Dealing with the Proliferation of Bilateral Trade Agreements: Consolidation, Multilateralization, Harmonization, or Dilution?

7/27/2019 Dealing with the Proliferation of Bilateral Trade Agreements: Consolidation, Multilateralization, Harmonization, or D

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Economics and REsEaRch dEpaRtmEnt

delg w e

prlfer f Blerl

tre agreee:

cl,

mullerlz,hrz, r dlu?

Jayant Menon

September 2008

RD WoRking PaPER SERiES no. 123


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ERD Wrkin Paper N. 123

Dealingwiththe Proliferationof Bilateral traDe agreements:

ConsoliDation, multilateralization,

harmonization, or Dilution?

Jayant Menon

sePtemBer 2008

Jayant Menon is Principal Economist, Oce or Regional Economic Integration, Asian Development Bank. This is

a revised version o a paper presented in the Conerence on International Rules on Trade and Investment, held

January 2008 in Bangkok. The author is grateul or comments received rom Charles Adams, W. Max Corden, Hal

Hill, William E. James, Hugh Patrick, and Richard Pomret; and to Anna Melendez-Nakamura and Dorothea Lazaro

or excellent research assistance. The views expressed herein refect those o the author and should not be taken

to refect those o the Asian Development Bank.


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Asian Development Bank6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippines

www.adb.org/economics

2008 by Asian Development BankSeptember 2008

ISSN 1655-5252

The views expressed in this paper

are those o the author(s) and do notnecessarily reect the views or policies

o the Asian Development Bank.


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FoREWoRD

The ERD Working Paper Series is a orum or ongoing and recently completedresearch and policy studies undertaken in the Asian Development Bank or onits behal. The Series is a quick-disseminating, inormal publication meant to

stimulate discussion and elicit eedback. Papers published under this Seriescould subsequently be revised or publication as articles in proessional journalsor chapters in books.


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CoNtENts

Abstract vii

I. IntroductionI. Introduction 1

II. BTAs Some acts and iguresII. BTAs Some acts and igures 2

III. actors Driving the Prolieration o BTAsIII. actors Driving the Prolieration o BTAs 6

A. eneral actorsA. eneral actors 6 B. Specifc actors 7

I. Alternative Approaches to Dealing with the Prolieration o BTAI. Alternative Approaches to Dealing with the Prolieration o BTAs,and Their Eectiveness 12

A. Consolidation o BTAs into PTAs 1A. Consolidation o BTAs into PTAs 13 B. Multilateralization o Preerential Taris and Other Accords 15 C. Harmonization o Most avored Nation Taris through

Coordinated Reduction 17 D. Dilution o ROOs through Liberalization 17

E. A Summing Up 18

. Summary and Conclusions 2. Summary and Conclusions 21

Reerences 22


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AbstRACt

Bilateral ree trade agreements (BTAs) have been prolierating. The outcome oThe outcome othis prolieration o oten overlapping BTAs and plurilateral ree trade agreementsree trade agreementsis described as the spaghetti bowl eect or, in the Asian region, the noodle

bowl eect. This is costly and welare-reducing. How should this situation beremedied? This paper evaluates the various options proposed in dealing with theThis paper evaluates the various options proposed in dealing with thespaghetti bowl. A general limitation o these proposals is their tendency to groupA general limitation o these proposals is their tendency to group

all kinds o BTAs together and treat them as a homogeneous group. Thus, the

proposals ignore underlying dierences in motivation in the ormation o BTAs. Toovercome this, the paper develops a taxonomy or classiying BTAs by motivationbeore considering the eectiveness o the dierent remedies proposed. EachEach

proposal has its pros and cons, and can cater to dierent types o BTAs. Thus,a combination o the various proposals may be warranted, even in the event oan expeditious and bona de conclusion to the Doha Round.


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I think the noodle bowl will become an inedible quagmireit may take a long time to throw

out but sensible businesses will simply order up other dishes.

Hugh Patrick,Columbia University (personal communication)

I. INtRoDuCtIoN

Every country in the world today, with the exception o Mongolia, is a member o at least

one plurilateral ree trade agreement (PTA) and bilateral ree trade agreement (BTA), and most areree trade agreement (PTA) and bilateral ree trade agreement (BTA), and most areand bilateral ree trade agreement (BTA), and most areree trade agreement (BTA), and most aretrade agreement (BTA), and most aremembers o multiple BTAs. I PTAs were considered the main threat to the world trade system inthe 1990s, the concern has since shited to BTAs.1 The number o BTAs has been growing at ans been growing at anbeen growing at anastounding pace. The outcome o this prolieration o oten overlapping BTAs and PTAs is describedas the spaghetti bowl eect or, in the Asian region, the noodle bowl eect. This phenomenon

increases the cost o doing business and welare losses associated with trade diversion, due todue toinconsistencies between various elements o the agreements. These include, or instance, dierentschedules or phasing out taris, dierent rules o origin, exclusions, conicting standards, and

dierences in rules dealing with antidumping and other regulations and policies (see Pangestu andScollay 2001).

How do we remedy the situation? There appears to be widespread agreement that a successul

conclusion to the stalled Doha Round o the World Trade Organization (WTO) would be the bestway orward in minimizing the negative impacts o the current mess. iven ongoing uncertaintyas to the timing and nature o such a conclusion, and concern that any expedited resolution mayinvolve signifcant compromises that could undermine the outcome itsel, interest has shited to

alternative measures in addressing this problem. Some see these as interim steps in addressingthe problem, while others propose them as ull-edged remedies. All o them are premised on theassumption that even a bona fde conclusion to the Doha Round may no longer be sufcient to

remedy the chaotic trading environment o criss-crossing BTAs and overlapping PTAs.

A general limitation o the proposals put orward in dealing with the spaghetti bowl eect isthat they tend to implicitly group all kinds o BTAs and PTAs together as a homogeneous group. In

other words, the proposals ignore underlying dierences in motivation in orming BTAs and PTAs. It

1 There are various stages in economic integration that are used to classiy trade agreements, beginning with single-sector

agreements such as the United StatesCanada Auto Pact or the European Coal and Steel Community. This is ollowed bymultisector agreements that limit the extent o preerential taris, such as the Association o Southeast Asian Nations

prior to ull implementation o the ASEAN ree Trade Agreement, and South Asian Preerential Trade Agreement prior toull implementation o South Asian ree Trade Area (SATA) in South Asia. Next are ree trade agreements (TAs) (with

independent external taris), customs unions with a common external tari, and common markets with integration

extending beyond goods to actors o production. This paper ocuses on TAsby ar the most popular and widespreadtype o BTA.


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2 September 2008

Dealingwiththe proliferationof bilateral traDe agreementS: ConSoliDation, multilateralization, harmonization, or Dilution?

Jayantmenon

is argued that the underlying motivation will be critical in determining whether or not a particular

remedy is likely to be eective in minimizing the impacts o the spaghetti bowl eect. In otherwords, unless the proposed remedy does not directly conict with the underlying motivation inorming the BTA, it is likely to be resisted by the parties concerned, and is unlikely to work.

A second limitation relates to how some o the proposed remedies are presented. In general,these are promoted only in terms o neutralizing the distortions associated with the spaghettibowl eect. The related but oten ignored issue is the impact that the proposed remedies have in

terms o promoting trade liberalization beyond neutralization o the spaghetti bowl eect. In otherwords, to what extent can a proposed remedy go beyond dealing with the distortions associatedwith overlapping BTAs and PTAs with its diering rules and requirements, and urther the cause opromoting reer trade?

