IDEAS home Printed from https://ideas.repec.org/a/tpr/asiaec/v8y2009i2p119-139.html
   My bibliography  Save this article

Free Trade Agreements versus Customs Unions: An Examination of East Asia

Author

Listed:
  • Innwon Park

    (Division of International Studies at Korea University, 5-1 Anam-Dong, Sungbuk-Gu, Seoul 136-701, Korea.)

  • Soonchan Park

    (Department of Economics and International Trade, Kongju National University, Kongju, Korea.)

Abstract

The spaghetti bowl phenomenon expected from the proliferating East Asian regional trade agreements (RTAs) is worrisome. In particular, the complicated web of hub-and-spoke type of overlapping free trade agreements (FTAs) can result in high costs for verifying rules of origin. As an alternative policy option to avoid the negative effect of trade deflection, customs unions (CUs) should be examined. Most of the theoretical analyses on the formation of CUs highlight stronger positive welfare effects compared to FTAs. However, there is a lack of empirical evidence to support the second-best theory of customs unions. This paper is an attempt to fill this gap by applying two methodologies: an ex ante simulation approach and an ex-post econometric approach. We quantitatively estimate the trade effect of CUs and FTAs by adopting a Gravity regression analysis. In general, we find that a CU is a superior type of RTA to an FTA in terms of creating more intra-bloc trade. In addition to analyzing the trade effects of RTAs according to type, we quantitatively evaluate the welfare and output effects of CUs for East Asia (an ASEAN+3 CU and a China-Japan-Korea CU) compared to FTAs by applying a computable general equilibrium model analysis. The East Asian CUs adopt a system of common external tariffs (CET) based on simple-averaged, import-weighted, consumption-weighted, and minimum rates. Overall, we find that the ASEAN+3 CU with the minimum CET are the most desirable type of RTA for both East Asian member countries and the world economy as a whole. (c) 2009 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

Suggested Citation

  • Innwon Park & Soonchan Park, 2009. "Free Trade Agreements versus Customs Unions: An Examination of East Asia," Asian Economic Papers, MIT Press, vol. 8(2), pages 119-139, Spring.
  • Handle: RePEc:tpr:asiaec:v:8:y:2009:i:2:p:119-139
    as

