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http://www.fao.org/docrep/004/y4793e/y4793e04.htm

CHAPTER 1. INTRODUCTION

The resurgence of regionalism

Waves of regionalism

Regional integration has been a recognizable feature of international trade relations in the post-warperiod, though its salience has waxed and waned. Two waves of regionalism can be identified and athird may be underway. The first started with the establishment in 1957 of the forerunner of theEuropean Union and, in the developing world, the adoption in Latin America and Africa of import-substituting regional integration as the means to effect inward-looking growth. Most of the developingcountry schemes initiated at this time eventually became moribund or collapsed, while the growingmomentum of multilateral liberalization in the 1970s and 1980s contributed to the decline in theimportance attached to regionalism.

A second wave of regional integration started during roughly the second half of the 1980s. The originof the new regionalism has been attributed to the drawn out nature and slow progress of the GATTUruguay Round negotiations, to the apparent success and fears aroused by the EUs initiative aimedat establishing a Single European Market, and to the conversion of the United States to regionalismwith its negotiation of the North American Free Trade Agreement (NAFTA) and its Enterprise for theAmericas initiative which has led to proposals for a Free Trade Area of the Americas (FTAA). In LatinAmerica, new life was breathed into some old integration arrangements, sometimes in the wake ofpolitical change (the Central American Common Market and the Andean Pact) and newarrangements, such as MERCOSUR, were created. In Asia, ASEAN embarked on plans for anASEAN Free Trade Area (AFTA), the South Asian Association for Regional Cooperation agreed in1997 to transform itself into the South Asian Free Trade Area while the Asia Pacific EconomicCooperation (APEC) also committed to trade liberalization objectives on a non-preferential basis. InAfrica, home to the worlds oldest customs union in Southern Africa, initiatives have included therevitalization of existing regional groupings, the formation of new groupings and the announcement of

ambitious targets at the 36th OAU Summit in Lom, Togo in July 2000 to accelerate the formation ofan African economic and political union.

The third wave

Some observers believe that a third wave of integration is currently underway (Lloyd, 2002). Whilethere were 125 RTAs notified during the GATT years, a further 125 new RTAs have been notifiedsince the establishment of the WTO on 1 January 1995 up to April 2002 (WTO, 2002). Thisrepresents an average of 15 notifications every year to the WTO, compared with an annual averageof less than three during the four and a half decades of the GATT (see Figure 1) [1]. On average, eachWTO Member is involved in five RTAs, though some are parties to ten or more. According to a recentWTO study, most developing countries now participate in RTAs. Of the 243 RTAs estimated to be inforce in April 2002, between 30-40 per cent are agreements concluded between developing countries

(WTO, 2002).

Figure 1 - RTAs notified to the GATT/WTO (1948-2002), cumulative

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Source: WTO, 2002

Growing complexity of RTAs

Another WTO study noted that the configuration of RTAs is diverse and becoming increasingly morecomplex with overlapping RTAs and networks of RTAs spanning within and across continents at theregional and sub-regional levels (WTO, 2000a). The simplest configuration is a bilateral agreementformed between two parties. These account for more than half of all RTAs in force and almost 60 percent of those under negotiation. More complex are plurilateral agreements involving a number ofcountries and those agreements in which one of the partners is an RTA itself. Agreements in whicheach party is a distinct RTA are expected to emerge in the next five years, reflecting the growingconsolidation of established regional arrangements. A mapping of RTAs is provided by WTO (2000a).

In terms of geographic coverage, new bilateral developments have fundamentally changed thepattern of RTAs. First, up to the early 1990s, RTAs were a set of non-intersecting areas with only afew exceptions. This is no longer true. Many countries are now members of more than one RTA, whatBhagwati (1995) called the spaghetti bowl. Second, the new regionalism is characterized byintegration across the North-South divide with a number of schemes involving both developing andindustrialized countries. Third, several of the new agreements are cross regional in that the membersspan more than one of the worlds geographic regions.Fourth, another feature is the emergence oflarge continental RTAs. The EU is in its fourth enlargement. The FTAA would create an area of 34nations if negotiations are successfully concluded. An East Asia RTA is a possibility. The OAU ispromoting the idea of an African Common Market. Thus, the current scene is characterized by manynew bilaterals coexisting with very large continental RTAs, a pattern which Lloyd (2002) characterizes

as bilateralism combined with continentalism.

