ECONOMIC EFFECTS OF PREFERENTIALTRADEAGREEMENTS Jacob A. Jordaan Utrecht University School of Economics j.a.jordaan@uu.nl Outline • Introduction: international trade liberalisation • Types of PTAs • Why PTAs? • Towards deep integration • PTAs and WTO • Economic effects of PTAs • Need to look inside the agreements! • Key issues and discussion Lecture 5 Trade Agreements and Effects 2 Literature • Dür, A., Baccini, L. and Elsig, M. (2014) The design of international trade agreements: Introducing a new dataset. The Review of International Organisations, vol. 9, p. 353-375 • Kohl,T., Brakman, S. and Garretsen, H. (2016) Do trade agreements stimulate international trade differently? Evidence from 296 trade agreements. The World Economy, vol. 39.1, p. 97-131 Lecture 5 Trade Agreements and Effects 3 Introduction • Large progress has been made regarding trade liberalisation • GATT 1947 • The creation of the WTO solidified progress and fostered further movement • However, since Doha (2001) progress has slowed down • Different types of countries, coalitions, explosion of topics • At the same time, marked proliferation of PTAs • Variety of (groups of) countries, varying content • Last couple of decades increased focus on these PTAs Lecture 5 Trade Agreements and Effects 4 Source: WTO Lecture 5 Trade Agreements and Effects 5 Lecture 5 Trade Agreements and Effects • Literature mixes two related types of trade agreement • Preferential trade arrangements = uniliteral trade preferences These include Generalized System of Preferences Schemes and other non-reciprocal schemes • Regional trade agreements = reciprocal trade agreements between two or more partners • EU • Mercosur (Brazil, Argentina, Uruguay, Paraguay Venezuela) • Nafta (US, Canada, Mexico) • ASEAN (Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar, Cambodia) The debate on PTAs focuses on the second type of agreement 6 WTO and PTAs • WTO: principle of non-discrimination • PTAs: discriminatory, participants benefit from preferred access to markets • GATT article XXIV: Countries may enter into preferential trade agreements by fully liberalising “substantially” all trade between them while not raising trade barriers for outsiders • In reality, only a limited degree of worldwide international trade is of the preferential type • Traditionally, in WTO context PTAs seen as mechanism to fasten trade liberalisation Lecture 5 Trade Agreements and Effects 7 Lecture 5 Trade Agreements and Effects 8 World Trade Report 2011 “The WTO and preferential trade agreements: From co-existence to coherence” Relative importance largest PTAs Lecture 5 Trade Agreements and Effects 9 Asia: noodle bowl PTAs Lecture 5 Trade Agreements and Effects 10 US rejects TPP Lecture 5 Trade Agreements and Effects 11 Lecture 5 Trade Agreements and Effects 12 TPP signed March 8 • Ministerial Statement: Comprehensive and Progressive Agreement for Trans-Pacific Partnership • We, the Ministers and Senior Officials representing Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, are pleased to announce that today we are signing the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (hereinafter referred to as “the Agreement”). • Ministers shared the view that, by achieving a high standard and well-balanced outcome, the Agreement will strengthen the mutually-beneficial linkages among our economies, boost trade, investment and economic growth in the Asia-Pacific region, and create new opportunities for businesses, consumers, families, farmers and workers. The Agreement demonstrates our collective commitment to an effective, rules-based and transparent trading system which is open to all economies willing to accept these principles. • The signing of the Agreement enables us to move to the next phase. Ministers expressed their determination to complete their domestic processes to bring the Agreement into force expeditiously. • Ministers welcome the interest shown by a number of other economies wishing to accede to the Agreement. This interest affirms our shared objective, through the Agreement, of creating a platform that promotes high standards for broader economic integration in the future. Lecture 5 Trade Agreements and Effects 13 Lecture 5 Trade Agreements and Effects 14 Different types • System of preferential tariffs: lower trade restrictions between participants • Free trade association: no trade restrictions between members, individual policies towards non members • Customs union: FTA + common policy towards non-members • Common market: CU + free movement capital and labour • Economic union: CM + common economic policies • Economic and monetary union: EU + common currency • Political union  • Traditionally, assumption has been that once started, there would be an inherent movement towards stronger integration • How do you solve problems that occur in a trade agreement? • Move to the next phase! • More recent: preferential tariffs and free trade associations with deep integration elements Lecture 5 Trade Agreements and Effects 15 Reasons for proliferation PTAs (1) • PTAs have been around for a long time • Progress in WTO has slowed down • Victim of its own success? • Similar for EU • Monetary Union selective participation • EU of two speeds? • PTAs good alternative for multilateral negotiations • Flexibility and speed • Fewer negotiating partners Lecture 5 Trade Agreements and Effects 16 Reasons for proliferation PTAs (2) • Trade liberalisation has changed • Not much more to gain from tariff reduction • Non tariff barriers more tricky • e.g. Services, finance, technology • Substantial gains still to be made, but more detailed in terms of countries, sectors, etc. • e.g. car industry: import US cars with automatic gears • Economic stagnation of world economy • Recovery from latest financial crisis goes slow • Countries can not wait for WTO-effects to foster growth • Countries don’t want to miss the boat; every country is doing it • Multinational enterprises • General trade liberalisation no longer required • Specific deals can still create benefits • Global value chains