INTRODUCTION

An increase in trade liberalisation coupled with the introduction of new competition can
set new demands for certain domestic industries.In instances where domestic industries
are struggling to survive, various trade remedies are available to protect them from
foreign competitors. The retention of trade remedies in trade agreements serves the
purpose of obtaining political support needed for the successful implementation of the
agreement and assures import-competing sectors in member states that protection against
unanticipated consequences of liberalisation is available.
When there is a sudden surge in imports, countries can temporarily safeguard themselves
in an effort to protect the affected domestic industry. Traditionally, these safeguard
measures were only available for application under World Trade Organisation WTO!
rules" but with the proliferation of trade agreements in recent years, such measures have
also been included on a regional and bilateral level. While global safeguards concern the
application of safeguard measures on a multilateral level, regional or bilateral safeguards
refer to measures addressing distortions which come about as a result of implementing
regional of bilateral trade agreements. The rules of the WTO provide that safeguard
measures must be applied without discrimination. #egional or bilateral safeguards,
however, address only the adverse effect of the regional or bilateral liberalisation and are
therefore only applicable between contracting parties. $or this reason these measures are
also %nown as &transitional measures', as they may not be invo%ed after the termination
of the transition period. (lobal and regional safeguards are different institutions dealing
with problems arising from different free trade initiatives. The (eneral Agreement on
Tariffs and Trade (ATT! Article )I), together with the WTO Agreement on *afeguards,
remains the generally applicable safeguard regime at a multilateral level. *afeguards in
regional and bilateral agreements vary greatly+ from agreements containing no general
safeguard measure to agreements with detailed and rigid provisions and conditions for
implementation. All of the regional and bilateral agreements which contain safeguards do
nevertheless share similar characteristics and are comparable to some e,tent with the
WTO Agreement on *afeguards. $or this reason the multilateral rules on safeguards were
analysed to provide a basis on which the regional and bilateral agreements can be
compared. The e,amination of the regional and bilateral safeguards is therefore patterned
on the design of the WTO Agreements on *afeguards and provides for several topics
which include conditions for invocation, investigation procedures, applying the safeguard
measure, duration of safeguard measures, provisional application, compensation for loss
of trade, special treatment for developing countries and dispute settlement. -ven though
the rules and procedures for transitional safeguard measures are built into the agreements,
they still need to be applied within the framewor% of (ATT Article ))I.. The argument
has been made that intra-regional safeguards are in conflict with this provision. This is
due to the requirement that restrictions have to be eliminated on &substantially all trade'.
The fle,ibility of the article does, however, allow for intra-regional safeguard application.
Only if the measure is invo%ed on a significant percentage of the regional trade, will the
question arise whether the remaining trade qualifies as &substantially all trade'. In
addition to regional and bilateral safeguard, special safeguard mechanisms are applicable
in certain situations where protection could usually not be obtained otherwise. These
measures provide additional protection to traditionally sensitive sectors li%e agriculture
and te,tiles and clothing. The provisions have different requirements and conditions for
the invocation regarding notification, strength and length of implementation,
compensation, option of retaliation and the determination of serious in/ury. These special
measures were also e,amined to determine the difference between them and the normal
safeguard measures.
TRADE BLOCS
A trade bloc can be defined as a &preferential trade agreement' 0TA! between a subset of
countries, designed to significantly reduce or remove trade barriers within member
countries. When a trade bloc comprises neighbouring or geographically close countries, it
is referred to as a &regional trade or integration! agreement'. It is sometimes also referred
to as a &natural' trade bloc to underline that the preferential trade is between countries that
have presumably low transport costs or trade intensively with one another. The two
principal characteristics of a trade bloc are that+ 1! it implies a reduction or elimination
of barriers to trade, and 2! this trade liberali3ation is discriminatory, in the sense that it
applies only to the member countries of the trade bloc, outside countries being
discriminated against in their trade relations with trade bloc members. Though few, there
e,ist as well regional integration agreements in which co-operation rather than
preferential mar%et access is emphasi3ed. Trade blocs can also entail deeper forms of
integration, for instance of international competition, investment, labour and capital
mar%ets including movements of factors of production!, monetary policy, etc.
The integration of countries into trade blocs is commonly referred to as &regionalism',
irrespective of whether the trade bloc has a geographical basis or not. The first waves of
0TAs appeared in the 1456s leading to a fragmentation of the world into trade blocs. This
&old first! regionalism' is also associated with regional initiatives involving developing
countries in the 1476s and 1486s.1 9ased on the ob/ective of import-substitution
industriali3ation, the rationale was that developing countries could reap the benefit from
economies of scale by opening up their trade preferentially among themselves, hence
reducing the cost of their individual import-substitution strategy while the trade bloc
became more self-sufficient. :ore successful e,periences followed with the recent
proliferation of trade blocs, the so-called &new second! regionalism', which involve
mostly countries from the ;orth with the *outh the ;orth-*outh trade blocs!.
The main trade blocs in the world are+ 1! in -urope, the -uropean <nion -<!, the
-uropean $ree Trade Agreement -$TA!, the -uropean Agreements, and the -uropean
-conomic Area --A!" 2! with the <nited *tates, the ;orth American $ree Trade
Agreement ;A$TA!, the =anada-<* $ree Trade Agreement =<*TA!, and the <*Israel
$ree Trade Agreement" 5! in >atin America, the =ommon :ar%et of the *outh
:-#=O*<#!, the =entral American =ommon :ar%et =A=:!, the Andean 0act, the
>atin American Integration Association >AIA!, and the =aribbean =ommunity and
=ommon :ar%et =A#I=O:!" in *ub-*aharan Africa, =ommunaut? -conomique de
l'Afrique Occidentale =-AO!@<nion -conomique et :on?taire de l'Afrique Occidentale
<-:OA!, <nion AouaniBre et -conomique d'Afrique =entrale <A-A=!, the =ommon
:ar%et of -astern and *outhern Africa =O:-*A!@0referential Trade Area for -astern
and *outhern African *tates 0TA!, the *outhern African =ustoms <nion *A=<!" and
C! in Asia, the Association of *outheast ;ations A*-A;! and the A*-A; $ree Trade
Area A$TA!, and the Australia-;ew Dealand =loser -conomic #elations Trade
Agreement A;D=-#TA!.
