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THE WORLD TRADE ORGANISATION

 Only global Organization dealing with rules of trade between Nations.

 Multilateral Trading System.
 WTO principal rule based on GATT and Uruguay Round.
 WTO members operate a non-discriminatory trading system.
 Help Trade flow smoothly, freely, fairly & predictably.

ARTICLE 1 – MFN

Deals about the non-discriminating principle:

 MFN status states that all WTO members should receive the tariffs of those received by the most-
favoured-nations i.e. the same tariffs apply to all WTO members.

ARTICLE – XXIV

 Provides for the formation and maintenance of “customs unions” and “free-trade areas.”
 Derogation of ART I and subject to certain criteria:
– Terms of access more liberal
– Preferential agreement must cover all trade between parties
– Terms of access for non members should not be worse than before entering in a regional agreement
– Preferential agreements limited to geographically proximate partners
– Preferential agreements limited to countries that already enjoy high degree of economic integration
– Preferential agreement should be open ended
– Preferential agreements should involve high levels of obligations

ADVANTAGES OF WTO

 Minimises distortions in the market.

 Multiplier Effect
 Reduction in transaction costs.
à Avoidance of costly bilateral arrangements.
à Customs clearance easier.
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GAINS FROM REGIONAL INTEGRATION

1. STATIC GAINS

 This result from a one-time reallocation of economic resources.

 The static gains will depend on the size of both trade creation and trade diversion. Viner (1950).

 TRADE CREATION

Trade creation provides gains on both the supply and demand side. Viner (1950). de la Torre and Kerry
(1992)
 Supply side - reallocation of resources away from protected industries & towards regional market
producers.
 Demand side – lower cost products available

 TRADE DIVERSION

 Trade diversion takes place when a member switches from consumption of lower cost goods
imported from outside the region to higher cost goods produced within the region (which face
lower tariffs after integration)
 The cross-border subsidy element decrease aggregate economic welfare

2. DYNAMIC GAINS

 Such gains stem from the impacts of regional integration agreements on productive capacity,
potential output and income growth
 Greater competition lead to greater efficiencies in production & marketing and possible gains from
industrial reconstruction
 Production of specialized products and the development of niche markets e.g. the EU
 Economies of scale. De la Torre & Kelly (1992)
 Spillover effects
 Cooperation in the production of public goods of common interest
 Sparking of greater investment
 Improvement in technology from imports of capital goods
 Importation of best practices and new technologies

3. NON ECONOMIC BENEFITS

 Greater bargaining power of member countries vis-à-vis non-member countries

 Greater commitment to political objectives of common interest
 Loss of sovereignty
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REGIONAL TRADE AGREEMENT

DEFINITION

 Agreements whereby members accord preferential treatment to one another in respect to trade
barriers.

 Strategic trade arrangements have enabled many states to move towards free trade at their own
pace and for their own benefits.

TYPES OF REGIONAL TRADE AGREEMENTS

 PREFERENTIAL TRADING AGREEMENTS

Preferential Trading Agreements (PTAs) lower trade barriers among members. Such preferential trade
is usually limited to the portion of actual trade flows from LDCs, and is often non-reciprocal.

 FREE-TRADE AREA

Economic integration whereby countries seek to remove all barriers to trade between themselves, but
each country determines its own barriers against nonmembers. A prominent example of a FTA is the
North American Free Trade Agreement (NAFTA).

 CUSTOMS UNION

Economic integration whereby countries remove all barriers to trade among themselves, but erect a
common trade policy against nonmembers. The Customs Union of the Southern Cone –MERCOSUR
represents such an arrangement.

 COMMON MARKET

Economic integration whereby countries remove all barriers to trade and the movement of labor and
capital between themselves but erect a common trade policy against nonmembers. One example of
Common Market is the Common Market for Eastern and Southern Africa (COMESA).

 ECONOMIC UNION

Economic integration whereby countries remove barriers to trade and the movement of labor and
capital, erect a common trade policy against nonmembers, and coordinate their economic policies. One
example of Economic Union is the European Union (EU).
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BENEFIT OF REGIONAL TRADE AGREEMENT TO MEMBER COUNTRIES

 INCREASE IN OVERALL TRADE

By lowering or eliminating tariffs among themselves, the RTA member countries can enjoy lower
importing price and thus increase their overall trade.

 INCREASE NEGOTIATING POWER

In addition, RTAs can join the international trade negotiations as a whole. Thus, joining in a RTA will
enhance the member countries' bargaining power in multilateral negotiations because of the enlarged
size of the negotiator.

 ALLOWS FOR CROSS-BORDER MERGERS, ACQUISITIONS, STRATEGIC

ALLIANCES AND OTHER FORM OF FDI

RTA does not allow increase in trade of goods but even more by increased cross-border mergers,
acquisitions, strategic alliances and other form of FDI.

 REINFORCEMENT OF GOOD DIPLOMATIC PRACTICES

Also regional agreements reinforce good diplomatic practices aimed at reducing the inevitable rancour
that can flow from cross-border commercial disputes
 REDUCING THREAT OF ASSIMILATION

Trade agreements are a very effective way to reduce threat of assimilation by placing governments in a
better position to defend practices and preferences.

 SPILL-OVER EFFECT:REGIONAL GROWTH

If neighbouring countries grow rapidly, that appears to assist regional growth.

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NEGATIVE PART OF REGIONAL TRADE AGREEMENTS

 Preferential trade areas

 Preferential treatment and discrimination against non-members
 Embedded discrimination into trading patterns
 Erode existing commitment to more broadly based agreements
 Limit competition
 Acquisition of monopoly power
 Preferential agreements
 Reduce comparative advantage
 Common to manufacturing sector
 Minority encompass agriculture and services
 Fallacy of transposition
 Experiences of industrialized countries irrelevant to developing countries
 Initial conditions overlooked
-high level of intra-regional trade before integration was started
-similarities in income and industrialization levels allowing for intra-industry specialization
-political congeniality in foreign affairs and
-capability of and willingness to provide compensation payments