    Download full text from publisher

    File URL: http://www.mitpressjournals.org/doi/pdfplus/10.1162/asep.2009.8.2.119
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Burfisher, Mary E. & Robinson, Sherman & Thierfelder, Karen, 2004. "Regionalism," MTID discussion papers 65, International Food Policy Research Institute (IFPRI).
    2. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    3. Andrew K. Rose, 2004. "Do We Really Know That the WTO Increases Trade?," American Economic Review, American Economic Association, vol. 94(1), pages 98-114, March.
    4. Jong‐Wha Lee & Innwon Park, 2005. "Free Trade Areas in East Asia: Discriminatory or Non‐discriminatory?," The World Economy, Wiley Blackwell, vol. 28(1), pages 21-48, January.
    5. Rajapatirana, Sarath, 1994. "The evolution of trade treaties and trade creation : lessons for Latin America," Policy Research Working Paper Series 1371, The World Bank.
    6. Srinivasan, T. N., 1997. "The common external tariff of a customs union: Alternative approaches," Japan and the World Economy, Elsevier, vol. 9(4), pages 447-465, December.
    7. Aitken, Norman D, 1973. "The Effect of the EEC and EFTA on European Trade: A Temporal Cross-Section Analysis," American Economic Review, American Economic Association, vol. 63(5), pages 881-892, December.
    8. Trefler, Daniel, 1993. "Trade Liberalization and the Theory of Endogenous Protection: An Econometric Study of U.S. Import Policy," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 138-160, February.
    9. Richard E. Baldwin, 2008. "Managing The Noodle Bowl: The Fragility Of East Asian Regionalism," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 53(03), pages 449-478.
    10. Drusilla K. Brown & Alan V. Deardorff & Robert M Stern, 2001. "Impacts on NAFTA Members of Multilateral and Regional Trading Arrangements and Initiatives and Harmonization of NAFTA's External Tariffs," Working Papers 471, Research Seminar in International Economics, University of Michigan.
    11. Plummer, Michael G., 2006. "An ASEAN customs union?," Journal of Asian Economics, Elsevier, vol. 17(5), pages 923-938, November.
    12. Arvind Panagariya, 1999. "The Regionalism Debate: An Overview," The World Economy, Wiley Blackwell, vol. 22(4), pages 455-476, June.
    13. Baldwin, Richard E. & Venables, Anthony J., 1995. "Regional economic integration," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 31, pages 1597-1644, Elsevier.
    14. Magee Christopher S, 2003. "Endogenous Preferential Trade Agreements: An Empirical Analysis," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 2(1), pages 1-17, December.
    15. Innwon Park, 2009. "Regional Trade Agreements in East Asia: Will They Be Sustainable?," Asian Economic Journal, East Asian Economic Association, vol. 23(2), pages 169-194, June.
    16. Magee, Christopher S.P., 2008. "New measures of trade creation and trade diversion," Journal of International Economics, Elsevier, vol. 75(2), pages 349-362, July.
    17. Syropoulos, Constantinos, 2003. "Rules for the disposition of tariff revenues and the determination of common external tariffs in customs unions," Journal of International Economics, Elsevier, vol. 60(2), pages 387-416, August.
    18. Haveman, J-D & Hummels, D, 1996. "Trade Creation and Trade Diversion : New Empirical Results," Papers 96-004, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
    19. Jong‐Wha Lee & Innwon Park & Kwanho Shin, 2008. "Proliferating Regional Trade Arrangements: Why and Whither?," The World Economy, Wiley Blackwell, vol. 31(12), pages 1525-1557, December.
    20. Richard Baldwin, 1993. "A Domino Theory of Regionalism," NBER Working Papers 4465, National Bureau of Economic Research, Inc.
    21. Innwon Park, 2006. "East Asian Regional Trade Agreements: Do They Promote Global Free Trade?," Pacific Economic Review, Wiley Blackwell, vol. 11(4), pages 547-568, December.
    22. Ghosh, Sucharita & Yamarik, Steven, 2004. "Does trade creation measure up? A reexamination of the effects of regional trading arrangements," Economics Letters, Elsevier, vol. 82(2), pages 213-219, February.
    23. Egger, Peter, 2000. "A note on the proper econometric specification of the gravity equation," Economics Letters, Elsevier, vol. 66(1), pages 25-31, January.
    24. Krueger, Anne O., 1997. "Free trade agreements versus customs unions," Journal of Development Economics, Elsevier, vol. 54(1), pages 169-187, October.
    25. Kawai, Masahiro & Wignaraja, Ganeshan, 2008. "Regionalism as an Engine of Multilateralism: A Case for a Single East Asian FTA," Working Papers on Regional Economic Integration 14, Asian Development Bank.
    26. Kemp, Murray C. & Wan, Henry Jr., 1976. "An elementary proposition concerning the formation of customs unions," Journal of International Economics, Elsevier, vol. 6(1), pages 95-97, February.
    27. Tran Van Hoa & Charles Harvie (ed.), 2008. "Regional Trade Agreements in Asia," Books, Edward Elgar Publishing, number 12577.
    28. Mr. Tubagus Feridhanusetyawan, 2005. "Preferential Trade Agreements in the Asia-Pacific Region," IMF Working Papers 2005/149, International Monetary Fund.
    29. Panagariya, Arvind & Findlay, Ronald & DEC, 1994. "A political - economy analysis of free trade areas and customs unions," Policy Research Working Paper Series 1261, The World Bank.
    30. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
    31. repec:bla:worlde:v:22:y:1999:i:4:p:477-512 is not listed on IDEAS
    32. Arvind Panagariya, 1999. "The Regionalism Debate: An Overview," The World Economy, Wiley Blackwell, vol. 22(4), pages 455-476, June.
    33. Bhagwati, Jagdish & Greenaway, David & Panagariya, Arvind, 1998. "Trading Preferentially: Theory and Policy," Economic Journal, Royal Economic Society, vol. 108(449), pages 1128-1148, July.
    34. Manchin, Miriam & Pelkmans-Balaoing, Annette O., 2007. "Rules of origin and the web of East Asian free trade agreements," Policy Research Working Paper Series 4273, The World Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Innwon Park & Soonchan Park, 2011. "Best practices for regional trade agreements," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(2), pages 249-268, June.
