Regional Trade Agreements and World Trade Organizations - Coursework Example

Running Head: REGIONAL TRADE AGREEMENTS and WORLD TRADE RGANIZATIONS Name Course Course instructor Date The trade agreements have witnessed immense growth with the changes in the trading patterns as a result of globalization. The total number of trade agreements from 1999 to 2007 grew from 99 to 159. It is estimated that the number reached 400 in 2010. The trade agreements have a relation with the GATT/WTO as the later forms rules and regulations that are aimed at maintaining the legal formation process as well as maintaining of a fair and just trading relationship among the participating countries. the paper aims at giving an informed explanation as to why the Free Trade Agreements (FTAs) and Regional Trade Agreements (RTAs) are popular. The paper will further seek to explain how the agreements between the members of the WTO are potentially in breach of their obligation under the World Trade Organization (WTO/GATT) system. Lastly, the paper will explore the ways through which the conflicts are to be avoided or explained1. Free Trade Agreements are legally binding agreements involving two or more states to remove all barriers to trade between them. FTAs have become more popular. This is because they are easier and quicker to negotiate than multilateral agreements. They also enable countries to set more ambitious goals to be liberalized fully in the name of FTAs where such goals may not be supported in larger forums. Another reason why FTAs have become popular is that the commitment to facilitating freedom of trade and investment between the states involved builds and cements a closer relationship between them. Removal of barriers to trade has increased trade among countries and as a result, standards of living have improved drastically around the world2. FTAs can divert rather than create trade. For instance, FTA can provide some conditions that would divert trade away from the most efficient supplier of a particular good to a supplier in another partner country. Sometimes FTAs create numerous new rules which can bring complications for businesses. For example, new rules on labeling, standards and customs procedures can le ad to difficulties being faced by businesses3. One of the benefits of FTAs to an economy is on investment. This could be direct impact or indirect. Improvement of conditions for investors from the countries involved by taking necessary measures would lead to confidence on the part of investors. Another benefit is that it results to expanded trades. Also, in the process countries gets a chance to learn from one another. FTAs are different from multilateral trade agreements which are managed by WTO. The main agreement of WTO is the General Agreement on Tariffs and Trade (GATT). GATT is responsible for standardization of how countries regulate trade for benefit of all countries, and opening up of world markets by removing restrictions on trade. Since multilateral trade liberalization is slow and difficult, and the fact that areas of trade are covered, reaching these agreements is difficult4. Regional Trade Agreements(RTAs) have also undergone rapid growth lately. One of the reasons Many RTAs are inter-linked. For example, the countries of the European Union and Mexico belong to approximately 10 regional agreements. Also, Brazil, Colombia, Venezuela, Chile and some Central American countries belong to 5 to 10 regional agreements. During the process of implementation for the various regional agreements, their trade regimes become more complex. This causes most agreements to differ in terms of implementation time frame, product coverage and rules of origin5. Modern RTAs have a more extensive coverage of product compared to earlier agreements. Under general provisions of Article XX and the security provisions of Article XXI of GATT 1994, only 11 agreements in pre-1990 had 100 per cent product coverage, and coverage in Agriculture was more limited. However, under revised WTO agreement which was examined in 1998 and established in the post 1990 era, 43 agreements had 100 per cent coverage in industrial products and a better coverage in agriculture. Many of the new agreements go beyond the traditional tariff-cutting exercises. This means that they may cover investment, services, dispute settlement, intellectual property, supra-national institutional arrangements among others. Even larger number of agreements today limits quantitative restrictions and subsidies6. Generally, new agreements encourage more participation, increasing efficiency gain than by mere elimination of frontier barriers. What have become evident is that trade within RTAs has been undergoing spontaneous growth in comparison to trade from non-members7. Regional trade agreements continue to predominate. However, new agreements are encouraging more developed and developing countries from different geographical regions to join these agreements. FTAs have worked towards regional integration. RTAs is a collective term used by the WTO to refer to FTAs and other regional preferential trading arrangements. Different types of agreements that come under RTAs as prescribed by Article XXIV:8 are FTAs, Custom Unions and Interim agreements leading to the formation either of these. All trade barriers between members in FTAs and Customs unions are eliminated substantially. FTA member are given freedom to determine trade relationship with third party by themselves. Custom Unions are FTAs, only that they have a common external tariff for all members which calls for more harmonization. This requires more time to implement. Some RTAs are also FTAs. A good example is the agreement between Japan and Singapore. RTAs have extended agreements to countries that are not necessarily close geographically. Countries consider joining FTA because it involves fewer participants8. One of the reasons why these agreements may be unable to fulfill their obligations under WTO/GATT is the limited scope of current GATT/WTO framework. For instance, it was until the Uruguay Round that the framework was expanded to regulation of trade in services (GATS), from the original one that had been confined to regulating trade in goods (GATT)9. Failure of drafters of GATT to have countenanced pervasiveness of regionalism when framing regional exemption has caused it to becoming more of a rule than an exemption. This have led to rise in number of RTAs. RTAs go beyond WTO requirements which are harmonization and removal of trade barriers by including provisions covering other fields such as investment, competition, intellectual property environment and labor. The use of top down approach also enables them to go beyond WTO obligations. According to this approach, all sectors of trade are to be liberalized unless stated otherwise. Using this approach, WTO type principles can be extended to non-members of the organization. RTAs can adhere to international accords that WTO do not recognize which could be a way of overriding WTO regulations10. The Common Market concept and Economic Union are two perspectives of WTO-plus arrangements. In a common market, barriers to movement of factors of production between members are removed. On the other hand, monetary and fiscal policies are harmonized across common market in economic union, thus reducing retardation of commerce imposed by state boundaries. All these are provisions override the WTO law11. Article XXIV provides for formation of customs unions and free trade areas and in case the GATT is to retain significant