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0
5
10
15
20
25N
oti
fic
ati
on
Notified and Active Now Inactive
Formation of new Regional Integration Agreements (RIAs)
*Source: WTO; Note: Inactive data for years 2000-2002 are not available.
Types of RIA
By increasing order of integration:
1. Preferential Trading Agreements (PTAs): give preferential access to partners without eliminating all barriers
2. Free-Trade Areas (FTAs): eliminate internal tariffs to trade but leave members free to fix their external tariffs as they wish
• Governed by GATT Article XXIV• Require the use of Rules of Origin (ROOs)
3. Customs Unions (CUs): eliminate internal tariffs to trade and adopt a Common External Tariff (CET)
4. Single/Common Market: eliminate all internal barriers, direct or indirect, harmonize not just external trade policy but also regulations and standards
5. Economic Union: in addition, adopt a common currency and harmonize macroeconomic policy
Congo, R.D.
Namibia
Swaziland
Angola
Burundi Comoros
Djibouti
Kenya
Malawi
Uganda
Tanzania
Sudan Eritrea Ethiopia
Madagascar
Mauritius
Rwanda
SeychellesZambia
Zimbabwe
Botwana
Lesotho
Mozambique
South Africa
COMESA
SADC
SACURIFF
IOC
The spaghetti bowl---An example: East and South Africa
Trade creation and trade diversion: trade pattern
Country C
Country B
FTAimports
imports
home production competes with imports from B and C
Country A
Trade creation and trade diversion: numerical example
Case 1: Neither creation nor diversion
Producers A B CDomestic price 15.0 18.0 20.0Duty-paid price in A
With 20% MFN tariff 15.0 21.6 24.0With tariff only on C 15.0 18.0 24.0
Case 2: Trade creation
Producers A B CDomestic price 17.0 15.0 16.0Duty-paid price in A
With 20% MFN tariff 17.0 18.0 19.2With tariff only on C 17.0 15.0 19.2
Case 3: Trade diversion
Producers A B CDomestic price 13.0 11.0 10.0Duty-paid price in A
With 20% MFN tariff 13.0 13.2 12.0With tariff only on C 13.0 11.0 12.0
Imports from partner displace inefficient domestic production
Imports from partner displace efficient imports from rest of the world
Trade creation and trade diversion: gravity estimates
Source: Carrère (2004)
trade creation
trade diversion
Regressors coeff t-statln GDP i,t 1.00 96.7ln GDP j,t 1.15 104.9ln D ij -1.01 -44.7ln RER ij,t -0.01 -3.8EU
i,j belong to bloc 0.25 5.1exporter outside 0.15 2.2importer outside 0.36 15.7
Mercosuri,j belong to bloc -0.32 -0.6exporter outside -1.43 -14.8importer outside 0.01 0.2
NAFTAi,j belong to bloc 0.78 1.0exporter outside -0.43 -4.1importer outside 0.73 6.1
ASEANi,j belong to bloc 1.27 5.6exporter outside -0.21 -2.7importer outside 1.14 13.2
Obs. 240'691 R-2 0.65
Figure 8.1: Average Prices of Brazil's Imports from Argentina relative to those of Imports from
the United States
-10
0
10
20
1990 1991 1992 1993 1994 1995 1996
year
Ave
rag
e p
rice
ra
tio
(%
per
cen
t d
iffe
ren
ce f
rom
19
90)
Effect of RIA on the price of non-member exports
US export prices compared, Brazil vs ROW
MERCOSUR’s formation
Convergence during reduction in trade barriers
Other effects of RIAs: Income convergence
Dispersion of per-capita incomes in the EC
RTAs can also provide insurance against partners’ unilateralism:
Comment by political scientist Dan Drezner on Hillary Clinton’s proposal to review NAFTA every 5 years, posted (October 18, 2007) on Dani Rodrik’s blog:
“Last week, [Senator Clinton proposed] that we reassess our trade agreements every five years and demand adjustments to them if necessary, starting with NAFTA.
“This proposal makes me wonder if Senator Clinton understands the value-added of these free-trade agreements. […] They offer a guarantee to these countries that their relationship with the United States -- and their access to American consumers -- will not be disrupted.
