## 1. Preferential Trade Agreements in Force in the Asia and Pacific

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---

### Key messages
- Membership in the Asian RTAs considered in this study does not seem to have generally occurred at the expense of trade with nonmembers during 1984–2005, as most Asian countries’ integration with the global economy preceded regional integration.
- The above result appears more the effect of Asian countries’ strong inclination to pursue non-discriminatory liberalization, than the result of regionalism itself. Members of Asian RTAs recorded more trade with the rest of the world than other countries with similar characteristics in other regions; this effect was strongest for countries with the lowest MFN rates.
- A proliferation of RTAs, not accompanied by continuing unilateral and multilateral liberalization, could lead to suboptimal trade patterns. Mekong 3 countries—which have relatively higher MFN rates compared to the rest of the region—are advised to continue broad-based trade liberalization both regionally and on an MFN basis.
- Greater coherence among agreements (tariff preferences, rules of origin, phase-in modalities) would facilitate implementation, reduce administrative costs, and help minimize distortions in trade patterns.

### Context and scope
- At least 26 such agreements involving Asian economies have entered into force since 2001.
- Currently about 70 additional ones are under negotiation or discussion.
- By mid-2006:
  - 211 preferential trade agreements were currently in force and notified to the WTO, with 27 of these notified over the past year.
  - Another 65 were estimated to be operational but the WTO had not yet been notified.
- The empirical study focuses on the following preferential trade agreements in Asia: ASEAN, SAPTA/SAFTA, APEC, and the Australia-New Zealand Closer Economic Relation (CER).

### Rationale and possible motives for RTAs
- Economic and non-economic motivations:
  - RTAs can be a cornerstone of larger economic and political efforts to increase regional cooperation beyond the multilateral agenda.
  - RTAs can stimulate inward foreign direct investment and growth through technological transfers.
  - Proliferation may be motivated by a perception that being left out of regional agreements puts countries at a disadvantage.
  - Perception that WTO accession is time-consuming can motivate RTAs.
- Risks and concerns:
  - As discriminatory measures, RTAs can be harmful when pursued as substitutes for multilateral liberalization.
  - RTAs can become closed blocs, protecting vested interests and discouraging multilateralism.
  - Political economy effects: RTAs can create incentives to lobby against MFN-based reforms that would reduce the value of tariff preferences.
  - Hub-and-spoke structures can concentrate gains in the hub and marginalize spokes.
  - “Noodle bowl effect”: overlapping, inconsistent RTAs with differing rules (notably rules of origin) can increase administrative costs, complicate outsourcing decisions, and add fragility to the trading system.
  - Absence of regional dispute-settlement mechanisms can create risk of spillovers and disruptions.

### Best-practice design principles for RTAs
- Low external barriers and a continued commitment to MFN liberalization.
- Open access to membership.
- Consistency among different agreements.
- Comprehensive coverage of goods with few exclusions.
- Symmetrical and simple rules of origin with transparent and consistent regulations.
- Behind-the-borders reforms to promote synergies and strengthen the supply response.
- Establishment of dispute settlement provisions to resolve conflict in a timely fashion.

### Selected regional arrangements and implementation details
- ASEAN and AFTA:
  - ASEAN established in 1967; AFTA creation announced January 1992.
  - AFTA six original members: Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
  - Vietnam joined in 1995; Lao P.D.R. and Myanmar in 1997; Cambodia in 1999.
  - CEPT scheme required tariff rates on a wide range of products traded within the region be progressively reduced to no more than 5 percent by 2003 for the six original members.
  - Vietnam committed to reduce CEPT to no more than 5 percent by 2006, Lao P.D.R. and Myanmar by 2008, and Cambodia by 2010.
  - All import duties are to be eliminated by 2010 for the former six countries and by 2015 for the latter four.
  - ASEAN members may exclude products from CEPT in three cases: temporary exclusions, sensitive agricultural products, and general exceptions.
  - Implementation of AFTA rates appears to have been limited so far, reflecting administrative compliance costs, long lists of sensitive products and exceptions, and low utilization of preferences.
- SAARC / SAFTA:
  - SAARC established in 1985; members include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
  - In 1993 SAARC countries signed an agreement to gradually lower tariffs; in 2002 they signed SAFTA.
  - SAFTA went into force in January 2006 and created a framework for a free trade zone covering 1.4 billion people.
- APEC:
  - APEC seeks to promote regional integration in tandem with unilateral and multilateral liberalization.
  - 1994 APEC Bogor Declaration aimed at forming a free trade area in the region by 2010 for developed countries and by 2020 for developing countries.
  - APEC trade liberalization is based on concerted unilateral liberalization in accordance with the MFN principle rather than on preferential trade.
  - Current APEC tariffs are below the world average and declining.
- CER (Australia–New Zealand Closer Economic Relation):
  - Coverage more comprehensive than AFTA and has been revised several times to include services, trade facilitation, investment, and labor mobility.

