RTA vis a vis WTO.pdf

7/29/2019 RTA vis a vis WTO.pdf

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CHAPTER-1

INTRODUCTION

There has been a rapid growth in the number of regional trade agreements (RTAs) in recent

years. In Europe, these are mainly centered on the European Union, spreading to the Central and

Eastern European countries, the Baltic States, the Mediterranean and beyond. In the Americas,

two agreements NAFTA and MERCOSUR have had a significant impact, but these may be

overtaken by the Free Trade Area for the Americas. There has also been an increase in the extent

to which RTAs overlap, although there are significant variations in the product coverage and the

rules of origin. On the whole, the newer agreements tend to have deeper coverage, extending into

areas of domestic disciplines beyond the exchange of tariff concessions, and a number of

agreements now also cover the services sector.

The number of RTAs in force has varied considerably over the years. WTO (1999a) provides

various statistics about agreements which have been notified to the GATT or the WTO,

agreements which have not (yet) been notified, and those which remain in force. According to

the WTO Secretariat, 102 of the agreements which have been notified to the GATT/WTO were

in force at the end of 1998. This includes 78 agreements covering trade in goods notified under

Article XXIV of the GATT 1994, 13 goods agreements concluded between developing countriesnotified under the Enabling Clause, and 11 agreements covering trade in services notified under

the GATS. More than half of these agreements have entered into force since 1990, when there

were only about 40 agreements in force. In other words there were some 250 per cent more

agreements in force in 1998 than eight years earlier, and we know that new agreements continue

to be signed.

The longer term growth in the number of RTAs in recent years, which shows the cumulation of

RTAs notified to the WTO Secretariat, as well as the net increase. It demonstrates the rapid

growth which has taken place in the 1990s. It should be noted that these figures show only

notified agreements and do not include the many non-notified agreements that are in existence

today. Such agreements occur when there is a time lag before official notification is made to the


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WTO, or when RTA participants simply fail to notify agreements. There is no provision for

counter-notification of agreements under current WTO rules.

Apart from the growth in the number of agreements, modern RTAs have a much wider network

of participants and stretch across countries at different levels of economic development. APEC,

which does not (yet) allow for the mutual exchange of trade preferences, will cover some 40 per

cent of the world's population. The Free Trade Area of the Americas and the European Union's

agreements with Central and Eastern Europe and the Mediterranean each encompass more than

500 million people. In mid-1998, 100 of the (then) 132 or 76 per cent of all WTO Members were

participants in one or more notified regional trade agreements. If participation in both notified

and non-notified agreements is taken into account, then the share of participating WTO Members

rises to 97 per cent.


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Chapter-2

Evolution

In the evolution of regionalism since the end of World War II, three phases can be distinguished.

2.1 The European Era of Regionalism:

The first phase is the European era of regionalism. It started with the Treaty of Romes entry into

force in 1958, which established the European Economic Community (EEC). As a customs

union with a common commercial policy, the EEC quickly became a leading player in

international trade relations. The western and northern European countries that were not part of

the EEC came together in the European Free Trade Agreement (EFTA). During the 1970s, the

EEC expanded its influence through an impressive set of bilateral preferential trade areas with

the neighboring EFTA countries, the Mediterranean countries, and the former colonies in Africa,

the Caribbean and the Pacific (ACP). Since then, the EEC has continued to be actively engaged

in the negotiation of new preferential trade agreements.

2.2 The American Era of Regionalism:

The second phase is the American era of regionalism. While the United States had traditionally

been wary of RTAs, its attitude changed in the late 1980s. The conclusion of the bilateral free

trade deal between Canada and the United States in 1988 opened the door for the North

American Free Trade Agreement (NAFTA) in 1992. The United States has also propagated such

RTA initiatives as the Free Trade Area of the Americas (FTAA) and the development of free

trade within the Asia Pacific Economic Cooperation (APEC) framework. More significantly,

in1991, Argentina, Brazil, Uruguay and Paraguay created their own customs union, named

MERCOSUR. In subsequent years, Bolivia, Chile, Columbia, Ecuador, Peru and Venezuela have

become associate partners of MERCOSUR. The Accession Protocol with Venezuela was signed

in 2006.


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2.3 The Global Era of Regionalism:

The third phase, characterizing the first decade of the 21st

century, has been labeled the noodle

bowl, referring to the multiplicity of Asian RTAs. More accurately, it should be labeled the

global era of regionalism. The third phase has three characteristics.

1. The Boom in Asian RTAs. Asia is a late-comer in the politics of regionalism. In the early

1990s, the limited results of ASEAN led to the launching of more ambitious plans for an

ASEAN Free Trade Area (AFTA). AFTA became effective in 1994 and is aiming at reducing

tariffs and non-tariff barriers among ASEAN members on a large range of products. However,

the real spark that set off the current surge of RTAs in Asia was Chinas initiative in 2000 for a

free trade agreement with ASEAN. The ASEAN-China framework agreement laying out the free

trade plan was concluded in 2003, and it is scheduled to eliminate tariffs by 2010. The Chinese

initiative resulted in an East Asian domino effect. In response to Chinas project, India also

signed a framework agreement with ASEAN in 2003. However, progress towards its

implementation has been stalled. The Asian RTA wave has been labeled an example of

competitive liberalisation.

2. The Creation of Interregional RTAs. The negotiation of interregional RTAs has received a

particular push from the European Community. Negotiations for a free trade agreement between

the EC and Mercosur are well underway. Similarly, the EC has opened negotiations for the

conclusion of a free trade deal with the Gulf Cooperation Council.

