Regional trade agreements (RTAs)1 are an integral part of international trade, accounting for almost half of world trade and expected to grow further in the coming years. The number of Regional Trade Agreements (RTAs) has been steadily increasing over the last 15 years, as has the share of preferential trade in world trade. By the beginning of 2005 more than 250 RTAs had been notified to the World Trade Organization (WTO).2 In the 13 months between January 2004 and February 2005, 43 RTAs were notified to the WTO. For some WTO Members preferential trade now represents over 90 percent of their total trade.3 These agreements operate alongside global multilateral agreements under the WTO, and have both positive and negative effects. They can be attractive, for example, because it may be easier for a small group of neighbouring countries with similar concerns and cultures to agree on market opening in a particular area than to reach agreement in a wider forum such as the WTO. They can also offer new approaches to rule-making and so act as means on the way to a multilateral agreement. Prominent RTAs include:

AFTA ASEAN Free Trade Areas

ASEAN Association of Southeast Asian Nations

CAN Andean Community

CARICOM Caribbean Community and Common Market

CACM Central American Common Market

CEFTA Central European Free Trade Agreement

CEMAC Economic and Monetary Community of Central Africa

CIS Commonwealth of Independent States

COMESA Common Market for Eastern and Southern Africa

EAC East African Community

EAEC Eurasian Economic Community

ECO Economic Cooperation Organization

EFTA European Free Trade Association

GCC Gulf Cooperation Council

LAIA Latin American Integration Association

MERCOSUR Southern Common Market

MSG Melanesian Spearhead Group

NAFTA North American Free Trade Agreement

OCT Overseas Countries and Territories

PTN Protocol relating to Trade Negotiations among Developing Countries

SADC Southern African Development Community

SAFTA South Asian Free Trade Association

SPARTECA South Pacific Regional Trade and Economic Co-operation Agreement

UEMOA – WAEMU West African Economic and Monetary Union

 

 

With the establishment of GATT (now integrated into the WTO) after World War II, the multilateral approach was the preferred method of trade liberalization. But the establishment of regional free trade agreements has caused concerns about the rise of exclusionary trade blocks. In reaction, supporters of the multilateral approach have been reasserting their position. Yet unilateral, bilateral, regional, and multilateral trade liberalization are all valid means to open world markets. Each has its place, and no arrangement promising freer trade should be rejected without valid and acceptable causes.

As have been done in the past RTAs will continue to be negotiated, for a variety of economic, geo-political and security reasons. Preferential regional trade agreements already account for 43% of world trade, and this is expected to increase to 55% or more by 2006 if the RTAs currently in the pipeline are realised.

It is important to see that in the context of ever-expanding RTAs, what effect does regionalism have on multilateral trade negotiations? What role the WTO should play in moderating RTAs?

 

The WTO's Role in Regulating RTAs

In general, the WTO mandates that each member accord Most Favored Nation (MFN) status to all other WTO members. However, it allows an exception for regional trade initiatives that extend different terms of trade to participating countries, stipulating that an RTA must comply with two main requirements outlined in the GATT Article XXIV. First, the agreement must lower trade barriers within the regional groups. Second, the agreement cannot raise trade barriers for non-participating members. The Committee on Regional Trade Agreements, established by the WTO to examine each agreement, tries to reconcile the rules of the specific RTA with those governing multilateral trade agreements. The process becomes difficult in areas where WTO rules are vague and inconsistent, particularly those regarding dispute settlement and retaliation measures. The WTO has placed great emphasis on the need to tighten up its own policies in the face of RTA proliferation.

 

Should the WTO encourage RTAs?