### Empirical approach: gravity model specification and purpose
- A gravity model of trade is used to assess the impact of RTAs on bilateral trade flows.
- Core determinants: economic mass (GDP and GDP per capita) and distance, with additional controls (common border, common language).
- Deviations and methodological features:
  - Follows Soloaga and Winters (2001) with country-fixed effects (Subramanian and Wei, 2003; Dee and Gali, 2003).
  - Controls for possible MFN liberalization via WTO membership dummies.
- RTA dummies (three-dummy approach):
  - RTA2: both countries i and j are members of the same RTA.
  - RTAimp: the importer i is a member of the RTA (exporter j may or may not be).
  - RTAexp: the exporter j is a member of the RTA (importer i may or may not be).
- WTO dummies constructed identically to RTA dummies.
- Importer- and exporter-fixed effects capture country-specific omitted effects and proxy for “multilateral resistance.” Year-specific dummies and a normally distributed error term are included.
- Motivation for three-dummy approach: disentangles intra-bloc trade effects (sum of trade creation and trade diversion) from trade flows with nonmembers; identifies export diversion and import diversion separately; uses imports as dependent variable to avoid constraining exports to mirror import diversion.

### Sample and data
- Preferential trade agreements considered with Asia: ASEAN, APEC, SAPTA, CER.
- RTAs outside region considered: EAEC, EU-15, Mercosur, NAFTA.
- Data coverage statements in the paper:
  - Data set covers 182 countries for a total of 169,113 observations.
  - Table 5 pooled estimations report: Observations: 169,070.
- Bilateral trade data extracted from the UN COMTRADE database.
- Two estimation strategies:
  - Panel regression with year-specific effects and importer- and exporter-fixed effects covering 1984–2005 (Tables 5 and 6).
  - Ten separate annual cross-section regressions (one per year) including exporter- and importer-fixed effects (Table 7).

### Main econometric findings (1984–2005)
- Standard gravity variables—economic size, per capita income, bilateral distance, common language, common border—are statistically significant at the 99 percent confidence level and have expected signs.
- Distance is the most important factor determining trade flows.
- Membership in major RTAs in Asia (ASEAN, APEC, SAPTA) does not generally appear to have led to trade diversion over 1984–2005, though overlapping agreements complicate attribution.
- ASEAN and SAPTA members traded more than predicted by the basic gravity equation with both members and nonmembers (RTAexp and RTAimp dummies positive and statistically significant for regional groups).
- Selected quantitative results and interpretations:
  - Bilateral intra-ASEAN trade estimated to be around 330 percent greater than trade between countries that do not belong to any RTA: [exp(-0.473+1.256+0.683)-1=3.3]*100=330.
  - Trade between two ASEAN-6 countries estimated to be 5.2 times greater than between any random country pair that does not belong to any RTA: [exp(-0.188+1.276+0.749)-1=5.2].
  - Detailed ASEAN pattern: trade between two ASEAN members estimated to be 38 percent less than trade of ASEAN members with nonmembers; two ASEAN countries trade among themselves 3.3 times more than expected given fundamentals, but an ASEAN country trades with a non-ASEAN member even more [exp(1.256+0.683)-1=5.95], yielding an intra-regional bias that is negative [exp(-0.473)-1=0.38].
- Regional specifics:
  - ASEAN-6 shows stronger outward-looking pattern (lower MFN tariffs, more liberal regimes) than entire ASEAN group; coefficients for ASEAN-6imp and ASEAN-6exp are higher than for ASEAN.
  - SAPTA: trade among members higher than expected given economic characteristics, but SAPTA 2-dummy not significant during 1985-2005; different specifications suggest SAPTA did not significantly boost intra-trade more than trade with nonmembers.
  - CER (Australia–New Zealand): positive and significant CER 2 dummy indicates increased trade between them beyond MFN liberalization, but adding APEC dummy and other regional agreements suggests CER associated with import trade diversion (negative CER import dummy).
  - APEC membership estimated to significantly expand trade between members and between members and the rest of the world, consistent with an open regionalism trade-creating approach.
  - RTAs in Asia (especially ASEAN and APEC) showed higher openness vis-à-vis the rest of the world than members of RTAs outside the region.
  - Mercosur: fostered intra-regional trade but diverted imports from the world toward member countries.
  - NAFTA: estimated to have traded about 60 percent less with the rest of the world than expected based on the gravity model; explained by significant complementarities in production among NAFTA countries.