With these limitations in mind, the paper develops a taxonomy or classiying BTAs by underlyingmotivation beore considering the eectiveness o the dierent remedies proposed, both in termso how they address the spaghetti bowl eect, and more generally how they pursue liberalization.

The paper begins by providing some acts and fgures relating to BTAs including their prolieration

in Section II. Section III adapts a taxonomy developed in Menon (2007b) to classiy BTAs by theirmain driving orce, or motivation, to provide the backdrop or the ensuing analysis. Section I

begins by outlining the various options proposed in dealing with the consequences o the spaghettibowl eect, beore providing an assessment o their ability to do so. A fnal section provides asummary o main points.

II. btA: somE FACts AND FIguREs

A complete listing o the BTAs that involve at least one country rom the Asia and Pacifc

region,2 together with their status, is provided in Table 1, and summarized in Table 2. The sameinormation is provided in igure 1.

Between 1983 and 1999, the interest in orming BTAs grew at a slow but steady pace. rom2000 however, this growth started to accelerate. Between 2000 and 2004, the number o concludedBTAs more than doubled, and doubled again in the next 4 years to reach 77 by January 2008. Atthe moment, there are another 65 BTAs that are currently under negotiation, and 44 more that have

been proposed. This last number in particular keeps increasing.

O the BTAs that have been concluded or are under implementation, the United States (US)tops the list with 16 o them, ollowed by Chile (12), Singapore (10), Mexico (9), and Japan (8). O

the BTAs or which ramework agreements (As) have been signed or are currently being negotiated,Singapore tops the list with 10; ollowed by India with nine; and Australia, People's Republic oChina (PRC) Japan, and Pakistan with seven each. The majority o these BTAs, whether concluded,being negotiated, or yet proposed, are interregional in nature, in that one partner lies outside the

region, however defned. Table 3 considers various defnitions o the region, where it is evidentthat the share o intraregional BTAs is very low or both ASEAN+3 and ASEAN+6 defnitions. Evenwhen the region is defned to include the ull complement o countries covered in this paper, theshare o the Asia and Pacifc region is still only about hal.

2 There are several defnitions o the Asia and Pacifc region. In this paper, the region is taken to mean members o

ASEAN, Asia-Pacifc Economic Community (APEC), plus South Asia. The Central Asian Republics and Russia are excluded,but considered in Menon (2007b).


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erD workingpaper SerieSno. 123 3

taBle

1

Btas

of

Countries

ina

sean,

aPeC,

anD

south

asia,

as

of

anuar

2008

a

sean,

aPeC,

anD

south

asia,

as

of

anuar

2008

aPeC,

anD

south

asia,

as

of

anuar

2008

CoNCluDED1A/uN

DERImPlEmENtAtIoN1b

F

RAmEWoRkAgREEmENtsIgNED2a

uNDERNEgotIAtIoN2

PRoPosED/uNDERCoNsultAt

IoN/stuDy3

N.

Parie

Dae

N.

Pa

rie

Da

e

N.

Parie

Dae

1

ASEANKorea

Jul-06

78

AS

EANAustraliaandNew

Zealand

eb-0

5

143

AustraliaKorea

Dec-06

2

ASEANPRC

Jan-05

79

AS

EANEU

May-0

7

144

AustraliaMexico

Jan-06

3

AustraliaNew

Zealand

Jan-83

80

AS

EANIndia(Asigned)

Jan-0

4

145

IndiaAustralia

Jan-08

4

CanadaChile

Jul-97

81

AS

EANJapan(Asigned)

Nov-0

7

146

IndiaColombia

Mar-01

5

CanadaCostaRica

Nov-02

82

Au

straliaChile

Dec-0

6

147

IndiaETA

Nov-07

6

CanadaETA(concluded)

Jun-07

83

Au

straliaCC

Jul-07

148

IndiaIndonesia

Aug-05

7

CanadaIsrael

Jan-97

84

Au

straliaUAE

Mar-0

5

149

IndiaIsrael

Aug-07

8

CanadaUnited

States4

Oct-87

85

Ca

nadaAndeanCommunity

Jun-0

7

150

IndiaRussianederation

Oct-07

9

ChileColombia

(signed)

Nov-06

86

Ca

nadaCaribbeanCommunity

Oct-07

151

IndiaUruguay

2004

10

ChileETA

Dec-04

87

Ca

nadaCentralAmerica(ETA)

Nov-0

1

152

Indiaenezuela

2004

11

ChileMexico

Aug-99

88

Ca

nadaDominicanRepublic

Jun-0

7

153

IndonesiaETA

Nov-05

12

ChileMERCOSU

R

Oct-96

89

Ca

nadaSingapore

Jan-0

2

154

IndonesiaAustralia

Jul-07

13

ChilePanama(signed)

Jun-06

90

IndiaEgypt

Jan-0

2

155

JapanCanada

Nov-05

14

ChilePeru(sig

ned)

Aug-06

91

IndiaEU

Sep-0

5

156

KoreaCC

Nov-07

15

ETASingapore

Jan-03

92

IndiaCC(Asigned)

Aug-0

4

157

KoreaMERCOSUR

Dec-07

16

IndiaAghanis

tan(signed)

Mar-03

93

IndiaKorea

Mar-0

6

158

KoreaSouthArica

Jun-05

17

IndiaChile(si

gned)

Mar-06

94

IndiaMauritius

Aug-0

5

159

KoreaThailand

Aug-03

18

IndiaMERCOSU

R(signed)

Jan-04

95

IndiaSACU

(Asigned)

Nov-0

4

160

MalaysiaIndia

Jan-05

19

IndiaSingapore

Aug-05

96

IndiaThailand(Asigned)

Oct-03

161

MalaysiaKorea

Nov-05

20

IndiaSriLanka

Dec-98

97

Ja

panAustralia

Apr-0

7

162

New

ZealandIndia

May-07

21

IndoNepalTre

atyoTrade

Jun-02

98

Ja

panCC

Sep-0

6

163

New

ZealandKorea

Dec-06

22

JapanBrunei(signed)

Jun-07

99

Ja

panIndia

eb-0

7

164

New

ZealandMexico

Nov-02

23

JapanChile

Sep-07

100

Ja

panKorea

Dec-0

3

165

PakistanAghanistan

Jun-06

24

JapanIndones

ia(signed)

Aug-07

101

Ja

panSwitzerland

May-0

7

166

PakistanBrunei

Mar-06

25

JapanMalaysia

Jul-06

102

Ja

panietnam

Oct-06

167

PakistanJordan

Jun-06

26

JapanMexico

Apr-05

103

Ko

reaCanada

Jul-05

168

PakistanKazakhstan

Dec-03

27

JapanPhilippi

nes(signed)

Sep-06

104

Ko

reaEU

May-0

7

169

PakistanPhilippines

Apr-04

28

JapanSingapo

re

Nov-02

105

Ko

reaMexico

Mar-0

6

170

PakistanTajikistan

Dec-05

continued.

SeCtion ii

btaS: Some faCtSanD figureS


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September 2008


Jayantmenon

CoNCluDED1A/uN

DERImPlEmENtAtIoN1b

F

RAmEWoRkAgREEmENtsIgNED2a

uNDERNEgotIAtIoN2

PRoPosED/uNDERCoNsultAt

IoN/stuDy3

N.

Parie

Dae

N.

Pa

rie

Da

e

N.

