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

Menon, Jaytan Working Paper Dealing with the Proliferation of Bilateral Trade Agreements: Consolidation, Multilateralization, Harmonization, or Dilution? ERD Working Paper Series, No. 123 Provided in Cooperation with: Asian Development Bank (ADB), Manila Suggested Citation: Menon, Jaytan (2008) : Dealing with the Proliferation of Bilateral Trade Agreements: Consolidation, Multilateralization, Harmonization, or Dilution?, ERD Working Paper Series, No. 123, Asian Development Bank (ADB), Manila, https://hdl.handle.net/11540/1778 This Version is available at: https://hdl.handle.net/10419/109327 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Jayant Menon September 2008 about the paper Jayant Menon writes that a general limitation of the proposals put forward to deal with the proliferation of the free trade agreements is their failure to consider underlying differences in motivation in forming them. To overcome this, the paper develops a taxonomy for classifying free trade agreements by motivation before considering the effectiveness of the different remedies proposed. The paper finds that each proposal has its pros and cons, and can cater to different types of agreements, leading to the conclusion that a combination of the various proposals may be warranted. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ISSN: 1655-5252 Publication Stock No. about the asian development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries substantially reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two thirds of the world’s poor. Nearly 1.7 billion people in the region live on $2 or less a 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 policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. In 2007, it approved $10.1 billion of loans, $673 million of grant projects, and technical assistance amounting to $243 million. ERD WoRking PaPER SERiES no. 123 ERD Working Paper No. 123 Dealing with the Proliferation of Bilateral traDe agreements: ConsoliDation, multilateralization, harmonization, or Dilution? Jayant Menon sePtemBer 2008 Jayant Menon is Principal Economist, Office for Regional Economic Integration, Asian Development Bank. This is a revised version of a paper presented in the Conference on International Rules on Trade and Investment, held January 2008 in Bangkok. The author is grateful for comments received from Charles Adams, W. Max Corden, Hal Hill, William E. James, Hugh Patrick, and Richard Pomfret; and to Anna Melendez-Nakamura and Dorothea Lazaro for excellent research assistance. The views expressed herein reflect those of the author and should not be taken to reflect those of the Asian Development Bank. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ©2008 by Asian Development Bank September 2008 ISSN 1655-5252 The views expressed in this paper are those of the author(s) and do not necessarily reflect the views or policies of the Asian Development Bank. FoREWoRD The ERD Working Paper Series is a forum for ongoing and recently completed research and policy studies undertaken in the Asian Development Bank or on its behalf. The Series is a quick-disseminating, informal publication meant to stimulate discussion and elicit feedback. Papers published under this Series could subsequently be revised for publication as articles in professional journals or chapters in books. CoNtENts Abstract vii I. IntroductionI. Introduction 1 II. BTAs�� Some facts and �iguresII. BTAs�� Some facts and �igures 2 III. �actors Driving the Proliferation of BTAsIII. �actors Driving the Proliferation of BTAs 6 A. �eneral �actorsA. �eneral �actors 6 B. Specific �actors 7 I�. Alternative Approaches to Dealing with the Proliferation of BTAI�. Alternative Approaches to Dealing with the Proliferation of BTAs, and Their Effectiveness 12 A. Consolidation of BTAs into PTAs 1A. Consolidation of BTAs into PTAs 13 B. Multilateralization of Preferential Tariffs and Other Accords 15 C. Harmonization of Most �avored Nation Tariffs through Coordinated Reduction 17 D. Dilution of ROOs through Liberalization 17 E. A Summing Up 18 �. Summary and Conclusions 2�. Summary and Conclusions 21 References 22 erD working paper SerieS no. 123 5 CoNCluDED1A/uNDER ImPlEmENtAtIoN1b FRAmEWoRk AgREEmENt sIgNED2a uNDER NEgotIAtIoN2b PRoPosED/uNDER CoNsultAtIoN/stuDy3 No. Parties Date No. Parties Date No. Parties Date 59 Taipei,China–Nicaragua Oct-07 136 Thailand–E�TA Oct-05 60 Taipei,China–Panama Jan-04 137 Thailand–Peru (�A signed) Nov-05 61 Thailand–Australia Jan-05 138 Ukraine–Singapore May-07 62 Thailand–New Zealand Jul-05 139 United States–Malaysia Mar-06 63 Thailand–Peru (signed) Nov-05 140 United States–Thailand Jun-04 64 United States–Australia Jan-05 141 United States–SACU Nov-02 65 United