Impact of Reducing Non-tariff Trade Cost in RTAs: Case of the Asia-Pacific Trade Agreement

Transcription

1 Impact of Reducing Non-tariff Trade Cost in RTAs: Case of the Asia-Pacific Trade Agreement Rajan Sudesh Ratna Jing Huang I. Introduction The General Agreement on Tariffs and Trade (GATT), formed in 1947, looked at the free trade agreements (FTAs) and customs unions (CUs) as an exception to the basic principle of Most Favored Nation (MFN). 1 While starting with a few, the new wave of regional trade agreements (RTAs) have altered the international trade rules. The Asia and the Pacific is not untouched with this phenomenon and the number of RTAs in the region has seen an increase since early 1990s. The Asia-Pacific economies have turned now into major contributors to a global build-up of RTAs. Out of 262 RTAs in implementation worldwide, the Asia-Pacific economies are party to 156, with an average of 7.1 RTAs for each Asia-Pacific economy and thus creating a complex web of noodle bowl. 2 The Asia-Pacific Trade Agreement (APTA) is one of the oldest preferential trade agreements (PTAs) in the region (signed in 1975 as the Bangkok Agreement) and is open for membership to all the developing countries of the Asia and the Pacific. The current members are Bangladesh, China, India, Lao PDR, the Republic of Korea and Sri Lanka. Mongolia s accession was finalized in October 2013 and pending its national ratification. This is at present, the only agreement in force which has three major economies of Asia: i.e., China, India and the Republic of Korea. The APTA aims to promote intra-regional trade through reduction in tariff and non-tariff measures (NTMs); however, so far it has Economic Affairs Officer in Trade, Investment and Innovation Division, UNESCAP; rsratna@gmail.com; ratna@un.org. Views expressed by the authors are personal and may not represent the views of ESCAP or its member States. PhD student at Department of International Business & Trade, Kyung Hee University, Seoul. 1 Under Article I of GATT 1994, WTO members are not supposed to discriminate one member against another in terms of their trade policies including import duties. However, RTAs allow such discretion under Article XXIV of GATT 1994 subject to certain conditions. The plethora of RTAs now are thus challenging the principles of Article I since all the members of WTO are also parties to multiple RTAs. 2 APTIAD Briefing Note 7 (February 2016), ESCAP. Available at 1

2 only focused on reduction of tariffs. Four rounds of trade negotiations have taken place so far but the entire focus has been on reduction of tariffs only. No serious attempt has been made to address the issue of non-tariff measures during these negotiations. This paper therefore examines the importance of reducing and removing non-tariff measures and the associated cost of compliance which can enhance the intra-apta trade and investment flows so as to enhance opportunities for regional and global supply chains among APTA Participating States. Not enough literature exists on evaluating the effects of removal of NTMs for APTA. Most of the studies on APTA have focused on expansion of membership and the potential of trade that exists between the APTA members due to tariff concessions. Therefore, this paper examines a new dimension of APTA by evaluating the impact of NTMs on trade. The paper first examines the trade, tariff and non-tariff profiles of APTA members to understand their relative importance and then looks at the overall bilateral trade cost by using the ESCAP World Bank database. By using the gravity model, this study evaluates the impact of elimination of non-tariff related trade cost on intra-apta exports keeping in view the future negotiating prospects of FTAs. In conclusion part of the paper, the study looks at measures which can facilitate reduction or elimination of two important non-tariff measures 3 namely; the sanitary and phytosanitary (SPS) measures and the technical barriers to trade (TBT). It is recognised that both tariff and non-tariff measures can affect trade, however, with the reduced levels of existing MFN tariffs, NTMs have become a major determinant in restricting trade. NTMs often create challenges for exporters and importers in terms of their compliance and thus have a price-enhancing effect on trading goods. The paper proceeds as follows. Section II sheds some light on the existing literature on how the NTMs affect trade. Section III reviews the intra-apta tariff and trade. Section IV uses the gravity model to understand the correlation between exports and non-tariff related trade costs. In sections V and VI, the paper presents the empirical results as well as calculate the potential trade which can happen if both the tariffs and non-tariff measures are removed. Section VII gives the major findings of the paper by way of conclusion. II. Literature Review 3 As per WTO glossary of trade terms, non-tariff barriers/measures refer to all barriers/measures to trade that are not tariff-related such as quotas, import licensing systems, technical and sanitary regulations (TBT and SPS), prohibitions, etc. Some of these instruments, in particular technical regulations, minimum standards and certification systems regarding health and consumer safety do not ipso facto constitute barriers to trade, as they are generally employed to meet legitimate policy goals. However, there is a perception that, in some circumstances these types of policy instruments are being misused to protect the domestic industries. On the other hand, in general the measures which are WTO compliant are treated as non-tariff measures and those which violate the WTO principles are termed as barriers. 2

