1. Regional Trade Agreements as Trade Policy Instruments
UNCTAD - DITC
Trade Analysis Branch
Copyright, 2000 © UNCTAD.

3. Types of RTAs and their main features (I)

4. Types of RTAs and their main features (II)

5. Quantifying RTA effects

6. The potential gains from integration (I)
Increased productivity as a result of economies of scale
Increased production efficiency as a result of further specialization in accordance with national comparative advantage
improved international bargaining position
efficiency gains due to increased competition
technological spillovers and increase in FDI

7. The potential gains from integration (II)
Scale economies made possible by the increased size of the market for firms operating below optimum levels before integration
intensified competition may lead to the adoption of best business practices
reduction of uncertainty and transaction costs
regional economic covergence

8. Potential costs of RTAs on member countries
The polarization effect
a relative or absolute economic decline of regions or nations as a result of the interaction between RTA measures and different forces:
differences in comparative advantage
dynamic effects: knowledge and technology spillovers, backward and forward supply linkages, cumulative causation, economies of scale
Trade diversion (discussed later)
Substantial negotiating and administrative resources, especially for small, developing economies
Transfer of tariff government revenues to domestic consumers and/or partners’ producers

9. Trade effects
trade creation: extra-imports from partner country that directly reduces your domestic production as an effect of RTA formation
trade diversion: extra-imports from partner country that directly reduces imports from third countries as an effect of RTA formation

10. Welfare effects Trade creation Trade diversion Welfare gains WelfareIf
overall supply is increased
And/or
lower cost imports replace higher cost domestic production If
imports from partner country displace lower cost imports
Welfare gains
Welfare
loss

11. Effects of elimination/reduction of trade barriers under an RTA
Country A
Partner countries
T Change in tariffs
Change in import prices
trade creation
trade diversion
Change in imports
Change in exports
Change in GDP
Change in domestic prices
Change in GDP
Change in domestic prices
Change in, savings, investment, production and consumption
Change in consumption, savings, investment and production
feedback

12. The African Case

13. Quantifying the effects of trade policies in the African case
We have seen that trade policy reform may contribute significantly to industrialization and growth
A key aspect of the influence of trade policies on regional exports and economic growth is the rate of protection on intermediary goods necessary for agricultural or manufactured products.
Tariffs on intermediate goods are additional direct costs making producers less competitive. They are also additional indirect costs for trade facilitation services.

14. What is the comparative situation of African trade barriers on intermediate goods?
Agricultural materials 60 50 40
tariffs (%) 30 20 10
Benin
Burkina
Faso
Cote
d’Ivoire
Ghana
Guinea
Bissau
Nigeria
Senegal
All Sub-
Saharan
Africa
Fast
Growing
Exporters

15. What is the comparative situation of African trade barriers on intermediate goods?

16. What is the comparative situation of African trade barriers on intermediate goods?

17. What is the comparative situation of African trade barriers on intermediate goods?

18. What is the comparative situation of African trade barriers on intermediate goods?

19. Results
African tariffs on intermediate goods are very high, reducing the export competitiveness of final products
high tariffs on agricultural inputs (fertilizers, machinery, etc) are a major constraint on rural development
duty drawbacks schemes are not administered efficiently and do not offset the influence of tariffs

20. Further analytical tools
Effective Rates of Protection

21. EFFECTIVE RATE OF PROTECTION (I)
ERP=T-(p/P)t
1-p/P
P -price of final product
p- price of intermediary inputs
T- tariff on final product
t - tariff on intermediary product

22. EFFECTIVE RATE OF PROTECTION (II)
Price of T-shirt (P): $1
Price of cotton yarn used in production (p): $0.6
Tariff on T-shirt (T): 20%
Tariff on yarn (t): 10%
Scenario B: duty-free access for yarn under an RTA
Scenario A: no RTA
ERP=
$0.35 ?
ERP=
$0.5 ?

23. Summary and conclusions
There are different types of RTAs, depending on membership and objectives
RTAs and trade policies in general have far reaching economic effects
The economic effects of RTAs depend upon their design
African countries should continue their trade policy reform at regional and multilateral level
Future strategy
tariff dismantling at regional or multilateral level on intermediary products are necessary to promote export competitiveness and economic growth
‘second best’ strategy: introduction of duty drawback schemes to promote exports