© P. Montalbano

INTERNATIONAL ECONOMIC POLICY AND

DEVELOPMENTAA 2017-2018

PROF. PIERLUIGI MONTALBANOpierluigi.montalbano@uniroma1.it

Trade Agreements(multilateral and regional)

© P. Montalbano

© P. Montalbano

International Trade Agreements• When countries seek to reduce trade barriers (trade

liberalization) between themselves, they enter into a trade agreement—a pact to reduce or eliminate trade restrictions.

• There are two primary types of free-trade agreements: multilateral and regional/bilateral agreements.

• Multilateral agreements are negotiated among large groups of countries to reduce trade barriers among them

• The WTO is an example of a multilateral trade agreement

© P. Montalbano

A Brief History of the MultilateralTrade Negotiations

• After World War II, the Allied countries met to discuss issues such as high trade barriers and unstable exchange rates.

• In 1947 the General Agreement on Tariffs and Trade (GATT) was established to reduce barriers to trade between nations.

• Under the most favored nation principle of the GATT/WTO, the

lower tariffs agreed to in multilateral negotiations must be

extended equally to all GATT/WTO members.

• A central exception to the MFN is for customs unions and free trade areas.

Two reasons:

• 1. such agreements can contribute to the growth of world trade.

• 2. regional trade liberalization can serve as a building block to further

liberalization at the multilateral level

© P. Montalbano

© P. Montalbano

© P. Montalbano

International ConferencesSingapore (1996); Geneva (1998); Seattle (1999); Doha (2001); Cancùn (2003), Hong Kong (2005), Geneva (2009 and 2011), Bali (2013), Nairobi (2015), Buenos Aires (2017)

Critical Issues: About 80% of members countries are DCs Regionalism NTBFailure of DDA state of deadlock

Scheme

Location: Geneva,

Switzerland

Born: 1 January 1995

Agreement: Uruguay

Round (1986-1994)

Members: 164 countries

since 29 July 2016

Staff: 640

Head: Roberto Azevêdo

(Director-General)

Functions: • Administering WTO trade agreements• Forum for trade negotiations• Handling trade disputes• Monitoring national trade policies• Technical assistance and training for developing countries• Cooperation with other international organizations Switzerland

Its main function is to ensure that trade flows as smoothly, predictably and freely as possible

© P. Montalbano

AlgeriaAndorraAzerbaijanBahamasBelarusBhutanBosnia and HerzegovinaComorosEquatorial GuineaEthiopiaHoly See (Vatican)IranIraqLebanese RepublicLibyaSao Tomé and PrincipeSerbiaSomaliaSudanSyrian Arab RepublicTimor-LesteUzbekistan

Observer governments

© P. Montalbano

© P. Montalbano

© P. Montalbano

© P. Montalbano

© P. Montalbano

© P. Montalbano

TRADE REGIONALISM

GATT/WTO

Colonial Regimes

Regional Trade

Agreements (RTAs)

Bilateral Commercial Treaties

© P. Montalbano

Regional integration:RTAs classification

3. COMMON MARKET (CM): CU + free movement of factors of production among member-countries

2. CUSTOMS UNION (CU): FTA + common external tariff (CET)

1. FREE TRADE AREA (FTA): eliminates protection among members but each member keeps its own tariff structure

Regional economic integration can be classified into 4 stages (Machlup, 1977)By increasing order of integration:

4. ECONOMIC UNION: CM + single currency and common economic policiesEx. Economic and Monetary Union of the EU

© P. Montalbano

16

Levels of Integration

E

M

U

© P. Montalbano

Effects of trade agreements

The welfare gains and losses that arise from regional trade agreements are more complex than those that arise from multilateral trade agreements

2 main effects:

• Trade creation: occurs when high-cost domestic production is replaced by low-cost imports from other members.

• Trade diversion: occurs when low-cost imports from nonmembers are diverted to high-cost imports from member nations.

