Third-country effects on the formation of free trade agreements

The recent proliferation of free trade agreements (FTAs) has resulted in an increasingly complex network of preferential trading relationships. The economics literature has generally examined the formation of FTAs as a function of the participating countries' economic characteristics alone. In this paper, we show both theoretically and empirically that the decision to enter into an FTA is also crucially dependent on the participating countries' existing FTA relationships with third countries. Accounting for the interdependence of FTAs helps to explain a significant fraction of FTA formations that would not otherwise be predicted by countries' economic characteristics.     

企业利用FTA的影响因素研究

随着经济全球化和区域经济一体化的快速发展,中国已把FTA作为一项重要的经济发展战略。目前,中国已经签署了9个FTA,但中国企业对FTA的利用率偏低,这在一定程度上降低了FTA的实施效果。调查发现,企业对FTA相关信息的认知水平不高、原产地规则的面条碗效应、企业的属性等都是影响企业利用FTA的因素。因此,本文建议政府相关部门在提供更多支持和服务的同时,鼓励FTA服务公司的建立和发展,并推动整合东亚多重原产地规则。     

How FTAs Affect Income Levels of Member Countries

The purpose of this paper is to analyse whether FTAs cause the income levels of member economies to converge or diverge. Although existing studies predict the possibility of convergence among FTA members to a certain degree, they fail to provide definitive evidence. By using the concept of accelerating convergence, this study aims to estimate the pure convergence effects of FTAs, separate from the conventional notion of income convergence, so‐called β‐convergence. The neoclassical model of economic growth has been extended to incorporate varying steady states for an open‐economy framework. Applying the system GMM method to a dynamic panel of data consisting of major FTAs – comprising the European Union, NAFTA, Mercosur and AFTA, and encompassing the cases of launching an FTA, expanding membership or deepening FTA integration – we find considerable evidence for the income convergence effect of FTAs.     

Liberalisation and Protection under Overlapping Free Trade Agreements: Dynamic Interplay between Free Trade Agreements and Investment

Two decades into the most recent wave of regionalism many of its implications remain to be fully understood. A vast literature has explored the impacts of free trade agreements (FTAs) on investment flows, but less attention has been given to how existing patterns of investment alter FTA liberalisation. It is contended here that the dynamic interplay between overlapping FTA areas and the investment sunk in them shapes governments' and firms' positions regarding further FTA liberalisation. During trade negotiations, a country may decide to exclude a sector from FTA liberalisation to prevent (concession prevention) future FTA partners from making similar demands. Concession prevention could also occur when a foreign firm, holding a dominant market position in a host country, relinquishes liberalisation demands in an FTA between host and home countries to prevent its current position being eroded if the host country grants similar (or better) concessions to competing firms from other countries in future FTAs. Conversely, investment sunk into a country's sensitive sector in the territory of partners from previous FTAs could pre‐empt (concession pre‐emption) the protectionist position of that country when it subsequently negotiates FTAs with the investment‐source countries. These arguments were tested in the negotiations around the liberalisation of the automotive industry that Thailand and Malaysia had with Japan in their respective bilateral FTAs. The distinct interaction between investment and the FTAs in which these countries participate resulted either in entrenchment of protectionism in the sector or its liberalisation across subsequent FTAs.     

