static and dynamic theories of trade … 39th volume/5 trade integrati… · ·...

International Journal of Information Technology and Business Management 29

th July 2015. Vol.39 No.1

© 2012-2015 JITBM & ARF. All rights reserved

ISSN 2304-0777 www.jitbm.com

46

STATIC AND DYNAMIC THEORIES OF TRADE INTEGRATION

REVISITED

T.U.I. Peiris1, M. Azali

2, M.S.Habibullah and A. Hassan

4

1Department of Accountancy and Finance, Faculty of Management Studies, Sabaragamuwa University of Sri

Lanka, Sri Lanka. 2,3,4

Department of Economics, Faculty of Economics and Management, Universiti Putra

Malaysia, Malaysia. [email protected]

ABSTRACT

Regional trade agreements (RTAs) are considered as one of the major growth stimulant factors in the

contemporary world due to their potentiality in generating welfare gains. When assessing welfare effects of

RTAs, until recently, the attention of most researchers confined to the static theory, which addresses the

resource allocation effect of trade integration (TI). Even though dynamic theory roots back to the same era that

static theory was grounded, the importance of attending to the dynamic efficiency of RTAs became popular in

the recent past. Findings of this survey indicate that both theories independently provide a significant

assessment on the desirability of RTAs. Thus, this study emphasizes the requirement of attending to both static

and dynamic theories when assessing the desirability of RTAs.

Keywords: Static theory, Dynamic theory, Regional trade agreements and Trade integration.

INTRODUCTION

The term “Economic Integration” (EI) is not often

defined, because it does not have an apparent

meaning for all the economists and most of them

believe it as a complex notion which must be

defined with care1. Nonetheless, some rational

definitions in this regard are available in the

literature. Prominent economists, who attempt to

define EI, have used three approaches. Some regard

it as a combination of a state and a process. Some

define it as a process, while others argue it as a

means towards a particular objective. However,

these definitions provide some vital fundamentals

despite of their categorization. They are: formation

of more comprehensive systems; abolish

discrimination between economic units; prices of

all similar goods and factors are equalized; process

towards a union; co-ordination of economic

policies; free movement of goods and factors of

production; means towards an end. With these

fundamentals in mind, it can be broadly defined as

1 Katarzyna Sledziewska, The Theory of Economic

Integration: Descriptive background. University

Warszawski. www.wne.uw.edu.pl/~sledziewska.

a move towards a union with some common

objectives by abolishing discriminations between

economic units to ensure the availability of

comprehensive systems that guarantee: free

movement and price equalization of goods and

factors of production; and the harmonization of

policies of economic sectors in the participating

countries. Some key definitions under above

categorization are further listed with the rest of this

section in order to provide an explicit idea about

EI.

EI as a Process and/or State

Balassa (1961, 1976) under the implicit

assumption, that discrimination actually affecting

economic intercourses, defines EI as “a process and

as a state of affairs. Regarded as a process, it

encompasses measures designed to abolish

discrimination between economic units belonging

to different national states; viewed as a state of

affairs, since it can be represented by the absences

of various forms of discrimination between

national economies”. Holzman (1976) believes

that “EI is a state in which the price of all similar

goods and factors in two regions are equalized”.

Swann (1996) defines EI as “a state of affairs or a

process that involves a combination of previously

separated economies into larger arrangements”.

mailto:[email protected]





47

EI as a Process

Pinder (1968) believes EI as a process towards a

union, during which both the removal of

discrimination between member countries and the

co-ordination of economic policies have to be

considered as important elements of integration.

Hence, Pinder suggests a definition as “both the

removal of discriminations between the economic

agents of the member countries, and the formation

and application of co-ordinated and common

policies on a sufficient scale to ensure that major

economic and welfare objectives are fulfilled”.

Vajda (1971) has criticized the Pinder’s definition

due to its generality. However, Vajda agrees with

the requirement of considering policy co-ordination

as an important consideration in this process.

Mennis and Sauvant (1976) indicate EI “as a

process, whereby boundaries between national

states become less discontinues, thus leading to the

formation of more comprehensive systems. EI

consists in the linking up and the merging of

industrial apparatus, administration and economic

policies of participating countries”. Maksimova

(1976) believes it as “a process of developing deep

and stable relationships about the division of labor

between national economies. This process aims at

the formation of international economic entities,

within the framework of groups of countries with

the same type of socio-economic system, which are

consciously regulated in the interest of the ruling

classes of these countries” (Jiawen Yang). Molle

(1991) believes EI as a step by step process. Molle

argues that in the initial stages, tariffs on goods are

removed and then movements of production factors

are liberalized. In the third stage, the national

policies with regard to economic sectors are

harmonized.

EI as a Means

Staley (1977) indicates that EI is involved with the

“utilization of all potential opportunities of

efficient division of labor”. With that, Staley

believes it as a means to utilize human resource

efficiently. According to Robson (1987) when EI

comes into its optimum level, full integration, free

movement of goods and factors of production and

the absence of discrimination should enhance the

efficiency in resource usage. Thus, Robson also

regards it as a means to obtain efficiency in

resource utilization. Jovanovic (1998) believes EI

as one of the means of increasing national welfare,

especially through TI. Pinder (1968) while

defining EI as a process believes it as a means to

achieve welfare objectives of the participating

countries.

Levels of EI

A review on EI is considered as incomplete without

a proper note on levels or types of EI, because the

theoretical development of the subject matter

heavily depends on welfare effects of different

levels of integrations. Depending on various

grounds, especially with and without considering

the concepts of corporation and integration, many

suggestions are given to the phenomenon of levels

of EI. Balassa (1961) clearly distinguishing

economic corporation: includes actions taken to

reduce discrimination; and EI: a process in which

some forms of discriminations are suppressed,

introduce five levels in this regard. They are: a free

trade area (FTA), a custom union (CU), a common

market (CM), an economic union, and complete

integration. In a FTA all the tariffs or the

quantitative restrictions in trade are completely

removed among the member countries, but each

member country keeps its own tariff barriers in

trade with non-member countries. Some examples

for these are: NAFTA, formed in 1993; ASEAN

FTA, came in to force in 1992; and SAFTA,

formed in 2005. A CU is similar to a FTA, but

tariffs on non-member countries are equalized by

the union partners. That is, a common external

tariff is applied on the goods import from the non-

members. This common tariff can differ across

goods but not across member countries. The EEC

(from 1957 to 1992) can be considered as the best

example for a CU. A CM is similar to a CU, but a

higher form of EI is attained through the

abolishment of restrictions on factor movement

among union members. The European Union (EU)

in the beginning of 1993 showed the features of a

CM. Balassa (1961) defines the next levels of

integration as, “an economic union, as distinct from

a CM, combines the suppressions of restrictions on

commodity and factor policies, in order to remove

discrimination that was due to disparities in these

polices. Total EI presupposes the unification of

monetary, fiscal, social and countercyclical policies

and requires the setting up of a supra-national-

authority whose decisions are binding for the

member states”. The best example for this type of

integration is the EU. This five stage integration

process can possibly be seen as continuum from a

lower integration level to deeper integration levels.

However, most of the present world EI

arrangements are still at the initial stages of FTAs

and CUs.

Balassa (1961) indicates that the theory of EI is

evolving base on the effects of these various levels

of integration to the respective economies of

participating countries. Since most of the EI

arrangements today are TI agreements, either FTAs





48

or CUs, the literature is abandoned with theoretical

and empirical analysis of these two forms of

integration arrangements. Effects of TI

arrangements on economic welfare and growth

have been theatrically proved in several

perspectives. In the most comprehensive sense,

they can be categorized into the static analysis of

TI and the dynamic analysis of TI (Bhagwati and

Panagariya, 1996). Hence, the following sections

will theoretically and empirically review the static

and dynamic theories.

STATIC THEORY

Viner (1950) introduced the static theory through

the concepts of trade creation (TC) and trade

diversion (TD). Viner (1950) believes that TC

leads to welfare rising as trade shifts from a high

cost supplier member country to a low cost supplier

member country in the union. Meanwhile, TD

lowers the welfare as it leads to shift trade from a

low cost supplier non member country to a high

cost supplier member country in the union. These

two concepts, TC and TD, can be further explained

with the help of following example in table 1.1.

Table 1.1 Price of commodity "X"

Country

A

Country

B

Country

C

Price of

commodity X

35 20 15

In general, TC indicates that a regional trade

agreement (RTA) generates trade that would not

have indeed existed otherwise. Thereby, supply of

the product occurs from a more efficient producer.

According to the above example if country A

enters into a FTA either with country B or country

C, in both cases, country A will start importing

commodity X from the contracting country since

the domestic price of commodity X in country A

(35) is higher than country B (20) or country C

(15). Thus, the direction of trade will shift from a

high cost member country (country A) to a low cost

member country (country B or C) generating a TC.

On the other hand, TD indicates that a RTA diverts

trade away from a more efficient supplier outside

the RTA and towards a less efficient supplier

within the RTA. In the above example let’s further

assume that country A levies a tariff of 100% on

commodity X. So, new prices of commodity X

from country B is 40 and country C is 30. Hence,

country A would buy the commodity from country

C, who is the low cost producer in this case. Later,

if country A forms a FTA with country B, then

country A will buy it from country B, because due

to the FTA, the price of commodity A falls to 20 in

country B. This indicates that the direction of trade

has shifted from an initial low cost non-member

country (country C) to the high cost member

country (country B) by generating a TD. For more

examples in this regard better to refer Lipsey

(1960) and Hosny (2013).

Subsequent Developments to the Static Theory

Many developments have been made to the static

analysis of TI mainly criticizing Viner’s conclusion

on trade diverting unions. J. E. Meade is considered

as the first economist to further develop Viner’s

theory. Meade (1955) in his book, “the theory of

customs unions”, appreciates Viner’s work and

meanwhile criticizes it with the argument that

Viner’s analysis is acceptable only under the

conditions of inelastic demand and completely

elastic supply. However, if demand is allowed to be

more elastic, then Meade believes that a CU may

actually increase the degree of trade even under the

conditions of TD. Further, Meade argues that this

effect, which is termed as “trade expansion”,

should be included to the traditional Viner analysis

of TC and TD (Hosny, 2013 and Hay, 1957).

Viner’s argument on trade diverting CUs is also

criticized on the ground that Viner has concentrated

only on the production side effects and has ignored

the supply side effects in the analysis of CUs

(Lipsey, 1957, 1960; Gehrels, 1956-1957; Krauss,

1972; Sheer, 1982). For instance, Lipsey (1957)

indicates that the relative price change due to the

tariff reductions between member countries of a

CU brings two effects. First, a production side

effect as illustrated by Viner (1950); and second,

consumption effect which leads to increase the

consumption of members through the exchange of

each other’s products, while reducing the

consumption from countries outside the union.

Thus, Lipsey shows that TDs are not always

welfare reducing. Very much the same belief is

carried to his next article, “the theory of CUs: a

general survey” published in “The Economic

Journal” in 1960, in which he clearly indicates that

“Viner’s analysis implicitly assumed that

commodities are consumed in some fixed

proportion which is independent of the structure of

relative prices”. Cooper and Massell (1965) briefs

Lipsey’s (1957) argument of welfare rising TDs in

such a way that “when a CU is formed, some

dutiable goods formally imported from outside

sources will be replaced by some goods imported





49

by the partner country, duty-free but at a higher

real cost. The shift to a higher-cost source of

supply tends to lower the country’s real income,

and consequently consumer welfare; but the

removal of constraint on consumption may raise

welfare. If the second effect is favorable, and out-

weights the first effect, there is a net raise in

welfare”. Gehrels (1956-1957), in the study,

“customs union from a single-country viewpoint”,

points out that assessing the gains of CUs merely

through the production effects will provide a biased

judgment and further reveals the importance of

considering the response of consumers to the

reduction in import prices cause by the tariff

removals. Thereby, he argues that the omission of

consumption effects will result in underestimating

the gains and making unfavorable conclusions,

where a union would in fact benefit the members.

