CHAPTER II

HISTORY OF REGIONALISM : PHASE I AND II

GROWTH OF REGIONALISM

~ l_Regionalism has a relatively long history. Starting from the 16th

century there have been attempts at regional integration, primarily

restricted to Europe)A brief historical overview is given below. 1

Selected Early Preferential Trade Agreements

• Great Britain : Proposals for union between England and Scotland

during 1547-48, and the 1603 union of crowns; the 1703 Act of

Union of England and Scotland established political as well as

economic union.

• France : Colbert's plan in 1664 to unite all the provinces of the

Kingdom into a customs union with internal free trade failed; all

internal barriers were abolished by the Revolutionary Government,

. 1789-90.

• United States of America : Initially, American colonies maintained

separate tariff systems with a moderate number of duties; the

1 Fritz Machlup, A History of Thought on Economic Integration (New York, 1977), pp.46-47.

53

Constitution adopted in 1789 barred the individual states from levying

any duties on trade with other states.

• German Zollverein : Plans laid for a customs union of German splinter

states which, at that time (1813-15) were imposing customs duties at

38 frontiers. This treaty was in effect from 1834 to 1871.

Examples of other customs unions in Europe include five between

Austria and neighbouring countries between 1775 and 1879, the Swiss

Confederation established in 1848, a customs union formed by Belgium

and Luxembourg in 1921; and the Benelux Customs Union established by

Belgium, Luxembourg and the Netherlands in 1944 (effective in 1947).2

Regional integration in modern times can be traced to the Benelux

Customs Union. The phenomenon continued to spread widely,

notwithstanding the emergence after World War II of a multilateral system

of trade relations based on tht principles of non-discrimination and

reciprocity embodied in the General Agreement on Tariffs and Trade -

GATT -194 7. From the 1950s till 1 998, 162 regional trade agreements

(RTAs) were notified to the GATT/WT0.3

2 ibid, p. 49. 3 This is the number of notifications received at the WTO till the last quarter of 1998. The list of RTAs notified to the GATT/WTO is given in Appendix I.

54

A distinction can be drawn between two waves or phases of

regionalism which have .occurred in the post World War II era - pre-Cold

War and post-Cold War regionalism. The two phases have also come to be

known as the First Regionalism and the Second Regionalism.4

THE FIRST REGIONALISM J ' ;v .

~This phase occurred in the late 1950s and 1 960s and spread to both

developed and developing countries. Among the developed countries,

regionalism was largely confined to Western Europe. In 1957, the signing

of the Treaty of Rome led to the formation of the European Economic

Community (EEC) comprising France, Germany, Italy, Belgium, the

Netherlands and Luxembourg. The Treaty was entered into force on 1

January, 1958. This Treaty began a process of regional integration which

is of central importance to regionalization in the world economy because it

set an example and established many precedents. The Treaty provided for

the est3blishment of a customs union covering industrial and agricultural

goods, and leading to the abolition of all internal tariffs and the adoption of

a common external -tariff. In addition, it included provisions for the free

movement of labour and capital and the creation of a common market. 5 ) v

4 Jagdish N. Bhagwati has suggested the use of these phrases to distinguish between the two phases of regionalism.

5 M. Hodges (ed.). European Integration (Harmondsworth, 1972). pp. iv-ix.

55

v'

\}:his was followed three years later, in 1960, by the signing of the

Stockholm Convention and the establishment of the European Free Trade

Area (EFTA). EFTA initially comprised seven countries : the United

Kingdom, Austria, Switzerland, Sweden, Norway, Denmark, and Portugal.

Unlike the EEC, EFT A involved only the elimination of internal tariffs with

no common external tariff. In 1973, both the UK and Ireland joined the EC,

along with Denmark. In 1975, the EEC and EFTA signed a new free trade

agreement providing for the elimination of tariffs on trade in manufactured I V

goods.6 "

"''' ~ '

JOther examples of regional trade blocs among industrialized

cQUntries during this period included a free trade agreement set up in 1965

between Australia and New Zealand, creating the New Zealand and

Australian Free Trade Area (NAFTA). In 1983 this became the Australian

and New Zealand Closer Economic Relations Trade Agreement

(ANZCERTA). 7

I

During this period, a number of arrangements came into being in v

Latin America. 8 In 1960, the Treaty of Montevideo established the Latin

American Free Trade Association (LAFTA) between Mexico and all the

J()effrey A. Frankel, Regional Trading Blocs in the World Economic System (Washington D.C., 1997), pp. 252-3.

7 ibid, p. 268. 8 This brief overview on Latin American integration in summarized from Diana Tussie, Latin American Integration: from LAFTA to LA/A (london, 1981 ).