While there is a proliferation of 0TAs in the world, and almost every country in -urope,
in >atin America and in *ub-*aharan Africa belongs to at least one 0TA, not all 0TAs are
effective at liberalising intra-bloc trade. $or instance, focusing on the trend in intrabloc
trade intensities and shares, it appears that ;A$TA, the <*-Israel $TA, =A=:, the
Adean (roup, :-#=O*<#, =-AO@<-:OA and *A=< can be considered as effective
trade blocs which does not mean that they are efficient!, whereas A*-A; seems to be so
far a rather ineffective grouping.
THE CAUSES OF TRADE BLOC FORMATION
*everal reasons e,plain the recent emergence of trade blocs. The so-called &old
regionalism' was motivated by the desire to pursue in developing countries import
substitution development at a regional level, to insulate a region from the world economy
and to stabili3e and foster the economy at a regional level. 0olitical and economic
considerations also played a ma/or role, as in the case of the -uropean =oal and *teel
=ommunity -=*=, 1471! and the -uropean -conomic =ommunity --=, 147E!.
The recent emergence of trade blocs the so-called &new regionalism'! has been e,plained
by various factors. #ecogni3ing the gains from liberali3ation, it is often argued that
concluding a 0TA is politically easier than pursuing multilateral trade liberali3ation
agreements. It is easier to negotiate with few partners than with a large number of
participants in the multilateral process as envisaged under the (eneral Agreement of
Tariffs and Trade (ATT!@World Trade Organi3ation WTO!. ;ot only concessions can
be more easily e,changed among a small number of countries, but effective enforcement
mechanisms can also be agreed upon at a lower cost. The length and difficulties
encountered during the <ruguay #ound of (ATT negotiations 14F8-144C! is usually
considered to have contributed to increase the attractiveness of the regional i.e.
preferential! path to trade liberali3ation. 0TAs also allow trading partners to go deeper
and faster in their liberali3ation process,addressing modern trade barriers which are more
varied, more comple, and less transparent than standard tariffs and quotas traditionally
considered under (ATT #ounds. 0referential integration agreements can also entail
elements beyond standard trade policy concerns, such as competition, investments, labour
and capital mar%et considerations. In other words, the fewer the number of participants to
trade negotiations, the larger the number of issues on which it is possible to reach an
agreement.
Another claimed advantage of 0TAs is that they may help ensuring the credibility of the
reform process underta%en by one or several members of the trade bloc. Indeed, trade
blocs often involve small! reform-minded countries willing to bind their commitments to
often unilateral! liberalisation process by entering a 0TA with larger entities. :ore
generally, 0TAs can serve as commitment, signalling and insurance mechanisms in the
policy determination of its members, hence contributing to reducing uncertainty and
increasing credibility about political and economic developments.
Trade blocs may e,ert other types of &pressures for inclusion'. The gravity model
suggests that countries geographically close trade more than distant countries. ;amely,
the gravity equation predicts, among other things, that the volume of trade between two
countries is negatively related to the economic distance i.e. geographic distance, ta%ing
into account transport costs and trade barriers! between them. As neighbouring countries
tend to be &natural trading partners', they are more li%ely to form a trade bloc. :oreover,
as trade bloc formation diverts trade at the e,pense of non-member countries, the
deepening of an e,isting bloc or the creation of a new one may cause e,cluded trading
partners to /oin the 0TA in order to reduce the costs of being Gleft outH+ the so-called
&domino effect' of regionalism. $inally, trade blocs may serve to pursue non-economic
ob/ectives, or ob/ectives beyond the immediate economic concerns of a 0TA, such as
political stability, democratic development or security issues either domestic security, or
as a response to third-country security threats, or security threats between partner
countries!.
THE EFFECTS OF TRADE BLOCS
Aiscriminatory trade policy is the defining characteristic of a trade bloc. The different
types of trade blocs or 0TAs! can be broadly distinguished in three categories+
1! a free trade agreement $TA! where trade barriers among member countries are
removed, but where each member remains responsible for the determination of its trade
policy vis-I-vis non-member countries"
2! a customs union =<!, with liberalised intra-bloc trade, as well as the adoption of a
e,ternal tariff structure and trade barriers towards outsiders common to all members of
the =<" and
5! a common mar%et, which entails a =< with deeper integration between its members
such as free movements of goods, services and factors of production, common economic
policies, etc.!. :ost of the analyses on the effects of trade blocs focus on $TAs and@or
=<s.
The effects of a 0TA are of two types+ the trade effects and the welfare effects. The trade
effects comprise the impact of a 0TA on the volume and quantity of trade, on the terms of
trade i.e. prices! and on the level of protection generally tariffs! for 0TA members and
e,cluded countries. In analysing the welfare effects of a 0TA, it is important to
distinguish between the impact of trade bloc formation and e,pansion! on the welfare of
1! each of its member, 2! the trade bloc as a whole and 5! the countries e,cluded from
the trade bloc.
A standard result of international trade theory is that, in a competitive environment and in
the absence of mar%et distortions and e,ternalities, free trade will ma,imise global
welfare. #emoving trade barriers between a subset of countries could therefore appear to
be, a priori, a move in the right direction. Jet, the &theory of second best' points out that
removing a distortion while others remain in place may not increase welfare. Trade blocs
are e,amples of second best since a distortion is removed, i.e. trade barriers between
member countries, while another distortion is created in the form of a discrimination
between members and non-members the latter facing trade barriers from the 0TA!, as
well as other mar%et imperfections. Kence, the welfare implications of a trade bloc are
ambiguous as they depend on many factors. The demonstration of the theory of second
best situation entailed by a 0TA was derived from the seminal wor% of Lacob .iner
1476!, which shows that while liberalising trade between a group of countries can lead
to &trade creation' between members which should increase welfare!, it can also reduce
trade between the =< and its trading partners.
THE VARIOUS TYPES OF TRADE BLOCS
There are several levels of regional trade blocs. *ome trade blocs liberali3e more
economic transactions than others. $ive ma/or categories of trade blocs are described in
the te,tboo%+
<nder a preferential trade area 0TA!, member countries agree to lower, but not
eliminate, trade barriers within the group to levels below those erected against
outside economies.
A free trade area $TA! eliminates all trade restrictions between members of the
trade bloc, but each member maintains its own restrictions on trade with third
countries.
