1. Reinert/Windows on the World Economy, 2005 Regional Trade
Agreements CHAPTER 8
2. Reinert/Windows on the World Economy, 2005 2 Introduction
Multilateralism refers to the GATT/WTO system as well as the trade
negotiations that take place among all GATT/WTO members as a group
Recall that one of the founding principles of this system is
nondiscrimination Involves the most favored nation (MFN) and
national treatment (NT) sub- principles Each WTO member must grant
to each other member treatment as favorable as they extend to any
other member country Regionalism refers to a violation of the
nondiscrimination principle in which one member of a regional trade
agreement (RTA) discriminates in its trade policies in favor of
another member of the RTA and against nonmembers Has been allowed
by the GATT/WTO under certain circumstances Free trade areas (FTAs)
Customs unions (CUs) Interim agreements leading to a FTA or CU
within a reasonable length of time
3. Reinert/Windows on the World Economy, 2005 3 Introduction
Regionalism and multilateralism represent two alternative trade
policy options When multilateralism falters regionalism picks up
the pace Nearly every member of the WTO is also a member of at
least one RTA Over 150 RTAs exist
4. Reinert/Windows on the World Economy, 2005 4 Table 8.1.
Types of Regional Trade Agreements
5. Reinert/Windows on the World Economy, 2005 5 Regional Trade
Agreements Consider two countriesBrazil and Argentina Suppose these
countries initially pursue independent and non-preferential trade
policies Trade policies of these two countries are not coordinated
in any way and do not discriminate among countries There is no
integration of the countries labor, capital, and money markets
First-level RTA is known as preferential trade area Brazil and
Argentina lower their trade barriers between each other, but do not
eliminate them Labor and capital markets remain unintegrated
Because the two countries have not fully eliminated trade barriers
between each other, this type of RTA is not allowed by the WTO
6. Reinert/Windows on the World Economy, 2005 6 Regional Trade
Agreements Second-level RTA is known as free trade area Brazil and
Argentina eliminate the trade barriers between each other With
regard to non-member countries Brazil and Argentina pursue
independent policies Labor and capital markets remain unintegrated
Third-level regional agreement is known as customs union Brazil and
Argentina eliminate the trade barriers between each other
Additionally, member countries adopt common trade barriers with
regard to non-member countries (often referred to as a common
external tariff) Labor and capital markets remain unintegrated
Fourth-level RTA is known as common market A customs union in which
labor and capital markets are integrated into a regional market Any
restrictions on movements of labor and physical capital (direct
foreign investment) have been removed
7. Reinert/Windows on the World Economy, 2005 7 Regional Trade
Agreements WTO members who wish to form FTAs or CUs may do so
However, there are certain requirements Trade barriers against
non-members cannot be higher or more restrictive than those in
existence prior to the FTA or CU FTA or CU must be formed within a
reasonable length of time FTA or CU must eliminate trade barriers
on substantially all the trade among the members With regard to
services, the General Agreement on Trade in Services (GATS)
requires that the FTA or CU involve substantial sectoral
coverage
8. Reinert/Windows on the World Economy, 2005 8 Regional Trade
Agreements How to determine whether a product is from a partner
country Suppose that Brazil and Argentina form a RTA Shirt produced
in Venezuela is imported into Brazil and label Made in Brazil is
attached Shirt can then be imported into Argentina with no
restrictions or tariffsproduct is not really made in Brazil To
protect against such possibilities, RTA members usually define
rules of origin Can be defined in a number of ways, including by
Amount of value added in an RTA partner country Degree of product
transformation
9. Reinert/Windows on the World Economy, 2005 9 The Economic
Effects of Regional Trade Agreements Trade creation Occurs when the
formation of a FTA or CU leads to a switching of imports from a
high-cost source to a low-cost source Tends to improve welfare
Trade diversion Occurs when imports switch from a low-cost source
to a high-cost source Tends to worsen welfare
10. Reinert/Windows on the World Economy, 2005 10 Trade
