Profileration of Regional Trade Agreements

I. Overview of Regional Trade Agreements

A trade agreement (also known as trade pact) is a wide ranging tax, tariff and trade
treaty that often includes investment guarantees. The most common trade agreements are
of the preferential and free trade types are concluded in order to reduce (or eliminate)
tariffs, quotas and other trade restrictions on items traded between the signatories.
Regional trade agreements have a general and a specific meaning. The general
meaning is that RTAs may be agreements concluded between countries not necessarily
located in the same geographical region. The specific meaning is that the parties to an
RTA offer to each other, by definition, more favorable treatment in trade matters than to
the rest of the world, including WTO Members.
Regional Trade Agreements: Basic Issues
RTAs can be broadly divided into five categories based on their level of
integration: Preferential Trade Agreements (PTAs), Free Trade Agreements (FTAs),
Customs Unions (CUs), Common Markets and Economic Unions.
A PTA is a union in which member countries impose lower trade barriers on
goods produced within the union, with some flexibility for each member country on the
extent of the reduction.
A Free Trade Area (FTA) is a special case of PTA where member countries
completely abolish trade barriers (both tariff barriers and non-tariff barriers) for goods
origination within the member countries. It should be clarified here that in most cases,
countries do not abolish trade barriers completely even within Free Trade Areas. Most
agreements tend to exclude sensitive sectors.
A Customs Union (CU) provides deeper integration that an FTA because, unlike
FTAs where member countries are free to maintain their individual level of tariff barriers
for goods imported from non-member countries, in a CU, member countries also apply a
common external tariff (CET) on a good imported from outside countries. The CET can
vary across goods but not across union partners. PTA, FTA and CU are called shallow
integration arrangements in trade literature.
Apart from these shallow arrangements there are two types of regional agreements
which provide Deep integration. The first deep integration stage is called Common
Markets, where member countries attempt to harmonize some institutional arrangements
and commercial and financial laws and regulations among themselves. A common market
also entails free movements of factors of production, i.e. removal of controls on free
movement of labor and capital. The final deep integration level is the Economic
Union where countries implement common economic policies and regulations and adopt
a single currency.
II. Effect of RTAs
Since the mid 1990s is a surge in Regional Trade Agreements (RTAs). However,
regional trade agreements can have both positive and negative effects.
2.1. Positive effects
RTAs 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 stepping stones on the way to a
multilateral agreement.
Initially WTO encouraged the growth of RTAs because it believed that regional
integration initiatives can complement the multilateral trade regime. Baldwin (1995)
finds that regionalism promotes and fosters multilateral trade liberalization by raising
incentives of outside countries to join the existing trading bloc.
RTAs provide a forum for promoting liberalization in a manner that is consistent
with their national interests. While MERCOSUR was established to become a customs
union, it also provides member countries a platform to discuss other issues such as
security and drug trafficking For example, MERCOSUR was established to decrease
tensions between Brazil and Argentina and also helped avert a coup in Paraguay
following reaffirmation by the presidents of the MERCOSUR member countries that
democracy was a condition for membership.
RTAs can also reduce trade in small arms and conflict resources such as illegal
timber and blood diamonds. For example, in 1998 the Economic Community of West
African States (ECOWAS) established the worlds first moratorium on light weapons and
placed a ban on the import of new weapons without the approval of ECOWAS members.
2.2. Negative effects
Regional agreements also risk making it harder for countries outside the region to
trade with those inside and may discourage further opening up of markets, ultimately
limiting growth prospects for all. Moreover, broad-based multilateral negotiations, with
more players and more sectors, will offer greater potential for mutual gain than limited
bilateral or regional deals.
The high proliferation of RTAs in global trade and increased diversion of trade
through this route is increasingly becoming a cause for concern for the multilateral
trading system under WTO. Regional trade agreements represent an important exception
