Week 9 Regionalism vs Multilateralism 1 World Trade Organization 2011 World Trade Report 2011 Part II section D 2 World Bank 2000 Trade Blocs Report of the World Bank Chapter 5 3 World Bank 2000 Trade Blocs Report of the World Bank Chapter 6 4 World Trade Organization 2011 World Trade Report 2011 Part II section E 5 Bhagwati Jagdish 1993 Regionalism and Multilateralism An Overview In Jaime DeMelo and Arvind Panagariya eds New Dimensions in Regional Integration Cambridge Cambridge University Press March 3 2014 Regionalism vs Multilateralism Goal for both free trade o Best method method Regionalism Multilateralism A combination Liberal economists argue that multilateral approaches are the 1st best strategy Regionalism theory of the 2nd best o Involves TD unlike multilateralism reduces utility of TC GATT WTO and RTAs War time negotiations o Before WWII the two dominant economies were the US and UK o UK wanted to maintain imperial preferences preferences toward former colonies o US wanted to do away with all types of discrimination GATT Article 1 called for unconditional MFN treatment o US wins the debate over UK GATT Article 24 permits countries to form RTAs if they o 1 Eliminate trade restrictions on substantially all trade among the members within a Waves of Regionalism 1st Wave late 1950s and 60s reasonable period o 2 Do not raise barriers on the whole to nonmembers Otherwise would have exasperated TD o Meant to eliminate the development of RTAs Not at all successful Poorly enforced States must only notify not ask permission o European Community as the exemplar ECSC EEC o EFTA o Talk of NAFTA but US indifferent o Outbreak of RTAs in LDCs LAFTA and CACM 1960 Attempts in Africa based on colonial associations o Very little long term success except in Europe 1 Why Southern RTAs could not reconcile regional liberation with ISI Hostility by the US to RTAs in LDCs 2nd Wave mid 1980s to 1990s o Growth in all regions o Participation of the hegemon 1985 Israel US FTA 1989 CUSFTA 1994 NAFTA o New energy in Europe 1986 Single European Act Europe 1992 o Collapse of the USSR o Developing developing country PTAs e g MERCOSUR o Explanations Shift in US position Frustration with multilateralism Relative decline growth of EU o LDC movement to orthodox liberalism away from ISI 3rd Wave 2000 to present o Continued participation by US and EU but now especially Asia o Much broader network of participants o Often a deeper level of integration o Not just free trade but common policies on services capital flows investment intellectual property regulatory systems labor and environmental standards o Impetus for this new wave frustration with stagnation at the multilateral level WTO Doha Round Dynamics of Regionalism Domino effect expansion within or across regions o Diffusion o Countries perceive benefits from membership o Costs from being left out o Interests within countries exporters Open regionalism any country willing to abide by RIA rules may join o Not likely because all member must agree o Whether this will work depends on the depth of the RIA Shallower RIAs have more chance for approval APEC came closest to success After 1992 a dramatic increase in RTAs o Collapse of USSR 2 US Trade Agreements Office of US Trade Representative USTR executive branch o Congress has been giving the power to negotiate treaties more and more to the executive US has FTAs with 20 countries o Most are politically motivated i e Israel regional security in Middle East o With countries like Bahrain and Oman that export goods that are not a threat to US producers i e pearls o 2 regional agreements 1 NAFTA 2 CAFTA DR March 5 2014 Regional Integration Building Blocs or Stumbling Blocs The argument for multilateralism o All come together and negotiate reductions which apply to all o An incremental process moving the entire system toward free trade Problem everyone must be on board only move as fast as the most reluctant country Excludable Non Excludable Rivalrous Private Goods Common Pool Resources Nonrivalrous Club Goods Regionalism Public goods Multilateralism Problem free rider collective action Countries cheat on FTAs WTO meant to prevent free riders and overcome collective action The argument for regionalism a two step process problems much deeper reductions Result a world of regional blocs o 1 A small number of similar states come together and can move quickly negotiate o 2 The small number of blocs negotiate to reduce barriers between themselves Result global free trade Opponents of regionalism fear never reaching step 2 3 Bhagwati article Paul Krugman s Argument Trade barriers will be lowest and world income greatest if o 1 There is a single world trade bloc containing all countries Global free trade OR trade o 2 There are many small independent countries Each so small they have no market power and no incentive to deviate from free Krugman s analysis 3 blocs produce the worst outcomes Large blocs have market power and therefore an incentive to use trade barriers to improve their terms of trade Regionalism and the GATT WTO Article 24 of the GATT o Regional agreements actually violate MFN o Has never been rigorously enforced developing countries o Makes Article 24 weaker than it already was The Enabling Clause 1979 in GATT relaxes conditions for creating RTAs that only include 4 Committee on Regional Trading Agreements CRTA o Established within the WTO in 1996 o Means of ensuring a more rigorous review of RTAs o Must be able to review RTAs before they are formed Containing the Fallout of Trade Diversion Limit agreements to geographically proximate regional blocs Outlaw FTAs only allow CUs And the common external tariff would be set at the lowest tariff among any of the members o The external tariff rate would be the lowest rate set by any of the members Eliminate non tariff barriers such as anti dumping AD and voluntary export restraints VER 5 Week 11 NAFTA 1 In Bong Kang and Kenneth Greene 1999 A political economic analysis of Congressional voting patterns on NAFTA Public Choice 98 385 397 2 Hills NAFTA s Economic Upsides Foreign Affairs 2014 3 Wilson NAFTA s Unfinished Business Foreign Affairs 2014 4 Castaneda NAFTA s Mixed Record Foreign Affairs 2014 5 ZepedaWise Gallagher Lessons from Mexico Under NAFTA 2009 March 17 2014 Origins 1985 Canada proposes FTA with US 1988 CUSTA Canadian US Trade Agreement 1 Jan 1989 CUSTA enters into force June 1990 US and Mexico agree to pursue FTA o Canada expresses interest in joining