Trade Blocs: RIAs as Stepping Stones or Millstones to Multilateral Trade Liberalization, Study Guides, Projects, Research of Negotiation

Download Trade Blocs: RIAs as Stepping Stones or Millstones to Multilateral Trade Liberalization and more Study Guides, Projects, Research Negotiation in PDF only on Docsity! C H A P T E R 5 93 Introduction DOES REGIONAL INTEGRATION ENCOURAGE EVOLUTION toward globally free trade, or does it place obstacles in its way, and perhaps even increase the likelihood of trade wars between competing blocs? The stakes in the bet as to whether RIAs are stepping stones to multilateral trade liberalization or millstones around its neck are truly huge.1 Opening trade and increasing competition have been behind virtually every sustained economic growth experience, and the unprecedented postwar growth of world output and income has clearly been allied to the growth of world trade and trade liberalization. Progress here affects everyone, and is particularly important for the small and medium economies that depend heavily on international trade, and are the principal beneficiaries of an orderly and nondiscriminatory trading regime. This chapter takes up these issues. First, we investigate the external tariffs of RIAs, and ask whether there are reasons to believe that a world of relatively few large RIAs will have lower or higher tariffs than a world composed of a large number of separate countries. We then turn to the dynamics of the world trading system. Does the presence of RIAs create incentives for excluded countries to join existing RIAs, to form new RIAs of their own, or to change their external trade policy in other ways? What are the prospects for “open regionalism” as proposed by some APEC countries? This leads us into the effects of RIAs on multilateral trade negotiations—the rounds of GATT/WTO talks. Have RIAs prompted countries to initiate and become involved in these negotiations, and do they facilitate or impede successful outcomes of the talks? Finally, we turn to the rules of the WTO itself, and ask whether the WTO should treat RIAs differently from its present lax stance. Trade Blocs and the World Trading System T R A D E B L O C S 94 5.1 How RIAs Set External Tariffs ARE THERE ANY REASONS TO BELIEVE THAT A WORLD OF trading blocs is likely to be more prone to high tariffs between blocs than a world of separate nations? Some commentators have foreseen doomsday scenarios in which “Fortress Europe” and other major trade blocs engage in trade wars, damaging to themselves and above all to excluded developing regions. Is there any basis for such views? A famous insight on the possible effects of trade blocs on tariffs comes from Paul Krugman (1991a and 1991b). 2 He noted that trade barriers would be lowest—and consequently world income greatest—in two opposite circumstances. One is when there is a single world trade bloc containing all countries, that is, global free trade. The other is when trade policy is set by many small independent countries, each so small as to have no market power and no reason to deviate from free trade. How- ever, between these extremes each trading bloc has an incentive to use external tariffs to try and improve its terms of trade (reducing trade vol- umes to drive up the price of exports and reduce the price of imports). This reduces world real income, which reaches a minimum for some intermediate number of trade blocs. 3 Extending the insight in a simple (and not very robust) example, Krugman suggested that the worst num- ber of similar sized RIAs for world welfare was three. Each sets a tariff to try and turn the terms of trade in its own favor, but this can only be at the expense of other blocs. The “prisoners’ dilemma” in tariffs is worst with three prisoners! This paper sparked a large literature, and many counter-examples. Perhaps the most pertinent criticism of the analysis surrounds the fact that tariff setting and trade negotiations involve repeated interactions between the same countries or blocs, so that the simple logic of the prisoner’s dilemma need not apply. Countries or blocs may be able to cooperate, particularly if they perceive that the cost of breaking an agree- ment on tariffs is a future trade war, with all the costs this imposes. Analysis of this situation (for example, Bond and Syropoulos 1996a and 1996b) suggests that as bloc sizes get larger the returns to cheating on a trade agreement grow, but so too does the loss from the resulting trade war. In some cases at least, the former effect dominates, with the result that it is more difficult to maintain free trade in a world of large trading blocs, suggesting that regionalism increases the likelihood of protection. Considerable caution needs to be employed in interpreting these results; 97 T R A D E B L O C S A N D T H E W O R L D T R A D I N G S Y S T E M forgo them. But another, more malign reason, is that countries suffer from being left out, and it is this that creates the rush to join. So how does the existence of RIAs affect nonmember countries? The first and most direct way in which nonmembers are affected is through the change in trade flows caused by a RIA, causing both the exports and imports of nonmember countries