E Economic i Integration I t ti

NEKH71, fall 2012 Maria Persson

Short Practical Introduction

Teacher

Maria Persson Maria.Persson@nek.lu.se www.nek.lu.se/nekmpe/ Office EC1:250 Course coordinator

My background
Position PhD since March 2009 Assistant professor Previous teaching introductory international economics, economic integration, microeconomic theory Research interests international trade, economic integration and development economics Research projects on: the duration of trade, trade facilitation and trade preferences
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Other involved teachers

Guest lecturer Joakim Gullstrand Joakim.Gullstrand@nek.lu.se http://www.nek.lu.se/nekjgu/ Office EC1: 263 Teaching assistant Ross Wilson Ross.Wilson@nek.lu.se R Wil @ k l http://www.nek.lu.se/nekrwl/ Office EC1:277

Live@Lund
Student portal where all information and material can be found Log in at http://liveatlund.lu.se/ http://liveatlund lu se/

Literature
Baldwin and Wyplosz (2009): The Economics of European Integration. Third edition. Recent update: Fourth edition now available. OK to use. Hoekman and Kostecki (2009): The Political Economy of the World Trading System. The WTO and Beyond. Third edition. Supplementary articles Freely downloadable through Live@Lund

Teaching
15 lectures Presentation will be available in Live@Lund My aim is to publish it there no later than the night before the lecture 2 seminars 2 written assignments

Examination
Mandatory written exam Maximum 80 points Two voluntary seminars Being (actively) present gives 5 points for each seminar to add to exam results Two voluntary written assignments Each gives 5 points to add to exam results Altogether: Maximum 100 points
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Grades
A (Excellent): B (Very Good): C (Good): D (Satisfactory): E (Sufficient): 85 points 75 points 65 points 55 points 50 points

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Introduction to Economic Integration

What is economic integration?

Broad definition: Senior Nello (2005, p.3): [] ] the elimination of barriers to the movement of products [ and factors of production between a group of countries and the introduction of common policies Common distinction: Negative integration: removal of barriers Positive integration: introduction of common policies and b ildi of building f common i institutions tit ti

What is economic integration?

Narrower definition: Robson (1998): International economic integration integration, often termed regionalism, regionalism International may be defined as the institutional combination of separate national economies into larger economic blocs or communities. (p.1) Economic integration is basically concerned with the promotion of efficiency in resource use on a regional basis (p.2)

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Course Contents
Part 1: Background: Economic Effects of Trade and Trade Policy Part 2: Multilateral Economic Integration Part 3: Preferential/Regional Economic Integration Part 4: Agricultural and Regional Policy from an EU Perspective (guest lecturer: Joakim Gullstrand)

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Part 1: Background: Economic Effects of Trade and Trade Policy

Before we focus on economic integration, start with short recap of material most of you are familiar with. with Agenda: Why trade? Welfare effects of trade restrictions , quantitative q restrictions Tariffs, Reasons for limiting trade?

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Part 2: Multilateral Integration

The course proper starts by taking a global perspective on the rules and institutions that govern international trade. Agenda: Introduction to the multilateral trading system WTO as an organization WTO as a forum for negotiations Rules u es for o t trade ade in goods: GATT G Rules for trade in services: GATS Anti-dumping Deeper integration: Trade and...
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Part 3: Regional Integration

We then investigate what happens when countries do not remove trade barriers for all other countries, but only for their (regional) trade partners. Note that this is what is often meant by economic integration! Agenda: Introduction to regional integration Free trade areas and customs unions Developing countries and the EU: Non-reciprocal trade preferences Market size and scale effects Competition policy
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Part 4: Agricultural and Regional Policy from an EU Perspective

We end by focusing on some specific policies that are important in order to understand how regional integration works. works Agenda: Agricultural policy: CAP Regional policy
N.B. N B The Th examination i ti for f this thi part t is i to t hand h d in i one of f the th two t (voluntary) written assignments. In other words, the written exam will not cover this material.

