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Trade, Regionalism, and Development: Integration, Externalities, and Productivity Sherman Robinson Peter Holmes, David Evans Leo Iacovone, and Karen Jackson.

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Presentation on theme: "Trade, Regionalism, and Development: Integration, Externalities, and Productivity Sherman Robinson Peter Holmes, David Evans Leo Iacovone, and Karen Jackson."— Presentation transcript:

1 Trade, Regionalism, and Development: Integration, Externalities, and Productivity Sherman Robinson Peter Holmes, David Evans Leo Iacovone, and Karen Jackson University of Sussex October 2005

2 2 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

3 3 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

4 4 Bloc Formation 1960s

5 5 Trade Blocs: 1960s

6 6 Export Shares 1960s Europe +N America +Asia-UKAsia-USTotal Europe N America Asia-UK Asia-US

7 7 Total Shares of World Trade 1960s Europe +N America +Asia-UKAsia-USTotal Europe N America Asia-UK Asia-US Total

8 8 Bloc Formation 1970s

9 9 Trade Blocs: 1970s

10 Trade Shares 1970s

11 11 Bloc Formation 1980s

12 12 Trade Blocs: 1980s

13 13 Export Shares 1980s Export Shares Europe +N America +E&SE AsiaS AmericaBloc 5Total Europe N America E&SE Asia S America Bloc

14 14 Total Shares of World Trade 1980s Europe +N America +E&SE AsiaS AmericaBloc 5Total Europe N America E&SE Asia S America Bloc Total

15 15 Bloc Formation 1990s

16 16 Trade Blocs: 1990s

17 17 Export Shares 1990s Europe +N America +MERCOSURE&SE AsiaEU-linkedAndeanBloc 7Total Europe N America MERCOSUR E&SE Asia EU-linked Andean Bloc

18 18 Total Shares of World Trade 1990s Europe +N America +MERCOSURE&SE AsiaEU-linkedAndeanBloc 7Total Europe N America MERCOSUR E&SE Asia EU-linked Andean Bloc Total

19 19 Implications of Trends The formation of blocs pre-dated any explicit RTA. Three kinds of RTA: –Bloc creation –Bloc expansion –Market access

20 20 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

21 21 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

22 22 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”.

23 23 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

24 24 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.

25 25 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

26 26 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

27 27 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

28 28 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”

29 29 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

30 30 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

31 31 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

32 32 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

33 33 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

34 34 Evaluating RTAs Ricardian Trade Smithian niche Smithian value-chain Type of industry/trade Type of barriers faced Externalities RTAs vs other mechanisms Poverty and distributional impacts

35 35 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?

36 36 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

37 37 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

38 38 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

39 39 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

40 40 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

41 41 Country Export Shares to Trade Blocs, 1990s ( EU+)

42 42 Country Export Shares to Trade Blocs, 1990s ( NAFTA+ & MERCOSUR )

43 43 Country Export Shares to Trade Blocs, 1990s ( East & Southeast Asia )

44 44 Country Export Shares to Trade Blocs, 1990s ( EU-linked & Andean )

45 45 Country Export Shares to Trade Blocs, 1990s ( Residual )


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