Developing Countries & Regional Agreements

Article XXIV of the GATT, sets out the rules for customs unions or free trade areas. The ambiguity of the article has allowed large numbers of regional trade agreements involving GATT/WTO members to come into being, even though almost none of them has been formally found to be fully compatible with the rules.

A 1979 Understanding on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries (the “Enabling Clause”) allows developing countries some greater flexibility for agreements amongst themselves. Article V of the GATS is the services equivalent of GATT Article XXIV.

During the Uruguay Round, a minor interpretative Understanding was reached on Article XXIV, which clarified some technical points.

In 1996, the WTO established a Committee on Regional Trade Agreements. The Committee’s mandate includes:

• to review new or enlarged arrangements,
• to improve examination and reporting procedures, and
• to consider the systemic implications of the regionalism/multilateralism relationship.

The Singapore Declaration stated that the relationship between the WTO and regional trade agreements needed to be further clarified. The WTO Committee on RTAs recently launched a work programme focussing on

• legal analysis of the relevant WTO provisions
• comparison of RTAs
• a debate on context and economic aspects.
  
  

According to World Bank research (Fernandez and Portes), by the time the WTO was established, nearly every GATT member was party to at least one RTA. More than 90 preferential regional agreements are now in place, ranging from customs unions to free trade areas to non-reciprocal preferential agreements. They differ significantly in the scope and treatment of issues including mobility of labour and capital, investment and production sharing.

Fernandez and Portes also proposed that growth in RTAs during the past decade can be characterized in three ways; they have:

• Deepened to cover so-called soft restrictions including health and environment standards, services, intellectual property, investment and capital mobility.
• Widened to include countries not previously party to an RTA.
• Been revived or newly created.

Prospective arrangements may cover free trade areas between Europe and the nations of sub-Saharan Africa, the Caribbean and the Pacific as well as, possibly, free trade across the Atlantic. Recently, the EU and MERCOSUR agreed to begin negotiations in 2001 on an RTA to include members of both groups.

Other World Bank research (Croome 1998) suggests that as regional trading arrangements (RTAs) have proliferated over the last decade, they have raised questions about whether they do

• stimulate growth and investment,
• facilitate technology transfer,
• shift comparative advantage towards high value-added activities,
• provide credibility to reform programs, or
• induce political stability and co-operation.
  
  

Concerns have been expressed that RTAs divert trade in inefficient directions and undermine the multilateral trading system.

Again, the research indicates that developing countries, including RTA members, have a great interest in making RTAs more consistent with WTO disciplines. Reasons include

• compatibility of RTAs with any strengthening of WTO provisions, and
• RTAs can be trade restrictive and protectionist in nature, particularly in regard to rules of origin.

Of particular interest to developing countries, especially LDCs, is the European Union’s need to replace, by early 2000, its Lomé agreements with the 71 ACP countries. These include the majority of LDCs as well as nearly thirty further small and vulnerable economies. Virtually all of them are heavily dependent on trade with the EU. Negotiations on the successor to Lomé IV commenced in late 1998. The EU’s Council of Ministers proposes to replace trade provisions in Lomé with regional trade agreements that will meet Article XXIV requirements.

Regional agreements

The least-developed countries (LDCs) have been especially concerned by the growing importance of free trade areas and customs unions, which now cover virtually all their major export markets, including Europe and North America.

Since most of the major regional trading arrangements do not include least-developed countries, they are concerned that these arrangements will result in a loss of preference vis-à-vis third countries and, more generally, increase their degree of marginalization.

Although LDCs and other third countries might benefit from the trade-creating effects of the regional arrangements - and from the stimulus to growth and import demand – the trade-diverting costs and investment diversion may outweigh any gains.

While trade-diverting effects and their importance is difficult to assess, research suggests (Croome 1998) the actual diversion effects on overall LDC exports will be limited. Most LDC exports do not compete directly compete with RTA members'. In any case, the tariff reductions and bindings agreed to in the Uruguay Round agreement will ensure that the degree of discrimination against third countries is reduced.