to be smaller than they otherwise would have been. Such changes do not necessarily have an adverse effect, although there are several circumstances when they will. One is when they lead to a terms-of-trade deterioration for excluded economies. That is, the fall in demand for their exports (and reduction in supply of imports) may reduce their export price (and raise their import price). We saw in chapter 3 that member countries have gained from this, and that excluded country loss is simply the other side of the coin. Another set of circumstances under which excluded coun- tries will be harmed by the relative decline in their trade is if their trade flows are already too small, that is, if they are running at a level at which marginal benefits exceed marginal costs. This will happen if the excluded economies have their own restrictive trade policies in place. It will also happen if firms are operating in imperfectly competitive markets and are making a positive price-cost margin on each unit of sales. Losing sales in a RIA market might be particularly damaging to such firms, causing them to lose profits, and perhaps causing them to be unable to cover their fixed costs. Probably more importantly, countries fear that firms may relocate in search of the benefits of a larger market. This is consistent with what actually happened to FDI in Europe. Following announcement of the Single Market Program in the late 1980s, FDI fell in every single EFTA country. In order to restore their share of FDI, the governments of EFTA had little choice but to accept the Single Market Program. All except Switzerland did this, either by applying for EU membership or by join- ing the European Economic Area. Only once they had announced these moves did FDI recover (Baldwin, Forslid, and Haaland 1996). Another source of loss from nonmembership of RIAs is the risk at- tached to being isolated if a trade war occurs. Of course, all countries— inside or outside RIAs—will usually lose from a trade war, but countries in RIAs have the insurance of knowing that they will still have free trade with partner countries. Whalley (1996) undertakes some numerical simu- lations of the costs of being outside a bloc during a trade war, showing T R A D E B L O C S 98 that they can be very sizable. He argues that this creates a strong insur- ance motive for being inside a large RIA. The argument is not all one-sided, however. Against these losses, there are a number of sources of gains that the rest of the world might expect from the formation of a RIA. We saw in chapter 3 that a RIA might improve the supply side of the integrating economies—perhaps by im- proving policy, increasing firms’ efficiency, and thereby raising income levels. Such supply-side improvements will tend to reduce the prices of products exported by the RIA. This will be beneficial to countries who import these goods, although damaging to competing exporters. Generally all these third country effects are likely to be small, particu- larly when the RIA is between relatively small economies, but there are exceptions. The important role NAFTA seems to have played in miti- gating Mexico’s 1994 peso crisis clearly benefited the rest of the world. Bloc Formation If we accept that the existence of RIAs creates demand for additional RIA membership, the demand can be met either by formation of new RIAs or by expansion in the membership in existing ones. Expansion requires the permission of existing members, and we discuss it in the next subsection (on open regionalism). Formation of new blocs has been an important alternative, as is evident from the figures on new RIA no- tifications. The process of bloc formation has been analyzed by Frankel (1997). He studies a hypothetical world of many countries and four continents, with zero trading costs between countries within the same continent and positive costs between continents. 6 Starting from a situa- tion in which each continent has a nondiscriminatory trade policy, any one continent could then improve its welfare by forming an FTA and imposing preferential tariffs. This would harm overseas producers since they would have to lower their prices to mitigate their loss of competi- tiveness, and would then suffer from the terms-of-trade decline. From here a second continent benefits by creating a RIA, switching a loss of welfare into gain, and thence a third continent, converting larger losses into smaller ones. Even the fourth continent gains by creating a RIA, although by then all continents are worse off than under nondiscrimina- tory policies. World welfare falls at every stage, but no continent has the incentive to undo the regionalism unilaterally. 