8/4/2019 IB Class 10

1/32

Regional Trade

Agreements (RTAs)

T.J. Joseph

8/4/2019 IB Class 10

2/32

Definition

Regional Economic Integration refers to agreements

among countries in a geographic region to reduce,

and ultimately remove, tariff and nontariff barriersto the free flow of goods, services, and factors of

production between each other.

8/4/2019 IB Class 10

3/32

Definition

Regionalism: actions by governments to liberalize or

facilitate trade on a regional basis, sometimes through

free-trade areas (FTAs) or customs unions

In WTO context: countries in RTAs may not necessarily

belonging to the same geographical region

The simplest form is bilateral agreement formed

between two parties. This account about 80% of allRTAs in force

8/4/2019 IB Class 10

4/32

8/4/2019 IB Class 10

5/32

Definitions (cont)

A customs union is a free trade area with a common

external tariff. The participant countries set up

common external trade policy against nonmembers.

Eg., EUstarted as a CU but moved to large integration

Andean Pactbetween Bolivia, Colombia, Eucador, and Peru

imposes a common tariff of 5 to 20 percent on products

imported from outside.

SACU,

Countries choose to form FTAs, if their economical

structures are complementary. They will choose customs

union, If they are competitive.

8/4/2019 IB Class 10

6/32

Definitions (cont)

Common Market: Economic integration whereby countriesremove all barriers to trade and the movement of labor

and capital between themselves but erect a common trade

policy against nonmembers.

Integrates the elements of both FTAs and Customs Unions

E.g., for years EU functioned as a common market

MERCOSUR, the South American groupings of Argentina,Brazil, Paraguay, and Uruguay

8/4/2019 IB Class 10

7/32

Definitions (cont)

A Economic Union: Economic integration wherebycountries remove barriers to trade and the movement of

labor and capital, erect a common trade policy against

nonmembers, and coordinate their economic policies

It will have a common currency, harmonized tax rates, a

common monetary and fiscal policy

Demands a coordinating bureaucracy and sacrifice of

certain level of national sovereignty

E.g., European Union

8/4/2019 IB Class 10

8/32

RTAs differ considerably in scope Now it is going beyond traditional tariff reduction or

elimination to include regional rules on investment,

competition, environment, etc.

Countries traditionally favoring MFN liberalization are

increasingly being drawn into RTAs.

Those which have been engaged in RTAs for some time are

looking further afield for cross-regional partners Mega-blocks such as the FTAA or Euro-Mediterranean FTA

are under negotiation.

Main Trends Identified

8/4/2019 IB Class 10

9/32

Overview

Most of the WTO members are party to one or moreRTAs.

In Oct. 2003, all WTO members, except Mongolia, was

either participate or negotiating RTAs

As of February 2007, 369 RTAs have been notified to

the GATT/WTO

Out of these, only 194 are active (or in force) now

8/4/2019 IB Class 10

10/32

RTAs in force by date of entry into force

0

20

40

60

80

100

120

140

160

180

200

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

Year

No.ofRTAs

8/4/2019 IB Class 10

11/32

The greatest concentration of RTAs is in Europe,

where over 100 RTAs are in force.

The main focus of RTA activity has shifted away from

Europe in the last two years towards Asia Pacific.

APEC members, in particular, have been among themost active participants in RTAs.

Regional and cross-regional

developments

8/4/2019 IB Class 10

12/32

Motivation

Why do countries engage in RTAs?

RTAs are connected to the broader policy aims of

countries (includes political and security

considerations as well as economics)

8/4/2019 IB Class 10

13/32

Economic Rationale

Free trade allows countries to specialize in what they canproduct most efficiently

Search for larger markets, which is easier and faster atregional or bilateral level

Deeper integration of economies

Defensive necessity to maintain market access opportunities(especially for smaller countries)

Lock out competition in product where they cannot competeinternationally

Lock in investment. Helps to secure more FDI when you havesome location advantage (eg. Mexico in NAFTA)

Motivations

8/4/2019 IB Class 10

14/32

Motivations

Political Reasons

Creates incentives for political cooperation and reduce

possibilities of violent conflicts

Increase bargaining power in multilateral negotiations

by securing commitment first at regional level

Prevent backsliding on

Political/economic reforms

Ensure or reward political support (eg. UN membership)

Consolidate peace and increase regional security withtheir RTA partners (eg. India and Pakistan in SAFTA)

8/4/2019 IB Class 10

15/32

Positive Economies of scale (Trade

creation)

Laboratories for change

Provide competition

Attract FDI

Generate employment

Allow countries to hone

negotiating skills

Negative

Certain sectors/industries may

lose

Dampens enthusiasm for

multilateral negotiations

Labyrinthine rules of origin

Trade and investment diversion

Weakest countries left out

Loss of national sovereignty

Effects of RTAs

8/4/2019 IB Class 10

16/32

Rules of Origin (RoO)

RoO are an inherent feature of FTAs as a means ofdetermining whether goods are eligible for

preferential treatment in the importing country and

to prevent trade deflection

Trade deflection means transshipment of goods

from non-parties of an RTA through the RTA partner.

8/4/2019 IB Class 10

17/32

Trade Creation and Trade Diversion

Trade Creation: occurs when high-cost domesticproducers are replaced by low-cost producers within

the free trade area

Also occur when higher-cost external producers are

replaced by lower-cost external producers within FTA

Trade Diversion: occurs when lower-cost external

suppliers are replaced by higher-cost suppliers within

the FTA.

