Benefiting from Regional Integration

Bernard Hoekman

Maurice Schiff

Junichi Goto

• Regional trade agreements (RTAs) are proliferaRegional trade agreements (RTAs) are proliferating and now cover more than one third of worlting and now cover more than one third of world trade, but their liberalizing effect has not alwd trade, but their liberalizing effect has not always been large.ays been large.

• RTAs can create trade and bring many other beRTAs can create trade and bring many other benefits for development …but results are not aunefits for development …but results are not automatic and depend critically on design and itomatic and depend critically on design and implementation. mplementation.

• RTAs have systemic consequences that adversRTAs have systemic consequences that adversely affect excluded countries, requiring internately affect excluded countries, requiring international attention.ional attention.

Key MessagesKey Messages

EUEU

EAECEAECNAFTANAFTA

APECAPEC

MercosurMercosur

REGIONALISM IN THE WORLD

AFTAAFTA(FTAA)(FTAA)

Regional Trade Agreements are proliferating… Regional Trade Agreements are proliferating…

……and now potentially cover more than one-third of global and now potentially cover more than one-third of global trade trade

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

Some Theories of Regional Integration Agreement

Stages of Economic Integration(five stages according to Balassa)

• Free Trade Area (FTA) – starting point– rules of origin

• Customs Union– common external tariffs

• Common Market– movement of capital and labor

• Economic Union– coordination of fiscal and monetary policy

• Complete Economic Union– super-natural institution

Trade Creation

A 100

B 90

C 90

Before: A=100, B=90*1.2=108, C=90*1.2=108

After: A=100, B=90, C=90*1.2=108

20 percent tariff

Trade Diversion

A 100

B 80

C 70

Before: A=100, B=80*1.2=96, C=70*1.2=84

After: A=100, B=80, C=70*1.2=84

20 percent tariff

Expansion of the FTA and the Third Country

welfare

Size of FTA

Further cost of S-S RIA

PW = PW + T

PW

SP SP

SROW

SROW

Q1 Q2 Q3 Q4

Q

DH

F

E

J

A

G

B

I D

C

Article XXIV of the GATT

• ‘non-discrimination; MFN’ as the basic principle of WTO/GATT

• FTA and Customs Union as exceptions to the fundamental principle

• Article XXIV of the GATT sanctions if– complete liberalization (100 percent, substantially all the trad

e)

– no increase in external barrier

• Ambiguous– how soon

– “substantially all the trade”

– shall not on the whole be more restrictive

• Various proposal for strengthening it– e.g. Bhagwati (set to the lowest)

Assessing RIAs in the World

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 numSouth-South RTAs predominate in number, but not in trade coveredber, 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

……and regional agreements are a and regional agreements are a relatively small driver of trade relatively small driver of trade reformreform

MultilateralAgreements

25%

RegionalAgreements

10%

AutonomousLiberalization

65%

Decomposing 20% pt. declineDecomposing 20% pt. decline

Source: Martin and Ng, 2004

0

5

10

15

20

25

30

1983 2003

Av. Tariffs, 1983 and 2003Av. Tariffs, 1983 and 2003

29.9

9.3

Decomposing tariff reductions in response to multilateral, regional and own initiatives Decomposing tariff reductions in response to multilateral, regional and own initiatives

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 Agreements with high external tariffs risk trade diversionrisk trade diversion

0 5 10 15 20 25

SAFTA

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

Lower external tariffs are associated Lower external tariffs are associated with greater regional integrationwith greater regional integration

0

5

10

15

20

25

0 5 10 15 20 25 30

Intra-regional trade/GDP

MNAMNASASSAS

SSASSA

LACLAC

ECAECA EAPEAP

Average external tariffsAverage external tariffs

Standards Transport

Customs

cooperation Services

Intellectual

Property Investment

Dispute

Settlement Labor Competition

U.S.-Led

US-Jordan No No Yes Yes Yes Yes Yes Yes No

US-Chile Yes No Yes Yes Yes Yes Yes Yes Yes

US-Singapore Yes No Yes Yes Yes Yes Yes Yes Yes

US-Australia Yes No Yes Yes Yes Yes Yes Yes Yes

US-CAFTA Yes No Yes Yes Yes Yes Yes Yes No

US-Morocco Yes No Yes Yes Yes Yes Yes Yes No

NAFTA Yes No Yes Yes Yes Yes Yes Yes Yes

E.U.-Led

EU-South Africa Yes Yes

EU-Mexico Yes Yes Yes Yes Yes Yes Yes No Yes

EU-Chile Yes Yes Yes Yes Yes Yes Yes No Yes

South-South

MERCOSUR No No Yes Yes No Yes Yes No Yes

Andean Community No No Yes Yes No Yes Yes No Yes

CARICOM Yes Yes Yes Yes No Yes Yes Yes Yes

AFTA Yes Yes Yes Yes No Yes No No No

SADC Yes Yes Yes No Yes

COMESA Yes Yes Yes Yes No Yes Yes Yes Yes

Other

Japan-Singapore Yes No Yes Yes Yes Yes Yes Yes Yes

Canada-Chile No No Yes Yes No Yes Yes Yes Yes

Chile-Mexico Yes Yes Yes Yes Yes Yes Yes Yes

RTAs go far beyond tradeRTAs go far beyond trade

• StrengthsStrengths– Locking in reforms by Locking in reforms by

binding commitmentsbinding commitments– Services liberalizationServices liberalization– Move to international Move to international

standardsstandards• WeaknessesWeaknesses

– Restrictive rules of origin Restrictive rules of origin – Exemptions, esp. Exemptions, esp.

agricultureagriculture

North-South RIAsNorth-South RIAs South- South RIAsSouth- South RIAs

• StrengthsStrengths– Nonrestrictive rules of Nonrestrictive rules of

originorigin– Adjacency permit trade Adjacency permit trade

facilitationfacilitation

Some sweeping generalization…Some sweeping generalization…

WeaknessesWeaknessesSmall markets/Higher external Small markets/Higher external barriersbarriersExemptionsExemptionsMinimal servicesMinimal services

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

•DesignDesign

Large ex-post marketLarge ex-post market

Low external tariff barriers Low external tariff barriers

Nonrestrictive rules of originNonrestrictive rules of origin

Wide product coverage with minimal Wide product coverage with minimal exemptions exemptions

Liberalization of servicesLiberalization of services

Deeper integrationDeeper integration

•Implementation: Avoiding paper Implementation: Avoiding paper agreementsagreements

Design are crucial to achieving objectivesDesign are crucial to achieving objectives

• International community through the WTOInternational community through the WTO– Get Doha doneGet Doha done– Concentrate on transparencyConcentrate on transparency

• High income countries High income countries – Widen coverage in FTAs (i.e. agriculture)Widen coverage in FTAs (i.e. agriculture)– Move toward conformity in rules of origin, and make lMove toward conformity in rules of origin, and make l

ess restrictiveess restrictive

• Developing countries Developing countries – Unilateral liberalization: driving competitivenessUnilateral liberalization: driving competitiveness– deep integration and institutional reforms (customs, deep integration and institutional reforms (customs,

ports, trade-related standards)ports, trade-related standards)

Policy implications…Policy implications…