International Trade AgreementsSpring Semester 2013 – January 16 to May 10, 2013

Ninth and Tenth ClassesFebruary 13/15, 2013

Professor Luis Ernesto Derbez Bautista

Second Section - Trade Agreements: A Typology

We will review the following aspects of Trade Agreements

1. From GATT to WTO: multilateral and regional agreementsA review of the evolution of the trade system from Bretton Woods until today

2. Preferential Trade Agreements: Bilateral and Plurilateral TreatiesDifference between reciprocal and unilateral preferences in trade agreements

3. Custom UnionsA higher form of trade integration between nations

4. Integration and TradeThe concept of regionalism and the political aspects of integration

5. Free Trade AreasA special form of preferential trade systems

6. Monetary UnionsA deeper integration process

7. Conclusions

Some Concepts Regarding Trade Arrangements

The economics literature has often used somewhat different definitions of regional trade arrangements:

The term Regional Trade Agreement (RTA) is used to refer to an agreement between two or more countries to apply lower trade policy barriers to goods and services imported from the members than to those imported from third countries. A Free Trade Area (FTA) is a PTA for which barriers on trade between members are reduced or eliminated, and the term usually suggests other policy measures in addition to discriminatory trade preferences. FTA members may elect to impose a common external tariff (CET) for each product; a CET may be imposed with or without the continued use of internal customs controls. A Customs Union (CU) is an FTA with a CET, in which internal customs controls have been eliminated, so that goods imported from third countries may circulate freely throughout the territory of the customs union.A Common Market, the deepest form of economic integration, allows the free movement of productive factors (labor and capital) as well as products (goods and services).

Preferential Trade Arrangements (PTAs) in the WTO are unilateral tradepreferences. They include GSP schemes, non-reciprocal preferential schemes forproducts from LDCs only, as well as other non-reciprocal preferential schemes thathave been granted a waiver by the General Council (such as AGOA orCARIBCAN).

Modern RTAs, and not exclusively those linking the most developed economies,tend to go far beyond tariff-cutting exercises. They provide for increasingly complexregulations governing intra-trade (e.g. with respect to standards, safeguardprovisions, customs administration, etc.) and they often also provide for apreferential regulatory framework for mutual services trade.The most sophisticated RTAs go beyond traditional trade policy mechanisms, toinclude regional rules on investment, competition, environment and labor.

What all RTAs in the WTO have in common is that they are reciprocal tradeagreements between two or more partners. They include free trade agreementsand customs unions, notified under Article XXIV:7 of the GATT 1994, andparagraph 2 (c) of the Enabling Clause, and Economic Integration Agreementsunder Article V:7 of the GATS.

PTAs and RTAs in WTO

RTAs represent a departure from the non-discrimination principle underlying the original GATT multilateral trading system.

The post-war economic order erected in the 1940s establishednondiscrimination as the norm in international economic relations, in bothtrade and financial relations. The choice of a multilateral trading system withthe most favored nation (MFN) (non-discrimination) principle at its corereflected a desire to buffer trade from other policy areas and to insulate small,less powerful countries from undue influence of larger ones.

WTO rules allow an exception to the non-discrimination principle undercertain conditions; however—despite important recent advances toward greatertransparency—oversight of WTO rules on RTAs has proven weak. As a result,in the past two decades the number of RTAs has risen sharply and theynow cover a third to half of global trade.

The scope of RTAs has also broadened, to include trade in financial and otherservices, investment flows, and other rules.

Why are RTA´s important in the 21st Century?

By July 2005, only one WTO member — Mongolia, — was not party to aregional trade agreement. The surge in these agreements has continuedunabated since the early 1990s. By July 2005, a total of 330 had been notifiedto the WTO (and its predecessor, GATT). Of these: 206 were notified after theWTO was created in January 1995; 180 are currently in force; several othersare believed to be operational although not yet notified.

Article 24 of the WTO says that if a free trade area or customs union is created, duties and other trade barriers should be reduced or removed on substantially all sectors of trade in the group. Non-members should not find trade with the group any more restrictive than before the group was set up.

