1. Benefiting from Regional Integration
Bernard Hoekman
Maurice Schiff
Junichi Goto

2. Key Messages
Regional trade agreements (RTAs) are proliferating and now cover more than one third of world trade, but their liberalizing effect has not always been large.
RTAs can create trade and bring many other benefits for development …but results are not automatic and depend critically on design and implementation.
RTAs have systemic consequences that adversely affect excluded countries, requiring international attention.
Definition of RTA
Liberalizing effect modest from a global perspective, though important for some participants

3. REGIONALISM IN THE WORLDEU
NAFTA
APEC
EAEC
(FTAA)
AFTA
Mercosur

4. Regional Trade Agreements are proliferating…
Annual number
Total in force
Cumulative in force
New agreements annually
Cumulative fall in 2004 reflects accession of 10 countries into EU and elimination of some 60 bilateral agreements
…and now potentially cover more than one-third of global trade

5. Some Theories of Regional Integration Agreement

6. Stages of Economic Integration (five stages according to Balassa)
Free Trade Area (FTA)
starting point
rules of origin
Customs Union
common external tariffs
Common Market
movement of capital and labor
Economic Union
coordination of fiscal and monetary policy
Complete Economic Union
super-natural institution

7. Trade Creation Before: A=100, B=90*1.2=108, C=90*1.2=108
20 percent tariff
Before: A=100, B=90*1.2=108, C=90*1.2=108
After: A=100, B=90, C=90*1.2=108

8. Trade Diversion Before: A=100, B=80*1.2=96, C=70*1.2=84
20 percent tariff
Before: A=100, B=80*1.2=96, C=70*1.2=84
After: A=100, B=80, C=70*1.2=84

9. Expansion of the FTA and the Third Country
welfare
Size of FTA

10. Further cost of S-S RIA

11. Article XXIV of the GATT
‘non-discrimination; MFN’ as the basic principle of WTO/GATT
FTA and Customs Union as exceptions to the fundamental principle
Article XXIV of the GATT sanctions if
complete liberalization (100 percent, substantially all the trade)
no increase in external barrier
Ambiguous
how soon
“substantially all the trade”
shall not on the whole be more restrictive
Various proposal for strengthening it
e.g. Bhagwati (set to the lowest)

12. Assessing RIAs in the World

13. South-South RTAs predominate in number, but not in trade covered
Number of RTAs
Percent of World Trade Covered
South-South
South-South US US
US is Nafta
96-02 are other FTAs
European Union
European Union

14. …and regional agreements are a relatively small driver of trade reform
Decomposing tariff reductions in response to multilateral, regional and own initiatives
Av. Tariffs, 1983 and 2003
Decomposing 20% pt. decline
29.9
Methodological weaknesses: data are inconsistent; assumes Uruguay round is the only multilateral effect; assumes all RTAs are fully implemented with full coverage.
Problems: It is impossible to distinguish interactive effects. China’s reform is unilateral, but it clearly had accession to WTO in mind. Same with much of ECA.
9.3
Source: Martin and Ng, 2004

15. Effects on members: Do RTAs create – or divert -- trade?
Estimated exponential impact on trade
Overall exports
Overall imports
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.

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

17. Lower external tariffs are associated with greater regional integration
Average external tariffs
SAS
MNA
SSA
LAC
ECA
EAP

18. RTAs go far beyond trade
Standards
Transport
Customs
cooperation
Services
Intellectual
Property
Investment
Dispute
Settlement
Labor
Competition
U.S.-Led
US-Jordan No
Yes
US-Chile
US-Singapore
US-Australia
US-CAFTA
US-Morocco
NAFTA
E.U.-Led
EU-South Africa
EU-Mexico
EU-Chile
South-South
MERCOSUR
Andean Community
CARICOM
AFTA
SADC
COMESA
Other
Japan-Singapore
Canada-Chile
Chile-Mexico

19. Both North-South and South-South accords can be improved…
Some sweeping generalization…
North-South RIAs
South- South RIAs
Strengths
Locking in reforms by binding commitments
Services liberalization
Move to international standards
Weaknesses
Restrictive rules of origin
Exemptions, esp. agriculture
Strengths
Nonrestrictive rules of origin
Adjacency permit trade facilitation
Weaknesses
Small markets/Higher external barriers
Exemptions
Minimal services

20. Design are crucial to achieving objectives
Large ex-post market
Low external tariff barriers
Nonrestrictive rules of origin
Wide product coverage with minimal exemptions
Liberalization of services
Deeper integration
Implementation: Avoiding paper agreements

21. Policy implications… International community through the WTO
Get Doha done
Concentrate on transparency
High income countries
Widen coverage in FTAs (i.e. agriculture)
Move toward conformity in rules of origin, and make less restrictive
Developing countries
Unilateral liberalization: driving competitiveness
deep integration and institutional reforms (customs, ports, trade-related standards)
Slide 2: Main messages
[enter]
-Global recovery is underway, with its locus in the US, increasingly in Japan and East Asia. // yet current projections are moderately below those prepared 6 months ago, as the Euro Area continues to lag
-Developing countries have been resilient throughout the downturn and will play a key role in recovery... // though the international environment remains fragile // as macro stimulus measures in the rich countries have largely run their course
[enter] Read #2 above
[enter] Read #3 above