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p. 76 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 Effects of PTAs on Trade in Asia and the Pacific: Some Evidence Trends in Intrabloc Trade Trade Intensity Indices Gravity Model Estimation Beyond Gravity Models: Computable General Equilibrium Models Conclusions References

Asian Development Outlook 2002 : III. Preferential Trade Agreements in Asia and the Pacific : Effects of PTAs on Trade in Asia and the Pacific: Some Evidence

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Beyond Gravity Models: Computable General Equilibrium Models

The gravity model estimation results can help explain bilateral trade flows and the effect of PTAs on flows, but reveal little or nothing about the effects of changing trade flows on the size and distribution of aggregate real income of economies. Broader econometric analyses of trade, growth, and increased national income provide evidence that higher levels of trade are associated with higher growth rates and improved national standards of living. This literature dates from the 1970s and includes several empirical studies of the relationship between trade and income, the results of which suggest that higher volumes of trade facilitate growth and higher income.¹¹ However, growth and higher income could, in turn, drive variations in trade flows. Indeed, trade and economic performance affect each other and it requires a more complete description of an economy to evaluate causal linkages and feedback mechanisms in and among the economies of the world.

Computable general equilibrium (CGE) models provide a framework that can detail how the extra trade translates into improved economic performance. They also suggest why the growth process can be faster for one subset of countries but slower for another. In CGE models, analysts assemble the relevant economic structural features and behavior of agents and, using the framework, simulate the economic effects of existing or proposed PTAs. The analytical design of the model drives the results of the empirical analysis and establishes the model’s credibility.

Results from some CGE studies, such as Robinson and Thierfelder (1999), show that PTAs create trade rather than divert it. In particular, this study found that PTAs increase intrasector trade between countries by expanding market size and by enabling individual economies to benefit from increased specialization and division of labor. Frankel and Romer (1999) point out that trade provides countries with the opportunity to exploit their respective comparative advantage and achieve cost efficiencies through the larger markets offered to their domestic industries. It also enables countries to reduce resource wastage due to rent seeking, and to increase investment. However, this finding is questioned by Andriamananjara (1999), who developed a CGE model showing that PTAs tend to reduce the export markets of the nonmember countries and lead them to expand their import-competing sectors. Supporting this result, Scollay and Gilbert (2001) argue that effective PTAs tend to lead to a greater number of trade conflicts as a result of their negative impact on nonmembers.

A number of CGE-based studies note that larger PTAs have superior positive welfare effects (Scollay and Gilbert 2001, Wang and Schuh 2000), particularly if these PTAs liberalize their trade in a nondiscriminatory manner. The results of the study by Gonzalez-Vigil (2000) acknowledge the merit of open regionalism, as represented by APEC. This provides support for the proposition that APEC conforms with the multilateral trading system because its nondiscriminatory nature avoids marginalizing nonmembers. Scollay and Gilbert (2001) note that global liberalization remains the first-best option. The aggregate gains under global liberalization both for the world as a whole and for the APEC members together are about 50% higher than under the next most favorable multilateral trading arrangement simulated.

General equilibrium model simulations of the effects of PTAs suggest that aggregate trade creation dominates trade diversion. Most models show that current and potential welfare changes for member countries are generally positive, especially when the possibilities of technology transfers and increased competition are included in the simulation (Robinson and Thierfelder 1999). Fukase and Winters’ (1999) elaboration of the potential benefits for the Lao PDR, Myanmar, and Viet Nam of ASEAN accession is a typical example of the empirical literature on the subject. Their findings are generally positive, but the authors are quick to caution that “there is little evidence that dynamic gains always occur with regional integration especially in the case of integration schemes between developing countries. The existence of such gains depends heavily on the specific models used, and is very sensitive to the characteristics of the regional integration and the members’ economic policy” (p. 3). The consensus view of economists is that PTA liberalization likely yields lower welfare gains than does multilateral liberalization.

CGE analyses enable consideration of the crucial policy question concerning the effect of PTAs on eventual achievement of broader multilateral trading arrangements. Scollay and Gilbert (2001) find that PTAs can be building blocks to broader multilateral trading arrangements provided that they improve the economic welfare of their members as well as nonmembers, and leave open the door to future negotiation. Foroutan (1998) found that the acceptance of a liberalized trade policy may be a condition for the survival and strengthening of PTAs, but that membership of a regional bloc is neither a necessary nor a sufficient condition for liberalization.

Several other studies offer more critical assessments of the effects of PTAs on prospects for eventual multilateral trade liberalization. Bagwell and Staiger (1997) are more skeptical concerning the effects of PTAs on prospects for a global open trading arrangement. They argue that PTAs obscure the transmission of externalities across countries and thus prevent the reciprocity principle from conveying efficient multilateral results for members. They also establish that externalities are transmitted efficiently across countries only if tariffs are in accord with the principle of nondiscrimination. Andriamananjara (1999) mentions a number of barriers to multilateral trade introduced by PTAs. In summary, CGE models have proven useful in improving the understanding of the sources of trade expansion brought about through PTA-based trade liberalization and income growth, as well as greater appreciation of the interaction between such liberalization and income growth.

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