States–Bahrain Aug-06 142 United States–UAE Nov-04 66 United States–Chile Nov-04 67 United States–Colombia (signed) Nov-06 68 United States–Israel Sep-85 69 United States–Jordan Dec-01 70 United States–Marshall Islands May-04 71 United States–Micronesia Jun-04 72 United States–Morocco Jan-06 73 United States–Oman (signed) Sep-06 74 United States–Panama (signed) Jun-07 75 United States–Peru (signed) Apr-06 76 United States–Palau Oct-94 77 United States–Singapore Jan-04 �TA = free trade agreement, �A = framework agreement, E�TA = European �ree Trade Association, �CC = �ulf Cooperation Council, SACU = South African Customs Union, MERCOSUR = _____?????, EU = European Union, UAE = United Arab Emirates, PRC = People’s Republic of China, ACP-EC = ____????. 1a Concluded�� Parties have signed the agreement after completing negotiations. Some �TAs would require legislative or executive ratification. 1b Under Implementation�� �TA has entered into force. 2a �A Signed�� Parties have initially negotiated and signed an �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 forces, and conducting feasibility studies to determine the desirability of entering into an �TA. 4 Superseded by the North Atlantic �ree Trade Agreement. 5 Now �CC–Singapore �TA. Sources�� Author’s compilation based on data from the following websites�� Asian Regional Information Center <aric.adb.org>; Australian �overnment Department of �oreign Affairs and Trade (www.dfat.gov.au); Bilaterals.org <www.bilaterals.org>; �oreign Affairs and International Trade Canada <www.dfait-maeci.gc.ca>; Office of the US Trade Representative <www.ustr.gov>; Organization of American State’s �oreign Trade Information System (www.sice.oas.org); and World Trade Organization <www.wto.org>. Table 1. continued. SeCtion ii btaS: Some faCtS anD figureS 6 September 2008 Dealing with the proliferation of bilateral traDe agreementS: ConSoliDation, multilateralization, harmonization, or Dilution? Jayant menon figure 1 Btas of Countries in asean,3 aPeC, anD south asia, B�� status, Cumulative as of �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 from the following websites�� Asian Regional Information Center <aric.adb.org>; Australian �overnment Department of �oreign Affairs and Trade (www.dfat.gov.au); Bilaterals.org <www.bilaterals. org>; �oreign Affairs and International Trade Canada <www.dfait-maeci. gc.ca>; Office of the US Trade Representative <www.ustr.gov>; Organization of American State's �oreign Trade Information System (www.sice.oas.org); and World Trade Organization <www.wto.org>. III. FACtoRs DRIvINg thE PRolIFERAtIoN oF btAs Why are BTAs so popular? In answering this question, a set of general as well as specific factors or motivations for the popularity of BTAs needs to be identified. The general motivations apply to most, if not all BTAs, but there is always at least one additional specific factor that drives the formation of a BTA (even as usually there is more than one specific factor 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 of the other party. It is also possible that each party has more than one motivating factor in pursuing the BTA. When there are two or more factors motivating the BTA, the dominant one is used in classifying the BTA. A. general Factors An important general reason for the popularity of BTAs is the apparent disenchantment with the pace of progress with liberalization at the multilateral level. The difficulties associated with 3 Lao PDR is a member of ASEAN, but not APEC. erD working paper SerieS no. 123 7 concluding the Doha round have simply reinforced this view. Many countries feel that the WTO has failed to deliver and so have pursued BTAs (and PTAs) as a means of pressing ahead with their trade and liberalization agendas.4 A form of snowballing or domino effect, as with PTAs in the past (see Baldwin 1996), has also been driving the growth in BTAs. In the Asia and Pacific region, interest in forming BTAs began in the late 1990s with Japan, Republic of 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 countries in the Asia and Pacific region felt disadvantaged if they did not join the club. The number of BTAs thus continued to grow, and almost doubled to 109 between 2002 and 2004. There is clearly a momentum driving some of the growth in BTAs with countries not wanting to be left behind in this apparent race.5 It is often claimed that some, if not most, BTAs are essentially politically motivated. There is no doubt that political economy considerations, and indeed political parties or politicians themselves, play a major role in driving the proliferation of BTAs. A recent example of this is how the control of both Houses by the Democrats has put at risk a number of BTAs that the Bush administration has been pursuing. Although this paper