RULES: REGIONAL AGREEMENTS Building blocks or stumbling blocks?

It is estimated that more than half of world trade is now conducted under agreements of this kind. They are found in every continent. 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) and its ASEAN Free Trade Area (AFTA), and the Common Market of Eastern and Southern Africa (COMESA).

From its inception, GATT — and now the WTO — has allowed member countries to conclude customs unions and free-trade areas, as an exception to the fundamental principle of non discrimination set out in the most-favoured-nation clause of GATT’s Article 1.

Conditions for trade in goods within these agreements were set in GATT Article 24. Essentially, a regional trade agreement should aim to boost trade between its member countries and not to raise barriers against the trade with other WTO members. During the 1986–94 Uruguay Round negotiations, Article 24 was clarified to some extent and updated.

Preferential trade arrangements on goods between developing-country members are regulated by an “Enabling Clause” dating from 1979. These arrangements are not subject to examination by the Committee on Regional Trade Agreements but are notified to the Committee on Trade and Development.

For trade in services, economic integration agreements are governed by GATS Article 5.

Non-reciprocal preferential agreements generally involve selected developing and developed countries. WTO members that have signed an agreement of this kind have to seek a waiver from WTO rules. Among the best known examples of such agreements are the US-Caribbean Basin Economic Recovery Act and the Cotonou Agreement signed by the EC and the ACP countries to replace the Lomé Convention.

Non-reciprocal schemes under the Generalized System of Preferences — when developed countries allow imports from developing countries to enter duty-free or at low duty rates — are regulated by the “Enabling Clause”.

  

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Work in the Regional Trade Agreements Committee

In February 1996, the WTO General Council set up a single committee to oversee all regional trade agreements, replacing separate working parties, each dealing with a separate agreement. The Regional Trade Agreements Committee also looks at the broader, systemic implications of the agreements for the multilateral trading system, the relationship between them, and encourages adequate reporting by countries that have signed these agreements.

Up to July 2005, over 300 regional trade agreements had been notified to the WTO and before it to GATT. Of these, 128 agreements notified under GATT Article 24, 21 agreements under the Enabling Clause and 31 under GATS Article 5 are still in force today. The committee has currently under examination more than 150 agreements.

The Regional Trade Agreements Committee has developed procedures to examine the agreements, including compiling information. These procedures are for assessing whether each agreement is consistent with WTO provisions. However, since there is no consensus among WTO members on how to interpret the criteria for assessing this consistency, the committee now has a lengthening backlog of uncompleted reports. In fact, consensus on consistency with Article 24 has been reached in only one case so far: the customs union between the Czech Republic and the Slovak Republic after the break up of Czechoslovakia.

As the number of regional agreements increases, so does the need to analyze whether the WTO’s rules on these agreements need to be clarified further. WTO members differ on whether regional agreements help or hinder the multilateral trading system — whether they function as “building blocks” or “stumbling blocks”. One view is that the regional agreements strengthen the multilateral system because they can move faster, and because they can help integrate developing countries into the world economy. Other countries believe that the WTO’s rules should be revised— and not just reinterpreted — so that the two systems can work together better, particularly since the number of agreements has increased, and their membership has increasingly overlapped.

  

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What’s at stake?

Issues raised by the regionalism debate are complex.

Some are primarily legal. For example, GATT Article 24 requires that a regional trade agreement should cover “substantially all the trade” in goods between its members. Similarly, GATS Article 5 calls for a “substantial sectoral coverage” in services. But there is no agreement among members on what this means, and in practice many agreements leave out large and sensitive areas such as agriculture and financial services. This poses difficulties for assessing whether the agreements are consistent with WTO rules.

Other issues are more institutional in nature. They highlight possible discrepancies between the regional agreements’ rules and those of the WTO. The focus in negotiations has shifted over time from tariff reductions to rules and regulations, both at the regional and at the multilateral level — for instance, rules on anti-dumping, subsidies, or product standards. Some recent regional agreements include provisions not covered by the WTO at all, such as investment or competition policies.

Finally and most importantly, there is the economic dimension. Today, this goes far beyond the effects of tariff preferences on members and non-members of regional agreements. Rather, this is now a question of the regional agreements’ impact on the shape and development of world trade itself — given their large and increasing number and their overlapping membership. Over the next few years, this will be one of the most important challenges facing trade policymakers in all continents.

  

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The Doha Declaration

The relationship between regionalism and multilateralism has become a critical systemic issue, reflected in the WTO Regional Trade Agreements Committee’s increasing backlog of unconcluded reports and its lack of consensus on the broader question of the consistency between regional agreements and WTO rules.

At the Doha Ministerial Conference in November 2001, WTO members agreed to give a political push to this question and to negotiate a solution, giving due regard to the role that these agreements can play in fostering development.

The ministerial declaration mandates negotiations aimed at “clarifying and improving disciplines and procedures under the existing WTO provisions applying to regional trade agreements. The negotiations shall take into account the developmental aspects of regional trade agreements”.

  

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Since then: the Rules Negotiating Group

While the Regional Trade Agreements Committee has continued its examination of specific agreements, members decided that the Doha mandate should be fulfilled through a specific negotiating channel. A Rules Negotiating Group was set up in 2002 to clarify and improve disciplines on implementation on dumping, subsidies and countervailing measures, fishery subsidies, and regional trade agreements.

The negotiating group’s work has progressed substantially. Identifying the issues could be completed quickly because they had already been debated extensively in the Regional Trade Agreements Committee.

  

Good progress on procedural issues

The Group has made good progress on developing draft procedures that would promote greater “transparency” of RTAs. In September 2005, the Group was working on a draft text from the chairman, containing elements on the early notification of the RTAs, and improving the information provided by members on their agreements. The Secretariat is expected to play an increasing role in presenting factual reports on individual agreements, as a way to make the review of regional agreements more efficient and coherent. As an experiment, the Committee on RTAs used a Secretariat factual report in its examination of the Chile-Korea Free Trade Agreement in July 2005 to the general satisfaction of delegations.

Outstanding issues in this area include how to deal with RTAs presently under examination in the RTA Committee, and whether the new procedures would apply to RTAs notified under the Enabling Clause.

  

Issues to do with the trading system

Discussions on “systemic issues” have gained momentum with the recent tabling of several proposals. However, divergent positions continue to be expressed on issues such as:

• how to interpret the phrase “substantially all the trade”
    
• regulations that could restrict trade such as rules of origin under preferential schemes
    
• how regional agreements relate to development
    
• the primacy of the multilateral trading system and the negative effect regional agreements can have on other countries.

  

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For Hong Kong

The negotiating group has no intermediate deadlines in the area of RTAs. However, the Group has agreed on an intensive work programme aimed at submitting a draft transparency agreement to ministers and to advancing as far as possible discussions on the systemic issues.