to the WTO's principle of nondiscrimination. According to the WTO rules, countries
within a RTA can trade among themselves using preferential tariffs and easier market
access conditions than what is applicable to other WTO Member countries.
2.3. Trade creation and trade diversion
Regional trade agreements imply both trade liberalisation and trade discrimination. While
there is a near-consensus among economists that trade liberalisation is desirable, the same
cannot be said of trade discrimination. Such discriminatory trade liberalisation is
beneficial when it promotes a shift of resources from inefficient domestic suppliers to
more efficient producers within the region, i.e. when there is so-called trade creation.
In contrast, a trading bloc is likely to be harmful if it generates a shift of resources from
efficient external producers to inefficient producers within the region, i.e. when there is
so-called trade diversion.
Urata Shujiro and Okabe Misa examined the impacts of regional trade agreements
(RTAs) on commodity trade, with a particular focus on trade creation and diversion
effects. Based on the estimation of the gravity equation for commodity trade, dealing
with zero-trade flow and endogeneity problems, we analyze the impacts of various types
of RTAs involving 67 countries for 20 commodities during 1980-2006. They identified
that partial scope (PS) RTAs and RTAs among developing countries tend to cause trade
diversion. Taking tariff rates into consideration explicitly, our results suggest that trade
diversion is likely to be caused by the remaining tariffs on imports from non-members,
while trade creation would be caused by various factors besides the reduction in tariff
rates. As for specific RTAs, the EU is shown to have a trade creation effect in trade of
agricultural commodities, while the AFTA and the NAFTA have trade creation effects in
all types of machinery trade. These results seem to indicate that regional production and
distribution networks in machinery have been formulated thanks to the reduction of
tariffs under RTAs.
2.3.1. Trade creation
When a customs union is formed, the member nations establish a free trade area
amongst themselves and a common external tariff on non-member nations. As a result,
the member nations establish greater trading ties between themselves now that
protectionist barriers such as tariffs, import quotas, non-tariff barriers and subsidies have
been eliminated. The result is an increase in trade among member nations in the good or
service of each nation's comparative advantage. In other words, increase in trade causes
greater revenues.
Why is there such a dominance of trade creation? It seems that governments are
choosing their partners well. For example, variables that suggest greater gains from a
bilateral deal (such as proximity between the members, a similarity in their GDPs and a
large difference in their factor endowments) are also sharp predictors of whether the two
countries actually have a common RTA
Moreover, when countries form an RTA, their governments not only lower tariffs
vis--vis their RTA partners; they also tend to reduce tariffs on imports from countries
outside the bloc. Governments liberalise externally because they choose to there is no
reciprocity from the non-members. Such external trade liberalisation following an RTA
appears especially important in developing countries (Estevadeordal et al. 2008 analyse
Latin America in the 1990s). The lower external tariffs provide a double blessing. They
imply that RTAs are responsible for more trade liberalisation than they mandate
amplifying trade creation and for less trade discrimination than might be expected
limiting trade diversion.
2.3.2. Trade diversion
In seminal work, Viner (1950) shows that an RTA does not necessarily improve
members welfare. The preferential removal of tariffs may lead to trade diversion, where
imports shift away from the most efficient supplier to the country receiving preferential
treatment. This generates an inefficiency in world production, which is harmful to bloc
non-members. It can also hurt members, if the change in consumer prices, and therefore
in consumer surplus, is too small to outweigh the costs from the inefficiency. In contrast,
if the RTA leads to greater imports from the efficient suppliers within the bloc, consumer
gains outweigh the costs from production inefficiency and the agreement necessarily
improves members welfare. Such welfare analyses in the context of regional trade
agreements highlight the broader point that removal of one distortion in the presence of a
second distortion is not necessarily welfare-enhancing.
The spaghetti bowl crisis due to the fact that their exist different trading terms in
each RTAs and this leads to trade diversion among others, the spaghetti bowl is
