico EPA beyond trade liberalisation, and Section 4 concludes the paper.

2. Trade and FDI with EPA Partners 2.1. Overview Japan’s trade with Singapore has increased in the past few years (Table 1A), though this increase cannot readily be interpreted as the result of trade liberalisation through EPAs since the actual reduction of tariffs by the EPA is quite limited.7 Comparing the number of tariff lines committed to zero tariffs under the WTO with that under the EPA (Table 1B), tariffs may appear reduced in many tariff lines. For instance, the number of commodities committed to zero tariffs under the WTO/EPA in all industries on the Singapore side is 974 out of 5859, while that in agriculture, fishery, and forestry industries on the Japanese side is 428 out of 486. In fact, actual tariff removal by the EPA is observed in only four commodities in all industries on the Singapore side and none in agriculture, fishery, and forestry industries on the Japanese side. This is because MFN (most favoured nation) tariff rates are already zero for 4881 (=5859 − 974 − 4) commodities on the Singapore side8 and 58 (=486 − 428) commodities9 on the Japanese side.10 For non-agricultural commodities on the Japanese side, most tariffs are immediately removed under the EPA, 10 commodities in 6 See,

for instance, Frankel (1997) and Rauch (1999) for a gravity model analysis of RTAs. Kimura and Ando (2002) for more detailed discussion on the relationship between GATT/WTO Article 24 and the Japan–Singapore EPA. 8 Singapore bounded only 4067 out of 5859 commodities (69% of total) under the WTO as of 2002. Therefore, some of the 4881 commodities are bounded at positive tariff rates under the WTO with an MFN tariff of zero per cent, and the rest are not bounded under the WTO with an MFN tariff of zero per cent. 9 These 58 commodities include coniferous wood and derived products, raw furskins, oats other than those used for sowing, a protein preservative used for manufacturing frozen minced fish, cigarettes containing tobacco, some kinds of spirits, and undenatured ethyl alcohol intended for use in distilling industrial alcohol, among others. 10 Moreover, major commodities among Japanese agricultural imports from Singapore, such as cocoa butter, cocoa powder, chocolate, and other food preparation materials 7 See

(A) Japanese trade with Singapore (Billion US$).

Exports Imports

2001

2002

2003

2004

2005

14,709 5,383

14,191 5,011

14,847 5,435

17,988 6,292

18,436 6,695

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Japanese trade with Singapore and JSEPA.

262

Table 1.

Source: UN Comtrade.

(B) Tariff removal under JSEPA.

9,023

664

100.0%

3, 087

34.2%

84.2%

6, 938

76.9%

93.8%

2,277

32

4.8%

428

18.8%

6.6%

486

21.3%

6.9%

Share in Total (a/b)

Tariff Tariff Lines Lines: with Zero Share of Rates Zero ComRates mitted Com(c) mitted in Total (c/a)

Trade Values: Share of Zero Rates Committed in Total

Tariff Tariff Lines Lines: with Zero Share of Rates Zero ComRates mitted Com(d) mitted in Total (d/a)

Trade Tariff Values: Lines Share of with Zero Zero Tariff by Rates Actual ComTariff mitted in Removal Total from MFN (e)

0

(Continued)

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Trade Values in 2000 (Billion Yen) (b)

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Mitsuyo Ando

Japanese imports from Singapore Agriculture, fishery, and forestry

Tariffs Under JSEPA

9in x 6in

Zero Tariff Commitment Under WTO

November 17, 2009 14:4

Table 1.

(Continued )

(B) Tariff removal under JSEPA.

6,746

632

95.2%

2, 659

39.4%

88.2%

5,859

2, 094

100.0%

974

16.6%

58.8%

Share in Total (a/b)

Zero Tariff Commitment Under WTO Tariff Lines with Zero Rates Committed (c)

Tariff Lines: Share of Zero Rates Committed in Total (c/a)

Trade Values: Share of Zero Rates Committed in Total

Tariffs under JSEPA Tariff Lines with Zero Rates Committed (d)

Tariff Lines: Share of Zero Rates Committed in Total (d/a)

Trade Values: Share of Zero Rates Committed in Total

6, 452

95.6%

98.2%

5, 859

100.0%

100.0%

Tariff Lines with Zero Tariff by Actual Tariff Removal from MFN (e)

4

B-763 b763-ch08

263

Source: Ministry of Finance, Japan. “Outline of the contents of JSEPA” (http://www.mof.go.jp/jouhou/kanzei/ka140115d.htm) and author’s calculation. Notes: 1) Agriculture, forestry, and fishery cover products in HS01–24 plus those listed in the WTO Agriculture Agreement, Annex 1-1-(ii) and products in HS44 and 46 for forestry. 2) Tariff lines with zero tariff commitment under WTO do not include those with zero tariffs on an MFN base and/or those not bounded under the WTO. 3) Products not committed to tariff removal (1791 tariff lines (=(a)2277−(d)486)) include fresh fish (tuna, etc.), food preparation containing cacao, preparations of milk, prepared edible fats, and vegetable fats and oils. 4) 58 tariff lines (=(d)486−(c)428) for agriculture, fishery, and forestry on the Japanese side and 4881 tariff lines (=(d)5859−(c)974−(e)4) for all on the Singapore side have already zero tariffs on an MFN base, and thus the number of tariff lines with an actual tariff removal is zero and four, respectively.

9in x 6in

Trade Values in 2000 (Billion Yen) (b)

Impacts of Japanese FTAs/EPAs

Mining and manufacturing Japanese exports to Singapore

Tariff Lines (a)

November 17, 2009 14:4

264

Table 1.

(Continued )

(C) Major commodities of agricultural imports: share in total imports in 2005 and tariffs under EPA.

4.3% 1.5% 1.4% 0.0% 4.4%

∗∗

∗

9in x 6in B-763

Source: Ando and Kimura (2007). Notes: Agriculture, fishery, and forestry sectors are HS1–24 and 44. ∗ Indicates zero tariff under WTO or exclusion from the list of tariff elimination for Japan in JSEPA. ∗∗ Indicates exclusion from the list of tariff elimination for Japan in JSEPA.

Tariffs Mitsuyo Ando

Agriculture and fishery total Cocoa butter, cocoa powder, chocolate and other food preparation materials incl. cacao Preparations of cereals, flour, starch or milk Forestry total Agriculture, fishery, and forestry

Share

b763-ch08

November 17, 2009 14:4

9in x 6in

B-763

Impacts of Japanese FTAs/EPAs

b763-ch08

265

petrochemicals being exceptions.11 Although we will formally examine the relationship between the expansion of trade and EPAs in Section 2.3, the expansion of trade between Japan and Singapore can hardly be interpreted as a direct result of tariff removal by the EPA. Two peculiar features must be taken into account in analysing statistical data on Japan’s trade with Mexico. First, a large amount of trade between these two countries transits in the US. It is therefore preferable to use Mexican imports from Japan for the analysis of Japanese exports to Mexico including those passing through the US. Roughly speaking (ignoring the c.i.f–f.o.b adjustment), 42% of Mexican imports from Japan in 2005 transited through the US.12 Second, a significant portion of Japanese exports to Mexico are “Maquiladora imports” or “other temporary imports” (from the viewpoint of Mexico). In 2005, less than 40% of Japanese exports to Mexico were sold to Mexican consumers.13 Table 2 shows the rise in Japanese trade with Mexico after enforcement of the EPA, particularly on the export side: total exports expanded from US$8.1 billion in 2001 to US$13.1 billion in 2005 and US$15.3 billion in 2006.14 The rapid expansion of exports in the electric machinery, transport equipment, and precision machinery industries contributed to this increase in total exports: in 2006 exports were 1.6 times those in 2001 for electric machinery, 3.8 times for transport equipment, and 4.2 times for precision machinery. The next section considers this in greater detail. Table 3 presents net values of Japanese investment in Mexico on the balance-of-payment (BOP) basis. Since the BOP statistics record net transactions, with negative figures indicating the occurrence of outward Japanese containing cacao, are either subject to zero tariff on an MFN basis or excluded from the list of tariff elimination schedule of Japan in JSEPA (Table 1C). 11 The schedule of tariff elimination for these 10 commodities in petrochemicals are (i) tariff removal in April 2005 for one commodity, (ii) phasing out tariff removal from January 2003 to 2010 for seven commodities, and (iii) phasing out tariff removal from January 2005 to 2010 for two commodities. In addition, 294 mining and manufacturing commodities are excluded from the liberalisation list, including petroleum-related products, petrochemical, and leather products, among others. 12 Since imports are calculated by country of origin while exports by destination (basically the first reaching country), Mexican imports from Japan include Japanese exports to Mexico through the US. In 2005, Mexican imports from Japan were US$13 billion, while Japanese exports to Mexico were US$6.9 billion. 13 “Maquiladora imports” or “other temporary imports” are temporary imports of commodities such as parts and components or capital goods used in producing goods to be exported from Mexico. See JETRO (2006a) for these imports in 2004 and 2005. 14 Since Mexican imports from Japan by sector in 2006 are available only from January to October, sectoral imports in 2006 are estimated, based on the share of sectoral imports from January to October 2006 and total imports in 2006.

2003

2004

2005

2006

2001

2002

2003

2004

2005

2006

0.5

0.6

1.6

0.9

228.9

244.4

241.7

283.7

324.3

324.7

1.5

1.2

0.5

0.5

0.8

1.7

150.7

133.6

154.7

179.1

178.7

176.9

0.1

0.2

0.2

0.2

0.2

0.4

2.0

2.0

1.3

3.3

3.2

4.0

3.4

4.2

3.4

3.9

4.5

6.3

40.9

41.0

34.9

47.4

40.9

49.4

13.3

51.3

21.2

24.7

25.3

70.2

383.3

272.1

250.7

312.2

453.6

479.4

245.9 337.9

331.7 357.1

270.1 421.1

282.6 472.1

301.0 526.3

327.7 586.8

119.6 30.1

84.3 5.3

100.5 6.1

96.3 7.4

70.3 10.4

72.5 12.5

3.0

4.0

3.4

0.8

0.3

0.4

2.2

1.6

2.1

2.0

2.7

3.4

3.0

3.4

3.5

1.3

0.3

0.3

1.3

0.8

0.9

0.7

1.1

0.8

47.3 30.2 0.1

69.8 27.5 0.1

64.6 27.2 0.1

44.8 28.6 0.1

65.7 33.4 0.3

35.3 46.1 0.1

2.7 33.5 1.3

4.0 26.9 2.2

4.9 25.1 1.0

4.7 25.1 1.4

4.0 30.2 5.2

2.3 33.8 5.0

b763-ch08

(Continued)

B-763

0.4

9in x 6in

0.8

Mitsuyo Ando

Value (Millions US$) HS01–05 Live animals and products HS06–14 Vegetable products HS15 Animal and vegetable oils HS16–24 Products of food industry HS25–27 Mineral products HS28–38 Chemicals HS39–40 Plastic and plastic materials HS41–43 Skin, raw material HS44–46 Wood and wood products HS47–49 Pulp and paper HS50–63 Textiles HS64–67 Footwear, umbrellas

2002

Imports

November 17, 2009 14:4

Japanese trade with Mexico from 2001 to 2006. Exports

2001

266

Table 2.

