Regional Trade Agreements. Chan KIM Gwenafaye MCCORMICK Rurika SUZUKI Suiran MURATA Chun H CHAN

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1 Regional Trade Agreements Chan KIM Gwenafaye MCCORMICK Rurika SUZUKI Suiran MURATA Chun H CHAN

2 Forms of Regional Trade Cooperation Chan Kim 1M

3 General concept of regional economic integration An arrangement between three or more geographically contiguous states. --> The European Union (EU), East African Cooperation, the Andean Community of Nations In recent years... A large number of preferential trade agreements (PTAs) have been signed --> China - Hong Kong, South Korea and Chile

4 Minilateral relationship Trans-regional groupings Regionalism is minilateral rather than a bilateral relationship --> NAFTA, ASEAN, AFTA Interregional groupings

5 Why regionalism?

6 Reason why governments enter regional economic agreements Political motivations for entering RTAs Economic motivations for regionalism

7 Political motivations for entering RTAs Economic cooperations and confidence building Regionalism as a reward for security partners Regional economic cooperations and the new security agenda Regionalism as a bargaining tool Regionalism as a mechanism for locking-in reforms Regionalism to satisfy domestic political constituencies Ease of negotiating and implementing agreements

8 Economic motivations for regionalism Economic reasons for choosing regionalism over multilateralism Regionalism enables continued protection of sectors that would not survive in global competition Regionalism provides opportunities for deeper integration Economic reasons for preferring regionalism to unilateralism or the status quo Larger markets and increased foreign investment

9 The political economy of regionalism

10 Private sector interests Regional market > Domestic market Regional agreement > multilateral liberalization

11 History of Regionalism Gwenafaye McCormick

12 Background Two modern waves First Wave - early 1960s Second Wave - mid 1990s

13 First Wave of Regionalism Encouraged by creation of the European Economic Community Mostly linked LDCs reasons and goals Why did it kind of fail? Results?

14 So why did regionalism survive? Two main reasons: 1. End of the Cold War 2. Increased Global Interdependence

15 Second Wave of Regionalism More about LDC-industrialized nation partnerships subsequent desires? Failure of global trade organizations (like the WTO) size issue RTAs as external pressure

16 Regionalism s Effect Wave model and what it tells us Contagion You do, I do. Bandwagoning nobody wants to be at a disadvantage

17 Preferential Agreement Rurika Suzuki 1M

18 What is a Preferential Agreement? Trade agreements between countries where tariffs are reduced for specific products to the countries that signed the contract

19 The United States Discriminatory multilateral approach of trade Washington utilized to fulfill its political objectives Reconcile with former enemies Strengthen the economies of participating countries New negotiations to reduce tariffs and discrimination against US exports in European markets.

20 The United States: Change in Attitude 1980's Announced its willingness to enter regional trade agreements 1990's early 1990's - pursued regionalism Caribbean Basin Initiative Free trade agreement with Canada stimulate development of preferential trade agreement in East Asia

21 The European Union

22 EU's Relationship with Developing Economies the Lome Convention was a non-reciprocal arrangement Duty free access to European Market Allowed sales in Europe to become higher Discriminatory regimes against non-acp countries Was EU following the rules made by WTO? Trade War

23 Was EU following the rules made by WTO? WTO concluded that the EU failed to follow WTO articles EU was forced to abandon previous approaches of trade and make new arrangements

24 Neo-functionalism vs Intergovernmentalism Neo-functionalism "spillover" stimulate cooperation Intergovernmentalism the actions of national states unintended consequences European Court of Justice

25 The economic consequences of RTA 1M Suiran Murata

26 Regional agreements and members trade

27 Other factors that influenced trade Size of the two economies The levels of per capita income The geographical distance between the two countries Whether or not they share a common boundary Whether or not their populations speak the same language

28 Welfare Effects of RTAs?

29 The ratio of intra-regional trade to GDP increased in all regional groupings, so too did the ratio of trade with extra-regional partners to GDP. (World bank in 2000)

30 Dynamic effects of RTA Increase in Foreign Direct Investments (FDI) Expansion of domestic market Being a member of RTA attracts FDI Generate increased competition for domestic companies Forcing them to become more efficient

31 1. Evidence suggests that RTAs have led to more trade among members than would otherwise be the case 2. They have encouraged increased FDIs in member states 3. According to economic simulations, RTAs have had little aggregate effect on members economic welfare 4. Little evidence exists that RTAs have produced significant trade diversion

32 Stepping stone or Stumbling block?

33 Agreements suggesting RTAs facilitate global negotiations Regional agreements improve the financial position of export-oriented interests

34 Agreements suggesting RTAs are stumbling stones to the global negotiations Spaghetti bowl effect occurs

35 Facilitate Trade liberalization? Although lively debate over whether the RTAs will facilitate or obstruct global trade liberalization has been taking its place for several years, its evidence and effects remains inconclusive.

36 Summary and Elaboration of Key Points 1M Chan H CHAN

37 Future minilateral agreement?

38 Important concept: trade diversion - Loss of tariff revenue - E.g. T-shirts import from Indonesia to the US

39 Motivation for regional agreements Political: - Confidence building: ASEAN (1967) to stabilize the region - New Security agenda: illegal immigration etc - Bargaining tool for LDC: CARICOM - Ensure reciprocity Economic: - the domestic industry -> economies of scale - Foreign companies to establish local factories. FDI.

40 Overall economic consequence - The verdict on the economic effects of regional trade arrangements is mixed and inconclusive.

41 Discussion Questions Do you think the wave model is in effect? Are we still riding the second wave, are we at the tail end, or are we moving into a period between waves? Regional agreement or multilateral liberalization? (if you are running a company or a firm) Do you see the RTAs as stepping stones or stumbling blocks?