Members of the WTO are allowed to enter into preferential customs unions and free trade areas with other countries under certain specified conditions set out in Article XXIVof the
GATT. They are also allowed to liberalize trade in services preferentially with specific countries under GATS Article V. The main difference between a customs union and a free trade area is that a customs union has a common external tariff against third countries. It also usually involves a higher level of integration.
Regional Integration Agreements (RIAs) have been proliferating and radically altering the trade landscape. Over the last fifty years, more than 150 such arrangements were notified to the GATT and the WTO. Most of these are still around in one form or another. RIAs have
multiplied to such an extent that only a handful of WTO Members aren’t members of some regional trade pact or other. Half of international trade now takes place within the framework of RIAs.
The reigning heavyweight RIAs are the European Union and the NAFTA. Other major agreements include the Mercosur, the European Free Trade Area (EFTA), the Australia-New Zealand CRTA, South African Customs Union, and the ASEAN free trade area. Canada has free trade agreements with Chile and Israel and is currently negotiating with the EFTA. The
European Union has free trade agreements with Central European countries and trade deals with North Africa and Mercosur. New Zealand just signed a trade pact with Singapore at the APEC meeting in Auckland. The EU has concluded a free trade arrangement with South Africa that takes effect next year, and is currrently negotiating with Mexico. Negotiations are underway for a Free Trade Agreement of the Americas (FTAA). And everyday more talks get underway – New Zealand-Chile, Japan-South Korea, South Korea-Mexico – the list goes on. These RIAs run the course from a regional economic union (the EU) to bilateral free trade agreements.
RIAs can be a step down the path to multilateral free trade if they are a manifestation of a general willingness to open up markets and bring down trade barriers. But they can just as easily go the other way if they’re really disguised efforts to stake out markets and discriminate against others.
Concern about the contrasting tendencies for and against freer trade inherent in RIAs has led the WTO to establish some basic conditions that a customs union or free trade agreement must meet to qualify under the GATT. First, the agreement must eliminate all the duties and other restrictive regulations of commerce on “substantially all the trade between the constituent territories in products originating in such territories.” Second, the proposed implementation of the customs union or free trade area must be in a reasonable period of time. Third, the
agreements can’t raise barriers to trade. This means that, as a general rule, the duties and other regulations can’t be made higher or more restrictive. The WTO must be notified of the details of any agreement and has the right to approve or reject it, or to recommend changes.
The process of vetting RIAs was sufficiently controversial in the Uruguay Round that an Understanding on the Interpretation of Article XXIV of the GATT was negotiated to clarify the
rules. It is in the interest of all non-members of an RIA that the agreement be trade creating and not diverting. But this is probably too much to ask given that almost all WTO Members benefit from some trade diversion in their favour as a result of their membership in an RIA. The rules consequently are limited to preventing the worst forms of discrimination, namely raising barriers against non-RIA members. And since everyone is doing it, of course, nobody really wants the WTO to adopt too tough a line.
The agreements that have the greatest potential to divert trade and merit the closest scrutiny are those between developed countries and high tariff developing countries. The most obvious examples are the free trade agreements between the European Union and North African countries. Given the high external tariffs of these North African countries, it will be difficult for non-EU countries to be competitive in their markets. A similar criticism could be made by the Europeans of the FTAA if it comes to pass.
If everyone is so keen on negotiating more and more bilateral free trade agreements, an obvious question is why not go for a multilateral free trade agreement. Clearly, bilateral free trade agreements are a poor substitute for multilateral free trade. It would be much more efficient to have a single non-discriminatory agreement for everyone rather than a plethora of discriminatory bilateral agreements. But it is easier to negotiate bilateral agreements and
everyone thinks that they can gain some advantage over their competitors. The politics works in favour of bilateral agreements, hence their popularity.
One of the big achievements of a successful Millennium Round would be to get tariffs down as close to zero as possible. This would make the RIAs divert less trade and help to improve the efficiency of the global economy. For Canada, it would reduce the benefits of NAFTA, but would create opportunities to diversify trade. That wouldn’t be such a bad thing given the current concentration of Canadian trade with the United States.
The Millennium Round could also, perhaps, as part of its institutional review of the WTO, strengthen the provisions of Article XXIV. One possibility would be to be more specific about how long the RIA participants would have to eliminate all tariff barriers among
themselves. This would require the participants to go all the way to a customs union or a free trade area and not to enter into a discriminatory trade agreements of indefinite duration.
Trade blocks themselves, other than the European Union, will not play a big role as participants in the Millennium Round. Only the European Union and South African Customs Union negotiated jointly in the Uruguay Round. Mercosur should negotiate jointly if it is going to become a real customs union, but the trade conflict between Argentina and Brazil after last year’s devaluation of the Brazilian real make joint participation problematic. Once again, except for the EU, it will again be individual countries around the table.
There is also the question of the role of the Asia Pacific Economic Co-operation (APEC) in the Millennium Round. APEC, while not a real RIA, includes the United States, Japan,
Canada, and eighteen other Pacific economies (the word “countries” is a not used because of the membership of Hong Kong and Taiwan). It’s APEC’s sheer size, accounting for over half of world output as well as more than half of the world’s population, and its potential to introduce discriminatory measures that has worried outsiders, including most notably the Europeans, rather than anything APEC has actually done. So far, except for launching the Information Technology Agreement, which became multilateral, and an aborted effort to achieve sectoral trade
liberalization, APEC has limited itself to enunciating grandiose targets for regional free trade by 2010 for developed countries and 2020 for developing countries. In the declaration emanating from the APEC’s leaders’ meeting in Auckland in September, the leaders passed the ball for trade liberalization to the WTO calling for a comprehensive three-year round of multilateral negotiations. APEC will not be a force in the Millennium Round. So the Europeans can stop worrying.