Credible Commitment through RTAs and their Effects on Trade:
A Study of Asia's Reciprocal Trade Agreements
Raymond Hicks
Princeton University
[email protected]
Soo Yeon Kim
Department of Government and Politics
University of Maryland
[email protected]
Prepared for the Workshop on
“The Politics of Preferential Trade Agreements: Theory, Measurement, and Empirical Analysis,”
April 30-May 1, 2010, Niehaus Center for Globalization and Governance,
Woodrow Wilson School of Public and International Affairs, Princeton University
Abstract
Reciprocal trade agreements (RTAs) have proliferated rapidly in Asia in recent years, an
unprecedented phenomenon in a region in which state-led institution-building efforts
were largely unsuccessful during the Cold War years. Nevertheless, the formation of trade
agreements in the region is consistent with global trends, and it is in the larger context of debate
on whether such agreements constitute "building blocks" or "stumbling blocks" to multilateral
trade liberalization that this paper examines the qualitative aspects of these institutional
mechanisms and their impact on trade flows. In the scholarly community, research on RTAs has
expanded tremendously over the last decade, reflecting the proliferation of trade agreements
worldwide. By and large, however, this literature has tended to treat RTAs as homogenous in
both their effects and their provisions. While some recent research has examined RTAs in terms
of credible commitment, these studies have focused on specific aspects of RTAs such as dispute
settlement mechanisms or escape clauses. In this paper, we investigate the provisions of
preferential trade agreements in Asia, focusing our attention on those agreements that are
professedly geared toward trade liberalization through reciprocal exchanges of trade concessions.
We build on the concept of credible commitment, i.e., that states "tie their hands” through
international agreements and thus signal strong commitment to trade liberalization to other
international actors. We argue that a broad range of agreement provisions will affect a RTA’s
ability to achieve its primary objective, namely trade liberalization. We develop a coding scheme
that measures the strength of a wide variety of provisions in the legal texts of RTAs. After
weighting the different components into a single index of credibility, we apply this index to
Asian RTAs to evaluate the impact of RTAs on trade flows as a function of credible
commitment.
2
Credible Commitment through RTAs and their Effect on Trade:
A Study of Asia’s Reciprocal Trade Agreements 1
The dramatic surge in the formation of reciprocal trade agreements (RTAs) in recent
years has been noted widely, both in the public at large and in academic scholarship. It has
produced a burgeoning literature on their causes and possible effects. In debating the merits and
drawbacks of these agreements, much of the scholarship has focused on their implications for the
multilateral trading system, such as the dynamic time-path question of whether they constitute
“building blocks or stumbling blocks” to the forward momentum of trade liberalization. 2 Far
less attention has been paid to the actual provisions of these agreements that now constitute a
“spaghetti bowl” of institutional mechanisms populating the global trade system. This paper
engages an emerging body of scholarship devoted to the qualitative aspects of trade agreements
as well as the long-standing debate on the role of RTAs in multilateral trade liberalization. The
analysis examines closely the provisions of trade agreements, using reciprocal trade agreements
in Asia as the sample of analysis. We focus on the specific components of trade liberalization
that are embedded in the texts of the agreements and evaluate the relative success of Asia’s
RTAs in expanding trade among their participants.
1
The authors are especially grateful to Joanne Gowa, Helen Milner, and Rob O’Reilly for
comments and suggestions on this paper. We also thank Thilo Bodenstein, Christina Davis,
Yoram Haftel, Yuch Kono, Peter Rosendorff, Dustin Tingley and comments received at the
annual meeting of the International Political Economy Society (2008), the International Studies
Association (2009),the Midwest Political Science Association (2009); the American Political
Science Association (2009); the Mid-Atlantic International Political Economy Group (January
2010); and the International Relations Seminar at the Department of Political Science, University
of Pittsburgh (March 2010).
2
Bhagwati 1993.
3
Our paper engages the current debate on the effects of preferential trade agreements,
specifically the impact of reciprocal trade agreements (RTAs) on trade liberalization. 3 The
argument we advance in this paper is two-fold. First, we challenge the assumption implicit in
much of current scholarship that the effects of reciprocal trade agreements are homogenous. That
is, we argue that because these trade agreements differ in their provisions, the effect of these
institutions on trade flows may well be a function of these provisions. Second, we adopt a
theoretical approach that considers RTAs as mechanisms of credible commitment on the part of
its participants. Trade agreements differ in terms of the level of credibility that is embedded in
their provisions, and we argue that it is these provisions that are likely to affect the success of
these agreements in expanding trade among their participants.
To capture the level of credibility in RTA provisions we propose a coding scheme that
focuses on nineteen key features of RTAs, divided into five categories including type of
agreement, breadth and depth of coverage, pace of change, and administrative matters. We apply
our coding scheme to RTAs that have been signed or are currently in force in Asia, where RTAs
have seen an unprecedented surge in recent years and where the wide variation in development,
wealth, and other factors related to trade provide an opportunity to test our argument.
Immediately below we briefly review the existing literature on RTAs and provide a
discussion of trade agreements as institutions for signaling credible commitment. We then
provide a description of our coding scheme and apply it to the RTAs in Asia. We employ a
standard gravity model of international trade with year and dyadic fixed effects to evaluate the
3
Throughout the paper, we use the term reciprocal trade agreement rather than preferential trade
agreement for two main reasons. First, the focus on the paper is on reciprocal agreements or
agreements where all sides have to make concessions. Second, the type of trade agreement below
free trade agreements are commonly referred to as preferential trade agreements because they
offer concessions on some products but stop short of a free trade area.
4
impact of trade agreements on trade flows, with the former measured both as a dichotomous
variable and in terms of the level of credibility in RTA provisions. We find that while overall
there does appear to be a credibility component to RTAs, more recent RTAs lose their tradegenerating effect. We suggest that this may be because RTAs have become much more
commonplace and standardized in recent years and that countries may no longer be signing
RTAs in order to actively encourage trade growth, but because most other countries are signing
them.
Literature Review
A burgeoning literature on the determinants and effects of RTAs has attended the rapid
surge and spread of RTAs themselves. Studies have addressed a wide range of questions, such as
the effect of RTAs on the long-standing question of their trade-creation effects and ultimately
their implications for multilateralism and the multilateral system as “building blocks or
stumbling blocks” or as “friends” or “foes.” 4 Studies have examined closely the conditions under
which RTAs are likely to be trade-diverting, resulting in welfare losses for those outside the
agreement and thus a “foe” to the pursuit of multilateral trade liberalization. 5 Going beyond the
theoretical literature, empirical studies of RTAs have found a correlation between RTAs and
unilateral trade liberalization. 6
Scholarship on RTAs in political science has gone beyond many of the formal economic
models to consider more closely how, as Bhagwati has pointed out, “Often politics seems to
4
Viner 1950, Bhagwati 1991, 1993, 1994; Baldwin 1995; Levy 1997; Bagwell and Staiger 1998;
Panagariya 2000; Pomfret [1997]2001; Aghion, Antras and Helpman 2004; Limao 2006a,
2006b; and Baier and Bergstrand 2007.
5
Grossman and Helpman 1995; Krishna 1998.
6
Foroutan 1998; Panagariya 1999; Bohara, Gawande, and Sanguinetti 2004.
5
drive these choices [of RTA formation].” 7 Mansfield, in one of the earliest political science
articles on the subject, identified the political correlates of RTA-expansion at the systemic level. 8
Other studies have turned to the political determinants of RTAs to examine what countries are
more likely to sign RTAs, focusing, in particular, on the effects of democracy and domestic veto
players. 9 Studies have disaggregated RTAs into different final objectives—free trade
agreements, customs unions, or common markets—in an effort to identify why different types of
RTAs are concluded; finally scholars are starting to examine the components of RTAs to
determine whether they affect investment or linkages across issue areas in these agreements. 10
Few studies, however, have examined the qualitative aspects of RTA-formation and their
impact on economic outcomes, though an emerging body of research has analyzed various
aspects of trade agreements. Among these is the study by Pevehouse and Buhr who argue that
democracies are more willing to concede limited autonomy in their international affairs and are
motivated by the possible economic benefits of the trade agreement, both of which lead them to
agree to a high level of legalism in trade agreements. 11 More recently, and taking a slightly
different approach, Gray and Slapin rely on expert surveys of the quality of RTAs to assess their
7
Bhagwati 1993.
