Regional trade agreements

John Ries, BASM530

RTAs: What are they?

• WTO’s Dictionary of Trade Policy Terms: “actions by governments to liberalize or facilitate trade on a regional basis, sometimes through free-trade areas or customs unions”.

• RTAs can cover goods and services. They include dispute resolution mechanisms and may establish regional rules on investment, competition, environment and labour.

Degrees of integration

• (1) Free-trade area: This level involves the elimination of tariffs within the area.

• (2) Customs union: This involves the elimination of tariffs between members as well as the establishment of common tariffs with non-member countries.

• (3) Common market: This includes the same tariff policies of customs unions but adds the freedom of movement of factors of production.

• (4) Economic union: This adds the harmonization of economic policies--monetary, fiscal, and regulatory policies. It requires considerable sacrifice of national sovereignty by member nations and some degree of political union.

Consistency with WTO rules

• No conflict when RTAs and WTO cover different topics (investment, environment, etc.).

• Biggest inconsistency is violation of MFN. Allowed if– liberalization of substantially all trade– customs unions cannot increase restrictions

on third country imports (on average)

Examples of regional trade agreements

• Among the best known are 

- The European Union,- The European Free Trade Association (EFTA),- The North American Free Trade Agreement (NAFTA), - The Southern Common Market (MERCOSUR),- The Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA), and - The Common Market of Eastern and Southern Africa (COMESA).

RTAs in ForceRTAs in force by date of entry into force

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Benefits of RTAs

• Reaching multinational consensus has proven to be extremely difficult so nations entered into regional trade agreements.

• When RTAs generate liberalization that would not occur in a multilateral framework, there will be trade creation between members and exploitation of comparative advantage.

RTA cost: trade diversion

• Countries China and Mexico export toys to the US subject to a 50% tariff. China's per-unit cost is $100 (price after tariff $150) and Mexico's is $120 ($180). US consumers buy from China and consumers pay $150.

• Now Mexico and the US enter into a free trade agreement. Now US consumers buy from Mexico for $120. Trade is diverted from China to Mexico. U.S. consumers are $30 better off but the U.S. government has lost $50 in tariff revenues.

Canada-U.S. Free Trade Agreement

• The fundamental aspect of the agreement is the gradual elimination of virtually all tariffs and quotas. All should were eliminated by Jan 1, 1998.

• Dispute resolution under Canada-US FTA– Canada pushed for dispute resolution

mechanisms in the Canada-US FTA. An important aspect is the review of antidumping and countervailing duty determinations.

North American Free Trade Agreement (NAFTA) • Essentially extension of the Canada-US

FTA to Mexico. Tariffs to be phased out over 10-15 year period beginning January 1, 1995.

• Side accords on environmental and labour standards set up elaborate mechanisms to assure enforcement of existing regulations. Possibility of fines and trade sanctions for non-compliance.

Investment provisions of the NAFTA

• National treatment provides for rights of establishment of foreign investors. However, there are some excluded sectors. The right of a country to provide public services (law enforcement, education, health care) is also protected.

• NAFTA prohibits “direct or indirect” expropriation of an investment (Chapter 11 provisions)– Foreign investors from NAFTA countries can go to a

NAFTA panel if they felt that government action expropriated their assets for which they received inadequate compensation.

The European Union

• Established in 1958, membership now stands at 27 countries.

• Monetary union: 16 countries use Euro.• Border-control free: Most countries (GB is an exception)

have eliminated internal border checkpoints and controls. – Austria, Belgium, Denmark, Finland, France, Germany, Iceland,

Italy, Greece, Luxembourg, Netherlands, Norway, Portugal, Spain and Sweden.

• Labour mobility: EU citizens can work anywhere (temporary restrictions apply to citizens of new member countries).

• Harmonization of regulations (product standards, professional certification, etc.)