Conceptualising Deep Integration

1. Conceptualising Deep Integration Michael Gasiorek Peter Holmes

2. Outline • Deep Integration: market and institutional • Nature of gains • Fuller market access • Domestic impact • Competitive effects • Winners and losers • Private vs public dimensions • Examples: few outside EU accession • Conclusions: DI can work only if partner economy ready

3. RZ Lawrence (1996) on Deep Integration • “Shallow integration” when “border measures” essentially tariffs and quotas, eliminated • “Deep integration” defined by RZL as process whereby domestic economic (regulatory) policies/measures, are approximated in order to remove barriers to trade behind the border. Whole economy affected. • Lawrence surmised DI easier in a smaller group than WTO, tho’ cautious on benefits

4. Deep Market Integration • Trade investment & business practices take on characteristics of internal trade • intensity of interaction • willingness to sign long term contracts • ability to switch partner if contracts go wrong

5. New features of Supply chains • Trade in tasks, ie intermediates not final commodities • Trade more in services • Relational trading and networks replace ship and forget • Quality and compatibility standards matter more than post shipment inspection • Agriculture becoming like industry eg with Quality Assurance, Eurepgap etc

6. Markets and Institutions • a very comprehensive certification or standardisation regime can permit • trade between anonymous partners or • networks of repeat business • can institutional integration create more competitive thickly integrated markets?

7. Deep Institutional Integration • No value in reducing tariffs if regulatory incompatibilities bar all scope for trade expansion eg: • Service regulation • SPS & TBT measures • Competition rules and market conditions • (IPR??) • Shallow integration leaves most of non trading economy untouched (contrast EU Accession)

9. Can DII help DMI? • RTAs follow trade – suggesting a revealed preference exists. • We conjecture that: • Private actors can only address some of the market failures • Public action is likely to make Deep MI more contestable • If there are again they are economy wide not just for market access

10. Types of trade and RTAs

11. Types of approximation • National Treatment - NAFTA • Mutual Recognition of • Standards • Conformity assessment • Harmonisation - EU approach in pre-accession and some ENP In reality very limited steps

12. Regulatory approximation • Standards codified specifications of process or product • Regulations - mandatory specifications • Conformity assessment - how to check if standards or regs complied with • Accreditation-verification of reliability of CA • Mutual recognition of standards does not imply MR of conformity assessement

13. TBT & SPS in RTAs Pre-accession FTAs create implied obligation to harmonise rules, but accession negotiations drove this EU-Turkey CU (1996) did not have MR of conformity assessment till 2006 EU FTAs with non candidates generally aspire to lower barriers but little harmonisation agreed by partners and no MR by EU

14. Competition Provisions in RTAs • Strong in pre-accession agreements • EU seeks to ensure that FTA partners adopt competition policies that will reduce trade barriers but provisions rather weak • US FTAs limited provisions • But countries ready to discuss this in RTA context that not at WTO – maybe even India

15. Deep Integration: tighter networks or more competition? Deep market integration can take 2 forms: • Tight networks of firms with long term subcontracting but little scope for alternative partners • Open competitive markets where long term contracting occurs by choice

16. Potential gains from DI • Regulatory certainty • more niche market specialisation and the creation of more stable value chains. • technology transfer and diffusion both through trade and FDI, • pro-competitive gains from increasing import competition in an environment of imperfect competition, • greater exploitation of economies of scale in production • the greater use of intermediate inputs; • the increased geographical dispersion of production through trade that supports the exploitation of different factor proportions for different parts of the production process • local economies of scale through finer specialization and division of labour in production; • externalities arising from institutional changes that lead to a wide increases in productivity.

17. Ways to address market failures • A multilateral agreement, e.g. by ISO norms supported by the WTO • A regional/bilateral agreement, e.g. RTA • Autonomous government decisions of the individual countries, eg S.Africa, Switzerland adopt EU regs • The market, e.g. through FDI, detailed sub-contracting arrangements through the value chain, or by purely voluntary standards.

