Interview with Richard Newfarmer on Global Economic Prospects 2005: Trade, Regionalism, and Development

The short answer is they're not any different. However, trade policy integrated into a domestic investment climate that provides macroeconomic stability, enforcement of basic property rights, and competitive markets offers opportunities for producers that would not otherwise be present. Since trade can increase competition in the domestic market at the same time it provide new opportunities for exports abroad, trade policy is one element – but certainly not the only element -- of domestic investment climate. A good investment climate and good trade policy can lead to faster economic growth and poverty reduction.

Bilateral and plurilateral agreements have spread throughout the global economy, and at an accelerating pace in the 1990s. A major concern with the proliferation of regional trading agreements is that they introduce preferences for some countries -- and that's fine -- but at the cost of discrimination against other countries. This means that, say, when Tunisia signs an agreement with Europe, Europe grants Tunisia duty-free access to its market, but producers in other countries competing with Tunisia have to pay Europe’s tariff and thus do not have the same level of access. As a result, countries excluded from these types of agreements tend to lose, even though countries signing the agreements may benefit.

The problem of discrimination is less than when the GATT was founded after the war because tariffs and non-tariff barriers have come down – the margin of preference is generally less. Moreover, countries are becoming parties to multiple agreements. Nonetheless, some countries inevitably will enjoy better access than others, and its those developing countries we worry about.

The interesting question is whether this form of liberalization ultimately is a stepping stone to more liberal, multilateral agreements. Do countries learn the benefits of trade from opening up first to regional partners, and therefore support multilateral liberalization? Or do they enjoy their preferential access, and oppose multilateral agreements because they do not want to see the value of their preferences erode? The jury is still out. Doha is the first test.

There are several questions here. It is true that developing countries are seeking agreements with the largest markets, particularly the United States and the European Union, simply because these offer the greatest opportunity for developing country exporters. If a country is able to get preferential access to the extremely large U.S. market, that offers much greater potential than signing an agreement with a smaller country somewhere else in the world.

And, in fact, if we look at the trade coverage of regional trading agreements, we find that agreements with the U.S. or with the EU now constitute roughly 80 percent of all trade covered in regional trading arrangements. These are big players, indeed.

The second part of your question concerns Brazil's strategy, and asks whether it makes sense to tighten Mercosur, reach an agreement with the EU, or focus heavily on China. In fact, Brazil could usefully do all three things, but it must do so in a way that is consistent and coherent. It's important, for example, to improve Mercosur by taking advantage of the opportunities to improve improve border crossings, reduce the time it takes for exports to cross into each other's markets, which drive up the costs of those exports, and further harmonize regulations, all of which would expand trade at no efficiency costs. At some point, bringing down Mercosur’s external tariff to NAFTA-competitive levels would improve competitiveness of members.

Simultaneously, Brazil is also seeking to expand its markets in neighboring Latin American countries, with China, and with the EU through bilateral agreements. More importantly, Brazil is working intensively on a multilateral agreement through the WTO’s Doha round. In fact, Brazil has been very important in moving the WTO's Doha discussions towards a more pro-development outcome simply because of Brazil's insistence on serious liberalization in agriculture, particularly in the rich countries where tariffs and subsidies are high. This benefits not only Brazil, but also other developing countries.

In sum, what I have sketched out here is a tripartite policy, a regional policy focusing on trade facilitation within Mercosur and reducing the cost of trading within Mercosur; second, a multilateral trade strategy to gain access to the markets of the world, including China and the EU; and third, a unilateral strategy that eventually would entail reducing the common external tariff and opening Brazil’s services markets to spur domestic competition and productivity.

East Asia has done very well in multilateral trade discussions generally, and doesn’t need a preferential trade agreement to coordinate policy positions and to participate in shifting coalitions. Now that China has become a member of the WTO, it will weigh more heavily in the discussions, and its role will increase over time, representing on some issues at least not only its national interests, but potentially the interests of East Asia at large. China and other East Asian countries are participating in the G-20 coalition that favor more a more ambitious opening in EU, US and Japanese agricultural markets.

So, the short answer is East Asia has much to gain with a multilateral system, but can obtain the benefits of coordination through participation in negotiating coalitions that suit its interests probably more readily than by forming a regional trade agreement.

We estimate that the global economy in 2005 will slow moderately from its current very rapid pace of 4 percent growth in 2004 to about 3.2 percent for 2005. And that will have some impact on moderating growth for the countries of East Asia. Nonetheless, East Asia is growing very rapidly, and we expect growth rates to moderate only slightly down to 7.1 percent in 2005 from current growth rates of around 7.8 percent this year.

As part of this process, the Philippines' growth rate is likely to moderate somewhat, but this should not be seen as cause for concern. Rather, it reflects cyclical developments in the global economy and a return to more sustainable growth rates.

In policy terms, this is a good time to begin new reforms -- or to consolidate reforms underway. During good times such as we are experiencing now and are likely to experience over the next 12 to 24 months, reforms are easier to undertake and protect growth rates in the long run.

As with any country, import tariffs represent actually a tax on exports as well, and so too the island economies, like other small economies anywhere, need to sell their services and exports into the international market in order to be able to grow and to reduce poverty. Policies that tax exports are likely to have negative effects on growth rates, and likely to undermine growth rates and domestic productivity. To be sure, for many small countries, tariffs are an important source of revenue -- and this is one reason why trade policy reforms need to be accompanied by complementary policies to ensure that they will lead to growth. In this case, tax reforms may be necessary to replace lost tariff revenues.