Trade Creation, Trade Diversion and Investment Flows: Evidence from the Canada-Chile Free Trade Agreement.

Rapport de recherche

Trade diversion and declining tariffs : evidence from Mercosur

This paper empirically examines the alternative posed by Richardson (1993) to the traditional view that trade integration may exacerbate inefficiencies through trade diversion. Richardson’s hypothesis boldly predicts that trade diversion may actually cause tariffs to decline! The hypothesis is fundamentally attributable to the presence of a political component in the governments’ objective functions. A cross-sectionally rich data-set on trade and tariffs from the Mercosur-pact countries, primarily Argentina, is used. The evidence yields surprising conclusions about the validity of the political economy construct in models of trade integration.

Integration and trade diversion

Includes bibliography

Exports from the Brazilian automotive sector to the Southern Common Market: Trade diversion or cost reduction?

The automotive sector is one of the sectors in which trade between mercosur countries has grown most strongly. This article examines the possibility that trade diversion occurred in that sector during the period 1991-2010, assuming that product costs fell as a result of market expansion. The analysis is based on the concepts of “cost reduction” and “trade suppression” coined by Corden (1972), which capture the effects of economies of scale. Indices of regional orientation and revealed comparative advantages are used in combination to assess whether the trade bloc is evolving in line with comparative advantages. The results suggest efficiency gains for automotive-sector products, exports of which from Brazil to mercosur grew more vigorously because the expanded and relatively protected market made it possible to exploit the economies of scale that are characteristic of the automotive industry.

An exploratory assessment of the potential impact of the free trade area of the americas on the andean community

A través de una simulación llevada a cabo con GTAP, este documento presenta una evaluación preliminar del impacto potencial que el Área de Libre Comercio de las Américas tendría sobre la Comunidad Andina de Naciones. Mantenido por la Universidad de Purdue, el GTAP es un modelo multiregional de equilibrio general, ampliamente usado para el análisis de temas de economía internacional. El experimento llevado a cabo tiene lugar en un ambiente de competencia perfecta y rendimientos constantes a escala y consiste en la completa eliminación de aranceles a las importaciones de bienes entre los países del Hemisferio Occidental. Los resultados muestran la presencia de modestas pero positivas ganancias netas de bienestar para la Comunidad Andina, generadas fundamentalmente por mejoras en la asignación de recursos. Movimientos desfavorables en los términos de intercambio y el efecto de la desviación de comercio con respecto a terceros países, reducen considerablemente las ganancias potenciales de bienestar. De la misma forma, la existencia de distorsiones económicas al interior de la Comunidad Andina tiene un efecto negativo sobre el bienestar. El patrón de comercio aumenta su grado de concentración en el comercio bilateral con los Estados Unidos y la remuneración real a los factores productivos presenta mejoras con la implementación de la zona de libre comercio.

