Negotiating an RTA Some Key C hallenges & Opportunities for Developing Countries

1. Negotiating an RTASome Key Challenges & Opportunities for Developing Countries 16 April 2010 Taisuke ITO, UNCTAD

2. Outline • North-South RTA negotiations • DCs market opening at home • Market access in the partners • Deep integration issues • South-South integration & cooperation • State of play, its role & potential

3. 1. Policy Issues in RTAs (1) • RTAs here to stay – How to make them useful for development while minimizing the costs? • Trade creation & diversion = TC>TD leads to net welfare gains • TC = source of efficiency gains but short-term adjustment challenge (like any trade liberalization) • TD = efficiency loss, challenge for RTA members and affected non-members • Need to assess trade diversion relative to the non-static benefits of increased trade

4. Policy Issues in RTAs (2) • Dynamic Effects • Economies of scale, pro-competitive effects, FDI, ToT, positive externalities from institutional changes • Deep integration • Increase the likelihood of dynamic gains • But upward regulatory harmonization entails implementation costs (unlike tariffs) and can be sub-optimal for “non-best practice” DCs (WTO-plus) • And deeper commitments on broader coverage of behind-the-border regulatory issues may limit domestic “policy space”

5. 2. North-South RTAs: Why Significant? • Reciprocal, as against non-reciprocal • Adjustment costs important as DCs tend to have higher tariffs, import dependence, dependence on tariffs on government revenue • Limited scope for improved market access • Low MFN rates & unilateral preferences in DDCs • Deep integration under “new generation” RTAs • Broader coverage of behind-the-border measures

6. Effects of trade liberalization – ExampleNigeria’s 100% liberalization vis-à-vis the US (SMART simulation) Source: TRAINS/WITS

7. (1) Market Opening in Developing Countries • Import surge, de-industrialization /food security & revenue loss concerns • Lesser & slower liberalization as SDT in RTAs to mitigate adjustment costs, but • The degree of such flexibility constrained by GATT Art XXIV requirement (“Substantially all the trade”), ie, 90% over 10 years. EPAs evolved around 80% over 15 years (EU) • How to design product coverage & schedules under the WTO legal constraint? How does it matter?

8. How to determine “Sensitive” Products? • Objectives • To protect domestic industry from import competition • To minimize tariff revenue loss • SAT constraints = Min. 80-90% volume & t-line coverage • By which benchmarks? • Products with high dutiable imports • Products protected with high tariffs with high imports • Products facing large theoretical tariff revenue loss (MFN rates/100 *import value) • Minimizing import surge (overall & by product) • Minimizing tariff revenue loss • Maximizing consumer surplus (welfare) - memo

9. Products with the highest dutiable import value Source: TRAINS/WITS

10. (b) Products with the highest tariffs & imports Source: TRAINS/WITS

11. (c) Products with the highest theoretical tariff revenues Source: TRAINS/WITS

12. (d) Import Surge Minimization (SMART) Source: TRAINS/WITS

13. (e) Tariff Revenue Loss Minimization (SMART) Source: TRAINS/WITS

14. Summary • Import-surge minimization line-by-line basis captured products with very low level of initial imports • Consumer surplus maximization - by design, captured lowest imported items, hence the large numbers chosen. • Caveat – only illustrative for estimates based on simulation Source: TRAINS/WITS

15. Implications • Not straightforward exercise – depends on individual trade & tariff structures • Static & dynamic perspectives complementary, to be combined with other considerations – domestic production, direct competition, employment, social sensitivities etc • Import concentration in a few lines affect the choice • High tariff protection approach, the favored one? • SAT requirement limits the selection • In case of regional groupings, harmonizing with other countries further complicates the task – lack of overlap (EPAs) • Staging & speed of liberalization yet another issue • WTO interface – Rules negotiations on SAT

16. Note: EPA Liberalization Schedules (Value) Source: ECDPM

17. Note: EPA Liberalization Schedules (Tariff Lines) Source: ECDPM

18. (2) Market Access in RTA Partners • New MA opportunities limited due to already low tariffs in DDCs (SSA, LDCs). Not so much so for non-LDCs? • Excluded sectors often sensitive and politically difficult either in RTAs or MTN • Statutory prohibition on “import sensitive AG product” (US TPA) / Hierarchy of preferences (EU) • How have existing RTAs dealt with such “sensitive” products? Any lessons? • 3 US RTAs - Bahrain, Jordan, Morocco (Oman) • 6 EU RTAs - Algeria, Egypt, Jordan, Morocco, Tunisia, Turkey

19. US Tariff Treatment 2008 by Regime (Total 10047) 84% for LDCs, 91% for AGOA (2007) Source: TRAINS/WITS

20. US RTA Product Coverage of MFN & GSP Dutiable Lines, 2008 (Total 3264) Source: TRAINS/WITS

21. US - Frequency of “Sensitive” Products by HS Chapter (DF under no or 1 RTAs, total 526) Source: TRAINS/WITS

22. US MFN Tariffs 2007 (Simple Av, incl. AVEs) Source: TRAINS/WITS

23. How do they affect actual exports?US MFN & Effective Rates, 2007 (Weighted av.) Source: TRAINS/WITS

24. The “sensitive” products affect DC exportsShare of US Duty-Free Imports, 2007 Source: TRAINS/WITS

25. US Tariff Treatment of Jordan’s Major Exports, 2007 Source: TRAINS/WITS

26. US Actual & Potential “Value” of Preferences, 2007 (Tariffs saved, % of dutiable imports) Source: TRAINS/WITS

27. Summary • Tariff line coverage is high for all 3 RTAs. Morocco FTAs, & other to a lesser extent, still in implementation • All provide significantly greater coverage than GSP • The coverage is lower in the import value terms • Excluded or back-loaded are dairy, processed foodstuffs & apparels, where tariffs are still high • The exclusion of apparels have significant implications, particularly for Jordan • But it is also the sector where preference margins are high, & concentration of exports in the sector resulted in high “value” of preferences for Jordan even if it has very low DF trade coverage • Fuller coverage could have increased preference value, particularly in Jordan

