Economic integration agreements and international trade

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國立中正大學經濟學系

國際經濟學博士 學位論文

Department of Economics

National Chung Cheng University

Ph.D. Dissertation

ECONOMIC INTEGRATION

AGREEMENTS AND

INTERNATIONAL TRADE

指導教授: 陳偉智 博士

Advisor: Dr. Chen, Wei-Chih

研 究 生: 阮詩環

Advisee: Nguyen Thi Hoang Oanh

中華民國 108 年7 月

July, 2019

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ACKNOWLEDGEMENTS

To approach this step of achievement, firstly, I would like to show my gratitude

to my home-country‘s government (Vietnamese government) who offered me the

chance to study abroad. This has been my dream since I was a child. In addition, I

would like to thank to the faculty members in the Economics of Department at the

National Chung Cheng University for their approval so that I could have the admission

to obtain the doctoral program here.

When I first came to our department, everything was new to me, especially the

courses were very difficult. To be honest, my English was not good, and I had no idea

about Chinese. Undoubtedly, I got into a panic actually for wondering how to pass the

courses and how to adapt to the new life. Dr. Wang, Yu-Lin helped me not only

choose the courses and to solve the academic problems but overcome my

homesickness by accompanying me to somewhere or giving me some small gifts.

From the bottom of my heart, no words can describe my appreciation towards her

kindness. She also recommended Dr. Chen, Wei-Chih to be my advisor afterwards. I

met Dr. Chen when I was the third-semester student, and I became his advisee in the

fourth semester. A long time before I came to Taiwan, I went to a fortune teller (),

saying that in my life there would be a man who very much helped me, and now I

know who he is. He always encourages me no matter what I do and what the results

look like.

I cannot also thank enough to Dr. Chen, Ho-Chyuan, Dr. Tang, Meng-Chi, Dr.

Liu, Wen-Hsien, and Dr. Weng, Yong-Ho for serving as committee members in my

final defense. I am grateful for the excellent courses offered by you. I remembered I

once had a meeting with Dr. Tang in his office to discuss the final term paper, he gave

each student 30 minutes, but it took me nearly an hour. My English was so bad that I

could not understand what he said, so I consciously stayed longer to hear what he said

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again and again. After nearly an hour, he advised me much, and I said ―Could you

write down what you want me to do?‖ (). He smiled and wrote one sentence in a

piece of paper, then I finished the course. Many thanks to Dr. Tang for your patience

with the student like me!

I am eternally grateful to Dr. Wu, Jyh-Lin, Dr. Huang, Bwo-Nung, Dr. Ueng,

Shyh-Fang, Dr. Chen, Fang-Yueh, Dr. Chen, Wei-Cheng, Dr. Chu, Shiou-Yen, and Dr.

Tseng, Fu-Min, who have not only helped me improve my academic skills but also

been fruitful resources for me to learn from.

And I am also very thankful that other Professors in our department and the

officers – Ms. Yuen and Ms. Huang help me with all enthusiasm and kindness in the

whole time I have studied in Taiwan.

It has been very fortunate of me to have friends from different countries:

Taiwan, Vietnam, Thailand, Swaziland, Indonesia, etc. They are always beside me

when I need their helps. They have shared the happiness and sadness with me.

Last but not least, I would like to send a special thank to my parents, my family,

my husband, and my children. My husband, especially, has taken care of our kids and

helped me all the time I have studied in Taiwan. If I do not have helps from him, I

absolutely cannot finish my PhD degree.

One again, I would like to thank all the people who help me to achieve this

goal, which is definitely not easy in my life. Thank you so much!

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PREFACE

Over thirty years, the world has witnessed a big transformation of trade

relationships, the preferential trade relationships truly began. The change in perception

of the U.S. towards the preferential relationships, which was remarked by the U.S.

signing a free trade agreement with Israel in 1985, is one of the four forces dragging

the booming in preferential relationships some years later, from only 15 RTAs in 1980

to 461 in 2018 (WTO). However, in the debate of the first contest of the campaign in

2016, Donald Trump – the President of the United States of America criticized the

development strategies that the U.S has followed during the past 30 years and longed

to revise them. After Donald Trump became the president, the world witnessed an

extreme change in the USA‘s strategies which withdrew from the Trans-Pacific

Partnerships (TPP). In the meantime, as the U.S. presidential election (2016), the UK

also conducted the staying or leaving the EU referendum, and it was determined to

leave. How will the preferential relationships change along with this move of the U.S.

