Global Economic Prospects, 2005: Trade, Regionalism and Development

1
Global Economic Prospects, 2005Trade,
Regionalism and Development
Hans Timmer and Richard Newfarmer World Bank
November, 2004
2
Global Outlook

• Developing countries experience record growth in
  2004, but will face less favorable macro
  conditions as the world economy slows in 2005 by
  around 1 percentage point.
• Downside risks could slow the global economy
  further.
• Many developing countries are well placed to
  absorb the slowdown and the risks, but poor oil
  importers and indebted middle-income countries
  are vulnerable.

3
Growth is projected to slow
Forecast
Real GDP, percent change
Developing countries
4
Developing economies remain above trend
Real GDP, percent change
Developing countries
Early 1980s debt crisis
2001 Global downturn
East Asia financial crisis
1990s recession Transition countries
5
Outpacing developed countries
Real GDP, percent change
Developing countries
High-income countries
6
Strong performance of developing countriesReal
GDP per capita, percent growth
Average growth 2003-2004
7
Strong performance of developing countriesReal
GDP per capita, percent growth
Average growth 2003-2004
Acceleration
Deceleration
8
Strong performance of developing countriesReal
GDP per capita, percent growth
Average growth 2003-2004
9
Strong performance of developing countriesReal
GDP per capita, percent growth
Average growth 2003-2004
10
Emerging capacity constraints boosted commodity
prices Per cent price increase, US and world
trade-weighted effective terms
Source World Bank.
11
Higher oil-prices neutralized positive impact of
other commodity prices for oil importersImpact
of commodity price changes (20012004)
non-oil prices
oil prices
both oil and non-oil prices
Terms-of-trade gains of GDP
Low and Middle Income
Low Income (excl. India)
HIPC
12
Risks remain

• Developed-world debt and US current account
  deficit might trigger financial tensions,
  including higher interest rates and weakening
  dollar.
• Oil prices could rise further, instead of the
  moderation foreseen in the baseline
• A hard landing in China is still a possibility

13
Poor oil importers are immediately hit by high
oil pricesDeviation from baseline in first
year, per cent of GDP, with 10 higher oil price
Domestic Demand
Current Account Balance
14
Impact of 200 basis point rise in long
ratesDeviation from baseline, percent of GDP
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Trade, Regionalism and DevelopmentKey Messages

• Regional trade agreements (RTAs) are
  proliferating and now cover one third of world
  trade, but their liberalizing effect has often
  been modest.
• RTAs can create trade and bring other benefits
  for members but results are not automatic and
  depend critically on design.
• For non-members, discrimination in RTAs adversely
  affects excluded countries, posing systemic
  issues that require international attention.

16
Regional Trade Agreements are proliferating
Annual number
Annual number
17
Regional Trade Agreements are proliferating
Annual number
Total in force
Cumulative in force
New agreements annually
and now potentially cover more than one-third of
global trade
18
South-South RTAs predominate in number, but not
in trade covered
Number of RTAs
Percent of World Trade Covered
South-South
South-South
US
US
European Union
European Union
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Why this proliferation?
High-income countries, such as US and EU

• To support foreign policy goals, including
  development
• Slow progress on multilateral agenda
  competitive liberalization
• Access to services markets, protection of
  intellectual property, and rules for investment

Developing countries

• Secure access to markets, especially large
  markets
• More FDI
• Among neighbors, lowering trade cost at border
• Framework for regional cooperation

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but RTAs provide less new market access than it
might appear
Share of trade covered (), 2003
21
and regional agreements are a relatively small
driver of trade reform
Decomposing tariff reductions in response to
multilateral, regional and own initiatives
Decomposing 20 pt. decline
Av. Tariffs, 1983 and 2003
29.9
9.3
Source Martin and Ng, 2004
22
Assessing effects of RTAs on members two ways

• 1 Prospective general equilibrium models
• Most agreements projected to create more trade
  than they divert
• Projected gains less than multilateral
• Excluded countries almost always lose
• Market access is a key determinant on net
  benefits
• 2 Retrospective econometric, gravity model
• Different studies different results
• Meta analysis suggest that half of agreements
  have been net trade diverting

