Economic integration: a policy
maker’s guide to the state of the
art or what have we learned from
the Sussex Framework
Over view
– Shallow integration, gains from trade and the
theory of second best
– Intra industry trade
– Integration, productivity and growth
– The disappearing (?) monetary union effect
• beyond the tariff equivalent
– Regulation – simply a cost of doing business?
– The services puzzle
Shallow integration, gains from
trade and the theory of second best
• Old news but what we know best: trade creation
and trade diversion
– Easy ways to detect by examination of the trade and
protection numbers
• size of tariffs and NTB
• Share of partner trade
• Overlap of trade structures and RCA
– Also know what to do in FTA to reduce the bad
impacts
• Cut mfn tariffs/NTB and especially tariff/NTB peaks in areas
where partner competitive
Intra industry trade
• The Balassa discovery
– This is the beginning of looking for deep
integration
• Grubel Lloyd indices adapted to discriminate by
vertical and horizontal IIT ie supply chain trade
versus varieties trade
Integration and growth
• More uncertain mechanisms and models
via endogenous growth type models
– Usual routes through increased innovation
and specialisation driven by competition and
economies of scale in turn driven by
increased trade and FDI
The (disappearing (?)) monetary
union effect
• Rose (2000,2003) claims large effects on
trde from monetary integration from gravity
modelling. Mechanism not clear
– Started in xs of 100% increases in trade as a
result of monetary union
– By time of UK treasury’s 5 tests (2003) on
EMU range in order of 5-50% increase
– Now doubt that increase in trade detected
after formation of EMU real.
Known Unknowns or beyond the tariff equivalent
Regulation – simply a cost of doing
business?
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•
•
Regulation can add to costs and for foreign entrants to market may be de
facto discriminatory – but that is not (always or even often) their purpose so
measuring the price wedge does not catch their potential benefits
The focus needs to be on the output of the regulation and perhaps the
inputs required to deliver it and whether they generate externalities, higher
quality, new varieties and markets, supply chain integration
Generates a number of puzzles
– How to measure outputs of regulation and their implications for production
methods – food and SPS standards may require up rating of water purity with
externalities for unrelated industries or even human health or production
methods that shift production function out to set against costs
– This may require too much information to produce other than case studies which
may be suggestive but hard to generalise – a missing theory although if enough
case studies may be possible by qualitative research to try to pull out underlying
regularities
– Search for precursors of deep integration may be way to go so look at IIT and
FDI indicators to identify ‘green shoots’ where deep integration may be underway
and look for examples there – at least for goods
The services puzzle
• Services are subject to regulation and that
is the main obstacle to trade so all the
same issues arise as on goods
• But hampered by lack of statistical fine
grain on either production or trade to
pursue the potential from deep integration.
• FDI one clear indicator but only for one
mode of provision