28. EU Tariff Treatment by Regime, 2008 (Total 14238) Source: TRAINS/WITS

29. Note: EU DF Product Coverage by Regime (Total 14310) Source: TRAINS/WITS

30. EU RTA Product Coverage of MFN & GSP Dutiable Lines, 2008 (Total 6241) Source: TRAINS/WITS

31. EU - Frequency of “Sensitive” Products by HS Chapter, 2008 (DF in no or 1 RTAs, total 1308) Source: TRAINS/WITS

32. EU MFN Tariffs 2007 (Simple Av, incl. AVEs) Source: TRAINS/WITS

33. How do they affect DC exports? Not so much?EU MFN & Effective Rates, 2007 (Weighted av.) Source: TRAINS/WITS

34. Share of EU Duty-Free Imports, 2007 Source: TRAINS/WITS

35. EU Actual & Potential “Value” of Preferences, 2007 (Tariffs saved, $000) Source: TRAINS/WITS

36. EU Actual & Potential “Value” of Preferences, 2007 (Tariffs saved, % of dutiable imports) Source: TRAINS/WITS

37. Source: TRAINS/WITS

38. Summary • Tariff line coverage in EU RTAs is lower than US RTAs, as low as 80% for Egypt, less than 90% for Algeria, Morocco, Tunisia (may be yet to be implemented) • Significantly better than GSP but lower than LDCs • “Sensitive” products concentrate on Agriculture • By contrast, the coverage is higher on import volume terms, unlike US RTAs, all above 90% (olive oils, vegetables, fruits) • Significant preference margins, thus preference value, especially for Turkey. Caveat – EU has competing RTAs, so preference margin & value can be an overestimate • Some potential remain for improved preference for Egypt, Morocco, Tunisia & Jordan, not so much for Turkey

39. Implications • The design of product coverage and staging matter for DC export opportunities • Innovative approach & lessons • Tariff reduction, longer period, longer than 10 years for fuller liberalization? • Preferential TRQ, expansion and tariff elimination for key products • MFN reduction – Preference erosion but may gain where products not covered or utilized

40. Not all Preferences are utilizedTentative estimates of the utilization rates of Quad unilateral preferential schemes by LDCs, 2007 Source: GSP database

41. Rules of Origin (1) • Determine the eligibility for preferential treatment => can be trade policy instrument • Insulate an industry from the RTA consequences, to attract investment in strategic sectors like TRIMs • Raise production cost by protecting intermediate good producers (resultant distortion = 4.3% tariffs) • Also compliance cost (1.8% under NAFTA) • Restrictive rules hampers the use of preferences • Often more restrictive in N-S than in S-S RTAs

42. Rules of Origin (2) • Wholly obtained • Substantial transformation, as measured by • Change in tariff classification • Regional value-added • Specific processing requirement • Some restrictive rules • High local content requirement (60%) • T&C – “yarn-forward”/double transformation • Processed foodstuff – raw materials to be wholly obtained • Fish taken outside territorial waters – “vessels” – registration, flag, ownership, crew

43. Rules of Origin (3) • Facilitated use of non-originating input to qualify for RTA RoO in key products • Time-bound exemption /“RoO-free quota” • Phase-in implementation • Lower thresholds in VA rules for DCs • Use of non-originating row materials for processing • Optional rules for processed AG • Single transformation for apparels • Broader & fuller cumulation (Paneuro) • Higher tolerance rules • But RoO also reciprocal – balancing act needed

44. Other NTBs • SPS/TBT Standards • Products may be covered but can be totally restricted (QR) • Harmonization/equivalence/MRAs => difficult in N-S context? • Cooperation in conformity assessment & certification? • SG/AD/CVM • As per WTO requirement? Some eliminated AD for RTA partners • SG – bilateral SG with elements of asymmetry + exclusion from global SG? • AG subsidies • Basically WTO issue, but need to be factored in • Not to target export subsidies to RTA partners exports, zero-for-zero (EPAs) & prohibition of new subsidies

45. (3) Deep Integration Issues • Services • Binding existing regime, investment focus (M3), financial, telecom • Limited M4 & labour mobility (high-skill labour, intra-corporate transferees etc) • Intellectual property rights • TRIPS-plus, to be applied on an MFN basis • Investment • Liberation, investor protection vs Investment promotion & cooperation • Competition policy • CP law (state aid, adoption of CPL) vs cooperation • Government procurement • MA interests vs asymmetric supply capacity.

46. 3. South-South RTAs • Reinvigoration of SS RTAs - broader economic cooperation • S-S trade dynamic, now nearly 50% of DC trade • Mostly intra-regional – distance matter. Role of regional arrangements • Limited complementarily, small markets, limited liberalization traditionally noted • More positive views as many engaged in SS RTAs • What are the “realities”?

47. Intra-RTA trade generally lower in SS RTAsIntra-RTA Trade Share (2008) Source: UNCTAD GlobStat

48. But grew faster in many SS RTAs Av Annual Change in Intra- & Extra-RTA Exports: 2000-08 Source: UNCTAD GlobStat

49. Source: UNCTAD GlobStat

50. Source: UNCTAD GlobStat