international trade law the wto and regional trade agreements
TRANSCRIPT
Law International Trade Law
The WTO and Regional Trade Agreements
DESCRIPTION OF MODULE
Items Description of Module
Subject Name Law
Paper Name International Trade Law
Module Name/Title WTO and Regional Trade Agreements
Module Id 16
Pre-requisites The concept of Customs Union and Free Trade Areas
Whether the recent proliferation of FTA’s is a
building Bloc or stumbling blocs in the development
of multilateralism?
Objectives To understand the following:
The concept of Customs Union and Free Trade Areas
Whether the recent proliferation of FTA’s is a
building Bloc or stumbling blocs in the development
of multilateralism?
Keywords GATT, WTO, regionalism, free trade areas, customs unions,
multilateralism.
E-TEXT
Topics & Sub-Topics covered
16.1. Introduction to Customs Unions and Free Trade Areas
16.2. The Inception of Regionalism
Role Name Affiliation
Principal Investigator Dr. Ranbir Singh Vice Chancellor, National
Law University, Delhi
Co. P.I Prof. (Dr.) G.S. Bajpai Registrar, NLU, Delhi
Paper Coordinator Dr. Saloni Khanderia-Yadav National Law University,
Delhi
Content Writer/Author Dr. Saloni Khanderia-Yadav National Law University,
Delhi
Content Reviewer Dr. Prabhash Ranjan South Asian University,
Delhi
Language Editor Dr. Saloni Khanderia-Yadav National Law University,
Delhi
16.2.1. Types of Regional Trade Agreements
16.3. Article XXIV of the GATT, 1947
16.3.1. Conditions precedent for the creation of a customs union and free trade
areas
16.4. Defining a customs union
16.4.1. What is meant by the phrase “substantially all trade”?
16.4.2. Understanding the phrase “substantially the same duties and restrictions of
commerce”
16.4.3. What happens when the formation of a customs union leads to the increase
in duties with third parties?
16.4.4. A measure imposed by a customs union such formation must be necessary,
if it is inconsistent with the GATT rules
16.5. Defining a Free Trade Area
16.5.1. Examples of FTA‟s
16.7. The Sudden Proliferation of RTA’s: Stepping Stones or Stumbling Blocs?
16.7.1. Regionalism versus Multilateralism
16.7.2. Motivating Factors
16.7.3. Stepping Stone or Stumbling Bloc?
16.8. Summary
TEXT
16.1. Introduction to Customs Unions and Free Trade Areas:
This module pertains to the understanding of the World Trade Organization and
Regional Trade Agreements. Regional Trade Agreements (hereinafter referred to as
RTA’s) are Agreements in order to further liberalize and facilitate trade among
nations. It must be noted that the agreements are not necessarily negotiated between
nations belonging to the same region. The inception of the WTO in 1995 has
witnessed and in fact even encouraged the formation of Regional Trade Agreements.
Accordingly, Article XXIV of the GATT, 1947 facilitates and regulated the
functioning of Regional Trade Agreements. In fact, RTA’s operate as an exception to
the corner-stone of the significant principle of most-favored nation discussed
previously. In other words, while the principle of most-favored nation makes it
incumbent for WTO Members to provide equal treatment, and prohibits
discrimination (both de jure and de facto; RTA’s are an exception to this, which
signifies that Members of an RTA are authorized to adopt measures by virtue of being
a Member of an RTA, which may otherwise be a WTO inconsistent measure. Against
this backdrop, this module shall delve to understand the functioning of RTA’s as
regulated by the WTO, and understand the extent to which the operation of RTA’s
operates as an exception to the principle of equality in the WTO.
For this purpose, this chapter would discuss:
Article XXIV of the GATT, 1947;
The Understanding on the Interpretation of Article XXIV of the GATT, 1947;
The concept of Customs Unions; and
The concept of Free Trade Areas;
Article V of the GATS (The General Agreement on Trade in Services) and the
exception of regional integration.
16.2. The Inception of Regionalism:
RTA’s have proliferated since the birth of the WTO in 1995. In the year 2013,
approximately 575 RTA’s were notified to the WTO.1 This entails that countries
in the international community now perceive regionalism as the preferred method
of trade. Also, some of the most common reasons why nations are now turning to
regionalism are, because it involves the interests of a smaller group of countries.
This in turn makes it easier for countries involved to reach some form of
consensus, than at a global level where the interests of countries are different
economic levels is involved.
Consequently, the General Agreement on Tariffs and Trade (GATT, 1947) which
is now a part of the WTO, 1995 recognizes the significance of regional integration
on trade by virtue of Article XXIV. In other words, despite the fact that the
operation of RTA’s (both Customs Union and Free Trade Area’s) is inconsistent
to the principle of Most-Favored Nation; the former are permitted to operate when
1 The World Trade Organization, (n.d.) Regional Trade Agreements, Retrieved November 12, 2013,
from http://www.wto.org/english/tratop_e/region_e/region_e.htm
they fulfill certain criteria laid down by the GATT, 1947 (for goods) and the
GATS (for services).
