SESSION III: THE ECONOMICS OF PTAs: II (non-traditional effects). JAIME DE MELO. This version, March 2004. OUTLINE: SESSION III. Evaluating the welfare effects of RTAs (ex-ante) using simulation models. Non-traditional effects of RTAs (anything but TD and TC).
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THE ECONOMICS OF PTAs: II
JAIME DE MELO
This version, March 2004
OUTLINE: SESSION III
Evaluating the welfare effects of RTAs (ex-ante) using simulation models
Non-traditional effects of RTAs (anything but TD and TC)
Location & agglomeration effects, and growth
Regionalism and Services
Annex: welfare effects of trade policy under imperfect competition
Evaluating the welfare effects of RTAs (ex-ante)
In simulation models W (=welfare effect of trade policy change)
(see mechanisms and channels in annex)
Two examples of simulation model results from SW chp. 2 (but see box 2.1 on difficulties with simulation models)
Example 1. Mercosur: Flores (97) estimates (%of GDP in parenthesis- Argentina (1.8), Uruguay (2.1), Brazil (1.3)Two examples from SW chp. 2 . Below decomposition of gains for imperfectly competitive sectors
..but these results while easy to trace if model is well-formulated (=not a black box) lack robustness to most parameter and closure rule changes
Welfare estimates from ex-ante simulation exercices (end)
Example 2. Effect of UEMOA implementation for Senegal (Dissou 2002)
Here CU has positive effect but FTA only is negative (TD), while CET which is lower than Senegal’s tariff is positive. . Note that ULT is greatest gain here! (and likely to be always the case for small countries)
NON TRADITIONAL EFFECTS OF RIAs
1. Domino effect: join RIAs to avoid “being left in the cold”. Has played an important role in the case of the Europe Agreements between the EU and Central and East European Countries (See the analyis in PTA2_ECON1).
NAFTA put into force
3. Credibility and signaling: use of an RIA to send a signal to private and public agents that there will be no recidivism (=helps to lock in reforms as in the case of WTO accession).
Would this effect be strong with EPAs?
This may uncertainty and investment, in particular foreign direct investment, as in the case of Mexico:
4Growth; Location & agglomeration effects
Convergence of real income per capita?
European integration was accompanied by income convergence (see below). So could South-South RIAs lead to the same outcome?
Unfortunately no, just the opposite: RIAs among poor countries probably leads to income divergence. Why?
Following provides one illustration of why this might be the case (but see discussion in SW chp. 5 )
Assume that countries can be ranked by comparative advantage in agricultural (vs. manufacturing) goods, which mimics the ordering by decreasing level of income (and capital) per capita:
world average capital/labor ratio
Growth effects and divergence in S-S RIAs
N-N RIA: Hungary steps in between France and ROW for agricultural products = France (the richest) suffers trade diversion income convergence
S-S RIA: Armenia steps in between Azerbaïdjan and ROW for manufactured products = Azerbaïdjan (the poorest) suffers trade diversion income divergence
MEASURING CONVERGENCE IN INCOME PER CAPITA
AVERAGE INITIAL y
RELATIVE TO RICHEST
SAMPLE AVERAGE GROWTH (2.1%)
OBSERVATIONS CONTRIBUTE TO:DIVERGENCE: (I & III)
CONVERGENCE: (II & IV)
INCOME PER CAPITA IN 48 US STATES: 1929-60
DISPERSION IN INCOME PER CAPITA IN 48 US STATES
DISPERSION IN INCOME PER CAPITA IN THE EC
Convergence during reduction in trade barriers
Agglomeration effects (II)
Agglomeration is the result of the balance between Marshallian centripetal and centrifugal effects
Agglomeration effects (II)
Any difference among modes of trade liberalization (I.e. between UTL, MTL, and PTA)?
See SW box 5.1 summary of simulations where N-S better than S-S for the South (gets lower intermediates from North + market access).
Goes beyond what is negotiated at the WTO W..but it takes a very, very long time!
Deep integration (II)
Example of EC integration and difficulty to get partial movement of people (mode IV) in the next agenda for multilateral negotiations, suggest modest hopes for ‘deep integration’ in N-S and S-S agreement
Q , C
Deep integration (III)
DWL= dead weight (or efficiency) loss
… but failure of OECD to get the Multilateral Agreement on Investment (MAI) signed (which would have given binding dispute settlement procedures suggest that perhaps in some cases the regional route might work…but will take time.
Regionalism and Services
The GATS Article V
1. This Agreement shall not prevent any of its Members from being a party to or entering into an agreement liberalizing trade in services between or among the parties to such an agreement, provided that such an agreement:
(a) has substantial sectoral coverage  and
(b) provides for the absence or elimination of substantially all discrimination, in the sense of Article XVII, between or among the parties, in the sectors covered under sub-paragraph (a),…
Quite similar to article XXIV with exceptions for developing countries
Regionalism and Services (from Matoo-Fink)
Regionalism and Services (II)
….but there are potential exceptions to these arguments (sunk costs can lead to ‘history matters’ type of situation so sequencing may be important (regional before or after multilateral; etc…)
welfare effects of trade policy under imperfect competition
Following slide decomposes the effects of a an increase in protection on welfare in an industry producing a differentiated good under IRTS
See on comments on last slide
Trade policy to protect oligopoly (or monopolistic competition) industry
Increase in Protection
Less elastic demand
Less product variety
SE (for existing firms)
Firm entry SE
SE= ‘Scale Efficiency’
Most simulation models include all effects on previous slide except variety (only a few determine the number of varieties of products in equilibrium)