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p. 70 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia III. Preferential Trade Agreements in Asia and the Pacific Overview Trends in Trade and the Expansion of PTAs: Trends in World and Asian Trade Flows Diversity in of PTAs The Economic and Broader Effects of PTAS: Theoretical Arguments Economic Effects of PTAs PTAs as Institutional Mechanisms for Broader Cooperation Long-Run Concerns: The Role of PTAs in the International Trading System Policy Guidelines for Asian PTAs Effects of PTAs on Trade in Asia and the Pacific: Some Evidence Conclusions References

Asian Development Outlook 2002 : III. Preferential Trade Agreements in Asia and the Pacific : The Economic and Broader Effects of PTAS: Theoretical Arguments

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Long-Run Concerns: The Role of PTAs in the International Trading System

A number of the characteristics that distinguish PTAs and WTO have the potential of making PTAs a useful component of a larger multitiered international trading system, which can speed up the eventual development of a global system for open trade.

Opportunities for Experimentation and Testing of Trade Liberalization. It is clearly important for WTO to expand its treatment of trade barriers to include nontariff barriers, but it is unclear how best to set the rules to identify and sanction these forms of restricting trade. PTAs provide members with a short-term opportunity to experiment with different sets of rules relating to nontariff barriers.

Antidumping is still a large lacuna in the WTO framework for reducing trade barriers, and PTAs may offer an easier forum for developing the solutions to dumping that have eluded multilateral arrangements. Article VI of the General Agreement on Tariffs and Trade (GATT) defined dumping as having occurred if the product of a country is sold in another country for less than its “normal value.” Unfortunately, the rule for calculating the normal value was not well specified. There are also no clear guidelines for establishing the “material injury” that is the basis for imposing an antidumping duty. The Uruguay Round Antidumping Measures Code clarified the method for calculating the normal value, defined standards for determining material injury, and imposed limits on how long antidumping measures could be imposed, but these stipulations were weakened by various other provisions and exceptions (Abbott 1995). Although resolution of antidumping cases is an important unresolved issue under WTO, PTAs provide added opportunities for finding solutions under conditions that may be more conducive to the negotiation of antidumping disputes.

Practice for Multilateral Negotiations. PTAs can be both a training ground and an information-sharing opportunity so that developing countries, particularly smaller countries, can be better prepared for negotiations in the multilateral setting. The process of accession to WTO is very difficult, particularly for transition economies and least-developed countries (Michalopoulos 1999). Regional PTAs can help countries prepare for accession through learning together and by pooling resources.

Continued interaction and the flow of information among member countries of PTAs can facilitate global trade negotiations by allowing each group to agree in advance on a negotiating position by working out compromises among themselves. Customs unions, by definition, are required to participate as a unit in tariff negotiations. There is obviously no guarantee, however, that regional groupings leading to two-stage negotiations (first among themselves, then in the larger WTO forum) will generate a more liberal trade policy than the single-stage negotiations in which all countries negotiate within WTO. The costs of within-group reconciliation of interests to achieve any kind of group unity may outweigh the benefits that the group’s increased bargaining power can bring (Wang and Winters 1998; Andriamananjara and Schiff 2000; Mendoza et al. 1999). Nevertheless, APEC, for instance, has facilitated participation of its members in WTO negotiations. It is widely recognized to have contributed to negotiating the close of the Uruguay Round, and is generally involved in building capacity for implementation of WTO measures among its members.

The advantages of PTAs outside of areas directly related to trade liberalization—including nontariff barriers and the provision of a forum for smaller developing countries—seem to explain their popularity more than their economic benefits, both domestically and internationally. PTAs can be more palatable domestically in political terms than multilateral arrangements, as they allow countries to reserve sensitive economic sectors and to integrate with countries that will not create strong competitive pressures for restructuring.

Internationally, 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 reforms, particularly nontariff reforms such as investment policies or regulation. They are often seen as a quicker means to bypass WTO’s complicated multilateral negotiations.

PTAs and the Development of a Broader Multilateral System for Open Trade. Although it is clear that PTAs and WTO are potentially complementary mechanisms, there is disagreement over whether this potential will be realized. An alternative scenario is that the proliferation of PTAs may damage the credibility of existing multilateral global trade negotiation frameworks if WTO does not improve its ability to police the agreements and ensure that they are compatible with the framework set out in its charter.

