1 Conceptualising Deep Integration - PowerPoint Presentation

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Conceptualising Deep Integration

Michael Gasiorek

Peter HolmesSlide2

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Outline

Deep Integration: market and institutional

Nature of gains

Fuller market access

Domestic impact

Competitive effects

Winners and losers

Private vs public dimensions

Examples: few outside EU accession

Conclusions: DI can work only if partner economy ready Slide3

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RZ Lawrence (1996) on Deep Integration

“Shallow integration” when “border measures” essentially tariffs and quotas, eliminated

“Deep integration” defined by RZL as

process whereby

domestic

economic (regulatory) policies/measures, are approximated in order to remove barriers to trade behind the border. Whole economy affected.

Lawrence surmised DI easier in a smaller group than WTO, tho’ cautious on benefitsSlide4

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Deep Market Integration

Trade investment & business practices take on characteristics of internal trade

intensity of interaction

willingness to sign long term contracts

ability to switch partner if contracts go wrongSlide5

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New features of Supply chains

Trade in tasks, ie intermediates not final commodities

Trade more in services

Relational trading and networks replace ship and forget

Quality and compatibility standards matter more than post shipment inspection

Agriculture becoming like industry eg with Quality Assurance, Eurepgap etc Slide6

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Markets and Institutions

a very comprehensive certification or standardisation regime can permit

trade between anonymous partners

or

networks of repeat business

can institutional integration create more competitive

thickly integrated markets?Slide7

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Deep Institutional

Integration

No value in reducing tariffs if regulatory incompatibilities bar all scope for trade expansion eg:

Service regulation

SPS & TBT measures

Competition rules and market conditions

(IPR??)

Shallow integration leaves most of non trading economy untouched (contrast EU Accession)Slide8

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Border barrier aspects

Behind the border dimension

Infrastructure

Institutional / regulatory / policy

Infrastructure

Institutional / regulatory / policy

Tariffs / quotas

Customs clearance

Actual measures

Domestic implementation of applications for clearances etc especially for quotas

Standards: (SPS, TBT)

Warehouse facilities

Inspection processes

Labs

Standards, regulations etc

Investment

n/a

n/a

Access to facilities

Investment rules

IPR

Checks to secure compliance

Patent office

IPR legislation and rules

Trade defence

(AD, CVDs Safeguards)

Customs clearance

Actual measures

n/a

Bureaucratic procedures for imposing duties and appealing etc

Services: e.g. financial, insurance, transport, telecoms)

Internet

Possible blockages on internet

Core network for peripheral services

Regulations

Govt procurement

X

Purchasing system

Legislation and rules

Comp. policy – private firms

Any marketing obstacles by incumbents

Courts

Legislation and rules

Comp policy- state aids

Aids regime and ways to challengeSlide9

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Can DII help DMI?

RTAs follow trade – suggesting a revealed preference exists.

We conjecture that:

Private actors can only address some of the market failures

Public action is likely to make Deep MI more contestable

If there are again they are economy wide not just for market access Slide10

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Types of trade and RTAsSlide11

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Types of approximation

National Treatment - NAFTA

Mutual Recognition of

Standards

Conformity assessment

Harmonisation - EU approach in pre-accession and some ENP

In reality very limited stepsSlide12

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Regulatory approximation

Standards codified specifications of process or product

Regulations - mandatory specifications

Conformity assessment - how to check if standards or regs complied with

Accreditation-verification of reliability of CA

Mutual recognition of standards does not imply MR of conformity assessementSlide13

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TBT & SPS in RTAs

Pre-accession FTAs create implied obligation to harmonise rules, but accession negotiations drove this

EU-Turkey CU (1996) did not have MR of conformity assessment till 2006

EU FTAs with non candidates generally aspire to lower barriers but little harmonisation agreed by partners and no MR by EUSlide14

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Competition Provisions in RTAs

Strong in pre-accession agreements

EU seeks to ensure that FTA partners adopt competition policies that will reduce trade barriers but provisions rather weak

US FTAs limited provisions

But countries ready to discuss this in RTA context that not at WTO – maybe even India Slide15

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Deep Integration: tighter networks or more competition?

