Trade policy and productivity

Previous studies on the determinants of productivity emphasized the role of trade and institutions but omitted trade policy due to endogeneity concerns. This paper considers the role of one important element of trade policy: free trade agreements (FTAs). Based on recent work on the determinants of FTAs, we suggest an instrument which is based on the propensity to enter an FTA due to (exogenous) geographical characteristics. We find that differences in institutional quality and trade, due to variations in geography and trade policy, have a sizeable effect on productivity and can explain the huge variation in per capita income across countries.     

FREE TRADE NETWORKS WITH TRANSFERS*

We investigate the network of bilateral free trade agreements (FTAs) in the context of a network formation game with transfers. In a previous paper we showed that without international transfers countries with different industrialization levels cannot sign an FTA, so that the global free trade network, in which every pair of countries signs an FTA, is not in general pairwise‐stable. In this paper we show that, even if the world consists of fairly asymmetric countries, the global free trade network is pairwise‐stable when transfers between FTA signatories are allowed. Moreover, it is a unique pairwise‐stable network unless industrial commodities are highly substitutable.     

Do Preferential Rules of Origin Reverse Trade Creation and Trade Diversion?

Restrictive preferential rules of origin (PROOs) moderate the ‘trade diversion and trade creation’ effects of free trade agreements (FTAs). Moderation effects occur because restrictive PROOs reverse the increase in the relative price of non-member country goods initially caused by FTAs. Such a reversal arises because high compliance costs associated with restrictive PROOs lead to a lower utilization of tariff preferences by member countries. With a lower utilization, the increase in the relative price of non-members country goods would be smaller than it could have been with a full utilization. Thus, restrictive PROOs will lead to less than full trade diversion from non-members to member countries, and less than complete trade creation to member countries. This paper infers the effect of restrictive PROOs on intra-regional trade from the estimated parameters of the revenue function, on the presumption that trade diversion refers to a decrease in the elasticity of substitution between import sources, and that trade creation refers to a difference between the change in import price elasticity and the trade diversion effect. Empirical results support the conjecture that restrictive PROOs move in the opposite direction of FTAs partly undoing the trade diversion and trade creation effects of FTAs.     

Are free trade agreements good for the environment? A panel data analysis

This study empirically examines the relationship between free trade agreements (FTAs) and greenhouse gas (GHG) emissions. For this purpose, we use three different FTAs: the Southern Common Market, the North American Free Trade Agreement, and the Australia–United States Free Trade Agreement. These FTAs are between developing, both developing and developed, and only developed countries, respectively. Panel unit root, panel cointegration, and fully modified ordinary least squares estimations are employed to examine the long‐run relationship between GHG emissions and trade liberalization. The results indicate that the environmental effects of FTAs depend on the different agreement types. When FTAs are between only developed or developing countries, overall there is no environmental damage, and these types of FTAs can be beneficial for the environmental quality in the long run. However, when developing and developed countries are in a trade agreement, overall environmental quality decreases due to increased GHG emissions.     

Measuring fixed costs for firms’ use of a free trade agreement: Threshold regression approach

By employing the threshold regression method, we estimate the average tariff equivalent of fixed costs for the use of a free trade agreement (FTA) among all existing FTAs in the world. It is estimated to be around 3%.     

Barriers to Global Free Trade through Bilateral Agreements

This paper examines the formation of bilateral free trade agreements (FTAs) in the context of a dynamic noncooperative bargaining game with a random proposer. We show that global free trade (a grand coalition) does not necessarily occur unless transfer payments among countries are allowed. When transfer payments are possible, bilateral FTAs always achieve global free trade, but the ex‐ante and ex‐post inequalities of social welfare among countries are larger than those when all countries are independent because of the strategic bargaining behavior.     

Sectoral FTA gains,conflicts, and the role of interindustry factor mobility: Evidence from Korea's free trade agreement

Free trade agreements (FTAs) can ignite domestic conflicts between export- and import-competing industries over trade gains. However, if the factors of production, such as capital and labour, move freely across industries, the returns to factor owners will quickly converge. Then, sectoral conflicts over FTAs will be less likely to arise. We analyse the case of South Korea's FTAs to measure (a) sectoral FTA gains and (b) interindustry factor mobility and to examine (c) the role of interindustry factor mobility in mitigating sectoral conflicts over trade policies. South Korea is an ideal case study due to the low barriers to domestic geographic mobility and high trade dependence. Based on data on its trade with 252 countries and factor returns between 2002 and 2017, we find that export industries did not gain much from the FTAs, while the import-competing agricultural sector was the winner. Sectoral conflicts greatly decreased over 2008–2010. Interindustry capital mobility plays a significant role in weakening the sectoral conflicts, while the impact of interindustry labour mobility is limited.     