3 Nobel laureate Jan Tinbergen (1962) noted that FTAs reduce trade costs due to reduction in tariff and non-tariff barriers; thus increasing the competition and thereby improving the efficiency in the markets and in effect increasing consumer welfare by bringing down the prices of imported goods, as well as by diversifying consumers choice. Krueger (1999) observed that FTAs act as portents for the open multilateral trading system as they create trade-diverting environment as well as interest groups which oppose further multilateral liberalization. Bayoumi and Eichengreen (1997) did study on ex post effect of FTAs and customs union on bilateral merchandise trade flows. Baier & Bergstrand (2006) found that, on average, an FTA approximately doubles the bilateral trade after 10 years. With the global reductions in tariff have been implemented over the years, the recent studies have focused on impact of NTMs on trade. UNCTAD (2010) points that the traditional way of trade policies measures which control market access in the forms of tariffs and quotas could still be improved by further liberalization; however, they no longer have a significant impact on providing greater market access. At present the NTMs are major determinants, which if reduced, could provide greater and effective market access. Deardorff (1998) observed that governments realized that tariff will not work effectively in restricting imports, and thus there is more reliant on the use of NTMs to restrict imports. Bureau & Marette (1998) also noted that since the traditional protective measures become less important, NTMs in the form of regulatory measures, such as quality standards and technical regulations in the form of sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBT), which may be WTO-compliant, have become the main impediments to trade. Kee (2004) attempted to estimate the percentage increase in specific product process across countries due to NTMs. The effect of TBT on trade impact was studied for twelve western European nations from and the study helped in estimating impact of 1% increase in the number of shared standards on bilateral trade flows (Moenius, 2004). Hoekman and Nicita (2008) did a study to analyze the impacts of trade policies on developing countries. The data set covers 104 importers and 115 exporters. The analysis suggests that tariff and NTMs are statistically significant determinants of trade flow, on average, 10% of trade tariff restrictiveness index (TTRI) reduction would increase trade volumes approximately 2%, while NTMs add another 1.8%. Furthermore, the study shows the importance of other trade costs, such as transactions costs at and behind the border as well, especially for low-income countries. Bellanawithana et al (2009) examined the effect of NTM on agricultural exports using the gravity modeling approach by employing the value of agriculture trade flows as dependent variable and used the gravity model variables like GDP, distance, geographical proximity like common border, landlocked country and other variables like common language, colonial ties, etc. The trade restrictiveness indices of TTRI and OTRI were used as constructed by Kee, Nicita and 3

