While multilateral negotiations are in a stalemate and RTAs are proliferating, the welfare effects of RTAs, that is the effects on the economic performance of their signatories and the rest of the world, can be very different from the overall gains from trade derived in a multilateral setting.
Deeper agreements not only improve market access through preferential tariffs but can also minimize trade costs through the convergence of domestic regulation and harmonizing NTMs. In a world of deeper integration and frictionless trade – with no tariffs and no trade costs – trade flows would be shaped by comparative advantage derived from differences in technology and resource endowments (see Parts 2 and 3). Food and agricultural products would meet consumers’ preferences from around the world and be sourced from the most efficient producer globally. Compared to deep integration at the global level, an RTA would create incentives to the signatories of the agreement to trade relatively more among themselves than with the rest of the world – the trade creation effect. Because products would be sourced from signatory countries, this could divert trade away from other, potentially more efficient, producers elsewhere in the world – the trade diversion effect.ba
For example, liberalization and economic integration in the European Union between 1985 and 2000 was found to have increased the intra-European Union trade of six major food and agricultural products. However, some of this increase came at the expense of countries outside the European Union due to reductions in the level of imports by the European Union from these countries.296 A study investigating the agricultural trade patterns of 50 countries that are signatories of five major RTAs during the period 2005–2014 found both trade creation and trade diversion effects but concluded that, in agriculture, trade creation prevailed, as the increase in trade between signatories was larger than the trade reduction experienced by non-participating countries.297
Simulations using a model of the global economy illustrate these trade creation and diversion effects. The model was used to identify the potential effects of deeper integration, reflected by the hypothesis of no trade policies and no trade costs: (i) globally; (ii) on Africa only, inspired by AfCFTA; and (iii) on Eastern and South-eastern Asia and Oceania inspired by RCEP. In all three scenarios, trade barriers, as determined by border measures such as tariffs, non-tariff measures and transportation and logistics costs are reduced to zero in order to isolate the relative effects of multilateral and regional trade integration (see Box 4.3).298
BOX 4.3Analysing economic integration and trade cost reduction scenarios
A computable general equilibrium model – a model of the global economy including agriculture and the food sector – is used to simulate the effects of different liberalization and trade cost reduction scenarios. The simulation exercise considers a full liberalization and deep trade integration scenario which entails the removal of all border measures, such as tariffs, non-tariff barriers and transport costs in all sectors, including food and agriculture.
This hypothetical scenario of “frictionless trade” results in the free movement of goods, services and capital between countries. Tariffs are set to zero to reflect trade liberalization, non-tariff measures are removed to reflect that regulatory and legal frameworks have converged and the same rules apply throughout the world or region. Transport costs are also removed to reflect improvements in infrastructure, highlight the influence of comparative advantage and completely isolate the effects of trade integration.
Simulations on these policy packages have been applied at the global level and for selected regions and are specified in Table 4.1. As the model is a stylized representation of the economies involved and specific details on the type of deeper integration cannot be accommodated, the results should be interpreted with care: the mechanisms and direction of impacts matter more than the size of the effects.
TABLE 4.1SCENARIO ASSUMPTIONS
Three scenarios are considered: the first one includes a global liberalization and integration, where transport costs, non-tariff barriers and all border measures are eliminated; the second scenario is inspired by AfCFTA and illustrates the direction of the effects that a full agreement may bring to the region and the world; the third scenario is an illustration of a deeper regional integration in Asia and Oceania inspired by RCEP.
