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Korea and the World Economy, Vol. 17, No. 2 (August 2016) 213-242
Regional Comprehensive Economic Partnership (RCEP)
FTA: Reducing Trade Cost through Removal
of Non-Tariff Measures*
Rajan Sudesh Ratna** ∙ Jing Huang***
The Regional Comprehensive Economic Partnership (RCEP) is an
ASEAN-led proposal for a regional free trade area between 10
ASEAN countries and ASEAN’s 6 other Free Trade Agreement
(FTA) partners. The current international trade regime is now being
governed by the non-tariff measures that raise the trade cost. The
critical issue for market access, thus, would be as to how the
reduction/elimination of non-tariff measures (NTMs) is addressed in
RCEP negotiations. This paper first explores the background of
RCEP, the trade and tariff profiles of RCEP members. The paper
examines the overall trade cost using the ESCAP — World Bank
database and then evaluates the impact of elimination of non-tariff
related trade cost on intra-RCEP exports in a post FTA situation by
using the gravity model. Lastly, this paper suggests some measures
for effective RCEP negotiations, especially how to deal with the
issues relating to non-tariff measures with a special focus on sanitary
and phytosanitary, and technical barriers to trade.
JEL Classification: F13, F14, F15
Keywords: international trade, Regional Trade Agreements (RTA),
economic integration, Asia-Pacific, non-tariff measures,
RCEP, Sanitary and Phytosanitary measures (SPS),
Technical Barriers to Trade (TBT), rules of origin, WTO
* Received August 15, 2016. Revised August 28, 2016. Accepted August 31, 2016. The
views expressed in this paper are purely personal and do not reflect the views of
UNESCAP or its members. The authors are thankful to Dr. Susan F. Stone and Dr. Mia
Mikic for their guidance. Authors are also thankful to A. Biswas and D. Kim for their
inputs in developing this paper.
** Author for Correspondence, Economic Affairs Officer; Trade, Investment and Innovation
Division, United Nations ESCAP, Bangkok, Thailand 10200, Tel: +00-66-22881548, E-
mail: rsratna@gmail.com, ratna@un.org
*** Ph.D. student, Department of International Business and Trade, Kyung Hee University,
Seoul, Republic of Korea.
Rajan Sudesh Ratna ∙ Jing Huang
214
1. BACKGROUND
When General Agreement on Tariffs and Trade (GATT) was formulated
in 1947, the regional trade agreements (RTAs) were looked into as an
exception to the basic principle of Most Favored Nation (MFN).1) The Asia
and the Pacific is also not untouched with this global phenomenon and the
number of RTAs in the region has seen an increase since early 1990s. Once
considered as an example of the benefits of autonomous trade liberalization,
Asia-Pacific economies have turned into major contributors to a global build-
up of preferential trade agreements (PTAs). The Asia-Pacific economies
lead in the global process of establishing new PTAs. Out of 262 PTAs in
implementation worldwide, Asia-Pacific economies are party to 156. This
means that each Asia-Pacific economy is implementing 7.1 PTAs, on average
and has already created a complex web of ‘noodle bowl’.2)
Established in 1967, The Association of Southeast Asian Nations
(ASEAN) was initiated by five nations: by Indonesia, Malaysia, the
Philippines, Singapore and Thailand, and has expanded to include Brunei
Darussalam, Cambodia, Lao PDR, Myanmar, and Vietnam. The ASEAN
Free Trade Area (AFTA) was signed in 1992, and the Common Effective
Preferential Tariff (CEPT) entered into force in 1993 as a scheme for the
AFTA in order to promote development and growth of new production and
trade. The CEPT was replaced by the ASEAN Trade in Goods Agreement
(ATIGA) in 2010. The ATIGA targeted eliminating import duties on all
products traded between the Member States by 2015, with flexibility for
Cambodia, Lao PDR, Myanmar and Vietnam to do so by 2018. While the
CEPT mostly focused on tariffs reduction, the ATIGA comprised broaden
provisions on non-tariff measures (NTMs) such as Sanitary and
1) Under Article I of GATT 1994, WTO members are not supposed to discriminate one
member with another in terms of their trade policies including import duties. However,
RTAs are allowed as exceptions to MFN under Article XXIV of GATT 1994 subject to
certain conditions. The plethora of RTAs now are thus challenging the principles of Article
I since all the members of WTO are also parties to multiple RTAs.
2) APTIAD Briefing Note 7 (February 2016), ESCAP (available at: http://www.unescap.org/
sites/default/files/APTIAD%20brief.pdf).
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
215
Phytosanitary measures, rules of origins and other trade facilitation
provisions (Bernabe, 2011). ASEAN has been also playing important role in
developing FTAs with its Dialogue Partners. Five ASEAN+1 FTAs entered
into force, the ASEAN-China FTA (ACFTA) in 2005, the ASEAN-Japan
Comprehensive Economic Partnership (AJCEP) in 2008, the ASEAN-
Australia-New Zealand FTA (AANZFTA) in 2010, the ASEAN-India FTA
(AIFTA) in 2010, and the ASEAN-Republic of Korea FTA (AKFTA) in
2010.
2. RCEP
The Regional Comprehensive Economic Partnership (RCEP) is an
ASEAN-led initiative for a regional free trade area between 10 ASEAN
countries3) and ASEAN’s 6 other Free Trade Agreement (FTA) partners
(figure 1). RCEP aims to be the largest regional FTA, with a combined
market of over 3.4 billion people (49% of the world’s population) with the
combined GDP of over USD $21.2 trillion in 2014 (around 30% of world
GDP). If negotiated successfully, RCEP would create one of the most
extensive trading bloc in the world and would have significant implications
as an ASEAN-centred regional free trade initiative. It might also be used as
a tool to consolidate several other agreements that are signed or being
negotiated by the RCEP members (figure 1), and thereby removing, to
certain extent, the complexities involved with the ‘noodle-bowl’ phenomena
of present RTAs.
