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SESSION I REGIONALISM BASICS AND OVERVIEW
JAIME DE MELO
This version, March 2004
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OUTLINES SESSION I-VI
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OUTLINE SESSION I
? Regional Integration agreements (RIAS) and the
WTO
? Types of Barriers to Trade
? Classifying regional trading arrangements (RTAs)
? Definitions, terms, and abbreviations
? Some examples of RTAs
? Objectives of RTAs
? RTAs in history
? Basic economics RTAs Trade creation and
trade diversion.
? Annex Selected WTO provisions on RIAs
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OUTLINE SESSION II
PART II THEORY
? Viners analysis trade creation and Trade
diversion
? What do we know about the welfare effects of
RTAs? (effects related to discriminatory trade
preferences)
PART II EMPIRICS
? Detecting (ex-post) trade diversion (TD) and
trade creation (TC)
? Sophisticated anti-monde the gravity model
? Annex Tools for trade policy analysis (you
must master these to follow discussion in this
and next session)
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OUTLINE SESSION III
? Evaluating the welfare effects of RTAs
(ex-ante) using simulation models
? Non-traditional effects of RTAs (anything but
TD and TC)
? Location agglomeration effects, and growth
? Investment
? Deep integration
? Regionalism and Services
Annex welfare effects of trade policy under
imperfect competition
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OUTLINE SESSION IV
? Elements of the political economy of protection
? Are government commitments credible?
? Is regionalism likely to increase or diminish
protection towards the outside world?
? Application The CET in the MERCOSUR
? Regionalism as politics
? Implementation issues Rules of Origin
? Application Rules of Origin in NAFTA
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OUTLINE SESSION V
? Relation of regionalism to multilateralism
static and dynamic issues
? Regionalism and Tariff levels
? Trade Blocs and excluded countries
? Domino Regionalism
? Regionalism as Insurance
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OUTLINE SESSION VI
? A checklist to keep in mind
? Rules of Thumb for Regionalism
? Where are we Heading?
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BACK TO SESSION I
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ARE RIAs ALLOWED UNDER WTO?
Article XXIV allows members to form an RIA
provided they
1. eliminate within-union trade barriers on
substantially all trade
2. do not raise trade barriers on goods produced
outside the union

• seems to rule out partial PTAs but later
  amendments allow them for developing countries
  under certain circumstances (enabling clause)
• See annex for the language of these rules

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TWO WAVES OF RIAs
Figure 1.1 RIAs Notified and Active, 1948-April
2002
Source WTO Note Inactive data for years
2000-2002 are not available.
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ANNOUNCING MY COLOURS!!!
Much heated debate on the topic, notably
regarding the relation between regionalism and
multilateralism
as regards N-S and N-N integration, the regional
approach is likely to be justifiable to small
countries rising uncertaintes wrt to the
openness of the WTS will induce them to look to
regionalism as an instrument of insuring future
market access, MP chp.1 (1993),p. 20. Will
N-S regional agreements be successful? the
chapters in this volume suggest several lessons.
First, the new initiative, unlike the old
onessuch as the Lomé convention are reciprocal
so the opportunity for the accedant countries to
maintain high protection barriers is avoided.
Second, the experience of the EC shows that the
adoption of common rules (institutions) is not
easy to achieve. Third, substantial compensation
was a key to the success of the second (Southern)
EC enlargement. Compensation turned out to be an
unsurmountable barrier for S-S integration. It
could still foil the success of the new
initiatives if the need for some redistribution
is not directly adressed. MP chp.1 (1993), pp .
18-20.
Have I changed my views? Only marginally (Market
access less than I thought then, but there is
hope via trade facilitation (second generation
trade reforms) that is likely to be deeper at a
regional level .
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? TYPES OF BARRIERS TO TRADE (see Annex to
PTA_ECON1 for Welfare Analysis)
DWL dead weight (or efficiency) loss
1) A tariff (that raises the price from p0 to p1)
gives rise to govt revenue (area C) which is a
rent. DWLBD 2) A quota (like a tariff) gives
rise to a rent that is captured by domestic
residents (area C), DWLBD 3) Technical barriers
to trade (TBT) DWL BCD
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? CLASSIFYING RTAs
By increasing order of integration
PREFERENTIAL TRADING AREA (PTA) Gives
preferential access to partner without
eliminating protection
FREE TRADE AREA (FTA) eliminates protection
among members but each member keeps its own
tariff structure
CUSTOMS UNION (CU) FTA common external tariff
(CET)
SINGLE MARKET (SM) CU harmonization of norms
and regulations
ECONOMIC UNION SM single currency and common
economic policies
(NB RIAs also include cooperation arrangements
but those do not involve preferential market
access non-discriminatory)
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? Definitions, Terms and abbreviations

