Regional Trade Agreements - PowerPoint by ja2304

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									                        Regional Trade
                         Agreements
                                       CHAPTER 8

Reinert/Windows on the World Economy, 2005
                                                 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”


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                                                 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


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                    Table 8.1. Types of Regional Trade
                                Agreements




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                        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
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                        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
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                        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”



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                        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


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                         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

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                            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

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                     Figure 8.1: A Trade-Creating, Regional Trade
                       Agreement between Brazil and Argentina




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                                           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

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                                         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
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                      Figure 8.2. A Trade-Diverting, Regional Trade
                        Agreement between Brazil and Argentina




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                                 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
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                    Table 8.2: The Evolution of the
                           European Union




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                                 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

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                                 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
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                        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
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                                            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


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                                            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


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                           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
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                                                 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

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                      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
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                       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?
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                       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
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                       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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