WBIAERC Course on Regional Integration in Africa and EPAs

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WBI-AERCCourse on Regional Integration in
Africa and EPAs

• Nairobi, Kenya
• 22-24 May 2006

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Objectives of the Course

• To encourage dialogue and exchange of experience
  among participants
• To increase awareness of the features and
  implications of regional trade agreements for
  African countries
• To improve understanding of the practical
  challenges to real economic integration in Africa
  implementation and design of agreements
• To improve understanding of the implications of
  the Economic Partnership Agreements and their
  interactions with African Regional Integration
  schemes
• To address the EPAs negotiating issues in the
  context of African development
• To discuss ways forward

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Outline of the course

• Regional Integration Setting the Context
• Enhancing African regional integration Policies
• Enhancing African regional integration
  Infrastructure and Institutions
• Primer on EPAs
• EPAs Negotiating Issues (1) Tariff Issues
• EPAs Negotiating Issues (2) Rules of Origin
• EPAs Negotiating Issues (3) Services and trade
  facilitation
• EPAs Negotiating Issues (4) Investment, IPR, and
  Competition
• Toolkit for analyzing the development
  implications of an EPA
• The Way Forward (1)
• The Way Forward (2) A Panel Discussion

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Regional Integration Setting the
contextDiscussion of the systemic issues from a
global perspective

• Presentation to the WBI-AERC
• Course on Regional Integration
• in Africa and EPAs
• Nairobi, Kenya
• 22-24 May 2006
• Presented by Soamiely Andriamananjara
• The World Bank Institute

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Outline of the Session

• Recent trends and stylized facts
• Beyond tariffs Deeper integration
• Impacts of RTAs
• Systemic Issues
• Some policy implications

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What are we talking about?

• Various types of Trade Liberalization in
  developing countries

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Recent Trend RTAs are proliferating
Total in force
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Why this proliferation?

• Push from high-income countries, (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
• Attract more FDI
• Reaction to other RTAs competitive
  liberalization led by a few dynamic players
  (Chile, Mexico, Singapore)
• Leverage/Lock in domestic reform
• Among neighbors, lowering trade cost at border
• Framework for regional cooperation and pooling
  resources

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Recent Trends Changing nature of RTAsNew
Regionalism

• Shift in paradigm
• From controlling/managing trade infant
  industry industrialization to
  facilitating/promoting trade export-led growth
  strategy
• From closed regionalism import competing to
  a more open type
• Increasing inclusion of deep integration
  measures in RTAsbeyond tariffs and quotas (ntbs,
  trade facilitations, standards ) and beyond
  merchandise trade (services, labor, )
• More and more North-South agreements Emergence
  of a hub and spokes system

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Stylized Fact 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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Stylized Fact RTAs provide less new market
access than it might appear
Share of trade covered (), 2003
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Stylized Fact For developing countries, regional
agreements are a relatively small driver of trade
reform

Av. Tariffs in Developing Countries
Share of tariff reductions
29.9
9.3
Source Martin and Ng, 2004
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Stylized facts RTAs frequently go beyond tariff
liberalization include services, investment and
intellectual property rights
Source Global Economic Prospects, 2005 Chapter 5
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Beyond Tariffs Trade facilitation is crucial..
delays at border drive 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
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Beyond Tariffs 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
• 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 5 percent increase in FDI in
  the host country.
• However, market access more important than
  investor protections
• no evidence that protections increase FDI flows
  to developing countries

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

• 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?

• 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

Conclusion Development consequences of
investment and IPR rules depend heavily on market
access these rules leverage
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Beyond Tariffs 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
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Impacts of RTAs on Trade Flows

• RTAs are designed to increase trade among members
  
• By design, RTAs are preferentialthus
  discriminatory
• Regional trade expansion, at the expense of trade
  with the rest of the world
• trade diversion Imports diverted from low cost
  external producers to high costs regional
  producers
• Problems with Trade diversion Hurt both members
  and non-members
• Members Lost tariff revenue not compensated by
  consumer gainsterms of trade loss
• Non-members Lost export sales or decreased
  export prices
• The likelihood of trade diversion increases when
• External (MFN) tariffs are high Discrimination
  stronger
• Countries are not important trade partners

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Risk of trade diversion high in RTA with high
external tariffs
Average weighted tariffs
Note Tariffs are import-weighted at the country
level to arrive at RTA averages Source UN
TRAINS, accessed through WITS
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Some empirics RTAs create intra-regional trade
Estimated exponential impact on trade (from
Gravity Model)
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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But maybe at the expense of overall trade trade
diversion?
Estimated exponential impact on overall imports
and exports
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.
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East Asia has used MFN to integrate regionally

• East Asia has led in global integration

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East Asia has used MFN to integrate regionally

• East Asia has led in global integration
• and in regional integration

LA
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Impacts of RTAs on Growth

• Larger market ? Pro-competitive impact
• More firms ? Stronger competition
• Larger firms ? Economies of scale
• More specialization and wider variety of goods
• Larger market ? Attract FDI
• More trade ? Access to wider range and more
  advance technology
• Note that this does not work if trade diversion
  is dominant
• Some empirical findings
• Chile-EU FTA is expecter to increase Chiles
  growth rate by 0.6 percent and EUs by 0.005
  percentage point. Berthelon, 2004
• NAFTA increased TFP in Mexican manufacturing by
  as much as 7 percent Schiff and Wang, 2003

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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
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Systemic issuesuneven and discriminatory access

• Preferences hurt excluded countries

• Emergence of a Hub and spokes configuration

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Systemic issuesuneven and discriminatory access

• Preferences hurt excluded countries

• Emergence of a Hub and spokes configuration

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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
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
Multilateral liberalization
Individual RTA (average)
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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
Multilateral liberalization
Individual RTA (average)
All countries sign RTAs
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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

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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

• Disincentives to engage in multilateral
  liberalization

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Regionalism versus Multilateralism

• Strain on limited negotiating capacity?
• - Negotiating RTAs distracts from negotiating
  at WTO
• But Negotiating RTA could also a training
  ground for negotiating at WTO
• RTAs can pool their negotiating capacity and
  negotiate as a group with common position
• Incentive theoretic impacts
• Incentives of RTA non-members
• An increase in the degree of preference in
  the RTA increases the excluded countrys support
  for large multilateral liberalization
  (Competitive Liberalization)
• Incentives of RTA members
• - An increase in the degree of preference in
  the RTA reduces a RTA members willingness to
  undertake large multilateral trade liberalization
• Given sufficient trade diversion, multilateral
  liberalization that was feasible before the RTA
  can cease to be so afterwards

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Regionalism versus Multilateralism

• Competitive liberalization or vicious circle of
  competitive diversion
• Difficulties in Multilateral liberalization
  prompted propagation of RTAs
• Propagation of RTAs make Multilateral
  liberalization more difficult
• Adjustments to make Regionalism consistent with
  Multilateralism
• RTAs should have open membership policy Not
  realistic?
• RTAs should be accompanied by decrease in MFN
  rates

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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, similar 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 Link RTAs to domestic reform
  agenda

.Open regionalism
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Policy implications

• International community through the multilateral
  system
• Make progress in Doha 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 (services, customs, ports, trade-related
  standards)