Computational Analysis of the Menu of US‐Japan Trade Policies

We have used the Michigan Computable General Equilibrium (CGE) Model of World Production and Trade to calculate the aggregate welfare and sectoral employment effects of the menu of US‐Japan trade policies. The menu of policies encompasses the various preferential US and Japan bilateral and regional free trade agreements (FTAs) negotiated and in process, unilateral removal of existing trade barriers and global (multilateral) free trade. The welfare impacts of the FTAs on the United States and Japan are shown to be rather small in absolute and relative terms. The sectoral employment effects are also generally small but vary across the individual sectors depending on the patterns of the bilateral liberalisation. The welfare effects on the FTA partner countries are mostly positive though generally small, but there are some indications of potentially disruptive employment shifts in some partner countries. There are indications of trade diversion and detrimental welfare effects on non‐member countries for some of the FTAs analysed. In comparison to the welfare gains from the US and Japan bilateral FTAs, the gains from both unilateral trade liberalisation by the United States, Japan and the FTA partners, and from global (multilateral) free trade are shown to be rather substantial and more uniformly positive for all countries in the global trading system. The US and Japan FTAs are based on ‘hub’ and ‘spoke’ arrangements. We show that the spokes emanate out in different and often overlapping directions, suggesting that the complex of bilateral FTAs may create distortions of the global trading system.     

Trade‐Policy Issues and Policy Options for Japan and the United States: Introduction and Overview

This symposium includes papers that analyse a number of issues that are likely to play a key role in the Doha Development Agenda (DDA) negotiations. These issues are analysed from the perspective of US‐Japanese economic relations. In these papers, the economic effects of the WTO negotiating options available to both countries are explored. A final paper examines the important issues raised by the free trade agreements (FTAs) that have or will soon be negotiated by the United States and Japan. Brief summaries of the papers are provided. With all the advantages that have accrued to Japan from the multilateral trading system, it is not surprising that for many years Japan, alone among the world's major economies, stayed aloof from regional trading arrangements. The very past success of the multilateral trading system has made further progress at this level far more complex and has pushed many countries, Japan included, to look to new and deeper regional trading agreements as a more productive path. But it should not be forgotten that while FTAs may be easier to conclude, their benefits are modest compared with what can be gained from a successful Doha Round, and the costs from new distortions imposed on regional trade can be very significant for some of the world's poorer economies. Every good reason remains for Japan to continue to wish to be a pillar of the WTO and of the new Doha Round.     

Small Hubs,Large Spokes and Overlapping Free Trade Agreements

The proliferation of overlapping free trade agreements (FTA) in recent years has led to pair‐wise hub‐and‐spokes (HAS) throughout the world. Being avid subscribers to FTAs, many countries in the Asia‐Pacific region, including the United States, Japan, Singapore, South Korea, Thailand and Australia, have become trade hubs to their partners who are in turn relegated to spoke status. In this paper, we question whether being a hub is welfare optimal for a small and open economy such as Singapore compared to membership in a single bilateral FTA or a multi‐member free trade zone. Within this context, we use a computable general equilibrium model to examine the welfare implications of the triangular trade relationship of the United States, Singapore and Japan. This is facilitated by the Japan–Singapore Economic Partnership Agreement, the USA–Singapore Free Trade Agreement, and a hypothetical USA–Japan Economic Partnership Agreement. The analysis is extended to incorporate ‘super‐hub’ effects, that is, the spoke countries could be trade hubs in other HAS systems. Our experiment reveals that hub status generates positive welfare gain and is the highest Singapore can get from the trade configurations considered. Meanwhile, Japan loses more than the USA when both are relegated to spoke status. These findings prove to be robust under different market structures and production technologies, deeper economic integration, ‘super‐hub’ effects, as well as uncertainty in the key model parameters and the extent of trade liberalisation shocks.     

