Impacts of common rules of origin on FTA utilization

This paper examines empirically the impacts of sharing rules of origin (RoOs) with other ASEAN+1 free trade agreements (FTAs) on ASEAN-Korea FTA/ASEAN-China FTA utilization in Thai exports in 2011. Our careful empirical analysis suggests that the harmonization of RoOs across FTAs play some role in reducing the costs yielded through the spaghetti bowl phenomenon. In particular, the harmonization to "change-in-tariff classification (CTC) or real value-added content (RVC)" will play a relatively positive role in not seriously discouraging firms’ use of multiple FTA schemes. On the other hand, the harmonization to CTC or CTC&RVC hinders firms from using those schemes.

New measures of FTA liberalization level

This paper proposes new measures of the liberalization level of free trade agreements (FTAs). Our measures take three issues into account. First, in order to identify the differences in FTA liberalization level over time, we compute the annual liberalization level rather than the level during the whole period. Second, our measure includes information on tariff margins, i.e. the difference between FTA rates and most favoured nation rates. Third, the restrictiveness of rules of origin (RoOs) is also taken into account in order to penalize the liberalization level of products with more restrictive RoOs. In this paper, we compute such measures of FTA liberalization level for three FTAs in Thailand.

FTA in international finance : impacts of exchange rates on FTA utilization

This paper investigates how exchange rates affect the utilization of a free trade agreement (FTA) scheme in trading. Changes in exchange rates affect FTA utilization by two ways. The first way is by changing the excess profits gained by utilizing the FTA scheme, and the second way is by promoting the compliance of rules of origin. Our theoretical models predict that the depreciation of exporters' currency against that of importers enhances the likelihood of FTA utilization through those two channels. Furthermore, our empirical analysis, which is based on rich tariff-line-level data on the utilization of FTA schemes in Korea's imports from ASEAN countries, supports the theoretical prediction. We also show that the effects are smaller for more differentiated products.

Is FTA/EPA effective for a developing country to attract FDI? : simulation analysis based on an extended knowledge-capital model

To prepare an answer to the question of how a developing country can attract FDI, this paper explored the factors and policies that may help bring FDI into a developing country by utilizing an extended version of the knowledge-capital model. With a special focus on the effects of FTAs/EPAs between market countries and developing countries, simulations with the model revealed the following: (1) Although FTA/EPA generally ends to increase FDI to a developing country, the possibility of improving welfare through increased demand for skilled and unskilled labor becomes higher as the size of the country declines; (2) Because the additional implementation of cost-saving policies to reduce firm-type/trade-link specific fixed costs ends to depreciate the price of skilled labor by saving its input, a developing country, which is extremely scarce in skilled labor, is better off avoiding the additional option; (3) If a country hopes to enjoy larger welfare gains with EPA, efforts to increase skilled labor in the country, such as investing in education, may be beneficial.

Measuring the costs of FTA utilization : evidence from transaction-level import data of Thailand

In this study, we measure the utilization costs of free trade agreement (FTA) tariff schemes. To do that, we use shipment-level customs data on Thai imports, which identify not only firms, source country, and commodity but also tariff schemes. We propose several measures as a proxy for FTA utilization costs. The example includes the minimum amount of firm-level savings on tariff payments, i.e., trade values under FTA schemes multiplied by the tariff margin, in all transactions. Consequently, the median costs for FTA utilization in 2008, for example, are estimated to be approximately US$2,000 for exports from China, US$300 for exports from Australia, and US$1,000 for exports from Japan. We also found that FTA utilization costs differ by rule of origin and industry.

Harmonization of trade in services by APEC members

This study maps out the degree of services trade liberalization by the APEC members toward achieving a Free Trade Area of the Asia-Pacific (FTAAP) and makes some comparative analyses. The study finds that the commitment level differs greatly between sensitive and less sensitive sectors, and that the commitment level under the ASEAN Framework Agreement (AFAS) package 8 is the highest among the four FTAs studied. It also finds that there are cross-country and sector-wide similarities in the pattern of service sector commitment under and across each of the FTAs; this implies that the shared domestic sensitivities can be overcome by an APEC-wide economic cooperation scheme for enhancing competitiveness (through, e.g., the Trans-Pacific Strategic Economic Partnership Agreement or TPP).

