ftas: fantastic, fine or futile?

FTAs: fantastic, fine or futile? Business views on trade agreements in Asia

A survey by The Economist Intelligence Unit

Sponsored by

1© The Economist Intelligence Unit Limited 2014


Contents

Introduction 2

Survey demographics 3

Key findings 4

FTA usage rates are low 4

FTAs help to increase exports for firms that use them 5

India gets the most out of its FTAs 5

Lack of awareness is commonplace 6

Complexity hinders usage 7

Governments must supply better information 8

Larger firms have it no easier than smaller ones 8

Firms want more— and more ambitious—FTAs 9

Exchange rate regulation given top priority 11

Understanding of multilateral trade deals remains low 12

IT and telecoms firms claim the most benefits 12

Conclusion 14

2 © The Economist Intelligence Unit Limited 2014


Introduction

The Asia-Pacific region has been at the centre of the proliferation of bilateral and regional free trade agreements (FTAs) over the past 15-20 years, during which time the total number of such agreements in force globally has risen to over 350. This trend has generated mixed reactions. On one side are those who believe FTAs represent the next-best alternative to a new multilateral deal at the World Trade Organisation (WTO), towards which progress has been very slow and which looks unlikely to be completed.The other side views bilateral and regional agreements as detrimental to world trade overall—creating trade diversion, draining effort and attention away from multilateralism, and yielding only a network of overlapping and sometimes conflicting rules that ultimately discourage trade.

Between these two extremes lie the views of businesses for which trade and trade policy matter on a much more practical level. Their actions and decisions ultimately dictate the success of any trade policy. How companies in Asia—particularly smaller and medium-sized enterprises, among the most significant drivers of trade—view FTAs is crucial to their implementation. Are they aware of these agreements and do they understand the potential benefits they offer? If they are using them, are they benefitting in the form of increased exports?

If they aren’t, why aren’t they? What can be done to address constraints on their usage of FTAs? In terms of trade policy, what would companies in the region like to see happen next?

This research, conducted by The Economist Intelligence Unit (EIU) and sponsored by HSBC, answers these questions by analysing corporate views about FTAs across eight countries in the Asia-Pacific region. The findings1 are based on a survey conducted in the first quarter of 2014 of senior executives from 800 companies in Australia, China, Hong Kong, India, Indonesia, Malaysia, Singapore and Vietnam—100 from each country.

In order to reflect the views of smaller and medium-sized companies the survey was weighted in their favour: 80% of respondent enterprises have annual revenues of between US$50m and US$150m while 20% have revenues in excess of US$150m. All have exposure to cross- border trade and investment and all respondents are knowledgeable about the corporate strategy this involves. Half of the respondents are C-level executives or board members, with the other half ranging in title from manager and department head to senior vice-president or director (Figure 1). Respondent companies operate in a range of sectors, including IT and telecoms, consumer goods and retail, financial services, manufacturing and others (Figure 2).

1 The EIU bears sole responsibility for the findings of this report, which do not necessarily reflect the views of the sponsor.



Survey demographics

Respondents by job title(% respondents)

Figure 1

Manager

Head of Department

Head of Business Unit

SVP/VP/Director

CRO

Other C-level executive

CFO/Treasurer/Comptroller

CEO/President/Managing directorBoard member

CIO/Technology/

Director

15%

5%

9%

25%

16%6%

6%

13%

4%

1%

Respondent companies by industry sector(% respondents)

Figure 2

Other

Manufacturing

Professional services(including logistics and distribution)

IT and technology/telecoms

Construction

Consumer goods/retailFinancial services

Education

16%

10%

24%

7%

15%9%

12%

7%



FTA usage rates are lowOn average, the usage rate of the more than 50 FTAs signed by the eight countries surveyed in this study is just 26% (Figure 3). In other words, each FTA signed in Asia is used, on average, by only one in four exporters. Usage rates are lowest in Australia and Malaysia, which is perhaps to be expected given both are major commodity exporters and there are few barriers to global trade in non-agricultural commodities—but they are barely higher in Singapore, where the average usage rate is 21%.

