21st Century Regionalism: Filling the gap between 21st century trade 

and 20th century trade rules

Richard BaldwinGraduate Institute, Geneva 

WTO Geneva, 3 November 2010

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Pre‐Industrial Revolution

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Consumption & production

bundledspatially

Production

&

Consumption transportation⇒

Very little trade

Transportation “glue”

Transportation revolution (steam power)

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“Freight rates and productivity gains in British tramp shipping 1869–1950” (2004) Saif I. Shah and Williamson 

1st Unbundling 

1st wave (1850‐1914)

2nd wave (1950‐now)

First unbundling

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⇒

1st unbundling: Production clustering within nations

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Production Bay B

Production Bay A

Production Bay C

Manufacturing requires continual two‐way flows among “production bays” of:Things,People,Information,Investment in training, machines, processes.

Coordination “glue”

20th trade & trade governance

• International commerce = goods crossing borders.• Trade disciplines required = fairly simple (GATT 1947):

– Tariffs & other border measures – MFN;– Subsidies & unfair competition – AD/CDV;– Taxes & regulation of goods – National treatment;– etc.

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Bay BBay A

Bay C

Bay BBay A

Bay C

ICT revolution• ICT revolution melts the coordination glue:

Telecommunication cheaper, universal.

Computing & information storage becomes cheap.

Information management software.

Increased modularisation of manufacturing

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Second unbundling

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⇒ Bay BBay A

Bay C

Bay BBay A

Bay C

2nd unbundling

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21st century trade more complex

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Bay B

Bay BBay A

Bay C

Bay BBay A

Bay C

21st century trade & governance• 21st century trade needs deeper disciplines.

• Recognition & early efforts (1986):– EU’s Single Market Programme

• Goal: flows across border just as flows within borders.

– US‐Canada FTA• Deepen disciplines to include investment & services.

– Uruguay Round • TRIPs, TRIMs & Services.

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ICT revolution acceleratesMoore’s law & Gilder’s law at work: In 2001 more information could be sent over a single cable in a second than was sent over the entire internet in a month in 1997.

Cost of information processing (cents per instruction per second)

Optical Fiber Transmission (cents per Mbit/km)

0

1E+09

2E+09

3E+09

4E+09

5E+09

6E+09

0

100

200

300

400

500

600

700

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Mobile and fixed-line telephone subscribers per employee

Mobile and fixed-line telephone subscribers

Internet Hosts

1

10

100

1,000

10,000

100,000

1,000,000

10,000,000

100,000,000

1,000,000,000

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

1983

1995

North‐South production unbundling

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Example #1: HP Server “Made in Singapore,”

Example #2: Hard Disc Drive “Made in Thailand”

North‐South trade governance gap• Need for new disciplines North‐South.

• WTO is otherwise occupied.

⇒ Governance gap.

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Filling North‐South governance vacuum• Explosion of BITs 1990s.

• North‐South deep RTAs– US (NAFTA‐like), Japan (EPAs), EU (Association Agreements).

• Unilateral tariff liberalisation.

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Filling North‐South governance vacuum

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02468

101214161820

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Philippine

Thailand

Korea

Malaysia

China

Indonesia

Singapore

1989

1995

• Unilateral tariff liberalisation facilitates 21st c. trade especially: 

• By developing nations 

• In parts & components.

• 21st regionalism not about tariff preferences.

Possible preference margins are low• Much trade has zero MFN applied tariffs (no preference); share growing 

fast everywhere.• Other average tariffs are low (except sensitive products; often excluded 

from RTAs),• Big inter‐regional have positive MFN tariffs but are not covered by RTAs 

(yet).

17 0 20 40 60 80 100

CEMAC GCC

UEMOA Andean Community

ECOWAS CARICOM

MERCOSUR CEFTA

COMESA EAC

SADC NAFTA

SACU CACM

ASEAN EU27 EU15 EFTA

Zero MFN tariff (% Total Imports)

0 2 4 6 8 10 12 14 16

CEMAC COMESA

EAC ECOWAS

UEMOA CARICOM

SADC SACU

MERCOSUR Andean Community

CEFTA ASEAN CACM

NAFTA GCC

EU27 EFTA

MFN applied tariff (trade weighted average)

Death of preferences

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Big PMs only on narrow fraction of exports.

