Policy considerations in Regional Trade Agreements (RTAs)

Policy considerations in Regional Trade Agreements (RTAs) Joint Conference Parliamentary Assembly of the Mediterranean (PAM) and the United Nations Trade and Productive Capacity Cluster Palais des Nations, Geneva, 4-5 May 2011 Presentation by: Kheireddine Ramoul, UNCTAD

Presentation outline • Introduction; • Systemic implications of the interface between RTAs and MTS; • RTAs in the Mediterranean region; • The Euro-Mediterranean Association Agreements; • The Greater Arab Free Trade Area (GAFTA); • Comparing Intra-RTAs in the Med-region; • RTAs and MTS the need for Convergence

Introduction • With the conclusion of the Uruguay Round (UR) there was an expectation that exceptions to multilateralism, such as regional trade agreements (RTAs), even though legally covered by the WTO under certain conditions, would either become less of an alternative policy option for countries or will need to be adapted and conducted to form building blocks for the new multilateralism pursued under the auspices of the WTO.

Systemic implications of the interface between RTAs and MTS • The debate on the interrelationship between MTS and RTAs is long-standing and well documented. It mainly pertains to the following two broad issues: • (i) relative welfare effects of non-preferential across-the-board (MFN) liberalization versus preferential liberalization; and • (ii) the political economy implications of RTAs for MTS, as well as those of MTS for RTAs.

Cont’d • While the first question asks which approaches to trade liberalization are superior in terms of trade and welfare gains for the members of RTAs, third countries and the world as a whole, the second question seeks to ascertain the systemic implications of RTAs for the MTS in general and multilateral trade negotiations in particular, i.e. whether regional integration constitutes a building block or stumbling block to multilateral trade liberalization and a more open and liberal multilateral trading system.

Cont’d • it is well documented that regional integration may increase the level of trade between members at the expense of less efficient domestic producers (“trade creation”) or of more efficient third countries (“trade diversion”) under perfect competition; • This depends on a variety of assumptions and conditions, including complementarities of production structure among RTA partners and initial level of trade barriers;

Cont’d • With regard to the political economic implications of RTAs vis-à-vis the MTS, various arguments have been advanced, both in favour of and against regionalism. On the positive side, RTAs enable participating countries to move closer and quicker to freer trade with stronger disciplines over a wider range of goods and services than could be attained at the multilateral level. RTAs could also act as laboratories for testing approaches to new issues.

Cont’d • Faster and deeper integration, new-generation RTAs may reduce incentives for multilateral approach to trade liberalization in particular, in areas of MA and standard-setting in new issues (IPR, investment or competition policy), such “WTO-plus” (or “WTO-minus” in the sense that developing countries would loose part of their policy space and enjoy a lesser degree of flexibility under these RTAs than under WTO); • RTAs can act as negotiating forums virtually substituting for the WTO, thereby leading to “forum shopping”, and posing a systemic risk to the viability of the MTS. The proliferation of RTAs, with more and more countries being members of several RTAs at the same time, could create competing and possibly antagonistic blocs that would erode the viability of the MTS.

Cont’d • Furthermore, in the context of multilateral trade talks North-South RTAs may serve as negotiating leverage; • Bilateral RTAs negotiated and concluded at a time when multilateral trade negotiations are underway may constrain solidarity between developing countries and affect their ability, to act collectively at the multilateral level, and thereby weaken their bargaining position.

Cont’d • The emerging pattern of regional agreements raises a major policy issue for governments in the Med- region about the coherence of these numerous regional agreements with one another and with the multilateral liberalization process within the WTO. • The challenge facing most of countries in the south of the Mediterranean is to design and implement an appropriate and strategic pacing and sequencing of national, regional and multilateral trade liberalization; • The coherence between multilateralism and regionalism becomes an opportunity and challenge for these countries in the context of an ever evolving international trading system.

Cont’d • Challenge:simultaneous participation by countries in a web of RTAs while also engaging in the MTS including in particular accession to the WTO , both of which have overlapping agendas & commitments, could affect sensitive development policies and overloads the limited negotiating capacities of Mediterranean developing countries & countries with economy in transition (Algeria, Bosnia, Libya, Lebanon, Montenegro, Palestine, Serbia, Syria).

