Trade, Regionalism and Development

1. Trade, Regionalism and Development Richard Newfarmer World Bank June, 2005

2. Key Messages • Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest. • For members, RTAs can create trade and bring many other benefits for development …but results are not automatic and depend critically on design and links to domestic reforms. • Non-trade regulations – investment and intellectual property rights -- merit close scrutiny because development benefit is unclear and “one size does not fit all” • For all countries, RTAs have systemic consequences that adversely affect excluded countries, requiring international attention.

3. Regional Trade Agreements are proliferating… Annual number Annual number

4. Regional Trade Agreements are proliferating… Annual number Total in force Cumulative in force New agreements annually

5. 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

6. …but RTAs provide less new market access than it might appear Share of trade covered (%), 2003

7. …and in developing countries regional agreements are a relatively small driver of trade reform Av. Tariffs in Developing Countries Share of tariff reductions 29.9 9.3 Source: Martin and Ng, 2004

8. Why this proliferation? High-income countries, such as US and EU • To support foreign policy goals, including development • Slow progress on multilateral agenda: “competitive liberalization” • Access to services markets, protection of intellectual property, and rules for investment • Secure access to markets, especially large markets • Attract more FDI • Leverage domestic reform • Among neighbors, lowering trade cost at border • Framework for regional cooperation Developing countries

9. Effects on members

10. Effects on members: Do RTAs create – or divert -- trade? Estimated exponential impact on trade 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.

11. 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.

12. 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

13. E.Asia & Pacific Latin America Europe & C. Asia M. East & N. Africa Sub-Saharan Africa S.Asia East Asia has used MFN to integrate regionally • East Asia has led in global integration

14. Sub-Saharan Africa Europe & Central Asia Middle East & N. Africa South Asia East Asia East Asia has used MFN to integrate regionally • East Asia has led in global integration • …and in regional integration LA

15. RTAs frequently include services, investment and intellectual property rights… Source: Global Economic Prospects, 2005: Chapter 5

16. Trade/GDP Malaysia Slovenia Slovakia Malawi Kyrgyzstan Ethiopia Uganda Trade facilitation is crucial.. delays at border drive up trading costs RTAs can provide framework for mutual efforts to reduce costs • Single customs document • Harmonize driving & weight regulations • Computerize both sides of the border Trade/GDP Potential of RTAs to reduce border costs not yet realized

17. Investment accords provide for new access and new investor protections… • Potential benefits include greater FDI flows because… • Liberalized market access • increased payoff to trade integration, • reduced risk premia, • enhanced credibility of investment climate • Reduced international policy spillovers • Rent shifting via TRIMs, etc. • RTAs that create large ex-post market results and, provided good investment climate, do attract more FDI. • A 10% increase in post-FTA market size is associated with a 5 percent increase in FDI in the host country. • However, market access more important than investor protections • no evidence that protections increase FDI flows to developing countries…

18. US FTAs contain TRIPS Plus provisions that provide greater IPR protection. Brings generics under market and data exclusivity arrangements No analysis of economic consequences prior to signing Open questions: Will FTAs foreclose use of Doha flexibilities on TRIPS for generics? Will stronger IPRs contribute to more FDI and high tech trade? Are TRIPS Plus measures appropriate to all countries? Intellectual property rights figure prominently in N-S RTAs, particularly US FTAs Conclusion: Development consequences of investment and IPR rules depend heavily on market access these rules leverage

19. Strengths Compatibility among economies Services liberalization Move to international standards Weaknesses Restrictive rules of origin Exemptions, esp. agriculture Inappropriate rules? No movement of workers Both North-South and South-South accords can be improved… Some sweeping generalization… North-South Index of ROO Restrictiveness Estevadeordal, 2004

20. Strengths Compatibility among economies/large markets Services liberalization Move to international standards Weaknesses Restrictive rules of origin Exemptions, esp. agriculture Inappropriate rules No movement of workers Both North-South and South-South accords can be improved… Some sweeping generalization… North-South South- South • Strengths • Focus on trade • Nonrestrictive rules of origin • Adjacency permit trade facilitation • Weaknesses • Small, similar markets • Higher external barriers • Exemptions • Minimal services • No movement of workers

21. Design and implementation are crucial to achieving objectives • Design • Low external tariff barriers • Nonrestrictive rules of origin • Wide coverage with few exclusions • Liberalization of services • Facilitating trade at borders • Appropriate rules • Implementation: Link RTAs to domestic reform agenda ….Open regionalism

22. Systemic issues…

23. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Simulated welfare impact of Chile’s FTA with US $ m. Gains to Chile Costs to excluded countries Source: Harrison, et al, 2002

24. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Change in real income in 2015 compared to baseline in percent Multilateral liberalization

25. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Change in real income in 2015 compared to baseline in percent Multilateral liberalization Individual RTA (average)

26. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Change in real income in 2015 compared to baseline in percent Multilateral liberalization Individual RTA (average) All countries sign RTAs

27. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Multiple arrangements burden customs

28. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Multiple arrangements burden customs