As reported by Krauss (1972), Lipsey (1957) and

Gehrels (1956-1957) introduce the first exception

to the alleged Vinerian law that TD necessarily

reduces welfare. In this regard, they relax Viner’s

assumption of fixed proportions in consumption.

Krauss (1972) believes that the applicability of

Viner’s conclusions are limited not only because of

the fixed proportions in consumption assumption,

but also due to the assumption of constant costs in

home country, since both fail to describe the real

world conditions. Hence, the next exception is

obtained by relaxing Viner’s assumption of

constant costs in home country. By doing so,

Michaely (1965) and Bhagwati (1971) also show

the existence of welfare gains that can exceed the

welfare losses resulting from a TD. Thus, a net

welfare gain can occur to the home country even

with a trade diverting union.

Sheer (1982) also argue against the Viner’s

assumption of independent consumption to the

price reductions that RTAs bring to their members.

Therefore, with the study, “a survey of the political

economy of custom unions”, Sheer indicates that

even though these arrangements shift the imports

from a low-cost source to a high-cost source, will

result in higher consumption gains due to the

change in relative price levels. There by, Sheer

believes this increase in consumption will induce a

production response in the import sector and it also

can be considered as a gain from TI. Johnson

(1975) believes the argument; TD may be welfare

increasing in the sense that the welfare loss from

diversion is outweighed by the gains of

consumption substitution, as one of the relics of

criticism on Viner’s distinction between TC and

TD. Thereby, he indicates that if TC and TD are

identified with reference to the volume of trade

ignoring the shifts in production location, then as

any TD gain must involve an increase in the

volume of trade; such increase can be considered as

TC like any other TC source of gain.

The importance of analyzing the impact of these

production and consumption effects to the

complementary and substitutable products can be

considered as another major development to the

static theory. Meade (1955) explains this by using a

small tariff reduction in a single product: Holland

reduces its tariff on beer imports from Belgium

while the duty on beer imports from other countries

remains unchanged. In order to assess the welfare

gain, “one must trace out the repercussions of this

change upon all the quantities of all products traded

internationally, and one must then weight each

change in the volume of a product traded by the

difference between its price in the county of export

and its price in the country of import” (cited from

Hawtrey, 1956).

Subsequently, depending on the form of tariff

reduction (small reduction, large reduction,

complete removal, or gradual reduction) many

researchers contribute to the static theory. Lipsey

and Lancaster (1956-1957) in their study, “the

general theory of second best”, assuming “country

A initially charges a uniform ad valorem rate of

tariff on imports of X and Y; A then forms a CU

with country B; now X is imported duty free while

the pre-union tariff is still applies to Y”, indicate

that if tariffs are gradually removed, then the

welfare must raise in the initial stages of tariff

removal and it lowers in the final stages. Another

important conclusion is suggested by indicating

“nothing can be said about the welfare effects of a

complete removal of the X tariff”. In case of small

removals of tariff, they believe welfare must rise

while in a large reduction it may raise or lower. De

Melo, Panagariya and Rodrik (1993) indicate that

gradual tariff removals are more likely to be

bringing greater economic welfare than the

complete tariff removals (cited from Hosny, 2013).

Lipsey (1960) introduces another development by

considering the size of expenditure on the three

classes of commodities namely, domestically

purchased commodities, commodities purchased

from the union partner and those purchased from

non-partner countries. Lipsey believes that if a

country’s proportion of international trade with its

union partner is high and it is lower with the non-

partners, then the union is more likely to produce

welfare gains. In the same time, “a custom union is





50

more likely to raise welfare the lower is the total

volume of foreign trade, for the lower is foreign

trade, the lower must be purchases from the non-

partner countries relative to the purchases of

domestic commodities”.

The analyses of terms of trade effect on economic

gains from CUs can also be considered as one of

the major development to the Vinerian analysis of

static gains. Krauss (1972) believes whenever

terms of trade are permitted to vary in an analysis

that will dramatically change the perspective of the

analysis. Thus, each variation will provide a new

contribution. Further, he indicates that an analysis

of this nature varies according to the amount of

non-member trade that is assumed to survive with

the formation of a CU with TD production effect.

Melvin (1969) indicates that in a trade diverting

CU if terms of trade are permitted to change, then

the probability for the welfare improvement is very

less under the assumption that no trade with outside

countries survive the formation of the CU. Later,

this argument is criticized by Krauss (1972) on the

ground that, Melvin has failed to recognize the TC

production effect and thus, he has wrongly believed

a pure TD production effect. Hence, he suggests a

correct form to the Melvin’s conclusion: “the

greater the terms of trade loss from the TD

production effect, the greater the gross TC

required, whether from production or consumption

sources, for union to improve welfare”.

Johnson (1962), with an alternative assumption:

some non-member country trade does survive,

states that a CU with TD production effects has the

tendency to make improvements to the terms of

trade and on the top of that, the amount of loss

from the TD can be either reduced or eliminated

through such improvements in the terms of trade.

Cooper and Massell (1965) also indicate that “the

loss from TD effect is less the greater the

improvement in the terms of trade” (Cited from

Krauss, 1972). Arndt (1968) analyzes the home

country’s economic welfare in contrast to the

changes in member country’s tariff policy as a

result of implementing a common external tariff.

Arndt indicates that in order to implement a

common tariff on non-member countries if a

member country has to raise its tariff while the

home country’s tariff remains unchanged, then the

home country receives a terms of trade gain. Other

researchers who contributed in this regard include

Spraos (1964), Kemp (1969), Vanek (1965).

Depending upon the solution to the inquiry,

whether the removal of tariffs on trade is more

advantageous if the trade is between

complementary countries than it is between

competitive countries, another significant addition

is made to the static theory. Meyer (1956) in his

study, “complementarity and lowering of tariffs”,

states that trade gains generate from the

complementary goods received in exchange to the

goods retained by each party to the transaction. On

the other hand, there is no such certainty of gains

from trade if the goods exchanged are competitive

to the goods retained. Mayer further indicates that

“the benefit will be the greater, the larger the

number of initially rival economies that participate

to trade”. Viner (1950), Lipsey (1960) and Sheer

(1981) also believe a CU would raise gains if the

countries are producing the same commodity.

Makower and Morton (1953) point out those gains

are higher in unions that have a widely different

production advantageous situation. In other words,

the economic gains will be larger the larger is the

difference between the production costs in unions,

where the same commodity is produced.

International trade literature believes that countries

with similar demand structures or in other words

countries with similar per capita income levels

would develop similar industries and thus, they

would enjoy more trade potential (Linder, 1961;

and Kemp 1965). Sakamoto (1969) believes that

the similarity in the demand structures or the

income per capita levels is a significant

determinant for the success of EI processes. Later,

many researchers indicate that the greater the

similarity in the per capita income between

members of a union the grater is the potentiality for

intra-industry trade (Lancaster, 1980; Greenway,

1981; and Zdenek and Greenway, 1984). However,

on the one hand, when countries have similar per

capita incomes Linder hypothesis states that intra

industry trade should increase and on the other

hand, when countries have dissimilar per capita

incomes comparative advantage theory states that

inter industry trade should increase. Herein, Hosny

(2013) concludes as “the impact on per capita

income on trade is not settled in the literature” and

“the increase or decrease in trade flows between

member countries of a union will be determined by

the similarity of per capita income and the pattern

of trade; whether it follows the line of inter

industry or intra industry trade”.

Empirical Evidences on Static Welfare Gains

As mentioned in the above theoretical review on

static theory, TC and TD are the two main static

outcomes of a RTA. Empirical evidences on this

regard are substantial. Hence, sub section one





51

provides empirical evidences of European

integration arrangements (Aitken, 1973; Endoh,

1999; Plezman, 1977; Han, 1992). Sub section two

concentrates on North American integration

(Schwanen, 1997; Helliwell, Lee and Messinger,

1998; Head and Ries, 1999; Clausing, 2001;

Krueger, 1999; Fukao, Okubo and Stern, 2001).

Sub section three empirically reviews the Asian

integration arrangements (Ooi, 1981; Devan, 1987;

Ramasamy, 1995; Imada, 1993; Elliott and

Ikemoto, 2004; Siah, Choong, and Yusop, 2009;

Endoh, 2000; Roberts, 2010). Finally, in the sub

section four, some further evidences are provided

from other counterparts of the world.

European TI Arrangements

Aitken (1973) with the study, “the effect of the

EEC and EFTA on European trade: a temporal

cross-section analysis” published in “the American

Economic Review”, investigates the existence and

the approximate sizes of TC and TD during the

period 1951 to 1967. As the title of the study

indicates a cross-sectional trade model is employed

for the European Economic Community (EEC) and

for the European Free Trade Association (EFTA).

Aitken indicates the existence of both TC and TD

effects during this period. The TC effect of EEC is

substantially greater than that of EFTA and

approximately $9.2 billion and $1.3 billion,

respectively. Further, he confirms the fact that, the

integration effects of EEC and EFTA are

consistence with the theoretical expectations.

Endoh (1999) examines these static effects in EEC,

Lathing American Free Trade Association

(LAFTA) and Council of Mutual Economic

Assistance (CMEA) over the period 1960 to 1994.

Endoh implements a simplified version of gravity

model in this regard. Results of the gravity model

indicate that each of the TI arrangements provides

significant TC and TD effects. However, during

1990s these effects are relatively lower in all cases.

Among other researchers who investigate these

static effects in European countries: Plezman

(1977) concentrates on the EEC, EFTA and

CMEA; Hnag (1992) examines the impact of

European Community (EC) on non-member

countries.

North American TI Arrangements

Schwanen (1997) with the study, “Trading up: the

impact of increased continental integration on

trade, investment and jobs in Canada”, investigates

the influence of Canada-US Free Trade Agreement

(CUSFTA) and its successor North American Free

Trade Agreement (NAFTA) on the trade flow of

Canada during 1989 and 1995. Schwanen

compares the trade flows of liberalized and non

liberalized sectors under these agreements. His

findings confirm a significant improvement of

trade in the liberalized sectors. This indicates a

significant TC impact. Helliwell, Lee and

Messinger (1998) investigate the impact of

CUSFTA by employing both aggregate and

industry level data. They also confirm a significant

improvement in Canadian international trade

following this agreement.

The study, “rationalization effects of tariff

reductions” by Head and Ries (1999) examines the

impact of CUSFTA on the manufacturing sector of

Canada. Here, the term “rationalization” is justified

as “a decline in the number of plants accompanied

by increases in output per plant”. Head and Ries

use a panel of 320 Canadian manufacturing

industries during the six years following the

agreement. Their findings provide substantial

rationalization of tariff reductions as the number of

plants decreased by 21% while the output per plant

increased by 34%. Clausing (2001) also investigate

the impact of CUSFTA on trade flows between

Canada and US by using commodity level data

during the period 1989 and 1994. Clausing

concludes that CUSFTA leads to substantial TC

effects while TD is very little.

Krueger (1999) with her study, “trade creation and

trade diversion under NAFTA”, uses a gravity

equation in a pooled time series cross section in

order to assess the impact of NAFTA especially to

the Mexican trade flows during 1987 to 1997.

Krueger confirms a significant improvement in the

Mexican trade flows suggesting a TC. Two

possible reasons have identified on this regard:

Mexican reduction in tariffs and quantitative

restriction; and the alteration of exchange rate

policy by Mexico. This study further confirms a

TD effect as NAFTA’s imports from non members

significantly reduced. The study titled, “an

econometric analysis of trade diversion under

NAFTA”, by Fukao, Okubo and Stern (2001)

attempt to investigate the TD phenomenon of

NAFTA by using both industry and commodity

level data. Fukao at el. use a “partial equilibrium

model of differentiated product industries under

monopolistic competition”. This model is

implemented through the fixed effect panel

analysis over the period 1992 to 1998. Significant

TDs are found in many industries while, US

imports of textile and apparel products depict the

strongest TD effect. When they extend the study to

the commodity level (HS 4-digit level) textile,





52

apparel and some footwear products indicate a

significant TD effect.

