REGIONAL RULES IN THE GLOBAL TRADING SYSTEM
The proliferation of regional trade agreements (RTAs) over the past two decades has highlighted the need to look closely at the relationships between regional and WTO rules or disciplines. A major obstacle to advancing understanding of RTAs is the absence of detailed information about their contents. This has limited the debate between those who view RTAs as discriminatory instruments hostage to protectionist interests and those who see them as conducive to multilateral trade opening. This book provides detailed analysis of RTA rules in six key areas – market access, technical barriers to trade, contingent protection, investment, services and competition policy – across dozens of the main RTAs in the world. The analysis helps to provide new insights into the interplay between regional and multilateral trade rules, advances understanding of the economic effects of RTAs and contributes to the discussion on how to deal with the burgeoning number of RTAs. a n t o n i e s t e v a d e o r d a l is Manager at the Integration and Trade Sector of the Inter-American Development Bank in Washington. k a t i s u o m i n e n is Trade Economist at the Integration and Trade Sector of the Inter-American Development Bank in Washington. r o b e r t t e h is Counsellor in the Economic Research and Statistics Division of the World Trade Organization.
REGIONAL RULES IN THE GLOBAL TRADING SYSTEM Edited by ANTONI ESTEVADEORDAL, KATI SUOMINEN and ROBERT TEH
cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, Sa˜o Paulo, Delhi Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521759342 Ó World Trade Organization 2009 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2009 Printed in the United Kingdom at the University Press, Cambridge A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data Regional rules in the global trading system / [edited by] Antoni Estevadeordal, Kati Suominen, Robert Teh. p. cm. Includes index. ISBN 978-0-521-76084-3 (hardback) ISBN 978-0-521-75934-2 (paperback) 1. International trade. 2. Regionalism–Economic aspects. 3. Trade blocs. 4. Foreign trade regulation. 5. Commercial treaties. I. Estevadeordal, Antoni. II. Suominen, Kati. III. Teh, Robert. IV. Title. HF1379.R4394 2009 3820 .91–dc22 2008053616 ISBN 978-0-521-76084-3 hardback ISBN 978-0-521-75934-2 paperback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party Internet Web Sites referred to in this publication, and does not guarantee that any content on such Web Sites is, or will remain, accurate or appropriate. The views and opinions expressed in this volume are strictly those of the authors’ and editors’ alone and do not reflect the views of the IDB, the WTO or any of their members.
From Kati Suominen, to Gen. Fred F. Woerner, Ret. and From Robert Teh, to Imelda de Leon
CONTENTS
List of figures page viii List of tables x List of Contributors xii Foreword xiii Acknowledgements xvi List of abbreviations xvii 1 Introduction 1 antoni estevadeordal, kati suominen an d r o b e r t te h 2 Big-Think Regionalism: a critical survey r i c h a r d ba l d w i n
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3 Market access provisions in regional trade agreements antoni estevadeordal, matthew shearer and k at i s uomi nen
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4 Trade remedy provisions in regional trade agreements robert teh, thomas j. prusa and m i c h e l e bu d e t t a
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5 A mapping of regional rules on technical barriers to trade r o b e r t a p i e r m a r t i n i a nd mi c h el e b u d et ta 6 Services liberalization in the new generation of preferential trade agreements: how much further than the GATS? 316 m a r t i n r o y , j u a n m a r c h e t t i a n d h o e li m 7 Mapping investment provisions in regional trade agreements: towards an international investment regime? 365 b a r b a r a k o t sc h w a r 8 Competition provisions in regional trade agreements robert teh
Appendix: List of RTAs included in the survey Index 503 vii
418
492
250
FIGURES
2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 3.1 3.2a 3.2b 3.3a 3.3b 3.4a 3.4b 3.5a 3.5b
The RTA diagram’s trade pattern page 27 The RTA (preferential trade arrangement) diagram 29 Ambiguous net welfare effects 30 The Johnson diagram (small Home and Partner nations) 31 The small PTA diagram: a simple case 34 Net welfare effects, FTA to global free trade 43 Stumbling-bloc FTAs 44 Juggernaut framework 52 Juggernaut building-bloc logic 52 Imported MFN liberalization 62 An economic theory of the GATT 64 Percentage of tariff lines duty free, by selected benchmark years 112 Reciprocity of concessions: Year 5 113 Reciprocity of concessions: Year 10 113 Duty-free lines in 5 years v. TRQ incidence 114 Duty-free lines in 10 years v. TRQ incidence 114 Agricultural duty-free lines in 5 years v. TRQ incidence 115 Agricultural duty-free lines in 10 years v. TRQ incidence 115 Evolution of duty-free treatment in selected RTAs 124 Evolution of duty-free treatment in selected RTAs: North–North agreements v. agreements with a Southern party 124 3.5c Evolution of sectoral duty-free treatment in selected RTAs 125 3.6a Distribution of liberalization by RTA parties in chapters, Year 5 126 3.6b Distribution of liberalization by RTA parties in chapters, Year 10 126 3.7a Distribution of liberalization of chapters in RTA parties’ schedules, Year 5 128 3.7b Distribution of liberalization of chapters in RTA parties’ schedules, Year 10 128 3.8 Evolution of duty-free treatment as trade-weighted percentage of tariff lines 130 3.9 Evolution of duty-free treatment as percentage of imports 130 3.10a Evolution of duty-free access in Canadian market for Costa Rican goods: a comparison using various measures 131
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list of figures 3.10b Evolution of duty-free access in Costa Rican market for Canadian goods: a comparison using various measures 132 3.10c Evolution of duty-free access in Chilean market for Korean goods: a comparison using various measures 132 3.10d Evolution of duty-free access in Korean market for Chilean goods: a comparison using various measures 133 3.10e Evolution of duty-free access in EU market for South African goods: a comparison using various measures 133 3.10f Evolution of duty-free access in South African market for EU goods: a comparison using various measures 134 3.10g Evolution of duty-free access in Moroccan market for US goods: a comparison using various measures 134 3.10h Evolution of duty-free access in US market for Morrocan goods: a comparison using various measures 135 3.11 Coverage of selected market access disciplines in fifty RTAs 139 3.12 Coverage of selected RTAs, by NTM provision 140 3.13 Coverage of selected RTAs, by other measure provision 140 3.14 Coverage of selected RTAs, by special regime provision 141 3.15 Coverage of selected RTAs, by RoO provision 142 3.16 Coverage of selected RTAs, by customs procedure provision 143 3.17 Restrictiveness of RoO in selected RTAs 151 3.18 Facilitation of regime-wide RoO in selected RTAs 151 4.1a Frequency of anti-dumping initiations, 1980–2006 170 4.1b Frequency of anti-dumping measures, 1995–2006 170 4.2a Frequency of CVD initiations, 1995–2006 171 4.2b Frequency of CVD measures, 1995–2006 171 4.3a Frequency of safeguard initiations, 1995–2006 172 4.3b Frequency of safeguard measures, 1996–2006 172 4.4 Number of RTAs in sample coming into force, by decade 177 4.5 RTAs by level of development of members 177 4.6 Hub-and-spoke arrangement of RTAs in sample 178 6.1 Proportion of sub-sectors with new and improved commitments under mode 3, per WTO Member (when comparing the GATS offer to the GATS schedule (‘GATS’) and the PTA commitments to the GATS offer (‘PTA’)) 332 6.2 Proportion of sub-sectors with new and improved commitments under mode 1, per WTO Member (when comparing the GATS offer to the GATS schedule (‘GATS’) and the PTA commitments to the GATS offer (‘PTA’)) 361 7.1 Coverage by country 397
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TABLES
3.1 3.2
3.3
3.4 4.1 4.2 4.3 4.4a 4.4b 4.5 4.6 4.7a 4.7b 4.8 4.9a 4.9b 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 6.1
RTAs covered in the study page 105 Products subject to tariff rate quotas in CAFTA: US tariff quotas on products entering from Central America and the Dominican Republic 118 Products subject to tariff-rate quotas in CAFTA: Central American and Dominican Republic tariff quotas on products entering from the United States 120 Three-level matrix for mapping market-access provisions in RTAs 152 Trade remedy actions, initiations and measures, 1995–2006 169 Anti-dumping template 186 Countervailing duties template 188 Bilateral safeguards template 191 Global safeguards template 192 Anti-dumping mapping 195 Countervailing duties mapping 203 Bilateral safeguards mapping 208 Global safeguards mapping 231 Characteristics of RTAs that have disallowed trade remedies 241 Probit estimation results 244 Multinomial logit estimation results 245 The structure of the template for mapping regional rules on standards, technical regulations and conformity assessment procedures 270 An overview of TBT provisions in RTAs 272 Characteristics of RTAs by hub 279 The extent of regional TBT liberalization 283 The likelihood of provisions encouraging the harmonization of technical regulation 288 The likelihood of provisions encouraging mutual recognition of conformity assessment 288 The likelihood of provisions encouraging notification of standards and procedures 289 The likelihood of provisions establishing a dispute settlement body 289 Preferential trade agreements reviewed 322
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list of tabl es 6.2 6.3 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 8.1 8.2 8.3
Cross-tabulation of countries and PTAs 328 Examples of commitments providing for the phasing-in of liberalization 346 Agreements used in sample and date of entry into force 376 Mapping of investment provisions: results by geographic pairing Mapping of investment provisions: results by levels of development Scope and coverage 401 Non-discrimination: most favoured nation and national treatment standards 403 Standards of treatment 406 Performance requirements and restrictions on nationality 409 Denial of benefits, transparency and dispute settlement 412 Competition template 424 Competition mapping 426 Correlation of competition provisions in selected hubs 486
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382 386
CONTRIBUTORS
Richard Baldwin is Professor of International Economics at the Graduate Institute of International Studies in Geneva. Michele Budetta is a graduate student at the University Cattolica del Sacro Cuore in Milan Antoni Estevadeordal is Manager in the Integration and Trade Sector at the Inter-American Development Bank. Barbara Kotschwar is Research Associate at the Peterson Institute for International Economics. Aik Hoe Lim is Counsellor at the Trade in Services Division of the World Trade Organization. Juan Marchetti is Counsellor at the Trade in Services Division of the World Trade Organization. Roberta Piermartini is Counsellor at the Economic Research and Statistics Division of the World Trade Organization. Thomas J. Prusa is Professor of Economics at Rutgers University. Martin Roy is Counsellor at the Trade in Services Division of the World Trade Organization. Matthew Shearer is Statistician and Economist at the Inter-American Development Bank. Kati Suominen is International Trade Specialist in the Integration and Trade Sector at the Inter-American Development Bank. Robert Teh is Counsellor at the Economic Research and Statistics Division of the World Trade Organization.
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FOREWORD
The number of regional trade agreements (RTAs) has grown enormously over the last decade. Over 200 RTAs currently in force have been notified to the World Trade Organization, with many more being currently negotiated. More and more areas, that traditionally were not part of trade agreements, are being covered by these agreements. RTAs now typically include rules on competition policy, the environment, labour, services, investments, intellectual property, trade remedies or technical barriers to trade, in addition to the usual market access provisions in merchandise trade. The proliferation of RTAs requires increased attention to be paid to the potential conflicts and complementarities between ‘regional’ and ‘global’ rules. The relationship between regionalism and multilateralism has sometimes been framed as one where RTAs are either a building bloc or a stumbling bloc to multilateralism. But, having closely witnessed integration arrangements in Europe, Latin America and the Caribbean, Africa, Asia and elsewhere around the globe, we believe that this is not as black and white. RTAs have delivered important trade gains for their participants. But, often, they have also been a source of trade diversion and have hampered movement towards greater multilateral liberalization, as is the case with certain rules of origin. In our view, the key research question is to identify those regional rules that promote complementarities with the multilateral trading system and those that conflict with it. A great amount of scholarly interest has been spawned by regionalism, with both eminent economists and political scientists making many valuable theoretical contributions. But, with a few notable exceptions like NAFTA and the EU, very little research has as yet been devoted to the actual contents of these RTAs. There is not enough understanding of the diversity in regional rules, the difference between these regional rules and multilateral rules, the feasibility of converging towards some common xiii
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foreword
standard and the appropriate methods for assessing the compatibility of regional rules with multilateral rules. As part of the effort to remedy this gap in knowledge, the InterAmerican Development Bank and the World Trade Organization have carried out a joint research project to enhance our understanding of regional rules and their implications for the global trading system. This research attempts to complement the already rich vein of economic theorizing by assembling a comprehensive mapping of the trade and trade-related rules that govern RTAs around the globe. It maps various provisions or rules across dozens of the most important RTAs in six key areas: market access, trade remedies, technical barriers to trade, services, investment, and competition policy. For the first time, a framework for analysing these regional rules and a mapping of these rules have been put together in a single volume. One of the early harvests of the WTO Doha Round has been the establishment, on a provisional basis, of a new transparency mechanism for RTAs. Regional trade agreements have been the subject of some multilateral examination since the days of the GATT. This new transparency mechanism brings a higher level of examination to RTAs. It provides for early announcement of any RTA, and its notification to the WTO. It requires a factual presentation of the notified RTAs to be made to WTO Members on the basis of a report prepared by the WTO Secretariat. It mandates that any changes affecting the implementation of an RTA, or the operation of an already implemented RTA, will be notified to the WTO. Finally, at the end of the RTA’s implementation period, it calls for the parties to the RTA to submit to the WTO a written report on the realization of liberalization commitments in the RTA as originally notified. We believe that the contributions in this volume can provide relevant conceptual frameworks, methods of analysis and data which could be of help in the context of the new transparency mechanism. This volume, which addresses one of the key challenges faced by the multilateral trading system, represents another facet of the fruitful partnership between the IDB and the WTO. The IDB has a long history of research and capacity-building on trade and integration issues and, together with other regional and multilateral lending agencies, is heavily involved in supporting the WTO’s Aid for Trade initiative. We look
foreword
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forward to more collaborative endeavours between our two institutions that will help improve the workings of the global trading system. Pascal Lamy Director-General World Trade Organization Luis Alberto Moreno President Inter-American Development Bank
ACKNOWLEDGEMENTS
The research collaboration between the Inter-American Development Bank and the World Trade Organization Secretariat which gave rise to this publication has made the editors indebted to numerous colleagues rich in ideas and enormously interested in regional integration. We would like to express our deepest thanks to all the authors of the papers in this volume for their contribution and involvement in this joint research undertaking. We are grateful for the financial support extended by the Inter-American Development Bank without which this research would not have been possible. Along the way, several seminars and workshops were organized in Geneva and Washington, D. C. We appreciate the comments and suggestions made by seminar and workshop participants that have provided our contributors with fresh perspectives and valuable insights. Particular thanks are due to Chad Bown, Simon Evenett and Ken Vandevelde for their careful reading and thoughtful comments on several chapters of this volume. We are beholden to staff members of the IDB and WTO Secretariats for their assistance, patience and many helpful suggestions. We would like to make specific mention of Patrick Low, Clem Boonekamp, Robert Anderson, Stefania Bernabe´, Jo-Anne Crawford, Jesse Kreier, Anthony Martin, Andreas Sennekamp and Hiromi Yano of the WTO Secretariat; and Santiago Levy of the IDB, as well as Robert Devlin and Nohra Rey de Marulanda, who served at the IDB during the launch of this joint research project. Finally, we wish to thank Finola O’Sullivan of Cambridge University Press for her support in preparing this volume.
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ABBREVIATIONS
ACCC ACE AD AFAS AFTA ALADI ANZCERTA ASEAN AUSFTA BIT BOP CA CACM CAFTA CARICOM CDC CEMAC CEN CENELEC CER CET CITT COMESA COMTRADE
Australian Competition and Consumer Commission Acuerdo de Complementacio´n Econo´mica Anti-dumping ASEAN Framework Agreement on Services ASEAN Free Trade Area Asociacio´n Latinoamericana de Integracio´n Australia New Zealand Closer Economic Relations Trade Agreement Association of Southeast Asian Nations Australia–US Free Trade Agreement bilateral investment treaty balance of payments Central America Central American Common Market Central America Free Trade Agreement Caribbean Community and Common Market Comite´ de Defensa de la Competencia Communaute Economique et Monetaire de l’Afrique Centrale Committee for Standardisation European Committee for Electrotechnical Standardisation Australia–New Zealand Closer Economic Relations common external tariff Canadian International Trade Tribunal Common Market for Eastern and Southern Africa United Nations Commodity Trade Statistics xvii
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CRTA CU CUSFTA CVD DOC DR ECJ EEA EEC EFTA ETSI EU FDI FTA FTC FYROM GATS GATT GCC GDP GPA HKC HS IADB IAF ICSID IEC ILAC ISO ITO LAIA MAI MERCOSUR MFN MRA MTN NAFTA NATO
list of abbreviations
WTO Committee on Regional Trade Agreements customs union Canada–US Free Trade Agreement countervailing duty US Department of Commerce Dominican Republic European Court of Justice European Economic Area European Economic Community European Free Trade Association European Telecommunications Standards Institute European Union foreign direct investment free trade agreement Federal Trade Commission Former Yugoslav Republic of Macedonia General Agreement on Trade in Services General Agreement on Tariffs and Trade Gulf Cooperation Council gross domestic product Government Procurement Agreement Hong Kong, China Harmonized System Inter-American Development Bank International Accreditation Forum International Centre for Settlement of Investment Disputes International Electrotechnical Commission International Laboratory Accreditation Cooperation International Organization for Standardization International Trade Organization Latin American Integration Association Multilateral Agreement on Investment Mercado Comun del Sur most-favoured-nation mutual recognition agreement Multilateral Trade Negotiations North American Free Trade Agreement North Atlantic Treaty Organization
l ist of abbreviations
NGO NT NTM NZCC OCT OECD PTA QM RoO RoW RTA SADC SAPTA SAT SCM SEP SITC SPARTECA SPS SSG TBT TRIMs TRIPS TRQ UEMOA UN/EDIFACT UNCTAD VER WAEMU WCO WTO
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non-governmental organization national treatment non-tariff measure New Zealand Commerce Commission Overseas Countries and Territories Organization for Economic Co-operation and Development preferential trade agreement quantitative measures rules of origin rest of the world regional trade agreement Southern African Development Community South Asian Preferential Trade Arrangement substantially all trade subsidies and countervailing measures (Trans-Pacific) Strategic Economic Partnership Standard International Trade Classification South Pacific Regional Trade and Economic Cooperation Agreement sanitary and phytosanitary special safeguard technical barriers to trade Trade-Related Investment Measures Trade-Related Intellectual Property Rights tariff rate quota L’Union Economique et Mone´taire Ouest Africaine United Nations/Electronic Data Interchange for Administration, Commerce, and Transport United Nations Conference on Trade and Development Voluntary Export Restraint West African Economic and Monetary Union World Customs Organization World Trade Organization
1 Introduction antoni estevadeordal, kati suominen and robert teh* 1
Introduction
Regional trade agreements (RTAs) have proliferated around the world in the past decade. Some 200 RTAs currently in force have been notified to the World Trade Organization (WTO) and the number will continue to rise given the many RTAs being proposed and negotiated. It is estimated that, if one takes into account RTAs which are in force but have not been notified, signed but not yet in force, currently being negotiated, and in the proposal stage, close to 400 RTAs are scheduled to be implemented by 2010 (Fiorentino, Verdeja and Toqueboeuf, 2006). Virtually all countries are member of at least one RTA, with most countries belonging to two or more RTAs at once. The geographic reach of RTAs has also changed over time, making ‘regional’ somewhat of a misnomer. While most RTAs are still formed among countries inhabiting the same region or continent, they increasingly involve members that are not immediate neighbours and create partnerships spanning oceans. Trans-Atlantic and trans-Pacific RTAs are gaining in number through such agreements as the European Union (EU)–Mexico Economic Partnership Agreement, the EFTA–Chile free trade agreement (FTA) and the recently signed Korea–US FTA. The economic importance of regional trade agreements has continued to grow. More than half of global merchandise trade flows among countries connected by a common RTA. But RTAs are today increasingly important in areas other than merchandise trade. Indeed, the architecture of RTAs has become both more comprehensive and more complex. Besides trade in goods, many RTAs now regulate such subjects as trade in services, investments, standards, intellectual property *
The views and opinions expressed in this volume are strictly those of the authors and editors alone and do not reflect the views of the IDB, the WTO or any of their Members.
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antoni estevadeordal, kati suominen , robert teh
and competition rules, as well as a host of issues not directly related to trade, such as labour and environment. The body of rules governing international trade has been extended to matters traditionally considered to be within the realm of domestic regulations (‘behind-theborder’ measures). These developments suggest that RTAs have become a major and strategic part of commercial policy for many countries. But RTAs also pose important challenges for the multilateral trading system. Indeed, the growing importance of RTAs has directed attention to the potential conflicts as well as complementarities between the rules that are adopted in RTAs (‘regional’ rules) and the multilateral rules established in such agreements as the General Agreement on Tariffs and Trade (GATT) of 1994, the General Agreement on Trade in Services (GATS) and other WTO Agreements (‘global’ rules). While the GATT had in the past conducted examinations of RTAs, scrutiny may now become more exacting. The multilateral Doha trade round launched in 2001 included a negotiating mandate aimed at clarifying and improving disciplines and procedures under the existing WTO provisions applying to RTAs – GATT Article XXIV, the Enabling Clause, and GATS Article V. These negotiations have resulted in a new transparency mechanism that was adopted by the WTO’s General Council in December 2006. The transparency mechanism obliges Members to notify the WTO of any RTA that Members enter into and to provide information about the agreement. The mechanism also mandates the WTO Secretariat to prepare a report on notified RTAs. While this report on the RTA has to be ‘factual’ and refrain from any ‘value judgment’, the increased level of scrutiny can alert the rest of the WTO membership to some of the rules and practices in RTAs that adversely affect non-RTA members. This may induce countries to adopt RTA rules that complement rather than conflict with existing WTO agreements. The growing policy attention paid to RTAs finds a parallel in the debate in the economic literature on whether RTAs are ‘building blocs’ or ‘stumbling blocs’ to multilateral trade liberalization.1 These concepts refer to the nature of the dynamics or time paths that RTA formation can generate (Bhagwati and Panagariya, 1999). RTAs are building blocs if they accelerate multilateral trade negotiations or progressively enlarge their membership so that they lead to global free trade. RTAs are stumbling blocs if they hamper the attainment of global trade liberalization. 1
Bhagwati (1991) first coined the terms ‘building bloc’ and ‘stumbling bloc’.
introduction
3
The stumbling bloc camp argues that RTAs undermine countries’ incentives to undertake further multilateral liberalization because members are unwilling to dilute the preferential access they have to the markets of RTA partners. Another argument is that RTAs can create incompatible regulatory structures and standards which lock in the members’ policies, and increase the adjustment costs associated with multilateral liberalization, thus making it less attractive. The importance of non-economic motives or interests can make RTAs a stumbling bloc to global free trade (Lima˜o, 2007). RTAs can be valuable to a large country because the preferential access to its market allows it to extract co-operation in nontrade matters from smaller partners. Multilateral tariff reductions reduce the value of preferential access to the large market and thus the surplus that can be extracted from potential RTA partners. Various political-economy models have sought to show that the establishment of an RTA weakens the motivation of the members for reciprocal liberalization with non-members. In Levy (1997), if an RTA produces disproportionately large gains and relatively small losses to the median voter so that his utility is raised above what could be achieved with a multilateral deal, multilateral liberalization will no longer be viable. Krishna (1998) argues that trade-diverting RTAs generate large rents tied to the preferences granted by the agreement for producers. Multilateral trade liberalization threatens those rents. If governments are swayed more by producer interests, then multilateral liberalization will not be pursued. Moreover, the attention that governments invest in RTA negotiations draws away scarce political and human resources from multilateral negotiations. There are strong arguments for the building bloc story as well. Baldwin (1995) has proposed a domino theory of regionalism where the establishment of an RTA increases the value for non-members of joining the agreement.2 The creation of a preferential regional arrangement will reduce the profits of the firms exporting to the region but who are located in a non-member country. They will have a reason to lobby their government to join the bloc. If the regional bloc enlarges as a consequence, the value of membership for outsiders increases since they face a cost disadvantage in an even greater number of markets. This leads to a snowballing of countries which want to join so that the RTA progressively enlarges its membership until global free trade is reached. Another building-bloc 2
However, the domino theory does not explain what incentives existing members have to accept new members.
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argument is that preferential trade liberalization will help enlarge the exporting sectors and diminish the import-competing sectors in RTA members. Thus a country which enters into an RTA will expand the economic and political strength of its pro-liberalization constituency (‘juggernaut’ effect), making it possible for its government to cut a multilateral deal (Baldwin, 2005). There are also those who see RTAs as a stepping stone towards a global free trade policy (Ethier, 1998). RTAs may help a government intent on carrying out economic reforms to mobilize domestic forces in support of opening up to the wider world. By initially entering into a preferential trade arrangement, the reforming country would be able to capture economic benefits, for example through FDI inflows from its RTA partners that tilt the political balance within the country in favour of economic reform and multilateral liberalization. A more recent vein of research has argued that, as more RTAs are established, the cost to producers of overlapping rules would lead them to pressure governments to harmonize or ‘multilateralize’ these rules (Baldwin, 2006). As bilateral and regional trade agreements proliferate, a ‘spaghetti bowl’ of rules of origin will emerge. This, in turn, will run against the increasing fragmentation of production as firms find it more cost-efficient to locate the manufacturing of parts and components in different countries. The requirement to comply with different rules of origin will then raise firms’ production costs. Paradoxically, RTA spaghetti bowls can become building blocs to multilateralism as offshoring becomes a force for the multilateralization of existing regional rules. Indeed, there are nascent efforts by some groups of countries in Asia as well as the Americas to examine ways to connect their common RTAs into broader trade areas so as to reduce the complexity of rules facing economic actors in the RTAs and to facilitate more trade and investment. To be sure, the multilateralization of regional rules may for many still seem to be a long-term aspiration. But what is clear today is that, given that nearly all WTO Members are RTA members and vice versa, WTO Members should have an interest in reducing conflicts between regional and multilateral rules and in ensuring compatibilities between them. Yet, despite the growing academic and policy attention to regionalism, the anatomy of RTAs remains poorly understood. Virtually all of the existing mappings that have been undertaken on RTAs focus on a single RTA discipline – rules of origin.3 The lack of a comparative look at 3
A partial list of the literature includes Estevadeordal (2000), Suominen (2004), Estevadeordal and Suominen (2005) and Cadot et al. (2006).
introduction
5
other RTA rules severely limits our understanding of the effects of RTAs and provides little foundation for recommending measures to further compatibilities between regional and global rules. We therefore take up Richard Baldwin’s recommendation in this volume to move the economic profession’s discussion from high theory to one which is more empirically grounded and policy-relevant.
2
Objectives and analytical approach
The main objective of this volume is to begin filling the gaps in our knowledge of RTA rules and their relationship to multilateral trade rules. The ultimate goal of our endeavour is to provide a firmer basis for informed policy debate and policy-making on RTAs. We seek to accomplish these objectives by developing detailed analytical mappings of regional rules in six key areas – market access, trade remedies, technical barriers to trade, services, investment, and competition policy – across dozens of the main RTAs around the world. The choice of rules to include in the mapping exercise has been dictated by a number of considerations. Our primary focus was regional rules for which there are corresponding global rules or for which a global rule is under negotiation in the Doha Round. However, we also allowed for the inclusion of regional rules that are applied in a substantial number of RTAs even though they have no multilateral counterpart (which is the case for competition policy). We feel that the choice of these six areas also strikes the right balance between the ‘traditional’ areas covered in trade agreements, such as market access and trade remedies, and the new but growing areas such as TBTs, services, investment and competition. Beyond addressing the lacuna in our knowledge of RTAs, we seek to meet three other objectives with this book. First, we hope to inspire and inform further work on disaggregating RTAs into their component parts, a task that is absolutely crucial for understanding the implications of the rising tide of regionalism on the global economic system. Secondly, by developing methodologies for dissecting RTAs, we hope to establish a rigorous starting point for further studies, as well as to provoke debate on the best prisms to examine RTAs. Thirdly, by virtue of containing detailed data on RTAs around the world, the chapters here hope to serve as inputs for fresh empirical work on the economic effects of RTAs.
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3
Organization and main findings
The second chapter of this volume, by Richard Baldwin, provides an analytic framework for examining the building bloc–stumbling bloc debate. The chapter discusses various economic mechanisms (Smith’s certitude, Haberler’s spillover and Viner’s ambiguity) that help determine whether preferential trade arrangements help or hinder multilateral trade liberalization. Baldwin critically reviews the long line of literature on both sides of the debate and identifies four distinct types of stumbling blocs in the literature – preference-erosion, goodies-bag, cherry-picking and the bargaining-model stumbling blocs. The building-bloc effects include the juggernaut effect, the Kemp–Wan effect, and the veto-avoidance mechanism. He then details the economic arguments that underlie these various effects. Baldwin’s main conclusion is that, while many of the models provide helpful theoretical frameworks for assessing the potential effects of RTAs on the global trading system, it is now time to move the literature’s focus from high theory to empirically grounded research which will have more policy relevance. The third chapter begins the mapping exercise. The focus of Antoni Estevadeordal, Matthew Shearer and Kati Suominen is on market access disciplines in RTAs – both tariff liberalization and a number of other disciplines that can qualify the extent of market access in RTAs, including non-tariff measures, special regimes, rules of origin, and customs procedures and trade facilitation. The study goes to the heart of GATT Article XXIV, which sets out the conditions under which the main types of RTAs – free trade agreements (FTAs) and customs unions (CUs) – are viewed as consistent with multilateral trade rules. The Article has been a source of extensive debate and interpretations. Some of the most disputed issues centre on the Article’s stipulation that RTAs are to eliminate tariffs on ‘substantially all trade’ (SAT) between the parties, and to do so within a ‘reasonable length of time’. Another key line of debate involves the meaning of the Article’s requirement that, besides tariffs, RTAs eliminate ‘other restrictive regulations of commerce’ on substantially all trade. Employing both tariff-line-level and aggregate data, the authors strive to capture the extent to which RTAs meet the Article XXIV benchmarks. There are three main findings. First, most RTAs attain a common interpretation of SAT and ‘reasonable length of time’ – liberalization of 90 per cent of tariff lines by year 10 of the agreement. Trade-weighted measures of the depth of liberalization yield similar results.
introduction
7
However, and secondly, there are a number of outlier RTA parties (in general, developing countries) and product categories (particularly sensitive sectors – agriculture, textile and apparel, and footwear) that do not attain the benchmark. Many an RTA also contains provisions that could potentially be classified as ‘other restrictive regulations of commerce’, such as tariff rate quotas, special safeguards, and demanding rules of origin. Thirdly, in terms of the aggregate provisions, many RTAs are also ‘WTO-plus’, in terms of incorporating a larger number and/or more specific provisions than are currently in force at the multilateral level. One key example is customs procedures and trade facilitation where US agreements in particular establish quite comprehensive and specific commitments. Overall, the findings are encouraging as to the extent of liberalization provided in RTAs and the potential for RTAs to serve as testing grounds for new, more comprehensive trade rules than have thus far been crafted at the multilateral level. The results could also provide insights and guidance for any future efforts to define ‘substantially all trade’ and ‘reasonable length of time’ in a more precise fashion at the multilateral level – as well as for negotiators of new RTAs to meet and go beyond the liberalization attained in past agreements. To be sure, the discriminatory potential of the RTAs remains, and must be attenuated with simultaneous unilateral and multilateral liberalization. In chapter four, Robert Teh, Thomas Prusa and Michele Budetta examine provisions on trade remedies – anti-dumping, countervailing and safeguard measures – in RTAs. Their main concern is with the possible increase in discrimination against non-members that come from regional rules on trade remedies. The elastic and selective nature of trade remedies may lead to more discrimination against non-members through greater frequency of trade remedy actions against them. The adoption of RTA-specific trade remedy rules can increase this risk of discrimination, with trade remedies against RTA members being abolished outright or being subjected to greater discipline. Given the second-best nature of preferential liberalization, any increase in intraregional trade that this brings about may simply be substituting for cheaper sources of imports from non-members. They find that about one-sixth of the RTAs surveyed have dispensed with at least one type of trade remedy. In addition, a number of RTAs have adopted RTA-specific rules that tightened discipline on the application of these remedies against RTA members. In the case of
8
antoni estevadeordal, kati suominen , robert teh
anti-dumping for example, some specific provisions have increased de minimis volume and dumping margin requirements, adopted a lesser duty rule and shortened the duration for applying anti-dumping duties. They have also pointed to the role of regional bodies with the authority to review or remand determinations made by national authorities in possibly reducing anti-dumping action against RTA partners. In the case of safeguards, they have expressed some concern about the exclusion of RTA partners in safeguard actions triggered by GATT Article XIX and the Agreement on Safeguards. This puts RTA rules on safeguards in conflict with the non-discriminatory principle that underlies multilateral rules on safeguard action and squarely raises the problem of trade diversion. Although WTO panels have ruled against such exclusions so far, it is not clear that future panels will do so consistently given the particular ground of parallelism on which previous decisions have been made. There appears to be less of a problem with countervailing duty (CVD) provisions in RTAs: no major changes have been made to CVD rules in the RTAs included in their survey. They suspect that a major reason for this is the absence of agreements in RTAs on meaningful or significant curbs on subsidies or state aid. Chapter five, by Roberta Piermartini and Michele Budetta, analyzes the variety of approaches that have been adopted at the regional level to remove technical barriers to trade (TBTs). The chapter attempts to answer whether RTA provisions have gone deeper than the Agreement on Technical Barriers to Trade (TBT Agreement) of the WTO in liberalizing TBTs and what factors determine the design of TBT rules at the regional level. The chapter develops a template that follows the structure of the WTO TBT Agreement to map rules on technical barriers to trade in regional trade agreements. The authors find that provisions on standards, technical regulations and conformity assessment procedures are widespread across RTAs. Overall, regional agreements tend to favour harmonization over mutual recognition of product standards, while equivalence and mutual recognition appear to be the preferred options to deal with TBTs arising from testing and certification. Their analysis seems to confirm theoretical predictions that similarity in the levels of development affects the likelihood of introducing provisions for mutual recognition of product standards and technical regulations, but there does not appear to be a link between the requirement to harmonize standards and the level of development. In general, regional rules on TBTs develop according to a hub-and-spoke
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structure. In particular, the family of RTAs which involves the EU tends to promote the use of European standards. A common feature of RTAs signed by the US is the inclusion of provisions for the establishment of institutions to deal with the administration of the TBT chapter of the agreement, the resolution of disputes on TBT matters and encouragement of mutual recognition. One important question that the authors raise is whether, because of a ‘cloning’ tendency on the part of the hubs, standards become a barrier to trade between major regional groupings. To the extent that TBT provisions in RTAs succeed in locking in a country to ‘regional’ standards, RTAs act as a stumbling bloc in the process of multilateral liberalization. Trade in services makes up a substantial proportion of world trade. In 2006, commercial services exports grew by 12 per cent in nominal terms to US$2.76 trillion – accentuating the salience of both RTA and GATS services rules.4 Chapter six, by Martin Roy, Juan Marchetti and Aik Hoe Lim, analyzes services liberalization commitments in RTAs, and compares them to prevailing GATS commitments and Doha Round offers. Focusing on market access achieved in both bilateral and multilateral negotiations thus far, their main finding is that services commitments in RTAs tend to go significantly beyond GATS schedules and even Doha Round offers. These advances take the form of a high proportion of new bindings in sectors that had remained uncommitted in the GATS and improved bindings in sectors that were already committed in the GATS schedules/offers. The authors reach a number of further conclusions about the pattern of services liberalization in RTAs. First, countries that have used negative-list approaches have bound at least the existing level of openness for the large majority of sectors. This instils predictability in the bilateral relationship and spurs cross-border investment and trade. The authors also highlight that a number of agreements have led to ‘real’ liberalization on the ground. Secondly, a number of the larger developed countries tend not to go as far beyond GATS as many of the smaller developing economies. The authors argue that this might be explained by an imbalance between negotiating partners and by the fact that at least some of the larger developed countries have less room to improve their already extensive GATS schedule and offers. Thirdly, as a result, the most protected services activities in larger developed countries remain largely unaffected by RTAs, for example audiovisual for EFTA and the EC, maritime transport 4
WTO (2007).
10 antoni estevadeordal, kati suominen , robert teh
and certain professional services for the US, cross-border trade in a number of financial services for a variety of countries, and education services where there has been no significant improvement for the US, EC and EFTA Member States. Preferential trade in services has its benefits and costs. On the one hand, preferential access in services may be less costly than in merchandise goods. One reason the authors provide is that barriers to trade in services are usually embedded in regulations and it may be difficult for governments to devise and enforce one set of regulations for some service suppliers and another set of regulations for a different group. But preferential access can also engender important costs: non-parties may suffer because preferences may provide lasting advantages to first movers that might be hard to reverse through subsequent extension of access to other countries; while parties to the agreement may also suffer if they are stuck with relatively less efficient suppliers. Additionally, from a political economy perspective, bilateral negotiations may have a deleterious impact on multilateral talks. For one, bilateral and regional initiatives divert important resources from multilateral negotiations. Moreover, the proliferation of RTA negotiations may well have led some WTO Members to make minimal WTO services offers in the Doha Round so as to have ‘negotiating chips’ to trade in RTA negotiations. The authors suggest two ways in which multilateral initiatives can overcome these drawbacks and help harness regionalism to reinforce multilateralism. First, countries involved in RTAs could conditionally offer a level of services commitments in the WTO closer to the one they agreed to in RTAs. Those WTO Members that have not been involved so far in RTAs could use the GATS-plus commitments in RTAs as a kind of target they could aim for in the Doha Round. Secondly, the authors propose better multilateral surveillance of the implementation of the services commitments in RTAs. They envision this surveillance to be modelled along the lines of China’s transitional review mechanism in the WTO, according to which China has an obligation to provide information on policies affecting trade in services (e.g. changes to laws and regulations, state of play of licensing applications), information which is subsequently reviewed by Members in the specialized WTO bodies overseeing the issues at hand. The same obligation could be imposed on WTO Members having signed RTAs including services obligations and commitments. A substantial body of academic literature agrees that trade policy and investment tend to influence each other: high tariff walls may encourage
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market-seeking investment that ‘jumps’ the tariff while trade liberalization can attract investment that relies on availability of cheap intermediate goods and access to foreign markets. In chapter seven, Barbara Kotschwar analyzes investment chapters in fifty-two RTAs, finding that most cover such areas as MFN treatment, national treatment, transparency, denial of benefits and restriction of transfers, nationality of management and board of directors, performance requirements, expropriation, and investor–state dispute settlement. She finds that investment provisions in US RTAs are particularly comprehensive and often extend well beyond what can be found in multilateral instruments regulating investment such as the Agreement on Trade-Related Investment Measures (TRIMs) and the General Agreement on Trade in Services (GATS), and, less directly, in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the Agreement on Subsidies and Countervailing Measures (SCM). Kotschwar discovers two main phenomena: the increasing commonalities in investment provisions at the bilateral and regional levels, and the importance of flexibility in the forging of investment provisions. Common approaches have emerged in RTAs with respect to the scope of application, treatment, transfers, expropriation and mechanisms for the settlement of disputes. At the same time, regional arrangements are allowing countries to customize their investment relations in terms of the depth of liberalization, the extent of protection, and demands by developing countries to address the development dimensions of FDI. Whereas increased commonalities could be a harbinger of an eventual multilateral investment regime, widespread exercise of flexibility may ensure that investment provisions at the bilateral and RTA level end up driving the evolution of the international investment regime so that a single, comprehensive and coordinated regime is unlikely in the near future. Nonetheless, the commonly shared elements could serve as conduits between the various RTAs – as well as between the RTAs and the multilateral system. One complication affecting investment rules that Kotschwar identifies is their multilayered nature: countries regulate investment not only through RTAs and multilateral instruments, but also through bilateral investment treaties (BITs). Ensuring complementarities between RTAs, BITs, TRIMs and the other multilateral investment rules is likely to pose one of the more salient policy challenges in the years ahead. A growing number of RTAs, many of them involving developing countries, include competition policy and competition-related provisions. While there have been a number of surveys of competition
12 antoni estevadeordal, kati suominen , robert teh
provisions in RTAs in recent years, they have tended to dwell only on the competition policy chapter of regional agreements. The principal contribution of chapter eight is to go beyond this and to examine competition-related disciplines and principles that are found in other chapters of RTAs. Robert Teh shows how extensive the scope of competition rules is in RTAs. There are competition disciplines to be found in the RTA chapters on investment, services (in telecommunications, maritime transport and financial services), government procurement and intellectual property. Between a third and a half of the RTAs that were studied in the chapter have horizontal provisions cutting across the entire agreement on transparency, procedural fairness and nondiscrimination. These findings underline the importance of examining competition-related provisions beyond those contained in the competition policy chapter. Within the competition policy chapter proper, the main obligations involve application of competition laws to curb anti-competitive behaviour and closer co-operation among competition authorities of RTA partners. The types of anti-competitive behaviour that are of concern are concerted actions, abuse of a dominant position, monopoly, state enterprises or undertakings with special or exclusive rights and state aid. For the most part, the scope of co-operation among national competition authorities is limited to exchange of information, notification and consultation. However, a small number of RTAs give a substantial role to regional bodies in carrying out surveillance, investigations and taking measures to curb anti-competitive behaviour. One of the findings of this chapter is that a significant number of RTAs carve out competition policy, either partially or completely, from dispute settlement. This further underscores the importance of the competitionrelated provisions in the sectoral chapters and the horizontal principles, since for the RTAs with carve-outs, they are the only provisions on competition that could be enforced through the RTA’s disputesettlement mechanism. The chapter goes on to argue that many elements of competition rules in RTAs are non-discriminatory in that their benefits cannot be denied to non-RTA members. This applies in great measure to the horizontal principles of transparency, procedural fairness and non-discrimination. But, beyond these principles, the requirement to apply competition law, or to set up a competition authority, or to subject state aid and public monopolies to disciplines, all improve the conditions of competition in the marketplace, and should enhance economic opportunities to firms
introduction
13
who already operate in the market, whether they are domestic, from an RTA member or from a country which is not a party to the regional agreement.
4
Conclusion
There are three policy-related lessons that arise from this volume. First, RTAs are here to stay. Countries have become comfortable in walking with two feet. Regionalism and multilateralism are being pursued simultaneously by many countries that apparently see no major conflict in the pursuit of both policies. Given their proliferation globally and with rules governing a host of policy areas, they cannot be ignored at the multilateral level. One key policy objective must be to harness RTAs as an instrument to further multilateral liberalization. Secondly, regional rules and their economic impacts are complex, and these findings are reflected in the analysis in many of the chapters in this volume. The trade remedies chapter highlights the discriminatory impact of what appears to be trade-friendly elimination of such measures. The TBT chapter points to the pitfall of harmonized product standards that may lock RTA members into a particular regulatory framework that is costly to escape from. On the other hand, the competition chapter notes that a significant number of RTA rules on competition create benefits that are non-discriminatory and that extend beyond firms from RTA members. An almost similar finding is made in the services chapter. Since many services restrictions are embedded in regulatory regimes, governments will often not put in place different regulatory regimes for different supplier countries. Thus once some restrictions on trade in services are removed for RTA members, they will not continue to be applied to other countries. But the services chapter also warns about the possibility of lasting advantages to first-movers that might be hard to reverse through subsequent extension of access to other countries. The third lesson is that RTAs can have far-reaching implications for domestic politics – they create coalitions and vested interests as any policy of trade liberalization does – as well for national policies. RTAs prescribe new rules, regulations and institutions, such as domestic bodies to implement RTA provisions. RTAs thus both regulate trade and create the means to regulate. The key lesson for any signatory is that the negotiation of RTAs is only the beginning of a long process of implementing and investing in the implementation of numerous RTA provisions while at the same time seeking to ensure compatibilities
14 antoni estevadeordal, kati suominen , robert teh
between a country’s old and new RTAs as well as between RTAs and multilateral commitments. It is our hope that this volume will inspire further research on regionalism. It is the task of empirical analysts to harness and hone the data assembled in this volume to better understand the full range of RTA effects. There are four key areas of inquiry where greater knowledge is needed. The first is the political economy of deep v. shallow integration or comprehensive v. limited integration. What determines the choice between these options in RTAs? Why are countries increasingly negotiating and signing RTAs containing behind-the-border disciplines such as competition policy or technical barriers to trade? Is the purpose to limit the liberalization provided by the market access chapter, to expand it or to guard against nullification of market access through other measures? A broader question that this refers to is the complementarities between the various provisions within RTAs. Do tariff and investment provisions foster each other or work at cross-purposes? Are services trade provisions complementary to provisions on competition policy? Secondly, as pointed out by Baldwin, why have developing nations agreed to disciplines in RTAs that they have tended to resist at the multilateral level, such as intellectual property rights, tariff bindings, TBTs, services, government procurement and competition policy? Is this simply a matter of sequencing? Or do political-economy considerations make it easier to advance on these issues with a handful of partners than with the entire WTO membership? To what extent does this result hinge on the uneven negotiating positions of developing and developed county members in an RTA? Or is this a matter of modalities – should multilateral talks be structured in a different fashion to provide momentum for negotiations of these disciplines? Thirdly, do any of the differences identified in the mappings between RTAs matter for economic decisions, and do they have real economic consequences? Does the RTA spaghetti bowl impose costs on producers and traders? And, if so, how could these differences between RTAs be bridged so as to facilitate trade and investment between them? And what would connecting RTAs mean to the global trading system? Fourthly, how could the interplay between multilateralism and regionalism be made more constructive? What should be done at the national level to build synergies between a country’s RTA and WTO commitments? How could multilateral disciplines regulating RTAs be improved? How can multilateral reporting and oversight of RTAs be
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strengthened? How might best practices and lessons learned from RTAs be better transposed to the multilateral level? At the regional level, what can be done by parties embarking on these arrangements to ensure compatibility with global trade rules? How should groups of countries interested in connecting their various RTAs devise such broader integration areas so as to best facilitate economic exchange, both among each other and with the rest of the world? And, finally, how best to employ RTAs as a means to arrive at global trade liberalization? References Baldwin, Richard E., 1995. ‘A Domino Theory of Regionalism’, in Richard E. Baldwin, P. Haaparanta and J. Kiander (eds.), Expanding Membership of the EU, Cambridge: Cambridge University Press, pp. 25–48. 2005. ‘Stepping Stones or Building Blocs? Regional and Multilateral integration’, in Julie McKay, Maria O. Armengol and Georges Pineau (eds.), Regional Economic Integration in a Global Framework, Frankfurt: European Central Bank, pp. 113–34. 2006. ‘Multilateralising Regionalism: Spaghetti Bowls as Building Blocs on the Path to Global Free Trade’, The World Economy 29: 1451–518. Bhagwati, Jagdish, 1991. The World Trading System at Risk, Princeton University and Harvester Wheatsheaf. Bhagwati, Jagdish, and Panagariya, Arvind, 1999. ‘Preferential Trading Areas and Multilateralism’, in Jagdish Bhagwati, Pravin Krishna and Arvind Panagariya (eds.), Trading Blocs, MIT Press, pp. 33–100. Cadot, Olivier, Estevadeordal, Antoni, Suwa-Eisenmann, Akiko, and Verdier, Thierry (eds.), 2006. The Origin of Goods: Rules of Origin in Regional Trade Agreements, Oxford: Oxford University Press. Ethier, Wilfred J., 1998. ‘Regionalism in a Multilateral World’, Journal of Political Economy 106: 1214–45. Estevadeordal, Antoni, 2000. ‘Negotiating Market Access in the Americas: The Case of NAFTA’, Journal of World Trade 34: 141–66. Estevadeordal, Antoni, and Suominen, Kati, 2005. ‘Rules of Origin in Preferential Trading Agreements: Is All Well with the FTA Spaghetti Bowl in the Americas?’, Economı´a 5: 63–103. Fiorentino, Roberto V., Verdeja, Luis, and Toqueboeuf, Christelle, 2006. ‘The Changing Landscape of Regional Trade Agreements: 2006 Update’, World Trade Organization Discussion Paper No. 12. World Trade Organization. Krishna, Pravin, 1998. ‘Regionalism and Multilateralism: A Political Economy Approach’, Quarterly Journal of Economics 113: 227–51. Levy, Philip I., 1997. ‘A Political Economic Analysis of Free-Trade Agreements’, American Economic Review 87: 506–19.
16 antoni estevadeordal, kati suominen , robert teh Lima˜o, Nuno, 2007. ‘Are Preferential Trade Agreements with Non-Trade Objectives a Stumbling Block for Multilateral Liberalization?’, Review of Economic Studies 74: 821–55. Suominen, Kati, 2004. ‘Rules of Origin in Global Commerce’, PhD Dissertation, University of California, San Diego. World Trade Organization, 2007. International Trade Statistics 2007, World Trade Organization.