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Interesting Themes
Focus on trade Multilateral integration vs. vs regional integration How do they fit together? How do they affect each other? European Union Lots of empirical examples from the EU! p g countries Developing Does the WTO work well for low- and middle-income countries? Which rules govern their trade with the EU?
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Part 1 Background: Economic Effects of Trade and Trade Policy

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Agenda
Theoretical gains from trade Welfare analysis of trade restrictions Tariffs Quantitative restrictions Reasons for limiting trade

Why trade?
Welfare gains according to... Traditional theory New trade theory New new trade theory

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Welfare analysis of trade restrictions

Tariffs Small country case Large country case Quantitative restrictions Small country case Normally, trade increases welfare, and, correspondingly, trade restrictions reduce welfare. Why do countries then limit their trade?
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Reasons for limiting trade

1. 2 2. 3. 4. 5. 6. 7. 8. Tariff revenue needed for the governments budget Improve terms of trade Mercantilism Import substitution and infant industry protection To correct market failures Strategic trade policy y considerations National security Political economy: Benefits for important interest group

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Summary of Part 1
Conclusions to bring with you to the rest of the course: In most (though not all) circumstances circumstances, trade leads to higher long-term national welfare than restricted trade Consequently, trade restrictions typically lowers national welfare Reasons why countries nevertheless restrict trade are sometimes economically sound, but just as often they do not have a basis in economic theory or empirics

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Part 2 Multilateral Integration

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Introduction to the Multilateral System

Hoekman and Kostecki Chapter 1.3 13

Agenda for Introduction to the Multilateral System

"Multilateral Trade System"? Economic integration in the context of the World Trade Organization (WTO)... (WTO) We will discuss: Arguments in favor of trade negotiations Characterizing principles of the WTO

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The Multilateral Trading System

Two perspectives on the trading system A market for the exchange of liberalization commitments focus on multilateral negotiations A code of conduct for trade policy focus on the outcome of negotiations

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Why trade negotiations rather than each country unilaterally setting its own trade policy?
1. Large countries can increase welfare through optimal tariff, but run the risk of retaliation Can get situation with bad welfare outcomes for all (Prisoners dilemma) Can be solved through repeated games, i.e. trade negotiations 2. Lock-in mechanism Easier E i to t not t reintroduce i t d trade t d barriers b i after ft commitment it t through international agreement 3. Political economy
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Prisoners Dilemma
US
Free trade Protectionism

EU

Free trade

(10, 10)

(-10, 20)

Protectionism

(20, -10)

(-5, -5)

(EU welfare, US welfare)

Back to arguments for negotiations

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Arguments for trade negotiations

3. Political Economy Winners from trade barriers: the import competing industry few concentrated winners that win a lot Losers from trade barriers: consumers of import product large aggregated losses, but loss is invisible and spread across many The problem of collective action implies that there will be lobbying for trade barriers, but not against. Solution: In negotiation, countries offer own liberalization to achieve liberalization in other countries Motive for the export industry to participate Better functioning political process

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Characterizing Principles of the WTO (Code of Conduct for Trade Policy)

Key principles: 1. Nondiscrimination 2. Reciprocity

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Nondiscrimination
Two components: Most Favored Nation (MFN) ( ) National treatment Implications: Efficiency; sourcing from the lowest cost suppliers Support for smaller countries who cannot threaten with retaliation Lowers transaction costs and negotiation costs Makes it harder to break a commitment Exceptions: regional integration and non-reciprocal trade preferences for developing countries
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Reciprocity
Paying for increased market access in other countries by own liberalization N.B. Underlying mercantilist mindset! Reasons: Reduce free-riding Political economy: export industry gets involved Exports as well as imports increase less need for exchange rate adjustments and smaller risk for negative terms of trade effects Regional integration with important trade partners may weaken this principle
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Summary of Introduction to the Multilateral System

Make sure that you can... Discuss arguments in favor of having multilateral trade negotations rather than letting each country set its trade policy unilaterally Explain what is meant by nondiscrimination and reciprocity, and why these principles are important from an economic perspective

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WTO as an Organization
Hoekman and Kostecki, Ch Chapter 1 4 (details 1.4 (d il not relevant), l ) chapter 2

Agenda for WTO as an Organization

From GATT to WTO: short historical overview GATT vs. WTO: differences and similarities The function of the WTO The structure of the WTO Decision-making

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From GATT to WTO

The need for an International Trade Organization (ITO) was pointed out already p y at the Bretton Woods conference which created the IMF and World Bank A charter for the ITO was formulated at the UN conference in Havana in 1948, but it did not come into force because of the US congress refusal to ratify. Awaiting the ITO, some (23) countries had in 1947 negotiated an interrim agreement with a narrower focus than the ITO: the : G General lA Agreement t on Tariffs T iff and d Trade T d (GATT). (GATT) 1947-1994, the GATT was the forum for multilateral trade negotiations. It was, however, only a set of rules (with a secretariat) for trade in goods, and not an international organization The Uruguay round (1986-1994) created a World Trade 39 Organization (WTO) which came into force 1995

