Assessing regional trade agreements with developing countries

305 Pages·2006·2.21 MB·English

DFID PROJECT NUMBER 04 5881

ASSESSING REGIONAL TRADE AGREEMENTS WITH
DEVELOPING COUNTRIES: SHALLOW AND DEEP
INTEGRATION, TRADE, PRODUCTIVITY, AND ECONOMIC
PERFORMANCE

UNIVERSITY OF SUSSEX

DAVID EVANS
MICHAEL GASIOREK
AHMED GHONEIM
MICHANNE HAYNES-PREMPEH
PETER HOLMES
LEO IACOVONE
KAREN JACKSON
TOMASZ IWANOW
SHERMAN ROBINSON
JIM ROLLO

MARCH 2006
TABLE OF CONTENTS
OUTLINE OF THE REPORT..............................................................................................................8
CHAPTER 1: EXECUTIVE SUMMARY........................................................................................10
1.1. KEY CONCEPTUAL ISSUES:...........................................................................................................10
1.2. THE RT A FRAMEWORK..............................................................................................................12
1.3. THE EGYPT-EU ASSOCIATION AGREEMENT.................................................................................14
1.4. AN EPA BETWEEN THE EU AND THE CARIBBEAN........................................................................15
1.5. POLICY CONCLUSIONS.................................................................................................................16
CHAPTER 2: DEEP INTEGRATION AND NEW REGIONALISM.............................................18
2.1. INTRODUCTION............................................................................................................................19
2.1. HISTORY OF TRADE PATTERNS 1960-1990...................................................................................21
2.2.1. Trends in Regional Integration: 1960-1990........................................................................22
2.2.2. Historical Classification of Regional Trade Agreements....................................................27
2.3. TYPOLOGY OF RTA'S..................................................................................................................29
2.3.1. RTA's Defined.....................................................................................................................29
2.3.2. Analytical Aspects of Shallow and Deep Integration..........................................................32
2.3.3. Standards and externalities: Right and wrong norms?.......................................................38
2.4. TOWARD A CHECKLIST FOR EVALUATING RTAS.........................................................................39
2.4.1 RTA Characteristics.............................................................................................................40
2.4.2. Deep integration.................................................................................................................43
2.5. CONCLUSIONS..............................................................................................................................47
BIBLIOGRAPHY...................................................................................................................................51
CHAPTER 3: A FRAMEWORK FOR EVALUATING REGIONAL TRADE AGREEMENTS
INVOLVING DEVELOPING COUNTRIES....................................................................................61
3.1. INTRODUCTION............................................................................................................................62
3.2. WHAT TYPE OF AGREEMENT?....................................................................................................65
3.2.1 The partner countries..........................................................................................................65
3.2.2. FTA or Customs union?......................................................................................................66
3.2.3. Overlap with other agreements...........................................................................................67
3.2.4. Expected ease of negotiation...............................................................................................68
3.2.5. Nature of barriers to trade..................................................................................................69
3.2.6. Elements of Deep Integration..............................................................................................74
3.2.7. Is the RTA WTO compatible?..............................................................................................77
3.2.8. Role of donors.....................................................................................................................80
3.3. ASSESSING SHALLOW AND DEEP INTEGRATION...........................................................................81
3.3.1 Initial conditions - shallow integration................................................................................82
3.3.2 Initial conditions - deep integration.....................................................................................87
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3.3.3. Trade-Driven Productivity Change.....................................................................................91
3.4.3. A Case-Study Approach......................................................................................................97
3.4. WINNERS AND LOSERS................................................................................................................99
TECHNICAL APPENDIX: SHALLOW & DEEP INTEGRATION................................................................102
A3.1. Indicators of Shallow Integration......................................................................................102
A3.2. Partial Equilibrium Analysis.............................................................................................105
A3.3. Product Variety.................................................................................................................112
A3.4. Intra-Industry Trade (IIT).................................................................................................114
A3.5. Decomposing Total Factor Productivity (TFP).................................................................118
3.5. BIBLIOGRAPHY..........................................................................................................................119
3.6 KEY DEFINITIONS AND ACRONYMS............................................................................................122
CHAPTER 4: APPLYING THE RTA FRAMEWORK: EGYPT CASE STUDY.......................123
4.1. OVERVIEW OF THE EU-EGYPT AGREEMENT..............................................................................124
4.2. WHAT TYPE OF AGREEMENT?..................................................................................................125
4.2.1. The partner countries?......................................................................................................125
4.2.2. FTA or Customs union......................................................................................................133
4.2.3. Overlap with other agreements.........................................................................................134
4.2.4. Expected ease of negotiation.............................................................................................137
4.2.5. Nature of barriers to trade................................................................................................140
4.2.6. Elements of Deep Integration............................................................................................149
4.2.7. Is the RTA WTO compatible?............................................................................................155
4.2.8. Role of donors...................................................................................................................159
4.3. ASSESSING THE IMPACT OF EU-EGYPT INTEGRATION ON SHALLOW INTEGRATION....................161
4.3.1. Assessing the liberalisation of the Egyptian market: inferences from the descriptive
statistics......................................................................................................................................161
4.3.2. The Importance of Trade...................................................................................................174
4.3.3. Multi-Country CGE Analysis of Shallow Integration.......................................................175
4.3.4. Overview on Shallow integration......................................................................................188
4.4. DEEP INTEGRATION....................................................................................................................189
4.4.1 FDI.....................................................................................................................................190
4.4.2. Intra Industry trade and deep integration in Egypt..........................................................195
4.4.3 A case study approach to the potential for deep integration in Egypt: The Impact of EU SPS
Regulations on Egyptian potato exports.....................................................................................196
4.4.4 Overview on deep integration............................................................................................198
4.5. CONCLUSIONS...........................................................................................................................199
CHAPTER 5: APPLYING THE RTA FRAMEWORK: AN EU-CARIBBEAN ECONOMIC
PARTNERSHIP AGREEMENT:.....................................................................................................202
5.1. OVERVIEW OF THE EU-CARIBBEAN EPA PROCESS......................................................................203
5.1.1. Introduction.......................................................................................................................203
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5.2 WHAT TYPE OF AGREEMENT?...................................................................................................205
5.2.1 The partner countries........................................................................................................205
5.2.2 FTA or CU?......................................................................................................................209
5.2.3 Overlap with other agreements:.........................................................................................211
5.2.4. Expected Ease of Negotiation...........................................................................................213
5.2.5 Nature of barriers to trade.................................................................................................220
5.2.6. Elements of Deep Integration............................................................................................235
5.2.7 Is the RTA WTO compatible?............................................................................................236
5.2.8. Role of donors...................................................................................................................237
5.3. AN ASSESSMENT OF AN EU-CARICOM EUROPEAN PARTNERSHIP AGREEMENT: SHALLOW
INTEGRATION....................................................................................................................................238
5.3.I. Introduction.......................................................................................................................238
5.3.2. EPAs: some background issues.........................................................................................239
5.3.3. Evaluating an EPA using descriptive statistical indicators..............................................242
5.3.4. A CGE Analysis of the Impact the EU-Caribbean RTA process.......................................270
5.2.4. Summary and Conclusions...............................................................................................281
BIBLIOGRAPHY:................................................................................................................................284
APPENDIX.....................................................................................ERROR! BOOKMARK NOT DEFINED.

