The term includes agreements that are bilateral as well as those that are not regional in a geographic sense. In increasing order of integration, Balassa classified these as preferential trading areas, free trade areas, customs unions, common markets, economic and monetary unions Monetary Unions and Monetary Zones , and finally complete economic integration. Agreements that include a common external tariff are known as customs unions. Common markets additionally provide for the free movement of other resources, such as labour and capital, while economic unions are characterized by the harmonization of other economic policies, including monetary unions.
More recent examples include the European Union and MERCOSUR, both of which are characterized by the establishment of a new legal order under which individuals have directly enforceable rights. Such forms of integration inevitably involve the pooling of sovereignty. The core issue, as described in more detail below, is that the formation of regional trade agreements can have negative economic consequences on third countries not party to these agreements.
Recent Trends 6 In recent years the number of regional trade agreements has increased significantly. In January , the WTO listed notified regional trade agreements of which covered both goods and services, covered only goods, and one covered only services. With the exception of Mauritania and Mongolia, all WTO members are party to at least one such agreement. It is evidently easier to achieve agreement on these issues at the bilateral and regional level than at the multilateral level.
These figures need, to be placed in the context of a multilateral trading system in which, historically speaking, trade is relatively liberal. Trade in goods is often not significantly more liberal under these agreements than it would be under the WTO commitments of the respective parties. It has also been suggested that the present era of regional trade agreements, each with different rules, will eventually be superseded by enhanced multilateral liberalization Baldwin.
Instruments 9 Art. The main obligation to which this exception applies is the most-favoured-nation obligation in Art. This waiver was made permanent in as para.
By contrast, the most- favoured-nation obligation in Art. Any WTO-plus intellectual property protection provided in regional trade agreements must consequently be extended to all other WTO members.
History 12 There was no question that an exception for customs unions should also be made in the GATT These were typically formed as a preliminary step to political integration and the notion of an exception to the most-favoured-nation principle was long-standing.
By contrast, the concept of free trade areas did not exist prior to the GATT The extension of the customs union exception to free trade areas, a novel concept, occurred relatively late in the negotiation process and has been explained as having been a means of securing the participation of certain developing countries in the GATT system which had an interest in regional economic integration falling short of a full customs union, and as satisfying the desire of the United States to accommodate a possible US-Canada free trade agreement see Chase.
The terms of the compromise are stated in Art. XXIV 4 GATT, which recognizes the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies of the countries parties to such agreements but also that the purpose of a customs union or of a free-trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories.
Customs unions may go further, and eliminate internal trade barriers for imported goods as well. In the economist Jacob Viner demonstrated that the economic value of a regional trade agreement can be assessed by weighing its positive effects—trade creation between the parties—against its negative effects— trade diversion away from a more efficient third country producer.
But this also means that, contrary to the assumption underpinning Art. XXIV 8 GATT, a full regional trade agreement can be more trade diverting than a lesser preferential agreement simply because it covers more trade. Whether such diversion does in fact occur, and whether in any given case it outweighs trade creation, depends on the agreement at issue, and this is notoriously difficult to assess.
In the end, though a little crude, the compromise in Art. XXIV 8 GATT is probably as good a way as any to ensure protection of the advantages of regional trade agreements while minimizing their detrimental effects. Trade in Goods 1. Parties 16 Art. For agreements between a WTO member and a non-member it was originally intended that a waiver should be obtained under Art. Substantive Conditions a Internal Conditions 17 A number of terms relevant to the definition of a permissible regional trade agreement have proved controversial.
There has never been an agreement on the volume of trade that must be liberalized under WTO rules. However, there has been no consensus on these tests and practice remains variable. In this case, the panel rejected the argument that Art. Understanding Poverty Topics Regional Integration brief. Email Print. Tweet Share Share LinkedIn. Stumble Upon. Shipping Containers at the Port of Rades, Tunisia.
Overview Research Data Overview A regional trade agreement RTA is a treaty between two or more governments that define the rules of trade for all signatories. World Bank Group research finds that: Deep agreements boost trade, foreign investment and global value chain GVC participation more than shallow agreements. On average, deeper agreements increase goods trade by more than 35 percent, services trade by more than 15 percent, and GVC integration by more than 10 percent.
