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The economic impact of investment provisions in Asian RTAs

Sébastien Miroudot

Trade Policy Linkages and Services Division

Bangkok, 18 January 2008

OECD Trade & Agriculture Directorate

The universe of international investment agreements

• Bilateral/Regional– Bilateral Investment Treaties (BITs)– Regional Trade Agreements (RTAs)– Double taxation treaties

• Multilateral– GATS– TRIMs

• Sectoral– Energy Charter Treaty

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Why provisions on investment are found in trade agreements?

• Investment is today one of the main objectives of countries in pursuing regional economic integration.

• Investment is a key component in economic development and trade and investment are more and more intertwined.

• Negotiators have turned their attention to investment-related policies, especially those affecting trade in services.

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Asian RTAs with investment provisions (in force in 2006)

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PATCRA Australia, Papua New Guinea 1977 Korea-Chile Chile, Korea 2004

ANZCERTA (services) Australia, New Zealand 1989 US-Singapore Singapore, USA 2004

AUSFTA Australia, USA 2005

CECA India, Singapore 2005

JMSEP Japan, Mexico 2005

NZTCEP New Zealand, Thailand 2005

NZSCEP New Zealand, Singapore 2001 TAFTA Australia, Thailand 2005

JSEPA Japan, Singapore 2002Chinese Taipei-Guatemala

Chinese Taipei, Guatemala 2006

EFTA-SingaporeIceland, Liechtenstein, Norway, Singapore, Switzerland. 2003 EFTA-Korea

Iceland, Korea, Liechtenstein, Norway* and Switzerland 2006

SAFTA Australia, Singapore 2003 JMEPA Japan, Malaysia 2006

CEPA China, Hong Kong 2004 Korea-Singapore Korea, Singapore 2006

Chinese Taipei-Panama Chinese Taipei, Panama 2004 Trans-Pacific SEPBrunei, Chile, New Zealand, Singapore 2006

Agreement Countries Year in force

ASEAN Investment Area

Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam

1998

Agreement Countries Year in force

ASEAN framework agreement on services

Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam

1995

Liberalising provisions in the sample of RTAs analysed

Pre-establishment?

National treatment?

Limitations? MFN?

"NAFTA-inspired" or

"GATS-inspired"?

Market access and

national treatment?

Limitations? MFN?

ANZCERTA (services) 1989 no no - no NAFTA yes negative list yes

ASEAN framework agreement on services

1995 no no - no GATS yes positive list yes

ASEAN Investment Area 1998 yes yes negative list yes - - - -

NZSCEP 2001 yes yes negative list yes GATS yes positive list no

JSEPA 2002 yes yes negative list no GATS yes positive list noEFTA-Singapore 2003 yes yes negative list yes GATS yes positive list yesSAFTA 2003 yes yes negative list no NAFTA yes negative list noCEPA 2004 no no - no - yes positive list no

Chinese Taipei-Panama 2004 yes yes negative list yes NAFTA yes negative list yes

Korea-Chile 2004 yes yes negative list yes NAFTA yes negative list yesUS-Singapore 2004 yes yes negative list yes NAFTA yes negative list yesAUSFTA 2005 yes yes negative list yes NAFTA yes negative list yesCECA 2005 yes yes positive list no GATS yes positive list noJMSEP 2005 yes yes negative list yes NAFTA yes negative list yes

NZTCEP 2005 yes yes negative list no - no - noTAFTA 2005 yes yes positive list yes GATS yes positive list noChinese Taipei-Guatemala

2006 yes yes negative list yes NAFTA yes negative list yes

EFTA-Korea 2006 yes yes negative list yes GATS yes positive list yesJMEPA 2006 yes yes negative list yes GATS yes positive list yesKorea-Singapore 2006 yes yes negative list no NAFTA yes negative list noTrans-Pacific SEP 2006 no no - no - yes negative list yes

AgreementYear in force

Goods Services

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Sectoral coverage of the ASEAN Framework Agreement on Services (2006)

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% commitments % beyond GATS

Brunei ASEAN 0.32 0.25

Indonesia ASEAN 0.34 0.20

Cambodia ASEAN 0.60 0.05

Myanmar ASEAN 0.24 0.23

Malaysia ASEAN 0.46 0.23

Philippines ASEAN 0.35 0.13

Singapore ASEAN 0.39 0.11

Thailand ASEAN 0.51 0.27

Vietnam ASEAN 0.62 0.03

Country AgreementServices coverage*

Based on Fink and Molinuevo (2007)

Previous empirical studies and motivations for the analysis

• Jeon and Stone (2000)• Adams et al. (2003)• Lesher and Miroudot (2006)• Dee (2006)

Have RTAs and their investment provisions an impact on FDI and trade flows?

Are trade and FDI complements?Differences among agreements: do they matter?

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The dataset• 18 reporter countries: Australia, Bangladesh, Brunei,

Cambodia, China, Chinese Taipei, Hong Kong (China), India, Indonesia, Japan, Republic of Korea, Malaysia Myanmar, New Zealand, Philippines, Singapore, Thailand and Vietnam.

• 190 partner countries

• Unbalanced panel 1990-2006

• Dependent variables:– Imports and exports of goods (COMTRADE)– Imports and exports (cross-border) of services (OCDE TISP)– Inward and outward FDI stocks (OCDE + additional data from

UNCTAD FDI Statistics)

• Gravity model variables: distance, geographical dummies (CEPII), GDP (World Development Indicators), tariffs (TRAINS).

• Knowledge-capital specification: GDP and skilled labour endowment (tertiary school enrolment, World Development Indicators).