Although a PTA’s charter may be in compliance with WTO rules, it is unclear that PTAs are monitored well enough, in practice, to ensure that they actually follow these rules (Box 3.2). Neither has there been a way to enforce the obligations on PTAs or to punish those in violation (Laird 1999).

An area of the debate concerns the dynamic path of PTAs, more specifically the effect of development of PTAs on eventual achievement of an all-inclusive multilateral free trade arrangement. The most optimistic view of PTAs, associated with Baldwin’s (1993) domino theory, is that PTA membership will gradually expand to cover all nations as the promise of access to the PTA market will attract applicants for membership. Critics of PTAs envisage a future in which the world has divided itself into several large trade blocs with little incentive for further reduction of trade barriers to create global free trade.

The efforts of Central and Eastern European countries to fulfill the requirements of EU membership can be seen as an example of the attractive power that a large regional organization can have. Similarly, some political-economic analyses argue that liberalization via PTAs can have a demonstration effect and create a demand for further liberalization. Fernandez and Portes (1998), for example, argue that PTAs serve as a focal point for the often dispersed domestic beneficiaries of liberalization to coordinate and offer strong political support for continued trade reform.

In general, the predicted outcomes for the dynamic path of PTA evolution are hard to test, as there has not been enough time to watch this path, since many PTAs were formed in the 1990s. The early stages of the domino theory and the fear of evolution of several major trade blocs are identical. In both cases, nations want to join existing PTAs. ASEAN’s rapid expansion to include Cambodia, Lao PDR, Myanmar, and Viet Nam could, for example, be seen as either evidence for the domino theory or the precursor to an Asian bloc.

Most political economy theory suggests that PTAs will reduce rather than increase demands for liberalization (Krugman 1991). The way this works is that trade opening via PTAs will be enough to satisfy groups that benefit from freer trade and access to greater product variety. These pro-trade groups will lessen their lobbying efforts at further liberalization and the country will have little incentive to pursue further multilateral liberalization. Levy (1997), for example, shows how bilateral trade negotiations may alter domestic interest groups’ payoffs and make them more likely to block further multilateral liberalization. PTA liberalization can also create interest groups opposed to further liberalization. Krishna (1998) points out that preferential access to large markets can create excess profits for producers in member countries. PTAs thus create a new interest group opposed to further multilateral liberalization. Andriamananjara (1999) demonstrates how a PTA shrinks the export sectors of the nonmember countries, which in turn, leads to an expansion of these countries’ import-competing and lobbying sectors. Therefore, nonmember countries respond by becoming more protectionist and, in the process, undermine efforts to liberalize the multilateral trading system.

Scollay and Gilbert (2001) point out the possibility that PTAs will allow countries with like-minded protectionist policy outlooks to acquire greater bargaining power in the multilateral framework. PTAs, and particularly customs unions, can attract the support of protectionist interests in prospective member nations due to the opportunity they offer to raise domestic tariffs to the level of the highest tariff applied by any member. This creates an opportunity to pursue the elevation of trade barriers under the guise of trade liberalization through a PTA. Andersen and Eliassen (1991), for example, note that the number of lobbyists in Brussels, the seat of the EU, grew 10-fold between 1970 and 1990.

A pessimistic long-run scenario is that PTAs will proliferate and overlap such that countries become embedded in a “spaghetti bowl” of mutually inconsistent trade restrictions (Krueger 1997). The complexity of exchanging goods between countries will increase, lessening the incentives to trade. Trade routes will also be affected as producers take market barriers into account when planning exports. This is a particular concern for PTAs with complicated rules of origin.

In summary, although welfare consequences of PTA liberalization tend to be positive, it is generally acknowledged that PTA liberalization of trade does not compare favorably with multilateral liberalization if gains from trade alone are considered. The contribution of PTAs to the efficiency-improving expansion of world trade can be maximized if PTAs develop so that the comparative advantage of countries relative to each other is similar to that with the rest of the world. This is more likely to be the case when a PTA accounts for a large share of world GDP—but not when it consists of several very poor countries. The same argument applies to the size of the market and the ability to attract FDI: PTAs encompassing a small market cannot take advantage of the scale economies of a wider grouping of countries nor can they attract inflows of foreign capital as effectively as a more diverse set of countries. Furthermore, PTAs can foster competition by making industry coverage as comprehensive as possible and by minimizing the dispersion of external tariffs within the PTA in order to reduce the amount of trade diversion through indirect trade deflection.

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