Regionalism John Ravenhill
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Rave-05.qxd 27/8/04 5:15 PM Page 116 Regionalism 5 John Ravenhill G Introduction 117 G Why regionalism? 120 G The rush to regionalism 126 G The political economy of regionalism 133 G The economic consequences of regional integration 138 G Regionalism and the WTO: stepping stone or stumbling block? 141 READER’S GUIDE The number of regional trade agreements has grown rapidly since the World Trade Organization (WTO) came into existence in 1995. More than 40 per cent of world trade is now conducted within these preferential trade arrangements, the most significant excep- tion to the WTO’s principle of non-discrimination. Governments have often entered regional economic agreements primarily motivated by political rather than economic con- siderations. Nonetheless, they may prefer trade liberalization on a regional rather than a global basis for several economic reasons. This chapter reviews the political economy of regionalism: why regional trade agreements are established, which actors are likely to sup- port regional rather than global trade liberalization, the effects that regionalism has had on the trade and welfare of members and non-members, and the relationship between liberalization at the regional and global levels. Rave-05.qxd 27/8/04 5:15 PM Page 117 REGIONALISM 117 Introduction When the Japanese prime minister, Junichiro Reciprocity and Fuller Participation of Developing Koizumi, and his Singaporean counterpart, Goh Chok Countries, permits regional agreements among Tong, signed a bilateral trade agreement in January developing countries on trade in goods. 2002, Japan departed from the rapidly depleting G Article V of the General Agreement on Trade in ranks of WTO members that were not parties to a dis- Services (GATS) establishes conditions that permit criminatory trade arrangement. By the middle of liberalization of trade in services among regional 2003, only Macau and Mongolia among the WTO’s partners. 146 members were not parties to one or more regional At the beginning of 2003, of the 179 RTAs in effect, trading agreements (RTAs). These take various forms 135 came under the auspices of Article XXIV, twenty- ranging, in scope of cooperation, from free trade areas five were under GATS Article V, and nineteen under to economic unions (Box 5.1). the Enabling Clause. RTAs are the most important exception that the Why do governments choose to pursue their for- WTO permits to the principle that countries should eign economic policy objectives through regionalism not discriminate in their treatment of other members. rather than through other strategies? What explains Parties to regional arrangements are obliged to notify the recent growth in regionalism? Which political the WTO of the details of their agreements; the interests are driving integration at the regional level? Committee on Regional Trade Agreements has respon- What impact do regional agreements have on the sibility for ensuring that the agreements comply with economies and on the political systems of partici- the WTO’s provisions. World Trade Organization data pants? And what are the consequences of the growth reflect the explosion in the number of regional of regionalism for the global trading system? These arrangements that has occurred since the early 1990s. are the principal questions that this chapter addresses Throughout its entire existence from 1948 to 1994, (our focus is on trade rather than the recent growth the General Agreement on Tariffs and Trade (GATT) in regional collaboration on finance). But first, we received 124 notifications of regional trade agree- turn to matters of definition: what do we mean by ments, of which only sixty-five were still in force regionalism? when it was replaced by the WTO. Between 1995 and Regionalism refers to a formal process of intergov- the beginning of 2003, the WTO received notification ernmental collaboration between two or more states. of a further 130 agreements. In addition, the WTO It should be distinguished from regionalization, which estimated that at the latter date a further seventy RTAs refers to the growth of economic interdependence were operational but had yet to be notified to it. This within a given geographical area. growth in regionalism has led to a marked increase in One of the few issues on which writers on regional- the share of world trade conducted on a discrimina- ism agree is that there is no such thing as a ‘natural’ tory basis. Trade within discriminatory regional region. Regions are social constructions whose agreements in 2000 accounted for 43 per cent of total members define their boundaries. Consider, for world trade; the WTO expects this share to exceed 50 instance, the European Union: in its successive per cent by 2005 (WTO 2003c: 48, Table 1B10). incarnations—European Economic Community, Three sets of rules in the WTO permit the creation European Community, and, now, the European of RTAs: Union—its membership has risen from its six G Article XXIV of the GATT lays down conditions for founders to the current total of