Regional Trade Agreements, Bilateralism and Multilateralism - Essay Example

Regional Trade Agreements, Bilateralism and Multilateralism Introduction Liberalisation of trade in the world occurs through a multiplicity of channels such as multilateralism, bilateralism and regionalism. Not all of these channels appear to be in accord with one another1 because of the different sets requirements in each channel, some of which are in conflict. Multilateralism, or non-discrimination, implies a universal trading system as embodied in the World Trade Organisation (WTO), in which members of the WTO are supposed to trade with each other without discriminating against any nation.2 Despite WTO existing to promote multilateral trade liberalisation, it is also evident that an average WTO member state also belongs to a number of preferential trade agreements (PTAs)3. A PTA can be defined as an agreement that frees up trade between two or more nations but which does not apply to nations that are not part of that PTA.4 Such an arrangement goes against the principle of the most-favoured-nation (MFN) of the WTO, which requires that any treatment that one country accords another country with respect to trade should also be accorded to other countries.5 Based on this state of affairs, it can be argued that despite the existence of the WTO and the organisation’s call for non-discriminatory multilateralism, bilateralism and regionalism do exist on a large scale. PTAs, as exercised in the form of bilateralism and regionalism, tend to exclude countries that are not included in the agreements, and may therefore be said to hinder the development of free trade. For instance, bilateralism means a free trade agreement involving two countries or regions6, while regionalism implies the coming together of a number of countries for purposes of enhancing trade between the countries involved. In particular, regionalism means the “institutionalised cooperation among groups of states to give trade benefits to each other that may not be extended to third parties”.7 Both bilateralism and regionalism tend to go against the essence of multilateralism since they are inclined towards deviating from non-discriminatory trade as explained above. Despite this, the WTO has argued that “the ever-growing number of regional trade agreements and preferential trade arrangements is a prominent feature of international trade.”8 In view of the issues raised above, this essay will explore the legal and economic arguments for regional trade agreements and discuss whether the world is moving away from non-discriminatory multilateralism towards bilateralism and regionalism. Legal and economic arguments for regional trade agreements According to the WTO, regional trade agreements (RTAs) refer to mutual trade agreements between two or more countries, and they include FTAs and custom unions.9 Members of FTAs retain policies for external trade while members of customs unions have a shared external tariff structure.10 One example of a regional trade organisation is the European Union (EU), which is the largest RTA in the world.11 There are various reasons why countries form or sign RTAs. For instance, RTAs can be perceived to be providing a basis for the formation of strategic alliances, hence being critical to security arrangements in organisations such as the EU.12 RTAs can also be regarded as an opportunity for small countries to come together and be able to trade with larger countries. In the following section, the legal and economic arguments for regional trade agreements are discussed. Legal arguments for RTAs To start with the formation of RTAs is anchored in the law that governs the WTO. Although the MFN principle of the WTO requires countries not to “discriminate between their trading partners”,13 Article XXIV of the General Agreements on Tariffs and Trade (GATT) provides an exception from the aforementioned principle. The MFN exception can be understood through the provision that stipulations of the agreement “shall not prevent the formation of a CU/FTA”14. However, the permission to move away from the MFN is based on some conditions, since it is only made possible for entities that meet a certain status.15 Paragraph 8 of Article XXIV of GATT outlines the preconditions that entities must attain to qualify for deviation from MFN.16 These are that the parties must have formed a customs union or an FTA, or they must be in interim agreements towards the formation of a CU or an FTA.17 Therefore, the argument for RTAs is that by forming or signing CUs or FTAs, countries take advantage of the provision that provides for deviation from the MFN principle. This makes it possible for small countries to be in a position to better negotiate with bigger countries because of their membership to a large body that negotiates on their behalf. For example, the small countries in the EU economic bloc are able to negotiate for better terms because of their mere membership to EU, which gives the legal collective bargaining power. When negotiating with the US for instance, the laws that govern the EU are used. Another legal argument for RTAs is that RTAs are able to formulate standards that govern trade, labour, environmental issues, and products standards among other issues. By having standardised sets of laws, member countries are in a position to benefit from movements of people between countries, standardised