The extent of regional trade associations

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Regional trade associations have a long history and wide geographical coverage. The prevalence of such arrangements can be seen from Tables 23A and 23B which list the most significant current free-trade areas together with their constituent countries. The 115 countries on the list include most of the Contracting Parties of GATT, as well as a few that are not GATT members. The tables show that enthusiasm for RTAs varies by continent. The regions that are almost entirely covered by RTAs are Africa, Europe and the Americas. Asia and the centrally planned economies of Central and Eastern Europe and the

TABLE 23A
Country membership of major free trade areas, 1992
1

Europe

Americas

EFTA CUSTA AP
(European Free Trade Association) (Canada-US Free Trade Agreement) (Andean Pact)
Bolivia
Austria Canada Colombia
Finland United States Ecuador
Iceland   Peru
Norway NAFTA Venezuela
Sweden (North American Free Trade Agreement)  
Switzerland MERCOSUR
  Canada (Southern Common Market)
EEA Mexico Argentina
(European Economic Area) United States Brazil
EC- 12   Paraguay
(Belgium CARICOM Uruguay
Denmark (Caribbean Community and Common Market)  
France CACM
Germany Antigua/Barbuda (Central America Common
Greece The Bahamas Market)
Ireland Barbados Costa Rica
Italy Belize El Salvador
Luxembourg Dominica Guatemala
Netherlands Grenada Honduras
Portugal Guyana Nicaragua
Spain Jamaica  
United Kingdom) Montserrat  
Austria St Kitts/Nevis  
Finland St Lucia  
Iceland St Vincent/the Grenadines  
Norway Trinidad/Tobago  
Sweden    

¹.Bilateral preference arrangement are excluded former USSR have not yet developed regional trade associations to nearly the same extent. Regionalism is itself therefore a region-specific phenomenon; different continents have approached the issue of regional trade from very different perspectives.

TABLE 23B
Country membership of major free trade areas, 1992¹

Africa

Asia and the Pacific Near East
ECOWAS PTA ASEAN ACM
(Economic Community of West African States) (Preferential Trade Area for Eastern and Southern African States) (Association of Southeast Asian Nations) (Arab Common Market)
Egypt
Benin Brunei Darussalam Iraq
Burkina Faso Angola Indonesia Jordan
Cape Verde Burundi Malaysia The Libyan Arab
Côte d'lvoire Botswana The Philippines Jamahiriya
The Gambia The Comoros Singapore Mauritania
Ghana Djibouti Thailand The Sudan
Guinea Ethiopia   The Syrian Arab
Guinea-Bissau Kenya CER Republic
Liberia Lesotho (Closer Economic Relations Agreement) Yemen
Mali Madagascar  
Mauritania Malawi Australia  
The Niger Mauritius New Zealand  
Nigeria Mozambique    
Senegal Rwanda    
Sierra Leone Seychelles    
Togo Somalia    
  Swaziland    
ECCAS United Republic of    
(Economic Community of Central African States) Tanzania    
Uganda    
Zambia    
Zimbabwe    
Burundi      
Cameroon SACU    
The Central African (South Africa Customs Union)    
Republic    
Chad Botswana    
The Congo Lesotho    
Equatorial Guinea Namibia    
Gabon South Africa    
Rwanda Swaziland    
San Tome/Principe      
Zaire      

1Bilateral preference arrangements are excluded.

As a consequence, the RTAs that have been set up vary widely. The extent to which regional trade institutions have been a significant factor in economic policy also varies greatly.

The trend towards regional trade liberalization has proceeded furthest in Europe. In the EC, a large and seamless "internal market" was largely in place by early 1993. Plans were laid for eventual economic and monetary union (EMU), together with cooperation on security issues and foreign policy, and the European Community became known as the European Union to emphasize this change. The negotiation of a European Economic Area, which includes the EC and the European Free Trade Association (EFTA) countries, and of association agreements, first with Poland, Hungary and the Czech and Slovak Republics and later with Romania, Bulgaria and Slovenia, effectively sets up an economic group of well over 20 countries. The accession on 1 January 1995 of three of the EFTA countries and the political decision to extend membership to include several of the Central European countries, over the next few years, makes this process of market integration more tangible. North America is following a similar process with the North American Free Trade Agreement (NAFTA) between Mexico, Canada and the United States, which builds upon the earlier Canada-US Free Trade Agreement (COSTA) and promises a tariff-free zone for most commodities over a ten-year period.

