How do mutual recognition agreements influence trade?

• Author: Yong Joon Jang
• DOI: http://doi.org/10.1111/rode.12400
• Date: 01 August 2018
• Published date: 01 August 2018

REGULAR ARTICLE

How do mutual recognition agreements influence

trade?

Yong Joon Jang

Kyung Hee University, Korea

Correspondence

Department of International Business and

Trade, Kyung Hee University, 26

Kyungheedae-ro, Hoegi-dong,

Dongdaemun-gu, Seoul, South Korea.

Email: yjjang@khu.ac.kr

Abstract

This paper empirically tests how the magnitude of trade

promotion effects of mutual recognition agreements

(MRAs) varies with various mediums. The main rationale

for the research is that because an MRA eliminates tech-

nical barriers to trade (TBT), the trade promotion effects

of MRAs are inversely much stronger if TBT originally

restricted trade before their entry into force. Using data

on MRAs and international trade in 34 countries and 22

manufacturing sectors covering 1995 to 2009, the paper

empirically shows that the trade promotion effects of

MRAs can be much stronger, depending on the type of

contract, time period after the entry into force, compo-

nents of exports, and country and industry characteristics

such as technology level and global competitiveness. The

results will provide insight for policy makers and stake-

holders who cooperate with foreign countries in various

regulations, especially in developing countries that have

low levels of technology, competitiveness, and regulatory

governance capacity.

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INTRODUCTION

New trade restrictions in the category of nontariff measures (NTMs) have risen since 2008, given

the continuing uncertainties in the global economy (WTO, 2014). Unlike tariffs, NTMs do not

have a standard measurement method (Deardorff & Stern, 1998) and thus are difficult to identify.

In this respect, NTMs have become more significant in trade facilitation. Meanwhile, Santana and

Jackson (2012) report the top five types of NTMs in the nonagricultural market access (NAMA)

negotiation in the WTO. Table 1 shows that standards and technical regulations, which define

specific characteristics and test methods, ranked highest among NTMs in 2003. Unlike other types

DOI: 10.1111/rode.12400

Rev Dev Econ. 2018;22:e95–e114. wileyonlinelibrary.com/journal/rode ©2018 John Wiley & Sons Ltd

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of NTMs, a country can establish its own legitimacy through national standards, technical regula-

tions, and certification assessment procedures (CAPs) to protect human health, safety, and the envi-

ronment because the contents depend on each geographic, natural, and socio-cultural environment.

In this respect, the term technical barriers to trade (TBT) refers to standards, technical regulations,

and CAPs that should be mandatory for products and can create obstacles to international trade .

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The annual number of WTO TBT notifications has risen significantly in the 2010s,

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which

implies that WTO members have begun not only to express more concern about improving human

health, safety, and environmental protections, but also to exploit TBTs to discriminate against

imports so as to protect domestic industries. TBTs can be a guise for protectionism because of

their own legitimacy, uncertainty, and unquantifiable level. Akhtar and Jones (2014) mention that

regulatory issues are among the most difficult to address in trade negotiation.

In this respect, countries have started to promote trade liberalization in TBT issues and have

entered into mutual recognition agreements (MRAs). An MRA is the agreement in which two or

more countries agree to recognize one another’s technical regulations and certification procedures

(OECD, 2013).

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A country considers others’regulations and procedures to be equivalent if they

meet the same regulatory objectives under MRAs. An MRA is the most common type of regula-

tory cooperation among countries. Accordingly, one of the important research topics related to

TBT issues is the analysis of how effectively MRAs promote exports. While studies that analyz e

the trade effects of TBTs emphasize the importance of member countries and industry characteris-

tics, the timing effects, types of TBTs, and components of international trade, those on MRAs have

ignored the role of these various characteristics in their empirical analyses by focusing on just one

or two industries in several developed countries. Because an MRA reduces or eliminates TBTs, it

will be important to consider various characteristics when analyzing its trade effects.

To fill this gap, this paper contributes to the growing body of literature on TBTs and MRAs by

investigating the role of various characteristics in the mechanism through which MRAs can affect

international trade. In fact, TBTs have both trade promotion and trade restriction effect s, depending

on the relative volume in the increase in adaptation costs and decrease in transaction costs.

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Simi-

larly, MRAs will affect exports differently depending on the original relative volume of the change

in adaptation costs from TBTs. Based on this argument, I build up eight hypotheses for the mecha-

nism through which MRAs can affect international trade. To test the hypotheses, I construct a

panel dataset of MRAs from the WTO TBT Information Management System (IMS) and attempt

to empirically analyze the impact of MRAs on exports across 22 industries in 34 countries from

TABLE 1 Top-five categories of NTM notifications in GATT or WTO–NAMA negotiation

GATT 1968 GATT 1973 GATT 1989 WTO–NAMA 2003

Quantitative restrictions

(20.7%)

Quantitative restrictions

(15.6%)

Quantitative restrictions

(13.9%)

Standards/technical regulations

(30%)

Surcharges, port taxes,

statistical taxes (13.5%)

Border tax adjustments

(11.2%)

Surcharges, port taxes,

statistical taxes (10.5%)

Quantitative restrictions (12.8%)

Discriminatory film taxes,

use taxes, etc. (11.1%)

Surcharges, port taxes,

statistical taxes (10.5%)

Border tax adjustments

(8.6%)

Other specific limitations

(11.6%)

Standards/technical

regulations (6.2%)

Standards/technical

regulations (9.2%)

Standards/technical

regulations (8.2%)

Customs formalities (9.1%)

Customs valuation (5.5%) Government aids (6.6%) Government aids (7.3%) Rules of origin (7.4%)

Source. Santana and Jackson (2012, p. 469).

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JANG