tries to take into account political, strategic, and foreign policy-related issues, it focuses on economic and economic related considerations because they are easier to identify and measure. Thus, the discussion that follows is likely to understate the role that politics and politicians play in the proliferation of BTAs, simply because these influences are often difficult to measure or model, let alone classify. b. specific Factors In trying to classify BTAs, with a view toward a better understanding of them and their motivating factors, previous researchers have focused on issues such as relative size of the partners (Bonapace 2004, Whalley 2008); or geographic dispersion (Scollay 2003); while still others have referred to a range of trade, political, and other noneconomic issues (e.g., Pangestu and Scollay 2001, Baldwin 2004, Ravenhill 2006). These studies generally fail to identify any clear or consistent pattern relating to size or geography, and usually conclude that a myriad of factors are probably involved. Menon (2007b) brings together, in a systematic way, various economic, political, and strategic factors underlying the proliferation of BTAs in an attempt to redress this ambiguity. This section adapts the taxonomy in Menon (2007b) to focus on economic motivations. This adaptation, or the original taxonomy, does not attempt to explain or classify all BTAs, only most of them. There are apparently a host of BTAs that are basically single or limited-issue agreements, which may not even try to address tariff or nontariff barriers. �urthermore, these may be sector- or 4 In a paradoxical twist, it seems WTO meetings themselves are being overshadowed and are providing an opportunity for members to pursue new BTAs with other member countries. In a Bangkok-based daily, (The Nation 2004), an item reports that “In the corridors of the WTO meetings, Thai officials discussed the possibility of �TAs with Mexico, Chile and Peru.” In the same vein, it is somewhat ironic that the Japan–Singapore BTA was concluded at the APEC summit meeting in Shanghai in October 2001. 5 Baldwin (2006b, 22) argues that it could continue to play a role in the proliferation of BTAs in the region in the coming years�� “If history is any guide, the domino effect in East Asia will spread to many, many more countries in the neighborhood. In Europe, for example, several waves of domino effects have left the European Union with preferential trade deals with every WTO member except for nine. It is therefore conceivable that the 13 members of the ASEAN+3 group will end up signing a very large number of bilaterals in the coming years.” SeCtion iii faCtorS Driving the proliferation of btaS 8 September 2008 Dealing with the proliferation of bilateral traDe agreementS: ConSoliDation, multilateralization, harmonization, or Dilution? Jayant menon taBle 2 Btas of Countries in asean, aPeC, anD south asia �Cumulative��as of �anuar�� 2008asean, aPeC, anD south asia �Cumulative��as of �anuar�� 2008aPeC, anD south asia �Cumulative��as of �anuar�� 2008anD south asia �Cumulative��as of �anuar�� 2008 south asia �Cumulative��as of �anuar�� 2008 �Cumulative��as of �anuar�� 2008Cumulative�� as of �anuar�� 2008as of �anuar�� 2008 yEAR CoNCluDED1a uNDER ImPlEmENtAtIoN1b FA sIgNED2a uNDER NEgotIAtIoN2b 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 7 1995 8 0 1 9 1996 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 32 149 2007 76 64 43 183 2008 77 65 44 186 �TA = free trade agreement, �A = framework agreement. 1a Concluded�� Parties have signed the agreement after completing negotiations. Some �TAs would require legislative or executive ratification. 1b Under Implementation�� �TA has entered into force. 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 forces, and conducting feasibility studies to determine the desirability of entering into an �TA. Sources�� Author’s compilation based on data from the following websites�� Asian Regional Information Center <aric.adb. org>; Australian �overnment Department of �oreign Affairs and Trade (www.dfat.gov.au); Bilaterals.org <www. bilaterals.org>; �oreign Affairs and International Trade Canada <www.dfait-maeci.gc.ca>; Office of the US Trade Representative <www.ustr.gov>; Organization of American State’s �oreign Trade Information System (www.sice. oas.org); and World Trade Organization <www.wto.org>. erD working paper SerieS no. 123 9 product-specific, which makes generalization even more difficult.6 There is not much that can be done to accommodate these single- or limited-issue BTAs in a taxonomy, apart from recognizing that they exist and that they may need to be considered separately. There are three broad categories of specific economic factors that can be identified�� sectordriven, market access, and PTA-based. As