Costs and Benefits of Economic Integration - Essay Example

Asian countries have witnessed rapid regional economic integration in the past decades. Examine the rationale for various types of regional trading agreements (RTAs) in the region and evaluate the economic impacts of these RTAs on East Asian countries. Introduction The number of regional trade agreements (RTAs) in East Asian nations has increased from 3 in 2000 to 72 in June 2013. (ADB 2013). ASEAN Free Trade Area (AFTA) was started in the year 1992 which is the main foundation bloc for the ASEAN Economic Community. (AEC). There are other RTAs in East Asia, and they are Asia-Pacific Economic Cooperation (APEC), China –ASEAN, Japan –Malaysia, Japan –Singapore, South Korea –EFTA, Thailand- Laos, Thailand –India and so on. As per Krugman (1994), bilateral trade minimises the tariffs and due to that barriers to trade are being removed. As per Bhagwati (1992), regional bilateral trade result in multilateralism and increase in international trade. The main aim of AFTA is to remove tariffs in the East Asia regions and ultimately to accomplish zero intra-regional tariffs, and this has been fortified by CEPT (Common Effective Preferential Tariff). At the start, in ASEAN, Malaysia, Brunei Darussalam, Indonesia, Singapore, Phililiphines and Thailand were the founding members and in 2003, another four nations such as Lao PDR, Cambodia, Vietnam, and Myanmar joined the AFTA. Tariffs were reduced drastically by all the member nations in AFTA, and Indonesia reduced the tariff rates to zero percent in 1997 for its 99% of its products shown in CEPT list. (Fujita, Kuroiwa & Kumagai 2011:325). There had been a substantial increase in the bilateral exports due to reduction in the tariff rates within the East Asian regions and for instance, Indonesia successfully increased its exports to Thailand, Singapore, Phililiphines and Malaysia by 200% in 1990s, mainly because of the bilateral trade by espousing CEPT’s targets (Common Effective Preferential Tariff). (“Hapsari and Mangunsong 2006:21”). The main aim of the research essay is to look into whether East Asian nations have experienced fast regional economic integration in the past decades, to evaluate the rationale for various types of regional trading agreements (RTAs) in the East Asian countries and to find out the economic impacts of these RTAs on East Asian countries. Fujita, Kuroiwa & Kumagai 2011:325). Literature Review Meaning of Free Trade Agreements The reduction of the tariffs for particular products between selected nations is known as preferential trade agreement. As per Leung (2000), the majority of the FTAs (Free Trade Agreements) are nothing but preferential trade agreements. ASEAN Free Trade Agreement (AFTA) tries to enhance ASEAN’s competitive position as a manufacturing base in the global market through the abolition, within ASEAN, of both non-tariff and tariff barriers. AFTA has introduced CEPT (the Common Effective Preferential Tariff) Scheme under AFTA, which buttresses a tariff rate of 0 to 5% for products manufactured within ASEAN with differential fine-tuning for ASEAN -6 nations.(Cheritel 2006:10). How RTA promotes regional trade in East Asian Regions For East Asian RTAs, liberalisation of market access for products is still regarded as the most leading issue as just 50% of the RTA in enforcement now covers services’ trade also. Majority of the RTAs in East Asian Regions cover “ beyond-tariff” issue which is falling under the WTO Agreements like contingency safeguard initiatives like countervailing duties , anti-dumping duties and safeguards , and rules of origin (ROO) issues. Less than 50% of the above RTAs have dealt with provisions like services, intellectual property rights and standard-associated initiatives. An analysis of the 15 RTAs in South East Asian RTAS reveals that a) the magnitude of preferential trade liberalisation is comparatively modest, b) depending upon the nature of RTAs and signatory nations, the tariff lines coverage and preferential margin differ, c) only certain number of RTA entered in these regions can be regarded as real or genuine “free trade agreements”. For instance, coverage remains less than 10% for all member nations in SAFTA (South Asian Free Trade Agreement), and preferential margin is maintained at less than 3% for all SAFTA members. However, in case of AFTA (ASEAN Free Trade Agreement), preferential margins are much higher than that of SAFTA and in ATFA, the average coverage remains more than 75 %( UNCTAD 2008:5). In case of India, its FTA with the other Asian developing nations has, in fact, helped it to expand its exports, and it derived adequate economic gains. For maximising