Analysis of the proposed china asean free trade area a gravity model and RCAI approach

... Participating Countries AFTA ASEAN Free Trade Area Brunei Darussalam Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam BAFTA CEFTA Baltic Free- Trade Area Central.. .ANALYSIS OF THE CHINA -ASEAN FREE TRADE AREA: A GRAVITY MODEL AND RCAI APPROACH BENJAMIN A ROBERTS (M Soc Sci., NUS) A THESIS SUBMITTED FOR THE DEGREE OF MASTER OF SOCIAL SCIENCE DEPARTMENT OF. .. Southern Common Market Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates Argentina Brazil Paraguay Uruguay MSG NAFTA SAPTA Melanesian Spearhead Group Fiji Papua New Guinea Solomon Islands

ANALYSIS OF THE CHINA -ASEAN FREE TRADE AREA: A GRAVITY MODEL AND RCAI APPROACH BENJAMIN A. ROBERTS NATIONAL UNIVERSITY OF SINGAPORE 2003 ANALYSIS OF THE CHINA -ASEAN FREE TRADE AREA: A GRAVITY MODEL AND RCAI APPROACH BENJAMIN A. ROBERTS (M. Soc. Sci., NUS) A THESIS SUBMITTED FOR THE DEGREE OF MASTER OF SOCIAL SCIENCE DEPARTMENT OF ECONOMICS NATIONAL UNIVERSITY OF SINGAPORE 2003 Acknowledgement I would like to thank Dr. Shandre Thangavelu and Professor Thampapillai for all their support and encouragement during my not so fascinating candidature at the National University of Singapore. Special regards goes to all my colleagues and friends who made my days at NUS enjoyable. i TABLE OF CONTENTS 1. Introduction 1.1 Overview of GATT/WTO/RTAs & the Multilateral Trade System 1-2 2. Literature Review 2.1 The Gravity Model 2.2 The GTAP Model 19-23 23-26 26-29 3. Research Methodology 30-32 4. Economic Overview of China & ASEAN 4.1 Overview of Macroeconomic Indicators 4.2 Industrial Sector Decomposition 4.3 Summary of the Trading Partners of the CAFTA Economies 4.4 Trade Policy Summary of the CAFTA Economies 4.5 Overview of AFTA 33 34-38 39-40 41-46 47-53 53-56 5. CAFTA Framework Agreement 5.1 The Articles of Agreement 5.2 Articles Pertaining to Trade in Goods 57-58 58 59-63 6. Exposition of the Revealed Comparative Advantage Index 6.1 The Index 6.2 Complementarities in the Production Activities of China & ASEAN 6.3 Necessary Steps to a Mutually Beneficial Free Trade Area 64-65 65-80 A Gravity Model Approach to the Proposed FTA 7.1 Conceptual Framework 7.2 Model Specification 7.3 Data Used in Estimating the Model 7.4 Estimation Results 7.5 Sensitivity Analysis 7.6 Graphical Depiction of the Evolution of the Explanatory Vars Conclusion Appendix 1 References 97-98 98-101 101-104 105-110 110-121 121-122 7. 8. 2-18 80-86 86-96 123 126-127 128-131 ii LIST of TABLES Table 1: RTAs Notified to the GATT & in Force in the 1948-1989 Period 9-10 Table 2: Definitions & Abbreviations of Regional Trade Agreements 11 Table 3: RTAs Notified to the GATT/WTO & in Force in the Post 1989 Perio d 12-17 Table 4: Definitions & Abbreviations of Regional Trade Agreements 18 Table 5: Macroeconomic Indicators of China & the ASEAN Economies 34 Table 6: Industries making up the Industrial Sector in China & ASEAN 39 Table 7: China & ASEAN Trading Partners 41 Table 8: CAFTA Trade Policies Summary 45 Table 9: Tariff & Non-Tariff Highlight of the CAFTA Economies 47-49 Table 10: AFTA CEPT Package 55 Table 11: CEPT Tariff Rates 55 Table 12: RCAI Indices for the Top Five Exports of the CAFTA Economies 67-68 Table 13: RCAI Calculations for 1996 72 Table 14: World Market Share of Commodities in which the CAFTA Economies Have a Revealed Comparative Advantage Table 15: Sector Contribution to GDP & Employment 76 81 iii Table 16: China's Revealed Comparative Disadvantage Index 83 Table 17: Geographical Distribution of Global FDI Flows to Selected Countries 91 Table 18: Inward FDI Stock in ASEAN 92 Table 19: Intra-ASEAN FDI Flows 93 Table 20: Explanatory Variables Descriptive Statistics 108-109 Table 21: F-Statistic and p-Values of Trade Flows 111 Table 22: OLS Regression Coefficients for Exports 112 Table 23: OLS Regression Coefficients for Imports 113 Table 24: Tobit Regression Coefficients for Exports & Imports 114 iv LIST of FIGURES Figure 1: Per Capita GDP of CAFTA Economies 35 Figure 2: GDP & Per Capita GDP of China 36 Figure 3: GDP & Per Capita GDP of ASEAN 37 Figure 4: Sector Composition of GDP of CAFTA Economies 38 Figure 5: Import Origination of the CAFTA Economies (2000) 40 Figure 6: Export Destinations of the CAFTA Economies (2000) 40 Figure 7: Percentage Changes in ASEAN Exports to the US/EU/Japan/China 116 Figure 8: Percentage Changes in ASEAN Imports to the US/EU/Japan/China 116 Figure 9: Relative Importance of Explanatory Variables in the Gravity Model Overtime 123 v SUMMARY In this thesis, I have attempted to analyze the economic feasibility of the proposed China-ASEAN Free Trade Area by first evaluating the Framework of Agreement and objectives underlying both CAFTA and AFTA. That the objectives of both regional trade arrangements were almost synonymous meant that the aspired integration is a possibility. Other areas of concern pointed out include the liberalization of tax regimes and the tarrification of non-tariff barriers among some of the ASEAN members vis -à-vis China. Under a still limiting three-digit SITC classification, I was able to show that only some of the CAFTA economies had similar RCAI. An examination of the Revealed Comparative Disadvantage Indices of China also showed that the ASEAN countries were in a position to tap on China's import market. Whilst ASEAN economies like Singapore, Malaysia, and Thailand could easily do so, others like Cambodia, Laos, Malaysia, and Vietnam (CLMV) will have to realign their industrial strategies to take advantage of China's Revealed Comparative Disadvantage Indices. Broadly taken, the inter member RCAI indices reveal some similarities but vast differences exist to allow for complementarities in their production activities. Like most FTAs, the proposed China-ASEAN FTA will have its effect on the global trading system. The underlying assumption of trade creation meant that members of the FTA had a potential to improve their welfare. This welfare improvement is not automatic and requires conscious effort on the part of the less developed ASEAN economies. The results of the model were convincing enough to label the proposed FTA a 'natural' trading bloc. The model also showed a potential for increased trade flows, both for Imports and Exports, within the Regional Trade Agreement. vi 1. INTRODUCTION The economic benefits realised from the formation of the European Union (EU) and that of NAFTA1 have led to an appreciation of the benefits inherent in economic integration. Economic theory claims that the potential benefits from economic integration are much more likely to be realised provided that integrating members were trading amongst themselves ex ante . This postulation is premised on the need for the avoidance of trade diversion. In this regard integration is beneficial if it is trade creating and not trade diverting, that is, if it is dynamic. The recent proposed China-ASEAN Free Trade Area (FTA), like other regional trade agreements (RTA), has drawn some concerns. Sceptics writing on the subject have downplayed its economic feasibility and prospects despite projections that the FTA will create an economic region of 1.7 billion people with a GDP of US$2 trillion and a trade value of US$1.23 trillion (2001). The China-ASEAN FTA, like all FTAs, must be evaluated from an economic as well as from a social and political dimension if one is to make an informative finding. Though acknowledging the de jure dimension of the proposed FTA, emphasis is placed on the de facto dimension with an assumption, albeit a logical one, that the economic is synonymous to the social. The Thesis comprises of eight chapters. Chapter one is the introductory chapter and it gives an overview of the GATT/WTO/RTAs and the Multilateral Trade System. Chapter two surveys the existing literature on the static and dynamic models to regional trade agreements. Chapter three outlines the research methodology of the thesis. 1 Chapter four gives an economic overview of the economies with which this thesis is concerned. Chapter five provides a succinct overview of the agreement underlying the China -ASEAN Comprehensive Economic Co-operation. Emphasis is given to the trade aspects of the Agreement. Chapter six details the Revealed Comparative Advantage Indices of the production activities of the economies concerned. Chapter seven deals with the dynamic aspects of the proposed FTA using the Gravity Model of Trade. Chapter eight, the concluding chapter gives a synthesis of the static and dynamic analyses to trade and gives an overview of what the two approaches revea l for the proposed FTA. 1.1 OVERVIEW of GATT/WTO/RTAs & the MULTILATERAL TRADE SYSTEM Since the adoption of GATT in 19472 (by way of the Geneva Round) and up until the end of 1994 there were 124 regional trade agreements notified to the GATT. This number increases to 150 if trade in services is accounted for. With the creation of the WTO in 1995, the international trade environment has seen an exponential growth in the formation of FTAs/RTAs. Following its creation, the WTO has received over 100 notifications for the formation of FTAs/RTAs in both Goods and Services. This works out at an average of 3.4 RTAs per year in the GATT period compared to over 12.5 RTAs per year in the WTO period for both Goods and Services. The average number of notifications between the two periods has therefore grown by over 260%. This is an 1 Ment ion is only made of these two FTAs (RTAs) but there are currently 224 RTAs that have been notified to the WTO. This is inclusive of the GATT years and includes RTAs in both Goods and Services. 2 There were 8 Trade Rounds negotiated under the auspices of the GATT most of whose objective was to reduce tariff levels within the multilateral trading system. Since the inception of the WTO there has been 4 Ministerials of which 3 went well with Seattle having failed. The last of these was the Doha 2 astronomical rate, especially if we consider the fact that not all FTAs/RTAs formed were notified to the GATT or notified to the WTO. Given this exponential growth in notifications it is only logical to ask why this upsurge of interest among nations to form FTAs and why now? Answering this question requires an understanding of what an FTA/RTA is; what its creation does to the multilateral trade framework; and what purpose it serve s. In the broadest sense a regional trade area (RTA) refers to the geopolitical integration of countries with the aim of promoting trade (either in goods or services) within the integrating area and among the integrating members. Pursuant to this definition, a RTA is all encompassing in that it is inclusive of a Free Trade Area, Customs Union, Common Market, and Monetary Union, respectively. The ordering is, however, not strict as is evidenced in the real world. The European Union as we know it today, for example, started with the formation of the European Economic Community (Common Market) 3 and not with a Free Trade Area. Actually five of the founding fathers of the European Free Trade Agreement (EFTA) including pioneering Britain would later leave the EFTA to join the European Community4. Another example of a RTA that did not follow the prescribed economic path is the South African Customs Union (SACU) and the ECOWAS of West Africa, though these are less binding compared to its Ministerial or better yet the Doha Declaration of 2001. The Cancun Ministerial will be held September 2003. 3 The EEC was established in 1958 by a treaty among original members Belgium, France, Italy, Luxembourg, The Netherlands, and West Germany. It was, however, the European Coal and Steel Community of 1952 that laid the foundation to the EEC. In 1958 Britain proposed for the expansion of the EEC into a transatlantic FTA but was turned down. It however succeeded in forming the European Free Trade Area (EFTA) with signatories Austria, Denmark, Norway, Portugal, Sweden and Switzerland. Iceland joined in 1970 with Finland joining in 1986 along with Liechlenstein in 1991. However, in 1973 Denmark and Great Britain will leave EFTA to join the European Community. Portugal followed in 1986 and then Austria, Finland, and Sweden in 1995. As it stands today the EFTA is comprised of the original members of Iceland, Norway, Switzerland, and Liechlenstein. However, the EFTA has forged trade relations with some of its East European counterparts. These include the EFTA-Bulgaria FTA, the EFTA-Czech Republic FTA, the EFTA-Hungary FTA, the EFTA-Poland FTA and the EFTA-Israel FTA. 3 counterparts in Europe 5. The logical path is, however, enhancing given the stepping stone guidance to forming a formidable RTA. The encompassing nature of the definition of a RTA has made it synonymous to its different levels and forms. It is therefore very common to use the term RTA interchangeably with either a Customs Union or a FTA. Strictly speaking, the three are not synonymous especially if we consider the fact that an FTA and a Customs Union have a 'trade in goods' connotation whereas a RTA can be taken to mean either trade in goods or in services or both. To this end, an RTA covers both the GATT and General Agreement on Trade in Services (GATS) whereas an FTA is primarily concerned with the GATT. This distinction between an RTA and an FTA is conveyed further by the distinction made within the Committee on Regional Trade Agreements (CRTA) which was formed in February of 1996 by the WTO6. The CRTA is comprised of three bodies- the Council for Trade in Goods (CTG); the Council for Trade in Services (CTS) and the Commit tee on Trade and Development7. The objective of the CRTA is to allow for transparency of RTAs and to enable its country members the opportunity to evaluate compliance of a RTA to the World Trade Organisation rules. The earlier question regarding the upsurge in the number of FTAs in the World Trade Organisation (1995-onward) compared to the GATT (1948-1994) is an important one. An examination of the depth and coverage of the RTAs in the two periods will help us 4 See EU Web-site (www.eurunion.org) for history of the Union. See subsequent pages for a list of the RTAs with or without notification to the WTO. 6 See the WTO web-site (www.wto.org/english/tratop_e/region_e/regcom_e.htm) for further details . 7 The CTG handles all notifications falling under Article XXIV of the GATT (trade in goods) whereas all notifications of RTAs falling under the Enabling Clause are made to the CTD. The CTS tracks all notifications of RTAs covering GATS. 5 4 in answering the question - why an upsurge in the number of RTAs following the creation of the WTO. The growth rate in the average number of RTAs in the two period referred to earlier is alarming. It is alarming not because of the inter-period comparison of the RTAs notified to the GATT/WTO but because of the potential consequences it might have on the multilateral trade framework which the WTO is responsible for promoting. An evaluation of the RTAs formed after 1989 contrasts sharply with the RTAs formed in the 1948-89 period. Perhaps the only exception that could be cited in terms of complexity and degree of product coverage is the EC. It should, however, be pointed out that the EU, which became effective in January 1993, is more encompassing than the EC was. Other Customs Union or FTAs formed before 1989 (see table 1) were less comprehensive and less binding by way of legal framework. In fact some, PTN and LAIA, were merely protocols to the facilitation of trade. While others like the GSTP are mere non-binding preferential agreements. It is no coincidence therefore that these RTAs fall under the classification of "other" in the "Type of Agreement" heading in table1. Looking at table1 it becomes evident that the RTAs formed from 1948-89 involved less of developing countries and even lesser RTAs among developing countries. In fact most of the RTAs involving developing countries were through plurilateral/bilateral agreements with the EC. The RTAs that existed exclusively among developing countries were not RTAs in the strict sense of the word but had objectives of fostering trade amongst themselves without necessarily harmonising, reducing tariffs, or intending for a broader product coverage. 5 Besides the above differences in the RTAs of the two periods, another major distinction between the two concerns the Rules of Origin (ROO8). Regarding the ROO it is safe to say that all RTAs in the 1948-89 period were less conscientious of the ROO primarily because the GATT MFN principle (clause) did not come into play until 1994. However, there are other ROO besides the "MFN rules of origin." There is also the "Preferential rules of origin" which as the name suggests allow for preferential access (of goods) to RTA member countries. This is considered an integral part to the formation of FTAs albeit the MFN principle of the GATT. Reconciling this integral aspect to a FTA with the MFN principle of the GATT is not free of problems and has indeed resulted, in part, to the existence of two major models of the ROO - the "panEuropean" and the NAFTA-model of ROO. Wide differences exist between the two in terms of regional content requirements (%), rules of tolerance, and exceptions for sector specific goods. Variations are lesser in the ROO within the "pan-European" model than it is in the NAFTA-model. T his should not be surprising given that the EU is, in terms of level, in the final stage of a RTA whereas the NAFTA is still in the first stage. Despite these level differences, it is evident that RTAs with lesser exceptions, in terms of coverage, and lesser or harmonised standards (Sanitary and Photo-sanitary) would tend not to hamper the multilateral trade framework (WT/REG/W/45, 2002). RTAs formed in the post 1989 period are relatively more harmonising than those formed in the 1948-89 period. The most noteworthy of mention been NAFTA, AFTA, and MERCUSOR (see table3&4). These RTAs provide for a wider product coverage, harmonisation of tariffs, harmonisation of standards, and some go as far as providing for some harmonisation in procurements along with addressing issues of IPRs and 8 Rules applied in FTAs to determine whether goods qualify for duty-free admission. Normally such rules specify a minimum percentage of inputs which have to come from member countries. 6 competition policy. The RTAs of this period also tend to be more aligning with WTO guidelines and are relatively more transparent. Another important distinction between the RTAs of the two periods is the number of RTAs forme d exclusively among developing countries in the post 1989 period that have remained effective in terms of objective. Good examples are AFTA and MERCUSOR and to a lesser extent CARICOM (see table3&4). Despite these differences in RTA type, transparency, product coverage, harmonisation, and safeguard provisions the pertinent question of their effect on the multilateral trade framework is still to be answered. Do RTAs, in the words of Bhagwati (1992), act as "building-blocs" or "stumbling-blocs" to the multilateral trade system? The question of whether RTAs foster or hinder the multilateral trading system is argued to be too early to answer. Winters (1998) points out in his "Regionalism versus Multilateralism" study that the verdict is still out on the question given the short history of effective RTAs. He argues that "one can build models that suggest either conclusion but to date these are sufficiently abstract that they should be viewed as parables rather than sources of testable predictions"(pg.1). Putting aside economic models and invoking logic against a backdrop of RTA objectives would perhaps shed some light on the question. To clarify the point, one can look at the different RTA forms along with their objectives and provisions and ask what their effect on the multilateral trading system is likely to be. This possibility would perhaps allow us to not wait for time series data to make for an informed empirical analysis, albeit its importance. This possibility was undertaken in Viner's (1950) pioneering work on the conventional analysis of RTAs along with Meade (1955) and Lipsey (1960). All three evaluated RTA implications (at different degrees) on the multilateral trading system by way of a 7 Customs Union and the resulting concerns of trade diversion. Obviously the partial equilibrium analysis, the underlying assumptions, and the focus on a CU meant that a thorough analysis would be shortcoming. I will return to this issue in more details under the Literature Review section of the thesis. For now the important point to note is that an awareness has been created that RTAs have an effect on the multilateral trading system but how the different levels (forms) of RTA affect the RTA and whether they do in different ways has yet to be conveyed by research. A priori it is safe to posit that an FTA, Customs Union, Common Market, and Economic Union will affect the multilateral trading system in different ways even if this reasoning is solely based on the differences in the encompassing nature and objectives of the different RTA forms. The objectives of RTAs are different and this difference is reflected in the policies and agreements underlying them. An FTA, for example, provides an agreement for the harmonisation of tariffs, amongst others, among integrating members whereas a CU allows for this along with a common trade policy toward countries outside of the Union. An economic Union, the EU for example, goes well beyond the provision of the two. Against this framework we can then make a case for why there has been an explosion in the number of RTAs, especially in the post 1989 period. RTAs have been and are currently in the rise because they facilitate trade and lend a sense of belonging to the multilateral trade framework even if it may concomitantly hinder globally freer trade. 8 TABLE 1: Agreement RTAs Notified to the GATT and in Force in the 1948-1989 Period By date of entry into force Date of entry into force GATT/WTO notification Date Related provision EC (Treaty of Rome) 1-Jan-58 10-Nov -95 GATS Art. V EC (Treaty of Rome) 1-Jan-58 24-Apr-57 EFTA (Stockholm Convention) Type of agreement WT/ document series Examination process Status Ref. Services agreement REG39 Under factual examination … GATT Art. XXIV Customs union … Report adopted 6S/70 & 109 29.11.57 3-May -60 14-Nov -59 GATT Art. XXIV Free trade agreement REG85 Report adopted 9S/70 04.06.60 CACM 12-Oct-61 24-Feb-61 GATT Art. XXIV Customs union REG93 Report adopted 10S/98 23.11.61 TRIPARTITE 1-Apr-68 23-Feb-68 Enabling Clause Other … Report adopted EFTA accession of Iceland 1-Mar-70 30-Jan-70 GATT Art. Accession to XXIV free trade agreement … Report adopted 18S/174 29.09.70 EC — OCTs 1-Jan-71 14-Dec -70 GATT Art. XXIV Free trade agreement REG106 Report adopted 18S/143 09.11.71 EC — Malta 1-Apr-71 24-Mar-71 GATT Art. XXIV Customs union REG102 Report adopted 19S/90 29.05.72 EC — Switzerland and Liechtenstein 1-Jan-73 27-Oct-72 GATT Art. XXIV Free trade agreement REG94 Report adopted 20S/196 19.10.73 EC accession of Denmark, Ireland and United Kingdom 1-Jan-73 7-Mar-72 GATT Art. Accession to XXIV customs union … Report adopted C/M/107 11.07.75 PTN 11-Feb-73 9-Nov-71 Enabling Clause Other … Examination not requested … EC — Iceland 1-Apr-73 24-Nov -72 GATT Art. XXIV Free trade agreement REG95 Report adopted 20S/158 19.10.73 EC — Cyprus 1-Jun-73 13-Jun-73 GATT Art. XXIV Customs union REG97 Report adopted 21S/94 21.06.74 EC — Norway 1-Jul-73 13-Jul-73 GATT Art. XXIV Free trade agreement … Report adopted 21S/83 28.03.74 CARICOM 1-Aug-73 14-Oct-74 GATT Art. XXIV Customs union REG92 Report adopted 24S/68 02.03.77 Bangkok Agreement 17-Jun-76 2-Nov-76 Enabling Clause Other … Report adopted EC — Algeria 1-Jul-76 28-Jul-76 GATT Art. XXIV Free trade agreement REG105 Report adopted 24S/80 11.11.77 PATCRA 1-Feb-77 20-Dec -76 GATT Art. XXIV Free trade agreement … Report adopted 24S/63 11.11.77 EC — Egypt 1-Jul-77 15-Jul-77 GATT Art. XXIV Free trade agreement REG98 Report adopted 25S/114 17.05.78 EC — Jordan 1-Jul-77 15-Jul-77 GATT Art. XXIV Free trade agreement REG100 Report adopted 25S/133 17.05.78 9 16S/83 14.11.68 25S/109 14.03.78 GATT/WTO notification Date of entry into force Date EC — Lebanon 1-Jul-77 EC — Syria Agreement Related provision Type of agreement 15-Jul-77 GATT Art. XXIV Free trade agreement 1-Jul-77 15-Jul-77 GATT Art. XXIV 31-Aug-77 1-Nov-77 SPARTECA 1-Jan-81 EC accession of Greece WT/ document series Examination process Status Ref. REG100 Report adopted 25S/142 17.05.78 Free trade agreement REG104 Report adopted 25S/123 17.05.78 Enabling Clause Other … Report adopted 20-Feb-81 Enabling Clause Other … Examination not requested … 1-Jan-81 24-Oct-79 GATT Art. Accession to XXIV customs union … Report adopted 30S/168 09.03.83 LAIA 18-Mar-81 1-Jul-82 Enabling Clause … Examination not requested … CER 1-Jan-83 14-Apr-83 GATT Art. XXIV Free trade REG111 agreement Report adopted 31S/170 02.10.84 19-Aug-85 13-Sep-85 GATT Art. XXIV Free trade agreement … Report adopted 34S/58 14.05.87 GATT Art. Accession to XXIV customs union … Report adopted 35S/293 19.10.88 Enabling Clause … Examination not requested … Services REG40 agreement Consultations on draft report … … Examination not requested … ASEAN United States — Israel EC accession of Portugal and Spain CAN 1-Jan-86 11-Dec -85 25-May -88 12-Oct-92 CER 1-Jan-89 GSTP 19-Apr-89 25-Sep-89 22-Nov -95 GATS Art. V Enabling Clause Other Other Other Source: Adopted from WTO (RTAs in effect as of January 31, 2002). 