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RTA's and Agricultural Trade RTA’s and Agricultural Trade: A Retrospective Assessment Thomas L. Vollrath Abstract This article examines the impact of six regional trade areas on agricultural trade. Five are of recent origin: AFTA, APEC, CER, CUSTA, and MERCOSUR. The sixth, the EU, has a longer legacy. All of these areas, with the exception of APEC, are formalized agreements. Except for AFTA, all have imported increasingly more agricultural goods from member states than from the rest of the world since the mid-1980’s. This raises a concern about whether integration has lowered world economic welfare through agricultural trade diversion. Empirical evidence shows that, with the notable exception of the EU, none of the regional trade agreements (RTA’s) diverted agricultural trade at the sector level. The analysis also show that the CER, CUSTA, and MERCOSUR created agricultural trade. the risk of diverting trade away from nonmember coun- Introduction tries. They can also facilitate agreement on contentious issues that confound the multilateral trade negotiations of gricultural markets in many countries have gradu- the World Trade Organization, such as the harmonization ally opened to world trade since the mid-1980’s. A of technical standards and the formation of technical Countries have adopted domestic market-oriented working groups that address pesticide regulations, reforms, honored timetables for reducing tariffs under phytosanitary restrictions, and product quality stan- the Uruguay Round, and joined regional trade areas dards—all of which may be disguised nontariff barriers. and/or agreements. Researchers have described the progress toward free trade in agricultural products as Within the past decade, many prominent economists being glacial (Barichello et al., 1991): “The situation (Bergsten, Dornbusch, Krugman, Summers) have changes at a speed so slow that the observer may think become advocates of regional blocs as a practical means there is no movement at all. But, as with a glacier, to achieve freer trade (Economist, various years). Many there is an underlying flow so inexorable that it is hard policymakers believe that RTA’s make markets more to think of the trend being soon reversed.” efficient—neoclassical theory says that the reduction of international trade barriers shifts world production Regional trade agreements (RTA’s) can advance the toward efficient producers and enables consumers to cause of trade liberalization. They can free up markets purchase goods at lower prices. But the growth in by reducing tariffs among member countries, albeit at Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture/AER-771 ✵ 27 RTA’s and Agricultural Trade: A Retrospective Assessment intraregional trade and the recent proliferation of RTA’s The total value of intraregional imports in comparison concern others who worry that RTA’s may diminish with member imports from all suppliers shows how welfare gains from multilateral trade liberalization deep integration is. Increases in intraregional trade (Economist, Oct.18, 1997; and Panagariya, 1996). shares depict increased reliance upon regional sources of supply. Declining shares indicate decreased depend- A welfare problem may exist because RTA’s extend ence. Figure 2 shows how intraregional import shares preferences to (and, therefore, discriminate in favor of) of the specific regional trade areas changed between partner countries. Whether any individual RTA 1970 and 1995.2 advances the well-being of society—that is, its trade- creating effects dominate its trade-diverting effects—is The European Union’s (EU) precursor, the European an empirical issue. This article addresses this question Economic Community (EEC), established the by examining agricultural trade of six regional trade Common Agricultural Policy (CAP) in the early areas, namely AFTA, APEC, CER, CUSTA, EU, and 1960’s to manage the agricultural market. The aim was MERCOSUR.1 All of these areas, except APEC, to improve farmer income, stabilize the market, and possess formal agreements. guarantee regular supplies for consumers. The CAP promoted free internal trade by granting preferences to member-country suppliers, as demonstrated by the World Agricultural Trade Is intra-EU share of agricultural imports rising from 28 Becoming More Regionalized percent in 1962 to 70 percent in the 1990’s. Figure 1 puts regional agricultural imports into a Australia and New Zealand established the Closer global perspective by showing trade shares of the 34 Economic Relations (CER) in 1983. Within 5 years, countries belonging to 6 regional trade areas. The the agricultural import shares that Australia and New importance of member countries in global imports Zealand supplied each other increased 10 percentage does not appear to have changed much in the last 25 points to 27 percent, before reaching what appears to years. Collectively, these countries accounted for 62 be a new structural equilibrium (23-25 percent). percent of global trade in agricultural goods in 1995, the same percentage as in 1970 and the 1970-95 The Canada-U.S. Free Trade Agreement (CUSTA) was average. By contrast, the share of their intraregional formally launched in 1989. As with the CER, the intra- trade to global trade rose more than 10 percentage CUSTA share of Canadian and U.S. trade increased for points between 1970 and 1995, increasing to 40.3 several years before leveling off. The sharp rise in percent by 1995. This suggests the rising importance intraregional trade shares immediately following the of regionalization in world agricultural trade. birth of both CER and CUSTA suggests that integra- tion induced a change in the sourcing of agricultural imports—one that favored member-country suppliers. 