Multilateralism & Regionalism - The Development Interface -

1. Multilateralism & Regionalism- The Development Interface - Short Course on Key Issues on the International Economic Agenda for Permanent Missions in Geneva, 23 November 2007 Taisuke ITO DITC/UNCTAD

2. Context & Questions • WTO Doha Negotiations go slowly • More movement towards RTAs? • RTAs already proliferated. What is new? • Implications for development & MTS? • RTAs are here to stay. How to make them more useful for developing countries given evolving MTS?

3. Outline • Recent trends & issues in RTAs • Interface between WTO & RTAs: Developmental perspective

4. Part IRecent Trends & Issues in RTAs

5. Number of Notified RTAs by Year of Entry into Force: 1948-2007 Source: WTO

6. RTA MEMBERSHIP ACROSS THE WORLD (March 2002) Source: WTO

7. RTA MEMBERSHIP ACROSS THE WORLD (2007) Source: WTO

8. FUTURE PROSPECTS Dominican Republic Nicaragua Myanmar Cambodia El Salvador Guatemala Honduras Russia Panama Indonesia Costa Rica Bhutan, Maldives, Nepal, Pakistan Brunei Darussalam Viet Nam Laos USA Philippines Malaysia Paraguay Bangladesh Thailand Brazil Argentina India Singapore Uruguay Sri Lanka New Zealand Chile Mexico Japan People’s Rep. of China Peru Colombia Hong Kong, China Korea Canada Bolivia Ecuador Chinese Taipei Australia Venezuela Fiji, Solomon Islands, Vanuatu Papua New Guinea Bahamas Haiti Fed. States of Micronesia, Marshall Islands, Kiribati, Palau, W. Samoa,Tonga, Vanuatu, E. Timor, Cook Islands, Nauru, Niue, Tuvalu Dominica, Suriname, Jamaica, St. Lucia, Belize, St. Kitts & Nevis, Grenada, Barbados, Guyana, St. Vincent & the Grenadines, Antigua & Barbuda, Trinidad & Tobago ASIA AMERICAS Source: A. Estevadeordal , “New perspective on North-South RTAs”, presentation at a pre-UNCTAD XI seminar on regionalism, Rio de Janeiro, 8 June 2004.

9. Trends in RTAs • RTA proliferated worldwide since 1990s with WTO & accelerated with bilateral “hub-&-spoke” FTAs => “spaghetti bowl” • 367 notified to WTO of which 214 in force (Dec 2006) (400 by 2010?) • DCs active in RTAs => Overlapping (SSA) & multiple membership (av. 8 RTAs per country in LA, 4 in SSA) • [Continental scale (FTAA, ACP-EU EPAs)] • Inter-regional RTAs, mostly bilateral (US-FTAs) • Block-to-block RTAs (EU-Mercosur, EPAs)

10. Trends in RTAs (2) • Chile, Mexico & Singapore emerged as semi-hubs • Non-traditional regionalists (India, JPN, KOR, China, Singapore, Aus, NZ) entered the scene • N-N RTAs (US-AUS, EU enlargement) re-emerged • N-S RTAs significant => transform unilateral preferences to reciprocal preferences • Emerging DCs got involved (China, US-KOR, EU New Strategy towards South & SE Asia) • S-S RTAs reinvigorated, including inter-regional, plurilateral initiatives

11. Why RTAs? Some Motivations • Political considerations (EU, US FTAs) • Change in the 1990s in conventional wisdom on economic policy management and development strategies => trade integration as key development tool • RTAs as a platform to participate in expanded international supply chains (input manufactures ↑ ) • Protection of regional markets from outsiders • Quicker and deeper than WTO as negotiations easier with limited number of partners (less free rider problem) • Lock-in unilateral preferences (N-S RTAs)

12. Why RTAs? Some Motivations (2) • “Domino effects” • Large RTAs increase the incentive for non-members to join the RTA to avoid trade creation/diversion (EU enlargement)  Incentive for insiders to resist • Countries have incentive to react to the formation of an RTA by the formation of new RTA, rather than seeking multilateral approach, in order to maintain competitive edge vis-à-vis its competitors in key export markets => Hub & spoke bilateral FTAs (US, EU & JPN with Mexico) • Greater bargaining power at multilateral level • Any effect of the slow pace of the Doha Round?

13. RTA proliferation means increased share (%) of world trade under RTAs 51.2% 43.2% Note: Estimate based on 113 RTAs in force in 2000 with trade data of 1999. Source: WTO, World Trade Report 2003.

14. New market access under RTAs may be more limited than it might appear Share of trade covered (%), 2003 Note: Not include intra-EU 15 trade. Source: World Bank, Global Economic Prospects 2005. Reported in S. Andriamananjara, “Regional Integration: Systemic issues from a global perspective” in an UNCTAD Ad-hoc expert meeting in 15-16 March 2007.

