Can Regionalism Work? Caroline Freund

Transcription

1 Can Regionalism Work? Caroline Freund

2 Number of PTAs Evolution of PTAs

3 Why Do Countries Impose Trade Barriers? Economists agree free trade is best. Why have trade barriers? To raise revenue. To protect declining industries. To promote infant industries. Because of inertia. To improve terms of trade.

4 Reciprocal Liberalization Works Political constraints weakened because export industry gains. Terms of trade motivations disappear with reciprocal liberalization. Joint welfare is higher if countries can agree to lower tariffs. WTO and PTAs both allow countries to cooperate and commit to reducing trade barriers.

5 Potential Advantages of Regionalism Negotiations are simpler. Regionalism allows countries to go much deeper on integration into behind-the-border barriers. Because tariff revenue is not involved in some areas associated losses are absent or smaller. Examples: services, trade facilitation, product standards harmonization, labor mobility, regulatory control, competition policy, investment. In some cases, non-members may gain.

6 Problems with Regionalism Trade Diversion imports may be diverted from low cost producers to regional producers. Example: Shoes produced for $11 a pair in Argentina and for $10 a pair in Mexico. Brazilian tariff is 20 percent. Without MERCOSUR, Brazil imports shoes from Mexico. With MERCOSUR, Brazil imports shoes from Argentina. Trade is diverted from Mexico to Argentina as a result of preferences. Brazil loses tariff revenue. Brazilian welfare depends on consumer gains (if shoes are cheaper) and lost tariff revenue. Low tariff implies trade diversion is less likely to be an issue.

7 Trade Diversion in Partial Equilibrium price S t A S A P t w P w D B M 1 M 2 M* imports

8 Trade Diversion in Partial Equilibrium price S t A S A P t w P w M 1 M 2 M* imports

9 Trade Diversion Is Likely to Be More Extreme If Tariffs are high. Countries are not important trade partners. There are no preferences for other exporters of similar goods.

10 Other Problems With Regionalism Regionalism may hinder multilateralism. Some theoretical work highlights that regionalism may lower countries incentives to liberalize multilaterally, although there are also models showing reverse. May generate cumbersome new trade barriers, such as rules of origin (ROO).

11 Empirical Evidence Evidence on trade diversion far from conclusive. Some evidence that it is a concern in high-tariff trade blocs (Yeats 1996) Little work on effect of PTA formation on MFN tariffs. Foroutan (1998) finds that both integrating and non-integrating countries have reduced tariffs. Limao (2004) finds that the U.S. has liberalized less products that are important in preferential agreements. But, there is some anecdotal evidence that countries have increased tariffs (Mexico, Israel). Also worries about preference erosion abound. Evidence implies that ROO restrict preference usage and trade (Brenton 2002, Estevadeordal et. al. 2004).

12 What Should Countries Do? In 1991 Summers proclaimed that countries should pursue the living ism. Flaw is governments are entering into too many agreements, facilitating discrimination and increasing bureaucracy. Best strategy is unilateral, multilateral then and only then regional liberalization.

13 But, Multilateralism Is Not Always the Answer Liberalization of some sectors first implies that overall liberalization can be trade diverting. Negotiating with a large number of countries is difficult. MFN creates a free-rider problem. Multilateral liberalization is slow and small countries may not benefit.

14 Choosing Partners Traditional gains come from lower domestic prices and increased profits abroad. Loss comes from trade diversion and loss in tariff revenue. Diversion less likely if own tariffs are already low. Gains bigger if other countries tariffs are high. Trade bloc countries should be main trading partners. Additional gains from deeper integration, transportation infrastructure, telecommunications, customs, etc. Regional blocs more likely to be welfare improving. Countries can take advantage of IRTS.

15 Developing Country Concerns Tariffs tend to be much higher in the South. Exhaustion of scarce trade negotiating resources. Dependence on tariffs for tax revenue Denmark Macao, China Sweden United States Latvia Lithuania Singapore Slovenia Moldova Ukraine Slovak Republic Russian Federation Bolivia Iran, Islamic Rep. El Salvador Syrian Arab Republic Tajikistan Paraguay Morocco Philippines Yemen, Rep. India Bangladesh Nepal Lebanon Guinea Bahamas, The Madagascar

16 Concerns: North-South Agreements Asymmetric bargaining power, sectors important for south may be left out, eg. agriculture and textiles. Divide and rule Break up coalitions of developing countries and impose own agenda, labor, environment, IP, investment, competition policy etc. Eg. US-Jordan labor, and US- Chile and Singapore Capital controls.

17 What Should the WTO Do? Impose a multilateral tax on PTA formation to confirm commitment to free trade. Bind tariff rates at applied rates, leaving no room for tariff increases following a trade agreement. Agree to lower multilateral tariffs part of the way with preferential tariffs. Minimize of Rules of Origin forcing tariff compression among regions. Allow only one ROO per agreement, not sector-specific ROO. Redefine North-South Agreements Preferences from North in response to MFN liberalization from South.

18 Conclusions Regionalism should be a mechanism for promoting deep integration, not for offering preferential treatment. Ideal strategy is UMR Unilateralism, Multilateralism, then Regionalism. Danger that the reverse is becoming common practice. Up to the United States and the EU to reverse this trend. A first step would be serious engagement on agriculture.

19 Agriculture Three types of policies: subsidies, tariffs, and quotas. For production subsidies, multilateral negotiation is more effective since reduction benefits exporters everywhere. For export subsidies regional agreements may be a good starting place. Some progress regionally on other barriers. Not necessarily good because shifts the balance on negotiations. Exporters of some goods with preferential treatment to large markets oppose multilateral liberalization. This is largely a US-EU issue.

20 Services Tariff revenue less of an issue. Regional agreements may allow countries to take advantage of increasing returns to scale. Regulatory considerations: Don t want domestic monopoly to become foreign monopoly. First-mover advantage and dynamic concerns. Danger of locking in an inefficient provider.