Firms can't answer the questions we have about PTAs

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Masahiro Kawai and Ganeshan Wignaraja try to use an ADB survey of Asian firms to assess the Asian “noodle bowl” of preferential trade agreements:

Properly designed FTAs keep trade and FDI flowing, even when crisis strikes. Yet, the plethora of overlapping and complex FTAs in East Asia carries the risk of becoming unwieldy and making business cumbersome. Influenced by Jagdish Bhagwati’s famous remark about a spaghetti bowl of FTAs, critics argue that the explosion of deals, with complex rules and variable tariffs, has increased transaction costs, particularly for small- and medium-sized enterprises (SMEs) – those that can least afford them (see Bhagwati, 2008 for an excellent synthesis). They also argue that the multiplicity of bilateral and plurilateral deals hinders the broader push toward a global trade agreements. The spaghetti bowl phenomenon is popularly known as the “noodle bowl” effect in Asia and has led Richard Baldwin and Philip Thornton (2008) to propose a “WTO Action Plan on Regionalism” that includes deepening of the transparency mechanism for FTAs.

For the first time, the ADB study on FTAs sought the views of those most directly affected – the region’s export-oriented firms. The results showed that these businesses view FTAs as a benefit rather than a burden and use them to expand trade to a far greater degree than had been previously thought. The benefits of FTAs include wider market access and preferential tariffs that make it easier to import intermediate materials needed for finished goods. Multiple country rules of origin (ROOs), which determine where goods originate from for a variety of purposes, including quotas and labelling, may add some administrative and transaction costs. But the large majority of exporters do not view ROOs as a significant hindrance to business activity. In addition, bilateral and plurilateral FTAs counter protectionist tendencies amid the current economic uncertainty. They provide a valuable stepping stone toward broader trade liberalisation in support of economic recovery.

Unfortunately, this is not compelling evidence. Surveying firms is simply not a persuasive means of assessing the costs and dangers identified by skeptics of preferential trade. Questions about exporters’ preference utilization and perceived trouble with rules of origin cannot answer questions like:

  • Do PTAs dampen protectionist pressures or just shift them onto less-preferred trading partners?
  • Do PTAs divert political energy away from multilateral negotiations – are they building blocks or stumbling blocks?
  • Do these PTAs create more trade than they divert?
  • Will latecomers in the PTA race find themselves forced to join agreements that favor the first movers, through mechanisms such as decisions on technical barriers to trade?

It’s good to collect evidence on preference utilization (28% of firms utilize some preferences, though that’s not as meaningful as evidence on the percentage of trade flows that utilize preference), but this survey doesn’t answer any of the big questions about Asia’s noodle bowl.

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One Response to “Firms can't answer the questions we have about PTAs”

  1. Ben Shepherd Says:

    I think the survey results are even less meaningful than you suggest here.

    They only surveyed “export-oriented firms”–I assume they mean firms that actually export. So their sample is composed exclusively of firms that are productive enough to overcome the hurdles associated with multiple agreements, complex rules of origin, etc.

    The most productive exporters think the noodle bowl is ok? In the words of the immortal Mandy Rice-Davies: “Well, they would, wouldn’t they.”

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