21st Century Regionalism
Richard Baldwin
Graduate Institute, Geneva RIETI
Tokyo, 2 February 2011
1
Globalisation as 2 unbundlings
• Put 21st century regionalism into broad canvas of economic globalisation.
2
Pre‐Industrial Revolution
Consumption
Production
transportation
&
Consumption
& production
bundled

Very little
trade
3
Globalisation’s First Unbundling

Production
Bay A
Transportation
“glue”
weakened
Production
Bay B
Production
Bay C
Coordination
“glue”
4
Estimated Transport costs, 1870 ‐ 2000
15
1.9
1.8
1.7
Averge global trade cost measure
15
Global trade flow (right scale in logs)
14
14
1.6
13
1.5
13
1980
1.4
12
1.3
1.2
12
11
1910
1970
10
1870
1875
1880
1885
1890
1895
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
1.1
11
Source: David , Meissner, and Novy (2011)
5
20th trade & trade governance
Bay A
Bay B
Bay A
Bay C
Bay B
Bay C
• International commerce = goods crossing borders.
1.Trade disciplines required = fairly simple:
GATT 1947.
2.Trade liberalisation = tariff cutting.
6
Globalisation’s Second Unbundling
ICT revolution  2nd unbundling Steam power  1st unbundling

Bay A
Bay B
Coordination
“glue” weakened by
ICT revolution
Bay C
7
ICT revolution indicators
1985
1995
8
% of world manufactures imports
Outward processing trade, 1967 – 2005.
7
6
5
Total
4
3
2
Asia
1985
Europe
North America
1
Latin America
0
Africa
Source: Amador and Cabral (2008)
Source: Amador and Cabral (2008).
9
Number of Japanese auto and electrical machinery plants in East Asia, 1975 – 2004
900
800
China
700
1995
600
1985
500
400
300
Thailand
200
Malaysia
Indonesia
100
0
1975
Vietnam
1980
1985
1990
1995
2000
2004
• Source: Fujita and Hamaguchi (2006). 10
Widening and deepening of Factory Asia, 1985 and 2000
International input-output matrix
1985 China Indonesia Malaysia Philippines Thailand Singapore Taiwan Korea Japan
Indonesia
8%
Malaysia
16%
Philippines
Thailand
China
2%
14%
Taiwan
3%
Korea
Singapore
3%
7%
Japan
3%
12%
14%
4%
9%
12%
7%
8%
RoW
15%
19%
19%
14%
11%
10% 16%
8%
2000
China Indonesia Malaysia Philippines Thailand Singapore Taiwan Korea Japan
Indonesia
2%
Malaysia
3%
4%
12%
2%
Philippines
Thailand
4%
3%
3%
China
2%
3%
4%
5%
2%
Taiwan
5%
5%
3%
3%
Korea
2%
3%
4%
8%
3%
4%
4%
Singapore
13%
6%
4%
Japan
2%
7%
15%
20%
16%
19%
14%
7%
RoW
4%
16%
20%
20%
17%
38%
15% 11%
4%
Source: Baldwin (2006) “Managing the Noodle Bowl”
11
21st century trade more complex
Bay A
Bay B
Bay C
Bay A
Bay B
Bay C
Bay B
12
Summary
• 21st century trade is more complex.
– 20th century trade = goods made crossing borders.
– 21st century trade = multi‐directional (mostly regional) flows of people, goods, services, capital, and information.
• ICT is to 2nd as steam was to 1st, – Not mostly about trade costs, rather about coordinating production internationally.
13
Governance Gap
• 21st century trade needs deeper disciplines.
• Early recognition & policy response (1986):
– EU’s Single Market Programme.
– US‐Canada FTA.
– Uruguay Round’s new issues. • ICT revolution accelerates N‐S unbundling 
– Need for new disciplines North‐South.
– WTO is otherwise occupied.  Governance gap.
14
21st century regionalism
Filling governance vacuum:
1. Explosion of BITs 1990s.
2. North‐South deep RTAs.
3. Unilateral liberalisation (tariffs & pro‐biz reforms).
15
Explosion of BITs in 1990s
2500
250
1995
150
No. of Treaties Signed
1500
No. of Treaties Signed (Cumulative)
FDI in Billion US$
100
50
0
1985
1000
No of Treaties
2000
200
500
0
16
North‐South Deep RTAs
• US’s NAFTA‐like agreements (after 1994)
• Japan’s EPA‐like agreements (after 2007)
• EU’s Association agreements (after 1994).
17
1985
Unilateral tariff liberalisation
Average tariff rates, developing nations, 1982 - 2003
1992
90
Applied MFN tariffs (%)
BR
80
PE
70
1985 1992
EC
CO
50
AR
40
30
VE
UY
PY
20
Philippine
Thailand
18
Korea
16
Malaysia
14
China
12
Indonesia
10
Singapore
1992
8
6
4
CH
10
Applied MFN tariffs (%)
20
MX
BO
2
1985
0
0
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
60
AR
BO
BR
CH
CO
EC
MX
PE
PY
UY
VE
18
Unilateral Pro‐biz Reforms
• Some “import liberalisation” help you export and/or attract offshored factories.
– Pro‐FDI policies.
– Pro‐customs facilitation policies.
– Pro business‐establishment policies.
– Pro ‘infrastructure services’ liberalisation.
19
Summary: RTAs Not About Tariff Preferences
• 20th century regionalism (tariff preferences) still matters:
– A lot for small RTAs,
– A little for big RTAs.
• FACTS:
20
Possible preference margins are low
Zero MFN tariff (% Total Imports)
EFTA
EFTA
EU15
EU27
ASEAN
CACM
SACU
NAFTA
SADC
EAC
COMESA
CEFTA
MERCOSUR
CARICOM
