Regional Trade Agreements and Multilateral Trading System - Essay Example

Regional Trade Agreements In recent years there have been rapid growths in the number of Regional Trade Agreements (TRAs) involving developing countries. In this essay factors accounting for this growth are considered which include politics, economics and sustainable business-related concerns. RTAs are found to be more personal and focused than multilateral trade agreements, and can potentially reshape economic geography at a fast-paced level. Existing issues regarding RTAs are prevalent but the most common are in line with the factors that definitely caused their rise; the specific concern on trade creation, trade diversion and discrimination; and the probable advantages or disadvantages of TRAs over multilateral trading system. The proponent found that TRAs are good tools for effective global trading system. Keywords: Regional Trading Agreements (RTAs), multilateral trading system Introduction The world is changing rapidly into a global village and trade between countries has increased promptly with more openness of countries to goods, services, capital as well as ideas and knowledge. The volume of trade of merchandise goods for export has grown from approximately $62 billion in 1950 to $6,327 billion in 2000 (Bora, Grynberg & Razzaque, 2004). This means that over fifty years, trade on merchandise goods grew by more than 100 times. One of the reasons why trade increased in haste especially in today’s modern economic market is the ability of every country to embrace Multilateral Trade Agreements (MTAs), which seek to implement role, policies and procedures that could benefit every member especially in their trade participation. However, lately the popularity of Regional Trade Agreements (RTAs) could prove remarkable trade creation at some certain point, as it seeks to eliminate barriers to trade and encourage flexible trade agreements between the participating countries. RTA is a way to form unified economic force in order to integrate the advantages in gaining access to free trade and creation of fair trade for its members (World Bank, 2005; Freund & Ornelas 2010). Politics, economics and sustainable business-related concerns are some of the factors that are commonly viewed accounting for the growth of RTA. However, there are many existing issues regarding RTAs but the most common are in line with the factors that definitely caused their rise; the specific concern on trade creation, trade diversion and discrimination; and the probable advantages or disadvantages of TRAs over the Multilateral trading system. These factors are viewed to probably give rise for the growth of RTAs. Thus, it is important to understand the probable advantages and disadvantages of TRAs over multilateral trading system in general. However, some additional common reasons for the popularity of RTAs could be substantially explained through traditional economic welfare argument, dynamic economic gains, deeper integration covering behind the border regulatory reform, frustration at slow progress in WTO, and increased bargaining position of small countries. It is therefore important to understand why countries engage in trade negotiations. In this paper, the proponent tries to emphasise all these issues in great detail by using empirical evidences and arguments that are generated from available literature. Specific issues are therefore included in order to find out essential ideas to help understand why TRAs are in upward spiral. Survey of the related theoretical and empirical literature Why there are trade negotiations is the first question to come in mind in order to understand why there is an increase in RTAs. The following are theoretical frameworks that could substantially explain significant things about trade negotiations and TRAs in particular. Terms of Trade Agreements Terms of trade agreement assume that countries eventually engage in trade negotiations to avoid trade wars, but it is not sufficient enough to explain why countries of unequal economic size cooperate in trade negotiations (Kirkpatrick, Clarke & Polidano, 2002). Countries like India, Philippines, Vietnam, Indonesia and other developing countries cooperate in trade negotiations as they substantially look at them important in their economic growth. Let us take a closer look at the issue of trade barriers. Barriers to free trade are very real. These can be generally classified into four: tariffs, import quotas, nontariff barriers, and voluntary export restrictions (McConnell & Brue, 1993). Tariffs for instance can either be revenue or protective. Revenue tariffs are imposed on imported products for the purpose of generating tax revenues for the government. Thus, the more a country would impose revenue tariffs on products that are not produced domestically, the most likely its government would benefit from the whole amount it will potentially generate from them. However, the impact of this on their counterpart countries would also be tremendous because it would mean reduction of their potential gain. Supposed to be the exact amount they paid for higher tariff revenues should have been part of their potential gain. On the other hand, a country that is trying to implement import quotas is at some point obligating its exporters to produce products in large quantities despite high tariffs. Furthermore, it could also prohibit imports once the limit of products for low import quotas would be obtained. The implication of this among the exporting countries is again would boil down to reduction of their potential gain and not being able to significantly maximise the resources they have with them. In addition, some countries simply implement nontariff barriers which may be in a form of licensing requirements, and unjustifiable standards on product quality and safety or simply customs procedures that are beyond the pale. At some point this would totally reject the produced exported products leading to price bargaining or total rejection. At exporters’ part, this would mean lost