Dispensing with NAFTA Rules of Origin? Some Policy Options

The objective of this paper is to use a computable general equilibrium (CGE) methodology to estimate the economic gains, for both Canada and Mexico, of: (1) adopting a North American customs union (CU) that would also liberalise rules of origin (ROO); and (2) reviving the WTO scenario of multilateral free trade, thereby eliminating preferential commerce and thus the need for preferential ROO across free trade agreements (FTAs). Such a CGE methodology is useful as the approach permits computation of an efficiency (or ex post) cost of ROO that might, in some contexts, be more relevant than the existing ex ante indices of ROO restrictiveness, which are unable to account for the fact that the use of preferential access in an FTA (and the concomitant ROO compliance) is an option, not an obligation. The paper shows that the erosion of NAFTA tariff preferences at the end of the 1990s and early 2000s, which resulted from a different phasing of the NAFTA and Uruguay Round measures, has reduced the efficiency cost of NAFTA ROO, making these rules economically less relevant, especially for Canada, and therefore limiting somewhat the gains from liberalising them through a CU. Given this, the WTO scenario of multilateral free trade remains the approach that would deliver the largest economic gains in terms of GDP and welfare, while making preferential commerce and ROO obsolete.     

Failure of the WTO Ministerial Conference at Cancun: Reasons and Remedies

This paper first discusses four general developments in the world trading system that have made it increasingly difficult in recent years for nations to reach multilateral agreements aimed at further liberalising international trade, namely: (1) the increased technical complexity and disruptive domestic economic effects of the issues being negotiated; (2) the shift in relative bargaining power among the negotiating participants in favour of the developing countries; (3) the proliferation of bilateral and regional free trade agreements in contrast to multilateral agreements, and (4) the increased emphasis on achieving ‘fairness’ rather than reciprocity in trade liberalisation. Differences in negotiating positions of the participants on the major specific negotiating subjects of the Doha Round, such as new rules covering investment, competition policy, government procurement policy, and trade facilitation, agricultural liberalisation, changes in anti‐dumping and countervailing duty rules, the tariff‐cutting rule to increase access to non‐agricultural markets, and further liberalisation in the services sector, are then considered as well as the likelihood of reaching compromises on these matters. Finally, the possibilities of reaching acceptable balances of concessions and gains are considered for such key participants as the Group of 20 developing countries, the European Union, the United States and other industrial countries.     

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.     

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.     

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.     

Multilateral Agricultural Trade Liberalisation: The Contrasting Fortunes of Developing Countries in the Doha Round

An applied general equilibrium model is used to assess the impact of multilateral trade liberalisation in agriculture, with particular emphasis on developing countries. We use original data, and the model includes some specific features such as a dual labour market. Applied tariffs, including those under preferential regimes and regional agreements, are taken into account at the detailed product level, together with the corresponding bound tariffs on which countries negotiate. The various types of farm support are detailed, and several groups of developing countries are distinguished. Simulations give a contrasted picture of the benefits developing countries would draw from the Doha development round. The results suggest that previous studies have neglected preferential agreements and the binding overhang (in tariffs as well as domestic support), and have treated developing countries with a high level of aggregation and been excessively optimistic about the actual benefits of multilateral trade liberalisation. Regions like sub‐Saharan Africa are more likely to suffer from the erosion of existing preferences. The main gainers of the Doha Round are likely to be developed countries and Cairns Group members.     

Bilateral ‘WTO‐Plus’ Free Trade Agreements: The WTO Trade Policy Review of Singapore 2004

The World Trade Organisation's 2004 Trade Policy Review of Singapore (WTO‐TPR Singapore 2004) depicts the small and outward‐oriented economy as one of the most open countries to international trade and investment. The review highlights the benefits of the outward‐oriented strategy that has enabled the Singapore economy to weather recent external shocks such as the Asian financial crisis to the SARS and to the recent unfavourable conditions in the Middle East. In particular, the report commended Singapore's efforts on its liberalisation of the services sector and its economic benefits to consumers and global trade. However, the WTO‐TPR Singapore 2004 highlights several key areas of concerns: (a) the commitment to multilateral agreements with the rising number of bilateral free trade agreements signed by Singapore and (b) the lack of growth of total factor productivity, a key indicator for long‐run efficiency of the economy. The paper addresses the above key concerns raised in the WTO's TPR of Singapore in terms of its commitment to global trade in terms of WTO‐plus bilateral FTAs, which intends to support a multilateral trading system, and its overall industrial strategies to raise its competitiveness.     

