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INTERNATIONAL ECONOMIC POLICY AND
DEVELOPMENTAA 2017-2018
PROF. PIERLUIGI [email protected]
Trade Agreements(multilateral and regional)
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International Trade Agreements• When countries seek to reduce trade barriers (trade
liberalization) between themselves, they enter into a trade agreement—a pact to reduce or eliminate trade restrictions.
• There are two primary types of free-trade agreements: multilateral and regional/bilateral agreements.
• Multilateral agreements are negotiated among large groups of countries to reduce trade barriers among them
• The WTO is an example of a multilateral trade agreement
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A Brief History of the MultilateralTrade Negotiations
• After World War II, the Allied countries met to discuss issues such as high trade barriers and unstable exchange rates.
• In 1947 the General Agreement on Tariffs and Trade (GATT) was established to reduce barriers to trade between nations.
• Under the most favored nation principle of the GATT/WTO, the
lower tariffs agreed to in multilateral negotiations must be
extended equally to all GATT/WTO members.
• A central exception to the MFN is for customs unions and free trade areas.
Two reasons:
• 1. such agreements can contribute to the growth of world trade.
• 2. regional trade liberalization can serve as a building block to further
liberalization at the multilateral level
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International ConferencesSingapore (1996); Geneva (1998); Seattle (1999); Doha (2001); Cancùn (2003), Hong Kong (2005), Geneva (2009 and 2011), Bali (2013), Nairobi (2015), Buenos Aires (2017)
Critical Issues: About 80% of members countries are DCs Regionalism NTBFailure of DDA state of deadlock
Scheme
Location: Geneva,
Switzerland
Born: 1 January 1995
Agreement: Uruguay
Round (1986-1994)
Members: 164 countries
since 29 July 2016
Staff: 640
Head: Roberto Azevêdo
(Director-General)
Functions: • Administering WTO trade agreements• Forum for trade negotiations• Handling trade disputes• Monitoring national trade policies• Technical assistance and training for developing countries• Cooperation with other international organizations Switzerland
Its main function is to ensure that trade flows as smoothly, predictably and freely as possible
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AlgeriaAndorraAzerbaijanBahamasBelarusBhutanBosnia and HerzegovinaComorosEquatorial GuineaEthiopiaHoly See (Vatican)IranIraqLebanese RepublicLibyaSao Tomé and PrincipeSerbiaSomaliaSudanSyrian Arab RepublicTimor-LesteUzbekistan
Observer governments
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TRADE REGIONALISM
GATT/WTO
Colonial Regimes
Regional Trade
Agreements (RTAs)
Bilateral Commercial Treaties
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Regional integration:RTAs classification
3. COMMON MARKET (CM): CU + free movement of factors of production among member-countries
2. CUSTOMS UNION (CU): FTA + common external tariff (CET)
1. FREE TRADE AREA (FTA): eliminates protection among members but each member keeps its own tariff structure
Regional economic integration can be classified into 4 stages (Machlup, 1977)By increasing order of integration:
4. ECONOMIC UNION: CM + single currency and common economic policiesEx. Economic and Monetary Union of the EU
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16
Levels of Integration
E
M
U
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Effects of trade agreements
The welfare gains and losses that arise from regional trade agreements are more complex than those that arise from multilateral trade agreements
2 main effects:
• Trade creation: occurs when high-cost domestic production is replaced by low-cost imports from other members.
• Trade diversion: occurs when low-cost imports from nonmembers are diverted to high-cost imports from member nations.
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ECONOMIC DEVELOPMENT
Trade Creation
• Occurs when the formation of a RTA leads to a shifting in the pattern of trade from a high-cost producers to a low-cost producer
• Tends to improve welfare
Trade Diversion
• Occurs when imports shift in the pattern of trade from a low-cost producer to a high-cost producer
• Tends to worsen welfare
NEOCLASSICAL ECONOMICS OF TRADE
LIBERALIZATION
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The costs and benefits of PTA
Pb
Pb+t
O
E
Sa
Sa
Da
Da
q1 q2 q3 q4
Px
Qx
Sb+t
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Pc Sc
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a bc
d
e
a+b+c+e= consumers’ gains
a= supply reduction
c= state budget reduction
b+e=trade creation
d=trade diversion
Pierluigi Montalbano – Università di Roma “La Sapienza”
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Multilateralism vs Regionalism Under the WTO discriminatory trade policies are generally not
allowed:
• the “most favored nation” (MFN) principle states: ”Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members”
BUT:
Article XXIV: allows members to form an RTA provided they:
1. eliminate within-union trade barriers on “substantially” all trade
2. do not raise trade barriers on goods produced outside the union
Article XXIV recognizes:
- free-trade areas, in which a group of countries voluntarily agree to
remove trade barriers between themselves, and
- customs unions, which are free-trade areas in which the countries also
adopt identical tariffs between themselves and the rest of the world.
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WTO LAW
Provisions Rules Functions
General Rule
GATT Article I:1 Most-Favored-Nation Clause
Non-Discrimination
Exceptions
GATT Article XXIVFree Trade
AgreementsCustoms Unions
Mutual DiscriminatoryRegional Regimes for
Trade in Goods
GATT Article XXIV Enabling Clause
UnilateralDiscriminatory Regional
Regimes for Trade in Goods
Other Exceptions
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Multilateralism vs Regionalism
Contrasting stances among economists:
1. Regionalism is an alternative to multilateralism (a stumbling bloc) Bhagwati (1998)
2. Regionalism is a useful supplements to multilateralism (a building bloc) Ethier (1998) e Baldwin (1999).
Are RTAs desirable?
“Classical” answer:• “It all depends”. Different degrees of preferences, depth of
integration, country coverage , country size etc.