(Continued )

Exports 2001

2002

2003

2005

2006

2001

2002

2003

2004

2005

2006

173.9

184.2

2.4

2.1

2.6

2.0

1.8

1.4

2.3

3.0

23.1

50.7

49.2

48.7

88.9

63.0

152.5

843.2

951.1

1142.6

5.7

14.4

10.6

42.7

29.6

43.5

2050.5

2102.1

2356.5

372.7

383.0

226.5

206.1

285.5

335.3

4359.2

5606.7

6193.5

228.6

221.5

243.6

284.5

308.5

293.8

1316.8

1842.6

2525.2

249.0

224.0

241.0

227.9

276.3

287.6

801.0

1111.7

1332.4

64.1

48.9

75.5

179.7

226.1

290.3

52.1

59.0

64.4

8.7

22.4

94.9

154.2

189.9

207.7

211.7

267.9

396.0

28.4

15.9

14.8

22.7

30.0

43.3

2006.6 1799.7 1782.2 2172.0 2535.2 2819.9 (Continued) 267

b763-ch08

8085.2 9348.5 7594.6 10,583.0 13,077.8 15,294.0

B-763

85.7

9in x 6in

Total

Imports

Impacts of Japanese FTAs/EPAs

HS68–70 Cement, 42.8 87.7 78.6 ceramics, etc. HS71 Precious 2.0 2.8 1.2 stones HS72–83 Base metals 652.2 664.5 640.4 and products HS84 General 1574.3 1662.3 1393.4 machinery HS85 Electric 3863.8 4359.6 3099.9 machinery HS86–89 Transport 670.0 859.0 921.1 equipment HS90–92 Precision 314.6 329.9 397.1 machinery HS94–96 Various 46.6 56.4 47.9 manufactured goods Others Others 232.4 475.4 199.2

2004

November 17, 2009 14:4

Table 2.

(Continued )

Exports 2003

2004

2005

2006

2001

2002

2003

2004

2005

2006

0.0

0.0

0.0

0.0

0.0

0.0

11.4

13.6

13.6

13.1

12.8

11.5

0.0

0.0

0.0

0.0

0.0

0.0

7.5

7.4

8.7

8.2

7.0

6.3

0.0

0.0

0.0

0.0

0.0

0.0

0.1

0.1

0.1

0.2

0.1

0.1

0.0

0.0

0.0

0.0

0.0

0.0

2.0

2.3

2.0

2.2

1.6

1.8

0.2

0.5

0.3

0.2

0.2

0.5

19.1

15.1

14.1

14.4

17.9

17.0

3.0 4.2

3.5 3.8

3.6 5.5

2.7 4.5

2.3 4.0

2.1 3.8

6.0 1.5

4.7 0.3

5.6 0.3

4.4 0.3

2.8 0.4

2.6 0.4

0.0

0.0

0.0

0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.1

0.0

0.1

0.0

0.0

0.0

0.6 0.4 0.0

0.7 0.3 0.0

0.9 0.4 0.0

0.4 0.3 0.0

0.5 0.3 0.0

0.2 0.3 0.0

0.1 1.7 0.1

0.2 1.5 0.1

0.3 1.4 0.1

0.2 1.2 0.1

0.2 1.2 0.2

0.1 1.2 0.2

b763-ch08

(Continued)

B-763

2002

9in x 6in

2001

Mitsuyo Ando

Sectoral share (%) HS01–05 Live animals and products HS06–14 Vegetable products HS15 Animal and vegetable oils HS16–24 Products of food industry HS25–27 Mineral products HS28–38 Chemicals HS39–40 Plastic and plastic materials HS41–43 Skin, raw material HS44–46 Wood and wood products HS47–49 Pulp and paper HS50–63 Textiles HS64–67 Footwear, umbrellas

Imports

November 17, 2009 14:4

268

Table 2.

(Continued )

Exports

HS68–70

HS85 HS86–89 HS90–92 HS94–96

Total

2002

2003

2004

2005

2006

2001

2002

2003

2004

2005

2006

0.5

0.9

1.0

0.8

1.3

1.2

0.1

0.1

0.1

0.1

0.1

0.0

0.0 8.1

0.0 7.1

0.0 8.4

0.0 8.0

0.0 7.3

0.2 7.5

2.5 0.3

2.7 0.8

2.7 0.6

4.1 2.0

2.5 1.2

5.4 1.5

19.5

17.8

18.3

19.4

16.1

15.4

18.6

21.3

12.7

9.5

11.3

11.9

47.8

46.6

40.8

41.2

42.9

40.5

11.4

12.3

13.7

13.1

12.2

10.4

8.3

9.2

12.1

12.4

14.1

16.5

12.4

12.4

13.5

10.5

10.9

10.2

3.9

3.5

5.2

7.6

8.5

8.7

3.2

2.7

4.2

8.3

8.9

10.3

0.6

0.6

0.6

0.5

0.5

0.4

0.4

1.2

5.3

7.1

7.5

7.4

2.9

5.1

2.6

2.0

2.0

2.6

1.4

0.9

0.8

1.0

1.2

1.5

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

269

b763-ch08

Source: Author’s calculation and estimation, based on UN COMTRADE from 2001 to 2005 and Word Trade Analyzer, website of Ministry of Finance, Japan, and the Mexican government for 2006. Note: Mexican imports from Japan are used for Japanese exports to Mexico to consider trade through the US. Since Mexican imports from Japan by sector in 2006 are available only from January to October, sectoral imports in 2006 are estimated, based on the share of sectoral imports from January to October in 2006 and total imports in 2006.

B-763

Others

2001

9in x 6in

HS84

Imports

Impacts of Japanese FTAs/EPAs

HS71 HS72–83

Cement, ceramics, etc. Precious stones Base metals and products General machinery Electric machinery Transport equipment Precision machinery Various manufactured goods Others

November 17, 2009 14:4

Table 2.

2001

2002

2003

2004

Total

Total

Total

Total

2005

2006

Q3

Q4

Total

Q1

Q2

Q3

Sub-total

−231 0.01 −102 . −10

−120 0.01 . . n.a.

−157 0.04 . . −0.2

−114 n.a. . . −1

−621 0.06 −102 . −12

−128 2 . . −3

−165 n.a. . . −57

−102 n.a. . . 2

−395 n.a. . . −12

. . . 2

. . . 2

. . . 1

. . . 26

. . . 31

. . . n.a.

. . . n.a.

. . . −12

. . . n.a.

−3 −1 −110

−22 −8 −101

−32 −10 −116

−10 −1 −114

−67 −20 −441

n.a. −5 −107

n.a. −1 −84

−6 0.3 −85

n.a. −6 −277

.

.

.

.

.

.

.

.

B-763

Q2

9in x 6in

Q1

Mitsuyo Ando

Manufacturing (total) Food Textile Lumber and pulp Chemicals and pharmaceuticals Petroleum Rubber and leather Glass and ceramics Iron, non-ferrous, and metals General machinery Electric machinery Transportation equipment Precision machinery

Japanese net direct investment in Mexico on the BOP basis (100 million yen).

November 17, 2009 14:4

270

Table 3.

.

(Continued)

b763-ch08

2001

2002

2003

2004

Total

Total

Total

Total

324 −298

−308 −428

−14 −200

Q3

Q4

Total

22

−38

−38

−13

−66

.

.

.

.

. n.a. . . . 17 .

. −0.07 . . . n.a. .

. −0.06 . . . −28 −0.2

. −2

. −15

−209

−158

Q2

Q3

Sub-total

−6

−51

−27

−84

.

.

.

.

.

. −0.05 . . . −2 −0.7

. −0.2 . . . −13 −0.9

. −2 . . . 3 n.a.

n.a. n.a. . . . −10 n.a.

. n.a. . . . 3 n.a.

. . . . −4 n.a.

. −7

. −10

. −35

. n.a.

. −7

. n.a.

. n.a.

−194

−127

−134

−216

−129

−561 −688

Q1

−479

271

b763-ch08

Source: Author’s calculation, based on balance of payment available from the Bank of Japan’s website (http://www.boj.or.jp/theme/ research/stat/bop/bop/index.htm#diri; http://www.boj.or.jp/theme/research/stat/bop/bop/dlong/regbop/index.htm). Notes: “n.a.” is used for industries with 1 or 2 cases, while “.” is used for industries without any case. “manufacturing (total)” and “non-manufacturing (total)” includes other manufacturing and non-manufacturing sectors not identified in the table. Figures in “sub-total” are the sum in the period from Q1 to Q3.

B-763

24 −3

Q2

9in x 6in

Quarter total Sub-total (Q1–Q3) Total (Q1–Q4)

2006

Impacts of Japanese FTAs/EPAs

Non-manufacturing (total) Agriculture and forestry Fishery Mining Construction Transportation Communications Wholesale and retail Finance and insurance Real estate Services

(Continued ) 2005

Q1

November 17, 2009 14:4

Table 3.

November 17, 2009 14:4

272

9in x 6in

B-763

b763-ch08

Mitsuyo Ando

investment in a given year, the table vividly illustrates the significant scale of Japanese investment in Mexico in 2005 and 2006.15 Most Japanese investment in Mexico after the signing of the Japan–Mexico EPA aims at (i) expanding production of built-up (BU) cars in Mexico; (ii) establishing affiliates for sales in Mexico by Japanese automobile manufacturers without local production sites, which corresponds to the introduction of a zero-tariff import quota for BU cars under the EPA scheme; and (iii) expanding production of flat-panel LCD TVs in Mexico, which reflects increased demand in the US market (Table A.1 in the Appendix). Investment is observed mainly in the transport equipment sector. Interestingly, a certain degree of announcement effects on investment, i.e., investment before the implementation of the EPA, is observed.16 A number of investment decisions in Mexico made by Japanese firms were indeed released after the signing of the EPA and before the enforcement, as shown in Table A.1. Substantial investment was actually conducted, even from January to March in 2005, just before the EPA was enforced.

2.2. Sectoral issues in Japanese trade with Mexico 2.2.1. Japanese exports to Mexico The major commodity of Japanese exports to Mexico is machinery. While exports are the largest in the electric machinery industry (HS85 in Table 2), exports in the transport equipment (HS86–89) and precision machinery (HS90–92) industries are rapidly increasing. Table 4 presents major commodities at the HS4-digit level, with the largest export share in 2005 on the top, and their tariffs in Mexico including EPA tariffs as of January 2006. Most of the major export commodities are parts and components of electric machinery and transport equipment and BU cars. Exports of these items rapidly increased, as shown in the trade index in Table 4, which presents trade values with the base year 2004. However, most of these quickly expanding exports had already been traded with import tariffs of zero per cent on an MFN basis or under Los Programas de Promoci´ on Sectorial (PROSEC). These observations suggest that the EPA may not be a major factor underlying their rapid export 15 Note that investment in Mexico by Japanese affiliates in the US is not included in Japanese investment in Mexico on the BOP basis. 16 Announcement effects on investment were particularly significant in the case of NAFTA since the period between the dates of the substantive agreement (August 1992) and the signing of the FTA (December 1992) and the date of entry into force (January 1994) was long.

Major commodities of Japanese exports to Mexico and their tariffs in Mexico.

Commodity

8529

8708 9013 8532 8536

8541 8507 8479 7210

Tariffs for Major Commodities in each HS4-digit Category, as of January 2006

2004

2005

2006

2005

2006

5.59

10.77

14.00

238

362

0%

0%

0%

6.83

7.68

7.33

139

155

50%

Excl.

0%/20–30%

7.59

6.13

5.18

100

99

0%

0%

0%

4.03 2.63

4.64 4.52

7.57 5.29

142 213

271 291

10%, 15% 0%

0%, 3% 0%

0%, 11.7%, 14.4%, 16.2% 0%

3.46 3.29

3.80 3.67

2.53 3.40

136 138

105 149

0%, 10%, 15% 10%

0% 0%

11.7%, 16.2% 9%, 11.7%

3.11

3.03

2.67

120

124

0%

0%

0%

2.64 2.11 3.80

2.78 2.32 1.83

2.76 1.70 1.88

130 136 60

151 117 72

0% 0% 0%, 10%

0% 0% 0%

0% 0% 0%

2.20

1.83

1.68

103

110

0%, 14%

0%, 3%

0%, 18%, 25%

MFN

PROSEC

EPA

273

b763-ch08

(Continued)

B-763

8473

Trade index (2004=100)

9in x 6in

8542

Parts specific for some TV and radio Automobiles (passenger cars) Electronic integrated circuits Parts for automobiles Liquid crystal devices, lasers, etc. Condenser Apparatus for switching/protecting electrical circuits Parts for office machines (computer) Semi-conductor devices Storage battery Machines with specific functions Flat-rolled products of iron and non-alloy steel

Sectoral Share in Total

Impacts of Japanese FTAs/EPAs

8703

November 17, 2009 14:4

Table 4.