Aspects of deep agreements are public goods. Certain provisions of these agreements benefit all trading partners, and have positive welfare effects through expanded trade and an improved policy environment. In particular, for East Asian FTAs, which include members with a relatively wide range of tariff differentials, they argue that trade deflection through the use of backdoors is likely to be a more serious problem, making it even more complicated to verify RoO.
These factors may result in FTAs being protectionist in nature rather than movement toward global free trade. One more important characteristic of East Asian FTAs we should consider is the relatively stronger intra-regional division of labor. Kuroiwa shows that the local content of the East Asian production process has declined.
Urata also finds development of an increasing vertical intra-industry trade between East Asian countries. There is an increasing intra-regional trade in manufacturing parts and components that is closely connected to the supply chain.
The intra-regional division of labor in East Asia over the numerous locations of production facilities may require even more complicated and strict RoO. East Asian CUs: Salvatore lists some critical factors that maximize the trade creation effect and minimize the trade diversion effect of CUs.
Larger union size, higher pre-union tariff structure between members, lower pre-union tariff structure between members and nonmembers, higher pre-union intra-regional trade, greater substitutability of production structures between members and nonmembers, and geographical proximity will all create larger trade gains.
Based on this analysis, he proposes that the East Asian region form a preferential trade agreement such as a free trade area or a customs union.
In particular, he suggests that an East Asian customs union is a more desirable form of RTA, considering the significant external trade relations with large trade blocs like the European Union and the U. This will have large trade benefits for the region, as well as attracting more foreign direct investment and preventing the spaghetti bowl phenomenon. In sum, considering the above-mentioned regional characteristics and external relations, harmonizing commercial policy among the regional members and nonmembers is preferable.
This is a standard general equilibrium model that has been extensively used in studies to examine a wide range of trade policy issues. The three production factors land, labor, and capital are assumed to be mobile across sectors within a country but not mobile across borders. Aggregate household expenditure is determined as a constant share of total regional income.
The household maximizes utility subject to its expenditure constraints. The constant difference of elasticities CDE consumer demand system is designed to capture differential price and income responsiveness across countries. International trade is linked through Armington substitution. Product differentiation between imports by region of origin allows for two-way trade across regions in each tradable product.
We work with a multi-sector and multi-region CGE model of the world economy. Scenarios A. According to the applied assumptions for the determination of the CET, the structure of a CU is very different. Since Viner and Kemp and Wan proved the existence of welfare-improving CUs with CET and a system of lump-sum compensatory payment, some theoretical analyses on the determination of CET have been done.
However, Srinivasan and Krueger suggest that the CET should be maintained at the pre-union average level. Syropoulos builds a model for the endogenous relationship between distribution rules of tariff revenues between CU members and the determination of CET preferences with special attention to factor abundance. However, if the CET rate is determined by the minimum, this rate is only 1. In order to analyze the case, we may include one more CET system into our simulation analysis, for example, maximum external tariffs against nonmembers among members.
However, we examined but not reported the case and found that the welfare effects of the CUs are worse than those of the corresponding FTAs. Simulation Results 21 A. However, for the most desirable type of RTA, we will report the country- specific effects as a reference in Tables 6 and 7. The additional verifying costs of origins are not included in its estimation of trade costs. We also acknowledge some limitations of this research. In particular, we may need to perform usual sensitivity tests for the CGE model analysis with different macro-closure rules and parameter values for more robust results.
When the minimum tariffs are adopted as the common external tariffs of a CU, the nonmembers experience the largest decline in the welfare.
This is because the worsened terms of trade effect exceeds the efficiency effect. Let us turn to a discussion of the impact of CET measures.
With the minimum tariffs, the largest global welfare is also induced. This paper, however, is not an exhaustive study of economic modeling but, rather, is an empirical investigation to compare the relative performance of types of RTAs.
Thus, we leave these additional concerns as future research agenda. In terms of welfare and real GDP, Korea as the smallest country has the largest gains from freer trade, and Japan as the most advanced and liberalized country in terms of import tariffs has the smallest gains.
From our experiments, we found that i the effects of the proposed East Asian CUs heavily depend on the CET measures applied; ii the East Asian 23 The more disaggregated sectoral classification will provide more precise sector-specific and country-specific effects which are not a main objective of this paper. American Economic Review 5: Anderson, James and Eric Van Wincoop. Gravity with gravitas: a solution to the border puzzle. American Economic Review Andresen, Martin A. University of British Columbia.
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