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List of Tables:

Table 2.1: Trade Blocs in the 1960s.......................................................................................................22
Table 2.2: Trade Blocs in the 1970s.......................................................................................................23
Table 2.3: Trade Blocs in the 1980s.......................................................................................................24
Table 2.4: Trade Blocs in the 1990s.......................................................................................................25
Table 2.5: Typology of Trade Blocs.......................................................................................................31

Table 4.1: GDP Per Capita amongst Egypt and EU Members in 2001:..............................................126
Table 4.2: Characteristics of Egyptian-EU merchandise trade (1999-2004).......................................128
Table 4.3: Exports and Imports of Goods and Services, and Stocks of Inward and Outward FDI
amongst Members in 2000: (Current US$) (mn)........................................................................130
Table 4.4: Unit Labour Cost amongst Members in 1997:....................................................................131
Table 4.5: Tariff Barriers in Egypt and European Union:...................................................................132
Table 4.6: Membership of Egypt in Regional Trade Agreements (RTAs).............................................135
Table 4.7: Standard Deviation of Tariff Rates:....................................................................................157
Table 4.8: Egyptian MFN Tariff Rates.................................................................................................163
Table 4.9: Revealed Comparative Advantage, 2003............................................................................165
Table 4.10: Herfindahl Indices.............................................................................................................167
Table 4.11: Finger-Kreinin Index, EU- Egypt for Exports and Imports..............................................169
Table 4.12a: Egyptian Export Intensity Indices...................................................................................170
Table 4.12b: Trade Intensity Indices....................................................................................................172
Table 4.13: MENA Model Experiments................................................................................................179
Table 4.14: Experiment Results for Morocco.......................................................................................181
Table 4.15. Experiment Results for Egypt............................................................................................185
Table 4.16: Foreign Participation in Investment Companies by Activity until December 31, 1999....194

