Determinants of successful regional trade agreements

This paper investigates the determinants of the effectiveness of regional trade agreements (RTAs) in enhancing bilateral trade. Characteristics of both the country pair and other RTA members are found to significantly influence the trade creation effect of RTAs. However, North/North, North/South and South/South RTAs are found to have similar effects on trade.     

EAST ASIAN REGIONAL TRADE AGREEMENTS: DO THEY PROMOTE GLOBAL FREE TRADE?

Abstract.  We quantitatively evaluate the effects different paths have on East Asian Regional Trade Agreements (RTA), which include expansionary, duplicate and overlapping RTAs. By applying a computable general equilibrium model analysis, we find that the static effect of existing, proposed and negotiating East Asian RTAs on world and members' welfare is sufficiently positive. It will lead to non-discriminatory global free trade, by triggering the domino effect of regionalism if the RTAs take an expansionary path by cooperating with each other, in contrast to competing to achieve the first mover advantage, or hub self-interest.     

Regional Integration Agreements,Trade Flows and Economic Crisis: A Static and Dynamic Gravity Model

Regional trade agreements (RTA) strengthening is a crucial component of the contemporary global economy. These agreements are considered beneficial in many senses (economics: trade, FDI, growth, etc.) and are a stabilizing factor in international relations (politics). In this paper, I study the effects of RTAs on exports between members and non-members taking into account the Viner specification. I also try to estimate the effect of the recent economic crisis on the export flows and achievement of RTAs. I use a static and dynamic gravity model to 40 countries belonging to 6 heterogeneous RTAs for the period 1980–2011. This model is estimated taking into account the latest estimation techniques that treats endogeneity effects of integration and the existence of dynamic effect.     

North–South Integration and the Location of Foreign Direct Investment

We investigate how North–South integration affects the location of foreign direct investment (FDI) between the two regions. The theoretical analysis suggests that integration affects the incentives of partner and nonpartner Northern countries to locate in the South differently and may lead to investment diversion from the Northern partner. We test our propositions using data from the North American Free Trade Agreement (NAFTA), the first major North–South integration scheme. We find that NAFTA partner FDI in Mexico has increased since the inception of NAFTA above what is implied by other determinants of FDI and the global upward trend during this time. Other countries have not increased their use of Mexico as an export platform. We also find no evidence that inward US FDI has been diverted. The results are robust to a number of different model and econometric specifications as well as the skill data used.     

Tax Policies,Regional Trade Agreements and Foreign Direct Investment: A Welfare Analysis

In this paper, we develop a partial equilibrium three‐country model to examine the relationship between regional trade agreements (RTAs) and foreign direct investment (FDI) in an environment with double taxation. Our analysis shows that FDI is welfare‐improving for at least one or both of the two regional countries if wage asymmetry is significantly large. FDI and an RTA are also welfare‐improving for the high‐wage country and the region if the wage differential is not small. We also examine the role of repatriation taxes in affecting the determination of firm location under an RTA. Our results suggest that the signing of an RTA may induce relocation from the high‐wage country to the low‐wage country unless an increase in the repatriation tax rate also occurs.     

Choosing between multiple regional trade agreements: Evidence from Japan’s imports

Mega‐regional trade agreements (RTAs) are likely to overlap with other RTAs. When such overlaps occur, firms must choose the tariff rates from multiple RTAs. By employing data on Japan’s imports by tariff schemes, we investigate how RTA tariff rates affect firms’ decisions on tariff schemes when multiple RTAs exist. Our finding is that RTA utilization rates are higher when tariff rates for that RTA are lower (own effect) and tariff rates for alternative RTAs are higher (cross effect). We also found that the absolute magnitudes of own and cross effects are larger in bilateral and multilateral RTAs, respectively.     

Foreign direct investment and institutional reform: evidence and an application to Portugal

We examine the role of geographic, economic, and institutional factors in attracting Foreign Direct Investment (FDI) in Europe, using a cross-section of inward bilateral investments. We estimate and assess the expected benefits, the required reform efforts, and the efficiency of reform options corresponding to a convergence of Portuguese institutions to EU standards. We conclude that improving home institutions is likely to have a quantitatively very significant role in attracting FDI. Geographical and market size factors also play a role. Reforms promoting the independence of financial institutions and a leaner bureaucracy, lowering political risk and corruption, and improving the investment code may significantly affect the amount of bilateral inward FDI that is targeted to Portugal.     

