1. Formation of new Regional Integration Agreements (RIAs)
*Source: WTO; Note: Inactive data for years are not available.

2. By increasing order of integration:
Types of RIA
By increasing order of integration:
Preferential Trading Agreements (PTAs): give preferential access to partners without eliminating all barriers
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)
Customs Unions (CUs): eliminate internal tariffs to trade and adopt a Common External Tariff (CET)
Single/Common Market: eliminate all internal barriers, direct or indirect, harmonize not just external trade policy but also regulations and standards
Economic Union: in addition, adopt a common currency and harmonize macroeconomic policy

3. The spaghetti bowl---An example: East and South Africa
Congo, R.D.
Namibia
Swaziland
Angola
Burundi
Comoros
Djibouti
Kenya
Malawi
Uganda
Tanzania
Sudan
Eritrea
Ethiopia
Madagascar
Mauritius
Rwanda
Seychelles
Zambia
Zimbabwe
Botwana
Lesotho
Mozambique
South Africa
COMESA
SADC
SACU
RIFF
IOC

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
Imports from partner displace inefficient domestic production
Imports from partner displace efficient imports from rest of the world

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

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

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

9. RTAs can also provide insurance against partners’ unilateralism:
Comment by political scientist Dan Drezner on Hillary Clinton’s proposal to review NAFTA every 5 years, posted (October 18, 2007) on Dani Rodrik’s blog:
“Last week, [Senator Clinton proposed] that we reassess our trade agreements every five years and demand adjustments to them if necessary, starting with NAFTA.
“This proposal makes me wonder if Senator Clinton understands the value-added of these free-trade agreements. […] They offer a guarantee to these countries that their relationship with the United States -- and their access to American consumers -- will not be disrupted.
“[…] Senator Clinton's proposal would strip these agreements of the very certainty that makes them attractive to our allies. How does Senator Clinton think our trading partners in the Middle East, Central America, and Pacific Rim will react to her proposal? How is this proposal any different from the unilateralism that Democrats have condemned for the past six years?‘”

10. The effect we are trying to identify (simulated data)
No agreement: Volatility of trade policy vis-à-vis country 1 (MFN partner, y1) and country 2 (preferential partner, y2) in the absence of any agreement

11. MFN: No volatility-reducing effect on MFN trade measures (y1)
RTA: Border taxes are reduced during the transition period and completely eliminated at its end vis-à-vis country 2 (y2)
MFN: No volatility-reducing effect on MFN trade measures (y1)
Effect of transition on aggregate volatility is swamped by volatility in MFN measures [σ(y1)]

12. Results: baseline, second stage
Bias: countries sign RTAs when they have too much volatility

13. Results: baseline, second stage
Bias: countries sign RTAs when they have too much volatility

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

15. Vertical trade at work: Garment export growth, SSA Clothing exports to the US, selected ESA countries
Notes
AGOA: US Africa Growth and Opportunity Act, voted in 2001, gives duty-free access to African LSCs
HS61-62: Clothing categories in the customs Harmonized System
Source: Cadot et al 2004

16. Garment export growth: Madagascar Export-led growth: clothing products
Source: Nicita 2004

17. Rules of origin Mexico’s utilization of NAFTA, 2000, by HS section
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 metal 10 1 5
1. Live animals
2. Vegetables
5. Mineral Products
10. Pulp & paper
16. Machinery &El.eq 2
5% tariff preference
10% tariff preference
Note: NAFTA utilization rate: proportion of Mexican shipments entering the US under NAFTA’s preferential regime (as opposed to MFN)

18. 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)

19. The “Harmonized system”:
Overall structure
01 Chapter:
Live animals
0101 Heading:
Iive horses, asses, mulles and hinnies
0102 Heading:
Live bovine animals
0103 Heading:
Live Swine
0104 Heading:
Live sheep and coats
0105 Heading:
Live poultry
Subheading:
Purebred breeding animals
Subheading:
Others
Item:
Males
Item:
Females
Item:
Horses
Item:
Asses

20. Product-Specific Rules of origin: Examples
Exceptions

21. Product-Specific Rules of origin: Examples
Funny Technical requirements
NAFTA
Cotonou Convention (EU)

22. Rules of origin
Why they hurt: “slicing up the value chain” becomes more difficult
Tunisia
Comparative advantage
Cotton production
Infrastructure-intensive
Labor-intensive
Ginning
Spinning
Weaving
Dying
Cutting
Assembly
Shipping
Natural-resource intensive
Retailing
Capital-intensive

23. Rules of origin Pass-through of tariff preferences: the principle
US market
Price
Potential increase in Mexican producer price
Mexican post-tariff supply price
Mexican pre-tariff supply price
US internal price
= World price + US MFN tariff
Tariff preference
Preferential tariff
World price
US demand
Quantity
Assumptions
No US production
Mexican producers perfectly competitive
Market power on the US buyer side, so Δt captured only partially by Mexicans
Potential increase in Mexican supply

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

25. Rules of origin Pass-through of preferences: NAFTA < roo0
US consumer market
US intermediate
producer
US NAFTA tariff on blue & red socks
Mexico’s NAFTA tariff on fabric
ai2
ai1
Rest of the world
< roo1
Mexican final good 1
< roo2
Mexican final good 2
Mexico’s external tariff

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