10 26S/321 29.01.79 TABLE2: Acronym ASEAN BANGKOK CAN CARICOM Definitions and abbreviations Name Association of South East Asian Nations Bangkok Agreement Andean Community Caribbean Community and Common Market Participating Countries Brunei Darussalam Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam Bangladesh China India Republic of Korea Laos Sri Lanka Bolivia Colombia Ecuador Peru Venezuela Antigua & Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Haiti Jamaica Monserrat Trinidad & Tobago St. Kitts & Nevis St. Lucia St. Vincent & the Grenadines Surinam Costa Rica El Salvador Guatemala Honduras Nicaragua CACM Central American Common Market CER Closer Trade Relations Trade Agreement Australia New Zealand EC European Communities Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom EEA EFTA European Economic Area European Free Trade Association EC Iceland Lichtenstein Norway Iceland Liechtenstein Norway Switzerland GSTP General System of Trade Preferences Among Developing Countries LAIA OCT PTN Algeria Angola Argentina Bangladesh Benin Bolivia Brazil Cameroon Chile Colombia Cuba Democratic People's Republic of Korea Ecuador Egypt Ghana Guinea Guyana Haiti India Indonesia Islamic Republic of Iran Iraq Libya Malaysia Mexico Morocco Mozambique Nicaragua Nigeria Pakistan Peru Philippines Qatar Republic of Korea Romania Singapore Sri Lanka Sudan Thailand Trinidad and Tobago Tunisia United Republic of Tanzania Uruguay Venezuela Vietnam Yugoslavia Zaire Zimbabwe Latin American Integration Association Argentina Bolivia Brazil Chile Colombia Cuba Ecuador Mexico Paraguay Peru Uruguay Venezuela Overseas Countries and Territories Greenland New Caledonia French Polynesia French Southern and Antarctic Territories Wallis and Futuna Islands Mayotte Saint Pierre and Miquelon Aruba Netherlands Antilles Anguilla Cayman Islands Falkland Islands South Georgia and South Sandwich Islands Montserrat Pitcairn Saint Helena Ascension Island Tristan da Cunha Turks and Caicos Islands British Antarctic Territory British Indian Ocean Territory British Virgin Islands Protocol relating to Trade Negotiations Bangladesh Brazil Chile Egypt Israel Mexico Pakistan Paraguay Peru among Developing Countries Philippines Republic of Korea Romania Tunisia Turkey Uruguay Yugoslavia SPARTECA South Pacific Regional Trade and Economic Cooperation Agreement TRIPARTITE Tripartite Agreement Australia New Zealand Cook Islands Fiji Kiribati Marshall Islands Micronesia Nauru Niue Papua New Guinea Solomon Islands Tonga Tuvalu Vanuatu Western Samoa Egypt India Yugoslavia Source: Compiled from WTO CTRA 11 TABLE 3: RTAs Notified to the GATT/WTO and in Force in the Post 1989 Period By date of entry into force Laos — Thailand EC — Andorra 20-Jun-91 29-Nov -91 Enabling Clause Other … Examination not requested 1-Jul-91 25-Feb-98 GATT Art. XXIV Customs union REG53 Factual examination concluded … MERCOSUR 29-Nov -91 5-Mar-92 Enabling Clause Customs union COMTD/1 Under factual examination … AFTA 28-Jan-92 30-Oct-92 Enabling Clause Other … Examination not requested … EC — Czech Republic 1-M ar-92 13-May -96 GATT Art. XXIV Free trade agreement REG18 Factual examination concluded … EC — Slovak Republic 1-Mar-92 13-May -96 GATT Art. XXIV Free trade agreement REG18 Factual examination concluded … EC — Hungary 1-Mar-92 3-Apr-92 GATT Art. XXIV Free trade agreement REG18 Consultations on draft report … EC — Poland 1-Mar-92 3-Apr-92 GATT Art. XXIV Free trade agreement REG18 Factual examination concluded … EFTA — Turkey 1-Apr-92 6-Mar-92 GATT Art. XXIV Free trade agreement REG86 Report adopted 40S/48 17.12.93 EFTA — Czech Republic 1-Jul-92 3-Jul-92 GATT Art. XXIV Free trade agreement REG87 Report adopted 41S/116 08.12.94 EFTA — Slovak Republic 1-Jul-92 3-Jul-92 GATT Art. XXIV Free trade agreement REG88 Report adopted 41S/116 08.12.94 Czech Republic — Slovak Republic 1-Jan-93 30-Apr-93 GATT Art. XXIV Customs union REG89 Report adopted 41S/112 04.10.94 EFTA — Israel 1-Jan-93 1-Dec-92 GATT Art. XXIV Free trade agreement REG14 Factual examination concluded … CEFTA 1-Mar-93 30-Jun-94 GATT Art. XXIV Free trade agreement REG11 Consultations on draft report … Kyrgyz Republic — Russian Federation 24-Apr-93 15-Jun-99 GATT Art. XXIV Free trade agreement REG73 Under factual examination … EC — Romania 1-May -93 23-Dec -94 GATT Art. XXIV Free trade agreement REG2 Factual examination concluded … EFTA — Romania 1-May -93 24-May -93 GATT Art. XXIV Free trade agreement REG16 Factual examination concluded … Faroe Islands — Norway 1-Jul-93 13-Mar-96 GATT Art. XXIV Free trade agreement REG25 Factual examination concluded … Faroe Islands — Iceland 1-Jul-93 23-Jan-96 GATT Art. XXIV Free trade agreement REG23 Factual examination concluded … EFTA — Bulgaria 1-Jul-93 30-Jun-93 GATT Art. XXIV Free trade agreement REG12 Factual examination concluded … MSG 22-Jul-93 7-Oct-99 Enabling Clause Other … Examination not requested … EFTA — Hungary 1-Oct-93 23-Dec -93 GATT Art. XXIV Free trade agreement REG13 Consultations on draft report … 12 EFTA — Poland 15-Nov -93 20-Oct-93 GATT Art. XXIV Free trade agreement REG15 Factual examination concluded … EC — Bulgaria 31-Dec -93 23-Dec -94 GATT Art. XXIV Free trade agreement REG1 Factual examination concluded … EEA 1-Jan-94 10-Oct-96 GATS Art. V Services agreement … Factual examination not started … NAFTA 1-Jan-94 1-Feb-93 Free trade agreement REG4 Consultations on draft report … EC — Hungary 1-Feb-94 27-Aug-96 GATS Art. V Services agreement REG50 Consultations on draft report … EC — Poland 1-Feb-94 27-Aug-96 GATS Art. V Services agreement REG51 Factual examination concluded … BAFTA 1-Apr-94 15-Jun-99 Free trade agreement REG77 Factual examination concluded … NAFTA 1-Apr-94 1-Mar-95 GATS Art. V Services agreement REG4 Consultations on draft report … GATT Art. XXIV GATT Art. XXIV Georgia — Russian Federation 10-May -94 21-Feb-01 GATT Art. XXIV Free trade agreement REG118 Factual examination not started … COMESA 8-Dec -94 29-Jun-95 Enabling Clause Other … Examination not requested … CIS 30-Dec -94 1-Oct-99 GATT Art. XXIV Free trade agreement REG82 Under factual examination … Romania — Moldov a 1-Jan-95 24-Sep-97 GATT Art. XXIV Free trade agreement REG44 Factual examination concluded … EC — Lithuania 1-Jan-95 26-Sep-95 GATT Art. XXIV Free trade agreement REG9 Factual examination concluded … EC — Estonia 1-Jan-95 30-Jun-95 GATT Art. XXIV Free trade agreement REG8 Factual examination concluded … EC — Latvia 1-Jan-95 30-Jun-95 GATT Art. XXIV Free trade agreement REG7 Factual examination concluded … EC accession of Austria, Finland and Sweden 1-Jan-95 20-Jan-95 GATT Art. Accession to XXIV customs union REG3 Consultations on draft report … EC accession of Austria, Finland and Sweden 1-Jan-95 20-Jan-95 GATS Art. V Accession to services agreement REG3 Consultations on draft report … EC — Bulgaria 1-Feb-95 25-Apr-97 GATS Art. V Services agreement … Factual examination not started … EC — Czech Republic 1-Feb-95 9-Oct-96 GATS Art. V Services agreement … Factual examination not started … EC — Romania 1-Feb-95 9-Oct-96 GATS Art. V Services agreement … Factual examination not started … EC — Slovak Republic 1-Feb-95 27-Aug-96 GATS Art. V Services agreement REG52 Factual examination concluded … Faroe Islands — Switzerland 1-Mar-95 8-Mar-96 GATT Art. XXIV Free trade agreement REG24 Factual examination concluded … EFTA — Slovenia 1-Jul-95 18-Oct-95 GATT Art. XXIV Free trade agreement REG20 Factual examination concluded … 13 Kyrgyz Republic — Armenia 27-Oct-95 4-Jan-01 GATT Art. XXIV Free trade agreement REG114 Factual examination not started … Kyrgyz Republic — Kazakhstan 11-Nov -95 29-Sep-99 GATT Art. XXIV Free trade agreement REG81 Under factual examination … SAPTA 7-Dec -95 22-Sep-93 Enabling Clause Other … Examination not requested … CEFTA accession of Slovenia 1-Jan-96 8-Jan-98 GATT Art. Accession to XXIV free trade agreement REG11 Consultations on draft report … EC — Turkey 1-Jan-96 22-Dec -95 GATT Art. XXIV Customs union REG22 Under factual examination … Estonia — Ukraine 14-Mar-96 25-Jul-00 GATT Art. XXIV Free trade agreement REG108 Factual examination concluded … EFTA — Estonia 1-Jun-96 25-Jul-96 GATT Art. XXIV Free trade agreement REG28 Factual examination concluded … EFTA — Latvia 1-Jun-96 25-Jul-96 GATT Art. XXIV Free trade agreement REG29 Factual examination concluded … Georgia — Ukraine 4-Jun-96 21-Feb-01 GATT Art. XXIV Free trade agreement REG121 Factual examination not started … Georgia — Azerbaijan 10-Jul-96 21-Feb-01 GATT Art. XXIV Free trade agreement REG120 Factual examination not started … Slovenia — Latvia 1-Aug-96 20-Feb-97 GATT Art. XXIV Free trade agreement REG34 Factual examination concluded … EFTA — Lithuania 1-Aug-96 25-Jul-96 GATT Art. XXIV Free trade agreement REG30 Factual examination concluded … Slovenia — Former Yugoslav Republic of Macedonia 1-Sep-96 20-Feb-97 GATT Art. XXIV Free trade agreement REG36 Factual examination concluded … Kyrgyz Republic — Moldova 21-Nov -96 15-Jun-99 GATT Art. XXIV Free trade agreement REG76 Under factual examination … Slovak Republic — Israel 1-Jan-97 30-Mar-98 GATT Art. XXIV Free trade agreement REG57 Factual examination concluded … Poland — Lithuania 1-Jan-97 30-Dec -97 GATT Art. XXIV Free trade agreement REG49 Factual examination concluded … Slovenia — Estonia 1-Jan-97 20-Feb-97 GATT Art. XXIV Free trade agreement REG37 Factual examination concluded … EC — Faroe Islands 1-Jan-97 19-Feb-97 GATT Art. XXIV Free trade agreement REG21 Under factual examination … Canada — Israel 1-Jan-97 23-Jan-97 GATT Art. XXIV Free trade agreement REG31 Factual examination concluded … EC — Slovenia 1-Jan-97 11-Nov -96 GATT Art. XXIV Free trade agreement REG32 Factual examination concluded … Slovenia — Lithuania 1-Mar-97 20-Feb-97 GATT Art. XXIV Free trade agreement REG35 Factual examination concluded … Israel — Turkey 1-May -97 18-May -98 GATT Art. XXIV Free trade agreement REG60 Factual examination concluded … CEFTA accession of Romania 1-Jul-97 GATT Art. Accession to XXIV free trade agreement REG11 Consultations on draft report … 8-Jan-98 14 Slovak Republic — Latvia 1-Jul-97 14-Nov -97 GATT Art. XXIV Free trade agreement REG47 Factual examination concluded … Slovak Republic — Lithuania 1-Jul-97 14-Nov -97 GATT Art. XXIV Free trade agreement REG48 Factual examination concluded … Czech Republic — Latvia 1-Jul-97 13-Nov -97 GATT Art. XXIV Free trade agreement REG45 Factual examination concluded … EC — Palestinian Authority 1-Jul-97 30-Jun-97 GATT Art. XXIV Free trade agreement REG43 Factual examination not started … Canada — Chile 5-Jul-97 13-Nov -97 GATS Art. V Services agreement … Factual examination not started … Canada — Chile 5-Jul-97 26-Aug-97 GATT Art. XXIV Free trade agreement REG38 Factual examination concluded … Czech Republic — Lithuania 1-Sep-97 13-Nov -97 GATT Art. XXIV Free trade agreement REG46 Factual examination concluded … EAEC 8-Oct-97 6-Apr-99 GATT Art. XXIV Customs union REG71 Under fac tual examination … Czech Republic — Israel 1-Dec -97 30-Mar-98 GATT Art. XXIV Free trade agreement REG56 Factual examination concluded … Slovenia — Croatia 1-Jan-98 25-Mar-98 GATT Art. XXIV Free trade agreement REG55 Factual examination concluded … Kyrgyz Republic — Ukraine 19-Jan-98 15-Jun-99 GATT Art. XXIV Free trade agreement REG74 Under factual examination … Romania — Turkey 1-Feb-98 18-May -98 GATT Art. XXIV Free trade agreement REG59 Factual examination concluded … Hungary — Israel 1-Feb-98 24-Mar-98 GATT Art. XXIV Free trade agreement REG54 Factual examination concluded … Czech Republic — Estonia 12-Feb-98 3-Aug-98 GATT Art. XXIV Free trade agreement REG62 Factual examination concluded … Slovak Republic — Estonia 12-Feb-98 3-Aug-98 GATT Art. XXIV Free trade agreement REG63 Factual examination concluded … EC — Tunisia 1-Mar-98 23-Mar-99 GATT Art. XXIV Free trade agreement REG69 Factual examination concluded … Poland — Israel 1-Mar-98 25-Feb-99 GATT Art. XXIV Free trade agreement REG65 Factual ex amination concluded … Lithuania — Turkey 1-Mar-98 8-Jun-98 GATT Art. XXIV Free trade agreement REG61 Factual examination concluded … Kyrgyz Republic — Uzbekistan 20-Mar-98 15-Jun-99 GATT Art. XXIV Free trade agreement REG75 Under factual examination … Hungary — Turkey 1-Apr-98 12-May -98 GATT Art. XXIV Free trade agreement REG58 Factual examination concluded … Estonia — Turkey 1-Jun-98 23-Mar-99 GATT Art. XXIV Free trade agreement REG70 Factual examination concluded … Czech Republic — Turkey 1-Sep-98 24-Apr-99 GATT Art. XXIV Free trade agreement REG67 Factual examination concluded … Slovak Republic — Turkey 1-Sep-98 24-Mar-99 GATT Art. XXIV Free trade agreement REG68 Factual examination concluded … Slovenia — Israel 1-Sep-98 8-Mar-99 GATT Art. XXIV Free trade agreement REG66 Factual examination concluded … 15 Georgia — Armenia 11-Nov -98 21-Feb-01 GATT Art. XXIV Free trade agreement REG119 Factual examination not started … Estonia — Faroe Islands 1-Dec -98 26-Jan-99 GATT Art. XXIV Free trade agreement REG64 Under factual examination … Bulgaria — Turkey 1-Jan-99 4-May -99 GATT Art. XXIV Free trade agreement REG72 Factual examination concluded … CEFTA accession of Bulgaria 1-Jan-99 24-Mar-99 GATT Art. Accession to XXIV free trade agreement REG11 Consultations on draft report … Poland — Latvia 1-Jun-99 29-Sep-99 GATT Art. XXIV Free trade agreement REG80 Factual examination concluded … Poland — Faroe Islands 1-Jun-99 18-Aug-99 GATT Art. XXIV Free trade agreement REG78 Under factual examination … CEMAC 24-Jun-99 28-Sep-00 Enabling Clause Other … Examination not requested … EFTA — Palestinian Authority 1-Jul-99 21-Sep-99 GATT Art. XXIV Free trade agreement REG79 Factual examination not started … Georgia — Kazakhstan 16-Jul-99 21-Feb-01 GATT Art. XXIV Free trade agreement REG123 Factual examination not started … Chile — Mexico 1-Aug-99 14-Mar-01 GATS Art. V Services agreement REG125 Factual examination not started … Chile — Mexico 1-Aug-99 27-Feb-01 GATT Art. XXIV Free trade agreement REG125 Factual examination not started … EFTA — Morocco 1-Dec -99 20-Feb-00 GATT Art. XXIV Free trade agreement REG91 Factual examination concluded … Georgia — Turkmenistan 1-Jan-00 21-Feb-01 GATT Art. XXIV Free trade agreement REG122 Factual examination not started … EC — South Africa 1-Jan-00 14-Nov -00 GATT Art. XXIV Free trade agreement REG113 Factual examination not started … WAEMU/UEMOA 1-Jan-00 3-Feb-00 Enabling Clause Other … Examination not requested … Bulgaria — Former Yugoslav Republic of Macedonia 1-Jan-00 21-Jan-00 GATT Art. XXIV Free trade agreement REG90 Factual examination concluded … Hungary — Latvia 1-Jan-00 20-Dec -99 GATT Art. XXIV Free trade agreement REG84 Factual examination concluded … EC — Morocco 1-Mar-00 8-Nov-00 GATT Art. XXIV Free trade agreement REG112 Factual examination not started … Hungary — Lithuania 1-Mar-00 20-Dec -99 GATT Art. XXIV Free trade agreement REG83 Factual examination concluded … Poland — Turkey 1-May -00 14-May -00 GATT Art. XXIV Free trade agreement REG107 Factual examination concluded … EC — Israel 1-Jun-00 7-Nov-00 GATT Art. XXIV Free trade agreement REG110 Factual examination not started … Mexico — Israel 1-Jul-00 27-Feb-01 GATT Art. XXIV Free trade agreement REG124 Factual examination not started … Latvia — Turkey 1-Jul-00 22-Jan-01 GATT Art. XXIV Free trade agreement REG116 Under factual examination … 16 EC — Mexico 1-Jul-00 1-Aug-00 GATT Art. XXIV Free trade agreement REG109 Under factual examination … EAC 7-Jul-00 11-Oct-00 Enabling Clause Other … Examination not requested … Turkey — Former Yugoslav Republic of Macedonia 1-Sep-00 22-Jan-01 GATT Art. XXIV Free trade agreement REG115 Under factual examination … New Zealand - Singapore 1-Jan-01 4-Sep-01 GATT Art. XXIV Free trade agreement REG127 Factual examinati on not started … New Zealand - Singapore 1-Jan-01 4-Sep-01 GATS Art. V Services agreement REG127 Factual examination not started … EFTA — Former Yugoslav Republic of Macedonia 1-Jan-01 31-Jan-01 GATT Art. XXIV Free trade agreement REG117 Under factual ex amination … Hungary — Estonia 1-Mar-01 4-Oct-01 GATT Art. XXIV Free trade agreement REG128 Factual examination not started … EC — FYROM 1-Jun-01 21-Nov -01 GATT Art. XXIV Free trade agreement REG129 Factual examination not started … EFTA - Mexico 1-Jul-01 25-Jul-01 GATT Art. XXIV Free trade agreement REG126 Factual examination not started … EFTA - Mexico 1-Jul-01 25-Jul-01 GATS Art. V Services agreement REG126 Factual examination not started … EFTA — Jordan 1-Jan-02 22-Jan-02 GATT Art. XXIV Free trade agreement REG133 Examination not requested … EFTA — Croatia 1-Jan-02 22-Jan-02 GATT Art. XXIV Free trade agreement REG132 Examination not requested … Slovenia — Bosnia and Herzegovina 1-Jan-02 21-Jan-02 GATT Art. XXIV Free trade agreement REG131 Examination not requested … ECO Not available 22-Jul-92 Enabling Clause Other … Examination not requested … GCC Not available 11-Oct-84 Enabling Clause Other … Examination not requested … Source: Adopted from WTO (RTAs in effect as of January 31, 2002). 17 Table4: Acronym Definitions and abbreviations Name Participating Countries AFTA ASEAN Free Trade Area Brunei Darussalam Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam BAFTA CEFTA Baltic Free-Trade Area Central European Free Trade Agreement Estonia Latvia Lithuania Bulgaria Czech Republic Hungary Poland Romania Slovak Republic Slovenia CEMAC Economic and Monetary Community of Central Africa Cameroon Central African Republic Chad Congo Equatorial Guinea Gabon CIS Commonwealth of Independent States Azerbaijan Armenia Belarus Georgia Moldova Kazakhstan Russian Federation Ukraine Uzbekistan Tajikistan Kyrgyz Republic Common Market for Eastern and Angola Burundi Comoros Democratic Republic of Conga Djibouti Egypt Southern Africa Eritrea Ethiopia Kenya Madagascar Malawi Mauritius Namibia Rwanda Seychelles Sudan Swaziland Uganda Zambia Zimbabwe East African Cooperation Kenya Tanzania Uganda Eurasian Economic Community Belarus Kazakhstan Kyrgyz Republic Russian Federation Tajikistan Economic Cooperation Organization Afghanistan Azerbaijan Iran Kazakhstan Kyrgyz Republic Pakistan Tajikistan Turkey Turkmenistan Uzbekistan COMESA EAC EAEC ECO GCC Gulf Cooperation Council MERCOSUR Southern Common Market Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates Argentina Brazil Paraguay Uruguay MSG NAFTA SAPTA Melanesian Spearhead Group Fiji Papua New Guinea Solomon Islands Vanuatu North American Free Trade Agreement Canada Mexico United States South Asian Preferential Trade Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Arrangement UEMOA WAEMU West African Economic and Monetary Union Benin Burkina Faso Côte d'Ivoire Guinea Bissau Mali Niger Senegal Togo Source: Compiled from WTO CTRA 18 2. LITERATURE REVIEW of REGIONAL TRADE AREAS Every RTA formed, regardless of type, differs from each other. Thus no two FTA, Customs Union, Common Market, or Economic Union is alike even though they may share some common characteristics. This limited comparability among RTAs necessarily mean that trade models employed to enhance our understanding of RTAs will differ not only in the type of RTA been examined but in terms of the program structure of the RTA. An example will suffice to clarify on this point. A model employed, ex ante, to evaluate the potential net effect to forming NAFTA will produce findings that are very different from a model employed, ex ante, to evaluate the potential net effect from AFTA. This difference can be attributed to differences in product coverage, size of economic regions concerned, characteristic of the economic regions, trade level among the economic regions, program provisions, and level of protectionism, amongst others. This variance in models is further enhanced by the underlying assumptions. In his survey of the literature on 'Regionalism versus Multilateralism' Winters (1996) points out that the models employed to evaluate RTAs often focus on political, organizational, and hardly economic objectives. This shortcoming to economic objective is understandable given the de jure nature of RTAs. Under the economic objective, assumptions of a competitive framework with a homogeneous good model or a monopolistic framework with differentiated goods model is often employed. Within this dualistic approach four additional characteristics can be examined with each additional characteristic having sub-characteristics 9. This classification scheme 9 For greater details see Alan L. Winters Policy Research Working Paper "Regionalism versus Multilateralism" published under the WB working paper series WPS1687, 1996. 19 provides some 64 different models through which our understanding of RTAs and their effect on the multilateral trade system has been enhanced. The different models can, however, be reduced to a bare minimum of two. The two are the static & dynamic models. The static models tend to be concerned with welfare implications resulting from a RTA. The focus of the static models has tended to be a Customs Union, often between two countries, with an evaluation of its effect on a third country or the ROW. Viner's Customs Union Issue (1950) is the pioneering work of this model type. Others inc lude works of Meade (1956), Lipsey (1957), and Kemp & Wan (1976). It almost seems that the static RTA models have given exclusive emphasis to Customs Unions as if they were the sole RTA-type. This is understandable to the extent that a CU has a single common external tariff to the ROW given its common external trade policy. This CET advantage makes it easier to analyze. The static model, following from Viner's work, has come to face much criticism. I must indeed go in the record to say that I have never come across any piece of work that has faced this much criticism, though on a positive note given its pioneering status. One of the major criticisms of the Vinerian perspective is that it assumes a constant return to scale (CRS) production function. Michaely (1976) for example underlines this criticism by employing an increasing cost of production (a concave PPF) curve in which he shows that the net effect of trade creation and trade diversion, as treated in Viner, can be either welfare improving or worsening depending on the traded good's elasticity of demand and supply. While not questioning Michaely's model of an increasing returns to scale (IRS) production function and the conclusions at which he 20 arrives, I can only wonder if he actually read in toto Viner's The Customs Union Issue. I dare raise such a question because Viner pointed out in his work that "as output of any industry in a particular country increases over the long run relative to the national economy as a whole, its money costs of production per unit (average costs) relative to the general level of money costs (General price level) also tended to rise (p. 45)." It is evident that Viner is implying an industry exhibiting IRS production techniques and assuming, like he does, a two-goods economy (imports and exports) one is bound to observe a concave production possibility frontier (convex marginal rate of transformation curve) and not the flat marginal rate of transformation that Michaely argues. Therefore this criticism on the Vinerian perspective is an assumed one. In fact Michaely goes at length to quote Viner's analysis on the CU and would later point out that "Nothing is said here EXPLICITLY about the nature of the cost curves. References to a high -cost or a low-cost country, here and elsewhere in Viner's analysis, could CONCEIVABLY apply to the marginal costs at the point of production before the establishment of the union. This does not NECESSARILY imply that marginal costs are constant" (emphasis omitted, p. 83). Despite this assumed constancy in marginal costs critics got it right in pointing out that Viner's analysis could only have resulted in either trade creation or trade diversion and not both to the extent of having a net effect. This criticism was, however, pointed out by Viner himself albeit some qualifications needed for this either/or outcome to hold. In his CGE analysis of PTAs Yang (1998) shows how a partial equilibrium analysis (through an elimination of tariff in a RTA) results only in trade creation or diversion. Trade creation occurs when the prices of imports (intermediate-inputs) from RTA members fall because of the elimination or reduction in tariffs. This trade creation is 21 only a 'potential' for it assumes that domestic production is efficient relative to the ROW and that transportation costs are zero. On the other hand trade diversion only requires substitution of imports from the ROW to a RTA member following a fall in prices by way of tariff reduction (elimination) within the RTA. This preferential tariff treatment (assuming homogeneous goods) is all it takes for trade diversion to occur. Even though trade diversion takes place it is still possible for society to gain in welfare providing society's consumption pattern improves. This improvement in the consumption pattern (variety in the consumption basket) may more than compensate for the diversion from a 'least' to a 'high' cost producer as pointed out in Meade and Lipsey (op. Cit.). Viner's focus on production costs therefore missed the welfare implication that could result from the dominance of the income effect following preferential tariff treatment. That Viner assumes a two-good three-country model with prohibitive tariff on the nonRTA member and that the focus country is the smallest of the three countries necessarily means that trade diversion took place. Trade creation does not occur because the focus country is a price taker; meaning that it is relatively inefficient in the production of its export commodity. Given its high elasticity of demand for imports the focus country enjoys a higher welfare than would have been the case had it operated under autarky. Note however that a change in the underlying assumptions of smallness, high demand elasticity for imports, high income elasticity of import demand and low substitution elasticity between the import sources (Armington elasticities) can shift the outcome to one of trade creation. The exporting country (member RTA) can experience trade creation but for this to happen an implicit assumption is necessary. That is, the substitution effect resulting 22 from a reduction (elimination) in tariff must dominate the income effect and the import good must be an ordinary good. This does not have to be the case and if the import good is a necessity, luxury, inferior, or normal good the income effect will dominate. Therefore analyzing the effects of a CU on trade creation or diversion necessitates a closer examination of the characteristics of the goods involved. Most research interests on RTAs (CU issue) fall short of this analysis. Despite this shortcoming the trade creation and trade diversion of Viner remains the cornerstone for evaluating RTAs effect on welfare. However more dynamic and robust models, owing largely to the static nature of the Vinerian model, are now been used to analyze the effects of RTAs. Recent integration studies on trade have tended to employ models that are known for their dynamism and empirical robustness. Among these are the Gravity model and the now dominant CGE models like the Global Trade Analysis Project or GTAP model and the Michigan Model of World Production and trade. Whilst both model-types (Gravity and CGE) are noted for their respective robustness they both have their shortcomings and for that matter cannot be exclusively relied upon to arrive at a comprehensive study of RTAs. 2.1 The Gravity Model The Gravity model, pioneered by Tinbergen (1962) and Linneman (1966), is renowned for its empirical robustness but has been used, in conjunction, to undertake ex ante analysis of RTAs. The works of Porogan (2000) and Carillo and Li (2002) are examples of such complementary analysis. The model is a bilateral trade model and in 23 its most rudimentary form relates the trade between two countries to their national incomes and the geographical distance between them. Mathematically, it is represented as: TF ij = f (GDPi , GDP j , GDij) where TF ij = Trade flow between country i and country j GDij = Geographical distance between country i and country j The model in its crudest form tells us that trade between two countries (regions) is directly related to the countries' national income and inversely related to their geographical distance (Carillo and Li, 2002). Though the model was developed in the early 1960s, its application to the study of RTAs became popular following Krugman's (1991) study in which he posits that geography (proximity) plays a role in the decision to forming RTAs. He shows how proximity can lead to agglomeration of production to a given region and in the process biasing trade to that region by promoting a regional integrating area (RIA). Despite its simplicity and intuitive nature the Gravity model have come under heavy criticisms. Baldwin (1994) and Leamer (1994) criticized the model on grounds that it lacks a theoretical foundation. This criticism did not hold its ground for long given some of the assumptions made by studies employing the model to show how proximity, amongst other explanatory variables, influence decisions on regional integration. Perhaps Anderson (1979) best addressed the lack in 'theoretical foundation' criticism in a derivation of the model from trade theory. Other works including Deardorff (1998), Eaton & Kortum (1997), and Helpman & Krugman (1985) derived the Gravity model from a Heckscher-Ohlin, 24 Ricardian, and the 'New International Trade Theory' framework, respectively. Carillo and Li (2002) also showed how a classification into differentiated and homogeneous product category (intra regional and intra-sub regional trade) had different impacts on trade flows between and within the LAIA, Andean Community, and MERCUSOR, dispelling of the 'theoretical foundations' criticism. Other criticisms of the model are technical in nature and allude to issues of misspecification of the equation by way of the explanatory variables, the concerns of spatial dependence (caused by spatial aggregation and externalities) and heteroskedasticity (Anselin, 1998). Despite the valid concerns of these criticisms it is evident that econometric tools exist for dealing with them. Porogon (2000) points out that Spatial Econometrics technique deals with the spatial dependence problem. Other criticisms relates to the argument by some, for example Evernett & Keller (1998) that the success of the model depended on its assumption of IRS production technique outside of which it becomes less successful. The application of the model by Carillo and Li (2002) under a differentiated and homogeneous product classification has proved otherwise. This is shown by level of significance on the exporter GDP coefficient of the homogeneous product category. Despite the empirical robustness and intuitive attribute of the Gravity model other more dynamic models have come to be appreciated given their prediction power. As mentioned earlier the GTAP in its variant forms is an example of such dynamic model capable of making a case for or against RTAs, ex ante. Perhaps this and its 'shocking' capability made it so popular. Other advantages of GTAP include the broad familiarity with and transparency of its database. It is also very much aligned with 25 classical theory given its assumptions of CRS and perfect competition; although it allows for imperfect competition by way of fragmentation in production (Y ang, 1998). 