world trade report

World Trade Report 2011

The WTO and preferential trade agreements: From co-existence to coherence

9 789287 037640

World Trade Report

The ever-growing number of preferential trade agreements (PTAs) is a prominent feature of international trade. The World Trade Report 2011 describes the historical development of PTAs and the current landscape of agreements. It examines why PTAs are established, their economic effects, and the contents of the agreements themselves. Finally it considers the interaction between PTAs and the multilateral trading system.

Accumulated trade opening at the multilateral, regional and unilateral level has reduced the scope for offering preferential tariffs under PTAs. As a result, only a small fraction of global merchandise trade receives preferences and preferential tariffs are becoming less important in PTAs.

The report reveals that more and more PTAs are going beyond preferential tariffs, with numerous non-tariff areas of a regulatory nature being included in the agreements.

Global production networks may be prompting the emergence of these deep PTAs as good governance on a range of regulatory areas is far more important to these networks than further reductions in already low tariffs. Econometric evidence and case studies support this link between production networks and deep PTAs.

The report ends by examining the challenge that deep PTAs present to the multilateral trading system and proposes a number of options for increasing coherence between these agreements and the trading system regulated by the WTO.

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World Trade Organization 2011

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Cover image top right Heather Sapey-Pertin

The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system.

The 2011 World Trade Report is split into two main parts. The first is a brief summary of the trade situation in 2010. The second part focuses on the special theme of preferential trade agreements.

Website: www.wto.orgGeneral enquiries: [email protected]: +41 (0)22 739 51 11

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Contents

1

ContentsAcknowledgements and Disclaimer 2

Foreword by the Wto Director-General 3

executive summary 5

I World trade in 2010 18

II The WTO and preferential trade agreements: From co-existence to coherence 40 A Introduction 42

1. PerspectivesandinsightsintheWorldTradeReport2011 44

2. Structureofthereport 45

B Historical background and current trends 46

1. TheformationofPTAs:ahistoricalperspective 48

2. TheevolutionofPTAs:stylizedfacts 54

3. TradeflowsrelatedtoPTAs 63

4. Howpreferentialistrade? 72

5. Conclusions 85

C Causes and effects of PtAs: Is it all about preferences? 92

1. MotivesforPTAs 94

2. ThestandardeconomicsofPTAs 100

3. Goingbeyondthestandardanalysis 109

4. Conclusions 114

TechnicalAppendix:SystemiceffectsofPTAs 118

D Anatomy of preferential trade agreements 122

1. ArelowertariffsstillimportantforPTAs? 124

2. PatternsinthecontentofPTAs 128

3. ProductionnetworksanddeepPTAs 145

4. Africanregionalcooperation:lessonsfromdeepintegration? 151

5. Conclusions 153

Appendixtables 157

e the multilateral trading system and PtAs 164

1. Systemiceffectsofpreferentialtariffliberalization 166

2. DeepPTAprovisionsandthemultilateraltradingsystem 168

3. RegionalismandtheWTO:historicalperspective 182

4. TherelationshipbetweenPTAsandtheWTO 187

F Conclusions 196

statistical appendix 199

Bibliography 228

technical notes 239

Abbreviations and symbols 243

List of figures, tables, boxes and maps 245

Wto members 249

Previous World trade Reports 250

WOrld Trade repOrT 2011

2

acknowledgementsTheWorld Trade Report 2011waspreparedunderthegeneral direction of the Deputy Director-GeneralAlejandroJaraandsupervisedbyPatrickLow,DirectoroftheEconomicResearchandStatisticsDivision.Thewritingof thisyearsreportwascoordinatedbyNadiaRocha and Robert Teh. The principal authors of theReportwereMarcBacchetta,CosimoBeverelli, JohnHancock, Alexander Keck, Gaurav Nayyar, ColemanNee, Roberta Piermartini, Nadia Rocha, Martin Roy,Michele Ruta, Robert Teh and Alan Yanovich. Otherwritten contributions were provided by Marc Auboin,Manfred Elsig, Trudi Hartzenberg and Roy Santana.Special acknowledgment is owed toRichardBaldwinfor his many suggestions and contributions to thereport.TradestatisticsinformationwasprovidedbytheStatistics Group of the Economic Research andStatistics Division, coordinated by Hubert Escaith,Julia de Verteuil, Andreas Maurer and JurgenRichtering.AishahColauttiassistedinthepreparationof the graphical input and Paulette Planchette,assisted by Vronique Bernard, prepared thebibliography. Research assistance was provided byHans Baumgarten, Pavel Chakraborty, ClaudiaHofmann, Joelle Latina, Alen Mulabdic, AndreasLendle,andGianlucaOrefice.

Other Divisions in the WTO Secretariat providedvaluable comments on drafts at various stages of

preparation. The authors are particularly grateful toseveralindividualsintheLegalAffairsDivision(ValerieHughes, Gabrielle Marceau and Edna Robles), theTrade in Services Division (Rolf Adlung) and TradePolicies Review Division (Rohini Acharya, Jo-AnnCrawford, and Christelle Renard). The followingindividuals from outside the WTO Secretariat alsomade useful comments on earlier drafts: DaleAndrews,AnnCapling,ManfredElsig,GaryHufbauer,Lena Lindberg, Xuepeng Liu, Mark Manger, Jean-ChristopheMaur,AlessandroNicita,EmanuelOrnelas,Joost Pauwelyn, John Ravenhill, Robert Staiger, KatiSuominen, Tania Voon, Peter Williams, and JohnWhalley.

The production of the Report was managed byPaulette Planchette of the Economic Research andStatistics Division in close cooperation with AnthonyMartin,HeatherSapey-PertinandHelenSwainoftheInformation and External Relations Division. Thetranslators in the Languages, Documentation andInformationManagementDivisionworkedhardtomeettight deadlines. This year the WTO Secretariatlaunched a Webpage discussion on the topic of theWorld Trade Report 2011. The Webpage, whichattracted many stimulating contributions, wasmanaged by Joelle Latina, in collaboration withAnthonyMartin.

disclaimerThe World Trade Report and any opinions reflected therein are the sole responsibility of the WTOSecretariat.TheydonotpurporttoreflecttheopinionsorviewsofmembersoftheWTO.Themainauthorsof the Report also wish to exonerate those who have commented upon it from responsibility for anyoutstandingerrorsoromissions.

3FoReWoRD

Foreword by the WTO director-GeneralThisyear'sWorld Trade Reporttakesanin-depthfreshlook at preferential trade. The choice of this topicreflects two significant trends in international traderelations,bothofwhichcarryfar-reachingimplicationsfor themultilateral tradingsystem.Thefirstandmostreadily evident of these is the continuing growth andincreasing prominence of preferential tradeagreements (PTAs). In the last two decades, thenumberofPTAshasincreasedmorethanfour-fold,toaround 300 active agreements today. There is noreason to assume that PTAs will cease to grow innumberorthattheywillnotformpartofthelong-termtapestryof internationaltraderelations.Secondly, thecontent of PTAs continues to evolve and deepen,reflecting important changes in the world economy.This too raises vital questions about the focus andreach of the WTO, and the value assigned bygovernmentstoglobally-basedtraderelations.

TheperennialconcernabouttherelationshipbetweenthemultilateraltradingsystemandPTAshasprovokeddifferentreactionsamongcommentatorsandanalysts.Some would emphasize a clash of systems andinherent inconsistencies between discriminatory andnon-discriminatory approaches to trade relations.OtherswouldpointtothegrowingprominenceofPTAsasareflectionofthedemiseofmultilateralism.Othersstill would assert that regional and multilateralarrangements are in essence complementary andneed to be fashioned accordingly. None of theseperspectives can singly capture the complexity ofinternationaltraderelationsinaglobalizingworld.

Our report seeks to navigate a way through thesecomplexities in bringing new data and analyses tounderstandtheseissues.Itacknowledgesthemultiplemotivations for preferential approaches. At the sametime,thereportidentifiesimportantwaysinwhichthefocus of trade policy, particularly of the preferentialvariety,isbeingreshapedtoreflecttheconsequencesof past policies as well as changes in productionstructuresinternationally.

InearliertimesPTAsweremostlikelytobemotivatedby the desire to avoid relatively high most-favourednation (MFN) tariffs. The theory on free trade areasandcustomsunionsmirroredthisrealitybyplacingthenotions of trade creation and trade diversion centre-stage. At the same time, considerable attention hasbeen paid to the discriminatory effects of rules oforiginonthetradeofthirdparties.Morerecently,thiscontext has lost some of its relevance becauseunderlying realities have changed. As the reportdocuments, average tariffs have fallen markedly inrecent years,making tariff preferences amoreminormotivation for entering into PTAs. Furthermore, itseems that where MFN tariffs remain high they arealsoexcludedfrompreferentialreductions,additionallyweakeningthismotivation.

As tariff preferenceshavediminished in importance,non-tariff measures havebecome relatively moresignificantasdeterminantsof market access and theconditions of competition.Non-tariffmeasurescomeinmanyshapes.Theymaybe designed to influencecompetitive conditions inmarkets,justliketariffs,orthey may focus on publicpolicy concerns such ashealth, safety, and theenvironment. These publicpolicyinterventionsalsohavetradeconsequencesandmaybemoreorlessdiscriminatoryintheireffects.

For the most part, it would seem that non-tariffmeasures of the public policy variety have remainedfocused on consumer welfare and not benefits toproducers. However, the fact that interventionsputatively designed to protect consumers may alsofavour producers can lead to concerns over hiddenprotectionandunwarrantedmarketsegmentation. InaworldwheretheWTOishavingdifficultyadvancinganupdated multilateral agenda, the risks of preference-based discrimination and market disintegration builtaroundregulatorydivergenceshouldnotbedisregarded.