16.2.1. Types of Regional Trade Agreements:
RTA’s are regulated by virtue of Article XXIV of the GATT, 1947 as far as trade
in goods is concerned. However, in the event of trade in services, RTA’s are
governed by the GATS or the General Agreement on Trade in Services, in order
to facilitate trade in services between members belonging to such RTA’s.
Albeit the fact that there are several forms of regional integration, both the
GATT and the GATS merely regulate the operation of Customs Union and
FTA’s by virtue of Article XXIV and Article V respectively.
16.3. Article XXIV of the GATT, 1947:
For most, Article XXIV of the GATT recognizes the fact that countries in the
international community may be desirous of building closer relations among one
another; for the purpose of further liberalizing international trade. Apropos, the
GATT, by virtue of Article XXIV facilitates the creation of Customs Unions and
FTA’s in order to facilitate international trade; while at the same time not raise the
trade barriers for other non-Members. Accordingly, Article XXIV: 4 states that:
Types of RTA's RTA's
recognised by the GATT
Free Trade Areas which are similar to Customs
Union except for the fact that a common tariff is
not imposed on Members like in Customs Unions
Customs Union where Members agree to
eliminate tariffs aand all other regulative
restrictions of commerce.
Common Markets/Economic
Unions that agree to harmonize laws,
regulations, policies and maybe even currencies
Preferencial Trade Agreements provide
preferencial access to Members of the bloc
“The contracting parties recognize the desirability of increasing freedom
of trade by the development, through voluntary agreements, of closer
integration between the economies of the countries parties to such
agreements. They also recognize that the purpose of a customs union or of
a free-trade area should be to facilitate trade between the constituent
territories and not to raise barriers to the trade of other contracting
parties with such territories.”
16.3.1. Conditions precedent for the creation of a customs union and free trade
areas:
For the purpose of facilitating the formation of customs unions and free trade
areas, as provided in Article XXIV: 4, the GATT further states that Members are
free to adopt an interim agreement for the purpose of forming a customs union or
free trade area; subject to two conditions:
That duties and other regulations of commerce which are imposed at the time of
the formation of the Customs Union should not be higher for non-members, than
they were before the formation of such Customs Union;
and that the formation of the customs union or FTA would be prevented in case
the first criteria is not met.
16.4. Defining a customs union:
Accordingly, a customs union has been defined under Article XXIV: 8(a) as
“The substitution of a single customs territory for two or more
customs territories, so that (i) duties and other restrictive regulations of commerce (except, where
necessary, those permitted under Articles XI, XII, XIII,XIV, XV and XX) are
eliminated with respect to substantially all the trade between the
constituent territories of the union or at least with respect to substantially
all the trade in products originating in such territories, and,
(ii) (ii) subject to the provisions of paragraph 9, substantially the same duties
and other regulations of commerce are applied by each of the members of
the union to the trade of territories not included in the union.”
With respect to the first criteria,
While the above mentioned criteria are for the purpose of regulating international
trade between the Members of the Union, the GATT additionally lays down a
standard for Members of such a Union to apply with respect to non-members. For
the purpose of external trade (i.e. trade with non-members of the customs union),
the GATT, 1947 makes it implicit that members of the union apply substantially
the same duties and regulations of commerce to territories that are not part of the
union.
Two or more nations which are members of the WTO may come together so as to
form a customs union.
Members of the customs union must eliminate duties and other restrictive
regulations of commerce.
This is done for the purpose of further liberalizing international trade between
the Members of such customs unions.
While the formation of customs union necessitates the elimination of duties and
other regulations of commerce, those regulations for the purpose of the
application of quantitative restrictions, balance of payment regulations,
exceptions to the principle of non-discrimination, exchange arrangements
and general exceptions are otherwise left outside the scope of customs union.
In brief, while the GATT, 1947 encourages the formation of customs union
between its Members, it also ensures that such formation does not raise the
barriers to trade for those territories which are not parties to such customs union.
Hence, “duties and other restrictive regulations of commerce are eliminated for
substantially all trade between them.”
16.4.1. What is meant by the phrase “substantially all trade”?
The scope of Article XXIV: 5 (a) and 8(a) was further clarified by the Appellate
Body in the Turkey: Importation of Textiles dispute. The facts of this dispute in
brief were that Turkey entered into an interim agreement with EU in order to
form a customs union; in accordance with Article XXIV: 5(a) of the GATT, 1947.
As a result, Turkey imposed Quantitative Restrictions (QR’s) on 19 types of
textiles to be imported from India. India challenged this measure before the Panel
in order to examine the scope of Article XXIV read along with Articles XI and
XIII of the GATT, 1947. At the same time, Turkey argued that the formation of
customs union under Article XXIV of the GATT permitted certain violation to
the principles of the GATT-WTO; which were otherwise inconsistent. Hence,
violation of Article XI and XIII and imposition of QR’s by Turkey on Indian
textiles and clothing was permitted, when Turkey did so for the purpose of
forming a customs union. On ruling in favor of India, the Panel (confirmed by the
Appellate Body) adopted the view that the scope of Article XXIV: 8(a) was to
increase the freedom of trade between its Members, which may consequently be
improved by closer integration between some nations. However, the Panel
warned that closer integration between nations in the form of customs union must
only increase trade and further liberalize international trade and not under any
circumstance raise the barriers to trade of other Members to trade with such
territories; thereby creating an adverse effect on trade.2 In a related vein, Turkey
was of the view that Article XXIV: 5 which permitted the formation of a customs
union would be redundant if derogation from a GATT rule was not permitted.
