Benefiting from Regional Integration

1. Benefiting from Regional Integration Bernard Hoekman Maurice Schiff Junichi Goto

2. Key Messages • Regional trade agreements (RTAs) are proliferating and now cover more than one third of world trade, but their liberalizing effect has not always been large. • RTAs can create trade and bring many other benefits for development …but results are not automatic and depend critically on design and implementation. • RTAs have systemic consequences that adversely affect excluded countries, requiring international attention.

3. REGIONALISM IN THE WORLD EU NAFTA APEC EAEC (FTAA) AFTA Mercosur

4. Regional Trade Agreements are proliferating… Annual number Total in force Cumulative in force New agreements annually …and now potentially cover more than one-third of global trade

5. Some Theories of Regional Integration Agreement

6. Stages of Economic Integration(five stages according to Balassa) • Free Trade Area (FTA) • starting point • rules of origin • Customs Union • common external tariffs • Common Market • movement of capital and labor • Economic Union • coordination of fiscal and monetary policy • Complete Economic Union • super-natural institution

7. Trade Creation 20 percent tariff Before: A=100, B=90*1.2=108, C=90*1.2=108 After: A=100, B=90, C=90*1.2=108

8. Trade Diversion 20 percent tariff Before: A=100, B=80*1.2=96, C=70*1.2=84 After: A=100, B=80, C=70*1.2=84

9. Expansion of the FTA and the Third Country welfare Size of FTA

10. Further cost of S-S RIA

11. Article XXIV of the GATT • ‘non-discrimination; MFN’ as the basic principle of WTO/GATT • FTA and Customs Union as exceptions to the fundamental principle • Article XXIV of the GATT sanctions if • complete liberalization (100 percent, substantially all the trade) • no increase in external barrier • Ambiguous • how soon • “substantially all the trade” • shall not on the whole be more restrictive • Various proposal for strengthening it • e.g. Bhagwati (set to the lowest)

12. Assessing RIAs in the World

13. South-South RTAs predominate in number, but not in trade covered Number of RTAs Percent of World Trade Covered South-South South-South US US European Union European Union

14. …and regional agreements are a relatively small driver of trade reform Decomposing tariff reductions in response to multilateral, regional and own initiatives Av. Tariffs, 1983 and 2003 Decomposing 20% pt. decline 29.9 9.3 Source: Martin and Ng, 2004

15. Effects on members: Do RTAs create – or divert -- trade? Estimated exponential impact on trade Overall exports Overall imports Intra-regional trade Note: The bars show the magnitude of the dummy variables capturing respectively the extent to which intraregional trade, overall imports and overall exports differ from the “normal” levels predicted by the gravity model on the basis of economic size, proximity and relevant institutional and historical variables, such as a common language.

16. Agreements with high external tariffs risk trade diversion Average weighted tariffs Note: Tariffs are import-weighted at the country level to arrive at PTA averages Source: UN TRAINS, accessed through WITS

17. Lower external tariffs are associated with greater regional integration Average external tariffs MNA SAS SSA LAC ECA EAP

18. Customs Intellectual Dispute Standards Transport cooperation Services Property Investment Settlement Labor Competition U.S.-Led US-Jordan No No Yes Yes Yes Yes Yes Yes No US-Chile Yes No Yes Yes Yes Yes Yes Yes Yes US-Singapore Yes No Yes Yes Yes Yes Yes Yes Yes US-Australia Yes No Yes Yes Yes Yes Yes Yes Yes US-CAFTA Yes No Yes Yes Yes Yes Yes Yes No US-Morocco Yes No Yes Yes Yes Yes Yes Yes No NAFTA Yes No Yes Yes Yes Yes Yes Yes Yes E.U.-Led EU-South Africa Yes Yes EU-Mexico Yes Yes Yes Yes Yes Yes Yes No Yes EU-Chile Yes Yes Yes Yes Yes Yes Yes No Yes South-South MERCOSUR No No Yes Yes No Yes Yes No Yes Andean Community No No Yes Yes No Yes Yes No Yes CARICOM Yes Yes Yes Yes No Yes Yes Yes Yes AFTA Yes Yes Yes Yes No Yes No No No SADC Yes Yes Yes No Yes COMESA Yes Yes Yes Yes No Yes Yes Yes Yes Other Japan-Singapore Yes No Yes Yes Yes Yes Yes Yes Yes Canada-Chile No No Yes Yes No Yes Yes Yes Yes Chile-Mexico Yes Yes Yes Yes Yes Yes Yes Yes RTAs go far beyond trade

19. Strengths Locking in reforms by binding commitments Services liberalization Move to international standards Weaknesses Restrictive rules of origin Exemptions, esp. agriculture Both North-South and South-South accords can be improved… Some sweeping generalization… North-South RIAs South- South RIAs • Strengths • Nonrestrictive rules of origin • Adjacency permit trade facilitation • Weaknesses • Small markets/Higher external barriers • Exemptions • Minimal services

20. Design are crucial to achieving objectives • Design • Large ex-post market • Low external tariff barriers • Nonrestrictive rules of origin • Wide product coverage with minimal exemptions • Liberalization of services • Deeper integration • Implementation: Avoiding paper agreements

21. Policy implications… • International community through the WTO • Get Doha done • Concentrate on transparency • High income countries • Widen coverage in FTAs (i.e. agriculture) • Move toward conformity in rules of origin, and make less restrictive • Developing countries • Unilateral liberalization: driving competitiveness • deep integration and institutional reforms (customs, ports, trade-related standards)