Essays in open economy macroeconomics with borrowing frictions

Cette thèse comporte trois essais en macroéconomie en économie ouverte et commerce international. Je considère tour à tour les questions suivantes: sous quelles conditions est-il optimal pour un pays de former une union économique? (essai 1); l'augmentation de la dispersion transversale des avoirs extérieurs nets des pays est-elle compatible avec une dispersion relativement stable des taux d'investissement? (essai 2); le risque de perte de marché à l'exportation du fait de l'existence des zones de commerce préférentiel joue t-il un rôle dans la décision des pays exclus de négocier des accords commerciaux à leur tour? (essai 3). Le premier essai examine les conditions d'optimalité d'une union économique. Il s'intéresse à une motivation particulière: le partage du risque lié aux fluctuations du revenu. Dans la situation initiale, les pays ont très peu d'opportunités pour partager le risque à cause des frictions: les marchés financiers internationaux sont incomplets et il n'y pas de mécanisme pour faire respecter les contrats de crédit entre pays. Dans ce contexte, une union économique apparait comme un arrangement qui pallie à ces frictions entre les pays membres seulement. Cependant, l'union dans son ensemble continue de faire face à ces frictions lorsqu'elle échange avec le reste du monde. L'arbitrage clé dans le modèle est le suivant. D'un coté, l'intégration économique permet un meilleur partage du risque entre pays membres et la possibilité pour le partenaire pauvre d'utiliser la ligne de crédit du partenaire riche en cas de besoin. De l'autre coté, l'union peut faire face à une limite de crédit plus restrictive parce que résilier la dette extérieure est moins coûteux pour les membres l'union. De plus, le fait que le partenaire pauvre peut utiliser la limite de crédit du partenaire riche génère une externalité négative pour ce dernier qui se retrouve plus fréquemment contraint au niveau des marchés internationaux des capitaux. En conformité avec les faits observés sur l'intégration économique, le modèle prédit que les unions économiques sont relativement peu fréquentes, sont plus susceptibles d'être créées parmi des pays homogènes, et généralement riches. Le deuxième essai porte sur la dispersion des avoirs extérieurs nets et la relation avec la dispersion des taux d'investissement. Au cours des récentes décennies, la dispersion croissante des déséquilibres extérieurs et les niveaux record atteints par certaines grandes économies ont reçu une attention considérable. On pourrait attribuer ce phénomène à une réduction des barrières aux mouvements internationaux des capitaux. Mais dans ce cas, il est légitime de s'attendre à une augmentation de la dispersion au niveau des taux d'investissement; ceci, parce que le financement des besoins en investissements constitue une raison fondamentale pour laquelle les pays échangent les capitaux. Les données indiquent cependant que la dispersion des taux d'investissement est restée relativement stable au cours des récentes décennies. Pour réconcilier ces faits, je construis un modèle d'équilibre général dynamique et stochastique où les pays sont hétérogènes en raison des chocs idiosyncratiques à leurs niveaux de productivité totale des facteurs. Au niveau des marchés internationaux des capitaux, le menu des actifs disponibles est restreint à une obligation sans risque et il n'y a pas de mécanisme pour faire respecter les contrats de crédit entre pays. A tout moment, un pays peut choisir de résilier sa dette extérieure sous peine d'exclusion financière et d'un coût direct. Ce coût direct reflète les canaux autres que l'exclusion financière à travers lesquels les pays en défaut sont pénalisés. Lorsque le modèle est calibré pour reproduire l'évolution de la dispersion transversale des avoirs extérieurs nets, il produit une dispersion relativement stable des taux d'investissement. La raison principale est que les incitations que les pays ont à investir sont liées à la productivité. Avec l'intégration financière, même si les opportunités d'emprunt se sont multipliées, les incitations à investir n'ont pas beaucoup changé. Ce qui permet de générer une dispersion accrue de la position des avoirs extérieurs nets des pays avec une dispersion relativement stable des taux d'investissement. Le troisième essai analyse un aspect de l'interdépendance dans la formation des accords commerciaux préférentiels: j'examine empiriquement si le risque de diversion des exportations en faveur des pays membres des zones de commerce préférentiel est un facteur déterminant dans la décision des pays exclus de ces accords de négocier un accord à leur tour. Je construis un indicateur qui mesure le potentiel de diversion des exportations auquel font face les pays et estime un modèle probit de formation des zones de commerce préférentiel créées entre 1961 et 2005. Les résultats confirment que les pays confrontés à un plus grand potentiel de détournement des échanges sont plus susceptibles de former une zone de commerce préférentiel à leur tour.

Integration in Latin America - Trends and Challenges

Regional trade agreements have had a significant presence in the design of international and productive policies in Latin American and Caribbean countries since the early 1950s. Fifty years later, the region has not reached the degree of economic inter-relation found, for instance, in Western Europe, but the concern with promoting regional integration has been a tradition in an impressive amount of speeches and declarations by policy makers in the last decades. The weakening of multilateral negotiations and the multiplicity of bilateral agreements with countries in other regions might affect regional trade both via trade diversion and through investment decisions, considering a larger time horizon. International capital movement might affect exchange rates and output growth, hence influencing trade. At the same time the need for new, broader negotiating agenda, from simply dealing with trade issues to taking into consideration topics not directly related to trade but rather to competition, labour standards, environmental issues and others increase the difficulties in designing integration strategies. Even more so if the group of countries that aim at integrating their economies present markedly different characteristics. This article – an extension of a presentation made at the German Development Institute Conference on Regional Economic Integration Beyond Europe held in Bonn in December, 2007 - discusses these and other aspects related to regional integration in Latin America and the Caribbean.