99 T R A D E B L O C S A N D T H E W O R L D T R A D I N G S Y S T E M Open Regionalism? Open regionalism originated from APEC whose leaders envisioned a community based on openness and free exchange of goods, services, and investment. The term open regionalism has been used in different ways, and with two quite distinct meanings. One is unconditional nondiscriminatory liber- alization (or concerted unilateralism). The idea is that as member states liberalize trade within the bloc, so they simultaneously cut trade barriers on imports from external countries as well. This was the definition of the early APEC advocates, who saw the coalition as a means of encouraging countries to liberalize together and so provide for each other some of the terms of trade and political economy benefits of a full GATT/WTO round. Relative to forming a RIA, the policy brings the additional gains of liber- alizing external trade and thereby removing the source of trade diversion. Relative to a liberalization by a single country, the fact that it would be concerted, with all members liberalizing together, brings additional ben- efits as access for imports is eased, so firms get improved access to partner markets; this reduces the likelihood of liberalization leading to a terms-of- trade loss. However, despite these attractions, the idea of concerted unilateralism does not now seem likely to make headway. Within APEC, the United States is implacably opposed to the idea. More generally, the WTO system is so firmly based on the notion of trade liberalization being a concession (to be granted in return for some concession by trading part- ners) that the idea is unlikely to catch on. A second, and quite different concept is open access whereby the RIA announces that any country willing to abide by its rules may join. In terms of the economics, such an arrangement is still preferential, giving discriminatory benefits to members. Its main importance would be as a stepping stone to multilateralism: Could an open access RIA attract an increasing number of members, to the point where almost all countries became members? Analytical treatments of this issue are not optimistic. As we saw in chapter 4, there is generally an optimal size for a RIA, from the point of view of existing members, so it is not clear why members should want unrestricted access. In practical terms, the feasibility of open ac- cess depends crucially on the depth of the scheme. Where a RIA in- volves few conditions, then open access can be quite easily envisaged. Perhaps the best example is the Cross-Border Initiative in East and T R A D E B L O C S 102 Multilateralism as a Response to Regionalism The first argument is that countries outside RIAs may react to their exclusion by attempting to accelerate multilateral liberalization. Many commentators suggest that the creation of the EEC in 1957 had this ef- fect. This, they suggest, led directly to the Dillon and Kennedy Rounds of GATT negotiations as the United States sought to mitigate the EEC’s potential for diverting trade (Lawrence 1991; Sapir 1993; WTO 1995). Although perfectly conceivable, this is not a straightforward argument. First, it seems unlikely that multilateral negotiations would have stopped completely had the EEC not been created, especially given the global reach of the United States during the 1960s. Thus, at most, the EEC affected the timing, not the occurrence, of the Rounds. Second, agriculture played an important role in the formation of the EEC, and the EEC was probably more successful in resisting that sector’s liberal- ization in the multilateral trade negotiations than its individual mem- bers would have been. This has probably made future liberalization more, not less, difficult. Third, suppose that the hypothesis were true, that the creation of the EEC had led to negotiations. The logic of the argument is essentially coercive: EEC members did something that their trading partners considered harmful, and then offered to mitigate it in return for concessions. Coercion may be warranted and the outcome may have been beneficial, but this is a dangerous game. It depends critically on the willingness of the partners to fold—(by negotiating) rather than fight (by raising tariffs) and to respond multilaterally rather than regionally. It has also been argued that regionalism was behind the Tokyo Round. Winham (1986) reports both the first EEC enlargement (in- cluding free trade with EFTA) and the restrictiveness of Europe’s Com- mon Agricultural Policy as factors in the United States desire for a Round . The former observation seems no more compelling than those surrounding the creation of the EEC, while the latter is distinctly two- edged: it is based on regionalism having increased trade restrictions in agriculture (Common Agricultural Policy), and a response to this be- ing negotiation. For the net effect of this on multilateral progress to be beneficial requires a negotiating structure in which might and countervailing power are the critical elements of liberalization. Finally, consider the Uruguay Round, of which the WTO (1995) says, “There is little doubt that...the spread of regionalism [was a] major factor in eliciting the concessions needed to conclude” the Round. There 103 T R A D E B L O C S A N D T H E W O R L D T R A D I N G S Y S T E M was, indeed, a perception that the failure of the Round would lead to regional fragmentation. This almost certainly encouraged the spread of defensive regionalism, but whether this pressured the two major parties to agree is not clear, for they were the prime “regionalists,” and they would certainly not have been the principal casualties of fragmentation. Some senior EU negotiators have said that the 1993 Seattle APEC Sum- mit