Regional Trade Arrangements

What are bilateral and regional trade agreements?

A bilateral or regional trade agreement is an agreement entered into between two or more countries under which the participants agree to reduce tariffs, quotas and other restrictions on trade between them.

Bilateral trade agreements are as the name suggests, bilateral in character.

Whereas regional trade agreements are generally entered into between a number of countries in a particular region.

The agreements cover both trade in goods and trade in services and also deal with issues such as the protection of intellectual property.

They also frequently contain provisions or whole chapters dealing with protection for foreign investments.

Bilateral and regional trade agreements are sometimes referred to as preferential trade agreements because they are only beneficial to the particular states or countries to which they relate.

RTAs are not a new means of trade liberalization; historically, whenever multilateral trade negotiations broke down, bilateral and multilateral free trade agreements filled the void. Such strategic trade arrangements have enabled many states to move towards freer trade at their own pace, and for their own benefits.

What is Preferential Trading Arrangement?

Preferential Trading Arrangement means a system of discriminatory tariffs designed to benefit Less Developed Countries (LDCs). While some PTAs originate as political expressions of desired closer economic relations, they can act as a catalyst to eventual free trade among the participants. PTAs are also employed to help developing countries obtain access to a larger export market, and therefore gain greater economic development.

Around 50 per cent of world trade is currently carried out under preferential trade arrangements. Preferential trade is growing at a faster rate than global trade – between 1993 and 1997, preferential trade grew at 66 per cent annually while global trade grew at 34 per cent annually.

How many types of Regional Trade Agreements are there?

According to their level of integration amongst participating nation-states, RTAs can be described as the following categories.

1. First, at the most basic level, Preferential Trading Agreements (PTAs) lower trade barriers among members. Such preferential trade is usually limited to the portion of actual trade flows from LDCs, and is often non-reciprocal.

An example of such an agreement is the Papua New Guinea – Australia Trade and Commercial Relations Agreement (PATCRA II) that has been in effect since 1977.

2. Second, a Free Trade Agreement/Area (FTA) is a reciprocal arrangement whereby trade barriers (usually tariffs) between participating nations are abolished. However, each member determines its external trade policies against non-FTA members independently. Most commonly, barriers to trade are reduced over time, but in most cases, not all trade is completely free from national barriers.

A prominent example of a FTA is the North American Free Trade Agreement (NAFTA).

3. The third level of economic integration is the Customs Union. In a Customs Union, trade barriers among members are eliminated. Also, the participating nations adopt a common external trade policy (e.g. common external tariff regime or CET). A Customs Union is equivalent to an FTA plus a common external trade policy.

The Customs Union of the Southern Cone -Mercosur-represents such an arrangement.

4. The fourth level of economic integration is the Common Market. In a Common Market, countries remove all barriers to movement of both goods and factors, and retain the common external trade policy. It is equivalent to a customs union plus free mobility of factors.

One example of Common Market is the Common Market for Eastern and Southern Africa (Comesa).

5. The fifth level of economic integration is the Economic Union. In an Economic Union, besides the free goods and factor movements, member countries also adopt common macroeconomic policies. One example of Economic Union is the European Union (EU).

Is RTA beneficial to the member countries?

Although the recent spread of RTAs has given rise to concerns that such selective trade arrangements will undermine the benefits of global tariff reform and entrench trading blocs rather than free trade. RTA is beneficial to its member countries in the following aspects:

1. By lowering or eliminating tariffs among themselves, the RTA member countries can enjoy lower importing price and thus increase their overall trade. Due to the trade diversion resulting from the relative lower price, some member countries can increase their imports on goods previously supplied by countries outside the RTA.
2. In addition, RTAs can join the international trade negotiations as a whole. Thus, joining in a RTA will enhance the member countries’ bargaining power in multilateral negotiations because of the enlarged size of the negotiator.

 WTO and RTA

Essentially, RTAs are violations to WTO’s non-discrimination principle. This basic principle is defined in the Most-Favored-Nation (MFN) rule, which requires a member country to extend to all WTO members the privileges that it grants to one contracting party. However, WTO views RTAs to be good and encourages the formation of free trade areas and customs union.

RTAs are in fact helpful to world trade liberalization. Compared with multilateral negotiation systems, smaller numbers of parties are involved in RTAs, then similar political and economical interests can be easily processed. RTA rules can pave the way for WTO multilateral negotiations.

To ensure that RTAs can improve regional trade liberalization without hurting global trade liberalization, Article 24 of GATT regulates that RTAs should trade more freely among their member countries without raising barriers on trade towards the outside world. In addition, the WTO General Council created a Committee on Regional Trade Agreements (CRTA). Its purpose is to examine regional groups and to assess whether they are consistent with WTO rules.