Normative Influences of "Special and Differential Treatment" on North-South RTAs

Recently, there has been a surge in bilateral and regional trade arrangements between developed and developing countries, which are known as North-South RTAs. Under the current legal system of the WTO, North-South RTAs are governed by Article XXIV of the GATT or Article V of the GATS, which means such RTAs must be reciprocal and must cover substantially all the trade. On the other hand, there is another category of rules on RTAs based on the so-called Enabling Clause, which, in exceptional circumstances, provides special and differential treatment (SDT) for RTAs among developing countries. This paper considers the applicability of the SDT concept to North-South RTAs by examining why rules on RTAs and the concept of SDT were incorporated into the GATT/WTO legal framework so as to permit the derogation of most-favored-nation (MFN) obligations.

Who Uses FTAs?

It is noted that utilization of AFTA is low by international standards. In order to clarify the reasons for such low utilization, this paper investigates what kinds of Japanese affiliates in ASEAN are more likely to use FTAs in their exporting, by employing unique affiliate-level data. Our findings are as follow. First, the larger the affiliate is, or the more diversified its procurements’ origins are, the more likely it is to utilize an FTA scheme in its exporting. Second, affiliates exporting actively to developing countries are more likely to use FTAs than those exporting to developed countries. Third, there are clear differences in FTA utilization depending on affiliates’ locations and sectors. These results afford a clue to the reasons for the low FTA utilization in East Asia.

Measuring fixed costs for firms' use of a free trade agreement : threshold regression approach

In this paper, by employing the threshold regression method, we estimate the average tariff equivalent of fixed costs for the use of a free trade agreement (FTA) among all existing FTAs in the world. It is estimated to be 3.2%. This global estimate serves as a reference rate in the evaluation of each FTA’s fixed costs.

The role of Preferential Trade Agreements (PTAs) in facilitating global production networks

This paper examines the effects of preferential trade agreements (PTAs) in facilitating international trade flows connecting production networks. We consider over 250 PTAs with trade flows distinguished into parts and components and final goods for the period 1979-2008. The gravity equation estimates suggest that the concurrent year effects of PTA formation on trade in parts and components are unseen, whereas PTAs have positive and pervasive effects on both types of trade flows 6 and 9 years after the PTA formation.

Bilateral tariff rates in international trade : finished goods versus intermediate goods

In this paper, we examined back-and-forth international transactions through tariff reduction by estimating modified gravity equations for finished goods and intermediate goods separately. Our main findings are as follows. Exports of finished machinery products are negatively associated with not only the importer's tariff rates on finished machinery products but also the exporter's tariff rates on machinery parts. Similarly, exports of machinery parts are negatively associated with not only the importer's tariff rates on machinery parts but also the exporter's tariff rates on finished machinery products. These results imply that tariff reduction in only one production process in an industry has the potential to drastically change the magnitude of trade in the whole industry.

Non-conventional provisions in regional trade agreements : do they enhance international trade?

The scope of recent regional trade agreements (RTAs) is becoming much wider in terms of including several provisions such as competition policy or intellectual property. This paper empirically examines how far advanced, non-conventional provisions in RTAs increase trade values among RTA member countries, by estimating the gravity equation with more disaggregated indicators for RTAs. As a result, we find that the provision on competition policy has the largest impacts on trade values, following that on government procurement. Our further analysis reveals that the more significant roles of these two provisions can be also observed in the impacts on the intensive and extensive margins.

How serious is the omission of bilateral tariff rates in gravity?

In this paper, using the worldwide dataset of bilateral tariff rates, we explore how serious the omission of bilateral tariff rates in gravity is. Our findings are as follow. Firstly, the omission of bilateral tariff rates seems not to be so serious in terms of omitted-variable biases because the coefficients for the usual gravity variables do not change before or after their inclusion. Secondly, while the widely-used dummy variable of regional trade agreement could not play an alternative role in place of tariff rates, the inclusion of time-invariant pair fixed effects in addition to the time-variant importer fixed effects and exporter fixed effects accounts for the omission of tariff rates. The inclusion of those fixed effects makes the coefficient for bilateral tariff rates insignificant.

