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With free trade areas (FTAs) under negotiation between Japan and the ASEAN Free Trade Area (AFTA) members and between the Republic of Korea and AFTA members, preferential market access will become more important in Asian regionalism. Protectionist pressures will likely increase through rules of origin, the natural outlet for these pressures. Based on the experience of the European Union and the United States with rules of origin, the authors argue that, should these FTAs follow in the footsteps of the EU and the U.S. and adopt similar rules of origin, trading partners in the region would incur unnecessary costs. Using EU trade under the Generalized System of Preferences with Africa, Caribbean, and Pacific partners, the authors estimate how the use of preferences would likely change if AFTA were to veer away from its current uniform rules of origin requiring a 40 percent local content rate. Depending on the sample used, a 10 percentage point reduction in the local value content requirement is estimated to increase the utilization rate of preferences by between 2.5 and 8.2 percentage points.

Agricultural Products --- Economic Theory and Research --- External Tariff --- Free Trade --- Free Trade Area --- Free Trade Areas --- International Economics & Trade --- International Trade and Trade Rules --- Law and Development --- Macroeconomics and Economic Growth --- Preferential Market Access --- Preferential Trade --- Preferential Trade Agreements --- Protectionist Pressures --- Public Sector Development --- Regional Integration --- Regional Trade --- Regionalism --- Rules of Origin --- Tariff Classification --- Tariff Reductions --- Tariff Revenue --- Trade and Regional Integration --- Trade Deflection --- Trade Law --- Trade Policy --- Volume of Trade --- World Trading System

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With free trade areas (FTAs) under negotiation between Japan and the ASEAN Free Trade Area (AFTA) members and between the Republic of Korea and AFTA members, preferential market access will become more important in Asian regionalism. Protectionist pressures will likely increase through rules of origin, the natural outlet for these pressures. Based on the experience of the European Union and the United States with rules of origin, the authors argue that, should these FTAs follow in the footsteps of the EU and the U.S. and adopt similar rules of origin, trading partners in the region would incur unnecessary costs. Using EU trade under the Generalized System of Preferences with Africa, Caribbean, and Pacific partners, the authors estimate how the use of preferences would likely change if AFTA were to veer away from its current uniform rules of origin requiring a 40 percent local content rate. Depending on the sample used, a 10 percentage point reduction in the local value content requirement is estimated to increase the utilization rate of preferences by between 2.5 and 8.2 percentage points.

Agricultural Products --- Economic Theory and Research --- External Tariff --- Free Trade --- Free Trade Area --- Free Trade Areas --- International Economics & Trade --- International Trade and Trade Rules --- Law and Development --- Macroeconomics and Economic Growth --- Preferential Market Access --- Preferential Trade --- Preferential Trade Agreements --- Protectionist Pressures --- Public Sector Development --- Regional Integration --- Regional Trade --- Regionalism --- Rules of Origin --- Tariff Classification --- Tariff Reductions --- Tariff Revenue --- Trade and Regional Integration --- Trade Deflection --- Trade Law --- Trade Policy --- Volume of Trade --- World Trading System

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Most researchers focus on the political economy (interest group pressures) approach to analyzing why customs unions are formed, but terms-of-trade effects were also important in formation of the Common Market of the Southern Cone (Mercosur). Terms-of-trade externalities among Mercosur's members have been internalized in the common external tariff. The theoretical literature on trade follows two different approaches to explaining the endogenous formation of customs unions: (1) The terms-of-trade approach, in which integrating partners are willing to exploit terms-of-trade effects. Using the terms-of-trade approach, one concludes that tariffs on imports from the rest of the world should increase after the formation of a regional bloc, because the market power of the region increases and terms-of-trade externalities can be internalized in the custom union's common external tariff. As the union forms, the domestic market gets larger and members' international market power increases. (2) The interest group pressures (political economy) approach, in which, for example, the customs union may offer the potential for exchanging markets or protection within the enlarged market. Using this approach, one would usually conclude that tariffs for the rest of the world decline after the custom union's formation - a rationale related to free-rider effects in larger lobbying groups. It is important to recognize the forces behind the formation of customs unions. Most researchers have focused on the second approach and neglected terms of trade as a possible explanatory variable. Both rationales explain a significant share of tariff information. Results, write Olarreaga, Soloaga, and Winters, suggest that both forces were important in formation of the Common Market of the Southern Cone (Mercosur). Terms-of-trade effects account for between 6 percent and 28 percent of the explained variation in the structure of protection. There is also evidence that the terms-of-trade externalities among Mercosur's members have been internalized in the common external tariff. This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to understand the political economy of trade protection. Marcelo Olarreaga may be contacted at molarreaga@worldbank.org.

Currencies and Exchange Rates --- Debt Markets --- Domestic Market --- Economic Policy --- Economic Theory and Research --- Emerging Markets --- External Tariff --- Finance and Financial Sector Development --- Free Trade --- International Economics & Trade --- International Market --- International Markets --- International Prices --- International Trade --- International Trade and Trade Rules --- Macroeconomics and Economic Growth --- Markets and Market Access --- Multilateral System --- Political Economy --- Private Sector Development --- Public Sector Development --- Regionalism --- Share Of World Exports --- Tariff Data --- Tariff Levels --- Tariff Structures --- Tariffs --- Terms Of Trade --- Trade --- Trade Effects --- Trade Externalities --- Trade Policy --- World Prices

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May 2000 - Two theories are combined to explain why free trade areas (FTAs) have proliferated more than customs unions (CUs) have, and why FTAs are found more in North-South agreements and CUs in South-South agreements. Schiff combines two theories - one about how multilateral trade liberalization affects regional integration, the other about how it affects political disintegration - to explain why the ratio of free trade areas to customs unions has increased over time, and why it is larger in North-South than in South-South agreements. Ethier (1998, 1999) argues that multilateral trade liberalization led to the recent wave of regional integration arrangements. Alesina and others (1997), in discussing the number and size of countries, argue that multilateral trade liberalization leads to political disintegration, with an increase in the number of countries. Combining the two arguments, Schiff hypothesizes that as multilateral trade liberalization proceeds and the number of regional integration arrangements increases, the ratio of free trade areas to customs unions also increases. The same arguments are also used to show why that ratio is larger in North-South than in South-South agreements. The data, which show that ratio increasing in the 1990s and larger for North-South agreements, are consistent with the hypotheses. Finally, a number of voluntary and involuntary customs unions are examined where weaker members lose and conflict does or does not take place, and where free trade agreements are superior. This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to study regional integration. The author may be contacted at mschiff@worldbank.org.

Andean Pact --- Bloc Welfare --- Customs Union Formation --- Customs Unions --- Economic Dominance --- Economic Theory and Research --- Emerging Markets --- External Tariff --- Free Trade --- Free Trade Agreements --- Free Trade Area --- International Economics & Trade --- Law and Development --- Macroeconomics and Economic Growth --- Market Size --- Multilateral Liberalization --- Multilateral System --- Multilateral Trade Liberalization --- Open Regionalism --- Preferential Market Access --- Private Sector Development --- Public Sector Development --- Regional Integration --- Regionalism --- Rules of Origin --- Tariffs --- Trade --- Trade and Regional Integration --- Trade Diversion --- Trade Law --- Trade Policy