US, Canada & Mexico are exceptions.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Source: Carpenter & Lendle (2010)

Import shares by preference margins, selected nations

above 10% or specific

5% to 10%

below 5%

Partial preference

zero

No preference (MFN =0, or exclusion)

21st century disciplines (Japan EPAs)

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Sing Mex Mala Phil ThaiLiberalization&promotion of investment x x x x x Harmonization of custom procedures x x x x Protection of intellectual property rights x x x x

Mutual recognition and testing x x x x Movement of natural persons x x x x Government procurement x x x Competition x x x x x Enhancement of business environment x x x x Environment Labour Exchange of information about intellectual property rights x Financial services x x x x Information technology x x x x Science and technology x x x x x Education and human resource development x x x x x Trade and investment promotion x x x x Small and medium enterprises x x x x x Transportation x Energy x x Agriculture, forestry and fishery x x x Road development x x

Source: Balboa (2008) “Negotiated Trade Liberalization in East Asia: Examining Japan’s Economic Partnership Agreement (EPA): Focusing on the Japan Philippines Economic Partnership Agreement (JPEPA)”. 

Conceptual frameworks

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Traditional regionalism v 21st regionalism• Traditional view:

– Vinerian economics & implied political economy.

• 21st regionalism:– Vinerian analysis moot (RTAs not about preferences). 

– Regulation‐economics, not tax‐economics.

– Tools of discrimination often weak for BBBs.– BBBs = “Behind the Border Barriers”

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Summers: “I like all the ‘isms”

Bhagwati: “Termites in the system”

Krugman: “Is bilateralism bad?”

RTAs = tariff preferencesRTAs = tariff preferences

RTAs = disciplines underpin 2nd unbundlingRTAs = disciplines underpin 2nd unbundling

Difference without distinction?• Why we care about regionalism:

– Economic inefficiency from discrimination

– Injustice and power asymmetries

– Threats to support for multilateral liberalisation

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Traditional view economics

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Smith’s certitude = Partner gains from preference.

Viner’s ambiguity = Preference giver might lose.

Haberler’s spillover = third nations lose.

Different economics1. Frictional barrier liberalisation

– If rules‐of‐origin‐like tools available• Only Viner’s ambiguity dead.

– Without discrimination tools (many TBTs)• Haberler’s spillover also dead.

– {E’metric estimates of external trade creation}

2. Domestic entry liberalisation– Incumbents v entrants; not home vs foreign.– Discrimination very difficult.

3. Property right assurances– Ditto

4. Fiscal federalism: Centralisation not always good.

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Injustice & power asymmetries• Deep RTAs worse that shallow RTAs.

– Article 24 limits large partner's bargaining power.

– Article 5 GATS ditto (weakly) for services.

– No such WTO disciplines on BBBs• de facto = NS deep RTAs almost exclusively one‐sided on BBBs.

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Threats to WTO supportDifferent political economy

1. Basic nature of bargain– Traditional = exchange of market access.

– 21st c. = Northern factories for Southern reform.

2. Implications:– Only EU, US & Japan can do this deal (yet).

– WTO = no factories on offer.

– RTA tariff cuts multilateralisable; BBBs disciplines maybe not; 

• EU, US, Japan disciplines incompatible?

3. Unilateral tariff cutting = hole in WTO fuel tank.26

Sum up• 1st unbundling: 

– GATT & RTAs mainly about tariffs.

• 2nd unbundling: – 21st century regionalism mainly about BBBs

– Politics: factories for reform

• Key questions 21st c. regionalism: – Are US, EU and Japanese disciplines multilateralisable?

– Can & should some disciplines be brought under WTO?

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Sum up• Key questions 21st c. regionalism (cont’d): 

– Develop WTO disciplines like Art.24/Art.5 for deeper disciplines?

• How do new trade giants (China, India, Brazil, etc.) fit in?

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Future scenarios for WTO• Plan A (WTO centricity restored): 

– WTO disciplines updated to match 21st century trade.

• Plan B (WTO centricity eroded): – WTO unreformed, RTAs & BITs continue to lead.

– Drift back towards a 19th century Great Powers world?

• B.1: WTO stays vibrant with Marrakesh disciplines only; deeper disciplines outside.

• B.2: WTO credibility withers; bicycle falls over.

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End• Thank you for listening.

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