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Formation of new Regional Integration Agreements (RIAs) *Source: WTO; Note: Inactive data for years 2000-2002 are not available.

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Presentation on theme: "Formation of new Regional Integration Agreements (RIAs) *Source: WTO; Note: Inactive data for years 2000-2002 are not available."— Presentation transcript:

1 Formation of new Regional Integration Agreements (RIAs) *Source: WTO; Note: Inactive data for years are not available.

2 Types of RIA By increasing order of integration: 1.Preferential Trading Agreements (PTAs): give preferential access to partners without eliminating all barriers 2.Free-Trade Areas (FTAs): eliminate internal tariffs to trade but leave members free to fix their external tariffs as they wish Governed by GATT Article XXIV Require the use of Rules of Origin (ROOs) 3.Customs Unions (CUs): eliminate internal tariffs to trade and adopt a Common External Tariff (CET) 4.Single/Common Market: eliminate all internal barriers, direct or indirect, harmonize not just external trade policy but also regulations and standards 5.Economic Union: in addition, adopt a common currency and harmonize macroeconomic policy

3 Congo, R.D. Namibia Swaziland Angola Burundi Comoros Djibouti Kenya Malawi Uganda Tanzania SudanEritreaEthiopia Madagascar Mauritius Rwanda SeychellesZambia Zimbabwe Botwana Lesotho Mozambique South Africa COMESA SADC SACU RIFF IOC The spaghetti bowl---An example: East and South Africa

4 Trade creation and trade diversion: trade pattern Country C Country B FTA imports home production competes with imports from B and C Country A

5 Trade creation and trade diversion: numerical example Imports from partner displace inefficient domestic production Imports from partner displace efficient imports from rest of the world

6 Trade creation and trade diversion: gravity estimates Source: Carrère (2004) trade creation trade diversion

7 Effect of RIA on the price of non-member exports US export prices compared, Brazil vs ROW MERCOSUR’s formation

8 Convergence during reduction in trade barriers Other effects of RIAs: Income convergence Dispersion of per-capita incomes in the EC

9 RTAs can also provide insurance against partners’ unilateralism: Comment by political scientist Dan Drezner on Hillary Clinton’s proposal to review NAFTA every 5 years, posted (October 18, 2007) on Dani Rodrik’s blog: “Last week, [Senator Clinton proposed] that we reassess our trade agreements every five years and demand adjustments to them if necessary, starting with NAFTA. “This proposal makes me wonder if Senator Clinton understands the value-added of these free-trade agreements. […] They offer a guarantee to these countries that their relationship with the United States -- and their access to American consumers -- will not be disrupted. “[…] Senator Clinton's proposal would strip these agreements of the very certainty that makes them attractive to our allies. How does Senator Clinton think our trading partners in the Middle East, Central America, and Pacific Rim will react to her proposal? How is this proposal any different from the unilateralism that Democrats have condemned for the past six years?‘”

10 No agreement: Volatility of trade policy vis-à-vis country 1 (MFN partner, y1) and country 2 (preferential partner, y2) in the absence of any agreement The effect we are trying to identify (simulated data)

11 RTA: Border taxes are reduced during the transition period and completely eliminated at its end vis-à-vis country 2 (y2) MFN: No volatility-reducing effect on MFN trade measures (y1) Effect of transition on aggregate volatility is swamped by volatility in MFN measures [σ(y1)]

12 Results: baseline, second stage Bias: countries sign RTAs when they have too much volatility

13 Results: baseline, second stage Bias: countries sign RTAs when they have too much volatility

14 Other effects of RIAs: FDI Launch of NAFTA negotiations NAFTA put into force Amount of FDI into Mexico, million dollars

15 Vertical trade at work: Garment export growth, SSA Clothing exports to the US, selected ESA countries Source: Cadot et al 2004 Notes AGOA: US Africa Growth and Opportunity Act, voted in 2001, gives duty-free access to African LSCs HS61-62: Clothing categories in the customs Harmonized System

16 Garment export growth: Madagascar Export-led growth: clothing products Source: Nicita 2004

17 Tariff Preference NAFTA utilization rate 11. Textile 19. Arms 14. Jewelry 8. Leather goods 17. Transport Eq. 20. Misc. 12. Footwear 7. PLastics 3. Fats and Oils 6. Chemicals 13. Stone & Glass 4. Food. Be. & Tobacco 9. Wood 18. Optics Base metal Live animals 2. Vegetables 5. Mineral Products 10. Pulp & paper 16. Machinery &El.eq 2 Rules of origin Mexico’s utilization of NAFTA, 2000, by HS section Note: NAFTA utilization rate: proportion of Mexican shipments entering the US under NAFTA’s preferential regime (as opposed to MFN) 10% tariff preference 5% tariff preference

18 Rules of origin Mexico’s exports in ROO/tariff preference space Note: ROO index: Estevadeordal’s (2000) qualitative index of ROO restrictiveness (essentially how wide is the required change of tariff heading to make imports eligible)

19 01 Chapter: Live animals 0101 Heading: Iive horses, asses, mulles and hinnies 0102 Heading: Live bovine animals 0103 Heading: Live Swine 0104 Heading: Live sheep and coats 0105 Heading: Live poultry Subheading: Purebred breeding animals Subheading: Others Item: Males Item: Females Item: Horses Item: Asses The “Harmonized system”: Overall structure

20 Product-Specific Rules of origin: Examples Exceptions

21 Product-Specific Rules of origin: Examples Funny Technical requirements NAFTA Cotonou Convention (EU)

22 Comparative advantage Weaving Dying Cutting Assembly Natural-resource intensive Capital-intensive Labor- intensive Infrastructure -intensive Ginning Spinning Cotton production Retailing Shipping Rules of origin Why they hurt: “slicing up the value chain” becomes more difficult Tunisia

23 Rules of origin Pass-through of tariff preferences: the principle US market Assumptions No US production Mexican producers perfectly competitive Market power on the US buyer side, so Δt captured only partially by Mexicans Mexican pre-tariff supply price US demand Quantity Price World price US internal price = World price + US MFN tariff Preferential tariff Mexican post-tariff supply price Tariff preference Potential increase in Mexican producer price Potential increase in Mexican supply

24 Rules of origin Pass-through of preferences: NAFTA Source: Cadot et al. (2004)

25 Rules of origin Pass-through of preferences: NAFTA US intermediate producer Mexican final good 1 Mexican final good 2 Rest of the world US consumer market a i1 a i2 < roo 1 < roo 2 < roo 0 Mexico’s external tariff Mexico’s NAFTA tariff on fabric US NAFTA tariff on blue & red socks

26 Rules of origin Pass-through of preferences: NAFTA Source: Cadot et al. (2004) not significant significant


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