Trade, Regionalism and Development June, 2005 Richard Newfarmer World Bank

Trade, Regionalism and DevelopmentTrade, Regionalism and Development

June, 2005

Richard Newfarmer

World Bank

Regional trade agreements (RTAs) are proliferating and now Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has cover one third of world trade, but their liberalizing effect has often been modest.often been modest.

For members,For members, RTAs can create trade and bring many other RTAs can create trade and bring many other benefits for development …but results are not automatic and benefits for development …but results are not automatic and depend critically on design and links to domestic reforms.depend critically on design and links to domestic reforms.

Non-trade regulations – investment and intellectual property Non-trade regulations – investment and intellectual property rights -- merit close scrutiny because development benefit is rights -- merit close scrutiny because development benefit is unclear and “one size does not fit all”unclear and “one size does not fit all”

For all countries, RTAs have For all countries, RTAs have systemic consequencessystemic consequences that that

adversely affect excluded countries, requiring international adversely affect excluded countries, requiring international attention.attention.

Key MessagesKey Messages

Regional Trade Agreements are proliferating… Regional Trade Agreements are proliferating…

0

5

10

15

20

25

30

1958 1969 1976 1984 1989 1994 1999 2004

Annual numberAnnual number

Annual numberAnnual number

Regional Trade Agreements are proliferating… Regional Trade Agreements are proliferating…

0

5

10

15

20

25

30

1958 1969 1976 1984 1989 1994 1999 2004

0

50

100

150

200

250

300

New agreements annuallyNew agreements annually

Annual numberAnnual number Total in force Total in force

Cumulative in forceCumulative in force

0

5

10

15

20

25

30

35

1990 1996 2002

0

50

100

150

200

250

1990 1996 2002

South-South RTAs predominate in South-South RTAs predominate in number, but not in trade coverednumber, but not in trade covered

South-South-SouthSouth

European European UnionUnion

USUS

South-South

European European UnionUnion

Percent of World Trade CoveredPercent of World Trade CoveredNumber of RTAsNumber of RTAs

USUS

0

5

10

15

20

25

30

35

Including all trade Excluding 0% MFN Excluding <3% MFN

……but RTAs provide less new market but RTAs provide less new market access than it might appearaccess than it might appear

Share of trade covered (%), 2003Share of trade covered (%), 2003

……and in developing countries regional and in developing countries regional agreements are a relatively small driver of trade agreements are a relatively small driver of trade reformreform

Multilateral Agreements

25%

Regional Agreements

10%

Autonomous Liberalization

65%

Share of tariff reductionsShare of tariff reductions

Source: Martin and Ng, 2004

0

5

10

15

20

25

30

1983 2003

Av. Tariffs in Developing CountriesAv. Tariffs in Developing Countries

29.9

9.3

Why this proliferation? Why this proliferation?

High-income countries, such as US and EUHigh-income countries, such as US and EU

To support foreign policy goals, including developmentTo support foreign policy goals, including development Slow progress on multilateral agenda: “competitive Slow progress on multilateral agenda: “competitive

liberalization” liberalization” Access to services markets, protection of intellectual Access to services markets, protection of intellectual

property, and rules for investmentproperty, and rules for investment

Developing countriesDeveloping countries Secure access to markets, especially large marketsSecure access to markets, especially large markets Attract more FDIAttract more FDI Leverage domestic reformLeverage domestic reform Among neighbors, lowering trade cost at borderAmong neighbors, lowering trade cost at border Framework for regional cooperationFramework for regional cooperation

Effects on membersEffects on members

COMESA

WAEMU

EAC

CIS

SAPTA

SADC

Mercosur

CEMAC

ANDEAN

AFTA

GCC

ECOWAS

CACM

EC

NAFTA

SACU

-4 -2 0 2 4 6 8 10

Estimated exponential impact on trade

Intra-regional trade

Note: The bars show the magnitude of the dummy variables capturing respectively the extent to which intraregional trade, overall imports and overall exports differ from the “normal” levels predicted by the gravity model on the basis of economic size, proximity and relevant institutional and historical variables, such as a common language.

Effects on members: Do RTAs create – or divert -- Effects on members: Do RTAs create – or divert -- trade? trade?

COMESA

WAEMU

EAC

CIS

SAPTA

SADC

Mercosur

CEMAC

ANDEAN

AFTA

GCC

ECOWAS

CACM

EC

NAFTA

SACU

-4 -2 0 2 4 6 8 10

Estimated exponential impact on trade

Intra-regional trade

Overall exportsOverall imports

Note: The bars show the magnitude of the dummy variables capturing respectively the extent to which intraregional trade, overall imports and overall exports differ from the “normal” levels predicted by the gravity model on the basis of economic size, proximity and relevant institutional and historical variables, such as a common language.