“[…] Senator Clinton's proposal would strip these agreements of the very certainty that makes them attractive to our allies. How does Senator Clinton think our trading partners in the Middle East, Central America, and Pacific Rim will react to her proposal? How is this proposal any different from the unilateralism that Democrats have condemned for the past six years?‘”
02
46
81
0
0 20 40 60 80 100t
y1 y2
No agreement: Volatility of trade policy vis-à-vis country 1 (MFN partner, y1) and country 2 (preferential partner, y2) in the absence of any agreement
The effect we are trying to identify (simulated data)
RTA: Border taxes are reduced during the transition period and completely eliminated at its end vis-à-vis country 2 (y2)
MFN: No volatility-reducing effect on MFN trade measures (y1)
02
46
81
0
0 20 40 60 80 100t
y1 y2
Effect of transition on aggregate volatility is swamped by volatility in MFN measures [σ(y1)]
Results: baseline, second stageBias: countries sign RTAs when they have too much volatility
Dependent Variable: OLS 2SLS GMM Trade policy volatility (in log) Regressors: Trade agreements -0.045*** -0.140*** -0.122*** (0.014) (0.043) (0.042)
WTO -0.101 -0.196** -0.175* (0.083) (0.094) (0.093)
World price volatility (in log) 0.071** 0.080** 0.072** (0.031) (0.032) (0.031)
GDP volatility (in log) 0.030* 0.031* 0.031* (0.018) (0.018) (0.018)
Government's social welfare weighting (in log) -0.086*** -0.095*** -0.094*** (0.024) (0.024) (0.024)
Presidential system -0.216* -0.247** -0.211* (0.116) (0.120) (0.118)
Parliamentary system -0.122 -0.231* -0.203 (0.119) (0.136) (0.135)
Country and time fixed effects yes yes yes Observations 1095 1095 1095 2R 0.216 0.159 0.178
Results: baseline, second stageBias: countries sign RTAs when they have too much volatility
Dependent Variable: OLS 2SLS GMM Trade policy volatility (in log) Regressors: Trade agreements -0.045*** -0.140*** -0.122*** (0.014) (0.043) (0.042)
WTO -0.101 -0.196** -0.175* (0.083) (0.094) (0.093)
World price volatility (in log) 0.071** 0.080** 0.072** (0.031) (0.032) (0.031)
GDP volatility (in log) 0.030* 0.031* 0.031* (0.018) (0.018) (0.018)
Government's social welfare weighting (in log) -0.086*** -0.095*** -0.094*** (0.024) (0.024) (0.024)
Presidential system -0.216* -0.247** -0.211* (0.116) (0.120) (0.118)
Parliamentary system -0.122 -0.231* -0.203 (0.119) (0.136) (0.135)
Country and time fixed effects yes yes yes Observations 1095 1095 1095 2R 0.216 0.159 0.178
0
2'000
4'000
6'000
8'000
10'000
12'000
1985 1987 1989 1991 1993 1995
Other effects of RIAs: FDI
Launch of NAFTA negotiations
NAFTA put into force
Amount of FDI into Mexico, million dollars
Vertical trade at work: Garment export growth, SSA
Clothing exports to the US, selected ESA countries
Source: Cadot et al 2004
1997 2003Botswana 7.1 7.1 89 0.0Kenya 31.3 187.8 94 34.8Lesotho 86.5 392.4 95 28.7Mauritius 184.4 269 50 6.5South Africa 70.9 231.8 54 21.8
AGOA util.
rate 2003 (%)
Annual growth 1997-2003
Exports to the US, HS61-62
NotesAGOA: US Africa Growth and Opportunity Act, voted in 2001, gives duty-free access to African LSCsHS61-62: Clothing categories in the customs Harmonized System
Garment export growth: Madagascar
Export-led growth: clothing products
010
020
030
040
050
0
Mill
ion
US
D
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Exports to other countries Exports to the EUN
Exports to the U SA Net Exports
010
020
030
040
050
0
Mill
ion
US
D
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Exports to other countries Exports to the EUN
Exports to the U SA Net Exports
Source: Nicita 2004
0
0.2
0.4
0.6
0.8
1
1.2
0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
Tariff Preference
NA
FTA
utilization rate
11. Textile
19. Arms14. Jewelry
8. Leather goods
17. Transport Eq.
20. Misc.
12. Footwear
7. PLastics
3. Fats and Oils
6. Chemicals13. Stone & Glass
4. Food. Be. & Tobacco9. Wood
18. Optics
1615 Base metal10
1
5
1. Live animals2. Vegetables5. Mineral Products10. Pulp & paper16. Machinery &El.eq
2
Rules of origin
Mexico’s utilization of NAFTA, 2000, by HS section
Note: NAFTA utilization rate: proportion of Mexican shipments entering the US under NAFTA’s preferential regime (as opposed to MFN)
