India Asean Book

8/2/2019 India Asean Book

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Table of Contents

Abbreviations..........................................................................................................1

Federation of Indian Chambers of Commerce and Industry (FICCI) .....................4

About Deloitte.........................................................................................................5

1. Executive Summary ...........................................................................................6

2. Introduction.........................................................................................................9

2.1 Background and Scope .............................................................................9

2.2 Roadmap .................................................................................................10

3. Decoding FTAs .............................................................................................12

3.1 Economics of Free Trade ........................................................................12

3.1.1 Benefits of Free Trade..................................................................12

3.1.2 Historical Background...................................................................12

3.1.3 Impediments to Free Trade ..........................................................13

3.1.4 Trade Liberalization and FTAs.....................................................13

3.2 Trade Patterns in Asia .............................................................................15

3.3 FTAs in Asia.............................................................................................16

3.4 Challenges Posed by FTAs in Asia .........................................................19

4. Benefits from FTAs and the Empirical Evidence ..........................................22

4.1 Economic Growth ....................................................................................22

4.2 Price Reductions......................................................................................24

4.3 Gains from product variety.......................................................................25

4.4 The Survival of More Productive Firms ...................................................25

4.5 Trade and Employment ...........................................................................26

4.6 Attracting Foreign Investments:...............................................................27

5. Economic Impact of India-ASEAN FTA.........................................................29


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5.1 India ASEAN Trade and Impact of FTA on the Economy .......................29

5.1.1 Export Intensity & Trade Intensity Indices ....................................31

5.1.2 Sectorial Hirschman .....................................................................33

5.1.3 Complementarity index.................................................................35

5.2 Impact of FTA on Indian Industries Based on Revealed Comparative

Advantage......................................................................................................36

5.2.1 Overview of the Sectors ...............................................................385.2.2 Textiles, Apparels and

Accessories ............................................. 38

5.2.3 Competitiveness analysis ............................................................ 44

5.3 Impact of FTA on Services Sector .......................................................... 51

5.3.1 Telecommunication...................................................................... 53

5.3.2 Computer and Information Services ............................................ 54

5.3.3 Financial Service sector............................................................... 55

5.3.4 Insurance services ....................................................................... 56

5.3.5 Construction Services .................................................................. 57

5.4 Impact on Industry Supplementary Evidence ...................................... 57

6. Business Opportunities in ASEAN Countries................................................ 63

6.1 Findings based on current open project tenders..................................... 64

6.1.1 Malaysia ....................................................................................... 64

6.1.2 Singapore..................................................................................... 71

6.1.3 Indonesia...................................................................................... 76

6.1.4 Thailand ....................................................................................... 82

6.1.5 Philippines.................................................................................... 83

6.1.6 Vietnam ........................................................................................ 85

7. India-ASEAN FTA and Vision for Indias Growth .......................................... 87

8. Appendix ....................................................................................................... 89


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Appendix 1 .................................................................................................... 89

Appendix 2 .................................................................................................... 92

Appendix 3 .................................................................................................... 93

Contacts............................................................................................................... 941 India ASEAN Free

Trade Agreement A Deloitte-FICCI White Paper

Abbreviations

1MDB 1Malaysia Development Berhad

ACE ASEAN Centre for Energy

ADB Asian Development Bank

AIFTA ASEAN India Free Trade Area

APEC Asia Pacific Economic Co-operation

ARIC Asia Regional Integration Centre

ASEAN Association of South-East Asian Nations

ASEAN+3

The 10 ASEAN countries plus People's Republic of China,

Republic of Korea and State of Japan

ASEAN+6

The 10 ASEAN countries along with India, Australia , NewZealand, People's Republic of China, Republic of

Korea and

State of Japan

ASEAN 5

The five countries of Singapore , Malaysia , Indonesia, Brunei

Darussalam &Thailand

ASSOCHAM Associated Chambers of Commerce of India

BIMSTEC

Bengal Initiative for Multisectoral Technical and Economic


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Cooperation

BO Business Opportunities

CCI Communications Content & Infrastructure, Malaysia

CEPC Carpet Export Promotion Council, India

CFTA Canada-U.S. Free Trade Agreement

CITI Confederation of Indian Textile Industries, India

CMLV

Acronym for Cambodia, Myanmar, Lao's People Democratic

Republic

CP Complaining Party

CPI Consumer Price Index

DIPP Department of Industrial Policy and Promotion

DSM (ASEAN-India) Dispute Settlement Mechanism Agreement2

E&E Electrical and Electronics

EPP Entry Point Projects

ESC Economic Strategies Committee ,Singapore

ETP Economic Transformation Programme

EU European Union

FDI Foreign Direct Investment

FICCI Federation of Indian Chambers of Commerce and Industry

FTAA Free Trade Area of the Americas

FTA Free Trade Agreement

GATT General Agreement on Tariff and Trade

GDP Gross Domestic Product

GERD Gross Expenditure on R&D


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GLC Government-linked company

GNI Gross National Income

ICT Information and communication technology

IP Intellectual Property

IT Information Technology

KG D 6 Krishna Godavari-D6 Gas project, India

KLIA

Expressway

Kuala Lumpur International Airport Expressway

KLIFD Kuala Lumpur International Financial District

LAO PDR Lao Peoples Democratic Republic

LNG Liquefied Natural Gas

MDG Millennium Goal

MFN Most Favored Nation

MNC Multi- national Corporation

MRO Maintenance, Repair and Overhaul

MRT Mass Rapid Transit

MTDC Malaysian Technology Development Corporation

NAFTA North American Free Trade Agreement

NKEA National Key Economic Areas3 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper

OECD Organization for Economic Cooperation and Development

PCA Party Complained Against

PRC- Peoples Republic of China

PTA Preferential Trade Agreement

R&D Research and Development


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R&D&C Research, Development and Commercialization

RCA Revealed Comparative Advantage

RIL Reliance Industries Limited

RFP Request for Proposal

RM Ringgit Malaysia

ROO Rules of Origin

SAARC South Asian Association for Regional Cooperation

SCORE Sarawak Corridor of Renewable Energy, Malaysia

SITC Standard International Trade Classification

SME Small and Medium Enterprise

UAE United Arab Emirates

UK United Kingdom

US/ USA United States of America

USTR U.S. Trade Representative

WTO World Trade Organization4

Federation of Indian

Chambers of Commerce and

Industry (FICCI)

Established in 1927, FICCI is the largest and oldest apex business organisation

in India. Its history is closely interwoven with India's struggle for independence

and its subsequent emergence as one of the most rapidly growing economies

globally. FICCI plays a leading role in policy debates that are at the forefront of

social, economic and political change. Through its 400 professionals, FICCI is

active in 44 sectors of the economy. FICCI's stand on policy issues is sought out

by think tanks, governments and academia. Its publications are widely read for


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their in-depth research and policy prescriptions. FICCI has joint business

councils with 75 countries around the world.

