1. Regional trade agreements John Ries, BASM530

2. RTAs: What are they? WTO’s Dictionary of Trade Policy Terms: “actions by governments to liberalize or facilitate trade on a regional basis, sometimes through free-trade areas or customs unions”. RTAs can cover goods and services. They include dispute resolution mechanisms and may establish regional rules on investment, competition, environment and labour.

3. Degrees of integration (1) Free-trade area: This level involves the elimination of tariffs within the area. (2) Customs union: This involves the elimination of tariffs between members as well as the establishment of common tariffs with non-member countries. (3) Common market: This includes the same tariff policies of customs unions but adds the freedom of movement of factors of production. (4) Economic union: This adds the harmonization of economic policies--monetary, fiscal, and regulatory policies. It requires considerable sacrifice of national sovereignty by member nations and some degree of political union.

4. Consistency with WTO rules No conflict when RTAs and WTO cover different topics (investment, environment, etc.). Biggest inconsistency is violation of MFN. Allowed if –liberalization of substantially all trade –customs unions cannot increase restrictions on third country imports (on average)

5. Examples of regional trade agreements Among the best known are - The European Union, - The European Free Trade Association (EFTA), - The North American Free Trade Agreement (NAFTA), - The Southern Common Market (MERCOSUR), - The Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA), and - The Common Market of Eastern and Southern Africa (COMESA).

6. RTAs in Force

7. Benefits of RTAs Reaching multinational consensus has proven to be extremely difficult so nations entered into regional trade agreements. When RTAs generate liberalization that would not occur in a multilateral framework, there will be trade creation between members and exploitation of comparative advantage.

8. RTA cost: trade diversion Countries China and Mexico export toys to the US subject to a 50% tariff. China's per-unit cost is $100 (price after tariff $150) and Mexico's is $120 ($180). US consumers buy from China and consumers pay $150. Now Mexico and the US enter into a free trade agreement. Now US consumers buy from Mexico for $120. Trade is diverted from China to Mexico. U.S. consumers are $30 better off but the U.S. government has lost $50 in tariff revenues.

13. Canada-U.S. Free Trade Agreement The fundamental aspect of the agreement is the gradual elimination of virtually all tariffs and quotas. All should were eliminated by Jan 1, 1998. Dispute resolution under Canada-US FTA –Canada pushed for dispute resolution mechanisms in the Canada-US FTA. An important aspect is the review of antidumping and countervailing duty determinations.

14. North American Free Trade Agreement (NAFTA) Essentially extension of the Canada-US FTA to Mexico. Tariffs to be phased out over 10-15 year period beginning January 1, 1995. Side accords on environmental and labour standards set up elaborate mechanisms to assure enforcement of existing regulations. Possibility of fines and trade sanctions for non-compliance.

15. Investment provisions of the NAFTA National treatment provides for rights of establishment of foreign investors. However, there are some excluded sectors. The right of a country to provide public services (law enforcement, education, health care) is also protected. NAFTA prohibits “direct or indirect” expropriation of an investment (Chapter 11 provisions) –Foreign investors from NAFTA countries can go to a NAFTA panel if they felt that government action expropriated their assets for which they received inadequate compensation.

16. The European Union Established in 1958, membership now stands at 27 countries. Monetary union: 16 countries use Euro. Border-control free: Most countries (GB is an exception) have eliminated internal border checkpoints and controls. –Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Italy, Greece, Luxembourg, Netherlands, Norway, Portugal, Spain and Sweden. Labour mobility: EU citizens can work anywhere (temporary restrictions apply to citizens of new member countries). Harmonization of regulations (product standards, professional certification, etc.)