Regional Trade Agreements

Regional Trade Agreements

Introduction

“We should be thankful for the PTA’s” Mr. Bergsten, one of the leading advocate of RTA’s, says. With the WTO ongoing multilateral Doha Round of trade liberalization negotiations still stalled six years into the talks, the preferential deals helpfully “keep the bicycle moving forward” (Greg 2007). RTA’s Helps in moving forward despite the turbulent journey of WTO. There has been a rapid growth in the number of regional trade agreements (RTA’s) in the recent years.

The decade of 1980 till early 1993 saw a race between regionalism and multilateralism which ended with the emergence of WTO. Who’s the winner? or is it the fact that both coexist and complement each other or is regionalism a threat for the multilateralism? (WTO). Answering these questions is ambiguous (Richard 1997). GATT the result of many conferences saw a body for regulating the international trading system and to promote fair trading system. It started to loose its effect in the late 70’s and early 80’s when super power collaborated in regionalism and trading blocs. Countries tend to involve in trading with there neighbours more then before. Of the whole lot of the members of WTO only three members are not a part to either one of the regional trade agreements (Bart and Bob 2000). Regional trade agreements or RTA is becoming a phenomenon throughout the world in all the continents from Asia to Africa. In Europe it is mainly the EU spreading to the central and Eastern Europe, the Baltic States, the Mediterranean and beyond. In Americas we have NAFTA and MERCOSUR which is going to be taken by the free trade for the Americas. . In Asia we have ASEAN free trade i.e. AFTA was launched.

Definition

The simplest way to define RTA’s is

Trade agreements between countries excluding the geographic proximity. It’s the set of agreements between countries not necessarily neighbours (Brat and Bob 2000). A more pragmatic approach based on empirical elements would suggest to conceive a region as the expression of economic cooperation between (often, but not always) Neighbouring states, which is mainly the result of preferential agreements between them. (Ref: httpwww.webasa.orgPubblicazioniPorfilio_2002_1.pdf).

All the RTA’s are reported to the WTO which checks its compatibility with the articles of GATT.

WTO rules and RTA’s

WTO rules require each member accord Most Favoured Nation (MFN) status to the other WTO member. However GATT article XXIV allows exceptions to the MFN clause for RTA’s as long as they meet certain conditions.

• Agreement must lower trade barrier with in the regional trading partners.
• Agreement must not raise trade barriers against non-members.
• Agreement is supposed to cover substantially all trade among RTA partners.

These conditions are seldom met by the countries joining hands in the RTA’s. However trade coverage of many RTA is incomplete excluding “sensitive” sectors from trade liberalisation, true in case of agriculture. A strong political system is needed for regulating the formation of RTA’s. Doha declaration did call for negotiation for improving procedures and disciplines under WTO provisions relating to RTA’s but nothing has come out of it yet.(Timothy 2004).

History

Regionalisation is a phenomenon that’s not new. In the past nations do tend to trade with each other. One country allowing its traders to move to other for trading purpose. Britain was the leader in this regard who initiated the free trade in 1860 in British colonies (Richard 1997). Prior to early 1980’s RTA’s were limited to Western Europe, among developing countries and trade preferences from developed to developing countries. The limited role of RTA’s meant that the architects of global trading system did not have to fear that regional agreements might undermine the multilateral process of trade liberalization. Effective RTA’s were limited to western Europe EC (European community) and European Free Trade Area (EFTA). USA the strong supporter of Multilateral trading system tried best but could not carry along EC with itself and ended its long opposition of the regional trade agreements. Realising the fact that RTA’s is the only mean left to keep the multilateral process floating US first involved in FTA with Israel and then with Canada. Later entering in an agreement of free trade area for Latin America.

Types of RTA’s

There are several views on the emergence of regional trade blocs or regional trade agreements.

• Political origins rooted in foreign policy, commercial policy, developing policy interest.
• RTA’s for gaining access to larger markets.
• For dealing with issues which can not be dealt with at multilaterally such as competition, environment, labour standards etc.(Parkash 2006)

The Top-down approach and the Bottom- up approach.

The Top-down or the macro level approach assumes that broad forces such as global political and global economic forces are responsible for the emergence of the regional trading blocs on the other hand the Bottom-up approach says local variables i.e. domestic political or intra regional forces are responsible for trade bloc’s formation (Bart and Bob 2000).