2 Big-Think Regionalism: a critical survey richard baldwin* 1
Introduction
In the late 1940s and 1950s, the profession’s best and brightest minds were focused on regionalism: Jacob Viner, James Meade, Richard Lipsey, Harry Johnson and Max Cordon, inter alia. The reason was simple. Europe’s post-war architecture was one of the world’s greatest problems and a free trade area was to be part of it, economists were muddled over the issue. The thinking of the 1950s straightened out the economics and established the intellectual paradigm that dominated the regionalism literature right up to 1991.1 The paradigm was framed around the Vinerian question: ‘Would a nation gain from joining various preferential trade configurations?’, This literature – what could be called Small-Think Regionalism – ignored systemic implications since the only large preferential arrangement – the EEC – was viewed as sui generis. All this changed in the late 1980s when large-scale regionalism was reignited in North America. Regionalism seemed to sweep the world trading system like wildfire while the multilateral GATT talks proceed at a glacial pace. Then GATT negotiations slipped into a four-year coma in December 1990 with the acrimonious failure of the summit that was supposed to have wrapped up the Uruguay Round. Regionalism seemed to threaten the multilateral trade system. Once again, regionalism attracted attention from the profession’s leading lights. In 1991, Paul Krugman, Larry Summers and Jagdish Bhagwati laid out lines of analysis – what might be called Big-Think Regionalism – that continue to guide the profession’s thinking on regionalism even
*
1
I would like to thank the following scholars for comments and suggestions: Caroline Freund, Antoni Estevadeordal, Kati Suominen, Nuno Lima˜o, Richard Pomfret, Alan Winters, Patrick Low and all the economists in the WTO Research Department. Particularly, Viner (1950), Meade (1955a, 1995b), Lipsey (1957), Johnson (1957, 1958a, 1958b) and Corden (1957).
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today.2 While Small-Think Regionalism focused on the welfare of the individual nation, Big-Think Regionalism focuses on the systemic implications. It comprises two principal lines of inquiry: 1. Does spreading regionalism harm world welfare? Krugman (1991a) provided a line-sketch model that crystallized the profession’s thinking around a simple comparative static exercise: ‘Will an exogenous variation in the number of regional trade blocs raise or lower world welfare?’ He admitted, however, that this exercise missed much: In a fundamental sense, the issue of the desirability of free trade areas is a question of political economy rather than of economics proper . . . The real objection is . . . the fear that regional deals will undermine the delicate balance of interests that supports the GATT.3
This lead to the second line of inquiry: 2. Does regionalism help or hinder multilateralism? Krugman (1991b, 1993) sketches a bargaining model where regionalism can help or hinder multilateralism, but it was Jagdish Bhagwati’s bon mot that organized the profession’s thinking: do regional trade blocs ‘more readily serve as building blocks of, rather than stumbling blocks to, GATT-wide free trade’ (Bhagwati 1991 p. 77)? Specifically, the second line of inquiry crystallized around the question of whether an exogenous variation in regional trade blocs made multilateral tariff cooperation more or less likely. Summers’ (1991) contribution was to stake out one extreme of the debate on both lines of inquiry. He argued that ‘plausible’ regional arrangements were natural trade blocs and thus would raise world welfare. He also asserted that reasonable regional arrangements were as likely to accelerate the general liberalization process as to slow it down. Hence, his famous assertion that all the ‘-isms’ are good: unilateralism, bilateralism, plurilateralism and multilateralism. Summers rejected the notation that regionalism and multilateralism were enemies as Krugman, Bhagwati and many suspected; regionalism and multilateralism were the two legs on which the world was walking towards global free trade. The two main lines of inquiry embraced the notion that one could reasonably view changes in the number of blocs as exogenous. 2
3
See, particularly, Krugman (1991a, 1991b), Bhagwati (1991 Chapter 5), Summers (1991), but also Krugman (1993) and Bhagwati (1993). Krugman (1991b) p. 23.
big-thin k regionalism: a critical survey
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A third line of inquiry extended the issue by endogenizing regionalism’s spread. The focus was on cause and extent of spreading regionalism; it turned on the positive political-economy question of which trade blocs would actually emerge (Baldwin 1993b, 1995, Grossman and Helpman 1995, Yi 1996, Freund 2000a, 2000b, Aghion, Antras and Helpman 2004). In 2008, the world finds itself again in a situation like the 1990s when regionalism is booming and multilateralism seems to be ailing. But this time, the nature of regionalism is quite different. The trade deals being signed are much broader and are often not even regional, as the other chapters in this volume demonstrate.
1.1
Plan of the paper
My goal is to summarize and evaluate the Big-Think Regionalism literature. My focus is almost exclusively on theoretical work to limit the length of this already-too-long paper. Before turning to the literature, section 2 presents the elemental economic effects that concern Big-Think Regionalism in a way that helps to fix ideas and terms. Section 3 considers the stumbling/building bloc issue and section 4 looks at the ‘Is bilateralism bad?’ literature. The third line of inquiry is covered in section 5. The summary and concluding remarks are in section 6.
2
Basic economic effects
Before launching into a review of Big-Think Regionalism, it proves useful to conduct a quick review of the basic economics of preferential trade liberalization as far as the political economy interaction between regionalism and multilateralism is concerned. There is nothing new in this review, and it ignores many elements that are important economically, for example scale effects, growth effects and location effects. It is necessary since the literature is marked by a conceptual ‘spaghetti bowl’ – a tangle of conflicting, overlapping and competing terminologies for basic effects. My sole aim here is to establish a common set of labels and notation for the key concepts underpinning thinking in the Big-Think Regionalism literature. There are only three core effects. All have been known at least since 1950. To avoid creating yet another set of terms, I label them according to their intellectual fathers.
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2.1 Smith’s certitude, Haberler’s spillover and Viner’s ambiguity The theory of preferential trade did not begin in 1950 with Jacob Viner.4 Early contributions include Smith (1776), Taussig (1892), and Torrens (1844). Adam Smith’s contribution highlights one of the most robust finding in the field – what might be called ‘Smith’s certitude’: When a nation ‘exempt[s] the good of one country from duties to which it subjects those of all other . . . the merchants and manufacturers of the country whose commerce is so favoured must necessary derive great advantage’.5
Much later, Gottfried Haberler asserted that all members of a preferential trade agreement must gain while third nations must lose.6 The first part of the assertion is wrong, but what might be called ‘Haberler’s spillover’ – the part about third nations losing – turns out to be almost as robust as Smith’s certitude. Haberler’s spillover and Smith’s certitude are the linchpins of the Big-Think Regionalism discussion. The only basic element added in the post-war period came with Jacob Viner’s famous 1950 book, The Customs Union Issue. Viner’s key finding is that discriminatory tariff liberalization has ambiguous welfare effects (‘Viner’s ambiguity’).7 Viner’s ambiguity is quite general, but one is hard pressed to see this from the analysis in his book. An RTA is nothing more than a special case of non-uniform commodity taxation, but Viner did not have the benefit of modern economic tools for tax analysis.
4
5 6
7
See the excellent survey, Pomfret (1997 Chapter 8.1), on pre-Vinerian contributions; also Pomfret (1986) and O’Brien (1976). Smith (1776) as quoted in Pomfret (1997). His discussion runs over several pages but here he asserts it fairly directly: ‘There is no difference in kind, but only one of degree, between the grant of lower preferential duties upon imports from certain country and a general reduction in tariffs. A partial reduction is better than none at all (although, of course, a general reduction would be still better, from an economic standpoint).’ Haberler (1936 p. 384). Haberler’s spillover was certainly understood by scholars before Haberler (e.g. Bismarck used this aspect of customs union to force/cajole many German-speaking states to join his unified Germany), but I assign it to Haberler since Haberler’s 1936 book shows that mainstream trade economists were confused about the theory of the second best. This illustrates why Viner’s 1950 book was viewed as such a landmark. Viner’s consideration of other effects of customs union formation (its impact on the terms of trade, economies of scale, cartels, administrative efficiency, the pressure to harmonize excise taxes, and the necessity to go beyond tariff removals in order to remove trade barriers) made much less lasting impact on the literature, but remains a fascinating and highly accessible read.
big-thin k regionalism: a critical survey
21
Rather, he conducted the analysis using the enduring but imprecise concepts of ‘trade diversion’ and ‘trade creation’. The analysis will be directed towards finding answers to the following questions: in so far as the establishment of the customs union results in change in the national locus of production of goods purchased, is the net change one of diversion of purchase to lower or higher money-cost sources of supply, abstracting from duty-elements in money costs . . . If the customs union is a movement in the direction of free trade, it must be predominantly a movement in the direction of goods being supplied from lower money-cost sources than before. If the customs union has the effect of diverting purchases to higher money-cost sources, it is then a device for making tariff protection more effective. None of these questions can be answered a priori, and the correct answers will depend on just how the customs union operates in practice.8
‘Trade diversion’ and ‘trade creation’ are misleading since they suggest trade volumes are the key even though his words clearly indicate that cost/price changes are what matter. Moreover, they fail to cover all the effects generated by discriminatory tariff liberalization – even in a simple Walrasian setting. Given these shortcomings and the decadeslong debate on ‘what did Viner really mean’ (a debate in which Viner himself participated without notable effect), it is curious that the terms have enjoyed such enduring success.9 The generality of Viner’s ambiguity is glaringly obvious to readers schooled in the ‘theory of the second best’ (preferential liberalization induces new distortions while removing others) but Viner’s book was a landmark. The ‘theory of the second best’ was unknown in 1950, and many of Viner’s contemporaries – Haberler, for example – were muddled over the key differences between general and preferential liberalization.
8
9
Viner (1950) p. 44. Viner (1950) is worth reading in the original. His informal reasoning is full of insights and it anticipates much of the economic and political-economy theory as well as the political-economy debates that have surrounded economic integration in the subsequent six decades. The key passages are reproduced verbatim in Box 2.1. The basic problem was that the profession found the simple trade creation/diversion paradigm to be effective in communicating the crucial welfare-ambiguity result but the words did not fully capture all the basic economic effects. Arvind Panagariya, for example, suggests that the terms persist since they are ‘highly effective tools of focusing policy-makers’ attention on the ambiguous welfare effects of RTAs’ (Panagariya 2000).
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box 2.1 viner verbatim The relevant passages from Viner’s famous book, The Customs Union Issue, are relatively short and worth reading. (If nothing else, it gives students an idea of what economics was like before diagrams and maths became de rigueur.) The analysis will be directed towards finding answers to the following questions: in so far as the establishment of the customs union results in change in the national locus of production of goods purchased, is the net change one of diversion of purchase to lower or higher money-cost sources of supply, abstracting from duty-elements in money costs: (a) for each of the customs union country taken separately; (b) for the two combined; (c) for the outside world; (d) for the world as a whole? If the customs union is a movement in the direction of free trade, it must be predominantly a movement in the direction of goods being supplied from lower money-cost sources than before. If the customs union has the effect of diverting purchases to higher money-cost sources, it is then a device for making tariff protection more effective. None of these questions can be answered a priori, and the correct answers will depend on just how the customs union operates in practice. All that a priori analysis can do, is to demonstrate, within limits, how the customs union must operate if it is to have specific types of consequence. The removal of ‘nominal’ duties, or duties which are ineffective as barriers to trade, can be disregarded, and attention can be confined to the consequences of the removal, as the result of customs union, of duties which previously operated effectively as a barrier, partial or complete, to import. There will be commodities, however, which one of the members of the customs union will now newly import from the other but which it formerly did not import at all because the price of the protected Home product was lower than the price at any foreign source plus the duty. This shift in the locus of production as between the two countries is a shift from a high-cost to a lower-cost point, a shift which the free trader can properly approve, as at least a step in the right direction, even if universal free trade would divert production to a source with still lower costs. There will be other commodities which one of the members of the customs union will now newly import for the other whereas before the customs union it imported them from a third country, because that was the cheapest possible source of supply even after payment of duty. The shift in the locus of production is now not as between the two member countries but as between a low-cost third country and the other, high-cost, member country. This is a shift of the type which the protectionist approves, but it is not one which the free trader who understands the logic of his own doctrine can properly approve. Simplified as this exposition is, it appears to cover most of the basic economic issues involved. The primary purpose of a customs union, and its major consequence for good or bad, is to shift sources of supply and the shift can be either to lower- or to higher-cost sources, depending upon the circumstances.
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box 2.1. (cont.) From the free trade point of view, whether a particular customs union is a move in the right or in the wrong direction depends, therefore, so far as the argument has as yet been carried, on which of the two types of consequences ensue for that customs union. Where the trade-creating force is predominant, one of the members at least must benefit, both may benefit, the two combined must have a net benefit, and the world at large benefits; but the outside world loses, in the short-run at least, and can gain in the long-run only as the results of the general diffusion of the increased prosperity of the customs union area. Where the trade-diverting effect is predominant, one at least of the member countries is bound to be injured, both may be injured, the combination will suffer a net injury, and there will be injury to the outside world and to the world at large. The question as to what presumptions can reasonably be held to prevail with respect to the relative importance in practice of the two types of effects will be examined subsequently.10 There is quite a bit of discontent among modern academic economists with the trade-creation-trade-diversion terminology, for example Kowalczyk 1990.
2.1.1 Kemp–Wan logic A fourth elemental effect in the regionalism literature concerns the interaction between preferential and multilateral tariff cutting. It is not really a basic economic effect but rather a specific combination of effects motivated by the fact that the most important regional liberalization over the last sixty years (Europe and North America) has been accompanied by multilateral liberalization. When thinking about this teaming of multilateral and regionalism liberalization, the guiding light is the Kemp–Wan logic. Meade (1955a) introduced analysis that produced one of the few general statements that can be made about RTAs – the Kemp–Wan theorem.11 Kemp–Wan (1976) demonstrate that RTAs could be 10 11
Viner (1950) pp. 42–4. Meade identified the basic result in 1955 when he argued that, were it not for external trade considerations (the PTA’s trade with non-members), duty-free internal trade would be optimal: ‘if all trade barriers take the form of fixed and unchanged quantitative restrictions, then a customs union must increase economic welfare’ (Meade 1955b p. 98). As often happened in ‘customs union theory’, the result was reinvented repeatedly (Vanek 1965, Ohyama 1972, and Kemp and Wan 1976). The profession knows it as the Kemp–Wan theorem. Recently, Krishna and Panagariya (2000) follow-up Meade’s
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designed to be Pareto improving for every member of the RTA and the world at large. The logic is elegant. Assume two nations sign an RTA and alter their external tariffs to freeze their external trade flows; the external trade flows can then be treated as part of the bloc’s endowment. Removal of all intra-RTA barriers thus shifts the twonation bloc from a second-best situation to a first-best situation (i.e. laissez-faire in goods and factors given tastes, technology and endowments). The first welfare theorem of Walrasian economics guarantees an increase in economic efficiency and lump-sum transfers within the RTA ensure welfare gains for all. Third nations are unaffected since their trade vectors are unaffected. Dixit and Norman (1980) generalize the analysis, showing that the Kemp–Wan improvement can be obtained without lump-sum transfers; intra-RTA commodity taxes and subsidies are sufficient. Of course, real-world RTAs do not adjust external tariffs in a Kemp– Wan manner, nor do they have access to large lump-sum transfers. Nevertheless, the theorem is important from a policy perspective. It proves that RTAs are not necessarily bad for world welfare. Moreover, it helps us think about why the duo of multilateral and preferential tariff cutting – a duo that has been in operation since the 1950s – may have been critical to explaining why post-WWII regionalism has had a relatively benign impact on the world trade system to date – certainly much more benign that the European regionalism between the wars.
2.2
Modern treatment of Viner’s ambiguity
The first economists to apply modern economic analysis to Viner’s question were Meade (1955a, 1955b), Lipsey (1957) and Gehrels (1956–7). Modern tax analysis shows that the welfare impact of any tax change is captured by two terms in the Walrasian setting – one related to the change in consumption over the tax wedge, the other related to the level of consumption times the change in the actual price paid. James Meade’s pioneering analysis applied this to import taxes (tariffs) where the two terms may be called the trade volume and trade price effects (the trade price effect is often called the terms-of-trade effect). For the nation imposing the tariff, the net welfare effects is related to the initial tariff insight that the key is to freeze external tariff vectors to show that Kemp–Wan holds for FTAs as well as for customs unions, if the FTA is free to choose all external tariffs.
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wedges on bilateral trade, changes in bilateral imports, and the changes in bilateral border prices according to: Net Home welfare effect ¼ ðp p ÞdM ðMÞdp
ð1Þ
where p and p* are the vectors of internal and border prices, M is the vector of bilateral imports (exports are negative imports), and dM and dp* are the vector of changes in bilateral trade volumes and border prices, respectively. See Box 2.2 for a derivation of this expression in a simple linear case, and the Annex to this chapter for a more general demonstration that allows for a variety of other effects (pro-competitive effects, scale effects, location effects and accumulation effects) in a more general economic setting.
box 2.2 walrasian net welfare effects: linear example The Annex to this chapter works through the general derivation of the modern analysis of a marginal tariff liberalization. This box works through a linear example that makes the reasoning more transparent and directly connects it to the standard undergraduate analysis involving consumer surplus, producer surplus and tariff revenue. It also specifies the translation from marginal tax analysis into discrete tariff changes. We work in a three-nation Walrasian setting with tariffs as the only distortion. We assume Home imports from both Partner and RoW nations and initially apply the same specific tariff T to imports from both sources. Assuming a linear demand function, p ¼ 1 – C, where C is Home consumption and p is the Home’s internal price, and a linear supply function, p ¼ b þ Q, where Q is Home production, the sum of consumer surplus, producer surplus and tariff revenue is: W ¼ ða pÞ=2 þ ðp bÞðQ=2Þ þ ðp p ÞðC QÞ where p* is the common border price and the three terms are, respectively, consumer surplus, producer surplus and tariff revenue (C – Q equals imports). After the tariff liberalization, welfare can be written as: W' ¼ ða p'Þ=2 þ p'ðQ'=2Þ þ ðp' p 'ÞðC' Q'Þ where the ‘primes’ indicate post-liberalization quantities and prices. Subtracting the post-liberalization welfare, W’, from the pre-liberalization W, and rearranging: W ¼ ðp' pÞðM' MÞ=2 ðp ' p ÞM where M ¼ C – Q, and M' ¼ C' – Q' . Intuitively, the traditional focus on consumer surplus, producer surplus and tariff revenue is unnecessarily cumbersome since the
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box 2.2. (cont.) incidence of the tariff can always be decomposed into a part that falls on domestic agents (consumers) and foreign agents (foreign exporters). That is, the incidence of the tariff on consumers is an internal transfer; only the incidence on foreigners (via change in the border price) matters for net welfare.
2.2.1
Viner’s special case: adding up created and diverted trade An antiquated but enduring rule-of-thumb for evaluating RTAs turns on the volume of trade created and diverted. We can use Meadean analysis to show exactly what is being assumed away. Assuming tariffs are the only barriers (no export taxes or subsidies so p – p* equals the vector of bilateral tariffs, T) and ignoring changes in all border prices (so Mdp* is zero), the welfare effect boils down to T times dM. Further assuming that tariffs are identical on all imports, the net welfare effect is proportional to the sum of changes in imports. In other words, this says an RTA member gains if the RTA creates more trade than it diverts. A slightly more general test – one that allows for different bilateral tariffs – is to check the change in tariff revenue collected. Of course, this test ignores Smith’s certitude and Haberler’s spillover, but it was the best economists could do in the 1950s and 1960s without computers. 2.2.2 Meade’s primary, secondary and tertiary effects Meade (1955b) described the trade volume and border price effects as the primary effects, but he listed two other categories of effects. Meade’s secondary effects are the substitution and income effects of a tariff change on other markets. His tertiary effect concerns general equilibrium adjustments necessary to ensure the balance of payment. 2.3
Illustration of basic economic effects
Smith’s certitude, Haberler’s spillover and Viner’s ambiguity capture most of the basic economics of RTAs, and, together with the Kemp– Wan logic, most of the political-economy reasoning in the Big-Think Regionalism literature.12 It is possible to deal with these mathematically, 12
Of course, when considering the full economic impact, one must consider scale economies, pro-competitive effects, variety effects, location effects and growth effects
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Good 1 Good 2
Home
Partner
Good 2
Good 1
Good 3
Good 3 RoW
Figure 2.1
The RTA diagram’s trade pattern
however, to demonstrate the basic interactions among the elemental effects, and, to facilitate the exposition of the logic of the Big-Think Regionalism literature in the sequel, it is useful to have an amenable and flexible analytic framework, especially one that lends itself to graphical analysis. The simplest framework that meets these requirements is a Walrasian three-nation model (Home, Partner and RoW) with three goods (goods 1, 2 and 3); each nation exports two goods and imports the other good. Since each nation has two sources of imports, tariff discrimination can be a real issue in all markets. To rule out Meade’s secondary effects, tastes are assumed to be identical across nations and additively separable in all goods.13 For simplicity’s sake, the three nations are symmetric in terms of size and the MFN tariff they initially impose.14 The two trading equilibria (regionalism versus multilateral free trade) in a typical market (good 1) can be worked out with the help of the ‘RTA Diagram’. The analyses for imports of goods 2 (into Partner) and 3 (into RoW) are isomorphic due to the strong symmetry. Figure 2.2 shows the export supply curves (marked XS with the appropriate superscript to indicate the origin nation) for Home’s two
13
14
(Baldwin and Venables 1995). However, most of these are not critical in the Big Think Regionalism literature. The reader can mentally insert a fourth untaxed good that enters the utility function linearly to formally eliminate Meade’s tertiary effects. The RTA diagram can be thought of as a modification of the Blackhurst (1972) diagram.
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potential suppliers (the two left-most panels). The horizontal sum of the XS curves is shown in the right-most panel (as MSFT) along with Home’s import demand curve, MD. Under global free trade, the domestic and border price is PFT as shown in all nations for all goods. Assuming all nations impose a specific tariff T on an MFN basis, the internal price in Home is driven up to P while the border price is driven down to P – T for both suppliers. Home imports drop, with the reduction divided equally among the two suppliers.
2.3.1 From MFN tariffs to FTA If an FTA or customs union is formed between Home and Partner, the total import supply curve becomes the kinked MSFTA curve. The resulting internal price falls to P' , but there are now two border prices. The FTA raises the price facing Partner exporters from P – T to P’, while it lowers the RoW border price from P – T to P' – T. Partner exports expand while RoW exports contract. Identical things happen in the market for good 2, but here Home is the exporter and Partner the importer. Nothing happens in the market for good 3 (where RoW is the importer) since RoW maintains its MFN tariff and the strong separability assumptions rule out Meade’s secondary and tertiary effects. We see Smith’s certitude and Haberler’s spillover immediately in Figure 2.2. Smith’s certitude shows up as Partner gains (the areas a þ b) that result from the higher exports and higher border price. Since the FTA is reciprocal and nations are symmetric, Home gains the same from a higher border price and greater exports to Partner in good 2. Haberler’s spillover shows up as the RoW lose (the area ‘e’) from the drop in the border price it faces (from P – T to P' – T) and the reduction of its exports to Home. 2.3.2 The preference rent A critical observation, as far as the regionalism–multilateralism debate is concerned, touches on a decomposition of Smith’s certitude, namely, how FTA exporters gain from two distinct features of their improved market access. First, the removal of the intra-FTA tariff boosts their market access directly. Secondly, FTA-based exporters benefit from the reduction in RoW exports induced by the tariff discrimination. The second part of the gain – area ‘a’ in Figure 2.2 – could be called the ‘preference rent’ since, if the tariff-cutting were multilateral instead of preferential, FTA partners would gain only ‘b’, not ‘a’ þ ‘b’. This
big-thin k regionalism: a critical survey Border price
Internal price
Border price XS R
MSMFN
XSP
MSFTA
P P⬘ PFT P–T P⬘–T
c
a
d
b
29
MSFT
P⬘ PFT P–T
e
MD T
X R⬘
Figure 2.2
R oW E xports
XP⬘
Partner E xports
M
Home imports
The RTA (preferential trade arrangement) diagram
preference rent ‘a’ is vulnerable to so-called preference erosion and, as such, it plays a leading role in the stumbling-bloc logic. On the import side (Figure 2.3), Home gains a trade-volume effect (equal to area A) from expanding its imports, i.e. replacing highcost domestic production with lower-cost imports. Home also gains from a border-price effect, i.e. the terms-of-trade improvement against RoW (area B) while losing from the terms-of-trade loss against Partner (area C1 þ C2). Home’s terms-of-trade gain on the export side partly offsets the terms-of-trade loss on the import side (D1 ¼ C1), so Home’s net welfare change is A þ B þ D2 – C2.15 As drawn, it looks like Home and Partner gain, but this depends upon elasticities and the initial MFN tariff; in general Viner’s ambiguity holds in this framework.16 The net welfare impact on RoW is unambiguously negative (Haberler’s spillover). RoW experiences no change on the import side, but twice loses area ‘e’ (right-most panel in Figure 2.2) – once on its exports of good 1 to Home and once on its exports of good 2 to Partner. The ‘Haberler spillover’ is an externality as far as the global trade system
15
16
Area C2 might be called the ‘trade diversion’ effect, while D2 and A might be call the ‘trade creation’ effect, but, as usual, the trade creation/diversion dichotomy is incomplete; here it leaves out the third nation terms-of-trade gain, B. As we shall see in the mathematical version of these diagrams, the FTA lowers welfare when the MFN tariff is sufficiently high. See Box 2.3.
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richard baldwin Border price
Domestic price XS P
D2
A P
P⬘ D1
C1
P–T
B P⬘–T
C2
MD
NB:C1= D1
X
X⬘
Figure 2.3
FTA Exports
X R⬘ X R
M
Home imports
Ambiguous net welfare effects
is concerned, and as such it plays a central role in the Big-Think Regionalism literature.
2.4
Influential diagrams that ignore some of the three-elemental effect
Up to the 1990s, the literature’s main points were presented using diagrammatic analysis – two diagrams were particularly pivotal. The fact that these diagrams ignored some of the three basic effects distorted the direction of the literature and with it academic trade economists’ perceptions of RTAs. Since these older, incomplete diagrams occasionally enter today’s regionalism debate, it is worth presenting them briefly and highlighting their shortcomings. The first is the Johnson diagram that is still used in most undergraduate textbooks.
2.4.1 The Johnson (1960) diagram and the JCM proposition Meade’s analysis was not integrated into mainstream trade theory in part because it was marginal and trade economists were interested in studying the discrete liberalization implied by RTAs. Viner provided no diagrams, so ‘Customs union theory’, as it was known at the time, was a distinctly wordy subject until Johnson (1960a) introduced his famous diagram that illustrated Viner’s ambiguity in a manner that was immediately transparent to all economists.
big-thin k regionalism: a critical survey euros
euros
D
31
S
PB+T
XSB+T
PA+T
XSA+T
PB PA
B+D E
A
B
C
D
F
G
E
H
XSB XSA
MD M
Figure 2.4
M⬘
imports
quantity
The Johnson diagram (small Home and Partner nations)
In the diagram (see Figure 2.4), Home imports can come from partner nation A or B. Home’s demand is an infinitely small share of world demand, so it faces perfectly elastic export supply curves from both sources (labelled XSA and XSB). We start with the Home imposing an MFN-specific tariff of T, so all imports come from the low-cost supplier, nation A. The domestic price is PA þ T, while the border price is PA. Home can form a customs union with nation A or B, so we consider both. The customs union with B would remove the tariff only on imports from B (the high-cost supplier), and this produces supply switching. Home switches from importing everything from A to importing everything from B. Home’s domestic price falls from PA þ T to PB. Assuming a utilitarian metric, the net welfare effects are (B þ D) – E, which may be negative or positive depending upon elasticities and the height of the initial tariff; this is Viner’s ambiguity.17 The customs union with nation B was called ‘purely trade diverting’, yet, if the initial tariff is high and the PB – PA border-price gap was small, it can be welfare-improving for Home. This result – a welfare-improving but purely trade-diverting customs union – seemed to contradict Viner’s reasoning and it produced the first of what was to be a long series of ivory-tower debates over terminology; this one pitted Meade (1955b) against Johnson (1960a) and Corden (1965).18 17
18
The left panel translated the effects into Meade’s two-part framework: B þ D is the trade-volume effect (related to the change in the volume of imports), and E is the tradeprice effect (related to the change in the border price). The 1950s, 1960s and 1970s saw a rather extended and fruitless discussion of what Viner really meant. It featured contributions from the greatest trade economists of the time, including Meade (1955a), Johnson (1960a), Corden (1965), Bhagwati (1971, 1973),
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If Home chooses to form a customs union with A, the ambiguity disappears. Such a customs union is unambiguously welfare-improving since its positive effects are identical to MFN free trade (both before and after, all imports would come from A). Home’s domestic price falls from PA þ T to PA, and the net welfare gain is B þ G þ D þ H.19
2.4.2 Omitted elemental effects Readers will immediately note that Smith’s certitude and Haberler’s spillover are missing. Third nations are entirely unaffected by the trade policy of an infinitely small nation like Home. In Johnson’s diagram, the partner nations care no more about Home’s trade policy than a perfectly competitive firm does about gaining or losing one atomistic buyer. This was an attractive feature in the Small-Think Regionalism literature where national welfare was the pivotal issue, but it renders the diagram useless for the Big-Think Regionalism debate. Quite simply, the diagram assumes that Home’s decision to form an FTA has no systemic effects at all. Also missing from the diagram is an analysis of the preferential access that Home’s exports win in its partner’s market. For two decades, the Johnson diagram dominated economic analyses of RTAs to such an extent that Smith’s certitude and Haberler’s spillover came to be largely forgotten by academic trade economists. This went so far that many mainstream trade theorists came to view RTAs as economically irrational – a view encapsulated in the Johnson–Cooper– Massell (JCM) proposition which states that a small nation should always prefer unilateral MFN liberalization to any RTA. The point is easily illustrated in Figure 2.4; cutting T to zero on imports from A and B would always yield net welfare gains that are at least as high as any customs union.
19
Kirman (1973) and Johnson (1974). Viner himself participated in the exchange without fully clarifying matters (Viner 1965). See Kowalczyk (1992) and Pomfret (1986) for summaries of the ‘what Viner really meant’ literature. The quandary was thickened by the fact that the deep economics of taxation in a Walrasian world really do only need two effects, as Meade (1955a) demonstrated, but only one of the two deals with trade volumes. One reaction to this cognitive dissonance was to expand the terminology (e.g. external trade creation, gross trade creation, etc., as in Balasaa 1967); another was to stretch the meaning of the terms to cover the trade-price effects (which is possible since bilateral border prices and imports are related by the export supply curves). This contrast is the source of the rule of thumb that an FTA with your main trading partners is more likely to be welfare-improving since you are giving preferences to the partners that have demonstrated themselves to be the low-cost supplier by winning the largest market share in an even competition with other suppliers.
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From the modern perspective, Johnson’s analysis seems impossibly simplistic and the disconnect between academic and real-world thinking is truly astounding. For instance, when the United Kingdom put in its first application for EU membership in 1961, better market access for UK exporters was the key concern, but academic economists were working with the Johnson diagram that assumed this away. Moreover, the main RTA in existence at the time – the EEC – counted for a substantial fraction of world imports and the key nations – the United Kingdom, France and Germany – were far from atomistic. As Pomfret (1997) points out, a number of frameworks were developed at the time that would have allowed the necessary extension, including Johnson (1957, 1958), Humprey and Ferguson (1960), and Blackhurst (1972), but the Johnson diagram’s hold on the literature was so firm that the early efforts were obliged to stick with his small-country fiction.20
2.4.3 The ‘Small FTA’ diagram An important analytical extension of the Johnson diagram came with the ‘small FTA’ analysis (Shibata 1967). It allows for Smith’s certitude even though it continues to assume away Haberler’s spillover. The diagram continues to be used even today (e.g. Grossman and Helpman 1995), so it is worth presenting it briefly. The small FTA diagram looks somewhat different under various assumptions on the pattern of comparative advantage and the smallness of the two partners. The various combinations of assumptions yield a range of results that have been covered by three decades of literature (see Panagariya 2000 for a comprehensive survey of papers using the small FTA diagram in recent decades). Here we study a fairly standard case and illustrate the diagram’s properties by demonstrating two classic results in the regionalism literature. The diagram (see Figure 2.5) presumes that the two FTA partners, Home and Partner, import the same good from RoW. Home and Partner are ‘small’ with respect to RoW, and so face a perfectly elastic RoW export supply curve, XSRoW. This sets the initial border price to PR in both nations. Home has a higher MFN tariff than Partner to start with – TH as opposed to TP – so the pre-FTA price is higher in Home. 20
The early 1980s saw a number of widely read studies that sought to reverse the JCM proposition while staying in the small-country framework. These efforts, e.g. Wonnacott and Wonnacott (1981) and Berglas (1983), strike the modern reader as awkward due to the small-nation assumption and the intricate diagrammatic analysis.
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richard baldwin euros Trade price gain
euros
Partner D
Home Trade volume gain
S
Trade price loss
PR+TH
PR+TP
XSRoW
PR
S
D
M⬘H
Figure 2.5
quantity
M⬘H
quantity
The small PTA diagram: a simple case
When Home and Partner form their FTA, Partner-based firms initially see a higher price in Home and so begin exporting to Home. In equilibrium, all post-FTA Home imports, M' H, are supplied by Partner firms. Partner’s internal price remains at PR þ TP, so its consumption and production are unchanged, which means that the new exports to Home are replaced – one for one – by new Partner imports from RoW. In the case illustrated in the diagram, Partner is large enough relative to Home to ensure that Home’s entire demand can be satisfied by Partner producers at PR þ TP. In terms of welfare, the FTA results in a positive trade volume effect for Home but a negative border price effect (Home pays PR þ TP for its imports instead of PR). Partner expands its imports across the tariff wedge, and this results in a positive trade volume effect equal to TR times the expanded imports, i.e. M' H.
2.4.4 Irrelevance of rules of origin Although it seems an odd objective from today’s perspective, Shibata’s goal was to illustrate the irrelevance of rules of origin (RoO). His point is that RoO only prevent blatant trade deflection. Because goods from Partner and RoW are fungible, the equilibrium is the same with and without RoO as long as Partner’s supply is sufficient. If Partner’s supply were not large enough to supply all of Home’s imports at PR þ TP, the FTA with RoO would have somewhat higher prices than one without. The use of this exercise in the Big-Think Regionalism literature comes in the form of ‘imported liberalization/protection’ (see section 3.3.4 below), and Grossman and Helpman (1995).
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2.4.5 Unsustainability of the FTAs Another application that found popularity in the academic literature but seems odd today is the proposition that FTAs will always break down. Using a diagram like Figure 2.5, Vousden (1990 p. 234) argues that Home would be tempted to lower its MFN tariff to just under that of Partner in order to recapture the tariff revenue, and Partner would have an incentive to reply. The resulting race-to-the-bottom tariffcutting was viewed as making FTAs ‘unsustainable’. Vousden’s (1990) diagram did not attract much attention until Richardson (1995) extended and popularized it. These two results (irrelevance of rules of origin and unsustainability of FTAs) are classic examples of how academic thinking on regionalism has often followed literature-driven paths that have little relevance to real-world policy concerns. 3
Stumbling and building-bloc logic
From 1960 to the late 1980s, regionalism was a simple matter. It consisted of: (1) the EEC, which encompassed one-third of world trade in a highly effective customs union; and (2) a slew of RTAs among developing nations that covered a trivial fraction of world trade and in any case never operated effectively. Regionalism’s systemic implications were simply not an issue. Regionalism got complicated in the late 1980s when Canada and Mexico changed their minds on regionalism (Krugman 1991b p. 7).21 The US had long been interested in regional preferential trade, but Mexico and Canada resisted, fearing domination by their giant neighbour. Canada proposed an FTA with the US in 1985 that entered into force in 1989. Mexico proposed an FTA with the US in 1990, and this evolved into NAFTA at Canada’s insistence (to safeguard its Auto Pact preferences). 21
Bhagwati (1991 p. 71) ascribes the shift to the US’s conversion to regionalism, but this contradicts the judgments of trade policy scholars who were engaged in the details of policy at the time (Smith 1988 p. 41, Wonnacott 1987 p. 17, Schott 1988 p. 29, Hufbauer, Schott and Clark 1994 p. 100, Whalley 1993). It also contradicts the facts. The US’s long-standing interest in regionalism is testified by a long string of deals that were struck, or almost struck, in 1854, 1874 and 1911. In March 1948, they concluded a secret draft protocol eliminating most tariffs and quotas bilaterally, but this was ultimately rejected by the Canadians. In 1958, US government procurement was preferentially liberalized in Canada’s favour. The US–Canada Auto Pact came into force in 1965. The 1974 Trade Act authorized the US President to negotiate an FTA with Canada, and the 1979 Trade Agreements Act required the President to study an FTA in North America.
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The US–Mexico initiative triggered a wave of Latin American requests for bilateral FTAs with the US and gave greater urgency to arrangements among Latin Americans, most notably MERCOSUR.22 The rise of North American regionalism coincided with two other major developments in the world trade system. First, GATT negotiations were lurching from crisis to crisis in the late 1980s and then, as mentioned in the introduction, seemed to die with the acrimonious collapse of the Uruguay Round’s ‘final’ summit in December 1990. Secondly, European regionalism was reignited by the Single European Act and the collapse of the Soviet Union. Many respected thinkers looked at this temporal correlation and saw causality. They feared that regionalism’s spread might kill the proverbial gold-laying goose – the GATT-centred world trade system. The fears are easy to understand. Two-thirds of world imports went to North America and Europe; 40 per cent of this was intra-bloc trade and soon to be covered by discriminatory liberalization schemes. Still more worrisome, North Americans and Europeans were the stalwarts of the GATT system. If regionalism weakened their support for multilateralism, the goose was indeed in deep trouble. Spreading regionalism had become much more than a Small-Think ‘should I join?’ question. These fears promoted regionalism to a status on the world’s policy agenda that it had not enjoyed since the 1950s. This naturally attracted paradigm-setting efforts from the profession’s leading international economists.
3.1
Framing the new regionalism debate
Krugman (1991b) is clearest in rejecting the relevance of the 1950s Small-Think approach and delineating the outlines of a new line of inquiry – what I call Big-Think Regionalism: In a fundamental sense, the issue of the desirability of free trade areas is a question of political economy rather than of economics proper. While one could argue against the formation of free trade areas purely on the grounds that they might produce trade diversion . . . [t]he real objection is a political judgment: fear that regional deals will undermine the delicate balance of interests that supports the GATT.23
22 23
See Baldwin (1997) or Serra et al. (1997) for an account of this domino effect. Krugman (1991a) p. 23.
big-thin k regionalism: a critical survey
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The Krugman (1991b) framing of what he identified as the key issue – the impact of regionalism on support for the GATT system – did not catch on.24 His 1991 papers, however, did reframe the 1950s national welfare question into a global-level question. Krugman (1991a) introduced a new approach by asking whether spreading regionalism raises or lowers world welfare. This spawned a decade-long literature and continues to influence research even today. This ‘Is bilateralism bad?’ literature – also known as the multilateralism versus regionalism literature – looks distinctly odd from today’s perspective. It tries to use simple theory to answer what is intrinsically a complicated empirical question. At the time, however, it was the best they could do. Economists had limited access to the necessary data and lacked the panel econometric techniques to exploit them. Moreover, spreading regionalism was at the time more of a threat than a reality, so there was little to test empirically. In my mind, this literature is now mainly of interest to historians of thought, but many participants in today’s regionalism debate cite it, so I review it in section 3.5 below. The focus of this section is on what I consider to be the central theoretical question: Does regionalism help or hinder multilateralism? Ultimately this also is an empirical question, but, given the relatively little experience the world has had of the regionalism–multilateralism interface (only one MTN has been completed since 1991), convincing empirics is not yet feasible – although some tantalizing results are beginning to emerge. Moreover, given the complexity of the
24
He argued that the multilateral process had run aground with the December 1990 failure and was unlikely to get afloat anytime soon as the system was plagued by deep-seated problems. ‘[W]hile some kind of face-saving document will probably be produced, in reality the Uruguay Round has clearly failed either to significantly liberalize trade or to generate good will that would help sustain further rounds of negotiation.’ Regionalism, however, was not one of those deep-seated problems. ‘But while the move to free trade areas has surely done the multilateral process some harm, it is almost surely more a symptom than a cause of the decline of the GATT . . . [T]he problems of the GATT are so deep-seated that it is unlikely that a world without regional free trade agreements would do much better.’ He closes his essay with a prediction that history falsified a faute de mieux view on regionalism. ‘The world may well be breaking up into three trading blocs; trade within those blocs will be quite free, while trade between the blocs will at best be no freer than it is now and may well be considerably less free. This is not what we might have hoped for. But the situation would not be better, and could easily have been worse, had the great free trade agreements of recent years never happened.’
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interlinkages, a clear theoretical understanding is a necessary condition for well-structured empirical work.
3.1.1 Are regionalism and multilateralism friends or foes? Bhagwati’s book, The World Trading System at Risk, does not focus on regionalism. Indeed, his Part One, ‘The GATT Architecture under Threat’, listed four main threats; regionalism was number four. Nevertheless, his writing helped establish Big-Think Regionalism as the new paradigm. In the lead paragraph to his chapter on regionalism, he writes: ‘These regional alignments have led to fears of fragmentation of the world economic into trading blocs in antithesis to GATT-wide multilateral free trade. Does such regionalism truly constitute a threat to multilateralism?’ Although he does not set out an analytic framework for answering the question, his writing influenced the intellectual paradigm for more than a decade. 3.1.1.1 Framing the issue three ways Theory requires explicit questions. Asking whether regionalism and multilateralism are friends or foes is not sufficient. Pure logic identifies three mutually compatible ways that regionalism and multilateralism could interact: regionalism could affect multilateralism; multilateralism could affect regionalism; and both multilateralism and regionalism could be driven by third factors.
The literature has looked at all of these, but the first has dominated since Krugman (1991b, 1993) presented a simple analytic framework for posing the question. His explicit question was: how does an exogenous variation in regionalism (specifically, the formation of a new RTA) affect nations’ incentives to cut tariffs multilaterally? 3.1.1.2 Modelling choices and branches of the literature Answering this question requires an economic model that links tariff choices to equilibrium outcomes and a political-economy model that endogenizes the MFN tariff choice (the RTA tariff levels are taken as exogenous in this literature). The choice of economic models is quite open, but the literature naturally gravitated to the simplest possible models that yielded the elemental economics effects – Smith’s certitude and Haberler’s spillover – that are pivotal to regionalism’s systemic implications (Viner’s ambiguity is more a Small-Think Regionalism issue).
big-thin k regionalism: a critical survey
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The choice of political-economy modelling is facilitated by two key institutional features of the global trade system: the nature of RTA tariffcutting and MFN tariff-cutting. Specifically: Real-world RTAs involve bargaining on very few tariff lines; they cut
tariffs to zero on most goods.25 This institutional fact made modelling of the preferential liberalization easy – most authors assumed that forming an RTA meant zero tariffs on all goods traded among members. Real-world multilateral tariff-cutting talks also involve bargaining on very few tariff lines. Since the 1963 Kennedy Round began, multilateral tariff ‘bargaining’ was simple: GATT members pre-agreed tariff-cutting rules with exceptions for specific products (the usual ‘sensitive’ products such as clothing, footwear, etc.). This real-world feature is easily understood. Nations’ tariff schedules typically list about ten thousand individual lines and at least a dozen nations participate actively in MTN tariffcutting negotiations. (The number has increased greatly in the ongoing Doha Round, but only the richest OECD nations participated substantially in the Kennedy, Tokyo and Uruguay Round tariff cuts.) If each of the dozen nations bargained for one minute over each of its tariff lines with each of the other nations, the talks would take twenty-five years of 24/7 discussion. Trade diplomats avoid this by agreeing the basic tariff-cutting before the talks start – i.e. it is set in the agenda. Specifically, the Kennedy and Tokyo Rounds used formulas that cut tariffs by about one-third with some sensitive industrial goods excluded (Winters 1991 p. 171). The Uruguay Round agreed, at its 1988 Ministerial Midterm Review in Montreal, to cut tariffs by at least as much as in the Tokyo Round, i.e. by about onethird and again sensitive products were predictably excluded (Croome 1995 p. 183). This institutional fact made modelling of the multilateral liberalization easy (or at least should have). Many authors modelled multilateralism as saying yes-or-no to an exogenously defined MFN tariff cut. One branch of the literature, however, adopted the alternative tack of twisting reality to the theory. These authors ignored the institutional
25
RTAs involving a developed WTO member must respect this; those involving only developing nations do not, but de facto they have, as chapter 3 in this volume shows.
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features of MTNs in order to use game theory’s simple bargaining models – models that had been developed to deal with much simpler bargaining situations. While I do not believe that such models provide useful insights into the key Big-Think Regionalism questions, they are often referred to in the academic literature, so I review them in section 3.4 below. While most of the literature has followed Krugman’s lead in asking how exogenous variations in regionalism affect multilateralism, two other branches consider (1) how RTAs can affect MTNs (competitive liberalization), and (2) how RTAs and MTNs are driven by deeper forces (Summers’ notion that all the ‘-isms’ are good). I review thinking on these in section 3.5 below. With this structuring of the literature out of the way, I turn to review what I consider the most relevant theory on the Big-Think Regionalism literature.
3.2
Stumbling-bloc logic
In its cleanest form, the stumbling-bloc logic asserts that, if the stumbling bloc RTAs were forbidden, global free trade would be obtained, but, since they are allowed, global free trade becomes impossible. Weaker forms are put forth in the help-or-hinder literature – for example, RTAs may slow the achievement of global free trade – but clarity has led the profession to focus on the strong form. In my opinion, only three distinct stumbling-bloc logics are relevant to real-world policy analysis: (1) the preference-erosion/exploitation stumbling bloc; (2) the goodies-bag stumbling bloc; and (3) the cherrypicking stumbling bloc, although I am sure many more shall be illuminated in coming years. For simplicity’s sake, these stumblingbloc logics are demonstrated under the naı¨ve but transparent assumption that national governments choose tariffs to maximize national welfare.
3.2.1 Preference-erosion/exploitation stumbling bloc The logic of the preference-erosion/exploitation stumbling bloc is easy and quite general. Starting from a world where all nations have MFN tariffs, the question is: Can some group of nations raise their collective welfare above the free trade level by forming a trade bloc and thus exploiting other nations? If the answer is ‘yes’, then that bloc is a
big-thin k regionalism: a critical survey
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stumbling bloc on the road to multilateral free trade because the bloc members would veto global free trade as undermining their exploitation of third nations. In the Walrasian setting, and in many other trade models, the answer is almost always ‘yes’, but the answer may depend upon the level of MFN tariffs when the bloc is formed. Given Smith’s certitude and Haberler’s spillover, some combination of nations is bound to be able to better exploit third nations by acting as a bloc. This is almost trivially true if the bloc can violate its WTO tariff bindings by raising external tariffs. After all, the bloc as a whole has more buying power than its constituents do individually, so the bloc can better exploit foreigners. Less obviously, but equally true, stumbling blocs can be found even when external tariffs are maintained (as has been the case for all of the major post-war RTAs). The preference-erosion/exploitation stumbling-bloc logic can be illustrated more concretely with the RTA diagram. 3.2.1.1 A Walrasian illustration Start by noting that MFN free trade would be approved by all governments in the simple model laid out above (see Figure 2.2 and Box 2.3). The first welfare theorem tells us that global free trade is efficiency-enhancing (a move to the first-best), and symmetry ensures that each nation would get an equal slice of the gains. This conclusion, however, can be reversed when we start from the situation where Home–Partner have formed an FTA. Taking the FTA as the base case, a move to global free trade eliminates the preference margin Home exporters enjoyed in Partner and this would lead to a terms-of-trade loss of area C1' and a trade-volume loss of C2' (see Figure 2.6). On the import side, global free trade would win Home an additional trade-volume gain of area A' , a terms-of-trade improvement with respect to Partner exporters of area C1' , and a terms-of-trade loss on imports from RoW, area B' . Global free trade would also improve Home exporters’ market access to RoW, and this would boost Home welfare by area D' . Overall, the net welfare change of moving from the FTA to global free trade is – C2' – B' þ D' þ A' ; the sign of this is ambiguous. As Box 2.3 shows, however, it is always negative when the initial MFN tariff is low enough. Working out magnitudes in the diagrams for the whole range of possible T’s is tedious, so we lighten the analysis by introducing the
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box 2.3 the walrasian rta diagram model in maths The three goods (1, 2 and 3) are produced according to rising marginal costs. For good 1, we assume Partner and RoW have comparative advantage, while Home does not. The assumed linear supply curves that yield this are: p ¼ b þ X1H ;
p ¼ X1P ;
p ¼ X1R ;
0
ð2Þ
where the superscript indicates the producing nation and the subscript indicates the good. Demand for good 1 is identical in all nations and is given by: j
j
p i ¼ a C1 ;
j ¼ H; P; R;
0
ð3Þ
The supply and demand curves for goods 2 and 3 are similar, but Partner has the comparative disadvantage in good 2 and RoW in good 3. The demand curves are identical for all goods. As is well known, the utility function that generates this demand structure involves quasi-linear preferences (utility is separable and quadratic in consumption of each of the three goods). The model has a fourth untaxed good that is only introduced to formally eliminate Meade’s tertiary effects (it is produced under constant returns using only labour and identical technology worldwide, thus ensuring trade balance as long as the parameters are such that all three nations produce some in all equilibria, an assumption we maintain throughout). We take labour as nume´raire and choose units so that one unit of labour is needed to produce one unit of the fourth good. The supply curves are thus the marginal cost curves where marginal cost is, for example, the wage ‘w’ times total output X for nations with a comparative advantage in the good in question. As usual, rising supply curves generate producer surplus which we take to be the reward to the implicit, scarce, specific factor that is generating the diminishing returns. As is well known, consumer surplus plus producer surplus plus tariff revenue is an exact measure of utility, assuming tariff revenue is returned lump sum to the workers/owners.
equations behind the diagrams (see Box 2.3). Solving for equilibrium prices under the FTA and global free trade situations and plugging these into the welfare functions, we can plot the welfare of a typical FTA nation (Home) against the MFN tariff. The results are shown in Figure 2.7. For initial MFN tariff levels that are sufficiently low, we see that Home’s welfare is higher with the FTA than it is with global free trade – and this despite the fact that Home would have agreed to global free trade starting from the initial situation without the FTA. (The line marked MFN is
big-thin k regionalism: a critical survey Internal price
Border price C2⬘ P⬘ PFT
XS
P
A⬘
C1⬘
C1⬘
D’
B⬘
P–T P’–T
Exports
Figure 2.6
43
MD
XR⬘
Imports
Net welfare effects, FTA to global free trade
everywhere below the line marked global free trade, but the dashed FTA line is above the global free trade line for sufficiently low tariffs.) Intuitively, the FTA allows Home to exploit RoW both on the import side (by pushing down the price it pays RoW good 1 exporters) and on the export side (by raising the price in Partner at the expense of RoW good 2 exports). The move to global free trade undoes these two forms of exploitation, but in exchange it provides better access to the RoW market and more liberalization in Home’s import market. When the initial T is low, the market-access and home-liberalization gains are modest so the net is negative. In other words, the basic logic of the stumbling-bloc result turns on the way that an FTA allows the FTA partners to exploit excluded nations. The Walrasian model presented here is very special, but the heartand-soul of this stumbling-bloc effect – the exploitation of excluded nations – is quite a general result; one that is surely an important consideration in the real world. The opposition of small developing nations to agricultural liberalization in the DDA – especially those who benefit from the EU’s unilateral preferences – is a classic example of the preference-erosion stumbling bloc. Had the EU not unilaterally granted these nations preferences, these nations would probably have been pushing for EU market opening in sugar and other goods.
