21st Century Regionalism

Richard BaldwinGraduate Institute, Geneva 

RIETITokyo, 2 February 2011

1

Globalisation as 2 unbundlings• Put 21st century regionalism into broad canvas of economic globalisation.

2

Pre‐Industrial Revolution

3

Consumption & production

bundled

Very little trade

Production

&

Consumption transportation

Globalisation’s First Unbundling

4

Production Bay B

Production Bay A

Production Bay C

Coordination“glue”

Transportation “glue”

weakened

Estimated Transport costs, 1870 ‐ 2000

5

1011111212131314141515

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

1870

1875

1880

1885

1890

1895

1900

1905

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

Source: David , Meissner, and Novy (2011)

Averge global trade cost measure

Global trade flow (right scale in logs)

1910 1970

1980

20th trade & trade governance

1.Trade disciplines required = fairly simple:GATT 1947.

2.Trade liberalisation = tariff cutting.

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Bay BBay A

Bay C

Bay BBay A

Bay C

• International commerce = goods crossing borders.

Globalisation’s Second Unbundling

7

Coordination “glue” weakened by

ICT revolution

Bay BBay A

Bay C

ICT revolution 2nd unbundling Steam power 1st unbundling

ICT revolution indicators

8

1985 1995

Outward processing trade, 1967 – 2005.

9

0

1

2

3

4

5

6

7

% o

f wor

ld m

anuf

actu

res

impo

rts

Source: Amador and Cabral (2008)

TotalAsiaEuropeNorth AmericaLatin AmericaAfrica

Source: Amador and Cabral (2008).

1985

Number of Japanese auto and electrical machinery plants in East Asia, 1975 – 2004

• Source: Fujita and Hamaguchi (2006). 

10

Malaysia

Thailand

Vietnam

China

Indonesia

0

100

200

300

400

500

600

700

800

900

1975 1980 1985 1990 1995 2000 2004

19851995

Widening and deepening of Factory Asia, 1985 and 2000

11

1985 China Indonesia Malaysia Philippines Thailand Singapore Taiwan Korea JapanIndonesia 8% Malaysia 16% Philippines Thailand China 2% 14% Taiwan 3% Korea Singapore 3% 7% Japan 3% 12% 14% 4% 9% 12% 7% 8% RoW 15% 19% 19% 14% 11% 10% 16% 8%

International input-output matrix

2000 China Indonesia Malaysia Philippines Thailand Singapore Taiwan Korea Japan Indonesia 2% Malaysia 3% 4% 12% 2% Philippines Thailand 4% 3% 3% China 2% 3% 4% 5% 2% Taiwan 5% 5% 3% 3% Korea 2% 3% 4% 8% 3% 4% 4% Singapore 13% 6% 4% Japan 2% 7% 15% 20% 16% 19% 14% 7% RoW 4% 16% 20% 20% 17% 38% 15% 11% 4%

Source: Baldwin (2006) “Managing the Noodle Bowl”

21st century trade more complex

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Bay B

Bay BBay A

Bay C

Bay BBay A

Bay C

Summary• 21st century trade is more complex.

– 20th century trade = goods made crossing borders.

– 21st century trade = multi‐directional (mostly regional) flows of people, goods, services, capital, and information.

• ICT is to 2nd as steam was to 1st, – Not mostly about trade costs, rather about coordinating production internationally.

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Governance Gap• 21st century trade needs deeper disciplines.

• Early recognition & policy response (1986):– EU’s Single Market Programme.

– US‐Canada FTA.

– Uruguay Round’s new issues. 

• ICT revolution accelerates N‐S unbundling – Need for new disciplines North‐South.

– WTO is otherwise occupied.                                       Governance gap.

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21st century regionalismFilling governance vacuum:

1. Explosion of BITs 1990s.

2. North‐South deep RTAs.

3. Unilateral liberalisation (tariffs & pro‐biz reforms).

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Explosion of BITs in 1990s

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0

500

1000

1500

2000

2500

0

50

100

150

200

250

No

of T

reat

iesNo. of Treaties Signed

No. of Treaties Signed (Cumulative)

FDI in Billion US$

1985

1995

North‐South Deep RTAs• US’s NAFTA‐like agreements (after 1994)

• Japan’s EPA‐like agreements (after 2007)

• EU’s Association agreements (after 1994).

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18

Unilateral tariff liberalisationAverage tariff rates, developing nations, 1982 - 2003

AR

BO

BR

CH

COEC

MX

PE

PY

UYVE

0

10

20

30

40

50

60

70

80

90

1985198619871988198919901991199219931994199519961997199819992000200120022003200420052006

Applied MFN tariffs (%) ARBOBRCHCOECMXPEPYUYVE

0

2

4

6

8

10

12

14

16

18

20

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Applied MFN tariffs (%) Philippine

Thailand

Korea

Malaysia

China

Indonesia

Singapore

19921985

1992

1985

1992

1985

Unilateral Pro‐biz Reforms• Some “import liberalisation” help you export and/or attract offshored factories.– Pro‐FDI policies.

– Pro‐customs facilitation policies.

– Pro business‐establishment policies.

– Pro ‘infrastructure services’ liberalisation.

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Summary: RTAs Not About Tariff Preferences• 20th century regionalism (tariff preferences) still matters:– A lot for small RTAs,

– A little for big RTAs.

