CHAPTER 5
REGIONAL TRADE AGREEMENTS
OBJECTIVES:
At the end of the topic, students should be able to:
1. explain the structure and significance of major international trade agreements and
organizations;
2. explain how trade agreements between specific regions or groups of countries
promote trade and economic cooperation;
INTRODUCTION
The past two decades have witnessed a proliferation of regional trade blocs that promote
regional economic integration. World Trade Organization (WTO) members are required to notify the
WTO of any regional trade agreements in which they participate. By 2018, all members had notified
the WTO of participation in one or more regional trade agreements. As of early 2018, there were 284
regional trade agreements in force.
Consistent with the predictions of international trade theory and particularly the theory of
comparative advantage, agreements designed to promote freer trade within regions are believed by
economist to produce gains from trade for all member countries. The General Agreement on Tariffs
and Trade (GATT) and its successor, the World Trade Organization, also seek to reduce trade barriers.
However, the WTO has a global perspective and 164 members, which can make reaching an
agreement extremely difficult. By entering into regional agreements, groups of countries aim to
reduce trade barriers more rapidly than can be achieved under the auspices of the WTO.
Levels of Economic Integration
Several levels of economic integration are possible in theory. From least integrated to most
integrated, they are a free trade area, a customs union, a common market, an economic union, and,
finally, a full political union.
In a free trade area, all barriers to the trade of goods and services among member countries
are removed. In the theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or
administrative impediments are allowed to distort trade between members. Each country, however, is
allowed to determine its own trade policies with regard to nonmembers.
The customs union is one step farther along the road to full economic and political
integration. A customs union eliminates trade barriers between member countries and adopts a
common external trade policy. The EU began as a customs union, but it has now moved beyond this
stage.
The next level of economic integration, a common market, has no barriers to trade among
member countries, includes a common external trade policy, and allows factors of production to move
freely among members. Labor and capital are free to move because there are no restrictions on
immigration, emigration, or cross-border flows of capital among member countries.
An economic union entails even closer economic integration and cooperation than a common
market. Like the common market, an economic union involves the free flow of products and factors
of production among member countries and the adoption of a common external trade policy, but it
also requires a common currency, harmonization of members’ tax rates, and a common monetary and
fiscal policy.
The move toward economic union arises the issue of how to make a coordinating bureaucracy
accountable to the citizens of member nations. The answer in through political union in which a
central political apparatus coordinates the economic, social, and foreign policy of the member states.
A. THE EUROPEAN UNION
The European Union (EU) is the product of two political factors :
1. The devastation of western Europe during two world wars and the desire for lasting peace,
and
2. The European nations’ desire to hold their own on the world’s political and economic stage.
The forerunner of the EU, the European Coal and Steel Community, was formed in 1951 by
Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands. Its objective was to remove
barriers to intragroup shipments of coal, iron, steel, and scrap metal. With the signing of the Treaty of
Rome in 1957, the European Community became the European Union following the ratification of the
Maastricht Treaty.
The community grew in 1973, when Great Britain, Ireland, and Denmark joined. These three
were followed in 1981 by Greece; in 1986 by Spain and Portugal; and in 1995 by Austria, Finland,
and Sweden bringing the total membership to 15 (East Germany became part of the EC after the
reunification of Germany in 1990). Another 10 countries joined the EU on May 1, 2004, eight of them
from eastern Europe plus the small Mediterranean nations of Malta and Cyprus. Bulgaria and
Romania joined in 2007 and Croatia in 2013, bringing the total number of member states to 28. Right
now, it looks as if the number of members will fall to 27 in 2019 when Britain exits the EU.
In February 1992, EC members signed the Maastricht Treaty, which committed them to
adopting a common currency by January 1, 1999. The euro is now used by 19 of the 28 member states
of the European Union; these 19 states are members of what is often referred to as the euro zone.
On June 23, 2016, and by a narrow margin, the British electorate voted in a national
referendum to leave the EU. In early 2017, the British government formally notified the EU of its
intention to exit the EU. Under the Treaty of Lisbon, it had two years to negotiate the terms of exit
with the EU, which was scheduled to occur on March 29, 2019. While the British have enjoyed the
benefits of free trade within Europe, a segment of the population has never been comfortable with the
loss of national sovereignty implied by membership within EU, and more recently, immigration has
become a key issue.
B. THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA
The governments of the United States and Canada in 1988 agreed to enter into a free trade
agreement, which took effect January 1, 1989. The goal of the agreement was to eliminate all tariffs
on bilateral trade between Canada and the United States by 1988. This was followed in 1991 by talks
among the United States, Canada, and Mexico aimed at establishing a North American Free Trade
Agreement (NAFTA) for the three countries. The talk concluded in August 1992 with an agreement
in principle, and the following year, the agreement was ratified by the governments of all three
countries. The agreement became law January 1, 1994.
At the end of August 2018 Mexico and the United States announced that they had come to terms
on a new trade agreement that preserved much of NAFTA but introduced a number of significant
changes. Under the pressure of being the odd country out, Canada, in the waning hours of September
30, also agreed to join the new trade accord, which was branded the United States–Mexico–Canada
Agreement (USMCA). The pact was signed by Trump, Trudeau, and Mexican Pres. Enrique Peña
Nieto on November 30, 2018.NAFTA, negotiated before the wide adoption of the internet, did not
include provisions on digital trade or e- commerce. USMCA entered into force July 1, 2020. All
NAFTA rules are expired except for automotive products.