8
Mansfield 1998.
9
On the effects of democracy on overall PTA-formation, see Mansfield, Milner and Rosendorff
(2000, 2002). On the role of domestic veto players, see Mansfield, Milner and Pevehouse (2007,
2008).
10
See Büthe and Milner 2008 on the impact of PTAs on investment, and Hafner-Burton 2005;
and Limao 2005, 2007 on linkages across issue areas in PTAs.
11
Pevehouse and Buhr (2005). Their sample of analysis is inclusive of Smith’s sample but adds
agreements of the former Soviet Union, Eastern Europe, and less developed countries, including
hub and spoke arrangements as well as agreements “completed or released for review to the
WTO or UN since 1995” (3).
6
perceived effectiveness. 12 They find that “exit options,” or the degree to which countries conduct
trade beyond the agreement partners, are associated with less effective agreements, at least as
perceived through expert surveys. These studies are clearly indicative of the need to examine the
qualitative dimensions of trade agreements. This paper seeks to engage this emerging body of
literature by offering a comprehensive index of the provisions of preferential trade agreements.
In doing so, we adopt a theoretical approach that emphasizes the credible commitment that can
be codified, going beyond much of the existing literature which reduces RTAs to a simple
dichotomy indicating the presence or absence of such an agreement.
Commitment and RTAs
In recent years, political scientists and economists have begun to examine RTAs as
commitment devices. Büthe and Milner argue that RTAs increase FDI in developing countries
because they act as a visible commitment to liberal economic policies. 13 The visibility of RTAs
makes reneging on them less likely, so investors are more certain that governments will maintain
liberal economic policies. Economists tend to view trade agreements broadly defined as a
manner in which governments can commit to free trade. 14
This literature generally builds off the time-inconsistency problem or the insight that, if
the government has discretion over policy, it has an incentive to renege on its ex ante policy
promise and enact a different policy ex post. If the public does not anticipate that the government
will renege, the government will derive a short-term benefit. The public will not be consistently
fooled, however, and will adjust their expectations to account for the possibility of reneging.
12
Gray, Julia and Jonathan Slapin. 2010. Exit Options and the Effectiveness of Regional Trade
Agreements. Manuscript.
13
Büthe and Milner 2008.
14
See, for example, Maggi and Rodriguez-Clare (1998), Bagwell and Staiger (1999), and Staiger
and Tabellini (1999).
7
Discretionary policy will therefore not be efficient. The government can overcome this problem
by delegating policy to an external agent or by committing itself to follow a policy rule, both of
which tie the government’s hands and limit its discretion over policy., To the extent that the
actions force a government to be “constrained to obey a set of rules that do not permit leeway for
violating commitments” the actions act as a credible commitment, as defined by North and
Weingast (1989, 804). By limiting the ability to renege on a policy choice, credible commitments
assure economic actors of a government’s actions.
Indeed, scholars have argued that international institutions better tie their participants’
hands and are more credible commitments than domestic choices because the costs of reneging
on international institutions are greater. 15 International trade agreements such as membership in
the GATT/WTO or involvement with RTAs thus should provide a more effective means for
governments to signal a credible commitment to trade liberalization and, as Buthe and Milner
argue, to economic liberalization more broadly than should domestic-level commitments.
Obligations from the GATT or RTA regarding institutionally mandated maximum trade barriers
for certain products insulate the government from domestic interest group pressures to increase
protectionist measures while the difficulties in defecting on the agreement convince exporters
and actors in partner countries that it will not renege on the decision to liberalize trade.
Nevertheless, in the literature on trade agreements as credible commitment devices,
RTAs are still treated as homogeneous—there is no distinction between RTAs based on the
contents of the agreements. Indeed, as Maggi and Rodriguez-Clare argue in a recent paper, much
of the economics literature treat trade agreements as if they "leave no discretion to governments"
(2007, p. 1375). If trade agreements are assumed to completely relieve a government’s
15
Simmons 2000a, 2000b.
8
discretion over trade policy, it makes sense to treat all agreements as the same because there is
little to distinguish them.
Even a cursory glance at the text of RTAs shows that they differ widely, especially
agreements involving developing countries. Some agreements reduce, but do not eliminate, trade
restrictions on a few products, leaving barriers on most products; other agreements remove all
trade restrictions when the agreement goes into force. Moreover, most agreements contain a
negative list of products that are not covered by the agreement, providing governments with
some discretion over trade policy. This suggests, we argue, that it makes sense to treat the
credibility of RTAs as a continuum rather than a dichotomy. That is, simply signing an RTA
should not be sufficient to increase trade if the agreement is not credible. Traders and producers
will have knowledge of the details of the RTA and, specifically, how the RTA will affect them.
If they see that trade restrictions have not been lowered or that the lowering of barriers are
largely symbolic, they will have little incentive to produce more for export or to trade more with
the other country or countries in the RTA. If, on the other hand, trade restrictions have been
decreased by a large amount and private actors trust the governments to respect the agreement,
then they will be more likely to produce more for or increase trade with the other members of the
RTA. So rather than treating all RTAs as the same, we suggest that we need a measure of an
agreement’s credibility.
Coding RTAs
Similar to the central bank independence literature, which quantifies the level of central
bank independence by examining the texts of central bank laws, 16 we measure the credibility of
the commitment by examining the legal provisions of the RTA. The level of credible
16
Grilli, Masciandaro, and Tabellini 1991; Cukierman, Webb, and Neyapti 1994.
9
commitment, we argue, is a function of two interrelated components. On the one hand, the
agreement must embody high levels of obligation, or the degree to which actors are bound by
their institutional commitments. 17 High levels of obligation make reneging on institutional
commitments difficult, as it would be costly for a signatory to back out once such commitments
have been made. This aspect of credible commitment resolves the time-inconsistency problem,
by tying the governments hand with respect to the policy area. 18
Second, for RTAs, high levels of obligation must be matched by equally strong
provisions regarding the range of actions to be governed by the agreement. The agreement must
actually remove trade policy discretion from the government. One can imagine an agreement
with high levels of obligation that strongly prevent an actor from reneging but which imposes no
meaningful constraints on the actor’s behavior and requires little action of any kind from the
actor. This second component thus highlights the strength of the provisions of the institutional
agreement, or how much the institutional commitments restrict the range of actions of an actor.
An RTA that alters trade restrictions for only a limited group of products will not be as effective
at signaling credible commitment as one that eliminates restrictions on all products, nor will an
agreement that covers products in which the participant countries do not engage in extensive
trade when compared to one which covers all products in which the participants trade. In such
cases, the agreement would be a largely symbolic gesture and not effective either as a
mechanism for signaling credible commitment to trade liberalization or for promoting trade.
Thus RTAs signal credible commitment to trade liberalization when they embody high
levels of obligation and are attended by strong substantive provisions for the removal of trade
barriers. While the former makes it difficult for participants to renege on the agreement, the latter
17
Abbott, Keohane, Moravcsik, Slaughter and Snidal 2000, 17.
18
Kydland and Prescott 1977.
10
places strong constraints on actor behavior with respect to trade. In other words, not only must it
be difficult for a government to renege on the agreement, the agreement must remove at least
some of a government’s discretion over trade policy. We seek to capture both these dimensions
of credible commitment in our classification of RTA provisions.
The success of an RTA is defined in this paper in terms of its effect on trade flows.
RTAs, we hypothesize, are more successful in achieving their goal of trade liberalization and
trade expansion to the extent that they allow less wiggle-room for governments and impose a
more stringent time frame for completing the objectives. Conversely, agreements signal weak
credible commitment when characterized by, among others, more discretion for governments in
applying the provisions, a longer time until the final objective which allows reluctant and
opportunistic governments to introduce amendments further lengthening the time frame, narrow
product coverage, and more subjective dispute settlement mechanisms. We hypothesize
generally that the stronger the two components of credibility that are encoded in an RTA, the
more successful it will be in liberalizing trade between its participants. Empirically, this can be
observed in an expansion of trade after the RTA goes into effect. Below we provide details on
how different provisions of an RTA contribute to its credibility and, subsequently, how they may
be expected to affect trade.
