M.A. (D.L.B.), Jindal School of International affairs, O.P. Jindal Global University
In recent times, the pace and scale of the proliferation of Regional Trade Agreement (RTAs) have caused consternation in the international community regarding its compatibility with the Multi-lateral Trading Systems (MTS) under the World Trade Organization (WTO). In this research paper, an attempt has been made to analyze if RTAs challenge the overarching goal of the WTO to promote globalization through trade liberalization. It critically examines international trade after 1995 (post establishment of WTO) and finds that countries have increasingly preferred to conduct trade through RTAs. Superficially, it would seem that this shift of trade pattern from the MTS regime to RTAs runs counter to WTO’s vision of globalization. However, a careful analysis of secondary effects would reveal that RTAs, in fact, promote globalization by improving trade relations amongst the comity of nations. This paper concludes that the WTO framework fails to capture the local realities and political compulsions of small and struggling economies. Geostrategic compulsions, a fact almost completely ignored by WTO, coupled with regional economic challenges, continue to shape the contours of international trade.
Keywords: Proliferation, Regional Trade Agreement (RTA), Multi-lateral Trading System (MTS), World Trade Organization (WTO), Globalization, Trade Liberalization
International trade evolved into a multilateral regime under the aegis of the General Agreement on Trade and Tariffs (GATT) and continued under the World Trade Organization (the WTO) after its establishment in 1995. Since then, many countries, including newly emerging nations, have integrated into the global economy, largely stimulated by the possibilities of free-trade world markets and potential economic growth. In 2007, an empirical analysis of the effect of GATT/WTO on the trade flow between countries concluded that the “institution stimulated growth in international trade, and the benefits were extended to all members including the developing countries.” (Goldstein, Rivers, & Tomz, 2007)
The principle of Most Favored Nation (MFN) is at the core of the architecture of the WTO and its predecessor, GATT. It is trade without discrimination between member countries and normally does not grant special preference to any trading partner over the other. However, regional trade pre-dated MTS and was, therefore, ‘grandfathered’ into the GATT and later into WTO outlined in Article XXIV of GATT, Article V of GATS and the Enabling Clause. These agreements were allowed under strict conditions and with a caution to consider RTAs as complementary rather than a substitute to the MTS. In essence, RTAs were to be an exception to the rule.
However, the pace and scale of the proliferation of RTAs, especially after 1995, has caused great consternation in the international community regarding its compatibility with MTS. It raises a serious question on the legitimacy of RTAs under the WTO framework as they permit preferential treatment to certain countries, which in itself runs counter to the WTO’s foundational principle of non-discrimination. According to Professor Jagdish Bhagwati, RTAs were “particularly antithetical to the GATT’s principles and objective of worldwide freer trade” (Bhagwati, 1990). The solution, as per him, lies in shaping the RTAs in a manner that they become “maximally useful and minimally damaging and consonant with the objectives of arriving at multilateral free trade for all.” (Bhagwati, 1992).
In this research paper, an attempt has been made to analyze if RTAs challenge the overarching goal of the WTO to promote globalization through trade liberalization. It critically examines international trade vis-à-vis RTAs after 1995 (post establishment of WTO) to theorize that countries’ choice to participate in RTAs is a balance of both economic and political interests. This theorization aims to derive a conclusion that RTAs serve as “building blocks” of globalization even if they are antithetical to
WTO’s rules and principles.
- RESEARCH STRUCTURE
Section I of the research paper outlines the background to contextualize the subject of the research. It introduces the specific question of the research and provides a rationale for the selection of the research topic. It also states the objectives of the research. Section II constitutes the research structure that provides the outlines of the paper. Section III addresses the methodology. It presents primary data collected from the WTO database. Presentation of data has been facilitated through tables and charts. It also specifies the period covered (1995 – 2019 and 1995 – 2020). Section IV contains a literature review and presents the analysis of the theoretical arguments that have been made in the research area. Section V constitutes the discussions and analyses, which leads to the achievement of this research paper’s objectives. Section VI presents the results of the data analysis. Section VII concludes the research paper and summarizes the results with lessons drawn from the findings. The section acknowledges the limitations of the paper and highlights the scope of future studies in the same research area.
The data analyzed for this paper includes the RTAs that came into force after the establishment of WTO in 1995. The first data set includes 268 RTAs, which are all from the period of 1995 – 2020. The primary source of data is the WTO database. It comprises quantitative data of RTAs that includes the number of RTAs in force, year of entry into force, type, and coverage. The second data set is the presentation of the economic growth of the world in terms of GDP, Exports, and Imports, which will give the direction of world globalization in terms of trade.