Prompted by these activities, several regional schemes have been revived or formed in Latin America and Africa. In Latin America, the formation of the Southern Common Market (MERCOSUR) among the Southern Cone countries (excluding Chile) and the decision by the Andean Pact countries to form an Andean Common Market by 1995 have strengthened the level of economic cooperation in this region. The countries of the Central America Common Market (CACM) have signed a framework agreement for free trade with Mexico by 1996 and can be expected to negotiate terms with the other NAFTA countries. Also concerned about their future are the Caribbean Community and Common Market (CARICOM) countries, most of whom have preferential access to the United States through the Caribbean Basin Initiative (CBI) and to the EC through the Lomé Convention, but now face the prospect of the value of those preferences eroding. These countries may also be obliged to join a widened NAFTA to remain in contention for investment funds and to maintain access to the United States market. As a part of this strategy, the Caribbean states as a whole have recently formed an Association of Caribbean States (ACS), which includes most of the present CACM and CARICOM countries as well as Mexico.

In December 1994 the Summit of the Americas called for a Western Hemisphere Free Trade Agreement to be completed by 2005. This is to be achieved by building on several of the agreements that are already in place. Examination of the current agreements is already under way with a view to deciding what would be required to merge them into a single agreement.

In Africa, riddled with regional trade agreements since the colonial days, there is a new sense of urgency. South of the Sahara, the continent is now covered by four trade agreements: the Economic Community of West African States (ECOWAS) in West Africa, farmed from the expansion of the French-speaking West African Economic Community (WAEC) to include English-speaking countries; the Economic Community of Central African States (ECCAS) in Central Africa, a revitalization of the Central African Customs and Economic Union (CACEU) arrangement of the 1960s; the Preferential Trade Area of Eastern and Southern Africa (PTA), which includes countries that were in the now defunct East African Customs Union (EACM) as well as those in southern Africa; and the Southern African Customs Union (SACU), which covers those countries closely aligned with South Africa. The Organization of African Unity (OAU) has agreed the ultimate objective of working towards an African Economic Community, based on these existing subregional groupings, by the turn of the century.

Discussions among the countries of Asia and the Pacific are also aimed at establishing a regional trade identity. The eldest Asian regional association, the Association of Southeast Asian Nations (ASEAN), has historically had a political and security, rather than an economic, focus. ASEAN countries have now agreed to establish an ASEAN Free-Trade Area (AFTA) that would liberalize internal trade in 15 years. Broader economic groupings have been suggested, most prominently by Malaysia, as a way of reacting to European and North American regional blocs. The Asia-Pacific Economic Cooperation Council (APEC) was formalized in 1989 to act as a forum for the discussion of trade and trade-related issues in the Asia

Pacific area. More recently, however, APEC has set up a secretariat and called for a programme that would lead to regional trade liberalization. The APEC nations have agreed to a target for free trade among the countries in the region by the year 2020 or by 2010 in the case of trade between developed countries in the region. While this is not a binding commitment, it clearly marks an important policy direction that will be pursued. Other regional trade groupings are taking shape in Asia. A Central Asian bloc, including six former Soviet republics together with Afghanistan, Iran, Pakistan and Turkey, is in its infancy as the Economic Cooperation Organization (ECO). Another trade group links India, Pakistan, Nepal, Sri Lanka, the Maldives and Bangladesh in the South Asian Association for Regional Cooperation (SAARC).

Rationale for RTAs

The prevalence of free-trade areas implies that they fulfil some kind of political or economic need not satisfied by multilateral trade arrangements. They seem to suit those countries that are balancing an open economic policy with a fear of economic competition from other countries. Part of the political attraction of trade blocs may he that they are perceived as troth a step towards more open trade and as a line of defence against competitors. They are therefore likely to have widespread support in the business and political communities. As economic struggles replace the security concerns of the Cold War, economic alliances such as these may come to replace defence groupings as a focus for foreign policy. In international economic fore, this may lead to groups of states playing the role formerly filled by the superpowers.