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richard baldwin Home Welfare Global free trade
0.6
0.59
0.58
0.57 Stumbling bloc T’s
MFN
0.56
FTA 0
0.05
0.1
0.15
0.2
0.25 MFN T
T
Figure 2.7
Stumbling-bloc FTAs
3.2.1.2 Who did what, when? The logic of the preference-erosion/ exploitation stumbling bloc was demonstrated in a Walrasian setting by Reizman (1985) and Kennan and Reizman (1990), and in a Brander– Krugman setting by Krishna (1998) and Freund (2000a, 2000b).26 The core algebra for the preference-erosion/exploitation stumbling bloc in the Brander–Krugman setting is laid out in Box 2.4 where the main Freund and Krishna results are also demonstrated.
box 2.4 preferential liberalization in the brander–krugman model One set of stumbling/building bloc papers employs the Brander–Krugman model, i.e. Cournot oligopoly with segmented markets. As is well known, reciprocal dumping trade among all nations arise in this model for a wide range of parameters. This set up is useful since every nation sells to every other nation. Moreover, the Cournot oligopoly and market segmentation immediately give us Smith’s certitude and Haberler’s spillover. Interestingly, Viner’s ambiguity does not arise in the simple symmetric version since the pro-competitive effects of
26
Also see Goto and Hamada (1997, 1999), Nordstrom (1995) and section 3 of Bond and Syropoulos (1996a) for examples of preference erosion/exploitation stumbling blocs.
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box 2.4. (cont.) preferential liberalization are always strong enough to outweigh any terms-oftrade losses for the integrating nations. One important drawback in this approach is the inability to distinguish between import-competing firms and export firms (they are the same firms). On the demand side, the model is quite similar to the Walrasian model in Box 2.3. It has three nations (Home, Partner and RoW) and uses the same quasi-linear preferences with an untaxed nume´raire to neutralize Meade’s secondary and tertiary effects. The demand curves are identical to (3). Marginal costs are flat (set to zero without loss of generality, given the linear demands), there is one firm per nation, and firms play Cournot in all markets (assumed to be segmented). Solving the Nash first-order conditions, profits of a Home firm depend upon tariffs according to: 1 ð4Þ pH ¼ ða þ tPH þ tRH Þ2 þ ða þ tRP 3tHP Þ2 þ ða þ tPR 3tHR Þ2 16 where the subscripts on the directional specific tariffs (the t’s) are ‘from, to’ (e.g. tRP is the tariff on the good shipped from RoW to Partner). The expressions for Partner and RoW profits are isomorphic. Equilibrium welfare of a typical nation – defined as the sum of consumer and producer surplus plus tariff revenue – depends upon the matrix of tariffs according to: 1 WH ¼ f15a2 þ tHP ð18tHP 12ða þ tRP ÞÞ þ tHR ð18tHR 12ða þ tPR ÞÞ 32 ð5Þ þ tHR ð18tHR 12ða þ tPR ÞÞ þ tRP ð4a þ 2tRP Þ þ tPR ð4a þ 2tPR Þ þ tRH ð6a 21tRH Þg Krishna (1998) uses profit at the government’s objective function, while Freund 2000a uses welfare. The value of Home profits under the three regimes – symmetric MFN tariffs ‘MFN’, FTA with Partner ‘FTA’, and hub-and-spoke FTA with Partner and RoW ‘HS’ – are: pMFN ¼ pFT H H þ
3t 2 at ; 4
FT pFTA H ¼ pH þ
3t 2 ; 8
FT pHS H ¼ pH þ
t 2 þ 2at 8
ð6Þ
2
3a where pFT H ¼ 16 . The corresponding expressions for Partner are the same for the MFN and FTA cases (by symmetry of nations), and RoW’s expression is also identical for the MFN case. The profits for the three remaining cases are:
5t 2 2at ; 8 2 5t 2at þ 8
FT pHS P ¼ pH þ FT pHS R ¼ pH
¼ pFT pFTA R H þ
11t 2 4at ; 8
ð7Þ
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3.2.2 Goodies-bag stumbling bloc Another stumbling-bloc logic – one which follows closely the fundamental economic logic of the preference-erosion stumbling bloc – might be called the ‘goodies bag’ stumbling bloc.27 In a nutshell, the rents corresponding to ‘Smith’s certitude’ can be thought of as a ‘bag of goodies’. These goodies can be used by one or both RTA parties to buy non-economic benefits from its partners. Since the size of non-economic benefits that can be ‘purchased’ is linked to the richness of the ‘goodies bag’, i.e. the margin of preferences, RTA members have an extra incentive to maintain high margins of preference by avoiding multilateral liberalization. The goodies-bag logic, however, extends to a far greater range of issues than the tariffs that are the focus of the preferenceerosion stumbling bloc. In the case of RTA between very large and very small nations – a case that is extremely common in the new century (e.g. US and Costa Rica or Japan and Singapore) – the large country’s interest in the RTA can hardly be the preferential market access. The EU, for example, grants extensive preferences to its members’ former colonies, justifying these on the basis of international solidarity. In other words, the economic gains to the EU’s partners count as a plus inside the EU since they advance one of the EU’s non-economic objectives – fostering development. Similarly, but more explicitly, the US justifies many of its FTAs with small, poor nations on the basis of noneconomic objectives (typically anti-drug and/or anti-terror policies). The previous section illustrated how the desire to guard rents created by an RTA could make a nation reject global free trade when MFN free trade would have been embraced without the RTA. The goodies-bag stumbling-bloc logic amplifies this mechanism by making both nations interested in each other’s export rents – the area corresponding to C1' , in Figure 2.6, with the link coming through the pursuit of noneconomic objective (non-economic in the narrow sense). 27
Here is an example of the terminology in the context of US unilateral concessions from The Hindu newspaper, 24 September 2001. Referring to the mood in Washington, the correspondent notes: ‘There is tremendous support and sympathy for Pakistan in the light of the decisions taken by its President, Gen. Pervez Musharraf, to support the US wholeheartedly in its war against terrorism. As for Pakistan, the question is not merely the lifting of US sanctions. Rather, it is in the larger “goodies bag”‘ that most certainly is coming up. As it is, there is disappointment in the official Pakistan establishment here that Mr Bush has not gone the whole hog.’ See www.hinduonnet.com/2001/09/25/ stories/03250007.htm.
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3.2.2.1 Who did what, when? The theoretical notion was formalized by Lima˜o (2007) and tested in Karacaovali and Lima˜o (2005) for the EU, and Lima˜o (2006) for the US. Both papers suggest that these trade powerhouses cut their MFN tariffs less on those items where they granted important preference margins. In short, the goodies-bag did seem to act as a ‘slowing bloc’ even if it did not act as a stumbling bloc. The evidence in Lima˜o (2006) is widely misrepresented as showing that the US raised tariffs in the Uruguay Round for items on which it granted FTA preferences. Of course, this cannot be right since MTN market access talks only involve tariff bindings and the US did not violate any of its bindings in the Uruguay Round. Indeed, the data shows US tariffs decreasing for all but twelve of the thousands of tariff lines (defined at the HS-8 products level in the WTO’s database).28 Formally, Lima˜o estimates an econometric model of US tariff cuts in the Uruguay Round. His famous stumbling bloc results that he finds is that the US cut tariffs by less than his econometric model predicted they should have on items for which the US had granted FTA preferences before the Uruguay Round. In short, he shows that the US preferences acted as a ‘slowing bloc’ not a stumbling bloc.
3.2.3 Cherry-picking stumbling bloc An entirely distinct mechanism is at work in the third type of stumbling bloc – the cherry-picking stumbling bloc. Moving to global free trade will typically involve some pluses and some minuses from the national perspective. The question is: Can one find a group of nations whose integration would provide many of the pluses with few of the minuses? If the answer is ‘yes’, the trade bloc is likely to be a stumbling bloc. Starting from the bloc situation, a move to global free trade involves many minuses and fewer pluses for bloc members, so bloc members may veto global free trade even when they would have embraced it without the trade bloc. Here is an example of a setting that could yield a cherry-picking stumbling bloc. Assume the trading environment is marked by Helpman–Krugman trade; there is both intra-industry trade in differentiated products and inter-industry trade in Walrasian sectors. In this world, trade liberalization will produce gains from trade due to the Krugman variety effect. It will also produce gains from trade from comparative advantage effects, but the comparative advantage gains 28
As per a bilateral communication with the author.
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come bundled with politically difficult Stolper–Samuelson effects on domestic factor prices. Now suppose two large nations have quite similar factor endowments. If they form a trade bloc, they will win a large share of the variety gains that would come with global free trade, but will experience little of the Stolper–Samuelson pain. Taking the trade bloc as the base case, the bloc members may find a move to global free trade unattractive. It would entail a good deal of Stolper–Samuelson pain and only a modest amount of additional variety or comparative advantage gains. Depending upon parameters, especially the political power of Stolper–Samuelson sufferers, the gains may not be sufficient to make global free trade attractive to the bloc members. 3.2.3.1 Who did what, when? Levy (1997) illustrates a cherry-picking stumbling bloc in a highly stylized set-up, but his main result is surely more general than his model.
3.3
Building-bloc logic
While many trade policy scholars – such as Paul Krugman (1991b) and Jagdish Bhagwati (1991) – worried that regionalism was a stumbling bloc to global free trade, others – such as Larry Summers (1991) and Fred Bergsten (1991) – viewed regionalism as a largely benign or even constructive force in the world trade system. This sub-section considers the economic logic of the assertion that RTAs could foster multilateral liberalization, i.e. how RTAs may be building blocs on the road to global duty-free trade. There are four main logics in the literature. We start with the one that permeates the justifications used by nations which simultaneously pursue regional and multilateral liberalization – the notion that preferential liberalization creates a political-economy momentum that makes multilateralization liberalization easier (and vice versa).
3.3.1 Juggernaut building-bloc logic Liberalization begets liberalization, according to the juggernaut building-bloc logic. The logic comes in two parts that are most easily explained in the context of multilateral liberalization. When the GATT started in 1947, import duties were high worldwide, since they had been set without international coordination during the Smoot–Hawley tariff wars. The tariffs balanced the supply and demand for protection in the ‘political market’ of each nation separately. The main demanders of
big-thin k regionalism: a critical survey
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import protection were import-competing firms and the workers they employed. Governments were the supplier of protection, but concern for the general economic well-being of the nation meant that the supply of protection was not perfectly elastic. Starting from this situation of uncoordinated tariff-setting, announcement of an MTN based on the principle of reciprocity alters the array of political forces inside every participating nation. The central point is reciprocity; it converts each nation’s exporters from bystanders in the tariff debate to anti-protectionists. For exporters, lobbying against domestic tariffs becomes a means of lowering foreign tariffs. Because the MTN rearranges the political economy forces inside every nation, all governments find it politically optimal to choose tariff levels that are lower than the unilaterally optimal tariffs.29 This is the first part of the juggernaut theory.30 The logic is not new. Informed observers have long known that the GATT’s reciprocal MTNs were mostly about helping nations internalize a political economy externality inside their own polities, i.e. about making it easier for national politicians to put together a national coalition in support of freer trade. Writers such as Robert Baldwin (1970, 1985) and Mac Destler (1992) are explicit on this point, but historical accounts of the Cobden–Chevalier Treaties show that using external trade deals to realign domestic political forces was very much in the minds of nineteenth-century thinkers (Irwin 1993 p. 96). Even Krugman (1991b) writes: ‘[T]he process of multilateral negotiation . . . sets each country’s exporting interests as a counterweight to import-competing interests; as trade negotiators bargain for access to each others’ markets, they move
29
30
More formally, without MTNs governments maximize a politically weighted objective function that includes things affected by the nation’s own tariffs – profits of importcompeting sectors, consumer surplus and tariff revenue. During the MTN, a nation’s tariff affects all these things, but foreign tariff levels are linked to domestic tariffs via reciprocity; the objective function now includes the impact of foreign tariffs on exporter’s profits. Since this new impact is negative (higher domestic tariffs lower exporters’ profits via reciprocity), announcement of the MTN leads the government to find it politically optimal to choose a tariff that is lower than the politically optimal tariff before the MTN. The word ‘juggernaut’ – defined as ‘any massive inexorable force that advances crushing whatever is in the path’ – stems from a British mispronunciation of the Hindu deity of the Puri shrine, Jagannath. A festival is held in Puri involving the ‘chariot of Jagannath’, an enormous and unwieldy construction that requires thousands of people to get it rolling. Once started, however, it rolls over anything in its path.
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toward free trade despite their disregard for the gains from trade as economists understand them.’ The second part of the juggernaut logic concerns the impact of the tariff cuts on openness. The tariff cuts make all nations’ more open export sectors expand with the foreign tariff cuts, and importcompeting sectors contract with domestic tariff cuts. Assuming political influence is linked to industry size, this economic re-landscaping strengthens pro-liberalization forces and weakens anti-liberalization forces in all nations – although of course such industrial restructuring takes years. In other words, the initial reciprocal tariff cuts start a liberalization juggernaut rolling. Due to the economic re-landscaping that occurs during the phase-in of the initial tariff cuts, all governments find that their politically optimal tariff in the next MTN is below the levels that they found politically optimal during the previous MTN. These fresh tariff cuts continue the re-landscaping and the juggernaut continues to roll forward. Thus, once the liberalization juggernaut starts rolling, it crushes all tariffs in its path.31 To the extent that regionalism can start the juggernaut rolling, RTAs can be building blocs – hence the name ‘juggernaut building-bloc logic’.32 The precise mechanism is a simple extension of the juggernaut logic. RTAs re-landscape members’ economies – making export sectors 31
32
The juggernaut logic is from Baldwin (1994 chapter 2.5) and is elaborated in Baldwin (2006) and formalized in part by Freund (2000b). The first part of the juggernaut mechanism – reciprocity’s realignment of domestic special interests – has long been recognized in histories of trade liberalization, e.g. Destler (1992 p. 17) and Bergsten (1996) under the name ‘bicycle theory and export politics’; the point was also made by many others including Baldwin (1984), and Hoekman, Bernard and Kostecki (2001). The basic idea dates much further back, as Irwin (1996) points out. Even more recently, the first-half of the juggernaut logic has been studied formally by Grossman and Helpman (2001), and Bagwell and Staiger (2002). Juggernaut-like mechanisms were discussed independently by Hufbauer, Erb and Starr (1980), Hufbauer, Schott and Clark (1994 p. 164), and Richardson (1993). Bergsten (1998) mentions an alternative source of political-economy momentum (‘modest liberalization begets broader liberalization by demonstrating its payoff and familiarizing domestic politics with the issue’). Staiger (1996, section 5.4) uses a repeated game setting with workers moving slowly out of the import-competing sector to generate gradualism, but MTNs and GATT reciprocity play no role. Milner (1997) and Oye (1993), working independently in the International Political Economy context, discuss mechanisms by which FTAs can create a pro-liberalization political economy momentum. More recently, Hathaway (1998) presents a similar logic in her positive-feedback model. But, likewise, multilateral tariff-cutting may lower tariffs to the level where PTAs become feasible, when previously they were not (this may have been the case with the US–Canada FTA).
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larger and import-competing sectors smaller. Thus the RTA can alter the member governments’ stance in MTNs, making it politically optimal to cut MFN tariffs to levels that would not have been politically optimal without the RTA. Of course, if an RTA results in higher external tariffs (as in the case of the EU’s agriculture tariffs), then an RTA can start the juggernaut rolling backwards. The basic idea can be presented in a diagram, Figure 2.8. The two curves, FE and GFOC, show how the size of the import competing sector depends upon the tariff (free entry) and how that tariff depended upon the size of the import-competing sector via politics. Here, ‘n’ (the number of firms) measures the size of the import-competing sector. The politically optimal tariff choice – taking as given the size of the import-competing sector – is plotted as GFOCunil (solution to the government’s first-order condition without MTN). The politically optimal tariff rises with n, since the larger the import-competing sector, the higher is the political benefit from a marginal increase in the tariff. The free entry curve, FE, relates the equilibrium number of firms to the tariff. As the tariff rises, more firms find it optimal to enter the market. These two relationships assume that the government and firms are short-sighted and the government chooses T taking n as given, while firms choose n taking T as given. Note that this only captures the size of anti-trade forces; the size of the pro-trade export sector is suppressed to avoid a three dimension diagram. To see the two steps of the juggernaut effect, note that announcement of the MTN shifts the GFOC curve to GFOCMTN. This is lower, since the government finds it politically optimal to set a lower tariff for any given level of n when domestic protection is linked to foreign protection via reciprocity. As drawn, the new long run equilibrium, Efinal, entails free trade, but, since entry and exit occur slowly, the tariff and state of the import-competing industry do not jump to Efinal. The diagram illustrates one possible adjustment path. Each MTN results in an instantaneous drop in the tariff, but slow entry/exit means the horizontal arrows reflect slow movement of the state variable. The juggernaut effect acts as a building bloc if the FTA reduces the importance of the import-competing industry in governments’ objective functions. As we saw in the previous section, an FTA between Home and Partner does reduce the size of the Home import-competing sector, so, in that model, FTAs are building blocs on the road to global free trade. Figure 2.9 illustrates the juggernaut building-bloc logic diagramatically (the maths of the juggernaut stumbling bloc are illustrated in Box 2.7 in the Annex to this chapter). The FE curve in Figure 2.9 was
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richard bald win Tariff,T FE Eo
To
GFOC (unil)
GFOC (MTN)
Size of import competing sector, n
Efinal
Figure 2.8
Juggernaut framework
Tariff,T FE (with FTA) Eo
To
E1
FE GFOCunil
GFOCMTN
E2
Size of import competing sector, n
Figure 2.9
Juggernaut building-bloc logic
drawn for symmetric MFN tariffs. When the FTA is signed, the FE curve rotates inwards as shown since the additional competition from Partner producers lowers that Home price facing import-competing firms so some of them exit. Consequently, the GFOC under reciprocal trades will yield a lower MFN tariff after the FTA (point E2) than before (point E1). Of course, if the FTA somehow raised protection of the Home
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import-competing sector, the effect is reversed and the FTA acts as a stumbling bloc.33 3.3.1.1 The Wei and Frankel momentum Frankel and Wei (1995) illustrate another juggernaut-like mechanism. In their model, imperfect information makes workers uncertain as to whether they will win or lose from global free trade. Since an FTA is an intermediate form of liberalization, they show that an FTA could be politically feasible even when global free trade would not be. After the FTA is signed, the nation’s true comparative advantage is revealed, and workers now know whether they will win or lose from free trade. If the parameters are chosen carefully, the certainty resolution may mean that global free trade is politically feasible only after the FTA. Thus the FTA is a building bloc, and, since it operates by altering the political-economy landscape, it can be thought of as a momentum-generating mechanism. The juggernaut logic exploits the fact that nations do have preferences over trade arrangements in the way that individual consumers have preferences over consumption bundles. The nature of the trade deal proposed can affect a nation’s ranking over choices (unilateral versus reciprocal, for example). Moreover, nations’ rankings over choices – unlike the rankings of a standard Walrasian consumer – are pathdependent since historical liberalization can affect the current political strength of various pro- and anti-trade special-interest groups. There are, however, a number of building-bloc logics that assume nations – like Walrasian consumers – have exogenous preferences over outcomes. The next section considers the easiest of these, assuming a representative consumer and assumes that the government acts to maximize this individual’s well-being.
33
Agriculture in Europe is a good example. The customs union formation realigned special interests in the Community in a way that fostered higher agricultural tariffs. Since EEC tariffs on agricultural goods were not bound until the 1990s, the EEC was free to raise its agricultural tariffs without appealing to the Article 24 exception. Since EEC tariffs were bound for manufacturing goods, EEC nations need the Article 24 exception to establish the common external tariff (CET), and this led them to respect the Article’s requirement that the CET not be higher on average; roughly speaking, France lowered its tariffs, Germany raised its, and the Benelux nations did little since their tariffs were initially between the French and German levels. In this way, the EEC customs union formation probably reduced the overall size of the EEC import-competing sector in manufacturing but raised it in agriculture.
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3.3.2 Kemp–Wan building-bloc logic The assertion that trade blocs may be building blocs in a static Walrasian world is as easy and as general as the assertion that they may be a stumbling bloc. Starting from a world where all nations have MFN tariffs, the question is: Can a group of nations always raise their collective welfare by forming a trade bloc? If the answer is ‘yes’, then a piecemeal enlargement of the bloc will raise bloc members’ well-being monotonically. Bloc members attain the highest welfare when all nations are part of the bloc. In this world, the formation of a single bloc should trigger a domino effect that leads to worldwide free trade. The Kemp–Wan theorem tells us that the answer to the question above is always ‘yes’ in a Walrasian setting when nations have access to international lump-sum transfers (Kemp–Wan) or a complete set of commodity taxes and subsidies (Dixit–Norman). Kemp and Wan (1976) – which is probably the first formal contribution to the building/ stumbling bloc discussion – make exactly this point. See Aghion, Antras and Helpman (2004) for an elaboration of the Kemp–Wan argument that uses modern co-operative game theory concepts.34 While this Kemp–Wan building-bloc logic is flawless, it falls down on the very real-world problem that nations do not have access to massive lump-sum transfers. Indeed, assuming that such international transfers are a realistic possibility basically assumes away most of the core difficulties facing the international trade system (and international relations more broadly). Without international transfers, the logic of preferenceerosion stumbling blocs and cherry-picking stumbling blocs suggests that, in many blocs, some bloc members would eventually veto some enlargements. 3.3.3 Veto-avoidance building-bloc logic The exploitation/preference-erosion stumbling-bloc logic turned on the fact that bloc members could veto the move to global free trade. The veto-avoidance building-bloc logic points out that, although the bloc
34
The key concepts are ‘coalition externalities’ (Haberler’s spillover) and ‘grand-coalition superadditivity’ (global free trade is first best). The authors assume one nation is the undisputed agenda-setter and that unlimited international transfers (transferable utility in game theory parlance) are possible.
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members could veto a multilateral trade liberalization, they cannot veto further RTAs that may eventually eliminate all tariffs globally. The explosion in the number of RTAs among small nations that has been witnessed in the new century may very well be due to a combination of the juggernaut effect and the veto-avoidance logic. We start by considering the development of an extremely common form of regionalism, namely, hub-and-spoke FTAs – where one nation (e.g. the US, the EU or India) has a network of ‘radial’ bilateral FTAs with some of its trading partners while these trading partners do not have FTAs with each other. Simplicity dictates our continued use of the symmetric Figure 2.2 framework, so we arbitrarily bestow hub status on Home. 3.3.3.1 Incentives for hub-and-spoke FTAs Roughly speaking, Home found the bilateral FTA with Partner attractive since the improved market access for Home exporters in Partner’s market more than outweighed the potential welfare losses from trade diversion in Home’s import market. This suggests that Home might also find a second bilateral FTA with RoW to be welfare-enhancing, especially given all the separability that rules Meade’s secondary and tertiary effects. As it turns out, in the RTA diagram framework, Home always gains from signing a second FTA with RoW. Intuitively, the point is that Home gains the same preferential market access as it did from the first FTA and it undoes the potentially harmful trade diversion by fully liberalizing its import market. To see this in more detail, we reinterpret Figure 2.6. On the export side, Home’s second FTA wins it preferential access to RoW’s market without giving up its preferences in Partner; this has a net welfare value of areas þ D' þ C1' þ C2' , in the left panel.35 On the import side, the second FTA brings the price in Home’s market for good 1 to the global free trade level, PFT. The welfare impact of this is the positive trade-volume effect area A' plus the conflicting terms-of-trade effects, areas –B' and þC1' . The formulas in Box 2.5 show that the overall welfare change for Home is always positive.
35
Given the separability of the markets, the second FTA with RoW would yield a price for good 3 equal to P' .
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box 2.5 the walrasian rta diagram model: equilibrium prices and welfare The model described in Box 2.1 is a system of linear equations. The equilibrating variable is the internal price in the nation that imports the good (1, 2 or 3; the price of good 4 is always unity). Solving for typical good 1 when T ¼ 0, the equilibrium price for the typical good and the equilibrium welfare of a typical nation (Home) are: 3a þ b 9a2 6ab þ 5b2 ð8Þ ; WHFT ¼ 12 6 The equilibrium price is identical for goods 2 and 3; internal and border prices are equal. When nations impose a symmetric MFN tariff, T, we get the MFN equilibrium price, p1MFN, and, when Home and Partner sign a bilateral FTA, we get the FTA equilibrium price p1FTA. Direct calculation shows these to be: p1FT ¼
2 1 ð9Þ p1MFN ¼ p1FT þ T; p1FTA ¼ p1FT þ T 3 3 The MFN price applies to all three goods, but the FTA price concerns only the liberalized goods (good 1, which Home imports from Partner, and good 2, which Partner imports from Home). Under the bilateral FTA, the price of good 3 remains at the MFN level (additive separability and free trade in the fourth good eliminate all cross-good effects). The prohibitive MFN tariff is T ¼ 1/2b; we assume throughout that T < 1/2b. The so-called optimal tariff (Nash tariff) is T ¼ 1/8b. The welfare of a typical FTA partner, Home, under MFN tariffs and bilateral FTA, are given by the first two expressions in: 2 b WHMFN ¼ WHFT T ; WHFTA ¼ WHFT þ T T 2 ; 3 9 ð10Þ 5b 2 FTA FT WR ¼ WR T 9 The third expression gives the welfare of the excluded nation under the FTA. The welfare levels of Home and RoW under the hub-and-spoke FTA arrangement are: 2b 2 b 7 ð11Þ T þ T 2 ; WRH&S ¼ WRFT T T 2 9 9 9 9 Comparing RoW welfare under free trade and H&S, we see the gain from moving to free trade is bT/9 þ 7T2/9 > 0. WHH&S ¼ WHFT þ
Would RoW accept Home’s offer of a second FTA? As it turns out, RoW gains from such an FTA as long as T is not too high (see Box 2.5 for details). That is, the hub-and-spoke situation is better for RoW than
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the initially disadvantaged position when it was excluded from the Home–Partner FTA. On the export side, an FTA with Home would improve RoW’s market access a great deal (its export price would rise from the depressed level of P' – T up to the free trade price PFT) and the liberalization on the import side would have the usual positive trade-volume effect and conflicting terms-of-trade effects (identical to those experienced by Home in its first FTA). The threshold tariff for RoW to gain from the hub-and-spoke arrangement is calculated in Box 2.5. Plainly, Partner will be harmed by the formation of the hub-and-spoke system around Home. Its preferences in Home are eroded and it receives nothing in compensation. Partner would thus like to veto Home’s second FTA, but, except in extraordinary circumstances, third nations cannot veto FTAs; the main exception is that of customs unions. Functioning customs unions, however, are quite rare in the modern world. Customs unions require supranational decisionmaking capacity to keep all external tariffs in line despite changes in anti-dumping duties, special unilateral preferences to third nations (GSP, etc.) and tariff changes in multilateral trade talks. In fact, the groups of nations that manage such coordination fall into exactly two types: the EU and nations involved in super-hegemon relations (France and Monaco, Switzerland and Liechtenstein, and the South African Customs Union, etc.). In fact, the real world is covered with hub-and-spoke trade arrangements, so we assume henceforth that Partner has no veto over Home’s FTA policy and the hub-and-spoke system gets set up. 3.3.3.2 Incentives for spoke-spoke FTAs The story, however, is not finished. As it turns out, the two spokes may find a spoke-spoke FTA to be advantageous and this would achieve global duty-free trade (although trade would not necessarily be free, due to the exclusion of various ‘sensitive sectors’, rules of origin and cumulation). To see this, note that the hub-and-spoke FTA puts Home in an enviable position – giving it the benefits of free trade as far as its imports go and preferential market access for all of its exporters. In this sense, hub-and-spoke bilateralism might be thought of as another example of the preference-erosion/exploitation stumbling-bloc logic; Home would veto WTO talks aimed at achieving global free trade. However, this simple world can reach global duty-free trade without multilateral talks. An FTA between Partner and RoW would do the job. So, would Partner and RoW be interested in an FTA?
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Taking hub-and-spoke bilateralism as the point of departure, it is clear that the spokes – Partner and RoW in the example at hand – have a very different view of global free trade than does the hub. Taking Partner as an example, a move to global free trade would do nothing to erode Partner’s preferences in Home, since those were already eroded by Home’s second FTA. For Partner, the shift to the global free trade regime would involve a standard exchange of market access with RoW; Partner would see its export price to RoW rise from P' – T to PFT for good 3, and RoW would see a symmetric border price rise for its exports of good 2 to Partner (see Figure 2.2). The attendant liberalization of the two nation’s import markets would have the usual conflicting tradevolume and terms-of-trade effects, but overall the two nations could find the exchange to be welfare-enhancing. In fact, Partner and RoW would always prefer global free trade to the hub-and-spoke situation, as the formulas in Box 2.5 confirm. This is certainly not to be taken as a general result. It does, however, illustrate how regionalism could be a building bloc in a world where overall free trade would be in the interest of all nations, but achieving the goal is blocked by nations fearing erosion of their preferences. See Lloyd (2002) for a clear development of the veto-avoidance logic. This line of thinking is one strand in the widely discussed ‘competitive liberalization’ logic of Bergsten (1996a).
3.3.4 Related logics: induced liberalization and protection Before ending this review of the helps-or-hinders literature, it is useful to cover two economic mechanisms that link RTAs and MFN tariffs without formally making the connection with multilateral trade talks. Both mechanisms consider the impact of RTAs on a nation’s MFN stance in the absence of a new MTN. The first links RTAs to unilateral MFN liberalization. The second looks at how an RTA can lower or raise a nation’s effective MFN tariff rate. 3.3.4.1 RTAs and unilateral liberalization: are RTA and MFN tariffs complements or substitutes? The building-bloc logics examined above directly address the issue of whether RTAs help or hinder the attainment of global free trade. Here, we look at a related, but logically distinct, question: What is the impact of an RTA on the tariffs a nation would find unilaterally optimal to impose on third nations? Intuitively, the question is whether preferential tariffs are complements or substitutes for MFN tariffs.
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The easiest way to organize the various mechanisms is to start from Meade’s formula for the welfare impact of any trade-policy change in a Walrasian economy, namely, TdM – Mdp*. A nation choosing its bilateral tariffs optimally would view this as a first-order condition and set it to zero to find its optimal tariff. The optimal bilateral tariffs are:36 dp Tod ¼ Mod ð12Þ dM od where ‘o’ indicates the origin nation and ‘d’ the destination nation (i.e. the nation choosing the tariffs). In general, anything can happen to Tod when the nation signs a free trade agreement since – according to the Slutsky equation – the direct and cross-good income and substitution effects of the FTA-induced price changes could raise or lower the righthand side of (12). Attempts to resolve the inherent ambiguity have led to several economic mechanisms being stressed in the literature. 3.3.4.2 Preferential and MFN tariffs as complements If the RTAinduced price changes have little impact on the equilibrium slopes of the third-nation import-supply curves, then Tod is likely to fall since RTAs typically reduce an RTA member’s trade with third nations (Harberler’s spillover), i.e. Mod is likely to fall. For example, in the simple RTA diagram model presented in section 2.1 above, the import-supply curves are linear, so dp*/dM does not change, but Haberler’s spillover lowers third-nation trade, and so Home’s optimal tariff on RoW exports fall. Another mechanism that yields complementarity turns on the general principle that taxes become more distortionary when the cross-product variance of rates increases (the so-called uniform tax rate principle). This is a feature of many economic models, especially when administrative and enforcement considerations are taken into account. (This is why most nations impose fairly even indirect tax rates across products.) Since the RTA automatically makes the import tax structure more uneven, there is some presumption that the RTA makes the third-nation tariffs more distortionary. In models where this is true, nations are likely to lower third-nation tariffs when it re-optimizes its trade tax structure, i.e. RTAs encourage nations to lower applied MFN tariffs.
36
Divide both sides by pod* to get the optimal ad valorem tariff in terms of the importsupply elasticity.
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3.3.4.3 Preferential and MFN tariffs as substitutes The most obvious mechanism that suggests the substitutes result (i.e. nations find it optimal to raise third-nation tariffs after having signed an RTA) concerns the market power of the new bloc. If the RTA allows RTA members to better coordinate their third-country tariffs, they are likely to raise external tariffs since they will have more purchasing power than before. This, of course, presumes three fairly unrealistic things: they can coordinate external tariffs; the governments share sufficiently similar objective functions; and their external tariffs are not subject to WTO bindings (or they are willing to violate their WTO commitments). Since most effective RTAs are among developed nations whose tariffs are almost universally bound at near-zero levels (apart from a few lowvolume items) and such nations rarely violate their WTO bindings, this mechanism is probably of little real-world relevance except in a few commodities (agriculture before the Uruguay Round), and a few lowtrade-volume RTAs among developing nations. 3.3.4.4 Who did what, when? Contributions to the literature that have looked at the complementarity-versus-substitutes effects include, inter alia, Reizman (1985), Kennan and Reizman (1990), Krugman (1991a, 1993), Bond and Syropolous (1996a), and Ornelas (2005, 2008). 3.3.4.5 Imported MFN liberalization and protection A closely related line of reasoning considers the automatic impact of FTAs on the external protection of FTA members, when members impose different tariffs on third nations. Under some circumstances, the FTA effectively lowers the higher MFN tariff (imported MFN liberalization); in other circumstances, the FTA effectively raises the lower MFN tariff (imported MFN protection). A good example of imported MFN liberalization can be found in North–South FTAs. The concept can be explained intuitively with reference to Mexico’s experience. Mexico signed FTAs with the US and Canada in 1994 (NAFTA) which phased in tariff cuts over ten to fifteen years. Mexican MFN tariffs were (and still are) much higher than US and Canadian MFN tariffs, but, as NAFTA brought Mexican prices down to the US internal level, domestic prices in Mexico came to resemble those that Mexico would have observed if it had lowered its MFN tariffs to US levels. To put it differently, the high Mexican MFN tariffs became irrelevant since the same goods could be purchased from the US duty-free and the US internal price was linked to the world price
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via its low MFN tariff (leaving aside the small sectors still protected by high US MFN tariffs, such as clothing, textiles and footwear). In this sense, Mexico ended up ‘importing’ the US’s low MFN tariffs.37 The argument can be made more precise with Figure 2.10. The two left panels show import demand of the US (left-most) and Mexico (middle); the right panel shows the world market for the good under consideration. The US total supply curve is shown in Mexico’s panel for reasons that will become clear. The US initially imposes a zero tariff on imports from RoW while Mexico imposes a tariff of TMX on imports from both the US and RoW. When Mexico eliminates duties on US imports, US–made goods can enter Mexico duty-free. Since the Mexican internal price is initially above the US internal price, US firms sell to the Mexican market and in doing so drive down Mexico’s internal price to the US internal price – which of course is just the world price. US production entirely displaces Mexican imports from RoW and the Mexican MFN tariff becomes irrelevant. The feasibility of this outcome is established by noting that the US supply at Po is more than sufficient to cover the entire Mexican import demand (point 2 is to the right of point 1). Note that there would be a secondary effect on world prices as the US expands its imports. In the diagram, the new world price would be at the intersection of the dotted MD curve and the XSRoW curve. For simplicity’s sake, this second-order impact is not shown in the two left-most panels. If one combines this imported MFN liberalization with the juggernaut logic, the FTA can eliminate all the firms in Mexico that would have otherwise opposed MFN liberalization. That is, Mexican industry has no interest in lobbying for the maintenance of high Mexican MFN tariffs since those tariffs provide no protection to Mexican industry. In the case at hand, the Mexican government signed a vast array of FTAs to exchange its now-politically useless MFN tariffs against preferential access for its exporters. 37
Extension of this analysis led to the ‘unsustainability of the FTAs’ proposition. Vousden (1990 p. 234) argues that Home would be tempted to lower its MFN tariff to just under that of Partner in order to recapture the tariff revenue and Partner would have an incentive to reply, with the resulting race-to-the-bottom tariff making FTAs ‘unsustainable’. Richardson (1995) extended and popularized the result. The main results in Shibata (1967), Vousden (1990) and Richardson (1995) – the irrelevance of rules of origin and the unsustainability of FTAs – are of little relevance to real-world policy concerns (rules of origin are at the heart of many current policy debates and FTAs, not customs unions, are by far the most prevalent form of PTAs).
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richard bald win euros Partner
euros Home
XSRoW
Po +TMX
SUS
1
Po
RoW border price
2
Po
MDUS
MDUS+MX
MDMX
Imports
Figure 2.10
MoMX
Imports
Imports
Imported MFN liberalization
Since developed nations (the North) tend to have much lower MFN tariffs on most manufactured goods than developing nations (the South), the mechanism suggests that an important implication of North–South FTAs for the world trading system is the way they lower the South’s resistance to further liberalization. Given that most of the South does not participate in MTN tariff-cutting exercise on the basis of reciprocity, the North–South FTAs are one of the few ways of triggering juggernaut effects in developing nations. 3.3.4.6 Rules of origin and imported MFN protection The opposite result – an RTA importing MFN protection to a nation with low MFN tariffs – can occur when highly restrictive rules of origin are imposed. The argument can be illustrated with reference to NAFTA. Since the US’s first foray into regionalism – the 1965 US–Canada Auto Pact – US and Canadian rules of origin on autos have been highly restrictive. One of Canada’s motives in pushing for the trilateralization of the US– Mexico free trade agreement was to extend its restrictive rules of origin to Mexico and thereby avoid the undermining of the Auto Pact. The rules of origin forced Mexican-based car producers to import parts and components from the US or Canada instead of from third nations. As before, NAFTA equalized US and Mexican internal prices, but this meant that the Mexican prices were linked to the world prices via the higher MFN tariffs in the US and Canada. In this way, ‘imported MFN protection’ occurred. NAFTA, with its rules of origin, had effects that mimicked a rise in the Mexican MFN tariffs to the US and Canadian
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levels. The imported-MFN-protection reasoning is most often associated with Krueger (1993), although it has played a role in the literature discussed above.38 Although the distortionary impact of rules of origin is limited by the level of the MFN tariff, the all-or-nothing feature of rules of origin for final goods can lead to large ‘effective rates of protection’. For example, if a US$20,000 NAFTA-origin car pays zero tariff while the same nonNAFTA car would pay 5 per cent, a rule of origin that stipulates that a particular component must be made inside NAFTA could make it economic to pay up to US$1,000 more for the local versus imported component. While the distortion in the final good market is limited to 5 per cent, the distortion in the component market can be much larger (this is the traditional effective rate of protection logic). 3.3.4.7 Who did what, when? Shibata (1967), Vousden (1990), Richardson (1993, 1994, 1995), and Grossman and Helpman (1995) are all important contributors to or users of this line of analysis.
3.4
Bargaining-model stumbling/building-bloc logics
The stumbling/building bloc mechanisms discussed above resonate strongly with real-world considerations, in my judgment, since they took advantage of the simple institutional features of real-world tariffcutting in RTAs and MTNs (see section 3.1 above). This, however, is not how the Big-Think Regionalism started thinking about the issue (Krugman 1991b, 1993). As Krugman (1993 p. 58) puts it: ‘In this realm of foggy discussion it is natural for economists to grab hold of any analytic tool they can find, even if they are ill-adapted to the work at hand.’ I do not believe that the literature that followed up this lead by Krugman has contributed to policy insights since it is built on foundations of sand. Nevertheless, a large literature has developed around it, and many academic participants in the Big-Think Regionalism debate refer to the literature’s insights, so I will review the basic logic here. When Krugman wondered how regionalism would affect the GATT, the tool he grabbed was simple bargaining game theory with two nations that are considering setting tariffs co-operatively (under GATT), or non-co-operatively (Nash tariffs). As Figure 2.11 shows, both nations 38
See note 37 above.
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richard baldwin Nation 2’s tariff, t2
Nash tariffs
t *2
GATT tariffs Efficient bargaining curve tariffs
t *1
Figure 2.11
Nation 1’s tariff, t1
An economic theory of the GATT
prefer the co-operating outcome. He notes: ‘Trade bargaining . . . is characterized by a Prisoners’ Dilemma. This Dilemma arises in part from a terms-of-trade effect of conventional optimal tariff analysis, but also (and presumably in practice mostly) from the effect of each country’s tariff on the other country’s producer interests’ Krugman (1993 p. 72). He goes on to invoke all the usual theorems of repeated games to think about the building/stumbling-bloc issue and concludes: ‘Trade liberalization must be supported by the belief of countries that if they cheat they will lose from the subsequent collapse of the cooperative outcome.’39 The crux of his analysis is to examine the impact that an exogenously formed RTA has on the costs and benefits of cheating.
3.4.1 Terms-of-trade approach in a nutshell Much of Krugman’s reasoning is informal, so it is worth spelling it out explicitly. The whole analysis turns on three equilibrium welfare levels: W
GATT
is the level of a nation’s welfare with global co-operation (GATT tariffs);
39
This is not a new point. It is very clear in the discussion of Johnson (1953), but probably dates much further back. Indeed, the notion that a quid pro quo would be mutually advantageous was probably well understood by trade diplomats as far back as Roman times.
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Nash
W is national welfare under non-co-operative tariffs; and cheat W reflects the nation’s welfare when its government ‘cheats’, i.e.
chooses a tariff to maximize its own welfare when the foreign government embraces its GATT tariffs. There are two logical steps in the approach. The first step consists of the obvious point that tariffs are worse than a zero-sum game from the global perspective so some form of co-operation could be Paretoimproving, but nations have an incentive to cheat. Formally, this is a prisoners’ dilemma and it arises when Wcheat > WGATT > WNash. The second step involves a dynamic game that models when co-operation is sustained. As Krugman notes, co-operation is self-enforcing when the gains from cheating are more than offset by the losses from the (infinite) punishment. Taking d as the discount factor, the present value of cooperating forever in symbols is WGATT / (1 – d). If co-operation is to be sustained, this must exceed the one-period gain from cheating, Wcheat, plus the present value of the infinite sequence of the Nash outcomes that kick in next period after the foreigners realize cheating has occurred, dWNash / (1 – d). Clearing the (1 – d) terms, the condition for selfsustaining global free trade is: W GATT >ð1 dÞW cheat þ dW Nash In words, each nation compares the value of welfare under co-operation to a weighted average of the cheating outcome and the Nash outcome. So far this is a trivial relabelling of an undergraduate lecture on repeated games. The contribution of this approach comes in considering how an RTA changes the three levels, Wcheat, WFT and WNash. Krugman (1993) asks whether the formation of a trade bloc among nations makes those nations more or less able or willing to co-operate. His answer is: It can cut either way. Krugman’s core insight – an insight that has been followed up in a dozen articles since – is that RTAs typically reduce the RTA members’ trade with the rest of the world, and so reduce both the costs and the benefits of cheating. Since these work in opposite directions, some bargain-approach papers find that RTAs are building blocs (thus making cooperation more likely) while others find that RTAs are stumbling blocs. 3.4.1.1 Who did what, when? This approach came to be known as the terms-of-trade approach after Kyle Bagwell and Bob Staiger,
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and students formally modelled the issues, starting with Bagwell and Staiger (1996a, 1996b). For examples of this sort of application to the regionalism questions, see Bond and Syropoulos (1996b), Campa and Sorenson (1996), Bond, Syropoulos and Winters (1993), Bagwell and Staiger (1996a), Conconi and Perroni (2000), Conconi (2000), Yi (1996), and Ornelas (2005, 2008).
3.4.2 Critique of the self-enforcing approach to tariff-liberalization The approach set out by Krugman seems entirely natural to readers schooled in game theory that was developed to explain strategic interactions among private agents. This sort of model resonates strongly when thinking about how OPEC sustains its cartel, or chemical companies agree to fix the price of vitamin C. When it comes to Big-Think Regionalism, however, it is vitiated by two factually incorrect assumptions: (1) that the cheating period is long enough to make it tempting; and (2) that punishment can be usefully modelled as consisting only of tariff changes. First, real-world tariffs are part of a nation’s tax code and are thus entirely transparent – at least in the advanced industrialized nations that account for more than 80 per cent of world trade. The domestic laws of the US, the EU and Japan, for example, require their governments to publicly announce the tariff schedule. Consequently, tariff-cheating is detected by foreigners at exactly the same time the change is implemented (if not before). See Box 2.6 for a real-world example of a surprise tariff cut being detected immediately. This means that the cheating period is zero, i.e. d is unity, so the sustainability condition becomes WGATT > WNash. In other words, as in the stumbling-bloc logics discussed above, nations co-operate if and only if it is in each case in their own interest to do so. The whole ‘selfenforcing’ module is irrelevant. This is a lethal problem for the approach since its only contribution was to examine how an RTA affected the costs and benefits of cheating for one period. The second critical flaw is even more damaging to the relevance of its insights. When Krugman set out the basic approach, he took the repeated Prisoners’ Dilemma model straight off the self – including its assumption that the punishment can only come in the form of a change in the variable of interest. That is, he assumed that nations can only punish via tariffs. This restriction of the strategy space makes perfect
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box 2.6 nixon’s tariff ‘cheating’ A quite extreme example can be found in the surprise announcement of a 10 per cent rise in all US tariffs on 15 August 1971. The announcement was made on national television by President Nixon, acting under the emergency authority in the Trade Expansion Act (authority that was inserted to allow the US to respond instantly to changes in the international environment, including sudden tariff hikes by foreigners). The nightly news coverage of the announcement included interviews with European and Japanese policy-makers discussing the policy change even before it was implemented the next morning. The only other legal option the US had was an Act of Congress, which would have been equally public. Interestingly, the 10 per cent surcharge was to take immediate effect, but bureaucratic delays in US Customs and confusions over the exact coverage meant that implementation was not immediate. The reaction by foreigners, however, was immediate and the ‘import surcharge’ was formally removed after just four months. US tariff revenue as a percentage of US imports was lower in 1971 than in 1970.40 While this episode demonstrates that nations have and might use tariffs as a stick to get their way (in this case, the problem was the European and Japanese refusal to revalue their currencies despite the growing US trade deficit), it also clearly illustrates that there is no period in which the cheater could profit before the others work out what has been done.
sense in the analysis of collusion among firms. It does not make sense when it comes to the co-operation in the global trade system. In the real world, co-operation in the GATT/WTO system is supported by the threat of a breakdown in co-operation far broader than tariffs. The system’s members can and do use a wide range of ‘carrots and sticks’ to induce trade co-operation: foreign development aid, military aid, political support in the international arena, participation in NATO, US troops stationed in Germany and Japan, etc. Moreover, if international trade co-operation did breakdown, the costs would far exceed lost markets for exporters. It would halt or seriously hinder international co-operation on many pressing issues – climate change, international terrorism, money laundering, organized crime, humanitarian crises and the control of illegal drugs, to mention just a few. Formally, we would 40
See www.state.gov/r/pa/ho/frus/nixon/iii/8698.htm. You can watch Nixon announce it at http://themessthatgreenspanmade.blogspot.com/2008/03/nixon-ends-gold-conver tibility.html.
