The Nexus between Trade and Cooperation Free Trade Negotiations between US and the Andean Nations October 7, 2004 Robert Devlin, Deputy Manager Antoni Estevadeordal, Principal Economist Integration and Regional Programs Department Inter-American Development Bank 1
Outline The Rise of Regional Trade Agreements (RTAs) Regional Trade Agreements as Regional Cooperation (Regional Public Goods) The Linkages between Regional Trade Agreements and other Regional Public Goods Evolving Nature of RTAs Some Political Economy Considerations for Regional Cooperation Conclusions
The Rise of Regional Trade Agreements 3
The Rise of RTAs: Regionalism and Multilateralism 4
PRESENT Dominican Republic Bhutan, Maldives, Nepal, Pakistan Bangladesh Laos Malaysia Myanmar Cambodia Viet Nam Thailand Indonesia Brunei Darussalam Philippines Russia USA Costa Rica Nicaragua El Salvador Guatemala Honduras Panama Paraguay Brazil Argentina India Sri Lanka New Zealand Singapore Chile Uruguay Mexico Japan People s Rep. of China Peru Hong Kong, China Chinese Taipei Australia Korea Canada Colombia Venezuela Bolivia Ecuador Fiji, Solomon Islands, Vanuatu Papua New Guinea Bahamas Haiti Fed. States of Micronesia, Marshall Islands, Kiribati, Palau, W. Samoa,Tonga, Vanuatu, E. Timor, Cook Islands, Nauru, Niue, Tuvalu Dominica, Suriname, Jamaica, St. Lucia, Belize, St. Kitts & Nevis, Grenada, Barbados, Guyana, St. Vincent & the Grenadines, Antigua & Barbuda, Trinidad & Tobago ASIA AMERICAS 5
UNDER NEGOTIATION Dominican Republic Bhutan, Maldives, Nepal, Pakistan Bangladesh Laos Malaysia Myanmar Cambodia Viet Nam Thailand Indonesia Brunei Darussalam Philippines Russia USA Costa Rica Nicaragua El Salvador Guatemala Honduras Panama Paraguay Brazil Argentina India Sri Lanka New Zealand Singapore Chile Uruguay Mexico Japan People s Rep. of China Peru Hong Kong, China Chinese Taipei Australia Korea Canada Colombia Venezuela Bolivia Ecuador Fiji, Solomon Islands, Vanuatu Papua New Guinea Bahamas Haiti Fed. States of Micronesia, Marshall Islands, Kiribati, Palau, W. Samoa,Tonga, Vanuatu, E. Timor, Cook Islands, Nauru, Niue, Tuvalu Dominica, Suriname, Jamaica, St. Lucia, Belize, St. Kitts & Nevis, Grenada, Barbados, Guyana, St. Vincent & the Grenadines, Antigua & Barbuda, Trinidad & Tobago ASIA AMERICAS 6
FUTURE PROSPECTS Dominican Republic Bhutan, Maldives, Nepal, Pakistan Bangladesh Laos Malaysia Myanmar Cambodia Viet Nam Thailand Indonesia Brunei Darussalam Philippines Russia USA Costa Rica Nicaragua El Salvador Guatemala Honduras Panama Paraguay Brazil Argentina India Sri Lanka New Zealand Singapore Chile Uruguay Mexico Japan People s Rep. of China Peru Hong Kong, China Chinese Taipei Australia Korea Canada Colombia Venezuela Bolivia Ecuador Fiji, Solomon Islands, Vanuatu Papua New Guinea Bahamas Haiti Fed. States of Micronesia, Marshall Islands, Kiribati, Palau, W. Samoa,Tonga, Vanuatu, E. Timor, Cook Islands, Nauru, Niue, Tuvalu Dominica, Suriname, Jamaica, St. Lucia, Belize, St. Kitts & Nevis, Grenada, Barbados, Guyana, St. Vincent & the Grenadines, Antigua & Barbuda, Trinidad & Tobago ASIA AMERICAS 7
The Way Regionalism has worked in the Americas: The 4 Wheels of Latin America and Caribbean Trade Liberalization Policy UNILATERAL MULTILATERAL Regionalism SUBREGIONAL INTEGRATION Free Trade Areas (FTAs) 8
Since 1990: A Multipolar Trade Policy in 4 Wheel Drive (4 x 4) UNILATERAL (40+% 12%) MULTILATERAL (URUGUAY-DOHA ROUND) SUBREGIONAL MERCOSUR CACM Andean Community CARICOM Regionalism South-South LAC CH-LAC (5) MX-LAC (7) Mercosur-CAN CACM-DR MX-Mercosur (neg?) Inter-Regional CH-South Korea Mercosur-South Africa (neg) Chile-China (neg) FTAs North-South Agreed In NAFTA Negotiation CH-Canada US-CAN CR-Canada US-Panama Mx-Japan EU-Mercosur Mx-EU EU-Caricom Ch-EU APEC US-DR Canada-CACM US-CAFTA FTAA MX-EFTA CH-EFTA 99
Regional Trade Agreements (RTAs): Why Important for Development? Market Access/Secure Trade and Investment Rules Anchor Structural Reforms Growth and Productive Transformation (X, M, FDI, etc.) Institutional Modernization Bargaining Power Cooperation 10
Regional Trade Agreements as Regional Cooperation (Regional Public Goods) 11
Cooperation is a Public Good Properties of Public Goods : Nonrivalry of Benefits: Their consumption by an economic agent does not detract from their consumption by others Nonexclusion of nonmembers: Benefits are received by members and nonmembers alike (free-rider problem) Impure RPGs Pure RPGs
