The WTO and the Regional Trade Agreements

While for the better part of the last century the multilateral trading system was the most dominant, Regional Trade Agreements (RTAs) have grown to become an integral feature of the present day’s global trading system. Regionalism is described as the process by which RTAs come about as “actions of governments to liberalize or facilitate trade on a regional basis, sometimes through free trade areas or customs unions” (Kerr & Gaisford 2008, p. 82). For many countries, RTAs have become central in formulating commercial policies resulting in a significant shift of resources from multilateral trade objective to the pursuance of preferential agreements. There is therefore a relationship between the WTO and the RTAs in trade efforts.

While the WTO has general policies for governing trade among the member states, RTAs have more specific rules leading to a complementary relationship between the two. One of the unique features of RTAs is their increased level of sophistication which is exhibited by them having regulatory regimes that extend to trade policy areas that are not covered by multilateral agreements. For example, while WTO policies of fair trade hugely ignore the environmental policies of member nations, RTAs take such into consideration. On the other hand, WTO polices offer very substantive dispute resolution mechanisms. The two trade regimes complement in each other in some instances.

The purpose of the WTO is to establish and monitor the rules for trade policy-making in its members and to encourage the liberalization of trade through successive rounds of trade negotiations to reduce tariffs and other barriers to trade in goods and services. RTAs allow for the development of an elaborate web of preferential trade agreements between countries which may not have any geographical rationale. The WTO rules allow for the formation of such trade relationships as long as trade barriers on average do not rise after integration and tariffs are eliminated within the area of intra-regional trade (Brulhart & Mathews 2007, p.942).

Rourke (2007, p.138) declares that core to the creation of the WTO was the resolve by the world to move away from “economic isolationism and towards the imperative of an open, rules-based global trading system”. This is a shared agenda with RTAs which also aim at liberalization at a regional scale. Picker (2005) notes that states enter into RTAs for multiple and diverse reasons, including furthering economic, security, and foreign policy goals. States therefore join RTAs to secure economic gains from other RTA states markets and also to ensure continued access to a market already covered by an RTA. The RTAs interact with the multilateral system and trade policy as a whole and for this reason, regionalism sometimes acts as an inducement for the development of multilateralism.

While the aim of the WTO (promotion of free trade in the entire globe) is noble and desirable, it fails to take into consideration the realities that not all nations are at the same economic level. RTAs purport to rectify this by promoting free trade at preferential levels. This is especially beneficial to developing economies which are given an opportunity to implement domestic reforms and subsequently open up to competitive market pressures at a sustainable pace than would be the case under the WTO. As such, RTAs facilitate the integration of many developing nations into the world economy and their eventual contribution to the multilateral process.

Nature and Characteristics of Regional Trade Agreements

Regional Trade Agreement (RTA) is by definition a general term that refers to a wide array of levels of economic integration policies with the lowest level being represented by trade preferences among member states (Evans 2006, p.29). As such, RTAs are economic initiatives which aim to practice free trade among the member nations. Babili (2008, p.1) notes that regional trade accounts for 55% of total global trade. Bearing this in mind that the importance of RTAs cannot be understated.

RTAs may be concluded between countries that are not geographically proximate e.g. the U.S. free trade agreements with Israel, Jordan and Chile. RTAs also vary in their coverage and they may include specific goods and services. The depth of preferential treatment they accord to their members is also greatly varied. A significant characteristic of RTAs is articulated by Kerr and Gaisford (2008, p.82) who assert that modern RTAs movements are not just towards the removal or reduction of tariffs and quotas but for deeper forms of economic integration among member states. This modern RTA movement is best illustrated by the European Union which has not only achieved a common market but has also had its member states adopt compatible fiscal and monetary policies.

There exist four standard types of RTAs. The most prevalent form is the Free Trade Area which in practice involves the participants agreeing to eliminate the barriers to trade between one another for certain specific products. However, the members are allowed to pursue their independent trade policies with non-members. Another form of RTAs is the customer’s union which is an FTA that operates on agreed grounds against non-members.

The third form of RTA is the common market which is in operation a customs union that also allows for the free movement of capital and labour within member states. The forth and arguably ultimate form of RTA is the economic union. This requires the member’s states to harmonize their fiscal and monetary policies and to some extent their economic and social legislation so that companies and workers can face the same economic conditions throughout the union.

RTAs undoubtedly lead to the economic prosperity of the member nations and also enhance competition and investments in the individual member states. One of the RTAs that best demonstrates this and arguably the most dramatic regional integration experienced to date is the European Union. Evans et al (2006, p.19) note that the EU has both pursued regionalism as a strategy to not only achieve short-term economic goals but also as a means of encouraging investment and competition and to reinforce a multipolarity in the international system.

While the future of RTAs is guaranteed, there appears to be a changing trend in the role they play. This reality is articulated by Maxey and Macor (2009, p.7) who notes that the growing consolidation of established tradition relationships is leading to an emergence of a new class of agreements which is made up of RTAs where each member is a distinct RTA itself. However, such unions are very complex to negotiate and it is unlikely that they may grow to the level whereby they render the WTO irrelevant in the near future.