Effects on members: Do RTAs create – or divert -- Effects on members: Do RTAs create – or divert -- trade? trade?

Agreements with high external tariffs risk Agreements with high external tariffs risk trade diversiontrade diversion

0 5 10 15 20 25

SAPTA

ECOWAS

COMESA

MERCOSUR

EAC

SADC

AFTA

NAFTA

Note: Tariffs are import-weighted at the country level to arrive at PTA averagesSource: UN TRAINS, accessed through WITS

Average weighted tariffs

East Asia has used MFN to integrate East Asia has used MFN to integrate regionallyregionally

Regional exports as share of world exports (%)(oil excluded)

0

2

4

6

8

10

12

14

E.Asia & Pacific

Latin America

M. East & M. East & N. AfricaN. Africa

Europe & C. Asia

S.Asia

Sub-Saharan Africa

• East Asia has led East Asia has led in global in global integrationintegration

26.5%

15.3%

6.4%3.5%

0.8%

5.3%

0%

5%

10%

15%

20%

25%

30%

Intra-regional trade as a share of GDP, 2002

East AsiaEast Asia Europe &Europe & Central AsiaCentral Asia

Middle East Middle East & N. Africa& N. Africa

SouthSouth AsiaAsia

Sub-Sub-Saharan Saharan AfricaAfrica

• East Asia has led East Asia has led in global in global integration integration

• ……and in regional and in regional integrationintegration

LALA

East Asia has used MFN to integrate East Asia has used MFN to integrate regionallyregionally

Services Investment Intellectual Property

Agreements National and MFN/Treatment Market Accessa

Rule of Origin (Nonrestrictive)b

Pre-establishment & Limitations Market Access

Exceptions

Right to Provide

Services w/o establishmentd

Ratchet Mechanisme

National Treatment/MF

Post-establishment

Ownership Limitationsf

Pre-establishment Limitations

Ban on Performance Requirements

Investor-State Dispute

Settlement

Intellectual Property

U.S. U.S.-Jordan Yes Yes Negative-list No No Yes Negative-list Negative-list TRIMS+ Yes Yesh

U.S.-Chile Yes Yes Negative-list Yes Yes Yes Negative-list Negative-list TRIMS+ Yes TRIPS+ U.S.-Singapore Yes Yes Negative-list Yes Yes Yes Negative-list Negative-list TRIMS+ Yes TRIPS+ U.S.-Australia Yes Yes Negative-list Yes Yes Yes Negative-list Negative-list TRIMS+ No TRIPS+ U.S.-CAFTA Yes Yes Negative-list Yes Yes Yes Negative-list Negative-list TRIMS+ Yes TRIPS+ U.S.-Morocco Yes Yes Negative-list Yes Yes Yes Negative-list Negative-list TRIMS+ Yes TRIPS+ NAFTA Yes Yes Negative-list Yes Yes Yes Negative-list Negative-list TRIMS+ Yes TRIPS+ EU EU-South Africa No No No No No No No No No Non Yesi

EU-Mexico Yes Yes Standstillc No No No No No No Non Yesi EU-Chile Yes Yes Positive-list Yes No Positive-list No Non Yesi South-South MERCOSUR Yes Yes Positive-list No No Yes No Negative-list TRIMS+ Yes Noj

Andean Community No Yes Positive-list No No - No Positive-list TRIMS+ No Nok

CARICOM Not specified Yes Negative-list No No No No Positive-list No Yes No Asean Yes Yes Positive-list No No Yes Yes Positive-list No Yes Nol

SADC No No? No No None No No TRIPS COMESA Yes No? Positive-list Nog No Positive-list No No Nom

Other Japan-Singapore No Yes Positive-list No No Yes Yes Canada-Chile Yes Yes Negative-list Yes Yes Yes Chile-Mexico Yes Yes Negative-list Yes Yes

RTAs frequently include services, investment RTAs frequently include services, investment and intellectual property rights…and intellectual property rights…

Source: Global Economic Prospects, 2005: Chapter 5Source: Global Economic Prospects, 2005: Chapter 5

Trade facilitation is crucial.. delays at border Trade facilitation is crucial.. delays at border drive up trading costsdrive up trading costs

RTAs can provide RTAs can provide framework for mutual framework for mutual efforts to reduce costsefforts to reduce costs

