IMF Survey: 'Noodle Bowl' Risk of Trade Pact Overlap
IMF News, June 25, 2007
Source details
- Canonical URL
- IMF Survey: 'Noodle Bowl' Risk of Trade Pact Overlap
Other formats
Bibliographic details
- Authors: Patrizia Tumbarello IMF Asia, Pacific Department June
- Published: June 25, 2007
Overview
- Regional trade agreements (RTAs) have proliferated across the Asia and Pacific region over the past 20 years.
- The continued spread of RTAs risks turning the world trade system into a "noodle bowl" of overlapping and potentially inconsistent and unmanageable RTAs.
- A recent IMF Working Paper (WP 07/53) examined RTAs in Asia during 1984-2003; empirical estimates in the study also reference the period 1984-2005.
Key statistics and factual findings
- "As of May 2007, more than 40 RTAs had been signed among Asian countries themselves or between one or more of these countries and selected trading partners outside the region, and an additional 70 RTAs were under negotiation."
- The IMF study's empirical estimates suggest that membership in ASEAN, SAPTA, APEC, and ANZCER:
- "did promote trade among their members, but not at the expense of trade with nonmembers during 1984-2005."
- This effect was strongest for countries with the lowest MFN rates.
- The study examines RTA effects using a gravity model of trade covering membership influences on level and direction of trade.
Trade effects: trade creation and trade diversion
- Trade diversion:
- RTAs can divert imports from low-cost nonmember sources to higher-cost member suppliers, causing welfare losses for both members and nonmembers.
- The cost difference borne by importing members is commonly known as a trade diversion effect.
- Trade creation:
- If resources previously devoted to high-cost domestic production are reallocated to more efficient domestic producers as a result of the RTA, economic welfare can increase (trade creation effect).
- Net welfare implications depend on:
- Initial protection versus nonmembers (lower protection reduces risk of net welfare loss).
- Whether RTA partners agree to introduce swift reductions in their MFN tariffs over time, ideally matching preferential rates.
Drivers of RTA proliferation
- Economic and noneconomic motivations:
- Vehicle for dialogue and coordination on regional issues not on the multilateral agenda (regulatory harmonization, infrastructure development, transit trade and transport).
- Stimulate inward foreign direct investment and growth through technological transfers.
- Political motivation: joining RTAs to avoid being left at a disadvantage when others form agreements.
- Bargaining advantage in multilateral negotiations by adopting a common regional position on sensitive sectors (for example, textiles and agriculture).
- Possible reduction in fixed negotiation costs for small states negotiating as a region rather than individually.
Policy implications and recommendations
- Participation in RTAs "does not, in general, seem to have occurred at the expense of trade with nonmembers" according to WP 07/53, but risks remain if RTAs substitute for multilateral liberalization.
- The paper's findings reinforce the need for:
- Countries with more restrictive trade regimes to continue reducing high tariffs even if participating in regional arrangements.
- Pursuing broad-based trade liberalization on an MFN basis in tandem with regional integration, especially for countries whose MFN rates are higher than those in the rest of the region.
- Ensuring RTA partners introduce swift reductions in their MFN tariffs over time, ideally matching preferential rates to minimize trade diversion.
- Addressing vested interests within RTA members that can turn agreements into closed blocs and discourage multilateral liberalization.
Pan-Asian free trade area scenario
- Coherence among existing RTAs in tariff preferences and rules of origin could:
- Help minimize administrative costs associated with verifying rules of origin.
- Limit possible distortions in trade patterns.
- Since late 2006, Japan has advocated creation of a pan-Asian free trade area potentially including Australia, China, India, Japan, Korea, New Zealand, and the 10 ASEAN countries.
- The study notes that consolidation into a single pan-Asian free trade area could potentially avoid some risks associated with proliferating RTAs, but assessing whether consolidation would address all RTA pitfalls "would require further analysis to estimate the possible implications for Asian intraregional trade and the region's trade with the rest of the world."
Source: IMF Survey by Patrizia Tumbarello, IMF Asia and Pacific Department, June 25, 2007.