International Trade Agreements Ninth and Tenth Classes February 13/15, 2013

International Trade Agreements
Spring Semester 2013 – January 16 to May 10, 2013
Ninth and Tenth Classes
February 13/15, 2013
Professor Luis Ernesto Derbez Bautista
Second Section - Trade Agreements: A Typology
We will review the following aspects of Trade Agreements
1. From GATT to WTO: multilateral and regional agreements
A review of the evolution of the trade system from Bretton Woods until today
2. Preferential Trade Agreements: Bilateral and Plurilateral Treaties
Difference between reciprocal and unilateral preferences in trade agreements
3. Custom Unions
A higher form of trade integration between nations
4. Integration and Trade
The concept of regionalism and the political aspects of integration
5. Free Trade Areas
A special form of preferential trade systems
6. Monetary Unions
A deeper integration process
7. Conclusions
Some Concepts Regarding Trade Arrangements
The economics literature has often used somewhat different definitions
of regional trade arrangements:
The term Regional Trade Agreement (RTA) is used to refer to an agreement
between two or more countries to apply lower trade policy barriers to goods
and services imported from the members than to those imported from third
A Free Trade Area (FTA) is a PTA for which barriers on trade between
members are reduced or eliminated, and the term usually suggests other
policy measures in addition to discriminatory trade preferences. FTA members
may elect to impose a common external tariff (CET) for each product; a CET
may be imposed with or without the continued use of internal customs
A Customs Union (CU) is an FTA with a CET, in which internal customs
controls have been eliminated, so that goods imported from third countries
may circulate freely throughout the territory of the customs union.
A Common Market, the deepest form of economic integration, allows the free
movement of productive factors (labor and capital) as well as products (goods
and services).
PTAs and RTAs in WTO
Preferential Trade Arrangements (PTAs) in the WTO are unilateral trade
preferences. They include GSP schemes, non-reciprocal preferential schemes for
products from LDCs only, as well as other non-reciprocal preferential schemes that
have been granted a waiver by the General Council (such as AGOA or
Modern RTAs, and not exclusively those linking the most developed economies,
tend to go far beyond tariff-cutting exercises. They provide for increasingly complex
regulations governing intra-trade (e.g. with respect to standards, safeguard
provisions, customs administration, etc.) and they often also provide for a
preferential regulatory framework for mutual services trade.
The most sophisticated RTAs go beyond traditional trade policy mechanisms, to
include regional rules on investment, competition, environment and labor.
What all RTAs in the WTO have in common is that they are reciprocal trade
agreements between two or more partners. They include free trade agreements
and customs unions, notified under Article XXIV:7 of the GATT 1994, and
paragraph 2 (c) of the Enabling Clause, and Economic Integration Agreements
under Article V:7 of the GATS.
Why are RTA´s important in the 21st Century?
RTAs represent a departure from the non-discrimination principle
underlying the original GATT multilateral trading system.
The post-war economic order erected in the 1940s established
nondiscrimination as the norm in international economic relations, in both
trade and financial relations. The choice of a multilateral trading system with
the most favored nation (MFN) (non-discrimination) principle at its core
reflected a desire to buffer trade from other policy areas and to insulate small,
less powerful countries from undue influence of larger ones.
WTO rules allow an exception to the non-discrimination principle under
certain conditions; however—despite important recent advances toward greater
transparency—oversight of WTO rules on RTAs has proven weak. As a result,
in the past two decades the number of RTAs has risen sharply and they
now cover a third to half of global trade.
The scope of RTAs has also broadened, to include trade in financial and other
services, investment flows, and other rules.
Regionalism and WTO
By July 2005, only one WTO member — Mongolia, — was not party to a
regional trade agreement. The surge in these agreements has continued
unabated since the early 1990s. By July 2005, a total of 330 had been notified
to the WTO (and its predecessor, GATT). Of these: 206 were notified after the
WTO was created in January 1995; 180 are currently in force; several others
are believed to be operational although not yet notified.
Article 24 of the WTO says that if a free trade area or customs union is created, duties
and other trade barriers should be reduced or removed on substantially all sectors of
trade in the group. Non-members should not find trade with the group any more
restrictive than before the group was set up.