3. Preferential Trade Arrangements Among Geographically Distant Partners. As the interregional

negotiations indicate, preferential arrangements are no longer confined to a particular

geographical region. Trade relations in the 21st century are characterized by a proliferation of

RTAs concluded between countries that are geographically far apart. In addition to its

intraregional deals, the European Community has concluded bilateral free trade deals with

geographically distant countries such as South Africa (1999), Mexico (2000) and Chile (2002)

and has announced its intention to start negotiations with India. Likewise, Japan has successfully

negotiated intercontinental free trade agreements with Mexico (2004) and Chile (2006). The

United States has recently concluded free trade agreements with geographically distant countries

such as South Asian countries.


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Chapter-3 India and Regional Trading Agreements:

The importance of increasing regional trade within Asia cannot be emphasised enough. At a time

when regional trading agreements, such as the EU and NAFTA have led to higher trade and

investment, Asia lags behind. Trade within Asia is a miniscule proportion of world trade, even

though the Association of South East Asian Nations (ASEAN) countries (Singapore, Phillipines,

Thailand, Indonesia, Malaysia, Cambodia, Laos, Vietnam, Myanmar and Brunei), along with

China, Japan, Korea and India are among the fastest growing exporters in the world today. China

is expected to enter into an agreement with the ASEAN countries to promote trade by cutting

tariffs on a large number of commodities with the region. This will lead to greater economic

integration, in a region in which members have, until now, seen themselves largely as

competitors, than as potential partners.

3.1 India's involvement with FTAs:

Over the last few years a number of FTAs have been signed with Asian neighbours like Sri

Lanka and Singapore. Steps are being taken for the creation of free trading areas within South

Asia and among the members of the ASEAN.

The benefit to India from entering an FTA is limited when India is dealing with a free-trading

country. Since India is a high tariff economy, an FTA gives the partner a clear benefit, but if the

partner already has zero or near zero tariffs, (as is the case with Singapore) Indian exporters do

not stand to gain much. The FTA does not give Indian exporters additional market access. While

India has an average custom to total import ratio of around 20 percent, Singapore is a zero tariff

zone, Srilanka's is much lower at 5 percent and Thailand, with whom the next FTA is proposed

to be signed has custom collections at 3.8 percent of total imports. Indian exporters gain little by

getting preferential tariffs in these countries. It is their exporters who stand to gain. India loses

the custom duties that would have been collected on their exports.


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3.1.1 Agreement on South Asia Free Trade Area (SAFTA):

The Agreement on South Asian Free Trade Area (SAFTA) was signed by all the member States

of the South Asian Association for Regional Cooperation (SAARC) during the twelfth 'SAARC

Summit' held in Islamabad on 4-6th January, 2004. As a result, SAFTA came into force from 1st

January, 2006.

The objectives of SAFTA are to promote and enhance mutual trade and economic cooperation

among the 'Contracting States' by inter-alia:-

Eliminating barriers to trade in, and facilitating the cross-border movement of goodsbetween the territories of the Contracting States;

Promoting conditions of fair competition in the free trade area, and ensuring equitablebenefits to all Contracting States, taking into account their respective levels and pattern o

economic development;

Creating effective mechanism for the implementation and application of this Agreement,for its joint administration and for the resolution of disputes; and

Establishing a framework for further regional cooperation to expand and enhance themutual benefits of this Agreement.

3.1.2 Asia-Pacific Trade Agreement (APTA):

The Asia-Pacific Trade Agreement (APTA), formerly known as the Bangkok Agreement, was

signed on 31st of July 1975 as an initiative of the United Nations Economic and Social

Commission for Asia and the Pacific (ESCAP).

The objectives of the agreement is to promote economic development through a continuous

process of trade expansion among the developing member countries of ESCAP and to further

international economic cooperation through the adoption of mutually beneficial trade

liberalization measures consistent with their respective present and future development and trade

needs, and taking into account the trading interest of third countries, particularly those of other

developing counties.

The agreement is governed in accordance with the following general principles:-

The Agreement shall be based on overall reciprocity and mutuality of advantages in sucha way as to benefit equitably all participating States;


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The principles of Transparency, National Treatment and Most-Favoured-NationTreatment shall apply to the trade relations among the Participating States;

The special needs of least developed country Participating States shall be clearlyrecognized and concrete preferential measures in their favour shall be agreed upon.

3.1.3 BIMSTEC ( Bay of Bengal Initiative for Multi-Sectoral Technical and Economic

Cooperation):

BIMSTEC (Bangladesh India Myanmar Sri Lanka and Thailand Technical and Economic

Cooperation), a sub-regional economic cooperation grouping was formed in Bangkok in June

1997. Its membership involves 5 members of SAARC (India, Bangladesh , Bhutan, Nepal & Sri

Lanka) and 2 members of ASEAN (Thailand, Myanmar). Thus, it is visualized as a bridging

link' between the two major regional groupings i.e. ASEAN and SAARC. Its chairmanship o

BIMSTEC rotates among the member countries in alphabetical order. The immediate priority of

the grouping is consolidation of its activities and making it attractive for economic cooperation.

BIMSTEC member countries agreed to establish the BIMSTEC Free Trade Area Framework

Agreement in order to stimulate trade and investment in the parties, and attract outsiders to trade

with and invest in BIMSTEC at a higher level.