Sectoral Share in Total 2004

8471

Total

2006

MFN

PROSEC 0%

EPA

2.29

1.61

0.95

87

60

0%

0%

1.70 1.75 1.17 1.11 1.22 0.99

1.53 1.47 1.32 1.24 1.15 1.07

1.08 1.29 1.15 1.13 0.98 0.91

111 104 140 137 116 134

92 107 142 147 116 133

0% 15%, 20% 0%, 10%, 15%, 20% 50%, ST for used 0% 10%

1.05 0.90 0.01 0.75

1.08 0.97 0.85 0.83

0.82 127 0.95 134 0.04 7829 1.26 136

112 153 410 241

10% 10% 0%, 10%, 20% 0%, 9%

0% 0% 0% 0%, 3%

0%, 10.4%, 11.7% 0%, 11.7% 0%, 11.7%, 20.7% 0%, 13%, 18%

0.71

0.83

0.75

144

152

0%

0%

0%

100.00 100.00 100.00

124

145

0% 0% 0% 14.4%, 16.2%, 18.4% 0% 0%, 11.7%, 14.4%, 16.2% Excl. 0%/20–30%, excl. used 0% 0% 0% 0%, 11.7%

b763-ch08

Source: Author’s calculation and estimation, based on UN COMTRADE for trade in 2004 and 2005 and World Trade Analyzer and data provided by the Mexican government for trade in 2006, and JETRO daily for tariffs. Note: Mexican imports from Japan are used to consider trade through the US. Since Mexican imports from Japan by sector in 2006 are available only from January to October, annual imports by sector in 2006 are estimated based on the share of sectoral imports from January to October in 2006 and annual imports in 2006. “ST for used” and “excl. used” for HS8704 mean specific tariffs for used motor vehicles and used cars treated as exceptions of tariff liberalization under EPA respectively.

B-763

9031

2005

Tariffs for Major Commodities in each HS4-digit Category, as of January, 2006

9in x 6in

8409 8533 8502 7225

2006

Trade index (2004=100)

Mitsuyo Ando

8525 3926 8504 8704 8523 8538

Automatic data processing machines and the units Transmission apparatus Plastic products (other) Electrical transformers Trucks Recording media Parts specific for some electrical apparatus Parts for engines Electrical resistors Electric generator Flat-rolled products of other alloy steel Measuring or checking instruments

2005

(Continued )

November 17, 2009 14:4

Commodity

274

Table 4.

November 17, 2009 14:4

9in x 6in

B-763

Impacts of Japanese FTAs/EPAs

b763-ch08

275

growth.17,18 For instance, increase in exports of parts and components such as HS8529 (specialised TV and radio parts) and HS9013 (flat-panel LCD), with MFN tariffs of zero per cent, reflect an increased demand for flat-panel LCD TVs in the US market. These are produced by Japanese affiliates located near the border between Mexico and the US. Increased purchasing power of the Mexican market is another reason behind the expanding exports of electric machinery, including parts and components. On the other hand, a direct effect of tariff reduction by an EPA is observed in a rapid increase in exports of BU cars (HS8703 and HS8704). In general, exports of BU cars to Mexico are virtually prohibited, with MFN tariffs of 50%. The Mexican government, however, has provided automobile manufacturers producing in Mexico with a zero-tariff import quota, equivalent to 10% of local production in the year before in terms of units (Table 5).19 Therefore, Japanese automobile manufacturers with local production (namely Nissan, Honda, Toyota, and Mitsubishi) have exported BU cars with an import tariff of zero per cent within the quota.20 In addition, under the EPA, a zero-tariff import quota for BU cars, equivalent to 5% of sales in the Mexican market in the previous year, is given to Japanese automobile manufacturers, regardless of whether they produce locally.21 As a result, some Japanese automobile manufacturers such as Mazda, Suzuki, Isuzu, and Subaru without local production obtain a zero-tariff import 17 PROSEC is a system introduced to promote domestic production in 22 manufacturing sectors. PROSEC tariffs are lower than MFN tariffs, usually from zero to three per cent. These tariffs are imposed on designated commodities from the 22 sectors, imported by local producers. 18 Of course, there are some cases where the large preferential margin of an EPA tariff contributes to trade expansion since PROSEC tariffs cannot be applied to imports of parts and components used for repairs even if they are designated commodities. A Japanese company, Kayaba Industry (a shock absorber producer), for instance, decided to establish an affiliate for sales in Mexico. One of the reasons behind its investment decision is an expectation that the demand for its products used in repairing Japanese automobiles would increase in accord with expanding sales of Japanese automobiles in Mexico (JETRO, 2006b). Another reason is that preferential margin between its MFN tariff of 15% and its EPA tariff of zero per cent is large, while the PROSEC tariff cannot be applied. In such a case, the preferential margin of an EPA tariff would contribute to trade expansion. 19 A zero-tariff import quota means that the tariff is zero per cent within the quota and at the level of the MFN tariff beyond the quota. 20 Although Mitsubishi Automobiles does not have production sites in Mexico, it can utilise a part of the zero-tariff import quota that is allocated to DaimlerChrysler, with which it has a business alliance. 21 The total amount of the zero-tariff import quota for Japanese automobile manufactures under EPAs in 2005F/Y (54,839 units) and 2006F/Y (56,585 units) is close to the total amount of the zero-tariff import quota for Japanese automobile manufacturers with local production in 2005 (58,218 units) and 2006 (65,305 units).

November 17, 2009 14:4

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276

Table 5. Zero-tariff import quota for BU cars allocated to Japanese automobile manufacturers by Mexico (quantity). Automobile Manufactures

Sub-total: companies with local production Nissan Honda Toyota Mitsubishi Sub-total: companies without local production Mazda Suzuki Isuzu Subaru Total

Quota for Local Producers

Quota under EPA

2005

2006

2005F/Y

2006F/Y

58,218

65,305

46,599

45,270

27,218 5000 16,000 10,000

29,305 9000 17,000 10,000

23,718 8900 6664 7317

23,029 8652 6487 7102

0

0

8240

11,315

0 0 0 0

0 0 0 0

3340 3000 1900 0

5502 4092 1221 500

58,218

65,305

54,839

56,585

Source: Documents provided at the JETRO seminar. Notes: Zero-tariff import quota for local producers is provided as 10% of previous-yearlocal production in terms of quantity. Zero-tariff import quota under EPA is equivalent to 5% of previous-year-sales at the local market in terms of quantity. Mitsubishi automobiles without local production sites partially use zero-tariff import quota allocated to DaimlerChrysler in the same business alliance.

quota for BU cars, although the quota is much smaller than that allocated to local producers. Moreover, given this new zero-tariff import quota, some have established affiliates for sales in Mexico. In the case of BU cars, the zero-tariff import quota under the EPA has direct and significant effects on Japanese exports to and investment in Mexico.22 Given that the outquota tariff under the EPA is supposed to be phased out from the base rate of 20% or 30% to zero per cent by 1 April 2011, further impact of tariff removal on exports of BU cars is expected.23 22 When microdata of US firms abroad in very recent years become available, it would be interesting to investigate whether this increase in sales of Japanese automobiles has an impact on local production by US automobile manufacturers and/or their exports of BU cars from US to Mexico. It might also be interesting to examine the impacts on the unit prices if exports were decomposed into those under the zero-tariff import quota and others to obtain necessary unit prices. 23 MFN tariffs on BU cars rose: although MFN tariffs on BU cars are currently 50%, they were 20% or 30% in 2003, depending on the types. In this case, a choice of phasing out tariffs has indeed had a positive effect of securing the ceiling on tariffs, although the immediate removal of tariffs is still the best choice.

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Impacts of Japanese FTAs/EPAs

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277

A striking development is the “reverse phenomenon” in tariffs between EPA and MFN, i.e., EPA tariffs become higher than MFN tariffs, as observed for some commodities (Tables 4 and 6). EPA tariffs on some commodities are to be phased out over three to 10 years from the base rates at the level of MFN tariffs in 2003. Mexico reduced MFN tariffs on 9366 commodities on 31 December 2004 and those on 6089 commodities on 30 September 2006. As a result, about a half of the commodities (approximately 10,000) in mining and manufacturing have been subject to this “reverse phenomenon” as of January 2007 (see highlighted categories with EPA tariffs higher than MFN tariffs in Table 6).24 Such effects will be unlikely to occur with the commodities subject to immediate tariff removal under the EPA. The gradual removal of tariffs by the EPA, rather than one-shot tariff removal, may cause confusion for exporters, requiring them to investigate whether their exporting commodities should be with an EPA tariff or an MFN tariff. In addition, the choice of phasing out certainly delays the possible positive effects of trade liberalisation by the EPA, particularly in cases of “reverse phenomenon”. Although phasing out tariffs could have the advantage of securing the ceiling of tariffs, there seem to be serious disadvantages. On the whole, direct and significant effects of EPA on exports seem to be limited to the exports of BU cars. This does not mean, however, that no impact on exports of other commodities will be observed in the future. We can expect more significant effects on exports, particularly after the problem of “reverse phenomenon” of tariffs is solved. 2.2.2. Japanese imports from Mexico The major imported commodities are agriculture and fishery products (HS1–24 in Table 2) and mineral products (HS25–27) including salts (HS2501) and molybdenite (HS2613): the shares in total imports from Mexico in 2006 are about 20% and 17%, respectively. The rise in the price of molybdenite, as a result of an increasing demand for mineral resources in international markets, contributes to the dramatic increase in total mineral imports in 2005 and 2006.25 Table 7 shows the major agricultural commodities imported from Mexico, with their import values, their import shares in total, and their 24 In the case of NAFTA, no commodity is subject to “reverse phenomenon” since the FTA has been in force for some time. In the case of the EU–Mexico FTA, there were about three commodities (out of about 10,000 commodities) subject to “the phenomenon” in 2006, but the problem was solved in early 2007 with the removal of EPA tariffs on relevant commodities. 25 The import price of molybdenite in 2005 was 2.4 times that in 2004 (JETRO, 2006a).

MFN tariffs and EPA tariffs imposed by Mexico on imports from Japan.

EPA Base Rate

MFN Tariff as of Jan. 2007

2005 F/Y

2006 F/Y

2007 F/Y

2008 F/Y

2009 F/Y

B2

—

10

2.6

2.6

2.6

2.6

2.6

B4

18

10

13.5

9

4.5

0

B5

10 13 15 18 20 23 30

7 7 10 10 7 15 20

8 10.4 12 14.4 16 18.4 24

6 7.8 9 10.8 12 13.8 18

4 5.2 6 7.2 8 9.2 12

2 2.6 3 3.6 4 4.6 6

B6

18 18 23 30

10 15 20 20

15 15 19.2 25

12 12 15.3 20

9 9 11.5 15

6 6 7.7 10

3 3 3.8 5

0 0 0 0

B7

13 20 23 30

50 50 50 50

11.1 17.1 19.7 25.7

9.3 14.3 16.4 21.4

7.4 11.4 13.1 17.1

5.6 8.6 9.9 12.9

3.7 5.7 6.6 8.6

1.9 2.9 3.3 4.3

0 0 0 0

B8

13 18

7 10

11.4 15.8

9.8 13.5

8.1 11.3

6.5 9

4.9 6.8

3.3 4.5

1.6 2.3

EPA Tariff 2010 F/Y

2011 F/Y

2012 F/Y

2013 F/Y

2014 F/Y

2015 F/Y

November 17, 2009 14:4

EPA Category

278

Table 6.

0

9in x 6in

Mitsuyo Ando

0 0 0 0 0 0 0

B-763

(Continued)

b763-ch08

0 0

EPA Category

November 17, 2009 14:4

Table 6.