• Regional Trading agreement (RTA) Regional
  Integration Agreement (RIA) preferential trading
  agreement (PTA)
• ? generic terms (often used interchangeably) to
  describe all types of agreements, preferential
  and non-preferential

? Rules of origin (RoO) rules applied to
identify origin of a product
? Common external tariff (CET) Applies to a CU
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EXAMPLES OF RIAs
Selected Regional Integration Agreements with
Developing Country Members/Type of
RIA/Notification to GATT-WTO
DEVELOPED AND DEVELOPING ECONOMIES European Union
(EU)/Common Market/Article XXIV formerly
European Economic Community (EEC) and European
Community (EC), 1957 Belgium, France, Germany,
Italy, Luxembourg, Netherlands 1973 Denmark,
Ireland, United Kingdom 1981 Greece 1986
Portugal, Spain 1995 Austria, Finland, Sweden.
European Economic Area (EEA)/FTA/Article XXIV
1994 EU, Iceland, Liechtenstein,
Norway. Euro-Mediterranean Economic Area
(Euro-Maghreb)/FTAs/ Article XXIV Bilateral
agreements, 1995 EU and Tunisia 1996 EU and
Morocco.  
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EXAMPLES OF RIAs (ctd)
EU bilateral agreements with Eastern
Europe/FTAs/Article XXIV 1994 EC and Hungary,
Poland, 1995 EC and Bulgaria, Romania, Estonia,
Latvia, Lithuania, Czech Republic, Slovak
Republic, Republic of Slovenia. Canada-US Free
Trade Agreement (CUSFTA)/Article XXIV 1989.
North American Free Trade Area (NAFTA)/Article
XXIV 1994 Canada, Mexico, United States. Asia
Pacific Economic Co-operation (APEC) 1989
Australia, Brunei Darussalam, Canada, Indonesia,
Japan, the Republic of Korea, Malaysia, New
Zealand, Republic of the Philippines, Singapore,
Thailand, United States 1991 Peoples Republic
of China, Taiwan (China), Hong Kong (China)
1993 Mexico, Papua New Guinea 1994 Chile
1998 Peru, Russia, Vietnam.
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EXAMPLES OF RIAs (ctd)
LATIN AMERICA AND CARIBBEAN Andean Pact/Customs
Union/Enabling Clause 1969 revived in 1988,
Bolivia, Colombia, Ecuador, Peru,
Venezuela. Central American Common Market
(CACM)/Article XXIV 1960 revived in 1993, El
Salvador, Guatemala, Honduras, Nicaragua 1962
Costa Rica. Southern Cone Common Market, Mercado
Común del Sur (MERCOSUR)/Enabling Clause 1991
Argentina, Brazil, Paraguay, Uruguay. Group of
Three (G3)/FTA/Enabling Clause 1995 Colombia,
Mexico, Venezuela. Latin American Free Trade Area
(LAFTA), 1960/Article XXIV revived as Latin
American Integration Association (LAIA)/ Enabling
Clause 1980, Mexico, Argentina, Bolivia, Brazil,
Chile, Colombia, Ecuador, Paraguay, Peru,
Uruguay, Venezuela.
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EXAMPLES OF RIAs (ctd)
Caribbean Community and Common Market
(CARICOM)/Article XXIV 1973 Antigua and
Barbuda, Barbados, Jamaica, St. Kitts and Nevis,
Trinidad and Tobago 1974 Belize, Dominica,
Grenada, Montserrat, St. Lucia, St. Vincent and
the Grenadines 1983 The Bahamas (part of the
Caribbean Community but not of the Common
Market). AFRICA Cross-Border Initiative (CBI)
1992 Burundi, Comoros, Kenya, Madagascar,
Malawi, Mauritius, Namibia, Rwanda, Seychelles,
Swaziland, Tanzania, Uganda, Zambia,
Zimbabwe. East African Cooperation (EAC) 1996
