21st Century Regionalism
Richard BaldwinGraduate Institute, Geneva
RIETITokyo, 2 February 2011
1
Globalisation as 2 unbundlings• Put 21st century regionalism into broad canvas of economic globalisation.
2
Pre‐Industrial Revolution
3
Consumption & production
bundled
Very little trade
Production
&
Consumption transportation
Globalisation’s First Unbundling
4
Production Bay B
Production Bay A
Production Bay C
Coordination“glue”
Transportation “glue”
weakened
Estimated Transport costs, 1870 ‐ 2000
5
1011111212131314141515
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1870
1875
1880
1885
1890
1895
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
Source: David , Meissner, and Novy (2011)
Averge global trade cost measure
Global trade flow (right scale in logs)
1910 1970
1980
20th trade & trade governance
1.Trade disciplines required = fairly simple:GATT 1947.
2.Trade liberalisation = tariff cutting.
6
Bay BBay A
Bay C
Bay BBay A
Bay C
• International commerce = goods crossing borders.
Globalisation’s Second Unbundling
7
Coordination “glue” weakened by
ICT revolution
Bay BBay A
Bay C
ICT revolution 2nd unbundling Steam power 1st unbundling
ICT revolution indicators
8
1985 1995
Outward processing trade, 1967 – 2005.
9
0
1
2
3
4
5
6
7
% o
f wor
ld m
anuf
actu
res
impo
rts
Source: Amador and Cabral (2008)
TotalAsiaEuropeNorth AmericaLatin AmericaAfrica
Source: Amador and Cabral (2008).
1985
Number of Japanese auto and electrical machinery plants in East Asia, 1975 – 2004
• Source: Fujita and Hamaguchi (2006).
10
Malaysia
Thailand
Vietnam
China
Indonesia
0
100
200
300
400
500
600
700
800
900
1975 1980 1985 1990 1995 2000 2004
19851995
Widening and deepening of Factory Asia, 1985 and 2000
11
1985 China Indonesia Malaysia Philippines Thailand Singapore Taiwan Korea JapanIndonesia 8% Malaysia 16% Philippines Thailand China 2% 14% Taiwan 3% Korea Singapore 3% 7% Japan 3% 12% 14% 4% 9% 12% 7% 8% RoW 15% 19% 19% 14% 11% 10% 16% 8%
International input-output matrix
2000 China Indonesia Malaysia Philippines Thailand Singapore Taiwan Korea Japan Indonesia 2% Malaysia 3% 4% 12% 2% Philippines Thailand 4% 3% 3% China 2% 3% 4% 5% 2% Taiwan 5% 5% 3% 3% Korea 2% 3% 4% 8% 3% 4% 4% Singapore 13% 6% 4% Japan 2% 7% 15% 20% 16% 19% 14% 7% RoW 4% 16% 20% 20% 17% 38% 15% 11% 4%
Source: Baldwin (2006) “Managing the Noodle Bowl”
21st century trade more complex
12
Bay B
Bay BBay A
Bay C
Bay BBay A
Bay C
Summary• 21st century trade is more complex.
– 20th century trade = goods made crossing borders.– 21st century trade = multi‐directional (mostly regional) flows of people, goods, services, capital, and information.
• ICT is to 2nd as steam was to 1st, – Not mostly about trade costs, rather about coordinating production internationally.
13
Governance Gap• 21st century trade needs deeper disciplines.• Early recognition & policy response (1986):
– EU’s Single Market Programme.– US‐Canada FTA.– Uruguay Round’s new issues.
• ICT revolution accelerates N‐S unbundling – Need for new disciplines North‐South.– WTO is otherwise occupied.
Governance gap.
14
21st century regionalismFilling governance vacuum:
1. Explosion of BITs 1990s.
2. North‐South deep RTAs.
3. Unilateral liberalisation (tariffs & pro‐biz reforms).
15
Explosion of BITs in 1990s
16
0
500
1000
1500
2000
2500
0
50
100
150
200
250
No
of T
reat
iesNo. of Treaties Signed
No. of Treaties Signed (Cumulative)
FDI in Billion US$
1985
1995
North‐South Deep RTAs• US’s NAFTA‐like agreements (after 1994)• Japan’s EPA‐like agreements (after 2007)• EU’s Association agreements (after 1994).
17
18
Unilateral tariff liberalisationAverage tariff rates, developing nations, 1982 - 2003
AR
BO
BR
CH
COEC
MX
PE
PY
UYVE
0
10
20
30
40
50
60
70
80
90
1985198619871988198919901991199219931994199519961997199819992000200120022003200420052006
Applied MFN tariffs (%) ARBOBRCHCOECMXPEPYUYVE
0
2
4
6
8
10
12
14
16
18
20
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Applied MFN tariffs (%) PhilippineThailand
Korea
Malaysia
China
Indonesia
Singapore
19921985
1992
1985
1992
1985
Unilateral Pro‐biz Reforms• Some “import liberalisation” help you export and/or attract offshored factories.– Pro‐FDI policies.– Pro‐customs facilitation policies.– Pro business‐establishment policies.– Pro ‘infrastructure services’ liberalisation.
19
Summary: RTAs Not About Tariff Preferences• 20th century regionalism (tariff preferences) still matters:– A lot for small RTAs,– A little for big RTAs.