Asian TI Arrangements (Except South Asia)

Ooi (1981) with his study titled “the ASEAN

preferential trading arrangements (PTA): an

analysis of potential effects of intra-ASEAN trade”

investigates the potential TC effects of two specific

events: the 20% tariff reduction of all items with

import value of less than US$ 50,000, and the

consideration of increasing this cutoff ceiling to

US$500,000 as proposed by the “ASEAN

Economic Ministers”. This analysis is done on the

aggregate basis at the one digit level of SITC code

for Philippines and Thailand. Ooi’s results indicate

a significant TD effect for Philippines and

Thailand, approximately 98.21% and 97.98%

respectively. Devan (1987) with his study, “the

ASEAN preferential trading arrangements: some

problems, ex-anta results, and a multipronged

approach to future intra-ASEAN trade

development”, extends the Ooi’s investigation in

several ways: specifically concentrates on the

manufactured products and commodities at the

seven digit CCCN level; concentrates on the effect

of 25 per cent or/and 50 per cent margins of

preference; and concentrates on four ASEAN

countries (Malaysia, Thailand, Philippians, and

Indonesia). Devan’s results indicate that whatever

the margins of preference the selected countries

would gain a 4.8 per cent or US$ 110.57 million

TC gain in average. Further, when petrol based

products are excluded, the TC gain increase up to

5.2 per cent. The TD effect is valued at US$ 58.67

million or 6.3 per cent of ASEAN’s 1984 extra-

ASEAN import value.

The study titled “production and trade effects of an

ASEAN free trade area” by Imada (1993) is

considered as the first study of this nature that

investigates the supply side effects within the

region (Ramasamy, 1995). Imada indicates that all

previous studies in the region concentrated only on

the price elasticity approach in estimating the

impact of tariff reductions on import growth.

Hence, she points out the importance of

investigating the closer integration on export,

production and consumption as well. Though, she

does not specifically investigate the TC and TD

effects, the results of the study show the

potentiality of expanding intra-ASEAN trade if

intraregional trade is liberalized, partially or

completely. Ramasamy (1995) concentrates on the

negative resource allocation effect of ASEANs

with the study titled “trade diversion in an ASEAN

free trade area”. Ramasamy assumes that the

imports from member countries and rest of the

world are not perfect substitutes, thus the elasticity

of substitution is 1. Under this assumption, his

results indicate that TD is highest in Philippine and

followed by Singapore, Thailand, Malaysia, and

Indonesia respectively. The net welfare impact, that

is when TC is considered, is depicting a gain for

Indonesia and Thailand, but for Malaysia and

Singapore it is a net loss.

Elliott and Ikemoto (2004) investigate the ASEAN

intra-trade and extra-trade bilateral trade patterns

during the periods before and after the signing of

ASEAN Free Trade Area (AFTA) and crucial years

around Asian crisis. Elliott and Ikemoto use a

modified gravity equation in this regard. Their

results confirm the findings of previous studies that

focused on AFTA because no evidences are found

for the significant influences on trade flows in the

immediate years after the signing the AFTA.

Hence, they indicate that the TC effect is lower

with compared to the preceding period 1988-1992.

However, when only inter-ASEAN trade is

considered, some positive AFTA effects are found.

The study titled “AFTA and the intra-trade patterns

among ASEAN-5 economies: trade-enhancing or

trade-inhabiting?” by Siah, Choong, and Yusop

(2009) examine the ability of ASEAN integration

in promoting intra-ASEAN trade. In this regard, a

modified gravity model is implemented within the

autoregressive distributed lag (ARDL) framework

during the period 1970 to 2001. Their conclusion

confirms the importance of AFTA in increasing

intra-ASEAN trade. However, they point out the

possibility that the trade deflection might not allow

all ASEAN countries to benefit from this

agreement.

Endoh (2000) with his study “the transition of post

war Asia-Pacific trade relations” examines the

behavior of trade patterns among Asia-Pacific

countries. A gravity model is employed during the

period 1960 to 1995 to arrive at the desired

objectives. The results of the gravity model

indicate that ASEAN’s impact on intra-regional

trade is insignificant, East Asia Economic Caucus

(EAEC) countries are showing higher intra-

regional trade volumes and at a growing trend

along with those of Asia-Pacific Economic

Cooperation (APEC) counties. Finally, he states the

existence of a close trade relation among APEC

economies. Roberts (2010) investigates the impact

of China-ASEAN free trade area (CAFTA) on the

trade flows of respective countries with his study

titled “a gravity study of the proposed China-

ASEAN free trade area”. As the title of the study





53

suggests gravity model is employed in this regard.

With the results, Roberts first confirms the

desirability of gravity model as its outcomes well

explained the trade flows within CAFTA. Then he

states the requirement of well defined policies and

strategies to maximize the expected benefits.

Further, he indicates that the potential TC effect is

insignificant and even though, the TD is not

explicitly modeled the “inconsequential effect of

CAFTA” would take the form of TD.

More Evidences from Other Counterparts of the

World

Becker, La, and Suarez (2001) with the study titled

“trade creation and trade diversion for

MERCOSUR” investigate the effect of

MERCOSUR trading bloc on the trade flows of the

member countries (Brazil, Argentina, Uruguay and

Paraguay). A modified gravity model is used to

analysis the bilateral trade flows in between the

member countries and the selected non-member

countries. The findings of the study provide

sufficient evidences to conclude the existence of

TD effects in Brazil, Uruguay and Paraguay.

Argentina reports neither TC nor TD effects

following this integration arrangement. Yeats

(1998) with his study published in the “World Bank

Economic Review” also indicates that the

MERCOSUR TI arrangement leads to substantial

TD effect due to higher discriminatory tariffs

against non-members. The study titled “The

common market for Eastern and Southern Africa

(COMESA) and Kenya’s export trade” by Musila

(2004) attempts to answer the empirical question

whether the COMESA integration arrangement

helps Kenya to promote and diversify their exports.

The gravity model is employed in this regard.

Results of the model indicate that the COMESA

leads to significant TC effects. Hence, Kenya’s

export performances are positively affected by this

agreement. Further, no TD effects are reported.

Boughanmi (2008) investigates the impact of old

and immerging RTAs on the trade flows of Middle

East and North African (MENA) countries with

the study titled “The trade potential of the Arab

Gulf Cooperation Countries (GCC): a gravity

model approach”. The results of the study indicate

that the GCC intra-trade is not significantly

changed and had probably reached its fullest

potential during the first decade of DCC creation.

Further, Boughanmi indicates that the regions’

trade with Mashreq countries is more significant

than the Maghreb countries2. Finally, Boughanmi

concludes the fact that the newly launched trade

agreements have the potentiality of improving

regions trade.

Soloaga and Winters (2000) with the study

“Regionalism in the nineties: what effect on trade?”

investigate the effect of RTAs on the trade flows of

respective regions. They use a gravity equation to

analysis the bilateral trade flows of nine selected

RTAs namely: MERCOSUR, NAFTA, ASEAN,

Central American CM (CACM), ANDEAN, GCC,

EU, EFTA and Latin American Integration

Association (LAIA). Soloaga and Winters could

not find sufficient evidences for the TC effect in

any of the trading blocs considered. However, EU

and EFTA report significant TD effects and export

diversions. The study titled “Assessing regional

trade arrangements: are South-South RTAs more

trade diverting?” by Cernat (2001) investigates the

potential impact of nine RTAs on the intra-regional

and extra-regional trade of respective regions. The

nine RTAs considered herewith are: AFTA,

ANDEAN Community, Caribbean Community

(CARICOM), Common Market for Eastern and

Southern Africa (COMESA), Economic

Community of West African States (ECOWAS),

EU, MERCOSUR, NAFTA, and Southern African

Development Community (CADC). An expanded

gravity model is employed in order to assess the

specific TC and TD effects of these RTAs. Results

indicate that both South-South RTAs and African

RTAs are less trade diverting when compared to

other RTAs. Cernat also states that the significant

improvements in both intra-regional and extra-

regional trade of South-South RTAs may possibly

result from the RTA formation. This indicates a

substantial TC effect in South-South RTAs.

DYNAMIC THEORY

Improvement of welfare must be the ultimate

objective of an economic activity. Hence, the

desirability or the successfulness of TI must be

evaluated through its contribution to the welfare

generation (Balassa, 1961). Many prominent

researches indicate that the Vinerian analysis of TC

and TD and its developments are insufficient in

assessing welfare of a TI arrangement. Thus, the

requirement of an alternative way of evaluating the

2 Mashreq countries are Egypt, Syria, Lebanon,

Jordan and Iraq. Maghreb countries are Tunisia,

Algeria, Morocco, Libya and Mauritania.





54

welfare is emerged (Balassa, 1961; Hasson, 1962;

Cooper and Massell, 1965; Krauss, 1972; Sheer,

1982). Balassa (1961) believes that the economic

welfare resulting from an integration arrangement

can be measured by using four criterions. They are

“(a) a change in quantity of commodities produce,

(b) a change in degree of discrimination between

domestic and foreign goods, (c) a redistribution of

income between nationals of different countries,

and (d) income redistribution within individual

countries”. First two criterions measure the change

in potential welfare or in the static sense it is the

improvement in the allocation of resources at a

given point of time. Other two measure the welfare

effects of income redistribution. Balassa indicates

that the potential welfare in the static sense or the

“static efficiency, however, is only one of the

possible success criteria that can be used to

appraise the effects of economic integration”.

Further he points out the importance of expanding

an investigation to study the impact of integration

on “dynamic efficiency” instead of limiting to the

resources allocation under static assumption.

Balassa (1961) defines the “dynamic efficiency” as

“the hypothetical growth rate of national income

achievable with given resource use and saving

ratio. In technical terms, whereas static efficiency

would require that the economy operates on its

production possibility frontier; dynamic efficiency

can be represented by the movement of this frontier

in the northeast direction”. As he indicates,

technological progress, the allocation of

investment, dynamic inter-industry relationships in

production and investment, and uncertainty and

inconsistency in economic decisions can be

considered as the factors affecting the dynamic

efficiency of an economy.

C. A. Cooper and B. F. Massell are considered as

the other two pioneering economists who

intensified the requirement of dynamic analysis.

Cooper and Massell (1965) in their study, “a new

look at custom union theory” published in “the

economic journal”, question the usefulness of

static analysis in evaluating CUs. They point out

that the formation of a CU may not necessarily

reduce the tariffs of a participating country

depending on its initial tariff level. Hence, “the

static analysis fails to show why a CU may be

acceptable when a tariff reduction is not, and it

fails to analysis how a CU may more efficiently

serve the ends previously served by non-

preferential protection”. Moreover, they state that

the static analysis fails to assess the gains from the

changes in the terms of trade, economies of scale,

and reductions in unemployment which should

otherwise be evaluated in a different analytical

framework.

Krauss (1972) in his interpretive survey of resent

developments in CUs theory indicates that the

dynamic effects explained by Cooper and Massells

(1965) carry two separate arguments: first, “being

concerned with the effects of protection on the

efficiency with which the firm operates, according

to a given technology and market structure”;

second, “larger markets permits the exploitation of

economies of scale and the adoption of more up to

date technology”. Moreover, Krauss (1972)

emphasizes the requirement of empirical researches

to investigate the welfare effects of CUs on the

basis of the location of production, consumption

patterns, terms of trade, and economies of scale.

