Building trade and investment capacity in Myanmar

International Trade II: Regional Integration, Preferential Trade Policies

and Agreements Presented by Mia Mikic

mikic@un.org

Intensive training on trade policy and analysis, 26-31 May 2014, UMFCCI Building, Yangon

1

About terminology • Wikipedia Regional integration is a process in which neighboring states enter into an agreement in order to upgrade cooperation through common institutions and rules. A preferential trade area (also preferential trade agreement, PTA) is a trading bloc that gives preferential access to certain products from the participating countries. This is done by reducing tariffs but not by abolishing them completely. A PTA can be established through a trade pact. It is the first stage of economic integration. The line between a PTA and a free trade area (FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade.

2

• Deardorff’s glossary of international terms:

Regional integration: The formation of closer economic linkages among countries that are geographically near each other, especially by forming preferential trade agreements. Preferential trade arrangement: 1.A group of countries that levy lower (or zero) tariffs against imports from members than outsiders. Includes FTAs, customs unions, and common markets. Encouragement to use this term instead of the more misleading FTA has come from Jagdish Bhagwati, as in Bhagwati and Panagariya (1996). 2. Frankel (1997) uses PTA for an arrangement where internal tariffs are reduced but not zero, reserving FTA for a trading bloc with zero internal tariffs.

3

• Business dictionary Regional integration: An arrangement for enhancing cooperation through regional rules and institutions entered into by states of the same region. Regional integration could have as its objective political or economic goals or in some cases, a business initiative aimed at broader security and commercial purposes. Regional integration could have an intergovernmental or supranational organization. Preferential trade agreement: A trade pact between countries that reduces tariffs for certain products to the countries who sign the agreement. While the tariffs are not necessarily eliminated, they are lower than countries not party to the agreement. It is a form of economic integration. See also Trade and Investment Framework Agreement (TIFA), bilateral investment treaty, free trade area, customs union, common market, monetary union

4

So, for the purpose of discussion in this session

• Regional integration = economic integration and it has several levels of depth and scope of integration

• Institutional mechanism : various agreements (contracts)

5

Forms of Economic Integration

Preferential Tariff/Trade Arrangement

Free Trade Agreement

Customs Union

Common Market

Economic Union

6

Text-book taxonomy FTA Customs

Union

Common

Market

Monetary

Union

Economic

Union

Free trade

among

members

Yes Yes Yes Yes Yes

Common

external tariff

regime

No Yes Yes/No Yes/No Yes

Free resource

mobility (and

some macro

coordination)

No No Yes Yes Yes

Common

currency (or

fixed peg)

No

No

No

Yes

Yes

Common

macro-

economic

policies

No

No

No

Yes

Yes

7

What are we going to talk about in this session?

• Reasons for a country to consider regional integration / cooperation

• Coexistence with MTS- regional integration and WTO rules: – GATT Art XXIV

– GATS Art V

– Enabling clause

– Transparency mechanism (2006)

• State of regional integration in Asia

8

International cooperation

• Many incentives/ reasons for international cooperation pre WWII and afterwards.

• GATT and WTO delivering MTS

• Still not sufficient for countries and alternative avenues (PTAs) sought

9

WTO disciplines on RTAs

Primacy of MTS as an optimal liberalization path

MTS is the pillar of non-discrimination – MFN (most-favoured nation principle)

*Why then over 140 agreements in Asia-Pacific and more than 350 in the world? Several reasons (list non-exhaustive):

1. MTS too slow or not able to deliver market access 2. Competitive liberalization 3. Domino effect 4. Credibility for reforms/national security 5. Enabling learning among “willing partners” 6. Etc…

RTAs – Complementary to MTS or BAD idea?

• Free trade based on comparative advantage (CA) – many factors necessary to make it work; ‘policy space’ needed for LEARNING BY DOING (trading, negotiation, etc) MTS “minus” variants

• MTS too restrictive (scope, extent of liberalization, etc) MTS “plus” variants

• In both cases justified from perspective of the parties involved; what about THIRD PARTIES?

TRADE CREATION vs. TRADE DIVERSION

• Cannot say much A PRIORI

• KEMP-WAN-VANEK theorem provides some solution but in practice not easy

• This uncertainty about NET RESULT led to built-in waivers in GATT and WTO (exceptions): – ART XXIV GATT

– ART V GATS

– Enabling Clause

• No agreement in conformity with the WTO (?)

• Flexibility resulted in proliferation of RTAs….

