Multilateralism, Regionalism andMultilateralism, Regionalism and

Economic Partnership Agreements Economic Partnership Agreements (EPAs)(EPAs)

March, 2006

Richard Newfarmer

World Bank

Regional trade agreements (RTAs) are Regional trade agreements (RTAs) are proliferating, but their effects in creating proliferating, but their effects in creating trade depend on design.trade depend on design.

Regional trade agreements can Regional trade agreements can complement -- but not substitute for – complement -- but not substitute for – multilateral openings. multilateral openings.

For Africa, EPAs are potentially the most For Africa, EPAs are potentially the most important regional agreement, but to important regional agreement, but to realize benefits countries will need clear realize benefits countries will need clear strategy.strategy.

Regionalism v. Multilateralism:Regionalism v. Multilateralism:Key MessagesKey Messages

0

5

10

15

20

25

30

35

1990 1996 2002

0

50

100

150

200

250

1990 1996 2002

South-South-SouthSouth

European European UnionUnion

USUS

South-South

European European UnionUnion

Percent of World Trade CoveredPercent of World Trade CoveredNumber of RTAsNumber of RTAs

USUS

Regional Trade Agreements are proliferating… Regional Trade Agreements are proliferating…

COMESA

WAEMU

EAC

CIS

SAPTA

SADC

Mercosur

CEMAC

ANDEAN

AFTA

GCC

ECOWAS

CACM

EC

NAFTA

SACU

-4 -2 0 2 4 6 8 10

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.

For members: Do RTAs create trade? For members: Do RTAs create trade?

COMESA

WAEMU

EAC

CIS

SAPTA

SADC

Mercosur

CEMAC

ANDEAN

AFTA

GCC

ECOWAS

CACM

EC

NAFTA

SACU

-4 -2 0 2 4 6 8 10

Estimated exponential impact on trade

Intra-regional trade

Overall exportsOverall 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.

For members: Do RTAs create trade? For members: Do RTAs create trade? …. Not automatically…. Not automatically

Agreements with high external tariffs risk Agreements with high external tariffs risk trade diversiontrade diversion

0 5 10 15 20 25

SAFTA

ECOWAS

COMESA

MERCOSUR

EAC

SADC

AFTA

NAFTA

Note: Tariffs are import-weighted at the country level to arrive at PTA averagesSource: UN TRAINS, accessed through WITS

Average weighted tariffs

•DesignDesign

Low external tariff barriers Low external tariff barriers

Nonrestrictive rules of originNonrestrictive rules of origin

Wide coverage with few exclusions Wide coverage with few exclusions

Liberalization of servicesLiberalization of services

Facilitating trade at bordersFacilitating trade at borders

Appropriate rulesAppropriate rules

•Implementation: Avoiding paper Implementation: Avoiding paper agreementsagreements

Design and implementation are crucial to Design and implementation are crucial to achieving objectivesachieving objectives

…….Open regionalism.Open regionalism

RTAs are not a substitute for RTAs are not a substitute for multilateral liberalization… multilateral liberalization…

Export opportunities in the world market are Export opportunities in the world market are several times larger than regional markets in several times larger than regional markets in Africa Africa

South-south trade is growing rapidly and Africa South-south trade is growing rapidly and Africa has interest in gaining access to markets in S. has interest in gaining access to markets in S. Asia, E. Asia and in other regionsAsia, E. Asia and in other regions

In negotiations, Africa by itself cannot move the In negotiations, Africa by itself cannot move the EU or US in key agricultural markets, but EU or US in key agricultural markets, but alliances with other trading partners offer some – alliances with other trading partners offer some – if limited -- possibilityif limited -- possibility

Africa gains more from a multilateral agreement Africa gains more from a multilateral agreement than from a world divided into trading blocsthan from a world divided into trading blocs

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

East Asia Europe & SSA The America

Change in real income in 2015 from baseline scenario (percent)

Note: Separate represents the gains when each block is formed in the absence of the other two. BLOC3 represents the gains when all three regional PTAs are implemented simultaneously.

MultilateralMultilateral

EU + EPAsEU + EPAs

(w/ other RTAs)(w/ other RTAs)

EU + EPAsEU + EPAs

EPAs: Positive results require a EPAs: Positive results require a strategystrategy

Consider the risks of a “bad” EPAConsider the risks of a “bad” EPA

Agreements could end up providing little new access to EU and governments may not use opportunity to adopt reforms

• …because EU negotiators focus excessively on their own demands rather than development

• …because SSA negotiators sign agreements without coming to consensus on their internal reforms

Aid could be insufficient to provide to elicit supply response.

Result:• hub and spoke trade relations, with negligible stimulus to

regional integration• possible income losses stemming from revenue losses without

compensating internal and external trade gains• if services not MFN, entrenchment of monopolistic service

providers, either from the EU or state owned companies

Use EPAs to deepen regional Use EPAs to deepen regional integrationintegration

Reduce policy barriers to intra-regional trade Accelerate implementation of existing

liberalization agreements Reduce administrative delays at border crossings

0 5 10 15 20 25 30

SS Africa

South As.

