EVOLUTION OF TRADE AGREEMENTS

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REGIONAL TRADE AGREEMENTS (RTAs) ESCAP
situation and interaction with WTO rules
Tiziana Bonapace Chief Trade Policy Section Trade
and Investment Division UNESCAP
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Introduction

• Non-discriminatory treatment
• founding principle of GATT and fundamental
  principle of multilateral trading system
• embodied in concept of MFN and national treatment
• fairness rules are fundamental to gaining
  confidence of all countries in the system
• Discriminatory treatment
• Regionalism based on discriminatory treatment in
  favour of a select group of members is a major
  departure from GATT/WTO founding principles
• permissable, provided that certain conditions are
  met
• GATT Article XXIV
• (5) duties and other regulations of commerce are
  not higher or more restrictive after the
  formation of the CU/FTA than before
• (8) duties and other regulations of commerce are
  removed on substantially all intraregional trade
  within a reasonable period of time
• the formation of the CU/FTA is notified to the
  WTO, surveillance and monitoring

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• GATS Article V
• economic integration
• similar to GATT article (essentially imposes same
  conditions) no mode of supply may be excluded a
  priori, must provide for elimination of
  substantially all measures violating national
  treatment (under sector specific commitments),
  should not result in higher barriers to third
  countries
• Enabling clause
• 1979 Decision on Differential and More
  Favourable Treatment of Developing Countries
  allows for more favourable treatment to
  developing countries without condition of having
  to cover substantially all trade

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Scope of RTAs

• The four biggest FTAs (the EU, NAFTA, Mercosur
  and ASEAN) accounted for about two thirds of
  world export trade
• China-ASEAN FTA even higher percentage
• MFN based trade exception to rule?
• 90 per cent of the members of WTO are members of
  an FTA or CU.
• systemic challenge to WTO because discriminatory
  FTAs erode the founding principle and disciplines
  of multilateral trading system?
• systemic building block stimulate further MFN
  liberalization? key policy requirement is for
  RTAs to reduce external barriers on an MFN basis,
  in parallel with phasing in the particular
  preferential liberalization (building block)

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Situation in UNESCAP Region

• Only 31 of ESCAPs 53 members are WTO members, 11
  members are in the process of accession. 11 no
  status
• Until recently, ESCAP the least regionalized
  among the regions of the world in terms of RTAs
  notified. Nevertheless, as for other regions, a
  surge in regionalism (currently about 30 RTAs in
  operation) took place in the 1990s
• RTAs in the region vary considerably in style and
  design. Reflect evolutionary process of trade
  liberalization in the region
• positive list approach to liberalization less
  integrated, country-by-country, item-by-item,
  partial elimination of tariffs and other trade
  barriers (generally early RTAs)
• negative list more integrated, across the
  board liberalization among members, with
  exceptions ( 1990s)
• Deep liberalization considerable variation
  liberalization of trade in services, capital,
  labour movements, provisions on competition
  policy, trade remedies, trade facilitation,
  government procurement

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Regional Trading Panorama mid 1990s

• Prior to 1997/8 APEC embodied principles of open
  regionalism (non-discriminatory rather than
  preferential)
• APEC was vehicle for moving regional trade
  liberalization forward beyond confines of the 4
  major RTAs/CUs AFTA, NAFTA, CER, EU
• Stable accomodation between multilateralism and
  regionalism
• 1997 disruption financial crisis, collapse of
  APEC/EVSL
• Loss of credibility of APEC as vehicle for moving
  regionalism forward beyond confines of 4 major
  RTAs, growing perception of need for East Asian
  identity
• North-East Asia empty box Japan, ROK, Friends of
  Article I, China preoccupied with transition
• 1998 cooperation shifts on two fronts
• - monetary cooperation ASEAN Chiang Mai
  Initiative
• - trade cooperation historic shift Japan-RoK
  BTA, followed by further BTAs with selected
  partners
• 2001 China accedes to Bangkok Agreement
• 2002 China-ASEAN FTA signed
• Japan-RoK-China FTA under study
• 2003 Japan-ASEAN EPA, India-ASEAN FTA?

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Regional Trading Panorama mid 1990s

• since 2000, number of BTAs more than 30
• no clearly identifiable pattern large country
  large country (Japan ROK), small country large
  country (Singapore-Japan, Singapore-US) or small
  country small country (Singapore-NZ, Hong
  Kong-NZ), crosscontinental BTAs (Japan-Mexico,
  Chile-NZ), plurilaterals (P5 US, Aus, Sing,
  Chile, NZ) also one countryRTA (India-ASEAN,
  China-ASEAN), also tripartite (Sing, NZ, Chile),
  also ASEAN3
• Completed agreements for Singapore-Japan,
  Singapore-US, Chile-ROK, Singapore-New Zealand,
  Singapore-Australia
• New generation FTAs, go beyond tariff
  concessions, to encompass provisions on
  anti-dumping, safeguards, trade facilitation,
  MRAs, liberalization of investment and services,
  facilitation of movements of business people and
  workers, (across the border especially),
  e-commerce, cooperation among chambers of
  commerce, establishment of consultation process
  on environmental protection, non-economic
  activities such as exchange of experts,
  professionals, cooperation among universities,
  exchange of professionals, joint studies on
  cultural issues etc.

