International Business

Regional Trade Agreements

Session 8

Regional Trade Agreements (RTAs) have become a very prominent feature of the Multilateral Trading System (MTS). A trading agreement is an arrangement between countries to reduce tariff barriers. Custom duties on imports have been a big barrier to international trade, reducing trade and the gains that could be made from trade. Reducing these leads to an increase in trade and business. There are multilateral, bilateral and regional trade agreements. There are customs unions and free trade areas. The "Most Favored Nation" (MFN) clause of the GATT agreement is the fundamental principle of WTO. It states that all countries belonging to GATT should be treated equally. Therefore, if India, a member of WTO reduces tariffs on goods imported from Singapore, it should also do so for all other member countries. This founding principle of GATT/WTO and is described in Article I of its preamble. The surge in RTAs has continued unabated since the early 1990s. As of 15 May 2011, some 489 RTAs, counting goods and services notifications separately, have been notified to the GATT/WTO. Of these, 358 RTAs were notified under Article XXIV of the GATT 1947 or GATT 1994; 36 under the Enabling Clause; and 95 under Article V of the GATS. At that same date, 297 agreements were in force. There are agreements between countries of Europe, North America, Asia, Africa and Latin America. There are bilateral agreements between the US and many countries such as Chile, South Korea and Jordan. Regionalism refers to pursuit of trade agreements between countries or groups of countries across the globe. Bilateral and regional accords offer incentives and advantages to trade among members to the disadvantage and exclusion of non-members. Virtually, all the members of the WTO are parties to RTAs. The principle of non-discrimination is one of the main reasons countries join the WTO. Ye, the GATTs founding fathers recognized that RTAs could benefit and invigorate the multilateral trade system. At the same time, they feared that, left unchecked, RTAs could damage and even weaken the world system. Their solution was to create a special provision-GATT article XXIVthat allows for RTAs only when two conditions are met: The level of RTAs trade barriers toward non-members are not on the whole higher than prior to RTAs formation RTA liberalizes substantially all the trade between its members

Article XXIV was, in essence, an attempt to allow RTAs to exist within the larger system without damaging that system by having to follow certain disciplines. The hope was that article XXIV would permit RTAs as an interim exception to the WTOs non-discrimination rule until they would transition into full, multilateral nondiscriminatory liberalizing measures. However, as the new millennium began, concerns about regionalisms impact on the multilateral system was of such concern to trade policy makers that it was placed at the top of the agenda at the launch of the Doha Development Round of trade talks.

Levels of Economic Integration

Free Trade Area all barriers to the trade of goods and services among member countries are removed. In the theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or administrative impediments are allowed to distort trade between members. Each country however is allowed to determine its own trade policies with regard to nonmembers. Customs Union eliminates trade barriers between member countries and adopts a common external trade policy. Establishment of a common external trade policy necessitates significant administrative machinery to oversee trade relations with nonmembers. Common market- has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members. Economic Union involves free flow of products and factors of production between member countries and the adoption of a common external trade policy, but it also requires a common currency, harmonization of members tax rates, and a common monetary and fiscal policy. Political Union a central political apparatus coordinates the economic, social, and foreign policy of the member states.

Prepare a write up on the following: 1. 2. 3. 4. 5. 6. 7. 8. NAFTA ASEAN EU The Andean Community MERCOSUR CARICOM Free Trade Area of the Americas APEC

9. EAC 10. GCC 11. SADC

Case study
What Asias Regional Alliances can learn from the European Model The European Union has plenty of critics. For Asian leaders who seek greater regional integration across the continent, however, the EU provides at least a distant goal, if not a model. But time spent in Brussels talking to officials at the European Commission about the EUs relations with Asia highlights the gap between the EU and its nearest Asian equivalents. On the most basic level, the EU has made war between any of the 27 members seem almost inconceivable. It has closed the rift in Western Europe that brought about two World Wars in the first half of the 20th century, as well as the one that brought the Cold War in the second-half. It has achieved a single market across all these national frontiers and a single currency across many of them. Its economic power is increasingly being matched by its political strength. In comparison, the two big Asian regional integrative ventures-the Association of South East Asian nations (ASEAN) and the South Asian Association for Regional Cooperation (SAARC)are struggling. ASEAN has at least achieved the first aim. Formed in 1967, after a period of confrontation, just short of war, between Indonesia and Malaysia, it has made armed conflict between its members (now 10 of them) seem unlikely. SAARC is not even there. It is riven by internal conflicts in Afghanistan and Sri Lanka, and a dormant but unresolved dispute over Kashmir between India and Pakistan. In Brussels, SAARC hardly gets a mention. This is not just because its contribution to regional integration is so inchoate. It is also because, within South Asia, India physically, politically, and economically dwarfs its neighbors. The EU is pursuing a free-trade agreement (FTA) with India. Pakistan, of course, would want similar treatment. ASEAN, however, is a different matter. Here the EU would like a regional FTA. But ASEAN lacks both the internal-market integration and the bureaucratic capacity to negotiate one. The EU must engage in bilateral talks with its members in the hope that, one day in the future, a block-to-block agreement becomes feasible. But relations are soured by the EUs distaste for the Junta-ruled Myanmar, an ASEAN member. Time at meetings is wasted, and goodwill lost, as the EUs representatives harangue Myanmar. EU officials optimistically detect a second wind in ASEANs enthusiasm for integration, pointing to an agreement on an ASEAN Charter in 2007. But they have to admit ASEAN fudged the tricky parts: on reaching decisions by voting rather than by consensus; on beefing up its paltry secretariat in Jakarta; on increasing solidarity funding for its poorest members (Cambodia,

Laos, and Myanmar); and on infringement issues, i.e. those affecting national sovereignty. All of this reflects the different aims ASEAN members have for their organization. For manyespecially the poor ones-its doctrine of non-interference in each others internal affairs is the core of the ASEAN spirit. They joined not to give up sovereignty, but to bolster their negotiating positions with the West through membership in a bigger group. Ceding national sovereignty is controversial enough in many European countries. In much of South East Asia, it remains out of question,. SAARCs purpose, for most of its smaller members, is different: to rein in India, feared to greater or lesser extent by all its neighbors as a potential bully. But that fear, too, is a big barrier to integration.

Questions What are the different levels of regional integration? Draw five concentric circles diagram and place the above three regional integration endeavors at their appropriate positions.