What you will learn

• The background of RTA's in the context of the GATT.
• The regulations of GATT and the WTO governing RTAs.
• Policy measures that support RTAs whilst complying with the spirit of Agreement commitments.

7.1 Regional trading agreements (RTAs)

7.1.1 The Rationale for RTAs

The development of internationally integrated production structures has led to pressure for broader and more stable international markets, which, in the context of the breakdown of old political alliances, has led to an acceleration in the process of regional integration. The trend towards regionalisation is by investment rather than trade, including investment in the service sector, although the process also is being fuelled by a parallel trend towards trade liberalisation (FAO 1993).

The development of Regional Trading blocs via Customs Unions or Free Trade Areas (FTAs) has occurred throughout the world, and includes both developed and developing countries. But in many cases progress towards the economic vision that stimulated their proliferation has been mixed. To date, the most significant by far has been the European Union (EU). The impact of this regional grouping has had a significant impact on world agricultural markets, and provides a benchmark for comparative analysis when judging the coverage of other agreements.

There are a number of motivations for RTAs that relate to political as well as economic forces. A RTA can be defined broadly as a process of reducing the economic significance of national political boundaries within a geographic area.

The following extract points towards the interlinkages between economic and political forces which drive Regional Trading Agreements, and their complementary with the GATT;

"...a key motivation of excluded countries to join an existing RTA or form a new one is their desire to safeguard their ability to pursue outward-oriented development policies, (and this) suggests that RTAs can make a positive contribution to the liberalisation of global trade" Blackhurst and Anderson 1989.

• It is apparent, therefore, that regional agreements are potentially policy options that are compatible with the multilateral liberalisation objectives of the GATT, and represent a potential stepping stone towards unilateral liberalisation.

The debate over the contribution of such agreements to the liberalisation of world trade and hence the implicit compatibility with the GATT is divided. It is clear that in the context of lowering trade barriers between countries RTAs can be compatible.

In recent years, policy makers from developing countries have reinforced their commitment to regional trading agreements. Tables 7.1 and 7.2 highlight the existing agreements between developing countries and the growth of intra-regional trade respectively. By the end of 1994, 98 agreements had been ratified by GATT, a further 11 were notified under the enabling clause of 1979. Interestingly, 34 agreements were notified in the period 1990-94. This was stimulated by the following factors

• The growth of bilateral trade agreements most notably in the trade relations of the United States and the new European Union. This, combined with the drawn out negotiations and the fear that there would be no final agreement, led countries to strengthen regional blocs in anticipation of a future polarisation of trade.

• The growing harmonisation in agricultural policies of many countries either through internally stimulated reforms cultivating greater openness, or externally imposed reforms as part of structural adjustment programmes.

Table 7.1 Organisations for economic co-operation and trade in developing regions

Source : De Rosa 1995.

Table 7.2 Share of intra-regional trade (exports plus imports) in total trade in seven geographic regions, 1928-93

(Percentage of each region's merchandise trade)

* Mexico is included in Latin America
Source : De Rosa 1995.

7.1.2 RTAs and agricultural trade

We have seen that RTAs are not new, and that there have been a number of efforts made by developing countries. However, the treatment of agricultural commodities has not been similar to agreements which have governed trade liberalisation in other sectors. ECOWAS is somewhat an exception where agriculture is fully integrated into the RTA in principle. But the stumbling block encountered in this agreement, as in others, has been the integration of agricultural policy. The differences between the members trade policy reforms and domestic policies hindered the incorporation of agricultural policy into a coherent regional framework.

The impact of the Agreement is likely to have a significant impact on the possibility of this situation changing in the future.

• In general, the loss of preferential trading agreements, discussed in Chapter 4, will stimulate the growth of regional groupings via the strengthening of existing agreements.
• The process of unilateral trade liberalisation embarked upon by many countries, as discussed throughout Chapter 5, also indicates that agricultural policies in many developing countries are becoming closer.
• The commitments in the Uruguay Round with respect to domestic support to agriculture is now removing the conflict countries face between trade aspirations and domestic policy constraints. Although, as we have seen in Chapter 6 the opportunities of this are countered by the potential for non-conformity via dirty tariffication and the flexibility accorded to developing countries.

7.2 RTA's and GATT regulations

This section examines more closely the compatibility and the requirements RTAs need to fulfil in order to comply with the GATT articles which were drawn up in 1947. The following section examines how these have been modified.

7.2.1 The MFN principle and RTAs

• The MFN principle is embodied in Article I of the GATT and commits signatory governments, now members of the WTO, to the principle of non-discrimination stating that members "shall unconditionally offer to all other contracting parties (members) any advantage, favour, privilege or immunity affecting customs duties, charges, rules and procedures that they give to products originating in or destined for any other country".
• The essence of the MFN is potentially contradictory to some of the practices which subsequently have been adopted in RTAs. The MFN clause is designed to ensure that the multilateral trading system operated on the principles of comparative rather than political advantage. Thus, a country is expected to import from the lowest cost foreign supplier ensuring world markets reflect comparative advantage whilst simultaneously minimising the costs of protection. To sum up, the MFN aims to ensure the depoliticisation of world trade.
• Customs unions and Free Trade Agreements are allowed under GATT provisions with conditions which are discussed below. The rationale behind this lies in the reasoning that such agreements are formulated on the basis of reducing trade discrimination and therefore have an economic rationale that is, in theory, compatible with the principles underlying the GATT.