Single customs Single customs documentdocument

Harmonize driving & Harmonize driving & weight regulationsweight regulations

Computerize Computerize both both sides of the bordersides of the border

Trade/GDPTrade/GDP

Potential of RTAs to reduce border costs not yet realizedPotential of RTAs to reduce border costs not yet realized

0

50

100

150

200

250

0 5 10 15 20 25

Days through customs, imports

Trade/GDPTrade/GDP

MalaysiaMalaysia

EthiopiaEthiopia

MalawiMalawi

UgandaUganda

KyrgyzstanKyrgyzstan

SloveniaSlovenia

SlovakiaSlovakia

Investment accords provide for new access Investment accords provide for new access and new investor protections…and new investor protections…

Potential benefits include greater FDI flows because… Liberalized market access increased payoff to trade integration, reduced risk premia, enhanced credibility of investment climate

Reduced international policy spillovers Rent shifting via TRIMs, etc.

RTAs that create large ex-post market results and, provided good investment climate, do attract more FDI.

A 10% increase in post-FTA market size is associated with a 5 percent increase in FDI in the host country.

However, market access more important than investor protections no evidence that protections increase FDI flows to developing

countries…

Intellectual property rights figure prominently Intellectual property rights figure prominently in N-S RTAs, particularly US FTAsin N-S RTAs, particularly US FTAs

US FTAs contain TRIPS Plus provisions that provide greater IPR protection.

Brings generics under market and data exclusivity arrangements

No analysis of economic consequences prior to signing

Open questions: Will FTAs foreclose use

of Doha flexibilities on TRIPS for generics?

Will stronger IPRs contribute to more FDI and high tech trade?

Are TRIPS Plus measures appropriate to all countries?

Conclusion: Development consequences of Conclusion: Development consequences of investment and IPR rules depend heavily on market investment and IPR rules depend heavily on market access these rules leverageaccess these rules leverage

Both North-South and South-South Both North-South and South-South accords can be improved…accords can be improved…

StrengthsStrengths Compatibility among Compatibility among

economieseconomies Services liberalizationServices liberalization Move to international Move to international

standardsstandards WeaknessesWeaknesses

Restrictive rules of Restrictive rules of origin origin

Exemptions, esp. Exemptions, esp. agricultureagriculture

Inappropriate rules?Inappropriate rules? No movement of No movement of

workersworkers

North-SouthNorth-South

Some sweeping generalization…Some sweeping generalization…

0

1

2

3

4

5

6

NAFTA EU-Mexico EU-Chile SADC Chile-CACM

AFTA COMESA ECOWAS

Index of ROO RestrictivenessIndex of ROO Restrictiveness

Estevadeordal, 2004Estevadeordal, 2004

StrengthsStrengths Compatibility among Compatibility among

economies/large economies/large marketsmarkets

Services liberalizationServices liberalization Move to international Move to international

standardsstandards WeaknessesWeaknesses

Restrictive rules of Restrictive rules of origin origin

Exemptions, esp. Exemptions, esp. agricultureagriculture

Inappropriate rulesInappropriate rules No movement of No movement of

workersworkers

North-SouthNorth-South South- South South- South

StrengthsStrengths Focus on tradeFocus on trade Nonrestrictive rules of Nonrestrictive rules of

originorigin Adjacency permit trade Adjacency permit trade

facilitationfacilitation

Some sweeping generalization…Some sweeping generalization…

WeaknessesWeaknesses Small, similar marketsSmall, similar markets Higher external barriersHigher external barriers ExemptionsExemptions Minimal servicesMinimal services No movement of workersNo movement of workers

Both North-South and South-South Both North-South and South-South accords can be improved…accords can be improved…

•DesignDesign

Low external tariff barriers Low external tariff barriers

Nonrestrictive rules of originNonrestrictive rules of origin

Wide coverage with few exclusions Wide coverage with few exclusions

Liberalization of servicesLiberalization of services

Facilitating trade at bordersFacilitating trade at borders

Appropriate rulesAppropriate rules

•Implementation: Link RTAs to domestic Implementation: Link RTAs to domestic reform agendareform agenda

Design and implementation are crucial to Design and implementation are crucial to achieving objectivesachieving objectives

…….Open regionalism.Open regionalism

Systemic issues… Systemic issues…

-1,000

-500

0

500

1,000

Simulated welfare impact of Chile’s FTA with US

Preferences hurt excluded countries

Source: Harrison, et al, 2002Source: Harrison, et al, 2002

Gains to ChileGains to Chile

Costs to excluded countriesCosts to excluded countries

$ m.$ m.

