34
Economic Determinants of Regional Integration Caroline Freund World Bank Geneva November 4, 2010
| Date post: | 27-Mar-2015 |
| Category: |
Documents |
| Upload: | jordan-ortega |
| View: | 213 times |
| Download: | 1 times |
Economic Determinants of Regional Integration
Caroline Freund
World Bank
Geneva
November 4 2010
Evolution of Regional Trade Agreements
Average Number of Partners
0
2
4
6
8
10
12
14
16
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Ave
rag
e N
um
ber
of R
TA
Par
tner
s
Figure 1 - Average Number of RTA Partners Over Time
Total Number of RTA Partners Number of FTA Partners Number of CU Partners
Concerns about Regionalism
bull Unnatural AgreementsmdashPolitical support centers around trade diverting agreements
bull Trade diversion
bull Future Liberalization is at risk
When do Countries form Regional Agreements
bull Social WelfaremdashNo serious concerns governments sign trade creating agreements
bull Political InterestsmdashGovernments may sign agreements that cater to specific interests May be trade diverting and may alter future path of liberalization
Why Preferential
bull Multilateral negotiations stalled
bull Free-rider problem
bull Competition to multilateral system
bull Political Interests
Trade Diverting Agreements
bull Grossman and Helpman (1995) Krishna (1998)ndash Trade diversion yields profit gains firms want
to protect their preferencesndash Only diverting agreements formed and reduce
incentives for future liberalization
Natural Partners
bull Trade agreements are formed by countries that are near and trade a lotndash Krugman (1991) shows that when trade costs are low
regionalism is trade creatingndash Frankel (1995) regional trade is more than explained by
natural factorsndash Krishna (2003) estimates welfare effects of 24
hypothetical agreements neither volume nor geography are good indicators of gains from trade ndashhowever 80 percent of agreements are welfare improving
Natural Partners cont
bull Baier and Bergstrand (2004) GE model to determine the country pairs that gain the most from an agreementndash Variables include distance remoteness income
similarity of income comparative advantagendash Variables correctly predict 85 of actual
agreements
Outcome
bull If agreements are formed for political reasons should observe significant trade diversion
Evidence on Diversion
bull Little robust evidence of diversion
bull Magee (2008) ndash Panel data from 133 countries 1980-1998ndash Country-pair exporter-year and importer-year fixed
effectsndash Average impact on trade is smallmdashabout three
percentndash Trade creation dominates trade diversion by one
order of magnitude
Does Regionalism Alter Future Multilateral Liberalization
WorldWelfare
time
R path I
R path II
R path III
Multilateralism
R path IV
Adapted from Bhagwati 1993
Free trade
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Evolution of Regional Trade Agreements
Average Number of Partners
0
2
4
6
8
10
12
14
16
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Ave
rag
e N
um
ber
of R
TA
Par
tner
s
Figure 1 - Average Number of RTA Partners Over Time
Total Number of RTA Partners Number of FTA Partners Number of CU Partners
Concerns about Regionalism
bull Unnatural AgreementsmdashPolitical support centers around trade diverting agreements
bull Trade diversion
bull Future Liberalization is at risk
When do Countries form Regional Agreements
bull Social WelfaremdashNo serious concerns governments sign trade creating agreements
bull Political InterestsmdashGovernments may sign agreements that cater to specific interests May be trade diverting and may alter future path of liberalization
Why Preferential
bull Multilateral negotiations stalled
bull Free-rider problem
bull Competition to multilateral system
bull Political Interests
Trade Diverting Agreements
bull Grossman and Helpman (1995) Krishna (1998)ndash Trade diversion yields profit gains firms want
to protect their preferencesndash Only diverting agreements formed and reduce
incentives for future liberalization
Natural Partners
bull Trade agreements are formed by countries that are near and trade a lotndash Krugman (1991) shows that when trade costs are low
regionalism is trade creatingndash Frankel (1995) regional trade is more than explained by
natural factorsndash Krishna (2003) estimates welfare effects of 24
hypothetical agreements neither volume nor geography are good indicators of gains from trade ndashhowever 80 percent of agreements are welfare improving
Natural Partners cont