RTAs Effect on WTO Goals

Outline

  • Introduction
  • RTAs Undermining WTO Efforts
  • RTAs Supporting WTO efforts
  • Discussion
  • Conclusion

Introduction

The popularity of RTAs among trading nations surged significantly by the close of the twentieth century and by the end of 2002, the WTO affirmed that 250 RTAs had been notified and 130 ratified (Kerr & Gaisford 2008, p.82). As of today, every country on earth belongs to at least one RTA. Crawford and Laird (2000) note that the rapid growth and expansion of RTAs has led to concerns about the weakening of the multilateral trading system (WTO). This is a well founded fear considering the fact that most nations are dedicating more resources to RTA arrangements at the expense of multilateral arrangements. This paper will argue that while RTAs do in some instances support progress in the WTO towards removing barriers to trade and investment, they mostly undermine the WTOs efforts and even threaten to render it redundant.

RTAs Undermining WTO Efforts

The WTO is built on a number of principles the most fundamental of which is the principle of Most Favored Nation Treatment (MFN). This principle dictates that imports from one member state will be awarded the same treatment as imports from any other member country. Therefore, the WTO as a matter of principle emphasizes a multilateral approach to free trade and opposes all forms of trade discrimination. This is a principle that RTAs by their very nature violate since RTAs are inherently discriminatory. Kerr and Gaisford (2008, p.85) declare that by conceding preferences to their members, RTAs discriminate against non-members therefore cutting across the very basis that multilateral trading systems are founded on. It is therefore evident that by their very operational principle, RTAs undermine the core WTO objective of free global trade.

Part of the reason why countries join RTAs is to increase their bargaining powers. This is especially the case when the RTA takes the form of a customers’ union in which the member countries give up elements of their economic and political sovereignty so as to gain increased collective sovereignty. Kerr and Gaisford (2008, p.83) asset that the “acquisition of power and the thwarting of that of others has often been an important reason for the formation of RTAs”. This ganging of nations into blocs with increase power only benefits the stronger blocs at the expense of the weaker blocs or individual nations which do not belong to any block. This is a move away from the goals of the WTO towards mutually beneficial trade for all nations in the world.

RTAs generally include more clauses than are there in multilateral trade agreements. Some of these additional clauses are elements that are unrelated to trade and may in the long run end up restricting trade rather than promoting it. Maxey and Macor (2009, p.11) highlight that in most RTAs especially involving the US, there exist parameters on “labor standards, environmental issues, intellectual property rights and capital movements”. This impositions result in member states sometimes being forced to adopt policies at the cost of disregarding their national policies which are at times best for the country and its citizens. Non compliance with the agreed parameters result in trade sanctions which are at times in direct violation to WTO countermeasures which are aimed at advancing trade liberalization (Marceau & Wyatt 2010, p.93).

Openness is one of the main policies that the organization advances. This stems from its philosophy that an open and transparent approach leads to improved growth in economic of all nations (Rourke154). This policy is also attributed to be one of the main factors leading to the rapid growth exhibited in developing nations and hence reduction in poverty levels. Openness also leads to predictability hence nations can accurately forecast and anticipate changes in the market and use this information for better decision making. The proliferation of RTAs has the effect of undermining transparency and predictability in international trade relations since each trading bloc aims at having a competitive advantage over the others.

The Dispute resolution mechanism of the WTO is arguably the most efficient since it is backed by all members and there exist various measures to ensure that all nations abide by the decisions reached by the panel. Steger (2009, p.8) notes that with the exception of the European Union, the dispute settlement mechanisms of regional agreements are significantly weak as compared to the WTO. As such, while RTA formation is relatively easier to negotiate and conclude than the WTO is to amend, their dispute settlement mechanisms may results in the skyrocketing of conflicts and differences. These conflicts and differences that arise from RTAs if not properly settled result in imposition of unfair trade barriers and other punishments which are detrimental to free trade efforts.

RTAs Supporting WTO efforts

Economists agree that international trade is one of the means through which development can be perpetuated and poverty eradicated and the WTO purports to do just that by promoting fair trade amongst nations (Cooper, 2006). However, different countries have varied economic realities and as such, a universal solution may not be feasible. The potential of RTAs in promoting economic development was recognized by the international community as far back as the 1970s.

Kerr and Gaisford (2008, p.87) notes that this realization led to the adoption of the Enabling Clause which allowed developing countries to enter into agreements that while opening up trade did not obligate the countries to liberalize ‘substantially’ all trade. In addition to this, developing countries were allowed to give preferential treatment to other developing countries. By so doing, the playing field could be leveled giving developing nations a chance to meet the WTO objectives of development and poverty eradication.