An important additional element in the equation,stemming from the emergence of supply chainproduction as a prominent mode of twenty-first-centuryintegration,isthatnewregulatorymattersareincreasingly on PTA agendas. These include issuessuch as investment, competition policy, governmentprocurementandharmonizationormutual recognitionofproductandprocessstandards.Thereportanalysesthe content of a large number of PTAs in terms ofwhether they augment WTO provisions in particularpolicyareasandintroduceentirelynewissues.Bothofthese tendencies are identified in many PTAs,particularly those that have entered into force morerecently.Here,then,isanotherreasonwhyweneedtoremainattentivetopolicyfragmentation.Totheextentthat the desire for deeper integration under PTAs, inbothWTOandnon-WTOareasofregulation,isdrivenby the logic of vertically integrated internationalproduction structures, one is less likely to encounterdiscriminatory intent lurking behind regulatorycooperationinPTAs.Butweshouldbemindfulofthepossibility that even in the absence of intent,marketsegmentation and discriminatory outcomes could beanunavoidableconsequenceofthesearrangements.

The report pays explicit attention to the question ofwhatisneededinamultilateralcontexttoensurethat


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PTAsandtheWTOdonotsimplyrunonparalleltracks,offering plentiful opportunities for inconsistency andconflict. This focusexplains the subtitle of the reportFromco-existencetocoherence.Whatthen,shouldtheWTObedoing? It hasoftenbeensaid that if theWTOmadeprogress inmultilateralnegotiations,bothon market access and rules, this would soften thelikelihood of clashes and inconsistencies with PTAs.Thisisundoubtedlyavalidpoint,buttheexperienceoftheDohaDevelopmentRoundduring the lastdecadehasraisedquestionsabout theabilityandwillingnessofgovernments toadvance themultilateralagenda. Ithas also raised the need to connect the multilateralandbilateralbrainsoftradepolicydriversandactors.We need a better record if we are to attain greatercoherence between the WTO and PTAs throughsuccessfulmultilateralnegotiations.

A second possibility is to continue the quest forgreaterlegalclarityanddetailintheWTOrulesaboutwhat is permissible underPTAs.Progresshere couldblunt the likelihood of damaging discriminatoryoutcomes under PTAs, whether intentional orotherwise.Hereagain,however, yearsofeffort in theDoha Round and before to address multilateralprovisionsonPTAshaveyieldedlimitedresults.Itisforgovernments todeterminewhether theyneedgreaterlegal certainty in this domain. If they do, perhaps amorecircuitous route to theobjective isprecisely theone thatmembershave recentlyembarkedupon.Theprovisional establishment of the TransparencyMechanismforRegionalTradeAgreementsmaypavethewayfornon-litigiousdeliberationsthatcouldbuildconfidence and understanding among membersregardingthemotives,contentsandpolicyapproachesunderpinningregionalinitiatives,leadingovertimetoasharedvisionandreinforcedlegalprovisions.

Thirdly, to the extent that PTAs are motivated by adesire for deeper integration rather than marketsegmentation, there could be a role for the WTO topromotegreatercoherenceamongnon-competingbutdivergent regulatory regimes that in practice causegeographical fragmentationor raise trade costs. Thisagenda has been referred to as multilateralizingregionalism. In some cases the multilateralizationeffect occurs de facto because regulatory reformsundertaken in a PTA context are applied in a non-discriminatory manner. This MFN dividend could bebuiltupon inotherpolicyareas.The feasibilityof thisapproachwouldneedtoberesearchedfurther.

Whateverviewonetakesofpreciselyhowtopromoteaglobalorientationintraderelations,thereisnodoubtthat we need to build towards a more stable andhealthier tradingenvironment,wherealternative tradepolicyapproachesaremutuallysupportiveandbalanceequitablytheneedsofallnations.Itistothediscussionof this agenda that this year's World Trade Reportseeks to make a contribution. I hope members willhaveafirstopportunitytoconsidersomeoftheissuesin this report at the upcoming 8th WTO MinisterialConferenceinDecember2011.

Pascal LamyDirector-General

5exeCutIve summARy

executive summarySection a: Introduction

The report is divided into four main parts. The firstprovides an historical analysis of preferential tradeagreements (PTAs) and a description of the currentlandscape. It documents the large increase in PTAactivity in recentyears,breaking thisdownby region,levelofeconomicdevelopment,andtypeofintegrationagreement.ItprovidesapreciseestimateofhowmuchtradeinPTAsreceivespreferentialtreatment.

The second section discusses the causes andconsequences of PTAs, focusing on both economicand political factors. A distinction is made betweenshallowanddeep integration inorder tosuggest thattraditional theories do not fully explain the emergingpatternofPTAs.ThereportexaminesinparticulartheroleofinternationalproductionnetworksinpromptingthecreationofdeepPTAs.

The third section focuses on the policy content ofPTAs,withparticularreferencetothedepthandscopeofcommitmentscomparedwiththosecontainedintheWTO agreements. It supports the link betweenproduction networks and PTAs with both statisticalevidenceandcasestudies.

The final section identifies areas of synergies andpotential conflicts betweenPTAs and themultilateraltrading system and examines ways in which the twotradesystemscanbemademorecoherent.

See page 42

Section B: Historical background and current trends

the formation of trading blocs: a historical perspective

Global trade relations have never been uniform or monolithic and regional trading arrangements have been around for centuries.

Regional trading arrangements have encompassedempires and colonial spheres of influence, bilateralcommercial treaties and, more recently, multilateralagreements. They have often overlapped andinteracted,creatingatradelandscapedefinedlessbyclear-cut choices between regionalism andmultilateralism or discrimination and non-discrimination than by the complex interplay, evencompetition,amongmultipletraderegimes.

Despitethiscomplexity,inmorerecenttimestradeco-operation has become broader and more inclusive.Defining landmarks in this trend have been theestablishment of the GATT in 1947 and theWTO in1995.At thesame time, trade relationshavebecomedeeper and more far-reaching, incorporating areassuchasservicestrade,foreigninvestment,intellectualproperty and regulatory regimes. These tendenciesareaclearreflectionofthegrowingintegrationoftheworld economy and the internationalization ofpoliciesthatwereonceconsidereddomestic. Insomecases,regionalagreementshaveprogressedfurtherinthis direction than the over-arching multilateralframework.

Progress has not been continuous, and there havebeenmajorset-backsandreversalsalongtheway.Theeconomicdepressionoftheearly1870s,forinstance,effectivelybroughttheexpansionofEurope'sbilateraltradetreatiestoanend,justastheGreatDepressionoftheearly1930shelpedfuelthespreadofdefensiveand increasingly hostile trade blocs in the inter-warperiod. Conversely, the push for a more open andinclusive trading order has been strongest duringperiods of economic expansion and internationalpeace.AmainjustificationforcreatingtheGATTinthepost-warperiodwasthewidelyheldbeliefthathostiletrade blocs had contributed directly to the economicchaos of the 1930s and the outbreak of theSecondWorldWar.

the establishment of the post-war multilateral trading system did not diminish the attraction of bilateral or regional approaches to trade arrangements and led instead to a period of creative interaction and sometimes tension between multilateralism and regionalism.


6

The first wave of regionalism in the late 1950s and1960s was driven by Western Europe's push forcontinentalintegration,leadingtotheestablishmentofthe European Economic Community (EEC) in 1957and the European Free Trade Agreement (EFTA) in1960.Throughoutthisperiod,GATTtariffcuttingandmembership enlargementmoved in tandem, firstwiththeDillonRound in1960-61and thenwith themuchmore ambitious Kennedy Round between 1964 and1967.

Subsequent waves of regionalism, from around themid-1980s onwards, reflected an increasing embraceofsucharrangementsintheAmericas,AsiaandAfrica,as well as in Europe. The continuing proliferation ofregionalagreementsoverthelast25years involvesawide network of participants including bilateral,plurilateral and cross-regional initiatives andencompassescountriesatdifferentlevelsofeconomicdevelopment including developed-developed,developing-developing, and developed-developingalliances. These newest agreements also oftenaddressWTO+ type issues, suchas services, capitalflows, standards, intellectual property, regulatorysystems (many of which are non-discriminatory) andcommitmentsonlabourandenvironmentissues.

The Uruguay Round (1986-1994) coincided with aperiod of growing regionalism and several issues,including services and intellectual property, wereaddressed for the first time both regionally andmultilaterally. The continuing proliferation of PTAs inparallelwith theDohaRound has provoked a debateabout coherence, compatibility and potential conflictbetweenmultilateralandregionalapproachestotradecooperation. Among the questions addressed in thisdebatearewhetherburgeoning regionalismsignals aweakeningofinternationalcommitmenttoopentrade,and foreshadows a return to a more fragmentedtrading system. Alternatively, PTAs may be part of abroad pattern seen since the Second World War where some countries want to move further andfaster in trade rule-making than others, wherebilateralandregionalagreementscanhaveapositive,domino effect, encouraging the pace of multilateralcooperation (and vice versa), andwhere regional andmultilateral agreements are becoming coherent, notconflicting, approaches tomanaging amore complexandintegratedworldtradingorder.

stylized facts about PtAs

PtA participation has accelerated over time and become more widespread.

From the1950sonwards, thenumberofactivePTAsincreased more or less continuously to about 70 in1990.Thereafter,PTAactivityacceleratednoticeably.The number of PTAs in force in 2010 was close to300. The surge in PTA activity is driven both by agrowing number of countries taking an interest in

reciprocal trade opening and by an increase in thenumberofPTAspercountry.AllWTOmembers (withtheexceptionofMongolia)belongtoatleastonePTA.

PtA activity has transcended regional boundaries.

OnehalfofthePTAscurrentlyinforcearenotstrictlyregional.Theadventofcross-regionalPTAshasbeenparticularlypronounced in the lastdecade.The trendtowardsabroadergeographicalscopeofPTAsisevenmore pronounced for those PTAs that are currentlyunder negotiation or have recently been signed (butarenotyet inforce).Practicallyalloftheseareofthecross-regionaltype.

PtAs have seen opposing trends towards further rationalization on the one hand and a sprawling web of new bilateral and overlapping deals on the other.

Numerous bilateral agreements have beenconsolidated into plurilateral agreements either viaaccessions or negotiations between existing PTAs.Examples include successive EU enlargements, theconsolidation of bilateral pacts between EasternEuropean countries in the context of the CentralEuropean Free Trade Agreement (CEFTA) and theconclusion of a PTA between Mercosur and theAndeanCommunity in theLatinAmerican IntegrationAssociation(LAIA)framework.

