asia-pacific trade and investment report 2011 · 2011- world and asia-pacific trade developments,...

ASIA-PACIFIC TRADE AND INVESTMENT

REPORT 2011

Update March 2012

The volume is issued without formal editing

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FOREWORD

The Asia-Pacific Trade and Investment Report (APTIR) is a recurrent publication prepared by the Trade and Investment Division of the United Nations Economic and Social Commission for Asia and the Pacific. It provides information on and independent analyses of regional trends and developments in trade and investment; emerging issues in trade, investment and trade facilitation policies; and impacts of these policies on countries’ abilities to meet the challenges of achieving inclusive and sustainable development. APTIR is also the principal background document for the biennial Committee on Trade and Investment of ESCAP. In those years when the Committee has a session, APTIR contains two parts. Part I contains a review of trends and developments in trade and investment in the Asia-Pacific region, while Part II contains an in-depth analysis of a particular theme and issues relevant for the Committee’s deliberations. In those years when there is no Committee session, only Part I of APTIR is published online. Updates are issued as online documents as necessary. APTIR is available as a full-text online publication and can be downloaded from http://www.unescap.org/tid as can Asia-Pacific country briefs and the annex tables with trade performance indicators and maps.

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ACKNOWLEDGEMENTS

APTIR 2011-Update March 2012 was prepared under the substantive direction and guidance of Ravi Ratnayake, Director, Trade and Investment Division (TID) of the Economic and Social Commission for Asia and the Pacific. The core team of authors, led by Mia Mikic, consisted of Witada Anukoonwattaka, Yann Duval, Masato Abe, and Heini Amanda Salonen of TID. Chorthip Utoktham provided valuable inputs to chapter 4 while the Asia-Pacific Research and Training Network on Trade (ARTNeT) research assistants Mariano Mamertino, Natta Charusilawong and Meerim Shakirova contributed through compilation and tabulation of statistical data. Neema Paresh Majmudar contributed section E on business challenges to enhance intraregional trade and to editing of the Update. The production of the Update was managed by Panjai Limchupong. Chaveemon Sukpaibool formatted the volume. The volume is issued without formal editing and the remaining errors and omissions are responsibility of the authors. Views and opinions in this volume should not be taken as endorsed by the United Nations or its members.

Parts of this Update were prepared as background material and inputs for two flagships publications of ESCAP: Economic and Social Survey of Asia and the Pacific (2012) and the theme study of 2012 under the title “Promoting regional cooperation and integration”.

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CONTENTS

FOREWORD ............................................................................................................... iii ACKNOWLEDGEMENTS......................................................................................... iv ABBREVIATIONS AND ACRONYMS ..................................................................... vi

1. TRENDS AND DEVELOPMENTS IN MERCHANDISE TRADE..........................8 A. RECOVERY IN EXPORT SLOWING DOWN FOR THE LARGEST TRADING ECONOMIES..................8 B. SECTORAL PERFORMANCE..............................................................................................................................................................11 C. SHORT-TERM PROSPECTS FOR MERCHANDISE TRADE..........................................................................................14 D. TRENDS IN INTRAREGIONAL TRADE.......................................................................................................................................15 E. IDENTIFYING AND TRANSLATING INTRAREGIONAL TRADE OPPORTUNITIES INTO

BUSINESS REALITY..................................................................................................................................................................................19

2. TRENDS AND DEVELOPMENTS IN COMMERCIAL SERVICES TRADE...24 A. EXPORTS OF COMMERCIAL SERVICES SLOW DOWN AT THE END ON 2011..........................................24 B. SUBREGIONAL AND SECTORAL BRAKEDOWN OF SERVICES TRADE.......................................................25

3. INTRAREGIONAL FLOWS HELP FOREIGN DIRECT INVESTMENT TO

RECOVER...........................................................................................................................32 A. FULL RECOVERY OF FOREIGN DIRECT FLOWS ONLY TO SOME PARTS OF THE REGION........32 B. INTRAREGIONAL FLOWS OF FOREIGN DIRECT INVESTMENT ON THE RISE........................................41 C. OPPORTUNITIES AND CHALLENGES........................................................................................................................................48 D. THE ROLE OF REGIONAL TRADE AGREEMENTS IN PROMOTING INTRAREGIONAL FDI...........50

4. TRENDS IN PROTECTIONISM ...................................................................................53

A. EXTENT OF USE OF ZERO MOST-FAVOURED NATION TARIFF RATES......................................................54 B. NON-TARIFF BARRIERS........................................................................................................................................................................61

5. 5. MEASURING COMPREHENSIVE TRADE COSTS FOR THE REGION....63

A. SHIFTING FOCUS TO BEHIND-THE-BORDER BARRIERS...........................................................................................63 B. IDENTIFYING POLICY PRIORITIES FOR REDUCING TRADE COSTS..........................................69

6. ASIA-PACIFIC AND TRADE AGREEMENTS.........................................................72 A. STYLIZED FACTS........................................................................................................................................................................................72 B. TRADE FACILITATION PROVISIONS IN TRADE AGREEMENTS..........................................................................78

REFERENCES ........................................................................................................... 80

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ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank AFTA ASEAN Free Trade Area APTA Asia-Pacific Trade Agreement APTIAD Asia-Pacific Trade and Investment Agreements Database ARTNeT Asia-Pacific Research and Training Network on Trade ASEAN Association of Southeast Asian Nations BIT bilateral investment treaty CIS Commonwealth of Independent States Comtrade United Nations Commodity Trade Statistics CLMV Cambodia, Lao People’s Democratic Republic, Myanmar and Viet Nam EFTA European Free Trade Association EIU Economist Intelligence Unit EU European Union FDI foreign direct investment FTA free trade agreement GATS General Agreement on Trade in Services GDP gross domestic product GTA Global Trade Alert GVC global value chain IIA international investment agreement IMF International Monetary Fund ITC International Trade Centre UNCTAD/WTO LPI logistics performance index LSCI Liner Shipping Connectivity Index M&A mergers and acquisitions MFN most-favoured-nation MTS multilateral trading system NIAEs newly industrialized Asian economies nie not included elsewhere NTBs non-tariff barriers NTMs non-tariff measures ODA official development assistance PTA preferential trade agreement ROW rest of the world RTA regional trade agreement

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SAARC South Asian Association for Regional Cooperation SME small and medium-sized enterprise TNC transnational corporation UNCTAD United Nations Conference on Trade and Development WITS World Integrated Trade Solution WTO World Trade Organization

8

1. TRENDS AND DEVELOPMENTS IN MERCHANDISE TRADE A. RECOVERY IN EXPORT SLOWING DOWN FOR THE LARGEST

TRADING ECONOMIES

A return to high double digits export growth rates did not last for long. After recording above 20% rates of growth in 2010, since second quarter of 2011 exports of the Asia-Pacific as well as the world has been slowing significantly (figure 1). The region’s export growth has declined significantly from 19% in the third quarter to just 9% in the last quarter of 2011 due to weak global demands and the disruptions in the regional supply chains caused by Japan’s tsunami and floods in Thailand. Since the second quarter of 2011, the region has shifted from leading world export growth to falling behind the world average. Import growth also decelerated gradually from 23% to 16% during the same periods. However, the region has still maintained its leading position in import growth due to resilient domestic demand of fast growing economies in the region. Figure 1. Most countries followed the regional trend with increasing variations in

2011- World and Asia-Pacific trade developments, 2008-2011

Exports

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Source: ESCAP calculation, based on World Trade Organization (WTO) online Short-term Statistics

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Adverse impacts of the ongoing world’s economic slowdown have affected economies in the region differently. The economies which face the greatest growth pressure from the developed world’s continuous economic slowdown are the export dependent economies. These are the economies which have the relatively high share of their GDP accounted for by exports (figure 2). Among these, the economies in East and South-East Asia such as Singapore, Hong Kong, China; Thailand, China, Taiwan Province of China, Republic of Korea, Malaysia, and the Philippines appear to have relatively high exposure. Their export growth performance has been deteriorating over the past three quarters (figure 3). Another group of economies in the region who may experience a slowdown in exports due to the global situation is commodity exporters. The impact on this group is less certain, as not all commodity prices move downwards in synch with global growth trends. For example, food prices may exhibit less of a connection with global growth than prices of oil or metals. In addition, impacts of the natural disasters have caused supply shortages of some commodities in short and medium terms. Therefore, certain commodity producers in the region may be more adversely affected than the others even if the world commodity prices are rising. Figure 2. Merchandise export as a share to GDP, selected Asia-Pacific economies

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Figure 3. Export and import growth of selected Asian countries, 2008-2011

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Taiwan Province of China

Source: ESCAP calculation, based on WTO online Short-term Statistics

On the other hand, the economies with the least impact from the developed economies’ slowdown are those with large and robust domestic markets and limited reliance on exports as driver of growth- the most prominent being India and Indonesia. Strong domestic demand in India and Indonesia are related to a high proportion of consumption in GDP. China is a special case in that while exports are important to the economy, with a significant proportion of investment also related to the export sector, domestic demand and especially investment also

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plays an important role and will provide some cushioning to growth. The weakening of external demand suggests that economic growth of China may be being rebalanced toward domestic sources. While inflation remains a concern in those fast growing Asia-Pacific economies including China, India and Indonesia, it appears that the inflationary pressures are getting weaker. Thus, the moves toward tight monetary policy implemented over the past year may be eased to some degree to help dealing with the weak external demand.

B. SECTORAL PERFORMANCE

An analysis by sector reveals that the global trade share of the fuel and mining sector has increased very rapidly over the past decade at the expense of the manufacturing sector. From 2000 to 2010, the share of fuel and mining in world trade increased from 14% to 21%; during the same period, the share of manufactures contracted from about 77% to 70%, while agriculture maintained its share at about 10% (see Table 1). This global trend was followed by the Asia-Pacific region, with the share of manufactures in its total trade dropping from 81% to 71% during the same period, while the share of fuel and mining in total trade increased from 12.5% to 21.5%. The trade share of agriculture remained quite stable at about 7%.

Table 1. Sectoral compositions of world and Asia-Pacific trade, 2000 and 2010

(Percentage)

World Asia-Pacific Sector 2000 2010 2000 2010 Agricultural products 9.0 9.5 6.4 7.1

Fuel and mining products 14.0 21.1 12.5 21.5 Manufactured products 77.0 69.5 81.2 71.4

Source: ESCAP calculation, based on WTO International Trade Statistics online

Similar changes took place on both export and import sides of Asia-Pacific region (see Table 2). The share of manufactures in total exports of the region dropped from 81% in 2000 to 76.5% in 2010, while the share in total imports contracted from 72% to 66% during the same period. The share of fuel and mining increased from 13% to 17% in Asia-Pacific exports, and from 18% to 26% in its imports. The share of agriculture in Asia-Pacific exports declined slightly from 10% to 8%.

Table 2. Sectoral composition of Asia-Pacific Exports and Imports, 2000 and 2010 (Percentage)

Exports Imports Sector 2000 2010 2000 2010

Agricultural products 6.4 6.0 10.1 8.4 Fuel and mining products 12.5 17.0 17.7 25.8 Manufactured products 81.2 76.5 72.2 65.8 Source: ESCAP calculation, based on WTO International Trade Statistics online

By looking at growth of trade value, we can observe that the rising portion of fuel and

mining in world trade is due to the rise in prices and not in real terms. In terms of export volume, world manufacturing exports grew faster than exports by other sectors at an average annual rate of 6% from 2000 to 2010, with agricultural exports increasing by slightly less than 4%, and fuel and mining exports growing by less than 3% (see Table 3). In 2010, the export

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performance in real terms reveals that the manufacturing sector has been the key driver for export recovery of the region. Manufacturing exports recovered strongly with a growth rate of 18% in real terms, while agricultural and fuel sectors grew by only 7% and 6%, respectively. The major manufacturing exports included office and telecom equipment, transport equipment, other machinery, and chemicals, each accounted for about 12% of total merchandise exports.

Table 3. Growth in the volume of world merchandise exports, 2000-2010

(Annual percentage change)

2000-2010 2007 2008 2009 2010 World merchandise exports 5.0 6.5 2.0 -12.0 14 Agricultural products 3.8 5.5 2.0 -3.0 7 Fuel and mining products 2.6 3.5 0.5 -4.5 6 Manufactured products 5.9 8.0 2.5 -15.5 18

Source: WTO (2011).

Asia-Pacific continues to gain market share in world trade, especially in manufacturing exports. The region increased its share in world merchandise exports from 30% to 39% during a decade from 2000-2010 (see Table 4). It was relatively more successful in capturing a larger portion of the world manufacturing market (up from 31% to 43%), than of the fuel and mining sector (up from 26% to 32%) in the observed period. The region’s share in world agricultural exports increased slightly from 21% to 25% during this period. In a similar way, the share of the region in world imports increased from 25% to 35% in the period 2000-2010. Dynamic economic activities in the region caused the region’s fuel and mining consumption to grow very rapidly. The region accounted for 43% of world fuel and mining imports in 2010, an increase by 11.5 percentage points from 2000. The region’s share of world manufactured imports also grew fast to reach 33%, but its share of world agricultural imports increased only marginally from 27% to reach 30% during this period. Table 4. Share of Asia-Pacific in world exports and imports, by sector, 2000 and 2010

(Percentage)

Exports Imports 2000 2010 2000 2010

Agricultural products 21.0 24.5 27.4 30.3 Fuel and mining products 26.4 32.4 31.5 43.0 Manufactured products 31.2 42.8 23.8 33.0 Asia-Pacific average 29.6 38.9 25.2 34.8

Source: ESCAP calculation based on WTO International Trade Statistics

By looking more closely at export products of the region’s economies, it is found that export recovery of the region has been driven by exports of machinery and transport equipment which accounted for 45% of total merchandise exports of the region (Table 5). Office and telecommunication equipment account for about a half of exports of the machinery and transport equipment sector and its exports grew by 28% in 2010. The recent dynamics of Asia’s trade in office and telecom equipment confirmed the recovery from export contraction during the 2009 global economic crisis. A further breakdown of trade flows data for office and telecommunication equipment into three subcategories, namely electronic data processing (EDP) and office equipment, telecommunications equipment,

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and integrated circuits, revealed that trade recovery of integrated circuits outperformed most of export sub categories.1 The region holds the leading role in world trade in these products with 63% of world exports in 2010. A regional breakdown of exports of office and telecommunication during the period between 2005 and 2010 revealed an outstanding export position of China. China’s exports accounted for 28% of world exports, or over 40% of Asia’s exports in these products. Exports of China grew by 15% annually during the past five years, while combined exports of other Asian economies increased by 3% per year during the same periods (Table 5a).

Table 5. Merchandise exports of Asia, by products

Shares in merchandise exports Annual Growth 2008 2009 2010 2009 2010 Agricultural products 6.03 6.36 6.26 -13.66 28.94

Food 4.74 5.16 4.82 -11.00 22.44 Fish 0.80 0.95 0.88 -3.37 21.99 Other food products 3.94 4.21 3.94 -12.56 22.54

Raw materials 1.29 1.20 1.44 -23.48 56.83 Fuels and mining products 12.37 10.79 11.53 -28.57 39.85

Ores and other minerals 1.76 1.83 2.17 -15.01 55.66

Fuels 8.81 7.45 7.66 -30.77 34.54

Non-ferrous metals 1.80 1.51 1.70 -31.07 46.92 Manufactures 79.01 79.73 79.43 -17.40 30.46

Iron and steel 4.15 2.72 3.00 -46.40 44.71

Chemicals 7.38 7.71 7.86 -14.42 33.35 Pharmaceuticals 0.66 0.86 0.76 5.62 15.66 Other chemicals 6.71 6.86 7.10 -16.41 35.56 Other semi-manufactures 5.77 5.98 5.83 -15.11 27.62

Machinery and transport equipment 44.64 44.76 44.92 -17.94 31.44

Office and telecom equipment 20.80 21.96 21.42 -13.57 27.70

EDP and office equipment 7.31 7.58 7.28 -15.15 25.89 Telecommunications equipment 6.86 7.22 6.50 -13.84 17.84 Integrated circuits 6.63 7.17 7.64 -11.55 39.56

Transport equipment 10.53 9.90 10.27 -23.01 35.82

Automotive products 6.62 5.33 5.92 -34.03 45.31

Other transport equipment 3.91 4.57 4.36 -4.39 24.77

Other machinery 13.31 12.89 13.23 -20.75 34.43

Textiles 2.84 3.12 3.03 -9.96 27.27

Clothing 4.34 4.70 4.28 -11.33 19.18

Other manufactures 9.90 10.75 10.51 -11.14 28.13

Personal and household goods 2.35 2.63 2.59 -8.33 29.17 Scientific and controlling instruments 2.64 2.86 3.00 -11.55 37.34 Miscellaneous manufactures 4.91 5.26 4.92 -12.26 22.61

Total merchandise exports 100.00 100.00 100.00 -18.15 30.95

Source: ESCAP calculation based on WTO (2011).

1 From 2005 until the beginning of world economic slowdown in late 2008, exports of telecom equipment had been more dynamic than computers and semi-conductors due to vigorous demand growth for consumer electronics, especially mobile phones, wireless telecom equipment and flat panel display colour television.

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Table 5a. Exports of office and telecommunication equipment of selected regions, 2005-2010

Exporters Share in world exports (in %)

Annual percentage change

2005 2010 2005-2010 2009 2010 World 100 100 5 -15 21 Asia 54.7 62.6 8 -14 28 China 17.8 28 15 -9 30 Other Asia 36.9 34.6 3 -17 26 Europe 29.9 23.2 0 -19 10 North America

13.9 12.8 3 -17 19

Source: WTO (2011), International trade statistic, table II.40, p.93.

C. SHORT-TERM PROSPECTS FOR MERCHANDISE TRADE Amid the weakening of global demand and adverse impacts of natural disasters, growth of exports and imports by many developing Asia-Pacific economies are expected to decelerate in 2012 with an upward adjustment and return to the normal (historical) level in 2013 (Table 6). However, the prospects of regional developing countries on average depend also on the prospects of China’s exports return to double-digit growth rates, as China accounts for over 30% of the exports values of Asia-Pacific developing economies.