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Regional Trading Panorama

• Future direction unclear
• Two trends
• 1) Bilateralism fragmenting regionalism
  bilateral FTAs
• Opposite direction to globalising regionalism
• Reasons difficult to pinpoint
• Some driven by aggressive trade strategy
  competition to become hub country with smaller
  countries at the end of the spoke. Trade flows
  from hub to spoke, thus displacing flow of trade
  among spoke countries
• Some driven by defensive strategy fear of
  hegemony in trade policy by large regional
  trading powers
• Majority of BTAs driven by political factors
  vehicle for political, security issues tied to
  benefits of trade

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Regional Trading Panorama (contd)

• 2) Linking subregions and continents
• Increase in intraregional trade (trade among
  developing countries) represents enhanced
  opportunity for trade and production links across
  countries and continents
• Numerous bridging initiatives that could lay
  foundations for region-wide zones of integrated
  production chains
• Intersubregional initially ASEAN3, now
  ASEAN111. Bangkok Agreement, BIMST-EC,
  AFTA-CER
• Intercontinental US Enterprise for ASEAN
  Initiative overall framework agreement as a
  group and individual bilateral PTAs, TREATI
  (EU/ASEAN), AFTANAFTA, EUMediterranean basin
  countries, FTAAS, TAFTA

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Moving Regionalism Forward

• A few observations
•  
• Future direction? What about South Asia? What are
  the prospects for a one Asia vision? Is
  bilateralism the new approach to liberalization
  that promises Asia greater benefits than
  multilateralism or regionalism? To what extent
  will fragmentation continue? Will these new
  initiatives detract from or reinvigorate WTO
  negotiations? Will bilateralism lead to a hubs
  and spokes discriminatory configuration of FTAs?
  Or will all these bilateral, subregional,
  regional and cross-continental initiatives
  coalesce and provide a fast track to global free
  trade under multilateralism?

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Moving Regionalism Forward (contd)

• A few observations
• Future direction is unclear. No simple answers,
  no conclusive answers yet.
• Bilateralism based on exclusivity is a major
  departure from non-discriminatory principles of
  multilateralism
• definite trend for developing countries to play
  more influential role in multilateralism. Should
  not allow regionalism to distract finite
  negotiating capacities from this opportunity
• ASEAN10China may lead to an East Asian Economic
  Grouping (EAEG)
• Collapse of Cancun Concern of world degenerating
  into three hostile trading blocs. APEC as link
  between FTAA and EAEG? Could serve as a building
  bloc for a much larger and inclusive
  trans-Pacific trading area?
• Prospects for Asia to emerge as an integrated
  centre of economic growth in the next 30 years
  look promising. Bangkok Agreement could evolve
  into a Pan-Asian common framework for trade and
  investment

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Moving Regionalism Forward (contd)

• Negotiating and concluding WTO agreements will
  continue to be difficult. How difficult, how
  committed will Government remain to the process
  unsure?
• RTAs/BTAs will continue to be a useful
  alternative means of capturing the gains from
  trade and investment liberalization.
• BUT second best option. Increasingly, have to
  question to what extent RTAs/BTAs are stepping
  stones or building blocks to multilateralism. Do
  they really bridge gaps between countries and
  address issues which are difficult to resolve
  under WTO?
• Costs imposed
• The only region that lacks a unifying framework
• Traditionally Asia has been outward oriented and
  flexible, increasingly need for unifying
  framework recognized

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Primacy of Multilateral Trading System

• Core issue is how to recognize the existence of
  RTAs and impose disciplines so that they are
  complementary to WTO system
• ensure that supportive role of regionalism in
  multilateralism can be given a more solid legal
  foundation.
• Basic priniciple of WTO rules on RTAs facilitate
  trade among members of RTA and do not raise
  barriers against third parties
• WTO rules highly ambiguous and subject to varying
  interpretations WTO rules dead, creaky.
• Uruguay Round Understanding on the Interpretation
  of Article XXIV of GATT 1994 sought to clarify
  meanings
• completion of FTA is in principle 10 years
• when a member of a CU raises tariffs as a result
  of joining the CU, negotiations with third
  countries are in accordance with Article XXVIII
  of the GATT
• a third country that benefits from a reduction in
  tariffs due to a member joining a CU is under no
  obligation to offer compensation

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WTO Negotiating Group on Rules

• Doha Declaration makes provision for negotiations
  on CU/FTA rules
• Perhaps single most important difficulty centres
  around interpretation of GATT Article XXIV8 what
  is substantially all trade. Similar
  difficulties with GATS Article V substantial
  sectoral coverage
• Is it a quantitative requirement?
• statistical benchmark e.g 96 per cent of trade
  should be covered by 10 year mark, or xx percent,
  by xx stage of implementation, or a threshold
  limit of HS tariff lines at six digit level, or
• Implication is that as long as agreed benchmark
  is reached, the exclusion of a particular sector
  (e.g. agriculture or marine products) is not of
  concern