Do regional trade agreements stimulate FDI? Evidence for the Agadir,MERCOSUR and AFTA regions

The integration of emerging markets into the global economy is heavily promoted by foreign direct investment (FDI ) inflows. Among the factors explaining the location of FDI , regional trade agreements (RTA s) can be relevant for emerging markets, as they can promote economic integration and increase the attractiveness of the region for foreign investors. This paper investigates the impact of South–South trade agreements on the FDI decision of multinationals, where the Agadir, mercado comun del sur (MERCOSUR), and ASEAN free trade area (AFTA) agreements are considered. Three panels of countries are defined, where the members joined a specific agreement or not. Non‐Gulf Arab states are compared to better performing regions in Latin America and Southern and Eastern Asia. The analysis provides evidence that openness to foreign trade and financial markets are among the main catalysts to attract FDI , provided that business‐friendly institutions exist in the host country. Other variables, like the size of the industrial sector, urbanization rates, and external debt appear to be important in some cases. The integration of China into the world economy is a specific trigger for FDI to Asian destinations. Since RTA s influence the market size by reducing barriers to trade, their impact operates via GDP growth and openness. Gains from the agreement are striking for Latin America and Asia, but not for Arab states. To attract more FDI , business‐friendly institutional reforms and mechanisms to support new firm foundation should be implemented in this region.     

Does a Regional Trade Agreement Lessen or Worsen Growth Volatility? An Empirical Investigation

This paper assesses how regional trade agreements (RTAs) impact on growth volatility for a sample of 170 countries over the period 1978–2012. Notwithstanding concerns that trade openness through RTAs might heighten exposure to shocks, RTAs through enhanced policy credibility, improved policy coordination and reduced risk of conflicts can also ease growth volatility. Empirical estimations suggest the benefits outweigh the costs as RTAs are consistently associated with lower growth volatility. In addition, smaller economies benefit more from the reduced growth volatility associated with RTAs than larger ones. The nature of the RTA also matters as shallow agreements such as partial‐scope preferential trade agreements do not appear to have a significant effect on growth volatility, whereas free trade areas and customs unions do. Finally, in investigating the drivers of RTAs, the regression results confirm that countries that are more prone to shocks are more likely to join an RTA, in particular with countries with relatively less volatile growth.     

Trade-creation and trade-diversion effects of regional trade arrangements: low-income countries

Although the number of regional trade arrangements (RTAs) among the lowest-income developing countries is surging, the literature on their welfare effects is still scarce, and the few that exist fail to provide conclusive results. Furthermore, these RTAs are dominated by countries with a small share of total exports destined for intraregional trade flows. Our study focuses on the welfare effects of RTAs (pertaining to trade creation and trade diversion) among this group of countries. We use a theoretically justified gravity model to estimate welfare effects, focusing on trade creation and trade diversion and deviating from the norm in related studies, accounting for heterogeneity in third countries. Using ECOWAS as a sample, we estimate welfare effects on 1992–2012 annual bilateral imports for 14 countries from 169 countries. Contrary to conventional expectations in the literature, we find that economic integration among small and relatively low-income countries that have a small share of total trade with each other is welfare-improving for the members as a group, for the majority of the individual member countries, and for some third countries. Accounting for heterogeneity in third countries reveals that an RTA among low-income countries has a particularly robust trade-creation effect.     

Has Abenomics Succeeded in Raising Japan's Inward Foreign Direct Investment?

Japan is known to have an exceptionally low level of inward foreign direct investment (FDI). The promotion of inward FDI is one of the policy goals of Abenomics structural reforms. This present paper studies the accumulation of Japan's inward FDI stock during the first 3 years of Abenomics (2012–2015), and finds no evidence that Japan's inward FDI stock increased more than the trend before Abenomics started would have predicted. A comparison of the main policies for promoting inward FDI that have been implemented to the real and perceived impediments to inward FDI reveals that it may be advisable to shift the emphasis of the policy to address more regulatory and administrative issues and to reduce the cost of doing business in Japan.     

Foreign direct investment,heterogeneous workers and employment security: Evidence from Germany

We analyze how foreign direct investment (FDI) affects employment security using administrative microdata for German employees. Measuring FDI intensity at the industry level enables us to take into account the sum of direct effects at multinationals as well as indirect effects of FDI throughout the affected industry. We find that both inward and outward FDI significantly reduce employment security. This is particularly the case for inward FDI coming from the western part of the European Union as well as for outward FDI going to Central and Eastern Europe. The effects are sizeable for older and low‐skilled workers.     