formerly East African Community (1967), broke up
in 1977 Kenya, Tanzania, Uganda.
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EXAMPLES OF RIAs (ctd)
Economic and Monetary Community of Central Africa
(CEMAC) 1994 formerly Union Douaniere et
Economique de lAfrique Centrale (UDEAC), 1966
Cameroon, Central African Republic, Chad, Congo,
Gabon 1989 Equatorial Guinea. Economic
Community of West African States (ECOWAS) 1975
Benin, Burkina Faso, Cape Verde, Côte dIvoire,
Gambia,Ghana, Guinea, Guinea-Bissau, Liberia,
Mali, Mauritania, Niger, Nigeria, Senegal, Sierra
Leone, Togo. Common Market for Eastern and
Southern Africa (COMESA)/ Enabling Clause 1993
Angola, Burundi, Comoros, Djibouti, Egypt,
Ethiopia, Kenya, Lesotho, Malawi, Mauritius,
Mozambique, Rwanda, Somalia, Sudan, Swaziland,
Tanzania, Uganda, Zambia, Zimbabwe. Indian Ocean
Commission (IOC) 1984 Comoros, Madagascar,
Mauritius, Seychelles.
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EXAMPLES OF RIAs (ctd)
Southern African Development Community (SADC)
1980 for-merly known as the Southern African
Development Co-ordination Conference (SADCC),
Angola, Botswana, Lesotho, Malawi, Mozambique,
Swaziland, Tanzania, Zambia, Zimbabwe 1990
Namibia 1994 South Africa 1995 Mauritius
1998 Democratic Republic of the Congo,
Seychelles. Economic Community of West Africa
(CEAO) 1973 revived in 1994 as UEMOA, Benin,
Burkino Faso, Côte dIvoire, Mali, Mauritania,
Niger, Senegal. West African Economic and
Monetary Union (UEMOA or WAEMU) 1994 Benin,
Burkina Faso, Côte dIvoire, Mali, Niger,
Senegal, Togo, 1997 Guinea-Bissau. Southern
African Customs Union (SACU) 1910 Botswana,
Lesotho, Namibia, South Africa, Swaziland.
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EXAMPLES OF RIAs (ctd)
Economic Community of the Countries of the Great
Lakes (CEPGL) 1976 Burundi, Rwanda, Democratic
Republic of the Congo. EUROPE  Central European
Free Trade Area (CEFTA) 1993 1996 Czech
Republic, Hungary, Poland, Slovak Republic,
Slovenia 1997 Romania 1988 Bulgaria. Committee
for Mutual Economic Assistance (CMEA) Bilateral
Agreements between individual CEFTA members and
individual Baltic countries.
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EXAMPLES OF RIAs (end)
MIDDLE EAST AND ASIA Association of South-East
Asian Nations (ASEAN) 1967 ASEAN Preferential
Trading Arrangements/Enabling Clause 1977 ASEAN
Free Trade Area (AFTA)/Enabling Clause 1992,
Indonesia, Malaysia, Philippines, Singapore,
Thailand 1984 Brunei Darussalam 1995 Vietnam
1997 Myanmar, Lao Peoples Democratic Republic
1999 Cambodia. Arab Common Market/Article XXIV
1964 Agreement for Economic Unity among Arab
League States. Gulf Co-operation Council
(GCC)/Enabling Clause 1981 Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia, the United Arab
Emirates. South Asian Association for Regional
Co-operation (SAARC)/ Enabling Clause 1985
Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan, Sri Lanka.
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? RTAs in history
Irwin paper (DM chp. 4) shows how Anglo-French
treaty of 1860 that included the unconditional
MFN clause ushered the open trade regime of the
19th- C.