A c!t"#! ni"n =<! is a free trade area whose members agree on common
tariffs against nonmember countries.
A c"##"n #ar$et =:! allows for the free trade of goods among members, sets
common tariffs against outside countries, and permits the free movement of
factors of production among members.
An ec"n"#ic ni"n -<! has all the characteristics of a =: plus members agree
to a uniform set of macroeconomic and microeconomic policies.
The ;orth American $ree Trade Area ;A$TA!, consisting of =anada, :e,ico, and the
<nited *tates, is an e,ample of a free trade area. The -uropean <nion, which in 2662
adopted a single currency, the euro, administered by a regional central ban%, is an
e,ample of an economic union.
Preferential trade a%ree#ent, PTA&
A Preferential trade area also Preferential trade a%ree#ent, PTA! is a trading
bloc which gives preferential access to certain products from the participating countries.
This is done by reducing tariffs, but not by abolishing them completely. A 0TA can be
established through a trade pact. It is the first stage of economic integration. The line
between a 0TA and a $ree trade area $TA! may be blurred, as almost any 0TA has a
main goal of becoming a $TA in accordance with the (eneral Agreement on Tariffs and
Trade.
These tariff preferences have created numerous departures from the normal trade
relations principle, namely that World Trade Organi3ation WTO! members should apply
the same tariff to imports from other WTO members.

Free trade area FTA'&
A free trade area FTA! is a trade bloc whose member countries have signed a free
trade a%ree#ent FTA!, which eliminates tariffs, import quotas, and preferences on
most if not all! goods and services traded between them. If people are also free to move
between the countries, in addition to $TA, it would also be considered an Open 9order. It
can be considered the second stage of economic integration. =ountries choose this %ind of
economic integration if their economical structures are complementary. If their
economical structures are competitive, they are more li%ely to form a customs union.
C!t"#! Uni"n&
A c!t"#! ni"n is a type of trade bloc which is composed of a free trade area with
a common e,ternal tariff. The participant countries set up common e,ternal trade policy,
but in some cases they use different import quotas. =ommon competition policy is also
helpful to avoid competition deficiency.
0urposes for establishing a customs union normally include increasing economic
efficiency and establishing closer political and cultural ties between the member
countries.
It is the third stage of economic integration.=ustoms union is established through trade
pact.
C"##"n #a$et&
A !in%le #ar$et is a type of trade bloc which is composed of a free trade
area for goods! with common policies on product regulation, and freedom of
movement of the factors of production capital and labour! and of enterprise and services.
The goal is that the movement of capital, labour, goods, and services between the
members is as easy as within them. The physical borders!, technical standards! and
fiscal ta,es! barriers among the member states are removed to the ma,imum e,tent
possible. These barriers obstruct the freedom of movement of the four factors of
production.
A c"##"n #ar$et is a first stage towards a single mar%et, and may be limited initially
to a free trade area with relatively free movement of capital and of services, but not so
advanced in reduction of the rest of the trade barriers.
The -uropean -conomic =ommunity was the first e,ample of a both common and single
mar%et, but it was an economic union since it had additionally a customs union.
Ec"n"#ic ni"n&
An ec"n"#ic ni"n is a type of trade bloc which is composed of a common mar%et with
a customs union. The participant countries have both common policies on product
regulation, freedom of movement of goods, services and the factors of
production capital and labour! and a common e,ternal trade policy. The countries share a
common currency.
0urposes for establishing a economic union normally include increasing economic
efficiency and establishing closer political and cultural ties between the member
countries. -conomic union is established through trade pact.
FREE TRADE
AREA
$ree trade
among
members
CUSTOMS $ree trade =ommon
UNION among
members
e,ternal
commercial
policy
COMMON
MAR(ET
$ree trade
among
members
=ommon
e,ternal
commercial
policy
$ree
factor
mobility
within the
mar%et
ECONOMIC
UNOIN
$ree trade
among
members
=ommon
e,ternal
commercial
policy
$ree
factor
mobility
within
the
mar%et
Karmoni3ed
economic
policies
ECONOMIC
INTER)RATION
$ree trade
among
members
=ommon
e,ternal
commercial
policy
$ree
factor
mobility
within
the
mar%et
Karmoni3ed
economic
policies
*upranational
Organi3ational
*tructure
T*e"rie! "f Internati"nal Trade&
In the 1866 and 1E66 centuries, mercantilism stressed that countries should
simultaneously encourage e,ports and discourage imports. Although mercantilism is an
old theory it echoes in modern politics and trade policies of many countries. The
neoclassical economist Adam *mith, who developed the theory of absolute advantage,
was the first to e,plain why unrestricted free trade is beneficial to a country. *mith
argued that Mthe invisible handM of the mar%et mechanism, rather than government policy,
should determine what a country imports and what it e,ports. Two theories have been
developed from Adam *mithMs absolute advantage theory. The first is the -nglish
neoclassical economist Aavid #icardoMs comparative advantage. Two *wedish
economists, -li Kec%sher and 9ertil Ohlin, develop the second theory.
The Kec%scher-Ohlin theory is preferred on theoretical grounds, but in real-world
international trade pattern it turned out not to be easily transferred, referred to as the
>eontief parado,. Another theory trying to e,plain the failure of the Kec%sher-Ohlin
theory of international trade was the product life cycle theory developed by #aymond
.ernon.
Mercantili!#
:ercantilism is a philosophy from about 566 years ago. The base of this theory was the
Gcommercial revolutionH, the transition from local economies to national economies,
from feudalism to capitalism, from a rudimentary trade to a larger international trade.
:ercantilism was the economic system of the ma/or trading nations during the 18th,
1Eth, and 1Fth century, based on the premise that national wealth and power were best
served by increasing e,ports and collecting precious metals in return. It superseded the
medieval feudal organi3ation in Western -urope, especially in Kolland, $rance, <nited
Ningdom, 9elgium, 0ortugal and *pain. The monarch controlled everything. Their policy
was to e,port in the countries that they controlled and not to import to have a positive
9alance of Trade!.
(eographical discoveries not only stimulated the international trade, but also produced an
affluent flow of gold and silver, which could be used to encourage the economy based on
money and prices.
The state e,ercised much control over economic life, chiefly through corporations and
trading companies. 0roduction was carefully regulated with the ob/ect of securing goods
of high quality and low cost, thus enabling the nation to hold its place in foreign mar%ets.
