RULES: REGIONAL AGREEMENTS Building blocks or stumbling blocs?

Although the term used in the WTO is “regional”, this subject includes bilateral free trade agreements between countries or groups of countries that are not in the same region. These agreements have become so widespread that most WTO members are now also parties to one or more of them, and their scope, coverage and number are still growing.

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 of 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. 

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 May 2003, over 265 regional trade agreements had been notified to the WTO and before it to GATT. Of these, 139 agreements notified under GATT Article 24, 19 agreements under the Enabling Clause and 26 under GATS Article 5 are still into force today. The committee has currently under examination more than 125 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.

  • 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”.

These negotiations fall into the general timetable established for virtually all negotiations under the Doha Declaration. They are to end by 1 January 2005. The Cancun Ministerial Conference is to take stock of progress, provide any necessary political guidance, and take decisions as necessary.

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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 met formally nine times in 2002 and 2003. Informal meetings, where issues can be thrashed out more freely, have also been held. A seminar on regionalism for officials also took place in Geneva in April 2002; it helped to raise awareness on the significance of regional agreements in world trade and to explore ways of ensuring coherence between trade policy initiatives at the multilateral and regional levels.

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. In order to help participants present submissions and proposals, the Secretariat provided a background note in August 2002 listing all the issues related to regional trade agreements that had been raised in various WTO councils and committees and mentioned in WTO dispute rulings. The negotiating group decided to try as a priority to make progress in “procedural” issues, and to address at this stage only a few “systemic” issues. Another question that has been raised is whether new rules coming out of the negotiations should apply retroactively to existing regional agreements. This complex legal question has far-reaching implications.

Procedural issues   The question that has emerged as a priority under the “procedural” heading is “transparency” — the obligation to notify regional trade agreements to the WTO; “when” the information should be notified; “what” should be notified on each agreement; and “where” or which WTO council or committee should consider the information. The negotiating group is also considering how to use the Internet to make information available publicly.

The aim is to improve the information provided by members on their specific agreements, so that the reviews can be done more conveniently and consistently. 

The Secretariat could 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.

Issues to do with the trading system At this stage, a few “systemic” issues have already been identified as meriting early consideration:

  • 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.