2.2 FEATURES of the GTAP Model The GTAP, established in a comity effort in 1992, was motivated primarily by the increasing level of global integration made possible by the 'Rounds' of trade negotiations of the GATT/WTO10. The comity ef fort to the creation of the GTAP database has made quantitative analyses and assessments of RTAs and countryspecific trade policies easier. Adams (1998), for example, making use of the GTAP database through an Applied General Equilibrium (AGE) analysis was able to show how liberalization of APEC's trade would not only affect macro variables in the APEC region but on the ROW as well. He showed that liberalization in the APEC region would have a positive effect on intra- exports and imports along with impr ovement in the Real GDP (both at market prices and factor costs) but a negative effect on the same variables in the ROW. The effects of liberalization on variables such as the rental rates of capital, the terms of trade, and real exchange rates were less uniform within the region, with some members enjoying positive gains while others exhibited losses. The ROW, however, exhibited losses on all counts, though to varying degrees11. From the above simulation findings it becomes evident why CGE models to trade analyses is robust. Depending on the interests of the modeler, various macro variables and how they are affected by a reduction or elimination in tariffs can be captured. A comparison to the Gravity model, for example, will reveal that the Gravity model 10 See Hertel's 'Global Trade Analysis' (1997) for more details on the originality and inspiration for the GTAP model. 11 The changes (effects) from liberalisation are often stated as 'equivalent variation' following the shocks to the initial (base) values. 26 would be less encompassing given the potential econometric problem with increasing the number of explanatory variables in a multiple-regression model. This is of no concern under a CGE model and it is beneficial in that it provides for a broader overview. Despite the advantages of the CGE models, they are not free of problems. The Michigan model, for example, has been criticized for its understatement of the importance of the terms of trade effects along with problems of unsatisfactory 'closure rules'12 of the model. Both the GTAP and Michigan model can also be criticized on their sole focus on merchandise trade. Winter (1987) pointed out this criticism on the Michigan model arguing that it provides for possible abstraction from trade and investment in services, and international assets transactions. The assumption of low substitution elasticities between imports and domestic output can have an overestimation effect on trade following tariff elimination or reduction. In comparison to the Gravity model it is also evident that the GTAP or Michigan model is excessively theory based with a single period of relevant empirical data. In that regard, the Gravity model probably is a better policy-based model than both the GTAP and Michigan model. CGE modeling is arguably dynamic and as pointed out earlier it can be very telling given the number of macro variables one chooses to include in the model, that is, the number of variables and equations in the model. However one should be cautious lest 12 The Closure Rules concerns the method that is chosen to determine aggregate expenditure in a CGE model. For example a model with x variables and y equations, where x>y, can be 'closed' by specifying x - y variables as exogenous. That is declaring them as constants. Note these x - y variables can be subjected to shocking as well. See Deardorff and Stern's book Computational Analysis of Global Trading Arrangements (1990) for more details on 'Closure' in the Michigan Model and Hertel's Global Trade Analysis (1997) for more details on 'Closure' in the GTAP Model. 27 be led into believing that because of its dynamic nature all is right. This is not only limited to the CGE models but the static ones as well. Given this caveat, care needs to exercised when analyzing effects of RTAs, be it a FTA, CU, Common Market, or an Economic Union. Mayes (1997) provides a list of warnings in evaluating economic impacts resulting from economic integration. These include: (1) The avoidance of treating quotas and other Non-Tariff Barriers (NTBs) as tariffs by quantifying them as tariff equivalents. He points out that this is wrong given that the beneficiary to tariff revenue is the importing country whereas the beneficiary to the revenue from imposing quotas and other NTBs is the exporting country, except where the quota is auctioned. (2) The practice of not accounting for the complex array of income and substitution effects resulting from price changes following tariff elimination or reduction (3) The need for awareness that changes in prices can result from efficiency in production, thus real changes, whereas tariffs are transfers and therefore have no real effects. Note, however, that changes in prices can also be inflationary in nature. (4) The limitation to a before and after approach can be misleading with biased findings. For example, in evaluating the effects to forming an RTA (CU) one might be tempted to attribute all 'equivalent variations' following the RTA formation to the tariff elimination. This may not be the case given that there are other factors that could also be causes to the price changes. Prices can change (fall) because of economies of scale that result from an expanded market but prices can also change because of a more competitive transport industry, be it shipping, airfreight, or trucking services. 28 (5) The issue of constancy in parameters is also noteworthy. He warns that even if economies of scale and efficiency effects take place following integration it will not only be the explanatory variables that will change but the parameters as well. Therefore it is incorrect to use the results of a model estimated in a period with integration to suggest what would have happened in the counterfactual. He points out further that the best model is highly simplified with simple assumptions. He argues that "…one of the stages in the argument is usually left out and, instead of comparing what the model predicts with integration to what it predicts without integration, authors tend to compare actual behavior with what would have happened without integration attributing all differences to the effects of integration (p. 77). I assume that in the above quote 'actual behavior' is synonymous to 'with integration.' All the above caveats just go to point out that models in themselves alone are necessary but not sufficient in effecting a complete analysis of potential RTA benefits and costs. To that regard, the proposed China-ASEAN FTA (CAFTA) will employ a two-tier complementary approach. 29 3. RESEARCH METHODOLOGY The preceding introductory and overview chapters of this study gives a clear indication of what the underlying thesis question plans to answer. There are different possibilities of going about this task but regardless of methodolo gy adopted one would either end up employing static or dynamic analysis or a combination of both. The strength and weaknesses of both analyses has already been alluded to in the preceding chapters. Static analysis has the added advantage of been dependent on empirical data but lack the dynamism necessary to make forecasts. Dynamic analysis on the other hand has a predictive power capability but may only make use of one periodic historical data and in that regard does not reflect substantial empirical data. This advantage and disadvantage of both analyses type made it necessary for me to employ both in evaluating the economic prospects of the proposed CAFTA. First I carry out a historical analys is of the trade statistics of the CAFTA members using Balass a's relative comparative advantage index (RCAI). This analysis is static and makes use of five years trade statistics, 1996-2000. The analysis is an attempt to point out the comparative advantage and level of competitiveness in the top 5 traded commodities of the CAFTA economies and in the process evaluate whether their comparative advantages and competitiveness in the goods traded, both within and outside the proposed RTA, are in direct competition or in complement to each other. The trade statistic figures are derived from the UNCTAD/WTO database of the International Trade Center13 (ITC) and all reported figures are in the Standard 13 The URL for this site is www.intracen.org/tradstat/welcome.htm. 30 International Trade Classification 3 scheme (SITC3). The details of this analysis are expounded upon in chapter 5. Second a dynamic analysis using the Gravity model is undertaken. The Gravity model to be estimated will make use of trade data for the periods 1996-2000. This is essential for analytical conformity. Trade data from the International Trade Statistics and Direction of Trade Statistics will be used. Estimation of the Gravity Model14 will be either through Ordinary Least Squares (OLS) or Censored/Truncated (Tobit) estimation. The details of the Gravity model are provided in chapter 6. The results of the static and dynamic analyses are used in a complementary framework to make a case for the economic prospect of the proposed free trade area. The static analysis will address the empirical aspect of the analyses. The revelation of complementarity or competition in production and trade from the RCAI analysis will be of interest to making a case for or against CAFTA. The dynamic analysis part will provide some grounds as to what the future holds for the proposed China ASEAN FTA. That the proposed FTA is to take ef fect in 2010 makes this aspect of the analyses very important. Besides making projections, it will tell us the effect CAFTA can have on some of the members of the Multilateral Trade System. This revelation will be paramount especially in the context of t he WTO. The welfare implications on the integrating economies will also be evaluated and claims that the proposed area will lead to an economic region with trade value of US$1.23 trillion will be assessed. 14 It is argued that OLS is the best estimation technique for the Gravity model but Tobit has been proved to be more robust under missing or no trade flow data between countries. 31 Albeit it's ambitious nature, a regional integration area of this magnitude must first start with an overview of the macro economic variables of the proposed integrating economies. This economic overview is what the next chapter is concerned with. 32 4. ECONOMIC OVERVIEW of CHINA and ASEAN The proposed China-ASEAN FTA is an amalgam of economies with different economic, political, and social structures. Perhaps among the few common characteristics are the elements of cultural similarities, resource endowments, and similar lines of economic activity. The differences between the economies are vast and include levels of economic development, degree of openness to trade, trade policies, composition of economic activity, per capita incomes, population growth rates, and land area, amongst others. These similarities and differences are paramount in analyzing the question of the economic feasibility of the proposed CAFTA. Are these similarities and differences, especially as it regards trade policies, potential constraints or stepping-stones to the realization of CAFTA? Economic theory would have us believe that it is much easier for countries with similar economic characteristics or geographical proximity to integrate than it is for economies exhibiting differences along those lines. This belief is one of the underlying factors to the Gravity Model of integration. A closer examination of NAFTA, for example, excepting the issue of proximity would question the economic argument to integration. Albeit this outlining of similarities and differences in integrating bodies, common sense would tell us that forming an integration area would be facilitated provided that some common characteristics exist among the integrating members. What these characteristics are and how they rank in terms of importance to integration is anybody's guess. Given the economic nature of RTAs it is only logical that the evaluation of the proposed China -ASEAN FTA be preceded by such analysis of their economic similarities and differences. It is to this analysis that I now turn. 33 4.1 Overview of the Macroeconomic Indicators of China & ASEAN TABLE 5: Country MACROECONOMIC INDICATOS GDP (PPP) Population Per Capita Real GDP GDP (PPP) Growth (%) China $4.5 trillion 1,273,111,290 $3600 8 Singapore $109.8 billion 4,300,419 $26500 10.1 Malaysia $223.7 billion 22,229,040 $10300 8.6 Thailand $413 billion 61,797,751 $6700 4.2 Indonesia $654 billion 228,437,870 $2900 4.8 Philippines $310 billion 82,841,518 $3800 3.6 Brunei $5.9 billion 343,653 $17600 3 Laos $9 billion 5,635,967 $1700 4 Myanmar $63.7 billion 41,994,678 $1500 4.9 Cambodia $16.1 billion 12,491,501 $1300 4 Vietnam $154.4 billion 79,939,014 $1950 5.5 SOURCE: Compiled from www.cia.gov/cia/publications/factbook/geos/bx.html. All data are for 2000. 34 Per Capita GDP (2000 est.) 30,000 25,000 US $ 20,000 15,000 10,000 5,000 0 CHN SG MY TH IN PH BN LS MYN CM VN Series1 35 CHINA 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 China GDP Pop. 36 ASEAN ECONOMIES 700 600 500 Million 400 300 200 100 0 SG MY TH IN PH GDP BN LS MYN CM VN Pop. 37 SectorcompositionofGDP 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CHN SG MY TH IN PH BN LS MYN CM VN Agriculture Industry Services 38 4.2 China & ASEAN Industrial Sector Decomposition TABLE 6: INDUSTRIES MAKING UP THE INDUSTRIAL SECTOR IN CAFTA ECONOMIES CH SG M Y TH IN PH BN LS MYN CM VN INDUSTRIES Apparels Armaments Automobiles Beverage Bietechnology* Cement Chemicals & Fertilizers Coal Computers & Parts Construction Electric Appliances Electricity Electronics Electronics Assembly Financial Services* Fishing Food Processing Footwear Furniture Garmen ts Gem Mining Glass Iron Light Manufacturing Liquefied Natural Gas Logging Machine Building Mining (Various Elements) Oil Drilling Equipment Palm Oil Paper Petroleum Petroleum Refining Pharmaceuticals Plastics Plywood Rice Milling Riubber Processing Rubber / Rubber Prods. Ship Repair Steel Telecommunication Textiles Timber Tin Tobacco Tourism Toys Tungsten Wood & Wood Products v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v v 39 IMPORT ORIGINATION OF The CAFTA ECONOMIES (2000 est.) China 5% ROW 31% Hong Kong 5% Japan 16% Malaysia 4% USA 14% Thailand 4% Taiwan 4% S. Korea 6% Singapore 11% EXPORT DESTINATIONS OF CAFTA ECONOMIES (2000 est.) China 6% ROW 18% Hong Kong 8% Japan 18% USA 18% Malaysia 2% UK 5% Thailand 3% Singapore 7% S. Korea 8% Netherlands 5% Taiwan 2% The import/export percentages are averages based on year 2000 figures as reported in the US CIA Factbook for China and ASEAN economies (CAFTA). The percentages are exclusive of Laos and Vietnam since data for them were not reported. 40 4.3 Summary of the Trading Partners of the CAFTA Economies CAFTA Trading Partners TABLE 7: C H I N A H O N G J A P A N M A L A Y S I A K O N G CH SG MY TH IN PH BN LS MYN CM VN v v v v v v v v v v v v v v v v v v v v v v v v v v v v S. S I K N O G R A E P A O R E v v v v v v v v v v v v v I N D I A T U H K A I L A N D v v v v v v v v v v v v U S A v v v v v v v v v v v v v v v v v v v v v v V I E T N A M N E T H E R L A N D S T A I W A N v v v v v v v v v v v v v G E R M A N Y v F R A N C E B E L G I U M A U S T R A L I A v v v v v v v v v v v v The preceding tables and graphs give some overview of the economic activities, trade, and economic indicators of China and the ASEAN economies. The graph depicting per capita incomes of the proposed CAFTA economies highlights a stark contrast between the economies. Of the eleven economies only Singapore has per capita incomes above $25000; Brunei has per capita incomes below $20000; whereas Malaysia has per capita incomes below $15000 and Thailand below $10000. The remaining 7 economies have per capita incomes, measured in PPP terms, below $5000. The implication of the per capita GDP diff erences on the prospects of the proposed China-ASEAN FTA is subjective. What is clear is that the Gravity model to trade, which holds a positive relationship between the interaction terms of member GDP levels to trade flows, would have predicted a low level of bilateral- trade and thus be less supportive of a FTA based solely on incomes. To the extent that the proposed 41 China-ASEAN FTA is to reduce tariff levels on traded goods to the point of harmonization and elimination of NTBs, the stark contrast in per capita incomes should not be much of a concern. However if the intended goal of the proposed FTA were to eventually culminate into a Common Market then the stark contrast in per capita incomes would be worrisome. This is so because of the free mobility of factors within a Common Market which would ultimately result in equalization of factor prices; an equalization that could hurt the high-income members to the advantage of the low-income members. Another issue of concern relates to that of the sector composition of GDP of the CAFTA economies. Again there exists a sharp contrast on the industrial composition of each of the CAFTA economies with under 30% of economic activity been accounted for by the industrial sectors of Singapore, Cambodia, Laos, and Myanmar. That trade tends to be concentrated in the industrial sector of manufactures is reason to be concerned but more so for Cambodia, Laos, and Myanmar than Singapore. This is so given that Singapore's manufacturing sector is more complex than those of the other three economies and what it lacks in percentage makeup is more than compensated for by a relatively more vibrant and complex service sector within the region. Though the industrial percentage composition of the economies of China, Malaysia, Thailand, Indonesia, Brunei, and Vietnam is above the 30% mark, activities in this sector tend to be more concentrated in either low -value low -skill (toys, footwear, textiles) or high-value moderate -skill products (electronics & computers). Whereas in Singapore the concentration is more so in high-value moderate -skill and high-value high-skill products (specialized equipment, business and consulting services). This contrast in industrial base is in all actuality a plus for the proposed FTA but is only of concern if the similarity in industries making up the industrial 42 sector in the CAFTA economies is taken into consideration. Under such consideration we see that nearly half of the economies within CAFTA are involved in the Chemicals, Food Processing, Textile s, Cement, Electronics, Electronics Assembly, Footwear, Petroleum, Petroleum Refining, and Rubber & Rubber Product industries. This involvement in similar industrial activities can be seen as been competitive rather than complementary and therefore a stumbling bloc to the proposed FTA. This argument whilst deserving of merit is not totally true and I will give the counter argument in chapter 6. Augmenting the direct competition argument is the concern of similarity in major trading partners among the CAFTA economies. In terms of exports and on average basis, 18% of the CAFTA economies' exports are destined for the USA, 18 % for Japan, and 8% for Hong Kong. On the import side, 16% of the CAFTA economies' imports come from Japan and 14% come from the USA. The level of intra trade among the CAFTA economies is very limited and tends to be dominated bilaterally between Singapore and the other 10 CAFTA economies. This dominance explains why Singapore accounts for, on average, about 11% of CAFTA import origin ation and 7% of CAFTA export destination. On the flip side, 100% of all CAFTA economies trade with Japan; about 90% trade with the USA; 80% trade with Hong Kong, S. Korea, and Taiwan; and about 50% trade with the Netherlands. About 50% of CAFTA trade with Malaysia; 70% with China; and about 60% with Thailand. The level of intra regional trade therefore seems to be more concentrated, bilaterally, in Singapore, China, Thailand, and Malaysia. The implications one can draw from this are subjective but the one that is unavoidable is the role that these economies would have to play if the proposed CAFTA is to become a reality. A detailed examination of 43 the trade policies of the CAFTA economies and what needs to be achieved by way of a re-evaluation of these trade policies will clarify my point above regarding the roles of Singapore, China, Thailand, and Malaysia in the fate of CAFTA. 44 Table8: CAFTA Trade Policies Summary CH SG MY TH IN PH BN L MY C V S N N M TARIFFS : Applied MFN Rate(Avg) 16% 0% 9% 18% 10% 11% 3% Avg. Bound Rate 9.2% 14% 26% 38% 14% 25% 71% 64% 69% 96% 64% 95% -- % Tariff Lines Bound to WTO Non-Tariff Barriers: Import Restrictions( a) Yes Yes Yes Yes Yes Yes Yes Import Licensing (b) Yes Yes Yes Yes Yes Yes Yes Import Ban (c) Yes Yes Yes Yes Yes Yes Yes Import Permits (d) Yes Yes Yes Yes Yes Yes Yes Import Quotas (e) Yes No No Yes Yes Yes No Export Restrictions (f) -- UN Yes Yes Yes Yes Yes Customs Procedures (g) Yes Yes Yes Yes Yes Yes Yes Customs Valuation (h) TV TV TV TV TV UA UA Rules of Origin (i) S A/G A/G A A/G A A Preshipment Inspection -- No No No Yes Yes No Antidumping Y/L Y/N Y/N Y/L Y/L Y/L Y/N Countervailing Measure Y/L Y/L Y/L Y/L Y/L Y/L Y/N Safeguards Y/L Y/N Y/N Y/N Y/N Y/L Y/N Standards (k) -- IEC IE IEC IEC IEC IEC S & PS Measures (l) Yes Yes Yes Yes Yes Yes Yes V G H --- --- P/L T Yes No No Yes Yes No No Other Measures Affecting Imports: Contingency Measure Other Charges Affecting Imports (m) Competition Policy Framework (n): 45 Notes: a: See table 9 for details on respective country import restrictions b: See table 9 for details on products subjected to import licensing c: See table 9 for details on products subjected to import bans d: See table 9 for details on products that require import permits e: See table 9 for details on products subjected to import quotas f: See table 9 for products subjected to export restrictions. Table 8 highlights United Nations (UN) mandated sanctions against exports to certain countries. g: These include either or all of Registration and Documentation Requirements for either or both imports and exports. h: This refers to the type of customs valuation adopted by the respective countries. These can either be Transaction Value (TV); Brussels Definition of Value on (BDV)-based on CIF values; USA, Australia, and Canada(UA) Valuationbased on FOB values; Domestic market Price (DMP)-adopted by some developing countries. i: Existence of rules and regulations used by the respective countries to determine origination or preferences for origination of imports. ASEAN (A)preferences and GSTP (G) preferences for developing country exports, or the Single (S) Non Non-Preferential ROO maintained by China are examples. j: These include use of Antidumping Measures (A); Countervailing Measures C ) and Safeguards (S) and whether there are Legislation (L) or No Legislation (N) on these. k: These refer to observance of International Standards like ISO (I), International Electrotechnical Commission (E), Codex Alimentarius (C)-food labelling etc. l: These include adopted Sanitary and Phytosanitary standards and whether there exists Legislation (L) or No Legislation (N) on these in the respective countries. m: These include charges like Excise Tax (T); Sales Tax (S) VAT (V); GST (G), Handling Charges (H), Processing Fees (P), Laboratory Fees (L). n: "Yes" denotes countries with a comprehensive CP framework. "No " can denote Either a complete lack of CP framework or provisional ones. 46 4.4 Trade Policy Summary of the CAFTA Economies Table 9 15: Tariff & Non-Tariff Highlights of the CAFTA Economies TARIFFS AG. IND. IMPORT Restrictions Ban Licensing (Quotas etc) Sectors Counterfeit CH Protected Currencies; Printed Matter; Magnetic media; Films; All Products under Import License had to be phased out upon accession into the WTO. Photographs deemed detrimental to political, economic, cultural & moral interests; Old & Used garments. SG Bound Bound In 1998 around Plants of rubber; Rates Rates 19.2% of all tariff Scanning receivers; (2000) (2000) lines were subject Gums; Cocoa; 15.4% 7.4% to some form of Coconut & Oil Palm import restriction. from Central & Licensing requirements for Rice imports justified on food security reasons. Non for strategic Various Agricultural and Industrial goods. Automobiles; & industrial reasons. South America and MY Impose Quotas on West & Central imports of Motor Africa; Military Vhcls under 3 Communication years old. Quota is Equipment; increased by 3% Motor Vehicles 3+ annually. years old. Applied Applied Dairy product; Rice; Indecent or Rates Rates Cotton waste; obscene articles; (2001) (2001) Textile article; Spirits & Vinegar; 3.5% 9.9% Garments; Plastic & Rubber Peanuts; articles; Textiles Syrups; sugars; & Clothing; Bound Bound Beverages; 15 Tables 8 & 9 were compiled from the most recent Trade Policy Reviews of the respective countries with the WTO. These documents are WT/TPR/S/**. Where ** is 51, 59, 63, 67, 84, and 92 for Indonesia, Phillippines, Thailand, Singapore, Brunei, and Malaysia, respectively. The summary for China was mostly derived from WTO/WB/NBR publications. 