Article 5 of the General Agreement on Trade in Services (GATS) provides for economic integration agreements in services. Other provisions in the WTO agreements allow developing countries to enter into regional or global agreements that include the reduction or elimination of tariffs and non-tariff barriers on trade among themselves.

Regional agreements have allowed groups of countries to negotiate rules and commitments that go beyond what was possible at the time multilaterally

Regionalism and WTO

Evolution of Regional Trade Agreements

Some Concepts Regarding Trade Arrangements

• Unilateral Tariff Liberalization.

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Figure 1 - Average Number of RTA Partners Over Time

Total Number of RTA Partners Number of FTA Partners Number of CU Partners

Average Number of RTA Partners

As a result of the variety of

RTAs, the following are the type of items that

are negotiated between

partners to reach an EPA

(Economic Partnership Agreement)

The increase in RTAs, coupled with the preference shown for concludingbilateral free-trade agreements, has produced the phenomenon of overlappingmembership. As their scope broadens to include policy areas not regulatedmultilaterally, these overlaps increase the risks of inconsistencies in the rulesand procedures among RTAs themselves, and between RTAs and themultilateral framework. This gives rise to:

regulatory confusion,

distortion of regional markets, and

severe implementation problems.

RTAs complicate trade in the world

RTA rules of origin (RoO) should be liberal and transparent. The RoO define whether a good is eligible for duty-free treatment, based on whether it has sufficiently ―originatedǁ in the partner country. With restrictive RoO, the use of intermediate inputs from third countries disqualifies a shipment from duty-free treatment in the PTA partner country, exacerbating the bias of the RTA against third countries. The result is a non-transparent form of protection that is not evident in a country’s tariff code.

Cumulation provisions in RTAs should be broad-based, with ―diagonal rather than ―bilateral cumulation. Multiple PTAs for a single country add a new dimension to RoO—that of ―cumulation.

Suppose a single country, X, has RTAs with two other countries, Y and Z. Under bilateral cumulation of rules of origin, inputs that Y imports from Z do not count in meeting the RoO for Y when it exports to X. This fragmented ―hub and spokeǁ system—with X as the hub and Y and Z as spokes—discourages trade between Y and Z.

Alternatively, under diagonal cumulation, inputs that Y imports from Z help Y to meet the RoO when it exports to X. When RoO are otherwise restrictive, bilateral cumulationexacerbates the effects of this restrictiveness

One such complication is: The origin of goods!

And…this is another

Free Trade Area Trade within the group is duty free but members set their own tariffs on imports from non-members (e.g. NAFTA).

Customs Union Members apply a common external tariff (e.g. the European Union).

Preferential Trade Agreement Unilateral trade preferences given to a group of countries, normally from Developed to Developing Nations (e.g.ACP)

GSP Generalized System of Preferences — programs by developed countries granting preferential tariffs to imports from developing countries

Free-rider A casual term used to infer that a country which does not make any trade concessions, profits, nonetheless, from tariff cuts and concessions made by other countries in negotiations under the most-favored-nation principle

rules of origin Laws, regulations and administrative procedures which determine a product’s country of origin. A decision by a customs authority on origin can determine whether a shipment falls within a quota limitation, qualifies for a tariff preference or is affected by an anti-dumping duty. These rules can vary from country to country

Summarizing

Characteristics of integration processes

The typical paradigm is that of linear market integration, following stepwise integration of goods, labor and capital markets, and eventually monetary and fiscal integration. The starting point is usually a free trade area, followed by a customs union, a common market, and then the integration of monetary and fiscal matters to establish an economic union. This process is followed by a regional economic community (REC). The achievement of a political union, features as the ultimate objective of integration.

Concerns about a deeper regional integration agenda include a focus on the perceived loss of sovereignty that such a deeper integration agenda involves. This forms part of a broader ‘policy space’ debate that is associated with the perceived effect of decisions made by member states at regional or multilateral levels.

Integration Paradigms

Let us now debate the transformation of

NAFTA

Let us now debate the integration of Mexico into

Mercosur