November 30th, 2022

Lecturer: Prof. Dr. Ulrich Schüle

Contents: New Regionalism as Alternative to Multilateralism?

Pre-Class Reading: Gerber: ch. 13 & 14; van Marrewijk et. al. (2012): ch. 13; Hill (2014): ch 9;

Additional Reading: Baldwin (2011); Schüle and Kleisinger (2016)

Discussion Questions:

(1) Briefly explain the expression “new regionalism” and discuss the standard definitions of
“free trade agreements”, “customs unions” and “common markets”. In this context,
analyse to which extent real-world regional trade agreements (RTAs) correspond to the
standard definitions.

 New regionalism:
 Processes that build concrete patterns of economic transactions within an
identified geographical space
 Rising economic interdependence between states which can be measured
 Economic transactions between countries
 Common sense of identity and purpose
 Creation of a institution that expresses a particular identity
 Group of nations identify themselves as one region
 Group of countries forming a cluster, forming a regional trading block
 The EU is a per se example
 Contrary: multilaterism, what would correspond to the global free
trade approach of the WTO
 Agreements of countries where MNEs are active
 Free Trade Areas:
 Members remover trade impediments among themselves but retain the
freedom to determine policies with respect to the outside world (non-
participants)
 Consequence trade deflection (Flucht): goods enter the FTS with the lowest
external tariff and then circulate around
 Removal of trade restrictions between the members of the area
 But no common external tariff
 Custom Unions:
 Members set a common tariff barrier -> common external tariff against non-
members
 All tariffs and quotas are removed for intra-union-trade
 One common tariff for external trade
 No trade deflection possible
 Two diverse effects:
 Trade creation: country A starts to import goods from the CU which is
produced cheaper in country B
 Trade diversion: country A now imports a good no longer from a
cheaper producer outside the CU + tariff, but now it imports it from
country B, there the product is more expensive but it has not pay tariffs
 Results of trade creation and diversion:
 
The price is reduced but still not the same as it would be with
free trade
 Good news for consumers (not as good as it would be with free
trade)
 Bad news for inefficient domestic producers which were
previously detected by national trade barriers
 Conglomerate of countries with common tariffs
 Common Market/ Single Market
 a CU with free factor mobility across frontiers
 Capital, labor and enterprises can move unhindered between participates
 Usually members of a CM are geographically close
 With the common market, Import of goods, services, capital and Immigration
still has a Common external tariff (CET) and common rules on visa, to a third
country.

- Agricultural products, where left out in the beginning for protectionism.
- Service, intangible a product that cannot be stored
- General Agreement on Tariff and Trade.- For finished goods.
- Multilateral- Si un país que firmó el GATT acuerda con otro país bajar sus tarifas debe
hacerlo para todo el resto.
- New regionalism.- after the cold war there were – FTA
- FTA.- Members eliminate the trade barriers , tariffs, so all products can be exchange in the
members countries.
- Customs union- The differente countries A,B,C agree on a Customs Union (CU). The trade
within the customs union need no customs control. The imports from outside the CU
needs to apply the Common External Tariff (CET)

(2) Compare USMCA with the economic integration in the EU and identify the major
differences.