This is surprisingly low for a small, export-dependent economy.2

To be sure, exporters in Asia are more likely to use regional FTAs with neighbouring countries, and those with larger economies, than to use bilateral agreements with distant or smaller economies (a point explored in more detail on P10). To some degree the low usage of such FTAs—just 6% of exporters in Singapore use its FTA with Costa Rica, for example—tends to drag down the headline usage rate. But the effect is not dramatic; average usage rates are not much

Key findings

Usage of FTAs signed by named country(% respondents)

Most usedAverage

0

20

40

60

80

100

VietnamSingaporeMalaysiaIndonesiaIndiaHong KongChinaAustraliaTotal

26%

48%

23%

63%

33%

40%

27%

51%

42%39%

16%

43%

21%

65%

37%30%

19%

Figure 3: Low usage

2 In the survey, usage rates were aggregated in some instances where two countries had trading relationships under more than one possible FTA (e.g. bilateral and regional).



higher for regional deals with nearby countries than for bilateral ones. The average usage rate of the ASEAN FTA by the countries surveyed within the bloc is 50%, compared to 29% for agreements signed with the bloc by the four countries in the survey outside it. The average usage rate of FTAs with countries on a purely bilateral basis is 19%.

Critics of FTAs have long warned this would happen. FTAs, they say, replace the relative simplicity of multilateral WTO agreements with a “noodle bowl” of overlapping preferences and rules and regulations that, in practice, often prove more trouble than they are worth for companies to use. But the result is nonetheless surprising, given the benefits in terms of increased exports reported by companies that do use the FTAs.

FTAs help to increase exports for firms that use themMore than 85% of respondents across the Asia-Pacific region report that their exports to the markets concerned have increased either significantly (23%) or moderately (63%) as a result of the FTAs that they use. A mere 1% of firms

claim that their exports have decreased, while the remainder have seen no change.

This is particularly significant since one of the larger questions surrounding FTAs is whether the improved market access they are meant to create actually results in increased trade between the signatories. For economists, this is a difficult question to answer with a high degree of certainty, not least because of the complexity involved in trying to isolate the effect of any one trade agreement from the numerous other factors that can determine trade flows between two countries, such as economic growth and exchange rates. Yet for the firms surveyed for this research the answer to this question is a resounding “yes” (Figure 5).

India gets the most out of its FTAsCompanies in India are most likely to report that the FTAs they use have led to increased exports, with 93% seeing either significant (41%) or moderate (52%) rises (Figure 5). The trading agreements most used by Indian firms are those that cover Singapore, Malaysia and the broader ASEAN region, and Japan.

Least- and most-used FTAs(% respondents)

0

10

20

30

40

50

60

70

7

30

8

48

11

63

14

4034

51

6

39

6

43

14

65

Figure 4: Peaks and troughsCh

ile

New

Zea

land

Cost

a Ri

ca

Hon

g Ko

ng

Chile

Chin

a

MER

COSU

R

Sing

apor

e

ANZ

ASEA

N

Paki

stan

ASEA

N

Cost

a Ri

ca

Chin

a

ANZ

ASEA

N

Australia China Hong Kong India Indonesia Malaysia Singapore Vietnam



India is not a major exporter, considering its size, nor is it known for signing high-quality FTAs (that is, those that make deep cuts to tariffs, amongst other liberalising measures). One possible explanation for the high impact of the FTAs that it has signed may be that its exporters started from a lower base than other countries in the region—and consequently have seen comparatively greater benefits.

At the other end of the spectrum, companies in Australia are least likely to report export increases through FTAs, although with 75% of firms claiming significant or moderate export increases these agreements can hardly be labelled failures. Ahead of Australia is Malaysia, where reported benefits from FTAs are also below the regional average. As mentioned in reference to their lower-than-average usage rates, both of these countries are major commodity exporters; as tariffs and other barriers to trade in most non-agricultural commodities are already low or non-existent, FTAs cannot provide much in the way of new market access.

Lack of awareness is commonplaceWhat accounts for the low average usage rates of FTAs? One reason could be that many companies are simply not aware of them: some 44% of respondents across the region admit either to having a limited understanding of one or more FTAs their country has signed, or having never heard of one or more of the agreements. (This varies from 56% of respondents in India to just 24% in Indonesia.)

For this subgroup, the most important reason for their lack of awareness is that the agreements and details of the FTAs in question are not sufficiently publicised (Figure 6), cited by 50%. Less than a third of respondents say that they have no knowledge of FTAs in those countries where they have no plans to expand.

