Preferential Trade Agreements and Trade Liberalization Efforts in the OIC Member States
With Special Emphasis on the TPS-OIC
34
statistical methodologies employed in the estimation of these models require particular
assumptions that need to be meet in order for the estimates be valid.
It is also worth pointing out that regional trade agreements have become more complex. They
increasingly involve commitments for the implementation of policies that go beyond the
standard elimination of bilateral tariffs and go deep into how institutions and legislation al-
lows or restrict trade. Over time there is growing awareness of the importance of the role that
legislation and government policies have, behind borders, in discriminating between domestic
and foreign products. For both technical reasons and also due to lack of data inclusion of such
factors in empirical work is not straightforward.
The objective of the remaining part of this section is two-fold. On one hand, it will try to show
how different ex-ante and ex-post techniques have been recently employed to evaluate the
effects of different trade agreements, particularly with respect to the shallow integration
aspects of free trade agreements. On the other hand, it will try to identify the main features and
elements of recent agreements from the institutional and legal point of view, in particular with
respect to the elements associated with deep integration. As these provisions are generally non
standard, the analysis of their effects on trade is particularly complicated and depends on the
shape that these take. Therefore, we will evaluate different agreements with the objective of
identifying and characterising them.
Empirical Analysis of RTAs
Given their focus on measurable variables (trade flows and tariffs), there are many studies that
analyse the trade and welfare effects of FTAs, particularly with respect to the shallow
integration aspects. The mechanism is easy to understand: As tariff are reduced, domestic
prices go down accordingly and demand will increase. An elasticity of demand will determine
the degree to which price changes are translated into quantity changes. This is the simplest
mechanism use to quantify the effect of regional trade agreements. On this basis an analysis of
the possible diversion of trade between origins, an analysis of the welfare implications of the
reform and how these effects are transmitted to rest of the economy can also be undertaken.
But the main point to make is that shallow integration aspects of the free trade agreements
have been the easiest to quantify and consequently, they are more abundant in the literature.
It is important to highlight that it is expected that the effects of an FTA (in terms of shallow
integration) are likely to be affected by the nature of the participants. Agreements between
developed countries (North-North FTAs) will have different effects to agreements made
between developing countries (South-South FTAs) or between developed and developing
countries (North-South FTAs). In essence, as Developed Countries present more diversified
export structures, less reliant on the trade of mineral and agricultural products; North-North
FTAs tend to have more important trade creation effects as they help to increase the
specialisation, increase scale of production and generate important productivity gains.
Essentially they can allow for more trade in differentiated product with firms producing under