Global Economic Prospects, 2005: Trade, Regionalism and Development Global Economic Prospects, 2005: Trade, Regionalism and Development November, 2004 Hans Timmer and Richard Newfarmer World Bank

Developing countries experience record growth in 2004, but will face less favorable macro conditions as the world economy slows in 2005 by around 1 percentage point. Downside risks could slow the global economy further. Many developing countries are well placed to absorb the slowdown and the risks, but poor oil importers and indebted middle-income countries are vulnerable. Global Outlook

Growth is projected to slow Real GDP, percent change Forecast Developing countries

Developing economies remain above trend Real GDP, percent change Developing countries Early 1980s debt crisis 1990s recession Transition countries East Asia financial crisis 2001 Global downturn

Outpacing developed countries Real GDP, percent change Developing countries High-income countries

Strong performance of developing countries Real GDP per capita, percent growth Average growth

Strong performance of developing countries Real GDP per capita, percent growth Acceleration Deceleration Average growth

Strong performance of developing countries Real GDP per capita, percent growth

Average growth

Emerging capacity constraints boosted commodity prices Emerging capacity constraints boosted commodity prices Per cent price increase, US$ and world trade-weighted effective terms Source: World Bank.

Higher oil-prices neutralized positive impact of other commodity prices for oil importers Higher oil-prices neutralized positive impact of other commodity prices for oil importers Impact of commodity price changes (2001–2004) non-oil prices oil pricesboth oil and non-oil prices Low and Middle Income HIPC Low Income (excl. India) Terms-of-trade gains % of GDP

Developed-world debt and US current account deficit might trigger financial tensions, including higher interest rates and weakening dollar. Oil prices could rise further, instead of the moderation foreseen in the baseline A hard landing in China is still a possibility Risks remain

Poor oil importers are immediately hit by high oil prices Poor oil importers are immediately hit by high oil prices Deviation from baseline in first year, per cent of GDP, with $10 higher oil price DomesticDemand CurrentAccountBalance

Impact of 200 basis point rise in long rates Impact of 200 basis point rise in long rates Deviation from baseline, percent of GDP

Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest. Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest. RTAs can create trade and bring other benefits for members …but results are not automatic and depend critically on design. RTAs can create trade and bring other benefits for members …but results are not automatic and depend critically on design. For non-members, discrimination in RTAs adversely affects excluded countries, posing systemic issues that require international attention. For non-members, discrimination in RTAs adversely affects excluded countries, posing systemic issues that require international attention. Trade, Regionalism and Development: Key Messages

Regional Trade Agreements are proliferating… Annual number

Regional Trade Agreements are proliferating… …and now potentially cover more than one-third of global trade New agreements annually Annual number Total in force Cumulative in force

South-South RTAs predominate in number, but not in trade covered South- South European Union US South- South European Union Percent of World Trade Covered Number of RTAs US

Why this proliferation? High-income countries, such as US and EU To support foreign policy goals, including development To support foreign policy goals, including development Slow progress on multilateral agenda: competitive liberalization Slow progress on multilateral agenda: competitive liberalization Access to services markets, protection of intellectual property, and rules for investment Access to services markets, protection of intellectual property, and rules for investment Developing countries Secure access to markets, especially large markets Secure access to markets, especially large markets More FDI More FDI Among neighbors, lowering trade cost at border Among neighbors, lowering trade cost at border Framework for regional cooperation Framework for regional cooperation

…but RTAs provide less new market access than it might appear Share of trade covered (%), 2003

…and regional agreements are a relatively small driver of trade reform Decomposing 20% pt. decline Source: Martin and Ng, 2004 Av. Tariffs, 1983 and Decomposing tariff reductions in response to multilateral, regional and own initiatives Decomposing tariff reductions in response to multilateral, regional and own initiatives

Assessing effects of RTAs on members: two ways 1 Prospective – general equilibrium models Most agreements projected to create more trade than they divert Most agreements projected to create more trade than they divert Projected gains less than multilateral Projected gains less than multilateral Excluded countries almost always lose Excluded countries almost always lose Market access is a key determinant on net benefits Market access is a key determinant on net benefits 2 Retrospective – econometric, gravity model Different studies – different results Different studies – different results Meta analysis suggest that half of agreements have been net trade diverting Meta analysis suggest that half of agreements have been net trade diverting

Effects on members

Estimated exponential impact on trade Intra-regional trade Note: The bars show the magnitude of the dummy variables capturing respectively the extent to which intraregional trade, overall imports and overall exports differ from the normal levels predicted by the gravity model on the basis of economic size, proximity and relevant institutional and historical variables, such as a common language. Effects on members: Do RTAs create – or divert -- trade?