Hence, maintaining restrictions of commerce and imposing QR’s was a necessary
corollary to the formation of a customs union, according to Turkey’s arguments.
The Panel however ruled in favor of India and stated that the formation of
2 Panel report, Turkey-Restrictions on Imports of Textiles and Clothing Products, WT/DS34/R, adopted
on 19 November, 1999; para 9.101-102, p 127.
customs union does not permit in any manner the imposition of QR’s on third
party members.
16.4.2. Understanding the phrase “substantially the same duties and restrictions
of commerce”:
The application of substantially the same duties and regulations of commerce is
the second criteria for the formation of a customs union. Despite the fact that the
phrase “substantially all trade” has not been defined in the GATT, it does not
mean that QR’s can be imposed on third parties in a bid to liberalize trade
between members of the customs union. Against that backdrop, the Panel in the
Turkey: Textiles dispute noted that a customs union should not raise barriers to
trade on the whole; and the purpose of the GATT provisions on the same was to
liberalize trade. In addition, while confirming the Panel’s ruling in India’s favor,
the Appellate Body also noted that while it was required by the Members of the
customs union to “apply substantially the same duties and regulations of
commerce”, it was not necessary that all the members of the customs union apply
exactly the same duty. Thus, the term “substantial” meant “almost the same” and
not “the same”.3
The Understanding on the Interpretation of Article XXIV of the GATT
(hereinafter referred to as “the Understanding”) seeks to further clarify the
meaning of the phrase “substantially all duties and restrictions of commerce”. In
this respect it is important to note that Article XXIV: 8(a) which defines a
customs union must be read along with Article XXIV: 5 (a) which require that
“…duties and other regulations of commerce imposed by the members of the
territory must not be higher or more trade restrictive than the general incidence
of the duties and regulations of commerce applicable in the constituent territories
before the formation of such union…”
The Understanding clarifies the meaning and scope of Article XXIV: 5 (a) by
virtue of Paragraph 2 and states that the calculation of the for the purpose of
3 Panel report, Turkey-Restrictions on Imports of Textiles and Clothing Products, WT/DS34/R, adopted
on 19 November, 1999; as modified by the Appellate Body Report, WT/DS34/R, DSR 1999:VI, Para
49-50
understanding whether the duties and regulations of commerce are more trade
restrictive that the “general incidence … applicable before the formation of
such union”, an overall assessment of the weighted average tariff rates of the
customs duties should be calculated. The Understanding additionally
elaborates that the applied rates of the duties must be used to calculate the
weighted average of the customs duties.
On the other hand, regulations of commerce must also not be more trade
restrictive than they have been before the formation of such a territory. For
this purpose, the Understanding clarifies that there must be an overall
assessment of other inter-dependant regulations of commerce such as “the
examination of individual measures, regulations, products covered and trade
flows which may be affected.”4
16.4.3. What happens when the formation of a customs union leads to the
increase in duties with third parties?
While forming a customs union in accordance with the provisions of Article
XXIV: 5(a), it may so happen that the duties with respect to Members not
party to such a territory may consequently be increased. In such scenarios,
Article XXIV: 6 requires the application of the procedure listed in Article
XXVIII of the GATT, 1994, in order to achieve a mutually satisfactory
solution. For the purpose of providing a compensatory adjustment, the Article
XXIV: 6 clarifies that Members should “give due account to the compensation
already afforded by the reduction in the corresponding duty of the other
constituents of the union.” The Understanding sheds light on Article XXIV: 6
and states that in the event the reduction in corresponding duties is not
sufficient, customs unions must offer compensation in the form of reduction of
duties or tariffs.5
16.4.4. A measure imposed by a customs union such formation must be
necessary, if it is inconsistent with the GATT rules:
4 Para 2 of the Understanding
5 The Understanding on the Interpretation of Article XXIV of the GATT, Para 5 and 6. The
Understanding also states by virtue of Paragraph 5 that if a compensatory adjustment is not able to be
reached, the customs union may modify or withdraw the concessions at issue; leaving the affected
Members to withdraw substantially equivalent concessions as per the provisions of Article XXVIII of
the GATT.