### Time-series / cross-section patterns and selected regression statistics
- Table 5 pooled estimations summary (1984-2005, dependent variable log of imports of country i from country j):
  - Observations: 169,070.
  - Adj. R-squared: 0.65 in regressions (1)-(3), 0.66 in regression (4).
  - Example coefficients (Regression (1) with p-values):
    - lnGDP i: 0.902 (0.000)***.
    - lnGDP j: 1.046 (0.000)***.
    - ln distance: -1.324 (0.000)***.
    - common language: 0.959 (0.000)***.
    - ASEAN imp: 0.683 (0.000)***.
    - ASEAN exp: 1.256 (0.000)***.
    - ASEAN 2: -0.473 (0.000)***.
    - WTO imp: -0.910 (0.000)***.
    - WTO exp: -0.699 (0.000)***.
    - WTO 2: 1.031 (0.000)***.
- Table 6: Gross intra-trade effects (sum γ1+γ2+γ3) examples:
  - ASEAN (Regression 1): 1.466 (corresponds to -0.473+1.256+0.683).
  - CER (Regression 1): 1.733.
  - SAPTA (Regression 1): 0.937.
  - ASEAN-6 (Regression 2): 1.837.
  - APEC (Regression 3 and 4): 1.556 and 2.093 respectively.
  - NAFTA (Regression 4): -1.287.

### Explanations and robustness considerations
- Little evidence of trade diversion by Asian RTAs possibly because regional integration followed long periods of unilateral liberalization in the 1980s and 1990s and proceeded in parallel with multilateral liberalization; many Asian countries acceded to the WTO in the mid-1990s and lowered MFN tariffs substantially, limiting risk of trade diversion.
- Variables capturing changes in trade flows may be capturing effects of lower MFN rates.
- AFTA’s limited practical impact to date may be partly due to high administrative costs verifying AFTA rules of origin relative to preferential margin.
- Use of total merchandise trade may underdetect international/distribution networks and regional supply chains; more disaggregated models (e.g., machinery goods or parts and components) could better detect these networks.
- Differences in rules of origin across RTAs (e.g., New Zealand–Singapore and AFTA use 40 percent value-added criteria; ASEAN–India, Singapore–India, and Japan–Singapore include multiple-change-of-tariff-heading criteria or other more complex provisions) are a key source of inconsistency and administrative cost.

### Policy conclusions and recommendations
- RTAs can expand trade and cooperation but are discriminatory and entail risks of costly trade diversion.
- For 1984–2005, membership in RTAs considered does not generally appear to have occurred at the expense of trade with nonmembers; global integration often preceded regional integration.
- Recommendations:
  - ASEAN members with more restrictive trade regimes, particularly the Mekong countries, should continue decreasing their MFN tariffs alongside regional integration.
  - Regional integration is not a substitute for multilateral and unilateral liberalization; continuing unilateral and multilateral liberalization is important to maximize benefits and avoid significant trade diversion.
  - Multiple bilateral/regional agreements with mutually inconsistent rules of origin can complicate firms’ production and sourcing decisions; consolidation (e.g., an Asian Free Trade Area) could potentially avoid some risks but requires further research and analysis.
- Quoted policy perspective from the paper: “There is little doubt that Asia’s interests lie in an opening trading system among all nations of the world and that preferential arrangements with Asia would, in Asia’s self-interest, need to be building blocks and not stumbling blocks to further global liberalization.”

