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1 Are trade blocs building or stumbling blocks? New evidence Richard E. Baldwin Professor of International Economics Graduate Institute, Geneva ERWIT Appenzell.

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Presentation on theme: "1 Are trade blocs building or stumbling blocks? New evidence Richard E. Baldwin Professor of International Economics Graduate Institute, Geneva ERWIT Appenzell."— Presentation transcript:

1 1 Are trade blocs building or stumbling blocks? New evidence Richard E. Baldwin Professor of International Economics Graduate Institute, Geneva ERWIT Appenzell 5 June 2008

2 2 Introduction Joint with Elena Seghezza Are free trade agreements bad? Pure economics – hard to get upset. Hard to find evidence of an effective FTA harming the signers or anyone else at a significant level of GDP. Politics is the big question: Do FTA hinder multilateral liberalisation?

3 3 SB Theory Stumbling/Building Bloc theory 4 mechanism in literature: –Preference-erosion/exploitation SB –Goodies-bag SB –Cherry-picking SB –Super-game SB or BB not really relevant to real world, IMHO

4 4 BB Theory Juggernaut BB Kemp-Wan BB Veto-avoidence BB (Induced unilateral protection/liberalisation) logic. –Optimal bilateral tariff: –Imported protection/liberalisation An FTA can render one partners MFN tariffs irrelevant (US Mexico)

5 5 Existing empirics BB: {actually unilateralism} –Estevadeordal, Freund and Ornelas (2006) SB: –US: Limão (2006), EU: Karacavaoli and Limão (2008) –Are UR cuts correlated with pre-existing preferences. –Answer YES

6 6 Facts of MFN liberalisation Tariff cutting in GATT Rounds : Principle supplier basis –Something like bargaining with a leader 1963 onward: formula –Bargaining too complex 12 nations, 1 min/tariff line = 25 years of 24/7 discussion. Agreeing basic tariff cutting before the talks start. –Kennedy (63-67) cut by a third –Tokyo (73-79) cut by a third –Uruguay (86-94) cut by not less than Tokyo

7 7 Empirics of MFN liberalisation Tokyo

8 8 Uruguay Round

9 9 Tariff cut budget Limaos work ignores the budget constraint imposed by the formula approach. Diff-in-diff can only focus on deviations from the average tariff cut. Limaos result: –model of tariff cuts –goodies-bag -> tariffs cut by less in some items. Claim: 1 st order SB means average tariff was cut by less due to RTAs

10 10 New approach Is the stumbling-bloc of first-order importance? If stumbling-bloc mechanisms have had a major impact on tariffs over the past decades, we should be able to detect this in the levels of the tariffs. –Highest MFN tariffs in the products where PTA tariffs are the lowest. Suggests that correlation of PTA and MFN tariffs has important information. –Across nations –Across products within nations Information in the level.

11 11 Across nations Figure : MFN and preferential tariff averages by nation, Stumbling Bloc: low PTA & high MFN Building Bloc: low PTA & low MFN

12 12 Tariff line data Start with top 50 exporters (2005) Drop some: –not WTO members no MFN rates (the Russian Federation, Vietnam, Ukraine, Iran), –Oil exporters (UAE, Saudi Arabia). –All MFN rates are zero (Hong Kong, Singapore) –Too many specific tariffs (Switzerland) 23 left: –Argentina, Australia, Brazil, Canada, Chile, China, EU, India, Indonesia, Israel, Japan, Korea, Malaysia, Mexico, New Zealand, Norway, Pakistan, the Philippines, South Africa, Taiwan, Thailand, Turkey, US.

13 13 Tariff line data Take ALL listed PTA tariffs (US has more than six) Variable ObservationsmeanStd devminmaxNumber of zeros MFN rate 1,430, ,768 Preferential rate 1,430, ,305 GAP (MFN-PTA) 1,430, ,320

14 14 Tariff line data Simple question: Are MFN and PTA tariffs complements or substitutes? Simple regression:: (1) MFN gpm = + PTA gpm + Dchapter gm + v gm Dchapter: 14 dummies for the main HS chapter aggregations (animal, vegetables, foodstuffs, mineral products, chemicals, plastics, raw hides, skin & leather, wood, textile, footwear, stone & glass, metals, machinery and transportation equipment. v, may contain a common group effect.

15 15 Zero MFN tariffs Zero MFN tariffs are an issue. –If MFN = 0, cant have SB. –AND Juggernaut theory predicts that MFN=PTA=0 frequently Including MFN=0 shades results against the hypothesis to test.

16 16 Only positive MFN tariffs First we throw out the zeros. SB - BB + s.e. Country dummies

17 17 Rich & poor nations Next we divide sample into rich & poor. –Different political economy?

18 18 Including all tariff observations Use all tariff lines, including zeros

19 19 Respecting the inequality constraint Since MFN PTA, OLS is not quite right. –PTA Coefficient should be more negative than -1.0 if substitutes, SB. –Greater than -1.0 if they are complements, BB.

20 20 END Thanks for listening: Please read:


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