RTAs in the Mediterranean region • Many Mediterranean countries have concluded regional trade agreements with one another and with the EU in the Post-Uruguay Round; • The issue of coherence of these agreements with one another and with the multilateral liberalization process within the WTO; • The comparative analysis revealed that INITIALLY many of the concluded intraregional bilateral FTAs consist of a wide range of preferential arrangements that focus on the “traditional” trade agenda: elimination of tariffs and other import charges; • Analysis shows that after a reactive or defensive phase, the renewed regionalism in the Mediterranean region has not been a substitute but rather a complement to multilateral liberalization;

Cont'd • A major factor contributing to this change was the FTAs reached between the EU and the previous communist countries in Central and Eastern Europe. • The conclusion of these agreements raised concern that the Mediterranean Arab countries might be marginalized in EU markets as the competitive advantage that they once enjoyed (through preferential access and geographic proximity) would be eroded. • Moreover Mediterranean Arab countries, building on their relationship with the EU, have concluded a new generation of bilateral RTAs/FTAs with one another.

The Euro-Mediterranean Association Agreements (AAs) • The partnership with the EU, initially proposed to the three Maghreb countries (Algeria, morocco, Tunisia), was extended in 1995 to the 12 countries of the South and East of the Mediterranean Basin; • For the EU, the Euro-Mediterranean Partnership implied upgrading of its relations with Mediterranean countries from the narrow Cooperation Agreements concluded in the 70s to the much more complex Association Agreements, which until then were applied only to Cyprus, Malta, and Turkey; • A political partnership and a social partnership were added to the traditional economic issues; the economic partnership covered many new issues (such as cross-border supply of services and policy harmonization) not covered by the previous Cooperation Agreements; • However, given that Cooperation Agreements already granted Mediterranean countries nearly duty-free access to EU markets for industrial goods, there was little room for further trade concessions.

Cont'd • The Euro-Mediterranean Partnership must be understood as a long-term process; • A network of association agreements, even when completed, will not be enough to provide the foundations of a Euro-Mediterranean economic space. This will not be possible until the current bilateral scheme is transformed into a real regional multilateral arrangement; • At present, the economic/Trade aspects are the most important part of these agreements which possess two dimensions: reciprocity of commercial preferences in industrial trade and the replacement of the traditional five-year financial protocols by the MEDA programme.

Main Features of RTAs in Mediterranean region (Med-R) • A force that is currently shaping the Med-R economies is the advent of a RTAs that seek to provide a commitment mechanism to liberalize external trade and foreign investment, thereby increasing participation in the world economy;

Cont’d • The broad Euro-Mediterranean Partnership agenda & the economic provisions of the already signed AAs include detailed commitments, mainly related to trade liberalization; • The key commitment concerns the establishment of a free trade area in industrial goods over a 12-year period(liberalization will mostly occur on the partner country); • On agricultural and fishery trade the AAs call for a gradual and reciprocal liberalization while offering very limited improvements to access the EU markets.

The EuroMed AAs with Arab States • Algeria: Signed April 2002 Sept. 2005; • Egypt: Signed June 2001 June 2004; • Israel: Signed Nov. 1995 June 2000; • Jordan: Signed Nov. 1997 May 2002; • Lebanon: Signed June 2002 Interim Agreement March 2003; • Morocco: Signed Feb. 1996 March 2000; • Palestine :Signed Feb. 1997 Interim Agreement July 1997; • Syria: Initialled Oct. 2004; • Tunisia: Signed July 1995 March 1998;

(AAs) Cont’d • Talks to improve on the existing agricultural concessions is provided for and would generally start five years after the signing of the AA; new concessions are to be implemented the following year. • commitments on policy harmonization concern competition policy. • The AA requires that the Mediterranean partner countries adopt the basic competition rules of the EU; • The Association Council is required to adopt the implementation rules within five years of the entry into force of the AA (e.g., the AAs with Israel and the Central and East European countries set the target date at three years after the entry into force).

Cont’d • Within 5 years, the Association Council will normally make recommendations for widening the AA to cover the right of establishment and the liberalization of cross-border supply of services; • Most AA refer to the commitments made under the GATS if the Partner county is a WTO member/ if not : consolidation if existing market access in + MFN treatment in addition to a broad commitment to future negotiations after the completion of the WTO accession of the country concerned ``Rendez-Vous Clause``.

