Interacting Preferential Trade Agreements: Illustrations from Asia-Pacific

Multilateral trade negotiations have faced many hurdles and frustrations in recent years, giving increased impetus for some countries to negotiate regional and bilateral trade agreements. In this international climate, many countries are actively pursuing a range of bilateral trade agreements. However, gains from any bilateral trade agreement will be influenced not only by what is negotiated between the countries directly involved, but also by other preferential trade agreements that countries may negotiate with other countries. In this paper, we focus on some of the agreements that China is currently negotiating. Agreements are currently under negotiation with countries that include New Zealand and Australia and a framework agreement between China and ASEAN was signed in 2002. Thus we explore how such preferential trade agreements might impact on one another. We use the dynamic GTAP model to assess the anticipated impact of possible liberalization scenarios, including analysis of how agreements with other countries may impact these gains. For example, while the China-New Zealand agreement is unlikely to have a large economic impact on China, significant gains may accrue to New Zealand, particularly if there is liberalization of the sensitive agricultural sector. However, if China also enters into preferential agreements with other countries, this is likely to adversely impact on the gains accruing to New Zealand. If the spokes emanating from the China hub can be joined in a regional free trade area, rather than bilateral hub-and-spoke agreements, the overall gains can be much greater. Our analyses can be improved in a number of ways, including through appropriate modelling of rules of origin, savings in trade facilitation costs and productivity gains.