CEPAL Review no. 115

Stylized features of the investment-growth connection in Latin America, 1980-2012 / Sandra Manuelito and Luis Felipe Jiménez.--International technological dynamics in production sectors: An empirical analysis / Fernando Isabella Revetria.-- Does public financial support stimulate innovation and productivity? An impact evaluation / Diego Aboal and Paula Garda.-- Digital inclusion in education in Tarija, Plurinational State of Bolivia / Sulma Farfán Sossa, Antonio Medina Rivilla and María Luz Cacheiro González.-- Macroeconomic trade-offs and external vulnerabilities of human development in Nicaragua / Marco V. Sánchez Cantillo.-- Classroom discipline, classroom environment and student performance in Chile / Carolina Gazmuri, Jorge Manzi and Ricardo D. Paredes.-- Pricing and spread components at the Lima Stock Exchange / Luis Chávez-Bedoya, Carlos Loaiza Álamo and Giannio Téllez De Vettori.-- Exports from the Brazilian automotive sector to the Southern Common Market: Trade diversion or cost reduction? / André Filipe Zago de Azevedo and Angélica Massuquetti.--Determinants of unfair inequality in Brazil, 1995 and 2009 / Ana Claudia Annegues, Erik Alencar de Figueiredo and Wallace Patrick Santos de Farias Souza.-- A comparative analysis of productivity in Brazilian and Mexican manufacturing industries / Armênio de Souza Rangel and Fernando Garcia de Freitas.

Economic Incentives for Indirect TTIP Spillovers. CEPS Special Report No. 94/October 2014 [TTIP Series No. 2]

A deep, comprehensive and ambitious TTIP should not undermine or otherwise negatively affect the WTO and its signatories. Among other things, this means that trade diversion ought to be minimised and positive spillovers stimulated. The present CEPS Special Report provides some elementary quantification, which helps to understand the economic incentives for third countries to seek regulatory alignment with TTIP results, where relevant, and for which TTIP should be ‘open’. It focuses on ‘indirect’ spillovers and employs a rather aggregate economic approach. We find that, of three groups of countries that are important for trade with the EU and the US, the ‘closest’ neighbours (NAFTA, EEA, Switzerland and Turkey) exhibit powerful incentives to align so as to benefit from positive spillovers. This is less clear for two other groups. Of the (seven) ‘biggest traders’ (in manufactured goods, for which spillovers matter most), China turns out to have the greatest interest in alignment in selected sectors, followed by Israel, Japan and South Korea. Whereas the latter three either have or are negotiating FTAs with the US and the EU, precisely China has none and remains outside TPP as well. In terms of sectors, the chemical sector followed by electronic equipment are by far the most important, with agro-products and fish as a good third (SPS issues). However, in chemicals and electrical equipment, the TTIP negotiations so far, and recent US/EU regulatory cooperation, do not indicate an ambitious approach, which could reduce regulatory barriers to market access drastically.

EU Enlargement: external economic implications. Bruges European Economic Policy (BEEP) Briefing 4/2003

Unlike some previous EU enlargements (e.g. with the UK and with Spain/Portugal) the present EU enlargement to Central Europe has not prompted much, let alone a fierce, debate about the external dimension. This BEEP briefing discusses the main economic aspects of the external dimension, in particular whether there is a threat of (how much) trade diversion. Attention is paid to the three main topics of interest for third countries: industrial trade effects, impact on FDI and agricultural trade effects. Agriculture is arguably the most sensitive of the three, given the very high CAP border protection, and although large-scale trade diversion may eventually occur under certain scenarios (such as an unreformed CAP), these fears are greatly exaggerated in the short to medium term (5-7 years): the time frame considered is therefore all-important. This conclusion becomes less surprising if one takes a closer look at the current sorry state of agriculture in the CEECs. Separate sections treat the somewhat sensitive subject of U.S.-CEEC Bilateral Investment Treaties, as well as the longterm development perspective, which addresses the prospects for catch-up growth by the accession countries. In the end, non-European stakeholders in the accession process will greatly benefit from sustained catch-up growth by the CEECs, which are locking-in deep reforms due to EU accession.