AAs • The proposed fields of action are: • customs and taxation; • free movement of goods (a bilateral and multilateral co-ordination framework aimed at removing technical barriers to trade trough administrative cooperation and mutual assistance); • government procurement (approximation of laws and alignment of practices; gradual liberalization of cross-border trade which, during a transitional period to be defined, may be asymmetrical, as in the Association Agreements with some Central and East European countries); • intellectual property rights (improved levels of protection, exceeding the standards set by the TRIPS agreement; introduction of effective provisions and of measures to ensure their enforcement);

Cont'd • financial services (setting-up an adequate regulatory framework for prudential supervision; • strengthening cooperation between supervisory authorities; given the large differences among partners, liberalization measures may be agreed on a bilateral basis or inside small groups of partners whose financial markets show a similar level of development);

Cont'd.. • The new generation of RTAs is extending liberalization to cope with the multilateral trade policy agenda covering services and domestic regulatory and institutional reforms, such as product standards regimes and intellectual property rights; • It aims to be an integral part of a pro-active strategy to pursue coherent regional and multilateral integration (Euro Med, WTO accessions, CEFTA, GAFTA..).

Cont'd • This new attempt at regional cooperation among Med- countries has been viewed as a measure to prevent the potentially adverse effects of the European initiative on intra-regional trade among the member states of the Arab League; • For instance, Egypt signed bilateral FTAs with a number of other Arab countries (Jordan, Lebanon, Morocco, and Tunisia); bilateral FTAs were also reached between Morocco and Tunisia, Tunisia and Jordan, Morocco and Jordan, and Lebanon and Syria.

The Greater Arab Free Trade Area (GAFTA) • GAFTA (came into existence in 1997) is an Arab League initiative that attempts to revive unsuccessful regional integration efforts; • Negotiations of the GAFTA agreement have been difficult. This is a trade pact between countries that have pursued far-reaching economic reforms (e.g., Egypt, GCC countries, Jordan, Morocco, and Tunisia) and others that have not shifted away from traditional import substitution/protection strategies nor reduced the predominant role of the state; • It is mainly about liberalization of traditional trade barriers for goods;

Cont’d • To some extent, the Greater Arab Free Trade Area (GAFTA) was established out of concern that the AAs might create a bilateral trade pattern which would discourage (trade diversion) intra- Arab economic ties. • Moreover, the implementation of the Uruguay Round Agreements are expected to reduce the preferences that Mediterranean Arab countries had enjoyed for access to the EU markets. Hence, the return to shifting trade flows into other markets, notably intra-regional markets, has become more desirable.

Cont'd • In essence, the adopted across-the-board approach for tariff reductions in GAFTA offers the advantage of being transparent and ensures that high tariffs are reduced faster than lower tariffs in absolute terms; • However, the extent to which this approach will boost intra-regional trade flows is dependent on the magnitude of tariff dispersion as well as the effective rate of protection across industries in individual member countries; • Since tariff structures among the GAFTA member states are uneven, with some countries having high tariff protection and others very low, the liberalization approach could have a significant trade creation effect. In particular, countries that levy relatively low import duties (such as the GCC countries) face small potential for increasing imports through GAFTA;

Cont'd • However, many of the manufactured goods exported by the GCC countries face relatively high duties in other Arab country markets (e.g., Egypt Lebanon, Syria) so the potential for export expansion is high.

Cont'd • One of the serious weaknesses in the GAFTA program have been the safeguard measures that give members the right to exclude from immediate liberalization certain industrial and agricultural products. • Eg. in September 1999, the Economic Council of Ministers of the Arab League, the highest authority overseeing the implementation of the GAFTA Program approved requests from six countries (Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia) to exclude industrial products from the gradual liberalization scheme for a three-year period. • For instance, Egypt submitted a negative list of 679 industrial products at the HS six-digit level. Morocco’s list included 800 industrial products at the HS 6-digit level, Syria 229, Tunisia 161, and Lebanon 41.

Cont'd • Most of the excluded products are processed foodstuffs, semi-manufactures, and consumer goods competing with domestic production (e.g., textiles and ready-made clothing, plastics, mechanical appliances and television sets, motor vehicles, steel, and iron sheets).

