Bilateral and regional free trade agreements (FTAs) have been proliferating at an astonishing rate across Asia in recent years. But how many businesses in the region are actually utilising them? And of those that are, how much of a difference are they making to their trading activities?
Intra-regional trade is of enormous importance to businesses operating in Asia. Between 2007 and 2009, for example, a United Nations report claims that the average share of intra-Asian exports for total merchandise exports was around 50% in developing Asia.
These figures would suggest that the introduction of regional and bilateral FTAs may potentially be of substantial benefit to Asian economies, as well as the exporting businesses operating within them. A growing understanding of this fact – as well as the need to bolster intra-Asian trade at a time when a number of western economies are still yet to emerge from recession – can perhaps help explain why there has been such an enormous proliferation in such treaties in recent years. The Asia Regional Development Centre (ADIC) website, for instance, which tracks developments in this space, lists 119 FTAs as being “signed and in effect” across the continent. A further 25 FTAs have been signed but are not yet in effect, while negotiations have been initiated for another 56 agreements.
Given the enormous amount of attention FTAs have received of late, not to mention the time and the effort that goes into negotiating them, it seems a little strange that until now, the effectiveness of such agreements for exporters has not been adequately explored. In fact, the first notable effort to do so came only this month with the publication of an HSBC-sponsored study, conducted in the first quarter of 2014 by the Economist Intelligence Unit (EIU). What was unearthed by the study should certainly give policy makers involved in drafting FTAs some pause for thought.
“We conducted this survey because we wanted to look at FTAs from the point of view of business,” explains Noel Quinn, Head of Commercial Banking, HSBC, Asia Pacific. “We wanted to find out whether or not businesses felt these agreements were beneficial to them, whether they understood them, and how they would like them to progress going forward.”
The survey revealed that among the 800 businesses – large and small – that were surveyed across a total of eight different jurisdictions, the FTAs that have been established had only a 26% utilisation rate. If you dig down a little further into the data, bilateral FTAs, the agreements that have been most common across the continent, had only a 19% utilisation rate. Does this apparent lack of enthusiasm for FTAs from the region’s exporters reflect the fact that exporters see no value in the agreements? Other findings suggest that this is not the case. Of the 26% who use FTAs, 86% reported that their exports had seen an increase as a consequence of trading under the terms of the agreement. An additional 24% told the researchers that they their exports had increased significantly as a result of their participation.
Why then, if the benefits are indeed so tangible, are more businesses not embracing FTAs? “I think much of the challenge is communication,” notes Quinn. A typical FTA, for example, will consist of a multitude of detailed legal provisions on what goods qualify, the process for qualification, the types of documentation required and so on. The complexity – and sometimes conflicting nature – of such provisions is perhaps why 44% of respondents said that they have little or no understanding of the FTAs that their country has signed, or having never even heard of one or more of the agreements.