1. Global Economic Prospects, 2005: Trade, Regionalism and Development
Hans Timmer and Richard Newfarmer
World Bank
November, 2004

2. Global Outlook
Developing countries experience record growth in 2004, but will face less favorable macro conditions as the world economy slows in 2005 by around 1 percentage point.
Downside risks could slow the global economy further.
Many developing countries are well placed to absorb the slowdown and the risks, but poor oil importers and indebted middle-income countries are vulnerable.

3. Growth is projected to slow
Real GDP, percent change
Forecast
Developing countries

4. Developing economies remain above trend
Real GDP, percent change
Developing countries
Early 1980s
debt crisis
2001 Global
downturn
East Asia financial crisis
1990s recession
Transition countries

5. Outpacing developed countries
Real GDP, percent change
Developing countries
High-income countries

6. Strong performance of developing countries Real GDP per capita, percent growth
Average growth

7. Strong performance of developing countries Real GDP per capita, percent growth
Average growth
Acceleration
Deceleration

8. Strong performance of developing countries Real GDP per capita, percent growth
Average growth

9. Strong performance of developing countries Real GDP per capita, percent growth
Average growth

10. Emerging capacity constraints boosted commodity prices Per cent price increase, US$ and world trade-weighted effective terms
Source: World Bank.

11. Low Income (excl. India)
Higher oil-prices neutralized positive impact of other commodity prices for oil importers Impact of commodity price changes (2001–2004)
Terms-of-trade gains
% of GDP
non-oil prices
oil prices
both oil and non-oil prices
Low and Middle Income
Low Income (excl. India)
HIPC

12. Risks remain
Developed-world debt and US current account deficit might trigger financial tensions, including higher interest rates and weakening dollar.
Oil prices could rise further, instead of the moderation foreseen in the baseline
A hard landing in China is still a possibility

13. Poor oil importers are immediately hit by high oil prices Deviation from baseline in first year, per cent of GDP, with $10 higher oil price
Domestic
Demand
Current
Account
Balance

14. Impact of 200 basis point rise in long rates Deviation from baseline, percent of GDP

15. Trade, Regionalism and Development: Key Messages
Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest.
RTAs can create trade and bring other benefits for members …but results are not automatic and depend critically on design.
For non-members, discrimination in RTAs adversely affects excluded countries, posing systemic issues that require international attention.

16. Regional Trade Agreements are proliferating…
Annual number
Annual number

17. Regional Trade Agreements are proliferating…
Annual number
Total in force
Cumulative in force
New agreements annually
…and now potentially cover more than one-third of global trade

18. South-South RTAs predominate in number, but not in trade covered
Number of RTAs
Percent of World Trade Covered
South-South
South-South US US
European Union
European Union

19. Why this proliferation?
High-income countries, such as US and EU
To support foreign policy goals, including development
Slow progress on multilateral agenda: “competitive liberalization”
Access to services markets, protection of intellectual property, and rules for investment
Developing countries
Secure access to markets, especially large markets
More FDI
Among neighbors, lowering trade cost at border
Framework for regional cooperation

20. …but RTAs provide less new market access than it might appear
Share of trade covered (%), 2003

21. …and regional agreements are a relatively small driver of trade reform
Decomposing tariff reductions in response to multilateral, regional and own initiatives
Av. Tariffs, 1983 and 2003
Decomposing 20% pt. decline
29.9
9.3
Source: Martin and Ng, 2004

22. Assessing effects of RTAs on members: two ways
1 Prospective – general equilibrium models
Most agreements projected to create more trade than they divert
Projected gains less than multilateral
Excluded countries almost always lose
Market access is a key determinant on net benefits
2 Retrospective – econometric, gravity model
Different studies – different results
Meta analysis suggest that half of agreements have been net trade diverting

23. Effects on members

24. Effects on members: Do RTAs create – or divert -- trade?
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.

25. Effects on members: Do RTAs create – or divert -- trade?
Estimated exponential impact on trade
Overall exports
Overall imports
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.

