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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.
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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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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
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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
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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
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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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