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Methodology to quantify investment provisions

• An index is created for each signatory on the basis of 20 types of provisions grouped into 5 components:– Non-discrimination in non-services sectors (6)– Non-discrimination in services sectors (6)– Investment regulation and protection (3)– Scope of services commitments (1)– Preferential (GATS-plus) commitments (1)

• The information is coded on a zero-to-one scale where zero indicates the absence of a given provisions and one represents the most “FDI-friendly” provision.

• A simple average is used for the 5 components and the final index uses weights obtained through factor analysis (principal component analysis)

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Coding of provisions and weights

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Category Score Category Score

Component 1: Non-discrimination (non-services sectors) Weight: 0.151 Component 3: Investment regulation and protection Weight: 0.209

Right of establishment? Provisions prohibiting performance requirements?Pre-establishment limitations Free transfer of fundsNational treatment Temporary entry and stay for key personnel?Limitations to national treatment Provisions on expropriationMost Favoured Nation Specific reference to fair and equitable treatmentLimitations to MFN State-investor dispute settlement

Component 2: Non-discrimination (services sectors) Weight: 0.124 Component 4: Scope of commitments (services) Weight: 0.255

Provisions on establishment? Percentage of sub-sectors where commitments are madePre-establishment limitationsNational treatmentLimitations to national treatmentMost Favoured NationExceptions to MFN Percentage of sub-sectors where commitments go beyond GATS

Component 5: Preferential commitments (services) Weight: 0.261

Extensiveness of investment provisions:Index scores (2006)

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Empirical models

• Gravity equation for trade:

• Knowledge-capital specification for FDI:

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0 1 2 3 4

5 6

ln(distance ) common_border common_language colonial_rel

ln(Joint_GDP ) ln(RTA_index )

ijt ij ij ij ij

ijt ijt i j t ijt

Trade

0 1 2 3 4

5 6 7

ln(distance ) common_border common_language colonial_rel

ln(Joint_GDP ) ln(Relative_GDP )+ ln(Relative_skill )+ln(RTA_index )

ijt ij ij ij ij

ijt ijt ijt ijt i j t ijt

FDI

Results of the Poisson estimations

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Dependent variable: Inward FDI Outward FDICross-border

imports of services

Cross-border exports of services

Imports of goods Exports of goods

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

                     

Distance-0.947 -1.046 -0.950 -1.646 -0.711 -0.579 -0.402 -0.445 -0.440 -0.476

(432.73)** (326.69)** (319.64)** (256.60)** (7497.07)** (6200.55)** (21849.25)** (19279.20)** (24573.57)** (21806.45)**

Common border3.386 3.079 (dropped) (dropped) 1.796 1.612 0.984 0.707 0.915 0.763

(47.76)** (37.25)** (11773.03)** (10141.59)** (29947.73)** (15503.45)** (30373.00)** (19576.90)**

Common language1.142 1.142 1.611 2.355 0.120 0.134 0.427 0.398 0.118 0.028

(559.39)** (376.26)** (379.42)** (347.91)** (1018.49)** (1135.13)** (17172.70)** (13076.84)** (4968.62)** (974.87)**

Colonial relationship-1.034 -1.192 -1.937 -4.771 -0.151 -0.202 -0.374 -0.482 -0.022 -0.049

(331.72)** (250.64)** (351.62)** (362.95)** (1226.27)** (1704.24)** (11320.38)** (12127.62)** (694.25)** (1307.24)**

Joint GDP0.645 0.193 1.235 1.112 0.692 0.479 0.745 0.778 0.936 1.077

(251.89)** (35.34)** (436.40)** (221.95)** (3613.24)** (2370.46)** (27003.69)** (23051.14)** (34378.00)** (32725.37)**

Applied tariff              -0.064   -0.027

          (7467.87)**   (2927.07)**

Relative GDP  0.488   -1.737            

  (51.21)** (175.36)**  

Relative skill  -0.441   0.589            

(79.17)** (108.86)**

RTA index0.033 0.028 0.097 0.103 0.016 0.028 0.001 0.010 0.027 0.029

(120.90)** (65.72)** (218.56)** (89.46)** (1173.62)** (2025.25)** (354.79)** (1993.36)** (7467.66)** (6738.57)**

 

Fixed effects

Reporter & partner yes yes yes yes yes yes yes yes yes yes

Year yes yes yes yes yes yes yes yes yes yes

                       

Number of obs. 4,922 1,890 2,851 1,251 2,574 2,612 34,124 20,080 36,337 19,739

Pseudo R-squared 0.9303 0.9367 0.9436 0.9705 0.9577 0.9422 0.9475 0.9514 0.9574 0.9612

                     

Concluding remarks• The index created is quite robust and is positively associated

with FDI, cross-border trade in services and to a lesser extent trade in goods.– It is important to account for differences in the coverage of

RTAs– Investment provisions in RTAs matter

• … but there are still questions about the causal relationship involved and what the index exactly captures.

• The analysis suggests that a preferential treatment exists for investment and services trade– Further research needed regarding rules of origin and how

firms take into account provisions in RTAs in their investment decisions.

• The “fragility” of Asian regionalism? (Baldwin, 2006)– Countries could be more ambitious in liberalising investment in

services. The scope of commitments is sometimes low.• Whether FDI in Asia is mostly of the vertical or horizontal

type is not clear in the analysis– There are however complementarities between investment and

trade (in particular in services)1414

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sebastien.miroudot@oecd.orgsebastien.miroudot@oecd.org

More information on OECD workon trade and FDI:

www.oecd.org/tadwww.oecd.org/tad

Thank You!Thank You!