(Continued )

2005 F/Y

2006 F/Y

2007 F/Y

2008 F/Y

2009 F/Y

2010 F/Y

2011 F/Y

2012 F/Y

2013 F/Y

2014 F/Y

C

10 10 13 13 15 15 18 23 30

7 9 7 9 9 10 10 15 20

9 9 11.7 11.7 13.5 13.5 16.2 20.7 27

8 8 10.4 10.4 12 12 14.4 18.4 24

7 7 9.1 9.1 10.5 10.5 12.6 16.1 21

6 6 7.8 7.8 9 9 10.8 13.8 18

5 5 6.5 6.5 7.5 7.5 9 11.5 15

4 4 5.2 5.2 6 6 7.2 9.2 12

3 3 3.9 3.9 4.5 4.5 5.4 6.9 9

2 2 2.6 2.6 3 3 3.6 4.6 6

1 1 1.3 1.3 1.5 1.5 1.8 2.3 3

0 0 0 0 0 0 0 0 0

D

7 13 18 18

5 7 5 10

7 13 18 18

7 13 18 18

7 13 18 18

7 13 18 18

7 13 18 18

7 13 18 18

EPA Tariff

7 13 18 18

7 13 18 18

7 13 18 18

0 0 0 0

Impacts of Japanese FTAs/EPAs

7 13 18 18

2015 F/Y

B-763

MFN Tariff as of Jan. 2007

9in x 6in

EPA Base Rate

Source: Documents provided at the JETRO seminar. Note: Tariffs include only tariff lines with MFN tariff reduction on 31 December 2004 (9336 tariff lines) and/or 30 September 2006 (6089 tariff lines). EPA tariffs: highlighted are those beyond MFN tariffs as of January 2007.

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279

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280

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Mitsuyo Ando

tariffs in Japan, including EPA tariffs. The major features of EPA tariffs are classified into: (i) introduction of import quota with in-quota tariff at a level half that of MFN tariffs, (ii) the phasing out of tariffs over three to 10 years, (iii) tariff reduction from 3% or 3.5% to zero per cent, and (iv) exclusion from the tariff elimination schedule. These features suggest that a certain portion of agricultural imports has been liberalised through EPA negotiations. In addition to exceptions from the tariff removal list, however, a complicated protection structure in MFN tariffs still remains in EPA tariffs such as price-differential tariffs, specific tariffs, seasonal tariffs,26 and import tariff quotas (see Table 7).27 If the administrative procedure is costly and preferential margin is small, actual utilisation of EPA tariffs would be predictably low. Among import commodities, beef has had the most substantial growth since 2005:
1.7 billion in 2004,
6.4 billion in 2005, and
5.2 billion in 2006. Indeed, Japan introduced an import tariff quota for beef under the EPA: the tariff within a quota of 10 is zero per cent for the first and second years for market entry, while the tariff beyond the quota is 50% or 12.8%, depending on the parts of beef. The rapid increase in imports of beef, however, is not a consequence of the introduction of import tariff quotas, particularly in view of the small quota, but rather of the prohibition on the imports of US beef as a result of Bovine Spongiform Encephalopathy (BSE), after which Mexico surfaced as an alternative import source. The commodity with the largest share among agricultural imports from Mexico is pork. As Table 7 shows, imports increased in 2006 for some sorts of fresh, chilled, or frozen pork and prepared or preserved pork (excluding ham, bacon, pressed ham, etc.), although they did not increase in 2005.28 Japan introduced an import tariff quota for pork under the EPA, combined with a price-differential tariff; the amount of import quota in total (including other categories of pork) from the first to fifth year is 38,000 t in 2005F/Y, 53,000 t in 2006F/Y, 65,000 t in 2007F/Y, 74,000 t in 2008F/Y, and 80,000 t in 2009F/Y. For fresh, chilled, or frozen pork, in-quota tariffs are (i) the difference between
535.53 and a value for custom duty per kilogram29 when an import value for the custom duty per kilogram is more 26 Although

seasonal tariff does not appear in Table 7, bananas are a sample commodity. Ando and Kimura (2008) for the review of agriculture protection in Japanese EPAs (those in effect, those with substantive agreement, and those under negotiation/study). 28 Imports are
19.7 billion in 2004,
19.6 billion in 2005, and
21.8 billion in 2006 for fresh, chilled, or frozen pork, while imports are
0.1 billion in 2004,
0.1 billion in 2005, and
0.4 billion in 2006 for prepared or preserved pork (excluding ham, bacon, pressed ham, etc.). 29 A value for the custom duty per kilogram means an imported price per kilogram before an import duty is imposed. 27 See

November 17, 2009 14:4

Table 7. Agriculture imports from Mexico and the tariff rates in Japan from 2004 to 2006: major imported commodities in 2005. Commodity

2004 Values % in (Billion Agri. Yen)

Values % in (Billion Agri. Yen)

Tariffs (% in Total)

WTO

Preferential Temporary

EPAa

234.8 55.5

100.00

(100.00) (23.64)

279.9 60.4

100.00

(100.00) (21.58)

328.1 64.6

100.00

(100.00) (19.67)

19.9 0.6

35.87 1.12

(8.48) (0.26)

19.9 0.4

32.89 0.62

(7.10) (0.13)

22.4 1.6

34.66 2.48

(6.83) (0.49) (
482/kg)

19.1 0.0 0.0

34.47 0.02 0.01

(8.15) (0.01) (0.00)

19.2 0.0 0.0

31.71 0.01 0.02

(6.84) (0.00) (0.00)

20.2 0.0 0.0

31.33 0.04 0.00

(6.17) (0.01) (0.00)

0.1

0.20

(0.05)

0.1

0.25

(0.05)

0.4

0.57

(0.11)

20%

Excluded

0.0

0.04

(0.01)

0.2

0.28

(0.06)

0.2

0.25

(0.05)

Free

Free

(4.3%) 8.50% 4.3%/∗ Free (8.5%)

c

4.3% 8.5%

d

2.2%/4.3%f 4.3%f 4.3%/8.5%h

281

b763-ch08

(Continued)

B-763

Internal organse Prepared or preserved pork (ham, bacon, pressed ham)g Prepared or preserved pork (excl. ham, bacon, pressed ham) Prepared or preserved pork (simply boiled in water)

2006 (% in Total)

9in x 6in

Pork Pork (fresh, chilled, or frozen)b

Values % in (Billion Agri. Yen)

Impacts of Japanese FTAs/EPAs

Total Agriculture total (HS1–HS24)

2005 (% in Total)

Commodity

2004 Values % in (Billion Agri. Yen)

(Continued )

2005 (% in Total)

Values % in (Billion Agri. Yen)

2006 (% in Total)

Values % in (Billion Agri. Yen)

Tariffs (% in Total)

WTO Preferential Temporary

EPAa

Beef Beef (fresh, chilled, or frozen) Tongues and livers Avocados

1.7 1.4

3.03 2.47

(0.72) (0.58)

6.4 5.4

10.59 8.97

(2.29) (1.94)

5.2 4.1

8.12 6.31

(1.60) (1.24) (50%)

0.3

0.57

(0.13)

1.0

1.62

(0.35)

1.2

1.81

(0.36) 12.8%

6.2

11.09

(2.62)

6.4

10.55

(2.28)

6.8

10.56

(2.08)

3%

Tunas Bluefin tunas Yellowfin tunas

6.1 6.1 0.0

10.99 10.99 0.02

(2.60) (2.60) (0.00)

6.4 6.3 0.1

10.53 10.42 0.11

(2.27) (2.25) (0.02)

6.1 5.4 0.2

9.44 8.39 0.24

(1.86) (1.65) (0.05)

3.5% 3.5%

Excluded Free j

Melons

3.4

6.05

(1.43)

2.8

4.70

(1.02)

2.6

4.04

(0.79)

6%

From 6% × 6 timesk

Coffee Coffee, not roasted Coffee, roasted

1.6 1.6

2.85 2.81

(0.67) (0.66)

1.9 1.8

3.10 3.05

(0.67) (0.66)

1.0 1.0

1.60 1.49

(0.32) (0.29)

Free

0.0

0.04

(0.01)

0.0

0.04

(0.01)

0.1

0.11

(0.02)

12%

Pumpkins

1.8

3.29

(0.78)

1.8

2.94

(0.63)

2.6

4.05

(0.80)

3%

38.5%

0%∼/50%i

Free

∗

Free

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Free 10%/∗ Free

Mitsuyo Ando

Free

9in x 6in

0%∼/12.8%i ∗

November 17, 2009 14:4

282

Table 7.

From 10% × 4 timesk Free

(Continued)

b763-ch08

Commodity

2004 Values % in (Billion Agri. Yen)

Values % in (Billion Agri. Yen)

2006 (% in Total)

Values % in (Billion Agri. Yen)

Tariffs (% in Total)

WTO

2.97

(0.70)

1.7

2.79

(0.60)

2.0

3.17

(0.62)

0.8 0.8

1.37 1.47

(0.32) (0.35)

0.8 0.8

1.33 1.34

(0.29) (0.29)

1.0 1.0

1.61 1.50

(0.32) (0.29)

0.1

0.13

(0.03)

0.1

0.12

(0.03)

0.0

0.06

(0.01)
126/l

Free Free 16%
25.2/l/∗ Free

Temporary

EPAa

Free Excludedl

Free ∗

2.69

(0.64)

1.6

2.58

(0.56)

1.5

2.34

(0.46)

3%

1.0

1.87

(0.44)

1.3

2.22

(0.48)

1.6

2.48

(0.49)

3%

Limes

0.9

1.66

(0.39)

0.9

1.54

(0.33)

1.0

1.61

(0.32)

Free

Sardines (of sardinops spp.) Shrimps and prawns (frozen) Grapefruit juice (not containing added sugar with more than 10% of sucrose by weight and a Brix value over 20)

0.4

0.74

(0.17)

0.8

1.25

(0.27)

0.4

0.56

(0.11)

m

0.6

1.01

(0.24)

0.7

1.13

(0.24)

0.8

1.23

(0.24)

1%

0.0

0.00

(0.00)

0.3

0.58

(0.12)

0.2

0.34

(0.07)

25.5%

∗

Free

Free

Free

Free

Free

Free

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1.5

Mangoes

9in x 6in

1.6

Preferential

Impacts of Japanese FTAs/EPAs

Alcoholic beverages Beer Distilling alcohol (excl. those used for making alcoholic beverages) Liqueurs and cordials Asparagus

(Continued )

2005 (% in Total)

November 17, 2009 14:4

Table 7.

From 25.5% × 8 timesk

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283

(Continued)

Values % in (Billion Agri. Yen) Frozen orange juice (not containing added sugar with more than 10% of sucrose by weight)

0.2

0.37

(Continued )

2005 (% in Total)

(0.09)

Values % in (Billion Agri. Yen) 0.3

0.51

2006 (% in Total)

(0.11)

Values % in (Billion Agri. Yen) 0.4

0.55

Tariffs (% in Total)

(0.11)

WTO Preferential Temporary

25.5%

EPAa

12.75%/ 25.5%n

November 17, 2009 14:4

2004

284

Table 7. Commodity

Source: Author’s calculation, based on UN COMTRADE, for trade in 2004 and 2006 and Ando and Kimura (2006) for others inluding information on tariffs. Notes: “∗ Free” denotes free for only those originated in the LDCs. a Other examples of major market access improvement for agricultural, forestry and fishery products are as follows:

9in x 6in B-763 b763-ch08

b If a value for custom duty per kilogram is more than the upper limit prices for the specific duty applied to partial pork (
53.53) but not more than the gate price of partial pork (
524). c Per kilogram, the difference between the standard import price of partial pork (
535.53) and the value for custom duty. d Within quota, per kilogram, the difference between
535.53 and a value for custom duty per kilogram if a value for custom duty per kilogram is more than
53.53 but not more than the value obtained by dividing
535.53 by 1.022 (
524). e If a value for custom duty per kilogram is more than the gate price of partial pork (
524). f Within quota, 2.2% if a value for custom duty per kilogram is more than the value obtained by dividing
535.53 by 1.022 (
524). Beyond quota, 4.3%. Tariff quota (total, including other categories of pork) from the first to fifth year for pork is 38,000 t in 2005F/Y, 53,000 t in 2006F/Y, 65,000 t in 2007F/Y, 74,000 t in 2008F/Y, and 80,000 t in 2009F/Y. g If a value for custom duty per kilogram is more than the gate price of processed pork (
897.59). h Within the quota, 4.3% if a value for custom duty per kilogram is more than the value obtained by dividing
577.15 by 0.643 (
897.59). Beyond the quota, 8.5%. Tariff quota (total, including other categories of pork) from the first to fifth year for pork is 38,000 t in 2005F/Y, 53,000 t in 2006F/Y, 65,000 t in 2007F/Y, 74,000 t in 2008F/Y, and 80,000 t in 2009F/Y. i Within quota, 0% for the first and second years for the market entry, and the rates will be discussed for the third to fifth year during the second year, subject to the rates not higher than 0.9 times of the applied MFN tariff rate at the beginning of 2003F/Y. Beyond quota, 50%/12.8%. Tariff quota from the first to fifth year for beef is 10 t in the first and second years and, 3000 t in the third year, 4000 t in the fourth year 6000 t in the fifth year. j Discussion will be required for cultured ones. k To be removed through 6, 4, or 8 times of annual reduction, starting from the standard rates (6%/10%/25.5%). l Tequila etc. are exceptions. m Higher rate, either 3% or 0.8 times of the applied MFN tariff rate (the rate obtained by subtracting one-fifth of applied MFN tariff rate from the applied MFN tariff rate), if the applied MFN tariff rate is more than 3%.; Discussion will be required if the applied MFN tariff rates is not more than 3%. n Within quota, half of MFN tariffs. Tariff quota (sum of HS200911, 200912, 200919) is 4000 for the first year, 4250 for the second year, 5100 for the third year, 5950 for the fourth year, and 6500 for the fifth year. From the sixth year, tariffs will be negotiated including the amount of quota.