How do free trade agreements change import prices? : firm-level evidence from China's imports from ASEAN

The literature has revealed the positive impacts of free trade agreements (FTAs) on export prices by employing product-level trade data. This paper empirically examines the impacts of FTAs on import prices at the firm level. We focus on firm-level imports in China from ASEAN countries by employing China’s firm-product-level trade data. As a result, controlling for firm characteristics and product characteristics, we could not find significantly positive impacts of an FTA’s entry into force on import prices of FTA eligible products. Instead, we found a significant increase in import quantities of FTA eligible products. Thus, at the firm level, the gains from FTAs for exporters may be the increase in export quantities rather than the rise in export prices.

New measures of FTA liberalization level

This paper proposes new measures of the liberalization level of free trade agreements (FTAs). Our measures take three issues into account. First, in order to identify the differences in FTA liberalization level over time, we compute the annual liberalization level rather than the level during the whole period. Second, our measure includes information on tariff margins, i.e. the difference between FTA rates and most favoured nation rates. Third, the restrictiveness of rules of origin (RoOs) is also taken into account in order to penalize the liberalization level of products with more restrictive RoOs. In this paper, we compute such measures of FTA liberalization level for three FTAs in Thailand.

Some practical guidance for the computation of free trade agreement utilization rates

The literature on the use of free trade agreements (FTAs) has recently been growing because it is becoming more important to encourage the use of current FTAs than to increase the number of FTAs. In this paper, we discuss some practical issues in the computation of FTA utilization rates, which provide a useful measure to discover how much FTA schemes are used in trade. For example, compared with the use of customs data on FTA utilization in imports, when using certificates of origin data on FTA utilization in exports, there are several points about which we should be careful. Our practical guidance on the computation of FTA utilization rates will be helpful when computing such rates and in examining the determinants of those rates empirically.

Tariff reductions and labor demand elasticities : evidence from Chinese firm-level data

International production fragmentation has been a global trend for decades, becoming especially important in Asia where the manufacturing process is fragmented into stages and dispersed around the region. This paper examines the effects of input and output tariff reductions on labor demand elasticities at the firm level. For this purpose, we consider a simple heterogenous firm model in which firms are allowed to export their products and to use imported intermediate inputs. The model predicts that only productive firms can use imported intermediate inputs (outsourcing) and tend to have larger constant-output labor demand elasticities. Input tariff reductions would lower the factor shares of labor for these productive firms and raise conditional labor demand elasticities further. We test these empirical predictions, constructing Chinese firm-level panel data over the 2000--2006 period. Controlling for potential tariff endogeneity by instruments, our empirical studies generally support these predictions.

FTA in international finance : impacts of exchange rates on FTA utilization

This paper investigates how exchange rates affect the utilization of a free trade agreement (FTA) scheme in trading. Changes in exchange rates affect FTA utilization by two ways. The first way is by changing the excess profits gained by utilizing the FTA scheme, and the second way is by promoting the compliance of rules of origin. Our theoretical models predict that the depreciation of exporters' currency against that of importers enhances the likelihood of FTA utilization through those two channels. Furthermore, our empirical analysis, which is based on rich tariff-line-level data on the utilization of FTA schemes in Korea's imports from ASEAN countries, supports the theoretical prediction. We also show that the effects are smaller for more differentiated products.

Measuring the usage of preferential tariffs in the world

The preference utilization ratio, i.e., the share of imports under preferential tariff schemes out of total imports, has been a popular indicator for measuring the usage of preferential tariffs vis-à-vis tariffs on a most-favored-nation basis. A crucial shortcoming of this measure is the data requirements, particularly for import value data classified by tariff schemes, which are not available in most countries. This study proposes an alternative measure for preferential tariff utilization, termed the "tariff exemption ratio." This measure offers the unique advantage of needing only publicly available data, such as those provided by the World Development Indicators, for its computations. We can thus calculate this measure for most countries for an international comparison. Our finding is that tariff exemption ratios differ widely across countries, with a global average of approximately 50%.

Gravity with multiple tariff schemes

This study contributes to the literature on gravity analysis by explicitly incorporating both most favored nation (MFN) rates and regional trade agreement (RTA) rates. Our gravity equation considers the fact that all exporters do not necessarily utilize RTA schemes, even when exporting to their RTA partners. We apply the tariff line–level data on worldwide trade to this gravity equation. As a result, we find a significantly negative coefficient for the (log) ratio of RTA rates to MFN rates. From the quantitative point of view, we show that in the first year of the Japan–Australia Economic Partnership (i.e., 2015), exports from Australia to Japan are expected to increase by 6% compared with the exports in 2014. Furthermore, it is shown that, based on the subsequent reduction in RTA rates, the magnitude of the trade-creation effect through tariff reductions gradually rises over time.