Regional Trade Agreements

Introduction “Multilateralism” refers to the GATT/WTO system as well as the trade

negotiations that take place among all GATT/WTO members as a group.

“Regionalism” refers to a violation of the nondiscrimination principle in which one member of a regional trade agreement (RTA) discriminates in its trade policies in favor of another member of the RTA and against nonmembers.

Has been allowed by the GATT/WTO under certain circumstances• Free trade areas (FTAs)• Customs unions (CUs)• Interim agreements leading to a FTA or CU “within a reasonable

length of time”. Regionalism and multilateralism represent two alternative trade policy options.

Types of Regional Trade Agreements

Regional Trading Arrangements

Sharp proliferation in Regional Trading Agreements (RTAs) in recent

years

The number of these agreements has more than quadrupled

since 1990, rising to around 230 by late 2004

Nearly all countries belong to at least one RTA

Trade between RTA partners now makes up nearly 40% of total

global trade.

RTAs are viewed by most countries as building blocks towards

eventual global free trade.

PTAPTA

ECONOMIC ECONOMIC COOPERATIONCOOPERATION

MONETARY MONETARY UNIONUNION

COMMON COMMON EXTERNAL EXTERNAL

TARIFF (CET)TARIFF (CET)

FTAFTA

Stages of Economic Development

Regional Trade Agreements

Consider two countries—Brazil and Argentina Suppose these countries initially pursue independent and non-

preferential trade policies Trade policies of these two countries are not coordinated in any way

and do not discriminate among countries There is no integration of the countries’ labor, capital, and money

markets

First-level RTA is known as preferential trade area Brazil and Argentina lower their trade barriers between each other,

but do not eliminate them•Labor and capital markets remain unintegrated

Because the two countries have not fully eliminated trade barriers between each other, this type of RTA is not allowed by the WTO

Regional Trade Agreements

Second-level RTA is known as free trade area Brazil and Argentina eliminate the trade barriers between each other With regard to non-member countries Brazil and Argentina pursue

independent policies Labor and capital markets remain unintegrated To eliminate completely quantitative trade restrictions and customs

tariffs against each other’s goods Member countries retain the sovereign power to decide the trade

policies to be imposed on non-members

Third-level regional agreement is known as customs union Brazil and Argentina eliminate the trade barriers between each other Additionally, member countries adopt common trade barriers with

regard to non-member countries (often referred to as a common external tariff)

Regional Trade Agreements

• Similar to free trade area.• Adopt uniform import tariffs and common quota restrictions to non-

members.• Weakened the ability of member countries to determine national trade

policies independently.• Labor and capital markets remain unintegrated.

Fourth-level RTA is known as common marketA customs union in which labor and capital markets are integrated into a regional market

• Any restrictions on movements of labor and physical capital (direct foreign investment) have been removed.

• Similar to customs union• Plus free movement of factors of production• A significant reduction of national sovereignty

The Regional Context

South Asian countries are exchanging tariff preferences under SAPTA.

India, Sri Lanka and Bangladesh are members of the Bangkok Agreement.

South Asian countries are also exchanging preferences under GSTP (Global System of Trade Preferences).

India, Sri Lanka and Bangladesh are also members of other economic groupings like BIMST-EC, IOR-ARC.

Recent Trends in RTAs

RTA Share of intra-regional exports in total exports: 2002 (%)

EU (15) 61.6

NAFTA (3) 56.5

AFTA (10) 24.0

CEFTA (7) 12.2

MERCOSUR (4) 11.5

ANDEAN (5) 10.2

Reinert/Windows on the World Economy, 2005

How to determine whether a product is from a partner country.

Suppose that Brazil and Argentina form a RTA

• Shirt produced in Venezuela is imported into Brazil and label “Made in Brazil” is attached

• Shirt can then be imported into Argentina with no restrictions or tariffs—product is not really made in Brazil

• To protect against such possibilities, RTA members usually define rules of origin

Can be defined in a number of ways, including by Amount of value added in an RTA partner

country Degree of product transformation

Trade Creation and Trade Diversion

Let’s discuss trade creation and trade diversion using the absolute advantage model

Along with Brazil (B) and Argentina (A), we are also going to refer to a third country, Venezuela (V) Brazil and Argentina are members of a RTA, whereas Venezuela is

not

Trade Creation

Occurs when the formation of a FTA or CU leads to a switching of imports from a high-cost source to a low-cost source.Tends to improve welfare.

Before the RTA, Brazil has in place a specific (per unit) tariff on imports from both Argentina and Venezuela.