10% tariff preference
5% tariff preference
11. Textile
17. Transport Eq.
5. Mineral Products
16. Machinery &Eq.
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
0 1 2 3 4 5 6 7 8
ROO index
Tar
iff
pref
eren
ce
Rules of origin
Mexico’s exports in ROO/tariff preference space
Note: ROO index: Estevadeordal’s (2000) qualitative index of ROO restrictiveness (essentially how wide is the required change of tariff heading to make imports eligible)
01 Chapter:
Live animals
0101 Heading:
Iive horses, asses, mulles and hinnies
0102 Heading:
Live bovine animals
0103 Heading:
Live Swine
0104 Heading:
Live sheep and coats
0105 Heading:
Live poultry
010110 Subheading:
Purebred breeding animals
010190 Subheading:
Others
01011010 Item:
Males
01011020 Item:
Females
01019010 Item:
Horses
01019020 Item:
Asses
Number of digits
Number of lines in
category
Tariff section 1 21Tariff chapter 2 91Tariff heading 4Tariff sub-heading 6Tariff item 8 4'876
The “Harmonized system”:
Overall structure
Product-Specific Rules of origin: Examples
Exceptions
HS code Product description 200911 ORANGE JUICE, FROZEN, SWEETENED OR NOT 200919 ORANGE JUICE, OTHER THAN FROZEN, SWEETENED OR NOT 200920 GRAPEFRUIT JUICE, SWEETENED OR NOT 200930 CITRUS FRUIT JUICE FROM A SINGLE FRUIT, NESOI
HS codes/group Applicable Product-specific Rule of Origin (PSRO) 200911-200930
HS code Product description 080510 ORANGES, FRESH 080520 MANDARINS (INC TANGER ETC) & CITRUS HYBR FR OR DRI 080530 LEMONS AND LIMES, FRESH OR DRIED 080540 GRAPEFRUIT, FRESH OR DRIED 080590 CITRUS FRUITS, INC KUMQUATS, NESOI, FRESH OR DRIED
A change to subheading 200911 through 200930 from any other chapter, except from heading 0805
Product-Specific Rules of origin: Examples
Funny Technical requirements
HS codes/group Applicable Product-specific Rule of Origin (PSRO)
...of subheading 511111 or 511119, if hand-woven, with a loom width of less than 76cm, woven in the United Kingdom in accordance with the rules and regulations of the Harris Tweed Association, Ltd, and so certified by the Association
...certain textile products
NAFTA
Cotonou Convention (EU)
Cotonou ConventionHS codes/group Applicable Product-specific Rule of Origin (PSRO)
It was at least 50% owned by nationals of an EU or ACP state (although under certainconditions leased or chartered vessels can qualify);
Fish
It was registered in an EU or ACP state ;It sailed under the flag of an EU or ACP state ;
The vessel’s captain, officers and at least 50% of its crew were nationals of an EU orACP state ;
The chairman and the majority of the board members of the company owning the vessel were nationals of an EU or ACP state
Comparative advantage
Weaving
DyingCutting
Assembly
Natural-resource intensive Capital-intensive
Labor-intensive
Infrastructure-intensiveGinning
Spinning
Cotton production
RetailingShipping
-
500
1'000
1'500
2'000
2'500
3'000
3'500
Imports Exports
Clothing
Textiles
Rules of origin
Why they hurt: “slicing up the value chain” becomes more difficult
Tunisia
Rules of origin
Pass-through of tariff preferences: the principle
US market
Assumptions•No US production•Mexican producers perfectly competitive•Market power on the US buyer side, so Δt captured only partially by Mexicans
Mexican pre-tariff supply price
US demand
Quantity
Price
World price
US internal price = World price + US MFN tariff
Preferential tariff
Mexican post-tariff supply price
Tariff preference
Potential increase in Mexican producer price
Potential increase in Mexican supply
Rules of origin
Pass-through of preferences: NAFTA
Source: Cadot et al. (2004)
Dependent variable: price increase for Mexican good shipped to US
Regressors coeff t-stat coeff t-stat coeff t-stat coeff t-statUS tariff pref. 0.784 3.29 0.799 3.33 0.522 1.82 0.474 2.12ROO
type 1 2.817 2.01 3.564 2.85type 2 4.822 4.23 6.549 5.93
Obs. 1304 913 1304 913R-2 0.45 0.46 0.45 0.49
With ROOWithout ROOAll goods Final goods All goods Final goods
Rules of origin
Pass-through of preferences: NAFTA
US intermediateproducer
Mexican final good 1
Mexican final good 2
Rest of the world
US consumer market
ai1ai2
< roo1
< roo2
< roo0
Mexico’s external tariff
Mexico’s NAFTA tariff on fabric
US NAFTA tariff on blue & red socks
Rules of origin
Pass-through of preferences: NAFTA
Source: Cadot et al. (2004)
Dependent variable: price increase for US good shipped to Mexico
Regressors coeff t-stat coeff t-statApplying on good itself
Mexican tariff pref. 0.62 6.56 0.92 6.76ROO on US good
type 1 -1.516 -1.31 1.405 0.72type 2 2.319 1.11 1.405 1.51
Applying downstreamUS tariff pref. donwstream 0.689 3.86 0.637 2.07ROO downstream
type 1 0.037 1.86 0.022 0.54type 2 0.053 2.01 0.119 2.39
Obs. 837 473R-2 0.54 0.51
All goods Intermediate goods
not significant
significant
significant
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