Trade, Regionalism, and Development: Integration, Externalities, and

Productivity

Sherman Robinson

Peter Holmes, David Evans

Leo Iacovone, and Karen Jackson

University of Sussex

October 2005

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Outline

• Evolution of trade blocs: 1960s-1990s

• Historical typology of RTAs

• Composition of trade

• Shallow versus deep integration

• Deep integration and externalities

• Externalities and productivity

• Role of RTAs

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World Bank Study

• Global Economic Prospects: 2005– Historical analysis of trade shares and

trends in formation of trade blocs

• Methodology of finding trade blocs– Definition of a bloc: Countries trade more

within the bloc than with outside countries– Bloc membership: Country increases

within-bloc average trade share

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Trade Blocs: 1960s

World Countries and Regions

Europe + (70)US + (41)Asia-UK (56)Asia-US (6)

1960s

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Export Shares 1960s

Europe + N America + Asia-UK Asia-US Total

Europe + 75.4 14.2 8.2 2.3 100N America + 37.5 44.5 8.3 9.7 100

Asia-UK 48.8 12.7 20.6 18.0 100Asia-US 23.0 37.3 19.5 20.2 100

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Total Shares of World Trade 1960s

Europe + N America + Asia-UK Asia-US Total

Europe + 39.7 7.5 4.3 1.2 52.7N America + 11.2 13.3 2.5 2.9 29.9

Asia-UK 5.0 1.3 2.1 1.9 10.3Asia-US 1.6 2.6 1.4 1.4 7.1

Total 57.6 24.7 10.3 7.4 100

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Trade Blocs: 1970sWorld Countries and Regions

Europe + (21)N America + (30)E&SE Asia (23)S America (11)Rest (90)

1970s

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Trade Blocs: 1980sWorld Countries and Regions

Europe + (25)N America + (30)E&SE Asia (44)S America (11)Rest (65)

1980s

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Trade Blocs: 1990sWorld Countries and Regions

Europe + (42)N America + (31)E&SE Asia (43)MERCOSUR (6)Rest (61)Andean (4)S Africa + (4)

1990s

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Implications of Trends

• The formation of blocs pre-dated any explicit RTA.

• Three kinds of RTA:– Bloc creation– Bloc expansion– Market access

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Composition of Trade

• Increased trade as share of GDP– Largest increase in trade among OECD countries

• Increased trade in intermediate inputs– Import content of exports increased– International segmentation of production

• Increased trade in new products• Trends challenge standard trade theory and

analysis of gains from trade

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Analysis of RTAs and Global Trade Liberalization

• Standard analysis of RTAs:– Trade diversion versus trade creation– International prices: terms of trade– Rules of origin—spaghetti networks

• Trade liberalization– Increased efficiency and welfare triangles– Actual gains seem to be much larger than

can be explained by standard trade theory

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Shallow and Deep Integration

• Early RTAs and GATT rounds facilitated shallow integration: – Reduction of border trade barriers– PTA/EPA/RTA/FTA– Customs Union

• New RTAs all involve elements of “deep integration”.

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Deep Integration• Factor mobility

– Financial and FDI flows– Labor

• Regulatory harmonization– Standards and rules

• Domestic tax and subsidy policies• Harmonize macro policies• Institutions to manage and facilitate integration• Legal and institutional harmonization

– Commercial law– Dispute resolution

• Monetary union

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Negative and Positive Integration

• Negative integration: removal of barriers to cross-border flows of commodities– Role of multilateral liberalization: WTO– Role of RTAs

• Positive integration: fostering trade through deep integration– Often involves exploiting externalities and

correcting for market failures.

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Deep Integration & Externalities

• Types of externalities– External to firm, internal to industry– External to industry, internal to country– External to country, internal to world

• Public good externalities– Institutions, etc. that affect economic

environment in which firms operate– Sectoral, national, and international

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Trade and Productivity

• Link from RTA → deep integration → externalities → increased productivity

• Classify RTAs by potential for generating externalities through different forms of deep integration

• Case studies and anecdotal evidence

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Externalities and Productivity

• Technology transfer– Through trade and FDI

• Dynamic comparative advantage

• Productivity and production dispersion– Ricardian gains and factor proportions– Smithian gains from local economies of

scale and finer division of labor

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Ricardian vs Smithian gains

• Inter-industry trade creation

• Factor endowments determinants

• Constant returns• Exogenous

technology• Homogenous goods

– No role for standards

• Intra-industry trade creation– Horizontal quality differentiation– Vertical specialization

• Productivity, specialization, technology determinants

• Increasing returns• Endogenous technology• Heterogeneous goods

– Standards and harmonisation – NOT “ship and forget”

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Smithian gains and market integration

• Integration in global value-chains– Fragmentation of production

• Higher profitability from niche products– Quality and health standards harmonisation

lead to increased productivity

• Cross-border market failures: externalities• Inter-firm and intra-firm coordination• Economies of scale and technology

transfers

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Externalities and Positive Integration

• Intra-firm arrangements (e.g. FDI)

• Inter-firm (e.g., private standards: Eurepgap)

• national adoption of export related norms

• regional/bilateral agreements

• multilateral arrangements

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Potential Role for RTAs

• Support private sector initiatives– Institutional capacity building related to

specific export flows• Standards• Investment and pecuniary externalities

– Infrastructure and technology– Intra-industry trade via vertical value-chain

specialization

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Potential Role for RTAs

• Public sector– Nature of externalities and market failure

– Externalities: to industry and/or country• Infrastructure: physical and institutional

• Public goods

– Legal and institutional harmonisation• “Rules of the game”: more than a level

playing field

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New regulatory frameworks

• May raise productivity for some/all producers

• May raise costs for some/all producers

• Create/enhance market access– Wider and deeper markets

• Have differential effects on groups of consumers/producers

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Diagnostic Tests

• Are there trade-related externalities and market failures? – Potential for positive integration

• Does the RTA address them?• Is there scope for productivity gains?• Will gains cover the costs (to producers

and local consumers)?• What groups will profit most/least?

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Example: Egyptian Potatoes• Major export (25% tot. agric exports)• 90s: EU reg’s hit Egypt ( “brown rot” ban)• Barrier created new opportunity for Egypt:

– Adopting process standards key to exporting• EU-Egypt Agreement: institutional cooperation• Crucial role of governments

– Positive externalities• Institutional/country level (in EU and Egypt)

– Product standardisation

– Expanded markets

• Producer level: productivity increases

• Distributional impacts: large vs small farms

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Conclusions

• Historical analysis leads to a different view of RTAs: bloc creation, bloc expansion, market access– Bloc formation precedes formal RTAs

• Need to re-visit theory of “natural” trading partners

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Conclusions

• RTAs and deep integration may lead to externalities and productivity gains– Different types of RTAs have different

implications for these links– Different types of externalities

• Such gains, if present, are likely to be much larger than efficiency-gain triangles in standard trade analysis

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Conclusion

• Need to use tools of “new trade theory” and “new regionalism” to examine these links

• Detailed institutional analysis– Nature of externalities– Links to productivity

• Sectoral/firm/process case studies

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Conclusions

• New typologies of RTAs based on their potential role in internalizing externalities and achieving productivity growth

• Indicators of “good” versus “bad” RTAs– Externalities and TFP links– Gainers and losers: distributional implications