Why Business Needs to Remain Involved in Trade Agreements

While we wait for the possible closure of the Trans-Pacific Partnership (TPP) negotiations next week (fingers crossed!), it is worth pondering why businesses must be engaged as much as possible in the process of negotiations.  Without business input and pressure, officials are likely to create a final agreement that does not suit the needs of companies on the ground.

Completing an agreement is only half the battle.  Once the texts are finished, participating countries must take steps to implement their commitments.  Without business pressure, implementation measures are often half-hearted or even non-existent. 

We can see these problems in different settings across Asia.  Take, for example, trade facilitation efforts.  Asian governments have made promises to speed up and reduce costs associated with moving goods across borders in this region. 

The trade facilitation agreement (TFA) signed with great fanfare in Bali, Indonesia, in December 2013, is still awaiting ratification and implementation.  This is a signature achievement of the World Trade Organization (WTO) after more than a decade of negotiations. 

On September 18, Liechtenstein became the 17th country to have taken official steps to move the agreement towards implementation.  The agreement requires 2/3 of the WTO membership before the deal actually enters into force.  This means that more than 140 additional countries must agree to participate—preferably before the end of this year—before any of the provisions in the agreement can be activated.

While this agreement may bring substantial benefits for businesses, especially in many developing countries where getting goods across borders remains slow and expensive, businesses have not been particularly active in pushing TFA. 

In general, businesses long ago lost interest in most of the agenda under discussion at the WTO.  This is not, I will hasten to add, necessarily because the agenda itself is unimportant.  Mostly, I think, it’s because companies do not have the same type of time horizons that the WTO seems to operate on these days.  No firm can afford to spend a decade pushing topics without any clear returns from this investment.

But the net result is a bit of a chicken-and-egg dilemma.  Governments are not going to rush to negotiate or implement an agreement like TFA absent business interest.  However, businesses are loath to push on TFA without clear signs that the payoff will arrive shortly.  There is frankly little upside to convincing corporate bosses that your efforts helped Liechtenstein sign an agreement.

Another problematic area of trade facilitation can be found in ASEAN.  Although the 10 members of ASEAN made a commitment in 2005 to create by 2012 what are called National Single Windows (NSWs) for trade, not all members have actually implemented these provisions.  NSWs are intended to make it easier for firms to move goods by allowing the entry of data only once and the simultaneous processing of that information by all the relevant agencies so that arriving goods can clear customs speedily. (Note that NSWs are only the first step, as ASEAN also pledged to hook them together and create an ASEAN-wide Single Window.)

Despite significant efforts and the involvement of the ASEAN Secretariat and various ASEAN Dialogue Partners like the United States, Vietnam’s launch of its own NSW earlier this month meant that only 7 of 10 members officially have active systems.   Even here, the record from the ground is less impressive, as many businesses report obstacles to using NSWs.

Again, part of the problem has been getting significant business pressure mobilized to ensure that ASEAN governments implement commitments in a timely manner.  Businesses that have been active in this issue could be feeling burned by the extensive time it has taken for their efforts to bear fruit in the form of faster and easier trade facilitation in ASEAN.

Ironically, however, trade facilitation ought to be one of the easier topics for mobilizing business engagement with trade officials.  After all, delays at the border are obvious and costly.  It is relatively easy for a firm to show the impact of reducing barriers to their own supplies and goods at customs. 

Other elements of the trade agenda can be much harder for businesses to push.  For example, while it may be true that opening up services sectors will result in substantial benefits, even for manufacturing companies, it is harder to show clearly the bottom line impact of doing so.  Hence, getting firms to mobilize behind broader trade negotiations can be tough.

Larger agreements could result in greater benefits for companies, but they come with a trade-off:  bigger deals take longer to produce an impact.  The TPP negotiations have been under way for more than five years.  Even if we get a deal next week, the fastest timelines for implementation and entry into force is likely to be in mid-2017. 

One thing, however, is quite clear.  Absent business interest and mobilization, trade agreements are less likely to meet the needs of businesses today.  Officials will try to negotiate better deals, of course.  No one ever announced their intention to create “low quality, 19th century” outcomes. 

