Transparency Mechanism for Trade Agreements - Essay Example

Name: Tutor: Course: Date: Introduction Regional Trade Agreements (RTAs) were formed by countries of a particular region with the main objective being to allow member countries grant tariff concessions to each other, an offer that cannot be extended to non member countries. Over the last two decades, the RTAs have been on increase covering more than half of international trade and operating alongside the global multilateral trade agreements under the World Trade Organization (WTO). The Regional Trade Agreements however have both positive and negative effects. One of the positive impacts is that they enable negotiation between a group of small countries that have similar concerns and cultures on a market opening that is available in a certain area. This is because it may be difficult for such countries to negotiate and reach an agreement in a larger forum such as the WTO. However, on the other hand these RTAs have made it hard for other countries outside that particular region to trade with those in the region and this may discourage further opening of markets. In other words they limit the scope of trade for the member countries to only between those in the same region. 1 In recent years there has been an extensive concern about the negative effects of the RTAs especially on multilateral trade liberalization. Some commentators are arguing that the RTAs are undermining the WTO multilateral trading system by eroding the role of Most Favored Nation (MFN) treatment from WTO making it to appear like an exception and not as a core rule of WTO. However others argue that RTAs support the objectives of WTO by promoting trade liberalization, development of new rules and closer integration between countries. This essay looks at the both side of the arguments regarding the role of RTAs in enabling WTO fulfill its objective of trade liberalization. Political, legal and economic arguments for regionalism or bilateral trade agreements Arguments regarding the impact of RTAs on the multilateral trading system have been presented for several years from the political, legal and economic perspective. Traditionally, the debate was directed towards the economic welfare impacts related to preferential tariff reductions which results in balance between trade creation and trade diversion and also on political issues. Some of the political economic concerns included uncertainties on the choice to favour some trading partners with RTAs and disfavoring others. The other concern was the rate at which RTAs were proliferating with a fear that they may result into antagonistic trading blocs resulting in reduction in the international stability2. RTAs have been argued to be the most political amongst all the instruments of conventional trade policy because of the motivations that lead to their formation and also their effect on the excluded nations. Some arguments state that RTAs are a ‘stumbling block’ for multilateral trade agreements. This is due to the political dynamics of RTAs and their services provision. The political dynamics of RTAs have been identified at two levels which are the international political economy and the domestic level politics of trade. The main question here is what drives countries to choose RTAs and the countries they choose as well as the content they consider in these agreements. The answer to this lies in the expressed or assumed interests of the firms in that particular country, the industries and the workers as well as various government ministries, legislative bodies, regulatory agencies and other sub-units of the national government. Some countries’ strategic political reason for the RTA is to recognize and promote a special relationship between the partners and therefore under such an agreement, there is a higher likeliness of establishing higher levels of preference for the members and therefore a lot of reluctance in multilateralism3. Economists argue that countries in such an agreement use their wealth to promote their power. This is by using instruments such as trade barriers, exchange rate policy and such agreements to promote regional stability, strengthening of allies and weakening of the adversaries. These trade agreements cover several issues including nontrade issues such as labor, investment and services and these also have an impact on the growth and income level of a country. Analysts also argue that even if all states are equal under the law, some are more equal than others in terms of power and influence. Therefore not all members of the WTO are equal in their ability to achieve the grand objectives of the overall block. Therefore RTAs which are formed by influential members of WTO tend to dominate the discussion of issues of members of WTO and not merely those of their RTA members4. Others have on the other hand argued in favour of RTAs with their main focus being on the economic benefits of RTAs. Advocates of RTAs argue that they can result in trade creation which occurs through enhancement of the overall global efficiency through the RTA. This occurs when the RTA allows relatively more efficient producers to acquire a share in those markets covered by RTAs at the expense of the less efficient producers. In this case, global welfare is achieved through optimal allocation of resources where trade creation outweighs trade diversion. The other alleged benefit of the RTAs is that they produce dynamic effects. This implies the efficiency gained by economic players within the larger market which is created by RTA through increased