Monthly Archives: May 2019

Should the WTO Require Free Trade Agreements to Eliminate Internal Tariffs?

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By Kamal Saggi (Vanderbilt University), Woan Foong Wong (University of Oregon), and Halis M. Yildiz (Ryerson University)

At a time when multilateral trade liberalization at the World Trade Organization (WTO) seems to have come to a grinding halt, preferential trade agreements (PTAs) appear to be the only game in town for countries interested in undertaking international trade liberalization. Under the current rules of the WTO, countries entering into a PTA are required to eliminate tariffs on “substantially all trade” with each other and refrain from raising trade restrictions on non-member countries. In the existing literature, Article XXIV has often been invoked as a justification for the assumption that PTA members impose zero tariffs on each other. Though reasonable, this approach masks the incentives underlying the tariff-setting behavior of PTA members and, by design, fails to shed light on the consequences of requiring them to fully liberalize internal trade. In reality, PTA members do not always abide by this restriction.[1] In a recent article, we employ a model of endogenous trade agreements to shed light on the consequences of such non-compliance on the part of PTA members regarding the free internal trade requirement of GATT Article XXIV.[2]

Our conceptual approach follows the recent literature on endogenous formation of trade agreements.[3] In a modified version of the three-country competing exporters framework, in order to draw out the implications of requiring PTA members to eliminate tariffs on one another, we derive and contrast optimal tariffs and equilibrium trade agreements under two scenarios.[4] While members are required to engage in free internal trade in the WTO-consistent scenario, PTA members have the freedom to implement jointly optimal internal tariffs under the unconstrained preferential liberalization scenario. A comparison of these two scenarios delivers several interesting results.

First, we show that if FTA members choose internal tariffs to maximize their joint welfare, they indeed have an incentive to impose positive tariffs on one another. The intuition for this surprising result rests on the interplay between the lack of external tariff coordination between FTA members and the complementarity of imports tariffs. Since FTA members set their external tariffs independently, each member fails to take into account the benefits that its external tariff confers on its partner and thus the individually optimal external tariffs of FTA members are too low from the perspective of maximizing their joint welfare. While coordinating their internal tariffs, FTA members deliberately choose to set positive internal tariffs on each other: doing so commits each of them to a higher external tariff on the non-member country thereby bringing their individually optimal external tariffs closer to jointly optimal ones. To confirm the role that external tariff coordination plays in generating positive internal tariffs within an FTA, we consider a CU formation game where members can coordinate their external as well as internal tariffs. Under such a case, members indeed find it optimal to engage in free internal trade. This result suggests that the free internal trade requirement of Article XXIV is likely to be more binding for FTAs relative to CUs.

The second major insight delivered by our analysis is that requiring PTA members to eliminate internal tariffs benefits the non-member since it leads to lower external tariffs on the part of PTA members. This result is noteworthy since part of the original intent behind the design of Article XXIV may have been to minimize any potential negative effects of PTAs on non-member countries. Ostensibly, this objective was met by prohibiting PTA members from raising their external tariffs on outsiders. However, in our model, PTA members have no incentive to increase their external tariffs on the non-member country anyway. Thus, the Article XXIV stipulation that PTA members cannot raise tariffs on outsiders may actually do little to protect the interests of outsiders. Our analysis demonstrates that, somewhat surprisingly, it is the Article XXIV requirement of free internal trade within a PTA that ends up protecting the non-member as opposed to the restriction imposed on the external tariffs of PTAs.

Our third major result pertaining to the free internal trade requirement of Article XXIV is that having such a requirement makes it harder to achieve global free trade. By lowering the external tariffs of FTA members, the free internal trade requirement of Article XXIV makes it less attractive for the non-member to enter into trade agreements with them. Thus, the free internal trade requirement of Article XXIV might facilitate some degree of free-riding in the WTO system by allowing non-member countries to benefit from reductions in external tariffs of FTA members (that result from their internal trade liberalization) without having to offer any tariff cuts of their own. Thus, our overall message is somewhat nuanced: when circumstances are such that achieving global free trade is not possible, the free internal trade requirement of Article XXIV increases world welfare by lowering tariffs worldwide but, at the same time, it also reduces the likelihood of reaching global free trade.

