RIETI Report March 2017

Designing mega-regional trade agreements

Several mega-regional trade agreements (RTAs) involving a large number of countries have been under negotiation including the Trans-Pacific Partnership (TPP) Agreement. Although the TPP was axed by new U.S. President Donald Trump, the number of multilateral RTAs, including mega-RTAs, is increasing. The emergence of mega-RTAs is likely to complicate the trading environment, as some countries may be covered by overlapping RTAs. In the March issue of the RIETI Report, we present the column "Designing mega-regional trade agreements" by Kazunobu Hayakawa from the Institute of Developing Economies, RIETI Faculty Fellow and Waseda University Professor Shujiro Urata, and Nanzan University Associate Professor Taiyo Yoshimi.

Hayakawa et. al look at how exporters choose tariff schemes given a choice of multiple RTAs. They found that the utilization rate of RTA schemes depends on the quality of the RTA in terms of the coverage of products for tariff reduction, the extent of tariff reduction, and the extent of ease of complying with rules of origin. Mega-RTAs should be designed to be of the best quality such that the exporters choose to utilize them without consideration of other overlapping RTAs, resulting in the avoidance of the "spaghetti bowl" effect.

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Designing mega-regional trade agreements

HAYAKAWA KazunobuOverseas Research Fellow, Institute of Developing Economies

URATA ShujiroFaculty Fellow, RIETI

YOSHIMI TaiyoAssociate Professor, Department of Economics, Nanzan University

Several mega-regional trade agreements (mega-RTAs) involving a large number of countries have been under negotiation. The Trans-Pacific Partnership (TPP) Agreement, involving 12 Asia-Pacific countries including the US and Japan, concluded negotiations in October 2015 with the parties signing it in February 2016. Although this mega-RTA was axed by new US President Donald Trump afterwards, it may still exist among the remaining 11 countries. Two other mega-RTAs—the Regional Comprehensive Economic Partnership (RCEP) involving 16 East Asian countries, and the Trans-Atlantic Trade and Investment Partnership (TTIP) between the US and EU—have also been under negotiation. Most RTAs are bilateral and involve two countries. However, the number of multilateral RTAs, including mega-RTAs, is increasing.

The emergence of mega-RTAs is likely to complicate the trading environment, as some countries may be covered by overlapping RTAs. For example, the TPP overlaps with the North American Free Trade Agreement (NAFTA), which involves the US, Mexico, and Canada. It also overlaps with the Japan-Mexico RTA. Among the RCEP member countries, there already exist several RTAs, in particular the so-called ASEAN plus-one RTAs (i.e. between each member of the Association of Southeast Asian Nations and China, Japan, South Korea, India, and Australia-New Zealand). Once overlapping RTAs enter into force, firms are faced with multiple RTA schemes when trading with the member countries. For example, if the TPP enters into force (even among 11 countries), exporters in Japan will be able to choose tariff schemes from among the TPP, the Japan-Mexico RTA, and most favoured nation (MFN) schemes (i.e. non-use of a preferential scheme) when trading with Mexico.

To read the full text
http://www.rieti.go.jp/en/columns/v01_0084.html

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