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WTO Negotiating Group on Rules (contd)

• Is it a qualitative or quantitative requirement?
• Qualitative no major sector should be excluded.
• Quantitative threshold could imply that a major
  sector could be excluded.
• Another difficulty not on the whole higher or
  more restrictive for third parties after than
  before. Uruguay Round clarified this aspect,
  (average weighted applied duties, based on import
  statistics), but lack of data makes it difficult
  to assess implications for third countries
• Harm4onize external tariffs to lowest level
  applied by a member
• Link RTA tariff reductions to MFN tariff
  reductions
• RTAs should be open for any member to join

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WTO Negotiating Group on Rules (contd)

• Notification and examination of RTAs
• Notification Proposal Surge of dingC RTAs,
  requires review under relevant GATT/GATS
  relevant articles (CRTA instead of Committee on
  TD). Proposal strongly opposed by developing
  countries because would detract from development
  contribution of RTAs, and principle of S and D
  which is an integral part of WTO agreements. Need
  policy space and flexibility to allow domestic
  sector to adjust to liberalization. Would also
  add burden to CRTA, not justified in terms of
  small percentage of trade covered by South-South
  RTAs
• Timing proposal two step notify outline at
  time of signing RTA and second detailed
  notification after ratification. expost-facto
  notification raises problems if RTA not in
  compliance with WTO rules. Questions about added
  burden this two step would entail for CRTA?
• Pragmatic approach improve surveillance function
  of WTO secretariat
• ESCAP role can support WTO surveillance serve
  as a mapping agency that assists countries to
  review RTAs, take stock, possibly harmonize
  provisions, more effective link between region
  and WTO notification process

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WTO Negotiating Group on Rules (contd)

• Clarifying term other regulations of commerce
  (ORC) and other restrictive regulations of
  commerce (ORRC)
• Preferential Rules of Origin contained in RTAs
• Article XXIV paragraphs 5 (a) requires that ORC
  shall not on the whole be higher or more
  restrictive than those in effect prior to the
  formation of the CU/FTA
• paragraph 8 (b) of same article requires that
  ORRC be eliminated on substantially all trade
  (except when necessary those permitted under
  Articles, XI, XII, XIII, XIV, XV, XX)

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WTO Negotiating Group on Rules (contd)

• Trade remedies are excluded (AD, Safeguards,
  CVD). Does Article XXIV8 allow trade remedies to
  be applied to imports coming from other FTA
  partners?
• Agreement on Safeguards-MFN application
• Is the exceptions list illustrative or
  exhaustive? Are safeguards ORCs, ORRCs? Proposal
  If safeguards are not ORCs then departure from
  MFN should not be permitted since GATT XXIV is an
  exception, and exception should be permitted only
  to the extent contemplated in Article.
• Important consideration because remedies give
  negotiators flexibility to conclude more
  ambitious liberalization programmes

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WTO Negotiating Group on Rules (contd)

• Preferential rules of origin (RoO) they regulate
  the eligibility of goods receiving preferential
  tariffs in an RTA. Are they ORC? Proposal they
  should be made to comply with provisions of
  Article XXIV (should not raise barriers to third
  country trade)
• Concern is that preferential RoO can create
  barriers to third parties. Example Chile tomato
  paste used for Ketchup, displaced by Mexican
  produced tomato paste after formation of NAFTA
  RoO requirement specifying that origin of tomato
  paste should be NAFTA for Ketchup to receive
  preferential tariff.
• Investment diversion also

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Conclusion

• Interpretation of the extent to which RTAs are
  compatible with WTO rules is difficult
• Panel rulings, appellate body decisions deal with
  specific issues, they are binding only on the
  parties to the dispute, and they are piecemeal
• Future trade negotiations will need to clarify
  rules and bring about a more solid foundation in
  which RTAs can fulfill their complementary role
  to the multilateral trading system
• Overall role that WTO rules and procedures have
  played has been limited, despite their legally
  binding and irreversible nature. Regionalism more
  influenced by political, and other socio-economic
  factors
• Increasingly need for unifying framework
  recognized in which ESCAP secretariat can play a
  role

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The Comprehensive Trade and Investment
Cooperation Framework for Asia-Pacific

COMPREHENSIVE TRADE AND INVESTMENT COOPERATION
FRAMEWORK FOR ASIA-PACIFIC (CTICF)
TRADE AND INVESTMENT EXPANSION IN ASIA-PACIFIC
GLOBAL TRADE AND INVESTMENT LIBERALIZATION
UNESCAP REGIONAL TRADE AND INVESTMENT
COOPERATION
MULTILATERAL TRACK
REGIONAL TRACK
BILATERAL TRACK
COUNTRIES LIBERALIZATION PROCESS