The Asian Noodle Bowl

of FTAs:Is It Serious for Business?

Ganeshan WignarajaPrincipal Economist, ADB

gwignaraja@adb.org

BangkokNovember 2009

Evidence from Japan, Singapore, Korea, PRC,

Thailand and Philippines

Messages • With the spread of FTAs, many East Asian

firms are responding to new opportunities.

• Firm-level evidence grants little support to view that the Asian Noodle Bowl has harmed business over the last 8 years.

• As more FTAs take effect and complexity of the “Noodle Bowl” increases, a more intense, negative impact on business is expected.

• Implementing key policies can help to mitigate negative effects and facilitate a more SME-inclusive response to FTAs.

Contents

I. Setting and Research

II. Firm Survey Findings – Japan, Singapore, Korea, PRC, Thailand and the Philippines

III. Policy Implications and Conclusions

I. Setting and Research

216 FTAs

113 in effect

0

50

100

150

200

250

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

Rapid Growth of FTAs in Asia*

Note: * Includes concluded FTAs, FTAs under official negotiation, and proposed FTAs in Asia and the Pacific. Source: ADB Asia Regional Integration Center (ARIC) FTA Database www.aric.adb.org; data as of 1 September 2009

FTAs by Country and Status

CountryGNI per capita * (US$, 2007)

Simple Ave MFN **

(%, non-agri)

Status of FTAs ***

FTAs In FTAs In EffectEffect

Future Future FTAsFTAs

Japan 37,790 2.6 11 9

Singapore 32,340 0.0 16 14

Korea 19,730 6.6 5 17

PRC 2,370 9.9 9 12

Thailand 3,400 8.2 9 14

Philippines 1,620 5.8 5 6

Note: * At current prices, World Development Indicators online (accessed June 2009). ** 2007 applied rates, World Tariff Profiles. Average MFN for ASEAN-10 is 7.4%; and ASEAN-6 is 5.3%. *** As of November 2009, ADB FTA database (www.aric.adb.org). Future FTAs refers to FTAs that are signed (but not yet under implementation), under negotiation and proposed.

Varying Rules of Origin in FTAs

PRODUCT (HS

CODE)

AFTA ASEAN-China FTA

ASEAN-Korea FTA

ASEAN-Japan FTA

Japan-Thailand

EPA

US-Singapore

FTA

Electronic integrated circuits (85.42)

CTC or 40% RVC

40% RVC CTC or 40% RVC

CTC or 40% RVC

CTC or 40% VC CTC

Parts and accessories for motor vehicles (87.08)

40% RVC 40% RVC 45% RVC 40% RVC CTC or 40% VC 6 digit CTC or CTC plus 30% RVC (build-up)

Woven fabrics of cotton (52.09)

CTC; or 40% RVC; or Process Criterion for Textile Products

40% RVC; or Process Criterion for Textile and Textile Products

CTC or 40% RVC

CTH or CTC plus material is dyed or printed in either Party; or non-originating is woven entirely in any party

CTH or CTC plus fabric/yarn is dyed or printed in either Party

CTH

Men’s or Boy’s suits, blazers, etc. (62.03)

40% RVC; or CTC plus good is both cut (or knit to shape) and sewn in any party; or Process Criterion for Textile Products

40% RVC; or Process Criterion for Textile and Textile Products

40% RVC; or CTC plus good is both cut and sewn in any party

CTC plus non-originating material is woven entirely in any party

CTC plus non-originating material is knitted or crocheted in either party or any ASEAN member

CTC plus good is both cut (or knit to shape) and sewn or otherwise assembled in the territory of one or both of the PartiesNote: CTC= Change in Tariff Classifications, VC= Value Content, LDCS= Least Developed Contracting

States Sources: Official texts of FTAs (status as of January 2009).

• Spread of FTAs triggered concerns about crisscrossing FTAs – (Bhagwati’s “spaghetti bowl of trade deals”, 1995, 2008). Discriminatory trade liberalization with multiple

FTAs means different tariffs and ROOs for same commodity.

With FTA growth, international trading system chaotic and raises transaction costs for SMEs.

• ADB President Kuroda (2006) referred to same phenomenon as the “Asian Noodle Bowl” effect of FTAs – one that could present challenges for broader regional and global integration.

