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Table of Contents
Abbreviations..........................................................................................................1
Federation of Indian Chambers of Commerce and Industry (FICCI) .....................4
About Deloitte.........................................................................................................5
1. Executive Summary ...........................................................................................6
2. Introduction.........................................................................................................9
2.1 Background and Scope .............................................................................9
2.2 Roadmap .................................................................................................10
3. Decoding FTAs .............................................................................................12
3.1 Economics of Free Trade ........................................................................12
3.1.1 Benefits of Free Trade..................................................................12
3.1.2 Historical Background...................................................................12
3.1.3 Impediments to Free Trade ..........................................................13
3.1.4 Trade Liberalization and FTAs.....................................................13
3.2 Trade Patterns in Asia .............................................................................15
3.3 FTAs in Asia.............................................................................................16
3.4 Challenges Posed by FTAs in Asia .........................................................19
4. Benefits from FTAs and the Empirical Evidence ..........................................22
4.1 Economic Growth ....................................................................................22
4.2 Price Reductions......................................................................................24
4.3 Gains from product variety.......................................................................25
4.4 The Survival of More Productive Firms ...................................................25
4.5 Trade and Employment ...........................................................................26
4.6 Attracting Foreign Investments:...............................................................27
5. Economic Impact of India-ASEAN FTA.........................................................29
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5.1 India ASEAN Trade and Impact of FTA on the Economy .......................29
5.1.1 Export Intensity & Trade Intensity Indices ....................................31
5.1.2 Sectorial Hirschman .....................................................................33
5.1.3 Complementarity index.................................................................35
5.2 Impact of FTA on Indian Industries Based on Revealed Comparative
Advantage......................................................................................................36
5.2.1 Overview of the Sectors ...............................................................385.2.2 Textiles, Apparels and
Accessories ............................................. 38
5.2.3 Competitiveness analysis ............................................................ 44
5.3 Impact of FTA on Services Sector .......................................................... 51
5.3.1 Telecommunication...................................................................... 53
5.3.2 Computer and Information Services ............................................ 54
5.3.3 Financial Service sector............................................................... 55
5.3.4 Insurance services ....................................................................... 56
5.3.5 Construction Services .................................................................. 57
5.4 Impact on Industry Supplementary Evidence ...................................... 57
6. Business Opportunities in ASEAN Countries................................................ 63
6.1 Findings based on current open project tenders..................................... 64
6.1.1 Malaysia ....................................................................................... 64
6.1.2 Singapore..................................................................................... 71
6.1.3 Indonesia...................................................................................... 76
6.1.4 Thailand ....................................................................................... 82
6.1.5 Philippines.................................................................................... 83
6.1.6 Vietnam ........................................................................................ 85
7. India-ASEAN FTA and Vision for Indias Growth .......................................... 87
8. Appendix ....................................................................................................... 89
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Appendix 1 .................................................................................................... 89
Appendix 2 .................................................................................................... 92
Appendix 3 .................................................................................................... 93
Contacts............................................................................................................... 941 India ASEAN Free
Trade Agreement A Deloitte-FICCI White Paper
Abbreviations
1MDB 1Malaysia Development Berhad
ACE ASEAN Centre for Energy
ADB Asian Development Bank
AIFTA ASEAN India Free Trade Area
APEC Asia Pacific Economic Co-operation
ARIC Asia Regional Integration Centre
ASEAN Association of South-East Asian Nations
ASEAN+3
The 10 ASEAN countries plus People's Republic of China,
Republic of Korea and State of Japan
ASEAN+6
The 10 ASEAN countries along with India, Australia , NewZealand, People's Republic of China, Republic of
Korea and
State of Japan
ASEAN 5
The five countries of Singapore , Malaysia , Indonesia, Brunei
Darussalam &Thailand
ASSOCHAM Associated Chambers of Commerce of India
BIMSTEC
Bengal Initiative for Multisectoral Technical and Economic
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Cooperation
BO Business Opportunities
CCI Communications Content & Infrastructure, Malaysia
CEPC Carpet Export Promotion Council, India
CFTA Canada-U.S. Free Trade Agreement
CITI Confederation of Indian Textile Industries, India
CMLV
Acronym for Cambodia, Myanmar, Lao's People Democratic
Republic
CP Complaining Party
CPI Consumer Price Index
DIPP Department of Industrial Policy and Promotion
DSM (ASEAN-India) Dispute Settlement Mechanism Agreement2
E&E Electrical and Electronics
EPP Entry Point Projects
ESC Economic Strategies Committee ,Singapore
ETP Economic Transformation Programme
EU European Union
FDI Foreign Direct Investment
FICCI Federation of Indian Chambers of Commerce and Industry
FTAA Free Trade Area of the Americas
FTA Free Trade Agreement
GATT General Agreement on Tariff and Trade
GDP Gross Domestic Product
GERD Gross Expenditure on R&D
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GLC Government-linked company
GNI Gross National Income
ICT Information and communication technology
IP Intellectual Property
IT Information Technology
KG D 6 Krishna Godavari-D6 Gas project, India
KLIA
Expressway
Kuala Lumpur International Airport Expressway
KLIFD Kuala Lumpur International Financial District
LAO PDR Lao Peoples Democratic Republic
LNG Liquefied Natural Gas
MDG Millennium Goal
MFN Most Favored Nation
MNC Multi- national Corporation
MRO Maintenance, Repair and Overhaul
MRT Mass Rapid Transit
MTDC Malaysian Technology Development Corporation
NAFTA North American Free Trade Agreement
NKEA National Key Economic Areas3 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
OECD Organization for Economic Cooperation and Development
PCA Party Complained Against
PRC- Peoples Republic of China
PTA Preferential Trade Agreement
R&D Research and Development
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R&D&C Research, Development and Commercialization
RCA Revealed Comparative Advantage
RIL Reliance Industries Limited
RFP Request for Proposal
RM Ringgit Malaysia
ROO Rules of Origin
SAARC South Asian Association for Regional Cooperation
SCORE Sarawak Corridor of Renewable Energy, Malaysia
SITC Standard International Trade Classification
SME Small and Medium Enterprise
UAE United Arab Emirates
UK United Kingdom
US/ USA United States of America
USTR U.S. Trade Representative
WTO World Trade Organization4
Federation of Indian
Chambers of Commerce and
Industry (FICCI)
Established in 1927, FICCI is the largest and oldest apex business organisation
in India. Its history is closely interwoven with India's struggle for independence
and its subsequent emergence as one of the most rapidly growing economies
globally. FICCI plays a leading role in policy debates that are at the forefront of
social, economic and political change. Through its 400 professionals, FICCI is
active in 44 sectors of the economy. FICCI's stand on policy issues is sought out
by think tanks, governments and academia. Its publications are widely read for
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their in-depth research and policy prescriptions. FICCI has joint business
councils with 75 countries around the world.