While tariffs are often reduced or removed during the liberalization process at both the multilateral and regional levels, other trade costs can also be reduced through trade facilitation and harmonizing standards (see Box 4.2). At the multilateral level, the WTO Trade Facilitation Agreement aims to expedite border procedures. Trade facilitating measures are also suggested as a policy priority at the regional level, especially in Africa.299 Elsewhere, a study based on Peruvian customs data shows that trade facilitation provisions in RTAs can reduce trade costs and enhance the export competitiveness of value chains in the RTA signatory countries.300 Lower trade barriers can promote regional value chains and contribute to growth in agriculture and the food industry. Lower tariffs and harmonized NTMs facilitate global and regional value chain participation and promote value added creation, as they make it easier for products to cross multiple borders.301
Trade cost reductions can also be achieved by harmonizing standards.302, 303, 304 At the multilateral level, both the WTO SPS and TBT Agreements encourage countries to build their national measures on international standards, such as those recommended by the FAO/WHO Codex Alimentarius Commission.305, 306 At the regional level, many RTAs foresee a harmonization of their standards or provide for the mutual recognition of domestic standards. For example, the Deep and Comprehensive Free Trade Areas (DCFTAs) of the European Union with Georgia, the Republic of Moldova and Ukraine suggest that SPS measures by the three countries converge towards the European Union legislation.307, 308, 309
In the hypothetical scenario of globally frictionless trade, food and agricultural trade would significantly increase in all regions (Figure 4.1). Regions that are relatively more competitive, such as Eastern and South-eastern Asia and Oceania, would increase their food and agricultural exports by up to 470 percent. Exports from Africa and Latin America and the Caribbean are projected to increase the least, but they would still more than double. Some countries in Latin America and the Caribbean are already strong exporters and may, therefore, be closer to their export potential. On average, as African countries are characterized by low productivity per worker and are less competitive (see Part 2), they may not be able to expand their exports as significantly as other regions, even under frictionless trade. With zero tariffs and no trade costs, food and agricultural imports to Africa are expected to increase by 140 percent. This impact is smaller than in other regions due to the lower purchasing power of African consumers. Overall, the hypothetical elimination of trade costs results in an increase in imports by low-income countries in the region to address food consumption requirements (see Part 2).
FIGURE 4.1Multilateral liberalization and integration: effects on GDP, food security, and food and agricultural trade
Under the hypothesis of worldwide frictionless trade, GDP would increase in all regions (Figure 4.1). As trade flows would reshape in a way that countries can import each product from the most efficient producers, food prices would decline in all regions, but relatively less in Africa where productivity per worker is low and relatively lower incomes result in fewer imports. Increasing wages and lower food prices would improve food purchasing power, which would promote food security globally.
The two regional trade integration scenarios inspired by AfCFTA and RCEP (see Boxes 4.4 and 4.5) should be understood as an illustration of the potential effects if all border measures, transport costs and non-tariff barriers were removed in Africa or Eastern Asia, South-eastern Asia and Oceania. In both the Africa and the Eastern Asia, South-eastern Asia and Oceania integration scenarios, economic impacts would mainly affect the respective regions (Figures 4.2 and 4.3). Because trade would become frictionless only in these regional markets, mimicking the realization of deeper trade agreements, but not in the rest of the world, the effects would remain below those projected in the global trade integration scenario, for both Africa and the Eastern and South-eastern Asia and Oceania regions and for the world as a whole.
FIGURE 4.2Liberalization and integration in Africa: Effects on GDP, food security, and food and agricultural trade
FIGURE 4.3Liberalization and integration in Asia and Oceania: Effects on GDP, food security, and food and agricultural trade
BOX 4.4The African Continental Free Trade Area
The decision to establish a Continental Free Trade Area was approved by the eighteenth ordinary Session of Assembly of the African Union Heads of State and Government, held in Addis Ababa, Ethiopia in January 2012. This initiative is a flagship project of Agenda 2063 of the African Union – Africa’s own development vision. The agreement establishing the AfCFTA entered into force on 30 May 2019, covering 54 of the 55 African Union Member States, 43 of which have ratified the agreement so far.362, 363
AfCFTA aims to create, through successive rounds of negotiations, a single market for goods and services to deepen the economic integration of the African continent and to lay the foundation to establish a continental customs union at a later stage. This will be achieved through the gradual removal of tariffs on at least 90 percent of over 5 000 tariff lines. The reduction of tariffs is seen as having significant potential to increase intra-regional trade.364, 365, 366 The agreement includes the mutual recognition of standards and licenses and the harmonization of plant import requirements and SPS measures to facilitate trade.367
AfCFTA will overlap with several regional economic communities already in force in Africa. These include COMESA, East African Community (EAC), the Economic Community of West African States (ECOWAS), the South African Development Community (SADC), the Intergovernmental Authority on Development (IGAD), the Economic Community of Central African States (ECCAS), the Community of Sahel-Saharan States (CEN-SAD) and the Arab Maghreb Union (AMU). There are also several other unions and communities with greater levels of economic integration, such as the South African Customs Union (SACU), the West African Economic and Monetary Union (WAEMU) and the Economic and Monetary Community of Central Africa (CEMAC). One important issue is how the AfCFTA will coordinate and build on these existing regional structures.