Table 6. Prospects for real merchandise export and imports growth in selected economies

(Percentage)

Economy Exports (a) Imports (a) 2011 2012 2013 2011 2012 2013

Japan 0.50 2.90 7.88 7.24 8.17 5.46 Australia 1.47 7.06 9.24 12.53 5.89 2.84 China 4.47 10.11 9.77 4.80 6.40 7.28 Hong Kong, China 3.59 2.42 6.93 4.85 5.12 7.20 India 24.73 7.68 11.90 18.94 8.08 12.99 Indonesia 13.55 6.01 7.48 14.19 8.00 8.75 Republic of Korea 11.25 4.79 10.71 8.86 4.26 10.82 Malaysia 4.64 7.40 7.66 4.82 5.48 7.41 Philippines -9.09 -1.30 14.51 -6.23 1.77 13.52 Russian Federation 0.75 1.36 5.05 18.92 7.09 9.32 Singapore 2.97 0.12 8.07 3.29 11.72 8.93 Taiwan Province of China

4.20 4.11 8.37 -0.42 3.77 10.21

Thailand 9.14 7.46 9.36 16.03 0.01 10.02 Turkey 6.65 5.13 10.82 13.92 -1.39 9.24 Asia and the Pacific (b)

5.38 5.51 8.85 8.24 6.12 8.30

Developing AP (c) 6.38 5.91 9.01 8.16 5.81 9.04

Source: ESCAP estimates and projections based on Oxford Economic Forecast, data up to February 2012 (a) Estimates based on constant prices and exchange rates (b) Growth of Asia and the Pacific is export-weighted average growth rates of those observed countries. The estimates are using 2010 as base year (c) Growth of developing Asia and the Pacific is export-weighted average growth rates of those observed countries excluding Japan and Australia. The estimates are using 2010 as base year.

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D. TRENDS IN INTRAREGIONAL TRADE

The increasing importance of intraregional export demand can cushion the blow to Asian exporters from the developed economies’ low economic growth and declining demand for imports. This will be possible if intraregional export continues to grow faster than the export to the traditional markets, as it was the case in the last decade. While Asia-Pacific's exports to the rest of the world roughly doubled between 2000 and 2010, intraregional exports rose almost 2.5 times (ESCAP, 2011b, p.9). To sustain this high intraregional export growth not only this region needs to sustain high economic growth and rising purchasing power, but also put in place more aggressive policies towards removing obstacles to trade intraregionaly. Notwithstanding that, the region should not underestimate the importance of demand from the rest of the world, including the developed markets. In fact, the slowdown in overall manufacturing in a number of economies of the region, as seen from the declines in Purchasing Managers Index (PMIs) towards the end of 2011 and in early 2012 is a clear reminder of the still significant role the developed economies have in supporting economic growth of the region. The intraregional share of exports in Asia-Pacific has been growing, particularly in the past decade. In 2010, intraregional exports accounted for 49.5% of total exports, increasing from 43% in 2000 (see Table 7). In 2000, about 27.5% of total exports went to developing countries in this region, while only 10.6% went to Australia, Japan and New Zealand. Only 5% was absorbed by China. United States, EU25 and the rest of the world were buying 21%, 18% and 17.6 % respectively in 2000. By 2008, that is one year before the crisis fully affected the region’s trade, the roles of China and the United States already changed radically: China’s share as a destination market for Asia-Pacific exporters increased substantially by 60%, while the United States’ share dropped by almost half to 12.7 percentage share. With other shares almost not changed, this pushed the share of Asia-Pacific to almost 50% that year. In 2010 these changes were reconfirmed with the share of China rising to almost 10%, and that of United States falling further to 12.1% (Table 7). So, a large part of export growth from the region can be explained by rapid growth of trade between China with rest of the region. Moreover, the dependence on markets of the United States and EU25 has declined by 9 and 0.3 percentage points, respectively, over the period 2000-2010. Exports from the region to the rest of the world, excluding United States and the EU25, has increased to 20.4% in 2010 from 17.6% in 2000. The share of exports to United States declined by 6.2 percentage points for the developing economies of the Asia-Pacific region as a group between 2000 and 2010, while the share of exports to EU25 increased by about 0.4 percentage points during the same period (lower part of Table 7). Finally, share of rest of the world in developing Asia-Pacific exports increased from 17.2% in 2000 to 20.7% in 2010. Based on this trend from the last decade, it’s clear that developing economies of the region have been slowly moving away from directly exporting to the United States and other developed regions, while increasing their exports to developing economies in the region and the rest of the world. This shift has been probably accentuated by the economic crisis of 2008/2009. The increasing importance of intraregional exports partly reflects that economies in the region are accelerating the depth of regional integration through production fragmentation and trade. Nevertheless, the true importance of the developed country markets to economies in the region is hiding behind the fact that a significant portion of

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exports of the medium-income and high-income economies of the region are intermediate inputs which are processed in another country and onward exported to the developed economies. China is the most prominent destination for intraregional intermediate inputs, with the country’s large proportion of exports is toward the developed economies. Thus, if demand from developed economies were to slow down significantly and remain sluggish for some time, the ripple effects across the regional supply chain may eventually be reflected in intraregional exports.

Table 7. Destination markets of Asia-Pacific exports (in percentage share and percentage points)

World US EU25 ROW

Total Developed China

Developing excl. China

AP 2000 100 43.0 10.6 4.9 27.5 21.1 18.3 17.6

AP 2008 100 47.1 8.6 7.9 30.7 12.7 20.2 19.9

Change from 2000

(percentage points) 4.1 -2.0 3.0 3.2 -8.3 1.9 2.3

AP 2010 100 49.5 8.1 9.8 31.7 12.1 18.0 20.4

Change from 2000

(percentage points) 6.5 -2.5 4.8 4.2 -9.0 -0.3 2.8

Developing AP 2000 100 45.1 13.4 4.4 27.4 18.1 19.5 17.2

Developing AP 2008 100 45.9 9.0 6.0 31.0 12.1 22.1 19.9

Change from 2000


Developing AP 2010 100 47.6 8.6 7.1 31.9 11.9 19.9 20.7

Change from 2000


Exporters

Asia Pacific

Source: ESCAP calculation based on UNCOMTRADE data, WITS database On the import side, the bulk of the region’s imports is coming from within the Asia-Pacific region. The share of intraregional imports was already over 50% in 2000, and the share increased to 53.3% in 2010 (Table 8). For developing Asia-Pacific economies, intraregional trade took 53.1% of their imports in 2010. Imports of Asia-Pacific economies have been gradually shifted away from developed economies in the region and the United States. The shares of imports from developed Asia-Pacific economies and the United States decreased by 4.2 and 5.5 percentage points, respectively, while imports from developing Asian economies and the rest of the world gained the larger share. Focusing only on developing Asia-Pacific countries, they reduced the share of imports from developed Asia and the United States by 3.9 and 3.8 percentage points, respectively. Realignment of sourcing of imports happened across the board with China, other developing countries in Asia-Pacific and the rest of the world gained the shares by 1.2, 2.1, and 5.1 percentage points, respectively.

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Table 8. Origins of Asia-Pacific imports (Percentage share and percentage point)

World US EU25 ROW

Total Developed China

Developing excl. China

AP 2000 100 51.2 14.7 11.9 24.6 13.5 14.6 20.8

AP 2008 100 52.2 12.3 13.7 26.2 8.2 14.0 25.6

Change from 2000


AP 2010 100 53.3 10.5 14.1 28.7 8.0 13.6 25.1

Change from 2000


Developing AP 2000 100 53.7 17.7 11.3 24.6 11.3 14.8 20.3

Developing AP 2008 100 52.7 13.3 12.6 26.8 7.5 14.7 25.1

Change from 2000

(percentage points) -1.1 -4.4 1.2 2.1 -3.7 -0.1 4.9

Developing AP 2010 100 53.1 13.8 12.5 26.8 7.4 14.1 25.4

Change from 2000

(percentage points) -0.6 -3.9 1.2 2.1 -3.8 -0.7 5.1

Importers

Asia Pacific

Source: ESCAP calculation based on UNCOMTRADE data, WITS database To understand the features of the South-South trade within the Asia-Pacific, Tables 9 and 10 summarize changes of geographical structure of exports and imports for the developing Asia-Pacific countries and identify the core market in each subregion. Table 9 shows that trade with developing economies in East and North-East Asia (ENEA) currently accounts for about a half of intraregional trade by developing Asia-Pacific economies. Over the past decade, the share of exports to ENEA increased by 2.4 percentage points, especially exports to China that increased by 4.5 percentage points. South-East Asia (SEA) remains the second-largest intraregional market accounting for over 30% of intraregional exports of developing Asia and the Pacific, but its importance has declined considerably over this decade by more than 9 percentage points. During the same period, the share of South and South-West Asia (SSWA) increased by almost 5 percentage points from 9.1% to 14%. The rising importance of the subregion mainly reflected the rising share of India that increased by 3.2 percentage points. Exports to North and Central Asia (NCA) increased slightly by 1.8 percentage points, and they accounted for about 6% of the exports. Share of exports to developing economies in the Pacific remain insignificant throughout the period. On the import side, the South-South trade within the region appears to be adversely affected even before onset of the crisis as the share of imports from ENEA and SEA both dropped in 2008 relative to 2000 and then regained some of the loss but the SEA is still at a declining trend, and mostly because of the smaller share of Singapore as the origin of imports. It is also worthy to mention that China plays much larger role as the origin of imports for the developing Asia-Pacific developing countries than as their destination export market. On the other hand, both SSWA and NCA increased their role in Asia-Pacific South-South imports with largest shares going to India and the Russian Federation (Table 10).

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Table 9. Destination markets of developing Asia-Pacific exports (percentage share and percentage point)

Total China Rest Total Singapore ASEAN5 Rest Total India SAFTA excl. India

Rest Total Russian Federation

Rest

Developing AP 2000 100 46.0 13.8 32.2 40.2 13.8 25.0 1.4 9.1 3.1 3.0 3.0 4.2 2.4 1.8 0.5

Developing AP 2008 100 45.9 16.2 29.7 31.4 8.4 21.8 1.1 13.4 5.8 3.0 4.7 8.5 4.4 4.0 0.8

Change from 2000

(percentage points)

-0.1 2.4 -2.5 -8.8 -5.4 -3.2 -0.3 4.3 2.6 -0.1 1.7 4.2 2.0 2.2 0.3

Developing AP 2010 100 48.4 18.3 30.0 30.9 7.7 21.9 1.3 14.0 6.3 3.3 4.4 6.0 3.3 2.7 0.9

Change from 2000

(percentage points)2.4 4.5 -2.2 -9.3 -6.2 -3.1 -0.1 4.8 3.2 0.3 1.4 1.8 0.9 0.9 0.4

Exporters

Developing AP developing ENEA SEA SSWA NCA Developing Pacific

Source: ESCAP calculation based on UNCOMTRADE data, WITS

Table 10. Origins of developing Asia-Pacific imports

(percentage share and percentage point)

Total China Rest Total Singapore ASEAN5 Rest Total India

SAFTA excl. India Rest Total

Russian Federation

Rest

Developing AP 2000 100 50.4 31.4 18.9 37.0 11.1 25.3 0.6 6.2 2.7 0.8 2.7 6.2 4.5 1.7 0.2

Developing AP 2008 100 48.7 31.9 16.8 32.8 8.8 23.1 0.8 10.0 4.4 0.6 5.0 8.4 6.5 1.9 0.2

Change from 2000

(percentage points)-1.7 0.5 -2.2 -4.2 -2.3 -2.2 0.2 3.8 1.7 -0.2 2.3 2.1 2.0 0.1 0.0

Developing AP 2010 100 49.8 31.8 18.0 33.7 8.2 24.8 0.7 9.4 4.5 0.7 4.2 7.3 5.2 2.1 0.2

Change from 2000

(percentage points)-0.6 0.4 -1.0 -3.3 -2.9 -0.5 0.0 3.2 1.9 -0.1 1.5 1.1 0.7 0.3 0.0

Importers

Developing AP developing ENEA SEA SSWA NCA Developing Pacific

Source: ESCAP calculation based on UNCOMTRADE data, WITS

From the above descriptive statistics, it is clear that the widely diverging growth performance of the large Asian developing economies and the developed economies of the world means that intraregional demand will become increasingly important to the exporting economies of Asia-Pacific. China, for instance, has become the most important export market for a number of economies in the region and their robust growth of exports to China has outpaced exports to the sluggish developed economies since the onset of crisis in 2008. However, some caution is called for here as to whether intraregional demand will provide the same opportunities for growth as did the once robust import demand of developed markets in the past. In the short term, it is expected that intraregional demand will not be as supportive to exporting economies as it was during early phase of the crisis when the major economies supported their large domestic demand through significant stimulus packages. The two largest developing economies in the region, China and India, have been more concerned with taming rising prices than with maintaining growth which, though slowing down, remains relatively strong. ESCAP analysis2 shows that the strong

2 For more details see ESCAP, 2011a, Economic and Social Survey 2011, Chapter 1, p. 11.

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growth of China was a key factor in supporting the export recovery of the region after the onset of the crisis and before the subsequent uptick in demand from the developed economies. Demand from India was also a factor in supporting growth in the region, with India notable for its characteristics as an economy with large and growing domestic consumption which maintains trade deficits with most countries of the region. In 2010, for example, the ASEAN economies had a trade surplus with India of $13 billion, representing 17% of the total trade surplus of ASEAN, and China had a trade surplus with India of $21 billion (ESCAP, 2010, p.16). However, in contrast to the start of the crisis, the policy regimes in both China and India have moved from stimulus to monetary tightening in order to moderate the respective drivers of domestic demand in the economies, investment and consumption. It is this two-track nature of growth in the region, with inflation concerns dominating for the domestic-demand oriented group and growth concerns for the export-oriented group, which imply that intraregional demand may well prove less supportive for growth in the short-term than in earlier years. In the medium to long term, China, which remains the largest domestic market in the region at present, is gradually rebalancing towards a more domestic demand-led economy. However, the sector of the domestic economy which is by far the most important is the investment sector. The import demands of this sector are centered around natural resources. Therefore, the benefiting economies in the region would tend to be commodity exporters. On the other hand, manufacturing exporters would need to rely on the further growth of consumption in China. Furthermore, studies have indicated that the import content of consumption in China is quite low compared with that of advanced countries (for example, Akyüz, 2011). This implies that a consumption boom in China may have a limited impact on export growth of the region. Thus, to become a sustainable trade locomotive for the region, China will need to raise not only domestic consumption, but also the intraregional import content of its domestic consumption.3 Other large economies in the region, India and Indonesia, offer a more consumption-led economy for exporters of manufactured goods. However, the income levels of Indonesia and India are lower than that of China at present. Another important factor affecting increase in intraregional trade is supply capacity of firms to reorient their production to new markets and adjust production and supply to these new markets. Box 1 covers the most important limitations in this regard. E. IDENTIFYING AND TRANSLATING INTRAREGIONAL TRADE

OPPORTUNITIES INTO BUSINESS REALITY As the recovery from the 2008-2009 global crisis continues with great uncertainty, the role of emerging economies in changing patterns of competition in world trade is increasing. The developing countries are becoming important drivers of the world economy, and South-South and intraregional trade is growing rapidly, as discussed in the previous section. Since 1990 South-South trade has grown at almost twice the rate of world trade. According to UNCTAD, South-South merchandise trade accounted for more than 10% of world trade imports in 1995 and by 2008, this share had almost doubled to nearly 20%

3 See more details in ESCAP, 2011b, Asia-Pacific Trade and Investment Report 2011, Chapter 1, p. 12.

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valued at $3.1 trillion (ITC, 2010a). The figures also indicate that more than 70 percent of South-South trade is attributed to intra-Asian trade. Among Asian developing countries, 39% of trade is with other developing countries. For example, China’s trade with other developing countries is currently 25% of total trade and is expected to reach 50% by 2020 and 60% by 2027. About 50% of Indonesia’s trade is with other developing countries mainly in East Asia (ITC, 2011a) and is expected to grow further. Amidst diversifying markets, changing demographics and consumer driven demand in developing countries, there is a renewed call for modernization of trade support mechanisms for developing countries to make the geographical shift in their trade. Some countries in Asia have already strategically prepared themselves for this shift. Through a rethink of its trade policy, when other countries had a tendency to concentrate on developed countries as trading partners, Lao People’s Democratic Republic took advantage of its geographical proximity to emerging markets and looked at regional markets for trading opportunities (ITC, 2011b). Lao PDR has demonstrated how developing countries, in particular least developed countries can take advantage of emerging markets. With a focus on trading with other countries from the sub-region, Lao PDR now stands to prosper by being transformed from a ‘land-locked’ to a ‘land-linked’ country. Some critical policy measures required for all countries in the region to further utilize the opportunities to enhance intra-regional trade are highlighted below: Identifying Potential Export Markets As countries focus towards intra-regional trade, along with geographical shift, there is necessarily a product shift as taste, preferences, and consumption power in Asian countries are quite different from Western European and US markets. About 10 to 15 years ago, trade analysts were taking about the ‘flying geese pattern’ of shifting export production from one country to other mainly driven by labour costs as firms search for lower production costs. But a totally different intra-regional trade pattern in emerging now with a more complex pattern of localization and specialization. It is no longer just about lower labour costs but about the availability of supporting industries and the value added and service components that determine the pattern of trade. Moreover, technology has enabled open access, partly enabled through telecommunications and the internet. There are global markets for ideas, the exchange of intellectual property, global access to capital markets and to talent. Policy makers need to focus on how to ensure a quality business environment through creating a more favourable investment climate in terms of infrastructure, legal frameworks and economic and financial incentives. Trade Support Institutions (TSI) have a role to play in providing strategic direction, and implementing more focused and specialized programmes for enhancing intra-regional trade and investment through identifying potential areas for export development. Managers of enterprises feel the effect of economic uncertainty in their traditional export markets and struggle to interpret the changing economic climate and identify opportunities. TSIs can provide a number of support services to assist firms to successfully identify and translate intra-regional trade opportunities into transactions.

