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From The World Bank Group
Global Economic Prospects 2005
Trade, Regionalism, and Development

Regional Trade Pacts Must Create – Not Divert – Trade to Reduce Poverty: World Bank Report
Global Economic Prospects 2005 predicts highest growth in 30 years for developing countries

WASHINGTON, November 16, 2004 — With regional trade agreements (RTAs) having increased sixfold since the 1980s and now covering more than one-third of global trade, the World Bank's Global Economic Prospects 2005 advises countries concluding bilateral and regional trade pacts to keep them “open”, so as not to divert trade or cause market distortions that penalize other developing countries.

Regional trade agreements, including North-South bilateral free trade deals as well as South-South preferential agreements, can improve prospects for rapid poverty reduction, the report says, but only if developing countries integrate them into a strategy for liberalization of trade on three fronts - unilateral, multilateral, and regional.

Global Economic Prospects 2005
Complete Report as One File (1.2MB PDF)
Overview in Spanish (655k pdf)
Foreword, Overview, & Frequently Cited Regional Trading Agreements and the Parties to Them (90k pdf)
Ch. 1: Global Outlook and the Developing Countries (130k pdf)
Ch. 2: Regional Trade and Preferential Trading Agreements: A Global Perspective (450k pdf)
In the last four decades, developing countries have burst onto the global marketplace. Their share of global trade increased from about one-fifth in 1960 to about one-third in 2004— at a time when global trade as whole was increasing to unprecedented levels. In every region, exports have outpaced the growth of output and increased as a share of GDP. Three rounds of multilateral trade negotiations combined with structural economic reforms undertaken throughout the world ushered in the sustained reduction in border protection that made this growth possible. The World Trade Organization (WTO), formed in 1994, consolidated an evolving system of rules based on nondiscrimination among trading partners— a cornerstone of the multilateral system. Today a second trend in the trading system is rapidly gaining momentum and establishing a very different set of rules. This new trend is the proliferation of regional and bilateral trade agreements (RTAs)—agreements among a group of countries that reduce barriers to trade on a reciprocal and preferential basis for those in the group. The number of these agreements has more than quadrupled since 1990, rising to around 230 by late 2004.1 Trade between RTA partners now makes up nearly 40 percent of total global trade, and new agreements increasingly address issues beyond trade. The value of preferences has steadily fallen, however, as most countries have been reducing tariffs across the board to all partners on a most favored nation, or nondiscriminatory (MFN) basis, at the same time as they have been eliminating barriers preferentially through RTAs. In fact, roughly 66 percent of the decline in average tariffs in developing countries during the last two decades has come from unilateral reductions, as distinct from 25 percent coming out of the Uruguay Round and around 10 percent from RTAs. Moreover, product exclusions and restrictive rules of origin further limit the tradeexpanding effects of preferences. Nonetheless, the result of this proliferation is an increasingly complex global trading system where different countries’ access to a given market are often governed by very different sets of rules.
Ch. 3: Regional Trade Agreements: Effects on Trade (115k pdf)
Regional trade agreements (RTAs) can have positive or negative effects on trade depending on their design and implementation. Analysis in this chapter confirms that gains from a preferential trade agreement cannot be taken for granted; moreover, even in agreements with positive impacts on average incomes, not all members are assured of increases. The interesting policy question then is not whether RTAs are categorically good or bad, but what determines their success? The broader policy context in which an RTA is designed and implemented is crucial. Agreements that have been designed to complement a general program of economic reform have been most effective in raising trade. When RTAs have tended to be fruitless, it is often because of the lack of a coherent program of reform. For an RTA itself, the most important ingredient for success is low trade barriers with all global partners. Most-favored-nation (MFN; i.e., nondiscriminatory) liberalization, which creates more trade, is the fastest and most efficient way to increase intraregional trade. In addition, agreements that minimize excluded products expand the scope for positive net benefits through competition and trade creation. Recent research has added nonrestrictive rules of origin to the list of successful factors; local firms must be able to effectively source materials at the lowest cost. Such rules of origin are an essential element of agreements that expand both regional exports and exports to the rest of the world. RTAs can be a springboard to global markets, but here too, low MFN trade barriers are necessary for success. RTAs can help countries integrate with global markets, but no agreement provides guarantees, so design and implementation matter.