The fundamental goal of the WTO is to remove all trade barriers and ideally orchestrate a global free trade environment. Foroutan (1998, p.3) declares that the effectiveness of RTAs may be accessed by looking at the extent to which intra-bloc trade liberalization leads to a relatively more rapid trade expansion with partners or creates barriers to trade with third countries. While RTAs are normally accused as being discriminatory in nature, they lead to the reduction of trade barriers. Foroutan (1998, p.7) demonstrated that the overall tariff protection in Latin American countries which belonged to an effective RTA had been reduced in some cases up to 50%. On the other hand, countries which were not part of an effective RTA failed to achieve the same impressive degrees of import liberalization. As such, RTAs contributed positively to the attaining of the WTOs goal of removing barriers to trade and investment

The WTO (2006, p.9) suggests that part of the reasons for the proliferation of RTAs is because they provide member states with access to larger markets. While it can be argued that the WTO provides an even larger market share compared to RTAs due to its global scope, there exists a lack of willingness among WTO members to liberalize further on a multilateral basis thus hindering trade. RTAs have the advantage that most nations find it easier to liberalize at regional or bilateral levels. From the trading blocs established at a liberal level, nations can find it easier to move on to multilateral processes. As such, RTAs are a stepping stone to nations involving themselves in the multilateral stage that the WTO champions.

In terms of size and complexity, RTAs are significantly smaller than the WTO. This is an attribute that makes RTAs useful to the multilateral arena. Picker (2004, p.277) demonstrates that regional agreements may come up with economic reforms and on successful implementation of the same; they can give credibility to those reforms in the multilateral arena. As such, RTAs serve as “testing grounds” for new approaches that may be implemented by the WTO.

Discussion

The WHO (2003) notes that as of late 2003, countries that traditionally relied on multilateral liberalization began turning to RTAs. While it is evident from the arguments presented above that there are both merits and demerits that RTAs bring about to the WTO, it is undesirable that RTAs should develop at the expense of WTO. This is because RTAs have a regional bias and in as much as they may contribute positively to multilateral trade developments, the advancements they present are only marginal compared to those that the WTO can provide. An increase in countries relying more on the RTAs invariably results in a weakened WTO since resources which would otherwise have been used in WTO efforts are diverted to RTAs.

The WTO is mandatory for global trade development since left to their own devices, most countries would adopt protectionist measures which would only serve their national interests even if at the cost of the international community. This is evident from the reactions that nations took following the 2008 global financial crisis which sent most of the world economies into recession. While world leaders made commitments to try and reverse the situation, Mattoo and Subramanian (2009) report that many countries proceeded to take up measure to protect domestic companies. Without the WTO as a facilitator of the implementation and administration of agreements reached at by nations, these protectionism actions would be rife therefore greatly hindering trade amongst nations (Tai & Lee 2009, p.11). It is therefore imperative that the continuity of WTO efforts be guaranteed.

As a result of globalization and the opening up of more economies, key players in international trade have identified Non-Tariff Barriers which result from increased regionalism as a major hindrance to trade. As a result of this, there have been calls to deal with regionalism which arises from RTAs. Picker (2004, p.276) affirms that it could be argued that RTAs promote multilateral trade developments “through those countries not parties to RTAs pushing extra hard for multilateral development so as to reduce their comparative disadvantage or to erode the benefits of those RTAs to RTA members”. RTAs therefore act as a motivating factor for nations to adopt multilateral policies therefore accentuating the importance of the WTO to all nations.

While most states join RTAs so as to establish positive preferences from other countries, regional arrangements are also gotten into with an aim at impacting multilateral arrangements. This is because regional arrangements can have the desirable effect of increasing the bargaining power of the constituent members within the multilateral setting (Picker 2004, p.276). While RTAs offer great benefits to their member states, only those RTAs that can contribute to greater trade liberalization by maintaining low external barriers and minimizing trade diversions should be pursued. Such RTAs would not only speed up the process to achieving the WTO goal of free international trade but also lead to increased development for all nations.

Conclusion

This paper set out to argue that RTAs mostly undermine WTO efforts towards achieving global free trade. To reinforce this claim, this paper has presented arguments that demonstrate the ways that RTAs support WTO efforts as well as ways in which RTAs undermine WTO efforts. While it has been noted that RTAs do in some ways assist in furthering the cause of the WTO, the rapid creation of regional agreements to a large extent hinders the greater goal of free trade which is championed by the WTO. This is because RTAs encourage regionalism and protectionist behavior that is adverse to free trade efforts.

Throughout this paper, it has been suggested that RTAs are a threat to the growth and legitimacy of WTOs. However, RTAs are crucial to world trade and can indeed be used as stepping stones to a multilateral free trade regime. However, this positive outcome can only be achieved if the regional agreements adopt market openness and work in alignment to WTO policies. It can therefore be authoritatively stated that the ideal RTAs would promote greater trade liberalization in accordance with WTO rules. If this does not occur, RTAs will continue to be counterproductive to the goals of WTO therefore leading to a delay to the achievement of the multilateral free trade regime which would be the best for the whole world.

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