Parie

Dae

29

JapanThailand

Nov-07

106

Ma

laysiaAustralia

May-0

5

171

PakistanThailand

Sep-06

30

KoreaChile

Apr-04

107

Ma

laysiaChile

2007

172

PRCIndia

Jun-03

31

KoreaETA

Sep-06

108

Ma

laysiaNew

Zealand

May-0

5

173

PRCKorea

Mar-06

32

KoreaSingapore

Mar-06

109

Ne

w

ZealandCC

Jul-07

174

PRCNorway

Mar-07

33

KoreaUnitedStates(signed)

Jun-07

110

Ne

w

ZealandHongKong

Nov-0

0

175

PRCSouthArica

Jun-04

34

LaosThailand

Jun-91

111

Ne

w

ZealandPRC(Asigned)

Dec-0

4

176

SingaporeBahrain5

Oct-03

35

MalaysiaPakistan

Jan-08

112

Pa

cifcACPEC

Sep-0

4

177

SingaporeSriLanka

Aug-03

36

MexicoBolivia

Jan-95

113

Pa

kistanBangladesh

Nov-0

3

178

SingaporeUAE5

Mar-05

37

MexicoCostaRica

Jan-95

114

Pa

kistanCC(Asigned)

Aug-0

4

179

ThailandChile

Mar-06

38

MexicoETA

Jul-01

115

Pa

kistanIndonesia(Asigned)

Nov-0

5

180

ThailandMERCOSUR

Mar-06

39

MexicoEU

Jul-00

116

Pa

kistanMERCOSUR(Asigned)

Jul-06

181

UnitedStatesBrunei

May-07

40

MexicoIsrael

Jul-00

117

Pa

kistanMorocco

2005

182

UnitedStatesIndonesia

Jan-07

41

MexicoNicarag

ua

Jul-98

118

Pa

kistanSingapore

Aug-0

5

183

UnitedStatesPakistan

Aug-07

42

MexicoUrugua

y

Jul-04

119

Pa

kistanTurkey(Asigned)

May-0

4

184

UnitedStatesPhilippines

1989

43

New

ZealandS

ingapore

Jan-01

120

Pe

ruETA

Apr-0

6

185

UnitedStatesSriLanka

2002

44

PakistanIran

Sep-06

121

PR

CAustralia(Asigned)

May-0

5

186

UnitedStatesTaipei,China

2002

45

PakistanMauritius

Jun-05

122

PR

CCC

Apr-0

5

46

PakistanSriLa

nka

Jun-05

123

PR

CIceland(Asigned)

2006

47

PapuaNew

uineaAustralia

Sep-91

124

PR

CPeru

Jan-0

8

48

PRCChile

Oct-06

125

PR

CSingapore

Oct-0

6

49

PRCHongKong,China

Jan-04

126

PR

CSACU

Jul-04

50

PRCMacao

Jan-04

127

SingaporeEgypt

Nov-0

6

51

PRCPakistan

Jul-07

128

SingaporeKuwait

Jul-04

52

PRCThailand

Oct-03

129

SingaporeMexico

Jul-00

53

SingaporeAustralia

Jul-03

130

SingaporePeru

eb-0

6

54

SingaporeETA

Jan-03

131

SingaporeQatar5

Nov-0

6

55

SingaporeJord

an

Aug-05

132

SingaporeUkraine

May-0

7

56

SingaporePanama

Jul-06

133

Taipei,ChinaDominicanRepublic

2006

57

SriLankaIran

(signed)

Nov-04

134

Taipei,ChinaParaguay(Asigned)Aug-0

4

58

Taipei,Chinauatemala

Jul-06

135

Th

ailandBahrain(Asigned)

Dec-0

2

continued.

Table1.continued.


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September 2008


Jayantmenon

figure 1Btasof Countriesin asean, aPeC, anD south asia, B status,

Cumulativeasof anuar 2008

Concluded/under implementation

Proposed/under consultation/study

Framework agreement signed/under negotiation

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

200

180

160

140

120

100

80

60

40

20

0

Sources Author's compilation based on data rom the ollowing websites Asian Regional

Inormation Center ; Australian overnment Department o

oreign Aairs and Trade (www.dat.gov.au); Bilaterals.org ; oreign Aairs and International Trade Canada ; Ofce o the US Trade Representative ; Organizationo American State's oreign Trade Inormation System (www.sice.oas.org);

and World Trade Organization .

III. FACtoRs DRIvINg thE PRolIFERAtIoN oF btA

Why are BTAs so popular? In answering this question, a set o general as well as specifc actorsor motivations or the popularity o BTAs needs to be identifed. The general motivations apply

to most, i not all BTAs, but there is always at least one additional specifc actor that drives theormation o a BTA (even as usually there is more than one specifc actor involved). or instance,each party to the BTA may have their own motivation in pursuing the agreement, and this may not

coincide with the interest o the other party. It is also possible that each party has more than onemotivating actor in pursuing the BTA. When there are two or more actors motivating the BTA, the

dominant one is used in classiying the BTA.

A. genera Facr

An important general reason or the popularity o BTAs is the apparent disenchantment with

the pace o progress with liberalization at the multilateral level. The difculties associated with

3 Lao PDR is a member o ASEAN, but not APEC.


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erD workingpaper SerieSno. 123

concluding the Doha round have simply reinorced this view. Many countries eel that the WTO has

ailed to deliver and so have pursued BTAs (and PTAs) as a means o pressing ahead with theirtrade and liberalization agendas.4

A orm o snowballing or domino eect, as with PTAs in the past (see Baldwin 1996), has also

been driving the growth in BTAs. In the Asia and Pacifc region, interest in orming BTAs beganin the late 1990s with Japan, Republic o Korea, New Zealand, and Singapore. By 2000, Australia,PRC, Thailand, and US had joined the trend, with more than 40 new BTAs proposed or negotiated

(see Table 2). Momentum gathered over the subsequent years to the point where other countriesin the Asia and Pacifc region elt disadvantaged i they did not join the club. The number o BTAsthus continued to grow, and almost doubled to 109 between 2002 and 2004. There is clearly amomentum driving some o the growth in BTAs with countries not wanting to be let behind in

this apparent race.5

It is oten claimed that some, i not most, BTAs are essentially politically motivated. There isno doubt that political economy considerations, and indeed political parties or politicians themselves,

play a major role in driving the prolieration o BTAs. A recent example o this is how the control

o both Houses by the Democrats has put at risk a number o BTAs that the Bush administrationhas been pursuing. Although this paper tries to take into account political, strategic, and oreign

policy-related issues, it ocuses on economic and economic related considerations because they areeasier to identiy and measure. Thus, the discussion that ollows is likely to understate the rolethat politics and politicians play in the prolieration o BTAs, simply because these inuences areoten difcult to measure or model, let alone classiy.

b. specifc Facr

In trying to classiy BTAs, with a view toward a better understanding o them and theirmotivating actors, previous researchers have ocused on issues such as relative size o the partners(Bonapace 2004, Whalley 2008); or geographic dispersion (Scollay 2003); while still others have

reerred to a range o trade, political, and other noneconomic issues (e.g., Pangestu and Scollay2001, Baldwin 2004, Ravenhill 2006). These studies generally ail to identiy any clear or consistentpattern relating to size or geography, and usually conclude that a myriad o actors are probablyinvolved. Menon (2007b) brings together, in a systematic way, various economic, political, and

strategic actors underlying the prolieration o BTAs in an attempt to redress this ambiguity.

