Global Economic Prospects, 2005: Trade, Regionalism and Development

1. Global Economic Prospects, 2005:Trade, Regionalism and Development Hans Timmer and Richard Newfarmer World Bank November, 2004

2. Global Outlook • Developing countries experience record growth in 2004, but will face less favorable macro conditions as the world economy slows in 2005 by around 1 percentage point. • Downside risks could slow the global economy further. • Many developing countries are well placed to absorb the slowdown and the risks, but poor oil importers and indebted middle-income countries are vulnerable.

3. Growth is projected to slow Forecast Real GDP, percent change Developing countries

4. Developing economies remain above trend Real GDP, percent change Developing countries Early 1980s debt crisis 2001 Global downturn East Asia financial crisis 1990s recession Transition countries

5. Outpacing developed countries Real GDP, percent change Developing countries High-income countries

6. Strong performance of developing countriesRealGDP per capita, percent growth Average growth 2003-2004

7. Strong performance of developing countriesRealGDP per capita, percent growth Average growth 2003-2004 Acceleration Deceleration

8. Strong performance of developing countriesRealGDP per capita, percent growth Average growth 2003-2004

9. Strong performance of developing countriesRealGDP per capita, percent growth Average growth 2003-2004

10. Emerging capacity constraints boosted commodity prices Per cent price increase, US$ and world trade-weighted effective terms Source: World Bank.

11. Higher oil-prices neutralized positive impact of other commodity prices for oil importersImpact of commodity price changes (2001–2004) non-oil prices oil prices both oil and non-oil prices Terms-of-trade gains % of GDP Low and Middle Income Low Income (excl. India) HIPC

12. Risks remain • Developed-world debt and US current account deficit might trigger financial tensions, including higher interest rates and weakening dollar. • Oil prices could rise further, instead of the moderation foreseen in the baseline • A hard landing in China is still a possibility

13. Poor oil importers are immediately hit by high oil pricesDeviation from baseline in first year, per cent of GDP, with $10 higher oil price Domestic Demand Current Account Balance

14. Impact of 200 basis point rise in long ratesDeviation from baseline, percent of GDP

15. 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 other benefits for members …but results are not automatic and depend critically on design. • For non-members, discrimination in RTAs adversely affects excluded countries, posing systemic issues that require international attention.

16. Regional Trade Agreements are proliferating… Annual number Annual number

17. 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

18. 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

19. Why this proliferation? High-income countries, such as US and EU • 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 • More FDI • Among neighbors, lowering trade cost at border • Framework for regional cooperation Developing countries

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

21. …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

22. 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

23. Effects on members

24. Effects on members: Do RTAs create – or divert -- trade? Estimated exponential impact on trade 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.

25. 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.

26. 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

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

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

29. 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

30. 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

31. 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) • Ratchet mechnanisms (US) • Upside potential great because risks of losses through diversion minimal. • …but achievements in additional liberalization subject to question • South-south gone much less far

32. 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 premia, • 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 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.

33. 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

34. 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 in areas with most progress – investment and IPR – are those with uncertain development consequences

35. Strengths Compatibility among economies 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 Index of ROO Restrictiveness Estevadeordal, 2004

36. 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

37. Design and implementation are crucial to achieving objectives • Design • Low external tariff barriers • Nonrestrictive rules of origin • Wide coverage with few exclusions • Liberalization of services • Facilitating trade at borders • Appropriate rules • Implementation: Avoiding paper agreements ….Open regionalism

38. Systemic issues…

39. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries

40. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Simulated welfare impact of Chile’s FTA with US $ m. Gains to Chile Costs to excluded countries Source: Harrison, et al, 2002

41. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Change in real income in 2015 compared to baseline in percent Full multilateral liberalization

42. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Change in real income in 2015 compared to baseline in percent Full multilateral liberalization Individual RTA (average)

43. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Change in real income in 2015 compared to baseline in percent Full multilateral liberalization Individual RTA (average) All countries sign RTAs

44. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Multiple arrangements burden customs

45. 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

46. Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Multiple arrangements burden customs

47. 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

48. Policy implications… • International community through the WTO • Get Doha done: lowers risk of trade diversion for members and minimizes effects on excluded countries • 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)

49. Global Economic Prospects, 2005:Trade, Regionalism and Development Hans Timmer and Richard Newfarmer World Bank November, 2004

50. www.worldbank.org/ globaloutlook • Multilingual, modular presentation • Printable version • Forecast database out to 2006 • Downloadable charts • Insightful calculators and simulation tools • Valuable one-page data briefs