Impact of Free Trade Agreements on Business Activity in Asia

With the Doha talks stalled and mounting pressures from the global economic downturn, the well-known dynamism of “Factory Asia” may be at risk. More pressingly, signs of protectionism, in the form of non-tariff barriers, subsidy packages, and “buy local” conditions among trading partners are aggravating the slowdown. Weathering the present economic storm will increasingly depend on coordination on trade liberalization, particularly on the free trade agreements (FTA) front— of which the region as seen an explosion of activity.

FTAs are increasingly becoming a vehicle of trade policy and diplomacy among Asian countries—yet the benefits and costs of these trade deals are the subject of debate. Advocates point out that agreements strengthen policies that underpin regional trade integration, laying the building blocks toward multilateral liberalization. Critics, on the other hand, worry that this wave of agreements fosters an alarming “noodle bowl” of overlapping rules of origin requirements— which may be costly to businesses.

The collection of working papers— based on surveys of over 800 firms conducted across six countries (Japan, Republic of Korea, People's Republic of China, Singapore, Thailand, and Philippines)—provides one of the first ever comprehensive assessment of the impact of FTAs on business activity in Asia. It sheds light on the issues faced by firms in adapting to FTAs: utilization of preferences and business strategies in response to FTAs, benefits and costs of FTAs, burdens and costs imposed by multiple rules of origin, in-country resources on preferences and what businesses demand further in terms of support.

Overall findings suggest that the Asian noodle bowl does not seem to have harmed the region's business activity to date. Use of FTA preferences is higher than expected (22% of responding firms). Furthermore, only 27% of responding firms said that multiple rules of origin significantly added to business cost. As more FTAs under negotiation take effect and the complexity of the Asian noodle bowl increases, the business impact is likely to intensify. Implementation of key policies and closer public-private sector cooperation can mitigate potential negative effects.