Conceptualising Deep
Integration
Michael Gasiorek
Peter Holmes
1
Outline
• Deep Integration: market and institutional
• Nature of gains
– Fuller market access
– Domestic impact
– Competitive effects
•
•
•
•
Winners and losers
Private vs public dimensions
Examples: few outside EU accession
Conclusions: DI can work only if partner
economy ready
2
RZ Lawrence (1996) on Deep Integration
• “Shallow integration” when “border measures”
essentially tariffs and quotas, eliminated
• “Deep integration” defined by RZL as process
whereby domestic economic (regulatory)
policies/measures, are approximated in order to
remove barriers to trade behind the border.
Whole economy affected.
• Lawrence surmised DI easier in a smaller group
than WTO, tho’ cautious on benefits
3
Deep Market Integration
• Trade investment & business practices
take on characteristics of internal trade
• intensity of interaction
• willingness to sign long term contracts
• ability to switch partner if contracts go
wrong
4
New features of Supply chains
• Trade in tasks, ie intermediates not final
commodities
• Trade more in services
• Relational trading and networks replace
ship and forget
• Quality and compatibility standards matter
more than post shipment inspection
• Agriculture becoming like industry eg with
Quality Assurance, Eurepgap etc
5
Markets and Institutions
 a very comprehensive certification or
standardisation regime can permit
 trade between anonymous partners
or
• networks of repeat business
• can institutional integration create more
competitive thickly integrated markets?
6
Deep Institutional Integration
• No value in reducing tariffs if regulatory
incompatibilities bar all scope for trade
expansion eg:
–
–
–
–
Service regulation
SPS & TBT measures
Competition rules and market conditions
(IPR??)
• Shallow integration leaves most of non trading
economy untouched (contrast EU Accession)
7
Border barrier aspects
Infrastructure
Institutional /
regulatory /
policy
Behind the border dimension
Infrastructure
Institutional / regulatory /
policy
Tariffs / quotas
Customs clearance
Actual measures
Standards: (SPS, TBT)
Warehouse
facilities
Inspection processes
Labs
Standards, regulations etc
Investment
n/a
n/a
Access to facilities
Investment rules
Checks to secure
compliance
Patent office
IPR legislation and rules
IPR
Domestic implementation
of applications for
clearances etc
especially for quotas
Trade defence
(AD, CVDs Safeguards)
Customs clearance
Actual measures
n/a
Bureaucratic procedures for
imposing duties and
appealing etc
Services: e.g. financial,
insurance, transport,
telecoms)
Internet
Possible blockages on
internet
Core network for
peripheral
services
Regulations
X
Purchasing system
Legislation and rules
Courts
Legislation and rules
Govt procurement
Comp. policy – private
firms
Comp policy- state aids
Any marketing obstacles by incumbents
Aids regime and ways to
challenge
8
Can DII help DMI?
• RTAs follow trade – suggesting a revealed
preference exists.
• We conjecture that:
– Private actors can only address some of the
market failures
– Public action is likely to make Deep MI more
contestable
– If there are again they are economy wide not
just for market access
9
Types of trade and RTAs
Type of trade
Classical
Homogeneous, ship
and forget, commodity
Horizontal IIT
Vertical IIT
Mostly final,
differentiated by variety
and by quality
Trade growth is in quality
needs monitoring and
differentiation along
production chain; mostly
industrial but not only.
Services outsourcing
More likely to be
integrated; long term
affiliation or
subcontracting likely
lack of quality assurance
systems, standardisation,
general issues of business
environment
As above all quality and
compatibility for
processes
economies of scale and
technology transfer; more
competition
Includes more agricultural
niche products
may be internationally
integrated or
subcontracting
Type of firms
Any
Possible market failure
Any
Reputation, health,
learning effects,
Role for RTA
Eliminate border barriers
and equivalent
Gains if successful
traditional
quality standards ensuring
protection of consumer
and environment
higher profitability from
niche products plus
learning about value chain
+ economies of scope
10
Types of approximation
• National Treatment - NAFTA
• Mutual Recognition of
– Standards
– Conformity assessment
• Harmonisation - EU approach in preaccession and some ENP
In reality very limited steps
11
Regulatory approximation
• Standards codified specifications of
process or product
• Regulations - mandatory specifications
• Conformity assessment - how to check if
standards or regs complied with
• Accreditation-verification of reliability of CA
• Mutual recognition of standards does not
imply MR of conformity assessement
12
TBT & SPS in RTAs
Pre-accession FTAs create implied
obligation to harmonise rules, but
accession negotiations drove this
EU-Turkey CU (1996) did not have MR of
conformity assessment till 2006
EU FTAs with non candidates generally
aspire to lower barriers but little
harmonisation agreed by partners and no
MR by EU
13
Competition Provisions in RTAs
• Strong in pre-accession agreements
• EU seeks to ensure that FTA partners
adopt competition policies that will reduce
trade barriers but provisions rather weak
• US FTAs limited provisions
• But countries ready to discuss this in RTA
context that not at WTO – maybe even
India
14
Deep Integration: tighter
networks or more competition?
