Regional Trade Agreements Week 9. Lecture Plan Introduction Why Regionalism? Political Economy of Regionalism Economic Consequences of Regionalism Regionalism.

Regional Trade Agreements

Week 9

Lecture Plan

• Introduction• Why Regionalism?• Political Economy of Regionalism• Economic Consequences of Regionalism• Regionalism and the WTO

Introduction (1)

• By end of March 2013, only 4 of the WTO's 159 members were not party to one or more regional trade agreements

• All non-global trade agreements are scrutinized by the WTO's Committee on Regional Trade Agreements (RTAs)– RTAs are the most important exception to the

principle that countries should not discriminate in their treatment of other members

Introduction (2)

• "Regional" or "free" trade agreements are probably better termed "preferential" trade agreements (PTAs) because many are not “regional” in the conventional sense of the word.

• In recent years, a large number of PTAs have involved only 2 parties (bilateral agreements)

• PTAs can occur between neighbours or between countries that are far removed from one another– There is no such thing as a "natural" region– Regions are social constructions

Introduction (3)

• Regionalism is a “formal process of intergovernmental collaboration between two or more states”– Regionalization on the other hand refers to the

growth of economic interdependence within a given geographical area

Re-emergence of regionalism (new regionalism)

• Old regionalism linked to cold war context– Bi-polar world order, introvert

– State actors– EU as a model

• New regionalism linked to globalization– Multipolar world order, extrovert

– Triple helix (governments, private sector, academia & civil society)

– Multiple actors & stakeholders

Regionalism takes many shapes and forms

• Several regional ‘scales: continent, macro-region, sub-regions, micro-regions EU - EU BSR - Öresund region OAS – CARECOM - Carribean LME AU – COMESA – EAC – LVBC

• Different types of regionalism Security; economic; social;

environmental Or a combination of the above

STAP Research Paper

Why Regionalism? Political Reasons-1

– To improve inter-state relations through enhancing confidence

– To enhance security within a region against both internal and external threats, and to reward partners that have cooperated on security matters

– To address “non-traditional” security threats (e.g. environmental damage, illegal migration)

– To enhance bargaining power in the global economy through group solidarity

Why Regionalism? Political Reasons-2

– To lock in domestic economic reforms and attract

foreign investors

– To satisfy domestic constituencies’ demands for

reciprocity and facilitate governments’ decision to

undertake economic liberalization

– Regional agreements may be easier to negotiate

and implement than global ones

Why Regionalism? Economic Reasons– RTAs are sometimes perceived to be preferable to

non-discriminatory multilateral agreements because:• RTAs enable continued protection of sectors that would

otherwise not survive global competition• RTAs provide opportunities for “deeper integration”

that are not possible at the global level

– RTAs are preferable to unilateralism or status quo because:• RTAs may offer larger markets (reciprocity provisions)

and increased foreign investment

The Rush to Regionalism (1)

• “First” wave of regionalism in early-1960s– Emerged in response to the establishment of the

European Economic Community in 1957– Many linked less developed countries together

(South-South oriented)• To promote local “import-substitution industrialization”• To enhance the bargaining power of participants• Many failed because

– Participating countries were not significant economic partners for one another

– Regionalism exacerbated inequalities among partner states

The Rush to Regionalism (2)

• “Second” wave of regionalism since mid-1990s emerged as a result of:– The end of the Cold War, which opened up new possibilities for

economic partnerships– Growing integration of markets placed increasing pressure on

governments to pursue market-friendly policies– Frustration with the difficulties of negotiating global agreements

• Contributed to the US changing its position on RTAs– “Contagion” effects– Need to ensure compliance with WTO rules

Political Economy of Regionalism (1)

• Why would firms support regionalism?

– Economies of scale argument

– Strategic trade theory argument

– Need to conduct various stages of production in different geographical locations (often within the same geographical region)

– Sales and production are often concentrated within a geographical region

Strategic Trade Policy

The use of trade policies, including tariffs, subsidies, and even export subsidies to alter the outcome of international competition in a country's favor, usually by allowing its firms to capture a larger share of industry profits.