investment and trade. Depending on the RTA, this efficiency can arise from economies of scale and specialization, reforms in the laws that govern businesses activities and increased transparency in legal processes related to operations of RTAs5. The arrangements for forming the Regional Trade Agreements have however been found to conflict with the objectives of the WTO especially on promoting trade liberalization. Trade liberalization is the common objective of both the RTAs and WTO. However the two pursue a similar objective using different approaches and this creates some tension in their relationship. WTO has over the years seen a gradual erosion of the principle of the Most Favored Nations as a result of the emergence of several layers of preferential trade regimes6. Some of the regional agreements were created to account for the unequal levels of development among the member states. Others were created after the initiation of the GATT so that likeminded members who were willing to liberalize trade faster and deeper could not be held back by the slow rate of progress at the multilateral level. Due to this, it has therefore become difficult for WTO to attain the liberalization of MFN. However GATT’s Article 24 allows regional trading arrangements to be created as a special exception as long as they meet strict criteria7. RTAs can only promote multilateral trade liberalization when the preferential concessions are extended at the MFN level. However this is difficult to achieve because countries cannot extend their preferences on a MFN basis unless it is part of a multilateral round of trade negotiations. There is however a problem because there are no specific relevant WTO rules on what RTAs should do and what they should not do. This gives the members an avenue for designing their own agreements. As a result, most RTAs can never address other sensitive sectors such as agriculture8. Some authors have pointed out that when countries form a free trade area among the members of its bloc, they reduce their external trade barriers. This is done by the countries in order to maximize their national welfare and this is against the objective of WTO. However the general result here is that this reduces trade diversion and in most cases, the decline in external tariffs returns some imports back to their original source and this reduces trade diversion. Basically, the larger the group in a RTA, the more the collective monopoly power and these results in higher tariff command. Therefore if the world will be allowed to consist of a few large blocs, each bloc will be seeking to changes the terms of trade in its favour thus raising the tariffs against other blocs. This will be in conflict with the WTO objective of promoting trade liberalization9. The regional trade arrangements can however promote the integration of developing countries into the world trade system in that they promote negotiations among a small group of neighboring countries which are associated with each other. Through these negotiations, they can reach an understanding which will provide a building block for wider liberalization probably under the multilateral framework. Another method through which they promote integration is that due to the technical nature of trade and its many political consequences, RTAs may act as vehicles to bring developing countries into a forum where they can have a strong bargaining power in the WTO negotiations. As far as the developing countries are concerned, the RTAs represent them in WTO negotiations. This is because in most cases they do not succeed while negotiation when they group according to a common identity. Therefore when they form an RTA together with the stronger nations, they gain more bargaining power10. WTO efforts to regulate RTAs Concerns over the increasing number of RTAs were raised during the Fourth Ministerial Conference in Doha in 2001 with the ministers suggesting inclusion of RTA rules in the Doha Development Agenda (DDA). During this conference, WTO members agreed that RTAs have an important role to play in regard to trade liberalization and in promoting economic development. They however stressed that there is a need to create a harmonious relationship between regional and multilateral process. The ministers therefore agreed to initiate negotiations which will clarify and promote adherence to the disciplines and procedures that are stated in WTO provisions to ensure that there is better control of the RTAs by the Committee on Regional Trade Agreements (CRTA). This will ensure better control of the dynamics of RTAs and reduce the risks that are associated with their increased proliferation11. The negotiations to regulate RTAs have been based on the issues of procedural nature and the legal issues. These negotiations however are however complex because clarifying and improving compliance to WTO rules concerns various other regulatory areas. However negotiations on WTO procedures have progressed well with the members having reached an agreement on a Draft Decision on a Transparency Mechanism for Regional Trade Agreements, which was signed in July 2006. This Drafty Decision is to promote greater transparency on RTAs as well as revitalizing the CRTA in order to improve the WTO’s oversight on RTAs12. Some of the elements in the Draft Decision include procedures for early announcements of RTAs, a specified time frame for RTA notification, the type of information which the parties must submit and a secretariat’s factual presentation. This Decision is expected to provide homogenous and objective