Mitsuyo Ando

— Chicken: within quota, 0% for the first year for the market entry, and the rates will be discussed for the second to fifth year during the first year, subject to the rates not higher than 0.9 times of the applied MFN tariff rate at the beginning of 2004F/Y. Beyond quota, 6%, 11.9%, etc. Tariff quota from the first to fifth year for beef is 10 t in the first year and, 2500 t in the second year, 4000 t in the third year, 6000 t in the fourth year 8500 t in the fifth year. — Orange: within quota, 0% for the first and second years for the market entry, and the rates will be discussed for the third to fifth year during the second year, subject to the rates not higher than 0.9 times of the applied MFN tariff rate at the beginning of 2004F/Y. Beyond quota, 16% or 32%, depends on the importing seasons.

November 17, 2009 14:4

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Impacts of Japanese FTAs/EPAs

285

Imported price after import duty is imposed (¥) 535.53 524 482 In-quota tariff: 2.2% In-quota tariff: price differnece In-quota tariff: ¥482 0 53.53

524

Imported price before import duty is imposed (¥)

Fig. 1. Imported prices of pork per kilogram before and after import duty is imposed. Note: Pork is fresh, chilled, or frozen. Import duty in shadows is in-quota tariff under EPA.

than
53.53 but not more than the value obtained by dividing
535.53 by 1.022 (
524) and (ii) 2.2% when a value for the custom duty per kilogram is more than the value obtained by dividing
535.53 by 1.022 (
524) (see Table 7 and Fig 1).30 For prepared or preserved pork (excluding ham, bacon, pressed ham, etc.), on the other hand, the MFN tariff of 20% remains under the EPA since pork in this category is excluded from the list of tariff elimination, although their imports increased. In sum, the increase in pork imports can be partially interpreted as a consequence of the import tariff quota, with EPA tariffs being lower than MFN tariffs, but cannot be fully interpreted as an effect of tariff reduction by the EPA. A slight increase in imports is observed in avocados (from
6.2 billion in 2004 to
6.4 billion in 2005 and
6.8 billion in 2006), mangos (from
1.0 billion in 2004 to
1.3 billion in 2005 and
1.6 billion in 2006), frozen shrimp (from
0.6 billion in 2004 to
0.7 billion in 2005 and
0.8 billion in 2006), and others. Given that the reduction of tariffs from the MFN rate 30 The in-quota tariff is
482 when a value for custom duty per kilogram is not more than
53.53, though imports in this category do not exist at least from 2004 to 2006. For some of other pork and prepared or preserved pork, the in-tariff quota is (i) the difference between
577.15 and 0.6 times the value for the customs duty per kilogram when the value for the customs duty per kilogram is not more than the value obtained by dividing
577.15 by 0.643 (
897.59) and (ii) 4.3% when a value for the custom duty per kilogram is more than the value obtained by dividing
577.15 by 0.643 (
897.59).

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Mitsuyo Ando

of 1% or 3% to the EPA rate of zero per cent is so marginal that it could be easily absorbed in exchange-rate fluctuations, the rise in imports of these commodities from Mexico may well be due to some sort of announcement effect on imports. A slight increase in imports is also observed in frozen orange juice: imports are
0.2 billion in 2004,
0.3 billion in 2005, and
0.4 billion in 2006. This increase would be a consequence of introducing an import tariff quota with an in-quota tariff of 12.75% (half of MFN tariffs) under the EPA. Since the preferential margin of 12.75% (=MFN tariff of 25% − EPA tariff of 12.75%) is large, unlike for commodities such as avocados, mangoes, and shrimp with low MFN tariffs.31 On the import side as a whole, at present there seems to be some sort of announcement effect from the Japan–Mexico EPA on imports of some fruits and vegetables such as avocados and mangoes. Although the introduction of an import tariff quota with in-quota tariffs lower than MFN tariffs reduces tariffs within quotas, satisfactory effects of such tariff reduction are observed for only some sorts of fresh, chilled, or frozen pork and frozen orange juice. 2.3. Gravity model estimation of Japanese trade This section formally examines the impact of Japanese EPAs on trade with Japan’s counterparts using gravity model estimation. We investigate whether trade has expanded as a result of trade liberalisation by EPAs, considering basic economic conditions/relationships such as distance, size of economy, and income gaps. We first conduct gravity model estimation and then examine the differentials between actual values of trade and fitted value, i.e., theoretical levels of trade predicted by our gravity estimations.32 To obtain the theoretical levels of Japanese trade with the relevant countries, which are explained by the basic economic conditions/relationships, (i) our sample consists of countries listed in Table A.2 with exports/imports of no less than 0.01% of Japanese total exports/imports in the corresponding year, and (ii) data pooled from 2001 to 2005. The equation for our gravity model is as follows: ln(T radeti ) = β0 + β1 ln(Disti ) + β2 ln(GDPit ) + β3 ln(GDP P Cgapti ) + ε, 31 Leather shoes and women’s cotton trousers are examples of non-agricultural products with an expansion of imports in 2005 and introduction of zero-tariff import quotas under an EPA: EPA tariffs for leather shoes are zero within quota and 21.6–30% beyond quota, and those for women’s cotton trousers are zero within quota and 9.1–10% beyond quota (JETRO, 2006a). 32 The differentials themselves may include factors other than the effects of EPAs. The focus here is on examining their trends before and after the enforcement of EPAs.

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where T radeti represents total Japanese exports to, or imports from, country i in year t in real terms; Disti distance between (capitals of) Japan and country i; GDPit , real GDP of country i in year t, and GDP P Cgapti , real income gap or absolute value of the difference in real GDP per capita between Japan and country i in year t. To identify the effects on exports and imports individually, the gravity estimations are conducted separately for exports and imports.33 Data on trade values are obtained from UN COMTRADE (online).34 Note that the wholesale price index in the US is used as a proxy of deflator to convert nominal trade values into real terms. Data on the wholesale price index in the US, real GDP, and real GDP per capita are available from World Development Indicators 2006 (online),35 and distance measures are obtained from CEPII (Centre d’Etudes Prospectives et d’Informations Internationales) Web site.36 Table 8 presents results of gravity model estimations for Japanese exports and imports. The results indicate that Japan has a larger (smaller) amount of trade with countries located closer to (farther from) Japan, countries larger (smaller) in economic size, and countries with a smaller (larger) income gap.37 Table 9 in turn presents differentials between actual and fitted values of Japanese exports to or imports from Singapore and Mexico in real terms and differential ratios in terms of fitted values (=(actual value − fitted value)/fitted value).38 The following calculation is carried out to compare differentials (values) and differential ratios before and after EPA implementation. Given the timing of implementation, November 2002 (signed in January 2002) for Singapore and April 2005 (signed in September 2004) for Mexico, differential values and ratios are calculated from 2001 to 2005 for Singapore and from 2001 to 2006 for Mexico. Note that figures for 33 Since the countries from which Japan imports pork are very limited, we do not conduct gravity model estimations at sectoral levels. 34 See the Web site of UN COMTRADE (http://comtrade.un.org/). 35 See the World Bank Web site for the World Development Indicators (http:// publications.worldbank.org/WDI/). 36 The CEPII distance database is available at http://www.cepii.fr/anglaisgraph/bdd/ distances.htm. It provides four different measures: two are simple distances (distances between the capitals and between most important cities in terms of population), and two are weighted distances incorporating geographical distribution of population inside each country. The choice of distance variable does not change our results significantly. 37 Our sample excludes those with extremely small portions of trade with Japan. To examine whether our results are robust, regardless of the coverage of countries, we conduct gravity estimations with several sample sets such as a sample set including all countries with necessary data or a sample set comprised of countries with larger portions of Japanese trade. The results do not change, regardless of the coverage, though the coefficients of variables change slightly. 38 As is the case with gravity model estimations, the wholesale price index in the US is used to convert nominal values of actual trade into real terms.

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Table 8. Results of gravity estimation for Japanese exports and imports: 2001–2005.

Constant Distance (log) GDP (log) Income gap (log) (diff. in GDP per capita) No. of observations Adjusted R2

Export

Import

14.40∗∗∗ (8.61) −1.15∗∗∗ (−10.57) 0.72∗∗∗ (24.69) −0.15∗ (−1.91) 456 0.680

11.74∗∗∗ (5.92) −1.11∗∗∗ (−8.93) 0.80∗∗∗ (22.55) −0.14∗ (−1.67) 421 0.666

Source: Author’s estimation. Notes: Countries included are those with more than 0.01% of total Japanese exports/imports in the corresponding year. *Statistical significance at 10% and ***at 1%.

Japanese exports to Mexico in 2006 are calculated by using Mexican imports from Japan and 1.05 as a proxy for the c.i.f–f.o.b adjustment. Moreover, real GDP and real GDP per capita in 2006 are estimated, since they are not yet available, by employing estimates of nominal GDP at local currency in 2006, GDP deflator at local currency in 2006 (recalculated with base year 2000), and exchange rate (obtained by using GDP at local currency and GDP in US$ in the base year, 2000), available from the World Economic Outlook Database 2006 (online).39 For Singapore, although actual exports and imports have increased, as shown in Table 1A, and their actual values are larger than fitted values, differential values and ratios do not change significantly either before or after the enforcement of EPA (Table 9). This suggests that the Japan– Singapore EPA has had little impact on trade. Actual increase in trade is within the range explained by the basic economic conditions; however, more active trade between Japan and Singapore can also be attributed to the development of international production/distribution networks in East Asia. For Mexico, on the export side, differential values and ratios are positive, having increased particularly since 2005. Actual values of exports are larger than fitted values by US$7.6 billion in 2005 and US$9.3 billion in 2006, which are equivalent to 3.6 times the fitted values in 2005 and 4.1 times those in 2006. On the import side, on the other hand, differential values and 39 See

the International Monetary Fund (IMF) Web site for the World Economic Outlook Databases (http://www.imf.org/external/ns/cs.aspx?id=28).

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Table 9. Differentials between fitted and actual trade values and differential ratios. Singapore Exports

2001 2002 2003 2004 2005 2006

Millions US$ (Real)

Ratio to Fitted Value

12713 12414 12312 14252 13297 .

6.87 6.47 6.27 6.79 6.06 .

Mexico Imports

Millions US$ (Real)

3931.96 3607 3735 4114 3940.04 .

Exports

Imports

Ratio to Fitted Value

Millions US$ (Real)

Ratio to Fitted Value

Millions US$ (Real)

Ratio to Fitted Value

2.81 2.48 2.51 2.56 2.34 .