A non-government, not-for-profit organisation, FICCI is the voice of India's

business and industry. FICCI has direct membership from the private as well as

public sectors, including SMEs and MNCs, and an indirect membership of over

2,50,000 companies from regional chambers of commerce.

FICCI works closely with the government on policy issues, enhancing efficiency,

competitiveness and expanding business opportunities for industry through a

range of specialised services and global linkages. It also provides a platform for

sector specific consensus building and networking. Partnerships with countries

across the world carry forward our initiatives in inclusive development, which

encompass health, education, livelihood, governance, skill development, etc.

FICCI serves as the first port of call for Indian industry and the international

business community.5 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper

About Deloitte

Deloitte Touche Tohmatsu Limited is a UK private company whose member firms

around the world provide integrated professional services in Audit, Tax,

Enterprise Risk Services, Consulting and Financial Advisory. We provide

services to public and private clients spanning multiple industries. With a globally

connected network of member firms in more than 150 countries, we bring worldclass capabilities and

deep local expertise to help clients succeed wherever they

operate. Our more than 170,000 professionals are committed to becoming the

standard of excellence.

In India, we are spread across 13 locations and our 15,000 professionals take

pride in their ability to deliver to clients the right combination of local insight and

international expertise. Our professionals are unified by a collaborative culture


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that fosters integrity, outstanding value to markets and clients, commitment to

each other, and strength from cultural diversity. We enjoy an environment of

continuous learning, challenging experiences, and enriching career opportunities.

Our professionals are dedicated to strengthening corporate responsibility,

building public trust, and making a positive impact in their communities.6

1. Executive Summary

The India ASEAN Free Trade Agreement (FTA) was signed in Bangkok on

August 13, 2009, and came into effect from January 1, 2010 with Malaysia,

Thailand and Singapore. It is expected to be in place with all member countries

by 2016. The FTA collectively covers a market of nearly 1.8 billion people and

proposes to gradually slash tariffs for over 4,000 product lines. Currently the FTA

is restricted to trade in goods while negotiations for a similar agreement for

services are currently under way.

The theoretical underpinnings leading to an advocacy for free trade agreements

is unequivocal as free trade is expected to increase production, improve

specialization and lead to other welfare improvements in the long run for

consumers and producers alike. However the practical experience and lessons

from the FTAs that have been in place in other regions of the world does not

provide the necessary backing to the conclusions that emerge from the theory of

free trade. What is therefore the likely impact of the India-ASEAN FTA on the

Indian economy? What industries will benefit from the implementation of the FTA

and what industries will be hurt? Is this likely to create a significant impact on the

wages, employment and trading patterns in India in the years to come? What

opportunities and threats should Indian businesses be aware of? These are

some of the issues that we address in this white paper.


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Drawing upon the mixed findings of the impact of other FTAs on the member

countries, it is therefore not surprising that the impact of the India-ASEAN FTA

on the Indian economy is also likely to benefit some constituents while it will

negatively impact certain sectors in the short run. Drawing upon existing

research, we find strong reason to advocate that the success of the FTA is

critically dependent on the existence of good institutions in the country and an

efficient regulatory environment such that they act as true enablers for the

benefits to flow through and disperse throughout the economy. Benefits from the

FTA can possibly have a positive impact on Indias growth rate, help improve

productivity in Indian manufacturing and usher in an environment (driven by

healthy competition) that can promote greater business ties leading to

employment creation and greater trade within India and ASEAN.

We find evidence that the implementation of the FTA can only result in

intensifying the trade dependence amongst India and ASEAN. Seen in light of

the fact that currently ASEAN region exports more to India than what India

exports to ASEAN, a greater trade dependence will possibly allow Indias exports

to ASEAN to increase in the years ahead. Moreover, we also find that India has

increasingly been concentrating its exports to ASEAN towards mineral fuels and 7 India ASEAN Free


mineral oils. It is therefore plausible that post the implementation of the FTA,

these sectors will benefit more as they will be best poised to avail of their greater

presence within ASEAN. Other sectors/industries can also be expected to benefit

through greater efficiencies achieved through specialization although a more indepth analysis will need

to be conducted to arrive at any affirmative conclusion in

this regard. We also find evidence that suggests that the trading profile between

India and ASEAN is such that ASEAN exports to India when matched against


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Indias import profile is more compatible in contrast with Indias exports to

ASEAN and its import profile. This implies that ASEAN trade will benefit more

post implementation of the FTA compared to the perceived gains from trade that

India is likely to experience.

Our industry specific analysis focuses on determining the relative comparative

advantage enjoyed by Indias industry vis-a-vis that of the ASEAN trading

partners. The basis for this analysis stems from the fundamentals of trade theory

that concludes that free trade will result in specialization in certain

products/industries in which a country enjoys a comparative advantage and will

end up producing and exporting more products from these industries. Based on

our analysis, we find that the following Indian industries enjoy a greater

competitive advantage relative to their counterparts in the ASEAN countries:

pharmaceutical

On the other hand, the following industries in ASEAN enjoy a larger competitive

advantage than the counterparts in India:

The automobile industry (including auto parts and ancillaries) is on the borderline

with no clear trend that may allow us to conclude whether India or ASEAN has a

clear advantage over the other.

Although the current FTA is restricted to that in goods alone, we extrapolate the

possible implications of the FTA on the services sector through secondary


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multiplier effects on the economy. We also find evidence that a FTA with services

(that is currently being discussed) will certainly be a boost to the services sector

in the Indian economy and will help in sustaining the growth momentum in the

medium to long term.

Finally, we find ample evidence to suggest that the FTA will open up

opportunities for Indian businesses in Malaysia, Singapore, Indonesia, Thailand

and Philippines. We have highlighted important initiatives announced by the

respective governments in these countries as well as projects with open tenders

that will become accessible to Indian businesses to further their business 8

interests in these countries. These opportunities will result in enhancing the

growth of key businesses in these sectors with the benefits of income and

employment generation in India that will add to the India growth momentum.

