Regional Trading Arrangements,
Developing Countries and Deep
Integration
…or
lessons from EU integration for LDCs
…or
implications for EU-LDC integration
…or
implications for the EU-ACP EPAs
Michael Gasiorek
Centre for the Analysis of Regional Integration at Sussex
(CARIS)
The EU “model” of integration
• EU model:
– shallow + deep integration  single market
– importance of competition and regulatory harmonisation
– + priority given to economic convergence via
• structural funds,
• protection of key sectors (agriculture, textiles etc),
• programs encouraging / allowing labour mobility
• Note:
– the EU model and advances in it has always been based on both
economic and political imperatives.
–  the EU model is not simply a model of economic
liberalisation. The reality has been much more complicated
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EU as a good “reference model”?
• For the transition economies?
– the answer appears to be yes (FDI, trade, regulatory
convergence etc) + adhesion has allowed them to adjust to the
structural changes implied by “globalisation” (structural funds,
migration etc)
• South-South integration?
– There are examples of EU style models eg. CARICOM / CSME,
ECOWAS, but in reality much of the integration is largely
shallow.
• For EU-South integration.
– The BIG difference here is that the model “worked” for the
countries which were either members of the EU or were due to
become members ie the transition economies. When adhesion
is not on the agenda the viability of the model needs to be
looked at more carefully.
3
Why sign an RTA with the EU?
• RTA’s at a minimum involve the elimination of border
barriers = shallow Integration.
• As is well known the first order impact of this will
depend on the balance of trade creation and trade
diversion.
• Empirical evidence (CGE & PE models, Sussex
Framework) provides a pretty unanimous view on this:
– Typically middling – high tariffs, very high NTBs with high
peaks.
– scope for trade creation relatively limited (eg. based on share of
imports from EU + on degree of overlap in partner countries);
– scope for trade diversion relatively high (again based on shares
of trade from ROW countries, on degree of similarity in imports
from ROW and EU, and on the number of industries where the
EU can be seen as a sole supplier.
– Therefore net effect very likely to be small if not negative
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Ethiopian imports by source
100%
90%
24%
24%
27%
24%
21%
25%
29%
80%
70%
60%
50%
40%
12%
3%
10%
5%
5%
30%
20%
41%
27%
2%
6%
5%
6%
31%
14%
2%
10%
6%
7%
36%
7%
2%
7%
SA+UAE+Yemen
12%
Japan
14%
China
25%
15%
2%
8%
8%
5%
4%
4%
7%
9%
5%
7%
9%
8%
31%
30%
31%
29%
2000
2001
2002
2003
23%
10%
Rest of the World
Neighbors
USA
EU 27
0%
1997
1998
1999
5
ECOWAS imports by source
100%
90%
25.3%
24.8%
4.5%
3.1%
1.9%
1.4%
8.4%
2.4%
4.1%
1.9%
11.6%
28.6%
28.4%
9.0%
3.0%
6.4%
3.1%
10.1%
5.2%
1.7%
4.8%
3.4%
80%
70%
60%
12.7%
50%
16.9%
RoW
US
India
China
RoSSA
40%
ECOWAS
30%
51.0%
20%
46.7%
EU-15
39.8%
39.7%
2002
2004
10%
0%
1997
2000
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why sign an EU-South RTA?
• If effect is small / negative (+ if regionalism undermines
multilateralism), why should LDCs sign RTA’s with the
EU? So, other possible motivating factors include:
– Maintain / make legally binding (as opposed to optional/
reversible as under GSP and EBA) existing preferential access
to EU markets.
– “Dynamic gains”: economies of scale, pro-competitive effect,
technology transfer, FDI…
Note: more likely to occur with “deep” integration: i.e.
elimination of non-tariff impediments to trade / segmentation of
markets.
– As a means of locking in / legitimising domestic reforms
– As a means for obtaining more assistance / financial aid from
the EU.
• Is any of the above enough to conclude that LDCs
should seriously consider an RTA with the EU?
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Re. Preferential access:
• Given erosion of preference margins how significant is
this in reality?
– A key part of the “development” strategy of the EU towards
LDCs is via the offering of preferential access to their markets.
As the preference margins are eroded more thought / emphasis
should be given to alternative ways of supporting development.
• Small preference margins, however, can be significant
in highly competitive markets.
– there is a need for a clearer understanding of the sectors /
products / countries for whom the margins really matter & why,
and  of the possible impact of preference erosion.
• Making preference margins legally binding potentially
important as it reduces uncertainty which can stimulate
greater investment etc. However, in practice how often
are these withdrawn?
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Re: Dynamic gains + deep integration:
Policy Areas
Actions to be undertaken
Standards: (SPS, TBT)
harmonisation, certification, accreditation, MR.
Investment
rules on investment caps, removal of capital
market restrictions, right of establishment
IPR
Patent legislation
Trade facilitation
Improvements in customs procedures, port /
infrastructure facilities etc.
Trade defence
Reduction in protectionist use of anti-dumping,
safeguard clauses etc
Services
Liberalisation of service provision; labour
mobility
Government procurement
Allow for non-discriminatory open competitive
tendering + dispute resolution
Competition policy
Legislation + regulatory action where required.
