trade, regionalism, and development: integration, externalities, and productivity sherman robinson...
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Trade, Regionalism, and Development: Integration, Externalities, and
Productivity
Sherman Robinson
Peter Holmes, David Evans
Leo Iacovone, and Karen Jackson
University of Sussex
October 2005
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Outline
• Evolution of trade blocs: 1960s-1990s
• Historical typology of RTAs
• Composition of trade
• Shallow versus deep integration
• Deep integration and externalities
• Externalities and productivity
• Role of RTAs
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World Bank Study
• Global Economic Prospects: 2005– Historical analysis of trade shares and
trends in formation of trade blocs
• Methodology of finding trade blocs– Definition of a bloc: Countries trade more
within the bloc than with outside countries– Bloc membership: Country increases
within-bloc average trade share
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Trade Blocs: 1960s
World Countries and Regions
Europe + (70)US + (41)Asia-UK (56)Asia-US (6)
1960s
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Export Shares 1960s
Europe + N America + Asia-UK Asia-US Total
Europe + 75.4 14.2 8.2 2.3 100N America + 37.5 44.5 8.3 9.7 100
Asia-UK 48.8 12.7 20.6 18.0 100Asia-US 23.0 37.3 19.5 20.2 100
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Total Shares of World Trade 1960s
Europe + N America + Asia-UK Asia-US Total
Europe + 39.7 7.5 4.3 1.2 52.7N America + 11.2 13.3 2.5 2.9 29.9
Asia-UK 5.0 1.3 2.1 1.9 10.3Asia-US 1.6 2.6 1.4 1.4 7.1
Total 57.6 24.7 10.3 7.4 100
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Trade Blocs: 1970sWorld Countries and Regions
Europe + (21)N America + (30)E&SE Asia (23)S America (11)Rest (90)
1970s
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Trade Blocs: 1980sWorld Countries and Regions
Europe + (25)N America + (30)E&SE Asia (44)S America (11)Rest (65)
1980s
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Trade Blocs: 1990sWorld Countries and Regions
Europe + (42)N America + (31)E&SE Asia (43)MERCOSUR (6)Rest (61)Andean (4)S Africa + (4)
1990s
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Implications of Trends
• The formation of blocs pre-dated any explicit RTA.
• Three kinds of RTA:– Bloc creation– Bloc expansion– Market access
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Composition of Trade
• Increased trade as share of GDP– Largest increase in trade among OECD countries
• Increased trade in intermediate inputs– Import content of exports increased– International segmentation of production
• Increased trade in new products• Trends challenge standard trade theory and
analysis of gains from trade
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Analysis of RTAs and Global Trade Liberalization
• Standard analysis of RTAs:– Trade diversion versus trade creation– International prices: terms of trade– Rules of origin—spaghetti networks
• Trade liberalization– Increased efficiency and welfare triangles– Actual gains seem to be much larger than
can be explained by standard trade theory
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Shallow and Deep Integration
• Early RTAs and GATT rounds facilitated shallow integration: – Reduction of border trade barriers– PTA/EPA/RTA/FTA– Customs Union
• New RTAs all involve elements of “deep integration”.
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Deep Integration• Factor mobility
– Financial and FDI flows– Labor
• Regulatory harmonization– Standards and rules
• Domestic tax and subsidy policies• Harmonize macro policies• Institutions to manage and facilitate integration• Legal and institutional harmonization
– Commercial law– Dispute resolution
• Monetary union
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Negative and Positive Integration
• Negative integration: removal of barriers to cross-border flows of commodities– Role of multilateral liberalization: WTO– Role of RTAs
• Positive integration: fostering trade through deep integration– Often involves exploiting externalities and
correcting for market failures.
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Deep Integration & Externalities
• Types of externalities– External to firm, internal to industry– External to industry, internal to country– External to country, internal to world
• Public good externalities– Institutions, etc. that affect economic
environment in which firms operate– Sectoral, national, and international
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Trade and Productivity
• Link from RTA → deep integration → externalities → increased productivity
• Classify RTAs by potential for generating externalities through different forms of deep integration
• Case studies and anecdotal evidence
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Externalities and Productivity
• Technology transfer– Through trade and FDI
• Dynamic comparative advantage
• Productivity and production dispersion– Ricardian gains and factor proportions– Smithian gains from local economies of
scale and finer division of labor
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Ricardian vs Smithian gains
• Inter-industry trade creation
• Factor endowments determinants
• Constant returns• Exogenous
technology• Homogenous goods
– No role for standards
• Intra-industry trade creation– Horizontal quality differentiation– Vertical specialization
• Productivity, specialization, technology determinants
• Increasing returns• Endogenous technology• Heterogeneous goods
– Standards and harmonisation – NOT “ship and forget”
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Smithian gains and market integration
• Integration in global value-chains– Fragmentation of production
• Higher profitability from niche products– Quality and health standards harmonisation
lead to increased productivity
• Cross-border market failures: externalities• Inter-firm and intra-firm coordination• Economies of scale and technology
transfers
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Externalities and Positive Integration
• Intra-firm arrangements (e.g. FDI)
• Inter-firm (e.g., private standards: Eurepgap)
• national adoption of export related norms
• regional/bilateral agreements
• multilateral arrangements
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Potential Role for RTAs
• Support private sector initiatives– Institutional capacity building related to
specific export flows• Standards• Investment and pecuniary externalities
– Infrastructure and technology– Intra-industry trade via vertical value-chain
specialization
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Potential Role for RTAs
• Public sector– Nature of externalities and market failure
– Externalities: to industry and/or country• Infrastructure: physical and institutional
• Public goods
– Legal and institutional harmonisation• “Rules of the game”: more than a level
playing field
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New regulatory frameworks
• May raise productivity for some/all producers
• May raise costs for some/all producers
• Create/enhance market access– Wider and deeper markets
• Have differential effects on groups of consumers/producers
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Diagnostic Tests
• Are there trade-related externalities and market failures? – Potential for positive integration
• Does the RTA address them?• Is there scope for productivity gains?• Will gains cover the costs (to producers
and local consumers)?• What groups will profit most/least?
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Example: Egyptian Potatoes• Major export (25% tot. agric exports)• 90s: EU reg’s hit Egypt ( “brown rot” ban)• Barrier created new opportunity for Egypt:
– Adopting process standards key to exporting• EU-Egypt Agreement: institutional cooperation• Crucial role of governments
– Positive externalities• Institutional/country level (in EU and Egypt)
– Product standardisation
– Expanded markets
• Producer level: productivity increases
• Distributional impacts: large vs small farms
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Conclusions
• Historical analysis leads to a different view of RTAs: bloc creation, bloc expansion, market access– Bloc formation precedes formal RTAs
• Need to re-visit theory of “natural” trading partners
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Conclusions
• RTAs and deep integration may lead to externalities and productivity gains– Different types of RTAs have different
implications for these links– Different types of externalities
• Such gains, if present, are likely to be much larger than efficiency-gain triangles in standard trade analysis
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Conclusion
• Need to use tools of “new trade theory” and “new regionalism” to examine these links
• Detailed institutional analysis– Nature of externalities– Links to productivity
• Sectoral/firm/process case studies
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Conclusions
• New typologies of RTAs based on their potential role in internalizing externalities and achieving productivity growth
• Indicators of “good” versus “bad” RTAs– Externalities and TFP links– Gainers and losers: distributional implications