3.1.4 Framework Agreement on Comprehensive Economic Cooperation between India and

the Association of South East Asian Nations (ASEAN):

India's engagement with the Association of South East Asian Nations (ASEAN) started with its

"Look East Policy" in the year 1991. Indias focus on a strengthened and multi-faceted

relationship with it is an outcome of ASEANs economic, political and strategic importance in

the larger Asia-Pacific Region and its potential to become a major partner of India in trade and

investment. Also, it now provides a land bridge for India to connect with the Asia-Pacific-

centred economic crosscurrents shaping the 21st century market place. While, ASEAN seeks

access to Indias professional and technical strengths. India and ASEAN have convergence in

their security perspectives.

ASEAN was established on 8 August 1967 in Bangkok by the five original member countries,

namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Now, it has a membership of

10 countries namely Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar,


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Philippines, Singapore, Thailand and Vietnam. India is one of the four 'Summit level Dialogue

Partners' of ASEAN.

The objectives of this Agreement are :-

Strengthen and enhance economic, trade and investment co-operation between theParties;

Progressively liberalise and promote trade in goods and services as well as create atransparent, liberal and facilitative investment regime;

Explore new areas and develop appropriate measures for closer economic co-operationbetween the Parties; and

Facilitate the more effective economic integration of the new ASEAN Member States andbridge the development gap among the Parties.

3.1.5 Other agreements include:

India And Singapore Comprehensive Economic Cooperation Agreement (CECA) India-Sri Lanka Free Trade Agreement (ISFTA) India-Chile Prefrential Trade Agreement (PTA) India-Afghanistan Preferential Trade Agreement (PTA) India-Bhutan Trade Agreement India-Nepal Trade Treaty Framework Agreement For Establishing Free Trade Between India And Thailand Free Trade Agreement (FTA) Between India And Gulf Cooperation Council (GCC) India- Japan Trade Agreement Joint Study Group Between India And Korea Trade Agreement Between India And Bangladesh Comprehensive Economic Cooperation And Partnership Agreement (CECPA) Between

India And Mauritius


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3.2 Implications of Rules of Origin for India:

There is a big cost in terms of creating a whole bureaucracy which sits at custom points and

checks whether goods coming from FTA partners satify "Rules of origin". Documentation would

be provided to them which would need to show the percentage of value addition in Thailand for

a good being imported from Thailand. This creates scope for corruption.

3.3 Then why does India try to enter RTAs:

First, there are political gains of belonging to a group. Second, it is a way to reduce barriers to

trade and reduce custom duties which may not be as easy to do in a unilateral manner. Yashwant

Sinha, when he was Finance Minister, had announced that Indian tariffs would be brought down

to ASEAN levels. If India is part of a deal to cut custom duties, it becomes easier to do so. While

domestic producers may protest, consumers stand to gain when duties are cut. In addition, these

agreements can lead to an increase in service exports an area in which there is slower progress in

multilateral arrangements like WTO.


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CHAPTER-4

REGIONALISM VERSUS MULTILATERALISM

The trend in the growth of RTAs is difficult to interpret. On the one hand, this scale of trading

within regional agreements would have been difficult to imagine by the founders of the GATT.

On the other hand, the trend has to be set in the context of two other recent phenomena. First, the

1990s were also a period of rapid growth of accessions to the GATT and the WTO, from some

80 GATT Contracting Parties in 1990 to over 153 WTO Members today. In the accession

process, new GATT/WTO Members committed themselves to reduced protection and the

implementation of WTO rules, which include the notification of RTAs to which they are party.

Second, this was also a period of unilateral liberalization, particularly among developing

countries and economies in transition, and this liberalization was largely consolidated in the

Uruguay Round. Thus, we have also seen a decline in the use of non-tariff measures as well as

considerable rationalization of tariff structures, tariff reductions to moderate average levels and a

major expansion in binding coverage. This background of unilateral and multilateral

liberalization considerably reduces the scope for trade diversion, and in practice, as Baldwin

(1997) points out "almost all empirical studies of European and North American arrangements

find positive impacts on member's living standards". Thus, the context of the new RTAs and

their product coverage are rather different from the unsuccessful regional trade agreements of the1950s and 1960s, which were in many respects designed deliberately to achieve trade diversion.

Nevertheless, the fact is that trade within RTAs has been generally growing much faster than

trade from non-members. An analysis of seven regional integration agreements (APEC, the

European Union, NAFTA, ASEAN, CEFTA, MERCOSUR and the Andean Community) shows

that, on average, imports from other members of these arrangements increased on (import

weighted) average at some 7 per cent a year in the period 1990-98, while imports from non-

members increased at 5.5 per cent. However, while the growth in imports from non-members

was on average lower than from members (the exception is the EU whose imports from non-

members grew at the same rate as from members), this is similar to the average rate of growth of

6 per cent in world imports, including those by the selected integration arrangements, in the same

period. Also, it has to be noted that in the cases of NAFTA, MERCOSUR and the Andean


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Community imports from non-members grew at 7, 15 and 12 per cent, respectively, somewhat

above the growth rate for world imports.

