Chapter 5 Regional Economic Integration & Brexit

5.1 The WTO and RTAs

5.1.1 Guiding Principles of GATT/WTO

  • Most Favored Nation (MFN)
    • Any preferential treatment offered to one member country must be extended to all other members
    • Members can extend MFN to non-members
  • National treatment
  • Generalized System of Preferences (GSP)
    • For Less Developed Countries, to give them a chance to develop their economy
  • Exceptions for regional arrangements (such as EU, NAFTA):
    • Nested within the WTO: given precedence when recognized

5.1.2 WTO and Regional Arrangements

WTO Members are permitted to enter into such arrangements under specific conditions which are spelled out in three sets of rules:

  • Paragraphs 4 to 10 of article XXIV of GATT concerning the formation and operation of customs unions and free-trade areas covering trade in goods;
  • The Enabling Clause fore preferential trade arrangements in trade in goods between developing country members;
  • Article V of GATS to govern the conclusion of RTAs in the area of trade in services for both developed and developing countries.

“When a WTO member enters into a regional integration arrangement through which it grants more favourable conditions to its trade with other parties to that arrangement than to other WTO members’ trade, it departs from the guiding principle of non- discrimination defined in Article I of GATT, Article II of GATS, and elsewhere.”

5.1.3 Evolution of RTAs in the World, 1948-2016

Rise in the number of RTAs being discussed

5.1.5 What It Looks Like Geographically

Source: WTO

5.1.6 Types of Regional Arrangements

© 2013 Cengage Learning. All rights reserved.

5.1.7 Regional Integration in a Snapshot

5.1.8 Expanding RTAs, Trade Flows and the MNE

Key questions

RTA size and trade bias: * Old Q: are RTAs building or stumbling blocks (impact on world trade) * Pure building block: trade creation with no trade diversion * Weak building block: trade creation exceeds trade diversion * Weak stumbling block: trade diversion fully offsets trade creation * Pure stumbling block: trade diversion more than fully offsets trade creation * New Q: Is an expanding RTA more of a building block or stumbling block?

MNE expansion strategies: * Identify linkages between activities of MNEs and the RTA environment in which they operate, using an analysis over time (dynamic versus static assumptions)

Methods

  • Gravity equation
    • Trade costs
    • Transport and transaction costs, regime costs arising from differences in legal systems and practices, languages, networks, competitive policies, and monetary regimes, and tariffs or tariff- equivalent restrictions aimed at discriminating against foreign producers.
    • Non-observable, and are proxied by physical distance, cultural distance and institutional distance
  • 11 RTAs, four of which expanded over time (ASEAN, CARICOM, EU and NAFTA)

Trade creation and trade diversion depends on the size and expansion of RTAs
SPARTECA pure building block; ANDEAN a weak building block; USIS – pure stumbling block, along with the other 4 (as weak stumbling blocks); ASEAN expanding building block (peaked); EU building block (weaker than ASEAN) peaked at 10 members; NAFTA comparable to EU weak building block; CARICOM – pure stumbling block

5.1.9 The Trans-Pacific Partnership: A Building Bloc?

5.1.10 Environmental Influences on MNE Subsidiary Role

5.2 Regional and economic integration

5.2.1 NAFTA and Trade

  • First deal Canada-US in 1988
  • Mexico joined the agreement in 1994
  • Led to the reorganization of value chains within North-America

Source: Globe and Mail, 2017

5.2.2 NAFTA in Context

Source: UN Comtrade Database; WTO - World Trade Statistics

Source: http://www.europeanfinancialreview.com/?p=17412#!prettyPhoto

5.2.3 NAFTA and FDIs

  • Generally positive effect on inward FDI into the entire region

  • Benefits accruing only to the United States and Canada

Source: Feilsand Rahman (2008) “Regional Economic Integration and Foreign Direct Investment: The Case of NAFTA” Management International Review

5.2.4 Trade Agreement, FDIs, and National Policies

Source: “GE closing U.S. engine plant, moving to Canada; cites lack of U.S. export financing”, Canadian Business based on The Canadian Press and Associate Press, September 28th 2015 http://www.canadianbusiness.com/business-news/ge-closing-u-s-engine-plant-moving-to-canada-cites- lack-of-u-s-export-financing/

And what came next: https://www.theglobeandmail.com/report-on-business/international- business/us-business/ge-chooses-ontario-as-site-for-state-of-the-art-gas-engine-plant/article30223899/

5.2.5 The New USMCTA (to take effect in 2020)

  • Will be reviewed every 6 years and could expire in 2036, or be extended to 2052
  • Canada will ease restrictions on its dairy market and allow American farmers to export about $560 million worth of dairy products (about 3.5% of Canada’s total $16 billion dairy industry)
  • US Tariffs on steel (25%) and aluminum (10%) still in place
  • Maintenance of the dispute settlement process (panel of representatives from the 3 nations
  • Requirement to have the other partners agree if a trade agreement with China is to be signed
  • Stiffer intellectual property rules
  • Increase in the rule of origins (75% regional content, $16 wage provision, etc.), making Mexico less competitive
    • … which may also make Mexican companies not to comply and just pay the 2.5% MFN tarriff
    • …but they do not want that (see Annex 2-C) because to qualify, they need to satisfy the OLD rules of origin of the original NAFTA

5.3 Brexit

“Brexit frees us to build a truly global Britain.” - Boris Johnson

“Should the United Kingdom remain a member of the European Union or leave the European Union?”