4 Olarreage (2006). The regression analysis showed that NTMs have significant negative effect on South-South and North-South trade, while NTMs have insignificant effect on agricultural exports in South-North and North-North trade. Ratna (2016) examined the impact of elimination of non-tariff related trade costs on intra-rcep exports in a post FTA situation by using the gravity model. He observed that the impact of removing non-tariff trade costs will be more on intra-rcep exports rather than a mere elimination of tariffs. He also suggested how to deal with the issues relating to non-tariff measures especially in the case of SPS and TBT in the RCEP negotiations. The studies which so far have dealt with APTA have mostly focused on how countries can benefit from the membership of APTA. Pomfret (2008) analysed country-specific benefits of APTA membership for Azerbaijan, Kazakhstan and Kyrgyzstan, while Pholphirul (2009) examined how Malaysia, Vietnam, and Thailand can benefit. III. Intra-APTA tariff and trade Since all APTA Participating States are members of WTO, their present MFN applied tariffs are low due to their WTO obligations as well as autonomous liberalisation which is mostly in the range of 2 to 10 %. In this regard, in APTA where the offer of tariff concession is partial, the critical issue for market access, thus, would be a reduction/elimination of NTMs. Though certain non-tariff measures (export and import quotas, import licenses, monopoly trade measures, etc.) have been disciplined under WTO, still a significant amount of non-tariff measures remain. Despite having disciplines on SPS and TBT in WTO, their use is increasing day by day. Costs associated with complying these regulatory procedures are impacting trade. ESCAP (2011) has estimated the tariff and non-tariff trade costs and found that non-tariff trade costs are higher than the tariff trade cost. 4 WTO (2012) observed that TBT/SPS measures distort trade in agricultural products. Thus, non-tariff related trade cost for APTA members and reduce trade cost could be made possible through the instruments of harmonization, mutual recognition, equivalence, conformity assessment, as they reduce transaction cost. At present, APTA is the only operational trade agreement linking China, India and the Republic of Korea. Figure 1 depicts the intra-apta imports from 2002 to 2015, which shows 4 ESCAP (2011) Trade Facilitation in Asia and the Pacific: An Analysis of Import and Exports Processes, Studies in Trade and Investment 71. 4

5 that the intra-apta imports have seen a higher growth for all these three economies than those with the world. Figure 1: Imports of China, India and Republic of Korea Source: Authors compilation on the basis of WITS database During 2011 to 2015 the intra-apta imports share increased from 14 per cent to 16 per cent (from US $2627 billion to US $2868 billion). This increase in share by over 2 percentage points was mainly driven by China (figure 2). Figure 2: APTA import share Source: Authors compilation on the basis of WITS database; mirror data used for Lao PDR and Bangladesh. 5

6 Analysis of the import shares data from among the Participating States of APTA, showed that China s share as exporter to other APTA Participating States declined by 1 percentage point and the Republic of Korea by 3 percentage points, whereas India s share increased by 2 percentage points (figure 3). Figure 3: Share of intra-apta import share Source: Authors compilation on the basis of WITS database; mirror data used for Lao PDR and Bangladesh. In conventional FTA, countries often negotiate reduction in tariffs only and the provisions addressing the NTMs, particular in SPS and TBT measures are weak. Kee et al. (2009) measured Overall Trade Restrictiveness Index (OTRI) and Tariff Trade Restrictiveness (TTRI) for 78 developed and developing countries. He observed that NTMs increase the level of trade restrictiveness imposed by tariff (average 87 per cent). This study also states that the effect of NTMs on OTRI is bigger than the effect of tariff in 34 countries. 6

7 Figure 4: TTRI and NTMRI profile of Intra-APTA countries (2009) Source: Authors compilation from World Bank database of OTRI available at ~piPK: ~theSitePK:469382,00.html (accessed in August 2016) Based on Kee et al (2009), in order to understand the tariff trade restrictiveness of the intra-apta countries, as shown in figure 3 that except Bangladesh and Lao PDR which are two Least developed countries, among the other APTA countries India has the highest OTRI level (14.9%, followed by China (9.7%), RoK (9.0%) and Sri Lanka (7.4%). It is also evident that for China the major contribution is from NTM Restrictiveness Index (NTMRI), which is around 60 per cent of its OTRI and India s NTMRI is around 40 per cent of the OTRI and thus they form a major part of the trade restriction index and thus establishes their importance (figure 4). IV. The Model This section aims to quantify the impacts of reduction of tariffs and NTMs of APTA on overall market access using the gravity model. The objective is to analyse if the tariff preferences alone can ensure better market access or would it be important to address the NTMs as well, especially if APTA aims to become FTA. In this study, the biggest challenge is NTMs as per r HS classification so as to study their impact on trade. Various databases that provide information on NTMs are at the aggregate level and not at the 6 or 8 digit product level (HS) classification, hence a sectoral or product based analysis would be quite difficult and challenging. Even the WTO database is based on the notification submitted by the members, which is not always complete. This research study, therefore, used the overall trade 7

