Trade Policy Dialogue on the Multiple Dimensions of Market Access and Development Regional Trade Liberalization as a Complement to Multilateral Liberalization? Trade Policy Dialogue on the Multiple Dimensions of Market Access and Development Regional Trade Liberalization as a Complement to Multilateral Liberalization? Carlos A. Primo Braga Senior Adviser World Bank OECD Global Forum on Trade Mexico City, October 2006

Planning ahead

Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest. Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest. RTAs can create trade and bring many other benefits for development …but results are not automatic and depend critically on design and implementation. 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. RTAs have systemic consequences that adversely affect excluded countries, requiring international attention. Trade, Regionalism and Development: Key Messages

Regional Trade Agreements are proliferating… …and now potentially cover more than one-third of global trade New agreements annually Annual number Total in force Cumulative in force

South-South RTAs predominate in number, but not in trade covered South- South European Union US South- South European Union Percent of World Trade Covered Number of RTAs US

Why this proliferation? High-income countries, such as US and EU Grant trade access to support foreign policy goals, including development Grant trade access to support foreign policy goals, including development Slow progress on multilateral agenda: “competitive liberalization” Slow progress on multilateral agenda: “competitive liberalization” Access to services markets, protection of intellectual property, and rules for investment Access to services markets, protection of intellectual property, and rules for investment Developing countries Secure access to markets, especially large markets Secure access to markets, especially large markets Lock in reforms to promote domestic agenda Lock in reforms to promote domestic agenda More FDI More FDI Among neighbors, lowering trade cost at border Among neighbors, lowering trade cost at border Framework for regional cooperation Framework for regional cooperation

…but RTAs provide less new market access than it might appear Share of trade covered (%), 2003

…and regional agreements are a relatively small driver of trade reform Decomposing 20% pt. decline Source: Martin and Ng, 2004 Av. Tariffs, 1983 and Decomposing tariff reductions in response to multilateral, regional and own initiatives Decomposing tariff reductions in response to multilateral, regional and own initiatives

Assessing effects of RTAs on members: two ways 1 Prospective – general equilibrium models  Most agreements projected to create more trade than they divert  Projected gains less than multilateral  Excluded countries almost always lose  Market access is a key determinant on net benefits 2 Retrospective – econometric, gravity model  Different studies – different results  Meta analysis suggest that half of agreements have been net trade diverting

Estimated exponential impact on trade Intra-regional trade Overall exports Overall imports 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. Effects on members: Do RTAs create – or divert -- trade?

Agreements with high external tariffs risk trade diversion Note: Tariffs are import-weighted at the country level to arrive at PTA averages Source: UN TRAINS, accessed through WITS Average weighted tariffs

Lower external tariffs are associated with greater regional integration MNA SAS SSA LAC ECAEAP Average external tariffs

StandardsTransport Customs cooperationServices Intellectual PropertyInvestment Dispute SettlementLaborCompetition U.S.-Led US-JordanNo Yes No US-ChileYesNoYes US-SingaporeYesNoYes US-AustraliaYesNoYes US-CAFTAYesNoYes No US-MoroccoYesNoYes No NAFTAYesNoYes E.U.-Led EU-South AfricaYes EU-MexicoYes NoYes EU-ChileYes NoYes South-South MERCOSURNo Yes NoYes NoYes Andean CommunityNo Yes NoYes NoYes CARICOMYes NoYes AFTAYes NoYesNo SADCYes NoYes COMESAYes NoYes Other Japan-SingaporeYesNoYes Canada-ChileNo Yes NoYes Chile-MexicoYes RTAs go far beyond trade Let’s consider: trade faciliation, services, investment, intellectual property rights and temporary movement of labor

Delays at border drives up trading costs RTAs can provide framework for mutual efforts to reduce costs  Single customs document  Harmonize driving & weight regulations  Computerize both sides of the border Trade/GDP Potential of RTAs to reduce border costs not yet realized Trade/GDPMalaysia Ethiopia Malawi Uganda Kyrgyzstan Slovenia Slovakia

Services liberalization deepest in N-S agreements… US and EU (less systematically) agreements establish  National treatment  MFN treatment for members  Nonrestrictive rules of origin of investor  Pre-establishment access subject to negative lists (US) or positive lists (EU) Upside potential great because risks of losses through diversion minimal. …but achievements in additional liberalization subject to question South-south gone much less far

Investment accords provide for new access and new investor protections… Potential benefits include greater FDI flows because…  Liberalized market access  increased payoff to trade integration,  reduced risk premium  enhanced credibility of investment climate Reduced international policy spillovers  Rent shifting via TRIMs, etc. However, market access more important than investor protections as no evidence that protections significantly increase FDI flows to developing countries… RTAs that create large ex-post market results and, provided good investment climate, do attract more FDI. A 10% increase in post-FTA market size is associated with a 0.5 percent increase in FDI in the host country.

