THE IMPACT OF REGIONALISM AND MULTILATERALISM FOR DEVELOPING COUNTRIES: THE GRAVITY APPROACH. By Blasetti Eugenia, De Marinis Marta, Urzi Alessandra

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1 THE IMPACT OF REGIONALISM AND MULTILATERALISM FOR DEVELOPING COUNTRIES: THE GRAVITY APPROACH By Blasetti Eugenia, De Marinis Marta, Urzi Alessandra

2 THE DEBATE ON MULTILATERAL AGREEMENT Why is that important in relation to developing countries? The answer lies in different assumptions which drive economic policies: The neoliberal paradigm that sees international trade as an important factor for the development of poor countries and their integration into the global economy. On the other hand, the unfairness nature of international trade may actually seem to be useless and irrelevant for poor countries. Side effects could also affect rather than develop their weak industrial sectors and internal markets.

3 INTERNATIONAL BILATERAL AND MULTILATERAL AGREEMENTS To increase international trade, bilateral and multilateral agreements have been established. FTA: Is an agreement between two or more countries to establish a free trade area where commerce in goods and services can be conducted across their common borders, without tariffs or hindrances. GSP: is a preferential tariff system which provides nonreciprocal concessions under which countries allow duty-free or low-duty entry to imports from selected countries.

4 GATT/WTO GATT/WTO is a multilateral organization which had been established to promote international free trade, spelling out the principles of liberalization. The agreements cover goods, services and intellectual property. By taking part in it, the individual countries commitments is to lower customs tariffs and other trade barriers, and to open services markets. These agreements are not static: they are renegotiated from time to time andnewagreementscanbeaddedtothe package. It is also provided with independent body to conduce procedures to settle disputes.

5 THE GATT/WTO sprinciples MFN: is the non-discrimination requirement. It is a method of establishing equality of trading opportunity among states by guaranteeing equal trade opportunity to that accorded to the Most-favoured Nation. RECIPROCITY: is the mutually agreed reductions of trade barriers. It refers to the idea of mutual changes in trade policy which bring about changes in the volume of each countries imports that are of equal value to changes in the volume of its exports

6 GATT/WTO ROUNDS NUMBER OF COUNTRIES IN GATT/WTO GENEVA ANNECY TORQUAY GENEVA DILLION KENNEDY TOKYO 1994 URUGUAY- WTO

7 WTO s MEMBERSHIP STATUS 2014

8 THE GRAVITY EQUATION Basic assumptions OMITTED VARIABLE use of different framework of specification BIAS OF MISPECIFICATION: Include more proxy variables correlated with the omitted variable BIAS OF HETEROGENEITY: include panel data to account for time dimension(fixed Effects) FITIN withthe model: R-squared Mean Squared error

9 A MATTER OF DUMMIES Adopting a dummy strategy focuses on aggregate effects, uses aggregated data: The trade effect of the preferential trade policy is the marginal effect of a dummy variable that takes the value of one if the preferential trade policy affects the imports (or/and export) of country i from country j WTO FTA GSP Disadvantages - all countries included in a treated group are assumed to be subject to the same dose of treatment which: may be correct in the case of non discriminatory policy, e.g. the Most Favored Nation (MFN) clause of the GATT/WTO agreement but false in the case of non reciprocal preferential agreements(gsp) the treatment gets confounded with any other event that is specific to the country-pair and contemporaneous to the treatment.

10 DO WE REALLY KNOW THAT WTO INCREASES TRADE? By Andrew Rose Published on «The American Economic Review» in 2004

11 OBJECTIVE OF ROSE s THE ANALYSIS Is to understand wether the WTO and predecessor GATT have actually boosted trade. The author, through the analysis conducted using GM, concludes that GATT/WTO's impact is not as systematically significant as portrayed and described in the main literature. Furthermore, he finds that GSP extended from the North to developing countries approximately doubles trade.

12 A PRELIMINARY LOOK: GRAPHICAL EVENT STUDIES

13 A PRELIMINARY LOOK: GRAPHICAL EVENT STUDIES

14 THE SEXY PART The event studies seen above provides little evidence that membership in the GATT/WTO stimulates trade. However those results may not be completely persuasive To is isolate the effects of the multilateral trading system Rose runs a Standard Regression Analysis, and sensitive analysis, using: OLS Country Fixed Effects Year specific Fixed Effects

15 THE GRAVITY EQUATION With: culture, geography and history as dummies to take into account extra conditions variables as the parameters of Rose s interest. see Table 1*

16 SHIFT IN THE DATA SET CROSS-SECTIONAL DATA: The parameters are observed in individual years at 5 year intervals. It does not take into account, as in panel data, the time series dimension.

17 RETURNING TO PANEL DATA: GATT ROUNDS Country-pair fixed effects capture the within relation: What does joining the GATT do to the trade flow pattern over time for a given country pair?