A non-government, not-for-profit organisation, FICCI is the voice of India's
business and industry. FICCI has direct membership from the private as well as
public sectors, including SMEs and MNCs, and an indirect membership of over
2,50,000 companies from regional chambers of commerce.
FICCI works closely with the government on policy issues, enhancing efficiency,
competitiveness and expanding business opportunities for industry through a
range of specialised services and global linkages. It also provides a platform for
sector specific consensus building and networking. Partnerships with countries
across the world carry forward our initiatives in inclusive development, which
encompass health, education, livelihood, governance, skill development, etc.
FICCI serves as the first port of call for Indian industry and the international
business community.5 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
About Deloitte
Deloitte Touche Tohmatsu Limited is a UK private company whose member firms
around the world provide integrated professional services in Audit, Tax,
Enterprise Risk Services, Consulting and Financial Advisory. We provide
services to public and private clients spanning multiple industries. With a globally
connected network of member firms in more than 150 countries, we bring worldclass capabilities and
deep local expertise to help clients succeed wherever they
operate. Our more than 170,000 professionals are committed to becoming the
standard of excellence.
In India, we are spread across 13 locations and our 15,000 professionals take
pride in their ability to deliver to clients the right combination of local insight and
international expertise. Our professionals are unified by a collaborative culture
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that fosters integrity, outstanding value to markets and clients, commitment to
each other, and strength from cultural diversity. We enjoy an environment of
continuous learning, challenging experiences, and enriching career opportunities.
Our professionals are dedicated to strengthening corporate responsibility,
building public trust, and making a positive impact in their communities.6
1. Executive Summary
The India ASEAN Free Trade Agreement (FTA) was signed in Bangkok on
August 13, 2009, and came into effect from January 1, 2010 with Malaysia,
Thailand and Singapore. It is expected to be in place with all member countries
by 2016. The FTA collectively covers a market of nearly 1.8 billion people and
proposes to gradually slash tariffs for over 4,000 product lines. Currently the FTA
is restricted to trade in goods while negotiations for a similar agreement for
services are currently under way.
The theoretical underpinnings leading to an advocacy for free trade agreements
is unequivocal as free trade is expected to increase production, improve
specialization and lead to other welfare improvements in the long run for
consumers and producers alike. However the practical experience and lessons
from the FTAs that have been in place in other regions of the world does not
provide the necessary backing to the conclusions that emerge from the theory of
free trade. What is therefore the likely impact of the India-ASEAN FTA on the
Indian economy? What industries will benefit from the implementation of the FTA
and what industries will be hurt? Is this likely to create a significant impact on the
wages, employment and trading patterns in India in the years to come? What
opportunities and threats should Indian businesses be aware of? These are
some of the issues that we address in this white paper.
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Drawing upon the mixed findings of the impact of other FTAs on the member
countries, it is therefore not surprising that the impact of the India-ASEAN FTA
on the Indian economy is also likely to benefit some constituents while it will
negatively impact certain sectors in the short run. Drawing upon existing
research, we find strong reason to advocate that the success of the FTA is
critically dependent on the existence of good institutions in the country and an
efficient regulatory environment such that they act as true enablers for the
benefits to flow through and disperse throughout the economy. Benefits from the
FTA can possibly have a positive impact on Indias growth rate, help improve
productivity in Indian manufacturing and usher in an environment (driven by
healthy competition) that can promote greater business ties leading to
employment creation and greater trade within India and ASEAN.
We find evidence that the implementation of the FTA can only result in
intensifying the trade dependence amongst India and ASEAN. Seen in light of
the fact that currently ASEAN region exports more to India than what India
exports to ASEAN, a greater trade dependence will possibly allow Indias exports
to ASEAN to increase in the years ahead. Moreover, we also find that India has
increasingly been concentrating its exports to ASEAN towards mineral fuels and 7 India ASEAN Free
Trade Agreement A Deloitte-FICCI White Paper
mineral oils. It is therefore plausible that post the implementation of the FTA,
these sectors will benefit more as they will be best poised to avail of their greater
presence within ASEAN. Other sectors/industries can also be expected to benefit
through greater efficiencies achieved through specialization although a more indepth analysis will need
to be conducted to arrive at any affirmative conclusion in
this regard. We also find evidence that suggests that the trading profile between
India and ASEAN is such that ASEAN exports to India when matched against
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Indias import profile is more compatible in contrast with Indias exports to
ASEAN and its import profile. This implies that ASEAN trade will benefit more
post implementation of the FTA compared to the perceived gains from trade that
India is likely to experience.
Our industry specific analysis focuses on determining the relative comparative
advantage enjoyed by Indias industry vis-a-vis that of the ASEAN trading
partners. The basis for this analysis stems from the fundamentals of trade theory
that concludes that free trade will result in specialization in certain
products/industries in which a country enjoys a comparative advantage and will
end up producing and exporting more products from these industries. Based on
our analysis, we find that the following Indian industries enjoy a greater
competitive advantage relative to their counterparts in the ASEAN countries:
pharmaceutical
On the other hand, the following industries in ASEAN enjoy a larger competitive
advantage than the counterparts in India:
The automobile industry (including auto parts and ancillaries) is on the borderline
with no clear trend that may allow us to conclude whether India or ASEAN has a
clear advantage over the other.
Although the current FTA is restricted to that in goods alone, we extrapolate the
possible implications of the FTA on the services sector through secondary
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multiplier effects on the economy. We also find evidence that a FTA with services
(that is currently being discussed) will certainly be a boost to the services sector
in the Indian economy and will help in sustaining the growth momentum in the
medium to long term.
Finally, we find ample evidence to suggest that the FTA will open up
opportunities for Indian businesses in Malaysia, Singapore, Indonesia, Thailand
and Philippines. We have highlighted important initiatives announced by the
respective governments in these countries as well as projects with open tenders
that will become accessible to Indian businesses to further their business 8
interests in these countries. These opportunities will result in enhancing the
growth of key businesses in these sectors with the benefits of income and
employment generation in India that will add to the India growth momentum.