Thai Trade Policy: From Non‐discriminatory Liberalisation to FTAs

FTAs have dominated Thai trade policy recently, reflecting the general trend in east Asia. But they also reflect domestic political changes, especially the decision‐making style of the Thaksin government. Thai FTAs have become very politicised. In particular, the US‐Thai FTA negotiations have run into a storm of domestic protest. The first section of the paper surveys the national trade‐policy framework. It highlights the slowdown of unilateral trade and FDI liberalisation after the Asian crisis, though a descent back into protectionism was successfully resisted. Thailand punches well below its weight in the WTO, and not very forcefully in ASEAN, because political attention and negotiating resources have switched to FTAs. The second section identifies the main actors in Thai trade policy, and briefly describes the trade‐policy decision‐making process as well as recent developments during the Thaksin administration. The following central section deals with Thailand's FTAs. These have been driven by vague foreign‐policy goals, while credible economic strategy has been lacking. The residual commercial logic is narrowly mercantilist and ‘trade‐light’, seeking an exchange of concessions in a narrow range of sectors rather than comprehensive, trade‐creating FTAs. Weak and partial FTAs are the result. The sole exception has been the Thailand‐USA FTA negotiations, as the USA wants a strong, deep‐integration FTA. However, negotiations were suspended in 2006 in the wake of the Thai political crisis. Overall, Thai trade policy post‐Asian crisis is highly unbalanced. It stands on a shaky FTA leg, while the other WTO leg has gone to sleep and the ASEAN arm is limp. Above all, core unilateral liberalisation and related regulatory reform are lacking.     

Free Trade Areas in East Asia: Discriminatory or Non‐discriminatory?

The debates on regional trade arrangements in East Asia focus on whether the RTAs can be net trade creating or diverting, and whether they impede multilateral trade liberalisation or not. This paper attempts to answer these questions by quantitatively estimating the economic impact of possible East Asian free trade areas based on a bilateral gravity model, and evaluating the main characteristics of the proposed FTAs. We find that the trade creation effect expected from the proposed East Asian FTAs such as a China‐Japan‐Korea or an ASEAN plus three (China, Japan, Korea) FTA will be significant enough to overwhelm the trade diversion effect. We also judge that East Asian FTAs will likely be a building block for a global free trade.     

从WTO协议中“最惠国条款”及其例外看自由贸易区的兴起

最惠国待遇条款是WTO赖以存在的基石,GATT第24条作为最惠国待遇的最大一项例外为自由贸易区(FTA)的建立提供了正当性的基础。由于该条款谈判历史上的原因,GATT第24条的条款并不非常明确。自由贸易区的兴起和发展使其正成为平行于WTO体制之外的国际经贸法制。中国应根据本国经贸状况构建符合本国利益的自由贸易区体系和规则。     

Endogenous free trade agreements and the multilateral trading system

I evaluate in this paper the impact of free trade areas (FTAs) on the world trading system. I use an oligopolistic-political-economy model where the external tariffs of FTA members, as well as the decision to form FTAs, are endogenously determined. In this context, I show that FTAs are primarily beneficial to the multilateral trading system. This conclusion is based, first, upon the finding that FTAs induce their member governments to lower their external tariffs, and to do so deeply enough to enhance trade even between FTA members and non-members. While this ensures gains for the latter, in general FTA members may not gain. I show, however, that governments will endorse only welfare-improving arrangements, in spite of their political motivations; as a result, FTA members benefit from ratified arrangements as well. Finally, I find that FTAs, by reducing the role of special interests criteria in governments' trade regime decisions, also tend to enhance support for further liberalization at the multilateral level.     

Free-trade areas and special protection

This paper investigates the impact of free-trade-area (FTA) agreements on the ability of countries to multilaterally cooperate within an economic environment characterized by trade-flow volatility. We show that the parallel formation of different FTAs leads to a gradual but permanent easing of multilateral trade tensions. In particular, we demonstrate that the emergence of the FTAs will be accompanied by a decline in global ‘special’-protection activity, such as safeguard or anti-dumping initiations, but will have less significant implications for most-favored-nation tariffs, or ‘normal’ trade protection.     

Trade-diverting free trade agreements,external tariffs,and feasibility

There has been a proliferation of preferential trade agreements within the last two decades. This paper analyzes the effects of free trade agreements (FTAs) on external tariffs in small economies where protection decisions are made politically. Our model determines tariff rates endogenously instead of assuming they are fixed during or after the formation of FTAs as commonly done in the literature. We show that when an FTA is established, the tariff rates that apply to non-members essentially decline. More importantly, we investigate the interaction between endogenous tariff determination and the feasibility of an FTA. We find that the expectation of tariff reductions under endogenous tariffs could make an otherwise feasible FTA if tariffs were fixed become infeasible. However, if domestic import-competing sectors are relatively smaller and the government places a significant weight on political contributions relative to social welfare, an FTA with endogenous tariffs may be more likely to be feasible than an FTA assumed to fix external tariffs.     