Myopic or farsighted : bilateral trade agreements among three symmetric countries

We examine network formation via bilateral trade agreement (BTA) among three symmetric countries. Each government decides whether to form a link or not via a BTA depending on the differential of ex-post and ex-ante sum of real wages in the country. We model the governmental decision in two forms, myopic and farsighted and analyze the effects on the BTA network formation. First, we find that both myopic and farsighted games never induce the formation of star networks nor empty networks. Second, the networks resulting from myopic game coincides with those resulting from farsighted games.

Toward an inclusive and a little bit ethical world trading system : listening to the voices of the people in LDCs

Many specialists in international trade have started saying that the era of a mega FTA is approaching. If the three poles of the global economy, namely East Asia, EU and the United States, form mega FTAs, most of the volume of global trade will be covered. That may be fine, but there will be many countries left out of the mega FTA, most of which will be the least developed countries (LDCs). Since the inception of the Doha Development Agenda (DDA) negotiations in 2001, the WTO and its member countries have tried to include LDCs in the world trading system through various means, including DFQF and AfT. Although these means have some positive impact on the economic development of LDCs, most of the LDCs will never feel comfortable with the current world trading system. To overcome the stalemate in the DDA and to create an inclusive world trading system, we need more commitment from both LDCs and non-LDCs. To surmount the prolonged stalemate in the DDA, we should understand how ordinary people in LDCs feel and think about the current world trading system. Those voices have seldom been listened to, even by the decision makers of their own countries. So as to understand the situation of the people in LDCs, IDE-JETRO carried out several research projects using macro, meso and micro approaches. For the micro level, we collected and analyzed statements from ordinary people concerning their opinions about the world trading system. The interviewees are ordinary people such as street vendors, farmers and factory workers. We asked about where they buy and sell daily necessities, their perception of imported goods, export promotion and free trade at large, etc. These ‘voices of the people’ surveys were conducted in Madagascar and Cambodia during 2013. Based on this research, and especially the findings from the ‘voices of the people’ surveys, we propose a ‘DDA-MDGs hybrid’ strategy to conclude DDA negotiations and develop a more inclusive and a little bit more ethical world trading system. Our proposal may be summarized in the following three points. (1) Aid for Trade (AfT) ver. 2 Currently AfT is mainly focused on coordinating several aid projects related to LDCs’ capacity building. However, this is inadequate; for the proposed ‘DDA-MDGs hybrid’, a super AfT is needed. The WTO, other development agencies and LDC governments will not only coordinate but also plan together aid projects for trade capacity building. AfT ver. 2 includes infrastructure projects either gran aid, ODA loans and private investment. This is in accordance with the post-MDGs argument which emphasizes the role of the private sector. (2) Ethical Attitude Reciprocity is a principle of multilateral agreement, and it has been a core promise since GATT. However, for designing an inclusive system, special and differential treatment (S&D) is still needed for disadvantaged members. To compromise full reciprocity and less than full reciprocity, an ethical attitude on the part of every member is needed in which every member refrains from insisting on the full rights and demands of its own country. As used herein, the term ‘ethical’ implies more consideration for LDCs, and it is almost identical to S&D but with a more positive attitude from developed countries (super S&D). (3) Collect Voices of the People In order to grasp the real situation of the people, the voices of the people on free trade will continue to be collected in other LDCs, and the findings and leanings will be fed back to the WTO negotiation space.