Atthesametime,aparalleltrendisdiscernibletowardsbilateral deals across regions. While many of thesebilateral arrangements are between developingcountries,developedcountrieshavealsoplayedapart.A consequence of this trend is an increasedfragmentation of trade relations, with countriesbelongingtomultiple,sometimesoverlappingPTAs.

Free trade agreements are far more prevalent than customs unions and a number of products continue to be excluded from preferential access.

Free trade agreements account formore than three-quarters of all PTAs in force. Although GATTArticle XXIV requires that import duties are to beeliminated on substantially all trade among themembers of customs unions and free trade areas,someproducts are oftenexcluded.A recent study ofPTAs involving fourmajor trading countries and theirpartnersshowsthatabout7percentof tariff lines inthe sample are excluded, either temporarily orpermanently.Theseproductsaremainlyagriculturalorfood items, and labour-intensive manufacturedproductssuchasfootwearandtextiles.

the coverage of PtAs in terms of policy areas has widened and deepened over time.

Notwithstanding the prevailing pattern of specificproductexclusionsfromtariffelimination,mostrecent

7exeCutIve summARy

PTAsgobeyondtraditionaltariff-cuttingexercisesandmay include such policy areas as services trade,investment, intellectual property, technical barriers totradeanddisputesettlement.Forinstance,aboutone-third of PTAs in force today contain servicescommitmentscomparedtolessthanatenthin1990.

stylized facts about trade flows related to PtAs

the value of world trade between members of preferential trade agreements has increased as the number of PtAs has expanded.

Intra-PTAtraderepresentedabout35percentoftotalworldmerchandise trade in 2008, comparedwith 18per cent in 1990.1 Preferential trade that is, tradeactually receiving preferential tariff treatment represents a much smaller share of world trade.However,itisstillworthconsideringtotaltradeamongPTAmembersbecause the latestgenerationof tradeagreements may be motivated by a broader set ofconsiderationsthanjusttariffreductions,includingthedevelopmentandmaintenanceofsupplychains.

The share of manufactured goods in total intra-PTAexports is the same as the share of manufacturedgoodsinworldtrade(65percent),andthissharedoesnotvarymuchacrossPTAs.However, intra-PTAtradeinpartsandcomponentsdoesvarysignificantlyacrosstrade agreements, suggesting a link between somePTAsandverticallyintegratedproductionstructures.

Plurilateral trade agreements accounted for half ofglobal intra-PTA trade in 2008, while bilateral tradeagreements(includingthosewhereonepartyisaPTA)accountedfortheotherhalf.

If many recent PtAs were designed to support production networks, we might expect to see greater geographic concentration of trade over time, since many production networks are regional in nature. evidence of this exists only for certain regions.

The share of intra-regional trade in Europe's totalexports remained roughly constant at around 73 percent from 1990 to 2009. Asia's intra-regional tradeshare increased from 42 per cent to 52 per cent oftotalexportsduringthesameperiod.NorthAmericasintra-regional trade share rose from 41 per cent in1990 to 56 per cent in 2000, but then fell back to48percentin2009,sothereappearstobenoglobalpattern that applies to all industrialized regions.Developing regions that predominantly export naturalresourceshaveseen theshareof intra-regional tradeintheirtotalexportssharesrisesubstantiallyoverthepast20yearsorso,buttheyremainquitesmall.

The extent to which trade has become moregeographicallyconcentrateddiffersdependingonthe

typeofgoodsbeingtraded.Theshareofintra-regionaltrade in world exports of manufactured goods wasquite stable between 1990 and 2009, fluctuatingbetween56and59percent,but theshareforofficeand telecom equipment jumped from 41 per cent to58 per cent. Taken together, these results suggestthatsupplychainsmaybeanimportantcomponentofrecent PTA activity in Asia and in the electronicssector,butnotsomuch inother regionsoreconomicsectors.

How preferential is trade?

trade among PtA members is not all preferential on account of the fact that a significant portion of intra-PtA trade is mFn duty-free.

In a sample covering imports of the 20 largestimporters from all their trading partner countries accountingfor90percentofworldmerchandisetradein 2008 only 16 per cent qualified as preferentialtrade,assumingfullutilizationofpreferences.2Inotherwords,despite theexplosionofPTAs in recentyears,84 per cent of world merchandise trade still takesplace on a non-discriminatory most-favoured nation(MFN)basis.Thisisfirstlybecausehalfofworldtradeis already subject to zeroMFN tariff rates. Secondly,PTAs tend to exempt high MFN-tariff items frompreferential treatment and continue to trade theseproductsatMFNrates.

Existing preferential tariffs reduce the global trade-weightedaverage tariffbyonepercentagepoint, and90 per cent of this reduction (i.e. 0.9 percentagepoints) is due to reciprocal preference regimes. Only2percentofglobalimportsareeligibleforpreferentialtariffs where preference margins are 10 per cent ormore. For most large exporters, preferential tariffsmatter little for the bulk of their exports. This is notalwaystruefor individualsectorsespecially incertainsmaller economies exporting a narrow set ofcommodities (mainly sugar, rice, bananas, fish andgarments), where preference margins may be moresubstantial. There is a possibility though that thesepreferenceswillbeerodedover timeasthecountriestowhichtheyexportenterintomorePTAs.

Data from some customs administrations suggest a high rate of preference utilization.

Information on the value of imports under differentpreferential regimes from the EU and US revealpreference utilization rates of 87 and 92 per centrespectively.Preferenceutilizationratesareuniformlyhighformostexportingcountries,preferentialregimesand types of products. Analysis shows that bothpreferencemarginsand importvalueshaveapositiveand statistically significant impact on preferenceutilization.Surprisingly,however,manyindividualitemsfacing tariffs below 1 per cent still exhibit highutilization rates. This might suggest either that the


8

cost of using preferential tariffs in certain cases isnegligible or that other benefits are linked to usingthese preferences, perhaps related to privilegedcustoms clearance, qualification under specificsecuritymeasuresoradvantages incaseofre-exporttootherPTApartners.

Data from firm surveys offer a more detailed and mixed picture of preference utilization rates.

Firm surveys carried out in 2007-08 by the AsianDevelopment Bank (ADB) and the Inter-AmericanDevelopment Bank (IDB) in six East Asian countriesandfourLatinAmericancountries respectively revealthattheuseofPTApreferentialtariffsisnotuniformlyhigh. For instance, the ADB survey shows that onlyaround one-quarter of firms in the sample currentlyusedthesepreferences.However,thisnumberdoubledwhen plans for using PTA preferences in the futurewere factored in. The IDB survey shows that only20 per cent of the firms in the sample did notmakeanyuseofPTApreferences.

Complications and costs involved in complying withrulesoforiginwerecitedasconsiderationsinfluencingpreference utilization, especially where preferencemargins were low. The surveys also cited other firm-specific factors that influenced preference utilization.For instance, larger, more experienced firms, withhigherforeignequityandmoreinformationaboutPTAprovisions,weremore likelytousepreferential tariffs.Firms inanumberofcountriessuggested thata lackof informationonPTAswasthemajorexplanationforthenon-useofthesepreferences.

See page 46

Section C: Causes and effects of pTas: is it all about preferences?

motives for PtAs

economic and political science theories provide various explanations for why countries establish preferential trade agreements.

Unilateral trade policy choices can have beggar-thy-neighbour consequences, such as unfavourablyaffectingtheratioofimporttoexportprices(terms-of-tradeeffect)oraproductionrelocationeffect.Countriesmight be stuck in a situation characterized by highrestrictionsandinefficientlylowlevelsoftrade.Atradeagreementcouldneutralizethesebeggar-thy-neighboureffects and achieve higher welfare. Economic theorysuggests,however,thatamultilateralagreementratherthanaPTAisthebestwaytoaddresstheproblem.

Gains in credibility suggest a second reason forsigning a PTA. A government may choose to tie itshandsthroughaninternationalagreementinordertoprevent future policy reversals that would beconvenient in theshort-run,but inefficient in the longterm.APTAmayprovideastrongercommitmentthana multilateral agreement when a country is small inworldmarkets.

"Non-traditionalreasonsforwhycountriesformPTAsinclude accessing a larger market, ensuring againstpreference erosion, increasing predictability of futuretrade policy, signalling stability to investors, andachievingdeeperpolicycommitments.

The creation of PTAs cannot be understood withouttaking account of political circumstances. Politicalscience explanations of PTA formation focus on therole of political integration, the role of domesticpolitical considerations, the formofgovernmentsandinstitutions,diplomacy,andtheroleofpowerrelations.

Changes in trade relationships may explain the growth of PtAs over time. together with certain country characteristics, they may also explain the timing of PtA formation and enlargement.

Thepotentiallossofmarketsharefornon-membersofanexistingPTAinducesthemtoformnewPTAsorjoinexistingones.ThesedominoeffectsofPTAformationcan be further strengthened with multilateral tradeopening.

Among the factorsaccounting for thepatternofPTAformationandenlargementover timearethephysicaldistance between countries, economic size, similarityineconomicsize,proximityofapotentialentranttoanexistingPTA,theextentofexistingagreementsfacingacountrypair,andtheexistingnumberofmembersinaPTA.

9exeCutIve summARy

the standard economics of PtAs

the standard theory on the effects of PtAs suggests that preferential trade agreements increase trade between member countries and reduce trade with third-countries, leading to negative welfare effects for non-members of PtAs.

APTA increases tradeamongmembersasexportersbenefit from the elimination of tariffs in partnermarkets. Non-member countries suffer from areduction of exports to member countries and adecline in the price of their exports in internationalmarkets.

In the traditional Vinerian analysis, preferential tradeopening allows some domestic production to bereplacedby imports frommoreefficientfirms locatedin preference-receiving countries, leading to welfaregains (trade creation). At the same time PTAs mayreduce imports from more efficient non-membercountries,implyingawelfareloss(tradediversion).Thenet welfare effect of PTAs depends on the relativemagnitudeoftheseopposingeffects.

supply chain or vertical production arrangements may change the welfare calculus.

The possibility of trading components used in theproductionoffinalgoodsaltersthecalculationoftradecreationandtradediversion.Althoughtheoutcomeisstill uncertain, welfare-reducing PTAs trading only infinal goods could become welfare-improving oncemembers trade in parts and components along asupply chain. In this way, international productionnetworks can mitigate the trade diversion effects ofPTAs,althoughthisisbynomeansguaranteed.

the trade effects of a preferential agreement depend on the economic characteristics of PtA members.