comprised of customs unions, regional and bilateral free trade areas, common markets,
preferences, and miscellaneous trade deals.
2.4. Stumbling block and building blocks
Regionalism surges as it sweeps the world trading system as at when the
multilateral trade negotiations organized by the WTO, that is the Doha Round came to a
deadlock. This negative correlation raises the question of whether regional trade
agreements building block or stumbling blocks global trade liberalization. Until recently,
much of the discussion was at the purely theoretical level the so-called stumbling bloc
or building bloc debate. Trade blocs are stumbling blocks if they prevent or slow
multilateral tariff cutting, while they are building blocs if they accelerate or at least do not
hinder multilateralism.( Bhagwati 2008). Numerous mechanisms have been presented to
suggest that one or the other position is feasible/likely which include Empirical research
that supports this rationale for developing countries. But results for the US and the EU
indicate that they are less likely to reduce external tariffs on goods where preferences are
offered (Limao 2006). But since the tariffs of both the US and the EU are very low to
start with, and cannot be raised because of their WTO commitments, there is little room
for change anyway. However, The WTO risks a serious of its relevance if it continues to
shy away from the fact that multilateralism and regionalism is the key to global trade.
(Baldwin 2007).
III. Summary of procedure to implement the transparency mechanism on RTAs
3.1. Early announcement
Members participating in new negotiations aimed at the conclusion of an RTA
should inform the WTO Secretariat of such negotiations. Members which are parties to a
newly signed RTA should send to the Secretariat information on the RTA, including its
official name, scope, date of signature, any foreseen timetable for its entry into force or
provisional application, relevant contact points and/or website addresses, and any other
relevant unrestricted information.
3.2. Notification format for RTAs
The notification of an RTA by Members should take place as early as possible, in
general no later than the parties' ratification of the RTA or any party's decision on the
application of the relevant parts of an agreement and before the application of preferential
treatment between the parties. Parties should specify under which provision(s) of the
WTO agreements the RTA is notified and provide the full text and any related schedules,
annexes and protocols, in one of the WTO's official languages.
3.3. Procedures to enhance transparency
The consideration by Members of a notified RTA shall be normally concluded
within one year after the date of notification. The WTO Secretariat will draw up a precise
timetable for the consideration of the RTA in consultation with the parties at the time of
the notification. Parties to an RTA shall make data (described in detail in the Annex to
the Transparency Decision) available to the Secretariat, if possible in electronic format,
as soon as possible, but normally within a period of ten weeks (or 20 weeks in the case of
RTAs involving only developing countries) after the date of notification of the
agreement.
3.4. Notification of changes
Any changes affecting the implementation of an RTA, or the operation of an
already implemented RTA, should be notified to the WTO as soon as possible after
changes occur. The parties should provide a summary of the changes made, as well as
any related texts, schedules, annexes and protocols, in one of the WTO official languages
and, if available, in electronic format.
At the end of the RTA's implementation period, the parties shall submit to the
WTO a short written report on the realization of liberalization commitments in the RTA
as originally notified.
3.5. Factual abstracts
Article 22(b) of the Transparency Mechanism calls for a factual abstract to be
prepared by the Secretariat to present the features of RTAs for which the CRTA has
concluded the factual examination by 31 December 2006.
IV. Proliferation of RTAs
4.1. Proliferation of RTAs
WTO members (as, previously, GATT contracting parties) are bound to notify the
regional trade agreements (RTAs) in which they participate. Nearly all of the WTO's
Members have notified participation in one or more RTAs (some Members are party to
twenty or more). Notifications may also refer to the accession of new parties to an
agreement that already exists, e.g. the notification of the accession of Bulgaria and
Romania to the European Union Customs Union.
In the period 1948-1994, the GATT received 124 notifications of RTAs (relating
to trade in goods), and since the creation of the WTO in 1995, over 400 additional
arrangements covering trade in goods or services have been notified.

