Regional trade agreement

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Regional trade agreement

  1. 1. Reinert/Windows on the World Economy, 2005 Regional Trade Agreements CHAPTER 8
  2. 2. Reinert/Windows on the World Economy, 2005 2 Introduction  “Multilateralism” refers to the GATT/WTO system as well as the trade negotiations that take place among all GATT/WTO members as a group  Recall that one of the founding principles of this system is nondiscrimination  Involves the most favored nation (MFN) and national treatment (NT) sub- principles • Each WTO member must grant to each other member treatment as favorable as they extend to any other member country  “Regionalism” refers to a violation of the nondiscrimination principle in which one member of a regional trade agreement (RTA) discriminates in its trade policies in favor of another member of the RTA and against nonmembers  Has been allowed by the GATT/WTO under certain circumstances • Free trade areas (FTAs) • Customs unions (CUs) • Interim agreements leading to a FTA or CU “within a reasonable length of time”
  3. 3. Reinert/Windows on the World Economy, 2005 3 Introduction  Regionalism and multilateralism represent two alternative trade policy options  When multilateralism “falters” regionalism “picks up the pace”  Nearly every member of the WTO is also a member of at least one RTA  Over 150 RTAs exist
  4. 4. Reinert/Windows on the World Economy, 2005 4 Table 8.1. Types of Regional Trade Agreements
  5. 5. Reinert/Windows on the World Economy, 2005 5 Regional Trade Agreements  Consider two countries—Brazil and Argentina  Suppose these countries initially pursue independent and non-preferential trade policies • Trade policies of these two countries are not coordinated in any way and do not discriminate among countries • There is no integration of the countries’ labor, capital, and money markets  First-level RTA is known as preferential trade area  Brazil and Argentina lower their trade barriers between each other, but do not eliminate them • Labor and capital markets remain unintegrated  Because the two countries have not fully eliminated trade barriers between each other, this type of RTA is not allowed by the WTO
  6. 6. Reinert/Windows on the World Economy, 2005 6 Regional Trade Agreements  Second-level RTA is known as free trade area  Brazil and Argentina eliminate the trade barriers between each other  With regard to non-member countries Brazil and Argentina pursue independent policies  Labor and capital markets remain unintegrated  Third-level regional agreement is known as customs union  Brazil and Argentina eliminate the trade barriers between each other  Additionally, member countries adopt common trade barriers with regard to non-member countries (often referred to as a common external tariff)  Labor and capital markets remain unintegrated  Fourth-level RTA is known as common market  A customs union in which labor and capital markets are integrated into a regional market • Any restrictions on movements of labor and physical capital (direct foreign investment) have been removed
  7. 7. Reinert/Windows on the World Economy, 2005 7 Regional Trade Agreements  WTO members who wish to form FTAs or CUs may do so  However, there are certain requirements • Trade barriers against non-members cannot be “higher or more restrictive than” those in existence prior to the FTA or CU • FTA or CU must be formed “within a reasonable length of time” • FTA or CU must eliminate trade barriers on “substantially all the trade” among the members • With regard to services, the General Agreement on Trade in Services (GATS) requires that the FTA or CU involve “substantial sectoral coverage”
  8. 8. Reinert/Windows on the World Economy, 2005 8 Regional Trade Agreements  How to determine whether a product is from a partner country  Suppose that Brazil and Argentina form a RTA • Shirt produced in Venezuela is imported into Brazil and label “Made in Brazil” is attached • Shirt can then be imported into Argentina with no restrictions or tariffs—product is not really made in Brazil • To protect against such possibilities, RTA members usually define rules of origin  Can be defined in a number of ways, including by  Amount of value added in an RTA partner country  Degree of product transformation
  9. 9. Reinert/Windows on the World Economy, 2005 9 The Economic Effects of Regional Trade Agreements  Trade creation  Occurs when the formation of a FTA or CU leads to a switching of imports from a high-cost source to a low-cost source • Tends to improve welfare  Trade diversion  Occurs when imports switch from a low-cost source to a high-cost source • Tends to worsen welfare