Foreign direct investment and international trade in a continuum Ricardian trade model

We develop a continuum Ricardian trade model to capture both North–South trade and technology transfer via foreign direct investment (FDI) by multinational enterprises (MNEs). We show that there is a unique range of products produced in the South by MNEs. In the case of an infinitely elastic supply of expatriates, if the ability of Southern workers in absorbing Northern technology increases, then (a) the range of MNE production increases, (b) Northern workers's welfare and Southern workers' welfare change in opposite directions, and (c) the world aggregate welfare increases under certain conditions. We explore issues such as North–South wage gaps, FDI policies and the product cycle. We also derive results under a general supply of expatriates.     

ASEAN's New Frontiers: Integrating the Newest Members into the ASEAN Economic Community

Since Vietnam, Lao People's Democratic Republic (PDR), Myanmar, and Cambodia joined the Association of Southeast Asian Nations (ASEAN) in the 1990s, concerns have been raised over a Development Divide. The real division is between ASEAN members participating in the integrated East Asian economy and those that do not. The older ASEAN members have become more efficient traders, and Cambodia, Laos, Myanmar, and Vietnam must reform faster if they are to catch up. Cambodia, Lao PDR, and Myanmar are not meeting the challenge, but Vietnam may be leaving the laggards, and the Philippines is lagging the leaders. The challenge is how to avoid a two‐tier ASEAN with fast‐growing modern economies coexisting besides inward‐looking poor countries.     

Does WTO accession matter for the dynamics of foreign direct investment and trade?

The aim of this article is to study the impacts of World Trade Organization accession on the dynamics of foreign direct investment (FDI) and trade in Vietnam. In order to do this, we employ an augmented gravity model and use a panel data set covering bilateral trade and FDI between Vietnam and its 17 most important partner countries, over the period 1990–2008. Firstly, we find that WTO accession has a significantly positive effect both on Vietnam’s imports and on inward FDI. Secondly, even though we find no evidence to demonstrate convincingly that WTO accession influences Vietnam’s exports, this accession seems to indirectly encourage Vietnam’s exports through the FDI channel due to a strong connection between these two.     

A SEARCH FOR CLOSER ECONOMIC RELATIONS IN EAST ASIA

In recent years, growing interdependence in East Asia through trade and financial cooperation heightened the need for East Asian Economies to engage in closer regional economic relations. This paper attempts to discuss emerging economic integration efforts in East Asia with special reference to bilateral and regional free trade agreements. It discusses backgrounds for recent developments of East Asian regionalism in terms of deepening intraregional economic dependence and financial cooperation, and South Korea's position towards FTAs with major trading partners as well as East Asian economic integration. Important issues and challenges for an East Asian FTA are presented.     

Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China

At the center of the pollution haven debate is the claim that foreign investors from industrial countries are attracted to weak environment regulations in developing countries. Some recent location choice studies have found evidence of this attraction, but only for inward FDI in industrial countries. The few studies of inward FDI in developing countries have been hampered by weak measures of environmental stringency and by insufficient data to estimate variation in firm response by pollution intensity. This paper tests for pollution haven behavior by estimating the determinants of location choice for equity joint ventures (EJVs) in China. Beginning with a theoretical framework of firm production and abatement decisions, we derive and estimate a location choice model using data on a sample of EJV projects, Chinese effective levies on water pollution, and Chinese industrial pollution intensity. Results show EJVs in highly-polluting industries funded through Hong Kong, Macao, and Taiwan are attracted by weak environmental standards. In contrast, EJVs funded from non-ethnically Chinese sources are not significantly attracted by weak standards, regardless of the pollution intensity of the industry. These findings are consistent with pollution haven behavior, but not by investors from high income countries and only in industries that are highly polluting. Further investigation into differences in technology between industrial and developing country investors might shed new light on this debate.     

Intellectual property rights and skills accumulation: A product-cycle model of FDI and outsourcing

This study investigates the effects of stronger intellectual property rights (IPR) protection in the South on innovation, skills accumulation, wage inequality, and patterns of production based on a North–South general-equilibrium model with foreign direct investment (FDI) and international outsourcing. We find that stronger Southern IPR protection raises the extent of outsourcing and reduces the extent of FDI. This increases the proportion of unskilled Southerners and mitigates Southern wage inequality. In the North, stronger Southern IPR protection raises the proportion of skilled Northerners and wage inequality. The effects of international specialization, R&D cost, and Northern population are also examined.     

Privatization, strategic foreign direct investment and host-country welfare

Recent evidence shows that developing countries and transition economies are increasingly privatizing their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). We show that there is a two-way causality between privatization and greenfield FDI. Privatization increases the incentive for FDI, which, in turn, increases the incentive for privatization compared to the situation of no FDI. The optimal degree of privatization depends on the cost difference of the firms, and on the foreign firm's mode of entry.