Regional Trade Agreements
Week 9
Lecture Plan
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Introduction
Why Regionalism?
Political Economy of Regionalism
Economic Consequences of Regionalism
Regionalism and the WTO
Introduction (1)
• By end of March 2013, only 4 of the WTO's
159 members were not party to one or more
regional trade agreements
• All non-global trade agreements are
scrutinized by the WTO's Committee on
Regional Trade Agreements (RTAs)
– RTAs are the most important exception to the
principle that countries should not discriminate in
their treatment of other members
Introduction (2)
• "Regional" or "free" trade agreements are probably
better termed "preferential" trade agreements (PTAs)
because many are not “regional” in the conventional
sense of the word.
• In recent years, a large number of PTAs have involved
only 2 parties (bilateral agreements)
• PTAs can occur between neighbours or between
countries that are far removed from one another
– There is no such thing as a "natural" region
– Regions are social constructions
Introduction (3)
• Regionalism is a “formal process of
intergovernmental collaboration between two
or more states”
– Regionalization on the other hand refers to the
growth of economic interdependence within a
given geographical area
Re-emergence of regionalism (new regionalism)
• Old regionalism linked to cold war context
– Bi-polar world order, introvert
– State actors
– EU as a model
• New regionalism linked to globalization
– Multipolar world order, extrovert
– Triple helix (governments, private sector,
academia & civil society)
– Multiple actors & stakeholders
Regionalism takes many shapes and forms
• Several regional ‘scales: continent,
macro-region, sub-regions, microregions
 EU - EU BSR - Öresund region
 OAS – CARECOM - Carribean LME
 AU – COMESA – EAC – LVBC
• Different types of regionalism
 Security; economic; social;
environmental
 Or a combination of the above
STAP Research Paper
Why Regionalism? Political Reasons-1
– To improve inter-state relations through
enhancing confidence
– To enhance security within a region against both
internal and external threats, and to reward
partners that have cooperated on security matters
– To address “non-traditional” security threats (e.g.
environmental damage, illegal migration)
– To enhance bargaining power in the global
economy through group solidarity
Why Regionalism? Political Reasons-2
– To lock in domestic economic reforms and attract
foreign investors
– To satisfy domestic constituencies’ demands for
reciprocity and facilitate governments’ decision to
undertake economic liberalization
– Regional agreements may be easier to negotiate
and implement than global ones
Why Regionalism? Economic Reasons
– RTAs are sometimes perceived to be preferable to
non-discriminatory
multilateral
agreements
because:
• RTAs enable continued protection of sectors that would
otherwise not survive global competition
• RTAs provide opportunities for “deeper integration”
that are not possible at the global level
– RTAs are preferable to unilateralism or status quo
because:
• RTAs may offer larger markets (reciprocity provisions)
and increased foreign investment
The Rush to Regionalism (1)
• “First” wave of regionalism in early-1960s
– Emerged in response to the establishment of the
European Economic Community in 1957
– Many linked less developed countries together
(South-South oriented)
• To promote local “import-substitution industrialization”
• To enhance the bargaining power of participants
• Many failed because
– Participating countries were not significant economic partners
for one another
– Regionalism exacerbated inequalities among partner states
The Rush to Regionalism (2)
• “Second” wave of regionalism since mid1990s emerged as a result of:
– The end of the Cold War, which opened up new possibilities for
economic partnerships
– Growing integration of markets placed increasing pressure on
governments to pursue market-friendly policies
– Frustration with the difficulties of negotiating global agreements
• Contributed to the US changing its position on RTAs
– “Contagion” effects
– Need to ensure compliance with WTO rules
Political Economy of Regionalism (1)
• Why would firms support regionalism?
– Economies of scale argument
– Strategic trade theory argument
– Need to conduct various stages of production in different
geographical locations (often within the same geographical
region)
– Sales and production are often concentrated within a
geographical region
Strategic Trade Policy
The use of trade policies, including tariffs,
subsidies, and even export subsidies to
alter the outcome of international
competition in a country's favor, usually by
allowing its firms to capture a larger share
of industry profits.