29. Overlapping African agreements… Nile River Basin COMESA IGAD ECCAS AMU CEMAC Somalia Sao Tomé & Principe Algeria Libya Morocco Mauritania Tunisia Egypt Cameroon Central African Rep. Gabon Equat. Guinea Rep.Congo ECOWAS Djibouti Ethiopia Eritrea Sudan Burundi* Rwanda* Ghana Nigeria Conseil de L’Entente Chad Cape Verde Gambia DR Congo Kenya* Uganda* Benin Niger Togo Burkina Faso Cote d’Ivoire Angola Guinea-Bissau Mali Senegal EAC Liberia Sierra Leaone Guinea Tanzania* Mauritius* Syechelles* Malawi* Zambia* Zimbabwe* SACU Comoros* Madagascar* WAEMU Mano River Union South Africa Botswana Lesotho CLISS Namibia* Swaziland* Reunion AMU: Arab Maghreb Union CBI: Cross Border Initiative CEMAC: Economic & Monetary Community of Central Africa CILSS: Permanent Interstate Committee on Drought Control in the Sahel COMESA: Common Market for Eastern and Southern Africa EAC: East African Cooperation ECOWAS: Economic Community of Western African Studies IGAD: Inter-Governmental Authority for Government IOC: Indian Ocean Commission SACU: Southern African Customs Union SADC: Southern African Development Community WAEMU: West African Economic & Monetary Union *CBI Mozambique SADC IOC

30. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Multiple arrangements burden customs Disincentives to engage in multilateral liberalization

31. Policy implications… • International community through the WTO • Get Doha done: lowers risk of trade diversion for members and minimizes effects on excluded countries • High income countries have systemic responsibility • Widen coverage in FTAs (i.e. agriculture) • Move toward conformity in rules of origin, and make less restrictive • Promote rules tailored to local capacities • Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objective • Unilateral: driving competitiveness • Multilateral: seeking broad market access • Regional: deep market access and institutional reforms (services, customs, ports, trade-related standards)

32. Further Reading Findlay, C.. Sheri Stephenson, and F.J. Pinto “Services in Regional Trading Agreements” in M. Plummer A Comprehensive Guide to the World Trade Organization Kluwer Fink, Carsten and P. Reichenmiller “Intellectual Property” Trade Note #20 World Bank (website) 2004. Freund, Caroline L. 1998 “Multilateralism and the Endogenous Formation of PTAs” Discussion Paper 614 US Federal Reserve, Washington. Hoekman, Bernard and Richard Newfarmer “Investment in Regional Preferential Trade Agreements” Journal of World Trade Fall 2005 Schiff, Maurice and L. Alan Winters, Regional Integration and Development World Bank 2003 Schott, Jeffrey (ed.) Free Trade Agreements Washington: Institute for International Economics 2005 World Bank, Global Economic Prospects, 2005: Trade Regionalism and Development

33. Trade, Regionalism and Development Richard Newfarmer World Bank June, 2005

34. Systemic issues…

35. Evaluating alternatives and South Asia’s systemic interests Basic methodology is computer (CGE) simulations Allows simulation of relative price affects based upon demand and substitution consideration However, outcomes are static, and do not account for productivity, technological change, and other dynamic effects Moreover, simulations do not model services liberalization, trade facilitation and lowering of other trade costs, or capture non-trade benefits of regional cooperation

36. Evaluating alternatives: Gains to Latin America from multilateral accords Change in income of Latin America in el 2015 above baseline scenario (percent) Multilateral Fuente: World Bank en Global Economic Prospects, 2005: Chapter 6

37. Evaluating alternatives: Gains to Latin America from multilateral and regional accords Change in income of Latin America in el 2015 above baseline scenario (percent) Multilateral FTAA (por sí solo) Nota: “ALCA por sí solo” asume que otras regiones importantes no forman bloques comerciales que discriminan a Latinoamérica.

38. Evaluating alternatives: Gains to Latin America from multilateral and regional accords Multilateral FTAA (por sí solo) FTAA (c/ otros ARCs) Nota: “ALCA por sí solo” asume que otras regiones importantes no forman bloques comerciales que discriminan a Latinoamérica.“ALCA con otros ARCs” asume un ARC en las Américas, el Este Asíatico y Europa con un ARC Europa del Este-Africa.

39. Evaluating alternatives: South Asia gains most from a multilateral agreement Change in South Asia’s real income in 2015 from baseline scenario (percent) Multilateral

40. Evaluating alternatives: South Asia gains most from a multilateral agreement Change in South Asia’s real income in 2015 from baseline scenario (percent) Multilateral SAFTA (by itself) Note: “SAFTA by itself” assumes that other major regions do not form trading blocs that would discriminate against South Asia.

41. Evaluating alternatives: South Asia gains most from a multilateral agreement Change in South Asia’s real income in 2015 from baseline scenario (percent) Multilateral SAFTA (by itself) SAFTA (w/ other RTAs) Note: “SAFTA by itself” assumes that other major regions do not form trading blocs that would discriminate against South Asia. “SAFTA with other RTAs” assumes an RTA in East Asia, the FTAA in the Americas, and a Europe plus African RTA.

42. Evaluating alternatives: East Asia gains most from a multilateral agreement Change in real income in 2015 from baseline scenario (percent) Multilateral Asean + 3 (by itself) Asean + 3 (w/ other RTAs) Note: Separate represents the gains when each block is formed in the absence of the other two. BLOC3 represents the gains when all three regional PTAs are implemented simultaneously.

43. Developing countries pay more of their foreign tariffs to rich countries and to neighbors Share of tariff burden, percent Rest of world Intra-region Industrial …