Intellectual property rights figure prominently in N-S RTAs, particularly US FTAs US FTAs contain TRIPS Plus provisions that provide greater IPR protection. Brings generics under market and data exclusivity arrangements No analysis of economic consequences prior to signing Open questions:  Will FTAs foreclose use of Doha flexibilities on TRIPS for generics?  Will stronger IPRs contribute to more FDI and high tech trade?  Are TRIPS Plus measures appropriate to all countries? Conclusion: Development consequences of investment and IPR rules depend heavily on market access these rules leverage

Labor services are area of potential Types of labor services treatment  Full labor mobility (EFTA, ANZCERTA)  Access for certain groups (NAFTA, Japan-Singapore FTA)  Mode-4 type access (ASEAN, EU-Mexico)  No provisions (APEC, COMESA) Patterns include:  Limited mobility  Skilled labor only: mainly intra-corporate  In conclusion…not much movement Ironically, areas with least progress – services and labor – have greatest development potential… while areas with most progress – e.g., IPR – are those with more uncertain development consequences

Perceptions of risk and opportunities vary …

Both North-South and South-South accords can be improved… Strengths Strengths  Compatibility among economies  Services liberalization  Move to international standards Weaknesses Weaknesses  Restrictive rules of origin  Exemptions, esp. agriculture  Inappropriate rules  No or limited movement of workers North-South Some sweeping generalization… Index of ROO Restrictiveness Estevadeordal, 2004

Strengths Strengths  Compatibility among economies/large markets  Services liberalization  Move to international standards Weaknesses Weaknesses  Restrictive rules of origin  Exemptions, esp. agriculture  Inappropriate rules  No movement of workers North-South South- South Strengths Strengths  Focus on trade  Nonrestrictive rules of origin  Adjacency permit trade facilitation Some sweeping generalization… Weaknesses Weaknesses  Small markets/Higher external barriers  Exemptions  Minimal services  No movement of workers Both North-South and South-South accords can be improved…

Design Design  Large ex-post market  Low external tariff barriers  Nonrestrictive rules of origin  Wide product coverage with minimal exemptions  Liberalization of services  Facilitating trade at borders  Appropriate rules Implementation: Avoiding paper agreements Implementation: Avoiding paper agreements Design are crucial to achieving objectives Design are crucial to achieving objectives ….Open regionalism

Algeria Libya Morocco Mauritania Tunisia AMU Ghana Nigeria Cape Verde Gambia ECOWAS Benin Niger Togo Burkina Faso Cote d’Ivoire Conseil de L’Entente Guinea-Bissau Mali Senegal WAEMU Liberia Sierra Leaone Guinea Mano River Union CLISS Cameroon Central African Rep. Gabon Equat. Guinea Rep.Congo Chad Sao Tomé & Principe ECCAS CEMAC Angola Burundi* Rwanda* Egypt DR Congo Djibouti Ethiopia Eritrea Sudan Kenya* Uganda* Somalia Tanzania* EAC South Africa Botswana Lesotho Namibia* Swaziland* Mozambique SACU Malawi* Zambia* Zimbabwe* Mauritius* Syechelles* Comoros* Madagascar* Reunion IOC *CBI SADC COMESA Nile River Basin IGAD AMU: Arab Maghreb Union CBI: Cross Border Initiative CEMAC: Economic & Monetary Community of Central Africa CILSS: Permanent Interstate Committee on Drought Control in the Sahel COMESA: Common Market for Eastern and Southern Africa EAC: East African Cooperation ECOWAS: Economic Community of Western African Studies IGAD: Inter-Governmental Authority for Government IOC: Indian Ocean Commission SACU: Southern African Customs Union SADC: Southern African Development Community WAEMU: West African Economic & Monetary Union Overlapping African agreements…

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Multiple arrangements burden customs Disincentives to engage in multilateral liberalization Hub and spokes put weaker countries at disadvantage

International community through the WTO International community through the WTO  Get Doha done  Concentrate on transparency/Article XXIV High income countries have systemic responsibility High income countries have systemic responsibility  Widen coverage in FTAs (i.e. agriculture)  Move toward conformity in rules of origin, and make less restrictive  Promote rules tailored to local capacities Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objective Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objective  Unilateral: driving competitiveness  Multilateral: seeking broad market access  Regional: deep market access and institutional reforms (customs, ports, trade-related standards) Policy implications…

The importance of being prepared …

Source: World Bank (2005) Global Economic Prospects Thank you !