Environmental provisions in Japanese regional trade agreements with developing countries

With the growing interest in environmental issues in the global community, recently concluded regional trade agreements (RTAs) have introduced environmental provisions. These RTAs will help achieve sustainable development at the intersection of trade liberalization and ever-increasing environmental concerns. However, environmental provisions are not incorporated into all RTAs. For example, Japanese RTAs often incorporate environmental issues only in the preamble or relevant articles. As the first step in examining the environmental provisions in RTAs, this paper focuses on the RTAs that Japan has concluded with developing countries. The main characteristic of environmental provisions in Japanese RTAs is that there are very few relevant provisions. All Japanese RTAs has neither environmental chapters nor side agreements. However, the attitude toward the environment in Japanese RTAs has gradually changed since the signing of the Japan-Chile EPA in 2007, in which a joint environmental statement was adopted. Although Japanese RTAs have environmental provisions, environmental problems originating from the RTAs may occur. One of the possible causes is a lack of environmental impact assessment. Japanese RTAs need to incorporate an environmental impact assessment system in order to identify environmental problems resulting from its RTAs, and to enable the country to take appropriate measures at the appropriate time.

Service liberalization in Lao PDR

Service liberalization is emerging as a high-priority issue in various parts of the world for mega free trade agreements as well as national policy. Lao PDR is no exception. To examine the level of service liberalization in Lao PDR, we first compare the Hoekman Indices of Lao PDR, Cambodia, and Vietnam on the ASEAN Framework Agreement on Services (AFAS 8). Lao PDR has lower commitment in many subsectors. In particular, we list the sectors in which Lao PDR made a lower commitment than Cambodia and Vietnam in Mode 3 (supply of services through commercial establishments abroad). Second, a simulation analysis using the Geographical Simulation Model (IDE-GSM) from the Institute of Developing Economies at the Japan External Trade Organization (IDE-JETRO) reveals how service liberalization benefits the economic development of Lao PDR. The two analyses clearly reveal that it is essential for Lao PDR to promote further service liberalization since such liberalization will contribute to the country's development.

Dynamics of investment negotiations between China and Japan : the China-Japan-Korea trilateral investment treaty and beyond

The investment agreement relationship between China and Japan is complex. The many intersecting and overlapping agreements can rightly be described as a "noodle bowl of agreements." The 1989 bilateral investment treaty (BIT) between China and Japan still stands. Japan can also free-ride on the negotiation outcome of China's BITs and free trade agreements (FTAs) with other countries by using the most-favored-nation (MFN) provision in the 1989 China-Japan BIT, which does not contain regional economic integration organization (REIO) exception rules. However, because the China-Japan BIT does not have investor-state dispute settlement (ISDS), it may face implementation problems. The China-Japan-Korea trilateral investment treaty (CJK TIT), in force since 2014, made improvements upon the 1989 BIT, but Japan is not entirely satisfied with the outcome. For Japan, pre-establishment national treatment (NT) and prohibition of various types of performance requirements are the most important negotiation items, but the CJK TIT insufficiently addressed those problems. Moreover, because the CJK TIT has MFN provisions with an REIO exception rule, better access to investment markets brought about by future FTAs such as the China-Korea FTA and the EU-China FTA cannot be imported into CJK TIT. Hence, in the long run, Japan needs to pursue an FTA investment chapter with China that covers both MFN and ISDS.

Firm-level utilization rates of regional trade agreements : importers' perspective

While previous theoretical studies have examined exporters' choice of tariff schemes without considering explicit heterogeneity of importers, an empirical analysis on regional trade agreement (RTA) utilization is, in general, possible by employing trade data covering the importers' side. To better link the empirical analysis with a theoretical model, this study develops a model that sheds light on the role of both importers' and exporters' characteristics in RTA utilization. The model enables us to replicate stylized facts concerning importers' RTA utilization. Based on this model, we derive some propositions on the determinants of RTA utilization rates (i.e., share of imports under RTA schemes out of total imports) at an import firm-product level. Finally, we found that these theoretical predictions are supported by highly detailed import data in Thailand from Australia from 2007 to 2009.

Normative Influences of "Special and Differential Treatment" on North-South RTAs

Recently, there has been a surge in bilateral and regional trade arrangements between developed and developing countries, which are known as North-South RTAs. Under the current legal system of the WTO, North-South RTAs are governed by Article XXIV of the GATT or Article V of the GATS, which means such RTAs must be reciprocal and must cover substantially all the trade. On the other hand, there is another category of rules on RTAs based on the so-called Enabling Clause, which, in exceptional circumstances, provides special and differential treatment (SDT) for RTAs among developing countries. This paper considers the applicability of the SDT concept to North-South RTAs by examining why rules on RTAs and the concept of SDT were incorporated into the GATT/WTO legal framework so as to permit the derogation of most-favored-nation (MFN) obligations.

