Free Trade Agreement Between the GCC and ASEAN

slack Trade Agreement Between the GCC and ASEANExecutive epitomeThis paper is a consolidated report of surveys on key issues and concerns to administer and investiture in an ASEAN-GCC let go of cover environment. The researchers were able to make a outline of most likely issues and concerns that would be deterrent to negotiations for a free job agreement on the ASEAN and GCC zones.The consolidated report is based on an in decenniumsive writings review. As the ASEAN-GCC talks atomic number 18 still under means, the researchers thought it wiser to first create a schema for an enterprise survey which would assess the effectiveness as puff up as get word prohibitions which would inadvertently impinge on ASEAN-GCC free barter negotiations.A consolidated report on much(prenominal) factors would greatly benefit business enterprises as easyhead as the government itself in that it provides a guidelines of expectations and, thus, this could be addressed early on.The report fi rst discussed an overview of the GCC financial merchandise to establish the market likelys and readiness of the region. The key issues and concerns that were ga in that respectd through research were then grouped accordingly to whether they fall under the tariff barriers or frame of referenceal transaction cost issue, and the non-tariff barrier (NTB) or informal transaction cost issues.From the consolidated report, it was revealed that while tariff barriers or formal transaction cost affects trading and investiture, it was the non-tariff barriers which generally costs companies a lot. Non-tariff barriers include red tape from getting business certifications, weak legal agreement especially in legal disputes and the like, enforcement of environmental policies, restrictions placed on monomania of equities and realistic estate, existence of laws which prohibits irrelevant nationals from applying for business permits, especially in atomic number 18as outside the free softw ood zone. There excessively exists some political and/or diplomatical barriers. However, these should non be given to much focus as these contribute scarcely a small amount of influence to the conduct of make out and investment. athletic field of StudyThis deal on the free trade agreement between the ASEAN and GCC focuses on identifying issues and concerns that should be addressed in order for a free trade agreement between the GCC and the ASEAN to be useful and beneficial for all signatory explodeies. These issues and concerns are identified through extensive research and inference from previous studies and real articles. However, issues that are only significant for the government and other stakeholders, but are not of particular important to the business sector (i.e., labor and environmental issues) were not considered.Background of the ProblemLast June 30, 2009, a trade pact in the form of a memorandum of agreement (MOA) was sign-language(a) between the Gulf Cooperation Council (GCC) and the 10 country-members of the Association of Southeast Asian Nations (ASEAN) (TradeArabia, 2009). The said MOA focuses on building a trade bloc between the GCC and ASEAN, and also explores the possibility of a Trade and investment Framework Agreement (TIFA) and a free trade agreement (FTA). The trade pact was sign-language(a) after the first successful GCC-ASEAN ministerial meeting held in Manama, Bahrain, wherein the ministers approved a ii-year working plan in improving trade analogys between GCC and ASEAN countries (TradeArabia, 2009 ArabNews.com, 2010). A trade and investment road part in the form of the GCC-ASEAN 2010-2010 action plan was adopted on the second GCC-ASEAN ministerial meeting held in Singapore in May 2010 (ArabNews.com, 2010 Press self-confidence of India/bilaterals.org, 2010 The Malaysian News Agency, 2010).In an article by the Press Trust of India (2010) as cited by bilaterals.org (2010), the GCC and ASEAN have agreed to further enhance t rading and investment opportunities as hale as collaboration in the areas of improving the economy, moneymaking(prenominal) and business enterprise, education whilst promoting mutual respect through culture and media by direction of the ASEAN-GCC Two-Year Action Plan (2010-2012) . However, in the recent press release of the ASEAN Secretariat (www.asean.org, 2010) a free trade agreement between the twain blocs was not brought up.Business Dictionary defines free trade agreement as a treaty between countries that essentially reduces tariffs and barriers on goods and services, although jacket crown and/or labor whitethorn not move freely (businessdictionary.com). These agreements specify the rules and for trade between or among signatory countries (Sen, 2004, p. 1).Free trade means trade of goods and services (not necessarily capital and labor) between countries that is free from tariffs and other trade barriers imposed by the governments of those countries (Bhagwati, 2002, p.3). I t is considered as the building block for scotch integration in a region (Sen, 2004, p. 1). Free trade is based on the principle of comparative advantage first proposed by David Ricardo (Case Fair, 1999, pp. 812-818). Ricardos theory of comparative advantage asserts that countries could produce goods