  10. 10. Reinert/Windows on the World Economy, 2005 10 Trade Creation and Trade Diversion  Let’s discuss trade creation and trade diversion using the absolute advantage model  Along with Brazil (B) and Argentina (A), we are also going to refer to a third country, Venezuela (V)  Brazil and Argentina are members of a RTA, whereas Venezuela is not
  11. 11. Reinert/Windows on the World Economy, 2005 11 Figure 8.1: A Trade-Creating, Regional Trade Agreement between Brazil and Argentina
  12. 12. Reinert/Windows on the World Economy, 2005 12 Trade Creation  Before the RTA, Brazil has in place a specific (per unit) tariff on imports from both Argentina and Venezuela  Argentina is the lower-cost producer in comparison to Venezuela  Therefore Brazil imports good from Argentina  Once Brazil joins either a FTA or CU with Argentina, tariff is removed on imports from Argentina  Good continues to be imported from Argentina and imports increase because price has fallen due to removal of tariff  Consumer surplus in Brazil increases while producer surplus and government tariff revenue falls  Net increase in welfare due to trade creation
  13. 13. Reinert/Windows on the World Economy, 2005 13 Trade Diversion  Before the RTA, Brazil has in place a specific (per unit) tariff on imports from both Argentina and Venezuela  Assume Venezuela is now the lower-cost producer in comparison to Argentina  Brazil imports the good from Venezuela  Once Brazil joins a FTA or CU with Argentina, however, Brazil switches to Argentina as an import supplier  Imports expand as the domestic price falls  Consumer surplus in Brazil increases while producer surplus and government revenue falls  Whether net welfare effect is positive or negative depends  If trade-diverting effects outweigh trade-creating effects then RTA will reduce welfare in Brazil
  14. 14. Reinert/Windows on the World Economy, 2005 14 Figure 8.2. A Trade-Diverting, Regional Trade Agreement between Brazil and Argentina
  15. 15. Reinert/Windows on the World Economy, 2005 15 The European Union  Set of agreements among countries of Western Europe in the realms of economics, foreign and security policies, and justice and home affairs  Extend back to the Marshall Plan under which United States aided in the reconstruction of Europe after World War II • Promoted liberalization of trade and payments among European countries in its zone of influence  1992 marked the official completion of a common market in which barriers to labor and physical capital were to be removed  Actual completion of a common market is still in process
  16. 16. Reinert/Windows on the World Economy, 2005 16 Table 8.2: The Evolution of the European Union
  17. 17. Reinert/Windows on the World Economy, 2005 17 The European Union  Some economists argue that trade creation dominated trade diversion in the EC and EU  Alan Winters has a more cautionary view  Despite common external tariff of European Union CU nontariff barriers increased in certain sectors  EU subsidies increased in other sectors  Tsoukalis offers an intermediate view  Overall trade creation in manufactured goods and overall trade diversion in agricultural goods • Largely the result of the Common Agricultural Policy (CAP)—has protected EEC/EU agriculture from foreign competition and has involved the heavy use of export subsidies
  18. 18. Reinert/Windows on the World Economy, 2005 18 The European Union  Has ventured beyond a common market to a monetary union with the euro  A current preoccupation of the EU is the issue of enlargement  Expanding membership to include selected Eastern European countries, as well as Turkey  Crucial sticking point, especially in the case of Poland, is the extent to which CAP provisions are to be extended to new EU members
  19. 19. Reinert/Windows on the World Economy, 2005 19 The North American Free Trade Area  In January 1994 a FTA between Canada, Mexico and US took place (NAFTA)  Addressed the following  Trade in goods  Financial services  Transportation  Telecommunications  Foreign direct investment  Intellectual property rights  Government procurement  Dispute settlement
  20. 20. Reinert/Windows on the World Economy, 2005 20 NAFTA Issues  Impact of NAFTA on wages in the United States— particularly blue-collar wages  If assumptions of Heckscher-Ohlin model of international trade hold true, would expect increased North-South trade to adversely affect workers in North  Some observers concluded NAFTA would hurt US workers • Eventually, a labor side agreement was attached to main NAFTA agreement  Mathematical models of NAFTA completed by that time showed an improvement in US wages as a result of NAFTA trade liberalization  In retrospect, issue of NAFTA and wages was probably overblown • Average monthly layoffs in United States as a result of non-NAFTA causes have been hundreds of times higher than the NAFTA job displacements following the implementation of this RTA