It is, therefore, important to look carefully at the dynamics of particular agreements. On a simple

comparative static analysis, third parties may be adversely affected by trade diversion and a

reduction in their terms of trade, but this is less obvious on the basis of a crude dynamic analysis,

especially in the case of the faster growing RTAs. In any event, the overall numbers do not point

to serious diversion away from imports from nonmembers of RTAs. On the other hand, there

have certainly been concerns expressed in the Caribbean about the negative effects of NAFTA

on their trade. Yeats (1997) claims evidence of trade diversion in MERCOSUR. While

protection of certain sectors such as automobiles certainly limits market opportunities in

MERCOSUR, overall these countries are now much more open than they were in the 1980s, and,

as noted earlier, imports from third countries have also been growing rapidly (Laird, 1998).

Bhagwati (1992) and Krueger (1995) express strong concerns about the negative effects of

growing regionalism and they worry that RTAs divert attention from the multilateral trading

system. Bhagwati, in particular, stresses the benefits of free trade and rejects arguments about the

need for an alternative to the GATT for countries which wish to liberalize faster, regionalism as

a supplement to GATT, regionalism to accelerate the GATT processes, balance-of-payments

pressures for a quick result on trade, recent experiences in Europe and the Americas, changed

attitudes to liberalization in developing countries, and so on.

On the other hand, Baldwin (1997), Ethier (1998) and Lawrence (1999) tend to regard

regionalism much more as a complement to multilateralism (building blocks rather than

stumbling blocks). Baldwin argues that NAFTA triggered off pressures for such agreements as a

kind of domino effect. He and Lawrence both argue that such liberalization strengthens the hand

of exporters and pro-trade forces. Ethier (1998) emphasises that "the new regionalism is in good

part a direct result of the success of multilateral liberalization, as well as being the means by

which new countries trying to enter the multilateral system (and small countries already in it)

compete among themselves for direct investment".

Lawrence also makes an important point that the correct comparison is not between a preferential

arrangement and complete multilateral liberalization, but between two second-best situations of

multilateral liberalization that is only partial with preferential trade liberalization which could be

much more complete.


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Alan Winters has argued that RTAs are like street gangs: "you may not like them, but if they are

in your neighbourhood, it is safer to be in one". However, in Winters (1996) he argues that, on

the basis of various models, it is not yet possible to determine whether regionalism encourages or

discourages evolution towards globally freer trade, and in Winters (1998), he says that there is no

reason to expect a single, simple answer. However, he is worried that regionalism probably

increases the risks of catastrophe in the trading system, a comment that might seem particularly

apt in the wake of the Seattle WTO Ministerial meeting of late 1999. In a look at the issue of the

tendency towards large blocs of RTAs, Winters (1998) also discusses whether reducing the

number of players in multilateral negotiations could simplify the process of reaching agreement

at the multilateral level. Citing the difficulties that the European Union had in formulating a

common position in the Uruguay Round, he argues that such powerful coalitions could make

negotiations more difficult.

4.1 The impact of regionalism on multilateralism:

Does regionalism complement or hamper broad based multilateral liberalization? The

standard approach to this question is to examine whether RTAs help or hinder the viability of

multilateral free trade. Some authors take a political-economy perspective. Levy shows that a

bilateral agreement may provide disproportionate gains to the countries median voters, thus

undermining support for an otherwise feasible multilateral trade agreement. Krishna , employs an

entirely different structure, where national markets are segmented and oligopolistic firms are

pivotal to determine trade regimes. Yet he finds a surprisingly similar result: RTAs can turn

producers against a multilateral agreement that they would otherwise support, because free trade

would destroy the rents created by the RTAs. Since in his setting the most trade-diverting

arrangements gather the most political support, Krishnas analysis casts a gloomy view on the

desirability of RTAs. A regional trade agreement can bring such large gains to some groups that

they lose from further liberalization. If these groups are powerful enough, then free trade

becomes politically infeasible.

RTAs can be harmful a simple example, consider that car producers in one member country and

steel producers in another member gain from a bilateral agreement, because their market base

grows and they are still relatively shielded from international competition. Without the RTA,

these groups may have benefited from multilateral liberalization, but not as much as they do


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under the bilateral agreement. As a result, both steel and car producers oppose free trade once the

RTA is in place. All other trade policies beyond the decision to form trade agreements or not are

given exogenously.

Assuming away the choice of how much to restrict trade in the absence of multilateral free trade

helps to streamline but otherwise has no bearing in the argument developed. However, that

assumption is critical in the political economy analyses. FTAs weaken the role of politics in

the determination of trade policies. The role of special interests in the decisions of governments

diminishes, governments become less inclined to hinder free trade. Thus, whereas political-

economy motivations may induce a government to obstruct a welfare-improving multilateral free

trade agreement, membership in an FTA makes such possibility less likely to happen. But the

possibility of forming RTAs can also make free trade easier to achieve by inducing otherwise

uncooperative countries to cooperate. This is more likely to be the case with customs unions,

because they tend to be more harmful to outsiders.

The rules of the multilateral system also matters. Specifically, the provision of nondiscrimination

in the GATT/WTO requires that tariff concessions must be extended to all members. This allows

a country to free ride on the liberalization efforts of others, and could ultimately reduce the

extent of feasible liberalization by those countries. This may explain the inclusion of RTAs in the

original GATT charter, despite the GATTs overwhelming focus on nondiscrimination. FTAs are

not permitted, a country may oppose a multilateral free trade agreement because it can free ride

on the liberalization efforts of others. The threat of FTAs can reverse that situation by offering

the liberalizing countries a way to stop the outsider from free riding.

This discussion underscores two central elements in this debate: (i) whether the gains from

RTAs are so large for their members that a multilateral agreement becomes undesirable for them;

and (ii) whether outsiders benefit or lose when an RTA is formed.

