S

International Economic Policy 2014-15

Prof. PIERLUIGI MONTALBANOpierluigi.montalbano@uniroma1.it

Trade Liberalisation and

Global Governance

China

USA

10

10

-5

-5

20

-10

20

-10

Trade

Trade

Protectionism

Protectionism

Prisoner’s dilemma

Ta

riffs …

Fonte: N

enci, 2011

T M

ED

IA M

OND

IALE

0 5 10 15 20 25

1870

1874

1878

1882

1886

1890

1894

1898

1902

1906

1910

1914

1918

1922

1926

1930

1934

1938

1942

1946

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

Trade & Tariffs

Source: Nenci (2011) adapted from Maddison (1989), Mitchell (1992) and Coatsworth and Williamson (2002)

EVOLUTION OF MULTILATERAL

TRADE NEGOTIATIONS

• Rounds involve more and more Members

> 23 in 1947 Geneva Round; 160 in Doha Round

• Negotiations have encompassed more issues

> tariffs only in early Rounds; multiple border and nonborder

issues in later Rounds

• Negotiations have become more protracted

> months in early Rounds; many years in later Rounds

• Developing Countries have become more active

> no involvement in early Rounds; agenda setting now

Nenci, S.

Post-1995 Ministerials

� Singapore 1996 (Singapore issues, plan of action for LDCs, ITA)

� Geneva 1998 (electronic commerce, implementation)

� Seattle 1999 (battle of Seattle)

� Doha 2001 (launch of Doha Round)

� Cancún 2003 (failed mid-term review)

� Hong Kong, China 2005 (wait and see)

� Geneve (2009) and Geneve (2011) (no results)

� Bali (2013) (adoption of the Bali Package)

Nenci, S.

DDA: Topics for Negotiations

� Agriculture

� Non-agricultural market access (NAMA)

� Services

� System of notification and registration of GIs for wines and spirits under TRIPS

� WTO Rules

� Dispute Settlement Understanding

� Trade and environment

� S&DT

Nenci, S.

Benefits of WTO membership

� Support for strengthening policies and institutions associated with international trade;

� Greater stability in commercial policy;

� Better and more secure market access to major export markets;

� Access to WTO’s dispute settlement mechanism.

Nenci, S.

GATT, WTO AND

DEVELOPING COUNTRIESS&DT - ‘Special and Differential Treatment’

�Right to Protect

permits developing countries to retain higher levels of protection than

would otherwise be the case

�Right to Access

offers exports from developing countries access to OECD markets on a

preferential basis

�Right to Slower Adjustment

provides longer period for adoption of new disciplines and measures

Nenci, S.

Multilateral vs RTAs

• A key exception to the MFN in the GATT/WTO is for customs unions (CUs) and free trade areas (FTAs). Two reasons:

• 1. such agreements can contribute to the growth of world trade.

• 2. regional trade liberalization can serve as a building block to further liberalization at the multilateral level

• Whereas regional trade agreements (RTAs) operate among a

smaller group of countries, often in the same region

• Regional trade agreements are also known as “preferential

trade agreements (PTAs),” because they give preferential

treatment (i.e., free trade) to the countries included within

the agreement, but maintain tariffs against outside countries.

Nenci, S.

PTA and WTO

� Under the WTO, such discriminatory trade policies are

generally not allowed:

• Each country in the WTO promises that all countries will pay tariffs no

higher than the nation that pays the lowest: called the “most favored

nation” (MFN) principle.

BUT:

Article XXIV: allows members to form an RIA provided they:

1. eliminate within-union trade barriers on “substantially” all trade

2. do not raise trade barriers on goods produced outside the union

Nenci, S.

During the last decades there has been a rapid growth in the number of regional

trade agreements. As of 15 January 2012, some 511 RTAs had been notified to

the GATT/WTO, 319 were in force

Regional economic integration

RIAs notified to the WTO

Source: WTO 2014

‘Spaghetti bowl’

Source: Baldwin, 2009

The ‘Mother of all Spaghetti Bowls’: The

Cobden-Chevalier Network in 1875

Source: Lampe (2011)Note: Lines represent unconditional MFN-PTAs signed between 1857 and 1875

Effects of trade agreements

� The welfare gains and losses that arise from regional

trade agreements are more complex than those that

arise from multilateral trade agreements

� 2 main effects:

• Trade creation: occurs when high-cost domestic

production is replaced by low-cost imports from

other members.

• Trade diversion: occurs when low-cost imports from

nonmembers are diverted to high-cost imports from

member nations.

Nenci, S.

Diversity of RTAs

� Vary by type: Regional, North-South, South-South, mega-regionals

� Vary in the breadth and depth – difficult to generalize

� But usually RTAs go far deeper than the multilateral talks, covering issues like investment, labor mobility, competition and state-owned enterprises

� The share of global trade that takes place within regions, especially the EU, could decline in the future. On the other hand, deeper integration in Asia would expand its share of intra-regional trade (WTO, 2014)

Nenci, S.

Examples of Regional Trade Agreements -1

Among the best known are:

- The European Union,

- The European Free Trade Association (EFTA): set up for the

promotion of free trade and economic integration to the benefit of Iceland,

Liechtenstein, Norway and Switzerland.

- The North American Free Trade Agreement (NAFTA): to remove most

barriers to trade and investment among the United States, Canada, and

Mexico.

- The Southern Common Market (MERCOSUR): economic and political

agreement among Argentina, Brazil, Paraguay and Uruguay to promote

free trade and the fluid movement of goods, people, and currency

among its members.

Nenci, S.

