International Trade Policies : Volume II The Uruguay Round and Beyond: Background Papers

Peter Uimonen, Arvind Subramanian, Naheed Kirmani, Nur Calika, Michael Leidy, and Richard Harmsen

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1995
• eBook ISBN: 9781557754578

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VI
Regional Trading Arrangements

Richard Harmsen and Michael Leidy¹

Regional trading arrangements² have become increasingly important in the relations among Fund members. This paper reviews recent developments in regional trading arrangements, factors contributing to their proliferation, and the effects of increased regionalism including its compatibility with multilateral liberalization. This is supported by a comprehensive catalog of existing arrangements (in Appendix I). Two of the most prominent regional initiatives, the European Union (EU)³ and the North American Free Trade Agreement (NAFTA), are reviewed in some detail. Selected agreements are examined briefly in Appendices II-IX (the EU’s trading relations with transition and Mediterranean economies, the Southern Cone Common Market (MERCOSUR), the Central African Customs and Economic Union (UDEAC), the Cross-Border Initiative (CBI), the ASEAN Free Trade Area (AFTA), the Asia-Pacific Economic Cooperation Forum (APEC), the Gulf Cooperation Council (GCC), and the Economic Cooperation Organization (ECO)). Appendix X provides information in intra- and extra-regional trade flows.

The key conclusions of the paper are as follows:

• Since the second half of the 1980s, some important new regional trading arrangements emerged, and many others were reactivated, in particular in Europe and the Western Hemisphere. The trend toward increased regional integration was due partly to frustration with slow progress in the Uruguay Round, but factors beyond the Round appear to have played an important role. While the completion of the Round may lessen some of the impetus toward regionalism, indications are that interest will remain strong in the future.

• As regionalism emerges as an integral part of the trading environment, it should not be allowed to divert attention from the fact that the first-best policy is most-favored-nation (MFN) liberalization, and the ultimate goal is global free trade. Hence, it is important that regional initiatives be implemented in a manner that would harness them securely to the long-run goal of multilateral liberalization and that regional trading arrangements develop as “building blocks” to such liberalization. The Fund’s policy advice should actively support such an objective.

• Regional trading arrangements are most likely to contribute to global trade liberalization and minimize trade diversion if they satisfy a number of conditions. These include coverage of all sectors (without exception), transparent rules of origin, liberal rules of accession, and strengthened disciplines on the use of anti-dumping action against third parties. Most important, MFN liberalization should precede or accompany new arrangements, especially when protection against non-members is high. Deeper forms of integration (including, e.g., services trade) can enhance potential gains from efficient resource allocation within the regional grouping.

• Many of the major regional initiatives in the recent past have been associated with outward orientation, as evidenced, for example, by MFN liberalization that preceded or accompanied regional liberalization.

• Measured by the scope of integration and the number of countries involved, the EU is the most advanced regional trading arrangement; some of the forces behind its integration are unique and not easily replicated. In the manufactured goods sector, there has been substantial net trade creation in the aggregate as a result of European integration. Earlier concerns by trading partners of “Fortress Europe” as a result of the Internal Market Program have not materialized. Nonetheless, pockets of discrimination continue within the manufacturing sector, where trade diversion has affected specific sectors and countries and the level of industrial subsidies is high. In the agricultural sector, trade diversion effects were clearly predominant as a result of the Common Agriculture Policy, with significant negative implications for welfare in the EU and third countries. Given the major impact of the EU on the world economy, and prospects for its further expansion, the Fund needs to continue to press for liberalization in areas still subject to significant protection.

• NAFTA is unique in that it attempts integration among economies at very different income levels. While the potential for trade diversion in the aggregate as a result of NAFTA appears to be limited, there may be significant effects in selected sectors or individual countries.

Overview of Recent Developments and Issues

Regional trading arrangements come in a variety of packages, with varying degrees of internal liberalization and alternative external commitments (Box 1). This section summarizes the recent interest in pursuing regional trading arrangements, discusses the political and economic factors that motivated these initiatives, reviews the theoretical considerations that help to evaluate their economic effects, and identifies a number of specific guidelines for the formation of economically preferred regional trading arrangements.