of profitability in business. The next potential barrier to trade is voluntary export restriction. As stated earlier, import quotas may have significant impact on the exporters so as their primary defence mechanism; they would also limit their exports to a certain country imposing such restriction. For instance, those products required by the US to be either part of high or low import quota are remarkably restricted or treated with limit by their exporters including but not limited to Japan and other renowned international business counterparts. This entire move is essentially under voluntary export restrictions. Political Economy Argument Another important theory why countries are involved in trade negotiations can be explained through political economy arguments. These arguments explicate (1) the political influence involve in domestic exports and imports, consumers, and substation producers and employees; and (2) the capability of multilateral trade negotiations to strengthen political support for trade liberalisation by creating gains for domestic producers (Kirkpatrick, Clarke & Polidano, 2002). There is a political gain in belonging to a group. India and other developing countries for instance enter into RTAs because of this reason as one of their primary concerns. However, this claim needs substantial back ups through deeper political research. A study revealed based on the historical time series that the initial stage of regional inequality in the USA, Italy, Brazil, Sweden and France resulted to weak level of prosperity which is said to be directly associated with poor political integration (Chaudhuri, 2001). It is proven in history that countries which formed collaboration with each other resulted to powerful force especially in their goal to combat their enemies. In the case of First World War and the preceding wars, having allies could be used to illustrate how it strengthened political force or power between supporting nations. In today’s contemporary time, the same is true with RTAs. Taking the case of China as one of the countries to be the leading economy in a not so distant future would substantially prove the existence of politics which is going on upon joining RTA. For instance, this cannot just be looked from economic perspective although it concerns greatly about it. ASEAN members are said to be competing with each other when it comes to achieving exclusive partnership with China which in a not so distant future will eventually result to internal conflicts between them (Tran, 2008). Sad to say, there is already politics going on in here which may be pointed out as a way to either disintegrate a group or either form another new one. Let us take the case of the latter as one of the ultimate reasons why countries enter into RTAs. The General Agreement on Tariffs and Trade (GATT) was established in order to address concerns on protectionism primarily on manufactured goods (McConnell & Brue, 1993). Nations signed in to this because they believe that this would be able to protect their interest from the general point of view. However, there are other concerns like agriculture, services, international investment, patents and copyrights that could be remarkably better addressed in joining RTAs. In other words, there are other important concerns that nations would want to address in order to get protected and these primarily involve their ability to have strong power or force to conduct trade, but above all sustainability. In international trade, sustainability can be achieved if there is strong political force, power or influence. As illustrated in the case of ASEAN members and China, collaboration with the most powerful nation proves to be a significant factor to ensure achievement of personal objectives. Furthermore, it is clear enough that not only ASEAN members are trying to initiate friendship with China but other countries as well. They have to do this in order to substantially share the strong political influence that China possesses in the business world today. After all, China is considered a force for stability in the twenty-first century (Keller & Rawski, 2007). Thus, it would therefore make sense why many countries would want to stay close to it particularly its Asian counterparts. Economies of Scale Finally, trade negotiation would be a way for small countries to gain from economies of scale, and substantial economic advantages for big countries (Kirkpatrick, Clarke & Polidano, 2002). It is a way of achieving competitive advantage as there would be a decline in unit costs of a product or operation for producing a product as the volume per period increases (Porter, 1998). This means that those countries within RTA can substantially compete with other countries as they could deter entry by forcing their competitors to possibly come in at a large scale and risk strong reaction from existing firms or come in at a small scale with a cost disadvantage. Traditional economic welfare argument Trade liberation is an issue of great concern. Many hesitant groups or economic experts against RTA are viewing it as potential stumbling block to multilateral trade liberation. However, empirical evidence suggests that trade creation has dominated, implying that RTAs are building blocks (Kirkpatrick, Clarke & Polidano, 2002). RTAs are proven to primarily increase service exports. In the case of Sri Lanka and India, the latter’s export to the former grew from $640 million in 2001 to $2.2 billion in 2007 and the former’s export to the latter grew from $45 million in 2001 to $470 million in 2007 (United Nations, 2009). With this, both of these nations are fully secured to ensure distribution of raw materials that would lead to production of other potential products for the purpose of additional investment and future business creation and productivity. In other words, it is important for all nations to always have substantial supplies of goods in order to warrant consistent flow of commerce and trade that specifically would help ensure their economic survival. Let us take a