*Source: _wp0753 - 1. Preferential Trade Agreements in Force in the Asia and Pacific*

### 1. Preferential Trade Agreements in Force in the Asia and Pacific

### 1. Preferential Trade Agreements in Force in the Asia and Pacific Region, February 2007

### Key messages (from the paper)
- Membership in the Asian RTAs considered in this study does not seem to have generally occurred at the expense of trade with nonmembers during 1984–2005, as most Asian countries’ integration with the global economy preceded regional integration.
- The above result appears more the effect of Asian countries’ strong inclination to pursue non-discriminatory liberalization, than the result of regionalism itself. In fact, while members of Asian RTAs seem to have recorded more trade with the rest of the world than other countries with similar characteristics in other regions, this effect was strongest for countries with the lowest MFN rates.
- Looking forward, a proliferation of RTAs, which is not accompanied by continuing unilateral and multilateral liberalization, could run the risk of leading to suboptimal trade patterns. To guard against this risk, the Mekong 3 countries—which have relatively higher MFN rates compared to the rest of the region (Table 2)—would be well-advised to continue to pursue broad-based trade liberalization, not only at the regional level, but also vis-à-vis the rest of the world on an MFN basis.
- Greater coherence among existing agreements, in terms of tariff preferences, rules of origin, and phase-in modalities would facilitate implementation, reduce administrative costs, and help minimize possible distortions in trade patterns.

### Context and scope
- At least 26 such agreements involving Asian economies have entered into force since 2001.
- Currently about 70 additional ones are under negotiation or discussion.
- By mid-2006:
  - 211 preferential trade agreements were currently in force and notified to the WTO, with 27 of these notified over the past year.
  - Another 65 were estimated to be operational but the WTO had not yet been notified.
- The empirical study focuses on the following preferential trade agreements in Asia: ASEAN, SAPTA/SAFTA (South Asian Association for Regional Cooperation preferential arrangements), APEC, and the Australia-New Zealand Closer Economic Relation (CER).

### Rationale and possible motives for RTAs (enumerated)
- Economic and non-economic motivations:
  - RTAs can be a cornerstone of larger economic and political efforts to increase regional cooperation beyond the multilateral agenda.
  - RTAs can stimulate inward foreign direct investment and growth through technological transfers.
  - Proliferation may be motivated by a perception that being left out of regional agreements puts countries at a disadvantage.
  - Perception that WTO accession is time-consuming can motivate RTAs.
- Risks and concerns:
  - As discriminatory measures, RTAs can be harmful when pursued as substitutes for multilateral liberalization.
  - RTAs can become closed blocs, protecting vested interests and discouraging multilateralism.
  - Political economy effects: RTAs can create incentives to lobby against MFN-based reforms that would reduce the value of tariff preferences.
  - Hub-and-spoke structures can concentrate gains in the hub and marginalize spokes.
  - “Noodle bowl effect”: overlapping, inconsistent RTAs with differing rules (notably rules of origin) can increase administrative costs, complicate outsourcing decisions, and add fragility to the trading system.
  - Absence of regional dispute-settlement mechanisms can create risk of spillovers and disruptions.

### Best-practice design principles for RTAs (bullet list from paper)
- Low external barriers and a continued commitment to MFN liberalization.
- Open access to membership.
- Consistency among different agreements.
- Comprehensive coverage of goods with few exclusions.
- Symmetrical and simple rules of origin with transparent and consistent regulations.
- Behind-the-borders reforms to promote synergies and strengthen the supply response.
- Establishment of dispute settlement provisions to resolve conflict in a timely fashion.

