CHAPTER 1. INTRODUCTION

The resurgence of regionalism

Waves of regionalism

Regional integration has been a recognizable feature of international trade relations in the post-war period, though its salience has waxed and waned. Two waves of regionalism can be identified and a third may be underway. The first started with the establishment in 1957 of the forerunner of the European Union and, in the developing world, the adoption in Latin America and Africa of import-substituting regional integration as the means to effect inward-looking growth. Most of the developing country schemes initiated at this time eventually became moribund or collapsed, while the growing momentum of multilateral liberalization in the 1970s and 1980s contributed to the decline in the importance attached to regionalism.

A second wave of regional integration started during roughly the second half of the 1980s. The origin of the ‘new regionalism’ has been attributed to the drawn out nature and slow progress of the GATT Uruguay Round negotiations, to the apparent success and fears aroused by the EU’s initiative aimed at establishing a Single European Market, and to the conversion of the United States to regionalism with its negotiation of the North American Free Trade Agreement (NAFTA) and its Enterprise for the Americas initiative which has led to proposals for a Free Trade Area of the Americas (FTAA). In Latin America, new life was breathed into some old integration arrangements, sometimes in the wake of political change (the Central American Common Market and the Andean Pact) and new arrangements, such as MERCOSUR, were created. In Asia, ASEAN embarked on plans for an ASEAN Free Trade Area (AFTA), the South Asian Association for Regional Cooperation agreed in 1997 to transform itself into the South Asian Free Trade Area while the Asia Pacific Economic Cooperation (APEC) also committed to trade liberalization objectives on a non-preferential basis. In Africa, home to the world’s oldest customs union in Southern Africa, initiatives have included the revitalization of existing regional groupings, the formation of new groupings and the announcement of ambitious targets at the 36^th OAU Summit in Lomé, Togo in July 2000 to accelerate the formation of an African economic and political union.

The third wave

Some observers believe that a third wave of integration is currently underway (Lloyd, 2002). While there were 125 RTAs notified during the GATT years, a further 125 new RTAs have been notified since the establishment of the WTO on 1 January 1995 up to April 2002 (WTO, 2002). This represents an average of 15 notifications every year to the WTO, compared with an annual average of less than three during the four and a half decades of the GATT (see Figure 1)^[1]. On average, each WTO Member is involved in five RTAs, though some are parties to ten or more. According to a recent WTO study, most developing countries now participate in RTAs. Of the 243 RTAs estimated to be in force in April 2002, between 30-40 per cent are agreements concluded between developing countries (WTO, 2002).

Figure 1 - RTAs notified to the GATT/WTO (1948-2002), cumulative

Source: WTO, 2002

Growing complexity of RTAs

Another WTO study noted that “the configuration of RTAs is diverse and becoming increasingly more complex with overlapping RTAs and networks of RTAs spanning within and across continents at the regional and sub-regional levels” (WTO, 2000a). The simplest configuration is a bilateral agreement formed between two parties. These account for more than half of all RTAs in force and almost 60 per cent of those under negotiation. More complex are plurilateral agreements involving a number of countries and those agreements in which one of the partners is an RTA itself. Agreements in which each party is a distinct RTA are expected to emerge in the next five years, reflecting the growing consolidation of established regional arrangements. A mapping of RTAs is provided by WTO (2000a).

In terms of geographic coverage, new bilateral developments have fundamentally changed the pattern of RTAs. First, up to the early 1990s, RTAs were a set of non-intersecting areas with only a few exceptions. This is no longer true. Many countries are now members of more than one RTA, what Bhagwati (1995) called the ‘spaghetti bowl’. Second, the new regionalism is characterized by integration across the North-South divide with a number of schemes involving both developing and industrialized countries. Third, several of the new agreements are ‘cross regional’ in that the members span more than one of the world’s geographic regions. Fourth, another feature is the emergence of large continental RTAs. The EU is in its fourth enlargement. The FTAA would create an area of 34 nations if negotiations are successfully concluded. An East Asia RTA is a possibility. The OAU is promoting the idea of an African Common Market. Thus, the current scene is characterized by many new bilaterals coexisting with very large continental RTAs, a pattern which Lloyd (2002) characterizes as bilateralism combined with continentalism.

Hubs and spokes

The existence of overlapping RTAs creates what is referred to as ‘hub and spoke’ configurations. A hub arises when one country is a member of two or more distinct RTAs. Spokes may be either bilateral (where a hub country forms a bilateral RTA with another country) or plurilateral (where a hub country enters into a relationship with another RTA). Hubs and spokes can be a negative feature of the proliferation of RTAs as they create multi-layered preference schemes. In particular, spokes have less market access than the hub as the hub enjoys preferential access to all spokes but a spoke has preferential access to the hub only. A spoke country can avoid this effect by becoming a hub in its own right by entering into its own set of bilateral or plurilateral RTAs. No doubt this partly explains the acceleration in bilateral agreements which is occurring at the present time.