Estimated exponential impact on trade Intra-regional trade Overall exports Overall imports Note: The bars show the magnitude of the dummy variables capturing respectively the extent to which intraregional trade, overall imports and overall exports differ from the normal levels predicted by the gravity model on the basis of economic size, proximity and relevant institutional and historical variables, such as a common language. Effects on members: Do RTAs create – or divert -- trade?

Agreements with high external tariffs risk trade diversion Note: Tariffs are import-weighted at the country level to arrive at PTA averages Source: UN TRAINS, accessed through WITS Average weighted tariffs

Lower external tariffs are associated with greater regional integration Average external tariffs MNASAS SSA LAC ECAEAP

Lower external tariffs are associated with greater regional integration MNA SAS SSA LAC ECAEAP Average external tariffs

StandardsTransport Customs cooperationServices Intellectual PropertyInvestment Dispute SettlementLaborCompetition U.S.-Led US-JordanNo Yes No US-ChileYesNoYes US-SingaporeYesNoYes US-AustraliaYesNoYes US-CAFTAYesNoYes No US-MoroccoYesNoYes No NAFTAYesNoYes E.U.-Led EU-South AfricaYes EU-MexicoYes NoYes EU-ChileYes NoYes South-South MERCOSURNo Yes NoYes NoYes Andean CommunityNo Yes NoYes NoYes CARICOMYes NoYes AFTAYes NoYesNo SADCYes NoYes COMESAYes NoYes Other Japan-SingaporeYesNoYes Canada-ChileNo Yes NoYes Chile-MexicoYes RTAs go far beyond trade Lets consider: trade faciliation, services, investment, intellectual property rights and temporary movement of labor

Delays at border drives up trading costs RTAs can provide framework for mutual efforts to reduce costs Single customs document Single customs document Harmonize driving & weight regulations Harmonize driving & weight regulations Computerize both sides of the border Computerize both sides of the borderTrade/GDP Potential of RTAs to reduce border costs not yet realized Trade/GDPMalaysia Ethiopia Malawi Uganda Kyrgyzstan Slovenia Slovakia

Services liberalization deepest in N-S agreements… US and EU (less systematically) agreements establish National treatment MFN treatment for members Nonrestrictive rules of origin of investor Pre-establishment access subject to negative lists (US) or positive lists (EU) Ratchet mechnanisms (US) Upside potential great because risks of losses through diversion minimal. …but achievements in additional liberalization subject to question South-south gone much less far

Investment accords provide for new access and new investor protections… Potential benefits include greater FDI flows because… Liberalized market access increased payoff to trade integration, reduced risk premia, enhanced credibility of investment climate Reduced international policy spillovers Rent shifting via TRIMs, etc. However, market access more important than investor protections as no evidence that protections increase FDI flows to developing countries… RTAs that create large ex-post market results and, provided good investment climate, do attract more FDI. A 10% increase in post-FTA market size is associated with a 0.5 percent increase in FDI in the host country.

Intellectual property rights figure prominently in N-S RTAs, particularly US FTAs US FTAs contain TRIPS Plus provisions that provide greater IPR protection. Brings generics under market and data exclusivity arrangements No analysis of economic consequences prior to signing Open questions: Will FTAs foreclose use of Doha flexibilities on TRIPS for generics? Will stronger IPRs contribute to more FDI and high tech trade? Are TRIPS Plus measures appropriate to all countries? Conclusion: Development consequences of investment and IPR rules depend heavily on market access these rules leverage

Labor services are area of potential Types of labor services treatment Full labor mobility (EFTA, ANZCERTA) Access for certain groups (NAFTA, Japan-Singapore FTA) Mode-4 type access (ASEAN, EU-Mexico) No provisions (APEC, COMESA) Patterns include: Limited mobility Skilled labor only: mainly intra-corporate In conclusion…not much movement Ironically, areas with least progress – services and labor – have greatest development potential… while in areas with most progress – investment and IPR – are those with uncertain development consequences

Both North-South and South-South accords can be improved… Strengths Strengths Compatibility among economies Compatibility among economies Services liberalization Services liberalization Move to international standards Move to international standards Weaknesses Weaknesses Restrictive rules of origin Restrictive rules of origin Exemptions, esp. agriculture Exemptions, esp. agriculture Inappropriate rules Inappropriate rules No movement of workers No movement of workers North-South Some sweeping generalization… Index of ROO Restrictiveness Estevadeordal, 2004

