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Abstract:
Will the current wave of regional integration arrangements lead to the world being divided into competing inward-looking trading blocs? Or will it lead to a more open multilateral trading system? Using a multicountry political economy model, and after having shown that global free trade is optimal, I investigate the possibility of achieving it through regionalism.

An outsider country considering entering a trading block must weigh the tradeoff between the costs of opening its own market to more foreign competition and the gains from getting better access to the bloc's preferential market. The gain of access is always larger, so an outsider would always want to apply for membership in the existing bloc. If the bloc policy is open membership, its expansion would result in global free trade.

But if member countries can accept or reject new members, expansion of the bloc is unlikely to yield global free trade. When deciding whether to accept or reject a new member, an insider compares the gains from getting preferential access to the new member's market with the losses from having to share its original preferential market with the new member. When the bloc is small, the gains are large enough to offset the losses, so insiders are willing to accept new members. As the bloc expands, the insiders' incentive for expanding decreases, eventually to zero. If only one regional integration arrangement were allowed to form, insiders would stop accepting new members when half the world belonged to the bloc.

The remaining outsiders would probably form a bloc of their own, which would lead members of the original bloc to increase its size in anticipation of the creation of the second bloc. The threat of regionalism by outsiders would foster larger regional integration arrangements.

In this model, the typical subgame perfect equilibrium would be two blocs, one of them containing roughly two-thirds of the world, the other containing roughly one-third.

Even if blocs form and merge simultaneously, yielding progressively larger symmetrical blocs, they would fail to converge in a single bloc unless the external tariff were low enough. In other words, global free trade could be achieved through bloc expansion if trading blocs lowered their external tariffs when abolishing their internal tariffs.

Abstract:
The paper studies the effects of regional integration on the incentives of members and non-members to undertake multilateral trade liberalization. Using a three-country political economy model with imperfect competition, it shows how regionalism can undermine support for multilateralism. Discriminatory trade policies alter the balance of gains and losses that members and non-members experience from multilateral liberalization. As the degree of preference within the PTA increases, the member countries' support for large multilateral tariff cuts, as well as the excluded countries' support for small multilateral trade liberalization, declines.

Abstract:
In a sequential Computable General Equilibrium analysis, we investigate the likely effects of the EU-South Africa Free Trade agreement (FTA), with a special emphasis on South Africa's growth prospects. We find that the FTA increases South African output and welfare. We note, however, that the gains are very modest when viewed in the context of the time period over which full adjustment to the treaty provisions is expected to occur. Only 2 percent of the economic growth expected over the next 18 years in South Africa can be linked to additional trade associated with the FTA. The long phase-in period and the partial benefits of regionalism limit the importance of trade as an engine of growth.

Regionalism, Growth, Free Trade Area, South Africa, European Union

Abstract:
The creation or the expansion of a Preferential Trade Arrangement (PTA), in general, hurts the non-member countries because of trade diversion. This could increase the pressure for protection in the non-member countries and, ultimately, worsen the member countries' market access in those outsiders. The insiders have an incentive to pre-empt this reaction by liberalizing their external trade. Regionalism can help multilateralism.

Abstract:
The global economic effects of eliminating certain significant categories of non-tariff measures (NTMs) are estimated in a CGE context. As a first step, a database of institutional information identifying alleged instances of NTMs for particular products and countries is constructed based on WTO, U.S. Government, and EU sources, and compared with the UNCTAD policy inventory. This database is then concorded to a GTAP-feasible multiregion, multisector aggregation. Retail price data from the EIU CityData database, similarly concorded, are analyzed econometrically, taking into account systematic deviations from purchasing-power parity, to determine whether and to what extent the presence of alleged NTMs is associated with significantly higher prices. The estimated price effects are then used to calibrate a CGE simulation in order to obtain simulation estimates of trade and welfare effects of their removal, which can be disaggregated. Removal of the categories of NTMs under consideration yields global gains on the order of $90 billion. These gains arise notably from liberalization by Japan and the European Union by region, and from liberalization of apparel and machinery/equipment by sector.

Non-tariff measures

Abstract:
This paper uses a differentiated-good model to study the welfare effects of Regional Integration Arrangements (RIAs). It shows, on the one hand, that an expansion of a regional grouping always unambiguously hurt those that are left out even if the external tariffs of the RIA remain constant. On the other hand, the effects of an expansion on a member country's welfare is positive for small RIA size but becomes negative as the RIA becomes large.

