The Developing Economies

The AFTA-ANZCERTA linkage was established in September 1995 during the informal consultations between the ASEAN Economic Ministers and Ministers from Australia and New Zealand. The aim of the agreement is to facilitate trade and investment flows between the two regions. The Ministers reaffirmed their commitment to the multilateral trading system and the need for both regional trading arrangements to reinforce the process of liberalisation within the WTO framework. The Ministers recognised the significant potential benefits of establishing linkage between the two regions to benefit their economies through comparative advantages in trade and investment.

The objectives of the AFTA-ANZCERTA agreement are: firstly, to improve the efficiency and competitiveness of firms and industries in member countries in order to enhance the welfares of the members’ people; secondly, to liberalise and facilitate trade in goods and services; thirdly, to establish a conducive business environment for investment and finally, to formalise simple and transparent rules.

The AFTA and ANZCERTA are the only two regional trading arrangements in the East Asia/West Pacific regions. Both the AFTA and ANZCERTA are outward-looking regional trading arrangements which have lowered external trade barriers vis-à-vis outside countries during the period of regional trade liberalisation. Both the AFTA and ANZCERTA are formal regional trading arrangements, which have been notified to GATT.

They are both free trade areas in the GATT terminology. This means that they have agreed to remove border barriers to trade among the members of each agreement on trade among them. The member countries of the AFTA and ANZCERTA have, however, retained their own tariffs and other barriers to international trade with countries that are not members of the respective agreements. In addition they have agreed to certain free trading arrangements between the two groups.

There have been three general reviews on the ANZCERTA agreement since its formation in 1983: firstly, the acceleration of the achievement of free trade in goods due to the ANZCERTA rules, therefore all tariffs and non-tariff barriers to trade were eradicated; secondly, the inclusion of trade in services in the ANZCERTA 1983 Agreement; and finally, enhancement of the ANZCERTA agreement by synchronising a range of non-tariff barriers to a free trade of goods and services, including quarantine and customs aspects, standards and harmonisation and business law.

As a form of regional trading arrangement, ANZCERTA is classified as an advanced trading arrangement, second to the European Union in terms of the extent of liberalisation of trade across borders. In addition, in a few areas of trade integration, ANZCERTA is more highly developed than the European Union in terms of the agreements in eradicating subsidies on intra-regional trade and competition law.

The Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA) was signed in 1982 to set up a free trade area covering the two neighbouring countries, Australia and New Zealand. The ANZCERTA came into operation in 1983 replacing the previous trade agreement established via the New Zealand-Australia Free Trade Agreement (NAFTA) which was in operation since 1965 and provided free trade in some specific products such as forest products and selected manufactured products.

The general agreement of the ANZCERTA was that all products originating in either country could be traded between Australia and New Zealand and were free from any tariffs or non-tariff barriers. By contrast, the 1965 trade agreement did not cover the liberalisation of most non-tariff barriers, which were particularly significant in both countries. The formation of ANZCERTA, which is consistent with World Trade Organisation (WTO) free trade principles, encompasses all merchandise trade and also services, and the elimination of tariffs and non-tariff restrictions to trade. Through the ANZCERTA both countries have tried to further increase the closeness of their relations in international trade.

The objectives of the ANZCERTA agreement are: to strengthen the broader relationship between Australia and New Zealand; to develop closer economic relations between Australia and New Zealand through a mutually beneficial expansion of free trade between the two countries; to eliminate barriers to trade between Australia and New Zealand in a gradual and progressive manner under an agreed timetable and with a minimum of disruption; and to develop trade between Australia and New Zealand under conditions of fair competition.

Recent progress in international trade theory has increased the knowledge of the causes and direction of international trade. Until now, the factor-endowment model still continued to play an outstanding role in international trade. Even it is now broadly recognised that differences in relative factor endowments are not the only reason for trade flows in either goods or services. The assumption of absolute endowment differences has little function in determining trade volumes and there is a noticeable inconsistency of actual trade volumes with competitive trade theory.

Many recent studies of international trade analysis have given more attention to the concepts of imperfect competition and increasing returns to scale in explaining the direction of and gains from trade. Increasing returns to scale can obtain cost savings through increased specialization. This gain can occur even in the absence of any natural pattern of comparative advantage and or even if two trading countries are definitely identical in all aspects.

Krugman (1992) added that the source of trade between two endowed similarly countries could happen because of the existence of economics of scale in imperfectly competitive economies that will enable trading countries to get gains from trade even if the economies have identical tastes, endowment factors and technology. Such as evidence that there is an extensive trade among the North (developed) countries that could be have relatively similar endowment factors. This kind of trade still dominates worldwide international trade flows.

Trade patterns, stated in some textbooks as the structure of trade, can be defined broadly as the explanation of which goods are exported and which are imported by each trading country. It relates to what are the fundamental laws or policies that govern the international allocation of resources and the flow of trade. The patterns of trade, in terms of the Heckscher-Ohlin (H-O) models depend on the relative abundance of specific factors. The H-O theorem proposed that a country exports products that use its relatively abundant factors intensively.

The H-O model builds on neoclassical supply-side theories. It depends on three assumptions about production characteristics in each country: firstly, the production functions for good X and Y exhibit constant returns to scale. Specifically, we always take good X to be labour intensive and good Y to be capital intensive. Secondly, there are fixed total supplies of both labour and capital, which are homogenous and perfectly mobile between industries within each country. Thirdly, there are no market distortions such as imperfect competition that would influence production or consumption decisions. This last assumption guarantees that the factors of production are fully employed.

From these starting points, we move to the condition where the model allows trade. Then, two additional assumptions are required. These are that preferences in both countries are taken to be identical and homogenous and the defining characteristic of the H-O model which is that countries are assumed to differ in their relative factor endowments.