Expanding coverage

Another characteristic of ‘new generation’ agreements is their expanding instrument and commodity coverage. Newer agreements increasingly cover agriculture, services, investment, intellectual property, government procurement, trade facilitation, dispute settlement, as well as limits on the use of quantitative restrictions and safeguards. A number of agreements make provision for the use of competition policy instruments in place of anti-dumping procedures on trade among the parties (Crawford and Laird, 2000). There is also a growing emphasis on policy integration, where countries agree to reduce the market-segmenting effects of differences in national regulatory regimes. As an example, consider the 1995 Osaka Action Agenda agreed by APEC leaders. The 15 action areas include tariffs; non-tariff measures; services, investment; standards and conformance; customs procedures; competition policy; government procurement; deregulation; intellectual property; rules of origin; dispute mediation; mobility of business persons; Uruguay Round implementation; and information gathering and analysis (Scollay, 2001).

Characteristics of integration schemes

Typology of integration schemes

The classic schema of economic integration ranks integration arrangements according to the depth of integration achieved along a continuum starting with a preferential trade area, and evolving through a free trade area, customs union, common market, economic union, economic and monetary union to ultimately achieve a state of total economic integration. Regional trade arrangements (RTAs) are a subset of possible regional integration arrangements (RIAs).

In preferential trade areas countries lower tariffs on trade with each other while retaining autonomy in setting tariffs on trade with third countries. In free trade areas, countries eliminate tariffs on trade with each other while retaining autonomy in trade policy with third countries. A problem with preferential and free trade areas is the danger of trade deflection. This can arise where goods are imported through the country with the lowest external tariff for free circulation throughout the region. Trade deflection can be controlled by the use of rules of origin (rules which determine if a product is deemed to have originated in a particular country and is thus eligible for preferential tariff treatment) or through forming a customs union.

Customs unions remove tariffs on trade with other members and apply a common trade policy towards third countries. A common market in addition aims at removing restrictions on factor mobility (capital, labor) between members as well as freeing trade in goods and services. In an economic union, members pursue some degree of harmonization of national economic policies in order to remove discrimination due to disparities in these policies. Monetary union adds the adoption of a common currency and a common monetary policy, while the stage of total economic integration involves the unification of monetary, fiscal and social policies under the auspices of a supranational authority. Examples of RTAs which fall into these categories are shown in Table 1.

In the past, there was a tendency to see this typology as a ‘ladder’ along which participating countries would move to successively deeper stages of integration. While there is some support for this in the EU experience, the ‘ladder’ theory does not take account of the specific problems which arise when integrating mixed economies. A mixed economy is one where the economic order is based on market principles but where there is considerable public intervention either to control market forces (e.g. competition, consumer protection and environmental policies) or to correct or compensate for market outcomes (e.g. social and regional policies). Differences in these public interventions give rise to unintended trade barriers which can only be overcome either by eliminating the intervention (deregulation) or by ‘supranationalizing’ it (by transferring the intervention to the union level through a form of positive integration).

Thus, in the EU’s experience, we see examples of positive integration accompanying market integration from the very outset. For example, governments have long intervened in agricultural markets in order to protect farm incomes, ensure food security and stabilize prices. The integration of agricultural markets in the EU required from the outset that these functions were transferred to the EU level and the Common Agricultural Policy was born. Similarly, the introduction of monetary union, which required the negative integration steps of eliminating controls on capital movements and national governments’ ability to issue money, also required a good deal of positive integration in setting up common monetary rules and institutions at the EU level.

In short, policy harmonization may well be needed to make trade integration work, particularly if extended to services trade (the lesson of the single market program in the EU) and may indeed precede trade integration (as in the case of monetary unions in Africa). Conversely, policy integration agreements can stand alone. They do not have to be accompanied by preferential trade liberalization. For example, countries may conclude mutual recognition agreements for health, safety or prudential standard regimes without any intention of forming an RTA.

Table 1 - Selected examples of different types of regional integration arrangements

Monetary unions

There are also examples of monetary unions in which countries agree to pool their monetary sovereignty without necessarily integrating other aspects of trade and economic policy. Customs union theory is concerned only with the markets for goods. Optimal currency area theory has a slightly different focus. It seeks to understand the conditions under which is economically efficient to create a currency union. Interest in regional financial arrangements was rekindled in Asia following the Asian financial crisis in 1997-98 which existing regional institutions could do little to alleviate. Such arrangements can take various forms. The most limited form would be a regional liquidity fund, where national central banks enter swap arrangements with each other to pool liquidity. A more advanced form would be characterized by preparation for monetary union, including fixed exchange rate bands and rules to achieve nominal convergence. The most integrated form is creation of a monetary union, including a single currency and monetary policy. Although food and agricultural trade would undoubtedly be influenced by the exchange rate implications of forming a monetary union, we do not consider this type of RTA further and concentrate on RTAs in the discussion in the rest of this paper.

Political commitment and regional integration

Importance of political commitment

While regional integration arrangements are often evaluated in purely economic terms, integration may be pursued for explicitly political motives. Although it is now almost taken for granted that trade integration is one of the main benefits sought by countries entering regional integration arrangements, Page (2000) points out that it is hard to explain the growth of interest in regional integration based on trade motives alone given that tariff levels in most regions have been falling and are now at relatively low levels. She concludes that all successful regions have objectives other than freeing trade, and that this may be essential for the will to evolve.