Origins of the Asian Noodle Bowl

Analytical Work on Asian Noodle Bowl

Four lines of inquiry:• Asian Noodle Bowl as a chaotic mass of preferential trading

arrangements (eg. Dent, 2006; Petri, 2008).

• Comparison of ROOs across FTAs according to “best practices”, building a map of ROOs graded by levels of restrictiveness (eg. Estevadeordal & Suominen, 2006; Plummer, 2007).

• Gravity and CGE model-based studies analyzing economic effects of various FTA scenarios and region-wide FTAs as means to increase economic welfare (eg. Gilbert et al., 2004; Lee & Park, 2005; Francois & Wignaraja, 2008; Hufbauer & Schott, 2009).

• Noodle Bowl solutions including deepening transparency mechanism for FTAs, WTO advisory services (eg. Baldwin & Low, 2009).

Little empirical evidence on impact of Noodle Bowl on firms to shed light on debate…

About This Research• Aims:

Inform debates on East Asian FTAs with new firm-level evidence on the business impact of FTAs

Focus on market access issues of FTAs to assess the severity of the Noodle Bowl effect on goods

Offer suggestions for tackling Noodle Bowl effect

• 6 enterprise surveys in 2007/2008 - Japan, Singapore, Korea, PRC, Thailand, PhilippinesMix of development levels and FTA experiencesLarge, diverse dataset (841 manufacturing firms)ADB and different partners involved in surveys

Sample Profile All

Firms Japan Singapore Korea PRC Thailand Philippines

No. of exporting firms 841 38 75 120 232 221 155

By sector, % distributionBy sector, % distribution

Electronics 32.3 42.1 66.7 14.2 17.2 33.0 49.0

Auto 20.7 34.2 … 14.2 10.3 38.0 23.2

Textiles/Garments 17.6 23.7 21.3 14.2 18.1 29.0 …

Other * 21.5 … 12.0 57.5 25.9 … 27.7

By size**, % distributionBy size**, % distribution

SMEs 32.9 15.8 69.3 5.8 18.4 48.4 41.3

Large 44.2 18.4 25.3 75.0 40.4 38.5 52.3

Giant 21.8 65.8 5.3 19.2 41.3 13.1 6.5

By ownership***, % distributionBy ownership***, % distribution

Foreign 39.5 13.2 50.7 0.0 38.8 44.8 64.5

Note: Data is provisional for PRC; therefore, cross-country distribution for all firms may not add up to 100. * Other sectors include chemicals/pharmaceuticals, food, and metals/machinery/sundries. ** Based on the number of permanent employees: SME (100 or less), large (101 to 1,000), and giant (over 1,000). *** Foreign firms are defined as firms with at least 10% foreign equity share.

% distribution of firms

Asian Noodle Bowl:Key Questions

1. Are FTA preferences being used?

2. What are the perceived benefits and costs of FTAs?

3. Are multiple rules of origin a burden on SMEs?

4. Is there enough support for domestic firms to export under FTAs?

II. Firm Survey Findings Japan,

Singapore, Korea, PRC, Thailand and Philippines

Q1. Utilization of FTA Preferences

% of responding firms

Note: Data for PRC is provisional.

20.824.9

20.0

47.4

28.0

54.2

77.9

45.740.7

29.0

17.3

45.1

0

10

20

30

40

50

60

70

80

Japan Singapore Korea PRC Thailand Philippines

Use FTA Use and plan to use FTA

Profile of Users and Non-Users of FTAs*

• Firm size: Users in all five countries are significantly larger than the non-users

• Foreign ownership: Users in Japan & Thailand have significantly higher share of foreign equity than non-users

• Age of firm: Users in Thailand & Philippines are significantly older than non-users

• Awareness of FTA provisions: Users in Japan, Singapore, PRC, and Thailand are significantly more knowledgeable of FTA provisions that affect their business than non-users

• Responsiveness to FTAs: Users in all five countries are significantly more likely to have changed business plans in response to FTAs

Note: * Findings based on t-tests between samples of users and non-users of FTA preferences excluding Korea.

Only findings with significant differences between the two groups are shown.

Impediments to Using FTA Preferences

% of responding firms

Note: . . . Indicates topic was not covered in the survey questionnaire for that country.

