1. 1 The economic impact of investment provisions in Asian RTAs Sébastien Miroudot Trade Policy Linkages and Services Division Bangkok, 18 January 2008 OECD Trade & Agriculture Directorate

2. The universe of international investment agreements Bilateral/Regional –Bilateral Investment Treaties (BITs) –Regional Trade Agreements (RTAs) –Double taxation treaties Multilateral –GATS –TRIMs Sectoral –Energy Charter Treaty 2

3. Why provisions on investment are found in trade agreements? Investment is today one of the main objectives of countries in pursuing regional economic integration. Investment is a key component in economic development and trade and investment are more and more intertwined. Negotiators have turned their attention to investment-related policies, especially those affecting trade in services. 3

4. Asian RTAs with investment provisions (in force in 2006) 4

5. Liberalising provisions in the sample of RTAs analysed 5

6. Sectoral coverage of the ASEAN Framework Agreement on Services (2006) 6 Based on Fink and Molinuevo (2007)

7. Previous empirical studies and motivations for the analysis Jeon and Stone (2000) Adams et al. (2003) Lesher and Miroudot (2006) Dee (2006)  Have RTAs and their investment provisions an impact on FDI and trade flows?  Are trade and FDI complements?  Differences among agreements: do they matter? 7

8. The dataset 18 reporter countries: Australia, Bangladesh, Brunei, Cambodia, China, Chinese Taipei, Hong Kong (China), India, Indonesia, Japan, Republic of Korea, Malaysia Myanmar, New Zealand, Philippines, Singapore, Thailand and Vietnam. 190 partner countries Unbalanced panel 1990-2006 Dependent variables: –Imports and exports of goods (COMTRADE) –Imports and exports (cross-border) of services (OCDE TISP) –Inward and outward FDI stocks (OCDE + additional data from UNCTAD FDI Statistics) Gravity model variables: distance, geographical dummies (CEPII), GDP (World Development Indicators), tariffs (TRAINS). Knowledge-capital specification: GDP and skilled labour endowment (tertiary school enrolment, World Development Indicators). 8

9. Methodology to quantify investment provisions An index is created for each signatory on the basis of 20 types of provisions grouped into 5 components: –Non-discrimination in non-services sectors (6) –Non-discrimination in services sectors (6) –Investment regulation and protection (3) –Scope of services commitments (1) –Preferential (GATS-plus) commitments (1) The information is coded on a zero-to-one scale where zero indicates the absence of a given provisions and one represents the most “FDI-friendly” provision. A simple average is used for the 5 components and the final index uses weights obtained through factor analysis (principal component analysis) 9

10. Coding of provisions and weights 10

11. Extensiveness of investment provisions: Index scores (2006) 11

12. Empirical models Gravity equation for trade: Knowledge-capital specification for FDI: 12

13. Results of the Poisson estimations 13 Dependent variable: Inward FDIOutward FDI Cross-border imports of services Cross-border exports of services Imports of goodsExports of goods (1)(2)(3)(4)(5)(6)(7)(8)(9)(10) Distance -0.947-1.046-0.950-1.646-0.711-0.579-0.402-0.445-0.440-0.476 (432.73)**(326.69)**(319.64)**(256.60)**(7497.07)**(6200.55)**(21849.25)**(19279.20)**(24573.57)**(21806.45)** Common border 3.3863.079(dropped) 1.7961.6120.9840.7070.9150.763 (47.76)**(37.25)** (11773.03)**(10141.59)**(29947.73)**(15503.45)**(30373.00)**(19576.90)** Common language 1.142 1.6112.3550.1200.1340.4270.3980.1180.028 (559.39)**(376.26)**(379.42)**(347.91)**(1018.49)**(1135.13)**(17172.70)**(13076.84)**(4968.62)**(974.87)** Colonial relationship -1.034-1.192-1.937-4.771-0.151-0.202-0.374-0.482-0.022-0.049 (331.72)**(250.64)**(351.62)**(362.95)**(1226.27)**(1704.24)**(11320.38)**(12127.62)**(694.25)**(1307.24)** Joint GDP 0.6450.1931.2351.1120.6920.4790.7450.7780.9361.077 (251.89)**(35.34)**(436.40)**(221.95)**(3613.24)**(2370.46)**(27003.69)**(23051.14)**(34378.00)**(32725.37)** Applied tariff -0.064 -0.027 (7467.87)** (2927.07)** Relative GDP 0.488 -1.737 (51.21)** (175.36)** Relative skill -0.441 0.589 (79.17)** (108.86)** RTA index 0.0330.0280.0970.1030.0160.0280.0010.0100.0270.029 (120.90)**(65.72)**(218.56)**(89.46)**(1173.62)**(2025.25)**(354.79)**(1993.36)**(7467.66)**(6738.57)** Fixed effects Reporter & partner yes Year yes Number of obs.4,9221,8902,8511,2512,5742,61234,12420,08036,33719,739 Pseudo R-squared0.93030.93670.94360.97050.95770.94220.94750.95140.95740.9612

14. Concluding remarks The index created is quite robust and is positively associated with FDI, cross-border trade in services and to a lesser extent trade in goods. –It is important to account for differences in the coverage of RTAs –Investment provisions in RTAs matter … but there are still questions about the causal relationship involved and what the index exactly captures. The analysis suggests that a preferential treatment exists for investment and services trade –Further research needed regarding rules of origin and how firms take into account provisions in RTAs in their investment decisions. The “fragility” of Asian regionalism? (Baldwin, 2006) –Countries could be more ambitious in liberalising investment in services. The scope of commitments is sometimes low. Whether FDI in Asia is mostly of the vertical or horizontal type is not clear in the analysis –There are however complementarities between investment and trade (in particular in services) 14

15. 15 sebastien.miroudot@oecd.org More information on OECD work on trade and FDI:www.oecd.org/tad Thank You!