bull Baier and Bergstrand (2004) GE model to determine the country pairs that gain the most from an agreementndash Variables include distance remoteness income
similarity of income comparative advantagendash Variables correctly predict 85 of actual
agreements
Outcome
bull If agreements are formed for political reasons should observe significant trade diversion
Evidence on Diversion
bull Little robust evidence of diversion
bull Magee (2008) ndash Panel data from 133 countries 1980-1998ndash Country-pair exporter-year and importer-year fixed
effectsndash Average impact on trade is smallmdashabout three
percentndash Trade creation dominates trade diversion by one
order of magnitude
Does Regionalism Alter Future Multilateral Liberalization
WorldWelfare
time
R path I
R path II
R path III
Multilateralism
R path IV
Adapted from Bhagwati 1993
Free trade
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Average Number of Partners
0
2
4
6
8
10
12
14
16
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Ave
rag
e N
um
ber
of R
TA
Par
tner
s
Figure 1 - Average Number of RTA Partners Over Time
Total Number of RTA Partners Number of FTA Partners Number of CU Partners
Concerns about Regionalism
bull Unnatural AgreementsmdashPolitical support centers around trade diverting agreements
bull Trade diversion
bull Future Liberalization is at risk
When do Countries form Regional Agreements
bull Social WelfaremdashNo serious concerns governments sign trade creating agreements
bull Political InterestsmdashGovernments may sign agreements that cater to specific interests May be trade diverting and may alter future path of liberalization
Why Preferential
bull Multilateral negotiations stalled
bull Free-rider problem
bull Competition to multilateral system
bull Political Interests
Trade Diverting Agreements
bull Grossman and Helpman (1995) Krishna (1998)ndash Trade diversion yields profit gains firms want
to protect their preferencesndash Only diverting agreements formed and reduce
incentives for future liberalization
Natural Partners
bull Trade agreements are formed by countries that are near and trade a lotndash Krugman (1991) shows that when trade costs are low
regionalism is trade creatingndash Frankel (1995) regional trade is more than explained by
natural factorsndash Krishna (2003) estimates welfare effects of 24
hypothetical agreements neither volume nor geography are good indicators of gains from trade ndashhowever 80 percent of agreements are welfare improving
Natural Partners cont
bull Baier and Bergstrand (2004) GE model to determine the country pairs that gain the most from an agreementndash Variables include distance remoteness income
similarity of income comparative advantagendash Variables correctly predict 85 of actual
agreements
Outcome
bull If agreements are formed for political reasons should observe significant trade diversion
Evidence on Diversion
bull Little robust evidence of diversion
bull Magee (2008) ndash Panel data from 133 countries 1980-1998ndash Country-pair exporter-year and importer-year fixed
effectsndash Average impact on trade is smallmdashabout three
percentndash Trade creation dominates trade diversion by one
order of magnitude
Does Regionalism Alter Future Multilateral Liberalization
WorldWelfare
time
R path I
R path II
R path III
Multilateralism
R path IV
Adapted from Bhagwati 1993
Free trade
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Concerns about Regionalism
bull Unnatural AgreementsmdashPolitical support centers around trade diverting agreements
bull Trade diversion
bull Future Liberalization is at risk
When do Countries form Regional Agreements
bull Social WelfaremdashNo serious concerns governments sign trade creating agreements
bull Political InterestsmdashGovernments may sign agreements that cater to specific interests May be trade diverting and may alter future path of liberalization
Why Preferential
bull Multilateral negotiations stalled
bull Free-rider problem
bull Competition to multilateral system
bull Political Interests
Trade Diverting Agreements
bull Grossman and Helpman (1995) Krishna (1998)ndash Trade diversion yields profit gains firms want
to protect their preferencesndash Only diverting agreements formed and reduce
incentives for future liberalization
Natural Partners
bull Trade agreements are formed by countries that are near and trade a lotndash Krugman (1991) shows that when trade costs are low
regionalism is trade creatingndash Frankel (1995) regional trade is more than explained by
natural factorsndash Krishna (2003) estimates welfare effects of 24