Appendix 1 contains detailed information about the coding scheme. The scheme features
5 categories of RTA provisions covering 19 individual components, with a varying number of
components in each category. Each of the components is coded such that a more credible
commitment receives a higher score. We will go over below how each of the components
contributes to an RTA’s level of credible commitment.
11
The first category is the type of RTA with a single component. The closer the economic
ties an RTA creates, we suggest, the more credible the commitment, all else equal. That is, an
economic union requires a greater commitment than a free trade area, so it will receive a higher
score in this category. It is entirely possible, of course, that the RTA may propose a common
market or an economic union but that the final objective is achieved so far in the future as to
make the commitment largely lack credibility. This type of symbolic commitment will be
accounted for with components of the index in other categories. Thus we expect that RTAs that
provide for the formation of economic unions will contribute more toward expanded trade flows
than other types of RTAs.
The second category is the breadth of coverage. This category includes components on
the type of products covered by the agreement, such as the extent of industrial and agricultural
products covered, and whether other trade restrictions such as technical barriers to trade and nontariff barriers are covered. The indicators in this category largely focus on the policy
requirements the agreement imposes on the participant governments. A trade agreement will be
less credible if it eliminates tariffs, but allows the government to maintain other types of trade
restrictions such as non-tariff barriers or technical barriers to trade. Also, the more products
covered by an RTA, the more credible the agreement. An agreement that covers both agricultural
and industrial products will tie the hands of the government vis-à-vis domestic interest groups
more than one that excludes either of these sectors. By including politically sensitive areas such
as agriculture, a government can more easily resist protectionist pressures from this sector. 19
19
The rationale for the coding of the reciprocal component is that an agreement that has different
timetables for the participant countries may not be as credible as those that require the same
timetables. Because the focus of this paper is on reciprocal PTAs, none of the RTAs coded
receive a score of 0 on this measure. There are differences in the timing of the tariff cuts that we
felt were important, but are restricted to a couple of cases. First, many multilateral RTAs have
12
The third category is the depth of the coverage, which measures the stringency of its
enforcement mechanisms. The items in this category indicate how much room for maneuver the
countries have and how formalized the interactions are between the RTA partners. How strongly
does a particular RTA tie the hands of the government or is enforcement relatively weak and
dependent on the good will of a government? If matters like dispute settlement are treated more
objectively, we expect the RTA to be more credible; however, if there is not a mechanism for
solving disputes or if an injured party can demand whatever compensatory damages they desire,
the RTA will be less credible as each party may not trust the others to be fair. Also, the
agreement should be less credible the more easily it allows countries to take advantage of escape
clauses, dumping clauses, or other exclusions to limit trade liberalization.
The coding of escape clauses raises the idea of a tension between the level of obligation
and flexibility in agreements. 20 While we agree that flexibility mechanisms such as escape
clauses are important in reducing the ex ante contracting costs of an RTA, our interest lies in
how economic actors view the commitment reflected in RTA provisions in the implementation
different schedules for the lesser and more developed countries, so those were scheduled as .5.
Also, Singapore basically has no tariff rates, so in its agreements it tends to eliminate all of its
tariffs upon entry into force while allowing the partner country more latitude (with a couple of
exceptions). These were also coded as .5.
20
We are grateful to Helen Milner for encouraging us to think more critically of our coding of
flexibility provisions. The existing scholarship points to similar tensions in dispute settlement
mechanisms, in the form of tradeoffs between “rigidity and stability” as exemplified in the
WTO’s dispute settlement mechanism (Rosendorff 2005). Rosendorff argues that institutional
mechanisms such as the WTO’s Dispute Settlement Understanding allow temporary “defections”
from obligations that render a more stable institution. Rosendorff also argues that this dilemma
can be similarly mitigated through flexibility mechanisms such as escape clauses. Smith refers to
the dilemma between “treaty compliance” and “policy discretion,” and argues that how domestic
political actors assess the trade-offs between these two desirable goals (143-150) determines the
strength of legalism in dispute settlement mechanisms. From this point of view, an agreement
will be more effective if governments are permitted to invoke escape clauses under specific
conditions in order to alleviate pressures from domestic constituents.
13
stage. We argue that once RTAs are signed and proceed to the implementation stage, the balance
between the level of obligation to trade liberalization and the flexibility of escape clauses
function as powerful signals of credible commitment. The stringency of rules regarding the
invocation of escape clauses, we argue, also contributes to signaling credible commitment vis-àvis economic actors. We thus code flexibility provisions in RTAs according to the stringency
with which they can be invoked, giving agreements that contain provisions disallowing escape
clauses the highest credibility score for this component.
Finally, we suggest that RTAs that set up formal institutions and that have regularized
meetings between members will be more credible because such institutional arrangements reduce
transaction costs among its members and facilitate transparency, as the rules that govern the
RTAs will be clearer and more objective, and disputes and other issues can be easily discussed in
regularly convened meetings. In other words, formal institutions and regular meetings will make
the actions taken in the name of the RTA more transparent, which will increase credibility. We
hypothesize that RTAs with provisions for greater depth of coverage will also be more effective
in promoting trade liberalization.
The fourth category is the pace of change, which focuses on how long it takes to reach
the final objective and how strong is the initial trade liberalization. The components in this
category call for more explanation as they are not as straightforward as the other components.
The first component in this category examines how long it takes for the agreement to reach the
final objective. An agreement that envisages meeting its final objective well into the future is less
credible than one that will meet its objective in the short term. How should the full
implementation of the agreement be measured? Some agreements are easy to code as they
specify a timetable for reaching the goal (e.g., “all tariffs will be eliminated by year 10”). Other
14
agreements assign categories of reduction to different tariff lines so different products will have
different timetables. In our coding scheme, we make the assumption that governments will try to
offer more protection to politically sensitive areas than it will to less sensitive areas.
Governments will negotiate a longer time to implementation for products in politically sensitive
sectors, and we capture this important side of domestic trade politics by coding the timetable as
the longest period of time until the agreement completes its objectives. On the other hand, if an
agreement permanently excludes some products, these products are not considered in the
timetable variable. We recognize that this coding may give too much emphasis to a couple of
product lines, but believe it is the best alternative available. We expect that the longer the time
horizon for full implementation of the RTA, the less effective the RTA will be in liberalizing
trade between its participants.
The second component of the pace of change category is what we call the extent, or the
reductions in tariffs when the agreement goes into effect. Again, because different products have
different tariff reduction schedules, this component is difficult to quantify. Some RTAs list the
extent of the tariff cuts in the agreement while others list them as a schedule in an annex that is,
unfortunately, not available for all RTAs. As a compromise, we focused on the percentage of
tariff lines in a country’s schedule that would be duty-free when the agreement enters into force.
To code this measure we examined the tariff schedules to determine how many of the lines
would be reduced to 0; we also consulted news articles or government assessments of RTAs that
listed the proportion of tariff lines reduced to 0. 21 The biggest problem with this measurement is
that RTAs involving countries that have liberalized most of their trade before signing an RTA
21
To receive a value greater than 0 on this measure, the agreement must specify that some tariff
lines will be cut to 0%. In other words, there must be something in the agreement that binds the
tariffs at 0%.
15
will receive a higher score than will RTAs involving countries with less liberalized trade, even if
the RTA itself makes the same proportion of lines with a non-zero tariff duty-free. On the other
hand, the trade agreement may, in effect, bind duty-free lines to 0%, suggesting that it is
appropriate to include the duty-free lines in our measure. We expect that countries that sign
RTAs that provide for higher levels of tariff reductions will enjoy greater expansion of trade
through the agreement.
Finally, the fifth category focuses on the administrative aspects of the agreement:
whether the agreement needs to be ratified, how amendments to the agreement are accepted, and
RTA renewal. An RTA will be more credible the more public legitimacy it has, so we code an
RTA that requires acceptance at the domestic level as stronger than one that goes into effect
immediately after it is signed. An agreement that has to be renewed occasionally will not tie the
hands of a government as much as one that goes on in perpetuity because changes in domestic
circumstances may alter political opinion on the desirability of the agreement and politicians
have an easy way out of the agreement. Finally, agreements that have clauses indicating that
amendments have to be ratified by all parties are considered more credible than agreements that
do not mention the amendment process or allow countries to amend the agreement by simple
agreement. 22 Thus we expect RTAs that provide for domestic ratification and those that require
unanimity among members in amending the agreement to have a positive impact on trade
liberalization and those that require renewals to have a negative effect in trade liberalization. 23
22
Here and in the ratification component, we consider ratification to be any requirement that the
agreement or amendment has to be accepted through the domestic approval process.