This section adapts the taxonomy in Menon (2007b) to ocus on economic motivations. Thisadaptation, or the original taxonomy, does not attempt to explain or classiy all BTAs, only most

o them. There are apparently a host o BTAs that are basically single or limited-issue agreements,which may not even try to address tari or nontari barriers. urthermore, these may be sector- or

4 In a paradoxical twist, it seems WTO meetings themselves are being overshadowed and are providing an opportunityor members to pursue new BTAs with other member countries. In a Bangkok-based daily, (The Nation 2004), an item

reports that In the corridors o the WTO meetings, Thai ofcials discussed the possibility o TAs with Mexico, Chile

and Peru. In the same vein, it is somewhat ironic that the JapanSingapore BTA was concluded at the APEC summitmeeting in Shanghai in October 2001.

5 Baldwin (2006b, 22) argues that it could continue to play a role in the prolieration o BTAs in the region in thecoming years I history is any guide, the domino eect in East Asia will spread to many, many more countries in the

neighborhood. In Europe, or example, several waves o domino eects have let the European Union with preerential

trade deals with every WTO member except or nine. It is thereore conceivable that the 13 members o the ASEAN+3group will end up signing a very large number o bilaterals in the coming years.

SeCtion iii

faCtorSDrivingthe proliferationof btaS


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September 2008


Jayantmenon

taBle 2Btasof Countriesin asean, aPeC, anD south asia Cumulative as ofanuar 2008asean, aPeC, anD south asia Cumulative as ofanuar 2008aPeC, anD south asia Cumulative as ofanuar 2008anD south asia Cumulative as ofanuar 2008south asia Cumulative as ofanuar 2008Cumulative as ofanuar 2008Cumulative as ofanuar 2008asof anuar 2008

yEAR CoNCluDED1a uNDER

ImPlEmENtAtIoN1

FA sIgNED2a

uNDER NEgotIAtIoN2

PRoPosED/uNDER

CoNsultAtIoN/stuDy3

totAl

1983 1 0 0 1

1984 1 0 0 1

1985 2 0 0 2

1986 2 0 0 2

1987 3 0 0 3

1988 3 0 0 3

1989 3 0 1 4

1990 3 0 1 4

1991 5 0 1 6

1992 5 0 1 6

1993 5 0 1 6

1994 6 0 1 71995 8 0 1 91996 9 0 1 10

1997 11 0 1 12

1998 13 0 1 14

1999 14 0 1 15

2000 16 2 1 19

2001 19 3 2 24

2002 22 7 5 34

2003 27 10 10 47

2004 39 22 14 75

2005 49 36 22 107

2006 67 50 32 1492007 76 64 43 183

2008 77 65 44 186

TA = ree trade agreement, A = ramework agreement.1a Concluded Parties have signed the agreement ater completing negotiations. Some TAs would require legislative or

executive ratifcation.1b Under Implementation TA has entered into orce.2a A Signed Parties have initially negotiated and signed the A.2b Under Negotiation Parties have begun negotiations without an A.3 Proposed/Under Consultation/Study Parties are considering an TA, establishing joint study groups or joint task orces,

and conducting easibility studies to determine the desirability o entering into an TA.

Sources Authors compilation based on data rom the ollowing websites Asian Regional Inormation Center ; Australian overnment Department o oreign Aairs and Trade (www.dat.gov.au); Bilaterals.org ; oreign Aairs and International Trade Canada ; Ofce o the US TradeRepresentative ; Organization o American States oreign Trade Inormation System (www.sice.oas.org); and World Trade Organization .


19/34

erD workingpaper SerieSno. 123

product-specifc, which makes generalization even more difcult.6 There is not much that can be

done to accommodate these single- or limited-issue BTAs in a taxonomy, apart rom recognizingthat they exist and that they may need to be considered separately.

There are three broad categories o specifc economic actors that can be identifed sector-

driven, market access, and PTA-based. As depicted in igure 2, each o these three categorieshas two subcategories. Thus, in total, six specifc economic actors are identifed to explain theprolieration o BTAs.

FIGURE 2

DIFFERENTMOTIVATIONS FOR FORMING BTAS: SPECIFIC FACTORS

Specific factors

Sector-driven Market access PTA

Sector-

expanding

Sector-

excluding

Market-

restoring

Market-

creating

PTA-

facilitating

PTA-

integrating

1. secr-Drien btA

Sector-driven BTAs are subdivided into sector-excluding and sector-expanding BTAs.These BTAsare motivated mainly by one or a ew key sectors. There is both a positive and negative element

to this sector-based motivation, with some BTAs designed to expand liberalization into sectors orareas that have previously been ignored at the multilateral level, and others designed to excludesensitive sectors or issues.

(i) Sector-ExpandingBTAs

It is easy to see why BTAs are easier to negotiate and conclude than PTAs or a multilateraldeal with only two parties involved, the potential or disagreement is reduced. As the ocus oliberalization shits away rom the relatively easier task o reducing trade taxes on industrial products,achieving agreement on a multilateral level has become more difcult as the agenda broadens to

address less transparent orms o protection, more complex issues, and new sectors. By requiringonly two parties to agree, a BTA could ace ewer obstacles than a regional or multilateral pact. BTAsmay then have the potential to achieve a deeper level o integration than that possible throughthe multilateral approach alone. Even i it is not any deeper, it is oten argued that we might be

able to get there more quickly using the bilateral approach compared to the multilateral one. Thus,

sector-expanding BTAs are oten described as WTO Plus or New Age BTAs. The USSingapore BTAis one o the frst such BTAs, and is being used as a model by BTAs being pursued by the US with

other ASEAN countries as part o its Enterprise or ASEAN Initiative.

6 or example, out-o-season ruit and vegetables could motivate a BTA, such as the USChile agreement (that alsoincluded copper) or the proposed PakistanIndonesia one (seasonal dierences in citrus ruit).

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O the various so-called Singapore issues that were raised at the WTO Ministerial Conerence

in Singapore in 1996, only the rather uzzy concept o trade acilitation measures appears to havesurvived on the WTO agenda. Other Singapore issues such as establishing rules or investment,competition policy, and government procurement are being pursued in some sector-expanding BTAs.

Progress with liberalization o services in general has been slow at the multilateral level and raughtwith difculties given country-specifc sensitivities. A wide-ranging multilateral deal looks unlikelyin the near uture. Some sector-specifc BTAs have emerged in response to such an environment.In this environment, BTAs have also been driven by the act that preerential access may enable

a supplier to steal an irreversible march on the competition, and cement a long-term advantagein the market. Many o the US BTAs with developing countries are pursuing more avorable rulesrelating to investment and intellectual property rights. Most o these BTAs involve countries thathave had long-standing and strong trade relations, but are now looking to extend that relationship

to new areas, especially in services.

(ii) Sector-ExcludingBTAs

Apart rom services, the most sensitive sector as ar as liberalization is concerned is agriculture.Most sector-excluding BTAs relate, in one way or the other, to this sector. An example o the negative

element would be the BTA between Japan and Singapore, known as the JapanSingapore EconomicPartnership Agreement (JSEPA). Japan has long resisted joining PTAs because o its reluctanceto liberalize its agriculture sector, while in Singapore the absence o any signifcant agriculturalsector has acilitated the signing o this BTA. Even the ew agricultural products that Singapore

does export were easily excluded rom the JSEPA, such as cut owers and ornamental fsh. Lessthan 10% o the volume o exports o agricultural products rom Singapore to Japan is providedwith duty-ree access, and the JSEPA did not create any new preerences in the agricultural sector(Ravenhill 2006).