Cont'd • There is a major concern that the transition period (to last for as long as 03 years) for the excluded industrial products allows for pressure from interest groups to resist market opening, especially, at the end of the three-year period, the excluded products will integrate the GAFTA Program and will be subject to the cumulated rates of tariff reductions achieved by the other products initially covered in the program. • Such a liberalization process may create problems in implementing tariff reductions in the future (e.g., through pressure for safeguard protection), thereby reducing the ability of GAFTA to realize its full potential for regional trade expansion.

Cont'd • Liberalization of agricultural products is subject to seasonal tariff reductions; member countries are allowed to suspend tariff preferences on some produce during the peak harvest seasons; • Similarly, the right to suspend from the liberalization scheme certain agricultural products during the crop/harvest seasons and for as long as the transition period— 10 years until the time for full elimination of tariffs— substantially limits the liberalization of intra-regional agricultural trade.

Cont'd • NTBs in the form of import licensing for safety and health standards are still applied, mainly for processed food-stuffs and, to a lesser extent, semi-manufactures.

Cont'd • For subsidies, countervailing measures, safeguards, and anti-dumping measures, international rules apply ( the program does not make explicit reference to the relevant WTO agreements in these areas, since only 10 GAFTA countries are WTO members and 08 others are seeking membership); • it would appear that WTO disciplines are the rules to which the program refers; • Other NTBs in the form of inefficient customs and administrative procedures associated with importing are still relevant constraints to intra-regional trade in GAFTA

Comparing Intra-RTAs in the Med-region • a wide range of bilateral preferential trade arrangements, involving different schedules of liberalization and policy instruments. Virtually almost all intra-Arab bilateral FTAs involve slow gradual trade liberalization, reflected in numerous lists for exceptions as well as the exclusion of agriculture and services sectors from the liberalization scheme; • It may be that the limited nature of intra-Arab bilateral FTAs have facilitated their negotiations as compared to the AAs or even the GAFTA, as the latter, involving more member countries, has faced much slower implementation; • However, the partial coverage of the intra-regional FTAs from immediate liberalization may divert trade flows between member countries.

RTAs and MTS the need for Convergence • Redefinition of the relationship between RTAs and the MTS is required, to achieve a better synergy between the two; • The guiding principle in realigning the RTA/MTS relationship should be to facilitate trade between the parties and not raise barriers to third parties.

Cont'd • The impact of overlapping RTA membership on trade and investment patterns, both for the parties to RTAs and third parties; • Overlapping networks of RTAs increase their complexity and that of their relationships with the MTS; • The effects of RTAs' rules of origin (RoO) regimes.

Cont'd • Difficulties resulting from changes in WTO Members' trade regimes by the enlargement of an existing RTA or its replacement by a new one (The case of the EU and the recently acceded EU Members) ; • Two questions have been raised regarding, firstly, the possible changes in WTO rights and obligations of Members acceding to a customs union/RTAs and, secondly, the appropriateness of comparing the RoO of one FTA with those of a distinct, pre-existing FTA with overlapping membership; • The lack of accession provisions in most bilateral RTAs and the fact that Article XXIV does not impose disciplines on accession have raised doubts about the openness of RTAs and their effectiveness in contributingto the growth of world trade.

Cont'd • The development of regional trade policy disciplines # from those of the WTO Agreements could lead to Members forgoing some of their WTO rights when becoming parties to an RTA? • Dispute settlement provisions contained in "new generation" RTAs could build jurisprudence conflicting with that of the WTO? • One question relates to the consequences of clauses providing that, in the event of inconsistency, RTA rules prevail over WTO: could this result in a diminution of the rights that the parties had under the WTO in relation to their trade with one another?

Cont'd • Answer: Parties to RTAs argue that provisions in their RTA to prevail in the event of inconsistency was geared toward situations in which the RTA provisions went beyond WTO disciplines and that the RTA did not alter the rights and obligations of its parties with respect to each other under the WTO. • Could Parallel dispute settlement procedures nullify or impair WTO rights of third parties? • Answer:procedures for DS concerned trade between the parties and not trade with third parties.

Policy considerations in Regional Trade Agreements (RTAs)