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The initial step could be to identify products that are currently exported by one or more countries in the region to the rest of the world, and simultaneously imported by that same region from the rest of the world. The simple fact that such products are imported into the region provides an indication of existing demand and those same products are exported by countries in the world, provides a further indication of existing supply under competitive conditions. It is critical that results of this initial research are disseminated to relevant trade related organizations in a given region for a review and for a ‘short listing’ of products that are important for their national economic development objectives. Subsequently, a country may consider organizing intra-regional trade promotion activities. It may be useful to validate statistical data obtained from the trade flow analysis through supply and demand surveys. Supply surveys provide information on exporters and their products, including technical features, packaging, export availability, prices and commercial conditions. Demand surveys include information on importers, their requirements, and the dynamics of the markets. It may also be useful to organize trade forums and seminars to provide platforms for business negotiations and transactions among importers and exporters of a specific product group. During such meetings, existing opportunities and obstacles to trade expansion can be identified (Helmers and Pasteels, 2006). The use of Internet and social networks has made it easier for small companies to tackle the challenge of visibility and establish reputation. This trend creates a whole series of opportunities for SMEs particularly in the technology and outsourcing sectors. TSIs can provide technical expertise to SMEs to enter target markets, support in market intelligence, design, packaging, standards and quality, pricing and promotion. Trade fairs are useful for networking, benchmarking and learning from competitors as well as meeting distributors and buyers (ITC, 2010b). TSIs also need to assist enterprises to better meet quality requirements, using the domestic market for research and development, ensuring that enterprises are sufficiently prepared to obtain financing and helping exporters find the right slot in global supply chains (ITC, 2011c). Modifying Export Products According to Market Demands In certain cases, countries may be able to export the same products within the region that were exported to developed countries. However, this identity in broad categories masks heterogeneity. Developing regional markets especially through south-south trade offers potential to exploit geographical proximity and less demanding product standards at times. For example, even if one country diverts its exports of textiles from developed to other countries within a region, which technically fall within the same category, these textile products can vary significantly in terms of prices and quality. Given the relatively low incomes of consumers in developing countries, costs matter more compared to quality. The firms may need to alter cost and quality structure of existing products, when incomes are low in new markets. It may be beneficial for companies entering new markets to enter into partnerships to achieve a better position in new foreign markets. Since upgrading product qualities and specialization are important for export success in the long run, it may be advisable for countries to carefully design their

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geographical diversification strategy. This is especially true due also to the fact that at times importers from developed countries transfer state of the art technology and knowhow to exporters to produce better quality products. For example, a USAID funded project named ‘SPREAD’ in collaboration with Texas A&M University introduced fully washed coffee techniques to Rwanda in 2000 which enabled it to supply premium quality coffee to developed countries capturing high end markets. Exporting to developed countries may also impel them to improve overall efficiency as it requires better planning, meeting deadlines, better quality control, maintaining product consistency et al. These in turn lead to modern ways of doing business, product innovation and better ability to respond to market conditions (Easterly and Reshef, 2010). Identification of products to be exported to intraregional markets also needs to take into consideration the impact of changing demographics. For example, in contrast to China, which is moving towards an ageing population, India and South Asia are expected to see a decrease in the national median age over the next 10 to 15 years. For example, 50% of Indonesia’s population is below 29 years of age. This is seen from the fact that Indonesia is the second largest user of Facebook in the world with 29 million users and the sixth highest user of Twitter. Creating Conducive Policy Environment through Trade Facilitation Measures In a number of cases, trade liberalization was the key factor behind the growth in exports. In order for private sector firms to successfully seize the opportunity to enter the intraregional market, it is critical to have an overall conducive trade policy environment for such an export shift to take place. At the policy level, it is not just a question of exporting more but linking export growth to employment and enhancement of the skills of indigenous companies. There is also a need to find innovative new ways of financing to assist exporters as they shift from traditional markets of developed countries into new markets and customers. An alternative financing model focusing on five key stages in the chain: producers, stokers, traders, processors and end-users needs to be developed (ITC, 2011c). In addition to trade policy, there are number of administrative barriers which may act as barriers to trade. Trade costs of many economies of the region have decreased, largely due to tariff cuts, but much remains to be done to address non-tariff barriers (NTBs). Given that non-tariff trade costs account for at least 90 percent of overall trade costs, economies should pay greater attention to addressing NTBs including those arising from unnecessarily cumbersome procedures and regulations or inadequate logistics services (ESCAP, 2011b). In this context, trade facilitation measures which are meant to ensure that liberalization of trade policies get translated into simplified procedures and formalities are of utmost importance to the countries in the region. Intraregional trade facilitation performance varies greatly amongst the subregions of Asia and the Pacific. ASEAN has achieved high levels of international trade efficiency with tariff-equivalent non-tariff trade costs of only 49% in its largest middle income members (Indonesia, Malaysia, the Philippines and Thailand), on a par with the costs prevalent in developed country groupings. In comparison, intraregional trade costs in South, North and Central Asia are more than double those of the ASEAN economies.

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Trade facilitation measures are wide-ranging starting from simple measures such as timely publication of trade regulations and procedures; to more advanced measures such as taking advantage of information and communications technologies (ICT) to develop risk management systems for inspection and clearance of goods which enable customs to limit physical inspection of only high risk goods. Many countries have also undertaken the development of national electronic single windows that enable the electronic exchange of trade data and documents between traders, customs authorities and other government agencies. The long term goal is to extend the services to include payment of duties, receiving authorization, clearance as well as interacting with logistics service providers. The Republic of Korea, Singapore and Hong Kong, China are world leaders in establishing national single windows. The full benefits of Single Windows and other electronic data exchange systems can not be achieved until it is accepted by authorities in the partner country. The ASEAN Single Window initiative aims at developing a regional Single Window system for its member countries by 2012. The third round of negotiations of Asia Pacific Trade Agreement (APTA) also resulted in a Trade Facilitation Framework Agreement among its six members (Bangladesh, China, India, the Lao People’s Democratic Republic, the Republic of Korea and Sri Lanka) in 2009. A long term trade facilitation strategy should also include logistics infrastructure and services. Facilitating transit trade and enhancing the movement of goods to and from international sea ports in neighboring economies is also critical for enhancing intra-regional trade for landlocked countries of Asia-Pacific. Effectively Utilizing Aid for Trade Aid for trade can be utilized to facilitate intra-regional trade expansion and diversification. Aid-for trade include (1) technical assistance for trade policy and regulations; (2) trade related infrastructure, (3) productive capacity building including supply side capacity for trade development, (4) Implementing and adjusting to trade-related reform and liberalization, (5) other trade-related needs including smooth integration into the world trading system and implementation of trade agreements (WTO and OECD, 2010). To summarize, the strategic response of Asia Pacific countries to sustainable intra-regional growth in trade would entail (cf. ITC, 2011c):

Trade support institutions becoming more dynamic and responsive Entrepreneurs integrating themselves into global supply chains Policy makers designing innovative trade policy and addressing non-tariff

barriers to trade The financial service industry providing greater flexibility to firms starting

business in new markets Utilizing Aid for Trade to enhance capacity to engage in intra-regional trade.

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2. TRENDS AND DEVELOPMENTS IN COMMERCIAL SERVICES TRADE4 A. EXPORTS OF COMMERCIAL SERVICES SLOW DOWN AT THE END ON 2011

Asia-Pacific as a region has increased its contribution to world export of commercial services from 23% in 2000 to 29% in 2011 (values for 2011 are still estimates based on WTO and UNCTAD joint data on trade in commercial services). The share of Asia-Pacific in world imports of commercial services remained at a higher level, rising from 27% in 2000 to 32% in 2011. Despite the exports of commercial services growing faster than its imports since 2003, the region still generates a deficit in its services trade with the world (see figure 7).

Figure 7. Exports and imports of commercial services, Asia-Pacific region

Source: Based on data from WTO and UNCTAD, Accessed at WTO International Trade Statistics, downloaded 23 March 2012.

Commercial services exports and imports from the Asia-Pacific region played an important role in the recovery phase of the world economy. Leading exporters of commercial services in 2010 included India (33%), China (32%), Indonesia (29%), Hong Kong, China (23%), Singapore (20%) and Australia (17%).5 However, their exports in 2011 slowed down considerably: India (20%), China (7%), or Singapore (12%).6 Apart from a dip during the 2008/2009 crisis, export of commercial services was on an upward trend which halted in the last quarter of 2011, with export growing at 4% (year-on-year) compared to 8% in the third

4 The lack of data on trade in commercial services remains a problem for many economies in Asia and the Pacific, in particular with respect to sectoral and regional breakdown of trade flows. Therefore analysis in this subsection compiles the data from different sources including mirror data but even with this approach it is not possible to deliver an up-to-date and detail account of intra-regional services trade flows. 5 Some smaller economies experienced very high jump of services export in 2010, also making up for the loss in 2009, for example: Papua New Guinea (55%), Macao, China (52%), Solomon Island (35%), Sri Lanka (31), Viet Nam (30%), and Bangladesh (28%). 6 These are preliminary estimates for 2011 released by WTO, Short Term Trade in Commercial Services Statistics, March 2012.

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quarter.7 This is consistent with the slowing down of global exports of commercial services, especially in the last quarter of 2011 when export grew at 3% on year-to-year basis compared to 13% in the previous quarter (as reported by WTO and UNCTAD, March 2012). In contrast to exports, imports of commercial services in the last two quarters of 2011 remained strong across Asia.

Strong imports of commercial services are associated with the “Factory Asia” phenomenon (discussed in detail in ESCAP 2009 and 2011b) which requires efficient service sector for effective integration into global and regional production networks.8 While some economies were able to improve their capacities to supply and trade in various commercial services, many still depend on imports. B. SUBREGIONAL AND SECTORAL BRAKEDOWN OF SERVICES TRADE While services play an increasing role for Asia-Pacific as a whole, their importance differs widely among individual subregions due to the heterogeneity of the region. Figure 8 compares the importance of each subregion in regional services trade during 1999-2010.9 East and North-East Asia remained the largest contributor to the region’s services trade (just under 51% in 2010). South-East Asia ranked second providing around one-fifth of the regions’ trade in services. The largest increase is registered in the regional share of South and South-West Asia (more than 30%, mostly due to India), but it still remains only the third largest contributor to regional services trade at 15%. Similarly, North and Central Asia’s services trade share increased by more than 60%, (mainly because of the importance of transportation services in landlocked economies) allowing this subregion to pass the Pacific in fourth position in 2010. The fact that the regional share of Pacific economies’ commercial services trade dropped is particularly worrying as it may reflect a loss in competitiveness in the supply of tourism and related services which are important driver of economic growth and employment.10 Similarly, at the individual economy level there are winners and losers in terms of captured share of total Asia-Pacific and world exports of services. Between 1999 and 2010, India doubled its share to reach 11% of regional exports. Similarly, China increased its share to 17% of the regional exports of services. Japan’s share, on the other hand, fell by one-third of its 1999 share and it lost its top Asian ranking to China. The increase in the services exports by China and India also resulted in a several-fold increase of their share in world services exports during the period under review; data for 2010 show that China captured 4.6% and India 3.3%, respectively, of world services exports. These two countries were ranked as the third and sixth leading exporters in 2010.11 Australia, Japan, the Republic of Korea and Thailand currently all contribute

7 This is based on WTO Short Term Trade in Commercial Services Statistics. WTO aggregates the world trade estimates from individual reporters' quarterly balance-of-payments statistics taken from the IMF and Eurostat, supplemented with estimates for missing data, as well as national sources. 28 economies from Asia and the Pacific are included in the dataset with quarterly data. Data for China is available only from Q1 2010. 8 Many of the costs they determine the competitiveness of domestic industries are associated with the availability and reliability of services. 9 This figure has not been updated due to lack of disaggregate data for 2011 at the time of preparation of this update (March 2011). 10 But it may also be a reflection of incomplete statistics for this subregion. 11 The rank is based on world trade excluding intra-EU-27 services exports.

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smaller shares to regional services exports than in 1999. The position of some small Pacific island economies, such as Fiji and Vanuatu, also worsened.

Figure 8. Commercial services trade – subregional shares in total Asia-Pacific trade of services

(Percentage)

Source: Calculated by ESCAP based on data downloaded from WTO International Trade Statistics online, downloaded on 7 April 2011.

Commercial services export at the global level underwent some mild structural changes, as the share of travel services export dropped by 6.7 percentage points (from 1/3 to ¼ of global exports), and transportation services share also fell slightly by 1.9 percentage points. Box 1 details the recent developments in tourism sector. In contrast, the share of the residual category, called “other commercial services” increased from about 45% to just over 53% (these changes are measured along the vertical axis of figure 9). During the same period, Asia-Pacific increased its share in all three categories of services exports. The largest percentage point increase was recorded in travel, the service category which suffered the worst decline globally. Asia-Pacific’s share increased by almost 10 percentage points, to reach $260 billion in 2010. Asia-Pacific share in transportation services exports increased by over 4.2 percentage points to $245 billion in 2010. Largest increase in terms of value of exports was recorded in the category which dominates world services exports – other commercial services. The region topped $520 billion in 2010 in its exports of other commercial services, contributing over ¼ of total world export in this category.

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Figure 9. Repositioning of Asia-Pacific in exports of commercial services (changes

in 2010 over 2000)

Source: Calculated by ESCAP based on WTO International Trade Statistics Database, Commercial services, accessed online on 23 March 2012.

Other commercial services comprise eight subcategories but the data is not readily available for all countries and for some the periods for which data are available are very short (see box 2 for definitions and examples of these services). Based on WTO International Trade Statistics, Table 11 provides more detail on developments in exports of these eight categories over 2000-2010 decade. Over this period Asia-Pacific increased the value of its other commercial services exports by almost fourfold and its share of world exports of other commercial services rose to over 26% in 2010. Despite improvements in services trade data collection, still more than half of this category is in a broad category of “other business services” (see box 2). The remaining half is split into seven other categories, some of which have recorded marked increase in their share, such as construction and computer and information services. It is noteworthy that Asia-Pacific shares in both of these subcategories surpass the average region’s share: Asia-Pacific exports more than 50% of all construction services and almost 32% of computer and information services in 2010. Despite almost doubling the value of export of communication services, its share fell both in Asia-Pacific basket and as a share of Asia-Pacific in world export of communication services. Similarly export of insurance and financial services, both closely associated with merchandise exports, increased over three times in value, but their share remained similar.

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Table 11. Other commercial services export breakdown

(comparison 2000 and 2010)*

Source: Calculated by ESCAP based on WTO International Trade Statistics Database accessed on 23 March 2012. Note: * the values of 2000 exports for Asia-Pacific are biased downwards due to lack of data for several Central Asian economies. For detailed country-by-country data consult WTO International Trade Statistics Database.

Box 1. International tourism remains one of the largest

services sector of Asia-Pacific

International tourism is one of the 12 sectors covered by the WTO General Agreement on Trade in Services (GATS) and is also often covered in RTAs. 12 However, it does not feature as a self-standing service activity in trade statistics, but is reflected in travel services. In national accounts it does not often appear as a well-defined category, even though it is an important source of income and employment for many developing and least developed countries, especially in Asia and the Pacific. While 2010 brought some recovery in tourist arrivals from the 2009 sharp decline caused by a combined effect of global economic crisis, pandemic threats, and factors related to disasters and international security, 2011 again saw slowing down of demand for tourism services.

According to the United Nations World Tourism Organization (UNWTO), in

2011 the number of international tourists increased globally by 4.4%. In that year, Asia-Pacific’s tourism sector experienced a less dynamic growth than in 2010 (6.1% compared to 12.9%) (Table Box 2). Asia and the Pacific region captured almost 22% of total global international tourist arrivals, with more than half of that linked to visits to North-East Asia, while Oceania’s part fell to just 5% of the region and is now equal to the share of South Asia. The most dynamic growth in international tourist arrivals was recorded in Bhutan and Georgia (39%), Sri Lanka (31%), Palau and Myanmar (26%), Cambodia, Thailand and Vietnam (20%). Japan recorded a fall of tourist arrival of 28% due to triple disaster in 2011.

12

GATS schedules refer to sector 9, known as “Tourism and travel related services”, which is broken down into four subsectors: hotels and restaurants (including catering), travel agencies and tour operators services, tourist guides services, and other.

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Figure Box 2. Recent changes in international tourist arrivals

Source: UNWTO World Tourism Barometer online (downloaded in March 2012). Note: *Asia-Pacific comprises the following economies: Australia; Bhutan; Cambodia; China; Cook Islands; Guam; Fiji; French Polynesia; Hong Kong, China; India; Indonesia; Japan; Kiribati; Macao, China; Maldives; Malaysia; Marshall Islands; Myanmar; Nepal; New Caledonia; New Zealand; Niue; Northern Mariana Islands; Pakistan; Palau; Papua New Guinea; Republic of Korea; Samoa; Singapore; Solomon Islands; Sri Lanka; Taiwan Province of China; Thailand; Tonga; Vanuatu; and Viet Nam.

While there are no detailed and long-term data series on the geographical breakdown of travel services, this category appears to be contributing towards an expansion of intraregional trade in Asia. According to WTO (2011b), more than 60% of China’s travel receipts were sourced from Asian economies, in particular Hong Kong, China, as well as Japan, the Republic of Korea and Taiwan Province of China. More than two thirds of the Republic of Korea’s travel exports were destined for other Asian economies with more than 30% of those exports going to Japan. In the case of Hong Kong, China, the share of Asia is even higher (more than 84%), with China being the largest recipient of exports of travel services. Asian economies accounted for around 77% of Japan’s travel exports and 60% of Australia’s travel receipts in 2008. In reporting Asian economies, travel exports to the European Union-27 represented between 6% and 9% of the total, while the share of the United States ranged between 5% and 12%. The prospects for 2012 are relatively positive. In February 2012, UNWTO forecast reduced growth for all regions, with Asia and the Pacific still expected to perform well (Table Box 2).

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Table Box 2. Tourist arrivals - Rates of growth for 2010, 2011 and 2012 (forecast) (Percentage)

Region 2010/2009 2011/2010 2012 forecast

World 6.5 4.4 3.0-4.0

Europe 2.9 5.8 2.0-4.0

Asia and the Pacific 12.9 6.1 4.0-6.0

Americas 6.4 4.2 2.0-4.0

Africa 8.4 0.2 4.0-6.0

Middle East 14.9 -8.4 0.0-5.0

Source: United Nations World Tourism Organization, Barometer February 2011, available from http://dtxtq4w60xqpw.cloudfront.net/sites/all/files/pdf/unwto_barom12_01_january_en_excerpt.pdf Note: 2011 based on over 100 reported countries data by March 2011. 2012 rates are UNWTO forecasts.

Box 2. Definition and examples of commercial services

The WTO provides definition of services statistical data as follows: The Balance of Payments Manual, 5th edition (BPM5) subdivides “the current account into goods, services (including government services, n.i.e.), income (investment income and compensation of employees), and current transfers. The commercial services category is defined as being equal to services minus government services, n.i.e. Commercial services is further sub-divided into transportation services, travel, and other commercial services.

Transportation Services covers sea, air and other including land, internal waterway, space and pipeline transport services that are performed by residents of one economy for those of another, and that involve the carriage of passengers, the movement of goods (freight), rentals (charters) of carriers with crew, and related supporting and auxiliary services.

