Regional Trade Agreements

Regional trade agreements (RTAs) are treaties among two or more governments that agree to offer more favorable treatment to trade between themselves than they do to goods imported from outside the region. This preferential treatment usually takes the form of the removal or reduction of tariffs on imports from regional partners, thereby creating a free trade area. RTAs are typically classified in a hierarchy that ranges from this most basic form, the free trade area, to customs union, to common market, and ultimately to economic union. A customs union goes beyond the removal of internal tariffs that occurs within a free trade area to specify common tariffs that all member states impose on imports from outside the region. Common markets are customs unions that also remove barriers to the flow of factors—capital and labor—within the region. Finally, economic unions are common markets that also adopt a common currency.

The vast majority of RTAs, including the North American Free Trade Agreement (NAFTA) and the ASEAN Free Trade Agreement, are free trade agreements. These impose the least number of constraints on the policy autonomy of national governments. As one progresses up the hierarchy of RTAs, governments are obliged to coordinate their policies in more and more areas, such as tariffs, immigration, taxation, and capital movements. Only a handful of RTAs take the form of customs unions. Among them are Mercosur and the Southern African Customs Union. Only one economic union exists: the European Union.

Regional trade agreements between states go back several centuries. In the nineteenth century, they became an important instrument in Europe for forging larger political entities among small states. The classic example is the German Customs Union, Deutscher Zollverein, founded in 1834, which brought together states that had previously been linked in three smaller customs unions and paved the way for German unification. In the period between World War I and World War II, the preferential trade agreements between the European powers and their colonies were commonly blamed for exacerbating the decline in international trade during that period. The U.S. government was determined that the international trade regime put in place after World War II would learn from the problems of the interwar period and be based on nondiscriminatory trade—enshrined in the Most-Favored Nation principle of Article I of the General Agreement on Tariffs and Trade (GATT). Nonetheless, largely because of pressure from the Europeans, Article XXIV of GATT allowed for preferential regional trade agreements provided they met certain conditions, most notably that members should not notify GATT of their entry into these arrangements, that they eliminate barriers on "substantially all trade" among the regional partners, and that duties and regulations faced by nonmembers "shall not on the whole be higher or more restrictive" than those in force before the RTA was signed.

The GATT's legitimization of RTAs provided the basis for the development of what eventually became the European Union, beginning with sectoral cooperation in the European Coal and Steel Community in 1952 and broadening into a customs union with the negotiation of the Treaty of Rome in 1957. Although the European agreements arguably did not meet the criteria for RTAs specified in the GATT, other governments did not oppose them, primarily because they gave priority to the Cold War security objectives that European integration was believed to support. Europe's attempts to promote more rapid economic growth (and to provide a protected base for its manufacturing firms) through a regional agreement prompted a wave of imitators in Africa and Latin America in the 1960s. Few of these agreements, however, survived the political tensions that arose among their members, particularly over the distribution of the benefits of regional collaboration.

In the 1970s and first half of the 1980s, progress in liberalization in the GATT, an apparent slowdown in European integration, and problems of economic adjustment to higher oil prices and to the rise of the newly industrializing economies all diverted governments' attention away from regional trade agreements. Two developments were to bring regionalism back to center stage in international trade negotiations: the decision by the European Community in the mid-1980s to complete its process of market integration by 1992, and the signing by the Canadian and U.S. governments of a free trade agreement in 1988. Until the early 1980s, U.S. administrations had been unenthusiastic about preferential trade agreements; the agreement with Canada, and proposals for its extension to Mexico, which in 1994 resulted in the signing of NAFTA, creating what was then the world's largest free trade area, sent a clear signal that U.S. international trade strategy had changed and that it would not be likely to oppose RTAs elsewhere.