Article 5 of the General Agreement on Trade in Services (GATS) provides for
economic integration agreements in services. Other provisions in the WTO agreements
allow developing countries to enter into regional or global agreements that include
the reduction or elimination of tariffs and non-tariff barriers on trade among
Regional agreements have allowed groups of countries to negotiate rules and
commitments that go beyond what was possible at the time multilaterally
Evolution of Regional Trade Agreements
Some Concepts Regarding Trade Arrangements
• Unilateral Tariff Liberalization.
Average Number of RTA Partners
Figure 1 - Average Number of RTA Partners Over Time
Total Number of RTA Partners
Number of FTA Partners
Number of CU Partners
Average Number of RTA Partners
As a result of
the variety of
RTAs, the
following are
the type of
items that
partners to
reach an EPA
RTAs complicate trade in the world
The increase in RTAs, coupled with the preference shown for concluding
bilateral free-trade agreements, has produced the phenomenon of overlapping
membership. As their scope broadens to include policy areas not regulated
multilaterally, these overlaps increase the risks of inconsistencies in the rules
and procedures among RTAs themselves, and between RTAs and the
multilateral framework. This gives rise to:
 regulatory confusion,
 distortion of regional markets, and
 severe implementation problems.
One such complication is: The origin of goods!
RTA rules of origin (RoO) should be liberal and transparent. The RoO define whether a
good is eligible for duty-free treatment, based on whether it has sufficiently
―originatedǁ in the partner country. With restrictive RoO, the use of intermediate inputs
from third countries disqualifies a shipment from duty-free treatment in the PTA partner
country, exacerbating the bias of the RTA against third countries. The result is a nontransparent form of protection that is not evident in a country’s tariff code.
Cumulation provisions in RTAs should be broad-based, with ―diagonal rather than
―bilateral cumulation. Multiple PTAs for a single country add a new dimension to
RoO—that of ―cumulation.
Suppose a single country, X, has RTAs with two other countries, Y and Z. Under
bilateral cumulation of rules of origin, inputs that Y imports from Z do not count in
meeting the RoO for Y when it exports to X. This fragmented ―hub and spokeǁ
system—with X as the hub and Y and Z as spokes—discourages trade between Y and
Alternatively, under diagonal cumulation, inputs that Y imports from Z help Y to meet
the RoO when it exports to X. When RoO are otherwise restrictive, bilateral cumulation
exacerbates the effects of this restrictiveness
And…this is another
Free Trade Area Trade within the group is duty free but members set their own tariffs
on imports from non-members (e.g. NAFTA).
Customs Union Members apply a common external tariff (e.g. the European Union).
Preferential Trade Agreement Unilateral trade preferences given to a group of
countries, normally from Developed to Developing Nations (e.g.ACP)
GSP Generalized System of Preferences — programs by developed countries granting
preferential tariffs to imports from developing countries
Free-rider A casual term used to infer that a country which does not make any trade
concessions, profits, nonetheless, from tariff cuts and concessions made by other
countries in negotiations under the most-favored-nation principle
rules of origin Laws, regulations and administrative procedures which determine a
product’s country of origin. A decision by a customs authority on origin can determine
whether a shipment falls within a quota limitation, qualifies for a tariff preference or is
affected by an anti-dumping duty. These rules can vary from country to country
Characteristics of integration processes
Integration Paradigms
The typical paradigm is that of linear market integration, following
stepwise integration of goods, labor and capital markets, and eventually
monetary and fiscal integration. The starting point is usually a free trade
area, followed by a customs union, a common market, and then the
integration of monetary and fiscal matters to establish an economic
union. This process is followed by a regional economic community
(REC). The achievement of a political union, features as the ultimate
objective of integration.
Concerns about a deeper regional integration agenda include a focus
on the perceived loss of sovereignty that such a deeper integration
agenda involves. This forms part of a broader ‘policy space’ debate that
is associated with the perceived effect of decisions made by member
states at regional or multilateral levels.
Let us now debate the transformation of
Let us now debate the integration of
Mexico into