Historical Narrative

1. Historical Narrative Richard E. Baldwin Professor of International Economics Graduate Institute, Geneva

2. Historical Narrative 3 key effects: Jugger (MTNs), Domino (RTAs), RTB (unilateralism). “Empirical evidence” intended to “demonstrate” usefulness of the 3 key effects. Line sketch. Can’t pretend to explain everything.

3. 6 stylised facts • The GATT process started when tariffs were very high worldwide; • Rich nations liberalised much more than poor nations, in both the GATT process (i.e. bound rates) and RTAs; • The liberalisation focused on industrial goods in which two-way trade in similar goods is prevalent; • The process took 40 years; • Some sectors were excluded entirely and others experienced much less tariff cutting; • Regional tariff cutting went hand-in-hand with multilateral liberalisation.

4. Tariffs, 1931 & 2000

5. Tariffs, other nations

6. Historical Narrative • 1947-1958. • GATT starts. • Juggernaut works but stops in 1950s.

7. Dominos trigger juggernauts • 1958-1972. • EEC formation: • Europe domino effect phase I. • Global reaction: Kennedy Round • US 1963 Trade Act changes basis of reciprocity from item-by-item to formula. • Makes GATT reciprocity ‘stronger’ pol.ec. Force • Juggernaut starts rolling again. • Kennedy Round starts 1963 • US-Canada signed the “Auto Pact” FTA but cars & parts only. • NB: MTNs, RTAs & unilateralism proceed in tandem. • Liberalisation begets liberalisation.

8. Dominos trigger juggernauts • EEC formation prompts a new MTN. • Kennedy quote • Kennedy’s “Special Message to the Congress on Foreign Trade Policy,” January 25, 1962; here is the first of “five fundamentally new and sweeping developments [that] have made obsolete our traditional trade policy” (i.e. the 1934 Act) he used to argue for a stronger form of reciprocity:[1] • “ The growth of the European Common Market - an economy which may soon nearly equal our own, protected by a single external tariff similar to our own - has progressed with such success and momentum that it has surpassed its original timetable, convinced those initially skeptical that there is now no turning back and laid the groundwork for a radical alteration of the economics of the Atlantic Alliance. Almost 90 percent of the free world's industrial production (if the United Kingdom and others successfully complete their negotiations for membership) may soon be concentrated in two great markets - the United States of America and the expanded European Economic Community. A trade policy adequate to negotiate item by item tariff reductions with a large number of small independent states will no longer be adequate to assure ready access for ourselves - and for our traditional trading partners in Canada, Japan, Latin America and elsewhere - to a market nearly as large as our own, whose negotiators can speak with one voice but whose internal differences make it impossible for them to negotiate item by item.”

9. 1973-1985 • EEC first enlargement and EEC-EFTA FTAs, create another incentive for an MTN (Tokyo Round, 73-79). • Stagflation postpones all forms of trade liberalisation. Tokyo

10. 1986-1990 • Juggernaut & domino re-engage. • Single European Act, 1986. • EEA talks start in ’89. • US-Canada FTA talks start, 1986. • Uruguay Round starts, 1986. NB: RTAs & MTN are starting together (again)

11. 1990-1994 • European spaghetti bowl forms. • USSR collapse. • North American spaghetti bowls forms. • US-Mexico FTA triggers massive domino effect. • NAFTA, Mercosur, dozens of spoke-spoke FTAs, long queue for US bilaterals.

12. 1990-1994 • Uruguay finishes • WTO • Coverage of new goods, agriculture, textiles and apparel, • DSM, Rules (TRIPS, TRIMS & Services (GATS). • And about 30% tariff cut.

13. 1994-2000 • North American spaghetti bowls advances. • NAFTA crushes Mexican anti-trade forces. • Mexico ‘sells’ its politically optimal tariff cuts in over 40 bilaterals. • Japan, EU & US. • Anti-Spoke strategies South goes RTA-mad. • European spaghetti bowl advances. • Euro-Meds, etc. • European spaghetti tangle gets tamed (PECS).

14. PECS • How PECS fixed the European spaghetti bowl and why. • Spaghetti bowl problems: • Multi ROOs (hard to do biz in spokes) • Bilateral cumulation (hinders efficient sourcing in spokes) • 1997, EU set up PECS: • imposed common set of ROOs on EU, EFTA & CEECs. • Imposed diagonal cumulation.

15. PECS • Spaghetti bowl is not by accident. • Pair-specific political economy forces => pair-specific policy; especially hub & spoke. • Unbundling & off-shoring of manufacturing • Former beneficiaries of complexity downsized and off-shored from EU. • Some EU firms set up in spokes and are now harmed by the complexity (“us” becomes “them”). • EU firms push EU to tame the tangle of FTAs. • “Spaghetti bowl as building blocs” • Complexity & unbundling create new politically economy force • Push system the short distance from near-free trade with matrix of bilaterals to free trade ‘lake.’ • Multilateralise the FTAs. • Domino effect in ROOs/Cumulation.

