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Asian Development Outlook 2002 :
III. Preferential Trade Agreements in Asia and the Pacific :
Overview
Debate Over Merits of PTAs
The debate over the relative merits of PTAs is pertinent for DMCs for several reasons. (Box 3.1 discusses some of the terms used in this chapter and Table 3.1 lists the membership status of the World Trade Organization (WTO) of the developing member countries [DMCs] of the Asian Development Bank [ADB]). First, the number of PTAs in the region is growing. The Association of Southeast Asian Nations (ASEAN) and the South Asian Association for Regional Cooperation (SAARC) have formed PTAs—the ASEAN Free Trade Area (AFTA) and the SAARC Preferential Trading Arrangement (SAPTA). Australia and New Zealand have deepened the Closer Economic Relations Trade Agreement (CER) and, via the South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA), extended preferential trade to their Pacific island neighbors. Several Pacific DMCs have joined the Melanesian Spearhead Group (MSG) and the Asia-Pacific Economic Cooperation (APEC) continues to evolve. The Economic Cooperation Organization (ECO) is the grouping in which the Central Asian DMCs participated, after the fall of the Soviet Union disrupted existing patterns of trade among themselves and with the Russian Federation. A Japan-Singapore trade agreement was signed in January 2002. There are other PTAs on the agenda. For example, an East Asian Free Trade Agreement, an expansion of ASEAN, and bilateral agreements between Japan and the Republic of Korea (Korea), are currently being discussed.
Second, PTAs outside of the region as well as preferential access agreements such as the “Everything But Arms” initiative1 of the European Union (EU) and the phasing out of the Multifiber Arrangement (MFA) will affect DMCs’ export prospects. Regional PTAs have been seen as a defensive response to regionalism (i.e., the formation of regional trade blocs) elsewhere. Third, DMCs need to address the relationship between PTAs and multilateral trade negotiations under the Doha round of WTO negotiations.
The political dimension of PTAs, at both the domestic and international levels, seems to explain their popularity more than their economic advantages. PTAs can be more palatable domestically than multilateral arrangements, as they allow countries to clarify sensitive sectors while integrating with countries that will not create strong competitive pressures for economic restructuring.
On the international front, PTAs can be a forum for improved diplomatic relations and increased nontrade economic integration. Some argue that PTAs can serve as “commitment mechanisms” for policy reform, particularly nontariff reform, such as investment policies or regulation. They are often cited as quicker mechanisms for bypassing the complicated multilateral negotiations that occur in WTO.
In terms of economic performance, the evaluation of PTAs relative to broader liberalization is less clear. There is no strong empirical evidence that they have been harmful to broader trade in the Asia and Pacific region. Although clearly inferior to a multilateral trading arrangement in reducing the barriers to trade on a global scale, PTAs represent a second-best means of promoting trade liberalization in a context where multilateral negotiations proceed slowly. In such an environment, openness via PTAs can create some of the same institutional and competitive pressures as increased openness via multilateral negotiations. However, opinions vary regarding how effective PTAs are for creating incentives for efficient allocation of resources.
Opponents of PTAs point out that patterns of specialization in PTAs are not necessarily those that would occur if a country had opened its borders to the world economy. They also point out the potential that PTAs create for a complicated network of overlapping rules and trade restrictions that will limit trade between PTAs. From the critics’ perspective, the political attractiveness of PTAs is cause for fear that trade agreements negotiated outside of the WTO could lead to a less important role for WTO and prevent the realization of global free trade.
The operational question now facing policymakers is how to achieve fuller benefits of increased openness to trade. Although PTAs involve a measure of controversy—particularly within the economics profession—they are, at the moment, a popular means of liberalization in the face of domestic and international constraints. There has been a substantial increase in the formation of regional PTAs in the past decade. It is in this context that this chapter looks at PTAs in the Asia and Pacific region, and at the effect, on countries in the region, of PTAs in other regions.
Box 3.1. Terminology of Preferential Trade Agreements
Preferential trade agreements (PTAs) are agreements between two or more countries in which tariffs imposed on goods produced in the member countries are lower than on goods produced outside.1 In the literature, PTAs also refer to preferential trading arrangements or areas. This chapter defines PTAs broadly to include a host of trade arrangements made outside of the multilateral trading system, including PTAs notified to the World Trade Organization as well as looser arrangements such as APEC. The multilateral trading system represents the global effort to achieve trade liberalization across all countries carried out under the aegis of the World Trade Organization.
PTAs include regional trading arrangements (RTAs), which are PTAs where countries come from the same geographic region. Because existing PTAs among DMCs include a number of arrangements with countries from outside of the region (e.g., APEC and SPARTECA), the term PTA is generally used in this chapter.
There are several types of PTAs, in terms of their level of trade and economic integration. The most modest form of PTA involves preferential tariffs—but not eliminated tariffs—between two or more countries on certain goods. This contrasts with most-favored nation (MFN) trade liberalization, which occurs when each country lowers its trade barriers for all of its trading partners, regardless of the other countries’ trade policies. Free trade agreements (FTAs) are PTAs in which tariffs are eliminated entirely on the goods produced in member countries, but countries maintain their own tariff structures with nonmembers. Customs unions are PTAs in which all members adopt a common external tariff structure. Consistent with the common external trade policy, customs unions generally act as a single body in all trade negotiations with nonmembers.