A similar set o exclusions o sensitive sectors can be ound in Japans BTA with Mexico. Unlike

Singapore, Mexico does have a large agricultural sector and is a major exporter o meat (pork inparticular) to Japan, so the exclusions have been so widespread that about 13% o Mexicos exportsto Japan are excluded rom the BTA. So, even when agriculture is important to one partner butsensitive in the other, it appears that BTAs can still be concluded by excluding this sector. Apartrom exclusions, there is also greater room to manipulate rules o origin in a one-on-one setting to

limit liberalization o sensitive sectors. Clearly the exibility provided by BTAs through one-on-onenegotiations allows such compromises to be made, and trade agreements to be concluded whenthey might otherwise stall or ail.

2. marke Acce btA

Market access BTAs can be divided into two groups market-restoring and market-creating.

(i) Market-RestoringBTAs

In the discussion earlier on general actors behind the popularity o BTAs, it was noted thatone o the reasons was the apparent disenchantment with the pace o progress o liberalizationat the multilateral level. The same disenchantment with the WTO was one o many actors driving


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the original interest in PTAs. It also set o a kind o snowballing or domino eect (see Baldwin

1996). As the world trade system started being carved up into blocks, countries that did not belongto a PTA elt compelled to orm or join one in order to secure regional markets, or compensateor markets in other regions that were becoming more isolated and less accessible as a result o

preerential arrangements.Some BTAs have developed in response to such a global trading environment. The motivation

behind them is to try and restore trade links that existed prior to a trading partner joining a PTA.

They generally apply to nonregional but traditional trade partners where one or both have becomemembers o a relatively integrated PTA, which has weakened trade links between them as a result.These BTAs are designed to bypass, or at least reduce, the discriminatory treatment imposed uponthem as a result o the PTA. Lloyd (2002, 6) describes this as the one actor that is common to all

new PTAs and sees it as becoming more important relative to the other actors. As Lloyd puts it,This is the ear o exclusion rom major markets. In this context, exclusion does not mean that acountry is denied access to a market, that is, total exclusion. It means that it has access on terms

less avorable than some other country or countries (Lloyd 2002, 6).

With the European Union (EU) and North American ree Trade Agreement (NATA) as centers oregional preerential trade, and with little or no prospect o other countries becoming members o

these regional trade blocs, many o the BTAs being pursued with them (either with the EU or NATAor with individual member countries) would serve as examples o restoring market-access BTAs.

The US is a major trading partner or most o the ASEAN countries. As noted earlier, with

the exception o Cambodia and Myanmar, all other ASEAN countries have either concluded or arepursuing BTAs with the US. or the ASEAN countries, the BTAs are viewed as a means o restoringmarket access in the post-NATA era.

(ii) Market-CreatingBTAs

Market-creating BTAs usually involve countries seeking to strengthen trade and investmentrelations when there has been little or weak economic relations in the past. To the extent thatlimited trade in the past has been due to trade barriers or other regulatory or commercial restrictions,market-creating BTAs may be successul in achieving its objective o promoting bilateral trade.

They could also involve one party that is basically a highly trade-liberalized economy, such asChile or Singapore. These countries have little let to liberalize on the tari ront but are lookingor better access to new markets. Countries looking to conclude BTAs with such low- or zero-taricountries are usually motivated by access to nontrade sectors, particularly services. In this respect,

these BTAs are similar to sector-expanding BTAs, but dier rom them in that they involve new ornontraditional trading partners. These highly liberalized countries also provide the best gateway,or conduit, to the region that they belong to, i the partner country is looking or such regionalaccess. or example, many o the countries pursuing BTAs with Chile are looking or a oothold in

the broader Latin and South American markets.

Another instance could involve both countries having relatively high trade barriers with therest o the world, but then each removed them preerentially among regional partners in a PTA.

In this case, there may be potential or boosting trade between the two countries through a BTAthat opens up a conduit between the PTAs that each country is a member o. On the other hand, i

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A. Cnidain btA in PtA

This section deals with the consolidation o BTAs into regionwide ree trade agreements (TAs),or blocks, where the various BTAs between members belonging to the same region are supposed tobecome largely redundant. There are numerous examples o deunct BTAs ollowing the establishment

o the European Union that lend credence to this approach. In the Asia and Pacifc region, theUSCanada BTA was superseded by the establishment o NATA. An Asia-wide TA could supersedea host o regional BTAs, and consolidate them into one regionwide agreement, i the rules are

changed to accommodate this.

The consolidation approach has the potential to reduce, perhaps even eliminate, intraregionalBTAs. In terms o our taxonomy, this would cover PTA-integrating BTAs and, depending on the size

o the consolidated PTA, some or all PTA-acilitating BTAs as well. It is hard to imagine how it wouldneutralize any other type o BTA however. Most BTAs in the Asia and Pacifc are interregional innature, as seen rom Table 3. In the Asia and Pacifc region, Kawai and Wignaraja (2007) proposean ASEAN+3 TA initially, then an expansion to ASEAN+6 in their main consolidation proposal. rom

Table 3, an ASEAN+3 TA could potentially address only 6% o all BTAs, while an ASEAN+6 TA would

cover less than a quarter o them. In short, it would not aect the vast majority o BTAsnot interms o neutralizing them anyway.

taBle shareof intraregional Btasfor Different Definitionsof region

gRouP CoNCluDED1a uNDERImPlEmENtAtIoN1

FA sIgNED2a uNDERNEgotIAtIoN2

PRoPosED/uNDERCoNsultAtIoN/stuDy3

totAl

N.sare

(%)N.

sare(%)

N.sare

(%)N.

sare(%)

ASEAN+3 11 14 1 2 1 2 12 6

ASEAN+6 17 22 14 21 11 25 42 23

ASEAN+6 +Other APEC4 34 44 27 41 20 45 81 44

ASEAN+6 + Other APEC +Other South Asia 40 52 30 63 26 59 96 52

ASEAN = Association o Southeast Asian Nations, APEC = Asia Pacifc Economic Cooperation orum, TA = ree trade

agreement.1a Concluded Parties have signed the agreement ater completing negotiations. Some TAs would require legislative or

executive ratifcation.1b Under Implementation TA has entered into orce.2a A Signed Parties have initially negotiated and signed the A.2b Under Negotiation Parties have begun negotiations without an A.3 Proposed/Under Consultation/Study Parties are considering a TA, establishing joint study groups or joint task orces,

and conducting easibility studies to determine the desirability o entering into an TA.4 Lao PDR is a member o ASEAN, but not APEC.Sources Authors compilation based on data rom the ollowing websites Asian Regional Inormation Center ; Australian overnment Department o oreign Aairs and Trade (www.dat.gov.au); Bilaterals.org ; oreign Aairs and International Trade Canada ; Ofce o the US Trade

Representative ; Organization o American States oreign Trade Inormation System (www.sice.

oas.org); and World Trade Organization .

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On the negative side, this consolidation approach may not always be easy to implement, with

its serious technical and implementation problems associated with olding several TAs togetherthat have dierent tari rates and innumerable rules o origin (oten defned dierently by product)or preerences to kick in (Bhagwati 2006).