the economic gains from RTAs with LDC (least developing countries) from Asia, it becomes apparent that non-tariff’s barriers like infrastructural deficiencies, NTBs, lack of trade financing should be tackled on a precedence basis (UNCTAD 2008:5). Empirical research on ASEAN- related RTAs like ASEAN +3, ASEAN +6 demonstrates that a) implementation of these RTAs would bring about increasing impacts on GDP in all signatory nations, b) reduction of NTM would offer higher impact on GDP instead of elimination of tariff and c) larger economic impacts are anticipated as the figures of signatory nations improve. It is projected that ASENA+6 would likely to enhance the real GDP for its member nations by about 2% provided that all tariffs were removed and if there is a reduction of about 75% in non-tariff measures. If the non-tariff measure (NTMs) is reduced by 50%, the economic impact would be reduced to 1.3%. Thus, the outcome of tariff elimination without reduction of NTM accounts only just “0.2% increase in GDP”. It is also projected that increase in GDP in ASEAN+6, ASEAN +3 and ASEAN likely to be 1.3% , 1% and 0.9% respectively, if there has been an elimination of tariff in whole with 50% reduction in NTM (UNCTAD 2008:6). In case of AFTA, for instance, utilisation rates for all exports emanating from Malaysia and Thailand amounted only for 23.5% of exports as of 2006. However, these figures have been steadily increasing as the coverage of preferential tariff items becomes broader as per its tariff reduction and elimination schedule. Vietnam stands first in utilisation rates among ASEAN Members since it is having relatively high MFN tariffs. The utilisation of preferential tariffs occasionally transforms the trade balance between the signatory nations as evidenced in the case of Thailand-India FTA. Despite utilisation rates of Thai exports to India still hovers around 18% in 2006 , since 2004, exports of electronic and electrical products from Thailand to India increased radically and in 2005 , Thailand achieved a surplus trade balance with India for the first time. This shows that RTAs in South East Asian regions can boost the economy of small nations like Thailand. (UNCTAD 2008:7). Welfare Impacts of RTA in East Asian Regions With the help of a computable general equilibrium (CGE) model, one can simulate the welfare impacts of RTAs, especially ASEAN + 1 RTAs. CGE studies reveal that implementation of various ASEAN+1 RTAs in full bring advantages to the member nations and resulted in monetary losses to non-members. Various studies find that the level of advantages varies from agreement to agreement with large share of advantages by ASEAN from RTAs and Northeast Asian economies like Japan and China reaping larger benefits out of it. ASEAN –Korea and ASEAN-China RTAs expand the concept of preferential tariffs among members to establish a huge trade bloc covering China and another giant block with Korea. Thus, business firms in these nations would definitely make use of incentives under such RTA plans. (Barro & Lee 2011:283). As per ADB & ADBI (2011) research study, about 28% of Asian companies used RTA preferences. Further, 20% of Asian companies replied that multiple ROOs (rules of origin) have increased the cost of doing business. Relying upon the opinions from the various businesses, the study found that alarms over the Asian FTA noodle bowl impact on business, which might have been exaggerated at the time of surveys. Thus, the above study found that the looming risk of an Asian noodle issue in the near future with the ever increasing RTA numbers in the province. From the above table , we can understand that business firms are of the view that ASEAN FTA offers advantages like concentration of manufacturing , preferential tariffs, new business opportunities and market access, whereas they also cite the following disadvantages in using ASEAN FTA like cost of relocation of manufacturing facilities , enhanced cut-throat competition , competitive disadvantage and higher documentation costs(Wignaraja 2013:26). Table 1- Benefits and costs of ASEAN FTAs. Preferential tariffs are normally referred as the main advantage of ASEAN FTAs and enhanced documentation work pertaining to RTA as the main disadvantage. Thus, Southeast Asian business enterprises reap more advantages than cost incurred. Most of the businesses in these regions have reported that the striking feature of AFTA is the preferential tariffs which promote imports intermediate raw-materials. One another advantage cited is that larger market access which enhances the export opportunities. Some of the disadvantages cited by the businesses are enhanced competition due to flow of foreign