The economic case for free-trade areas is less convincing than the political rationale. Economists warn that free-trade areas have negative as well as positive impacts on the perfomance of the trade system. Lowering trade barriers to a partner country improves resource allocation by allowing more competition for previously protected domestic industries. This trade creation is of benefit to the country concerned and contributes to the international division of labour through international trade. However, to the extent that the partner country gets preferential access to the partly liberalized market, there may be a less desirable consequence if that partner is not the most efficient supplier of the good in question. This trade diversion is a cost to both the importing country, as the foreign exchange cost of imports from the preferred partner is higher than from the efficient supplier, and to the world at large, as resources are not ideally allocated on the basis of comparative cost. Thus partial free trade has always been seen as a second-best economic policy, with its mix of liberalization and de facto discrimination against third countries that may be the more appropriate trade partners. Much of the argument about the role of RTAs in the trade system comes down to the anticipated balance between trade creation and trade diversion.

The positive economic case for RTAs rests on the notion that the process of removal of trade barriers may be easier in regional markets and hence is a step in the direction of freer trade with all countries. This case is strengthened in areas such as services, where little multilateral trade liberalization has been evident until now. Dispute settlement may also be easier in regional areas where legal systems and traditions are similar. In these areas, several of the free-trade areas are pushing ahead of the provisions of the Final Act of the Uruguay Round. Regional trade blocs could well have a growing role in trade liberalization.

Although changes in trade barriers attract more attention, the most significant attribute of regional trade liberalization may be its role in stimulating investment. The attraction to investors at home is that domestic firms can invest in the partner economy, with less chance of discriminatory action by the host government, to take advantage of cost differences such as lower wage rates. Overseas investors can be encouraged with the assurance of access to an expanded "home" market for the finished product. As such, this motive for regionalism is a spin-off from the 1980s', "globalization" of business. In this respect, RTAs encourage profitable investment by reducing uncertainty. However, if they were possible, multilateral agreements on investment would be an even better stimulus to trade.

Combined with general multilateral liberalization, regional trade and investment liberalization can increase growth and employment and make better use of the world's resources. "Open regionalism" is the term that has been used to distinguish this form of export-oriented trade and investment liberalization from the closed integration models of the 1960s. The concept implies that trade diversion is kept to a minimum by the reduction of trade barriers on third-country imports, while trade creation is maximized by the accompanying measures of internal liberalization.

The problems posed by such alliances stem from the defensive nature of much of trade politics. It is likely that this defensive posture might lead to regions using trade restrictions against other blocs. Moreover, even the most benign form of regional liberalization is likely to appear protectionist to outsiders. It is a fine line between encouraging partner investment and discouraging investment from third parties and at times of economic hardship such subtle discrimination can easily turn to more blatant protection. This highlights the need for strong multilateral institutions and rules to oversee the trade blocs and their relationships to one another. The notion of making regional and multilateral trade rules and institutions complementary with each other is the most positive response to concerns over the threat to the trade system. A stronger multilateral framework would reduce the prospect of one bloc increasing discrimination against another. The beneficial aspects of regional trade liberalization could thus be reaped without the cost to the global division of labour.

The treatment of agriculture in RTAs

In many respects, agricultural trade should be a major stimulus to regional trade pacts. Regional flows of agricultural products improve the food security of the area by allowing production fluctuations to even out. Differences in resource endowments underpin much of agricultural trade and ensure that there will always be profitable trade between areas that have ample arable land in relation to population and those that have less. This trade will often be across regions rather than within a single region. Similarly, trade in crops that require particular climatic conditions will tend to be among rather than within regions. However, agricultural trade is taking on the patterns of industrial trade, including two-way trade within the same sector. Intra-industry specialization owes its justification to economies of size in particular processes and to the search for cheap and reliable components and materials. Under such a system, trade grows among countries that have similar resource endowments and are at similar stages of development. Trade in processed foodstuffs already moves among countries that produce similar products. This type of trade is much more likely to be generated either within a region or among countries that could form a region in the absence of political and infrastructural obstacles. This implies, for certain types of agricultural trade, a growing significance of the movement towards free trade areas.

Regional trading blocs and free-trade areas treat agriculture in various ways. Some ignore it, as if it were not really subject to the same set of circumstances as other sectors. In a few cases agriculture is treated as a regular sector of the economy and is subject to the same rules. In most cases, however, agricultural trade is only partially included in regional trading blocs and free-trade areas, as countries have taken care to frame free-trade areas so as to preserve as much as possible of the domestic autonomy of farm and food policies. Nevertheless the agricultural sector is bound to be profoundly affected by the existence of free trade with neighbouring countries. The issue is whether countries will allow national farm policies to change to take advantage of the possibilities that freer regional trade brings, or whether they will resist such changes and leave those policies to be modified by market pressures or to collapse under their own weight.