Table 5.1. GDP and Population Statistics for CARIFORUM Members (2002)...................................207
Table 5.2. GDP and Population Statistics for EU Members (2002).....................................................208
Table 5.3: Calendar of CARIFORUM-EU Trade Negotiations within the Cotonou Framework........215
Table 5.4: Share of CARICOM +DR in EU15 Trade...........................................................................216
Table 5.5: Share of Trade by source: 2000-2003.................................................................................217
Table 5.6 Caricom + DR Trade 1994-2002.........................................................................................218
Table 5.7 : FDI Flows from the EU15 to selected CARIFORUM members.........................................219
Table 5.8: Caribbean Tariff structure..................................................................................................221
Table 5.9: Caricom-DR FTA: List and schedules of selected agricultural products which shall be
subject to special arrangements..................................................................................................223
Table 5.10: Schedule for List of Selected Agricultural Products to be Subject to Special Trading
Arrangements when Imported into CARICOM's MDC's from the Dominican Republic as
Provided for in Article III of the Protocol..................................................................................224
Table 5.11: Share of CARICOM imports by supplier – 2002...............................................................251
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Table 5.12: Shares of trade for those industries where the reporting country share is between 40-80%
....................................................................................................................................................252
Table 5.13: Decile analysis for selected MDCs...................................................................................259
Table 5.14: Decile analysis for selected OECS economies..................................................................261
Table 5.15: Revealed Comparative Advantage Correlation Cofficients..............................................263
Table 5.16: RCA indices greater than 1 – MDCs.................................................................................265
Table 5.17: RCA indices greater than 1 - OECS..................................................................................267
Table 5.18: Regional Composition of GTAP v6 dataset and Caribbean Forum EPA..........................274
Table 5.19: Sectors, Factors and Regions............................................................................................275
Table 5.20: Experiments EU-Cariforum EPA and MFN Tariff Cuts...................................................278
Table 5.21: Macro Results for Caribbean Forum Countries for Experiments.....................................279

Table A1: CARICOM MFN Tariff Rates..............................................................................................287
Table A2: CARICOM principal import destinations............................................................................289
Table A3: CARICOM principal export destinations.............................................................................291
Table A4: Finger Kreinin Index of Export Similarity for the CARICOM Economies, the EU and the US
....................................................................................................................................................293
Table A5: Kreinin Index of Import Similarity for the CARICOM Economies, the EU and US............294
Table A6: CARICOM Top 20 Export Commodities..............................................................................295
Table A7: CARICOM Top 20 import Commodities..............................................................................295
Table A8: CARICOM Top 20 Export Commodities to the EU.............................................................296
Table A9: Herfindhal Indicators for the Caribbean Economies: Exports............................................296
Table A10: Herfindhal Indicators for the Caribbean Economies: Imports..........................................297
Table A11: Trade in goods (% of GDP) for Caribbean Economies.....................................................298
Table A12: RCA and RMA for CARICOM...........................................................................................299
Table A.13 Value Added Shares 2001 %..............................................................................................300
Table A.14a: Factor shares in economy %..........................................................................................301
Table A.14b: Factory shares by activity %..........................................................................................301
Table A.15a: Export Shares 2001 %....................................................................................................302
Table A.15b: Import Shares 2001 %....................................................................................................302
Table A16a: % Tariffs on Caribbean EPA imports from EU15, 2001.................................................303
Table A.16b: % Tariffs on EU15 imports from Caribbean, 2001........................................................303
Table A.16c: Potential trade diversion EU15 less other tariffs %.......................................................304

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List of Figures

Figure 2.1 – RTAs in force by year of entry into force...........................................................................19
Figure 2.2. Emerging Patterns of Regionalisation Summarised............................................................26

Figure 3.1: Classification of intra industry trade...................................................................................91
Figure 3.2: Effect of input variety on productivity...............................................................................112
Figure 3.3: Effect of output variety on productivity.............................................................................113
Figure 3.3: Bilateral trade types..........................................................................................................115

Figure 4.1: Egyptian Exports Geographical Distribution, 1980 and 2001..........................................127
Figure 4.2: Gross Implemented Investments (1991-2003)...................................................................193
Figure 4.3: Foreign Direct Investment in Egypt (1981-2000), five-year averages..............................194
Figure 4.4: Aggregate Grubel-Lloyd index for Egypt 1980-2003........................................................195

Figure 5.1: Regional groupings in the Caribbean...............................................................................212
Figure 5.2: Real Change in Total Real Exports...................................................................................219
Figure 5.3: Change in Total Real Exports...........................................................................................219
Figure 5.4: Levels of export concentration in the Caribbean - 2000...................................................269