Firm-level trade creation and diversion of regional trade agreements in Thailand

Using highly detailed import data for Thailand, this paper examines firm-level trade creation and diversion of regional trade agreements (RTAs). Specifically, by focusing on firm-product pairs in which firms import a particular product from non-members but not from RTA members in the initial year of our sample, we empirically investigate the start of imports from RTA members under RTA schemes and the cessation of imports from non-members at the firm-level. We find that firms are more likely to stop importing products with low RTA tariff rates or high most-favored-nation tariff rates from non-members and to start importing such products from RTA member countries. However, from the quantitative point of view, there are very few firms that switch import sources from non-members to RTA members when facing the introduction of RTA schemes.

Essays on the general equilibrium effects of barriers to trade on economic growth, foreign trade and the location of economic activity in Brazil

This work presents a fully operational interstate CGE model implemented for the Brazilian economy that tries to quantify both the role of barriers to trade on economic growth and foreign trade performance and how the distribution of the economic activity may change as the country opens up to foreign trade. Among the distinctive features embedded in the model, modeling of external scale economies, port efficiency and land-maritime transport costs provides an innovative way of dealing explicitly with theoretical issues related to integrated regional systems. In order to illustrate the role played by the quality of infrastructure and geography on the country‟s foreign and interregional trade performance, a set of simulations is presented where barriers to trade are significantly reduced. The relative importance of trade policy, port efficiency and land-maritime transport costs for the country trade relations and regional growth is then detailed and quantified, considering both short run as well as long run scenarios. A final set of simulations shed some light on the effects of liberal trade policies on regional inequality, where the manufacturing sector in the state of São Paulo, taken as the core of industrial activity in the country, is subjected to different levels of external economies of scale. Short-run core-periphery effects are then traced out suggesting the prevalence of agglomeration forces over diversion forces could rather exacerbate regional inequality as import barriers are removed up to a certain level. Further removals can reverse this balance in favor of diversion forces, implying de-concentration of economic activity. In the long run, factor mobility allows a better characterization of the balance between agglomeration and diversion forces among regions. Regional dispersion effects are then clearly traced-out, suggesting horizontal liberal trade policies to benefit both the poorest regions in the country as well as the state of São Paulo. This long run dispersion pattern, on one hand seems to unravel the fragility of simple theoretical results from recent New Economic Geography models, once they get confronted with more complex spatially heterogeneous (real) systems. On the other hand, it seems to capture the literature‟s main insight: the possible role of horizontal liberal trade policies as diversion forces leading to a more homogeneous pattern of interregional economic growth.

Trade and investment flows between the Caribbean and the rest of the hemisphere in the context of the FTAA

Includes bibliography

East Asia's Economic Development cum Trade "Divergence"

This paper addresses some salient features of how some of "successful" East Asian economies have been faring in terms of enhancing their export competitiveness. That export becomes more divergent in terms of its unit price as more technology-enhancing economic activity is undertaken within an economy, is the primary message that this study conveys. This is indeed what Schumpeter had addressed in conjunction with his "creative destruction" thesis. From this perspective, East Asia's export-led industrialization has been attained through a particular policy focus upon high "trade divergence" sectors underpinned by a generally high level of manufacturing flexibility. The experience of Malaysia's development serves as the strong case in point. As an East Asia-wide FTA is expected to facilitate "divergent" export-led industrialization through enhanced knowledge interaction, this dynamic or "divergent" impact that knowledge creation could exert should come to the fore of relevant policy arguments, together with static consideration of trade creation and diversion. A formal statistical test of the "divergence hypothesis" above is called for with a view to building upon this preliminary study.