ECA

MNA

Latin Am

East Asia

OECD

Source: World Bank, Doing Business 2006

Days through ports to warehouse

Use EPAs to deepen regional Use EPAs to deepen regional integrationintegration

Reduce policy barriers to intra-regional trade Accelerate implementation of existing

liberalization agreements Reduce administrative delays at border crossings Promote regional infrastructure investments and

regulatory frameworks – e.g., power, air transport

Use EPAs to phase down high MFN tariffsUse EPAs to phase down high MFN tariffs

0 5 10 15 20

6 CEMAC

5 ECOWAS

4 ESA

3 CARCOM

2 SADC

1 Pacific

AFTA

NAFTA

Note: EPA Tariffs are import-weighted at the country level, then weighted by GDP at EPA averagesSource: UN TRAINS, accessed through WITS

Average MFN weighted tariffs

Because high tariffs: undermine competitivenes, risk Because high tariffs: undermine competitivenes, risk trade diversion, and impede intra-African trade…trade diversion, and impede intra-African trade…

Use EPA to motivate convergence of Use EPA to motivate convergence of external tariffexternal tariff

Average tariffs

Nigeria 30.0

Sierra Leone 14.9

Ghana 13.1

The Gambia 12.7

UEMOA(Benin, Burkina Faso, Cote d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, Togo) 12.0

Guinea 6.5

Mauritania (non affiliated) 10.9

Consider the case of ECOWAS

1.1. Propose program of phased variable geometry for MFN CET consistent with Propose program of phased variable geometry for MFN CET consistent with regional development programs, e.g.:regional development programs, e.g.: Phase 1 & 2: Eliminate internal barriers in CU/FTAPhase 1 & 2: Eliminate internal barriers in CU/FTA Phase 1-2: Bring down MFN peak tariffs to average to promote intra-African and Phase 1-2: Bring down MFN peak tariffs to average to promote intra-African and

other efficient trade other efficient trade Phase 2-3: Bring down MFN average levels to East Asian levelsPhase 2-3: Bring down MFN average levels to East Asian levels Phase 3: Enact EU preferences Phase 3: Enact EU preferences

2.2. Propose less restrictive rules of origin (e.g., SSA-wide)Propose less restrictive rules of origin (e.g., SSA-wide)

3.3. Propose trade facilitation measures to reduce costsPropose trade facilitation measures to reduce costs

4.4. Request program of technical and financial assistance for trade facilitation, SPSS, Request program of technical and financial assistance for trade facilitation, SPSS, and supply side measures (e.g., infrastructure)and supply side measures (e.g., infrastructure)

5.5. Formulate and propose program of services liberalization in own regional interest on Formulate and propose program of services liberalization in own regional interest on MFN basisMFN basis

Elements of a negotiating strategy…Elements of a negotiating strategy…

An illustration…An illustration…

Unilateral measuresUnilateral measures: improving investment climate, : improving investment climate, transportation links, and trade-related institutions and trade transportation links, and trade-related institutions and trade policy to drive competitivenesspolicy to drive competitiveness

Multilateral measuresMultilateral measures: Use alliances with broad coalitions to : Use alliances with broad coalitions to leverage access to all foreign marketsleverage access to all foreign markets

Regional measuresRegional measures: Use EPAs to deepen existing regional : Use EPAs to deepen existing regional integration programsintegration programs

Conclusion: Promoting development requires Conclusion: Promoting development requires a coherent trade strategy integrating three a coherent trade strategy integrating three components…components…

References and further reading available at www.worldbank.org/trade

Hinkle, L., M. Hoppe, and R. Newfarmer “Beyond Cotonou: Hinkle, L., M. Hoppe, and R. Newfarmer “Beyond Cotonou: Strategies for Economic Partnership Agreements” in Strategies for Economic Partnership Agreements” in Richard Newfarmer (ed.) Richard Newfarmer (ed.) Trade, Development and DohaTrade, Development and Doha World Bank: 2005 World Bank: 2005

Newfarmer, R. “Regional Trade Agreements: Promises and Newfarmer, R. “Regional Trade Agreements: Promises and Pitfalls” in in Richard Newfarmer (ed.) Pitfalls” in in Richard Newfarmer (ed.) Trade, Development Trade, Development and Dohaand Doha World Bank: 2005 World Bank: 2005

Schiff, M. and L. Winters Schiff, M. and L. Winters Regionalism and DevelopmentRegionalism and Development World Bank: 2003World Bank: 2003

World Bank, World Bank, Global Economic Prospects 2005: Trade, Global Economic Prospects 2005: Trade, Regionalism and DevelopmentRegionalism and Development World Bank, 2004. World Bank, 2004.

Multilateralism, Regionalism and EPAsMultilateralism, Regionalism and EPAs

March, 2006

Richard Newfarmer

World Bank