 EU exits since 1994

 Originally just planned as a CU
 Common agricultural policy and planning of monetary union
 Idea of monetary union was set up in the Werner Report: complete irreversible
convertibility of currencies, closely aligned exchange rates, full liberalization of
capital movements and a common central banking system
 It has been noticed that a single country could not maintain an effective independent
economic policy
 Since 1993 free movements of goods, services, people and capital
 Reduction of trade barriers
 Opening of the national contract market
 Sorting out of disparities in the national tax system
 Liberalization of the money market and financial services
 Harmonization of national laws on safety and pollution
 Diminishing of passport checks at internal borders
 Harmonization of company laws in the EU of intellectual property rights laws was
brought into line
 Maastricht Treaty:
  Establishment of new separate structures for justice and home affairs, a
common foreign security policy
 Citizenship to the population of 12 states: move and live in any country
 Social employment issues covering worker´s pay, health and safety
 Subsidiarity: the EU does not undertake any action, except areas with
exclusively competences
 Madrid Council: allowance of control and eastern countries to join the EU
 2004 new constitution:
 Qualified majority voting
 The new post president stays now for two and a half year than just six months
 Election of a minister of foreign affairs
 New form of commission: two thirds of the states have their own commissioner
 Greater power to parliament
 Adding the Charta about fundamental rights, freedoms and principles
 New constitution of the personality of the EU, and its laws over national laws
 WTO success: states more related by regional agreements
NAFTA:
 Canada, Mexico and the US
 Free trade area with no common external tariff
 Most tariffs on industrial goods have already been eliminated and tariffs on agricultural
products ended
 But many exclusions and exceptions so that this far away from
removing all trade restrictions
 US benefited from lower Mexican labor costs
 Most benefits for Mexico:
 Faster recovering from crisis

 The EU is a much more complex building than the NAFTA and achieved more benefits
for the participating countries. It poses its own constitution and commission with those
it acts like a state.
 The automotive industry is also one of the most integrated industries across the
NAFTA/USMCA economies.

Rules of Origin and Rules of Cumulation:

 RoO are criteria to determine the national source of a product
 Allows producer of contracting parties of a free trade zone to use input
materials from another contracting party without losing the originating status
of that input for the purpose of the applicable rules of origin
 To implement measures and instruments of commercial policy such as anti-
dumping duties and safeguard measures
 To determine whether the imported products shall receive most-favored-
nation treatment or preferential treatment
 That the system cannot be “misused”
 To protect the country´s economy: otherwise no more own products of
origin
 To push trade within the regional trade zone and at the same time protect
home country´s producer
 Exporters are less constraint in their choice of inputs and input sourcing
  Producers are more competitive
 Promotes regional integration within trading areas
 Application of RoO:
1. Heading and (is inly valid if in addition 2. or 3. apply
2. Does not exceed 40 % (either all import materials do not exceed the factoring
price)
3. Does not exceed 25 % (refers less documentation than 2.)
 If there occurs a change in the heading, it is substantial transformation
of the good

(3) Critically discuss possible reasons for “new regionalism”.

 One country alone cannot maintain an effective independent economic policy

 To increase welfare
 To reduce costs of CCA
 To vanish the “small-country-effect” – a small country cannot affect tariffs on world
market prices
 New world structure after the cold war
 Decline of American hegemony in combination with a more positive attitude on the part
of the USA towards regionalism
 The globalization process
 The end of the “Third Worldism” and changed attitudes towards economic
development and the political system in developing countries
 Regional agreements in order to apply preferential treatments
 Easier/import export of goods for members
 Benefit from lower human labor costs in less developed member-countries

(4) Discuss the trade-creation and trade-diversion effects of RTAs and compare the results
of this static analysis with the results of a dynamic analysis which includes the long-term
effects of increased competition.

Static analysis:
 Trade diversion
 Applicants had higher tariffs than those in the CU
 The common external tariff (CET) of the CU was low
 The CU was large
 The trade structure was complementary and competitive with the rest of the
CU
 In the case of the EU:
 1+2 was satisfied
 4 was met as well
 3 was true
 5 to difficult to judge
 The EU brings more trade creation than diversion
Dynamic analysis:
 FDI flew into the Eastern regions
 Business was established in these Eastern countries to benefit from the lower worker´s
pay there
 Because less people were allowed to move from this poorer countries to
the richer ones
 The EU benefited from the “new Eastern members” in becoming more competitive
against US/Asia
Spaghetti Bowl Effect
 Spaghetti bowl of transaction costs
 Questions the real benefits of RTAs
 Overlapping FTAs harm trade by increasing transaction costs for business through
variable tariffs, complicated rules of origin and high bureaucratic requirements
 One commodity is subject of different tariffs and tariff reductions for the purpose of
domestic preferences
 Different contents in bilateral agreements
 Different certificates of origin with each country

(5) Explain the “Spaghetti” or “noodle” bowl effect.

