Theory of Economic Integration

1. Theory of Economic Integration Regionalism and WTO Product-market integration in a neoclassical world, introduction Katarzyna Śledziewska

2. Outline • Preferential Trade Agreements and the Multilateral Trade System • Significance of RTAs • Product-market integration in a neoclassical world, introduction

3. WTO rules The GATT recognised the importance and value of economic integration between countries Regionalism - the most significant exception to WTO’s principal of non-discrimination Three sets of rules in the WTO permit the creation of RTAs: • Article XXIV of the GATT • the “Enabling Clause • Article V of the General Agreement on Trade in Services (GATS)

4. WTO rules • Article XXIV of the GATT • lays down conditions for the establishment and operation of free trade agreements and customs unions covering trade in goods • Paragraph 4 • „the purpose of a customs union or of a free-trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories”

5. WTO rules • Article XXIV of the GATT • Paragraph 8 • „duties and other restrictive regulations of commerce are eliminated with respect to substantially all the trade between the constituent territories of the union” • „substantially the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territoriesnot included in the union”

6. WTO rules • Article XXIV of the GATT • Paragraph 8 „substantially all the trade” • It is commonly accepted that • agriculture is excluded (EFTA) • or only included selectively (EU with Mediterrean coutries

7. WTO rules • Article XXIV of the GATT • Paragraph 5 • „the duties and other regulations of commerce (…) 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” • Interim agreements are also possible, provided they lead to a FTA (CU) within a „reasonable” time

8. WTO rules • the “Enabling Clause”, • formally the 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of developing Countries, • permits regional agreements among developing countries on trade in goods • de facto unlimited discretion to coclude incomplete preferential agreements or any kind of FTAs

9. WTO rules • Article V of the General Agreement on Trade in Services (GATS) • establishes conditions that permit liberalization of trade in services among regional partners

10. Notifications of RTAs in force to GATT/WTO Source: http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx

11. Notifications of RTAs in force to GATT/WTO

12. Outline • Preferential Trade Agreements and the Multilateral Trade System • Significance of RTAs

13. Significance • Integration: • Has affected most of the countries in the world • Has become an unavoidable and powerful element in most national and international economic policy decisions • Economic integration • securing access to a wider market and reinforcing growth • However – past experience • Negative in certain developing-country groups

14. Significance • The number of regional trade agreements (RTAs) has grown rapidly since WTO came into existence in 1995 • The most significant exception to WTO’s principal of non-discrimination • More than 50 percent of world trade is conducted within these preferential trade arrangements

15. RTAs in force by date of entry into force Establishment of WTO

16. Significance • Number of RTAs • 1990 - 27 • 1995 - 60 • 2000 - 102 • 2005 – 186 • 2009 - 266 “Regionalism is in fashion. It seems that every month brings news of yet another agreement among a group of countries, or between one group and another, to strength their economic links, particularly by removing barriers to trade and investment among themselves”. Frankel (1997)

17. Percentage of main RTAs in world’s exports

18. Significance • The vast majority of WTO members are: • party to one or more regional trade agreements • party to twenty or more (some) • Examples • http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx

19. Preferential Trade Agreements and the Multilateral Trade System • One of the most frequently asked questions is whether these regional groups help or hinder the WTO’s multilateral trading system • the multilateral system may be fracturing into discriminatory regional blocs • regional agreements will go beyond what was achieved in the Uruguay Round and instead become building blocks for further global liberalization and WTO rules in new areas

20. Multi or regional? • Considerable uncertainty regarding the future and the relevance of the multilateral trading system • Problems embodied in obvious, serious and repeated troubles of multilateral trade liberalisation negotiations (Seattle, Cancun, Doha) • „Clean and lean” multilateral trading system and rules difficult to develop between developed and developing countries • RTAs – create and maintain a complex labyrinth of international trading roles and relations • seem more easy to develop than multilateral trade system • General agreement about the advantages, value and importance of a multilateral approach to international trade • Differences in opinion regarding international trade liberalisation arrangements

21. Negative effects of integration • Integration hurts third countries through trade diversion • Simple multilateral trade rules (tariffs, rules of origin) are replaced by a complex and overlapping labyrinth or „spaghetti bowl” of various rules specific to each group • There are regional industry-specific lobbies that demand and receive various types of protection in order to shift rents and distort location of production • These lobbies resist further trade liberalisation • Resources, time and energy are shifted from multilateral towards regional issues

22. Negative effects of integration • There are administrative, operational and multiple enforcement costs that increase transaction and overall trade costs • Strong and exclusive trading blocs may exploit their monopoly power and improve their own terms of trade; they may clash and provoke ‘trade wars’ • Deeper integration may introduce protection in previously unprotected business areas • Major players in multilateral trade liberalisation negotiations, the US and especially the EU, are bound to specific trade liberalisation agreements (CAP) • Regional trade arrangements may slow down and postpone progress on the multilateral plane as there are gainers form the existence of deals that discriminate in trade who may not welcome the arrival of a new multilateral deal

23. Why wider or deeper integration since the mid-1980s • Deeping and widening of integration in the EU and North America • Integration between developed countries such as the United States and Canada, and a developing ones (Mexico) • Economic transition in the formerly centrally planned economies in central and eastern Europe and the 2004 EU entry of eight of these countries, then of two • A change in economic policies in the developing countries towards more outward-looking and liberal models • Change of structure of production (move towards knowledge-based goods and services and operations of transnational corporations) • Changing character of protectionism • Weaking confidence in the multilateral trading system since 1995