Natural Trading Blocs, Deep Integration and the European Neighbourhood Policy

Transcription

1 Natural Trading Blocs, Deep Integration and the European Neighbourhood Policy Jim Rollo University of Sussex Brussels Economic Forum 22 April

2 Acknowledgements this presentation draws on work (both individual and collective) by members of a team of economists at Sussex University working on the analytics of regional trading arrangements. This is particularly focused on how to identify their potential costs and benefits as a practical guide to developing countries negotiators (funded by DFID). Those colleagues most closely involved are David Evans, Michael Gasiorek, Peter Holmes, Leo Iacovone, Karen Jackson and led by Sherman Robinson. it also draws on work on the ENP led by Alan Mayhew and funded under the Jean Monnet programme 2

3 Thinking About Trade and Regional Trading Arrangements since Viner economists have been suspicious of preferential liberalisation - tendency to believe that trade diversion dominates trade creation (think of the CAP) and latterly negative effects of Rules of Origin. Jagdish Bhagwati, the WTO & the World Bank the current keepers of that flame of scepticism. But the number of PTA growing exponentially and there is evidence that market-led regional integration is in advance of policy (see GEP 2005) why this explosion in the 1990s in particular and if revealed preference is for PTA are economists (as behaviouralists) right to dismiss this rush to preferential trade simply as error 3

4 The number of PTAs exploded in the 1990s Agreements not notified to the WTO Agreements notified to the WTO Cumulative number of agreements (EU-15 counted as single country Cumulative number of agreements (EU- 25 counted as single country Source: Chapter 2 World Bank Global Economic Prospects from WTO data and WTO staff 4

5 World Bank Study Global Economic Prospects: 2005 Historical analysis of trade shares and trends in formation of trade blocs Methodology of finding trade blocs Definition of a bloc: Countries trade more within the bloc than with outside countries Bloc membership: Country increases withinbloc average trade share 5

6 Trade Blocs: 1960s (source: GEP 2005 Ch 2) 1960s World Countries and Regions Europe + (70) US + (41) Asia-UK (56) Asia-US (6) 6

7 Trade Blocs: 1970s (source: GEP 2005 Ch 2) 1970s World Countries and Regions Europe + (21) N America + (30) E&SE Asia (23) S America (11) Rest (90) 7

8 Trade Blocs: 1980s (source: GEP 2005 Ch 2) 1980s World Countries and Regions Europe + (25) N America + (30) E&SE Asia (44) S America (11) Rest (65) 8

9 Trade Blocs: 1990s (source: GEP 2005 Ch 2) 1990s World Countries and Regions Europe + (42) N America + (31) E&SE Asia (43) MERCOSUR (6) Rest (61) Andean (4) S Africa + (4) 9

10 what underpins these trends? Increased trade as share of GDP increased FDI chopping up the supply chain Import content of exports increased Increased trade in new products all challenge standard trade theory and analysis of gains from trade 10

11 Shifting from Shallow to Deep Integration Shallow Integration - removing border barriers (negative integration) and largely the focus of GATT/WTO and PTA until the 1990s the basic critique of PTA heavily focused on the costs (trade diversion and ROO) and benefits (trade creation) of shallow integration measurement preoccupied with efficiency and welfare triangles actual gains from trade seem to be much higher (Robinson & Thierfelder) 11

12 Deep Integration and Positive Integration Deep integration includes Factor mobility Financial and FDI flows Labour Regulatory harmonization Standards and rules Domestic tax and subsidy policies Institutions to manage and facilitate integration Legal and institutional harmonization Commercial law Dispute resolution Harmonize macro policies Monetary union Positive integration: fostering deep integration by harmonisation Often involves exploiting externalities and correcting for market failures. 12

13 Smithian gains and market integration Integration in global value-chains Fragmentation of production Higher profitability from niche products Quality and health standards harmonisation lead to increased productivity Cross-border market failures: externalities Inter-firm and intra-firm coordination Economies of scale and technology transfers 13

14 Externalities and Productivity Technology transfer Through trade and FDI Dynamic comparative advantage & learning by doing Productivity and production dispersion Ricardian gains and factor proportions Smithian gains from local economies of scale and finer division of labor 14

15 Ricardian vs Smithian gains Inter-industry trade creation Factor endowments determinants Constant returns Exogenous technology Homogenous goods No role for standards Intra-industry trade creation Horizontal quality differentiation Vertical specialization Productivity, specialization, technology determinants Increasing returns Endogenous technology Heterogeneous goods Standards and harmonisation NOT ship and forget 15

16 Externalities and Positive Integration Intra-firm arrangements (e.g. FDI) Inter-firm (e.g., private standards: ISO) national adoption of export related norms regional/bilateral agreements multilateral arrangements 16

17 Potential Role for RTAs Support private sector initiatives Institutional capacity building related to specific export flows Standards Investment and pecuniary externalities Infrastructure and technology Intra-industry trade via vertical value-chain specialization 17

18 Potential Role for RTAs Public sector Nature of externalities and market failure Externalities: to industry and/or country Infrastructure: physical and institutional Public goods Legal and institutional harmonisation Rules of the game : more than a level playing field 18

