These topics are the front line of contemporary trade debates and negotiations.

Firstly, a key challenge is to raise FTA preference use. While well-designed FTAs can provide benefits to FTA members, early studies document that the historic use of FTAs in Asia was relatively low. For instance, the average FTA preference use for four Asian countries (South Korea, Thailand, Viet Nam, and Malaysia) rose from 24 per cent to 37 per cent of total exports between 2008 and 2011. South Korea (49 per cent) and Thailand (42 per cent) were outliers with high FTA use in 2011 compared with Viet Nam (33 per cent) and Malaysia (24 per cent).

The enterprise surveys by the Asian Development Bank (ADB) and ADB Institute (ADBI) in China, Japan, South Korea, Malaysia, Philippines, Singapore, and Thailand also indicate higher-than-expected FTA use at the enterprise-level with 32 per cent of enterprises utilising FTAs and more planning to do so. The surveys also reveal that FTA use entails fixed costs which large firms were better able to overcome than small-and medium-sized enterprises (SMEs).

A lack of information on FTAs is the main reason for their underutilisation. Low margins of preference, administrative costs and delays in export documentation, and non-tariff measures in partner economies were also cited as reasons for non-use.

A second challenge is tackling complications presented by multiple rules of origin (ROOs). Existing literature suggests that multiple ROOs in overlapping FTAs constitute an Asian ‘noodle bowl’ which raises transaction costs for SMEs. ADB-ADBI surveys indicate that multiple ROOs are a future risk to Asian enterprises rather than a present issue. The surveys also reveal that, contrary to usual expectations, larger enterprises in Asia have more negative perceptions of multiple ROOs than SMEs. Large firms export to multiple markets and adapt their business strategies to FTAs. They are, therefore, more likely to express concerns regarding ROOs. Meanwhile, SMEs tend to export to single markets and hence have little basis for complaint.

Third, liberalising agricultural trade presents a difficult challenge. The coverage of agricultural trade differs markedly among current Asian FTAs. Agricultural trade was excluded from most early FTAs due to pressure from powerful farm lobbies or social concerns regarding poverty in rural areas. But a review of tariff-line coverage of agricultural products in Asian FTAs shows that, over time, these agreements are becoming more comprehensive in agricultural trade. Of the 69 FTAs examined, 46 per cent had comprehensive coverage, another 28 per cent had some coverage, and 26 per cent had little coverage of agricultural products.

A fourth challenge is to reduce restrictions to services trade. FTAs can contribute to reducing the significant regulatory barriers to services trade currently present in the region. A review of criteria covering key sectors of the General Agreement on Trade in Services (GATS) similarly indicates a trend in Asian FTAs towards progressively liberalising the services-trade sectors of participants and providing, again over time, for increased regulatory cooperation on services trade. Of the 69 FTAs reviewed, 41 per cent had comprehensive coverage, another 36 per cent had some coverage, and 23 per cent had little coverage of services trade.

Finally, increasing the WTO-plus elements of FTAs must be pursued more rigorously. Studies demonstrate that Asian FTAs vary considerably in scope in terms of coverage of issues going beyond the WTO framework. A review of criteria covering the four ‘Singapore issues’ (competition, intellectual property, investment, and public procurement) shows that of the 69 FTAs reviewed, 23 per cent had comprehensive WTO-plus coverage, another 54 per cent had partial WTO-plus coverage, and 23 per cent were goods-and-services agreements only.

A comprehensive national, regional and global policy agenda is essential if the full benefits of FTAs in Asia are to be realised. Necessary national-level actions include strengthening support systems for SMEs, rationalising ROOs and their administration, ensuring better coverage of agricultural and services trade, forging comprehensive WTO-plus FTAs and implementing domestic reforms.

A the regional level, the ultimate goal is to multilateralise mega regional FTAs through liberal cumulation rules and eventually create a larger Asia-Pacific FTA through the convergence of the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP) agreement. However, this would require addressing the difficult task of forging a US–China agreement.

Key global level actions include enhancing surveillance of non-tariff measures to reduce protectionism and a WTO agenda on supply chains and FTAs to encourage convergence of regional and global trading rules.

Masahiro Kawai is Dean and CEO of the Asian Development Bank Institute (ADBI).

Ganeshan Wignaraja is Director of Research of the Asian Development Bank Institute (ADBI).

This article is an abridged version of a paper by the authors entitled ‘Patterns of Free Trade Areas in Asia’, available here and published by the East West Center, as well as in a book edited by the authors entitled ‘Asia’s Free Trade Agreements: How is Business Responding?’ available here.