information on RTAs which must be notified to the WTO making the WTO source of public information on all the issues13. Strengths and Weaknesses of Preferential Trade Agreements Despite the much debate on the proliferation and the role of the Preferential Trade Agreements, they have strengths which favour them and on the other side weaknesses which threaten their survival. One of the strengths is that regional trade agreements are quicker to conclude. This is because they are made up o few parties and this means that Preferential Trade Agreements can be reached within a very short time. This makes them very attract to business people and some politicians who are after quick results. The others strength is that they can be able to enter into a new territory where there are no existing consensus among the members of WTO. This is because of the similarities in their interests and common values which enable the bilateral trade agreements to venture into areas such as intellectual property, environmental standards investments, and labor standards among others. In other words, they can set up their standards of operation as long as there are no prior standards by the WTO. They can also negotiate issues that could not be possible multilaterally14. The other strength is that the Preferential Trade Agreements are reached upon political and geographical considerations among other factors. This is an advantage to the developing countries because as they negotiate with the more powerful developed nations, they will also be included in the preferential benefit and also gain assistance on development and other non-trade benefits. This therefore enables the developing countries to have an advantage over other WTO members who are not members of the regional advantage. Generally they contribute to the reinforcement of a country’s trade system acting as instruments for domestic reforms in sectors where the multilateral system is weaker15. On the other hand, there are various weaknesses of the Preferential Trade Agreements. One weakness is that PTAs generate an incentive for increased trade discrimination which may end up hurting all the trading partners. This happens when countries outside the agreement try to form an agreement with one of the countries inside the agreement to avoid exclusion. Some countries therefore end up being in more than one agreement as it has occurred in Asia recently. This is a short lived phenomenon and results in less meaningful preferences for a nation. The other weakness is the complications in the trading environment that are brought by the preferential trade agreements resulting on incoherent rules of trade. For example various members of WTO belong to more than ten regional trade agreements where each of the trade agreement has its own rules of origin which ensures that the preferences are gained by the partners and not non-members. This complicates the entire business process because some will want to direct their products to different preferential markets so as to satisfy the rules of origin. This will result in issues of transparency of the entire trading system16. Another weakness is that the discriminatory nature of the PTAs creates a conflict of interest among the developing nations, those who receive the preferences and those who do not because they tend to deal with similar products. This may hinder them from negotiating as a block when it comes to the multilateral rounds against the protectionism by developed nations. For example during the Uruguay Round, it was agreed by the developed nations that MFA which manages their imports of apparel and textiles would be eliminated. However today, 25% of America’s imports of apparel come from countries in the Caribbean and Central America without quotas and tariffs as a result of the preferences that receive under the NAFTA and CBTPA. On the other hand the exporters especially Asians are faced with the quotas17. Finally, the PTAs and their discriminatory policies may be used as bargaining chips by the developed nations against the developing ones. This may occur on issues directly related to WTO, for example in dispute settlement, issues related to trade such as competition laws and intellectual property rights. I however tend to believe that PTAs alter the balance of trade negotiating power in favour of countries with larger economies. The developed nations which of course are the nations with larger economies are actively forming PTAs with the developing nations whose economic power is lesser. This has led other developing countries also to struggle to gain participation in PTAs with the developed nations to protect themselves from trade exclusion. The powerful nations are therefore taking advantage of those PTAs to push for non trade clauses which they know that it may not be possible under the Multi Nationals. These include labor and environmental laws as well as tough patent laws which they know that their partners who are the developing nations may not resist. For example the United States managed to influence the issues of capital control through the PTA. This was basically done to protect the interests of financial lobby in the United States. Another commentator points out that after the Asian crisis, the US treasury used the PTAs to impose non-trade related issues such as free movement of capital on developing countries. The developing countries knew very well that free movement of capital is very important for their economic strength but they had to accept the preconditions because of the power held by US in that particular PTA. Under