56

countries of South America (except Guyana and Surinam). Under this

framework, intra-regional trade was to be liberalized, but its objectives

were not met. LAFT A came to an end in the late 1970s and was replaced

in 1 980 by the Latin American Integration Association (LAIA) which had

the ultimate goal of achieving regional free trade. In 1969, under the

Cartagena Agreement, several South American countries including some

LAFT A countries signed the Andean Pact, providing for closer economic

relations. In Central America, the Managua Treaty of 1960 established the

Central American Common Market (CACM) between Costa Rica, El

Salvador, Guatemala, Honduras and Nicaragua. A Caribbean Free Trade

Association (CARIFTA) was also set up which in 1973 was formed into the

Caribbean Community (CARICOM).

In Africa, a Central African Customs and Economic Union (CACEU)

was set up in 1964 comprising six central African countries. In 1967 the

East African Community (EAC) was set up in East Africa, but collapsed ten

years later. In 1969 the Southern African Customs Union (SACU) was

established. In 1975, the Economic Community of West African States

(ECOWAS) was formed under the Treaty of Lagos among 16 countries. 9

9 Pierre Ohonte, and others, "Economic Trends in Africa: the Economic Performance of Sub-Saharan African Countries", International Monetary Fund Working Paper 94/109, (Washington D.C., 1994).

57

In Asia, there were fewer examples of regional integration. 10 In

1967, though the Assoeiation of South-East Asian Nations (ASEAN) was

set up (consisting of Brunei, Indonesia, Malaysia, the Philippines, Singapore

and Thailand), as a regional forum, it did not have any specific regional

trade liberalization objective. In 1964 the Arab Common Market (ACM)

was formed between Egypt, Iraq, Jordan and Syria . • ~,1

(\.Y'' \_In North America, regionalism remained virtually non-existent, with

the key economic power, the USA, showing a strong commitment to the

multilateral approach.) .,/

In the decades immediately after World War II, the United States

accounted for close to half of global GDP. It could generate large benefits

for the world economy by freeing up its trade. It could also internalize a

large part of those benefits. This gave the United States a reason - and

the leverage - to push for non-discriminatory multilateral trade around the

world. In the ensuing years, it took on the promotion of the cause of free

trade. 11)

(;')Gautam Jaggi, "Association of Southeast Asian Nations (ASEAN) and Asean JJ_) Free Trade Area (AFT A): Chronology and Statistics", Asia Pacific Economic

Cooperation Working Paper 95-4, (Washington D.C., 1995).

GRichard Pomfret, The Economics of Regional Trading Arrangements (Oxford, 1997), pp.35-40.

58

FACTORS BEHIND FIRST REGIONALISM

,/-~ ~~-l!n this first phase •• regionalism was either confined to North-North or

South-South countries. It was also heavily focussed on trade objectives

with the pursuit of trade preferences from members being a d<;>minant goal,

especially among the developing countries. Tariffs were high among

industrial countries and even higher on trade among developing countries.

Regional preferences were therefore attractive. In practice only the EC

started with wider objectives that went beyond trade liberalization among

members. 12 )

!X (;he first-phase regionalism was not only geographically horizontal

and functionally oriented towards trade : it was also motivated by a variety

of factors in the different parts of the world where it occurred. 13 ;· ~..-

In the industrial North, regional arrangements were mo~ivated by

both economic and political considerations. The accords reached by the six

original EC member countries did have an evident economic rationale - the

thought was that further integration of neighbouring economies, starting

with the elimination of existing trade barriers, would lead to the

improvem~nt of collective welfare. But there was a political angle to it too) ~

12 Bela Balassa, European Economic Integration (Amsterdam, 1975), pp.13-15. 13 Kym Anderson and H. Norheim, "History, Geography and Regional Economic

Integration", in Kym Anderson and Richard Blackhurst, eds., Regional Integration and The Global Trading System (Geneva, 1993), pp.19-21.

59

Most of these early attempts at regional integration were inspired by

the prevailing develop~ent theories which argued that developing

countries needed to create large regional markets if they were to overcome

the constraints on industrial development posed by small domestic /

~ ,'\,.

markets. 11r&wever, due to the lack of broad industrial production and

relatively low level of economic development within most of the developing

world, the individual nations were forced to import heavily from Europe

and North America. This limited the expansion of intra-regional trade, and

by extension, the spread of regionalism) v

{.,.Phase I regionalism ebbed in the early 1970s. The attempts that had

been made to liberalize trade among the members of the various regional

blocs had generally failed. Outside Europe, in Latin America and Africa,

regionalism lost momentum and virtually collapsed. 18 ) ../.

THE SECOND REGIONALISM '~-[~ ~

(The second emergence of regionalism came in the li!ter half of the

1980s, ·and had its starting ground in North America. Here, the most

important development was the conversion of the United States to

American Trade with the European Community (New York, 1962), Ooc.E/CN 12/631.

17 Nino Maritano, A Latin American Economic Community: History, Policies and Problems (Notre Dame, 1970), pp.1 04-6.

18 Miguel S. Wionczek, "The Rise and Decline of Latin American Economic Integration", Journal of Common Market Studies, vol.l. 1970, pp.53-4.