Coverage of RTA’s

RTA’s differ considerably in their scope and coverage. Most RTA’s go beyond slashing tariffs and attempt to reduce trade impediments by including provisions referred to as “WTO Plus”. These measures are much wider in scope, sometimes involving countries that are not parties to the WTO; using a “top down” or negative list approach (especially in services) as compared to a positive list approach in the WTO; measures intended to reduce trade impediments associated with standards, customs and border crossings; regulations and rules that improve the overall investment climate; etc. (Parkash 2006).

Growth of RTA’s

During the late 80’s the National Planning Association in USA reported the failure and loss of belief on GATT. The report suggests the movement of international economy to regional trade. (Brat and Bob 2000). This was the time when USA tied itself in regional agreements with countries like Israel and Canada. The patterns of the Trading system in the multilateral system were becoming regional. As pointed out above almost all the members of the WTO are engaged in some form of RTA’s. How important is the trade block depends on the countries involved. Of all the trading blocs EU, APEC and NAFTA are the biggest share holders of the world trade (Brat and Bob 2000). The growth of RTA’s has been very fast in the recent past since then. Half of the world trade flow is comprised of trade between regional trading partners and it is increasing. This figure was about 20% in the year 1960 (Parkash 2006). It has become a very prominent feature of the global trading system. Some 380 RTA’s have been notified to the GATT/WTO up to July 2007. Of these, 300 RTA’s were notified under Article XXIV of the GATT 1947 or GATT 1994; 22 under the Enabling Clause; and 58 under Article V of the GATS. At that same date, 205 agreements were in force. (Ref: http://www.wto.org). In the 13 months between January 2004 and February 2005, 43 RTA’s were notified to the WTO. In the words of Jo-Ann Crawford and Roberto Fiorentino of the WTO, “this [is] the most prolific RTA period in history” (Brown et al 2005). If we take into account RTA’s which are in force but have not been notified, those signed but not yet in force, those currently being negotiated, and those in the proposal stage, we arrive at a figure of close to 400 RTA’s which are scheduled to be implemented by 2010. Of these RTA’s, free trade agreements (FTA’s) and partial scope agreements account for over 90%, while customs unions account for less than 10 %. (Ref: http://www.wto.org). During the period from 1948 to 1995 GATT received about 195 notifications of regional trading agreements relating to trade in goods. After the WTO creation in 1995 additional 240 agreements covering trade in goods and services have been notified (Ref: http://www.wto.org). For some WTO Members preferential trade now represents over 90 percent of their total trade (Brown et al 2005).

On an average, each country belongs to six RTA’s, although there exists a considerable variation across regions and levels of development (Parkash 2006).

Evolution of Regional Trade Agreements in the world, 1948-2007

The following Chart shows all RTA’s notified to the GATT/WTO (1948-2007), including inactive RTA’s, by year of entry into force.

Source: WTO Secretariat

Why RTA’s

There are many critiques of RTA’s as a mean of trade liberalisation but RTA’s are going to be there. Any person will argue that multilateral trading system is the best for trading system as it promotes fair trading system and ensure non-discriminatory approach. It encourages each member to benefit from the trading system equally. Supporters of Multilateralism (WTO) believes that its rules for reducing trade barriers has helped in raising living standards, stimulate trade and boost world output The reality is some what different. The failure of Cancun ministerial talks of the WTO and some what lost Doha round suggest the failure of the WTO system. The Doha round came to a halt when the four powers fail to reach an agreement on commerce liberalisation (Ref: http://www.voxeu.org/index.php?q=node/317). One other argument is that negotiating trade agreements with a limited number of members is very easy then doing so with a 148 member lot where differences can be huge. Unlike the “lowest common denominator” solution offered at WTO negotiations RTA’s are more specific and according to needs of a specific set of countries. It is against this background that countries are moving to regional trade agreements. RTA’s provide a more practical and feasible approach to trade liberalisation (Timothy 2004). There are several driving forces behind why countries join regional trading agreements. Some of the key ones are

RTA’s support for Multilateralism

RTA’s is the ways forward looking at the current political environment and the status of the international trade regulating bodies. The supporters of RTA’s suggest that RTA’s give support to multilateralism and free trade. RTA’s contribute to both internal and international dynamics and enhance the idea of global liberalisation.

Internal dynamics is crucial for developing countries which help them in consistency of economic policies locking them in regional pacts which cannot be overthrown by new governments. Internationally RTA’s creates new ideas of liberalisation and incentives for other regions and countries to follow suit and thus speeding up the process of multilateralism (Sarman and Ratnakar 2007).