depicted in �igure 2, each of these three categories has two subcategories. Thus, in total, six specific economic factors are identified to explain the proliferation of BTAs. FIGURE 2 DIFFERENT MOTIVATIONS FOR FORMING BTAS: SPECIFIC FACTORS Specific factors Sector-driven Market access PTA Sectorexpanding Sectorexcluding Marketrestoring Marketcreating PTA- facilitating PTA- integrating 1. sector-Driven btAs Sector-driven BTAs are subdivided into sector-excluding and sector-expanding BTAs.These BTAs are motivated mainly by one or a few key sectors. There is both a positive and negative element to this sector-based motivation, with some BTAs designed to expand liberalization into sectors or areas that have previously been ignored at the multilateral level, and others designed to exclude sensitive sectors or issues. (i) Sector-Expanding BTAs It is easy to see why BTAs are easier to negotiate and conclude than PTAs or a multilateral deal�� with only two parties involved, the potential for disagreement is reduced. As the focus of liberalization shifts away from the relatively easier task of reducing trade taxes on industrial products, achieving agreement on a multilateral level has become more difficult as the agenda broadens to address less transparent forms of protection, more complex issues, and new sectors. By requiring only two parties to agree, a BTA could face fewer obstacles than a regional or multilateral pact. BTAs may then have the potential to achieve a deeper level of integration than that possible through the multilateral approach alone. Even if it is not any deeper, it is often 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 often described as “WTO Plus” or “New Age” BTAs. The US–Singapore BTA is one of the first such BTAs, and is being used as a model by BTAs being pursued by the US with other ASEAN countries as part of its “Enterprise for ASEAN Initiative”. 6 �or example, out-of-season fruit and vegetables could motivate a BTA, such as the US–Chile agreement (that also included copper) or the proposed Pakistan–Indonesia one (seasonal differences in citrus fruit). SeCtion iii faCtorS Driving the proliferation of btaS 10 September 2008 Dealing with the proliferation of bilateral traDe agreementS: ConSoliDation, multilateralization, harmonization, or Dilution? Jayant menon Of the various so-called “Singapore issues” that were raised at the WTO Ministerial Conference in Singapore in 1996, only the rather fuzzy concept of trade facilitation measures appears to have survived on the WTO agenda. Other Singapore issues such as establishing rules for investment, competition policy, and government procurement are being pursued in some sector-expanding BTAs. Progress with liberalization of services in general has been slow at the multilateral level and fraught with difficulties given country-specific sensitivities. A wide-ranging multilateral deal looks unlikely in the near future. Some sector-specific BTAs have emerged in response to such an environment. In this environment, BTAs have also been driven by the fact that preferential access may enable a supplier to steal an irreversible march on the competition, and cement a long-term advantage in the market. Many of the US BTAs with developing countries are pursuing more favorable rules relating to investment and intellectual property rights. Most of these BTAs involve countries that have had long-standing and strong trade relations, but are now looking to extend that relationship to new areas, especially in services. (ii) Sector-Excluding BTAs Apart from services, the most sensitive sector as far as liberalization is concerned is agriculture. Most sector-excluding BTAs relate, in one way or the other, to this sector. An example of the negative element would be the BTA between Japan and Singapore, known as the Japan–Singapore Economic Partnership Agreement (JSEPA). Japan has long resisted joining PTAs because of its reluctance to liberalize its agriculture sector, while in Singapore the absence of any significant agricultural sector has facilitated the signing of this BTA. Even the few agricultural products that Singapore does export were easily excluded from the JSEPA, such as cut flowers and ornamental fish. Less than 10% of the volume of exports of agricultural products from Singapore to Japan is provided with duty-free access, and the JSEPA did not create any new preferences in the agricultural sector (Ravenhill 2006). A similar set of exclusions of sensitive sectors can be found in Japan’s BTA with Mexico. Unlike Singapore, Mexico does have a large agricultural sector and is a major exporter of meat (pork in particular) to Japan, so the exclusions have been so widespread that about 13% of Mexico’s exports to Japan are excluded from the BTA. So, even when