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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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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
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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
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4 Bloc Formation 1960s
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5 Trade Blocs: 1960s
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6 Export Shares 1960s Europe +N America +Asia-UKAsia-USTotal Europe +75.414.28.22.3100 N America +37.544.58.39.7100 Asia-UK48.812.720.618.0100 Asia-US23.037.319.520.2100
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7 Total Shares of World Trade 1960s Europe +N America +Asia-UKAsia-USTotal Europe +39.77.54.31.252.7 N America +11.213.32.52.929.9 Asia-UK5.01.32.11.910.3 Asia-US1.62.61.4 7.1 Total57.624.710.37.4100
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8 Bloc Formation 1970s
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9 Trade Blocs: 1970s
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Trade Shares 1970s
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11 Bloc Formation 1980s
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12 Trade Blocs: 1980s
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13 Export Shares 1980s Export Shares Europe +N America +E&SE AsiaS AmericaBloc 5Total Europe +72.811.96.61.27.6100 N America +23.948.020.23.14.9100 E&SE Asia18.836.136.81.07.4100 S America36.032.812.911.46.9100 Bloc 541.316.727.02.912.1100
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14 Total Shares of World Trade 1980s Europe +N America +E&SE AsiaS AmericaBloc 5Total Europe +35.25.83.20.63.748.3 N America +4.59.03.80.60.918.8 E&SE Asia4.38.38.50.21.723.0 S America1.00.90.40.30.22.8 Bloc 52.91.21.90.20.97.0 Total47.925.217.71.97.3100
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15 Bloc Formation 1990s
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16 Trade Blocs: 1990s
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17 Export Shares 1990s Europe +N America +MERCOSURE&SE AsiaEU-linkedAndeanBloc 7Total Europe +73.59.31.210.80.60.34.3100 N America +19.349.42.524.10.41.23.0100 MERCOSUR27.520.922.716.30.96.65.1100 E&SE Asia17.925.00.951.20.50.44.0100 EU-linked41.511.92.026.88.10.49.3100 Andean25.528.98.829.00.55.81.5100 Bloc 733.020.31.436.40.90.37.8100
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18 Total Shares of World Trade 1990s Europe +N America +MERCOSURE&SE AsiaEU-linkedAndeanBloc 7Total Europe +33.64.20.64.90.30.11.945.8 N America +3.89.80.54.80.10.20.619.9 MERCOSUR0.40.30.40.30.00.1 1.6 E&SE Asia4.96.80.313.90.1 1.127.2 EU-linked0.20.10.00.20.0 0.10.6 Andean0.10.20.00.20.0 0.6 Bloc 71.50.90.11.60.0 0.44.5 Total44.622.31.825.90.6 4.1100
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19 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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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
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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
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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”.
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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
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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.
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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
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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
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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
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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”
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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
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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
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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
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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
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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
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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
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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?
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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
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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
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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
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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
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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
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41 Country Export Shares to Trade Blocs, 1990s ( EU+)
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42 Country Export Shares to Trade Blocs, 1990s ( NAFTA+ & MERCOSUR )
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43 Country Export Shares to Trade Blocs, 1990s ( East & Southeast Asia )
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44 Country Export Shares to Trade Blocs, 1990s ( EU-linked & Andean )
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45 Country Export Shares to Trade Blocs, 1990s ( Residual )
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