termites final

8/8/2019 Termites Final

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REGIONALISM V/S

MULTILATERALISM

Presented by:

Anuratn PurushottamSunita Arora


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REGIONALISM

Any policy designed to

reduce trade barriers

between a subset of

countries regardless ofwhether those

countries are actually

contiguous or even

close to each other


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MULTILATERALISM

For any one country it is a positive function of

(a) the degree to which discrimination is absent

(b) the extent to which the countrys trading

regime approximates free trade.


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SOME FACTS

number of RTAs was negligible around 20

till about 1990

increased exponentially to over 300 by 2005,and are close to 400 today

around 75% are now operational

more than 50% of these are betweendeveloping countries, including the so-called

transition economies


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Ctnd.

if we exclude RTAs involving countries that have closeto aero most-favoured nation (MNF) tariffs, the shareof world trade in RTAs falls from 33% to about 20%.

85% of these RTAs are free trade agreements (FTAs)rather than Customs unions (CUs).

most countries are members of multiple RTAs. This

feature is particularly true of developing countries,especially those in the African continent.


6/22

6

Is more regionalism good?

Significant debate among economists:

- Jagdish Bhagwati (Columbia) do trade blocsserve as building blocks or stumbling blocks forworldwide freeing of trade?

- Larry Summers (Harvard) I like all the isms,unilateralism, regionalism and multilateralism

In assessing regionalism, Bhagwati sees discrimination,Summers sees liberalization smacks of the blindmen and the elephant!


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7

Why might regionalism be bad?

Economic benefits, trade creation, may be outweighed by costs, trade

diversion

- trade creation occurs due to removal of tariffs between members of a

regional agreement

- trade diversion occurs because non-members face discriminatory tariffs

on their goods

As a result, it really matters where a good comes from - the rules of

origin

Example: Mexico can export overcoats to theUS tariff-free, but if the

yarn/fabric used to make them is imported from outside NAFTA, the

overcoat is no longer Mexican and is subject to a tariff


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IMPLICATION

RTA must lead to

increased trade amongthe RTA members if the

RTA is presumed to have

been beneficial to the

members of the RTA


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% AGE SHARE OF INTRA REGIONAL TRADE TO TOTAL

GLOBAL TRADE

RTA -3 -2 -1 YEAR OF

IMPLEMENTATION

+1 +2

MERCOSUR 6.71 8.25 8.86 11.10 13.10 18.51

NAFTA 42.22 43.64 45.79 47.95 46.22 47.62

ASEAN 17.84 18.94 19.75 20.07 21.35 24.32

GCC 4.88 5.23 5.93 4.98 4.62 4.54

SAARC 6.63 6.48 6.74 6.37 6.48 6.31

EU 67.49 68.83 69.26 65.16 65.65 67.22


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REASONS FOR PROLIFERATION OF

RTAs

Perceived failure of WTO

Changing international political order after

1991:decline ofUS hegemony

emergence of multipolar negotiating blocs


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BENEFITS OF RTAs

safety valve ifmultilateralnegotiations become

stuck useful templates for

broader negotiations

spur the economic

reform andconsolidation withinmember states


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TERMITES IN TRADING SYSTEM


14/22

The main problem with these bilateral and

regional agreements is that they exclude othercountries. In Mr. Bhagwati's view, they are

more accurately called "preferential" trade

agreements because they discriminate against

non-participating countries.


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FTAs have several crippling downsides

that must be recognized.

they will often divert trade from cheaper

nonmember sources to more expensive

member sources, bringing harm rather than

good.

enormous growth of such FTAs: "spaghetti

bowl" of preferences and chaos in the world

trading system


16/22

16

Alphabetti spaghetti

Multiple agreements, and different rules of origin cause

production inefficiency

Half-finished goods go around agreement networks based ondifferential tariffs in an attempt to deliver final good at

lowest price a spaghetti bowl effect (Bhagwati, 1995)

If all WTO members signed a bilateral agreement with everyother member, there would be 11,026 strands of spaghetti


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The current tide of preferences has been a result of politicians

mistakenly, and in an uncoordinated fashion, pursuing free trade

agreements because they think (erroneously) that they are

pursuing a free trade agenda


18/22

we now have once again a world marred by

discriminatory trade, much as we had in the 1930s. And

we know how that turned out.


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Trade Barriers and Firm Strategy

Trade barriers raise the cost of exporting products to a

country Voluntary export restraints (VERs) may limit a firmsability to serve a country from locations outside thatcountry To conform to local content requirements, a firm may

have to locate more production activities in a givenmarket than it would otherwise All of these can raise the firms costs above the levelthat could be achieved in a world without trade barriers

IMPLICATIONS FOR MANAGERS


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As long as global economic gains are perceived

as unequally distributed, RTAs will flourish:

reducing overall trade barriers to such an

extent that preferences and discrimination

do not matter all that much.

WTO must address the issue


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