Abstract

JEL classifications

Keywords

۱٫ Introduction

۲٫ Background

۲٫۱٫ Data

۲٫۲٫ Trends of wine consumption and imports

۲٫۳٫ FTAs’ preferential tariff rates on wines

۳٫ Empirical analyses

۳٫۱٫ Baseline specification and estimation technique

۳٫۲٫ Alternative specification

۴٫ Estimation results

۵٫ Conclusion

References

Abstract

East Asia has experienced an unprecedented expansion in its wine market over the past two decades. This paper examines the extent to which import tariff reductions through bilateral free trade agreements (FTAs) have contributed to an increase in wine imports to Japan, China, and South Korea. Our empirical method involves estimating an augmented version of the gravity equation by the Poisson pseudo-maximum likelihood (PPML) technique. Analyzing a panel dataset for 1990–۲۰۱۶ covering 27 exporters, we find that overall a 1 percentage point reduction in tariff among FTA member countries is associated with an increase in the wine import volumes by 0.042%, which is seven times higher than a similar reduction in tariff on an MFN basis. The strongest trade creation effects are founded for bottle wine. The results are robust to various specifications.

۱٫ Introduction

The deadlock-state of the multilateral trade negotiation under the World Trade Organization (WTO) has made the establishment of bilateral, reginal, and cross-regional free trade agreements (FTAs) a central trade policy for many countries during the past two decades. The number of FTAs in operation has grown for 22 in 1990 to 305 by 2020. Despite such growth, the question of whether or not FTAs actually create trade continues to remain a subject of controversy, as preferential tariff schemes under FTAs are not necessarily utilized given the extensive cost and bureaucracy associated with compliance with rules of origin, and the narrow tariff margins of the counterpart most favored nation (MFN) tariff rates (UNCTAD, 2018). Indeed, recent empirical trade literature concludes that trade creation brought about by FTAs is weak or even nil in most cases(Grant, 2013; Zhou, 2017).

This paper examines trade creation effects of FTAs in East Asia, with emphasis on their impact upon wine trade. Our focus on wine is motivated by the fact that relatively high MFN tariffs have been imposed on imported wine products in East Asian nations. For example, as of 2014, the simple average MFN tariff rates for all products were 5 % for Japan, 10 % for China, and 13 % for South Korea, whereas the MFN tariff rates for bottled wine were 14–۱۵ % among these three countries (Table 2).1 In addition, East Asian countries have witnessed a dramatic increase in domestic demand for wine over the past three decades, transforming global wine markets (Mariani, Napoletano, Pomarici, & Vecchio, 2014). Given a large proportion of this increased demand has been absorbed by foreign producers, wine trade in East Asia appears to be well suited for evaluating the trade creation effects of FTAs. In addition, wine tariffs in Japan, China, and South Korea have changed significantly since the WTO Doha Round of multilateral trade negotiations in 2004.

This paper empirically investigates the extent to which preferential tariff reduction under FTAs increased wine imports to Japan, China, and Sourth Korea. Our empirical method involves estimating an augmented version of gravity equation by the Poisson pseudo-maximum likelihood (PPML) technique, with a panel dataset for 1990–۲۰۱۶ covering the 3 importers (Japan, China, and South Korea) and 27 exporters. Our baseline specifications include the gross domestic products (GDP) of importers and exporters, distance between importers and exporters, wine consumption per capita, wine production volume per vine, real exchange rate, MFN tariff rates, non-tariff measures, importer-fixed effects, exporter-fixed effects, and year-fixed effects. We estimate our model by bottle, bulk, and sparkling wines separately, as well as their pooled samples.