Carlos A. Primo Braga Senior Adviser World Bank OECD Global Forum on Trade Mexico City, 23-24 October 2006

1. Trade Policy Dialogue on the Multiple Dimensions of Market Access and DevelopmentRegional Trade Liberalization as a Complement to Multilateral Liberalization? Carlos A. Primo Braga Senior Adviser World Bank OECD Global Forum on Trade Mexico City, 23-24 October 2006

2. Planning ahead

3. Trade, Regionalism and Development:Key Messages • Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest. • RTAs can create trade and bring many other benefits for development …but results are not automatic and depend critically on design and implementation. • RTAs have systemic consequences that adversely affect excluded countries, requiring international attention.

4. Regional Trade Agreements are proliferating… Annual number Total in force Cumulative in force New agreements annually …and now potentially cover more than one-third of global trade

5. South-South RTAs predominate in number, but not in trade covered Number of RTAs Percent of World Trade Covered South-South South-South US US European Union European Union

6. Why this proliferation? High-income countries, such as US and EU • Grant trade access to support foreign policy goals, including development • Slow progress on multilateral agenda: “competitive liberalization” • Access to services markets, protection of intellectual property, and rules for investment • Secure access to markets, especially large markets • Lock in reforms to promote domestic agenda • More FDI • Among neighbors, lowering trade cost at border • Framework for regional cooperation Developing countries

7. …but RTAs provide less new market access than it might appear Share of trade covered (%), 2003

8. …and regional agreements are a relatively small driver of trade reform Decomposing tariff reductions in response to multilateral, regional and own initiatives Av. Tariffs, 1983 and 2003 Decomposing 20% pt. decline 29.9 9.3 Source: Martin and Ng, 2004

9. Assessing effects of RTAs on members: two ways 1 Prospective – general equilibrium models • Most agreements projected to create more trade than they divert • Projected gains less than multilateral • Excluded countries almost always lose • Market access is a key determinant on net benefits 2 Retrospective – econometric, gravity model • Different studies – different results • Meta analysis suggest that half of agreements have been net trade diverting

10. Effects on members: Do RTAs create – or divert -- trade? Estimated exponential impact on trade Overall exports Overall imports Intra-regional trade Note: The bars show the magnitude of the dummy variables capturing respectively the extent to which intraregional trade, overall imports and overall exports differ from the “normal” levels predicted by the gravity model on the basis of economic size, proximity and relevant institutional and historical variables, such as a common language.

11. Agreements with high external tariffs risk trade diversion Average weighted tariffs Note: Tariffs are import-weighted at the country level to arrive at PTA averages Source: UN TRAINS, accessed through WITS

12. Lower external tariffs are associated with greater regional integration Average external tariffs MNA SAS SSA LAC ECA EAP

13. Customs Intellectual Dispute Standards Transport cooperation Services Property Investment Settlement Labor Competition U.S.-Led US-Jordan No No Yes Yes Yes Yes Yes Yes No US-Chile Yes No Yes Yes Yes Yes Yes Yes Yes US-Singapore Yes No Yes Yes Yes Yes Yes Yes Yes US-Australia Yes No Yes Yes Yes Yes Yes Yes Yes US-CAFTA Yes No Yes Yes Yes Yes Yes Yes No US-Morocco Yes No Yes Yes Yes Yes Yes Yes No NAFTA Yes No Yes Yes Yes Yes Yes Yes Yes E.U.-Led EU-South Africa Yes Yes EU-Mexico Yes Yes Yes Yes Yes Yes Yes No Yes EU-Chile Yes Yes Yes Yes Yes Yes Yes No Yes South-South MERCOSUR No No Yes Yes No Yes Yes No Yes Andean Community No No Yes Yes No Yes Yes No Yes CARICOM Yes Yes Yes Yes No Yes Yes Yes Yes AFTA Yes Yes Yes Yes No Yes No No No SADC Yes Yes Yes No Yes COMESA Yes Yes Yes Yes No Yes Yes Yes Yes Other Japan-Singapore Yes No Yes Yes Yes Yes Yes Yes Yes Canada-Chile No No Yes Yes No Yes Yes Yes Yes Chile-Mexico Yes Yes Yes Yes Yes Yes Yes Yes RTAs go far beyond trade Let’s consider: trade faciliation, services, investment, intellectual property rights and temporary movement of labor

14. Trade/GDP Malaysia Slovenia Slovakia Malawi Kyrgyzstan Ethiopia Uganda Delays at border drives up trading costs RTAs can provide framework for mutual efforts to reduce costs • Single customs document • Harmonize driving & weight regulations • Computerize both sides of the border Trade/GDP Potential of RTAs to reduce border costs not yet realized

15. Services liberalization deepest in N-S agreements… • US and EU (less systematically) agreements establish • National treatment • MFN treatment for members • Nonrestrictive rules of origin of investor • Pre-establishment access subject to negative lists (US) or positive lists (EU) • Upside potential great because risks of losses through diversion minimal. • …but achievements in additional liberalization subject to question • South-south gone much less far

16. Investment accords provide for new access and new investor protections… • Potential benefits include greater FDI flows because… • Liberalized market access • increased payoff to trade integration, • reduced risk premium • enhanced credibility of investment climate • Reduced international policy spillovers • Rent shifting via TRIMs, etc. • However, market access more important than investor protections as no evidence that protections significantly increase FDI flows to developing countries… • RTAs that create large ex-post market results and, provided good investment climate, do attract more FDI. A 10% increase in post-FTA market size is associated with a 0.5 percent increase in FDI in the host country.