23
Since the early 1990s, RTAs have also started to include non-trade aspects such as clauses on
investment, labor, the environment, or intellectual property rights. While these are important
aspects of RTAs, it is not clear whether they increase the trade-related credibility of the
agreement. It is as likely that these components are added in order to appease domestic
16
Obviously, not all of the components will have an equal impact on credibility as some
carry more weight than others. To reflect this difference we have weighted the different
components to derive a weighted credibility score for each RTA. Weights are based on the
perceived importance of the component and our rationale for the weights is further discussed in
Appendix 2. Not all agreements have information about every component in the index. Many of
the components penalize an agreement for not having information; that is, they are coded as 0 if
they lack detail about dispute settlement clauses. Other components that lack information (such
as information about the timetable or the extent of tariff elimination) are coded as missing and
are not included in the numerator or denominator of the category or index total. The category and
index totals, therefore, are rescaled to include only those components about which there is
information.
Before proceeding to the data analysis section, it is important to respond to potential
objections. First, does it make sense to focus on the legal provisions of an RTA? Part of the
argument of this paper is that the legal texts of RTAs mean something to governments and
economic actors and focusing on the text provides a more comprehensive story than focusing
only on whether an RTA exists. Whether the provisions do matter is an empirical question that
will be investigated later in the paper. An alternative would be to focus on the behavioral
indicators of RTAs: RTAs that increase trade are more credible. However, if we consider
expanded trade as an indicator of credibility, the argument becomes circular.
Second, many of these agreements are evolving documents as they are subsequently
amended to add a wider range of products. Other agreements may be amended over time, so the
constituencies as they are a symbol of credible commitment. (We would like to thank Rob
O’Reilly for his insights on this point.)
17
provisions in force now are not the same as they were when the agreement was adopted. Ideally,
we would recode the agreements whenever a substantive change was made. Because of data
limitations—the texts of some agreements are difficult to find, let alone modifications—we
concentrate here only on the initial agreement.
Data and Analysis
The focus of this paper is on RTAs in Asia, where such agreements have seen an
unprecedented and rapid rise since the mid-1990s and especially in the aftermath of the Asian
financial crisis. 24 According to Ravenhill, East Asia in particular has emerged as the “most active
site in the world” for trade agreements in the 21st century. 25 Until then, the region had seen few
trade agreements, and the prevailing mode of trade cooperation involved the Asia-Pacific
Economic Cooperation forum formed in 1989 and the more regionally delimited Association of
Southeast Nations (ASEAN), which in 1992 announced its intention to form the ASEAN Free
Trade Area (AFTA). 26 The shift toward bilateral and regional trade agreements represent a
marked departure from the Asia-Pacific Economic Cooperation (APEC) forum’s emphasis on
multilateralism and especially open regionalism, which involved concerted unilateral trade
liberalization and the practice of MFN for members and non-members alike. 27 The region has
also seen a surge in the expansion of existing regional agreements, which involves negotiations
24
Ravenhill 2008a, 2003. In this paper we are excluding RTAs that involve countries in Central
Asia (Armenia, Georgia, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan)
because the texts of these agreements are so difficult to find.
25
Ravenhill 2008b, 157.
26
The few trade agreements in force before the rapid surge of the mid-1990s include the
Bangkok Agreement, in force since 1975, and the South Pacific Regional Trade and Economic
Cooperation Agreement (SPARTECA), which was signed in 1981 and provided for nonreciprocal preferential trade for exports of South Pacific countries to Australia and New Zealand.
27
On the success of trade liberalization and economic integration through APEC, see, for
example, Bora and Pangestu 1996; and Pangestu and Gooptu 2004.
18
between individual countries and regional groupings, including the ASEAN’s negotiations with
Japan, China, and India. 28 Plurilateral agreements are also in development, forming overlapping
arrangements such as the Trans-Pacific Strategic Economic Partnership including New Zealand,
Singapore, Brunei Darussalam, and Chile, and a separate New Zealand-Singapore bilateral
agreement.
The rapid pace of RTA-formation in Asia, pursued by virtually all Asian countries except
for Mongolia, leads to questions regarding their likely effectiveness in liberalizing and
expanding trade and whether these agreements may well be more symbolic in nature and little
more than “paper tigers.” While the existing scholarship has identified key patterns in RTAformation in the region (Ravenhill 2006, Dent 2006), few studies have examined the actual
impact of Asia’s RTAs on trade flows. Our paper contributes to the ongoing debate on the
impact of Asia’s RTAs, by utilizing our coding scheme to distinguish the level of credibility in
these agreements and evaluating their effects on trade between agreement partners. Moreover,
the Asian region also provides a varied set of cases on which to test our hypotheses, representing
a wide range in levels of development, more so than any other region. Countries vary from the
very poor (Burma, Bhutan) to the very well-off (Japan, Korea) and countries across the entire
range have signed RTAs.
As of 2009, the Asian Development Bank reported 207 RTAs currently under
implementation, signed, under negotiation, or under consideration. About 40 of these were from
Central Asia, so there were close to 170 agreements in the rest of the region under study. 29 Of
these, 48 were under implementation and another 16 had been signed, so most of the agreements
28
The ASEAN-Japan Comprehensive Economic Partnership, ASEAN-China Comprehensive
Conomic Cooperation, and ASEAN-India Comprehensive Economic Coooperation.
29
http://aric.adb.org/FTAbyCountryAll.php.
19
were not yet in effect. We ended up coding the texts of 57 agreements since the texts of 7
agreements were not available.
The rest of this section proceeds as follows: in the first part, we provide some descriptive
statistics of the results of the coding of RTA. The second part discusses the findings of our
quantitative analysis of the effects of RTAs on bilateral trade to see if our measure of RTAs
performs better than measures in existing studies
Descriptive Statistics
Table 1 lists alphabetically the 57 RTAs that are included in our analysis, including the
year in which the RTA was signed, when it went into force (if applicable), and the credibility
score. Because it is difficult to get an idea of patterns from looking at the raw data, in the
remainder of this section we provide some simple descriptive statistics of our RTA coding,
broken down by several factors; these statistics are listed in Table 2.
Timing. The vast majority of RTAs in Asia were signed after 1995—of the 57 agreements
that we coded, 11 were signed before 1995 and 46 after 1995. In fact, 45 of these 46 were signed
in 2000 or later and the more recent RTAs have much higher credibility scores than older ones.
The average credibility score of agreements after 1995 was 0.576, double the pre-1995 average
score of 0.287. Part of the reason for the higher scores after 1995 is that the recent agreements
are more standardized and are more likely to cover several key areas using similar language. For
example, the WTO adopted agreements on technical barriers to trade and on escape clauses, so
all agreements signed by WTO members pay at least lip service to these agreements.
PTAs vs. FTAs. In Asia, all agreements are either preferential trade agreements—where
the countries grant trade concessions to the other signees but most trade is not completely
liberalized—or free trade agreements—where a substantial amount of trade is free from trade
20
restrictions. There are currently no cases of customs unions, common markets, or economic
unions. For the credibility score to have any meaning, preferential trade agreements (PTAs)
should have, on average, lower scores than free trade agreements (FTAs). This expectation is,
indeed, borne out. The average credibility score of the 17 PTAs in the database was 0.338 while
the average score of the 40 FTAs was 0.597. If we concentrate on the post-WTO agreements, the
PTAs’ credibility average increases to 0.413 while the average for FTAs increases to 0.615.
Multilateral vs. bilateral agreements. Multilateral agreements tend to have lower scores
than bilateral agreements, due mainly to the fact that many of the multilateral agreements were
signed before 1995 while few bilateral ones were signed before that year. Of the 11 multilateral
RTAs in Asia, 6 were signed before 1995; the average credibility score of the multilateral RTAs
is 0.394. In comparison, of the 41 bilateral RTAs, only 5 were signed before 1995. 30 The average
score of the bilateral RTAs is 0.544. A second difference between bilateral and multilateral
agreement, though a relatively minor one given its weight, is that the latter have a mix of more
developed and less developed countries in Asia, so the agreements have different liberalization
schedules for the two types of countries. Also, the presence of more countries in the multilateral
negotiations may mean that more interests are represented at the table. Because the agreement of
all of the parties will be needed before the agreement is signed, each of the parties could act as a
veto player. 31 The threat that countries may hold up the agreement if there are unacceptable parts
may lead to log-rolling as sections that concern one or two parties are watered-down at their
30
In addition, there are 5 cases of hub and spoke agreements, or agreements between an existing
RTA (such as ASEAN) and another country. These agreements do not involve full membership
or even association with the existing RTA. All of the hub and spoke agreements were signed
after 1995 and their average credibility score is 0.599.
