Theory of Economic Integration

Regionalism and WTOProduct-market integration in a neoclassical world, introduction

Katarzyna Śledziewska

Outline Preferential Trade Agreements and the

Multilateral Trade System Significance of RTAs Product-market integration in a neoclassical

world, introduction

WTO rulesThe GATT recognised the importance and value of economic

integration between countries

Regionalism - the most significant exception to WTO’s principal of non-discrimination

Three sets of rules in the WTO permit the creation of RTAs:1. Article XXIV of the GATT 2. the “Enabling Clause3. Article V of the General Agreement on Trade in Services

(GATS)

WTO rules

Article XXIV of the GATT lays down conditions for the establishment and

operation of free trade agreements and customs unions covering trade in goods

Paragraph 4 „the purpose of a customs union or of a free-trade area

should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories”

WTO rules Article XXIV of the GATT

Paragraph 8 „duties and other restrictive regulations of commerce are

eliminated with respect to substantially all the trade between the constituent territories of the union”

„substantially the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union”

WTO rules Article XXIV of the GATT

Paragraph 8„substantially all the trade” It is commonly accepted that

agriculture is excluded (EFTA) or only included selectively (EU with Mediterrean coutries

WTO rules Article XXIV of the GATT

Paragraph 5 „the duties and other regulations of commerce (…) shall

not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union or the adoption of such interim agreement”

Interim agreements are also possible, provided they lead to a FTA (CU) within a „reasonable” time

WTO rules the “Enabling Clause”,

formally the 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of developing Countries,

permits regional agreements among developing countries on trade in goods

de facto unlimited discretion to coclude incomplete preferential agreements or any kind of FTAs

WTO rules Article V of the General Agreement on Trade in

Services (GATS) establishes conditions that permit liberalization of trade

in services among regional partners

Notifications of RTAs in force to GATT/WTO

     Accessions New RTAs   Grand total

  GATT Art. XXIV (FTA)   2   148   150

  GATT Art. XXIV (CU)   6   8   14

  Enabling Clause   1   26   27

  GATS Art. V   3   72   75

  Grand total   12   254   266Source: http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx

Notifications of RTAs in force to GATT/WTO

    Enabling

clause  GATS Art.

V  GATT Art.

XXIV  Grand

total

  Customs Union   6      8   14

  Customs Union - Accession   0      6   6

  Economic Integration Agreement      72      72

  Economic Integration Agreement - Accession      3      3

  Free Trade Agreement   9      148   157

  Free Trade Agreement - Accession   0      2   2

  Preferential Trade Agreement   11         11

  Preferential Trade Agreement - Accession   1         1

  Grand total   27   75   164   266

Outline Preferential Trade Agreements and the

Multilateral Trade System Significance of RTAs

Significance Integration:

Has affected most of the countries in the world Has become an unavoidable and powerful element in

most national and international economic policy decisions

Economic integration securing access to a wider market and reinforcing

growth However – past experience

Negative in certain developing-country groups

Significance The number of regional trade agreements (RTAs) has grown

rapidly since WTO came into existence in 1995 The most significant exception to WTO’s principal of non-

discrimination More than 50 percent of world trade is conducted within these

preferential trade arrangements

RTAs in force by date of entry into force

Establishment of WTO

0

50

100

150

200

250

Significance Number of RTAs

1990 - 27 1995 - 60 2000 - 102 2005 – 186 2009 - 266

“Regionalism is in fashion. It seems that every month brings news of yet another agreement among a group of countries, or between one group and another, to strength their economic links, particularly by removing barriers to trade and investment among themselves”. Frankel (1997)

0

50

100

150

200

250

Percentage of main RTAs in world’s exports

-

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

90,0

100,0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

MERCOSUR

ECO

EFTA

CIS

GCC

ASEAN

APTA

NAFTA

EU

Significance The vast majority of WTO members are:

party to one or more regional trade agreements party to twenty or more (some)

Examples http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx

Preferential Trade Agreements and the Multilateral Trade System

One of the most frequently asked questions is whether these regional groups help or hinder the WTO’s multilateral trading system the multilateral system may be fracturing into

discriminatory regional blocs regional agreements will go beyond what was achieved

in the Uruguay Round and instead become building blocks for further global liberalization and WTO rules in new areas

Multi or regional? Considerable uncertainty regarding the future and the

relevance of the multilateral trading system Problems embodied in obvious, serious and repeated troubles of

multilateral trade liberalisation negotiations (Seattle, Cancun, Doha)

„Clean and lean” multilateral trading system and rules difficult to develop between developed and developing countries

RTAs – create and maintain a complex labyrinth of international trading roles and relations seem more easy to develop than multilateral trade system

General agreement about the advantages, value and importance of a multilateral approach to international trade

Differences in opinion regarding international trade liberalisation arrangements

Negative effects of integration

Integration hurts third countries through trade diversion Simple multilateral trade rules (tariffs, rules of origin) are

replaced by a complex and overlapping labyrinth or „spaghetti bowl” of various rules specific to each group

There are regional industry-specific lobbies that demand and receive various types of protection in order to shift rents and distort location of production These lobbies resist further trade liberalisation

Resources, time and energy are shifted from multilateral towards regional issues

Negative effects of integration There are administrative, operational and multiple

enforcement costs that increase transaction and overall trade costs

Strong and exclusive trading blocs may exploit their monopoly power and improve their own terms of trade; they may clash and provoke ‘trade wars’

Deeper integration may introduce protection in previously unprotected business areas

Major players in multilateral trade liberalisation negotiations, the US and especially the EU, are bound to specific trade liberalisation agreements (CAP)

Regional trade arrangements may slow down and postpone progress on the multilateral plane as there are gainers form the existence of deals that discriminate in trade who may not welcome the arrival of a new multilateral deal

Why wider or deeper integration since the mid-1980s Deeping and widening of integration in the EU and North

America Integration between developed countries such as the United

States and Canada, and a developing ones (Mexico) Economic transition in the formerly centrally planned

economies in central and eastern Europe and the 2004 EU entry of eight of these countries, then of two

A change in economic policies in the developing countries towards more outward-looking and liberal models

Change of structure of production (move towards knowledge-based goods and services and operations of transnational corporations)

Changing character of protectionism Weaking confidence in the multilateral trading system since

1995