To assess the potential trade-creating impact of AfCFTA, it is important to understand the current trade patterns in African countries. Only 8 percent of African merchandise exports are directed toward Africa, suggesting that there are important constraints (for instance, high trade costs) to intra-regional trade.368
As for agriculture, almost 40 percent of Africa’s agricultural products are exported to Europe (see Figure 4.4), while intra-African agricultural trade is regionally concentrated, mostly centred around South Africa, which is both the major exporter and importer.369
FIGURE 4.4Intra-African exports and African exports to other regions, food and agricultural products, 2019
However, there are significant differences by product. For instance, the 2021 Africa Agriculture Trade Monitor370 finds that while the share of intra-African imports in total African imports is low for cereals, it is high for some fruits and vegetables, such as tomatoes and citrus fruit. The evidence shows that the number of trade links between African countries grew substantially between 2003 and 2019 for ten key agricultural products. Still, while rising incomes are fuelling demand for diversified diets in the region, meeting this demand with imports from within the region will require significant efforts in overcoming supply-side constraints, such as low levels of agricultural productivity and infrastructure gaps.
SOURCE: Adapted from FAO. 2022. Agricultural trade in the Global South – An overview of trends in performance, vulnerabilities, and policy frameworks. Rome, FAO.
BOX 4.5The Regional Comprehensive Economic Partnership
RCEP is composed of 15 countries across Asia and Oceania, including the ten signatories of the Association of Southeast Asian Nations (ASEAN) and five regional partners: Australia, China, Japan, New Zealand and the Republic of Korea. Signed on 15 November 2020 and entered into force on 1 January 2022, RCEP is the largest regional trade agreement by economic output in the world. The participating countries account for about one-third of global GDP and one-third of world population.371
RCEP is comprehensive in terms of both coverage and depth of commitments; it contains 20 chapters and includes many areas that were not previously covered. Key developments expected from implementing RCEP include further liberalization of trade, harmonization of non-tariff measures and increased trade facilitation. The food and agricultural sector will remain the least liberalized, with about 18 percent of tariff lines on which RCEP members remain uncommitted.372 Indeed, the existing level of protection between RCEP members is higher in agriculture than in any other sector.
Through new market access commitments, modern rules and disciplines that facilitate trade and investment, RCEP aims to strengthen supply chains in the region and promote the participation of micro, small and medium enterprises in regional value chains and production hubs. The most important contribution of RCEP is the harmonization of the rules of origin, which has important positive implications for value chains in the region.373 However, the agreement does not contain provisions to harmonize regulatory standards on the environment, nor address any issues related to labour.374
NOTE: India withdrew from the trade agreement in November 2019 citing concerns related to some provisions proposed in the agreement, including market access, rules of origin, dispute settlement mechanisms, and other important issues. As an original member of the negotiation, the door to rejoin the RCEP for India remains wide open.375, 376
In the Africa trade integration scenario, the food and agricultural exports and imports of African countries would increase.310 With deeper integration, that implies the removal of significant trade costs, intra-African trade would increase significantly by up to 300 percent,bb but trade with other regions, in particular African imports of food and agricultural products from other regions, would decline (Figure 4.2). Exports to other regions would also decline. Thus, on average, removing all trade barriers in Africa only could potentially create intra-African trade but divert trade away from countries outside the region with a higher willingness to pay (in case of importers of African products) or more efficient providers of certain products (in case of exporters to Africa).
Still, the removal of all trade barriers within Africa would lower food prices in Africa, increase GDP and improve food purchasing power. However, as comparative advantage would not be able to play out globally, these improvements in Africa would be much lower than in a situation with frictionless trade worldwide. At the global level, food prices might even slightly increase.
In the trade integration scenario for Eastern and South-eastern Asia and Oceania, intra-regional trade would increase by up to 700 percent, leveraging a relatively high comparative advantage and no trade costs. Exports to other regions would also increase, fueling falling food prices in the rest of the world. Imports from other regions might decline (Figure 4.3).
In both regional integration scenarios, income, as measured by GDP, increases to a lesser extent as compared to the scenario of frictionless trade across the world. As comparative advantage cannot influence trade globally, regional trade integration results in trade being diverted away from more efficient producers outside the integrated regions. This adds to the findings of other studies that trade agreements are inherently discriminatory – they create trade between the signatory countries but divert trade away from the rest of the world – and multilateral trade integration is the most efficient way to promote market access and economic growth for all.311, 312