### Selected regional arrangements and implementation details
- ASEAN and AFTA:
  - ASEAN established in 1967.
  - AFTA creation announced January 1992.
  - AFTA six original members: Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
  - Vietnam joined in 1995; Lao P.D.R. and Myanmar in 1997; Cambodia in 1999.
  - CEPT scheme required tariff rates on a wide range of products traded within the region be progressively reduced to no more than 5 percent by 2003 for the six original members.
  - Vietnam committed to reduce CEPT to no more than 5 percent by 2006, Lao P.D.R. and Myanmar by 2008, and Cambodia by 2010.
  - All import duties are to be eliminated by 2010 for the former six countries and by 2015 for the latter four.
  - ASEAN members have the option of excluding products from CEPT in three cases: temporary exclusions, sensitive agricultural products, and general exceptions.
  - Implementation of AFTA rates appears to have been limited so far, reflecting administrative compliance costs, long lists of sensitive products and exceptions, and low utilization of preferences.
- SAARC / SAFTA:
  - SAARC established in 1985; members include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
  - In 1993 SAARC countries signed an agreement to gradually lower tariffs; in 2002 they signed SAFTA.
  - SAFTA went into force in January 2006 and created a framework for a free trade zone covering 1.4 billion people.
- APEC:
  - APEC seeks to promote regional integration in tandem with unilateral and multilateral liberalization.
  - 1994 APEC Bogor Declaration aimed at forming a free trade area in the region by 2010 for developed countries and by 2020 for developing countries.
  - APEC trade liberalization is based on concerted unilateral liberalization in accordance with the MFN principle rather than on preferential trade.
  - Current APEC tariffs are below the world average and declining (see Table 3 referenced in text).
- CER (Australia-New Zealand Closer Economic Relation):
  - Coverage more comprehensive than AFTA and has been revised several times to include services, trade facilitation, investment, and labor mobility.

### Empirical approach: gravity model (specification and purpose)
- A gravity model of trade is used to assess the impact of RTAs on bilateral trade flows.
- Core idea: trade between two countries is a function of economic mass (GDP and GDP per capita) and distance, with additional controls (common border, common language).
- The paper follows Soloaga and Winters (2001) with modifications:
  - Includes country-fixed effects (Subramanian and Wei, 2003; Dee and Gali, 2003).
  - Controls for possible MFN liberalization via dummies on WTO membership (Subramanian and Wei, 2003; Rose, 2004).
- The specification regresses the (log of) imports of country i from country j on:
  - Economic size (GDP) of both countries.
  - GDP per capita of both countries (level of development).
  - Distance between economic centers (log of distance).
  - Common border dummy and common language dummy.
  - Three RTA dummies for each RTA under study (following Soloaga and Winters (2001)):
    - RTA2: both countries i and j are members of the same RTA.
    - RTAimp: the importer i is a member of the RTA (exporter j may or may not be).
    - RTAexp: the exporter j is a member of the RTA (importer i may or may not be).
  - WTO membership dummies for importer and exporter, and WTO joint membership dummy where relevant.
- Motivation for three-dummy approach:
  - Disentangles intra-bloc trade effects (sum of trade creation and trade diversion) from trade flows with nonmembers.
  - Allows identification of export diversion and import diversion separately.
  - Uses imports as the dependent variable (rather than sum of imports and exports), avoiding constraining exports to mirror import diversion patterns.

### Notable analytical cautions and observations
- Many Asian RTAs followed MFN-based trade reforms rather than preceding them; integration with the global economy often preceded regional integration.
- Differences in rules of origin across RTAs (example: New Zealand–Singapore and AFTA use 40 percent value-added criteria; ASEAN–India, Singapore–India, and Japan–Singapore include multiple-change-of-tariff-heading criteria or other more complex provisions) are a key source of inconsistency and administrative cost.
- Without continued unilateral and multilateral liberalization, a continued proliferation of RTAs could increase the risk of trade diversion and suboptimal trade patterns.
- The paper does not assess whether a pan-Asian free trade area would be preferable to multiple overlapping initiatives, but emphasizes that greater coherence among existing agreements (tariff preferences, rules of origin, phase-in modalities) would reduce administrative costs and trade distortions.