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- Panagariya (2000). The definitions used in this chapter are generally based on the discussion in this paper and in Appleyard and Field (1998).
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Table 3.1 World Trade Organization and Preferential Trade Agreements, Membership Status of Developing Member Countries, 2001
| Developing Member Country |
World Trade Organization Membership Status (Date of Membership or Date Working Party Established) |
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| Afghanistan |
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| Azerbaijan |
Applicant (16 July 1997). Submitted a memorandum on its foreign trade regime in April 1999. A first set of questions concerning the memorandum was circulated in July 2000 and a second set in December 2001. |
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| Bangladesh |
Member (1 January 1995). |
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| Bhutan |
Applicant (15 July 1999). Not submitted a memorandum on its foreign trade regime. The working party has not yet met. |
|
| Cambodia |
Applicant (21 December 1994). Submitted a memorandum on its foreign trade regime in June 1999. Replies to questions concerning the memorandum were circulated in January 2001. First meeting of the working party took place on 22 April 2001. The next meeting is planned for the first quarter of 2002. |
|
| China, People’s Rep. of |
Member (11 December 2001). |
|
| Cook Islands |
|
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| Fiji Islands |
Member (14 January 1996). |
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| Hong Kong, China |
Member (1 January 1995). |
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| India |
Member (1 January 1995). |
|
| Indonesia |
Member (1 January 1995). |
|
| Kazakhstan |
Applicant (6 February 1996). Last meeting of the working party was in October 1998. Bilateral market access negotiations in goods and services commenced in October 1997, and are continuing based on a revised goods offer and the existing services offer. Working party last met in July 2001. |
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| Kiribati |
|
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| Korea, Republic of |
|
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| Kyrgyz Republic |
Member (20 December 1998). |
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| Lao People’s Dem. Rep. |
Applicant (14 April 1999). Memorandum on its foreign trade regime was circulated in June 2001. The first meeting of the working party is expected to take place in the first half of 2002. |
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| Malaysia |
Member (1 January 1995). |
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| Maldives |
Member (31 May 1995). |
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| Marshall Islands |
|
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| Micronesia, Federated States of |
|
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| Mongolia |
Member (29 January 1997). |
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| Myanmar |
Member (1 January 1995). |
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| Nauru |
|
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| Nepal |
Applicant (21 June 1999). The first meeting of the working party took place in May 2000. Market access negotiations commenced in September 2000. The next meeting of the working party is expected to be held in 2002. |
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| Pakistan |
Member (1 January 1995). |
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| Papua New Guinea |
Member (9 June 1996). |
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| Philippines |
Member (1 January 1995). |
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| Samoa |
Applicant (15 July 1998). Memorandum on its foreign trade regime was circulated in February 2000. Replies to a first set of questions concerning the memorandum were circulated in August 2000, and replies to a second set are pending. The first meeting of the working party may take place in the first half of 2002. |
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| Singapore |
Member (1 January 1995). |
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| Solomon Islands |
Member (26 July 1996). |
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| Sri Lanka |
Member (1 January 1995). |
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| Taipei,China |
Member (1 January 2002). |
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| Tajikistan |
Applicant (18 July 2001). Not yet submitted a memorandum on its foreign trade regime. The working party has not yet met. |
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| Thailand |
Member (1 January 1995). |
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| Tonga |
Applicant (15 November 1995). A memorandum on the foreign trade regime was circulated in May 1998 and replies to questions concerning the memorandum were circulated in November 2000. The first meeting of the working party was held in April 2001. |
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| Turkmenistan |
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| Tuvalu |
|
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| Uzbekistan |
Applicant (21 December 1994). Submitted a memorandum on its foreign trade regime in September 1998. Replies to questions concerning the memorandum were circulated in October 1999. Bilateral market access contacts have been initiated. The first meeting of the working party may take place in the first half of 2002. |
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| Vanuatu |
The final meeting of the working party was held on 29 October 2001. |
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| Viet Nam |
Applicant (31 January 1995). Topics under discussion in the working party include agriculture, the customs system, import licensing, national treatment, sanitary and phytosanitary measures and technical barriers to trade, state trading, trading rights, and trade-related intellectual property rights. |
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AFTA = ASEAN Free Trade Area; APEC = Asia-Pacific Economic Cooperation; CIS = Commonwealth of Independent States; ECO = Economic Cooperation Organization; GSTP = Global System of Trade Preferences among Developing Countries; MSG = Melanesian Spearhead Group; SAARC = South Asian Association for Regional Cooperation; SAPTA = SAARC Preferential Trading Agreement; SPARTECA = South Pacific Regional Trade and Economic Cooperation Agreement.
Notes: a Viet Nam joined in 1995, Lao People’s Democratic Republic and Myanmar in 1997, and Cambodia in 1999. b Thailand joined in 1990, the Philippines in 1992, and Myanmar in 1997.
Sources: World Trade Organization, 2001, International Trade Statistics 2001; official websites of the preferential trade agreements.
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