A Burden or an Incentive: Developing World Trade and the Role of Regional Trade Agreements

Julien L. Chaisse, Paul Cézanne University, Aix-en-Provence (France)
Anirudh Shingal, World Bank

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Abstract

The multilateral trading system existed first as the GATT from 1947 to 1994 and then as the WTO since 1995. Regional Trade Agreements (“RTAs”), defined as “a free-trade agreement, customs union or common market consisting of two or more countries” , however, began coming into their own only in the 1990s. Before that, there were virtually no such agreements until 1970 and less than 50 in 1990. This suggests that greater reduction in trade barriers (both tariff and non-tariff) was achieved in the earlier rounds of the GATT, which precluded the need for countries to resort to RTAs. Once, however, this initial thrust via the multilateral route was saturated, countries had to look at other ways of expanding their trading opportunities and this phenomenon was further propelled by the lack of substantial progress in successive Trade Rounds. Regional cooperation has indeed been adopted as a means of expanding the process of economic development by many countries across the world. RTAs can enable a broader coverage of economic issues than what is available multilaterally, for instance, in terms of competition, investment and movement of natural persons. Politically, an increase in the bargaining power, which creates a necessity for economic reforms and precludes the reneging on such commitments, would be one of the benefits emanating from an RTA. Thus, in addition to expansion of trading opportunities, there are other reasons, both economic and political, for which a country might negotiate a RTA. Provisions on RTAs in the Legal Texts come primarily in the form of Article XXIV of the GATT and Article V of the GATS, which require inter alia, that substantially all trade between be covered between the parties forming an RTA and that the latter does not result in making ex-post conditions more trade-restrictive for non-parties to the Agreement than what they were ex-ante. Economic theory refers to the ‘trade creating’ and the ‘trade diverting’ effects of an RTA, while analyzing the welfare effects on both parties and non-parties to an Agreement. As a result, the necessary economic test then for an RTA to have a positive net welfare effect is for trade creation to exceed trade diversion. However, consensus on the conformity of the RTAs with the provisions of the GATT was reached in only one case – the Czech-Slovak Customs Union! Examinations of RTA issues have been plagued by divergences of view on a series of systemic lacunae both in the substantive rules of the WTO and in the very process of examination. Moreover, the WTO Understanding on the Interpretation of Article XXIV, adopted as part of the Final Act of the Uruguay Round, has done little to resolve the more difficult issues.