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