We duly emphasize the importance of an enabling policy environment that can
enhance or pull down the chances of the FTA becoming a catalyst in Indias
growth story. No free trade agreement can result in the intended outcome in
fostering trade, growth and employment creation in a country if the FTA is
juxtaposed against a myriad set of conflicting subsidies and taxes in the domestic
front that can destroy the very competitiveness that the FTA can usher in.
This is critical to the success of the India ASEAN FTA and cannot be
emphasized enough.
2. Introduction
2.1 Background and Scope
The India ASEAN Free Trade Agreement (FTA)
1
was signed in Bangkok on
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August 13, 2009, and came into effect from January 1, 2010 amidst mounting
scepticism from the business community in India regarding the asymmetric
impact of this agreement on certain sectors of the Indian economy. The FTA,
drafted after almost six years of tough negotiations, is expected to be
implemented in phases with Malaysia, Thailand and Singapore implementing the
agreement from January 1, 2010 in the first phase.
The FTA, considered the world's largest, covers a market of nearly 1.8 billion
people and proposes to gradually slash tariffs for over 4,000 product lines over a
staggered period, by 2016. However, certain specified products on both sides will
be shielded to some degree. This FTA aims at opening a 1.8 billion consumer
market to the member countries with a combined GDP of $ 2.3 trillion. In
addition, ASEAN-India bilateral trade has been growing steadily from 1993 and
stood at US$ 43.9 billion as of 2009-10 with ASEANs export to India at US$
25.79 billion and imports from India at US$ 18.1 billion as of the same year. As
for foreign direct investment (FDI), the inflow from India to ASEAN member
States was US$ 476.8 million in 2008, accounting for 0.8 per cent of total FDI in
the region. Total Indian FDI into ASEAN from 2000 to 2008 was US$ 1.3 billion.
Just like any other FTA, the India-ASEAN FTA has also been mired in political
controversy despite the economic principle that advocates free trade as a
desirable trading form benefiting all partners through mutual access to greater
markets, free flow of labour and capital, reduced transaction costs of doing
business across geographies and an efficient allocation of resources to the
various production forms. Driven by the theoretical underpinnings of free trade
and the empirical evidence from FTAs implemented in various regions of the
world, this white paper takes a closer look at the India-ASEAN FTA and explores
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its impact on the Indian economy. It provides a balanced view of the pros and
cons associated with the FTA and evaluates its impact on key industries in India
both from the standpoint of opportunities that are likely to be created as well as
the challenges posed on them from greater competition that the FTA is likely to
usher in. An important analysis presented in this paper is the possible impact of
the FTA on some key industries using the relative production advantages or
disadvantages that Indian industry reflects in the region.
2.2 Roadmap
Our white paper starts by summarizing the theory governing free trade. Several
assumptions have been made by economists to conclude on the benefits of free
trade. Notable among them is the notion of free markets i.e. markets that are
not constrained by the existing regulatory environment. It is important to
understand this framework as any meaningful discussion on the benefits of free
trade will necessarily have to be evaluated in a larger environment where other
existing policy parameters (and their impact on the specific industries) may act as
a deterrent to the realization of the full benefits from trade.
Before moving on to an analysis of the impact of the FTA on India, we
summarize the impact of other existing FTAs on the participating nations. The
evidence on the benefits of such trade pacts in other regions is mixed and the
success, if any, can best be described as limited. However, trade relations and
the impact of trade liberalization is a dynamic phenomenon and we recognize the
limited tenure of some of these agreements to be able to draw meaningful
conclusions; hence, it is possible that a longer term analysis on the impact of
other FTAs is required before one draws a conclusion about their success.
We then provide a snapshot of the characteristics of India-ASEAN trade. This
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allows us to delve into a before and after comparison of the impact of the FTA on
the Indian economy. We focus on some of the key member countries that are a
party to the FTA and draw inferences on the impact of the agreement on the
Indian economy based on the economic policies and priorities that have been
announced by the respective countries. As the current India-ASEAN FTA
pertains to goods only, we restrict our analysis to the impact on those sectors
that are directly impacted by the FTA. However, inter-industry linkages and
multiplier effects in the economy are important determinants that will ensure
that the impact from the FTA will flow through to the other sectors as well.
We make some observations on the impact of the FTA on the services sector
in this context.
Several large scale projects initiated and announced in the ASEAN region in the
recent past may open up opportunities for Indian businesses once the FTA is
operationalized. We provide a summary of such initiatives as a part of the
opportunities from the FTA section B in this paper. We also discuss the possible
short term impact of the FTA on some Indian industries arising from trade
diversion and specialization that are associated with any FTA of this kind.
Specific sectors and the impact of the FTA on them are also discussed. The
feedback from the industries is summarized based on anecdotal evidence and
our analysis from them. We also provide a theoretical analysis of the impact of
the FTA on the focus industries based on the principles of trade theory. Finally, we juxtapose the FTA on
the growth path of the Indian economy and
conclude on how this will play out over the next decade in terms of Indias growth
rate as well as some other social sector priorities. A large part of this discussion
is subjective and we recognize the limitations of our conclusions based on other
contingencies that are not explored or taken up in detail. Nonetheless, our
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observations are interesting in their own right and may pave the way for greater
analysis and fine-tuning in the future. Decoding FTAs
3.1 Economics of Free Trade
3.1.1 Benefits of Free Trade
The economic case for an open trading system based on multilaterally agreed
rules rests largely on commercial common sense. But, it is also supported by
evidence as captured by world trade and economic growth trends since the
Second World War. The first 25 years after the war witnessed steep reductions
in tariffs. This was accompanied by significant increases in world trade that
averaged approximately 8 percent per annum over the same period. More
significantly, world economic growth accelerated and averaged approximately 5
percent per annum during this period. While an increase in growth may be
driven by a number of factors (e.g. technological advances), empirical research
indicates a definite statistical link between freer trade and economic growth.
Economic theory points to strong reasons for the link. All countries, including the
poorest, have resources human, industrial, natural, financial which they can
employ to produce goods and services for their domestic markets or to compete
overseas. Economics tells us that we can benefit when these goods and
services are traded. Simply put, the principle of comparative advantage says
that countries prosper by concentrating their resources in on what they can
produce best, and then trading these products for products that other countries
produce best. In other words, liberal trade policies policies that allow the
unrestricted flow of goods and services sharpen competition, motivate
innovation and breed success. The importance of global free trade can be
grasped by the fact that there are currently 153 countries that are members of
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the World Trade Organization (WTO) the international organization whose
main function is to ensure that trade flows as smoothly, predictably and freely
as possible.