RTA will benefit only if the trade created exceeds the trade

diverted

8/4/2019 IB Class 10

18/32

Benefits of the RTA Strategy

Maintain momentum of trade liberalization Deeper cuts than in WTO but by fewer countries

Easier to conclude deals (though maybe not

super-regionals) Learning by doing

Establish precedents/models for other

negotiations Education on complexities of trade reforms and

implementation problems

8/4/2019 IB Class 10

19/32

Drawbacks of the RTA Strategy

Trade and investment diversion

Overlapping jurisdictions

Attention/resource diversion from WTO

negotiations

Bad precedents (re rules/exceptions)

8/4/2019 IB Class 10

20/32

Drawbacks of the RTA Strategy

RTAs also include policy areas not regulatedmultilaterally. This increase the risk of inconsistencies

in the rules and procedures among the RTAs

themselves, and between RTAs and the multilateral

framework

Give rise to regulatory confusion, distortion of

regional markets, and severe implementation

problem

8/4/2019 IB Class 10

21/32

RTAs and WTO

Article XXIV of GATT provide for the formation andoperation of customs unions and free-trade areas

covering trade in goods ;

The Enabling Clause to GATT added in 1979 refers to

preferential trade arrangements in trade in goods

between developing country Members; and

Article V of GATS governs the conclusion of RTAs in

the area of trade in services, for both developed anddeveloping countries.

8/4/2019 IB Class 10

22/32

RTAs can clearly help countries integrate into the MTS(complementary)

But by their very nature RTAs are discriminatory: afundamental departure from the non-discrimination

(MFN) principle of the WTO. No empirical conclusion on the effects of RTAs on

global trade liberalization and economic growth

Are RTAs a building block or stumbling block? Need to look at the changing landscape of RTAs

RTAs and WTO

8/4/2019 IB Class 10

23/32

Long-standing controversy about the interpretationof provisions relating to RTAs

Impasse in the current examination of agreements.

Negotiations launched at Doha have resulted in

fruitful discussions on transparency, but nothing

substantial agreement has reached so far

RTAs in the WTO context

8/4/2019 IB Class 10

24/32

Concerns

Failure to achieve an accord on Doha Development

Agenda

The increasing notification of RTAs after the launch of

Doha Development Agenda

It is easier to get access to a larger market through RTAs,particularly in the absence of willingness among WTO

members to liberalize further on a multilateral basis.

The set back of negotiations at Cancun to Hong Kong and

the failure to reach an accord on Doha Agenda,

apparently indicate the forging of more RTAs.

8/4/2019 IB Class 10

25/32

Possible Solution

Concurrent MFN trade liberalization by RTS partiescan play an important role in defusing potential trade

distortions

Countries should lower MFN tariffs alongsidepreferential tariffs, thus reducing the likelihood of

trade and investment diversion

More transparency providing sufficient information

on tariffs, regulations, and rules of origins of their

RTAs

8/4/2019 IB Class 10

26/32

Promoting complementary WTO reforms

Improve WTO rules for RTAs Indicative guidelines for rules of origin and

contingent protection

Commitment by RTA members to harmonize andlower their MFN tariffs over a 10-year period

More active surveillance after pacts enter intoforce

External assessment of RTA impacts after 5-7 years

Continue to advance WTO reforms!

8/4/2019 IB Class 10

27/32

Trade Blocks

NAFTA-North American Free Trade Area (US,Canada and Mexico):

Came into force in 1984

A trade and investment agreement among threecountries

To phase out tariff over a period of 15 years

Agreements on Tariff reduction, free factormovements, flow of investment, protection of the

environment etc

8/4/2019 IB Class 10

28/32

Trade Blocks

ECM-European Common Market: Founded in 1957 under the Treaty of Rome by six

countries

Purpose: Elimination of customs duties, quantitativerestrictions in exports and imports, common tariff

and common commercial policy, common

agricultural policy, free factor mobility etc

Establishment of European Monetary System in 1978

8/4/2019 IB Class 10

29/32

Trade Blocks

United Nations Conference on Trade and Development(UNCTAD): A forum mostly for developing countries todiscuss their development problems

Functions: promote international trade between less

developed countries, formulate policies of internationaltrade in goods and services

Trade in Manufactured Goods Scheme: the export of

manufactured, semi manufactured and some agricultural

items from the developing countries enter duty-free or atreduced rates in the developed countries

8/4/2019 IB Class 10

30/32

Trade Blocks OPEC (Organization of Petroleum Exporting

Countries)

A permanent intergovernmental Organization of the

petroleum exporting countries

At present 11 countries are members

OPEC supply more than 40% of Worlds oil and

possess 78% of the total world crude oil reserve

8/4/2019 IB Class 10

31/32

References

Text Book Chapters

1. Chapter 6, International Businessby Charles W. Hilland Arun K. Jain, Tata McGraw Hill publication.

2. Chapter 8, International Business byOded Shenkarand Yadong Luo, Wiley publication.

3. Chapter 8, International Business, John J. Wild,Kenneth L. Wild, and Jerry C.Y.Han, Prentice Hall.

Reports and Articles

1. Assessing Regional Trading Arrangements in the Asia-

Pacific, UNCTAD (2001).

8/4/2019 IB Class 10

32/32

Further Readings & References

Web Resources for International TradeAgreements

http://commerce.nic.in on Indias FTAs

www.saarc-sec.org on SAARC

www.bimstec.org on BIMSTEC

www.nafta-sec-alena.org on NAFTA

http://europe.eu.int/index_en.htm on European Union

www.bilaterals.org for general information

http://www.apec.org/ on APEC

Write short-notes on these RTAs / FTAs