Free trade networks

The paper examines the formation of free trade agreements (FTAs) as a network formation game. We consider an n-country model in which (possibly asymmetric) countries trade differentiated industrial commodities. We show that if all countries are symmetric, the complete FTA network is pairwise stable and it is the unique stable network if industrial commodities are not highly substitutable. We also compare FTAs and customs unions (CUs) as to which of these two regimes facilitates global trade liberalization, noticing that unlike CUs, each signatory of an FTA can have another FTA without consent of other member countries.     

Rue the ROOs: Rules of origin and the gains (or losses) from trade agreements

ABSTRACT

This article provides three-good, three-country examples of trade in both intermediate inputs and final goods. These show the adverse effects that rules of origin (ROOs) can have, even in a world where every country has a free trade agreement (FTA) with every other country. ROOs may cause ubiquitous FTAs to yield a level of welfare, for everyone, that is worse than if there were no FTAs at all, and all trade were subject to common nondiscriminatory tariffs. Thus, the move to an ever increasing number of FTAs may be reducing world welfare.     

Do free trade agreements actually increase members' international trade?

For over 40 years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and — in particular — the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: trade policy is not an exogenous variable. We address econometrically the endogeneity of FTAs. Although instrumental-variable and control-function approaches do not adjust for endogeneity well, a panel approach does. Accounting econometrically for the FTA variable's endogeneity yields striking empirical results: the effect of FTAs on trade flows is quintupled. We find that, on average, an FTA approximately doubles two members' bilateral trade after 10 years.     

The FTA Music Is Playing in Asia: After ECFA,Will Taiwan Join the Dance?

In the context of stalled multilateral trade negotiations, major trading economies are seeking free trade agreements (FTAs) to secure their market access objectives. Nowhere is this dynamic stronger than in East Asia, where a web of bilateral and plurilateral agreements is stitching together piecewise an Asian free trade area that could plausibly rival the EU and NAFTA trade blocs and where the possibility of a formal pan-Asian agreement has been raised. Taiwan has been largely excluded from this dynamic. However, with the June 29, 2010 signing of the Economic Cooperation Framework Agreement (ECFA) with China, the possibility of Taiwan joining the FTA dance in East Asia would appear to have been greatly strengthened as the advocates had anticipated. This article considers the economic and trade implications of Taiwan's participation versus non-participation in an emerging East Asian trade bloc. We support our analysis with simulations using the GTAP computable general equilibrium model. The article finds that the benefits to Taiwan of participating in such a bloc have increased, as have the opportunity costs of exclusion, since the share of East Asian partners in its trade has risen.     

FTA between China and Korea

Under the regional cooperation being a main trend of the World’s economic development, East Asia should make China and Korea as a breakthrough, build Sino-Korean free trade district, and then push the development of the whole East Asia’s regional economic cooperation. Both China and Korea want to contribute to FTA and keep the close geographic, humanistic and trade relation. Both countries’ political relation has been improving. In the IT industry, the focus of sino-Korean FTA, sino-Korean IT industries develop quickly and possess the cooperative basis. While in the FTA’s construction, IT industries’ cooperation faces the obstacles: Sino-Korean economic nationalism ; the existence of huge china trade deficit for sino-Korean trade ; the copyright dispute in the software development. Sino-Korea must take the corresponding measures in order to push the sino-Korean substantial development.     

FTA betwee China and Korea

Under the regional cooperation being a main trend of the World’s economic development,East Asia should make China and Korea as a breakthrough,build Sino-Korean free trade district,and then push the development of the whole East Asia’s regional economic cooperation.Both China and Korea want to contribute to FTA and keep the dose geographic,humanistic and trade relation.Both countries’ political relation has been improving.In the IT industry,the focus of sino-Korean FTA,sino-Korean IT industries develop quickly and possess the cooperative basis.While in the FTA’s construction,IT industries’ cooperation faces the obstacles:Sino-Korean economic nationalism; the existence of huge china trade deficit for sino-Korean trade;the copyright dispute in the software development.Sino-Korea must take the corresponding measures in order to push the sino-Korean substantial development.     