3.1.2 Historical Background
The desirability of free trade, originally put forth by Adam Smith in The Wealth of
Nations in 1776, was first demonstrated theoretically by 19th century English
economist David Ricardo. Ricardo showed that in a world where labor is the only
factor of production, if each country specializes in the good in which it has a
comparative advantage, then all countries can gain from trade. The intuition is
that this kind of specialization maximizes global production of goods and enables
countries to enjoy greater levels of consumption through international trade.
Ricardos seminal work has spawned a rich literature in international trade theory 13 India ASEAN Free
Trade Agreement A Deloitte-FICCI White Paper
showing that even under more general conditions, Ricardos conclusion that free
trade is mutually beneficial continues to hold good.
Of particular interest is the Heckscher-Ohlin theory that introduced a second
factor of production, capital, and showed that a country will export the commodity
that intensively uses the factor that is relatively more abundant in that country
(and will import the good that intensively uses the scarce factor). In other words,
as observed by Markusen et al., the Heckscher-Ohlin theory may be used to
support certain empirical observations including evidence that labor-abundant
developing nations such as India tend to export labor-intensive goods such as
clothing, footwear etc.
3.1.3 Impediments to Free Trade
Given the overwhelming theoretical basis favouring free trade, it is somewhat
surprising to find that free trade is almost never observed in practice. Free trade,
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in its purest form, refers to the unfettered export and import of goods and
services between one country and another with no government intervention on
either countrys side. However, barriers to free trade are an observed
phenomenon and manifest themselves as:
I. Tariff barriers: A tax on imports that are invoked by countries mainly to
protect the domestic industries from the possible consequences of
greater competition.
II. Non-tariff barriers: These can be in form of quantitative restrictions on
imports/exports (quotas) or existing government regulations governing
technical and safety standards for products that can have the effect of
restricting imports. Another form of non-tariff barrier to free trade is
found in Domestic Content Requirements that are regulations wherein
importers are forced to import goods that contain minimum prescribed
amounts of domestically produced components. Such restrictions are
commonly imposed on the domestic operations of foreign firms that
engage in foreign direct investment in production facilities in the
regulating country.
It should be noted that there can be a number of other regulatory/administrative
measures that can be put in place to indirectly restrict import quantities.
3.1.4 Trade Liberalization and FTAs
Given the existence of trade barriers (regardless of origin) at any point in time,
the question often arises as to what countries can do to lower or eliminate trade
barriers among themselves. Efforts to do so are broadly referred to as trade
liberalization and can take several forms. Markusen et al. state that trade
liberalization often occurs in the form of a multilateral agreement such as the
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various trade negotiation rounds of the General Agreement on Tariffs and Trade
(GATT), or an agreement among a smaller set of countries, typically with some
geographical proximity. This latter type of agreement is called a preferentialtrade agreement (PTA)
and forms the starting point for our analysis of the
ASEAN-India Free Trade Area (AIFTA) under consideration.
consists of a number of countries that agree to eliminate all trade barriers
among themselves while keeping intact their existing tariffs with non-member
countries. The North American Free Trade Agreement (NAFTA) signed by
the United States, Canada and Mexico is an example in this regard.
customs union in which member countries, in addition to eliminating all trade
barriers among themselves, also adopt a common tariff against non-member
countries.
et: When the cooperation among member states is extended to
allow free movement of factors of production (e.g., labor and capital) across
national boundaries, a common market is formed.
place in the
case of an economic union, i.e., a common market in which members
coordinate monetary, fiscal policies and other policies. The European Union
is the classic example of an economic union.
Beneficial Effects of FTAs
The beneficial effects of FTAs are several as listed below.
countries and tends to increase incomes/growth of the members. Intuitively,
starting from a situation of tariff-distorted trade, the elimination of tariffs allows
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each member to specialize in the production of the goods in which it has a
comparative advantage and trade those goods in exchange for imports of
other goods from fellow members.
ating tariffs, expands a
member countrys export market thereby allowing it to expand its scale of
operations and lower its average cost of production.
domestic market, then increased competition from foreign products dampen
domestic monopoly inefficiencies, if not eliminate them altogether.
trade flows and expands the variety of products available to consumers in the
home country.
Potential Negative Effects of FTAs
There can also be potential drawbacks associated with FTAs.
country switching its import supplier from a more efficient (low cost) country to
a less efficient member country resulting in an inefficient allocation of
resources. Dumping: Dumping refers to the practice of a foreign country selling its
product in the home market at a price that is lower than its fair value. While
this can occur even in the presence of trade barriers, the elimination of tariffs
in the home country increases the probability of this occurrence and can
cause considerable harm to domestic industries that can be driven out of
business altogether.
the domestic market for the imported product leading to loss of market share
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and laying off of workers in that sector. In the short run, this kind of
dislocation can cause considerable hardship to the affected workers.
number of industries that are unable to compete with cheaper imports. This
may lead to excessive dependence on foreign supplies for a number of
commodities a situation that could have adverse effects if there were a
disruption in any of the foreign supplies.
The net effect of an FTA will therefore be driven by the benefits and the possible
negative impacts arising from them. What makes this assessment difficult for an
FTA such as the India-ASEAN one is the fact that the market in which such an
FTA is being implemented is fraught with policy guidelines, regulatory restrictions
and competitive trade policy that directly hinders the interpretation of a truly free
trade agreement.
3.2 Trade Patterns in Asia
Asias rise in the 1960s from a poor underdeveloped agro based economy to a
global factory has been spectacular. Though the continent lacked large reserves
of natural resources and was steeped in high levels of poverty, it had abundant
supply of cheap and productive manpower. Geographical proximity to the
expanding, high-income economy of Japan with MNCs in the lookout for low cost
production locations proved to be a boon for Asia. A thriving world economy
hungry for labor-intensive imports from Asia, declining tariffs in developed
country markets, inflows of trade-related FDI, and generous foreign aid flows
acted as the key driver of outward-oriented growth in Asia.
Market driven expansion of trade and FDI along with innovation and learning by
Asian firms have enabled them to acquire requisite technological capabilities to
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either compete internationally or become suppliers to MNCs over time. As firms
underwent systematic innovation and learning, imports from the region witnessed
a gradual shift. From exporters of labor intensive products like textiles, garments,
and footwear, Asia started to export more of technology-intensive exports like
chemicals, ships, electronics, and automobiles. Asian firms through their
constant innovation and investment in research and development emerged as
leaders in production networks and supply chains.