Cooperation is a Public Good Sum Ind.Contr. Overall level of RPG equals the sum of country contributions Largest Contr. The largest effort by one country determines the level of RPG
Cooperation is a Public Good Sum Ind.Contr. Limiting Air Pollution Largest Contr. Impure RPGs Pure RPGs
Cooperation is a Public Good Sum Ind.Contr. Limiting Air Pollution RTAs / FTAs Largest Contr. Impure RPGs Pure RPGs
Cooperation is a Public Good Sum Ind.Contr. Limiting Air Pollution RTAs / FTAs Largest Contr. Agricultural Research Impure RPGs Pure RPGs
Some Characteristics of Cooperation Evolution of Concept National (NPG) Global (GPG) Regional (RPG) Regional Public Good Geographical contiguous area 2 + countries (e.g. LAC subregional groups) Territorial subsystem bound by forces of economics, politics, culture (e.g. inter-regional S-S and N-S initiatives) 17
Some Characteristics of Cooperation Other Characteristics of Cooperation Voluntary adjustment of national policies/institutions Some subordination of interests to group dynamics Costs typically up front Benefits typically not immediate and can be uncertain Asymmetric information Uncertain distribution of benefits Commitment issues Need negotiations Identify costs and benefits Mutual interests Distribution of benefits Degree of commitment Modalities 18
Some Characteristics of Cooperation Need focal points to bring players together Must be obvious to players Past experience, culture, history influence Need institutional arrangements To support negotiation and agreements Can be formal (hard) and informal (soft) (inter-governmental) Resources Joint financing One-way transfers Third parties 19
Some Characteristics of Cooperation Size and relative power of individual participants can determine nature of cooperation N-S power asymmetric Avoid cooperation degenerating to coercion Enforcement mechanism Sanctions Political will Self enforcement 20
The Linkages between Regional Trade Agreements and other Regional Public Goods 21
RTAs (T) and Regional Cooperation (C) 10000 1000 Number of Agreements (Log) 100 Regional Trade Economic Investment Energy Infrastructure Intellectual Property Labor & Social Environmental ACP Education 10 1 1962 1967 1972 1977 1982 1987 1992 1997 2002 Year of Entry into Force 22
From T to C? Spaghetti Bowl in T may serve as a wiring of economic-commercial incentives for Cooperation C. Two questions: Different models of wiring or linkages among RTAs? Different models or linkages between T and C? 23
RTAs wiring The classical debate: RTAs and WTO Regional Integration in Europe: RTAs and European Enlargement Regional Integration in the Americas: RTAs and the FTAA Regional Integration in Asia-Pacific: RTAs and APEC 24
WTO and RTAs RTAs WTO WTO as the Center of Gravity of the World trading System: New Regional Rules? 25
Regional Integration in Europe FTAs in European Expansion EU-25 EU-15 Pan-European FTAs EU-15 center of gravity of an Pan-European System of FTAs 26
Regional Integration in the Americas RTAs and The FTAA [1] RTAs FTAs [3] FTAA [2] Is the FTAA still the Center of Gravity in The Americas? 27
Regional Integration in Asia-Pacific RTAs and APEC [3] APEC [1] RTAs FTAs [2] Is APEC still the Center of Gravity in Asia-Pacific? 28
RTAs (T) and Cooperation (C) models (1) T (2) C (3) T & C or T // C (4)T + C or T C ============================ T C (or T + C) C T (or C + T) 29
North-South Examples 30 Trade (T) and Cooperation (C) Models T N. Am. EU AP/Asia T C LAC C T T C
North-South Examples 31 Trade (T) and Cooperation (C) Models T N. Am. EU AP/Asia T C LAC C T APEC T C T & C
North-South Examples 32 Trade (T) and Cooperation (C) Models T FTAA T // C N. Am. EU AP/Asia T C LAC C T APEC T C T & C
North-South Examples 33 Trade (T) and Cooperation (C) Models T FTAA T // C N. Am. EU AP/Asia T C LAC C T APEC EU-LAC T C T & C T + C
T and C Linkages MODEL: T C Regional Initiative Objectives and Degree of Deepening T Relationship between T and C: Instit. Dev. Objectives and Degree of Regional C T EU C Full T Integration High Institutionality Community Way Multilevel Issue RPGs FTAA (Summit) T // C Classical FTA + Low Institutionality GPGs APEC T & C Open Regionalism Principles Medium Institutionality Mix RPGs and GPGs 34
Evolving Nature of RTAs 35
Where could they go from here? NAFTA Today T Tomorrow (?) T&C Migration arrangements Portability social security Environment > NADBANK Monetary union Technical assistance 36