The present MFN applied tariffs of most of the RCEP members are in the
range of 5-7%, mostly due to their autonomous liberalization of tariffs on a
multilateral basis as well as due to their FTA commitments (AFTA, ATIGA
and the ASEAN +1 FTAs). The critical issue for market access, thus, would
be as to how the reduction/elimination of non-tariff measures (NTMs) are
3) ASEAN countries: Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia,
Myanmar, Philippines, Singapore, Thailand and Vietnam.
Rajan Sudesh Ratna ∙ Jing Huang
216
Figure 1 RCEP and Bilateral FTAs
Source: ESCAP, Asia Pacific Trade and Investment Database.
addressed in RCEP negotiations. This paper first explores the background of
RCEP, the trade and tariff profiles of RCEP members. The paper examines
the overall trade cost using the ESCAP — World Bank database and then
evaluates the impact of elimination of non-tariff related trade cost on intra-
RCEP exports in a post FTA situation by using the gravity model. Lastly,
this paper suggests some measures for effective RCEP negotiations,
especially how to deal with the issues relating to non-tariff measures with a
special focus on Sanitary and Phytosanitary, and Technical Barriers to Trade.
ASEAN has been a pivot in developing RTAs in the Asia-Pacific region
attempting to create itself as a ‘hub’ for regionalism. Despite the significant
achievement of developing RTAs in the region, economic liberalization has
not fully accomplished due to different provisions applied among the RTAs.
This situation creates a “noodle-bowl” effect, which further increases costs of
trade within blocks and possibly decreases the opportunities for new trade
and investment.
The ASEAN Economic Ministers Meeting (August 2012, Phnom Penh,
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
217
Cambodia) endorsed the Guiding Principles and Objectives for Negotiating
the Regional Comprehensive Economic Partnership (RCEP). RCEP aims to
achieve a comprehensive and mutually beneficial economic partnership. The
RCEP agreement will include provisions to support economic and technical
cooperation among partner members, to facilitate trade and investment, to
enhance transparency in trade and investment, as well as to promote the
participating countries’ engagement in global and regional supply chains.
Moreover, with consideration for the different levels of development of the
member countries, RCEP will also include flexible provisions for special and
different treatment, consistent with the existing ASEAN+1 FTAs, as
applicable. The RCEP negotiations are still continuing and it is expected that
negotiations will conclude by 2016.
3. INTRA RCEP EXPORTS4)
During 2004-2013, the intra-RCEP exports grew faster (approximately at a
rate of 16.2%) compared with exports growth of 10.6% of world. More
specifically, Cambodia’s exports to RCEP countries shows the highest annual
growth at 33.5% as against its global export growth of 13.7% only. Among
14 countries, 11 countries show higher exports growth rate to other RCEP
members (Australia, India, Indonesia, Japan, Cambodia, Republic of Korea,
Malaysia, New Zealand, Philippines, Singapore and Thailand) (figure 2).
This high growth is mostly due to individual countries’ exports to China.
The intra-RCEP growth is either negative or lesser if their export to China is
not accounted for.
Brunei Darussalam’s share of exports in 2013 to RCEP members was
highest (approximately 98% of its global exports) followed by Myanmar
(93%), Lao PDR (85%), Australia (79%), Indonesia and Malaysia (both
66%). The economies having greater export share are likely to gain more
due to RCEP FTA as duty free preferences will allow greater market access
4) Lao PDR and Myanmar are not included due to lack of availability of data.
Rajan Sudesh Ratna ∙ Jing Huang
218
Figure 2 Exports Annual Average Growth Rate (2004-2013)
Source: Authors’ calculation from WITS database.
Figure 3 Intra-RCEP Share of Exports
Source: Authors’ calculation from WITS database.
(figure 3). Among RCEP export partners, while the LDC members have
traded more with their neighbouring countries which are already their FTA
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
219
partners; Australia exported to China the most, followed by Japan and
Republic of Korea. Australia’s export to these three countries accounted for
approximately 70% of all its exports to RCEP countries. Top three export
partners of Indonesia were Japan, China and Singapore; they made up 54%
of all exports to RCEP countries. Malaysia’s biggest export partner among
RCEP countries was Singapore, followed by China and Japan, they
accounted for 60% (2013).
4. TARIFF PROFILES OF RCEP COUNTRIES
The current import duties (commoly known as MFN or applied rate of
duties) are much lower than the bound rates agreed in the Uruguay Round
(brought to the bound levels during 2000-2005) which is due to autonomous
liberalisation by many countries.5) The commitments to bring applied duties
down to zero due to FTAs are also one of the reasons for autonomous
liberalisation as countries realise the benefit of liberalisation and also
confident that their industries can face the challenges and would become
globally competitive. Due to this, in most of the items, there exist a large
gap between the bound rates and MFN duties, especially in case of
developing countries. The gap is likely to be narrowed after the conclusion
of Doha round negotiations. The negotiations to tariff elimination in FTAs
are held on the basis of the applied tariffs which are different than the
apporach taken in GATT/ WTO which uses bound rates as benchmark.