Differences and Similarities: GATT vs. WTO

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The Function of the WTO

1. 2 2. 3. 4. 5. Facilitate the implementation of multilateral trade agreements Forum for negotiations Administer the dispute settlement mechanism Multilateral surveillance of trade policies Cooperate with IMF and the World Bank to achieve greater coherence in global economic policy making 6. Technical assistance and training for developing countries

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Structure of the WTO

Organizational structure Structure from an agreements perspective

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Back to structure of the WTO

43 Source: www.wto.org

Back to the structure of the WTO

Source: www.wto.org 44

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Decision-Making
Decision by consensus is most common Consensus: no country (which is present) objects One country, one vote Compare this with e.g. the IMF and the World Bank where votes are weighted by economic size, and whose boards are based on just a few members This favors small countries, but... It is also difficult for them to have representation in all bodies How do you reach consensus with 157 members?
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Decision-Making in the WTO

Source: Hoekman and Kostecki (2009, p. 68)

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Agenda for WTO as an Organization

From GATT to WTO: short historical overview GATT vs. WTO: differences and similarities The function of the WTO The structure of the WTO Decision-making

Summary of WTO as an Organization

Make sure that you... Have a broad understanding of the historical evolution of the multilateral trading system Can discuss differences and similarities between the GATT system and WTO Broadly understand the function and structure of the WTO Can explain how decisions are made in the WTO, and can di discuss advantages d t and d problems bl with ith this thi decision-making d ii ki process

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WTO as a Forum for Negotiations

Hoekman and Kostecki chapter. h t 4.5 4 5 and d 4.1* 4 1* cursory

Agenda for WTO as a forum for negotiations

We have talked about how multilateral negotiations are a way to facilitate freer trade because: 1. Can avoid locked situation with bad welfare outcomes (due to large countries optimal tariffs) 2. Lock-in mechanism 3. Political economy: incentive for export industry to lobby Will now talk about: The purpose of negotiations Historical overview of trade rounds (details are superfluous!) The Doha Round Key aspects of multilateral trade negotiations
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Purpose
Multilateral trade negotiations are used to Agree on rules and procedures Reduce trade barriers Decide if new members can join Solve conflicts To some extent, negotiations take place continuously, but the reoccurring trade rounds are important to understand the system

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Previous Trade Rounds

More and more members Rounds cover an increasing number of issues Last longer and longer

Source: www.wto.org

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The Doha Round

The Ministerial Conference in Doha, Qatar in November 2001 started the Doha Development Agenda Negotiations cover around 20 trade-related areas Single undertaking: must agree on all issues before an agreement can be reached Key issues include agriculture (incl. cotton), manufactures (Non-Agricultural Market Access: NAMA), services trade facilitation and development. services, development Should have been finished by 2005... ...but still no deal! See www.wto.org/ for lots of details!
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Key Aspects of Multilateral Trade Negotiations (MTNs)

1. 1 2. 3. 4. 5. 6. 7. 8. MTNs are multi-issue multi issue barter exchanges MTNs are multistage games MTNs are multiplayer games MTNs are time-demanding, repeated games Governments represent numerous interests Feasible solutions are defined by yp power and threat p points Possible with symbolic and unenforceable deals Equity may matter more than economic efficiency

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Source: www.wto.org

Trade Negotiations
Government II
Industry a Industry b Industry c Ministry A Ministry B Ministry C

Government III Government I

NGOs

Government
Industry ... Ministry

Internal Negotiation

External Negotiation 56
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Back to Key Aspects

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Summary of WTO as a forum for negotiations

Make sure that you... Can discuss the purpose of trade negotiations Broadly understand the historical set of trade rounds leading up to the Uruguay Round Can point to some key areas under negotiations in the Doha Round. Can discuss key characteristics of multilateral trade negotiations ti ti

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Rules for Trade in Goods:

GATT
Hoekman and Kostecki, Ch Chapters: 5.1-5.3, 5 1 5 3 5.5, 5 5 5.7-5.9 57 59

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Agenda for Rules for Trade in Goods

Overview of GATT Nondiscrimination: MFN National Treatment Tariffs Quantitative restrictions Subsidies Technical regulations and product standards Sanitary and phytosanitary measures