1 The 18 original APEC countries are Australia, Brunei, Canada, In 1988, MERCOSUR established an economic union Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, Philippines, Singapore, South between Argentina and Brazil after years of unilateral Korea, Taiwan, Thailand, and the United States. Russia, Peru and tariff reductions in both countries. This early liberaliza- Viet Nam joined in 1998. The AFTA countries are Brunei, tion altered the agricultural price structure within both Indonesia, Malaysia, Philippines, Singapore, and Thailand. The countries, inducing changes in the pattern of their agri- CER countries are Australia and New Zealand. The CUSTA coun- tries are Canada and the United States. The EU countries are Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, and the United Kingdom. The MERCOSUR countries are Argentina, Brazil, 2MERCOSUR is not included in figure 2 only because it would Paraguay, and Uruguay. render the chart hard to read. 28 ✵ Regional Trade Agreements and U.S. Agriculture/AER-771 Economic Research Service/USDA RTA’s and Agricultural Trade: A Retrospective Assessment Figure 1 Figure 2 Growing importance of regionalization in global Share of agricultural imports provided by agricultural trade* member countries Percent Percent 70 80 APEC 70 60 60 34-country share of global trade 50 EU 50 CUSTA 40 AFTA 40 30 20 30 Trade within the 6 RTA's as share of global trade 10 CER 20 0 1970 72 74 76 78 80 82 84 86 88 90 92 94 1970 72 74 76 78 80 82 84 86 88 90 92 94 *34 countries belonging to APEC, AFTA, CER,CUSTA, EU & MERCOSUR. Arrows identify years that regional trade areas were created. cultural imports. From 1983 to 1990, the share of intra- Korea, Taiwan, Singapore, Hong Kong, and China. MERCOSUR trade doubled, rising to 60 percent. After The mix of supplying and purchasing countries is declining sharply between 1990 and 1991, this share favorable to growth in intraregional trade. moved upward again with the expansion of MERCOSUR to include Paraguay and Uruguay in 1991. Trade shares provide some insight into the changing structure of agricultural trade. But, an economic Members of the Association of Southeast Asian framework is needed before welfare implications can Nations (ASEAN), originally formed for political and be drawn about the formation of these regional trade military reasons in 1967, formally launched the areas. The concepts of trade creation and trade diver- ASEAN Free Trade Area (AFTA) in 1991. Little sion are central in determining whether an individual incentive exists for AFTA countries to import many regional trade area or RTA advances freer world trade agricultural goods from each other, given similarity in or diminishes world welfare. their resource endowments and production patterns. Indeed, intra-AFTA trade shares show that member countries have become less dependent upon each other A Search for Trade Creation to supply domestic agricultural import needs within and/or Trade Diversion the last 15 years (fig. 2). According to Viner (1950), trade creation occurs when The Asia-Pacific Economic Cooperation (APEC) imports are substituted for domestic products as a Forum, unlike the other regional trade agreements, is a result of tariff reductions that reduce the price of prospective RTA. APEC has yet to sanction any member imports below that of home-produced goods. concrete trade disciplines. The steady growth in intra- Trade diversion occurs with a shift in imports from an APEC trade, as with MERCOSUR, predates formal efficient nonmember exporter to a more expensive integration. APEC’s membership includes both major producer from the country’s RTA partners due to pref- agricultural exporters, such as the United States, erential tariff treatment. Trade diversion, in Viner’s Canada, and Australia, as well as large and/or rapidly view, does not necessarily mean a decline in trade, but growing agricultural importers like Japan, South rather a shift in trade away from least-cost suppliers. Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture/AER-771 ✵ 29 RTA’s and Agricultural Trade: A Retrospective Assessment Meade (1955) extended the concepts of trade creation farther from the origin.3 Conversely, an RTA that and trade diversion to include trade expansion, which purchases goods from high-priced suppliers induces occurs whenever demand is highly price-responsive.
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