Among RCEP countries, Myanmar has the highest average bound tariff
rate (83.4%), followed by India (48.7%) and Indonesia (37.1%). In terms of
applied tariff rate, India shows the highest rate (12.6%), followed by
Republic of Korea (12.1%), Cambodia (10.9%) and Lao PDR (9.7%), while
Singapore follows a duty free MFN tariff, even though has a bound rate of
5) Even in case of China and Lao PDR which acceded after Uruguay Round negotiations and
have different time frame to bring their duties to bound level (after 2005) have liberalised
tariffs autonomously.
Rajan Sudesh Ratna ∙ Jing Huang
220
Figure 4 Tariff Profile of RCEP Countries
Source: WTO Tariff Profile (2014).
10% (figure 4). In case of RCEP the basis for tariff reductions will be the
applied MFN tariff and thus the highest tariff cuts will be done by India,
Republic of Korea, Cambodia and Lao PDR. However, these countries have
already brought their duties to zero in ASEAN FTAs.
5. NON-TARIFF MEASURES (NTMs)
Non-tariff measures are not easy to define and are interchangeable with the
term Non-tariff Barriers.6) As the term suggest, NTMs are broadly defined as
any policy measure other than customs tariffs that can have influence on
6) As per WTO glossary of trade terms, non-tariff barriers/measures refers to all barriers to
trade that are not tariffs such as quotas, import licensing systems, sanitary regulations,
prohibitions, etc. Some of these instruments, in particular technical regulations, minimum
standards and certification systems regarding health and consumer safety do not ipso facto
constitute barriers to trade, as they are generally employed to meet legitimate policy goals.
However, there is a perception that, in some circumstances these sorts of policy instruments
are being misused. On the other hand, in general the measures which are WTO compliant
are treated as non-tariff measures and those which violate the WTO principles are termed as
‘barriers’.
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
221
international trade flow, According to UNCTAD (2012), NTMs on import
side can be categorized into two groups; technical measures and non-
technical measures (Box 1).
Box 1 Import Related Non-Tariff Measures (NTMs)
Technical Measures:
Sanitary and Phytosanitary (SPS) Measures
SPS measures define as any measure applied to protect human or animal life from
risks arising from additives, contaminations, toxins or disease causing organisms
in their food, to protect human life from plant or animal carried diseases, to protect
animal or plant life from pests, diseases or disease causing organisms and to
prevent or limit other damage to a country from entry, establishment or spread of
diseases.
Technical Barriers to Trade (TBTs)
TBT measures include technical regulations, standards and conformity assessment
procedures (WTO, 2004). TBT measures typically deal with labelling of
composition or quality of food, drink or drug, quality requirements for fresh food,
volume, shape and appearance of packaging etc.
Non-technical Measures:
Quotas
Restriction of imports of specified products by setting a maximum quantity or
value of goods authorized for import.
Non-automatic Licensing
Non-automatic licensing is usually the means for administering a quota or a
conditional prohibition and in such cases is a condition for import.
Voluntary Export Restraints (VERs)
Voluntary export restraints (VERs) are usually informal export restraint
arrangements (ERAs) between an exporter and an importer whereby the exporter
agrees to limit the exports for a certain period of time.
Rajan Sudesh Ratna ∙ Jing Huang
222
Prohibitions
Unconditional interdiction to import. The so-called “prohibition with exceptions”
is incorporated in the category of licensing which is relevant to the nature of the
exception.
Antidumping Measures
Antidumping measures may be taken after an investigation by the investigating
authority of the importing country has led to a determination of dumping and
material injury resulting there from. It is considered that dumping takes place
when a product is introduced into the commerce of an importing country at less
than its normal value.
Countervailing Measures
Countervailing measures may be taken after an investigation by the investigating
authority of the importing country has led to a determination that the imported
goods are benefiting from subsidies, and that they result in injury. Countervailing
measures may take the form of countervailing duties or undertakings by the
exporting firms or by the authorities of the subsidizing country.
Government Procurement Procedures
Government procurement procedures typically involve a price preference for
domestic goods. The price preference is computed to determine the outcome of
public tenders for the supply of goods or services to government agencies.
Source: Authors’ compilation from UNCTAD and WTO.
Certain types of NTMs have been dealt in the multilateral trading system.
During the early GATT negotiating rounds, the members recognized that
NTMs can distort the impact of significant tariff reduction and in the
Kennedy Round (1964-1967), members agreed to deal with NTMs in the
forthcoming negotiations. The Tokyo Round (1973-1979) created a special
negotiating sub-committee on technical barriers, customs, subsidies and
countervailing measures, and government procurement. In the Uruguay
Rounds, comprehensive negotiations led to disciplining some NTMs like
import licensing, quota, standards and technical regulations, rules of origin
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
223
etc. The agreements on Sanitary and Phytosanitary measures (SPS),
Technical Barriers to Trade (TBT) and others came into force on 1 January
1995. The Doha Round is also discussing further disciplining some of the
issues relating to NTMs and the Trade Facilitation Agreement agreed in Bali
Ministerial meeting in December 2013 is one such decision. The GATT
rules on NTMs, however, are ‘generally consistent with a shallow integration
approach’ (WTO, 2012).
As discussed earlier, in view of the reduced tariffs mostly due to
autonomous liberalization, the important barriers to trade now are the non-
tariff ones at the border as well as behind the border. Though certain non-
tariff measures (export and import quotas, import licenses, monopoly trade
measures etc.) have been disciplined under WTO, still a significant amount
of non-tariff measures remain. Despite having disciplines on SPS and TBT
in WTO, their use is increasing day by day. Costs associated with complying
these regulatory procedures are impacting trade. ESCAP (2011) has
estimated the tariff and non-tariff trade costs and found that non-tariff trade
costs are higher than the tariff trade cost. WTO (2012) observed that
TBT/SPS measures distort trade in agricultural products. It would thus be
important to look at non-tariff related trade cost of RCEP members and
examine whether reduction of trade cost is possible through the instruments
of harmonisation, mutual recognition, equivalence, conformity assess etc. of
not as they reduce transaction cost.
