Asian governments were slower than some to join the free trade agreement (FTA) party, but once they got involved, they have been enthusiastic participants. Singapore, for instance, has more than 20 active deals with several significant agreements like the Trans-Pacific Partnership (TPP) and a bilateral with the European Union just waiting for ratification to be completed.
Many companies understand that all these trade agreements must provide benefits of some sort that could give them a competitive advantage in the marketplace somewhere. How does a firm figure out which deal provides the best benefits for which markets?
Firms seem to have multiple answers to this question, “So how?”
For some, especially many of the smaller firms at a Singapore Business Federation event last week, government should figure it out and help companies. Clearly, governments all across the region need to work hard to get more information into the hands of firms. It does no good at all to negotiate a beautiful deal if no one knows about it. The terms of the agreement have to be communicated in a language that makes sense to busy business people.
Governments might also usefully work on training their own people about the various trade deals. It also does not help to have a splendid trade agreement that goes unused because, for instance, the customs officials in a specific port never got the memo about new changes required from an agreement.
While governments should certainly do a better job of making trade agreements accessible, firms that want to be competitive have to figure out how to use the various available tools to their advantage. Companies have to be willing to invest some resources—particularly some time and, potentially, some money into investigating whether or not trade agreements deliver bottom-line impacts to the firm.
While it is possible to say, broadly, which agreements are “better” than others—with deeper, more meaningful cuts or improved market access or investment protection—the extent of benefits embedded in an agreement can vary between sectors, industries and even firms. Hence working out which deal is the “best” or offers the firm the greatest savings or access may require substantial knowledge of the firm as well as various agreements.
As an example, it is possible to imagine an agreement that is broadly not particularly good. The tariff cuts are generally poor with many tariff lines not included at all. However, if a firm’s products are included in the portion of lines that got cuts, the deal could be very helpful and deliver substantial bottom line results to the company. Or, if the agreement has limited market opening in services, but 3 star hotels are opened for investment, then 3 star hotel operators may receive significant benefits out of what might otherwise be a rather disappointing agreement.
Firms can hire specialists to assist in working out what sort of benefits could be available from different agreements. In the past, the benefits for firms might have been modest because many of the bilateral agreements in the region were not, frankly speaking, very good for companies. They often excluded sensitive sectors and—by definition—carved out most of the things that are actually traded between the parties.
However, the latest generation of agreements can be quite different. Firms can gain substantial benefits. The best of the bunch is likely to be the TPP, since the deal is deep and broad and likely covers the sector and industry of interest to most firms.
The ASEAN Economic Community (AEC) could hold some promise for firms, especially for those companies that are either new to ASEAN or are interested in expanding market access for goods to other ASEAN members. Do note that the AEC is mostly (for now) about duty-free access for goods.
But the AEC is not the only agreement that can be used in ASEAN. Firms could also use the provisions in the ASEAN-Australia-New Zealand (AANZFTA) that has significantly better coverage in many areas, including services and investment. The agreement works not just between ASEAN and ANZ, but also within ASEAN.
The Regional Comprehensive Economic Partnership (RCEP), still under negotiation, also has potential to be useful for firms. It might, again, provide better inter-ASEAN coverage too for some sectors.
This complexity, however, is partly why firms may need to find a specialist to assist in finding the benefits of various overlapping trade agreements. These specialist firms can be at least three types: embedded within the big consultancy firms in the region, smaller specialist companies, or companies that provide software solutions.
A trade deal will not, of course, solve all problems of competitiveness. Even the best agreements do not resolve issues with exchange rate shifts, labor or staffing issues, licensing requirements, soaring rents, many business costs and so forth. But FTAs can be a critical tool in the tool kit that provides advantages, particularly relative to other competitors that may not be using such agreements or be using such agreements effectively.
For most firms, the potential payoff from successfully harnessing a trade agreement could more than offset any costs associated with figuring out how to best use a deal. This applies not just to larger firms, but also to many smaller companies.
Companies may also want to develop or acquire some level of in-house knowledge of trade agreements as well. Without basic understanding of FTAs, for example, companies may struggle to make sense of software solutions or to provide sufficient information to consultancies so they can provide better recommendations on future pathways.
In the past, developing such information and knowledge may not have been so critical. But with economic growth slowing in the region and with the potential benefits in various agreements increasing, it is no longer time to ignore trade agreements. Instead, they should become one piece of the competitiveness arsenal for every company in Asia.
***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***