laws for importation or export of products, as well as issues to do with the environment. More importantly, the standardisation of trade practices that is associated with RTAs is beneficial for enhancing trade among RTA member states.18 Economic arguments for RTAs Economic arguments for RTAs lie in the standard normative trade theory, which proposes that free trade results into an improvement in the economic welfare of the countries that are involved in the RTA.19 Economic integration through mechanisms such as formation of RTAs means the opening up of trade with a given set of trade partners while maintaining or raising the level of discrimination against other countries.20 This helps the countries that are members of a given RTA to have an enhanced level of trade between them, which presents economic benefits for such countries. Specifically, the economic argument for RTAs is that reduced tariff as well as non-tariff barriers between member states of RTAs do increase the level of trade and enhance the choices that consumers can make since more products are made available because of cross-border trade.21 For instance, the Eurasian Customs Union enables immediate “trade creation” that reflects the removal of barriers like customs checks within the borders of the countries that form the trade bloc.22 It is also argued that producers of goods and services within a regional integration organisation can reap the benefits of an expanded market size.23 The size of the market in an important factor that facilitates innovation since fixed costs can be spread over a big customer base. At the time, it is argued that consumers can benefit from increased competition between different producers. What happens is that with the increased availability of products and services from different producers due economic integration, producers are likely to innovate to enhance quality and reduce the prices of goods and services through looking for ways to reduce production costs. In turn, the benefits of high quality and reduced prices are passed to consumers.24 These effects notably depend on the creation of things such as a single customs area and elimination of barriers to market access, as is the case with organisations such as the customs unions of the EU and the East African Community (EAC)25 that brings together Kenya, Tanzania, Rwanda, Uganda and Burundi. Another economic argument for the formation of RTAs is that having a situation in which exporters are able to export within a regional area can serve as a first step toward the expansion of exports to other parts of the world.26 That is, countries can increase their production by initially developing export level by capitalising on low tariff and non-tariff barriers within a given regional bloc, and then making use of this capacity to start exporting to other countries. Another point is that countries that are part of an RTA can establish a cross-border production chain by capitalising on the comparative advantage that each country has and afterwards exporting finished products outside the RTA area.27 An example of such type of collaboration can be seen in the Association of Southeast Asian Nations (ASEAN), which is an organisation that brings together Brunei Darussalam, Cambodia, Lao, Malaysia, Indonesia, Philippines, Myanmar, Singapore, Thailand and Vietnam.28,29 Economic integration through RTAs can also help member states to strengthen their political and economic institutions. Since some competencies are transferred to newly created bodies and other areas of economic policy are synchronised across countries, an opportunity arises to revise and review laws and regulations and to strengthen their implementation, which in turn helps in enabling an improvement in the business environment as well as market liberalisation.30 It has also been pointed out that integration through RTAs can promote the liberalisation of the service industry, which tends to be under stronger protection and regulation than the goods industry in many countries.31 Therefore, it can be argued that RTAs can greatly help in liberalising the service industry among the countries that form the economic bloc, thus ensuring that services such as telecommunication and air travel become more competitive and more affordable. Non-discriminatory multilateralism versus bilateralism and regionalism Under the principles of the WTO, it would be assumed that there would be fair trade dealings based on non-discriminatory multilateralism. For instance, based on the principle of MFN, all countries need to treat others equally in regard to trade dealings in that when a nation reduces trade barriers or opens up its market, the same conditions have to be applied for services and goods from all other countries that the country trades with, whether poor or rich, strong or weak.32 This of course is subject to some exceptions, some of which have been mentioned above. For instance, countries can establish free trade agreements that are applicable only to goods within the group, thus showing favouritism against goods from countries outside the group.33 As well, countries can give developing nations special consideration for their goods.34 Also, a nation can increase barriers against goods or services that are regarded to be traded unfairly from specific nations.35 Additionally, in services, nations are permitted, in limited situations, to discriminate.36 This