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Effects on members
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Effects on members Do RTAs create or divert
-- trade?
Estimated exponential impact on trade
Intra-regional trade
Note The bars show the magnitude of the dummy
variables capturing respectively the extent to
which intraregional trade, overall imports and
overall exports differ from the normal levels
predicted by the gravity model on the basis of
economic size, proximity and relevant
institutional and historical variables, such as a
common language.
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Effects on members Do RTAs create or divert
-- trade?
Estimated exponential impact on trade
Overall exports
Overall imports
Intra-regional trade
Note The bars show the magnitude of the dummy
variables capturing respectively the extent to
which intraregional trade, overall imports and
overall exports differ from the normal levels
predicted by the gravity model on the basis of
economic size, proximity and relevant
institutional and historical variables, such as a
common language.
26
Agreements with high external tariffs risk trade
diversion
Average weighted tariffs
Note Tariffs are import-weighted at the country
level to arrive at PTA averages Source UN
TRAINS, accessed through WITS
27
Lower external tariffs are associated with
greater regional integration
Average external tariffs
MNA
SAS
SSA
LAC
ECA
EAP
28
Lower external tariffs are associated with
greater regional integration
Average external tariffs
MNA
SAS
SSA
LAC
ECA
EAP
29
RTAs go far beyond trade
Lets consider trade faciliation, services,
investment, intellectual property rights and
temporary movement of labor
30
Delays at border drives up trading costs

• RTAs can provide framework for mutual efforts to
  reduce costs
• Single customs document
• Harmonize driving weight regulations
• Computerize both sides of the border

Trade/GDP
Potential of RTAs to reduce border costs not yet
realized
31
Services liberalization deepest in N-S agreements

• US and EU (less systematically) agreements
  establish
• National treatment
• MFN treatment for members
• Nonrestrictive rules of origin of investor
• Pre-establishment access subject to negative
  lists (US) or positive lists (EU)
• Ratchet mechnanisms (US)
• Upside potential great because risks of losses
  through diversion minimal.
• but achievements in additional liberalization
  subject to question
• South-south gone much less far

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Investment accords provide for new access and new
investor protections

• Potential benefits include greater FDI flows
  because
• Liberalized market access
• increased payoff to trade integration,
• reduced risk premia,
• enhanced credibility of investment climate
• Reduced international policy spillovers
• Rent shifting via TRIMs, etc.
• However, market access more important than
  investor protections as no evidence that
  protections increase FDI flows to developing
  countries
• RTAs that create large ex-post market results
  and, provided good investment climate, do attract
  more FDI. A 10 increase in post-FTA market
  size is associated with a 0.5 percent increase in
  FDI in the host country.

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Intellectual property rights figure prominently
in N-S RTAs, particularly US FTAs

• US FTAs contain TRIPS Plus provisions that
  provide greater IPR protection.
• Brings generics under market and data exclusivity
  arrangements
• No analysis of economic consequences prior to
  signing

• Open questions
• Will FTAs foreclose use of Doha flexibilities on
  TRIPS for generics?
• Will stronger IPRs contribute to more FDI and
  high tech trade?
• Are TRIPS Plus measures appropriate to all
  countries?

Conclusion Development consequences of
investment and IPR rules depend heavily on market
access these rules leverage
34
Labor services are area of potential

• Types of labor services treatment
• Full labor mobility (EFTA, ANZCERTA)
• Access for certain groups (NAFTA, Japan-Singapore
  FTA)
• Mode-4 type access (ASEAN, EU-Mexico)
• No provisions (APEC, COMESA)
• Patterns include
• Limited mobility
• Skilled labor only mainly intra-corporate
• In conclusionnot much movement

Ironically, areas with least progress services
and labor have greatest development potential
while in areas with most progress investment
and IPR are those with uncertain development
consequences
35
Both North-South and South-South accords can be
improved
Some sweeping generalization
North-South
Index of ROO Restrictiveness

• Strengths
• Compatibility among economies
• Services liberalization
• Move to international standards
• Weaknesses
• Restrictive rules of origin
• Exemptions, esp. agriculture
• Inappropriate rules
• No movement of workers

Estevadeordal, 2004
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Both North-South and South-South accords can be
improved
Some sweeping generalization
North-South
South- South

• Strengths
• Compatibility among economies/large markets
• Services liberalization
• Move to international standards
• Weaknesses
• Restrictive rules of origin
• Exemptions, esp. agriculture
• Inappropriate rules
• No movement of workers

• Strengths
• Focus on trade
• Nonrestrictive rules of origin
• Adjacency permit trade facilitation

• Weaknesses
• Small markets/Higher external barriers
• Exemptions
• Minimal services
• No movement of workers

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Design and implementation are crucial to
achieving objectives