induced the EU finally to concede on agriculture and conclude the Uruguay Round (Bergsten 1997). Again, this may be true, but there are counter-arguments. For example, APEC was not advertised as a discrimi- natory RIA, and any discrimination would, anyway, have been far in the future. Also, the principal necessary condition for the EU to complete the round was agricultural reform, which was initiated in 1990 and com- pleted in 1992 (Hathaway and Ingco 1996). Does Regionalism Facilitate Negotiation? If regional integration agreements made trade negotiations easier, perhaps they would help the world evolve toward freer trade. Coordi- nated coalitions may have greater negotiating power than their mem- bers do individually and such coalitions may facilitate progress just by reducing the number of players represented in a negotiation (Kahler 1995). Whether this really occurs is a moot point. For example, a nego- tiation comprising one dominant partner and a competitive fringe of small countries might be easier and proceed further than if the fringe coalesced into a significant counterforce. This line of reasoning prejudges the issue of whether blocs are genu- inely unified in their approach to trade negotiations. This is not usually so, meaning that any gains from having fewer players in the last stage of a negotiation are offset by the complexity of agreeing joint positions in the first phase. The difficulties of achieving a European position on ag- riculture and cultural protection in the Uruguay Round are well known, and formulating EEC positions in the Tokyo Round proved complex (Winham 1986). Moreover, two-stage negotiations need not be more liberal than single-stage ones (Basevi, Delbono, and Mariotti 1995). To be sure, Germany and the United Kingdom pressured France to agree to the agricultural deal in the Uruguay Round, but the liberalizers had to make potentially trade-restricting concessions on “commercial defense instruments” to clinch the deal. Wang and Winters (1998) argue that T R A D E B L O C S 104 the benefits to African countries of enhancing their bargaining power by cooperation are likely to be outweighed by the costs of combining their different interests into a single negotiating position. While the EU has internal procedures for arriving at a common posi- tion, many of the CUs that attend the next round of global trade talks have not yet developed procedures for determining their negotiating po- sitions. SACU’s previous practice of delegating all responsibility to South Africa begins to look less tenable as divisions emerge between members, and MERCOSUR has yet to devise really robust internal decisionmaking capacity. Thus, at least into the foreseeable future, RIAs do not seem likely to facilitate even a traditional trade negotiation. Moreover, as WTO has extended its reach, it has embraced subjects in which most central CU authorities have no mandate to negotiate. Mixing national and CU responsibilities seems unlikely to simplify matters, and it is not realistic to expect member countries to surrender sovereignty on sensitive issues to regional bodies just because trade negotiations are in process. Successful trade negotiations also require political will and adminis- trative effort. Reserves of administrative skill, political capital, or imagi- nation are finite; if they are devoted to a RIA they are not available for multilateral objectives. These arguments were advanced to explain both EU and U.S. behavior during the Uruguay Round, but they must be several times more important for developing countries. Negotiating a RIA, especially with a major power that has its own objectives, will absorb a huge proportion of the scarce policymaking skills of a developing coun- try. Perhaps one of the opportunity-costs of RIAs is that less negotiating capacity and political capital are available for multilateral negotiations. One alarming possibility is that regionalism might undermine U.S. or EU willingness to participate actively in the multilateral system. 7 Over the last three decades they have been major players, monitoring both smaller countries’ policies and each other’s. A loss of interest by either would reduce WTO’s overall effectiveness and could upset the current fine balance. Regionalism and the Frontiers of Liberalization One of the strengths that is frequently claimed for the regional ap- proach to liberalization is that it makes it easier to handle the tough issues (Kahler 1995); there are areas in which regional liberalization or 107 T R A D E B L O C S A N D T H E W O R L D T R A D I N G S Y S T E M nondiscrimination, when A negotiates a reduction in one of B’s tariffs, it knows that the commercial value of its effort will not be undermined by B then offering C an even lower tariff. This, in turn, makes A more willing to “buy” the concession by reducing one of its own tariffs on B, and so encourages trade liberalization. Over 50 years of operation the GATT continued in this low-key, member-driven, fashion. It was essentially consensual in approach and pragmatic in operation. The GATT did not adjudicate trade disputes, but had a dispute settlement process, less concerned with law than with solving disputes in a way that preserved