Free Trade Agreement Essay
This report was written to evaluate the benefits and challenges of ASEAN-Korea Free Trade Agreement (AKFTA) from Singapore’s perspective. Free trade agreements are treaties signed between two or more nations in order to create free trade areas between member countries. The free trade agreement that we will be focusing in this report would be the AKFTA. Research has shown that the three benefits that AKFTA has brought to companies in Singapore are economic benefits (trade in goods and services), intellectual property protection as well as human resource management and development. Two challenges that are faced by companies in Singapore are the lack of awareness and knowledge on AKFTA followed by the Rules of Origin (ROO). In conclusion, it can be seen that despite all the various benefits that AKFTA can provide for the companies in Singapore, all these would not be applicable if they do not know about AKFTA or do not have the knowledge on how to utilize it in their business. Hence, it is important that there are information-services that are capable of informing people about AKFTA as well as other FTAs that are applicable to them. On top of that, instructions on how to utilize these FTAs
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Free trade agreements (FTAs) are treaties that are discussed and signed between two or more countries in order to establish a free trade area between member countries. Within this free trade area, trading of goods and services can be commenced across national, regional and global borders without tariffs or other trade barriers. In addition, issues such as competition policy, commitments on services, government procurement, customs cooperation, foreign investment, intellectual property rights and other issues that will assist trade are addressed by modern FTAs. Usually one of the terms included in these FTAs would be that the member countries are required to impose a standardized tariff (common external tariff) on trade with non-member countries. This is to encourage and “push” greater trade between member countries. 3. Brief Overview of ASEAN-Korea Free Trade Agreement (AKFTA) Korea is the second Dialogue Partner with whom ASEAN has forged a free trade agreement. The Framework Agreement was signed in 2005 by ASEAN and Korea.
Thereafter, ASEAN and Korea signed four other agreements that legally established the ASEAN-Korea Free Trade Agreement (AKFTA). This agreement came into effect with Singapore in 2006. ASEAN and Korea maintain close political collaboration on bilateral, regional, and international issues through existing instruments such as ASEAN-ROK Summit, ASEAN Regional Forum (ARF), East-Asia Summit (EAS), ASEAN Plus Three (APT) and Ministerial Meetings. The results of the AKFTA can be seen through trade volume in ASEAN, which has significantly increased by over 23% in the first year period of ASEAN-Korea Trade in Goods implementation. Similarly, bilateral trade volume between Korea and ASEAN nearly tripled going from 2001-2010, where the volume increased from US$32 billion to US$98.1 billion. Parties who are involved in the AKFTA are Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam and Korea. The following three agreements are major agreements under the AKFTA, which have been entered into force and implemented by ASEAN and Korea. 1. The ASEAN-Korea Trade in Goods Agreement entered into force in June 2007 2. The ASEAN-Korea Trade in Services Agreement entered into force in May 2009 3. The ASEAN-Korea Investment Agreement entered into force in June 2009 4. Benefits of AKFTA on Companies in Singapore
a. Economic Benefits – Trade in Goods and Services
The establishment of a large free market that includes 11 countries will bring about economic benefits to the region since it will attract more foreign direct investments (FDIs), which in turn creates more jobs. Due to the establishment of the AKFTA, bilateral trade volume between Korea and ASEAN from 2001–2010 has increased nearly three folds from US$32 billion to US$98.1 billion. Furthermore, annual average growth of trade with member countries has increased by 28.9%. This clearly tells us that the creation of AKFTA has successfully led the member countries to greater trade among themselves. This helps Singapore companies to become more competitive as they are able to freely trade between Korea and other ASEAN countries to achieve a comparative advantage.
When they are able to produce their goods and/or services at a lower opportunity cost as compared to companies in other countries, they are more capable to drive down the cost of their goods and/or services and that will allow them to achieve stronger sales margins. Stronger sales margin will facilitate the companies’ growth as well as the economy’s growth of Singapore as a whole. This will package Singapore to appear attractive to foreign investors, leading to an increase in FDIs. FDIs are vital for growth and even for the survival of the host country companies. With more foreign investments in Singapore, the companies in Singapore are better abled to expand in the country, region or even globally. This will once again lead to further growth in both the companies and Singapore’s economy. AKFTA increases economic efficiency in member countries by exposing their firms and industries to greater foreign competition and this can bring about significant returns. Similarly, AKFTA increases the international competitiveness of member countries by promoting competition and efficiency.
b. Intellectual Property Protection
The increasing openness in the global market gave rise to the need of a basic set of common rules to ensure that nations do not abuse intellectual property (IP). It is important to have adequate protection and enforcement of IP rights. AKFTA included guidelines on the protection of IP rights such as copyrights, designs, geographical indications as well as patents. Acting against the infringement of such IP rights will cut down on illegal copying or free-riding and the amount of counterfeit products being produced. IP Protection under the AKFTA allows companies in Singapore to obtain incomes from their direct exploitation (by their own company) as well as from indirect exploitation by third parties, under the legalized licensing contracts. These indirect incomes are important to small and medium enterprises (SMEs) in Singapore, as it sometimes exceed the earnings from the direct exploitation. With such improved protection of IP rights overseas, companies in Singapore will have a higher opportunity to market and pitch their ideas and products in third countries under the conditions that are similar to Singapore. It gives Singapore companies a competitive advantage in the commercial industry as unlawful exploitation by third countries is prevented. This is crucial for SMEs in Singapore as such IP rights will arm them like effective instruments in order for them to go out to compete with other large and powerful companies. Improved IP protection allows companies in Singapore to remain competitive and it will unfold more business opportunities and markets.