Recent trends in Asian integration and Japanese participation

In East Asia, de facto integration is taking place because Free Trade Agreements (FTAs) and Economic Partnership Agreements (EPAs) are flourishing in the region. ASEAN aims to form an ASEAN Economic Community (AEC) by 2015 with the completion of the ASEAN Free Trade Area (AFTA). Surrounding countries have been competing with each other to forge FTAs or EPAs with ASEAN, including China, Japan, Korea, Australia and New Zealand, and India. As a result, ASEAN has become a trading hub in East Asia. Bilateral FTAs/EPAs are also partly in place among 16 countries (ASEAN + 6). These economic ties in trade, services and investment are accelerating this region’s development as the world’s largest production base and biggest consumption market, helping to turn around the global recession in the aftermath of the so-called Lehman Shock. However, some problems also need to be pointed out in the East Asian integration such as the spaghetti bowl effect, severe competition, labor issues, environmental destruction and power struggles.

Chapter 8 Location Choice of Japanese Multinationals: Country Characteristics or Region Characteristics?

In the present global era in which firms choose the location of their plants beyond national borders, location characteristics are important for attracting multinational enterprises (MNEs). The better access to countries with large market is clearly attractive for MNEs. For example, special treatments on tariffs such as the Generalized System of Preferences (GSP) are beneficial for MNEs whose home country does not have such treatments. Not only such country characteristics but also region characteristics (i.e. province-level or city-level ones) matter, particularly in the case that location characteristics differ widely between a nation's regions. The existence of industrial concentration, that is, agglomeration, is a typical regional characteristic. It is with consideration of these country-level and region-level characteristics that MNEs decide their location abroad. A large number of academic studies have investigated in what kinds of countries MNEs locate, i.e. location choice analysis. Employing the usual new economic geography model (i.e. constant elasticity of substitution (CES) utility function, Dixit-Stiglitz monopolistic competition, and ice-berg trade costs), the literature derives the profit function, of which coefficients are estimated using maximum likelihood procedures. Recent studies are as follows: Head, Rise, and Swenson (1999) for Japanese MNEs in the US; Belderbos and Carree (2002) for Japanese MNEs in China; Head and Mayer (2004) for Japanese MNEs in Europe; Disdier and Mayer (2004) for French MNEs in Europe; Castellani and Zanfei (2004) for large MNEs worldwide; Mayer, Mejean, and Nefussi (2007) for French MNEs worldwide; Crozet, Mayer, and Mucchielli (2004) for MNEs in France; and Basile, Castellani, and Zanfei (2008) for MNEs in Europe. At the present time, three main topics can be found in this literature. The first introduces various location elements as independent variables. The above-mentioned new economic geography model usually yields the profit function, which is a function of market size, productive factor prices, price of intermediate goods, and trade costs. As a proxy for the price of intermediate goods, the measure of agglomeration is often used, particularly the number of manufacturing firms. Some studies employ more disaggregated numbers of manufacturing firms, such as the number of manufacturing firms with the same nationality as the firms choosing the location (e.g., Head et al., 1999; Crozet et al., 2004) or the number of firms belonging to the same firm group (e.g., Belderbos and Carree, 2002). As part of trade costs, some investment climate measures have been examined: free trade zones in the US (Head et al., 1999), special economic zones and opening coastal cities in China (Belderbos and Carree, 2002), and Objective 1 structural funds and cohesion funds in Europe (Basile et al., 2008). Second, the validity of proxy variables for location elements is further examined. Head and Mayer (2004) examine the validity of market potential on location choice. They propose the use of two measures: the Harris market potential index (Harris, 1954) and the Krugman-type index used in Redding and Venables (2004). The Harris-type index is simply the sum of distance-weighted real GDP. They employ the Krugman-type market potential index, which is directly derived from the new economic geography model, as it takes into account the extent of competition (i.e. price index) and is constructed using estimators of importing country dummy variables in the well-known gravity equation, as in Redding and Venables (2004). They find that "theory does not pay", in the sense that the Harris market potential outperforms Krugman's market potential in both the magnitude of its coefficient and the fit of the model to be estimated. The third topic explores the substitution of location by examining inclusive values in the nested-logit model. For example, using firm-level data on French investments both