these platforms, the developed countries are therefore able to push for rules that favour them in the WTO18. PTAs have also become an important trend towards moving beyond the minimum standards set by Trade Related Intellectual Property Rights Agreement (TRIPS) through reduction of options and ambiguities and generally bringing together all the gains to the high-income economies and ensuring strengthened protection and enforcement of Intellectual property Rights. The incorporation of Intellectual Property provisions is a major incentive to trading partners in e engagement to PTA negotiations. This is due to the active and influential role some of their industrial sectors play that make the regional partnership to be more productive and convenient. Therefore the trading partners engage in PTAs so that they can enjoy the level of protection and enforcement which they cannot achieve at a multilateral level due to resistance from like-minded countries. The negotiation agendas for PTAs are therefore largely made up of the demands by the large economies due to their industrial sectors and a few issues raised by the developing countries. Therefore the countries with the strong economies use the PTAs to push for issues which they cannot achieve at the multilateral level because they experience less challenges at the PTA level. They therefore bear the most negotiating power and trade activities go in their favour19. Findings of Appellate Body in Turkey‘s Restrictions on Imports of Textile and Clothing Products The case on Turkey- restrictions on Imports of Textiles and Clothing Products was among the cases that WTO dispute settlement has examined since the Uruguay Round. In this case, India had brought an action against Turkey due to imposition of quantitative restrictions by Turkey on India textiles after formation of Custom Union (CU) with the European Communities (EC). The report issued by WTO was in favor of India on matters unrelated to GATT Article XXIV. Turkey appealed by arguing that the article justifies its restrictions. However the conclusion of the Appellate Body was that it had the jurisdiction to review the legality of the RTAs pursuant of Understanding. The Appellate Body was however not as clear as it should have been, it pointed out some vague phrases in the Article XXIV such as the “Common External Trade Policy”. Some of the Turkey’s arguments were that if it was allowed to impose qualitative restrictions on the Textiles, the EC would exclude 40 percent of Turkish textile imports. The Appellate Body however rejected the argument by Turkey on the basis that Turkey did not have many restrictive alternatives to apply to prevent trade diversion as a result of EC-Turkey CU20. The decision by the Appellate Body however provided adequate incentives for the member states to invoke the system in terms of timing and necessity. According to the Appellate Body regarding the case of Turkey-Textiles, there are two conditions which are cumulative and that must be met for the Article XXIV to justify the violation of a GATT. The first condition is that the party which is claiming the benefit of defence must show that measure being raised is introduced upon the formation of a custom union which meets fully the requirements stated in sub-paragraphs 8(a) and 5(a) of Article XXIV. Secondly, that party must also show that the formation of that custom union would be prevented if it denied introducing the measure being raised. The Appellate Body drew these conditions from the chapeau of Article XXIV:5 which states that the “provisions of GATT shall not prevent the formation of a CU or a free trade area, or the adoption of an interim agreement necessary for the formation of a customs union or a free trade area, provided that………..”21. According to these provisions, the member states may invoke the system because for these two conditions to apply and justify the exclusion of regional imports from a safeguard measure as per the second condition; chances are high that Article XXIV may be used as a valid defense. One of the reasons for this is because it would appear like an extraordinary coincidence if the safeguard measures were in real sense ‘introduced upon the formation’ of the custom union or free trade area. In most cases, the safeguard is introduced after the event but not during the same date as that of creation of the legal agreement. The other reason is that it would not be easy for a WTO member to convince the panel that without excluding regional imports, the legal conditions for a valid customs union or free trade area cannon be met under Article XXIV. Generally the language in the Article XXIV is flexible enough to permit regional safeguards. It is therefore difficult to say that enforcing the safeguard measure even on regional imports would prevent the formation of a GATT consistent trade deal22. The decision by the Appellate Body may also be invoked by the member states based on the words of the Article XXIV. The member states may argue that the words of the Article XXIV do not imply the requirement that the otherwise inconsistent measure “be introduced upon the formation of” the regional arrangement. Article XXIV states that GATT provisions shall not prevent the formation of a CU or of a free trade area, but not that it shall not prevent measures introduced upon the formation of the same. The interpretation of the Appellate Body in the Turkey-Textiles’ case added those words. GATT does also not state any restrictions on the timing of the measures which can be justified under Article XXIV. Another point