Formation of new Regional Integration Agreements (RIAs)

1
Formation of new Regional Integration Agreements
(RIAs)
Source WTO Note Inactive data for years
2000-2002 are not available.
2
Types of RIA

• By increasing order of integration
• Preferential Trading Agreements (PTAs) give
  preferential access to partners without
  eliminating all barriers
• Free-Trade Areas (FTAs) eliminate internal
  tariffs to trade but leave members free to fix
  their external tariffs as they wish
• Governed by GATT Article XXIV
• Require the use of Rules of Origin (ROOs)
• Customs Unions (CUs) eliminate internal tariffs
  to trade and adopt a Common External Tariff (CET)
• Single/Common Market eliminate all internal
  barriers, direct or indirect, harmonize not just
  external trade policy but also regulations and
  standards
• Economic Union in addition, adopt a common
  currency and harmonize macroeconomic policy

3
The spaghetti bowl---An example East and South
Africa
4
Trade creation and trade diversion trade pattern
5
Trade creation and trade diversion numerical
example
Initial (MFN) tariff
Final (preferential) tariff
6
Trade creation and trade diversion gravity
estimates
trade creation
trade diversion
Source Carrère (2004)
7
Trade in the CIS and the CEECs more gravity
estimates
Coefficients on bilateral-trade dummy variables
Observed trade as a percentage of  potential 
trade
Source Koukhartchouk and Maurel (2003) Notes
means significant at 1, at 5 n.s. means
not significant Sample period 1994-2001.
8
Effect of RIA on the price of non-member exports
MERCOSURs formation
US export prices compared, Brazil vs ROW
9
Other effects of RIAs Income convergence
Convergence during reduction in trade barriers
Dispersion of per-capita incomes in the EC
10
Other effects of RIAs FDI
Launch of NAFTA negotiations
NAFTA put into force
Amount of FDI into Mexico, million dollars
11
Rules of origin Mexicos utilization of NAFTA,
2000, by HS section
10 tariff preference
5 tariff preference
Note NAFTA utilization rate proportion of
Mexican shipments entering the US under NAFTAs
preferential regime (as opposed to MFN)
12
Rules of origin Mexicos exports in ROO/tariff
preference space
Note ROO index Estevadeordals (2000)
qualitative index of ROO restrictiveness
(essentially how wide is the required change of
tariff heading to make imports eligible)
13
Rules of origin Why they hurt slicing up the
value chain becomes more difficult
Tunisia
Comparative advantage
Infrastructure-intensive
Cotton production
Labor-intensive
Ginning
Spinning
Weaving
Dying
Cutting
Assembly
Shipping
Retailing
Natural-resource intensive
Capital-intensive
14
Rules of origin Benchmark no preferential
access, no ROO (k 1)
? P p (net price)
Souths supply of value added
?(P,0) P
Fix P and p and start from here
?(P,p) P - p
Souths participation constraint
? P - p
p
Y
(FG quantities)
(inputs domestic price)
xs(p) Xk(X) (desired mix)
p (inputs world price)
Areas input supply curve
- 1
?(P,P) 0
X Y (IO coeff 1 implies 45 degree line)
x,x,X (input quantities)
Legend notation P final goods domestic
price in the North (world price P) Y Souths
output of the final good (exported to N) T
Norths tariff on the final good p inputs
domestic price in the area (world price p) Y
min V(K,L) X (Leontieff technology, unit IO
coeff.) X x x k(X) xs(p)/X desired
input mix determined by supply
15
Rules of origin Preferential access but no ROO
(k 1, blue)
? P p
Souths supply of VA
?(P,0) P
?(P,p) P - p
P - p
Souths participation constraint
P - p
p
Y
(inputs domestic price)
xs(p) Xk(X)
p (inputs world price)
Areas input supply curve
- 1
?(P,P) 0
X Y
x,x,X
16
Rules of origin Preferential access and ROO at
rate k (green) Case 1 participation constraint
not binding
?
Souths supply of VA
?(P,p) P (1-k)p kp
P - p
-k
P - p
Souths participation constraint
P - p
(FG quantities)
p
Y
-k(X) gt -k
Areas input supply curve
- 1
p
p (new price of input)
X Y
x,x,X
New notation P P T k x/X (Rule Of
Origin) p kp (1-k)p (price of composite
input given ROO) Increase in
input producers surplus
17
Rules of origin Preferential access and ROO at
rate k (green) Case 2 participation constraint
violated (inelastic supply of z)
?
Souths supply of VA
?(P,p) P (1-k)p kp
P - p
Souths participation constraint
P - p
P - p
-k
p
Y
Areas input supply curve (less elastic)
p
-k gt -k
-k
X Y
x,x,X
18
Rules of origin Pass-through of tariff
preferences the principle
US market
Price
Potential increase in Mexican producer price
Mexican post-tariff supply price
Mexican pre-tariff supply price
US internal price World price US MFN tariff
Tariff preference
World price
Preferential tariff
US demand
Quantity

• Assumptions
• No US production
• Mexican producers perfectly competitive
• Market power on the US buyer side, so ?t captured
  only partially by Mexicans

Potential increase in Mexican supply
19
Rules of origin Pass-through of tariff
preferences the principle
US market
Price
Potential increase in Mexican producer price
Mexican supply curve
US internal price World price US MFN tariff
Preferential tariff
US internal price pref. tariff
Tariff preference
World price
US demand
Quantity

• Assumptions
• No US production
• Mexican producers perfectly competitive
• Market power on the US buyer side, so ?t captured
  only partially by Mexicans

Potential increase in Mexican supply
20
Rules of origin Pass-through of preferences
NAFTA
Source Cadot et al. (2004)
21
Rules of origin Pass-through of preferences
NAFTA
lt roo0
US intermediate producer
US consumer market
ai1
ai2
Rest of the world
Mexican final good 1
lt roo1
lt roo2
Mexican final good 2
22
Rules of origin Pass-through of preferences
NAFTA
significant
not significant
significant
Source Cadot et al. (2004)