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Are trade blocs building or stumbling blocks? New evidence

Are trade blocs building or stumbling blocks? New evidence. Richard E. Baldwin Professor of International Economics Graduate Institute, Geneva ERWIT Appenzell 5 June 2008. Introduction. Joint with Elena Seghezza Are free trade agreements bad? Pure economics – hard to get upset.

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Are trade blocs building or stumbling blocks? New evidence

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  1. Are trade blocs building or stumbling blocks? New evidence Richard E. Baldwin Professor of International Economics Graduate Institute, Geneva ERWIT Appenzell 5 June 2008

  2. Introduction • Joint with Elena Seghezza • Are free trade agreements bad? • Pure economics – hard to get upset. • Hard to find evidence of an effective FTA harming the signers or anyone else at a significant level of GDP. • Politics is the big question: • Do FTA hinder multilateral liberalisation?

  3. SB Theory • Stumbling/Building Bloc theory • 4 mechanism in literature: • Preference-erosion/exploitation SB • Goodies-bag SB • Cherry-picking SB • Super-game SB or BB • not really relevant to real world, IMHO

  4. BB Theory • Juggernaut BB • Kemp-Wan BB • Veto-avoidence BB • (Induced unilateral protection/liberalisation) logic. • Optimal bilateral tariff: • Imported protection/liberalisation • An FTA can render one partner’s MFN tariffs irrelevant (US Mexico)

  5. Existing empirics • BB: {actually unilateralism} • Estevadeordal, Freund and Ornelas (2006) • SB: • US: Limão (2006), EU: Karacavaoli and Limão (2008) • Are UR cuts correlated with pre-existing preferences. • Answer “YES”

  6. Facts of MFN liberalisation • Tariff cutting in GATT Rounds • 1947-1956: “Principle supplier” basis • Something like bargaining with a leader • 1963 onward: “formula” • Bargaining too complex • 12 nations, 1 min/tariff line = 25 years of 24/7 discussion. • Agreeing basic tariff cutting before the talks start. • Kennedy (63-67) ‘cut by a third’ • Tokyo (73-79) ‘cut by a third’ • Uruguay (86-94) ‘cut by not less than Tokyo’

  7. Empirics of MFN liberalisation Tokyo

  8. Uruguay Round

  9. Tariff cut budget • Limao’s work ignores the ‘budget constraint’ imposed by the formula approach. • Diff-in-diff can only focus on deviations from the average tariff cut. • Limao’s result: • model of tariff cuts • goodies-bag -> tariffs cut by less in some items. • Claim: 1st order SB means average tariff was cut by less due to RTAs

  10. New approach • Is the stumbling-bloc of first-order importance? • If stumbling-bloc mechanisms have had a major impact on tariffs over the past decades, we should be able to detect this in the levels of the tariffs. • Highest MFN tariffs in the products where PTA tariffs are the lowest. • Suggests that correlation of PTA and MFN tariffs has important information. • Across nations • Across products within nations • Information in the level.

  11. Across nations Building Bloc: low PTA & low MFN Stumbling Bloc: low PTA & high MFN Figure : MFN and preferential tariff averages by nation, 2005.

  12. Tariff line data • Start with top 50 exporters (2005) • Drop some: • not WTO members no MFN rates (the Russian Federation, Vietnam, Ukraine, Iran), • Oil exporters (UAE, Saudi Arabia). • All MFN rates are zero (Hong Kong, Singapore) • Too many specific tariffs (Switzerland) • 23 left: • Argentina, Australia, Brazil, Canada, Chile, China, EU, India, Indonesia, Israel, Japan, Korea, Malaysia, Mexico, New Zealand, Norway, Pakistan, the Philippines, South Africa, Taiwan, Thailand, Turkey, US.

  13. Tariff line data • Take ALL listed PTA tariffs (US has more than six)

  14. Tariff line data • Simple question: Are MFN and PTA tariffs complements or substitutes? • Simple regression:: • (1) MFNgpm =a + b PTAgpm + g0 Dchaptergm +vgm • Dchapter: 14 dummies for the main HS chapter aggregations (animal, vegetables, foodstuffs, mineral products, chemicals, plastics, raw hides, skin & leather, wood, textile, footwear, stone & glass, metals, machinery and transportation equipment. • v, may contain a common group effect.

  15. Zero MFN tariffs • Zero MFN tariffs are an issue. • If MFN = 0, can’t have SB. • AND Juggernaut theory predicts that MFN=PTA=0 frequently • Including MFN=0 shades results against the hypothesis to test.

  16. Only positive MFN tariffs • First we throw out the zeros. Country dummies SB  - BB  + s.e.

  17. Rich & poor nations • Next we divide sample into rich & poor. • Different political economy?

  18. Including all tariff observations • Use all tariff lines, including zeros

  19. Respecting the inequality constraint • Since MFN  PTA, OLS is not quite right. • PTA Coefficient should be more negative than -1.0 if substitutes, SB. • Greater than -1.0 if they are complements, BB.

  20. END Thanks for listening: Please read: www.VoxEU.org

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