Why do countries opt for RTA? Since 1947, three waves of regionalism have swept the world trading system. During 1950s, 1960s, and 1970s, the ‘rush to discrimination’ was led by the Western Europe, which founded the only substantial new customs union of the second half of the twentieth century and also established a complex network of preferential arrangements with other trade partners.
This wave was resisted by the US, which remained committed to the multilateral system. Of late, the US is showing keen interest in regionalism, first in the FTA, and then in emergent bilateral deals, as the window of opportunity to advance a “new trade agenda,” at a time when the progress of multilateral trade negotiations look precarious, and when the ability of the US to control multilateral agenda seems uncertain.
For the US trade policy has never been just about trade, but also about setting the rules of the game with a view to broader global political interests.
Image Source: paris.embassy.gov.gh
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A second wave of regionalism was initiated by the US departure from the GATT non-discrimination principle in the first half of 1980s and peaked with the NAFTA negotiations in the early 1990s, which coincided with the European Union’s 1992 project for completing the internal EU market.
The third wave is gathering force in the opening years of twenty-first century. This is led by Asian countries, which had thus far been the strongest bulwarks of non-discrimination – Japan and South Korea within the WTO and China and Taiwan outside the WTO.
The Asian regionalism can be dated from the aftermath of the 1997 financial crisis and started in the area of monetary cooperation, involving the so-called ASEAN+3 group of ten ASEAN countries plus China, Japan, and South Korea.
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Partly due to dissatisfaction with the IMF, collapse of WTO meetings in Seattle and the diminishing significance of APEC led to new approaches to trade liberalisation in the Asia-Pacific region. The effective discrimination is more focused on aspects other than tariffs, i.e., financial services, capital flows, and coordination of regulatory systems.
In the recent negotiations for the proposed free trade agreement between India and Australia, the latter is insisting that the issues including environment, labour, intellectual property, government procurement and competition policy be part of negotiations. The motivations are both economic as well as political.
Economic benefits include:
i. To benefit from economies of scale in producing for a larger market;
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ii. To expose domestic producers to a limited amount of foreign competition (perhaps preparing them for wider-scale competition);
iii. To increase the country’s attractiveness to foreign investors and have the benefit of learning by doing;
iv. To developing country with developed country helps to obtain concessions that are not granted to other countries, particularly better market access for its products;
v. To the developed country, it helps in eliminating the special and differential treatment that may be granted to developing countries in the context of WTO agreements;
vi. Two advantages of North-South integration are to take advantage of large endowment differences, and the South can take advantage of knowledge and technology mainly produced in the North; and
vii. There are losses of opportunity cost from remaining outside a trading block. The political benefits can be identified as under:
viii. Intra-regional and extra-regional security (like European Coal and Steel Community, 1951) against non-members;
ix. Cooperation and trade can pave the way for cooperation in other areas, including shared natural resources (water, fishing, hydro-electric power, transboundary pollution problems, and infrastructure for trade like railways, roads, ports, telecommunications);
x. Serve as an anchor for domestic economic (and political) reforms that otherwise would be politically difficult to carry out (like Central European Countries had to do for accession to the EU);
xi. A form of protection against a regional hegemon (Gulf Cooperation Council was established in part to counterbalance regional powers of Iran and Iran; and Central and Eastern European countries wanted to conclude free trade agreements with the EU to reduce possible exercise of Russian hegemony); and
xii .A group of countries is always better placed to ‘punch’ more effectively within the global economy.
The regionalism in 1950s and 1960s was limited to trade and just a few other areas. The new regionalism is more global in scope and involves integration not only of trade but also of finance and foreign direct investment. In the 1980s, European reticence to join the American initiated Uruguay Round of Trade negotiations, fear in the US on Europe’s inward turning, slow and drawn out Uruguay Round and regional movements in Europe led the US to form NAFTA along with Canada and Mexico. Integration of Western Europe has been motivated primarily by political considerations.
The Pacific Ocean regionalism has been principally but not entirely market driven. In terms of institutional form, the EU is highly institutionalised, erected external tariff and participates as a regional block in international negotiations. NAFTA has a few formal institutions, an FTA without external tariff and no common market. The Pacific Ocean regionalism has a very low level of institutional development, no external tariff and every country has high tariff.
The economic success of an RTA is often gauged by growth of trade between the participants. However, a trade criterion, while seemingly a reasonable way of evaluating the success of a trade agreement, does not reveal much about the economic benefits that flow from increased regional trade. If intra-RTA trade expands at the expense of inefficient partner-country producers, it is good. But if inefficient firms producing above world-market prices gain market share at the expense of third country efficient firms due to preferential access, it is bad.
