Multi-National Trading System vs Regional Trade Agreements - Literature review Example

WTO Doha Round and RTA Introduction In the past two decades, several regional trade agreements have enormously proliferated across the universe. A study carried out by WTO reveals that 146 WTO member states out of the total 146 countries are currently participating in the RTAs. This has been brought about by the considerable expansion involving the geographical reach and scope of the Regional Trade Agreements in the current years. Other than generally eliminating tariffs on the intra-bloc commodity trade, the current arrangements have been having deeper coverage (Baldwin, 1997). Therefore, this paper critically analyses whether Regional Trade Agreements (RTAs) are becoming an alternative to a multi-national trading system. Regional Trade Agreements (RTAs) are basically groupings formed by countries having a common purpose regarding minimizing the trade stumbling blocks involving the affiliate States. As opposed to naming of the RTAs, these unions sometimes involve nations which may unnecessarily belong to similar physical region. With the levels of incorporation, Regional Trade Agreements are categorized distinctly (Krishna & Panagariya, 1999). PTA comprises of member states that impose limited trade obstacles for commodities manufactured in that association, while having flexibilities for the associate countries. On the other hand, Free Trade Area is an exceptional form of PTA where the member states absolutely all the trade barriers, including non-tariff and tariff barriers, for the commodities which originate within the member countries. Customs Union offers wide integration than that of FTA since, unlike the Free Trade Area whose associate states become entirely liberated from having personal tariff barriers in commodities brought in from the non-associate states, within the Customs Union, the associate states are expected to adhere to the universal external tariffs on goods brought in especially from the non-associate states. CETs vary across commodities but not among the union members. In trade literature, CU, FTA, and PTA are referred to as a shallow integration (Bhagwati & Panagariya, 1996). One of those key striking developments within the World Trading Systems has been an upsurge in the Regional Trade Agreements since late 1990s. At first, World Trade Organization (WTO) promoted the growth of the Regional Trade Agreements (RTAs) since it believed that the initiatives for the regional integration are able to harmonize multi-lateral trade system. However, the steady proliferation of these RTAs within the global trade as well as the enhanced diversion of trades through RTAs is becoming a concern for these multilateral trading systems under World Trade Organization (The World Trade Organization, 2013). Other than the so called “shallow arrangements”, there exist 2 kinds of regional agreements that offer “deep integration”. Common markets being the first type, the member states try to harmonize various institutional platforms and financial and commercial regulations and laws. These universal markets include liberated transits especially regarding the production elements, for instance, the removal of regulations involving free transit of capital and labor. Whereas in the Economic Union (EU), the member states execute common regulations and policies involving economy by adopting a single currency (Johnson & Turner, 2010). Among the RTAs, most of these agreements consist of shallow integration arrangements as they generally FTAs or PTAs. On the other hand, only a handful of the Economic Union, Common Markets, and Customs Union exist in the world. Most of the deep integration agreements largely exist in Europe, for instance, the EU single market and the Maastricht treaty programs. The Central common market (CACM) and the Andean pact are PTAs examples. The FTAs examples include Asean free trade area (AFTA) and North American free trade area (NAFTA). Mercosur is one of the examples of the Customs Union. Regional Trade Agreements have been representing significant exceptions to the non- discrimination principles of the WTO. According to the rules of World Trade Organization, the countries which are under RTAs can as well be involved in trade among themselves while using simple market access factors and preferential tariffs than what has been applied to the other member countries of the WTO. Due to these conditions, the WTO member countries who are not members of any RTA tend to lose out much when involved in these markets. Likewise, getting to trade within these regional trade markets is not part of the WTO’s purview (Griffin & Pustay, 2007). As an increasing degree of global trade is getting diverted through RTAs, there exists some amount of apprehension regarding the roles of RTAs in WTO. The 2003 annual report of WTO expressed deep concern regarding latest developments that involve RTAs. WTO argued that RTA can help to strengthen, complement, and build the multilateral trading system, but going by their nature, they perceived RTAs as discriminatory given that they do not follow the MFN principles which are regarded as the pillar of multi-lateral trading system. WTO claims that the effects of RTA on the global trade economic growth and trade liberalization are not strict due to the notion that regional economic effects of RTAs in inherently ambiguous (Rugman & Collinson, 2012). The current spurt involving regionalism seems to be more energized through indecisiveness at conferences involving world trade organization. Economists have been suggesting that such failures have showed the inherent challenges facing the multi-lateral trading arrangement as it is may compel several nations towards diverting their attention for negotiating into the regional trade agreements. The WTO has drawn attention to the fact that in the modern regional arrangements, 2 broad trends keep emerging. Firstly, several nations which initially depended on the multi-lateral trade system are progressively joining the regional arrangements to enhance trade. Secondly, several wide continent mega trade arrangements fall within the arrangement. The moment these arrangements have been