Hubs and spokes

The existence of overlapping RTAs creates what is referred to as hub and spoke configurations. Ahub arises when one country is a member of two or more distinct RTAs. Spokes may be eitherbilateral (where a hub country forms a bilateral RTA with another country) or plurilateral (where a hubcountry enters into a relationship with another RTA). Hubs and spokes can be a negative feature ofthe proliferation of RTAs as they create multi-layered preference schemes. In particular, spokes haveless market access than the hub as the hub enjoys preferential access to all spokes but a spoke haspreferential access to the hub only. A spoke country can avoid this effect by becoming a hub in itsown right by entering into its own set of bilateral or plurilateral RTAs. No doubt this partly explains theacceleration in bilateral agreements which is occurring at the present time.

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Expanding coverage

Another characteristic of new generation agreements is their expanding instrument and commoditycoverage. Newer agreements increasingly cover agriculture, services, investment, intellectualproperty, government procurement, trade facilitation, dispute settlement, as well as limits on the useof quantitative restrictions and safeguards. A number of agreements make provision for the use ofcompetition policy instruments in place of anti-dumping procedures on trade among the parties

(Crawford and Laird, 2000). There is also a growing emphasis on policy integration, where countriesagree to reduce the market-segmenting effects of differences in national regulatory regimes. As anexample, consider the 1995 Osaka Action Agenda agreed by APEC leaders. The 15 action areasinclude tariffs; non-tariff measures; services, investment; standards and conformance; customsprocedures; competition policy; government procurement; deregulation; intellectual property; rules oforigin; dispute mediation; mobility of business persons; Uruguay Round implementation; andinformation gathering and analysis (Scollay, 2001).

Characteristics of integration schemes

Typology of integration schemes

The classic schema of economic integration ranks integration arrangements according to the depth of

integration achieved along a continuum starting with a preferential trade area, and evolving through afree trade area, customs union, common market, economic union, economic and monetary union toultimately achieve a state of total economic integration. Regional trade arrangements (RTAs) are a

subset of possible regional integration arrangements (RIAs).

Inpreferential trade areascountries lower tariffs on trade with each other while retaining autonomyin setting tariffs on trade with third countries. In free trade areas, countries eliminate tariffs on tradewith each other while retaining autonomy in trade policy with third countries. A problem withpreferential and free trade areas is the danger oftrade deflection. This can arise where goods areimported through the country with the lowest external tariff for free circulation throughout the region.Trade deflection can be controlled by the use of rules of origin (rules which determine if a product isdeemed to have originated in a particular country and is thus eligible for preferential tariff treatment)

or through forming a customs union.

Customs unionsremove tariffs on trade with other members and apply a common trade policytowards third countries. A common marketin addition aims at removing restrictions on factor mobility(capital, labor) between members as well as freeing trade in goods and services. In an economicunion, members pursue some degree of harmonization of national economic policies in order toremove discrimination due to disparities in these policies. Monetaryunionadds the adoption of acommon currency and a common monetary policy, while the stage oftotal economic integrationinvolves the unification of monetary, fiscal and social policies under the auspices of a supranational

authority. Examples of RTAs which fall into these categories are shown in Table 1.