47 Rates Rates Molasses; Footwear; (2001) (2001) Cheeses; Ceramic prods. 11.8% 16.6% Ice Cream; Wheat. TH Applied Applied Fish Meal; Jute; Angola Diamond; Fish meal with Agro-based Rates Rates Kenaf; Marble; Counterfeit protein content of products; textiles (1999) (1999) Used Motor Vhcls; products; Machines less than 60%; & clothing; motor 32.1% 14.6% Silk Yarn; for production of gunny bags; marble; vehicles. Electrical & counterfeit products. travertine; building Bound Bound Mechanical stones; alabaster; six Rates Rates Operated games. wheeled buses; silk (1999) (1999) 37.8 32% yarn; used motor Import Quotas vehicles; defense imposed on some products. Agricultural products only. IN Bound Bound Chemical Products Chloroflouro Petro-chemicals Agriculture (food Rates Rates including waste & Carbons; Polymers.. (1998) (1998) pesticides; printed rice); M ining & 47.3% 36.8% material in Wood resources; Chinese; audio & Fertilizers; commodities - Applied Applied Videocassettes; Cement; Iron & Rates Rates films & colour Steel; (1998) (1998) photocopy Automobiles; 8.6% 9.7% machines. Textiles & Garments Restrictive marketing arrangements on paper & cement. PH Applied Applied Cyanide; Impose bans on Import license Agriculture & Rates Rates Chloroflouro Dynamite; required for Used Agro processing (1999) (1999) Carbons; Firearms; Gunpowder; Cocoa Motor vehicles; industries; 11.5% 10.1% Pesticides. leaves; Opium; Motor vehicles Parts Textiles, Used clothing; Toy & components. Clothing; and Maintains import guns; Steel. quota on Rice. 48 BN Bound Bound Rice; Sugar; Salt; Impose ban on Import licensing Petroleum & Rates Rates Beef; Poultry; Cement; required for Natural Gas. (2001) (2001) Alcoholic Telecom 25.5% 24.8% Beverages; Plants Equipment; Medical & Live Animals; products; Applied Applied Used Motor Chemicals; and Live Rates Rates Vehicles 5+ years Plants & Animals. (2001) (2001) old; Converted 0.4% 3.3% Timber. LS - - - - - - MYN - - - - - - CM - - - - - - VN - - - - - - 49 Table 8 & 9 gives some indication of the respective trade policies of the CAFTA economies. It is paramount to point out that the summaries in the two tables are to give an idea of the trade policies adopted by the economies and it is in no way a comprehensive overview of these economies trade policies. For a more comprehensive overview one is advised to look at the WTO Trade Policy Reviews (see footnote 15) or the country reports presented to the WTO Secretariat. I earlier alluded to the role that must be played by the economies of China, Singapore, Malaysia, and Thailand if the proposed China-ASEAN FTA is to become a reality. These economies are economically more prosperous than the remaining ASEAN countries and an examination of their economic indicators proves the point. However, it is not the issue of economic maturity alone that is of concern here but how the trade policies of China, Singapore, Malaysia, and Thailand differs from the rest of the other ASEAN countries, especially as it relates to their trade policies and how their trade policies fulfill WTO obligations. The average percentage of developing countries tariff lines that are bound to the WTO is 73%. That Singapore, Malaysia, and Thailand have only 71, 64, and 69%, respectively, of their tariff lines bound to the WTO is reason for concern. This is even more alarming if we consider the fact that Indonesia has 96% and Brunei 95% of their tariff lines bound to the WTO. Notwithstanding the ASEAN objective of harmonization of tariffs, this low percentage of bounded tariff lines provides an avenue for employment of restrictive trade policies or at best a source of skepticism on the part of the bilateral or multilateral trading system. The April 1999 China Offer provided for an overly ambitious package - in terms of reduction in tariff rates, percentage of tariff lines to be bound to the WTO, and reduction in NTBs - to the extent where the major players in the global trade framework expressed elements of skepticism regarding China's Offer. Despite China's 50 Offer concerns are still abound about their tariff regimes, especially vis-à-vis the USA and EU. This skepticism about the trade regime of China can possibly have a negative or at best a delaying effect on the realization of the proposed China -ASEAN FTA. Complaints about dumping practices against China by Vietnam and import ban on China's printed material by Indonesia are examples. Issues of NTB - quotas, import licensing, state trading and protected sectors - is of concern regarding the realization of the proposed China-ASEAN FTA. China, the dominant economic partner in this potential alliance continues to make use of licensing requirements and restricts the trade of some 35 products to State Trading Enterprises. That the 35 products includes items of Tobacco, Chemicals, Natural Rubbe r, Motor Vehicles, and some Textiles is an issue of concern given that these are commodities in which most ASEAN member countries have comparative advantages or are strategic industrial targets. Thailand continues to make use of quantitative restrictions on agricultural commodities, a sector in which Philippines, Laos, Cambodia, and Vietnam have some comparative advantage. This is a problem within the context of the ASEAN liberalization scheme given that most of the items in the General Exception List (GEL) and the Sensitive List are agricultural in nature. The time frame for including items in the Sensitive List in the CEPT scheme, 2010, is of paramount importance given that this is the tentative time frame in which CAFTA is to come into effect. The number of items under Singapore and Malaysia's GEL, for reasons of safeguards, 38 and 53 respectively, raises protectionist concerns. That Malaysia has the second largest number of items under its Sensitive list, second to Laos, places a question mark on the 'lead by example' criteria suggested earlier. 51 Issues of Customs Valuation methodologies also continue to be of concern but especially so in Thailand than in Singapore and Malaysia. Though China, Singapore, Malaysia, and Thailand are signatories to the WTO Committee on Customs Valuation16 and have all agreed to adopting the "Transaction Value" methodology of customs valuation there still exists gray areas in such implementation and problems of 'under valuation' are still abound in China, Malaysia, and especially Thailand. This problem of value declaration has resulted in the adoption of the provisional arrangements, under Article VII of the GATT, by Thailand. Other members of ASEAN, Indonesia, for example, have also made use of such provisional arrangements17. Legislation dealing with the issue of Safeguards is another area that needs to be addressed by the more prosperous ASEAN economies. Of the four, only China and Thailand have enacted legislation dealing with the issue. This inaction regarding legislative enactment provides loopholes that can be exploited to restrict trade. That only two of the ASEAN economies have legislation in this area is worrisome given the need for the more prosperous ASEAN economies to lead by example from which the other le ss developed ASEAN countries can follow. Perhaps this lack of legislation on Safeguards should not be surprising given that only Thailand, out of the more prosperous ASEAN economies, has a comprehensive competition policy framework. Though China has a competition policy framework it is still shadowed by restrictive practices of State Trading regimes, amongst others. Last but not the least is the issue of the spread between the applied MFN and bound tariff rates of the CAFTA economies. Taking Singapore as an example, the economy with the highest per capita 16 See WTO document G/VAL/W/95 for an overview of the history dealing with the standardisation of Customs Valuation among the international community. 52 GDP and the most liberal economy in terms of trade, we find applied MFN rates of 0% and bound rates of 9.2%. This spread allows for the ability to vary its tariff rates as and when it deems strategically necessary. Though there is no violation of WTO provisions in this practice it creates an environment of uncertainty in tariff regimes, an environment that can have negative effects on the multilateral trade system by way of non-transparent tax regimes. 4.5 Overview of the ASEAN Free Trade Area The ASEAN Free Trade Area (AFTA) came into effect on 28th January 1992 and was formed under the Enabling Clause provision of the GATT/WTO. In this respect, AFTA shares some similarities with the proposed China-ASEAN Free Trade Area in that their formation is effected under the Enabling Clause provision and they both did not seek WTO consultation. Despite the similarities between the two FTAs a more paramount issue is whether the objectives of the two FTAs might be in conflict to one another, especially the time frames to implementing their respective agreement schedules. Objectives of AFTA . The ultimate objective of AFTA is to increase ASEAN's competitive edge as a production base geared for world market. Through the elimination of intra-regional tariffs and non-tariff barriers, ASEAN's manufacturing sectors will become more efficient and competitive. . And with the larger size of the market, investors can enjoy economies of scales in production. Foreign direct investments will be attracted into the region. This will in turn stimulated growth of supporting industries in the region for many foreign direct investments. 17 See GATT Article VII for more details on these provisional arrangements regarding value declaration. 53 The objectives of AFTA clearly indicate that AFTA and CAFTA objectives are not in conflict (see chapter 5). But AFTA's program of tariff reduction is more encompassing and accelerating than that of CAFTA and by the time CAFTA comes into effect AFTA would already have reached its CEPT target of 0-5% applied MFN tariff rates for the Unprocessed Agricultural Products (UAP). By this time, January 2010, all UAPs under the Immediate Inclusion List, Temporary Exclusion List, and Sensitive List would have been phased into the CEPT scheme. In contrast, the programme of tariff reduction under the CAFTA 'Normal Track' would have realised the same tariff reductions as the CEPT scheme (under AFTA) for only China and ASEAN6; with the provision that the 'Other ASEAN' economies meet this obligation by 2015. That the products listed under the 'Sensitive Track' would involve longer time frames means that the complexity of the overlap in schedules under AFTA and CAFTA is not easily resolved and could possibly complicate the tariff reduction objectives of both AFTA and CAFTA. The product coverage for the 'Early Harvest' under the CAFTA Framework Agreement includes only 8 product categories (HS Code 01-08), exclusively agricultural, but only at the 8/9 digit HS Code. Comparing the 'Early Harvest' to the 'Inclusion List' of AFTA (Table10) shows why AFTA is more encompassing than CAFTA. Although CAFTA is not as encompassing as AFTA, most of the CAFTA economies except Cambodia and Vietnam have opted not to maintain an 'Exclusion List' under the 'Early Harvest' programme. As of 2002 Laos, Malaysia, and Philippines, were yet to complete their negotiations vis-à-vis ASEAN and China on their Exclusions Lists, albeit a deadline of March 2003. 54 Table10: AFTA CEPT Package Number of Tariff Lines Country Inclusion Temporary Exclusion Brunei 6,105 Indonesia 6,622 Laos 533 Malaysia 8,621 Myanmar 2,356 Philippines 5,202 Singapore 5,739 Thailand 9,046 Vietnam 1,718 Total 45,942 Percentage 82.8 Source: ASEAN Secretariat. Table11: Country 135 541 2,820 276 2,987 380 0 73 1,141 8,353 15.1 Sensitive General Exception 14 4 96 104 21 71 0 7 23 340 0.6 Total 239 45 102 63 108 28 120 NA 131 836 1.5 6,493 7,212 3,551 19,064 5,472 5,681 5,859 9,126 3,013 55,471 100.0 CEPT Tariff Rates 1998 Brunei 1.35 Darussalam Indonesia 6.12 Laos 5.00 Malaysia 3.40 Myanmar 4.47 Philippines 7.43 Singapore 0.00 Thailand 10.56 Vietnam 3.92 2 ASEAN 5.05 Source: ASEAN Secretariat 1999 2000 2001 2002 2003 1.30 1.00 0.97 0.94 0.87 5.29 5.00 3.00 4.45 6.54 0.00 9.75 3.90 4.59 4.57 5.00 2.57 4.38 5.27 0.00 7.40 3.38 3.74 4.36 5.00 2.40 3.32 4.79 0.00 7.36 2.97 3.54 4.10 5.00 2.27 3.31 4.53 0.00 6.02 2.72 3.17 3.69 5.00 1.97 3.19 3.62 0.00 4.64 1.78 2.63 The progress made by AFTA under the CEPT scheme objectives is impressive and the question remains if China will be able to meet this challenge given the preponderance 55 of NTBs (see Table9) in Chinese trade policy and the masking of these policies by State Trading Enterprises. That the average applied MFN rate for all products in China is 16% is also reason for skepticism. Having examined some of the concerns underlying the two Free Trade Areas I will now examine the Framework Agreement underlying the proposed China -ASEAN Free Trade Area. This is the task I undertake in the next chapter. 56 5. CAFTA FRAMEWORK AGREEMENT On November 4th , 2002 the People's Republic of China and the Association of South East Asian Nations (ASEAN) signed a Framework Agreement for a Comprehensive Economic Co-operation between the two bodies. This comprehensive agreement embodied, amongst others, the formation of a FTA. In this chapter I plan to give a succinct overview of what this agreement entailed but more so on the trade aspects of the Framework Agreement. The Framework Agreement states as follows: Preamble WE, the Heads of Government/State of Brunei Darussalam, the Kingdom of Cambodia, the Republic of Indonesia, the Lao People's Democratic Republic ("Lao PDR"), Malaysia, the Union of Myanmar, the Republic of the Philippines, the Republic of Singapore, the Kingdom of Thailand and the Socialist Republic of Viet Nam, Member States of the Association of South East Asian Nations (collectively, “ASEAN” or “ASEAN Member States”, or individually, “ASEAN Member State”), and the People’s Republic of China (“China”): Recalling our decision made at the ASEAN-China Summit held on 6 November 2001 in Bandar Seri Begawan, Brunei Darussalam, regarding a Framework on Economic Co-operation and to establish an ASEAN-China Free Trade Area (“ASEAN-China FTA”) within ten years with special and differential treatment and flexibility for the newer ASEAN Member States of Cambodia, Lao PDR, Myanmar and Viet Nam (“the newer ASEAN Member States”) and with provision for an early harvest in which the list of products and services will be determined by mutual consultation; Desiring to adopt a Framework Agreement on Comprehensive Economic Co-operation (“this Agreement”) between ASEAN and China (collectively, “the Parties”, or individually referring to an ASEAN Member State or to China as a “Party”) that is forward-looking in order to forge closer economic relations in the 21st century; Desiring to minimise barriers and deepen economic linkages between the Parties; lower costs; increase intra-regional trade and investment; increase economic efficiency; create a larger market with greater opportunities and larger economies of scale for the businesses of the Parties; and enhance the attractiveness of the Parties to capital and talent; Being confident that the establishment of an ASEAN-China FTA will create a partnership between the Parties, and provide an important mechanism for strengthening co -operation and supporting economic stability in East Asia; Recognising the important role and contribution of the business sector in enhancing trade and investment between the Parties and the need to further promote and facilitate their co-operation and utilisation of greater business opportunities provided by the ASEAN-China FTA; Recognising the different stages of economic development among ASEAN Member States and the need for flexibility, in particular the need to facilitate the increasing participation of the newer ASEAN 57 Member States in the ASEAN-China economic co-operation and the expansion of their exports, including, inter alia, through the strengthening of their domestic capacity, efficiency and competitiveness; Reaffirming the rights, obligations and undertakings of the respective parties under the World Trade Organisation (WTO), and other multilateral, regional and bilateral agreements and arrangements; Recognising the catalytic role that regional trade arrangements can contribute towards accelerating regional and global liberalisation and as building blocks in the framework of the multilateral trading system; 5.1 The Articles of Agreement China and ASEAN have agreed to be bounded by the 16 Articles underlying the Framework Agreement. The sixteen ARTICLES are: 1 Objectives 2 Measures for Comprehensive Economic Co-operation 3 Trade in Goods 4 Trade in Services 5 Investment 6 Early Harvest 7 Other Areas of Economic Co-operation 8 Timeframes 9 MFN Treatment 10 General Exceptions 11 Dispute Settlement Mechanism 12 Institutional Arrangements for the Negotiations 13 Miscellaneous Provisions 14 Amendments 15 Depository 16 Entry into Force 58 5.2 Articles Pertaining to Trade in Goods Under Article 1, the objectives of the agreement are: (a) strengthen and enhance economic, trade and investment co-operation between the Parties; (b) progressively liberalise and promote trade in goods and services as well as create a transparent, liberal and facilitative investment regime; (c) explore new areas and develop appropriate measures for closer economic co-operation between the Parties; and (d) facilitate the more effective economic integration of the newer ASEAN Member States and bridge the development gap among the Parties. Article 3 1. 2. provides as follows: In addition to the Early Harvest Programme under Article 6 of this Agreement, and with a view to expediting the expansion of trade in goods, the Parties agree to enter into negotiations in which duties and other restrictive regulations of commerce (except, where necessary, those permitted under Article XXIV (8) (b) of the WTO General Agreement on Tariffs and Trade (GATT)) shall be eliminated on substantially all trade in goods between the Parties. For the purposes of this Article, the following definitions shall apply unless the context otherwise requires: (a) “ASEAN 6” refers to Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand; (b) “applied MFN tariff rates” shall include in-quota rates, and shall: (i) in the case of ASEAN Member States (which are WTO members as of 1 July 2003) and China, refer to their respective applied rates as of 1 July 2003; and (ii) in the case of ASEAN Member States (which are non -WTO members as of 1 July 2003), refer to the rates as applied to China as of 1 July 2003; (c) “non-tariff measures” shall include non-tariff barriers. 3. The tariff reduction or elimination programme of the Parties shall require tariffs on listed products to be gradually reduced and where applicable, eliminated, in accordance with this Article. 4. The products which are subject to the tariff reduction or elimination programme under this Article shall include all products not covered by the Early Harvest Programme under Article 6 of this Agreement, and such products shall be categorised into 2 Tracks as follows: (a) Normal Track: Products listed in the Normal Track by a Party on its own accord shall: (i) have their respective applied MFN tariff rates gradually reduced or eliminated in accordance with specified schedules and rates (to be mutually agreed by the Parties) over a period from 1 January 2005 to 2010 for ASEAN 6 and China, and in the case of the newer ASEAN Member States, the period shall be from 1 January 2005 to 2015 w ith higher starting tariff rates and different staging; and (ii) in respect of those tariffs which have been reduced but have not been eliminated under paragraph 4(a) (i) above, they shall be progressively eliminated within timeframes to be mutually agreed between the Parties. (b) Sensitive Track: Products listed in the Sensitive Track by a Party on its own accord shall: 59 (i) have their respective applied MFN tariff rates reduced in accordance with the mutually agreed end rates and end dates; and (ii) where applicable, have their respective applied MFN tariff rates progressively eliminated within timeframes to be mutually agreed between the Parties. 5. The number of products listed in the Sensitive Track shall be subject to a maximum ceiling to be mutually agreed among the Parties. 6. The commitments undertaken by the Parties under this Article and Article 6 of this Agreement shall fulfil the WTO requirements to eliminate tariffs on substantially all the trade between the Parties. 7. The specified tariff rates to be mutually agreed between the Parties pursuant to this Article shall set out only the limits of the applicable tariff rates or range for the specified year of implementation by the Parties and shall not prevent any Party from accelerating its t ariff reduction or elimination if it so wishes to. 8. The negotiations between the Parties to establish the ASEAN-China FTA covering trade in goods shall also include, but not be limited to the following: (a) other detailed rules governing the tariff reduction or elimination programme for the Normal Track and the Sensitive Track as well as any other related matters, including principles governing reciprocal commitments, not provided for in the preceding paragraphs of this Article; (b) Rules of Origin; (c) treatment of out-of-quota rates; (d) modification of a Party’s commitments under the agreement on trade in goods based on Article XXVIII of the GATT; (e) non-tariff measures imposed on any products covered under this Article or Article 6 of this Agreement, including, but not limited to quantitative restrictions or prohibition on the importation of any product or on the export or sale for export of any product, as well as scientifically unjustifiable sanitary and phytosanitary measures and technical barriers to trade; (f) safeguards based on the GATT principles, including, but not limited to the following elements: transparency, coverage, objective criteria for action, including the concept of serious injury or threat thereof, and temporary nature; (g) disciplines on subsidies and countervailing measures and anti-dumping measures based on the existing GATT disciplines; and (h) facilitation and promotion of effective and adequate protection of trade-related aspects of intellectual property rights based on existing WTO, World Intellectual Property Organization (WIPO) and other relevant disciplines. Article 6 provides as follows: 1. 2. With a view to accelerating the implementation of this Agreement, the Parties agree to implement an Early Harvest Programme (which is an integral part of the ASEAN-China FTA) for products covered under paragraph 3(a) below and which will commence and end in accordance with the timeframes set out in this Article. For the purposes of this Article, the following definitions shall apply unless the context otherwise requires: (a) “ASEAN 6” refers to Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand; (b) “applied MFN tariff rates” shall include in-quota rates, and shall: 60 3. (i) in the case of ASEAN Member States (which are WTO members as of 1 July 2003) and China, refer to their respective applied rates as of 1 July 2003; and (ii) in the case of ASEAN Member States (which are non -WTO members as of 1 July 2003), refer to the tariff rates as applied to China as of 1 July 2003 . The product coverage, tariff reduction and elimination, implementation timeframes, rules of origin, trade remedies and emergency measures applicable to the Early Harvest Programme shall be as follows: (a) Product Coverage (i) Chapter 01 02 03 04 05 06 07 08 All products in the following chapters at the 8/9 digit level (HS Code) shall be covered by the Early Harvest Programme, unless otherwise excluded by a Party in its Exclusion List as set out in Annex 1 of this Agreement, in which case these products shall be exempted for that Party: Description Live Animals Meat and Edible Meat Offal Fish Dairy Produce Other Animals Products Live Trees Edible Vegetables Edible Fruits and Nuts (ii) A Party which has placed products in the Exclusion List may, at any time, amend the Exclusion List to place one or more of these products under the Early Harvest Programme. (iii) The specific products set out in Annex 2 of this Agreement shall be covered by the Early Harvest Programme and the tariff concessions shall apply only to the parties indicated in Annex 2. These parties must have extended the tariff concessions on these products to each other. (iv) For those parties which are unable to complete the appropriate product lists in Annex 1 or Annex 2, the lists may still be drawn up no later than 1 March 2003 by mutual agreement. (b) Tariff Reduction and Elimination (i) All products covered under the Early Harvest Programme shall be divided into 3 product categories for tariff reduction and elimination as defined and to be implemented in accordance with the timeframes set out in Annex 3 to this Agreement. This paragraph shall not prevent any Party from accelerating its tariff reduction or elimination if it so wishes. (ii) All products where the applied MFN tariff rates are at 0%, shall remain at 0%. (iii) Where the implemented tariff rates are reduced to 0%, they shall remain at 0%. (iv) A Party shall enjoy the tariff concessions of all the other parties for a product covered under paragraph 3(a)(i) above so long as the same product of that Party remains in the Early Harvest Programme under paragraph 3(a)(i) above. (c) Interim Rules of Origin The Interim Rules of Origin applicable to the products covered under the Early Harvest Programme shall be negotiated and completed by July 2003. The Interim Rules of Origin shall be superseded and replaced by the Rules of Origin to be negotiated and implemented by the Parties under Article 3(8)(b) of this Agreement. 