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Current status

Exceptions conditional GATT– Art XXIV

• Article XXIV 1947

• Conditions: – Neutrality requirement (5 a and b)

– Transparency requirement (7a)

– Commitment to deep integration -substantially all trade in a reasonable time (8 a and b)

– Compensation requirement (6 ref to Art XXVIII)

• Uruguay Round Understanding

• Establishment of CRTA in 1996

Enabling Clause 1979

• Notification (4a and b)

• UR-

• For partial scope agreements

• CTD

GATS V 1995

• Substantial sectoral coverage (1 a)

• No a priori exclusion of any mode of supply (footnote to 1a)

• Eliminate substantially all discrimination – provide national treatment within a reasonable time (1b)

• Note that agreements are called EIAs, notified to CTS for all members (no separate treatment of Ding countries)

Waiver clause

• GATT XXV:5 – members jointly can waive an obligation, including MFN, imposed upon another member

• In pre WTO history 28 waivers granted, most for non-reciprocal preferences

Present…based on DDA Declaration

(a) Issues of systemic (substantive) nature; (b) Issues of a procedural nature with a focus on: (i) Improving transparency with respect to RTAs; and (ii) Improving procedures for the consideration/surveillance of RTAs by WTO.

Systemic issues

• (a) Issues related to the interpretation of the existent disciplines under Article XXIV of GATT and Article V of GATS;

• (b) Issues related to coherence between the existent RTAs rules, and between those rules and other disciplines in the WTO agreements;

• (c) Issues related to potential institutional tensions and potential conflict between RTAs and MTS;

• (d) Identification of the “developmental aspects” of RTAs and how to best reflect these aspects in RTAs rules in WTO.

Procedural issues- Transparency Mechanism

• The first tangible result of DDA negotiation

• Offers systematic way of gathering information and surveying; but no ground for Dispute Settlement?

• Factual presentation distributed for a number of RTAs

• Many more Factual Abstracts and presentations “in preparation; still many ‘on hold’

23

Proposed Timeline for Factual Presentations in the CRTA/CTD

1. Notification of the RTA

2. Submission of trade and tariff line information as +10 weeks / 20 weeks*

specified in Annex I of the Transparency Mechanism

3. Draft of the Factual Presentation sent to the Parties +6 weeks

4. Jointly agreed comments received from Parties +4 weeks

5. Comments integrated into Factual Presentation +2 weeks

6. Factual Presentation circulated in all three languages +3 weeks

7. Written questions received from Members +4 weeks

8. Written responses received from Parties +4 weeks

9. Q&R circulated to the Members +2 weeks (at the latest 3 days before the meeting)

Total time lapsed since notification 35 weeks / 45 weeks*

* In the case of RTAs involving only developing countries.

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Date Scheduled for

ConsiderationAgreement

Circulation

DateDocument

Deadline for

written

questions

CRTA 72nd Session

7-8 April 2014

Panama - Central America (Honduras, Nicaragua

and Guatemala) (Goods and Services)27-Jan-14 WT/REG278/1 24-Feb-14

Republic of Korea - Turkey (Goods) 22-Jan-14 WT/REG339/1 19-Feb-14

European Union Enlargement - Accession of

Croatia (Goods and Services)27-Jan-14 WT/REG337/1 24-Feb-14

WT/REG335/1 14-Feb-14

Deadline for circulation: 27 January 2014

06-Jan-1427-Nov-13European Union - Bosnia and Herzegovina (Goods) WT/REG242/1

Panama - Canada (Goods and Services) 17-Jan-14 WT/REG334/1 14-Feb-14

Chile - Malaysia (Goods) 3-Dec-13 WT/REG330/1 07-Jan-14

Canada - Jordan (Goods) 17-Jan-14

State of regional integration in Asia (and Pacific)

• Increasing number of FTAs due to

– Intensification of FTA activity in Europe

– Stalled Doha Round

– Need to remove impediments to broadening market-led

integration

→ Number likely to increase further

• 85% presented as free trade deals

• Only 2% are customs unions

• Only 11% declared as having partial scope

• ASEAN pursues Asian Economic Community but

still ASEAN members seek bilateral agreements

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• Mostly bilateral agreements, often in same

subregion

• 223 agreements involving economies in Asia and

the Pacific

• 2008-2012: more than 8 agreements put into force

each year on average

• 118 bilateral agreements in the region

• 56 with partners outside Asia-Pacific

• 11 agreements enacted with partners in Middle East,

15 with Latin America

• 15 plurilateral agreements (8.1 members on

average)

27

28

0

20

40

60

80

100

120

140

160

Developing-developing Developed-developing Developed-developed

Cumulative number of PTAs enacted by Asia-Pacific economies during 1973-

2013 (August), notified and non-notified to WTO

ESCAP calculation based on data from Asia-Pacific Trade and Investment

Database (APTIAD).

