An Analysis of Trade Policy Environment and Global Production Networks: Implications on Regional Agreements

1. An Analysis of Trade Policy Environment and Global Production Networks: Implications on Regional Agreements by Tereso S. Tullao, Jr. Mitzie Irene P. Conchada John Paul Aguinaldo

2. Introduction • Economic performance of the East Asian region registered fastest growth • Growth is attributed to increase in exports • Global production networks is one of the causes of increase in exports • Forces of liberalization, deregulation & impact of information and communication technology changed the way TNCs compete globally

3. Main Problems of the Study • What is the role of liberalization forces in promoting or enhancing growth of GPNs in the region? • What are other forces that may further enhance the growth of GPN? • What are the implications of GPN in the emergence of regional trading arrangements and regional arrangements?

4. Objectives • To trace the pattern of trade within & outside the region (composition, direction and growth); • To trace the role of GPN in the pattern of trade in the region; • To review the liberalization forces in the Asian region (trade, investment and business facilitation); • To review the non-liberalization forces; • To assess the possible role and contributions of RTA or bilateral or regional trading arrangements and other regional agreements.

5. Concept of Global Production Networks • Emergence of GPNs brought on a new perspective to pattern of trade & investments • GPNs are seen to replace the transnational corporations (TNCs) as a response to 3 constituent processes: • Ascendancy of liberalization processes • Rapid uptake of information & communication technologies • Onset of globalization

6. GPNs are the nexus of interconnected functions & operations through which goods & services are produced, distributed & consumed • Three interconnected transformations in the cross-national organization of business: • GPNs multiplied as a major organizational involvements in global operations • GPNs acted as catalysts for international knowledge diffusion • A long-term process of “digital convergence” opened up new opportunities for organizational learning & knowledge exchange

7. Hierarchy of GPN Participants • Local supplier – handles activities that are outsourced by flagships • Higher-tier suppliers/lead suppliers – interact directly with CMs and BLs; have their own propriety assets & technology; are able to develop & deepen linkages • lower-tier suppliers - main competitive advantage are low transactions costs; usually interact with higher-tier suppliers and do not have proprietary assets; most vulnerable to shocks • Flagship – supervises and directs operation of the network; has control over resources in the network & coordinates transactions and knowledge diffusion • Brand leader (BL) – top of the hierarchy • Contract manufacturer (CM) – links the BL to local suppliers; create their own supply chain networks to service BL

8. Drivers of GPN • Liberalization/institutional changes – four elements: • Trade liberalization • Liberalization in capital flows • Liberalization in FDI policies • Privatization • permitted the integration of domestic markets with the global markets for goods, services & capital through changes in domestic regulations & policy • Liberalization made it easier for TNCs to identify locational specialization • Liberalization measures provide better access to external resources • Liberalization measures reduce the constraints for geographic dispersion of the value chain (Ernst and Kim, 2001)

9. Information & communication technology • Enables better linkages in the international market • Reinforces globalization by increasing demand for it & creating new opportunities • Allows greater mobility of resources & capabilities across geographic boundaries & the selection of cost efficient locations • Provides a network infrastructure that allows for greater coordination among all GPN players

10. Competition • Competition in the global arena became complex, fierce & dynamic • Due to competition, firms are forced to have some presence in all major markets & must be able to integrate activities across countries • Competition cuts across sectors & market segments • Growing complexity of competition changed the determinants of structure, location & growth of business organizations

11. Other Issues • Knowledge diffusion • GPNs enable a network flagship to tap resources & capabilities of suppliers • Transfer of knowledge upgrades the GPN & makes it competitive • Provides incentive for flagships to spearhead knowledge transfer • Case of the evolution of Samsung • Governance • GPNs work with production parameters • Flagship directs the production process by enforcing production standards • Regulatory agencies (national governments/regional agreements) could specify production standards

12. Pattern of Trade in ASEAN

14. Limited intra-ASEAN trade • BUT relative to other regional trading groups, AFTA fares better • Major export & import products in the region: machinery & electronic appliances • Direction of trade: US, EU, and Japan are the leading trading partners of ASEAN • Other major trading partners: China, South Korea, India, Canada & CER

15. GPN in Asia • Country experiences in GPN • Taiwan – transnational communities helped integrate Taiwan in a global production network (Saxenian, 2002) • Before 1980s, cheap labor in Taiwan attracted investments from US • More Taiwanese residents went to the US to take post-grad studies • Through active government recruitment (late 1980s), the brain drain reversed & a technology cluster emerged in Taiwan’s Hsinchu Science Park • Reverse brain drain resulted from Taiwanese policies that made opportunities greater