61

•

regionalism. As mentioned earlier, in the first phase the United States was

an ardent defender of. multilateralism and by far the most formidable_

opponent of regionalism; although in this period the US acted as an

external federator in the European process of integration. Though

philosophically opposed to regionalism, it saw an integrated Western

Europe as an effective deterrent to the potential threat of Communism

from a powerful Soviet Union. 19 The turnaround in American philosophy

from multilateralism to regionalism has been attributed to various factors. )/

~!lowing the Second World ~ar, the USA in its capacity as the

leader in military and economic power, could set the agenda for the world

economy. It pushed forth a multilateral agenda, helping to set up a number

of multilateral institutions and agreements (most notably, the IMF, the

World Bank, and the GATT) to promote and enforce multilaterally agreed

rules in trade and finance. The United States also played a key role in the

eight rounds of multilateral trade negotiations of the GATT, in a bid to

strengthen the multilateral trading system. 20) v-

,/(However, with the end of the Cold War, the political economy l'

equations changed considerably, and the world became increasingly

19 Machlup, n.1, pp.73-74.

@?)Jagdish N. Bhagwati, "Regionalism and Multilateralism: An Overview", in Jaime V de Melo and Arvind Panagariya, eds., New Dimensions in Regional Integration

(Cambridge, 1993), pp.36-38.

62

multipolar. Japan and the East Asian newly-industrialized countries (NICs),

hardly significant players in the world economy earlier, emerged as major . economic forces; and the United States began to explore regional

economic arrangements to expand its market and exports. 21 It was

important for the United States to develop its bargaining potential through

a regional trade arrangement that included itself and other countries, both

developed and developing. The motivation for this was the fact that the

resulting huge market would give a tremendous boost to its negotiating

power. ) -if

,More specifically, it was after 1982 that there was a definite shift in vJ the pattern of US policy. The American proposal and agenda for a new

(eighth) round of multilateral trade negotiations (which subsequently took

shape as the Uruguay Round), met with stiff European resistance; and the

United States visualized regional economic alliances with other developed

and developing countries to enhance its bargaining power. 22 )

lNoted economist Jagdish. N. Bhagwati expresses this as follows :

"As the key defender of m~ltilateralism through the postwar years,

its [the US] decision now to travel the regional route (in the geographical

B Jagdish Bhagwati and T.N. Srinivasan, Lectures on International Trade ~(Cambridge, 1983), p.57.

. ~2 Albert Fishlow and Stephan Haggard, The United States and the Regionalisation ./\../' of the World Economy (Paris, 1992), pp.44-49.

63

and preferential senses simultaneously) tilts the balance of forces away at

the margin from multilateralism to regionalism". 23 J v . v(The spread of regional integration arrangements has been outlined

below. The categorization on the basis of continental blocs, does not

however, imply that these arrangements are confined to geographically

contiguous regions. 24 )

J

/ North America : First came the US-Israel Free Trade Area (FTA) in 1985.

This provided for the elimination of all tariffs on bilateral trade within ten

years. In 1988 the Canada-US Free Trade Area (CUSFTA) came into

existence, wherein all bilateral tariffs and quantitative restrictions were to

be eliminated over a ten-year period. Attempts were also made to liberalize

trade in services and investment. 25 - • '

In 1990, when Mexico initiated discussions with the United States

on a possible free trade agreement, Canaja joined in to result in the North

American Free Trade Agreement (NAFTA) in 1994. In addition to taking

over the basic structure of CUSFT A commitments, in NAFT A the members

agreed to eliminate all border measures applying to agricultural products.

't" '

~.:\~ Jagdish N. Bhagwati, "Threats to the World Trading Systems", The World Economy, vol.15, no.4 (19921, p.444.

24 Appendix II contains a set of 5 maps detailing the spread of RT As on a geographical basis.

25 CUSFTA, Canada- United States Free Trade Agreement (January 1988), 27 I.L.M 281.

64

Additional areas of obligation include financial services, where members

grant most-favoured-naJion (MFNl and national treatment to service

providers of member countries, and intellectual property protection in a

range of areas - copyrights, patents, trademarks, and industrial and trade

secrets. 26

Latin America In latin America, the 1990s witnessed a proliferation of

regional trading arrangements. In 1990 Argentina and Brazil signed the

Argentina-Brazil FTA.27 In 1991, Argentina, Brazil, Paraguay and Uruguay

signed the Southern Common Market Treaty in Asuncion leading to the

formation of MERCOSUR (acronym for Mere ad Comun del Sur). The

MERCOSUR's ultimate target is a common market among its members with

free circulation of goods, services, capital and labour. It provide'd for the

elimination of tariffs among its members by the year 2000, and a common

external tariff. MERCOSUR's member countries constitute an integrated

market of 203 million people (approximately 48% of the Latin American

population), and cover practically two-thirds of the region's land area. It

26 NAFT A, Agreement Establishing the North American Free Trade Agreement (December 1992), 32 I.L.M. 289 and 32 I.L.M. 605.