Strengths Strengths Compatibility among economies/large markets Compatibility among economies/large markets Services liberalization Services liberalization Move to international standards Move to international standards Weaknesses Weaknesses Restrictive rules of origin Restrictive rules of origin Exemptions, esp. agriculture Exemptions, esp. agriculture Inappropriate rules Inappropriate rules No movement of workers No movement of workers North-South South- South Strengths Strengths Focus on trade Focus on trade Nonrestrictive rules of origin Nonrestrictive rules of origin Adjacency permit trade facilitation Adjacency permit trade facilitation Some sweeping generalization… Weaknesses Weaknesses Small markets/Higher external barriers Small markets/Higher external barriers Exemptions Exemptions Minimal services Minimal services No movement of workers No movement of workers Both North-South and South-South accords can be improved…

Design Design Low external tariff barriers Low external tariff barriers Nonrestrictive rules of origin Nonrestrictive rules of origin Wide coverage with few exclusions Wide coverage with few exclusions Liberalization of services Liberalization of services Facilitating trade at borders Facilitating trade at borders Appropriate rules Appropriate rules Implementation: Avoiding paper agreements Implementation: Avoiding paper agreements Design and implementation are crucial to achieving objectives ….Open regionalism

Systemic issues… Systemic issues…

Preferences hurt excluded countries Systemic issues…uneven and discriminatory access

Simulated welfare impact of Chiles FTA with US Preferences hurt excluded countries Source: Harrison, et al, 2002 Gains to Chile Costs to excluded countries $ m. Systemic issues…uneven and discriminatory access

Preferences hurt excluded countries Change in real income in 2015 compared to baseline in percent Full multilateral liberalization Hub and spokes put weaker countries at disadvantage

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Change in real income in 2015 compared to baseline in percent Full multilateral liberalization Individual RTA (average) Hub and spokes put weaker countries at disadvantage

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Change in real income in 2015 compared to baseline in percent Full multilateral liberalization Individual RTA (average) All countries sign RTAs Hub and spokes put weaker countries at disadvantage

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Multiple arrangements burden customs

Algeria Libya Morocco Mauritania Tunisia AMU Ghana Nigeria Cape Verde Gambia ECOWAS Benin Niger Togo Burkina Faso Cote dIvoire Conseil de LEntente Guinea-Bissau Mali Senegal WAEMU Liberia Sierra Leaone Guinea Mano River Union CLISS Cameroon Central African Rep. Gabon Equat. Guinea Rep.Congo Chad Sao Tomé & Principe ECCAS CEMAC Angola Burundi* Rwanda* Egypt DR Congo Djibouti Ethiopia Eritrea Sudan Kenya* Uganda* Somalia Tanzania* EAC South Africa Botswana Lesotho Namibia* Swaziland* Mozambique SACU Malawi* Zambia* Zimbabwe* Mauritius* Syechelles* Comoros* Madagascar* Reunion IOC *CBI SADC COMESA Nile River Basin IGAD AMU: Arab Maghreb Union CBI: Cross Border Initiative CEMAC: Economic & Monetary Community of Central Africa CILSS: Permanent Interstate Committee on Drought Control in the Sahel COMESA: Common Market for Eastern and Southern Africa EAC: East African Cooperation ECOWAS: Economic Community of Western African Studies IGAD: Inter-Governmental Authority for Government IOC: Indian Ocean Commission SACU: Southern African Customs Union SADC: Southern African Development Community WAEMU: West African Economic & Monetary Union Overlapping African agreements…

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Multiple arrangements burden customs Hub and spokes put weaker countries at disadvantage

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Disincentives to engage in multilateral liberalization Multiple arrangements burden customs Hub and spokes put weaker countries at disadvantage

International community through the WTO International community through the WTO Get Doha done: lowers risk of trade diversion for members and minimizes effects on excluded countries Get Doha done: lowers risk of trade diversion for members and minimizes effects on excluded countries High income countries have systemic responsibility High income countries have systemic responsibility Widen coverage in FTAs (i.e. agriculture) Widen coverage in FTAs (i.e. agriculture) Move toward conformity in rules of origin, and make less restrictive Move toward conformity in rules of origin, and make less restrictive Promote rules tailored to local capacities Promote rules tailored to local capacities Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objective Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objective Unilateral: driving competitiveness Unilateral: driving competitiveness Multilateral: seeking broad market access Multilateral: seeking broad market access Regional: deep market access and institutional reforms (customs, ports, trade-related standards) Regional: deep market access and institutional reforms (customs, ports, trade-related standards) Policy implications…

Global Economic Prospects, 2005: Trade, Regionalism and Development Global Economic Prospects, 2005: Trade, Regionalism and Development November, 2004 Hans Timmer and Richard Newfarmer World Bank

globaloutlook Multilingual, modular presentation Printable version Forecast database out to 2006 Downloadable charts Insightful calculators and simulation tools Valuable one-page data briefs

globaloutlook Multilingual, modular presentation Printable version Forecast database out to 2006 Downloadable charts Insightful calculators and simulation tools Valuable one-page data briefs