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Regional Trading Agreements

What are Regional Trading Agreements?

Regional Trade Agreements (RTAs) are the agreements whereby members
accord preferential treatment to one another in respect to trade barriers.
During the second half of the 1990's, trade liberalization and the pursuit of
global free trade underwent a metamorphosis. The political momentum
shifted away from what was seen by some nations as the painstakingly slow
process of multilateral tariff negotiations to smaller regional and bilateral
arrangements - the Regional Trade Agreement.
RTAs are not a new means of trade liberalization; historically, whenever
multilateral trade negotiations broke down, bilateral and multilateral free
trade agreements filled the void. Such strategic trade arrangements have
enabled many states to move towards freer trade at their own pace, and for
their own benefits.
What is Preferential Trading Arrangement?
Preferential Trading Arrangement means a system of discriminatory tariffs
designed to benefit Less Developed Countries (LDCs). While some PTAs
originate as political expressions of desired closer economic relations, they
can act as a catalyst to eventual free trade among the participants. PTAs are
also employed to help developing countries obtain access to a larger export
market, and therefore gain greater economic development.
Around 50 per cent of world trade is currently carried out under
preferential trade arrangements. Preferential trade is growing at a faster
rate than global trade - between 1993 and 1997, preferential trade grew at
66 per cent annually while global trade grew at 34 per cent annually.
How many types of Regional Trade Agreements are there?
According to their level of integration amongst participating nation-states,
RTAs can be described as the following categories.
First, at the most basic level, Preferential Trading Agreements (PTAs) lower
trade barriers among members. Such preferential trade is usually limited to
the portion of actual trade flows from LDCs, and is often non-reciprocal. An
example of such an agreement is the Papua New Guinea - Australia Trade
and Commercial Relations Agreement (PATCRA II) that has been in effect
since 1977.
Second, a Free Trade Agreement/Area (FTA) is a reciprocal arrangement
whereby trade barriers (usually tariffs) between participating nations are
abolished. However, each member determines its external trade
policies against non-FTA members independently. Most commonly,
barriers to trade are reduced over time, but in most cases, not all trade is
completely free from national barriers. A prominent example of a FTA is
the North American Free Trade Agreement (NAFTA).
The third level of economic integration is the Customs Union. In a Customs
Union, trade barriers among members are eliminated. Also, the
participating nations adopt a common external trade policy (e.g. common
external tariff regime or CET). A Customs Union is equivalent to an FTA
plus a common external trade policy. The Customs Union of the Southern
Cone -Mercosur-represents such an arrangement.
The fourth level of economic integration is the Common Market. In a
Common Market, countries remove all barriers to movement of both goods
and factors, and retain the common external trade policy. It is equivalent to
a customs union plus free mobility of factors. One example of Common
Market is the Common Market for Eastern and Southern Africa (Comesa).
The fifth level of economic integration is the Economic Union. In an
Economic Union, besides the free goods and factor movements, member
countries also adopt common macroeconomic policies. One example of
Economic Union is the European Union (EU).
Is RTA beneficial to the member countries?
Although the recent spread of RTAs has given rise to concerns that such
selective trade arrangements will undermine the benefits of global tariff
reform and entrench trading blocs rather than free trade. RTA is beneficial
to its member countries in the following aspects:
1. By lowering or eliminating tariffs among themselves, the RTA
member countries can enjoy lower importing price and thus increase
their overall trade. Due to the trade diversion resulting from the
relative lower price, some member countries can increase their
imports on goods previously supplied by countries outside the RTA.
2. In addition, RTAs can join the international trade negotiations as a
whole. Thus, joining in a RTA will enhance the member countries'
bargaining power in multilateral negotiations because of the enlarged
size of the negotiator.
Essentially, RTAs are violations to WTO's non-discrimination principle.
This basic principle is defined in the Most-Favored-Nation (MFN) rule,
which requires a member country to extend to all WTO members the
privileges that it grants to one contracting party. However, WTO views
RTAs to be good and encourages the formation of free trade areas and
customs union.
RTAs are in fact helpful to world trade liberalization. Compared with
multilateral negotiation systems, smaller numbers of parties are involved in
RTAs, then similar political and economical interests can be easily
processed. RTA rules can pave the way for WTO multilateral negotiations.
To ensure that RTAs can improve regional trade liberalization without
hurting global trade liberalization, Article 24 of GATT regulates that RTAs
should trade more freely among their member countries without raising
barriers on trade towards the outside world. In addition, the WTO General
Council created a Committee on Regional Trade Agreements (CRTA). Its
purpose is to examine regional groups and to assess whether they are
consistent with WTO rules.