Research Institute of Economy, Trade and Industry (RIETI)
RIETI BBL Seminar
Handout
November 20, 2015
Speaker: Dr. Lili Yan ING
http://www.rieti.go.jp/jp/index.html
RIETI Symposium
Tokyo, 20 November 2015
Economic Research Institute
for ASEAN and East Asia
How restrictive are ASEAN’s RoO?
Olivier Cadot and Lili Yan Ing
1
Outline
1.
2.
3.
4.
5.
Introduction
Stylized Facts
Theoretical Framework
Empirical Results
Conclusion
2
1. Introduction
FTA-Trade Coverage Ratios
Proportion of trade with FTA partners in total trade (%)
ASEAN+Aus and NZ
ASEAN+China,
ASEAN+India,
ASEAN+Japan,
ASEAN+Korea,
RCEP is currently in the
process of negotiations
Chile
Peru
Mexico
EU27
Canada
Indonesia
Singapore
ASEAN
New Zealand
US
Korea
Australia
EU27(ex. Intra-EU)
Japan
India
China
59.7%
FTA (July, 2012), Trade data (2011)
0
20
40
60
80
100
3
1. Introduction
ASEAN’s imports by trading blocks
23.2%
40.5%
16.5%
2.1%
2.3%
ASEAN (AFTA)
Japan (AJCEP)
India (AIFTA)
The rest of the world
6.3%
9.0%
China (ACFTA)
Korea (AKFTA)
Australia and New Zealand (AANZFTA)
Source: Authors’ calculations based on UNCOMTRADE data
4
1. Introduction
50%
of automobile
62%
liquid display screen
86%
smart phones
Asia
46%
machinery
100%
digital camera
Source: Hiratsuka (2013) and ERIA Staff calculations for machinery based on World Input Output data
[accessed in August 2014]
5
2. Sytlized facts
ROO stands in the middle of these two trends. ROO
could make them incompatible…
2.1. ROO: How do they work?
• Product specific rules: changes in tariff classification,
regional value contents, or technical requirements
• Regime-wide rules essentially cumulation rules
(bilateral, diagonal and full cumulation)
6
2. Sytlized facts
2.3. ASEAN’s tariff and ROO
• ROO can be binding only when tariff preference
margins are substantial.
14.00
12.00
MFN
AFTA
10.00
8.00
6.00
4.00
2.00
-
Source: ASEAN Secretariat
7
3. Theoretical framework
3.1. Set up
Suppose that country 𝑖 exports 𝑛𝑖 varieties to country 𝑗 and let 𝑥𝑖𝑗𝑘
be the quantity of variety 𝑘 exported from 𝑖 to 𝑗 (in tons), 𝑝𝑖𝑗𝑘 its CIF
price, 𝐸𝑗 the total expenditure in country 𝑗, and 𝑠𝑖𝑗𝑘 its share in
country 𝑗’s expenditure. We have
𝑝𝑖𝑗𝑘 𝑥𝑖𝑗𝑘 = 𝑠𝑖𝑗𝑘 𝐸𝑗
(1)
8
3. Theoretical framework
Let 𝑝𝑖𝑘 be the producer price of variety 𝑘 in country 𝑖; we will assume
that it is affected by an idiosyncratic shock 𝜑𝑖𝑘 representing
comparative advantage, i.e.
𝑝𝑖𝑘
𝑝𝑖
=
𝜑𝑖𝑘
(3)
Let 𝜏𝑖𝑗𝑘 be the bilateral trade cost between 𝑖 and j for variety 𝑘,
including all of its components (tariffs, RoOs, and other measures).