Intra-regional trade also flourished as regional trade barriers and logistics costs
fell and production found way to more cost-effective locations. As per ADB
estimates, trade within Asia increased significantly from 37% of total trade to
54% between 1980 and 2007. The end of the 20th century witnessed the Asian 16
crisis (1997) and this significantly changed the outlook of outward orientation in
the region.
The Asian Financial Crisis of 1997-98 wrecked havoc among the economies of
Thailand, Indonesia, Malaysia, and the Republic of Korea (hereafter Korea) and
adversely affected the economies of Philippines, Hong Kong and China. The
crisis led to the emergence of sentiments of economic regionalism in East Asia
and a number of economies have come together in the post crisis era to
undertake initiatives for regional economic surveillance and close economic
collaboration. Several groups have been to set up to facilitate the process.
3.3 FTAs in Asia
Market driven forces of cross border trade, FDI flows and finance as a result of
multilateral and unilateral trade liberalization processes has deepened the
economic ties in the Asian region. The last twenty years have witnessed an
upsurge of bilateral and multilateral trade agreements being convened in this part
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of the world.
For several decades the Asian economies had structured their approach to
international trade on the multilateralism and most favored nations (MFN)
principles through the General Agreement on Tariffs and Trade (GATT)/WTO
framework and open regionalism and unilateral liberalization centered on APEC.
But this long standing policy stance of pursuing trade through the frameworks of
APEC and WTO has witnessed a change over the past decade. The region is
pursuing a three-track approach based on global (WTO-based) cum transregional (APEC-based), regional
(ASEAN+3 or ASEAN+6), and bilateral
liberalization of trade.
Asia is at the forefront of FTA activity. At present there are a total of 506 FTAs in
various stages of negotiation in the region of Asia, of which 119 are ones that
have been proposed, 110 are under negotiation, and 277 that have been already
concluded. Out of the 277 concluded FTAs 231 are already under effect.
Table 3.1: No of FTAs in in various Asian countries (as of 2010)
UNDER NEGOTIATION CONCLUDED
TOTAL
Country Proposed
Framework
Agreement
Signed/Under
Negotiation
Under
Negotiation
Signed
In
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Effect
Singapore 4 1 9 3 18 35
India 11 4 7 0 11 33
Korea,
Republic of
10 2 8 1 6 27
Pakistan 10 5 3 2 6 26
China,
People's
Republic of
8 3 3 1 10 25
Thailand 6 4 3 0 11 2417 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
Japan 6 0 5 0 11 22
Australia 6 2 5 0 8 21
Malaysia 3 1 5 2 8 19
Indonesia 7 1 1 1 7 17
New
Zealand
4 1 3 2 7 17
Brunei
Darussalam
4 1 1 0 8 14
Viet Nam 3 1 2 0 7 13
Philippines 4 0 1 0 7 12
Lao PDR 2 0 1 0 8 11
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Kazakhstan 2 1 0 3 5 11
Myanmar 2 1 1 0 6 10
Cambodia 2 0 1 0 6 9
Source: Asian Regional Integration Centre website
The table exhibits the status of FTAs signed by the top 15 countries (in respect of
maximum number of total FTAs) and all the ASEAN countries.
Singapore leads the region with a total of 35 FTAs followed by India and Korea.
Singapore with its strategic location, world class infrastructure and logistics is the
regional head quarter for a number of top MNCs in the world. One of the
founding members of ASEAN, Singapore has trade agreements with all the major
Asian economies like PRC, India, Japan, and Korea as well as economies
outside the region, including the United States (US) and Australia. The USSingapore FTA which has been
effective since 2004 was the first such
agreement made by US in Asia and is supposed to be a model agreement in
terms of scope.
India and China too have been active in the FTA scenario in a bid to ensure
market access for their goods and services. China has separate agreements with
ASEAN for goods and services and is in the process of negotiating a third one for
investments. India has a goods FTA with ASEAN (which is the focus for this
paper), and is trying to negotiate a service agreement. Japan and Korea the
two major Asian economies have also been active in forging trade treaties with
other Asian economies with a total of 22 and 27 treaties respectively under their
belts. The relatively poorer economies such as Cambodia, Lao Peoples
Democratic Republic (Lao PDR), Viet Nam, Philippines, and Indonesia have by
and large relied on the ASEAN to convene trade agreements with the larger
economies . All of these countries are members of ASEAN. Weak infrastructural
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capacity and low resources could be a reason why these countries have not
been able to conduct negotiations on their own.
The four major factors that have played a driving force behind the emergence of
FTAs in East Asia have been:
-driven economic integration - Asian
policymakers have realized the potential of FTAs in reducing trade barriers, 18
harmonizing rules, standards and regulations and the long term economic
benefits that these can bring in and have embarked on a mission to foster
greater economic integration in the region through trade pacts.
n economic integration
initiatives - The successes of initiatives for economic integration in Europe
and the Americas have proved to be a strong motivation for the region to
move towards regional economic cooperation and integration. The successful
launch of an economic and monetary union by the euro area countries and the
expansion of EU to further east as well as the success of NAFTA and the Free
Trade Area of the Americas (FTAA) in North Central, and South America have
proven beneficial to the participating economies. The fear that the two
trading giants, the EU and the US, might become more dominant and
influential in rule-setting in the global trading arena and thus marginalizing
Asian economies has been a major impetus for the regional leaders to come
forward to step up initiatives of regional cooperation and integration. Also, the
slow progress in the WTO/Doha round and the APEC process has prompted
the regional economies to come together themselves and form trade
agreements that are mutually beneficial to their circumstances.
- The financial crisis of 1997-98 that rocked the
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economies of East Asia has been an eye-opener to the fact that the region
needs to strengthen regional economic cooperation in order to sustain
economic growth along with stability. Though it adversely affected the east
Asian Economies only, the crisis became a lesson for all emerging Asian
economies and triggered a need among the east Asian economies to
strengthen their regional economic cooperation to ensure sustainable growth
and stability in the region. Fear of exclusion has also prompted many nations
to join the FTA bandwagon.