While the GATT does permit certain derogations from its rules in order to form a
customs union, without which the formation would be impossible. For instance, as
mentioned in the previous paragraphs, the formation of a customs union (and for
that matter even a free trade area) requires the elimination of duties and restrictive
regulations of commerce between the territories. As a result, duties and regulative
restrictions of commerce are bound to be higher for non-member territories than
they are for the territories of the customs union/free trade area. Consequently, the
formation of a customs union/free trade area would lead to the violation of the
rule of most-favored nation treatment. Likewise, there may be certain other
measures that may be required to be introduced; and without with the formation of
a customs union would be impossible. Similarly, in the Turkey-Textiles dispute,
Turkey argued that the introduction of QR’s on textiles being imported from India
was a necessary measure; without which the formation of a customs union with
European Union would be rendered impossible. Turkey’s stance was that since
EU had imposed QR’s on textiles and clothing from India, EU would additionally
stop importing textiles and clothing from Turkey in case the letter imported the
said products from India. Since Turkey exported 40% of its total exports to EU, it
could not afford to lose this trade with EU on importing textiles and clothing from
India.
The Appellate Body however concluded that Turkey’s measure of imposing QR’s
from Indian textiles and clothing is certainly not a necessary measure without
which the formation of a customs union would be impossible. Turkey could
alternatively invoke the rules of origin (ROO) in order to distinguish the textiles
and clothing originating from Turkey; thereby permitting the EU to import the
said products from Turkey.6
16.5. Defining a Free Trade Area:
6 Panel report, Turkey-Restrictions on Imports of Textiles and Clothing Products, WT/DS34/R, adopted
on 19 November, 1999; as modified by the Appellate Body Report, WT/DS34/R, DSR 1999:VI, para
61-62.
The constitution of free trade areas (FTA’s) also permits the application of a GATT
inconsistent measure, if the application of such measure is necessary for the formation of
an FTA. Against this backdrop, Articles XXIV: 5(b) and XXIV: 8(b) pertains to the
formation of FTA’s.
An FTA has been defined by virtue of Article XXIV: 8(b) to mean:
“…A group of two or more customs territories in which the duties and other
restrictive
regulations of commerce (except, where necessary, those permitted under
Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the
trade between the constituent
territories in products originating in such territories.”
The operation of FTA’s is similar to that of customs unions, with respect to the
meaning and scope of elimination of “substantially all trade and restrictive regulations
of commerce.” Thus this phrase would have a similar interpretation with respect to
FTA’s as well. The difference lies in the fact that unlike the operation of customs
unions, FTA’s do not require to have “substantially the same duties and other
When two or more customs territories come together
They eliminate duties and other regulative restrictions of commerce
with respect to substantially all trade between them.
While the formation of customs union necessitates the elimination of duties and other regulations of commerce,
those regulations for the purpose of the application of quantitative restrictions,
balance of payment regulations, exceptions to the principle of non-
discrimination, exchange arrangements and general exceptions are otherwise
left outside the scope of customs union.
FTA’s do not require to have “substantially the same duties and other regulations of commerce” with respect to territories which are not party to the
free trade area.
regulations of commerce” with respect to territories which are not party to the free
trade area. In other words, there is no defined standard with respect to external trade
with the members of the FTA. Therefore, members of the FTA are free to decide their
own duties and regulative restrictions of commerce with third parties; unlike in the
case of customs unions wherein territories of the customs union must have
substantially the same duties and regulative restrictions of commerce for third parties.
In a related vein, Article XXIV: 5(b) states that the duties and other regulative
restrictions of commerce with respect to the trade between the constituent territories
and third parties shall not be more trade restrictive than it was prior to the formation
of the FTA. For this purpose, Article XXIV: 5(b) states:
“With respect to a free-trade area, or an interim agreement leading to the formation of
a free-trade area, the duties and other regulations of commerce maintained in each if
the constituent territories and applicable at the formation of such free-trade area or the
adoption of such interim agreement to the trade of contracting parties not included in
such area or not parties to such agreement shall not be higher or more restrictive than
the corresponding duties and other regulations of commerce existing in the same
constituent territories prior to the formation of the free-trade area, or interim
agreement as the case may be.”
16.5.1. Examples of FTA‟s:
ASEAN – Australia – New Zealand Free Trade Area (AANZFTA);
ASEAN–China Free Trade Area (ACFTA);
ASEAN–India Free Trade Area (AIFTA).
16.7. The Sudden Proliferation of RTA’s: Stepping Stones or Stumbling Blocs?7
The recent wave of regional trade agreements has raised serious questions on the
functioning of the multilateral trade regime regulated by the World Trade
Organization (hereinafter referred to as the WTO). This is chiefly due to the fact that
where on the one hand, the multilateral trade regime embarks upon the principle of
most-favored nation; thus prohibiting discrimination among the members of the WTO,
7 This discussion in this part (16.7.) is a reproduction of the manuscript authored by the author (Dr.
Saloni Khanderia-Yadav), and has been accepted for publication in the South Currents Texas
International Trade Law Journal, titled: Is Regionalism „Softly‟ Killing the WTO‟s Multilateral Agenda:
Forthcoming, South Texas Currents’ International Trade Law Journal. (Texas, United States).
regionalism is an exception to this principle. In other words, where regionalism in the
form of customs union or free trade areas provide preferential treatment to members
within the area, multilateralism is an anti-thesis and provides non-discriminatory
treatment to all the Members. This recent surge in regionalism, whether it is in the
form of customs unions or free trade areas, can be traced to the coming into existence
of the WTO. Against this backdrop, while nations traditionally preferred regionalism
as a way to remove barriers between the Members of such Agreements, Regional
Trade Agreements (RTA’s) in the current era often focus on deeper integration that
just the mere removal of trade barriers. Hence, while Article XXIV of the GATT,
1947 regulates the functioning of Customs Unions (CU) and Free Trade Areas
(FTA’s), there do exist various other forms of regionalism as well. Regionalism may
be in the form of preferential trade agreements which provide preferential access to
goods and services to Members of the Agreement in comparison to non-members.