Because of the different rules of the FTA can be difficult to determine the rule that finally apply to
a product. Spaghetti bowl means difficult to eat.

In some cases the company needs to decide if they want to export to certain country or not
because of the rules of the tariffs that can exist.

(6) Describe the various forms of integration in Europe: which aspects do authors refer to when
discussing the following expressions: monetary union, single market, customs union?

(7) Name and describe the contents of various RTAs between the EU and non-EU countries.

(8) Brexit as an example of economic disintegration: Discuss possible forms of the UK’s future
relation to the EU: EEA, customs union, FTA, no agreement. Discuss potential results on trade
flows.

(9) Research for Latin American RTA examples and analyse their political and economic success. In
particular, describe and analyse the major components of the Mercosur.

Mercosur - Mercado Comun del Sur

 Since 1991: Arg, Brazil, Paraguay and Uruguay + 1996/98 Chile and Bolivia as
associated members
 Linder Hypotheses works for Arg and Brazil
 Inter-industry trade is not very likely to happen, but intra-industry trade would work
 To compete economically with the US
 Members wanted not to become that depend from the US as many other LA-countries
 Officially a custom union
 Elimination of tariffs on goods and services and a common external tariff
(CET)
 Just tariffs on sugar and automobiles remained
 Reciprocal investment promotion and protection agreement
 Intellectual property rules were set up
 Advantages:
 Substantial trade creation
 Rapid trade expansion in form of higher imports
 Trade diversion: countries with highest external tariffs grown most
 Trade deals between Mercosur and The EU (are planned)
 Disadvantages:
 Imbalance
 of country sizes (Arg + Brazil vs. vs the others, if those struggle, the whole
Mercosur suffers)
 No dispute settlement procedure
 No achievements in freeing trade in services and government purchases
 Many exceptions of CET
 Parliament has no decision making power
ANDEAN Community:
 Economic and social integration organization
 Tariff preferences from the EU
 Creation of FTA between ANDEAN and Mercosur
 Control of drug problems
 Facilitates free circulation of people
 Common agricultural policy, macroeconomic policy harmonization, common foreign
policy
 Common external tariff
 Operates as a CU
 Etc.
PACIFIC ALLIANCE
The Pacific Alliance is an initiative of regional integration comprised by Chile, Colombia,
Mexico and Peru, officially established on April 28th, 2011. Its objectives are:
 Build in a participatory and consensual way an area of deep integration to move
progressively towards the free mobility of goods, services, resources and people.
 Drive further growth, development and competitiveness of the economies of its
members, focused on achieving greater well-being, overcoming socioeconomic
inequality and promote the social inclusion of its inhabitants.
 Become a platform of political articulation, economic and commercial integration
and projection to the world, with emphasis on the Asia-Pacific region.

(10) Research and discuss RTA examples in Africa.

- African Continental Free Trade Area (AfCTA)

(11) Discuss the basic developments towards the ASEAN Economic Community.

The Association of Southeast Asian Nations, or ASEAN, was established on 8 August 1967 in
Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the
Founding Fathers of ASEAN: Indonesia, Malaysia, Philippines, Singapore and Thailand. Brunei
Darussalam joined ASEAN on 7 January 1984, followed by Viet Nam on 28 July 1995, Lao PDR and
Myanmar on 23 July 1997, and Cambodia on 30 April 1999, making up what is today the ten
Member States of ASEAN1

(12) Critically discuss the role of regional trade agreements in the context of the WTO’s
multilateralism.

(13) Is “multilateralism” dead? Do we still need the WTO?

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