Reasons for Reasons for ImpedimentImpediment

ss

JapaJapann

SingaporSingaporee

KoreaKorea PRCPRC ThailanThailandd

PhilippinPhilippineses

Lack of information

33.3 25.0 34.2 36.2 … 70.1

Delays and admin costs

53.3 60.0 10.8 9.5 22.2 30.6

Small margin of preference

33.3 60.0 35.8 13.8 16.7 13.4

Use of EPZ schemes/ITA

… … 25.8 7.8 … 26.9

Confidentiality of information

26.7 30.0 … 9.1 … 12.7

NTMs in FTA partners

… … 4.2 6.0 36.1 9.0

Too many exclusions

… … … 3.5 25.0 14.9

Rent-seeking … … … 3.9 … 23.1

Number of respondents

15 20 120 232 36 134

5

6

6

6

9

7

11

14

17

30

48

67

145

0 20 40 60 80 100 120 140

ASEAN-PRC FTA **

AFTA

Japan-Thailand EPA

US-Thailand FTA

Thailand-Australia FTA

ASEAN-Japan EPA

Thailand-India FTA

Singapore-India FTA

Japan-Philippines EPA

Japan-Korea EPA

Japan-Indonesia EPA

Japan-Mexico EPA

US-Singapore FTA

Q2. ASEAN-PRC, AFTA,

Major Bilaterals Useful*Ranking by no. of firms that use and/or plan to use FTAs

Note: * Rankings exclude Korea and are not weighted. ** Includes firms that reported Thailand-PRC Early Harvest.

FTA Impacts More Positive than Negative*

AFTAASEAN-PRC FTA

Japan-Thailand

EPA

Japan-Philippines

EPA

Positive Impacts

Market access 36 111 24 4

Preferential tariffs 32 59 11 5

Concentration of production 16 33 13 2

New business opportunities 14 62 9 2

Negative Impacts

Increased competition 13 46 5 2

Documentation of FTA use 11 45 5 3

Competitive disadvantage 7 28 4 4

Relocation of production 10 12 1 0

Note: * Excludes Korea

No. of firms that reported on the FTAs that they use and/or plan use

Q3. Multiple ROOs Add to Business Costs

% of responding firms that reported multiple ROOs add to business costs

Note: Data for PRC is provisional.

27.726.2

6.3

15.4

37.5

31.0

0

10

20

30

40

50

Japan Singapore Korea PRC Thailand Philippines

Burden Imposed by Multiple ROOs by Firm Size: A Puzzle?*

% of responding firms in each size category

20.022.2

24.326.6

14.3

45.5

25.3 24.7

41.2

50.0

35.7

60.0

0

10

20

30

40

50

60

70

Japan Singapore Thailand Philippines

SME Large Giant

Note: * Excludes Korea and PRC. SME = 100 or fewer employees, Large = 101 to 1,000 employees, Giant = more than 1,000 employees.

% of responding firms that reported multiple ROOs add to business costs, by firm size

Puzzle of ROO Perceptions: Some Insights /a

Explanatory VariablesEst.

Coefficientsz-values

Firm size (no. of permanent employees) 0.000032 2.20 **

Age (no. of years since establishment) 0.118084 2.26 **

Dummy: 1 = foreign-owned 0.290725 1.92 *

Dummy: 1 = aware of FTA provisions that affect business 0.187310 1.05

Dummy: 1 = changed business plan in response to FTAs 0.623770 3.96 ***

Dummy: 1 = export to multiple FTA markets 0.463059 2.20 **

Dummy: 1 = located in Singapore -0.260633 -0.64

Dummy: 1 = located in PRC -1.019698 -2.05 **

Dummy: 1 = located in Thailand 0.055715 0.14

Dummy: 1 = located in Philippines 0.506967 1.23

Constant -1.701179 -3.64 ***

n 442

*** significant at 1% level, ** at 5% level, * at 10% level.

Wald 2 66.01 ***

/a Excludes Korea. Pseudo R2 0.16

Probit EstimatesDependent binary variable: 1 = firm reports that dealing with multiple ROOs

significantly adds to business costs; 0 otherwise

Benefits of Harmonized ROOs

28.6

57.1

41.7

38.9

40.4

43.9

0 20 40 60

Japan

Singapore

Korea

PRC

Thailand

Philippines

CTC27.6%

VA 24.3%

Option 48.1%

% of responding firms that see benefits from

ROO harmonization

% of firms that chose

a particular rule *

Note: * Excludes Korea. VA= Value Added; CTC= Change of Tariff Classification; Option= VA or CTC