18 NEW CATEGORIES

19 ANALYSIS ON MORE RECENT YEARS DYNAMIC ANALYSIS: Is to take into account the development of trade flows over time.

20 ROSE S CONCLUSIONS Rose has called into question the effectiveness and hence the usefulness of the GATT/WTO as a multilateral institution. According to him, his results are robust: while the GSP encourages trade, the membership in the GATT/WTO seems not to have an economically or statistically significant effects on trade. However he holds such results to be a mystery see table 8*

21 DO WE REALLY KNOW THAT WTO INCREASES TRADE? COMMENTS By Tomz, Goldstein & Douglas Published on «The American Economic Review» in 2007

22 THE ROLE OF MEMBERSHIP Formal Members Non-member Participants: Colonies Newly independent states Provisional members (de facto participants) Treating this category as outsiders leads to systematic downward bias in estimating the effect of the GATT/WTO

23 TOMZ et al. GRAVITY REGRESSION While Rose finds that membership in GATT/WTO doesn t have a positive impact on trade flows Tomz et al., by re-adjusting membership variables, find positive economically and statistically consistent results. Use of fixed effects for years and country-pair.see table 2*

24 GATT ROUNDS

25 NEW CATEGORIES

26 SHIFT IN DATA SET

27 TOMZ et al. s CONCLUSIONS Rose s mystery is solved: The negative effect of the multilateral trade system studied, is here explained as a consequence of overlooking the role of non-member participants. Indeed the GATT created rights and obligations not only for formal contracting parties but also for colonies, newly independent states and provisional members, thus enhancing trade.

28 THE WTO PROMOTES TRADE, STRONGLY BUT UNEVENLY By ARVIND SUBRAMANIAN & SHANG-JIN WEI Published on «The Journal of Inernational Economics» in 2007

29 THE OBJECTIVE OF THE ANASYSIS IS TO criticize Rose s work by giving robust evidence that WTO has strong positive impact on trade, however unequally since it depends on: What the country does with its membership With whom the country negotiates Which products the negotiation covers.

30 THE4ASYMMETRIES GENERATED BY THE GATT/WTO 1) Developed vs developing members 2) Imports of members from other members vs imports from non-members 3) Liberalized vs exempted sectors 4) New vs old developing countries

31 DIFFERENCES BETWEEN THE TWO GRAVITY MODELS ROSE Use the average of trade flow from country j to country k Year and Country pair fixed effects Considers GSP, FTA and WTO as additive dummies SUBRAMANIAN & WEI Only focus on import flows from country k to country j. Time varying importer and exporter fixed effects (Multilateral Resistance) Decompose GSP, FTA and WTO dummies to isolate their specific impact

32 1 ASYMMENTRY: DEVELOPED vs DEVELOPING COUNTRES The FTA, GSP and WTO dummies are separated in order to capture their own effect. Those are also related to the categories of developed and developing countries.

33 2 ASYMMETRY:IMPORTS FROM MEMBERS vs IMPORTS FROM NON-MEMBERS Each dummy is further disaggregated into two dummies to underline the role of the membership of the importer and exporter country. This specification give informations not just on who liberalized, but also whothis liberalization was done with. see table 4*

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35 3 ASYMMETRY: ASYMMETRY BETWEEN SECTORS Where S is an index representing the five sectors for which this equation is estimated: Liberalized manufacturing Clothing Footwear Agriculture Other highly protected manufacturing

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37 4 ASIMMETRY: NEW VS OLD DEVELOPING COUNTRIES MEMBERS Is to check if there had been any change in the trading patterns of GATT/WTO members in recent past: Developing countries have always benefitted from a Special and Differential Treatment, under the GATT (before 1995) With the Uruguay Round and the establishment of WTO, developing countries have been required to take on more obligations to liberalize their trade regimes(after 1995) seetable7*

38 SUBRAMANIAM & WEI S CONCLUSIONS Rose s analysis implies that the GATT/WTO, whose raison d'être is to promote trade, has failed to do so. While Subramanian & Wei s paper shows that the GATT/WTOhasdoneasplendidjobof promotingtrade. The unevenness emerged is related to four asymmetries in the system, analized above. The results suggest that: There has been little impact of WTO membership on developing countries' imports; However, the positive impact of WTO membership on industrial country imports meant that developing countries exports also increased significantly Indeed, despite not liberalizing themselves sufficiently, developing countries enjoyed at least some of the benefits of industrial country liberalization, notwithstanding the exclusion of the 5 sectors These unreciprocated benefits pose a challenge to the theory of the GATT/WTO, which merits further research.

39 FINAL CONCLUSIONS.

40 METHODOLOGICAL ISSUES In recent studies, the linear prediction of trade flows has been recognized as limited. Indeed, questions related to the effect of a gradual liberalization in trade policies cannot be answered using dummies, and the trade elasticity to trade policy changes cannot be estimated. Since this is the most common event the use of a dummy for preferential trade policy can be a relevant shortcoming. Alternatives exist: Switching from a dummies strategy to a continuous variables strategy, quantifying the preferential margin that the preferential agreement guarantees. Using the matching econometrics strategy.

41 THEORETICAL ISSUES The different theories here presented have shown how controversial the debate over the impact of expanded multilateral trade system, is. In relation to developing countries, the most convincing and most precise theory, to us, seems to be that of Subramanian and Wei. By underlining the inequalities experienced by less developed countries, as a consequence of relations in multilateral trade agreements, they, in fact, deliver the most comprehensive and exhaustive analysis. Indeed, beyond the gravity analysis, and despite the WTO eagerness to improve market access, fears remain that trade liberalization with large industrialized nations will: Erode infant industrial sectors, hindering the process of economic development Increase inequalities amongst global economic areas Not take into account the social and environmental sustainability in boosting the growth of specific sectors.