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OUTLINE OF THE REPORT
The central purpose of this project was to produce a framework or handbook
for officials and their advisers in order to be able to assess the economic implications
and desirability of specific RTAs. In this report we refer to this as the RTA
framework. The goal is to ensure that a detailed assessment of RTAs can can be
carried out by officials and desk officers without recourse to complex analytical tools
and without being overly demanding in terms of underlying data requirements but
nevertheless well grounded in economic theory. The RTA framework provides the
basis for such assessments, which are then based on readily available information and
statistics, including information on institutions and policies.
Central to the RTA framework which has been developed as part of this
project is the distinction and interaction between what is commonly referred to as
shallow and deep integration. As is well known from the existing literature the net
welfare effects from (preferential) shallow integration are inherently ambiguous.
Multilateral or unilateral non-preferential trade liberalisation would typically yield
higher static welfare gains than preferential/regional integration. A key conclusion
emerging from this report and the RTA framework, is that there are potentially
significantly higher welfare gains possible from integration if the process of regional
integration includes appropriate elements of deep integration. Indeed, inter alia, this
may help to explain the manifest rise in the popularity of regional trade agreements.
The framework that is developed here, therefore, focusses both on shallow and
deep integration, and offers the means for officials to undertake prima facie analyses,
either ex post or ex ante, of regional integration arrangements. As well as developing
the RTA framework itself, the project applies then applies the framework to two
“country” case studies: Egypt and the Caribbean. Hence we use the framework in
order to provide an actual assessment of existing RTA policies in the context of the
Association Agreement between the EU and Egypt, and the proposed Economic
Partnership Agreement between the EU and the Caribbean region. As well as
applying the framework itself to these two case studies, we check on the usefulness
and robustness of the methods and results obtained by undertaking and drawing upon
more formal and sophisticated empirical analysis. The aim of the latter is in order to
check on, and validate the conclusions derived from the RTA framework itself. The
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more formal empirical analysis is based principally upon partial and general
equilibrium modelling. The major conclusion from the more formal work is that the
partial and general equilibrium analysis corroborate the results derived from the
framework, albeit with more detail on the size of likely welfare effects.
The report is structured in the following fashion:
Chapter 1 of the report provides an executive summary in which we highlight both the
key conceptual issues and conclusions arising from this report, as well the conclusions
arising from the application of the framework to two case studies – the Caribbean-EU
EPA process, and the Egypt-EU association agreement.
Chapter 2 explores in some detail the historical development of regional trading
arrangements, and focusses on the importance of both shallow and deep integration in
terms of both explaining the emergence of RTAs as well as understanding the likely
welfare implications.
Chapter 3 details the framework itself. It is here that we present the list of key issues /
aspects which we believe are pertinent to the analysis of most regional trade
agreement, and we indicate the measures which can shed analytical light on those
issues.
Chapter 4 and 5 are focussed respectively on the cases of the Egypt-EU Association
Agreement, and the EPA negotiations between the EU and the Caribbean region. Each
of these chapters both applies the framework itself, as well as considers the results
obtained from the more formal modelling procedure.

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CHAPTER 1: EXECUTIVE SUMMARY

1.1. KEY CONCEPTUAL ISSUES:
1. Recent years have seen an explosion in the number of regional trade agreements.
Our analysis of these agreements suggests that typically RTAs can be
characterised as being primarily one of three types: bloc creating, bloc expanding,
or focussed on market access
2. In assessing any regional trade agreement it is important to consider the impact
not just of shallow integration measures, but also measures which may lead to
“deeper” integration.
3. “Shallow” integration: Involves the lowering or elimination of barriers to the
movement of goods and services across national borders within the region. Within
this context “negative” integration entails the lowering barriers created by national
policies.
4. “Deep” integration: Involves establishing or expanding the institutional
environment in order to facilitate trade and location of production without regard
to national borders. Within this context “positive” integration suggests policies
designed to encourage trade and facilitate segmentation of production processes
and value chains. Elements of deep integration may include:
o Regulatory harmonization
(cid:1)(cid:2)Competition policy
(cid:1)(cid:2)Financial/banking regulation
(cid:1)(cid:2)Industrial policy
o Establishment of common standards and technical regulations
(cid:1)(cid:2)Established and enforced by private, national, regional, or
international institutions
(cid:1)(cid:2)Commodity/industry specific or broader
o Harmonization of institutional structures
(cid:1)(cid:2)Legal systems, commercial law
(cid:1)(cid:2)Dispute resolution
o Harmonization of domestic tax and subsidy policies
o Coordination of macro policies
(cid:1)(cid:2)Monetary union
o Creation of institutions to manage and facilitate integration
(cid:1)(cid:2)Regional investment funds
5. International trade theory and evidence suggests that the consequences arising
from a regional trade agreement are a mix of: trade creation, trade diversion, and
changes in terms of trade (international prices). The welfare results of an RTA
will depend on the net impact of these effects and the magnitude of the results will
depend heavily on the size of the initial tariff barriers. There is a potential for an
overall negative impact if trade diversion is large. This occurs if demand is
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