61 (d) Application of WTO provisions The WTO provisions governing modification of commitments, safeguard actions, emergency measures and other trade remedies, including anti-dumping and subsidies and countervailing measures, shall, in the interim, be applicable to the products covered under the Early Harvest Programme and shall be superseded and replaced by the relevant disciplines negotiated and agreed to by the Parties under Article 3(8) of this Agreement once these disciplines are implemented. 4. In addition to the Early Harvest Programme for trade in goods as provided for in the preceding paragraphs of this Article, the Parties will explore the feasibility of an early harvest programme for trade in services in early 2003. 5. With a view to promoting economic co-operation between the Parties, the activities set out in Annex 4 of this Agreement shall be undertaken or implemented on an accelerated basis, as the case may be. Articles 8 provides as follows: 1. For trade in goods, the negotiations on the agreement for tariff reduction or elimination and other matters as set out in Article 3 of this Agreement shall commence in early 2003 and be concluded by 30 June 2004 in order to establish the ASEAN-China FTA covering trade in goods by 2010 for Brunei, China, Indonesia, Malaysia, the Philippines, Singapore and Thailand, and by 2015 for the newer ASEAN Member States. 2. The negotiations on the Rules of Origin for trade in goods under Article 3 of this Agreement shall be completed no later than December 2003. 3. For trade in services and investments, the negot iations on the respective agreements shall commence in 2003 and be concluded as expeditiously as possible for implementation in accordance with the timeframes to be mutually agreed: (a) taking into account the sensitive sectors of the Parties; and (b) with special and differential treatment and flexibility for the newer ASEAN Member States. 4. For other areas of economic co-operation under Part 2 of this Agreement, the Parties shall continue to build upon existing or agreed programmes set out in Article 7 of this Agreement, develop new economic co-operation programmes and conclude agreements on the various areas of economic co-operation. The Parties shall do so expeditiously for early implementation in a manner and at a pace acceptable to all the parties concerned. The agreements shall include timeframes for the implementation of the commitments therein. Article 9 provides as follows: Most-Favoured Nation Treatment China shall accord Most-Favoured Nation (MFN) Treatment consistent with WTO rules and disciplines to all the non-WTO ASEAN Member States upon the date of signature of this Agreement. Article 10 provides as follows: General Exceptions Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between or among the Parties where the same conditions prevail, or a disguised restriction on trade within the ASEAN-China FTA, nothing in this Agreement shall prevent any Party from taking and adopting measures for the protection of its national security or the protection of articles of artistic, historic and archaeological value, or such other measures which it deems necessary for the protection of public morals, or for the protection of human, animal or plant life and health. 62 Article 11 provides as follows: Dispute Settlement Mechanism 1. The Parties shall, within 1 year after the date of entry into force of this Agreement, establish appropriate formal dispute settlement procedures and mechanism for the purposes of this Agreement. 2. Pending the establishment of the formal dispute settlement procedures and mechanism under paragraph 1 above, any disputes concerning the interpretation, implementation or application of this Agreement shall be settled amicably by consultations and/or mediation. Article 12 provides as follows Institutional Arrangements For The Negotiations 1. The ASEAN-China Trade Negotiation Committee (ASEAN-China TNC) that has been established shall continue to carry out the programme of negotiations set out in this Agreement. 2. The Parties may establish other bodies as may be necessary to co-ordinate and implement any economic co-operation activities undertaken pursuant to this Agreement. 3. The ASEAN-China TNC and any aforesaid bodies shall report regularly to the ASEAN Economic Ministers (AEM) and the Minister of the Ministry of Foreign Trade and Economic Co-operation (MOFTEC) of China, through the meetings of the ASEAN Senior Economic Officials (SEOM) and MOFTEC, on the progress and outcome of its negotiations. 4. The ASEAN Secretariat and MOFTEC shall jointly provide the necessary secretariat support to the ASEAN-China TNC whenever and wherever negotiations are held. Article 16 provides as follows: 1. This Agreement shall enter into force on 1 July 2003. 2. The Parties undertake to complete their internal procedures for the entry into force of this Agreement prior to 1 July 2003. 3. Where a Party is unable to complete its internal procedures for the entry into force of this Agreement by 1 July 2003, the rights and obligations of that Party under this Agreement shall commence on the date of the completion of such internal procedures. 4. A Party shall upon the completion of its internal procedures for the entry into force of this Agreement notify all the other parties in writing. The preceding articles give an understanding of the entailments of the Framework Agreement for the Comprehensive China-ASEAN Economic Co-operation as it relates to trade in Goods. Having outlined these articles, I will now take up the RCAI analysis. 63 6. EXPOSITION OF THE REVEALED COMPARATIVE ADVANTAGE INDEX The RCAI, developed by Balassa in1965, serve as a good indicator of a country's comparative advantage in the production of a given commodity relative to the rest of the world. In that respect, it gives an indication, overtime, of a country's evolving degree of competitiveness in the production of a commodity. This degree of competitiveness can either improve or deteriorate depending on the industrial strategies and trade policies pursued. A country with a comparative advantage in Apparels & Textiles, for example, can opt for industrial strategies that would promote such an industry and in the process adopt trade policies that exclusively protects the industry from external competition or subject it to some minimal competition. To that effect, the RCAI gives an indication of a country's industrial strategies and trade policies. It is this encompassing nature of the RCAI that makes it so revealing - an analysis of a country's RCAI overtime can give an insight into the industrial strategies and the trade policies adopted. This is, however, unlikely to be true in all cases, especially regarding natural resource endowment vis -à-vis comparative advantage and competitiveness. Despite this advantage, RCAI on its own can be very limiting for it only tells us about the past and the very present, hence its static nature. It cannot tell us what industries or sectors within an industry an economy will strategically choose to promote for developmental purposes. This is so because not only does a RCAI change overtime but also the sector in which an economy has a revealed advantage may not be strategically important to the overall performance of an economy. This disadvantage and thus the lack of dynamism is reason enough to not exclusively make an argument for or against a FTA based exclusively on RCAI analysis. This point 64 would be picked upon later to clarify the arguments against sole dependence on RCAI for making a case for or against a FTA. 6.1 THE INDEX RCAI ki = ( x ki / xi) / ( x kw / x w ) RCAI ki = Revealed Comparative Advantage of country I in product k X ik = Exports of product k by country I X i = Total exports of country I X kw = Exports of product k by the world X w = Total world exports. A closer look at the index reveals that it is exclusively based on historical data and thus its empirical advantage in addressing 'what is.' Going beyond 'what is' requires selectivity and vision but nonetheless knowing 'what is' makes a good starting point for analyzing and making a case for a regional trade agreement or a free trade agreement as is in the case of the China-ASEAN FTA. The index assumes a positive value and the higher the index the higher the revealed advantage and vice versa. In an attempt to reveal the production advantages of these aspiring economies and to see whether their revealed advantages are complementary or competing against one another I made use of the COMTRADE database. Trade figures, in terms of US nominal $values, were compiled for the period 1996 to 2000 for the top five exports of the aspiring economies of China and ASEAN. The trade data are that of the three-digit SITC level. Trade statistics for some of the economies - notably Laos, Vietnam, and 65 Cambodia - were not complete and hence the RCAI revelations, trend wise, were less telling. This shortcoming, however, does not impact the analysis or take much from it. Unlike other studies that approximate total world exports (the x w component of the index) by summing the exports of the major trade nations, this component in this study is a complete summation of world exports for the periods under study. To that extent the RCAI calculated are true reflections of the comparative advantages of the commodities under study. The approximation of world exports using only the major trading nations can grossly underestimate a country's RCAI in a commodity. 66 Table 12 : RCAI Indices for the Top Five Exports of the CAFTA Economies CHINA FTW A&Tex MS&MnfgA VegP Chem 1996 1997 1998 1999 2000 5.71 4.01 2.38 1.41 0.94 5.84 3.91 2.47 1.21 0.91 5.89 3.68 2.46 1.13 0.89 6.22 3.82 2.71 1.17 0.88 6.12 4.02 2.79 1.17 0.81 1.41 1.02 0.66 0.62 0.43 1.43 1.04 0.73 0.68 0.48 1.46 1.30 0.76 0.71 0.51 1.62 1.17 1.05 0.81 0.52 1.87 1.01 0.85 0.86 0.47 11.87 2.74 1.32 1.05 0.77 11.08 2.48 1.32 1.20 0.72 13.23 1.84 1.39 1.08 0.73 12.52 2.09 1.46 1.00 0.69 10.73 1.85 1.38 1.00 0.69 2.88 2.07 2.00 1.64 0.56 2.45 1.77 1.63 1.54 0.81 2.24 1.37 1.44 1.56 1.00 2.04 1.74 1.43 1.56 1.17 1.88 1.53 1.61 1.59 1.45 6.23 5.35 4.60 3.36 1.85 8.04 3.58 3.52 3.63 1.32 5.52 3.19 3.52 3.37 1.52 8.25 4.59 4.22 3.38 2.14 8.83 4.17 3.95 2.61 2.16 5.67 1.79 2.11 2.14 1.57 5.19 2.04 1.73 1.65 1.42 4.33 2.53 1.35 1.40 1.21 2.22 2.85 1.25 1.23 1.10 3.87 2.62 1.52 1.43 1.22 SINGAPORE M&EE MinP Chem Plstc OMI MALAYSIA F&O W&WA Mach Min A&Tex THAILAND FTW VegP PFS A&Tex Plstc INDONESIA F&O FTW BM&MA MinP A&Tex PHILLIPPINES F&O M&EA VegP A&Tex MS&MnfgA 67 1996 1997 1998 1999 2000 48.01 3.86 0.61 108.93 13.25 1.25 54.27 6.74 3.84 6.62 0.53 214.61 15.34 15.50 5.94 9.28 53.80 4.12 55.41 46.05 32.70 21.28 20.54 57.95 37.42 29.45 24.38 19.49 35.93 20.65 26.19 21.70 16.46 - - 70.69 43.94 15.20 3.66 1.47 49.34 3.20 11.95 15.27 0.13 - - - - 0.21 0.07 0.02 0.01 0.01 0.22 0.06 0.02 0.01 0.01 0.29 0.08 0.02 0.02 0.01 - LAOS Electricity W&WP Anml&AnmlP Prcsd FdStf Gypsum&Tin MYANMAR Pulses Other Marine Prawn Fish Nat. Rubber CAMBODIA Nat. Rubber Garments Prcsd Wood Cigarette Rattan VIETNAM Sea-Prod Rice Rubber FTW Handicraft Products in Table12: A&Tex: Apparel & Textiles PFS: Prepared Foodstuff A&AP: Animal & Animal Producs Plstc: Plastics BM&MA: Base Metal & Metal Articles Prcsd Fdstf: Processed Foodstuff Chem: Chemicals (Organic & Inorganic) Prcsd Wd: Processed Wood F & O: Fats & Oil VegP: Vegetable Products FTW: Footwear W&WA: Wood & Wood Articles Mach: Machinery W&WP: Wood & Wood Product M&EA: Machinery & Electrical Appliances MinP: Mineral products OMI: Optical & Musical Instru MS&MnfgP: Misc. & Manufacturing Products 68 Table 12 above gives an overview of the RCAI index for the top five exports of the CAFTA economies. Brunei is not included in the table because no trade statistics were available from the COMTRADE database for the years under consideration. Within the product categories we see some distinction between the more developed CAFTA economies of China and ASEAN5 as opposed to Laos, Cambodia, Myanmar, and Vietnam. China and ASEAN5 have revealed comparative advantages in agricultural processing/light manufacturing com modities whereas Laos, Cambodia, Myanmar, and Vietnam have revealed comparative advantages in unprocessed/processed agricultural commodities. These revealed comparative advantages are representative of the underlying economic activities of the respective CAFTA economies; perhaps with the exception of Singapore and Vietnam. Singapore's dominant service sector over industry along with its industries' focus on machinery (light & heavy and inclusive of electronics) makes it an exception to the above observation. This exception for Singapore is also extendable to China, Malaysia, Thailand, Philippines, and Indonesia, but perhaps to a lesser degree. Vietnam's low contribution of agriculture relative to the other sectors in its overall GDP makes it an exception to the observation as well. However, Vietnam's top five exports are more agricultural/natural resource processing than they are industrial in terms of manufacturing activity. This fact is further exemplified if we consider that Vietnam's industrial sector tend to be concentrated in food processing, garments, shoes, mining, cement, chemical fertilizers, glass, tires, oil, coal, steel, and paper - industrial activities that draw heavily from agriculture and natural resource endowments. This industrial cha racterization is also true for the economies of Laos, Cambodia, and Myanmar. 69 A closer examination of the economies of Laos, Cambodia, and Myanmar in Table12 would reveal high RCA indices for Electricity, Pulses, and Natural Rubber, respectively. Interpretation of these high indices has to be undertaken with some caution. In the case of the above mentioned commodities Laos, Cambodia, and Myanmar have such high RCA indices in these commodities because world exports of these commodities are relatively low whereas these commodities form a good proportion of the total country exports of their respective countries. The world export share for Laos, Cambodia, and Myanmar in the respective commodities is 0.33%, 0.45%, and 1.11% respectively. This is a further indication of the large proportion of these commodities in the total exports of their countries and not necessarily revealing their relative competitiveness in these commodities vis -à-vis the rest of the world. It is rather inadequate to make an argument for or against a FTA based solely on RCAI analysis. Taking the case of Laos, Cambodia, and Myanmar, as an example, it is evident that these countries have high revealed indices in the commodities of electricity, natural rubber, and pulses, respectively. However, it is equally evident that part of the economic objective to forming a regional grouping is to improve upon the integrating members' economic and social welfare. That been the case it is only logical to question the industrial strategic importance of the commodities (sectors) in which the above mentioned countries have their revealed comparative advantages. The strategic importance and contribution of pulses, electricity, and natural rubber to the overall economic and social welfare of Myanmar, Laos, and Cambodia becomes questionable. This is even more so if we consider the world export share accounted for by these countries in these respective commodities. Given these concerns the issue of whether the relatively less developed economies of ASEAN should realign their 70 economies rather than focusing their resources and energy in the sectors in which they have revealed comparative advantages becomes unavoidable. Welfare comparison between an economy reliant on 'computer chips' for its export earnings and another reliant on 'potato chips' for its export earnings is senseless but so would be the attempt to forge a FTA between the two. Some provisions between the two would have to be made if this FTA should become mutually beneficial. To expound on this point it is necessary to closely examine, by picking a given year's RCAI calculations, what the comparative advantages of the CAFTA economies reveal. 71 Table 13: A&Tex BM&MA Chem Cigarette Electricity F&O Fish FTW Garments Gypsum&Tin M&EA Mach Min MinP MS&MnfgA NatRubber OMI Other Marine PFS Plstc Prawn Prscd Fdstf Prscd Wood Pulses Rattan VegP W&WA RCAI Calculations for 1996 CH 4.01 SG 0.94 0.66 MY 0.77 TH 1.64 IN 1.85 4.6 PH 2.14 LS Myn CM VN 3.66 48.1 11.87 6.23 5.67 21.28 5.71 2.88 5.35 43.94 0.61 1.41 1.79 1.32 1.05 1.02 3.36 2.38 1.57 20.54 70.69 0.43 46.05 2 0.56 0.62 32.7 3.86 15.2 55.41 1.47 1.41 2.07 2.11 2.74 Critics of the proposed China-ASEAN FTA have pointed out that the economic activities engaged in by the respective CAFTA economies are in direct competition to one another and for that reason forming an FTA among these economies would not be in the best interest of the ASEAN countries vis-à-vis China. This competition argument is deductive and mostly based on the exports, export destinations, and trading partners of the CAFTA economies. The point made by the critics is well in line with the expositions made in chapter four. Chapter four outlined that the exports of the CAFTA economies were in direct competition against each other in that they vie for the same major export markets. 72 Another point that can be posited for such competition is the 'model framework' that has been provided by the Newly Industrializing Economies (NIEs) of which Singapore is a part. The success realized by the NIEs have resulted in carbon copying of the NIEs' industrialization strategies and trade policies by the lesser developed ASEAN economie s in hopes of replicating the NIEs success. It is no surprise therefore that economies like Malaysia, Thailand, Indonesia, Philippines, Brunei, and to a lesser extent Laos, Cambodia, Vietnam, and Myanmar are opting for more open and liberal trade regimes with the intention of enhancing the international competitiveness of their export oriented industries and in the process create magnets for FDI. This desire to become like the NIEs has also resulted in the adoption of less liberal policies of protectionism in certain industries within the aspiring economies. But perhaps the question that ought to be asked is whether this competition is detrimental to a FTA. An examination of table 13 will show that the concerns of the critics are well founded. But how much does table 13 reveal? Are the revelations of table 13 comprehensive enough to warrant an argument against the proposed China-ASEAN FTA? The answer to this question is a definite no. If we look at the above table we see that there are only four commodities (out of a possible 27) in which three or more CAFTA economies have a revealed comparative advantage. These commodities are Apparels & Textiles, Fats & Oils, Footwear, and Vegetable Products. Out of these four commodities China has revealed comparative advantage in three, with the highest advantage in two of the commodities - Apparels & Textiles and Footwear. It is no surprise therefore that China is seen as a threat to the ASEAN economies and therefore not a formidable partner in a FTA with ASEAN. 73 Earlier I argued that the revelations of the RCAI indices in table 13 were not comprehensive enough to make an argument against the proposed China-ASEAN FTA. Wong and Chan (2002) argue that the lack of complementarity between China and ASEAN economies will result in competitive pressures that would result in ASEAN losing some of their export market share in the developed economies. They pointed out that this was not only true for the traditional low -tech sectors but some evolving high-tech sectors as well. Whilst their argument is founded, especially if consideration is given to the Apparels & Textiles and Footwear sectors, it is not holistic. In their study they pointed out that harnessing the comparative advantage of the CAFTA economies was essential to exploring the potential for economic cooperation between China and ASEAN but failed to expound further on this comparative advantage issue. This shortcoming is reflective of critics of the proposed FTA. The incomplete or unavailability of trade data at the four, five, or six-digit SITC levels, have often resulted in RCAI calculations at the two or three-digit level with conclusions that would otherwise be untrue had data been more readily available at the higher digit level. For this reason, recommendations/conclusions based on two-digit SITC would have to be interpreted with caution. At the three-digit level one would have to exercise caution in making recommendations but perhaps conclusions would be much sounder at the higher SITC levels. To make this point clearer, Apparels and Textiles trade data as used in this study were at the three-digit SITC level, that is, 841846 & 848 for Apparels and 651-659 for Textiles. However, the RCAI revelations would have been much more different had they been based on 5-digit SITC. RCAI based on fewer digit SITC can only tell us so much making it even more necessary to 74 complement RCAI expositions on regional trade arrangements with other more robust methodologies. The RCAI calculations give some indication of the comparative advantages of the CAFTA economies. From these indications, along with other complementary analyses of trade and respective trade policies, one may draw conclusions similar to those of the critic of the proposed China-ASEAN FTA. This rushing to conclusion can be rather misleading. The direct competition argument posited by critics against CAFTA becomes less convincing if analyzed from a market share perspective. The RCAI equation, mathematically defined earlier, can be decomposed into a market share component that reveals the degree of world competitiveness of the exports of the various CAFTA economies. This is the ratio of the exports of a given commodity by an economy to the world exports of that same commodity. That is wms ki = ( X ik / X kw ) * 100 and wmski is world market share of country i in commodity k. The value of wmski is an indication of the level of competitiveness in a commodity held by a given economy. That this value is inclusive of the production technologies adopted and therefore reflects the levels of efficiency inherent in the production process makes the market share component of the RCAI index a good proxy of the supposed competition inherent within the aspiring CAFTA economies. 