1. Regionalism And Multilateralism 1 SESSION V REGIONALISM AND THE MULTILATERAL TRADING SYSTEM This version, April 5, 2004 JAIME DE MELO

2. Regionalism And Multilateralism 2 OUTLINE: SESSION V Relation of regionalism to multilateralism: static and dynamic issues Regionalism and Tariff levels Trade Blocs and excluded countries Regionalism as Insurance Domino Regionalism

3. Regionalism And Multilateralism 3 THE TWO WAVES OF RIAs (from Overview) RIAS Notifications to the GATT/WTO 1949 25 20 15 10 5 196119701976 1991 1997

4. Regionalism And Multilateralism 4 MAIN ISSUES What makes Regional Integration Agreements (RIAs) suddenly so popular? Should one worry (relation to the multilateral system)? Is regionalism an insurance policy if the WTS goes awry? Have RIAs led to increases in protection against non- members? How does regionalism affect the WTS? These issues can be summarized in the paths for world welfare under the different scenarios below

5. Regionalism And Multilateralism 5 RELATION TO MULTILATERALISM (are RIAs desirable ?) Two strategies towards world trade liberalization: Multilateralism (M) or Regionalism (R)? 1. Static considerations: - M is non-discriminatory welfare (U) (paths M(1) and M(2) in figure below) - R may increase or decrease world welfare (paths R(2) vs R(1) in figure below) 2. Dynamic issues: - M becomes uncertain:see difficulties to launch the millenium round (paths M(1) or M(2)) - R is uncertain too! (less members and deeper integration are positive factors (path R(3)), but between them RIA blocs may remain protectionist)

6. Regionalism And Multilateralism 6 ARE RIAs DESIRABLE ?: GRAPHICAL ANALYSIS ULUL U2RU2R U1RU1R U0U0 t0t0 R(3) M(2) M(1 ) R(2) R(1) 0 time

7. Regionalism And Multilateralism 7 OTHER ISSUES AND CONTROVERSIES Does regionalism go hand in hand with multilateral trade liberalization (MTL) or does it work at cross- purposes, i.e. does sufficiently deep regionalism reduce the incentives of members to participate in further multilateral trade negotiations? Would a world organized in a few trading blocks (the triad) hurt those left out?

8. Regionalism And Multilateralism 8 Regionalism and Tariff levels In spite of the waves of RIAs, tariffs still significant

9. Regionalism And Multilateralism 9 Regionalism and Tariff levels The table below (See S-W box 8.3 for details) tries to compare openness and tariff changes in significant RIA members with non-significant or non-RIA countries. No increase in protectionism in RIA countries. RIAs could also have helped lock in previous reforms, but many caveats

10. Regionalism And Multilateralism 10 Effects on third countries TOT of US for 1356 manufactures sold to Brazil and to ROW Absolute and relative decline in TOT !!! Can you explain why? MERCOSUR: CU (Argentina, Brazil, Uruguay, Paraguay) Went into effect in 1995 As expected by theory, but need next graph that isolates effects of Brazil on US exports

11. Regionalism And Multilateralism 11 Effects on third countries (Mercosur end) Same effect for Korea (but with less commodities) Still after controlling for exchange rates and other factors, result holds …rather convincing evidence that for manufactures (differentiated products), preferential trade liberalization lowers prices or excluded countries.

12. Regionalism And Multilateralism 12 Domino Regionalism (I) …. May be best not to be left in the cold when regionalism is spreading (the excluded effect on profits seen earlier) but does this make regionalism a good thing? Below results of a Cournot model where each bloc maximizes welfare (i.e. chooses welfare maximizing tariffs, taking other blocs policy as given) There are no transport costs within continents (blocs are formed within continents) and positive trading costs across continents. At the start each country has an MFN,and there are 4 continents.

