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…