75 TABLE 14: Revealed Comparative Advantage Indices for CAFTA 1996 CHINA FTW 18.57 A&Tex 13.03 MS&MnfgA 7.74 VegP 4.59 Chem 3.06 SINGAPORE M&EA 3.81 MinP 2.75 Chem 1.79 Plstc 1.67 OMI 1.15 MALAYSIA F&O 20.02 W&WA 4.62 Mach 2.22 Min 1.77 A&Tex 1.29 THAILAND FTW 3.46 VegP 2.49 PFS 2.40 A&Tex 1.97 Plstc 0.68 INDONESIA F&O 6.68 FTW 5.74 BM&MA 4.94 MinP 3.60 A&Tex 1.99 PHILLIPPINES F&O 2.51 M&EA 0.79 VegP 0.93 A&Tex 0.95 MS&MnfgA 0.69 LAOS Electricity 0.33 W&W Prod Anml&AnmlP Prcsd FdStf 0.03 Gypsum&Tin 0.004 MYANMAR Pulses 1.11 Other Marine 0.92 Prawn 0.65 Fish 0.43 Nat. Rubber 0.41 CAMBODIA Nat. Rubber 0.45 Garments 0.28 Prcsd Wood 0.10 Cigarette 0.02 Rattan 0.009 VIETNAM Sea-Prod Rice Rubber FTW Handicraft - 1997 1998 1999 2000 22.17 14.85 9.38 4.58 3.44 22.66 14.14 9.47 4.35 3.44 23.63 14.52 10.31 4.45 3.36 26.97 17.69 12.27 5.15 3.59 3.72 2.69 1.90 1.77 1.24 3.36 3.00 1.74 1.63 1.18 3.63 2.61 2.34 1.81 1.17 4.56 2.45 2.08 2.10 1.15 18.11 4.05 2.15 1.96 1.18 20.28 2.82 2.12 1.65 1.12 20.64 3.45 2.41 1.65 1.14 18.62 3.21 2.40 1.73 1.19 2.95 2.13 1.97 1.85 0.97 2.51 1.54 1.61 1.75 1.12 2.33 1.99 1.63 1.78 1.34 2.28 1.86 1.95 1.94 1.77 8.92 3.97 3.91 4.03 1.47 5.64 3.26 3.60 3.44 1.56 7.83 4.36 4.00 3.21 2.03 9.69 4.58 4.33 2.87 2.38 2.72 1.07 0.91 0.86 0.75 2.67 1.56 0.83 0.86 0.75 1.52 1.95 0.85 0.84 0.75 2.61 1.76 1.02 0.96 0.82 0.43 0.05 0.005 0.74 0.09 0.05 0.09 0.007 1.34 0.10 0.10 0.04 0.058 0.34 0.026 1.22 0.79 0.62 0.51 0.41 0.93 0.53 0.68 0.56 0.42 0.95 0.43 0.63 0.42 0.38 - 0.64 0.04 0.15 0.20 0.002 0.67 0.14 0.21 0.16 0.003 - - 0.04 0.01 0.004 0.003 0.002 0.04 0.01 0.003 0.003 0.002 0.06 0.02 0.005 0.004 0.003 - 76 Table 14 provides an overview of how globally competitive the CAFTA economies are in the commodities in which they have revealed comparative advantages. To make a case against critics of the China-ASEAN FTA it is only prudent to first prove and then decipher the implications of having similar competitiveness in the same commodities. As pointed out earlier there are only four commodities out of a possible twenty-seven in which three or more CAFTA economies have a RCA. Taking Apparels & Textiles, the commodity in which five of the CAFTA economies have a RCA, we see that there is hardly any competition between China and the ASEAN countries with RCA in this commodity. China accounts for 13% of the total world market share in this export commodity whereas Malaysia, Thailand, Indonesia, and Philippines account for less than 2% each of the world export market share. If this export share analysis is to be placed within an industry framework one can make the argument that within CAFTA China is a monopoly in the export share of Apparels and Textiles. Market share in this commodity within the aspiring China -ASEAN FTA is definitely under the control of China. Such an analysis can be deemed simplistic because the study is at the economy level and not the industry level. However, the logic of the argument still holds regardless of what level one is considering. If we extend the analysis to the other three commodities of Fats & Oils, Footwear, and Vegetable Products, we see that the same argument can be made for the dominant CAFTA economy. Malaysia holds the dominant market share in Fats & Oil, with China dominating again in Footwear and Vegetable Products. This revelation makes it clear that the competition argument against the proposed China-ASEAN FTA is at best a slippery one. China and ASEAN not forming a Free Trade Area would not result in 77 China losing its competitive edge on the commodities in which it dominates; neither will the ASEAN economies necessarily increase their competitive position. How globally competitive an industry is remains a combination of various factors of which industrial strategies, trade policies, strategic trade policies, resource endowments, production technologies, and production efficiency are a part. China's competitiveness in the respective commodities did not come overnight and it would take any of its competitors some time to overcome that advantage. The argument can be made that the issue of competition between ASEAN and Chinese exports concerns the vying for the same foreign markets and for that matter it becomes a non-slippery issue. Making such an argument would require a complete decomposition of the ASEAN export commodities in terms of the percentages (volume or value) that are destined for the export markets that the CAFTA economies are supposedly competing in. It would also require justifying that these export percentages are capable of meeting the import demands of the respective trade partners of the CAFTA economies. Unless such task is undertaken this issue of competition would at best be cautionary. To illustrate let us revisit chapter four where I pointed out that the major trading partners for the CAFTA economies are the USA, Japan, Hong Kong, The Netherlands, South Korea, The United Kingdom, and Taiwan. I exclude China, Malaysia, and Singapore because of the point that is to be made. Accounting for export destinations and using trade figures for 2000, given that the graphical depiction is based on 2000 data, it can be shown that making a case for intra-CAFTA competition in terms of major trading partners import markets is impossible. Imports for Apparels and textiles by the major trading partners (excluding Taiwan) for the year 2000 stood at $121.7 billion and $47.2 billion, respectively. The CAFTA economies with RCA in these 78 commodities were only able to supply (export) 41 and 49% of their major trading partners' import of Appa rels and textiles. Out of this supply, China accounted for 73% of the exports of Apparels and 70% of the exports of Textiles (out of the five CAFTA economies). Sidelining bilateral trade policies and under a framework of a free multilateral trade environment, what these statistics tell us is that ASEAN and China are in no way capable of supplying their major trading partners demand of Apparels & Textiles let alone world demand. If China and ASEAN can only account for under half of their major trading partners demand for the commodities in which CAFTA have a RCA then where is the competition that is been trumpeted by the critics of the proposed China-ASEAN FTA. Looking at the composition of Textiles & Clothing exports by China and ASEAN5, Tongzon (2002, p. 245) makes the point that for the HS two-digit classification (50-63) there are hardly any competition between the export of Textiles & Clothing within the two regions. He points out that Cotton (HS 52) dominates China's export of Textiles whereas man-made -filaments and staple fibers (HS 54 & 55) dominate Textile exports of Malaysia, Singapore, Thailand, and Indonesia; while Philippines Textile exports are dominated by knitted fabrics (HS 60). As pointed out earlier the caveat of the critics is in order but empirical data proves that it is non-existent. This caveat is further paralyzed by the not-so-recent Agreement on Textiles and Clothing (ATC) which provides for the phasing out of the Multi Fibre Arrangement (MFA), an arrangement that has been in existence since 1974. The provisions of the MFA have resulted in a shift in production concentration from some of the NIEs, notably Singapore, to less developed but emerging South East Asian countries like Thailand. Thailand, for example, saw its exports of Textiles and Clothing increased by five-fold between 1980-1989. With the passing of the ATC it is 79 evident that access of developing countries to developed countries' markets will lead to an increase in their export market share in Textiles and Clothing. This increased market share, largely because of more efficient production, will at worst ease the supposedly high level of competition claimed to exist between the CAFTA economies. On a more realistic note, the increased demand for Textiles and Clothing will create export opportunities for the CAFTA economies. Perhaps the question that needs to be asked, against this backdrop of export opportunities, is not competition per se but whether there exists complementarities in the economic activities engaged in by China and ASEAN. This is what I will now address. 6.2 Complementarities in the Production Activities of China & ASEAN Answering the question about the existence of complementarities in the economic activities of China and ASEAN is not as clear cut as that of competition. Simply put the question of the existence of complementarities is very broad and would have to be narrowed if an answer is to be provided. Within the framework of this study, issues of complementarities pertaining to factor inputs, production techniques, production efficiency, and trade in services will not be addressed. What I will address along the confines of complementarities will be industry level activities, be it agricultural or manufacturing, pertaining to the production and trade in goods. 80 Table 15 18 : Sector Contribution to GDP & Employment Economic Activity % Employment by Sector (% Contribution to GDP- 2000) Agriculture Industry Agriculture Industry CHINA 15 50 50 24 SINGAPORE 0 30 0 23.2 MALAYSIA 14 44 18.4 22.8 THAILAND 13 40 47.4 14.5 INDONESIA 21 35 45.3 13 PHILIPPINES 20 32 39.1 9.6 BRUNEI 5 46 - - LAOS 51 22 80 - MYANMAR 42 17 65 10 CAMBODIA 43 20 76.3 4.7 VIETNAM 25 35 6.6 20.4 An examination of the 'economic activity' column of table15 shows that the economies of Laos, Myanmar, Vietnam, and Cambodia are very dependent on agriculture whereas the rest of the economies depend much more on the contribution of industry for their national income. However, if the examination is extended to account for the percentage employment provided by the two sectors the dichotomy under 'economic activity' in table15 becomes less distinct. Agriculture, for example, accounts for 15% of China's GDP yet 50% of the Chinese labour force is engaged in the agricultural sector. This disproportionate sectoral contribution to GDP and sectoral employment is representative of the economies in which agriculture accounts for about 20% or less of GDP with the exception of Malaysia and possibly Brunei. Singapore and Vietnam seem to be special cases in that Singapore does not have a relevant agricultural sector 18 Statistics for 'Economic Activity' are based on the CIA Fact Book for year 2000. Statistics for '% Employment by Sector' are based on the ASEAN Secretariat 2000 and CIA Fact Book 2000. 81 and Vietnam might possibly have a very efficient agricultural labour force. Many conclusions can be drawn from this disproportion but it is not my intention to address such. What I am interested in is making a case for the existence of complementarities within this different economic activity makeup. It is almost tempting to argue that within ASEAN there seem to be a division of labour between agricultural and industr ial activity. It is evident from table15 that the ASEAN6 economies have a heavy reliance on industry, with the exception of Singapore, whereas the other ASEAN economies have a greater reliance on Agriculture, though less so for Vietnam. This distinction must be interpreted with caution and cannot be relied upon to justify the existence of complementarities in the economic activities of the ASEAN countries for at least three reasons. First, the production technologies adopted within the agricultural and industrial sectors are not known; second, the total factor productivity (TFP) of each sector is also unknown; and third, all the ASEAN economies and China have protectionist provisions for their agricultural sectors, measures that can hinder any complementa ry benefits that could have been realized. Owing to the above difficulties it is almost impossible to convincingly argue that there exists complementary benefits in the economic activities engaged in by China and ASEAN. Despite these difficulties, the revelations of the RCAI calculations tell a different story. As pointed out earlier there are only four commodities out of a possible twentyseven in which three or more CAFTA economies have a revealed comparative advantage. This leaves twenty-three commodities in which either one or two of the CAFTA economies have a RCA. That so few of the CAFTA economies have a RCA in these twenty-three commodities means that there are more complementarities (potential and actual) between China and ASEAN than is actually believed. 82 TABLE 16: China’s Revealed Comparative Disadvantage Index (RCDI) 1996 1997 1998 1999 2000 Stylene Primary Polymers (572) Manufactued Fertilizers (562) Man-Made Woven Fabrics (653) Textile/Leather Machinery (724) Special Industrial Mach. (728) Flat Rolled Irons/Steel Prod. (673) Textile Yarn (651) Telecomms Equip (764) Valves/Transistors/Etc (776) Paper/Paper Boards (641) Electrical Circuit Equip (772) Office Equip Parts/Accessories (759) Heavy Petrol /Bitum Oils (334) Petrol/Bitum, Oil, Crude (333) Electrical Equipments (778) 7.32 6.02 4.68 4.82 4.23 3.10 2.72 1.52 0.83 1.17 1.08 0.80 0.79 0.47 0.98 8.03 5.64 4.79 3.37 2.95 2.39 2.81 1.44 1.06 1.47 1.30 1.00 1.24 0.75 1.12 8.02 4.95 4.26 2.43 2.77 2.10 2.69 1.84 1.47 1.53 1.40 1.14 1.09 0.65 1.13 8.08 4.28 4.28 2.91 2.54 2.92 2.27 1.72 1.84 1.56 1.49 0.99 0.93 0.66 1.24 6.25 2.73 3.85 3.23 2.36 2.57 2.23 1.44 1.78 1.20 1.49 1.00 0.66 1.03 1.19 China's World Import Share ( %) 1996 1997 1998 1999 2000 Stylene Primary Polymers (572) Manufactued Fertilizers (562) Man-Made Woven Fabrics (653) Textile/Leather Machinery (724) Special Industrial Mach. (728) Flat Rolled Irons/Steel Prod. (673) Textile Yarn (651) Telecomms Equip (764) Valves/Transistors/Etc (776) Paper/Paper Boards (641) Electrical Circuit Equip (772) Office Equip Parts/Accessories (759) Heavy Petrol /Bitum Oils (334) Petrol/Bitum, Oil, Crude (333) Electrical Equipments (778) 21.89 17.99 13.98 14.40 12.64 9.27 8.14 4.54 2.48 3.50 3.23 2.40 2.36 1.42 0.03 23.73 16.66 14.16 9.97 8.73 7.07 8.30 4.25 3.13 4.35 3.84 2.95 3.67 2.21 0.03 23.53 14.54 12.50 7.13 8.14 6.16 7.88 5.40 4.32 4.49 4.12 3.35 3.19 1.92 0.03 26.10 13.84 13.82 9.41 8.22 9.45 7.35 5.57 5.96 5.04 4.80 3.19 3.02 2.14 0.04 24.87 10.88 15.33 12.85 9.39 10.23 8.87 5.73 7.09 4.79 5.91 4.00 2.62 4.09 0.05 83 Table16 shows the commodities in which China has a revealed comparative disadvantage index (RCDI) along with their degree of dependence on world imports. The RCD index is expressed similarly like the RCA index except that the RCDI is based on import values. Using Table16, the imports of China can be analyzed to see whether the ASEAN economies export those commodities in which China have a relatively high RCDI or high world import share. Table16 above gives some credit to the claim that there are more complementarities (potential or actual), regarding trade, between China and ASEAN. This complementarity is primarily limited to Singapore, Malaysia, Indonesia, Thailand, and Philippines but extends, though to a lesser extent, to Vietnam and Cambodia. An examination of Table14 and Table16 reveals that 67% of China's top15 imported commodities (the three-digit SITC codes in brackets in table 16) are exported by the ASEAN economies of Singapore, Malaysia, Indonesia, Thailand, Philippines, Vietnam, and Cambodia. These commodities, exported by some of the ASEAN economies, include the three-digit SITC codes 562, 653, 724, 728, 651, 776, 772, 334, 333, and 77819. This represents 10 commodities out of China's top 15 imports. Out of China's top 15 imports, with rankings based on the RCDI indices of 1996-2000, only imports ranked second, sixth, eighth, tenth, and twelfth are not exported by any of the ASEAN economies. Out of the 10 commodities exported by the seven ASEAN economies, only two (653 and 651) are exported by Cambodia and six (653, 724, 728, 651, 333, and 778) are exported by Vietnam. This intra China -ASEAN trade (actual) gives an idea about the complementarity (potentia l or actual) that could be exploited between the two. It does not reflect the actual intra China-ASEAN trade. It is only an 19 See Appendix 1 for the three-digit SITC codes used and their commodity names. 84 indication in that the data used to compute the RCAI or RCDI are based on aggregated data and not on country specific export destination or import origination. To that extent, one can only make a case for the potential complementarities that could be exploited but cannot for sure say if this complementarity already exists. Making a case for actual complementarity is possible and I will allude to this later. For now it is worth mentioning that if the actual complementarity is non-existent (or existent but insignificant) between China and ASEAN in the commodities suggested earlier then exploiting the potential complementarities between the two can likely result in trade diversion effects. This trade diversion can have negative welfare implications on the rest of the world if China and ASEAN does form a FTA. Formation of a FTA between China and ASEAN, as highlighted in the preceding analyses, reveal that the more developed ASEAN economies would tend to benefit more than the lesser developed ones. Though the preceding analyses has been solely based on empirical data and limits itself to an examination of the top five commodities, the analyses along with the inferences stemming from it are still valid. This is still true if other limitations pertaining to the use of an RCAI analysis are considered. An example to clarify on this point is necessary. Considering that an RCAI index can only reveal 'what is' and is in no way able to reveal what the future industrial strategy or trade policy plans of an economy might be, it can only be indicative of actual outcomes. As we are well aware, what matters in the formation of a regional trade arrangement or a free trade area is not 'actual' but 'potential' outcomes. If 'actual' outcomes were all that mattered then feasibility analysis or evaluations of free trade areas or regional trade arrangements would solely be based on analysis of empirical data with a complete discount of more dynamic analysis that attempt to capture 85 'potential' effects and consequences on the forming area and the rest of the world. I make this point only to point out that the ASEAN economies of Laos, Brunei, and Myanmar, and to a lesser extent Vietnam and Cambodia, may not be disadvantaged if China and ASEAN form a FTA. This is so because the preceding analyses that points to them been disadvantaged relative to the other ASEAN economies have relied exclusively on RCAI ana lyses that are based on actual data with no indication of what 'potential' outcomes may arise. Having said that, it is only logical to ask just what might make the economies of Laos, Brunei, Myanmar, Vietnam, and Cambodia benefit from a possible FTA between China and ASEAN? This is the question I will now address. 6.3 Necessary Steps to a Mutually Beneficial China-ASEAN FTA Economic theory does not stipulate or mandate that certain economic criteria be met for a FTA to be successful. However, it does c aution against the possibility of trade diversion resulting from the formation of a FTA or a RTA. However, it is very difficult if not impossible to make a case for any existing FTA that has not resulted in some form of trade diversion. This tendency will definitely not be avoided if the China-ASEAN FTA becomes a reality. Within the China -ASEAN FTA the issue will not be about whether trade diversion does occur but how much trade is generated within the region, that is, how much trade creation occurs. As pointed out earlier, for trade creation to occur certain variables in relation to trading members within the proposed FTA must be addressed. Among these are issues of elasticity of supply, income elasticity of demand, efficiency in production and total factor productivity. 86 It has already been mentioned that the CLVM economies of Cambodia, Laos, Vietnam, and Myanmar, based on RCAI analyses, would be disadvantaged following the formation of a China -ASEAN FTA. The reasons for these disadvantages are obvious and have already been specified. The CLVM economies are yet to become members of the WTO even though some of them currently have consultative arrangements with the WTO for accession purposes. Although AFTA have provisional arrangements to accommodate the CLVM economies of ASEAN, these provisions are limited in scope and do not address the issues that will provide for a more mutually beneficial FTA. The provisions are mostly 'breathing space' provided by way of allowing a greater time frame for the less developed ASEAN economies to meet the program of tariff reduction, inclusion of unprocessed agricultural products, or elimination of NTBs. These provisions do not address the issues that will make the less developed ASEAN economies benefit more from AFTA, let alone the proposed China-ASEAN FTA. AFTA, it is worth pointing out, was formed under the 'Enabling Clause' of the WTO and the articles guiding its formation were never subjected to the WTO examination process even though it is stipulated that AFTA's mode of conduct complies with WTO guidelines. Whether AFTA never sought the WTO examination process because some of its members are yet to become members of the WTO is irrelevant here. What is of relevance is the question of how AFTA will handle trade disputes within the trade area should one arise. Are the articles guiding AFTA, including the 1996 Protocol on Dispute Settlement Mechanism, sufficient to settle trade disputes that might arise, especially between WTO ASEAN members and Non-WTO ASEAN members. Singapore, for example, took antidumping measures on Malaysia's exports of Steel 87 Reinforcement Bars in January, 1997 and this was settled through the WTO a year later. How would such a trade dispute have been settled had it been against one of the non-WTO ASEAN members? These issues may seem trivial but they are of paramount importance. For this reason, amongst others, it is important that the first provision of AFTA should be a push in facilitating the accession of its non-WTO members into the WTO where provisional arrangements for multilateral trade promotion and facilitation are more binding. It is pointed out in the ASEAN Secretariat that the CEPT is the primary binding mechanism behind AFTA and that the "ultimate objective of AFTA is to increase ASEAN's competitive edge as a production base geared for world markets 20." How AFTA will achieve such a competitive edge is, at best, blurry. AFTA indicates that through the elimination of intra-regional tariffs and NTBs, its manufacturing sectors will become more efficient and competitive. But is that all it takes to gain efficiency? It is almost banal to point out that achieving efficiency and being competitive takes more than just eliminating or harmonizing tariffs. The New International Trade literature posits that comparative advantage specialization is no longer a valid proposition to economy-wide welfare enhancements. Therefore having the less developed CLMV economies specialize in agriculture and/or agricultural related industries, given their RCAI revelations, is poor economic advice. Even if it weren't, the gyrations in the terms of trade of primary commodities would make it poor advice. While realizing the importance of agriculture and realizing that there is a need for these economies to de velop their agricultural sectors, there is also the need to help the CLVM economies of ASEAN to develop their industrial base and hence their 20 See http://www.moc.go.th/thai/dbe/afta-net.htm for details. Quotation on first page. 88 competitiveness. This need is in line with the second provision that must be met if the proposed China-ASEAN FTA is to be mutually beneficial- that is, an increase in FDI from the more developed ASEAN economies to the less developed ASEAN members. The agreement that launched the Initiative for ASEAN Integration (IAI) in 2000 had as its objective the desire to bridge the development gap between ASEAN6 and the CLMV economies. The exclusion of Brunei from the CLMV classification is peculiar in that it raises concerns about whether the primary motive of the IAI is to raise the per capita GDP levels of the CLMV economies. Brunei has the second highest per capita income within ASEAN but this is primarily because of its oil and gas endowments. Brunei's industrial base is almost exclusively dependent on petroleum and natural gas. This dependency necessitates undertaking provisional measures to safeguard the economy in the eventuality its natural resource becomes depleted. In this regard Brunei is, though to a lesser extent, in the same predicament as the CLMV economies. The IAI program, a six-year work plan, has as its priority areas infrastructure development; human resource development; information and communication technology development; and promotion of regional economic integration. All these priorities, according to the work plan, should be met by June 2008, when the plan ceases. Unless this time frame is extended three caveats are in place. First, the work plan is very short to achieve the stated objectives. Second, it does not give guidelines as to where the investment to achieve these objectives will come from. Third, among a total of 47 protocols -cum -agreements in ASEAN none talks about foreign direct investment from ASEAN5 into the CLMV economies and Brunei. An exception to this fact is the "ASEAN Agreement for the Promotion and Protection of Investment" which is encompassing of the ASEAN Investment Area and addresses guidelines for 89 FDI from abroad into ASEAN. That ASEAN is able to fulfill the IAI program within 6 years is suspect. But perhaps fulfilling the more daunting tasks of preparing the CLMV economies to be globally competitive and bridging the development gap through a reliance on FDI from outside ASEAN is even more suspect, especially against a backdrop of emerging China where TFP is higher, labour is cheaper, and goods demand is more effective. 90 Table 17 Source: Statistics of FDI in ASEAN: Comprehensive Data Set, 2002 Edition Table 17, adopted from the ASEAN FDI database, shows global FDI inflows into ASEAN. The table goes to prove the point that the CLMV economies, including Brunei, cannot be solely dependent on FDI from the ROW and that ASEAN5 must augment the FDI the CLMV + Brunei economies receive from other sources. Between 1995 and 2001, the average percentage global inflow of FDI into the CLMV + Brunei economies were 1%, 0.31%, 1.3%, 8.1%, and 2.68% respectively. With the exception of Vietnam (8.1%) these global FDI inflows are rather too low to generate the muchneeded competitiveness of the CLMV + Brunei economies let alone bridging the existent development gap. 91 Table 18 a) Estimated by accumulating flows since 1970 b) Negative accumulation of flows. However, this value is included in the regional and global total c) Stock data prior to 1990 are estimated by subtracting flows d) Estimated by adding flows to the stock of 1999 e) Estimated by adding flows to the stock of 1994 f) Stock data prior to 1999 are estimated by accumulating flows since 1971 g) Estimated by adding flows to the stock of 1999 h) Estimated by accumulating flows since 1992 Table18 shows the stock level of FDI from 1980 to 2001 in ASEAN and paints the same picture as Table17. The stock of FDI during the stated period also shows that the CLMV economies, especially Laos and Cambodia, attract very little FDI from abroad. Given these low levels of FDI it is apparent that ASEAN5 have a vital role to play if the objectives of the IAI are to be met. 92 Table 19 : INTRA-ASEAN FDI FLOW (BOP Basis): 1995-2001 (US $Million) BN Host Country CM IN LS MY MYN PH SG TH VN Source Country - Brunei (BN) - (26.84) - * ** 177.76 292.39 - - 93.00 0.21 - Cambodia (CM) - - - 0.04 1.70 2.92 - - (1.00) 4.44 0.6 Indonesia (IN) 47.82 - - - 124.13 243.81 23.79 38.57 849.50 37.23 58.08 Laos (LS) - - - - 0.06 0.16 - - (0.50) 4.75 5.72 Malaysia (MY) 182.12 - 78.20 93.74 - - 57.04 77.74 1149.7 151.88 400.0 7 - - - 0.01 (0.98) (0.06) - - 19.50 0.68 - Philippines (PH) 2.61 - (1.7) - 56.40 90.83 3.80 - 104.50 24.64 46.08 Singapore (SG) 1083.9 - (49.15) 5.52 2047.74 6072.04 716.90 886.19 - 3678.52 1567. Myanmar (MYN) 05 Thailand (TH) 5.57 - 135.45 146.73 13.37 50.45 183.55 23.48 594.30 - 317.3 9 Vietnam (VN) - - - 3.90 1.89 5.33 - - 8.50 0.73 - Total ASEAN 1322.0 - 135.87 249.92 2422.07 6757.87 985.08 1025.9 2817.8 3903.08 2394. 99 Country Total 244.12 5.79 1179.1 10.03 2190.48 18.21 236.32 9936.7 1419.8 15.12 BN CM IN LS MY MYN PH SG TH VN Figures in ( ) are disinvestments; * Consists of Equity & Loans. ** Includes reinvestment earnings for all of MY; BN figures include reinvestment earnings; SG figures for 1995-96 &2001 include equity & reinvestment earnings and exclude inter-company loans. Figures for 1997-2000 include equity, reinvestment earnings and intercompany loans. 93 Table19 shows the INTRA-ASEAN level of FDI flows on a balance of payment (BOP) basis. These figures do not represent FDI in the true sense of the word because the figures include Portfolio Investments (equity & reinvestment earnings) and Other Investments (intercompany loans). For this reason, the actual level of FDI would tend to be overstated. The level of investment flows from ASEAN5 to the CLMV + Brunei economies over the six-year period relative to the total INTRA-ASEAN investment flow are significantly low. During the period under consideration the CLMV economies combined received less than 1% 21 of all INTRA-ASEAN investment flows with Brunei accounting for 1.6%. Though a direct comparison cannot be made between the global FDI and the INTRA-ASEAN investment flows (for obvious reasons), one cannot help but highlight the little that is being done by ASEAN5, in terms of investment flows, to help the CLMV economies become more competitive or bridge the development gap. This limitation in investment flows is even more serious if we consider the sectors that these investments are directed at within the CLMV economies. Most INTRA-ASEAN Investment Flow to the manufacturing sectors of the CLMV economies, on project cost basis, tend to be concentrated in the sectors of Apparels and Textiles, Wood & Wood Products, Fabricated Metal Products (excluding Machinery & Equipment), Non-metallic Mineral Products, and Paper & Paper Products. These sectors represent manufacturing activities in which the CLMV economies already have some or emerging revealed comparative advantage 22. The sectors receiving the least investments include Medical, Precision & Optical Instruments; Transport Equipment; 21 This is calculated by taking the Country Total divided by the cumulative total of ASEAN during the 1995-2001 period. The ASEAN cumulative total is US $15,256.71 Million. Calculation for Brunei, for example, is [244.12/15256.71]*100 = 1.6%. 