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Trade, Regionalism and DevelopmentTrade, Regionalism and Development
June, 2005
Richard Newfarmer
World Bank
Regional trade agreements (RTAs) are proliferating and now Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has cover one third of world trade, but their liberalizing effect has often been modest.often been modest.
For members,For members, RTAs can create trade and bring many other RTAs can create trade and bring many other benefits for development …but results are not automatic and benefits for development …but results are not automatic and depend critically on design and links to domestic reforms.depend critically on design and links to domestic reforms.
Non-trade regulations – investment and intellectual property Non-trade regulations – investment and intellectual property rights -- merit close scrutiny because development benefit is rights -- merit close scrutiny because development benefit is unclear and “one size does not fit all”unclear and “one size does not fit all”
For all countries, RTAs have For all countries, RTAs have systemic consequencessystemic consequences that that
adversely affect excluded countries, requiring international adversely affect excluded countries, requiring international attention.attention.
Key MessagesKey Messages
Regional Trade Agreements are proliferating… Regional Trade Agreements are proliferating…
0
5
10
15
20
25
30
1958 1969 1976 1984 1989 1994 1999 2004
Annual numberAnnual number
Annual numberAnnual number
Regional Trade Agreements are proliferating… Regional Trade Agreements are proliferating…
0
5
10
15
20
25
30
1958 1969 1976 1984 1989 1994 1999 2004
0
50
100
150
200
250
300
New agreements annuallyNew agreements annually
Annual numberAnnual number Total in force Total in force
Cumulative in forceCumulative in force
0
5
10
15
20
25
30
35
1990 1996 2002
0
50
100
150
200
250
1990 1996 2002
South-South RTAs predominate in South-South RTAs predominate in number, but not in trade coverednumber, but not in trade covered
South-South-SouthSouth
European European UnionUnion
USUS
South-South
European European UnionUnion
Percent of World Trade CoveredPercent of World Trade CoveredNumber of RTAsNumber of RTAs
USUS
0
5
10
15
20
25
30
35
Including all trade Excluding 0% MFN Excluding <3% MFN
……but RTAs provide less new market but RTAs provide less new market access than it might appearaccess than it might appear
Share of trade covered (%), 2003Share of trade covered (%), 2003
……and in developing countries regional and in developing countries regional agreements are a relatively small driver of trade agreements are a relatively small driver of trade reformreform
Multilateral Agreements
25%
Regional Agreements
10%
Autonomous Liberalization
65%
Share of tariff reductionsShare of tariff reductions
Source: Martin and Ng, 2004
0
5
10
15
20
25
30
1983 2003
Av. Tariffs in Developing CountriesAv. Tariffs in Developing Countries
29.9
9.3
Why this proliferation? Why this proliferation?
High-income countries, such as US and EUHigh-income countries, such as US and EU
To support foreign policy goals, including developmentTo support foreign policy goals, including development Slow progress on multilateral agenda: “competitive Slow progress on multilateral agenda: “competitive
liberalization” liberalization” Access to services markets, protection of intellectual Access to services markets, protection of intellectual
property, and rules for investmentproperty, and rules for investment
Developing countriesDeveloping countries Secure access to markets, especially large marketsSecure access to markets, especially large markets Attract more FDIAttract more FDI Leverage domestic reformLeverage domestic reform Among neighbors, lowering trade cost at borderAmong neighbors, lowering trade cost at border Framework for regional cooperationFramework for regional cooperation
Effects on membersEffects on members
COMESA
WAEMU
EAC
CIS
SAPTA
SADC
Mercosur
CEMAC
ANDEAN
AFTA
GCC
ECOWAS
CACM
EC
NAFTA
SACU
-4 -2 0 2 4 6 8 10
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.
Effects on members: Do RTAs create – or divert -- Effects on members: Do RTAs create – or divert -- trade? trade?
COMESA
WAEMU
EAC
CIS
SAPTA
SADC
Mercosur
CEMAC
ANDEAN
AFTA
GCC
ECOWAS
CACM
EC
NAFTA
SACU
-4 -2 0 2 4 6 8 10
Estimated exponential impact on trade
Intra-regional trade
Overall exportsOverall imports
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.
Effects on members: Do RTAs create – or divert -- Effects on members: Do RTAs create – or divert -- trade? trade?