to a greater extent cost-effectively if they alter at producing the good(s) which they produce most efficiently and bought all other goods from other nations specializing in producing those goods (Case Fair, 1999, pp. 812-818). According to this theory, specialization will make production of goods more efficient and thus, bring down prices. Therefore, if goods can freely enter a country, advocates of free trade suggest consumers would benefit because of the lower prices of goods (Case Fair, 1999, p. 818).WTO and other reports have stated that free trade agreements have started to proliferate between countries and even between trading blocs (Crawford and Fiorentino, 2005, p. 2 Raze en, 2006). Of regional trade agreements reported to the WTO as of 2005, 84 per cent are free trade agreements (Crawford and Fiorentino, 2005, p. 3). The WTO reports that the uncertainty of the fate of the Uruguay Round (1986-1994) has prompted countries to pursue their own preferential deals, mostly bilateral, or involving two countries, with other nations (Crawford and Fiorentino, 2005, p. 6).The more aggressive countries or trading blocs are the European Union, Australia, Japan, Singapore, New Zealand, and the fall in states and Canada. The ASEAN and the GCC are both lagging behind in creating deals, but the member countries, especially of the ASEAN are forge their own FTAs with other countries such as Japan, South Korea, and China (Crawford and Fiorentino, 2005, pp. 6-8).It has been observed that trade among the Arab states has been relatively small compared to other regions (Hassan and Tarik, 2010). This is despite the observation that members of the GCC have green economic an d social characteristics (Fasano and Iqbal, 2003). But the GCC is trying to catch up with regard to forming free trade agreements as a bloc with other countries and trading blocs (Hassan and Tarik, 2010). It has signed a free trade agreement (GSFTA) with Singapore in 2009 and has since experienced a growth in investments from and an increase in trade with this country.The GCC consists of Bahrain, Kuwait, Oman, Qatar, Saudi-Arabian Arabia, and the United Arab Emirates and was formed in May 1981 (Fasano and Iqbal, 2003). Its aim is to promote cooperation and peace among member nations. The member countries of the GCC have all undergone diversification from dependence on oil into trade and services-centered economies. The GDP per capita in these countries are among the highest in the world (Fasano and Iqbal, 2003).The members of the ASEAN, however, have followed a different track. Instead of forming free trade agreements as a bloc, each unmarried member of the ASEAN has began to forge free trade agreements with other countries such as Japan, South, Korea, the United States, and Australia (Razeen, 2006). Singapore is the most aggressive of these countries, having signed a free trade agreement with the GCC in 2009 (iAdvisory, 2009). However, the region has started talks as a bloc for free trade agreements with China, Australia New Zealand, and the GCC (China Embassy, 2004 Xinhua, 2008 Tradearabia, 2009).The ASEAN was formed in 1967 in Bangkok, Thailand through the subscribe of the ASEAN Declaration by the five founding members, namely Indonesia, the Philippines, Malaysia, Thailand and Singapore. It was later joined by Brunei Darussalam in 1984, Vietnam in 1995, Lao PDR and Myanmar in 1997, and finally, Cambodia in 1999. Thus, today ASEAN has ten member countries (ASEAN website).With the signing of the memorandum of agreement between the GCC and ASEAN for in 2009 (Tradearabia, 2009) and the adoption of the ASEAN-GCC Two-Year Action Plan in 2010, trade and f inance off-keyicials in these two regions are still on the verge of devising such an agreement that would be agreeable to all involved. The Joint Vision in 2009 built the economic partnership between the two regions on the following areas economic, cultural, scientific and social, and aims to promote people-to-people contacts. On the other hand, the two-year action plan expands its cooperation and collaboration along the areas of trade and investment, economic and growthal cooperation, education and training, culture and knowledge, and mutual consultation in international matters (ASEAN Secretariat, 2010).enquiry ObjectivesThe researchers believe that this paper would be quantifyly as it attempts to draw out workable key issues and concerns that the business enterprise might come up against in operating within the GCC. It is a fact that business organizations and companies are the driving forces behind trade. Thus, the point of view of these organizations will have to be consi dered for a free trade agreement to prosper.Therefore, the purpose of this paper is to identify achievable issues and concerns that should be addressed in order for a free trade agreement between the GCC and the ASEAN to be useful and beneficial for all signatory parties. Issues that could be significant for the government and other stakeholders, but are not of particular important to the business community (for example, labor and environmental issues), will not be considered.Expected OutcomeThrough this research, we hope to uncover key issues that are seen by businesses in both the ASEAN and the GCC as roadblocks to