But getting better provisions requires sustained attention from businesses and governments.  The other megaregional agreement under negotiation in Asia, the Regional Comprehensive Economic Partnership (RCEP), is going into the 10th round of talks in Busan, South Korea.  Officials have largely had limited contact with many of the companies in this region that are likely to have an interest in RCEP rules.

We are holding an event at RCEP on October 14 in Busan that seeks to bring together regional businesses and government officials engaged in this trade negotiation for the first time.  (To register to attend, please visit our website http://www.asiantradecentre.org/event-registration/ )  

Without better connections between government and businesses in the region, RCEP runs the risk of creating a trade agreement not particularly well suited to the demands and interests of the business community.  Given that trade agreements are primary intended to be a vehicle for facilitating trade by companies, a low-quality outcome in RCEP accompanied by little business interest would be an enormous missed opportunity. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Doesn’t Always Take Two to Tango: Unilateral Trade Policies and Indonesia

The current obsession with trade negotiations (okay, maybe it’s mostly our obsession) may have obscured the fastest, often easiest way for governments to make their domestic economies more competitive:  governments can act on their own to create more favorable trade environments. 

In the past, many Asian governments were at the forefront of making unilateral changes to their domestic economies.  Singapore and Hong Kong, for example, slashed applied tariffs to zero absent external demands for them do so.  Others opened or liberalized sector after sector to promote inward investment or spur domestic competition.

But much of this unilateral spirit of reform appears to have dissipated.  Governments now prefer to wait to make changes until some foreign partner requests reform.  It may appear to be easier to make politically and economically hard choices with a foreign party to absorb some of the “blame” for any short-term pain. 

One government official said me a few years ago, “Yes, we know that a 2% tariff is really just a nuisance.  It probably costs us more to collect the tariff than the revenue it generates.  It is an administrative hassle for firms.  But if we get rid of it, what will we use as a bargaining chip when we engage in trade negotiations?”

I tried to argue that eliminating nuisance tariffs does not automatically mean that no one will do a free trade “dance” with you in the future.  Singapore did not get more than 20 active FTAs by stripping away 2% tariff levels for preferred partners in an FTA.  There is more to a trade deal than tariff reductions, after all, and win-win outcomes can be achieved in a whole range of sectors and issue areas.

One particularly promising area for unilateral reforms can be found in regulations.  For most companies today, the biggest headaches are not tariff levels or official customs procedures or registering for protection of intellectual property rights.  Instead, the hassle factors that are most pertinent to firms tend to be regulatory in nature.

Such regulations may include rules for licensing of all sorts.  Such rules may mean that you can import this item, but only if you first hold a valid permit for doing so or you may invest in a sector but only after appropriate licenses for operation are in place.   Other regulatory barriers could be rules that require goods be transshipped through only one port or only after inspection of paperwork or goods by specific ministries.

This is not to argue that regulations are not needed or necessary.  Government, as always, retains the right to regulate in the public interest and to safeguard the interests of human, animal and plant life and health. 

However, the thicket of regulations in many markets clearly extends well beyond what is strictly necessary in many countries around the region.

For example, nearly every firm that speaks to us can relate some good stories about nightmare regulations in Indonesia.  These range from the large to the small hassles, time and cost needed to try to comply with the rules.  The forest of regulations ensnares firms in nearly every sector and applies to both big and small companies.

The Indonesian government of Joko Widodo (Jokowi) has recognized some of the problems.  The National Development Planning Minister Sofyan Djalil just highlighted more than 2700 regulations and presidential and ministerial decrees that were “inimical to economic activity.” 

That is surely an impressive number of identified obstacles to trade and economic growth. 

Partly in response, Jokowi has begun rolling out a three-part package of unilateral economic reforms to tackle the problems of excessive regulation.  The first package was revealed with great fanfare last week.

It includes the drafting of 91 new regulations and 89 regulations to be amended. 