Systemic issues…uneven and Systemic issues…uneven and discriminatory accessdiscriminatory access



-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Change in real income in 2015 compared to baseline in percent

Multilateral liberalizationMultilateral liberalization

Hub and spokes put weaker countries at disadvantage



-1.0

-0.5

0.0

0.5

1.0

1.5

2.0


Multilateral liberalizationMultilateral liberalizationIndividual RTA Individual RTA

(average)(average)




-1.0

-0.5

0.0

0.5

1.0

1.5

2.0


Multilateral liberalizationMultilateral liberalizationIndividual RTA Individual RTA

(average)(average)

All countries sign RTAsAll countries sign RTAs





Multiple arrangements burden customs




0

1

2

3

4

5

6

7

8

E. Asia &Pacific

Europe &C. Asia

LatinAmerica &Caribbean

MiddleEast & N.

Africa

S. Asia Sub-SaharanAfrica

Av. Number of PTAs per country, 2002/3


AlgeriaLibyaMorocco MauritaniaTunisia

AMU

GhanaNigeria Cape Verde

Gambia

ECOWAS

Benin NigerTogo Burkina FasoCote d’Ivoire

Conseil de L’Entente

Guinea-Bissau Mali Senegal

WAEMU

Liberia Sierra Leaone Guinea

Mano River Union

CLISS

CameroonCentral African Rep.GabonEquat. GuineaRep.Congo

Chad

Sao Tomé & Principe

ECCAS

CEMAC

Angola

Burundi*Rwanda*

Egypt

DR Congo

DjiboutiEthiopiaEritreaSudan

Kenya*Uganda*

Somalia

Tanzania*

EAC

South AfricaBotswanaLesotho

Namibia*Swaziland*

Mozambique

SACU

Malawi*Zambia*Zimbabwe*

Mauritius*Syechelles*

Comoros*Madagascar*

Reunion

IOC

*CBI

SADC

COMESA Nile River BasinIGAD

AMU: Arab Maghreb UnionCBI: Cross Border InitiativeCEMAC: Economic & Monetary Community of Central AfricaCILSS: Permanent Interstate Committee on Drought Control in the SahelCOMESA: Common Market for Eastern and Southern AfricaEAC: East African CooperationECOWAS: Economic Community of Western African StudiesIGAD: Inter-Governmental Authority for GovernmentIOC: Indian Ocean CommissionSACU: Southern African Customs UnionSADC: Southern African Development CommunityWAEMU: West African Economic & Monetary Union

Overlapping African agreements…Overlapping African agreements…



Disincentives to engage in multilateral liberalization



International community through the WTOInternational community through the WTO Get Doha done: lowers risk of trade diversion for members and Get Doha done: lowers risk of trade diversion for members and

minimizes effects on excluded countriesminimizes effects on excluded countries

High income countries have systemic responsibilityHigh income countries have systemic responsibility Widen coverage in FTAs (i.e. agriculture)Widen coverage in FTAs (i.e. agriculture) Move toward conformity in rules of origin, and make less restrictiveMove toward conformity in rules of origin, and make less restrictive Promote rules tailored to local capacitiesPromote rules tailored to local capacities

Developing countries should adopt a 3 part strategy, using each Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objectiveinstrument to its most appropriate objective Unilateral: driving competitivenessUnilateral: driving competitiveness Multilateral: seeking broad market access Multilateral: seeking broad market access Regional: deep market access and institutional reforms (services, Regional: deep market access and institutional reforms (services,

customs, ports, trade-related standards)customs, ports, trade-related standards)

Policy implications…Policy implications…

Further ReadingFurther Reading

Findlay, C.. Sheri Stephenson, and F.J. Pinto “Services in Findlay, C.. Sheri Stephenson, and F.J. Pinto “Services in Regional Trading Agreements” in M. Plummer Regional Trading Agreements” in M. Plummer A A Comprehensive Guide to the World Trade OrganizationComprehensive Guide to the World Trade Organization Kluwer Kluwer

Fink, Carsten and P. Reichenmiller “Intellectual Property” Fink, Carsten and P. Reichenmiller “Intellectual Property” Trade NoteTrade Note #20 World Bank (website) 2004. #20 World Bank (website) 2004.

Freund, Caroline L. 1998 “Multilateralism and the Freund, Caroline L. 1998 “Multilateralism and the Endogenous Formation of PTAs” Discussion Paper 614 US Endogenous Formation of PTAs” Discussion Paper 614 US Federal Reserve, Washington.Federal Reserve, Washington.