18. Private vs public • Regulations are mandatory • Standards often private, eg ANSI or Eurepgap • Conformity assessment usually private firms or ISO members as consultancies • Accreditation (IAF) must confirm state system

19. Eurepgap private standards • EU supermarkets have own standards body for verification of production processes that if followed will assure conformity to EU product standards • Eurepgap is not regulated and conformity to Eurepgap norms is undertaken by a small number of private firms (SGS etc) • National standards offices in sub-saharan Africa are rarely accredited for this • Supermarkets often alleged to be forcing poor farmers to take unfair share of burden

20. Why might DI not be achieved by solely by the market? • Asymmetric information • Learning spillovers • Reputational spillovers • Environmental spillovers • Economies of scale in testing & certification etc • Compatibility externalities • Collective actions, coordination failure, network externalities • Private contracting and governance may not foster competition

21. “Upgrading quality” vs risk of wrong standards • Import of EU standards can provide a chance to adopt a standard that can deal with a market failure – and impact on whole economy - CEEC case • OR it can impose a costly and unnecessary set of inappropriate regulations for domestic markets driven by external trade considerations – limited examples

22. Likely winners and losers • Winners • consumers who value export quality • exporters who get easier market access • new exporters • foreign firms • Domestic markets functioning better due to new norms • Losers • consumers who don’t want to pay more • firms unable to compete • excluded 3rd country suppliers (discrimination vs erga omnes) • Markets which don’t need trade driven rules

23. Quantifying effect of DI • Models extrapolate trends and assume RCA indicates direction of change • Most EU FTAs suggest very little gain from removing shallow barriers • Sussex framework suggests looking for rising IIT indicators where DI could impact: India but less Egypt so far • CGE work with CASE by M.Maliszewska assumes DI improves business climate and raises regulatory certainty and lowers risk premium across whole economy - investment and output increase sharply

24. EU Accession • Some fears before accession that EU norms inappropriate and costly, eg for Poland, eg domestic food industry • Deep Inst integration very hard (Turkey MR of conformity assessment not till 2006 10 years after CU) • But growth of partners suggests positive effects going beyond traded sector

25. ESA EPA Rwanda and Ethiopia • coffee major export • no tariffs. • Core barrier are capacity and SPS regs on ochratoxin (and on some spices for Ethiopia). • EU can give aid for trade but can only offer MR when this is successful Mauritius • seeks to be financial services exporter • says “What rules do you want? We’ll comply.”

26. South African Water • SA imposing EU water quality rules on for all food production and distribution in SA • This will • raise quality across whole economy • raise costs • Open export markets • Exclude some farmers

27. EU seeks Deep EU-India FTA • Little or no gain likely from shallow integration • Rising IIT suggests deep market integration emerging • Some improvement in Market access to EU possible (SPS?) but main gains to domestic economy if: • Further improvement in services reg (lock-in?) • Better standards regime

28. Egyptian potatoes and “Brown Rot” • EU exports seed potatoes; Egypt exports new potatoes (deep market int?) • EU requires clean water to be used for irrigation • If one consignment found contaminated all crop may be banned – externality • Egypt keen to adopt necessary rules but hesitant about comprehensive post FTA commitment to all EU norms

29. SPS in possible EU Central America FTA? • EU unlikely to impose additional requirements • But also unlikely to guarantee MR, so CA will be subject to same rules • So tariff removal will not increase market access unless • non animal reg. regime deemed equivalent • Animal suppliers approved • Suppliers can meet additional private (and MS) rules

30. Conclusions • With low tariffs shallow integration has little to offer – with high we risk trade diversion • So we must look to gains from Deep Int for the whole economy • We need to explore nature of externalities/coordination failures that allow RTA to be instrument for more efficient economy wide and competitive integration • Limited luck so far outside EU itself