19 New regulatory frameworks May raise productivity for some/all producers May raise costs for some/all producers Create/enhance market access Wider and deeper markets Have differential effects on groups of consumers/producers 19

20 Evaluating RTAs Type of industry/trade Type of barriers faced Externalities RTAs vs other mechanisms Poverty and distributional impacts Ricardian Trade Smithian niche Smithian valuechain 20

21 Example: Egyptian Potatoes Major export (25% tot. agric exports) 90s: EU reg s hit Egypt ( brown rot ban) Barrier created new opportunity for Egypt: Adopting process standards key to exporting EU-Egypt Agreement: institutional cooperation Crucial role of governments Positive externalities Institutional/country level (in EU and Egypt) Product standardisation Expanded markets Producer level: productivity increases Distributional impacts: large vs small farms 21

22 Raising quality via NTBs? Are all standards (regs, T&C etc) non tariff barriers to be reduced? When EU calls for harmonisation, what is balance between higher cost and higher value (quality & compatibility)? Entry to export markets vs exit from home? How can we ensure positive effects are widely spread among producers, eg learning When can we leave it to private sector, MPEG, Eurepgap? When should we fear raising rivals costs 22

23 Trade and Productivity Link from RTA deep integration externalities increased productivity Classify RTAs by potential for generating externalities through different forms of deep integration 23

24 Diagnostic Tests Are there trade-related externalities and market failures? Potential for positive integration Does the RTA address them? Is there scope for productivity gains? Will gains cover the costs (to producers and local consumers)? What groups will profit most/least? 24

25 Conclusions RTAs and deep integration may lead to externalities and productivity gains Different types of RTAs have different implications for these links Different types of externalities Such gains, if present, are likely to be much larger than efficiency-gain triangles in standard trade analysis 25

26 Conclusion Need to use tools of new trade theory and new regionalism to examine these links Detailed institutional analysis Nature of externalities Links to productivity Sectoral/firm/process case studies 26

27 Conclusions New typologies of RTAs based on their potential role in internalizing externalities and achieving productivity growth Indicators of good versus bad RTAs Externalities and TFP links Gainers and losers: distributional implications 27

28 The countries of the ENP All low income, Israel apart. Growth rates hugely unstable since Only Russia and Algeria above $5000 pc at ppp so stable growth the major challenge and higher productivity growth rates the key to dealing with high real exchange rate in resource rich countries education level much higher in E. Europe (notably among women) than in the Med so potential productivity higher there mitigated by much worse demographics Med countries have 25-35% of population under 15; E. Europe around 15% about the same as the % of population above 65. Services and manufactures relatively underdeveloped in all but a few countries the curse of resources and a problem for employment creation particularly for unskilled Egypt apart, trade a significant share of GDP (in some cases above 100% suggesting transit trades or perhaps understated GDP) The EU is a major market and supplier for the Maghreb but trade integration with eastern Europe & Mashraq much less intensive Largely an exchange of manufactures for processed food, agricultural commodities and energy 28

29 GDP per head $ ppp Tunisia Ukraine Syrian Arab Republic Russian Federation Morocco Israel Jordan Lebanon Libya Moldova Georgia Belarus Egypt, Arab Rep. Azerbaijan Algeria

30 Annual growth rates % pa Algeria Azerbaijan Belarus Egypt, Arab Rep. Georgia Israel Jordan Lebanon Moldova Morocco Russian Federation Syrian Arab Republic Tunisia Ukraine 30

31 Literacy rate, adult male (% of males ages 15 and above) Algeria Belarus Egypt, Arab Rep. Israel Libya Moldova Morocco Russian Federation Syrian Arab Republic Tunisia Ukraine 31

32 Tunisia Ukraine Literacy rate, adult female (% of females ages 15 and above) Russian Federation Syrian Arab Republic Morocco Georgia Israel Jordan Lebanon Libya Moldova Egypt, Arab Rep Belarus Azerbaijan Algeria

33 Tunisia Ukraine Syrian Arab Republic Georgia Israel Jordan Lebanon Libya Moldova Morocco Russian Federation Population ages 0-14 (% of total) Population ages 65 and above (% of total) Egypt, Arab Rep Belarus Azerbaijan Algeria

34 What Does this Suggest for the Economic Aspects of ENP If productivity growth is the key to growth then ENP should encourage the search for Ricardian and Smithian gains from trade by measures that Reduce EU border barriers to exports from the two regions and agriculture in particular Aid access to the supply chain and help the development of niche markets with careful and initially targeted harmonisation of regulatory norms in individual countries where these are barriers to product differentiation accompanied by aid for testing and certification eg processed foods in Med Actively help in encouraging the splitting of the supply chain among ENP countries by allowing cumulation of ROOs, intra regional free trade in Med and in E.Europe and regulatory convergence Suggests differentiated approach among countries along with some regional approaches. Labour market differences suggest differentiate between Med and E Europe in Med use aid in highly targeted way on market development, regulatory integration and providing human capital. Integration into single market a long way away but a targeted beginning should be made In East Europe the human capital constraint is less and the central Europe route to integration into the single market is open to them but the incentives are not strong resource bias in exports gives no big incentive to regulatory integration. The ENP may miss a trick by keeping the prospect of EU membership off the table 34