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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
Policy Guidelines for Asian PTAsIn terms of achieving the welfare gains and competitive effects associated with free trade in economic terms alone, PTAs are a second-best means, after general liberalization. The main debate is over the size of the gap between the “first” and “second” best ways to liberalize. Some policymakers seek to minimize this gap; others argue that it is too wide to close and that there is no reason to deviate from the first-best path. The nontrade effects of PTAs further complicate the debate when one considers the wide range of potential gains from PTAs that might offset the economic costs. The cost of a PTA to a country, relative to multilateral liberalization, depends on the characteristics of the other member countries as well as the institutional design of the PTA. For a country to realize its potential trade gains from a PTA, it needs access to a large market as well as incentives to specialize in the industry in which it has a comparative advantage. To achieve its potential nontrade benefits from a PTA, institutional features, such as the breadth of policies covered, the frequency of negotiations, and the mechanism for settling disputes, are more important. PTAs as Trade Facilitation Mechanisms. For DMCs, trade liberalization via PTAs is no substitute for broader trade liberalization, for several reasons. First, there are economic limitations on the extent of gains from trade that can be achieved from trade within regional PTAs. The PTAs within the region tend to encompass countries with relatively similar resource bases, manufacturing capabilities, and economic structures, such that there is not much scope for expanding trade within the existing agreement. The prospects for trade-enhanced technology transfer are also limited for trade within most of the region’s PTAs. (APEC, the only organization that does not seek to lower barriers to trade among members more than barriers to all trade, is an obvious outlier in terms of diversity of the member economies, potential for technology transfer across states, and importance of existing trade links among members.) Second, the institutional features of the region’s PTAs are not the most conducive to achieving gains from trade. All are basically FTAs, but, as mentioned above, the extent of free trade varies widely. The agreements retain protection for sectors that would potentially be most affected (and, in the long run, made more efficient) by external competition. Rules of origin, prominent in these agreements as in all FTAs, are a potential source of distortion in trade flows. Third, the aggregate economic size of some PTAs tends to be small, such that any possible large-market effects of economic integration are limited. Trade within the PTAs in the region is generally not free. AFTA members’ lists of items to which preferential tariffs are applied, for example, tend to exclude sectors with significant domestic production (USTR 2000). Automobiles and most agricultural products are notable exceptions to the items slated by AFTA for free trade, which is targeted for 2010. SAPTA has encouraged tariff concessions, but significant nontariff policy barriers remain in place. Antidumping investigations continue to be a major barrier to trade in the South Asian subregion. Bangladesh and Nepal have called for resolution of these disputes under SAARC/SAPTA. India, in particular, restricts imports of consumer goods by requiring special import licenses. The states in India can also impose separate taxes on imports that raise their price in the market. Member states have been reluctant to liberalize trade restrictions on the categories of items with the highest potential in their market. There are also hidden policy barriers that inhibit trade, including cumbersome bureaucratic procedures. In addition, the tariff rate alone can be misleading. For example, government values of goods for calculating tariffs are often much higher than the market value of the cheapest source of imports. APEC’s method of encouraging member economies’ trade liberalization by peer pressure has shown mixed results. The Bogor Declaration states the ultimate goal, i.e., that members are to reduce tariffs to zero by 2010, or by 2020 for developing countries, but it is unclear exactly how this will be implemented and there have been difficulties in agreeing to strategies (Elek 1995). Australia and the US pushed for binding targets, as they were worried that the developing countries would be “free riders” on their market openings (Gallant and Stubbs 1997). Asian members wanted to follow “concerted unilateralism” to liberalize at their own pace, while developing countries wanted to ensure that they would not be forced to liberalize before they were ready. These differences of opinion were highlighted at the Osaka Summit: the PRC; Japan; Korea; and Taipei,China wanted to continue protection of their agriculture sectors despite pressure from the US. The resulting strategy was the Early Voluntary Sectoral Liberalization (EVSL), in which each country developed individual action plans. These plans generally did not move beyond existing commitments to liberalize politically sensitive sectors where the gains from liberalization would, perhaps, be the highest. The potential gains from trade from any PTA, however, depend heavily on the extent of liberalization. The simulations of Anderson (1997) on the impact of APEC shows, for example, that welfare gains for APEC members depend heavily on whether agriculture is included in the list of liberalized sectors. All PTAs