4.2 The impact of multilateralism on regionalism:

Studying how regionalism affects multilateralism is not the only way to look at this relationship.

The incentives for and the sustainability of preferential liberalization when multilateral tariffs are

lower. Deeper multilateralism provides greater incentives to form RTAs. The intuition draws

from the complementarity effect between internal and external tariffs. When external tariffs are

low, the loss from trade diversion is small but the gains to producers from preferential access and


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to consumers from lower prices remain. There are other forces that can make regional and

multilateral tariff reduction complement each other to generate broader trade liberalization.

Reciprocal liberalization lowers tariffs, which leads to an expansion of the export sector and a

decline in the import-competing sector. Following this transition, the political-economy support

for protection is reduced, and further reciprocal liberalization becomes optimal. This process

changes the structure of production, which in turn facilitates future liberalization. The type of

liberalization can be regional or multilateral but spillovers from one to the other are likely.

Identification strategy relies on the timing of the agreements. Since the ten agreements

considered were negotiated after the conclusion of the Uruguay Round and are very small from

the US perspective, they are unlikely to have affected the multilateral talks in any meaningful

way. Hence, The juggernaut idea that tariff complementarity may work both ways. In contrast

with the common view that regionalism and multilateralism are substitute trade strategies, their

evidence indicates that the two are close complements.


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CHAPTER-5

THE WTOS PROVISIONS ON RTA

For a proper understanding of the relationship between the increasing number of RTAs and

todays multilateral trade regime, a brief historical introduction to the WTOs provisions on

RTAs is necessary. GATT started functioning on January 1, 1948, on the basis of Havana

Charter of 1948 establishing the International Trade Organization (ITO). GATT included

relatively few clauses, mainly relating to tariff obligations. Their main function was to enable the

swift implementation of tariff reductions while awaiting the coming into existence of the ITO.

However, because the ITO was never ratified, GATT gradually assumed the role of the major

multilateral trade forum. GATT contains two general concepts that are essential to understanding

the discussion on regionalism in international trade: schedules of tariff concessions and

unconditional most-favored-nation (MFN) treatment

The WTOs GATS contains a similar provision. Each WTO member is required to have a

schedule of specific commitments which identifies the services for which members guarantee

market access and national treatment and any limitations that may be attached. Schedules must

specify: (1) the terms, limitations and conditions on market access; (2) the conditions and

qualifications on national treatment; (3) the undertakings relating to additional commitments and,

where appropriate, the time-frame for implementation of such commitments; and (4) the date ofentry into force of such commitments. GATS Article XVI stipulates that each Member [must]

accord services and service suppliers of any other Member treatment no less favourable than that

provided for under the terms, limitations and conditions agreed and specified in its

[commitments]chedule.

GATT Article I contains the most-favored nation (MFN) obligation. It holds that, with respect to

customs duties and all other rules in connection with importation and exportation, any

advantage, favour, privilege or immunity granted by any contracting party to any product

originating in or destined for any other country shall be accorded immediately and

unconditionally to the like product originating in or destined for the territories of all other

contracting parties.

GATT has stated explicitly that the contracting parties recognize the desirability of increasing

freedom of trade by the development, through voluntary agreements, of closer integration


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between the economies of the countries parties to such agreements. At the same time, the

multilateral trade regime also imposes certain conditions on such RTAs. Those conditions can be

found in three different WTO sources:

(1) In the area of trade in goods, RTAs are subject to GATT Article XXIV, complemented by an

Understanding on its interpretation that was negotiated during the Uruguay Round;

(2) in the area of trade in services, the legal foundation for RTAs is found in Article V of the

General Agreement on Trade in Services (GATS);

(3) RTAs concluded among developing countries benefit from particular rules contained in

paragraph 2(c) of the Decision on Differential and more Favorable Treatment, Reciprocity and

Fuller Participation of Developing Countries, also called the Enabling Clause.


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CHAPTER-6

WTOS STANDARDS FOR RTAS

While the new Transparency Mechanism is an essential component for the restoration of the

WTOs supervisory role on the trade policies pursued by RTAs, the impact of the Mechanism is

necessarily limited by a number of non-procedural factors. One of the current stumbling blocks

to the WTOs effectiveness in dealing with RTAs is the lack of agreement on the interpretation

of the substantive WTO criteria. Under GATT 1947, the Working Groups in charge of the

examination of RTAs were generally unable to resolve basic methodological issues. As a

consequence, the reports submitted by the Working Groups to the GATT Council did, in most

cases, merely list the divergent views expressed by the contracting parties. In fact, the WTO

Committee on Regional Trade Agreements (CRTA) has not been more productive than the old

GATT Working Parties.

6.1 The WTOs Internal Requirements for RTAs:

1. The Membership of RTAs. The internal requirements are found in paragraphs 5, 8 and 5(c) of

Article XXIV. The first internal requirement concerns the membership of the RTAs. Paragraph 5

states that the provisions of the Agreement shall not prevent, as between the territories of

contracting parties, the formation of a customs union or of a free-trade area or the adoption of aninterim agreement necessary for the formation of a customs union or a free trade area[.]

The WTO members of such RTAs should (a) be required to provide the CRTA with a full

explanation on the reasons for concluding the RTA with the nonmember; and (b) be required to

take the responsibility of providing technical assistance to the non-member with a view of

bringing that country towards WTO membership.