27 Economic Commission for Latin America and the Caribbean (EClAC) Open Regionalism in Latin America and the Caribbean (Santiago, 1994), p.7.

65

also represents roughly 50% of Latin America's industrial production and

intra-regional trade. 28

There were also significant attempts to revitalize and reinforce

existing arrangements. 29 In 1992 the countries belonging to the CARICOM

declared their intention to move towards the creation of a common market,

including the creation of a common external tariff. In 1993 the six Central

American states belonging to the Central American Common Market

(CACM) signed an agreement providing for the removal of all remaining

internal barriers to trade and the adoption of a new, lower common

external tariff. The Andean Pact was renewed in 1990, and in 1994 its five

members - Peru, Bolivia, Venezuela, Colombia and Ecuador - reached an

agreement on the adoption of a four-tier common external tariff. There

have also been negotiations between different RT As to enter into pacts

with one another, as well as to expand their respective membership.

Initiatives for the creation of a South American Free Trade Area and an

ambitious Trans-Atlantic Free Trade Area (TAFTA), involving countries on

both sides of the Atlantic, are on the anvil. The goal of further integration

28 Alexander Yeats, "Does MERCOSUR's Trade Performance Raise Concerns about the Effects of Regional Trade Arrangements?", World Bank Policy Research Working Paper, no.1729 (Washington D.C., 1997), pp.18-19.

29 Sebastain Edwards, Crisis and Reform in Latin America: From Despair to Hope (New York, 1995), pp.1-20.

66

in the western hemisphere through a Free Trade · Agreement for the

Americas (FT AA) by the year 2005 was agreed in 1 994. 30 . Asia and the Pacific : The third important area where regional integration

has been taking place is Asia. In 1991 the six ASEAN countries -

Singapore, Malaysia, Thailand, Indonesia, the Philippines, and Brunei

(Vietnam was admitted as a member in 1995) - embarked on a programme

of achieving on ASEAN Free Trade Area (AFTA) by 2008, a timetable

subsequently shortened to 2003. Tariffs on most products are to be

progressively reduced.31

Members of the South Asian Association for Regional Cooperation

(SAARC) - Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka

concluded a trade agreement in 1993 - the SAARC Preferential Tariff

Arrangement (SAPTA). This is a framework agreement wherein the

members have laid the foundation for the establishment of a South Asian

Free Trade Area (SAFT A) by the year 2001.32

30 Eric Bond and Constantinos Syropolous, "The Size of Trading Blocs: Market Power and World Welfare Effects'", Journal of International Economics, vol.40, no.3/4, May 1996, pp. 411-37.

31 Australian Department of Foreign Affairs and Trade, ASEAN Free Trade Area: Trading Block or Building Block? (Canberra, 1996), pp.20-23.

32 Jeffrey Frankel and Shang-Jin Wei, "The New Regionalism and Asia: Impact and Options", in Arvind Panagariya and others, eds., The Global Trading System and Developing Asia (Hong Kong, 1998), pp.5-7.

67

An ambitious step towards closer integration in the Asia-Pacific

region was taken with the formation of the Asia-Pacific Economic

Cooperation (APEC) in 1989. Started as an informal dialogue group of 18

developing and developed nations - including the United States. Canada,

Australia, New Zealand, Japan, China, Hong Kong and the ASEAN

countries - APEC has been working towards achieving regional free trade

by 2010 for developed-country members, and 2020 for the developing.

The APEC members account for approximately 50 per cent of the world's

output, trade, and population; and equally importantly, has the backing of

economically strong countries. 33

The Australia and New Zealand Closer Economic Relations Trade

Agreement (ANZCERTA), which was created out of the former NAFTA (in

the period of the First Regionalism) in 1983 went on towards the

elimination of all tariffs by 1988 and all quantitative restrictions by 1995.34

Africa and West Asia : Developments in these two regions are considered

together due to a number of agreements that span both regions. However,

information is sketchy on a number of arrangements because notifications

have not been made to the GATT /WTO. In 1981, the Gulf Cooperation

33 APEC, A Vision for APEC: Towards an Asia-Pacific Economic Communiry. Report of the Eminent Persons' Group to APEC Ministers (Singapore, 1993).

34 Jeffrey Frankel and others, " APEC and Regional Trading Arrangements in the Pacific" APEC Working Paper Series No.94-1 (Washington D.C., 1995), p.2.