Considering the amount of time and resources that countries devote to negotiating and implementing FTAs, one would assume that there would be a commensurate effort made towards ensuring the agreements were understood and, above all, used by firms. Yet, with a few notable exceptions, such as Singapore, which has an

Firms reporting increase in exports as a result of FTAs used(% respondents)

Figure 5: Seeing the benefits

Increased moderatelyIncreased significantly

0

20

40

60

80

100

TotalVietnamSingaporeMalaysiaIndonesiaIndiaHong KongChinaAustralia

59%

16%

68%

20%

52%

41%

78%

8%

55%

24%

65%

21%

53%

34%

63%

23%

71%

18%



online tool for firms to consult, countries in Asia have not created their own single-window information service for FTA details.

Lack of publicity surrounding the details of FTAs is a particular problem in Asia’s emerging markets. Some 68% of executives in India who admit to ignorance or a limited understanding of some FTAs the country has signed cite lack of available information as a problem, as do 64% in Vietnam and 50% in Indonesia—compared to 38% in Australia. But then again nearly 50%

in Singapore say the same thing, despite the government’s efforts.

Complexity hinders usageEven where companies are aware of the FTAs open to them, many are put off by various factors: just 7% of businesses across Asia use all the FTAs they know about. The complexity of the agreements themselves, which comprise hundreds of pages of dense legal text, annexes and tariff schedules, is the most commonly cited reason (picked by

Reasons for limited understanding of FTAs(% respondents)

My company does not actively follow trade issues

The agreements apply to markets where we do nothave business and have no plans to expand into

My company lacks the resources to keep track of the details

Would like to know more but notsufficiently publicised

NB: Totals do not add to 100 since respondents could select more than one answer

I do not see that it is relevant to my business

Figure 6: What was that, again?

50%

41%

32%

20%

3%

Reasons for not using FTAs(% respondents)

No substantial new market access

Lack of internal expertise

Countries are not attractive markets

Complexity of agreement terms


Benefits do not compensate for difficulties

Figure 7: Not worth the trouble

45%

34%

33%

32%

28%

27%Irrelevance

Cannot see the benefits 14%



45% of companies across the region; Figure 7). Of these, 85% rank complexity of terms as of major or considerable importance in their decision not to use those FTAs.

Governments must supply better informationThe onus appears to be on governments in Asia to rectify lack of awareness of FTAs, as companies say government bodies (54%) and special government agencies (54%) are their primary sources of information about such agreements (Figure 8). The private sector might be expected to fill part of the gap to some extent, and a range of firms do say industry associations and financial institutions provide some assistance and advice in this area, but so far this hasn’t been sufficient to drive widespread usage of FTAs.

Companies in Asia are crying out for such information: 73% of respondents say the provision of more support and education on existing FTAs is either very important or important for government trade policy. This is seen as particularly crucial in Indonesia (where 53% characterise it as very important) and Vietnam (41%; Figure 9).

Larger firms have it no easier than smaller onesTrade analysts and economists generally assume that the complications created by the “noodle bowl” effect are felt most acutely by smaller enterprises, which often lack the manpower and budget necessary to deal with the plethora of new rules and regulations—or stay informed about the potential benefits of new deals. The survey suggests, however, that larger companies (defined in this research as those with annual turnover of over US$150m) struggle just as much as smaller ones.

For instance, almost the same percentage of respondents from smaller and larger firms cite lack of internal expertise (33%/36%) and the complexity of agreements (45%/43%) as constraints on using FTAs (Figure 10). This is despite a higher percentage of larger firms (71% compared to 63% of smaller ones) saying that they employ a person solely responsible for managing and analysing trade issues.