Regional Integration, differentiated good model, bloc expansion

Abstract:
This article discusses whether the current proliferation of preferential trade agreements - the so-called competitive liberalization - encourages evolution toward multilateral free trade. It argues that countries pursuing preferential trade initiatives are in pursuit of the economic rents resulting from the trade diversion associated with trade preference (or discrimination). By lowering the margin of preference, multilateral trade liberalization reduces those rents and is likely to be resisted by members of trade-diverting preferential blocs. Future preferential agreements should be designed to be less trade diverting in order to be more compatible with the objective of global free trade.

Competitive liberalization, Multilateralism, Preferential Trade Agreements

Abstract:
International Transport Services (ITS) play an important role in influencing international trade flows. This paper develops an analytical framework in which ITS costs are endogenously determined. It shows that ITS sector liberalization foster international trade very much the same way tariff liberalization does. From a political economy viewpoint, a unilateral liberalization of the sector may not always be politically feasible, and a multilateral agreement can help prop up support for reform. It is further argued that deregulation and competition policy reform are more likely to be feasible if undertaken jointly.

International Transport, Trade Facilitation, Political Economy

Abstract:
This model shows that a microstate's decision to form, expand, or join a regional organization is based on reduced negotiating costs and increased bargaining power, rather than on the traditional costs and benefits of trade integration. Forming a regional grouping with neighboring nations may be one way for microstates to overcome a major problem: Because of their weak bargaining power and high fixed costs of negotiation, microstates are at a severe disadvantage in dealing with the rest of the world. They don't have the human and physical resources to unilaterally conduct the various bilateral and multilateral negotiations a developing nation typically conducts. Andriamananjara and Schiff present a model in which the decision to form, expand, or join a regional club is based on reduced negotiating costs and increased bargaining power, rather than on the traditional costs and benefits of trade integration (which might be miniscule for a microstate and might even generate welfare losses). Under various conditions for entry, the model is used to determine the equilibrium group size, which is shown to be positively correlated with the number of issues to be tackled, the degree of similarity among countries, and the per-issue costs of international negotiation. They use the case of the Caribbean Community (CARICOM) to show the model's relevance in the real world. The countries that belong to CARICOM pooled their negotiating resources and formulated common policy stances. Despite its relatively limited impact on trade and investments, CARICOM served as a political instrument in joint negotiations on trade and investment with larger countries and regional trade blocs. By establishing a union, the CARICOM countries succeeded in making their voices heard on a variety of issues in a way none of them could have done alone. This paper - a product of the Development Research Group - is part of a larger effort in the group to examine the economics of regionalism and development. Maurice Schiff may be contacted at mschiff@worldbank.org.

Abstract:
The developing countries that began trading more openly in the 1980s did so incrementally-shock therapy was uncommon. Asian countries led in trade reform and openness, so their export-led growth performance was not surprising. African countries trailed in reform and have still not become as open as other countries.

Developing countries experienced a revolution in trade policy in the 1980s and 1990s, but it is unclear how much real openness increased. After all, they had started with multiple, often redundant, trade restrictions. And it is unclear how changes in openness should be measured.

The most appropriate measure of openness is based on imports of consumer goods, argue Andriamananjara and Nash, since these imports commonly face the biggest trade barriers. After developing several such measures, including a measure of the change in tariff equivalent protection, they explore the recent evolution of trade policy, using readily available trade data.

Openness has developed incrementally rather than overnight. In the early stages of adjustment, barriers to imports tended not to be reduced much. At first, the net reduction of incentives to produce import substitutes was minor, especially when currency depreciation is considered. Recently import barriers have been reduced more substantially, and since there has been little currency depreciation, incentives to produce import substitutes have declined.

Shock therapy was uncommon. A few countries moved quickly to eliminate nontariff barriers to imports and to adopt low, fairly uniform tariffs. But most countries tended to peel away redundant layers of trade barriers, one at a time. They usually began with the barriers embodied in rationing and exchange controls, proceeded to nontariff measures, and finally reduced tariffs. Each step may have reduced protection a bit but the big reductions apparently came only in later stages. Still, even gradual reform helped open up those economies.

The Asian countries tended to be most open both early and late. They were also above-average in reform efforts, by some measures, so their strong growth performance (based on exports) was unsurprising.

The African countries, whose trade policies were probably worst to begin with, made relatively modest progress initially. In recent years their progress has been substantial; whether they have improved as much as other countries depends on which measure is used.

