Are Economic Blocks and Free Trade Agreements Building of Stumbling Blocks - Example

ARE ECONOMIC BLOCKS AND FREE TRADE AGREEMENTS BUILDING OF STUMBLING BLOCKS? Student’s Name Institution In the face of globalized era and multilateral trading system, regional trading systems are steadily taking shape. Basically, many countries all over the world are part of Regional Trade Agreements (RTA’s). Currently, a total of 165 RTA’s has been registered with the World Trade Organization (WTO) and more are in the process of formation due to fear of marginalization of non- member countries. Regionalism, which is also referred to as Preferential Trade Area (PTA) is classified into three. The first form of PTA is more inclined to trade liberalization and is constructed on the grounds of high tariffs charged by other trading countries. For instance, formation of European Economic Community (EEC) in 1958 was in response to a wave of preferential trade areas that had become popular at that time. Similarly, the developing countries followed suit, but their PTA’s never succeeded. This was because the rationale under which they were founded differed significantly from the objectives pursued under PTA’s. In this regard, developing nations viewed formation of PTA’s as to favor industrialization through improving market accessibility in other developing countries and by reducing trading costs. Secondly, regionalism as stipulated in Article XXIV of General Agreements on Tariffs and Trade (GATT) saw the United States sign FTA’s with nations like Canada, Israel and Mexico. This wave of regionalism not only emphasized on market liberalization, but also stressed on rules of origin that encouraged trade creation at the expense of diversion. Notably, it is under regionalism wave that a heated debate arose of whether PTA’s represented a building or stumbling block to cross- border trade. As echoed by Bergstrand (1985), this heated debate took place at a time when Uruguay round of negotiations was taking place. Similarly, the discussion on free trade area was on course and member countries were also holding fruitful discussions. Interestingly, it is Bhagwati (1991) while examining the impacts of regional trade groups on the global economic system that coined the terms stumbling and building blocks. In this case stumbling block refers to closeness while building block refers to openness of the trading system. Further Anderson (1979) pointed out that preferential trade area that encourages multilateral trade by adding more members within the trading block or by promoting increased multilateral trade between trading nations represents a building block; else represents a good example of a stumbling block. According to the Ethier (1998), regionalism represents a discriminatory system that adversely affects cross- border trade. Further, he argues that such a trade system not only trigger inter-block trade wars, but also favors the larger economies at the expense of smaller ones. It is also apparent that existence of preferential trade blocks results into additional trading costs as different players involved have their own trade rules. Bhagwati’s vision was countered by Frankel, Stein & Wei (1995) who argued that inter-regional liberalization led to multilateralism and more importantly induced trade. According to Baldwin (2006), those countries that supported the establishment of GATT later on joined trading blocks. According to Bhagwati’s (1991), a trading block acts as a stumbling block when it is an obstacle to international trade and a building block when it supports they lead not only in generating trade movement with other world countries, but also supports trade flow. The third form of regionalism took place in 1990’s and saw mushrooming of several PTA’s across the world. Nonetheless, quite a number of PTA’s took shape of bilateral agreements between nations. According to Elliot & Ikemeto (2004), all PTA arrangements either give rise to trade creation or trade diversion. Basically, trade creation refers to substitution of expensive domestic production by less expensive imports from the preferred trading partners. On the other hand, trade diversion occurs when a country changes its source of imports in favor of a less efficient nation that will benefit from the preference at the expense of an efficient producer who now suffers from exclusion from preference. Nonetheless, it is difficult to identify and measure the effects of trade preference scheme due to the difficulties in identifying development that can be linked to a given trade preference. This study provides a good analysis that shows whether or not the bases on which FTA’s are formed are either discriminatory or not. Essentially, non- discrimination is the fundamental pillar under which international trade is founded. As a principle, this pillar is paramount to both international and regional trades. According to Baltagi, Egger & Pfaffermayr (2003), such principles discourage any form of discrimination which could make PTA act as a stumbling block rather than a building block to trade. Technical Barriers to Trade (TBT) Article 2.1 and Sanitary and Phyto-Sanitary (SPS) Article 2.3 of WTO stipulates the grounds within which a PTA should be formed and prohibits discrimination across like products. In addition, the two articles require similar treatment between substitutes. For instance, if the policy requires application of sanitary standards to fish and not other kinds of edible meat, this could make fish more expensive thereby