Providing a practise/teaching ground

The regional trade agreements provide a ground for the countries involved in the agreements to learn the process of negotiation and trade liberalisation. Experience learned from removing trade barriers among a limited number of members can be used for trade talks at the multilateral or global trade talks. Similarly the experience learned from market opening and its effect on the local domestic economy for the member country in an RTA can be of great help in discussing these issues at the multilateral level.

Promoting political stability

RTA’s also has positive political effects in changing tense political situation between countries to normality. Trade and broader economic integration has created the European Union (EU) in which another war between Germany and France is literally impossible. Argentina and Brazil have used Southern Common Market (MERCOSUR) to end their historic rivalry, which had taken on nuclear overtones in recent decades. Central goals of Asia Pacific Economic Commission (APEC) include anchoring the United States (US) as a stabilising force in Asia and forging institutional links between such previous antagonists as Japan, China and the rest of East Asia3. One could also hope that the political rivalry between India and Pakistan is laid to rest after the formation of SAFTA leading to deeper economic integration in days to come (Sarman and Ratnakar 2007).

Promoting Good Governance

RTA’s also helps in promoting good governance, democracy and rule of law. These are issues which are of great importance for poor nations. They help in promoting transparency in government actions. The 2000 agreement between EU and ACP (African Caribbean and Pacific) is based on three essential points of human rights, democracy and rule of law. If any of these gets violated preferential access might be cancelled (Brown 2005). In general the RTA’s are paving the way to good governance in countries where there is unstability, violation of human rights, and no governance of law.

Help for poor countries

RTA’s provides a way of helping poor countries bringing up there financial status. Rich countries are involving in RTA’s with developing third world countries that would have little effect on the economies of rich ones but can be of great help to the developing country.

Promoting global economy

Economist suggests that RTA’s could have positive effects on global economy if RTA’s are open for trade from outside. Baldwin 1995 identifies the domino theory of global free trade extension through PTA’s. Baldwin suggests each trade agreements provides incentives for countries to join provided they are allowed to join. Initialy countries find it less attractive. Then they join in the trading agreements feeling for it. After some time yet another country join hands with the agreements and following suite yet another join in. This pattern continues and will eventually in the end the PTA become global. This theory is derived from EU expansion. This theory has lead to the phenomenon of OPEN REGIONALISM.

Impact on Trade

RTA’s have had a great effect on the trade of the countries involved in the trading blocs. Several studies like the one carried out by Joen and Stone (2000) about Association of Southeast Asian Nations (ASEAN) and its impact on trade and investment in Asian-pacific economies. They found that intra-bloc trade between ASEAN increased. Similar is the case with MERCOSUR, the regional trade agreement between the countries of southern Latin America where in the decade between 1990 and 2000 the trade flows between the MERCOSUR members increased significantly. Exports rose from $4.1 billion to $17.1 billion and imports grew from $4.2 billion to $17.9 billion (Brown 2005). Similarly if we closely look into every regional agreement It has helped in increasing the trade with in the region.

References

• Edited Bart Kerremans & Bob Switky, The Political Importance of Regional Trading Blocs, Ashgate publishing ltd., 2000.
• Richard Pomfret, The Economics Of Regional Trading Arrangements, Clarendon Press Oxford, 1997.
• Webase.org, [online], available from http://www.webasa.orgPubblicazioniPorfilio_2002_1.pdf [assessed 27/11/2007].
• Parkash s, The Regional Trade Agreements: The New WTO Transperancy Mechanism, WTO News and Views; 2, 3; July – September 2006.
• Timothy e. Deal, Regionalism vs Multilateralism, EU Enlargement and World Trade: Implications for Business in Poland and OECD Countries, 1 April 2004.
• Voxeu.org, [online], available from http://www.voxeu.org/index.php?q=node/317 [assessed 20/11/2007].
• Sarman K and Katnakar A, Regional Debate, Repositioning SAFTA, South Asian Journal, 25/03/2007.
• Brown O, Haq F, Khan S, Moeed Y, 2005, Regional Trade Agreements: Promoting Conflict or Buliding Peace, Published by International Institute for Sustainable development.
• Greg Rushford, Asia Drags Down The Free Trade Cause,Far Eastern Economic Review. Hong Kong: Oct 2007. Vol. 170, Iss. 8; pg. 29, 6 pgs