• ? France reduced duties to 10-15 range, GB the
  number of dutiable goods from 419 to 48 and
  reduced the wine tariff
• GB lowered to all partners, FR only to GB.
• Other countries wanting to get access to FR
  market, rapidly cascaded into a series of
  bilateral trade agreements, all linked by the
  inclusion of the unconditional MFN clause ( MP,
  p. 97)
• What ushered this? Mostly desire to get access to
  FR market (recall GB and FR were the two largest
  markets then)

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? RTAs in history (end)

• Irwin also compares the 19th- c WTS with current
  one under WTO
• Both had unconditional MFN clause
• but no external constraint on tariff
  behaviorsee his discussion on the erosion of the
  liberal order

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? Objectives of RIAs
Selection of stated objectives in the Treaties
? Boosting trade and income To enhance the
competitiveness of their firms in global markets
North American Free Trade Agreement (1992). To
create an expanded and secure market for the
goods and services produced in their territories.
To reduce distortions to trade Treaty on Free
Trade Between the Republic of Colombia, the
Republic of Venezuela and the United Mexican
States (1994).
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? Objectives of RIAs (ctd)
To modernize their economies in order to expand
the supply and improve the quality of available
goods and services, with a view to enhancing the
living conditions of their populations Southern
Common Market (MERCOSUR) Agreement (1991). ?
Boosting investment To ensure a predictable
commercial framework for production activities
and investment Treaty on Free Trade Between the
Republic of Colombia, the Republic of Venezuela
and the United Mexican States (1994).
Prerequisite for the stimulation of domestic,
regional and foreign direct investment and the
expansion, growth and the development of the
economies of each member state and the region as
a whole Kinshasa Resolution on the Establishment
of a COMESA Common Market for Eastern and
Southern Africa (1998).
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? Objectives of RIAs (ctd)
A stimulus to the development of the national
economies by expanding investment and production
opportunities, trade, and foreign exchange
earnings Agreement on the Common Effective
Preferential Tariff Scheme for the ASEAN Free
Trade Area (1992). ? Stimulating development To
ensure in particular that these arrangements
encourage the development of the less advanced
members of the customs union and the
diversification of their economies South African
Customs Union Agreement (1969). ? Democracy and
Human Rights To involve the peoples of the
Region centrally in the process of development
and integration, particularly through the
guarantee of democratic rights, observance of
human rights and the rule of law Treaty of
Southern African Development Community (1992).
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? Objectives of RIAs (ctd)
To strengthen democracy and respect for human
rights, sustainable and balanced economic and
social development, to combat poverty and
promote greater understanding between cultures
Barcelona Declaration Adopted at the
Euro-Mediterranean Conference (1995). ? Regional
Cooperation and Co-ordination To establish a
firm foundation or common action to promote
regional cooperation in South-East Asia in the
spirit of equality and partnership and thereby
contribute towards peace, progress and prosperity
in the region The ASEAN Declaration (1967).
To foster coordinated action by the Parties in
international economic fora, particularly in
those related to the processes of Latin American
integration Treaty on Free Trade Between the
Republic of Colombia, the Republic of Venezuela
and the United Mexican States (1994).
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? Objectives of RIAs (end)
? Stimulate regional and global integration To
contribute the harmonious development and
expansion of world trade and provide a catalyst
to broader international cooperation North
American Free Trade Agreement (1992). To
facilitate the accession of Chile to the North
American Free Trade Agreement To contribute to
hemispheric integration Canada Chile Free
Trade Agreement (1996).
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? BASIC ECONOMICS TRADE CREATION AND TRADE
DIVERSION
3 countries A (importer and country of interest
here) B (partner in RTA) and C (ROW). Here B and
C both exporters) Unit production costs assumed
to be constant Initially A applies identical
tariffs on both imports (t20) Let A and B form
an FTA no more tariffs on B imports
?Welfare implications for A depend on cost
conditions
If the lowest cost producer is
B? all is well as partner is low cost producer
trade creation (as partner is low cost supplier
initially)
C ? If C imports are now replaced by (less
efficient) B imports trade diversion (partner
is high cost supplier )
A ?nothing happens! (A is not even importing
initially).
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NUMERICAL EXAMPLE
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ANNEX SELECTED WTO PROVISIONS ON RIAs
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Article XXIV of the GATT 4. The contracting
partiesalso recognize that the purpose of a
customs union or of a free trade area should be
to facilitate trade between the constituent
territories and not to raise barriers to
trade. 5.(a) With respect to a customs unionthe
duties and other regulations of commerce imposed
at the institutionshall not on the whole be
higher or more restrictive than the general
incidence of the duties and regulations of
commerce applicable in the constituent
territories prior to the formation of such
union (b) With respect to a free-trade areathe
duties and other regulations of commerce
maintained in each of the constituent territories
and applicable at the formation of such
free-trade area...shall not be higher or more
restrictive than the corresponding duties and
other regulations of commerce existing in the
same constituent territories prior to the
formation of the free-trade area (c) Any interim
agreementshall include a plan and schedule for
the formation of such a customs union or of such
a free-trade area within a reasonable length of
time. 7.(a) Any contracting party deciding to
enter into a customs union or a free-trade area,
shall promptly notify the contracting parties and
shall make available to them such information
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8.(a) A customs union shall be understood to mean
the substitution of a single customs territory
for two or more customs territories, so that (i)
duties and other restrictive regulations of
commerce (except, where necessary, those
permitted under Article XI, XII, XIII, XIV, XV
and XX) are eliminated with respect
tosubstantially all the trade in products
originating in such territories 8.(b) A free
trade area shall be understood to mean a group of
two or more customs territories in which the
duties and other restrictive regulations of
commerce (except, where necessary, those
permitted under Articles XI, XII, XIII, XIV, XV
and XX) are eliminated on substantially all the
trade between the constituent territories in
products originating in such territories. The
Enabling Clause 1. Notwithstanding the
provisions of Article Icontracting parties may
accord differential and more favorable treatment
to developing countries, without according such
treatment to other contracting parties. 2.(c)
The provisions of paragraph 1 apply to
theregional or global arrangements entered into
amongst less-developed contracting parties for
the mutual reduction or elimination of tariffs
and, in accordance with criteria or conditions
which may be prescribed by the contracting
parties, for the mutual reduction or elimination
of non-tariff measures, on products imported from
one other
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The Uruguay Round Understanding on the
Interpretation of Article XXIV 2. The
evaluationof the duties and other regulations of
commerceshallbe based upon an overall
assessment of weighted average tariff rates and
of customs duties collected For this purpose,
the duties and charges to be taken into
consideration shall be the applied rates of duty.
It is recognized that for the purpose of the
overall assessment of the incidence of other
regulations of commerce for which quantification
and aggregation are difficult, the examination of
individual measures, regulations, products
covered and trade flows affected may be
required. 3. The reasonable length of time
referred to in Article XXIV 5(c) should exceed
ten years only in exceptional cases.