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include this in the repeated game by giving the players the ability to impose large costs (unrelated to tariffs) on any player that deviated from co-operation. In summary, the basic idea that trade co-operation should be modelled explicitly is not useless. Trade co-operation is almost surely dependent upon nations’ perceptions of the costs and benefits of deviating. Unfortunately, the terms-of-trade approach is focusing on the trees and missing the forest. Its insights as to whether an RTA makes cheating on a tariff more or less attractive misses the point altogether, since the main carrots and sticks supporting co-operation have nothing to do with tariffs. This means that RTAs do not have a first-order impact on the underpinnings of international trade co-operation – at least not via its impact on the costs and benefits of deviating from co-operation. The mainstream stumbling/building-bloc ideas discussed in sections 3.2 and 3.3 above ignored the sustainability issue. They just assumed that nations would keep their word if they did agree to go to free trade. This strikes me as a fairly reasonable assumption even though threats are explicitly or implicitly part of all forms of co-operation. There is little to gain from explicitly modelling the threats since the most important forms of retaliation are entirely outside the model.
3.5
Other links from RTAs to MTNs
There are a number of points made in the literature that do not fit neatly into the stumbling/building-bloc framework as I have delineated it. One line of reasoning views a nation’s MFN tariffs, or yes–no stance on multilateral co-operation, as dependent upon the strength of various domestic special-interest groups. The Big-Think Regionalism question here is whether an RTA weakens or strengthens the pro-trade or antitrade interest groups. At one end, Winters (1993) argues that regionalism (especially the EU on agriculture) strengthened the hand of protectionists since it worsened Olsen’s Asymmetry (i.e. winners from protectionism are few in number and easy to organize, while the losers are dispersed, numerous and difficult to organize politically). He calls this the ‘restaurant bill’ problem. Just as diners at a table where the bill will be split equally tend to order too much, the EU tended to grant too much protection to farmers. At the other end, De Melo et al. (1993), Richardson (1994) and Panagariya and Findlay (1996) argue that an RTA tends to dilute the influence of special-interest groups via various mechanisms.
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Another important line of thinking asserts that the formation of RTAs creates forces that induce nations to begin and/or finish multilateral trade talks. For example, Lawrence (1991), Sapir (1993) and WTO (1995) all argue that the threat of regionalism was a critical element in inducing GATT members to initiate the Uruguay Round and to accept the final Uruguay Round agreement. Windham (1986) makes the same argument for the Tokyo Round. Bergsten (1996a) dubs this ‘competitive liberalization’ and asserts that regionalism fosters multilateralism and vice versa. A somewhat related line of thinking, which has not been formalized, is that RTAs are a testing grounds for the GATT/WTO (Lawrence 1996, Bergsten 1996b). The prime example here is the EU, which dealt with deeper-than-tariff-cutting liberalization for decades before the issues arrived on the GATT agenda in the Tokyo and Uruguay Rounds. See Ludema (1996) for a partial formalization of the idea. Another line of thinking suggests that RTAs can provide commitments that boost the credibility of a nation’s policy reforms (Fernandez and Portes 1998). This was explicitly mentioned by Mexico in its request to the US for an FTA.
4
Multilateralism and regionalism
The analytic contributions discussed above help frame our thinking on whether regionalism is likely to help or hinder multilateral trade liberalization. The bulk of the theoretical literature over the past two decades, however, has been concerned with an analytically distinct question: Would more regionalism be good or bad for world welfare? The question of whether RTAs raise or lower welfare is empirical, so one might wonder why so many theoretical articles were published on the topic. The answer lies in the history-of-thought. When leading thinkers such as Larry Summers, Paul Krugman and Jagdish Bhagwati set the intellectual ‘terms of reference’ for the regionalism literature in the early 1990s, the EU was the only effective regional arrangement. Since it was widely viewed as unrepresentative, the analysis was conducted by speculating on two scenarios – what the world would look like with, and without, more regionalism. The comparison of these two scenarios was taken as providing insight on whether spreading regionalism would raise or lower world welfare. From the perspective of the new century, this literature looks distinctly dated. The world has seen a great deal of regionalism develop,
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and it does not look anything like the speculated scenarios of the theoretic models from the 1990s. Since my goal is to review the main theoretical literature, even that which is no longer very useful, I cover the ‘Is bilateralism bad?’ papers, extracting the literature’s main insights without focusing too much on ‘Who did what, when?’ issues.
4.1
Is bilateralism bad?
This literature was kicked off by Paul Krugman’s 1991 article entitle ‘Is Bilateralism Bad?’ (Krugman 1991a). In typical Krugman style, it laid out a seductively simple model, asked it a seductively simple question, and found an answer that was provocative and seductively simple – world welfare would be lowest with three symmetric blocs.41 This provocation produced an impressive string of contributions from authors who felt that Krugman’s speculated scenarios model left out critical elements of reality. To understand the basic logic behind the three-is-worst result, it is important to note that the simplicity of Krugman’s model rules out most of the standard effects of RTAs. On the production side, he assumes each nation produces a single good, so no production distortions are possible. Since nations and blocs are all symmetric, no nation gains on net from taxing imports. While a tariff tends to lower the cost of imports via the usual terms-of-trade effect, foreign tariffs exactly offset this since they are the same size and applied to the same amount of trade (each bloc’s imports equal its exports). In short, all welfare effects are channelled through the consumer distortion.
4.1.1 More regionalism with fixed tariffs. To fix ideas, we first hold the tariff constant while varying the size of the symmetric blocs. At one extreme is the case of only one bloc, in which case there is no tariff and thus no consumer distortion; welfare is maximized. At the other extreme there are zero blocs in the sense that all goods – including domestically produced goods – are taxed at the same rate. Since no production distortion is possible and there is no net terms-of-trade effect, this extreme also attains the first-best outcome. After all, consumer distortion is driven by distorted relative prices. 41
Note that the exercise was anticipated by Riezman (1985) and Kennan and Riezman (1990), but these did not catch on.
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Moving away from either extreme lowers welfare. This is the key intuition for the U-shaped relationship between the number of blocs and welfare. The fact that the minimum is at three is not a result that is robust to parameter changes in Krugman’s own model, and it was shown repeatedly to fall down in less simplified models. Digging slightly deeper into the intuition, consider what happens when moving from one bloc (global free trade) to two, and then three blocs. When the world forms into two blocs, the price of imported goods rises. Since consumers do not see the true price their nation pays for goods, this leads to socially inefficient expenditure switching; localgood expenditure shares rise and imported-good expenditure shares fall. When the world reconfigures into three blocs, two things happen to the consumer distortion. Some goods that were previously untaxed become taxed; this increases the distortion. The distortion between a typical domestic good and a typical imported good, however, falls since more varieties are now taxed. The tension between these two effects is what generates the U-shaped relationship.
4.1.2 Impact of regionalism on tariffs Krugman assumes the blocs are customs unions and that they set the tariff at the naı¨ve optimal tariff level, i.e. the Nash tariff that is equal to the inverse of the bloc’s import elasticity. Since the bloc gets more market power as it enlarges, Krugman has tariffs rising as the number of blocs declines, although not very much according to his numerical simulations. 4.1.3 Extensions and modifications A series of papers considered more complicated models, with the two main complications being the introduction of national comparative advantages and trade costs. When authors introduced comparative advantage, it is easy to make the three-is-worst result go away, but the U-shaped relation remains in all the models that do not allow for production distortions. Bond and Syropoulos (1996a), for example, find that the worst number of blocs may be two, three or more.42 More interestingly, considerations of comparative advantage can reverse Krugman’s result that bigger blocs would like to charge higher 42
Srinivasan (1993) and Deardorff and Stern (1994) provide other examples.
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tariffs. The intuition can be had by linking the optimal tariff to market power and market power to comparative advantage. When nations produce entirely distinct goods, as in Krugman’s model, grouping nations into, say, two trade blocs does nothing to make the blocs’ production structures more similar, and thus market power is merely a matter of size. When nations’ production structures differ in a richer way, formations of blocs can make the blocs’ output-mix more similar and this will reduce each bloc’s market power. For example, if there are four nations, two labour-poor and two labour-rich, the formation of two blocs with one nation of each type would produce a world where blocs had equal factor endowments. In a Heckscher–Ohlin world, such a shift would extinguish the market between the two blocs and with it the incentive to charge a tariff. Of course, that is not the only possibility, but it shows that the monotonic link between bloc size and optional tariffs can be broken. Sinclair and Vines (1995) undertake a more thorough study of the bloc-size-tariff issue, examining, for instance, the case of FTAs as well as customs unions. They make the intuitive point that increasing the size of an FTA does not have a first-order impact on each FTA member’s market power and so the tendency for higher tariffs is absent. The idea that trade costs (i.e. frictional trade barriers) would affect the comparison between regionalism and multilateralism is obvious and was pointed out by Krugman (1991a) in a simple extension of his basic model. He assumes that there are continents as well as countries – where continents are defined as groups of nations that have low trade costs among themselves but high trade costs with other continents. If the inter-continental trade costs are high enough, continental free trade comes very close to approximating global first trade (since the remaining tariffs fall on very little trade). In the extreme of infinite intercontinental trade costs, the first-best outcome can be obtained with continental trade blocs. The basic point that ‘natural trade blocs’ can liberalize most of the world’s trade had strong resonance with the real-world pattern of RTAs. It also attracted a large number of papers that elaborated on Krugman’s basic insight by considering more general sets of trade costs.43 Altogether, the ‘Is bilateralism bad?’ literature is best thought of as a string of parables from which we might glean some insight into 43
See Frankel, Stein and Wei (1995, 1996), Frankel (1996), Nitsch (1996a, 1996b), Schiff (2001), and Spilembergo and Stein (1996).
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real-world events. The two main insights, however, are not particularly difficult to grasp. The first is that spreading regionalism might or might not harm global welfare. The second is that the more regional free trade comes closer to mimicking global free trade, the more regionalized is the world trade pattern (due to transport costs or comparative advantage).
5
Endogenous bloc formation
In the early 1990s, regional liberalization seemed to be the easy route to integration. A central issue in the Big-Think Regionalism literature was therefore why countries were eager to open markets regionally but reluctant to do so multilaterally. From the new-century perspective, this question looks odd. In both North America and Europe, regionalism ran into severe political problems (NAFTA, failure to renew fast-track, Maastricht, Nice and Constitutional Treaty rejection, Turkish enlargement, etc.), while the Uruguay Round passed without much discussion once the final compromises had been completed. For example, NAFTA and the Uruguay Round came into effect in the same year. Moreover, the multilateral trade system continues to enjoy a high level of background support in all major trading nations. Yet, the slowness of the Doha Round, together with booming regionalism worldwide, has brought discussion of the causes of regionalism back to the forefront of trade policy discussions. Paul Krugman, Jagdish Bhagwati and other intellectual leaders of Big-Think Regionalism put forward many accounts of the causes of regionalism.44 The main explanations were: (1) that members were frustrated with the GATT’s slow progress, especially since the issues had become so much more complex than tariffs and the number of members had grown; (2) that regionalism negotiations were easier; (3) the US conversion from devoted multilateralist to ardent regionalist removed one of the key restraints on regionalism; and (4) the US’s aggressive unilateralism scared Western Hemisphere nations into seeking a ‘safe harbour’ against the US policies and/or a breakdown in the GATT system. In a 1993 paper, I proposed a very different explanation with the domino theory of regionalism (Baldwin, 1993b, 1995, 1997). The theory 44
See Krugman (1991a, 1991b, 1993), Bhagwati (1991, 1993), Anderson and Blackhurst (1993), Whalley (1996), Lawrence (1996), Bergsten (1996), Panagariya (1996), inter alia.
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views a nation’s decision to join an RTA as endogenous and notes that Haberler’s spillover provides a de novo political economy force that might make nations change their minds after some of their trade partners form or deepen a preferential trade agreement. This section reviews the domino theory, its intellectual antecedents and its subsequent contribution to the theory of endogenous bloc formation.
5.1
Domino theory
All the contributions in this area require two basic elements – a model of the economy that connects tariff choices to economic outcomes, and a political-economy model that connects economic fundamentals to policy choices. The economic model is not very important as long as Haberler’s spillover arises, i.e. as long as the preferential policies of a nation’s partners can create export discrimination. The political-economy model only requires that exporters tend to support membership in an RTA and import-competitors tend to oppose it. The logic proceeds in two steps. First is the immediate impact of an idiosyncratic deepening of integration in an RTA. Given an initial political equilibrium where the nation in question has chosen to be outside the RTA, the idiosyncratic deepening or widening of the RTA generates new political economy forces. Specifically, non-member exporters now have a greater stake in membership – they face more discrimination if their nation stays out and greater market access if it joins. Anti-membership forces may also be strengthened in non-member nations, but, if the industrial output of export sectors is systematically larger than the output of importcompeting sectors (as is usually the case since the export sector produces for both domestic and foreign consumers) and the sectors’ political power is linked to their size, the shock raises the pro-membership forces more than the anti-membership forces. For outsiders that were previously close to indifferent to membership (politically), these changes shift the domestic political-economy equilibrium to the projoiners’ camp. The second stage starts if one non-member actually does decide to join. The PTA enlargement implies that discrimination facing the remaining non-members expands and this again heightens the promembership political-economy forces in outsiders, potentially producing a membership application from an outsider that previously found
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it politically optimal to stay out. The cycle repeats itself until a new political equilibrium membership in the PTA obtains. If the world was marked by perfect information and synchronized periodicity in political decision-making, PTA membership bids would be perfectly coordinated and bloc enlargement would happen in a steplike fashion. Uncertainty, imperfect information and mismatches of decision timings suggest that the new political economy equilibrium may be reached only gradually. During the transition, it might look like regionalism was spreading like wildfire.
5.2 The supply side The domino theory ignores the ‘supply side’ membership – i.e. thinking about whether the incumbents would allow the applicants to join. This was not an omission but rather a strategic choice reflecting a judgment that most ‘applications’ to join or form RTAs were driven by economics for the demandeurs (often small nations) and by politics for the re´pondeurs. The issue of the economic impact on the re´pondeurs was thus ignored for parsimony’s sake. Given the rather promiscuous approach that nations are taking in the new century to RTAs, the assumption seems to me as continuing to be relevant. Much of the subsequent literature on endogenizing the membership of RTAs has focused on putting the supply side into a model with domino-like features. These studies follow the lead of Riezman (1985) in using co-operative game theory to model this ‘club formation’ issue.45 Yi (1996) was one of the first to formalize the domino logic using cooperative game theory with and without considering the supply constraint. In his model, the domino effect leads to global free trade, if membership is open (i.e. the supply side is ignored), but not if the joiners require the assent of the incumbents and the incumbents care only about how tariffs affect their national welfare. Haveman (1992), Syropoulos (1999), Abrego, Riezman and Whalley (2006), and Melatos and Woodland (2007) consider a number of extensions including asymmetric nations. Aghion, Antras and Helpman (2004) is perhaps the most complete study of what happens when the supply side is fully incorporated. To make headway and reduce the proliferation of cases, they allow for transferable utility among nations and assume there is a single nation 45
Also see Kennan and Riezman (1990), Riezman (1999) and Kose and Riezman (2000).
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proposing various configurations. While these assumptions are rather strong and rather at odds with the main outlines of international trade relations in today’s world, they do allow the authors to engage the powerful tools of game theory that were developed for simpler problems. Their main conclusion is that almost anything could happen, but one possible is that – as Yi (1996) found – the domino effect could lead to every nation joining a single RTA.
5.2.1 Asymmetric lobbying The political-economy forces driving the domino effect are strengthened by the peculiar tendency of special-interest groups to fight harder to avoid losses than to secure gains. Joining allows excluded firms to avoid damage as well as to win new commercial opportunities, so trade diversion may play a particularly important role in generating new, promembership political-economy activity. Many explanations for this ‘loser’s paradox’ are possible, but one simple economic interpretation that is relevant to the domino theory is based on unrecoverable investments, i.e. sunk costs. Entry into most industries and markets involves large unrecoverable investments in product development, training, brand name advertisement and production capacity. In such situations, established firms can earn positive profits without attracting new firms, but only insofar as these profits constitute a fair return on the entry investments, i.e. sunk costs create quasi-rents, not pure rents. Given that firms in an industry will already have incurred the sunk costs, deepening of an existing bloc or formation of a new one will destroy quasi-rents, and thus generate strong, de novo political forces pushing the government to redress the new discrimination. The most direct way would be to join the bloc, but other modalities are possible. Governments of excluded nations may seek to restore quasi-rents by calling for a multilateral trade round, or forming a new trade bloc among excluded nations.46 6
Directions for future research and concluding remarks
In 2008, a Big-Think Regionalism review might seem like an intellectual indulgence from two distinct angles.
46
See Baldwin and Robert-Nicoud (2002, 2005) for a formal treatment of the ideas and Baldwin (1993b) for an early formal model.
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1 Regionalism is here to stay. Regionalism has been raging for two decades and it shows no signs of abating. Since the existing RTAs are not going to be disbanded and more will surely be signed, discussion of whether these RTAs help or hinder multilateral liberalization is something of a luxury. The real-world issue facing policy-makers is how to increase the likelihood that these RTAs help the world trade system and reduce the likelihood that they hurt it. While there may be some room for highly abstract reasoning on this issue, the devil is in the detail. Thinking up ways of making regionalism fit in better with multilateralism will require highly detailed knowledge of matters such as rules of origin, and RTAs’ treatment of non-tariff barriers. The chapters in this volume provide the most comprehensive effort to gather such information and should therefore provide an excellent springboard for future empirical and theoretical work. 2 Deep, multilateral integration. For the GATT’s first thirty years, multilateralism meant shallow integration (mainly tariff-cutting). Deep integration (liberalization of tariffs and many behind-theborder measures) was the purview of regionalism.47 This began to change with the 1979 Tokyo Round, although it was not until the Uruguay Round’s Single Undertaking that deep integration became an integral part of multilateralism. In 2008, the WTO is dealing with, or talking about dealing with, a wide range of areas where liberalization requires discipline of behind-the-border measures – trade in services, trade-related intellectual property rights, traderelated investment measures, multilateral investment disciplines more generally, technical barriers to trade, government procurement, competition policy, and trade facilitation. A critical issue now facing policy-makers is whether the deep integration initiatives in RTAs are throwing up impediments to deep multilateral liberalization. From this perspective, the exclusive focus on border measures in the helpor-hinder literature seems somewhat amiss.
47
Until the 1980s, regionalism principally referred to European PTAs that were implemented (EFTA and the EEC) and a handful of developing-nation schemes that were never effectively implemented, the main exception being the ties between Australia and New Zealand. The EEC involved deep integration from its inception, but the trend accelerated with the 1986 Single European Act and its extension to EFTA via the European Economic Area (EEA) negotiations. The ‘Down Under’ pair embraced deep integration with their 1984 Closer Economic Relationship (CER).
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But does it matter that the stumbling/building-bloc theory deals almost exclusively with tariff liberalization? Can one not model deep integration as the removal of barriers that – like tariffs – drive a wedge between internal and external prices? Answering these questions requires detailed knowledge of exactly what sort of deep integration is going on in the RTAs. The chapters in this book provide an excellent starting point. Importantly, the findings suggest that deep integration in RTAs may indeed be creating incompatibilities that will impede deep integration at the multilateral level – at least in some areas. Several of the chapters provide evidence that at least two ‘families’ of RTAs are emerging as far as deep integration schemes are concerned – one based on the NAFTA model and another based on the EU model. For example, the chapter on technical barriers to trade (TBTs) suggests that the EU family is fostering a convergence to the EU’s product standards and regulations, while the NAFTA family is fostering convergence to international norms. Although the EU and international norms are not always in conflict, it is easy to think of situations where this trend in RTAs will hinder rather than help multilateral TBT liberalization.
6.1
Future research topics
One of the astounding contrasts that emerge from the detailed mapping of RTAs is the extent to which developing nations accept disciplines in RTAs that they resist at the WTO level. In areas across the board – intellectual property rights, tariff bindings, TBT liberalization, access commitments in services, investment agreements, government procurement, subsidy disciplines, trade facilitation, and competition policy – the RTAs reviewed in the chapters show that developing nations have accepted things that they refuse even to discuss at the multilateral level. Does this indicate that something is wrong with the WTO’s negotiating procedures? An important topic for future theoretical and empirical research is the identification of the determinants of deep integration in RTAs and the failure of such initiatives at the multilateral level. A second topic of research concerns the deep difference between the political economy of shallow and deep integration. For example, while discrimination is relatively simple when it comes to tariffs, some behind-the-border measures do not lend themselves to preferences. For example, many TBTs and services trade restrictions are justified on ‘good governance’ grounds – protection of consumers, etc. – that do not logically admit preferences. If the restrictions are necessary to protect
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consumers from fraud from one nation, then it seems natural that they should be applied to imports from all partners. Moreover, many behind-the-border measures, especially in services, act to shield incumbents from competition from other domestic firms as well as from foreign firms. In such a situation, any liberalization with respect to foreigners is likely to bring on competition from domestic rivals as well. Such considerations suggest that the trade political-economy models of tariff-liberalization need to be modified when thinking about behindthe-border measures. Theoretical advances in the political economy of various forms of deep integration should be greatly assisted by the mappings contained in the chapters in this volume. The near future should see many empirical studies trying to determine why some RTAs include various deepintegration initiatives while others exclude them. The answers will surely involve some general considerations – for example, rich nations inevitably place greater trust in the legal and governance structures of other rich nations and such trust is necessary for many of the deeper forms of integration. Other answers, however, are likely to be highly specific to particular areas. For example, services trade liberalization that goes beyond GATS may be systematically easier between nations that share similar legal and/or educational environments (as is often the case between former colonizing nations and their former colonies). A third topic – one that would involve a high level of abstraction – would be to think about the design of a WTO negotiating framework that would result in successful deep integration in the same way that the GATT’s framework fostered successful tariff-cutting.
6.2
Concluding remarks
The bulk of this paper presented a survey regarding the analytics of the ‘classic’ debate on regionalism versus multilateralism. The intent of the paper, however, was to suggest that there is a need to move the literature’s focus from the high theory of shallow integration to a more policy-relevant issue, the theory and empirics of deep integration in the regional versus multilateral contexts. There is also a need to advance the profession’s thinking on how the liberalization in RTAs can be made more supportive of multilateral liberalization, i.e. on how one can promote convergence/harmonization of RTAs. The vast datasets that are contained in the other chapters in this volume provide a rich stimulus to future research that goes beyond effect.
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Annex Derivation of the welfare-organizing framework Consider an economy with an infinitely lived representative agent with G sectors. Some sectors consist of differentiated products, and for these sectors we assume that all varieties produced in a single country are symmetric; the total number of varieties available in sector i is denoted as ni, where ni ¼ 1 for homogenous good sectors. The consumer’s intertemporally separable preferences are: R 1 qt V ½p; n; Edt ð13Þ t¼0 e where V[p,n,E] is the instantaneous indirect utility function (i.e. indirect utility function for a moment in time) where p and n are the vectors of consumer prices and the number of varieties in each sector, and E is total consumption expenditure. Expenditure is home income less home savings, S, where income is the sum of home factor income, revenue from tariffs and other import barriers (assumed to be returned lump-sum to consumers) and pure profits, i.e.: E ¼ wL þ rK þ Tm þ — S
ð14Þ
where w and r, and L and K, are the prices and stocks of home’s labour force and capital stocks, m is the vector of sectoral trade (imports enter with a positive sign, exports with a negative sign), T is the vector of the specific-tariff equivalent of home-imposed DCR import barriers so Tm is trade rent term that includes tariff revenue (we ignore export taxes and subsidies), — is pure profit and S is savings. Note that T /p – p*, where p* is the border price. The border price is what the country actually pays for imports and what it actually gets paid for exports. This price need not equal the world price in the case of frictional trade barriers, or quantitative restrictions where foreigners get the trade rents. The stock of labour, L, is assumed to be fixed, but the capital stock, K, is endogenous. Pure profits are related to the vector of local prices, p, the vector of sectoral outputs, Q, and the vector of average costs, a, according to: — ¼ ðp aÞQ;
ai ½w; r; xi
ci ½w; r; xi ; xi
Qi ni xi
ð15Þ
where Qi is a typical element of the sectoral output vector Q, ai is a typical element in the vector of sectoral average costs a, defined as
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the total cost of a typical firm (recall that all domestic firms within a sector are assumed to be identical), ci[w,r,xi], divided by typical firm output, xi; as usual, total cost is a function of w, r and firm output x. Notice that pure profits are decomposed here. That is, — is defined as if all goods in a particular sector were sold at the domestic (i.e. local) price, p. For perfect competition sectors and for sectors marked by Dixit–Stiglitz monopolistic competition, this does not matter since, in both cases, firms charge the same producer price in all markets (perfectly competitive firms never price discriminately across markets, and non-discrimination, i.e. mill pricing, is optimal under Dixit–Stiglitz competition). However, for oligopolistic sectors, producer prices can vary across markets. For such sectors, the profitability of such price discrimination shows up in the (p – p*)m term in the E definition. For example, suppose markets are segmented and there are costs to exporting, so a profit-maximizing oligopolist would typically charge a lower producer price for exports (as in the Brander–Krugman reciprocal dumping model). Then the total profit of the firm would be paqa þ pbqb – a[w,r,qa þ qb](qa þ qb), where the ‘a’ indicates the producer price and quantity for local sales and ‘b’ indicates the producer price and quantity for exports, but in notation of (15), the profit is pa(qa þ qb) – a[w,r,qa þ qb](qa þ qb) þ (pb – pa)qb with the last term showing up in the trade rents term.
Calculations Totally differentiating V and converting utils (which is the unit of measure in dV) into dollars by dividing through by the scalar VE yields (the units of VE are dollars per util): Vp dV Vn Vn ¼ ð Þdp þ dn þ dE ¼ Cdp þ dn þ dE VE VE VE VE
ð16Þ
where Vp and Vn are vectors of partial derivatives. The second expression follows from the first using Roy’s identity. To calculate dE, we totally differentiate the definition of E, (14), and use T ¼ p – p* to get: dE ¼ Ldw þ Kdr þ rdK þ ðp pÞdm þ mdp mdp þ ðp aÞdQ þ Qðdp daÞ dS
ð17Þ
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Where da ¼ {(cwdw þ crdr)/x} þ {cr/x – c/x2}dx, and {@a/@x} ¼ {(@c/@x)/x} – {c/x2}, so: X @c i dw @c i dr @ai Q þ Qi þ Qi dxi Qda ¼ i i @w x @r xi @x i i ð18Þ X @ai ¼ Ldw þ Kdr þ Q dxi i i @x i The second expression follows from the first by Shepard’s lemma (e.g. (@ci/@w) equals the optimal labour demand for a typical firm and in equilibrium, the total demand for all firms in the economy must equal labour supply L). Plugging (6) and (5) into (4) and using –C – m – Q, and defining @a/@x ¼ ax, the expression for home welfare changes simplifies to: dV =VE ¼ ðp pÞdm mdp þðp aÞdQ þ Qðax Þdx þ ðVn =VE Þdn þ rdK dS
ð19Þ
This expression is our organizing framework.
Discussion The first row shows effects that occur even when one ignores scale economies and imperfect competition; these are referred to as NICNIR (no imperfect competition, no increasing returns), or Walrasian effects. As in the public finance literature, welfare effects in a Walrasian world stem from quantity changes times initial price wedges and price changes times net trades. We refer to the first as the trade volume effect and to the second as the trade price effect (in certain special cases, the border price effect is equivalent to the terms-of-trade effects). The second row shows the ICIR (imperfect competition and increasing returns) effects. That is, the effects that appear when we assume the economy is marked by scale economies and imperfect competition. The first effect is the production-rent effect (i.e. if there are pure profits in a sector, increased production in that sector tends to improve national welfare). In a common special case, it corresponds to the profit-shifting effect that is well known in the strategic trade policy literature. The second term is the scale effect (–ax is positive under scale economies) average cost falls as output increases. The third term includes two distinct effects, the well-known variety effect (i.e. an
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increase in the total number of varieties available tends to improve domestic welfare) and a location effect. The location effect concerns implications for whether a particular variety is produced locally or is imported. For example, when trade is costly, domestic welfare is higher when a variety is produced domestically instead of abroad since this allows avoidance of the trade cost. The third row constitutes the accumulation effects, i.e. the welfare implications of induced capital formation and the induced savings that is required. (Recall that, with balanced trade and no trade in factors, savings must equal investment.) Induced capital formation has two counteracting welfare effects. A higher capital stock raises income and thereby expenditure. This is reflected in the first term, and it is the positive aspect of induced capital formation. However, induced capital formation means that consumption must be foregone. This negative influence on the current flow of utility is captured by the second rowthree term. Accumulation effects concern the way in which trade policy can affect a nation’s stock of productive resources. Typically, we focus only on the impact on a nation’s human capital stock, physical capital stock and knowledge capital stock (i.e. level of technology), assuming away Malthusian effects. Since the accumulation of human, physical and knowledge growth is the source of all per capita output growth, many authors refer to accumulation effects as growth effects, or dynamic effects. Interested readers can easily extend this framework to capture additional effects. Considerations, such as adjustment costs that drive a wedge between income and expenditure, enter as did dS. Factors that affect wealth – environmental damage or changes in the value of vintage capital – could be included by the full intertemporal indirect utility functions that include current wealth and/or putting environment variables – such as emissions – in the cost functions. Considerations of income distribution could be incorporated by using an indirect social welfare function that included a Gini coefficient. An X-inefficiency term could be introduced into the cost functions. All sorts of price wedges could be inserted, and external economies could be introduced via the average cost function.
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box 2.7 juggernaut effect maths Using the basic Walrasian model from Box 2.3, we must add two elements: the political-economy model of tariff choice, and free entry. Now the number of firms per nation and per industry can vary. The national supply curves, taking good 1 as an example, are: p ¼ b þ X1H =nH ;
p ¼ X1P =nP ;
p ¼ X1R =nR ;
0
ð20Þ
where the ni’s are the number of symmetric firms in nation-i, and the prices refer to the prices actually faced by the various firms (with tariffs, these will differ). The supply curves for goods 2 and 3 are isomorphic, except Partner has the comparative disadvantage in good 2 and RoW in good 3. Firm-level operating profit is (p – b)2 / 2 for Home firms and (p)2 / 2 for Partner and RoW firms. Assuming entry costs are subject to congestion, the fixed entry cost in ‘f’ time ni for nation-i, where f > 0 is a parameter, the free entry conditions under the MFN regime are: ðp bÞ2 ðp T Þ2 ¼ n2H f ; ¼ n2i f ; i ¼ P; R 2 2 and the free-entry costs under the FTA regime are similar. The equilibrium prices under the MFN and FTA regimes are: pMFN ¼
3a þ T ð2 þ nP þ nR Þ þ bnH ; 3 þ nP þ nR þ nH
pFTA ¼
3a þ T ð1 þ nR Þ þ bnH 3 þ nP þ nR þ nH
ð21Þ
ð22Þ
Plugging (22) into the appropriate free-entry condition, we can solve for the FE curve, i.e. the n’s as a function of the T. The MFN solutions are: bT nMFN ¼ nMFN ¼ nMFN ; ; nMFN H R P R f pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 1 289 þ 400T 800T 2 10T nMFN ¼ þ R 3 3 6
ð23Þ
where the last expression takes numerical values for a, b and f to reduce the clutter (there is an analytic solution but it is too cumbersome to be revealing); specifically, this takes a ¼ 1, b ¼ 1/4 and f ¼ 1/10. For the FTA regime, the n’s as functions of the T’s are: bT T FTA ; nFTA nFTA ¼ nFTA þ ; H ¼ nR P R f f pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 2 3 10T 921 þ 1200T 3200T nFTA ¼ þ R 4 3 12
ð24Þ
Notice that, since nR is lower in the FTA than in the MFN regime (RoW firms face a lower border price under the FTA), the size of the Home import-competing sector is smaller with the FTA.
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box 2.7. (cont.) The political-economy model of tariff choice is based on a politically realistic objective function where consumer surplus, the various producer surpluses (import-competing and exporting sectors’ profit net of fixed costs) and tariff revenue are weighted by coefficients that are exogenously determined by the nation’s political system. To keep things simple, we take the weight to be unity on everything except the import-competing sector’s producer surplus, so the Home government’s objective function is: G ¼ apM þ CS þ TR þ pX where the p’s are producer surplus in the import-competing sector (M) and export sectors (X) respectively, CS is consumer surplus and TR is tariff revenue. The first three terms always depend upon T, while the fourth term is a function of T only under reciprocity. Thus: *
*
*
*
Gunil ¼ apM ½T ; n þ CS½T ; n þ TR½T ; n þ pX ½n *
*
*
*
GMFN ¼ apM ½T ; n þ CS½T ; n þ TR½T ; n þ pX ½T ; n
ð25Þ
Here we impose a very simple version of reciprocity in MTN talks; the foreign tariffs, TP and TR, equal the Home tariff, T. Under the FTA regime, we set the Home– Partner T’s to zero exogenously. The building/stumbling-bloc issues then turn on whether the Home government finds it optimal to choose a higher or lower T – under reciprocity – after the FTA has been implemented. The first-order conditions of these two objective functions are the GFOCunil and GFOCMFN in the diagram; * these show how the politically optimal tariff depends upon the vector of n’s, n. Using the solutions for the n’s from the FE conditions in the GFOC conditions, we can see what T would be chosen under the three scenarios: unilateral tariff setting, MFN tariff setting with reciprocity without an FTA between Home and Partner, and MFN tariff setting with reciprocity but with the FTA. An analytic solution for the T is available, but, since it is the solution to a system of quadratic equations, it is too unwieldy for building understanding. If we use the numerical values for a, b and f as above, and take the political overweight of import-competing profits, a, to be two, we get: Tunil ¼ 0:09;
TMFNðrecipÞ ¼ 0:06;
TFTAðrecipÞ ¼ 0:005
This demonstrates the juggernaut building bloc formally. Intuitively, the FTA downsizes the overweighted import-competing profits, and this in turn makes the Home government find it politically optimal to set a lower tariff in reciprocal trade talks.
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1995. ‘Tariff Revenue Competition in a Free Trade Area’, European Economic Review 39: 1429–37. Richardson, M., and Desruelle, D., 1994. ‘Fortress Europe: Jericho or Chateau d’If?’, mimeo. Rieder, R., 2006. ‘Playing Dominoes in Europe: An Empirical Analysis of the Domino Theory for the EU, 1962–2004’, HEI Working Paper No. 11/2006, Graduate Institute of International Studies, Geneva. Riezman, Raymond, 1985. ‘Customs Unions and the Core’, Journal of International Economics 19: 355–66. 1999. ‘Can Bilateral Trade Agreements Help Induce Free Trade’, Canadian Journal of Economics 32: 751–66. Sapir, A., 1993. ‘Discussion of Chapter 7’, in Jaime de Melo and Arvind Panagariya (eds.), New Dimensions in Regional Integration, Cambridge: Cambridge University Press, pp. 1491–506. 1997. ‘Domino Effects in Western European Trade, 1960–1992’, CEPR Discussion Paper. Published as ‘Domino Effects in Western European Regional Trade, 1960–92’, (2001) European Journal of Political Economy 17: 386. Schattschneider, E. E., 1935. Politics, Pressures and the Tariff, New York: PrenticeHall. Schiff, Maurice, 2001. ‘Will the Real “Natural Trading Partner” Please Stand Up?’, Journal of Economic Integration 16(2): 245. Schott, Jeffrey, 1988. ‘The Free Trade Agreement: A US Assessment’, in J. Schott and M. Smith (eds.), The Canada–US Free Trade Agreement: The Global Impact, Washington DC: Institute for International Economics. Serra, Jaime, et al., 1997. Reflections on Regionalism: Report of the Study Group on International Trade, New York: Carnegie Endowment for International Peace. Shepsle, K. A., and Weingast, B. R., 1981. ‘Political Preferences for the Pork Barrel: A Generalization’, American Journal of Political Science 25: 96–111. Shibata, H., 1967. ‘The Theory of Economic Unions: A Comparative Analysis of Customs Unions, Free Trade Areas, and Tax Unions’, in C. S. Shoup (ed.), Fiscal Harmonization in Common Markets, vol. I, Theory, New York: Columbia University Press, pp. 145–264. Sinclair, P., and Vines, D., 1995. ‘Bigger Trade Blocs Need Not Entail More Protection’, mimeo, University of Birmingham. Smith, M., 1988. ‘The Free Trade Agreement in Context: A Canadian Perspective’, in J. Schott and M. Smith (eds.), The Canada–United States Free Trade Agreement: The Global Impact, Washington DC: Institute for International Economics. Spilembergo, Antonio, and Stein, Ernesto, 1996. ‘The Welfare Implications of Trading Blocs among Countries with Different Endowments’, NBER Working Paper No. 5472.
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Srinivasan, T. N., 1993. ‘Regionalism v. Multilateralism: Analytical Notes’ Comment’, in Jaime de Melo and Arvind Panagariya (eds.), New Dimensions in Regional Integration, Cambridge: Cambridge University Press, pp. 84–9. Summers, L., 1991. ‘Regionalism and the World Trading System’, Federal Reserve Bank of Kansas City Economic Review 76: 295–302. Syropoulos, Constantinos, 1999. ‘Customs Unions and Comparative Advantage’, Oxford Economic Papers 51(2): 239–66. Vanek, Jaroslav, 1965. General Equilibrium of International Discrimination: The Case of Customs Unions, Cambridge, MA: Harvard University Press. Viner, Jacob, 1950. The Customs Union Issue, New York: Carnegie Endowment for International Peace. 1965. ‘Introduction Guide to John Rae’s Life of Adam Smith’, in John Rae, The Life of Adam Smith, New York: Augustus M. Kelley. Vousden, Neil, 1990. The Economics of Trade Protection, Cambridge: Cambridge University Press. Whalley, J., 1993. ‘Regional Trade Arrangements in North America: CUSTA and NAFTA’, in Jaime de Melo and Arvind Panagariya (eds.), New Dimensions in Regional Integration, Cambridge: Cambridge University Press. 1996. ‘Why Do Countries Seek Regional Trade Agreements?’, NBER Working Paper No. 5552. Winham, G. R., 1986. International Trade and the Tokyo Round Negotiation, Princeton, NJ: Princeton University Press. Winters, Alan L., 1991. International Economics, 4th edn, London: Routledge. 1993. ‘The European Community: A Case of Successful Integration’, CEPR Discussion Paper No. 755. 1994. ‘The EC and Protection: The Political Economy’, European Economic Review 38: 596–603. 1995. ‘Who Should Run Eastern European Trade Policy and How?’, in Alan L. Winters (ed.), Foundations of an Open Economy: Trade Laws and Institutions for Eastern Europe, London: CEPR, pp. 19–39. 1996. ‘Regionalism versus Multilateralism’, World Bank Policy Research Working Paper 1687, Washington DC: World Bank. Wonnacott, Paul, 1987. The United States and Canada: The Quest for Free Trade, Washington DC: Institute for International Economics. Wonnacott, Paul, and Wonnacott, Ronald J., 1981. ‘Is Unilateral Tariff Reduction Preferable to a Customs Union? The Curious Case of the Missing Foreign Tariffs’, American Economic Review 71: 704–14. World Trade Organization, 1995. Regionalism and the World Trading System, Geneva: WTO. Yi, S., 1996. ‘Endogenous Formation of Customs Unions under Imperfect Competition: Open Regionalism Is Good’, Journal of International Economics 41: 151–75.
3 Market access provisions in regional trade agreements antoni estevadeordal, matthew shearer and kati suominen* Regional trade agreements (RTAs) have proliferated over the past decade around the world to cover nearly half of global trade. The number of RTAs notified to the WTO is approaching 200, while the total number of RTAs around the world exceeds 300. The global RTA spree has forged a veritable spaghetti bowl of multiple and often overlapping agreements. The various rules included in each RTA entangle the bowl further. Besides market access of goods, many RTAs today include provisions in such trade disciplines as services, investment, standards, intellectual property, and competition rules, as well as a host of issues not directly related to trade, such as the environment. While RTAs can generate important economic benefits, their spread has also produced a number of concerns. First, the manifold disciplines embedded in RTAs can introduce policy frictions that increase the costs of trading. Each new RTA rule represents a new policy for firms to consider in their export, outsourcing and investment decisions. Each also has legal, administrative and economic implications to the RTA parties. Secondly, differences in rules across RTAs can translate into transaction costs to countries operating on two or more RTA fronts simultaneously. This is a growing consideration today given that nearly all WTO members are party to at least one RTA; in some regions such as
*
The authors are, respectively, Manager, Economist/Statistician, and Trade Economist at the Integration and Trade Sector of the Inter-American Development Bank (IDB). The authors wish to thank Jaime Granados, Jeremy Harris, Jessica Luna, Fazia Pustela and Carolyn Robert of the IDB, and Robert Scollay of the APEC Study Centre of the University of Auckland for their extensive inputs and excellent comments. Maria Jose Casanovas, Santiago Florez-Gomez and Carlos M. Gutierrez Jr provided outstanding research assistance. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the IDB, the WTO, or their Member countries.
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Latin America, the average number of RTA memberships per country rises to more than half a dozen. And, thirdly, at the systemic level, the burgeoning universe of RTAs is feared to set back the implementation of the multilateral trade rules of the General Agreement on Tariffs and Trade (GATT) and the WTO Agreements, and undercut states’ incentives for multilateral trade liberalization. The concerns about RTAs have focused policy attention on GATT Article XXIV, which sets out the conditions under which the main types of RTAs – free trade agreements (FTAs) and customs unions (CUs) – are viewed as consistent with the multilateral trade rules. The Article is, however, ambiguous, and thus a source of extensive debate and a host of interpretations. Some of the most disputed issues centre on the Article’s stipulation that RTAs are to eliminate tariffs on ‘substantially all trade’ between the parties, and to do so within a ‘reasonable length of time’. Another key line of debate involves the meaning of the Article’s requirement that, besides tariffs, RTAs eliminate ‘other restrictive regulations of commerce’ on ‘substantially all trade’. Further discussions have focused on the extent to which RTAs are ‘WTOþ’, or cover a broader range of disciplines than the multilateral agreements, and, as such, regulate the behaviour of their members more – and potentially also involve deeper liberalization – than multilateral rules do. Alongside these debates has developed an important body of academic literature aimed at establishing whether RTA formation is ultimately trade-creating and conducive to multilateral trade liberalization; however, even on this front, a clear consensus has yet to emerge. Notwithstanding the forceful emergence of RTAs and the contentious debates on them, there are few rigorous efforts to disaggregate RTAs in order to analyze the operation and effects of their component provisions. This implies that assessments of RTAs’ economic outcomes have yet to disentangle the various RTA rules’ respective causal effects from each other, let alone from the effects of variables beyond RTAs – which, in turn, limits the usefulness of the arguments of both those who view RTAs as discriminatory instruments that work to obstruct global trade liberalization, and those who regard RTAs as compatible with multilateral trade rules and conducive to global free trade. Yet, an improved understanding of the regional-multilateral nexus is crucial in the face of the growing importance of RTAs in the global trading system. Particularly timely are efforts (1) to establish appropriate methods for assessing and measuring the compatibility of the RTA rules with the
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multilateral trade rules; (2) to evaluate the legal and economic implications of the system of RTAs on the multilateral trade regime; and (3) to explore the utility and feasibility of harmonizing the RTA rules towards a common standard. The purpose of this chapter is to start shedding light on the extent of compatibilities among RTAs as well as between RTAs and the multilateral trade rules in the area of market access. We strive to accomplish this by presenting a detailed mapping of six market-access provisions – tariffs, non-tariff measures (NTMs), so-called other measures, special regimes, rules of origin (RoO), and customs procedures – in fifty RTAs around the world. The focus here is on both the main texts of RTAs, and RTA annexes containing the member states’ tariff liberalization programmes. While the findings are preliminary, the chapter discusses their potential broader implications for market access issues in the multilateral trade regime, including their usefulness for sharpening the contested GATT terminology related to RTAs. The first section elaborates on some of the main debates surrounding the meaning of Article XXIV, and discusses the potential contribution of this paper in light of the existing literature on market access in RTAs. The second section presents the mappings. Section three focuses on the potential implications of the findings, while section four charts avenues for future research. Section five concludes.
1
Market access in RTAs: key debates and analytical approaches 1.1
Main debates surrounding RTAs
Preferential market access is the most fundamental characteristic of any RTA. The margin of preference that an RTA creates depends on the RTA’s market-access provisions – on whether the barriers to trade between the RTA parties are fully removed or only partly removed, and in the latter case also on the extent to which they are removed. The preferential margin also depends on the level of the most-favourednation (MFN) barriers of the RTA parties, as well as on whether the MFN barriers are increased, lowered or left unchanged when the RTA is formed. As such, the measurement of the extent of market access granted by an RTA – and any assessment of the RTA’s economic effects – has more than one dimension. While product coverage is important, the pace and extent of tariff reductions also matter, as do the parties’ trade policies towards third countries. Furthermore, the relevance of an RTA
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to its members depends on whether the products of greatest export interest to them are covered by the RTA. These issues permeate the legal debates on RTAs. From a legal perspective, the key questions surrounding Article XXIV are three-fold: (1) the extent of product coverage by an RTA; (2) the length of the transition period to the RTA; and (3) RTA instruments that are deemed key arbitrators of market access. The first two issues are subject to the GATT Article XXIV stipulation that the elimination of tariffs on ‘substantially all trade’ (SAT) between the parties must occur within a ‘reasonable length of time’. Importantly, the 1979 Enabling Clause imposes less stringent requirements on RTAs involving only developing countries; while such RTAs are expected to carry out some lowering of barriers between the parties, they can stop short of complete tariff elimination. The third key question on RTAs pertains to the Article XXIV provision that, besides tariffs, RTAs eliminate ‘other restrictive regulations of commerce’ on ‘substantially all trade’. There is no clear consensus as to which of the various trade policy instruments should be regarded as ‘other restrictive regulations of commerce’. The following three parts elaborate on the various interpretations of these key GATT terms.
1.1.1 Substantially all trade GATT Article XXIV stipulates that the elimination of tariffs on ‘substantially all trade’ between the parties must occur within a ‘reasonable length of time’. Efforts to define ‘substantially all trade’ have followed two main approaches: A quantitative approach that would use a statistical benchmark, such
as a percentage of trade between the parties. The commonly suggested percentages are 90, 85 and 80 per cent. A main objection to this approach is that it would not preclude the exclusion of entire sectors from liberalization. A qualitative approach, whereby no sector (or at least no major sector) would be kept from liberalization. One difficulty of this approach is defining ‘sector’; a further question is whether the inclusion of a minor segment of a major sector would satisfy the definition. Four further approaches have been suggested as possible ways to resolve the above ambiguities: A definition of product coverage ‘in terms of a certain percentage of
tariff lines’. For instance, Australia has suggested using a threshold
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of 95 per cent of all Harmonised System (HS) tariff lines at the six-digit level. A definition based on the calculation of the percentage of trade between the RTA parties that is carried out under the preferential rules of origin applying to the RTA. A definition stating that all sectors should be included. A definition along the lines suggested by footnote 1 of GATS Article V, which precludes an a priori exclusion of any sector from an agreement. The economic rationale for the SAT requirement is not altogether clear. Laird (1999) notes that exclusion of products in which at least one of the parties is internationally competitive will indeed reduce the scope for trade creation and limit the potential welfare gains from the agreement. Meanwhile, exclusion of products in which both parties are internationally uncompetitive will lower the potential for trade diversion, and could therefore be welfare enhancing. However, it is not difficult to conceive of situations where inclusion of sensitive products could be trade diverting, even if one party is an internationally competitive producer. If the protected market is shared between several internationally competitive suppliers, the supplier that secures preferential access through an RTA may be able to displace the other competitive suppliers from the market. If the preferred partner is unable to supply the entire market, the price in the importing partner market may not fall; Panagariya (1999) points out that the result may be some trade diversion, combined with a welfare loss for the importing partner that is not offset by the gain to the exporting partner.
1.1.2 Reasonable length of time Article XXIV, paragraph 5(c), requires that ‘any interim agreement’ leading to the formation of an FTA or a CU ‘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’.1 While ‘reasonable length of time’ is generally accepted to apply only after the arrangement has been fully implemented, there are various ambiguities, such as what exactly constitutes a ‘reasonable length of time’, and whether the elimination of barriers scheduled for beyond such time should be counted towards the fulfilment of the SAT requirement. The 1
Interestingly, even though most FTAs and CUs have been, at least in part, implemented by stages, very few have expressly been notified as ‘interim agreements’ to the WTO. See WTO (2002c).
