REGIONALISM, FREE TRADE AGREEMENTS AND THE WTO · 2017-09-22 · • 1957: European Economic...

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REGIONALISM, FREE TRADE AGREEMENTS AND THE WTO

Jakarta, 5-7 September 2017

Alexandre Larouche-Maltais Senior Trade & Investment Expert

Conference Board of Canada

Outline: Regionalism, free trade agreements (FTAs) and the WTO

• Historical developments

• Distinguishing trade agreements

• Canada’s current negotiations

Regionalism in the world

• Creating or diverting trade?

• Keeping attention away from the multilateral negotiations?

• Forgetting developing countries?

Debates – pros and cons of FTAs

• Internal conditions

• External conditions

• Transparency

Legal aspects

Part 1

Part 2

Part 3

PART 1REGIONALISM IN THE WORLD

Historical developmentsDistinguishing trade agreements

Canada’s current negotiations

Historical developments: Three “waves” of regionalism

(1) Europe's push for

continental integration

(2) US’ momentum

behind regionalism

(3) New participants,

larger initiatives

Source: WTO, World Trade report 2011

Late 1950s and 1960s

Mid-1980s and 1990s

2000s




(2) US’ momentum

behind regionalism


larger initiatives



Mid-1980s and 1990s

2000s

European Activism• 1951: European Coal and Steel Community • 1957: European Economic Community (EEC) vs

European Free Trade Association (EFTA)• Complex network of preferential, but non-

reciprocal trade arrangements with past colonies

Pressure for progress at the multilateral level

• 1960: launch of the Dillon Round• 1964-67: Kennedy Round

GATT tariff cutting and membership enlargement




(2) US’ momentum

behind regionalism


larger initiatives



Mid-1980s and 1990s

2000s

Deepening European integration

• 1980s: Europe’s “single market” program for dismantling remaining physical, technical and tax barriers

• 1993: EEC became the European Community (EC)

• New cluster of bilateral PTAs with Central and Eastern European countries (future EU members)

US’ new trade policy

• Ongoing concerns about the EC's expansion & delays in launching and then advancing the Uruguay Round negotiations

• 1985: FTA with Israel• 1988: FTA with Canada• 1994: NAFTA




(2) US’ momentum

behind regionalism


new initiatives



Mid-1980s and 1990s

2000s

New players

• “Developed-developed”, “developing-developing”, and “developed-developing” alliances

New initiatives

• Bilateral, plurilateral and cross-regional initiatives• Focused on WTO-plus type issues, e.g. services,

capital flows, standards, IP, regulatory systems, etc.

Distinguishing Trade Agreements

Customs Unions (CUs)

Free Trade Agreements

(FTAs)

Bilateral Trade

Agreements (BTAs)

Regional Trade

Agreements (RTAs)

Preferential Trade Arrangements (PTAs)

Preferential Trade

Agreements

Plurilateral Agreements

Multilateral Agreements

World Trade Organization

(WTO)


Plurilateral Agreements

Multilateral Agreements


(WTO)

Multilateral agreements refer to mandatory treaties to which all WTO members must be parties.

E.g. GATT, Agreement on Agriculture, SPS, TBT, TRIMs, Anti-Dumping, SCM, Safeguards, Trade Facilitation, etc.

Plurilateral agreements refer to optional treaties to which only certain WTO members are parties.

E.g. Civil Aircraft & Revised GPA

These agreements are implemented inthe framework of the WTO


Preferential Trade

Agreements


(WTO)

GATT Art. XXIV:4 - The contractingparties recognize the desirability ofincreasing freedom of trade by thedevelopment, through voluntaryagreements, of closer integration betweenthe economies of the countries parties tosuch agreement.

They include free trade agreements (FTAs) and customs unions (CUs), bilateral and regional agreements

These agreements are negotiated outside the framework of the WTO




(FTAs)

Preferential Trade

Agreements


(WTO)




(FTAs)

Preferential Trade

Agreements

A free trade area is a grouping of countries within which tariffs and non-tariff trade barriers between the members are generally abolished but with no

common trade policy toward non-members. E.g. Canada-Chile FTA

Customs unions are arrangements in which the parties agree (1) to allow free trade on products within the CU, and (2) to a common external tariff (CET) with

respect to imports from the rest of the world. E.g. European Union

Source: OECD Glossary of Statistical Terms


Bilateral Trade

Agreements (BTAs)

Regional Trade

Agreements (RTAs)

Preferential Trade

Agreements


(WTO)


Bilateral Trade

Agreements (BTAs)

Regional Trade

Agreements (RTAs)

Preferential Trade Agreements

Regional trade agreements are treaties that are concluded between more than two countries. E.g.