2. The Degree of Trade Liberalization: the Substantially All Requirement. The second internal

requirement focuses on trade coverage. GATT Article XXIV:8(a)(i) provides that customs union

shall be understood to mean the substitution of a single customs territory for two or more

customs territories, so that duties and other restrictive regulations of commerce are eliminated

with respect to substantially all the trade between the constituent territories of the union.

3. The Reciprocity of Trade Liberalization. The third criterion concerns the reciprocity of

liberalization between the parties in free trade areas and customs unions. Under GATT 1947,


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several one-way free trade areas had been notified. Whether the Article XXIV: 8 requirement to

liberalize substantially all the trade implied that such liberalization needed to be fully

reciprocal was the subject of debate and disagreement.

4. The Specific Requirement for Customs Unions. The fourth internal requirement deals

specifically with customs unions. GATT Article XXIV:8(a)(ii) contains the requirement that the

parties to customs unions must apply substantially the same duties and other regulations of

commerce in relation to third parties. According to the Appellate Body in the Turkey-Textiles

case, this provision implies that the constituent members of a customs union are . . . required to

apply a common external trade regime. The Appellate Body adds that the term substantially

the same offers a certain degree of flexibility.

5. The Period of Implementation. The fifth internal requirement deals with the time period within

which the RTA is to be formed. GATT Article XXIV:5(c) states that any interim agreement . . .

shall include a plan and schedule for formation of . . . customs union or . . . free trade area within

the reasonable period of time. The Understanding on the Interpretation of Article XXIV of

GATT 1994 clarifies that the reasonable period of time referred to in paragraph 5(c) should be

ten years and should only exceed this period of time in exceptional cases.

6.2 The WTOs External Requirements for RTAs:

1. The General Principle.

While the parties to RTAs have generally held the view that paragraph 4 of Article XXIV can be

seen as a purposive preamble without additional legal consequences, third countries have tended

to interpret it as creating a separate obligation to be complied with by the RTA parties,

independent of other Article XXIV provisions. The issue was first discussed in depth during the

examination of the Treaty of Rome establishing the European Economic Community in 1957.

The Communitys representatives held that the paragraph was merely laying down a general

principle that was translated into legal requirements in paragraphs 5 to 9.

2. The External Trade Consequences of RTAs. In addition to its internal requirements that focus

on the relationship between the parties to an RTA, GATT Article XXIV also contains external

obligations that deal with the RTAs legal relationship with nonmembers. During the Uruguay

Round, the European Community argued that the purpose of the examination under GATT

Article XXIV:5 was to discuss the consequences of the customs union or free trade area by


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looking at the total trade of the member States with the other contracting parties taken

collectively.

3. The Specific Requirement for Customs Unions: Compensatory Adjustment. The second

external requirement on RTAs concerns the common customs duties that are adopted by the

members of a customs union. If, in the creation of a customs union, a WTO member increases a

rate of duty inconsistently with what is listed in its schedule of concessions, the customs union is

obliged to enter into compensatory adjustment negotiations with the outside contracting

parties. According to GATT Article XXIV:6, the members of a customs union must thus offer

compensatory adjustment when bound tariffs have been raised following the formation or the

enlargement of the union.


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CHAPTER-7

WTOS PROCEDURAL STANDARDS FOR ASSESSING RTAS

On July 10, 2006, negotiators of the World Trade Organizations (WTO) Doha Development

Round approved a new WTO Transparency Mechanism (Mechanism) for Regional Trade

Agreements (RTAs). Instead of awaiting the final results of the Doha Round, the WTO General

Council formally established the Mechanism on a provisional basis on December 14, 2006. The

decision on the provisional application of the new Mechanism is significant. It shows the

urgency felt by the WTO members for more transparency in the creation and functioning of

RTAs. By July 2007, no less than 380 RTAs had been notified to the General Agreement on

Tariffs and Trade (GATT) and the WTO. An additional twenty RTAs were estimated to be

operational, though not yet notified. From September 2005 to September 2006 alone, thirty-two

RTAs were notified. According to the WTOs website, Mongolia is the only WTO member that

is not party to any RTA.

Transparency is an essential concept in the WTO: Members recognize the inherent value of

domestic transparency of government decision-making on trade policy matters for both

Members economies and the multilateral trading system, and agree to encourage and promote

greater transparency . . . . Transparency is of particular importance with respect to RTAs as they

are an exception to the key MFN-principle. In Article XXIV:7(a), GATT 1947 provides thatcontracting parties should promptly notify their Agreement to the contracting parties and shall

make available to them such information regarding the proposed union or area as will enable

them to make such reports and recommendations to contracting parties as they may deem

appropriate. GATS Article V:7(a) stipulates that members which are parties to any RTA

covering trade in services shall promptly notify such agreement, enlargement or modification of

that agreement. Members that are parties to an RTA that is implemented on the basis of a time-

frame shall report periodically on its implementation.

Several delegations . . . stressed the need to improve the transparency of RTAs and the

efficiency of the procedures related to the examination of RTAs, noting that the CRTA

[Committee on Regional Trade Agreements] ha[s] been unable to adequately fulfill its mandate

of reviewing RTAs and overseeing their implementation.


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7.1 The Competent Body for the Examination of RTAs:

In the old days of GATT 1947, examination of RTAs was conducted by individual working

parties. Often, several working parties co-existed, each assessing different RTAs. This

fragmented approach neither contributed to coherence, nor to an orderly discussion of systemic

issues which are common to RTAs. To remedy these problems, the WTO General Council

established the Committee on Regional Trade Agreements (CRTA) in February 1996. The

CRTAs role is to carry out the examination of RTAs; to consider and make appropriate

recommendations on the requirement for biennial reporting on their operation; to develop

procedures to facilitate and improve the examination process; and to consider the systemic

implications of such agreements and regional initiatives for the multilateral trading system and

the relationship between them.