31
Tsebelis 1995.
21
request. Overall, the provisions acceptable to all parties may be weaker than those that would
exist were the agreement a bilateral one.
Overall, the credibility index we propose provides a consistent assessment of the quality
of the RTAs in our sample, providing higher scores for those agreements with the strongest
credibility components. There is also a substantial increase in the scores after 1995 when the
agreements become much more standardized and cover the same areas. Finally, preferential trade
agreements also have a lower average score than free trade areas.
Quantitative Analysis
We employ directed-dyad data to examine whether our measure of RTA credibility has
an effect on bilateral trade. Because the focus of this paper is on Asian RTAs, we limit the
observations to dyads containing at least one Asian country. In the case of South Korea, for
example, we include trade between Korea and all of its trading partners, including Chile with
whom it signed an RTA in 2003, but there are no dyads between Chile and any non-Asian
countries. The time period is restricted to the years 1970 to 2006. Asian countries did not start
signing RTAs until the mid-1970s; even then they were relatively rare until the 1990s. 32 Table 3
lists the Asian countries in the sample.
To test our hypothesis on the effects of credibility of RTAs on trade flows, we estimate
two sets of models. In the first set of models, we include a dummy variable for RTAs to examine
whether the mere presence of an in-force RTA is sufficient to increase trade. In the second set of
models, we replace the dichotomous RTA variable with our measure of RTA credibility. If the
dichotomous variable is significant and the continuous measure is not, it suggests either that a
32
ASEAN was formed in 1967, but a trade aspect was not added until the ASEAN Preferential
Trade Agreement was signed in 1977. The Bangkok Agreement was the first Asian-only RTA,
signed in 1976. (India had signed a trade agreement with Yugoslavia and Egypt in 1967.)
22
credible commitment is not necessary to affect trade or that our measure is not valid. If the
dichotomous variable is not significant but the continuous measure is, it would suggest that there
is a credible commitment element to RTAs. If both are significant, it could mean that some type
of RTA is better than no RTA but more credible ones increase trade more.
Dependent variable. The dependent variable is the logged value of goods (in 2000 U.S.
dollars) imported into country 1 from country 2. The main source for the data is the IMF’s
Direction of Trade statistics. Missing data were filled in, when possible, with import data from
Gleditsch. 33 Data from both sources were converted into constant dollars using the United States
GDP deflator from the World Bank’s World Development Indicators.
Independent variables. To control for economic conditions (economic size and level of
economic development), gravity models include controls for the logged products of both a
dyad’s GDP as well as its GDP per capita. Data on GDP and GDP per capita (both in 2000 U.S
dollars) are from the World Bank’s World Development Indicators. Our measure of currency
unions is from the Rose, with some modifications based on Cohen to bring it up-to-date. 34 The
both GATT/WTO and one GATT/WTO variables indicate whether both countries in the dyad or
one of the two countries in the dyad are GATT or WTO members. The variables were
constructed using the lists of GATT and WTO membership dates available from the WTO
website. 35 With year and dyadic fixed effects, many of the variables common in gravity models
drop out of the model. These include land size, contiguity, number of islands in the dyad, the
number of landlocked countries in the dyad, colonies and distance.
33
Gleditsch 2002. Although Gleditsch makes some disputable assumptions about trade patterns
to fill in missing data, he does have trade data for Taiwan unlike the IMF.
34
Rose 2004; Cohen 2006.
35
(http://www.wto.org/english/thewto_e/gattmem_e.htm and
http://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm, respectively).
23
Findings
Most existing studies find that RTAs have a positive effect on trade within a dyad. 36 The
coefficient on reciprocal RTAs in the Goldstein, Rivers, and Tomz (2007) article, for example, is
0.33 which translates to a 42% increase in trade after an RTA goes into force for their 1946-2003
sample period (53). In the first column of table 4, we attempt to replicate these findings by
adding a dichotomous variable that takes on the value of 1 if there is a RTA in force within the
dyad. This measure does not distinguish between RTAs, treating them all equivalently. All
models in the paper include both year and dyadic fixed effects as that seems to be the standard
now. In general, the control variables are as expected. GDP and GDP per capita are both positive
and significant. Dyadic membership in a customs union also increases trade. Both of the GATT
variables are negative but neither is significant.
Surprisingly, the RTA dummy variable, while positive, is not significant. Unlike other
studies, we find that RTAs do not significantly increase trade. Perhaps our measure of the
credibility of RTAs will perform better. In the second column of table 4, we present results using
our weighted credibility measure while the third column presents results using an unweighted
measure. Neither variable is significant, though, as with the RTA dummy variable, they are in
the correct direction. These results are puzzling, especially as Goldstein, Rivers, and Tomz find
that the effect of RTAs is increasing over time (2007, pp. 62-63). Why does the RTA variable
have no effect in our sample, given its saliency in other work? In the rest of the section, we delve
further into this puzzle through two tracks. First, we explore whether “unpacking” our credibility
measure has any effect on the results. Second, we investigate whether there is a time element in
36
See, for example, Rose (2004,104) and Goldstein, Rivers, and Tomz (2007, 53-54).
24
that RTAs have become too commonplace to have as much of an effect or are signed for nontrade related reasons.
Unpacking the index. To determine whether some of the categories of our credibility
index have more of an effect than others, we include each category individually into the model
above. As before the time period covers 1970 to 2006 and year and dyadic fixed effects are
included. The control variables stay much the same as before. Three of the RTA credibility
categories fail to reach significance and the coefficient on the pace of change category is in the
wrong direction. The type of RTA and the breadth of the RTA provisions, however, both have a
positive and significant effect on trade. 37 The highest level of RTA in Asia is a free trade area.
Moving from no RTA or a preferential agreement to a free trade agreement increases trade by
25%. 38 If we include separate dummy variables for a preferential agreement and a free trade
agreement, the latter is statistically significant while the former is not. Not surprisingly, this
suggests that minimal agreements where countries liberalize trade only on some products do not
have a large effect on trade while promises to liberalize substantially all products do have an
effect.
The breadth measure ranges from 0 to a maximum of .903. Increasing the breadth
measure from 0 to the median value of .427 (for observations with an RTA) increases trade by
17% while trade increases by 47% if breadth moves from 0 to the maximum. As discussed above
the components in this category focus on the range of products covered and the treatment of nontariff trade restrictions. As with the results from the type category, the results here suggest that
37
The type category codes preferential trade agreements as 0, so in the analysis they are treated
the same as no RTA. We reran the regression with type recoded so that preferential agreements
receive a score of .2 and free trade agreements a score of .4. The results do not change.
38
Percentage changes were calculated by eβ-1
25
the more products covered by the agreement and the more an agreement attempts to liberalize
trade restrictions, the stronger is the effect on trade.
Surprisingly, the depth category—which includes the dispute settlement mechanism
clauses and the escape clauses—is insignificant. Perhaps there are too many components for the
dispute settlement and escape clauses to show an effect. In the rest of this section, we examine
the effects of individual components, focusing on the breadth of coverage category. We also
compare the results when the dispute settlement clauses or escape clauses are mentioned.
The breadth of change category, as detailed in Appendix 1, includes five individual
components: i) whether tariff concessions are reciprocal; ii) whether the agreement covers
industrial products; iii) whether the agreement covers agricultural products; iv) whether the
agreement covers non-tariff barriers (NTBs) to trade; and v) how stringent are restrictions on
technical barriers to trade (TBTs). In table 6, we substitute each of the individual components in
the breadth of coverage category for the RTA measures, in order to assess their individual effects
on trade flows. Neither coverage of non-tariff barriers (NTBS) nor technical barriers to trade
(TBTs) has a statistically significant effect on trade flows. On the other hand, whether the tariff
concessions negotiated are reciprocal (Reciprocal), and whether the agreement covers industrial
(Industrial Goods) and/or agricultural goods (Agriculture) all have a positive and statistically
significant effect on trade flows.