Agreements with high external tariffs risk Agreements with high external tariffs risk trade diversiontrade diversion
0 5 10 15 20 25
SAPTA
ECOWAS
COMESA
MERCOSUR
EAC
SADC
AFTA
NAFTA
Note: Tariffs are import-weighted at the country level to arrive at PTA averagesSource: UN TRAINS, accessed through WITS
Average weighted tariffs
East Asia has used MFN to integrate East Asia has used MFN to integrate regionallyregionally
Regional exports as share of world exports (%)(oil excluded)
0
2
4
6
8
10
12
14
E.Asia & Pacific
Latin America
M. East & M. East & N. AfricaN. Africa
Europe & C. Asia
S.Asia
Sub-Saharan Africa
• East Asia has led East Asia has led in global in global integrationintegration
26.5%
15.3%
6.4%3.5%
0.8%
5.3%
0%
5%
10%
15%
20%
25%
30%
Intra-regional trade as a share of GDP, 2002
East AsiaEast Asia Europe &Europe & Central AsiaCentral Asia
Middle East Middle East & N. Africa& N. Africa
SouthSouth AsiaAsia
Sub-Sub-Saharan Saharan AfricaAfrica
• East Asia has led East Asia has led in global in global integration integration
• ……and in regional and in regional integrationintegration
LALA
East Asia has used MFN to integrate East Asia has used MFN to integrate regionallyregionally
Services Investment Intellectual Property
Agreements National and MFN/Treatment Market Accessa
Rule of Origin (Nonrestrictive)b
Pre-establishment & Limitations Market Access
Exceptions
Right to Provide
Services w/o establishmentd
Ratchet Mechanisme
National Treatment/MF
Post-establishment
Ownership Limitationsf
Pre-establishment Limitations
Ban on Performance Requirements
Investor-State Dispute
Settlement
Intellectual Property
U.S. U.S.-Jordan Yes Yes Negative-list No No Yes Negative-list Negative-list TRIMS+ Yes Yesh
U.S.-Chile Yes Yes Negative-list Yes Yes Yes Negative-list Negative-list TRIMS+ Yes TRIPS+ U.S.-Singapore Yes Yes Negative-list Yes Yes Yes Negative-list Negative-list TRIMS+ Yes TRIPS+ U.S.-Australia Yes Yes Negative-list Yes Yes Yes Negative-list Negative-list TRIMS+ No TRIPS+ U.S.-CAFTA Yes Yes Negative-list Yes Yes Yes Negative-list Negative-list TRIMS+ Yes TRIPS+ U.S.-Morocco Yes Yes Negative-list Yes Yes Yes Negative-list Negative-list TRIMS+ Yes TRIPS+ NAFTA Yes Yes Negative-list Yes Yes Yes Negative-list Negative-list TRIMS+ Yes TRIPS+ EU EU-South Africa No No No No No No No No No Non Yesi
EU-Mexico Yes Yes Standstillc No No No No No No Non Yesi EU-Chile Yes Yes Positive-list Yes No Positive-list No Non Yesi South-South MERCOSUR Yes Yes Positive-list No No Yes No Negative-list TRIMS+ Yes Noj
Andean Community No Yes Positive-list No No - No Positive-list TRIMS+ No Nok
CARICOM Not specified Yes Negative-list No No No No Positive-list No Yes No Asean Yes Yes Positive-list No No Yes Yes Positive-list No Yes Nol
SADC No No? No No None No No TRIPS COMESA Yes No? Positive-list Nog No Positive-list No No Nom
Other Japan-Singapore No Yes Positive-list No No Yes Yes Canada-Chile Yes Yes Negative-list Yes Yes Yes Chile-Mexico Yes Yes Negative-list Yes Yes
RTAs frequently include services, investment RTAs frequently include services, investment and intellectual property rights…and intellectual property rights…
Source: Global Economic Prospects, 2005: Chapter 5Source: Global Economic Prospects, 2005: Chapter 5
Trade facilitation is crucial.. delays at border Trade facilitation is crucial.. delays at border drive up trading costsdrive up trading costs
RTAs can provide RTAs can provide framework for mutual framework for mutual efforts to reduce costsefforts to reduce costs
Single customs Single customs documentdocument
Harmonize driving & Harmonize driving & weight regulationsweight regulations
Computerize Computerize both both sides of the bordersides of the border
Trade/GDPTrade/GDP
Potential of RTAs to reduce border costs not yet realizedPotential of RTAs to reduce border costs not yet realized
0
50
100
150
200
250
0 5 10 15 20 25
Days through customs, imports
Trade/GDPTrade/GDP
MalaysiaMalaysia
EthiopiaEthiopia
MalawiMalawi
UgandaUganda
KyrgyzstanKyrgyzstan
SloveniaSlovenia
SlovakiaSlovakia
Investment accords provide for new access Investment accords provide for new access and new investor protections…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 Intellectual property rights figure prominently in N-S RTAs, particularly US FTAsin 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?