We duly emphasize the importance of an enabling policy environment that can

enhance or pull down the chances of the FTA becoming a catalyst in Indias

growth story. No free trade agreement can result in the intended outcome in

fostering trade, growth and employment creation in a country if the FTA is

juxtaposed against a myriad set of conflicting subsidies and taxes in the domestic

front that can destroy the very competitiveness that the FTA can usher in.

This is critical to the success of the India ASEAN FTA and cannot be

emphasized enough.

2. Introduction

2.1 Background and Scope

The India ASEAN Free Trade Agreement (FTA)

1

was signed in Bangkok on


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August 13, 2009, and came into effect from January 1, 2010 amidst mounting

scepticism from the business community in India regarding the asymmetric

impact of this agreement on certain sectors of the Indian economy. The FTA,

drafted after almost six years of tough negotiations, is expected to be

implemented in phases with Malaysia, Thailand and Singapore implementing the

agreement from January 1, 2010 in the first phase.

The FTA, considered the world's largest, covers a market of nearly 1.8 billion

people and proposes to gradually slash tariffs for over 4,000 product lines over a

staggered period, by 2016. However, certain specified products on both sides will

be shielded to some degree. This FTA aims at opening a 1.8 billion consumer

market to the member countries with a combined GDP of $ 2.3 trillion. In

addition, ASEAN-India bilateral trade has been growing steadily from 1993 and

stood at US$ 43.9 billion as of 2009-10 with ASEANs export to India at US$

25.79 billion and imports from India at US$ 18.1 billion as of the same year. As

for foreign direct investment (FDI), the inflow from India to ASEAN member

States was US$ 476.8 million in 2008, accounting for 0.8 per cent of total FDI in

the region. Total Indian FDI into ASEAN from 2000 to 2008 was US$ 1.3 billion.

Just like any other FTA, the India-ASEAN FTA has also been mired in political

controversy despite the economic principle that advocates free trade as a

desirable trading form benefiting all partners through mutual access to greater

markets, free flow of labour and capital, reduced transaction costs of doing

business across geographies and an efficient allocation of resources to the

various production forms. Driven by the theoretical underpinnings of free trade

and the empirical evidence from FTAs implemented in various regions of the

world, this white paper takes a closer look at the India-ASEAN FTA and explores


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its impact on the Indian economy. It provides a balanced view of the pros and

cons associated with the FTA and evaluates its impact on key industries in India

both from the standpoint of opportunities that are likely to be created as well as

the challenges posed on them from greater competition that the FTA is likely to

usher in. An important analysis presented in this paper is the possible impact of

the FTA on some key industries using the relative production advantages or

disadvantages that Indian industry reflects in the region.

2.2 Roadmap

Our white paper starts by summarizing the theory governing free trade. Several

assumptions have been made by economists to conclude on the benefits of free

trade. Notable among them is the notion of free markets i.e. markets that are

not constrained by the existing regulatory environment. It is important to

understand this framework as any meaningful discussion on the benefits of free

trade will necessarily have to be evaluated in a larger environment where other

existing policy parameters (and their impact on the specific industries) may act as

a deterrent to the realization of the full benefits from trade.

Before moving on to an analysis of the impact of the FTA on India, we

summarize the impact of other existing FTAs on the participating nations. The

evidence on the benefits of such trade pacts in other regions is mixed and the

success, if any, can best be described as limited. However, trade relations and

the impact of trade liberalization is a dynamic phenomenon and we recognize the

limited tenure of some of these agreements to be able to draw meaningful

conclusions; hence, it is possible that a longer term analysis on the impact of

other FTAs is required before one draws a conclusion about their success.

We then provide a snapshot of the characteristics of India-ASEAN trade. This


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allows us to delve into a before and after comparison of the impact of the FTA on

the Indian economy. We focus on some of the key member countries that are a

party to the FTA and draw inferences on the impact of the agreement on the

Indian economy based on the economic policies and priorities that have been

announced by the respective countries. As the current India-ASEAN FTA

pertains to goods only, we restrict our analysis to the impact on those sectors

that are directly impacted by the FTA. However, inter-industry linkages and

multiplier effects in the economy are important determinants that will ensure

that the impact from the FTA will flow through to the other sectors as well.

We make some observations on the impact of the FTA on the services sector

in this context.

Several large scale projects initiated and announced in the ASEAN region in the

recent past may open up opportunities for Indian businesses once the FTA is

operationalized. We provide a summary of such initiatives as a part of the

opportunities from the FTA section B in this paper. We also discuss the possible

short term impact of the FTA on some Indian industries arising from trade

diversion and specialization that are associated with any FTA of this kind.

Specific sectors and the impact of the FTA on them are also discussed. The

feedback from the industries is summarized based on anecdotal evidence and

our analysis from them. We also provide a theoretical analysis of the impact of

the FTA on the focus industries based on the principles of trade theory. Finally, we juxtapose the FTA on

the growth path of the Indian economy and

conclude on how this will play out over the next decade in terms of Indias growth

rate as well as some other social sector priorities. A large part of this discussion

is subjective and we recognize the limitations of our conclusions based on other

contingencies that are not explored or taken up in detail. Nonetheless, our


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observations are interesting in their own right and may pave the way for greater

analysis and fine-tuning in the future. Decoding FTAs

3.1 Economics of Free Trade

3.1.1 Benefits of Free Trade

The economic case for an open trading system based on multilaterally agreed

rules rests largely on commercial common sense. But, it is also supported by

evidence as captured by world trade and economic growth trends since the

Second World War. The first 25 years after the war witnessed steep reductions

in tariffs. This was accompanied by significant increases in world trade that

averaged approximately 8 percent per annum over the same period. More

significantly, world economic growth accelerated and averaged approximately 5

percent per annum during this period. While an increase in growth may be

driven by a number of factors (e.g. technological advances), empirical research

indicates a definite statistical link between freer trade and economic growth.

Economic theory points to strong reasons for the link. All countries, including the

poorest, have resources human, industrial, natural, financial which they can

employ to produce goods and services for their domestic markets or to compete

overseas. Economics tells us that we can benefit when these goods and

services are traded. Simply put, the principle of comparative advantage says

that countries prosper by concentrating their resources in on what they can

produce best, and then trading these products for products that other countries

produce best. In other words, liberal trade policies policies that allow the

unrestricted flow of goods and services sharpen competition, motivate

innovation and breed success. The importance of global free trade can be

grasped by the fact that there are currently 153 countries that are members of


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the World Trade Organization (WTO) the international organization whose

main function is to ensure that trade flows as smoothly, predictably and freely

as possible.