7.2 The Information to be provided:

The examination of notified RTAs is conducted on the basis of information provided by the

parties. GATT Article XXIV: 7(a) requires WTO members to provide information on a proposed

free trade area or customs union as they deem appropriate. It does not lay down any specific

notification format to be followed by countries wishing to form a regional trading arrangement.

GATS Article V:7(a) provides without further instructions that any member entering into an

agreement shall make relevant information available to the Council for Trade in Services as the

latter may request it.

7.3 The Role of the WTO Secretariat:

With respect to the concrete examination of RTAs by the CRTA and the CTD, the Doha Round

Transparency Mechanism contains an important novelty. In the past, the WTO Secretariat played

only a marginal role in the assessment of RTAs. Under the Transparency Mechanism, the WTO

Secretariat, on its own responsibility and in full consultation with the parties, shall prepare a

factual presentation of the RTA. This procedure seems comparable to what exists under the

Trade Policy Review Mechanism (TPRM).


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7.4 The Timing of the Notification:

1. Early Announcement. As to the timing of the assessment exercise, some delegations expressed

support for early notification. The first phase is called the early announcement. Without

affecting the substance and the timing of the notification required under GATT Article XXIV,

GATS Article V or the Enabling Clause, nor affecting members rights and obligations under the

WTO agreements in any way, the Doha Round negotiators agreed on the usefulness of an early

announcement of pending RTAs. This implies that members participating in negotiations aimed

at the conclusion of an RTA

2. Notification in the Strict Sense. The second phase covers the notification in the strict sense.

The Transparency Mechanism stipulates that notification shall take place as early as possible.

As a rule, it will occur no later than directly following the parties ratification of the RTA or any

partys decision on application of the relevant parts of an agreement, and before the application

of preferential treatment between the parties. The Mechanism adds that the WTO consideration

of a notified RTA shall be normally concluded in a period not exceeding one year after the date

of notification.

3. The Subsequent Notification and Reporting of Changes to RTAs. GATS Article V:7(a) makes

clear that parties to any RTA covering trade in services shall also notify the enlargement or

modification of that agreement. Moreover, under GATS, parties to an RTA that is implemented

on the basis of a time-frame are obliged to report periodically on its implementation.300 GATT

Article XXIV does not include explicit provisions on the notification or reporting of

modifications or extensions of existing customs unions or free trade areas.


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CHAPTER-8

ENFORCEMENT OF THE WTOS RTA DISCIPLINES

In addition to the discussions on the substantive and procedural requirements that must be met by

RTAs, questions persist on two key topics related to the enforcement of WTO disciplines on

RTAs. The first question concerns the legal consequences that should result from a WTO finding

of incompatibility. The second question deals with the justiciability of WTO disciplines on

RTAs. Both issues will be discussed below.

A. The WTO as the Partial Constitutional Supervisor of RTAs

B. The Limited Justiciability of the WTOs RTA Disciplines

GATT/WTO Dispute Settlement and RTAs:

1. The State-of- Play. In the days of the old GATT 1947, the relationship between the dispute

settlement system and Article XXIV came up in two cases. The Panel held that the

examination or re-examination of Article XXIV agreements was the responsibility of the

contracting parties. The Panel added that it would not be appropriate to determine the

conformity of an agreement with the requirements of Article XXIV on the basis of a complaint

by a contracting party under Article XXIII:1(a).

The Panels reasoning runs as follows: The Panel could not accept that tariff preferencesinconsistent with Article I: 1 would, by notification of the preferential arrangement and

invocation of Article XXIV against the objections of other contracting parties, escape any

examination by a panel established under Article XXIII. If this view were endorsed a mere

communication of a contracting party invoking Article XXIV could deprive all other contracting

parties of their procedural rights under Article XXIII: 2 and therefore also of the effective

protection of their substantive rights, in particular those under Article I. The Panel concluded

therefore that a panel, faced with the invocation of Article XXIV, first had to examine whether or

not this provision applied to the agreement in question.

2. The Justiciability of the WTOs RTA Disciplines. It is important to analyze whether the

current state of the WTO case-law constitutes an appropriate answer to the credibility gap with

regards to the monitoring of RTAs. In the highly political context surrounding the creation of

regional agreements, the most pertinent question concerns the justiciability of the WTO


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disciplines on RTAs and the possible impact of an over-legalization of the enforcement of the

rules. The issue will be looked at from three related angles: the rather vague nature of the WTO

provisions on RTAs; the institutional balance on which the WTO rests; and the difference

between judging concrete trade policy measures versus the overall legality of RTAs.

a. The Nature of the WTOs RTA Provisions.

b. Preserving the WTOs Institutional Balance.

c. Judging Concrete Trade Policy Measures Versus the Overall Legality of RTAs.


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CHAPTER-9

IMPACT OF RTAS

Does membership of an RTA weaken the interest in multilateral negotiations and liberalization?

