Week 9 - The Evolution of the Global Trade Regime (April 24) Week 10 – No class (May 1)

1. Week 9 - The Evolution of the Global Trade Regime (April 24) Week 10 –No class (May 1) Week 11- Regional Trade Agreements (May 8) Week 12 –– Quiz - The Political Economy of Global Financial Crisis (May 15) Week 13 - Movie Display at the class - Inside Job http://www.imdb.com/title/tt1645089/ (May 22) Week 14 – Submission of movie review at the class (print-out)- Globalization, Growth, Poverty, Inequality, Resentment, and Imperialism ( May 29) Week 15 – Review before Final (June 5)

2. Regional Trade Agreements Week 10-11

3. Lecture Plan • Introduction • Why Regionalism? • Political Economy of Regionalism • Economic Consequences of Regionalism • Regionalism and the WTO

4. Introduction (1) • By end of March 2013, only 4of the WTO's 159 members were not party to one or more regional trade agreements • All non-global trade agreements are scrutinized by the WTO's Committee on Regional Trade Agreements (RTAs) • RTAs are the most important exception to the principle that countries should not discriminate in their treatment of other members

5. Introduction (2) • "Regional" or "free" trade agreements are probably better termed "preferential" trade agreements (PTAs) because many are not “regional” in the conventional sense of the word. • In recent years, a large number of PTAs have involved only 2 parties (bilateral agreements) • PTAs can occur between neighbours or between countries that are far removed from one another • There is no such thing as a "natural" region • Regions are social constructions

6. Introduction (3) • Regionalism is a “formal process of intergovernmental collaboration between two or more states” • Regionalization on the other hand refers to the growth of economic interdependence within a given geographical area

9. Why Regionalism? Political Reasons-1 • To improve inter-state relations through enhancing confidence • To enhance security within a region against both internal and external threats, and to reward partners that have cooperated on security matters • To address “non-traditional” security threats (e.g. environmental damage, illegal migration) • To enhance bargaining power in the global economy through group solidarity

10. Why Regionalism? Political Reasons-2 • To lock in domesticeconomic reforms and attract foreign investors • To satisfy domestic constituencies’ demands for reciprocity and facilitate governments’ decision to undertake economic liberalization • Regional agreements may be easier to negotiate and implement than global ones

11. Why Regionalism? EconomicReasons • RTAs are sometimes perceived to be preferable to non-discriminatory multilateral agreements because: • RTAs enable continued protection of sectors that would otherwise not survive global competition • RTAs provide opportunities for “deeper integration” that are not possible at the global level • RTAs are preferable to unilateralism or status quo because: • RTAs may offer larger markets (reciprocity provisions) and increased foreign investment

12. The Rush to Regionalism (1) • “First” wave of regionalism in early-1960s • Emerged in response to the establishment of the European Economic Community in 1957 • Many linked less developed countries together (South-South oriented) • To promote local “import-substitution industrialization” • To enhance the bargaining power of participants • Many failed because • Participating countries were not significant economic partners for one another • Regionalism exacerbated inequalities among partner states

13. The Rush to Regionalism (2) • “Second” wave of regionalism since mid-1990s emerged as a result of: • The end of the Cold War, which opened up new possibilities for economic partnerships • Growing integration of markets placed increasing pressure on governments to pursue market-friendly policies • Frustration with the difficulties of negotiating global agreements • Contributed to the US changing its position on RTAs • “Contagion” effects • Need to ensure compliance with WTO rules

20. Political Economy of Regionalism (1) • Why would firms support regionalism? • Economies of scale argument • Strategic trade theory argument • Need to conduct various stages of production in different geographical locations (often within the same geographical region) • Sales and production are often concentrated within a geographical region

22. Strategic TradePolicy The use of trade policies, including tariffs, subsidies, and even export subsidiesto alter the outcome of international competition in a country's favor, usually by allowing its firms to capture a larger share of industry profits.

23. Political Economy of Regionalism (2) • Regional institutions have to be given more competence and power if members broaden the scope of policy issues for cooperation • Free Trade Areas (FTAs) are attractive to many governments because they do not require the establishment of strong regional institutions (governments’ obligations are limited in comparisiontothose under a common market)

24. Alternative Explanations of European Regionalism (1) • According to neo-functionalist theorists, cooperation in one area of economic activity would produce pressures for cooperation in other areas (E.Haas,1953) • This "spillover" effect, some of it unintended, will lead to a deepening of cooperation • Regional institutions can provide the integration process with a dynamic of its own, leading to deeper integration

32. Alternative Explanations of European Regionalism (2) • "Liberal intergovernmental" perspective argues that deeper integration is the outcome of key decisions taken by member governments, emphasis on domestic (economic) constitutienciestoshapegovernmentalpositionsin interstatebarganing. • Member governments delegate authority to regional institutions in a "calculated, rational, and circumscribed" manner. (A.Moravcsik) • Sandholtz (1993): membership of a region can influence how governments define their interests • Thus, partly reconciling the neo-functionalist and liberal intergovernmental perspectives

35. Economic Consequences (1) • Estimating the trade effect of PTAs is not a straightforward exercise due to the impact of many different variables • Factors other than provisions of the PTAs themselves that can affect the volume of trade between two countries: • Size of the two economies • Levels of per capita income • Geographical distance between the two countries • Do they share a common boundary? • Do their populations speak the same language?

36. Economic Consequences (2) • Several studies confirm that PTAs have • a positive impact on trade between members • caused changes in patterns of international trade • It is difficult to distinguish between the effects of "trade creation" and "trade diversion” • World Bank (2000): "it is not possible to conclude that trade diversion has been a major problem”

38. Economic Consequences (3) • It is also difficult to estimate the effects of economies of scale & competition dynamics • Generally, the impact of PTAs appears to be relatively minor given the other factors, such as floating exchange rates, that come into play

39. Regionalism and the WTO (1) • Will PTAs facilitate or obstruct global trade liberalization? • PTAs seen to facilitate global negotiations because • Regional groupings reduce the number of actors in global negotiations • Deeper regionalism within regional groupings can serve as models at the global level • Regionalism paves way for full global liberalization • Regionalism can lead to a "domino" effect and broaden the scope of liberalization

40. Regionalism and the WTO (2) • However, • Regional groupings may have little flexibility in bargaining with others • There is as yet no evidence that deeper regional cooperation has translated to the global level • Regional groups may not pave the way for further liberalization if firms are comfortable operating within the region • Firms may have little incentive to lobby governments if PTAs are shallow

41. Regionalism and the WTO (3) • PTAs hinder global negotiations because • PTAs magnify power disparities that lead to resentment in smaller, less developed economies against trade liberalization • PTAs divert scarce resources away from global negotiations • "Spaghetti bowl" effect increases the cost of international trade • PTAs might lower the incentive for firms to push for further liberalization

43. The spaghetti bowl effect A phenomenon of international economic policy that refers to the complication which arises from the application of domestic rules of origin in the signing free trade agreements across nations. The effect leads to discriminatory trade policy because the same commodity is subjected to different tariffs and tariff reduction trajectories for the purpose of domestic preferences.With the increase in FTA's throughout the international economy, the phenomena has led to paradoxical, and often contradictory outcomes amongst bilateral and multilateral trade partners. When applied specifically to trade among Asian nations, the effect is sometimes called the noodle bowl effect.

45. Regionalism and the WTO (4) • PTAs hinder global negotiations because (cont.) • PTAs enable governments to exempt sensitive sectors from liberalization, thereby strengthening protectionist forces • The contradictory arguments on the relationship between PTAs and global trade liberalization rest on hypotheses that are not easy to test.