Regional Trade Agreements as Trade Policy Instruments UNCTAD - DITC Trade Analysis Branch Copyright, 2000 © UNCTAD.

Types of RTAs and their main features (I)

Types of RTAs and their main features (II)

Quantifying RTA effects

The potential gains from integration (I) Increased productivity as a result of economies of scale Increased production efficiency as a result of further specialization in accordance with national comparative advantage improved international bargaining position efficiency gains due to increased competition technological spillovers and increase in FDI

The potential gains from integration (II) Scale economies made possible by the increased size of the market for firms operating below optimum levels before integration intensified competition may lead to the adoption of best business practices reduction of uncertainty and transaction costs regional economic covergence

Potential costs of RTAs on member countries The polarization effect a relative or absolute economic decline of regions or nations as a result of the interaction between RTA measures and different forces: differences in comparative advantage dynamic effects: knowledge and technology spillovers, backward and forward supply linkages, cumulative causation, economies of scale Trade diversion (discussed later) Substantial negotiating and administrative resources, especially for small, developing economies Transfer of tariff government revenues to domestic consumers and/or partners’ producers

Trade effects trade creation: extra-imports from partner country that directly reduces your domestic production as an effect of RTA formation trade diversion: extra-imports from partner country that directly reduces imports from third countries as an effect of RTA formation

Welfare effects Trade creation Trade diversion Welfare gains Welfare If overall supply is increased And/or lower cost imports replace higher cost domestic production If imports from partner country displace lower cost imports Welfare gains Welfare loss

Effects of elimination/reduction of trade barriers under an RTA Country A Partner countries T0 Change in tariffs Change in import prices trade creation trade diversion Change in imports Change in exports Change in GDP Change in domestic prices Change in GDP Change in domestic prices Change in, savings, investment, production and consumption Change in consumption, savings, investment and production feedback

The African Case

Quantifying the effects of trade policies in the African case We have seen that trade policy reform may contribute significantly to industrialization and growth A key aspect of the influence of trade policies on regional exports and economic growth is the rate of protection on intermediary goods necessary for agricultural or manufactured products. Tariffs on intermediate goods are additional direct costs making producers less competitive. They are also additional indirect costs for trade facilitation services.

What is the comparative situation of African trade barriers on intermediate goods? Agricultural materials 60 50 40 tariffs (%) 30 20 10 Benin Burkina Faso Cote d’Ivoire Ghana Guinea Bissau Nigeria Senegal All Sub- Saharan Africa Fast Growing Exporters

What is the comparative situation of African trade barriers on intermediate goods?

What is the comparative situation of African trade barriers on intermediate goods?

What is the comparative situation of African trade barriers on intermediate goods?

What is the comparative situation of African trade barriers on intermediate goods?

Results African tariffs on intermediate goods are very high, reducing the export competitiveness of final products high tariffs on agricultural inputs (fertilizers, machinery, etc) are a major constraint on rural development duty drawbacks schemes are not administered efficiently and do not offset the influence of tariffs

Further analytical tools Effective Rates of Protection

EFFECTIVE RATE OF PROTECTION (I) ERP=T-(p/P)t 1-p/P P -price of final product p- price of intermediary inputs T- tariff on final product t - tariff on intermediary product

EFFECTIVE RATE OF PROTECTION (II) Price of T-shirt (P): $1 Price of cotton yarn used in production (p): $0.6 Tariff on T-shirt (T): 20% Tariff on yarn (t): 10% Scenario B: duty-free access for yarn under an RTA Scenario A: no RTA ERP= $0.35 ? ERP= $0.5 ?

Summary and conclusions There are different types of RTAs, depending on membership and objectives RTAs and trade policies in general have far reaching economic effects The economic effects of RTAs depend upon their design African countries should continue their trade policy reform at regional and multilateral level Future strategy tariff dismantling at regional or multilateral level on intermediary products are necessary to promote export competitiveness and economic growth ‘second best’ strategy: introduction of duty drawback schemes to promote exports