FS07 Regional Integration and Economic Globalizati

Regional Integration and Economic Globalization: 

Regional Integration and Economic Globalization

Slide2: 

Does regional economic integration reinforce economic globalization?

Structure: 

Structure What is regional economic integration? Global trade system and regional integration Geography of international trade Trade effects of regional economic integration

What is regional economic integration?: 

What is regional economic integration? Establishment of closer economic relations between (neighbouring) countries Typically, economic integration can be broken down into 4 levels: Free trade area Customs union Economic and monetary union Political union

Global trade system and regional integration: 

Global trade system and regional integration Since the end of WWII the US championed global liberalization of trade Why? Inception of GATT The pursuit of global trade  a difficult task Emergence of regional trade organizations also refered to as Preferential Trade Agreements (PTAs) In 1990s “second wave” of PTAs corresponding with birth of WTO

Slide6: 

Creation of NAFTA  regionalism as a tactical device to support multilateralism? Two competing positions: PTAs are a stepping stone to global trade liberalization PTAs enable governments to combat exogenous economic shocks and forces of globalisation by strengthening their position in trade negotiations

Classical Liberal Case Against PTAs: 

Classical Liberal Case Against PTAs PTAs are second best option Distortive to global trade Negotiating strength may lead do to policies exploiting the rest of the world (ROW)

Slide8: 

However, international market are far from ideal competition PTAs may remove trade distortions by lowering tariffs Greater consumer demand stimulated by lower prices may cause trade creation

The Relation between GATT/WTO and PTAs : 

The Relation between GATT/WTO and PTAs WTO – based on the principle of the most favoured nation (MFN) PTAs run contrary to the logic of MFN WTO rules allow for creation of PTAs as long as they aim for freer international trade facilitate trade between the constituent territories do not raise barriers vis-à-vis the ROW

Slide10: 

According to Schiff and Winters (2003), the key factors to determine trade effects of a PTA are: Its relative size Population Share of world trade Level of ‘openness’ The compatibility of PTAs with WTO requirements was seldom effectively challenged New wave of ‘defensive’ regionalism in 1990s? Geography of trade and empirical studies on trade ‘openness’ provide some indication

Geography of Trade: 

Geography of Trade Trade not truly global Concentrated in the ‘triads’ – EU, NAFTA, ASEAN Largely due to presence of multinational enterprises (MNEs) – account for 50% of international trade, often intra-industrial Despite advances in technology, most trade remains ‘intra-regional’

Slide12: 

Examples: Growing share of intra-regional trade in Western Europe since the introduction of Single European Act Similar developments in NAFTA Notable exception  Africa – dependent on extra-regional imports

Trade ‘openness’ of PTAs: 

Trade ‘openness’ of PTAs Soloaga and Winters (2001) analyze the effects of PTAs using a gravity model Considering trade effects based on two sets of attribute of trading partners: size (GDP, population, land area) and transaction costs (distance, cultural similarities etc.) Results suggest that especially the EU has had strong trade diverting effects since mid-1980s.  Regional integration happening at the expense of the ROW

Conclusions: 

Conclusions PTAs enable governments to play with bigger cards while negotiating trade agreements At the same time, run contrary to the principle of WTO Some evidence suggests that PTAs contributed to regionalization of world trade rather than to its globalization The question arising: is it wrong to seek stronger position on the world market?

Reading: 

Reading Soloaga, I. and Winters, L., A. (2001) ‘Regionalism in Nineties: What Effect on Trade?’. Available at: http://www.worldbank.org/html/dec/Publications/Workpapers/wps2000series/wps2156/wps2156.pdf Mirus, R. and Rilska, N. (2003) ‘Economic Integration: Free Trade Areas versus Customs Unions’. Available at: http://www.iir.gov.ab.ca/trade_policy/pdfs/WCER-FTA_custom_unions_shortversion_Aug01.pdf