completed, an important share involving the flow of universal negotiations is channeled via such trade systems (The Financial Times, 2013). To describe the rapid expansion of the RTA since 1990s, Peng & Meyer (2011) have been attempting to explain the political and economic reasons which have pushed most states towards the increased regionalism. The explanations have been categorized into 3 broad phases. Firstly, the conventional explanation regarding welfare impacts through the trade liberalization including the subsequent gains attained at a regional platform. However, such theories may not entirely describe the current waves of regionalism especially during the 1990s. The conventional theory involving gains from the trade indicates that the elimination of the trade barriers permits producers and consumers to buy from the most competitive and cheaper sources of supply. This has enhanced efficiency by increasing welfare. With respect to this sense, it was conventionally believed that the regional trade arrangements would produce benefits from trades given that the member states minimized trade barriers and challenges among themselves (Morrison, 2008). However, the conventional analysis of the regional trade agreements may not fully elaborate the reason behind the upsurge in regionalism especially during the period of 1990s. Most economists have come to acknowledge the fact that frustrations brought about by the multi-lateral trading arrangement has become a key reason behind this current spurt of regionalism. While responding to a question regarding to the challenges that the GATT faced which made most States to shift to their regions, Krueger (1995) argued that nations find regionalism as a better alternative since several participants within the multi-lateral trade arrangements minimizes the non-cooperation cost by creating rigidity within the system. On the same note, Krugman also believes that the modern barriers of trade are quite more unique to negotiate within a multi-lateral platform as most nations are finding it simpler to handle their issues and challenges on a regional or bilateral level (The United Nations, 2013). Several nations, especially the emerging nations have become discontented especially to the extent of WTO progress for several of the promises involving Uruguay round agreement on expanding the global trade are yet to materialize in practice. For instance, among the developing nations, the promised trade expansion within the major dimensions of Agriculture, services, and textiles has been depressing (Frankel, 1997). In addition, lack of willingness and incipient protectionism among the developed nations to offer market access especially on the multi-lateral platform has compelled several emerging states in opting to go for local substitute. The South segregate found within the congregate of WTO has been strengthening an apprehension among the developing nations regarding the prospect involving trade expansion within the WTO era. This compelled several countries to implement regionalism to be an alternative preference for growing their networks. Therefore, it isn’t amazing that an increment exists with respect to the establishment of RTA. Several economists argue that the transformation of the United States from being a multilateral defender to a regionalism follower could one of the key reasons that have resulted in the expansion of regionalism since the period of 1990s. Evidently, it is being noted that most of the big developed nations are steadily participating in the FTAs, especially with the emerging nations within a bilateral platform. This is compelling several emerging nations in seeking for engagement in the FTAs with the well established States in opposition to any likely segregation from such arrangements (Ethier, 1998). The drive in seeking for free trade agreements with developed nations is specifically strong for the developing nations when the other competing nations are also competing especially to supply commodities to those developed markets, are member states to the PTAs particularly with those emerging nations. When the non-associate nations are unable to form a union of an FTA with those developed nations, they often try to make up their own markets by entering into regional trade markets among those members who have been excluded. This brings an effect of bandwagon where no nations wish to be excluded out of the major regional arrangements. Among the other essential economic factors that are also fueling regionalism currently include foreign express investment including the benefits linked to the economies of scale. As per the 2003 report of World Trade Organization, the preferential contact with huge regional markets has become a primary source of foreign inflow of capital for the developing nations. On the same note, its also been argued that lesser nations join the RTAs since it can provide local firms with the benefits of economies of scale (Das, 2001). Greenaway & Panagariya (1998) also suggests that significant differences in motivation exist between the regional trade agreements that have been initiated and followed up by the key developed nations and the endeavors to establish trading arrangements within the developing countries. In his opinion, the developed nations such as European Nations and United States of America are pushing for regional trade arrangements, influenced by huge capital, to compel developing nations to get involved in deeper investment and trade commitments which are more than multi-laterally possible given the divisions which are involved within the WTO. Likewise, the actual motivating element for the developing nations to push forward with regional groupings among themselves can as well be to resist any form of hegemony of super-powers within the universal arrangement. Political elements have been motivating most nations to get into the regional agreements. Trade associations involving financial systems may enhance the conflict cost by enhancing the cooperation within the cross border. For this reason, the regional trade agreements have been strategically utilized to enhance tranquility by increasing regional safety within its member states. These Regional Trade Agreements