and the UK? How is the liberalization of trade affected? And how are the trade flows

affected? It is still early to assert the answers. This withdrawal or termination of

preferential relationships is, however, not the first time in the history and development

of preferential trade agreements. We use those terminating relationships to provide a

partial evaluation of those events on trade flows. The result shows that after the

termination of a pair‘s economic integration agreement, their trade flows only increase

in some years later and are driven by an extensive margin in the short run. Building

trade relationships during EIA incorporation period does not help the pair maintain

their long-term relationship.

One of outstanding stylized facts in the EIAs is the difference in willingness to

join the EIAs among countries, some of whom have signed many EIAs, but some

others have not signed any. Participating a lot of EIAs plays a role of a cushion for a

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country to sign an EIA with other countries more easily, especially in the case of small

countries and large countries. However, this fact possibly generates trade diversion in

trade growth and in the probability of products survival. This dissertation provides an

evidence of the latter diversion effects of owning so many EIAs from the perspective

of both exporters and importers.

Obviously, preferential trade agreements have accelerated the trade

liberalization process although only in regional scale, trade flows in over the world

increase, and the opportunities of economic integration for all countries are offered.

Vietnam is a small country, and over two decades ago (1995) Vietnamese GDP per

capita was only 581 (2010 US$), but she was ―willing to join‖ in the preferential

agreements by signing the first free trade agreement with the Association of Southeast

Asian Nations (ASEAN) countries. This is the milestone in Vietnamese integration

process. After 20 years (2015), Vietnamese GDP per capita was 1651 (2010 US$), and

the opening index was 170%. Especially, she has had the eight free trade agreements

in force (by 2015), including six free trade agreements along with ASEAN and two

bilateral trade agreements. ―Jumping on the battle‖ Vietnam hopes to accelerate her

trade and economic growth. This dissertation also provides some evaluations on the

trade effects of free trade agreements which Vietnam signed along with ASEAN and

also by herself. Before detailing three matters above, the dissertation provides some

contents relating to preferential trade agreements that are analyzed in the literature

review.

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TABLE OF CONTENTS

CHAPTER 1..............................................................................................................................1

OVERVIEWS OF TRADE AGREEMENTS ........................................................................1

1. Trade Agreements: History and Trend of Developments...................................................1

1.1. Definitions of Trade Agreements...............................................................................................1

1.2. History and Trend of Development ...........................................................................................2

2. Type of Trade Agreements.................................................................................................4

2.1. Number of members..................................................................................................................4

2.2. The Level of Cooperation...........................................................................................................5

3. The Stylized Facts of EIAs.................................................................................................8

4. The Purposes of the EIA Formations ...............................................................................10

5. The Determinants that Affect the Formations of EIAs.....................................................12

5.1. Economic Factors.....................................................................................................................12

5.2. The Economic Political Factors................................................................................................14

CHAPTER 2............................................................................................................................16

LITERATURE REVIEW......................................................................................................16

1. Trend of Study..................................................................................................................16

1.1 The Theories of EIA Effects.......................................................................................................16

1.2 The Empirical Works.................................................................................................................19

2. Endogenous Problem in Analyzing the Effects of EIAs ..................................................26

2.1. Instrumental Variables/2SLS Approach with Cross-section Data............................................26

2.2. Fixed Effect and First Differencing with Panel Data................................................................28

3. Extensive and Intensive Margins......................................................................................29

3.1. Count Method..........................................................................................................................32

3.2. Share Method..........................................................................................................................33

CHAPTER 3............................................................................................................................36

THE LASTING EFFECTS OF EIAs ON TRADE .............................................................36

1. Introduction ......................................................................................................................36

2. Data and Variables............................................................................................................39

2.1 EIA Variables.............................................................................................................................40

2.2 Trade Variables.........................................................................................................................41

3. Empirical Model Specifications .......................................................................................42

3.1 Trade Creation of EIAs..............................................................................................................42

3.2 The Lasting Effects of Past EIAs................................................................................................43

3.3 The Short-Run and Long-Run Effects of Past EIAs....................................................................43