Deep market integration can take 2 forms:
• Tight networks of firms with long term
subcontracting but little scope for
alternative partners
• Open competitive markets where long
term contracting occurs by choice
15
Potential gains from DI
• Regulatory certainty
• more niche market specialisation and the creation of more stable
value chains.
• technology transfer and diffusion both through trade and FDI,
• pro-competitive gains from increasing import competition in an
environment of imperfect competition,
• greater exploitation of economies of scale in production
• the greater use of intermediate inputs;
• the increased geographical dispersion of production through trade
that supports the exploitation of different factor proportions for
different parts of the production process
• local economies of scale through finer specialization and division of
labour in production;
• externalities arising from institutional changes that lead to a wide
increases in productivity.
16
Ways to address market failures
– A multilateral agreement, e.g. by ISO norms
supported by the WTO
– A regional/bilateral agreement, e.g. RTA
– Autonomous government decisions of the
individual countries, eg S.Africa, Switzerland
adopt EU regs
– The market, e.g. through FDI, detailed subcontracting arrangements through the value
chain, or by purely voluntary standards.
17
Private vs public
• Regulations are mandatory
• Standards often private, eg ANSI or
Eurepgap
• Conformity assessment usually private
firms or ISO members as consultancies
• Accreditation (IAF) must confirm state
system
18
Eurepgap private standards
• EU supermarkets have own standards body for
verification of production processes that if
followed will assure conformity to EU product
standards
• Eurepgap is not regulated and conformity to
Eurepgap norms is undertaken by a small
number of private firms (SGS etc)
• National standards offices in sub-saharan Africa
are rarely accredited for this
• Supermarkets often alleged to be forcing poor
farmers to take unfair share of burden
19
Why might DI not be achieved by
solely by the market?
•
•
•
•
•
•
•
Asymmetric information
Learning spillovers
Reputational spillovers
Environmental spillovers
Economies of scale in testing & certification etc
Compatibility externalities
Collective actions, coordination failure, network
externalities
• Private contracting and governance may not
foster competition
20
“Upgrading quality” vs risk of
wrong standards
• Import of EU standards can provide a
chance to adopt a standard that can deal
with a market failure – and impact on
whole economy - CEEC case
• OR
it can impose a costly and unnecessary
set of inappropriate regulations for
domestic markets driven by external trade
considerations – limited examples
21
Likely winners and losers
• Winners
–
–
–
–
–
consumers who value export quality
exporters who get easier market access
new exporters
foreign firms
Domestic markets functioning better due to new
norms
• Losers
– consumers who don’t want to pay more
– firms unable to compete
– excluded 3rd country suppliers (discrimination vs erga
omnes)
– Markets which don’t need trade driven rules
22
Quantifying effect of DI
• Models extrapolate trends and assume RCA
indicates direction of change
• Most EU FTAs suggest very little gain from
removing shallow barriers
• Sussex framework suggests looking for rising IIT
indicators where DI could impact: India but less
Egypt so far
• CGE work with CASE by M.Maliszewska
assumes DI improves business climate and
raises regulatory certainty and lowers risk
premium across whole economy - investment
and output increase sharply
23
EU Accession
• Some fears before accession that EU
norms inappropriate and costly, eg for
Poland, eg domestic food industry
• Deep Inst integration very hard (Turkey
MR of conformity assessment not till 2006
10 years after CU)
• But growth of partners suggests positive
effects going beyond traded sector
24
ESA EPA
Rwanda and Ethiopia
• coffee major export
– no tariffs.
– Core barrier are capacity and SPS regs on ochratoxin
(and on some spices for Ethiopia).
– EU can give aid for trade but can only offer MR when
this is successful
Mauritius
– seeks to be financial services exporter
– says “What rules do you want? We’ll comply.”
25
South African Water
• SA imposing EU water quality rules on for
all food production and distribution in SA
• This will
– raise quality across whole economy
– raise costs
– Open export markets
– Exclude some farmers
26
EU seeks Deep EU-India FTA
• Little or no gain likely from shallow
integration
• Rising IIT suggests deep market
integration emerging
• Some improvement in Market access to
EU possible (SPS?) but main gains to
domestic economy if:
– Further improvement in services reg (lock-in?)
– Better standards regime
27
Egyptian potatoes and “Brown Rot”
• EU exports seed potatoes; Egypt exports
new potatoes (deep market int?)
• EU requires clean water to be used for
irrigation
• If one consignment found contaminated all
crop may be banned – externality
• Egypt keen to adopt necessary rules but
hesitant about comprehensive post FTA
commitment to all EU norms
28
SPS in possible EU Central America FTA?
• EU unlikely to impose additional requirements
• But also unlikely to guarantee MR, so CA will be
subject to same rules
• So tariff removal will not increase market access
unless
– non animal reg. regime deemed equivalent
– Animal suppliers approved
– Suppliers can meet additional private (and MS) rules
29
Conclusions
• With low tariffs shallow integration has little to
offer – with high we risk trade diversion
• So we must look to gains from Deep Int for the
whole economy
• We need to explore nature of
externalities/coordination failures that allow RTA
to be instrument for more efficient economy wide
and competitive integration
• Limited luck so far outside EU itself
30