The natural trading partners hypothesis suggeststhat trade agreements among countries which tradeintensively are more likely to be trade-creating.Preferentialtradeagreementsmayalsohavedynamiceffects,forinstancedrivenbyeconomiesofscale,andeffectsonthelocationofproduction.

Severalstudieshavetestedthetraditionaltheoriesontradecreationandtradediversion.Whilethisliteratureisnotconclusive, itsuggeststhattradediversionmayplaya role in someagreementsand in somesectors,but itdoesnotemergeasakeyeffectofpreferentialagreements.

When governments have political economy reasons for signing a PtA, the question arises whether trade-diverting or trade-creating agreements are more politically viable and

whether a PtA reduces or increases the incentive to set inefficiently high external tariffs.

In shaping their PTAs, governments may not beinfluenced exclusively by the welfare implications ofagreements.Iforganizedlobbygroupscarrysufficientweight in the political preferences of governments,trade-divertingPTAscouldbepoliticallyviableinsomecircumstances.

Moreover,conflictingpoliticaleconomyforcesmayactupon external tariffs agreed in a PTA. On the onehand, PTAs destroy protectionist benefits and lowerthe demand for high external tariffs. On the otherhand, high external tariffs can be used in PTAs tosustaincooperationonnon-tradeissues.Theempiricalliteraturefindsevidenceofbotheffects.

Restrictive rules of origin (Roos) in PtAs may divert or suppress trade in intermediate goods.

RestrictiveRoOsmaymake itprofitable forfirms inacountrytoengageinsupplyswitchingreplacinganefficientnon-membersupplierofanintermediategoodwithalessefficientone,eitherfromapartnercountry(tradediversion)oradomesticfirm(tradecontractionor suppression). Furthermore, by influencing thesourcing of intermediate goods, RoOs are likely toincreasefirms'costsandhencehaveanadverseeffectonfinalgoodstrade.

This discrimination, which leads to trade diversion byprotecting the exports of certain industries in PTAmember countries, can be resolved through thediagonal cumulation of RoOs. Under thisarrangement, participating countries agree that in allPTAs concluded among themselves, materialsoriginating in one country can be considered to bematerialsoriginatinginanyoftheothercountries.

Going beyond the standard analysis

the concept of deep integration is widely used to refer to any arrangement that goes beyond a simple free trade area.

Trade agreements that mostly deal with bordermeasuresareoftendefinedas shallowagreements.Incontrast,preferentialagreementsthatincluderuleson other domestic policies are referred to as deepagreements.

Two distinct dimensions of deep integration are theextensive and the intensive margin. The extensivemargin refers to an increase in the policy areascovered by an agreement, while the intensivemarginreferstotheinstitutionaldepthoftheagreement.Theextensive and intensive dimensions of deepagreements may be related, as an extension of thecoverageofanagreementmayrequirethecreationofcommoninstitutionsforitsproperfunctioning.


10

Deep integration and trade are intimately related.

Deep arrangements may be necessary to promotetradeincertainsectorsandeconomicintegrationmorebroadly. For instance, harmonization or mutualrecognition of certain regulations may be a pre-requisite for trade in services, or competition policyrulesmayberequiredtoallowcomparativeadvantagetomaterialize.

Economic theory also suggests that the degree oftradeopennessisadeterminantofdeepagreements.In this respect, shallow and deep integrationmay beseen as complementary where the first generates ademandforgovernancethatthesecondcanprovide.

An institutional challenge for the WTO is to find anapproachthatfacilitatesdeeper integrationsoughtbyits members while maintaining compatibility with thenon-discriminationprinciple.

the rise in international production networks illustrates the complementarity between trade and governance which is at the core of successful deep agreements.

In order for cross-border production networks tooperatesmoothly,certainnationalpoliciesneedtobeharmonized or rendered mutually compatible tofacilitate business activities in several countries. Thisgeneratesademandfordeepformsofintegration.

Developed countries were the first movers in theattempt toprovidesome international rules to furtherencourage international fragmentation of production.AgreementssuchastheEUSingleMarketProgrammeortheUS-Canadafreetradeareacanbeexplained(atleast in part) in terms of increased demand for deepintegration generated by the needs of internationalproductionsharingarrangements.

The continuous expansion of production sharingbetweendevelopedanddevelopingcountriesrequiresdeeperagreementstofillthegovernancegapbetweencountries.AnagreementsuchastheNorthAmericanFree Trade Agreement, for example, includesdisciplines going beyond preferential tariffs that arerequired to facilitate production sharing between theUnited States and Mexico. In Europe the Euro-Mediterraneanagreementsfulfilthesameobjective.

The recent wave of preferential agreements may (atleast in part) be an institutional response to newcircumstancescreatedby thegrowth inoffshoring. Inthissense,PTAsareefficiency-enhancingratherthanbeggar-thy-neighbour(trade-diverting)agreements.

Deep integration may involve several trade-offs that need to be addressed.

A basic trade-off arises between the benefits ofcommonpoliciesandthecostsofharmonizationwhenpolicypreferencesdifferamongmembercountries.

Deep integration lowers trade costs and providesshared benefits, such as common rules and a stablemonetary system, that the market or nationalgovernmentsfailtooffer.However,nounifyinganalysisispossibleoftheeconomiceffectsofdeepintegration,as these effects depend on the specific form thatarrangementstake.

Deepintegrationwithadvancedeconomiesmaycreateadvantages for developing countries from importingbest-practice institutions. However, costs may beinvolvedifthecommonrulesaredistantfromnationalpreferencesandtheneedsofdevelopingcountries.

Deep integration also has systemic effects. Deepagreements may impose costs on non-membercountries.Ontheotherhand,deepregionalintegrationcould provide an appropriate intermediate level ofintegration(e.g.commonrules)betweennationstatesand the global level in different behind-the-borderareas.

See page 92

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Section d: anatomy of preferential trade agreements

Preferential tariffs and PtAs

Preference margins are small and market access is unlikely in many cases to be an important reason for creating new PtAs.

The estimated average applied tariff across allproducts and countrieswas 4 per cent in 2009, andthescopeforexchangingpreferentialmarketaccessisthereforelimited.Significanttariffbarriersstillexistinsomesectors,however,suchasagricultureandlabour-intensivemanufacturedgoods.However,PTAsdonotappear tobeabout theremovalof tariffpeakseither.Most sensitive sectors remain sensitive (subject tohigher tariffs) in PTAs. Approximately 66 per cent oftarifflineswithMFNratesabove15percentagepointshavenotbeenreducedinPTAs.

Whentheadvantageconferredbyprovidingpreferentialaccesstoanexporter iscalculatedwithrespecttotheaverageappliedtarifffacedbyallexporterstothesamemarketratherthanrelativetotheMFNrate,theshareofglobal trade for which preferential market accessmattersislessthan13percent.

Patterns in the content of PtAs

PtAs cover many more policy areas than tariffs and frequently entail legally enforceable commitments.

In a sample of almost 100 PTAs, deep integrationelementswereclassifiedintoWTO+areasandWTO-Xareas. WTO+ refers to deeper integration in areascoveredbytheWTOandWTO-XreferstopolicyareasnotcoveredinWTOagreements.Theanalysisconfirmsthatmany PTAs go beyond theWTO and these deepintegrationprovisionsarefrequentlyenforceablelegally.

As expected, WTO+ provisions universally includeindustrial and agricultural tariffs. An increasingly largenumberofPTAsnowalsoincludeprovisionsontechnicalbarriers to trade, services, intellectual property andtrade-related investment measures. WTO-X provisionscommonly include competition policy, investment andthemovementofcapital.Aboutone-thirdofthePTAsinthe sample also include environmental laws, labourmarketregulationsandmeasuresonvisaandasylum.

Compared with PTAs between trading partners withsimilarlevelsofincome,thosebetweendevelopedanddeveloping countries contain a higher number ofWTO+ provisions on average. WTO-X provisions areencounteredmost frequently in agreements betweendeveloped countries, followed by those betweendevelopedanddevelopingcountries,andfinally thosebetweendevelopingcountries.

overall, services commitments in PtAs have gone well beyond commitments in the General Agreement on trade in services (GAts) as well as Doha Round offers in services.

Services obligations typically form part ofcomprehensivePTAscoveringnewgenerationissuessuch as investment, intellectual property, ore-commerce.Outof85notificationsunderArticleVoftheGATS,3a littlemore thana third relyonaGATS-typelistingofareaswherespecificcommitmentsapply(positive list), almost half rely on the morecomprehensive approach of indicatingwhere specificcommitments do not apply (negative list) and theremainderadoptamixtureofthetwoapproaches.

Despite innovations in their structure, most servicesPTAs share a broad commonality with the GATS interms of the basic set of disciplines, although somePTAs have gone beyond GATS with respect todisciplinesondomesticregulationortransparency,forexample.

the investment chapters in PtAs contain many provisions and guarantees that are important to international production networks.

Since firm-specific assets such as human capital(management or technical experts) and intellectualproperty(patents,blueprints)giveinternationalfirmsacompetitive edge, protecting these assets againstexpropriationwillencouragemoreproductionsharing.Allowing freer movement of corporate personnel isanother critical requirement. Investor confidence willbe further improved through access to a disputesettlementmechanism.

FromthesampleofinvestmentchaptersinPTAsusedfor this report, it appears that a large proportion ofagreementshaveadoptedanegativelistandhenceamoreambitiousapproachtoinvestmentopening.TheytypicallyextendMFNandnationaltreatmenttoforeigninvestors, provide guarantees of investor protectionand grant private investors the right to disputesettlement. In general, the investment provisions inthesePTAsareaccommodating,althoughnoattempthas been made to test how much these provisionsactuallyaffectflowsofforeigndirectinvestment.Morerecent PTAs appear more open on the investmentfrontthanearlierones.

As tariff barriers have progressively been reduced, non-tariff barriers have acquired increasing weight. over time, more and more PtAs have included provisions regarding technical barriers to trade (tBts).