Recent studies on RCEP have stressed the importance of addressing
NTMs. They proposed that priority should be given to address NTMs from
the beginning of negotiations and RCEP must develop standards to measure
NTMs and provide common approaches and conformity assessments (Das,
2012). It has also been pointed out that RCEP should clarify the types of
NTMs to avoid delay of elimination of it due to lack of clear definition and
they should be removed as much as possible (Fukunaga and Isono, 2013).
Since the text of negotiation is not available in the public domain, it is also
not known if initiatives taken by ASEAN to address NTMs, mostly through
the process of harmonisation is also being discussed in RCEP or not.
Rajan Sudesh Ratna ∙ Jing Huang
224
However, for a successful market access it is necessary that these additional
costs associated with the NTMs are addressed in RCEP negotiations,
importance of which is discussed in the following section.
The Overall Trade Restrictiveness Index (OTRI)7) summarizes the trade
policy stance of a country by calculating the uniform tariff rate (replacing
current tariff schedule and NTMs) that will keep its overall imports at the
current level. OTRI is a more sophisticated way to calculate the weighted
average tariff of a given country. The weights indicate the composition of
import volume and import demand elasticities of each imported product. The
empirical methodology of the OTRI was first developed by Kee, Nicita, and
Olarreaga (2008, 2009), based on the theoretical underpinning of Anderson
and Neary (1994, 1996, 2003). NTMs considered in this calculation include
price control measures, quantitative restrictions, monopolistic measures,
technical regulations, and agriculture support. The tariff and non-tariff
indices can be segregated from the OTRI. The analitical studies show that
NTMs play significant role in trade restrictiveness. Kee et al. (2009)
measured Overall Trade Restrictiveness Index (OTRI) and Tariff Trade
Restrictiveness Index (TTRI) for 78 developed and developing countries by
using the UNCTAD TRAINS NTB database and tariff data of 2003 and 2004
from WITS. He observed that NTBs increase the level of trade
restrictiveness imposed by tariff (average 87%). The study also states that
the effect of NTBs on OTRI is bigger than the effect of tariff in 34 countries
(out of 78). Subtracting TTRI8) from OTRI9) gives the non-tariff component
of the trade restrictiveness index (NTMRI).
In conventional FTAs countries often negotiate elimination of tariffs only
and the provisions relating to removing the obstacles of NTMs thorugh
a process of harmonisation, conformity assessments, mutual recognition
7) As defined by World Bank available at http://econ.worldbank.org/WBSITE/EXTERNAL
/EXTDEC/EXTRESEARCH/0,contentMDK:22574446~pagePK:64214825~piPK:64214943
~theSitePK:469382,00.html
8) This indicator reflects the equivalent uniform tariff of a country tariff schedule that would
maintain domestic import levels constant (World Bank).
9) This indicator reflects the uniform equivalent tariff of a country's tariff schedule and non-
tariff measures (NTMs) that would maintain domestic import levels (World Bank).
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
225
Figure 5 TTRI and NTMRI Profile of RCEP Countries (2009)10)
Source: World Bank.
agreements etc. especially relating to the SPS and TBT measures are either
very weak or just reiterate their WTO rights and obligations. In order to
understand what will be the implication if the NTMs are not addressed, a
summary of RCEP members’ TTRI (Tariff Trade Restrictiveness Index) and
NTMRI (Non-tariff measure Restrictiveness Index) is shown in the figure 5.
It is evident that when one looks into the OTRI, Malaysia shows the
highest OTRI level (27.4%), followed by Philipinnes (21.7%), India (14.9%)
and Singapore. Indonesia shows the lowest OTRI (4.7%). It is also evident
that in case of Malaysia, Philippines, Singapore New Zealand, Australia and
Japan the major contribution is from NTMRI. In the case of Malaysia and
Philippines the NTMRI is 4 times than the TTRI; Singapore has 100% and
New Zealand’s NTMRI is also around 4 times the TTRI. In all these cases,
therefore, removing of non-tariff measures would be important for effective
market access. Thus, when it comes to trade negotiations in RCEP, both the
tariff and non-tariff measures need to be addressed in the FTA negotiations
as tariff elimination alone will not be in a position to enhance trade as per the
potential.
10) The latest data available is for year 2009 only.
Rajan Sudesh Ratna ∙ Jing Huang
226
6. QUANTIFYING NTMs
The analitical studies show that NTMs play significant role in trade
restrictiveness. The fact that NTMs especially in terms of SPS and TBT
standards vary greatly across countries makes harmonization of standards a
policy priority. Basic economic theory explains that if standards are
necessary (e.g., for food safety), then commonly agreed international
standards should facilitate trade by harmonizing the production process for
all countries. In practice, the harmonization should remove trade restrictions,
as production processes do not need to be customized to meet requirements
for each export market. SPS and TBT standards and regulations are double-
edged sword. On one hand, SPS and TBT measures can promote economic
development and trade. On the other hand, they may also be used as
disguised protectionism and unnecessarily frustrate international trade. The
risk of the use of these measures for protecting the domestic producers is
particularly high in the agriculture sector, where lowering the level of
protection provided by tariff, increases the importance of sanitary and
phytosanitary measures as border protection instruments. The major
difficulty in dealing with standards and regulations is to distinguish those
measures which are justified by a legitimate cause from those which are
applied for protectionists’ purposes (Ratna, 2005).