Travel includes goods and services acquired by personal travellers, for health, education or other purposes, and by business travellers. Unlike other services, travel is not a specific type of service, but an assortment of goods and services consumed by travellers. The most common goods and services covered are lodging, food and beverages, entertainment and transportation (within the economy visited), gifts and souvenirs. Other commercial services correspond to the following components defined in BPM5:

(i) communications services includes telecommunication, postal and courier services. Telecommunication services encompasses the transmission of sound, images or other information by telephone, telex, telegram, radio and television cable and broadcasting, satellite, electronic mail, facsimile services etc., including business network services, teleconferencing and support services. It does not include the value of the information transported. Also included are cellular telephone services, Internet backbone services and on-line access services, including provision of access to the Internet,

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(ii) construction covers work performed on construction projects and installation by employees of an enterprise in locations outside the territory of the enterprise (the one-year rule to determine residency is to be applied flexibly). In addition goods used by construction companies for their projects are included which implies that the "true" services component tends to be overestimated, (iii) insurance services covers the provision of various types of insurance to non residents by resident insurance enterprises, and vice versa, for example, freight insurance, direct insurance (e.g. life) and reinsurance (iv) financial services covers financial intermediation and auxiliary services provided by banks, stock exchanges, factoring enterprises, credit card enterprises, and other enterprises, (v) computer and information services is subdivided into computer services (hardware and software related services and data processing services), news agency services (provision of news, photographs, and feature articles to the media), and other information provision services (database services and web search portals), (vi) royalties and licence fees, covering payments and receipts for the use of intangible non-financial assets and proprietary rights, such as patents, copyrights, trademarks, industrial processes, and franchises, (vii) other business services, comprising trade-related services, operational leasing (rentals), and miscellaneous business, professional and technical services such as legal, accounting, management consulting, public relations services, advertising, market research and public opinion polling, research and development services, architectural, engineering, and other technical services, agricultural, mining and on-site processing, (viii) personal, cultural, and recreational services is subdivided into two categories, (i) audiovisual services and (ii) other cultural and recreational services. The first component includes services and fees related to the production of motion pictures, radio and television programmes, and musical recordings. Other personal, cultural, and recreational services includes services such as those associated with museums, libraries, archives, and other cultural, sporting, and recreational activities.” Source: The above text is taken from WTO Statistical data sets – Metadata, accessed at http://stat.wto.org/StatisticalProgram/WSDBStatProgramTechNotes.aspx?Language=E#Def on 23 March 2012

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3. INTRAREGIONAL FLOWS HELP FOREIGN DIRECT INVESTMENT TO RECOVER A. FULL RECOVERY OF FOREIGN DIRECT FLOWS ONLY TO SOME

PARTS OF THE REGION Inflows

The Asia-Pacific region saw a strong recovery in FDI inflows in 2010 although in aggregated terms, regional inflows still fell short of the levels witnessed in 2007 and 2008 and performances across countries varied greatly. After suffering a decline of 23% in 2009, Asia-Pacific developing countries increased their FDI inflows by 19% in 2010. In contrast, the developed countries in the region, namely Australia, Japan and New Zealand, continued to witness a decline in their FDI inflows by 13% in 2010, mainly due to a decrease in FDI inflows to Japan. As not all countries in the region experienced a similar resumption of growth, FDI inflows also reacted in very different ways from one subregion to another. FDI inflows recovered in East and North-East Asia and more remarkably in South-East Asia in 2010 (growing annually by 17% and 109% respectively). In contrast, North and Central Asia witnessed a slight decrease (2%) in FDI inflows, whereas FDI inflows to South and South-West Asia continued to decline notably (by 19%) due to the considerable slump in inflows to India, which is the subregion’s leading FDI recipient (figure 10).

Figure10. Foreign direct investment inflows by subregion, 2008-201013

0

20

40

60

80

100

120

140

160

180

200

East and North-

East Asia

South-East Asia South and South-

West Asia

North and Central

Asia

Developed Asia-

Pacif ic

Billio

ns o

f U

nit

ed

Sta

tes d

ollars

2008 2009 2010

Source: ESCAP calculations based on UNCTAD (2011a). Note: Developed Asia-Pacific countries include Australia, Japan and New Zealand.

13 The Pacific island States registered minimal FDI inflows (average of less than 0.5% of the region’s total) and are therefore excluded from figure 1.

33

FDI inflows into the Asia-Pacific subregions can be disaggregated into two

groups – one focused on the five regional “giants” (i.e., China, India, Russian Federation, Singapore and Hong Kong, China) 14 and the second comprising the remainder of the economies in the region. China, India, Russian Federation, Singapore and Hong Kong, China - which are economies with either a large domestic market, rich natural endowments or an advanced level of economic development - are the top FDI destinations among developing economies in Asia and the Pacific, and accounted for more than 71% of FDI inflows into the region in 2010.15 It is therefore helpful to analyze the developments in those economies separately in order to gain a better understanding of the drivers of FDI flows and to identify their potential to increase future FDI (figures 11 and 12).

Figure 11. Foreign direct investment inflows to the regional “giants”, 2008-2010

0

20

40

60

80

100

120

China Hong Kong,

China

Singapore Russian

Federation

India

Bil

lio

ns o

f U

nit

ed

Sta

tes d

ollars

2008 2009 2010

Source: ESCAP calculations based on UNCTAD (2011a).

These five economies showed an improved but still a mixed picture in 2010. China posted an 11% recovery of FDI inflows to approximately $106 billion in 2010, almost regaining the level of 2008. China’s economic growth exceeded expectations in 2010 spurring investment. However, China is experiencing rising wages and production costs, which continue to shift investment away from low-cost manufacturing to the service and high-technology sectors. FDI inflows to Hong Kong, China, also increased in 2010 by 32% to $69 billion, surpassing the 2008 level. FDI inflows to Singapore rose

14 Although Australia is the fifth largest FDI destination in Asia and the Pacific, as a developed country it was not included into the group of “regional giants”. 15 Including FDI to the developed countries in the region, i.e., Australia, Japan and New Zealand.

34

sharply by 153% to reach $39 billion in 2010 after a sharp slump in 2008. Singapore continues to be the main investment hub of South-East Asia and has benefited greatly from the increase in investment flows in developing Asia. The Russian Federation also witnessed an increase in FDI inflows of 13% (to $41 billion), mainly due to a fast-growing local consumer market, whereas in India inflows decreased by 31% to $25 billion in 2010 following stagnating economic growth, high inflation and continuing infrastructure bottlenecks (figure 12). Hesitation of the Government of India to liberalize certain sectors such as retail and insurance may have also affected FDI inflows (UNCTAD, 2011a; 2011c; Asian Development Bank, 2011).

Figure 12. Foreign direct investment inflows to developing subregions excluding the five “giants”, 2008-2010

0

10

20

30

40

50

East and North-East

Asia excl. China and

Hong Kong, China

South-East Asia excl.

Singapore

South and South-West

Asia excl. India

North and Central Asia

excl. the Russian

Federation

Bil

lio

ns o

f U

nit

ed

Sta

tes

do

lla

rs

2008 2009 2010

Source: ESCAP calculations based on UNCTAD (2011a).

The changes in FDI inflow into both South-East Asia and East and North-East Asia have followed a similar trend in trade in goods and services, and growth in general before and after the global economic crisis (figures 11 and 12). In 2010, South-East Asia quickly regained the pre-crisis 2007 level of FDI inflows, relatively equally spread among the economies of the subregion. Malaysia experienced a record jump of more than 500%, thereby increasing its FDI inflows from $1.4 billion in 2009 to $9.1 billion in 2010.16 Indonesia also benefited from rising FDI inflows which grew by 171% from $4.9 billion in 2009 to $13.3 billion in 2010. However, Singapore was clearly the lead destination for FDI in the subregion. The country is ranked as the number one FDI destination in the

16 The Malaysian Industrial Development Authority approved a much larger number of investment projects (more than 900) in 2010 compared with earlier years (ESCAP, 2011b). In 2011, Malaysia was ranked 16th in the World Competitiveness Yearbook (IMD, 2011) and also was ranked 18th in the World Bank Doing Business Report 2012 (World Bank, 2011), particularly with regard to easy access to finance and a high level of investor protection.

35

world in terms of business environment and had 300 registered projects in 2010 (fDi Intelligence, 2011). When Singapore is excluded, the subregion loses on average 38% of FDI inflows in the period 2008-2010. Indonesia accounts for 17% of the subregion’s inflows, Malaysia for 11%, Thailand for 7% and Viet Nam for 10%. Indonesia outperformed both Thailand and Malaysia during 2008-2010 partially due to expansion of export-oriented manufacturing. Indonesia also has an advantage due to the existence of a relatively large domestic market as well as adequate supply of labour compared with tightening labour markets in neighbouring countries (Asian Development Bank, 2011).

In contrast, the recovery of FDI in East and North-East Asia was much more modest. In 2010, FDI inflows into East and North-East Asia increased by 17%, after witnessing a drop of 13% in 2009. When excluding China and Hong Kong, China, from FDI inflows into East and North-East Asia, the recovery in 2010 disappears as 93% of total FDI inflows into this subregion went to China and Hong Kong, China and FDI inflows to the remaining economies (Mongolia; the Democratic People’s Republic of Korea; Macao, China; the Republic of Korea; and Taiwan Province of China) continued to stall in 2010 and dropped slightly by 0.4% in aggregate terms. FDI inflows into South Asia and South-West Asia have continuously declined since the start of the global economic crisis. FDI inflows to that subregion reached a peak in 2008 ($71 billion) but declined in both 2009 (by 29%) and 2010 (by 19%). India accounted for 70% of subregional FDI inflows in 2009, and its FDI inflows considerably decreased in 2009 and 2010 by 16% and 31%, respectively. As shown in figure 15 when India is excluded, remaining South and South-West Asia still recorded a large contraction in FDI inflows in 2009, though those inflows rebounded slightly in 2010.

In North and Central Asia, most FDI is in the natural resources sector,17 and is therefore of a long-term nature and cannot be suddenly withdrawn (cf., UNCTAD, 2010). This could partially explain why this subregion witnessed a delayed and resilient reaction to crisis. In 2009, while the Russian Federation, which accounted for 64% of subregional FDI inflows, experienced a quick drop of FDI inflows (by 51%), other countries in North and Central Asia only suffered mildly from the global crisis with FDI inflows falling by just 5%, to $20 billion. Yet, in 2010, FDI inflows fell by 28% to $15 billion. This large drop was mainly because of a fall in FDI inflows to Turkmenistan, Kazakhstan and Armenia, which recorded declines in FDI inflows of 46%, 28% and 26%, respectively. Kazakhstan accounted for 67% of the subregion’s FDI inflows in 2009 as well as in 2010 (excluding Russian Federation).

17 North and Central Asian countries, many of which are landlocked are relatively rich in natural resources. The abundance of natural resources ensures a steady flow of foreign exchange to these countries. In addition to oil and gas, this subregion is also rich in gold and other precious metals such as silver and platinum, and some base metals such as copper, molybdenum, lead and zinc. As a result, the region is highly resource-dependent. In Azerbaijan and Kazakhstan, for example, hydrocarbons and minerals account for more than 50% of their exports, while oil and gas account for more than 25% of their fiscal revenue. This resource abundance has attracted considerable FDI inflows to the subregion; a nine-fold increase was recorded during 1993-2008, two-thirds of which went to the energy sector (OECD, 2011). High trade costs, especially transportation, are the biggest challenge for traders and investors in the subregion. The subregion needs to improve its roads, rail system, pipelines and communications infrastructure to reduce trade costs. Although tariff barriers in the region are low, non-tariff barriers associated with customs clearance, transits, trade permits and “unofficial payments” must reduce (ESCAP, 2011b).

36

Table 12 ranks the top-10 FDI destinations in Asia and the Pacific based on three indicators of FDI performance in terms of inward FDI stock. Firstly, destinations with high FDI inward stock are those that received large FDI inflows in the period 2007-2010. They are typically middle- to high-income economies with middle- to large-sized domestic markets (e.g. China and India) or free-port economies with a quality pro-business environment (i.e. Hong Kong, China; and Singapore). Secondly, economies which successfully accumulated large FDI inward stock per capita include those that have opened their markets to trade and investment or have relatively rich natural resources (or have relatively small population, such as three Pacific island States that are ranked in the top-10). Thirdly, when the size of FDI inward stock is compared with the size of economy (i.e., FDI inward stock as percentage of GDP), many small economies rank among the top-10 because of disproportionately small size relative to other economies (such as five Pacific island economies which enter the list suggesting that FDI plays a major role in their development). Hong Kong, China topped the rankings in all three categories.

Table 12. Top-10 Asia-Pacific economies by three indicators of the foreign direct investment inward stock, 2010

Rank Economy

FDI inward stock 2010 (Millions of

United States

dollars)

Economy

FDI inward stock per

capita 2010 (Millions of

United States dollars)

Economy

Average FDI inward stock

as percentage of GDP

2008-2010

1 Hong Kong, China

1,097,620 Hong Kong, China

155,620 Hong Kong, China

437

2 China 578,818 Singapore 92,378 Singapore 196

3 Australia 508,123 Brunei Darussalam

27,577 Tuvalu 115

4 Singapore 469,871 Macao, China 26,912 Palau 97

5 Russian Federation

423,150 Australia 22,818 Maldives 89

6 Japan 214,880 New Caledonia 21,340 Brunei Darussalam

86

7 India 197,939 New Zealand 16,055 New Caledonia

70

8 Turkey 181,901 Northern Mariana Islands

12,589 Fiji 65

9 Thailand 127,257 Palau 6,292 Mongolia 64

10 Republic of Korea

127,047 Kazakhstan 5,076 Solomon Islands

64

Regional Average

78,228 Regional Average

7,446 Regional Average

40

Median 4,760 Median 1,074 Median 20

Source: ESCAP, based on data from the UNCTAD (2011a). Notes: Regional average and median calculated based on data for 53 economies in Asia and the

37

Figure 13 presents the most recent trends in FDI inflows for selected developing countries in Asia and the Pacific based on available data for the year 2011.18 In South-East Asia, FDI inflows to Indonesia and Malaysia continued to maintain momentum in 2011 with 21% growth during the first eight months for Indonesia and 16% growth during the first six months of 2011 for Malaysia after these two countries had already experienced a significant recovery in inflows in 2010. A ranking by A.T. Kearney of the world’s most attractive investment destination for 2012 ranked Indonesia 9th and Malaysia 10th (China, not surprisingly was at number 1 and India at number 2). Coupled with the large size of its domestic market and its rich natural resources, Indonesia’s efforts to improve the business environment and reduce political instability have succeeded in attracting investment (EIU, 2011a). The Government of Malaysia has taken steps towards attracting more FDI to the country as detailed in the Economic Transformation Programme. 19 Reforms include administrative improvements and facilitating investors’ access to investment opportunities. These reforms coupled with a strong infrastructure will continue to attract FDI to the country according to the Central Bank of Malaysia (2011). In contrast, Thailand suffered a sharp decline (32%) in inflows during the first eight months of 2011 partially due to political instability. This decline is expected to continue as a result of Thailand’s wide-spread flooding in the second half of 2011, which inundated a number of major industrial estates. Similarly, Viet Nam’s weak growth in FDI inflows of 3% in 2010 has turned negative with a decline of 23% over the first ten months of 2011. The main factors discouraging investment to Viet Nam include lack of human capital, heavy bureaucracy and discriminative policies against foreign firms although the country has taken steps to reduce these impediments (EIU, 2011a; WEF, 2010). In East Asia and North-East Asia, FDI inflows to China and the Republic of Korea have continued to grow in 2011 by 16% (as of end of October) and by 4% (as of end of September), respectively. China remains the engine of growth in the region and is expected to maintain growth momentum due to its large domestic market (UNDESA, 2010). Such a positive outlook is expected to attract increasing flows of FDI to China in the future as well. In other subregions, there are signs of patchy recovery. In India, FDI inflows grew by 57%, in the Russian Federation by 30% and in Kazakhstan by 7% during the first half of 2011.

18 Because of the limited availability of data for 2011 from traditional sources (in particular, IMF and UNCTAD), the analysis in this section relies on country data obtained from the CEIC database. 19 The Economic Transformation Programme is a joint effort by the Government of Malaysia and the country’s private sector to elevate Malaysia to the level of high-income country by the year 2020. The plan focuses on several sectors identified as national key economic areas such as oil, gas and energy; financial services; tourism; and palm oil. The goal is to transform the economy into a service-based economy, create jobs and increase the standard of living in a sustainable manner. In order to reach these goals Malaysia is implementing policy measures relating to, for example, market liberalization, human resource development, enhanced public finance and business environment reform. (Malaysia, Performance Management and Delivery Unit, 2010)

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Figure 13. Percentage change of FDI inflows in selected Asian economies, 2009/2008, 2010/2009 and 2011/2010

-75% -50% -25% 0% 25% 50% 75% 100%

Pakistan

Thailand

Viet Nam

Republic of Korea

Kazakhstan

China

Malaysia

Indonesia

Russian Federation

India

2008-2009

2009-2010

2010-2011

Source: ESCAP calculations based on data from CEIC Data Company Limited (2011). Notes: Growth rates for 2010/11 are until end of June 2011 for India, Kazakhstan, Malaysia and Russian Federation, until the end of August for Thailand, until the end of September for Indonesia, Republic of Korea and Pakistan and until the end of October for China and Viet Nam. There is a large discrepancy between the figures provided by CEIC and UNCTAD in the case of growth of FDI inflows to Thailand in 2009/10. According to UNCTAD (2011a), inflows to Thailand increased only by 17% in 2009/10.

In South Asia, India continues to attract most of the FDI inflows to the subregion. During the first ten months of 2011, India attracted $33 million in greenfield FDI, the highest in South Asia (fDi Intelligence, 2011). According to the Asian Development Bank (2011) foreign investors in India have struggled with issues relating to land acquisition and obtaining environmental clearances. In addition, as mentioned above, the Government of India has reviewed its intention to liberalize certain sectors such as retail and insurance and the liberalization of FDI in the retail sector is currently the focus of intensive debate. 20 Opponents fear a severe backlash to the country’s domestic small-scale grocery stores. Pakistan continues to struggle and has witnessed a further decline in FDI inflows in 2011. In 2009, FDI inflows to the country decreased by 57% and in 2010 by 14%. Most recently, the year-on-year decline in FDI inflows until September 2011 is recorded at 36% (UNCTAD, 2011). The sectors experiencing the largest declines in FDI inflows to Pakistan include communication, especially telecommunications, petroleum refining, the paper and pulp industry and chemicals. On the bright side, the financial services sector experienced year on year growth of 24.3% over the June-April 2010-11 period. However, according to the Asian Development

20 To maintain the trend, India has to further relax restrictions on FDI in some key sectors (especially services such as retailing), simplify FDI procedures and remove other bottlenecks (EIU, 2011b). India is expected to continue strong growth of real GDP and take economic liberalization measures, resulting in a growing need for both public and private investment (especially in infrastructure and industrial development). Thus, a more investor-friendly climate needs to be established in order to attract higher FDI inflows, as was clearly indicated by the Doing Business Survey 2012 (World Bank, 2011) in which India was again ranked relatively low at 132.