C. THE ANDEAN COMMUNITY
Bolivia, Chile, Ecuador, Colombia, and Peru signed an agreement in 1969 to create the
Andean Pact. The Andean Community was largely based on the EU model but was far less
successful at achieving its stated goals. The integration steps begun in 1969 included an internal tariff
reduction program, a common external tariff, a transportation policy, a common industrial policy, and
special concessions for the smallest members, Bolivia and Ecuador.
The tide began to turn in the late 1980s when, after years of economic decline, the
governments of Latin America began to adopt free-market economic policies. In 1990, the heads of
the five current members of the Andean Community Bolivia, Ecuador, Peru, Colombia, and Venezuela
met in the Galápagos Islands. The resulting Galápagos Declaration effectively relaunched the Andean
Pact, which was renamed the Andean Community in 1997. The declaration’s objectives included the
establishment of a free trade area by 1992, a customs union by 1994, and a common market by 1995.
In late 2006, Venezuela withdrew from the Andean Community as part of that country’s attempts to
join Mercosur.
D. SOUTHERN CONE FREE TRADE AREA (MERCOSUR)
Mercosur is the second-largest common-market agreement in Latin America after NAFTA.
The Treaty of Asunción, which provided the legal basis for Mercosur, was signed in 1991 and
formally inaugurated in 1995. The treaty calls for a common market that would eventually allow for
the free movement of goods, capital, labor, and services among the member countries, with a uniform
external tariff. Because there was concern among Mercosur members about sacrificing sovereign
control over taxes and other policy matters, the agreement envisioned no central institutions similar to
those of the European Common Market institutions.
E. ASIA-PACIFIC ECONOMIC COOPERATION (APEC)
The other important grouping that encompasses the Asian-Pacific Rim is the Asia-Pacific
Economic Cooperation. Formed in 1989, APEC provides a formal structure for the major
governments of the region, including the United States and Canada, to discuss their mutual interest in
open trade and economic collaboration. APEC is a unique forum that has evolved into the primary
regional vehicle for promoting trade liberalization and economic cooperation. APEC includes all the
major economies of the region and the most dynamic, fastest-growing economies in the world. The 21
members of APEC (Asia-Pacific Economic Cooperation) are: Australia, Brunei Darussalam, Canada,
Chile, the People's Republic of China, Hong Kong, China, Indonesia, Japan, the Republic of Korea,
Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Republic of the Philippines, the
Russian Federation, Singapore, Chinese Taipei, Thailand, the United States of America, and Vietnam.
APEC has as its common goal a commitment to open trade, to increase economic
collaboration, to sustain regional growth and development, to strengthen the multilateral trading
system, and to reduce barriers to invest and trade without detriment to other economies.
Representatives from APEC member nations meet annually to discuss issues confronting the group, to
propose solutions to problems arising from the growing interdependence among their economies, and
to continue their quest for ways to lower barriers to trade.
F. ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN)
Formed in 1967, the Association of Southeast Asian Nations (ASEAN) includes Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
Laos, Myanmar, Vietnam, and Cambodia have all joined recently, creating a regional grouping of 600
million people with a combined GDP of some $2 trillion. The basic objective of ASEAN is to foster
freer trade among member countries and to achieve cooperation in their industrial policies. Progress
so far has been limited, however.
Until recently, only 5 percent of intra-ASEAN trade consisted of goods whose tariffs had been
reduced through an ASEAN preferential trade arrangement. This may be changing. In 2003, an
ASEAN Free Trade Area (AFTA) among the six original members of ASEAN came into full effect.
G. CENTRAL AMERICAN COMMON MARKET, CAFTA, AND CARICOM
Two other trade pacts in the Americas have not made much progress. In the early 1960s,
Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua attempted to set up a Central
American Common Market. It collapsed in 1969, when war broke out between Honduras and El
Salvador after a riot at a soccer match between teams from the two countries.
1. Caribbean Community and Common Market (CARICOM)
The success of the Caribbean Free Trade Association led to a creation of the Caribbean
Community and Common Market. CARICOM member countries continue in their efforts to achieve
true regional integration. The group has worked toward a single-market economy, and in 2000
established the CSME (CARICOM Single Market and Economy) with the goal of a common currency
for all membersCARICOM continues to seek stronger ties with other groups in Latin America and has
signed a trade agreement with Cuba.
. 2. Regional Trade Agreements in the Middle East
The Middle East has several regional trade agreements in place, including the Greater Arab Free
Trade Area (GAFTA) and the Middle East Free Trade Area Initiative (MEFTA) with the United States.
These agreements aim to facilitate trade and investment within the region and with other countries.
The Middle East has been less aggressive in the formation of successfully functioning
multinational market groups. The Arab Common Market has set goals for free internal trade but has
not succeeded. The aim is to integrate the economies of the 22 Arab countries, but before that will be
feasible, a long history of border disputes and persisting ideological differences must be overcome.
The idea is still alive, however, and is a topic of discussion whenever Arab foreign ministers meet.
Iran, Pakistan, and Turkey, formerly the Regional Cooperation for Development (RCD), have
renamed their regional group the Economic Cooperation Organization (ECO). Since reorganizing,
Afghanistan and six of the Newly Independent States were accepted into the ECO.
The other activity in the region, led by Iran, is the creation of the Organization of the Islamic
Conference (OIC), a common market composed of Islamic countries. A preferential tariff system
among the member states of the OIC and the expansion of commercial services in insurance,
transport, and transit shipping are among the issues to the debated at the next conference of Islamic
countries. The OIC represents 60 countries and over 650 million Muslims worldwide. The member
countries’ vast natural resources, substantial capital, and cheap labor force are seen as the strengths of
the OIC.