The consumer price of variety 𝑘 in country 𝑗 is then
𝑝𝑖𝑗𝑘 = 𝜏𝑖𝑗𝑘 𝑝𝑖𝑘
(4)
9
3. Theoretical framework
Let 𝑉𝑖𝑗 be the total value of exports from 𝑖 to 𝑗. Bilateral trade between 𝑖 and 𝑗
is:
𝑉𝑖𝑗 =
𝑘
𝑝𝑖𝑗𝑘 𝑥𝑖𝑗𝑘 =
𝑘
𝑠𝑖𝑗𝑘 𝐸𝑗 =
𝑘
𝑝𝑖𝑗𝑘
𝑃𝑗
1−𝜎
𝐸𝑗 =
𝑘
𝜏𝑖𝑗𝑘 𝑝𝑖𝑘
𝑃𝑗
1−𝜎
𝐸𝑗
(5)
Country 𝑖’s GDP is the sum of its sales to all destinations, including itself:
𝑚
𝑌𝑖 =
𝑚
𝑉𝑖𝑗 =
𝑗=1
𝑗=1
𝑘
𝑖𝑗𝑘 𝑝𝑖𝑘
𝑃𝑗
𝑚
1−𝜎
𝐸𝑗 =
𝑘
𝑝𝑖𝑘
1−𝜎
𝑗−1
𝜏𝑖𝑗𝑘
𝑃𝑗
1−𝜎
𝐸𝑗
(6)
10
3. Theoretical framework
Noting finally that income equals expenditure, 𝐸𝑗 = 𝑌𝑗 and
1−𝜎
letting 𝜏𝑖𝑗 = 𝑘 𝜏𝑖𝑗𝑘
be the average trade cost from 𝑖 to 𝑗 across all
varieties gives a modified gravity equation holding the aggregate level in the
absence of symmetry:
𝑣𝑖𝑗𝑘
𝑝𝑖𝑗𝑘
= 𝑠𝑖𝑗𝑘 𝑉𝑖𝑗 =
𝑃𝑗
1−𝜎
𝑝𝑖 𝜏𝑖𝑗𝑘
𝑉𝑖𝑗 =
𝜑𝑖𝑘 𝑃𝑗
1−𝜎
𝜏𝑖𝑗
𝑌𝑖 𝑌𝑗
Ω𝑖 𝑃𝑗
1−𝜎
(13)
11
3. Theoretical framework
3.2. Estimation strategy, data and data sources
The estimation strategy is based on the Anderson-van Wincoop (2004)
framework at the product level from but relaxing key symmetry assumptions
on production costs and trade costs. We log-linearize equation (13):
ln 𝑣𝑖𝑗𝑘 = 𝛽1 ln 𝜏𝑖𝑗𝑘 + 𝛽2 ln 𝜏𝑖𝑗 + 𝛿𝑖𝑘 + 𝛿𝑗 + 𝑢𝑖𝑗
(14)
Let 𝜏𝑖𝑗𝑘 stand for product-specific trade costs, which are what we are
interested here (product-specific tariffs and RoOs)
𝜏𝑖𝑗𝑘 = 𝑒 𝛾1 𝑡𝑖𝑗𝑘 +𝛾2 𝑟𝑖𝑗𝑘
(15)
12
3. Theoretical framework
𝑀𝐹𝑁
𝑅𝑇𝐴
𝑀𝐹𝑁
ln 𝑣𝑖𝑗𝑘 = 𝛽1 𝑡𝑖𝑗𝑘
+ 𝛽2 𝐼𝑖𝑗𝑘
× 𝑡𝑖𝑗𝑘
𝑅𝑇𝐴
+ 𝛽3 𝐼𝑖𝑗
+
𝑙
𝛽4𝑙 𝐼𝑖𝑗𝐴𝑆𝐸𝐴𝑁 𝑟𝑖𝑗𝑘𝑙 + 𝐱 𝑖𝑗 𝜸 + 𝛿𝑖 + 𝛿𝑗 + 𝛿𝑠(𝑘) + 𝑢𝑖𝑗𝑘
(19)
𝑀𝐹𝑁
Let 𝑡𝑖𝑗𝑘
be the MFN tariff rate on product 𝑘 applicable to trade between 𝑖 and 𝑗,
𝑅𝑇𝐴
𝐼𝑖𝑗
is a dummy variable marking preferential trade (for any RTA), where
𝑙 indexes the various forms of RoOs (CTC, local content, etc.)
𝑥𝑖𝑗 be a vector of country-pair attributes such as distance, common border,
common language and common colonizer.
Where 𝛿𝑖 , 𝛿𝑗 , and 𝛿𝑠(𝑘) are respectively exporter, importer and sector (HS4)
fixed effects, 𝑠(𝑘) being the HS4 sector to which HS6 product 𝑘 belongs.