agriculture is important to one partner but sensitive in the other, it appears that BTAs can still be concluded by excluding this sector. Apart from exclusions, there is also greater room to manipulate rules of origin in a one-on-one setting to limit liberalization of sensitive sectors. Clearly the flexibility provided by BTAs through one-on-one negotiations allows such compromises to be made, and trade agreements to be concluded when they might otherwise stall or fail. 2. market Access btAs Market access BTAs can be divided into two groups�� market-restoring and market-creating. (i) Market-Restoring BTAs In the discussion earlier on general factors behind the popularity of BTAs, it was noted that one of the reasons was the apparent disenchantment with the pace of progress of liberalization at the multilateral level. The same disenchantment with the WTO was one of many factors driving erD working paper SerieS no. 123 11 the original interest in PTAs. It also set off a kind of snowballing or domino effect (see Baldwin 1996). As the world trade system started being carved up into blocks, countries that did not belong to a PTA felt compelled to form or join one in order to secure regional markets, or compensate for markets in other regions that were becoming more isolated and less accessible as a result of preferential 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 become members of 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 upon them as a result of the PTA. Lloyd (2002, 6) describes this as the one factor that is common to all new PTAs and sees it as becoming more important relative to the other factors. As Lloyd puts it, “This is the fear of exclusion from major markets. In this context, exclusion does not mean that a country is denied access to a market, that is, total exclusion. It means that it has access on terms less favorable than some other country or countries” (Lloyd 2002, 6). With the European Union (EU) and North American �ree Trade Agreement (NA�TA) as centers of regional preferential trade, and with little or no prospect of other countries becoming members of these regional trade blocs, many of the BTAs being pursued with them (either with the EU or NA�TA or with individual member countries) would serve as examples of restoring market-access BTAs. The US is a major trading partner for most of the ASEAN countries. As noted earlier, with the exception of Cambodia and Myanmar, all other ASEAN countries have either concluded or are pursuing BTAs with the US. �or the ASEAN countries, the BTAs are viewed as a means of restoring market access in the post-NA�TA era. (ii) Market-Creating BTAs Market-creating BTAs usually involve countries seeking to strengthen trade and investment relations when there has been little or weak economic relations in the past. To the extent that limited trade in the past has been due to trade barriers or other regulatory or commercial restrictions, market-creating BTAs may be successful in achieving its objective of promoting bilateral trade. They could also involve one party that is basically a highly trade-liberalized economy, such as Chile or Singapore. These countries have little left to liberalize on the tariff front but are looking for better access to new markets. Countries looking to conclude BTAs with such low- or zero-tariff countries are usually motivated by access to nontrade sectors, particularly services. In this respect, these BTAs are similar to sector-expanding BTAs, but differ from them in that they involve new or nontraditional trading partners. These highly liberalized countries also provide the best gateway, or conduit, to the region that they belong to, if the partner country is looking for such regional access. �or example, many of the countries pursuing BTAs with Chile are looking for a foothold in the broader Latin and South American markets. Another instance could involve both countries having relatively high trade barriers with the rest of the world, but then each removed them preferentially among regional partners in a PTA. In this case, there may be potential for boosting trade between the two countries through a BTA that opens up a conduit between the PTAs that each country is a member of. On the other hand, if SeCtion iii faCtorS Driving the proliferation of btaS 12 September 2008 Dealing with the proliferation of bilateral traDe agreementS: ConSoliDation, multilateralization, harmonization, or Dilution? Jayant menon historically weak trade relations is due to economic reasons based on comparative advantage, such as competitive rather than complementary resource endowments, then such BTAs will have little, if any, effect on boosting bilateral trade, unless the preference margins are very large. 