In the past, there was a tendency to see this typology as a ladder along which participating countrieswould move to successively deeper stages of integration. While there is some support for this in theEU experience, the ladder theory does not take account of the specific problems which arise whenintegrating mixed economies. A mixed economy is one where the economic order is based on marketprinciples but where there is considerable public intervention either to control market forces (e.g.

competition, consumer protection and environmental policies) or to correct or compensate for marketoutcomes (e.g. social and regional policies). Differences in these public interventions give rise tounintended trade barriers which can only be overcome either by eliminating the intervention(deregulation) or by supranationalizing it (by transferring the intervention to the union level through aform of positive integration).

Thus, in the EUs experience, we see examples of positive integration accompanying marketintegration from the very outset. For example, governments have long intervened in agriculturalmarkets in order to protect farm incomes, ensure food security and stabilize prices. The integration of

agricultural markets in the EU required from the outset that these functions were transferred to the EU

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level and the Common Agricultural Policy was born. Similarly, the introduction of monetary union,which required the negative integration steps of eliminating controls on capital movements andnational governments ability to issue money, also required a good deal of positive integration insetting up common monetary rules and institutions at the EU level.

In short, policy harmonization may well be needed to make trade integration work, particularly ifextended to services trade (the lesson of the single market program in the EU) and may indeed

precede trade integration (as in the case of monetary unions in Africa). Conversely, policy integrationagreements can stand alone. They do not have to be accompanied by preferential trade liberalization.For example, countries may conclude mutual recognition agreements for health, safety or prudentialstandard regimes without any intention of forming an RTA.

Table 1 - Selected examples of different types of regional integration arrangements

Type Level of Integration Examples ofRegional Trade

Areas

Free TradeArea

Members eliminate tariffs among themselves butkeep their own tariffs against the rest of the world

EU-CEEAssociationAgreements

NAFTACEFTAANZCER

CustomsUnion

Members eliminate tariffs among themselves andadopt a common tariff against the rest of the world

MERCOSURAndean PactCentral AmericaCommonMarketSACU

CommonMarket

Members eliminate tariffs among themselves,adopt a common external tariff, and removeimpediments to movements of factors ofproduction between member countries

European EconomicCommunity

EconomicUnion

Members move beyond a common market to co-ordinate and harmonize economic policies

European UnionWAEMU

MonetaryUnion

Members share a common currency and monetarypolicy

Euro-zone countriesof the EuropeanUnionCFA zone[2]

Monetaryunions

There are also examples of monetary unions in which countries agree to pool their monetarysovereignty without necessarily integrating other aspects of trade and economic policy. Customsunion theory is concerned only with the markets for goods. Optimal currency area theory has a slightlydifferent focus. It seeks to understand the conditions under which is economically efficient to create a

currency union. Interest in regional financial arrangements was rekindled in Asia following the Asianfinancial crisis in 1997-98 which existing regional institutions could do little to alleviate. Sucharrangements can take various forms. The most limited form would be a regional liquidity fund, wherenational central banks enter swap arrangements with each other to pool liquidity. A more advancedform would be characterized by preparation for monetary union, including fixed exchange rate bandsand rules to achieve nominal convergence. The most integrated form is creation of a monetary union,including a single currency and monetary policy. Although food and agricultural trade wouldundoubtedly be influenced by the exchange rate implications of forming a monetary union, we do not

consider this type of RTA further and concentrate on RTAs in the discussion in the rest of this paper.

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Political commitment and regional integration

Importance of political commitment

While regional integration arrangements are often evaluated in purely economic terms, integrationmay be pursued for explicitly political motives. Although it is now almost taken for granted that tradeintegration is one of the main benefits sought by countries entering regional integration arrangements,Page (2000) points out that it is hard to explain the growth of interest in regional integration based ontrade motives alone given that tariff levels in most regions have been falling and are now at relativelylow levels. She concludes that all successful regions have objectives other than freeing trade, andthat this may be essential for the will to evolve.