13
3. Theoretical framework
We also carry out the estimation by section, making sure that each
section includes goods with different types of ROO. We then
convert estimates into ad-valorem equivalents (AVEs) of ROOs
using a standard formula for semi-logarithmic equations
𝐴𝑉𝐸𝑙 = 𝑒 𝛽4𝑙 -1
(20)
14
3. Theoretical framework
Data and data sources
•
The main data source are RoO data in the form of
precise requirements at the HS6 level of product
classification were provided to us by the ASEAN
Secretariat.
•
Trade data in thousand U.S. dollars are from the CEPII’s
BACI database, which is based on COMTRADE but
reconciles direct export and mirrored import data.
•
Gravity variables are from the CEPII’s free-access online
database.
15
4. Empirical results
16
17
18
5. Conclusion
1.
ASEAN’s RoOs have a relatively simple and transparent
structure: 40% are RVC and CTH. The Textile Rule seems to
stand out as a relatively more trade-inhibiting rule than others.
2.
An average tariff equivalent, across all measures and products
is 3.40%. The trade-weighted average is 2.09%. The effects
are heterogeneous. While it is small in sectors like electronics
or capital equipment, it peaks in sectors like fats (6.7%),
leather products (9%), textile and apparel (8.3%), footwear
(12.7%), or automobiles (6.9%).
3.
The simplification and streamlining of ROOs should prioritize
light industries like textiles and apparel, footwear and prepared
foods and this should be seen as part of ASEAN’s internal
development and poverty-reduction strategy.
19
Appendix
20
Review of Free Trade Agreements

By January 2010, ASEAN has 6 FTAs in effect (AFTA,
ASEAN+Australia and New Zealand, ASEAN+China,
ASEAN+India, ASEAN+Japan, ASEAN+Korea FTAs)

In Nov 2011, the Regional Comprehensive Economic
Partnership (RCEP) was proposed. The RCEP is
currently in the process of negotiations.

RCEP Members: ASEAN-10 and its main trading
partners, Australia, China, India, Korea, Japan and New
Zealand
21
RCEP: regional cumulation
The existing
ASEAN+1 FTAs
China
RCEP
China
regional
cumulation
ASEAN
ASEAN
India
India
RCEP enables business operating in Indonesia to enjoy preferential rates by
using regional cumulation of RCEP members (eg. using imports from China,
producing in Indonesia and exporting to India, Australia or other RCEP
members). RCEP members: the ASEAN-10, Australia, China, India, Japan,
Korea and New Zealand
22
Evaluation of the use of existing FTAs
The use of FTAs in ASEAN countries (2013): Survey based analysis
Firms using FTAs
for Exports
(% of exporting firms)
Firms using FTAs
for Imports
(% of importing firms)
FORM D (AFTA-ATIGA)
FORM E (ACFTA)
FORM AK (AKFTA)
FORM AANZ (AANZFTA)
FORM AJ (AJCEP)
FORM AI (AIFTA)
51.5%
25.6%
20.0%
13.8%
6.6%
10.8%
39.4%
38.7%
12.3%
5.4%
3.3%
9.6%
FORM A (GSP)
42.0%
16.5%
FTAs
Source: The Use of FTA in ASEAN (ERIA study, forthcoming)
Note: The summation of the use of FTA COOs does not necessarily add up to 100% as not all of firms use FTAs and
one firm may have more than one FTA and non-FTA COOs.
23
Recent trends in trade in goods
Trade in Goods of ASEAN and its 6 FTA Partners
Share of world’s
trade in goods
30%
25%
6 ASEAN FTA
Partners
Average growth of 13%
20%
15%
Average growth of 10%
10%
ASEAN
5%
0%
1999
2001
2003
2005
2007
Source: Pangestu, Mari Elka and Lili Yan Ing, 2015.
2009
2011
2013
24
Recent trends in FDI
Share of total
world’s FDI
Total FDI in ASEAN and its 6 FTA partners
25%
20%
Average growth of 15%
6 ASEAN
FTA Partners
15%
10%
Average growth of 22%
ASEAN
Countries
5%
0%
1999
2001
2003
2005
Source: Pangestu, Mari Elka and Lili Yan Ing, 2015.
2007
2009
2011
25