ECOWAS
Andean Community
UEMOA
GCC
CEMAC
EU
ASEAN
NAFTA
SACU
0
20
40
50%
21
60
80
100
MFN applied tariff (trade
weighted average)
EFTA
EFTA
EU27
GCC
NAFTA
CACM
ASEAN
CEFTA
Andean Community
MERCOSUR
SACU
SADC
CARICOM
UEMOA
ECOWAS
EAC
COMESA
CEMAC
EU
NAFTA
ASEAN
SACU
0
2
4
5%
6
8
10
12
14
10%
Source: Archarya, Crawford & Renard (2010)
16
Detailed Data
• Carpenter & Lendle (2010)
– Detailed tariff‐line import and tariff data,
– covering almost 90% of world imports in 2008. • Results:
– 50% of trade over RTAs, but
– Only 16% eligible for preferences (due to zero MFN).
– Less than 2% imports have preferences over 10%.
• ERGO: RTAs are not only about preferential tariffs.
22
Death of preferences
Preferential margins
MFN=0%
0% (MFN>0%)
0%
20%
0 - 5%
5 - 10%
10 - 20%
> 20%
Total
Total (ex intra-EU)
EUR-intra
EUR-extra
Switzerland
Turkey
Mexico
Canada
US
China
Japan
Korea
Hong Kong
Singapore
Taiwan
India
Australia
Russia
Brazil
Aregentina
Malaysia
Thailand
Indonesia
Source: Carpenter & Lendle (2010)
40%
60%
80%
100%
23
Numbers
0% MFN=0% (MFN>0
unknown
%)
Total 1.2%
47.3%
21.8%
Total (ex intra‐EU)
0.7%
52.3%
30.3%
0 ‐ 5%
18.5%
11.0%
5 ‐ 10% 10 ‐ 20%
7.5%
3.9%
2.4%
1.3%
> 20%
1.4%
0.5%
24
Conceptual frameworks
25
Traditional regionalism v 21st regionalism
• Traditional view: RTAs = tariff preferences
• 21st regionalism: RTAs = disciplines underpin 2nd unbundling
26
Difference without distinction?
• Why we care about regionalism:
– Economic inefficiency from discrimination
– Injustice and power asymmetries
– Threats to support for multilateral liberalisation
27
Traditional view: preferential tax economics
Smith’s certitude = Preference-getter wins.
Haberler’s spillover = third nations lose.
Viner’s ambiguity = Preference-giver might lose.
28
Received wisdom thinking
Vinerian economics & implied political economy
Krugman: “Is
bilateralism bad?”
Bhagwati: “Termites
in the system”
Summers: “I like
all the ‘isms”
29
Regulation economics, not tax economics
• 21st century regionalism not about preferences, so Vinerian economics is moot or insufficient.
• Regulation economics far more complex than tax economics.
‐ Frictional barriers (BBBs).
‐ Entry restrictions.
30
21st c. Regionalism: Different economics
• Frictional barrier liberalisation
• If rules‐of‐origin‐like tools available
• Only Viner’s ambiguity dead.
• Without discrimination tools (many TBTs)
• Haberler’s spillover also dead.
• {E’metric estimates of external trade creation}
• Domestic entry liberalisation
• Incumbents v entrants; not home vs foreign.
• Discrimination very difficult.
• Property right assurances
• Ditto
31
Regulation economics, not tax economics
Should policy be in WTO?
• Tariffs = strong logic for centralisation at global level (MFN better than RTA).
• Regulation = mixed logic for centralisation.
– “Fiscal federalism”: e.g. competition policy? Bank regulation? Telecomms regulation?
32
Injustice & power asymmetries
• Deep RTAs worse that shallow RTAs (power p.o.v.).
– Article 24 limits large partner's bargaining power.
– Article 5 GATS ditto (weakly) for services.
– No such WTO disciplines on BBBs
• de facto = NS deep RTAs almost exclusively one‐sided on BBBs.
33
Threats to WTO support
Different political economy
1. Basic nature of bargain
– Traditional = exchange of market access.
– 21st c. = Northern factories for Southern reform.
2. Implications:
– Only EU, US & Japan can do this deal (yet).
– WTO = no factories on offer.
– RTA tariff cuts multilateralisable; BBBs disciplines maybe not; • EU, US, Japan disciplines incompatible?
3. Unilateral tariff cutting = hole in WTO fuel tank.
34
Sum up
• 1st unbundling: – GATT & RTAs mainly about tariffs.
• 2nd unbundling: – 21st century regionalism mainly about BBBs
– Politics: factories for reform
• Key questions 21st c. regionalism: – Are US, EU and Japanese disciplines multilateralisable?
– Can & should some disciplines be brought under WTO?
35
Sum up (cont’d)
• Should we develop WTO disciplines like Art.24/Art.5 for deeper disciplines?
• How do new trade giants (China, India, Brazil, etc.) fit in?
36
Future scenarios for WTO
• Plan A (WTO centricity restored): – WTO disciplines updated to match 21st century trade.
• Plan B (WTO centricity eroded): – WTO unreformed, RTAs & BITs continue to lead.
– Drift back towards a 19th century Great Powers world?
• B.1: WTO stays vibrant with Marrakesh disciplines only; deeper disciplines outside.
• B.2: WTO credibility withers; bicycle falls over.
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End
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