ASEAN Free Trade Area (AFTA), North American Free Trade Agreement (NAFTA)

Bilateral trade agreements are treaties concluded between only two countries. E.g. Canada-Korea Free

Trade Agreement (CKFTA), Japan-Indonesia Economic Partnership Agreement (EPA)




(FTAs)

Bilateral Trade

Agreements (BTAs)

Regional Trade

Agreements (RTAs)

Preferential Trade

Agreements

Any bilateral CUs?

Any regional CUs? Any regional FTAs?

Any bilateral FTAs?


Preferential Trade

Agreements


(WTO)

PTAs in the WTO are “unilateral trade preferences.”


Source: WTO, “Regional trade agreements and preferential trade arrangements”



(WTO)

E.g. the Generalized System of Preferences (GSP)

schemes – programs by developed countries granting preferential tariffs to imports

from developing countries.


GSP-Canada: Beneficiaries

Source: WTO, “Glossary”


Preferential Trade

Agreements


(WTO)


Non-reciprocal preferential schemes other than GSP, e.g.:• EU’s Trade preferences for Pakistan (2012)• Australia’s and N-Z’s South Pacific

Regional Trade and Economic Cooperation Agreement (1981)

Canada’s Network of FTAs

As of 1 August 2017, Canada’s trading relationships are regulated by 11 FTAs providing Canada with preferentialmarket access to 15 countries.

On 21 September 2017, the CETA will partially enter into force, increasing Canada’s market access to the European Union and its 28 members.

Indonesia’s Network of FTAs

As of 1 August 2017, Indonesia’s trading relationships are regulated by 9 FTAs providing Indonesia with preferential market access to 21 countries, mainly in Asia.

Canada’s Current Negotiations

Bilateral initiatives

Can

ada

India

Japan

Singapore

Caribbean Community

Dominican Republic

Guatemala, Nicaragua and El Salvador

Morocco

Regional/Plurilateral initiatives

TiSA

• Group of 23 like-minded WTO members to further liberalize trade in services

TPP

• Signed by 12 Asian and American countries in Feb 2016; USA withdrew in Jan 2017

PART 2DEBATES – PROS AND

CONS OF FTASCreating or diverting trade?

Keeping attention away from the multilateral negotiations?

Forgetting developing countries?

Creating or diverting trade?

Trade creation

• “Trade creation occurs when the reduction of internal barriers leads private persons to import from a supplier that is a lower cost producer than domestic supplier.”

This situation would lead to an increase in consumer surplus and economic welfare.

Trade diversion

• “Trade diversion occurs when the reduction of internal barriers, while leaving in place external barriers, leads private persons to import from a RIA (region of international trade) rather than a lower cost non-RIA producer.”

However, recent economic studies tend to show that this situation is not always overall negative.

Source: Trachman, “International Trade: Regionalism,” 2007

Example 1 Example 2

Creating or diverting trade?

Canada-US FTA case

The CUSFTA had substantial effect on Canada-US trade:

• Over half of the $42 billion increase in US imports from Canada between 1989-1994

• Gains due to the CUSFTA were not at the expense of third countries

• BUT: individual circumstances associated with FTA vary, and must be judged on its own merits

ASEAN-China case

The ASEAN-China FTA had an overall positive impact on trade in goods between 1995-2010:

• 22% increase in trade in agricultural goods

• 130% increase in manufactured goods

• Reducing and removing tariff barriers in ACFTA promotes total trade volume not only among intra-bloc member countries, but also between intra-bloc and extra-bloc countries.

Source: Clausing, “Trade creation and trade diversion in the Canada-US FTA, 2001

Source: Yang & Martínez-Zarzoso, “A Panel Data Analysis of Trade Creation and Trade Diversion Effects: The case of ASEAN-China Free Trade Area”

Keeping attention away from the multilateral negotiations?