TheinclusionofspecificprovisionsinPTAsappearstofollowahubandspokestructure,withalargerpartnerrepresenting the hub towhose standards the spokeswill conform. For example, while the agreements


12

signed by the EU typically include harmonizationprovisions, North American agreements that embodyTBT provisions tend to prefer mutual recognition. Inaddition, North American, East Asian and South-CentralAmericanTBTprovisionsinPTAsmainlyfocuson introducing transparency requirements anddeveloping institutional bodies, while EU and Africanagreementsbarelyconsidertheseissues.

the risk of a lock-in effect exists in regional provisions on tBts.

Harmonizationtoaregionalstandardmayincreasethecostsforfurthermultilateralliberalization.Ifadoptingacertainstandardinvolvesthepaymentofsomeformoffixedcosts,theriskexiststhatregionalprovisionsmayworkasastumblingblockinmultilateralcooperation.

Competition policy complements the reduction of trade barriers.

TheadoptionofcompetitionpolicyinPTAsisinmanywaysanatural complement to the reductionof trade,investment and services barriers. In evaluatingcompetitionrulesinPTAs,oneneedstogobeyondthecompetition policy chapter of PTAs to includecompetition-related provisions that appear in otherchaptersoftradeagreements.Competitiondisciplinesappear in the chapters on investment, services (intelecommunications, maritime transport and financialservices), government procurement and intellectualproperty.

Sector-specific competition provisions may havestronger pro-competitive effects than the articles inthecompetitionpolicychapteritself,assumingthatthetrade agreement has one.Principles inPTAs relatingto non-discrimination, procedural fairness andtransparency can also have a strong bearing oncompetitionlawandpolicy.

many elements of competition rules in PtAs are characterized by non-discrimination.

Competition disciplines usually operate through theuseofdomesticregulations.Whileitisnotimpossiblefor these regulations to be tailored to favourenterprises originating from PTA partners, it may becostly to do so. To the extent that enforcement ofcompetitionlawreducesthemarketpowerofdomesticincumbents, theprospectsof foreignenterprises thatalreadyoperateinthemarketareimproved,whetherornottheyarefromaPTAmember.

Competition provisions in regional agreements maycarry other external benefits, such as economies ofscale from the creation of a regional competitionauthority. Even if no centralized authority isestablished,benefitscanflowfrominformationsharingand cooperation among enforcement authorities.Demonstration effects may also apply when a

competitionauthorityinonePTAmembertakesactionagainstanti-competitivebehaviour.

Production networks and deep PtAs

empirical analysis confirms the positive association between deep integration and production networks.

Lackofdataposessomedifficulties inassessingtheinternational fragmentation of production, forcingempirical studies to rely on proxy measures forproductionnetworks.Thisanalysisusestradeinpartsandcomponentstoproxyforglobalproductionsharing.

Results show that greater trade in parts andcomponents increases the depth of newly signedagreementsamongPTAmembers.PTAsalsoincreasetradeinpartsandcomponentsby35percentamongmembers. In addition, the greater the depth of anagreement, the bigger the increase in trade in partsand components among member countries. Theestimationresultsshowthatonaverage,signingdeepagreements increases trade in production networksbetween member countries by almost 8 percentagepoints.

the case of AseAn: from regionalization to regionalism.

ASEANwas established in1967 largely to dealwithrisingterritorial tensionsamongsomeof itsmembers(the original signatories were Indonesia, Malaysia,Philippines,SingaporeandThailand)andwithpossiblespilloversfromtheconflictinIndochina.Inthequarterof a century that spanned the creation of theassociationand thedecision formally toestablish theASEAN free trade area (AFTA), there was a shift ineconomicpolicyfromtraditionalimportsubstitutiontoexport promotion and openness to foreign directinvestment.

This led to a huge increase in total merchandiseexports of the five original members. In particular,exportsofpartsandcomponentsbecameincreasinglyimportant, rising from just about 2 per cent of totalexports in the year of the association's founding to17percentbythetimethefreetradeagreementwassigned. Equally tellingwas the increased prominenceofpartsandcomponentstradeinintra-regionaltrade.

While the increased regionalization of trade in partsandcomponentstradeinASEANwouldnothavebeenpossiblewithoutthecountries'opennesstotradeandforeigninvestment,itmaynothavebeensufficientforproductionnetworks tocontinue toflourish.Thismayexplain AFTA's evolution beyond a free trade area.Services and intellectual property agreements weresignedin1995,aninvestmentagreementanddisputesettlement mechanism in 1996, and a frameworkagreement for mutual recognition arrangements in

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1998.RecentstudiesdocumenthowAFTAsucceededinreducingtradecosts,not throughpreferential tariffliberalization but through concerted trade facilitationinitiatives,andhowthiswasmotivatedbyparticipationininternationalproductionnetworks.

Production networks may explain some PtAs in Latin America too: the case of Costa Rica.

As a result of its policies of trade and investmentopening, Costa Rica has experienced a significantchangeinitstradestructure,withasubstantialriseintheshareofmanufacturingexportsaswellastradeinservices in total exports. Over the last decade, thecountry has become more integrated with globalproduction networks in such sectors as electronics,medical devices, automotive, aeronautic/aerospace,andfilm/broadcastingdevices.

The link between production networks and PTAsseemsapparent inCostaRica's agreementswith theUnited States (US-CAFTA-DR agreement) and withChina.WhileoveralltradewiththeUnitedStatesgrewby about 11 per cent annually from 1995, parts andcomponentstradegrewatabouttwicethatrate.Morethan25percentofCostaRica'stotalgoodsexportsin2009weredirectly related toproductionnetworks inelectronics,withChinabeingthemaintradingpartner.Overall, trade in parts and components makes upabouthalfofCostaRica'scurrenttradewithChina.

not all integration experiences conform to this pattern: the case of Africa.

The roots of African integration lay in the effort tocorrectthegeographicalfragmentationbequeathedbycolonialism. Fragmentation resulted in smallmarkets,land-locked economies, and limited developmentoptions. In the 1980s, the Lagos Plan of Actionproposed the division of the continent into regionalintegration areas that would eventually constitute aunitedAfricaneconomy.

For themostpart,African integrationhasfocusedonimport tariffs. The inclusion of services and otherbehind-the-border issues, such as investment,competition policy and government procurement, hasproved contentious. A major limitation to Africanintegration progress has been its adherence to alinear integrationmodel. This process ismarked bythe stepwise integration of goods, labour and capitalmarkets, and eventually monetary and fiscalintegration.

Deep integration could improve Africa's record on regional cooperation.

Border measures are likely to represent a minorconstraint to regional trade in Africa compared withstructural economic shortcomings, such as a lack ofinfrastructure, an institutional framework, skills, and

economic diversification. Enhanced market accesswithoutthecapacitytoproducegoodsandservicestobenefit from those opportunities will fail to producehigher economic growth. At a regional level thesesupply-sideconstraintscouldbeaddressed inpartbya regional integration agenda that includes services,investment, competition policy and other behind-the-border issues. In short, a deep integration agendacouldaddresssupply-sideconstraintsmoreeffectivelythan an agenda that focuses almost exclusively onbordermeasures.

See page 122


14

Section e: The multilateral trading system and pTas

systemic effects of preferential tariff liberalization

A number of different mechanisms have been identified through which PtAs could foster or hinder multilateral trade opening.

Theprospectofpreferenceerosioncanbeaforceforsupporting further multilateral tariff reduction or forresisting it. The presence of political-economymotivations behind tariff reductions is another factorthat caneither foster or slowdown thediminution ofpreferential tariffs through trade-openingonanMFNbasis.

Opposition to further multilateral tariff reductionsmightalsoariseinthecaseofPTAsthatareconcludedto foster mutual cooperation on non-trade issues, orwhenPTAs increasetheadjustmentcostsassociatedwith multilateral opening, or when the PTA is trade-creatingfromtheperspectiveofexcludedcountries.

evidence on the systemic effects of regionalism on multilateral tariff reductions is inconclusive.

The literature that considers whether MFN andpreferential tariffscomplementorcompetewitheachother finds opposite results for developing anddevelopedcountries.Mostof thecontributions to thisliterature, however, do not distinguish between MFNtariffs that have been negotiated at the multilaterallevelandunilateraltariffreductions.

ExaminationofthecorrelationbetweenPTAformationandmultilateralismcannotproduceconclusive resultsbecause multilateral trade rounds are rare events,wheremoreorlessambitioustradeopeningscenariosarenegotiated.Multilateral tradenegotiationsarenotstructured to contemplate either full or zero tradeopening.Anecdotalevidencecanbefoundtosupporttheview thatPTAs facilitate furthermultilateral tradeopeningandtheoppositeviewthattheyhinderit.

Deep PtA provisions and the multilateral trading system

so far not much research has been conducted on the systemic effects of deep-integration provisions. the existing literature suggests that deep integration is often non-discriminatory.

Bytheirverynature,somedeepintegrationprovisionsarede facto extended tonon-membersbecause theyare embedded in broader regulatory frameworks thatapplytoalltradingpartners.Insuchcases,multilateralregulation may not be necessary. PTAs may also

directly refer to WTO rules on deep integrationmeasures, automatically supporting the multilateraltradingsystem.

Severalmechanismssupportingfurthertradeopeningare found in PTAs. These include non-party MFNclauses, a tendency to use template approaches thatreplicate trade rules, and domino effects pointing inthe direction of the progressive extension ofpreferentialmarketaccess.

Production chains can alter political-economy forces in favour of the adoption of trade measures that comply with the principle of non-discrimination.

Final good producers sourcing their imports throughinternational value chains are likely to support theharmonization of rules of origin across PTAs, forinstancethroughtheadoptionofrulesofcumulation.

The international fragmentation of production mayalsobeadriverofdeepintegrationprovisionsthatareconsistentwiththeprinciplesofthemultilateraltradingsystem, such as international standards andmultilateralrulesontraderemedies.

some deep provisions in PtAs can, however, contain discriminatory aspects, creating a tension with the multilateral trading system.

Theriskof tradediversionmayextendbeyondtariffs,forexampletotheareaofanti-dumping.Anti-dumpingprovisionsinPTAsmayresultinmembersbeingsparedfromanti-dumpingactionsandanincreasedfrequencyof anti-dumping actions against non-members.Moreover, many PTAs exclude the imports of PTApartnersfromglobalsafeguardactions.