The theory states that the world only contained a fi,ed amount of wealth and that to
increase a country wealth" one country had to ta%e some wealth from another, either
through having a higher import@e,port ratio.
*o, this tendency, to e,port more and import less and to receive in e,change gold the
deficit is paid in gold! is called :-#=A;TI>I*:.
The theory was critici3ed by the newly appeared class. :ore money was associated with
less products and inflation. The standard of living is wea%er.
:ercantilist ideas did not decline until the coming of the Industrial #evolution and of
laisse3-faire.
T*e A+!"lte Ad,anta%e -Ada# S#it* #"del'
The Absolute Advantage Adam *mith model! In the second half of the ).III century,
mercantilist policies became an obstacle for the economic progress. Adam *mith father
of liberalism and economical science! brought the argument in his boo% GThe Wealth of
;ationsH, published in 1EE8, that the mercantilist policies favorised producers and
disadvantaged the interests of consumers.
Adam *mith's theory starts with the idea that e,port is profitable if you can import goods
that could satisfy better the necessities of consumers instead of producing them on the
internal mar%et.
The essence of Adam *mith theory is that the rule that leads the e,changes from any
mar%et, internal or e,ternal, is to determine the value of goods by measuring the labour
incorporated in them.
In order to demonstrate its theory, Adam *mith analy3ed for the beginning country A,
using one factor of production, the productivity of labour, evaluated in the necessary of
hours needed to produce a unit of measure of the products ) and J. Ke used a
unifactorial system of economy.
*ymboli3ing K-hours, >-labour, the unitary necessary of labour for product ) is K>) and
for J K>J.
9ecause all the economies have limited resources, there are limits in the level of
production, and if a country wants to produce much of one product it has to give up
producing another goods, e,isting in this case renounce of trade. #enounces can be
illustrated by a graphic.
THE PRODUCTION POSSIBILITY FRONTIER

We have a single factor of production- labour, which results in productivity. This country
has a resource of labour of FOCP12 hours.
with C hours of labour the country can produce 1 %g of cheese
with F hours of labour the country can produce 1 liter of wine
The production possibility frontier illustrates the variety of the mi,ing of goods that can
be produce by economy. The opportunity cost is the number of measure unit of product J
to which the economy has to give up in ode to poduce one supplementary unit of product
).
SPECIALI.ATION IN PRODUCTION AND THE ADVANTA)E FROM TRADE
THROU)H ABSOLUTE ADVANTA)E
COUNTRY
Pr"dct!
<nits of product@unit of time
/ITHOUT TRADE
AFTER
SPECIALIZATION AND
TRADE
)
Y X Y
A
6 3 12 -
9
3 6 - 12
TOTAL
9 9 12 12
=ompany A is more productive than company 9 in the production of ) and has an
absolute advantage in this product and country 9 is more productive then 9 in producing
product J.
There is a potential problem with absolute advantage. If there is one country that does
not have an absolute advantage in the production of any product, will there still be benefit
to trade, and will trade even occurQ The answer may be found in the e,tension of absolute
advantage, the theory of comparative advantage.
C"#parati,e Ad,anta%e
The most basic concept in the whole of international trade theory is the principle of
comparative advantage, first introduced by Aavid #icardo in 1F1E. It remains a ma/or
influence on much international trade policy and is therefore important in understanding
the modern global economy. The principle of comparative advantage states that a country
should specialise in producing and e,porting those products in which is has a
comparative, or relative cost, advantage compared with other countries and should import
those goods in which it has a comparative disadvantage. Out of such specialisation, it is
argued, will accrue greater benefit for all.
In this theory there are several assumptions that limit the real-world application. The
assumption that countries are driven only by the ma,imisation of production and
consumption, and not by issues out of concern for wor%ers or consumers is a mista%e.
Hec$!c*er0O*lin T*e"r1
In the early 1466s an international trade theory called factor proportions theory
emerged by two *wedish economists, -li Kec%scher and 9ertil Ohlin. This theory is also
called the Kec%scher-Ohlin theory. The Kec%scher-Ohlin theory stresses that countries
should produce and e,port goods that require resources factors! that are abundant and
import goods that require resources in short supply. This theory differs from the theories
of comparative advantage and absolute advantage since these theory focuses on the
productivity of the production process for a particular good. On the contrary, the
Kec%scher-Ohlin theory states that a country should specialise production and e,port
using the factors that are most abundant, and thus the cheapest. ;ot produce, as earlier
theories stated, the goods it produces most efficiently.
The Kec%scher-Ohlin theory is preferred to the #icardo theory by many economists,
because it ma%es fewer simplifying assumptions. In 1475, Wassily >eontief published a
study, where he tested the validity of the Kec%scher-Ohlin theory. The study showed that
the <.* was more abundant in capital compared to other countries, therefore the <.*
would e,port capital- intensive goods and import labour-intensive goods. >eontief found
out that the <.*Ms e,port was less capital intensive than import.
Pr"dct Life C1cle T*e"r1
#aymond .ernon developed the international product life cycle theory in the 1486s.
The international product life cycle theory stresses that a company will begin to e,port its
product and later ta%e on foreign direct investment as the product moves through its life
cycle. -ventually a countryMs e,port becomes its import. Although the model is developed
around the <.*, it can be generalised and applied to any of the developed and innovative
mar%ets of the world.
The product life cycle theory was developed during the 1486s and focused on the <.*
since most innovations came from that mar%et. This was an applicable theory at that time
since the <.* dominated the world trade. Today, the <.* is no longer the only innovator
of products in the world. Today companies design new products and modify them much
quic%er than before. =ompanies are forced to introduce the products in many different
mar%ets at the same time to gain cost benefits before its sales declines. The theory does
not e,plain trade patterns of today.
FREE TRADE
$ree trade is a type of trade policy that allows traders to act and transact without
interference from government. Thus, the policy permits trading partners mutual gains
from trade, with goods and services produced according to the theory of comparative
advantage.
<nder a free trade policy, prices are a reflection of true supply and demand, and are the
sole determinant of resource allocation. $ree trade differs from other forms of trade
policy where the allocation of goods and services amongst trading countries are
determined by artificial prices that do not reflect the true nature of supply and demand.