The studies on harmonization generally compare country-specific
standards to internationally set guidelines. Sithamaparam and Devadason
(2011), for example, assess the impact of NTMs on Malaysian exports by
examining the heterogeneity of various export markets (European Union,
Japan and ASEAN-411)). They also find a positive effect of harmonization of
standards. Their results suggest that, while exports to ASEAN-4 have
increased because of the harmonization of regional standards, they have not
increased to the European Union, which generally adopts different standards
to other regions. Wilson, Otsuki, and Majumdsar (2003) examine the impact
of antibiotic residue standards on trade in beef and analyses the trade effect
11) Cambodia, Lao PDR, Myanmar and Vietnam.
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
227
of setting harmonized international standards. They specifically look at the
diverse standards applied in six importing countries or regions (Australia,
New Zealand, United States, Canada, European Union and Japan) and how
these affect exports from a number of countries (Australia, Argentina, Brazil,
Canada, Chile, China, Hungary, Mexico, New Zealand, Nicaragua, South
Africa, Switzerland, Thailand, Ukraine, Uruguay and United States). By
using an econometric approach, the study finds that bovine meat imports are
significantly lower for an importing country that has a more stringent
standard on an antibiotic item. They also find that not all countries would
benefit from such harmonization. While a universally adopted Codex
standard12) on beef would significantly increase bovine meat exports from
the emerging developing countries, it would decrease exports from low-
income countries. The reason is that many low-income countries can export
only to countries applying relatively lax standards as they do not have
production processes in line with the Codex standards, let alone with the
more stringent standards of many high-income markets.
The diverse trade impact from standard harmonization based on country’s
development level is also found in the study by Cadot et al. (2010). The
study shows that the existence of PTAs between developed and developing
countries (North-South agreements) hurts trade between developing countries
(South-South trade) and impedes developing countries’ attempts to diversify
into new markets if such harmonisation is on regional standards. Chen and
Mattoo (2008) estimate a gravity model of bilateral trade of 28 OECD
countries and 14 non-OECD countries at the three-digit SITC product level.
They find that harmonization agreements can increase trade between
participating countries but will not necessarily increase trade with other
countries. In particular, they find that harmonization increases exports from
developed countries outside the region, but it reduces exports from
developing countries outside the region. MRAs tend to increase trade within
the region. MRAs also increase trade with countries outside the region if
they are not associated with rules of origin. However, when the MRAs
12) Codex standard is international standards for food, established by FAO and WTO in 1963.
Rajan Sudesh Ratna ∙ Jing Huang
228
contain rules of origin, trade with countries outside the region is negatively
affected, especially exports from developing countries. Overall, the evidence
suggests that regional integration of TBT/SPS measures has trade-diverting
effects, especially to the detriment of developing countries. This finding is
consistent with the evidence that deep preferential trade agreements in the
area of TBT/SPS measures are more likely among countries with a higher
and more similar level of income. This finding also highlights the risk that
regional integration on TBT/SPS measures may lead to a multi-tiered world
where certain developing countries are marginalized.
Furthermore, as stressed in World Trade Report 2011, there is a risk of a
“lock-in” effect, whereby the regional harmonization of standards may
reduce incentives for further trade opening. Regardless of their objectives,
TBT/SPS measures may or may not reduce trade. Negative trade effects,
when they exist, generate negative spill-overs across countries. This
provides a rationale for international cooperation. Harmonization and mutual
recognition help to reduce the undesired negative trade effects of legitimate
public policy. However, both approaches highlight the need for capacity
building to address regulatory challenges in developing countries. The costs
related to compliance and conformity assessment impinge particularly on
developing countries. This is because they lack the technical infrastructure
necessary to effectively develop and design technical regulation, standards
and conformity assessment procedures.
Given the increasing importance of NTMs, researchers have also used the
gravity model to estimate the impact of NTMs on trade. The gravity model
has been used to examine bilateral trade flows, particularly to estimate the
impacts of trade-related policies on the trade flows.
The basic gravity model can be written as:
0 1 2
3
log( ) log( ) log( )
log( ) .
ij i j
ij ij
Trade Flow b b GDP b GDP
b Distance e
(1)
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
229
Gravity based techniques measure the trade impact of NTMs rather than
their welfare effect and thus ignore some of the effects of regulations that
correct market failures but restrict trade. It also captures the trade enhancing
effects of regulations when they act as standards that facilitate trade (Beghnin
and Bureau, 2001).
The effect of TBT on trade impact was studied for twelve western
European nations from 1980-1995 and the study helped in estimating impact
of 1% increase in the number of shared standards on bilateral trade flows
(Moenius, 2004). Hoekman and Nicita (2008) did a study to analyse the
impacts of trade policies on developing countries. The data set covers 104
importers and 115 exporters. The study used a traditional cross-section
gravity model that deals with trade volume as dependent variable, and
multilateral resistance terms (distance, language, landlocked, adjacency),
trade policies (TTRI, NTM) and domestic trade costs as explanatory
variables. The analysis in the paper suggests that tariff and NTMs are
statistically significant determinants of trade flow, on average, 10% of TTRI
reduction would increase trade volumes approximately 2%, while NTMs add
another 1.8%. Furthermore, the study shows the importance of other trade
cost such as transactions costs at and behind the border as well, especially for
low-income countries.
Bellanawithana et al. (2009) examined the effect of NTM on agricultural
exports using gravity model approach by using the value of agriculture trade
flows as dependent variable and used the gravity model variables like GDP,
distance, geographical proximity like common border, landlocked country
and other variables like common language, colonial ties etc. The trade
restrictiveness indices of TTRI and OTRI were used as constructed by Kee,
Nicita, and Olarreage (2006). The regression analysis presented that NTM
has significant negative effect on south-south and north-south trade, while
NTM has insignificant effect on agricultural exports in south-north and
north-north trade.
