The Rise of Bilateral Free Trade and/or Regional Trading Blocs - Essay Example

The Rise of Bilateral Free Trade and/or Regional Trading Blocs Name: Institution: Date: Introduction The Formation of WTO resulted in the creation of an international trading system in a pyramidal design. The pyramid design placed multilateralism at the top, bilateralism/regionalism at the center as well as WTO regulations and policies at the lowest part. RTAs was encouraged by WTO since it held an intense loyalty that regional unity policies would finally replace the multilateral trade policies. However, the quick and efficient growth in RTAs globally as well as the increased diversion of commerce using the regionalism, possess a threat to the other WTO-related systems (Bergsten, 2006). Over the past years, countries around the world have significantly increased trade agreement at both country-to-county (bilateral level) and grouping of multiple countries (regional level). A Free Trade Agreement is an undertaking that is formal aimed at eliminating or reducing trade barriers. The trade barriers include tariffs and quotas/quantitative restrictions on goods and services exchanged between signatory countries (Czaga, 2004). The international trading environment would get defined by the developments at a regional level. Events at local levels represent the present international trading environment. This paper, therefore, seeks to give a highlight of regional trade agreements as well as their relationship with the other business systems that are under WTO. The paper also strives to provide answers as to whether the rise of bilateral trade systems poses any stiff competition to the free trade systems` progress made WTO. All the trade agreements mentioned above are a potential opportunity for signatory countries to develop and modernize their tax and revenue systems. The primary objective of a trade agreement is to aid in the liberalization of tariff barriers through phasing down or removal of customs duties. Opportunities for associated reforms for domestic tax and revenue policies are created by trade agreements. Integration is growing across ASEAN region and the goal of Trans-Pacific (TPP) negotiators in pursuit for the formation of a modern and comprehensive 21st Century agreement. This integration is a clear demonstration of the potential role for regional agreements in driving reform (Das, 2001). The nature of these agreements gives its participants a significant role in shaping and directing their policies of trade. Sovereign nations usually join on a local scale so as to ensure the creation of free trade agreements. The members countries incorporated in free trade area can, therefore, trade freely amongst themselves but maintain trade barriers to non-member countries. In accordance with WTOs policies and regulations, countries whose participation and membership in RTA gets the opportunity of practicing immune of high taxes tariffs amongst other member nations. Such provisions are inaccessible to other countries that are not members of WTO (Bhagwati J. a., 2002). WTO Member countries that do not participate in RTA experiences significant losses. Global trades are being channeled through the route of regionalism massively. Therefore, there is a reasonable amount of fear concerning the importance of the trade policies within the organization. Therefore, the Cancun Ministerial Conference of WTO and Seattle failure is what has fuelled the rise of regionalism. The failures brought to the spotlight the challenges of the multilateral trading system and has thus resulted in an influx of many nations pushing their diplomatic ways into the trade agreements. RTAs central issues RTA is a combination of various nations that share a common agenda of eliminating or minimizing obstruction to free trade between participant countries. The definition does not necessarily mean that the groupings or unions are between countries within the same geographical region as the name suggests (Chang, 2002). Based on the nature of harmony, RTA has five groups as shown below ii) FTAs iii) CUs iv) CMs v) EUs. Therefore, PTA is considered as a union whose members have been relieved of any trade limitations amongst its members and at the same time offer give freedom of choice of adjusting the tariffs for all its members. FTA is entirely opposite from PTA in that it eliminates all kinds of tariffs for commodities from its participants. It is not common that the elimination of barriers is mandatory to all members Area (FTA), they instead do not include those sectors considered as of high sensitivity. For FTA, its members have the freedom of setting and regulating their taxes, duties and tariffs when trading with non-member nations (Baldwin R., 2003; Baldwin R., 2003). The CET is bound to fluctuate but not across partners of the Union. According the literature that covers trade, CU, FTA and PTA are called shallow integration policies. There exist more than one policies that govern the unions apart from the shallow arrangements that are namely the Economic Union and Common Market. Standard Markets are set up where countries who are member seek to harmonize some provisions that are institutional, financial and commercial laws, and regulations amongst themselves. Free movement of labor and capital which are the factors of production is made possible by the existence of a stock market. Countries adopt a single currency and have similar rules governing their economy through the Economic Union (EU). Shallow integration agreements are a majority of the agreements among the RTA despite the existing handful of Economic Unions, Customs Union and Common Markets worldwide (Bergsten, 2006). There has been a steady rise in RTA`s throughout the whole world. In 2002 report on WTO, global trades are taking place through regional trading groups has increased to more than 50%. According to another study conducted in October 2003, the study revealed that over 99.7% of WTO members were either participating or anticipating on the same around 250 RTAs are currently in force. This survey signifies that the scope and geographical reach of RTAs have increased massively (Engman, 2005). The recent developments in RTA comprise of countries that are developed thus resulting in competition, and provisions on environment and labor. Reasons for Countries to embrace Regional Trade Agreements Experts in the field of the economy have made attempts to do a greater exploration on the diverse ideas that have resulted in countries pushing for regionalism. The reasons that have contributed to this shift are as follows: 1. Impacts of Welfare on RTAs: Trade Creation and Trade Diversion Traditionally, several theories have been put across and try to justify the fact that the elimination of barriers to trade has led to flexible in choice of commodities between consumers and producers in the markets. Removal of trade barriers ensures efficiency and increases welfare. Due to this reason, traditionalists, regional trade blocs generate greater profits due to eliminated trade barriers between the member countries (Baldwin R. E., 1995). In the book “The Customs Union Issue” by Viner, this view was challenged, and he rather suggested a different technique regarded to as `Trade creation and trade diversion`. In his book, Viner showed that the effects of trade liberalization is not unmistakably active on a regional basis (Viner, 1950). According to Viner, RTAs results in the development of commerce in case its participants migrate from production to importing from others nations that are members of RTA. Thus, efficiency both in production as well as in consumption efficiency can be realized from this case (Bergsten, 2006). Trade diversions lower welfare of members as well the rest of the world. 