7.2.2 Article XXIV of GATT 1947

Box 7.1 highlights the provisions in GATT that apply directly to RTAs. The key provision is in Article XXVI which applies to RTAs directly. It permits the formation and existence of Customs Unions and Free Trade Areas on the principle that although it affects the principle of non-discrimination, the agreements in themselves present opportunities for further economic integration. Thus, the purpose of a customs union or a free trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories (Article XXIV, par. 4).

Paragraph 8 states that such RTAs must eliminate duties and other restrictive regulations affecting substantially all the trade between their constituent territories. This phrase "substantially all" has been open to many different interpretations. Importantly, the requirement to remove duties and other restrictions on mutual trade is not binding. There is flexibility with respect to the "substantially all" clause and also with respect to the fact that "where necessary" members will be allowed to maintain their right to impose duties and trade restrictions of various kinds.

Thus, the substantially all provision is seen as a way of avoiding the inclusion of particular sectors in such agreements. Historically this has been the agricultural sector where domestic policies and objectives differed considerably between members, and proved too sensitive to reform.

In the case of customs unions the same duties and regulations must be applied to all non-members. i.e. the application of a common external tariff and more commonly a common trade policy

The rationale was to highlight the potentially high political costs of the formation of customs unions. A wider sectoral coverage of the agreement enabled the enhancement of the trade creation impact of such agreements. But this aim of imposing a high cost has been reduced through interpretation and the enabling clause.

7.2.3 The Uruguay Round understanding on RTAs

The Uruguay Round sought to remove some of the ambiguities and enforce more rigorous monitoring of RTAs in the future. Thus, an Understanding on the interpretation of Article XXIV was added, which together with the original provision in GATT 1947 would become the responsibility of the WTO. Box 7.2 details the Understanding.

7.3 Policies that support RTAs and the Agreement commitments

In this section we examine the policy implications that stem from the Agreement and the extent to which they can support regional development. We will draw upon the policy options that were described in Chapter 5 but also some of the resulting trends highlighted in Chapter 4. In highlighting the policy response for RTAs we reveal that the trend in the future will be that a conducive trade policy and domestic policy environment are established by the Agreement.

RTAs are likely to be strengthened in the agricultural sector via the following policies:

• A common border policy which supports tariffs rather than non-tariff barriers. These on the whole have occurred where countries have entered into RTAs. This has now been reinforced to a degree at the multilateral level by the Agreement commitments on market access.
• Quasi tariffs which may take the form of variable levies are also appropriate in developing a common regional pattern of border protection. This is allowed for in the Agreement although indirectly. In the previous two chapters we have seen that the high ceiling bindings adopted by many developing countries on key agricultural food commodities can facilitate such variable duties, since the ceilings are set substantially above currently applied rates.
• Harmonisation of import policies and the greater co-ordination of export marketing. This is likely to be facilitated by export opportunities created by the Agreement as well as the erosion of preferential access. This provides an opportunity for developing countries with similar export products and markets, to co-ordinate their export marketing and harmonise import policies.
• Regional food security. Many countries in Africa and in other developing regions have food security high on the national policy agenda. We have seen from chapter 4 that the prices of agricultural food commodities are likely to rise as a result of the Agreement. The importance of strategies of collective self-reliance in dampening the effects of these rises, and reducing the cost of maintaining adequate food supplies may be crucial. Efforts towards lowering barriers to intra-regional cereal trade may facilitate this. The effect of the high ceiling bindings allow the scope for variable tariffs and other discriminatory concessions to a degree, although these may not be sustainable in the long run.

Thus, the trade policy reforms facilitated by the Agreement may serve to strengthen the basis for RTAs. As we have highlighted, there is also a food security objective which could be satisfied with closer regional co-ordination in agricultural policy.

7.4 Concluding comments

The conflict between RTAs and the GATT principles in the past is likely to be reduced as a consequence of the successful conclusion of the UR and the establishment of an Agreement on Agriculture. The guiding principles of regional agreements in the past were primarily based upon trade policy concessions. This avoided any real harmonisation of domestic policies and the difficulties in the agricultural sector as a result of national sensitivities precluded its role in such agreements. The success of RTAs and benefits towards agricultural development will come from greater co-ordination, not only of border measures but also of domestic policies.

The commitments undertaken in the Agreement will provide the basis from which greater coherence could develop with respect to both trade policy via tariffication and tariff reduction, and domestic policy. The previous chapters have shown that developing countries, in light of their commitment, may still be some way from this although the opportunity was provided by the Agreement.

The strengthening of RTAs may be an important policy option in the context of greater liberalisation of agricultural trade, and may strengthen agricultural and economic development as well as facilitate greater coherence for future rounds of multilateral trade discussions. The effect which the Agreement has on this process is likely to be significant in the long run. In addition the greater co-ordination between countries, particularly those in Africa where the institutional framework is in place, may provide a vital opportunity to address food security.