in the region have similar forms of rules of origin based on the percentage of inputs from member countries. For example, AFTA’s rules of origin allow a good to be considered as originating in a member country (i) if it is wholly produced in a member country or (ii) if the value of the materials from a member country makes up at least 40% of the free on board value and if the final manufacturing process takes place in a member country. CER’s rules of origin specify that 50% of the factory or works costs of the goods should be made up from expenditure on inputs or contents originating in the area. They impose the additional restriction that the last process of manufacture should have occurred in Australia or New Zealand. SPARTECA’s rules of origin are unusual in that excess local content from some SPARTECA qualifying goods can be transferred from goods with over 70% local content to help otherwise nonqualifying goods (between 35% and 50% local content) to meet the 50% local content requirement. SAPTA’s rules of origin, though still based on the percentage criterion, are slightly more complicated with provisions varying by product and special concessions for the least-developed countries. Verification of origin is generally done at the national level in accordance with guidelines agreed on as part of the charter for (or as an appendix to) the PTA. This mechanism creates several sources of rents, as there is no single acceptable way to calculate the value of a product. The guidelines for valuing the final product and the domestic inputs are generally vague and can thus be manipulated and interpreted differently by national authorities, which have wide discretion in applying these rules, and can do so arbitrarily. The same criticism applies to the guidelines for valuing inputs. The Asian PTAs’ level of cooperation in trade facilitation and in nontrade policy areas has generally been quite high. AFTA, in particular, is part of a wide range of trade facilitation and deeper integration policies among ASEAN countries. The ASEAN Industrial Cooperation Scheme (AICO) encourages technology investments in the ASEAN area by reducing tariffs on goods produced by companies that are partially owned by ASEAN citizens (30% equity), incorporated, and operating in member countries and cooperating or sharing resources (such as sharing technology or consolidating raw materials purchases) with another company in the region. The ASEAN Agreement on Customs lays the groundwork for regionwide harmonization of tariff nomenclature at the 8-digit Standard Industrial Trade Classification (SITC) level. The ASEAN Customs Vision 2020 also aims to streamline customs procedures for examination of goods and to simplify customs clearance for home use as well as the formalities of goods declaration for exporters. CER’s charter places many nontrade areas of domestic policy under its purview. A proposal to harmonize quarantine systems was one of the earlier agreements, while later cooperation included industry assistance, government purchasing, business law harmonization, export restrictions, and further harmonization of customs policies and procedures. A 1990 plan to avoid double taxation and income tax evasion is another example of a trade-supporting policy. The two governments also signed an agreement on common accreditation and quality standards in October 1990. A joint regulatory agency for food quality certification was established in 1995. This attention to augmenting tariff reductions with further attempts to reduce internal barriers is important, given that the small market size created in most of the PTAs imposes an upper bound on the market size gains possible. Khanna’s (2001) survey of exporters in Bangladesh and Nepal highlights some of the potential nontariff barriers that can impede trade if they are not explicitly considered in a PTA. The high tariffs on the consumer products that Bangladesh’s manufacturing sector is currently capable of producing are the main obstacle to cross-border trade for Bangladesh exporters. While transit in India is relatively free for carriers from Bhutan and Nepal, those from Bangladesh are subject to more restrictions. On the other hand, transit in Bangladesh is severely restricted; goods moving into Bangladesh from Bhutan, India, and Nepal are required to be transshipped at the border. The limited number of trade routes, sparsely staffed customs stations, and a multiplicity of customs forms have also been documented as prohibitive barriers to trade (World Bank 2001). Finally, continuing differences in product quality standards, quarantine restrictions, and accepted certification have restricted trade even when there are significant production cost differentials between countries. Given the limitations of the Asian PTAs in terms of market size and lack of diversity in many cases, these PTAs can best contribute to the building of a multitiered international trading system by continuing to put stress on lowering both internal and external tariffs. Aside from APEC, none of these PTAs can risk the trade diversion effects of bringing down internal tariffs without offering some tariff reductions to its other trading partners outside of the PTA. In fact, many countries in AFTA have already adopted MFN in adjusting their tariffs. Aside from tariff policy, Asian PTAs can also focus on ways to boost joint security, reduce political tension, and improve conflict resolution. They can also address other measures to facilitate trade, such as harmonizing cross-border standards, facilitating the flow of labor between countries, and reducing bureaucracy.
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