Creation and Trade Diversion Lets discuss trade creation and trade
diversion using the absolute advantage model Along with Brazil (B)
and Argentina (A), we are also going to refer to a third country,
Venezuela (V) Brazil and Argentina are members of a RTA, whereas
Venezuela is not
11. Reinert/Windows on the World Economy, 2005 11 Figure 8.1: A
Trade-Creating, Regional Trade Agreement between Brazil and
Argentina
12. Reinert/Windows on the World Economy, 2005 12 Trade
Creation Before the RTA, Brazil has in place a specific (per unit)
tariff on imports from both Argentina and Venezuela Argentina is
the lower-cost producer in comparison to Venezuela Therefore Brazil
imports good from Argentina Once Brazil joins either a FTA or CU
with Argentina, tariff is removed on imports from Argentina Good
continues to be imported from Argentina and imports increase
because price has fallen due to removal of tariff Consumer surplus
in Brazil increases while producer surplus and government tariff
revenue falls Net increase in welfare due to trade creation
13. Reinert/Windows on the World Economy, 2005 13 Trade
Diversion Before the RTA, Brazil has in place a specific (per unit)
tariff on imports from both Argentina and Venezuela Assume
Venezuela is now the lower-cost producer in comparison to Argentina
Brazil imports the good from Venezuela Once Brazil joins a FTA or
CU with Argentina, however, Brazil switches to Argentina as an
import supplier Imports expand as the domestic price falls Consumer
surplus in Brazil increases while producer surplus and government
revenue falls Whether net welfare effect is positive or negative
depends If trade-diverting effects outweigh trade-creating effects
then RTA will reduce welfare in Brazil
14. Reinert/Windows on the World Economy, 2005 14 Figure 8.2. A
Trade-Diverting, Regional Trade Agreement between Brazil and
Argentina
15. Reinert/Windows on the World Economy, 2005 15 The European
Union Set of agreements among countries of Western Europe in the
realms of economics, foreign and security policies, and justice and
home affairs Extend back to the Marshall Plan under which United
States aided in the reconstruction of Europe after World War II
Promoted liberalization of trade and payments among European
countries in its zone of influence 1992 marked the official
completion of a common market in which barriers to labor and
physical capital were to be removed Actual completion of a common
market is still in process
16. Reinert/Windows on the World Economy, 2005 16 Table 8.2:
The Evolution of the European Union
17. Reinert/Windows on the World Economy, 2005 17 The European
Union Some economists argue that trade creation dominated trade
diversion in the EC and EU Alan Winters has a more cautionary view
Despite common external tariff of European Union CU nontariff
barriers increased in certain sectors EU subsidies increased in
other sectors Tsoukalis offers an intermediate view Overall trade
creation in manufactured goods and overall trade diversion in
agricultural goods Largely the result of the Common Agricultural
Policy (CAP)has protected EEC/EU agriculture from foreign
competition and has involved the heavy use of export subsidies
18. Reinert/Windows on the World Economy, 2005 18 The European
Union Has ventured beyond a common market to a monetary union with
the euro A current preoccupation of the EU is the issue of
enlargement Expanding membership to include selected Eastern
European countries, as well as Turkey Crucial sticking point,
especially in the case of Poland, is the extent to which CAP
provisions are to be extended to new EU members
19. Reinert/Windows on the World Economy, 2005 19 The North
American Free Trade Area In January 1994 a FTA between Canada,
Mexico and US took place (NAFTA) Addressed the following Trade in
goods Financial services Transportation Telecommunications Foreign
direct investment Intellectual property rights Government
procurement Dispute settlement
20. Reinert/Windows on the World Economy, 2005 20 NAFTA Issues
Impact of NAFTA on wages in the United States particularly
blue-collar wages If assumptions of Heckscher-Ohlin model of
international trade hold true, would expect increased North-South
trade to adversely affect workers in North Some observers concluded
NAFTA would hurt US workers Eventually, a labor side agreement was
attached to main NAFTA agreement Mathematical models of NAFTA
completed by that time showed an improvement in US wages as a
result of NAFTA trade liberalization In retrospect, issue of NAFTA