The background of unilateral reforms and increased membership of the strengthened multilateral

system should mean that the recent strong trend towards regionalism is somewhat less dangerous

to third countries and to the multilateral system than earlier experiences. This conclusion is re-

inforced by the nature of the new agreements, which have wider coverage of product and

instruments than earlier agreements, enhancing the degree of integration. On the other hand, we

have certainly heard in Geneva comments from negotiators to the effect "If we do not get what

we want in the negotiating agenda, why should we worry? We have our own RTA. That is where

the action is!" Was this a factor behind the failure of the WTO Ministerial meeting in Seattle in

late 1999? On the whole, experience seems to confirm the equivocal view of Winters (1998) who

says that there is no reason to expect a simple answer to whether regionalism encourages or

discourages the evolution towards globally freer trade. Similarly, the jury remains out on

whether the emerging mega-blocs of RTAs will facilitate or frustrate the making of multilateral

agreements. It should be noted, however, that the emerging mega-blocks ignore, for the most

part, the least-developed countries, particularly those in sub-Sahara Africa and South Asia.

Are these new blocs then a sign of frustration with the multilateral system?

While many countries have embraced trade liberalization as part of a wider package of economic

reforms, the pace of change varies widely and has certainly slowed in recent years, even before

the Asian financial crisis. For the faster moving countries, finding like-minded countries may

well have been a factor behind regional agreements. Moreover, locking in reforms through RTAs

has also been a consideration, Mexico in NAFTA is a key example, and this may also be the

most important result of the Europe Agreements. Thus, the new regionalism lays down a

challenge to be bettered at the multilateral level. Do RTAs harm third countries and weaken the

MFN principle? It is hard to find concrete evidence that RTAs have harmed third countries.

RTAs are by their nature discriminatory and hence a derogation of the MFN principle. It is,

therefore, not surprising that rade within such blocs is generally growing faster than trade from

nonmembers (except in the EC where the numbers are the same in the 1990s). On the other hand,


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trade with non-members is growing at about the same rate as world trade in general, and in some

of the smaller, more dynamic RTAs, trade with non-members is growing faster than world trade.

It is argued in the literature that more comprehensive coverage ("going all the way") inclines

countries to take a more positive view of general liberalization. Similarly it is argued that deeper

integration is beneficial to third countries as domestic regulations allow greater competition even

from non-members. These issues obviously need more rigorous research. The maintenance of a

dual system (of antidumping duties for third parties and competition or anti-trust policy among

RTA parties) can create distortions where different criteria and conditions apply to the

invocation of such measures and thus have the potential for discrimination against third

countries.

Differing ROOs among RTAs are likely to have negative effects on trade.

Complex and varying methods of calculating regional content impose a significant burden on

industry and this problem is magnified by the overlap of RTAs. Likewise, the network of

diagonal cumulation schemes of preferential ROOs may have the effect of extending an RTA

beyond its own membership, without any legal basis. This is discriminatory, since some of the

RTA's trading partners those participating in the diagonal cumulation scheme benefit from

preferential treatment, while other third parties those outside the diagonal What about the

examination of RTAs in the WTO and the inconclusive debate on systemic issues? Does this

matter? This certainly does the system little credit, but it is also a consequence of the

fundamental consensus process of the WTO. It is frustrating to all WTO Members, participants

or not in an RTA, and has effectively given carte blanche to participants to operate a range of

discriminatory schemes. Given the divergences of view in the CRTA and the strength of

entrenched positions, it is difficult to see any major breakthroughs in this area. It may be that the

compatibility of individual RTAs with WTO rules is, in future, decided in the DSB of the WTO,

in the absence of firm conclusions in the CRTA. WTO (1995) suggests the conversion of the

examination process towards a transparency mechanism, which could be welfare-enhancing as

suggested by the public choice literature. For example, the present legal examinations might be

completed, reflecting the existing divergences of opinion (the current approach in the CRTA),

and this might be followed with a periodic examination, looking at the implementation of each

agreement and the evolution of trade among partners. A timetable for broad-based, economic


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review, keeping the RTAs under scrutiny, could go some way to satisfying the concern of third

countries about the operation of RTAs.

There can be little doubt that the main economic advantages to participants in regional trade

agreements would be even greater if the liberalization were carried out on a wider, multilateral

scale. RTAs are a second-best solution. Thus, on the basis of theory, Kemp and Wan (1976) note

"...there is a big incentive to form and enlarge a customs union until the world is one big customs

union, that is, until free trade prevails."


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CHAPTER-10

CONCLUSION & SUGGESTIONS

There are no clear cut answers to the debate on regionalism and multilateralism. Both are

continuing to exercise a strong and powerful influence on world trade. Multilateralism in the

form of the WTO has gained popularity in the recent years. The number of countries waiting to

seek accession and become members of the WTO corroborates this. At the same time, regional

economic groupings have proliferated at a rate and speed never seen before. However, for

developing countries, the key to their success lies in reforming their domestic economies: good

trade policy begins at home. Whether one follows the regional or the multilateral track,

reforming the domestic economy is imperative in order to maximize the gains from trade

liberalization. WTO meetings in Seattle, Cancun, and Hong Kong have all affirmed the same

bottom line: countries should follow unilateral trade policies suited to their own domestic needs

but within the framework of the changing international trade environment comprising both

regionalism and multilateralism.

RTAs are playing an important role in the development of the global markets and helping

countries in providing the various resources to its people and also has an impact on development

of the countries. Thus it is suggested that the RTA should be permitted as long as they are within

the ambit of the WTO and the multilateral agreements like WTO should be treated as the charteror the constitution for the international trade.

Documents

RTA vis a vis WTO.pdf