EU and regionalism debate - Regionalism vs Multilateralism...

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Unformatted text preview: Regionalism vs. Multilateralism • Required readings: – Susan Nello • Ch. 5: The economics of integration • Ch. 17: The EU and the GATT/WTO, • Ch. 18: EU trade and aid policies – Panagariya (1999) “The regionalism debate: an overview” – Panagariya (2002) “EU preferential trade arrangements and developing countries” • Additional reference: – Baldwin R. “Multilateralising regionalism: spaghetti bowls as building blocs on the path to global free trade” World Economy 2006 1 The regionalism debate Are regional arrangements an instrument of trade liberalization, or do they undermine the multilateral process of trade liberalization? – – – – – Introduction Effects on Union Members Implications for the Global Trading System Open Regionalism "Deep" Integration 2 1. Introduction • • • • • Preferential Trade Area Free Trade Area vs. Custom Union Rarely elimination of all trade barriers Exclusion of certain goods or sectors Accompanied by agreements in areas other than trade in goods 3 WTO provisions for PTAs • GATT system is based on 3 principles: – – – Tariff reductions Reciprocity Non­discrimination (MFN, Art.1) • PTAs have been accommodated into GATT through Article 24, with as conditions: – Eliminate, rather than just lower, within­union trade barriers on “substantially all trade” in a “reasonable period of time” – No increase in trade barriers on goods produced outside the union • GATS Art. 5: provisions for PTAs in services, 4 parallel those for goods WTO provisions for PTAs ­ 2 • Enabling Clause (1979) permits partial PTAs, under 2 conditions: – General System of Preferences (GSP) – Two­way trade preferences among developing countries (e.g. MERCOSUR, and ASEAN Free Trade Area) • APEC 5 Historical Evolution • Limited role for PTAs prior to 1980s, only 2 effective PTAs: European Community and EFTA • No fear that regional arrangements might undermine the multilateral process of trade liberalization • EC (widened and deepened its integration) versus USA (committed to the multilateral approach) • Fall of Berlin Wall: EU bilateral trade deals with 6 CEECs 2. PTA Effects on Union Members • The effects on union members can be studied under different headings: – Vinerian analysis focusing on welfare effects of a PTA (trade creation and diversion) – Rules of origin – “Natural trading partners” – Differences in transport costs across countries – Non­traditional gains 7 3. Implications for the Global Trading System • Questions: Can PTA expansion lead to global free trade? Do PTAs make multilateral liberalization less likely? – Do PTAs lead to a rise in trade barriers against non­members? – What kind of trade regimes are we likely to have with criss­crossing PTAs (Spaghetti­Bowl Phenomenon)? – WTO­illegal policies in PTAs? – – 8 3.1 Can PTA Expansion Lead to Global Free Trade? • Baldwin’s “Domino Theory of Regionalism” – Economic incentives for outside countries to seek entry into an existing PTA – Unless there are sufficiently strong non­economic factors that counter these incentives, as the PTA expands, eventually all countries want to enter the PTA • Limitations of Baldwin’s analysis – Trade barriers are seen as transport costs, thus the tariff revenue aspect is not taken into account – Assumption that “insiders” have no incentive to block the entry 9 3.2 Do PTAs Make Multilateral Liberalization Less Likely? Building or stumbling blocks? (Bhagwati) Building blocks? • Multilateral negotiations will move more rapidly if the number of negotiators is reduced to a handful of blocs – However, if blocs take the form of FTAs, there is no effect on the number of participants – One voice in EU or too occupied with internal problems? • PTAs may serve as a threat 10 3.2 Do PTAs Make Multilateral Liberalization Less Likely? ­ ctd. Stumbling blocks? • PTAs are mostly between developed and developing countries • Such PTAs are associated in public mind (in developed countries) with large inflows of L­ intensive goods and reduced wages for the unskilled • This can energize and unify protectionist lobbies, generating obstacles against multilateral liberalization • Multilateral negotiations, by contrast, involve both developed and developing countries and draw less attention of protectionist lobbies 11 3.3 Do PTAs Lead to a Rise in Trade Barriers against Non­Members? 