*Source: _wp0753 - 1. Preferential Trade Agreements in Force in the Asia and Pacific*

### introduction of dummies representing WTO membership aims at controlling for the effect of

### _wp0753 - introduction of dummies representing WTO membership aims at controlling for the effect of

### Model specification and role of dummies
- WTO three dummies constructed identically to RTA-dummies (see footnote 12 in source).
- Importer- and exporter-fixed effects (it δ and jt φ) capture country-specific omitted effects (preferences, institutional framework etc) and avoid omitted variable bias identified by Wei (1996), Haveman and Hummels (1998), and Anderson and Van Wincoop (2003).
- Time-varying importer and exporter-fixed effects are used to proxy for “multilateral resistance” (Anderson and van Wincoop (2003)); importer and exporter dummies proxy for barriers between countries and the rest of the world.
- Specification includes year-specific dummies t1 α and a normally distributed error term with zero mean and constant variance.

### Interpretation of RTA and WTO coefficients
- γ1 (when positive) = measure of intra-regional bias: how much more an RTA member trades with another member than with a nonmember.
- γ2 = how much more one RTA member imports from its nonmember trading partners relative to expectation given economic size, distance, geographic and cultural characteristics.
- γ3 = analogous interpretation on the export side.
- Positive γ2 or γ3 interpreted as evidence of an open trade bloc; negative coefficients interpreted as trade diversion.
- γ1 + γ2 + γ3 = how much the trade flow between two countries is raised if they are both members of the RTA; positive sign suggests an RTA generates more trade among its members than between a random non-RTA pair.
- WTO2-dummy coefficient represents how much more a WTO member trades with another member than with a nonmember; expected to be positive. If members import more from other members than from nonmembers, this indicates barriers against nonmembers are generally higher.

### Sample and data
- Preferential trade agreements considered with Asia: ASEAN, APEC, SAPTA, CER.
- RTAs outside region considered: EAEC, EU-15, Mercosur, NAFTA.
- Data set covers 182 countries for a total of 169,113 observations.
- Bilateral trade data extracted from the UN COMTRADE database.
- Two estimation strategies:
  - Panel regression with year-specific effects and importer- and exporter-fixed effects covering 1984–2005 (Tables 5 and 6).
  - Ten separate annual cross-section regressions (one per year) including exporter- and importer-fixed effects (Table 7).

### Main econometric findings (1984–2005)
- All standard gravity variables—economic size, per capita income, bilateral distance, common language, common border—are statistically significant at the 99 percent confidence level and have expected signs.
- Distance is the most important factor determining trade flows.
- Membership in major RTAs in Asia (ASEAN, APEC, SAPTA) does not generally appear to have led to trade diversion over 1984–2005, though overlapping agreements complicate attribution.
- ASEAN and SAPTA members traded more than predicted by the basic gravity equation with both members and nonmembers (RTAexp and RTAimp dummies positive and statistically significant for regional groups; Table 5, Regression 1).
- Example estimates:
  - Bilateral intra-ASEAN trade estimated to be around 330 percent greater than trade between countries that do not belong to any RTA (Table 5, Regression 1): [exp(-0.473+1.256+0.683)-1=3.3]*100=330.
  - Trade between two ASEAN-6 countries (Table 5, Regression 2) estimated to be 5.2 times greater than between any random country pair that does not belong to any RTA: [exp(-0.188+1.276+0.749)-1=5.2].
- Detailed ASEAN pattern:
  - Trade between two ASEAN members estimated to be 38 percent less than trade of ASEAN members with nonmembers.
  - Two ASEAN countries trade among themselves 3.3 times more than expected given fundamentals, but an ASEAN country trades with a non-ASEAN member even more [exp(1.256+0.683)-1=5.95], yielding an intra-regional bias that is negative [exp(-0.473)-1=0.38].
- ASEAN-6 shows stronger outward-looking pattern (lower MFN tariffs, more liberal regimes) than entire ASEAN group; coefficients for ASEAN-6imp and ASEAN-6exp higher than ASEAN.
- SAPTA: trade among members higher than expected given economic characteristics, but SAPTA 2-dummy not significant during 1985-2005; different specifications suggest SAPTA did not significantly boost intra-trade more than trade with nonmembers.
- CER (Australia–New Zealand): positive and significant CER 2 dummy indicates increased trade between them beyond MFN liberalization (Table 5, Regressions 1 and 2), but adding APEC dummy and other regional agreements suggests CER associated with import trade diversion (negative CER import dummy).
- APEC membership estimated to significantly expand trade between members and between members and the rest of the world (Table 5, Regressions 3 and 4), consistent with an open regionalism trade-creating approach.
- RTAs in Asia (especially ASEAN and APEC) showed higher openness vis-à-vis the rest of the world than members of RTAs outside the region (Table 5, Regression 4).
- Mercosur: fostered intra-regional trade but diverted imports from the world toward member countries.
- NAFTA: estimated to have traded about 60 percent less with the rest of the world than expected based on the gravity model; explained by significant complementarities in production among NAFTA countries.