Political Economy of Regionalism (2)
• Regional institutions have to be given more
competence and power if members broaden
the scope of policy issues for cooperation
– Free Trade Areas (FTAs) are attractive to many
governments because they do not require the
establishment of strong regional institutions
(governments’ obligations are limited in
comparision to those under a common market)
Alternative Explantions to Regionalism
Alternative Explanations of (European)
Regionalism (1)
• According to neo-functionalist theorists,
cooperation in one area of economic activity
would produce pressures for cooperation in
other areas (E.Haas,1953)
– This "spillover" effect, some of it unintended, will
lead to a deepening of cooperation
– Regional institutions can provide the integration
process with a dynamic of its own, leading to
deeper integration
Alternative Explanations of (European)
Regionalism (2)
• "Liberal intergovernmental" perspective argues that
deeper integration is the outcome of key decisions
taken by member governments, emphasis on
domestic (economic) constitutiencies to shape
governmental positions in interstate barganing.
– Member governments delegate authority to regional
institutions in a "calculated, rational, and circumscribed"
manner. (A.Moravcsik)
• Sandholtz (1993): membership of a region can
influence how governments define their interests
– Thus, partly reconciling the neo-functionalist and liberal
intergovernmental perspectives
Economic Consequences (1)
• Estimating the trade effect of PTAs is not a
straightforward exercise due to the impact of
many different variables
– Factors other than provisions of the PTAs themselves
that can affect the volume of trade between two
countries:
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Size of the two economies
Levels of per capita income
Geographical distance between the two countries
Do they share a common boundary?
Do their populations speak the same language?
Economic Consequences (2)
• Several studies confirm that PTAs have
– a positive impact on trade between members
– caused changes in patterns of international trade
• It is difficult to distinguish between the effects of "trade
creation" and "trade diversion”
– World Bank (2000): "it is not possible to conclude that
trade diversion has been a major problem”
Economic Consequences (3)
• It is also difficult to estimate the effects of economies of
scale & competition dynamics
• Generally, the impact of PTAs appears to be relatively
minor given the other factors, such as floating exchange
rates, that come into play
Regionalism and the WTO (1)
• Will PTAs facilitate or obstruct global trade
liberalization?
• PTAs seen to facilitate global negotiations
because
– Regional groupings reduce the number of actors in
global negotiations
– Deeper regionalism within regional groupings can
serve as models at the global level
– Regionalism paves way for full global liberalization
– Regionalism can lead to a "domino" effect and
broaden the scope of liberalization
Regionalism and the WTO (2)
• However,
– Regional groupings may have little flexibility in
bargaining with others
– There is as yet no evidence that deeper regional
cooperation has translated to the global level
– Regional groups may not pave the way for further
liberalization if firms are comfortable operating
within the region
– Firms may have little incentive to lobby
governments if PTAs are shallow
Regionalism and the WTO (3)
• PTAs hinder global negotiations because
– PTAs magnify power disparities that lead to
resentment in smaller, less developed economies
against trade liberalization
– PTAs divert scarce resources away from global
negotiations
– "Spaghetti bowl" effect increases the cost of
international trade
– PTAs might lower the incentive for firms to push
for further liberalization
The spaghetti bowl effect
A phenomenon of international economic policy that
refers to the complication which arises from the
application of domestic rules of origin in the signing free
trade agreements across nations. The effect leads to
discriminatory trade policy because the same commodity
is subjected to different tariffs and tariff reduction
trajectories for the purpose of domestic preferences.
With the increase in FTA's throughout the international
economy, the phenomena has led to paradoxical, and
often contradictory outcomes amongst bilateral and
multilateral trade partners. When applied specifically to
trade among Asian nations, the effect is sometimes called
the noodle bowl effect.
Regionalism and the WTO (4)
• PTAs hinder global
negotiations
because;
– PTAs
enable
governments
to
exempt
sensitive
sectors
from
liberalization,
thereby
strengthening
protectionist forces
The contradictory
arguments on the
relationship
between PTAs and
global
trade
liberalization rest
on
hypotheses
that are not easy
to test.