15. S-S RTAs proliferate but North’s RTAs dominate trade covered, not surprisingly Number of RTAs Percent of World Trade Covered South-South South-South US US EU EU Source: World Bank (2005), ibid.

16. US/EU markets large (NAFTA=8%, EU25= 23%) & have higher intra-RTA trade share than S-S RTAs (2005) Note: Exports. Source: UNCTAD

17. For DCs, RTAs seem to be a relatively small driver of trade reform in the past Av. Tariffs in Developing Countries Share of tariff reductions 29.9 9.3 Note: 33 largest DCs covering 90% of DC trade. Source: Martin and Ng, 2004, from World Bank (2005), op. cit.

18. Source: Estevadeordal & Robertson (2004). Reported in a presentation by Estevadeordal (2004), op.cit . 50 40 MFN Tariffs for 11 countries 30 20 Preferential Tariffs of 11 countries with respect to their RIA partners in the region 10 0 1985 1987 1989 1991 1993 1995 1997 Regionalism in the Americas Open Regionalism Simultaneous Preferential and MFN Liberalization in Latin America

19. Sub-Saharan Africa Europe & Central Asia Middle East & N. Africa South Asia East Asia East Asia has expanded its trade globally & regionally • Regional trade significant in income generation • With greater integration into global supply chain • Importance of competitive supply capacity LA Source: World Bank (2005), op. cit.

20. Intra-RTA trade yet grew faster in S-S RTAs Note: 1990=100 (left) & intra-RTA import share (right). Source: UNCTAD

21. Developing Countries and RTAs • Some DCs are highly dependent on some trading partners (West Africa with EU) and tariff revenue => significance of N-S RTAs for individual DCs

22. M. Kuwayama, “South-South Integration and Cooperation: A Latin American Perspective, presentation at a pre-UNCTAD XI seminar on regionalism, Rio de Janeiro, 8 June 2004. S-S RTA have the potential to foster diversification of DC exports into more value-added & technology intensive products (Latin America excluding Mexico) South-North South-South 2000-2002 52,5% 47,5% Excluding Mexico

23. Trade Effects of RTAs • Some 50% of world trade estimated under RTAs in 2005 as compared to 40% in 2000. Or over 30% (or 20% if MFN duty free excluded) • DCs liberalization driven mainly by unilateral lib & RTAs impacts may have been more limited than might appear & proceeded with MFN liberalization • Some large North RTAs account for the significant share given their market size & have higher regional intensity of trade • East Asia expanded intra-regional trade not necessarily relying on preferences => competitive supply capacity

24. Trade Effects of RTAs • N-S RTAs important for individual DCs in terms of volume & pose adjustment given their import concentration • N-S RTAs tend to reinforce existing comparative adv (natural resource-based or lower value-added products with high import content) • S-S RTAs intra-RTA trade is relatively low but steadily increasing over the past decades with variation across groupings (ASEAN) • S-S RTAs (& trade) important for diversification into non-traditional new markets & fast-growing, more value-added, technology-intensive products (dynamic comparative adv)

25. New Regionalism • Deep (positive) integration = positive harmonization of regulatory standards <=> Shallow (negative) integration = elimination of trade barriers (tariffs) • Broader policy coverage: “behind-the-border” measures (services, IPR, investment, CP, GP) => Greater implications for development policy options • WTO-plus in scope & depth Potential for dynamic gains, greater impact on national economy & development policies. Positive coherence with MTS matters

26. Welfare Effects of an RTA Positive • RTAs creates trade (static trade creation) • RTAs generates dynamic gains from scale economy, greater competition, FDI inflows & technology transfer Negative • RTAs diverge trade from more efficient third countries to less efficient RTA partners

27. Trade Creation & Diversion P S D • Price ↓, C ↑, P↓, Imp ↑ • Producer ↓ (a) • Consumer ↑(abcd) • Gov rev loss ↓(ce) • Gains from TC (b+d) • Loss from TD (e) Pw + t a b c d PRTA e Pw Q 0 S2 S1 D1 D2

28. Conditions for Trade Creation & Diversion • The higher the initial tariffs, the greater the effects, be it trade creation or diversion • The lower the post-RTA CET, the more likely it is that the RTAs is welfare increasing (less TD) • The greater the number of RTA partners, the more likely it is that there will be net trade creation • Wide differences in comparative advantage is likely to lead to net trade creation • The higher the share of trade with partner countries the greater the possibility of welfare enhancing RTAs

29. Risk of trade diversion high in RTA with high external tariffs Average weighted tariffs Note: Tariffs are import-weighted at the country level to arrive at RTA averages Source: UN TRAINS/WITS, from World Bank (2005), op. cit.