It could be argued that the creation of nearly 100 new regulations is not a particularly promising way to start clearing away 2700 existing, identified problematic rules.  But, of course, much depends on which rules are being tackled and whether or not the first set of reforms gets at some of the key obstacles to growth or simply nibble around the edges.

Indonesia has ample room for improvement.  It ranks 114 of 189 on the World Bank’s ease of doing business (well below most other ASEAN members) and has been hit by a sharp decline in the value of the rupiah and reduction in the amount of inward foreign direct investment.  Arianto Patunru and Sjamsu Rahardja highlight some selected non-tariff measures and local content requirement rules imposed in Indonesia since 2009.

Last week’s announced policy changes are largely intended to push up demand and not, as Chris Manning has argued, to increase competitiveness of domestic companies.  Changes include greater collaboration between central and local governments around price controls for products like beef, changes in banking to allow easier foreign currency account creation, and the provision of funds to citizens by raising the tax-free thresholds for the poorest citizens as well as newly expanded cash-for-work schemes.  The reform policies are not completely worked out yet, so it is not entirely clear what will be on the table, nor the level of implementation to be expected.

This package of reforms are meant to be overseen by a new economic policy deregulation center set up at the Office of the Coordinating Economic Minister.  The office will also assist with the roll out of two additional packages of reforms due in the next few months. 

The Jakarta Post responded with an editorial to urge the government to take the new deregulation center seriously.  It could implement reforms urged by the OECD in 2012 to evaluate regulations across ministries and to improve regulatory outcomes.

The consequences of successful reform could be quite substantial.  Indonesia’s large, youthful population and ample natural resources provides a platform for significant rewards.  McKinsey and Company has suggested that the country might become a Group of Seven economy by 2030.

As our conversations with companies have revealed, getting there will require unilateral reforms.   The announced regulatory changes are important, but must go substantially deeper and further for the real payoff to occur. 

*** Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Bargaining Over Services in TiSA

This week, President Tabare Vazquez agreed to withdraw his country from ongoing negotiations over services.  Uruguay will now notify the other 24 members[1] of the Trade in Services (TiSA).

This presents a good opportunity to examine TiSA.  Negotiations got underway in 2013 out of a shared frustration with a lack of progress in global trade talks for services coupled with a desire to push forward new, better suited rules for today’s interconnected, globalized economy and to give services an improved platform for growth. 

Services are an increasingly vital part of international trade.  The Asian Trade Centre has been part of an ongoing research project to track how much of the content of manufactured items like auto parts, aircraft engines, printer dyes, outdoor jackets, watches, whiskey, or making a table comes from services.  The full project will be out soon, but what has been particularly striking from this case study research is how much value is tied up in services content.

We often think of goods as physical items only—something you can drop on your foot and have to transport across borders in trucks, trains or ships.  But it turns out that for many value or supply chains today, at least half and perhaps as much as 80 percent of the value of a good is actually derived from services.

Such services can include research and product development, managing human resources, cleaning, security, distribution, logistics, warehousing, retail, and even after sales service and repair. 

TiSA members together contribute more than 70% of global trade in services.  For most, services also constitute a significant portion of domestic output contributing substantial numbers of jobs and generating important revenue for companies both large and small.   

Despite the critical importance of services, global rules for services remain underdeveloped and often lacking.  In part this is because services are devilishly hard to see and measure. 

Take examples from the Asian Trade Centre.  Our brochure was designed by a graphic artist in Pakistan, connected to us through an Australian online platform (www.freelancer.com).  Our website is hosted by an American company (Squarespace) and this blog is distributed by a different US company (MailChimp).  [All are receiving unsolicited endorsements.]  The blog content is written by me sitting in my lovely office today in Singapore and distributed to readers all across the globe. 

So how would available data capture all these services?  The short answer is not very well at all. 

In the mid-1980s when government officials were trying to design the first batch of global rules to govern trade in services,[2] most of what I just described would have been unimaginable.  Or, rather, some of the services might have been possible but the methods of delivery, the scale and the scope would not.