implies that in real sense, rarely do countries strictly adhere to the requirements of non-discriminatory multilateralism. Although non-discriminatory multilateralism would be one of the best ways to reduce trade barriers across the world, reaching multilateral agreements faces a number of challenges. Multilateralism requires that trade agreements be made between several countries. The sheer size of the WTO membership (164 members as of 29 July 2016)37 means that it is often very difficult or it often takes long for any meaningful trade agreement to be reached38, hence hampering the progress of multilateral trade talks. Indeed, the slow pace of multilateral trade negotiations has been identified as one of the factors that make countries opt for regional trade agreements and bilateral trade agreements.39 For example, there are many cases in which disagreements have been experienced in multilateral talks; for instance the Doha Round of talks under the WTO has been deadlocked for more than 10 years.40 Also, the Uruguay Round of talks under the GATT (which later became the WTO) took seven and a half years to conclude after facing a number of problems.41,42 The remedy for the slow pace of multilateral trade agreements has been for countries to get involved in bilateral and regional trade agreements. A bilateral trade agreement means an agreement between two countries aimed at the exchange of services and goods for the mutual benefit of the two nations.43 It is argued that because of the deadlock in the WTO, attention has shifted to bilateral FTAs.44 Although such agreements were unheard of prior to the 1990s, they have increased exponentially over the last decade as nations seek to deepen trade ties with their important economic partners.45 Bilateral FTAs characteristically encompass nations exchanging trade concessions with each other, although others address trade-related measures like intellectual property, biosecurity, and investment.46 The reason why bilateral FTAs are preferred to multilateral agreements is that since bilateral talks involve only two parties, deals can be bargained more efficiently.47 The obvious disadvantage of bilateral of FTAs of course is that they hinder the development of free trade. Regional free trade agreements are also being adopted as an alternative to multilateral trade agreements or non-discriminatory multilateralism. RTAs are midway between bilateralism and multilateralism, and they involve a group of nations within a geographic region undertaking negotiations for a free trade area.48 Regionalism with respect to trade between countries started increasing during the 1990s, with the formation of regional groupings such as Mercosur (bringing together Brazil, Venezuela Argentina, Uruguay and Paraguay) in 1991, ASEAN in 1992, and NAFTA (bringing together Mexico, Canada, and the US) in 1994.49 Today, there are very many RTAs, with some showing very high levels of integration. For example, the EU, bringing together 28 countries, is characterised by a very high level of integration, which culminated in a single market as well as a monetary union that makes it possible for the member states to use one currency, the euro.50 RTAs are sometimes regarded a good deal since they are easier than multilateralism and more valuable compared to bilateral agreements.51 It is because of this that advocates of regionalism have depicted RTAs as building blocks upon which multilateral agreements can later be established.52 State of non-discriminatory multilateralism, bilateralism and regionalism today Because of the preference by states for bilateralism and regionalism over non-discriminatory multilateralism, it can somehow be argued that world trade is moving more towards regionalism and bilateralism. This can be supported by the point that “the average WTO member now has agreements with more than 15 countries’’.53 Also, according to the Organisation for Economic Co-operation and Development (OECD), RTAs “cover more than half of international trade”.54 What the aforementioned statements mean is that in addition to being members of the WTO, where they can be involved in multilateral trade agreements, different countries are also engaging in bilateral and regional trade agreements with other partners. The shift towards bilateralism and regionalism is especially fuelled by the fact the some exceptions in the MFN principle of the WTO make it possible for RTAs and bilateral agreements to thrive. The growth in the attractiveness of regionalism can be attributed to various factors. For instance, some argue that regionalism provides a faster means to put forward preferred policy objectives and to show their practicality to other countries.55 In addition, there are those who point out that regionalism is way of getting access to a firmer foundation in the midst of the turbulence caused by economic and political changes across the world.56 Another argument for having RTAs is that RTAs enable member states to have better multilateral bargaining power. As illustrated using the case of the EU earlier in this essay, small states are able to bargain with bigger states through RTAs. Despite the perceived benefits that are associated with bilateralism and regionalism, there are challenges associated with such arrangements. For example, the formation of RTAs has not significantly led to the segmentation of regional trade across the world.57 In