4906 6256 4195 6332 7587 9283

1.80 2.29 1.52 2.24 2.63 3.14

−473 −660 −778 −600 −496 −336

−0.19 −0.27 −0.31 −0.23 −0.19 −0.12

Source: Author’s estimation, based on Table 8. Notes: Differentials are the values obtained by subtracting fitted values from actual values. The wholesale price index in the US is used to convert trade value into real terms. Figures for Japanese exports to Mexico are based on Mexican imports from Japan with c.i.f–f.o.b adjustment. Real GDP and real GDP per capita for Mexico and Japan in 2006 are estimated by using current GDP at local currency in 2006, GDP deflator at local currency in 2006 (recalculated with base year 2000), and exchange rate since they are not available yet.

ratios are still negative in 2006. The reduction of absolute values, however, implies that actual values tend to be closer to fitted values. These observations suggest that the Japan–Mexico EPA has had a positive impact on trade, particularly on exports, even after considering basic economic conditions/relationships. As discussed above, the introduction of the zero-tariff import quota for BU cars under the EPA is considered a significant contributing factor in the growth of Japanese exports to Mexico. Although it is not explicitly examined in the gravity analysis in this section, another contributing factor identified is the increased demand for flat-panel LCD TVs in the US market.

3. Effects of the Japan–Mexico EPA beyond Trade Liberalisation Besides tariff removal, important outcomes of the Japan–Mexico EPA include improvement in the business environment through bilateral consultations at the Committee for the Improvement of the Business Environment, possible participation in international bidding for contracts of

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government procurement, and a change in logistics in Japanese trade with Mexico.40

3.1. Business environment Chapter 13 of the Japan–Mexico EPA explicitly refers to “the Improvement of the Business Environment”; i.e., Article 136 affirms their commitment to creating a more favourable business environment through occasional bilateral consultations to improve various issues regarding the business environment. In addition, Article 137 confirms their agreement to establish a Committee for the Improvement of the Business Environment, involving representatives of the private sector. Representatives of private parties on the Japanese side include Nippon Keidanren, the Japan External Trade Organization (JETRO), Camara Japonesa de Comercio e Industria de Mexico, A.C. (JCCI Mexico) with a membership of over 180 Japanese firms in Mexico, and the Japanese Maquiladora Association (JMA) with a membership of about 70 Japanese firms around the Mexico–US border. The Committee for the Improvement of the Business Environment provides private sector interests with a channel to directly consult with, and lobby, departments/bureaus of the Mexican government responsible for relevant issues. The annual meeting of the committee involves an obligatory review of issues raised by the committee in the previous year, forcing both Japanese and Mexican sides to make efforts towards improvement. The committee realises its aims in several ways. First, issues of interest to the private sector are addressed more effectively than when private sector interests lobby individually, since the relevant government agency must get involved. Second, it is particularly significant when several departments/bureaus of the Mexican government are involved with an issue raised by the private sector. Furthermore, closer coordination and cooperation between them are necessary.41 Third, the committee is useful in developing a network of personal contacts to maintain ongoing consultations between Japanese private sector interests and the Mexican government. Fourth, it has improved communication between Japanese firms and the Japanese embassy in Mexico so that they can now mutually seek action from the Mexican government. As long as issues are within the scope of bilateral

40 Discussion

in this section is based on information provided primarily by the JMA. instance, both the department in charge of industrial policy and that in charge of international trade are involved in the scheme of preferential treatment for exports and imports in the electric machinery industry. 41 For

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consultations, the committee can provide effective channels to improve the business environment in Mexico.42 The issues raised by the Japanese side include (i) security, (ii) immigration control for entry and exit, (iii) intellectual property rights, (iv) infrastructure (transportation), (v) debt collection, and (vi) competitiveness-related matters such as labour issues and energy costs.43 Greatly-improved security at the International Airport in Mexico City is an important outcome.44 Until October 2004, the federal police was in charge of internal airport security while the municipal police was in charge outside, and these agencies were not coordinated. Efforts made through committee consultations have led to regular meetings between the two to share information and to now jointly guard places such as money exchange services areas and airport parking, resulting in a rapid decline in the reported number of Japanese victims at the airport. Immigration control is another area that has seen important improvements. In 2005 Japan requested facilitation of immigration control, particularly on the border near Otay in the US, emphasising complicated procedures of immigration control for entry and exit and inappropriate attitude of officials of the Instituto Nacional de Migraci´on (INM).45 As a result, immigration control on the border improved significantly. The procedure to obtain an FMT (tourist visa) at immigration control was rationalised, the requirement of an invitation letter was abolished, and a branch office of the INM was established near Otay. In 2006 Japan requested the immediate establishment of a second border at Otay to allow products produced in the Tijuana area to pass through customs clearance without significant delay.46 In addition, Japan addressed the importance of developing supporting industries47 and of improving infrastructure at the port of Ensenada near Tijuana.48 42 Issues requiring changes in laws are beyond the scope of the bilateral consultations of the committee. 43 The issues raised by Mexico include the quarantining of agricultural imports in Japan. 44 Security has been worsening, particularly in Tijuana and Mexico City. A comparatively high rate was reported for 2004, including robbery targeting Japanese nationals and transport trucks on route to and/or from airports and ports. Associated costs result in increased production costs for Japanese firms in Mexico. 45 At the immigration control near Otay, it has been reported that business people’s access to certain locations have been inappropriately limited; the submission of irrelevant invitation letters has been demanded, and unreasonable fines have been imposed as a result of misunderstanding by INM officials. 46 It takes three to four hours for trucks to cross the border because of congestion. 47 Some efforts by the public and private sectors in both countries were made to find potential business partners in local supporting industries. 48 The port at Ensenada is too shallow for large vessels to enter and has insufficient docks. Therefore, when Japanese firms at Tijuana import parts and components from abroad,

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Similarly, some requests from the Mexican government to the Japanese government have been realised through consultations at the committee. One is the initiation by AEROMEXICO of direct flight services between Tokyo (Narita) and Mexico City via Tijuana twice a week from 18 November 2006. The Japanese government had originally planned to assign Nagoya Airport instead of Narita Airport, insisting that air services agreements are completely unrelated to the Japan–Mexico EPA. The Mexican government, however, insisted at the committee that EPA member countries have priority in their access quota for Narita Airport. Direct flight services between Narita and Mexico City via Tijuana were eventually established. Considering the worsening security for land transportation, the unnecessarily long time for transport trucks to cross the border, and the transit time in the US needed for those who travel on business between Japan and Mexico, Japanese companies can now enjoy the various benefits of the direct flights between Narita and Mexico City via Tijuana, where most of them are located.49 3.2. Government procurement The EPA has provided Japanese firms with a chance to participate in international bidding for government procurement contracts in Mexico. Government procurement in Mexico, not only from ministries of the federal government but also from the Comisi´ on Federal de Electricidad (CFE), Petr´ oleos Mexicanos (PEMEX), and Instituto Mexicano del Seguro Social (IMSS), is basically intended to be domestic procurement.50,51 However, FTA/EPA member countries are allowed to participate with certain constraints. International bidding for the contracts by non-FTA/EPA member countries is extremely difficult or impossible. Since the enforcement of the Japan–Mexico EPA, Japanese firms have obtained the right to participate they often use the US port at Long Beach in Los Angeles and truck the imported parts and components to their factories in Mexico. However, frequent congestion at the Long Beach port results in delays of up to two weeks in the delivery of parts and components to factories even after they have been loaded. See Urata et al. (2005) for discussion of the business environment in Mexico, including this issue. 49 Improved competitiveness of Japanese firms in Mexico, avoiding problems emphasised above, is certainly also beneficial to Mexico. 50 The Agreement on Government Procurement (GPA) is plurilateral, to which only some members of the WTO are parties. Mexico is not a party to the GPA. See the WTO Web site for details of the GPA (http://www.wto.org/english/tratop e/gproc e/gp gpa e. htm). 51 CFE, PEMEX, and IMSS are the federal (state-owned) electricity commission, the Mexican state-owned petroleum company, and the Mexican social security institute, respectively.

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in international bidding under the same conditions as US and EU firms. For instance, the Mitsubishi Heavy Industries Ltd. has received a full-turnkey order from CFE, headquartered in Mexico City, for the construction of a supercritical-pressure coal-fired power plant.52 3.3. Logistics The logistics of Japanese trade with Mexico, particularly on the import side, are changing. Frequently, Japanese trading companies in the US used to import agricultural products such as pork and avocados from Mexico and export them to Japan. Since the implementation of the EPA, however, commercial transactions recorded as Mexican exports to Japan have increased even if they are still physically exported from Mexico to Japan through the US. One reason is that importers in Japan (destinations) must be identified at the time of exporting to obtain a special certificate of the rules of origin required to utilise EPA import tariffs in Japan. Another reason is that Mexican companies are now more interested in exporting to Japan, resulting in greater direct commercial transactions. Trade statistics on Mexican exports to Japan more directly reflect actual transactions, including a part of those transactions through the US, which used to be regarded as Mexican exports to the US since exports are recorded by destination.

4. Conclusion This paper provided a post evaluation of Japanese EPAs with Singapore and Mexico. It first examined the impacts of trade liberalisation by the EPA and then investigated the effects of the EPAs beyond trade liberalisation. The Japan–Singapore EPA had an important role as it was the first EPA for Japan. Our gravity model estimation as well as detailed analysis on trade and actual tariff reduction by the EPAs, however, have demonstrated that it has had almost no direct impact on trade because the actual reduction of tariffs by the EPA is quite limited. On the other hand, our empirical investigation has confirmed a certain degree of positive impact of the Japan–Mexico EPA on trade, particularly on the export side, and investment. Significant effects of tariff reduction are limited to exports of BU cars, reflecting the introduction of an additional 52 The plant, to be installed at CFE’s Pacifico power station will become Mexico’s first supercritical-pressure coal-fired power plant. It will have the capacity to generate 700 MW of electricity, making it one of the nation’s largest power plants. Operation is scheduled to commence in February 2010. See the MHI Web site for more detailed information (http://www.mhi.co.jp/power/e power/topics/2006/mar 02.html).

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zero-tariff import quota for BU cars under the EPA by Mexico that applies to Japanese automobile manufacturers with and, without, local production. Although other major Japanese exports to Mexico, including various parts and components of electric machinery and transport equipment, have also expanded, the EPA is not a major factor underlying their rapid growth since most of them are already subject to zero per cent import tariffs on an MFN basis or under PROSEC. Moreover, the “reverse phenomenon” between EPA and MFN tariffs exists on the Mexican side: about half of the commodities with phasing-out tariffs in mining and manufacturing are subject to it as of January 2007. More direct and significant effects of the EPA on trade of commodities other than BU cars are expected mostly after the problem of “reverse phenomenon” in tariffs is solved. An important outcome of the Japan–Mexico EPA beyond tariff removal is the improved business environment through bilateral consultations at the Committee for the Improvement of the Business Environment under the EPA, involving representatives from the private sector. Another outcome worth mentioning is that with the EPA, Japanese firms have finally obtained the right to participate in international bidding for government procurement contracts in Mexico under the same conditions as firms of other FTA partners including the US and the EU. In addition, a change in logistics in Japanese trade with Mexico is a notable effect of the EPA. Future designs of FTAs/EPAs must seriously consider possible abuses of the phasing out of tariffs under FTAs/EPAs, particularly when countries have high MFN tariffs. Moreover, a simple tariff structure is preferable to a complicated one, involving price-differential tariffs, specific tariffs, seasonal tariffs, import tariff quotas, and exceptions from the list of tariff removal. If administrative procedures are costly and preferential margins are small, actual utilisation of EPA tariffs is likely to be low. It will also be essential to create and effectively utilise channels such as the Committee for the Improvement of the Business Environment under the Japan–Mexico EPA, particularly for FTAs/EPAs with countries in which Japanese firms have substantial investment. A final point of emphasis is the possibility of the effects of RTAs on multilateral trade liberalisation. From the context of MFN tariff reduction explained in the announcement in an official gazette (DECRETO por el que se modifican diversos aranceles de la Tarifa de la Ley de los Impuestos Generales de Importaci´ on y de Exportaci´ on) on 30 December 2004 and 29 August 2006, it seems that the main reason Mexico reduced MFN tariffs unilaterally is that it feared the withdrawal of manufacturing multinational enterprises (MNEs) from the country. A considerable number of parts and components are imported from East Asian countries with which Mexico does not have FTAs/RTAs. On the other hand, many products

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are imported at lower import prices with lower preferential tariffs under various FTAs/EPAs in force. Given these observations, Mexico has realised the importance of the urgent reduction of MFN tariffs to avoid the withdrawal of MNEs from Mexico. In other words, the development of RTAs sometimes accelerates trade liberalisation on a multilateral basis. Appendix Table A.1. Japanese investment in Mexico: released after Japan–Mexico EPA was signed in September, 2004. Release Date

Name of Japanese Enterprise

Industry Sector

Sep. 2004

Kyocera Corporation

Oct. 2004

Tohoku Pioneer Corporation Kansai Paint Co., Ltd.