Rajan Sudesh Ratna ∙ Jing Huang
230
7. METHODOLOGY AND LIMITATIONS OF MODEL
This section aims to quantify the impacts of NTMs on overall market
access, particularly for all products among RCEP member countries. This
section evaluates if the elimination of tariffs among the RCEP members
would be sufficient for enhanced market access or addressing the issues of
the NTMs would be equally important, if not more. The biggest challenge
for researchers to study impact of NTMs on trade is to find exclusive non-
tariff measures as per WTO or UNCTAD classifications at product level and
then to express them in tariff equivalent form so that it could be used in the
model. Various databases that quantify NTM like TRAINS or ESCAP-
World Bank trade cost data base are at aggregate level and not at the 6 or 8
digit product level (HS) classification, hence a sectoral (at 2 digit HS level)
or product (6 or 8 digit HS level) based analysis is very difficult. In this
study the trade restrictiveness indices have been used from ESCAP-World
Bank trade cost database — bilateral tariff cost and non-tariff equivalent
trade costs. The ESCAP-World Bank trade cost database is comprehensive
as it includes all costs involved in international trade of goods.13)
In order to derive the relationships between tariffs, NTMs and FTA on
trade flows respectively, the gravity model has been used to examine the
relationship between bilateral trade flows by using standard gravity variables
and bilateral trade cost relating to NTMs. The factors known to have
influence on trade and have also been used in this model are importing
countries GDP, exporting countries GDP, distance, language, common
border, landlocked geographical position and colonial legacy. The standard
gravity model has been used as a first model (Model 1) to analyse this
relationship for RCEP members. In the second model (Model 2) FTA
variable has been added to test the assumption that FTA enhances the trade
among FTA partner countries and thus export will have a positive and
statistically significant relation with FTA. The Model 2 thus examines the
relationship between exports and FTA. The third model (Model 3) is
13) It uses the trade cost components as discussed in Anderson and van Wincoop (2001).
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
231
improved version of Model 2 where two more factors, TTC (bilateral tariff
trade cost) and NTTC (non-tariff trade cost) have been added. In the third
model (Model 3) the impact of TTC and NTTC on the exports was examined
first by having the FTA variable (Model 3a) and then by dropping the FTA
variable (Model 3b). From these three models one tries to examine which
factor is the most influential in affecting intra-RCEP exports — will trade
increase if in the FTA only the tariff issues are addressed (by bringing them
to zero) or there is a need to address the non-tariff issues simultaneously in
the negotiations.
The gravity model can be represented by the following equations for the
above mentioned three models:
Model 1:
0 1 2 3 4
5 6 7
ln( ) ln( ) ln( ) ln( ) ( )
( ) log( ) log( ) .
ijt it jt ij ij
ij j ij ij
b b GDP b GDP b Dist b lang
b Conting b Landlock b Colony e
(2)
Model 2:
0 1 2 3 4
5 6 7
8
ln( ) ln( ) ln( ) ln( ) ( )
( ) log( ) log( )
( ) .
ijt it jt ij ij
ij j ij
ijt ij
b b GDP b GDP b Dist b lang
b Conting b Landlock b Colony
b FTA e
(3)
Model 3:
0 1 2 3 4
5 6 7
8 9 10
ln( ) ln( ) ln( ) ln( ) ( )
( ) log( ) log( )
( ) ( ) ( ) .
ijt it jt ij ij
ij j ij
ijt ijt ijt ij
b b GDP b GDP b Dist b lang
b Conting b Landlock b Colony
b FTA b TTC b NTTC e
(4)
Where “b” terms are coefficients, “i” is the importer and “j” is the
Rajan Sudesh Ratna ∙ Jing Huang
232
exporter. The explanation for each independent variable is given below:
:
ijt
value of exports from country j to country i at year t.
Basic gravity variables
:
it
GDP
GDP in the ith importer at year t.
:
jt
GDP
GDP in the jth exporter at year t.
:
ij
Dist
geographical distance between capital cities in i and j.
Trade restrictiveness indices
ijt
TTC
:14) bilateral tariff trade cost imposed by importer i when exported
by exporter j at year t.
:
ijt
NTTC
non-tariff trade cost component imposed by importer
i when exported by exporter j at year t.
:
ijt
FTA
1 if ith importer has free trade agreement in force with
country j, dummy variable.
Cultural variables
:
ij
Lang
1 if both countries share the same official language, dummy
variable.
:
ij
Colony
1 if ith importer has colony ties with jth exporter, dummy
variable.
Geographical variables
:
ij
Conting
1 if country i share a land border with country j, dummy
variable.
:
j
Landlock
1 if jth exporter is a landlocked country, dummy variable.
:
ij
e
error term.
14) This index summarizes the impact of each country’s trade policies on its aggregate imports.
This captures only the impact of tariff.
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
233
Table 1 Sources for Data
The data set covers 15 exporters and 15 importers (225 country pairs)15)
for the data years between 1995 and 2011. The data from 1995was taken as
it captures the impact of effective tariff reduction by RCEP members due to
Uruguay Round results (from 1995 to 2000, with flexibility to developing
countries), autonomous tariff liberalisation taken during the period and the
fact that the phenomena of FTAs in Asia and the Pacific started in a big way
from 2002-2003. The latest trade cost database is available only up to 2011.
The detailed information on the sources for data is shown in table 1.
The gravity model estimations were done using the statistical software
package STATA/12.