Hoekman, Bernard and Richard Newfarmer “Investment in Hoekman, Bernard and Richard Newfarmer “Investment in Regional Preferential Trade Agreements” Journal of World Regional Preferential Trade Agreements” Journal of World Trade Fall 2005Trade Fall 2005

Schiff, Maurice and L. Alan Winters, Schiff, Maurice and L. Alan Winters, Regional Integration Regional Integration and Developmentand Development World Bank 2003 World Bank 2003

Schott, Jeffrey (ed.) Schott, Jeffrey (ed.) Free Trade AgreementsFree Trade Agreements Washington: Washington: Institute for International Economics 2005Institute for International Economics 2005

World Bank, World Bank, Global Economic Prospects, 2005: Trade Global Economic Prospects, 2005: Trade Regionalism and Development Regionalism and Development

Trade, Regionalism and DevelopmentTrade, Regionalism and Development

June, 2005

Richard Newfarmer

World Bank

Systemic issues… Systemic issues…

Evaluating alternatives and South Asia’s Evaluating alternatives and South Asia’s systemic interestssystemic interests Basic methodology is computer (CGE) simulationsBasic methodology is computer (CGE) simulations

Allows simulation of relative price affects based Allows simulation of relative price affects based upon demand and substitution considerationupon demand and substitution consideration

However, outcomes are static, and do not account However, outcomes are static, and do not account for productivity, technological change, and other for productivity, technological change, and other dynamic effectsdynamic effects

Moreover, simulations do not model services Moreover, simulations do not model services liberalization, trade facilitation and lowering of liberalization, trade facilitation and lowering of other trade costs, or capture non-trade benefits of other trade costs, or capture non-trade benefits of regional cooperation regional cooperation

Evaluating alternatives: Gains to Latin America Evaluating alternatives: Gains to Latin America from multilateral accordsfrom multilateral accords

0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

Change in income of Latin America in el 2015 above baseline scenario (percent)

MultilateralMultilateral

FuenteFuente: World Bank : World Bank een Global Economic Prospects, 2005: Chapter 6n Global Economic Prospects, 2005: Chapter 6

0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5


FTAA (FTAA (por sí solopor sí solo))

Nota: “ALCA por sí solo” asume que otras regiones importantes no forman bloques comerciales que discriminan a Latinoamérica.

Evaluating alternatives: Gains to Latin Evaluating alternatives: Gains to Latin America from multilateral and regional America from multilateral and regional accordsaccordsChange in income of Latin America in el 2015 above baseline scenario (percent)

0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5


FTAAFTAA ( (cc/ / otrosotros A ARCRCs)s)

Nota: “ALCA por sí solo” asume que otras regiones importantes no forman bloques comerciales que discriminan a Latinoamérica. “ALCA con otros ARCs” asume un ARC en las Américas, el Este Asíatico y Europa con un ARC Europa del Este-Africa.

FTAA (FTAA (por sí solopor sí solo))

Evaluating alternatives: Gains to Latin Evaluating alternatives: Gains to Latin America from multilateral and regional America from multilateral and regional accordsaccords

Evaluating alternatives: South Asia gains Evaluating alternatives: South Asia gains most from a multilateral agreementmost from a multilateral agreement

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

Change in South Asia’s real income in 2015 from baseline scenario (percent)



-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5


Note: “SAFTA by itself” assumes that other major regions do not form trading blocs that would discriminate against South Asia.


SAFTA (by itself)SAFTA (by itself)


-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5



SAFTA (by itself)SAFTA (by itself)

SAFTA (w/ other SAFTA (w/ other RTAs)RTAs)

Note: “SAFTA by itself” assumes that other major regions do not form trading blocs that would discriminate against South Asia. “SAFTA with other RTAs” assumes an RTA in East Asia, the FTAA in the Americas, and a Europe plus African RTA.

Evaluating alternatives: East Asia gains Evaluating alternatives: East Asia gains most from a multilateral agreementmost from a multilateral agreement

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

East Asia Europe The America

Change in real income in 2015 from baseline scenario (percent)

Note: Separate represents the gains when each block is formed in the absence of the other two. BLOC3 represents the gains when all three regional PTAs are implemented simultaneously.


Asean + 3 (by itself)Asean + 3 (by itself)

Asean + 3Asean + 3

(w/ other RTAs)(w/ other RTAs)

Developing countries pay more of their foreign Developing countries pay more of their foreign tariffs to rich countries and to neighborstariffs to rich countries and to neighbors

0102030405060708090

100

Industrial East Asia Europe andCentral

Asia

LatinAmerica

andCaribbean

Middle Eastand North

Africa

South Asia Sub-SaharanAfrica

Share of tariff burden, percent

Rest of worldRest of world

Intra-regionIntra-region

IndustrialIndustrial

……

Documents

Trade, Regionalism and Development June, 2005 Richard Newfarmer World Bank