The research methodology is simple and straightforward. It draws a correlation between the growing number of RTAs each year for the above period (1995 – 2020) and the growth of the world economy (1995 – 2019) to establish the fact that RTAs have not impeded globalization. A qualitative analysis of the more recent RTAs; Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP) is also done to highlight a more realistic approach to the current interdependent global political economy.
- LITERATURE REVIEW
Bhagwati (1990) asserted the danger to world efficiency with the multiplication of free trade areas. Regionalism would enable countries with high-tariff or high trade-barriers to be embraced by other countries, causing trade diversion from the GATT members to less efficient members of the free trade areas. Another solution, the author says, is for the countries joining free trade areas to reduce their external tariffs for all GATT members simultaneously, which would ensure a substantial reduction in the overall tariffs. This could be done by modifying GATT Article XXIV, permitting only custom unions with common external tariffs, and ruling out free trade areas.
Baldwin (1993) argued in favor of the RTAs by framing the Domino Theory of regionalism. The author presents the relationship between political forces and international trade called the political equilibria with the anti and pro membership forces determining countries’ position on regional liberalization. The domino effect caused regional liberalization to “sweep the globe like wildfire while multilateral trade talks proceed at a glacial speed.”
Baldwin (1997), Ethier (1998), and Lawrence (2000) regard regionalism as complementary to multilateralism by considering it as “building blocks rather than stumbling blocks.” Baldwin contemplated that the domino effect prompted by the North American Free Trade Agreement (NAFTA) led to the proliferation of regional agreements. Both Baldwin and Lawrence supported that liberalization augments exporters and pro-trade forces. Ethier highlighted that recognition of multilateral liberalization resulted in “the new regionalism.”
Winters (1999) traced the possibility of regionalism restricting the evolution of the global trading system to freer trade. He cautioned that regionalism would create forces or lobbies that would not allow the regional blocs to move towards global free trade.
Pal (2005) studied the influence of regionalism on the governance of the WTO. Countries find a way to avoid WTO rules as RTAs are kept beyond the purview of the WTO. The study brought out the issues arising as a consequence of RTAs, like the exploitation of developing countries by the developed countries leading to a power imbalance. The study also highlights the welfare impact of RTAs and examines whether RTAs lead to trade creation or trade diversion.
The multilateral approach to globalization was adopted by GATT in 1947 through the principles of non-discrimination and reciprocity. It entailed a reduction of tariffs and non-tariff barriers to trade to create a global free market. The thrust on multilateralism was further augmented by the establishment of WTO in 1995 as a result of the Uruguay Round of trade negotiations in 1994. All the members of WTO were bound by a “single undertaking” that reinforced the fundamental principle of MFN treatment. The objective of multilateralism was to create a world order where all member countries would be equal trade partners. It was expected that gains from multilateralism would subsequently render the exceptions to WTO rules like RTAs, either unnecessary or less of an option as an alternative policy for members.
However, the importance of RTAs only continued to grow over the years as more members recognized the roles RTAs can play. Paragraph 4 in the Doha Declaration echoes the apparent interests of the member countries in RTAs who stressed that “commitment to the WTO as the unique forum for global trade rulemaking and liberalization, while also recognizing that regional trade agreements can play an important role in promoting the liberalization and expansion of trade and in fostering development.”
Historically, MTS and multilateral organizations like WTO had an underlying political powerplay. ” (Tussie & Ngaire, 2000). A study in 2017 argues that “political ties rather than issue-area functional gains determine who joins and shows how geopolitical alignment shapes the demand and supply sides of membership” (Davis & Wilf, 2017). The findings “challenge the view that states first liberalize trade to join the GATT/WTO. Instead, democracy and foreign policy similarity encourage states to join” (ibid).
The proliferation of RTAs can be attributed to a similar political powerplay of large, developed countries that have continued to exist in the multilateral world system. RTAs offer better negotiating terms and the freedom to form political alliances for strategic gains. The political appeal of RTAs has made them useful tools for developed countries to expand their sphere of influence through trade. The Trans-Pacific Partnership Agreement (TPP) signed in 2015 was the United States’ “strategic pivot to Asia” to restrain China’s growing economic power. Although the United States withdrew from TPP in 2017, its constituent rules were forwarded by the succeeding RTA, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), in March 2018. For its part, China signed the Regional Comprehensive Economic Partnership (RCEP) in November 2020 with fourteen countries of the Asia Pacific region, including the ASEAN (Association of Southeast Asian Nations) countries. It is the largest regional trading bloc in the world today and accounts for nearly a third of the world economy.