68

Council (GCC) consisting of six Gulf nations was established with the aim

of forming a free trade. area covering industrial and agricultural products

(excluding petroleum products). A Preferential Trade Area for Eastern and

Southern African States (PTA) was established in 1981 with the aims of

establishing a common market by the year 2000, and the promotion of

trade and economic cooperation among members. 35

Europe : And of course, Europe continues to be a flagpost in regional

integration with the European Community (EC) and European Free Trade

Area (EFTA) straddling both the phases of regionalism. The EC is not only

the largest and most complex of the regional arrangements in place, but is

also the most ambitious. Unlike its counterparts in the rest of the world it

has gone far beyond the simple common market model.36 Regional

integration was deepened by the signing of the Single European Act (SEA)

in 1987, providing for the extension of the EC customs union into a

common market in which the 'four freedoms' - goods, services, labour,

and capital -would prevail.37 A landmark was the signing of the Maastricht

Treaty (Treaty on Closer Economic Union) in 1991 providing for full

35 Faezah Foroutan and Lant Pritchett, "Intra-Sub-Saharan African Trade: Is it too Little?", Journal of African Economies vo1.2, May 1993, pp.74-105.

36 Martin Wolf, .,Cooperation or Conflict?: the European Union in a Liberal Global Economy", International Affairs (londonL vol. 71, no.2, 1995, p.333.

37 M.M. Emerson and others, The EC Commission's Assessment of the Economic Effects of Completing the Internal Market (Oxford, 1988), p.7.

69

economic and monetary union, common foreign and security policy among

other objectives, betwe~n the European Union (EU - as it now came to be

known) members by 1999.38 Though a common currency - the euro has

already been adopted across the EU (barring the United Kingdom) on a trial

basis, the road towards total economic and political integration has proved

to be more arduous.

The European Union again has a series of complex preferential

trading arrangements with other countries. It reached an agreement with

the EFT A countries for the establishment of a European Economic Area

(EEA) in 1993, extending many of the aspects of the Single European Act

(SEA) to EFT A countries. 39 Further, the EU has trading agreements with 70

African, Caribbean, and Pacific (ACP) countries which are signatories of

the Lome Conventions (first set up in 1975). These agreements under the

four Lome Conventions involved the EU granting tariff preferences on

mainly industrial goods from these countries, usually with no reciprocity

requirements - these fall in the category of non-reciprocal preferential

agreements. 40 In addition, the EU has a series of trading agreements with

38 Alexis Jacquemin and Andre Sapir, "Europe Post-1992: Internal and External Liberalization", American Economic Review: Papers and Proceedings, vo1.81, no.2, May 1991, pp.166-70.

39 N. Grimwade, International Trade Policy: A Contemporary Analysis (New York, 1996), pp.259-60.

40 Rosalind H. Thomas, "The WTO and Trade Cooperation between the ACP and the EU: Assessing the Options", ECDPM Working Paper No. 16, (Maastricht, 1997), pp.2-3.

70

l

the countries of East Europe. In fact, the Committee on Regional Trade

Agreements (CRT A) of the WTO has stated that the EU is the dominant

player in regional initiatives with a total of 35 RTAs in force. 41

Chart 2.1 shows the number of countries participating, by region, in

notified RTAs which were in force during each decade from 1948-1998. In

the 1990s, a total of 138 countries were parties to RT As notified to the

WTO. In the period 1948-60 the European countries were the leading RTA

participants, while in the next three decades American countries were

foremost. In the 1990s, the Asia-Pacific and European regions both have

36 countries participating in RTAs.

Chart 2.1 : Number of Participants in RT As notified to the GATT /WTO by region and decade

160

140

120

100

80

60

40

20

1948-59 196)·69 :970-79

Source : Development Division, WTO Secretariat, 1998

41 CRT A, WT /REG 4/29 I 1998.

71

1990-98

•AfrK::a

IJ f,:nericas

0 Asia Pdcific

• Europe

11 !\iddie East

As can be seen from the chart, on a region by region basis, 13

African countries were _participants in notified RTAs in the 1960s. This

figure dropped by more than half in the next two decades, but has

increased to 25 participating countries in the 1990s. Participation by

countries in the Americas has remained fairly constant for the past four

decades, averaging 27 participants. In the 1990s, 30 countries in the

region have participated in notified RTAs. In the Asia-Pacific, only 4

countries participated in notified RTAs in the 1960s. This increased to 13

in the 1970s and has reached 36 in the 1990s. In Europe, participating

countries grew from 6 in the 1950s to 16 in the 1960s. During the 1970s

and 1980s there were 26 participating countries. In West Asia,

participating countries have grown from 3 in the 1960s to 11 in the

1990s.

CHARACTERISTICS OF THE SECOND REGIONALISM

J' (;he regionalism of the last few years is generally characterized by

its increased numbers, rapid succession, and growing North-South

orientation. A key feature of the new wave of regionalism is that it is

broader and more intensive than the first. Many more countries and a

greater proportion of trade are covered. The number of such arrangements

is also far greater. 42 ) ./

/

t) World Trade Organization, Regionalism and the World Trading System (Geneva, 1995), pp.1-2.