3.1.2 Historical Background

The desirability of free trade, originally put forth by Adam Smith in The Wealth of

Nations in 1776, was first demonstrated theoretically by 19th century English

economist David Ricardo. Ricardo showed that in a world where labor is the only

factor of production, if each country specializes in the good in which it has a

comparative advantage, then all countries can gain from trade. The intuition is

that this kind of specialization maximizes global production of goods and enables

countries to enjoy greater levels of consumption through international trade.

Ricardos seminal work has spawned a rich literature in international trade theory 13 India ASEAN Free


showing that even under more general conditions, Ricardos conclusion that free

trade is mutually beneficial continues to hold good.

Of particular interest is the Heckscher-Ohlin theory that introduced a second

factor of production, capital, and showed that a country will export the commodity

that intensively uses the factor that is relatively more abundant in that country

(and will import the good that intensively uses the scarce factor). In other words,

as observed by Markusen et al., the Heckscher-Ohlin theory may be used to

support certain empirical observations including evidence that labor-abundant

developing nations such as India tend to export labor-intensive goods such as

clothing, footwear etc.

3.1.3 Impediments to Free Trade

Given the overwhelming theoretical basis favouring free trade, it is somewhat

surprising to find that free trade is almost never observed in practice. Free trade,


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in its purest form, refers to the unfettered export and import of goods and

services between one country and another with no government intervention on

either countrys side. However, barriers to free trade are an observed

phenomenon and manifest themselves as:

I. Tariff barriers: A tax on imports that are invoked by countries mainly to

protect the domestic industries from the possible consequences of

greater competition.

II. Non-tariff barriers: These can be in form of quantitative restrictions on

imports/exports (quotas) or existing government regulations governing

technical and safety standards for products that can have the effect of

restricting imports. Another form of non-tariff barrier to free trade is

found in Domestic Content Requirements that are regulations wherein

importers are forced to import goods that contain minimum prescribed

amounts of domestically produced components. Such restrictions are

commonly imposed on the domestic operations of foreign firms that

engage in foreign direct investment in production facilities in the

regulating country.

It should be noted that there can be a number of other regulatory/administrative

measures that can be put in place to indirectly restrict import quantities.

3.1.4 Trade Liberalization and FTAs

Given the existence of trade barriers (regardless of origin) at any point in time,

the question often arises as to what countries can do to lower or eliminate trade

barriers among themselves. Efforts to do so are broadly referred to as trade

liberalization and can take several forms. Markusen et al. state that trade

liberalization often occurs in the form of a multilateral agreement such as the


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various trade negotiation rounds of the General Agreement on Tariffs and Trade

(GATT), or an agreement among a smaller set of countries, typically with some

geographical proximity. This latter type of agreement is called a preferentialtrade agreement (PTA)

and forms the starting point for our analysis of the

ASEAN-India Free Trade Area (AIFTA) under consideration.

consists of a number of countries that agree to eliminate all trade barriers

among themselves while keeping intact their existing tariffs with non-member

countries. The North American Free Trade Agreement (NAFTA) signed by

the United States, Canada and Mexico is an example in this regard.

customs union in which member countries, in addition to eliminating all trade

barriers among themselves, also adopt a common tariff against non-member

countries.

et: When the cooperation among member states is extended to

allow free movement of factors of production (e.g., labor and capital) across

national boundaries, a common market is formed.

place in the

case of an economic union, i.e., a common market in which members

coordinate monetary, fiscal policies and other policies. The European Union

is the classic example of an economic union.

Beneficial Effects of FTAs

The beneficial effects of FTAs are several as listed below.

countries and tends to increase incomes/growth of the members. Intuitively,

starting from a situation of tariff-distorted trade, the elimination of tariffs allows


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each member to specialize in the production of the goods in which it has a

comparative advantage and trade those goods in exchange for imports of

other goods from fellow members.

ating tariffs, expands a

member countrys export market thereby allowing it to expand its scale of

operations and lower its average cost of production.

domestic market, then increased competition from foreign products dampen

domestic monopoly inefficiencies, if not eliminate them altogether.

trade flows and expands the variety of products available to consumers in the

home country.

Potential Negative Effects of FTAs

There can also be potential drawbacks associated with FTAs.

country switching its import supplier from a more efficient (low cost) country to

a less efficient member country resulting in an inefficient allocation of

resources. Dumping: Dumping refers to the practice of a foreign country selling its

product in the home market at a price that is lower than its fair value. While

this can occur even in the presence of trade barriers, the elimination of tariffs

in the home country increases the probability of this occurrence and can

cause considerable harm to domestic industries that can be driven out of

business altogether.

the domestic market for the imported product leading to loss of market share


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and laying off of workers in that sector. In the short run, this kind of

dislocation can cause considerable hardship to the affected workers.

number of industries that are unable to compete with cheaper imports. This

may lead to excessive dependence on foreign supplies for a number of

commodities a situation that could have adverse effects if there were a

disruption in any of the foreign supplies.

The net effect of an FTA will therefore be driven by the benefits and the possible

negative impacts arising from them. What makes this assessment difficult for an

FTA such as the India-ASEAN one is the fact that the market in which such an

FTA is being implemented is fraught with policy guidelines, regulatory restrictions

and competitive trade policy that directly hinders the interpretation of a truly free

trade agreement.

3.2 Trade Patterns in Asia

Asias rise in the 1960s from a poor underdeveloped agro based economy to a

global factory has been spectacular. Though the continent lacked large reserves

of natural resources and was steeped in high levels of poverty, it had abundant

supply of cheap and productive manpower. Geographical proximity to the

expanding, high-income economy of Japan with MNCs in the lookout for low cost

production locations proved to be a boon for Asia. A thriving world economy

hungry for labor-intensive imports from Asia, declining tariffs in developed

country markets, inflows of trade-related FDI, and generous foreign aid flows

acted as the key driver of outward-oriented growth in Asia.

Market driven expansion of trade and FDI along with innovation and learning by

Asian firms have enabled them to acquire requisite technological capabilities to


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either compete internationally or become suppliers to MNCs over time. As firms

underwent systematic innovation and learning, imports from the region witnessed

a gradual shift. From exporters of labor intensive products like textiles, garments,

and footwear, Asia started to export more of technology-intensive exports like

chemicals, ships, electronics, and automobiles. Asian firms through their

constant innovation and investment in research and development emerged as

leaders in production networks and supply chains.