International Trade, Regional Free Trade Agreements, and Economic Development

In 1991, Krugman illustrated that natural (regional) free trade agreements (FTAs) are likely to be welfare-enhancing if intercontinental costs are prohibitively high, but are likely to be welfare-reducing if such costs are zero. In 1995, Frankel, Stein and Wei extended the analysis to consider positive but nonprohibitive transport costs. This paper extends these models to allow for countries of different economic size. Large countries will tend to have higher relative wages, influencing the relative gains and losses from natural FTAs. For even modest differences in size, intracontinental FTAs are welfare-enhancing for larger countries, regardless of strong preferences for diversity or low intercontinental transport costs.     

外部关税约束、自由贸易区规模与世界自由贸易

该文在外部关税约束条件下分析了几种不同类型的自由贸易区与世界自由贸易的关系,该文结果显示,一个实行开放成员国地位的自由贸易区可以实现世界自由贸易,但是当自由贸易区以追求成员国福利最大化为目标时,在世界规模大于4时,该自由贸易区的扩张不可能最终实现世界自由贸易.该文还研究了对称的自由贸易区是否可以通过进一步的融合从而把世界变成一个一体化的自由贸易区,结果显示,具有对称市场能力的自由贸易区可以通过进一步的融合提高成员国福利,从而最终实现世界自由贸易.     

Exempted sectors in free trade agreements

Almost all participants in free trade agreements (FTAs) exclude at least a few products or sectors from complete tariff removal on the exports of their FTA partners. The positive tariffs that remain within an FTA are often the highest tariffs that the countries apply on an MFN basis. It seems plausible that such exclusions may be chosen because the domestic producers of these products are viewed as especially vulnerable to competition from imports from the partner country. In brief, they are especially “sensitive sectors.” We develop this idea theoretically and then test it empirically on data from 37 countries in 240 importer–exporter pairs within FTAs. We find support for the sensitive‐sector hypothesis only in the high‐income countries. We find that low‐income countries, in contrast, exempt sectors where bilateral tariff removal would be more likely trade‐diverting and therefore harmful. Our explanation for this, supported empirically, is not that they are following the advice of trade economists, but rather that they are avoiding loss of tariff revenue and may also perhaps be influenced by the greater bargaining power of richer and/or larger partners in their FTAs.     

Free Trade Agreements and the Prospects for Regional Integration in East Asia

Trade policy in East Asia has switched from non-discriminatory unilateral liberalization, reinforced by General Agreements on Tariffs and Trade/World Trade Organization (GATT/WTO) commitments, to discriminatory free trade agreements (FTA). The paper surveys the FTA activity of the major regional players: China, the ASEAN countries, Japan, and South Korea. It concludes that emerging FTAs are weak and partial. A hub-and-spoke pattern of dirty FTAs will not drive regional economic integration or further integration with the global economy. Rather, it could be a force of regional economic disintegration – especially if the multilateral trading system weakens further. At the same time, FTA activity is distracting attention from the WTO, and, more fundamentally, from unilateral liberalization and domestic structural reforms. Hence, East Asian trade policies need to be rebalanced, with better-quality FTAs and more focus on the WTO. However, more important than the WTO and FTAs is a fresh spurt of unilateral liberalization and structural reform outside trade negotiations.     

The impact of FTAs on MENA trade in agricultural and industrial products

This article analyses the impact of Free Trade Agreements (FTAs) on Middle East and North African Countries (MENA) trade for the period 1994–2010. The analysis distinguishes between industrial and agricultural trade to take into account the different liberalization schedules. An augmented gravity model is estimated using up-to-date panel data techniques to control for all time-invariant bilateral factors that influence bilateral trade as well as for the so-called multilateral resistance factors. We also control for the endogeneity of the agreements and test for self-selection bias due to the presence of zero trade in our sample. The main findings indicate that North–South-FTAs and South–South-FTAs have a differential impact in terms of increasing trade in MENA countries, with the former being more beneficial in terms of exports for MENA countries, but both showing greater global market integration. We also find that FTAs that include agricultural products, in which MENA countries have a clear comparative advantage, have more favourable effects for these countries than those only including industrial products.     

Does it Matter Who You Sign With? Comparing the Impacts of North–South and South–South Trade Agreements on Bilateral Trade

Free trade agreements (FTAs) lead to a rise in bilateral trade regardless of whether the signatories are developed or developing countries. Furthermore, the percentage increase in bilateral trade is higher for South–South agreements than for North–South agreements. The results are robust across a number of gravity model specifications in which we control for the endogeneity of FTAs (with bilateral fixed effects) and also take account of multilateral resistance in both estimation (with country‐time fixed effects) and comparative statics (analytically). Our analytical model shows that multilateral resistance dampens the impact of FTAs on trade by less in South–South agreements than in North–South agreements, which accentuates the difference implied by our gravity model coefficients, and that this difference becomes larger as the number of signatories rises. For example, allowing for lags and multilateral resistance, a four‐country North–South agreement raises bilateral trade by 53% while the analogous South–South impact is 107%.     

