Non-conventional Provisions in Regional Trade Agreements: Do They Enhance International Trade?

1. Non-conventional Provisions in Regional Trade Agreements: Do They Enhance International Trade? Kaoru Nabeshima IDE-JETRO May ２６, 2012

2. Motivation • Regional trade agreements (RTAs) now cover wider areas including provisions on competition policies, government procurements, dispute settlements, intellectual property rights, and others. • The purpose of this paper is to assess how these non-conventional provisions increases bilateral trade.

3. Previous literature • Gravity equation with a simple RTA dummy • Baier and Bergstrand 2007 • Caporale et al. 2009 • Medvedev 2010 • Vicard 2009 • Gravity equation with forms/types of RTA (Vicard 2009) • The underlying assumption is that different types of RTAs (preferential arrangements, free trade agreements, customs union, and common markets) have different coverage.

4. Our formulation • Gravity equation with 5 variables • Applied bilateral tariff rates to capture the effects coming from reduction in tariff rates • Four dummy variables corresponding to the inclusion of government procurement, competition policy, intellectual property, and dispute settlement. • The aim is to assess the effects of these specific provisions on trade creation. • Data: Asia-Pacific Trade and Investment Agreement Database from United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) and Free Trade Agreement Database for Asia from the Asian Development Bank. • Overall, there are 111 RTAs (by 2009) of which at least one country from ESCAP region is included

5. Existence of Provisions in RTAs

6. Four provisions • Dispute settlement: included in 60% of RTAs • Intellectual property rights: 48% • Competition policy: 42% • procurement: only 36% of RTAs has provision on this issue • Inclusion of all 4 provisions: 24% • Inclusion of none of these provisions: 27%

7. Estimation strategy • Gravity equation with multilateral resistance term, 5 variables for RTAs, a dummy for WTO membership. • Use pseudo Poisson maximum likelihood (PPML) to account for zero trade values between a pair of countries. • Baseline results: • WTO membership increases trade by 411% (too large?) • RTA increases bilateral trade by 23% • With inclusions of four provisions at once: • Only competition policy has positive effect, dispute settlement has significantly negative effects, government procurement and IP has no effect

8. Estimation strategy • Estimation with these effects separately (to account for multicollinearity) • All four variables has positive impacts • Largest impacts coming from competition policy (71%), followed by government procurement (60%). The impact coming from IPR is relatively small (24%). Dispute settlement has no significant impact.

9. Intensive and extensive margin • Intensive margin: changes in the trade values per variety • Extensive margin: changes in the number of varieties traded • Previous literature: mixed results • Felbermayr and Kohler (2006): 40% of world trade growth came from extensive margin from 1950 to 1997 • Debaere and Mostashari (2010): small impacts of tariff reductions on extensive margin • Liu (2009): GATT/WTO increased trade both in intensive and extensive margins.

10. Importance of intensive and extensive margins for RTAs • If RTA increases trade in intensive margin: the support for such RTAs will come only from existing exporters • If RTA increases trade in extensive margin: much wider support base for RTAs (i.e. from existing and potential exporters) • Results: • Government procurement: ++ for both intensive and extensive margin • Competition policy: ++ for both intensive and extensive margin • Dispute settlement: + for both intensive and extensive margin • IPR: + only for intensive margin

11. Conclusion • Provisions on competition policy increases bilateral trade the most, followed by government procurements. • In addition to increase in trade values, we also observed positive impacts on intensive and extensive margins.