There are four major reasons for including agriculture in the provisions of a free-trade agreement. First, exporter members within the region will want improved access to importing markets for their agricultural goods. Only an alliance among food-importing countries is likely to be able to ignore intrabloc agricultural trade altogether. Second, food cost differences arising from different agricultural prices among countries within the free-trade agreement could both distort trade and investment patterns and cause problems of wage comparability. Third, if agriculture is excluded, the food sector will tend to remain national in scope, as a result of different raw material costs and regulations, and may not be internationally competitive. Fourth, to exclude agriculture from free-trade agreements leaves countries open to challenge under GATT. Article XXIV requires that such agreements cover essentially all trade among the partners.

On the other hand, there is in essence only one reason for excluding agriculture from the provisions of a free-trade area. Most domestic agricultural price policies require protection at the horder in order to he effective. As a consequence, free trade poses a threat to the operation of such policies. Negotiations on freer trade are therefore likely to he complicated by domestic: farm policy considerations. Politicians are often tempted to take the easy way out when faced with negotiating improved regional access to cherished domestic agricultural markets.

The situation is well illustrated by European experience. When the European Economic Community was established, agriculture was fully included in the aim of free internal trade. The exporting countries insisted on this as part of the bargain that allowed them to open up their industrial markets. In the treaty establishing the European Free Trade Association (EFTA) in 1960, agriculture was left out. With the exception of Denmark, which received some trilateral concessions in the United Kingdom market, no member of EFTA was an agricultural exporter. The EFTAEC trilateral trade agreements (1973) again left agriculture out, as no EFTA preferences were being eroded by the accession of Denmark and the United Kingdom to the EC. In the more recent negotiations leading to the creation of the European Economic Area (EEA) in 1992, agriculture has been largely left out.

The various Latin American free trade agreements have in the past focused mainly on industrial products, although the recent, more open agreements include provisions for agricultural trade liberalization. In Asia, regional groupings are less common and hence have less direct influence on agricultural policy. ASEAN has operated a collective agreement on food security, involving the sharing of rice stocks at times of shortage, but otherwise has had little agricultural content. Agriculture is to he largely excluded from the recently negotiated ASEAN free-trade area.

African free-trade agreements have generally included provisions for freer trade in agricultural goods, as these cover a large share of total trade for the countries involved. However, a variety of revenue duties coupled with parastatal control over many export commodities have made agricultural trade less than free, even when no tariff restrictions apply. Instead, the emphasis has often turned to the coordination of agricultural investment and to common approaches to prospective donors.

In North America, CUSTA (1990) included agriculture in the tariff-cutting activity, but not in the non-tariff barrier removal. Neither the United States nor Canada thought of the other as a trig potential market and the GATT Round seemed at that time to he taking care of agricultural trade issues. NAFTA (1992) was also overshadowed by the Uruguay Round. Market access has been improved by the provisions of two bilateral access agreements (United States-Mexico and Canada-Mexico) for agricultural products (to supplement the United States-Canacla bilateral agreement that already existed. Some substantial liberalization will he achieved by this, as a schedule of tariff reductions over the next decade will give Mexico better access to United States and Canadian agricultural markets and vie-e versa. Non-tariff harriers are also to he phased out On United States-Mexico trade, leading to a relatively free internal market in at least a large part of the continent. Canadian-United States farm trade, however, remains governed largely by the pre-existing CUSTA and so is not truly on a path to liberalization.

Among the range of free-trade areas that exist, perhaps only the Closer Economic Relations (CER) Treaty between Australia and New Zealand fully incorporates agriculture. This was made easier by the sharp reduction in New Zealand's protection of the sector in the late 1980s and by the deregulation of marketing systems in the two countries over the last few years.

Agriculture is likely to he affected by the extent to which trade blocs can fit into the multilateral system without becoming inward-looking and protectionist. If the blocs pursue aggressive policies towards each other in non-agricultural trade, their agricultural trade relations are unlikely to be liberal. Moreover, if each country were to keep its own restrictive agricultural policy in the face of otherwise open intrabloc trade policies, it is not clear what scope would exist for global negotiations on types and levels of support. If, on the other hand, domestic policies are modified as a result of intrabloc trade developments, the international implications of such blocs could be benign. Indeed one could imagine a path to liberal international markets passing through regionally liberalized agricultural policies brought about by the forces of regional market integration.


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