  • 72% of voters

  • 52%: ‘Leave’.

Working people and young people prefer to ‘stay in the EU’:

  • 73% of 18-24 year olds wanted to stay

  • 60% of those over 65 wanted to leave

  • The inactive (unemployed and retired) wanted to leave.

No party logic:

  • Among those who voted to leave: 40% are Tories and 20% are Labor.

  • Among those who voted to stay, 30% are Tories and 40% were Labor.

3 things to remember:

  1. Rising inequality

  2. The rise of populism

  3. A (lonely) journey into the unknown

5.3.1 The reasons for Brexit

  • Globalization is costing jobs

  • The United Kingdom is not a European economy

  • Immigration

  • The UK’s contribution to the European Union is unfair

5.3.1.1 The UK White Paper 12 Principles

5.3.1.2 Globalization is costing jobs?

Dani Rodrik, The Globalization Paradox (2011)

“Markets are most developed and most effective in generating wealth when they are backed by solid governmental institutions.”

5.3.1.3 The United Kingdom is not a European economy?

5.3.1.3.1 Total UK Exports by Destination (2019)
5.3.1.3.2 Total UK Imports by Origin (2019)
5.3.1.3.3 UK FDI inflows by partner country (millions of US dollars)
5.3.1.3.4 Outward FDI flows from the UK by partner country (millions of US dollars)

  • Multinational companies

  • European value chains

  • Europe’s place in the world

  • the English language

  • The finance industry

  • The EU is the most important destination market for British products and services.

  • The UK is also highly dependent on the EU: a trade deficit of US$ 151 billion in 2015.

  • Exports to the US are 1/4 of the exports to the EU.

  • US imports are 1/6 of EU imports

  • The United Kingdom accounts for 4.9% of US merchandise exports (20.8% to the EU-27).

5.3.1.4 Immigration

5.3.1.5 The UK’s contribution to Europe is unfair

5.3.1.5.1 Total expenditure in 2019 (millions of euros)
5.3.1.5.2 National contribution in 2019 (millions of euros)
5.3.1.5.3 Budget balance in 2019 (millions of euros)
5.3.1.5.4 British correction in 2019 (millions of euros)

5.3.2 The British economy

5.3.2.1 GDP growth (annual %)

5.3.2.2 Inflation, consumer prices (annual %)

5.3.2.3 EUR vs GBP Foreign Exchange Reference Rate

5.3.2.4 Economic activity: sales

5.3.2.5 Unemployment, total (% of total labor force) (modeled ILO estimate)

5.3.2.6 Real estate (and mortgage) market

5.3.2.7 Household debt, consolidated

5.3.3 The Future of the United Kingdom

5.3.3.1 The political future

  • Article 50 of the Treaty on European Union

  • Relations with members in the United Kingdom

  • Relations with the EU-27

  • Free trade agreements with the EU

  • Free trade agreements with the USA and other countries

  • Adapting to European regulations

  1. The Norway option: almost like the Common Market (products, services, finance and people), without the right to vote and the budgetary impact.

  2. The Canada option: CIG (products, services, finance)

  3. the WTO option: tariff and non-tariff barriers

  4. The Turkey option

  • Living without the European institutions

  • Living without European programs (ESA, etc.)

5.3.3.1.1 Total Exports in 2019 (US$ billion)

5.3.3.2 The economic future

5.3.3.2.1 Total Imports in 2019 (US$ billion)

The finance industry:

  • 1970s: development of international money markets

  • 1980s: Mr. Thatcher’s deregulations

  • 1990s: a concentration of the wholesale market in London (American banks)

  • 2000s: euro markets

  • 15 to 20% of banking activity to the Common Market

  • £66.5bn in taxes (2/3 of the education budget)

5.3.3.2.2 General government debt (% GDP)
5.3.3.2.3 Net lending (+) / net borrowing (-) (% of GDP)
  • The EU accounts for 30% of world trade in goods and 45% in services (16.9% of its GDP).
  • The USA represents 23% of the world trade in goods and 25% of services (14.5% of its GDP).
  • China accounts for 23% of world trade in goods and 16% in services (22.3% of its GDP).
  • The United Kingdom accounts for 6.4% of world merchandise trade and 11.75% of services (29.4% of its GDP).
  • Germany accounts for 14% of world merchandise trade and 11.5% of services (42.4% of its GDP).
  • France accounts for 6.5% of world trade in goods and 10% in services (30.8% of its GDP).

5.3.4 The consequences for the rest of Europe

5.3.4.0.1 EU Members’ Positions on Key Brexit Issues

  • Fracture of the EU-27

  • Legitimization of the populist vote (see Mateo Renzi, Donald Trump)

  • Slowing down European integration or speeding up European integration?

  • Detour of European resources in the next 2 years

5.3.5 Conclusion

The reasons for Brexit:

  • Dissonance between political institutions and the economic reality of the 21st century

  • Inequalities

The future of the United Kingdom:

  • economically uncertain

  • politically uncertain

The future of Europe:

  • Brexit reinforces populism and anti-European sentiment

  • economically uncertain

  • politically uncertain

  • unless…

5.4 Data Challenge

5.4.1 Political Risk

You are an analyst for an international company and the CEO would like to open a British subsidiary. Aware of the possible political risks, he asks you to determine what British population think about Brexit. Based on the concepts currently being discussed and the data available to you, create a graph and explain a district’s position on Brexit.

5.4.1.1 Polarity evolution by UK district