These artificial prices are the result of protectionist trade policies, whereby governments
intervene in the mar%et through price ad/ustments and supply restrictions. *uch
government interventions generally increase the cost of goods and services to both
consumers and producers.
Interventions include subsidies, ta,es and tariffs, non-tariff barriers, such as regulatory
legislation and quotas, and even inter-government managed trade agreements such as the
;orth American $ree Trade Agreement ;A$TA! and =entral America $ree Trade
Agreement =A$TA! contrary to their formal titles.!--any governmental mar%et
intervention resulting in artificial prices that do not reflect the principles of supply and
demand.
:ost states conduct trade polices that are to a lesser or greater degree protectionist.
R1S
One
ubiquitous protectionist policy employed by states comes in the form agricultural
subsidies whereby countries attempt to protect their agricultural industries from outside
competition by creating artificial low prices for their agricultural goods.
FEATURES OF FREE TRADE
$ree trade implies the following features
trade of goods without ta,es including tariffs! or other trade barriers e.g., quotas
on imports or subsidies for producers!
trade in services without ta,es or other trade barriers
The absence of Ttrade-distortingT policies such as ta,es, subsidies, regulations or
laws! that give some firms, households or factors of production an advantage over
others
$ree access to mar%ets
$ree access to mar%et information
Inability of firms to distort mar%ets through government-imposed monopoly or
oligopoly power
The free movement of labor between and within countries
The free movement of capital between and within countries
Free Trade Agreement (FTA)
Free trade agreements (FTAs) are generally made between two countries. Many
governments, throughout the world have either signed FTA, or are negotiating, or
contemplating new bilateral free trade and investment agreements.
The agreements are like stepping stones towards international integration into a
global free market economy. There are another way to ensure that governments
implement the liberalisation, privatiation and deregulation measures of the
corporate globalisation agenda.
!t is assumed that free trade and the removal of regulations on investment will
head to economic growth reducing poverty and increasing standards of living and
generating employment opportunity.
"ast evidences show that these kinds of agreements allow transnational
corporations (T#$s) more freedom to e%ploit workers shaping the national and
global economy to suit their interests. !n simple terms it removes all restrictions
on businesses.
FTAs severely constrain future governments in their policy options and help to
lock in e%isting economic reforms which may have been imposed by the !MF,
&orld 'ank or Asean (evelopment 'ank, or pursued by national governments of
their own volition. !t work towards removing all restrictions on businesses as
other free trade and investment agreements perform.
FTAs are sometimes of narrow range in their dealing of traded goods. )ou can
note the *+,$ambodia bilateral te%tile trade agreement which was e%tended in
-anuary .//. for a further 0years.
!ndia and +ri 1anka signed a free trade agreement in (ecember 2334 with !ndia
agreeing to a phase out of tariffs on a wide range of +ri 1ankan goods within 0
years, while +ri 1anka agreed to remove tariffs on !ndian goods over eight years.
5ne of its ob6ectives which was stated was to contribute, by the removal of
barriers to bilateral trade 7to the harmonious development and e%pansion of
world trade7.
5ther FTAs are much more comprehensive and cover other issues including
services and investment. These agreements generally take e%isting &T5
agreements as their benchmark. They often strive to even go further than what is
set out in the &T5 rules.
FREE TRADE A)REEMENT& IMPORTANCE
There are a number of things that ma%e free trade agreements important.
Obstacles such as ta,es, quotas and tariffs are removed.
The inability to distort trade policies gives every player an equal opportunity
in the global mar%et. The absence of government interference prevents the
formation of monopolies and oligopolies.
=apital can move freely across territorial borders.
$ree access to mar%ets and mar%et information.
(reater opportunities of employment, with the free movement of labor
between countries.
HISTORY OF FREE TRADE A)REEMENTS
The theoretical questioning of protectionism began in -ngland and other parts of -urope
during the si,teenth century. #ationali3ations were made to advocate the policy of free
trade. Adam *mith, in the mid-eighteenth century, proposed the thought that free trade
was the reason for the prosperity of most of the civili3ations.
The emergence of the Autch as an economic power, after the dominance of *pain
declined, brought the free trade versus mercantilism dispute into the limelight. =lassical
liberals promoted the concept of free trade on the basis of its favorable position in terms
of world security.
FTA& LIST OF A)REEMENTS
*ome of the important free trade agreements operating among the various nations of the
world are listed below+
;orth American $ree Trade Agreement ;A$TA!+ :e,ico, =anada and the <*.
-uropean -conomic Area --A!+ -< and non--< members of -urope
A*-A; $ree Trade Area A$TA!+ *outheast Asian nations
>atin American Integration Association A>AAI!+ *outh American countries
=ommonwealth of Independent *tates $ree Trade Agreement =I*$TA!+ =I*
$ree trade agreements also strengthen the political relations between countries apart from
benefiting them commercially.
TRADE A)REEMENTS AND TRADIN) BLOCS
These two concepts are close related. A trade agreement general leads to a trading bloc
being formed. A trading bloc is generally defined as Gtwo or more countries bound by a
specific agreement which determines some or all of their international trade practices and
which usually provides for common import tariffs on certain, if not all, imported
products.H *ome economists argue that although trading blocs are see as a means of
reducing trade restrictions between the countries involved!, they themselves represent a
form of trade barrier as they e,clude non-members.
Different t1pe! "f trade a%ree#ent!2tradin% +l"c!
Trade agreements@trading blocs also come in different forms, involving increasing levels
of co-operation. -,amples include+
Free Trade Area! -FTA' 3 This is the simplest %ind of trading bloc and
incorporates a two or more countries that have agreed to eliminate tariffs and
other barriers to trade amongst members, but individually each country retains its
own tariffs on imports from other non-member countries. 0erhaps the best
e,ample of a $TA is the ;orth American $ree trade Area ;A$TA!.
C"##"n M"netar1 Area -CMA' 3 A =ommon :onetary Area is when
countries usually geographically closely located to each other agree to accept one
dominant currency as legal tender. *outh Africa has had such an agreement in
place with *wa3iland and >esotho. We discuss the *A =ommon :onetary Area
C!t"#! Uni"n 3 A =ustoms <nion goes one step further than an $TA in that it
abolishes all tariffs amongst member countries, while members agree to a single,
e,ternal tariff on goods imported from outside the =ustoms <nion. #evenue
generated by the =ustoms <nion is shared amongst members based on a specific
formula. The *outh African =ustoms <nion *A=<! is one of the oldest =ustoms
<nions still in place. We discuss the *A=< in more detail below.