Intra-regional trade also flourished as regional trade barriers and logistics costs

fell and production found way to more cost-effective locations. As per ADB

estimates, trade within Asia increased significantly from 37% of total trade to

54% between 1980 and 2007. The end of the 20th century witnessed the Asian 16

crisis (1997) and this significantly changed the outlook of outward orientation in

the region.

The Asian Financial Crisis of 1997-98 wrecked havoc among the economies of

Thailand, Indonesia, Malaysia, and the Republic of Korea (hereafter Korea) and

adversely affected the economies of Philippines, Hong Kong and China. The

crisis led to the emergence of sentiments of economic regionalism in East Asia

and a number of economies have come together in the post crisis era to

undertake initiatives for regional economic surveillance and close economic

collaboration. Several groups have been to set up to facilitate the process.

3.3 FTAs in Asia

Market driven forces of cross border trade, FDI flows and finance as a result of

multilateral and unilateral trade liberalization processes has deepened the

economic ties in the Asian region. The last twenty years have witnessed an

upsurge of bilateral and multilateral trade agreements being convened in this part


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of the world.

For several decades the Asian economies had structured their approach to

international trade on the multilateralism and most favored nations (MFN)

principles through the General Agreement on Tariffs and Trade (GATT)/WTO

framework and open regionalism and unilateral liberalization centered on APEC.

But this long standing policy stance of pursuing trade through the frameworks of

APEC and WTO has witnessed a change over the past decade. The region is

pursuing a three-track approach based on global (WTO-based) cum transregional (APEC-based), regional

(ASEAN+3 or ASEAN+6), and bilateral

liberalization of trade.

Asia is at the forefront of FTA activity. At present there are a total of 506 FTAs in

various stages of negotiation in the region of Asia, of which 119 are ones that

have been proposed, 110 are under negotiation, and 277 that have been already

concluded. Out of the 277 concluded FTAs 231 are already under effect.

Table 3.1: No of FTAs in in various Asian countries (as of 2010)

UNDER NEGOTIATION CONCLUDED

TOTAL

Country Proposed

Framework

Agreement

Signed/Under

Negotiation

Under

Negotiation

Signed

In


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Effect

Singapore 4 1 9 3 18 35

India 11 4 7 0 11 33

Korea,

Republic of

10 2 8 1 6 27

Pakistan 10 5 3 2 6 26

China,

People's

Republic of

8 3 3 1 10 25

Thailand 6 4 3 0 11 2417 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper

Japan 6 0 5 0 11 22

Australia 6 2 5 0 8 21

Malaysia 3 1 5 2 8 19

Indonesia 7 1 1 1 7 17

New

Zealand

4 1 3 2 7 17

Brunei

Darussalam

4 1 1 0 8 14

Viet Nam 3 1 2 0 7 13

Philippines 4 0 1 0 7 12

Lao PDR 2 0 1 0 8 11


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Kazakhstan 2 1 0 3 5 11

Myanmar 2 1 1 0 6 10

Cambodia 2 0 1 0 6 9

Source: Asian Regional Integration Centre website

The table exhibits the status of FTAs signed by the top 15 countries (in respect of

maximum number of total FTAs) and all the ASEAN countries.

Singapore leads the region with a total of 35 FTAs followed by India and Korea.

Singapore with its strategic location, world class infrastructure and logistics is the

regional head quarter for a number of top MNCs in the world. One of the

founding members of ASEAN, Singapore has trade agreements with all the major

Asian economies like PRC, India, Japan, and Korea as well as economies

outside the region, including the United States (US) and Australia. The USSingapore FTA which has been

effective since 2004 was the first such

agreement made by US in Asia and is supposed to be a model agreement in

terms of scope.

India and China too have been active in the FTA scenario in a bid to ensure

market access for their goods and services. China has separate agreements with

ASEAN for goods and services and is in the process of negotiating a third one for

investments. India has a goods FTA with ASEAN (which is the focus for this

paper), and is trying to negotiate a service agreement. Japan and Korea the

two major Asian economies have also been active in forging trade treaties with

other Asian economies with a total of 22 and 27 treaties respectively under their

belts. The relatively poorer economies such as Cambodia, Lao Peoples

Democratic Republic (Lao PDR), Viet Nam, Philippines, and Indonesia have by

and large relied on the ASEAN to convene trade agreements with the larger

economies . All of these countries are members of ASEAN. Weak infrastructural


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capacity and low resources could be a reason why these countries have not

been able to conduct negotiations on their own.

The four major factors that have played a driving force behind the emergence of

FTAs in East Asia have been:

-driven economic integration - Asian

policymakers have realized the potential of FTAs in reducing trade barriers, 18

harmonizing rules, standards and regulations and the long term economic

benefits that these can bring in and have embarked on a mission to foster

greater economic integration in the region through trade pacts.

n economic integration

initiatives - The successes of initiatives for economic integration in Europe

and the Americas have proved to be a strong motivation for the region to

move towards regional economic cooperation and integration. The successful

launch of an economic and monetary union by the euro area countries and the

expansion of EU to further east as well as the success of NAFTA and the Free

Trade Area of the Americas (FTAA) in North Central, and South America have

proven beneficial to the participating economies. The fear that the two

trading giants, the EU and the US, might become more dominant and

influential in rule-setting in the global trading arena and thus marginalizing

Asian economies has been a major impetus for the regional leaders to come

forward to step up initiatives of regional cooperation and integration. Also, the

slow progress in the WTO/Doha round and the APEC process has prompted

the regional economies to come together themselves and form trade

agreements that are mutually beneficial to their circumstances.

- The financial crisis of 1997-98 that rocked the


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economies of East Asia has been an eye-opener to the fact that the region

needs to strengthen regional economic cooperation in order to sustain

economic growth along with stability. Though it adversely affected the east

Asian Economies only, the crisis became a lesson for all emerging Asian

economies and triggered a need among the east Asian economies to

strengthen their regional economic cooperation to ensure sustainable growth

and stability in the region. Fear of exclusion has also prompted many nations

to join the FTA bandwagon.