Countries tied to the French franc (for whom real devaluation was more difficult) showed less progress than nonfranc countries, illustrating the importance of the connection between devaluation and trade reform.
There is no evidence that rapid trade reform resulted in Africa's de-industrialization.

This paper - a product of the International Trade Division, International Economics Department - is part of a larger effort in the Department to evaluate the effects of structural adjustment, with special focus on African economies.

Abstract:
Data representing transshipment or re-exports are almost always excluded from analytical portrayals of international trade, yet transshipment is potentially an important phenomenon in understanding a number of economic questions, and is increasing in importance. Rapid technological change in areas such as containerization and hub-and-spoke routing has promoted the practice of transshipment. While there are significant gaps in the data, the share of re-exports in global exports has undoubtedly increased rapidly, from perhaps 1 in 20 in the mid-1980s to perhaps 1 in 6 today. Econometric analysis of U.S. domestic exports and foreign exports (re-exports) over pairs of U.S. ports and destinations suggests that re-exports are significantly more sensitive than domestic exports to factors influencing transaction costs, including distance, containerization, price-fixing liner agreements, and port efficiency and restrictive port policies in the importing country.

Re-exports, transshipment, shipping

Abstract:
This paper presents one channel through which the creation of a Preferential Trading Arrangement (PTA) can undermine multilateral trade liberalization. Using a modified Meade model, it is shown how a PTA shrinks the export sectors in the excluded countries. This in turn leads to an expansion of those countries' import-competing and lobbying sectors. Thus, non-member countries may respond to the creation of a PTA by becoming more protectionist-and thereby undermining efforts to liberalize the multilateral trading system.

Abstract:
According to the Agreement on Textiles and Clothing (ATC), all quantitative restrictions on textile and apparel commodities are to be removed on January 1, 2005. This paper examines the economic impacts of the 2005 liberalization at the U.S. state level. The methodology utilizes a regional model of the U.S. economy built up from individually consistent IMPLAN social accounts for each state. The model incorporates forward-looking dynamic responses and equilibrium unemployment. The results are useful in quantifying the geographic distribution of the benefits and costs of the ATC's expiration on the U.S. economy.

ATC, MFA, textiles, clothing, quotas, simulations

Abstract:
Using a comparative-static general equilibrium model and in the context of the western hemisphere, this paper compares the economic effects of a hub-and-spokes (HAS) type of bilateral trade configuration (with Chile being the hub) with those of a more comprehensive regional FTA (namely, the FTAA). The model is augmented to account for the possibility of technology spillovers and its effective assimilation among participating economies. In particular, absorptive capacity, governance factor, proximity and socio-institutional congruence conjointly determine an economy's capacity to capture the technology that is transmitted from developed spoke US to other regions.

Hub and Spokes, Free Trade Areas, Technology transfer, Absorption

Abstract:
This study discusses potential economic implications for Nigeria of an Economic Partnership Agreement with the European Union. It uses the World Bank’s Tariff Reform Impact Simulation Tool to assess the effects of preferential tariff liberalization with respect to the European Union. The results suggest that the impact of an Economic Partnership Agreement on total imports into Nigeria will be slight. This is in part because the Agreement will likely allow the most protected sectors to be excluded from liberalization, and also because where substantial tariffs are involved much of the increase in imports from the European Union will occur at the expense of other suppliers of imports. It is this trade diversion, arising from the discriminatory nature of the EPA, which generates a negative welfare impact of the tariff reforms. One way for Nigeria to limit these losses is to pursue non-preferential trade liberalization before implementing an EPA. The paper looks at the large number of import bans in Nigeria and argues that the positive impact on welfare of removing these import bans is likely to be substantial. Their removal would undermine a major reason for cross border smuggling and pave the way for a return to normal regional trade flows. The paper shows how an Economic Partnership Agreement presents an opportunity for accelerating the reforms that are needed to support a strategy to increase regional and global trade integration. Such an agreement is more likely to have positive and significant impacts when integrated into a comprehensive strategy toward competitiveness and alleviation of the supply constraints that have stifled the impact of previous trade agreements. Key issues that should be addressed include liberalization and regulatory strengthening of services sectors to ensure that all firms in Nigeria have access to efficiently produced backbone services and initiatives to address the country’s poor trade logistics performance.

Free Trade, Trade Policy, Currencies and Exchange Rates, Debt Markets, Trade Law