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multilateral 1994 Understanding on the Interpretation of Article XXIV states that the length of time in question should exceed ten years only in ‘exceptional cases’. However, there is no guidance as to what constitutes an ‘exceptional case’.
1.1.3 Other restrictive regulations of commerce Article XXIV requires that, besides tariffs, RTAs eliminate ‘other restrictive regulations of commerce’ on ‘substantially all trade’. RTAs carry several disciplines that can impose qualifications to the extent of market access provided by tariff liberalization, such as tariff rate quotas (TRQs), special safeguards (SSGs), NTMs and RoO. However, whether these or any other RTA instruments should be subject to the ‘other restrictive regulations of commerce’ phrase is unclear. TRQs can limit the extent of market access by restricting the traded quantities of goods that are provided preferential access. While they can be interpreted as a means to smooth the importing partner’s adjustment to the effects of liberalization, such a cushioning role could be considered relatively more important in cases where TRQs are applied only during the transition period. It is in cases where TRQs continue being applied beyond the end of the transition that they can be viewed as geared to limiting market access – and thus potentially subject to the phrase ‘other restrictive regulations of commerce’. SSG provisions allow RTA members to impose additional duties (usually with the existing MFN rate at the time as a ceiling) in the event that their market is disrupted by imports from the partner. In some cases, SSGs can be invoked automatically on the basis of a price or volume trigger. Bilateral emergency actions (BEAs) generally require some formal investigation prior to their imposition. Such requirements apply sometimes also to SSGs. Preferential rules of origin, a market access instrument that has yet to be subjected to any meaningful multilateral rules,2 have long been viewed as a protectionist instrument and a particularly appropriate subject to the ‘other restrictive regulation of commerce’ phrase. Recent 2
The only multilateral effort to deal with preferential RoO is the Common Declaration with Regard to Preferential Rules of Origin annexed to the Uruguay Round’s Agreement on Rules of Origin. The declaration provides disciplines for preferential rules of origin; in particular, Article 3(c) requires that laws and regulations relating to them be published ‘as if they were subject to, and in accordance with, the provisions of Article X of GATT 1994’ that regulates the publication and administration of trade regulations. However, the declaration has yet to be acted upon.
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debates have paid attention also to the role of customs procedures in determining the actual market access in RTAs; indeed, much like in the case of RoO, the potential uses of customs procedures as non-tariff instruments have gained growing attention at the multilateral level.3
1.2
State of the literature on market access in RTAs
Despite the lively debate on the meaning of Article XXIV, there are as yet only a handful of detailed surveys of RTAs’ market-access provisions and the extent to which they comply with the various interpretations of the Article. The World Trade Organization (2002a) carries out an extensive inventory of the coverage and liberalization of tariff concessions in 47 RTAs of a total of 107 parties. The data cover tariff treatment of imports into parties to selected RTAs, tariff line treatment as obtained from individual countries’ tariff schedules, and tariff dispersion for a number of countries. Scollay (2005) performs a similarly rigorous analysis of tariff concessions in a sample of eighteen RTAs. The IADB (2002) presents an exhaustive survey of market access commitments of RTAs in the Americas, while the World Bank (2005) carries out a more general mapping of the various disciplines in RTAs around the world. Besides tariff concessions, there are surveys on RoO. WTO (2002b) breaks ground, mapping the general rules of origin in ninety-one RTAs around the world. Estevadeordal and Suominen (2006) and Suominen (2004) cover a larger set of RTAs, and include both general and productspecific RoO in their analyses. Most empirical analyses have tended to abstract from the contractual details of RTAs, employing a simple dummy variable to represent RTAs and generally assuming that RTAs liberalize all trade immediately for all partners. While RTAs are in general found to boost trade among the partners, academic literature remains divided on whether RTAs are ultimately trade-creating or trade-diverting – and whether RTAs are a stepping stone or a stumbling bloc to global free trade.4 Among some 3
4
The WTO has raised RoO to a systemic issue in the Doha Development Round, while the World Customs Organization recently highlighted customs procedures as having ‘significant influence on the economic competitiveness of nations and the growth of international trade and the development of the global marketplace’. See World Customs Organization, www.wcoomd.org. For early works on the welfare effects of RTAs and customs unions, in particular, see Viner (1950), Meade (1955a), Lipsey (1960), Johnson (1965), Mundell (1964), Corden (1972), and Kemp and Wan (1976). Richardson (1994) and Panagariya and Findlay
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examples, Kemp and Wan (1976), Deardorff and Stern (1992), Baldwin (1993), Wei and Frankel (1995), Bergsten (1996), Frankel, Stein, and Weil (1997), Ethier (1998) and, on the political science side, Oye (1992) and Kahler (1995), provide grounds for believing that RTAs can be ever-expanding and propel strategic interactions conducive to global free trade. In contrast, Bhagwati (1993) argues that reduced protection between RTA members will be accompanied by increased protection vis-a`-vis outsiders, with RTAs ultimately undermining multilateral liberalization.5 However, the conclusiveness of these analyses remains hampered by the crude operationalization of RTAs. Some recent empirical studies do draw finer distinctions between RTAs. Li (2000) and Adams et al. (2003) introduce a measure on the ‘depth’ of RTAs in a gravity model. Lima˜o (2006), examining tariff concessions, finds that the United States and the EU have limited their multilateral tariff liberalization in goods traded with the RTA partners. However, Estevadeordal and Robertson (2004) and Estevadeordal, Freund and Ornelas (2005), operationalizing tariff liberalization in a number of Western Hemisphere RTAs, find that RTAs in the Americas have not only been liberalizing and conducive to trade in the region, but also helped further multilateral liberalization. Estevadeordal and Suominen (2005b) and Suominen (2004) operationalize the restrictiveness of rules of origin in some 100 RTAs, finding that, while RTAs foster trade, restrictive product-specific RoO dampen it.6 This paper aims to make four contributions to the nascent pool of mappings of RTA provisions, and, as such, help advance the empirical literature on the effects on RTAs. First, we pioneer in integrating six major market access disciplines into one single study. Secondly, unlike most existing mappings, we focus both on the main RTA texts, and on
5
6
(1996) extend the political economy analysis of RTA formation to looking at welfare implications of endogenously determined RTAs. For further works on the effects of RTAs, see Haveman (1992), Bagwell and Staiger (1993), Bond and Syropoulos (1995), Krueger (1997), Krishna (1998), Lawrence (1996), Bond, Syropoulos and Winters (2001), Melitz (2001), Coe et al. (2002), Frankel and Rose (2002), Rose (2002) and World Bank (2005). However, RoO likely also defy the traditional welfare analysis based on the unidimensional friction, the tariff, because any given RoO regime entails a layer of frictions – restrictiveness, complexity and various regime-wide components – that can work in different directions. This renders efforts to capture the welfare effects of RoO a hefty challenge at best. Furthermore, the global trade effects of the differences across RoO regimes have thus far escaped both theoretical and empirical scrutiny, as have the verification costs of RoO.
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the sectoral tariff concessions in RTA annexes and protocols. Thirdly, this paper presents three alternative measurements to examine RTA tariff schedules’ compliance with SAT and ‘reasonable length of time’. And, fourthly, this paper goes beyond the geographical coverage of many existing analyses by incorporating RTAs formed throughout the world. We also include a number of very recently concluded RTAs.
2
Descriptive mapping
This section consists of a descriptive mapping of six market access disciplines – tariffs, NTMs, other measures, special regimes, rules of origin, and customs procedures – in fifty RTAs. The mapping seeks to capture two dimensions of RTAs: coverage (or ‘comprehensiveness’) and liberalization (or ‘depth’). We seek to measure the two dimensions through two distinct approaches. The first approach involves mapping out the obligations included in the annexes and protocols of the RTAs’ market access chapters, and centres primarily on different measurements of RTA parties’ tariff liberalization schedules. The second approach focuses on the provisions spelled out in the main texts of RTAs. While the first set of indicators is both country- and product-specific and largely based on quantitative information, the second set draws on inherently regime-specific and largely qualitative information. The data in the first set of indicators are based on thirty-eight RTAs, and in the second set on a sample of fifty RTAs (see Table 3.1).
2.1 RTA coverage and liberalization: an assessment at the tariff-line level This section examines the coverage and liberalization at the tariff-line level in the thirty-eight RTAs outlined in Table 3.1. The first part consists of a survey of the overall approach of the tariff liberalization regimes – divided here into basket, sectoral and preferential tariff approaches.7 While most RTAs fall into one single category, some 7
Various prior studies characterize tariff elimination as carried out on the basis of a positive or a negative list, or as based on a certain formula. This study strives to abstract from these characteristics and classify liberalization programmes by their categorization of goods into distinct paths of liberalization. To be sure, some of the categories are more aligned with a positive-list approach, while others lend themselves to a negative-list approach.
Table 3.1 RTAs covered in the study Agreement
Year of entry into effect
Chile–China Panama–Singapore Australia–Thailand CAFTA
1/10/06 24/7/06 1/1/05 17/12/04 (SV), 03/3/05 (HO), 10/3/05 (GU), 11/10/05 (NI), 27/7/05 (US)a 5/7/97 1/11/02 1/4/04 1/8/99 1/1/04 1/1/00 1/1/95 1/3/00 1/7/01 30/11/02 1/4/05 1/1/01 28/7/03 1/1/05
Canada–Chile Canada–Costa Rica Chile–Korea Chile–Mexico China–Hong Kong, China EU–South Africa EU–Lithuania EU–Morocco EFTA–Mexico Japan–Singapore Mexico–Japan New Zealand–Singapore Singapore–Australia United States–Australia
Tariff line schedules
Trade-weighted chapters
Import-linked tariff lines
Aggregate provisions
Table 3.1 (cont.)
Agreement
Year of entry into effect
United States–Chile United States–Jordan United States–Morocco United States–Singapore Chile-central America Chile–New Zealand–Singapore– Brunei EU–Chile Mexico–Bolivia Mexico–Costa Rica Mexico–Nicaragua Mexico–Northern Triangle
1/1/04 17/12/01 1/1/06 1/1/04 15/2/02 (CR), 3/6/02 (SV) 8/11/06 (CHL); 6/06 (NZL, SGP, BRN) 1/2/03 1/1/95 1/1/05 1/7/98 15/3/01 (SV, GU), 1/6/01 (HO), 14/3/01 (MEX) 15/7/04 1/4/94 N/A 1998 (original) N/A 1/10/96 28/2/97 27/6//05
Mexico–Uruguay NAFTA United States–Peru Chile–Peru United States–Colombia MERCOSUR–Chile MERCOSUR–Bolivia ACE 58
Tariff line schedules
Trade-weighted chapters
Import-linked tariff lines
Aggregate provisions
ACE 59 Australia–New Zealand Canada–Israel Central America–Dominican Republic COMESA EU–Mexico EU–Romania EFTA–Singapore Mexico–Colombia–Venezuela Mexico–Israel New Zealand–Thailand United States–Bahrain United States–Israel Total agreements a
Refers to ratification dates.
27/6/05 27/3/83 1/1/97 7/3/02 (CR), 4/10/01 (SV), 3/10/01 (GU), 19/12/01 (HO) 8/12/94 1/7/01 1/2/95 1/1/03 1/1/95 1/7/00 1/7/05 13/12/05a 15/8/85
38
27
23
50
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employ a combination of two of the approaches. Other agreements, such as some of the more recent RTAs in the Asia–Pacific region liberalize trade immediately on all products. The second part analyzes tariff-line data emerging from the RTA parties’ tariff liberalization schedules. The third part examines alternative measurements – share of trade-weighted tariff lines that are liberalized and share of trade that is liberalized from the RTA partner in a given year – in sub-samples of twenty-seven and twenty-three RTAs, respectively.
2.1.1 Empirical survey: tariff liberalization regime models 2.1.1.1 Basket approach In a basket approach, the tariff elimination programme assigns all products into a set of distinct categories. The categories provide a timeframe and trajectory towards complete elimination of tariffs (as opposed to providing only an end-point preferential tariff, such as a reduction of tariffs from 35 per cent to 10 per cent). The baskets include TRQs, typically with a reference to an appendix with the quantities, as well as exceptions to preferential treatment (that are typically entered into a basket of continued MFN treatment).8 The United States tends to follow the basket approach, generally subjecting nearly the entire tariff universe to eventual complete tariff elimination. Some of the less visible ‘action’ in the US agreements can be found in the annexes on TRQs, where tariff liberalization generally takes place over longer time horizons and is accompanied by increasing in-quota quantities. Even sugar, a sensitive product from the US perspective, typically receives an increasing in-quota quantity (albeit from a small starting point), such that, even when sugar receives continued MFN treatment, as is the case in the Central American Free Trade Agreement (CAFTA), at a theoretical future point an infinite quantity of sugar will enter the RTA partner free of duty.9 8
9
Thailand–Australia and Thailand–New Zealand FTAs defy categorization, as they do not use any clearly defined baskets, but, rather, implement staging simply by cross-tabbed reduced tariff rates. This lends itself mostly to the basket approach, due to the use of comprehensive schedules. However, there are a large number of case-by-case trajectories, which suggests a preferential tariff approach, as well. It should be noted that the in-quota quantities (and even the existence of in-quota treatment) in these agreements differ greatly within CAFTA. Although the United States has given the same schedule with the same baskets to the other countries, the treatment within these baskets differs greatly between countries. So, although the statistics will reflect identical treatment of all Central American countries, this will not be the case, especially when considering that a number of the products subject to TRQs are those where Central America will have a strong comparative advantage (such as in sugar).
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2.1.1.2 Sector approach The sector approach, typically favoured by the EU, subjects all industrial products to a general tariff elimination schedule. A separate list for exceptions and separate annexes or protocols govern the treatment of agricultural and/or fish and/or processed agricultural products. The protocols tend to be quite complex, featuring different types of regimes, such as end-point preference margins or residual preferential tariffs, TRQs, reference quantities, and a phased reduction of tariffs to a final level (which is often non-zero). The sections referring to the scope of the agreement and definitions of certain product categories are as important to understanding the process of tariff reduction as is the section on the tariff reduction programme. The EU–Chile FTA that entered into effect in 2003 diverges from the EU’s standard practice of dividing tariff elimination into separate venues. Instead, the agreement establishes a single schedule for each party that contains all products. In its category column, the schedule includes various measures that will be maintained, such as TRQs, elimination of only the ad valorem component of a mixed duty (including in cases where the non ad valorem component is linked to an entry price),10 products subjected to a tariff concession of 50 per cent of the basic customs duty, and cases where no liberalization takes place, for instance due to ‘protected denominations’. The agreements negotiated by EFTA follow the EU model in carrying a general tariff elimination programme and separate schedules for fish and agriculture. In these sectors, rather than having a single tariff liberalization schedule, EFTA’s agreements include country-specific schedules.11 2.1.1.3 Preferential tariff approach In addition to the basket and sector approaches, some agreements, such as those forged under the umbrella of the Latin American Integration Association (LAIA), place a greater emphasis on the end-point preferential tariff. The Bangkok Agreement also focuses on the end-point preferences, with additional concessions provided to less developed RTA members. Both the LAIA and Bangkok models take a positive-list approach to the concessions, whereby the schedules contain the products to which the market-access 10
11
These two cases, as in TRQs, are additional examples of where the basket incidence statistics do not adequately present what is occurring within the ‘black box’. In this paper, the data on tariff elimination in the EFTA–Mexico FTA are based on Switzerland’s tariff schedules.
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estevadeordal, shearer, suominen
provisions of the RTA apply (as opposed to the negative-list approach, which catalogues the products to which the market-access provisions do not apply).
2.1.2 Tariff liberalization statistics This part turns to analyzing tariff-line data developed on the basis of the tariff liberalization schedules of seventy-six parties in thirty-eight RTAs.12 There are two main sets of indicators. The first set contains basic statistics that indicate the percentage of the tariff universe subject to tariff reductions, immediate tariff elimination, eventual tariff elimination, exclusions (or products subject to continued MFN treatment), and continued MFN treatment but with increasing TRQ access. The second set of indicators strives to capture the share of each individual RTA party’s tariff lines that are accorded some tariff reductions, and the share of lines that are duty-free by certain benchmark years (generally 1, 5, 10 and 15) since the launching of the RTA.13 Year 1 12
13
The tariff liberalization schedules were obtained from the Foreign Trade Information System at www.sice.oas.org, and some national sources, including websites. Some tariff data were obtained from TRAINS. Dummies are assigned according to when tariff reductions start (whether or not in year 1, 5, 10 or 15), as well as when a product becomes duty-free, and when a product that was not previously duty-free becomes duty-free. The dummies are subsequently multiplied by the number of lines with that treatment, and then divided by the total number of lines to obtain the percentage incidence. The total number of lines does not include previously duty-free lines for the incidence of reductions and non-duty-free lines that are now duty-free, but does include all lines for the total duty-free number. A line that has split treatment (i.e. part has a reduction one year and part does not) is treated as having the most generous reductions, but the least generous duty-free treatment (as a reduction on any part of a line is a reduction, but duty-free should cover a product in its entirety). Note that, in CAFTA, indicators for the Dominican Republic and each of the five Central American countries were calculated individually and then averaged together to create a single, indicative partner to the United States. The percentages for these three basic indicators include lines subject to TRQs, based on when out-of-quota tariff rates are reduced or phased out. For example, where tariff reductions or elimination are made on in-quota tariff rates, the product in question is treated as not receiving tariff reduction. Products subject to entry prices, when relevant, are counted as receiving tariff reduction, but not as having tariffs eliminated. Safeguards are not taken into account here (i.e. as interfering with tariff elimination). Split products or products partially covered by an agreement, as a general rule are accorded a reduction at the first date at which any of the various baskets accord a reduction, but are treated as having tariffs eliminated at the last date at which any of the various baskets accorded elimination. Other side-notes are dealt with on an ad hoc basis. Any TRQ, regardless of whether reductions occur on the in-quota or out-of-quota tariff rate, are counted in the TRQ incidence measure.
market access provisions in rtas
111
refers here to the year of entry into force. We focus on the absolute and relative number of duty-free lines, as well as on the speed at which concessions are made.14 Also calculated is the number of staging categories in an agreement, and some simple statistics indicating the share of tariff lines that carry TRQs. Figure 3.1 provides a view of the share of tariff lines liberalized by the partners in the thirty-eight RTAs. It maps out the shares of national tariff lines that become subject to liberalization in year 1, years 2–5, years 6–10, years 11–20, and more than 20 years into the RTA. The three-letter ISO code of each country giving the concession (i.e. the importing country) precedes the arrow, while the code of the partner country follows the arrow. Agreements formed in the Americas and particularly those signed by the NAFTA members generally liberalize trade relatively fast, with about three-quarters or more of lines freed in the first year of the agreement. The figure reveals the share of tariff lines subject to backloaded liberalization – particularly marked in Morocco and South Africa’s schedules in FTAs with the EU, largely due to the persistent protection in the agricultural protocols. Asia–Pacific RTAs stand out for being particularly frontloaded: they liberalize the bulk of the tariff universe in the first year of the RTA. This is in good part due to Singapore’s according duty-free treatment to all products upon the entry into force of its agreements. Figures 3.2a and 3.2b assess the extent to which tariff elimination is reciprocal among the RTA members by the benchmark years 5 and 10. They are sorted in a descending fashion from the least to the most reciprocal. While the parties’ respective product coverages often diverge markedly in year 5, with some partners (such as Korea) liberalizing up to twice as many lines as their partners (such as Chile), the differences shrink considerably by year 10 with the exception of EU’s agreements with Morocco and South Africa. Figures 3.3a and 3.3b display the relationship between tariff elimination and the incidence of TRQs in the 5- and 10-year benchmarks. Tariff elimination (y-axis) uses a reverse scale, so that values closer to the origin denote greater liberalization. While the diagrams measure the progress of tariff elimination at different points in time, TRQ incidence is here treated as time invariant (so that, if a TRQ is completely phased out by year 9, it will appear in the diagrams for both year 5 and year 10). 14
An argument for the third indicator is that it measures actual concessions, while the second one measures the persistence of residual tariffs.
CHL->MEX MEX->CHL CHL->CA CA->CHL CHL->PER PER->CHL MEX->BOL BOL->MEX MEX->TN TN->MEX MEX->NIC NIC->MEX MEX->CRI CRI->MEX MEX-.URY URY->MEX CAN->CHL CHL->CAN CAN->CRI CRI->CAN MERC->CHL CHL->MERC MERC->BOL BOL->MERC MERC->AND3 AND3->MERC MERC->PER PER->MERC CANUSA->MEX MEX->CANUSA USA->CHL CHL->USA USA->CAFTA CAFTA->USA USA->COL COL->USA USA->PER PER->USA USA->SGP SGP->USA USA->MAR MAR->USA USA->JOR JOR->USA USA->AUS AUS->USA EU->CHL CHL->EU EU->ZAF ZAF->EU EU->LTU LTU->EU EU->MAR MAR->EU EFTA->MEX MEX->EFTA KOR->CHL CHL->KOR JPN->MEX MEX->JPN CHL->CHN CHN->CHL PAN->SGP SGP->PAN CHL->P3 P3->CHL JPN->SGP SGP->JPN AUS->SGP SGP->AUS NZL->SGP SGP->NZL AUS->THA THA->AUS HKG->CHN CHN->HKG
National Tariff Lines (%) 100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Agreement / Concession
Year 1 (EIF)
Figure 3.1 Years 2–5 – Years 11–20 >20 Years or Never
Percentage of tariff lines duty free, by selected benchmark years
market access provisions in rtas
113
120 Party 1 Party 2 100
% of lines duty-free
80
60
40
20
0 Descending Percentage Point Difference Between Parties (Ordinal Scale)
Figure 3.2a
Reciprocity of concessions: Year 5
120 Party 1 Party 2 100
% of lines duty-free
80
60
40
20
0 Descending Percentage Point Difference Between Parties (Ordinal Scale)
Figure 3.2b
Reciprocity of concessions: Year 10
To be sure, many RTAs do not have TRQs; in such cases, the points are concentrated along the y-axis. Some agreements entail very rapid tariff elimination, with a handful of sensitive products being subject to TRQs. These appear lower on the y-axis, yet feature a significant TRQ incidence.
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estevadeordal, shearer, suominen 0
% of Tariff Lines Duty-Free in 5 Years
10 20 30 40 50 60 70 80 90 100 0
0.5
Figure 3.3a
1
1.5 2 TRQ Incidence
2.5
3
3.5
3
3.5
Duty-free lines in 5 years v. TRQ incidence
0
% of Tariff Lines Duty-Free in 10 Years
10 20 30 40 50 60 70 80 90 100 0
0.5
Figure 3.3b
1
1.5
2 TRQ Incidence
2.5
Duty-free lines in 10 years v. TRQ incidence
Note that TRQs in RTAs are usually additional to TRQ entitlements under the WTO Agreement on Agriculture, so that the RTA parties’ existing entitlements are not affected. Nevertheless, in quota-controlled markets where the Agreement on Agriculture allocates quotas to several supplying countries, the expansion of the quota of one supplying RTA
market access provisions in rtas
115
0
% of Tariff Lines Duty-Free in 5 Years
10 20 30 40 50 60 70 80 90 100 0
2
4
6
8
10
12
14
TRQ Incidence
Figure 3.4a
Agricultural duty-free lines in 5 years v. TRQ incidence
0
% of Tariff Lines Duty-Free in 10 Years
10 20 30 40 50 60 70 80 90 100 0
Figure 3.4b
2
4
6 8 TRQ Incidence
10
12
14
Agricultural duty-free lines in 10 years v. TRQ incidence
partner will put downward pressure on prices, causing some erosion in the quota rents available to all quota-holders, while only the RTA partner is compensated by increased market access. Given the possible negative impact on other quota-holders, it is not clear that TRQs in RTAs are consistent with the WTO rules on quotas. It is also unclear
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estevadeordal, shearer, suominen
whether Article XXIV provides a dispensation from those rules – or from GATT Article I.15 The aggregate tariff reduction statistics return a narrow range of averages for all of the agreements, but disguise what could be expected to be important variation in the speed of liberalization across product categories.16 Figures 3.4a and 3.4b take the first cut at the sectoral data, examining the relationship between tariff elimination and the incidence of TRQs for agricultural products. The diagrams indicate a stronger positive relationship between the two indicators than that emerging from the aggregate analysis. As such, they are suggestive of the sensitivity of agricultural products for many RTA partners. Box 3.1 and Tables 3.2 and 3.3 detail the operation of TRQs in CAFTA.
box 3.1 tariff rate quotas in cafta The United States presented a single schedule of tariff concessions to the Central American countries and the Dominican Republic in CAFTA. However, there are some differences in the actual concessions to each Latin American party. The differences in treatment arise from the granting of immediate elimination of duties for finite quantities of some goods by means of a tariff rate quota. While some of the parties receive duty-free access under a quota, others do not, and, while the products subject to quotas are similar across the parties, the quantities vary widely among them (see Table 3.2).17 The differences can have substantial implications, as the products in question are among the most sensitive, and as the tariff reduction takes a long time and may be subject to grace periods before actual reductions begin. 15
16
17
GATT Article I establishes disciplines on general most favoured-nation treatment and for preferential margins in arrangements that are mentioned in the Article. The Appellate Body in the Turkey – Restrictions on Imports of Textile and Clothing Products dispute found that a dispensation could be available in cases where it could be shown that the proposed measure is essential to the formation of the PTA, but did not set the criteria by which this condition could be fulfilled in practice. Viewing the percentages of lines that are duty-free by a certain benchmark year (e.g. year 10) by two-digit HS chapters may be ideal given that the level of disaggregation is detailed enough to provide distinct product categories. A four-digit approach may be useful as well, but can be excessively complex and disguise the more general trends. The best method could be to identify some two-digit chapters that have the least comprehensive tariff elimination, and then use these as priors to conduct four- or six-digit analysis within these chapters. These tables are summary versions of those used in the Comparative Guide to the Chile– United States Free Trade Agreement and the Dominican Republic-central America– United States Free Trade Agreement, a joint project of the Tripartite Committee (IDB, OAS and ECLAC). The categories in the US table are in order of appearance in the US General Notes, while those for the Central America/Dominican Republic table are an alphabetized common set.
market access provisions in rtas
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box 3.1. (cont.) Each of the Central American parties and the Dominican Republic have their individual schedules on products entering from the United States. The concessions are rather similar for the various product categories among these countries. Table 3.3 displays the TRQs by the Central American countries and the Dominican Republic on the United States.18 Indeed, while there are some differences in the tariff elimination treatment within Central America for individual products and for the in-quota quantities, the products on which the Central American parties open TRQs tend to be very similar. The Dominican Republic has a slightly different list of products than the Central American parties do; however, the differences can in part be explained by the aggregation of the TRQ in terms of product coverage.
Figures 3.5a to 3.5c display in light gray the year-to-year evolution of liberalization by the seventy-six RTA parties over a period of twenty years.19 The analysis is most relevant for RTAs that take the basket approach, and, in particular, for RTAs with a wide range of baskets. The percentage of duty-free national tariff lines in the overall total is calculated for each schedule. The bold line shows the average evolution of the various schedules. The diagrams also explore the parties’ attainment of the hypothetical interpretation of Article XXIV by placing the bar for SAT at product coverage of 90 per cent (vertical axis), while using year 10 (horizontal axis) as the benchmark time period for ‘reasonable length of time’.20 Figure 3.5a shows that, while some countries employ a ‘stair-step’ approach (stemming from the use of various gradual baskets) to tariff liberalization, others have constant percentage coverage of tariff lines in what could be characterized as a ‘now-or-never’ approach. Still others start from a low coverage, proceeding through one or two jumps to a near-100 per cent coverage. The overall average lies slightly above 90 per cent in year 10. However, there is wide variation across the parties, with a number of outliers lagging well behind the benchmark. 18
19
20
TRQs between the Dominican Republic and Costa Rica and Nicaragua are also part of the Agreement, but are not shown in these tables. The entry-into-force dates differ between agreements, thus the actual years of a given benchmark (e.g. agreement year 10) differ as well. Product coverage in terms of a benchmark based on trade, as opposed to tariff lines, may be more indicative of tariff liberalization, but is beyond the scope of the current analysis, due to the challenges of linking trade with tariff data at the product level. However, trade in a given product is also endogenous to the level of tariff protection on that product, although there may also be a tendency for tariff lines to be more highly concentrated in some sectors as opposed to others; this concentration may differ across countries based on their varying criteria for creating tariff openings.
Table 3.2 Products subject to tariff rate quotas in CAFTA: US tariff quotas on products entering from Central America and the Dominican Republic
Product category Beef Sugarc Sugar (organic)d Peanuts
Peanut butter Cheese Milk powder Butter Other dairy products Ice cream Fluid fresh milk and cream, and sour cream Ethyl alcohol (Central America originating) Ethyl alcohol (non-Central America originating) a
Out-of-quota tariff elimination treatmenta
Initial quantityb
15 year Continued MFN Continued MFN 15 year, nonlinear, 6 year grace period 15 year 20 year, 10 year grace period 20 year, 10 year grace period 20 year, 10 year grace period 20 year, 10 year grace period 20 year, 10 year grace period 20 year, 10 year grace period
10,536 11,000 2,000b *
1,320 10,000 * *
105 24,000 * 500
* 32,000 * *
525 8,000 * *
10,500 22,000 * 10,000
* 300
* 413
* 450
* 500
* 350
280 625 (250e)
Metric tonnes Metric tonnes
50
*
*
*
*
*
Metric tonnes
50
*
60
*
100
*
Metric tonnes
150
110 (220f)
120
250
*
100
Metric tonnes
97,087
160,194
77,670
194,174
48,544
266,989
Litres
407,461
*
366,715
305,596
560,259
254,663
Litres
Unlimited
Unlimited
Unlimited
Unlimited
Unlimited
Unlimited
Gallons
31,000,000b
*
6,604,322g
*
*
*
Gallons
Immediate
Most-FavouredNation
CRI
DOM
SLV
GTM
NIC
HND
Unit Metric Metric Metric Metric
tonnes tonnes tonnes tonnes
In-quota imports shall be free of duty as of entry into force of the Agreement. With the exceptions of imports of ‘Sugar (organic)’ and ‘Ethyl alcohol (non-Central America originating)’ from Costa Rica, which remain fixed, access quantities will be subject to growth over time. c TRQ access based on trade surplus condition. d A fixed 2,000 metric tonne TRQ was allocated by the US to Costa Rica for organic sugar under the US specialty sugar TRQ, and applies to tariff lines AG17011110, AG17011210, AG17019110, AG17019910, AG17029010 and AG21069044. e In the case of Nicaragua, an additional initial quantity of 250 metric tonnes applies to five tariff lines of the 52 total tariff lines making up the entire cheese TRQ. f In the case of the Dominican Republic, an additional initial quantity of 220 metric tonnes applies to four tariff lines of the 46 total tariff lines making up the entire ‘Other dairy products’ TRQ. g Or 10 per cent of the base quantity of dehydrated alcohol and mixtures established under Section 423, whichever is the lesser. * No TRQ. Source: Adapted from: Tripartite Committee, Comparative Guide to the Chile–United States Free Trade Agreement and the Dominican Republic–Central America–United States Free Trade Agreement, based on TRQ Annexes to CAFTA Agreement. b
Table 3.3 Products subject to tariff-rate quotas in CAFTA: Central American and Dominican Republic tariff quotas on products entering from the United States Out-of-quota tariff elimination treatmenta
Initial quantity in metric tonnesb
Product category
CRI
DOM
SLV
GTM
HND
NIC
CRI
DOM SLV
GTM
HND
NIC
Bacon Beans Beef
* * *
10 year 15 year *
* * 15 year, NL, specialc * * 20 year, 10yr GP 20 year, 10yr GP 20 year, 10yr GP * *
* * 10 year
* * *
* * *
* * *
220 * 8,560 * * 105
* * 1,060
* * *
* * *
* * 20 year, 10yr GP *
* * 20 year, 10yr GP *
* * 20 year, 10yr GP *
* * 150
1,100 * 220 * 220 100
* * 100
* * 100
* * 150
*
*
10
*
*
*
20 year, 10yr GP * *
20 year, 10yr GP * *
20 year, 10yr GP * *
410
*
410
450
410
575
* *
138 138
* *
* *
* *
* *
* *
* *
* *
* *
* *
138 440
* *
* *
* *
* *
Beef, prime and choice * Beef, trimmings * Butter 20 year, 10yr GP Buttermilk, curdled * cream and yoghurt Cheese 20 year, 10yr GP Cheese, cheddar * Cheese, mozzarella *
Cheeses, other Chicken meat, mechanically deboned
* *
15 year 15 year 10 year * * 15 year 20 year, NL, 10yr GP 10 year 10 year
Chicken leg quarters
Corn, white
17 year, NL, 10yr GP *
20 year, NL, 10yr GP *
Corn, yellow
*
*
Fresh onions
Con’t MFN Con’t MFN 5 year * 20 year, 10yr GP *
Fresh potatoes Frozen french fries Glucose Ice cream Liquid dairy Liquid milk Milk powder Other dairy products Pig fat Pork
* 20 year, 10yr GP 20 year, 10yr GP * 15 year, 6yr GP
18 year, NL, 10yr GP Con’t MFN 15 year, NL, 6yr GP *
330
550
0
21,810b
0
0
*
*
35,700
20,400
23,460
5,100
*
*
367,500
525,000
190,509
68,250
*
18 year, NL, 10yr GP Con’t MFN 15 year, NL, 6yr GP *
300
*
*
*
*
*
*
*
*
*
300
*
*
*
*
*
* * 20 year, 10yr GP 20 year, 10yr GP * 20 year, 10yr GP 20 year, 10yr GP * 15 year, NL, 6yr GPd
* * 20 year, 10yr GP *
* * 20 year, 10yr GP *
* * 20 year, 10yr GP *
2,631 * 150
* * 1,320 * 165 120
* * 160
* * 100
*
*
*
*
* * 72, 815f *
* 20 year, 10yr GP 10 year
* 20 year, 10yr GP 20 year, 10yr GP * 15 year, NL, 6yr GP
* 20 year, 10yr GP 20 year, 10yr GP * 15 year
* 200
220 * 2,970 300
* 400
* 300
* 650
140
*
120
182
140
50
* 1,100
550 *
* 1,650
* 4,148
* 2,150
* 1,100
18 year, NL, 10yr GP Con’t MFN 10 year
*
18 year, NL, 10yr GP Con’t MFNd 15 year, NL, 6yr GPd *
* * 12 year 12 year * 10 year 20 year, 10yr GP * 12 year *
* 15 year
10
Table 3.3 (cont.) Out-of-quota tariff elimination treatmenta
Initial quantity in metric tonnesb
Product category
CRI
DOM
SLV
GTM
HND
NIC
CRI
DOM SLV
GTM
HND
NIC
Pork cuts
*
*
*
*
*
*
3,465 *
*
*
*
Rice, brown
*
*
*
*
*
*
2,140 *
*
*
*
Rice, milled
20 year, NL, 10yr GP 20 year, NL, 10yr GPd * * *
15 year, NL, 6yr GP 20 year, NL, 10yr GP 20 year, NL, 10yr GP *
18 year, NL, 10yr GP 18 year, NL, 10yr GPd,e 15 year * *
18 year, NL, 10yr GP 18 year, NL, 10yr GPd * * *
18 year, NL, 10yr GP 18 year, NL, 10yr GPd * * *
18 year, NL, 10yr GP 18 year, NL, 10yr GPd * * *
5,250
8,560 5,625
10,500
8,925
13,650
51,000
*
54,600
91,800
92,700
* * *
* 263 3,850 * 110 *
* * *
* * *
* * *
Rice, rough
Sorghum Turkey meat Yogurt
a b
* 12 year 20 year, 10yr GP
62,220
With the exception of ‘Milk powder’ in the Dominican Republic, in-quota imports shall be free of duty as of entry into force of the Agreement. With the exception of imports of ‘Chicken leg quarters’ by Guatemala from the United States, where there are reductions in the duty-free quantity in several years, followed by unlimited access in year 18, access quantities will be subject to growth over time.
c
Duties in this category shall be reduced to 15 per cent in year 1. May be subject to performance requirements. e The aggregate quantity of goods entered into El Salvador from the United States under SAC provision 1006 shall be free of duty in any calendar year specified, ‘and shall not exceed 3,000 MT for “parboiled rough” rice or its equivalent “parboiled milled” rice quantity in any such year. Parboiled milled equivalency shall be calculated according to a 0.7 conversion factor, where 1 MT of parboiled rough rice is equivalent to 0.7 MT of parboiled milled rice’. f Quantities are measured in litres for the Nicaragua ice cream TRQ. * No TRQ. Source: Adapted from: Tripartite Committee, Comparative Guide to the Chile–United States Free Trade Agreement and the Dominican Republic-central America–United States Free Trade Agreement, based on TRQ Annexes to CAFTA Agreement. GP ¼ grace period; NL ¼ non-linear. d
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estevadeordal, shearer, suominen 110 100 90
% of Lines Duty-Free
80 70 60 50 40 30 20 Individual Agreement Average
10 0 1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Agreement Year
Figure 3.5a
Evolution of duty-free treatment in selected RTAs
110 100 90
% of L ines Duty-F ree
80 70 60 50 40 30 North-North Avg.
20
North-South Avg. 10
South-South Avg.
0 1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
A greement Y ear
Figure 3.5b
Evolution of duty-free treatment in selected RTAs by signatory party
market access provisions in rtas
125
110 100 90
% of L ines Duty-F ree
80 70 60 50 40 30 20 Overall Average Agriculture Avg. Industrial Avg.
10 0 1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
A greement Y ear
Figure 3.5c
Evolution of sectoral duty-free treatment in selected RTAs
An interesting result is that, while most concessions are made before year 10, there are much smaller movements in the subsequent years, and almost none after year 15. Overall, the findings echo those of WTO (2002a) and Scollay (2005), which note that RTAs in general do attain the 90 per cent mark within ten years. However, it should also be noted that a small number of agreements contain phase-outs even after year 20 – although the number of products subject to prolonged phase-outs is quite small. Figure 3.5b shows the evolution of duty-free treatment, distinguishing between North–North (solid lines), North–South (broken lines) and South–South (dotted lines) agreements.21 The averages for the three sets of lines are marked in bold. The North–North average is around 95 per cent of tariff lines covered at year 10, while the North–South and South– South averages are slightly above 90 per cent. This is a somewhat intuitive result given the sensitivity of agricultural products and the relative advantages of the developing nations in agriculture, as the overall average for all products in the diagram is pulled upwards due to the larger number of industrial products than agricultural products in the data. The 21
A somewhat arbitrary definition of North versus South is used here. North consists of the EU, EFTA, the United States, Canada, and the Asia-Pacific economies except for China and Thailand.
126
estevadeordal, shearer, suominen 0.5 0.45
StDev of Agreements
0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Average of Agreements
Figure 3.6a
Distribution of liberalization by RTA parties in chapters, Year 5
0.5 0.45
StDev of Agreements
0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
Average of Agreements
Figure 3.6b
Distribution of liberalization by RTA parties in chapters, Year 10
North–North average is also pulled upward by the treatment of Singapore as a Northern country. Moreover, only five of the agreements are classified as North–North, and four of these have Singapore as a party. Figures 3.6a and 3.6b provide further nuance by measuring the average liberalization (x-axis) and dispersion of liberalization (y-axis) across sixty-four RTA partners’ (in a total of thirty-two RTAs) liberalization
market access provisions in rtas
127
schedules in the ninety-seven Harmonised System chapters. The black dots indicate chapters consisting entirely of agricultural products, while squares refer to chapters consisting of industrial products.22 The chapters in the southeast corner are those in which all RTAs analyzed here feature deep liberalization, with negligible dispersion values resulting.23 Chapters in the northwest corner indicate limited liberalization across RTAs and particularly shallow liberalization in some RTAs, with high dispersion resulting. The pattern is clear: agricultural chapters in RTAs feature the least liberalization and also the highest dispersion of liberalization across RTAs, indicating that these chapters are particularly protected in some RTA parties’ schedules. The diagrams also show the relatively slow pace of liberalization: on average, RTA parties liberalize well below 50 per cent of tariff lines in the most sensitive chapters – dairy (chapter 04) and sugars (chapter 17) by the fifth year of the agreement, and less than 55 per cent in several others, including meat, cocoa, prepared cereals and baked goods, tobacco, and footwear (chapters 02, 18, 19, 24 and 64, respectively), while sugar and dairy still remain below 60 per cent at year 10. Encouragingly, however, RTA parties on average liberalize more than 75 per cent of tariff lines in the bulk of chapters by year 5 and more than 90 per cent of tariff lines in most chapters by year 10. The fastest and deepest liberalization takes place in such non-sensitive products as ores (chapter 26), fertilizers (chapter 31), pulp of wood (chapter 47), and some base metals (chapter 81); perhaps one of the reasons is that these are inputs into other products. The results indicate that most ‘action’ in the extent of liberalization occurs in agricultural and textile and apparel products. To be sure, there is significant movement in the textile chapters between the 5- and 10-year benchmarks, while dairy and sugar show little additional liberalization. The differences across parties dissipate by year 10; the persistent variation in agriculture owes largely to the EU’s agreements where liberalization is postponed – at times in perpetuity, as is the case,
22
23
For ease of presentation, in these diagrams chapters 1–24 (excluding chapter 3) are highlighted as agriculture. However, in the analyses of tariff liberalization statistics, agricultural and industrial products are defined at the six-digit HS level. An average liberalization level of one (100 per cent coverage) will necessarily be accompanied by a standard deviation of zero, but there are cases where one chapter may exhibit a higher standard deviation (dispersion among agreements) than another for a given level of average liberalization, or vice versa.
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Figure 3.7a
Distribution of liberalization of chapters in RTA parties’ schedules, Year 5
0.45 0.4
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Figure 3.7b
0.2
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Distribution of liberalization of chapters in RTA parties’ schedules, Year 10
for example, for certain live animals, meat, dairy and sugar products originating in South Africa in the EU–South Africa RTA. Figures 3.7a and 3.7b turn the analysis around, examining the degree and dispersion of liberalization in the ninety-seven Harmonised System chapters within the liberalization schedules of sixty-four RTA parties. Parties in the southeast corner feature deep liberalization
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across the board. Meanwhile, those in the northwest corner are marked by limited liberalization as well as by particularly limited liberalization in some chapters, which entails high dispersion of liberalization across chapters.
2.1.3
New approaches to measuring SAT: trade-weighted tariff liberalization The measurement of SAT simply as a share of tariff lines fails to fully account for the exclusion of sensitive products from RTAs, if the products are covered in a very small number of tariff lines. Does RTAs’ conformity with SAT vary, then, with the measurement that is employed? We strive to shed light on this question by combining the data on liberalization as a share of tariff lines with data on trade flows. In particular, we introduce two alternative methods of exploring the depth and speed of liberalization in RTAs: liberalization statistics examined above as weighted by trade, and the percentage of total trade (imports) from the RTA partner that is completely liberalized.24 By seeking to capture the economic significance of RTA concessions, the approach helps overcome the deficiencies of the measurements based on simple counts of tariff lines, and, as such, to further the debates on the appropriate definition for SAT. Figure 3.8 takes the first cut, examining the evolution of the duty-free share of tariff lines trade-weighted by chapter. The similarity with the unweighted data in Figure 3.5a is striking. This is hardly surprising: most trade occurs in sectors that are opened up rapidly, while sectors with backloaded liberalization have a low share of the overall trade given that they also tend to feature the highest tariff and non-tariff barriers. To be sure, while the bolded averages in the two diagrams are also similar, they are not immediately comparable due to different numbers of observations – twenty-seven v. thirty-eight RTAs. Figure 3.9 measures the evolution of duty-free treatment as a share of the imports from the partner that are liberalized. By this measure, RTA partners on average reach the 90 per cent mark right at year 10.25 The result could be seen as encouraging: RTA partners to liberalize a larger 24 25
The calculations are based on COMTRADE data. Ideally, imports were averaged over a three-year period immediately prior to the entry into force of the agreement. However, due to data-availability constraints as well as to ensure consistency between versions of the Harmonised System, the number of years taken as well as the years themselves varied somewhat from party to party.
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% of Tariff Lines Duty Free (Trade-Weighted by Chapter)
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Figure 3.8 tariff lines
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Evolution of duty-free treatment as percentage of imports
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share of trade than they do of tariff lines. However, again care should be taken not to compare Figure 3.9 directly with Figure 3.5a and 3.8, given that it contains an even less comprehensive dataset than that displayed in Figure 3.8 (twenty-three RTAs). Moreover, and importantly, the figure does not capture the potential trade among the RTA partners. Even if the share of actual trade excluded from an RTA were very small, the potential trade could be very significant in the absence of policy barriers. Figures 3.10a to 3.10h take a closer comparative look at liberalization under the three alternative measurements. They chart the evolution of the liberalization as an unweighted share of liberalized tariff lines, tradeweighted share of liberalized tariff lines, and share of liberalized imports by eight RTA parties in four RTAs – Canada–Costa Rica, Chile–Korea, EU–South Africa, and US–Morocco FTAs. While the paths of the three measurements tend to mirror each other, liberalization as a share of trade-weighted lines and as a share of actual imports tends to be deeper in some cases (as in the EU–South Africa RTA) and shallower in others (as in the Chile–Korea FTA) than conveyed by the simple counts of tariff lines. To be sure, the result does not 120
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Figure 3.10a Evolution of duty-free access in Canadian market for Costa Rican goods: a comparison using various measures
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Figure 3.10b Evolution of duty-free access in Costa Rican market for Canadian goods: a comparison using various measures 120
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Figure 3.10c Evolution of duty-free access in Chilean market for Korean goods: a comparison using various measures
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Figure 3.10d Evolution of duty-free access in Korean market for Chilean goods: a comparison using various measures 100 90 80
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Figure 3.10e Evolution of duty-free access in EU market for South African goods: a comparison using various measures
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Figure 3.10f Evolution of duty-free access in South African market for EU goods: a comparison using various measures 120
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Figure 3.10g Evolution of duty-free access in Moroccan market for US goods: a comparison using various measures
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Figure 3.10h Evolution of duty-free access in US market for Morrocan goods: a comparison using various measures
necessarily hold throughout the entire analyzed time period. In any case, measuring liberalization as a share of tariff lines often either under- or over-estimates (1) the importance of the bilateral trade in some tariff lines; and (2) the extent of trade that actually enters free of duty. RTAs where liberalization appears deeper when trade data is entered are not necessarily highly liberalizing. Rather, the results may simply indicate that much of the trade between the partners is free of duty even prior to the RTA’s entry into effect, which in essence would confirm the endogeneity of trade to the level of protection. In contrast, in some cases – Chile–Korea FTA and US schedule in the US–Morocco FTA – the share of liberalized imports trails that of liberalized lines.26 The bulk of actual trade in these schedules is subject to tariffs, which can be taken to indicate that, while tariffs persist on much of trade, they are not prohibitive of trade. Further iterations of this paper can explore these hypotheses. Overall, the results here echo the above findings on the differences between Northern and Southern parties’ liberalization paths. However, 26
The Korea–Chile FTA is analyzed in detail in WTO (2005).
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there are some notable exceptions. For instance, Morocco markedly attains the 90 per cent mark under each of the three liberalization measures by year 10 in its FTA with the EU, and Costa Rica does so in the Costa Rica–Canada FTA when liberalization is measured as a share of duty-free imports. Meanwhile, the EU does not attain the 90 per cent mark even by year 20 in the EU–South Africa FTA except under the trade-weighted tariff lines measure, which evinces the persistence of barriers in sensitive agricultural products in the EU’s schedule. Again, none of the diagrams captures the extent of potential trade between partners. Sectors with backloaded liberalization also tend to feature the highest tariffs, which means that they could also generate the greatest payoffs from liberalization. Indeed, measures based on potential trade, if possible, could well yield very different results. To be sure, a thorough analysis of potential trade would need to take into account such factors as total trade with the world and/or domestic production or consumption data. In a sense the question of potential trade is only of academic interest because WTO members are unlikely to agree on estimating the amount of trade that would occur in the absence of restrictions. Nevertheless, the issue is potentially of considerable practical importance in cases where prohibitive or near-prohibitive tariffs or quantitative restrictions seriously inhibit trade in sensitive products. In such cases, the party that aims to insulate its sensitive products might be able to do so while claiming that only a minimal percentage of the existing trade is affected by the exclusion – yet the potential trade that is being excluded could be very substantial.
2.2
RTA coverage: aggregate provisions
This section strives to complement the tariff-line data by exploring the coverage of the various market access commitments contained in the main texts of fifty RTAs. The mapping is based on a three-level matrix. The first level covers five main issue areas: NTMs, other measures, special regimes, RoO, and customs procedures. The second level is composed of disaggregated sets of issues falling under the main issue areas; the third level disaggregates the matrix further, carrying nineteen provisions for NTMs, one provision for other measures, fifteen provisions for special regimes, twenty-six for RoO, and twenty-two provisions for customs procedures. The three levels are displayed in the Annex to this chapter, along with definitions for the second-level provisions.