  21. 21. Reinert/Windows on the World Economy, 2005 21 NAFTA Issues  Another prominent issue was trade and the environment  Resulted in provisions for the creation of a North American Commission on Environmental Cooperation (CEC)  Focused some of its subsequent efforts to analysis of industrial pollution within North America
  22. 22. Reinert/Windows on the World Economy, 2005 22 Mercosur and the FTAA  RTA among Argentina, Brazil, Paraguay, and Uruguay was launched in 1991 with the Treaty of Asunción  Common Market of the South, or Mercosur, took on Chile and Bolivia as associate members in 1996 and 1997, respectively  Suggests that the RTA among the four core members is an actual common market with the free movement of labor and physical capital • However, this is not the case • Mercosur entered into force in 1995 as a FTA with plans to complete a CU by 2006 • Free movement of labor and physical capital is a long way off
  23. 23. Reinert/Windows on the World Economy, 2005 23 Mercosur  Had a positive impact on amount of trade among its four core members  Technology profile of traded goods is higher for trade within Mercosur than for trade between Mercosur and the rest of the world  However, intra-Mercosur trade is low by world standards  Troubled by two asymmetries that challenge its smooth functioning  Argentina and Brazil dwarf Paraguay and Uruguay in economic size • Smaller members find themselves somewhat sidelined from the core relationship between Argentina and Brazil  Fundamental macroeconomic asymmetries between Argentina and Brazil • Exchange rate asymmetries caused a great deal of friction between Argentina and Brazil
  24. 24. Reinert/Windows on the World Economy, 2005 24 Free Trade Area of the Americas  In 1994, governments of 34 countries in Western Hemisphere agreed to pursue a Free Trade Area of the Americas  Negotiations were launched at the Second Summit of the Americas in 1998 in nine negotiating groups  Market Access  Investment  Services  Government Procurement  Dispute Settlement  Agriculture  Intellectual Property Rights  Subsidies, Antidumping, and Countervailing Duties  Competition Policy
  25. 25. Reinert/Windows on the World Economy, 2005 25 Regionalism and Multilateralism  Represent two alternative trade policy options available to the countries of the world  The 1950s and 1960s saw “first wave” of RTAs in developing world  The 1980’s saw beginning of “second wave” of RTAs  What role will the second wave of RTAs play vis-à- vis the multilateral efforts toward trade liberalization pursued under the GATT-WTO framework  Will the second wave of RTAs complement the multilateral framework or will it work at cross-purposes to this framework?
  26. 26. Reinert/Windows on the World Economy, 2005 26 Regionalism and Multilateralism  Opponents argue  RTAs are discriminatory by nature  They draw attention to “spaghetti-bowl” nature of second- wave RTAs • Meaning the overlapping nature of most RTAs, with most WTO members holding simultaneous membership in many RTAs at once  For example, Mexico has signed FTA agreements with the United States, Canada, Nicaragua, Costa Rica, Chile, Bolivia, El Salvador, Guatemala, Honduras, Colombia, Venezuela, and the European Union  The negotiating energies put into RTAs will detract from those put into multilateral agreements under the auspices of the WTO
  27. 27. Reinert/Windows on the World Economy, 2005 27 Regionalism and Multilateralism  Key issue facing multilateral trading system is how to best manage and regulate RTAs  Responsibility falls to the WTO Committee on RTAs  A number of points are worth stressing here  GATT-era oversight of RTAs was inadequate  Marrakesh Agreement establishing WTO included an “understanding” on RTAs • Specified that the relevant measure to assess the phrase “shall not be higher or more restrictive than” is a weighted average of tariff rates and that “within a reasonable length of time” is to be no more than ten years • Specifies that all new RTAs must be notified to the WTO and a WTO working party is to be established to examine each notification and to ascertain its impact on the multilateral trading system  WTO could go further and tighten its requirements on the external protection of FTAs and CUs  Is possible to lessen the tensions between regionalism and multilateralism but probably not possible to eliminate these tensions entirely

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