FTAs can result in some export gains, and possibly increased FDI flows, but the size and durability of these benefits – highly uncertain. FTAs will most likely lead to an increase in imports with impact for the trade balance and the external debt position.

1. Module 2: Harnessing Benefits
from Trade
Singapore, November 2015
Regional and bilateral trade agreements
Ralf Peters, Mishiko Hayashi and Paul Hansen,
UNCTAD

2. 2
Outline
• Definitions
• Proliferation of RTAs
• Building or stumbling bloc for MTS ?
• Legal aspects RTAs and WTO
• The Economics

3. 3
Types of PTAs
• Common Market (CM)– CU, where the market of factor
production is integrated – free movement of people and
capital
• Economic Union (EU)– CM, which includes a certain degree of
hormanisation of national economic policy of partners.

4. 4
Types of PTAs
• Bilateral Trade Agreement (BTA) – partners usually don’t go
further than giving MFN and NT to each other. Normally they
do not commit to giving “free trade” access to each other, but
just reduce tariffs by the certain percentage (such agreements
are prohibited by the WTO rules for developed countries, but
may be concluded among developing countries)
• Free Trade Area (FTA) – the tariff goes down to 0 for the trade
among FTA parters, however each partner has its own
external policy
• Customs Union (CU) – FTA + common external policy

5. 5
Some statistics on PTAs
• As of 7 April 2015, some 612 notifications of PTAs (counting goods,
services and accessions separately) had been received by the GATT/WTO.
• Of these, 406 were in force.
• These WTO figures correspond to 449 physical PTAs (counting goods,
services and accessions together), of which 262 are currently in force.
• Out of all existing PTAs, CU constitute only 10%
• Around 60% of international trade is happening on a preferential basis
Further info on RTAs: WTO Regional Trade Agreements Information System
http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx

6. 6
Main PTAs (on a regional basis)

7. Motivations for RTAs
• Political considerations (EU, some US FTAs)
• Stability and security (PTA as an insurance policy)
• RTAs as a platform to participate in expanded
international supply chains
• Protection of regional markets from outsiders
• Quicker and deeper than WTO as negotiations easier
with limited number of partners
• Lock-in unilateral preferences (N-S RTAs)
• Fear of exclusion from the system (Domino Effect)
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8. How Do RTAs Affect WTO?
“Building block” Thesis
• Quicker & deeper integration for global free trade: Same goal,
different routes through open regionalism
• Competitive liberalization thesis
– Large RTAs increase the incentive for the outsiders to advance
multilateral liberalization to minimize trade diversion (Single European
Market, NAFTA/APEC)
• Laboratories for testing new approaches (services, investment,
competition policies)
• RTAs as development tool: incubator of production and export
diversification for gradual and strategic integration into world
economy / MTS
• Locking-in of domestic reform at regional level
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9. How Do RTAs Affect WTO?
“Stumbling block” Thesis
• Inward-looking & protectionist bloc
• Reduce incentive for MTS, esp. in Market Access
and new issues (WTO-plus)
• Specialization of areas and «forum-shopping»
• Administrative burdens and negotiating capital
constraints (overlapping membership to several
RTAs) (RoO)
• Fragmentation of regional rules in new areas &
jurisprudence
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10. Issues relating to North-South RTAs
Potential challenges
- Far-reaching liberalization of foreign investment and
government procurement;
- Strict rules on IPR and competition policy;
- Incorporation of labour and environmental standards;
- Obligation for developing countries to undertake
much broader and deeper liberalization of trade in
goods;
- Liberalization of services beyond GATS (GATS+)
agreements;
- Reduction of policy space
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11. 11
Outline
• Definitions
• Proliferation of RTAs
• Building or stumbling bloc for MTS ?
• Legal aspects RTAs and WTO
• The Economics

12. WTO Rules on RTAs
Provisions Coverage
GATT Article XXIV N-N, N-S RTAs in goods
Enabling Clause S-S RTAs in goods
GATS Article V All RTAs in services
All provisions allow for derogation from MFN
obligations in providing preferential treatment to RTA
partners under certain conditions
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13. GATT Article XXIV:5-8
(i) Duties and other restrictive regulations of commerce
(ORRCs) must be eliminated with respect to
substantially all the trade among parties (para
8(a)(i)&(b))
(ii) Duties and other regulations of commerce (ORCs) must
not be higher or more restrictive than prior to the RTA
formation (para 5(a)(b))
(iii) « Reasonable length of time » for the formation of
CU/FTA should exceed 10 years only in exceptional
cases (para5(c))
(iv) Notification to the CTG, examination & reporting by
CRTA on WTO consistency («make recommendation»
as required)
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14. Scope Regional or global arrangements entered
into among developing countries for the
mutual reduction or elimination of
tariffs & non-tariff measures
Principles (a) Be designed to facilitate trade between
the parties and not to raise barriers to
or create undue difficulties for their
trade with other Members; and
(b) not impede the liberalization of trade
between the parties at the multilateral level.
Enabling Clause
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15. Enabling Clause (2)
• The Enabling Clause does not assume formal link with
GATT Article XXIV conditions
• The Enabling Clause is less stringent than GATT XXIV as
it permits reciprocal preferences on a limited range of
products, & not « substantially all the trade»
• The clause permits reduce tariffs only, or non-tariff
measures as well, & not « elimination» like GATT
Article XXIV
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16. Issues in WTO Rules Negotiations
• How much is «substantially all the trade»? 90%? How
to measure?
• How long is «reasonable period of time»? 12 years?
What are the «exceptional cases»? How long is
reasonable in such cases?
• How should WTO monitor, examine and decide on
WTO compatibility of an RTA? Transparency
Mechanism adopted in 2006
DMD 29: Negotiations aimed at “clarifying and
improving disciplines and procedures” on RTAs while
taking into account “developmental aspects”
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17. Conclusions (RTAs and FTAs)
• FTAs can result in some export gains, and
possibly increased FDI flows, but the size and
durability of these benefits – highly uncertain.
FTAs will most likely lead to an increase in
imports with impact for the trade balance and
the external debt position.
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18. 18
Economic Aspects of PTAs:
Trade Creation and Trade Diversion
Home Partner Rest of the
World
Production
costs
45 25 20
Home has a
tariff of 100%
45 50 40
H-P concluded
a PTA
45 25 40
Trade
creation Trade
Diversion
import
Welfare effects can be positive or negative for all players including participants

19. Conclusions RTA:
Challenge and Opportunity
• Proliferation of RTAs
• Challenge for MTS
• Reduces policy space
• Opportunity for regional integration and
development
• » - investment, competition policy or gvt
procurement – which have been excluded from
the agenda of multilateral negotiations. FTAs thus
constitute a major vehicle for deeper integration,
with potential risks.
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