We also show that our results are robust to two alternative tariff setting scenarios. First, we relax the assumption that countries seeking to form FTAs set their MFN tariffs non-cooperatively. To this end, we allow countries to engage in a limited degree of cooperation and show that our main results regarding the impact of the free internal trade requirement continue to hold even when countries do not set their tariffs in a fully non-cooperative manner. Second, to address the issue of the extent of enforceability of the free internal trade provision of Article XXIV, we examine a scenario where Article XXIV imposes a ceiling on the internal tariffs of an FTA. Under such a scenario, we show that the free-riding incentive continues to be the pivotal force and tighter ceiling lowers the external tariffs of FTA members, making it less attractive for the non-member to enter into trade agreements with FTA members which in turn undermines global free trade.

References

Bagwell, K. and R.W. Staiger, (1999); “Regionalism and multilateral tariff cooperation.” In John Piggott and Allan Woodland, eds, International Trade Policy and the Pacific Rim, London: MacMillan.

Bagwell, K., C.P. Bown, and R.W. Staiger, (2016); “Is the WTO passé?” Journal of Economic Literature 54(4): 1125-1231.

Saggi, K. and H.M. Yildiz, (2010); “Bilateralism, multilateralism, and the quest for global free trade.” Journal of International Economics 81: 26-37.

Saggi, K., W.-F. Wong and H.M. Yildiz, (2019); “Should the WTO require free trade agreements to eliminate internal tariffs? “, Journal of International Economics, 118, 316-30, 2019.

Saggi, K., A. Woodland, and H.M. Yildiz, (2013); “On the relationship between preferential and multilateral trade liberalization: the case of customs unions.” American Economic Journal: Microeconomics 5(1): 63-99.

Endnotes

[1] See Bagwell et. al, 2016.

[2] See Saggi et al. (2019).

[3] See Saggi and Yildiz (2010) for FTAs and Saggi et. al (2013) for CUs.

[4] See Bagwell and Staiger (1999).

Welcome New Members May 2019

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We would like to welcome the following new members to the InsTED Network

Prof Kathy Baylis (University of Illinois at Urbana-Champaign) Her research interests lie in the design of agricultural, conservation, and trade policy to promote ecosystem preservation and international food security.

Ms Casey Petroff (Harvard University).  Her research interests are in economic development and public policy, focusing on the development of public good provision relating to health care.

Funding Opportunity: Marie Skłodowska-Curie Individual Fellowships

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Marie Skłodowska-Curie Individual Fellowships

Value:

Researcher unit costs which covers 100% of eligible costs, for up to 24 months
Living allowance: €4,880
Mobility allowance: €600
Family Allowance: €500
Research, training and networking costs: €800
Management and indirect costs: €650

Eligibility: At the time of the proposal submission, eligible candidates hold a doctoral degree (PhD) or have carried out at least four years of full-time equivalent research experience.

Description:

The goal of the Individual Fellowships is to enhance the creative and innovative potential of experienced researchers, wishing to diversify their individual competence in terms of skill acquisition through advanced training, international and intersectoral mobility.

Individual Fellowships provide opportunities to researchers of any nationality to acquire and transfer new knowledge and to work on research and innovation in Europe (EU Member States and Horizon 2020 Associated Countries) and beyond. The scheme particularly supports the return and (re)integration of European researchers from outside Europe and those who have previously worked here, as well as researchers displaced by conflict outside the EU and Horizon 2020 Associated Countries. It also promotes the career restart of individual researchers who show great potential.

Fellowships take the form of European Fellowships or Global Fellowships.