direct investments and from the entry of unrestricted imports. Majority of the businesses were of the opinion that they incurred negligible documentation costs. New business opportunities are being offered by RTAs is the opinion by Malaysian businesses whereas Indonesian businesses are of the view that it offers an equal advantage from market access and more concentration of manufacturing activities. Indonesian businesses observe that enhanced documentation costs and enhanced competition are the high costs from ASEAN-China RTA whereas Malaysian businesses observe cut-throat competition and cost associated with relocating manufacturing facilities as the chief cost from ASEAN-China RTA. As per ADB/ADBI (2011) survey, the chief cause for not employing ASEAN RTAs is the absence of information about the RTA. Many businesses have answered that they do not prefer the use of ASEAN RTAs since it does not throw light on the detailed tariff preferences and other provisions of ASEAN RTAs or how to employ them. Though the AFTA is well-known and first of its kind of RTA in Southeast Asia and having been in use for more than two decades, but it lost its charm to the ASEAN-China’s RTA is really perplexing. Since ASEAN RTAs is having too intricate legal texts, which need expert knowledge in international trade to understand its provision, many SMEs were not in a position to spend for engaging specialist services to understand and interpret the provision in ASEANs RTA. Table 2- Impediments for the use of RTAs (Wignaraja 2013:27). Business firms in ASEAN region cite that ASEAN FTA is less attractive as there has been delays and enhanced administrative costs in getting a certificate of origin, there has been very little margin of preferences, there has been too many exclusions in RTA, non-tariff measures have been imposed on FTA partners, there has been one-sided classification of product origin, and no confidentiality was maintained as regards to rules of origin (Wignaraja 2013:13). Rationale for Using Various Types of Regional Trade Agreements (RTAs) One of the main aims of entering into RTAs is to mutual exchanges of concessions on trade barriers, mainly to stimulate market access from which all parties to the agreement can derive advantages. In RTAs, the chances of success rates are high as the number of participating nations will be small or there has been earlier history of failures in negotiation at the multilateral level. As per Viner (1950), advantages may not be reaped by the nations forming a common union as trade may be diverted to suppliers of higher-cost within the integrating province and thus, trade-diversion losses may surpass the trade-creating benefits. One another advantage in countries engaging in RTAs as it can usher domestic policy reform and turn it more secure. Thus, by engaging in a RTA, the signatory nations are barred from reversing their domestic policy reform. Thus, signatories to a RTA can enhance their bargaining authority with third nations by negotiating a trade agreement with common external hurdles, mainly through customs union instead of FTAs. By using RTA, a small country can have the market access in a larger country and in case of Canada-U.S.A RTA, Canadian main intention was to accomplish a RTA that granted Canada some magnitude of exemption from the levy of countervailing and anti-dumping duties by the U.S manufacturers. Such RTA will also seek unique bilateral arrangements that would restrict the application of U.S safeguard initiatives to Canada. RTA can help to buttress security arrangements between the integrating nations. For instance, immediately after Second World War, a post-war regional trade agreement was entered between France and Germany, which helped to stop a further outbreak of war due to the considerable trade flows between these nations. (Whalley 1998:74). The economic impacts of these RTAs on East Asian countries The economic impacts of ASEAN FTA on East Asian nations can be enumerated as follows: Its main aim to offer 99% of tariff lines at 0 to 5% out of which sixty percent will be duty-free for ASEAN-6 by the year 2010 and 88% for CLMV by 2015. ASEAN also concluded about seven Mutual Recognition Agreements (MRAs) in the service sector. A wide-ranging investment agreement was signed on 26 February 2009. It has set a target for AEC, which is a single market and the manufacturing base by the year 2020 (Wignaraja 2013:34). As per WTO, there were about USD3 trillion trade among Asian nations in 2012. Thus, the increase in the number of RTAs in Southeast Asian region can be attributed to success of NAFTA (North Atlantic Free Trade Agreement) and that has been copied by East Asian nations and