Schiff and Winters (1998) in their review,

“dynamics and politics in regional integration

arrangements: an introduction”, indicate that

though, an integration arrangement leads to small

or even negative static gains it may possibly

provide dynamic gains. Meanwhile, they mention

about the difficulty of recognizing the forms of

these gains and how they come about. This might

be mainly due to lack of precise theoretical

evidences. Thus, with the intention of adding more

concreteness to this phenomenon, they summarize

the dynamics of an integration arrangement as

anything that affects to the rate of economic growth

of participating countries. Further, they define

dynamics as both permanent improvements and

temporary but long lived improvements in the rate

of economic growth.

Empirical Evidences on Dynamic Welfare Gains

The dynamic theory believes that several dynamic

factors of participating countries are affected

positively as a result of entering into a trade

agreement. For instance, these dynamic factors

may include economies of scale, technological

progress, dynamic inter-industry relationships in

production and investment, risk and uncertainty,

market structures and competition, and productivity

and growth. Because these factors are not clearly

defined in the theoretical literature, anything that

affects the rate of economic growth as a result of TI

is considered as dynamic effects. Recently, many

researches empirically reviewed the dynamic

theory of economic integration in several

dimensions. Some of those prominent works are

reviewed with the rest of this section.

Economies of Scale

Corden (1972) with his study, “economies of scale

and CU theory”, investigates the influence of





55

economies of scale on the traditional static theory.

He indicates that upon the formation of a CU the

average cost per unit of domestic output reduces

due to the expansion in the domestic output. This

positive welfare effect is termed as the “cost

reduction effect”. A negative welfare effect is also

observed as the imports from more efficient

producers replace the less efficient domestic

producers. This is termed as the “trade suppression

effect”. Corden concludes that when economies of

scale are allowed in an analysis of static welfare

TC and TD concepts must be supplemented by the

concepts of cost reduction and trade suppression

effects. However, Krauss (1972) criticizes

Corden’s (1972) conclusion on the ground that both

these concepts TC verses cost reduction effect and

TD verses trade suppression effect are integral

components of the same phenomenon. Hence,

economies of scale effect “should be

accommodated by extending the definitions of TC

and TD, not supplementing them”.

Rate of Return to Capital

The empirical question how an integration

arrangement affects to the rate of return to capital

(RRC) of a participating country is also researched

under the concept of dynamics of TI. The

Heckscher-Ohilin (HO) model suggests that an

integration arrangement between North-South

countries or between Industrial and Developing

countries tends to lower RRC in the North or

Developing countries because international trade

leads to decreasing returns in the scares factors

(Schiff and Winters, 1998). As reported by Falvey

(1995) and Schiff and Winters (1998), this HO

model is limited in nature to assess the above

phenomenon because it can be applied only to

models with equal numbers of factors of production

and it presumes the homogeneity of products being

traded, but in reality they are not valid conditions

specially in case of TI arrangements. However,

many researchers later point out several facts that a

TI arrangement may possibly increase RRC in all

participants. As reported by Schiff and Winters

(1998) they may include: the reduction in

transaction cost of tradable goods than those on

non-tradable goods; reductions in tariffs on imports

of capital equipments; improvements in financial

sector will reduce the cost of funds; and by

influencing on the greater credibility of

government policies it may provide a better

atmosphere for investments (Baldwin, Forslid and

Haaland, 1996; and Baldwin and Seghezza, 1996a,

1996b).

Credibility in Government Policies

Whalley (1996) in his study, “why do countries

seek regional trade agreements”, indicates that the

expectation of strengthening domestic policy

reforms as one of the main objective of a country’s

decision to participate in to a regional integration

arrangement. Whalley believes that the credibility

of domestic policies can be improved by binding a

country to a TI agreement because domestic policy

reforms are difficult to implement thereafter. He

points out the Mexican negotiations on NAFTA as

one of the best example on this regard. Later,

Francois (1997) confirms the argument that TI

leads to increase the credibility of economic

policies of participating countries by referring

specially to Mexican negotiations on NAFTA, and

then EU integration and Mediterranean countries.

Wacziarg (2001) also points out several reasons to

this phenomenon of policy credibility

improvement. Wacziarg indicates that the

credibility of government policies increases as a

result of boundedness through the integration

agreements and due to the threat of capital flight.

Also he states that the requirement of ensuring a

competitive environment for the domestic firms,

who participate in international trade, pressurizes

the local governments to maintain the

macroeconomic policies stable. Baldwin, Francois

and Portes (1997) with the study “the costs and

benefits of eastern enlargement: the impact on the

EU and the central Europe” indicates in detail how

both micro and macroeconomic policy stabilization

came about in central and eastern European

countries (CEEC), who seemed likely to join the

EU. Baldwin et al, (1997) report that “on the micro

side, EU membership greatly constrains arbitrary

trade and indirect tax policy changes. It also locks

in well defined property rights and codifies

competition policy and state-aid policy. By

securing convertibility, open capital markets and

rights of establishment, membership assures

investors that they can put in and take out money.

Finally, EU membership guarantees that CEEC-

produced products have unparalleled access to the

EU 15 markets. On the macro side, membership

puts the CEECs on a path to eventual monitory

union and thus provides a solid hedge against

inflation spurts”. Further, they indicate that both

these effects probably ensure the credibility and

stability of economic activities of CEECs and thus,

significant improvements in the investor

confidence.

Foreign Direct Investment

Because it is thoroughly believed that the FDI

sensitivity of TI as another significant dynamic





56

effect many researches keep on studying the effect

of TI on inward FDIs. Studies that concentrate on

EU, NAFTA and ASEAN are substantial in

literature. Brenton (1996) studies the behavior of

FDI in relation to the EU single market concept in

his study “the impact of the single market on FDI

in the EU”. He states that the single market concept

have influenced EU firms positively to invest in the

EU countries. Following this argument, Brenton

and Mauro (1999) study the impact of deepening

EI between EU and CEECs on FDI flows. They

conclude that the FDI stock in CEECs diverge very

little as a result of deepening integration. However,

their results “contradicts to those who have argued

that current FDI in the CEECs is very small

compared to overseas investment in countries of

similar income in different parts of the world”.

Also they indicate that the “additional integration

between the EU and the CEECs, have not

substantially reduce the flows of overseas

investment going to other European countries”.

Another study on the relationship between inward

FDI and European EI is conducted by Egger and

Michael (2002). They assess the reaction of

bilateral European FDI relations for the three

integration events of the “single market

programme”, “the 1995 enlargement” and “the

agreement between EU and the CEECs”. Their

results confirm a “substantial positive anticipation

effect” of FDI only during announcement and the

formal establishment of each event. Hence, they

conclude that these integration arrangements in

Europe depict significant effects on FDI, but the

relation still seems like anticipatory.

This phenomenon is also heavily researched with

respect to NAFTA. However, Feils and Rahman

(2008) point out that all the previous studies in this

regard concentrate only on a particular country in

the region and thus, failed to address the effect of

NAFTA in attracting FDI to the entire region as a

whole and country level compression thereof.

Therefore, with their study, “regional economic

integration and FDI: the case of NAFTA”, an

attempt is given to fill the gap in resent literature in

the region. They conclude that NAFTA favorably

influencing inward FDIs to the region as whole, but

most of these have acquired by United Stets and

Canada. Southeast Asian integration arrangements

also have succeeded in attracting FDIs to the region

and for its member countries. For instance, a

recent study by Uttama and Peridy (2009), “the

impact of regional integration and third country

effect on FDI”, confirm the ability of ASEAN EI in

attracting FDI. With this study they investigate the

determinants of FDI specially by considering

bilateral determinants, third country determinants

and regional EI in a single framework. Their main

findings indicate that all these considered

determinants simultaneously affect the FDI inflows

to the region.

Technology Transfer through FDI

Many researches subsequently, investigate the

expected benefits of inward FDIs with the view of

dynamic gains of TI. As a result, the direct and

indirect benefits of FDIs became a significant part

of dynamic gains. The mostly researched

phenomenon in this regard is the potential ability of

multinational firms in transferring technology,

knowledge or know-how to the host countries. The

process of technology transfer through FDIs can

possibly take two forms. That is horizontal and

vertical process of technology transfer. The

horizontal process may involve in transferring the

full technology needed in production of a particular

good. But in the vertical process, only the

technology required to produce a particular stage or

stages of a product is transferred. Vertical

technology transfer occurs in situations, where the

production process is carried out partly in the

source country and partly in the host country of

FDI. As reported by Javorcik (2010) depending on

the level of industrialization or the development of

the source and host country the conclusions of the

studies that focus on the causal relationship

between foreign ownership and firm performance

are not consistent. These inconsistent conclusions

are due to variations in the technological gap in

between the multinational companies and their

acquisition targets. Higher the gap higher goes the

performance of the acquired firms. Harris and

Robinson (2003) with their study published in

“Review of Industrial Organization” concentrate

on UK manufacturing sector and attempt to answer

the question “are foreign owned plants better”?

Their general conclusion indicates that the country

of origin is a significant determinant of technology

transfer and hence, the results vary significantly

across the countries. Moreover, they indicate that

“there is little evidence of a clear productivity

advantage of EU owned plants over domestic

plants”. These results might be influenced by the

little technological gap existed in between UK and

EU owned plants in the manufacturing sector.

In the mean time, researches on developing

countries provide evidence for significant

technology transfers from FDI. This may be due to

the weak research and development (R&D) base,

limited investment in R&D, weak infrastructure,

weak production and manufacturing capacity in





57

developing countries (Whab, Rose and Osman,

2012; Lado and Vozikis, 1996; Tepstra and David,

1985), and because most of the inward FDIs to

these countries originate from the developed

countries. Thus, the technology gap is significantly

high. As a result, these FDIs generate a positive

effect on the productivity of developing countries.

This indicates a significant technology transfer. Lee

and Tan (2006) study the intensity of technology

transfer through FDI and import of machinery in

the selected ASEAN countries (Singapore,

Malaysia, Thailand and Indonesia). They confirm a

substantial technology transfer through FDI to the

region. The intensity of technology transfer has

followed the intensity of FDI inflows to the region.

This indicates that, higher the FDIs acquire higher

the possibility of experiencing technology transfer.

Further, they conclude that Japan and US, two

highly industrialized nations, as the most

significant contributors of FDI and technology

transfer to the region.

Apart from the technology transfer, FDIs may

influence economic growth of host countries

through the spillover effects on other growth

stimulants as well. Nabende, Ford and Slater

(2001) examine the spillover effects of FDI on

human capital, labor force, technology transfer,

international trade and learning-by-doing. With the

presence of spillover effects they extend the study

to investigate the inward FDI sensitivity of APTA.

Their findings indicate that the spillover effects of

FDI are significant on human capital, technology

transfer and learning-by-doing. Further, AFTA

significantly influence the inward FDIs to the

region. Hence, they confirm a positive impact of

AFTA on human capital, technology transfer and

learning-by-doing. Arnold and Javorcik (2009) by

using micro data from Indonesian manufacturing

sector investigate the causal relationship between

foreign ownership and firm performances. They

conclude that the productivity of the firms acquired

by multinational companies is improving and this

improvement starts from the acquired year itself

and goes on to the subsequent years. Javorcik

(2010) indicates that Arnold and Javorcik (2009)

did not directly concentrate on the technology

transfer phenomenon. However, their findings,

“productivity improvements take place

simultaneously with increases in investment in

machinery and equipments, employment, wages

and output”, suggest a restructuring process on

those firms acquired by multinational companies.

Javorcik further indicates that in addition to the

technology transfer the spillover effect of tacit

knowledge, know-how, management techniques

and marketing strategies of multinationals’ may be

equally important for the FDI recipients.