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ECONOMIC DEVELOPMENT
Bhagwati’s Arguments Against
Regionalism
• The formation of regional trade
arrangements (RTAs) undermines the
WTO
• Regional Trade Agreements cause the
erosion of non-discrimination principle
• Regionalism is harmful because it
encourages trade diversion
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ECONOMIC DEVELOPMENT
Krugman’s Arguments Favoring
Regionalism
• Trade diversion from RTAs is low
because trading blocs are “natural”
trading areas
• Due to proximity and similarity of
cultures and standards of living,
regional trade agreements stimulate
trade that would have occurred even in
the absence of an agreement
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During the last decades there has been a rapid growth in the number of regionaltrade agreements.
Regional economic integration
Source: WTO 2016
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‘Spaghetti bowl’ RTAs in the Western Hemisphere
Source: Baldwin, 2009
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Source: WTO Secretariat
Participation in RTAs by country
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The most famous example of RIA: European Union
Common market heading toward economic union
Elements of economic union:
Yes: - common monetary policy
- common currency (euro)
No: - common fiscal policy
- harmonized taxation
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Examples of Regional Trade Agreements -1
Among the best known are:
- The European Union,
- The European Free Trade Association (EFTA): set up for the
promotion of free trade and economic integration to the benefit of Iceland,
Liechtenstein, Norway and Switzerland.
- The North American Free Trade Agreement (NAFTA): to remove most
barriers to trade and investment among the United States, Canada, and
Mexico.
- The Southern Common Market (MERCOSUR): economic and political
agreement among Argentina, Brazil, Paraguay and Uruguay to promote
free trade and the fluid movement of goods, people, and currency
among its members.
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Examples of Regional Trade Agreements -1
-The Association of Southeast Asian Nations (ASEAN) Free Trade
Area: Its aims include the acceleration of economic growth, social
progress, cultural development, the protection of regional peace and
stability among its members (Indonesia, Malaysia, the Philippines,
Singapore , Thailand ,Brunei, Burma (Myanmar), Cambodia, Laos, and
Vietnam)
- The Common Market of Eastern and Southern Africa (COMESA):
free trade area to promote regional economic integration through trade
and investment among 19 African countries (Burundi, Comoros, Congo,
Dem Rep.Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar,
Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda,
Zambia, Zimbabwe)
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Mega-regionals The Transatlantic Trade and Investment Partnership
TTIP(EU+US), the Trans-Pacific Partnership TPP (Trans-Pacificamong Australia, Brunei Darussalam, Canada, Chile, Japan,Malaysia, Mexico, New Zealand, Peru, Singapore, US, Vietnam)and the Regional Comprehensive Economic Partnership RCEP(ASEAN+ Australia, China, India, japan, South Korea, NewZealand) represent over three quarters of global GDP and twothirds of world trade (Ash & Lejarraga, 2014)
The sheer size of the mega-regions means that there would beeffects on third parties
The outcomes of the mega-regionals for rules on trade andinvestment, trade-related standards and regulation would likelydrive the international rules and standards
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• The Transatlantic Trade and Investment Partnership (TTIP) is a trade agreement that is presently being negotiated between the European Union and the United States (talks started in July 2013)
• It aims at removing trade barriers in a wide range of economic sectors to make it easier to buy and sell goods and services between the EU and the US.
• On top of cutting tariffs across all sectors, the EU and the US want to tackle non tariff barriers such as differences in technical regulations, standards and approval procedures (es. now when a car is approved as safe in the EU, it has to undergo a new approval procedure in the US even though the safety standards are similar).
• The TTIP negotiations will also look at opening both markets for services, investment, and public procurement. They could also shape global rules on trade.
The Trans-Atlantic Trade and Investment Partnership (TTIP)
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Effects of TTIP
TTIP is designed to drive growth and create jobs.
Independent research shows that TTIP could boost:
• the EU's economy by €120 billion;
• the US economy by €90 billion;
• the rest of the world by €100 billion
Trade diverting effects are mainly observed for Brazil and China and negative welfare effects for LDCs (Brockmeier & al, 2014)
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The Trans Pacific Partnership (TPP)
• The Trans-Pacific Partnership (TPP) is a regional trade agreement of broad scope and comprehensive coverage.
• The TPP partners include 12 countries on both sides of the Pacificthat participate in negotiations: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.
• The TPP Agreement includes 30 chapters covering trade and trade-related issues (trade in goods; customs and trade facilitation; sanitary and phytosanitary measures; technical barriers to trade; trade remedies; investment; services; electronic commerce; government procurement; intellectual property; labour; environment).
• The TPP will create an integrated regional economy accounting for 40percent of global GDP.
• Formal negotiations began in March 2010 and concluded in October2015. Final agreement signed by trade minister on February 4, 2016
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TPP: Who are in it?Current & potential members
Reached conclusion on contentAnnounced interest in joining
• Australia (2008)
• Brunei (2005)
• Chile (2005)
• Canada (2012)
• Japan (2013)
• Malaysia (2010)
• Mexico (2012)
• New Zealand (2005)
• Peru (2008)
• Singapore (2005)
• United States
(2008-2016)
• Viet Nam (2008)
- Combined population of 800 million
- 40% of global GDP
- $9 trillion in merchandise trade; $2 trillion trade of services (30% of world trade)
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Current TPP members are already part of existing Asia-Pacific FTAs
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BRITAIN IN A POST-BREXIT WORLD
Brexit Strategies
WTO Member
EU-UK RTA
EU-UK RTA+
EU-Turkey Model
EU-Switzerland Model
EU-Norway Model
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With or without EU
https://blogs.sussex.ac.uk/uktp
o/