26. Agreements with high external tariffs risk trade diversion
Average weighted tariffs
Note: Tariffs are import-weighted at the country level to arrive at PTA averages
Source: UN TRAINS, accessed through WITS

27. Lower external tariffs are associated with greater regional integration
Average external tariffs
SAS
MNA
SSA
LAC
ECA
EAP

28. Lower external tariffs are associated with greater regional integration
Average external tariffs
SAS
MNA
SSA
LAC
ECA
EAP

29. RTAs go far beyond trade
Standards
Transport
Customs
cooperation
Services
Intellectual
Property
Investment
Dispute
Settlement
Labor
Competition
U.S.-Led
US-Jordan No
Yes
US-Chile
US-Singapore
US-Australia
US-CAFTA
US-Morocco
NAFTA
E.U.-Led
EU-South Africa
EU-Mexico
EU-Chile
South-South
MERCOSUR
Andean Community
CARICOM
AFTA
SADC
COMESA
Other
Japan-Singapore
Canada-Chile
Chile-Mexico
Let’s consider: trade faciliation, services, investment, intellectual property rights and temporary movement of labor

30. Delays at border drives up trading costs
RTAs can provide framework for mutual efforts to reduce costs
Single customs document
Harmonize driving & weight regulations
Computerize both sides of the border
Trade/GDP
Malaysia
Ethiopia
Malawi
Uganda
Kyrgyzstan
Slovenia
Slovakia
Trade/GDP
Potential of RTAs to reduce border costs not yet realized

31. Services liberalization deepest in N-S agreements…
US and EU (less systematically) agreements establish
National treatment
MFN treatment for members
Nonrestrictive rules of origin of investor
Pre-establishment access subject to negative lists (US) or positive lists (EU)
Ratchet mechnanisms (US)
Upside potential great because risks of losses through diversion minimal.
…but achievements in additional liberalization subject to question
South-south gone much less far

32. Investment accords provide for new access 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.
However, market access more important than investor protections as no evidence that protections increase FDI flows to developing countries…
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 0.5 percent increase in FDI in the host country.

33. Intellectual property rights figure prominently in 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 investment and IPR rules depend heavily on market access these rules leverage

34. Labor services are area of potential
Types of labor services treatment
Full labor mobility (EFTA, ANZCERTA)
Access for certain groups (NAFTA, Japan-Singapore FTA)
Mode-4 type access (ASEAN, EU-Mexico)
No provisions (APEC, COMESA)
Patterns include:
Limited mobility
Skilled labor only: mainly intra-corporate
In conclusion…not much movement
Ironically, areas with least progress – services and labor – have greatest development potential… while in areas with most progress – investment and IPR – are those with uncertain development consequences

35. Both North-South and South-South accords can be improved…
Some sweeping generalization…
North-South
Index of ROO Restrictiveness
Strengths
Compatibility among economies
Services liberalization
Move to international standards
Weaknesses
Restrictive rules of origin
Exemptions, esp. agriculture
Inappropriate rules
No movement of workers
Estevadeordal, 2004

36. Both North-South and South-South accords can be improved…
Some sweeping generalization…
North-South
South- South
Strengths
Compatibility among economies/large markets
Services liberalization
Move to international standards
Weaknesses
Restrictive rules of origin
Exemptions, esp. agriculture
Inappropriate rules
No movement of workers
Strengths
Focus on trade
Nonrestrictive rules of origin
Adjacency permit trade facilitation
Weaknesses
Small markets/Higher external barriers
Exemptions
Minimal services
No movement of workers

37. Design and implementation are crucial to achieving objectives
Low external tariff barriers
Nonrestrictive rules of origin
Wide coverage with few exclusions
Liberalization of services
Facilitating trade at borders
Appropriate rules
Implementation: Avoiding paper agreements
….Open regionalism

38. Systemic issues…

39. Systemic issues…uneven and discriminatory access
Preferences hurt excluded countries

40. Systemic issues…uneven and discriminatory access
Preferences hurt excluded countries
Simulated welfare impact of Chile’s FTA with US
$ m.
Gains to Chile
Costs to excluded countries
Source: Harrison, et al, 2002

