Regional integration and the prices of imports : an empirical investigation

The authors explore the effects on the terms of trade of regional economic integration. They show why it is an appropriate measure of the welfare effects of such integration, comparing it with the many ex post studies that base their conclusions on changes in the import shares of member and nonmember countries. They demonstrate, by using a simple strategic model, how member countries might gain in their terms of trade, and nonmembers lose, through a lowering of preferential tariffs. Most important, they show that measuring such price effects, though difficult, is feasible. This is the first ex post study of its kind, they believe, and an improvement over previous ex post studies on how integration affects the rest of theworld. Using finely disaggregated data about Spanish imports of finished manufactures from major OECD trading partners, despite their noisiness, they found a consistent story over all of the country pairs examined. They find that nonmembers (in this case, Japan and the United States) suffered detectable losses in terms of trade relative to European Community competitors in Spanish import markets for differentiated goods.Trade Policy,Environmental Economics&Policies,Payment Systems&Infrastructure,Economic Theory&Research,Markets and Market Access,Access to Markets,Economic Theory&Research,Markets and Market Access,Environmental Economics&Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT

Regional integration as diplomacy

Regional integration agreements (RIAs) are examples of second best and have an ambiguous impact on welfare, contend the authors. They build a model in which RIAs unambiguously raise welfare by correcting for externalities. It assumes that trade between neighboring countries increases trust between them and reduces the likelihood of conflict. The optimum intervention in that case is a subsidy on imports from the neighbor. The authors show that an equivalent solution is for the neighboring countries to tax imports fromthe rest of the world -that is, to form an RIA- together with imposing some domestic taxes. In fact, security threats have moved neighboring countries to form RIAs. Examples include the creation of the European Coal and Steel Community (1951) and the European Economic Community (1957) to reduce the threat of war in Europe, as well as various RIAs among developing countries. The authors show, among other things, that: 1) the optimum tariffs on imports from the rest of the world are likely to decline over time; 2) deep integration implies lower optimum external tariffs if it is exogenous; 3) but if deep integration is endogenous, it implies higher optimum external tariffs before it occurs and lower ones thereafter; and 4) enlargement of a bloc (in terms of symmetric countries) has an ambiguous impact on external tariffs but improves welfare, and some form of domino effect exists in the sense that enlargement increases the incentive for nonmembers to seek accession. Although externalities associated with security matters imply that an RIA may maximize welfare, this model suggests that the RIA is a transitory arrangement in the sense that optimum trade preferences are highest at the time the RIA is formed (when security is low) and tend to decline over time. In other words, the RIA's external trade policy becomes increasingly open over time (as well as following deep integration).Rules of Origin,Environmental Economics&Policies,Economic Theory&Research,Payment Systems&Infrastructure,Trade Policy,Trade Policy,Environmental Economics&Policies,Economic Theory&Research,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Trade and Regional Integration

Trade and employment : stylized facts and research findings

The substantial literature investigating the links between trade, trade policy, and labor market outcomes-both returns to labor and employment-has generated a number of stylized facts, but many open questions remain. This paper surveys the subset of the literature focusing on trade policy and integration into the world economy. Although in the longer run trade opportunities can have a major impact in creating more productive and higher paying jobs, this literature tends to take employment as given. A common finding is that much of the shorter run impacts of trade and reforms involve reallocation of labor or wage impacts within sectors. This reflects a pattern of expansion of more productive firms-especially export-oriented or suppliers to exporters-and contraction and adjustment of less productive enterprises in sectors that become subject to greater import competition. Wage responses to trade and trade reforms are generally greater than employment impacts, but trade can only explain a small fraction of the general increase in wage inequality observed in both industrial and developing countries in recent decades. A feature of the literature survey is that the focus is almost exclusively on industries producing goods. Given the importance of service industries as a source of employment and determinants of competitiveness, the paper argues that one priority area for future research is to study the employment effects of services trade and investment reforms.