distorting the consumption patterns. In this light, the policy makers are advised to be considerate on possible consequences on other products when a given measure is applied to a given product. The other kind of discrimination that PTA principle tries to eliminate is that of giving different treatment to foreign and domestic products in different countries. Regrettably, one of the grounds within which FTA’s are founded includes providing discriminatory or preferential treatment to merchandise imported from member countries. However, to facilitate trade between member countries, PTA’s seeks to eliminate unnecessary barriers to trade amongst member countries. Consequently, the policy makers should ensure that PTA provisions do not significantly affect non-member countries adversely. However, even though the objectives in which FTA’s are establish appears to be non-discriminatory and multilateral, it is undeniable that some trade measures put in place lead to preferential treatment especially on tariff elimination, which is solely enjoyed by FTA members only. Disappointingly, when goods within a certain trading block enjoy some trade measures that are not equally available to other non-member countries, this represents a discriminatory treatment. Nevertheless, trade facilitation measures under FTA should be equally non-discriminative to both members, as well as non-members. For instance, where the goods in question are of non-exclusive nature, the benefits of such goods are enjoyed by non- members as well. This is because trade measures put in place cannot stop free-rider problem. In this case, same treatment is guaranteed to both members and non-members due to non- exclusivity nature of the good in question. Another good illustration is the custom provision that requires member states to publish custom procedures. In this case, this same information is communicated to non-member states that also pay similar amounts. The second scenario is where states agree to adopt binding commitments under international conventions such as the revised Kyoto convention. However, in a case where facilitation measures are exclusive, then PTA can either choose to allow non-member countries to enjoy such privileges. On the other hand, PTA can choose to limit such privileges to member countries only. Further, where facilitation measures are extended to non-members countries, such a case is non-discriminatory, and therefore, acts as a building block to international trade. Similarly equal application of facilitation measures occurs where PTA applies equal measures to both members and non-member countries. For instance where the law requires a certain number of documentary requirements from member countries, this should also be applied equally to non- member countries. This equal treatment provides equal level- playing ground for both member and non-member countries. Regrettably, it is more apparent that FTA members operating in a different FTA do not offer similar trade facilitation benefits and measures to trade partners in other FTA’s. This simply means that trade facilitation measures that a country offers to a member state in a given FTA could be totally different to that offered by the same member state to another country in a different FTA. This indicates that trade facilitation measures practiced by different FTA’s are not standard (Bhagwati, Greenaway & Panagariya, 1998). In such a case, trade facilitation measures in a given FTA could be more liberal as compared to others in which a certain nation is also a member. This kind of discrimination is commonly known as differentiated trade facilitation measure. This kind of discrimination is an intrinsic problem to trade that cuts across different FTA’s. Basically, FTA’s should eliminate tariffs totally as indicated in Article XXIV of General Agreements on Tariffs and Trade (GATT). Nonetheless, trade facilitation measures are usually tailor made to benefit the contracting parties and no party is under any obligation under the WTO system. In this regard, lack of multilateral guideline on the formulation of trade measures have led to varied measures that cut across different FTA’s. This has resulted to varied trade measures across different FTA’s that have caused many trade hurdles between states from different FTA’s. References Anderson, J. (1979). A Theoretical Foundation for the Gravity Equation. American Economic Review, 69(5), 106-116. Baldwin, R. (2006). Multilateralising Regionalism: Spaghetti Bowls as Building Blocks on the Path to Global Free Trade. The World Economy, 29 (5), 14 -18. Baltagi, B., Egger, P., Pfaffermayr, M. (2003). A Generalized Design for Bilateral Trade Flows Models. Economic Letters, 80 (6), 391-97. Bergstrand, J. (1985). The Gravity Equation in International Trade: Some Microeconomics Foundations and Empirical Evidence. Review of Economics and Statistics, 67 (3), 474-81. Bhagwati, J. (1991). The World Trading System at Risk. Princeton, NJ: Princeton University Press Bhagwati, J., Greenaway, D., Panagariya, A. (1998). Trading preferentially: Theory and Policy. Economic Journal, 108 (3), 1128-48. Elliot, R., Ikemeto, K. (2004). AFTA and the Asian Crisis: Help or Hindrance to ASEAN Intra- Regional Trade? Asian Economic Journal, 18(2), 1-23. Ethier, W. (1998), The New regionalism. The Economic Journal, 108 (8), 1149-61 Frankel, J., Stein, E., Wei, S. (1995). Trading blocs in the Americas: The Natural and Unnatural and the Supernatural. Journal of Development Economics, 47 (5), 61-95. Read More