39

Bank (2011) power shortages and security issues will continue to dampen growth prospects for the country, which will have a negative impact on FDI inflows. Recent data on FDI in the Pacific island States are very difficult to find and generally speaking, FDI is very limited to begin with though some countries in this subregion could benefit from FDI in the services sector. In Papua New Guinea, FDI is concentrated in the natural resources sector. In a most recent development, an Exxon Mobil-led consortium has embarked on a $15 billion Liquefied Natural Gas (LNG) project in the Southern Highlands with production to begin in 2014. Other foreign-invested LNG projects are in the pipeline.21 In Fiji, net FDI inflows are rising mostly in the tourism and hotel industry and textiles, garments and footwear industry. In general, FDI inflows to various countries of the Asia-Pacific region are increasing as a result of the comparatively healthy growth prospects in these countries. However, in general terms FDI inflows to the region continue to be volatile and sensitive to global cycles as well as national factors (e.g., related to security concerns, impact of natural disasters, and/or weak national economic fundamentals) as evidenced by the unusually large fluctuations in growth rates of FDI inflows. Moreover, financial instability and increased risks of another economic downturn, mainly caused by the ongoing Euro debt crisis, are expected to affect FDI inflows to the region particularly from the developed countries, which have been the traditional FDI sources to the region. Evidence of this could already be observed in the second half of 2011 which witnessed a sudden slump in FDI, especially in the form of cross-border mergers and acquisitions M&A, in the world (UNCTAD, 2011b).

Outflows Trends in FDI outflows resemble those of inflows.22 While global FDI outflows recovered by 13% to reach just over $1,300 billion in 2010 after declines in 2008 and 2009, this amount was still some 10% below the pre-crisis average (2005-2007) and 40% below the 2007 peak. Similarly, having decreased in 2008 by 16% and in 2009 by 45%, FDI outflows from developed countries showed improvement in 2010, increasing by 10% to $935 billion. The United States as well as the European Union increased FDI outflows in 2010 by 16% and 10%, respectively, after witnessing slumps both in 2008 and 2009. FDI outflows from Japan, however, have not recovered. Since hitting a peak of $128 billion in 2008, FDI outflows from Japan have declined by 42% in 2009 and 25% in 2010 reaching a level of $56 billion. In developing countries, aggregated FDI outflows increased by 21% from $271 billion in 2009 to $328 billion in 2010. Although developed economies continued to account for the biggest share of global FDI outflows (71% in 2010), developing countries are becoming increasingly important investors as their share in global FDI outflows grew to 25% in 2010 from 14% in 2007. As developed countries are still grappling with the effects of the crisis as evidenced by the present debt crisis in Europe and North America, many TNCs in developing countries are investing in other emerging markets where recovery is strong

21 http://www.mfat.govt.nz/Countries/Pacific/Papua-New-Guinea.php. 22 The statistical data on FDI outflows were calculated by ESCAP based on UNCTAD (2011a) unless otherwise specified.

40

and the economic outlook is better. In 2010, 70% of investment by developing countries was directed towards other developing countries, while 50% of FDI from developed countries flowed into developing countries (UNCTAD, 2011c).

FDI outflows from the Asia-Pacific region decreased by 17% in 2009 but started to recover in 2010 posting a 13% rise. At the same time, the share of Asia-Pacific FDI outflows in global outflows almost doubled to 28% in 2010 from 15% in 2007. It is noteworthy that FDI outflows from Asia-Pacific developing countries remained more or less stable in the crisis year of 2008 but grew by 2% in 2009 and by 21% in 2010 which is a clear sign of the rebounding dynamism of the region. In 2010, FDI outflows from East and North-East Asia grew by 22%, from South-East Asia by 25% and from North and Central Asia by 27% (figure 14). FDI outflows from South and South-West Asia, however, continued to stagnate in 2009 and 2010 due to a persistent slump in India.23 The FDI outflows from the regional developed economies declined by 8% in 2010 mostly due to falling FDI outflows from Japan. FDI outflows from East and North-East Asia maintained the largest share of regional FDI outflows (47%), followed by Asia-Pacific developed economies and North and Central Asia, accounting for 22% and 16%, respectively. FDI outflows from South-East Asia and South and South-West Asia had shares of 11% and 4%, respectively.

Figure 14. Foreign direct investment outflows by subregion, 2008-2010.24

0

20

40

60

80

100

120

140

160

180

200

East and North-

East Asia

South-East Asia South and

South-West

Asia

North and

Central Asia

Developed

Asia-Pacif ic

Billio

ns o

f U

nit

ed

Sta

tes d

ollars

2008 2009 2010

Source: ESCAP calculations based on UNCTAD (2011a). Note: Developed Asia-Pacific countries include Australia, Japan and New Zealand.

23 However, Indian enterprises are showing increasing interest in investing in foreign markets (fDi Intelligence, 2011). India’s FDI is expected to grow in the mid- to long term, despite the country’s decreases in FDI outflows in 2009 and 2010 with 18% decline in 2009 and 8% decline in 2010 reaching a level of $14,626 million (UNCTAD, 2011a). In the first six months of fiscal year 2011-2012 outward investments by Indian companies already reached $19,000 million a significant jump from the year 2010 (India Brand Equity Foundation, 2011). 24 The Pacific island States registered minimal FDI outflows (average of less than 0.1% of the region’s total) and have thus been excluded from figure 14.

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Based on these figures support the claim that the developing countries of the Asia-Pacific region are gaining significance as sources of FDI. This strong success was partly due to the dynamism of TNCs from emerging developing economies within the region and their increasing aspiration to compete in new markets (ESCAP, 2009b), thus leading to growth in intraregional FDI flows as outward FDI from traditional sources (i.e., developed countries) have yet to return to their pre-crisis levels.

B. INTRAREGIONAL FLOWS OF FOREIGN DIRECT INVESTMENT ON

THE RISE

Economic integration in Asia and the Pacific has been partly driven by the emergence of regional and global value chains, which has led to increasing intraregional flows of trade and FDI. The developing economies of Asia and the Pacific have gained importance as sources of FDI in the region, complementing traditional sources of FDI from the developed countries in the region. The attractiveness for enterprises based in developing countries to invest in other developing countries is based on traditional reasons, such as cost advantages in terms of lower wages or prices and the availability of specific resources. But these enterprises are likely to have specific advantages over competitors from developed countries as well because their technologies and knowledge fit the factor endowments and market characteristics of the recipient developing countries better. In particular, a smaller technology gap between the origin and the recipient countries may put these firms in a good position to transfer and diffuse technology and knowledge (ESCAP, 2011b).

1. South-East Asia (ASEAN)

The increased importance of intraregional flows of FDI is noticeable in the case of South-East Asia, as defined by the Association of Southeast Asian Nations (ASEAN). As shown in Table 13, FDI inflows to ASEAN countries from ASEAN+6 countries (ASEAN, Australia, China, India, Japan, New Zealand and Republic of Korea) increased from 15% of the total in the period 1998-2000 to 41% in the period 2008-2010. In contrast, inflows from the United States and the European Union decreased between these two periods from 54.9% to 30.7%.

Japan is a major provider of FDI in the ASEAN subregion and is the largest Asian investor in many ASEAN countries. For instance, Japan was the largest foreign investor in Thailand in 2010 with $3.16 billion invested during the year, followed by Singapore ($640 million), China ($546 million) and Hong Kong, China ($410 million). In that year, the total investments from other ASEAN countries in Thailand amounted to $767 million. Japan was also the largest foreign investor in Malaysia and the Philippines in 2010, investing $1.3 billion in each of these countries (Malaysian Investment Development Authority, 2012; Philippines National Statistical Coordination Board, 2012). Singapore invested $700 million in Malaysia in 2010, mostly in the electrical, petroleum and basic metal sectors. Singapore, Japan and Hong Kong, China, are also leading investors in Indonesia. In 2010, FDI from these three countries in Indonesia amounted to, respectively, $5 billion, $712 million and $566 million (Indonesia Investment Coordination Board, 2012).

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Table 13. Major sources of FDI inflows to ASEAN, 1998-2000 and 2008-2010 averages

Economy/Grouping 1998-2000 Average 2008-2010 Average

In millions of United States

dollars Share (%)

In millions of United States

dollars Share (%)

United States 5,466 22.4 5,394 10.1 European Union 7,943 32.5 11,036 20.6 Japan 2,042 8.4 5,426 10.1 ASEAN 1,759 7.2 8,926 16.7 Australia -513 -2.1 1,109 2.1 New Zealand 49 0.2 91 0.2 China 74 0.3 2,834 5.3 Republic of Korea 194 0.8 2,279 4.3 India 71 0.3 1,319 2.5 Others 7,356 30.1 15,157 28.3 ASEAN+3 4,068 16.6 19,465 36.3 ASEAN+6 3,676 15.0 21,985 41.0 Average flows to ASEAN 24,441 53,572

Source: ESCAP calculations based on ASEAN Investment Report 2011 (ASEAN Secretariat, 2011) and Statistics of Foreign Direct Investment in ASEAN (ASEAN Secretariat, 2006). Note: European Union consists of EU27; ASEAN+3 comprises the ten ASEAN countries plus China, Japan and Republic of Korea; ASEAN+6 comprises ASEAN+3 plus Australia, India and New Zealand.

The recent data also shows that the low-income ASEAN members, Cambodia,

Lao People’s Democratic Republic, Myanmar and Viet Nam - the so-called CLMV countries - have experienced growing FDI inflows from other ASEAN countries (Table 14). This provides some evidence in support of the “flying geese” view of the process of industrialization in less developed economies.25 Foreign investors are attracted to the CLMV countries because of their relatively low wages and access to natural resources. FDI inflows to Cambodia increased by 45% in 2010 to $783 million, and those to Myanmar increased by 31% to $756 million (UNCTAD, 2011a). According to official sources, China is the largest investor in Cambodia, followed by the Republic of Korea, Hong Kong, China; Taiwan Province of China, Malaysia and Thailand, with most investment targeting the booming garment industry. 26 FDI outflows from Cambodia amounted to $17 million in 2010. According to IMF (2011c), Thailand and Singapore have reported receiving FDI flows from Cambodia. In addition, China has been a major recipient in 2010.

25 See for a detailed analysis, the Asia-Pacific Trade and Investment Report 2010 (ESCAP, 2010), pp. 41-42, available from www.unescap.org/tid/publication/aptir2590.asp. 26 http://www.caminfoservices.com/cdc/investors-information/fdi-trend.html. FDI in the garment industry has recently declined as a result of the global economic crisis.

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Table 14. Share of intra-ASEAN FDI inflows of total FDI inflows to ASEAN countries, 2008-2010

(Percentage) Country 2008 2009 2010

Brunei Darussalam 0 1 14 Cambodia 30 32 45 Indonesia 36 28 44 Lao People’s Democratic Republic 21 18 41 Malaysia 23 -20 6 Myanmar 11 3 n/a Philippines 9 0 0 Singapore 8 14 10 Thailand 6 27 7 Viet Nam 28 6 16 TOTAL INTRA-ASEAN 20 14 16 CLMV 27 8 20

Source: ESCAP calculations based on ASEAN Investment Report 2011 (ASEAN Secretariat, 2011). Note: CLMV stands for Cambodia, Lao People’s Democratic Republic, Myanmar and Viet Nam

According to official sources, Viet Nam has been the largest foreign investor in Lao People’s Democratic Republic during the period 2000-2010, investing a total of $2.77 billion, closely followed by China with $2.71 billion.27 Most investment in Lao PDR is directed to the hydroelectricity and mining/resources sectors. The Government amended the Law on Foreign Investment in early 2010 to attract FDI in the non-resources sector. During the period 1990-2010, as a share of total cumulative investment, Taiwan Province of China was the largest investor in Viet Nam followed by the Republic of Korea, Singapore, Japan and Malaysia.28 China has emerged as the largest investor in Myanmar targeting the electricity, oil and gas and mining sectors. China’s pledged investment soared to a total of $20 billion during the 2010-2011 fiscal year (April-March) compared to just $300 million a year before according to official data.29 2. South Asia (SAARC)

The share of FDI from Asia-Pacific economies in India’s total FDI inflows increased from 11% in 2003 to 22% in 2010, 57% of which came from South-East Asia 30 and 37% from East and North-East Asia. However, India’s South Asian neighbours accounted for less than 1% of FDI inflows to India. 31 India is actively looking to expand its presence abroad and gain access to new markets and resources (India Brand Equity Foundation, 2011b). For instance, in November 2011 the Afghanistan Ministry of Mines (2011) announced that a consortium consisting of several Indian companies was awarded mining rights to the Hajigak iron ore deposit in 27 http://www.business-in-asia.com/laos/fdi_in_laos.html 28 http://www.vietpartners.com/Statistic-fdi.htm 29 As reported by Reuters: http://in.reuters.com/article/2011/06/09/myanmar-investment-idINL3E7H90ZW20110609 30 Singapore has dominated South-East Asia’s FDI to India, i.e., accounting for 81% in 2010. 31 This issue may be revisited to examine if India’s neighbouring countries may also use Mauritius as an intermediary to facilitate their investment to India. In addition to India, Mauritius holds the double tax treaties with four South Asian countries, i.e., Bangladesh, Nepal, Pakistan and Sri Lanka (LOWTAX, 2011).

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Afghanistan. According to the Ministry, the Hajigak is the largest unmined deposit in Asia and the project is expected to bring in not only new technologies and expertise but also create thousands of jobs in the country. The Ministry estimates that the value of investments will amount to billions of United States dollars.

Malaysia, Singapore and Thailand are the most significant suppliers of greenfield

FDI in Pakistan. In 2010, Singapore made a $91 million investment in electronic components in Pakistan, the largest FDI inflow during that year. During the 2005-2010 period Malaysia was the biggest supplier of FDI ($2.8 billion), followed by Singapore ($428 million) and Thailand ($25 million) (fDi Intelligence, 2011). In 2010, FDI inflows to Bangladesh increased by 30% to $913 million. According to the Bangladesh Board of Investment (2012), the largest contributors of FDI in 2009-2010, in terms of proposed investments, were Saudi-Arabia, Republic of Korea and China. FDI outflows from Bangladesh decreased by 47% to $15 million in 2010. According to the IMF (2011c) most FDI from Bangladesh is targeted towards India (39%). Within the Asia-Pacific region also Sri Lanka and Pakistan receive FDI from Bangladesh. Finally, Sri Lanka has benefited from increased investment from India and is expecting increasing flows of FDI from other Asia-Pacific countries as it recovers from its prolonged conflict.

3. North-East Asia

As China is by far the largest FDI destination in the Asia Pacific region (and the world), it is interesting to note that most investment in China was sourced from East and North-East Asian economies. Table 15 presents the shares of source economies in total FDI inflows to China in 2000 and 2010. Total FDI inflows to China more than doubled in the period 2000-2010 to $106 billion (UNCTAD, 2011a)., The main sources of FDI are Hong Kong, China;32 Japan; the Republic of Korea; and Taiwan Province of China (39.3%, 11.1%, 7.3% and 7.0%, respectively, accounting for 64.8% of total FDI inflows to China in 2010). North America33 and Europe followed East and North-East Asia with each having a less than 10% share of total FDI inflows to China in 2010. Overall, 72% of the FDI flows to China were sourced in the Asia-Pacific region in 2010, up from 62.3% in 2000.

Although the United States and the European Union are the main sources of FDI in the Republic of Korea, Asia-Pacific countries have gained ground. In particular, China has increased its investments in the Republic of Korea by 251% year-on-year in the first half of 2011. During the same period, the combined FDI from Hong Kong, China; Malaysia; Singapore and Taiwan Province of China in the Republic of Korea increased by 55% to $449 million – and FDI from Japan increased 44% to $891 million. In addition, FDI outflows from the Republic of Korea have been significantly larger in absolute terms

32 The high level of FDI flows from Hong Kong, China to China could be at least partly explained by traditional indirect investment made by TNCs from third countries to China through Hong Kong, China (e.g. ‘greenfield’ investments from Taiwan Province of China). Investment funds can also be recycled from China to Hong Kong, China and then back again in a process called round-tripping. Compared with the 2000 share of 45%, Hong Kong, China’s share in FDI inflows to China in 2010 dropped slightly (see table 2.9). As regards inflows to Hong Kong, China on average 27% of FDI came from China in 2008 (EIU, 2011d), which accounted for 69% of China’s aggregate FDI outflows (Ministry of Commerce, China, 2009). 33 The United States was the fourth largest source of FDI in China with a share of 9%.

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than FDI inflows to the country in recent years, amounting to $19 billion in 2010 (UNCTAD, 2011a) and growing in 2011 to a level of $44.5 billion. The growth in FDI outflows in 2011 is mainly explained by increased investment in the natural resources sector, especially in mining in North American and Oceania. (Republic of Korea, Ministry of Strategy and Finance, 2012) In 2010, the top destinations for FDI outflows from Republic of Korea were the United Kingdom, the United States and China, which together represented almost 42% of the total. FDI outflows from Republic of Korea to ASEAN countries increased by 156% to $3.7 billion (ASEAN Secretariat, 2011).

Table 15. Major source economies of foreign direct investment in China, 2000 and 2010

(Percentage shares) Region/economy 2000 2010

Asia and the Pacific 62.3 72.0 East and North-East Asia 54.5 64.8 Hong Kong, China 38.0 39.3 Japan 7.2 11.1 Republic of Korea 3.7 7.3 Taiwan Province of China 5.6 7.0 South-East Asia 7.0 6.2 Singapore 5.3 4.5 Malaysia 0.5 0.7 Philippines 0.3 0.4 Thailand 0.5 0.4 Indonesia 0.4 0.3 Viet Nam 0.0 0.0 Australia 0.8 0.8 New Zealand 0.0 0.1 Russian Federation 0.0 0.1 North America 11.4 9.1 Europe 11.3 8.8 Others 15.0 10.1 Total 100.0 100.0

Source: ESCAP, based on data from EIU (2011c). Notes: Europe comprises Austria, Belgium, Denmark, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. North America comprises Canada, Mexico and the United States of America.