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GATT
GATT: set of rules about trade in goods, regulating the use of trade policy among WTO members Contains rules about 1. Nondiscrimination Most Favored Nation (MFN) National treatment 2. Tariffs as the (in principle) only allowed instrument 3. Tariff bindings 4. Other policies cannot go against the principle of nondiscrimination or agreements about market access
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Nondiscrimination: MFN
GATT Article 1 A product d t made d i in one member b country t cannot t be b treated t t d any less favorably than a like product originating in any other country Exceptions: Regional integration (GATT Article XXIV) Non Non-reciprocal reciprocal preferences for developing countries (GATT Part IV)

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Nondiscrimination: National Treatment

GATT Article III Foreign goods cannot once they have paid tariffs and satisfied border measures be treated less favorably than like or directly competitive goods produced domestically Applies to both taxes and regulations AB cases implies that basically all domestic policies are covered Exceptions: E ti Subsidies S b idi and d government t procurement t (separate agreements) Motive: To constrain circumvention of tariff bindings through the discriminatory application of domestic policies
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Tariffs
In principle the only trade policy instrument allowed by GATT (for non non-agricultural agricultural goods) Quantitative restrictions (QRs) are banned National policies are covered by National Treatment Motive: Tariffs are preferable to QRs because: Tariffs are more transparent No allocation problems No quota rent which may create rent-seeking More effective in a dynamic environment

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Rules for Tariffs

1. MFN 2 Tariffs should be bound (GATT Article II) 2. Individual highest level for all countries Written in the countrys tariff schedule Bound vs. applied tariff: Binding overhang common y refers to bound, , not applied, pp , tariff Tariff reduction usually Since 1995, all agricultural products must have bound tariffs, and all WTO members must have a tariff schedule over bound tariffs
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Quantitative Restrictions (QRs)

GATT Articles XI-XIV QRs are in principle prohibited Both for imports and exports Some exceptions: agriculture (if domestic production is restricted), balance-of-payment reasons If used, must follow MFN

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Subsidies
Can affect trade by benefiting import-competing or exporting industries, and hence offset agreement about market access... but can also be economically justified by counteracting market failures Less distortive than border measures More visible Analyze in diagram! WTO Agreement on Subsidies and Countervailing Measures (SCM)

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Rules on Non-Agricultural Subsidies (SCM)

Non-actionable subsidies Non-specific Non specific subsidies which do not primarily benefit a specific firm, industry or group of industries Permitted Prohibited subsides Export subsidies Subsidies contingent on use of domestic goods Actionable subsidies Specific subsidies that are permitted, but may if an adverse effect is created on WTO member be met by countervailing duties
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Technical Regulations and Product Standards

Technical regulations Legally binding Usually aim to protect public or animal health, or the environment Product standards Usually voluntary and defined by the industry itself Can facilitate or block trade WTO rules: Agreement on Technical Barriers to Trade (TBT) Governments can use TRs to pursue domestic objectives, but must select instruments that minimize negative effects on international trade N.B. Private standards are not covered by the WTO rules!
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Sanitary and Phytosanitary Measures (SPS)

Requirements aiming to protect human, animal or plant health Typically apply to domestic as well as foreign goods, goods but differences in requirements can restrict trade Partly overlap with technical regulations, but... Easier to abuse Politically more sensitive Regulated by the Agreement on the Application of Sanitary and Phytosanitary Measures

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Rules on SPS
SPS measures should Not discriminate Not constitute a disguised restriction on trade Be based on international standards (if they exist) If tougher standards, must be justified by scientific evidence The precautionary principle can only be invoked if there is no relevant scientific evidence Lex specialis to the TBT agreement Many disputes, particularly regarding GMO
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Trade-Related Investment Measures (TRIMS)

TRIMS: regulations to force foreign direct investors to a certain behavior. According to the TRIMS agreement, certain regulations are prohibited, such as Local content requirements Domestic sales requirements The TRIMS agreement really only reaffirms that the GATTs rules about national treatment apply

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Summary
Hoekman and Kostecki (2009, pp. 264-265): Despite the complexities of the various agreements, the GATT is basically a simple agreement. The key disciplines are nondiscrimination (national treatment and MFN), tariff bindings, the prohibition on QRs, and a variety of disciplines that aim to prevent circumvention of the nondiscrimination principle and negotiated market access commitments.

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