also important for this Lecture 5 Trade Agreements and Effects 17 PTAs and deep integration • Traditionally, agreements characterised by shallow integration • Directly linked to border measures • Last couple of decades: growing importance of deep integration • Measures that are linked to domestic policies “behind the border” • Deep integration usually linked to the build up of different trade agreements • FTA → CU → CM → EU → EMU • Now more and more “lighter” trade agreements contain elements of deep integration • Institutions sufficiently strong in PTAs? Lecture 5 Trade Agreements and Effects 18 Gains from trade liberalisation Lecture 5 Trade Agreements and Effects 19 20% 80% Deep integration • Protection of multinational enterprises • Liberalisation of behind the border barriers to trade • Harmonisation of domestic trade rules to enhance efficiency of international production Lecture 5 Trade Agreements and Effects 20 Non-tariff barriers • Limiting Market Access • Import quotas, export restraints • Administrative and regulatory burdens discriminating against foreign firms (e.g. procurement) • Costs associated with operating in different markets • Approval conditions and procedures • Different standards regarding environment, health, consumer protection • Industry standards • Packaging and information requirements • How to assess need for NTBs • Some of these are there for good reasons! • Mixture of backgrounds (labour rights, environmental protection) Lecture 5 Trade Agreements and Effects 21 Example: topics negotiated on for TPP • Market access for goods • Trade remedies • Dispute settlement • Cross-border services • Financial services • Telecommunications • Cooperation & capacity building • Customs • E-commerce • Environment • Labour • Competition policy • Government procurement • Intellectual property • Investment • Technical barriers to trade • Rules of origin • Textiles / apparel Lecture 5 Trade Agreements and Effects 22 WTO and PTAs Lecture 5 Trade Agreements and Effects 23 Lecture 5 Trade Agreements and Effects 24 Effects of PTAs • Trade creation versus trade diversion • Static analysis • Theoretically, possibility of trade diversion • In reality, no real evidence for this • Several studies find evidence of trade creation • Natural trading partners hypothesis • Dynamic analysis emphasizes importance of scale economies, learning effects, spillovers, technology creation, etc. • More difficult to quantify • WTO+ versus WTO-x Lecture 5 Trade Agreements and Effects 25 PTAs and trade • Increasing number of studies look at whether PTA membership enhances international trade • In line with studies that have examined trade effects of WTO membership • One set of studies controls for yes/no membership • Findings are mixed • More recent • PTA membership and content of PTA Lecture 5 Trade Agreements and Effects 26 Dür et al. (2014) • 733 PTAs signed between 1945-2009 examined • 587 agreements with full text availability • 3318 initial members • 10 broad items • Market access, services, investments, IPR, competition, public procurement, standards, trade remedies, non-trade issues, dispute settlement • DESTA dataset • https://www.designoftradeagreements.org/ Lecture 5 Trade Agreements and Effects 27 Types and regional composition Lecture 5 Trade Agreements and Effects 28 Varation in agreement design (1) Lecture 5 Trade Agreements and Effects 29 Variation in agreement design (2) Lecture 5 Trade Agreements and Effects 30 Measuring the depth of PTAs Lecture 5 Trade Agreements and Effects 31 Development over time Lecture 5 Trade Agreements and Effects 32 Depth of PTAs across time Lecture 5 Trade Agreements and Effects 33 Empirical strategy Lecture 5 Trade Agreements and Effects 34 Control variables GATT/WTO Regime Conflict lnGDP Distance Contiguity Common language Common colony Common legal system Common currency Estimated effects of PTA and depth Lecture 5 Trade Agreements and Effects 35 Model 6 omits other controls Long period effects Before 1990 After 1990 GATT/WTO 0.19 (0.02)a 0.02 (0.013) PTA 0.36 (0.02)a 0.31 (0.03)a GATT/WTO 0.20 (0.02)a 0.01 (0.012) PTA 0.28 (0.03)a 0.05 (0.03)c Depth 0.09 (0.01)a 0.10 (0.001)a Lecture 5 Trade Agreements and Effects 36 Effects PTAs and time Lecture 5 Trade Agreements and Effects 37 Kohl et al. (2016) Lecture 5 Trade Agreements and Effects 38 Index of trade heterogeneity Lecture 5 Trade Agreements and Effects 39 Identifying effect on trade Lecture 5 Trade Agreements and Effects 40 M = imports 221 countries 1948-2011 Lecture 5 Trade Agreements and Effects 41 Interacting with WTO membership Lecture 5 Trade Agreements and Effects 42 Key issues (1) • Strong increase in PTAs • Not surprising? • Economic context: countries in search for growth • Multinational enterprises and global value chains • GATT/WTO has obtained initial gains from trade liberalisation • Incentives not there for countries to pursue similar goals via WTO • But at some stage successful PTAs need to be more formalised / extended / increased integration • WTO can play key role here? • This can take some time! • Many sensitive topics are addressed in PTAs Lecture 5 Trade Agreements and Effects 43 Key issues (2) • Most PTAs don’t reach the CU stage of integration • But they cover a lot, much more than the traditional theories contained! • Deep integration is striking • Protection, liberalization, harmonisation • Trial and error, large heterogeneity • Little attention is paid to the question whether PTAs are efficient in their structure / actions • What is best practice? • Overall effects • Little evidence of trade diversion, some evidence of trade creation • Heterogeneity and wide range of contents makes it difficult to identify full welfare effects • Empirical studies find that the content of PTAs is important for their positive impact on trade Lecture 5 Trade Agreements and Effects 44 Discussion points (1) Future integration: WTO or PTAs? Lecture 5 Trade Agreements and Effects 45 Discussion points (2) PTA integration: are the protesters right? Lecture 5 Trade Agreements and Effects 46