is that Article XXIV does not support any requirement that the formation of the CU can be prevented if introduction of the measure was not allowed. The article on the other hand states that the provisions of GATT do not prevent the formation of a CU or a free trade area. It however does not state that it shall not prevent measures necessary for the formation of a CU or free trade area. The interpretation by the Appellate Body seems to add the words “measures necessary for”. These words appear in the article but they only apply to interim arrangements for regional arrangements which fully meet Article XXIV. In other words, they apply to arrangements between an interim regional trade deal and a finalized regional trade deal. On another note, the word ‘measure’ is not used in Article XXIV. The article states that the scope of the provisions by GATT shall not be prevent the formation of the CU or a free trade area. This means that the provision may be altered so as to permit the formation of a CU or free trade area. It does not specify that the permission to for a CU of a free trade area is limited to measures entirely necessary for the formation. Therefore Article XXIV can be used to justify measures necessary for the formation and also permit extensively the formation of a CU even in cases where it may include exclusion of regional imports from safeguards23. Conclusion Both the positive and the negative impacts of RTAs cannot be ignored from the political, economic and the legal perspective. They have generally contributed to the economic plight of some member countries especially the developing countries which for a RTA with the developed nations. This has been achieved through adding on to their bargaining power which they could not get through WTO. However looking at the multilateral level, which is the main focus of WTO, RTAs poses a threat to the achievements of the WTO objectives. It is therefore important for WTO to regulate the proliferation of FTAs before they overtake its overall objectives. On the other hand, the RTAs have their own strengths which are enabling their survival. The member states capitalize on these strengths since they know that RTAs create avenues which are simple and can enable them to venture into areas where they cannot through WTO. Generally, they offer a more complicated platform for negotiations which would not be possible through WTO. However the most beneficiaries are countries with large economies since they have more negotiating power. In most cases, things work towards their favour. Regulation by the WTO will however ensure that RTAs play their intended role and that their proliferation will not interfere with its objectives especially on the multilateral trade liberalization. Bibliography Articles/Reports Appellate Body Report, Turkey – Textiles, Draft decision on a Transparency Mechanism for Regional Trade Agreements (26 June 2006) http://trade.ec.europa.eu/doclib/docs/2006/december/tradoc_131544.pdf Khor Martin, Bilateral/Regional Free Trade Agreements: An Outline of Elements, Nature and Development Implications (Third World Network, 2005) Parr Rosson, Preferential Trading Arrangements: Gainers and Losers from Regional Trading Blocs (2012) < http://www.ces.ncsu.edu/depts/agecon/trade/eight.html> Trade and Investment Division (TID), Regional Perspectives on the WTO Agenda: Concerns and Common Interests, Studies in Trade and Investment No. 47, (UNESCAP, 2011), 3. VanGrasstek Craig. “The Political Economy of Services in Regional Trade Agreements”, OECD Trade Policy Papers, No. 112 (OECD Publishing, 2011). World Bank, Regional Trade Agreements: Effects on Trade (Global Economic prospectus, 2005). WTO, Regional Trade Agreements: Committee. Work of the Committee on Regional Trade Agreements (CRTA) (2012) < http://www.wto.org/english/tratop_e/region_e/regcom_e.htm> WTO, Understanding the WTO: Cross-Cutting and New Issues 
Regionalism: friends or rivals? (2012) Books Bhagwati Jagdish, Termites in the Trading System: How Preferential Agreements Undermine Free Trade (Oxford University Press, 2008). International Trade Law Center, Arthur Appleton, Michael G. Plummer, The World Trade Organization: Legal, Economic and Political Analysis (Springer, 2005). Ito Takatoshi and Krueger Anne O., Regionalism versus Multilateral Trade (The University of Chicago Press, 1997). Richard Baldwin, and Venables Anthony, Regional Economic integration. In Grossman Gene. and Kenneth Rogoff, Handbook of International Economics, volume 3. North Holland 3rd ed, 1995). Roffe Pedro, Intellectual property, Preferential Trade Agreements and the Multilateral System, In Ricardo Meléndez-Ortiz, Christophe Bellmann and Miguel Rodriguez Mendoza, The future and the WTO: Confronting the Challenges (International Centre for Trade and Sustainable Development (ICTSD), 2012) 58, 59. Journals Davey William J, ‘The WTO: Looking Forwards’ (2006) 9(1) Journal of International Economic Law 3, 29. Estevadeordal Antoni, Caroline Freund, and Emanuel Ornelas ‘Regionalism Affect Trade Liberalization towards Non-members?’ (2008) 121 Quarterly Journal of Economics, 1531, 1575. Martin Philippe, Mayer Theirry, and Thoenig Mathias, ‘The geography of conflicts and regional trade agreements’ (2012) 4(4) American Economic Journal: Macroeconomics. Saggi Kamal and Yildiz Halis Murat, ‘Bilateral Trade Agreements and the Feasibility of Multilateral Free Trade’ (2011) 19(2) Review of International Economics 356. Legislations Article XXIV of GATT 1994 GATT’s Article 24 Sub-paragraphs 8(a) and 5(a) of Article XXIV of GATT 1994 Read More