hypothetical agreements neither volume nor geography are good indicators of gains from trade ndashhowever 80 percent of agreements are welfare improving
Natural Partners cont
bull Baier and Bergstrand (2004) GE model to determine the country pairs that gain the most from an agreementndash Variables include distance remoteness income
similarity of income comparative advantagendash Variables correctly predict 85 of actual
agreements
Outcome
bull If agreements are formed for political reasons should observe significant trade diversion
Evidence on Diversion
bull Little robust evidence of diversion
bull Magee (2008) ndash Panel data from 133 countries 1980-1998ndash Country-pair exporter-year and importer-year fixed
effectsndash Average impact on trade is smallmdashabout three
percentndash Trade creation dominates trade diversion by one
order of magnitude
Does Regionalism Alter Future Multilateral Liberalization
WorldWelfare
time
R path I
R path II
R path III
Multilateralism
R path IV
Adapted from Bhagwati 1993
Free trade
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
When do Countries form Regional Agreements
bull Social WelfaremdashNo serious concerns governments sign trade creating agreements
bull Political InterestsmdashGovernments may sign agreements that cater to specific interests May be trade diverting and may alter future path of liberalization
Why Preferential
bull Multilateral negotiations stalled
bull Free-rider problem
bull Competition to multilateral system
bull Political Interests
Trade Diverting Agreements
bull Grossman and Helpman (1995) Krishna (1998)ndash Trade diversion yields profit gains firms want
to protect their preferencesndash Only diverting agreements formed and reduce
incentives for future liberalization
Natural Partners
bull Trade agreements are formed by countries that are near and trade a lotndash Krugman (1991) shows that when trade costs are low
regionalism is trade creatingndash Frankel (1995) regional trade is more than explained by
natural factorsndash Krishna (2003) estimates welfare effects of 24
hypothetical agreements neither volume nor geography are good indicators of gains from trade ndashhowever 80 percent of agreements are welfare improving
Natural Partners cont
bull Baier and Bergstrand (2004) GE model to determine the country pairs that gain the most from an agreementndash Variables include distance remoteness income
similarity of income comparative advantagendash Variables correctly predict 85 of actual
agreements
Outcome
bull If agreements are formed for political reasons should observe significant trade diversion
Evidence on Diversion
bull Little robust evidence of diversion
bull Magee (2008) ndash Panel data from 133 countries 1980-1998ndash Country-pair exporter-year and importer-year fixed
effectsndash Average impact on trade is smallmdashabout three
percentndash Trade creation dominates trade diversion by one
order of magnitude
Does Regionalism Alter Future Multilateral Liberalization
WorldWelfare
time
R path I
R path II
R path III
Multilateralism
R path IV
Adapted from Bhagwati 1993
Free trade
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Why Preferential
bull Multilateral negotiations stalled
bull Free-rider problem
bull Competition to multilateral system
bull Political Interests
Trade Diverting Agreements
bull Grossman and Helpman (1995) Krishna (1998)ndash Trade diversion yields profit gains firms want
to protect their preferencesndash Only diverting agreements formed and reduce
incentives for future liberalization
Natural Partners
bull Trade agreements are formed by countries that are near and trade a lotndash Krugman (1991) shows that when trade costs are low
regionalism is trade creatingndash Frankel (1995) regional trade is more than explained by
natural factorsndash Krishna (2003) estimates welfare effects of 24
hypothetical agreements neither volume nor geography are good indicators of gains from trade ndashhowever 80 percent of agreements are welfare improving
Natural Partners cont
bull Baier and Bergstrand (2004) GE model to determine the country pairs that gain the most from an agreementndash Variables include distance remoteness income
similarity of income comparative advantagendash Variables correctly predict 85 of actual
agreements
Outcome
bull If agreements are formed for political reasons should observe significant trade diversion
Evidence on Diversion
bull Little robust evidence of diversion
bull Magee (2008) ndash Panel data from 133 countries 1980-1998ndash Country-pair exporter-year and importer-year fixed
effectsndash Average impact on trade is smallmdashabout three