- The WTO Doha

Development Round commenced on November 2001 as an initiative to

promote trade-led growth in developing countries. The negotiations were

primarily centered on two key areas: agriculture and non-agricultural market

access. After seven years of negotiations, talks were suspended over the

growing concerns that there werent appropriate safeguard measures to

protect poor farmers in the developing nations from the rising food and oil

prices. With the dim prospect of a finalized trade agreement, pro-business

Asian economies started to initiate bilateral and multilateral trade treaties

among themselves to further talks on liberalization of trade in goods

and services.

The number of FTAs is easy to track, but the numbers in themselves fail to

indicate how important FTA s are to trade and economy at the national level.

How much of a countrys trade is covered by the FTA is difficult to calculate

owing to the exceptions and exclusions contained in many trade agreements.

Official statistics on utilization rates of FTA preferences for Asia are not easily

available and published data on the direction of services trade do not exist. A


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paper by ADB attempts to form an indicative estimate of this, by making a

simplistic, yet bold assumption that that all goods trade is covered by concluded 19 India ASEAN Free


FTAs and computes the share of an economys bilateral trade with its FTA

partners in its total trade with the world for 2000 and 2008.

Graph 3.1: Share of an economys bilateral trade with its

FTA partners

Source : Asian FTAs: Trends and Challenges by Masahiro Kawai and

Ganeshan Wignaraja

The larger economies of the region like India, Korea, China, Japan have a

smaller share compared to the ASEAN member states. Korea has 44% of its

total trade with bilateral FTA partners, China 25%, India 23% and Japan 11%.

This implies that ASEAN members rely more on FTAs for their trade

compared to other nations.

Another point to note is that for all the nations, the share of trade with bilateral

FTA partners out of its total trade has increased over the eight year period

considered. This is an indication of the increasing number of FTAs and their

importance in total trade in the economies of the region.

3.4 Challenges Posed by FTAs in Asia

ADB

2

has pinpointed some challenges confronting FTAs in Asia. They have

made their own study and surveys to come to the conclusions that are

summarized below.

benefits like preferential tariffs, market access, and new business


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opportunities for partner economies. To automatically assume that such

benefits are exploited or enjoyed by the individual industries and firms would

be grossly inaccurate. In fact studies have shown that FTA preference

2

This section has been compiled mainly from the working paper by Asian Development

bank on FTAs in Asia.

80

70

60

50

40

30

20

10

0

Brunei Darussalam

Lao PDR

Singapore

Malaysia

Myanmar

Hong Kong, China

Cambodia

Korea

Thailand


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Indonesia

Vietnam

Japan

India

Philippines

China

2000 200820

utilization rates (estimated by shares of export value enjoying preferences

3

) is

low in Asia. This implies that although a number of FTAs have been

concluded in the region, in reality they are underutilized. The direct implication

is that the full benefit of free trade is not being actualized and it is ultimately a

waste of scarce resources used in negotiating trade treaties in developing

countries

4

. Lack of awareness by the firms in member countries were found to

be one of the major reasons behind this low utilization of FTAs.

raise awareness about FTAs and their various benefits and clauses to firms

and industries at a micro level. Government and Industry bodies could play an

important role in making FTAs more transparent to industries - especially

small and medium scale industries - which might not have the relevant

information or the capacity to decode the scope of FTAs.


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Asian FTAs is the suboptimal level of liberalization in agricultural products.

The coverage of the goods in the Asian FTAs differs from agreement to

agreement. Agricultural goods have been largely excluded in coverage owing

to the pressures from the farm lobbies and social concerns in the rural

sectors, where poverty looms large. According to the ADB report, it is

important for FTAs in the region to ensure coverage of at least 85% of all

agricultural product lines in a given agreement and minimize exclusions to not

more than 150 product lines. This can be achieved by adopting a negative list

approach to agricultural products with a few sensitive items. A realistic tariff

elimination schedule, a transparent regime, and reform of subsidies are issues

that need to be further addressed under FTAs.

of Origin (ROO): Rules of origin are used to determine the country of

origin of a product for purposes of international trade. They are used to

determine which goods will enjoy preferential tariffs to prevent trade deflection

among FTA members. For manufactured goods, ROOs comprise three types:

(i) a change in tariff classification rule defined at a detailed harmonized

system level; (ii) a local (or regional) value content rule, which requires a

product to satisfy a minimum local (or regional) value in the country (or region)

of an FTA; and (iii) a specific process rule, which requires a specific

production process for an item. It has been argued that Asian FTAs have

complicated ROOs and this deters the use of FTA preferences and raises

transaction costs for firms. Multiple ROOs in overlapping FTAs could pose a

severe burden on SMEs, which have less ability to meet such costs. This

problem was originally termed a spaghetti bowl of trade deals (Bhagwati

1995), and has now come to be known as the noodle bowl effect in Asia.


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Another group of analysts have argued that the Asian FTAs could be actually

creating a new order by building the foundation for a stronger regional trading

system (Petri 2008).

3

Baldwin 2006; World Bank 2007

4

Bhagwati 200821 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper

FTAs would increase cost of conducting business when dealing with multiple

ROOs in the region. Evidence suggested that multiple ROOs impose limited

burden on firms in East Asia. Of the 465 firms that responded to the question

on this issue, only 27% said that multiple ROOs significantly add to business

costs. But there were country-level variations in perceptions - Singaporean

firms had the most negative perceptions regarding multiple ROOs (38%),

while Korean firms had the least negative perceptions (15%). Negative

responses for Japanese, Philippine, and Thai firms were 31%, 28%, and 26%,

respectively. National FTA strategies, industrial structures, and the quality of

institutional support could explain the differences in perceptions of ROOs

across Asian countries.

more negative perceptions of multiple ROOs than SMEs. A possible reason

for this was large established firms tend to export to multiple markets and

change their business plans in response to FTAs and are thus more likely to

complain about issues of multiple ROOs. Smaller firms usually export to a


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33/43

reduction.

Empirical research supports the fact that opening trade increases growth in both

developed and developing countries

6

. However, it is also true that the existence

of good institutions and efficient regulatory systems are a prerequisite to attract

FDI and trade-led growth. A general consensus seems to have been emerging

5

Excerpted from Robert C. Feenstra, New Evidence On The Gains From Trade, Review

of World Economics/Weltwirtschaftliches Archive, December 2006; and Trade as a driver

of Prosperity Commission staff working document, European Commission, 2010

6

A. Winters "Trade liberalization and economic performance: an overview", Economic

Journal, 114, 2004, and R. Wooster, S. Dube and T.M. Banda (2006) "The contribution of

intra-regional and extra-regional trade to growth: evidence from the EU"23 India ASEAN Free Trade

Agreement A Deloitte-FICCI White Paper

over the last few years that trade opening works best for growth, employment

and incomes when it is successfully combined with other structural reform

measures

7

.