These three individual components all contribute strongly to the trade-creating effect of
an RTA. In terms of substantive effects that arise from the absence of an RTA to the highest
value on an individual component, RTAs with reciprocal reductions that are implemented within
the same time frame by agreement partners results in a 25.3% increase in trade. Agreements that
cover more than 80% of industrial goods—the highest category for coverage of industrial
26
goods—are associated with a 29.3% increase in trade. Finally, RTAs with provisions that cover
more than 80 percent of agricultural goods—also the highest category of coverage for
agricultural products--are associated with a 30.9% increase in trade. Overall, then, what appears
to be important in increasing trade is product coverage. The more products that are covered by
the agreement the greater the increase in trade.
Few of the other components have a significant effect on trade. The formalization of the
dispute settlement mechanism does have a significant effect on trade but neither how binding the
dispute settlement resolution is nor the compensation for losing a dispute settlement case is
significant. Escape clause provisions are also not significant. These findings could suggest that
some flexibility in the agreement is necessary in order to relieve domestic pressure, but more
work needs to be done.
Finally, the extent of the tariff cuts, or the percentage of tariff lines that are 0% when the
agreement goes into effect, has a significant but negative effect on trade. Eliminating a higher
proportion of tariffs right away actually decreases trade. This may reflect in part the fact that in
many of the agreements that eliminate tariffs most quickly, at least one of the countries already
imposes few tariffs (e.g., Singapore). Nevertheless, the negative coefficient suggests that an
elimination of tariff lines over time may have more of an impact than a large immediate
elimination.
RTAs and time. We have unpacked the credibility measure to see if there are certain
aspects of RTAs that are significant in our sample. While we have identified important aspects of
RTAs, we still have to determine why RTAs lose significance when we look at a longer time
27
period than other studies. 39 In this section we explore whether there is a time element to RTAs.
The discussion is exploratory and preliminary as the RTA variables were close to significance
and other work may find a significant effect.
As discussed above, most of the Asian RTAs have been signed in the last few years;
perhaps RTAs take some time to have an effect on trade or perhaps the proliferation and
standardization of RTAs in recent years means that the reasons for negotiating an RTA are
changing. In other words, countries may not be signing RTAs in order to increase trade as much
as they are signing RTAs because they feel they have to, in order to keep up with other countries
or for political reasons rather than the economic benefits such agreements may have produced in
the past. In the latter case, we would expect that RTAs should gradually have less effect on trade
as RTAs become commonplace.
To determine whether the lack of significance is because RTAs take time to have an
effect or because RTAs are too commonplace to have much of an effect, we ran a final set of
analyses. Columns 1 and 3 of table 7 run the models with a dummy variable for RTAs and with
our weighted credibility for the years 1970-2003. Columns 2 and 4 run the models on our
original sample (with data to 2006), but where any RTA that went into force from 2004 was
coded as missing and dropped from the sample. If RTAs do take some time to have an effect on
trade, we would expect the coefficients on the RTA variables to have a similar or larger size and
effect in columns 1 and 2 and in columns 3 and 4. The RTAs before 2004 in the two samples are
the same, but the models in columns 2 and 4 add three more years of trade data, giving the more
39
As a first test, we restricted the sample to 1970-2003. Both the RTA dummy and the
credibility index are significant in this sample, so it is not problems with the data. We also
replicate our analysis on the Goldstein, Rivers, and Tomz data, after restricting their sample to
dyads involving at least one Asian country and adding in our two RTA measures. Again, both
variables are highly significant and in the correct direction. (Results available upon request.)
28
recent RTAs time to have an effect. A diminution of the coefficients on the RTA variables would
suggest that RTAs do not need time to have an effect, implying that new RTAs may be less
effective at increasing trade.
Again all 4 models include year and dyadic fixed effects. For both the RTA dummy and
the credibility index, the coefficient when the sample stops in 2003 is significant at the .05 level.
In both cases, the coefficient diminishes in size when the sample runs to 2006; each is significant
only at the .10 level. It does not appear to be the case that the RTA variables lose significance
because they take time to affect trade and that the many RTAs signed in Asia in recent years
have not had time to increase trade. Instead, there appears to have been a change in the behavior
of RTAs in recent years. The results are preliminary and not too much should be read into them,
but they suggest, we argue, that RTAs may be becoming so common as to lose their
effectiveness at increasing trade.
Conclusion
In this paper, we have argued that though RTAs can be seen as credible commitments to
liberalize trade, not all RTAs have the same level of credibility. Some agreements are weaker
than others in providing for the liberalization of trade, as they allow for trade-distorting measures
or provide subjective dispute settlement mechanisms that frustrate trade. In developing this
argument, we constructed an index of RTA credibility based on the RTAs’ legal texts and
applied it to RTAs involving at least one Asian country. In our analyses of Asian RTAs and trade
flows for 1970 to 2006, we find that neither our credibility measure nor a dichotomous RTA
measure has a significant effect on trade. To dissect this finding, we focused on both the
individual components of the agreements as well as the time period. We find that some aspects
29
of the agreement are associated with increased trade—especially those aspects that specify the
coverage of products liberalized, but also how formal the dispute settlement mechanism is.
Nevertheless, the fact that neither the dichotomous RTA measure nor our overall
credibility measure is significant when the sample extends to 2006 suggests that something has
happened with trade agreements in recent years. The number of RTAs signed in Asia has
exploded in recent years; in fact, some scholars have argued that RTAs are no longer primarily
about trade; instead, RTAs are now signed for other economic reasons or for political purposes. 40
RTAs may serve as a useful “scapegoat” to bolster domestic economic reform in uncompetitive
sectors (Pempel and Urata 2006), to promote the United States’ foreign policy agenda of
rewarding economic reform and securing allies (Feinberg), or as a means of strategic
engagement of neighboring states as has been argued for China’s free trade agreement with the
ASEAN countries (Kwei 2006). These arguments fit nicely with our finding, but we find that
under certain conditions RTAs can still increase trade. Future work will extend our index to other
areas of the world to determine whether the same patterns apply and to other economic areas.
40
For example, Taiwan has tried to sign RTAs with all the countries in Central America in order
to achieve more international legitimacy. They have succeeded in signing RTAs with Panama,
Guatemala, Nicaragua and, most recently, Honduras and El Salvador. Costa Rica has turned
them down.