Conclusion: Development consequences of Conclusion: Development consequences of investment and IPR rules depend heavily on market investment and IPR rules depend heavily on market access these rules leverageaccess these rules leverage
Both North-South and South-South Both North-South and South-South accords can be improved…accords can be improved…
StrengthsStrengths Compatibility among Compatibility among
economieseconomies Services liberalizationServices liberalization Move to international Move to international
standardsstandards WeaknessesWeaknesses
Restrictive rules of Restrictive rules of origin origin
Exemptions, esp. Exemptions, esp. agricultureagriculture
Inappropriate rules?Inappropriate rules? No movement of No movement of
workersworkers
North-SouthNorth-South
Some sweeping generalization…Some sweeping generalization…
0
1
2
3
4
5
6
NAFTA EU-Mexico EU-Chile SADC Chile-CACM
AFTA COMESA ECOWAS
Index of ROO RestrictivenessIndex of ROO Restrictiveness
Estevadeordal, 2004Estevadeordal, 2004
StrengthsStrengths Compatibility among Compatibility among
economies/large economies/large marketsmarkets
Services liberalizationServices liberalization Move to international Move to international
standardsstandards WeaknessesWeaknesses
Restrictive rules of Restrictive rules of origin origin
Exemptions, esp. Exemptions, esp. agricultureagriculture
Inappropriate rulesInappropriate rules No movement of No movement of
workersworkers
North-SouthNorth-South South- South South- South
StrengthsStrengths Focus on tradeFocus on trade Nonrestrictive rules of Nonrestrictive rules of
originorigin Adjacency permit trade Adjacency permit trade
facilitationfacilitation
Some sweeping generalization…Some sweeping generalization…
WeaknessesWeaknesses Small, similar marketsSmall, similar markets Higher external barriersHigher external barriers ExemptionsExemptions Minimal servicesMinimal services No movement of workersNo movement of workers
Both North-South and South-South Both North-South and South-South accords can be improved…accords can be improved…
•DesignDesign
Low external tariff barriers Low external tariff barriers
Nonrestrictive rules of originNonrestrictive rules of origin
Wide coverage with few exclusions Wide coverage with few exclusions
Liberalization of servicesLiberalization of services
Facilitating trade at bordersFacilitating trade at borders
Appropriate rulesAppropriate rules
•Implementation: Link RTAs to domestic Implementation: Link RTAs to domestic reform agendareform agenda
Design and implementation are crucial to Design and implementation are crucial to achieving objectivesachieving objectives
…….Open regionalism.Open regionalism
Systemic issues… Systemic issues…
-1,000
-500
0
500
1,000
Simulated welfare impact of Chile’s FTA with US
Preferences hurt excluded countries
Source: Harrison, et al, 2002Source: Harrison, et al, 2002
Gains to ChileGains to Chile
Costs to excluded countriesCosts to excluded countries
$ m.$ m.
Systemic issues…uneven and Systemic issues…uneven and discriminatory accessdiscriminatory access
Systemic issues…uneven and Systemic issues…uneven and discriminatory accessdiscriminatory access
Preferences hurt excluded countries
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Change in real income in 2015 compared to baseline in percent
Multilateral liberalizationMultilateral liberalization
Hub and spokes put weaker countries at disadvantage
Systemic issues…uneven and Systemic issues…uneven and discriminatory accessdiscriminatory access
Preferences hurt excluded countries
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Change in real income in 2015 compared to baseline in percent
Multilateral liberalizationMultilateral liberalizationIndividual RTA Individual RTA
(average)(average)
Hub and spokes put weaker countries at disadvantage
Systemic issues…uneven and Systemic issues…uneven and discriminatory accessdiscriminatory access
Preferences hurt excluded countries
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Change in real income in 2015 compared to baseline in percent
Multilateral liberalizationMultilateral liberalizationIndividual RTA Individual RTA
(average)(average)
All countries sign RTAsAll countries sign RTAs
Hub and spokes put weaker countries at disadvantage
Systemic issues…uneven and Systemic issues…uneven and discriminatory accessdiscriminatory access
Preferences hurt excluded countries
Hub and spokes put weaker countries at disadvantage
Multiple arrangements burden customs
Systemic issues…uneven and Systemic issues…uneven and discriminatory accessdiscriminatory access
Preferences hurt excluded countries
Multiple arrangements burden customs
0
1
2
3
4
5
6
7
8
E. Asia &Pacific
Europe &C. Asia
LatinAmerica &Caribbean
MiddleEast & N.
