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Complexity restricts maximisation of FTA benefits

The network of free-trade agreements that criss-cross Asia is boosting regional trade and profits, but their complexities have left a lot of businesses confused.

A new survey shows that on average, each FTA signed in Asia is used by only 26 per cent of exporters, while 44 per cent say they have limited or no understanding of some of the agreements.

Ever since the 18th-century Scottish economist Adam Smith established that free trade was better for everyone concerned than protectionism, governments have been searching for ways to maximise the mutual benefits of trade.

The ideal solution would be massive multilateral agreements like the General Agreement on Trade and Tariffs or finalisation of the more recent Doha Development Agenda, but these have moved too slowly for many countries - resulting in a proliferation of either limited multilateral or bilateral treaties.

A 2011 working paper from the Asian Development Bank said that East Asian nations had signed 50 FTAs, were working on a further 43, and 32 others had been proposed.

But along with the proliferation of agreements has come confusion. Forty-five per cent of the exporters surveyed in an HSBC study said that complexity of the agreement terms was a key reason that they were not making use of the available FTAs, and 28 per cent said that the benefits did not compensate for the difficulties.

Trade is the lifeblood of Asia. Most of the region's extraordinary growth stories - from Japan to South Korea to China - were kick-started by exports, predominantly to the developed western markets of Europe and the United States.

Today, we are writing the second chapter of regional growth. Asian consumers empowered by growing affluence are dipping their toes into the opportunities of consumerism, and they are increasingly buying from their fellow Asians, creating new intra-regional trade dynamics, which hold the promise of both sustainability and a degree of protection from external shocks like 2008.

But, in order for those promises to be fulfilled, for growth to continue in an age of widely spread Asian supply chains, and for the benefits to flow to both producers and consumers in the region, trade friction needs to be minimised.

FTAs are undoubtedly useful: 86 per cent of those who use the existing agreements say their exports have increased as a result. But the mere fact of their existence is not enough. They need to be transparent enough for the small and medium-sized enterprises that form the backbone of the Asian economy to benefit, and deep enough to aspire to a true common market.

We are still some way off. The Trade in Goods agreement that binds together the 10 members of Asean, for example, has turned out to be one of the region's most successful FTA initiatives, but it runs to 125 pages, and that does not include the Sensitive and Highly Sensitive lists of goods partially or wholly excepted from the agreement.

This complexity is one of the key reasons that FTAs in Asia are used by only a quarter of exporters on average.

There were also unexpected and encouraging results from the HSBC survey showing that the benefits of freer trade extend across the export spectrum: FTAs signed by resource-rich Indonesia are used by 42 per cent of businesses on average, compared with 37 per cent in Vietnam, which has grown strongly as it taps into global supply chains.

The broader diversification of supply chains across the region means that goods in production cross many more international borders today than even five years ago. FTAs have made much of this trade possible, but if growth is to continue, agreements need to be made broader and more accessible.

The findings are based on an HSBC-sponsored survey conducted in the first quarter of 2014 of senior executives from 800 companies located in Australia, China, Hong Kong, India, Indonesia, Malaysia, Singapore and Vietnam - 100 from each country.

Some 80 per cent of respondent enterprises have annual revenues of between US$50 million and $150 million (Bt1.6 billion-Bt4.8 billion), while 20 per cent have revenues in excess of $150 million. All have exposure to cross-border trade and investment and all respondents are knowledgeable of corporate strategy with regard to these issues.

Half of the respondents are C-level executives or board members, with the other half ranging in title from manager and department head to senior vice president or director.

Noel Quinn is Head of Commercial Banking, HSBC Asia Pacific.


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