percentndash Trade creation dominates trade diversion by one
order of magnitude
Does Regionalism Alter Future Multilateral Liberalization
WorldWelfare
time
R path I
R path II
R path III
Multilateralism
R path IV
Adapted from Bhagwati 1993
Free trade
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Trade Diverting Agreements
bull Grossman and Helpman (1995) Krishna (1998)ndash Trade diversion yields profit gains firms want
to protect their preferencesndash Only diverting agreements formed and reduce
incentives for future liberalization
Natural Partners
bull Trade agreements are formed by countries that are near and trade a lotndash Krugman (1991) shows that when trade costs are low
regionalism is trade creatingndash Frankel (1995) regional trade is more than explained by
natural factorsndash Krishna (2003) estimates welfare effects of 24
hypothetical agreements neither volume nor geography are good indicators of gains from trade ndashhowever 80 percent of agreements are welfare improving
Natural Partners cont
bull Baier and Bergstrand (2004) GE model to determine the country pairs that gain the most from an agreementndash Variables include distance remoteness income
similarity of income comparative advantagendash Variables correctly predict 85 of actual
agreements
Outcome
bull If agreements are formed for political reasons should observe significant trade diversion
Evidence on Diversion
bull Little robust evidence of diversion
bull Magee (2008) ndash Panel data from 133 countries 1980-1998ndash Country-pair exporter-year and importer-year fixed
effectsndash Average impact on trade is smallmdashabout three
percentndash Trade creation dominates trade diversion by one
order of magnitude
Does Regionalism Alter Future Multilateral Liberalization
WorldWelfare
time
R path I
R path II
R path III
Multilateralism
R path IV
Adapted from Bhagwati 1993
Free trade
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Natural Partners
bull Trade agreements are formed by countries that are near and trade a lotndash Krugman (1991) shows that when trade costs are low
regionalism is trade creatingndash Frankel (1995) regional trade is more than explained by
natural factorsndash Krishna (2003) estimates welfare effects of 24
hypothetical agreements neither volume nor geography are good indicators of gains from trade ndashhowever 80 percent of agreements are welfare improving
Natural Partners cont
bull Baier and Bergstrand (2004) GE model to determine the country pairs that gain the most from an agreementndash Variables include distance remoteness income
similarity of income comparative advantagendash Variables correctly predict 85 of actual
agreements
Outcome
bull If agreements are formed for political reasons should observe significant trade diversion
Evidence on Diversion
bull Little robust evidence of diversion
bull Magee (2008) ndash Panel data from 133 countries 1980-1998ndash Country-pair exporter-year and importer-year fixed
effectsndash Average impact on trade is smallmdashabout three
percentndash Trade creation dominates trade diversion by one
order of magnitude
Does Regionalism Alter Future Multilateral Liberalization
WorldWelfare
time
R path I
R path II
R path III
Multilateralism
R path IV
Adapted from Bhagwati 1993
Free trade
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Natural Partners cont
bull Baier and Bergstrand (2004) GE model to determine the country pairs that gain the most from an agreementndash Variables include distance remoteness income
similarity of income comparative advantagendash Variables correctly predict 85 of actual
agreements
Outcome
bull If agreements are formed for political reasons should observe significant trade diversion
Evidence on Diversion
bull Little robust evidence of diversion
bull Magee (2008) ndash Panel data from 133 countries 1980-1998ndash Country-pair exporter-year and importer-year fixed
effectsndash Average impact on trade is smallmdashabout three
percentndash Trade creation dominates trade diversion by one
order of magnitude
Does Regionalism Alter Future Multilateral Liberalization
WorldWelfare
time
R path I
R path II
R path III
Multilateralism
R path IV
Adapted from Bhagwati 1993
Free trade
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Outcome
bull If agreements are formed for political reasons should observe significant trade diversion
Evidence on Diversion
bull Little robust evidence of diversion
bull Magee (2008) ndash Panel data from 133 countries 1980-1998ndash Country-pair exporter-year and importer-year fixed