72

Though the number of new RTAs notified to the GATT/WTO has

fluctuated over the year~ more than half of all notifications have occurred

since 1990.

Chart 2.2: Number of notified RTAs, by year of entry into force

16

14

12

10

8

6

4

2

0

~ ~ ~ ,._

~ ~

Source : Development Division, WTO Secretariat, 1998

As can be seen from Chart 2.2, there were fewer notifications in the

1950s. In the 1960s, notifications of RTAs averaged 2-3 a year. In the

1970s, the number of notifications increased, reaching a peak of 10 in

1973. During the 1980s and early 1990s, the number of notifications

dropped off considerably until 1992 when 11 new RT As were notified.

Since then an average of 11 new RT As have been notified to the

GATT/WTO annually. By 1990, 77 RTAs had been notified; as of mid

August 1998 this number had grown to 162.

73

In addition to the sheer numb~r of agreements which have come into

existence, many have sought a deeper level of integration than in the past . . Thus, often they are not restricted to the removal of internal tariffs or the

establishment of a common external tariff. Internal liberalization is often

extended to cover non-tariff barriers and imp~diments to the free

movement of labour and capital, with the aim of creating a common

market. 43 They may involve the creation of separate dispute settlement

mechanisms, as with NAFTA.44

Also, in some parts of the world (as in the Americas) the RT As

which have been established in the new phase, are much more complex.

One aspect of this has been the so-called 'hub-and-spoke' effect where a

large country has multiple RTAs with several smaller countries. This occurs

when country A enters into a free trade agreement with say two other

countries B and C, but where there is no free trade agreement between B

and C. Also, large country A (the hub) generally sets the terms and

conditions for membership for the smaller countries (the spokes). This

results, in general in goods and services flowing more freely between the

43 Paul Krugman, "Regionalism vs. Multilateralism: Analytical Notesn in de Melo and Panagariya, n.20, pp.56-59.

44 Some of the provisions covered in NAFT A have been mentioned in Chapter I, footnote 54.

74

hub and each spoke than between the spokes. Such arrangements require

complex rules of origin to prevent large-scale trade deflection.45 . DEPTH OF INTEGRATION

Among the RT As established in the second phase, a distinction can

be made between shallow and deep integration.46 Shallow integration

relates to the reduction among parties to an agreement of those measures

which deliberately discriminate against foreign suppliers or buyers.

Essentially, they are frontier measures, even though the point of

application may be internal to the country.

Most recent regional schemes are free trade agreements. The list

includes the CUSFT A, the US-Israel FT A, the NAFT A, MERCOSUR, and

most regional schemes in latin America, Africa and Asia. These involve

shallow integration, often little more than tariff and quota liberalization.

The term, deep integration, is used to refer to harmonizing or

otherwise constraining those legal measures and other practices which do

not have effects on international trade as therr primary objective, but

which nevertheless do affect international trade.'n These internal factors

-range from those which are aimed at influencing the level of production of

45 Richard E. Baldwin, Towards an Integrated Europe (London, 1994), pp.21-25.

f11s{ichard E. Baldwin, "The Causes of Regionalism", The World Economy, vol.20, ·v · no.7, (1997), p.867.

47 ibid., p.863.

75

particular goods and services (such as taxes or subsidies on specific

products) through, at the other end of the spectrum, language, the nature . of the legal system, and other products of history. In between these polar

cases are prescribed standards relating to health and safety, industry

standards, legal protection of intellectual property, and environmental

regulations, among others.

The European Union Single Market programme and the Maastricht

Treaty are archetypal deep integration agreements. 48 In principle, this mean

that member-states cannot restrict imports of EC goods or services at the

border (all border measures including anti-dumping and · countervaiting

duties are excluded), or by means of domestic health, safety and

environmental standards (standards are mutually recognised). Nor can they

restrict intra-EC capital and labour movements, or inhibit establishment of

firms from EC nations. Member-states cannot freely choose their state-aids

policy, competition policy, or indirect taxation rates. All these restrictions

are supervised by the supranational European Commission and can be

enforced by the European Court of Justice (this can overrule member-state

courts on single market issues).49 Also nations joining the prospective

I )Fa'\ ~ Rooert Z. Lawrence, Regionalism, Multilateralism, and Deeper Integration

~

(Washington D.C., 1996), pp.4 7-48. He also offers NAFTA as an example of deep integration.

:j:L. Alan winters, ·european Integration and the Rest of the World", Review of - lnternatio(lal Economics, vol.86, no.2, 1997, pp.52-56.

76

monetary union will no longer control their monetary policy. Of course,

practice does not always match principle, but obviously many of these

policies would be considered matters of purely national concern in say,

North America. This in a way explains why so few deep-type RT As exist.