European Fellowships are held in EU Member States or Horizon 2020 Associated Countries and are open to researchers either coming to Europe from any country in the world or moving within Europe. The researcher must comply with the rules of mobility in the country where the European Fellowship is held.

Global Fellowships are based on a secondment to a third country and a mandatory 12 month return period to a European host. The researcher must comply with the rules of mobility in the country where the Global Fellowship secondment takes place, not for the country of the return phase.

Deadline: 11 September 2019 , 17.00 Brussels time

Funding Opportunity: Education Endowment Foundation (EEF)

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Small Grants programme

Value: N/A (only Directly incurred costs and Directly Allocated costs for support and administrative staff)

Eligiblity:

  • Delivery must take place in English schools/settings
  • Project must be in state schools/colleges (a couple of exceptions: PVIs allowed for early years, training providers for post-16)
  • Approach must be focused on 3-16 year olds, or on English/Maths resits for 16-18 year-olds
  • Applicant must recognise the importance of the independent evaluation and be open to altering their project plan (e.g. changing proposed scale)

Applicants must be a legally constituted body (not individuals)

Funds for: Staff costs, travel and subsistence, activities (workshops, events and conferences) directly linked to the project.

Description:

The EEF’s grant funding tests the impact of high-potential projects aiming to raise the attainment of pupils from disadvantaged backgrounds. We do this to find out what’s most likely to work, and to put that into action across the country. We are interested in testing projects’ effectiveness through rigorous independent evaluations, often as randomised controlled trials where appropriate. In all EEF evaluations we also run an implementation and process evaluation, which attempts to explain the mechanism behind any impact. If projects are shown to have an impact, we will support them to scale up to improve outcomes for other disadvantaged children and young people across England.

Current priorities

We are open to ideas on a range of topics. However, we are currently particularly interested in projects that maintain or improve pupil outcomes while reducing teacher workload. This is a priority for schools, teachers and the Department for Education. For example, this could include:

  • approaches to marking and assessment that improve the efficiency of the process without decreasing its impact; or
  • testing models of professional development that effectively influence teacher practice without requiring substantial teacher time

We have funded a large number of trials on primary literacy teaching. We will only consider new proposals in this area by exception, if they would generate significant contributions to the existing evidence base.

Deadline:28th June 2019

XVII Euro-Latin Study Network on Integration and Trade (ELSNIT) Trade and Investment Promotion

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PARIS, FRANCE, OCTOBER 23-24, 2019

The Euro-Latin Network on Integration and Trade (ELSNIT) is now accepting submissions of papers examining the effects of trade and investment promotion policies along the economic and institutional dimensions. In particular, submitted papers should address questions such as–but not limited to–the following:

Export and Investment Promotion Agencies (EPAs and IPAs)’s Institutional Characteristics and Practices.

How do countries promote exports and investment? What is the role of EPAs and IPAs? How are these agencies organized and what is the volume of the financial and human resources these agencies are endowed with? To what extent agencies’ size and institutional attributes matter? Do agencies target specific sectors or countries? What is the extent of these targeting efforts? Are targeted sectors those already present in the host economy, connected to these sectors, or entirely new? How are these identified? Does targeting make a difference?

Export Promotion Programs.

What programs do EPAs traditionally have to promote exports? Are there recent innovations in the set of programs? What evidence is there available on the market failures these programs seek to address (e.g., information spillovers)? Are they properly designed to do so? Are new technologies used in the implementation of the programs (e.g., artificial intelligence to identify buyers)? Are programs (cost-) effective? Do their impacts vary with firms’, traded goods/services’, or destinations’ attributes? How? What are the channels through which the impacts take place (e.g., extensive margin)? Are impacts conditioned by other policy factors such as preferential trade agreements, trade facilitation policies, or innovation promotion programs? Are their spillovers from participating in export promotion programs?

Investment Promotion Programs.