© P. Montalbano

ECONOMIC DEVELOPMENT

Trade Creation

• Occurs when the formation of a RTA leads to a shifting in the pattern of trade from a high-cost producers to a low-cost producer

• Tends to improve welfare

Trade Diversion

• Occurs when imports shift in the pattern of trade from a low-cost producer to a high-cost producer

• Tends to worsen welfare

NEOCLASSICAL ECONOMICS OF TRADE

LIBERALIZATION

© P. Montalbano

The costs and benefits of PTA

Pb

Pb+t

O

E

Sa

Sa

Da

Da

q1 q2 q3 q4

Px

Qx

Sb+t

Sb

Pc Sc

q5 q6

a bc

d

e

a+b+c+e= consumers’ gains

a= supply reduction

c= state budget reduction

b+e=trade creation

d=trade diversion

Pierluigi Montalbano – Università di Roma “La Sapienza”

© P. Montalbano

Multilateralism vs Regionalism Under the WTO discriminatory trade policies are generally not

allowed:

• the “most favored nation” (MFN) principle states: ”Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members”

BUT:

Article XXIV: allows members to form an RTA provided they:

1. eliminate within-union trade barriers on “substantially” all trade

2. do not raise trade barriers on goods produced outside the union

Article XXIV recognizes:

- free-trade areas, in which a group of countries voluntarily agree to

remove trade barriers between themselves, and

- customs unions, which are free-trade areas in which the countries also

adopt identical tariffs between themselves and the rest of the world.

© P. Montalbano

WTO LAW

Provisions Rules Functions

General Rule

GATT Article I:1 Most-Favored-Nation Clause

Non-Discrimination

Exceptions

GATT Article XXIVFree Trade

AgreementsCustoms Unions

Mutual DiscriminatoryRegional Regimes for

Trade in Goods

GATT Article XXIV Enabling Clause

UnilateralDiscriminatory Regional

Regimes for Trade in Goods

Other Exceptions

© P. Montalbano

Multilateralism vs Regionalism

Contrasting stances among economists:

1. Regionalism is an alternative to multilateralism (a stumbling bloc) Bhagwati (1998)

2. Regionalism is a useful supplements to multilateralism (a building bloc) Ethier (1998) e Baldwin (1999).

Are RTAs desirable?

“Classical” answer:• “It all depends”. Different degrees of preferences, depth of

integration, country coverage , country size etc.

© P. Montalbano

ECONOMIC DEVELOPMENT

Bhagwati’s Arguments Against

Regionalism

• The formation of regional trade

arrangements (RTAs) undermines the

WTO

• Regional Trade Agreements cause the

erosion of non-discrimination principle

• Regionalism is harmful because it

encourages trade diversion

© P. Montalbano

ECONOMIC DEVELOPMENT

Krugman’s Arguments Favoring

Regionalism

• Trade diversion from RTAs is low

because trading blocs are “natural”

trading areas

• Due to proximity and similarity of

cultures and standards of living,

regional trade agreements stimulate

trade that would have occurred even in

the absence of an agreement

© P. Montalbano

During the last decades there has been a rapid growth in the number of regionaltrade agreements.

Regional economic integration

Source: WTO 2016

© P. Montalbano

‘Spaghetti bowl’ RTAs in the Western Hemisphere

Source: Baldwin, 2009

© P. Montalbano

Source: WTO Secretariat

Participation in RTAs by country

© P. Montalbano

The most famous example of RIA: European Union

Common market heading toward economic union

Elements of economic union:

Yes: - common monetary policy

- common currency (euro)

No: - common fiscal policy

- harmonized taxation

© P. Montalbano

Examples of Regional Trade Agreements -1

Among the best known are:

- The European Union,

- The European Free Trade Association (EFTA): set up for the

promotion of free trade and economic integration to the benefit of Iceland,

Liechtenstein, Norway and Switzerland.

- The North American Free Trade Agreement (NAFTA): to remove most

barriers to trade and investment among the United States, Canada, and

Mexico.

- The Southern Common Market (MERCOSUR): economic and political

agreement among Argentina, Brazil, Paraguay and Uruguay to promote

free trade and the fluid movement of goods, people, and currency

among its members.