• More than 50% cover free trade in goods

• Another 30% include free trade of goods and

services

• Different labeling, i.e. not “FTA”→ intention of

engaging in wider integration

• Tariffs have decreased considerably

• Emergence of an “Asia-Pacific bowl”

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Trends in Developing Countries

30

Source: Baldwin 2012

The “FTA Noodle Bowl”

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UN ESCAP, Asia-Pacific Trade and Investment Database (APTIAD)

Fragmented Asia and the Pacific

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UN ESCAP, Asia-Pacific Trade and Investment Database (APTIAD)

• FTA increase led by Singapore, India, China,

Republic of Korea and Japan

• Singapore leads with 38 FTAs in place (Jan.2013)

• Most ASEAN+1 agreements achieve intra-FTA

imports in total range of 20-23%

• APTA intra-regional imports lingers at 14-15%

• SAARC intra-regional imports almost <1%

33

Current FTAs in Asia-Pacific

34

Country Number of Agreements FTA Coverage

Malaysia 27 56.8

Singapore 38 66.4

Indonesia 22 68.5

Philippines 16 62.5

Viet Nam 19 45.9

Lao People’s Democratic Republic 14 85.4

Thailand 29 52.3

Brunei Darussalam 18

Myanmar 13

Cambodia 12 16.9

China 27 31.9

Japan 26 18.5

Republic of Korea 32 61.7

Australia 22 18.6

India 34 24.5

New Zealand 20 46.9

Source: ADB ARIC Database Source: UN ESCAP Country Briefs 2013

Challenges in FTAs

• Exclusion lists

• Open trade-led Asian development as example for other regions of the world?

– Importance of pursuing market-friendly trade and industrial policies to develop supply chain trade

– Improving surveillance on non-tariff measures

– Consolidating trade agreements into large region-wide ones

35

What has changed?

• Contents and members changing over the years

• Singapore issues increasingly incuded:

– Competition

– Government procurement

– Intellectual property

– Investment

• WTO-PLUS provisions

36

Recent developments

• Recent multilateral negotiations (mega deals):

– Trans-Pacific Partnership (TTP)

– Regional Comprehensive Economic Partnership

(RCEP)

• Bowl has adverse impact on efficiency of

trade between agreements members

• No correlation between number of FTAs a

country signs and the trade share attributed

to those arrangements

37

Rules of Origin (ROO) • Almost certain that it would benefit intra-regional

trade and facilitate sourcing from lesser developed countries

• Lack of uniformity of cumulation become major discussion point →“open cumulation” as potential solution

• Potential development role → ROO can enforce forging forward and backward linkages

• Regional value added for cumulation of 60% in APTA (15% higher than single country value added)

38

Challenges in FTAs

• Many FTAs do not feature LDCs (only 4 out of

114)

• CLMV countries covered through ASEAN but not

independently

• Non-tariff barriers often not covered

• Many different agreements → rules not coherent

• Overlapping FTAs might be rising transaction

costs esp. for SMEs

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Preferences Utilization • Utilization rate among Asian countries very low: usually

10%-20%, rarely above 25%

• NAFTA: more than 60% of Mexican exports to the US enter at preferential rates, 55% of Chilean exports take advantage of the relevant FTA

• Rates in EU generally even higher

→ nature of Asian intra-regional trade (esp. among ASEAN+3 ) as answer to low utilization rates

• A rate of 25% would reduce benefits by slightly less than 75% due to reduced trade diversion

• Without comprehensive conclusion of the Doha round, multilateralization of preferences even without reciprocity it the approach most likely to deliver the greatest benefits

40

Other concerns

• Trade in Asia-Pacific has been more market-driven (growth-driven?) than PTA-driven: sustainability?

• Forging agreements with partners outside the region kept Asia as a relatively open bloc: helping global economy?

• RTAs in Asia not “economic integration”: weak regional institutions and lack of incentives for convergence?

• Given changes in global economy, is there a need / possibility for stronger regional trade governance / integration?

Intra-PTA trade static in terms of shares