The Sussex Framework : Developing a Useful Analytical Tool for Policymakers Negotiating FTA

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The Sussex Framework Developing a Useful
Analytical Tool for Policymakers Negotiating FTA

• Jim Rollo
• Sussex European institute the Centre for
  Analysis of Regional Integration _at_ Sussex
• ECIPE BRUSSELS 22 November 2006

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The Perceived Problem

• the boom in trade policy
• trade and development and the tensions between
  more open markets and domestic interests
• the DDA
• the burgeoning of RTA - countries may be
  negotiating FTA with one or more partners while
  also negotiating in the WTO
• the boom in trade policy analysis
• big models, data and intellectual-capital
  intensive
• the theory of the second best and the need for
  country, sectoral, regional, social and
  environmental issues to be assessed for both
  multilateral and preferential liberalisation
• the shortage of analytical capacity in trade and
  development ministries mainly tho not solely in
  small and developing countries

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New trends in RTAs after 1990
Source World Trade Organization
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Trade Blocs 1990s
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The Project Objectives

• first, to develop a framework of qualitative
  questions and statistical indicators and derive
  rules of thumb which allow busy and
  under-resourced officials to assess likely
  economic impact of RTAs
• second, to test the framework on two cases
  EU/Egypt and EU/ Caribbean and compare the
  results with the more sophisticated analyses
  based on econometric modelling, both partial and
  general equilibrium

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Sussex Framework - the justification

• trained people key binding constraint for any
  bureaucracy, assessing new policy.
• Intention to create an easy to understand
  analytical checklist on likely impact of specific
  RTA to help relax that constraint
• three key elements
• looking at the details of the agreement - check
  list of the likely elements and their
  implications
• 6 rules of thumb based on descriptive statistics
  to assess likely impact of shallow integration on
  balance of trade diversion and trade creation
• likely indicators for the potential for deep
  integration

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the qualitative issues

• objective to check-off and analyse the actual
  content of any proposed agreement in a systematic
  way that reveals
• what is in and what is out
• the extent of proposed liberalisation and any
  exceptions
• remaining regulatory barriers and the elements of
  deep integration proposed
• how it interacts with existing agreements
  including WTO
• potential for impact on particularly politically
  sensitive groups

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Initial conditions - shallow integration

• summary of economic structure
• measures of initial comparative advantage - RCA
• trade shares by source
• price dispersion - unit value differences among
  sources
• similarity and differences in export structure
  across partners - Finger -Kreinen
• similarity in production structures
• trade intensity indexes
• trade propensity indices
• herfindahl indices
• tariff and non tariff barriers - averages and
  peaks
• Framework describes the statistical indicators
  and how to calculate them from easily available
  and cheap sources (notably WITS and TRAINS
  databases)

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Shallow Integration - some rules of thumb

• rules of thumb
• The effects will be greater the higher are the
  initial tariffs.
• The greater the number of RTA partners the more
  likely it is that there will be trade creation as
  opposed to trade diversion.
• Wide differences in comparative advantage likely
  to lead to a welfare improving RTA provided the
  initial tariffs are not too high.
• The more similar is the product mix in the
  economies concerned and the higher the
  elasticities of supply the more likely there is
  to be Trade Creation
• The higher the percentage of trade with potential
  partners the more likely the RTA is to be welfare
  enhancing.
• if trade is initially a small share of GNP, an
  RTA can be considered more likely to be welfare
  improving.

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Indicators of market integration, product variety
and potential for trade induced productivity gains

• FDI
• common standards and/or recognition of conformity
  testing and certification among partners at
  sectoral level
• product variety and intra industry trade -
  Grubel-Lloyd indices and variants
• local scale economies
• public /private ownership reduced rent seeking
• regulatory obstacles to trade or FDI expansion

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the potential for deep integration

• no easily derivable composite indicators of
  likely potential for and or welfare effects of
  deep integration
• framework gives suggestions of where to look via
  indicators of
• market integration
• product variety and intra industry trade
• opportunities for trade driven productivity
  improvements
• suggests the use of case studies in sectors where
  regulation appears to be an obstacle to bilateral
  trade

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How does the Sussex Approach Compare with CGE
lessons from the Egypt case study

• Similarities
• Both are able to emphasize the trade diversion
  effect, although reasons might differ. Moreover,
  CGE quantifies the effect, whereas the analytical
  approach shows how the effect
• Both emphasize that the agreement is not likely
  to bring much as it is shallow and that deep
  integration can alter the assessment.

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How does the Sussex Framework Compare with
CGE.cont

• Differences
• The devil in the details is revealed by the
  analytical approach but not by the CGE (e.g.
  liberalization of agriculture and processed
  agriculture, rules of origin)
• The CGE approach is able to capture the impact on
  productivity whereas the analytical approach
  cannot.
• Impact of how tariffs are dismantled is described
  better using the analytical approach.
• Capturing the effect of intra industry trade and
  similarities in export structure is better done
  in the analytical approach.

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Conclusions

• the framework is successfully designed to reveal
  systematically the key elements in an agreement
• benefits of minimising the potential for trade
  diversion (lower mfn tariffs) and maximising the
  potential for deep integration emerge strongly
  from the theoretical considerations.
• empirical framework successfully tested on case
  studies of Egypt and Caribbean