Deep market integration can take 2 forms:

Tight networks of firms with long term subcontracting but little scope for alternative partners

Open competitive markets where long term contracting occurs by choice Slide16

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Potential gains from DI

Regulatory certainty

more niche market specialisation and the creation of more stable value chains.

technology transfer and diffusion both through trade and FDI,

pro-competitive gains from increasing import competition in an environment of imperfect competition,

greater exploitation of economies of scale in production

the greater use of intermediate inputs;

the increased geographical dispersion of production through trade that supports the exploitation of different factor proportions for different parts of the production process

local economies of scale through finer specialization and division of labour in production;

externalities arising from institutional changes that lead to a wide increases in productivity. Slide17

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Ways to address market failures

A multilateral agreement, e.g. by ISO norms supported by the WTO

A regional/bilateral agreement, e.g. RTA

Autonomous government decisions of the individual countries, eg S.Africa, Switzerland adopt EU regs

The market, e.g. through FDI, detailed sub-contracting arrangements through the value chain, or by purely voluntary standards.Slide18

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Private vs public

Regulations are mandatory

Standards often private, eg ANSI or Eurepgap

Conformity assessment usually private firms or ISO members as consultancies

Accreditation (IAF) must confirm state system Slide19

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Eurepgap private standards

EU supermarkets have own standards body for verification of production processes that if followed will assure conformity to EU product standards

Eurepgap is not regulated and conformity to Eurepgap norms is undertaken by a small number of private firms (SGS etc)

National standards offices in sub-saharan Africa are rarely accredited for this

Supermarkets often

alleged

to be forcing poor farmers to take unfair share of burdenSlide20

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Why might DI not be achieved by solely by the market?

Asymmetric information

Learning spillovers

Reputational spillovers

Environmental spillovers

Economies of scale in testing & certification etc

Compatibility externalities

Collective actions, coordination failure, network externalities

Private contracting and governance may not foster competition Slide21

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“Upgrading quality” vs risk of wrong standards

Import of EU standards can provide a chance to adopt a standard that can deal with a market failure – and impact on whole economy - CEEC case

OR

it can impose a costly and unnecessary set of inappropriate regulations for domestic markets driven by external trade considerations – limited examplesSlide22

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Likely winners and losers

Winners

consumers who value export quality

exporters who get easier market access

new exporters

foreign firms

Domestic markets functioning better due to new norms

Losers

consumers who don’t want to pay more

firms unable to compete

excluded 3rd country suppliers (discrimination vs erga omnes)

Markets which don’t need trade driven rulesSlide23

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Quantifying effect of DI

Models extrapolate trends and assume RCA indicates direction of change

Most EU FTAs suggest very little gain from removing shallow barriers

Sussex framework suggests looking for rising IIT indicators where DI could impact: India but less Egypt so far

CGE work with CASE by M.Maliszewska assumes DI improves business climate and raises regulatory certainty and lowers risk premium

across whole economy

- investment and output increase sharplySlide24

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EU Accession

Some fears before accession that EU norms inappropriate and costly, eg for Poland, eg domestic food industry

Deep Inst integration very hard (Turkey MR of conformity assessment not till 2006 10 years after CU)

But growth of partners suggests positive effects going beyond traded sectorSlide25

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ESA EPA

Rwanda and Ethiopia

coffee major export

no tariffs.

Core barrier are capacity and SPS regs on ochratoxin (and on some spices for Ethiopia).

EU can give aid for trade but can only offer MR when this is successful

Mauritius

seeks to be financial services exporter

says “What rules do you want? We’ll comply.”Slide26

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South African Water

SA imposing EU water quality rules on for all food production and distribution in SA

This will

raise quality across whole economy

raise costs

Open export markets

Exclude some farmersSlide27

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EU seeks Deep EU-India FTA

Little or no gain likely from shallow integration

Rising IIT suggests deep market integration emerging

Some improvement in Market access to EU possible (SPS?) but main gains

to domestic economy

if:

Further improvement in services reg (lock-in?)

Better standards regimeSlide28

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Egyptian potatoes and “Brown Rot”

EU exports seed potatoes; Egypt exports new potatoes (deep market int?)

EU requires clean water to be used for irrigation

If one consignment found contaminated all crop may be banned – externality

Egypt keen to adopt necessary rules but hesitant about comprehensive post FTA commitment to all EU normsSlide29

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SPS in possible EU Central America FTA?

EU unlikely to impose additional requirements

But also unlikely to guarantee MR, so CA will be subject to same rules

So tariff removal will not increase market access unless

non animal reg. regime deemed equivalent

Animal suppliers approved

Suppliers can meet additional private (and MS) rulesSlide30

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Conclusions

With low tariffs shallow integration has little to offer – with high we risk trade diversion

So we must look to gains from Deep Int for the whole economy

We need to explore nature of externalities/coordination failures that allow RTA to be instrument for more efficient economy wide and competitive integration

Limited luck so far outside EU itself