Consider Freelancer.  This company currently brings together more than 16 million people in 247 countries to provide a wide range of services from software writing and data development to engineering and accounting.  Connections can happen instantly and millions of files, pages, images, and data points are moving around and across borders daily.

At the time of the Uruguay Round negotiations, however, officials could mostly imagine delivering services via post, land line telephones or, perhaps, fax machines.  Otherwise, the primary methods of getting services to travel across borders meant the movement of people—I might travel to another country for medical treatment or to deliver a stakeholder workshop in Korea for the next RCEP round (currently planned for October 14 in Busan, by the way!  Stay tuned for details).  Or I might invest directly in a company, or travel temporarily as a business employee of a big firm to set up a project.

In short, officials were struggling with how to categorize services and to understand how they might be delivered across borders.  Hence the rules they created in the 1980s and early 1990s were rather crude.  Whenever I have to explain to businesses how services are broken up in the rulebook, I am usually met with blank stares.  In addition, services commitments suffered because governments were reluctant to commit to much, as no one was entirely certain about what might happen.

This is a long way round to explaining why services were part of the “built in” agenda for the start of a new round of global trade negotiations.  These talks started in Doha, Qatar, in November 2001, and have been moribund for a very long time.

Countries that are active in services trade became increasingly unsatisfied with old rules and limited market access commitments.  Unable to push forward the broader global negotiations, a handful of key countries decided to start parallel talks outside the WTO in Geneva.  These parallel talks, now called TiSA, might eventually be brought back into the WTO.

I don’t have room here to delve into trade geek obsessions with how TiSA can be reconnected with the WTO, but suffice to say that officials are trying to craft an agreement that unleashes more economic growth for services for the members while remaining conscious of likely issues and interests from the broader community. 

After 13 rounds of TiSA, the jury remains out on how successful officials are likely to be in meeting their ambitions.  The basic idea is to continue to build on existing commitments at the WTO but expand market access and to try to reduce domestic level regulations that make it hard for services to be competitive.  For example, one goal is to try to get foreign service providers to receive the same treatment as domestic service firms as much as possible.  Many similar rules do exist in various free trade agreements.

Yet TiSA talks are challenging.  Uruguay just became the first country to withdraw from negotiations, citing concerns about its ability to regulate sectors like financial services and telecommunications.  Frankly, this is likely to be overblown, as officials do not give up their right to regulate easily and these sectors are seen as highly sensitive in most countries.  TiSA will not violate a government's right to regulate for health, safety, and environmental outcomes, nor will it alter all qualifications for service providers or allow for unfettered access to job markets.

In a rapidly changing environment, designing appropriate services rules are both necessary and difficult to do well.  We will have to watch and see how successfully TiSA manages the task.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***       

[1] Remaining TiSA members include: Australia, Canada, Chile, Chinese Taipei (Taiwan), Colombia, Costa Rica, the European Union, Hong Kong, Iceland, Israel, Japan, Lichtenstein, Mauritius, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, Republic of Korea, Switzerland, Turkey, and the United States.

[2] As part of the Uruguay Round negotiations in what was then the Global Agreement on Tariffs and Trade (GATT) and is now the World Trade Organization (WTO).

Cutting Tariffs in RCEP

In the past, governments mostly protected local markets by using tariff barriers.  Tariffs, which act like a tax on imports, can raise the cost of foreign goods.  If the tariff level is set high enough, foreign companies will simply avoid shipping goods across a customs border since it can be impossible to remain competitive with domestic goods in the face of high tariff levels.

Countries have reduced tariffs after multiple rounds of reductions at the global level.  In fact, many people argue that tariffs are no longer an especially big issue.  In ongoing free trade agreements (FTAs), the focus has largely shifted from goods to other chapters and different kinds of “sexier” market commitments like services, investment, e-commerce, or intellectual property rights. 

Yet tariffs continue to matter.  For some sectors—like agriculture—tariff rates charged at the border can be 100%, 330% (some dairy into Canada) or as high as 1400% (for a particular kind of potato into Japan). 