Lock-in effects of regulatory harmonization within a given PtA may have negative systemic effects.

Competing PTAs with incompatible regulatorystructures and standards may lock in members to aparticular regime, undermining the principles oftransparency and predictability of regulatory regimesand making movement towards multilateral tradeopeningcostly.

the non-discriminatory nature of deep provisions might in principle create political-economy and third-country resistance to further multilateral opening.

If preferential liberalization is non-discriminatory innature, it might be opposed by political-economyforces because highermarket shares (and profits) intheothermembersmarketmightbemorethanoffsetby the loss of domestic profits vis--vis firms frompartnersandnon-members.

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Concerns over overlapping jurisdiction between the Wto dispute settlement system and the dispute settlement mechanisms of PtAs have received considerable attention in the academic literature.

The possibility that dispute settlement procedures inmore than one forum can give rise to conflictingjudgementshasbeendiscussedasapotentialsourceofconcern.TheissuehasbeenraisedonlyinahandfulofWTOdisputes.Areviewof thedisputesbrought tothe WTO reveals that members continue to use theWTO dispute settlement system to resolvedisagreementswiththeirPTApartners.

seeking coherence between PtAs and the Wto

GAtt/Wto provisions provide exemptions under certain circumstances from the mFn principle for PtAs.

Surveysoftheapplicationoftheseprovisionssuggesta relatively tolerant attitude towards PTAs. Theprovisions themselves are widely regarded asincomplete and lacking in clarity. Recently, attentionhasfocusedon improvingtransparencyandtheDohaRound negotiations have resulted in the introductionon a provisional basis of a new transparencymechanism.

The fact that the Transparency Mechanism forRegional Trade Agreements is the only result of theDohanegotiationsthathasbeenallowedsofar togoforwardindependentlyofthefullresultsoftheRoundsuggeststhatWTOmembersareawareoftheneedtobetterunderstandwhatregionaltradeagreementsareabout.

the quest for coherence between regionalism and multilateralism is nothing new.

Until recently, ensuring coherence was broadlyunderstoodasacceptingthatPTAsandthemultilateralsystem could complement each otherwhile imposingdisciplines aimed at minimizing the negative effectsthat PTAs could have. Approaches to improvingcoherencefocusedontheweaknessesofmultilateraldisciplinesandhowtheycouldbefixed.

RecentdevelopmentsinPTAactivitymaywellchangethe perspective on coherence. Beyond the fact thatPTA activity has accelerated noticeably since 1990,what may challenge the current thinking is that thenewPTAs, or at least someof them, are qualitativelydifferentfromtheoldones.

Some of the new PTAs focus more on reducingbehind-the-border barriers than on extendingpreferentialtariffs.Giventhatpreferentialagreements

involvingsuchmeasuresdonot typically induce tradediversion, their systemic implications cannot beanalysed using the traditional stumbling blocks/building blocks framework. Moreover, the politicaleconomy of new PTAs is different from that ofpreferentialtariffs.

new international trade rules are being developed outside the Wto, with attendant risks of exclusion and additional trade costs arising from overlapping and possibly competing regulatory structures.

Whether and how these new challenges might beaddressed is an open question. The principle ofsubsidiarity, which states that regulatory regimesshouldbeasdecentralizedaspossible,couldbeusedtoassesswhethermeasuresagreedatthebilateralorregionallevelneedtobeincorporatedinamultilateralsetting.

A number of different approaches have been proposed for improving coherence between PtAs and the multilateral trading system.

Theremaybeacaseformaintainingseparateregimesfor regional and multilateral cooperation whereparticulartypesofcooperationaremoreappropriatelymanaged at the regional rather than the multilaterallevel.Bythesametoken,thereareissuesthatcannotbe addressed adequately at the regional level. Inbetweenthesetwoextremes,thecoherencequestionarises.

Proposals can be grouped under four headings:accelerating multilateral trade opening; fixing thedeficiencies in theWTO legal framework; adopting asofterapproachasacomplementtotheexistinglegalframework; multilateralizing regionalism (extendingexisting preferential arrangements in a non-discriminatory manner to additional parties). Theseapproachesarenotmutuallyexclusive.TheyallaimatmakingsurethatPTAscontributetotradecooperationandopeninginanon-discriminatorymanner.

LoweringMFNtariffswouldreducediscriminationandthereby blunt the adverse effects of PTAs. However,reducing all tariffs to zero does not seem to bepolitically feasible in thepresentcontextand itwouldnoteliminateallpotentiallyadverseeffectsofdeeperintegration measures. Moreover, the scope for far-reaching action in this domain is limited by the lowaveragelevelofexistingpreferentialtariffs.

TheDohaRoundincludesamandatetonegotiatewitha view to clarifying and improving disciplines andprocedures under the existing WTO provisionsapplying to regional trade agreements. Whilenegotiationsontheproceduralissueshaveresultedinthe adoption on a provisional basis of the newtransparency mechanism for regional trade


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agreements,negotiationsonruleshavenotadvanced.These difficulties conform to a long-standing patternoflimitedprogress.

Therationaleforusingasoftlawapproachwouldbeto allow WTO members to better understand theirrespective priorities and interests, with a vieweventually to unblocking progress towards legalinterpretations of particular provisions that wouldensure coherence.However, the soft lawapproach isnotwithoutriskassoftlawandhardlawcouldbecomeantagonistictooneanotheriftheunderlyingconditionsforcooperationareabsent.

As a result of global production sharing, new forcesfavourabletothemultilateralizationofregionalismmayhave emerged. The extent to which deep integrationmeasures inPTAshave thepotential togenerate thesame sort of costly spaghetti/noodle bowl aspreferentialtariffsisstillamatterfordebate,buttheremaybearolefortheWTOtoreducethesetransactioncosts.

See page 164

Conclusions

An over-arching conclusion of this report is thatregional and multilateral approaches to tradecooperationneednotbeincompatible,butneithercanthey be seen simply as arrangements that serve thesamepurposeorsatisfy thesameneeds.Support foran increasingly outward-looking and inclusive globaltradingorderhasbeenstrong in theperiodsince theendof theSecondWorldWar,and thisgrowingtrendtowards openness has manifested itself throughunilateral, bilateral, regional and multilateralapproaches.

The spread of deep PTAs and the weightier role ofnon-tariff commitments have important implicationsfor how to evaluate the role of PTAs and how theyinteractwiththemultilateraltradingsystem.Thesheernumber of PTAs and continuing momentum towardsestablishingmoreof themsuggest that theyarehereto stay. They respond to a range of economic andpolitical needs. Governments will need to find acoherentwayoffashioningtradepolicyattheregionalandmultilateral level. Thismeansensuring thatPTAsand the multilateral system complement each otherandthatmultilateraldisciplinesminimizeanynegativeeffectsfromPTAs.

See page 196

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Endnotes1 Thesefigureshavebeencalculatedexcludingintra-EUtrade.

2 Ifintra-EUtradeisincluded,30percentofworldtradeispreferential.

3 Thisfigureiscurrentasof1March2011,countingnotificationsforagreementsthatarecurrentlyinforce.

Global trade flows rebounded strongly in 2010 following their collapse in 2009. The rise in the volume of goods exports in 2010 was the largest on record, enabling world trade to return to its pre-crisis level but not its long-term trend. Economic conditions continued to improve in both developed and developing economies, but the recovery of both trade and output proceeded more slowly in developed countries.

I. World trade in 2010

Contents A. Introduction 20

B. the state of the world economy and trade in 2010 22

Appendix tables and charts 31


20

a. IntroductionWorld trade recorded its largesteverannual increasein2010asmerchandiseexportssurged14.5percent,buoyedbya3.6percentrecovery inglobaloutputasmeasured by gross domestic product (GDP) (seeFigure 1). Both trade and output grew faster indevelopingeconomiesthanindevelopedones.Exportsin volume terms (i.e. in real terms, accounting forchangesinpricesandexchangerates)wereup13percent in developed economies while the increase fordeveloping economies was nearly 17 per cent. Thedifferencebetweentradeofdevelopedanddevelopingeconomieswasevengreaterontheimportside,wheredeveloped economies' imports rose by 11 per centcomparedwith18percentintherestoftheworld.

The factors that contributed to the unusually large12percentdropinworldtradein2009mayhavealsohelped boost the size of the rebound in 2010. Theseinclude the spread of global supply chains and theproduct composition of trade compared with output.Global supply chains cause goods to cross nationalboundariesseveraltimesduringtheproductionprocess,whichraisesmeasuredworldtradeflowscomparedwithearlierdecades.Thequantificationofthiseffectwouldrequire data on trade in value added that are notcurrentlyavailable.Thegoodsthatweremostaffectedby the downturn (consumer durables, industrialmachinery,etc.)havealargershareinworldtradethanin world GDP, which increased the magnitude of thetradeslumprelative toGDP in2009,andwhichhadasimilarpositiveeffectduringtherecoveryof2010.

Higher prices for primary commodities and theextraordinary growth of trade in developing Asia

helped boost the combined share of developingeconomies and the Commonwealth of IndependentStates (CIS) inworldexports to45percent in2010,itshighestever.

China in particular made an outsized contribution tothe recovery ofworld trade in2010, as the country'sexportsincreasedbyamassive28percentinvolumetermsandimportsswelledbymorethan22percent.

1. Puttingthetraderecoveryintoperspective

Although thegrowth ofworld exports in2010was thehighestonrecordinadataseriesgoingbackto1950,itmighthavebeenevenhigheriftradehadquicklyrevertedtoitspre-crisistrend.Thisdidnothappen.Thereboundwas strong enough for world exports to recover theirpeaklevelof2008,butitwasnotstrongenoughtobringaboutareturntothepreviousgrowthpath(seeFigure2).

The3.6percentgrowthrateofworldGDPfor2010isalsolessrobustthanitmightappearatfirstglance. Itwas above its average rate of 3.1 per cent between1990and2008,but itwas far froma record. In fact,world GDP growth equalled or exceeded 4 per centseveral times in recent years, including 1997, 2000,2004 and 2006. Considering the depressed level ofworld output in 2009, growth in this range or higherwouldnothavebeensurprisingin2010.