16. 1986-2000 • RTB unilateralism in East Asia (circa 1985). Reductions in applied MFN tariffs on Asian crisis

17. MTNs, RTAs & unilateralism • In 1990s, as in the 1960s & 1980s, all the ‘isms’ progress hand-in-hand. • No evidence that ‘isms’ are substitutes.

18. Dynamic development of Noodle Bowl • FTAs spreading like wildfire, but until recently EA only region without them. • Trigger = China’s approach to ASEAN in Nov 2000, • Domino theory but important precursors. • Three phases of East Asian regionalism.

19. Phase I (1980s to 1990) • “Rampant unilateralism” • Unilateral tariff cutting • competition for jobs and investment linked to development of “Factory Asia.” • 3 key factors in development of the Asian Manufacturing Matrix • 1. Erosion of Japan’s comparative advantage in manufacturing. • EA divides into “HQ economies” (Japan only to start with) & “Factory Economies” (Advanced ASEANs). • Korea, Taiwan, Hong Kong & Singapore join later • “Triangle trade” becomes important. • 2. Reduced cost of moving goods and ideas. • 3. China’s emergence & domestic reforms

20. EXAMPLE: Parts Procurement of a Hard Disc Drive Assembler Located in Thailand USA Mexico SPNDLE MOTOR BASE CARRIAGE FLEX CABLE PIVOT SEAL VCM TOP COVER PCBA HGA HAS DISK HEAD SUSPENSION HEAD China Japan COVER DISK SCREW SEAL RAMP TOP CLAMP LATCH PLATE CASE LABEL FILTER PCBA SUSPENSION PCBA CARRIAGE HGA BASE HEAD SUSPENSION Taiwan Thailand TOP CLAMP Malaysia Hong Kong FILTER CAP BASE PIVOT SPACER VCM BASE CARD TOP CLAMP DISK Philippines DAMPING PLATE COIL SUPPORT PCBA Singapore COVER SCREW PIVOT PC ADP DISC Indonesia W.SUSPENSION VCM PCBA

21. Rampant Unilateralism %

22. Phase II (1990 to 2000) • “Regionalism delayed” • Acceleration of the widening and deepening of Factory Asia. • intra-EA trade begins to matter. • Malaysian Premier Mahathir’s EAEC. • APEC diversion. • Setting stage for Phase III: • 1997 Asian Crisis: APEC’s hollowness & brotherhood • China’s impeding WTO membership: end of status quo. • A new player was joining the game; all must re-evaluate their tactics and strategies.

23. Phase III (2000 to now) • “Rampant regionalism” • Nov 2000, Chinese premier Zhu Rongji broached the idea of an FTA between China and ASEAN at ASEAN-China summit. • Surprise move. • Why? • ASEAN are receptive; study grp formed. • Red lights begin to flash all over region.

24. Actual & projected “vulnerability indices” • Export dependence of Column nation on row market Japan and Korea “HAD” to have a plan to redress ACFTA discrimination, if it should arise.

25. Japan’s options in 2000-2002 • Plan A; join ACFTA • Domino theory & history predicts, BUT • 1. ad hoc nature of ACFTA rules out enlargement (ACFTA is not a group, so it cannot to be joined). • 2. China & ASEANs fear Japanese industry • Lock in low-skill status? prevent development of new Sonys, Hondas, Samsungs? • Plan B? Two classic responses • Form own trade bloc with other excluded nations. • EFTA in 1959; Mercosur 1991. • => JKFTA • Sign FTA with smaller partner. • Chile, Caricom with Mexico. • =>AJ FTA

26. Likely Trajectory? • Japan bilaterals with big ASEANs will get done • Next round of dominos (if any) • Hub-hub (JK, KC, JKC) • US moves? (K US?) • If domino theory is right, it will spread beyond EA. • cf. EU has preferences with 141 of 148 WTO members.

27. 2000-2006 • Western Hemisphere spaghetti bowl advances. • US opposition to FTAs crushed by NAFTA; • US follows promiscuous FTA strategy. • European FTAs multiply, spokes start to proliferate FTAs. • EPAs turn more towards 1) reciprocal, 2) North-South-South arrangements/

28. 2000-2006 • European FTAs multiply, spokes start to proliferate FTAs. • EPAs turn more towards 1) reciprocal, 2) North-South-South arrangements/

29. Staging Post 2010 • Europe, North America and East Asia: ‘fuzzy’, ‘leaky’ trade blocs. • North America & Europe done deals; between & within near-duty-free status (major flows). • Many East Asian FTAs may have problems (typically south-south), but Japan-Malaysia, & 4 other big ASEANs very likely to be implemented. • Rest due to domino and RTB unilateralism. • Prediction: Applied tariffs will be near zero for world’s major trade flows around 2010.

30. Fractals • Definition: “A rough or fragmented geometric shape that can be subdivided in parts, each of which is (at least approximately) a reduced/size copy of the whole.” • World trade system made of 3 fuzzy, leaky trade blocs each of which is made up of fuzzy leaky sub-blocs. • The point: • Solution to one is the solution to all (roughly).

31. END See various essays by Bhagwati on: www.VoxEU.org