30. Policy Issues in Trade Creation & Diversion • Trade creation = trade adjustment (like any other liberalization) => Issues for DCs under NS RTAs • Trade diversion hurts both RTA members and non-members • Non-members => Lost export sales. Also hurt by TC • Members => Lost tariff revenue not compensated by consumer gains • MFN reduction an answer? Trade diversion = static concept => Need to assess trade diversion relative to the non-static benefits of increased trade

31. Rules of Origin • RoO determine the eligibility for preferential treatment of a good => can be a powerful trade policy instrument • Insulate an industry from the consequences of FTA • Protect intermediate good producers by favoring intra-PTA supply links (resultant distortion = 4.3% tariffs) • Be used to attract investment in strategic sectors • Restrictive rules hampers the use of preferences (e.g., double transformation rule for T&C: Yarns => fabrics => clothing) • Cost of compliance (1.8% under NAFTA) • Often more restrictive in N-S RTAs

32. Dynamic Effects • Economies of scale • Greater specialization & increased production • IRS => product differentiation => Intra-Industry trade • Competition => efficiency => innovation • FDI inflows • Transfer of technology • Productivity & economic growth

33. Deeper Integration for Dynamic Gains? • Potential for greater gains as eliminating NTBs and harmonizing regulatory standards lead to larger markets & economies of scale • Tariff first, NTB next? (S-S RTAs) • Upwards harmonization entails costs and can be sub-optimal for DCs • Broader coverage of behind the border regulatory issues have implications to domestic development policy options = policy space loss

34. RTAs & Policy Space

35. Summary • RTAs proliferated worldwide with impact on trade • RTAs relevant to development as trade is increasingly important for GDP & growth and trade policy as development policy instruments • New regionalism entail broader & deeper policy coverage thus affect DC policy space (more than the MTS) • Regional negotiations matter in determing terms and conditions of the agreement

36. Part IIInterface Between WTO & RTAs Development Perspective

37. Questions (1) How do RTAs affect WTO/MTS? • How does WTO/MTS affect RTAs? => Implications for developing countries in regional trade negotiations

38. How Do RTAs Affect WTO?“Building block” Thesis • Quicker & deeper integration for global free trade: Same goal, different routes through open regionalism • Competitive liberalization thesis • Large RTAs increase the incentive for the outsiders to advance multilateral liberalization to minimize trade diversion (UR & Single European Market, UR conclusion & NAFTA/APEC) • Laboratories for testing new approaches (services, investment, competition policies) • RTAs as development tool: incubator of production and export diversification for gradual and strategic integration into world economy / MTS • Locking-in of domestic reform at regional level

39. (1) How Do RTAs Affect WTO? “Stumbling block” Thesis • Inward-looking & protectionist bloc • Reduce incentive for MTS, esp. in MA and new issues (WTO-plus, NN RTAs) • Specialization of areas and «forum-shopping» (only AG Subsidy & DS for WTO?) • Administrative burdens and negotiating capital constraints (overlapping membership to several RTAs) (RoO) • Fragmentation of regional rules in new areas & jurisprudence

40. (1) How Do RTAs Affect WTO? “Stumbling block” Thesis • Deep integration limits policy space for proactive development policies • Policy space and SDT permitted under MTSoverridden (e.g. less than full reciprocity) • Negotiating leverage at MTS (bilateral FTAs) • N-S RTAs may weaken S-S RTAs • Exclusion of small countries / « template » RTA • « Hub & spoke » RTAs

41. (2) How Does WTO Affect RTAs? • WTO rules on RTAs define the conditions to be met by RTAs • MFN market accessconditions determine the level of preferences under RTAs • WTO disciplines on regulatory issues constitute minimum standards for all

42. (i) RTAs and WTO Rules

43. (ii) RTAs and WTO Rules Comment • WTO rules notoriously ineffective • Not an answer to discipline proliferation of RTAs? But not mean rules are useless • Rules of the game => affect terms of RTAs • Not matter for many RTAs • Special relevance for low income vulnerable DCs seeking flexible terms of RTAs (EPAs)

44. WTO Rules on RTAs All provisions allow for derogation from MFN obligations in providing preferential treatment to RTA partners under certain conditions

45. GATT Article XXIV

46. GATT Article XXIV:5-8 • Duties and other restrictive regulations of commerce (ORRCs) must be eliminated with respect to substantially all the tradeamong parties (para 8(a)(i)&(b)) • Duties and other regulations of commerce (ORCs) must not be higher or more restrictive than prior to the RTA formation (para 5(a)(b)) • « Reasonable length of time » for the formation of CU/FTA should exceed 10 years only in exceptional cases (para5(c)) • Notification to the CTG, examination & reporting by CRTA on WTO consistency («make  recommendation» as required)

47. Enabling Clause

48. Enabling Clause (2) • The Enabling Clause does not assume formal link with GATT Article XXIV conditions • The Enabling Clause is less stringent than GATT XXIV as it permits reciprocal preferences on a limited range of products, & not « substantially all the trade» • The clause permits reduce tariffs only, or non-tariff measures as well, & not « elimination» like GATT Article XXIV

49. GATS Article V

50. GATS Article V (2)