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While the structure of the matrix draws on various different RTAs and RTA types, perhaps the greatest weight in the design of the matrix is given to RTAs based on the structure of the North American Free Trade Agreement (NAFTA). The justification for doing so is that NAFTA is among the most detailed and comprehensive of trade agreements, and also increasingly important as a blueprint for many RTAs in the Americas and around the world. As such, the methodology strives to ensure that no major provisions are being left out – which could be the case if the matrix were based on ‘thinner’ agreements. However, the matrix is general enough to accommodate differently structured agreements.
2.2.1 Methodology The methodology of the mapping as conducted at the second level of disaggregation aims to capture the coverage of market-access provisions in the various RTAs. A provision in an agreement is simply assigned 1 when the RTA covers it, and 0 when it does not. The underlying criteria for the choice of the various provisions are two-fold: (1) to cover all provisions for which there are counterparts in the multilateral trade regimes (GATT, WTO Agreements, and the World Customs Organization (WCO) rules per the 1999 Revised International Convention on the Simplification and Harmonisation of Customs Procedures (Kyoto Convention)); and (2) to capture also provisions that are not included in the multilateral rules but that figure prominently in RTAs. The coding is based on a liberal interpretation, so that 1 is assigned even when an agreement makes a relatively marginal reference to the provision; a stricter interpretation would result in a large number of zeros. For example, while some RTAs in the area of customs procedures have very detailed disciplines on the release of goods, including a specific timeline for the release, a clause on rapid release, and provisions on control and release systems, others include only a general statement that goods should be released expeditiously. In both cases, the coding methodology here would consider the provision covered. A provision is also considered covered if it is outlined in another, more general chapter in the RTA rather than in the chapters pertaining to an issue area examined here. For instance, while some agreements deal with the provisions of transparency and due process in the chapter on customs procedures and trade facilitation, others relegate them to a separate, general chapter on transparency that applies to the entire agreement. Again, the methodology here considers the provision covered in both cases.
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The third level of analysis goes beyond the simple 0–1 coding to qualify the coding conducted at the second level. For instance, in the case of cumulation of rules of origin, whereas the second-level coding assigns 1 for RTAs employing any type of cumulation – bilateral, diagonal or full cumulation – and zero for an RTA without any cumulation provisions, the third level allows for distinguishing between the three types of cumulation. Similarly, in the area of special regimes, the second-level provision ‘temporary admission of goods’ divides into five third-level areas, such as provision on the specification of the types of goods for which temporary admission is allowed, provision on expeditious release, and a ‘flexibility’ provision, i.e. the possibility of extending the time limits for the temporary admission of goods. In short, the third level of analysis paves the way for capturing properties or ‘outer measures’ of market access obligations of RTAs, such as restrictiveness and flexibility, depth and shallowness, and acceleration and deceleration.
2.2.2
Coverage of market access disciplines in RTAs: main trends Figure 3.11 provides a stylized visualization of RTAs’ coverage in the five disciplines examined here. Each spoke captures the coverage of one RTA at the second level of analysis. The figure reveals important variations across RTAs. While most RTAs contain NTM provisions on administrative fees and formalities, and on import and export restrictions, only a handful of RTAs – mainly CAFTA and the EU’s extra-regional agreements – are particularly encompassing, carrying provisions also on internal taxes and quantitative measures. FTAs in the Americas, Singapore’s FTAs, and the EU’s FTAs with Lithuania and Romania address export taxes, as well. Overall, most Asian and Mexico’s FTAs cover fewer than 50 per cent of the NTM provisions. In the area of special regimes, CAFTA, NAFTA, the US FTAs with Australia and Chile, and the Canada–Chile FTA are particularly encompassing. Except for the US–Israel and the US–Jordan FTAs, US FTAs contain provisions on waiver of customs duties, temporary admission of goods, expeditious release, and goods re-entered after repair or alteration. In RoO, agreements involving Western Hemisphere parties as well as the EU’s FTAs tend to be comprehensive. Asian FTAs are lighter, mainly due to lacking co-operation and review and appeal provisions, as well as tariff preferences levels (TPLs) and short-supply clauses pertaining to textile and apparel RoO particularly in FTAs in the Americas.
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US-Singapore ACE 58 ACE 59 US-Peru 100% Anzcerta US-Morocco CAFTA US-Jordan Canada-Chile US-Israel Canada-Costa Rica US-Chile Canada-Israel US-Bahrain
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EU-Morocco Mexico-Nicaragua EU-Romania Mexico-Japan EU-South Africa G3 Mexico-Israel Hong Kong-China Mexico-Costa Rica Japan-Singapore Mexico-Bolivia Korea-Chile Mercosur-Chile Mercosur-Bolivia
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Figure 3.11
Other Measures
Special Regimes
RoO
Customs Procedures
Coverage of selected market access disciplines in fifty RTAs
In general, many EU and US agreements tend to be more comprehensive than intra-Asian RTAs. There is some correlation in coverage: agreements that are comprehensive in one discipline tend to be so also in the others. Figures 3.12 to 3.16 take a converse tack, exploring the coverage of the various agreements by the second- and third-level provisions. Each bar represents the share of the fifty RTAs that incorporate a given provision. The black bars represent second-level provisions, while the white bars measure the third-level provisions (that fall under the second-level provision immediately to their left). The diagrams reveal a wide variation in coverage across provisions. For instance, in NTMs, while some 95 per cent of RTAs surveyed here contain provisions on import and export restrictions and some 60 per cent – most FTAs in the Americas and Singapore’s FTAs – have provisions on export taxes, only the EU’s extra-regional agreements carry well-developed provisions on internal taxes and quantitative measures.
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Import and export restrictions and prohibitions Conformity to GATT/WTO in import and export restrictions Prohibition to adopt/maintain import or export restrictions Limits on new duties and charges other than tariffs Exceptions Import licensing Prohibition if inconsistent with Import Licencing Agreement Notification of import licencing procedures Administrative fees and formalities Conformity to GATT Art. VIII:1 in fees and charges Prohibition of consular transactions Prohibition on customs user fees Electronic availability list of fees and charges Elimination of merchandise processing fee Internal taxes Conformity to GATT Art. III on internal taxes and regulations Export taxes Prohibition of export taxes Sectoral or other exceptions to export tax prohibition Subsidies Subsidies to domestic producers allowed Quantitative measures Prohibition/limitation on QM Sectoral exceptions to prohibition of QM 0%
Figure 3.12
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Coverage of selected RTAs, by NTM provision
Protection of distinctive products Possibility to amend RTA to designate a distinctive product Geographic indications
Sectoral measures (besides agric. and textiles) Merchandise processing fees
Treatment of digital products
Non-agricultural state trading enterprises Shortage clause 0%
Figure 3.13
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Waiver of customs duties Prohibition of waiver Prohibition of waiver in exchange for performance requirement Waiver can be retracted if having an adverse impact on local producer Temporary admission of goods Specification of types of goods for which temp. admission allowed Expeditious release Re-exportation port can differ from importation port Possibility to extend the time limit for temp. admission Drawback Phase-out of drawback Duty deferral Export processing zones Goods re-entered after repair or alteration Duty-free entry of commercial samples of neglible value Other special regimes 0%
Figure 3.14
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Coverage of selected RTAs, by special regime provision
In contrast, very few RTAs contain other measures provisions. Those that do are several FTAs in the Americas and the EU–Chile and EU–South Africa FTAs, especially in the areas of protection of distinctive products and geographic indications (generally, wine and spirits). As for special regimes, only temporary admission of goods is covered by more than half of the RTAs; CAFTA, NAFTA, the US FTAs with Australia and Chile, and the Canada–Chile FTA are particularly encompassing. Except for the US–Israel and the US–Jordan FTAs, US FTAs contain provisions on waiver of customs duties and goods re-entered after repair or alteration. In RoO, the opposite is the case: most of the main provisions are covered in most RTAs. De minimis as well as cumulation, certification and verification of origin are addressed in nearly all of the RTAs. Most RTAs also have clauses for reviews of the origin regime – something that has recently enabled the NAFTA parties to renegotiate origin requirements in certain sectors to provide regional producers greater latitude in sourcing. To be sure, RTAs differ in the content of the RoO provisions.
Product-Specific RoO Product-specific RoO (two or more RoO types) De Minimis Cumulation Certification Certificate may be submitted electronically Certificate valid for multiple shipments Verification of origin Specific steps for verification Sector-specific verification rules Consultations in case of unsatisfactory origin investigation TPLs Phase-out of TPLs Short supply Right to refuse access/suspend preferential treatment Uniform regulations Penalties Review and appeal process/mechanisms for solving disputes Cooperation Mutual assistance Consultations Working group on RoO Technical or administrative assistance Sector-specific cooperation Committee on Regional Integration of Inputs Joint Committee on Origin Modification of RoO regime/potential consultations to modify 0%
Figure 3.15
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Coverage of selected RTAs, by RoO provision
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Definitions Transparency Release of goods Automation Risk assessment Confidentiality Express shipments Review & Appeal Penalties Advance rulings S&D Share information Technical assistance Cooperation - administration Harmonization of procedures 0%
Figure 3.16
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Coverage of selected RTAs, by customs procedure provision
For instance, most of the EU’s RTAs prescribe a de minimis of 10 per cent and require government-issued certificates, US RTAs have a de minimis between 7 per cent (NAFTA) and 10 per cent (CAFTA) and rely on self-certification by the exporter or importer. Customs procedures tend to be similarly well covered. Nearly 60 per cent of the RTAs include provisions on confidentiality, advance rulings, penalties, and review and appeal mechanism; most RTAs (particularly US, Canadian and Chilean agreements and agreements in Asia) contain customs co-operation provisions, and about a half provide for technical assistance, transparency, and sharing of information. Box 3.2 focuses on one case of particularly comprehensive coverage in this area – the recently concluded FTA between Brunei, Chile, New Zealand and Singapore. CAFTA and the EU–Chile, the US–Chile, and the US–Morocco FTAs contain similarly comprehensive coverage of customs procedures and trade facilitation disciplines.27 US agreements stand out also for their particularly high level of precision. 27
It could be argued that, although there are already guidelines for customs procedures and trade facilitation provisions at the WCO (per the Revised Kyoto Convention), including these provisions in RTAs and in the WTO’s legal framework could have the advantage of making them more binding for the signatories.
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box 3.2 customs procedures and trade facilitation in the trans-pacific strategic economic partnership agreement The Trans-Pacific Strategic Economic Partnership Agreement (SEP) formed by Brunei, Chile, New Zealand and Singapore has a comprehensive list of provisions regulating customs procedures and trade facilitation between the parties. Some of the key provisions on customs procedures include: Customs co-operation (Art. 5.5). The parties’ customs administrations are to cooperate on issues pertaining to the implementation of the agreement, movement of goods, investigation and prevention of customs offences, the application of the WTO Customs Valuation Agreement, and the improvement of procedures through such measures as best practices and risk management techniques, technical skills and technologies. Advance rulings (Art. 5.7): The parties are to put forward procedures for advanced rulings on the origin of goods traded between them. The article allows the application for a ruling to be made prior to the importation of a good, and requires the advance ruling to be issued expeditiously (within sixty days of the receipt of the information). Review and appeal (Art. 5.8): Importers in each country are to be provided access to independent administrative and judicial reviews. Paperless trading/automation (Art. 5.10): The Article strives to increase the efficiency of customs procedures through the introduction of modern techniques and new technologies. The parties are also to seek to use electronic procedures that support business transactions.28 Express shipments (Art. 5.11): Parties are to implement procedures aimed at ensuring an efficient clearance of shipments, including pre-arrival processing of information and coverage of all goods in the shipment with a single document (that can be issued electronically). Risk management (Art. 5.13): The Article refers to customs procedures that facilitate clearance and movement of low-risk goods and focus attention on highrisk goods. Release of goods (Art. 5.14): The parties pledged to simplify the release of goods and to release goods at the point of arrival and within a period not exceeding 48 hours. This stands in clear contrast to many other RTAs, which have very few and only general rules governing the release of goods.
28
Notably, the NAFTA countries are developing a concept of trade automation (NATAP) that implies introducing standardized trade data elements, harmonizing customsclearance procedures and promoting electronic transmission of standard commercial data using UN/EDIFACT MESSAGES and advance processing by governments.
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Main findings and hypotheses
The above findings allow for making preliminary conclusions about the relationship between the regional and multilateral trade rules, and about the complexity of the system of RTAs – on the ‘distances’ between the RTAs – across the two axes of analysis, coverage and liberalization. The analysis of the tariff-line data yields four main results: As illustrated by the discussion on the basket, sector and preferential
tariff approaches, the overall set-up of tariff liberalization programmes varies notably across agreements. Agreements differ from each other in the number of product groups that are subjected to liberalization, as well as in the final year of liberalization: in some cases, all tariffs are eliminated upon the entry into force of the agreement, while, in others, tariff provisions are spread over transition periods as long as twenty years. RTA parties differ in their tariff-reduction trajectories. Some parties use a linear trajectory, while others employ a non-linear trajectory that often involves some backloading, with larger reductions left to the latter part of the transition period. In some cases, a grace period is provided before the reductions begin. Despite these differences, most RTAs attain the one interpretation of SAT and ‘reasonable length of time’ – liberalization of 90 per cent of tariff lines by year 10 into the agreement. As such, the coverage of products in RTAs tends to become rather homogeneous by the end of the first decade. However, there are a number of outlier RTA parties (in general, developing countries) and product categories (particularly sensitive sectors – agriculture, textile and apparel, and footwear) that fail to reach the benchmark. Also, the age of the RTA appears to matter: newer agreements tend to carry greater sectoral selectivity. Measurements based on trade data introduce further distinctions across RTAs. They reveal that measures based on counts of tariff lines alone often markedly over- or under-estimate the actual trade that flows free of duty, particularly in the earlier years of the RTA. The bottom line remains – most RTA partners liberalize 90 per cent or more of their trade-weighted tariff lines and their imports from their RTA partners by year 10. However, again, exceptions make the rule: for instance, one RTA partner fails to liberalize even 60 per cent of its trade-weighted tariff lines by year 10, and six RTA partners free fewer than 80 per cent of their imports from their respective partners by year 1. The message arising from the aggregate data is more mixed. Two main results can be highlighted.
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First, there is marked variation across RTAs in the coverage of main market access disciplines. Yet, the data also communicate clustering of RTAs by the main world regions – Asia, Europe and the Americas – and, in particular, by global trade hubs – the United States, the EU and Singapore, for instance. A close inspection of the data also suggests the exportation of RTA models from one region to the next through transcontinental RTAs, such as ‘borrowing’ of some of the US–Chile FTA’s market-access provisions to the Chile–Korea FTA. A finer analysis that exploits the third-level measures will allow for a more thorough assessment of the extent to which RTAs do cluster in distinct families. Secondly, most RTAs appear by and large aligned with (and/or explicitly call for adherence to) GATT and WTO provisions in market access. However, many an RTA also carries provisions that could potentially be classified as ‘other restrictive regulations of commerce’, such as tariff rate quotas, special safeguards, and demanding rules of origin. As such, the exercises at the tariff-line level provide only a partial handle on whether RTAs actually do comply with interpretations of SAT; after all, as noted above, Article XXIV requires that, besides tariffs, RTAs also eliminate ‘other restrictive regulations of commerce’ on ‘substantially all trade’. Yet, there may be potential trade-offs between these instruments and the extent of product coverage at the tariff-line level: governments may be more willing to engage in across-the-board liberalization if they know that TRQs, safeguards and other instruments are available as defensive measures. A similar political-economy argument can be made in the case of restrictive RoO. Many RTAs could be viewed as WTOþ in terms of incorporating a larger number and/or more specific provisions than are present in the multilateral regime. RTAs are clearly WTOþ in the case of RoO, since there are thus far no meaningful multilateral disciplines governing preferential RoO. As discussed above, many RTAs appear to be WTOþ in the area of safeguards and emergency measures. In the case of RoO, one way of assessing the compatibilities of RTAs with the multilateral rules (but not necessarily RTAs’ compliance with the ‘other restrictive regulations of commerce’ clause) is to operationalize the product-specific non-preferential rules of origin that have been under a multilateral process of harmonization since the Uruguay Round, and contrast them with product-specific RTA rules.29 29
This is a meaningful exercise given that the Common Declaration with Regard to Preferential Rules of Origin annexed to the Uruguay Round’s Agreement on Rules of
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In customs procedures and trade facilitation, RTAs appear by and large compatible with the main international instruments (the Arusha Declaration and the UN/EDIFACT Initiative that centre on the uses of technology and data processing; the existing GATT/WTO tradefacilitation instruments embedded in Articles V (freedom of transit), VIII (fees and formalities on imports and exports), and X (publication and administration of trade regulations) that are currently under renegotiation;30 and the WCO’s Revised Kyoto Convention of 1999, which contains an extensive list of specific provisions related to customs and trade facilitation in such areas as review and appeal procedures, customs clearance, and uses of new technologies). Indeed, trade-facilitation and customs-procedure measures in RTAs seem to have paralleled the development of the international instruments: RTAs that entered into force after 1999 tend to include such provisions as the release of goods, automation, risk assessment and express shipments – elements also included in the 1999 Revised Kyoto Convention. RTAs are providing value-added to efforts to address customs-procedures and trade-facilitation issues at the multilateral level, starting from the fact that RTA provisions are binding while the WCO instruments are not (see Box 3.3).
4
Agenda for future research
The exercises and findings of this paper are only preliminary. However, the data examined here open five avenues for further exercises and research. First, the data allow for a more extensive and deeper examination of the system of RTAs – such as quantifying ‘distances’ among RTAs and between RTAs and the multilateral trade rules in order to define policies for bridging the clearest gaps. The tariff-line-level data can be examined
30
Origin calls for a multilateral process for harmonizing preferential RoO following the harmonization of non-preferential RoO, and using the harmonized non-preferential RoO as the blueprint in the process. Estevadeordal and Suominen (2006) and Suominen (2004) carry out such an exercise, finding that the harmonized non-preferential RoO are in general less restrictive and complex than the major preferential RoO models. This could potentially be taken to imply the presence of a large number of outliers from the global benchmark in the area of RoO. In July 2004, WTO members agreed to launch negotiations in the context of the Doha Round to improve and clarify provisions set out in Articles V, VII and X. The negotiation mandate is largely aligned with the provisions of the Revised Kyoto Convention, which is indicative of the desire to make the Kyoto provisions binding.
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box 3.3 adding value to customs-procedures and trade-facilitation measures through rtas RTA provisions on customs procedures and trade facilitation can serve as important tools for fostering the members’ competitiveness and ability to reap the benefits from trade liberalization. They can also help members promote the necessary co-operation to implement new standards and carry out institutional trade-facilitation-related reforms. But are customs procedures and trade facilitation compatible with multilateral disciplines? And, if so, what is the value-added of including these disciplines in RTAs? RTAs’ customs-procedure and trade-facilitation disciplines complement the GATT and Kyoto Convention provisions in these areas by promoting transparency, harmonization, simplification of procedures and even the adoption of new technologies that could significantly improve the trading environment. For example, RTAs often include provisions on transparency and due process as consistent with GATT Article X. Like the Kyoto Convention, RTAs contain clauses on the simplification of procedures and documentation and on the use of modern technologies. Particularly, US agreements also tend to incorporate provisions on express shipments and release of goods. While harmonization of customs procedures is more limited in RTAs, many EU and US agreements in particular call for common procedures and coordination among customs authorities. Including customs-procedures and trade-facilitation disciplines in RTAs adds value in four ways to dealing with these issues at the multilateral level. First, unlike the WCO provisions, RTA provisions are binding and enforceable via the RTA’s dispute settlement mechanism. Secondly, RTAs serve as a training ground: they can provide a head-start for the members to absorb and implement the multilateral customs and trade-facilitation instruments. Thirdly, given that customsprocedure and trade-facilitation disciplines are relatively similar across RTAs, RTAs can facilitate and accelerate convergence in these disciplines around the world. Fourthly, to the extent that RTAs streamline customs procedures and facilitate trade, they are inherently good for the multilateral trading system: the resulting lowered trade costs boost trade with all trade partners.
more extensively; one of the first approaches could be to draw more detailed comparisons in the treatment of sensitive products across RTAs. Secondly, whereas the exercises of this chapter have thus far centered on assessing the coverage and liberalization of RTAs among the RTA members, further iterations will take a step further to examine preferential margins – the depth of RTA liberalization vis-a`-vis the treatment
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that the RTA parties offer their MFN trading partners. Such an exercise will help illuminate the implications of RTAs for non-member countries, and inform policy discussions on the meaning of the Article XXIV phrase that RTAs are ‘not to raise barriers’ towards third parties. Also, the other instruments examined here – RoO and customs procedures – can provide information on the effects of RTAs on third parties. Indeed, Estevadeordal and Suominen (2005b) and Suominen (2004) find that restrictive RoO in final goods encourage trade in intermediate goods between the RTA partners, which may imply that RoO can engender trade diversion in inputs to the RTA area, and hence undercut trade flows between the RTA parties and the rest of the world. Thirdly, further research could explore the relationship between the product coverage of RTAs and the comparative advantages of the member countries, which could be accomplished, for instance, by comparing the product coverage (in terms of percentage of tariff lines covered) for each sector or chapter with the computed revealed comparative advantages of the same sectors or chapters. This would help break into analyzing the potential for RTAs to expand trade – assess the extent to which the products of greatest export interest to the parties are covered by the market-access provisions of the agreement. Fourthly, the set of RTAs can be expanded in order to obtain a more generalizable sample. For one, a larger sample will allow for complementing the distinctions between Northern and Southern countries with further categories, such as ‘less developed countries’, which, in turn, can help guide discussions on the potential need for including in the RTA examinations conducted by the WTO Committee on Regional Trade Agreements (CRTA) also the agreements that are notified under the Enabling Clause. Furthermore, incorporating aspiring CUs in the study will help pave the way to a clearer discussion on whether the same multilateral standards should apply to CUs as govern FTAs.31 31
WTO (2002c) points out that, ‘[w]hile language therein is largely symmetrical, it contains some differences: sub-paragraph 5(a) states that the duties and other regulations of commerce “imposed” by a customs union are to be compared to those “applicable” by its parties prior to the institution of the union; paragraph 2 of the 1994 Understanding clarifies the meaning of these expressions with respect to duties, by specifying that, in the context of the general incidence calculation, “ . . . the duties and charges to be taken into consideration shall be the applied rates of duty”; sub-paragraph 5(b) provides that the corresponding comparison for FTAs should be based on the duties and other regulations of commerce “maintained in each of the constituent territories and applicable at the formation” of the FTA and those previously “existing in the same constituent territories”. Such differences in wording shed doubts on whether “applicable” duties for
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Fifthly, there is also room for relating the tariff-line and aggregate data across the agreements. This is of particular importance given that meeting the SAT requirement depends on the eradication not only of tariffs but also of ‘other restrictive regulations on commerce’, which may often be embedded in the aggregate provisions. Box 3.4 discusses a way of combining the two sets of indicators in the case of RoO.
box 3.4 how restrictive are roo? 3 2 Making meaningful cross-product comparisons across the great many types of RoO requires a parsimonious tool. The restrictiveness index developed in Estevadeordal (2000) is such a tool. Its observation rule of the index is based on the length of ‘jumps’ over the Harmonised System’s tariff lines required by RoO: a change of chapter is more restrictive than a change of heading, a change of heading more restrictive than a change of sub-heading, and so on. Value content and technical requirements add to the rule’s restrictiveness. Figure 3.17 reports the restrictiveness of RoO as calculated at the six-digit level of disaggregation in selected RTAs. Much like the restrictiveness of the product-specific RoO, the ‘facilitation’ provided by regime-wide RoO to the application of product-specific RoO can be assessed through an index. The ‘Facil’ index developed in Estevadeordal and Suominen (2006) and Suominen (2004) incorporates de minimis, diagonal cumulation, full cumulation, and drawback (all of which can be expected to cut producers’ production costs by amplifying their pool of low-cost inputs), and self-certification (which can keep producers’ administrative costs lower than the other methods). Figure 3.18 shows the operation of the index in selected RTAs. Combining the measures of restrictiveness and Facil in a gravity model exercise, Estevadeordal and Suominen (2005b) find that, while restrictive RoO dampen the trade flows between RTA parties, the various facilitation measures encourage trade between them – and, as such, can counter the negative effects of restrictive product-specific RoO.
5
Conclusion
This chapter has sought to shed new light on some key market-access provisions in a number of RTAs around the world. We have focused on
32
FTAs refer to bound rates or to applied rates.’ The document also notes that: ‘Another issue raised relates to the definition of the expression “other regulations of commerce” itself. It has been observed that, under Article XXIV:5, it might have a wider scope for FTAs than for customs unions, especially if, as it has been argued sometimes, FTA rules of origin should be considered as a regulation of commerce in that context.’ This box draws on Estevadeordal and Suominen (2006) and Suominen (2004).
Figure 3.17
Figure 3.18
PANEURO EFTA-ISRAEL EU-MEXICO CARICOM-DR ANZCERTA SPARTECA US-ISRAEL PE EFTA-CROATIA MERC-BOL MERC-CHI ALADI AFTA BANGKOK GCC ECOWAS MERCOSUR ANDEAN COMM. CARICOM COMESA
CAN-ISRAEL US-CHILE CAN-CHI MEX-BOL EEA MEX-NIC MEX-CR NAFTA MEX-ISRAEL CACM G3 SADC
EU-SOUTH AFR.
Facilitation index
Facilitation of regime-wide RoO in selected RTAs NONPREF
COMESA
ECOWAS
SADC
GCC
BANGKOK
AFTA
SAFTA
ANZCERTA
USISRAEL
USJORDAN
ANDEAN
MERCBOL
MERCCHIL
CHILEKOR
CACMCHI
MEXBOL
MEXCR
G3
CAFTA
USCHILE
NAFTA
EUCHILE
EUMEX
PANEURO
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8
7
6
5
4
3
2
1
0
Restrictiveness of RoO in selected RTAs
5
4
3
2
1
0
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both aggregate and tariff-line data, and compared RTAs vis-a`-vis each other as well as against the multilateral trade rules. The preliminary findings indicate that, while RTAs do differ from each other in some important respects, including in the set-up of the tariff-liberalization programmes, the speed and trajectory of tariff liberalization, and the employment of TRQs, they also share several features, such as similar overall coverage of the main general tariff, RoO, and, increasingly so, customs-procedure and trade-facilitation provisions. RTAs also tend to converge in the extent of their tariff liberalization by the end of the first decade of operation regardless of the measurement that is employed: the bulk of the RTAs examined here meet certain interpretations of the requirements of GATT Article XXIV. To be sure, the legal and economic significance of these findings has yet to be established; that is the task of further iterations of this paper.
Annex: Three-level matrix for mapping market-access provisions in RTAs and definitions Table 3.4 Three-level matrix for mapping market-access provisions in RTAs Non-tariff measures Import and export restrictions and prohibitions Conformity to GATT/WTO in import and export restrictions Prohibition from adopting or maintaining Limits on new duties and charges other than tariffs Exceptions Import licensing Prohibition if the measure is inconsistent with Import Licensing Agreement Notification of the existence of import licensing procedures and new procedures If there is no notification, import licensing procedure is not allowed Administrative fees and formalities Conformity to GATT/WTO (Art. VIII:1) in fees and charges Prohibition of consular transactions, including related fees and charges Prohibition on customs user fees Availability by Internet of current list of the fees and charges on importation and exportation Elimination of merchandise processing fee on originating goods Internal taxes Conformity to GATT Art. III on internal taxes and regulations
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Table 3.4 (cont.) Export taxes Prohibition on export taxes Sectoral or other exceptions to export tax prohibition Subsidies Subsidies to domestic producers allowed Quantitative measures Prohibition/limitation Sectoral exceptions to prohibition of quantitative measures (1 ¼ one party; 2 ¼ all parties) Non-discriminatory administration of quantitative measures Other measures Protection of distinctive products Possibility to amend the agreement to designate a good as a distinctive product Geographic indications Sectoral measures (besides agriculture and textiles) Merchandise processing fees Treatment of digital products Non-agricultural state trading enterprises Shortage clause Special regimes Waiver of customs duties Prohibition Prohibition on making in exchange for performance requirement Waiver can be retracted if having an adverse impact on local producer Temporary admission of goods Specification of types of goods for which allowed regardless of their origin Professional equipment Goods intended for display of demonstration Commercial samples and advertising Goods admitted for sports purposes Expeditious release Re-exportation port can differ from importation port Possibility to extend the time limit for temporary admission Requirement for the goods to be subject to duty-free temporary admission Drawback Share of countries for which allowed infinitely Share of countries for which allowed for a period of time Years of phase-out (years during which can be used)
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Table 3.4 (cont.) Duty deferral Export processing zones Goods re-entered after repair or alteration Prohibition to apply customs duty if a good re-enters after repair or alteration Prohibition to apply a customs duty to a good admitted temporarily from another party for repair or alteration Definition of repair and alteration Duty-free entry of commercial samples of negligible value shall be granted Party may require importation solely for solicitation of orders of goods or no larger consignment than one copy of ad material per packet Other special regimes Rules of origin Product-specific RoO Sector-specific definition (use of two or more types) Method of calculation of VC Alternative method/list specified (1 ¼ for some goods; 2 ¼ for all goods) Share of parties with phase-in Share of parties with permanent deviations from RoO regime De minimis Percentage level Cumulation Type (1 ¼ bilateral; 2 ¼ diagonal but only in a few sectors; 3 ¼ diagonal; 4 ¼ full) Certification Type (1 ¼ two-step public; 2 ¼ two-step public with some exemptions; 3 ¼ public; 4 ¼ private) Certificate may be submitted electronically Valid for multiple shipments Months valid Verification of origin Specific steps for verification Years certificate to be maintained Party with burden of proof (target of verification missions) (1 ¼ certifying agency; 2 ¼ certifying agency and exporter; 3 ¼ exporter; 4 ¼ importer; 5 ¼ exporter or importer) Sector-specific verification rules Potential future facilitation of reciprocal external audits Consultations in case of unsatisfactory conclusions of origin investigation
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Table 3.4 (cont.) TPLs Percentage of parties with a TPL Phase-out of TPLs Short supply Right to refuse to grant access/suspend preferential treatment Uniform regulations Penalties Review and appeal process/mechanisms for solving disputes Co-operation Mutual assistance Consultations (1 ¼ regular; 2 ¼ frequency not defined) Working group Technical or administrative assistance (mutual or unilateral) Sector-specific co-operation Committee on Regional Integration of Inputs Joint Committee on Origin Modification of RoO regime/potential consultations to modify Customs procedures and trade facilitation General issues Definitions Transparency and dissemination Requirement to publish customs laws, regulations and administrative procedures (1 ¼ some public documentation; 2 ¼ publication on the Internet) Release of goods Recommended specific timeline for the release of goods Clause on rapid release (without temporary warehousing) Control and release systems (release of goods prior to customs’ final determination of duties/taxes) Automation (use of IT/paperless trading) Risk assessment/management Clause for facilitating flow of low-risk goods Confidentiality Express shipments (1 ¼ some provision; 2 ¼ obligation to adopt) Review and appeal Scope (1 ¼ covers rules of origin only; 2 ¼ covers all customs procedures) Obligation to provide (domestic) importers access to review Obligation to provide exporters and producers of other party the same access as to domestic importers to review and challenge
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Table 3.4 (cont.) Penalties Advance rulings Obligation to issue/publish within a predefined period of time (or ‘expeditiously’) Clause for mechanisms for revoking Obligation to revoke within a predefined period of time Years of application SDT Sharing information Technical assistance Administrative assistance/co-operation on administration Mechanisms to solicit administrative assistance Mechanisms to deny administrative assistance Share of parties with phased-in implementation Co-operation – administration Requirement to share information (e.g. on best practices) Regular meetings Co-operation on trade facilitation Capacity-building/technical assistance (1 ¼ potential; 2 ¼ commitment) Group/working group/sub-group Joint committee Harmonization of procedures
Definitions for second-level of provisions33 A NTMs Import and export restrictions and prohibitions: a prohibition on adopting or maintaining any restrictions on the importation of any good of another party or on the exportation or sale for export of any good destined for the territory of another party (in general with the exception of the provisions of GATT Article XI). Administrative fees and formalities: provision that each party will ensure (often in accordance with GATT Article VIII:1 and its interpretive notes) that all fees and charges (other than customs duties, charges equivalent to an internal tax, and anti-dumping and 33
The definitions here are the authors’ elaboration based on WTO Agreements, various trade dictionaries, and RTA texts.
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countervailing duties) imposed on importation or exportation are limited to the approximate cost of services rendered, and that they do not represent an indirect protection of domestic goods or a taxation of imports or exports for fiscal purposes. Internal taxes: provision that usually prohibits the imposition on imported products from an RTA party of internal taxes or other internal charges of any kind (in excess of those applied, directly or indirectly, to like domestic products). Export taxes: provision that is usually phrased to prohibit a party from adopting or maintaining any duty, tax or other charge on the export of any good to the territory of another party (unless, for instance, if such duty, tax, or charge is adopted or maintained on any such good when destined for domestic consumption). Subsidies: financial contribution by a government (for example, a direct transfer of funds or a government revenue which is otherwise due is foregone or not collected) to producers or exporters that confers a benefit. Quantitative measures: explicit limits, usually by volume, on the amount of a specified commodity that may be imported into a country (sometimes also the amounts that may be imported from each supplying country are indicated). Other non-tariff measures: any further measures included in the set of NTM provisions, such as measures regulating the imposition of luxury taxes or the market access of such goods as chewing gum, distilled spirits, broadcast apparatus, for instance.
B Other measures Protection of distinctive products: requirement that a party to the agreement recognize certain good(s) as distinctive products of the other party/parties. (‘Distinctive’ refers, for instance, to marks that present a ‘unique commercial impression’.) Geographic indication: requirement that parties to the agreement identify a certain good as originating in the territory of a country (or a region or locality in that territory), where a given quality, reputation, or other characteristic of the good is attributable to its geographical origin. Sectoral measures (besides agriculture and textiles): provisions regulating any sectors, such as steel, vehicles or fisheries. Treatment of digital products: provisions referring to the market access of a defined set of digital products in the RTA.
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Non-agricultural state trade enterprises: entities established by gov-
ernments to import, export and/or produce certain products. Examples include government-operated import/export monopolies and marketing boards or private companies that receive special or exclusive privileges from their governments to engage in trading activities. Shortage clause: provision allowing a party to adopt export restrictions or export customs duties under certain circumstances of shortage or threat of shortage, such as in the face of a shortage of foodstuffs or essential materials to an industry of the party.
C Special regimes Waiver of customs duties: a measure that waives otherwise applicable customs duties on any good imported from any country, including the territory of another party. RTAs generally phrase the provision as prohibiting a party to waive customs duties (usually so if the waiver is conditioned on the fulfilment of a performance requirement and/or if a waiver can be shown by another party to have an adverse impact on the commercial interests of a person of that party). Temporary admission of goods: a customs procedure under which certain goods can be brought into a customs territory temporarily and relieved from the payment of import duties and taxes; such goods must be imported for a permitted purpose and must be intended for exportation within a predefined period. Drawback: provision for a total or partial refund of import duties and taxes paid for the final goods or inputs that may be obtained upon the exportation or destruction of certain goods under certain conditions. Duty deferral: any import scheme that includes provisions to allow the deferral of the payment of import rights such as the ones applied in free zones, temporary admission, warehouses or maquiladoras. Export processing zone: industrial parks or facilities which provide free trade zone benefits and usually offer additional incentives, such as exemption from normal tax and business regulations. Export processing zones are sometimes referred to as Special Economic Zones or Development Economic Zones. Export taxes: taxes applied to export products. These can be collected directly from the exporters or indirectly through a governmental trading agency that pays producers a price lower than the world price. Goods re-entered after repair or alteration: a customs procedure under which goods that were exported may be taken into home use free of import duties and taxes after being repaired or altered.
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Duty-free entry of commercial samples of negligible value and printed
advertizing materials: provision that the parties will grant duty-free entry to commercial samples of negligible value and to printed advertising materials that are imported from the territory of another party (usually under certain requirements, such as that commercial samples be imported solely for the solicitation of orders for goods of another party or non-party).
D Rules of origin There are two types of rules of origin, non-preferential and preferential RoO. Non-preferential RoO are used to distinguish foreign from domestic products in establishing anti-dumping and countervailing duties, safeguard measures, origin marking requirements, and/or discriminatory quantitative restrictions or tariff quotas, as well as in the context of government procurement. Preferential RoO, meanwhile, define the conditions under which the importing country will regard a product as originating in an exporting country that receives preferential treatment from the importing country. RTAs, in effect, employ RoO to determine whether a good qualifies for preferential treatment when exported from one member state to another. Product-specific RoO: refers to regimes that assign divergent RoO for
the various products that the RTA cover, rather than ascribing an across-the-board RoO that would cover all products. De minimis: provision allowing for a specified maximum percentage of non-originating materials to be used without affecting origin. Cumulation: provision allowing producers of one RTA party to use materials from another party/parties (or, in some cases, from nonmembers) without losing the preferential status of the final product. Certification of origin: the documentation that the RTA mandates the exporter, importer or producer of a good to prepare in order for the good to qualify for the RTA-provided preferential treatment. Verification of origin: procedures that exporting and/or importing RTA partner can undertake to ensure that a good meets the RTA rules of origin, such as a verification mission to an exporter that claims to have met the origin requirements. Tariff preference level: provision that goods that do not satisfy the RoO protocol qualify for preferential treatment up to some prespecified annual quotas. Above these levels, non-originating goods become subject to the importer’s MFN tariff.
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Short-supply clause: provision usually applicable to textile and
apparel products. It allows producers of apparel requiring yarns, fibres and fabrics that are not adequately supplied in the RTA market to use non-originating inputs. Uniform regulations: provision that the parties will establish and implement through their respective laws or regulations uniform regulations regarding the interpretation, application and administration of the RoO chapter by the agreement’s entry into force. Penalties: provisions for when a party may (and/or may not) impose penalties for the lack of proof of origin and whom the party may and may not penalize. Review and appeal process: provision governing the procedures of review and appeal of country of origin determinations. It can, for instance be worded to require a party to grant the same rights of review and appeal of country of origin determinations and advance rulings by its customs administration as it provides to importers in its territory to any person. Modification of RoO regime/potential consultations to modify: provision that any party that considers that the RoO regime of the RTA requires modification may submit a proposed modification for the consideration to the other party (usually with supporting rationale and background studies). Co-operation: any of the various mechanisms that the RTA puts in place to encourage or mandate collaboration between the RTA’s partners in the administration of the RoO regime. For example, cooperation may refer to provisions on consultations, technical or administrative assistance and/or a joint committee on origin.
E Customs procedures and trade facilitation Advance rulings: provisions for advanced ruling on the origin of goods traded between the parties. May include obligation to issue a ruling within a predefined period of time, for example. Automation: provisions that promote the use of technology that facilitates procedures for the release of goods. These may include the use of information technology and paperless trading, and the development of common data elements and processes or electronic systems aimed at facilitating the exchange of information and supporting business transactions. Co-operation on administration: provisions to facilitate co-operation and administrative assistance between the parties on customs
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procedures and trade facilitation. May include mechanisms to solicit assistance, co-operation on issues related to the application of the WTO Customs Valuation Agreement, or clauses on the implementation of the customs chapter, for instance. Definitions: list of definitions of concepts that are relevant only to the customs procedures chapter. Express shipments: procedures to expedite express consignments, such as a possibility of deferring payment of duties, taxes and fees with guarantees; and submission and processing information before the shipment arrives. Release of goods: provisions regulating the procedures for efficient release of goods, such as a recommended timeline for the release of goods and a clause on rapid release. Review and appeal: provisions that ensure that importers have access to independent administrative and judicial reviews. Risk assessment: use of risk management systems to facilitate the flow of low-risk goods, including systems to allow the processing of information prior to the arrival of the imported goods. Sharing of information: any provisions that mandate or encourage the exchange of information between the parties; such information may pertain to administrative procedures or best practices, for example. Special and differential treatment (SDT): transitional periods granted to developing countries in the implementation of the provisions on customs procedures and trade facilitation. Technical assistance: provisions for actual or potential capacitybuilding activities (may include a Mutual Assistance Agreement, for example). Transparency: provisions that mandate the publication and notification of customs law, regulations, and administrative procedures and the establishment of an inquiry point. References
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Estevadeordal, Antoni, and Suominen, Kati, 2005a. ‘Rules of Origin in Preferential Trading Arrangements: Is All Well with the Spaghetti Bowl in the Americas?’, Economı´a (Spring). 2005b. ‘What Are the Effects of Rules of Origin on Trade?’, mimeograph. 2006. ‘Mapping and Measuring Rules of Origin Around the World’, in Olivier Cadot, Antoni Estevadeordal, Akiko Suwa-Eisenmann and Thierry Verdier (eds.), The Origin of Goods: A Conceptual and Empirical Assessment of Rules of Origin in PTAs, CEPR and Oxford University Press. Ethier, Wilfred J., 1998. ‘Regionalism in a Multilateral World’, Journal of Political Economy 106(6): 1214–45. Frankel, Jeffrey A., and Rose, Andrew, 2002. ‘An Estimate of the Effect of Common Currencies on Trade and Income’, Quarterly Journal of Economics 117: 437–66. Frankel, Jeffrey A., Stein, Ernesto, and Wei, Shang-Jin, 1997. Regional Trading Blocs in the World Economic System, Washington DC: Institute for International Economics. Frankel, Jeffrey A., and Wei, Shang-Jin, 1995. European Integration and the Regionalisation of World Trade and Currencies: The Economics and the Politics, Berkeley, CA: University of California at Berkeley. Haveman, Jon David, 1992. ‘On the Consequences of Recent Changes in the Global Trading Environment’, PhD dissertation, University of Michigan. Hellqvist, Marcus, 2003a. ‘Trade Facilitation from a Developing Country Perspective’, Swedish National Board of Trade Paper. 2003b. ‘Trade Facilitation: Impact and Potential Gains’, Swedish National Board of Trade Paper. Heydon, Ken, 2002. ‘RTA Market Access and Regulatory Provisions – Regulatory Provisions in Regional Trade Agreements: Singapore Issues’, paper submitted for the WTO Seminar on Regionalism and the WTO, 26 April 2002, OECD Trade Directorate. Inter-American Development Bank (IADB), 2002. ‘Beyond Borders: The New Regionalism in Latin America. Economic and Social Progress in Latin America, 2002 Report’, IADB, Washington DC. Johnson, Harry, 1965. ‘An Economic Theory of Protectionism, Tariff Bargaining, and the Formation of Customs Unions’, Journal of Political Economy 73 (June): 256–83. Kahler, Miles, 1995. International Institutions and the Political Economy of Integration, Washington DC: Brookings Institution. Kemp, Murray C., and Wan, Henry Y., Jr, 1976. ‘An Elementary Proposition Concerning the Formation of Customs Unions’, Journal of International Economics 6 (February): 95–8. Krueger, Anne O., 1997. ‘Problems with Overlapping Free Trade Areas’, in Takatoshi Ito and Anne Krueger (eds.), Regionalism versus Multilateral Trade Agreements, Chicago: University of Chicago Press.
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Krishna, Pravin, 1998. ‘Regionalism and Multilateralism: A Political Economy Approach’, Quarterly Journal of Economics 113 (February): 227–51. Laird, Sam, 1999. ‘Export Policy and the WTO’, Journal of International Trade and Economic Development 8(1) (March): 73–88. Lawrence, R. Z., 1996. Regionalism, Multilateralism and Deeper Integration, Washington DC: Brookings Institution. Levy, Philip I., 1997. ‘A Political and Economic Analysis of Free Trade Agreements’, American Economic Review 87(4) (September): 506–19. Li, Quan, 2000. ‘Institutional Rules of Regional Trade Blocs and Their Impact on Trade’, in R. Switky and B. Kerremans (eds.), The Political Consequences of Regional Trade Blocks, London: Ashgate. Lima˜o, N., 2006, ‘Preferential Trade Agreements as Stumbling Blocks for Multilateral Trade Liberalisation: Evidence for the US’, American Economic Review 96(3): 896–914. Lipsey, Richard G., 1960. ‘The Theory of Customs Unions: A General Survey’, The Economic Journal 70: 498–513. Lipson, Charles, 1984. ‘International Cooperation in Economic and Security Affairs’, World Politics 37: 1–23. Lucenti, Krista, 2003. ‘Is There a Case for More Multilateral Rules on Trade Facilitation?’, in State Secretariat of Economic Affairs and Simon J. Evenett (eds.), The Singapore Issues and the World Trading System: The Road to Cancun and Beyond, Bern: World Trade Institute. Meade, James, 1955. The Theory of Customs Unions. Amsterdam: North Holland. Melitz, J., 2001. ‘Geography, Trade, and Currency Union’, Discussion Paper Series No. 2987, Centre for Economic Policy Research (October 2001). Milner, Helen, 1997. ‘Industries, Governments, and the Creation of Regional Trade Blocs’, in Edward D. Mansfield and Helen V. Milner (eds.), The Political Economy of Regionalism. New York: Columbia University Press. Mundell, Robert A., 1964. ‘Tariff Preferences and the Terms of Trade’, Manchester School of Economic and Social Studies 32: 1–13. Olarreaga, Marcelo, and Soloaga, Isidro, 1998. ‘Endogenous Tariff Formation: The Case of MERCOSUR’, World Bank Economic Review 12(2): 297–320. Oye, Kenneth A., 1992. Economic Discrimination and Political Exchange: World Political Economy in the 1930s and 1980s. Princeton, NJ: Princeton University Press. Panagariya, Arvind, 1999. ‘Preferential Trade Liberalisation: The Traditional Theory and New Developments’, Working Paper, University of Maryland. Panagariya, Arvind, and Findlay, Ronald, 1996. ‘A Political-Economy Analysis of Free-Trade Areas and Customs Unions’, in The Political Economy of Trade Reform: Essays in Honor of Jagdish Bhagwati. Cambridge, MA: MIT Press: 265–87.
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Regibeau, Pierre, and Rockett, Katharine, 2001. ‘Administrative Delays as Barriers to Trade’, Center for Economic Policy Research Discussion Paper No. 3007. Richardson, Martin, 1994. ‘Why a Free Trade Area? The Tariff Also Rises’, Economics and Politics 6(1) (March): 79–96. Rose, Andrew, 2002. ‘Do We Really Know That the WTO Increases Trade?’, Centre for Economic Policy Research Discussion Paper 3538. London: CEPR. Scollay, Robert, 2005. ‘ “Substantially All Trade”: Which Definitions Are Fulfilled in Practice? An Empirical Investigation’, report prepared for the Commonwealth Secretariat. APEC Study Center, University of Auckland (15 August 2005). Suominen, Kati, 2004. ‘Rules of Origin in Global Commerce’, PhD Dissertation, University of California San Diego. Tripartite Committee, 2005. A Comparative Guide to the Chile–United States Free Trade Agreement and the Dominican Republic-central America–United States Free Trade Agreement. Washington DC: Economic Commission for Latin America and the Caribbean, Inter-American Development Bank, and Organization of the American States (January 2005). Available at www.sice. oas.org/TPCStudies/USCAFTAChl_e/Contents.htm. Viner, Jacob, 1950. The Customs Union Issue. New York: Carnegie Endowment for International Peace. Wilson, John, Mann, Catherine, and Otsuki, Tsunehiro, 2003. ‘Trade Facilitation and Economic Development: Measuring the Impact’, World Bank Policy Paper 2988. World Bank, 2005. Global Economic Prospects. Washington DC: The World Bank. World Customs Organization, 2004. ‘Information Note: WCO instruments and GATT Articles V, VIII and X’, www.wcoomd.org/i.e./wto/Information_ note_En.pdf. World Trade Organization, 2002a. ‘Coverage, Liberalisation Process and Transitional Provisions in Regional Trade Agreements’, Committee on Regional Trade Agreements (5 April 2002). 2002b. ‘Rules of Origin Regimes in Regional Trade Agreements’, Committee on Regional Trade Agreements (5 April 2002). 2002c. ‘Compendium of Issues Related to Regional Trade Agreements’, Negotiating Group on Rules TN/RL/W/8/Rev.1 (1 August 2002). 2005. ‘Factual Presentation: Free Trade Agreement between the Republic of Korea and Chile (Goods)’, WT/REG169/3 (1 July 2005).