94 Office, Accounting & Computing Machinery & Equipment; and Radio, Television & Communication Equipment & Apparatus, amongst others. That these sectors, some of which are representative of the IAI priority areas, receive the least investment flows from ASEAN5 creates an element of doubt as to whether the IAI objective will be met by June 2008. From the preceding analyses, it is obvious why the second provision that must be met by AFTA prior to engaging in another FTA with China is to increase its FDI in the CLMV economies in order to improve their competitiveness vis-à-vis the Chinese economy. Unless this is done the proposed China-ASEAN FTA will leave the CLMV economies with Brunei in a rather disadvantaged state. The second provision calls for a more proactive role for ASEAN5 in the CLMV economies but it is equally important for the CLMV economies along with Brunei to take the development aspirations of IAI seriously. Depending on external sources of investments, global or ASEAN origin, has its merits and demerits. For this reason, the CLMV economies need to partly cater to their own investment needs and a good start would be for their respective governments to promote institutional transparency thus lending credibility to their institutions, especially within the financial sector. Undertaking measures that increase TFP of labor, another magnet for FDI, would be prudent policy rather than providing tax holidays that limit government coffers and in the process chokes the effective and smooth operation of public institutions and bureaucracies. Being the pacesetters, ASEAN5 must make it a mandate and see to it that the governments of the CLMV economies + Brunei promote and develop their industrial base and reduce their dependence on agriculture. The development and diversification of the agricultural sector must also accompany the reduction in the 22 For details on this sectoral investment flow see the Statistics of FDI in ASEAN: Comprehensive Data Set: 2000 Edition. Specifically see Section 5, Tables 5.2.1, 5.2.2, and 5.2.2.1 to 5.2.2.9. 95 dependence on agriculture, by way of employment, to the point where it becomes a major player in meeting the region's food needs. This would have the added advantage of increasing the complementarities among the CAFTA economies and reducing the competition between them. The limited number of provisions outlined in this section is in no way exhaustive but gives some indication of what can be done to ensure that the proposed China-ASEAN FTA is a mutually beneficial regional trade arrangement. That the proposed FTA is between China and ASEAN means that ASEAN5 has a big role to play if ASEAN's less developed members are to benefit from CAFTA. The preceding analyses of RCA, issues of competition and complementarities, and CLMV provisional requirements shows that the proposed FTA between China and ASEAN has a lot of potential providing the necessary measures are undertaken to ensure that all parties to the FTA benefit. The preceding analyses are based on empirical data and in that rega rd are limited in their dynamic capabilities. For a more dynamic approach to the economic feasibility of the proposed China-ASEAN FTA I will employ the Gravity model to trade. This is the concern of the next chapter. 96 7. CHINA-ASEAN TRADE POTENTIAL: A GRAVITY APPROACH In the preceding chapters I attempted to give an overview of the economies of China and ASEAN with respect to their trade composition and direction, trade policy orientation, and evaluation of the existence of complementarities in their production and trade activities. One of the analyses that was undertaken to make a case for (against) the existence of complementarities in the China-ASEAN Free Trade Area (CAFTA) is the RCAI analysis. However, I pointed out that the static nature of this analysis makes it a necessary but not sufficient tool in evaluating the costs and benefits of a FTA, especially against a backdrop of the dynamic nature of FTAs. It is this very reason that mandates the use of a more dynamic Gravity Model to help in evaluating the potential, if any, that might exist in the proposed China-ASEAN Free Trade Area. This is the objective of this chapter. The objective of this chapter is twofold. First, it attempts to answer the question of whether the Gravity Model to trade is suited for the proposed Regional Trade Area (RTA). Second, it seeks to find out if policy implications exist for both the proposed RTA governments and the Multilateral Trade System. The underlying objectives of this chapter are important for several reasons. First it helps to find out if the proposed FTA will affect the Multilateral Trade System by way of trade creation and trade diversion and the resulting effects on the economic welfare of both the RTA members and non-members alike. Second, it addresses the issue of whether there would be a creation of regional economic opportunities and how these will affect the welfare of the economic units of the member countries. Third, it helps 97 to give an insight into whether the proposed FTA will have any effect on the economic geography of production, trade, and development within the member countries. Not much work has been done on the proposed China-ASEAN FTA. Work done on CAFTA is largely restricted to trade ministries of the respective governments or studies undertaken by the ASEAN Secretariat to evaluate the potential of the proposed FTA. To this end and given the possible political connotation of such studies, it is imperative to carry out an independent study to address the three objectives mentioned above. It is, however, necessary to point out that the methodology employed to effecting such a study has been widely used in other FTA assessments in varying forms to provide answers to varying objectives of interest. In that regard, the methodology is only novel in the sense that it is been used here to evaluate a FTA that is yet to come into existence. 7.1 Conceptual Framework The Gravity model of bilateral trade is employed to help in answering the two questions alluded to earlier in this chapter. Highly acclaimed for its simplicity, empirical robustness, and until recently theoretical foundations, the Gravity Model is first estimated to determine its suitability to the proposed FTA. Assessing the coefficient betas on the explanatory variables along with their statistical significance will provide the answers to the two questions. In answering the questions I will draw both from economic theory and empirical evidence. 98 As pointed out in an earlier chapter, the Gravity Model is not free of criticisms. Until 1994 (e.g., Leamer) it was widely criticized for lacking a theoretical foundation. Work done by Krugman (1991) and Baldwin (1994), for example, has, however, dispelled of this view. Despite its simplicity, robustness, and theoretical foundations, criticisms, though challengeable, continue to plaque the model. Among these are issues of model misspecification (Polak, 1996), spatial dependence (Hamilton & Winters, 1992; Anselin, 1998), and heteroskedasticity concerns (Anselin, 1998). That these criticisms plaque the model is reason for concern of its usage in helping to answer the objective questions. As dead-ended as it may seem, there are methodologies available to dealing with these seemingly irresolvable problems. First, the issue of misspecification of the functional form is trivial. This is so because variables of economic size, trade distance, and GDP have been widely recognized as explanatory variables for trade flows. Also the model's log-linear specification, though highly restrictive as pointed out by Fik and Mulligan (1998), is only a problem under non-asymptotic conditions, especially in the least developing countries' context where trade data are hardly available. This data availability problem is reminiscent of the CLMV economies but the large number of groups and the resulting country-pairs makes the number of observations large enough to not worry about the problem of micronumerosity. The asymptotic nature of the sample along with the underlying provisions of the Central Limit Theorem makes the issue of spatial dependence and heteroskedasticity less of a concern. The Central Limit Theorem holds that as the number of observations approximates some asymptotic number the distribution of a given 99 variable assumes a normal distribution, a criteria that holds true for the nuisance term ( u i ) as well (Gujarati, 1995). Despite this provision, a more robust test for the presence of heteroskedasticity in the error terms is mandated and I plan to undertake such a test within the model. The inclusion of a remoteness indicator, following in the footsteps of Brulhart & Kelly (1999), also helps to avoid potential misspecification bias resulting from spatial effects. In the case of my estima ted model, the remoteness indicator is specified in nautical miles given that trade is carried mostly across maritime waters rather than over land given the limited road infrastructure within ASEAN and between ASEAN and China. Though Brulhart and Kelly weighted their remoteness indicator by the trading partner's GDP, I do not follow in this practice given that in their specification larger economies will tend to have higher trade costs (proxy for economic distance) than smaller economies. This may not necessarily be the case given demand elasticity and bargaining power of the wealthier CAFTA economies. Instead I explicitly account for the actual transport distance between the major port cities (or capital city) of the two trading partners without any weig hts applied to the remoteness indicator. The application of weights would seem to put too much emphasis on the importance of distance in bilateral trade flows. This importance in distance implicitly contradicts the positive effects of globalization. Effects argued to have reduced the economic distance between countries. The fall in shipping costs, expressed as CIF/FOB ratios also highlights the dwindling importance of trade distance. Blumenhagen (1981) estimated that about 11% of total import costs of developing countries consisted of freight costs. In 1996 UNCTAD estimated developing countries freight costs as a percentage of imports at 8.25%. This clearly is an indication that the importance of trade distance 100 might be on the decline. We will have the opportunity to access if this is the case following analysis of the estimation results. 7.2 Model Specification I specify a Gravity model that builds on the conventional Tinbergen (1962) and Linneman (1966) bilateral model to trade. Unlike most models, I do not seek to prove whether trade flows are indeed affected by geographical distance, economic size or incomes. These intricacies have already been settled. What I do seek to find out relates to the two objective questions alluded to earlier and how addressing these objectives will help address issues of policy implications within China and ASEAN. The model I specify takes the functional form: log TF ij= β o + β 1 log( gdpi) + β 2 log( gdp j ) + β 3 log( pcGDPi) + β 4 log( pcGDP j) + β 5 log( pcGDPdiff ij) + β 6 log(int er _ cafta _ dist ) + β 7 borderCafta ij + β 8 EU _ bilat _ Cafta ij + β 9 NAFTA _ bilat _ Cafta ij + ε ij TF ij (trade flows) represents both import and export values between country i and j and are expressed in '000s of current US$. Unlike some models, I estimate the model for both imports and exports given that the ASEAN economies, following in the footsteps of the NIEs, monitor both their exports and imports. The GDP variable is self-explanatory and is stated in '000s of current 23 US$. This is also true for the per 23 Linneman (1996) showed that the use of nominal GDP as opposed to Real GDP only had a small effect on the estimated betas. 101 capita GDP figures (pcGDP). β 1 & β 2 are expected to have a positive sign because of the direct relationship between trade and economic size. β 3 & β 4 are expected to have a positive sign for the same reason as beta 1&2 above. Unlike beta 1&2, however, beta 3&4 may not be statistically significant and the ir significance might depend on what trade flow is been estimated. The per capita GDP difference ( pcGDPdiff ij ) between countries i and j, expressed in absolute terms, is intended to test for the Linder Hypothesis. That is, that countries with similar levels of income per capita will exhibit similar tastes, produce similar but differentiated products and trade more within themselves. A negative sign on β 5 will support the hypothesis. There is also an implicit policy implication from this hypothesis for the economies of China and ASEAN. This policy implication will assist in answering the second objective question. The Inter _ Cafta _ dist ij variable captures the trade distance in nautical miles between the CAFTA economy pairs. Like Endoh (1999) I use actual transport distance rather than the usual practice of employing relative or absolute trade distance between trading countries. The expected sign on β 6 is negative given the inverse relationship between trade and distance. All the six explanatory variables (also the dependent variable) are expressed in log form and hence their coefficient interpretation is one of constant elasticity. The remaining explanatory variables border _ Cafta ij , Eu _ bilat _ Caftaij , and NAFTA _ bilat _ CAFTAij are dummies depicting the existence of a land border within the CAFTA trade pairs, the existence of a trade relationship between the EU and the CAFTA economies, and that of NAFTA and the CAFTA economies, 102 respectively. The dummy variables take on a value of 1 if 'yes' and a value of zero otherwise. The dummy variables EU / NAFTA _ bilat _ Cafta ij captures potential trade diversion24 (trade between an institutional member -EU & NAFTA- and non-institutional members-CAFTA economies) effects that could result following the formation of the proposed China-ASEAN FTA. That the dependent variables, export and imports, are in log form means that the coefficients on the dummies have semielasticity interpretation. For trade diversion to occur the expected sign on β 8 and β 9 must be negative and statistically important. Unlike Endoh (op. Cit.) I do not explicitly estimate for trade creation effects. Rather there is an underlying implicit assumption that trade creation will result; this is not an unrealistic assumption given the positive track record of empirical evidence on trade creation vis-à-vis FTAs. A positive sign is also expected on β 7 given the advantage of proximity for increased trade. The estimation method is that of Ordinary Least Squares (OLS). Preliminary data analyses methods are employed to ensure that OLS is appropriate for estimating the model. The results of such data analyses, by way of descriptive statistics, are provided in tabular form in the data section of the paper. The results of the analyses meet the Classical Linear Regression Model assumptions making OLS a good estimation candidate. An underlying assumption was held with respect to the levels of the dependent variables that are partly reported between two trading countries. This assumption is 24 The definition of Trade Diversion as used here does not reflect that held by Viner (1950) but it 103 premised on the IMF methodology of using a cif/fob ratio of 1.10 to proxy a country's trade partner's export or import value in a given period. Assume that Singapore trades with Laos and Singapore reports its trade flows to and from Laos. Assume Laos does not report either of its trade flows to Singapore. Using Singapore's reported import value from Laos and dividing it by the ratio 1.10 will give us Laos's export value to Singapore. This methodology was used in calculating some of the trade flow data for the CLMV economies and that of the trade flow between Singapore and Indonesia for 1996-2000, with Indonesia not reporting its trade flows to and from Singapore. This methodology implicitly assumes that trade costs comprises of only insurance and freight and sums up to 10% of import value. reflects that posited by Endoh (1999) for exports and Balassa (1967) for imports. 104 7.3 Data Used in Estimating the Model The specified functional form outlines nine explanatory variables and two dependent variables. Data on GDP for the CAFTA economies, except Brunei, were obtained from the World Economic Outlook database (May 2001). Data on GDP and per capita GDP for Brunei was obtained from the ASEAN Surveillance Coordinating Unit (ASCU) at www.aseansec.org/macroeconomic/gdpPercapita.html. Per capita GDP for the rest were obtained from the World Bank Development Database through the WDI data query at http://dvdata.worldbank.org/data-query. GDP and population queries used for calculating per capita GDP were only available for 1997-2000. Since the model estimates trade flows for 1996-2000, the 1996 per capita GDP figures from the World Economic Outlook database query were used. All GDP figures are in thousands of US$ and both GDP & per capita GDP figures are stated in nominal terms. Data on trading distance between the CAFTA economies are between major cities. The cities are Beijing (China), Singapore (Singapore), Kuala Lumpur (Malaysia), Bangkok (Thailand), Jakarta (Indonesia), Manila (Philippines), Bandar Seri Begawan (Brunei), Phnom Penh (Cambodia), Vientiane (Laos), Rangoon (Myanmar), and Hanoi (Vietnam). The inter trade distance data is stated in nautical miles and was obtained from the Great Circle Distance Between Cities database at www.wcrl.ars.usda.gov/cec/java/lat-long.htm . Data relating to contiguity was obtained from the Dyadic Direct Contiguity v3-0 zip file from the site http://cow2.polisci.psu.edu/cow2%20data/directcontiguity/dcv3desc.htm . The border matrix used is only in relation to land contiguity and not territorial waters. The 105 EU and NAFTA bilateral trade relationship with CAFTA was compiled from the International Trade Statistics Yearbook and the Direction of Trade Statistics Yearbook. This compilation is based on major trading partners only, that is, that reported by the respective United Nations bodies. Data on the dependent variables, exports and imports, stated in nominal US$ were compiled from the Direction of Trade Statistics Yearbooks 2000 and 2001. Trade data are reported in millions of nominal US$ but these were converted into thousands of nominal US$ for conformity. Some country pair trade data were completely lacking making the trade flows to be recorded as unava ilable in the IMF trade statistics yearbook. Such data, as pointed out by the Fund, could be indicative of a lack of statistical data reported, a zero value reported, or a less than half a significant digit. These three possibilities make it very difficult to justify exclusive use of one method of estimating my model. If missing trade values are interpreted as denoting zero trade between a given country pair then a better estimation technique would be Tobit rather than an OLS estimation. This is so give n that the use of OLS can bias the coefficients. If the missing values indicate the other two possibilities then OLS (under common sample estimation) would be best. For these reasons I use the OLS as the primary estimation and the Tobit estimation technique for sensitivity test. The underlying assumption under the Tobit estimation is that the trade data for the missing values are indeed zero. The estimation method used, as pointed out by Brulhart and Kelly (1999), should not affect the point estimates significantly. Baldwin (1994) cites this point as to why OLS has become the norm for estimating Gravity equations. In Brulhart and Kelly (op. Cit.) the number of missing observations represented less than 3% of their observations (15 out of 552) making estimation technique less of an issue. 106 In my case, depending on year and trade flow type, missing values account for between 15-20% (inclusive) of the observations. This high percentage necessitated the additional Tobit estimation method. 107 Table20: Explanatory Variables Descriptive Statistics 1996 Log LOG LOG LOG LOG LOG XPORTij MPORTij GDPi GDPj PCGDPi PCGDPj LOG LOGINTER_ Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis 12.037 12.6 73 16.930 6.908 2.436 -0.447 2.479 12.058 12.278 16.797 6.908 2.368 -0.403 2.445 17.366 18.233 20.522 14.382 1.944 -0.118 1.695 17.366 18.233 20.522 14.382 1.944 -0.118 1.695 7.212 7.050 10.274 4.736 1.676 0.466 2.130 7.212 7.050 10.274 4.736 1.676 0.466 2.130 7.782 7.905 10.270 2.398 2.019 -0.677 2.918 6.770 6.910 7.790 5.130 0.603 -0.668 2.914 Jarque-Bera Probability 3.972 0.1372 3.477 0.1758 8.058 0.0178 8.058 0.0178 7.462 0.0240 7.462 0.0240 8.424 0.0148 8.215 0.0164 Observations 89 87 110 110 110 110 110 110 Log LOGINTER_ PCGDPDIFF CAFTA_DIS ij Tij 1997 Log Log Log Log Log Log XPORTij MPORTij GDPi GDPj PCGDPi PCGDPj Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis 11.982 12.444 16.901 5.298 2.613 -0.624 2.710 11.913 12.137 16.811 4.605 2.553 -0.564 2.803 17.304 18.226 20.616 13.825 2.034 -0.207 1.872 17.304 18.226 20.616 13.825 2.034 -0.207 1.872 7.154 6.982 10.124 4.605 1.656 0.415 2.163 7.154 6.982 10.124 4.605 1.656 0.415 2.163 7.717 7.728 10.120 0.000 2.013 -1.045 5.038 6.770 6.910 7.790 5.130 0.603 -0.668 2.914 Jarque-Bera Probability 6.292 0.0430 4.919 0.0855 6.612 0.0367 6.612 0.0367 6.376 0.0412 6.376 0.0412 39.070 0.0000 8.215 0.0164 Observations 92 90 110 110 110 110 110 110 Log XPORTij Log MPORTij Log GDPi Log GDPj Log PCGDPi Log PCGDPj 11.912 12.588 16.632 5.298 2.537 -0.552 2.526 11.995 12.367 16.569 6.908 2.393 -0.433 2.290 17.131 17.997 20.668 14.007 1.932 -0.042 2.070 17.131 17.997 20.668 14.007 1.932 -0.042 2.070 6.921 6.636 9.957 4.644 1.599 0.586 2.263 6.921 6.636 9.957 4.644 1.599 0.586 2.263 7.471 7.391 9.952 1.609 1.897 -0.466 2.862 6.770 6.910 7.790 5.130 0.603 -0.668 2.914 Jarque-Bera Probability 5.358 0.069 4.545 0.103 3.993 0.136 3.993 0.136 8.786 0.012 8.786 0.012 4.067 0.131 8.215 0.016 Observations 89 87 110 110 110 110 110 110 PCGDPDIFF CAFTA_DIS ij Tij 1998 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Log LogINTER_ PCGDPDIFF CAFTA_DIS ij Tij 108 1999 Log Log Log Log Log Log XPORTij MPORTij GDPi GDPj PCGDPi PCGDPj 12.100 12.627 16.760 5.298 2.454 -0.555 2.697 12.123 12.421 16.666 6.908 2.395 -0.466 2.431 17.327 18.155 20.713 14.895 1.823 0.063 1.969 17.327 18.155 20.713 14.895 1.823 0.063 1.969 7.021 6.673 9.962 4.727 1.585 0.518 2.197 7.021 6.673 9.962 4.727 1.585 0.518 2.197 7.578 7.483 9.957 3.219 1.775 -0.241 2.089 6.770 6.910 7.790 5.130 0.603 -0.668 2.914 Jarque-Bera Probability 4.959 0.084 4.418 0.110 4.947 0.084 4.947 0.084 7.886 0.019 7.886 0.019 4.865 0.088 8.215 0.016 Observations 90 89 110 110 110 110 110 110 Log XPORTij Log MPORTij Log GDPi Log GDPj Log PCGDPi Log PCGDPj 12.095 12.578 17.036 6.908 2.600 -0.400 2.226 12.016 12.445 16.944 6.908 2.657 -0.396 2.211 17.410 18.135 20.800 14.984 1.800 0.099 2.008 17.410 18.135 20.800 14.984 1.800 0.099 2.008 7.081 6.751 10.042 4.956 1.547 0.607 2.266 7.081 6.751 10.042 4.956 1.547 0.607 2.266 7.612 7.517 10.035 4.078 1.780 -0.157 1.836 6.770 6.910 7.790 5.130 0.603 -0.668 2.914 Jarque-Bera Probability 4.747 0.093 4.838 0.089 4.688 0.096 4.688 0.096 9.221 0.010 9.221 0.010 6.664 0.036 8.215 0.016 Observations 92 93 110 110 110 110 110 110 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Log LOGINTER_ PCGDPDIFF CAFTA_DIS ij Tij 2000 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Log LOGINTER_ PCGDPDIFF CAFTA_DIS ij Tij Descriptive Statistics for the Dummy Variables 1 Count 0 Count Observations Borde CAFTAij 27 83 EU_Bilat_ CAFTAij 31 79 110 110 NAFTA_Bilat _CAFTAij 66 44 110 109 The above descriptive statistics gives us an indication of the data sample used in estimating the Gravity model for the China ASEAN Free Trade Area. Looking at the number of observations for the respective years, it is evident that there are missing values for the dependent variables to be estimated. 1996 data statistics, for example, reveals that only 89 observations are available for the variable 87 observations for log Mports ij . log Xports ij and only Using OLS estimation would therefore have to be done with a common sample. The fact that some observations for the dependent variables are missing requires for estimation, on sensitivity grounds, using Tobit. This would, however, only be done for 1996 and 2000 given that 1996 is the year with the least observations for both dependent variables and 2000 is the year with the most observations for both dependent variables. I decide on 1996 and not 1998 given the Asian Financial crisis in 1997, which could very well have affected trade flows for 1998. The important descriptive statistics for the dummy varia bles are the binary counts and observations. The correlation matrix reveals variable independence but a moderately strong positive relationship between the trade flow variables and GDP. 7.4 Estimation Results Concerns of heteroskedasticity in the Gravit y model, especially that of the unknown form, remains a problem. To address this concern, I first estimate the model with OLS and use the Breusch-Pagan test (BP test) to test the null hypothesis of homoskedastic constant error terms. The table below gives the F-statistics and ρ -values for the respective trade flows. 110 Table21 1996 1997 1998 1999 2000 Xport Mport Xport Mport Xport Mport Xport Mport Xport Mport F-Stat 1.94 1.96 2.94 2.64 2.29 1.19 3.39 1.68 2.47 1.86 ρ -value .0576 .0548 .004 .009 .0241 .0312 .0014 .1056 .0149 .0695 I reject the null hypothesis of homoskedastic error terms at the 10% significance level. This is solely for convenience given that some of the ρ values are significant even at the 1% significance level. I estimate the model for the five different periods using White's heteroskedastic robust estimation with the underlying assumption of the presence of heteroskedasticity of the unknown form. As Wooldridge (2000) argues heteroskedastic robust procedure results in valid t, F, and LM statistics even within the presence of heteroskedasticity. This is true at least in asymptotic samples. The regression equation was estimated using cross-sectional data for the 10 ASEAN economies and China. There are therefore 10 country-pairs and 110 observations. I estimate the model for five different periods (1996-2000) to evaluate the evolution of the importance of the independent variables overtime. As noted for its empirical success, the estimated Gravity model manifests a good fit with an adjusted R-square of over 0.60 for both trade flows and at all periods. Standard error of the regression equals to approximately 0.60 of the standard deviation and about one-eighth the mean of the dependent variable for both trade flows and at all periods. This good fit answers our first objective question of whether the Gravity model suits the proposed free trade area of CAFTA. 