The role of oxidative stress as an underlying mechanism in life-history trade-offs

A key aspect underpinning life-history theory is the existence of trade-offs. Trade-offs occur because resources are limited, meaning that individuals cannot invest in all traits simultaneously, leading to costs for traits such as growth and reproduction. Such costs may be the reason for the sub-maximal growth rates that are often observed in nature, though the fitness consequences of these costs would depend on the effects on lifetime reproductive success. Recently, much attention has been given to the physiological mechanism that might underlie these life-history trade-offs, with oxidative stress (OS) playing a key role. OS is characterised by a build-up of oxidative damage to tissues (e.g. protein, lipids and DNA) from attack by reactive species (RS). RS, the majority of which are by-products of metabolism, are usually neutralised by antioxidants, however OS occurs when there is an imbalance between the two. There are two main theories linking OS with growth and reproduction. The first is that traits like growth and reproduction, being metabolically demanding, lead to an increase in RS production. The second involves the diversion of resources away from self-maintenance processes (e.g. the redox system) when individuals are faced with enhanced growth or reproductive expenditure. Previous research investigating trade-offs involving growth or reproduction and self-maintenance has been equivocal. One reason for this could be that associations among redox biomarkers can vary greatly so that the biomarker selected for analysis can influence the conclusion reached about an individual’s oxidative status. Therefore the first aim of my thesis was to explore the strength and pattern of integration of five biomarkers of OS (three antioxidants, one damage and one general oxidation measure) in wild blue tit (Cyanistes caeruleus) adults and nestlings (Chapter 2). In doing so, I established that all five biomarkers should be included in future analyses, thus using this collection of biomarkers I explored my next aims; whether enhanced growth (Chapters 3 and 4) or reproductive effort (Chapter 5) can lead to increased OS levels, if these traits are traded off against self-maintenance. I accomplished these aims using both a meta-analytic and experimental approach, the latter involving manipulation of brood size in wild blue tits in order to experimentally alter growth rate of nestlings and provisioning rate (a proxy for reproductive expenditure) of adults. I also investigated the potential for redox integration to be used as an index of body condition (Chapter 2), allowing predictions about future fitness consequences of changes to oxidative state to be made. A growth – self-maintenance trade off was supported by my meta-analytic results (Chapter 4) which found OS to be a constraint on growth. However, when faced with experimentally enhanced growth, animals were typically not able to adjust this trade-off so that oxidative damage resulted. This might support the idea that energetically expensive growth causes resources to be diverted away from the redox system; however, antioxidants did not show an overall reduction in response to growth in the meta-analysis suggesting that oxidative costs of growth may result from increased RS production due to the greater metabolism needed for enhanced growth. My experimental data (Chapter 3) showed a similar pattern, with raised protein damage levels (protein carbonyls; PCs) in the fastest growing blue tit chicks in a brood, compared with their slower growing sibs. These within-brood differences in OS levels likely resulted from within-brood hierarchies and might have masked any between-brood differences, which were not observed here. Despite evidence for a growth – self-maintenance trade off, my experimental results on blue tits found no support for the hypothesis that self-maintenance is also traded off against reproduction, another energetically demanding trait. There was no link between experimentally altered reproductive expenditure and OS, nor was there a direct correlation between reproductive effort and OS (Chapter 5). However, there are various factors that likely influence whether oxidative costs are observed, including environmental conditions and whether such costs are transient. This emphasises the need for longitudinal studies following the same individuals over multiple years and across a wide range of habitats that differ in quality. This would allow investigation into how key life events interact; it might be that raised OS levels from rapid early growth have the potential to constrain reproduction or that high parental OS levels constrain offspring growth. Any oxidative costs resulting from these life-history trade-offs have the potential to impact on future fitness. Redox integration of certain biomarkers might prove to be a useful tool in making predictions about fitness, as I found in Chapter 2, as well as establishing how the redox system responds, as a whole, to changes to growth and reproduction. Finally, if the tissues measured can tolerate a given level of OS, then the level of oxidative damage might be irrelevant and not impact on future fitness at all.