Trade Diplomacy Slideshow Series Dr. Geoff Pigman

1. Trade DiplomacySlideshow SeriesDr. Geoff Pigman Regional Trade Integration: ‘Stepping Stones or Stumbling Blocks’ to Multilateral Trade Liberalization?

2. A taxonomy of regional trade integration • Free trade area (FTA) • zero tariffs between members • Customs Union • FTA • Common External Tariff • Common customs frontier • Common Market • customs union • common external trade policy Regional Trade Integration

3. Regional trade integration: GATT-legal when…(GATT 1947 Art. 24.5) … the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area; Provided that: (a) with respect to a customs union, or an interim agreement leading to a formation of a customs union, the duties and other regulations of commerce imposed at the institution of any such union or interim agreement in respect of trade with contracting parties not parties to such union or agreement shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union or the adoption of such interim agreement, as the case may be; (b) with respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free‑trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or interim agreement as the case may be; and… Regional Trade Integration

4. TRADE CREATION CET or external tariffs not higher than before customs union or FTA more intra-CU/FTA trade not less external trade KEY ISSUE………….. TRADE DIVERSION CET or external tariffs higher than before customs union or FTA more intra-CU/FTA trade less external trade ….RULES OF ORIGIN! Economic arguments for regional trade integration: trade creation vs. trade diversion Regional Trade Integration

5. Other economic arguments for regional trade integration • Partial gains from trade liberalization • welfare • efficiency • Creates economies of scale • firms and markets • investment flows Regional Trade Integration

6. FOR Allows for interim progress towards multilateral liberalization Keeps the ‘bicycle’ upright Reduces non-trade tensions between members (peace arg.) Creates stronger trade negotiating body AGAINST Substitutes for multilateral liberalization Encourages political competition between blocs Rewards complacency over multilateral negotiations Political arguments for and against regional trade integration Regional Trade Integration

7. The EEC/EC/EU: the model • Combine French and German coal and steel production: prevent future wars • A market of 500 million people • Trade diverting or trade creating? • Dynamics of multilateral trade negotiations • Encouraging replication • GCC, Mercosur, ASEAN, SADC, CAFTA Regional Trade Integration

8. Southern African Development Community (SADC) Regional Trade Integration

9. ASEAN – cooperation but no FTA Regional Trade Integration

10. But how big are RTAs/PTAs really? (Baldwin 2009) RTA/PTA share of world trade • EU-27 21.9% • NAFTA 6.4% • ASEAN 1.4% • MERCOSUR 0.3% • SADC 0.1% • GCC 0.1% Regional Trade Integration

11. US trade policy: regionalism as alternative or bargaining chip? • Caribbean Basin Initiative 1982 • US-Israel FTA 1984 • CUSTA 1988 • APEC 1993 • NAFTA 1994 • Free Trade of the Americas: a bridge too far • Later bilateral FTAs • Jordan, Morocco, Australia, etc. Regional Trade Integration

12. European and African regionalism models compared Europe – Viner/Balassa Africa Oldest customs union – SACU (1910) Multiple regional integration projects Tripartite project SADC –COMESA – EAC 26 countries Development focus infrastructure supply capacities • Free trade area • economies of scale • Customs union • common external tariff • Common market • Economic union • Political union Regional Trade Integration

13. Preferential trade agreements (PTAs) vs. multilateral liberalisation • PTAs are GATT/WTO-legal! • despite derogation from MFN • Bhagwati’s main critiques • trade diversion is common • complex rules of origin are trade-diverting • high trade volume ≠ trade creation • the ‘Spaghetti Bowl’ of PTAs is exclusionary • trade-unrelated issues harm developing countries Regional Trade Integration

14. PTAs: stepping stones or stumbling blocks to multilateral trade liberalisation? Stepping stones Stumbling blocks PTAs as low hanging fruit: reduces incentives for states to complete multilateral agreements concentrates power in hands of strongest states trade diplomacy resources are limited, esp. for LDCs domestic political resources are limited • PTAs lower trade barriers, even if unequally, so less work left to do multilaterally • convergence in PTA negotiating positions means fewer differences to resolve multilaterally Regional Trade Integration

15. Getting out of the spaghetti bowl • Bhagwati’s solutions: • reduce MFN tariffs to point where PTA tariff advantages are negligible • developing countries continue to hold the line in WTO against trade-unrelated demands • developing countries sign ‘trade only’ PTAs with Japan (and China)? Regional Trade Integration

16. Baldwin: ‘21st century regionalism’ • Stepping stone/stumbling blocks debate has become less relevant • Increasingly global supply/production chains mean PTA/RTA tariff preferences are less important and less of a problem • Greater ‘behind the border’ liberalization/ harmonization/cooperation will be needed Regional Trade Integration