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Understanding Regional Integration and Its Effect on International Trade and Policy


U.S. agriculture is more than twice as reliant on foreign markets compared to manufacturing and industrial sectors. Thus, expanding existing markets and opening new markets through trade agreements is clearly a high priority for U.S. and Virginia agriculture. <P>
Regional trading arrangements may be an attractive policy tool to promote U.S. and Virginia agricultural trade. Article XXIV (Customs Unions and Free Trade Areas) of the General Agreement on Tariffs and Trade (GATT) commits Members to eliminate restrictions on "substantially" all trade within the agreement. Moreover, regional trade agreements can facilitate deeper integration by liberalizing non-tariff barriers including technical standards, food safety concerns, and domestic regulations - areas where the World Trade Organization has made very little progress. Finally, regional trade agreements are easier to conclude because they involve fewer negotiating parties. <P>
The objectives of this project are threefold. First, to assess whether regional trade agreements achieve their intended purpose of stimulating members' agricultural trade and how long it takes before actual effects on trade occur after controlling for implementation and phase-in periods. <P>
The second objective is to evaluate whether the World Trade Organization has cultivated successful regional trade agreements since it oversees the formation and implementation of these agreements. <P>
Finally, the third objective is to determine the extent to which regional trade agreements reduce or eliminate tariff and non-tariff barriers to trade. <P>
Expected outputs from this project include a workshop on the importance of international trade and free trade agreements to Virginia Agriculture to be held in conjunction with the Virginia Farm Bureau Federation. Other outputs include publication of this work in top field journals; technical bulletins and external funding to support the involvement of graduate students.

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NON-TECHNICAL SUMMARY: The value of U.S. agricultural exports to the rest of the world now represents 90 billion, or almost one-third of gross farm receipts. According to the USDA's Economic Research Service, every dollar of exports creates an additional $1.48 in supporting activities to process, package, finance and ship agricultural products. Thus, $90 billion in agricultural exports generates an additional $133 billion in value-added support. Virginia agriculture is dependent on foreign markets for its output. In 1999, Virginia's agricultural exports reached $400 million. By 2006, exports increased by over 40 percent to $589 million and show no sign of decline. Wheat, poultry, live animals, tobacco and other agricultural products make up the top five exporting categories, with Rockingham, Augusta, Accomack, Page and Shenandoah counties accounting for the largest share by value (40 percent). Expanding existing markets and opening new markets through future trade agreements is clearly a high priority for U.S. agriculture. However, most international trade economists tend to agree that the multilateral process of the World Trade Organization has done very little to improve market access conditions. As a consequence, most, if not all, countries are pursuing bilateral and regional trade agreements. Indeed, we have witnessed an explosion in the number of regional agreements signed and entered into force in the last decade alone. The latest annual report of the WTO's Committee on Regional Trade Agreements shows a total of 183 agreements currently in force. Moreover, the WTO is in the process of reviewing an additional 141 regional trade agreements. Since the creation of the WTO in 1995, the Committee has received an average of 11 notifications per year, almost one per month and every WTO Member except Mongolia is now party to at least one regional or bilateral agreement. The proliferation of regional integration over the last decade as well as the number of RTAs under negotiation poses a number of interesting policy questions for international trade economists. Many agreements signed over the last decade contain numerous commodity specific exemptions concerning sensitive agricultural commodities; long transitional periods of trade liberalization lasting more than a decade; long-standing controversies about the interpretation of WTO provisions against which regional agreements are assessed; and the deplorable fact that tariffs and non-tariff barriers continue to plague agricultural trade.<P>


APPROACH: The starting point in this project is the gravity equation applied to international trade. The gravity model is one of the most successful empirical tools in economics and has provided some of the clearest and most robust empirical findings in economics. As its name suggests, econometric gravity equations predict bilateral trade flows between a pair of countries based on the idea of Newton's Law of Universal Gravitation whereby the propensity to trade is proportional to the product of their (economic) mass and the distance between them. This study adopts the gravity equation with three innovations. First a panel data setting is adopted to incorporate dynamic effects associated with agreement-specific phase-ins and transitional periods of trade liberalization. Second, this project will improve on previous work by incorporating notified (to the WTO) as well as non-notified regional trade agreements. Variation in the notification status of an RTA allows for testing of the effectiveness of the WTO in promoting successful regional trade agreements since the WTO oversees the formation and implementation fo notified RTAs. Thirdly, this project will improve on previoius work by incorporating detailed tariff and non-tariff barrier data into the analysis. Whether and to what extent regional integration reduces or eliminate trade costs will be an important result of this project.

Grant, Jason
Virginia Polytechnic Institute and State University
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