What programs do IPAs traditionally have to promote FDI? Are there recent innovations either in the set of programs or in their implementation modalities (e.g., use of artificial intelligence to identify leads)? What evidence is there available on the market failures these programs seek to address (e.g., information spillovers)? Are programs (cost-) effective in attracting FDI? Do their impacts vary across groups of firms, sectors, and origin countries? How? Are impacts conditioned by other policy factors such as preferential trade agreements, bilateral investment treaties, double taxation treaties, trade facilitation policies, and free trade zones or export processing zones’ regimes? Are their spillovers from investment promotion-attracted FDI to the local economy? What are the size and the nature of these spillovers? What are the channels through which these spillovers take place (e.g., employee rotation)? What characteristics do effective linkages’ programs have? Are investment promotion and linkages’ programs coordinated? How? Do linkages’ programs effectively foster spillovers? Can these programs help domestic firms internationalize when combined with other public support initiatives such as export and innovation promotion programs? Both theoretical and empirical contributions will be considered, but in all cases priority will be given to papers identifying and shedding light on relevant policy questions such as those outlined above, including case studies of policies followed by national or international organizations, in particular. Furthermore,
submission of papers that, in doing this, explicitly contrast successful and failed cases, comparing countries within a certain a geographical area, is strongly encouraged. Important lessons are expected to be drawn from these contributions for Latin American and Caribbean countries.

The selected papers will be presented along invited contributions at the XVII Annual ELSNIT Conference that will be hosted by the CEPII in Paris, France, on October 23-24, 2019. A recognized expert in the field will comment upon each paper. All the papers and discussions will be circulated as working documents of the network. The authors are free to submit the papers to academic journals, stating that they were presented at the XVII Annual ELSNIT Conference.

Procedures for Submission of Papers
All researchers who are associated with a European or Latin American/Caribbean based academic or research institution are eligible to submit papers. While detailed abstracts will be accepted, there is a strong preference for nearly completed papers. Submission should be accompanied by a statement declaring the institutional affiliation of the authors. The papers should be written in English. To register for the conference and submit a paper, please fill out this FORM and follow the instructions therein.

The deadline for submissions is June 14, 2019. The final selection of papers will be made by June 28, 2019 by the network coordinators –Simon Evenett (University St. Gallen and CEPR), Holger Görg (University of Kiel and Kiel Institute for the World Economy), Bernard Hoekman (EUI and CEPR), Jacint Jordana (IBEI and UPF), Gianmarco Ottaviano (Bocconi University – BAFI CAREFIN and CEPR), Gianluca Santoni (CEPII), and Christian Volpe Martincus (IDB/INT)–. The final versions of the papers must be delivered by September 20, 2019.
The selected authors’ and invited discussants’ travel expenditures (economy class) and per diems to participate at the conference will be reimbursed by the IDB. Detailed guidelines explaining the logistics of the conference will be provided at a later stage. Please circulate this call for papers among your colleagues and other potentially interested parties.

Background Information
The Euro-Latin Study Network on Integration and Trade (ELSNIT) is an initiative of the Inter-American Development Bank to create in Europe a forum on integration and trade issues relevant to Latin America and the Caribbean. The main objectives of the Network are to generate research, studies and debate on these issues, draw on a rich European experience and perspectives and increase interaction between European and Latin American researchers. The annual conference organized in the framework of the
Network focuses on a particular issue each year.
The ELSNIT Network is coordinated by a Steering Committee that currently consists of the Bocconi University, Milan, Italy; Centre d’Etudes Prospectives et d’Informations Internationales (CEPII), Paris, France; the Kiel Institute for the World Economy (IfW), Kiel, Germany; the European University Institute (EUI), Florence, Italy; the Institut Barcelona d’Estudis Internacionals (IBEI), Barcelona, Spain; the University of St. Gallen, St. Gallen, Switzerland; the Centre for Economic Policy Research (CEPR),
London, United Kingdom; and the IDB (INT).