17. US FTAs contain TRIPS Plus provisions that provide greater IPR protection. Brings generics under market and data exclusivity arrangements No analysis of economic consequences prior to signing Open questions: Will FTAs foreclose use of Doha flexibilities on TRIPS for generics? Will stronger IPRs contribute to more FDI and high tech trade? Are TRIPS Plus measures appropriate to all countries? Intellectual property rights figure prominently in N-S RTAs, particularly US FTAs Conclusion: Development consequences of investment and IPR rules depend heavily on market access these rules leverage

18. Labor services are area of potential • Types of labor services treatment • Full labor mobility (EFTA, ANZCERTA) • Access for certain groups (NAFTA, Japan-Singapore FTA) • Mode-4 type access (ASEAN, EU-Mexico) • No provisions (APEC, COMESA) • Patterns include: • Limited mobility • Skilled labor only: mainly intra-corporate • In conclusion…not much movement Ironically, areas with least progress – services and labor – have greatest development potential… while areas with most progress – e.g., IPR – are those with more uncertain development consequences

19. Perceptions of risk and opportunities vary…

20. Strengths Compatibility among economies Services liberalization Move to international standards Weaknesses Restrictive rules of origin Exemptions, esp. agriculture Inappropriate rules No or limited movement of workers Both North-South and South-South accords can be improved… Some sweeping generalization… North-South Index of ROO Restrictiveness Estevadeordal, 2004

21. Strengths Compatibility among economies/large markets Services liberalization Move to international standards Weaknesses Restrictive rules of origin Exemptions, esp. agriculture Inappropriate rules No movement of workers Both North-South and South-South accords can be improved… Some sweeping generalization… North-South South- South • Strengths • Focus on trade • Nonrestrictive rules of origin • Adjacency permit trade facilitation • Weaknesses • Small markets/Higher external barriers • Exemptions • Minimal services • No movement of workers

22. Design are crucial to achieving objectives • Design • Large ex-post market • Low external tariff barriers • Nonrestrictive rules of origin • Wide product coverage with minimal exemptions • Liberalization of services • Facilitating trade at borders • Appropriate rules • Implementation: Avoiding paper agreements ….Open regionalism

23. Overlapping African agreements… Nile River Basin COMESA IGAD ECCAS AMU CEMAC Somalia Sao Tomé & Principe Algeria Libya Morocco Mauritania Tunisia Egypt Cameroon Central African Rep. Gabon Equat. Guinea Rep.Congo ECOWAS Djibouti Ethiopia Eritrea Sudan Burundi* Rwanda* Ghana Nigeria Conseil de L’Entente Chad Cape Verde Gambia DR Congo Kenya* Uganda* Benin Niger Togo Burkina Faso Cote d’Ivoire Angola Guinea-Bissau Mali Senegal EAC Liberia Sierra Leaone Guinea Tanzania* Mauritius* Syechelles* Malawi* Zambia* Zimbabwe* SACU Comoros* Madagascar* WAEMU Mano River Union South Africa Botswana Lesotho CLISS Namibia* Swaziland* Reunion AMU: Arab Maghreb Union CBI: Cross Border Initiative CEMAC: Economic & Monetary Community of Central Africa CILSS: Permanent Interstate Committee on Drought Control in the Sahel COMESA: Common Market for Eastern and Southern Africa EAC: East African Cooperation ECOWAS: Economic Community of Western African Studies IGAD: Inter-Governmental Authority for Government IOC: Indian Ocean Commission SACU: Southern African Customs Union SADC: Southern African Development Community WAEMU: West African Economic & Monetary Union *CBI Mozambique SADC IOC

24. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Multiple arrangements burden customs Disincentives to engage in multilateral liberalization

25. Policy implications… • International community through the WTO • Get Doha done • Concentrate on transparency/Article XXIV • High income countries have systemic responsibility • Widen coverage in FTAs (i.e. agriculture) • Move toward conformity in rules of origin, and make less restrictive • Promote rules tailored to local capacities • Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objective • Unilateral: driving competitiveness • Multilateral: seeking broad market access • Regional: deep market access and institutional reforms (customs, ports, trade-related standards)

26. The importance of being prepared…

27. cbraga@worldbank.org • Source: World Bank (2005) Global Economic Prospects Thank you !