16. India – similar to Taiwan’s initial brain drain • Relative slow pace of building ties between Silicon Valley and India • Development of India’s software industry was attributed to Silicon Valley’s influence in gov’t policy • Malaysia – is harnessing its competitive edges including cost competitiveness, good infrastructure, highly skilled and trainable workforce, stable socio-political environment, and attractive tax incentives • Attracted numerous electronics, computer peripherals and semiconductors firms due to its number of industrial zones

17. China – leading destination of foreign direct investment and is an integral part of the GPN of foreign companies • Emerged as the leader in manufacturing electronic products • Philippines – experiences rapid growth of telecommunications industry • Became the production site for assembly and product-testing portions of the production stages of semi-conductors • Dominant role of call centers

18. GPN in the Electronics Industry • Recently, global players shifted production to Asia • Two factors that caused the shift: • Boom periods in the region – allowed flagships to expand operations in Asia • Intense competition – led flagships to seek low-cost locations • Electronics industry faces some constrains: • Suppliers are faced with extremely short production cycles • Complex supply chain • GPN in the Automotive Industry • Car sales are increasing in emerging markets, together with the increase in population • Major strategy is introduction of an innovation • Suppliers are stepping up the value chain

19. Liberalization Policies in ASEAN • Liberalization – key driver of global production networks; provides opportunities for locational specialization, outsourcing and spatial mobility • Regional trade agreements (RTAs) address the issue on opening up to trade by slowly integrating economic regions • RTAs should take measures to proceed to higher levels of integration – this issue is critical for global production networks

20. Tariff Policies in Southeast Asia • Main goal of Common Effective Preferential Tariff (CEPT) was to reduce tariffs to 0% - 5% (Jan. 1993) • Average tariffs among ASEAN members steadily declined – now below 5% • Tariff rates at production level are between 0% - 5% • Temporary exclusions are products for which tariffs will ultimately be lowered to 0%-5% but are protected temporarily by delay in tariff reductions • General exceptions include products that are necessary for protection of national security, public morals, human, animal or plant life, etc.

21. Non-tariff Policies in Southeast Asia • Para-tariff measures – increases the cost of imports by a fixed percentage or fixed amount, calculated on the basis of value and quantity • Price control measures – affects the cost of imports in a variable amount • Finance measures - regulates the access to and cost of foreign exchange for imports and define the terms of payment

22. Monopolistic measures - creates a monopolistic situation by giving exclusive rights to a group of economic operators • Technical measures - refers to technical regulations, product characteristics requirements, marketing requirements and the like • Under CEPT, non-tariff barriers should be eliminated within a 5 year period after product has enjoyed CEPT concessions • Framework Agreement on Mutual Recognition Arrangements • Reduced trade barriers in service sectors • Greater financial cooperation

24. FDI in ASEAN Region • The region is one of the major destinations of FDI due to liberalization measures and providing competitive and attractive investment environments • ASEAN Investment Area (AIA) – objective is to establish competitive investment region to attract FDI from ASEAN and non-ASEAN sources; 3 programs • Cooperation and facilitation • Promotion and awareness • Liberalization • AIA binds member countries to eliminate investment barriers, liberalize investment rules, grant national treatment & open up industries • Sensitive issue of AIA is the partial loss of economic sovereignty

25. FDI Policies in the ASEAN Region • Short-term measures to enhance investment climate: • Fiscal incentives • Domestic market access • foreign equity ownership • right of use of industrial land • customs clearance • employment of foreign personnel

26. FOREIGN DIRECT INVESTMENT POLICIES IN THE ASEAN REGION

27. Policies on Business Facilitation • Business facilitation - simplification of international procedures • Intends to open markets by reducing the cost of cross-border trade, improving access to trade information & aligning policy and business strategies • ASEAN emphasizes on building, networking, providing technical assistance & technology transfer • Facilitation measures that focus on transportation: • Framework agreement on mutual recognition arrangement (MRA) • Framework agreement on the facilitation of goods in transit • Framework agreement on the facilitation of inter-state transport

28. Other Locational Advantages of GPN • Level of infrastructure such as telecommunications – facilitates firms to respond adequately to competitive challenges • State and quality of soft infrastructure – includes political stability of the country, peace and order situation, administration of justice, quality of human resources, & industrial relations • Strategic significance to the flagship company in the GPN

29. FRAMEWORK FOR EVALUATING THE IMPLICATIONS OF GPN ON COUNTRY AND REGIONAL MEASURES

30. Conclusion • Surge of GPN in the region facilitated the rapid liberalization mechanisms in host countries • Liberalization measures have brought about convergence in tariff rates & investment climate • Hard & soft infrastructure on ICT facilitated the growth of GPNs • Regional cooperative efforts influence one of the major drivers of GPN – liberalization • Since the impact of regional agreements on the two other drivers is rather limited & indirect, existing regional agreements should be reviewed & evaluated