Bringing coherence

1. Political economy of recent FTAs go further than tariff reduction; only few countries can lead

2. Negotiating in the WTO may not help to directly foster inward investment

3. The nature of behind-the-border policies makes it difficult to multilateralize PTAs; they complement each other

Result of Doha failure

1. FTAs is a second best solution: As world trade is vital, FTAs are seen as a solution to further develop world trade

2. Impact of economic crisis started: The economic crisis forced economies to look for new markets and new economic partners and to try to boost the relations with existing partners

Source: WTO, “ World Trade Report 2011”

Source: Bonciu & Moldoveanu, “The Proliferation of FTAs in the Post-Doha Round Period” 2014


Far-reaching liberalization of FI, procurement, strict IP rules, high labor and environment standards

Reciprocity in FTAs eliminate the S&DT

Perceived risk of losing competitiveness vis-à-vis

other developing countries that have entered into FTAs

Source: UNCTAD, Trade and Development Report, 2007


Developing countries increasingly

concluding North-South FTAs

Developing countries’ share in world trade

Enabling Clause

Source: WTO, World Trade Statistical Review 2016

Enabling Clause

Decision of 28 November 1979 (L/4903)

1. “Notwithstanding GATT Art. 1, contracting parties may accord differential and more favourabletreatment to developing countries, without according such treatment to other contracting parties.”

2.c) Regional 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 another;

Decision adopted in 1979 by

GATT signatories to allow

derogations to the MFN

treatment in favor of

developing countries


Enabling Clause

Decision of 28 November 1979 (L/4903)

1. “Notwithstanding GATT Art. 1, contracting parties may accord differential and more favourabletreatment to developing countries, without according such treatment to other contracting parties.”

2.c) Regional 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 another;


Deviation from the MFN principle (GATT Art. 1)

Special rules for developing countries entering into FTAs:

• No explicit requirement to eliminate internal barriers

• But: no DSB jurisprudence specifically on relationship between Art. XXIV and the Enabling Clause

PART 3LEGAL ASPECTS OF

PREFERENTIAL TRADE AGREEMENTS

Internal conditionsExternal conditions

Transparency

PTAs as Deviations from MFN

Economic exceptions

• Free trade agreements and customs unions

• Preferential treatment for developing countries, e.g. Enabling Clause

• Balance of payments (GATT Art. XII)

• Assistance to economic development (GATT Art. XVIII)

• Trade remedies

Non-economic exceptions

• GATT Art. XX:

• Public morals

• human, animal or plant life or health

• national treasures of artistic, historic or archaeological value

• conservation of exhaustible natural resources

• Security

• Etc.

Source: Guzman & Pauwelyn, “International Trade Law” 2009

Internal Requirements

FTAs

GATT Article XXIV para. 8 (b)

A free-trade area shall be understood to mean a group of (…) territories in which the duties and other restrictive regulations of commerce (…) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.

CUs

GATT Article XXIV para. 8 (a)(i)

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 (…) are eliminated with respect to substantially all the trade between the constituent territories of the union…

External Requirements

FTAs


with respect to a free-trade area (…) the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free–trade area (…) to the trade of (third) parties 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

CUs

GATT Article XXIV para. 8 (a)(ii)

“…substantially the same duties and other regulations of commerce are applied by each of the members of the union to the (third parties)”

GATT Article XXIV para. 5(a)

“…duties and other regulations of commerce imposed at the institution of any such union (…) in respect of trade with (third) parties (…) shall 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 (…)


FTAs



CUs and FTAs

GATT Article XXIV para. 5 Chapeau:

Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area; Provided that

AB , Turkey – Textiles, (1999)

“Article XXIV provides a defense

for measures that are introduced

upon formation of a CU that

meets that requirements of

XXIV:5(a) and 8(a) if the

formation of the CU would

have been prevented if the

Member were not allowed to

introduce the measure”



FTAs



CUs

GATT Article XXIV para. 8 (a)(ii)

“…substantially the same duties and other regulations of commerce are applied by each of the members of the union to the (third parties)”

GATT Article XXIV para. 5(a)

“…duties and other regulations of commerce imposed at the institution of any such union (…) in respect of trade with (third) parties (…) shall 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 (…)

AB , Turkey – Textiles, (1999)

“substantially the same duties”

offers a limited flexibility,

requiring something “closely

approximating sameness.” It is

not enough that the relevant

trade regulations be

“comparable”


TransparencyThe TM clarifies existing

transparency requirements

as contained in the WTO

provisions on FTAs such

as notification,

consideration by the WTO,

and subsequent

notification of changes and

reporting.

Source: WTO E-LEARNING, Detailed Presentation of Regional Trade Agreements in the WTO

TransparencyNotable development: new responsibility of the WTO Secretariat to prepare factual presentations of all notified RTAs.

The factual presentation is a detailed summary of an RTA and contains data on the trade environment of the RTA parties, a description of the RTA's regulatory features, and details of the tariff, trade and regulatory liberalization envisaged over the transition period of the RTA.

Source: WTO E-LEARNING, Detailed Presentation of Regional Trade Agreements in the WTO

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