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Trade, Regionalism and Development. Richard Newfarmer World Bank. June, 2005. Key Messages. Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest.

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trade regionalism and development
Trade, Regionalism and Development

Richard Newfarmer

World Bank

June, 2005

key messages
Key Messages
  • Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest.
  • For members, RTAs can create trade and bring many other benefits for development …but results are not automatic and depend critically on design and links to domestic reforms.
  • Non-trade regulations – investment and intellectual property rights -- merit close scrutiny because development benefit is unclear and “one size does not fit all”
  • For all countries, RTAs have systemic consequences that adversely affect excluded countries, requiring international attention.
slide4

Regional Trade Agreements are proliferating…

Annual number

Total in force

Cumulative in force

New agreements annually

south south rtas predominate in number but not in trade covered
South-South RTAs predominate in number, but not in trade covered

Number of RTAs

Percent of World Trade Covered

South-South

South-South

US

US

European Union

European Union

slide6

…but RTAs provide less new market access than it might appear

Share of trade covered (%), 2003

and in developing countries regional agreements are a relatively small driver of trade reform
…and in developing countries regional agreements are a relatively small driver of trade reform

Av. Tariffs in Developing Countries

Share of tariff reductions

29.9

9.3

Source: Martin and Ng, 2004

why this proliferation
Why this proliferation?

High-income countries, such as US and EU

  • To support foreign policy goals, including development
  • Slow progress on multilateral agenda: “competitive liberalization”
  • Access to services markets, protection of intellectual property, and rules for investment
  • Secure access to markets, especially large markets
  • Attract more FDI
  • Leverage domestic reform
  • Among neighbors, lowering trade cost at border
  • Framework for regional cooperation

Developing countries

slide10

Effects on members: Do RTAs create – or divert -- trade?

Estimated exponential impact on trade

Intra-regional trade

Note: The bars show the magnitude of the dummy variables capturing respectively the extent to which intraregional trade, overall imports and overall exports differ from the “normal” levels predicted by the gravity model on the basis of economic size, proximity and relevant institutional and historical variables, such as a common language.

slide11

Effects on members: Do RTAs create – or divert -- trade?

Estimated exponential impact on trade

Overall exports

Overall imports

Intra-regional trade

Note: The bars show the magnitude of the dummy variables capturing respectively the extent to which intraregional trade, overall imports and overall exports differ from the “normal” levels predicted by the gravity model on the basis of economic size, proximity and relevant institutional and historical variables, such as a common language.

agreements with high external tariffs risk trade diversion
Agreements with high external tariffs risk trade diversion

Average weighted tariffs

Note: Tariffs are import-weighted at the country level to arrive at PTA averages

Source: UN TRAINS, accessed through WITS

east asia has used mfn to integrate regionally

E.Asia & Pacific

Latin America

Europe & C. Asia

M. East & N. Africa

Sub-Saharan Africa

S.Asia

East Asia has used MFN to integrate regionally
  • East Asia has led in global integration
east asia has used mfn to integrate regionally1

Sub-Saharan Africa

Europe &

Central Asia

Middle East

& N. Africa

South

Asia

East Asia

East Asia has used MFN to integrate regionally
  • East Asia has led in global integration
  • …and in regional integration

LA

slide15

RTAs frequently include services, investment and intellectual property rights…

Source: Global Economic Prospects, 2005: Chapter 5

trade facilitation is crucial delays at border drive up trading costs

Trade/GDP

Malaysia

Slovenia

Slovakia

Malawi

Kyrgyzstan

Ethiopia

Uganda

Trade facilitation is crucial.. delays at border drive up trading costs

RTAs can provide framework for mutual efforts to reduce costs

  • Single customs document
  • Harmonize driving & weight regulations
  • Computerize both sides of the border

Trade/GDP

Potential of RTAs to reduce border costs not yet realized

investment accords provide for new access and new investor protections
Investment accords provide for new access and new investor protections…
  • Potential benefits include greater FDI flows because…
    • Liberalized market access
    • increased payoff to trade integration,
    • reduced risk premia,
    • enhanced credibility of investment climate
  • Reduced international policy spillovers
    • Rent shifting via TRIMs, etc.
  • RTAs that create large ex-post market results and, provided good investment climate, do attract more FDI.
    • A 10% increase in post-FTA market size is associated with a 5 percent increase in FDI in the host country.
  • However, market access more important than investor protections
    • no evidence that protections increase FDI flows to developing countries…
intellectual property rights figure prominently in n s rtas particularly us ftas
US FTAs contain TRIPS Plus provisions that provide greater IPR protection.

Brings generics under market and data exclusivity arrangements

No analysis of economic consequences prior to signing

Open questions:

Will FTAs foreclose use of Doha flexibilities on TRIPS for generics?

Will stronger IPRs contribute to more FDI and high tech trade?