4. Central Asia

According to UNCTAD’s World Investment Reports in recent years (UNCTAD, 2010; 2011c), the Russian Federation has proved to be a dominant investor in Central Asia. For example, in 2009, the Russian Federation accounted for 68% of Central Asia’s subregional FDI inflows. In addition to the Russian Federation, a significant amount of FDI inflows to the subregion used to come from Turkey as well as from a handful of developed European countries, such as France, the Netherlands and the United Kingdom. In recent times, however, a gradually larger portion of FDI inflows has come from nearby developing countries, notably China and the Islamic Republic of Iran, and economies in East Asia such as Japan and the Republic of Korea.

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In 2010, the subregion’s FDI inflows fell by over 50% to about $6.8 billion, which was the worst performance of any subregion in Asia and the Pacific. Most FDI inflows to the subregion target the natural resources sector, such as oil and gas, and minerals, including gold, silver, platinum and other precious and base metals. This sector witnessed a nine-fold increase in FDI inflows between 1993 and 2008, two thirds of which went to the energy sector (OECD, 2011). This is hardly surprising as Central Asia provided about 10% of world gas exports (CIA, World Fact Book, 2011), and oil production in the subregion is expected to grow substantially in the next 20 years following the development of new oilfields, and much of the additional oil is expected to be exported. With the growing demand for energy in nearby developing countries, in particular China and India, TNCs in the energy sector from these two emerging economies have proactively been pursuing joint ventures (JV), as well as other forms of investment collaboration in Central Asia (box 3).

Box 3. China’s rising investment in Central Asia

China initiated its investment in Central Asia with the signing in April 1996 of general economic and security agreements with Central Asian economies. Since then, Chinese FDI in the subregion has increased dramatically. Chinese firms built two oil and gas pipelines from Kazakhstan and Turkmenistan to China (inaugurated in 2006 and 2009 respectively), laying the ground for large-scale exploration and development of oil and gas fields. In Turkmenistan, the China National Petroleum Corporation (CNPC) is the only foreign company possessing an onshore contract for oil and gas exploration. In Kazakhstan, the China Investment Corporation bought a 14.5% stake in KazMunaiGas, and CNPC bought a 49% share of Mangistaumunaigaz for $2.6 billion, both in 2009. In the electricity industry, China’s Tebian Electric Apparatus is building power transmission lines and substations in Kyrgyzstan and Tajikistan, and has acquired the right to extract gold, silver, copper and tungsten in the latter. Another company, XD Group, is modernizing the electricity system in Tashkent, Uzbekistan. In nuclear energy, CNPC formed a JV with Kazatomprom, a Kazakhstan state-owned enterprise, to invest in uranium production in the Central Asian country, while an affiliate of the China Guangdong Nuclear Power Corporation has entered into a JV to develop black-shale uranium in the Navoi Province of Uzbekistan. Source: UNCTAD (2011c)

According to UNCTAD (2011c), intraregional FDI links between Central Asian countries and other developing countries in the Asia-Pacific region are gaining momentum. The share of developing countries, including those from Asia and the Pacific, in greenfield investment projects in Central Asia rose from 9% in 2004 to 21% in 2010, or from $6 billion to $11 billion. These South-South investment links are, however, concentrated in a handful of countries in the subregion such as Kazakhstan and Turkmenistan, who are the main targets and the most popular destinations for FDI in the subregion, due to their vast energy and natural resources

.

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5. Pacific Islands

Intraregional FDI in the Pacific mainly consists of FDI from Australia, New Zealand, Japan and, increasingly, China to the Pacific Island countries. Australian companies are the most active in developing Papua New Guinea's mining and petroleum sectors. According to information from the United States State Department, China is increasing its investment in Papua New Guinea, including development of the $1 billion Ramu nickel mine.34 FDI in Fiji targets the hotel and tourism industry and the textiles, garment and footwear industries. Australia has traditionally been the largest foreign investor though FDI has declined since the political unrest in the country. FDI in Pacific Island countries benefit from the Australian S-TCF scheme, which facilitates duty free access to Australia for textiles, clothing and footwear products manufactured in Forum island countries. The scheme had been due to expire on 31 December 2004, but was further extended until 31 December 2011. In the latest development, a Chinese investor group acquired 6000 acres of land on Fiji’s main island of Viti Levu with the purpose of establishing a hotel, residential lots, medical facilities, golf course, shopping facilities and agricultural developments according to the group.35

The LCDs located in the Pacific region, apart from Tuvalu, were able to increase their FDI inflows in 2010. The Solomon Islands and Samoa topped the list with FDI growth rates of 99% and 94%, which amount to $238 million and $2 million, respectively. In the Solomon Islands mining is expected to draw in foreign investment in the future (Asian Development Bank, 2011). In Samoa tourism plays an important role in the economy. In addition, the country has been a leader in liberalizing telecommunications in the subregion, which has spurred investments (Wesley, 2011). Though experiencing less growth in FDI flows, 21% in 2010, Vanuatu is a major destination of FDI flows among the Pacific islands with $39 million invested in 2010. Australia is the largest foreign investor in Vanuatu accounting for over one-third of the total value of FDI in the country in 2010 and contributing to up to 46% of total proposed local employment during the year. Of the approved FDI in 2010, 37% came from Australia, 18% from France, 13% from China and 12% from New Zealand showing the importance of Asia-Pacific FDI to Vanuatu.36

6. Least Developed Countries

In 2010, 14 economies in the Asia-Pacific region were defined as least developed countries (LDC). FDI flows to these countries remain small: in 2010, the LDCs accounted for 1% of total FDI inflows to the Asia-Pacific region reaching a level of $3.6 billion.37

Though experiencing a dip in 2009, FDI inflows to these countries grew in 2010 by 36%. Most of the FDI inflows to the LDCs in the Asia-Pacific region are captured by a few countries. Bangladesh, Cambodia and Myanmar combined attracted 67% of all FDI inflows to the LDCs in 2010. These countries have also experienced significant growth in FDI inflows.

34 http://www.state.gov/r/pa/ei/bgn/2797.htm#econ 35 http://www.pacifictradeinvest.com/wp/?p=278 36 http://www.investvanuatu.org/vipa/reports/2010%20Annual%20Rpt-final%20with%20cover.pdf 37 ESCAP calculations based on UNCTAD (2011a).

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FDI outflows from the LDCs remain at low levels, with several countries posting no outward investments in 2010. The share of FDI outflows from the LDCs was only 0.01% of total FDI outflows from the Asia-Pacific region in 2010. What is more, FDI outflows from the LDCs dropped by 20% in 2010 down to $42 million from $52 million in 2009. Bangladesh and Cambodia accounted for over 77% of all outward FDI flows from the LDCs in 2010, though both countries experienced declines in outflows compared to 2009.

C. OPPORTUNITIES AND CHALLENGES

Despite the remarkable increases in FDI flows within the Asia Pacific region, there is still potential for intraregional FDI flows to grow. Sectors such as services, infrastructure and climate-smart goods and technologies continue to offer opportunities for investment (ESCAP, 2011). Advances in technology have facilitated trade in services and the sector has emerged as one of the most important providers of employment and income especially in South Asia (De, 2011; Ghani and Kharas 2010). Ghani and Kharas (2010) argue that two factors will continue to promote the globalization of services. Firstly, services make up more than 70% of global GDP and secondly, technology now allows services to be sold across borders without sellers actually crossing the borders e.g. via the Internet. There is very little data available on FDI flows in services. According to the World Trade Organization (WTO) about 50% of trade in services takes place through commercial presence, i.e. Mode 3 of the General Agreement on Trade in Services. Mode 3 is one of the four modes describing the delivery of services across borders. It is defined as the services provided within a country by a foreign supplier and represents FDI in services (WTO, 2005). According to UNCTAD (2011), overall service exports from developing Asia Pacific countries reached a level of almost $890 billion in 2010 up from $250 billion in 2000. Based on these data, there has been significant growth in FDI in services as well.

Apart from services, infrastructure development not only facilitates and sustains economic growth, but it also plays a large role in poverty reduction as well as in increasing connectivity and economic integration of countries and regions. Thus far infrastructure in the Asia Pacific region has been developed to serve the purpose of establishing global production networks and supply chains. However, after the global economic crisis the focus has shifted to infrastructure projects that support domestic as well as regional demand. Despite large investments in infrastructure, there are still huge opportunities for increased investment. Not only is there a need for basic infrastructure, but there is also a growing need for investing in the maintenance of existing infrastructural assets. Bhattacharyay (2010) estimates that within a period of ten years, from 2010 to 2020, developing countries in the Asia Pacific region38 will need to invest over $740 billion annually in national infrastructure projects. Of this 68% will be needed for new projects whereas 32% will go to maintenance. Most investment is required in

38 Countries include Afghanistan, Armenia, Azerbaijan, Bangladesh, Bhutan, Cambodia, China, Fiji, Georgia, India, Indonesia, Kazakhstan, Kiribati, Kyrgyzstan, Lao PDR, Malaysia, Marshall Islands, Mongolia, Myanmar, Nepal, Pakistan, Papua New Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Tajikistan, Thailand, Tonga, Uzbekistan, Vanuatu and Viet Nam.

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energy and transport. For regional projects, i.e. projects affecting two or more countries, the estimated need of annual investment is $29 billion over the period 2010-2020. Again improvements in energy and transport infrastructure account for the bulk of investment needs. Securing financing remains a challenge. Infrastructure offers huge opportunities for the private sector and FDI. However, according to Fung, Garcia-Herrero and Ng (2011), in order to reap all the benefits, especially from transnational infrastructure projects, investment should be a coordinated effort between private and public players.

Trading and investing in climate-smart goods and technologies (CSGTs) has been attracting growing interest. Recently, large portions of stimulus packages adopted in response to the global economic crisis in various countries, including China, have targeted industries producing CSGTs. In addition, as most of the future infrastructure development needs are within the energy sector, there will be a growing demand for a variety of sustainable energy solutions. Presently, China and Japan dominate intraregional exports in CSGTs, together accounting for 67% of total exports. These countries with the addition of Republic of Korea also absorb over half of the regional imports in CSGTs. Though only a few countries have developed competitive advantages in CSGTs, there are many opportunities for other countries to participate in regional climate-smart value chains. It is estimated that during the period 2010-2050 the Asia Pacific region will need to invest $600 billion in mitigating climate change on top of what is currently invested in order to reach international emission reduction targets (i.e. 450 ppm CO2). Depending on the nature of environmental policies that are adopted and the degree to which they are enforced, CSGTs can potentially offer huge opportunities for business (ESCAP, 2011).

Emerging market transnational corporations (TNCs) are becoming increasingly important as sources of investment funds. Especially, in their home markets these companies enjoy a number of advantages compared to TNCs from developed countries. First and foremost, emerging market TNCs are familiar with the specific needs and preferences of local consumers and have a keener sense of the type of technologies that are most appropriate for developing country conditions. They also know how to operate in politically and economically unstable environments. In addition, emerging market TNCs are often better able to reduce costs than developed country TNCs. Due to these advantages Ramamurti (2011) argues that emerging market TNCs are able to expand their investments in other emerging markets and eventually in developed markets as well. Following the identification of investment opportunities in CSGTs, noted above, climate-smart technologies are among the sectors where emerging market TNCs are gaining an increasingly stronger foothold. For example, companies in China such as Suntech and Sunergy are looking to become leaders in solar energy; while the Indian company Suzlon is one of the top-five wind energy companies in the world (Ramamurti, 2011).

An interesting feature of many TNCs from developing countries is their small size. In fact, an increasing number of corporations start out as small and medium sized enterprises (SMEs) and grow through participating in regional or global value chains, acquiring foreign companies or engaging in FDI. SMEs can draw significant benefits from internationalization, including gaining access to markets and resources otherwise unavailable to them, and enhancing revenue as well as competence and skills. Due to their small size and flexibility, SMEs are also in a better position, compared to larger companies, to channel the benefits derived from internationalization into local communities, especially in terms of technology and knowledge transfer (UNCTAD, 2005). By increasing their participation in global value chains, SMEs can reap the

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benefits of globalization and increased integration in the Asia Pacific region and further contribute to the growth and development of the region (Lim and Kimura, 2010).

Though overall FDI flows in the Asia Pacific region have grown tremendously, obstacles to further growth remain. There is great variation between countries in terms of the processes and regulations that affect FDI. According to the World Bank Doing Business (2012) rankings, which rank countries according to how conductive their regulatory environments are to doing business, the Top 3 countries are all located in the Asia Pacific region, namely Singapore, Hong Kong, China and New Zealand. These countries perform well in terms of the ease of starting a business, dealing with construction permits, protecting investors and providing an overall investment climate that is attractive to foreign investors. Unfortunately, not all countries in the Asia Pacific region fare as well. Several countries rank above the 100s (out of 183 countries) due to difficult trade procedures, lack of investor protection and failure to enforce contracts. Many also struggle with providing adequate access to energy.

Measuring the actual costs of FDI is fairly difficult, but analyzing trade costs can shed some light to the magnitude and prevalence of costs related to trade-related FDI. According to Duval and Utoktham (2010) trade costs between Asian countries are high, though there are notable variations between subregions. Intraregional trade costs are the highest in North and Central Asia39 amounting to 253% tariff equivalent and the lowest in ASEAN, where they reach 175% tariff equivalent. Within the Asia Pacific region the main focus has been on the reduction of tariffs whereas less attention has been paid to the reduction of non-tariff barriers. Duval and Utoktham (2010) estimate tariff costs to range from 0% to 22% compared to non-tariff barriers which vary from 66% to 350%. As tariff costs account for only about 10% of the total costs to trade, the effect of non-tariff barriers on trade remain significant. Efforts to lessen non-tariff barriers such as simplifying procedures and harmonizing regulations, decreasing the amount of red tape and improving infrastructure would also be a step towards addressing the problems and obstacles foreign investors face.

D. THE ROLE OF REGIONAL TRADE AGREEMENTS IN PROMOTING INTRAREGIONAL FDI

The Asia-Pacific region is home to several agreements and treaties aiming at increasing cooperation in trade and investment. Figure 15 shows FDI inflows to major trade groupings in Asia and the Pacific, i.e., the Asia-Pacific Trade Agreement (APTA), ASEAN Free Trade Agreement (AFTA), Economic Cooperation Organization Trade Agreement (ECOTA) and South Asian Free Trade Area (SAFTA) for the years 2000, 2005 and 2010. 40 When combining the four regional trade groups, 28 countries

39 Here North and Central Asia is defined as consisting of Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan and the Russian Federation. 40 APTA has six member countries, i.e., Bangladesh, China, India, Republic of Korea, Lao People’s Democratic Republic and Sri Lanka. AFTA covers all 10 ASEAN member countries. ECOTA has 10 member countries both from North and Central Asia and from South and South-West Asia, i.e., Afghanistan, Azerbaijan, Islamic Republic of Iran, Kazakhstan, Pakistan, Tajikistan, Turkey, Turkmenistan, Uzbekistan and Kyrgyzstan. SAFTA was signed by all eight South Asian countries. See ESCAP (2011a) APTIAD for more details of regional free trade agreements at www.unescap.org/tid/aptiad/agg_db.aspx.

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participate in one or two trade agreements. Unsurprisingly, APTA had the highest FDI inflows of any trade grouping, as it comprises some of the region’s major FDI destinations, including China and India. Despite the global economic crisis, aggregate FDI inflows to all regional trade groups showed positive trends throughout the 2000-2010 decade.

One of the factors supporting this trend has been the addition of investment provisions concerning e.g. investment promotion, protection, liberalization and cooperation in many regional trade agreements (RTAs). These provisions assume special importance among all other areas of expanded coverage of RTAs as investment has traditionally been a sensitive area and all attempts to forge a multilateral agreement on investment have failed. Of those RTAs involving an ESCAP member State, more than 50 have investment provisions.

Figure 15. Foreign direct investment inflows by regional trade agreement

Source: ESCAP calculations based on the UNCTAD (2011a).

The ASEAN Comprehensive Investment Agreement (ACIA)41, which entered into force in 2010, is probably the most advanced regional investment agreement in force among developing countries anywhere in the world. It combines the ASEAN Investment Area and ASEAN Investment Guarantee Agreement and has provisions for investment cooperation, promotion, liberalization and protection. Investment is defined broadly and includes foreign portfolio investment. ACIA is innovative in the sense as it

41 However, ACIA is a separate agreement from the ASEAN Free Trade Area (AFTA) or ASEAN Trade in Goods Agreement (ATIGA) and is part of the actions undertaken towards establishing the ASEAN Economic Community by 2015.

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includes more comprehensive and clearer definitions of concepts, and contains provisions for dispute settlement between States and investors that are among the most comprehensive found in any investment agreement. However, its effectiveness in promoting intraregional investment and linking it to initiatives aimed at closing development gaps within ASEAN has yet to be demonstrated (ESCAP 2011b).

The ASEAN-China Investment Agreement was signed in 2009 as a last in a series

of three agreements that set out to form the ASEAN-China Free Trade Agreement. The other two agreements include the Agreement on Trade in Goods and the Agreement on Trade in Services. The Investment Agreement includes 27 provisions that aim to increase the transparency of investments as well as promote the liberalization and facilitation of investments (China FDI Network 2009). In comparison to the other investment treaties China has signed with individual ASEAN members, the ASEAN-China Investment Agreement notably raises the standards of investment protection (Xiao, 2010). For both China and ASEAN, the ASEAN-China Free Trade Agreement is also the first agreement of its kind that they enter into with foreign countries. Investment flows between ASEAN and China have increased significantly in recent years and the Agreement is expected to further boost these flows (China FDI Network 2009).

The Asia-Pacific Trade Agreement (APTA) has also made progress in the area of

investment. APTA Participating States have all signed the framework agreement on the promotion, protection and liberalization of investment, which is currently in the process of ratification. The framework agreement provides a mandate for the negotiation of an APTA agreement on the promotion and protection of investments. Participating States are presently discussing implementation modalities and time frames of the four schedules contained in the Framework Agreement, i.e., cooperation and facilitation, promotion and awareness as well as liberalization and protection (ESCAP 2011b).

