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

Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest. Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest. For members, RTAs can create trade and bring many other benefits for development …but results are not automatic and depend critically on design and links to domestic reforms. For members, RTAs can create trade and bring many other benefits for development …but results are not automatic and depend critically on design and links to domestic reforms. Non-trade regulations – investment and intellectual property rights -- merit close scrutiny because development benefit is unclear and “one size does not fit all” Non-trade regulations – investment and intellectual property rights -- merit close scrutiny because development benefit is unclear and “one size does not fit all” For all countries, RTAs have systemic consequences that adversely affect excluded countries, requiring international attention. For all countries, RTAs have systemic consequences that adversely affect excluded countries, requiring international attention. Key Messages

Regional Trade Agreements are proliferating… Annual number

Regional Trade Agreements are proliferating… New agreements annually Annual number Total in force Cumulative in force

South-South RTAs predominate in number, but not in trade covered South- South European Union US South- South European Union Percent of World Trade Covered Number of RTAs US

…but RTAs provide less new market access than it might appear Share of trade covered (%), 2003

…and in developing countries regional agreements are a relatively small driver of trade reform Share of tariff reductions Source: Martin and Ng, 2004 Av. Tariffs in Developing Countries

Why this proliferation? High-income countries, such as US and EU To support foreign policy goals, including development To support foreign policy goals, including development Slow progress on multilateral agenda: “competitive liberalization” Slow progress on multilateral agenda: “competitive liberalization” Access to services markets, protection of intellectual property, and rules for investment Access to services markets, protection of intellectual property, and rules for investment Developing countries Secure access to markets, especially large markets Secure access to markets, especially large markets Attract more FDI Attract more FDI Leverage domestic reform Leverage domestic reform Among neighbors, lowering trade cost at border Among neighbors, lowering trade cost at border Framework for regional cooperation Framework for regional cooperation

Developing countries pay more of their foreign tariffs to rich countries and to neighbors Share of tariff burden, percent Rest of world Intra-region Industrial …

Effects on members

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 -- trade?

Estimated exponential impact on trade Intra-regional trade Overall exports Overall 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 -- trade?

Agreements with high external tariffs risk trade diversion Note: Tariffs are import-weighted at the country level to arrive at PTA averages Source: UN TRAINS, accessed through WITS Average weighted tariffs

East Asia has used MFN to integrate regionally E.Asia & Pacific Latin America M. East & N. Africa Europe & C. Asia S.Asia Sub- Sahara n Africa East Asia has led in global integration East Asia has led in global integration

East Asia Europe & Central Asia Central Asia Middle East & N. Africa South Asia Asia Sub- Saharan Africa East Asia has led in global integration East Asia has led in global integration …and in regional integration …and in regional integration LA East Asia has used MFN to integrate regionally

RTAs frequently include services, investment and intellectual property rights… Source: Global Economic Prospects, 2005: Chapter 5

Trade facilitation is crucial.. delays at border drive up trading costs RTAs can provide framework for mutual efforts to reduce costs  Single customs document  Harmonize driving & weight regulations  Computerize both sides of the border Trade/GDP Potential of RTAs to reduce border costs not yet realized Trade/GDPMalaysia Ethiopia Malawi Uganda Kyrgyzstan Slovenia Slovakia

Investment accords provide for new access 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 in 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 investment and IPR rules depend heavily on market access these rules leverage

Labor services are area of potential Types of labor services treatment  Full labor mobility (EFTA, ANZCERTA)  Access for certain groups (NAFTA, Japan-Singapore FTA)  Mode-4 type access (ASEAN, EU-Mexico)  No provisions (APEC, COMESA) Patterns include:  Limited mobility  Skilled labor only: mainly intra-corporate  In conclusion…not much movement Ironically, areas with least progress – services and labor – have greatest development potential… while in areas with most progress – investment and IPR – are those with uncertain development consequences

Both North-South and South-South accords can be improved… Strengths Strengths  Compatibility among economies  Services liberalization  Move to international standards Weaknesses Weaknesses  Restrictive rules of origin  Exemptions, esp. agriculture  Inappropriate rules?  No movement of workers North-South Some sweeping generalization… Index of ROO Restrictiveness Estevadeordal, 2004

Strengths Strengths  Compatibility among economies/large markets  Services liberalization  Move to international standards Weaknesses Weaknesses  Restrictive rules of origin  Exemptions, esp. agriculture  Inappropriate rules  No movement of workers North-South South- South Strengths Strengths  Focus on trade  Nonrestrictive rules of origin  Adjacency permit trade facilitation Some sweeping generalization… Weaknesses Weaknesses  Small, similar markets  Higher external barriers  Exemptions  Minimal services  No movement of workers Both North-South and South-South accords can be improved…

Design Design  Low external tariff barriers  Nonrestrictive rules of origin  Wide coverage with few exclusions  Liberalization of services  Facilitating trade at borders  Appropriate rules Implementation: Link RTAs to domestic reform agenda Implementation: Link RTAs to domestic reform agenda Design and implementation are crucial to achieving objectives ….Open regionalism

Systemic issues… Systemic issues…

Preferences hurt excluded countries Systemic issues…uneven and discriminatory access

Simulated welfare impact of Chile’s FTA with US Preferences hurt excluded countries Source: Harrison, et al, 2002 Gains to Chile Costs to excluded countries $ m. Systemic issues…uneven and discriminatory access

Preferences hurt excluded countries Change in real income in 2015 compared to baseline in percent Multilateral liberalization Hub and spokes put weaker countries at disadvantage

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Change in real income in 2015 compared to baseline in percent Multilateral liberalization Individual RTA (average) (average) Hub and spokes put weaker countries at disadvantage