WTO statistics on RTAs are based on notification requirements rather than on physical
number of RTAs. Thus, for an RTA that includes both goods and services, we count two
notifications (one for goods and the other services), even though it is physically one
RTA. Nevertheless, figures on the physical number of RTAs (counting goods and
services together), are provide d in the last table below.
The following table shows all RTAs in force, sorted by Notification:
Accessions New RTAs Grand total
GATT Art. XXIV (FTA) 1 208 209
GATT Art. XXIV (CU) 7 10 17
Enabling Clause 2 34 36
GATS Art. V 4 115 119
Grand total 14 367 381

The following table shows all RTAs in force, sorted by Type of Agreement:

Enabling
clause
GATS
Art. V
GATT Art.
XXIV
Grand
total
Customs Union 8

10 18
Customs Union - Accession 1

7 8
Economic Integration Agreement

115

115
Economic Integration Agreement -
Accession

4

4
Free Trade Agreement 13

208 221
Free Trade Agreement - Accession 0

1 1
Partial Scope Agreement 13

13
Partial Scope Agreement - Accession 1

1
Grand total 36 119 226 381

The following table shows all physical RTAs in force, sorted by Coverage:

Goods 135
Services 1
Goods and Services 114
Grand total 250

4.2. Implication of proliferation of RTAs
This paper try to highlights some research findings carried out by Association of
Women International Trade, 2006. Their studies highlighted some of the RTAs'
implications to the world trading system, which today encompasses no fewer than 150
countries. Recent research we have carried out at the IDB targets these sweeping
questions and provides some preliminary answers:
RTAs and multilateral liberalization have a complements. In an analysis of the
past 130 years of international trade integration, the study found that the most potent
waves of RTAs have taken place against the backdrop of multilateral liberalization.
RTAs particularly in the post-war era have proliferated against the backdrop of surges of
multilateral trade agreements, and, indeed, during multilateral trade rounds. This suggests
that multilateral trade agreements are unlikely to abate interest in RTAs: indeed, should
the historical record particularly of the past 50 years be a guide, it could be argued that
RTAs would proliferate even more if meaningful multilateral agreements materialize.
Conversely, there is little evidence that the spread of RTAs would be inimical to the rise
or odds of concluding multilateral trade negotiations. Rather, RTAs can further
multilateralism by training a body of negotiators to accomplish more, undercutting
protectionist interests, galvanizing export lobbies, and placing pressure on outsider
countries to advance at the multilateral level.
For instance, the specter of strong Asian-Pacific Economic Cooperation (APEC)
forum and the establishment of the North American Free Trade Agreement (NAFTA) in
the early 1990s arguably induced outsiders to these schemes to conclude the Uruguay
Round. But it is also not clear that a deceleration in multilateral liberalization would
reduce the propensity for RTAs to spread. Regionalism has thrived during and after
multilateral liberalization, but it has also survived challenges to multilateralism.
The geography of RTAs shows few signs of transforming into exclusive
continental mega-blocs. There are various reasons for this, such as the record of
difficulties in forming such blocs, the rise of important production linkages between the
main world regions, and, notably, the growing body of transcontinental trade agreements.
Indeed, rather than multi-member regional integration schemes formed among
neighboring countries, today's RTAs are increasingly bilateral and transcontinental in
nature. Regional economies are becoming connected to partners in other continents, and
the future "RTA market" will likely take place among countries of across oceans. Indeed,
it seems that formation of exclusive RTA blocs was a more pressing prospect a century
ago than it is today; even if mega-blocs were to arise, partners within them would
necessarily be much more connected to the rest of the world than they would have been
just a decade ago. This should assuage concerns about a rise of a tripolar global trading
system.
While bilateralism is ascendant, concerns over the RTA universe's balkanization
into distinct agreements are not necessarily warranted. Particularly the RTAs formed by
some of the main traders, such as the United States, Mexico, and European Union,
respectively, are often based on similar blueprints and share adherence to the General
Agreement on Tariffs and Trade (GATT) and WTO rules. Furthermore and importantly,
most countries are today party to both RTAs and the WTO system, which should mean
that most countries have a stake in the success of both spheres of integration.
A detailed analysis of sectoral provisions in some two dozen of the world's most
important RTAs shows that RTAs are in general in line with global trade rules. GATT
Article XXIV stipulates that RTAs must eliminate tariffs on "substantially all trade"
between the members within a "reasonable length of time." Most RTAs meet the
commonly used interpretation of these benchmarks-liberalization of 90 percent of
products by the tenth year into agreement implementation. Although some outlier RTA
members (in general developing countries) and product categories (particularly sensitive
sectors-agriculture, textile and apparel, and footwear) trail the benchmark, RTAs' overall
record of liberalization appears more positive than two decades ago.
Most RTAs are also aligned with (and/or explicitly call for adherence to) GATT
and WTO rules other than those related to tariff liberalization, such as non-tariff