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4. TRENDS IN PROTECTIONISM

Previous issues of APTIR focused on issues of contemporary use of protection because the 2008-2009 economic crisis was expected to open the door for new or increased protectionism globally and regionally. Indeed a number of protectionism measures were identified as being introduced in combination with policies and measures set to ease shocks of the crisis and unfortunately no countries were found to have abstained from using additional protectionist measures, including against other developing or least developed countries (see details in ESCAP 2011b, 2010 and 2009). While the worst of the crisis had passed through, the lingering risks of financial instabilities and weak economic conditions in most developed economies keep the fear of rise of protectionism alive. This volume however does not explore the incidence of new protectionist measures, but instead explores the type and level of border and behind-the-border trade barriers currently used. Traditionally, border barriers in international trade include tariffs and non-tariff barriers. Tariffs or taxes on trade are known as the most transparent barriers to international trade as they are typically expressed in per cent of the value of the traded goods (so-called ad valorem tariffs) and are payable when goods are crossing the borders of customs territories. Over six decades of multilateral negotiations first through GATT and then WTO have led to a significant reduction of tariff rates, more clarity about types of tariffs (e.g. specific tariffs) and predictable rules on level of tariffs to be used or valuation of dutiable goods and other issues. All members of WTO commit to transparency in publishing tariff data, and WTO (in addition to some other agencies) makes the data on tariffs available to public.42

In addition to tariffs, countries impose various non-tariff barriers (NTBs) to constraint imports or exports. Deardorff43 defines NTBs as “any measure that interferes with exports or imports other than a simple tariff, prominently including quotas and voluntary export restraints”. Often a term of non-tariff measures (NTMs) is used with a similar intention to describe obstacles to trade other than tariffs. Deardorff defines the non-tariff measures as “any policy or official practice that alters the conditions of international trade, including ones that act to increase trade as well as those that restrict it. The term is therefore broader than non-tariff barrier, although the two are usually used interchangeably.” Indeed, the examples provided in WTO Glossary online for NTBs, include quotas, import licensing systems, sanitary regulations, prohibitions, and others, and they are also given for the NTMs. Literature has tried to differentiate NTBs from NTMs by describing NTBs as preventing trade flows, while NTMs are perceived as having a potential to do so (as they can potentially have an economic effect on trade by changing quantities or prices, or both). This is a very thin line of differentiation and increasingly experts merge this category as NTMs. What is more important is the way these measures affect trade flows. In contrast to tariffs which are direct tax on prices of tradables, most NTMs act as entry barriers to markets by increasing fixed costs of producers/exports. They are often in form of regulation and thus are imposed “behind-

42 See for example Tariff Profiles, Tariff Analysis Online or Tariff Download Facility at www.wto.org. 43 Deardorff’s Glossary of international Economics available at http://www-personal.umich.edu/~alandear/glossary/n.html

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the-border”. The following sections address some selected issues related to use of protectionist measures and trade costs.

A. EXTENT OF USE OF ZERO MOST-FAVOURED NATION TARIFF RATES

Multilateral trade negotiations have been focused on the following objectives with respect to tariffs as an instrument of protection:

1. Converting non-ad valorem duties into ad valorem duties, 2. Reducing the level of so-could bound duties, 3. Reducing the number of tariff lines with tariff peaks, and 4. Increasing the binding coverage of tariff lines.

Each member of the WTO when agreeing on the terms of the negotiated tariff liberalization or on accession terms commits to apply these terms according to the most-favoured nation (MFN) principle without discrimination (except as allowed by the rules). Equally, countries are allowed to apply better than negotiated tariffs again only by following the MFN clause and its exceptions. Because of that, the tariff rates which countries apply are often much lower than the ones they have accepted as ceiling (bound) rates. However looking at the level of bound rates and coverage of bindings provides good idea about the scope of potential protectionism threat as well as potential magnitude of further liberalization. Namely, if a country has already bound many of its tariff lines at zero rate tariffs (so-called duty-free access), then such country has not much scope to provide any further preferential treatment in terms of market access to any of its trading partners (unless they are not members of the WTO). This section explores the features of bound MFN tariff lines for the Asia-Pacific economies. The analysis reveals that in general a small proportion of tariff lines of Asia-Pacific countries are bound at a level of zero duty. However, it seems that a country’s readiness to commit to duty-free imports is partly associated with either income per capita or an entrapôt nature of the economy. There is a significant share of bound duty-free lines observed in relatively high income economies such as Australia, Japan, New Zealand, Macao, China; and Hong Kong, China. It also appears that agricultural products are given more protection as fewer agricultural tariff lines have bound duty-free MFN rates relative to non-agriculture goods. For most countries, non-agriculture tariffs lines have a larger proportion of bound zero duty than agriculture lines. An exception holds for five regional economies: Australia, Malaysia, New Zealand, Hong Kong, China and Macao, China (see figure 16).

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Figure 16. Share of bound duty-free tariffs in total tariff lines

0

20

40

60

80

100

Austra

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Countries are ordered by real GDP per capita

Per

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NAG duty-free bound

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Source: Tariff data from WTO Tariff Profiles 2011 and real GDP per capita data from ESCAP Statistical Yearbook 2011.

While countries are not yet ready to extensively commit to duty-free bound

MFN tariff lines, they actually apply a large number of duty free lines. Figure 17 shows that the proportion of applied zero tariffs is high for a number of Asia-Pacific economies. There are 13 economies that applied zero duty to more than 50% of the non-agriculture tariff lines. These include Macao, China;, Hong Kong, China; and Singapore, where the duty-free share is 100%, followed by Cook islands (99%), Georgia (97%), Papua New Guinea (83%), Brunei Darussalam (78%), New Zealand (62%), Japan, Malaysia and Tuvalu at about 57% each, Sri Lanka (54%), and Kyrgyzstan (52%). For agriculture products, there are 10 countries that applied zero duty to over 50% of the agriculture tariff lines. The ratio is as high as 100% for Macao, China; Hong Kong, China, and Singapore, followed by 98% for Brunei Darussalam, 91%for Cook islands, 75% for Australia and Malaysia, 71% for New Zealand, 62% for Palau, and 57% for Tuvalu. The large difference between bound and applied duty-free shares reflects that Asia-Pacific countries generally preserve the flexibility to invoke duty on most of the tariff lines for which they currently impose no duties.

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Figure 17. Share of applied duty-free MFN tariffs in all tariff lines

0

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golia

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Source: Tariff data from WTO Tariff Profiles 2011 and GDP data from ESCAP statistical yearbook 2011

Comparisons across subregions are shown in figure 18 and 19. Developing countries in South and South-West Asia and the Pacific have a relatively insignificant proportion of tariffs bound as duty-free (figure 18). However, zero duty is actually applied to a considerable extent of tariff lines in most small Pacific countries, South-East Asian countries, and North and Central Asian countries (figure 19). Based on the applied duty-free ratio, countries in South and South-West Asia appear to be relatively more protective than developing countries in other region in general with an exception of holding for Sri Lanka. Such pattern is more obvious in the case of tariffs on agriculture than non- agriculture tariff lines

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Figure 18. Share of bound duty-free tariffs by Asia-Pacific subregions

Source: Tariff data from WTO Tariff Profiles 2011 and GDP data from ESCAP statistical yearbook 2011.

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Figure 19. Share of applied duty-free MFN tariffs by Asia-Pacific subregions


In contrast to exploring the share of duty-free market access based on share in total tariff lines, it is also possible to explore how much of imports is actually covered by zero duties. The comparisons between the share of duty-free access in total imports and in total tariff lines reveal interesting information about actual liberalization taking place. It can happen that duty-free market access is actually very low even though the respective country has a large proportion of applied duty free tariff lines. Such situation happens when the country intends to give zero tariffs to its irrelevant import products (that is, imports that often do not exist or is very small in value terms) while keeping positive tariffs on other imports. Figure 20 and 21 examine the situation for Asia-Pacific countries for which data are available. It can be seen from figure 21 that for non-agriculture products, the share of duty-free imports is relatively large when compared to the share of duty-free tariff lines.44 Some countries such as Japan, Malaysia and China have actually high shares of duty-free imports and the shares are significantly greater than those of applied duty-free tariff lines.

44 The unsurprising exception are countries that have been already applying zero duty to nearly all lines (Macao, China;, Hong Kong, China, Singapore, and Georgia) and Maldives which is on the other extreme.

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Figure 20. Share of applied duty-free access in terms of tariff lines and imports: non agricultural products

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More variations are observed in the case of agriculture products (figure 22). There are countries where the shares of duty-free imports are significantly lower than the shares of duty-free tariff lines. The countries include Australia, New Zealand, and Kyrgyzstan, where the share of duty-free agricultural tariff lines are 75%, 71%, and 29% , while actual duty free imports account for only 49%, and 21% of agriculture imports. This implies that important imports of those countries are not granted zero tariffs. In contrasts, more than 65% of Indonesian agricultural imports are duty free while less than 14%of the agriculture lines are given zero duty. A significant positive difference is also observed in the case of Azerbaijan, Viet Nam, Pakistan, and Japan.

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Figure 21. Share of applied duty-free access in terms of tariff lines and imports:

agriculture goods

Shares of applied free duty in tariff lines and imports: agriculture

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The above analysis is relevant for the investigations of the potential benefits of expansion of preferential trade agreements (PTAs), especially among the countries in the region. The main purpose of PTAs in the area of merchandise trade liberalization is to grant a PTA partner(s) with better than MFN access (which is allowed due to exemptions such as GATT Art. XIV and Enabling Clause). However, if countries have already committed to zero bound tariff rates for large shares of their tariff lines (or imports), no further concessions could be achieved through PTAs, at least not in terms of tariff elimination. WTO (2011) claimed that “half of world trade is already subject to zero MFN tariff rates” (p.7) making the PTAs less effective with respect to removing tariff obstacles to merchandise trade.45 As above analysis shows, the extent of bound zero MFN tariffs for Asia-Pacific economies averages around 50% but there are still many economies, especially lower-income ones, which bind no tariffs at zero level (or do not bind any tariffs). Therefore, negotiations of PTAs with or among these economies would bring more preferential access (provided that PTAs would include all

45 In fact, the WTO report argues that despite expansion of number of PTAs, still around 84% of global merchandise trade takes place under non-discriminatory MFN terms (p.7). In addition to high share of zero MFN tariffs, the Report argues that PTAs tend to exempt high MFN-tariff items from tariff reductions reducing further share of trade conducted under preferential terms.

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trade). Unfortunately, often PTAs do not include these economies, leaving them to rely on either multilateral or unilateral tariff reduction.46

B. NON-TARIFF BARRIERS

There is much less data on NTBs which prevents comparisons across countries or over time. WTO provides regularly updated information on so-called antidumping (AD) measures through its semi-annual reports on antidumping and on technical barriers to trade (TBT) through the publicly accessible database (TBT_IMS). Despite these two categories of NTMs being very often on the menu of the non-tariff protectionist actions, there are many more measures which should be monitored. While there have been many attempts to organize comprehensive inventories of NTMs, none of these initiatives have (as yet) produced databases equivalent to tariff schedules.47

Based on information available on 23 countries from Asia-Pacific region, they currently implement 623 AD measures and 3614 TBTs (figure 22). The number of NTBs varies across subregions (figure 23). Four countries in East and North-East Asia (ENEA) are imposing 2,082 measures (144 AD measures and 1,938 TBTs). South-East Asia (SEA) follows with 1,077 measures (48 AD and 1,029 TBTs) implemented by seven countries in the subregion. South and South-West Asia (SSWA) ranked third in terms of imposing NTBs with the number of 603 (394 AD and 209 TBTs). Four Pacific and three North and Central Asian (NCA) countries are implementing 319 and 156 measures, respectively. The Pacific islands have imposed 37 AD and 282 TBTs, while NCA used only TBTs.

Figure 22. NTBs implemented by Asia-Pacific region (in force and initiation)

Source: For AD the WTO semi-annual reports on antidumping and for TBT the public TBT-IMS database.

46 It needs to be noted that PTAs offer other areas of trade liberalization, in addition and above tariff reductions so their benefits are not exhausted only by reduction or elimination of tariffs on merchandise. 47 Among the earliest initiatives is UNCTAD’s TRAINS which is accessible through the World Bank’s WITS software application but it has not been regularly updated. A multiagency initiative (MAST) was started in 2006. A report on pilot studies was issued in 2009.

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Technical barriers to trade in principle are non-discriminatory and apply to all trading partners. But anti-dumping measures are applied in respect of particular exporting countries (and in this sense are discriminatory). According to the WTO data, the AD measures applied by Asia-Pacific countries are mostly aimed at other Asia-Pacific countries. South and South-West Asia, for example, have 271 anti-dumping measures in force on other Asia-Pacific countries, and 123 measures in force on countries outside the region. Other subregions (apart from North and Central Asia which have very few measures in force) have similar approaches (figure 23). Countries in East and North-East Asia mostly target countries in their own subregion, while other sub-regions mostly target other subregions.

Figure 23. Anti-dumping practices implemented by Asia-Pacific region (in force and initiation)

ENEA NCA Pacific SEA SSWA0

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Looking further into ADPs affecting countries in Asia and the Pacific, it is found that SSWA, SEA, and the Pacific are mainly imposing ADPs to countries in different subregion (figure 24). In contrast, the majority of ADPs imposed by ENEA countries is targeted at countries within the same region. This is a reflection of the fact countries in the ENEA subregion are a major target of those ADP measures.

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Figure 24. Intraregional Anti-dumping practices of Asia-Pacific region (in force and initiation)

ENEA NCA Pacific SEA SSWA0

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5. MEASURING COMPREHENSIVE TRADE COSTS FOR THE REGION

A. SHIFTING FOCUS TO BEHIND-THE-BORDER BARRIERS

As indicated above, during the past two decades import tariffs have decreased significantly and the importance of non-tariff measures aimed at further reducing international transaction costs, i.e. trade facilitation, has become more apparent. Even if international shipping and other non-tariff costs are excluded, costs associated with completing documentary and other import and export procedures for international trade can account for up to 15% of the value of traded goods (ADB/ESCAP, 2009). Enabling firms to move goods more efficiently from the factory floor to foreign buyers’ warehouses has become essential to capturing and creating new trade opportunities. With the shifting of growth potential away from developed countries to economies within the Asian and the Pacific region, increased attention to intraregional trade facilitation is needed.

Measuring trade facilitation performance precisely, including the costs of international trade transactions, remains a challenging exercise, not least because of the lack of a precise definition and agreement on the various cost components that should be included in the measurement. Comprehensive trade cost estimated by ESCAP account for all additional costs involved in conducting a transaction across borders rather than within borders. Therefore, comprehensive trade cost is a very broad

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aggregate measure of international trade costs including, inter alia, direct and indirect costs related to fulfilling regulatory import and export requirements as well as costs resulting from differences in currencies, languages, culture and geographical distance. Domestic and international shipping and logistics costs associated with imports and exports are also included.48According to that definition, apart from Singapore and Hong Kong, China, the top-ranked economies in the ESCAP Trade Cost Database are Malaysia, the United States, China, the Republic of Korea and Thailand, with Japan and Germany following closely.49 However, trade cost performance of a given country varies significantly depending on trading partners, as well as they type of goods traded.

Overall, trade costs of many economies of the region have decreased, but much remains to be done to address non-tariff barriers (NTBs). In fact, although ESCAP estimates reveal that many economies of the region have made significant progress in reducing costs over the past decade, they also show that in many cases nearly half the cost reduction may be attributed to tariff cuts.50 However, tariff trade costs typically account for no more than 10% of overall trade costs. This is illustrated in Figure 25, which shows that while tariff costs still do affect relative trade cost ranking of selected ESCAP countries with the USA, they often account for a very small portion of overall trade costs. As tariffs continue to fall – in part due to implementation of free trade commitments under the multitude of bilateral and regional agreements that have recently entered into force-, countries aiming to maintain their competitiveness will have to increase their attention to non-tariff trade costs, including those arising from unnecessarily cumbersome procedures and regulations or inadequate logistics services.

At the sectoral level, the costs associated with trading agricultural products across borders are found to generally far exceed those involved in trading manufactured goods, as illustrated in Figure 26. This is partly explained by the nature of the products (e.g., perishability), which can make them harder to trade across borders, as well as the higher level of regulations these products attract for food safety or food security reasons.51 The fact that the cost premium for trading agricultural goods vary so widely from country to country suggests that significant scope for reduction exist in many countries of the region.

48 The comprehensive trade cost estimate is an objective measure based on macroeconomic data rather than perception survey data. 49 For details, see Duval and Utoktham, 2011. 50 ESCAP (2011b), “Facilitating Intraregional Trade”, Asia-Pacific Trade and Investment Report 2011, Chapter 6, p.89-100, United Nations, Thailand. 51 For more details on this issue, see ESCAP (2011d), “Facilitating Agricultural Trade in Asia and the Pacific”, Trade and Investment Studies No. 74.

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Figure 25. Comprehensive Trade Costs (CTC) and CTC excluding tariff costs of trade (NT-CTC) between selected economies and the USA.

0% 100% 200% 300% 400%

Bhutan

Vanuatu

Afghanistan

Kyrgyz Republic

Maldives

Tonga

Azerbaijan

Armenia

Mongolia

Georgia

Fiji

Cambodia

Bangladesh

Sri Lanka

Pakistan

Kazakhstan

Indonesia

Turkey

Russian Federation

India

Vietnam

New Zealand

Thailand

Philippines

Australia

France

China

Korea, Rep.

Japan

United Kingdom

Malaysia

Germany

Tariff-equivalent trade costs (percent)

Comprehensive Trade Costs (CTC) and CTC excluding tariff costs of trade (NT-CTC) of Selected ESCAP Economies with the USA

NT-CTC

CTC

Source: ESCAP Trade Cost Database (version 2)

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Figure 26. Agricultural and Manufacturing Non-Tariff Comprehensive Trade Costs between Selected Economies and Japan

0% 100% 200% 300% 400% 500% 600% 700% 800%

Cambodia

Georgia

Kazakhstan

Vanuatu

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Fiji

Turkey

Maldives

France

India

Sri Lanka

Russian Federation

Germany

United Kingdom

Malaysia

Indonesia

Philippines

China

Vietnam

Australia

Thailand

United States

Korea, Rep.

Tariff-equivalent trade costs (percent)

NT-CTC of Selected ESCAP Economies with Japan

Manufacturing

Agriculture

Source: ESCAP Trade Cost Database (version 2)

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1. Intraregional trade cost remain high52

Intraregional trade facilitation performance varies greatly among the subregions of Asia and the Pacific. However, the non-tariff costs of trade by economies in the region with each other often still exceed those faced when trading outside the region.

According to the latest estimates available,53 non-tariff comprehensive trade costs between China, the Republic of Korea and Japan (East Asia-3) are among the lowest in the world, averaging less than 50% tariff-equivalent in 2007-2009. This is particularly remarkable given the absence of free trade agreements between those countries during that period. ASEAN has also achieved high levels of international trade efficiency among its largest middle-income members (i.e. Indonesia, Malaysia, the Philippines and Thailand, or ASEAN-4), but average trade costs among the larger ASEAN membership, including in particular its two least developed countries, is still more than double those among East Asia-3. Intraregional trade costs among North & Central Asia, at 149%, are highest in the region, followed by those among South Asian countries, at 113%.