Even in sectors where tariffs are generally low or set to zero, such as electronic goods, tariffs can still be important.  For example, while global commitments in the Information Technology Agreement (ITA) have eliminated tariffs entirely on some classes of goods, many of the raw materials, parts and components used in the manufacture of more complex electronic goods may continue to be charged tariffs at the border. 

Research shows, in fact, that the cumulative effect of even very low tariffs can be quite high—as semi-finished parts and components go back and forth across borders in supply chains, a 2, 5 or 10% tariff can add up quickly. 

Tariffs are leveled on the gross value of the good and not on the value-added amount.  Firms with long international chains can face significant costs from very low tariffs.  Ferrantino showed that a 10 percent tariff across a five stage chain results in a tariff equivalent of 34 percent—and doubling the chain again drives tariff levels up to the equivalent of 75 percent.  

Robert Koopman, now chief economist at the WTO, and his colleagues have reported that the effective tariff rate for the United States is 17 percent higher than the nominal rate, 71 percent higher in Hong Kong and 171 percent higher in Mexico.  Developing countries, overall, include more intermediate goods into final products, making the impact of tariffs more significant. 

Free trade agreements do not entirely solve this problem either.  Sebastien Miroudot and colleagues have shown how the amplification of tariffs still takes place under free trade agreements.

The continuing importance of tariffs makes some of the news coming out of regional talks in the Regional Comprehensive Economic Partnership (RCEP) particularly worrying.  At the ministerial meeting last month, leaders agreed to cut tariffs on 65% of goods at the launch of the agreement and raise this level to 80% by the time the deal is fully implemented in 10 years.

This news could also be presented another way—RCEP officials have agreed to leave 35% of tariffs untouched at the introduction of the agreement and not address 20% of tariffs even when the agreement is finished. 

I am trying to get research underway to determine the actual impact of such policies.  I suspect that trade between many RCEP members is currently limited to a small set of tariff lines.  If these lines are part of the “excluded” groups of tariff lines, the net impact of RCEP cuts will be modest indeed. 

The example I frequently give is to say that snow removal equipment will undoubtedly be “fully liberalized” across RCEP.  Given the tropical nature of many RCEP countries, such a concession is basically meaningless—they do not produce, sell, buy, export or import many snow shovels, snowplows, or even snow boots.  However, things that are actually traded, including many key agricultural items, will surely be left off, or “carved out,” of the final agreement.

More disturbing still, India has apparently won permission to continue with a “3 tier” offer in tariff cuts.  Under the tiered approach, ASEAN countries will receive the 65/80 offer (start at 65% coverage and increase to 80%).  South Korea and Japan, in tier two, will be stuck at 65%.  Finally, China, Australia and New Zealand will receive tariff cuts on only 42.5% of tariff lines at the outset into India.

Think about that for a moment.  India is promising to cut tariffs on less than half of tariff lines.  Snow shovels and boots are in.  Most commercially meaningful goods are not. 

New Zealand, in particular, is trying to fight back and require that India's offer include goods tariff lines that account for 55% of the value of goods traded between the two members.  This is more helpful, but still complicated and of less value to businesses than greater liberalization across the board.

Note that India’s coverage levels are not automatically reciprocal.  Apparently, China will offer India 42.5% of its domestic market, but Australia is going to be more generous at 80% coverage and New Zealand will start at 65% coverage. 

Tariff cuts have to be viewed in tandem with rules of origin (ROOs).  It is possible to have relatively modest cuts, but easy-to-use rules of origin and broad cumulation.  This makes it more likely that firms will take advantage of RCEP in the future since items produced with content from across the 16 member countries can be more easily included and often receive reduced tariff benefits into RCEP members.  A future post will consider where officials seem to be heading in the ROO chapter.

On the bright side, if these provisions remain for trade in goods, the Asian Trade Centre and a host of other consulting firms across the region are likely to have enormous demand in the coming years as companies come to grips with the potential benefits arising from RCEP commitments.  To successfully use an RCEP agreement with modest tariff cuts, different levels of commitment, and at least a 10 year phase in period, firms will need very savvy advice and support. 

We are standing by to help.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***