Common markets are another example of regionalism wherein even the laws,
regulations and policies are harmonized to further liberalize international trade.
Nevertheless, Customs Unions and FTA’s are today the most prominent forms of
regionalism among the members of the international community.
In the previous discussion pertaining to customs unions and Free Trade Areas, we
have seen that the General Agreement to Tariffs and Trade (hereinafter referred to as
the GATT) has encouraged the formation of such forms of regionalism. In the year
2013, the WTO had received 575 notifications approximately for the formation of
RTA’s.8 Hence, RTA’s have certainly become a prominent part of the international
trading system. Nonetheless, given the fact that they operate as an exception to the
MFN principle, have raised several concerns about whether regionalism operates as a
building stone or a stumbling bloc to the multilateral trade regime.
16.7.1. Regionalism versus Multilateralism:
To begin with, as we are aware, regionalism operates as an exception to the principle
of most favored nation (MFN). Article XXIV permits Members of such RTA’s (either
in the form of Customs Unions or FTA’s) to “eliminate duties and other restrictive
8 The World Trade Organization, Regional Trade Agreements, Retrieved November 12, 2013, from
http://www.wto.org/english/tratop_e/region_e/region_e.htm
regulations of commerce” with respect to “substantially all trade” between its
Members. Consequently, the nations party to such RTA’s are permitted to afford
more favorable treatment to other members of the Agreement, such treatment being
more favorable than that afforded by the Schedule of Concession. At the same time,
the countries that are forming either a Customs Union or Free Trade Area have to
ensure that such forms of regionalism does not “on the whole” increase the level of
protectionism or be higher than what it was (the level of protection) before the
formation of such blocs.9 However, Mansfield and Milner draw attention to the fact
that despite Article XXIV prohibits the level of protection to be higher for non-
members than it was prior to the formation of such blocs; in reality the situation
seems to be the opposite.10
This is primarily due to the fact that nations do, in practice
tend to bind the tariffs with respect to non-members on the basis of the average tariffs
for the members of such Customs Unions and FTA’s. This factor causes the tariffs to
rise as for non-members while eliminating tariffs and other barriers to trade for its
members. However, before analyzing whether RTA’s operate as a stepping stone or a
stumbling bloc, it becomes imperative to understand the motivating factors that have
encourages nations of the international trading community to negotiate such
Agreements, despite the existence of a multilateral trade regime already in place.
16.7.2. Motivating Factors:
9 Bhagwati, J.(1993), Regionalism and Multilateralism: An Overview. In Jamie de Melo and Arvind
Panagriya(Eds), New Dimensions in Regional Integration, Centre for Political Research.
Article XXIV: 5 (a) of the GATT, 1947 states that: “… duties and other regulations of commerce
imposed at the institution of any such union or interim agreement in respect to trade with contracting
parties not parties to such union or agreement shall not on the whole be higher or more trade restrictive
than the general incidence of the duties and regulations of commerce applicable in the constituent
territories prior to the formation of such union or the adoption of such interim agreement…” 10
Mansfield, E.D. & Milner, H.V. (1999). The New Wave of Regionalism, International Organization,
53 (3), 589-627.
The international trade community has in general preferred the formation of RTA’s
against the multilateral trade regime for numerous reasons over the past couple of
years; thereby causing serious implications over the functioning of the multilateral
trade regime.11
Albeit the fact that nations have come to be drawn towards
regionalism over the last decade, primarily due to the reason that there seems to be
some level of frustration among the international trade community over
multilateralism, given the slow pace of reaching any consensus12
; there seem to be
various other deciding factors as well. Firstly, RTA’s have benefitted the Members by
providing the latter with the advantage to added trade concessions by reason of
preferential access to the markets of other Members. This in turn aids Members to
such RTA’s to develop better diplomatic ties with other Members of the RTA (be it a
Customs Union or a Free Trade Area). Richardson (1993) further elaborates this
factor by stating that better diplomatic ties help in promoting peaceful relations with
Members of the RTA, mainly due to the fact that Members are no longer politically
empowered to engage in tariff protection strategies on negotiating an RTA. This in
11
Andriamananjara, S., (n.d.) Customs Unions. Retrieved on November 12, 1013, from
http://siteresources.worldbank.org/INTRANETTRADE/Resources/C5.pdf. 12
In other words, reaching any form of consensus in the WTO has of late become a difficult task given
the diverse nature of the membership. Hence nations find it difficult to negotiate upon a uniform set of
rules and regulations to govern developed, developing and least developed nations. On the contrary, in
case of regionalism, countries parties to such blocs are more or less on the same level of development.