Are TRIPS Plus measures appropriate to all countries?

Intellectual property rights figure prominently in N-S RTAs, particularly US FTAs

Conclusion: Development consequences of investment and IPR rules depend heavily on market access these rules leverage

both north south and south south accords can be improved
Strengths

Compatibility among economies

Services liberalization

Move to international standards

Weaknesses

Restrictive rules of origin

Exemptions, esp. agriculture

Inappropriate rules?

No movement of workers

Both North-South and South-South accords can be improved…

Some sweeping generalization…

North-South

Index of ROO Restrictiveness

Estevadeordal, 2004

both north south and south south accords can be improved1
Strengths

Compatibility among economies/large markets

Services liberalization

Move to international standards

Weaknesses

Restrictive rules of origin

Exemptions, esp. agriculture

Inappropriate rules

No movement of workers

Both North-South and South-South accords can be improved…

Some sweeping generalization…

North-South

South- South

  • Strengths
    • Focus on trade
    • Nonrestrictive rules of origin
    • Adjacency permit trade facilitation
  • Weaknesses
    • Small, similar markets
    • Higher external barriers
    • Exemptions
    • Minimal services
    • No movement of workers
slide21

Design and implementation are crucial to achieving objectives

  • Design
    • Low external tariff barriers
    • Nonrestrictive rules of origin
    • Wide coverage with few exclusions
    • Liberalization of services
    • Facilitating trade at borders
    • Appropriate rules
  • Implementation: Link RTAs to domestic reform agenda

….Open regionalism

systemic issues uneven and discriminatory access
Systemic issues…uneven and discriminatory access

Preferences hurt excluded countries

Simulated welfare impact of Chile’s FTA with US

$ m.

Gains to Chile

Costs to excluded countries

Source: Harrison, et al, 2002

systemic issues uneven and discriminatory access1
Systemic issues…uneven and discriminatory access

Preferences hurt excluded countries

Hub and spokes put weaker countries at disadvantage

Change in real income in 2015 compared to baseline in percent

Multilateral liberalization

systemic issues uneven and discriminatory access2
Systemic issues…uneven and discriminatory access

Preferences hurt excluded countries

Hub and spokes put weaker countries at disadvantage

Change in real income in 2015 compared to baseline in percent

Multilateral liberalization

Individual RTA

(average)

systemic issues uneven and discriminatory access3
Systemic issues…uneven and discriminatory access

Preferences hurt excluded countries

Hub and spokes put weaker countries at disadvantage

Change in real income in 2015 compared to baseline in percent

Multilateral liberalization

Individual RTA

(average)

All countries sign RTAs

systemic issues uneven and discriminatory access4
Systemic issues…uneven and discriminatory access

Preferences hurt excluded countries

Hub and spokes put weaker countries at disadvantage

Multiple arrangements burden customs

systemic issues uneven and discriminatory access5
Systemic issues…uneven and discriminatory access

Preferences hurt excluded countries

Hub and spokes put weaker countries at disadvantage

Multiple arrangements burden customs

slide29

Overlapping African agreements…

Nile River Basin

COMESA

IGAD

ECCAS

AMU

CEMAC

Somalia

Sao Tomé & Principe

Algeria

Libya

Morocco Mauritania

Tunisia

Egypt

Cameroon

Central African Rep.

Gabon

Equat. Guinea

Rep.Congo

ECOWAS

Djibouti

Ethiopia

Eritrea

Sudan

Burundi*

Rwanda*

Ghana

Nigeria

Conseil de

L’Entente

Chad

Cape Verde

Gambia

DR Congo

Kenya*

Uganda*

Benin Niger

Togo Burkina Faso

Cote d’Ivoire

Angola

Guinea-Bissau Mali

Senegal

EAC

Liberia

Sierra Leaone Guinea

Tanzania*

Mauritius*

Syechelles*

Malawi*

Zambia*

Zimbabwe*

SACU

Comoros*

Madagascar*

WAEMU

Mano River Union

South Africa

Botswana

Lesotho

CLISS

Namibia*

Swaziland*

Reunion

AMU: Arab Maghreb Union

CBI: Cross Border Initiative

CEMAC: Economic & Monetary Community of Central Africa

CILSS: Permanent Interstate Committee on Drought Control in the Sahel

COMESA: Common Market for Eastern and Southern Africa

EAC: East African Cooperation

ECOWAS: Economic Community of Western African Studies

IGAD: Inter-Governmental Authority for Government

IOC: Indian Ocean Commission

SACU: Southern African Customs Union

SADC: Southern African Development Community

WAEMU: West African Economic & Monetary Union

*CBI

Mozambique

SADC

IOC

systemic issues uneven and discriminatory access6
Systemic issues…uneven and discriminatory access