8. RESULTS AND DISCUSSION
The econometric estimations of equations (2), (3) and (4) are based on
OLS, Fixed Effect (FE) and Random Effects (RE) technique. The RE can be
15) Myanmar was dropped as the data from 1995 to 2011 was not available.
Variable
Source
ijt
UNCOMTRADE
it
GDP
World Bank, IMF
jt
GDP
World Bank, IMF
ij
Dist
CEPII
ij
TTC
ESCAP - World Bank Trade Cost Database
ij
NTTC
ESCAP - World Bank Trade Cost Database
ij
Lang
CEPII
ij
Colony
CEPII
ij
Conting
CEPII
j
Landlock
CEPII
ij
FTA
APTIAD Database, UNESCAP
Rajan Sudesh Ratna ∙ Jing Huang
234
preferred over FE in this kind of panel data setup because of the presence of
time invariant explanatory variables16) like Language, Colony, FTA, Conting,
Landlock in the model, however the FE is useful for addressing the
endogeneity issue which often arises in gravity models when estimating the
impact of trade policies, especially in RTAs. FE can help to overcome part
of the endogeneity problem due to omitted variable bias, although time-
varying omitted variables remain a problem. To get rid of the presence of
heteroscedasticity, if any, the robust estimates were used in the models.
Estimates for the gravity model were also attempted by using other popular
regression methods like OLS, FE, Hausman-Taylor (HT) and Poisson
Pseudo-Maximum Likelihood Estimator (PPML) to check the consistency of
the results. It turned out that the results achieved from the OLS, FE and RE
models are similar to other regression models. Here the regression result of
OLS, FE and RE results are presented for model 3 above and the regression
results are given in table 2.
The dependent variable is ln (natural logarithm) of actual exports and
imports of fifteen RCEP member countries. The first column shows the
description of independent variables and the remaining columns show the
coefficients that were obtained from the regression results for Models 3a and
3b. The positive and statistically significant relation of exports with the
GDPs of importing and exporting country is as per the assumptions.
Landlocked countries tend to trade less; especially in terms of exports
(Hoekman and Nicita, 2008), however, in this model it shows different
results — positive and statistically significant effect at 1% and 10% level on
export for OLS and RE respectively. One explanation for this could be high
trade of Lao PDR with Thailand and China. Thus the constraint of
landlocked countries to export to other countries with which it does not have
common border may be true, but the same may not be true if the countries
share common border and are larger economy than the landlocked country.
16) Fixed Effects are used only when one is interested in analyzing the impact of variables that
vary over time. The rationale behind the RE model is that the variations across entities is
assumed to be random and are uncorrelated with the independent variable of the model.
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
235
Table 2 Results for RCEP
OLS
FE
RE
Model 3a
Model 3b
Model 3a
Model 3b
Model 3a
Model 3b
lngdp_importer
0.635***
(37.81)
0.630***
(36.55)
0.573***
(13.36)
0.584***
(13.69)
0.619***
(14.36)
0.627***
(14.53)
lngdp_exporter
0.627***
(38.27)
0.621***
(39.63)
0.687***
(15.62)
0.704***
(16.26)
0.618***
(14.79)
0.630***
(15.04)
ln_dist
–0.447***
(–12.56)
–0.473***
(–15.48)
0.000623
(0.02)
–0.00405
(–0.12)
–0.0550
(–1.02)
–0.0650
(–1.23)
Lang
0.276***
(4.95)
0.279***
(4.98)
0.191
(1.35)
0.190
(1.35)
0.202*
(2.12)
0.203*
(2.12)
Conting
–0.117
(–1.61)
–0.108
(–1.51)
0.0735
(0.22)
0.0732
(0.22)
0.124
(0.59)
0.144
(0.68)
Landlock
–1.332***
(–8.01)
–1.337***
(–8.10)
0
(.)
0
(.)
–1.725***
(–4.26)
–1.667***
(–4.13)
Colony
–0.0219
(–0.26)
–0.0408
(–0.49)
0.443
(1.69)
0.443
(1.69)
0.436**
(2.76)
0.431**
(2.76)
FTA
0.100
(1.64)
0.0825*
(2.09)
0.0905
(1.43)
TTC
–0.0378***
(–16.71)
–0.0390***
(–19.10)
–0.0144***
(–8.99)
–0.0145***
(–9.09)
–0.0168***
(–6.53)
–0.0173***
(–6.65)
NTTC
–0.0167***
(–20.53)
–0.0166***
(–20.94)
–0.0153***
(–28.25)
–0.0154***
(–28.44)
–0.0157***
(–7.95)
–0.0157***
(–7.95)
_cons
–4.462***
(–8.32)
–3.980***
(–8.32)
–8.734***
(–11.86)
–9.167***
(–12.97)
–7.637***
(–6.30)
–7.879***
(–6.46)
N
2,461
2,461
2,461
2,461
2,461
2,461
Level of Significance
* = 10%, ** = 5%, *** = 1%
Note: t statistics is given in parentheses.
Distance is an important determinant of bilateral trade impacting the exports
negatively, but results do not show it as statistically significant for RCEP.
This possibly could be due to the fact that the members of RCEP are not
located geographically too far, except Australia and New Zealand and most
of the countries do trade with other RCEP members. Sharing common
language is an important factor of bilateral trade as it facilitates trade due to
better understanding of each others’ documentations; procedures etc.
However, RE model shows that it has statistically significant impact on
export at 10% level. Sharing a common border variable is also an important
Rajan Sudesh Ratna ∙ Jing Huang
236
determinant of bilateral trade, but it has no statistically significant impact in
this model. The model shows different results for FE (not significant) and
RE (significant at 5% level) on having common colonial relations among the
RCEP members.