closer look at the basic case of food distribution. Those nations that signed in the RTAs are at some point would be secured that their people could have something to eat. For example, in the Philippines, rice shortage is going to be a potential problem due to flooding food crisis in Asia (Philrice.net, 2009). However, due to the country’s tie up with Vietnam in RTA there is still until now sufficient supply of rice for its people at a relatively lower price and highly acceptable quality. The country is also planning to tie up with Indonesia for possible oil exploration and even for future large volume of importation. Thus, ongoing talks between these nations are now continuously initiated. The very point of these illustrations is to elaborately expound the thought that increasing service exports would result to security and even productivity. Supplies should be continuously flowing in the nation in order to make sure of economic development and survival. Thus, in RTAs members are expected to also substantially share their resources for their mutual benefits. Thus, it is therefore implied that the increase of exportations between members is expected to take place especially that it concerns about future sustainability of supplies of goods, food and raw materials. Dynamic economic gains and deeper integration Dynamic economic gains theory states that openness brings gains in terms of productivity growth, technological spillovers and increased competition (Kirkpatrick, Clarke & Polidano, 2002). Under deeper integration theory, in RTA there would be improvement of the business environment due to regulatory reform in investment rules, public procurement, trade facilitation and competition policy (Kirkpatrick, Clarke & Polidano, 2002). For instance, central to ASEAN is the strong “commitment to reduce barriers to intra-regional trade” prior to achieving effective economic integration (Institute of Southeast Asian Studies, 2009, p. 15). ANZERTA on the other hand wants to accelerate free trade and economic integration by specifically removing around 80 percent of tariffs and quotas between Australia and New Zealand (Shaikh, 2010, p. 4.172). APEC strongly promotes reduction of barriers to trade and investment and ensures free flow of goods, services and capital, thus it is also an advocate of free and open trade and investment (Hellmann & Pyle, 1997, p. 186). Just like with the above-mentioned regional trade agreements, MERCOSUR’s major goal is also to achieve economic integration which at some point encompasses freedom of movement (Handjiski, Lucas, Martin, & Guerin, 2010, p. 75). NAFTA seeks to produce good investment climate among its members by ensuring that they can conduct trade freely among themselves by eliminating tariffs or trade restrictions (Hufbauer, 2000, p. 8; Pohlmann, 2007). RTA such as the NAFTA encourages trade integration and this is found to potentially encourage foreign direct investment as observed in the case of countries like Mexico, Canada and the US, all of which are members of the said trade agreement (MacDermott, 2007, p. 107). These RTAs have one thing in common and that is to achieve economic advantage through free trade. In fact, some evidences suggest that members of these trade agreements have achieved prosperity and growth due to economic integration. For instance, based on the historical time series, the regional inequality in the USA, Italy, Brazil, Sweden and France from the initial stage resulted weak level of prosperity which is also said to be directly associated with poor economic integration (Chaudhuri, 2001). This makes sense since economic space tends to grow wider from the whole perspective of economic integration in which primarily when a neighbouring countries enhance their domestic growth, it could substantially create impacts on their neighbours which would create good policy and unity in the living standard (World Bank, 2009, p. 102). Frustration in progress at WTO Starting from its inception, the widespread of RTA led to important concerns about the weakening of the multilateral trading system (Crawford & Laird, 2001, p. 193). Multilateral trade agreements happen between many nations at a single time, for the benefits of all the members especially the small nations because each country receives fair treatment (Amadeo, 2012). Example, the Doha round of trade agreements involved 149 countries and although complicated, these are powerful once every member signed in the agreement. However, the entire process may take too much time. Although just like TRAs, regulation of the trade between the participating nations is the bottom line of the multilateral trade agreements. It is commonly stated that the progress in liberalization in RTAs is faster than its multilateral counterparts. The World Trade Organization (WTO) for instance has relatively slower progress in multilateral arrangement. Thus, it would make sense to fully place a great trust in RTAs especially on the creation of fast-paced decisions in line with international trade and economic integration. Bargaining Strength Bargaining strength is attractive to small countries (Kirkpatrick, Clarke & Polidano, 2002). In particular, these countries need to substantially solve economic disputes for their advantage. Joining RTAs would be an advantage as it promotes economic integration. Economic integration could also be an incentive for the resolution of regional disputes (World Bank, 2009, p. 102). World Bank cited the case of Chile and Bolivia in which the latter relied on importation of natural gas from Peru and Pacific during the late nineteenth century. Chile’s war with Bolivia ended up losing its chance to import supply of natural gas from Peru and Pacific which made it more dependent on supply from Argentina. However, due to lack of supply and high level of demand, Chile could not rely much on Argentina. Bolivia has South America’s second largest natural gas reserves, so the talks between Chile and Bolivia is viewed to result to economic integration in which the bottom line would be to