in France and abroad over the 1992-2002 period, Mayer et al. (2007) investigate the determinants of location choice and assess empirically whether the domestic economy has been losing attractiveness over the recent period or not. The estimated coefficient for inclusive value is strongly significant and near unity, indicating that the national economy is not different from the rest of the world in terms of substitution patterns. Similarly, Disdier and Mayer (2004) investigate whether French MNEs consider Western and Eastern Europe as two distinct groups of potential host countries by examining the coefficient for the inclusive value in nested-logit estimation. They confirm the relevance of an East-West structure in the country location decision and furthermore show that this relevance decreases over time. The purpose of this paper is to investigate the location choice of Japanese MNEs in Thailand, Cambodia, Laos, Myanmar, and Vietnam, and is closely related to the third topic mentioned above. By examining region-level location choice with the nested-logit model, I investigate the relative importance of not only country characteristics but also region characteristics. Such investigation is invaluable particularly in the case of location choice in those five countries: industrialization remains immature in those countries which have not yet succeeded in attracting enough MNEs, and as a result, it is expected that there are not yet crucial regional variations for MNEs within such a nation, meaning the country characteristics are still relatively important to attract MNEs. To illustrate, in the case of Cambodia and Laos, one of the crucial elements for Japanese MNEs would be that LDC preferential tariff schemes are available for exports from Cambodia and Laos. On the other hand, in the case of Thailand and Vietnam, which have accepted a relatively large number of MNEs and thus raised the extent of regional inequality, regional characteristics such as the existence of agglomeration would become important elements in location choice. Our sample countries seem, therefore, to offer rich variations for analyzing the relative importance between country characteristics and region characteristics. Our empirical strategy has a further advantage. As in the third topic in the location choice literature, the use of the nested-logit model enables us to examine substitution patterns between country-based and region-based location decisions by MNEs in the concerned countries. For example, it is possible to investigate empirically whether Japanese multinational firms consider Thailand/Vietnam and the other three countries as two distinct groups of potential host countries, by examining the inclusive value parameters in nested-logit estimation. In particular, our sample countries all experienced dramatic changes in, for example, economic growth or trade costs reduction during the sample period. Thus, we will find the dramatic dynamics of such substitution patterns. Our rigorous analysis of the relative importance between country characteristics and region characteristics is invaluable from the viewpoint of policy implications. First, while the former characteristics should be improved mainly by central government in each country, there is sometimes room for the improvement of the latter characteristics by even local governments or smaller institutions such as private agencies. Consequently, it becomes important for these smaller institutions to know just how crucial the improvement of region characteristics is for attracting foreign companies. Second, as economies grow, country characteristics become similar among countries. For example, the LCD preferential tariff schemes are available only when a country is less developed. Therefore, it is important particularly for the least developed countries to know what kinds of regional characteristics become important following economic growth; in other words, after their country characteristics become similar to those of the more developed countries. I also incorporate one important characteristic of MNEs, namely, productivity. The well-known Helpman-Melitz-Yeaple model indicates that only firms with higher productivity can afford overseas entry (Helpman et al., 2004). Beyond this argument, there may be some differences in MNEs' productivity among our sample countries and regions. Such differences are important from the viewpoint of "spillover effects" from MNEs, which are one of the most important results for host countries in accepting their entry. The spillover effects are that the presence of inward foreign direct investment (FDI) aises domestic firms' productivity through various channels such as imitation. Such positive effects might be larger in areas with more productive MNEs. Therefore, it becomes important for host countries to know how much productive firms are likely to invest in them. The rest of this paper is organized as follows. Section 2 takes a brief look at the worldwide distribution of Japanese overseas affiliates. Section 3 provides an empirical model to examine their location choice, and lastly, we discuss future works to estimate our model.