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Asian Development Outlook 2002 : III. Preferential Trade Agreements in Asia and the Pacific : The Economic and Broader Effects of PTAS: Theoretical Arguments
PTAs as Institutional Mechanisms for Broader CooperationComplementarity or Destructive Competition? PTAs involve fewer nations—and usually nations from a single region—than can be readily accommodated within WTO. Also, PTAs offer a potentially stronger forum for negotiation of deeper integration and wider policy reform. Many argue that they complement WTO by helping members coordinate for negotiations and, in the case of developing countries, build capacity for broader international trade negotiations. Once formed, PTAs have the potential to foster the provision of regional or international public goods and yield positive externalities stemming from their efforts in trade liberalization and related policy areas. PTAs’ smaller size and resulting easier coordination between members are viewed as characteristics that give them an advantage in achieving deeper integration, and in harmonizing standards, regulations, and financial structures (Laird 1999). The logic behind this is that a PTA’s smaller grouping of countries is more likely than all the members of WTO to have similar interests and needs, so that joint regulatory and monitoring institutions can be created and the institutions’ startup costs shared. Deeper integration can be an important efficiency gain, as differences in cross-border standards are costly. Hoekman and Konan (1999), for example, estimate that the bureaucracy involved in satisfying Egypt’s import product standards imposed an effective tax of between 5% and 90% of the value of shipments into the country. There is one significant caveat to this view of PTAs as potential trade-facilitating complements to WTO. Proliferation of PTAs that involve nontrade integration could preclude common international standards as small groups of countries take different paths. From the perspective of world welfare, moves toward small-group harmonization are less favorable than agreements that foster common standards across a wide range of trading partners. PTAs are also sometimes seen as creating potentially destructive competition to WTO. Bagwell and Staiger (1997), for example, find that the advent of a PTA obscures the transmission of clear information about tariff rates and makes it more difficult for countries adversely affected by tariffs to impose reciprocal tariffs. (The threat of reciprocal tariffs can deter countries from imposing tariffs initially.) Enhanced Regional Security. The traditional evaluation of gains from trade overlooks the fact that, for a country, trade with some countries might be more valuable than with others because it decreases the risk of conflict. The trade creation aspect of PTAs, particularly regional PTAs, is seen as a contribution to increased security. Intuition as well as empirical evidence indicate that increased trade among nations reduces the chance of military conflict (Polachek 1992, Irwin 1993). Schiff and Winters (1998) suggest that increased trade among members of PTAs—particularly PTAs involving deeper integration—can increase intragroup “trust” and thereby reduce tensions. Anwar (1994) argues that ASEAN lessened military tensions between members. Pomfret (1996) suggests that the ASEAN background may have contributed to the political stability and trust that allowed the formation of cross-border growth zones such as the Singapore-Johor-Riau growth zone, in spite of historical tensions. The trust-building effect of increased trade, however, will be lessened if there are no previously agreed-on rules for distributing benefits, transferring income, and resolving latent conflicts. Indeed, some older regional agreements have at times contributed to intragroup tensions. For example, the United Republic of Tanzania and Uganda, members of the East African Common Market, were dissatisfied with the income transfers that the common external tariff on manufactures created, which prevented them from providing additional protection to their industry sectors and catching up with fellow member Kenya’s more advanced manufacturing capacity. The ensuing arguments about compensation for the effects of imports on the various countries’ manufacturing sectors contributed to the collapse of the common market and eventual conflict between the United Republic of Tanzania and Uganda in 1979. Similarly, Honduras’ complaints about the distribution of benefits in the Central American Common Market were a factor in its 1969 conflict with El Salvador. The EU and its predecessors, on the other hand, have helped lessen tensions among member states, and it has itself benefited from a lowering of tensions, to the point where future European conflict is now, for many, inconceivable. In fact, in the 1950s, conflict prevention was the vision behind the establishment of the institutions and PTAs that evolved into the current EU. However, the mixed performance of PTA-enhanced trade for lessening conflicts among members suggests that the trading arrangements cannot be seen as more than a supplement for an already concerted effort to resolve conflict via negotiation. Preferential treatment may create trade, but trade links alone are not likely to outweigh existing grievances. Regional security can also be understood in economic terms. PTAs can be more valuable for trade purposes if future market access is considered more certain. PTAs with large markets can be seen as a form of insurance in the case of a global trade war (Perroni and Whalley 2000). WTO, in principle, provides the same kind of insurance, as members are sanctioned for violating commitments to bring down trade barriers. A PTA can also impose stringent restrictions on the imposition of nontariff barriers to trade. NAFTA, for example, created a multinational court to review antidumping cases levied by one member against another. A PTA that provides increased security of market access also encourages firms to specialize more narrowly and efficiently. From this perspective, the expected future gains from trade under a PTA can be larger relative to the expected gains from broader liberalization. Technology Transfer. Membership of PTAs can also foster improved technology transfer and information sharing between members. The extent of gains from trade due to technology transfer in a PTA clearly depends on the characteristics of the other member countries. Exchange of production techniques is more likely to occur in PTAs covering economically varied countries, as such PTAs will generally encompass a wider range of technologies. Since much technology transfer takes place through multinationals that have a variety of manufacturing platforms in different countries, PTAs can attract FDI from them by facilitating internal manufacturing, assembly, shipping, and marketing. Commitment to Reform. Policymakers often view joining international agreements as a way for their nations to demonstrate their commitment to economic reform. Either by allowing another country or supranational body to punish them for noncompliance, or by creating a situation where defection from the policy would be an explicit public breaking of trust, membership of a PTA can commit policymakers to reform and prevent them from backtracking on reforms once they are implemented. Fukase and Winters (1999), for example, argue that ASEAN membership is likely to be useful for locking in and accelerating the economic reforms of more recent member countries as well as enhancing their external credibility. The accession of Cambodia, for example, is cited as ASEAN’s recognition of the country’s political stability. Both WTO rules and PTA reciprocal market access provide a way for countries to restrict their ability to raise tariffs and thus have a more credible trade policy. This external commitment can support more efficient specialization, reduce resources wasted on rent seeking, and limit the delay in adjustment to competitive pressures (Maggi and Rodriguez-Clare 1998). However, PTAs have a potential comparative advantage vis-à-vis multilateral arrangements such as WTO as regulations can be written more tightly. This creates an opportunity for members to commit to nontrade policy goals such as liberalization of investment or political reform. The implied commitment from a country to a PTA can be greater than that from a WTO member to WTO if the PTA has a stricter enforcement mechanism or if it includes more auxiliary provisions.
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