Assessing Quality and Impacts of Major Free Trade Agreements

In this session, a presentation was made on the assessment of the quality of free trade agreements from empirical, case study and institutional approaches with a focus on foreign direct investment (FDI). The presentation reviewed the legal framework of eight bilateral and regional FTAs and examined commitment levels on the following issues: limitations on foreign ownership and market access; national treatment; screening and approval; composition of board of directors; entry by foreign investors; and performance requirements.

Professor Urata addressed the subject of "An Analysis of the Restrictions on Foreign Direct Investment in Free Trade Agreements" and made the following points.

Of the FTAs examined, the highest levels of FDI-related restrictions were found in the Japan-Mexico EPA and Korea-Chile FTA. A comparison of Japan and Mexico shows that Mexico has adopted more severe restrictions than Japan, its EPA partner. In the Korea-Chile FTA, both countries have adopted equally restrictive rules. In the Korea-Singapore FTA, Korea has maintained FDI-related restrictions in almost all sectors, while Singapore has adopted a relatively liberal stance. Low restriction levels are seen in the Japan-Singapore EPA, the U.S.-Singapore FTA, and the U.S.-Australia FTA. Different levels of restriction are adopted in accordance with the FTA partner. For instance, the level of restriction in the U.S.-Australia FTA is lower than in FTAs concluded by the United States with Singapore, Mexico, and Canada.

An overview by country reveals the following. FDI-related restrictions are high in Canada, Mexico, Chile, and Korea. On the other hand, the United States and Singapore have more liberal rules. Contrary to the general opinion, Japan is not restrictive.

Analysis by type of FDI-related restrictions reveals the following. The most common form of FDI-related restriction consists of restrictions on foreign ownership and market access. While calling for national treatment of investors, some FTAs retain other forms of restrictions. Canada, Australia, and Mexico maintain high levels of FDI-related licensing requirements.

The largest number of FDI-related restrictions is found in primary industries (agriculture, mining and other sectors) and tertiary industries (transportation, information and communications, and banking sectors).

Professor Austria responded to the Urata Presentation with the following comments.

A number of investment regimes have been adopted, but these frequently remain unimplemented. This tendency is particularly conspicuous among developing countries with poor transparency.

The assignment of weights in the computation of total scores seems to be arbitrary.

How were the weights computed for individual sectors?

East Asia is popular for its global manufacturing networks. To maintain their comparative advantages based on the principle of reciprocity, East Asian countries have focused on specific industries and have tried to work their way into global manufacturing networks. From there, they attempt to create an even more liberalized open market. As participants in global manufacturing networks, are these countries exposed to higher levels of risk?

How would it be to provide developing countries with certain priority rights in the liberalization of tertiary industries and service sectors in particular?

The results from Canada were very surprising. In an advanced country like Canada, isn't the FDI regime geared toward achieving higher levels of liberalization?

The following responses were given to the above discussions.

The issue of commitments and implementation is an issue that we would like to examine in the future.

Some of the weights used in the computation of total scores appear to be arbitrary. However, one of the reasons why this approach was taken was that the same approach has been adopted in other studies. Maybe the value of FDI can be used as weights.

Sectoral totals were computed using simple averages.

The United States is actively trying to apply the principle of reciprocity to FDI.

The service sector is very important for developing countries. This is because services have come to play a major role in global manufacturing networks. For this reason, the developing countries are being called on to liberalize their service sector. However, this is also a sensitive problem.

The results for Canada were obtained using the computational method. Clear explanations for the outcome are not available.