With respect to the European Union, existing FTAs are argued to have an impact

on increasing EU GDP by 2%. Further increased cooperation with existing trade

partners, particularly lowering of non tariff barriers could double this growth

effect. Moreover, empirical estimates also reveal that opening of trade increases


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productivity and increases competiveness of the EU industries with estimates

suggesting that between 1988 to 2000, productivity in manufacturing sector in the

EU region increased by 11% while mark-ups came down by 1.6% in the face of

increased imports during the period

8

. Productivity growth aid economic growth as

well as consumer welfare and therefore gains in productivity have second rung

effects of increasing economic growth.

Another study

9

suggests that since North American Free Trade Agreement

(NAFTA)s implementation in January 1994, U.S. agricultural trade with its

partners in the agreement has increased in both size and relative importance.

Between 1993 and 2000, U.S. agricultural exports to Canada and Mexico

expanded by 59 percent, while corresponding exports to the rest of the world

grew only 10 percent. Similarly, U.S. agricultural imports from Canada and

Mexico increased 86 percent between 1993 and 2000, compared with 42 percent

for U.S. agricultural imports from the rest of the world. However, other factors -

such as population growth, changes in macroeconomic performance and

exchange rates, and unusual weather patterns - generally have had a much

stronger effect on U.S agricultural trade with Canada and Mexico than NAFTA.

However, a commodity-by-commodity analysis provides that for a handful of

commodities, NAFTA has had a much larger impact, with an increase in trade

volume of 15 percent or more that is directly attributable to the agreement. This is

particularly true for products whose trade was severely restricted prior to CFTA


35/43

and NAFTA.

Trade relations among Canada, Mexico, and the United States have broadened

substantially since NAFTA's implementation, though experts disagree over the

extent to which this expansion is a direct result of the deal

10

. According to data

from the office of the U.S. Trade Representative (USTR), the United States' chief

7

R. Chang, L. Kaltani, N. V. Loayza (2009) "Openness can be good for growth: The role

of policy complementarities", Journal of Development Economics 90 (2009) 3349.

8

N. Chen, J. Imbs and A. Scott, Competition, Globalization and the Decline of Inflation,

CEPR Discussion Paper Series No. 4695, 2004.

9

Steven Zahniser and John Link (editors) Effects of North American Free Trade

Agreement on Agriculture and the Rural Economy (July 2002)

10

Lee Hudson Teslik NAFTA's Economic Impact Backgrounder, Council on Foreign

Relations (July 2009)24

negotiator in foreign trade and a major booster of NAFTA and other free trade

accords, the overall value of intra-North American trade has more than tripled

since the agreement's inception. The USTR adds that regional business

investment in the United States rose 117 percent between 1993 and 2007, as

compared to a 45 percent rise in the fourteen years prior. Trade with NAFTA


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partners now accounts for more than 80 percent of Canadian and Mexican trade,

and more than a third of U.S. trade.

4.2 Price Reductions

Gains through increase in economies of scale

There is inadequate empirical support that trade liberalization resulted in

expanded scale of operations for domestic firms/industries (in FTA member

countries) resulting in economies of scale and subsequent price reductions.

Gains through reduction of barriers and increased competition

Another mechanism through which free trade areas can lead to a reduction in

prices, aside from economies of scale, is through the elimination of rules and

regulations governing the flow of goods between FTA member countries. For the

European Union, as these non-tariff barriers were eliminated, it was expected

that firms would be forced to equalize their selling prices across markets. In other

words, rather than treating Europe as a collection of segmented markets, where

firms could choose their prices in each country separately, Europe would instead

become a unified market where firms could not price-discriminate. As pricediscrimination is eliminated,

average prices are expected to fall, providing

benefits to consumers.

In practice the results look mixed for the EU. A paper by Badinger (2006)

11

uses

sectoral data from 1981 to 1999 and finds evidence of markup reductions in

manufacturing and construction, but not in services.

The European Commission Report argues that tariff cut leads to lower consumer

prices although the pass-through effect of this price transmission channel is

usually imperfect. The paper


37/43

12

cites the example of how import prices for textiles

and clothing fell by 27.5 and 38.4 percent respectively in real terms (i.e. relative

to the general CPI) during the period 1996-2006. Import prices for consumer

electronics too exhibited a 50% reduction. The paper further explains the

macroeconomic spill-over effects of reduction in import prices that led to overall

reduction in inflation as a result of trade openness and increased international

11

Badinger, H. (2006) Has the EUs Single Market Programme fostered competition?

Testing for a decrease in markup ratios in EU industries, Oxford Bulletin of Economics

and Statistics, forthcoming.

12

J. Francois, M. Manchin, and H. Norberg, "Passing on of the benefits of trade openness

to consumers", European Commission, Directorate General for Trade, 2007, p.7.25 India ASEAN Free


competition. There exists theoretical literature on the negative relationship

between inflation and trade openness13. The inflation-trade openness correlation

has become even more strengthened during the 1990s and has become more

robust than earlier research suggested extending even to OECD countries.

4.3 Gains from product variety

In addition to reduction in prices, trade liberalization generates gains for the

customers also through an increase in the variety of goods available through

trade. Economists have estimated that in a typical country, new import varieties

account for 15 percent of productivity growth. For the developing countries, they

estimate the median impact of new imported varieties to be as high as 25 percent


38/43

of national productivity growth.

By combining the data on imports from new supplying countries with estimates of

the elasticity of substitution for each, Broda and Weinstein (2006)

14

come away

with an estimate of the gains from trade for the US due to the expansion of

import varieties, which amount to 2.6 percent of GDP in 2001. Translating these

"variety gains" into an EU context suggests that the average European consumer

benefits are in the range of 600 per year, in addition to the gains due to

lower prices

15

.

4.4 The Survival of More Productive Firms

Economic models predict that opening of trade in a sector will bid up the wage

and other factor prices, which forces the least efficient firms to exit the market

leading to an increase in the average productivity of the firms in that sector.