achieve resolution of regional disputes. RTAs as ways to create economic integration are therefore effective tools to solving disputes at the regional level. Potential disadvantages of RTAs Restrictive rules of origin and reciprocity are a potential problem in RTA as there seems to be protection of producers of domestic goods and removal of existing preferences particularly for least developed countries (Kirkpatrick, Clarke & Polidano, 2002). Thus, it would cause high admin costs and reduce benefits from the RTA market provisions. To ensure understanding of the essential disadvantages of RTAs it is important to know some analytical and policy issues. Among these analytical and policy issues include progress in liberalization compared to multilateral negotiations, the evidence of deeper integration of the member countries, diversion of attention away from multilateral negotiations, problems over overlaps in RTAs and their significance, the contributions of RTAs on domestic policy reform, the role of macro and micro economic polices in RTAs, and other challenges (Xirinachs, 2002, p. 181). Among of them, deeper integration and policy space erosion could be potential problems with RTAs (Kirkpatrick, Clarke & Polidano, 2002). Critical analysis There are two common major impacts of RTA on trade. The first impact is called ‘trade creation’ in which there is surging of free trade while its counterpart is ‘trade diversion’ and it is a condition when trade increases among members but becoming less on non-members (Jugurnath, Stewart & Brooks, 2007, p. 974). By studying different RTAs and based on gravity model, Jugurnath, Stewart and Brooks found that there is surging of trade both with trading partners and others in the case of the Association of South East Asian Nations (ASEAN) and the Australian and New Zealand Closer Economic Relations Trade Agreements (ANZCERTA). However, there is trade diversion in the case of Asian Pacific Economic Cooperation (APEC), the Southern Cone Common Market (MERCOSUR) and the North American Free Trade Association (NAFTA). The study only implies that RTA is not necessarily a good way to encourage trade creation as it is clearly presented that at some point there are some cases in which it could remarkably lead to trade diversion. It is therefore important to look at some important factors to closely understand why there is variation of impacts of different RTAs on the creation or diversion of trade. In fact, it is found that RTA membership may potentially reduce inter-industry trade in absolute terms and the remarkable trade volume effect should be due to increasing growth of trade within industries (Egger, Egger & Greenaway, 2008, p. 278). Egger, Egger and Greenaway pointed out that new membership in RTA is most likely influenced by economic fundamentals which include country size, factor endowments, and trade and investment costs. At some point, the real problem in here may not only be trade diversion, but at its deepest point would possibly be discrimination. Although this remains to be proven in great detail via empirical evidences, the existence of this issue is as good as having it being observed to exist at some point. Common sense would suggest that from the economic point of view, an individual would want to achieve more and have even more (McConnell & Brue, 1993). Thus, it is also implied that investing in somewhere where there can be potentially more to achieve could just be a logical explanation why there would exist discrimination in areas where there are less opportunity to obtain. For example, if there is more to achieve in China rather than Singapore or somewhere else, investors would potentially choose the former as the priority for investment instead of the latter. However, based on the various theories about RTAs especially on traditional economic welfare, dynamic integration and economies of scale, they are good opportunities to emphasise a country’s economic concerns especially on its competitiveness, growth, jobs and others. This is the bottom line of EU Trade Policy which in contrast with Economic Partnership Agreements (EPAs) lack progress due to limited gains from market access, technical issues (all trade, MFN treatment, Export taxes, infant industry), services and impact on policy space (Kirkpatrick, Clarke & Polidano, 2002). Although there are significant disadvantages in RTAs, they can all be potentially address with balanced agreements and the good thing about them is the potential to achieve fast-paced output for implementation unlike in the case of WTO and other multilateral trading system. RTA is more personalised and focused than multilateral trade agreements. In multilateral arrangements, there are some concerns that could not be directly approved by members so it would take time to gain approval. Thus, the decision making process would take longer at some point. Furthermore, RTA can reshape economic geography at a fast-paced level. Considering that there would only be a small number of participating members, policies and procedures could be easily ratified for as long as everything regarding it would substantially be helpful in achieving their personal objectives. In addition, Economic integration and political gain through RTAs have significant impacts on reduction of free trade barriers, but another point of it is to actually enhance the economic competitive advantage of a particular country. In the event of surging economic competition between countries, imported goods have been created with lower unit labour costs which would further result to their lower relative prices. Each country therefore has the potential to compete with others. Conclusion Based on the above discussion, it is implied that TRAs are more advantageous in ensuring trading efficiency or productivity than multilateral trading system. It is found that economic, political and other business related concerns are significant factors accounting for the increase of TRAs especially in developing countries. 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