41. Systemic issues…uneven and discriminatory access
Preferences hurt excluded countries
Hub and spokes put weaker countries at disadvantage
Change in real income in 2015 compared to baseline in percent
Full multilateral liberalization

42. Systemic issues…uneven and discriminatory access
Preferences hurt excluded countries
Hub and spokes put weaker countries at disadvantage
Change in real income in 2015 compared to baseline in percent
Full multilateral liberalization
Individual RTA
(average)

43. Systemic issues…uneven and discriminatory access
Preferences hurt excluded countries
Hub and spokes put weaker countries at disadvantage
Change in real income in 2015 compared to baseline in percent
Full multilateral liberalization
Individual RTA
(average)
All countries sign RTAs

44. Systemic issues…uneven and discriminatory access
Preferences hurt excluded countries
Hub and spokes put weaker countries at disadvantage
Multiple arrangements burden customs

45. Overlapping African agreements…
Nile River Basin
COMESA
IGAD
ECCAS
AMU
CEMAC
Somalia
Algeria
Libya
Morocco Mauritania
Tunisia
Sao Tomé & Principe
Egypt
Cameroon
Central African Rep.
Gabon
Equat. Guinea
Rep.Congo
ECOWAS
Djibouti
Ethiopia
Eritrea
Sudan
Burundi*
Rwanda*
Ghana
Nigeria
Conseil de
L’Entente
Cape Verde
Gambia
Chad
DR Congo
Kenya*
Uganda*
Benin Niger
Togo Burkina Faso
Cote d’Ivoire
Angola
Guinea-Bissau Mali
Senegal
EAC
Liberia
Sierra Leaone Guinea
Tanzania*
Mauritius*
Syechelles*
Malawi*
Zambia*
Zimbabwe*
SACU
Comoros*
Madagascar*
WAEMU
Mano River Union
South Africa
Botswana
Lesotho
CLISS
Namibia*
Swaziland*
Reunion
AMU: Arab Maghreb Union
CBI: Cross Border Initiative
CEMAC: Economic & Monetary Community of Central Africa
CILSS: Permanent Interstate Committee on Drought Control in the Sahel
COMESA: Common Market for Eastern and Southern Africa
EAC: East African Cooperation
ECOWAS: Economic Community of Western African Studies
IGAD: Inter-Governmental Authority for Government
IOC: Indian Ocean Commission
SACU: Southern African Customs Union
SADC: Southern African Development Community
WAEMU: West African Economic & Monetary Union
*CBI
Mozambique
SADC
IOC

46. Systemic issues…uneven and discriminatory access
Preferences hurt excluded countries
Hub and spokes put weaker countries at disadvantage
Multiple arrangements burden customs

47. Systemic issues…uneven and discriminatory access
Preferences hurt excluded countries
Hub and spokes put weaker countries at disadvantage
Multiple arrangements burden customs
Disincentives to engage in multilateral liberalization

48. Policy implications… International community through the WTO
Get Doha done: lowers risk of trade diversion for members and minimizes effects on excluded countries
High income countries have systemic responsibility
Widen coverage in FTAs (i.e. agriculture)
Move toward conformity in rules of origin, and make less restrictive
Promote rules tailored to local capacities
Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objective
Unilateral: driving competitiveness
Multilateral: seeking broad market access
Regional: deep market access and institutional reforms (customs, ports, trade-related standards)

49. Global Economic Prospects, 2005: Trade, Regionalism and Development
Hans Timmer and Richard Newfarmer
World Bank
November, 2004

50. www.worldbank.org/ globaloutlook Multilingual, modular presentation
Printable version
Forecast database out to 2006
Downloadable charts
Insightful calculators and simulation tools
Valuable one-page data briefs

51. www.worldbank.org/ globaloutlook Multilingual, modular presentation
Printable version
Forecast database out to 2006
Downloadable charts
Insightful calculators and simulation tools
Valuable one-page data briefs