Maclaren e
Maclaren e
Maclaren e
Role of RTAs
Seminar on
Regional Trade Agreements and the WTO
Geneva, 14th November 2003
The Case for Free Trade and the Role
of RTAs
Introduction
1. Predictions of trade theory
2. Evidence from CGE models
3. Hub and spokes arrangements
4. Effects of RTAs on multilateral trade negotiations
5. Conclusions
2
Country 1
RTA
Country 2 ROW
3
1. Predictions of Trade Theory
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This expression for B also shows clearly that measuring
changes in trade volumes alone will not predict whether a
country gains or loses
Other assumptions:
– imperfect competition (love of variety and economies of scale):
second generation models
– investment, factor accumulation and growth: third generation models
Second and third generation models tend to strengthen the
presumption that members gain
For second-generation models, equation (2) becomes
B = + trade volume + intra-union terms of trade + extra-
union terms of trade + output + average cost + varieties
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What are the welfare effects for excluded countries
which, pre-RTA, traded with the members?
– In first generation models, theory predicts that excluded
members, as a group, lose, although some individual
countries may gain
– In second generation models, theory predicts that these
losses may be greater than in first-generation models
What does the evidence from computable general
equilibrium (CGE) models suggest?
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2. Evidence from CGE Models
Structure:
– data base of bilateral trade flows
– data base of transportation costs and tariff rates
– tariff on good i from region r to region s
– behavioural equations
– accounting identities
Caveats:
– design of the experiment
– values of the elasticities
– the Armington assumption and CES functions: biases
Summary of Results:
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• Formation of NAFTA (Brown et al. (1992)):
– using a second generation model they found that
• each member gained
• 31 excluded countries lost
– using a third generation model they found that
• the gains to Mexico were three times greater
• the excluded countries lost
• EU Single market (Haaland and Norman (1992)):
– using a second generation model and representing deeper integration by
a 2.5% reduction in intra-EU trade costs, they found that
• EU gained 0.64% of GDP (internal markets integrated) and 0.40% (internal
market segregated)
• EFTA lost 0.22% and 0.15% of GDP, respectively
– conclusion: excluded members lose but the size depends on assumptions
about market structure in the RTA
• Asia-Pacific Region
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Table 1: Welfare Changes as a percentage of base period GDP
Hub and
Bilateral Plurilateral Global
spokes
Japan-
Japan- ASEAN + APEC
Region S.Korea-
Singapore 3 (pref’ial)
China
Japan 0.00 0.25 0.34 0.74 0.98
Singapore 4.06 0.87 4.12 0.72 6.94
S. Korea 0.00 0.80 1.18 1.63 1.83
China 0.00 2.09 1.96 3.19 4.51
APEC 0.01 0.16 0.25 0.58 0.84
Total
0.05 0.50 0.64 0.58 n.a.
members
Total non-
0.01 0.03 0.06 0.12 n.a.
members
World 0.00 0.09 0.11 0.27 0.56
Source: Scollay and Gilbert (2001) 11
Conclusions about gainers and losers:
– global, multilateral trade liberalisation generates the
greatest gains to the world economy
– the size of the gains is dependent upon the underlying
theory, the base period and the design of the
experiment
– countries, in aggregate, lose from being excluded from
an RTA
– the larger the RTA, the larger are these losses
– in principle, a Pareto improvement is possible but in the
absence of inter-regional transfers, RTAs are
undesirable for outside countries
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3. Hubs and Spokes
The configuration of RTAs has changed:
– from a given country being a member of one and only one RTA,
if a member at all
– to the same country being a member of more than one RTA
The configuration today has been described as hub and
spokes
The hub may be:
– a single country, e.g., the U.S. or Singapore
– a group of countries (plurilateral hub), i.e., an RTA itself, e.g.,
ASEAN
The spoke may be:
– a single country
– an RTA (plurilateral spoke)
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Country 1:
Hub
RTA2 Country 3:
Spoke
RTA1
Country 2: ROW
Spoke
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RTAs in Effect in the APEC region, 2003
•Russia •Japan
•Korea
•China
•Mexico
ASEAN
•Canada
Cambodia Vietnam
Myanmar Laos
Malaysia Philippines
Indonesia Brunei
•Thailand
•Peru
•Chile
Singapore
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4. Effects of RTAs on Multilateral
Trade Liberalisation
The growth of RTAs may affect the rate of
multilateral liberalisation by:
– affecting the pace of liberalisation from MTNs: the
‘building block’ or ‘stumbling block’ debate
– affecting the pace of unilateral liberalisations
Evidence on the first:
– if based on theory, is ambiguous, depending on whether
the objective is welfare maximising or political self-
interest
– if based on empirical evidence pre-Cancún, RTAs have not
slowed the pace
– post-Cancún, the EU and the U.S. have signalled a passive
role in MTN but a pro-active role in RTAs
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Evidence on the second is mixed:
– countries in ASEAN, CER and Latin America have
continued to liberalise unilaterally within their RTAs
– within NAFTA, Mexico and Canada have done likewise
– neither the EU nor the U.S. has engaged in significant
unilateral liberalisation over two decades
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5. Conclusions
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• “the elimination of discriminatory treatment in
international trade relations” appears in the
preamble to the Marrakesh Agreement
establishing the WTO (WTO (1995)) and yet it,
too, is being ignored by those Members who are
forming RTAs
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References