Preferential Trade Agreements and Trade Liberalization Efforts in the OIC Member States
With Special Emphasis on the TPS-OIC
35
economies of scale as opposed to trade more focussed on comparative advantage. Effectively,
free trade helps to "reveal" the true comparative advantages in each of the signing countries.
An analogous scenario may occur in developing countries with similar export structures. Free
trade may help to specialise production and trade, increasing scales of production and
productivity. However, given the nature of some developing countries export structure (based
on products intensive in the use of natural endowments), it is perhaps less likely that South-
South FTAs generate significant trade creation effects as it is unlikely that they can specialise
even further. On the other hand, if levels of protection tend to be high, South-South FTAs may
lead to trade diversion as preferences would be given to inefficient producers in the partner
country. This is for example the effect (and at some point also the objective) of the Latin-
American Trade Association (ALADI in the Spanish acronym).
North-South FTA, signed between countries with different export structures, may have
important trade creation effects as long as these advantages have not been already exploited
(ie where the level of protection is low before the implementation of the agreement). From the
developing country perspective, an FTA signed with a developed country may have important
trade creation effects as it will allow to import more products from efficient sources given the
higher diversification in the developed country export structure. All this suggests that
differences in the production and export mix have important implications on the effects of an
FTA, and that the distinction between agreements made between or within Developed and
Developing Countries is more associated with degrees of specialisation and diversification of
production rather than the development condition.
One of the main tools that have been used to evaluate the effects of RTAs has been computable
general equilibrium (CGE) analysis. In a CGE model, a set of equations represent the relevant
demand and supply relationships in the economy, including the effects on the labour markets,
the external balance account and the savings-investment balance. A main feature of the CGE,
and in contrast with a partial equilibrium model, is the interaction between different product
and factor markets. The general equilibrium condition (Walrasian equilibrium), guarantees
that every single market clears (i.e. is in equilibrium). This complex setting comes at the price
of a high level of aggregation. Particularly when multi-country models are considered, it
becomes very difficult to find data on many variables such as employment, production,
consumption and the respective parameters (elasticities) at disaggregated levels. In a multi-
country model there exist issues of compatibility of data across countries implying that data
for the desired disaggregation must be found for every single country considered. In
consequence, a main disadvantage of the CGE framework is the high level of aggregation of
products. For example, the GTAP database, widely used for CGE analysis, disaggregates the
economy to a total of 57 sectors which includes services.
CGE models have been criticized by many authors for multiple reasons going from their poor
performance (Kehoe, 2002) and weak econometric foundations (McKitrick and Ross, 1998) to
some conceptual poor foundations (Rodrik, 1997). It has also received some back up as well