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Benefiting from Regional Integration

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Presentation on theme: "Benefiting from Regional Integration"— Presentation transcript:

1 Benefiting from Regional Integration
Bernard Hoekman Maurice Schiff Junichi Goto

2 Key Messages Regional trade agreements (RTAs) are proliferating and now cover more than one third of world trade, but their liberalizing effect has not always been large. RTAs can create trade and bring many other benefits for development …but results are not automatic and depend critically on design and implementation. RTAs have systemic consequences that adversely affect excluded countries, requiring international attention. Definition of RTA Liberalizing effect modest from a global perspective, though important for some participants


4 Regional Trade Agreements are proliferating…
Annual number Total in force Cumulative in force New agreements annually Cumulative fall in 2004 reflects accession of 10 countries into EU and elimination of some 60 bilateral agreements …and now potentially cover more than one-third of global trade

5 Some Theories of Regional Integration Agreement

6 Stages of Economic Integration (five stages according to Balassa)
Free Trade Area (FTA) starting point rules of origin Customs Union common external tariffs Common Market movement of capital and labor Economic Union coordination of fiscal and monetary policy Complete Economic Union super-natural institution

7 Trade Creation Before: A=100, B=90*1.2=108, C=90*1.2=108
20 percent tariff Before: A=100, B=90*1.2=108, C=90*1.2=108 After: A=100, B=90, C=90*1.2=108

8 Trade Diversion Before: A=100, B=80*1.2=96, C=70*1.2=84
20 percent tariff Before: A=100, B=80*1.2=96, C=70*1.2=84 After: A=100, B=80, C=70*1.2=84

9 Expansion of the FTA and the Third Country
welfare Size of FTA

10 Further cost of S-S RIA

11 Article XXIV of the GATT
‘non-discrimination; MFN’ as the basic principle of WTO/GATT FTA and Customs Union as exceptions to the fundamental principle Article XXIV of the GATT sanctions if complete liberalization (100 percent, substantially all the trade) no increase in external barrier Ambiguous how soon “substantially all the trade” shall not on the whole be more restrictive Various proposal for strengthening it e.g. Bhagwati (set to the lowest)

12 Assessing RIAs in the World

13 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 US is Nafta 96-02 are other FTAs European Union European Union

14 …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 Methodological weaknesses: data are inconsistent; assumes Uruguay round is the only multilateral effect; assumes all RTAs are fully implemented with full coverage. Problems: It is impossible to distinguish interactive effects. China’s reform is unilateral, but it clearly had accession to WTO in mind. Same with much of ECA. 9.3 Source: Martin and Ng, 2004

15 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.

16 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

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

18 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

19 Both North-South and South-South accords can be improved…
Some sweeping generalization… North-South RIAs South- South RIAs Strengths Locking in reforms by binding commitments Services liberalization Move to international standards Weaknesses Restrictive rules of origin Exemptions, esp. agriculture Strengths Nonrestrictive rules of origin Adjacency permit trade facilitation Weaknesses Small markets/Higher external barriers Exemptions Minimal services

20 Design are crucial to achieving objectives
Large ex-post market Low external tariff barriers Nonrestrictive rules of origin Wide product coverage with minimal exemptions Liberalization of services Deeper integration Implementation: Avoiding paper agreements

21 Policy implications… International community through the WTO
Get Doha done Concentrate on transparency High income countries Widen coverage in FTAs (i.e. agriculture) Move toward conformity in rules of origin, and make less restrictive Developing countries Unilateral liberalization: driving competitiveness deep integration and institutional reforms (customs, ports, trade-related standards) Slide 2: Main messages [enter] -Global recovery is underway, with its locus in the US, increasingly in Japan and East Asia. // yet current projections are moderately below those prepared 6 months ago, as the Euro Area continues to lag -Developing countries have been resilient throughout the downturn and will play a key role in recovery... // though the international environment remains fragile // as macro stimulus measures in the rich countries have largely run their course [enter] Read #2 above [enter] Read #3 above

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