4 Trade remedy provisions in regional trade agreements robert teh, thomas j. prusa and michele budetta* 1
Introduction
This paper examines trade remedy provisions in regional trade agreements (RTAs). By trade remedies are meant anti-dumping, countervailing and emergency or safeguard measures. Anti-dumping and countervailing duties can be levied on exporters who engage in ‘unfair’ trading practices that cause material injury to domestic producers. These unfair trading practices can take the form of selling products below their ‘normal’ price or of benefiting from government-provided subsidies. Safeguard actions can be taken even if there is no unfair trade practice so long as imports have increased to an extent that serious injury has been suffered by domestic producers. No matter the difference in conditions under which they can be triggered, all these instruments represent internationally agreed means for a country to temporarily increase the level of trade protection received by its injured domestic industry. Despite the extensive literature on regionalism, not a lot is known about the actual content of many of these RTAs. This is certainly true about the trade remedy provisions. This paper proposes a set of templates for analyzing the trade remedy provisions in RTAs. Based on these templates, the trade remedy provisions of seventy-four existing RTAs are mapped. A major contribution then of this paper to the literature on *
The authors would like to thank Chad Bown, Jo-Ann Crawford, Andreas Sennekamp, Hiromi Yano and participants in the Inter-American Development Bank–WTO conference on ‘Regional Rules in the Global Trading System’, held in July 2006 in Washington DC, for their many helpful comments. They are absolved of any remaining errors and omissions in the paper. The views expressed in this paper are not meant to represent the positions or opinions of the WTO Secretariat nor of its Members and are without prejudice to Members’ rights and obligations under the WTO.
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regionalism is providing baseline information about the trade remedy rules in these agreements. Beyond this role of filling in gaps in knowledge of RTAs, the paper also probes how trade remedy rules in RTAs treat the trade of members differently from the trade of non-members. It will document, for example, how many RTAs have been able to abolish the use of trade remedies on intra-regional trade. It will examine whether the bar for taking trade remedy action on imports from RTA members is higher than on imports of non-members. Whereas the preferential nature of market-access provisions in RTAs is well known, the discriminatory aspect of trade remedy rules in RTAs has been hardly studied at all. Since only a small number of RTAs have actually abolished trade remedy actions against RTA partners, this paper examines a number of proposed explanations for why this could be the case and complements the analysis with probit model estimates.
1.1
Why are trade remedies needed?
Why do trade agreements need trade remedies? One explanation for the near universal presence of trade remedies in trade agreements is the political economy of protectionism (Tharakan 1995). The long-term process of tariff liberalization in the post-World War II era has successfully reduced tariff rates to very low levels worldwide. But import-competing sectors would continue to have an incentive to secure protection through whatever means they can find. Although trade remedy measures are typically administered by bureaucracies which appear to be insulated from political pressure, influence can be brought to bear on them indirectly ‘through the shaping of the laws and regulations’ which govern their work (Finger, Hall and Nelson 1982). One of the advantages offered by administered protection to import-competing sectors is that it is inherently predisposed in their favour since it is a channel for complaints about an excess of import competition and not of its lack. By design, the trade remedy bureaucracy can only impose protection and not remove it other than that which it imposes itself.1 A second explanation sees trade remedy measures as a pragmatic tool to deal with the political demands for protection that trade liberalization provokes (Jackson 1997). Trade liberalization may lead to costs of adjustment. If nothing is done to manage those costs, political pressure 1
Finger, Hall and Nelson (1982) p. 454. Moore (2002, 2006) offers an excellent overview of US sunset policy.
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may build up to a point where protectionist forces would be able to engineer a permanent reversal of trade liberalization. The introduction of trade remedy measures in a trade agreement may be thought of as anticipating the possibility of such difficult adjustments and the political pressure for protectionism that they give rise to and providing a means to deflate this pressure with a temporary reversal of liberalization. This implies that the depth of liberalization that can be achieved by a trade agreement ex ante may depend on whether there are built-in escape clauses that allow governments to depart temporarily from their liberalization commitments under well-defined and circumscribed conditions. Trade remedy measures address this need. While the use of the trade remedy measures may result in ex post welfare losses during periods when the level of protection is temporarily increased, the deeper liberalization that is allowed ex ante means that this could be outweighed by the long-term welfare gains.2
1.2 Frequency of trade remedy use Before moving on to discuss the role of trade remedies in RTAs, it may be useful to document the frequency of anti-dumping activity over the past quarter of a century and of countervailing duties and safeguards since 1995. First, it is clear that countries have a revealed preference for using anti-dumping measures compared to countervailing duties or safeguard measures. Using the notifications made by members to the WTO over the 1995–2006 period, there were nearly nine times more anti-dumping initiations (3,044) than there were countervailing duty (191) and safeguard (155) initiations combined (see Table 4.1). Over the same period, there were ten times more anti-dumping measures (1,941) than there were countervailing duty (115) and safeguard measures (78) applied.3 2
3
A recent paper by Moore and Zanardi (2007) has examined whether this particular explanation for trade remedy measures can be empirically verified. They find that the evidence for a sample of twenty-three developing countries is not supportive of the argument that the availability of anti-dumping measures has contributed to tariff reductions. Instead, they conclude that past use of anti-dumping may have led to less trade liberalization. Bown and Tovar (2008) find product-level evidence in the case of India that anti-dumping use is positively related to the size of India’s product-level tariff cut. The small number of safeguard initiations and actions compared to the other trade remedy measures should be taken in some context since a safeguard action may involve multiple import sources.
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Table 4.1 Trade remedy actions, initiations and measures, 1995–2006 Trade contingent instrument
Initiations
Measures
Anti-dumping Countervailing duty Safeguard
3,044 191 155
1,941 115 78
Note: Data on safeguard measures cover only the period from 1996 to 2006. Source: WTO Secretariat
Until the mid-1980s, most anti-dumping actions were taken by the four traditional users (Australia, Canada, the EU and the US). Beginning in the mid-1980s, anti-dumping actions began to spread beyond the traditional users and to involve many developing countries (see Miranda et al. 1998; Prusa 2005; Zanardi 2004). Figures 4.1a and 4.1b give an indication of the main trends. First, total anti-dumping initiations have continued to rise during the two decades since 1980, although there has been a significant drop in overall activity since 2001. Secondly, anti-dumping initiations by the traditional users have tailed off in the last decade. Thirdly, the new users (primarily developing countries like Argentina, Brazil, India and Mexico) have become quite active and have been responsible for much of the growth of antidumping activity since the mid-1990s. The new users initiate antidumping cases more intensively (fifteen to twenty times more frequently per dollar of imports) than historically predominant users like the US and the EU (Prusa 2005). Lastly, anti-dumping actions by developing countries are increasingly directed at other developing countries. For the period 1995–2006, more than 70 per cent of all anti-dumping initiations by developing countries were against other developing countries. The average annual number of countervailing duty (CVD) initiations has been about sixteen per year, but with an apparent decline in recent years (see Figures 4.2a and 4.2b).4 The bulk of all countervailing duty 4
However, it may be possible that the world is currently in the midst of a major change in how countries use CVDs. In the face of the US Department of Commerce paper decision last year overturning the practice since 1984 not to use CVDs against ‘non-market’ economies like China, there has subsequently been a major increase in US CVD use against China. There have been a dozen or so new cases recently initiated against China, many of which bring in other exporters as well. Thus, CVD use may be on the rise if other countries follow the US lead.
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400 350 300
Count
250 New Users
200 150 100 Traditional Users 50
2006
2004
2005
2002
2003
2000
2001
1998
1999
1997
1996
1995
1993
1994
1992
1990
1991
1989
1987
1988
1985
1986
1984
1983
1982
1981
1980
0
Year
Figure 4.1a Frequency of anti-dumping initiations, 1980–2006 Source: Prusa (2005) and WTO Secretariat.
250
200
Count
150 New Users 100
50
Traditional Users
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
Year
Figure 4.1b Frequency of anti-dumping measures, 1995–2006 Source: WTO Secretariat.
actions have been taken by the United States, the EU and Canada. Based on notifications to the WTO, the three WTO members accounted for nearly three-quarters of all CVD initiations during the past twelve years. More than two-thirds of all CVD initiations were directed at developing countries, with India being the most frequent target.
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45 40 Other Users
35
Count
30 25 20 15 10 Canada, EC and US 5 0 1995
1996
1997
1998
1999
2000 2001 Year
2002
2003
2004
2005
2006
2005
2006
Figure 4.2a Frequency of CVD initiations, 1995–2006 Source: WTO Secretariat.
20 18 16
Other Users
14
Count
12 10 8 6 Canada, EC and US 4 2 0 1995
1996
1997
1998
1999
2000
2001 Year
2002
2003
2004
Figure 4.2b Frequency of CVD measures, 1995–2006 Source: WTO Secretariat.
With regards to safeguards, the average annual number of initiations is about thirteen per year (see Figures 4.3a and 4.3b). About 70 per cent of all safeguard initiations are taken by developing countries, principally India, Jordan, Chile and Turkey.5
5
See Yano (2006).
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40 35 30
Count
25 20 15 Developing 10 5 0 1995
Developed 1996
1997
1998
1999
2000 2001 Year
2002
2003
2004
2005
2006
Figure 4.3a Frequency of safeguard initiations, 1995–2006 Source: WTO Secretariat.
16 14 12
Count
10 8 Developing 6 4 2 0 1996
Developed 1997
1998
1999
2000
2001 Year
2002
2003
2004
2005
2006
Figure 4.3b Frequency of safeguard measures, 1996–2006 Source: WTO Secretariat.
While all discriminatory applications of trade remedies increase the trade diversion effects of an RTA, the evidence presented here highlights the particular importance of anti-dumping, given the frequency with which it is applied by many developed and developing countries. RTA provisions that abolish or increase the discipline on anti-dumping actions against RTA members can have potentially damaging effects on
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non-members. While discriminatory anti-dumping rules in RTAs can reduce anti-dumping actions against RTA members, protectionist pressure may be diverted to non-members so that anti-dumping initiations and measures against them increase.
1.3 Trade remedies in RTAs Since RTAs have the objective of dismantling all barriers to intra-regional trade, one natural expectation is that RTA members will abolish the use of trade remedies against intra-bloc trade. In fact, there are those who view the elimination of trade remedies, in particular anti-dumping actions, as a requirement under GATT Article XXIV, which deals with customs unions and free trade areas. Paragraph 8(b) of GATT Article XXIV requires WTO members, who form a preferential trade area, to ‘eliminate duties and other regulations restricting trade’.6 Some have interpreted the reference to ‘other regulations restricting trade’ to include trade remedies, and to anti-dumping actions in particular (Marceau 1994). This view is strengthened by the fact that paragraph 8(b) of GATT Article XXIV allows, where necessary, RTA members to exclude certain GATT Articles from the general requirement to ‘eliminate other regulations restricting trade’.7 It would have been easy to include GATT Articles VI (anti-dumping and countervailing duties) and XIX (emergency action on imports of particular products) to the excluded GATT Articles, if that had been the intention of the framers of the GATT. That they are not suggests to some that RTAs which retain the use of trade remedy instruments are inconsistent with GATT rules (Marceau 1994). But the elimination of intra-regional tariffs may create new demands for the protective effects of trade remedies. For a government entering into a free trade agreement, import-competing sectors need to be given assurance that they have the means to protect themselves from the unanticipated consequences of the regional liberalization programme. 6
7
Article XXIV:8(b) states that: ‘A free trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted 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 GATT Articles not covered by the requirement to eliminate ‘other regulations restricting trade’ include Article XI (general elimination of quantitative restrictions), XII (restrictions to safeguard the balance of payments), XIII (non-discriminatory administration of quantitative restrictions), XIV (exceptions to the rule of non-discrimination), XV (exchange arrangements) and XX (general exceptions).
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Retaining trade remedies in the RTA serves the useful purpose of soliciting political support for the agreement. In these circumstances, trade remedies could be seen in a similar light as long transition periods, complicated rules of origin, and sensitive sectors in RTAs, all of which result in a slower process of liberalization for sensitive importcompeting sectors. Instead of directly cushioning the effects of the RTA by drawing out the process of tariff elimination, trade remedies achieve a different cushioning effect by specifying a set of conditions – injury to the domestic industry – under which the regional liberalization programme may be temporarily suspended or partially reversed. While abolishing trade remedies on RTA partners’ imports will most likely increase intra-bloc trade, this does not necessarily mean that it is welfare-enhancing. The ambiguity of the welfare impact stems from the well-known insight that preferential trade arrangements have both trade-creation and trade-diversion effects (Viner 1950). The impetus given to intra-regional trade by the abolition of trade remedy actions on RTA partners’ trade may be at the expense of cheaper sources of imports that come from non-members. Since RTAs thrust us into the world of the second best, actions that look like they will lead to an increase in economic efficiency may achieve exactly the opposite effect. The danger in fact is that, as intra-regional trade expands because of falling intra-regional tariffs, administered protection becomes increasingly directed at the imports of non-members. Bhagwati (1993) and Bhagwati and Panagariya (1996) have argued that, due to the ‘elastic’ and selective nature of administered protection, they can increase the risk of trade diversion from RTAs. Administered protection is elastic because it is ‘subject to serious arbitrariness and manipulation’. So, apart from discrimination introduced by preferential tariffs, the establishment of RTAs can lead to more discrimination against nonmembers of the RTA though more frequent trade remedy actions against them. It appears that both Bhagwati (1993) and Bhagwati and Panagariya (1996) envisioned that this increase in discrimination against nonmembers can take place without necessarily requiring the adoption of special RTA rules on trade remedies. The elastic and selective nature of trade remedy protection allows non-members to be targeted more frequently. But, to the extent that RTAs adopt special or additional rules on trade remedy actions on members’ trade, they can effectively increase the level of discrimination against non-members. This increase in discrimination can occur when RTA members abolish trade remedy actions
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against the trade of RTA members but not against non-members’ trade. It could occur when RTA members adopt rules that strengthen disciplines on trade remedy actions against the trade of RTA members but not against the trade of non-members. This is particularly relevant in the case of anti-dumping or countervailing measures where the actions taken are in response to unfair trade practices rather than by policies set in motion by the RTA like reductions in preferential tariffs. Unfair trade could be practised by suppliers within as well as outside the trade bloc. But, given that RTA rules on anti-dumping or countervailing measures make it impossible (if the measures are abolished by the RTA) or more difficult (if the RTA rules tighten discipline on their use) to apply against intra-bloc members, they get applied only against countries outside the bloc. The plan for the rest of the paper is as follows. Section 2 describes the key economic characteristics of the RTAs that were included in the analysis. Section 3 begins with a review of the available literature on the role of trade remedies in trade agreements. Based on this review, a number of issues are identified which need to be reflected in the trade remedy templates. One of those issues is the possibility that trade remedies worsen the problem of trade diversion in RTAs through rules that prohibit or deter trade remedy actions against RTA partners. The section then presents the templates used in the mapping exercise and also discusses some of the limitations inherent in relying primarily on the legal text of the agreements. Sections 4 and 5 discuss the results of mapping anti-dumping, countervailing duties and safeguards provisions in RTAs. The information from the mappings is used to describe general features of the trade remedy provisions and to provide answers to a few key questions. Section 6 summarizes the results and offers some conclusions.
2
RTAs included in the mapping
Seventy-four RTAs were surveyed for this paper (the list of the RTAs appears in the Appendix to this volume). The RTAs were selected based on a number of criteria. As much as possible, they should be RTAs notified to the WTO. The sample of RTAs should be geographically diverse, involving arrangements from all major regions, and should include North–North, South–South and North–South RTAs. The sample should also include the most economically important RTAs, and there should be a greater representation of the more recent generation of RTAs.
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2.1
Key economic characteristics of the RTAs
The bulk of the seventy-four RTAs included in the survey have been notified to the WTO.8 Collectively, the notified RTAs represented about 47 per cent of the total number of RTAs notified to the WTO under GATT Article XXIV and the Enabling Clause.9 The RTAs surveyed accounted for more than half of global merchandise import flows in 2005, although not all of that trade receives preferential treatment. Intra-RTA imports in 2005 for the surveyed RTAs ranged from a high of US$2.4 trillion (for the EU) to a low of US$73 million (for the arrangement involving EFTA and the Former Yugoslav Republic of Macedonia). The share of intra-RTA trade was largest (61 per cent) for the EU and NAFTA (34.5 per cent) while the smallest share was for the RTA involving the EU with the Faroe Islands.
2.2
Other stylized facts
Crawford and Fiorentino (2005) and Fiorentino, Verdeja and Toqueboeuf (2007) have provided a comprehensive picture of the current RTA landscape. They document the continuing increase in the number of RTAs being formed. Even countries in East Asia that have traditionally eschewed preferential trade arrangements have now become active players in regional trade negotiations. RTAs between developed and developing countries and cross-regional agreements are on the increase. Many of the patterns they have documented are apparent in the list of RTAs included in the survey. A large number of the RTAs in the sample were formed just recently. Forty came into force at the beginning of the current decade, and twenty-two in the 1990s. Only four came into force in the 1980s, four in the 1970s and four before 1970 (see Figure 4.4). The list is also geographically diverse with RTAs from Europe, North America, the Caribbean, Latin America, Asia–Pacific, Africa and the Middle East. A large majority of the RTAs (forty-six) involve members who are a mix of developed and developing countries.10 Twenty-two RTAs involve 8
9
10
Of the seventy-four RTAs included in this survey, only four have not yet been notified to the WTO as of 18 July 2007. They are the Andean Community, the Group of Three, Mexico–Northern Triangle and Mexico–Uruguay. As of 15 April 2008, 150 RTAs in force have been notified to the WTO under either GATT Article XXIV or the Enabling Clause of 1979. A further fifty-one RTAs in force have been notified under GATS Article V. ‘Developed countries’ refer to Australia, Canada, the EU, members of EFTA, Japan, New Zealand and the US. All other countries are classified as developing countries.
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45 40
Number of RTAs
35 30 25 20 15 10 5 0 Before 1970
1970s
1980s
1990s
2000s
Period
Figure 4.4
Number of RTAs in sample coming into force, by decade
Developed 8%
Developing 30%
Mixed 62%
Figure 4.5
RTAs by level of development of members
only developing countries as members, while six have developed members only (see Figure 4.5). There is a pronounced hub-and-spoke and cross-regional pattern in the RTAs in the sample (see Figure 4.6). The largest constellations are
EU-Algeria EU-Andorra EU-Chile EU-Croatia EU-Egypt EU-Faroe Islands EU-FYROM EU-Israel EU-Jordan EU-Lebanon EU-Mexico EU-Morocco EU-OCT EU-Pal Auth. EU-South Africa EU-Switz. & Liech. EU-Syria EU-Tunisia EU-Turkey EEA
EFTA-Chile EFTA Croatia EFTA-FYROM EFTA-Israel EFTA-Jordan EFTA-Mexico EFTA-Morocco EFTA-Pal. Auth EFTA-Singapore EFTA-Tunisia EFTA-Turkey EEA
ALADI Group of Three Mexico-Chile Mexico-EU Mexico-EFTA Mexico-Israel Mexico-Japan Mexico-Nicaragua Mexico - Northern Triangle Mexico-Uruguay NAFTA
NAFTA US-Australia US-Bahrain US-CAFTA-Dom. Rep. US-Chile US-Israel US-Jordan US-Morocco US-Singapore
ALADI Chile-Canada Chile-EU Chile-EFTA Chile-Korea Chile-Mexico Chile-US
AFTA Singapore-Australia Singapore-EFTA Singapore-Japan Singapore-New Zealand Singapore-US
Australia-Singapore Australia-Thailand Australia-US CER SPARTECA
Canada-Chile Canada-Costa Rica Canada-Israel NAFTA
EU
EFTA
Mexico
US
Chile
Singapore
Australia
Canada
Figure 4.6
Hub-and-spoke arrangement of RTAs in sample
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grouped around the EU (future accession countries, Euromed and others), EFTA and the US. But there are other active RTA players, which include Mexico (with ten RTAs), Singapore (with six RTAs), Australia (with five RTAs), Chile (with five RTAs) and Canada (with four RTAs). The sample is dominated by free trade agreements with just a few preferential agreements of partial scope (EU–OCT, SAPTA and SPARTECA), although there is a sizeable number of customs unions (Andean Community, CACM, CARICOM, CEMAC, EU, EU–Andorra, EU– Turkey, GCC, MERCOSUR and UEMOA). The prominent hub-and-spoke and cross-regional pattern of the RTAs in the sample raises the question whether there are identifiable features in the trade remedy provisions negotiated by the hubs. It turns out that there is some evidence that the hubs were negotiating according to certain trade remedy moulds in mind. These patterns are described in section 4 below, which discusses the results of the mapping.
3 3.1
Methodological approach to the mapping
Review of previous approaches to examining trade remedy rules in RTAs
There does not appear to have been many previous attempts to systematically analyze trade remedy rules in regional trade agreements. However, the anti-dumping rules in NAFTA, and, in particular, the role of bi-national panels which have the authority to review anti-dumping determinations made by national authorities, have received some research attention. To what extent can the existence of such a regional institution affect the frequency of anti-dumping initiations and measures against RTA partners? The key policy concern is the extent to which RTA rules on trade remedies can lead to more discrimination with reduced trade remedy actions against RTA partners but perhaps a greater propensity to take trade remedy actions against non-members. The economic literature suggests one important avenue through which the specific trade remedy rules in RTAs can reduce actions against imports from RTA partners. It appears that the existence of a regional body which has the power to review the determinations of national investigating authorities can reduce the incidence of trade remedy actions against intra-RTA imports. In the case of NAFTA and the Canada–US Free Trade Agreement (CUSFTA) for example, a member state can request a review of the final
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anti-dumping or countervailing duty determination made by the authority of another NAFTA partner. Under Chapter 19 of NAFTA, this would be undertaken by a bi-national panel, composed of five experts designated by the concerned NAFTA members. While the scope of the review is limited to determining whether the decision of the trade remedy authority is in accordance with national laws, the panel has the authority to remand it to the concerned authority for action if it judges that the determination has not been in accord with national laws. Chapter 19 also allows NAFTA partners to request a bi-national panel review of a proposed amendment of anti-dumping or countervailing duty statutes. The creation of bi-national panels in NAFTA appears to have reflected Canadian concerns over US anti-dumping and CVD actions (Gagne´ 2000; Jones 2000). If final determinations can be subject to review not only by the courts or tribunals of the country whose authorities imposed the measure but also by a regional body, it may provide an additional layer of objectivity (Gagne´ 2000). The existence of regional review bodies might also change the incentives for filing unfair trade petitions by reducing the likelihood of an affirmative finding of injurious unfair trade (Jones 2000). A number of empirical studies have tried to ascertain whether this specific provision in CUSFTA and NAFTA have had a discernible effect on the number of US trade remedy actions against NAFTA partners and on the final determinations by US authorities. One possible test is to see whether there is a significant difference in outcome of the appeals before bi-national panels as opposed to appeals before national tribunals. Goldstein (1996) computes the ratio of the share of US unfair trade orders against Canada as a proportion of Canadian imports to the United States. She found that, in 1987, before the FTA, the Canadian ratio of anti-dumping orders to its share of US imports was 0.83. By the close of 1990, that number had been reduced to 0.33. This reduction in unfair trade orders occurred only in Canadian trade as the same ratio computed for the European Union and Japan rose during the same period. She attributes this shift to the rulings of the bi-national panels. Rugman and Anderson (1997) reviewed the initial five-year period (1989–94) of the operation of CUSFTA. They noted that two-thirds of Canadian appeals of US trade remedy actions before bi-national panels were remanded compared with one-third for nonNAFTA countries before US tribunals (the Court of International Trade). Although they are critical of the bi-national panels and make a
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number of recommendations for improving them, given this evidence they acknowledged that Canada obtained a unique benefit from the binational panels under CUSFTA. However, both the Goldstein and the Rugman and Anderson papers did not apply any statistical tests to the data. Using anti-dumping and countervailing duty filings of the US from 1980 to 1997 and similar data of Canada from 1985 to 1997, Jones (2000) estimated a Poisson regression, with macroeconomic variables, imports, industry characteristics and an FTA dummy as regressors. He found a robust inverse relationship between the introduction of NAFTA Chapter 19 and the number of unfair trade petition filings. He found that there was a statistically significant reduction in both US anti-dumping filings against Canada and Canadian antidumping filings against the US after NAFTA took effect. Blonigen (2002) extended the study by Jones in a number of ways. First, Mexico was included in the study. Secondly, instead of representing Chapter 19 as a time dummy, he used the number of requests for panels and/or remands, thus more closely measuring the amount of Chapter 19 activity. Thirdly, Blonigen examined the possible effect of Chapter 19 not only on the number of anti-dumping/countervailing duty filings but also on the outcome of the reviews. Unlike Jones, he found no evidence that bi-national reviews under Chapter 19 of NAFTA affected the frequency of US filings or affirmative determinations against Canada and Mexico. However, he did discover some indication that cumulative remands by Chapter 19 dispute panels to review US decisions against Canada have led to fewer affirmative decisions against Canada.
3.2 Benchmarks (templates) used for the mapping The mappings that are presented in this paper are drawn almost exclusively from the legal text of the RTAs. In a small number of cases primarily involving older RTAs, the mapping has also relied on directives or decisions that were enacted subsequently, several years after the RTA came into force. The purpose of the mappings is, first, to help understand the nature of trade remedy rules. For this one needs to be able to assume that legal provisions in the RTAs coincide with actual practice. One important caveat to recognize then is the potential cleavage between the language contained in the agreements and how the provisions are actually implemented. Although the legal text controlling trade remedy practice may sometimes be similar across RTAs, there
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could be large variation in trade remedy practices that in turn generate differences in outcomes. Blonigen and Prusa (2003) have emphasized the importance of the institutional process surrounding the anti-dumping investigation and determinations, and argued that these have significant impacts beyond the anti-dumping duty finally observed. They pointed to the substantial discretion enjoyed by authorities in their decisions on dumping margins and injury determinations. They identified a number of differences in anti-dumping practices across countries. The level of transparency varied and seemed to be a problem for new users. Price undertakings were common in some countries but not in others. Some countries began collecting anti-dumping duties only a few days after a petition was filed, although most countries waited until a preliminary injury determination was made. Some countries levied an anti-dumping duty equal to the full dumping margin while others levied a lesser amount. There are other studies with findings consistent with this picture of significant differences in anti-dumping practices across countries. Bown (2008), for example, found substantial heterogeneity in the key determinants of anti-dumping use across the new user countries. For some countries, he found that macroeconomic shocks were important; for others political-economy forces were important; still yet for others there was more likely evidence of injury. Blonigen (2003) noted that the average dumping margin calculated by the US Department of Commerce (DOC) had risen from an average of 15.5 per cent in the early 1980s to an average of 63 per cent by 2000. During the same period, the proportion of cases in which the US International Trade Commission found material injury rose from 45 per cent in the early 1980s to 60 per cent by 2000. He concluded that DOC discretionary practices have played the major role in rising dumping margins. Importantly, the evolving effect of discretionary practices was due not only to increasing use of these practices over time, but also to apparent changes in implementation of these practices that meant a greater increase in the dumping margin whenever they were applied. The recent survey by Horlick and Vermulst (2005) of the antidumping practices in ten major user countries – Australia, Brazil, China, the EU, India, Indonesia, Mexico, South Africa, Thailand and the US – showed that this problem extended to many countries. They identified a number of problem areas: procedural issues, determination of dumping margins, injury determinations and procedural issues. They found that
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the increasing use of constructed normal values gave too much discretion to anti-dumping authorities in determining the existence of dumping. They reached a similar conclusion that there was too much administrative discretion in the determination of injury, injury margins and causation. What these studies imply is that, while the legal provisions on trade remedies in RTAs provide important information, they may not be enough. The institutional setting, the administrative procedures and practices will need to be examined to ascertain what part they play in determining the trade and welfare effects of trade remedy actions. However, it has not been possible to take these factors into account in this paper. While this is a concern, the mapping of these legal provisions continues to be a useful exercise, and the only test of whether there is predictive power from the mapping will come from empirically grounded tests of specific hypotheses about trade remedy practice in RTAs. The RTAs included in the sample contain a large number established during or after 2000, so that it could be said, with some degree of confidence, that the templates adopted provide the best prism for understanding trade remedy rules in these agreements. At the same time, the frenetic pace of RTA negotiations suggests the need to anticipate other evolving issues around trade remedies that future work will have to map, even if there has been no need yet to confront them for the RTAs in the data set. One such issue may be the China factor – both in RTAs that it signs and also in new RTAs that other countries sign in the face of ‘China–specific’ WTO provisions associated with its 2001 accession. This China factor is taken up in the discussion of the antidumping and safeguards templates.
3.2.1 Anti-dumping A two-level template is adopted for the comparative analysis of antidumping provisions. In the first level of the template, the key questions that are asked are: (1) whether anti-dumping action is disallowed among the members; and (2) whether specific rules on anti-dumping apply to RTA members’ trade. If specific anti-dumping rules apply to RTA members, the second level of the template maps these specific provisions of the agreement which differs from multilateral benchmarks. 3.2.1.1 Level 1 elements for anti-dumping The first level of the template classifies anti-dumping provisions in RTAs into three mutually
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exclusive categories. The first category of RTA includes those which disallow anti-dumping actions among the RTA members. The second category includes RTAs which have no such prohibition, but which, at the same time, develop no specific language or provisions on antidumping. The final category is made up of RTAs which allow antidumping action and which contain specific provisions on anti-dumping. 3.2.1.2 Level 2 elements for anti-dumping Although some RTAs have quite extensive provisions on anti-dumping, much of it replicates the language of the anti-dumping agreement in the WTO. Thus the second-level template only maps these specific provisions where it has been possible to find a departure from benchmarks established in the anti-dumping agreement in the WTO. The areas where it has been possible to find departures in RTA provisions are on de minimis dumping margins, de minimis dumping volumes, the lesser duty rule and the duration of final anti-dumping duties. Otherwise, there appears to be little or no significant difference between provisions in the anti-dumping agreement of the WTO and corresponding RTA provisions on determination of dumping, determination of injury, definition of domestic industry, evidence, provisional measures, price undertakings, retroactivity and notification and consultation. Under multilateral rules, an anti-dumping investigation is to be terminated immediately if the dumping margin is found to be less than 2 per cent of the export price or if the volume of dumped imports from a particular country is less than 3 per cent of imports. RTA provisions that specify higher de minimis dumping margins or higher de minimis volumes than the multilateral benchmarks will treat RTA partners more favourably. This is because, even though exports from RTA and non-RTA sources may be found to have the same dumping margin, the investigation against the RTA member will terminate while the investigation against non-RTA sources will continue if the margin turns out to be higher than the multilateral benchmark but less than or equal to that prescribed in the RTA. Multilateral rules encourage but do not mandate the application of an anti-dumping duty that is less than the dumping margin if a lesser duty would be adequate to remove the injury to the domestic industry. A lesser duty rule or mandate in an RTA can provide an advantage to members. In the event that an anti-dumping action is taken by a country against a group of suppliers, some of which happen to be RTA members and others not, then RTA partners will face a lower anti-dumping duty even though the anti-dumping investigation might have found the same dumping
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margin against all suppliers. Under multilateral rules, definitive antidumping duties are to be terminated within five years from its imposition. Thus, RTAs that impose a shorter termination period on regional partners will give an advantage to exporters from those countries. Anti-dumping duties against exports from RTA partners will already have been phased out while exports from non-RTA partners can continue to be slapped with the duties. Some RTAs also specify a duration for provisional measures that is shorter than the four months stipulated in the anti-dumping agreement. But it is not clear whether this would necessarily treat RTA partners more favourably than non-RTA members. It might be in the interest of exporters to delay the investigative process and their preference might be for a longer rather than a shorter period that provisional measures are in effect. In fact, Article 7, paragraph 4, of the anti-dumping agreement allows national authorities to apply provisional measures for a period of up to six months upon request by exporters representing a significant percentage of the trade involved.11 Hence, this provision has not been identified as one that gives more favourable treatment to exporters from RTA partners. Besides these, the template also includes elements that are either quite unique to regional agreements or which have been highlighted in the literature on RTAs. As noted above, one important avenue through which anti-dumping rules in RTAs can affect the probability of trade remedy actions among RTA partners is through the establishment of a regional body which has the power to conduct investigations or has the authority to review or remand final determinations of national authorities. Provisions that specify a series of steps which members are first required to take to try to come to a mutually satisfactory outcome before the anti-dumping procedures are fully activated have also been included in the template.
11
Some reasons why exporters might prefer a longer period for provisional measures can be provided. Exporters may need more time to submit additional evidence which might influence the final outcome of the investigation. It might be that the investigators are under too much time pressure and exporters are of the view that they will be able to do a better job, that is, that anti-dumping duties might be lower, should they be given more time. It might be that exporters think that there are significant changes taking place in the domestic industry and that it will be more difficult to substantiate the allegation of injury should there be more time before the final decision is taken. Finally, it might also be that the exporters believe that the final margins might be even higher and that they have consignments on their way which they would wish to clear with customs in good time.
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Table 4.2 Antidumping template Elements 1. Anti-dumping actions disallowed 2. Anti-dumping actions allowed but with no specific provisions 3. Anti-dumping actions allowed and with specific provisions a Mutually acceptable solution b Different de minimis dumping margin c Different de minimis dumped volume d Lesser duty rule e Different duration of AD duty f Regional body/committee conducts investigations and decides on AD duties reviews/remands final determinations other
Finally, one needs to address the possibility of China–specific provisions in RTAs. China is the most frequent target of anti-dumping initiations and measures. Over the 1995–2006 period, it was the subject of 535 anti-dumping initiations and 375 anti-dumping measures reported to the WTO, the most of any Member. As it pursues free trade agreements, it is likely to press for its partner(s) to give it market economy status or for some other commitment to rein in anti-dumping, including possibly disallowing anti-dumping in the agreement. There are two RTAs involving China in the sample – China–Hong Kong and China–Macao – and, as will be discussed in section 4 below, both have disallowed the use of anti-dumping, thus clearly illustrating the importance of the issue for China. But the prohibition of anti-dumping actions will not always be feasible with potential RTA partners whereas treatment of China as a market economy may be possible. Given the limited number of Chinese RTAs in the sample, no China-specific anti-dumping provisions have been identified, unless prohibition of anti-dumping in RTAs is classified as such, so none has been introduced in the template. But future work examining anti-dumping rules in RTAs will need to keep China–specific provisions in mind for those RTAs involving China.12 The template used to map the anti-dumping provisions of RTAs appears in Table 4.2. 12
The recently signed New Zealand–China free trade agreement, which is the first FTA China has signed with a developed country, does not contain any China-specific provision such as for example treating it as a market economy.
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3.2.2 Countervailing duties While a similar two-level template is adopted in the case of countervailing duties, one significant addition is the inclusion of information concerning the presence of a common policy or programme on subsidies and any additional disciplines that are imposed on the use of subsidies and state aid. Under multilateral rules, countervailing duties can be levied on imports which benefit from subsidies if they cause or threaten material injury to an established domestic industry, or are such as to retard materially the establishment of a domestic industry. If the RTA members have a common policy on subsidies or state aid, they may be able to dispense with the use of countervailing duties. Alternatively, if the RTA members are able to agree on additional disciplines that apply to subsidies or state aid, then it may be possible to limit the application of countervailing duties in the RTA. The additional information included in the template includes provisions abolishing export subsidies on agricultural products and disciplines that curb state aid if it distorts competition.13 But, absent a common subsidy policy or additional disciplines on subsidies, it is unlikely for the provisions governing countervailing duties in the RTA to depart much from multilateral rules or practice. 3.2.2.1 Level 1 elements for countervailing duties The first level classifies CVD provisions in RTAs into three mutually exclusive categories. The first group of RTAs are those RTAs which disallow CVD actions against RTA members. The second category includes RTAs with no specific CVD provisions. And the third are those with specific CVD rules that apply to RTA members’ trade. 3.2.2.2 Level 2 elements for countervailing duties The second level of the template ascertains whether RTA rules on CVDs can result in members being treated more favourably than non-members. Some RTAs have quite extensive provisions on countervailing duties. But much of the language replicates that found in the Agreement on Subsidies and Countervailing Measures of the WTO. The second-level template only maps those provisions where it has been possible to find a departure from the multilateral agreement. 13
The WTO’s Hong Kong Ministerial Conference has decided that all export subsidies on agricultural products will be eliminated by the end of 2013.
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Table 4.3 Countervailing duties template Elements I. Subsidies prohibit export subsidies on agriculture II. State aid incompatible if it distorts competition III. Countervailing duties a Countervailing duties disallowed b Countervailing duties allowed but no specific provisions c Countervailing duties allowed and with specific provisions 1 Mutually acceptable solution 2 Regional body/committee conducts investigations and decides on CVD duties reviews/remands final determinations other
Given that regional bodies established under an RTA may be given substantial authority, including the ability to conduct CVD investigations or to review and remand final determinations, information on regional institutions has been included in the template. Provisions that specify a series of steps which members are first required to take to try to come to a mutually satisfactory outcome before the CVD process fully kicks in have also been included. Otherwise, there appear to be no significant differences between the provisions of the Agreement on Subsidies and Countervailing Measures of the WTO and the CVD provisions found in RTAs. The template used to map the countervailing duties provisions of RTAs appears in Table 4.3.
3.2.3 Safeguards One needs to distinguish between ‘bilateral’ and ‘global’ safeguard provisions in regional trading agreements. Bilateral safeguard actions are meant to apply only to the trade of other RTA members. They provide a temporary escape hatch for RTA members when, as a result of undertaking the commitments under the agreement – i.e. reducing preferential tariffs – increased imports from regional partners result in serious injury to the domestic industry. Triggering the safeguard provision in the RTA allows a member to relieve itself of its RTA obligations temporarily, with the period of relief providing the domestic industry the opportunity to adjust towards free
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trade. In fact, these actions are worded in that way – bilateral safeguards – in a number of RTAs. But, even in those RTAs in which this distinction is not made explicitly, the safeguard provision is clearly meant to address emergency situations that occur as a result of the preferential treatment accorded to partners’ imports. Global safeguards refer to those actions or measures triggered by GATT Article XIX (emergency action on imports of particular products) and the Agreement on Safeguards. Multilateral rules require that any safeguard measure be applied on a non-discriminatory basis.14 But provisions on safeguards in some regional trade agreements go beyond bilateral actions and also touch on global safeguard actions. In many instances, the RTA provisions on global safeguards specify conditions under which regional partners will be excluded from multilateral safeguard actions invoked by a member. It is possible to argue that, because bilateral safeguards are responses to cuts in preferential tariffs, RTA rules that apply to them will not lead to more favourable treatment of intra-bloc members. This differs from the case of anti-dumping or countervailing duties which are triggered by unfair trade practices that are independent of the existence of the RTA. If the interest is in RTA safeguard rules that favour intra-bloc members, one should instead focus attention on the global safeguards provisions. But it may not be so easy to disentangle these issues so clearly. For example, the provision abolishing bilateral safeguards under the Treaty of Asuncio´n was used by Argentina to exclude MERCOSUR partners from a WTO safeguard action on footwear. Despite this, a conceptual distinction between bilateral and global safeguards will be maintained in this paper with the concern about discrimination focusing on RTA provisions on global actions. In any case, bilateral safeguards have an independent interest of their own. Thus two mappings are provided, one on RTA rules applying to bilateral actions and a second applying to global safeguards. 3.2.3.1 Level 1 elements for bilateral safeguards The first level of the template classifies safeguard provisions in RTAs into three mutually exclusive categories. The first category includes RTAs which disallow safeguard actions among RTA partners. The second covers RTAs which allow such actions but have no specific provisions. The third category includes those RTAs which both allow safeguard actions and have 14
Article 2.2 of the Agreement on Safeguards states that: ‘Safeguard measures shall be applied to a product being imported irrespective of its source.’
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specific language governing those actions. The second and more detailed level of the template involves a classification of the provisions contained in the third category of RTAs. 3.2.3.2 Level 2 elements for bilateral safeguards The level 2 template includes provisions on: conditions for the application of safeguards, investigation, mutually acceptable solution, application of safeguard measures, provisional measures, duration and review of safeguard measures, compensation (equivalent level of concession), retaliation (suspension of equivalent concessions), treatment of developing and least developed countries, existence of a regional authority, notification and consultation and dispute settlement. Given the role of trade remedy instruments in managing regional trade liberalization, the template takes into account the existence of special safeguard provisions for products or sectors which are politically sensitive. They are special in at least two ways. First, they are triggered by a different mechanism, typically involving price and/or quantity thresholds. Secondly, they do not require that injury to the domestic industry be demonstrated. The special safeguard provisions in the RTAs are usually applied to agricultural products and textiles and clothing, which in many countries are the most difficult sectors to liberalize. Thus, products or sectors that are difficult to liberalize at the multilateral level are also difficult to liberalize in RTAs and require special safeguard treatment. This is consistent with the findings by Estevadeordal, Shearer and Suominen in chapter 3 of this volume. As in the previous two templates, the role of regional bodies in safeguard actions is taken into account. Regional institutions could have a coordinating function, serving, for example, as a clearing-house for information on emergency action. Or regional authorities could conduct safeguard investigations and/or review safeguard measures taken by national authorities. Finally, the level 2 template includes provisions that specify a series of steps which members are first required to take to try to come to a mutually satisfactory outcome before the safeguard procedures fully kick in. The template used to map the bilateral safeguard provisions of RTAs appears in Table 4.4a. 3.2.3.3 Global safeguards Unlike the template used for bilateral safeguards, there is only one level in the template on global safeguards. It provides information about RTA provisions that refer to global safeguard actions, or GATT Article XIX or the Agreement on Safeguards.
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Table 4.4a Bilateral safeguards template Elements 1. Safeguard measures disallowed 2. Safeguard measures allowed but with no specific provisions 3. Safeguard measures allowed and with specific provisions a Conditions for application of safeguard increasing imports causing serious injury to domestic industry during transition period, reduction in tariffs lead to increased imports and to serious injury other b Mutually acceptable solution c Investigation d Application of safeguard measures only to the extent necessary to remedy serious injury and facilitate adjustment suspend concessions, tariff reduction or revert to MFN other e Provisional measures f Duration and review of safeguard measures duration less than 4 years not allowed beyond transition period g Maintain equivalent level of concessions (Compensation) h Suspension of equivalent concessions (Retaliation) i Regional body/committee conducts investigations and decides on safeguard duties review/remand final determinations other j Notification and consultation k Special safeguards
The more salient component of the template concerns which RTAs exclude members from global safeguard actions and the conditions under which this occurs. The stated conditions under which imports from RTA members can be excluded from a global safeguard action are if those imports do not account for a substantial share of total imports and if they do not contribute to serious injury or the threat thereof. Most of the RTAs describe very precisely what ‘substantial share’ of total imports and ‘contribute importantly to serious injury’ mean. Imports from an RTA partner do not constitute a substantial share of total imports if that partner is not among the top five suppliers during
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Table 4.4b Global safeguards template Elements 1. Retains rights and obligations under GATT Art. XIX/Safeguards Agreement 2. Excludes RTA members from global actions 3. Grounds for exclusion A Imports from the other Party does not account for a substantial share of total imports B Imports from the other Party does not contribute to serious injury or threat thereof 4. Definitions a Substantial share Among the top five suppliers during the most recent three-year period Exports jointly account for 80 per cent of total imports of importing country b Contribute importantly to serious injury Growth rate of imports from a party is lower than the growth rate of imports from all sources
the most recent three-year period. Imports from an RTA partner do not contribute importantly to serious injury or the threat thereof if its growth rate during the period of serious injury is appreciably lower than the growth rate of total imports from all sources. An interesting issue can sometimes arise as to whether ‘top five suppliers’ should be determined by trade volume or by trade value (Bown 2007). In the Canada bicycles safeguard case for example, the US was exempted from the Canadian International Trade Tribunal (CITT) safeguard recommendation because it was deemed to be a small supplier.15 Canada must have reasoned that the US was a small supplier by volume (it was not one of the top five) because the US had maintained a significant Canadian import market share by value (it was still number three, with over 13 per cent of the value of sales).16 The template used to map the global safeguard provisions of RTAs appears in Table 4.4b. 15
16
In the end, while the CITT recommended the imposition of a safeguard measure, the Canadian government did not implement the suggested action. Bown’s (2007) explanation for this difference in US import share by volume and by value is that the Canadian switch to low-end bikes was moving it towards more imports by volume from China and Vietnam. At the same time, the US was switching its export product mix to Canada to more expensive, high-end mountain bikes.
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3.2.3.4 China safeguard The conditions for China’s accession to the WTO included a transitional product-specific safeguard mechanism which could be applied to Chinese imports.17 This transitional mechanism would be terminated only twelve years after the date of China’s accession. It allows a WTO Member to impose a safeguard measure on Chinese imports if they cause or threaten to cause market disruption. It also allows a WTO Member, who considers that transitional safeguard action carried out by another WTO Member against China can cause significant deflection18 of trade into its market, to also limit imports from China. The transitional safeguard mechanism has been viewed with concern by some because of the discriminatory nature of the mechanism since it is applied only to Chinese imports and because of the weakened evidentiary requirement when ‘deflection’ is used as the trigger (Bown and Crowley 2007). In effect, it allows a WTO Member to free-ride off the first country’s investigation under the perceived threat of trade deflection. There are several ways in which the transitional safeguard mechanism may influence safeguard provisions in RTAs. China may demand from RTA partners that they curb their use of this mechanism and that this be written into the safeguard provision of the RTA. The transitional safeguard mechanism may also play a role even in those RTAs that do not involve China. One could imagine an RTA between two countries – neither of which is China – that might have provisions on how to deal with their implementation of this mechanism. They could include a provision in the RTA that allows one member to automatically use the trade deflection trigger once the other member invokes the transitional safeguard mechanism against China. However, provisions like these were not found in the two RTAs involving China or in any of the other RTAs in the sample. Hence, the safeguard templates do not provide for a China-safeguard element. But this may nevertheless be an area of future research on RTA safeguard provisions analogous to the issue of market economy status of China in RTA anti-dumping rules discussed earlier.
17
18
Section 16 of ‘Accession of the People’s Republic of China: Decision of 10 November 2001’, WTO Document No. WT/L/432. Section 16.8 of the accession decision uses the term ‘diversion’, but economists prefer the term ‘deflection’ as in Bown and Crowley (2007). Trade diversion refers to the switch from low-cost to high-cost sources of imports as a result of preferential treatment given to the high-cost countries.
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4
Analysis of the mapping 4.1 Anti-dumping
Table 4.5 shows the mapping of the anti-dumping provisions of the seventy-four RTAs using the two levels of the anti-dumping template. As explained in the previous section, the second-level template identifies those specific provisions which depart from multilateral benchmarks. Only a small number (nine) of RTAs have disallowed anti-dumping. These are Canada–Chile, CER (Australia–New Zealand), China–Hong Kong, China–Macao, the European Union (EU), the European Economic Area (EEA), the European Free Trade Association (EFTA), EFTA–Chile and EFTA–Singapore. In the case of the EEA, the prohibition on antidumping applies only to intra-regional trade of goods that fall under chapters 25 to 97 of the Harmonised System. In other words, antidumping measures can still be taken against agricultural and fishery goods.19 The Chile–Mexico FTA, which came into force in 1999, stipulated future negotiations between the partners that were expected to lead to the removal of anti-dumping actions. However, it appears that to date the negotiations to achieve this goal have not yet been successfully concluded. Seventeen RTAs have no specific anti-dumping provisions. With the important exception of NAFTA, the RTAs entered into by the US (Australia–US, US–Bahrain, US–Chile, US–Jordan, US–Israel, US– Morocco and US–Singapore) have no specific provisions on antidumping. The bulk of these have been negotiated after NAFTA. One interpretation that can be put on this is that the US wants to preserve its autonomy in applying its anti-dumping procedures against RTA partners. The large majority (forty-eight) of the RTAs contain specific language or further elaboration of anti-dumping rules that applies to partners in the RTA. It should be noted though that nine of those forty-eight RTAs basically state only that anti-dumping actions against RTA partners should adhere to GATT Article VI and the anti-dumping agreement. Thus, they could as well have been classified as RTAs with no specific provision on anti-dumping.20 Twenty-six RTAs have provisions that require an explicit process of finding a mutually acceptable solution prior to taking anti-dumping action. These RTAs primarily involve the EU, EFTA and Mexico. The 19 20
This is based on communication with the EFTA Secretariat. The nine RTAs are EU–Chile, EU–Egypt, EU–Lebanon, EU–Mexico, EU–South Africa, Korea–Chile, Mexico–Israel, SADC and US–CAFTA–Dominican Republic.