In addition, given the fact that regionalism involves a smaller group of countries, in comparison to a
multilateral agreement, regionalism thus becomes more favored among nations desirous of speedy and
more effective negotiations.
turn leads to the lowering of political power of independent nations with the
heightening of trade integration. In other words, Members would no longer be
independent, but rather mutually interdependent, and consequently lead to peace and
security across the world.13
Another motivating factor for nations to negotiate RTA’s:
either in the form of a Customs Union or Free Trade Area is that such negotiation
assists such nations to improve their bargaining power vis-à-vis the other nations
engaging in international trade. This factor assumes more significance given the fact
that nations of the international trade community have begun to find the
multilateralism somewhat arduous.14
To that end, the most significant reasons that
prompt nations to negotiate RTA’s are those that help in achieving politically
motivated pursuits. This often results in nations being better able to foster and
strengthen their relations vis-à-vis other countries, consequently also improving the
bargaining relations between such nations.15
In a related vein, Finger et al (1996)
draw a comparison between the bargaining positions of Uruguay and Paraguay with
India, South Africa and Australia. In particular, they state that due to the fact that
Uruguay and Paraguay were actively involved in RTA’s, they were in a better
bargaining position at the time of the Uruguay Rounds that led to the formation of the
WTO.16
Similarly, Hudec (1993) states that RTA’s have increased the market power
of the participating countries. Therefore, he corroborates that by virtue of being a
Member of an RTA, such membership is able to increase the leverage during a WTO
dispute when such country is the disputant. 17
13
Richardson, M. (1993). Endogenous Protection and Trade Diversion. Journal of International
Economics, 34(3-4), 309-324. 14
Whalley J., (1998), Why Do Countries seek Regional Trade Agreements? In Jeffery Frankey (Ed),
The Regionalism of the World Economy (pp.63-83). National Bureau of Economic Research, Chicago
University Press; Bagwell, K. & Staiger, R. (2001). Reciprocity, Non-discrimination and Preferential
Agreements in the Multilateral trading System, European Journal of Political Economy, 17(2), 281-
325. 15
Bhagwati, J. & Panagariya, P. (1996) Preferencial Trading Areas and Multilateralism – Strangers,
Friends or Foes. In Jagdish Bhagwati & Arvind Panagariya (Ed.), The Economics of Preferential Trade
Agreements (pp. 1 – 78). Washington D.C.: AEI Press. Retrieved from:
academiccommons.columbia.edu/download/.../ac.../econ_9596_004.pdf; Mansfield, E. (1998), The
Proliferation of Preferential Trading Arrangements, Journal of Conflict Resolution, 42(5), 523-543. 16
Finger, M.J., Ingco, M.D. & Reineke, U. (1996) The Uruguay Round: Statistics on Tariff
Concessions Given and Received. The World Bank Publications, Washington D.C. 17
Hudec, R.E. (1993). Enforcing international Trade Law: The Evolution of the Modern GATT Legal
System. Butterworths Legal Publishers. Retrieved from
http://www.wto.org/english/news_e/pres00_e/pr180_e.htm; Bagwell, K. & Stagier, R. (2001).
16.7.3. Stepping Stone or Stumbling Bloc?
As discussed in the previous paragraphs, members of the international trade
community have over the recent years grown to perceive regionalism as the preferred
method to trade with one another; as a result of which there have been some serious
implications on the functioning of the multilateral trade regime as regulated by the
WTO.
While the most compelling reasons that drive nations to politically re-organize
themselves on the lines of either a Customs Union or a Free Trade Area has been the
deep seated frustration in the multilateral trading regime over the past couple of years.
This shift in favor of regionalism has thus led to the “domino effect of regionalism.”
For most, this so-called “domino effect” in terms of regionalism has occurred with the
increased tendency of nations in the international community to re-organize
themselves, politically. In this bargain, various other nations tend to be left out from
being included in these regional trading blocs. As a result, Baldwin (1994), who
supports this view, elaborates that trade is often diverted away from such nations who
are not party to such blocs. This fear of having trade being diverted away, therefore
leads nations (which are left out from these regional trading blocs) to re-organize
Reciprocity, Non-discrimination and Preferential Agreements in the Multilateral trading System,
European Journal of Political Economy, 17(2), 281-325.
themselves; and thus trade among one another. Consequently, this factor has marked
the birth of various RTA’s in the international trade community; thereby creating a
some-what “domino effect” with the eruption of numerous regional trade blocs.