3. PtA-based btAs The PTA based category is also divided into two subcategories�� PTA-facilitating and PTA- integrating BTAs. (i) PTA-Facilitating BTAs These are BTAs designed to hasten the pace of integration between a nonmember and a member of a BTA. Although both parties are usually countries, they need not be so; they could also be BTAs or PTAs. An example of this would be the India–Thailand BTA, with India looking to strengthen ties with ASEAN �ree Trade Area (A�TA). The same is true of the “Plus 3” countries of ASEAN, with PRC, Japan, and Korea pursuing individual BTAs with ASEAN members. Such BTAs can also be pursued with the PTA as a whole, and all the “Plus 3” countries are doing so with ASEAN. (ii) PTA-Integrating BTAs These are BTAs between members of a PTA. These types of BTAs stand out because unlike all other BTAs, the parties involved already have some form of a preferential trade agreement designed to promote closer economic relations between them. Examples of such BTAs include the Lao PDR–�iet Nam BTA and the Singapore–Thailand BTA, where all countries are also members of A�TA. Iv. AltERNAtIvE APPRoAChEs to DEAlINg WIth thE PRolIFERAtIoN oF btAs, AND thEIR EFFECtIvENEss There are four broad approaches that have been proposed in addressing the proliferation of BTAs, and minimizing the damage that the spaghetti bowl effect is having on the world trade system. These are�� (i) consolidation of BTAs into PTAs (e.g., Brummer 2007, Kawai and Wignaraja 2007, Kawai 2007) (ii) multilateralization of preferential tariffs and other accords (e.g., �eridhanusetyawan 2005, Menon 2007a) (iii) harmonization of most favored nation (M�N) tariffs through coordinated reduction (Pangestu and Scollay 2001; Baldwin 2004; Hoekman and Winters 2007; Estevadeordal, �reund, and Ornelas 2007) (iv) dilution of rules of origin (ROOs) through liberalization (Baldwin 2006a; �asiorek 2007; Estevadeordal Harris, and Suominen 2007) In what follows, the rationale for each approach is provided before assessing how effective it is likely to be in achieving its objectives. erD working paper SerieS no. 123 13 A. Consolidation of btAs into PtAs This section deals with the consolidation of BTAs into regionwide free trade agreements (�TAs), or blocks, where the various BTAs between members belonging to the same region are supposed to become largely redundant. There are numerous examples of defunct BTAs following the establishment of the European Union that lend credence to this approach. In the Asia and Pacific region, the US–Canada BTA was superseded by the establishment of NA�TA. An Asia-wide �TA could supersede a host of regional BTAs, and consolidate them into one regionwide agreement, if the rules are changed to accommodate this. The consolidation approach has the potential to reduce, perhaps even eliminate, intraregional BTAs. In terms of our taxonomy, this would cover PTA-integrating BTAs and, depending on the size of the consolidated PTA, some or all PTA-facilitating BTAs as well. It is hard to imagine how it would neutralize any other type of BTA however. Most BTAs in the Asia and Pacific are interregional in nature, as seen from Table 3. In the Asia and Pacific region, Kawai and Wignaraja (2007) propose an 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% of all BTAs, while an ASEAN+6 �TA would cover less than a quarter of them. In short, it would not affect the vast majority of BTAs—not in terms of neutralizing them anyway. taBle 3 share of intraregional Btas for Different Definitions of “region” gRouP CoNCluDED1a uNDER ImPlEmENtAtIoN1b FA sIgNED2a uNDER NEgotIAtIoN2b PRoPosED/uNDER CoNsultAtIoN/stuDy3 totAl No. share (%) No. share (%) No. share (%) No. share (%) 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 of Southeast Asian Nations, APEC = Asia Pacific Economic Cooperation forum, �TA = free trade agreement. 1a Concluded�� Parties have signed the agreement after completing negotiations. Some �TAs would require legislative or executive ratification. 1b Under Implementation�� �TA has entered into force. 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 forces, and conducting feasibility studies to determine the desirability of entering into an �TA. 4 Lao PDR is a member of ASEAN, but not APEC. Sources�� Author’s compilation based on data from the following websites�� Asian Regional Information Center <aric.adb. org>; Australian �overnment Department of �oreign Affairs and Trade (www.dfat.gov.au); Bilaterals.org <www. bilaterals.org>; �oreign Affairs and International Trade Canada <www.dfait-maeci.gc.ca>; Office of the US Trade Representative <www.ustr.gov>; Organization of American State’s �oreign Trade Information System (www.sice. oas.org); and World Trade Organization <www.wto.org>. SeCtion iv alternative approaCheS to Dealing with the proliferation of btaS, anD their