Nor do larger enterprises necessarily get more out of the FTAs they use. A higher percentage of larger firms report significant increases to

Primary sources of FTA information(% respondents)

Private industry association

Government industry association

Central government body

Special government agency


Company’s internal research

Figure 8: Tell me more

54%

54%

49%

44%

38%

Bank or financial institution 27%



What could your home government do in terms of trade policy that would help to increase your company’s exports? - Provide more support in terms of education and advice on existing FTAs% respondents ranking as “Very important” or “Important”

India

Hong Kong

China

Australia

Indonesia

Figure 9: Help us out

69%

74%

75%

74%

82%

Malaysia 62%

Singapore 70%

Vietnam 76%

Total 73%

(% respondents)

0

20

40

60

80

100

33% 36%45% 43%

20%34%

85% 88%

Figure 10: Not so different

Smaller Larger Smaller Larger Smaller Larger Smaller Larger

Lack of internal expertisea barrier to using FTAs

Complexity of agreementterms a barrier to using FTAs

Significant increase inexports from using FTAs

Any increase in exports fromusing FTAs

NB: Smaller firms have global annual revenues of US$50m-US$150, larger ones have revenues over US$150m

exports (34%, versus 20% of smaller ones), but the percentage of firms that has seen at least some increase is roughly the same: 88% for larger firms and 85% for smaller ones.

Firms want more— and more ambitious—FTAs Despite the constraints, firms do still see the benefits of FTAs. When asked whether FTAs are



What factors affect your firm’s ability to increase overseas sales?(% respondents)

Exchange rates

Internal strategy

Tariffs/duties

Economic growth

Low-cost competition

Figure 11: Tear down that (tariff) wall

39%

39%

39%

37%

40%

37%

42%

37%

36%

35%

31%

25%Non-tariff barriers

ImportantVery important

What should your government do in terms of trade policy?(% respondents)

Sign FTAs with larger economies

Enforce more strongly theterms of existing FTAs

Sign FTAs with morecomprehensive provisions

Sign more FTAs in total

Provide more support in terms of education and advice on existing FTAs

Figure 12: More please, only better

43%

41%

42%

40%

39%

35%

37%

32%

33%

34%

ImportantVery important

the best hope for the future of their overseas business, 69% of respondents either strongly agree or agree. A further 79% characterise as very important or important for increasing their exports the goal of signing more FTAs in total.

The reasons for this are clear. Companies in Asia report that tariffs are second only to economic growth with regards to what most affects their overseas sales—and are more important even than firms’ internal strategy (Figure 11).

The support for more FTAs is not unqualified, however. If governments are going to continue to pursue such deals—as exporters clearly want—firms in Asia want the agreements to be more comprehensive (78% rate this as very important or important) and with larger economies (73%; Figure 12). Broad regional deals currently under consideration, such as the 12-nation Trans-Pacific Parternship (TPP), the 16-nation Regional Comprehensive Economic Partnership (RCEP) and the ASEAN Economic



Community, may go some way to meeting their demands—although they cannot supplant a global WTO deal.

Not surprisingly the desire for deals with larger economies corresponds with the types of individual FTAs that have the lowest usage rates in the region. Indeed, the fact that the countries involved are not attractive is the second most commonly cited reason for companies in Asia eschewing FTAs (Figure 7). Almost all of the less-popular agreements involve one—if not two or more—small economies that are often also geographically distant from each other. FTAs with Chile are amongst the least used, for instance, along with FTAs with countries like Costa Rica, Panama, and Peru. It is not hard to see why firms in China or Singapore might view agreements such as these as a less-than-optimal use of their government’s time and effort. (It should be noted, however, that in some cases there are non-economic considerations involved.)

Meanwhile non-tariff barriers, such as allegedly discriminatory rules and regulations, are the least important factor affecting the ability of Asian exporters to increase sales outside their home markets; only 25% of firms say they are very important. This is significant since in recent negotiations much attention has been focused

Which of the following would you like to see in the future?(% respondents)

All tariffs eliminated

Return to multilateralism

Greater outreach to businesseslike mine

More international regulation ofexchange rates


Increased limits to imports

Figure 13: Currency control

57%

54%

49%

49%

37%

30%Greater focus on cross-borderissues other than trade

on the elimination of non-tariff barriers. This could suggest a lack of awareness on the part of the companies surveyed about the detrimental impact of such barriers—or it could mean that economists and trade negotiators alike have overestimated the importance of the issue.

Exchange rate regulation given top priorityAn issue that is separate but related to free-trade agreements is the impact of exchange rate volatility on trade. Fifty-seven percent of firms in the region want to see more international regulation of exchange rates, making it a higher priority than a return to multilateralism (49%) or even the complete elimination of all tariffs (49%)—the latter of which would presumably increase fears among currently protected industries. This comes as a less of a surprise considering the level of currency volatility that has prevailed in the post-crisis era, as well as ongoing controversies surrounding allegedly undervalued currencies.