effectsndash Average impact on trade is smallmdashabout three
percentndash Trade creation dominates trade diversion by one
order of magnitude
Does Regionalism Alter Future Multilateral Liberalization
WorldWelfare
time
R path I
R path II
R path III
Multilateralism
R path IV
Adapted from Bhagwati 1993
Free trade
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Evidence on Diversion
bull Little robust evidence of diversion
bull Magee (2008) ndash Panel data from 133 countries 1980-1998ndash Country-pair exporter-year and importer-year fixed
effectsndash Average impact on trade is smallmdashabout three
percentndash Trade creation dominates trade diversion by one
order of magnitude
Does Regionalism Alter Future Multilateral Liberalization
WorldWelfare
time
R path I
R path II
R path III
Multilateralism
R path IV
Adapted from Bhagwati 1993
Free trade
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Does Regionalism Alter Future Multilateral Liberalization
WorldWelfare
time
R path I
R path II
R path III
Multilateralism
R path IV
Adapted from Bhagwati 1993
Free trade
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Building Bloc Theories
bull Domino Theory (Baldwin 1993)mdashcountries outside the agreement increasingly hurt by discrimination want in
bull Juggernaut (Baldwin 2006)mdashcountries learn from liberalization allowing more liberalization
bull External Tariffs (Bagwell and Staiger 1999 Freund 2000)
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
DB
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Trade Diversion in Partial Equilibrium
Pw
Ptw
SA
StA
MM1 M2
price
imports
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Endogenous Tariffs
bull Incentive to reduce tariffs to minimize diversion
bull Explains why minimal diversion is observed
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Stumbling Bloc Theories
bull Political economyndash Political groups support bilateral negotiations
Once they have preferences they donrsquot want to lose them (Levy 1997 and Krishna1998)
ndash Lobby switches to international protection (Findlay and Wellisz 1982)
bull Customs unions ndash Countries maximize joint welfare (Bagwell and
Staiger 1997 Freund 2000)
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Regionalism and External Tariffs Empirics Some Analyses No Concensus
bull Cross-country studies regionalism is goodndash Irwin (1993)ndash Foroutan (1998)ndash Baldwin and Seghezza (2007)
bull Preferences lower external tariffs in FTAsndash Estevadeordal Ornelas and Freund (2008)ndash Calvo Pardo Ornelas and Freund (2008)
bull Preferential imports lower external tariffsndash Bohara Gawande and Sanguinetti (2004)
bull Preferences Less liberalization in Uruguay Round ndash Limao (2006)ndash Karacaovali and Limao (2005)
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Why the Difference
bull Limao examines EU and US where tariffs are already low Diversionary costs less important
bull Preferences are North-South and may be for nontrade reasons
bull 90 percent of products have preferences
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Regionalism and Multilateralism
bull Mansfield and Reinhardt (2003) more RTAs formed during multilateral negotiations than at other times
bull US used NAFTA to push Uruguay Round Bergsten and Schott (1997)
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Potential Advantages of Regionalism
bull Negotiations are simplerbull Regionalism allows countries to go much deeper
on integrationmdashinto behind-the-border barriersndash Because tariff revenue is not involved in some areas
associated losses are absent or smaller
ndash Examples services trade facilitation product standards harmonization labor mobility regulatory control competition policy investment
ndash In some cases non-members may gain
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Deeper Integrationbull Migration and Services offer larger gainsbull Alesina and Spolaore (2003) economic benefits versus
heterogeneityndash Sizemdashpublic goods home market effects redistribution of
incomendash Costsmdashnational policies less satisfactory to more peoplendash These issues are clearly highlighted in EU
bull Schengen Turkey Euro bull Lisbon Treaty We can still have elections but we cannot use our
vote to change legislation in the many areas where the Union is given power to deciderdquo Danish MEP
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Deeper Integration from Fragmentation of Production
bull Is there a connection between fragmentation of production and regionalismndash Baldwin (2010) points out how it can enhance