addition, some RTAs, such as those in the Latin American region58 and Africa, have remained relatively weak. ASEAN has also remained relatively weak and its performance “abysmally low” over the years according to some scholars of international relations.59 More recently, the UK voted to leave the EU, meaning that in future, the UK will have to negotiate trade deals with other countries and organisations – the EU included – as an individual state. Combined, these events around regionalism show that regionalism is not necessarily a replacement for multilateralism. What appears to be indubitable today is that regionalism, multilateralism and bilateralism exist side by side and complement each other. This is supported by the fact that even the WTO has noted the significance of RTAs and “WTO members participating in these agreements are encouraged to notify the WTO when new agreements are formed”.60 In particular, regionalism can be regarded as a stumbling block to the achievement of free trade since it promotes discriminatory trade practices, but it can also be viewed as a steppingstone to multilateralism.61 Proponents of regionalism as a steppingstone to multilateralism argue that regionalism can help expand the scope of free trade and thus inevitably result in free trade in parts of the world.62 A good example of this is the suggestion that “the actual effects of RTAs bolster the case for a strengthened multilateral framework, particularly when regionalism leads to a patchwork effect between members and non-members within the concerned region”.63 This implies that regionalism is connected to multilateralism in that the member states of one regional block can use the bloc as a launch pad for getting into more negotiations with other countries outside the regional bloc. Therefore, it can be argue that the world is not really moving away from non-discriminatory multilateralism towards bilateralism and regionalism. Rather, it can be suggested that bilateralism and regionalism are being used as steppingstones towards multilateralism, since many negotiations based solely on multilateralism take too long. Conclusion This essay has discussed the legal and economic arguments for regional trade agreements. The legal arguments for RTAs include the points that regionalism helps in giving small states the power to negotiate with bigger states and that it also fosters standardisation of laws that govern trade, labour, environmental issues, and services and goods. The economic arguments for RTAs include the points that integration opens up regional trade, helps expand the market size for goods and services, and gives countries an opportunity to access markets outside the regional group. RTAs also help member states to establish cross-border production by making of use of the comparative advantage that each country has. The essay has also discussed the features of non-discriminatory multilateralism, bilateralism and regionalism. It has been noted that although the MFN principle of the WTO is meant to promote non-discriminatory multilateralism, it has exceptions that help bilateralism and regionalism to increase. As such, a significant proportion of trade deals across the world are based on bilateralism and regionalism. Regionalism is particularly important as it is midway between bilateralism and multilateralism, which means that through regionalism, trade negotiations can be done faster, and they are more robust than would be achieved in bilateralism. Despite the significance of bilateralism and regionalism, it has been pointed out that the world is not really moving away from multilateralism. Instead, bilateralism, regionalism and non-discriminatory multilateralism co-exist and complement one another. References Books Barry, Donald & Ronald C. Keith, ‘Introduction: Changing perspectives on regionalism and multilateralism’, in Donald Barry & Ronald C. Keith (eds), Regionalism, Multilateralism, and the Politics of Global Trade (UBC Press, 1999), 3-22. Chakraborty, Debashis & Amir Ullah Khan, The WTO Deadlocked: Understanding the Dynamics of International Trade (SAGE Publications India Pvt Ltd, 2008). Dür, Andreas & Manfred Elsig, ‘The purpose, design and effects of preferential trade agreements’. In Andreas Dür, Manfred Elsig (eds), Trade Cooperation: The purpose, design and effects of preferential trade agreements (Cambridge University Press, 2015) 1-24. Keating, Tom, ‘Thinking globally, acting regionally: Assessing Canada’s response to regionalism’, in Donald Barry & Ronald C. Keith (eds), Regionalism, Multilateralism, and the Politics of Global Trade (UBC Press, 1999), 213-74. Oxford Business Group, The Report: Saudi Arabia 2010 (Oxford Business Group, 2010). Perdikis, Nicholas, ‘Trade agreements: depth of integration’, in William Alexander Kerr & James D. Gaisford (eds), Handbook on International Trade Policy (Edward Elgar Publishing Limited, 2007), 106-119. Rudra Sil & Peter J. Katzenstein, Beyond Paradigms: Analytic Eclecticism in the Study of World Politics, (algrave Macmillan, 2011). Sen, Rahul, Free Trade Agreements in Southeast Asia (ISEAS Publications, 2004). Sharon Siddique and Sree Kumar, The 2nd ASEAN Reader (Institute of Southeast Asian Studies, 2003). Journal articles/Research papers Dynefors-Hallberg, Andreas, A Legal and Political View on Regional Trade Agreements in the GATT/WTO, Master’s Thesis, Göteborg University (2008), 32, Read More