## The Rise of Discriminatory Regionalism

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## Bibliographic details
- Authors: MICHELE RUTA
- Published: June 1, 2023

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### Overview
- Author: MICHELE RUTA, division chief in the IMF’s Strategy, Policy, and Review Department.
- Publication: F&D Magazine, June 2023.
- Central thesis: In an era of growing global tensions, regional trade alliances may shift from promoting integration toward building discriminatory barriers against nonmembers.

### Evolution of regional trade agreements (RTAs)
- Count and scale:
  - Fewer than 50 RTAs in 1990.
  - More than 350 RTAs today.
  - The 2018 African Continental Free Trade Agreement (AfCFTA) covers more than 1.3 billion people and is the world’s largest regional trade agreement.
- Depth and scope:
  - Pre-1990s typical agreements focused mainly on tariff liberalization and border issues (customs).
  - Since the 1990s, RTAs have become “deeper,” addressing regulations and nontariff measures and broadly regulating three overlapping policy areas:
    - Integration of goods, services, and factor markets and rules regulating areas such as tariffs, services, investment, and intellectual property rights.
    - Restrictions on governments’ ability to take action that could reverse economic integration, including regulatory barriers, sanitary measures, subsidies, and rules governing competition.
    - Protection of rights that could be diminished by market integration if regulations governing areas such as labor or environmental standards are not upheld.

### Effects on trade and nontrade outcomes
- Trade integration:
  - Deep RTAs increased trade between members by 40 percent on average (study cited).
  - Many recent RTA provisions are nondiscriminatory and have reduced costs for members and nonmembers alike.
  - Rules that increase competition, regulate domestic subsidies, or support adoption of international regulatory standards have been found to boost exports by nonmembers.
- Nontrade outcomes:
  - Provisions on investments, visa and asylum issues, and intellectual property protection have reduced the cost of cross-border activities, stimulating foreign direct investment, migration, and technology flows.
  - One study found that environmental provisions in RTAs prevented about 7,500 square kilometers of deforestation during 2003–14.
  - Unintended effects: RTAs without child labor provisions can reduce child employment and increase school enrollment; RTAs with child labor bans can shrink children’s wages and sometimes lead poorer households to send more children into the labor market to recoup lost income.

### Complementarity between regionalism and multilateralism
- Mechanisms of complementarity:
  - Societal supporters (for example, exporting firms) often favor both multilateral and regional integration.
  - WTO laws and dispute mechanisms form the foundation of many RTA laws; many RTAs restate existing WTO commitments and rely on WTO adjudication for enforcement.
  - Nondiscriminatory RTA commitments can promote both regional and multilateral integration.
- Implication:
  - In times of conflict, regionalism may be weaker because RTA laws would rest on shakier WTO laws and anti-integration domestic forces would oppose both regional and multilateral integration.

### Risks of discriminatory regionalism
- Historical precedent:
  - In the 1930s, discriminatory regionalism and protectionist measures reshuffled trade patterns; for the UK, imports from the British Empire rose from less than 30 percent at the beginning of the period to more than 40 percent at the end.
- Contemporary manifestations:
  - Surge of protectionist measures, such as local content requirements in subsidy programs and export restrictions targeting non-regional partners.
  - Use of stringent rules of origin to increase regional value content at the expense of extraregional inputs.
  - Leveraging RTAs for nontrade objectives: higher labor and environmental standards, adoption of domestic rather than global standards, or redirection of supply chains for national security reasons.
  - Example cited: an agreement signed at the end of March between Japan and the United States on certain critical minerals, characterized as limited in scope and different from deep RTAs of prior decades.
- Consequences:
  - Discriminatory practices are contrary to the spirit, if not the letter, of multilateral trade rules and could increase integration costs, hinder efficiency, and make regionalism less effective.

### Scenarios and outlook
- Continued deep, nondiscriminatory RTAs:
  - Would preserve integration between members and continue experimentation with new forms of integration.
  - Deep trade agreements that reduce market fragmentation should be encouraged, particularly in regions such as Africa with large development gains from a continental market.
- Shift toward discriminatory regionalism:
  - RTAs could weaken and grow more discriminatory if multilateral anchors erode, erecting protectionist walls against nonmembers.
  - Regionalism without multilateralism may be more exposed to disintegration forces.
- Conclusion:
  - There is no choice between regionalism and multilateralism; only a choice between integration and disintegration. A revival of multilateralism is necessary to complement RTAs in an age of conflict.

*Source: F&D Magazine, “The Rise of Discriminatory Regionalism,” Michele Ruta, June 2023.*

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_Source: https://www.imf.org/en/publications/fandd/issues/2023/06/the-rise-of-discriminatory-regionalism-michele-ruta_