The challenge of reducing international trade and migration barriers

While barriers to trade in most goods and some services including capital flows have been reduced considerably over the past two decades, many remain. Such policies harm most the economies imposing them, but the worst of the merchandise barriers (in agriculture and textiles) are particularly harmful to the world's poorest people, as are barriers to worker migration across borders. This paper focuses on how costly those anti-poor trade policies are, and examines possible strategies to reduce remaining distortions. Two opportunities in particular are addressed: completing the Doha Development Agenda process at the World Trade Organization (WTO), and freeing up the international movement of workers. A review of the economic benefits and adjustment costs associated with these opportunities provides the foundation to undertake benefit/cost analysis required to rank this set of opportunities against those aimed at addressing the world's other key challenges as part of the Copenhagen Consensus project. The paper concludes with key caveats and suggests that taking up these opportunities could generate huge social benefit/cost ratios that are considerably higher than the direct economic ones quantified in this study, even without factoring in their contribution to alleviating several of the other challenges identified by that project, including malnutrition, disease, poor education and air pollution.Economic Theory&Research,Environmental Economics&Policies,Emerging Markets,Free Trade,Trade Policy

Trade and Employment: Stylized Facts and Research Findings

The substantial literature investigating the links between trade, trade policy, and labour market outcomes has generated a number of stylized facts, but many open questions remain. A common finding is that much of the shorter-run impacts of trade and reforms involve reallocation of labour or wage impacts within sectors. Wage responses to trade and trade reforms are generally greater than employment impacts, but trade can only explain a small fraction of the general increase in wage inequality observed in recent decades. A priority area for future research is to study the employment effects of services trade and investment reforms.trade liberalization, labour markets, trade and wages, trade and employment

Trade Shocks and Industrial Location: the Impact of EEC Accession on the UK

This paper combines detailed production data (from the ARD) with international trade data by port to examine the impact of accession to the EEC on the location of UK manufacturing. The paper has two main objectives. The first is to test the implications of models of economic geography for the location of economic activity in a developed economy subject to a significant trade shock. The second is to shed new light on the implications of EEC accession for the UK economy. Our results suggest that accession did eventually encourage UK manufacturing to relocate towards the South-East but that within the aggregate some industries retreated north-westwards in the face of increased import competition. Methodologically we have found that proximity to the ports through which trade occurs is a proxy for export market access and import competition and thus helps to explain industrial location. We have also found that the port-composition of UK trade is partly determined by the country-composition of trade. UK accession changed the country-composition of UK trade and via the port-composition induced an exogenous shock to the relative degrees of export market access and import competition in different UK locations. Our results show that employment responded as predicted to these shocks.UK manufacturing industry, EEC, economic geography

Regional cooperation, and the role of international organizations and regional integration

The authors examine regional cooperation among neighboring countries in the area of regional public goods. These public goods include water basins (such as lakes, rivers, and underground water), infrastructure (such as roads, railways, and dams), energy, and the environment. Their analysis focuses on developing countries and the potentially beneficial role that international organizations and regional integration may play in bringing the relevant countries to a cooperative equilibrium. A major problem in reaching a cooperative solution is likely tobe the lack of trust. If neighboring countries do not trust each other because of past problems, they may fail to reach a cooperative solution as each tries to maximize its gain from the regional public good. These strategies typically do not account for spillover effects and ultimately leads to losses for all parties. Other constraints on reaching a cooperative solution are its complexity and the financial requirements. Two types of institutions may help resolve some or all of these problems. International organizations can help with trust, expertise, and financing. The United Nations and the World Bank have been involved in a number of such projects in Africa, Asia, and elsewhere, and have been successful in helping parties reach cooperative solutions. Regional integration agreements, though not necessary for regional cooperation, may also be helpful by embedding the negotiations on regional cooperation in a broader institutional framework. The authors examine these issues with the support of both analysis and a number of case studies.Environmental Economics&Policies,Water and Industry,Decentralization,Water Conservation,Common Property Resource Development,Water Supply and Sanitation Governance and Institutions,Water and Industry,Water Conservation,Environmental Economics&Policies,Common Property Resource Development