consensus and allowed the liber- alizing bandwagon to continue to roll. The WTO, which was created in 1995 to oversee the GATT and certain other agreements, is more legal- istic, but still focuses heavily on pragmatic and mutually acceptable so- lutions to problems. The WTO/GATT administers a set of rules for behavior, not a set of outcomes—it is concerned with meeting agreed obligations and rights rather than with economic outcomes per se. The WTO/GATT has undoubtedly been a force for economic good, but its role has not been defined in those terms. The GATT traditionally did not intrude into domestic politics. It had no ability to force member countries to liberalize if they did not wish to, and was extremely light-handed in its requirements about the shape of domestic legislation. The WTO is rather more far-reaching; through its greater breadth and its “single undertaking,” under which members must subscribe to virtually all its rules, rather than, as previ- ously, treat some as optional extras, it has constrained governments more tightly. Nevertheless, the WTO can still be effective only if it proceeds more or less by consensus. Given this background, the WTO can enhance the economic well- being of developing countries in four ways. First, if sufficient members wish, it can organize periodic rounds of tariff negotiations that offer opportunities and incentives to members to reduce their barriers to trade. Second, it provides guidelines for domestic policy—directly in some cases, but more often indirectly by shaping the terms of the debate. Govern- ments resisting pressures to protect particular lobbying groups are im- measurably strengthened if they can point to prohibitions in the WTO agreements. Third, the WTO can protect the rights of members against certain rules violations by other members. It cannot necessarily, how- ever, protect members against harm. 10 Fourth, it provides a forum and mechanism for governments to manage the spillovers from members’ T R A D E B L O C S 108 trade policies onto their partners. These four links provide the frame- work for assessing the WTO’s current rules about RIAs and exploring whether they can be improved. 5.5 The Rules for RIAs ARTICLE XXIV OF THE GATT SETS LIMITS ON THE RIGHTS OF RIA member countries to violate the MFN principle. It imposes three principal restrictions (appendix 1). A RIA must: • Not “on the whole” raise protection against excluded countries • Reduce internal tariffs to zero and remove “other restrictive regula- tions of commerce” other than those justified by other GATT ar- ticles • Cover “substantially all trade.” These conditions ensure that RIAs do not undermine the access of other countries to the RIA market. The first preserves the sanctity of tariff bindings by ensuring that forming a RIA does not result in a whole- sale dissolution of previous bindings. It is supplemented by a rule that compensation is due to individual partners for tariff increases induced by the RIA if other reductions to keep the average constant do not main- tain a fair balance of concessions. Together with the 1994 Uruguay Round Understanding on the Interpretation of Article XXIV on how to mea- sure tariff barriers for RIAs, these provisions offer reasonable assurances that the barriers facing nonmembers will not be raised. The second condition helps defend the MFN principle by making it subject to an “all-or-nothing” exception. If countries were free to nego- tiate different levels of preference with each trading partner, binding and nondiscrimination would be fatally undermined: no member could be sure that it would receive the benefits it expected from negotiating and reciprocating for a partner’s tariff reduction. Also, if a customs union is a first step toward nation building, it is inappropriate for an interna- tional trade treaty to stand in the way of such progress. Thus, internal free trade, such as one (usually) achieves within a single country, would seem to be an acceptable derogation of MFN, whereas preferences would not. The third condition reinforces this by requiring a serious degree of commitment to a RIA in terms of sectors. The second and third conditions—no internal tariffs and substantial coverage—are important in heading off pressure to use tariffs to fine-tune 109 T R A D E B L O C S A N D T H E W O R L D T R A D I N G S Y S T E M political favoritism toward either domestic industries or partner countries; they help to prevent governments that restrict RIAs from swapping trade- diverting concessions and, thus, from avoiding politically more painful trade creation. These conditions essentially require a serious commitment to integrating member markets as a condition for proceeding. Article XXIV is generally an aid to better RIAs, but it is certainly not sufficient for good economic policy. Even if the conditions were applied without exception they would not preclude harmful RIAs: Wholly GATT- compatible RIAs can be predominantly trade diverting, excluded coun- tries can suffer terms-of-trade declines, and institutions can arise that make liberal policies less likely. There are major difficulties in interpreting the conditions of Article XXIV. Even following the Uruguay Round Understanding