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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
22
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.
33
Asian RTAs with investment provisions (in force in 2006)
44
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)
66
% 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)
99
Coding of provisions and weights
1010
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)
1111
Empirical models
• Gravity equation for trade:
• Knowledge-capital specification for FDI:
1212
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
1313
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!
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