Multilateralism Or Regionalism?

MULTILATERALISM OR REGIONALISM? TRADE POLICY OPTIONS FOR THE EUROPEAN UNION GUIDO GLANIA JÜRGEN MATTHES CENTRE FOR EUROPEAN POLICY STUDIES BRUSSELS The Centre for European Policy Studies (CEPS) is an independent policy research institute based in Brussels. Its mission is to produce sound analytical research leading to constructive solutions to the challenges facing Europe today. The views expressed in this report are those of the authors writing in a personal capacity and do not necessarily reflect those of CEPS or any other institution with which the authors are associated. They gratefully acknowledge financial support provided by DaimlerChrysler and BASF. Guido Glania, Dr. rer. pol., is responsible for trade and development policy at the Federation of German Industry (BDI), with which he has worked in Brussels since 2004 and in Berlin from 1999-2003. From 1996-99 he was responsible for European trade policy at the Central Federation of the Textile Industry (Gesamttextil) in Eschborn. He studied economics in Cologne and was conferred a doctorate in Erlangen-Nuremberg. Jürgen Matthes is a Senior Economist with the Cologne Institute for Economic Research (IW Köln). Since 2003 he has been responsible for the International Economic Policy department. Prior to that he was the head of IW’s New Economy department (from 2000-03) and personal assistant to the director (1995-2000). His economic studies were undertaken in Dortmund and Dublin. He has published on a wide range of issues covering trade policy, development, the competitiveness of nations, the new economy and corporate governance. ISBN 92-9079-603-0 © Copyright 2005, Centre for European Policy Studies. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the Centre for European Policy Studies. Centre for European Policy Studies Place du Congrès 1, B-1000 Brussels Tel: 32 (0) 2 229.39.11 Fax: 32 (0) 2 219.41.51 e-mail: info@ceps.be internet: http://www.ceps.be CONTENTS 1. Introduction...........................................................................................................1 2. Definitions and Status Quo.................................................................................4 3. Pros and Cons of Regionalism..........................................................................13 3.1 Causes of increased regionalism ..............................................................13 3.2 Welfare analysis..........................................................................................20 Theoretical analysis.......................................................................................20 Empirical results ...........................................................................................32 3.3 Other welfare dimensions.........................................................................34 Transaction costs as a barrier to trade ..........................................................34 A race for markets boosts bilateral agreements .............................................36 3.4 Regionalism and the WTO........................................................................38 Regional trade agreements and WTO law ....................................................38 Regionalism and multilateralism – Building or stumbling blocks?..............42 Reform of WTO rules for regional trade agreements ....................................51 3.5 The developing countries’ perspective....................................................52 South-South integration ...............................................................................52 North-South integration ...............................................................................55 3.6 Is regionalism an opportunity for ‘new trade issues’?..........................59 4. Options for EU Trade Policy.............................................................................68 4.1 Multilateral liberalisation..........................................................................68 Problems at the WTO level ...........................................................................68 Revised agenda of the Doha Round...............................................................70 The EU perspective .......................................................................................72 4.2 Unilateral reduction of tariffs ...................................................................73 4.3 Bilateral agreements .................................................................................. 76 Transatlantic free trade zone ........................................................................ 79 Transatlantic trade and investment agreements .......................................... 83 Agreements with developing and emerging countries.................................. 85 Other countries’ agreements with developing countries .............................. 86 4.4 Plurilateral variants ................................................................................... 88 Tariffs............................................................................................................ 90 ‘New’ trade issues......................................................................................... 93 Plurilateral agreements only with industrial countries? ............................. 95 4.5 Recommendations for EU trade policy................................................... 97 5. Conclusions......................................................................................................... 99 References ................................................................................................................. 111 Tables 2.1 Selected regional trade agreements (in 2002).......................................... 7 4.1 Global trade rounds to date .................................................................... 71 4.2 The markets of the EU-25 countries ...................................................... 78 Figures 2.1 Reported regional trade agreements that are in force, by year of coming into force – Annual averages ...................................................... 8 3.1 Number of WTO members...................................................................... 19 3.2 Consequences of a customs union between countries A and B ......... 22 3.3 Developing countries – Share of tariff reductions between 1983 and 2003, unilaterally, multilaterally and regionally (in %) .............. 54 4.1 Structure of transatlantic trade according to product categories – Share of EU-25 extra trade with the US (in %)...................................... 81 4.2 China’s growing world market share of modern manufactured products – Share of global exports (in %).............................................. 87 4.3 Share of OECD countries in the world exports of modern manufactured products in 2003 .............................................................. 92 1. Introduction The trade policy of the European Union is facing tremendous challenges. In 1995 the founding of the World Trade Organisation (WTO) was widely considered a milestone for world trade policy. Yet not long after its inception, the WTO’s multilateral liberalisation has begun to slow down. One contributing factor is that, over the past few years, regional and bilateral trade agreements have been mushrooming, prompting the query of whether the WTO is being sidelined. The EU is heavily dependant on open markets. Thus, enhanced access to third countries is an important element for growth and more jobs. This situation makes the question of which long-term trade policy strategy the EU should follow a key issue for European competitiveness. Should the EU give top priority to the WTO, rely on both multilateral and bilateral liberalisation or should it mainly pursue bilateral and regional agreements? These questions cannot be answered without an in-depth theoretical and empirical analysis of the trade policy options the EU has at its disposal. This study provides such an analysis and makes recommendations for EU trade policy. Despite the EU’s commitment to the multilateral system, the negotiations within the WTO are dragging on. To a large extent, this is caused by an intensified clash of interests between industrial and developing nations. Today, poorer countries represent the majority of WTO member states, and further, they are acting in a more self-confident manner. Therefore, it is becoming increasingly difficult to achieve agreement within the WTO framework, which requires unanimity. The fundamental conflicts have twice culminated in a collapse of WTO ministerial conferences, in Seattle in 1999 as well as in Cancun in 2003. Of course, the ongoing Doha Development Round that began in 2001 overcame a major obstacle in mid-2004, but further negotiations can be expected to remain sluggish and to achieve rather modest results. The EU is | 1 2 | GLANIA & MATTHES an important and constructive player within the WTO context. But there is no guarantee that its own constructive stance and concessions will drive the negotiations forward. By contrast, there is strong momentum driving the conclusion of regional trade agreements. The most remarkable regional association is the EU itself. But the NAFTA in North America or ASEAN in Asia are also well known and are increasingly important. Approximately 50% of the 200 agreements that were

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