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The Evolution of Trade Treaties and Trade Creation: Lessons for Latin America

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  • Sarath Rajapatirana
Abstract
This paper examines the main distinctions between the General Agreement on Tariffs and Trade (GATT) and regional trading arrangements (RTAs), noting that under the former, liberalization of trade is based on the most favored nation (MFN) principle, while under the latter, there is a departure from that principle leading to preferential trade liberalization. Properly instituted RTAs must confirm to Article XXIV of the GATT. But the article has not been followed by nearly all the countries that have created regional integration schemes. This has meant that while the integration schemes for the 1980s and 1990s have not lead to increased protection against third countries, there has not been across the board trade liberalization among the groups forming RTAs. Developing countries have sought and received formal exemption from Article XXIV through the enabling clause at the Tokyo round. Departures from the MFN principle and Article XXIV have meant that there is potential for greater trade diversion with the proliferation of RTAs. The paper finds that there is no general tendency for RTAs to become increasingly integrated entities. The European Economic Community has been an exception, where greater integration has taken place with trade within the region growing steadily. In contrast, the Association of South East Asian nations (ASEAN) has been a loose agreement. Nevertheless, trade among the group has increased rapidly on the basis of multilateral trade liberalization undertaken by the countries in the group. Latin American countries also attempted to create RTAs in the 1960s based on their national protectionist policies which led to reduced trade within the regional as well as the rest of the world. RTAs carry with them the danger of trade diversion and that there is no inexorable logic that RTAs would lead to increased integration with lower protection. Countries venturing into RTAs must attempt to achieve GATT-plus trade liberalization, implying that RTAs are used to have greater trade liberalization than what could be achieved through GATT based trade. The lessons for Latin America to avoid unnecessary costs of these RTAs arising from trade diversion are to have low protection in the first place, to have open RTAs so that there is easy accession of new partners, to continue with the trade liberalization on a MFN basis, to avoid free trade areas (in preference for common markets) which could lead to new barriers through rules of origin and to coordinate regulatory and competition policies as well as to remove barriers arising from transport, ports and communications.

Suggested Citation

  • Sarath Rajapatirana, 1995. "The Evolution of Trade Treaties and Trade Creation: Lessons for Latin America," Reports _005, World Bank Latin America and the Caribean Region Department.
    • Handle: RePEc:wop:bawlad:_005
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    References listed on IDEAS

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    1. Innwon Park & Soonchan Park, 2011. "Best practices for regional trade agreements," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(2), pages 249-268, June.
    2. Innwon Park & Soonchan Park, 2009. "Free Trade Agreements versus Customs Unions: An Examination of East Asia," Asian Economic Papers, MIT Press, vol. 8(2), pages 119-139, Spring.
    3. Valdes, Alberto, 1995. "Joining an Existing Regional Trade Agreement: Issues and Policies from the Perspective of a Small Open Economy in Latin America," 1995: Economic Integration in the Western Hemisphere Symposium, June 7-9, 1995, San Jose, Costa Rica 50807, International Agricultural Trade Research Consortium.
    4. Laird, Sam, 1997. "MERCOSUR: Objectives and achievements," WTO Staff Working Papers TPRD-97-02, World Trade Organization (WTO), Economic Research and Statistics Division.
    5. Hamanaka, Shintaro, 2012. "Evolutionary paths toward a region-wide economic agreement in Asia," Journal of Asian Economics, Elsevier, vol. 23(4), pages 383-394.
    6. Park, Innwon & Park, Soonchan, 2009. "Consolidation and Harmonization of Regional Trade Agreements (RTAs): A Path Toward Global Free Trade," MPRA Paper 14217, University Library of Munich, Germany, revised 23 Mar 2009.
    7. Rajapatirana, Sarath, 1996. "Evaluating Bolivia's choices for trade integration," Policy Research Working Paper Series 1632, The World Bank.
    8. Nigel Nagarajan, 1998. "MERCOSUR and Trade Diversion: What Do The Import Figures Tell Us?," European Economy - Economic Papers 2008 - 2015 129, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    9. González-Vega, Claudio, 1995. "Strategic options of commercial policy for Central America: basic guidelines," Oficina de la CEPAL en Washington (Estudios e Investigaciones) 28977, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).

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