### Time-series / cross-section patterns (select results)
- Table 5 pooled estimations summary (1984-2005, dependent variable log of imports of country i from country j):
  - Observations: 169,070 (per Table 5).
  - Adj. R-squared: 0.65 in regressions (1)-(3), 0.66 in regression (4).
  - Example coefficients with p-values in parenthesis (significance denoted *, **, *** for 10%, 5%, 1%):
    - lnGDP i: 0.902 (0.000)*** in Regression (1).
    - lnGDP j: 1.046 (0.000)*** in Regression (1).
    - ln distance: -1.324 (0.000)*** in Regression (1).
    - common language: 0.959 (0.000)*** in Regression (1).
    - ASEAN imp: 0.683 (0.000)*** in Regression (1).
    - ASEAN exp: 1.256 (0.000)*** in Regression (1).
    - ASEAN 2: -0.473 (0.000)*** in Regression (1).
    - WTO imp: -0.910 (0.000)*** in Regression (1).
    - WTO exp: -0.699 (0.000)*** in Regression (1).
    - WTO 2: 1.031 (0.000)*** in Regression (1).
- Table 6: Gross intra-trade effects (sum γ1+γ2+γ3) examples:
  - ASEAN (Regression 1): 1.466 (corresponds to -0.473+1.256+0.683).
  - CER (Regression 1): 1.733.
  - SAPTA (Regression 1): 0.937.
  - ASEAN-6 (Regression 2): 1.837.
  - APEC (Regression 3 and 4): 1.556 and 2.093 respectively.
  - NAFTA (Regression 4): -1.287.

### Explanations and robustness considerations
- Little evidence of trade diversion by Asian RTAs possibly because regional integration followed long periods of unilateral liberalization in the 1980s and 1990s and proceeded in parallel with multilateral liberalization; many Asian countries acceded to the WTO in the mid-1990s and lowered MFN tariffs substantially, limiting risk of trade diversion.
- Variables capturing changes in trade flows may be capturing effects of lower MFN rates.
- AFTA’s limited practical impact to date may be partly due to high administrative costs verifying AFTA rules of origin relative to preferential margin.
- Use of total merchandise trade may underdetect international/distribution networks and regional supply chains; more disaggregated models (e.g., machinery goods or parts and components) could better detect these networks.

### Policy conclusions and recommendations
- Regional Trade Agreements (RTAs) can expand trade and cooperation but are discriminatory and entail risks of costly trade diversion.
- For 1984–2005, membership in RTAs considered does not generally appear to have occurred at the expense of trade with nonmembers; global integration often preceded regional integration.
- Policy recommendations:
  - ASEAN members with more restrictive trade regimes, particularly the Mekong countries, should continue decreasing their MFN tariffs alongside regional integration.
  - Regional integration is not a substitute for multilateral and unilateral liberalization; continuing unilateral and multilateral liberalization is important to maximize benefits and avoid significant trade diversion.
  - Multiple bilateral/regional agreements with mutually inconsistent rules of origin can complicate firms’ production and sourcing decisions; consolidation (e.g., an Asian Free Trade Area) could potentially avoid some risks but requires further research and analysis.
- Quoted policy perspective: “There is little doubt that Asia’s interests lie in an opening trading system among all nations of the world and that preferential arrangements with Asia would, in Asia’s self-interest, need to be building blocks and not stumbling blocks to further global liberalization.”