effeCtiveneSS 14 September 2008 Dealing with the proliferation of bilateral traDe agreementS: ConSoliDation, multilateralization, harmonization, or Dilution? Jayant menon On the negative side, this consolidation approach may not always be easy to implement, with its serious technical and implementation problems associated with “folding several �TAs together that have different tariff rates and innumerable rules of origin (often defined differently by product) for preferences to kick in” (Bhagwati 2006). Even if it were possible to implement, would there be any incentive to do so? A living example is provided in South Asia with the establishment of the South Asia �ree Trade Area (SA�TA) in 2004, which came about after a number of intraregional BTAs had been concluded (see Table 1), such as the India–Sri Lanka pact. According to Weerakoon (2008), the India–Sri Lanka BTA is superior in its provisions to SA�TA in almost all respects, and as a result, 93% of Sri Lanka’s exports to India currently enter duty free using the provisions of this BTA. Rather than consolidating and neutralizing this or other BTAs, it would appear that SA�TA has been rendered irrelevant by the presence of these BTAs. It could be argued that this may be a timing issue, since the full implementation of the SA�TA accords will not occur until 2016. Although this could be the case and can only be determined in the future, there are underlying reasons to suspect that it is more than just a timing issue. Once again, it may be a question of underlying motivation, and this view is captured in the following quotation from the Bangladeshi Minister of Commerce, Amir Chowdury�� “When it comes to (our) regional �TA, big economies like India and Pakistan may not offer handsome duty cuts due to distinct interests with an individual country. But they may offer large duty cuts in bilateral �TAs with Bangladesh.” This position implies that not only would existing intraregional BTAs continue in operation following the creation of a consolidated regional �TA, the incentive to pursue new intraregional BTAs would still remain. If this is true, then the consolidated regional �TA would simply add another strand to the spaghetti bowl. In short, it is questionable whether the consolidation approach is a practical and effective way to address even intraregional BTAs. Thus, the ball needs to be back in the court of the “consolidators”, who advocate this case. So far, there appears to be very little detail to go on with. Moreover, the contrary case, that it would be very difficult to achieve, is compelling. This arises because the BTAs are a highly heterogeneous group of agreements. They invariably have different tariff rates, different treatment of quantitative restrictions, different sector exemptions (and often different “phase-in” rates for them), different ROOs (often defined product by product), and a host of other arrangements ranging from some service sector liberalizations to labor and standards provisions. If consolidation were to proceed, the more likely outcome is some sort of “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 the proliferation of BTAs. This approach could serve to further fragment the world trade system, if it is perceived to be carving it up further, by introducing another distinct regional block. That is, apart from the EU and NA�TA, a consolidated Asian �TA may be viewed as the third block, or the third carved up, and thereby isolated, region. It is therefore critical that consolidation involve a concerted effort to ensure that the �TA is open, and perceived to be so. If the consolidated �TA is perceived as being isolating, or discriminatory in any way, it may provide fresh impetus for a new wave of market-restoring BTAs as traditional trade partners outside the region seek to retain trade access with members of the newly formed �TA. Perception and reality can 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 erD working paper SerieS no. 123 21 sectors are different from those associated with the spaghetti bowl effect. These distortions do not arise from preferences or explicit discriminatory treatment, but from domestic subsidies and other forms of national support, as well as various nontariff measures. But as noted in the Introduction, it is important to consider these proposals not only in terms of dealing with the spaghetti bowl, but more broadly in terms of the overall liberalization process. What can be done about these BTAs or, more specifically, 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 forum to deal with liberalization of these excluded sectors. The reason for this relates to the fact that the multilateral approach has one key advantage over the bilateral (or regional) approach, which is the ability to trade