Home 
Publications Catalog Online Publications Document
Asian Development Outlook 2002 : III. Preferential Trade Agreements in Asia and the Pacific
ConclusionsThe pace of growth in international trade accelerated in the 1990s. Simultaneously, there was a rapid increase in the number of international trading arrangements, including PTAs. This suggests that the growing importance of international trade in the determination of economic growth, both globally and at individual country level, has been leading nations to devote greater energies to develop PTAs while negotiating global trade agreements under the auspices of WTO. Most empirical and theoretical work indicates that the effects of PTA-enhanced trade are not as beneficial for welfare as more general trade liberalization. PTAs have generated an increase in market size and resulted in an increase in the variety and availability of new products. Nevertheless, when compared with multilateral trade liberalization, PTAs are limited vehicles for enhancing welfare. First, the product variety among PTA members is obviously lower than the product variety in the world. Second, a PTA-created market, as the product of an agreement among a few countries, is obviously smaller than the world market. The productivity- and efficiency-enhancing effects of international competition are likely to be qualitatively different in PTAs than in multilateral arrangements. Competition from other PTA members may, for instance, push countries into specialization that does not reflect their comparative advantage relative to the rest of the world. Domestic producers that make adjustments to serve the PTA market are likely to oppose further liberalization that would create pressure for reallocation of resources away from their sectors. The trade diversion that stems from preferential treatment for PTA members can manifest itself in inefficient specialization in member countries. A PTA member may be able to produce and sell goods in other member countries more cheaply than a competitor in a nonmember country can, even if the competitor’s production costs are lower. A PTA can also create an incentive to specialize in the use of tariff differentials to import nonmembers’ products and then resell them as local goods after some processing, so as to take advantage of the preferential treatment for member countries. Hence firms might set up in a member country with the lowest tariffs for the express purpose of including the minimum amount of local inputs with outside exports so that final products qualify as local goods. The difference between the effects of PTA-enhanced trade and more general liberalization varies with the institutional design of the PTA. First, the size of the tariff differential for members relative to the rest of the world determines the extent of distortion, primarily trade diversion, which the PTA can create. The greater the advantage accorded to members, the more the agreement isolates members from competition by firms in countries outside of the PTA. Second, incentives for inefficient specialization are created by the difference in member countries’ external tariffs and the necessity for developing and implementing rules of origin to prevent nonmembers’ goods from entering the group via the member country with the lowest level of trade protection. This can lead to distortions in production and location decisions as well as unproductive lobbying activity; it also offers wide scope for rent seeking. Third, the extent of the market created by a PTA depends heavily on the trade facilitation and nontrade measures that are incorporated into the agreement. PTAs can potentially lower border costs more than general liberalization because the smaller number of member countries are more likely to reach agreement on regulatory policies, customs procedures, and infrastructure priorities to promote trade. In regions where PTAs have been most successful in generating tangible changes in the internal structure of tariffs and other trade barriers, export growth may be more muted. Although other historical and institutional factors may also be important, this could be because distortions have been high and, as a result, members have become more isolated from competition outside of the PTA. Still, from a broader perspective there are diverse opinions within the economics profession regarding the welfare effects of PTAs, particularly the effects of PTAs as institutional trading arrangements for broader regional economic corporation and integration, an area to which economic analysis has devoted less attention than the narrower effects of PTAs on international trade. Many of the positive effects of PTAs arise in this area. On nontrade grounds, PTAs have several potentially beneficial effects as instruments for structural change. The institutional design of the PTA can have an important impact on how much the gains from PTA trade approximate to the gains from more general liberalization as well as the degree to which nontrade benefits are realized. For example, the limited market size in a PTA can be mitigated by deep integration—such as harmonization of regulations and streamlining of customs procedures—that reduces border costs by more than the results of tariff changes. Further, PTAs, as internationally negotiated pledges to leave unchanged the trade reforms that have been made in the past or to implement trade liberalization in the future, demonstrate greater commitment to reform than unilateral declarations of intent. This is particularly true when the PTA includes procedures for identifying and sanctioning countries that renege on their agreements. PTAs also provide forums for interaction between leaders as well as technical officials in member countries. This interaction can have positive spillovers for resolving other conflicts, enhancing regional cooperation in larger multinational negotiations, and generally ensuring a higher level of international communication between countries.
|
© 2009 Asian Development Bank Privacy | Terms of Use |
 Top of page |
Back