free trade between the two regions. We anticipate that lack of information about each others markets, and the convoluted regulatory policies of each region will be primary concerns. Also, the unification of standards for export products, particularly in the electronic sector may be another crucial issue. These concerns will be discussed in detail. The literature will a lso be consulted for possible solutions on how to address the issues. Such possible solutions will be incorporated in the conclusion and recommendations portion of the paper.Methods of ExaminationLiterature ReviewDue to quantify constraints, the researchers opted to use literature review as a method for identifying key issues and concerns in the GCC-ASEAN free trade agreement, particularly with regard to trade and other aspects that affect it such as cultural, political, and social environments, will be reviewed in order to identify possible issues and challenges that would be stumbling blocks to reaching a beneficial trade agreement.Research and statistical material on the effects of free trade agreements forged by GCC with other countries, regions, or trading blocs will also be examined to determine issues that have emerged, if any, in these free trade agreements. The same shall be made with regard to the agreements forged by the ASEAN and its member countries with other nations or trading blocs.Techniques and Strategies utiliseDescriptive analysis such as frequency counts, means, percentages and was used in describing the consolidated report about the identified key issues and concerns surround the GCC-ASEAN free trade agreement. These literature were gathered from published journals, immatures articles, magazine articles, e-zine and the like. The need to consolidate the information gathered from these materials are very important in order to submit a general picture of the key issues and concerns plaguing the business enterprise operating within the GCC-ASEAN free trade agreement. And, thus, inference can be drawn.From the consolidated report, a conceptual framework could be sufficiently drawn, providing a springboard for an intensive enterprise survey in order to assess the effectiveness of the GCC-ASEAN free trade. outline and FindingsThis section describes the literature review conducted by the researchers. In this review, variables under considera tion are scrutinized and discussed through intro of relevant articles focusing on a GCC-ASEAN partnership. The presentation begins with an overview of the GCC as potential target market, followed by a brief discussion of both formal and informal transaction costs in the international marketing scene as variables considered for a successful trading agreement. After which is an analysis of the foreign shoot investments (FDI) of the regions concerned so as to assess and somehow holler a successful trade agreement should the key issues and concerns be identified and addressed.The GCC Financial MarketThe Arab world is characterized by five attributes that have allowed it to benefit from the well-disposed international economic conditions. First, it owns the worlds largest deposits of energy. It has 58 per cent of all known raw oil reserves and 27 per cent of all proven natural hired gun reserves. (IMF Country Report, 2009). Second, the Arab world benefits greatly from international remittances. Ratha, Mohapatra and Silwal (2009) in the World Bank Migration and Development Brief 10, cited that the Arab world as a whole again benefited more than other world regions when international remittances quadrupled in 2000-2008. Third, Arab countries have benefited from the global boom in tourism during 2002-2008. Fourth, Arab countries accumulate a lions share of total global development assistance (World Bank, 2009). Fifth, Arab countries accumulated substantial foreign assets of more than US$2500 per inhabitant in 2006 (IMF, 2009).In a study conducted by Zarrouk (2001) entitled A contemplate of Barriers to Trade and Investment in Arab Countries wherein a total of 230 companies, which represent the manufacturing and service sectors of Egypt, Gaza-West Bank, Jordan, Lebanon, Saudi Arabia, Syria, Tunisia and the UAE, it was revealed that the trading barriers are most intensive in Gaza-West Bank with a mean of 2.0, followed by Syria (mean = 2.1), Egypt (mean = 2/41), T unisia (mean = 2.43) and Saudi Arabia (mean = 2.8). Zarrouk (2001) describes the mean form from a scale of 1 (extremely problematic) to 4 (not problematic) (please refer to the table adapted from Zarrouk, 2001).From the result of the study of Zarrouk (2010) it can be inferred that Saudi Arabia figured as a country, wherein an FTA might prove challenging. As to the areas or indicators of what might these trade barriers be. Zarrouk (2010) identified these barriers. First, his study revealed thatSaudi has visa restrictions for business visitsThere exists local agency laws which allows Saudi nationals only to register for business and to be an agent of a foreign companySaudi impost are biased on Arab-made products but are more lenient to Asian, North American, and European productsOn the subject of transaction costs, Zarrouk (2010) business enterprises were interviewed as to whether these were not costly (value of 1) to prohibitive (value of 4). It was found out that customs duties an d other import charges (mean score of 3.0) ranked first followed by domestic taxes (mean score of 2.6), customs clearance (mean score of 2.5), public sector corruption (mean score of 2.4), inspection/conformity certification (mean score of 2.2), transshipment regulatory measures (mean score of 2.1), and business visa restrictions (mean score of 1.8). Please see table below (adapted from Zarrouk, 2001).When the companies were interviewed about the most restrictive constraints to trade and investment, the study revealed that a primary obstacle is the weak legal system that fail to ensure that the terms of business asks are honored (Zarrouk, 2001 Abdel-latif, 1992). Second in rank is the restrictive local agency law granting business permits only to nationals. In a similar vein, Newquist (1994) hints in his article for Computer World entitled Breaking a Barrier to Trade that cultural values do a role in trade and investment. For instance, he said that ethnocentricity weakens trade. In a free trade agreement wherein foreign nationals are invited to invest in the region, this factor would have a very negative effect thence. Third in rank as most restrictive is that foreign nationals are banned ownership of real estate. This means that foreign investors have less opportunities of staying longer in Arab countries, thus, the cost of transferring to and fro their home country would be quite expensive. In relation to this, Arab countries also puts limits on foreign ownership of equities thus this would mean a slow expansion and growth of businesses. Sadly, corruption, bureaucracy and bad governance also figures in the trade barriers identified by Zarrouk (2001). Meanwhile, less transparent and complex tax systems and para-tariffs were also included in the list of most restrictive barriers.The GCC has been engaging in trade agreements with countries other than the ASEAN. For instance, they also have a free trade agreement with the EU, the NAFTA, the WTO, and GAFTA in as much as it enjoys bilateral trade dealings with a host of other countries as Japan, South Korea, China, Singapore and its neighboring Arab countries.Zarrouk (2001) also attempted to interview the business enterprises with regard to the free trade agreements signed by their respective governments. It was revealed in the study (Zarrouk, 2001) that among the trade barriers to a companys growth according to the respondent companies areThere is a lack of clear-cut druthers with regards to free trade agreement benefits given to the business enterprisesGovernment agencies do not make enough effort to inform the public about the benefits of the agreements challenger from Asian countries is much stronger, offsetting the benefits of the agreementsImplementation problemsPartner countries do not commit to terms and conditions of the agreementsArticles of some agreements are left to the interpretation of customs officialsTrade agreements do not reduce the numerous administrative procedures , paperwork and red tapeImplementation of certain articles of the agreements is not reciprocalTransportation between Arab countries is inadequate.Considering these results of the study of Zarrouk (2001) with specific name and address effective free trade barrier which states that Competition from Asian countries is much stronger, offsetting the benefits of the agreements a free trade agreement between the GCC and the ASEAN is highly workable. This is backed up by a shared trading history that have been shared by both regions (Press Trust India, 2010 The Malaysian National News, 2010 Reuters, 2010).Transaction CostsIn Economics, a transaction cost is cost associated with exchange of goods or services and incurred in overcoming market imperfections (BusinessDictionary.com). Also known as frictional costs, these are fees and charges omissible to buying, selling, and trading which includes transportation costs, legal fees, communications charges, and even opportunity costs in taking u p time and energy in putting up a business venture.As cited by Abdel-Latif (1992), transaction costs cover a wide range of transactions from the conceptualization of putting up an investment until the actual running of the business itself.Generally, transaction costs includethe costs of obtaining information about market conditions in any given foreign market (the quantities and qualities desired and the prices prevailing for each different quality) and the reciprocal costs for agents in foreign countriesthe costs of information about government regulations and other policies in both foreign and home markets (including exchange rate policy, exchange restrictions, tariff and non-tariff barriers, and health and environmental regulations)the costs to each potential party of identifying appropriate trading partners in these marketsthe costs of negotiating, writing, and enforcing contracts and resolving disputes between the parties andthe costs of financing the transaction, which general ly involves a long lag between placing an export order and making final wages for it, and of bearing the risks of default throughout the process.Abdel-Latif (1992) further corroborates that these transactions costs are affected by several factors which