- The WTO Doha
Development Round commenced on November 2001 as an initiative to
promote trade-led growth in developing countries. The negotiations were
primarily centered on two key areas: agriculture and non-agricultural market
access. After seven years of negotiations, talks were suspended over the
growing concerns that there werent appropriate safeguard measures to
protect poor farmers in the developing nations from the rising food and oil
prices. With the dim prospect of a finalized trade agreement, pro-business
Asian economies started to initiate bilateral and multilateral trade treaties
among themselves to further talks on liberalization of trade in goods
and services.
The number of FTAs is easy to track, but the numbers in themselves fail to
indicate how important FTA s are to trade and economy at the national level.
How much of a countrys trade is covered by the FTA is difficult to calculate
owing to the exceptions and exclusions contained in many trade agreements.
Official statistics on utilization rates of FTA preferences for Asia are not easily
available and published data on the direction of services trade do not exist. A
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paper by ADB attempts to form an indicative estimate of this, by making a
simplistic, yet bold assumption that that all goods trade is covered by concluded 19 India ASEAN Free
Trade Agreement A Deloitte-FICCI White Paper
FTAs and computes the share of an economys bilateral trade with its FTA
partners in its total trade with the world for 2000 and 2008.
Graph 3.1: Share of an economys bilateral trade with its
FTA partners
Source : Asian FTAs: Trends and Challenges by Masahiro Kawai and
Ganeshan Wignaraja
The larger economies of the region like India, Korea, China, Japan have a
smaller share compared to the ASEAN member states. Korea has 44% of its
total trade with bilateral FTA partners, China 25%, India 23% and Japan 11%.
This implies that ASEAN members rely more on FTAs for their trade
compared to other nations.
Another point to note is that for all the nations, the share of trade with bilateral
FTA partners out of its total trade has increased over the eight year period
considered. This is an indication of the increasing number of FTAs and their
importance in total trade in the economies of the region.
3.4 Challenges Posed by FTAs in Asia
ADB
2
has pinpointed some challenges confronting FTAs in Asia. They have
made their own study and surveys to come to the conclusions that are
summarized below.
benefits like preferential tariffs, market access, and new business
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opportunities for partner economies. To automatically assume that such
benefits are exploited or enjoyed by the individual industries and firms would
be grossly inaccurate. In fact studies have shown that FTA preference
2
This section has been compiled mainly from the working paper by Asian Development
bank on FTAs in Asia.
80
70
60
50
40
30
20
10
0
Brunei Darussalam
Lao PDR
Singapore
Malaysia
Myanmar
Hong Kong, China
Cambodia
Korea
Thailand
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Indonesia
Vietnam
Japan
India
Philippines
China
2000 200820
utilization rates (estimated by shares of export value enjoying preferences
3
) is
low in Asia. This implies that although a number of FTAs have been
concluded in the region, in reality they are underutilized. The direct implication
is that the full benefit of free trade is not being actualized and it is ultimately a
waste of scarce resources used in negotiating trade treaties in developing
countries
4
. Lack of awareness by the firms in member countries were found to
be one of the major reasons behind this low utilization of FTAs.
raise awareness about FTAs and their various benefits and clauses to firms
and industries at a micro level. Government and Industry bodies could play an
important role in making FTAs more transparent to industries - especially
small and medium scale industries - which might not have the relevant
information or the capacity to decode the scope of FTAs.
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Asian FTAs is the suboptimal level of liberalization in agricultural products.
The coverage of the goods in the Asian FTAs differs from agreement to
agreement. Agricultural goods have been largely excluded in coverage owing
to the pressures from the farm lobbies and social concerns in the rural
sectors, where poverty looms large. According to the ADB report, it is
important for FTAs in the region to ensure coverage of at least 85% of all
agricultural product lines in a given agreement and minimize exclusions to not
more than 150 product lines. This can be achieved by adopting a negative list
approach to agricultural products with a few sensitive items. A realistic tariff
elimination schedule, a transparent regime, and reform of subsidies are issues
that need to be further addressed under FTAs.
of Origin (ROO): Rules of origin are used to determine the country of
origin of a product for purposes of international trade. They are used to
determine which goods will enjoy preferential tariffs to prevent trade deflection
among FTA members. For manufactured goods, ROOs comprise three types:
(i) a change in tariff classification rule defined at a detailed harmonized
system level; (ii) a local (or regional) value content rule, which requires a
product to satisfy a minimum local (or regional) value in the country (or region)
of an FTA; and (iii) a specific process rule, which requires a specific
production process for an item. It has been argued that Asian FTAs have
complicated ROOs and this deters the use of FTA preferences and raises
transaction costs for firms. Multiple ROOs in overlapping FTAs could pose a
severe burden on SMEs, which have less ability to meet such costs. This
problem was originally termed a spaghetti bowl of trade deals (Bhagwati
1995), and has now come to be known as the noodle bowl effect in Asia.
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Another group of analysts have argued that the Asian FTAs could be actually
creating a new order by building the foundation for a stronger regional trading
system (Petri 2008).
3
Baldwin 2006; World Bank 2007
4
Bhagwati 200821 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
FTAs would increase cost of conducting business when dealing with multiple
ROOs in the region. Evidence suggested that multiple ROOs impose limited
burden on firms in East Asia. Of the 465 firms that responded to the question
on this issue, only 27% said that multiple ROOs significantly add to business
costs. But there were country-level variations in perceptions - Singaporean
firms had the most negative perceptions regarding multiple ROOs (38%),
while Korean firms had the least negative perceptions (15%). Negative
responses for Japanese, Philippine, and Thai firms were 31%, 28%, and 26%,
respectively. National FTA strategies, industrial structures, and the quality of
institutional support could explain the differences in perceptions of ROOs
across Asian countries.
more negative perceptions of multiple ROOs than SMEs. A possible reason
for this was large established firms tend to export to multiple markets and
change their business plans in response to FTAs and are thus more likely to
complain about issues of multiple ROOs. Smaller firms usually export to a
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reduction.
Empirical research supports the fact that opening trade increases growth in both
developed and developing countries
6
. However, it is also true that the existence
of good institutions and efficient regulatory systems are a prerequisite to attract
FDI and trade-led growth. A general consensus seems to have been emerging
5
Excerpted from Robert C. Feenstra, New Evidence On The Gains From Trade, Review
of World Economics/Weltwirtschaftliches Archive, December 2006; and Trade as a driver
of Prosperity Commission staff working document, European Commission, 2010
6
A. Winters "Trade liberalization and economic performance: an overview", Economic
Journal, 114, 2004, and R. Wooster, S. Dube and T.M. Banda (2006) "The contribution of
intra-regional and extra-regional trade to growth: evidence from the EU"23 India ASEAN Free Trade
Agreement A Deloitte-FICCI White Paper
over the last few years that trade opening works best for growth, employment
and incomes when it is successfully combined with other structural reform
measures
7
.
