CHAPTER 15 REGIONAL INTEGRATION 1. OVERVIEW OF RULES (1) Regional Integration In addition to the global economic regime based on the GATT and IMF systems, which has sustained the world economy since World War II, regionalism, through which neighbouring countries seek to strengthen their economies by entering into some form of “regional integration” has become a major trend. This trend was triggered by the EU market integration. In both developed and developing countries, customs unions and free trade areas (FTAs) continue to increase and expand. Today, they account for a considerable amount of world trade (Figure15-1, 15-2). In the WTO, regional trade agreement (RTAs) is referred to as customs unions, FTAs, and interim agreements. In this chapter, we use the term “regional integration” to signify both RTAs and other forms of regional cooperation. Almost 90 percent of the WTO Members are parties to such RTAs. Japan, Korea and Hong Kong are among the few exceptions. Article XXIV of the GATT allows RTAs to be exempted from the most-favoured-nation principle under certain conditions; RTAs must not raise barriers to trade with countries outside of the region. This is because while RTAs promote trade liberalization within the respective regions, if they raise barriers to trade with countries outside the regions, they would impede trade liberalization as a whole. From this standpoint, the adequate application of Article XXIV should be needed lest the WTO is turned into an empty shell. Moves towards “Regional Integration” In recent years, moves towards regional integration have been more and more active, with countries seeking to strengthen their ties with other countries. In Europe, when the Treaty on the European Union (the Maastricht Treaty) took effect in November, 1993, the European Union (EU) was created, which enlarged and built upon the European Community (EC). The enlargement of the EU took place on January 1, 1995 by accession of three new countries, Austria, Sweden and Finland, which were former members of the European Free Trade Association (EFTA). Meanwhile, the September, 1993 signing of the side agreements to the North American Free Trade Agreement (NAFTA) launched the free trade arrangement in North America in January, 1994. Elsewhere, AFTA (the ASEAN Tree Trade Area) began reducing tariffs among its members in January, 1993. It has continued to expand its range of items covered, and has agreed to make efforts toward the acceleration of the integration process with a view to implementing the AFTA free trade agreement by 2003, and to begin negotiations on access to services area. On the other hand, in the Americas, certain countries in Latin America initiated the Southern Common Market Treaty (MERCOSUR) in January, 1995. One of the trends that have recently been observed is to create mechanisms for broader regional co-operation. This includes: 1) enlargement of existing regional integration, including the FTAs between the EU and the Central and Eastern European countries (CEECs), the FTA to be set up between the EU and the Mediterranean countries, and the creation of a Free Trade Area of the Americas (FTAA); 2) linkage between regional integration organizations, such as economic co-operation, including the creation of a future FTA between the EU and MERCOSUR; and 3) continent-based regional co-operation that may not 263 necessarily be seeking to create a FTA or customs union, such as Asia-Pacific Economic Co- operation (APEC) and the Asia-Europe Meeting (ASEM). The APEC is some form of regional co-operation that does not immediately seek to establish customs unions or FTAs. The APEC is founded on an open regionalism that seeks not only to reduce the barriers to trade among its member economies but to make the result of these efforts available to other non-region economies as well. In November, 1994, an unofficial summit of the leaders of the APEC economies was held, and a joint declaration was issued “setting a goal of free and more open trade and investment by the year 2010 in the developed countries, and 2020 in the developing countries” (the Bogor Declaration). At the Manila meetings in November, 1996, all members submitted specific Individual Action Plans (IAP). All members (including new participating members in 1998, i.e. the Russian Federation, Vietnam and Peru) submitted revisions of the Plans at the Vancouver meetings held in November, 1997 and at the Kuala Lumpur Meeting in November, 1998. Thus, steps toward liberalization and facilitation have been taken. Japan, like Korea, Hong Kong, and Taiwan, is a WTO member that does not belong to any regional trade agreement. Japanese basic trade policy is to create an environment for free and transparent international economic activities by strengthening common international rules through