1. FTA can lead to a reduction in tariffs on inputs: – Assume a pre­PTA equilibrium a union member faces lower tariffs on final goods and higher tariffs on intermediate inputs, relative to its potential partner in some sectors – Final goods producers are in disadvantage and lobby to reduce the external tariff on the input > Counter arguments: – Reduction in the tariff on inputs increases the effective protection on final goods – Lobbying by final goods producers might also result in an increased tariff on final goods – It assumes that producers of intermediate goods do not 12 lobby 3.3 Do PTAs Lead to a Rise in Trade Barriers against Non­Members? ­ ctd. 2. Tariff­revenue objective: – If a country is dependent on tariffs for revenue purposes (e.g. Africa), it may be forced to raise the external tariff to maintain the fiscal balance – The more the country imports from the FTA partner, the larger the loss of revenue, the greater possibility of an increase in the external tariff and greater the trade diversion 13 3.3 Do PTAs Lead to a Rise in Trade Barriers against Non­Members? ­ ctd. 3. Political economy: – when producers play the central role in determining trade policies, liberalization through FTA is likely to be replaced by increased protection against outside countries 4. Considerable empirical evidence of increases in outside tariffs following the implementation of PTAs 14 3.4 The Spaghetti­Bowl Phenomenon • To avoid trade deflection, FTA agreements usually include rules of origin • Criss­crossing FTAs leads a “Spaghetti Bowl” whereby tariffs vary according to origin of the product • See Fig. 3: – Each FTA has its own rules of origin which vary across products and transition phase – For a given product, there are several different tariff rates depending on what origin is assigned to it 15 Fig. 3 Spaghetti Bowl 16 3.5 WTO­illegal policies in PTAs • PTAs can undermine the global trading system by introducing arrangements measures which are WTO inconsistent • Example: trade­balancing requirement within Mercosur: – An Argentine company operating in Brazil must export as much Brazilian goods to Argentina as it imports • However, these practices are not widespread 17 4. Open Regionalism • Current wave of PTAs represents “Open Regionalism" in contrast to closed, import­ substituting regionalism of 1950s and ‘60s • Three criteria for Open Regionalism (Bergsten,1994): – Freedom to member countries to liberalize further unilaterally or with non­members on a reciprocal basis – Consistency with GATT Article 24 – Open membership with positive encouragement to non­ members to join 18 4. Open Regionalism Problems with Bergsten’s definition ­ 1 • Rules out CU, although CU are perfectly compatible with GATT Art. 24 Individual members are not free to lower their tariffs CET cannot be lowered unless all members are willing to Members are not permitted to conclude PTAs with outside countries on their own – Entry of new members into the CU or a bilateral FTA has to be a joint decision – – – 19 4. Open Regionalism Problems with Bergsten’s definition ­ 2 • Compatibility with Art. 24 is a necessary but not sufficient condition for an arrangement to be open – FTA while keeping prohibitive tariffs on outside countries, is compatible with Art. 24 – It can hardly be characterized as open regionalism – This criterion says nothing about why the regionalism of the ‘50­‘60s was closed while that of today is open 20 4. Open Regionalism Problems with Bergsten’s definition ­ 3 • Limitations of the open membership criterion: “Open” club is still likely to harm non­members Admission price may include several unpleasant “side payments” that are essentially unrelated to trade (intellectual­property­rights, investment rules, higher labor and environmental standards) – Open membership does not necessarily translate into speedy membership, e.g. EU needed almost 50 years to grow from 6 members to 25 – – 21 5. “Deep” Integration • Regional arrangements promote “deeper” integration (Lawrence, 1996) • No “shallow” trade integration, but “deep” integration through coordination (or even complete harmonization) of other policies, e.g. product standards, environmental policies or labour standards • Gains by lower production costs and improved efficiency 22 5. “Deep” Integration ­ Critics • Deep integration might be undesirable: – Good reasons for diversity in domestic polices across nations – Harmonization is, in general, not a welfare­enhancing proposition – E.g. optimal pollution and labor standards depend on income levels • Uneven bargaining power between developed and developing countries • Deep integration can be pursued independently of a PTA 23 EU Preferential Trade Policies and Developing Countries 24 1. Introduction • EU has the most extensive network of PTAs of any WTO member • Prior to 1990: 32 PTAs had been notified to GATT/WTO (EC participant to 16 of these) • Now: 186 PTAs (EU remains a major player) • EU PTAs have not been confined to developed countries. EC has made a conscious effort to forge PTA with developing countries as well. 25 Purpose of this lecture • Overview and assessment of the EU PTA with developing countries • Beyond the obvious rent transfers accompanying those preferences, the overall impact is ambiguous: – Preferences offset each other – Undermining of the multilateral approach 26 Type of Trade Regime Name of Agreement Countries involved (a) Single market European Economic Area (EEA) Iceland, Liechtenstein, Norway (b) Customs Union Turkey, Andorra, San Marino (c) Free Trade Areas Switzerland, Israel, South Africa, Mexico, Chile, Croatia, Tunisia, Morocco, Palestinian Authority, Faroe Islands Russia and other former Soviet bloc countries (d) Partnership and