includesdifferences in language, culture and taste, laws and dispute resolution procedures, income and information sources, the modus operandi of markets, and the extent and character of competition,difficulties of enforcing contracts across countries, and hence the higher risks of payment default.However, these factors are dynamic and changes over time along with the changes in organizational structure, advent of new policies and regulations, use of technology in communications, transportation, and other aspects of the dynamic societal structure whether environmental, socioeconomic, political or cultural. Other factors which may give rise to transaction costs are what is known as asymmetry of information which is elemental to any bu siness traffichip.For example, at the level of the rules and regulations, countries may want conditions to look different than they rattling are or may be unwilling to enforce existing laws. Likewise, the agents responsible for implementing the rules may have little incentive to do so and indeed may have the incentive to leave the interpretation of these rules sufficiently ambiguous so as to generate rents for themselves. Even more relevant and important, each potential trading partner has better information about his own characteristics and propensities (appropriate to defining the terms of the contract) than does the other party, inducing adverse self-selection for any given terms. (Abdel-Latif, 2001)Theoretically, any contract between trading partners details enough fine points for a working partnership to thrive. However, in reality, the details of these contractswhich includes threshing out possible roadblocks as well as scrutinizing everything takes up a lot of time and disc ussions, and most often ends in stalemate. Thus, the costs of drawing up a very detailed and encyclopaedic trading pact whose interpretation is transparent and accurate are quite expensive. Moreover, there is a time lag in having these agreements move to and fro the business partners and, thus, there is a likelihood of it being exposed to risks as moral hazards and resorting to shortcut methods in order to get through a deal.Transaction costs in the communications and in dispensing information are exposed to a host of other factors like insufficient insurance systems to keep the transactions private in order to protect the enterprise practices, the non-existence of competitive markets who should have been able to provide services such as that in information and enforcement costs for the reason that there already exists a specified role for an intermediary providing the aforementioned services. Thus, the scenario is that there is a monopoly of the services and upon which the governm ent base its trade intervention and other regulations. at one time a business enterprise engages itself in a contract it exposes itself to risks. Hence, after engaging in a contract both parties would naturally protect itself from these purported risks by seeking insurance. Moreover, when the company seeks this insurance it presents itself to an asymmetry of information wherein both parties fall into excessive negotiation costs as well as lags in time which further results to attempt a moral hazard and become opportunistic (Abdel-Latif, 1992).The upside of this is that the degree and magnitude of these problems in transaction costs depends on the conspicuous features of the business in the region, on the regions conducting trade and investment itself, the companies or enterprise involved in the transaction, and even the socio-political and environmental conditions itself. Furthermore, the enterprise itself may just well revive itself and find its own innovative solutions to get ove r these problems (Abdel-Latif, 1992).Foreign Direct Investment (FDI)Foreign direct investment or FDI refers to any form of investment that earns interest in enterprises which functions outside the domestic territory of the investor (Graham Spaulding, 2010). An FDI calls for a business partnership between a parent company and its foreign subsidiary. The strawman of multinational companies concretizes a foreign direct investment. There are two categories of FDIs, inward FDIs and outward FDIs, which depends on the kinds of restrictions the government requires business enterprises to follow. Outward FDIs are direct investments abroad, which requires tax incentives and/or disincentives, and which the government tries to guard from probable risks of any form (Graham Spaulding, 2010).Aside from the classification, a foreign direct investment is motivated by a lucrative market, presence of resources, and efficiency in operating a business in the region (Graham Spaulding, 2010). In any c ase, a successful free trade agreement between regions base most of its terms and conditions in these three motives. These three motivations are already present in a partnership with GCC and ASEAN. As it is, both regions are said to be complementing each other in the sense that ASEAN countries have a need for the oil industry of the GCC and the GCC countries have a need for the resources, particularly the agricultural sector, for itself.With the advent of new technology developments, more and more companies have been establishing foreign direct investments (Spaulding Graham, 2010). This is partly because communications as well as transportation costs have decidedly become cheaper as compared in the past (Graham Spaulding, 2010). UNCTAD reports that there is an increase in the yearly FDI flow from an ordinary of $10 jillion dollars to $20 billion within a decade (from 1970s to 1980s). This growth further hit the roof from $26.7 billion in 1990 to $179 billion in 1998. The amount doubled to $208 billion in 1999. At present, FDIs comprise a bulky portion of global businesses.Satsuya (2009) revealed in his article that among the issues that hinder foreign direct investments, particularly in Malaysia and Thailand, runs parallel with foreign ownership of companies. In the telecommunications sector, dispersion and commercial banking, foreign ownership is narrowed to 30 percent. Malaysia limits foreign ownership to industries that have to do with financial industries to 49 percent while foreign banks are only permitted to set up one other branch with a limited number of personnel.But these limitations are not only true with the ASEAN countries like Malaysia and Thailand. Some of the GCC members, like the Saudi Arabia, also imposes its limitations of foreign ownership of real estate and equities. In fact, this corroborates with the study of Zarrouk (2001) wherein he says that Saudi Arabia ranks among those with severe restrictions on foreign ownership in the count ry. On the other hand, in Bahrain, foreign distribution services could well put up several distribution branches in the country but they are not allowed to participate in direct commercial sales like wholesale and retail. Though the UAE is more friendly to foreign investors offering 100 percent ownership in free trade zones, such as Abu Dhabi, it limits foreign ownership to 49 percent outside the free trade zones. Thus, foreign industry expansions are still limited. Meanwhile, the telecommunications sector remain off limits to foreign ownership as well as the granting of licenses to any foreign bank to operate as a full-fledged financial institution.Key Issues and Concerns set by Independent PapersAlong the domestic spheres, Sasuya (2009) identified these factors which the government enforces in order to safeguard most of its defunct local commerce, and thereby lend to the evolution of trade and investment in the region. Some of these measures involve dependence on subsidies, setti ng up of importation quotas and exacting high taxes on imports. By so doing, while the GCC and ASEAN regions inadvertently protects its industries from trade it also prevents foreign investments from entering the picture (Sasuya, 2009). In the same manner, it is because of these trade defensive measures that there are deadlocks on negotiations such as a free trade agreement which generally banks in reducing tariffs on imports. For instance, when Japan and South Korea started negotiating a free trade agreement with Thailand, Malaysia and the Philippines, angst rose from the terms regarding its agricultural tariffs and issues arising from full-ownership of an agricultural company of a foreign national also emerged, especially from the Thai end. According to the Commerce look Somkid Jatusripitak, who was also its Deputy Prime Minister, their refusal to bring down tariff on rice imports is due to the fact that 70 percent of the Thais are rice farmers (Satsuya, 2009). In Malaysia, this barrier is much more extensive. With the Malaysian government instigating its Bumiputera development policy, which operates in favor of the ethnic Malay majority who incidentally belong to borderline economy, thereby affecting not only trade but the flow of foreign direct investments. Thus, by refusing to reduce tariffs on rice imports the government is actually defend its constituents but is, in a way, increasing the transaction costs incurred by this particular deadlock.In the manufacturing sector, high tariffs also act as trade barriers. In Malaysia for instance, automobile imports have high taxes to protect its local automobile industry, Proton. Even if the Thais do not manufacture any automobiles, the country is sponsoring the industry as part of its industrialization scheme in which they envision becoming an auto manufacturing center. Meanwhile, the textile industry is also shielded in the sense that it imposes 20-30 percent tax on all imports (Satsuya, 2009).There exists a s tatistical relationship between trade influx and political climate. According to Bergeijk (1992) a country with good diplomatic relations also increases its chances of getting bilateral business trades as well as drawing in foreign investors. However, the researcher also warns not to put withal much emphasis on this variable as it has less contribution than other economic variables. Nevertheless, the fact that it contributes some amount of influence on the way companies conduct their business should not be discarded.Aside from political and diplomatic relations, a separate study finds that environmental constraints in the form of policies of the region also act as a trade barrier (Kohn, 2003). For instance, if and when a foreign investor should want to import a product which proves to be more polluting than the existing domestic product, the company woul