• FACTS:

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0 20 40 60 80 100

CEMAC GCC

UEMOA Andean Community

ECOWAS CARICOM

MERCOSUR CEFTA

COMESA EAC

SADC NAFTA

SACU CACM

ASEAN EU27 EU15 EFTA

Zero MFN tariff (% Total Imports)

0 2 4 6 8 10 12 14 16

CEMAC COMESA

EAC ECOWAS

UEMOA CARICOM

SADC SACU

MERCOSUR Andean Community

CEFTA ASEAN CACM

NAFTA GCC

EU27 EFTA

MFN applied tariff (trade weighted average)

10%5%

EFTA

EU

ASEAN

SACU

NAFTA

Possible preference margins are low

21 Source: Archarya, Crawford & Renard (2010)

50%

EFTA

EUASEAN

SACUNAFTA

Detailed Data• Carpenter & Lendle (2010)

– Detailed tariff‐line import and tariff data,

– covering almost 90% of world imports in 2008. 

• Results:– 50% of trade over RTAs, but

– Only 16% eligible for preferences (due to zero MFN).

– Less than 2% imports have preferences over 10%.

• ERGO: RTAs are not only about preferential tariffs.

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Death of preferences

230% 20% 40% 60% 80% 100%

Total Total (ex intra-EU)

EUR-intraEUR-extra

SwitzerlandTurkeyMexicoCanada

USChinaJapanKorea

Hong KongSingapore

TaiwanIndia

AustraliaRussiaBrazil

AregentinaMalaysiaThailand

Indonesia

Preferential margins

MFN=0% 0% (MFN>0%) 0 - 5% 5 - 10% 10 - 20% > 20%

Source: Carpenter & Lendle (2010)

Numbers

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 unknown

MFN=0%0% 

(MFN>0%)

 0 ‐ 5%  5 ‐ 10%  10 ‐ 20%  > 20%

Total  1.2% 47.3% 21.8% 18.5% 7.5% 2.4% 1.4%Total (ex intra‐EU) 0.7% 52.3% 30.3% 11.0% 3.9% 1.3% 0.5%

Conceptual frameworks

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Traditional regionalism v 21st regionalism• Traditional view:

• 21st regionalism:

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RTAs = tariff preferencesRTAs = tariff preferences

RTAs = disciplines underpin 2nd unbundlingRTAs = disciplines underpin 2nd unbundling

Difference without distinction?• Why we care about regionalism:

– Economic inefficiency from discrimination

– Injustice and power asymmetries

– Threats to support for multilateral liberalisation

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Traditional view: preferential tax economics

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Smith’s certitude = Preference-getter wins.

Viner’s ambiguity = Preference-giver might lose.

Haberler’s spillover = third nations lose.

Received wisdom thinkingVinerian economics & implied political economy

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Summers: “I like all the ‘isms”

Bhagwati: “Termites in the system”

Krugman: “Is bilateralism bad?”

Regulation economics, not tax economics• 21st century regionalism not about preferences, so Vinerian economics is moot or insufficient.

• Regulation economics far more complex than tax economics.

‐ Frictional barriers (BBBs).

‐ Entry restrictions.

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21st c. Regionalism: Different economics• Frictional barrier liberalisation

• If rules‐of‐origin‐like tools available• Only Viner’s ambiguity dead.

• Without discrimination tools (many TBTs)• Haberler’s spillover also dead.

• {E’metric estimates of external trade creation}

• Domestic entry liberalisation• Incumbents v entrants; not home vs foreign.

• Discrimination very difficult.

• Property right assurances• Ditto

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Regulation economics, not tax economicsShould policy be in WTO?

• Tariffs = strong logic for centralisation at global level (MFN better than RTA).

• Regulation = mixed logic for centralisation.– “Fiscal federalism”: e.g. competition policy? Bank regulation? Telecomms regulation?

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Injustice & power asymmetries• Deep RTAs worse that shallow RTAs (power p.o.v.).

– Article 24 limits large partner's bargaining power.

– Article 5 GATS ditto (weakly) for services.

– No such WTO disciplines on BBBs• de facto = NS deep RTAs almost exclusively one‐sided on BBBs.

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Different political economy

1. Basic nature of bargain– Traditional =

– 21st c. = Northern factories for Southern reform.

2. Implications:– Only EU, US & Japan can do this deal (yet).

– WTO = no factories on offer.

– RTA tariff cuts multilateralisable; BBBs disciplines maybe not; 

• EU, US, Japan disciplines incompatible?

3. Unilateral tariff cutting = hole in WTO fuel tank.

Threats to WTO support

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exchange of market access.

• 1st unbundling: – GATT & RTAs mainly about tariffs.

• 2nd unbundling: – 21st century regionalism mainly about BBBs

– Politics: factories for reform

• Key questions 21st c. regionalism: – Are US, EU and Japanese disciplines multilateralisable?

– Can & should some disciplines be brought under WTO?

Sum up

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Sum up (cont’d)• Should we develop WTO disciplines like Art.24/Art.5 for deeper disciplines?

• How do new trade giants (China, India, Brazil, etc.) fit in?

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Future scenarios for WTO• Plan A (WTO centricity restored): 

– WTO disciplines updated to match 21st century trade.

• Plan B (WTO centricity eroded): – WTO unreformed, RTAs & BITs continue to lead.

– Drift back towards a 19th century Great Powers world?

• B.1: WTO stays vibrant with Marrakesh disciplines only; deeper disciplines outside.

• B.2: WTO credibility withers; bicycle falls over.

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