Co­ operation Agreements (GSP) (e) Non­reciprocal: contractual preferences Mediterranean Agreements (g) Purely MFN treatment ‘First generation’ Lomé/Cotonou (f) Non­reciprocal: autonomous Generalised System of preferences Preferences (GSP) "Western Balkans" regime Algeria, Egypt, Jordan, Lebanon, Syria 78 African, Caribbean, Pacific (ACP) countries Other developing countries + members of CIS Albania, Bosnia, FR Yugoslavia Australia, Canada, Japan, NZ, Taiwan, Hong Kong, Singapore, United States, Korea 27 2. The Multi­layered EC Arrangements: Different layers of EC integration • European Union (EU­25): Characterized by the deepest integration with a common external tariff, common agricultural policy, common competition policy • European Economic Area (EEA): extends the Single Market of the EU to 3 out of the 4 European Free Trade Area (EFTA) members (Norway, Iceland and Liechtenstein). Two main differences with EU: – EU is a CU with a common external tariff ­ EEA is a FTA with each member maintaining its own separate tariff – EU common agricultural policy does not extend to EEA 28 Multi­layered EC Arrangements ­ ctd • Customs Unions: – – – Agreements for industrial products only, Andorra, San Marino and Turkey At various stages of implementation • FTA arrangements: – At various stages of implementation – Switzerland, Israel, South Africa, Mexico, Chile, Croatia, Tunisia, Morocco, Palestinian Authority, Faroe Islands 29 Relations with Mediterranean Partners ­ 1 • Special relationship with 12 Mediterranean partners: – Morocco, Algeria, Tunisia, Egypt, Israel, Jordan, the Palestinian Authority, Lebanon, Syria, and Turkey • Bilateral agreements exist since the 1960s, with renewed efforts since the oil embargo in 1973 • Two key provisions in the agreements: – trade preference – direct aid • Barcelona Conference/Process in 1995: launch of the EU­Mediterranean Partnership 30 Relations with Mediterranean Partners ­ 2 • Barcelona Process governs the current EU­ Mediterranean relations, with as key goals: – Construction of a common area of peace and stability – Creation of an EU­Mediterranean FTA by the year 2010 • Bilateral level: Association Agreements with the EU (including the establishment of a FTA as one of the provisions) • So far, the Mediterranean countries enjoy duty free access to the EU market for manufactured goods • Little progress towards free trade areas between the 31 Mediterranean states themselves ACP Preferences ­ 1 • 78 countries in Africa, Caribbean and Pacific (ACP) regions received one­way trade preferences from EC under the Lomé Conventions. • Origin in Treaty of Rome (1957): commitment to contribute to the prosperity of the colonies and overseas countries with historical ties with the EC member states – (creation of the European Development Fund ­ EDF) • Today governed by the ACP­EU Partnership Agreement, signed in Cotonou (2000), for a period of 20 years • Trade preferences for most ACP exports to EC markets + ‘trading protocols' on sugar, bananas, and beef and veal 32 ACP preferences ­ Scope • 99% of industrial products of ACP countries without quantitative limits • However for 39 LDCs “Everything but Arms” initiative replaces the ACP preferences • Major aid component through the EDF • ‘Essential elements’ of cooperation – Any violations of human rights could lead to a partial or total suspension of aid by EU – Environmental considerations allows the tapping of the EDF budget for the preservation of rainforests in ACP countries 33 ACP Preferences ­ Trading protocols • Banana protocol: gives duty­free entry for specific quotas of bananas into the EU market (main beneficiaries of the quotas: several small island Caribbean states) • Sugar protocol: – EU annually buys a fixed quantity of sugar from ACP producers at its internal sugar price. Among the major beneficiaries of this arrangement are Mauritius, Fiji, Guyana and Barbados – Current reforms: 2­step 39% price cut and compensation to farmers for 60% of the price cut,… • Beef and veal protocol: EC refunds 90% of tax normally paid on beef imports from several ACP countries (especially beneficial to Southern African exporters) 34 ACP Preferences ­ Progress • Negotiations of Economic Partnership Agreements (EPAs) started in 2002 • The EPAs should be compatible with GATT Art. 24, and are meant to foster gradual integration of the ACP countries into the global economy • Thus, current one­way trade preferences by EU will be replaced by reciprocal preferences (as in the case of the Mediterranean partners) 35 Generalized System of Preferences ­ 1 • Created in 1968 • Developed countries can grant autonomous tariff preferences to developing countries • Such preferences would violate the MFN principle • “Enabling Clause” was adopted in 1971 36 Enabling Clause • Trade preferences have to be: – Non­discriminatory: No discrimination across developing countries is permitted except in favor of the LDCs – Non­reciprocal: Preferences must also be one­way, no requirement for beneficiary countries to grant reciprocal preferences – Autonomous: Preferences cannot be a part of a contractual agreement with the recipient countries. (GSP preferences are distinct from the ACP preferences, which are contractual) 37 EU and GSP EU was the first to implement a GSP scheme in 1971. Characterized by quotas and ceilings for individual products and countries • Since 1995, EU has replaced the quota’s with tariff preferences that vary according to the sensitivity of products. • Currently, EU maintains five different GSP arrangements: • • – – – – – general arrangements; special incentives arrangements for protection of labor rights; special incentives arrangements for protection of the environment; special arrangements for LDCs; special arrangements to combat drug production and trafficking. 