Even i it were possible to implement, would there be any incentive to do so? A living exampleis provided in South Asia with the establishment o the South Asia ree Trade Area (SATA) in 2004,which came about ater a number o intraregional BTAs had been concluded (see Table 1), such as

the IndiaSri Lanka pact. According to Weerakoon (2008), the IndiaSri Lanka BTA is superior inits provisions to SATA in almost all respects, and as a result, 93% o Sri Lankas exports to Indiacurrently enter duty ree using the provisions o this BTA. Rather than consolidating and neutralizingthis or other BTAs, it would appear that SATA has been rendered irrelevant by the presence o these

BTAs. It could be argued that this may be a timing issue, since the ull implementation o the SATAaccords will not occur until 2016. Although this could be the case and can only be determined inthe uture, there are underlying reasons to suspect that it is more than just a timing issue.

Once again, it may be a question o underlying motivation, and this view is captured in the

ollowing quotation rom the Bangladeshi Minister o Commerce, Amir Chowdury When it comesto (our) regional TA, big economies like India and Pakistan may not oer handsome duty cuts due

to distinct interests with an individual country. But they may oer large duty cuts in bilateral TAswith Bangladesh. This position implies that not only would existing intraregional BTAs continuein operation ollowing the creation o a consolidated regional TA, the incentive to pursue newintraregional BTAs would still remain. I this is true, then the consolidated regional TA would simply

add another strand to the spaghetti bowl. In short, it is questionable whether the consolidationapproach is a practical and eective way to address even intraregional BTAs.

Thus, the ball needs to be back in the court o the consolidators, who advocate this case. So

ar, there appears to be very little detail to go on with. Moreover, the contrary case, that it wouldbe very difcult to achieve, is compelling. This arises because the BTAs are a highly heterogeneous

group o agreements. They invariably have dierent tari rates, dierent treatment o quantitativerestrictions, dierent sector exemptions (and oten dierent phase-in rates or them), dierentROOs (oten defned product by product), and a host o other arrangements ranging rom someservice sector liberalizations to labor and standards provisions. I consolidation were to proceed,the more likely outcome is some sort o lowest common denominator result, which achieves very

little (Hill and Menon 2008).

But there is a greater concern associated with employing this approach in addressing theprolieration o BTAs. This approach could serve to urther ragment the world trade system, i it

is perceived to be carving it up urther, by introducing another distinct regional block. That is,apart rom the EU and NATA, a consolidated Asian TA may be viewed as the third block, or thethird carved up, and thereby isolated, region. It is thereore critical that consolidation involve a

concerted eort to ensure that the TA is open, and perceived to be so.I the consolidated TA is perceived as being isolating, or discriminatory in any way, it may

provide resh impetus or a new wave o market-restoring BTAs as traditional trade partners outside

the region seek to retain trade access with members o the newly ormed TA. Perception and realitycan vary but, in this context, it may be perceptions that matter in the end, whatever the reality.It is hard to imagine how a new, large, consolidated block could be perceived as anything other


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than threatening, i not sinister, to nonmember traditional trading partners, however open it is

designed to be. I this is indeed the perception, and with more countries outside the region thaninside, it is possible that the total number o BTAs could actually increase as a result. This couldhappen i the reduction in the number o intraregional BTAs through a consolidated TA is more

than oset by the number o interregional market-restoring BTAs that it indirectly induces. This ishardly a remedy to the problems acing the world trade system. To the contrary, it could add tothe spaghetti bowl eect itsel.

b. miaeraiain Preerenia tari and oer Accrd

Once a country has concluded BTAs with most, i not all, o its major trading partners, it may

then make sense to equalize preerences across these BTAs, and oer them to non-BTA countries onan MN basis. This would remove the administrative burden, and eliminate distortions to countryand global trade patterns. As is oten the case with reversing much o second-best policies, however,it is the actual realized cost o implementation rather than any potential unrealized benefts that

usually drives the process. There are also signifcant unrealized benefts that will accrue to the

country concerned as well as the world trade system i this process o multilateralizing preerencesis pursued, irrespective o the reason or doing so.

Although this approach is appealing in theory, and has the potential to remedy the spaghettibowl eect, how realistic is it in practice? There are precedents to the voluntary multilateralizationo preerential accords, so this is not a pipe-dream. Indeed, ATA and the actions o its original

members confrm this possibility (see Menon 2007a, eridhanusetyawan 2005). At the Asia-PacifcEconomic Community (APEC) Leaders Summit in Subic Bay in 1996, President Ramos o the Philippinesraised the option o multilateralizing, within APEC, the ATA accords. At the time, Indonesia hadalready begun providing its ATA accords to other APEC countries. Although this proposal was never

ormally adopted by ATA members, the original members have been pursuing multilateralizationo their accords, not just within APEC, but on an MN basis on a wide range o products. In 2002,

preerences were ully multilateralized, or the margin o preerence (MOP) was zero, or more thantwo thirds o the tari lines or the original ASEAN countries (eridhanusetyawan 2005). This sharecontinues to increase year by year, although admittedly the MOP or a range o sensitive productsremains high.

In terms o supporting the process o global trade liberalization, the multilateralization processares well. Because preerential tari reduction schedules are generally more ambitious and rapid,this approach can accelerate the pace o multilateral trade liberalization.

To illustrate the process using ATA as an example, igure 3 compares, in stylized orm,trade liberalization outcomes under various scenarios involving WTO and ATA. WTO negotiationsand outcomes reduce the amount o time required or countries to move toward their goal o reeand open trade (defned here as 05% average tari rates). How does multilateralization o ATA

accords aect this outcome? I ATA is implemented on a purely minimalist basis, or without anymultilateralization o tari preerences, then the time taken to arrive at the aorementioned goal isunchanged. Average tari rates do all more rapidly, however, particularly up to ATAs 2003 deadline

or 05% internal tari rates or its original members, although this gain could be oset by thetrade diversion that it would also induce. I, however, members choose to ully multilateralize theirpreerences or all tari lines soon ater ATAs commencement, then the deadline or ree and open

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trade is moved orward to coincide with ATAs deadline o 2003. In reality, it can be observed that

preerences or a majority o tari lines have been ully multilateralized. I the remaining one thirdor so o tari lines are dealt with in the same way soon, then the deadline will all somewherebetween 2003 and the WTO-based deadline. I this happens, ATA would have served as a building

block that enables countries to pursue multilateral goals at a aster pace.FIGURE 3

WTO AND AFTA LIBERALIZATION: DIFFERENT SCENARIOS

AFTA with multilateralization

AFTA only

WTO

Without WTO

2003

Averagetariff rate (percent)

5

Source: Menon (2007a).

Time

How about the multilateralization approachs capacity to neutralize the spaghetti bowl eect?What kind o BTAs would this approach cater to? It could cover most, i not all, market access BTAs,

since the objective is mainly to restore or expand trade, and not exclude or protect it in any way.or similar reasons, it could also apply to all types o PTA-based BTAs.

It is oten argued that preerential accords in the nontari arena, such are those applying

to the services sector, are quite easily multilateralized once they have been negotiated (see Lloyd2002, Hoekman and Winters 2007). This is because the instrument o protection in many servicesector industries is regulation o one orm or the other, such as rules relating to oreign investment,competition policy, and government procurement. The same applies to the myriad measures that

relate to trade acilitation, as well as technical product standards, sanitary and phytosanitary

measures, certifcation procedures and processes, and mutual recognition arrangements relating toproessional qualifcations etc. Such regulations are quite naturally applied in a nondiscriminatoryashion, treating domestic and oreign frms7 equally. This is quite dierent rom taris aecting

trade in goods, where domestic/oreign and intraoreign discrimination is the objective. I this isthe case, then this approach would appeal to sector-expanding and some o the market-creatingBTAs.7 The nationality o a frm is defned here in terms o location o production rather than ownership.