Proponents of RTAs argue that they help nations gradually work towards global free trade by allowing countries to increase the level of competition slowly and give domestic industries time to adjust. In addition, RTAs can be valuable arenas for tackling volatile trade issues such as agricultural subsidies and trade in services. Political pressures and regional diplomacy can resolve issues that cause deadlock in multilateral negotiations. Proponents of RTAs, such as the US trade representative Robert Zoellick, a number of economists, and trade policy analysts, describe them as circles of free trade that expand until they finally converge to form expansive multilateral agreements. Other policy analysts express doubt about the benefit of booming RTAs. Some describe them as a complex web of competing trade interests that hinder multilateral agreement. Because RTAs create preference systems that transcend regional boundaries, some argue that political and economic tensions will lead to hostility and increased retaliation. The fear is that anti-dumping charges will increase and the dispute settlement process in the WTO will be complicated by unclear and conflicting regional trade laws. Additionally, RTAs may negatively impact global trade because regional preferences and rules of origin distort production by making location of production or source of raw materials the driving incentive. Others fear that RTAs prevent complete liberalization in the multilateral arena. Countries that benefit from regional trade agreements may be reluctant to expose themselves to the risks of opening their markets on a multilateral level if they expect relatively insignificant returns.

The recent pursuit of RTAs in Asia, among countries that had previously avoided preferential arrangements, is further evidence of the spread of regionalism (The motives for regionalism).

The spread of regionalism, including among countries that have traditionally avoided this approach, is due to a range of factors, including:

•  a concern not to be left out of the growing network of preferential deals;

•  a belief in the business community that, as product cycles get shorter and multilateral negotiating cycles get longer, quicker results may be obtained regionally;

•  the desire to use regional liberalisation as an accelerator for domestic reform;

• a concern on the part of government to use bilateral deals to promote underlying political or strategic objectives;

• or to pursue non-trade concerns, for example, related to core labour standards or protection of the environment. It is sometimes suggested that developing countries pursue RTAs for market access gains while developed countries seek deeper integration. This is too stark a distinction. Developed countries too have market access goals (including via regulatory issues like trade facilitation), while developing countries have a stake, via institution building, in deeper integration.

 

The question of how the positive and negative elements of bilateral or regional agreements play out, and how they relate to WTO agreements, is an issue of central importance for governments and for trade liberalisation talks.

An OECD study4 looked at this question, exploring the relationship between the multilateral trading system and RTAs in 10 sectors that are increasingly covered in regional agreements, ranging from services and labour mobility to environment and rules of origin. It concludes that regional trade agreements can complement, but cannot replace, coherent multilateral rules and progressive multilateral liberalisation.

The span of regional trade agreements considered in the OECD study is deliberately wide. It includes APEC (Asia-Pacific Economic Co-operation), a forum based essentially on peer pressure rather than binding rules; traditional free trade areas, such as NAFTA (North American Free Trade Agreement), customs unions, such as MERCOSUR (Mercado Común del Sur), with a common external tariff; and the EU, an economic and monetary union entailing integration going well beyond trade.

 

Regional or Multilateral Trade – justifications (Positive elements)

Following hypotheses deserves consideration:

• Bilateral and regional agreements are justified if they create more trade than they divert.

• Regional trade arrangements should not be accepted if they maintain high trade barriers to nonmembers.

• Overall wealth for both individuals and countries tends to grow when barriers to trade are removed.

• A multilateral approach to trade liberalization is the best for bringing discipline in the global trade and economic scenario.

 

Considering the above hypotheses, free trade areas or regional arrangements are justified under following conditions:

1.      They should not merely be exchanges of trade preferences, with countries simply removing their tariffs and other traditional barriers such as quotas. They should go beyond what can be done on a multilateral forum in the WTO.

2.      Regional arrangements should address internal barriers to trade.

3.      Regional arrangements should welcome other countries in the region to join.

4.      Both regional and multilateral arrangements should continue to develop.

 

Negative elements of regional and bilateral trade agreements

• The rapid proliferation of regional and bilateral trade agreements is undermining the core principle (non discrimination) of the multilateral trade system, raising several concerns.

• Regional trade agreements—RTAs—are absorbing scarce time and energy from negotiators.

• Many of the poorest WTO members are part of several regional and bilateral trade negotiations, confusing them from multilateralism.

 

• RTAs may also lock in competing and sometimes incompatible regulatory practices, making it harder to harmonize standards in the multilateral system at a later date. For example, some observers have expressed concerns that the imposition of TRIPs-plus rules on intellectual property rights will further erode flexibilities in the WTO TRIPS agreement—in particular in the area of compulsory licensing.

