Dr. JiangYu WangAssociate ProfessorSchool of LawThe Chinese University of Hong Kong19 March 2007

Trade creation or trade diversion?Building block or stumbling block?WTO consistency?Trade realism

Important question, and a topic of heated debate

The debate has provided little practical guidance for policy-making in the real world

A recent IMF staff paper suggests that Asian FTAs have not led to trade diversion.

Second-best choiceScale economy and competitionMore attractive to FDIPolitical and geopolitics benefits

The need for WTO Compliance In theory, yes

Is there anything to be complied with? MFN GATT Art. XXIV GATS Art. V The Enabling Clause

CU and FTA “Substantially-all-trade” (SAT)

requirement (XXIV:8) “Not-on-the-whole-higher” (NWH)

requirement (XXIV:5) Interim agreement: “shall include a plan

and schedule for the formation of such [RTA] within a reasonable period of time”.

Subject: “duties and other restrictive regulations of commerce [ORRC].”

What is SAT? Quantitative approach Qualitative approach

What is the scope of list of ORRC? No agreed definition No method to implement Question: overall or product-by-product,

country-by-country? The GATT/WTO Members have never

reached consensus on anything

The rule: “promptly notify” to enable Members to “make such reports and recommendations to contracting parties.”

Time, definitions, interpretations, etc. Anyway, no need for GATT/WTO approval

according to common understanding; GATT/WTO can make recommendations and reports

The Committee on Regional Trade Agreement (CRTA)

The “Contracting Parties of GATT” have never made an agreed set of recommendations to any RTA

RTAs operated at largeCRTA has not completed the review

of any RTA

Differential and more favourable treatment reciprocity and fuller participation of developing countries:

Following negotiations within the framework of the Multilateral Trade Negotiations, the CONTRACTING PARTIES decide as follows:

1.          Notwithstanding the provisions of Article I of the General Agreement, contracting parties may accord differential and more favourable treatment to developing countries(1), without according such treatment to other contracting parties.

2.          The provisions of paragraph 1 apply to the following(2): …… c)         Regional or global arrangements entered into amongst

less-developed contracting parties for the mutual reduction or elimination of tariffs and, in accordance with criteria or conditions which may be prescribed by the CONTRACTING PARTIES, for the mutual reduction or elimination of non-tariff measures, on products imported from one another;

PoliticsStarted with the GATT review of

Treaty of Rome

Is there a need to comply with WTO rules?

Experience shows that no RTA is not compatible with GATT/WTO

1. National security and regional stability as a legitimate goal in international trade relations

1. In the absence of positive multilateral rules, nations are free to pursue many goals

2. Almost all RTAs are political in nature3. Importance of politically-driven RTAs in East Asia:

Trade and Peace – interdependence promote peace

4. The East Asia case: colonized history, diverse culture, fragmented ideology grouping, border disputes, mistrusts, etc.

▪ Trade within the Asian region is far from reaching its potential, and policies that facilitate integration and more efficient regional trade accelerate growth and expand its basis, especially for lower-income Asia.

▪ Tariff barriers are only part of the challenge to further economic integration and trade expansion in the region…. A deeper and more inclusive Asian Free Trade Area can achieve for its members larger benefits than that would arise from global trade liberalization along [WTO] lines.

▪ The economies of the [ASEAN] have the most to gain (in domestic terms) from Asian economic integration, provided that this happens I a relatively uniform way.

China’s leading role China becomes the major market for

many Asian economies China’s rise as the major factor in

shaping the new division of labor (production-sharing network)

Deeper production-sharing practices within the [East Asia] region have contributed substantially to the rise of intraregional trade flows. In particular, China’s emergence as a major production site for labor-intensive stages of production and assembly has exerted a huge impact on such flows, both within Asia and between Asian and the rest of the world. Goods that were previously processed and exported by other Asian countries are now finalized in China for export. This phenomenon explains, in large part, the increasing bilateral trade imbalances between China and its major trading partners; China has recorded growing trade surpluses with North America and Europe, while widening its trade deficit with the rest of Asia (UNCTAD 2004, P. 46).

India as a trader is much less significant

But India’s demonstrated potential is unlimited

Both become fanatics of regional and bilateral trade agreements

Hub-and-spoke bilateralismPan-Asian FTASub-regional integration in East and

South Asia respectively, linked up by FTAs

Summary: China gains the most from bilateralism

based on a China-hub China gains least from an Asian Free

Trade Area

A Japan-Korea FTA produces relatively weak benefits for the two participating economies (0.3 percent of GDP for Korea and close to zero effect for Japan). The widespread negative effects on nonparticipants are negligible when expressed as a percentage of initial GDP, reaching 0.1 percent of GDP only in the case of Vietnam.

Including China in the proposed arrangement significantly improves the welfare outcome for Korea and Japan, to 0.7 percent and 0.1 percent of GDP, respectively. In China’s case, however, the welfare gain is negligible …. With the inclusion of China in the FTA, the negative effects on nonmembers start to appear significant, particularly for Taiwan, China, and for the ASEAN economies, which compete directly with China in many markets.

The negative welfare effects on the ASEAN economies are converted into positive effects … if the proposal is expanded into an ASEAN+3 FTA, comprising the 10 ASEAN economies plus China, Japan, and Korea. Proportionately to GDP, the ASEAN economies and Korea are the biggest gainers from this arrangement, although for Korea there is only a marginal improvement in the welfare outcome relative to the outcome from the China-Japan-Korea FTA. In comparison with the latter arrangement, Japan enjoys a slightly larger welfare gain, although as a percentage of GDP, the gain is still small….[T]he welfare effect on China is negligible, although very slightly inferior to that from the China-Japan-Korea FTA.

Gilbert, Scollay and Bora (2004)

Better positioned in South Asia (although not to be the largest gainer the SAFTA)

Economic gains are not the determining factor Multiple objectives of regionalism▪ Regional politics and stability▪ Strengthen domestic policy reform▪ Increasing multilateral bargaining power▪ Securing market access▪ Forming strategic linkages

Although countries are not required to practice altruism in international trade, big trading powers are expected to factor not only their national interest, but also regional and global interest, into their policy-making.

1. Hub-and-spokes bilateralism is stumbling blocks to the multilateral trading system, in which both China and India have significant interest.

2. Bilateral FTAs cause systemic problem of “spaghetti bowl”.

3. An integrated Asian market strengthen the negotiating position of China, India, and other Asian countries in the multilateral and bilateral talks (with U.S. and EU in particular).

4. The political objectives are important and necessary. Otherwise?

1. The routes for Asian economic integration: East Asian FTA + South Asia FTA + others = Asian free trade

2. A China-India FTA to link up the two sub-regionsfootnote: China-India FTA is strongly supported by Arvind Panagaria, a long time opponent to regionalism.

3. China and India should lead Asia to practice open regionalism (with Asian identity)- does not mean “open membership”- defined as “external liberalization by trade blocks”- “the degree of liberalization on imports from nonmembers need not be as high as that from member countries”

4. Deeper integration?- Investment- Services- Other areas

5. Develop Asian “common guidelines” or “best practice” for RTAs

- WTO consistent- Deeper integration- Liberal, or at least nonrestrictive, rules of

origin- Clear and simply codes on technical

barriers- Harmonization of regulatory standards not

necessary- Dispute settlement to promote legalism

6. In short, rebuilding global free trade by turning spaghetti bowls into building blocks