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C. harniain m Fared Nain tari r Crdinaed Redcin

There is oten resistance to multilateralizing preerences, ater all, preerences orm the basis oBTAs and PTAs. I such resistance cannot be overcome, then another way o reducing the MOP and thedistortions it creates is to bring down the MN taris themselves. When brought down gradually, the

MOP is not zero in the interim or at the end, but much smaller. This approach may be more realisticwhen members eel committed to the preerential arrangement and thereore preer a measuredapproach that retains some integrity o the arrangement, especially in the interim. When employing

this method, an aggressive stance would involve a coordinated approach, such as harmonizing MNtaris, as with a Customs Union, to the lowest rate applied in the region. This approach does notrequire a Customs Union to be established, however, as demonstrated by Estevadeordal, reund, andOrnelas (2007) in the case o Latin American PTAs. This aggressive approach is to be preerred, i

practicable, in implementing harmonization o MN taris through coordinated reduction. To someextent, this approach can be considered the dual to the multilateralization approach discussed inSection IB, but which employs a method more pragmatic than gradualism; and which produces aresult that is less ambitious than nonzero MOP. It also diers rom multilateralization in that it

applies only to tari but not nontari measures.So, in terms o the proposed taxonomy in this paper, it could cater to the same BTAs as the

multilateralization approach with the exception o sector-expanding BTAs, and to some o the

market-creating BTAs. But as with the multilateralization approach, it will not appeal to countriesmotivated to conclude sector-excluding BTAs.

D. Diin Roo r lieraiain

Rules o origin in emerging BTAs in the Asia and Pacifc region are idiosyncratic without

exception, and this appears to be by design rather than by accident (James 2008). An interimmeasure toward ull multilateralization o accords may take the orm o loosening up ROOs and

diluting their restrictive eect. I members o the BTA or PTA are not yet ready to give up reciprocalpreerences, then this approach could be seen as preparing the groundwork or that process. This

could be done by harmonization and expanding rules o cumulation. I rules o cumulation aresufciently expanded and then harmonized across dierent agreements, the outcome could no longerrequire complete multilateralization o tari accords. In this sense, liberalizing or reorming ROOs,like harmonized reduction o MN taris, can be thought o as an alternative means o achieving

the same result.

Like the harmonized reduction approach, the dilution o ROOs through liberalization approach

would apply mainly to tari measures, and cater to similar types o BTAs. But it can be more eectivein limiting uture growth in extra-regional BTAs such as market-restoring BTAs. This is becausea system o bilateral hub-spoke agreements with constraining rules o origin is likely to greatlyencourage hub-spoke trade at the expense o spoke-spoke trade. So, i the ROOs are sufciently

liberalized and rules o cumulation adequately expanded, it can remove distortions associated withartifcial sourcing o inputs simply to meet regional cumulation requirements. This will reducethe incentive or spoke countries to pursue BTAs with either the hub or other spokes in order toprevent (nonpreerential) spoke-spoke trade being diverted to (preerential) hub-spoke trade. The

Pan-European Cumulation System is a good model or how this can work (see asiorek 2007).

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In this way, the dilution approach has an edge over the harmonized approach. It has the

same advantage over the multilateralization approach in being better suited to addressing market-restoring BTAs, but not as eective in neutralizing sector-expanding BTAs, since it deals mainlywith tari but not nontari measures.

E. A sin up

This section summarizes the assessment and likely impacts o the our proposed remediesin addressing the eects o the prolieration o BTAs, as well as promoting liberalization moregenerally. igure 4 portrays the likely welare eects o each remedy, and variants therein, whileTable 4 summarizes the ability o each remedy to address the dierent types o BTAs presented in

the taxonomy.

Although igure 4 is largely sel-explanatory, two points are worth highlighting. irst is theact that the multilateralization approach produces the most signifcant reduction in distortions,

and does so in the shortest time rame. It has the capacity to eliminate not only the MOP, but alsosome o the distortions associated with discriminatory restrictions in the nontrade sector, especiallyservices. It can achieve this in the shortest time-rame because it involves a one-o decision, as

opposed to staggered (harmonization) or gradual (dilution) changes.

FIGURE 4

STYLIZED WELFARE EFFECTS OF DIFFERENTREMEDIES

Distortions/welfare costsof BTAs

A: Distortions (trade barriers)B: Distortions (trade and nontrade barriers)

B

A

{{

Time

Harmonization(coordinated)

Harmonization(uncoordinated)

Multilateralization

Consolidation (closed)

Consolidation (open)

Dilution (incomplete)

Dilution (complete)

I multilateralization is thereore the most preerred approach, the least preerred is consolidation.Although distortions all initially as (some) intraregional BTAs are neutralized, they can rise again

i (i) a lowest common denominator outcome prevails, whereby the average level o distortionsactually increases; and/or (ii) they induce new extraregional, or market-restoring, BTAs. I theconsolidated TA is perceived as being relatively closed, then it is likely that distortions couldincrease substantially. Even i the consolidated TA is designed to be open and perceived to

be so, the reduction in distortions is the lowest among the our approaches, because it can onlyaddress a limited range o BTAs, as highlighted in Table 4, and more likely on a lowest commondenominator basis.


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taBle effeCtivenessof ProPoseD remeD/aPProaChversus tPeof Bta

tyPE oF btA

PRoPosED REmEDy\APPRoACh

CoNsolIDAtIoN multIlAtERAlIzAtIoN hARmoNIzAtIoN DIlutIoN

Sector-expanding Yes

Sector-excluding Partial Partial Partial Partial

Market-restoring Yes Yes Yes

Market-creating Yes

PTA-acilitating Yes Yes Yes Yes

PTA-integrating Yes Yes Yes Yes

Impact

Induce new BTAs Yes (Closed) No No No

No (Open)

The consolidation approach has the capacity to address only two types o BTAs, namely PTA-acilitating and PTA-integrating, and these two types o BTAs can be addressed using any o theother three approaches (Table 4). In addition to these two types o BTAs, the harmonization and

dilution approaches can also deal with market-restoring BTAs, while the multilateralization approachcan additionally neutralize sector-expanding BTAs. All our approaches are able to address sector-excluding BTAs partially (as will be discussed later).

The consolidation approach may also be an overreaction to the problems associated withthe spaghetti bowl eect, or the general prolieration o BTAs. A act that is being increasinglyrecognized, and confrmed with data on utilization rates o preerences, is that many BTAs do nothave a signifcant real eect on trade and other ows. Some BTAs are simply paper agreements that

have no impact at all, apart rom wasted resources in their preparation, negotiation, and maintenance.Others that are being implemented have a much smaller impact than the sectors that they coverbecause o low utilization rates. arious surveys o utilization rates o preerences lend support to

this view (see rether and Olarreaga 1998). or instance, a survey by JETRO (2003) ound that in2002, the rate within ATA was only 4% or Malaysia, and 11% or Thailand. That is, the cost ocomplying with ROOs and other requirements are perceived to be higher than the beneft accordedby preerential treatment, and so exporters choose to ignore the preerential tari and apply or

MN treatment. Pomret (2007) claims that most o world trade continues to be conducted in thisway, despite the prolieration o preerential agreements.

igure 5 illustrates this in stylized orm. As the complexity o ROOs increases, the amount o

trade diversion also increases initially. That is, in order to satisy increasingly demanding domesticcontent and other requirements, the sourcing o more and more inputs need to be switched romthe lowest cost supplier (assumed to be extraregional) to regional member countries. Depending

on the MOP, a turning point is eventually reached, which corresponds to a certain critical levelo complexity. Beyond this level, it is no longer perceived to be proftable to try and satisy therequirements o the preerential agreement, and that it is more cost-eective to switch back tothe lowest cost supplier. The level o trade diversion induced starts to taper o. The recorded low

levels o utilization rates o preerences would suggest that the level o complexity o most ROOslie somewhere beyond this critical level.

