The de facto preferential trade agreement in East Asia

ABSTRACT

East Asian countries apply lower tariffs on their neighbors’ products than they are required to under the various trade agreements to which they belong, a concession they grant only rarely to countries outside the region. The result is a de facto preferential trade area in East Asia in which applied tariff rates significantly undercut the legally bound rates. This gap, termed binding overhang, is an under-studied aspect of international political economy, but provides information about the nature of East Asian regionalism. To wit, the regional bias in applied tariffs is driven by transnational production networks that must move components across borders, not geopolitics or state preferences for increased regional integration. This finding supports a ‘bottom up’ interpretation of East Asian regionalism.

KEYWORDS:

• East Asia
• trade
• regionalism
• binding overhang
• tariff
• preferential trade agreement

ACKNOWLEDGEMENTS

The author gratefully acknowledges the support of the Bradley Foundation and the Niehaus Center for Globalization and Governance at Princeton University, as well as the invaluable advice of Krzysztof Pelc, Christina Davis, Thomas Christensen, Andrew Moravcsik, Helen Milner, and the participants of the Princeton International Relations Graduate Research Seminar and the 2010 Conference on the Political Economy of International Organizations.

Notes

1. Here defined as the 10 ASEAN members (the Philippines, Indonesia, Malaysia, Thailand, Brunei, Singapore, Cambodia, Vietnam, Laos, and Myanmar) plus the countries of Northeast Asia (China, Korea, Japan) and Hong Kong and Taiwan.

2. In effect: Japan–Singapore (2002), Japan–Malaysia (2006), ASEAN Free Trade Agreement (1993), ASEAN–China (2005), ASEAN–South Korea (2007), South Korea–Singapore (2006), China–Hong Kong (2004), China–Macau (2004); Japan–Philippines (2007). Finalized: Japan–Indonesia (2006), Japan–Thailand (2007), Japan–Brunei (2006). Under negotiation: Japan–Vietnam (2007), Japan–ASEAN (2005), Japan–South Korea (2003), Singapore–China (2006). Proposed: ASEAN Plus Three (China, Korea, Japan). As of 2008 (Searight). Counting the multilateral deals as sums of bilateral deals, Richard Baldwin identifies 70 PTAs in the region (Baldwin, 2007). Some might count the Asia Pacific Trade Agreement from the 1970s, brokered by the UN, as a pre-1990 PTA, but I do not consider it here because it applies mostly to South Asian countries.

3. See also Pelc (2009).

4. In some instances the level of applied tariffs actually exceeds the bound rate, suggesting trade law violations. These examples are principally attributable to various safeguard measures that allow countries to temporarily raise tariffs above the negotiated ceilings.

5. However, Mr. Shiro Konuma of the Japanese Mission did identify one case of such an agreement outside the region. Japan has a very high bound rate on beef imports, but has made a special agreement with two large beef exporters, the United States and Australia, to keep a low applied rate on beef imports unless it faces extraordinary pressure to raise beef tariffs in the future.

6. The Ambassador stressed that he did not entertain requests from firms personally, instead redirecting them through the relevant ministerial channels.

7. One case was indentified outside the region, where Malaysia protested India's decision to raise applied tariff rates on Malaysia palm oil.

8. Defined in this way, a shift to the left occurred only three times in the data range considered: Japan 1995, Korea 1996, and Thailand 2001.

9. Data are drawn from the IMF's International Financial Statistics, as is the coding scheme. More recent volumes of the report place countries along an eight-point scale. Earlier volumes use different measures. My synthesis codes the data as follows: hard peg to a single currency is coded as one; currency boards are coded as two; Managed floats are coded as three; independent floating is coded four.

10. Year fixed effects were estimated as well, but because the results were consistent with the other models they are not reported here.

11. Because the data are so product specific, and because component is the key independent variable, including product fixed effects would not lead to useful results. The model was also tested using year fixed effects, yielding similar results.