© P. Montalbano

Examples of Regional Trade Agreements -1

-The Association of Southeast Asian Nations (ASEAN) Free Trade

Area: Its aims include the acceleration of economic growth, social

progress, cultural development, the protection of regional peace and

stability among its members (Indonesia, Malaysia, the Philippines,

Singapore , Thailand ,Brunei, Burma (Myanmar), Cambodia, Laos, and

Vietnam)

- The Common Market of Eastern and Southern Africa (COMESA):

free trade area to promote regional economic integration through trade

and investment among 19 African countries (Burundi, Comoros, Congo,

Dem Rep.Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar,

Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda,

Zambia, Zimbabwe)

© P. Montalbano

Mega-regionals The Transatlantic Trade and Investment Partnership

TTIP(EU+US), the Trans-Pacific Partnership TPP (Trans-Pacificamong Australia, Brunei Darussalam, Canada, Chile, Japan,Malaysia, Mexico, New Zealand, Peru, Singapore, US, Vietnam)and the Regional Comprehensive Economic Partnership RCEP(ASEAN+ Australia, China, India, japan, South Korea, NewZealand) represent over three quarters of global GDP and twothirds of world trade (Ash & Lejarraga, 2014)

The sheer size of the mega-regions means that there would beeffects on third parties

The outcomes of the mega-regionals for rules on trade andinvestment, trade-related standards and regulation would likelydrive the international rules and standards

© P. Montalbano

• The Transatlantic Trade and Investment Partnership (TTIP) is a trade agreement that is presently being negotiated between the European Union and the United States (talks started in July 2013)

• It aims at removing trade barriers in a wide range of economic sectors to make it easier to buy and sell goods and services between the EU and the US.

• On top of cutting tariffs across all sectors, the EU and the US want to tackle non tariff barriers such as differences in technical regulations, standards and approval procedures (es. now when a car is approved as safe in the EU, it has to undergo a new approval procedure in the US even though the safety standards are similar).

• The TTIP negotiations will also look at opening both markets for services, investment, and public procurement. They could also shape global rules on trade.

The Trans-Atlantic Trade and Investment Partnership (TTIP)

© P. Montalbano

Effects of TTIP

TTIP is designed to drive growth and create jobs.

Independent research shows that TTIP could boost:

• the EU's economy by €120 billion;

• the US economy by €90 billion;

• the rest of the world by €100 billion

Trade diverting effects are mainly observed for Brazil and China and negative welfare effects for LDCs (Brockmeier & al, 2014)

© P. Montalbano

© P. Montalbano

The Trans Pacific Partnership (TPP)

• The Trans-Pacific Partnership (TPP) is a regional trade agreement of broad scope and comprehensive coverage.

• The TPP partners include 12 countries on both sides of the Pacificthat participate in negotiations: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.

• The TPP Agreement includes 30 chapters covering trade and trade-related issues (trade in goods; customs and trade facilitation; sanitary and phytosanitary measures; technical barriers to trade; trade remedies; investment; services; electronic commerce; government procurement; intellectual property; labour; environment).

• The TPP will create an integrated regional economy accounting for 40percent of global GDP.

• Formal negotiations began in March 2010 and concluded in October2015. Final agreement signed by trade minister on February 4, 2016

© P. Montalbano

TPP: Who are in it?Current & potential members

Reached conclusion on contentAnnounced interest in joining

• Australia (2008)

• Brunei (2005)

• Chile (2005)

• Canada (2012)

• Japan (2013)

• Malaysia (2010)

• Mexico (2012)

• New Zealand (2005)

• Peru (2008)

• Singapore (2005)

• United States

(2008-2016)

• Viet Nam (2008)

- Combined population of 800 million

- 40% of global GDP

- $9 trillion in merchandise trade; $2 trillion trade of services (30% of world trade)

© P. Montalbano

Current TPP members are already part of existing Asia-Pacific FTAs

© P. Montalbano

BRITAIN IN A POST-BREXIT WORLD

Brexit Strategies

WTO Member

EU-UK RTA

EU-UK RTA+

EU-Turkey Model

EU-Switzerland Model

EU-Norway Model

© P. Montalbano

With or without EU

https://blogs.sussex.ac.uk/uktp

o/