Africa
S. Asia Sub-SaharanAfrica
Av. Number of PTAs per country, 2002/3
Hub and spokes put weaker countries at disadvantage
AlgeriaLibyaMorocco MauritaniaTunisia
AMU
GhanaNigeria Cape Verde
Gambia
ECOWAS
Benin NigerTogo Burkina FasoCote d’Ivoire
Conseil de L’Entente
Guinea-Bissau Mali Senegal
WAEMU
Liberia Sierra Leaone Guinea
Mano River Union
CLISS
CameroonCentral African Rep.GabonEquat. GuineaRep.Congo
Chad
Sao Tomé & Principe
ECCAS
CEMAC
Angola
Burundi*Rwanda*
Egypt
DR Congo
DjiboutiEthiopiaEritreaSudan
Kenya*Uganda*
Somalia
Tanzania*
EAC
South AfricaBotswanaLesotho
Namibia*Swaziland*
Mozambique
SACU
Malawi*Zambia*Zimbabwe*
Mauritius*Syechelles*
Comoros*Madagascar*
Reunion
IOC
*CBI
SADC
COMESA Nile River BasinIGAD
AMU: Arab Maghreb UnionCBI: Cross Border InitiativeCEMAC: Economic & Monetary Community of Central AfricaCILSS: Permanent Interstate Committee on Drought Control in the SahelCOMESA: Common Market for Eastern and Southern AfricaEAC: East African CooperationECOWAS: Economic Community of Western African StudiesIGAD: Inter-Governmental Authority for GovernmentIOC: Indian Ocean CommissionSACU: Southern African Customs UnionSADC: Southern African Development CommunityWAEMU: West African Economic & Monetary Union
Overlapping African agreements…Overlapping African agreements…
Systemic issues…uneven and Systemic issues…uneven and discriminatory accessdiscriminatory access
Preferences hurt excluded countries
Disincentives to engage in multilateral liberalization
Multiple arrangements burden customs
Hub and spokes put weaker countries at disadvantage
International community through the WTOInternational community through the WTO Get Doha done: lowers risk of trade diversion for members and Get Doha done: lowers risk of trade diversion for members and
minimizes effects on excluded countriesminimizes effects on excluded countries
High income countries have systemic responsibilityHigh income countries have systemic responsibility Widen coverage in FTAs (i.e. agriculture)Widen coverage in FTAs (i.e. agriculture) Move toward conformity in rules of origin, and make less restrictiveMove toward conformity in rules of origin, and make less restrictive Promote rules tailored to local capacitiesPromote rules tailored to local capacities
Developing countries should adopt a 3 part strategy, using each Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objectiveinstrument to its most appropriate objective Unilateral: driving competitivenessUnilateral: driving competitiveness Multilateral: seeking broad market access Multilateral: seeking broad market access Regional: deep market access and institutional reforms (services, Regional: deep market access and institutional reforms (services,
customs, ports, trade-related standards)customs, ports, trade-related standards)
Policy implications…Policy implications…
Further ReadingFurther Reading
Findlay, C.. Sheri Stephenson, and F.J. Pinto “Services in Findlay, C.. Sheri Stephenson, and F.J. Pinto “Services in Regional Trading Agreements” in M. Plummer Regional Trading Agreements” in M. Plummer A A Comprehensive Guide to the World Trade OrganizationComprehensive Guide to the World Trade Organization Kluwer Kluwer
Fink, Carsten and P. Reichenmiller “Intellectual Property” Fink, Carsten and P. Reichenmiller “Intellectual Property” Trade NoteTrade Note #20 World Bank (website) 2004. #20 World Bank (website) 2004.
Freund, Caroline L. 1998 “Multilateralism and the Freund, Caroline L. 1998 “Multilateralism and the Endogenous Formation of PTAs” Discussion Paper 614 US Endogenous Formation of PTAs” Discussion Paper 614 US Federal Reserve, Washington.Federal Reserve, Washington.
