Choosing between multiple regional trade agreements: Evidence from Japan’s imports

• DOI: http://doi.org/10.1111/roie.12389
• Author: Kazunobu Hayakawa,Shujiro Urata,Taiyo Yoshimi
• Date: 01 May 2019
• Published date: 01 May 2019

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wileyonlinelibrary.com/journal/roie Rev Int Econ. 2019;27:578–593.

© 2019 John Wiley & Sons Ltd

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INTRODUCTION

Regional trade agreements (RTAs), which reduce or eliminate tariffs on trade between RTA members,

have grown in number. Most RTAs are bilateral, involving only two countries; however, multilateral

RTAs involving more than two countries have increased since the 2000s.1 For instance, the Trans‐

Pacific Partnership (TPP), which consists of 12 Asia‐Pacific countries, concluded negotiations in

October 2015, and the 12 countries signed the TPP Treaty in February 2016.2 When multiple RTAs

exist, exporting firms can choose the RTAs to use for trading with other RTA member countries.

For example, firms in Japan can use either the Japan–Thailand RTA or the Association of Southeast

Asian Nations (ASEAN)–Japan RTA when exporting products to Thailand because Japan’s trade with

Thailand is covered by these two RTAs. RTA selection is likely to increase in the future, with an

increase in mega‐RTAs involving many countries, such as in the case of the TPP.

Received: 7 March 2018

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Revised: 25 November 2018

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Accepted: 7 December 2018

DOI: 10.1111/roie.12389

ORIGINAL ARTICLE

Choosing between multiple regional trade

agreements: Evidence from Japan’s imports

KazunobuHayakawa1

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ShujiroUrata2,3

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TaiyoYoshimi4

1Development Studies Center,Institute of

Developing Economies, Chiba‐shi, Japan

2Graduate School of Asia‐Pacific

Studies,Waseda University, Shinjuku‐ku,

Japan

3Research Institute of Economy, Trade and

Industry, Chiyoda‐ku, Japan

4Faculty of Economics,Chuo University,

Hachioji‐shi, Japan

Correspondence

Kazunobu Hayakawa, Development Studies

Center, Institute of Developing Economies,

Wakaba 3‐2‐2, Mihama‐ku, Chiba‐shi,

Chiba, 261‐8545, Japan.

Email: kazunobu_hayakawa@ide-gsm.org

Funding information

This work was supported by JSPS

KAKENHI, Grant Numbers JP15K13021,

JP16H03638, and JP17H02530

Abstract

Mega‐regional trade agreements (RTAs) are likely to

overlap with other RTAs. When such overlaps occur,

firms must choose the tariff rates from multiple RTAs. By

employing data on Japan’s imports by tariff schemes, we

investigate how RTA tariff rates affect firms’ decisions on

tariff schemes when multiple RTAs exist. Our finding is

that RTA utilization rates are higher when tariff rates for

that RTA are lower (own effect) and tariff rates for alter-

native RTAs are higher (cross effect). We also found that

the absolute magnitudes of own and cross effects are larger

in bilateral and multilateral RTAs, respectively.

JEL CLASSIFICATION

F15, F53

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HAYAKAWA et Al.

Against this backdrop, we examine choices of tariff scheme by exporting firms when multiple

RTAs overlap. In particular, we explore how RTA tariff rates affect exporting firms’ RTA choices.

In our analysis, we denote the effects of an RTA’s tariff rates on a firm’s choice on that RTA as an

“own effect” and those of other RTAs’ tariff rates as a “cross effect.” The concepts of these two types

of effects are summarized in Figure 1. Defining the utilization rate of an RTA scheme as the share of

imports under the RTA scheme out of total imports, we expect that the utilization of an RTA should

increase when its RTA tariff rate decreases. This increase should occur because (i) the RTA’s existing

users increase their exports under this RTA and (ii) users of other tariff schemes switch to this RTA.

Regarding the cross effect, the utilization of an RTA decreases when other RTAs’ tariff rates decline

because users of the former RTA switch to the latter.3

To empirically investigate these effects, we employ data on Japan’s economic partnership agree-

ments (EPAs).4 In May 2015, the Ministry of Finance of the Japanese government began to release

data on Japan’s imports under each RTA. Monthly data at a Japanese tariff‐line level (a nine‐digit har-

monized classification system (HS)) are available beginning January 2012. Examining those effects

for Japan is appropriate because Japan has RTAs not only with individual ASEAN member countries

(i.e., bilateral RTAs) but also with the ASEAN member countries as a group (i.e., a multilateral RTA).

The latter is called AJCEP (the ASEAN–Japan Comprehensive Economic Partnership). When firms

from ASEAN countries export to Japan, they choose the tariff rates from the MFN, bilateral RTA, or

AJCEP tariff rates. Thus, Japan’s RTAs with these ASEAN countries are pertinent for examining the

choice of tariff schemes when multiple RTAs are available.

What are the factors that affect exporting firms’ choice of RTAs between bilateral RTAs and

AJCEP?5 One is obviously the RTA tariff rates, in addition to MFN rates. Firms choose to use an

RTA with lower tariff rates when compared with other RTAs. Another factor is the rules of origin

(ROOs). Firms tend to use an RTA with nonrestrictive ROOs. On the choice between bilateral RTAs

and AJCEP, a multilateral RTA, the rules on “cumulation” affect the decision of exporting firms from

ASEAN. The cumulation provision of ROOs enables RTA users to accumulate the value of inter-

mediates from RTA member countries when determining the origin of the products to be exported.

Therefore, in RTAs involving a larger number of countries, exporters adjust procurement sources less

stringently to comply with ROOs. Exporters can enjoy regional cumulation (i.e., cumulation among

all AJCEP member countries) when using AJCEP, whereas bilateral RTAs allow ASEAN exporters

to enjoy cumulation only with Japan.6 AJCEP offers a greater chance of cumulation than do bilateral

FIGURE 1 Own and cross effects [Colour figure can be viewed at wileyonlinelibrary.com]