Regional trade agreements (RTAs) in the WTO regime are reciprocal trade agreements between two or more WTO members. RTAs started proliferating in the 1990s and so far about 511 notifications of RTAs have been received by the WTO as of January 2012. About 319 of them are believed to be in force (Anonymous, n.d.).
Popular RTAs are the European Communities, the North American Free Trade Agreement (NAFTA), the Association of Southeast Asian Nations (ASEAN), Free Trade Area (AFTA), the Common Market for Eastern and Southern Africa (COMESA), the Common Market of the South (MERCOSUR), the Common Market of the Caribbean (CARICOM), and the Australia-New Zealand Closer Economic Relations Agreement. Needless to say, a sizeable part of the world trade occurs under RTAs.
RTA s’ characteristics
The RTA’s main feature is that its members treat other members more favourably than other trading partners outside the RTA. The general criticism against RTAs is that they are discriminatory and not consistent with the most favoured treatment (MFN) obligation which is one of the basic principles of WTO law through GATT 1994 and GATS permit RTAs under certain conditions for establishing customs union or free trade areas under Article XXIV/4 of the GATT 1994. WTO law allows economic integration and trade liberalisation restricted among some of its members. The rationale behind this is that it is quite possible to have a certain degree of liberalised trade at the regional level which is not possible at the global level. Further, the liberalisation will be faster if tried within the regional boundaries. This was a significant level of economic growth within the region can be achieved and this will in turn lead to more trade with other parts of the world. However, trade creation effects have been found to be “smaller than the trade-diversion effects as trade between the participants replaces trade between participants and non-participants” (p696). However, whether RTAs create trade or divert trade is still not clear. Sutherland’s report also reflects the same view. Guy de Jonquieres said in 2006 about the dangers of proliferation RTAs as a potential source of erosion of rules and disciplines underpinning the WTO in the long run. The WTO’s dispute settlement mechanism which has been the bedrock of its authority will be weakened as the political commitments of its members are also weakened. Economic reasons aside, the countries may pursue economic integration with other countries for political reasons. European Union is an example to show that it was created mainly to avert a war among its members which weighed more than economic reasons. Similarly, the establishment of MERCOSUR, a customs union among Argentina, Brazil, Paraguay and Uruguay was to promote democracy therein. Closer regional cooperation enables them to participate in the WTO with more vigour. A study on the effect of COMESA and SADC’s membership of Zambia and Mauritius in the WTO showed that rather than any direct benefit of RTA among them, they had spill-over effects on the WTO. Although WTO should not hinder such processes, there must be a balance between the interests of RTA countries and the countries outside the RTAs. Article XXIV’s preamble states “the purpose of regional trade agreements should be to facilitate trade between the constituent territories and not to raise trade barriers to the other Members with such territories…. in their formation or enlargement, the parties to them should to the greatest possible extent avoid creating adverse effects on other Members “(Bossche, 2008, p697).
It is argued that RTAs though can stimulate trade among its members, they can have adverse effects on non-members and even on members and on the “political economy of trade policy formation “(Mavroidis, & Bagwell, 2011, p48). The three main concerns are (1) trade diversion from most efficient global members to regional members. Thus, the formation of trading blocs results in welfare reduction even for the RTA member states. (2) regionalism might result in bad equilibrium by preventing unilateral and multilateral tariff reduction. (3) RTAs have the potential to create new trade barriers to non-regional members. For example, the rules of origin prevalent in “RTA countries prevent the import of goods into a high tariff country via a low-tariff member” (Mavroidis, & Bagwell, 2011, p41). However, the founders of GATT believed that regionalism and multilateralism are complementary to each other. It could also result in members opting out of multilateral agreements if barred from RTAs (Mavroidis, & Bagwell, 2011).
It has been observed that most of the so-called RTA are shallow integration agreements characterised by preferential trade agreements (PTA) and free trade areas (FTA). More than 50 % of global trade is carried out through RTAs. The surge towards RTAs is attributed to the lopsided nature of the current multilateral trade system and countries’ dissatisfaction over that system. Yet another view is the early adoption of regionalism by big economic powers during the late 1980s and early 1990s. Dissatisfaction towards the multilateral trading regime has been the main reason for the preference towards regionalism which is the easier alternative to the rigidity in the multilateral trade negotiations. Modern trade barriers prove to be a hindrance to negotiating at the multilateral level. Most of the members find it hassle-free to deal on a bilateral basis at the regional level. The USA has since turned towards regionalism from its support for multilateralism. The U.S. A and European Union are increasingly entering into bilateral agreements with developing countries for free trade. A developing country finds it very attractive to enter into free trade with a developed country (Pal, 2003).
The above review shows bilateral agreements or regional trade agreements are a viable alternative to the multilateral trading system often faced with endless negotiations to arrive at a consensus. RTAs on the other hand make negotiations hassle-free since the neighbouring countries share common concerns and are able to shed inhibitions due to cultural and other economic reasons. WTO must seize the opportunity and encourage RTAs even more since history has proved that the multilateral trading system is faced with the problem of lack of consensus on issues and what can be achieved through a multilateral system can be achieved through RTA as well.
Anonymous. (n.d.). Regional Trade Agreements. World Trade Organization. Web.
Bossche, V. D. (2008 ). The Law and Policy of the World Trade Organization: Text, Cases and Materials. Cambridge: Cambridge University Press.
Mavroidis, P. C., & Bagwell, K. W. (2011). Preferential Trade Agreements: A Law and Economics Analysis. Cambridge: Cambridge University Press.
Pal, P. (2003). Regional Trade Agreements in a Multilateral Trade Regime: An Overview.