A study by Trefler (2004)

16

analysed the impact of the Canada-US free trade

agreement on the selection and productivity of firms using firm-level data. He

found that Canadian industries that had relied on tariffs to survive saw their

employment fall by 12 percent due to the elimination of tariffs. In manufacturing

overall, the trade agreement reduced employment by 5 percent. However, these

job losses were a short-term effect, and over a 10 year period, employment in

Canadian manufacturing did not drop. While low-productivity plants shut down,


39/43

13 W.C. Gruben. and D. McLeod, The Openness- Inflation Puzzle Revisited, Applied

Economics Letters, 11,2004, pp.465-468.

14

Broda, C. and D. E. Weinstein (2006) Globalization and the Gains from Variety,

Quarterly Journal of Economics, May, 121(2), 541-585.

15

"The gains from variety in the European Union" - Munich Discussion Paper No. 2010-

24) and Langenfeld and Nieberding - "The Benefits of Free Trade to U.S.Consumers",

Business Economics, 40 (3), 2005, p. 41-51.

16

Trefler, D. (2004) The Long and Short of the Canada-U.S. Free Trade Agreement,

American Economic Review, 94(4), September, 870-895.26

high-productivity Canadian manufacturers expanded into the United States.

Third, the trade agreement set off a productivity boom. Formerly sheltered

Canadian companies began to compete with, and compare themselves to, more

efficient American businesses. In the formerly sheltered industries most affected

by the tariff cuts, labor productivity jumped 15 percent, at least half from closing

inefficient plants. That corresponds to a compound annual growth rate of 1.9

percent in productivity.

To summarize, Trefler finds overwhelming evidence that the Canada-US free

trade agreement resulted in the self-selection of Canadian firms, with only the

more productive firms surviving. Productivity in Canadian manufacturing overall

rose 6 percent. This productivity gain translates directly into higher wages or

lower prices, and is a gain from trade for consumers.


40/43

The gains for developing countries are also shown to be substantial. Feenstra

and Kee, (2006)

17

completed a study of 44 countries over two decades, 1980

2000. Over this period, export variety of these countries to the United States

increases by 4.6 percent per year, thus more than doubling over these two

decades. Furthermore, that increase in export variety is associated with a 4.5

percent productivity improvement for exporters over the two decades. These

gains for the exporters are actually larger than the gains to the United States (of

2.6 percent) from the increase in its import variety over the past several decades.

4.5 Trade and Employment

At a theoretical level, trade openness creates new jobs while protectionism

reduces competitiveness of industries and thus destroys jobs. A report by

European commission finds a negative correlation between openness in trade

and unemployment. There persists a general misconception that trade opening

destroys jobs, and only exports create jobs. While this might hold true for certain

individual firms the reverse is true at the level of the entire economy. Trade

openness facilitates the integration of local companies in global production

chains. It makes them more productive and competitive, and creates more

employment.

Steven Zahniser and John Link (2002)

18

, while discussing about NAFTA and

Agricultural Employment, state that by increasing opportunities for U.S. exports

and encouraging the more efficient allocation of economic resources, NAFTA has


41/43

had a small, positive influence on U.S. agricultural employment. Moreover, an

17

Feenstra, R. C. and H. L. Kee (2006) Export Variety and Country Productivity:

Estimating the Monopolistic Competition Model with Endogenous Productivity,

University of California, Davis and World Bank Policy Research Group.

18

Steven Zahniser and John Link (editors) Effects of North American Free

Trade Agreement on Agriculture and the Rural Economy (July 2002)27 India ASEAN Free Trade

Agreement A Deloitte-FICCI White Paper

OECD study

19

finds that while there has been no decline in overall employment,

there has definitely been a shift of employment from industries to service sector.

Trade with low-wage countries can potentially also have a major beneficial

impact on technical change. For instance, a study drawing on a panel of over

200,000 European firms shows that import competition led to both within-firm

technology upgrading and between-firm reallocation of employment towards

technologically more advanced firms or subsidiaries. These effects account for

about 15-20% of technology upgrading between 2000 and 2007 and are growing

over time

20

. Another recent study finds that technological change and

globalization are associated with wage increases in nine EU Member States

21

.


42/43

Trade may also have created a "polarization" of employment in recent years.

Employment has been growing both in the high-skilled (professional and

managerial) jobs and in the lowest-skilled (personal services) jobs, whereas

there was a decline in medium-skilled jobs in manufacturing and routine office

jobs

22

. This phenomenon is not unique to EU and also has been observed

in US.

23

In summary, with increased trade and openness, the developed countries have

experienced a noticeable decline in manufacturing employment mostly due to

rapid technological progress but the decline has been more than compensated

by an increase in services employment. Wages increased for those remaining in

manufacturing, despite a considerable degree of labor churning and declining

job security.

4.6 Attracting Foreign Investments:

With an inclusion of certain favourable rules for the foreign investors, FTAs may

attract further foreign investments in a country. According to Steven Zahniser and

19

OECD (2007) "Trade and labor market adjustments", document TAD-TC-WP (2007)7,

May 2007.

20

Nicholas Bloom, Mirko Draca, John Van Reenen (2009): "Trade induced technical

change? The impact of Chinese imports on innovation, diffusion and productivity",


43/43

Stanford university working paper.

21

R. Christopoulou, J. F. Jimeno, A. Lamo (2010) "Changes in the Wage Structure in EU

Countries", ECB Working Paper No. 1199, April 2010.

22

M. Goos, A. Manning, A. Salomons (2009) "Job polarization in Europe", American

Economic Review, 2009 vol 99(2) pp 58-63.

23

"The Growth of Low-Skill Service Jobs and the Polarization of the U.S. Labor Market",

David Autor and David Dorn, MIT Working Paper, August 2010. Paul Krugman (2008)

"Trade and wages reconsidered", Brookings Papers.28

John Link (2002)24, such rules generally strengthen the rights of foreign

investors to retain profits and returns from their initial investments. They also

guarantee equal treatment to foreign and domestic investors alike under the laws

of each NAFTA country and prohibit new laws that would change the status of

foreign investments, once they are established. It is further stated that

econometric studies demonstrate that NAFTA has fostered a positive synergy

between trade and FDI in the North American processed food industry. As a

result, U.S. exports and U.S. FDI have grown together which is one of NAFTA's

success stories. Also, U.S. direct investment in the Mexican food processing

industry has more than doubled since NAFTA's implementation, reaching $5.3

billion in 1999. Similarly, under Canada-U.S. Free Trade Agreement (CFTA) and

NAFTA, U.S. FDI in the Canadian food processing industry expanded from $1.8

billion in 1989 to $5.0 billion in 1999.

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