With respect to the European Union, existing FTAs are argued to have an impact
on increasing EU GDP by 2%. Further increased cooperation with existing trade
partners, particularly lowering of non tariff barriers could double this growth
effect. Moreover, empirical estimates also reveal that opening of trade increases
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productivity and increases competiveness of the EU industries with estimates
suggesting that between 1988 to 2000, productivity in manufacturing sector in the
EU region increased by 11% while mark-ups came down by 1.6% in the face of
increased imports during the period
8
. Productivity growth aid economic growth as
well as consumer welfare and therefore gains in productivity have second rung
effects of increasing economic growth.
Another study
9
suggests that since North American Free Trade Agreement
(NAFTA)s implementation in January 1994, U.S. agricultural trade with its
partners in the agreement has increased in both size and relative importance.
Between 1993 and 2000, U.S. agricultural exports to Canada and Mexico
expanded by 59 percent, while corresponding exports to the rest of the world
grew only 10 percent. Similarly, U.S. agricultural imports from Canada and
Mexico increased 86 percent between 1993 and 2000, compared with 42 percent
for U.S. agricultural imports from the rest of the world. However, other factors -
such as population growth, changes in macroeconomic performance and
exchange rates, and unusual weather patterns - generally have had a much
stronger effect on U.S agricultural trade with Canada and Mexico than NAFTA.
However, a commodity-by-commodity analysis provides that for a handful of
commodities, NAFTA has had a much larger impact, with an increase in trade
volume of 15 percent or more that is directly attributable to the agreement. This is
particularly true for products whose trade was severely restricted prior to CFTA
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and NAFTA.
Trade relations among Canada, Mexico, and the United States have broadened
substantially since NAFTA's implementation, though experts disagree over the
extent to which this expansion is a direct result of the deal
10
. According to data
from the office of the U.S. Trade Representative (USTR), the United States' chief
7
R. Chang, L. Kaltani, N. V. Loayza (2009) "Openness can be good for growth: The role
of policy complementarities", Journal of Development Economics 90 (2009) 3349.
8
N. Chen, J. Imbs and A. Scott, Competition, Globalization and the Decline of Inflation,
CEPR Discussion Paper Series No. 4695, 2004.
9
Steven Zahniser and John Link (editors) Effects of North American Free Trade
Agreement on Agriculture and the Rural Economy (July 2002)
10
Lee Hudson Teslik NAFTA's Economic Impact Backgrounder, Council on Foreign
Relations (July 2009)24
negotiator in foreign trade and a major booster of NAFTA and other free trade
accords, the overall value of intra-North American trade has more than tripled
since the agreement's inception. The USTR adds that regional business
investment in the United States rose 117 percent between 1993 and 2007, as
compared to a 45 percent rise in the fourteen years prior. Trade with NAFTA
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partners now accounts for more than 80 percent of Canadian and Mexican trade,
and more than a third of U.S. trade.
4.2 Price Reductions
Gains through increase in economies of scale
There is inadequate empirical support that trade liberalization resulted in
expanded scale of operations for domestic firms/industries (in FTA member
countries) resulting in economies of scale and subsequent price reductions.
Gains through reduction of barriers and increased competition
Another mechanism through which free trade areas can lead to a reduction in
prices, aside from economies of scale, is through the elimination of rules and
regulations governing the flow of goods between FTA member countries. For the
European Union, as these non-tariff barriers were eliminated, it was expected
that firms would be forced to equalize their selling prices across markets. In other
words, rather than treating Europe as a collection of segmented markets, where
firms could choose their prices in each country separately, Europe would instead
become a unified market where firms could not price-discriminate. As pricediscrimination is eliminated,
average prices are expected to fall, providing
benefits to consumers.
In practice the results look mixed for the EU. A paper by Badinger (2006)
11
uses
sectoral data from 1981 to 1999 and finds evidence of markup reductions in
manufacturing and construction, but not in services.
The European Commission Report argues that tariff cut leads to lower consumer
prices although the pass-through effect of this price transmission channel is
usually imperfect. The paper
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12
cites the example of how import prices for textiles
and clothing fell by 27.5 and 38.4 percent respectively in real terms (i.e. relative
to the general CPI) during the period 1996-2006. Import prices for consumer
electronics too exhibited a 50% reduction. The paper further explains the
macroeconomic spill-over effects of reduction in import prices that led to overall
reduction in inflation as a result of trade openness and increased international
11
Badinger, H. (2006) Has the EUs Single Market Programme fostered competition?
Testing for a decrease in markup ratios in EU industries, Oxford Bulletin of Economics
and Statistics, forthcoming.
12
J. Francois, M. Manchin, and H. Norberg, "Passing on of the benefits of trade openness
to consumers", European Commission, Directorate General for Trade, 2007, p.7.25 India ASEAN Free
Trade Agreement A Deloitte-FICCI White Paper
competition. There exists theoretical literature on the negative relationship
between inflation and trade openness13. The inflation-trade openness correlation
has become even more strengthened during the 1990s and has become more
robust than earlier research suggested extending even to OECD countries.
4.3 Gains from product variety
In addition to reduction in prices, trade liberalization generates gains for the
customers also through an increase in the variety of goods available through
trade. Economists have estimated that in a typical country, new import varieties
account for 15 percent of productivity growth. For the developing countries, they
estimate the median impact of new imported varieties to be as high as 25 percent
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of national productivity growth.
By combining the data on imports from new supplying countries with estimates of
the elasticity of substitution for each, Broda and Weinstein (2006)
14
come away
with an estimate of the gains from trade for the US due to the expansion of
import varieties, which amount to 2.6 percent of GDP in 2001. Translating these
"variety gains" into an EU context suggests that the average European consumer
benefits are in the range of 600 per year, in addition to the gains due to
lower prices
15
.
4.4 The Survival of More Productive Firms
Economic models predict that opening of trade in a sector will bid up the wage
and other factor prices, which forces the least efficient firms to exit the market
leading to an increase in the average productivity of the firms in that sector.