concessions across disparate interests, i.e., to weigh the costs to countries of conceding protection in sensitive sectors (such as agriculture) against the benefits from increased market access in areas in which they have a comparative advantage (e.g. through changes to rules relating to investment, intellectual property or services).9 This constrains negotiating positions and options within the WTO. Every time a BTA allows a country to bypass this trade-off simply through its choice of partner, and secures benefits without incurring costs, the task of liberalizing such sensitive sectors is made more difficult. v. summARy AND CoNClusIoNs The interest in forming BTAs has been growing at a phenomenal rate. In the Asia and Pacific region, defined to cover most of APEC and South Asia, the number of concluded BTAs has almost tripled over the past 5 years, from 27 in 2002 to 77 in January 2008. �urthermore, this interest appears to be increasing at an increasing rate, with the number of proposed BTAs rising from five to 44 over the same period. The outcome of this proliferation of often overlapping BTAs and PTAs is described as the spaghetti bowl effect or, in the Asian region, the noodle bowl effect. However it is called, there is little doubt that BTAs are not a good way to organize trade, and are welfarereducing. This paper has considered the various options proposed in dealing with this proliferation, and assessed their ability to do so. But previous assessments have ignored underlying differences in motivation in forming BTAs. To address this, the paper developed a taxonomy for classifying BTAs by motivation before considering the effectiveness of the different remedies proposed. Each proposal has its pros and cons, and any one may be more effective in neutralizing a BTA depending on why the BTA was formed. In short, motivation matters. Thus, a combination of the various proposals may be warranted, given the myriad of motivations. Although multilateralization of preferential accords is the most preferred approach in dealing with the problem, incentives to do so might be lacking. The least preferred approach is consolidation into regionwide �TAs, because it is both impractical and potentially counterproductive. That is, it could induce a larger number of interregional BTAs than the number of intraregional BTAs that it may neutralize. 9 See Menon (1998) for more details. A potent example of this trade-off was provided in the lead-up to the WTO meeting in Hong Kong, China in December 2005. Brazil and India, representing the apparent position of a majority of developing countries, proposed opening their markets further to industrial goods and services in exchange for the European Union and the US dismantling the elaborate system of support to their agricultural sector. SeCtion v Summary anD ConCluSionS 22 September 2008 Dealing with the proliferation of bilateral traDe agreementS: ConSoliDation, multilateralization, harmonization, or Dilution? Jayant menon Because of differences in motivations, these proposals will have a role to play even in the event of an expeditious and bona fide conclusion to the Doha Round. Nevertheless the WTO remains the best forum to try and address the most stubborn of BTAs, the sector-excluding BTA; and the most difficult of sectors, agriculture, because of the WTO’s ability to trade concessions across disparate interests in a multilateral setting. REFERENCEs Baldwin, R. E. 1996. “A Domino Theory of Regionalism.” In R.E. Baldwin, P. 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Jayant Menon September 2008 about the paper Jayant Menon writes that a general limitation of the proposals put forward to deal with the proliferation of the free trade agreements is their failure to consider underlying differences in motivation in forming them. To overcome this, the paper develops a taxonomy for classifying free trade agreements by motivation before considering the effectiveness of the different remedies proposed. The paper finds that each proposal has its pros and cons, and can cater to different types of agreements, leading to the conclusion that a combination of the various proposals may be warranted. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ISSN: 1655-5252 Publication Stock No. about the asian development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries substantially reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two thirds of the world’s poor. Nearly 1.7 billion people in the region live on $2 or less a 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 policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. In 2007, it approved $10.1 billion of loans, $673 million of grant projects, and technical assistance amounting to $243 million. ERD WoRking PaPER SERiES no. 123