Technology Transfer through Trade

The trade expansion effect of RTAs either through

TC or TD may itself leads to a significant

technology transfer. International trade literature

provides a substantial amount of empirical studies

that concentrate on the links between trade and

technology transfer. (Parente and Prescott, 1994;

Coe and Helpman, 1995; Coe, Helpman and

Hoffmaister, 1997; Bayoumi, Coe and Helpman,

1999). Parente and Prescott (1994) with their study

“barriers to technology adoption and development”

state that some countries make it inherently

difficult for their firms to adopt new technologies

by maintaining differences in political, regulatory,

legal and social factors with other counter parts of

the world. Moreover, he indicates that international

trade eliminates such barriers to technological

adoption for some extent and thus, trade may affect

growth as a result of technological progress. Coe

and Helpman (1995) introduce a model to capture

the dependency in between the total factor

productivity and both local and foreign research

and development capital. Their results suggest that

the domestic productivity is benefitted from the

foreign research and development capital. Further,

they conclude that these benefits are higher as the

countries more open to the international trade.

Later, Coe, Helpman and Hoffmaister (1997)

reproduce the earlier study by introducing legal

origin and patent protection as instrumental

variables in a panel cointegration framework.

These new results, while confirming the earlier key

results, indicate that “institutional differences are

important determinants of total factor productivity

and that they impact the degree of research and

development spillover”.

Bayoumi, Coe and Helpman (1999) in their study

“research and development spillovers and global

growth” investigate the impact of research and

development, international research and

development spillover, and trade on economic

growth of developed and developing countries.

They found evidences to suggest that all these three

factors significantly boost the economic growth in

both industrialized and developing countries.

Moreover, they conclude that open trade policies

can benefit developing nations via facilitating

technology transfer from industrial countries. The

studies of Parente and Prescott (1994); Coe and

Helpman (1995); Coe, Helpman and Hoffmaister

(1997); and Bayoumi, Coe and Helpman (1999)

concentrate on a country’s imports of all goods,





58

that is, no distinction is given to the consumption

and capital goods. According to Saggi (2002) the

technological know-how that can be attained

through the reverse engineering of consumption

goods serves little to the technology transfer

process. But trade in capital goods that can be used

in the production of other consumption goods

should provide more technology transfer than the

consumption goods. Xu and Wang (1999)

distinguishing total imports of OECD countries

into capital goods and non-capital goods

investigated the significance of trade in the process

of technology transfer. They indicate that the

capital goods influence significantly and explain

more of the variation in the productivity than the

total imports. Further, non-capital goods have

failed to significantly influence the productivity of

these countries.

According to Saggi (2002) dynamic welfare

analysis of TI is highly curious about exploring the

ways and forms of technological progress turns up

in the participating countries. Technology spreads

among participating countries through number of

channels. It can be directly through the

international trade in technology or by the indirect

forms like trade in goods and international

movement of factors of production. The existence

of multitude of channels makes it difficult to assess

exactly how technology transfer takes place.

Hence, most researchers focus only on one or two

channels. Of these, FDI and trade have received

the most attention. However, Saggi (2002) in his

literature survey published in “the world bank

research observer” summarized the potentials

channels of knowledge or technology spillovers as

“demonstration effect”: imitation or the reverse

engineering activities of local firms; “labor

turnover”: the employees swish from multinational

firms to local firms may transfer some important

knowledge; and “vertical linkages”: technology

transfer can take place to the potential suppliers of

intermediate goods or to the buyers of their

products. Meanwhile, a literature survey on

technology transfer mechanisms of multinational

companies by Whab, Rose and Osman (2012) also

summarize these channels in a broader sense. They

are: formal market channels and non-market

channels of technology transfer. Under formal

market channels they identify direct exporting,

FDI, licensing, and international joint ventures. On

the other hand, under the non-market channels five

means are identified. Those are: imitation,

movement of personal, data in patent application

and test data, communication media, and temporary

migration.

RTAs AND ECONOMIC GROWTH

Shiff and Winters (1998) in their empirical review

on dynamics of regional TI arrangements indicate

the limitedness of theoretical and empirical studies

that specifically focus on the growth effects of

RTAs. However, the EI literature provides some

empirical studies that concentrate on trading blocs

and their subsequent impact on the economic

growth of participating countries. Most of these

studies evidence the likely effect of RTAs on

growth (Ben-David, 1993 and 1996; Henrekson,

Torstensson and Torstensson, 1997; Walz, 1997;

and Vamvakidis, 1998), while Brada and Mendez

(1988) and De Melo, Panagariya and Rodrik (1993)

conclude the opposite. Ben-David (1993) with his

study titled “Equalizing Exchange: Trade

Liberalization and Economic Convergence”

examine the growth convergences of EEC, EFTA

and CUSFTA member countries following their

rectification of respective RTAs. Results indicate a

significant income convergence for each trading

bloc and moreover, this convergence is upward

with faster growth rates for poor countries (Shiff

and Winters, 1998). Later, Ben-David (1996) with

his study published in the “Journal of International

Economics” compare the relationship between

international trade and income convergence of

member countries in a specific trading bloc with

selected group of non-member trading partners.

Ben-David (1996) confirms that the convergence

among trading partners within a trading bloc is

more likely than with non-member trading partners.

Henrekson at el. (1997) examine the effects of EC

and EFTA on the growth trajectories of member

countries with the study titled “Growth Effects of

European Integration”. They employ a base

regression model with appropriate proxies for

growth rate, level of development, human capital,

investment and two dummy variables for EC and

EFTA over the period 1976 to 1985. They conclude

the fact that RTAs “may not only affect resource

allocation, but also long run growth rates” since,

results of the regression model indicate that both

EC and EFTA lead to positive and significant

growth effects for the member countries. The study

titled “Growth and Deeper Regional Integration in

a three-country Model” conduct by Walz (1997)

employs the endogenous growth models of Romer

(1990) and Grossman and Helpman (1991) in to a

three-country model in order to assess the growth

effects of regional integration. Appling the TC and





59

TD effects in static theory into the dynamic setting,

he concludes the fact that dynamic effects of TI are

not always growth enhancing, since a union with

TC effects would leads to positive growth effects

while a union with TD effects lowers the steady-

state growth rate. However, Walz indicates that the

aforesaid relationship depends on the “general

specialization patterns of the integrating nations”

and therefore, reverse relationship is also possible.

For instance, as indicate by Shiff and Winters

(1998), TD may rise growth and TC may lowers it,

if a country specializes in the traditional sector.

Vamvakidis (1998) with the study titled “Regional

Integration and Economic Growth” attempt to

answer the empirical question, whether the

openness, market size, and level of development in

a specific regional bloc leads to economic growth

of home countries by considering ASEAN, The

Andean Pact, CACM, Central African Customs and

Economic Union (UDEAC), and the EU. In this

regard, cross country and time series growth

regressions are employed over the period 1970 to

1990. His findings indicate that except EU all the

other considered RTAs fail to influence growth of

member countries. Moreover, Vamvakidis

concludes the fact that “countries with open, large

and more developed neighboring countries do

experience positive spillovers”. Nabende, at el.

(2001) examine the influence of AFTA in attracting

FDI and subsequent spillover effects of FDI on

economic growth with their study titled “FDI,

Regional Economic Integration and Endogenous

Growth: Some Evidence from Southeast Asia”.

Ordinary least square and three-stage least square

techniques are employed on data gathered over the

period 1970 to 1996 for ASEAN-5 countries. Their

findings indicate that AFTA significantly

influences the inward FDIs to the region and the

spillover effects of FDIs on growth are significant

through human capital, technology transfer and

learning-by-doing.

Though empirical evidences on the aforementioned

phenomenon are limited, empirical studies that

concentrate on trade openness and economic

growth are substantial (among others, Grossman

and Helpman, 1992; Edwards, 1993; Sachs and

Warner, 1995; Coe, Helpman and Hoffmaister,

1997) and theoretically rich, because they confirm

few possible channels through which trade

openness may influence growth (Wacziarg, 2001;

and Arora and Vamvakidis, 2005). Some of these

channels can be applied even for an analysis that

considers the impact of RTAs on growth. Hence,

some selected studies that concentrate on the

relationship between openness and economic

growth are also reviewed in this section.

Wacziarg (2001) introducing a new measure of

trade policy openness and more specifically

identifying six channel variables that trade policy

influences economic growth, attempt to investigate

dynamic gains of trade. These channels include:

government size, quality of macroeconomic

policies, price distortions, factor accumulation and

another two variables that capture the effect of

technology transmission namely, FDI and

manufactured exports. In this regard, a structural

model is estimated using three-stage least squares

in a panel of 57 countries over the period 1970 to

1989. The findings of the study indicate that the

economic growth is positively influenced by the

trade openness and among channel variables,

accumulation of physical capital, technology

transmission, and improvements in macroeconomic

policies are significant. Accumulation of physical

capital is found as the main cannel through which

openness affects growth. Arora and Vamvakidis

(2005) also ignoring the influence the RTAs,

examine the effect of trading partners on the

growth rate of home country, with their study titled

“How Much Do Trading Partners Matter for

Economic Growth”. A fixed-effect panel data

model is estimated for 101 countries during 1960 to

1999. Independent variables use in this regard

includes: Convergence, demographic development,

investment in physical capital, human capital,

macroeconomic stability, trade openness, trading

partners GDP growth, and an interaction term that

captures the level of openness. Further, world real

per capita GDP, non trading partners real per capita

GDP and distance-weighted real per capita GDP

are used as control variables for common global

and regional trends. The results of the panel model

indicate a strong relationship between trading

partners GDP growth and home country GDP.

SOUTH ASIAN RTAs

Regional TI is one of the major concerns of South

Asian countries over the last two three decades. It

is institutionalized with the formation of SAARC in

1985 and the subsequent rectification of SAPTA,

SAFTA, and SATIS. The impact of such TI on

South Asian countries is investigated even before

the formation of SAARC. For instance, Jayaraman

(1978) and Rahman, Bhuyan, and Reza, (1981)

independently investigate the potential effects of a

hypothetical CU which comprises of Bangladesh,

India, Nepal, Pakistan and Sri Lanka. However, as





60

report by Bandara and Yu (2003) quantitative

research studies that concentrate on this

phenomenon within the region are limited due to

four possible reasons. First, the regions’

contribution to the global trade, investment, and

growth is not momentous. Second is the data

constraint in the region. Third, the published data

do not provide the real picture as the “illegal trade”

volume in the region is high. Finally, the existence

of non-tariff barriers, which are difficult to

recognize and quantify, also leads to the

limitedness of such quantitative studies. Despite

these possible constraints literature provides some

empirical evidences on the desirability of TI in the

region, especially on SAPTA and early stages of

SAFTA. Hence, the following section provides a

descriptive review on some of those studies,

thereby highlighting the literature gap that prevails

in the South Asian region.

Early studies that focus on desirability of SAPTA

use the partial equilibrium framework in order to

assess the price elasticities of goods demand by the

region. Govindan (1994) with the study titled “A

South Asian Preferential Trading Arrangement:

Implications for Agricultural Trade and Economic

Welfare” evaluate the trade effects of SAPTA by

estimating the price elasticities of food imports by

the member countries. The results of the study

confirm the potentiality of SAPTA in improving

the economic welfare and specially in securing the

food security in the region. DeRosa and Govindan

(1995 and 1996) point out the requirement of a

further study as Govindan (1994) does not devote

his attention on the third country effects and

consider only the effects of food imports by the

member countries. Hence, DeRosa and Govindan

with their study “Agriculture, Trade and

Regionalism in South Asia” extend the previous

study by investigating the implications of SAPTA-

APEC relations and including trade in

manufactures as well. In this regard, they evaluate

the unilateral tariff reductions by SAARC countries

with in a partial equilibrium framework. DeRosa

and Govindan while confirming the findings of

Govindan (1994) state that SAPTA expands the

intra-SAARC trade in manufactures, especially in

labor-intensive and other light manufactures.

Moreover, they indicate that the trade

liberalizations with other counterparts of the world

(eg: APEC) will bring more welfare gains to the

region when compared to intra-regional

liberalizations.

