RIETI Policy Symposium

Assessing Quality and Impacts of Major Free Trade Agreements

Information

  • Time and Date:
    13:00-18:00, Thursday, March 22, 2007;
    10:00-17:10, Friday, March 23, 2007
  • Venue:
    ANA Hotel Tokyo, Galaxy Banquet Room, B1F
    12-33, Akasaka 1-chome, Minato-ku, Tokyo 107-0052
  • Language:
    Japanese / English (with simultaneous interpretation)

Part I Ex-ante (text-based) Assessment of the Quality of FTAs

Session Outline

In this session, a presentation was made by Professor Cheong on the assessment of the quality of free trade agreements (FTAs) with a focus on rules of origin. Professor Cheong's paper provided verification of the subject from empirical, case study, and institutional approaches, while analyzing market access in relation to the scope of rules of origin and trade liberalization in a number of representative FTAs. This presentation only covered rules of origin, while the scope of trade liberalization was discussed in Session 2. Dr. Estevadeordal responded to the presentation with comments based on a number of major FTAs located throughout the world. Professor Urata summarized the discussions of Session 1 and 2 with comments concerning FTAs established in East Asia. He noted that, generally speaking, East Asian FTAs are of poorer quality than other FTAs because of their low coverage levels and the strictness of their rules of origin.

Outline: Inkyo Cheong Presentation

Professor Cheong addressed the subject of "Rules of Origin in Free Trade Agreements" and made the following points.

While rules of origin may be extremely stringent and complex, they are nevertheless necessary for the following reasons. First, such rules are needed to avoid trade distortion. Second, they are needed to prevent inconsistencies in country of origin of final products that contain numerous imported parts and components, but are considered to have been manufactured domestically. Third, rules of origin have an important role to play in economic policies. However, rules of origin are based on protectionist and political-economic considerations, and they reduce the benefits of FTAs.

In terms of quality, Japanese and Korean FTAs lag behind Chinese FTAs. The simple rules of origin contained in the China-ASEAN FTA were made possible by the leadership shown by China. At the present stage, it can be said that China will take the lead in the East Asia Economic Community.

Currently, the Asian countries are working to establish a large number of FTAs. While this is important, a critical issue for the future will be the creation of high quality FTAs.

Dr. Estevadeordal responded to the Cheong Presentation with the following comments.

Comparative analysis of FTAs is important. But it is also important to focus on institutional issues and problems of mechanism. It is desirable to adopt rules of origin that avoid trade deflection. However, the question remains why rules of origin are important in the first place. Reasons for this include the rapid increase in the number of FTAs, the insulation of industries from FTAs, the protection of manufacturers of intermediate goods, attracting investments in strategic areas, and the difference between short- and long-term effects. Theoretical explanations have been given, but further empirical evidence is needed.

Regarding the economic impact of rules of origin, these may distort the patterns of trade, investment, and production. Experience shows that rules of origin can be used to avoid trade distortion. On the other hand, such rules also have a negative impact in terms of administrative procedure costs for companies, the low level of the use of trade preferences, and the impact on trade patterns for final and intermediate goods.

The creation of a number of FTAs in East Asia has resulted in a complex mix of differing rules of origin. The resulting spaghetti bowl phenomenon poses some important policy issues.

The following comment was received in response to the above discussions.

It is important to consider how to increase intra-regional trade and how to promote greater integration in East Asia. It is important to analyze what kinds of rules of origin should be adopted to increase intra-regional trade in intermediate goods.

The following questions were received from the floor in response to the above discussions.

It is said that the rules of origin in the Australia New Zealand Closer Economic Relations Trade Agreement (CERTA) are very liberal. To further facilitate trade, what are the differences in regional value content and approaches to changes in tariff classification? Which model should be chosen?

Even if low tariffs are eliminated through FTAs, can rules of origin become an obstruction that effectively erases the impact of tariff removal?

The following response was given to the above question.

It is necessary to adopt mechanisms that correspond to changes in the business environment. I believe mechanisms that link trade and investment are needed, but such mechanisms are still being studied.