Preferences hurt excluded countries

Hub and spokes put weaker countries at disadvantage

Multiple arrangements burden customs

Disincentives to engage in multilateral liberalization

policy implications
Policy implications…
  • International community through the WTO
    • Get Doha done: lowers risk of trade diversion for members and minimizes effects on excluded countries
  • High income countries have systemic responsibility
    • Widen coverage in FTAs (i.e. agriculture)
    • Move toward conformity in rules of origin, and make less restrictive
    • Promote rules tailored to local capacities
  • Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objective
    • Unilateral: driving competitiveness
    • Multilateral: seeking broad market access
    • Regional: deep market access and institutional reforms (services, customs, ports, trade-related standards)
slide32

Further Reading

Findlay, C.. Sheri Stephenson, and F.J. Pinto “Services in Regional Trading Agreements” in M. Plummer A Comprehensive Guide to the World Trade Organization Kluwer

Fink, Carsten and P. Reichenmiller “Intellectual Property” Trade Note #20 World Bank (website) 2004.

Freund, Caroline L. 1998 “Multilateralism and the Endogenous Formation of PTAs” Discussion Paper 614 US Federal Reserve, Washington.

Hoekman, Bernard and Richard Newfarmer “Investment in Regional Preferential Trade Agreements” Journal of World Trade Fall 2005

Schiff, Maurice and L. Alan Winters, Regional Integration and Development World Bank 2003

Schott, Jeffrey (ed.) Free Trade Agreements Washington: Institute for International Economics 2005

World Bank, Global Economic Prospects, 2005: Trade Regionalism and Development

trade regionalism and development1
Trade, Regionalism and Development

Richard Newfarmer

World Bank

June, 2005

evaluating alternatives and south asia s systemic interests
Evaluating alternatives and South Asia’s systemic interests

Basic methodology is computer (CGE) simulations

Allows simulation of relative price affects based upon demand and substitution consideration

However, outcomes are static, and do not account for productivity, technological change, and other dynamic effects

Moreover, simulations do not model services liberalization, trade facilitation and lowering of other trade costs, or capture non-trade benefits of regional cooperation

evaluating alternatives gains to latin america from multilateral accords
Evaluating alternatives: Gains to Latin America from multilateral accords

Change in income of Latin America in el 2015 above baseline scenario (percent)

Multilateral

Fuente: World Bank en Global Economic Prospects, 2005: Chapter 6

evaluating alternatives gains to latin america from multilateral and regional accords
Evaluating alternatives: Gains to Latin America from multilateral and regional accords

Change in income of Latin America in el 2015 above baseline scenario (percent)

Multilateral

FTAA (por sí solo)

Nota: “ALCA por sí solo” asume que otras regiones importantes no forman bloques comerciales que discriminan a Latinoamérica.

evaluating alternatives gains to latin america from multilateral and regional accords1
Evaluating alternatives: Gains to Latin America from multilateral and regional accords

Multilateral

FTAA (por sí solo)

FTAA (c/ otros ARCs)

Nota: “ALCA por sí solo” asume que otras regiones importantes no forman bloques comerciales que discriminan a Latinoamérica.“ALCA con otros ARCs” asume un ARC en las Américas, el Este Asíatico y Europa con un ARC Europa del Este-Africa.

evaluating alternatives south asia gains most from a multilateral agreement
Evaluating alternatives: South Asia gains most from a multilateral agreement

Change in South Asia’s real income in 2015 from baseline scenario (percent)

Multilateral

evaluating alternatives south asia gains most from a multilateral agreement1
Evaluating alternatives: South Asia gains most from a multilateral agreement

Change in South Asia’s real income in 2015 from baseline scenario (percent)

Multilateral

SAFTA (by itself)

Note: “SAFTA by itself” assumes that other major regions do not form trading blocs that would discriminate against South Asia.

evaluating alternatives south asia gains most from a multilateral agreement2
Evaluating alternatives: South Asia gains most from a multilateral agreement

Change in South Asia’s real income in 2015 from baseline scenario (percent)

Multilateral

SAFTA (by itself)

SAFTA (w/ other RTAs)

Note: “SAFTA by itself” assumes that other major regions do not form trading blocs that would discriminate against South Asia. “SAFTA with other RTAs” assumes an RTA in East Asia, the FTAA in the Americas, and a Europe plus African RTA.

evaluating alternatives east asia gains most from a multilateral agreement
Evaluating alternatives: East Asia gains most from a multilateral agreement

Change in real income in 2015 from baseline scenario (percent)

Multilateral

Asean + 3 (by itself)

Asean + 3

(w/ other RTAs)

Note: Separate represents the gains when each block is formed in the absence of the other two. BLOC3 represents the gains when all three regional PTAs are implemented simultaneously.

developing countries pay more of their foreign tariffs to rich countries and to neighbors
Developing countries pay more of their foreign tariffs to rich countries and to neighbors

Share of tariff burden, percent

Rest of world

Intra-region

Industrial

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