• FACTS:
20
0 20 40 60 80 100
CEMAC GCC
UEMOA Andean Community
ECOWAS CARICOM
MERCOSUR CEFTA
COMESA EAC
SADC NAFTA
SACU CACM
ASEAN EU27 EU15 EFTA
Zero MFN tariff (% Total Imports)
0 2 4 6 8 10 12 14 16
CEMAC COMESA
EAC ECOWAS
UEMOA CARICOM
SADC SACU
MERCOSUR Andean Community
CEFTA ASEAN CACM
NAFTA GCC
EU27 EFTA
MFN applied tariff (trade weighted average)
10%5%
EFTA
EU
ASEAN
SACU
NAFTA
Possible preference margins are low
21 Source: Archarya, Crawford & Renard (2010)
50%
EFTA
EUASEAN
SACUNAFTA
Detailed Data• Carpenter & Lendle (2010)
– Detailed tariff‐line import and tariff data,– covering almost 90% of world imports in 2008.
• Results:– 50% of trade over RTAs, but– Only 16% eligible for preferences (due to zero MFN).– Less than 2% imports have preferences over 10%.
• ERGO: RTAs are not only about preferential tariffs.
22
Death of preferences
230% 20% 40% 60% 80% 100%
Total Total (ex intra-EU)
EUR-intraEUR-extra
SwitzerlandTurkeyMexicoCanada
USChinaJapanKorea
Hong KongSingapore
TaiwanIndia
AustraliaRussiaBrazil
AregentinaMalaysiaThailand
Indonesia
Preferential margins
MFN=0% 0% (MFN>0%) 0 - 5% 5 - 10% 10 - 20% > 20%
Source: Carpenter & Lendle (2010)
Numbers
24
unknown
MFN=0%0%
(MFN>0%)
0 ‐ 5% 5 ‐ 10% 10 ‐ 20% > 20%
Total 1.2% 47.3% 21.8% 18.5% 7.5% 2.4% 1.4%Total (ex intra‐EU) 0.7% 52.3% 30.3% 11.0% 3.9% 1.3% 0.5%
Conceptual frameworks
25
Traditional regionalism v 21st regionalism• Traditional view:
• 21st regionalism:
26
RTAs = tariff preferencesRTAs = tariff preferences
RTAs = disciplines underpin 2nd unbundlingRTAs = disciplines underpin 2nd unbundling
Difference without distinction?• Why we care about regionalism:
– Economic inefficiency from discrimination– Injustice and power asymmetries– Threats to support for multilateral liberalisation
27
Traditional view: preferential tax economics
28
Smith’s certitude = Preference-getter wins.
Viner’s ambiguity = Preference-giver might lose.
Haberler’s spillover = third nations lose.
Received wisdom thinkingVinerian economics & implied political economy
29
Summers: “I like all the ‘isms”
Bhagwati: “Termites in the system”
Krugman: “Is bilateralism bad?”
Regulation economics, not tax economics• 21st century regionalism not about preferences, so Vinerian economics is moot or insufficient.
• Regulation economics far more complex than tax economics.
‐ Frictional barriers (BBBs).
‐ Entry restrictions.
30
21st c. Regionalism: Different economics• Frictional barrier liberalisation
• If rules‐of‐origin‐like tools available• Only Viner’s ambiguity dead.
• Without discrimination tools (many TBTs)• Haberler’s spillover also dead.
• {E’metric estimates of external trade creation}
• Domestic entry liberalisation• Incumbents v entrants; not home vs foreign.• Discrimination very difficult.
• Property right assurances• Ditto
31
Regulation economics, not tax economicsShould policy be in WTO?
• Tariffs = strong logic for centralisation at global level (MFN better than RTA).
• Regulation = mixed logic for centralisation.– “Fiscal federalism”: e.g. competition policy? Bank regulation? Telecomms regulation?
32
Injustice & power asymmetries• Deep RTAs worse that shallow RTAs (power p.o.v.).
– Article 24 limits large partner's bargaining power.– Article 5 GATS ditto (weakly) for services.– No such WTO disciplines on BBBs
• de facto = NS deep RTAs almost exclusively one‐sided on BBBs.
33
Different political economy
1. Basic nature of bargain– Traditional =– 21st c. = Northern factories for Southern reform.
2. Implications:– Only EU, US & Japan can do this deal (yet).– WTO = no factories on offer.– RTA tariff cuts multilateralisable; BBBs disciplines maybe not;
• EU, US, Japan disciplines incompatible?
3. Unilateral tariff cutting = hole in WTO fuel tank.
Threats to WTO support
34
exchange of market access.
• 1st unbundling: – GATT & RTAs mainly about tariffs.
• 2nd unbundling: – 21st century regionalism mainly about BBBs– Politics: factories for reform
• Key questions 21st c. regionalism: – Are US, EU and Japanese disciplines multilateralisable?– Can & should some disciplines be brought under WTO?
Sum up
35
Sum up (cont’d)• Should we develop WTO disciplines like Art.24/Art.5 for deeper disciplines?
• How do new trade giants (China, India, Brazil, etc.) fit in?
36
Future scenarios for WTO• Plan A (WTO centricity restored):
– WTO disciplines updated to match 21st century trade.• Plan B (WTO centricity eroded):
– WTO unreformed, RTAs & BITs continue to lead.– Drift back towards a 19th century Great Powers world?
• B.1: WTO stays vibrant with Marrakesh disciplines only; deeper disciplines outside.
• B.2: WTO credibility withers; bicycle falls over.
37
End• Thank you for listening.
• Advert: Please look at http://VoxEU.org
“Research‐based policy analysis and commentary by leading economists”
38