influence in world trade policy, then a new understanding of meaning and application of this article must be decided upon. Due to the great extent of their coverage, putting RTAs under supervision of Goods Council was wrong12. The committee to handle examination must be clarified, besides the CRTAs rationalization of examination. This is because only RTAs notified under GATT Article XXIV are referred automatically to CRTA as a rule. RTAs regulated be GATS Article V are not obliged to be referred to CRTA. Also, RTAs formed under the Enabling Clause are not analyzed by Committee on Trade and Development or even referred to CRTA. The numerous numbers of RTAs today are capacity of CRTA and as a result, supervision of RTAs by WTO is unachieved. Another weakness of WTO is the rule of timing of notification of new RTAs which is vague. This creates confusion as to when it is the right time to make notification, whether before entry into force of the RTA or after. The GATT provision requesting members forming RTA to submit information for examination is also vague. For instance, specific timeframe for disclosure of data is not included in the provision. Extent of information to be given is not known and hence debatable13. Under GATT Article XXIV, fundamental characteristic of a customs union or a free trade area is substantially all the trade coverage. Its interpretation seems difficult due to its ambiguity. This has caused many custom unions and free trade agreements under EU excluding the agricultural sector or some parts of it14. Reason for this is that participants of RTAs interpret the clause as referring to whole trade coverage and not to specific sectors, allowing wider view of the product sectors covered. Definition of ‘other regulations of trade’ is not clear thus it is misinterpreted. Developing countries are not in a good position to conform to requirements of GATT Article XXIV. This forces them to enter WTO under Enabling Clause which gives them much flexibility when forming, notifying and operating RTAs. As a result of this flexibility, their commitments and trade policies are simplified15. In order to avoid conflict, GATT and the WTO has through its regulations allowed the member countries to engage and make regional and free trade agreements with other countries with observance of the non-discrimination fundamental principle. This principle that governs the free trade and regional agreements is set out in the Article I provisions. The conditions set out in the Article XXIV of the GATT agreements give guidelines as to how the conditions are to be met while trading in goods. These are governed under the Article V of the GATT and are referred to as economic integration agreements. The enabling clause that governs the regional and free trade agreements between countries was constituted in 1979. The involved nations are required to seek a waiver from the WTO rules. The regional agreements are thoroughly scrutinized by the body to verify their compatibility with the RTA and WTO rules. This is normally done by a Committee on Regional Trade Agreements (CRTA) that was constituted in 199616. The committee functions to investigate the agreements that have been referred to it by the Council for Trade in Goods as provided for by the regulations in Article XXIV, V and the Committee on Trade and Development under the regulation in the agreement of the Enabling Clause. The committee is permitted to form procedures that are aimed at facilitating the improvement of the process of the examination and ensure the progress of the reporting process is carried out adequately buy the agreement parties. The methodology to evaluate the tariffs and duties is to be based on the overall assessment of the collected custom duty and the weighted average. The WTO is charged with the mandate to calculate the evaluation which is to be based on the import statistics. The import statistics are collected from a tariff base line for the preceding representative period through a methodology that is utilized in computing tariff offers that was adopted in the round negotiations in Uruguay (1994) and by paying close consideration in applying the duty rates. It is also paramount to conduct an individual assessment to check whether the restrictiveness of the overall change increase in trade17. Article XXIV: 8(b) further permits the elimination of the commerce restrictive regulations that exist between the territories in question. An exemption to this should only be permitted in consideration to the GATT rules. Article 5:1also provides the need for the constituent territories to have a sectoral coverage. The sectoral coverage according to the GATT’s Article 5:1 is defined by the number of sectors, the supply modes and the trade volume. To ensure that the territorial constituents meet this provision, the exclusion of the a priori supply mode should not be provided in the agreements18. Article XXIV: 5 (b) provides for there to be a reasonable time for the formation of a free area of trade and a customs union. This article stipulates that the formation of such a plan should be within a reasonable time frame. The time frame agreed for the formation of such a plan as is 10 years with an exception of some sensitive cases. In addition, Article V:6 provides for the regulations that should be followed in cases of compensation. This is necessitate in instances where the formation of the customs union that the member has to raise a bound rate of duty. The treatment of developing countries is also taken into consideration as stipulated in the Article 5:3 of the GATT. This is in respect to the trading in services in which the Enabling Clause does not apply. The territories in question are to provide the notification requirements as provided by the Article XXIV. This provides that the preferential trade agreements are confined within the Enabling Clause. This is in addition to the form in which the GATT/WTO measures the neutrality of the trade policies between the countries that are in a free trade agreement19. It should however be noted that a great bulk of information that gives regulations on how the conflicts between the WTO and the regional agreements are to be handled is reserved in part IV and V of the WTO regulation. The information given in this part deals with the managing of conflicts between two or more fora that are in competition. Part IV of the WTO rules lays down the ways through which the settlement organs are to construe and reconcile the treaty texts that are in competition. Part V investigates the topical issues that form the conflict clauses including the interpretation system as a way of using them as conflict reconciliatory mechanisms20. In conclusion, the regional Trade Agreements form a vital part of trading in the global market. The developing nations form the greatest percentage of the countries that participate in the shaping of the RTAs. The RTAs in this study consisted of both the Customs Union and the Free Trade Areas. These trade agreement formations have become comprehensive and complex over time based on their instrumental coverage and sectoral. They are best known for the provision of the deeper integration as opposed to the removal of barriers on tariffs on the intra area trading as in the cases of Custom Unions. It is imperative to note that the WTO/GATT provide regulations that are aimed at maintaining the balance in trade and extracting unfairness in trade that might arise thus shielding the parties involved from exploitation. 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