The WTO and preferential trade agreements: From co-existence to coherence Discussion by Emanuel Ornelas World Trade Report 2011

Jaime de Melos Remarks at the WTO Report Launch 2010 I congratulate the WTO for this selection, a welcome report after so many reports by international organizations on Regionalism and the Multilateral Trading System or on Trade and Agriculture, topic s for which it is difficult to add much information from one report to the next.

The World Trade Report 2011 An insightful survey of what we know about PTAs But also much more:

What does the WTR 2011 have? Information/data Very thorough mapping of current state and of evolution over time of PTAs (much improved and updated) PTA X-ray: what is inside PTAs (new!) Diagnosis of how much trade is preferential (new!) And of how often preferences are used (new!) Emphasis on the institutional setting

What does the WTR 2011 have? (cont.) Analysis Lucid overview of motives for engaging in PTAs and the consequences of PTAs Economic, political, etc. Insightful overview of relationship between PTAs and multilateralism Building blocs? Stumbling blocs? New regionalism is different (new!) Out: market access In: production networks Ideas on how to multilateralize regionalism

Production networks vs. market access What is the Reports view? Scientific method of … counting: market access: 47 production network: if supply chain is included 145 if offshoring is included Fresh view is very welcome But can we dismiss the traditional view this quickly?

In PTA formation, are market access motivations really out? WTR: yes MFN tariffs are already very low on average Preferential margins very small Products with high MFN rates often left out in PTAs Not much trade is preferential anyway

Qualifications Average trade-weighted MFN tariff in 2009 is just 4% Low figure driven to a significant degree by EU, US and Japan But most PTAs do not involve them And in any case, a small preference in those large markets can be significant

Qualifications Preferential margins are small when adjusted to account for the preferential access enjoyed by others Relevant counterfactual is not situation where nobody has preferences, but situation where others have but I do not And even when preferential margins are small, they are very likely to be used For the EU and the US, around 90% of utilization rate

Qualifications Products with high MFN rates often excluded in PTAs Not surprisingly, given what we know from political-economy analyses of PTAs Still:

WTR: 2/3 of tariff lines with MFN>15% have not been reduced in PTAs Alternative view: 1/3 of tariff lines with MFN>15% have been reduced in PTAs And figures consider that there is exclusion if product is not liberalized in first year of PTA

Qualifications Not much trade is preferential Trade between PTA members: US$537b (1990) US$4 trillion (2008) In shares?

Qualifications Not much trade is preferential Trade between PTA members: US$537b (1990) US$4 trillion (2008) In shares? But how much trade is really preferential? Key distinctions: With/without intra-EU With/without MFN-free trade (50% of world trade is already free!)

WTR: surprisingly low share of preferential trade Alternative view: significant share of preferential trade just 16% close to 2/3 of all taxable trade

Qualifications Not much trade is preferential Trade between PTA members: US$537b (1990) US$4 trillion (2008) In shares? But how much trade is really preferential? Key distinctions: With/without intra-EU With/without MFN-free trade (50% of world trade is already free!) Perhaps more important is to know the potential for future discriminatory market access in PTAs

BRICs

Qualifications Applied tariffs bound tariffs WTR 2009 (on trade policy commitments and contingent protection): in most of the developing world, 70–90% of the tariffs could be raised by at least 15 percentage points PTAs provide certainty of improved market access.

Qualifications Survey of Government Reports discussed in the WTR 2011: According to governments, PTAs are predominantly about securing preferential market access and attracting investment

In PTA formation, are market access motivations really out? From the wealth of information put together in the WTR 2011: not really Much of global trade is preferential Yet there is also scope for significant more preferential trade Preferences seem to matter even when preferential margins are small Preferences can be especially important when there is water in the (MFN) tariff

In PTA formation, are production network motivations really in? WTR: yes Market access is no longer that important, so there must be something else Actual PTAs involve much more than tariff reduction (deep integration) Those behind-the-border measures affect the desirability of production networks Production networks seem to be particularly important drivers of recently formed PTAs

Qualifications Share of within-PTA trade relative to world trade very similar for parts & components and for other goods Analysis of content of PTAs in WTR11 All of the 96 agreements contain provisions relating to industrial and agricultural tariffs. How about WTO-X provisions?

Qualifications Non-tariff provisions also have potentially large market access effects Ex.: recognition & harmonization of standards used only by PTA members; service licenses exclusive to PTA partners Potentially discriminatory, can lead to significant trade creation/trade diversion

Qualifications Are PTAs signed to reduce AD activity among members? Prusa & Teh (2010): yes Another situation where traditional analysis applies very well

Qualifications Competition policies in PTAs are likely to be non-discriminatory (and welcome) Yes, but PTAs also have investment provisions Firms from PTA partners tend to have more favourable FDI conditions, and therefore also benefit more from the competition measures

Qualifications Antràs & Staiger (2011) provide some theoretical foundation: New externality due to prices being determined through bilateral bargaining, as often in production networks, rather than through market clearing Negotiations aimed at exchanging market access no longer sufficient But it is not clear how deep agreements could fix that problem

Qualifications Orefice & Rocha (forthcoming) provide some econometrics support PTAs trade in parts & components among partners by 35% on average More non-tariff provisions more trade in parts & components More trade in parts & components relative to total trade deeper PTAs Econometrics specification needs some further clarification In any case, additional effect of a provision is small 1 extra provision of 2 extra percentage points in trade in parts & components Effect of trade in parts on depth of PTA is very small Quadrupling share of trade in parts & components number of non-tariff provisions increases on average by one Would effects on other types of goods be very different? More non-tariff provisions are probably associated with deeper tariff cuts in most sectors

Qualifications Some case study evidence for relationship between PTAs and production networks: ASEAN and Costa Rica ASEAN: most of the reduction in trade costs occurred before 2002 But this is also the period where most of the preferences were implemented Look also at Chile PTA champion: participates in 26 PTAs 87% of Chilean exports are in primary products (of which mining is almost ¾) Singapore is probably best candidate to study effects of deep integration

More generally For behind-the-border policies that are non-discriminatory, why do countries need PTAs? Are those policies and tariffs complementary?

Market access and production network motivations are not unrelated Yi (2003): with production networks, because of multiple border crossings effect on trade flows of even small tariff reductions can be very large Ornelas & Turner (2008): with relationship- specific investments and lock-in effects, typical in production networks, effect on trade flows of even small tariff reductions can be very large Neither paper is about PTAs, but extension is immediate: with production networks, trade creation/trade diversion effects may be much bigger than usual Market access through preferences and gains through production networks are not independent, but complementary motives for PTA formation.

Overall evaluation Very innovative view on PTAs Insightful introduction to the topic for students, academics and practitioners alike Best available, by far Sets the agenda for what is next in the PTA literature New data and new analysis will set the tone in future research on the topic Hopefully it will also influence future WTO negotiations on PTA rules and design

Congratulations on an excellent piece of work!