there is no agree- ment about what “substantially all trade” means, nor even whether it re- fers to the proportion of actual trade covered or the inclusion of all major sectors of the economy. Similarly the treatment of nontariff barriers in assessing the overall level of trade restriction is not defined, nor is that of rules of origin. The requirement that “other restrictive regulations of com- merce” be removed between members is ambiguously worded: several ex- ceptions to this requirement are identified explicitly but other barriers, including antidumping duties and emergency protection, are not. Com- plete integration between members of a RIA would abolish these barriers and so their continuation—in NAFTA or the Euro-Med agreements— suggests an unwillingness to proceed too far in that direction. Perhaps because of its ambiguities, Article XXIV has been notori- ously weakly enforced. RIAs have to be notified to the GATT and until 1996, each was then reviewed by an ad hoc working party to see if it was in conformity with the Article. WTO (1995) reports that of 69 working parties reporting up to and including 1994, only 6 were able to agree that a RIA met the requirements of Article XXIV, of which only CARICOM and Czech-Slovak CU remain operative. However, the re- mainder did not conclude that agreements were not in conformity— they merely left the matter undetermined. This agnosticism is essentially the product of the GATT’s consensual nature. The first major test of the article was the Treaty of Rome estab- lishing the EEC. The political pressure to permit it was enormous: EEC countries would almost certainly have put the EEC before the GATT in the event of conflict and the United States strongly supported the treaty. The treaty, however, clearly violated Article XXIV, and so the only fea- sible solution was not to push the review to conclusion. 11 Given a start T R A D E B L O C S 112 probable, as few countries within RIAs appear to seek tighter disci- pline, as the EU continues its Mediterranean agreements and consid- ers replacing the trade provisions of the Lomé Convention with an FTA, and as the United States contemplates the Free Trade Area of the Americas. 17 However, see section 5.6 for a proposal on changing rules for both industrial and developing countries. A RIA that does not reduce external barriers may cause trade diver- sion. One discipline on this would be to require RIA members to liber- alize, both to reduce diversion and to induce external trade creation with nonmembers. Finger (1993) views these reductions as a price to be ne- gotiated to persuade nonmembers to forgo their MFN rights. How far the parties are prepared to go in a negotiation, however, is determined by the prevailing rules and enforcement mechanisms that define the outcome if negotiations fail; unfortunately, these currently leave non- members almost no negotiating power. Hence other authors have made more concrete proposals. Bhagwati (1993) suggests requiring that for each tariff heading a CU’s common external tariff be bound at the minimum tariff for that head- ing among all members. This does not guarantee the elimination of trade diversion—suppose the tariffs of three members were 98 percent, 99 percent, and 100 percent—but it will clearly reduce it. It would impose a high (mercantilist) price on RIA formation, so only “serious” integra- tors would pay it, and would, overall, be quite trade-liberalizing. As a reform it is admirably clear, and if feasible, it would be desirable eco- nomically. Its demanding nature, however, makes it very unlikely to suc- ceed in the present circumstances. Related is a proposal that members of FTAs be required to bind their tariffs at actual applied rates on the eve of the RIA. Apart from what this might do to pre-FTA applied rates, this suggestion is ran- dom in its liberalizing effect, which reduces its moral force. Bhagwati would just ban FTAs. This is also consistent with seeking to restrict RIAs to those that are committed to far-reaching integration, but again faces severe feasibility constraints, especially since some FTAs proceed quite far in other directions. Tied up with the FTA question is that of rules of origin. Some sug- gest a requirement that they be no more restrictive than before the RIA, but this is difficult to determine, ad hoc, manipulable in nature, and potentially very complex in the face of technological changes. Bet- ter would be a requirement precluding the manipulation of such rules 113 T R A D E B L O C S A N D T H E W O R L D T R A D I N G S Y S T E M for protectionist purposes, such as that countries should adhere to a single set of rules of origin agreed internationally, or that a country’s preferential rules should be the same as its nonpreferential ones. Wonnacott (1996) suggests a number of milder reforms in this direc- tion: for example, that rules of origin be banned where tariffs differ between members by less than, say, 2 percentage points, or that for each commodity they be banned for the FTA member with the lowest tariff. These might be acceptable, but would only scratch the surface. One proposal has been made to adopt ex post reviews to determine whether nonmember exports have fallen