Political Economy of Regionalism (2)

• Regional institutions have to be given more competence and power if members broaden the scope of policy issues for cooperation– Free Trade Areas (FTAs) are attractive to many

governments because they do not require the establishment of strong regional institutions (governments’ obligations are limited in comparision to those under a common market)

Alternative Explantions to Regionalism

Alternative Explanations of (European) Regionalism (1)

• According to neo-functionalist theorists, cooperation in one area of economic activity would produce pressures for cooperation in other areas (E.Haas,1953)– This "spillover" effect, some of it unintended, will

lead to a deepening of cooperation– Regional institutions can provide the integration

process with a dynamic of its own, leading to deeper integration

Alternative Explanations of (European) Regionalism (2)

• "Liberal intergovernmental" perspective argues that deeper integration is the outcome of key decisions taken by member governments, emphasis on domestic (economic) constitutiencies to shape governmental positions in interstate barganing. – Member governments delegate authority to regional

institutions in a "calculated, rational, and circumscribed" manner. (A.Moravcsik)

• Sandholtz (1993): membership of a region can influence how governments define their interests– Thus, partly reconciling the neo-functionalist and liberal

intergovernmental perspectives

Economic Consequences (1)

• Estimating the trade effect of PTAs is not a straightforward exercise due to the impact of many different variables– Factors other than provisions of the PTAs themselves

that can affect the volume of trade between two countries:• Size of the two economies• Levels of per capita income• Geographical distance between the two countries• Do they share a common boundary?• Do their populations speak the same language?

Economic Consequences (2)

• Several studies confirm that PTAs have

– a positive impact on trade between members

– caused changes in patterns of international trade

• It is difficult to distinguish between the effects of "trade

creation" and "trade diversion”

– World Bank (2000): "it is not possible to conclude that

trade diversion has been a major problem”

Economic Consequences (3)

• It is also difficult to estimate the effects of economies of scale & competition dynamics

• Generally, the impact of PTAs appears to be relatively minor given the other factors, such as floating exchange rates, that come into play

Regionalism and the WTO (1)

• Will PTAs facilitate or obstruct global trade liberalization?

• PTAs seen to facilitate global negotiations because– Regional groupings reduce the number of actors in

global negotiations– Deeper regionalism within regional groupings can

serve as models at the global level– Regionalism paves way for full global liberalization– Regionalism can lead to a "domino" effect and broaden

the scope of liberalization

Regionalism and the WTO (2)

• However,– Regional groupings may have little flexibility in

bargaining with others– There is as yet no evidence that deeper regional

cooperation has translated to the global level– Regional groups may not pave the way for further

liberalization if firms are comfortable operating within the region

– Firms may have little incentive to lobby governments if PTAs are shallow

Regionalism and the WTO (3)

• PTAs hinder global negotiations because– PTAs magnify power disparities that lead to

resentment in smaller, less developed economies against trade liberalization

– PTAs divert scarce resources away from global negotiations

– "Spaghetti bowl" effect increases the cost of international trade

– PTAs might lower the incentive for firms to push for further liberalization

The spaghetti bowl effect

A phenomenon of international economic policy that refers to the complication which arises from the application of domestic rules of origin in the signing free trade agreements across nations. The effect leads to discriminatory trade policy because the same commodity is subjected to different tariffs and tariff reduction trajectories for the purpose of domestic preferences. With the increase in FTA's throughout the international economy, the phenomena has led to paradoxical, and often contradictory outcomes amongst bilateral and multilateral trade partners. When applied specifically to trade among Asian nations, the effect is sometimes called the noodle bowl effect.

Regionalism and the WTO (4)• PTAs hinder global

negotiations because; – PTAs enable

governments to exempt sensitive sectors from liberalization, thereby strengthening protectionist forces

The contradictory arguments on the relationship between PTAs and global trade liberalization rest on hypotheses that are not easy to test.