Recent Developments in Regional Trading Arrangements

During the first half of the 1990s, some important new regional trading arrangements emerged, and many existing ones were reactivated (Appendix I). In Europe, developments were many and rapid. Progressive implementation of the Internal Market Program aimed to stimulate expansion of trade and growth within Europe. The European Economic Area (EEA) was formed between the EU and Austria, Finland, Iceland, Liechtenstein, Norway, and Sweden.⁴ Of these, Austria, Finland, Norway, and Sweden completed negotiations for their accession to the EU and are expected to accede in 1995 if their governments pass referendums. The EU entered into association agreements with several Central and East European countries, cooperation and partnership agreements with several countries of the former Soviet Union, free trade agreements with the Baltic countries, and a customs union with Turkey; it is in the process of negotiating agreements with some Mediterranean countries (Appendix II). Central and East European countries are negotiating similar agreements with the European Free Trade Association (EFTA); the Czech and Slovak Republics formed a customs union and concluded a free trade agreement with Hungary and Poland; Hungary and Poland have applied for EU membership. The Baltic countries concluded a free trade agreement among themselves. The Commonwealth of Independent States (CIS) agreed to form an economic union.⁵

In the Western Hemisphere, too, the trend toward regional trading arrangements accelerated. In addition to NAFTA, a substantial number of new arrangements were formed, most notably MERCOSUR (Appendix III), and existing regional integration schemes, such as the Andean Pact and the Central American Common Market (CACM), were revived. Many of the new arrangements tended to be bilateral, in most cases taking the form of free trade agreements, and were typically formed by countries already in one or more regional trading arrangement.⁶ A number of countries (Colombia and Venezuela, for instance) recently formed trade partnerships with several other countries. Additional agreements are under negotiation (e.g., those of the Group of Three—Colombia, Mexico, and Venezuela; the Caribbean Community (CARICOM) and Colombia; and the CARICOM and Venezuela). A number of countries in Latin America have expressed interest in acceding to the NAFTA. Within the set of existing arrangements recently revitalized, the Andean Pact and the CACM agreed on a common external tariff, and the CARICOM became more active.

While there was not much change in the status of the many long-standing regional trading arrangements in Africa, there were some new developments toward greater integration. With the recent devaluation of the CFA franc, the Central African Customs and Economic Union (UDEAC—see Appendix IV) moved forward on a number of fronts, including implementation of a common external tariff, replacement of quantitative restrictions (QRs) with tariffs, and phased elimination of intra-UDEAC duties. In eastern and southern Africa, there is a new Cross-Border Initiative (CBI) (Appendix V), sponsored by the World Bank, the European Commission, the African Development Bank, and the Fund. The CBI is intended as a pragmatic step toward economic integration in the subregion, including cross-border trade, investment, payments and exchange systems, and institutional development.

Economic integration in East Asia principally reflected private market forces; institutional arrangements tended to play more of a supporting than a leading role. Recent developments include the establishment of the ASEAN Free Trade Agreement (AFTA) (Appendix VI), and increased activity within the Asia-Pacific Economic Cooperation (APEC) forum (Appendix VII). Elsewhere in Asia, a decision was reached in 1992 to draft a preferential trading arrangement for the South Asian Association for Regional Cooperation (SAARC) with the recommendation that all formalities for putting this arrangement into operation, including the finalization of schedules of concessions, be completed before 1995.⁷

Box 1. Types of Regional Trading Arrangements

Free Trade Area

In principle, a free trade area (FTA) entails the full elimination of tariff and nontariff trade barriers between the partner countries, while each partner’s trade barriers with third countries are left intact. Rules of origin establish conditions under which an item qualifies for preferential access within the area. Some FTAs have recently included provisions to liberalize investment rules, services trade, government procurement, and other steps to achieve greater economic integration. Typically, provisions for factor mobility are not included, except perhaps in the context of facilitating services trade. The GATT’s Article XXIV (see Box 3) defines an FTA as an arrangement that eliminates duties and other restrictions on “substantially all the trade” between members. In practice, however, arrangements that are referred to as FTAs typically include a number of sectoral exceptions in which intraregional trade barriers remain in place (e.g., in sensitive sectors such as agriculture and textiles and clothing). Further, FTAs typically include provisions for contingent protection through, for example, one or more safeguards clauses and the maintenance of antidumping provisions.

Customs Union

A customs union is an FTA that also adopts a common external tariff against third countries. GATT’s Article XXIV defines a customs union essentially as a free trade area that applies “substantially the same duties and other regulations of commerce”¹ to trade with countries not included in the union. It also requires that duties and other regulations of commerce applicable to nonmembers “shall not on the whole be higher or more restrictive than the general incidence of ...

Table of contents

• Cover Page
• Title Page
• Copyright
• Contents
• Preface
• List of Abbreviations
• I. Economic Implications of the Uruguay Round
• II. Trade Reforms in Fund-Supported Programs
• III. Antidumping: Solution or Problem in the 1990s?
• IV. The International Dimension of Competition Policies
• V. Trade and the Environment
• VI. Regional Trading Arrangements
• Boxes Section
• Footnotes