PREFERENTIAL TRADE AGREEMENTS: an Australian perspective

1
PREFERENTIAL TRADE AGREEMENTS an Australian
perspective

• Lisa Gropp, Assistant Commissioner
• Australian Productivity Commission
• Visiting GEM, Sciences-Po
• 22 May 2007, ECIPE, Brussels

2
Australias participation in PTAs is on the rise

• Non-reciprocal agreements eg SPARTECA
• APEC non-discriminatory
• ANZCERTA 1983
• AUSFTA, Australia-Thailand, Australia-Singapore
• Australia-China in progress
• More to come? Malaysia, Japan?

3
Focus on Productivity Commission work on

• Trade and investment effects of trade and
  non-trade provisions of PTAs
• Impacts of rules of origin
• Policy implications

4
Unfortunately, trade creation and diversion are
still relevant

5
The theory

• Trade gains come from lower prices and trade
  expansion
• Replacing inefficient local production delivers
  net benefits
• Trade diversion reflects re-sourcing of imports
  from efficient world producers to less efficient
  PTA members
• Welfare outcomes can go either way depending on
• Relative costs, elasticities, terms of trade
  effects, preference margin etc

6
Competing or colluding interests?

• Consumers better off with lower prices
• But local producers of importables oppose lower
  prices
• PTAs often leave out sensitive sectors, or have
  other special arrangements (eg safeguards)
• Rules of origin stop trade deflection but also
  raise costs of PTA member exporters, eroding
  preference margin
• PTA exporters want a large preference margin
• Both PTA importers exporters interests can be
  accommodated at expense of consumers and
  taxpayers

7
Non-tariff provisions deep integration or the
third wave

• Still scope for trade creation and diversion but
  more scope to generate welfare gains
• measures often involve reductions in real costs
  rather than loss of rents, and
• discrimination often infeasible (eg addressing
  corruption)

8
Other effects?

• Dynamic impacts
• Investment (and labour) flows
• A building block for multi-lateral
  liberalisation?
• Non-economic objectives

9
Measuring the economic impact of PTAs

• Ex ante CGE modelling
• what if experiment
• can leave out important effects eg RoO, dynamic
  effects of liberalisation
• Ex post econometric analysis
• looks at actual outcomes
• but needs very careful model specification for
  proper attribution to PTAs

10
PC analysed trade investment effects of 19 PTAs

• Econometric gravity model
• Addresses omitted variable problem in other
  studies a stricter test of PTA impact
• Decomposes impacts of trade and third-wave
  measures on trade and investment flows
• Indexes to capture degree of PTA liberalisation

11
PTA coverage liberalisation
12
PTA liberalisation by sector
Member Liberalisation Index for selected PTAs
Agreements ordered by type

13
New evidence net trade diversion?
14
A puzzle net trade diversion in the most
liberal PTAs?

• Limitations of the MLI index
• Doesnt capture possible interactions
• Role of RoO, contingent protection in practice?

15
Rules of origin and their impacts

• Exports must meet origin test eg local content
  test, change of tariff classification
• Increase exporters costs
• Administrative costs 1-6 of export value
• Re-sourcing of intermediate imports
• Discourage innovation and efficiencies
• Different rules for different agreements the
  infamous spaghetti bowl

16
The hidden costs of CER rules of origin

• RoO relatively clean but
• New production methods discouraged
• Inconsistent interpretation of rules
• Sensitive to exogenous price changes (eg exchange
  rate movements)

17
Constructing a RoO restrictiveness index
Restriction categories for preferential RoO
18
NAFTA the most restrictive
Restrictiveness index for preferential RoO Index
score ranges between zero and one
19
Restrictiveness of RoO and average tariffs
correlated
Restrictiveness index for preferential RoO
weighted by the simple mean of members tariff
rates Index score ranges between zero and one
20
Restrictiveness of RoO and tariff differences
correlated
Restrictiveness index for preferential RoO
weighted by the standard deviation of members
tariff rates Index score ranges between zero and
one
21
The investment story is more positive
Non-trade provisions drive investment in PTAs
22
with net investment creation in most PTAs
Net impact of PTAs third wave provisions on
investment
23
especially investment flows to and from
non-members

24
So a mixed story

• Trade result unsurprising?
• The same old incentives to entrench protection
• With far less scrutiny than multilateral
  agreements
• The devil is in the (hidden) detail!
• Third-wave outcomes a better story
• But simply highlight that bigger benefits come
  from non-discriminatory liberalisation which can
  mostly be achieved through unilateral action?

25
AUSFTA fits the pattern

• Headline numbers impressive but
• Special arrangements for highly-protected
  sectors
• Dairy and sugar excluded (US sugar protection gt
  100)
• Special safeguards for beef and horticultural
• Complex RoO for TCF and autos
• Less discriminatory liberalisation of FDI,
  services trade

26
Some policy implications

• Stricter WTO rules for trade coverage of PTAs and
  requirements for greater openness (eg membership
  expansion) over time
• RoO should be more transparent, less
  productspecific, cleaner, to reduce their
  protectionist, cost-increasing impacts
• Desirability of more better analysis of
  domestic benefits of non-discriminatory reform to
  encourage unilateral liberalisation

27
www.pc.gov.au

• Adams et al 2003, The Trade and Investment
  effects of PTAs Old and New Evidence, PC Staff
  Working Paper, May
• PC (Productivity Commission) 2004,
  Restrictiveness Index for Preferential Rules of
  Origin, Research Paper, September
• PC 2004, Rules of Origin under the Australia-New
  Zealand CER Trading Agreement, June