Baldwin further provides the example of MERCOSUR, a prominent RTA, by
throwing light on how the members of the MERCOSUR decided to re-organize
themselves regionally by virtue of being requested by the United States before any of
the members of the MERCOSUR could negotiate a Free Trade Area with the United
States.18
The “domino effect of regionalism” has further led to the operation of simultaneous
regulatory regimes of trade. While numerous RTA’s exist in the current era, each of
them is governed by their own rules, regulations and regulatory regimes; therefore
leading to simultaneously operating regimes. The effect of simultaneously operating
regimes has often been referred to as the “spaghetti bowl impact”, with a mix of
rules.19
As a result, there is no uniform set of rules and regulations; in contrast to the
multilateral trade regime regulated by the WTO.
Nevertheless, the most striking implication on multilateralism has been the capability
of regional trading blocs to cause “trade diversion.” Viner explains that the creation of
regional trading blocs have led to the diversion of trade. In other words, these blocs,
in the attempt to liberalize “substantially all trade” among its members divert trade
away from the non-members towards the members of such blocs. In such
circumstances, trade is normally diverted away from more efficient trading partners
towards less efficient trading partners, which are now members of the regional trade
bloc. This factor thus works to the detriment of international trade; and is also an anti-
thesis top the fundamentals of the multilateral trade regime regulated by the WTO.
Hence, where on the one hand, the WTO promote fair competition among trade
between its Members (being Governments), regional trade blocs, on the other hand
are less competitive as trade is in such circumstances merely between the Members
18
Baldwin, R.E. (1994). A Domino Theory of Regionalism. In R. Baldwin, P Haarparanta & J.
Kianden (Ed.). Expanding Membership of European Union, CUP, Cambridge. 19
Baldwin, R. E. (2006). Multilateralizing Regionalism: Spaghetti Bowls As Building Blocs on the
Path to Global Free Trade (Working Paper 12545). Retrieved from National Bureau of Economic
Research website: http://www.nber.org/papers/w12545; Bhagwati, J.(1993), Regionalism and
Multilateralism: An Overview. In Jamie de Melo and Arvind Panagriya(Eds), New Dimensions in
Regional Integration, Centre for Political Research.
which may even be less efficient than the non-members.20
In a related vein, Bhagwati
and Panagaria (1996) corroborate this eventuality by stating that despite the fact that
regionalism is also likely to cause trade creation; it will in all probability have a
dominant effect on trade diversion.21
Another vital aspect of trade diversion on free trade is the capability of such trade
diversion caused by FTA’s to be able to significantly impact trade in intermediates.
Because trade is so fine-sliced by nature and because nations in the international
community are so mutually dependant on each other, they often rely on each other for
supplying intermediates or inputs in the production of the final product. When trade is
multilateral, countries party to the multilateral trade regime would rely on each other
for the supply of inputs. However, when trade becomes regional, members of the
regional agreement rely only on other members for the supply of intermediates or
inputs. In addition, the members of the PTA qualify for the preferences only when
they adhere to the rules of origin of that agreement. In other words, members must
even purchase intermediates or inputs from other members to such PTA in order to be
able to receive the benefits of the PTA.22
In a related vein, FTA’s have often
perceived to have a substantial impact on the prices of exports. When members of the
FTA begin to divert trade away from non-members to members of such an FTA, the
export prices of the excluded members is bound to rise.23
24
Apropos, nations of the
international community are sometimes compelled to regionalize themselves in a bid
to save themselves from losing access to the markets of countries which are already
party to RTA’s.25
20
Viner, J. (1950). The Customs Union Issue. New York: Carnegie Endowment for International peace. 21
Bhagwati, J. & Panagariya, P. (1996) Preferencial Trading Areas and Multilateralism – Strangers,
Friends or Foes. In Jagdish Bhagwati & Arvind Panagariya (Ed.), The Economics of Preferential Trade
Agreements (pp. 1 – 78). Washington D.C.: AEI Press. Retrieved from
academiccommons.columbia.edu/download/.../ac.../econ_9596_004.pdf 22
Krishna, P. (2012). Preferential Trade Agreements and the World Trade System: A Multilateralist
View. In Feenstra, R. & Taylor, A. (Ed.), Globalization in an Age of Crisis: Multilateral Co-operation
in the Twenty First Century. University of Chicago Press, Forthcoming. 23
Chang, W. & Winters, A. (2002). How Regional Trade Blocs Affect Excluded Countries: The Price
Effects of MERCOSUR. The American Economic Review, 92, 889-904. 24
Saloni Khanderia-Yadav, Is Regionalism „Softly‟ Killing the WTO‟s Multilateral Agenda:
Forthcoming, South Texas Currents’ International Trade Law Journal. (Texas, United States). 25
Panagariya, A. (2000) Preferential Trade Liberalisation : The Traditional Theory and New
Developments. Journal of Economic Literature, 38 (6), 287-331. Retrieved from
http://www.armeconomist.com/lecture/wto/12pta/Panagariya.pdf; Baldwin, R.E. (1994). A Domino
While these appear to be some of the trade-offs of regionalism, regionalism has
certainly contributed to the growth and development of international trade among
nations. While regionalism has led to some form of trade diversion, Viner (1950)
suggests that regionalism does on the other hand also promote trade creation. Hence,
as compared to trade diversion, trade creation occurs when nations come to be in a
better position to trade with one another as a result of regionalism. Hence, in contrast
to trade diversion, nations now divert trade away from non-efficient trade partners to
more efficient trade partners; thus creating international trade.