The EU and NAFTA appeared to succeed in stimulating intraregional trade and investment flows in the 1990s. And, contrary to some fears, they did not evolve into closed trading blocs that increased discrimination against nonmembers. Their apparent success encouraged other countries to construct their own regional agreements (a development further stimulated by the slow progress in WTO negotiations). The pace of regionalism accelerated markedly after the mid-1990s and spread to areas, such as East Asia, that previously had few RTAs. By May 2003, a total of over 265 RTAs had been notified to the WTO (and its predecessor, GATT). More than half this total was notified after the WTO was created in January 1995. Over 190 of these agreements are currently in force. Moreover, since agreements that link developing countries exclusively are not subject to Article XXIV and sometimes not notified to the WTO, the actual number of RTAs in operation is substantially higher—probably in excess of 250. By the end of 2003, only one of the WTO's 146 members—Mongolia—was not party to a regional trade agreement.

Commentators are divided about the impact of RTAs on participants, nonparticipants, and the global trading system as a whole. Traditionally, all forms of trade liberalization, even those involving only a small number of participants, were regarded by economists as having positive welfare effects. In the early postwar years, however, Jacob Viner demonstrated that a selective removal of tariffs might not be welfare-enhancing, because the tariff preferences created could divert trade from efficient producers outside the region to less efficient producers within it. East Asian textile exporters, for instance, found themselves at a disadvantage in competing in the U.S. market with Mexican suppliers after NAFTA was signed, even though many were more efficient producers. Global welfare suffers as a consequence of countries discriminating against the most efficient suppliers.

The case against RTAs focuses on this discriminatory character, which is contrary to the fundamental principle of the postwar trading regime. Some countries may find themselves excluded from RTAs because others do not regard them as sufficiently important markets to justify the investment of bureaucratic resources necessary to negotiate and implement agreements. Similarly, countries not regarded as reliable partners because of the nature of their political systems are likely to be excluded. These concerns are particularly applicable to small, less developed economies. Moreover, political factors may become prominent both in influencing the choice of potential partners and in determining the outcomes of negotiations. For weaker countries, the great advantage of the postwar multilateral trade regime was that it largely removed political considerations from trade issues. RTAs also open the way for power considerations to dictate the terms of agreements. Studies of the recent wave of RTAs have found that less developed countries have made more concessions than industrialized economies in regional partnerships involving countries with different levels of economic development.

Other criticisms of RTAs are that they increase the costs of international trade for businesses (because each agreement has its own set of rules with which businesses must comply), and that they divert attention and resources from negotiations at the global level, where the potential for gains from trade liberalization is greatest. Proponents of RTAs argue, in contrast, that they provide an opportunity to make progress on trade liberalization at a time when global talks are stalled (the smaller number of participants facilitates reaching agreement), that they enable governments to go beyond agreements reached within the WTO, thereby producing "deeper" integration that can serve as a model for future global agreements, and that they strengthen exporting interests that will have an incentive to lobby for further liberalization. The "new regionalism" in the WTO is of too recent origin to allow a definitive judgment on the arguments for and against RTAs.

SEE ALSO MERCOSUR;NAFTA;Treaties.

BIBLIOGRAPHY

Baldwin, Richard E. "The Causes of Regionalism." World Economy 20, no. 7 (1997): 865–888.

Bhagwati, J., and Panagariya, A., eds. The Economics of Preferential Trade Agreements. Washington, DC: AEI Press, 1996.

Mansfield, Edward D., and Milner, Helen V., eds. The Political Economy of Regionalism. New York: Columbia University Press, 1997.

Pomfret, Richard. The Economics of Regional Trading Arrangements. Oxford, U.K.: Clarendon Press, 1997.

Viner, Jacob. The Customs Union Issue. New York: Carnegie Endowment for International Peace, 1950.

INTERNET RESOURCES

Ravenhill, John. "The Move to Preferential Trade in the Western Pacific Rim." Asia Pacific Issues 69 (June 2003). East-West Center. Available from http://www.eastwestcenter.org/stored/pdfs/api069.pdf.

John Ravenhill