Comprehensive intraregional trade costs are usually expected to be lower than interregional trade costs due to the geographic proximity between countries of the same region as well as similarities in languages and culture. Table 16 shows that this holds true among Asian subregions, with one small exception: comprehensive trade costs of ASEAN-4 with East Asia-3, and China in particular, are found to be slightly lower than ASEAN-4 intraregional trade costs. However, the costs of trade between Asia-Pacific economies of different subregions are higher than those with non-Asia-Pacific economies or subregions. For example, the non-tariff costs of trade between ASEAN and SAARC are on average nearly double the costs of trade between ASEAN and the USA. Similarly, the costs of trade between North & Central Asia and South Asia are more than twice those between North & Central Asia and the European Union.

52 Here “regional” refers to more narrowly defined subregions within Asia and the Pacific, such as South-East Asia (or ASEAN), South Asia, North & Central Asia etc. 53 ESCAP Trade Cost Database (Version 2) released in Dec. 2011. For details, see Duval and Uthoktham (forthcoming), “Trade Costs in Asia and the Pacific: New bilateral and Sectoral Estimates”.

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Table 16. Non-tariff intra- and extraregional trade costs in Asia and the Pacific, 2007/2009

Region ASEAN-4 East Asia-3 North & Central Asia SAARC-4 AUS-NZL EU-3 USA

ASEAN-4 79% 73% 291% 134% 90% 97% 77%

(-9.5%) (-5.9%) (-14.2%) (2.1%) (-12.3%) (-4.9%) (3.0%)

East Asia-3 73% 47% 187% 119% 78% 70% 53%

(-5.9%) (-21.1%) (-32.7%) (-2.8%) (-15.7%) (-19.0%) (-13.5%)

291% 187% 149% 270% 270% 149% 165% North & Central Asia (-14.2%) (-32.7%) (-20.5%) (-22.4%) (-22.2%) (-26.0%) (5.0%)

SAARC-4 134% 119% 270% 113% 130% 101% 99%

(2.1%) (-2.8%) (-22.4%) (5.0%) (-2.7%) (-3.2%) (5.9%)

AUS-NZL 90% 78% 270% 130% 45% 89% 82%

(-12.3%) (-15.7%) (-22.2%) (-2.7%) (-23.5%) (-17.0%) (-11.1%)

EU3 97% 70% 149% 101% 89% 32% 51%

(-4.9%) (-19.0%) (-26.0%) (-3.2%) (-17.0%) (-32.6%) (-18.2%)

USA 77% 53% 165% 99% 82% 51%

(3.0%) (-13.5%) (-17.3%) (5.9%) (-11.1%) (-18.2%)

Source: ESCAP Trade Cost Database (version 2). Note: Trade costs may be interpreted as tariff equivalents. Percentage changes in trade costs between 2001/2003 and 2007/2009 are in parentheses. ASEAN4: Indonesia, Malaysia, the Philippines and Thailand; East: China, Japan and Korea; NC (North and Central Asia): Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, and Russian Federation; SAARC4: Bangladesh, India, Pakistan and Sri Lanka; AUS/NZL: Australia and New Zealand; EU3: France, Germany, and the United Kingdom; Percentage change in parentheses relative to 2001/2003.

All subregions in Asia and the Pacific made progress in reducing non-tariff trade costs with at least two other subregions between 2001/2003 and 2007/2009. North and Central Asia, the subregion with the highest international trade costs, made significant progress in reducing both its intra- and extraregional non-tariff trade costs during that period. Interestingly, trade costs decreased by nearly 34% between East Asia-3 and North & Central Asia during the period reviewed, the highest improvement among all pairs of subregions reviewed. Although its trade costs are significantly lower than those of North & Central Asia, South Asia made least improvements overall and is the only Asian subregion that is found to have made no significant progress in cutting non-tariff trade costs.54

Barriers to trade are being reduced at and behind the border

Improving at-the-border and behind-the-border procedures is at the core of trade facilitation, as defined in the ongoing WTO negotiations on that subject. The time it takes to complete all trade procedures involved in moving goods from factory to ship at the nearest seaport – or vice versa – in Asian and Pacific developing economies decreased on average by more than 18% between 2005 and 2011. South-East Asia made the most progress, cutting its average time for completing trade procedures to 20 days. Cambodia and Thailand cut their time by more than 40% during the same period. India and Pakistan achieved improvements of a similar magnitude, although trade procedures

54 Taking into account tariff costs, it did make improvements in cutting overall trade costs from 152% in 2001/3 to 139% in 2007/9.

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in South and South-West Asia still take 50% more time to complete than in South-East Asia (30 days). No significant progress was made in the Pacific. The mainly landlocked economies of North and Central Asia, made some small improvements, but the time taken by most of the economies of that subregion to clear procedures for moving goods to a seaport remains lengthy (50 days on average).55

Overall, while significant progress has been made, it still takes three times longer to complete trade procedures in Asia-Pacific developing economies than in Asia-Pacific developed economies (Australia, Japan and New Zealand), suggesting that there is considerable room for improvement.

The direct cost of completing procedures for moving goods from factory to seaport increased marginally in most Asia-Pacific economies between 2005 and 2011, ranging from $642 per container in South-East Asia, to more than $2,300 in North and Central Asia. This may be partially attributable to an increase in the cost of labour, increased demand for logistics and transport services as trade volumes increase, and exchange rate fluctuations in some cases. During 2005-2011, average costs increased the most in economies of South and South-West Asia, rising by 22%. In North and Central Asia, the costs of completing trade procedures increased by an average of 15%.

Interestingly, no significant differences are found between export time or cost, and import time or cost in most economies of the region.56 This suggests that most Governments now recognize the benefits associated with import facilitation, an often essential component of strategies aimed at increasing the participation of local firms in production networks and higher-value exports. Import procedures still tend to cost more than export procedures in most economies of the region, arguably because of the regulatory controls applied to imports. However, as of 2011, import time is found to be equal or shorter than export time in as many as 26 economies in the region, including in Malaysia, Pakistan, Kazakhstan and Solomon Islands, suggesting that those countries have taken steps to enhance border clearance procedures.

B. IDENTIFYING POLICY PRIORITIES FOR REDUCING TRADE COSTS

How can further improvements be made in reducing trade costs? What measures and policies would be most effective in doing so? A wide range of factors affect the level of trade costs between two partner countries, which makes it particularly difficult to answer these questions.

Some of the cost factors are inherent to the location, culture or history of the trading partners and may be difficult to address through policy, at least within a reasonable time frame. These costs are sometimes called “natural” trade costs. Other cost factors, such as tariff rates, the availability of logistics infrastructure and services, a favorable exchange rate, a conducive business environment, or transparent and streamlined border procedures, may be influenced by policy makers. Research

55 Importers and exporters also often face cumbersome business and investment procedures at home, which sometimes have an even larger adverse effect on trade than the trade-specific procedures (Duval and Utoktham, 2010b). 56 E.g., see the import/export cost and time ratios presented in APTIR 2011, Part III, Table 23.

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undertaken by ESCAP suggests that tariff trade costs in Asia and the Pacific generally account for 0 to 10% of bilateral comprehensive trade costs, while other policy related trade costs (i.e., of a non-tariff nature) account for 60 to 90% of bilateral trade costs. Natural trade costs vary widely depending on the partner countries considered, but account on average for more than 20% of trade costs.

Figure 27. Contribution of Various Policy-Related Factors to Changes in Trade Costs

Source: Duval and Uthoktham (2011), Note:*illustrative based on casual observation of the data only. Natural trade costs for landlocked countries may be outside the range shown for natural trade costs.

Figure 27 shows the estimated contribution of various policy related factors to changes in trade costs, based on an econometric analysis of ESCAP comprehensive trade cost data. The results strongly suggested that improving access to efficient maritime services (liner shipping connectivity) as well as to information and communication technology facilities are essential to making progress. This is likely to be challenging in many least developed countries given the financial cost associated with the development of the required hard infrastructure. However, policies aimed at liberalizing logistics and information technology services and increasing competition among service providers should be readily considered, with a view to maximizing efficiency at any given level of hard infrastructure development. Establishment of public-private partnerships to accelerate the development of the national information technology and the transport and logistics infrastructure may also be actively pursued. For landlocked countries, close cooperation with transit neighbors will remain essential in improving access to maritime services and bringing its trade costs to more competitive level.

The analysis also confirmed that, given limited resources available, focusing on improving the overall business environment may be often more effective in facilitating trade than implementing soft measures solely targeted at speeding up movement of goods between factory and the port (or vice-versa). Measures to facilitate access to trade finance

0-10%*

60-90%*

10-30%*

Tariff Trade Costs

Policy-Related Non-Tariff Trade Costs

Natural Trade Costs (Geographical and Cultural

Factors)

Direct Behind- & At-the border Trade Costs

1%

6-7%

6-7%

16-18%

52-57%

Availability/use of ICT Services

Business (Regulatory) Environment

Maritime Connectivity/Services

Other Trade Costs - Indirect cost of trade procedure - Currency fluctuation - Other non-tariff barriers

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and financial services were found to be of particular importance in reducing trade costs and may therefore be prioritized.

Interestingly, the direct cost of moving goods from/to factory to/from ship deck, including inland transportation, customs clearance and preparation of documents, is significant but ultimately only accounts for about 1% of the variation in non-tariff policy-related trade costs overall. The result highlights that what matters most is not the direct cost of completing the procedures, but the indirect and hidden costs associated with them (e.g. the reluctance to engage in trade in new, more regulated, or perishable products because of uncertainties regarding the time and costs of the trade process or the lack of transparent procedures). Disentangling these indirect and hidden costs remains a challenge. However, the fact that more than 50% of the changes in non-tariff policy-related trade costs across economies were not captured by the relatively wide-ranging trade cost factors included in the study suggests that they play a crucial role in trade facilitation.

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6. ASIA-PACIFIC AND TRADE AGREEMENTS

As discussed in the previous APTIR issues, Asia-Pacific region appears to be fragmented into several areas which have distinct geographical, political, cultural and historical features. Each subregion also enjoys different level of intraregional trade and economic integration which is often not proportional to a number of preferential trade agreements among the economies in a subregion. For example, the most intensive intra-regional trade is among economies of East and North-East Asia, which do not have any agreement connecting all of them. 57 In contrast, other subregions have at least one regional trade agreement connecting all subregional economies. However the intensity of intraregional trade among the partners of these agreements in general is low and also varies a lot among the agreements (see Table 17).

Table 17. Share of intraregional exports in total exports of selected PTAs

(Percentage)

2009 2010

APTA 11.7 12.2

ASEAN 25.0 26.6

CISFTA 18.5 18.0

ECOTA 7.4 6.7

EurAsEC 10.6 9.3

PACER 7.5 6.8

PICTA 11.2 9.4

SAFTA 5.6 6.3

Source: ESCAP's calculation based on UN COMTRADE data downloaded from WITS.

A. STYLIZED FACTS

As of end of March 2012, Asia-Pacific economies have put in force a total of 142 trade agreements at bilateral and plurilateral or regional levels. These are some of the interesting “factoids” on Asia-Pacific regionalism:

Economies of Asia and the Pacific are associated with almost 219 agreements, of which 142 are in force, and the rest are at various stages of negotiations.

There are currently 112 bilateral trade agreements in force, 45 of which are signed with an economy outside Asia and the Pacific. Turkey has the largest number of trade agreements with “non-regional” partners, followed by Central Asian economies. Other Asian countries, when signing agreements with partners outside the region, target mostly partners in Latin America.

Number of average trade agreements under implementation is 7.1; 50 out of 58 regional members and associate members of ESCAP have already put in force at least one trade agreement. Singapore now shares the top rank with Turkey with

57 This may soon change as the three largest economies from that subregion, China, Japan and the Republic of Korea have been sending signals about starting negotiations of the tripartite FTA.

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the largest number of agreements under implementation (20) followed by India (17) and Thailand (16). Not all of these are notified to the WTO.

There are 15 regional and plurilateral trade agreements, and the average number of countries per agreement is 8.1 (maximum is 15, and minimum 3).

Most of the agreements (71 out of 142) are declared as free trade agreements covering only goods liberalization, and another 41 cover goods and services liberalization. Only 17 are declared as having partial scope.

There are only 3 customs unions, one of which is between a country and another regional block (Turkey-EU).

Noodle bowl gets fuller fast, as more and more countries add agreements with same partners (in different configuration) and there has been no initiative towards consolidation of agreements, to reduce the number of those with the same membership.

More information on types and scope of Asia-Pacific regionalism is provided in the attached tables and figures.

Table 18. Number of agreements by type showing “depth” of liberalization

Type of agreement Number Share (%) Free trade agreement /area 71 50 Free trade agreement and Economic integration agreement58

41 29

Partial scope agreement2 17 12 Framework agreement 10 7 Customs union 3 2 Total in force 142 100

58 Economic Integration Agreement is agreement covering services trade liberalization (using WTO terminology). Partial scope agreements are typically South-South agreements notified (or meant to be notified) under the Enabling Clause (and thus implicitly meaning that they might not meet one or all of the conditions of the GATT Article XIX). It is also necessary to note that some FTA are notified under the Enabling clause.

74

Figure 28. Break-down of trade agreements by type and scope

5

1 2 1

66

31

3 2

6

9

0

37

60

0

10

20

30

40

50

60

Free trade agreement Free trade agreement andEconomic integration

agreement

Customs union Framework agreements Partial scope agreements

BTA RTA Country-bloc

Table 19. Number of members in plurilateral and regional trade agreements

Regional /plurilateral trade agreements

Number of members

D-8 PTA 8

PTN 14 APTA 6 ASEAN 10 BIMSTEC 7 CISFTA 11 ECOTA 10 EURASEC 5 GUAM FTA 4 MSG 4 PICTA 12 CU RUSSIA-KAZAKHSTAN-BELARUS 3 SAFTA 8 SPARTECA 15 Trans-Pacific SEP 4 Average number of members 8.1

75

Table 20. Number of agreements in force and under negotiations per economy59

59 Number of agreements in force and in total includes the GSTP (a global agreement), which was not taken into account in the previous tables. American Samoa, French Polynesia, Guam, New Caledonia, Northern Mariana Islands and Timor-Leste do not report any trade agreements. Total number of agreements also includes pending agreements when they exist. Average calculated only for economies with 1 or more agreements.

76

Figure 29. Number of agreements per Asia-Pacific economy

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77

Figure 30. Asia-Pacific “noodle bowl”

78

B. TRADE FACILITATION PROVISIONS IN TRADE AGREEMENTS

While it is now widely acknowledged that trade facilitation begins at home, it has long been recognized that additional benefits could be reaped through bilateral and regional cooperation on trade facilitation. The full benefits of Single Windows and other electronic trade data exchange systems cannot be achieved until electronic data and documents in a national Single Window is accepted by authorities in the partner country. While international standards have been developed to address technical issues related to cross-border data exchange, little progress has been made in developing an appropriate international legal framework for the cross-border electronic exchange of trade data and documents. Indeed, the pioneering ASEAN Single Window initiative, which aims at developing a regional Single Window environment for its member countries by 2012, has struggled to establish the necessary legal basis for electronic exchange among participating member countries.

Most preferential trade agreements – and economic partnership agreements – among economies of the region now include trade facilitation provisions (figure 33 and chapter 8 in APTIR 2011). The latest ASEAN Agreement on Trade in Goods, which came into force in 2010, includes an entire chapter on trade facilitation. The third round of negotiations of APTA also resulted in a Trade Facilitation Framework Agreement among its six members (Bangladesh, China, India, the Lao People’s Democratic Republic, the Republic of Korea and Sri Lanka) in 2009.

Figure 31. Number of bilateral/regional trade agreements with trade facilitation provisions in Asia and the Pacific

Source: Duval (2011)

A comparative study of recent RTAs conducted by ESCAP found that all agreements commit to increasing transparency, including through an obligation to publish laws and regulations affecting trade. They all also recognize the importance of using international standards for trade facilitation. Other measures that appear to be

79

increasingly common include those on automation/use of ICT, risk management, advance ruling and Single Windows.60

Transit facilitation measures are, in general, not specifically covered in trade agreements, although they are essential, particularly with regard to intraregional trade facilitation. While separate bilateral and regional transit agreements are often in place among developing economies of the region, the extent to which they are implemented – as well as their consistency with existing multilateral trade commitments (e.g. WTO, GATT Article V) – is not always clear. Significant barriers to transit trade remain in place in South and Central Asia. South-East Asia has made more progress in facilitating transit trade through a mix of bilateral, subregional and regional agreements and initiatives. However, reports from logistics operators that the comprehensive GMS Cross-border Transport Agreement is still not fully operational, although it was signed more than half a decade ago, shows how difficult it is to facilitate cross-border trade and transit. Apart from political will, a main issue impeding implementation of effective transit systems is the lack of collaboration between trade, transport and/or customs authorities and the limited involvement of local (at-the- border) public and private stakeholders at early stages of negotiations.

Overall, in most agreements, trade facilitation provisions in RTAs are still of a “best endeavour” nature, making it difficult to assess the extent to which they are implemented. Short of making trade facilitation measures unconditional, advancing trade facilitation as part of an RTA may best be done by setting a strong institutional mechanism through which procedural issues will be identified and addressed, after an agreement enters into force on a regular basis. Action plans and peer reviews would then be part of the institutional framework put in place, as would be the establishment or designation of a national trade facilitation body/committee – which would ideally be the same for all RTAs that a particular economy enters into. The ASEAN Agreement on Trade in Goods and its detailed commitment to implement a Trade Facilitation Work Programme is interesting in this regard, as it provides a specific way forward in order to ensure that progress is made in actual implementation of the many trade facilitation measures mentioned in the agreement.

At least in the initial stage of bilateral or regional cooperation on trade facilitation, a pragmatic approach may be most effective. In the case of neighbouring countries, for example, a starting point can be informal meetings between customs officials on both sides of the border to agree on common operating hours and days. As trust builds up, this may then be followed by discussions on more advance border measures, such as an agreement to adopt single-stop customs clearance procedures at the border – with inspection and clearance of shipments being carried out jointly at one place and one time – instead of separately on each side of a border. Such advanced trade facilitation measures, however, are often difficult to put in place, highlighting the need for coordinated support from regional organizations in this area.

60 For more details see Duval, 2011.

80

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