Regionalism & Regional Trade Regulation

In this article, I will discuss about Regionalism & Regional Trade Regulation, GATT Most-Favoured Nation clause, exception to the Most Favoured Nation clause, regionalism trade agreements, different trading blocs and their objective and lastly conclusion.

Basically regionalism is defined as a political division of an area in to partially autonomous regions. The very act of unifying all the member countries of a particular region, to bring in economic benefit and peaceful co-existence constitutes regionalism.

Regionalism is not a new phenomenon. It has taken place at different times. In the 19th century regionalism was almost exclusively a European phenomenon.

After the 1st World War, there was a second wave of regionalism. European countries signed agreements as sovereign states and looked beyond European border to strengthen their economic relation with overseas with overseas countries.

After the 2nd World War, the European Economic Community followed by the European Free Trade Area began a new phase of regionalism. Many developing countries after getting their independence established agreements between themselves.

The third phase of regionalism took place in the late 80s and 90s in a different international context. This last version of regionalism developed in an interdependent economy where the major actors failed to serve their disputes peacefully under the WTO system, which in turn assist the member states, in setting up a stable commercial environment.

Coming on to the GATT Most Favoured Nation clause, it is provided in Article I of the General Agreements and Tariffs and Trade. It is nothing but an equal treatment and non-discrimination clause. It is one of the bedrock principle of the World Trade Organisation. It means that if a country extends a benefit to a particular country, it must extend the same benefit principle or benefit to all the member states. For example, if a WTO member state A agree in negotiation with state B, to reduce the tariff on a product by 5%, the same tariff reduction benefit must also apply to all other WTO members as well. Besides Article I of GATT, Article II of GATS and Article IV of TRIPS also mentions about the same protection.

There is also an exception to this MFN clause. Regional integration is an exception to the MFN clause. Article XXIV of GATT profiles for regional integration.

Regional integration liberalises trade among countries within the region, while allowing trade barriers with countries outside because countries inside and outside the region ore treaded differently. Regional integration can be allowed only if two countries are fulfilled:

i. Tariff and trade barriers must be eliminated.

ii. Tariff and other barriers to trade, applied to outside countries must not be extra-ordinarily high then they were prior to the regional integration.

Coming on to regional trade agreements, regional trade agreements have grown at an phenomenal rate from mere 50 in 1990 to over 300 in 2010-2011. Regional trade agreements regulate more than half of the global trade. It is nothing but a set of agreements between countries not necessarily neighbours. Regional trade agreements lifts all the trade barriers from trade and foreign investment. They are also sometimes called FTAs, RTAs, PTAs, etc.

One of the largest FTAs in North American Free Trade Agreement, shortly called NAFTA. NAFTA links US, Canada and Mexico. The WTO with its 153 member countries acts as the regulating organisation over all the FTAs, RTAs, PTAs, etc.

At present, as of July 31, 2011 some 474 RTAs were notified to GATT/WTO. Of these, 351 RTAs were notified, out of which 193 were currently in force. If we take in account RTAs which are in force but have not modified, signed but not in force, those currently being negotiated, we arrive at a figure close to 400 RTAs.

Now taking in to consideration the trade blocs, we have in Europe, the European Union and the European Free Trade Agreements which also play a very important function. The founding members were Austria, Denmark, Norway, Portugal, Sweden, Switzerland and United Kingdom.

In the United States, the North American Free Trade Agreements plays a significant role. In Latin America, the Common Market of the South i.e. MERCOSUR is the best known RTA.

In Asia, we have ASEAN i.e. Association of South East Nation. It was established on 8th August, 1967 in Bangkok by the five original members namely Indonesia, Malaysia, Philippines, Singapore and Thailand. The main objective of the ASEAN was to accelerate economic growth, social progress and cultural development.

Also we have AFTA i.e. ASEAN Free Trade Agreement which was formed in 1992. AFTA is a trade bloc agreement by the Association of South East Asian Nation. Now it comprises of 10 members namely Brunie, Indonesia, Thailand, Singapore, Philippines, Laos, Myanmar, Cambodia and Vietnam.

In similar fashion we have APEC i.e. Asian Pacific Economic Cooperation. It was established to facilitate economic growth, cooperation, trade and investment in Asia-Pacific region.

One of the significant RTA operating in South Asia is the South Asian Association for Regional Cooperation (SAARC). It comprises of Afghanistan, Bangladesh, Nepal, Bhutan, Maldives, Pakistan, Srilanka and India. It was established in 8th December, 1985.

Main objectives of SAARC is to:

i. Promote the welfare of the people of South Asia.

ii. To accelerate the economic growth.

iii. To promote and strengthen collective self-reliance.

iv. To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields.

v. And to promote and strengthen cooperation with all the developing countries.

This region also has SAPTA i.e. South Asian Preferential Trade Agreements. This agreements was signed on 11th April, 1993 and was enabled in to force on 7th December 1995. SAPTA was viewed as interim platform in the move towards economic integration in South Asia and later it was transferred South Asia Free Trade Area (SAFTA) in 2004 with a view to enhance their productive capacity and regions trading interest.

This agreement was on 12th SAARC summit at Islamabad on 6 January 2004. It creates a framework for the creation of free trade area covering 1.6 billion people in the SAARC occupied area. The 7 foreign minister of the region signed a framework agreement on SAFTA with zero custom duty on the trade of practically all products in the region by the end of 2016.

Finally it can be said that although there is criticism that regional trade is hindering the multilateral trade system but practically RTAs are playing a very significant role. They are playing important role in promoting trade and liberalisation and in fostering economic development. RTAs are also used by some countries as valuable for promoting deeper integration of their economies that is presently available under the WTO system. Some issues which have been elaborately discussed in multilateral trading system like investment, environment, competition and labour standards have been vividly given importance and discussed in different regional trade agreements. Therefore we can draw the conclusion that RTAs have allowed a group of countries to negotiate rules and commitments for the economic development than what was possible at time in multilateral trading system.

The  author can be reached at: kaushikdhar@legalserviceindia.com