“Trade may well be secondary to political or security objectives or a tool rather than an objective: it is difficult to find any groups which have only a strictly trade agenda”. (ibid, p. 6)

Even if political motives are not uppermost, political will is a crucial ingredient in the integration process and, in its absence, little progress will be made. At the same time, economic integration can have political consequences, as when it contributes to stabilizing a political regime or enhancing regional peace and security. On the other hand, the experience of unsuccessful integration may cause discord and even provoke the breakdown of relations between participants.

Donor attitudes to regionalism

EU a strong supporter

The attitudes of major donors are important elements in the environment in which many developing countries are turning to regional integration strategies. Perhaps not surprisingly, the EU has demonstrated the most positive attitude to regional integration. This was underlined in the 1997 EU Green Paper on Development Cooperation (European Commission, 1997) and the subsequent decision to support Regional Economic Partnership Agreements (REPA) as the post Lomé arrangements for the ACP countries.^[3]

“Regional integration among developing countries is part of a wider strategy to promote equitable growth and is not an end in itself. Effective regional integration will increase competition, reduce private transaction costs, enable firms to exploit economies of scale, encourage inward foreign investment and facilitate macroeconomic policy coordination. Regional groupings should be open towards the world market in the sense of keeping tariffs at a level that does not encourage trade diversion. They should not attempt a form of regional autarky that has led to past failures. Open regionalism complements unilateral liberalisation. Without regional coherence, unilateral liberalisation may imply negative spill-over effects. A regionally coherent liberalisation strategy will reduce and smoothen the cost of adjustment to an economy in the face of globalisation, both for the private and public sector. The high adjustment cost of unilateral liberalisation has been a cause of policy reversal in a number of developing economies.” (EU Council Statement on Development Co-operation, 1997).

The EU’s support for, indeed insistence on, regionalism under the Cotonou Agreement with the ACP countries and in its Euro-Mediterranean agreements will be a powerful impetus for further regional economic integration among its partners in the coming decade.

World Bank more sceptical

In the early 1990s, the concept of open regionalism was a subject of intense debate in the World Bank. The Bank’s report on regional integration (World Bank, 2000) gives cautious support to the idea, and its stance is further spelled out in the companion volume by Schiff and Winters (2003). It believes that reducing barriers to trade and investment with all trade partners evenhandedly through nonpreferential trade liberalization, undertaken where necessary on a unilateral basis, remains the best development strategy. But it recognizes that political pressures may push some countries to prefer regional integration arrangements, and it has pursued a major research program with the aim of identifying best practice in the design of regional arrangements involving developing countries. Nevertheless, the Bank remains at best lukewarm about the idea. Its approach to regional integration remains at odds in significant ways with other donors.

Aims and structure of the paper

Given that differences exist on the desirability and on the efficient design of regional integration, especially involving developing countries, the first objective of this paper is to summarize the different arguments for those involved in the preparation of food security strategies as part of regional integration programs among developing countries. It aims to provide a better understanding of the motivations, processes and constraints to regional integration and cooperation. Table 2 presents a list of the common arguments in favor of regional integration. This paper concentrates primarily on the economic arguments while acknowledging that political motivations may often be the primary driving force.

Table 2 - Motives for regional integration

The second objective of the paper is to identify the potential role which regional trade arrangements might make to promoting food security among their members. In many developing countries food security remains an overriding objective because of low absolute levels of food availability per capita, low income levels and vulnerability to internal and external shocks. Poverty levels in many countries have increased over the last ten years because of low or non-existent economic growth, and poverty is heavily concentrated in the rural population. Chronic undernourishment remains high. Given the growing propensity of developing countries to enter into regional trade arrangements both with each other and with industrialized countries, it is pertinent to ask what impact this might have on their food security, and how these regional groupings might be able to contribute to promoting food security. Can poverty and hunger (as cause and consequence of food insecurity) be alleviated by regional integration? What are the the possible opportunities for regional integration to promote food security? Special attention is paid in the paper to the potential and constraints to regional co-operation in sub-Saharan Africa given the severity of food insecurity in that region and its ambitious objectives for regional integration.

Structure of the paper

The paper is divided into seven chapters. Following this introduction, Chapter 2 reviews the economic implications of regional integration to identify the potential gains from regional trade integration, particularly among developing countries. Chapter 3 discusses some institutional aspects of regional integration, emphasizing those factors which contribute to the sustainability of regional arrangements. Chapter 4 discusses the way in which regionalism is addressed by WTO multilateral rules as well as the issues it raises for the multilateral negotiations on agriculture. Chapter 5 examines how regionalism impacts on food security and the potential role of regional trade arrangements in promoting food security. Section 6 discusses the experience of regional economic initiatives in sub-Saharan Africa. It highlights the poor track record of regionalism and identifies the issues which must be addressed if regionalism on that continent is to be more successful in the future. Section 7 concludes with a check list of initiatives which might be pursued by those interested in developing the food security dimension of regional integration programs. In many cases such initiatives might be put forward for donor support as part of their assistance to regional economic groupings.