Examples of Regional Trade Agreements -1

-The Association of Southeast Asian Nations (ASEAN) Free Trade

Area: Its aims include the acceleration of economic growth, social

progress, cultural development, the protection of regional peace and

stability among its members (Indonesia, Malaysia, the Philippines,

Singapore , Thailand ,Brunei, Burma (Myanmar), Cambodia, Laos, and

Vietnam)

- The Common Market of Eastern and Southern Africa (COMESA):

free trade area to promote regional economic integration through trade

and investment among 19 African countries (Burundi, Comoros, Congo,

Dem Rep.Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar,

Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda,

Zambia, Zimbabwe)

Nenci, S.

Eurasian Economic Union

� The Eurasian Economic Union (EEU), also known as

the Eurasian Union (EAU) is a political and economic

union which was established on 29 May 2014 between

the leaders of Belarus, Kazakhstan, and Russia. The EEU

is said to be a continuation of the Eurasian Economic

Community customs union between the three states.

� A treaty to enlarge the EEU to Armenia was signed on

October 9, 2014.

� The Union will officially go into effect on 1 January

2015 assuming the treaty has been ratified by the

parliaments of the three countries..

Member States:

Signatory states to the

founding treaty[

Armenia

Belarus

Kazakhstan

Russia

Potential future members

Tajikistan

Kyrgyzstan

Nenci, S.

Eurasian Economic Union -2

Aim:

� Create a single economic market of 171 million

people and a gross domestic product of 3 trillion U.S. dollars.

� The core objective is the development of a single market and

achieving the "four freedoms“: free movements of goods,

capital, services and people within the single market.

• The free movement of people means that citizens can move

freely between member states to live, work, study or retire in

another country.

� Member states will have a common external tariff on all goods

entering the market.

� The objectives of the union also include joint coordination in

the area of energy, industry, agriculture and transport.

Nenci, S.

Mega-regionals

� The Transatlantic Trade and Investment Partnership

TTIP(EU+US), the Trans-Pacific Partnership TPP (Trans-Pacific)

and the Regional Comprehensive Economic Partnership RCEP

(ASEAN+) represent over three quarters of global GDP and

two thirds of world trade (Ash & Lejarraga, 2014)

� There is also the Canada-European Union: Comprehensive

Economic and Trade Agreement (CETA)

� TTIP alone would cover half of world trade

� TTIP would produce a strong increase of trade between the

EU and the US.

� Largest gains are from NTB removal.

� Trade diverting effects are mainly observed for Brazil and

China and negative welfare effects for LDCs (Brockmeier & al,

2014) Nenci, S.

Nenci, S.

Mega-regionals -2

� The sheer size of the mega-regions means that there

would be effects on third parties

� The outcomes of the mega-regionals for rules on

trade and investment, trade-related standards and

regulation would likely drive the international rules

and standards

Nenci, S.

• The Transatlantic Trade and Investment Partnership (TTIP) is a

trade agreement that is presently being negotiated between the

European Union and the United States.

• It aims at removing trade barriers in a wide range of economic

sectors to make it easier to buy and sell goods and services between

the EU and the US.

• On top of cutting tariffs across all sectors, the EU and the US want to

tackle barriers behind the customs border (non tariff barriers) such

as differences in technical regulations, standards and approval

procedures (es. now when a car is approved as safe in the EU, it has

to undergo a new approval procedure in the US even though the

safety standards are similar).

• The TTIP negotiations will also look at opening both markets for

services, investment, and public procurement. They could also

shape global rules on trade.

The Trans-Atlantic Trade and Investment Partnership (TTIP)

Nenci, S.

TTIP � Free Trade Area (FTA)

• Zero tariffs on all goods and services trade between EU

and US

• No change in tariffs on imports from outside; thus mostly

unequal tariffs

27

� Areas that TTIP is set to cover…

• market access for agricultural and industrial goods,

• government procurement,

• investment,

• energy and raw materials,

• regulatory issues,

• sanitary and phytosanitary measures,

• services,

Most important for EU & US

Nenci, S.

TTIP 2

� TTIP is designed to drive growth and create

jobs.

� Independent research shows that TTIP could

boost:

• the EU's economy by €120 billion;

• the US economy by €90 billion;

• the rest of the world by €100 billion

Talks started in July 2013.

Nenci, S.

Trade Effects of TTIP

� The main (expected) effects:

• Trade creation: Import from partner what was previously

produced at home

– Beneficial to partner, which exports

– Beneficial to importing country as a whole

– But harmful to import-competing industry in importing

country

• Trade diversion: Import from partner what was previously

imported from 3rd country

– Harmful to outside country

– Harmful to importing country as whole, as it pays more

for imports

– Beneficial to the partner exporting countryNenci, S.

The Trans Pacific Partnership (TPP)

• The TPP is a proposed regional free-trade agreement.

• The TPP partners now include 12 countries throughout the

Asia-Pacific region that participate in

negotiations: Australia, Brunei

Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New

Zealand, Peru, Singapore, the United States, and Vietnam.

• The proposed agreement began in 2005. Participating

countries set the goal of wrapping up negotiations in 2012,

but contentious issues such as agriculture, intellectual

property, and services and investments have caused

negotiations to continue into the present.

Nenci, S.

TPP: current & potential members

Currently in negotiations

Announced interest in joining

Potential future members Nenci, S.

Relation to Multilateralism

(are RIAs desirable ?)

Contrasting stances among economists:

1. Regionalism is an alternative to multilateralism (a

stumbling bloc) Bhagwati (1998)

2. Regionalism is a useful supplements to multilateralism (a

building bloc) Ethier (1998) e Baldwin (1999).

“Classical” answer:

• “It all depends”. Different degrees of preferences, depth of

integration, country coverage , country size etc.

Nenci, S.