Challenges of Free Trade: Spotlight on Asia Pacific

Asia Pacific has witnessed a surge in free trade agreements (FTAs) since the 2010s, reflecting the region’s greater economic integration. Despite its significant benefits, free trade agreements also bring challenges for countries and businesses:

• While domestic businesses benefit from a diversified export market, they also suffer from greater competition, due to the removal of trade tariffs and inflows of cheap foreign goods. This may weigh on business profits and constrain business expansion.
• There is also concern that tougher competitive pressures will reduce the incentives in Asia Pacific to implement proper labour standards and protect the environment. Asia Pacific has been the world’s largest polluter, as it accounted for 48.3% of the world’s total carbon dioxide (CO2) emissions in 2014,up from 42.1% in 2009.
• Free trade can contribute to higher income inequality, especially in high-wage countries, as it promotes cheaper goods from low-wage countries. Also, owners of intellectual property would receive more of the income gains, since FTAs often protect patents and copyrights. Income inequality has already been high in many Asia Pacific countries, such as China, the Philippines, Singapore, Thailand and Vietnam.
• Growing trade flows will make it more difficult for some Asia Pacific countries, such as China, South Korea and Japan, to rebalance their economies towards more consumption-driven models rather than export-led growth. In 2014, consumer expenditure made up 48.2% of Asia Pacific’s total GDP, significantly lower than 65.7% and 55.6% for North America and Western Europe in the same year respectively.

Despite the rise of FTAs since the 2000s, most exporting countries in Asia Pacific still have a long way to compete with China, the world’s largest exporter. China accounted for 37.5% of the region’s total exports in 2014, significantly up from 31.8% in 2009. Japan ranked as the region’s second largest exporter, making up 11.1% of total exports in 2014.

To learn more, download Euromonitor international’s white paper: “An Introduction to Regional FTAs in Australasian Markets: Business Perspectives from India and China”.