8 restrictiveness indices from the ESCAP-World Bank trade cost database bilateral tariff cost and non-tariff equivalent trade costs, which provide annual data for all the countries for the period of analysis; however, this data is available only up to In order to derive the relationships between tariffs and NTMs on trade flows, the gravity model has been used to examine the relationship between bilateral trade flows by using standard gravity variables and bilateral trade cost related to NTMs, developed by Ratna (2016). The standard variables used in this model are importing countries GDP, exporting countries GDP, distance, language, common border and colonial legacy. In this study, the standard gravity model has been used as a first model (Model 1). The second model (Model 2) added two more variables, tariff trade restrictiveness index (TTRI) and non-tariff measure restrictiveness index (NTMRI). In this model the impact of TTRI and NTMRI on export was examined. From these two models, the study examines which of these variables has a greater negative impact on exports. The paper examines if the FTA alone (APTA becoming an FTA where duties on goods will become zero) or a simultaneous reduction or elimination of NTMs would help the trade grow more faster. We also examine which of these two variables will have a relatively stronger impact in boosting intra-apta trade, with the hypothesis that reduction or elimination of both will influence trade positively. The gravity models used for this purpose are as follows: Model 1: Model 2: Where b are co-efficients, i is the exporter, j is the importer and t is time (year). The explanation for each independent variable as below: : value of exports from country i to country j at year t Basic gravity variables : GDP in the ith exporter at year t : GDP in the jth importer at year t : geographical distance between capital cities in i and j Trade restrictiveness indices 8

9 5 : bilateral tariff trade cost imposed by importer j when exported by exporter i at year t : non-tariff trade cost component imposed by importer j when exported by exporter i at year t Cultural variables : 1 if both countries share the same official language, dummy variable : 1 if ith importer has colony ties with jth exporter, dummy variable Geographical variables : 1 if country i share a land border with country j, dummy variable : error term The data set covers 6 exporters and 6 importers (36 country pairs) covering period from 2002 to The data from year 2002 was taken as the APTA s Third Round concessions started in that year and also the period saw autonomous tariff liberalisations on trade and the fact that the phenomenon of rising FTAs in Asia and the Pacific actually started during 2002 to The latest database is available up to The detailed data information as below: Variable Source UNCOMTRADE World Bank, IMF World Bank, IMF CEPII TTRIji Authors calculation based on ESCAP - WB trade cost database NTMRIji ESCAP- WB trade cost database : CEPII CEPII CEPII V. The Empirical Result All three econometric methods, namely: OLS, RE and FE were applied for the estimations of model (1) and (2). In order to get rid of the presence of heteroscedasticity, robust estimates in the models were applied. In Model 1 as shown in table 1, the dependent variable is ln (natural logarithm) of exports of 5 This index summarizes the impact of each country s trade policies on its aggregate imports. This captures only the impact of tariff. 9

10 six APTA member countries and first column shows the description of independent variables. Second, the third and fourth columns show the different variables coefficients that were obtained from different regression methods. In Model 1, under OLS, FE and RE, the correlation between the exports with the GDPs of importing and exporting country is as per the assumption - positive and statistically significant, even though the degree varies. Distance is an important factor that impacts exports negatively and is statistically significant under the OLS as well as RE (though not statistically significant). Both OLS and RE results r show a positive and statistically significant relationship with exports. of OLS, FE and RE models are 0.42, 0.27 and 0.43, respectively, and the F-tests are significant. Hausman test follows the null hypothesis, which in comparison to the RE makes FE more appropriate. Following the attribution of FE which controls all time-invariant differences between the individuals, removes the bias of the time-invariant characters are eliminated in estimating the coefficients in Model 1. In Model 1, distance and common border variables are omitted due to collinearity problem in the FE model. The other variables show the sign of the coefficients as were expected. GDP of the exporter and importer are both significant and have positive effect on bilateral trade. Table 1. Model 1: Simple gravity model estimates ( ) Independent Variables OLS FE RE lngdpi *** ** *** (15.21) (2.82) (3.56) lngdpj *** * ** lndist *** (-3.71). (0.06) contig *** *** constant (-1.26) (-1.26) (-0.36) R-squre F test 75.69* * Hausman test 8.19* LM test * t statistics in parentheses,* p < 0.05, ** p < 0.01, *** p <