13. Regionalism And Multilateralism 13 Figure 8.4 Domino Regionalism -4 -3 -2 0 1 2 3 01234 Number of Blocs Welfare relative to non- discrimination Inside Outside World …. Initially each continent can improve its welfare by improving its TOT as others lower prices to mitigate loss of competitiveness. Second continent, joins and converts a loss to a gain, third converts loss into lesser one. …. When all are in an RIA, they are worse off than under MFN. Not robust to asymmetric blocs, but still poses a question on stepping bloc vs. stumbling bloc Domino Regionalism (II)

14. Regionalism And Multilateralism 14 Table 8.4 Domino Regionalism Strong ExpansionIntermediate Expansion No Expansion EU (ex-EC): 1957: BeNeLux, France, Germany, Italy; 1973: Denmark, Ireland, UK; 1981: Greece; 1986: Portugal, Spain; 1995: Austria, Finland, Sweden; and plan to include the CEECs and some Mediterranean island countries. CUSFTA: 1989: Canada, US; becoming NAFTA by including Mexico: 1994; and possible expansion to FTAA. APEC: 1989: Australia, Brunei Darussalam, Canada, Indonesia, Japan, the Republic of Korea, Malaysia, New Zealand, Rep. of the Philippines, Singapore, Thailand, United States; 1991: Peoples Republic of China, Taiwan (China), Hong Kong (China); 1993: Mexico, Papua New Guinea; 1994: Chile; 1998: Peru, Russia, Vietnam. CARICOM: 1973: Antigua and Barbuda, Barbados, Jamaica, St. Kitts and Nevis, Trinidad and Tobago;1974:Belize, Dominica, Grenada, Montserrat, St. Lucia, St. Vincent and the Grenadines; 1983: The Bahamas (part of the Caribbean Community but not of the Common Market). UDEAC: 1966: Cameroon, Central African Republic, Chad, Congo, Gabon; 1989: Equatorial Guinea. Euro- Mediterranea n Agreement: FTAs between EU and Mediter. countries. FTAs between EU and Mexico, EU and Chile, etc. FTA between MERCOSUR and Chile, and between MERCOSUR and Bolivia. Andean Pact, CACM, G3, CBI, EAC, ECOWAS, COMESA, IOC, SACU, CEPGL, Arab Common Market, GCC, SAARC. Weaker form of regionalism Same form of RIA 13

15. Regionalism And Multilateralism 15 Strong ExpansionIntermediate Expansion No Expansion SADC: 1980: Angola, Botswana, Lesotho, Malawi, Mozambique, Swaziland, Tanzania, Zambia, Zimbabwe; 1990: Namibia; 1994: South Africa; 1995: Mauritius; 1998: Democratic Republic of the Congo, Seychelles. UEMOA: 1994: Benin, Burkina Faso, Côte dIvoire, Mali, Niger, Senegal, Togo, 1997: Guinea-Bissau. CEFTA: 1993:1996: Czech Republic, Hungary, Poland, Slovak Republic, Slovenia; 1997: Romania; 1988: Bulgaria. AFTA: 1992, Indonesia, Malaysia, Philippines, Singapore, Thailand; 1984: Brunei Darussalam; 1995: Vietnam; 1997: Myanmar, Lao Peoples Democratic Republic; 1999: Cambodia. Table 8.4 Domino Regionalism (continued) …but when the size of RIAs is taken into account, expanding RIAs dominate strongly, …the larger the bloc, the more costly it is to stay out of it (this is largely why the Nordic countries joined the EU)

16. Regionalism And Multilateralism 16 Regionalism as Insurance Simulation model (with real trade data) where one region, ROW, does not get into a trade war= set tariff that maximizes your blocs income taking the other blocs tariffs as given. …only illustrative since tariffs are GATT-bound but still it is a proxy for what insurance from being in a bloc might buy. Clearly, Canada and Mexico do better if while the six regions fight the war if they are in a CU with the US. The same applies to other Western Europe if they were in a CU including the US and EU. If we had FTAs instead of CUs, there would be less welfare loss from being outside since countries would not coordinate to exploit TOT gains.

17. Regionalism And Multilateralism 17 LOSSES OF ECONOMIC WELFARE AS % OF GDP RELATIVE TO 1986 (Equivalent Variations) Trade War With:No CUsCanada-US CUNorth America CU North America- Europe CU US1.20.5-0.40.5 Canada-25.50.90.4-0.7 Mexico-8.5 0.1-0.3 Japan-5.2 -5.4 EC (12)3.73.4 2.5 Other Western Europe-32.2-33.1-33.510.1 The rest of the world-10.6-10.9-11.1-13.4 World Total-6.0-5.8 -6.2 Source: Whalley (1998)See S-W box 8.5 for further explanations Box 8.5 Insurance Policies