A South–South Survival Strategy: The Potential for Trade among Developing Countries

Trade between developing countries, or South–South trade, has been growing rapidly in recent years following reductions in tariff barriers. However, significant barriers remain, and there is currently reluctance in many developing countries to undertake further reductions, with a preference instead for focusing on opening up access to developed country markets, or maintaining the status quo given that multilateral liberalisation may result in the erosion of preferential access enjoyed by some developing countries. This emphasis on Northern markets represents a missed opportunity for developing countries. To assess this we compare the potential effects of the removal of barriers on South–South trade with the gains from developed country liberalisation and from regional free trade areas within Africa, Asia and Latin America. A general equilibrium model, the Global Trade Analysis Project (GTAP) model, containing information on preferential bilateral tariffs, is used to estimate the impacts. The results indicate that the opening up of Northern markets would provide annual welfare gains to developing countries of $22 billion. However, the removal of South–South barriers has the potential to generate gains 40 per cent larger. The results imply that giving greater emphasis to removing barriers between as well as within continents could prove a successful Southern survival strategy.     

Intra-industry trade between the united states and the major latin american countries: Measurement and implications for free trade in the Americas

This paper presents estimates for the level of intra-industry trade in the 1991 bilateral commerce between the United States and Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Uruguay, and Venezuela. As theory predicts, intra-industry trade is positively correlated with income and with foreign investment in this study. Furthermore, Mexico and the United States present high levels of intra-industry trade, whereas the other Latin American countries analyzed have relatively low levels. The paper concludes that Mexico should experience much less difficulty in adjusting to free trade with the United States than the other countries. The low levels of intra-in-dustry trade between the United States and the other Latin American nations signal that increased trade between these areas would bring about significant dislocation of resources and high adjustment costs.     

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.     

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.     

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.     

Trade Liberalisation: The Effects of Free Trade Agreements on the Competitiveness of the Dairy Sector

In recent years, preferential trade agreements (PTAs), free trade agreements (FTAs) in particular, have proliferated while WTO negotiations have stagnated. This paper contributes to the literature on trade liberalisation and the agricultural sector by analysing the effects of FTAs on the competitiveness of the dairy sector across 76 countries and over a 20‐year period from 1990 to 2009. With a longitudinal econometric model, the results demonstrate that when a country has a revealed comparative advantage in the dairy sector, FTAs positively influence several indicators of competitiveness in the dairy sector, such as production, market share and trade balance. The results also indicate that multilateral FTAs are more beneficial than bilateral FTAs. There is strong empirical evidence that FTAs are more beneficial to developed countries than to developing countries. There is no statistical evidence to support the hypothesis about a relationship between FTAs and farm‐gate price.     

Trade liberalization,free trade agreements,and the value of firms: Stock market evidence from Singapore

We examine the effects of the United States–Singapore Free Trade Agreement (FTA) on the value of firms listed in the Singapore Exchange using event study analysis. Despite the predictability of the FTA negotiations, we find that one event – the removal of the last obstacle to the free trade deal in January 2003 – increases the value of firms in some industries by 1–11% on average. These results indicate that trade liberalization and FTAs do increase the value of firms.     

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.     

The WTO,the Doha Round Impasse,PTAs, and FTAs/RTAs

Beginning in 2001, the Doha Rounds afforded World Trade Organization (WTO) members the opportunity to develop equitable trade rules between the developed and developing member states. The WTO has been successful in advancing multilateral international trade; however, since the Doha Rounds stalemate, it has witnessed the development of more than 300 Preferential Trade Agreements (PTAs) and over 500 Free Trade Agreements (FTAs). This article attempts to answer two questions: (1) has the failure of the Doha Rounds contributed to the proliferation of PTAs and FTAs, and (2) are these agreements threatening the regulatory authority of the WTO, which, in turn, reduces its ability to effectively promote and govern free trade, and its mission?     

Tariff Liberalisation and Increased Administrative Protection: Is There a Quid Pro Quo?

Theoretical models and intuition suggest that the amount of non‐traditional protection such as anti‐dumping duties will increase as more traditional forms such as tariffs are lowered under multilateral trade agreements. This paper is the first empirical study of the role of tariff liberalisation in the spread of anti‐dumping. Through both correlations and regression approaches we analyse the relationship between tariff concessions made during the Uruguay Round trade negotiations and the filing of anti‐dumping petitions, with particular interest in whether multilateral trade reductions have spurred the recent growth in new users of anti‐dumping policies. We find that, at least for developing economies, tariff reductions agreed to under the Uruguay Round not only increased the likelihood of a country using anti‐dumping protection but also the total number of anti‐dumping petitions filed by countries.