Electronic Establishment of a new plant for the parts/optical production of solar battery equipments module for the US market Electronic Establishment of a new parts plant parts near the production site of speakers (for automobiles and entertainment equipment) Paints Announcement of establishing a joint venture with PPG Industries (US) for sales of automotive painting Food products Establishment of a branch of its affiliate in Brazil in Mexico City Automobiles Establishment of an affiliate for sales at the local market

Nov. 2004

Nov. 2004 Dec. 2004

Dec. 2004

Ajinomoto Co., Inc. Mazda Motor Corporation Nifco Inc.

Industrial plastic products

Dec. 2004

Unipres Corporation

Pressed auto parts

Jan. 2005

Kuriyama Corporation Fujita Corporation Bridgestone Corporation

Rubber products

Jan. 2005 Jan. 2005

Construction/ real estate Tires/rubber products

Business Lines

Movement of production facilities for automotive fasteners from Ohio in the US (production started in Jan. 2005) Expansion of production lines (additional large pressing machines and assembly lines) Establishment of an affiliate for sales of industrial rubber hose, fully owned by the affiliates in the US Establishment of a branch in Mexico City in Nov. 2004 Establishment of the third plant in Mexico for production of automotive tyres mainly for the North American market (production started in Jul. 2007) (Continued)

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Table A.1.

(Continued )

Release Date

Name of Japanese Enterprise

Industry Sector

Mar. 2005

Kayaba Industry Co., Ltd. Munekata Co., Ltd.

Hydraulic equipment

Establishment of an affiliate for sales

Plastic components

Introduction of the latest moulding machines to produce exterior frames for flat-screen TVs for the US market Establishment of a joint affiliate with Mitsubishi Corporation for the sale of pickup trucks Introduction of a module production system

Mar. 2005

Apr. 2005

Isuzu Motors Limited

Automobiles

May. 2005

Calsonic Kansei Corporation Hirotec Corporation

Auto parts

May, 2005

Jun. 2005

Jul. 2005

Sep. 2005

Sep. 2005

Takamatsu Machinery Co., Ltd. Nissan Motor Co., Ltd.

Suzuki Motor Corporation Mitsuba Corporation

Automotive door parts

Machine tools

Automobiles

Automobiles

Electrical components

Nov. 2005

Honda Motor Co., Ltd.

Automobiles

Dec. 2005

Piolax, Inc.

Automotive plastic parts

Business Lines

Establishment of a second plant in Mexico with the joint company for the production of auto parts sold to the GM local affiliate Scheduled to establish a center of maintenance/checking services for machine tools Renovation of production facilities in the Aguascalientes plant to start production of low-price compact cars for the North American market Establishment of five affiliates for sales in addition to an existing affiliate for sales of motorcycles Establishment of a new production site for die-cast components for the US affiliate Expansion of auto parts production lines in 2005 and 2006, establishment of storage plant in 2005, and expansion of automobiles in 2006 Expansion of the existing local plant aimed at increasing production and production lines for the expansion of transactions with Japanese auto manufacturers (Continued)

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Impacts of Japanese FTAs/EPAs Table A.1. Name of Japanese Enterprise

Industry Sector

Dec. 2005

Mitsubishi Heavy Industries, Ltd. Fuji Heavy Industries Ltd.

Heavy equipment

Automobiles

Jan. 2006

Jatco Ltd.

Auto parts

Jan. 2006

Toto Co., Ltd.

Sanitation equipment

Jan. 2006

Toyota Motor Corporation

Automobiles

Feb. 2006

SMK Corporation

Electronics

Feb. 2006

MarubeniItochu Steel Inc.

Iron and steel

Mar. 2006

Munekata Co., Ltd.

Plastic components

Source: JETRO (2006b).

297

(Continued )

Release Date

Jan. 2006

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Business Lines

Improvement of production facilities in a joint-venture plant catering to increased demand in the US market Development of distribution network with local dealers for imports and sales of US and Japanese automobiles including Subaru Improvement of production capacity for automotive step-less speed change devices (mainly for Nissan cars sold in North America) Establishment of production site for sanitary chinaware for the US market Improvement of production capacity of the Mexican plant to expand the production of pickup trucks and truck decks Introduction of additional production lines to improve production capacity of highly functional remote controls for the US market Establishment of a new coil center, in response to the expansion in production of consumer electronics and automobiles Improvement of the production capacity of the plant to produce exterior frames for flat-screen TVs, in response to an increased demand from Japanese consumer electronics makers

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Table A.2.

Argentina Australia Austria Azerbaijan Bahrain Bangladesh Belgium Belize Bolivia Botswana Brazil Cambodia

List of countries for gravity equation.

Ecuador Egypt, Arab Rep. El Salvador Estonia Ethiopia Fiji Finland France Gabon Germany Ghana Greece Guatemala Honduras

Canada

Hong Kong, China Chile Hungary China Iceland Colombia India Congo, Rep. Indonesia Costa Rica Iran, Islamic Rep. Croatia Ireland Czech Republic Israel Denmark Italy

Dominican Republic

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Algeria Angola

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Kazakhstan Kenya

Pakistan Panama

Tanzania Thailand

Korea, Rep. Kuwait Latvia Lebanon Liberia Libya Luxembourg Madagascar Malawi Malaysia Malta Marshall Islands Mauritania

Papua New Guinea Paraguay Peru Philippines Poland Portugal Romania Russian Federation Saudi Arabia Singapore

Trinidad and Tobago

Mauritius Mexico Mongolia Morocco Mozambique Netherlands New Zealand Nicaragua

Jamaica

Nigeria

Jordan

Norway

Slovak Republic Slovenia South Africa Spain Sri Lanka Sudan

Tunisia Turkey Uganda Ukraine United Kingdom United States Uruguay Uzbekistan Vanuatu Venezuela, RB Vietnam Yemen, Rep. Zambia Zimbabwe

Sweden Switzerland Syrian Arab Republic

Note: Countries listed here had no less than 0.01% of total Japanese exports or imports in the period from 2001 to 2005 at least once and also had accessed to all control variables.

References Ando, M and F Kimura (2008). Japanese FTA/EPA strategies and agricultural protection. Keio Business Review, 44(1), 1–25. Ando, M and S Urata (2007). The impacts of East Asia FTA: A CGE model simulation study. Journal of International Economic Studies, 11, 3–73. Burfisher, ME, S Robinson, and K Thierfelder (2001). The impact of NAFTA on the United States. Journal of Economic Perspectives, 15, 125–144. Frankel, JA (1997). Regional Trading Blocs in the World Economic System. Washington, DC: Institute of International Economics.

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Fukao, K, T Okubo, and RM Stern (2003). An economic analysis of trade diversion under NAFTA. North American Journal of Economics and Finance, 14, 3–24. Hufbauer, GC and JJ Schott (1992). Prospects for North American Free Trade. Washington, DC: Institute for International Economics. Hufbauer, GC and JJ Schott (1993). NAFTA: An Assessment. Washington, DC: Institute for International Economics. Hufbauer, GC and JJ Schott (2005). NAFTA Revisited: Achievements and Challenges. Washington, DC: Institute of International Economics. Japan External Trade Organization (JETRO) (2006a). JETRO White Paper on Trade and Investment 2006. Tokyo: JETRO. JETRO (2006b). JETRO Report on the Impacts of the Japan–Mexico EPA in the First: Year, Available at http://www.jetro.go.jp/biz/world/cs america/mx/ reports/05001225. Kataoka, G and A Kuno (2003). Boeki hogo no kosuto shisan [measuring the costs of trade protection]. UFJ Institute Report, 8(2), UFJ Institute, Tokyo. In Japanese. Kimura, F and M Ando (2002). Jiyuu boueki kyoutei to nougyou mondai (Free trade agreements and controversy about agricultural protection). Mita Gakkai Zasshi (Mita Journal of Economics), 95(1), 111–137. In Japanese. Krueger, AO (1999). Trade creation and trade diversion under NAFTA. National Bureau of Economic Research Working Paper No.7429. Krueger, AO (2000). NAFTA’s effects: A preliminary assessment. The World Economy, 23, 761–771. Kuno, A and F Kimura (2007). Nihon no keizairenkeikyoutei ni okaru boueki jiyuuka suijun no hyouka — houhouronteki kadai to bumon sangyou betsu hyouka [Evaluation of the degree of trade liberalisation in Japanese EPAs — methodological discussion and assessment by sector] KUMQRP Discussion Paper No. 2007-002, Tokyo: Keio University. In Japanese. Rauch, JE (1999). Networks versus markets in international trade. Journal of International Economics, 48(1), 7–35. Sazanami, Y, S Urata, and H Kawai (1995). Measuring the Costs of Protection in Japan. Washington, DC: Institute for International Economics. Urata, S, K Kiyota, M Ando, and A Kachi (2005). A Survey on Impediments to Trade and Foreign Direct Investment between Latin America and East Asian Countries. Tokyo: Japan Institute of International Affairs (JIIA).

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Index Assessment of Restiveness of ROO, 13 Analysis on index components, 10 Composition of CTC, 18 Cumulation, 5, 10, 12 de minimis rule, 5–6, 8–10, 12 Degree of restrictiveness, 9 In FTAs by Japan and Korea, 16 Outward processing, 9, 10, 12 Restrictiveness index, 10, 13, 15–16

Council of Mutual Economic Assistance (CMEA), 202, 238 Customs Union (CU), 2, 5, 166 Economic impacts of FTAs, 165 Accumulation effect, 170 Comparative advantage, 169, 175 Economic geography, 167, 202 Economies of agglomeration, 167–168, 179, 188 Factor price equalisation theorem, 167 Horizontal intra-industry trade, 167 Location effects, 168 Regional disparity, 168 Regional integration, 167–168 Scale economies, 167 Tariff elimination, 189 Terms of trade effect, 165, 189 Trade volume effect, 165–166, 189 Trade creation, 166, 175 Trade diversion, 166, 175, 182, 185–186, 188 Welfare decomposition, 166 See also Gravity Model See also Computable Equilibrium Model European Community (EC), 27, 131, 144–146, 153, 158–159, 207, 222

Bilateral agreements, 44–45, 52–53, 56, 59, 171 Common External Preferential Tariff (CEPT) scheme, 7, 22 Computable General Equilibrium (CGE) Model, 1, 168–171, 174, 176, 188, 260 (See also Economic impacts of FTAs) Accumulation effect, 170 Advantages, 168–169 Baldwin Dynamic Specification, 189 Dynamic Global Trade Analysis Project (GTAP), 170–173, 176, 181, 184, 186–187, 193, 194 Macroeconomics impact, 174, 176 (See also Global trade analysis project model)

Foreign Direct Investment (FDI), 1, 81–85, 87, 89–91, 93–95, 97–99, 101–103, 105–107, 109, 111–113, 301