and wages was probably overblown Average monthly layoffs in United
States as a result of non-NAFTA causes have been hundreds of times
higher than the NAFTA job displacements following the
implementation of this RTA
21. Reinert/Windows on the World Economy, 2005 21 NAFTA Issues
Another prominent issue was trade and the environment Resulted in
provisions for the creation of a North American Commission on
Environmental Cooperation (CEC) Focused some of its subsequent
efforts to analysis of industrial pollution within North
America
22. Reinert/Windows on the World Economy, 2005 22 Mercosur and
the FTAA RTA among Argentina, Brazil, Paraguay, and Uruguay was
launched in 1991 with the Treaty of Asuncin Common Market of the
South, or Mercosur, took on Chile and Bolivia as associate members
in 1996 and 1997, respectively Suggests that the RTA among the four
core members is an actual common market with the free movement of
labor and physical capital However, this is not the case Mercosur
entered into force in 1995 as a FTA with plans to complete a CU by
2006 Free movement of labor and physical capital is a long way
off
23. Reinert/Windows on the World Economy, 2005 23 Mercosur Had
a positive impact on amount of trade among its four core members
Technology profile of traded goods is higher for trade within
Mercosur than for trade between Mercosur and the rest of the world
However, intra-Mercosur trade is low by world standards Troubled by
two asymmetries that challenge its smooth functioning Argentina and
Brazil dwarf Paraguay and Uruguay in economic size Smaller members
find themselves somewhat sidelined from the core relationship
between Argentina and Brazil Fundamental macroeconomic asymmetries
between Argentina and Brazil Exchange rate asymmetries caused a
great deal of friction between Argentina and Brazil
24. Reinert/Windows on the World Economy, 2005 24 Free Trade
Area of the Americas In 1994, governments of 34 countries in
Western Hemisphere agreed to pursue a Free Trade Area of the
Americas Negotiations were launched at the Second Summit of the
Americas in 1998 in nine negotiating groups Market Access
Investment Services Government Procurement Dispute Settlement
Agriculture Intellectual Property Rights Subsidies, Antidumping,
and Countervailing Duties Competition Policy
25. Reinert/Windows on the World Economy, 2005 25 Regionalism
and Multilateralism Represent two alternative trade policy options
available to the countries of the world The 1950s and 1960s saw
first wave of RTAs in developing world The 1980s saw beginning of
second wave of RTAs What role will the second wave of RTAs play
vis-- vis the multilateral efforts toward trade liberalization
pursued under the GATT-WTO framework Will the second wave of RTAs
complement the multilateral framework or will it work at
cross-purposes to this framework?
26. Reinert/Windows on the World Economy, 2005 26 Regionalism
and Multilateralism Opponents argue RTAs are discriminatory by
nature They draw attention to spaghetti-bowl nature of second- wave
RTAs Meaning the overlapping nature of most RTAs, with most WTO
members holding simultaneous membership in many RTAs at once For
example, Mexico has signed FTA agreements with the United States,
Canada, Nicaragua, Costa Rica, Chile, Bolivia, El Salvador,
Guatemala, Honduras, Colombia, Venezuela, and the European Union
The negotiating energies put into RTAs will detract from those put
into multilateral agreements under the auspices of the WTO
27. Reinert/Windows on the World Economy, 2005 27 Regionalism
and Multilateralism Key issue facing multilateral trading system is
how to best manage and regulate RTAs Responsibility falls to the
WTO Committee on RTAs A number of points are worth stressing here
GATT-era oversight of RTAs was inadequate Marrakesh Agreement
establishing WTO included an understanding on RTAs Specified that
the relevant measure to assess the phrase shall not be higher or
more restrictive than is a weighted average of tariff rates and
that within a reasonable length of time is to be no more than ten
years Specifies that all new RTAs must be notified to the WTO and a
WTO working party is to be established to examine each notification
and to ascertain its impact on the multilateral trading system WTO
could go further and tighten its requirements on the external
protection of FTAs and CUs Is possible to lessen the tensions
between regionalism and multilateralism but probably not possible
to eliminate these tensions entirely