11 For testing the impact of NTMs on trade, we added NTMRIs and TTRIs in the regression analysis using Model 2 and the result is shown in table 2. The results show a positive relationship between exports and GDP of exporter in all three statistical methodologies, but not for GDP of importer. Only the FE shows a positive and statistically significant relationship. The variable common border show statistically significant and positive relation in the OLS and RE. This implies the statistically significant relationship between exports and the tariff and non-tariff trade cost. In table 2, the variable TTRI shows statistically significant under1 per cent and 0.1 per cent negative confidence level in FE and RE, respectively. The NTMRI in OLS, FE and RE shows a stronger negative effect on export than TTRI. Hence, the empirical model supports the hypothesis that the negative impact of existing NTMs is more than that of tariffs; therefore, it is important that APTA handles the non-tariff trade costs issues in the negotiations if it seeks to achieve greater expansion of trade and regional integration. In Model 2, of OLS, FE and RE are 0.88, 0.82 and 0.89, respectively. The F-test and Hausman test results in Model 2 illustrate that FE is more robust empirical method than OLS and RE in this case. Table 2. Model 2: Extended gravity model estimates ( ) Independent Variables OLS FE RE lngdpi *** * *** (8.63) (2.07) (5.34) lngdpj * (-0.43) (2.12) (1.71) lndist *** (5.13). (1.26) contig *** *** (5.77). (3.45) lnttri ** *** (-0.71) (-3.40) (-3.51) lnntmri *** *** *** (-21.23) (-6.76) (-10.22) Constant *** *** *** (15.88) (5.81) (6.67) R-squre F test * 33.85* 11

12 Hausman test 12.28* LM test * t statistics in parentheses,* p < 0.05, ** p < 0.01, *** p < VI. Conclusions Since the MFN duties are already low and the in the number of NTMs especially in terms of WTO-consistent SPS and TBT measures are increasing, the negative impact of NTMs on trade is more than tariffs. APTA being a preferential tariff agreement has so far only concentrated on enhancing trade through reductions in tariffs at preferential tariff rate (with partial reduction in MFN duties).. Although APTA provides for reduction and elimination of NTMs, in its four rounds of negotiations so far, the negotiators have not focused on this issue. APTA has till date not started meaningful discussions on how to reduce and eliminate trade costs relating to NTMs. The above empirical results have clearly spelt out that that in the intra-apta region, NTMs are more restrictive than the tariff measures. It also shows that the impact of NTM is much stronger than the tariffs and therefore reductions in NTMs will increase intra-apta trade more than equivalent amount of reduction and/or elimination of tariffs. The trade cost data on NTM does not cover only SPS and TBT measures but other factors too which are at and behind the borders and therefore for full realization of potential of trade can only be achieved if all other factors are also addressed to minimise the cost of trade. However, while many other factors may require a long time frame to be addressed, the issues relating to SPS and TBT measures can be addressed quickly if there is a desire among APTA members. It needs to be realized that the ability to gain and to benefit from market access due to preferential tariff also depends on successful compliance of the NTMs of the importing countries, most of which are mainly in the form of o SPS and TBT measures. These NTMs represent a challenge for exporters as well as importers and raise the price of goods traded. Many NTMs have primarily non-trade objectives such as the protection of public health or the environment, while affecting trade factor through procedural requirements that are WTO compliant. Compliance with the SPS and TBT measures are necessary, in order to access the export markets. It is therefore important that APTA members include this issue in their next round of negotiations and discussions. 12