• Design
• Low external tariff barriers
• Nonrestrictive rules of origin
• Wide coverage with few exclusions
• Liberalization of services
• Facilitating trade at borders
• Appropriate rules
• Implementation Avoiding paper agreements

.Open regionalism
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Systemic issues


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Systemic issuesuneven and discriminatory access

• Preferences hurt excluded countries

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Systemic issuesuneven and discriminatory access

• Preferences hurt excluded countries

Simulated welfare impact of Chiles FTA with US
m.
Gains to Chile
Costs to excluded countries
Source Harrison, et al, 2002
41
Systemic issuesuneven and discriminatory access

• Preferences hurt excluded countries

• Hub and spokes put weaker countries at
  disadvantage

Change in real income in 2015 compared to
baseline in percent
Full multilateral liberalization
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Systemic issuesuneven and discriminatory access

• Preferences hurt excluded countries

• Hub and spokes put weaker countries at
  disadvantage

Change in real income in 2015 compared to
baseline in percent
Full multilateral liberalization
Individual RTA (average)
43
Systemic issuesuneven and discriminatory access

• Preferences hurt excluded countries

• Hub and spokes put weaker countries at
  disadvantage

Change in real income in 2015 compared to
baseline in percent
Full multilateral liberalization
Individual RTA (average)
All countries sign RTAs
44
Systemic issuesuneven and discriminatory access

• Preferences hurt excluded countries

• Hub and spokes put weaker countries at
  disadvantage

• Multiple arrangements burden customs

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Overlapping African agreements
Nile River Basin
COMESA
IGAD
ECCAS
AMU
CEMAC
Somalia
Sao Tomé Principe
Algeria Libya Morocco Mauritania Tunisia
Egypt
Cameroon Central African Rep. Gabon Equat.
Guinea Rep.Congo
ECOWAS
Djibouti Ethiopia Eritrea Sudan
Burundi Rwanda
Ghana Nigeria
Conseil de LEntente
Cape Verde Gambia
Chad
DR Congo
Kenya Uganda
Benin Niger Togo
Burkina Faso Cote dIvoire
Angola
Guinea-Bissau Mali
Senegal
EAC
Liberia Sierra Leaone
Guinea
Tanzania
Mauritius Syechelles
Malawi Zambia Zimbabwe
SACU
Comoros Madagascar
WAEMU
Mano River Union
South Africa Botswana Lesotho
CLISS
Namibia Swaziland
Reunion
AMU Arab Maghreb Union CBI
Cross Border Initiative CEMAC Economic
Monetary Community of Central Africa CILSS
Permanent Interstate Committee on Drought
Control in the Sahel COMESA Common Market for
Eastern and Southern Africa EAC East
African Cooperation ECOWAS Economic Community
of Western African Studies IGAD
Inter-Governmental Authority for Government IOC
Indian Ocean Commission SACU
Southern African Customs Union SADC
Southern African Development Community WAEMU
West African Economic Monetary Union
CBI
Mozambique
SADC
IOC
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Systemic issuesuneven and discriminatory access

• Preferences hurt excluded countries

• Hub and spokes put weaker countries at
  disadvantage

• Multiple arrangements burden customs

47
Systemic issuesuneven and discriminatory access

• Preferences hurt excluded countries

• Hub and spokes put weaker countries at
  disadvantage

• Multiple arrangements burden customs

• Disincentives to engage in multilateral
  liberalization

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Policy implications

• International community through the WTO
• Get Doha done lowers risk of trade diversion for
  members and minimizes effects on excluded
  countries
• High income countries have systemic
  responsibility
• Widen coverage in FTAs (i.e. agriculture)
• Move toward conformity in rules of origin, and
  make less restrictive
• Promote rules tailored to local capacities
• Developing countries should adopt a 3 part
  strategy, using each instrument to its most
  appropriate objective
• Unilateral driving competitiveness
• Multilateral seeking broad market access
• Regional deep market access and institutional
  reforms (customs, ports, trade-related standards)

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Global Economic Prospects, 2005Trade,
Regionalism and Development
Hans Timmer and Richard Newfarmer World Bank
November, 2004
50

• www.worldbank.org/
• globaloutlook
• Multilingual, modular presentation
• Printable version
• Forecast database out to 2006
• Downloadable charts
• Insightful calculators and simulation tools
• Valuable one-page data briefs

51

• www.worldbank.org/
• globaloutlook
• Multilingual, modular presentation
• Printable version
• Forecast database out to 2006
• Downloadable charts
• Insightful calculators and simulation tools
• Valuable one-page data briefs