the ever increasing manufacturing networks among Asian nations and incapacity of WTO in deal-making. (Sipahutar 2013). According to OECD (2013), the budding Asian economies are anticipated to grow by about 6.9% per year in 2014-18 as compared to 8.6% registered well before the global financial crisis 2000-2007. The real GDP in Thailand and Malaysia is expected to grow by an average annual rate of 4.9% and 5.1% respectively over the above mentioned period. Over the same period, Singapore’s economy is anticipated to grow by 3.3% per annum. The CLMV nations (Cambodia, Lao PDR, Myanmar and Viet Nam) are anticipated to grow, which is led by Lao PDR at 7.7% per year whereas the real GDP growth is Myanmar, and Cambodia is expected to grow by 7% during the above period. “Conclusion and Recommendations” Regional Trade Agreements (RTAs) have now turned to be a very special feature of the MTS (Multilateral Trading Systems). The success of RTAs can be evident from the ever-increasing number of RTA being signed all around the world. RTAs are really assisting nations to integrate their markets. RTAs are being helpful in building a trade block among signatory nations. Thus, in the above chapter and from the under mentioned Table 3, we have seen that RTAs do really promote trade and exports between the corresponding nations .Thus, ASEAN RTAs offer more business interests between the signatory nations as in the case of ASEAN-China RTA and AFTA. Further, the business firms in these nations strongly believe that RTA offers benefits like greater market access and preferential tariffs as compared to its costs like higher flow of foreign direct investments, enhanced competition from the entry of imports and cost of relocation of manufacturing process and the documentation costs. Thus, we can conclude that the probable advantages from ASEAN RTAs are gradually being transformed into real advantages for business. Table 3- Real GDP Growth of Southeast Asia, China and India Source: www.oecd.org/dev/asianpacific/mpf Further, non use of RTAs by business firms suggest that there have been low margins of preference and higher documentation costs linked with ROOs. Further, due to want of adequate information, the business firms in the region may not be aware about the detailed tariff preferences and other provisions of ASEAN RTAs or how to employ them. One another reason cited for the non-use of ASEAN RTA is that the partners are not fall within the category of trading partners of the responding business firms. The possibility of RTA usage in the Southeast Asian economies is specifically influenced by learning at firm-level through construction technological capabilities together developing knowledge about RTAs. Business firms located in chief industrial areas, and the members of the automobile industry are more probable to employ RTAs than other business firms. RTAs are helping even smaller nations to prosper and this is evident from Thailand which achieved a surplus trade balance with India for the first time in 2005. This shows that RTAs in East Asian regions can boost the economy of small nations like Thailand. (UNCTAD 2008:7). As per Wignaraja, RTA offers advantages like concentration of manufacturing , preferential tariffs, new business opportunities and market access whereas RTAs also offer the following disadvantages in using RTAs like cost of relocation of manufacturing facilities , enhanced cut-throat competition , competitive disadvantage and higher documentation costs. Thus, by engaging a RTA, the signatory nations are barred from reversing their domestic policy reform. As per ADB/ADBI (2011) survey, the chief cause for not employing ASEAN RTAs is the absence of information about the RTA. Though the AFTA is well -known and first of its kind of RTA in Southeast Asia and having been in use for more than two decades, but it lost its charm to the ASEAN-China’s RTA is really perplexing. List of References Asian Development Bank. (2013). Asian Regional Integration Data Base. [online] Available from www.aric.adb.org > [Accessed 26 March 2014) Bhagwati, J.(1992).’ Regionalism versus multilateralism.’ World Economy 15,(5) Barro R J & Lee, JW. (2011). Costs and Benefits of Economic Integration. Oxford: Oxford University Press Cheritel, M. (2006). ASEAN: AFTA and Other Free Trade Agreements. Manila: GRINN Fujita M, Kuroiwa I & Kumagai, S. (2011). The Economics of East Asian Integration. New York: Edward Elgar Publishing Hapsari, I.M., and Mangunsong, C., (2006), “Determinants of AFTA Members’ Trade Flows and Potential for Trade Diversion,” Asia-Pacific Research and Training Network on Trade, 21 Krugman,P. 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