13 BIBLIOGRAPHY Aitken, Norman D. "The effect of the EEC and EFTA on European trade: A temporal cross-section analysis." The American Economic Review 63.5 (1973): Anderson, James E. "A theoretical foundation for the gravity equation." The American Economic Review 69.1 (1979): Anderson, J. E. and E. van Wincoop, Gravity with Gravitas: A Solution to the Border Puzzle, NBER Working Paper, No. 8079, Cambridge, MA, Anderson, James E., and Eric Van Wincoop. "Gravity with gravitas: a solution to the border puzzle." the american economic review 93.1 (2003): Baier, Scott L., and Jeffrey H. Bergstrand. "Economic determinants of free trade agreements." Journal of international Economics 64.1 (2004): Baier, Scott L., and Jeffrey H. Bergstrand. "The growth of world trade: tariffs, transport costs, and income similarity." Journal of international Economics 53.1 (2001): Beghnin, J. C. and J. C. Bureau, Quantitative Policy Analysis of Sanitary, Phytosanitary and Technical Barriers to Trade, Economie Internationale, 87, 2001, pp Bellanawithana A,, B. Wijerathne and J. Weerahewa, "Impacts of Non Tariff Measures (NTMs) on Agricultural Exports: A Gravity Modeling Approach"; paper presented in Asia-Pacific Trade Economists Conference, Trade-Led Growth in Times of Crisis, ARTNeT, ESCAP, United Nations. Bangkok, Bergstrand, Jeffrey H. "The gravity equation in international trade: some microeconomic foundations and empirical evidence." The review of economics and statistics (1985): Boisso, Dale, and Michael Ferrantino. "Economic distance, cultural distance, and openness in international trade: Empirical puzzles." Journal of Economic Integration (1997): Deardorff, Alan. "Determinants of bilateral trade: does gravity work in a neoclassical world?." The regionalization of the world economy. University of Chicago Press, Feenstra, Robert C. Advanced international trade: theory and evidence. Princeton university press, Hoekman, B., Nicita, A.,. Trade Policy, Trade Costs and Developing Country Trade. Policy Research Working Paper4797.World Bank, Washington, DC

14 Kee, H.L., A. Nicita and M. Olarreaga. "Estimating trade restrictiveness indices", Economic Journal, 2009, vol. 119, p Krueger, Anne O. "Are preferential trading arrangements trade-liberalizing or protectionist?." The Journal of Economic Perspectives 13.4 (1999): Looi Kee, Hiau, Alessandro Nicita, and Marcelo Olarreaga. "Estimating trade restrictiveness indices." The Economic Journal (2009): Moenius, J., (2004). Information versus Product Adaptation: The Role of Standards in Trade,International Business & Markets Research Center Working Paper # 1, Northwestern University. Rahapakse, Purnima, and Nisha Arunatilake. "Would a reduction in trade barriers promote intra-saarc trade? : A Sri Lankan perspective." Journal of Asian Economics 8.1 (1997): Ratna, Rajan Sudesh., Ph. D. thesis on Growing Regionalism under the Multilateral Trading System: Study on Select Issues in the Indian Context, Indian Institute of Foreign Trade, New Delhi Scollay, Robert, and John Gilbert. New regional trading arrangements in the Asia Pacific?. Vol. 63. Peterson Institute, World Trade Organization (2012). World Trade Report. Geneva Tinbergen, Jan. "An analysis of world trade flows." Shaping the world economy (1962): Kee, Hiau Looi, Alessandro Nicita, and Marcelo Olarreaga. "Ad-Valorem Equivalents of Non-Tariff Barriers." manuscript (March) (2004). UNCTAD, Trade and Development Report, 2010, Geneva Richard Pomfret. The Benefits of Joining the Asia-Pacific Trade Agreement (APTA) for Azerbaijan, Kazakhstan and Kyrgyzstan. staff working paper, UNESCAP, Piriya Pholphirul. Analyzing the Benefits of Joining the Asia-Pacific Trade Agreement (APTA) for Malaysia, Thailand, and Vietnam. staff working paper, UNESCAP,