measures. Many RTAs also are "WTO plus", or incorporate a larger number and/or more
specific rules than are currently applied at the multilateral level. Some examples include
customs procedures, trade facilitation, and services-all incidentally areas where
improvements will enhance a country's trade not only with its RTA partners, but with all
of its trade partners. While some RTA disciplines, such as restrictive rules of origin, can
hamper RTAs' liberalizing potential, the global system of RTAs seems more robust than
just two decades ago. A further positive characteristic of today's RTAs is implementation:
unlike the rather half-hearted implantation of the past eras, many of today's agreements
are implemented as a standard operating procedure. In part this owes to the development
of credible dispute settlement mechanisms at the regional and multilateral levels.
There are theoretical reasons to believe that RTAs can serve as harbingers of
further cooperation between the member states. For instance, the positive externalities
generated by RTAs, such as lowered barriers to trade and expanded markets, can
augment the pay-offs from further regional rules and regulations in such areas as trade
facilitation. RTAs can also produce negative externalities, such as border congestion and
air pollution, which, in turn, can give rise to demands for cooperation for, say, the
establishment of regional transportation networks or cross-border environmental
protection.
V. Examples of RTAs
Among the best known are
4. The European Union
5. European Free Trade Agreement EFTA
1. North America Free Trade Agreement NAFTA
The North American Free Trade Agreement (NAFTA; French: Accord de libre-change
nord-amricain, ALNA; Spanish: Tratado de Libre Comercio de Amrica del Norte,
TLCAN) is an agreement signed by Canada, Mexico, and the United States, creating a
trilateral trade bloc in North America. The agreement came into force on January 1, 1994.
It superseded the CanadaUnited States Free Trade Agreement between the U.S. and
Canada. In terms of combined purchasing power parity GDP of its members, as of 2007
the trade bloc is the largest in the world and second largest by nominal GDP comparison.
NAFTA has two supplements: the North American Agreement on Environmental
Cooperation (NAAEC) and the North American Agreement on Labor Cooperation
(NAALC).
All remaining duties and quantitative restrictions were eliminated, as scheduled, on
January 1, 2008.
Provisions
The goal of NAFTA was to eliminate barriers to trade and investment between the U.S.,
Canada and Mexico. The implementation of NAFTA on January 1, 1994 brought the
immediate elimination of tariffs on more than one-half of Mexico's exports to the U.S.
and more than one-third of U.S. exports to Mexico. Within 10 years of the
implementation of the agreement, all U.S.-Mexico tariffs would be eliminated except for
some U.S. agricultural exports to Mexico that were to be phased out within 15 years.
Most U.S.-Canada trade was already duty free. NAFTA also seeks to eliminate non-tariff
trade barriers and to protect the intellectual property right of the products.
In the area of intellectual property, the North American Free Trade Agreement
Implementation Act made some changes to the Copyright law of the United States,
foreshadowing the Uruguay Round Agreements Act of 1994 by restoring copyright
(within NAFTA) on certain motion pictures which had entered the public domain.
Trade
The agreement opened the door for open trade, ending tariffs on various goods and
services, and implementing equality between Canada, USA, and Mexico. NAFTA has
allowed agricultural goods such as eggs, corn, and meats to be tariff-free. This allowed
corporations to trade freely and import and export various goods on a North American
scale.
Agriculture
From the earliest negotiation, agriculture was (and still remains) a controversial topic
within NAFTA, as it has been with almost all free trade agreements that have been signed
within the WTO framework. Agriculture is the only section that was not negotiated
trilaterally; instead, three separate agreements were signed between each pair of parties.
The CanadaU.S. agreement contains significant restrictions and tariff quotas on
agricultural products (mainly sugar, dairy, and poultry products), whereas the Mexico
U.S. pact allows for a wider liberalization within a framework of phase-out periods (it
was the first NorthSouth FTA on agriculture to be signed).
Achievement
NAFTA created the world's largest free trade area, which now links 450 million people
producing $17 trillion worth of goods and services.
Trade between the United States and its NAFTA partners has soared since the agreement
entered into force.
U.S. goods and services trade with NAFTA totaled $1.6 trillion in 2009 (latest data
available for goods and services trade combined). Exports totaled $397 billion. Imports
totaled $438 billion. The U.S. goods and services trade deficit with NAFTA was $41
billion in 2009.
The United States has $918 billion in total (two ways) goods trade with NAFTA
countries (Canada and Mexico) during 2010. Goods exports totaled $412 billion; Goods
imports totaled $506 billion. The U.S. goods trade deficit with NAFTA was $95 billion
in 2010.
Conclusion
It is no doubt that RTA partners especially developing countries are mindful of their
preferential access and also give concession to their partners who are never extended to
their WTO members but the limitations of asymmetric negations remain endemic and
may not displace multilateral trading system despite its stronghold. However, WTO
needs to draw a line and revisit the enabling clause on RTA.

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