1. Trade Negotiations; Regional Integration
Appleyard & Field (& Cobbs): Chapters 17 – 18
Krugman & Obstfeld: Chapters 9 and 11

2. Trade Negotiations Bretton Woods Conference (1944)
International Bank for Restructuring and Development (IBRD, later to become the World Bank), International Monetary Fund (IMF), International Trade Organization (ITO)
General Agreement on Tariffs and Trade (GATT) to promote “freer and fairer” trade (1948)
U.S. Senate turns ITO down (1950)

3. Multilateral Trade Negotiations
Year
Subjects covered
Number of countries
1947–1961
Several negotiations
Tariffs
13–26
1964–1967
Kennedy Round
Tariffs and anti-dumping measures 62
1973–1979
Tokyo Round
Tariffs, non-tariff measures, “framework” agreements
102
1986–1993
Uruguay Round
Tariffs, non-tariff measures, rules, services, intellectual property, dispute settlement, textiles, agriculture, creation of WTO…
123

4. World Trade Organization
GATT becomes WTO (1995)
Acts as a forum for trade negotiations
Administers trade agreements
Settles trade disputes
Reviews national trade policies
Assists developing countries (technical assistance and training programmes)
Cooperates with other international organizations

5. Features of GATT/WTO (1)
Fixed-rule system
unambiguous rules are required to move away from a suboptimal Nash equilibrium
Multilateralism and non-discrimination
Most-favoured-nation (MFN) / normal trade relations (NTR)
Exceptions: 1) free trade areas and 2) GSP for developing countries
Reciprocity
the process evolves trough mutually balanced “concessions”

6. Features of GATT/WTO (2)
Dispute settlement
GATT had expert panels without authority to enforce its recommendations
WTO has a Dispute Settlement Body that can levy fines on countries
Transparency
Tariffs rather than quotas
WTO’s trade-policy-review mechanism
Unresolved issues
agriculture, textiles, shipping, anti-dumping duties, subsidies, FDI, intellectual property rights…

7. Structure of the WTO
Ministerial Conference (at least once every two years)
General Council (ambassadors, several times a year)
meets also as the Trade Policy Review Body and the Dispute Settlement Body
Other:
Goods Council, Services Council and Intellectual Property (TRIPS) Council
Specialized committees, working groups and working parties
Secretariat (technical support; no decision-making role)

8. What’s Next?
The Millenium Round was to be launched in Seattle (1999), but no agreement was found
A new round finally started in Doha (2001)
Issues
agriculture, labour standards, environment, intellectual property, anti-dumping and subsidies, investment, competition policy, transparency in government procurement …
Failure in Cancun (2003)
“Agreement on framework” (2004)

9. Types of Economic Integration (1)
Free trade area (FTA)
no tariffs between the members
each members sets its own tariffs to outside members → outside countries will use a transshipment strategy if no rules of origin exist
e.g. EFTA, NAFTA
Customs Union
free trade area +
common external trade policy
e.g. Benelux

10. Types of Economic Integration (2)
Common Market
customs union +
free factor movements
e.g. European Community
Monetary / Economic Union
common markets +
common currency, common institutions and coordination of economic policy
e.g. European Monetary Union

11. Static Effects of Economic Integration
Jacob Viner (1950): The Customs Union Issue. Carnegie Endowment for International Peace, New York.
Two kinds of impacts due to integration
Trade creation: shift from (high-cost) domestic production to (low-cost) a member production
Trade diversion: shift from (low-cost) nonmember production to (high-cost) member production
→ The welfare impact of economic integration is ambiguous

12. Welfare Impact of Trade Creation
Case 1: Member of integrated area (country M) is the most efficient producer of the good
Before integration, the price in home country is (1+t)*PM
After integration, price becomes PM
increase of consumer surplus
loss of producer surplus
loss of government revenue
Positive net impact (prior deadweight losses) SD P
(1+τ)PM
decrease of
producer
surplus
loss of govn’t
revenue
tariff
net benefit
net benefit PM DD
imports before integration Q
imports after integration

13. Welfare Impact of Trade Diversion
Case 2: Non-member of integrated area (country O) is the most efficient producer of the good
Before integration, the price in home country is (1+t)*PO
After integration, the price is PM
increase of consumer surplus (P+a+C+b)
loss of producer surplus (P)
loss of government revenue (C+G)
Government loses C+G, but only C is transferred to consumers
Net impact is a + b - G P SH DH
(1+τ)PM P a C b PM
tariff G PO
imports before integration Q
imports after integration

14. Factors Affecting the Net Welfare Impact of Trade Diversion
Trade diversion is likely to have less adverse impact on welfare
the closer the member country’s production cost is to the non-member’s
the higher the initial tariff
the more elastic supply and demand
the more participating countries in integration
Other possible static effects of integration
savings in administrative costs
possibility to improve the collective terms-of-trade
greater bargaining power in trade negotiations

15. Dynamic Effects of Economic Integration
Integration may result different evolution of member countries’ economies than would otherwise have occurred
more competition (less monopoly power)
access to larger markets → realization of economies of scale
greater investment (less restrictions for members + e.g. non-members are more motivated to “get behind the tariff wall” due to larger market available)
greater labour mobility

16. Current Trade Blocks
Andean Community (CAN), Asia-Pacific Economic Cooperation (APEC), Association of Southeast Asian Nations Free Trade Area (AFTA), Caribbean Community and Common Market (CARICOM), East African Economic Community (EAEC), Economic Community of West African States (ECOWAS), European Economic Area (EEA), European Free Trade Association (EFTA), European Union (EU), Mercado Comun del Sur (MERCOSUR or MERCOSUL), Mercado Comun Centro Americano (MCCA), South Asia Association for Regional Cooperation (SAARC), Southern African Development Community (SADC)
Proposed: Free Trade Area of the Americas (FTAA), South Asia Free Trade Agreement (SAFTA)