The FE results show that between FTA and exports there is a positive and
significant relationship at 10% but not significant for RE. There could be
two possible explanations for such a behaviour. One explanation could be
attributed to the fact that during the period 1995 to 2011 ASEAN FTA (zero
duty regime) was in place thus impact of intra ASEAN FTA exports were not
captured in this model. Secondly, most of the bilateral FTAs among the
RCEP members (mostly ASEAN plus one) have started after 2008 and are
still going through the transition period of tariff liberalisation, thus the trade
is not duty free during the period. Another reason, which explains the
insignificant relation, can be attributed to the decline in trade due to the
global economic recession which also hampered their bilateral exports to
other RCEP members. The correlations with other variables are on expected
lines.
This model illustrates statistically significant (at 1% level) and negative
relationship between exports and the tariff and non-tariff trade cost in all
three cases of OLS, FE and RE. It also brings out the fact that the impact of
reduction of NTMs is equally important as the reduction in tariffs and thus it
is important that RCEP agreement handles the non-tariff trade costs issues in
the negotiations. In this regard, using the Model 3b the impact assessment of
NTTC was calculated by using the methodology adopted by ESCAP (2012).
Using that methodology with RE coefficients, effort was made to predict the
intra-RCEP export potential for the year 2011 (as the latest data is available
only for 2011). In order to calculate the export potential a hypothetical
scenario was assumed where there is no existence of non-tariff trade cost i.e.,
the entire non-tariff trade cost is eliminated. This was done by taking the
variable NTTC as zero and tried to find the estimated intra-RCEP export by
using all the statistically significant variables in Model 3 as follows:
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
237
7.879 0.627*( ) 0.630*( ) 0.203*( )
1.667*( ) 0.431*( ) 0.0173*( ) .
ijt it jt ij
j ij ij
V GDP GDP Lang
Landlock Colony TTC
(5)
This estimated gravity equation is then used to get the predicted export
value of the RCEP in 2011. The difference between the actual exports value
and the predicted export value is considered as the “export potential” for the
year 2011. A positive trade potential suggests that there is scope for an
economy to increase its exports in RCEP with a particular trading partner
during that period. It was found that if the NTTC is eliminated it will
generate an additional intra-RCEP exports to the tune of $1,233 million
which shows a growth of around 55% over the actual intra-RCEP export
value of 2011 ($2,253 billion).
9. CONCLUSION
In this case, we examined the impact of tariff and non-tariff measures on
intra-RCEP trade flows. The result of the analysis reveals some interesting
points, even though there are certain limitations. The first being not very
significant impact of FTA on trade expansion, which was found in this case.
As pointed out, the lack of strong correlation could be due to ASEAN FTA
which was in place during the period of analysis and ASEAN+1 agreements
being in transition. The results, however, bring the greater importance of
non-tariff measures on exports compared to the tariff barriers. Thus the
issues of non-tariff measures need to be adequately addressed in the RCEP
negotiation. Since the RCEP members are also members to WTO, they are
governed by the disciplines on NTMs especially on issues relating to SPS
and TBT measures. However, given the nature of disputes that emerged in
WTO on these issues as well as specific trade concerns, which have been
raised in the meetings of SPS and TBT Committees, it is important that these
are addressed in a time bound manner. One such initiative which has been
taken at a regional level is the process of harmonisation of standards by
Rajan Sudesh Ratna ∙ Jing Huang
238
ASEAN. Since ASEAN is in the hub of the RCEP, it is important to initiate
the process on similar lines as being done in ASEAN through harmonisation
of standards on priority areas.
A growing number of regional trade agreements are now including
provisions relating to SPS and TBT measures. As per the WTO (2011),
approximately 60 percent of the agreements include the provisions relating to
mutual recognition of conformity assessments and harmonisation of technical
regulations. However, it has also been observed that countries are neither
willing to undertake binding provisions in RTAs for harmonization,
conformity assessments etc. on SPS and TBT nor subjecting these issues to
RTA disputes or consultation process. On these issues, most of the RTAs
have a very weak provision on cooperation or prescribe for developing
mechanisms on these issues, without a timeline, in subsequent negotiations
after the FTA has entered into force. In most of the cases the provisions
merely reiterate their obligations of WTO. In the RCEP negotiations,
therefore it is essential that the provisions on SPS and TBT should be in the
form of binding commitments and the agreement should also prescribe a
binding work programme to harmonise the standards on important sectors.
One way could be to adopt the AEC harmonisation of standards, which are
already in place, and 10 out of 16 RCEP members are implementing them on
the basis of international standards. At the same time, there should be
provisions relating to technical assistance and capacity building especially
for the LDC members of RCEP. In agriculture sector, given the common
border among certain members, it is importance that the concept of
regionalisation and equivalence are included in the agreement.
It would also be important for countries to identify priority sectors and
negotiate the process of harmonisation, mutual recognition of conformity
assessments etc. as a part of the RCEP text agreement, rather than keeping it
for future negotiations. In this regard, it would be important that RCEP
includes a commitment to a work programme and constitute a permanent
Working Group to address SPS and TBT issues. Often the provisions
relating to SPS and TBT are not subject to disciplines of dispute settlement
RCEP FTA: Reducing Trade Cost through Removal of Non-Tariff Measures
239
provisions within the FTA and countries often try to address them in the
WTO. However, the dispute resolution in WTO is time consuming and
costly. Thus in RCEP there should be a provision which brings the SPS and
TBT provisions within the ambit of RCEP dispute settlement process or at
least consultation process which will minimize the time and cost taken in
dispute resolution.
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