SESSION V REGIONALISM AND THE MULTILATERAL TRADING SYSTEM

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

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

3. RIAS Notifications to the GATT/WTO 25 20 15 10 5 1991 1949 1961 1970 1976 1997 THE TWO WAVES OF RIAs (from Overview)

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. 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)  RELATION TO MULTILATERALISM (are RIAs desirable ?) Two strategies towards world trade liberalization: Multilateralism (M) or Regionalism (R)?

6. UL R(3) M(2) M(1) U2R R(2) U0 U1R R(1) time 0 t0 ARE RIAs DESIRABLE ?: GRAPHICAL ANALYSIS

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?  Would a world organized in a few trading blocks (the “triad”) hurt those left out?

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

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. Effects on third countries 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  TOT of US for 1356 manufactures sold to Brazil and to ROW  Absolute and relative decline in TOT !!! Can you explain why?

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.  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 bloc’s 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. Figure 8.4 Domino Regionalism 3 2 1 Inside Welfare relative to non- discrimination 0 Outside -1 0 1 2 3 4 World -2 -3 -4 Number of Blocs  Domino Regionalism (II) …. 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’

14. Strong Expansion Intermediate 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: People’s 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-Mediterranean 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. Same form of RIA Table 8.4 Domino Regionalism Weaker form of regionalism 13

15. Strong Expansion Intermediate 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 d’Ivoire, 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 People’s 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 as Insurance • Simulation model (with real trade data) where one region, ROW, does not get into a ‘trade war’= set tariff that maximizes your bloc’s 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. LOSSES OF ECONOMIC WELFARE AS % OF GDP RELATIVE TO 1986 (Equivalent Variations) Trade War With: No CUs Canada-US CU North America CU North America- Europe CU US 1.2 0.5 -0.4 0.5 Canada -25.5 0.9 0.4 -0.7 Mexico -8.5 -8.5 0.1 -0.3 Japan -5.2 -5.2 -5.2 -5.4 EC (12) 3.7 3.4 3.4 2.5 Other Western Europe -32.2 -33.1 -33.5 10.1 The rest of the world -10.6 -10.9 -11.1 -13.4 World Total -6.0 -5.8 -5.8 -6.2 Box 8.5 Insurance Policies Source: Whalley (1998)—See S-W box 8.5 for further explanations