Preferential Trade Agreements and Trade Liberalization Efforts in the OIC Member States
With Special Emphasis on the TPS-OIC
36
(Hertel et al, 2007). However, they are typically popular among policy makers because they
provide actual numbers as to by how much trade and GDP might change. In this context,
(Cernat, 2003) addresses the FATPS (Framework Agreement on the Trade Preferential
System) in the context of the OIC. Using the GTAP v5 database (base year 1997), the author
finds that exports of the OIC countries will grow between 6.15% in the case of Bangladesh to -
0.01% in the case of Mozambique. In general, the author finds that the trade creation effects
(the expansion of exports within the agreement) would be of the order of USD 19 billion and
the trade diversion effects would be of around USD 6 billion. This suggests that the OIC
countries would be better off by USD 13 billion (1997 prices) a result of the agreement.
More recently the Centre for Policy Research (2013) studies the effect of the Trans-Atlantic
Trade and Investment Partnership (TTIP) using a projected 2027 GTAP v8 database. They
found that the EU’s and US’s GDP would expand by 0.48% and 0.39%, respectively and that
around half of these changes are attributable to the elimination of non-tariff barriers (although
tariff reductions still explains nearly a quarter of the effect on the GDP, mainly explained by the
tariffs on agricultural products in both countries). In terms of trade, the most ambitious
scenario considered suggest that total EU and US imports would increase by 5.11% and 4.7%
respectively. Although, big economies and trade partners, the terms of trade changes expected
are modest. This suggests that the trade diversion in place would be compensated by the trade
creation effects. It is interesting to see that in this study, the effect of the deep integration
elements (procurement and direct and indirect spillovers) account for nearly three quarters of
the total effect. Effectively, the removal of the NTBs associated with procurement and
competition policies can be more important than the removal of the tariffs; although, in the
particular case of the EU and US the tariffs are typically low already, increasing the relative
importance of the deep integration elements.
Mixed results are expected in a proposed FTA between Bangladesh, Indonesia and Malaysia
(Acar, Alpay, Bakimli and Koc, 2009). The authors found, using the GTAP v6 database that GDP
would expand by 0.01% in Indonesia and would contract by 0.16% and 0.02% in Bangladesh
and Malaysia, respectively. Total exports would grow by 5.5% in Bangladesh and by 0.9% in
Indonesia and 0.4% in Malaysia. This suggests that the trade diversion against Indonesia and
Malaysia might be particularly strong.
However, the CGE framework is not the only tool available to analyse the effect of FTAs on
trade flows. Gravity models have been used to capture and infer about the likely effects of
different type of trade policies, including regional trade agreements. In a gravity model, the
underlying factors that explain trade flows between countries are captured using econometric
estimation. Once controlled the "structural" factors that can affect trade such as distance,
common borders, common language; it should be possible to capture the effect of economic
variables (such as the aggregated demand) and trade policy related factors such as tariffs
and/or the existence of trade agreements. As a consequence, it should be possible to estimate
the effect on the bilateral trade flows of the elimination of a tariff applied bilaterally. In a