    2. Boldea, O. & Engwerda, J.C. & Michalak, T. & Plasmans, J.E.J. & Salmah, S., 2011. "A Simulation Study of an ASEAN Monetary Union (Replaces CentER DP 2010-100)," Other publications TiSEM e92b4cbf-8cde-4a19-83e2-8, Tilburg University, School of Economics and Management.
    3. Sunandan Ghosh, 2019. "Enlargement Decisions of Regional Trading Blocs with Asymmetric Members," Working Papers id:12992, eSocialSciences.
    4. Natalya Ketenci, 2017. "The Effect of the European Union Customs Union on the Balance of Trade in Turkey," Foreign Trade Review, , vol. 52(4), pages 219-232, November.
    5. Innwon Park, 2009. "Regional Trade Agreements in East Asia: Will They Be Sustainable?," Asian Economic Journal, East Asian Economic Association, vol. 23(2), pages 169-194, June.
    6. Innwon Park, 2011. "Is AFTA a Desirable Regional Trade Agreement for ASEAN?," International Area Studies Review, Center for International Area Studies, Hankuk University of Foreign Studies, vol. 14(4), pages 49-72, December.
    7. Engwerda, J. & Boldea, O. & Michalak, T. & Plasmans, J. & Salmah,, 2012. "A simulation study of an ASEAN monetary union," Economic Modelling, Elsevier, vol. 29(5), pages 1870-1890.
    8. Roberto Miranda, 2012. "Central American Economic Integration - The Impact of a Customs Union with Guatemala on El Salvador’s Economy," Competence Centre on Money, Trade, Finance and Development 1208, Hochschule fuer Technik und Wirtschaft, Berlin.
    9. Park, Innwon & Park, Soonchan, 2009. "Consolidation and Harmonization of Regional Trade Agreements (RTAs): A Path Toward Global Free Trade," MPRA Paper 14217, University Library of Munich, Germany, revised 23 Mar 2009.
    10. KURTOVIC, Safet & HALILI, Blerim & MAXHUNI, Nehat & TALOVIC, Sead, 2016. "Liberalization of Trade with the EFTA Countries: Some Evidence from Bosnia and Herzegovina - La liberalizzazione del commercio con i paesi dell’ EFTA: evidenze dalla Bosnia e Herzegovina," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 69(3), pages 213-232.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Innwon Park, 2009. "Regional Trade Agreements in East Asia: Will They Be Sustainable?," Asian Economic Journal, East Asian Economic Association, vol. 23(2), pages 169-194, June.
    2. Kim , Sangkyom & Park , Innwon & Park , Soonchan, 2013. "A Free Trade Area of Asia Pacific (FTAAP): Is It Desirable?," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 17(1), pages 3-25, March.
    3. Florian Mölders & Ulrich Volz, 2011. "Trade creation and the status of FTAs: empirical evidence from East Asia," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(3), pages 429-456, September.
    4. Lee, Jong-Wha & Shin, Kwanho, 2006. "Does regionalism lead to more global trade integration in East Asia?," The North American Journal of Economics and Finance, Elsevier, vol. 17(3), pages 283-301, December.
    5. Innwon Park & Soonchan Park, 2011. "Best practices for regional trade agreements," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(2), pages 249-268, June.
    6. Tristan Kohl, 2014. "Do we really know that trade agreements increase trade?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(3), pages 443-469, August.
    7. Cardamone, Paola, 2007. "A Survey of the Assessments of the Effectiveness of Preferential Trade Agreements using Gravity Models," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 60(4), pages 421-473.
    8. Juyoung Cheong & Do Won Kwak & Kam Ki Tang, 2015. "Can Trade Agreements Curtail Trade Creation and Prevent Trade Diversion?," Review of International Economics, Wiley Blackwell, vol. 23(2), pages 221-238, May.
    9. Innwon Park & Soonchan Park, 2008. "Reform Creating Regional Trade Agreements And Foreign Direct Investment: Applications For East Asia," Pacific Economic Review, Wiley Blackwell, vol. 13(5), pages 550-566, December.
    10. Jong‐Wha Lee & Innwon Park & Kwanho Shin, 2008. "Proliferating Regional Trade Arrangements: Why and Whither?," The World Economy, Wiley Blackwell, vol. 31(12), pages 1525-1557, December.
    11. Alberto Behar & Laia Cirera-i-Crivillé, 2013. "Does it Matter Who You Sign With? Comparing the Impacts of North–South and South–South Trade Agreements on Bilateral Trade," Review of International Economics, Wiley Blackwell, vol. 21(4), pages 765-782, September.
    12. Shadat Hossain, 2018. "SAFTA and AFTA: a comparative welfare analysis of two regional trade agreements," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 7(1), pages 1-27, December.
    13. Gabriel Felbermayr & Mario Larch & Mario Larch, 2014. "Transatlantic Free Trade: Questions and Answers from the Vantage Point of Trade Theory," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 14(04), pages 03-17, January.
    14. Roland Rieder, 2006. "Playing Dominoes in Europe: An Empirical Analysis of the Domino Theory for the EU, 1962-2004," IHEID Working Papers 11-2006, Economics Section, The Graduate Institute of International Studies, revised Jun 2006.
    15. Bianka Dettmer, 2012. "The European Union's service directive: Contrasting ex ante estimates with empirical evidence," Jena Economics Research Papers 2012-019, Friedrich-Schiller-University Jena.
    16. Dutt, Pushan, 2020. "The WTO is not passé," European Economic Review, Elsevier, vol. 128(C).
    17. Jayjit Roy, 2010. "Do Customs Union Members Engage in More Bilateral Trade than Free‐Trade Agreement Members?," Review of International Economics, Wiley Blackwell, vol. 18(4), pages 663-681, September.
    18. repec:era:eriabk:2021-impact-of-the-atiga-on-intra-asean-trade is not listed on IDEAS
    19. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
    20. Konya, Laszlo & Matyas, Laszlo & Harris, Mark, 2011. "GATT/WTO membership does promote international trade after all – Some new empirical evidence," MPRA Paper 34978, University Library of Munich, Germany, revised 20 Nov 2011.
    21. Sangeeta Khorana & Badri G. Narayanan, 2017. "Modelling Effects of Tariff Liberalisation on India’s Key Export Sectors: Analysis of the EU–India Free Trade Agreement," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 11(1), pages 1-22, February.

    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tpr:asiaec:v:8:y:2009:i:2:p:119-139. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kelly McDougall (email available below). General contact details of provider: https://direct.mit.edu/journals .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.