have been mostly utilized by the industrial nations so as to push for geo-political alliances by building up any diplomatic ties. Through the provision of enhanced discriminatory access particularly to larger markets, these nations aim at garnering improved support within political fronts. It is quite clear that several political RTAs have not been pushed by economics. On the other hand, among the RTAs having political arrangements, especially in situations where more developed countries are involved, the possibility that the economic interest of the lesser nations not being of a secondary concern is always high (Dunning, 1993). Regionalism has played a bigger role in the recent global trade system. Daniels & Sullivan (2011) argue that regional trade arrangements enhance the welfare of the member States. However, according to Clive (2010) dividing the world into smaller number of trade arrangements will make the multi-lateral negotiations to be simpler since it will exclude those who are termed as free riders from being in the system. On the other hand, it is still not yet clear why these FTAs may have an impact on several participants within the multi-lateral trading arrangements. This is because, unlike the Customs Union, the FTA members have been retaining their own barriers to external trade, hence in a multi-lateral level; they tend to bargain for these tariffs on their own. Also, despite the single unit participations by the nations belonging to the European Union within the multi-lateral trade arrangements, its effects regarding the success of such negotiations has been questionable. And according to Daniels & Sullivan (2011) the pre-occupation of the European Union with its agenda and internal issues hinders the success of the multi-lateral trade system. Bergsten (1996) does not perceive regionalism to be an intimidation to the system of multi-lateral trade. This is because trade in itself has already become free among the primary trading countries and only fewer regional liberalizations states are able to create anti-liberalization movement. Therefore, several regional trade arrangements may weaken those who are opponents of the liberalization of trade hence promoting the liberalization of trade agreements. Ethier (1998) argues that in its current form, regionalism does not in any manner threaten the multi-lateral liberalism, and as a matter of fact, it is as a result of the direct consequences of the multi-lateralism. He asserts that countries have been using regionalism as a foundation for getting into the multi-lateral trading arrangements; hence regionalism does not pose any harm to the multi-lateral trading system. However, several mainstream economists have been arguing that regionalism actually poses a threat to the multi-lateral trade arrangements. Ghosh (2004) asserts that the preferential trade agreements have become discriminatory in their own rights and pose a severe danger to multi-lateral arrangements. This is due to the fact that PTAs only bring about the inter-block trade wrangles including the domination by the powerful partners in the less powerful countries within the regional blocks. It also minimizes the passion for the participation within the multi-lateral trade arrangements. These economists feel that just by their own design, most of these preferential trade agreements have been leading to discrimination in trade, hence harming the multi-lateral trading negotiations. Similar perceptions have been shown by the officials of the World Trade organization as well. They claim that regionalism is a dominant complement to multi-lateral trading arrangements, but it can never be an alternative. On the same note, they say that the Renaissance of regionalism risks depicting a collapse of the worldwide economic cooperation as well as weakening of the sustenance of the multilateralism. It poses a danger to the WTO’s primacy as well as foreshadowing a world having serious fragmentation, marginalization, and conflict, especially of the poorest and weakest countries (Daniels & Van, 2011). Bhagwati (1992) also asserts that an increasing quantity of the preferential trade agreements could actually result in a unique authoritarian preferences including structures that an admission to market for commodities within a single nation may differ largely regarding its source. This “spaghetti-bowl” experience may result into lack of real transparency and complexity within the global system of trading. In addition, by pushing forward the hostile treaties of trade within the bilateral level, the developed nations are destabilizing the developing countries’ power within the multi-lateral trade system. For instance, within a preferential trade agreement involving developing countries and the developed countries, the well established countries mostly incorporate unfavorable clauses of trade liberalization, extraneous issues, and clauses of investment protection within the treaty. After abandoning the objections regarding these factors on a bilateral platform, the developing nation is unable to resist such issues within a multi-lateral system. This arrangement not only aids the developed nations to push for such issues within the World Trade organization, but it may as well break the association of developing nations within the multilateral negotiations (Morrison, 2011). Conclusion Several economists have attributed this surging in the regionalism particularly to the skewed nature regarding the recent multi-lateral trade arrangements including the dissatisfaction linked to it. And according to a different view, the increasing implementation of regionalism especially by the great economic giants during the early 1990s could be the major reason surrounding the modern flow in regionalism. And as a result of the failure of World Trade Organization, it has become quite obvious that among these emerging nations, the alternative actually exists amid the Regional Trade Agreements, which assists these nations to expand their access to market without necessarily compromising on their autonomy on national policy, and the Multi-lateral trading system, that is perceived to be extremely unbalanced. 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