Dynamic formation of preferential trade agreements: The role of flexibility

In practice, free trade agreements (FTAs) vastly outnumber customs unions (CUs). Nevertheless, the literature traditionally views CUs as optimal for members because CU members coordinate external tariffs. I show that a dynamic FTA flexibility benefit can help explain the prevalence of FTAs: individual FTA members have the flexibility to form their own future FTAs whereas CU members must jointly engage in future CU formation. I show how the relative prevalence of FTAs versus CUs depends on the structure of market size asymmetry across countries and use these predictions to shed some light on FTA versus CU formation in Europe and South America.     

The silent success of customs unions

Globally, 81 countries are now part of a customs union (CU), following the rapid proliferation of this type of trade agreement in past decades. Much of this growth has been driven by countries “upgrading” their links from a free trade agreement (FTA) to CU. At the same time, the rapid formation of new FTAs among countries that had no prior agreement in place has largely overshadowed this growth, making CUs the silent success of regional integration. Using the canonical regionalism model, augmented to allow for political bias towards firm interests, we investigate the endogenous choice of trade agreement. We show it is generally politically viable to move from FTA to CU, because such a move is rent‐creating; but for countries without a trade agreement in place, it may be optimal to form an FTA as a stepping stone to reduce the risk of political derailment. Importantly, forming a CU is consistent with member social welfare maximization: as long as trade with the rest of the world does not cease entirely, a CU leads to higher social welfare than either FTA or no agreement. These gains come at the expense of third‐country welfare. If past trends continue, one can expect more FTAs to be upgraded to CU with associated adverse consequences for outsiders.     

Dynamic Free Trade Networks: Some Numerical Results

To help predict whether the proliferation of free trade agreements (FTAs) continues until global free trade is effectively attained, this paper investigates dynamic paths of FTAs, generated by numerical simulations of a model of an FTA network formation game with many countries. The characteristics of the final FTA network naturally depend on how the proposer of an FTA is chosen in each period. The paper finds that if the country that has the largest incentive to form an FTA is chosen as a proposer in each period, the network evolution always leads to a unique final FTA network, which may or may not be the complete network of FTAs. FTA networks often evolve to a partition of the world into a small number of groups of asymmetric size owing to the negative network externality caused by preference erosion.     

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.     

Endogenous Free Trade Agreements and Foreign Lobbying

This paper assesses the political viability of free trade agreements (FTAs) in the presence of lobbying by organized foreign interest groups. The assessment is based on a model in which external tariffs and the decision to form an FTA are endogenously determined. The findings demonstrate that, in the presence of an organized lobby group in a prospective partner country, an FTA may initiate an increase in the level of protection against imports from third countries and impede trade with non‐member countries. Further, this study finds that a foreign lobby may encourage the local government to enter a welfare‐reducing trade‐diverting FTA. Finally, this paper shows that an FTA increases the lobbying power of the organized lobby groups of the member countries, which can potentially obstruct the viability of welfare‐improving multilateral trade liberalization.     

Bilateral versus Multilateral Free Trade Agreements: A Welfare Analysis

Why is a proliferation of bilateral free trade agreements (FTAs) between certain types of countries observed instead of progress in attaining global free trade through a multilateral FTA? This paper answers this question by exploring the enforceability of different types of FTAs through comparing minimum discount factors that are necessary to sustain them in an infinitely repeated game framework. The authors search for the globally welfare maximizing trade agreements that are sustainable under different conditions. The results depict that transportation costs, differences in country sizes and comparative advantages are all obstacles for having a multilateral FTA. Accordingly, international development policies conducted for the removal of such obstacles should be the main goal toward achieving a multilateral FTA, which is shown to be the first‐best solution to the maximization problem of global welfare.     

Do Customs Union Members Engage in More Bilateral Trade than Free‐Trade Agreement Members?

This paper provides the first empirical analysis directly comparing the effects of customs unions (CUs) and free‐trade agreements (FTAs) on members’ bilateral trade, while addressing the biases arising from log‐linearization of the gravity model and crucial time‐invariant unobservables. Since Fiorentino et al. (2007 ) question the popularity of CUs relative to FTAs, considering the latter to be more practical in the current trading climate, such a comparison seems especially relevant. While Baier and Bergstrand (2007 ) find an FTA to approximately double members’ bilateral trade after 10 years, the results of this paper find CUs to have had a much larger impact than FTAs.