C"##"n Mar$et 3 In a =ommon :ar%et, li%e with a =ustoms <nion, a common
tariff is placed on imports from other non-member countries, while no tariffs are
e,ist on goods produced by one member country and sold in the other member
country's. The main additional difference between a =ustoms <nion and a
=ommon :ar%et is that with the latter, the free movement of labour and is capital
is also permitted. In other words, any restrictions on immigration, emigration and
cross-border investment amongst member countries! are abolished. The current
-uropean <nion developed from the -uropean -conomic =ommunity, a form of
=ommon :ar%et. The =ommon :ar%et for -astern and *outhern Africa
=O:-*A! and the =aribbean =ommunity U formerly the =aribbean =ommunity
and =ommon :ar%et =A#I=O:! are perhaps the two best e,amples of
=ommon :ar%ets.
M"netar1 Uni"n 3 In the case of a :onetary <nion, member countries agree to
use a single currency or to fi, their rates of e,change for the respective
currencies. -ssentially, a :onetary <nion includes a =ommon :ar%et Area
discussed above!, the difference being, that a :onetary <nion involves far
greater integration and co-operation amongst member countries. The best e,ample
of a monetary union is -uropean <nion in which member countries have agreed
to use a new, single currency U the euroV There are many other :onetary <nions
in place .
Ec"n"#ic Uni"n 3 9eyond the free movement of labour and capital, an
economic union incorporates the harmoni3ation of economic policies amongst
member states, including the integration of monetary policies, economic policies,
ta,ation and other regulatory requirements. -uropean <nion is perhaps the only
true -conomic <nion in place today
A)REEMENT
This is list of free trade areas between three or more countries, mainly notified to
the (eneral Agreement on Tariffs and Trade@World Trade Organi3ation and in
$orce. in more detail below. -very customs union, trade common mar%et and
economic and monetary union has also a free trade area. *maller agreements, that
are part of larger one are not listed.
AAN.FTA 4 ASEAN56
African Free Trade ."ne -AFT.'
A!ia0Pacific Trade A%ree#ent -APTA'
Central Er"pean Free Trade A%ree#ent
-CEFTA'
C"##"n7ealt* "f Independent State! Free
Trade A%ree#ent -CISFTA'
D"#inican Rep+lic 3 Central A#erica Free
Trade A%ree#ent -DR0CAFTA'
Ec"n"#ic and M"netar1 C"##nit1 "f Central
Africa -CEMAC'
Er"pean Ec"n"#ic Area -EEA'
0EC 4 And"rra
0EC 4 CARICOM
0EC 4 OCT!
0EC 4 S7it8erland and Liec*ten!tein
0EC 4 Tr$e1
Ec"n"#ic C"##nit1 "f /e!t African State!
-ECO/AS'
EFTA 4 SACU
)reater Ara+ Free Trade Area -)AFTA'
Latin A#erican Inte%rati"n A!!"ciati"n
-ALADI'
N"rt* A#erican Free Trade A%ree#ent
-NAFTA'
S"t* A!ia Free Trade A%ree#ent -SAFTA'
S"t* Pacific Re%i"nal Trade and Ec"n"#ic
C""perati"n A%ree#ent -SPARTECA'
Tran!0Pacific Strate%ic Ec"n"#ic Partner!*ip
INDIA AND /ORLD TRADE OR)ANISATION
The setting up of World Trade Organisation WTO!, as legacy of 9retton Wood
institutions and as successor of (ATT wef Lanuary 1, 1447 ushered in a new regime of
international trade U a regime which viewed the world as a global economy and where all
the constituent countries irrespective of the status of development were to call the shots
on an equal footing. -,panded scope of /urisdiction of this multi-lateral trading body
with inclusion of agriculture, services, investment measures and patent issues gave rise to
e,pectations of a new international economic order ;I-O! which was /ust and fair. In
this respect it is important to note two basic principles of WTO+ :$; treatment and
national treatment.
The WTO agreements cover goods (ATT!, services (AT*! and intellectual
property T#I0*!. They spell out the principles of liberali3ation and the e,ceptions
permitted. They include commitments of individual countries to lower customs tariffs
and other trade barriers, and to open services mar%ets and %eep them open. They set
procedures for settling disputes. They prescribe special treatment for developing
countries. They require governments to ma%e their trade policies transparent by notifying
the WTO about laws in force and measures adopted, and through regular reports by the
WTO secretariat on their trade policies. These agreements are often called the trade rules
of the WTO, and the WTO is often described as &rule-based'. 9ut it is important to
remember that the rules are actually agreements that governments have negotiated.
This world trading body with assigned tas%s of administering WTO trade
agreements, to act as a forum for trade negotiations, handling trade disputes, monitoring
technical assistance W training for developing countries and cooperating with other
international organisation moved ahead through its si, ministerial conferences so far.
:inisterial =onference is the highest decision ma%ing authority of WTO on all matters
under multilateral trade agreements. *ince its inception in 1447, the WTO has held si,
:inisterial =onferences U in 1448 in *ingapore, in 144F at (eneva, in 1444 at *eattle, in
2661 at Aoha, in 2665 at =ancun and in 2667 in Kong Nong.
Today, the WTO has 1C4 members, together accounting for 46X of world trade.
These members are mostly country governments, but can also be customs territories.
There are nearly 56 applicants negotiating to become members including #ussia. The
main benefit of membership in the WTO is the right not to be discriminated against, in its
trade with other members of the WTO. This principle of non-discrimination in trade is
fundamental to the WTO and set down in the :$; and national treatment clauses.
In case a country is not a member of the WTO, it has to conduct international
trade with other countries under bilateral agreements which may need to be renewed
periodically and whose terms and conditions may also change. :embership of the WTO
ensures that the country concerned underta%es international trade transactions with other
WTO member- countries under a predictable and stable trade regime. Another important
benefit of membership is that it gives a country the right to ta%e part in WTO meetings
and trade negotiations, and therefore the opportunity to shape future international trade to
its advantage.