active participation in the next round of WTO negotiations. At the same time, we also consider that we need to strengthen regional and bilateral ties while they complement international rules. Such efforts will promote multilateral liberalization in the future and will expand the range of economic activities in which Japan enjoys a close economic partnership with Asian countries. From this standpoint, private-sector groups between Japan and Korea are jointly studying the potential for a free trade agreement, and the governments of the two countries are negotiating earnestly with a view to consulting an investment agreement. Last December, Japan reached an agreement with Singapore for a study group composed of industries, governments, and academics to study a free trade agreement as well. <Figure 15-1> Growth in the Value of World Trade by Region, 1990-98 (Trade in Goods) (Unit: Billion Dollars) EXPORT IMPORT 1998 ( % ) 1990-8 1998( % ) 1990-8 World 5270 ( 100) 6 5465 (100) 6 North America 897 (15.4) 7 1152 (21.1) 8 (America) 682(12.9) 7 944(17.3) 8 South America 276( 5.2) 8 340( 6.2) 14 Western Europe 2348(44.5) 5 2367(43.3) 4 Asia 1293(24.5) 7 1086(19.9) 5 (Japan) 388( 7.4) 4 280( 5.1) 2 (China) 184( 3.5) 15 140( 2.6) 13 EU(15) 2181(41.4) 5 2172(39.8) 4 NAFTA(3) 1014(19.2) 8 1280(23.4) 8 MERCOSUR(4) 80( 1.5) 7 99( 1.8) 16 ASEAN(10) 329( 6.2) 11 279( 5.1) 7 (Source) WTO Annual Report 1999(the WTO Secretariat) (NOTE) 1990-8:rate of increase (%) 264 <Figure 15-2> Ratio of Internal to External Trade for Major Regions (Trade in Goods) EXPORT 1998 IMPORT 1998 Total Internal External Total Internal External (billion Exports Exports (billion Imports Imports dollars) (%) (%) dollars) (%) (%) EU(15) 2181 62.7 ( -) 37.3 ( -) 2172 63.1 ( -) 36.9 ( -) NAFTA(3) 1014 51.3 (10) 48.7 ( 5) 1280 39.9 (11) 60.1 ( 7) MERCOSUR(4) 80 24.9 (22) 75.1 ( 5) 99 21.2 (22) 78.8 (15) ASEAN(107) 329 22.0 (12) 78.0 (11) 279 22.6 (12) 77.4 ( 6) (Source) WTO Annual Report 1999 (the WTO Secretariat) (NOTE) 1) Figures in parentheses ( ) for internal/external exports and internal/external imports show the 1990-1998 growth rate (%). 2) Numbers given here may not match those in Figure 15-1 because of the margin for error in the calculations. (2) Legal Framework (i) Existing GATT/WTO Provisions on Regional Trade Agreements (RTAs) Tariff reductions applying exclusively to specific countries are prohibited in principle under Article I of the GATT, which requires most-favoured-nation treatment as a basic rule. The WTO, however, under Article XXIV of the GATT, authorizes the establishment of customs unions, FTAs and interim agreements, if their purpose is to facilitate trade within the region, and not to raise barriers to trade with countries outside of the region. The WTO allows these RTAs to be exempted from the most-favoured-nation principle as long as they conform to the following conditions outlined in Figure 15-3. So far, the question of whether most customs unions or FTAs conform to Article XXIV of the GATT has been examined by working parties established separately for each RTA for which notification has been given. However, there is almost always disagreement over how to interpret Article XXIV since the wording is vague: “substantially all the trade between the constituent territories”, “other restrictive regulations of commerce (ORRCs)”, “on the whole....shall not be higher or more restrictive.” Because of this, in almost every case, the claims of the parties to the FTAs and customs unions and those of third countries with competing interests have been given equal weight. Interpretation of Article XXIV became an issue in the review of the Treaty of Rome that established the European Economic Community (EEC) in 1957. Indeed, only six of the 69 working parties that had completed reviews by the end of 1994 had been able to reach a consensus on conformity questions. But while there have been conflicts of opinion on Article XXIV interpretation in almost every review of a RTA, the legitimacy of most-favoured-nation treatment for a RTA has only been contested in three panel cases. None of these panel reports has been adopted by the GATT Council. 265 <Figure 15-3> Conditions of Customs Unions, FTAs and Interim Agreements under Article XXIV of the GATT. (Conditions under Article XXIV: 5, 8 of the GATT) - ORCs :other regulations of commerce - ORRCs :other restrictive regulations of commerce Article XXIV:5 Article XXIV:8 Customs Unions (a) The duties and ORCs shall not on (a)(i) The duties and ORRCs (except, the whole be higher or more where necessary, those permitted restrictive than the general incidence under Articles XI, XII, XIII ,XIV, of those previously applicable in the XV and XX) are eliminated with constituent territories prior to the respect to "substantially all the trade" formation.