A number of factors combined to make trade andoutput grow more slowly than they might otherwisehave done. First, curtailment of fiscal stimulus

Figure1: Growth in volume of world merchandise trade and GDP, 2000-10 (Annualpercentagechange)

Source:WTOSecretariat.

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measures in many countries dampened economicactivity in the second half of the year. Europeangovernments in particular moved towards fiscalconsolidation in an attempt to reduce their budgetdeficits through a combination of spending cuts andrevenue measures, with negative consequences forshort-termgrowth.

Secondly, although oil prices stabilized at aroundUS$78/barrel in2010, theywerestillhighby recenthistorical standards (e.g. oil prices averagedUS$31/barrelbetween2000and2005).Priceswerebelow theUS$96/barrel average seen in 2008, butthey were also up 30 per cent from 2009, raisingenergycostsforhouseholdsandbusinesses.

Finally, persistent unemployment prevented domesticconsumption from rebounding more strongly indeveloped countries and limited income growth andimport demand. The Organisation for EconomicCo-operation and Development (OECD) averageunemploymentratewas8.6percentin2010(upfrom6.1 per cent in 2008), and unemployment remainedatornear9percent in theUnitedStatesthroughouttheyear.

The record expansion of trade and the revival ofeconomic activity in 2010 were certainly welcomedevelopments, but their importance should not beoverstated.Despite the rebound, the negative impactofthefinancialcrisisandglobalrecessionarelikelytopersistforsometime.

Figure2: volume of world merchandise trade, 1990-2010 (Indices,1990=100)


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B. The state of the world economy and trade in 2010

1. Economicgrowth

World GDP at market exchange rates expanded3.6percentin2010,oneyearafteranunprecedentedcontraction of 2.4 per cent that accompanied thefinancialcrisisin2009.Outputofdevelopedeconomiesrose 2.6 per cent in 2010 after falling3.7 per cent in 2009, while the rest of the world(including developing economies and the CIS) grew7.0percent,upfrom2.1percentin2009(seeTable1).

Growthwas stronger in the first half of the year, butweakened in the second half as the sovereign debtcrisisaffectingsmallereuroareaeconomiesrestrainedeconomicgrowth,especiallyinEurope.

Althoughdevelopingeconomiescollectivelyavoidedanoutright decline in 2009, many individual economiessawtheirGDPcontract,forexampleSouthAfrica,Chile,Singapore and Chinese Taipei. However, all of theseeconomiesreturnedtopositivegrowthin2010,andtheonly large developing country that remained mired inrecessionwastheBolivarianRepublicofVenezuela.

GDPgrewfasterindevelopingAsia(8.8percent)thaninotherdevelopingregions lastyear,withChinaand India

registeringstrongincreasesof10.3percentand9.7percent, respectively.South andCentralAmerica also sawvigorousgrowthof5.8percent,drivenbyBrazilsstrong7.5 per cent upturn. However, Africa had the fastestaveragerateofGDPgrowthofanyregionover the lastfiveyears(4.7percentbetween2005and2010).

Developed economies grew more slowly thandeveloping economies, but some performed betterthan others. Concerns about the possibility ofsovereign defaults in Greece, Ireland, Portugal andSpainbroughtrenewedfinancialmarketinstabilityandfiscalausterityinthesecondhalfof2010,whichheldEuropesgrowthratedownto1.9percent,theslowestof any region. The economies ofGreece, Ireland andSpain all contracted in 2010, as did Icelands, whichwashitbyabankingcrisisin2008.

ThemajorexceptiontothebelowaverageGDPgrowthin Europe was Germany, whose 3.6 per cent growthrate outpaced all euro area economies and allEuropean Union members except for Sweden andPoland. According to OECD National AccountsStatistics,Germanysnetexportsofgoodscontributed1.4percenttoits3.6percentGDPgrowth,or40percent of the total increase. By comparison, domestic

Table1: GDP and merchandise trade by region, 2007-10 (Annualpercentagechange)GDP exports Imports

2008 2009 2010 2008 2009 2010 2008 2009 2010

World 1.4 -2.4 3.6 2.2 -12.0 14.5 2.2 -12.8 13.5

north America 0.1 -2.8 3.0 2.1 -14.8 15.0 -2.4 -16.7 15.7

UnitedStates 0.0 -2.6 2.8 5.8 -14.0 15.4 -3.7 -16.4 14.8

south and Central Americaa 5.1 -0.2 5.8 0.8 -7.9 6.2 13.2 -16.3 22.7

europe 0.5 -4.0 1.9 0.2 -14.1 10.8 -0.6 -14.2 9.4

EuropeanUnion(27) 0.5 -4.2 1.8 0.0 -14.5 11.4 -0.9 -14.2 9.2

Commonwealth of Independent states (CIs) 5.5 -7.1 4.3 2.0 -5.2 10.1 16.4 -25.6 20.6

Africa 4.8 2.1 4.7 1.2 -4.2 6.5 14.6 -5.0 7.0

middle east 5.3 0.8 3.8 3.5 -4.3 9.5 14.2 -7.8 7.5

Asia 2.8 -0.2 6.3 5.5 -11.2 23.1 4.7 -7.5 17.6

China 9.6 9.1 10.3 8.5 -10.5 28.4 3.8 2.9 22.1

Japan -1.2 -6.3 3.9 2.2 -24.8 27.5 -1.0 -12.2 10.0

India 6.4 5.7 9.7 14.4 -6.8 19.9 17.3 -1.0 11.2

Newlyindustrializedeconomies(4)b 1.9 -0.8 7.7 4.9 -5.7 21.3 3.5 -11.4 18.0

memo: Developed economies 0.2 -3.7 2.6 0.8 -15.1 12.9 -1.2 -14.4 10.7

memo: Developing and CIs 5.7 2.1 7.0 4.2 -7.8 16.7 8.5 -10.2 17.9

aIncludestheCaribbean.bHongKong,China;RepublicofKorea;Singapore;andChineseTaipei.



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finalconsumptionexpenditureonlycontributed0.7percenttoGDP,or19percentofthetotalincrease.

GDPgrowthintheUnitedStateswasmoresubdued,at2.8percentin2010,whileJapanswasup3.9percent.However,theJapaneserecoveryshouldbeseeninthecontext of the 6.3 per cent drop in output that thecountryexperienced in2009, themostseveredeclineamong leading industrialized economies. Japan alsoceded the position of the worlds second-largesteconomytoChina,measuredindollarterms.Intermsofincomeperhead,however,itmaybenotedthatJapansper capita GDP was US$ 44,800 in 2010, comparedwithafigureofUS$4,800forChina.

2. Merchandisetradeinvolume(i.e.real)terms

Worldmerchandiseexportsinvolumeterms(i.e.excludingtheinfluenceofpricesandexchangerates)rose14.5percentin2010,whileworldimportsgrew13.5percent.Inprinciple, world exports and imports should increase atroughly the same rate,with somediscrepancies due todifferences in data recording across countries. WorldtradeasmeasuredbyexportsgrewfourtimesasfastasglobalGDPin2010,whereastradenormallygrowsabouttwiceasfastasGDP(seeTable1).

The uneven recovery in output produced an equallyuneven recovery in trade. While world merchandiseexports rose14.5 per cent in volume terms, thoseofdevelopedeconomiesincreasedby12.9percent,andcombined shipments fromdeveloping economies andthe CIS jumped 16.7 per cent. Imports of developedeconomies grew more slowly than exports last year(10.7 per cent compared with 12.9 per cent) whiledevelopingeconomiesplus theCIS saw theoppositehappen (17.9 per cent growth in imports comparedwith16.7percentforexports).

OnlyinAsiaandNorthAmericadidexportsgrowfasterthantheworldaverage(15.0percentand23.1percent,respectively),whereasslowerthanaveragegrowthwasrecorded in Europe (10.8 per cent), the CIS (10.1 percent), the Middle East (9.5 per cent), Africa (6.4 percent)andSouthandCentralAmerica(6.2percent).

On the import side, faster than average growth wasobserved in South and Central America (22.7 percent),theCIS(20.6percent),Asia(17.6percent)andNorthAmerica(15.7percent)whileslowergrowthwasreported in Europe (9.4 per cent), the Middle East(7.5percent)andAfrica(7.1percent).

Asia's rapid real export growth in 2010 was led byChinaandJapan,whoseshipments to the restof theworld each rose roughly 28 per cent. Chinas tradeperformance ismore impressivewhen one considersthat thedecline in thecountrysexports in2009wasless than half that of Japan (11 per cent comparedwith 25 per cent). Meanwhile, the United States andthe European Union saw their exports growingmoreslowlyat15.4percentand11.4percent,respectively.Importswereup22.1percent in real terms inChina,14.8 per cent in the United States, 10.0 per cent inJapan,and9.2percentintheEuropeanUnion.

Regions that export significant quantities of naturalresources(Africa,theCIS,theMiddleEastandSouthAmerica)all experienced relatively lowexport volumegrowthin2010,butverystrongincreasesinthedollarvalue of their exports. For example, Africas exportswereup6percentinvolumeterms,and28percentindollarterms(seeAppendixTable1).

An explanation for this can be seen in rising primarycommodity prices, which resumed their upwardtrajectory in 2010, after plunging in 2009. Table 2illustrates commodity price developments in the lastfew years. Despite recent volatility, the overall trendtowards higher prices is clear. Prices fell sharply in2009astheglobalrecessiontookhold,butthenshotupagainwhengrowthresumedin2010.Theincreasesweredriventoalargeextentbyrisingimportdemandon the part of fast-growing developing economiessuch as China and India. Between 2000 and 2010,prices for metals rose faster than any other primarycommodity group, with average annual increases of12 per cent, followed closely by energy with 11 percentgrowthperannum.Onlyagriculturalrawmaterialpricesstagnated,withincreasesofjust2percentperyearonaverageoverthelasttenyears.

Table2: export prices of selected primary products, 2000-10 (Annualpercentagechange)2008 2009 2010 2000-10 2005-10

Allcommodities 28 -30 26 10 9

Metals -8 -20 48 13 15

Beveragesa 23 2 14 9 12

Food 23 -15 12 6 8

Agriculturalrawmaterials -1 -17 33 2 5

Energy 40 -37 26 11 8

aComprisingcoffee,cocoabeansandtea.