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Sources of deep integration gains:
• Technology spillovers (investment)
• Increased FDI (role of investment rules, government
procurement, competition policy, IPR)
• Improved access to DC markets (eg. through improved
standards regime, improved rules of origin, customs
procedures)
• Elimination of wasteful rent seeking (cf. government
procurement)
• Smithian specialisation gains, e.g. local economies of
scale arising from specialising in different parts of the
value chain (arising from common standards +
preferential market access)
• Externalities (standards, legal system, services,
transport infrastructure)
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Re: Locking in domestic reforms:
• Signing agreements with legally binding provisions both
with regard to
– (a) trade liberalisation (tariffs, quotas etc),
– (b) areas of deep integration can help to accelerate / facilitate
the introduction of much needed domestic reforms.
• e.g. EU-India - Indian’s appear to be primary
demandeurs of the proposed FTA and much of the
motivation appears to be to lock in domestic reforms.
• Certain key reforms (eg. trade facilitation, application of
international standards, government procurement rules)
likely to apply ergo omnes to all trading partners.
• Importance of the locking in of domestic reforms should
not be underestimated
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Re: aid / assistance from the EU.
• Clearly an objective of LDCs re. the EPA negotiations.
• From the EC point of view problematic as
– (i) institutionally DG trade negotiates economic agreements, and DGDev deals with development assistance;
– (ii) conceptually EC is strongly against the linkage of the two.
• Re (ii). Fundamental misconception in the EC approach which
seems to view the trade aspects of development as being about
market access issues (ie the remit of DG trade), and therefore
largely about border barriers.
• For many LDCs the positive linkage between trade and
development is to do with:
– a) liberalising access to own markets + impediments to market access
in the EU (standards, ROOs etc, EU subsidies)
– b) supply side constraints in their own markets.
– c) institutional constraints in their own economies.
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Re: aid / assistance from the EU.
• If the EU is serious about development it ought to be serious about
linking trade agreements with trade related issues arising from (a),
(b) and (c) above.
– i.e. link trade agreements with trade related assistance which may
require some form of conditionality.
– Conditionality a sensitive topic. However need not be “imposed” but
can arise from mutual identification of needs and sequencing of
reforms which imply actions by both parties.
– Also raises issues of “policy space”.
• A la Rodrik countries need “policy space” to develop institutions suitable to their
circumstances
• but equally policy space can be used as an excuse not to engage in
uncomfortable policies.
– Therefore what is required is a careful balancing act between the two.
– Trade related assistance should therefore focus on improving domestic
conditions, improving access to EU markets + supporty fotr the
adjustment costs (eg. fiscal transition programs)
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ways forward…?
• key constraint for many LDC’s is the lack of investment
– changing the investment climate and the levels of
investment is therefore absolutely crucial.
• No point in engaging in shallow/deep integration unless
country is “ready” in terms of:
– physical infrastructure: roads, transport facilities, warehousing
facilities, port facilities, customs procedures, telecoms etc.
– institutional infrastructure: eg. financial and legal institutions
– + some means of compensating the losers
• Investment in these areas should be of the highest
priority
• “absorption capacity” v the need for more financing?
• For many LDCs this will require technical & financial
assistance  trade related aid
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And what else?
• However, hard to develop long term competitive industries behind
high tariff / non-tariff barriers.
•  engaging in trade liberalisation with themselves + the world at
large important… eventually.
• May be easier to achieve (politically & economically) regionally 
distortions and hence lower welfare gains.
•  the big gains will come from:
– (a) much needed trade related domestic reforms + infrastructure
(physical and institutional) upgrading – ie the deep integration
elements outlined above;
– (b) the locking in of those reforms;
– (c) the likelihood that this will generate greater investment flows
• This more likely to be achievable regionally regional integration
with the EU could well be an important positive step for LDCs.
• HOWEVER: important that the institutions / policies pursued by
LDCs are appropriate to their needs. Eg. upgrading standards may
give access to EU markets, but may not be desirable domestically;
EU-style competition policy may not be appropriate etc.
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Priorities
First:
–
–
–
–
Investment: policies + finance
Infrastructure (physical + institutional) upgrading;
trade facilitation
Removal of developed country market access barriers (NTB’s, rules of
origin)
And only then…
–
–
–
Start to remove tariffs in domestic markets: regionally  with the EU
 multilaterally
Improve access to DC markets by upgrading standards capabilities
where appropriate
Competition policy
Finally…
–
–
–
Government procurement
IPR
Trade defence
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Conclusions:
• EU experience successful:
– has allowed for both shallow and deep integration + presence of
explicit policies to encourage convergence
– That has only been possible in the presence of an appropriate
institutional and physical infrastructure.
• For many LDCs that does not exist.  for RTAs to be
appropriate they have to find ways of delivering on:
– Institutional / infrastructure upgrading
– Convergence / mitigating against the adjustment costs implied
by the policy process.
• This can only happen if the agreements are trade-plus
• And will require commitments and policy actions on the
part of both the EU and partner countries.
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