2. Dissatisfaction with the Multilateral Trade Regime The cause rise of regionalism in the 1990s not indicated in the regional trade agreement analysis by conducted by traditionalists. However, according to economists, they argue that implementation of multilateral policies results in frustration and lead to increased advancement in regionalism. The problems associated with GATT lead countries to turn to their neighbors. The countries discovered that regionalism is an easier alternative since multilateral trade participants are many. Moreover, the negotiations reduce consequences of non-membership contributes to the slow growth and development in the system as well as its unshakable design (Chang, 2002). 3. Bandwagon Effect of Regionalism Many economists believe that the US being a follower of regionalism from being a multilateralism supporter could have triggered other members to follow suit. Developed countries like European Union and US are increasing their involvement with developing countries (Engman, 2005). Developing countries have sought to participate FTA in collaboration with the first world countries as a defense strategy for the fear of being excluded from these markets. Regionalism in the Global Trading System Besides the reasons for the increase of the rise in regionalism, there is a significant debate on current trade literature regarding the possibility of regionalism. Regionalism acts as a barrier to multilateral systems (Ethier, 2003; Bhagwati J. a., 2002). There as several differing perspectives from various economist concerning the importance of regionalism on the current worldwide trading system. Multilateral negotiation would be easier the entire globe was sub-divided into smaller trade-blocks since it removes free riders from the system. The system poses some unexplained situations like the reason as to why FTAs would represent an effect on multilateral trading systems` member states. In a multilateral platform, members negotiate their tariffs individually whereas FTA members maintain their tax policies. In addition, much as the EU members has had a singular participatory act in the multilateral trade systems. However, the process of negotiation is regarded as questionable. Multilateral trade negotiations of EU’s have been greatly hindered by its internal problems and agendas (Summers, 2007). Regionalism does not project any harm to the trading system under consideration. Business is considered entirely free, and that little regional liberalization can be capable of creating anti-liberalization forces (Engman, 2005). Regional trade agreements will in the end promote and foster multilateral trade liberalization. The current state of multilateralism is its direct consequence (Ethier, 2003). He argues that regionalism is a stepping stone for countries that wish to enter the multilateral trading system and due to this; regionalism cannot and will not pose any threat to the network of trade in hand. The most preferred agreements get considered as having a discriminative effect thus change to the PTA`s has great danger on the multilateral systems (Bhagwati J. &., 2000). Growth in regionalism has an adverse impact in the sense that it leads to inter-bloc trade wars where bigger partners can dominate the smaller countries. In this situation, the enthusiasm of the multilateral trade, regime are reduced (Bhagwati J. a., 2002). These authors express their fears concerning the adverse effects of the growth of regionalism that has made countries divert their focus from the system. It is important to note that criticism on PTAs gets labeled against bilateral and regional agreements where developed countries got participated in the treaty. Developing countries have a high demand for PTA due to frustrations they have encountered with the multilateral trading system (Gage, 2005). For developing countries to be unhappy with WTO is not unnatural since they have not been able to gain entry into the market. Such market offers an excellent opportunity for their products such as textile and agriculture (Gage, 2005). The idea of the dominance of countries that gets developed nations in the processes of making decisions have so far failed to offer any advantageous impact on the other third world countries. Conclusion The paper has covered the issues associated with the contradictions of regionalism and multilateralism. The discussions both at fictional as well as at economic view part on the matters of agreements in multilateral systems. Despite the significant criticism that has taken place for many years, the researchers have not reached a consensus on this issue. In current global trade system, regionalism is a reality even with its advantages and drawbacks (Lawrence, 2005). The wave of regionalism is bound to increase with regards to the variability of social differences such as politics and economy. If there is a continuous massive growth of regionalism, then this with have a significant impact on the WTO. A diversion of a vast number of global trade to the regional route would make WTO suffer massive losses since it will not have relevance in the world trading system. Theoretically speaking, regionalism offers no concrete solution. However, with multilateralism distorted at the current state, developing countries have shifted their attention to regionalism in order to expand their market access. Even with all the praises of regionalism, it still has it pitfalls. Other than trade diversion, uncertainty and opacity in the global business system can become into being due to the complex web of regional agreements. Problems with regards to the unequal power structure and bigger economic power exploiting the smaller members have a significant effect on trade-blocks. References Read More