Where could they go from here? 90 US: Overseas Development Assistance to Mexico, 1970-2002 (US$ Millions - Disbursements) 80 70 60 50 NAFTA 40 30 20 10 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Source: OECD-IDS Database (2004). Technical Cooperation Emergency Aid Development Food Aid Other Grants 37
Where could they go from here? NAFTA CAFTA Mercosur CAN CAN-US Today T T T T C T Tomorrow (?) T&C Migration arrangements Portability social security Environment > NADBANK monetary union Technical assistance T&C T C T C 38
Computable General Equilibrium Static Model of Peru Underestimates positive effects (no dynamics (I) and good trade only) Provides only orders of magnitude
CAN-US FTA: Asymmetric Effect (goods only) (%) 30 25 20 15 10 5 Impact of CAN-US FTA on Peruvian Exports to the US Short run Long run 0 Agriculture Crude Oil & Gas Labor-int. MFG Capital-int. MFG Total 40
CAN-US FTA: Asymmetric Effect (%) 50 40 (goods only) Impact of CAN-US FTA on Peruvian Imports from the US Short run Long run 30 20 10 0 Agriculture Crude Oil & Gas Labor-int. MFG Capital-int. MFG Total 41
Reason for Asymmetries U.S. already a very open economy U.S. opening even deeper for Peru via unilateral ATPA preferences Peru has relatively higher tariffs plus Peru less liberalized than U.S. in other trade-related disciplines (services, investment, government procurement, etc.)
Costs yes, but benefits too Lock in unilateral ATPA preferences and expand production coverage FTA provides mutual Voice and dispute settlement mechanism Attraction of U.S. FDI Institutional Modernization U.S.-Peru Cooperation could be important Support sectoral adjustments and poverty reduction Improve competitiveness Manage dislocations
Where could they go from here? NAFTA CAFTA Mercosur CAN CAN-US CAN Today T T T T C T T Tomorrow (?) T&C Migration arrangements Portability social security Environment > NADBANK monetary union Technical assistance T&C T C T C? 44
Some Political Economy Considerations for Cooperation 45
Some Political Economy Considerations for Cooperation Cooperation Needs a Focal Point to Begin Coordination problems Commitment problems Sovereignty Issues 46
Some Political Economy Considerations for Cooperation Trade is a good focal point Attracts attention of well-organized interest group Business Benefits can be assessed ex ante and ex post (not easy for non-trade) Involve very limited loss of sovereignty Does not demand resource transfers Trade has known Institutional Arrangements Practice Precedents WTO Rules Closer Economic ties endogenously create demand for cooperation (+ and externalities demand) 47
Some Political Economy Considerations for Cooperation Experience: Most Cooperation Trade Driven When trade component is not well developed cooperation initiatives can be weak APEC Hemispheric Summit 48
Some Political Economy Considerations for Cooperation In North-South negotiations DCs often have preferred to focus on non-trade cooperation C LDC small market Demand for market access in sensitive areas Non-trade cooperation driven by foreign policy and Aid Agendas LDCs usually demand trade (T) First: Market Access #1 Priority EU-Mexico Hemispheric Summit EU-Mercosur US Bilaterals trade driven 49
Conclusions 50
Conclusion: Promoting Cooperation Trade is effective first step to cooperation T is beachhead for C (T+C or T C) is elegant but a complex starting point due to organization, administration, sovereignty commitment issues, etc. C alone can falter 51
Conclusion: Promoting Cooperation Incremental approach to C is advisable Do not overwhelm with initiatives (e.g. Hemispheric Summit) Prioritize a few select initiatives with high probability of success (clear mutual benefits) Consolidate them before adding new ones Have quantifiable objectives and outcomes Monitoring and evaluation 52
Conclusion: Promoting Cooperation Intergovernmental support mechanisms can work at the beginning or in shallow arrangements The deeper and more comprehensive the cooperation the more the formal institutional demands Political will must be combined with formal dispute settlement mechanisms Mandates for cooperation need programmed budgets and financing Grants from richer parties or third parties effective at initial stages when identification of benefits and commitment issues at stake Regional Financial Institutions can help But Grant Money is unduly scarce and shrinking 53