Transport costs and"natural"integration in Mercosur

The authors explore the argument that trade between the Mercosur countries should be stimulated by preferential policies because of their geographic proximity. That is, that the Mercosur countries are candidates for natural integration. They find that, on average, transportation margins on trade within Mercosur and between Mercosur and Chile are about 6 percentage points lower than on trade with the rest of the world. That is a significant margin, and one that was reflected in the countries'trade patterns even before regional trade agreements reduced the policy-based barriers to mutual trade. But it is probably not large enough, in and of itself (without other benefits), to make the introduction of trade preferences desirable. The authors also explore the argument that absolutely high transportation costs between Mercosur and the rest of the world (that is, not relative to intra-Mercosur costs) justify regional trade preferences. For this to apply, the introduction of trade preferences must cause the Mercosur countries to cease importing some goods from the rest of the world completely. While Mercosur --rest-of-the-world transport costs certainly are high, trade patterns suggest that very few goods will cease to be imported from the rest of the world. Finally, the authors find that transport margins on imports are, on average, 2 to 4 percentage points higher for Mercosur countries than for the United States. Further research on why this is so is necessary before one can conclude that avoidable inefficiencies are involved.Development Economics&Aid Effectiveness,Trade Policy,Environmental Economics&Policies,Agribusiness&Markets,Consumption,Economic Theory&Research,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Environmental Economics&Policies,Trade and Regional Integration,Trade Policy

How has regionalism in the 1990s affected trade?

The authors apply a gravity model to data on annual non-fuel imports for 58 countries for the years 1980-96, to quantify the effects on trade of recently created or revamped preferential trade agreements (PTAs). They modify the usual gravity equation to identify the separate effects of PTAs on intra-bloc trade, members'total imports, and members'total exports. They also formally test the significance of changes in the estimated coefficients before and after the blocs'formation. Their estimates give no indication that the"new wave"of regionalism boosted intra-bloc trade significantly. They found convincing evidence of trade diversion only for the European Union and the European Free Trade Association. For the same blocs they also observed"export diversion", which would be consistent with these blocs'imposing a welfare cost on the rest of the world. Trade liberalization efforts in Latin America have had a positive impact on the imports of bloc members (Andean Group, Central American Common Market, Latin American Integration Association, and MERCOSUR). Increasing propensities to export generally accompanied increasing propensities to import, suggesting that general trade liberalization had a strong effect. The exception was MERCOSUR, for which import and export propensities displayed opposite movements, with exports performing worse than expected over the mid-1990s. Although MERCOSUR members have undoubtedly liberalized since the mid-1980s, these results suggest that their trade performance has been influenced more by competitiveness than by trade policy.Payment Systems&Infrastructure,Economic Theory&Research,Environmental Economics&Policies,Common Carriers Industry,Trade Policy,Trade and Regional Integration,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,Trade Policy,Environmental Economics&Policies

How regional blocs affect excluded countries - the price effects of MERCOSUR

The welfare effects of preferential trading agreements, are most directly linked to changes in trade prices - that is, the terms of trade. The authors use a simple strategic pricing game in segmented markets, to measure the effects of MERCOSUR on the pricing of"non-member"exports to the regional trading bloc. Working with detailed data on unit values, and tariffs, they find that the creation of MERCOSUR is associated with significant declines in the prices of non-members'exports to the bloc. These can be explained largely by tariff preferences offered to a country's partners. Focusing on the Brazilian market (by far the largest in MERCOSUR), they show that non-members'export prices to Brazil respond to both most-favorable-nation, and preferential tariffs. Preferential tariffs induce reductions in non-memberexport prices.Environmental Economics&Policies,Economic Theory&Research,Markets and Market Access,Export Competitiveness,Payment Systems&Infrastructure,Environmental Economics&Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,Markets and Market Access,Access to Markets