30
Table 1: Credible commitment scores of Asian RTAs
Agreement
Signed
Force
ASEAN Free Trade Area
1992
ASEAN Preferential Trade Agreement
1977
ASEAN-China Economic Cooperation Agreement
2004
ASEAN-Korea Economic Cooperation Agreement
2005
Australia-New Zealand Trade Agreement
1965
Bahrain-Thailand
2002
Bangkok Agreement
1975
Canada-Australia
1960
Economic Cooperation Organization Trade Agreement
2003
EFTA-Singapore FTA
2002
India-Afghanistan PTA
2003
India-Chile PTA
2006
India-MERCOSUR PTA
2004
India-Singapore Economic Cooperation Agreement
2005
India-Sri Lanka FTA
1998
Indo-Nepal Treaty of Trade
1991
Japan-Brunei FTA
2007
Japan-Chile EPA
2007
Japan-Indonesia EPA
2007
Japan-Malaysia EPA
2005
Japan-Mexico EPA
2004
Japan-Philippines EPA
2006
Japan-Singapore Economic Agreement
2002
Japan-Thailand EPA
2007
Korea-Chile FTA
2003
Korea-EFTA FTA
2005
Korea-Singapore FTA
2005
Korea-United States FTA
2007
Laos-Thailand PTA
1991
Malaysia-Pakistan Closer EPA
2005
Melanesian Spearhead Group
1993
New Zealand-China FTA
2008
New Zealand-Singapore Closer EPA
2000
Pacific Island Countries Trade Agreement
2001
Pakistan-Iran PTA
2004
Pakistan-Mauritius PTA
2007
Pakistan-Sri Lanka FTA
2002
Papua New Guinea-Australia Trade and Commercial Region
1976
People's Republic of China-Chile FTA
2005
People's Republic of China-Hong Kong Closer EPA
2003
People's Republic of China-Macao Closer EPA
2003
People's Republic of China-Pakistan FTA
2006
PTA-Group of Eight Developing Countries
2006
Singapore-Australia FTA
2003
Credibility
0.306
0.229
0.566
0.588
0.398
0.330
0.470
0.183
0.462
2003
0.716
0.320
2007
0.498
0.469
2005
0.472
2001
0.506
1991
0.171
2008
0.619
2007
0.660
2008
0.570
2006
0.600
2005
0.638
0.669
2002
0.663
2007
0.604
2004
0.682
2006
0.658
2006
0.656
0.698
1991
0.163
2008
0.655
1993
0.374
2008
0.681
2001
0.689
2003
0.441
2006
0.436
2007
0.335
2005
0.532
1977
0.410
2006
0.601
2004
0.420
2004
0.420
2007
0.579
0.393
2003
0.673
1992
1977
2005
2006
1966
2002
1976
1960
31
Agreement
Singapore-Jordan FTA
Singapore-Panama FTA
South Asian Free Trade Area
South Asian Preferential Trade Area
Taipei,China and Guatemala FTA
Taipei,China and Nicaragua FTA
Taipei,China and Panama FTA
Thailand-Australia FTA
Thailand-New Zealand Closer EPA
Trade Expansion and Cooperation Agreement
Trans-Pacific Strategic EPA
United States-Australia FTA
United States-Singapore FTA
Signed
Force
2004
2006
2004
1993
2005
2006
2003
2004
2005
1967
2005
2004
2003
Credibility
2005
0.645
2006
0.627
2006
0.516
1995
0.266
2006
0.587
2008
0.600
2004
0.729
2005
0.629
2005
0.629
1968
0.185
2006
0.694
2005
0.644
2004
0.628
32
Table 2: Credible commitment scores by category
Number
Average credibility
Year
Signed <1995
Signed >1995
11
46
0.287
0.576
Level
PTA
FTA
17
40
0.338
0.597
Members
Bilateral
Multilateral
Hub and spokes
41
11
5
0.544
0.394
0.599
Table 3: Asian countries in the quantitative analysis
Australia
Myanmar
Bangladesh
Nauru
Bhutan
Nepal
Brunei
New Zealand
Cambodia
Pakistan
China
Palau
East Timor
Papua New Guinea
Federated States of Micronesia Philippines
Fiji
Samoa
India
Singapore
Indonesia
Solomon Islands
Japan
South Korea
Kiribati
Sri Lanka
Korea
Taiwan
Laos
Thailand
Malaysia
Tonga
Maldives
Tuvalu
Marshall Islands
Vanuatu
Mongolia
Vietnam
33
Table 4: Regression results: 1970-2006
RTA dummy
RTA credibility
(1)
b/se
0.145
(0.090)
(2)
b/se
0.264
(0.200)
Unweighted credibility
GDP
(3)
b/se
0.777***
0.779***
(0.083)
(0.083)
GDP per capita
0.522***
0.521***
(0.079)
(0.079)
Both GATT
-0.0661
-0.0648
(0.063)
(0.063)
One GATT
-0.0732
-0.0722
(0.057)
(0.057)
Currency union
0.911**
0.912**
(0.390)
(0.390)
Constant
-43.85***
-43.94***
(2.965)
(2.962)
Log-likelihood
-2.47e+05
-2.47e+05
N
145255
145255
# of clusters
8120
8120
Significance levels: * .10 ** .05 *** .01
Note: All models contain year and dyadic fixed effects. .
0.224
(0.168)
0.779***
(0.083)
0.521***
(0.079)
-0.0651
(0.063)
-0.0724
(0.057)
0.911**
(0.390)
-43.95***
(2.961)
-2.47e+05
145255
8120
34
Table 5: Credibility Categories: 1970-2006
Type
Breadth
Depth
(1)
b/se
0.908**
(0.404)
(2)
b/se
(3)
b/se
(4)
b/se
0.377**
(0.170)
0.155
(0.169)
Pace
-0.0870
(0.171)
Administration
GDP
(5)
b/se
0.774***
0.776***
0.781***
(0.083)
(0.083)
(0.083)
GDP per capita
0.524***
0.523***
0.520***
(0.079)
(0.079)
(0.079)
Both GATT
-0.0636
-0.0670
-0.0642
(0.063)
(0.063)
(0.063)
One GATT
-0.0712
-0.0743
-0.0716
(0.057)
(0.057)
(0.057)
Currency union 0.910**
0.912**
0.912**
(0.389)
(0.389)
(0.390)
Constant
-43.74***
-43.83***
-44.00***
(2.968)
(2.963)
(2.962)
Log-likelihood
-2.47e+05
-2.47e+05
-2.47e+05
N
145255
145255
145255
# of clusters
8120
8120
8120
Significance levels: * .10 ** .05 *** .01
Note: All models contain year and dyadic fixed effects
0.783***
(0.083)
0.519***
(0.079)
-0.0622
(0.063)
-0.0699
(0.057)
0.910**
(0.390)
-44.12***
(2.954)
-2.47e+05
145255
8120
0.109
(0.109)
0.781***
(0.083)
0.520***
(0.079)
-0.0645
(0.063)
-0.0720
(0.057)
0.910**
(0.390)
-44.00***
(2.959)
-2.47e+05
145255
8120
35
Table 6: Breadth of Coverage Components: 1970-2006
Reciprocal
(1)
b/se
0.226**
(0.104)
Industrial Goods
(2)
b/se
(3)
b/se
(4)
b/se
0.258**
(0.104)
Agricultural
Goods
0.269**
(0.117)
NTBs
0.264*
(0.140)
TBTs
GDP
GDP per capita
Both GATT
One GATT
Currency union
Constant
(5)
b/se
0.775***
(0.083)
0.523***
(0.079)
-0.067
(0.063)
-0.074
(0.057)
0.915**
(0.390)
-43.780***
(2.965)
0.773***
(0.083)
0.524***
(0.079)
-0.064
(0.063)
-0.071
(0.057)
0.913**
(0.390)
-43.705***
(2.967)
0.779***
(0.083)
0.522***
(0.079)
-0.067
(0.063)
-0.075
(0.057)
0.909**
(0.389)
-43.943***
(2.958)
N
145255
145255
145255
# of clusters
8120
8120
8120
Significance levels: * .10 ** .05 *** .01
Note: All models contain year and dyadic fixed effects
0.779***
(0.083)
0.522***
(0.079)
-0.068
(0.063)
-0.076
(0.057)
0.912**
(0.389)
-43.941***
(2.958)
-0.155
(0.175)
0.783***
(0.083)
0.520***
(0.079)
-0.063
(0.063)
-0.070
(0.057)
0.912**
(0.390)
-44.117***
(2.965)
145255
8120
145255
8120
36
Table 7: Robustness Check: RTAs and Time
RTA dummy
RTA credibility
GDP
(1)
b/se
0.208**
(0.102)
(2)
b/se
0.191*
(0.100)
(3)
b/se
(4)
b/se
0.587**
(0.294)
0.673***
(0.088)
0.591***
(0.084)
-0.0492
(0.064)
-0.0757
(0.057)
0.897**
(0.356)
-39.98***
(3.158)
-2.14e+05
127935
7975
0.468*
(0.266)
0.780***
(0.083)
0.522***
(0.079)
-0.0659
(0.063)
-0.0746
(0.057)
0.910**
(0.396)
-43.98***
(2.967)
-2.46e+05
145097
8120
0.672***
0.778***
(0.088)
(0.083)
GDP per capita
0.592***
0.523***
(0.084)
(0.079)
Both GATT
-0.0494
-0.0666
(0.064)
(0.063)
One GATT
-0.0758
-0.0749
(0.057)
(0.057)
Currency union
0.892**
0.907**
(0.356)
(0.396)
Constant
-39.95***
-43.92***
(3.158)
(2.969)
Log-likelihood
-2.14e+05
-2.46e+05
N
127935
145097
# of clusters
7975
8120
Significance levels: * .10 ** .05 *** .01
Note: All models contain year and dyadic fixed effects; models 1 and 3 cover 1970 to 2003;
models 2 and 4 cover 1970 to 2006 with PTAs that went into force after 2003 coded as missing.