Hoekman, Bernard and Richard Newfarmer “Investment in Hoekman, Bernard and Richard Newfarmer “Investment in Regional Preferential Trade Agreements” Journal of World Regional Preferential Trade Agreements” Journal of World Trade Fall 2005Trade Fall 2005
Schiff, Maurice and L. Alan Winters, Schiff, Maurice and L. Alan Winters, Regional Integration Regional Integration and Developmentand Development World Bank 2003 World Bank 2003
Schott, Jeffrey (ed.) Schott, Jeffrey (ed.) Free Trade AgreementsFree Trade Agreements Washington: Washington: Institute for International Economics 2005Institute for International Economics 2005
World Bank, World Bank, Global Economic Prospects, 2005: Trade Global Economic Prospects, 2005: Trade Regionalism and Development Regionalism and Development
Trade, Regionalism and DevelopmentTrade, Regionalism and Development
June, 2005
Richard Newfarmer
World Bank
Systemic issues… Systemic issues…
Evaluating alternatives and South Asia’s Evaluating alternatives and South Asia’s systemic interestssystemic interests Basic methodology is computer (CGE) simulationsBasic methodology is computer (CGE) simulations
Allows simulation of relative price affects based Allows simulation of relative price affects based upon demand and substitution considerationupon demand and substitution consideration
However, outcomes are static, and do not account However, outcomes are static, and do not account for productivity, technological change, and other for productivity, technological change, and other dynamic effectsdynamic effects
Moreover, simulations do not model services Moreover, simulations do not model services liberalization, trade facilitation and lowering of liberalization, trade facilitation and lowering of other trade costs, or capture non-trade benefits of other trade costs, or capture non-trade benefits of regional cooperation regional cooperation
Evaluating alternatives: Gains to Latin America Evaluating alternatives: Gains to Latin America from multilateral accordsfrom multilateral accords
0.0
0.1
0.1
0.2
0.2
0.3
0.3
0.4
0.4
0.5
Change in income of Latin America in el 2015 above baseline scenario (percent)
MultilateralMultilateral
FuenteFuente: World Bank : World Bank een Global Economic Prospects, 2005: Chapter 6n Global Economic Prospects, 2005: Chapter 6
0.0
0.1
0.1
0.2
0.2
0.3
0.3
0.4
0.4
0.5
MultilateralMultilateral
FTAA (FTAA (por sí solopor 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 Evaluating alternatives: Gains to Latin America from multilateral and regional America from multilateral and regional accordsaccordsChange in income of Latin America in el 2015 above baseline scenario (percent)
0.0
0.1
0.1
0.2
0.2
0.3
0.3
0.4
0.4
0.5
MultilateralMultilateral
FTAAFTAA ( (cc/ / otrosotros A ARCRCs)s)
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.
FTAA (FTAA (por sí solopor sí solo))
Evaluating alternatives: Gains to Latin Evaluating alternatives: Gains to Latin America from multilateral and regional America from multilateral and regional accordsaccords
Evaluating alternatives: South Asia gains Evaluating alternatives: South Asia gains most from a multilateral agreementmost from a multilateral agreement
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
Change in South Asia’s real income in 2015 from baseline scenario (percent)
MultilateralMultilateral
Evaluating alternatives: South Asia gains Evaluating alternatives: South Asia gains most from a multilateral agreementmost from a multilateral agreement
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
Change in South Asia’s real income in 2015 from baseline scenario (percent)
Note: “SAFTA by itself” assumes that other major regions do not form trading blocs that would discriminate against South Asia.
MultilateralMultilateral
SAFTA (by itself)SAFTA (by itself)
Evaluating alternatives: South Asia gains Evaluating alternatives: South Asia gains most from a multilateral agreementmost from a multilateral agreement
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
Change in South Asia’s real income in 2015 from baseline scenario (percent)
MultilateralMultilateral
SAFTA (by itself)SAFTA (by itself)
SAFTA (w/ other SAFTA (w/ other RTAs)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 Evaluating alternatives: East Asia gains most from a multilateral agreementmost from a multilateral agreement
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
East Asia Europe The America
Change in real income in 2015 from baseline scenario (percent)
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.
MultilateralMultilateral
Asean + 3 (by itself)Asean + 3 (by itself)
Asean + 3Asean + 3
(w/ other RTAs)(w/ other RTAs)
Developing countries pay more of their foreign Developing countries pay more of their foreign tariffs to rich countries and to neighborstariffs to rich countries and to neighbors
0102030405060708090
100
Industrial East Asia Europe andCentral
Asia
LatinAmerica
andCaribbean
Middle Eastand North
Africa
South Asia Sub-SaharanAfrica
Share of tariff burden, percent
Rest of worldRest of world
Intra-regionIntra-region
IndustrialIndustrial
……
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