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Change in real income in 2015 compared to baseline in percent Multilateral liberalization Individual RTA (average) (average) All countries sign RTAs Hub and spokes put weaker countries at disadvantage

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Multiple arrangements burden customs

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Multiple arrangements burden customs Hub and spokes put weaker countries at disadvantage

Algeria Libya Morocco Mauritania Tunisia AMU Ghana Nigeria Cape Verde Gambia ECOWAS Benin Niger Togo Burkina Faso Cote d’Ivoire Conseil de L’Entente Guinea-Bissau Mali Senegal WAEMU Liberia Sierra Leaone Guinea Mano River Union CLISS Cameroon Central African Rep. Gabon Equat. Guinea Rep.Congo Chad Sao Tomé & Principe ECCAS CEMAC Angola Burundi* Rwanda* Egypt DR Congo Djibouti Ethiopia Eritrea Sudan Kenya* Uganda* Somalia Tanzania* EAC South Africa Botswana Lesotho Namibia* Swaziland* Mozambique SACU Malawi* Zambia* Zimbabwe* Mauritius* Syechelles* Comoros* Madagascar* Reunion IOC *CBI SADC COMESA Nile River Basin IGAD AMU: Arab Maghreb Union CBI: Cross Border Initiative CEMAC: Economic & Monetary Community of Central Africa CILSS: Permanent Interstate Committee on Drought Control in the Sahel COMESA: Common Market for Eastern and Southern Africa EAC: East African Cooperation ECOWAS: Economic Community of Western African Studies IGAD: Inter-Governmental Authority for Government IOC: Indian Ocean Commission SACU: Southern African Customs Union SADC: Southern African Development Community WAEMU: West African Economic & Monetary Union Overlapping African agreements…

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Disincentives to engage in multilateral liberalization Multiple arrangements burden customs Hub and spokes put weaker countries at disadvantage

International community through the WTO International community through the WTO  Get Doha done: lowers risk of trade diversion for members and minimizes effects on excluded countries High income countries have systemic responsibility High income countries have systemic responsibility  Widen coverage in FTAs (i.e. agriculture)  Move toward conformity in rules of origin, and make less restrictive  Promote rules tailored to local capacities Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objective Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objective  Unilateral: driving competitiveness  Multilateral: seeking broad market access  Regional: deep market access and institutional reforms (services, customs, ports, trade-related standards) Policy implications…

Further Reading Findlay, C.. Sheri Stephenson, and F.J. Pinto “Services in Regional Trading Agreements” in M. Plummer A Comprehensive Guide to the World Trade Organization Kluwer Fink, Carsten and P. Reichenmiller “Intellectual Property” Trade Note #20 World Bank (website) Freund, Caroline L “Multilateralism and the Endogenous Formation of PTAs” Discussion Paper 614 US Federal Reserve, Washington. Hoekman, Bernard and Richard Newfarmer “Investment in Regional Preferential Trade Agreements” Journal of World Trade Fall 2005 Schiff, Maurice and L. Alan Winters, Regional Integration and Development World Bank 2003 Schott, Jeffrey (ed.) Free Trade Agreements Washington: Institute for International Economics 2005 World Bank, Global Economic Prospects, 2005: Trade Regionalism and Development

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

Developing countries pay more of their foreign tariffs to rich countries and to neighbors Share of tariff burden, percent Rest of world Intra-region Industrial …

Systemic issues… Systemic issues…

Evaluating alternatives and South Asia’s systemic interests Evaluating alternatives and South Asia’s systemic interests Basic methodology is computer (CGE) simulations Allows simulation of relative price affects based upon demand and substitution consideration Allows simulation of relative price affects based upon demand and substitution consideration However, outcomes are static, and do not account for productivity, technological change, and other dynamic effects However, outcomes are static, and do not account for productivity, technological change, and other dynamic effects Moreover, simulations do not model services liberalization, trade facilitation and lowering of other trade costs, or capture non-trade benefits of regional cooperation Moreover, simulations do not model services liberalization, trade facilitation and lowering of other trade costs, or capture non-trade benefits of regional cooperation

Evaluating alternatives: Gains to Latin America from multilateral accords Change in income of Latin America in el 2015 above baseline scenario (percent) Multilateral Fuente: World Bank en Global Economic Prospects, 2005: Chapter 6

Multilateral FTAA (por sí solo) FTAA (por 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 America from multilateral and regional accords Change in income of Latin America in el 2015 above baseline scenario (percent)

Multilateral FTAA (c/ otros ARCs) 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 (por sí solo) FTAA (por sí solo) Evaluating alternatives: Gains to Latin America from multilateral and regional accords

Evaluating alternatives: East Asia gains most from a multilateral agreement 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. Multilateral Asean + 3 (by itself) Asean + 3 (w/ other RTAs)

Evaluating alternatives: South Asia gains most from a multilateral agreement Change in South Asia’s real income in 2015 from baseline scenario (percent) Multilateral

Evaluating alternatives: South Asia gains most from a multilateral agreement Change in South Asia’s real income in 2015 from baseline scenario (percent) Note: “SAFTA by itself” assumes that other major regions do not form trading blocs that would discriminate against South Asia. Multilateral SAFTA (by itself) SAFTA (by itself)

Evaluating alternatives: South Asia gains most from a multilateral agreement Change in South Asia’s real income in 2015 from baseline scenario (percent) Multilateral SAFTA (by itself) SAFTA (by itself) SAFTA (w/ other 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 most from a multilateral agreement 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. Multilateral Asean + 3 (by itself) Asean + 3 (w/ other RTAs)

Developing countries pay more of their foreign tariffs to rich countries and to neighbors Share of tariff burden, percent Rest of world Intra-region Industrial …