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FIGURE 5

ROOS AND TRADE DIVERSION

High margin of preference

Low margin of preference

Trade

diversion

Complexity of ROOs

Another reason why consolidation may be an overreaction relates to the role that exportprocessing zones play in providing a reuge or frms looking to escape the quagmire o the spaghetti

bowl. or example, the astest growing segment o world trade is in electronics and components.Here production is being sliced up across international boundaries more than ever, as multinationalenterprises continue the search or efcient, low-cost production centers that are integrated intotheir multicountry production and distribution systems.

Asia is the driving orce behind the growth o this trade.8 The big multinational enterprises inthese sectorsIntel, Dell, Sony, and otherstypically produce, source, and distribute in a dozenor more countries. It is inconceivable that these globally integrated giants can operate eectively

across so many customs zones, each with their own set o ROOs. In act they do not. Instead theygenerally choose to operate in export zones, where goods ow in and out on a duty-ree basis,beyond the reach o PTAs or BTAs. The more these PTAs and BTAs spread, the more these frms will

be driven into export zones to escape rom them, in the process creating an unhealthy dualismbetween the zones and the rest o the economy. Unless o course, the countries continue down thepath o unilateral liberalization and become, like Singapore and Hong Kong, China, one big reetrade area. or this reason, BTAs are ultimately likely to collapse under their own weight (Hill and

Menon 2008).

A eature that is clearly apparent rom Table 4 is that none o the approaches appear to beable to address sector-excluding BTAs ully. While any o the approaches could be employed to

neutralize preerences in sectors other than the ones being specifcally excluded (thus the reerenceto partial in Table 4), the liberalization o these excluded sectors remain problematic or allapproaches. It is important to note, however, that the distortions emanating rom excluding these

8 Between 19691970 and 20052006, the share o Asian (almost entirely East Asian) countries in global non-oil exports

recorded a three-old increase, rom 11.1% to 33.4%. The astest growing sectors have been within the machinery andtransport equipment group o manuacturing, in particular the inormation and communication technology products.

These have played a pivotal role in this major relocation o global trade to East Asia. By 2005/06, over 67% o totalworld inormation and communication technology exports originated rom Asia.


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sectors are dierent rom those associated with the spaghetti bowl eect. These distortions do not

arise rom preerences or explicit discriminatory treatment, but rom domestic subsidies and otherorms o national support, as well as various nontari measures. But as noted in the Introduction,it is important to consider these proposals not only in terms o dealing with the spaghetti bowl,

but more broadly in terms o the overall liberalization process.What can be done about these BTAs or, more specifcally, the sectors excluded in these BTAs?

The WTO and the potential role that the Doha Round could play become important here. This is

because the multilateral approach is arguably the best orum to deal with liberalization o theseexcluded sectors. The reason or this relates to the act that the multilateral approach has one keyadvantage over the bilateral (or regional) approach, which is the ability to trade concessions acrossdisparate interests, i.e., to weigh the costs to countries o conceding protection in sensitive sectors

(such as agriculture) against the benefts rom increased market access in areas in which they have acomparative advantage (e.g. through changes to rules relating to investment, intellectual property orservices).9 This constrains negotiating positions and options within the WTO. Every time a BTA

allows a country to bypass this trade-o simply through its choice o partner, and secures beneftswithout incurring costs, the task o liberalizing such sensitive sectors is made more difcult.

v. summARy AND CoNClusIoNs

The interest in orming BTAs has been growing at a phenomenal rate. In the Asia and Pacifcregion, defned to cover most o APEC and South Asia, the number o concluded BTAs has almost

tripled over the past 5 years, rom 27 in 2002 to 77 in January 2008. urthermore, this interestappears to be increasing at an increasing rate, with the number o proposed BTAs rising rom fveto 44 over the same period. The outcome o this prolieration o oten overlapping BTAs and PTAsis described as the spaghetti bowl eect or, in the Asian region, the noodle bowl eect. However

it is called, there is little doubt that BTAs are not a good way to organize trade, and are welare-reducing.

This paper has considered the various options proposed in dealing with this prolieration, andassessed their ability to do so. But previous assessments have ignored underlying dierences inmotivation in orming BTAs. To address this, the paper developed a taxonomy or classiying BTAs bymotivation beore considering the eectiveness o the dierent remedies proposed. Each proposal

has its pros and cons, and any one may be more eective in neutralizing a BTA depending on whythe BTA was ormed. In short, motivation matters. Thus, a combination o the various proposalsmay be warranted, given the myriad o motivations.

Although multilateralization o preerential accords is the most preerred approach in dealingwith the problem, incentives to do so might be lacking. The least preerred approach is consolidationinto regionwide TAs, because it is both impractical and potentially counterproductive. That is, itcould induce a larger number o interregional BTAs than the number o intraregional BTAs that it

may neutralize.

9 See Menon (1998) or more details. A potent example o this trade-o was provided in the lead-up to the WTO meeting

in Hong Kong, China in December 2005. Brazil and India, representing the apparent position o a majority o developing

countries, proposed opening their markets urther to industrial goods and services in exchange or the European Unionand the US dismantling the elaborate system o support to their agricultural sector.

SeCtion v

SummaryanD ConCluSionS


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22 September 2008


Jayantmenon

Because o dierences in motivations, these proposals will have a role to play even in the evento an expeditious and bona fde conclusion to the Doha Round. Nevertheless the WTO remains the

best orum to try and address the most stubborn o BTAs, the sector-excluding BTA; and the mostdifcult o sectors, agriculture, because o the WTOs ability to trade concessions across disparateinterests in a multilateral setting.

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http://www.iseas.edu.sg/vr32002.pdfhttp://www.iseas.edu.sg/vr32002.pdf


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abu e per

Jayant Menon writes that a general limitation of the proposals put forward todeal with the proliferation of the free trade agreements is their failure to considerunderlying differences in motivation in forming them. To overcome this, the paperdevelops a taxonomy for classifying free trade agreements by motivation beforeconsidering the effectiveness of the different remedies proposed. The paper findsthat each proposal has its pros and cons, and can cater to different types ofagreements, leading to the conclusion that a combination of the various proposalsmay be warranted.

Asian Development Bank6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippineswww.adb.org/economicsISSN: 1655-5252

abu e a devele Bk

ADBs vision is an Asia and Pacific region free of poverty. Its mission is to help itsdeveloping member countries substantially reduce poverty and improve the qualityof life of their people. Despite the regions many successes, it remains home to twothirds of the worlds poor. Nearly 1.7 billion people in the region live on $2 or lessa day. ADB is committed to reducing poverty through inclusive economic growth,environmentally sustainable growth, and regional integration.

Based in Manila, ADB is owned by 67 members, including 48 from the region.Its main instruments for helping its developing member countries are policydialogue, loans, equity investments, guarantees, grants, and technical assistance.In 2007, it approved $10.1 billion of loans, $673 million of grant projects, andtechnical assistance amounting to $243 million.

Documents

Dealing with the Proliferation of Bilateral Trade Agreements: Consolidation, Multilateralization, Harmonization, or Dilution?