111 Table22: OLS Regression Coefficients for EXP ORTS 1996 1997 1998 1999 2000 -12.577* -15.097* -21.942* -21.918* -21.892* (3.867) (3.662) (3.938) (4.593) (3.477) -3.252 -4.122 -5.571 -4.771 -6.294 0.930* 0.985* 1.202* 1.106* 1.157* (0.135) (0.107) (0.126) (0.150) (0.118) 6.849 9.147 9.500 7.360 9.757 0.667* 0.699* 0.919* 0.915* 0.949* (0.098) (0.102) (0.105) (0.119) (0.102) 6.805 6.798 8.696 7.760 9.242 0.326** 0.205 0.209 0.330* 0.482* (0.149) (0.151) (0.169) (0.136) (0.159) 2.180 1.363 1.231 2.431 3.030 0.191 0.057 0.005 0.052 0.088 (0.134) (0.142) (0.165) (0.150) (0.133) 1.427 0.400 0.034 0.347 0.663 -0.065 0.147 0.303 0.262 0.098 (0.128) (0.141) (0.182) (0.202) (0.150) -0.510 1.041 1.660 1.293 0.654 -1.076* -0.932* -1.011* -0.982* -1.198* (0.352) (0.293) (0.312) (0.246) (0.294) -0.052) -3.180 -3.235 -3.986 -4.071 0.321 0.551 0.367 0.572 0.423 (0.480) (0.432) (0.396) (0.315) (0.379) 0.668 1.275 0.927 1.812 1.115 0.237 0.014 -0.773** -0.709 -0.593 (0.408) (0.341) (0.365) (0.368) (0.397) 0.581 0.042 -2.119 -1.927 -1.490 NaftabilatCafta ij 0.169 0.599 -0.110 0.331 0.093 (0.508) (0.495) (0.442) (0.438) (0.415) Constant GDPi GDP j pcGDPi pcGDP j pcGDPdiff ij InterCaftaDistij BorderCafta ij EUbilatCafta ij 0.332 1.208 -0.250 0.755 0.223 Observations 89 92 89 90 92 Adj. R-Squared 0.628 0.663 0.707 0.649 0.738 SE of Regression 1.517 1.515 1.371 1.452 1.330 Notes: Coefficients in BOLD; Standard Errors in ITALIC; and t-Statistics in NORMAL typo. * The Coefficients are significant at the 1% level. ** The Coefficients ate significant at the 5% level. Heteroskedasticity-consistent t-values (White Adjusted). 112 Table23 : OLS Regression Coefficients for IMPORTS Constant GDPi GDP j pcGDPi pcGDP j pcGDPdiff ij InterCaftaDistij BorderCafta ij EUbilatCafta ij 1996 1997 1998 1999 2000 -12.869* -16.332* -18.079* -21.268* -22.449* (3.717) (3.663) (3.322) (3.771) (3.730) -3.461 -4.457 -5.441 -5.639 -6.018 0.652* 0.832* 0.899* 0.960* 0.996* (0.106) (0.120) (0.096) (0.115) (0.118) 6.150 6.900 9.271 8.347 8.377 0.882* 0.921* 0.941* 1.003* 1.108* (0.107) (0.117) (0.117) (0.134) (0.121) 8.243 7.869 8.035 7.459 9.132 0.246 0.250 0.154 0.189 0.207 (0.139) (0.141) (0.155) (0.151) (0.155) 1.765 1.767 0.995 1.249 1.335 0.364* 0.271 0.376** 0.382* 0.445* (0.148) (0.148) (0.164) (0.155) (0.169) 2.461 1.834 2.292 2.46 2.169 -0.046 -0.020 0.023 0.083 0.069 (0.133) (0.129) (0.160) (0.180) (0.173) -0.349 -0.158 0.144 0.463 0.399 -0.970* -0.962* -0.876* -0.862* -1.155* (0.351) (0.319) (0.320) (0.275) (0.337) -2.762 -3.015 -2.731 -3.132 -3.428 0.112 0.479 0.312 0.496 0.311 (0.548) (0.453) (0.411) (0.385) (0.426) 0.204 1.056 0.760 1.288 0.730 0.368 -0.094 -0.364 -0.051 -0.144 (0.364) (0.395) (0.334) (0.321) (0.377) 1.011 -0.238 -1.087 -1.159 -0.382 0.055 -0.112 -0.435 -0.244 (0.452) (0.456) (0.417) (0.459) (0.439) NaftabilatCafta ij -0.052 -0.117 0.121 -0.268 -0.948 -0.555 Observations 87 90 87 89 93 Adj. R-Squared 0.648 0.640 0.678 0.643 0.696 SE of Regression 1.404 1.531 1.356 1.429 1.463 Notes: Coefficients in BOLD; Standard Errors in ITALIC; and t-Statistics in NORMAL typo. The Coefficients are significant at the 1% level. ** The Coefficients ate significant at the 5% level. Heteroskedasticity-consistent t-values (White Adjusted). 113 Table24: TOBIT Regression Coefficients for EXPORTS & IMPORTS 1996 2000 1996 Exports Constant GDPi GDP j pcGDPi pcGDP j pcGDPdiff ij InterCaftaDistij BorderCaftaij EUbilatCafta ij Imports -42.435* -45.636* -43.444* -48.500* (8.245) (8.053) (8.524) (7.928) -5.146 -5.666 -5.096 -6.117 1.890* 1.878* 0.964* 1.478* (0.296) (0.272) (0.249) (0.240) 6.387 6.904 3.862 6.144 1.287* 1.526* 2.037* 2.005* (0.204) (0.236) (0.248) (0.237) 6.312 6.447 8.205 8.455 0.128 0.447 0.836* 0.422 (0.384) (0.391) (0.302) (0.322) 0.333 1.145 2.766 1.308 0.358 0.159 0.389** 0.410 (0.372) (0.316) (0.413) (0.437) 0.963 0.504 0.941 0.938 0.415 -0.010 -0.261 -0.102 (0.485) (0.420) (0.350) (0.428) 0.856 -0.023 -0.745 -0.239 -1.683* -1.367** -1.173 -1.182 (0.668) (0.614) (0.683) (0.605) -2.517 -2.226 -1.716 -1.954 2.768* 1.018 1.845* 0.887 (0.863) (0.755) (0.844) (0.737) 3.206 1.348 2.184 1.203 0.038 -1.164 0.274 -0.535 (0.778) (0.641) (0.900) (0.754) 0.049 -1.815 0.304 -0.710 2.135** 1.596 0.932 (1.052) (1.065) (1.160) (0.908) 0.756 2.004 1.375 1.025 NaftabilatCaftaij 0.796 Censored Obs. 2000 21 18 23 17 Uncensored Obs. 89 92 87 93 Adj. R-Squared 0.586 0.640 0.599 0.634 SE of Regression 3.371 3.047 3.390 3.023 Notes: Coefficients in BOLD; Standard Errors in ITALIC; and Z-Statistics in NORMAL typo. The Coefficients are significant at the 1% level. ** The Coefficients ate significant at the 5% level. Heteroskedasticity-consistent Z-values (Huber/White Adjusted). 114 The above tables give the results for the regression coefficients for Exports and Imports along with the t-values, SE, Adj. R-Square, and the observations. As Tables 21 and 22 indicate six out of seven coefficients have the expected signs for all the five different periods. periods is The only coefficient that does not have the expected sign for all pcGDPdiff ij . The expected negative sign was only observed for 1996 in both OLS regressions. Thus the test for the Linder Hypothesis held true only for 1996. The coefficients on the dummies EU _ bilat _ Cafta ij and Nafta _ bilat _ cafta ij could be either positive or negative. As the coefficients reveal there is a clear trend of trade diversion in both Exports and Imports to and from the European Union. Since I did not explicitly model for trade creation one can only speculate on the trade creation direction. There is no clear trend regarding Export flows to NAFTA but Imports from NAFTA tend to depict a diversion for the years 1998-2000. This finding is not surprising considering that all of the CAFTA economies are major trading partners of the USA whereas only the Netherlands and the United Kingdom play a significant role in the trade of the EU with CAFTA. The graph below helps to make this point clear. Over the 1996-2000 period, net percentage changes in exports from ASEAN to the USA, Japan, the EU, and China were 28.7, 34.91, 34.08, and 263.58%, respectively. Over the same period, net percentage changes in imports into ASEAN from the USA, Japan, the EU, and China were 11, -6.19, -5.61, and 168.26%, respectively. Therefore on net trade flow terms, though positive, the EU experienced a drop on trade flows with ASEAN. China might have enjoyed part of this diversion in trade flows. This observation is supported by the greater Import diversion for the EU _ bilat _ Cafta ij coefficient (1997-2000) than for Export diversion (1998-2000). 115 Fig. 7: Percentage Changes in ASEAN Exports to: 200 Per Cent Changes 150 100 50 0 93 94 95 96 97 98 99 00 01 -50 Years USA Fig. 8: Japan EU China Percentage Changes in ASEAN Imports From: 80 60 Per Cent Changes 40 20 0 93 94 95 96 97 98 99 00 01 -20 -40 -60 Years USA Japan EU China 116 However, a caveat is necessary given that none of the coefficients on EU _ bilat _ Caftaij were statistically signific ant for Imports during 1997-2000 and only one was significant (1998) for Exports during 1998-2000. That none of the coefficients on Nafta _ bilat _ Cafta ij were significant for either trade flows and positive for almost all the years on Exports reflects the non-threatening nature of the proposed FTA to the USA. However, a potential import diversion may not be unrealistic. The coefficients on GDP are statistically significant at the 1% level for both Exports and Imports for all five period. Their elasticities continue to increase reflecting the increasing importance of income to trade. Per capita GDP, however, does not show any clear pattern in its importance to trade flows. pcGDPi Export flows and not for Import flows. the other hand tends to be pcGDP j on tends to be significant for significant for Import flows and not for Export flows. This finding is in line with economic theory in that exports of a country are affected by local per capita or aggregate income levels whereas imports levels are affected by partner countries per capita or aggregate income levels. The coefficients on int er _ cafta _ dist ij are statistically significant for all the five period but unlike aggregate income, trade distance does not show a clear trend in its importance in trade. It is on the decline for import flows from 1996-1999 but increased again in 2000. This unclear trend in importance on Export flows coupled with the near perfect declining trend in importance on Import flows support the fact that countries tend to monitor their imports more. This can be because of the higher costs associated with imports given that imports include insurance and freight costs that are bore by the importing country. Another possible explanation is of foreign 117 exchange constraints that could result from negative net exports. The point that weighting of trade distance by country GDP (as undertaken by Brulhart and Kelly) would seem to give greater importance to trade distance than necessary is supported. As pointed out, globalization and its benefits- increased communication, cultural breakdowns, etc - tend to reduce the economic distance between countries making trade flows, especially Exports, less affected by trade distance. The coefficient on Bordeer _ Caftaij , depicting contiguity, shows that sharing a common border helps to facilitate trade. The coefficients are, however, not significant. Given the physical geography of the proposed FTA one would anticipate increased trade among ASEAN and China. An explanatory variable that is often ignored in the interpretation of the results of a Gravity model is the intercept parameter (constant). The estimated equation, like most Gravity models, shows a significantly negative intercept with an increasing e lasticity, under both trade flows, over time. Given that trade flows reflect the degree of openness of an economy, the increasing elasticity of the intercept parameter over time means that international trade continues to play a vital role in the welfare of economies. Countries that remain in autarky or those that are semi-open will tend to enjoy lower welfare than those that are open. This analysis stems from the national income accounting framework. The negative coefficient on the intercept thus supports Adam Smith's position on trade. One of the two underlying objectives of this paper was to help answer the question of whether there are policy implications for both the proposed FTA and the Multilateral 118 Trade System. As seen in the regression results, the coefficients on per capita GDP differences ( pcGDPdiff ij ) had the expected sign only for 1996 and was positive for the remaining periods. In this light, one should reject the Linder Hypothesis. Rejection of the Linder Hypothesis is, however, not a reflection of a model mis-specification. Two studies I am familiar with, Hoftyzer (1984) and Kennedy & McHugh (1983) have rejected the Linder Hypothesis. In my study, the rejection of the Linder Hypothesis ascertain the fact that China and ASEAN do not have similar demand patterns and therefore their manufacturing sectors are less likely to produce goods destined for each others' markets. This fact is reflected in the World Bank's classification of China, Cambodia, Laos, Myanmar, and Vietnam as Low Income economies; Indonesia, Thailand, and Philippines as Low Middle Income economies; Malaysia as a Middle Income economy; and Singapore and Brunei as High Income economies. Other studies proving of Linder's Hypothesis tend to model the OECD economies and not an amalgam of economies like the ones modeled here. Despite this observation, an inherent policy implication for CAFTA is that narrowing the income gap among its aspiring members is essential if full advantage is to be made of integration. Another policy implication regards the Inter _ Cafta _ dist ij variable. In the model estimation I specify distance in nautical miles rather than land distance given the poor transport infrastructure within ASEAN and between ASEAN and China. Given the significance level of this variable, it is evident that trade among CAFTA will increase following a comprehensive development of the land transport infrastructure, especially among the CLMV economies. 119 Another policy implication regards the Multilateral Trade System and this is addressed by way of the trade diversion dummy variables EU _ bilat_ Cafta ij and Nafta _ bilat _ Cafta ij . Though these are not statistically significant, it is the potential trade diversion and its global welfare effect that is of importance. Measures must be undertaken by both CAFTA and the affected trading partners to reduce the negative welfare effects. That the proposed China-ASEAN FTA never underwent WTO consultation is reason for concern. This concern perhaps justifies the recent signing of the USA -Singapore FTA and the other FTA proposals (Japan, India, and CER) in the pipeline with ASEAN. The negative welfare effects stemming from trade diversion should not be the only concern for CAFTA. A more urgent and real problem is that of the welfare of the less prosperous ASEAN economies of Cambodia, Laos, Myanmar, and Vietnam (the CLMV economies). As the regression results indicate, the Linder Hypothesis did not hold valid in the case of the estimated CAFTA Gravity model. This shortcoming necessitates revisiting one of the outlined reasons as to why the twofold objectives of this chapter are deemed important. That is, giving us an insight into whether the proposed FTA will have any effect on the economic geography of production, trade, and development within China and ASEAN. If the Linder Hypothesis is to hold China and ASEAN will have to ensure convergence on their per capita incomes. For this to eventually happen, the equalization of factor prices will have to take place. Overtime therefore, one is likely to find a relocation of economic activity from the more prosperous CAFTA economies to the less prosperous ones where factor prices will be lower. This, however, requires the presence of strong institutions, an educated labour force, transparent bureaucracies, synonymous trade and competition policies, and the mobility of factor inputs between the CAFTA economies. That the proposed FTA 120 maintains improving the welfare of its economic units as one of its objectives, means that we are likely to see a shift in the economic geography of production, trade, and greater development within the less prosperous member countries. 7.5 Sensitivity Analysis Table23 gives the results of the Tobit regression. As pointed out the Tobit estimation was undertaken in an attempt to find out if using OLS, with missing dependent observations, will differ markedly from a Tobit estimation that accounts for all dependent variable observations, including missing values. This sensitivity analysis is undertaken for only two periods rather than the entire five periods. Comparing the OLS and Tobit estimation output reveals that in this case, OLS is a better estimator of the specified Gravity model than Tobit. This is supported by the lower Akaike and Schwarz Criterion (AIC & SC) in the OLS estimation. The contiguity variable under the Tobit estimation is significant for 1996 whereas it is not under the OLS estimation. Also the trade distance variable is only significant for Export flows and not for Import flows. Though a secondary issue, the Adj. R-square is higher for the OLS estimation than for the Tobit estimation. Higher standard error of regression is also noted for the Tobit estimation despite the larger number of observations. Albeit these differences the variables under both estimation techniques have the expected signs. Under the Tobit estimation, however, the intercept parameter has a higher elasticity. This is not surprising given the number of zero observations , that is, the left censored observations. My findings under the sensitivity analysis thereby collaborates Brulhart and Kelly (1999) and Baldwin's (1994) position that using Tobit estimation rather 121 than OLS in estimating the Gravity model does not significantly affect the point estimates. Under the rules of thumb of model choice OLS is therefore a better estimation, at least in this specification, given the lower AIC and SC. 7.6 Graphical Depiction of the Evolution of the Explanatory Variable s The following page contains a graphical depiction of the evolution of some of the explanatory variables and the intercept parameter overtime. These depictions give an overview of the relative importance, overtime, of the explanatory variables in explaining trade flows within the proposed FTA. While some of the explanatory variables depict a consistent trend, others reveal no trend and exhibit changes in relative importance overtime. 122 Evolution of GDP of Country i Evolution of Intercept Parameter Evolution of pcGDP of Country j 0 1.2 0.45 1 -5 0.4 0.35 0.8 -10 0.3 Elasticity Elasticity 0.6 0.25 Elasticity -15 0.2 0.4 0.15 -20 0.1 0.2 0.05 -25 Exports 0 1996 1997 Exports 1996 Imports 1998 0 Exports 1997 1998 1999 1996 Imports 1997 1999 2000 Imports 1998 2000 Imports 1999 2000 Exports Imports Exports Imports Exports Evolution of pcGDP of Country i Evolution of GDP of Country j Evolution of Distance Importance 1.2 0.5 0 0.45 1 0.4 -0.2 0.35 0.8 -0.4 0.3 Elasticity 0.6 Elasticity 0.25 Semi-Elasticity -0.6 0.2 0.4 0.15 -0.8 0.1 0.2 -1 0.05 0 Exports 0 Exports 1996 -1.2 Exports 1996 1997 Imports 1998 1997 1996 Imports 1998 1999 2000 1997 Imports 1998 1999 1999 2000 2000 Imports Exports Imports Exports Imports Exports Evolution of Importance of Border 0.6 0.5 0.4 Semi-Elasticity 0.3 0.2 vvhfiwwwf 0.1 0 Exports 1996 1997 Imports 1998 1999 2000 Imports Exports 123 8. CONCLUSION In this thesis, I have attempted to analyze the economic feasibility of the proposed China-ASEAN Free Trade Area by first evaluating the Framework of Agreement and objectives underlying both CAFTA and AFTA. That the objectives of both regional trade arrangements were almost synonymous meant that the aspired integration is a likely possibility. However, I find that though likely there were measures needed to be undertaken to make CAFTA mutually beneficial to all its aspiring members, especially so for the CLMV economies. This provisional requirement is recognized and addressed by both AFTA and CAFTA, though AFTA has so far been more proactive in this mandate. Other areas of concern pointed out include the liberalization of tax regimes and the tarrification of non-tariff barriers among some of the countries of ASEAN vis-à-vis China. China's trade policy regime, albeit recent improvements preceding its WTO accession, was pointed out as a possible deterrent to a full realization of the benefits that integration might offer. Another concern that has been floated as a possible negative against the proposed China-ASEAN FTA is the lack of complementarity between the production activities of China and ASEAN. A shortcoming argued to put the CAFTA economies in direct competition to one another. I was able to show that this was largely a misconception and critics reaching such a conclusion center their analysis around traded commodities at the one or two digit SITC. Under a still limiting three-digit SITC classification, I was able to show that only some of the CAFTA economies had similar RCAI. These Revealed Comparative Advantage Indices would tend to differ more and more as one moves from three to four to five to eight digit SITC classification. An examination of 124 the Revealed Comparative Disadvantage Indices of China also showed that the ASEAN countries could tap on China's import market. Whilst ASEAN economies like Singapore, Malaysia, and Thailand could easily do so, others like the CLMV econom ies will have to realign their industrial strategies to take advantage of China's Revealed Comparative Disadvantage Indices. Broadly taken, the inter member RCAI indices reveal some similarities but vast differences exist to allow for complementarities in their production activities. The issue of complementarity focuses only on the integrating members and is exclusively based on static analysis making it impossible to address the more dynamic issues of economic welfare for both the region and the rest of the world. Like most FTAs, the proposed China-ASEAN FTA will have its effect on the global trading system. This was proved true by the specified Gravity Model which showed that effects of trade diversion was a reality on both the EU and the U.S., but more so for the EU. The underlying assumption of trade creation, given that it was not explicitly modeled for, meant that members of the FTA had a potential to improve their welfare. This welfare improvement is not automatic and required conscious effort on the part of the less developed ASEAN economies. The Gravity model was also able to show that geography continues to play a vital role in the formation of FTAs and that trade distance does matter in commerce. The results of the model were convincing enough to label the proposed FTA a 'natural' trading bloc. The model also showed a potential for increased trade flows, both for Imports and Exports, within the Regional Trade Agreement. This is as much as I am willing to commit myself unlike studies that project trade values of up to US $1.23 trillion. 125 Appendix 1 3 Digit SITC Codes Used in Calculation of RCAI & RCDI Animal & Animal Products (291) Antiques & Works of Art (896) Apparel (841-846; 848) & Textiles(651-659) Base Metal & Metal Articles (281-289) Cashew Nuts (057) Cigarette, Tobacco, Cigar (122) Coffee(061-062; 071-075; 081, 091, 098) Coffee:(071) Crude Oil (333) Electricity (351) Fats & Oils (411,421,422,431) Fish (037) Fishing Products Footwear (851) Garment & Textiles(841-846; 848 & 651-659) Gems (277) Gypsum & Tin (273 & 288) Handicrafts(896) Inorganic Chemicals (511-516) & Organic Chem(522-525; 531, 533) Jewellery & Precious Metal Products (897, 298) Leather (611-613) & Hydes (211 -212) Live Animals except Fish (001) Machinery(711-714; 716,718,721-728; 731,733,735,737,741-749) & Electrical App. (771-778) Maize (044) Mineral Products (321,322,325,333,334,335,342,343,344) Misc. (811-813; 821,831) 126 Natural Rubber(231) Optical (871-872) & Musical Instru. (898) Other Marine/Seafood (411) Personal Effects (551, 553, 554) Plastics (571-575; 579, 581 -582) Prawn (036) Prepared Foodstuffs(061-062; 071-075; 081, 091, 098) Processed Wood (244-248; 251) Pulses (054) Rattan (292) Rice (042) Rubber (231) Sea-Products (411) Sesame Seed (222) Skin & Furs(611-613; 211-212) Timber (244-248) Vegetable Products (054, 056-059) Vehicles (781-786; 791) Wood & Wood Articles (244-248; 251) 127 References 1. Adams, P. D. (1998). Long-Run Effects of APEC Trade Liberalisation: An Applied General Equilibrium Analysis. Blackwell Publishers Ltd., Oxford. 2. Anderson, J. E. (1979). "A theoretical foundation for the gravity Equation." American Economic Review, Vol. 69, p.106-116. 3. Anselin, L. (1998), "Lagrange multiplier tests for spatial dependence and spatial heterogeneity." Geographical Analysis, vol. 20, pp. 1-17 4. Armington, P. S. (1969). 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Venezuela Overseas Countries and Territories Greenland New Caledonia French Polynesia French Southern and Antarctic Territories Wallis and Futuna Islands Mayotte Saint Pierre and Miquelon Aruba Netherlands Antilles Anguilla Cayman Islands Falkland Islands South Georgia and South Sandwich Islands Montserrat Pitcairn Saint Helena Ascension Island Tristan da Cunha Turks and Caicos Islands British Antarctic... and abbreviations Name Association of South East Asian Nations Bangkok Agreement Andean Community Caribbean Community and Common Market Participating Countries Brunei Darussalam Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam Bangladesh China India Republic of Korea Laos Sri Lanka Bolivia Colombia Ecuador Peru Venezuela Antigua & Barbuda Bahamas Barbados Belize Dominica... Malaysia Myanmar Philippines Singapore Thailand Vietnam BAFTA CEFTA Baltic Free- Trade Area Central European Free Trade Agreement Estonia Latvia Lithuania Bulgaria Czech Republic Hungary Poland Romania Slovak Republic Slovenia CEMAC Economic and Monetary Community of Central Africa Cameroon Central African Republic Chad Congo Equatorial Guinea Gabon CIS Commonwealth of Independent States Azerbaijan Armenia... Azerbaijan Armenia Belarus Georgia Moldova Kazakhstan Russian Federation Ukraine Uzbekistan Tajikistan Kyrgyz Republic Common Market for Eastern and Angola Burundi Comoros Democratic Republic of Conga Djibouti Egypt Southern Africa Eritrea Ethiopia Kenya Madagascar Malawi Mauritius Namibia Rwanda Seychelles Sudan Swaziland Uganda Zambia Zimbabwe East African Cooperation Kenya Tanzania Uganda Eurasian Economic... Republic of Iran Iraq Libya Malaysia Mexico Morocco Mozambique Nicaragua Nigeria Pakistan Peru Philippines Qatar Republic of Korea Romania Singapore Sri Lanka Sudan Thailand Trinidad and Tobago Tunisia United Republic of Tanzania Uruguay Venezuela Vietnam Yugoslavia Zaire Zimbabwe Latin American Integration Association Argentina Bolivia Brazil Chile Colombia Cuba Ecuador Mexico Paraguay Peru Uruguay Venezuela... Grenada Guyana Haiti Jamaica Monserrat Trinidad & Tobago St Kitts & Nevis St Lucia St Vincent & the Grenadines Surinam Costa Rica El Salvador Guatemala Honduras Nicaragua CACM Central American Common Market CER Closer Trade Relations Trade Agreement Australia New Zealand EC European Communities Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain... Belarus Kazakhstan Kyrgyz Republic Russian Federation Tajikistan Economic Cooperation Organization Afghanistan Azerbaijan Iran Kazakhstan Kyrgyz Republic Pakistan Tajikistan Turkey Turkmenistan Uzbekistan COMESA EAC EAEC ECO GCC Gulf Cooperation Council MERCOSUR Southern Common Market Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates Argentina Brazil Paraguay Uruguay MSG NAFTA SAPTA Melanesian... to the static nature of the Vinerian model, are now been used to analyze the effects of RTAs Recent integration studies on trade have tended to employ models that are known for their dynamism and empirical robustness Among these are the Gravity model and the now dominant CGE models like the Global Trade Analysis Project or GTAP model and the Michigan Model of World Production and trade Whilst both model- types... within the LAIA, Andean Community, and MERCUSOR, dispelling of the 'theoretical foundations' criticism Other criticisms of the model are technical in nature and allude to issues of misspecification of the equation by way of the explanatory variables, the concerns of spatial dependence (caused by spatial aggregation and externalities) and heteroskedasticity (Anselin, 1998) Despite the valid concerns of these... way of fragmentation in production (Y ang, 1998) 2.2 FEATURES of the GTAP Model The GTAP, established in a comity effort in 1992, was motivated primarily by the increasing level of global integration made possible by the 'Rounds' of trade negotiations of the GATT/WTO10 The comity ef fort to the creation of the GTAP database has made quantitative analyses and assessments of RTAs and countryspecific trade