The study titled “Is SAARC a viable economic

block? Evidence from gravity model” conducted by

Hassan (2001) devoting special attention to the

Bangladesh trade patterns attempt to answer the

empirical question, whether intra-SAARC trade is

welfare improving or not. In addition, the impact of

SAPTA and hypothetical trading blocs between

Bangladesh and other regional blocks like ASEAN,

NAFTA and EEC are also investigated. As the title

of the study suggests a basic gravity model with

appropriate proxy variables for size of the

economy, level of economic development, and

transportation cost or distance between countries

are employed in arriving at the results. Based on

the results of the gravity model, he point out the

requirement of further TI commitments, since the

prevailed integration arrangements are failed in

creating welfare benefits to the countries of the

region. Bandara and Yu (2003) use the GTAP

model in their study titled “How Desirable is the

South Asian Free Trade Area? A Quantitative

Economic Assessment” in order to evaluate the

welfare gains of SAPTA and proposed SAFTA. In

this regard, they use the GTAP version five

databases and aggregate it into 12 regions

considering Bangladesh, India, Sri Lanka and rest

of the South Asia as separate regions. Further, 17

industries are considered in this regard. Bandara

and Yu conclude the fact that SAPTA and the

proposed SAFTA as a TI arrangement is highly

undesirable and would lead to a significant TD

effect. Further, they indicate that South Asia have

the potentiality of gaining much more through

unilateral and multilateral trade liberalizations than

preferential trading arrangements. Yet still,

hypothetical FTAs with NAFTA and EU depict the

potentiality of welfare gains to the region.

Hirantha (2004) examines the TC and TD effects of

intra-regional (SAPTA) and extra-regional

(ASEAN, NAFTA and EU) trade arrangements

with his study titled “From SAPTA to SAFTA:

Gravity Analysis of South Asian Free Trade”. A

basic gravity model is employed by using both

panel and cross sectional data analysis techniques

in order to analysis the bilateral trade data during

1996 to 2002. Hirantha indicates that the results of

the study contradict with the most of the previous

studies within the region as it depicts a significant

intra-regional TC effect. Also, insignificant TD

effect is found as the region imports mostly from

non-member countries. Further, he concludes the

fact that this significant TC effect of SAPTA will

lead positively for the success of proposed SAFTA.

Tumbarello (2006) investigates the TC and TD

effect of several preferential trading arrangements

including SAPTA. A gravity equation as proposed

by Soloaga and Winters (2000) is employed by





61

using both panel and cross sectional data analysis

techniques during 1984 to 2003.Tumbarello

confirms the significance of all the basic gravity

variables like, economic size, per capita income,

bilateral distance, common language, and common

border. Moreover, he confirms the existence of TC

effects and also the absences TD effects for almost

all the RTAs considered including SAPTA. Kumar

and Saini (2007) with the study titled “Economic

Co-operation in South Asia: The Dilemma of

SAFTA and Beyond” use the GTAP model once

again to assess the potential impact of SAFTA on

member countries. Further, Kumar and Saini

examine the effects of alternative trade

liberalization scenarios: extended trade relations

with ASEAN, NAFTA and EU; unilateral and

multilateral trade liberalizations; and a hypothetical

CU for South Asia. They also made a conclusion

quit similar to the Bandara and Yu (2003), which

indicates that “the welfare basis for establishing

SAFTA or for deeper trade policy coordination is

not very strong. Nor it is obvious that cooperation

among South Asia would be forthcoming given the

anticipated welfare impacts”.

The study titled “Trade Potential in SAFTA: An

Application of Augmented Gravity Model” conduct

by Rahman, Shadat and Das (2006) examine the

static welfare effect of several RTAs with special

focus on SAFTA. In this regard, the gravity model

is augmented by introducing bilateral exchange

rates and bilateral free trade agreements. They

estimate this augmented gravity model by using

panel data approach with country-pair and time

specific fixed effects during 1991 to 2003. Rahman

at el. indicate the existence of both export creation

and export diversion in SAPTA. In addition, they

state that Bangladesh, India, and Pakistan are likely

to be gain while other countries (Bhutan is not

considered with this study due to the data

constraint) are negatively affected. Moktan (2008)

investigate the desirability of SAPTA with the

study titled “Evaluating the Intra-regional Exports

and Trade Creation and Trade Diversion Effects of

Trade Agreements in SAARC Countries”. An

augmented gravity model (augmented by

introducing policy variable and time specific fixed

effects) is employed in a pooled panel data

framework during the period 1980 to 2005. The

time period is broken down to five sub periods as

Pre-SAARC (1980-1984), Post-SAARC (1985-

2005), Pre-SAPTA (1980-1994), Post-SAPTA

(1995-2005), and Pre+Post (1980-2005). Results

indicate a significant impact of trade agreements on

exports during Post-SAARC and Post-SAPTA

periods while it is insignificant in Pre-SAARC and

Pre-SAPTA period. Also he confirms the existence

of significant TC effects within the region. Further,

he indicates these TCs possibly result from the

effect of SAPTA and the “delayed impact of

bilateral trade agreements” between member

countries of the region.

Once again, Moktan (2009) with his study “The

Impact of Trade Agreements on Intraregional

Exports: Evidence from SAARC countries”

investigates the desirability of trade agreements in

SAARC countries by introducing several

adjustments to his previous study. In this study,

generalized gravity model or so called unilateral

trade model and panel data set are used over the

expanded period of 1971 to 2005. This 35 year

period is broken down to five sub periods as Pre-

SAARC1 (1971-1979), Pre-SAARC2 (1980-1984),

Pre-SAPTA (1985-1995), Post-SAPTA (1996-

2005), and SAARC 1&2 (1985-2005). Estimated

results indicate that the impact of trade agreements

during Pre-SAARC1, Pre-SAARC2 and Pre-

SAPTA are not significant while during Post-

SAPTA and SAARC 1&2 are significant.

Moreover, when the potential significance of

SAPTA is tested, results show the failure of

SAPTA in inducing a TC effect within the region

and confirm the fact that the actual impact on

exports in Post-SAPTA periods came from the

delayed impact of bilateral trade agreements

between member countries of the region.

The research paper titled “Does South-South Trade

Agreements Enhance Member Countries’ Trade?

Evaluating Implications for Development Potential

in the Context of SAARC” conduct by

Bhattacharya and Das (2009) examine the potential

influence of SAFTA on member countries by

devoting special attention to the “behind the

border” and “beyond the border” constraints to

bilateral trade flows during 1995 to 2008.

Following the available literature, they define

“behind the border” constraints as “the unfavorable

policy environments in the home country” while

those in the partner country were define as “beyond

the border” constraints. In this regard, the error

term, ε, of a gravity model measured through the

maximum likelihood framework is decomposed

into “single sided error term”, u, which captures the

combine effect of “behind the border” constraints

and into “double sided error term”, v, which

denotes “beyond the border” constraints and

normal error term. Four hypothetical tariff

reductions (25%, 50%, 75% and 100%) are

evaluated in arriving at the results. The findings of

the study indicate that, the “behind the border”





62

constraints significantly influence the exports of

member countries. Further, relatively smaller

member countries will achieve the maximum gain

when a FTA among SAARC members fully

operational. Moinuddin (2013) using a resent data

set (1992-2011) investigates the determinants of

trade flows and the effects of SAFTA with the

study titled “Fulfilling the Promises of South Asian

Integration: A Gravity Estimation”. A gravity

model with standard gravity variables and

additional explanatory variables to represent the

openness and restrictions (exchange rate, ratio

between Import and GDP, and Tariff rates) are

implemented in a panel least square regression

framework. In addition, two dummy variables are

used to represent SAFTA and countries that link to

“multi fiber agreements”. The reported results on

determinants provide several conclusions: all the

standard gravity variables are significant; the

impact of currency depreciation or appreciation

measured by using exchange rate is not significant

for all the countries; the proxy for the openness

(Import-GDP Ratio) is significant; the measure of

restriction indicates that the reductions in tariffs

will positively affect the intra-regional trade.

Further, Moinuddin confirms the existence of TC

effects within the region as a result of SAFTA.

In addition to above reviewed empirical evidences

that focus on static welfare effects of intra-SAARC

trade integrations, very few researchers devote their

attention on the dynamic aspect as well (Alam,

2000; Pradan, 2002; Sirinivasan, Kalaivani, and

Ibrahim, 2011; Athukorala, 2013). An exploratory

study titled “Intra-Regional FDI and Economic

Integration in South Asia: Trends, Patterns and

Prospects” conduct by Athukorala (2013) examines

the behavior of FDI within the South Asian region.

In this study, Athukorala clearly mentions the lack

of research studies that concentrate on the

intraregional-FDI and FDI-Trade nexus for the

region. However, depending on his investigation on

inward and outward FDI trends several conclusions

are made. He indicates that the majority of

intraregional-FDIs within the region are horizontal

FDIs, while the vertical FDIs are limited. Further,

he states that though the impact of SAFTA and

other bilateral FTAs on inward-FDI is yet to

investigate for the region, FDI trends suggest that

cross border trade liberalizations and liberalization

of investment regimes may lead to attract

intraregional vertical FDIs. However, the scope of

other studies limited to the FDI and its effect on the

growth trajectories of the region. Or in other words,

these studies concentrate on the causal relationship

between inward FDI and economic growth

ignoring the phenomenon of integration. Alam

(2000) examine the impact of FDI on Bangladesh

and Indian economies and conclude the study

indicating that the impact is unsatisfactory. Pradan

(2002) also stress a similar conclusion with his

study conduct for India over the period 1969 to

1997. Both these studies concentrate on one or

two countries of the region. But, a recent study,

“An empirical investigation of foreign direct

investment and economic growth in SAARC

countries”, by Sirinivasan at el. (2011) examines

the causal nexus between FDI and all the SAARC

countries over the period 1970 to 2007. The

econometric tool of Johansen Cointegration (JC)

test, Vector Error Correction Model (VECM), and

Impulse Response Function (IRF) are employed in

attaining results. The reported results of JC test

indicate a long run relationship between FDI and

GDP in Bangladesh, India, Maldives, Nepal,

Pakistan and Sri Lanka. VECM results confirm

strong bidirectional link in these two variables for

the countries except for India. However, a

significant one way causality is depicted from GDP

to FDI for India.

CONCLUSION

This study reviews the theoretical and empirical

justifications of static and dynamic theories of TI.

A careful summarization of static theory and its

further developments indicate that a RTA may

possibly generate welfare gains mainly through the

effects of TC and TD. Though, TD is initially

considered as a welfare reducing effect, later it has

been proved that TD is not necessarily a negative

aspect. Further, some key characteristics of

participating countries and the agreement itself

may lead to intensify the static welfare gains. These

features may include the terms of trade, form of

tariff reduction, competitive verses complementary

nature of economies, levels of income, volume of

trade, and etc. According to many prominent

researches mere concentration on static effects is

insufficient when assessing the effects of RTAs.

Therefore, to have a better understanding on the

desirability of RTAs it is required to assess the

dynamic effects as well. The dynamic welfare

theory concentrates on the factors that lead to

increase rate of economic growth as a result of

entering into a RTA. TI literature identifies

economies of scale, increasing RRC, improvements

in government policy credibility, inward FDI,

technology transfer, human capital developments,

improvements in knowledge and knowhow, and

etc. as dynamic factors. However, due to lack

studies that concentrate on dynamic effects the





63

knowledge on this regard is still unsatisfactory.

Moreover, this has resulted in a vacuum in

literature on the potential growth channels of

RTAs. All in all, this literature survey intensifies

the requirement of studies that focus on both static

and dynamic theories when assessing the

desirability of RTAs. However, the existence of

undefined and inconclusive region specific other

factors may lead to different conclusions for

different TI arrangements. Hence, when

empirically testing the welfare effects of RTAs it is

import to consider region specific trade stimulant

and deleterious factors as important. Empirical

literature on these welfare effects is quite rich in

Europe, North America, and Southeast Asia.

However, empirical knowledge on this regard in

other counter parts of the world, especially South

Asia, is yet to reach a peak due to lack of studies,

inconsistency in findings, and especially

completely ignorance of dynamic welfare effects.