since a RIA was created and de- mand changes in policies if they have (McMillan 1993). Although fre- quently taken seriously (for example, Frankel 1997), the proposal is wrong in virtually every respect. Exports are the wrong criterion, quantitative targets are the wrong way to formulate trade policy, the internal costs of trade diversion are ignored, economic modeling is still too imprecise to identify causes with any credibility, and ex post adjustment after five years is no basis for the policy predictability sought by investors. There are three major proposals for creating a “liberal dynamic.” Srinivasan (1998) proposes that RIAs be permitted only temporarily by requiring all RIA concessions to be extended to all countries within, say, five years. This is effectively a ban on RIAs, and certainly foregoes any gains that they might offer in terms of deep integration or nation build- ing. It is not a serious contender. Second, stretching back at least to the United States submission to the Preparatory Committee of London Monetary and Economic Con- ference of 1933, scholars and policymakers have argued that requiring RIAs to admit any country willing to accept their rules both reduces their adverse effects on excluded countries and establishes a liberal dy- namic (Viner 1950). While this may be true if admission can be guaran- teed, virtually every RIA extant has geographical restrictions on mem- bership and has features that require negotiation. The latter vitiate the promise of “open access.” However, though unconditional open access seems unfeasible, section 5.6 suggests a way to improve developing coun- tries’ access to the large blocs in the North. A more feasible approach than unconditional open access is to define and enforce current rules more rigorously. A precise definition and en- forcement of “substantially all trade” would be a useful innovation. A quantitative indicator would be clear, but it would need to be high given that the kinds of trade restrictions countries wish to maintain typically T R A D E B L O C S 114 constrain existing trade quite fiercely. The frequently cited 80 percent, which dates from consideration of the Treaty of Rome is not adequate. Even 90 percent, which seems to inform current EU-MERCOSUR talks, is not indicative of serious intent to integrate. We would advocate 95 percent after 10 years and 98 percent after 15 years. Similarly, a more constraining view of “other restrictive regulations of commerce” would be useful—ensuring that they include the effects of rules of origin on excluded countries, and that obvious barriers such as safeguards actions and antidumping duties are abolished internally. The latter requirement would increase the degree of trade creation, since these policies are ex- plicitly aimed at preserving domestic output levels. Thus they would raise the bar for “serious” regionalism. However, even these changes might encounter fierce opposition and will require major political commitment by many WTO members to be implemented. To be acceptable to the major powers, they will certainly need to be accompanied by a grandfathering clause to assure current RIAs that they will not be undermined by new interpretations. A vehicle to take forward reform measures is the Committee on Re- gional Trading Agreements (CRTA), which reports to the WTO’s Gen- eral Council, and was established in 1996 to increase the transparency, efficiency, and consistency of the WTO’s treatment of RIAs. It was seen as a means of ensuring more rigorous review of new RIAs because a single group would review all of them using the same criteria and with more searching notification and information requirements. It would also undertake periodic review of existing RIAs, and could resolve some of the systemic issues that remained after the Uruguay Round. The more thorough review was seen as a route to better compliance with WTO requirements, while the consideration of conceptual issues was a step toward refining and codifying the rules more precisely. Unfortunately the CRTA has not yet reached its stride. Its assessments of particular cases have been stymied by the lack of clear systemic rules, and the discussion of rules stalemated on exactly the same “substantially all” and “other regulations” issues as the previous Uruguay Round discus- sions. By December 1997 the Committee had initiated consideration of 59 RIAs (including 32 inherited from previous working parties). It had completed factual analysis of 30 of these, and was “elaborating conclu- sions” on 26. To date, no analyses have been released or conclusions reached. The future development of the CRTA could take several routes. Re- view of existing RIAs is not likely to be productive. Although RIAs are open to dispute if third party countries feel aggrieved (at least until the 117 T R A D E B L O C S A N D T H E W O R L D T R A D I N G S Y S T E M We have proposed that the WTO should modify its rules concerning trade blocs to create a presumptive right of association. Analogous to the MFN clause, if association is granted to one country, there should be a presumption that similar terms should be available to others: if Iceland is offered reciprocal freedom from antidumping suits by the EU, then the same option should be available to Ghana. Naturally, association is complex, and so in practice each accession must be negotiated; regard- less, the poor should not be denied the association rights already con- ferred on several middle-income countries. We have proposed a package negotiating offer by the South to the North concerning the WTO rules governing trade blocs. The South would offer to extend the existing rules concerning North-North trade blocs to South-South blocs. Although this is a concession, it would strengthen the MFN principle that is very much in the interest of the South. In return, the South would demand an open access rule, in which the right to equal treatment of applications for association in all trade blocs would be enshrined. 