For developing countries, RTAs are permanent fixtures of their foreign policies. RTAs enable these countries to integrate into the global trading system faster than MTS. Given their limited resources and policy options, being a member of RTAs gives the developing countries better negotiation power in a multilateral system besides increasing their market shares of goods and services in international trade, promoting sustainable economic growth and development. “The formation of an enlarged regional market space through regional trade liberalization is not perceived as an end in itself but as a stepping-stone towards the future attainment of a single economic, social and cultural grouping spanning several countries.” (Mashayekhi, Puri & Ito ,2005). RTAs, therefore, should be viewed as “building blocks” to a more liberal MTS and globalization.
The evidence to the “building block” argument is provided by the proliferation of RTAs (as reflected in Table 1.0), which at the same time also reflects the growing skepticism towards the MTS. The criticism of MTS largely is attributed to the “multilateral trade talks that proceed at a glacial speed” (Baldwin,1993). Mansfield and Reinhardt (2003) note that due to the expansion of WTO membership, it is more difficult to achieve coordinated trade liberalization formulations with acceptable content and at a desirable pace. The Uruguay Round of talks started in 1986 and concluded in 1994, and the Doha Round that began in 2001 is still a work in progress. In contrast, RTAs are more agile and faster with negotiations. “Fewer participants presumably mean fewer conflicts of interest and fewer areas of disagreement” (Ethier, 1998).
This paper has assessed the growth of RTAs from 1995 to 2019 and established the trend of RTAs increasing substantially during this period as depicted in Table 1 and Figure 1. This is indicative of the fact that more countries are participating in RTAs.
RTAs in force for the period of 1995 – 2020
|Coverage||Type of RTAs|
|SL No||Year in force||Number of RTAs||Goods||Goods & Services||FTA||FTA & EIA||CU||CU & EIA|
Source: WTO database
Figure 1.Number of RTAs per year and cumulative value for the period 1995 – 2020.
Data from WTO database
Similarly, world trade has grown exponentially over the last 20 years, as exhibited in Table 2. The corresponding increase of RTAs and world trade is indicative of the fact that RTAs are not an impediment to international trade and globalization.
Table No. 2
World GDP, Export and Import
|Sl No||Year||GDP (in trillion USD)||Exports (in trillion USD)||Imports (in trillion USD)|
Source: World Bank Database
Superficially, it would seem that due to proliferation of RTAs and the apparent shift of trade pattern from MTS regime to RTAs runs counter to WTO’s vision of globalization; however, a careful analysis of secondary effects, reveals that RTAs, in fact, promote globalization by improving trade relations amongst the comity of nations.
Building on the argument that WTO is “outmoded and too cumbersome to deal with the complexities of contemporary trade issues” (Baldwin, 1993), this paper points out that the countries choose to participate in RTAs as a means to a faster integration into the global economy. The WTO framework applies a common rule to all member countries under MFN. While this liberal approach intends to ensure non-discrimination, the lag in the MTS stagnates the economic growth of small and struggling countries. The local realities and political compulsions of these countries coupled with regional economic challenges invariably force them to opt for RTAs, a fact which seems to have escaped WTO and its proponents.
The GATT/ WTO framework was modeled to bring order into a world besieged by two world wars and the cold war. However, the global realities of the 21st century present a multitude of new and complex relationships amongst countries. The increased global competitiveness has forced countries, both developed and developing, to forge strategic alliances in the form of RTAs not just for economic gains but for political power. While increasing regionalism challenges the primacy of multilateralism in international trade, it does not that mean that multilateralism and regionalism are mutually exclusive. In other words, multilateralism is in part articulated through regionalism, and RTAs will ultimately build on the objective of multilateralism to promote globalization in the long run. Regionalism will be the new multilateralism.
The paper is limited by the availability of specific empirical data to exhibit the extent of RTAs’ contribution to world trade in the period covered. More quantitative analysis in the subject can reveal the contribution of regionalism in globalization conclusively.
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The opinions expressed in this article are those of the author (s). They do not purport to reflect the opinions or views of the Jindal Centre for the Global South or its members.