twenty-five. And the establishment and operation of free trade agree- debates over EU membership for Turkey show that no ments and customs unions covering trade in goods. consensus exists on either geographic or cultural cri- G the ‘Enabling Clause’, formally the 1979 Decision teria that could be used to distinguish the ‘European’ on Differential and More Favourable Treatment, from the ‘non-European’. Rave-05.qxd 27/8/04 5:15 PM Page 118 118 JOHN RAVENHILL Box 5.1 A hierarchy of regional economic arrangements Regional integration arrangements are usually perceived to negotiate than are free trade areas. The relatively small as a hierarchy that runs from free trade areas through cus- number of customs unions includes the Andean toms unions and common markets to economic unions. Community, CARICOM, MERCOSUR, and the Southern The terminology of ‘hierarchy’ is used because each level African Customs Union. Many have experienced difficul- incorporates all the provisions of the lower level of ties in negotiating a common external tariff. Even in the integration. This does not imply that particular regional European Union individual states maintained different arrangements will necessarily progress from a lower to a tariffs on some products for more than thirty years after its higher level of integration. Nor is it the case that regional formation. MERCOSUR’s negotiation of a common partnerships inevitably begin at the lowest level and then external tariff took fifteen years longer than anticipated, it move to ‘deeper’ integration: some arrangements, for applied to only three-quarters of total products, and even instance, have been established as customs unions. then was not accepted by two of its members, Bolivia and Peru. A free trade area exists when countries remove tariffs and non-tariff barriers to the free movement of goods and A common market includes a customs union and also services between them. Governments meanwhile are free allows for free movement of labour and capital within the to choose how they treat goods and services imported regional partnership. Such free flows of factors of produc- from non-regional-partner states. Membership in one free tion inevitably require governments to collaborate in addi- trade area therefore does not prevent a country from tional policy areas to ensure comparable treatment in all establishing or joining other free trade areas: Mexico, for countries within the common market. Few governments example, is a party to agreements with more than thirty historically have been willing to accept the loss of policy- countries. Because free trade areas impose relatively few making autonomy that occurs in a common market. The constraints on national decision-making autonomy, they Andean Community, CARICOM, the COMESA (Common are the easiest of the regional arrangements to negotiate. Market for Eastern and Southern Africa) grouping, and More than 90 per cent of regional partnerships take the MERCOSUR have committed themselves to work for the form of free trade areas. Examples include NAFTA, the establishment of a common market but it is too early to Japan–Singapore Economic Partnership Agreement, and judge whether their aspirations will be realized. the Baltic Free Trade Area. An economic union includes a common market plus the A customs union goes beyond the removal of barriers to adoption of a common currency and/or the harmoniza- trade within the region to adopt a common set of policies tion of monetary, fiscal, and social policies. Only the towards imports from countries outside the region. This European Union has reached this level of economic includes agreement on a common level of tariffs (often integration. referred to as a common external tariff) on all extra- regional imports. Such agreements cost governments Many of the free trade agreements signed in recent years autonomy in their foreign economic policies (joint institu- also include provisions for ‘deeper’ integration, the most tions are usually required to negotiate and administer the common of which relate to the removal of restrictions on common external trade policies). They will also have dis- investment flows. But even though these are elements tributive effects, depending on the level at which the often found in common markets, these free trade areas do common external tariff is set for various items. not aspire to the creation of a common external tariff or to Consequently, customs unions are usually more difficult the free flow of labour within the regional grouping. For most of the post-war period, the concept of African Cooperation (Kenya, Tanzania, and Uganda), regional economic integration has usually been asso- and the Andean Pact (Bolivia, Colombia, Ecuador, ciated with an arrangement between three or more Peru, Venezuela). In recent years, however, a large geographically contiguous states. Again, the EU number of preferential trade agreements have been provides an excellent example but consider also East signed that involve only two parties (for example, Rave-05.qxd 27/8/04 5:15 PM Page 119 REGIONALISM 119 200 180 160 140 120 100 No.