The likelihood of firms ever getting their wish here is low, however. Proposals have been tabled for the WTO to take on some form of monitoring and enforcement of exchange rates, with assistance from the IMF, but none has gained



any serious traction. This hasn’t stopped a group of US legislators from pressing for currency disciplines to be included in the TPP, a 12-country FTA led by the US that is currently being negotiated. Few think it is likely that the TPP will contain any sort of currency provisions, for the same reason the WTO/IMF proposals have failed—there is no single, agreed-upon method for determining the fair value of any one currency.

Understanding of multilateral trade deals remains lowAsian companies’ perceptions of the impact of multilateral trade deals on their businesses are skewed by generally poor understanding of how the international trade system functions. Just one-third of respondents on average are aware of their companies’ usage of WTO Most Favoured Nation market access provisions, although they apply automatically to all WTO members (Figure 14).

At the same time it is hard to blame firms for thinking the WTO is no longer hugely relevant to their businesses. To the extent that they follow trade negotiations, since 2001 executives in Asia would have read and heard little but accounts of successive failures to reach an agreement on the Doha Development Round. At the Bali meeting

Awareness/usage of WTO provisions(% respondents)

0

20

40

60

80

100

TotalVietnamSingaporeMalaysiaIndonesiaIndiaHong KongChinaAustralia

16%

36%

50%

26% 28%38%

53%

33%

14%

Figure 14: Multilaterally challenged

in December 2013, WTO members thought they had salvaged a deal on trade facilitation, but the implementation of this package was blocked at the eleventh hour by objections from India. There has been vastly more progress on bilateral and regional agreements—and hence a more positive view of those agreements tends to prevail.

IT and telecoms firms claim the most benefitsAmong the sectors surveyed, IT and telecoms firms in Asia report the greatest benefits from using FTAs, with 34% saying their usage has led to a significant increase in exports and 60% reporting a moderate increase (Figure 15). This presumably reflects the growing importance of the sector’s products and services to the regional and global economy, but it is also the result of the unique set of circumstances the sector faces when it comes to trade barriers.

Trade in IT goods is still governed at the multilateral level by the Information Technology Agreement, or ITA, a nearly 20-year-old accord signed in 1996, not long after the WTO Uruguay Round deal went into effect. Two decades represents a long time by the standards of almost any major industry, but for a sector as dependent on innovation as IT it is a virtual eternity. The ITA



Firms reporting export increases for FTAs used

Figure 15: Industry leaders

Increased moderatelyIncreased significantly

0

20

40

60

80

100

51%

26%

67%

17%

69%

22%

60%

25%

60%

34%

66%

14%

65%

16%

Manufacturing Professionalservices

IT, tech,telecoms

EducationConstruction Consumer goodsand retail

Financialservices

therefore fails to cover a huge range of products and services that have been developed since the mid-1990s—the main reason why negotiations are currently underway to conclude an updated ITA, the so-called ITA 2. But it also may explain

why FTAs, most of which have been completed much more recently, provide benefits to IT and telecoms firms: they can cover those products that the old ITA lacks.3

3 It is important to note that the response rate for some highly-protected sectors, such as agriculture and automotives, was not sufficient to draw conclusions about those industries. Were that not the case, it is possible these sectors would have matched or surpassed IT and telecoms in terms of reported benefits from FTAs.



Conclusion

the remit of governments to rectify—particularly through the provision of better information and more consultation with companies during the negotiating process. In addition, businesses in Asia think their governments should seek more comprehensive agreements (although this is not always within the control of a single country, especially in regional negotiations). Nevertheless, for now there seems little alternative, and the future of trade in the region depends both on governments negotiating the right type of FTA and companies in the region using them.

Tariffs and duties are among the most important factors dictating the ability of companies in Asia to increase their exports. This finding is well supported by economic theory and underscores the importance of easing trade access within the region and internationally. Yet progress on this front has been far from smooth. In the absence of a global multilateral deal, the numerous bilateral and regional FTAs already in effect in Asia, while beneficial, could evidently be far more effective in increasing trade.

The startlingly low rate of FTA use is a result of a number of factors. Many of these are firmly within

While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report.

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