RESEARCH AND ANALYSIS

Peculiarities and rationale of asymmetric regional trade agreements

Vladimir G. Sherov-Ignatiev and Sergei F. Sutyrin

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The impressive proliferation of preferential agreements during the last couple of decades has resulted in a variety of both bilateral and multilateral trade-economic alliances operating with different levels of success all around the globe. Within this rich variety there is a special group of so-called asymmetric regional trade agreements (RTAs). Asymmetry refers to the dominant role of one member state and reveals itself in the agreements' elaboration process, mutual concessions, distribution of costs and benefits between the participants.

The most evident examples of asymmetric RTAs are represented by North-South bilateral agreements involving the United States, EU and Japan, as well as by China’s bilateral free trade areas (FTAs). Under these arrangements, dominant partners have good reasons to expect a number of extra gains. Firstly, the limited number of negotiating parties allows the leaders to achieve more than they could expect to get under the Doha Round, where countries of the South tend to coordinate their positions and build coalitions. Second, dominant partners enjoy additional benefits of being hubs within the hub-and-spoke networks of the alliances. Thirdly, they can minimize the costs of preparing new agreements, using previous ones as a blueprint. They negotiate a new RTA in line with the standard approach with minor adjustments to meet some concerns of the “junior” partners. However, as Peter Drahos and John Braithwaite argue, it is “like cooking an elephant and rabbit stew. However you mix the ingredients, it ends up tasting like elephant”.1

For their part, “juniors” also could perceive asymmetric agreements as win-win agreements.  They are more interested in better access to the dominant partners’ markets than vice versa. Minor countries might hope to succeed in competition with outsiders due to the possible trade diversion effect of bilateral preferences. Another potential advantage for the “juniors” relates to their hope for loyalty of dominant partners in other spheres of interaction, such as financial aid and investments.

Regional multilateral agreements are often asymmetric as well. In the case of FTAs, the North American Free Trade Agreement (NAFTA), South Asian Free Trade Area (SAFTA) and Commonwealth of Independent States (CIS) are the most striking examples. Here the dominant position of United States, India or Russia acts as a barrier to the introduction of regional supranational institutions. On the one hand, the regional leader is not ready to share its power with smaller neighbours. On the other hand, minor partners prefer not to delegate part of their sovereignty to the regional “boss”.

At the same time, asymmetry does not appear to be an ultimate obstacle preventing creation of more sophisticated trade alliances, namely customs unions (CUs). The Southern African Customs Union (SACU), MERCOSUR, Gulf Cooperation Council (GCC) or the recently established Customs Union of Russia, Belarus and Kazakhstan (CU RBK), demonstrate this trend clearly enough. It is worth mentioning that these organizations share some meaningful features. They mostly unite countries with both a medium level of industrial development and a large share of raw materials in their exports. Dependence on export of these products means high vulnerability to the volatility of global commodity markets. During periods of rapid growth of prices, these countries suffer from the Dutch disease: appreciation of local currencies decreases price competitiveness of locally manufactured goods. 

The fact that resource-exporting countries prefer CUs while exporters of finished manufactured goods in South and Southeast Asia tend to stick to FTAs can be purely coincidental. But we must admit that CUs in comparison with FTAs provide more opportunities to protect domestic industries against competing imports. In particular, CUs – thanks to the possibility of eliminating nearly all barriers between member countries – give better opportunities to promote division of labour, economies of scale, and regional cooperation. It is well known, that FTAs eliminate only import tariffs, while border registration procedures remain in place, and rules of origin constitute substantial problem. For example, border-crossing waiting and procedures, according to Sergey Glazev, the CEO of CU RBK, constitute up to half of the time of importing goods within the CIS, despite free trade among most of the alliance members.2 As import tariffs are now low, trade facilitation has become the new priority issue all around the world. In this context, Jacob Viner’s classical approach to the analysis of regional integration is worth extending, namely whether elimination of non-tariff trade-related institutional and physical barriers generates trade creation and trade diversion effects.

Interestingly enough, most contemporary RTAs, notified to the WTO as customs unions, are not fully implemented CUs. In other words, customs control at their internal borders still exists. Until recently, the European Union and Switzerland-Liechtenstein alliance have been the only comprehensive CUs in this sense.  In 2010-2011, one more full-scale CU emerged, though behind the WTO so far – the CU RBK. In July 2011, all mutual trade within the alliance became barrier-free for merchandize goods. Liberalization of trade in services and implementation of the national treatment principle with respect to trade in services is planned for 2012. In addition to substantial positive effects, the CU’s high (in a way final) level of maturity in principle blocks the possibility of signing by member countries of separate FTAs with third parties. The latter could be the case for non-accomplished CUs (e.g. US-Bahrain and US-Oman FTAs3 ), preventing their upgrading to a full-scale status.

To conclude, asymmetric alliances in general add diversity to the large community of RTAs. From this perspective they definitely might be perceived as yet another example of what Jagdish Bhagwati has called “termites in the trading system”. At the same time, it remains an open question whether the evolution of specific preferential agreement up to full-scale CU tends to diminish discrepancies between regional and global trade liberalization.
  

Note
1
. http://www.globalresearch.ca/articles/AZI403A.html. Back to text
2. http://www.glazev.ru/sodr_evrazes/260/. Back to text
3. Both Oman and Bahrain are GCC member states. Back to text

  

Vladimir G. Sherov-Ignatiev is Associate Professor in the World Economy Department at St. Petersburg State University.

Sergei F. Sutyrin is Professor and World Economy Department Head at St. Petersburg State University. He is also a WTO Chair holder.

 

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