Source: Kawai and Wignaraja (2009)

Q4. Sources of Support

JapanSingapore

* Korea PRCThailan

dPhilippines

Public sector sources

48.9 45.5 27.5 91.9 74.3 63.3

Of which: Ministries 26.5 45.5 16.7 63.3 59.4 33.3

Of which: Customs … … … 51.6 8.4 14.3

Private sector sources

51.0 45.4 72.5 60.6 25.6 36.7

Of which: Business/industry Associations

20.4 13.6 … 10.0 18.8 21.9

Of which: Chamber of Commerce

14.3 13.6 … 46.6 6.8 3.4

Of which: Mass media/Newspaper

… … 58.4 … … …

Of which: lawyers/ consulting firms

10.2 9.1 … 27.1 … 11.3

% of responses

Note: * Around 10% of Singapore firms reported that they do not use available FTA-related services. For all other countries, 100% of firms responded to this issue. … indicates not covered by questionnaire.

Consultations on FTAs

18.7

49.3

22.6

45.6

0

10

20

30

40

50

60

Thailand Philippines

With government With business associations

% responding firms that participated in consultations

Use of Support Services and Quality Level

Japan Singapore PRC

Available Services

Usage rate, % of responden

ts

Quality level

(1 to 5) *

Usage rate, % of

respondents

Quality level

(1 to 5) *

Usage rate, % of responden

ts

Quality level

(1 to 5) *

Online information on FTAs/EPAs

21.0 2.7 14.7 3.7 73.0 2.8

Business consulting services on FTAs/EPAs

10.5 3.2 1.3 … 32.0 ** 2.8

Support for issuance of Origin Certificate

10.5 3.0 14.7 3.7 54.0 3.3

Note: * Rated by firms on a scale of 1 to 5, where 5 is the highest quality.** Refers to consulting services offered by business associations.

Big Demand for Support in PRC, Thailand, Philippines

Services Demanded by Firms

PRC Thailand Philippines%

respondents

(n=225)

% of SMEs

(n=40)

% respondent

s(n=202)

% of SMEs

(n=106)

% respondent

s(n=155)

% of SMEs

(n=64)

More awareness training on concluded FTAs

79.1 85.0 33.7 52.8 82.6 82.8

More information on the implication of FTAs on business

83.1 87.5 49.0 58.5 65.2 65.6

Upgrading of technical standards and quality

27.1 25.0 44.6 50.0 52.3 56.3

Adoption of EDI to speed up and simplify procedures for ROO certification

57.8 67.5 25.7 35.8 53.5 56.3

Financial support for upgrading technology and skills

34.7 30.0 36.1 33.0 41.9 45.3

Enhanced consultations during FTA negotiations

39.6 35.0 27.7 32.1 42.6 40.6

Improved extension services for SMEs

40.9 57.5 21.8 26.4 46.5 45.3

More effective surveillance of NTMs in FTA partner country market

42.7 42.5 19.3 29.2 38.1 42.2

III. Policy Implications and Conclusion

Policy Implications• Reduce MFN tariffs

• Upgrade ROO administration – e.g trusted trader program, private sector issuing COO, more IT-based systems

• Encourage ROO rationalization – e.g. co-equality of rules and extended cumulation

• Increase awareness on how to use FTAs

• Improve business participation in FTA consultations

• Improve institutional support systems, especially for SMEs

Conclusion • Key findings from surveys:

Use of East Asian FTAs is higher than expected by previous studies

Firms report more benefits than costs from major FTAs in effect, including AFTA

Multiple ROOs impose a limited burden on firms in East Asia

Significant demand exists for more institutional support for SMEs to export under FTAs

• Further research: Firm surveys are valuable empirical research

tools. Next steps - widening sample countries and

extending the scope to services

ResourcesOverview paper and

country studies are available on the ADBI website at:

http://www.adbi.org/preview/research.free.trade.agreements.asia/