A study by Trefler (2004)
16
analysed the impact of the Canada-US free trade
agreement on the selection and productivity of firms using firm-level data. He
found that Canadian industries that had relied on tariffs to survive saw their
employment fall by 12 percent due to the elimination of tariffs. In manufacturing
overall, the trade agreement reduced employment by 5 percent. However, these
job losses were a short-term effect, and over a 10 year period, employment in
Canadian manufacturing did not drop. While low-productivity plants shut down,
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13 W.C. Gruben. and D. McLeod, The Openness- Inflation Puzzle Revisited, Applied
Economics Letters, 11,2004, pp.465-468.
14
Broda, C. and D. E. Weinstein (2006) Globalization and the Gains from Variety,
Quarterly Journal of Economics, May, 121(2), 541-585.
15
"The gains from variety in the European Union" - Munich Discussion Paper No. 2010-
24) and Langenfeld and Nieberding - "The Benefits of Free Trade to U.S.Consumers",
Business Economics, 40 (3), 2005, p. 41-51.
16
Trefler, D. (2004) The Long and Short of the Canada-U.S. Free Trade Agreement,
American Economic Review, 94(4), September, 870-895.26
high-productivity Canadian manufacturers expanded into the United States.
Third, the trade agreement set off a productivity boom. Formerly sheltered
Canadian companies began to compete with, and compare themselves to, more
efficient American businesses. In the formerly sheltered industries most affected
by the tariff cuts, labor productivity jumped 15 percent, at least half from closing
inefficient plants. That corresponds to a compound annual growth rate of 1.9
percent in productivity.
To summarize, Trefler finds overwhelming evidence that the Canada-US free
trade agreement resulted in the self-selection of Canadian firms, with only the
more productive firms surviving. Productivity in Canadian manufacturing overall
rose 6 percent. This productivity gain translates directly into higher wages or
lower prices, and is a gain from trade for consumers.
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The gains for developing countries are also shown to be substantial. Feenstra
and Kee, (2006)
17
completed a study of 44 countries over two decades, 1980
2000. Over this period, export variety of these countries to the United States
increases by 4.6 percent per year, thus more than doubling over these two
decades. Furthermore, that increase in export variety is associated with a 4.5
percent productivity improvement for exporters over the two decades. These
gains for the exporters are actually larger than the gains to the United States (of
2.6 percent) from the increase in its import variety over the past several decades.
4.5 Trade and Employment
At a theoretical level, trade openness creates new jobs while protectionism
reduces competitiveness of industries and thus destroys jobs. A report by
European commission finds a negative correlation between openness in trade
and unemployment. There persists a general misconception that trade opening
destroys jobs, and only exports create jobs. While this might hold true for certain
individual firms the reverse is true at the level of the entire economy. Trade
openness facilitates the integration of local companies in global production
chains. It makes them more productive and competitive, and creates more
employment.
Steven Zahniser and John Link (2002)
18
, while discussing about NAFTA and
Agricultural Employment, state that by increasing opportunities for U.S. exports
and encouraging the more efficient allocation of economic resources, NAFTA has
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had a small, positive influence on U.S. agricultural employment. Moreover, an
17
Feenstra, R. C. and H. L. Kee (2006) Export Variety and Country Productivity:
Estimating the Monopolistic Competition Model with Endogenous Productivity,
University of California, Davis and World Bank Policy Research Group.
18
Steven Zahniser and John Link (editors) Effects of North American Free
Trade Agreement on Agriculture and the Rural Economy (July 2002)27 India ASEAN Free Trade
Agreement A Deloitte-FICCI White Paper
OECD study
19
finds that while there has been no decline in overall employment,
there has definitely been a shift of employment from industries to service sector.
Trade with low-wage countries can potentially also have a major beneficial
impact on technical change. For instance, a study drawing on a panel of over
200,000 European firms shows that import competition led to both within-firm
technology upgrading and between-firm reallocation of employment towards
technologically more advanced firms or subsidiaries. These effects account for
about 15-20% of technology upgrading between 2000 and 2007 and are growing
over time
20
. Another recent study finds that technological change and
globalization are associated with wage increases in nine EU Member States
21
.
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Trade may also have created a "polarization" of employment in recent years.
Employment has been growing both in the high-skilled (professional and
managerial) jobs and in the lowest-skilled (personal services) jobs, whereas
there was a decline in medium-skilled jobs in manufacturing and routine office
jobs
22
. This phenomenon is not unique to EU and also has been observed
in US.
23
In summary, with increased trade and openness, the developed countries have
experienced a noticeable decline in manufacturing employment mostly due to
rapid technological progress but the decline has been more than compensated
by an increase in services employment. Wages increased for those remaining in
manufacturing, despite a considerable degree of labor churning and declining
job security.
4.6 Attracting Foreign Investments:
With an inclusion of certain favourable rules for the foreign investors, FTAs may
attract further foreign investments in a country. According to Steven Zahniser and
19
OECD (2007) "Trade and labor market adjustments", document TAD-TC-WP (2007)7,
May 2007.
20
Nicholas Bloom, Mirko Draca, John Van Reenen (2009): "Trade induced technical
change? The impact of Chinese imports on innovation, diffusion and productivity",
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Stanford university working paper.
21
R. Christopoulou, J. F. Jimeno, A. Lamo (2010) "Changes in the Wage Structure in EU
Countries", ECB Working Paper No. 1199, April 2010.
22
M. Goos, A. Manning, A. Salomons (2009) "Job polarization in Europe", American
Economic Review, 2009 vol 99(2) pp 58-63.
23
"The Growth of Low-Skill Service Jobs and the Polarization of the U.S. Labor Market",
David Autor and David Dorn, MIT Working Paper, August 2010. Paul Krugman (2008)
"Trade and wages reconsidered", Brookings Papers.28
John Link (2002)24, such rules generally strengthen the rights of foreign
investors to retain profits and returns from their initial investments. They also
guarantee equal treatment to foreign and domestic investors alike under the laws
of each NAFTA country and prohibit new laws that would change the status of
foreign investments, once they are established. It is further stated that
econometric studies demonstrate that NAFTA has fostered a positive synergy
between trade and FDI in the North American processed food industry. As a
result, U.S. exports and U.S. FDI have grown together which is one of NAFTA's
success stories. Also, U.S. direct investment in the Mexican food processing
industry has more than doubled since NAFTA's implementation, reaching $5.3
billion in 1999. Similarly, under Canada-U.S. Free Trade Agreement (CFTA) and
NAFTA, U.S. FDI in the Canadian food processing industry expanded from $1.8
billion in 1989 to $5.0 billion in 1999.