Apart from the deep integration schemes in Europe, Australia and New

Zealand are also working towards closer integration through the Closer

Economic Relations (CER) agreement. 50

Among RT As, the range of products covered and the depth of

liberalization in terms of tariff and non-tariff measures also varies

considerably. With respect to product coverage, all agreements cover

industrial products (with some exceptions), while most exclude agricultural

products, unprocessed primary products (fishery and forestry products),

and mining products. The exclusion of agricultural products is primarily due

to restrictive trade policies most governments maintain in this sector due

to domestic policies of support for farmers. 61

With respect to the depth of liberalization attained by members of

RTAs, most of the early agreements concluded by developing countries

aimed st a partial reduction of tariffs, while agreements reached by

50 Frankel and others, n.34, p.66. 51 Bernard Hoekman and Michael Leidy, "Holes and Loopholes in Integration

Agreements: History and Prospects .. , in Anderson and Blackhurst, n.13, pp.129-34.

77

developed countries, and recently by developing countries as well,

progressively eliminate tariffs on products covered by the agreement. 52 . Few agreements eliminate the use of non-tariff border measures between

members, such as import licensing, anti-dumping and countervailing

measures. Only the EU has completed the liberalization of cross-border

trade between members removing tariff and non-tariff measures on all

products. 53

In order to determine the depth of integration of RT As notifi.ed to the

GATT/WTO, notifications of RTAs have been divided into five categories.

The definitions are as follows54:

"FTA-" RT As which are either non-reciprocal or have a limited

product coverage including most RT As notified under the

Enabling Clause.

"FTA" RT As notified under GATT Article XXIV as free trade

agreements.

- "FTA+" RT As which have substantive provisions covering trade in

services, separately notified under GATS Article V.

"CU" RTAs notified as customs unions under GATT Article

XXIV or the Enabling Clause.

52 Lawence, n.48, pp.56-58. 53 Winters, n.49, p.81. 54 CRTA, "Mapping of Regional Trade AgreementsH, (Geneva, 1998).

78

.. cu +, RTAs notified as customs unions whi.ch have substantive

provisions covering trade in services, separately notified . under GATS Article V.

Figure 2.1 shows the entire picture of RTAs notified to the

GATT/WTO by category. Customs unions (both categories) make up 12

per cent of the total, whereas FT As (all three categories make up 88 per

cent).

Figure 2. 1 : Depth of Integration of all RTAs notified to

the GATT /WTO, 1948-1998

FTA+ 6%

FTA+ 17%

Source: Development Division, WTO Secretariat, 1998

MOTIVATION FOR REGIONAL INTEGRATION

Wher. do countries seek membership of regional trade agreements?

And when/why do members of such agreements seek new members? Such

79

decisions are taken on political as well as economic grounds, and the

motivation behind regional arrangements vary from group to group. 55 . • Some countries see trade agreements as providing underpinnings to

strategic alliances, and hence implicitly form part of security

arrangements. These aspects of foreign and national security may

predominate, any economic costs being regarded as the price to pay

to achieve the non-economic objectives.

• Smaller countries often see trade agreements with larger partners as

a way of obtaining more security for their a'=cess to larger country

markets.

• Some countries' use of regional trade arrangements might reflect

tactical considerations - conscious efforts to use RT As to play the

multilateral card.

In some cases, the objectives of countries negotiating participation

in RT As are multiple, in other cases, one or two single objectives tend to

be dominant. 56

55 This section of the analysis is based on discussions held with economists of the Development Division, WTO, as well as academics at the Graduate Institute of International Studies, Geneva, most notably Professor Richard Blackhurst.

56 John Whalley, "Why do Countries Seek Regional Trade Agreements", National Bureau of Economic Research Working Paper, 5552 (Cambridge, 1996), details various factors which have led to countries participating in regional integration initiatives.

80

1 . Traditional trade gains : Perhaps the most conventional objective

thought to underly a c51untry's participation in trade negotiation is that

through reciprocal exchanges of concessions on trade barriers there will be

improvements in market access from which all parties to the RT A will

benefit. The reasons for participating in a regional negotiation - apart from

or over and above, the multilateral - are usually that fewer trading partners

are involved (by definition, an RT A involves substantially fewer countries

than a multilateral trade negotiation), that the chances of success are seen

as high because the number of countries is small or there has been a prior

history of frustration with negotiating failures at the multilateral level. 67

This idea of trade gains from regional integration was a key economic

objective behind the creation of the European Economic Community in the

late 1950s, although not probably the central motive.68

2. Increased multilateral bargaining power : Another objective that

countries have in negotiating regional initiative is to increase their

bargaining power towards third countries by entering an RTA with common

external barriers (i.e. through a customs union). This idea was shared by

57 Paul Krugman, n.43, p.61; and Peter Sutherland, "Regional Integration and the World Trade Organization", News GA TT/WTO (Geneva), no.3, 7, July 1994; hold the view that regionalism has spread because of the relative efficacy of negotiating agreements among a smaller group of countries, than a larger group at the multilateral level. Also there was a fear of failure of the Uruguay Round of MTNs leading countries to lose faith in the multilateral process.