Argentina is the lower-cost producer in comparison to Venezuela Therefore Brazil imports good from Argentina

Once Brazil joins either a FTA or CU with Argentina, tariff is removed on imports from Argentina Good continues to be imported from Argentina and imports increase

because price has fallen due to removal of tariff. Consumer surplus in Brazil increases while producer surplus and

government tariff revenue falls. Net increase in welfare due to trade creation .

Trade Diversion

Occurs when imports switch from a low-cost source to a high-cost source. Tends to worsen welfare.

Before the RTA, Brazil has in place a specific (per unit) tariff on imports from both Argentina and Venezuela.

Assume Venezuela is now the lower-cost producer in comparison to Argentina Brazil imports the good from Venezuela.

Once Brazil joins a FTA or CU with Argentina, however, Brazil switches to Argentina as an import supplier Imports expand as the domestic price falls.

Consumer surplus in Brazil increases while producer surplus and government revenue falls .

Whether net welfare effect is positive or negative depends If trade-diverting effects outweigh trade-creating effects then RTA

will reduce welfare in Brazil.

Committee on Regional Trade Agreements (CRTA)

Established in 1996 To centralize the effort of working parties in one body To examine in detail future regional trade agreements notified to

the WTO To provide a common platform to discuss ways of dealing with

the issue of regionalism in the WTO

India and Nepal Treaty on Transit and Trade

On 2nd March, 2002, the validity of India-Nepal Treaty of Trade and Protocol was extended for a period of 5 years w.e.f. 6.3.2002.

Rules of Origin along with local content and substantial manufacturing clause introduced.

TRQ for Vanaspati, acrylic yarn, copper products and zinc oxide introduced.

INDO-BHUTAN TREATY

Agreement on Trade and Commerce between India and Bhutan signed on 28th February, 1995

Preferential market access allowed for products originating from respective countries

All exports and imports of Bhutan to and from countries other than India will be free from and not subject to customs duties and trade restrictions of the Government of India.

INDIA-SRI LANKA FTA

PM Vajpayee offered to consider bilateral FTAs with our South-Asian neighbours in his address in the Colombo SAARC Summit.

The FTA was signed by PM of India and President of Sri Lanka on 28th December 1998.

The Agreement envisages phasing out of tariff on all products except for a limited number of items in the Negative List, over a period of time. While India would complete the process of tariff elimination over a period of 3 years, Sri Lanka would achieve this over 8 years.

BIMST- EC

The Initiative was taken by Thailand in 1994 and with the admission of Myanmar in December 1997 it was named as “Bangladesh, India, Myanmar, Sri Lanka, Thailand Economic Cooperation” (BIMST-EC) to serve as a bridge linking ASEAN and SAARC.

6 areas of Trade and Investment, Technology, Transportation and Communication, Energy, Tourism and Fisheries were identified for cooperation

The Second Economic/ Trade Ministers meeting in April 2000 decided to constitute an Inter Governmental Group (IGG) to prepare a Concept Paper on possible approaches towards a PTA leading to an FTA.

IGG’s recommendation was considered by the Ministers in their third meeting held in Yangon in 2001 and a Group of Experts was constituted to examine in detail the two approaches.

The GOE consists of the representatives of Government, Business and the Academia.

A final decision will be taken in the next Trade and Economic Ministers Meeting, scheduled to be held in Sri Lanka.

HIGH-INCOME COUNTRIES SUCH AS US & EU

To support foreign policy goals, including development

Slow progress on multilateral agenda: “competitive liberalization”

Access to services markets, protection of intellectual property, and

rules for investment

DEVELOPING COUNTRIES

Secure access to markets, especially large markets

More FDI

Among neighbors, lowering trade cost at border

Framework for regional cooperation

Arguments for RTA’s

Argument against RTA’s

RTAs are discriminatory by nature They draw attention to “spaghetti-bowl” nature of second-wave RTAs

• Meaning the overlapping nature of most RTAs, with most WTO members holding simultaneous membership in many RTAs at once

For example, Mexico has signed FTA agreements with the United States, Canada, Nicaragua, Costa Rica, Chile, Bolivia, El Salvador, Guatemala, Honduras, Colombia, Venezuela, and the European Union

The negotiating energies put into RTAs will detract from those put into multilateral agreements under the auspices of the WTO.

Responsibility falls to the WTO Committee on RTAs Is possible to lessen the tensions between regionalism and

multilateralism but probably not possible to eliminate these tensions entirely

Conclusion

A clear trend towards regionalism Inherent difficulties in building the

multilateral trading system Depends on the future development of

major RTAs Few major regional trading blocs may

replace the multilateral trading system