Trade maywellbesecondaryto politicalorsecurityobjectivesoratoolratherthananobjective:itisdifficulttofindanygroups whichhaveonlyastrictlytradeagenda. (ibid, p. 6)

Even if political motives are not uppermost, political will is a crucial ingredient in the integrationprocess and, in its absence, little progress will be made. At the same time, economic integration canhave political consequences, as when it contributes to stabilizing a political regime or enhancingregional peace and security. On the other hand, the experience of unsuccessful integration may

cause discord and even provoke the breakdown of relations between participants.

Donor attitudes to regionalism

EUa strong supporter

The attitudes of major donors are important elements in the environment in which many developingcountries are turning to regional integration strategies. Perhaps not surprisingly, the EU hasdemonstrated the most positive attitude to regional integration. This was underlined in the 1997 EUGreen Paper on Development Cooperation (European Commission, 1997) and the subsequentdecision to support Regional Economic Partnership Agreements (REPA) as the post Lomarrangements for the ACP countries. [3]

Regionalintegrationamongdevelopingcountriesis partofa widerstrategyto promoteequitable

growthandisnotanendinitself. Effectiveregionalintegration willincreasecompetition,reduceprivatetransactioncosts,enablefirmstoexploiteconomiesofscale,encourageinwardforeigninvestmentandfacilitate macroeconomicpolicycoordination. Regionalgroupingsshouldbeopentowardsthe worldmarketinthesenseofkeepingtariffsatalevelthatdoesnotencouragetradediversion. Theyshouldnotattemptaform ofregionalautarkythathasledto pastfailures. Openregionalism complementsunilateralliberalisation. Withoutregionalcoherence,unilateralliberalisationmayimplynegativespill-overeffects. A regionallycoherentliberalisationstrategywillreduceand

smoothenthecostofadjustmenttoaneconomyinthefaceofglobalisation, bothforthe privateandpublicsector. Thehighadjustmentcostofunilateralliberalisationhas beenacauseofpolicyreversalinanumberofdevelopingeconomies.(EU Council Statement on Development Co-operation, 1997).

The EUs support for, indeed insistence on, regionalism under the Cotonou Agreement with the ACPcountries and in its Euro-Mediterranean agreements will be a powerful impetus for further regional

economic integration among its partners in the coming decade.

World Bank more sceptical

In the early 1990s, the concept of open regionalism was a subject of intense debate in the WorldBank. The Banks report on regional integration (World Bank, 2000) gives cautious support to theidea, and its stance is further spelled out in the companion volume by Schiff and Winters (2003). Itbelieves that reducing barriers to trade and investment with all trade partners evenhandedly throughnonpreferential trade liberalization, undertaken where necessary on a unilateral basis, remains thebest development strategy. But it recognizes that political pressures may push some countries toprefer regional integration arrangements, and it has pursued a major research program with the aim

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integration, emphasizing those factors which contribute to the sustainability of regional arrangements.Chapter 4 discusses the way in which regionalism is addressed by WTO multilateral rules as well asthe issues it raises for the multilateral negotiations on agriculture. Chapter 5 examines howregionalism impacts on food security and the potential role of regional trade arrangements inpromoting food security. Section 6 discusses the experience of regional economic initiatives in sub-Saharan Africa. It highlights the poor track record of regionalism and identifies the issues which mustbe addressed if regionalism on that continent is to be more successful in the future. Section 7

concludes with a check list of initiatives which might be pursued by those interested in developing thefood security dimension of regional integration programs. In many cases such initiatives might be putforward for donor support as part of their assistance to regional economic groupings.

[1] The WTO figures only include notified agreements, and there are many other non-notified, or not yet notified, agreements in existence. Also, non-reciprocal preferentialagreements covered by waivers are not included in these numbers.[2] CFA stands forfrancdescoloniesfranaisesdAfrique. It was created onDecember 25th, 1945 as the currency of a zone of francophone countries in West andCentral Africa, pegged to the French franc and supported by the activities andresources of the Bank of France.[3] We refer to the European Union countries as the EU throughout this paper.Formally, however, it is the European Community which has responsibility for the

conduct of EU trade policy.