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p. 76 of 77 BACK | NEXT Foreword, Acknowledgments, Contents, Acronyms and Abbreviations, Definitions I. Developing Asia and the World II. Economic trends and prospects in developing Asia III. Routes for Asia's Trade Introduction The drivers of trade and integration in Asia The rise of bilateralism Trade scenarios: Potential benefits and risks An agenda for trade and integration in Asia Conclusions Endnotes and references Statistical appendix

Asian Development Outlook 2006 : III. Routes for Asia's Trade

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Endnotes

¹ The analysis here builds on and extends Part 3 of ADB (2002a). A particularly significant development since then has been the rise of bilateral free trade agreements.

² Hubs are usually large countries that are the center of preferential trading regions such as the United States in the western hemisphere and the European Union in Europe and the Mediterranean rim. Spokes are smaller, often developing, countries that opt to join the hub through an FTA. Whereas hubs automatically have preferential access to all the spokes in the system, the converse is not always true. Spokes may be linked to one another through their own FTAs. However, rules of origin may inhibit trade between the spokes. One solution to this problem is for hubs to allow "diagonal cumulation" (as in the Euro-Med Free Trade Agreement rules of origin) so that content from several spokes can count cumulatively toward the originating value added and will help make products eligible for duty-free treatment in the hub (Cadot et al. 2006).

³ Kawai (2005) reports East Asia (comprising members of the Association of Southeast Asian Nations, PRC, newly industrialized economies of Hong Kong, China; Korea; Singapore; and Taipei,China) having an intraregional trade share of 44%. However, if South Asia is included, this share will fall somewhat.

⁴ For example, see Rose (2004). Rose uses a standard gravity model and finds little evidence that trade patterns of members of the GATT/WTO system differ from those of outsiders once standard variables have been taken into account. He concludes that if GATT/WTO membership does not account for the fact that trade growth has led income growth in the post-Second World War era, membership in regional trade agreements (e.g., EU, NAFTA) may be an alternative explanation. That East Asian countries attained even more rapid growth in trade than other regions of the world without resort to discriminatory trade preferences for several decades would appear to contradict such a conclusion.

⁵ The program was largely successful as it reduced Indonesia's simple average import tariff from 20% in 1994 to about 7% by the end date. See James (2005a).

⁶ Data from Athukorala and Yamashita (2005) show increase from 66% to 70% between 1992 and 2003.

⁷ Compliance costs fall typically in the range of 3—5% of the cost, insurance, freight import price and these costs (arising from paperwork and documentation procedures in customs and ports) discourage firms from applying for tariff preferences (Productivity Commission 2003).

⁸ This is in fact why Sutherland et al. (2004) recommended that the deepest possible cuts be made in MFN tariffs in the Doha Round negotiations—as the only practical way to undo the "spaghetti bowl" problem in the context of proliferation of discriminatory trade agreements.

⁹ For an earlier version of GEMAT, with an assumption of constant returns to scale and perfect competition, see Roland-Holst et al. (2005).

¹⁰ The calculation here does not take into account the recent revision of GDP statistics in the PRC, which raises the GDP figure of 2004 by 16.8%.

¹¹ Technically, the changes in real income are measured as Hicksian equivalent variation, which represents a money metric of welfare change. It is defined as the amount of income that, if given to the consumers at baseline prices, would be equivalent in terms of their level of utility to the effects of policy changes.

¹² They estimate gains of 0.7% of world GDP by 2015 but their scenario assumptions imply quicker liberalization than those used here. The coarser regional disaggregation for the non-Asia region in GEMAT also partly accounts for the smaller estimate of global gains.

¹³ Rules of origin are not captured in GEMAT.

¹⁴ In the global trade liberalization scenario, India suffers a terms-of-trade deterioration.

¹⁵ Baldwin cautions that, to avoid the possibility of transnational protectionist alliances, the exclusion of sectors from FTAs should be considered case by case. Agreements to exclude them on a consistent basis risk creating strong constituencies in favor of protectionism.

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