Week 9: Regionalism vs. Multilateralism 1"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"• WarZtime"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"“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"Waves"of"Regionalism"• 1st&Wave:"late"1950s"and"60s"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"longZterm"success,"except"in"Europe"2" Why:" Southern"RTAs"could"not"reconcile"regional"liberation"with"ISI" Hostility"by"the"US"to"RTAs"in"LDCs"• 2nd&Wave:"midZ1980s"to"1990s"o Growth"in"all"regions"o Participation"of"the"hegemon:" 1985:"IsraelZUS"FTA" 1989:"CUSFTA"(1994:"NAFTA)"o New"energy"in"Europe" 1986:"Single"European"Act"(Europe"1992)"o Collapse"of"the"USSR"o DevelopingZdeveloping"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""3"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"problems"• The"argument"for"regionalism:"a"twoZstep"process"o 1)"A"small"number"of"“similar”"states"come"together"and"can"move"quickly"negotiate"much"deeper"reductions" Result:"a"world"of"regional"blocs"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"""""""""4"• 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"al l "countries" Global"free"trade"OR&o 2)"There"are"many"small"independent"countries" Each"so"small"they"have"no"market"power"and"no"incentive"to"deviate"from"free"trade"• 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"• The"Enabling"Clause"(1979)"in"GATT:"relaxes"conditions"for"creating"RTAs"that"only"include"developing"countries"o Makes"Article"24"weaker"than"it"already"was"5"• 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"nonZtariff"barriers"such"as"antiZdumping"(AD)"and"voluntary"export"restraints"(VER)""Week 11: NAFTA