When the <ruguay #ound of (ATT tal%s was in progress during early 1446s,
Indian economy was ailing and was totally on out of trac%. <nder this compelling
situation, India adopted new economic reforms ;-#s! in 1441 based on #ao-:anmohan
:odel as a crisis-driven strategy. :acro -conomic *tabili3ation :-*! which covered
reforms in monetary policy, fiscal policy and e,ternal sector was brought to provide
immediate relief to ailing economy. 9ut, structural reforms, also called *A0 *tructural
Ad/ustment 0rogrammes!, was meant for long term reform process which covered
components of industrial policy reform, 0*< reform, financial sector reform and trade W
capital flow reforms. Then crisis-driven reforms has now reached to consensus driven
under second generation of our reform policies. These changes in Indian economy based
on >0( liberali3ation, privati3ation and globalisation! gave rise to a new mar%et
economy that brought growth and development in India. In this conte,t, the emergence
of WTO as multilateral world trade body to ma%e trade-friendly environment at the
global level and Indian attachment to this body could be understood.
India, one of the founder member of WTO, had its own e,pectations as well as
reservations about the new economic order. While it unleashed great opportunities for
agriculture and te,tiles sectors by improving their access to developed countries as
provided in AOA U Agreement on Agriculture and phasing out of :$A U :ulti $ibre
Agreement!, it has some grey areas in the form of provisions for patent regime and
services sector. As the events gradually unfolded, India, li%e other developing countries
recogni3ed that the rules of the game were not favourable to them and they must play an
active role within the permissible limits to &minimise the damage.' In the last decade, our
economic agenda and the policies to be pursued have been largely shaped by the WTO
commitments.
India adopted the process of globalisation and WTO rulings as a facet of
structural reforms. It brought devaluation in currency in 1441 and also adopted
convertibility system in Indian #upees in different stages. Trade and current account
have been made fully convertible and we are moving towards capital account
convertibility regime, though cautious and as a long term ob/ective. .arious steps have
been ta%en towards import liberlisation in India, for e,ample, de-licensing, de-
canalisation W e,pansion of O(> open general license!, removing quantitative
restriction, lowering pea% custom rate, etc. India has also adopted a very liberal policy
towards foreign capital to attract direct foreign investment and portfolio investment.
Insurance and print media have been opened for private competition. India has made
following changes in the economy as mandated by WTO.
Yuantitative #estrictions Y#s! have been completely phased out in 2666-61 and
only the tariff structure remains which itself has been lowered considerably, with
8EX of the tariff lines being bound.
0atent law has been reformed with amendment of 0atent Act 2667!. It provides
for product patent in pharmaceutical and farm products.
<nder the T#I:s Trade #elated Investment :easures! agreement, restrictions on
entry of foreign investment and conditions upon various aspects have been
removed and rela,ed. -,cept a few sectors, $AI is being allowed upto 166X
through automatic route and Indian companies are also free to invest abroad.
<nder the (AT* (eneral Agreement on Trade in *ervices!, India has made
commitment in 55 activities where foreign service providers are allowed to enter
%eeping in view national interests.
India's legislation on =ustom .aluation rules, 144F has been amended to bring it
in conformity with the provisions of WTO agreements on implementation of
article .II of (ATT 144C and the =ustoms .aluation Agreement.
INDIA FREE TRADE AGREEMENT
EU3INDIA FREE TRADE A)REEMENT
In June 2007, the European Union (EU)s European Commission and the o!ernment o"
India started ne#otiatin# a $ree %rade &#reement ($%&)' %his ne( #eneration $%&
)o!ers man* areas other than trade in #oods !i+' trade in ser!i)es, in!estment,
inte,,e)tua, propert* ri#hts, )ompetition po,i)*, #o!ernment pro)urement et)' -en)e,
these ne#otiations are #oin# to ha!e "ar rea)hin# )onse.uen)es /oth "or the po,i)*
spa)e o" the Indian state and on the ,i!es and ,i!e,ihoods o" Indian )iti+ens' 0o "ar, 1!e
rounds o" the ne#otiations ha!e /een )omp,eted and a proposed si2th round (hi)h
(as meant to ta3e p,a)e in 4e( 5e,hi in the ,ast (ee3 o" 4o!em/er has 6ust /een
postponed' In addition to the EU, India is )urrent,* ne#otiatin# (ith 20 other )ountries
and re#ions in),udin# Japan and the European $ree %rade &sso)iation (E$%&)' $%&s
ne#otiations (ith more de!e,oped e)onomies are ,i3e,* to ha!e simi,ar a#enda (ith
minor !ariations in the desi#n and ar)hite)ture o" the a#reement'
0tudies
1
, in),udin# those /ased on ri#orous )omputa/,e #enera, e.ui,i/rium re!ea,
that $%&s /et(een de!e,opin# and de!e,oped e)onomies do not e2tend mu)h
ad!anta#e to de!e,opin# )ountries su)h as India' %he reasons /ehind poor #ains to
de!e,opin# )ountries "rom $%&s are man*' $irst,*, the* undermine the ri#ht o" 7special
and diferential treatment spe)i1)a,,* re)o#ni+ed under the 8or,d %rade 9r#anisation
(8%9) "rame(or3' Under this ri#ht, de!e,opin# )ountries are not re.uired to e.ua,,*
re)ipro)ate' In )ontra!ention to this spe)ia, treatment, the a/o!e $%&s demand "u,,
re)ipro)it*' 0e)ond,*, man* $%&s (ith de!e,oped )ountries )ontain pro!isions re,ated
to in!estment, inte,,e)tua, propert*, )ompetition po,i)*, #o!ernment pro)urement,