5.7 Conclusion THE CONCLUSION FIRST DEALS WITH CHANGES IN WTO RULES to benefit developing countries, and second, with improvement and enforcement of rules. We first recommend that: • Industrial countries should fully open their markets to developing country exports, particularly those from least-developing countries. • The WTO should modify its rules concerning trade blocs to cre- ate a presumptive right of association. • In return, developing countries should accept the disciplines of Articles XXIV and V for their RIAs. Second, we recommend that: • The WTO enforce the disciplines of Articles XXIV and V rigor- ously in the CRTA, especially those on coverage and depth of lib- eralization. • The WTO define the rules more rigorously: On “substantially all trade,” we advocate 95 percent of trade after 10 years and 98 per- cent after 15; on “other restrictive regulations of commerce,” we T R A D E B L O C S 118 advocate inclusion of the abolition of internal barriers, such as safe- guard actions and antidumping duties. • The WTO use the dispute settlement procedure to enforce the rights of third countries not to face increases in protection either directly or indirectly through the use of tools such as rules of origin. Appendix I: WTO Provisions on Regional Integration Arrangements (Extracts) Article XXIV of GATT 4. The contracting parties…also recognize that the purpose of a cus- toms union or of a free trade area should be to facilitate trade be- tween the constituent territories and not to raise barriers to trade. 5(a). With respect to a customs union…the duties and other regula- tions of commerce imposed at the institution…shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constitu- ent territories prior to the formation of such union… (b). With respect to a free trade area…the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free-trade area…shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territo- ries prior to the formation of the free-trade area… (c). Any interim agreement…shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time. 7(a). Any contracting party deciding to enter into a customs union or a free-trade area, shall promptly notify the CONTRACTING PARTIES and shall make available to them such information… 8(a). A customs union shall be understood to mean the substitution of a single customs territory for two or more customs territories, so that: (i) duties and other restrictive regulations of commerce (ex- cept, where necessary, those permitted under Article XI, XII, XIII, XIV, XV and XX) are eliminated with respect to…substantially all the trade in products originating in such territories… 8(b). A free trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive 119 T R A D E B L O C S A N D T H E W O R L D T R A D I N G S Y S T E M regulations of commerce (except, where necessary, those permit- ted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories. The Enabling Clause 1. Notwithstanding the provisions of Article I…contracting parties may accord differential and more favorable treatment to develop- ing countries, without according such treatment to other contract- ing parties. 2(c). The provisions of paragraph 1 apply to the…regional or global arrangements entered into amongst less-developed contracting parties for the mutual reduction or elimination of tariffs and, in accordance with criteria or conditions which may be prescribed by the CONTRACTING PARTIES, for the mutual reduction or elimination of nontariff measures, on products imported from one other; The Uruguay Round Understanding on the Interpretation of Article XXIV 2. The evaluation…of the duties and other regulations of commerce…shall…be based upon an overall assessment of weighted average tariff rates and of customs duties collected…For this purpose, the duties and charges to be taken into consideration shall be the applied rates of duty. It is recognized that for the pur- pose of the overall assessment of the incidence of other regulations of commerce for which quantification and aggregation are diffi- cult, the examination of individual measures, regulations, prod- ucts covered and trade flows affected may be required. 3. The “reasonable length of time” referred to in Article XXIV 5(c) should exceed ten years only in exceptional cases. GATS Article V 1. This Agreement shall not prevent any of its Members from being a party to or entering into an agreement liberalizing trade in services