Ch. 4: Beyond Trade Policy Barriers: Lowering Trade Costs Together (100k pdf)
The removal of tariffs and quotas is a key feature of regional trade agreements (RTAs), but modern RTAs can, and are, being designed to achieve much more than that. Trade policies are only one element—and often a relatively minor one—of the overall costs of trade. Because logistical, institutional, and regulatory barriers are often more costly than tariffs and generate no offsetting revenue, cooperative governmental efforts to improve customs procedures, minimize the trade distorting impact of standards, and reduce transport costs may have a higher payoff than reciprocal reductions in overt trade policy barriers. When RTA membership is part of a broad program of economic liberalization in which the objective is to attract international investment as much as to promote trade, a broad set of regulatory issues becomes paramount. Which are the most appropriate institutions to address these regulatory barriers? In certain cases, institutions at the regional level will provide for the most effective solutions, relative to both the multilateral and national levels.1 RTAs can effectively promote dialogue and implement coordinated responses. However, most RTAs have contributed little to reducing the associated trade costs, especially RTAs among developing countries. Many regional policy initiatives have foundered because of the lack of effective implementation, and crossing borders between most developing countries is still a major impediment to trade.
Ch. 5: Beyond Merchandise Trade: Services, Investment, Intellectual Property, and Labor Mobility (120k pdf)
As barriers to merchandise trade have come down and trade has expanded, policymakers and trade negotiators have turned their attention to services and trade-related regulatory issues. Of these, services, investment, intellectual property, and temporary movement of labor arguably have the greatest potential for affecting incomes and trade in developing countries. Agreements on these four issues are now becoming common in bilateral and some preferential regional trade agreements (RTAs). North-South agreements, notably the bilateral free trade agreements of the United States and of the European Union (EU), have been the important drivers for services, investment, and intellectual property rights (IPRs). In broad terms, the United States, for example, offers access to its large market for goods in exchange for access to services markets in developing countries and their acceptance of rules governing investment and intellectual property rights. The EU market access agreements also cover many of these topics, if less specifically. Labor services— that is, the temporary movement of workers—are largely confined to professional and skilled workers, often intracorporate transfers. South-South agreements tend to feature services liberalization less prominently, and their rules governing investment, intellectual property, and even the temporary movement of workers, are commonly weak or absent altogether.
Ch. 6: Making Regionalism Complementary to Multilateralism (120k pdf)
The emergence of a more proactive stance in multilateral negotiations by developing countries in parallel with an explosion of preferential regional trade agreements (RTAs) around the world raises an important question: Are these trends complementary, representing different paths to the same desired outcome of faster growth, development, and poverty reduction, or are they competing and incompatible? In principle, the best outcome for all countries would be a nondiscriminatory trading system; developing countries, in particular, would benefit from a nondiscriminatory trading system because most poor people and many poor countries might find themselves excluded from preferential deals. If the explosion in RTAs implies a higher probability that the majority of developing countries would face greater discrimination than under an MFN (or nondiscriminatory) regime, the world as a whole will be worse off, and individual developing countries may lose substantially.1 RTAs can be a complement to multilateral reform, but they are not a substitute. Consider a scenario, modeled in the first section of this chapter, in which each developing country signed an agreement with the United States, the European Union (EU), Canada, and Japan—the Quad. Each developing country could raise its real incomes by individually signing bilateral agreements with the Quad countries; and in some cases they would raise their real incomes more than they would through multilateral accords. But these gains disappear if all developing countries were to sign such agreements. In fact, all developing countries would lose relative to a multilateral agreement and even relative to the baseline. This scenario underscores the fact that, while stalled collective action through multilateral channels creates a strong incentive for each developing country to sign a regional agreement, if every country does so, they all lose.
Appendix: Regional Economic Prospects (150k pdf)
Regional Annexes
Africa (152K)
East Asia & Pacific (156K)
East Europe & Cen. Asia (146K)
Lat.   Amer. & Caribbean (149K)
Mid. East & N. Africa (149K)
South Asia (150K)

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