 

• A related concern is that a new generation of RTAs contains dispute-settlement provisions that have the potential to conflict with WTO dispute settlement.

 

• Slow progress of MTN (in the DDA) is increasing concern about whether the WTO is an effective place to do business. The economically advanced countries may conclude that WTO does not meet their constantly evolving business needs because of difficulties in negotiating and agreeing upon rigorous new standards in the multilateral context, thus hastening the trend toward regionalism. As the negotiating agenda extends into areas beyond tariffs, it has become more difficult to develop rules that reconcile the needs of the advanced trading nations with those of the less advanced countries. The WTO Customs Valuation agreement is a good example. An approach that suited the more advanced countries appears to be expensive and difficult for less advanced countries to implement.

 

• Differentiation in the application of WTO rules based on different implementation capacities appears to be difficult to reconcile in the face of an increasingly legalistic approach to rulemaking. Moreover, some members came away from Cancun with serious doubts about the ability to reach agreement by consensus among such a heterogeneous and large number of countries, although no clear alternative has been presented. There are therefore real challenges in making the mechanics of a truly representative trade negotiation work effectively.

 

• Finally, the legitimacy crisis of the global governance regime associated with WTO agreements. Although the trade focus of the WTO is understood  by many analysts as a plus, critics emphasize that unless the multilateral trade regime is able to address other important goals—such as poverty and the environment—while promoting a fair distribution of outcomes in a transparent manner, its political legitimacy will be increasingly contested in the streets and in parliaments around the world.

 

Conclusion

 

1. Bilateral or regional trade agreements that simply remove tariffs and traditional trade barriers are generally acceptable even if they divert some trade.

 

2.  Such agreements increase economic freedom.

 

3. It is difficult to determine before the fact what arrangements will be more trade diverting in the long run than the status quo.

 

4. Regional trade arrangement hold out better prospects for dealing with difficult trade problems than does the GATT/WTO mechanism, which usually must cater to the lowest common policy denominator. But the danger that deepening trade will simply deepen failed regulatory policies is also greater

 

5. Bilateral and regional trade arrangement create incentives for non-members to join. Through this incentive effect traditionally protectionist countries now come to understand the need to join Free Trade Area or remain poor or economically unstable. A similar relationship between regional and multilateral arrangements. NAFTA and the EU create an incentive for WTO countries to push ahead with further liberalization. If they do not, regional arrangements are likely to expand. It should be remembered that the American free trade areas with Israel and Canada resulted, in part, from the Reagan administration's frustration with multilateral trade problems. Another GATT round resulted in part because of the FTAs.

 

6. Unilateral, bilateral, regional, and multilateral trade liberalization are all valid means to achieve the goal that is the aim of market liberalisation: greater economic liberty.

 

7. Trade liberalization is, first and foremost, a country should remove its trade barriers unilaterally, whether other countries do so or not. Critics usually admit that, in general, freer trade, including bilateral and regional liberalization, improves the welfare of all countries by promoting wealth creation. But they also maintain that under certain circumstances, opening markets with only one or several trading partners could merely divert trade.

 

8. To judge the effects of bilateral or regional trade arrangements other than the multilateral GATT/WTO approach, it is necessary then to distinguish between two types of regional arrangements: free trade areas (FTAs), such as NAFTA, and customs unions, such as the EU, which maintain common barriers to non member countries. The greatest danger for trade distortions and compromises of economic liberty seems to lie in the latter.

 

9. There are concerns that RTAs are incomplete, unequal, or counter-productive that even those who support the recent proliferation of the agreements believe must be addressed. The volume of RTA activity stretches negotiation capacities to their limit, and in the case of developing countries, prevents them from actively participating in all proceedings. The WTO has partnerships with the United Nations and the World Bank to build capacity in smaller countries and give aid money to support participation in trade negotiations.