*Source: Author’s estimations and analysis in the IMF working paper text provided.*

### References

### _wp0753 - References

### References (bibliographic entries)
- Anderson J. E., (1979), “The Theoretical Foundations of the Gravity Equation,” American Economic Review, Vol. 69, pp. 106-116.
- Anderson J. E., and E. Wincoop (2003), “Gravity with Gravitas: A Solution to the Boarder Puzzle,” American Economic Review, Vol. 93, No 1, pp. 170-92.
- Asian Development Bank, 2006, Asian Development Outlook 2006.
- Baldwin, R., 1993, “A Domino Theory of Regionalism,” CEPR Discussion Paper No. 857, Center for Economic Policy Research.
- Baldwin, R., 2006, “Managing the Noodle Bowl,” CEPR Discussion Paper No. 5561, London.
- Bergstrand, J., 1985, “The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence,” Review of Economics and Statistics, 67:3, August, pp.474-81.
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### Annex I — Country Membership (group listings)
- The Asia Pacific Economic Cooperation (APEC): Australia, Brunei Darussalam, Canada, Chile, China, Hong Kong SAR, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, Taiwan Province of China, Thailand, the United States, and Vietnam.
- Agreement on South Asian Association for Regional Cooperation (SAARC) Preferential Trading Arrangement (SAPTA): Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
- Association of Southeast Asian Nations (ASEAN): Brunei Darussalam, Cambodia, Indonesia, Lao P.D.R., Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
- ASEAN-6: Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, and Thailand.
- Bangkok Agreement: Bangladesh, China, Lao PDR, and Sri Lanka
- Closer Economic Relation (CER): Australia and New Zealand.
- Eurasian Economic Community (EAEC): Belarus, Kazakhstan, the Kyrgyz Republic, the Russian Federation, and Tajikistan.
- European Union comprising 15 members (EU-15): Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom.
- North American Free Trade Agreement (NAFTA): Canada, Mexico, and the United States.
- Southern Common Market (Mercosur): Argentina, Brazil, Paraguay, and Uruguay.
- Trans-Pacific Strategic Economic Partnership (TPSEPA): Brunei Darussalam, Chile, New Zealand, and Singapore.

### Annex II — Summary of Recent Empirical Literature on Trade Creation vs. Trade Diversion in Asia
- Wei and Frankel 1997
  - (No further cell content provided in the table excerpt.)
- Soloaga and Winters (2001)
  - Data and methodology: Gravity model (annual cross-section regressions); aggregate trade data 1960–90.
  - Results: A positive intra-bloc coefficient for ASEAN.
- Clarete, Edmonds and Wallack (2002)
  - (No further cell content provided in the table excerpt.)
- Dee and Gali (2003)
  - Data and methodology: Gravity model (annual cross-section regressions); aggregate trade data 1980–96.
  - Results: No evidence of trade diversion on ASEAN.
- (Table entries continued:)
  - Gravity model (Tobit estimation with country-specific effects); aggregate trade data 1970–97; instead of a 0–1 dummy, the authors calculated a member liberalization index to capture the degree of intra-RTA liberalization.
  - Results: A positive intra-bloc coefficient for SAPTA. No evidence of intra-bloc trade effects on ASEAN and CER, but evidence of import trade diversion for ASEAN. APEC is fostering greater intra-bloc trade as well as greater trade with the rest of the world.
  - Net trade diversion and a negative intra-bloc trade effect on ASEAN.
- Elliot and Ikemoto (2004)
  - Data and methodology: Gravity model (pooled regression); aggregate trade data 1983–99.
  - Results: Found evidence of trade creation, but little evidence of trade diversion on ASEAN.
- Gosh and Yamarik (2004)
  - Data and methodology: Gravity model (pooled regression); extreme bounds analysis to test the robustness of trade creation hypothesis; aggregate trade data 1970–95 in 5–year interval.
  - Results: Some evidence of trade creation, but not robust under extreme bounds analysis; little evidence of trade diversion on ASEAN.

*Source: _wp0753 - References*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp0753.pdf_