REFERENCES 1. Aitken, N.D. (1973). The effect of the EEC and

EFTA on European trade: a temporal cross-

section analysis. American Economic Review,

63, 881–892.

2. Alam, M.S. (2000). FDI and economic growth

of India and Bangladesh: a comparative study.

Indian Journal of Economics, 80(1), 1-15.

3. Ang, J. (2008). Determinants of FDI in

Malaysia. Journal of Policy Modeling, 30(1),

185–89.

4. Arndt, S. W. (1968). On Discriminatory vs.

Non-preferential Tariff Policies. Economic

Journal, 78, 971-79.

5. Arnold, J., and Javorcik, B.S. (2009). Gifted

Kids or Pushy Parents? Foreign Direct

Investment and Plant Productivity in Indonesia.

Journal of International Economics, 79: 42-53.

6. Arora V., and Vamvakidis A. (2005). How

Much Do Trading Partners Matter for

Economic Growth. IMF Staff Papers, 52(1),

24-40.

7. Athukorala P. (2013). Intra-Regional FDI and

Economic Integration in South Asia: Trends,

Patterns and Prospects. UNCTAD, Background

Paper No. RVC 7.

8. Balassa, B. (1961). The Theory of Economic

Integration. Homewood, Illinois: Richard D.

Irwin.

9. Balassa, B. (1965). Economic development and

integration. Mexico: Centro De Estudios

Monetario Latinoamericanos.

10. Balassa, B. (1976). Economic integration

among developing countries. Journal of

Common Market Studies, 14 (1): pp. 37-55.

11. Baldwin, R. A., and Seghezza, E. (1996a.).

Growth and European Integration: Towards an

Empirical Assessment. CEPR Discussion

Paper 1393. Centre for Economic Policy

Research, London.

12. Baldwin, R. A., and Seghezza, E. (1996b.)

Testing for Trade-Induced Investment-Led

Growth. CEPR Working Paper 1331. Centre

for Economic Policy Research, London.

13. Baldwin, R. A., Francois, J. and Portes, R.

(1997). The Costs and Benefits of Eastern

Enlargement: The Impact on the EU and

Central Europe. Economic Policy: A European

Forum, 24:127-76.

14. Baldwin, R.A., Forslid J., and Haaland, J.

(1996). Investment Creation and Investment

Diversion: A Simulation Study of the EU's

Single Market Programme." CEPR Discussion

Paper 1308. Centre for Economic Policy

Research, London.

15. Bandara, S. J., and Yu, W. (2003). How

desirable is the South Asian Free Trade Area?

A Quantitative Economic Assessment. The

World Economy, 26, 1293-1323.

16. Bayoumi, T., Coe, D. T., and Helpman, E.

(1999). R&D Spillovers and Global Growth.

Journal of International Economics, 47, 399-

428.

17. Becker, K., La, M. D., and Suarez, L. C.

(2001). Trade creation and trade diversion for

MERCOSUR. The Journal of Euromarketing,

10(2), 67-105.

18. Ben-David, D. (1993). Equalizing Exchange:

Trade Liberalization and Economic

Convergence. Quarterly Journal of Economics,

108, 653-79.

19. Ben-David, D. (1996). Trade and Convergence

among Countries. Journal of International

Economics, 40, 279-298.

20. Bhagwati, J. (1971). Customs Unions and

Welfare Improvement. Economic Journal, 81,

580-87.

21. Bhagwati, J. (1971). Trade-diverting customs

unions and welfare-improvement: A

clarification. The Economic Journal, 81 (323),

580-587.

22. Bhagwati, J., and Panagariya, A. (1996). The

theory of preferential trade agreements:

Historical evolution and current trends. The

American Economic Review, 86 (2), 82-87.

23. Bhattacharya, S.K. and Das, G.G. (2009). Does

South-South Trade Agreements Enhance

Member Countries’ Trade? Evaluating

Implications for Development Potential in the

Context of SAARC. UNU-CRIS Working

Papers, W-20011/2.

24. Boughanmi, H. (2008). The trade potential of

the Arab Gulf Cooperation Countries (GCC): a

gravity model approach. Journal of Economic

Integration, 23(1), 42-56.





64

25. Brada, J. C., and Mendez, J. A. (1988). An

estimate of the dynamic effects of economic

integration. The Review of Economics and

Statistics, 70(1), 163-168.

26. Brenton, P. (1996). The Impact of the Single

Market on Foreign Direct Investment in the

EU. Report for DG II, mimeo, (1996).

27. Brenton, P., and Mauro, D. F. (1999). The

Potential Magnitude and Impact of FDI flows

to CEECs. Journal of Economic Integration,

14(1), 59-74.

28. Buckley, P. J., Clegg, J., Forsans, N., and

Reilly, K. T. (2001). Increasing the Size of

Country: Regional Economic Integration and

Foreign Direct Investment in a Globalized

World Economy. Management International

Review, 41(3), 251–274.

29. Buckley, P. J., Clegg, J., Forsans, N., and

Reilly, K. T. (2004). A Simple and Flexible

Dynamic Approach to Foreign Direct

Investment Growth: Did Canada Benefit from

the Free Trade Agreements with the United

States? Paper presented at the Academy of

International Business Annual Meeting,

Stockholm, July.

30. Cernat, L. (2001). Assessing regional trade

arrangements: are South-South RTAs more

trade diverting? Policy issues in international

trade and commodities study series no 16.

31. Clausing, K. A. (2001). Trade creation and

trade diversion in Canada-United State Free

Trade Agreement. Canadian journal of

economics, 34(3), 677-696.

32. Coe, D. T. and Helpman, E. (1995).

International R&D spillovers. European

Economic Review, 39, 859-887.

33. Coe, D. T., Helpman, E., and Hoffmaister, A.

W. (1997). North-South R&D Spillovers. The

Economic Journal, 107(January), 134-149.

34. Cooper, C. A., and Masselll, B. F. (1965b).

Toward a general theory of customs union for

developing countries. The Journal of Political

Economy, 73 (5), 461-476.

35. Cooper, C. A., and Masselll. B. F. (1965a). A

new look at customs union theory. The

economic Journal, 75 (300), 742-747.

36. Corden, W. M. (1972). Economies of scale and

customs union theory. The Journal of Political

Economy 80 (3): pp. 465-475.

37. De Melo, J., and Panagariya, A. (Eds.). (1993).

Introduction. Chapter 1 in New Dimensions in

Regional Integration. Cambridge University

Press.

38. De Melo, J., Panagariya, A., and Rodrik, D.

(Eds.). (1993). The new regionalism: A

country perspective. Chapter 6 in New

Dimensions in Regional Integration.

Cambridge University Press.

39. DeRosa, D. A. and Govindan K. (1996).

Agriculture, Trade, and Regionalism in South

Asia. Journal of Asian Economics, 7(2), 293–

316.

40. DeRosa, D. A. and Govindan, K. (1995).

Agriculture, Trade, and Regionalism in South

Asia. Food, Agriculture, and the Environment

Discussion Paper 7 (Washington DC:

International Food Policy Research Institute).

41. Devan, J. (1987). The ASEAN preferential

trading arrangements: some problems, ex-anta

results, and a multipronged approach to future

intra-ASEAN trade development. ASEAN

economic bulletin, 4(2).

42. Edwards, S. (1993). Openness, Trade

Liberalization, and Growth in Developing

Countries. Journal of Economic Literature,

31(September), 1358-1393.

43. Egger, P., and Michael, P. (2002), Foreign

Direct Investment and European integration in

the 90’s. The World Economy, 27, 99-110.

44. Elliott, R.J.R. and Ikemoto, K. (2004). AFTA

and the Asian crisis: help or hindrance to

ASEAN intra-regional trade? Asian Economic

Journal, 18, 1-23.

45. Endoh, M. (2000). The transition of post war

Asia-Pacific trade relations. Journal of Asian

Economics. 10, 571-589.

46. Endoh, M. (1999). Trade creation and trade

diversion in the EEC, LAFTA and CMEA:

1960-1994. Applied Economics, 31(2), 207-

216.

47. Falvey, Rod. (1995). Factor Price

Convergence. Trade and Wage Dispersion

Project Paper 2. International Economics

Department, World Bank, Washington, D.C.

48. Feils, D. and Rahman, M. (1998). Foreign

Direct Investment in Canada. Global Business

and Finance Review, 3(2), 55–62.

49. Feils, D. and Rahman, M. (2008). Regional

economic integration and FDI: the case of

NAFTA. Management International Review,

48(2), 147-163.

50. Francois, J. (1997). External Bindings and the

Credibility of Reform. In Ahmed Galal and

Bernard Hoekman, eds., Regional Partners in

Global Markets: Limits and Possibilities of the

Euro-Med Agreements. London: Centre for

Economic Policy Research.

51. Fukao, K., Okubo, T., and Stern, R. M. (2001).

An econometric analysis of trade diversion

under NAFTA. North American Journal of

Economics and Finance. (13), 3-24.

52. Gehrels, F. (1956-1957). Customs union from

a single-country viewpoint. The Review of

Economic Studies, 24 (1), 61-64.

53. Globerman, S., and Shapiro, D. M. (1999). The

Impact of Government Policies on Foreign

Direct Investment: The Canadian Experience,

Journal of International Business Studies,

30(3), 513–532.

54. Govindan, K. (1994). A South Asian

Preferential Trading Arrangement:

Implications for Agricultural Trade and

Economic Welfare. mimeo, Research report for





65

Robert McNamara Fellowship, Washington,

DC: World Bank.

55. Greenway, D. (1981). Identifying the gains

from pure intra-industry exchange. Journal of

Economic Studies, 9(3), 40-54.

56. Grossman, G. M., and Helpman, E. (1991).

Innovation and Growth in Global Economy.

Cambridge, MA: MIT Press.

57. Grossman, G. M., and Helpman, E. (1992).

Innovation and Growth: Technological

Competition in the Global Economy. Boston,

Mass.: MIT Press.

58. Han, S. K. (1992). European Integration: The

Impact on Asian Newly Industrializing

Economies, OECD, Paris.

59. Harris, R., and Robinson, C. (2003). Foreign

Ownership and Productivity in the United

Kingdom Estimates for U.K. Manufacturing

Using the ARD. Review of Industrial

Organization, 22(3).

60. Hassan, M. K. (2001). Is SAARC a viable

economic block? Evidence from gravity model.

Journal of Asian Economics, 12, 263-290.

61. Hasson, J. A. (1962). Review of The theory of

economic integration, by Bela Balassa. The

Journal of Political Economy, 70(6), 614-615.

62. Hawtrey, R. (1956). Review of The theory of

customs unions, by J. E. Meade. The Economic

Journal, 66(262), 337-339.

63. Hay, G. A. (1957). Review of The theory of

customs unions, by J. E. Meade. The Journal of

Political Economy, 65(1), 85-86.

64. Head, K., and Reis, J. (1999). Rationalization

effects of tariff reductions. Journal of

International Economics, 47, 295–320.

65. Hejazi, W., and Safarian, A. E. (2002).

Explaining Canada’s Changing FDI Patterns,

Working Paper, University of Toronto.

66. Helliwell, J.F., Lee, F.C., and Messinger, H.

(1998). Effects of the Canada – U.S. FTA on

interprovincial trade. University of British

Columbia.

67. Henrekson, M., Torstensson J., and

Torstensson, R. (1997). Growth Effects of

European Integration. European Economic

Review, 41(8),1537-57.

68. Hirantha, S.W. (2004). From SAPTA to

SAFTA: Gravity Analysis of South Asian Free

Trade. Paper presented at the European Trade

Study Group (ETSG) Programme, Nottingham,

September.

69. Holzman, F. D. (1976). International Trade

under Communism. New York: Basic Books.

70. Hosny, A. S. (2013). Theories of Economic

Integration: A Survey of the Economic and

Political Literature. International Journal of

Economy, Management and Social Sciences,

2(5), 133-155.

