Regionalism and multilateralism: conflicts and needs

A total of 330 Regional Trade Agreements (RTAs) have so far been notified to the WTO. Of these 206 were notified after the WTO was created on January 1, 1995. Some 197 such agreements are currently in force and several others are to be operational soon. Among the best are known as the European Union (EU), the North American Free Trade Agreement (NAFTA), the Association of South-East Asian Nation (ASEAN), the South Asian Association for Regional Cooperation (SAARC), the Common Market of the South (MERCOSUR), the Australia-New Zealand Closer Economic Relations Agreement, the Common Market of Eastern and Southern Africa, and The European Free Trade Association. The vast majority of the WTO members are party to one or more such agreement.

Against this background, one may ask, do regionalism and bilateralism overtake multilateralism? Is this trend supportive of the growth of global trade? Are these pacts helpful in eradicating the poverty existing in 50 Least Developed countries (LDCs) and many weaker developing countries? Do these trade alliances promote the spirit of multilateral trading arrangements under the purview of the WTO? Do these policies help implement the Millennium Development Goals (MDGs). How effective are RTAs in promoting economic development and integrating developing countries into the global economy? Let us analyze the impacts and probable answers to these pertinent questions.

By definition, regionalism means actions by governments to liberalize or facilitate trade on a region basis, sometimes through free-trade areas or customs unions. It also includes bilateral free trade agreements between countries that are not in the same region e.g., USA-Singapore FTA. As the WTO members are increasingly embracing a trade policy strategy based on the promotion of free trade by targeting multiple fronts, trade experts warned that RTAs could potentially hinder the objective of a coherent and transparent multilateral trading system by discriminating against third parties, distorting trade flows, and by detracting limited resources from multilateral to RTAs.

This is the clear departure from the guiding principle of non-discrimination defined in article I of GATT, Article II of the General Agreement on Trade in Services (GATS) and elsewhere. On the other hand, RTA promoters argued that it encouraged abolishing or reducing barrier to trade within the group which might be replicated by other WTO members. The RTAs have also allowed groups of countries to negotiate rules and commitments that go beyond what was possible at the time multilaterally. In turn, some of these rules have paved the way for an agreement with the WTO. For example, services, intellectual property, environmental standards, investment and competition policies are all issues that were raised in regional negotiations and later developed into agreements or topics of discussion at the WTO.

Experiences show that these issues as presented at the WTO over the years did not do the trade of LDCs and weaker developing countries any good. Rather agreement on Trade-Related Intellectual Property Rights hindered the weaker economies from patenting their inventions. The environmental standards set by the WTO restrict the products of LDCs to enter into developed countries' markets. The WTO sponsored investment and competition policies have been facilitating the multinational companies with modern technologies, huge capital and guaranteed markets to set up industries in poor countries destroying their local industries. As a result local industries, the employment situation have been deteriorating in most of the LDCs.

The Article XXIV of the GATT 1994 provides the WTO members with the mandate for the formation and operation of customs unions, free-trade areas and interim arrangements leading to the formation of a customs union, or free-trade area covering trade in goods. But such arrangement must satisfy the provisions of paragraphs 5, 6, 7 and 8 of the Article XXIV. Paragraph 5 states, "The general incidence of the duties and other regulations of commerce applicable before and after the formation of a customs union shall in respect of duties and charge be based upon an overall assessment of weighted average tariff rates and of customs duties collected."

Paragraph 6 establishes the procedure to be followed when a member forming a customs union proposes to increase a bound rate of duty. It allows the parties to achieve mutually satisfactory compensatory adjustment. Paragraph 7 authorizes the WTO to review the customs unions and free-trade areas to make any recommendation to ensure fair implementation of the agreements. Paragraph 8 allows the parties to seek settlement of any dispute that may arise from the application of the provisions of Article XXIV that relate to customs unions and free-trade areas.

It means that the GATT recognizes that RTAs can benefit countries. It also recognizes that under some circumstances RTAs could hurt the trade interests of other countries. As a safeguard against those risks, Paragraph 12 of the GATT 1994 states, "Each member is fully responsible under GATT 1994 for the observance of all provisions of GATT 1994, and shall take such reasonable measures as may be available to it to ensure such observance by regional and local governments and authorities within its territory. Each member undertakes to accord sympathetic consideration to and afford adequate opportunity for consultation regarding any representations made by another member concerning measures affecting the operation of GATT 1994 taken within the territory of the former."

But the RTAs parties are desperate to exchange better market access facilities at all counts. This tendency results in contradiction, discrimination and increasing the risk of inconsistencies in the rules and procedures among RTAs themselves, and between RTAs and the multilateral framework. The increase in RTAs, coupled with the preference shown for concluding bilateral free-trade agreements, has also produced the phenomenon of overlapping memberships.

It is evident that RTAs should help trade flow more freely among the countries in the group without barriers being raised on trade with the outside world. It has been working very well and more than half of the world trade is now conducted under RTAs. The EU with 520 million people is doing 68 percent of their total trade within themselves. 12 years old NAFTA involving the US, Canada and Mexico is exchanging 34 percent of their total trade mutually. Intra-ASEAN trade has reached 45 percent of their combined trade. The Latin American trade bloc MERCOSUR does 38 percent of their total trade within themselves. Interestingly, these intra-RTA trades have been increasing sharply in most cases. At the same time, intra-RTA investment is also increasing. Obviously, one of the exceptions is SAARC where intra-regional trade was about 4 percent in 1985 when it was formed and has remained almost stationary till to day. Similar situation exists also in case of intra-regional investment.

The successful RTAs have been elevating their cooperation status. Starting with Preferential Trading Arrangements, they graduated to FTA, then to customs union and common market and finally to economic union like the EU. The ASEAN now at FTA-status is pushing for the EU-style Asean Economic Community by 2015, five years ahead of schedule. China, India, Australia, South Korea and New Zealand are at the final stages of FTA negotiations with ASEAN. South American Countries are working on to form the EU-modeled South American Community joining together the MERCOSUR, the Andean Community which groups Ecuador, Bolivia, Colombia and Peru and other countries like Venezuela, Chile, Guyana and Surinam.

The USA is now in FTA talks with Thailand, Malaysia, South Korea, Middle-East and Central American countries. The 14-nation Southern African Development Community recently signed a protocol to form FTA by 2008 and gradually elevate itself to a common customs union within the next 12 years. South Asian PTA has graduated to FTA in July 2006. Besides, South Asian countries including Bangladesh are pursuing bilateral FTAs to bolster mutual trade.

The regional and bilateral trade pacts forged outside the scope of the WTO are increasingly becoming more attractive. Everyone has bilateral accords in his pocket undermining the WTO just as it struggles to stitch together a new deal accommodating trade interests of 149 members. Globalization is the order of the day. Globalization is needed to achieve trade growth, sustainable for many more years to establish lasting peace and harmony across the world. So, RTAs should complement the WTO. The WTO's transparency mechanism should be strengthened also to convert RTAs as building blocks, not stumbling blocks to world trade.

Bijan Lal Dev is a trade analyst.