4. Estimated Results .............................................................................................................44

5. Robustness Checks and Extensions..................................................................................46

5.1 Multilateral Resistanceand Trade Diversion ............................................................................46

5.2 Cutoffs of the Short Run and the Long Run ..............................................................................47

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5.3 Lasting Effects by the Type of Agreements ..............................................................................47

5.4 Lagged Explanatory Variables..................................................................................................48

5.5 Constructing Trade Values at the Product Level ......................................................................48

6. Conclusion........................................................................................................................49

CHAPTER 4............................................................................................................................59

THE EFFECTS OF ASEAN EXPANSION ON..................................................................59

ASEAN’S EXPORTS TO VIETNAM..................................................................................59

1. Introduction ......................................................................................................................59

2. Data and Variables............................................................................................................62

2.1. Data.........................................................................................................................................63

2.2. Variables..................................................................................................................................63

3. Empirical Models and Estimate Results..........................................................................64

4. Robustness check..............................................................................................................74

5. Conclusion........................................................................................................................75

CHAPTER 5............................................................................................................................80

DIVERSION EFFECT OF ECONOMIC INTEGRATION AGREEMENTS......................80

I. Introduction .......................................................................................................................80

2. Data and Method ..............................................................................................................84

3. Estimate results.................................................................................................................90

4. Conclusions ......................................................................................................................99

CHAPTER 6..........................................................................................................................101

SUMMARY AND FUTURE RESEARCHES....................................................................101

REFERENCES .....................................................................................................................104

APPENDIX ...........................................................................................................................120

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LIST OF ABBREVIATES

ASEAN Association of Southeast Asian Nations

APEC Asia-Pacific Economic Cooperation

CGE Computable General Equilibrium

CMs Custom markets

CUs Custom Unions

EC European Community

EEC European Economic Community

EIAs Economic Integration Agreements

EU European Union

EUs Economic Unions

FDI Foreign Direct Investments

FTAs Free trade agreements

GCE General Computable Equilibrium

GATT General Agreement on Tariffs and Trade

GDP Gross domestic products

GSP Generalized Systems of Preferences

HK Hummels and Klenow

HS The Harmonized Commodity Description and Coding System

IPRs Intellectual Property Rights

IVs Instrumental Variables

LDCs Least developed countries

MFN Most favored nation

MLI Member Liberalization Index

MR Multilateral Resistance

NAFTA North American Free Trade Agreements

OLS Ordinary Least Square

OWPTA One-way Preferential Trade Agreements

PTAs Preferential trade agreements

RHS Right hand side

RoOs Rules of Origin

RTAs Regional trade agreements

ROW Rest of the world

STIC Standard International Trade Classification

2SLS Two-Stage Least Squares

TBT Technical barriers to trade

TC Trade creation

TD Trade diversion

TOT Terms of Trade

TRIMs Trade-Related Investment Measures

TRIPs Trade-Related Aspects of Intellectual Property Rights

TWPTAs Two-way Preferential Trade Agreements

UK United Kingdom

UNCTAD United Nations Conference on Trade and Development

VCCI Vietnam Chamber of Commerce and Industry

VN Vietnam

WTO World Trade Organization

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LIST OF FIGURES

Fig.1.1. Levels of cooperation in EIAs 1962 - 2000

Fig.1.2. RTAs in force and inactive, 1948-2018

Fig.1.3. The number of an exporter's EIA partners

Fig.1.4. The number of an importer's EIA partners

Fig.1.5. RTAs currently in force (by year of entry into force), 1948 – 2018

Fig.2.1. Trade creation and trade diversion

Fig.4.1. ASEAN exports to Vietnam

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LIST OF TABLES

Table 1.1 The Frequency and Percent of Types of EIAs…………………….…..…114

Table 1.2 The 52 Provisions in Classification of EIAs in Horn et al. (2010)……...115

Table 1.3 The number of EIA Relationships of per Exporter and Importer…….…..................9

Table 2.1 Definition of Extensive and Intensive Margins by Count Method ………32

Table 3.1 Summary statistics………………………………………….………….…...51

Table 3.2 The Effect of Current EIAs on Trade………….…….……………....……..52

Table 3.3 The Effects of Current and Past EIAs on Trade………….…….……...…...52

Table 3.4 The Long Run and Short Run Lasting Effects of Past EIAs…….…....…....52

Table 3.5 The Gravity Mode Specification……….…………………………………..53

Table 3.6 Different Cutoff Years between the Short Run and the Long Run ………54

Table 3.7 The Lasing Effects of EIAs by the Level of Integration……….……..........55