71. Imada, P. (1993). Production and trade effects

of an ASEAN free trade area. The Developing

Economies. 31(1), 3-23.

72. Javorcik, B. (2010). Foreign Direct Investment

and International Technology Transfer. Entry

for Encyclopedia of Financial Globalization.

73. Jayaraman, T. K. (1978), Economic

Cooperation in the Indian Sub-continent – A

Customs Union Approach. New Delhi: Orient

Longman.

74. Jiawen Yang. Inter-National and Inter-Country

Economic Integration: The Case of China.

School of Business and Public Management,

the George Washington University, USA.

75. Johnson, H. G. (1975). A note on welfare-

increasing trade diversion. The Canadian

Journal of Economics 8 (1): pp.117-123.

76. Johnson, H.G. (1962). The Economic Theory

of Customs Union. Money, Trade,and

Economic Growth, George Alien & Unwin,

London, pp. 46-73.

77. Jovanovic, M. N. (1998). International

Economic Integration Limits and Prospects.

London: Routledge.

78. Kemp, M. (1969). A contribution to the general

equilibrium theory of preferential trading.

Amsterdam: North-Holland Publishing Co.,

1969.

79. Krauss, M. B. (1972). Recent developments in

customs union theory: An interpretive survey.

Journal of Economic Literature, 10 (2), 413-

436.

80. Krueger, A.O. (1999). Trade creation and

trade diversion underNAFTA. National Bureau

of Economic Research, Working Paper 7429.

81. Kumar A. G., Saini, G. K. (2007). Economic

Co-operation in South Asia: The Dilemma of

SAFTA and Beyond. Indira Ghandhi Institute

of Development Research, Mumbai, Working

paper 017.

82. Lado, A., and Vozikis, G. (1996). Transfer of

Technology to Promote Entrepreneurship in

Developing Countries: An Integration and

Proposed Framework. Entrepreneurship

Theory and Practice, Winter, 55-72.

83. Lancaster, K. (1980). Intra-industry trade under

perfect monopolistic competition. Journal of

International Economics, 10(2), 151-175.

84. Lee, H. H., and Tan, H. B. (2006). Technology

Transfer, FDI and Growth in the ASEAN

Region. Journal of the Asia Pacific Economy,

11 (4), 394-410.

85. Linder, S. B. (1961). An essay on trade and

transformation. New York: John Wiley &

Sons.

86. Lipsey, R. G. (1957). The theory of customs

unions: Trade diversion and welfare.

Economica, New Series 24 (February), 40-46.

87. Lipsey, R. G. (1960). The theory of customs

unions: A general survey. The Economic

Journal, 70 (279), 496-513.

88. Lipsey, R. G., and Lancaster, K. (1956-1957).

The general theory of second best. The Review

of Economic Studies, 24 (1), 11-32.





66

89. Makower, H., and Morton, G. (1953). A

contribution towards a theory of customs

union. The Economic Journal, 63(249), 33-49.

90. Maksimova, M. (1976). Comments on Paper:

Types of Economic Integration by B. Balassa.

Machlup F. eds. Economic Integration

Worldwide. London: Macmillan.

91. Meade, J. E. (1955). The theory of customs

unions. Amsterdam: North Holland.

92. Melvin, J. R. (1969).On a demand assumption

made by Graham. Southern Economic Journal

36, 36-43.

93. Mennis, B., and Sauvant, K. P. (1976).

Emerging Forms of Transnational Community.

Lexington: Lexington Books.

94. Meyer, F. V. (1956). Complementarity and the

lowering of tariffs. The American Economic

Review, 46(3), 323-335.

95. Michaely, M. (1965). On Customs Unions and

the Gains from Trade. Economic Journal, 75,

577-83.

96. Milner, C. and G. Reed. (2004). Foreign Direct

Investment and Vertical integration of

Production by Japanese Multinationals in

Thailand. Journal of Comparative Economics

32(4), 05–21.

97. Min, B. (2003). FDI and Trade: Links in the

Case of Malaysia. Journal of the Asia Pacific

Economy, 8(2), 229–50.

98. Moinuddin, M. (2013). Fulfilling the Promises

of South Asian Integration: A Gravity

Estimation. ADBI Working Paper Series No.

415.

99. Moktan, S. (2008). Evaluating the Intra-

regional Exports and Trade Creation and Trade

Diversion Effects of Trade Agreements in

SAARC Countries. South Asia Economic

Journal. 9(2), 233-260.

100. Moktan, S. (2009). The Impact of Trade

Agreements on Intraregional Exports:

Evidence from SAARC countries. Journal of

International Economic Studies. 23, 23-42.

101. Molle, W. (1991). The Economics of European

Integration. Aldershot: Dartmouth.

102. Musila, J. W. (2004). The common market for

Eastern and Southern Africa and Kenya’s

export trade. International Journal of Social

Economics, 31( ½), 67-77.

103. Nabende, A. B., Ford, J. and Slater, J. (2001).

FDI, Regional Economic Integration and

Endogenous Growth: Some Evidence from

Southeast Asia. Pacific Economic Review. 6(

3), 383-399.

104. Ooi, G. T. (1981). The ASEAN preferential

trading arrangements (PTA): an analysis of

potential effects of intra-ASEAN trade.

Research and Discussion paper No. 26.

Singapore: Institute of Southeast ASEAN

Studies.

105. Parente S. L., and Prescott, E. C. (1994).

Barriers to technology adoption and

development. Journal of political economy,

102, 298-321.

106. Pelzman, J. (1977). Trade creation and trade

diversion in the council of mutual economic

assistance: 1954± 70. American Economics

Review, 67, 713-735.

107. Pinder, J. (1968). Positive Integration and

Negative Integration. The World today, Mar,

88-110.

108. Pinder, J. (1969). Problems of European

Integration. G. Denton eds. Economic

Integration in Europe. London: Weidenfeld and

Nicolson.

109. Pradhan, J.P. (2002). Foreign direct investment

and economic growth in India: a production

function analysis. Indian Journal of

Economics, 82, 582-6.

110. Rahman, M. K., Bhuyan, A. R. and Reza, S.

(1981). The Trade Effects of a South Asian

Customs Union: An Expository Study. The

Pakistan Development Review, 20(1), 61–80.

111. Rahman, M., Shadat, W. B., and Das, N. C.

(2006). Trade Potential in SAFTA: An

Application of Augmented Gravity Model.

CPD Occasional Paper Series 61. Dhaka:

Centre for Policy Dialogue (CPD).

112. Ramasamy, B. (1995). Trade diversion in an

ASEAN free trade area. ASEAN economic

bulletin, 12(1).

113. Ramirez, M. (2002). Foreign Direct Investment

in Mexico during the 1990s: An Empirical

Assessment. Eastern Economic Journal, 28(3),

409–423.

114. Roberts, B. A. (2010). A gravity study of the

proposed China-ASEAN free trade area. The

International Trade Journal, 18(4), 335-353.

115. Robson, P. (1987). The Economics of

International Integration. London: George

Allen and Unwin.

116. Romer, P. (1990). Endogenous Technological

Change. Journal of Political Economy, 98, 71-

102.

117. Sachs, J. D., and Warner, A. (1995). Economic

Reform and the Process of Global Integration.

Brookings Papers on Economic Activity 1.

Washington, D.C.: Brookings Institution.

118. Saggi, K. (2002). Trade, Foreign Direct

Investment, and International Technology

Transfer: A Survey. The World Bank Research

Observer, 17(2), 191-235.

119. Sakamoto, J. (1969). Industrial development

and integration of underdeveloped countries.

Journal of Common Market Studies, 7(4), 283-

304.

120. Schiff, M. and Winters, L. A. (1998).

Dynamics and politics in regional integration

arrangements: An introduction. The World

Bank Economic Review, 12(2), 177-195.

121. Schwanen, D. (1997). Trading up: the impact

of increased continental integration on trade,

investment, and jobs in Canada. C.D. Howe

Institute Commentary.





67

122. Sheer, A. (1981). A survey of the political

economy of customs unions. Law and

Contemporary Problems 44 (3): pp.33-53.

123. Siah, K. L., Choong, C. K., and Yusop, Z.

(2009). AFTA and the intra-trade patterns

among ASEAN-5 economies: trade-enhancing

or trade-inhabiting? International Journal of

Economics and Finance, 1(1), 117-126.

124. Sirinivasan P., Kalaivani M, and Ibrahim P.

(2011). An empirical investigation of foreign

direct investment and economic growth in

SAARC countries. Journal of Asia Business

Studies, 5(2), 232-248.

125. Soloaga, I., and Winters, L. A. (2000).

Regionalism in the nineties: what effect on

trade? The North American Journal of

Economics and Finance,12(1), 1-29.

126. Spraos, J. (1964). The Condition for Trade

Creating Customs Union. Economic Journal,

74, 101-08.

127. Staley, C. E. (1977). Review of A history of

thought on economic integration, by Fritz

Machlup. Annals of the American Academy of

Political and Social Science, 434, 242-243.

128. Swann, D. (1996). European Economic

Integration: The Common Market, European

Union and Beyond. Cheltenham: Edward

Elgar.

129. Tepstra, V. and David, K. (1985). The Cultural

Environment of International Business.

Cincinnati, OH: Southwestern Publishing Co.

130. Thomas, D., and Grosse, R. (2001). Country-

of-Origin Determinants of Foreign Direct

Investment in an Emerging Market: The Case

of Mexico, Journal of International

Management, 7(1), 59–79.

131. Tumbarello, P. (2006). Are Regional Trade

Agreements in Asia Stumbling or Building

Blocks? Some Implications for the Mekong

Countries, Paper prepared for the seminar on

Accelerating Development in the Mekong

Region—the Role of Economic Integration,

Siem Reap, Cambodia, June, 26–27.

132. Uttama, N. P., and Peridy, N. (2009). The

impact of regional integration and third country

effect on FDI. ASEAN economic bulletin,

26(3), 239-252.

133. Vajda, I. (1971). Integration, Economic Union,

and the National State. ibid., 28-44.

134. Vamvakidis, A. (1998). Regional Integration

and Economic Growth. World Bank Economic

Review, 12 (May), 251–70.

135. Vanek, J. (1965). General equilibrium of

international discrimination. Cambridge,

Mass.: Harvard University Press, 1965.

136. Viner, J. (1950). The Customs Union Issue.

New York: Carnegie Endowment for

International Peace.

137. Wacziarg, R. (2001). Measuring the dynamic

gains from trade. The world bank economic

review, 15(13), 393-429.

138. Walz, U. (1997). Growth and Deeper

Integration in a Three-Country Model. Review

of International Economics, 5(4), 492-507.

139. Whab, S. A., Rose, R. C. and Osman, S. I. W.

(2012). Exploring Technology Transfer

Mechanisms by the Multinational

Corporations: A Literature Review. Asian

Social Science, 8(3),142-150.

140. Whalley, J. (1996). Why Do Countries Seek

Regional Trade Agreements? NBER Working

Paper 5552. National Bureau of Economic

Research, Harvard University, Cambridge,

Mass.

141. Wong, H. (2005). The Determinants of Foreign

Direct Investment in the Manufacturing

Industry of Malaysia. Journal of Economic

Cooperation among Islamic Countries, 26(2),

91–110.

142. Xu, B., and Wang, J. (1999). Capital Goods

Trade and R&D Spillover in the OECD.

Canadian Journal of Economics, 32, 1258-

1274.

143. Yeats, A. J. (1998). Does MERCOSUR’s trade

performance rise concerns about the effect of

regional agreements? The World Bank

Economic Review, 12(1), 1-28.

144. Zdenek, D., and Greenway, D. (1984).

Economic integration and intra-industry trade:

The EEC and CMEA compared. Kyklos 7(3),

444-469.

static and dynamic theories of trade … 39th volume/5 trade integrati… · ·...

Documents