ser!i)es et)' and re.uire )ru)ia, )han#es in nationa, ,a( and po,i)* in de!e,opin#
)ountries' 0u)h )han#es redu)e the po,i)* spa)e a!ai,a/,e "or de!e,opin# )ountries
espe)ia,,* in these )riti)a, areas' %hird,*, pre"eren)es o/tained throu#h $%&s (ith
de!e,oped )ountries do not ,ast ,on# as these )ountries are a,so ne#otiatin# (ith a
ran#e o" other de!e,opin# )ountries in),udin# )ompetitors in the same produ)t ran#e'
:ast,*, de!e,oped )ountries are usin# $%&s to /rin# into p,a)e an internationa, trade
re#ime on terms not )ondu)i!e to de!e,opin# or ,east de!e,oped )ountries' $%&s are a
pre"erred route "or this as mu,ti,atera, ne#otiations a;ord de!e,opin# )ountries
)o,,e)ti!e /ar#ainin# spa)e (hi,e $%&s do not' 9n)e su<)ient $%&s are in p,a)e, the
ne( re#ime )an then /e pushed more easi,* throu#h mu,ti,atera, "orums ,i3e the 8%9
at a )on!enient time'
Context of EU-India FTA negotiations
%he EUs interest in pushin# these 7e2panded $%&s is part o" a /roader a#enda to
maintain Europes )ompetiti!e ed#e in the (or,d e)onom*' %his has /een ),ear,* spe,t
out in 2006 do)ument re,eased /* the European Commission entit,ed 7Global Europe:
Competing in a Globalized World' %his do)ument out,ines EUs ne( internationa, trade
po,i)* stressin# an a##ressi!e push "or mar3et e2pansion "or European #oods in, and
imports o" ra( materia,s "rom, the ,o/a, 0outh throu#h a series o" $%&s' It notes,
=Measures taken by some of our biggest trading partners to restrict access to
their supplies of these inputs are causing some EU industries major problems
Unless justi!ed for security or en"ironmental reasons# restrictions on access to
resources should be remo"ed$
>ore spe)i1)a,,*, on $%&s, the do)ument states,
%&n terms of content ne' competiti"eness(dri"en )*+s 'ould need to be
comprehensi"e and ambitious in co"erage# aiming at the highest possible
1
degree of trade liberalization including far(reaching liberalization of ser"ices and
in"estment$
&))ordin# to the Global Europe do)ument, the )riteria "or the se,e)tion o"
partners "or $%& ne#otiations are mar3et potentia, (indi)ated /* si+e and
#ro(th o" the e)onom*) and the ,e!e, o" prote)tion a#ainst EU e2port
interests' ?ased on the a/o!e )riteria, the Commission prioriti+ed India as
a 3e* strate#i)
tar#et /e)ause o" its ,ar#e mar3et, the numerous trade and non-trade /arriers a#ainst
EU interests and in order to /eat its main )ompetitors /* )omp,etin# a "ar-rea)hin#
trade and in!estment treat*' Current,*, the EU is Indias /i##est tradin# partner (hi,e
India ran3s ninth in terms o" si+e in the ,ist o" tradin# partners "or the EU'
%he roadmap "or the EU-India $%& is a,so re!ea,ed in the 7@eport o" the EU-India -i#h
:e!e, %rade roup (-%:) to the EU-India 0ummit dated 13
th
9)to/er 2006' %his
@eport ma3es detai,ed o/ser!ations and re)ommendations on the issues to /e
ne#otiated /et(een India and the EU in),udin# massi!e redu)tions in tari;'
EU-India FTA: Isses of Con!e"n
%he $%& proposed /* the EU raises a series o" )on)erns (ith re#ard to peop,es
,i!e,ihoods and po,i)* spa)e "or de!e,opin# an in),usi!e de!e,opment strate#*' %he
te2t o" pre!ious $%&s )on),uded /* the EU sho(s that these a#reements undermine
de!e,opment and pursue a )orporate a#enda that "a!ors mu,tinationa, )orporations
/ased in the EU'
In the present /a)3drop o" a #,o/a, 1nan)ia,, "ood and "ue, )risis, "uture po,i)* spa)e
"or #o!ernments /e)omes an essentia, ,ens (ith (hi)h to assess the merits o"
ne#otiatin# an $%& (ith the EU' ?ased on ne(s reports, the )urrent proposa,s on trade
in #oods (ou,d si#ni1)ant,* in)rease "ood inse)urit* and ,i!e,ihood ris3s "or /oth the
a#ri)u,ture and manu"a)turin# se)tors'
0ome o" the ma6or issues o" )on)ern "or India in an $%& (ith the EU in),udeA
1' Massive reductions in tarif
#$ Import surge'
%$ Impact on livelihoods'
B' Unequal impact of tarif reductions
&$ Automatic extension of MFN clause to EU'
6' Imposition of full reciprocity; undermining Indias special and diferential
treatment
'$ Inclusion of !ingapore Issues
($ Expansive li"erali#ation in services and investment
)$ $%I&!'plus intellectual property protection
*+$ (reating advantages for MN(s through )efective competition
**$ *i"eralising government procurement
*#$ Extreme and un+arranted secrecy in negotiations
Food se!"it,- .i/e.i0oods and a!!ess to 0ea.t0!a"e t0"eatened 1, EU-India
FTA
In )on),usion, in addition to )reatin# serious short and ,on#-term
e)onomi) !u,nera/i,it*, the EU-India $%& )ou,d ha!e ma6or "ood se)urit*,
hea,th)are and ,i!e,ihood imp,i)ations that must /e assessed in detai,' %he
)urrent #,o/a, )risis si#na,s a )riti)a, need to demo)rati+e trade po,i)*
pro)esses so that e,e)ted /odies and )i!i, so)iet* )an ha!e a !oi)e in the
)hoi)es #o!ernments ma3e' %his demo)rati) pro)ess is a )entra, pi,,ar to
ensure that #o!ernments are a))ounta/,e to their )iti+ens' Current ="reeC
trade and in!estment po,i)ies are pro!in# to /e hi#h,* )ost,* to )iti+ens
e!en as their #o!ernments ne#otiate a(a* their ri#ht to re#u,ate' %hese
po,i)ies a,so se!ere,* )onstrain po,i)* spa)e "or domesti) po,i)ies that
"a!our 6ust, e.uita/,e and en!ironmenta,,* sustaina/,e de!e,opment' It is
o" #ra!e )on)ern that the EU-India $%& ne#otiations ti,, date ha!e /een
mar3ed /* a #ross a/sen)e o" transparen)* and pu/,i) de/ate' %he Indian
o!ernments )onsu,tations ha!e /een ,imited to ,ar#e )orporate and
)ommer)ia, interests and ha!e )omp,ete,* /*-passed those most ,i3e,* to
/e
ad!erse,* a;e)ted /* the $%&' %here is an ur#ent need "or an in"ormed pu/,i) de/ate
on the "easi/i,it* and e<)a)* o" the $%& (ith the EU'

Reference!
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