forces for liberalizationndash Yi (2003) highlights effects of tariff
liberalization on vertical specializationndash Together there can be a virtuous circle
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Ongoing Work Regionalism study ECA
bull Did the EU expand vertical specialization
Dos this enhance growthDoes this lead to more synchronized GDP movements
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
What Should the WTO Dobull Impose restrictions on PTA formation to confirm
commitment to free tradendash Bind tariff rates at applied rates leaving no room for
tariff increases following a trade agreementndash Agree to lower multilateral tariffs part of the way with
preferential tariffsndash Minimize of Rules of Originmdashforcing tariff
compression among regions Allow only one ROO per agreement not sector-specific ROO
bull Redefine North-South Agreementsndash Preferences from North in response to MFN
liberalization from South
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Orbull Can regions govern themselves
ndash No jump in tariffs even where bindings arenrsquot bindingndash If anything discrimination by product (eg agriculture)
has done more to thwart multilateral negotiations than regionalism has
bull Is WTO effort better spent onndash Deeper multilateral integrationndash Expansion
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Conclusionsbull Preferential trade agreements are distortionary
ndash Governments choose well when forming agreements
ndash Adjust trade policies to minimize costs
bull Regionalism may endanger multilateralismndash Really we donrsquot know no counterfactualndash Future studies can probe this questionndash A different discrimination may be the problem
bull Products as opposed to country of origin
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Future Issuesbull Better Data--RTA database
ndash Coveragendash Preferential tariffsndash Rules of OriginmdashShame listndash Implementation
bull Benefits from Deeper Integrationndash IRTS especially in public goods institutionsndash Factor mobilityndash Home market effects ndash Fragmentation of Productionndash Lock-in of Policiesndash Security
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Extrashellip
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Trade Creation Generally Prevails
bull Trade Creationndash Leamer (1990) 14 countriesmdashtrade creationndash Srinivasan Whalley and Wooton (1993) surveyndash Gravity literature (Frankel 1997 Lee and Shin (2006) ndash Clausing (2001) Canada-US trade creationndash Krishna (2003)
bull Trade Diversionndash Yeats (1998) and Haveman Nair-Reichert and Thursby
(2003) Carrere (2006)
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
What Should Countries Do
bull In 1991 Summers proclaimed that countries should pursue the living ldquoismrdquo
bull Flaw is governments are entering into too many agreements facilitating discrimination and increasing bureaucracy
bull Best strategy is unilateral multilateral then and only then regional liberalization
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Developing Country Concerns
bull Tariffs tend to be much higher in the South
bull Exhaustion of scarce trade negotiating resources
bull Dependence on tariffs for tax revenue
0
10
20
30
40
50
60
70
Denm
ark
Mac
ao C
hina
Sweden
Unite
d Sta
tes
Latv
ia
Lith
uani
a
Singa
pore
Slove
nia
Mol
dova
Ukrai
ne
Slova
k Rep
ublic
Russia
n Fed
erat
ion
Bolivi
a
Iran
Islam
ic Rep
El Sal
vado
r
Syrian
Ara
b Rep
ublic
Tajikis
tan
Parag
uay
Mor
occo
Philip
pines
Yemen
Rep
In
dia
Bangla
desh
Nepal
Leba
non
Guin
ea
Baham
as T
he
Mad
agasc
ar0
5000
10000
15000
20000
25000
30000
35000
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
An Aside on the Modelsbull Endogeneity of tariffs--Common that everything besides
FTA is exogenous
ndash Are gains from FTA so big that ML becomes undesirable
ndash Do outsiders benefit or lose when an FTA is formed
bull Aghion Antras and Helpman (2007) show as long as free trade maximizes governments joint payoff it will be reached
bull Ornelas (2008) show RTAs help get closer to free trade
bull Customs unions versus free trade areas
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
Concerns North-South Agreements
bull Asymmetric bargaining power sectors important for south may be left out eg agriculture and textiles
bull Divide and rulebull Break up coalitions of developing countries and
impose own agenda labor environment IP investment competition policy etc
bull Eg US-Jordan labor and US- Chile and Singapore Capital controls