c. Human Resource Management and Development
An organisation’s most important asset is intellectual capital. Hence, the economic growth and success of countries is highly dependent on the people’s skills and knowledge. The Parties acknowledge this and therefore, Human Resource Management and Development is included under AKFTA. Under AKFTA, member countries commenced the exchange of people such as teachers, professionals, scholars and people who are engaged in scientific or educational activities etc. This is done to transfer competence and skills from one country to another in order to upgrade the people’s ability in the receiving country. Companies in Singapore benefit from this as they receive explicit knowledge and tacit knowledge. They pick up the good pointers from the member countries and apply it in their companies. When people in receiving companies achieve a higher level of competency and skills, they are able to contribute more (in terms of both quantity and quality) to the company. This will be beneficial to the company’s growth due to the increased efficiency and effectiveness of the company, which pulls them closer to their organizational goals.
The relationship of member countries will be strengthened through these various exchanges. This improved relationship will provide them with open doors to further opportunities to conduct exchanges with each other. Strong ties motivate member countries to conduct exchanges, which will result in the increased frequency of exchanges. When trust is established between member countries, the quality of the exchange will be better. The increase in the quantity and quality of these exchanges are usually accompanied by the development of human resource departments in receiving countries. In addition, conducting such exchanges prevents negative consequences such as isolation and resistance to ideas. Hence, through such exchanges, companies in Singapore can achiever a higher level of performance standards by acquiring perceptions and knowledge from member countries. This will reduce the amount of errors the companies make as they gain insight on how to avoid repetition of errors. There might be a breakthrough in these companies if they choose to change their work-style to the one introduced to them. All of these will lead the companies in Singapore to an increased level of efficiency and effectiveness. In conclusion, human resource management and development is made possible by AKFTA, which through various staff exchanges, increase the efficiency and effectiveness of companies in Singapore by the transfer of skills and competence. 5. Challenges Faced By Companies in Singapore regarding to AKFTA a. Lack of Awareness and Knowledge on AKFTA
Despite the demonstrable benefits provided by AKFTA, more than 50% of Singapore companies do not use AKFTA. Many reasons were cited for the non-use of AKFTA and the lack of information on AKFTA emerged as the most significant reason. The lack of information on AKFTA deprived companies in Singapore of the opportunity to learn how to understand a tariff schedule and decipher AKFTA provisions. They may not understand the complex and differing rules of origin as well. Furthermore, there is no identification to proper official channels that informs companies of FTA tariff schedules, FTA rules and FTA trade regulations. The lack of information-related services about the AKFTA caused companies in Singapore to not having access to detailed information on whether and how their export products can benefit if they use AKFTA. This reduces the competitiveness of companies in Singapore as they might have lost the chance to gain from AKFTA as a result of their unawareness of the AKFTA or the lack of information on AKFTA. b. Rules of Origin
Rules of Origin (ROO) are instruments to decide which goods will enjoy preferential tariffs, which will help to prevent trade deflection among member countries. It has been argued that restrictive ROOs obstruct the use of AKFTA preferences, while complicated ROOs increase cost of transactions for companies. Several ROOs in overlapping FTAs post a serious threat to SMEs, whose financial ability might not be allow them to handle such costs. Restrictive ROOs seize companies in Singapore of the opportunity to obtain intermediate goods or raw materials from international sources where these items can be obtained at a lower cost. This can result in an increase in cost of production in Preferential Trade Arrangement (PTA). As a result of complex ROOs, transaction costs incurred by companies in Singapore will be higher. This may reduce trade between Singapore and other member countries due to the opportunity cost of engaging in such trade. Multiple ROOs threatens Singapore SMEs as they contribute significantly to business costs. Masahiro Kawai Ganeshan Wignaraja’s (2009) study found out that firm in Singapore had the most negative perceptions regarding multiple ROOs (38%). Negative perceptions regarding multiple ROOs might just cause Singapore companies to consider not using AKFTA after all. Hence, restrictive and complicated ROOs are capable of increasing business costs in companies in Singapore and this might turn them away from the idea of using AKFTA. 6. Conclusion
In conclusion, the report has shown that AKFTA has several benefits on companies in Singapore such as intellectual property protection, human resource management and development and generating more trade between Singapore and the member countries of AKFTA. However, despite all the various benefits that AKFTA can provide to companies in Singapore, all these would not be applicable if they do not know about AKFTA or do not have the knowledge on how to utilize it. Therefore, it is important that there are various informative channels that inform companies about AKFTA and other FTAs that are applicable to them. AKFTA and other FTAs would then be more widely known. On top of that, instructions on how to utilize these FTAs
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