38 Special Arrangements for LDCs: EBA Initiative • Currently, there are 50 countries classified by the UN as the Least Developed Countries • “Everything but Arms” (EBA): – all (incl. Agriculture) imports from LDCs enter the EU duty free, except arms and ammunition; – 3 exceptions: bananas (liberalized in 2006), rice (’09) and sugar (’09) – In the meantime: (gradually increasing) tariff quotas for rice and sugar 39 3. Evaluation of the EU Web of Preferences • EU integration has 3 broad layers: – Core EU: with its common external tariff and the single market initiative – FTA involving reciprocal trade preferences – One­way trade preferences applying to developing countries 40 3.1 EU – Free Trade Agreements • Static versus dynamic arguments: Trade diversion remains a serious concern PTAs can lead to increased protection against outside countries and, thus turn into stumbling blocks of multilateral liberalization – These expectations have led to a slowdown of unilateral, non­discriminatory liberalization – The spaghetti bowl of tariffs – – 41 3.2 EU ­ One­way Preferences ­ 1 • Generated hardly no significant successes • ‘Green paper’ published in 1997 (to prepare for Cotonou): – the share of ACP countries in the EU market had declined from 6.7% in 1976 to 3% in 1998 – Merely 10 products accounted for 60% of the total ACP exports to EU – Per­capita GDP in SSA grew by only 0.4% p.a. compared with 2.3% for all developing countries in the period 1962­ 92 – Only handful nations ­ Ivory Coast, Mauritius, Zimbabwe and Jamaica ­ have benefited perceptibly from the preferences 42 3.2 EU ­ One­way Preferences ­ 2 • Impact of the special and differential treatment to developing countries under GATT (Whalley, 1990): “The paper suggests that available empirical studies, limited as they are, seem to point to the conclusion that special and differential treatment has had only a marginal effect on country economic performance, especially through GSP. And in the more rapidly growing economies, such as Korea, Taiwan, Turkey and others, there is little evidence that special and differential treatment has played much of a role in their strong performance.” 43 Reasons for limited effect of preferences ­ 1 • Adverse impact on the beneficiary­country liberalization: – Incentive for using internal liberalization as an instrument of encouraging the partner to open its market disappears – Empirical evidence: countries dropped from the US GSP program open their markets substantially • Rules of Origin – Element of discrimination between small/poor developing countries and their richer/larger counterparts, since poor countries can usually only do simple assembly operations – Rules are changed when developing countries manage to meet the rules 44 Reasons for limited effect of preferences ­ 2 • Adverse impact on the developed country liberalization: – Defense against multilateral liberalization: by offering special side deals to specific groups of countries through the preferences, they have effectively succeeded in maintaining e.g. CAP • Product selectivity, discrimination across beneficiary countries and side conditions vs. GSP (non­ discriminatory, non­reciprocal, and autonomous): – But Enabling Clause has a “permissive” rather than “mandatory” nature: violation of the conditions by developed countries without risk of a challenge in the WTO Dispute Settlement Body 45 Reasons for limited effect of preferences ­ 3 • Non­discrimination: – Scope of GSP has been limited in precisely those products in which developing countries have a comparative advantage (textiles and clothing, and agricultural exports) – FTAs & EU­ACP preferences • Side conditions: – Special agendas relating to labor, environment and drug production and trafficking – Consequence: preferences became reciprocal and contractual – Introduce a element of uncertainty for exporters: the benefit may be withdrawn any time on the pretext that a specific standard is not being fulfilled 46 Conclusion • Multi­layered integration schemes: – Developing countries suffer discrimination despite the special schemes in their favour because special schemes offered to others are sweeter – Trade diversion at the expense of other developing countries – One­way preferences (e.g. GSP) failed to fulfil the objectives they intended 47 ...
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