 

10. China has captured the world's attention because of its enormous market for imports, its high growth rates, and its new WTO membership. ASEAN countries have already begun competing for RTAs with China in the hopes of re-building economic stability and renewing growth that was shaken by the East Asian economic crisis of 1997. Mexico, and other Latin American countries that have specialized in manufactured goods, are feeling an export pinch as Chinese goods replace theirs in the US market. Lower wages, high productivity, and falling transportation costs have made China much more competitive than Mexico in exporting toys, shoes, and small electronics. On the other hand, countries that export agriculture commodities like Argentina and Brazil have benefited from the endless Chinese demand for soybeans, beef, grains, and produce. In response to continually frustrated efforts to open the US agriculture market, these countries may turn to China an alternative market.

 

11. Singapore has recently concluded an RTA with the US, and has been a major advocate of a RTA between ASEAN countries plus China, Japan, and South Korea slated for the next twenty years. Its active role and interest in regional agreements can be explained by the boom in trade between the Asian countries, and the desirability of access to the US market. Singapore is also an attractive country for RTAs because it has a fairly open and transparent economy, with good opportunities for investment in telecommunications, e-commerce, finance, and other services - sectors which were previously protected by trade barriers. The Singapore-US agreement has been heralded as a model for reducing barriers to investment and strengthening intellectual property rights. However, some NGOs that are particularly concerned with the environmental and economic impacts of deregulated investment argue that the agreement represents the importance of the US's interests over the welfare of Singapore. Questions remain about what effects intellectual property rights enforcement will have on public health.

 

12. There is a fear that in agreements formed outside the WTO, developing countries do not have the power of collective bargaining to negotiate RTAs (particularly bilateral agreements) that are in their best interest. For example, Chile concluded an agreement with the US in which it committed to lowering tariffs on agriculture products and deregulating investment, but could not gain any concessions from the US regarding farm subsidies. Since developing countries often depend on progress made in the WTO on sensitive issues it is important that multilateral negotiations retain a top priority.

 

13. Regional trade agreements continue to proliferate, as progress of WTO Multilateral trade negotiations is not up to expectation. Free trade blocs formed by agreements such as the North American Free Trade Agreement (NAFTA) and customs unions such as the European Union (EU) have allowed countries to lower trade barriers among neighbors and political allies, while retaining flexibility over which sectors to liberalize and which issues to negotiate.

 

14. It is observed that, there has been an uprise of regional trade agreements (RTAs): about 162 RTAs were in force as of 2002 with over half of those coming into existence after 1995. The WTO estimates that over 300 will be in effect by 2007. RTAs, such as the ones negotiated between the EU and Latin America, and between the US and the Association of South East Asian Nations, reflect a trend of trade liberalization outside of traditional regional boundaries. The collapse of the Cancun Ministerial Conference emphasized the difficulties inherent in that multilateral agreements and that many countries have focused on RTAs as the primary means of opening up international trade.

 

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1. Regional Trade Agreements refer to any of the following three when concluded between members of a regional group

•  A Free Trade Agreement (FTA) is where each party to the agreement reduces tariffs and other non-tariff barriers to trade, but maintains its own trade policy vis-à-vis third parties.

•  A Preferential Trade Agreement (PTA) is exactly the same as an FTA but the phrase highlights that the lowered trade barriers between partners are preferential to those offered to third parties.

•  A Customs Union (CU) is more politically ambitious requiring as it does a common external tariff and the harmonization of external trade policies.

 2. Regional Trade Agreements: Promoting conflict or building peace?

    Oli Brown, Faisal Haq Shaheen, Shaheen Rafi Khan, Moeed Yusuf, October 2005.

   http://www.iisd.org/security/tas

 

   Regional and Multilateral Trade Agreements: Complementary Means to Open Markets 

   Edward L. Hudgins

3. Crawford, J. and Fiorentino, R., “The Changing Landscape of Regional Trade Agreements”, Discussion Paper 8, 2005, World Trade Organization, Geneva.

 

4. POLICY BRIEF, OECD titled Regionalism and the Multilateral Trading System, The role   of regional trade agreements, August 2003.