Source:IMFInternationalFinancialStatistics.


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Incontrasttoprimaryproducts,pricesofmanufacturedgoodsroseverylittlein2010.Exportandimportpriceindices may differ substantially across countries, butasanexample,USnon-fuelimportpricesin2010werenearlyunchangedfrom2009(up2.7percentin2010afterfalling3percentin2009),andpricesofimportsfromChina (predominatedbymanufactures) declinedby0.1percent.Thismeansthatnominaltradefiguresfor natural resource exporters would be stronglydeflatedwhencalculating volumeestimates,whereasreal trade growth for countries that mostly exportmanufacturedgoodswouldberelativelyclosetotheirnominalgrowthrates.

Higher commodity prices lifted foreign exchangeearnings in regions that export a lot of primaryproductsandhelpedboostimports,especiallyinSouthand Central America, where the volume of importsjumped22.7per cent in2010, and in theCIS,whereimportswereup20.6percent.Africasimportvolumegrowthwasactuallythelowestofanyregionlastyear,at7.0percent,despite thecontinents largeshareoffuelsandminingproducts in its totalexports (64percent in 2009 and 71 per cent in 2008, whencommoditypriceswerehigher).

This relatively small increasemaybepartlyexplainedbythefactthatAfrican importsdidnotfallveryfar in2009(Africahadthesmallestdeclineofanyregionat-5.0percent),leavinglesspent-updemandforimportsinthefollowingyear.Also,notallAfricancountriesareimportant exporters of fuels and mining products,which saw the biggest price rises. Net importers oftheseproducts includeEthiopia,Kenya,MoroccoandTanzania, among others. These countries did notexperience the same windfall in export earningsenjoyedbynaturalresourceexporters.

Although South Africa is a net exporter of miningproducts, it is a net importer of fuels, whichrepresentedjustover21percentofthecountrystotalimports of goods in 2009 (the share is the same forKenyaandMorocco,whileTanzanias share is23percent).

3. Merchandiseandcommercialservicestradeinvalue(i.e.dollar)terms

AsaresultofrisingcommoditypricesandadepreciatingUS currency (down 3.5 per cent on average againstmajor currencies in 2010 according to US FederalReserve nominal effective exchange rate statistics),growth in the dollar value of world trade in 2010 wasgreater than the increase in volume terms. Worldmerchandise exports were up 22 per cent, rising fromUS$12.5trilliontoUS$15.2trillioninasingleyear,whileworld exports of commercial services rose 8 per cent,fromUS$3.4trilliontoUS$3.7trillion(seeTable3).1

The faster growth of merchandise trade comparedwith services can be partly explained by the smallerdeclineinservicesin2009(just12percentcomparedwith22percent formerchandise),which implies lessneed for faster-than-average growth to catch up toearliertrends.Theaverageannualgrowthinthevalueof merchandise trade and commercial services tradebetween2005and2010wasthesame,at8percent.

World exports of goods and commercial services incurrentUSdollarsreboundedmorequicklythanworldGDPin2010,andasaresulttheratioofworldtradetoGDP rose sharply after falling even more sharply in2009(seeFigure3).At124in2010,itremainedbelowits2008peakof132,butthe2010valuewasstillhighbyhistoricalstandards.

merchandise trade

Nominalmerchandiseexportsofdevelopedeconomiesjumped16percentin2010toUS$8.2trillion,upfromUS$7.0trillionin2009.However,becausethisrateofincreasewasslowerthantheworldaverageof22percent, the share of developed countries in worldmerchandise exports fell to 55 per cent, its lowestlevelever.

This falling share cannot be explained mainly as aresult of higher prices for primary products exportedpredominantlybydevelopingcountries.Thisisbecausethe latter prices were even higher in 2008 but the

Table3: World exports of merchandise and commercial services, 2005-10 (Billiondollarsandannualpercentagechange)

value Annual percentage change

2010 2008 2009 2010 2005-10

Merchandisea 15,238 15 -22 22 8

Commercialservices 3,665 13 -12 8 8

Transport 783 16 -23 14 7

Travel 936 10 -9 8 6

Othercommercialservices 1,945 13 -8 6 9

Source:WTOSecretariat.aIncludessignificantre-exportsorimportsforre-export.


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share of developed countries in world trade at thattimewasalsohigher,atnearly58percent.

Thestoryissimilarontheimportside,wheredevelopedeconomy imports increased 16 per cent to US$ 8.9trillion,buttheirshareinworldimportsdroppedto59percentfrom61percentin2009and63percentin2008.

AllWTOregionsexperienceddouble-digitincreasesinthedollar valueofbothexportsand imports in2010,thanks in part to rising prices for fuels and othercommodities(seeAppendixTable1).

The leading merchandise exporters in 2010 wereChina (US$ 1.58 trillion, or 10 per cent of worldexports), the United States (US$ 1.28 trillion, 8 percentofworld),Germany(US$1.27trillion,8percentofworld),Japan(US$770billion,5percentofworld)andtheNetherlands(US$572billion,3.8percentofworld). The United States overtook Germany tobecome the second-largest exporter, one year afterGermany ceded the top position to China (seeAppendixTable3).

ThetopmerchandiseimportersweretheUnitedStates(US$1.97trillion,13percentofworldimports),China(US$ 1.40 trillion, 9 per cent of world), Germany(US$ 1.07 trillion, 7 per cent of world), Japan(US$ 693 billion, 4.5 per cent of world) and France(US$606billion,4percentofworld).

If we ignore trade between the 27 European Unionmembers and treat the EU as a single entity, theleading exporters were the European Union(US$ 1.79 trillion, or 15 per cent of the total), China(13 per cent), theUnited States (11 per cent), Japan(6.5percent)andtheRepublicofKorea(4percent).

ThetopimportersexcludingtradewithintheEUweretheEuropeanUnion(US$1.98trillionor16.5percent

of world imports), the United States (16 per cent),China (12 per cent), Japan (6 per cent) and theRepublic of Korea (US$ 425 billion, 3.5 per cent).Hong Kongs total imports were actually larger thanKoreas (US$ 442 billion), but retained imports weresmaller(US$116billion)(seeAppendixTable4).

Commercial services

Worldexportsofcommercialservicesincreased8percenttoUS$3.67trillionin2010afterdropping12percentin2009(seeTable3).

Transportationwasthefastestgrowingcomponentofcommercialservicesexportsin2010,withanincreaseof14percenttoUS$782.8billion.Thefastergrowthof transport services is not surprising since they areclosely linked to trade in goods, which saw recordgrowth last year. Travel grew in line with commercialservices overall, whereas other commercial services(includingfinancialservices)advancedmoreslowly.

NorthAmericasexportswereworthUS$599billion in2010, while the value of the regions imports came toUS$ 471 billion. Exports and imports were both up9percentyear-on-year,butMexicolaggedontheexportsidewith5percentgrowth(seeAppendixTable2).

SouthandCentralAmericasexportsrose11percenttoUS$111billion,but importsgrewmore than twiceas fast (23 per cent) to reachUS$ 135 billion. Bothexports and imports of Brazil grew faster than theregional average (15 per cent and 35 per cent,respectively), with particularly high growth ratesobserved for imports of transport services (42 percent) and travel (51 per cent), partly due to thestrengthofthereal.

Europes exports and imports were both larger thanany other regions in 2010 (US$ 1.72 trillion and

Figure3: Ratio of world exports of goods and commercial services to GDP, 1980-2010

(Index,2000=100)

Source:IMFforworldGDP,WTOSecretariatforworldtradeingoodsandcommercialservices.

1980 1985 1990 1995 2000 2005 2010

140

130

120

90

80

70

60

110

100


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US$1.5trillion,respectively)buttheywerealsotheleastdynamic,withgrowthofjust2percentontheexportsideand 1 per cent on the import side. The reason forEuropespoorperformancecanbefoundintheweaknessof travel services,which declined by 3 per cent on theexportsideand2percentontheimportside.

In2010,exportsofCIScountriesincreasedby10percenttoUS$78billion.Theregions importsalsorose14percenttoUS$105billion.Russianexportgrowthof6percentwasdrivenbytransportservices.

Meanwhile, Africa exported US$ 86 billion worth ofcommercial services,11percentmore than in2009.The continents imports advanced 12 per cent toUS$ 141 billion. In South Africa, travel receiptsincreasedby24per centdue to the largenumberofforeignvisitorsattendingtheFIFAWorldCup.

The Middle East exported US$ 103 billion worth ofcommercial servicesand importedUS$185billion in2010. Exports and imports were both up 9 per centyear-on-year.

Finally, Asia exported US$ 963 billion worth ofservices in 2010 and imported a similar amount,US$961billion.Exportsand importswereup21percentand20percent, respectively.Transportwas themostdynamicsector,withagrowthrateof26percenton both the export and import sides. Travel exportsalsoroserapidlyat25percent.Also,othercommercialservices increased by 17 per cent, which nowrepresentshalfoftheregionsexports.

The United States exported US$ 515 billion incommercialservicesin2010,or14percentoftheglobaltotal, making it the worlds largest exporter. The othercountriesinthetopfivewereGermany(US$230billion,or 6 per cent of world exports), the United Kingdom(US$ 227 billion, also 6 per cent of world), China(US$ 170 billion, 5 per cent of world) and France(US$ 140 billion, 4 per cent of world) (see AppendixTable5).

TheUnitedStateswasalsotheleadingimporter,withpurchases ofUS$358 billion from foreign providers,equalto10percentofworld imports. Itwasfollowedby Germany (US$ 256 billion, 7 per cent of world),China (US$ 192, 5.5 per cent of world), the UnitedKingdom(US$156billion,4.5percentofworld)andJapan(US$155billion,4.5percentofworld).

China replacedFrance as the fourth-largest exporterof commercial services, while Germany overtook theUnitedKingdominsecondplace.Chinaalsomovedupthe rankingson the import side, takingover the thirdpositionfromtheUnitedKingdom.

When tradewithin the EU is excluded, the EuropeanUnion becomes the leading global exporter, withservices e

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