58 Balassa, n.12, p.59.

81

the countries involved in the formation of the EEC. The notion was that

individually European countries might have limited leverage in negotiating . multilaterally, but if the Western European countries acted cooperatively in

using a common trade policy, they could increase their leverage.

The objective of increasing negotiating power has also been seen in

some of the Latin American arrangements (most notably, the MERCOSUR)

where the rationale has been that groups of countries will have more

leverage in future accession negotiations to NAFT A than will individual

countries. 69

3. Guarantees of Access : An objective present in recent large-small

country trade negotiations, beginning with the Canada-US Agreement

(CUSFTA), is to use an RTA to make access to the larger country market in

the region more secure for the smaller country. In the example cited, the

Canadian aim was to achieve a regional agreement which gave it some

degree of exemption from the use of anti-dumping and countervailing

duties by the US producers. 60

4. Strategic linkage : The understanding that RT A~ can help underpin

security arrangements among the integrating countries has also been a

59 ECLAC, n.27, pp. 14-18. 60 Kimberly Clausing, "The Canada-United States Free Trade Agreement: Steeping

Stone .or Stumbling Block?•, (Cambridge, mimeographed, 1995), pp.33-39.

82

motivating factor. 61 This factor (of helping prevent a further war) was a

dominant consideration in the negotiation of European trade arrangements.

This is also a key difference between European and recent North

American trade agreements, in that strategic linkage is largely missing in

the latter arrangements. European agreements have been able to move

progressively towards ever deeper integration, because the political

commitment to it is so strong, almost to the point of agreement to found a

European federation to partially supersede agreements between the

individual nation states. 62

~ .. \ \ r I" . '' J

5. \ Multilateral and regional interplay : A further set of objectives

involve the actual or potential use of regional agreements for tactical

purposes by countries seeking to achieve their multilateral negotiating

objectives. The opposite can also be true in that ongoing. multilateral

negotiations can be used to influence the outcome of regional initiatives.63 ) .._,

v' \t)ence, during the Uruguay Round of Multilateral Trade Negotiations,

it was widely thought that it was to the US advantage to have regional

trade negotiations underway, so that in dealing with 'recalcitrant'

multilateral negotiating· partners, it could threaten or actually play the

61 Baldwin, n.46, pp.872-3.

62 P Cecchini, The European Challenge: The Benefits of a Single Market (London, 1992), pp.29-35.

63 Jagdish N. Bhagwati, ·Regional Accords Be-GATT Trouble for Free Trade•, Wall Street Journal, 5 December 1990.

83

regional/bilateral card.64 In turn, it was also believed that during the Round

the smaller countries u~ed multilateral and regional interplay as a way of

improving their negotiating leverage in regional arrangements with larger \ .....

countries.

All the above factors have been at work, but going by recent

history, two events coincided in the 1980s which can explain much of the

increased interest in regional integration initiatives.

a) The move towards a Single European Market for goods, services,

capital and labour in the late 1980s led to concerns in much of the rest of

the world that the EC might become less open to trade with outsiders

(fears of a 'Fortress Europe'), and less interested in pursuing multilateral

trade liberalization with other contracting parties to the GATT. 65 Fearfu I of

finding themselves with less-than-advantageous access to the markets of

their key trading partners, several non-EC countries in Western Europe

sought membership to the Community. Around the same time, following

the fall of the Berlin Wall, and the dissolution of the Soviet Union, many

East European countries also sought association agreements with the EC

and the EFTA.66

64 ibid.,

_ 65 Victoria Curzon Price, "The Threat of 'Fortress Europe' from The Development

of Social and Industrial Policies at a European Level", Aussenwirtschaft, vo1.46, 19911 pp.119-38.

66 ibid.

84

b) Canada and the United States joined in to create the Canada-US

Free Trade Agreement .(CUSFT A). Although this was primarily seen as a

way of strengthening the two economies it was hoped that it would also

enhance the leverage to help bring about a successful conclusion to the

Uruguay Round of negotiations. 67

These developments in regional integration in Europe and North

America - the two largest trading entities, coupled with the continued

difficulty of successfully concluding the Uruguay Round of Negotiations

(over and above the factors memioned earlier) conditioned the response to

regionalism in Latin America and the Asia-Pacific.68 Many countries in these

parts of the world began exploring options for increased regional economic

cooperation and integration, resulting in the present proliferation of

regional trading agreements.

Thus regionalism appeared to be the key movement in international

trade relations during the late 1980s and the 1990s.

67 Jeffrey Frankel and others, "Trading Blocs: The Natural, the Unnatural, and the Super-natural", Centre for International and Development Economies Research (CIDER) Working Paper no. C94-034 (Berkely , 1994), pp. 11-12.

68 Krugman, and Sutherland, n. 57.

85