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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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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.