37
Appendix 1: RTA coding scheme
The characteristics of RTAs have been grouped into five weighted categories to create an index
of RTA credibility: breadth, depth, and pace of coverage, ratification and withdrawal, and type of RTA
proposed.
The type of RTA proposed (weight = 0.20) is the easiest one to describe. It is simply an
indicator ranging from 1 to 5 that indicates the level of integration proposed in the agreement.
0
Preferential trade agreement
.25
Free trade agreement
.5
Customs union
.75
Common market
1
Economic union
Breadth of coverage (Weight = 0.175)
The indicators in this category focus on the breadth of the RTA, or the range of products covered
and whether standards other than trade are covered. For the products covered and the timetable of
reductions, the more stringent reductions will be coded.
Reciprocal: Are the tariff reductions reciprocal? (0.025)
0
Concessions by only one party
.5
Concessions by both, but different timeframes
1
Reciprocal reductions
Industry: Does the agreement cover industrial products? (0.025)
0
No or very few industrial products covered (<10%)
.5
Some industrial products covered (20-80%)
1
All industrial products covered (>80%)
Agriculture: Does the agreement cover agricultural products? (0.025)
0 No or very few agricultural products covered (<10%)
.33
Some processed agricultural products covered (20-80%)
.66
Some raw agricultural products covered (20-80%)
1
All agricultural products covered (>80%)
NTB: Does the agreement cover non-tariff barrier restrictions on trade? (0.05)
0
No mention
.33
Quantitative restrictions eliminated more slowly than tariffs
.66
Eliminated at same pace or more quickly, but exclusions allowed
1
Eliminated at same pace or more quickly than tariffs and no exclusions
Techbarrier: How stringent are restrictions on technical barriers to trade? (0.05)
0
Not covered
.25
Barriers not to restrict trade
.5
Cooperation on standards
.75
Standards must be objective, with some exceptions allowed
1
Standards must be objective, with no exceptions
Depth of coverage (Weight = 0.45)
The indicators in this category measure how strong the requirements of the RTA are.
Dispute settlement: How are disputes between the parties settled? (0.075)
0
No dispute settlement mentioned
.5
Informal consultations between the parties
1
Formal process in place
38
Resolution: In case of disputes, how binding is the resolution? (0.025)
0
Not mentioned
.33
Resolution is suggestive but not binding
.66
Resolution binding, but can be appealed
1
Resolution binding and cannot be appealed
Compensation: When compensation is decided, how is the amount determined? (0.05)
0
Not mentioned
.33
At discretion of contracting party with no standard
.66
At discretion of contracting party with specific guidelines
1
At discretion of formal arbiters
Escape clause identification: How are import surges identified? (0.075)
0
Countries identify import surges
.33
Consultations between parties with no settlement mechanism
.66
Based on objective criteria (WTO guidelines)/consultation with settlement
mechanism (non-WTO)
1
Stricter standards than WTO/specific guidelines (before WTO)
EC action: If protection from import surges is required, how is the level decided? (WTO
agreement has 4 year limit and compensation) (0.05)
0
No mention
.25
Suspension of tariff concessions on surge product
.5
Suspension of concessions with specific time limit (<=2 years)
.75
Suspension of concessions with compensation to other party
1
Suspension of concessions with compensation and time limit
Dumping clauses: Stringency of anti-dumping clause (0.075)
0
No anti-dumping clause/anti-dumping clause to be established
.33
Determination of dumping up to party
.66
(After 1995) WTO clause/(before 1995) joint consultations to determine whether
dumping occurred with possibility of outside mediation
1
(After 1995) Anti-dumping clause more stringent than WTO clause/(before
1995) clause contains specific guidelines for determine dumping
Formal institutions: Does the agreement create formal institutions? (0.05)
0
No formal institutions
.5
Formal institutions with suggestion and recommendation powers
1
Formal institutions with decision power
Meetings: How are meeting between the parties arranged? (0.05)
0
No procedure for meetings
.33
Meetings only when requested by one of the contracting parties
.66
Meetings at least once a year
1
Meeting at least once a year or whenever requested by a contracting party
Pace of change (Weight = 0.10)
The indicators in this category will measure the pace with which trade is liberalized within the
RTA.
Timetable: How long is the process to reach the final objective of the agreement? (0.025)
0
No timetable
.25
Greater than or equal to10 years
.50
Between 5 and 10 years
.75
Less than 5 years
1
Immediately
2
39
Extent: Percentage of tariff lines duty-free when agreement goes into force (0.075)
0
0%-9%
.1
Between 10% and 19%
.2
20-29%
.3
30-39%
.4
40-49%
.5
50-59%
.6
60-69%
.7
70-79%
.8
80-89%
.9
90-99%
1
All tariffs eliminated
Administration (Weight = .075)
How a RTA is ratified and what sort of clauses it specifies for the withdrawal of parties are
important characteristics for the strength of the agreement.
Ratification: Does the agreement need to be ratified by the domestic legislature? (0.05)
0
Agreement goes into force when signed
1
Agreement needs to be ratified by legislature
Renewal: Does the agreement have to be renewed? (0.025)
0
After given number of years, parties have to agree to renewal
.5
After given number of years, automatically renewed unless one party opts out
(automatic renewal)
1
Agreement is in force unless one party withdraws (no renewal necessary)
Amendment: What is the amendment process for the agreement? (0.025)
0
No amendment process mentioned
.5
Amendments have to be agreed by all parties
1
Amendments have to go through domestic ratification process
40
Appendix 2: Weighting the components of the index
Admittedly, the weighting of the components is a little arbitrary since all of the components
identified, we believe, will have some effect on credibility. With the weights we have given
higher scores to those components we believe are more important and lower scores to those that
will be relatively less important. Here we clarify these decisions.
The 5 broad categories have a varying number of components, so the weight of the categories
will reflect not only their importance but also the importance of each component.
The most important category is the depth of the coverage because the components really get at
the nuts and bolts of the agreement. This category also has 8 components, the most components
of any category, which also drives up its score. The weight of this category is .45. We suggest
that the 3 most important components are the ones that identify potential problems: dispute
settlement, escape clauses, and dumping clauses. Each of these receives a score of .075. The
creation of formal institutions, the frequency of meetings, the actions taken when the escape
clause is invoked, and compensation after the dispute settlement process receive scores of .05.
Finally, resolution of dispute settlement receives a score of .025.
Overall, the type of agreement is the second most important category, having a weight of .20.
Because there is only one component in the category, however, type has the highest weight of
any component which requires some explanation. The type component is really the objective of
the agreement or how far the parties plan to take integration. Because the other components are
coded in the context of the agreement—i.e., the timetable is coded based on how long it takes to
reach the stated objective so that a preferential agreement completes the timetable when the
preferential rates have been reached while a free trade agreement completes the timetable when
all the non-excluded products have zero tariffs—the type variable will weight the difficulty of
reaching the objective.
One objection to giving so much weight to the type variable is that some trade agreements have
an overly optimistic objective that may be difficult to meet given the characteristics of the
parties. These agreements will appear to have more credibility than they probably should. At the
extreme, an RTA with completely unrealistic expectations will receive very high credibility
score. This is, we realize, a potential problem with coding any legal document, but also suggest
that parties are not trying to impress us when writing the agreement. Instead, the agreements are
aimed at the firms that are involved in trading and that will not believe unrealistic agreements.
Breadth of the coverage is the third most important category with a weight of .175. Very few
agreements now make a distinction between agricultural and industrial goods—most agreements
cover both—so both of these components receive a weight of .025. The reciprocal element is
also relatively less important and receives a weight of .025 as well. Non-tariff barriers and
technical restrictions on trade, on the other hand, are stronger indicators of how far trade
liberalization goes and receives higher weights of .05.
41
The fourth category is the pace of the change. With only 2 components, we assigned this
category a weight of .10. The extent of the change imposes more of a cost on the government as
measured here. Because the timetable is measured in relation to the final goal of the agreement,
preferential trade agreements will generally receive a higher score on this component than will
free trade agreements. Preferential trade agreements, on the other hand, will suffer because very
few of their tariff lines are reduced to 0. Thus, we assigned a weight of .075 to the extent of
change and .025 to the timetable.
The least important category is the administrative category that includes ratification and renewal,
so we have assigned this category an aggregate weight of .075. Each of the components within
the category receives a weight of .025.
42
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