At the same time, albeit the fact that it may be true that the recent proliferation of
RTA’s has raised certain serious implications on multilateral trade, in terms of
whether the former is a stepping stone or a stumbling bloc; it cannot be denied that
regionalism has also served the cause of free trade in the recent years. This is
moreover due to the recent impasses in the multilateral trade negotiations over issues
such as intellectual property, competition, and more recently over agricultural issues
and food security, to name a few. This frustration is more to do with the diverse
nature of the members of the WTO which in turn makes it difficult to reach any form
of consensus.26
On the other hand, given the fact that RTA’s involve the interests of a
smaller group of countries, which are more or less on the same level of development;
negotiating RTA’s obviously becomes easier in comparison. In a related vein, RTA’s
have been able to provide sufficient “normative value” while negotiating
multilaterally; thus reinforcing a more favourable climate for multilateralism of
trade.27
In a related vein, Summers corroborates the aspect that FTA’s can often be beneficial
to the cause of free trade; and states that
Economists should maintain a strong, but rebuttable presumption in favour of all
lateral reductions in trade barriers; whether they be multi-, uni-, bi-, tri-, plurilateral.
Theory of Regionalism. In R. Baldwin, P Haarparanta & J. Kianden (Ed.). Expanding Membership of
European Union, CUP, Cambridge. 26
A speech by the ex-Director General, Mr. Pascal Lamy additionally highlights the fact that RTA’s
have been able to complement and supplement the multilateral trading regime. 27
For instance, issues and areas such as competition policy have been previously addressed under
various FTA’s which have served as a base upon which the issue may further be deliberated at a
multilateral level.
Global liberalization may be best, but regional liberalization is very likely to be good
(Summers, 1991).
In addition, Barfield refers to this aspect pointed out by Summers, and states that
Summers and other proponents of regionalism base their case on a belief that total
trade creation will outweigh trade diversion in most cases, that the multilateral
process is too slow to produce substantial progress toward further trade
liberalization; and that regional free trade arrangements will allow some nations to
speed up liberalization and ultimately produce a self-reinforcing process toward
more open markets (Barfield, 1995).
Hence, despite the common perception that FTA’s tend to hamper the goals of
multilateral trade; this may not really be the case given the current scenario with
respect to multilateralism under the ambit of the WTO, which seems to be at the
crossroads. Hence with nations finding it difficult to reach some form of consensus
within the WTO, FTA’s are certainly the next best option.
Against this backdrop, even though FTA’s do have their trade-offs and do in this
respect led to trade diversion towards the members of the group due to their very
nature; it must be acknowledged that they certainly lead to deeper integration and are
able to offer consensus in areas which the multilateral trade regime currently finds
difficult. In other words, it is not true that FTA’s are completely impeding the benefits
of the multilateral trade regime; but in fact have a mixed impact on the latter. For
most, the benefits of FTA’s in terms of being able to offer deeper integration and
being able to negotiate and also act as a pedestal to multilateral trade negotiations, on
certain issues like investment, competition and environment are far more and
outweigh the trade-offs. In addition, while it is true that FTA’s create multiple
regulatory regimes which often clash with one another; and in this sense negate the
benefits of coherent system of rules and regulations under the dispute settlement
procedures of the WTO; the former is able to successfully complement and
supplement the goals of the WTO; i.e. free trade.
16.8. Summary:
With this module we have understood the following concepts:
Customs Union (Article XIV: 8(a)) Free Trade Area (Article XIV: 8(b))
It is the substitution of two or more customs
territories for a single customs union.
It is a group of two or more customs territory
for a single union: known as a free trade area.
Substantially all trade (meaning of which is
not defined) is free; with duties and
regulative restriction of commerce being
eliminated.
Substantially all trade (meaning of which is
not defined) is free; with duties and
regulative restriction of commerce being
eliminated.
Only those duties and regulative restrictions
of commerce permitted as per the
requirements of Articles XI, XII, XIII, XIV,
XV and XX)
Only those duties and regulative restrictions
of commerce permitted as per the
requirements of Articles XI, XII, XIII, XIV,
XV and XX)
Substantially the same duties with territories
not part/Members of such customs unions.
Each member of the free trade area is free to
decide the duties it wants to levy with third
party nations. Hence, the duties that such
Members of the FTA levy are not required to
be uniform towards third party states.
Both Customs Unions and Free Trade Areas do have their trade-offs; and have in the
past distracted Members from multilateralism. However, they have been as beneficial.
This is primarily because multilateralism requires consensus among all the Members
of the WTO: which is certainly an uphill task. On the contrary, regionalism requires
the consensus of a small group of nations of the international community; thereby
making decision making relatively easier. In addition, regionalism has served as a
guiding map in terms of various international trade topics, such as competition,
intellectual property and trade and environment to name a few.