Table 3.8 Lag EIA Variables……........................................................................…….57

Table 3.9 Trade Data at the Product Level……………………..……..…………..…..58

Table 4.1 The List of FTAs is used in current Chapter…………………….….……118

Table 4.2 Standard International Trade Classification, Rev.3………………..…….118

Table 4.3 The Effect of FTAs on Trade Flows to Vietnam…………………….…......65

Table 4.4 The Export Effect of Bilateral and Multilateral Members to Vietnam…....66

Table 4.5 Total Registered Capitals of FDI by Main Counterparts (Accumulation

Statistics – Mill-USD)……………………………………...………………………..119

Table 4.6 The each FTA member‘s Export to Vietnam ………………..…………….68

Table 4.7 The Effect of ASEAN Expansion on ASEAN Export to Vietnam.…….….70

Table 4.8 The Different ―Export Behaviors‖ to Vietnam between the Less and More

ASEAN Countries Investing in Vietnam……………….………………………...…..73

Table 4.9 The Specialization of FTA-Members Exports to Vietnam on each Sector..77

Table 4.10 The Export Effect of FTAs to Vietnam –Count Method……..……..……78

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Table 4.11 The Effect of ASEAN Expansion on ASEAN Exports to Vietnam - Count

Method……………………………………………………………………………..….79

Table 5.1 Distribution of Spell Lengths……………………….……….……………..86

Table 5.2 Summary Statistics……………………………………….….……………..89

Table 5.3 The Effect of EIA on the Hazard of Products Ceasing…….….….….….…91

Table 5.4 The ―Phase-time‖ Effect of EIA relationships on Duration………..……...93

Table 5.5 The Interaction Effects of Products‘ Characteristics and Outsiders…...…95

Table 5.6 The Hazard of Agricultural and Manufacturing Products Ceasing…....…..96

Table 5.7 The Diversion Effect of Outsiders on the Export Growth………...…...…..99

Table 5.8 Marginal Effect of EIAs on the Hazard Rate of products Ceasing…....….120

Table 5.9 The marginal Effect of the ―phase-time‖ Effect of EIA Relationships on

Duration………………………………………………………………………………121

Table 5.10 The Marginal Effect of the Interaction Effect of Products‘ Characteristics

and Outsiders…………………………………………………………...……………122

Table 5.11 The Marginal Effect of the Hazard of Manufacturing and Agricultural

Products Ceasing……………………..…………………………………….………..123

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CHAPTER 1

OVERVIEWS OF TRADE AGREEMENTS

1. Trade Agreements: History and Trend of Developments

1.1. Definitions of Trade Agreements

The creation of the World Trade Organization (WTO) in 1995 (General

Agreement on Tariffs and Trade, GATT, is the precursor) has brought the

opportunities to promote the global trade liberalization and attracted more and more

countries to participate in. From 112 members in 1995, WTO had 164 members in July

2016. The success of the creation of the WTO insures the powerful legislative and

judicial tools for all members.

Under the Most Favored Nation (MFN) principle, WTO members must grant to

each other non-discriminately. However, the Article XXIV for trade in goods, the

Article V for trade in services, and the Enabling Clause for developing countries

have offered members opportunities to possibly grant across them discriminatively if

they sign preferential trade agreements (PTAs). What is a PTA? Frankel (1997)

defined a PTA as ―a group of two or more custom territories in which the duties or

other restrictive regulations of commerce (with some exceptions) …are eliminated

on substantially all the trade between the constituent territories…‖. Mansfield and

Milner (2012) defined ―PTAs are international agreements that aim to promote

economic integration among member-states by improving and stabilizing the access

that each member has to other participants‘ markets‖. Limão (2016) defined ―a PTA

is an international treaty with restrictive membership and including any articles that

(i) apply only to its members and (ii) aim to secure or increase their respective

market access‖ (p. 4). The nature of PTAs is that the discriminative treaty is applied

restrictively across members to secure the market access for at least one member. A