d - Asia Today International

GLOBAL TRADE
RUSH TO FTAs TO FILL THE VOID?
Traps for unwary in
knot of agreements
FIRMS must now factor in
the trade-off options between
tariff preferences available
through FDI and preferences
available by contracting to
local suppliers under multiple
rules of origin . . .
WITH THE FUTURE of multilateral
trade negotiations now in serious doubt, countries
are expected to intensify negotiations for
bilateral and regional trade agreements.
But the Manila-based Asian Development
Bank warns that such agreements are no
panacea for global trading problems. Instead,
they can add complexity to the global trading
system – and increase the cost of trade.
An important question is how to mitigate the
damage that may be caused by a knot of agreements
that differ in terms of their coverage,
treatment and ambitions, and which may contradict
one another. In Asia, the ADB says,
bilateral deals which emphasise closed reciprocity,
rather than the "open regionalism"
espoused in the past, are now on a strong
upswing. These agreements discriminate
against those not in the loop because of their
strict rules of origins – which are often inconsistent
and overlapping, adding to compliance
costs. The ADB says, problems associated with
bilateral trade agreements have little to do with
esoteric theories of being second best (to global
agreements) and everything to do with breadand-butter
commercial decisions.
Increasingly, bilateral agreements will influence
the volume and pattern of trade and
investment flows, globally and within Asia.
For example, the ADB says, instead of simply
choosing locations that minimise costs, firms
must now factor into their investment calculations
the trade-off between tariff preferences
made available through direct investment and
the preference they can receive by contracting
out to local suppliers under multiple rules of
origin.
Customs administration can also become
complex quickly, and opportunities for corruption
and malfeasance expand where there are
overlapping and inconsistent rules of origin.
The trend to bilateralism has accelerated
since 1999, when a Ministerial Meeting of the
World Trade Organisation in Seattle broke
down. This was compounded when the next
Ministerial meeting in Cancun, Mexico, in
2003, also stalled. After days of haggling by poor
African countries over cotton, access to agricultural
markets and cuts in industrial tariffs, the
2005 Hong Kong Ministerial Meeting narrowly
averted failure. At the last minute, Ministers
signed off on a face-saver by agreeing to set a
deadline by the end of April on the modalities –
10 | ASIA TODAY INTERNATIONAL MAY 2006
specific formulas and timeframes – to continue
with negotiations.
The deadline has come and gone, and pessimism
in terms of expectations of a successful
global Round has increased (see page 9).The
rush to bilateral FTAs will now accelerate as
countries fend for themselves in the void.
Non-believers in bilateral agreements, such
as Malaysia and India, are slowly being converted.
But they look at such agreements, understandably,
with caution. In an recent interview,
India's Finance Minister, Palaniappan
Chidambaram, told a Singapore newspaper:
"FTAs are a necessary track. Industry does
complain about inversion and about non-level
playing fields. But one has to be very careful in
Trade
Watch
assessing the overall advantage of an FTA. He
added: "We have to divide FTAs into two categories.
One, with our immediate neighbours’
concerns as the largest economy in the region.
And another will be how we treat FTAs with
developed countries – ASEAN, Japan, South
Korea and Singapore. In these, we have to exercise
great caution.”
India inked a Comprehensive Economic Cooperation
Agreement (CECA) with Singapore
last June, but the impression, from India's perspective
at least, is that it is not working as
envisaged. India has complained that the promised
investment flow from Singapore has yet to
materialise. Investment is central to all these
agreements, especially from the perspective of
the "junior partner". There is always the expectation
that an FTA will offer a calling card for
business to invest in the partner country.
Foreign investment has proved to be a boon
to exports, as borne out by the experience of
➔ CONTINUED PAGE 11
Global growth forecast
(FORECAST CLOSING DATE: APRIL 11, 2006)
WORLD SUMMARY
(%)
HONG KONG – Global economic
growth is expected to average 4.3 per cent this
year (measured using purchasing power parity
–PPP–weights), modestly down on 2005,
according to the latest global forecast from The
Economist Intelligence Unit. A further gentle
slowdown is expected in 2007, to 4.1 per cent,
a pace of growth that will be broadly maintained
in 2008-10.
Measured using GDP at market exchange
rates (which give greater emphasis to the
OECD countries and reflect the exchange rates
at which firms trade and repatriate profits),
world GDP growth is forecast to slow to 3.4 per
cent in 2006 and 3.1 per cent in 2007, before
picking up modestly to 3.2 per cent in 2008.
The EIU says international investors' risk
aversion seems to have increased in recent
weeks, perhaps prompted by a change in policy
of the Bank of Japan (central bank).
Source: Economist Intelligence Unit.
Countries with a large external deficit have
seen their exchange rates come under pressure
(including Iceland, New Zealand and Hungary)
and the risk of the dollar coming under severe
downward pressure has probably increased.
“We have revised our forecast for Japanese
monetary policy. With the Bank of Japan making
rapid progress on draining liquidity from
the financial system, we now expect interest
rates to begin rising from the third quarter of
2006 (previously end-2006),” the EIU says. ” We
have revised up our forecast for German GDP
growth in 2006 to 1.9 per cent (previously 1.6
per cent), reflecting improved business sentiment
and a modest expected improvement in
the labour market. Our forecast for food, feedstuffs
and beverages (FFB) prices has been
revised up, as surging demand for ethanol (a
petrol substitute) has an impact on the
sugar market.”