1. Formation of new Regional Integration Agreements (RIAs) *Source: WTO; Note: Inactive data for years 2000-2002 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 Initial (MFN) tariff Final (preferential) tariff

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

7. Trade in the CIS and the CEECs: more gravity estimates Source: Koukhartchouk and Maurel (2003) Notes: *** means significant at 1%, ** at 5%; n.s. means not significant Sample period: 1994-2001. Coefficients on bilateral-trade dummy variables Observed trade as a percentage of « potential » trade

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

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

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

11. 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 16 15 Base metal10 1 5 1. 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

12. 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)

13. 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

14. p p* (input’s world price) η* = P* - p* X = Y (IO coeff = 1 implies 45 degree line) Area’s input supply curve (input’s domestic price) Y(FG quantities) South’s supply of value added x,x*,X (input quantities) x s (p*) = Xk*(X) (desired mix) η = P – p (net price) - 1 South’s participation constraint η(P*,0) = P* η(P*,P*) = 0 Legend & notation : P : final good’s domestic price in the North (world price P*) Y : South’s output of the final good (exported to N) T : North’s tariff on the final good p : input’s domestic price in the area (world price p*) Y = min {V(K,L) ; X} (Leontieff technology, unit IO coeff.) X = x+ x* k*(X) = x s (p*)/X : desired input mix determined by supply Fix P* and p* and start from here η(P*,p) = P* - p Rules of origin Benchmark: no preferential access, no ROO (k = 1)

15. p* (input’s world price) P* - p* Area’s input supply curve (input’s domestic price) South’s supply of VA η = P – p P - p* - 1 South’s participation constraint η(P,0) = P η(P,P) = 0 η(P,p) = P - p pY X = Y x,x*,X x s (p*) = Xk*(X) Rules of origin Preferential access but no ROO (k = 1, blue)

16. p* P* - p* Area’s input supply curve (FG quantities) South’s supply of VA η P - p* - 1 South’s participation constraint -k P - π η(P,p) = P – (1-k)p* – kp -k*(X) > -k pY X = Y x,x*,X New notation : P = P* + T k = x/X (Rule Of Origin) π = kp + (1-k)p* (price of composite input given ROO) Increase in input producers’ surplus Rules of origin Preferential access and ROO at rate k (green) Case 1: participation constraint not binding p (new price of input)

17. p* P* - p* Area’s input supply curve (less elastic) South’s supply of VA η P - p* South’s participation constraint -k P - p η(P,p) = P – (1-k)p* – kp -k* > -k pY X = Y x,x*,X Rules of origin Preferential access and ROO at rate k (green) Case 2: participation constraint violated (inelastic supply of z)

18. 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

19. 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 supply curve US demand Quantity Price World price US internal price = World price + US MFN tariff Preferential tariff Tariff preference Potential increase in Mexican producer price Potential increase in Mexican supply US internal price – pref. tariff

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

21. 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

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