Tariffs and formation of free trade agreements networks

This paper examines the formation of bilateral free trade agreements (FTAs) on the basis of country heterogeneity in the tariff level. We demonstrate that a country's unilateral incentive to form an FTA depends on the relative magnitudes of the (negative) market concession effect and the (positive) market expansion effect, both of which are determined by the tariff levels of the two FTA partner countries. Global welfare is maximised when all country pairs form FTAs. Two countries in equilibrium are more likely to form an FTA when their tariff gap is smaller or when their tariff levels are neither very high nor very low. This finding is robust to several extensions of the model. Our preliminary empirical analysis provides some evidence for the finding.     

Multilateral,Regional and Bilateral Trade‐Policy Options for the United States and Japan

We have used the Michigan Model of World Production and Trade to simulate the economic effects on the United States, Japan, and other major trading countries/regions of the Doha Round of WTO multilateral trade negotiations and a variety of regional/bilateral free trade agreements (FTAs) involving the United States and Japan. We estimate that an assumed reduction of post‐Uruguay Round tariffs and other barriers on agricultural and industrial products and services by 33 per cent in the Doha Round would increase world welfare by $686.4 billion, with gains of $164.0 billion for the United States, $132.6 billion for Japan, and significant gains for all other industrialised and developing countries/regions. If there were global free trade with all post‐Uruguay Round trade barriers completely removed, world welfare would increase by $2.1 trillion, with gains of $497.0 billion (5.5 per cent of GNP) for the United States and $401.9 billion (6.2 per cent of GNP) for Japan. Regional agreements such as an APEC FTA, an ASEAN Plus 3 FTA, and a Western Hemisphere FTA would increase global and member country welfare but much less so than the Doha multilateral trade round would. Separate bilateral FTAs involving Japan with Singapore, Mexico, Chile and Korea, and the United States with Chile, Singapore and Korea would have positive, though generally small, welfare effects on the partner countries, but potentially disruptive sectoral employment shifts in some countries. There would be trade diversion and detrimental welfare effects on some non‐member countries for both the regional and bilateral FTAs analysed. The welfare gains from multilateral trade liberalisation are therefore considerably greater than the gains from preferential trading arrangements and more uniformly positive for all countries.     

Does firm size matter in exporting and using FTA schemes?

In this paper, we empirically compare the role of firm size when exporting with that when using free trade agreement (FTA) schemes. We employ a unique survey providing detailed information on FTA use by Japanese affiliates in ASEAN, India, and Oceania. Our findings from the analysis on Japanese affiliates in ASEAN are as follows. First, firm size matters in both decisions on exporting and on using FTA schemes. In particular, firm size is more quantitatively important in decisions on FTA use than on exporting. Second, firms with experience in utilizing FTAs for exporting have an approximately 40% higher probability of using an FTA for exporting to a new country. Third, larger-sized firms use a larger number of FTA schemes.     

Computational Analysis of the US FTAs with Central America,Australia and Morocco

We use the Michigan Model of World Production and Trade to assess the economic effects of the US bilateral FTAs negotiated with Central America, Australia and Morocco. The model covers 18 economic sectors in each of 22 countries/regions and is based on version 5.4 of the GTAP database for 1997 together with specially constructed estimates of services barriers and other data on sectoral employment and numbers of firms. The distinguishing feature of the model is that it incorporates imperfect competition in the manufacturing and services sectors, including monopolistic competition, increasing returns and product variety. The modelling focus is on the effects of the bilateral removal of tariffs on agriculture and manufactures and services barriers. Rules of origin and other restrictive measures and the non‐trade aspects of the FTAs are not taken into account due to data constraints. The computational results indicate that the benefits of bilateral FTAs for the United States and partner countries are rather small in both absolute and relative terms, and that far greater benefits could be realised if the United States and its FTA partners adopted unilateral free trade and especially if multilateral free trade was adopted by all countries/regions in the global trading system.