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115–117, 119–121, 123–125, 127, 129–130, 168, 196, 220–221, 253, 259, 261 See also Restrictions on FDI Foreign investors, 87, 91–92, 94–97, 130, 184 See FDI Free Trade Agreement (FTAs) Agricultural liberalisation, 19–22 ASEAN-China FTA, 2, 6, 7, 11–12, 22–26, 41, 131, 149, 151, 161–163, 198–201, 210, 212, 215, 219, 230, 233, 235–237, 242 ASEAN Free Trade Area (AFTA), 6, 7, 11–15, 30, 32– 35, 38, 46, 50, 62–68, 70, 72, 74, 76, 78, 131, 144–145, 151, 157–158, 162–164, 198–202, 209–210, 212–214, 219–221, 224–225, 233, 235–239, 242 Australia-New Zealand CER, 2, 7, 14–15, 19–20, 25, 27, 30, 32–35, 38, 43–44, 46, 50, 62–68, 70, 72, 74, 76, 78, 131, 146, 151–152, 158–159, 163, 198–201, 207, 209, 212–213, 216, 220, 225, 233, 235–237 Australia-Singapore FTA, 19, 136 Australia-US FTA, 7, 20–21, 30, 33–35, 38, 43–44, 46, 50, 68, 70, 72, 74, 76, 78, 82, 85–86, 88, 90, 120, 131, 147, 151, 158–159, 162, 163 Chile-Japan EPA, 242 Chile-Korea FTA, 2, 6, 8, 11–13, 17–18, 20, 22, 26, 30–31, 34–35, 38, 43, 46, 50, 68, 70, 72, 74, 76, 78, 85–87, 90, 112, 131, 149–150, 161–163, 199–201, 210, 212–213, 217, 220, 231, 234–237 Chile-MERCOSUR, 15, 26 EU-Mexico FTA, 2, 6, 7, 11–13, 15, 18, 20–21, 30, 33, 35, 45,

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69, 71, 73, 75, 77, 79, 152, 131, 145, 153, 158, 159, 162–163, 210–213, 215, 220, 233, 235–237, 279 EU-EFTA FTA, 7, 11–13, 15, 27, 30, 32–35, 37, 46, 50, 62–67, 69, 71, 73, 75, 77, 79, 131, 143– 144, 152, 157–158, 162–163, 202, 207, 222, 224, 228, 238 Utilisation rate, 5, 243–244 Impact on Japanese companies, 247 Impact of Japanese FTAs, 247, 252 Japan-Brunei EPA, 260 Japanese firms, 241–243, 245 Japan-Indonesia substantive agreement EPA, 260 Japan-Malaysia EPA, 138, 242– 244, 247–248, 251, 253, 260 Japan-Mexico EPA, 2, 6, 11–13, 16, 30, 33–34, 36, 38, 43, 46, 50, 69, 71, 73, 75, 77, 79, 82, 85–86, 90, 95, 102, 131, 138, 147–148, 151, 159–164, 198, 200–201, 209–210, 212, 216, 234–237, 242–243, 247–248, 251–261, 273, 289, 292–293, 295–298 Japan–Singapore EPA (JSEPA), 2, 6, 8–9, 16, 18, 20, 22–23, 88, 175–177, 260, 262–265 Japan-Thailand EPA, 242 Japan-Philippines EPA, 138 Korea-Singapore FTA, 6, 8–9, 16–19, 30–31, 33–34, 36, 38, 41, 43–45, 50, 69, 71, 73, 75, 77, 79, 85–86, 88, 90, 95, 98, 131, 137, 142, 147–148, 151, 159–164, 198, 201, 209, 212, 216, 231, 233, 235, 242–245, 251, 253, 260–261, 296 Korea-Mexico FTA, 2 Latin America Free Trade Agreement (LAFTA), 202, 223–224, 238

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MERCOSUR, 14–15, 26–27, 198–202, 210, 212–215, 219–220, 222–225, 229, 233, 235–237 NAFTA, 2, 4–15, 18–22, 26, 30–34, 36–37, 40–41, 43, 50–51, 62–67, 69, 71, 73, 75, 77, 79, 82, 86–87, 90, 95, 97, 131, 142, 147, 152, 157–158, 162–163, 198–203, 207, 209, 212–214, 219–220, 222–225, 232, 235–238, 260, 273, 279 PANEURO, 7, 15, 18–19 Preferential tariff schemes, 241–242 US-Andean FTA, 14–15, 222, 225 US-Singapore FTA, 6–8, 14–15, 18–19, 22, 30, 34, 37, 44, 46, 50, 82, 85–86, 88, 90, 116, 131, 146, 151, 159, 160–163, 235 See also Services in FTAs See also Economic impacts of FTAs General Agreement in Trade and Services (GATS), 29–31, 33–37, 40–44, 46, 51–54, 56, 59–60, 68–80 (See also Services in FTAs) Central Product Classification (CPC), 34, 55, 57, 60 GATS-plus, 41, 46 Horizontal commitments, 36, 40–41, 43, 51 Mode 1 , 32, 47 Mode 2 , 32, 47 Mode 3 , 36, 41, 44, 46, 56 Mode 4 , 38, 40–42, 46, 49, 55, 58–59, 66 Negative list (top-down), 30–34, 36, 41, 43, 46, 51–53, 56, 59 Positive list (bottom-up), 30–34, 40–41, 43, 46, 52–53, 56, 59 Reservations on specific commitments, 39 Sectoral exclusions, 34–36, 44, 51

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Template, 33 General Agreement on Tariffs and Trade (GATT), 19, 131–135, 137–138, 140–141, 145–146, 148–153, 163–164, 195–196, 204, 225, 259, 261 Article IVXX, 19 GATT 19 , 131, 133–135, 137–138, 140, 145–146, 149–152, 163 Generalised System of Trade Preferences (GSTP), 203, 238 Global trade analysis project model (GTAP model), 170, 178–179, 182 Dynamic simulations, 178, 183, 184 Simulation of Japan’s existing and future bilateral FTAs, 171 Static simulations, 185 Gravity Model, 195, 197, 201–203, 205, 208, 238–239, 261, 289–290, 296 Effects on FTAs, 212 Estimation of Japanese trade, 286–289, 293 Horizontal (intra-industry) trade, 204 Trade creation, 196–198, 201–204, 207–208, 212–213, 219–220 Trade diversion, 196–197, 201–203, 207–208, 212–213, 219–220, 225, 238, 260 Vertical (inter-industry) trade, 204 Japan EPA tariffs, 273, 279, 281–282, 288–289, 297 Japan External Trade Organization (JETRO), 164, 243–244, 253, 265, 276–279, 281, 289, 293, 300 Japan MFN tariffs, 277, 279, 281, 287–289, 297 Most-favoured Nation (MFN), 19, 23– 24, 26, 47–49, 52–53, 55–57, 59–60,

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62–66, 137, 171, 174, 261–263, 265, 273–274, 276–282, 287–289, 297–298 Multinational corporations (MNCs), 220–221 Non-discrimination, 134–135 Non-tariff barriers to trade (NTBs), 2, 19 Probit Model, 248 Productivity commission of Australia, 9, 10, 163 Questionnaire, 241–244 Quasi-global Safeguard Type, 151, 163 European, 152, 163 GATT, 151, 163 NAFTA, 152, 163 WTO, 151, 163 Regional Trade Agreements (RTAs), 3–6, 26, 195–196, 207, 221, 259–261, 297, 298 Requirement of regional value content (RVC), 3–8, 10–12, 14, 16, 17 Adjusted value (AV), 4 Methods for calculating RVC, 4 RVC criteria and profit rates, 4 Value of non-originating materials (VNMs), 4 Restrictions on FDI, 81 Australia-US FTA, 82, 85–86, 88, 90, 120 Chile-Korea FTA, 85–87, 90, 112 Degree of restrictions, 83, 85, 87, 92 Japan-Mexico EPA, 82, 85–86, 90, 95, 102 Japan-Singapore EPA, 88 Korea-Singapore FTA, 85–86, 88, 90, 95, 98 NAFTA, 82, 86–87, 90, 95, 97 Policies, 81–83 Sectors, 90, 96–129 Types of measures, 95

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US-Singapore FTA, 82, 85–86, 88, 90, 116 Rules of Origin (ROO), 1–10, 12–14, 16–19, 25–26, 178–179, 188 Analysis on index component, 10 Change in tariff classification (CTC), 3–6, 10–12, 14, 17–18 (See also Assessment of Restiveness of ROO) De-merits, 3 Descriptive overview, 2 Descriptive analysis, 6 Empirical assessment, 9 In US and EU FTAs, 6 In East Asian FTAs, 7 Merits, 3 Principle criteria, 10–11 Requirement of a specific production process (SP), 3–5, 10–11, 14, 16–17 See also Requirement of regional value content (RVC) Safeguard Clauses Bilateral, 157, 161–163 Global, 155, 157 (see also WTO Safeguard Agreement) Safeguard Mechanism, 131–133, 135–146, 148, 150–154 ASEAN Free Trade Area (AFTA), 131, 144–145, 151, 157–158, 162–163 ASEAN-China FTA, 131, 149, 151, 161–163 Australia-New Zealand CER, 131, 146, 151–152, 158–159, 163 Australia-US FTA, 131, 147, 151, 158–159, 162, 163 Basic idea and structure, 132 Bilateral and Regional, 131–132, 135–140, 142, 146, 148, 150–154, 179 Chile-Korea FTA, 131, 149–150, 161–163

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EU-Mexico FTA, 131, 145, 153, 158, 159, 162–163 EU-EFTA FTA, 131, 143–144, 152, 157–158, 162–163 GATT 19 (see also WTO safeguard agreement) Japan-Mexico EPA, 131, 138, 147–148, 151, 159–163 Japan-Singapore EPA, 131, 149–150, 161–163 Korea-Singapore FTA, 131, 137, 142, 147–148, 151, 159–163 NAFTA, 131, 142, 147, 152, 157–158, 162–163 No general safeguard type, 150 US-Singapore FTA, 131, 146, 151, 159, 160–163 See also Quasi-Global safeguard type Services in FTAs, 29 (See also GATS) ASEAN Free Trade Area (AFTA), 30, 32–35, 38, 46, 50, 62–68, 70, 72, 74, 76, 78 AFTA-China, 41 Australia-New Zealand CER, 30, 32–35, 38, 43–44, 46, 50, 62–68, 70, 72, 74, 76, 78 Australia-US FTA, 30, 33–35, 38, 43–44, 46, 50, 68, 70, 72, 74, 76, 78 Chile-Korea FTA, 30–31, 34–35, 38, 43, 46, 50, 68, 70, 72, 74, 76, 78 EU-EFTA FTA, 30, 32–35, 37, 46, 50, 62–67, 69, 71, 73, 75, 77, 79 EU-Mexico FTA, 30, 33, 35, 45, 69, 71, 73, 75, 77, 79 Extent of liberalisation, 42, 46, 50–51 Form and content, 30, 51 Japan-Mexico FTA, 30, 33–34, 36, 38, 43, 46, 50, 69, 71, 73, 75, 77, 79

305

Korea-Singapore FTA, 30–31, 33–34, 36, 38, 41, 43–45, 50, 69, 71, 73, 75, 77, 79, National treatment and market access, 30, 43, 45, 51 Multiple-member agreement, 44 NAFTA, 30–34, 36–37, 40–41, 43, 50–51, 62–67, 69, 71, 73, 75, 77, 79 NAFTA template, 30, 40, 51 Templates for investment, 56 US-Singapore, 30, 34, 37, 44, 46, 50 Trade flows, 197, 201–204, 207, 220, 232, 238–239 (See also Gravity Model) Bilateral, 196–198, 201, 203205, 207, 211, 220–221, 232 Impact on FTAs, 195–198, 201– 204, 207–208, 212, 220–221 Intra-FTA, 167, 197–199, 201–202, 220 Intra-regional dependence, 198 Trade intensity index, 197–198, 201 World Customs Organization (WCO), 3 World Trade Organisation, 2, 4–6, 19, 27, 30, 43, 46, 52, 80, 82, 131–132, 134–136, 138–142, 147–152, 162–164, 173–174, 179, 196, 202, 204, 221, 241, 259, 261–264, 283, 285–287, 295 WTO Safeguard Agreement, 131 Committee on safeguards, 135 GATT 19, 131, 133–135, 137–138, 140, 145–146, 149–152, 163 Zero-tariff import quota, 273, 277–278, 297