Table 4.5 Antidumping mapping I. Anti-dumping
II. Specific Provisions
Allowed
RTA AFTA ALADI Andean Community Australia– Singapore Australia– Thailand Australia–US CACM Canada–Chile Canada–Costa Rica Canada–Israel CARICOM CEMAC
6. Regional body/committee 2. Different de minimis dumping margin
3. Different de minimis dumped volume
4. Lesser duty rule
5. Different duration of AD duty
Conducts investigations
Reviews final determinations Other
No specific Disallowed provisions
With specific provisions
1. Mutually acceptable solution
0 0 0
1 1 0
0 0 1
0 0 0
0 0 1
0 0 1
0 0 0
0 0 1
0 0 1
0 0 1
0 0 1
0
0
1
0
0
0
1
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0 0 1 0
1 0 0 0
0 1 0 1
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
0 1 0 0
0 0 0 0
0 1 0 0
0 0 0
1 0 1
0 1 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 1 0
0 1 0
0 1 0
Table 4.5 (cont.) I. Anti-dumping
II. Specific Provisions
Allowed
RTA CER China–Hong Kong China–Macao COMESA European Union EU–Algeria EU–Andorra EU–Chile EU–Croatia EU–Egypt EU–Faroe Islands EU–FYROM EU–Israel EU–Jordan
6. Regional body/committee 2. Different de minimis dumping margin
3. Different de minimis dumped volume
4. Lesser duty rule
5. Different duration of AD duty
Conducts investigations
Reviews final determinations Other
No specific Disallowed provisions
With specific provisions
1. Mutually acceptable solution
1 1
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1 0 1 0 0 0 0 0 0
0 0 0 0 1 0 0 0 0
0 1 0 1 0 1 1 1 1
0 0 0 1 0 0 1 0 1
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 1 0 1 0 0 1 0 1
0 0 0
0 0 0
1 1 1
1 1 1
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
1 1 1
EU–Lebanon EU–Mexico EU–Morocco EU–OCT EU–Palestinian Authority EU–South Africa EU–Switzerland and Liechtenstein EU–Syria EU–Tunisia EU–Turkey EEA EFTA EFTA–Chile EFTA–Croatia EFTA–FYROM EFTA–Israel EFTA–Jordan EFTA–Morocco EFTA– Palestinian Authority EFTA–Singapore EFTA–Tunisia EFTA–Turkey GCC
0 0 0 0 0
0 0 0 1 0
1 1 1 0 1
0 0 1 0 1
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 1 0 1
0 0
0 0
1 1
0 1
0 0
0 0
0 0
0 0
0 0
0 0
0 1
0 0 0 1 1 1 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
1 1 1 0 0 0 1 1 1 1 1 1
1 1 1 0 0 0 1 1 1 1 1 1
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
1 1 1 0 0 0 1 1 1 1 1 1
1 0 0 0
0 0 0 1
0 1 1 0
0 1 1 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
0 1 1 0
Table 4.5 (cont.) I. Anti-dumping
II. Specific Provisions
Allowed
RTA Group of Three Japan–Singapore Korea–Chile MERCOSUR Mexico–Chile Mexico–EFTA Mexico–Israel Mexico–Japan Mexico– Nicaragua Mexico– Northern Triangle Mexico– Uruguay NAFTA
6. Regional body/committee 2. Different de minimis dumping margin
3. Different de minimis dumped volume
4. Lesser duty rule
5. Different duration of AD duty
Conducts investigations
Reviews final determinations Other
No specific Disallowed provisions
With specific provisions
1. Mutually acceptable solution
0 0 0 0 0 0 0 0 0
0 1 0 0 1 0 0 1 0
1 0 1 1 0 1 1 0 1
1 0 0 0 0 1 0 0 1
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 1 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 1 0 0 0 0 0
0
0
1
1
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
1
0
New Zealand– Singapore SADC SAFTA SPARTECA Turkey–Israel US–Bahrain US–CAFTA– Dominican Republic US–Chile US–Israel US–Jordan US–Morocco US–Singapore UEMOA
0
0
1
0
1
1
0
1
0
0
0
0 0 0 0 0 0
0 0 0 0 1 0
1 1 1 1 0 1
0 0 1 1 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 1 0 0
0 0 0 0 0 0
1 1 1 1 1 0
0 0 0 0 0 1
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 1
0 0 0 0 0 1
0 0 0 0 0 1
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robert teh, thomas j. prusa, michele budetta
provisions share a number of common features. There is a regional body (joint committee) that is established to oversee the whole RTA. When an anti-dumping investigation is initiated, the regional body is informed and attempts are made by the partners to arrive at a mutually agreed solution. If no mutually acceptable solution is found within a specified time period (usually thirty days), the action (investigation) is allowed to proceed. Provisional anti-dumping measures can be taken if delay will lead to material injury. But, apart from serving as a forum for seeking a mutually acceptable solution, the joint committee plays no central role in how the anti-dumping process or investigation affecting intraregional trade develops. Some RTAs increase the threshold required to apply anti-dumping duties, or in the event that a duty is applied, either reduces it below the dumping margin or shortens the applicable duration. But this turns out to involve only a handful of RTAs. Only two RTAs impose higher de minimis dumping margins and volume requirements. The Andean Community and the New Zealand–Singapore FTA both have de minimis dumping margins of 5 per cent. The Andean Community has a de minimis volume requirement of 6 per cent, while the New Zealand– Singapore FTA has a 5 per cent de minimis volume requirement. Only one RTA – the Australia–Singapore FTA – mandates a lesser duty rule. Only three RTAs – the Andean Community, MERCOSUR and the New Zealand–Singapore FTA – limit the maximum duration of definitive anti-dumping duties below the benchmark in the anti-dumping agreement. They prescribe a maximum duration of three years. Of the seventy-four RTAs included in the survey, five (Andean Community, Central American Common Market, CARICOM, NAFTA and UEMOA) give a role to regional bodies to conduct investigations and/or review the final determinations of national authorities. In the Andean Community, the Secretary-General of the Andean Community is given the authority to open and conduct anti-dumping investigations and to decide on provisional and final anti-dumping duties. The Secretariat for Central American Economic Integration (SIECA) is the regional body given the authority to conduct anti-dumping investigations in the CACM. In the CARICOM, one of the regional organs – the Council for Trade and Development (COTED) – has the authority to conduct anti-dumping investigations, to authorize member states to apply anti-dumping measures and to keep such measures under review. The UEMOA Commission is the regional body in charge of antidumping in UEMOA. In the case of NAFTA, the establishment of
trade remedy provisions in rtas
201
bi-national panels can be requested by any of the members to review final anti-dumping determinations. With the exception of NAFTA, the four other RTAs are customs unions. Some of these regional groupings have a history of relying heavily on regional institutions in the integration process. The Andean Community and the CARICOM, in particular, are composed of small member states, and it could be argued that certain public goods may be better delivered by regional institutions than by national ones because of the possibility of pooling expertise and resources. In the context of the current WTO negotiations for example, CARICOM countries have tabled proposals that will allow WTO Members to designate a regional body to carry out the functions necessary to implement the provisions of the Sanitary and Phytosanitary (SPS) Agreement, the Technical Barriers to Trade (TBT) Agreement and the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. These WTO Agreements have implementation obligations that seem to pose very high hurdles for developing countries, particularly for the smallest ones. This explanation has some similarity to the argument made by Andriamananjara and Schiff (1999) that a micro-state’s decision to form, expand or join a regional organization is based on reduced negotiating costs and increased bargaining power, rather than on the traditional costs and benefits of trade integration. While the use of regional bodies in antidumping actions in these RTAs may have been intended as a device to lower the cost of public good provision, it also mitigates the ability of domestic producers to inveigle a compliant national investigating authority to find for them in dumping cases. Thus, all things being equal, an RTA that gives a role to regional institutions in conducting investigations and in final determinations may see less antidumping initiations and findings. The template that was used to map anti-dumping rules in RTAs was developed to identify provisions that are likely to give better treatment to RTA partners. Those rules that were identified as giving favourable treatment of RTA partners include the abolition of anti-dumping measures on intra-RTA trade, higher de minimis dumping margins and volumes, the lesser duty rule, shorter duration of definitive antidumping duties and the establishment of regional bodies with investigative or review powers. Applying this template on the sample of RTAs, one finds that about one-quarter of them have either done away entirely with anti-dumping rules, or tightened discipline on the application of anti-dumping on RTA members, or given authority to regional
202
robert teh, thomas j. prusa, michele budetta
institutions to conduct investigations or review the findings of national authorities. While the list of RTAs with these types of provisions does not appear long, the trade covered by those RTAs is quite large. The outcome of the mapping indicates the need to be vigilant about possible discrimination arising from anti-dumping rules in RTAs.
4.2
Countervailing duties
The detailed mapping of the countervailing duty provisions using the two levels of the countervailing duty template is presented in Table 4.6. Only five RTAs have abolished countervailing duties. These RTAs are China–Hong Kong, China–Macao, the European Union, the EEA and EFTA. However, in the case of EFTA and the EEA, CVDs are disallowed only for products falling under chapters 25 to 97 of the Harmonised System, i.e. CVDs can be applied to agricultural and fishery products.21 The great majority of the surveyed RTAs either have no specific countervailing duty provisions (thirty RTAs) or have specific provisions on CVDs that allow the use of such measures (thirty-nine RTAs). But, of those RTAs with specific provisions on CVDs, seventeen state only that all CVD actions should be in accord with GATT Article VI and the Agreement on Subsidies and Countervailing Measures. The only interesting RTA provisions are those where a mutually acceptable outcome is encouraged and where regional bodies are allowed to conduct CVD investigations or have the power to review and remand final CVD determinations. Fourteen RTAs – mostly involving EFTA and Mexico – require members to take a specified set of steps to find a mutually acceptable solution as soon as a case is initiated. Four RTAs – the Andean Community, CACM, CARICOM and NAFTA – give regional bodies investigative or review powers on CVDs. Unlike the case of antidumping, the CVD rules on de minimis and duration of measures did not differ from multilateral thresholds. This result suggests that there has been little tinkering with CVD rules in the sample of RTAs surveyed. There does not appear to be any ground to suppose the idea that CVD rules in RTAs will result in better treatment of regional partners. The absence of significant departures may in turn be traced to the lack of progress at the RTA level in agreeing to additional curbs on subsidies or state aid. Information on the type of commitments made by RTA members on subsidies and state aid has been included in 21
This is based on communication with the EFTA Secretariat.
Table 4.6 Countervailing duties mapping I. Subsidies
II: State Aid
III. Countervailing Duties
IV. Specific Provisions
Allowed
2. Regional body/committee
RTA
Prohibit export subsidies on agriculture
Incompatible if it distorts competition
With No specific specific Disallowed provisions provisions
1. Mutually acceptable solution
Conducts investigations
Reviews final determinations
Other
AFTA ALADI Andean Community Australia–Singapore Australia–Thailand Australia–US CACM Canada–Chile Canada–Costa Rica Canada–Israel CARICOM CEMAC CER China–Hong Kong China–Macao COMESA European Union EU–Algeria EU–Andorra
0 0 0 1 1 1 0 1 1 0 0 0 1 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0 1 0 0
0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0
0 0 1 0 0 0 1 0 0 0 1 0 0 0 0 0 0 0 0
0 0 1 0 0 0 1 0 0 0 1 0 0 0 0 0 0 0 0
0 0 1 0 0 0 1 0 0 0 1 0 0 0 0 0 0 0 0
1 1 0 0 0 1 0 1 1 0 0 1 0 0 0 0 0 0 1
0 0 1 1 1 0 1 0 0 1 1 0 1 0 0 1 0 1 0
Table 4.6 (cont.) I. Subsidies
RTA EU–Chile EU–Croatia EU–Egypt EU–Faroe Islands EU–FYROM EU–Israel EU–Jordan EU–Lebanon EU–Mexico EU–Morocco EU–OCT EU–Palestinian Authority EU–South Africa EU–Switzerland and Liechtenstein EU–Syria EU–Tunisia EU–Turkey
II: State Aid
III. Countervailing Duties
IV. Specific Provisions
Allowed
2. Regional body/committee
Prohibit export subsidies on agriculture
Incompatible if it distorts competition
With No specific specific Disallowed provisions provisions
1. Mutually acceptable solution
Conducts investigations
Reviews final determinations
Other
0 0 0 0 0 0 0 0 0 0 0 0
0 1 1 0 0 1 1 0 0 1 0 1
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 1 1 1 1 0 0 1 1 1
1 1 1 0 0 0 0 1 1 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0
1 1
0 0
0 1
1 0
0 0
0 0
0 0
0 0
0 0 0
0 1 0
0 0 0
0 1 1
1 0 0
0 0 0
0 0 0
0 0 0
0 0 0
EEA EFTA EFTA–Chile EFTA–Croatia EFTA–FYROM EFTA–Israel EFTA–Jordan EFTA–Morocco EFTA–Palestinian Authority EFTA–Singapore EFTA–Tunisia EFTA–Turkey GCC Group of Three Japan–Singapore Korea–Chile MERCOSUR Mexico–Chile Mexico–EFTA Mexico–Israel Mexico–Japan Mexico–Nicaragua Mexico–Northern Triangle Mexico–Uruguay NAFTA
0 0 0 0 0 0 0 0 0
1 1 0 0 0 1 0 1 1
1 1 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 1 1 1 1 1 1 1
0 0 0 1 1 1 1 1 1
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 1 1 1 1 1 1
0 0 0 0 1 0 0 0 1 0 0 0 1 1
0 0 1 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 1 0 1 0 0 1 0 0 1 0 0
1 1 1 0 1 0 1 1 0 1 1 0 1 1
0 1 1 0 1 0 0 0 0 1 0 0 1 1
0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 1 1 0 0 0 0 0 0 0 0 0 0 0
1 0
0 0
0 0
0 0
1 1
1 0
0 0
0 1
0 1
Table 4.6 (cont.) I. Subsidies
RTA New Zealand– Singapore SADC SAFTA SPARTECA Turkey–Israel US–Bahrain US–CAFTA– Dominican Republic US–Chile US–Israel US–Jordan US–Morocco US–Singapore UEMOA
II: State Aid
III. Countervailing Duties
IV. Specific Provisions
Allowed
2. Regional body/committee
Prohibit export subsidies on agriculture
Incompatible if it distorts competition
With No specific specific Disallowed provisions provisions
1. Mutually acceptable solution
Conducts investigations
Reviews final determinations
Other
1
0
0
1
0
0
0
0
0
0 0 0 0 1 1
0 0 0 1 0 0
0 0 0 0 0 0
0 0 1 1 1 0
1 1 0 0 0 1
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
1 0 0 1 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 1 1 1 1 1
1 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
trade remedy provisions in rtas
207
the template. The only quite explicit provision to be found is the prohibition or elimination of export subsidies to agricultural products in sixteen RTAs, none of which involves the EU or EFTA.22 But, apart from this, there is often only the quite general undertaking against state aid that distorts competition. It appears that countries have not put subsidy programmes on the table in their RTA negotiations and thus feel a continuing need for countervailing duties as a weapon to wield against such support. While it is possible to agree to a reduction or elimination of subsidies in an RTA negotiation, part of the trade benefits from that will be captured by non-members. The reluctance to give away a ‘freebie’ may explain why the only meaningful negotiation on further reductions in agricultural subsidies is occurring at the multilateral level.
4.3
Safeguards
4.3.1 Bilateral safeguards A detailed mapping of the bilateral safeguard provisions in RTAs appears in Table 4.7a. Only five RTAs (Australia–Singapore, Canada–Israel, European Union, MERCOSUR and New Zealand–Singapore) have ruled out the use of safeguard measures against a partner’s trade. In the case of MERCOSUR, Annex IV to the Treaty of Asuncio´n allowed the application of safeguard clauses to imports of products benefiting from the trade liberalization programme only up to 31 December 1994.23 Only four (CACM, CEMAC, EU–Andorra and GCC) have no specific safeguard provisions. The great majority of RTAs (sixty-five) surveyed have specific provisions on safeguards. Interestingly, none of the RTAs included in the survey give a role to regional institutions in conducting safeguard investigations or in reviewing findings by national authorities. There is a clear difference between the EU and EFTA-centric RTAs and those involving the other major hubs: the US, Mexico, Chile, Australia, Singapore and Canada. In these latter RTAs, safeguard measures are imposed only during the transition period – the stipulated period for intra-RTA tariffs to be eliminated. For the most part, the 22
23
The RTAs which have prohibited export subsidies on agricultural products are Australia–Singapore, Australia–Thailand, Australia–US, Canada–Chile, Canada–Costa Rica, CER, Group of Three, Mexico–Chile, Mexico–Nicaragua, Mexico–Northern Triangle, Mexico–Uruguay, New Zealand–Singapore, US–Bahrain, US–CAFTA– Dominican Republic, US–Chile and US–Morocco. As noted previously, the Treaty of Asuncio´n has nevertheless been the basis for Argentina’s exclusion of MERCOSUR partners from global safeguard actions on footwear.
Table 4.7a Bilateral safeguards mapping
1. 2. 3. a
b c d
Elements
AFTA
ALADI
Andean Community
Australia– Singapore
Australia– Thailand
Australia– US
Safeguard measures disallowed Safeguard measures allowed but with no specific provisions Safeguard measures allowed and with specific provisions Conditions for application of safeguard increasing imports causing serious injury to domestic industry during transition period, reduction in tariffs lead to increased imports and to serious injury other Mutually acceptable solution Investigation Application of safeguard measures only to the extent necessary to remedy serious injury and facilitate adjustment suspend concessions, tariff reduction or revert to MFN other
0 0
0 0
0 0
1 0
0 0
0 0
1
1
1
0
1
1
1
1
0
0
1
1
0
0
0
0
1
1
0 0 0
1 0 0
1 0 0
0 0 0
0 1 0
0 1 0
0
0
1
0
0
0
1
0
0
0
1
1
0
0
0
0
0
0
e f
g h i
j k
Provisional measures Duration and review of safeguard measures duration less than four years not allowed beyond transition period Maintain equivalent level of concessions (compensation) Suspension of equivalent concessions (retaliation) Regional body/committee conducts Investigations and decides on safeguard duties review/remand final determinations other Notification and consultation Special safeguards
0
0
1
0
1
1
0 0
1 0
0 0
0 0
1 0
1 1
0
0
0
0
1
1
0
0
0
0
1
1
0
0
0
0
0
0
0
0
0
0
0
0
1 1 1
1 1 0
1 1 0
0 0 0
0 1 1
0 1 1
Table 4.7a (cont.)
1. 2. 3. a
b c d
Elements
CACM
Canada– Chile
Canada– Costa Rica
Canada– Israel CARICOM CEMAC
CER
Safeguard measures disallowed Safeguard measures allowed but with no specific provisions Safeguard measures allowed and with specific provisions Conditions for application of safeguard increasing imports causing serious injury to domestic industry during transition period, reduction in tariffs lead to increased imports and to serious injury other Mutually acceptable solution Investigation Application of safeguard measures only to the extent necessary to remedy serious injury and facilitate adjustment suspend concessions, tariff reduction or revert to MFN other
0 1
0 0
0 0
1 0
0 0
0 1
0 0
0
1
1
0
1
0
1
0
1
0
0
1
0
1
0
1
1
0
0
0
1
0 0 0
0 1 0
0 1 0
0 0 0
0 0 0
0 0 0
0 1 1
0
0
0
0
1
0
1
0
1
1
0
0
0
1
0
0
0
0
0
0
0
e f
g h i
j k
Provisional measures Duration and review of safeguard measures duration less than four years not allowed beyond transition period Maintain equivalent level of concessions (compensation) Suspension of equivalent concessions (retaliation) Regional body/committee conducts Investigations and decides on safeguard duties review/remand final determinations other Notification and consultation Special safeguards
0
0
0
0
1
0
0
0 0 0
1 1 1
1 1 1
0 0 0
0 0 0
0 0 0
1 0 0
0
1
1
0
0
0
0
0
0
0
0
0
0
0
0 0 0 0
0 0 1 1
0 0 1 1
0 0 0 0
0 1 1 0
0 0 0 0
0 0 1 0
Table 4.7a (cont.)
Elements 1. 2. 3. a
b c d
Safeguard measures disallowed Safeguard measures allowed but with no specific provisions Safeguard measures allowed and with specific provisions Conditions for application of safeguard increasing imports causing serious injury to domestic industry during transition period, reduction in tariffs lead to increased imports and to serious injury other Mutually acceptable solution Investigation Application of safeguard measures only to the extent necessary to remedy serious injury and facilitate adjustment suspend concessions, tariff reduction or revert to MFN other
China– Hong Kong
China– Macao
COMESA
European Union
EU– Algeria
EU– Andorra
EU–Chile
0 0
0 0
0 0
1 0
0 0
0 1
0 0
1
1
1
0
1
0
1
1
1
0
0
0
0
0
0
0
0
0
0
0
0
0 0 0
0 0 0
1 0 0
0 0 0
0 0 1
0 0 0
1 1 1
0
0
0
0
1
0
1
1
1
0
0
0
0
0
0
0
0
0
0
0
0
e f
g h i
j k
Provisional measures Duration and review of safeguard measures duration less than 4 years not allowed beyond transition period Maintain equivalent level of concessions (compensation) Suspension of equivalent concessions (retaliation) Regional body/Committee conducts investigations and decides on safeguard duties review/remand final determinations other Notification and consultation Special safeguards
0
0
0
0
0
0
0
0 0
0 0
1 0
0 0
0 0
0 0
0 0
0
0
0
0
1
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0 0 1 0
0 0 1 0
0 1 1 0
0 0 0 0
0 1 1 0
0 0 0 0
0 1 1 1
Table 4.7a (cont.) Elements 1. 2. 3. a
b c d
Safeguard measures disallowed Safeguard measures allowed but with no specific provisions Safeguard measures allowed and with specific provisions Conditions for application of safeguard increasing imports causing serious injury to domestic industry during transition period, reduction in tariffs lead to increased imports and to serious injury other Mutually acceptable solution Investigation Application of safeguard measures only to the extent necessary to remedy serious injury and facilitate adjustment
EU– Croatia
EU– Egypt
EU–Faroe Islands
EU– FYROM
EU– Israel
EU– Jordan
EU– Lebanon
EU– Mexico
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1
1
1
1
1
1
1
1
1
0
0
1
1
1
0
1
0
0
1
0
0
0
0
0
1 0 1
0 0 1
1 0 1
0 0 1
1 0 1
1 0 1
0 0 1
1 0 1
1
1
0
1
1
1
1
1
suspend concessions, tariff
e f
g h i
j k
reduction or revert to MFN other Provisional measures Duration and review of safeguard measures duration less than four years not allowed beyond transition period Maintain equivalent level of concessions (compensation) Suspension of equivalent concessions (retaliation) Regional body/committee conducts Investigations and decides on safeguard duties review/remand final determinations other Notification and consultation Special safeguards
1
0
0
1
0
0
0
0
0 1
0 0
1 1
0 1
0 1
0 1
0 0
0 1
1 0
0 0
0 0
1 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1 1 0
1 1 0
1 1 0
1 1 0
1 1 0
1 1 0
1 1 0
1 1 0
Table 4.7a (cont.)
Elements 1. Safeguard measures disallowed 2. Safeguard measures allowed but with no specific provisions 3. Safeguard measures allowed and with specific provisions a Conditions for application of safeguard increasing imports causing serious injury to domestic industry during transition period, reduction in tariffs lead to increased imports and to serious injury other b Mutually acceptable solution c Investigation d Application of safeguard measures only to the extent necessary to remedy serious injury and facilitate adjustment
EU–South Africa
EU– Switzerland and Liechtenstein
EU– Syria
EU– Tunisia
EU– Morocco
EU– OCT
EU– Palestinian Authority
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1
1
1
1
1
1
1
1
0
1
1
1
0
1
0
0
0
0
0
0
0
1 0 1
1 0 0
1 0 1
0 0 1
1 0 1
1 0 1
1 0 1
1
0
1
1
0
1
1
suspend concessions, tariff reduction
e f
g h i
j k
or revert to MFN other Provisional measures Duration and review of safeguard measures duration less than four years not allowed beyond transition period Maintain equivalent level of concessions (compensation) Suspension of equivalent concessions (retaliation) Regional body/committee conducts Investigations and decides on safeguard duties review/remand final determinations other Notification and consultation Special safeguards
0
1
0
1
0
0
0
0 1
0 0
0 1
0 1
1 1
0 1
0 1
0 0 0
0 0 0
0 0 0
1 0 0
0 0 0
0 0 0
0 0 0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0 1 1 0
0 1 1 0
0 1 1 0
0 1 1 1
0 1 1 0
0 1 1 0
0 1 1 0
Table 4.7a (cont.) Elements 1. Safeguard measures disallowed 2. Safeguard measures allowed but with no specific provisions 3. Safeguard measures allowed and with specific provisions a Conditions for application of safeguard increasing imports causing serious injury to domestic industry during transition period, reduction in tariffs lead to increased imports and to serious injury other b Mutually acceptable solution c Investigation d Application of safeguard measures only to the extent necessary to remedy serious injury and facilitate adjustment suspend concessions, tariff reduction or revert to MFN other e Provisional measures
EU– Turkey
EEA
EFTA
EFTA– Chile
EFTA– Croatia
EFTA– FYROM
EFTA– Israel
EFTA– Jordan
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1
1
1
1
1
1
1
1
0
0
0
0
1
1
1
1
0
0
0
1
0
0
0
0
1 0 0
1 0 1
1 0 1
0 1 1
1 0 1
1 0 1
1 0 1
1 0 1
1
1
1
0
0
1
1
1
0
0
0
1
1
0
0
0
0 0
0 1
0 1
0 1
0 1
0 1
0 1
0 1
f
Duration and review of safeguard measures duration less than four years not allowed beyond transition period g Maintain equivalent level of concessions (compensation) h Suspension of equivalent concessions (retaliation) i Regional body/committee conducts investigations and decides on safeguard duties review/remand final determinations other j Notification and consultation k Special safeguards
0 0 0
0 0 1
0 0 0
1 0 1
1 0 1
0 0 0
0 0 0
0 0 0
0
1
0
1
1
0
0
0
0
0
0
0
0
0
0
0
0 1 1 0
0 0 1 0
0 1 1 0
0 1 1 0
0 1 1 0
0 1 1 0
0 1 1 0
0 1 1 0
Table 4.7a (cont.)
Elements 1. Safeguard measures disallowed 2. Safeguard measures allowed but with no specific provisions 3. Safeguard measures allowed and with specific provisions a Conditions for application of safeguard increasing imports causing serious injury to domestic industry during transition period, reduction in tariffs lead to increased imports and to serious injury other b Mutually acceptable solution c Investigation d Application of safeguard measures only to the extent necessary to remedy serious injury and facilitate adjustment suspend concessions, tariff reduction or revert to MFN other
EFTA– Morocco
EFTA– Palestinian Authority
EFTA– Singapore
EFTA– Tunisia
EFTA– Turkey
GCC
Group of 3
0 0
0 0
0 0
0 0
0 0
0 1
0 0
1
1
1
1
1
0
1
1
1
1
1
1
0
0
0
0
0
0
0
0
1
1 0 1
1 0 1
0 1 1
1 0 1
1 0 1
0 0 0
0 1 0
1
1
0
1
1
0
1
0
0
1
0
0
0
1
0
0
0
0
0
0
0
e f
Provisional measures Duration and review of safeguard measures duration less than four years not allowed beyond transition period g Maintain equivalent level of concessions (compensation) h Suspension of equivalent concessions (retaliation) i Regional body/committee conducts Investigations and decides on safeguard duties review/remand final determinations other j Notification and consultation k Special safeguards
1
1
1
1
1
0
0
0 0 0
0 0 0
1 0 1
0 0 0
0 0 0
0 0 0
1 0 1
0
0
1
0
0
0
1
0
0
0
0
0
0
0
0 1 1 0
0 1 1 0
0 1 1 0
0 1 1 0
0 1 1 0
0 0 0 0
0 0 1 1
Table 4.7a (cont.) Elements 1. Safeguard measures disallowed 2. Safeguard measures allowed but with no specific provisions 3. Safeguard measures allowed and with specific provisions a Conditions for application of safeguard increasing imports causing serious injury to domestic industry during transition period, reduction in tariffs lead to increased imports and to serious injury other b Mutually acceptable solution c Investigation d Application of safeguard measures only to the extent necessary to remedy serious injury and facilitate adjustment suspend concessions, tariff reduction or revert to MFN other e Provisional measures
Japan– Singapore
Korea– Chile
MERCOSUR
Mexico– Chile
Mexico– EFTA
Mexico– Israel
Mexico– Japan
0 0
0 0
1 0
0 0
0 0
0 0
0 0
1
1
0
1
1
1
1
1
0
0
0
1
0
0
1
0
0
1
0
1
1
0 1 0
0 0 0
0 0 0
0 1 0
1 0 1
0 1 0
0 1 0
1
0
0
0
1
0
0
1
0
0
1
1
1
1
0 0
0 0
0 0
0 0
0 1
0 0
0 1
f
Duration and review of safeguard measures duration less than four years not allowed beyond transition period g Maintain equivalent level of concessions (compensation) h Suspension of equivalent concessions (retaliation) i Regional body/committee conducts Investigations and decides on safeguard duties review/remand final determinations other j Notification and consultation k Special safeguards
1 0 1
0 0 0
0 0 0
1 1 1
1 0 1
1 0 1
1 0 1
1
0
0
1
1
1
1
0
0
0
0
0
0
0
0 1 1 0
0 0 0 1
0 0 0 0
0 0 1 0
0 1 1 0
0 0 1 0
0 0 1 0
Table 4.7a (cont.)
Elements 1. Safeguard measures disallowed 2. Safeguard measures allowed but with no specific provisions 3. Safeguard measures allowed and with specific provisions a Conditions for application of safeguard increasing imports causing serious injury to domestic industry during transition period, reduction in tariffs lead to increased imports and to serious injury other b Mutually acceptable solution c Investigation d Application of safeguard measures only to the extent necessary to remedy serious injury and facilitate adjustment suspend concessions, tariff reduction or revert to MFN other e Provisional measures
Mexico– Nicaragua
Mexico– Northern Triangle
Mexico– Uruguay
NAFTA
New Zealand– Singapore
0 0
0 0
0 0
0 0
1 0
1
1
1
1
0
0
0
1
1
0
1
1
0
0
0
0 1 0
0 1 0
0 1 0
0 1 0
0 0 0
0
0
1
0
0
1
1
1
1
0
0 0
0 0
0 1
0 0
0 0
f
g h i
j k
Duration and review of safeguard measures duration less than four years not allowed beyond transition period Maintain equivalent level of concessions (compensation) Suspension of equivalent concessions (retaliation) Regional body/committee conducts investigations and decides on safeguard duties review/remand final determinations other Notification and consultation Special safeguards
1 1 1
0 0 1
1 1 1
1 1 1
0 0 0
1
1
1
1
0
0
0
0
0
0
0 0 1 0
0 0 1 1
0 0 1 0
0 0 1 1
0 0 0 0
Table 4.7a (cont.)
Elements 1. Safeguard measures disallowed 2. Safeguard measures allowed but with no specific provisions 3. Safeguard measures allowed and with specific provisions a Conditions for application of safeguard increasing imports causing serious injury to domestic industry during transition period, reduction in tariffs lead to increased imports and to serious injury other b Mutually acceptable solution c Investigation d Application of safeguard measures only to the extent necessary to remedy serious injury and facilitate adjustment suspend concessions, tariff reduction or revert to MFN other
US– Bahrain
US–CAFTA– Dominican Republic
US–Chile
SADC
SAFTA
SPARTECA
Turkey– Israel
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1
1
1
1
1
1
1
1
1
1
1
0
0
0
0
0
0
0
1
1
1
0 0 0
0 1 0
0 1 1
1 0 1
0 1 0
0 1 0
0 1 0
1
0
0
1
0
0
0
0
1
1
0
1
1
1
0
0
0
0
0
0
0
e f
Provisional measures Duration and review of safeguard measures duration less than four years not allowed beyond transition period g Maintain equivalent level of concessions (compensation) h Suspension of equivalent concessions (retaliation) i Regional body/committee conducts investigations and decides on safeguard duties review/remand final determinations other j Notification and consultation k Special safeguards
0
1
1
1
0
0
0
0 0 0
1 0 0
0 0 0
0 0 0
1 1 1
0 1 1
1 1 1
0
0
0
0
1
1
1
0
0
0
0
0
0
0
0 0 0 0
0 0 1 0
0 1 1 0
0 1 1 0
0 0 1 1
0 0 1 1
0 0 1 1
Table 4.7a (cont.) Elements 1. Safeguard measures disallowed 2. Safeguard measures allowed but with no specific provisions 3. Safeguard measures allowed and with specific provisions a Conditions for application of safeguard increasing imports causing serious injury to domestic industry during transition period, reduction in tariffs lead to increased imports and to serious injury other b Mutually acceptable solution c Investigation d Application of safeguard measures only to the extent necessary to remedy serious injury and facilitate adjustment suspend concessions, tariff reduction or revert to MFN other e Provisional measures f Duration and review of safeguard measures
US–Israel
US–Jordan
US–Morocco
US–Singapore
UEMOA
0 0
0 0
0 0
0 0
0 0
1
1
1
1
1
1
0
0
0
0
0
1
1
1
0
0 0 0
0 1 0
0 1 0
0 1 0
1 0 0
0
0
0
0
0
1
1
1
1
0
0 0
0 1
0 1
0 1
0 1
duration less than four years not allowed beyond transition period
g h i
j k
Maintain equivalent level of concessions (compensation) Suspension of equivalent concessions (retaliation) Regional body/committee conducts investigations and decides on safeguard duties review/remand final determinations other Notification and consultation Special safeguards
0 0 0
0 1 1
1 0 1
1 1 1
0 0 0
0
1
1
1
0
0
0
0
0
0
0 0 1 0
0 0 1 0
0 0 1 1
0 0 1 1
0 1 1 0
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safeguard measure allowed is a suspension of the process of tariff reduction or, at worst, an increase of the preferential rate to the MFN level. The RTAs limit the duration of the safeguard measure to between one and three years. The RTAs require a member to maintain an equivalent level of concession if that member imposes a safeguard measure. If no mutually acceptable compensation is agreed upon between the concerned members, the right to retaliation is not restricted.24 Limiting safeguard measures to the transition period and the shorter duration of such measures can lessen the impact of safeguard actions on intra-regional trade. Further, the stronger provisions on compensation and retaliation can provide greater deterrence to the use of bilateral safeguard actions in the RTA. Sixteen RTAs have special safeguard provisions which create a different threshold for imposing additional protective measures on certain sectors, usually agriculture and textiles and apparel. The RTAs include AFTA, Australia–Thailand, Australia–US, Canada– Chile, Canada–Costa Rica, EU–Chile, EU–South Africa, Group of Three, Korea–Chile, Mexico–Northern Triangle, NAFTA, US–Bahrain, US–CAFTA–Dominican Republic, US–Chile, US–Morocco and US– Singapore. These special safeguard measures typically allow an RTA member to impose additional duties on sensitive imports, although the tariff should not exceed the MFN rate, once imports cross either a volume or price threshold. They could be imposed even without showing serious injury or a threat of serious injury. Further, they normally extend beyond the transitional period of the RTA. These special safeguard provisions should probably be seen as part of the portfolio of trade management instruments, which include long transitional periods, sectoral carve-outs and complex and restrictive rules of origin, to mitigate the effects of the RTA on import-sensitive industries.
4.3.2 Global safeguards The threat of discrimination becomes more explicit in the RTA provisions that touch on global safeguards. Table 4.7b shows the mapping of the global safeguard provisions in RTAs. Twenty-nine RTAs make reference to GATT Article XIX or the Agreement on Safeguards. While most of these RTAs state that their safeguard provisions are in accord 24
By comparison, Article 8.3 of the Agreement on Safeguards requires that retaliation not be exercised for the first three years that a safeguard measure is in effect, provided that there has been an absolute increase in imports.
Table 4.7b Global safeguards mapping 3. Grounds for exclusion
4. Definitions a. Substantial share
RTA AFTA ALADI Andean Community Australia– Singapore Australia–Thailand Australia–US CACM Canada–Chile Canada–Costa Rica Canada–Israel
b. Contribute importantly to serious injury
1. Retains rights and obligations under GATT/ Safeguards Agreement
Imports from party does not 2. Excludes account for a RTA members substantial from global share of total actions imports
Imports from party does not contribute to serious injury or threat thereof
Among the top five suppliers in most recent three-year period
Exports jointly account for 80 per cent of total imports
Growth rate of imports from a party is lower than growth rate of total imports
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0
0
0
0
0
0
0
1 1 0 1 1 1
1 1 0 1 0 1
0 0 0 1 0 1
1 1 0 1 0 1
0 0 0 1 0 1
0 0 0 0 0 0
0 0 0 1 0 1
Table 4.7b (cont.) 3. Grounds for exclusion
4. Definitions a. Substantial share
b. Contribute importantly to serious injury
RTA
1. Retains rights and obligations under GATT/ Safeguards Agreement
Imports from party does not 2. Excludes account for a RTA members substantial from global share of total actions imports
Imports from party does not contribute to serious injury or threat thereof
Among the top five suppliers in most recent three-year period
Exports jointly account for 80 per cent of total imports
Growth rate of imports from a party is lower than growth rate of total imports
CARICOM CEMAC CER China–Hong Kong China–Macao COMESA European Union EU–Algeria EU–Andorra EU–Chile EU–Croatia EU–Egypt
0 0 0 0 0 0 0 1 0 1 0 1
0 0 0 0 0 0 0 0 0 1 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 1 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 1 0 0
EU–Faroe Islands EU–FYROM EU–Israel EU–Jordan EU–Lebanon EU–Mexico EU–Morocco EU–OCT EU–Palestinian Authority EU–South Africa EU–Switzerland and Liechtenstein EU–Syria EU–Tunisia EU–Turkey EEA EFTA EFTA–Chile EFTA–Croatia EFTA–FYROM EFTA–Israel EFTA–Jordan EFTA–Morocco EFTA–Palestinian Authority
0 0 0 0 1 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0
1 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0 0 0 0 1 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0
Table 4.7b (cont.) 3. Grounds for exclusion
4. Definitions a. Substantial share
b. Contribute importantly to serious injury
RTA
1. Retains rights and obligations under GATT/ Safeguards Agreement
Imports from party does not 2. Excludes account for a RTA members substantial from global share of total actions imports
Imports from party does not contribute to serious injury or threat thereof
Among the top five suppliers in most recent three-year period
Exports jointly account for 80 per cent of total imports
Growth rate of imports from a party is lower than growth rate of total imports
EFTA–Singapore EFTA–Tunisia EFTA–Turkey GCC Group of 3 Japan–Singapore Korea–Chile MERCOSUR Mexico–Chile Mexico–EFTA Mexico–Israel Mexico–Japan
0 1 0 0 1 1 1 0 1 0 1 1
0 0 0 0 1 0 0 0 1 0 1 0
0 0 0 0 1 0 0 0 1 0 1 0
0 0 0 0 1 0 0 0 1 0 1 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 1 0 0 0 1 0 1 0
0 0 0 0 1 0 0 0 1 0 1 0
Mexico–Nicaragua Mexico–Northern Triangle Mexico–Uruguay NAFTA New Zealand– Singapore SADC SAFTA SPARTECA Turkey–Israel US–Bahrain US–CAFTA– Dominican Republic US–Chile US–Israel US–Jordan US–Morocco US–Singapore UEMOA
1 1
1 1
1 1
1 1
0 0
1 1
1 1
1 1 0
1 1 0
1 1 0
1 1 0
1 1 0
0 0 0
1 1 0
0 0 0 0 1 1
0 0 0 0 0 1
0 0 0 0 0 0
0 0 0 0 0 1
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
1 0 1 1 1 1
0 0 1 0 1 0
0 0 0 0 0 0
0 0 1 0 1 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
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with or do not affect their members’ rights and obligations under the multilateral agreements, more than half of them go on to exclude the imports of RTA partners from global safeguard actions. The stated conditions under which imports from RTA members can be excluded from a global safeguard action are if those imports do not account for a substantial share of total imports and if they do not contribute to serious injury or the threat thereof. The RTAs which exclude RTA partners from global actions include Australia–Thailand, Australia–US, Canada– Chile, Canada–Israel, EU–Chile, Group of Three, Mexico–Chile, Mexico–Israel, Mexico–Nicaragua, Mexico–Northern Triangle, Mexico– Uruguay, NAFTA, US–CAFTA–Dominican Republic, US–Jordan and US–Singapore. Most of the RTAs describe very precisely what ‘substantial share’ of total imports and ‘contribute importantly to serious injury’ mean. Imports from an RTA partner do not constitute a substantial share of total imports if that partner is not among the top five suppliers during the most recent three-year period. Imports from an RTA partner do not contribute importantly to serious injury or the threat thereof if its growth rate during the period of serious injury is appreciably lower than the growth rate of total imports from all sources. Now, the Agreement on Safeguards requires that safeguard measures are applied to all imports irrespective of source (non-discrimination). Thus, the exclusion of RTA partners from a safeguard action poses a potential conflict between regional and multilateral rules.25 This conflict has been addressed in a number of WTO dispute cases (Argentina – Footwear, United States – Wheat Gluten, United States – Line Pipe and United States – Steel). In these cases, the investigating authority had included imports from all sources in making the determination that imports were entering in such increased quantities so as to cause serious injury to the domestic industry. But, instead of applying safeguard measures to all imports irrespective of their source, the country invoking the safeguard action excluded its RTA partners. In Argentina – Footwear, Argentina had included MERCOSUR imports in the analysis of factors contributing to injury to its domestic industry. But it excluded MERCOSUR countries from the application of the safeguard measure. In United States – Wheat Gluten, the US excluded Canada from the application of its safeguard action although imports of wheat gluten from 25
Bown (2004) discusses the discriminatory protection contained in the 2002 US steel safeguard action.
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Canada were included in the investigation phase. In the United States – Line Pipe case, the US excluded imports from its NAFTA partners from the safeguard measure. And, in United States – Steel, the US included all sources of imports in its analysis of increasing imports, serious injury and the causal nexus. However, it excluded its NAFTA partners, Israel and Jordan from the application of its safeguard action. In all four cases, the Appellate Body had ruled against the WTO Member which included their RTA partners in the safeguard investigation but excluded them in the application of the safeguard measure. The key concept that underlies all these cases has been called ‘parallelism’. The WTO’s Appellate Body acknowledged that the word parallelism is not found in the text of the Agreement on Safeguards; however, it considered that the requirement of parallelism is found in the language used in the first and second paragraphs of Article 2 of the Agreement on Safeguards.26 In brief, parallelism prohibits any asymmetry in the application of safeguards measures. Regionalism is just the most relevant and prominent application of parallelism to date. In the case of RTAs, parallelism means that, when a WTO Member has conducted a safeguard investigation considering imports from all sources, it cannot, subsequently, without any further analysis, exclude imports from RTA partners from the application of the resulting safeguard measure.27 In order to be able to exclude imports from RTA partners, the investigating authority must establish explicitly that imports from non-RTA sources alone caused serious injury or the threat of serious injury to the domestic industry. The investigating authority, in its causality analysis, should ensure that the effects of the excluded (RTA) imports are not attributed to the imports included in the safeguard measure.28 While the elaboration of the principle of parallelism by the Appellate Body in these four cases has clarified one issue, WTO jurisprudence has not provided a definitive ruling to what extent GATT Article XXIV could be relied on by a WTO Member to exclude RTA partners from the application of a safeguard measure. One dispute (between the US and Korea) in which this issue was given some consideration was the US – Line Pipe case. There, the US argued that GATT Article XXIV gave it the right to exclude its NAFTA partners from the scope of the safeguard measure. The panel accepted the US argument that the exclusion of its RTA partners from safeguard actions forms part of the required 26 27 28
See Appellate Body Report, US –Steel, para. 439. Ibid., para. 441. Ibid., para. 453.
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elimination of ‘restrictive regulations of commerce’ on ‘substantially all the trade’ among the free trade area members, which is a condition required by GATT Article XXIV. The panel decision was subsequently appealed by Korea. On appeal, the Appellate Body declared the ruling by the panel on Article XXIV as moot and having no legal effect.29 The question whether GATT Article XXIV permits imports originating from an RTA partner to be exempted from a safeguard measure becomes relevant only in two circumstances. The first was when the imports from RTA members were not included in the safeguard investigation. The second was when imports from RTA members were included in the safeguard investigation it nevertheless was established explicitly that imports from sources outside the free trade area, alone, satisfied the conditions for the application of a safeguard measure. Since neither of these applied to the circumstances surrounding the US – Line Pipe case, the issue was not relevant to the case. The Appellate Body was careful to point out though that, in taking this decision, it was not ruling on the question whether GATT Article XXIV permits exempting imports originating in a member of a free trade area from a safeguard measure. This decision thus leaves the question of an appeal to GATT Article XXIV still very much open.30 The provisions excluding RTA partners from global safeguard actions raises concerns about increased discrimination against non-members and trade diversion. Although WTO dispute settlement panels have ruled against excluding RTA partners from safeguard measures if imports from those RTA partners had been included in the investigation, they appeared to have done so on quite narrow grounds – on the lack of parallelism in the application of safeguard measures. It is entirely conceivable that, under a different set of circumstances, exclusion of RTA partners from global safeguard measures could pass muster. Future RTAs may, in the face of these WTO dispute settlement rulings, contain explicit language in their safeguard provisions that avoid being ensnared on the parallelism issue.
5
Abolishing trade remedies
About one-sixth of the RTAs surveyed have managed to abolish the application of trade remedies on intra-regional trade. Only one 29 30
Appellate Body Report, US – Line Pipe, para. 199. See Pauwelyn (2004) for a discussion of this issue.
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RTA – the European Union – has managed to abolish all three forms of trade remedies on members’ trade. Are there any economic factors which distinguish these RTAs and which could explain why they have been able to abolish trade remedy measures against members’ trade? Perhaps the leading candidate to explain the abolition of trade remedy measures, particularly anti-dumping, is the depth of market integration envisioned in the RTA. RTAs that aim at deeper integration, going beyond the elimination of border measures, and harmonizing or even in some cases adopting common internal regulations, are more likely to do away with trade remedy measures. We have already alluded to the role of a harmonized or a common subsidy policy in explaining the type of CVD provisions that can be adopted in an RTA. De Araujo et al. (2001) have argued that the implementation of common macroand micro-economic policies in the EU reduced the social and political cost related to the removal of anti-dumping. They point in particular to the role that structural funds played in easing the need for anti-dumping as a trade adjustment measure. Wooton and Zanardi (2002) link the phasing out of anti-dumping with the creation of a single market. They point as examples to the experiences of the European Union and the European Economic Area. In their view, the elimination of antidumping was a necessary step to achieving a common market. A second explanation that is sometimes provided is the adoption of a common competition policy by members of the RTA. RTAs that adopt a common competition policy may find anti-dumping to be redundant. Of course, the two explanations are not mutually exclusive since a common competition policy may not make sense until a sufficiently high level of integration is achieved. However, Hoekman (1998) dismisses the notion of a link between the adoption of a common competition policy and the abolition of anti-dumping in an RTA. He argues that the adoption of a common competition policy in an RTA is often motivated by the need to manage the result of deeper integration.31 Its purpose is not to provide a substitute policy instrument so that antidumping measures can be abolished, although of course this could be one of the consequences of having a common competition policy. 31
Hoekman (1998) defines deep integration as consisting of explicit actions by governments to reduce the market segmenting effect of differences in national regulatory policies that pertain to products, production processes, producers and natural persons. In practice, this will require decisions: (1) that a partner’s policies are equivalent (mutual recognition); or (2) to adopt a common regulatory stance in specific areas (harmonization).
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Another argument against this link is that there are important differences between competition policy and anti-dumping – for example competition policy is often concerned with consumer protection but anti-dumping is not – which may make one instrument rather than the other more likely to be hostage to protectionist interests. So, to the extent, for example, that anti-dumping is being used as a shield against imports, the adoption of a common competition policy need not automatically lead to the abolition of anti-dumping. We have earlier noted the difference in how developing and developed countries use the three trade remedy instruments. For instance, developing countries have become more frequent users of anti-dumping and safeguard actions. One may therefore also need to examine what effect the development status of the members of the RTA have on the trade remedy rule adopted. Table 4.8 brings together background data on those RTAs that have abolished trade remedies. The information includes level of development of RTA members, intra-RTA imports, share of intra-RTA imports, whether the RTA aims at ‘deeper’ integration (which is explained in greater detail below), the presence of a competition policy provision in the RTA and the existence of a common external tariff. We also calculate the average of these indicators for the thirteen RTAs that have abolished trade remedy instruments and the other RTAs in the sample who have not. On average, those RTAs that have abolished trade remedy instruments have greater intra-RTA trade (both in value and share), are more likely to have a competition policy provision in the RTA and to achieve deeper integration. But there does not seem to be any difference in terms of the adoption of a common external tariff. RTAs which have disallowed trade remedies and RTAs which retain the instruments appear equally likely to have a common external tariff. We have conducted a more formal test of what possible explanatory variables affect the decision to abolish trade remedies using a probit model. Our explanatory variables included the development level of RTA members, the vintage of the RTA (when it came into force), average volume (as well as share) of intra-RTA trade prior to the establishment of the RTA, the existence of a common external tariff, the inclusion of a competition policy provision in the RTA, and the degree of integration achieved by the members. Now it is possible to distinguish between several forms of integration. The adoption of harmonized or common behind-the-border measures such as standards and sanitary and phytosanitary measures will be one
Table 4.8 Characteristics of RTAs that have disallowed trade remedies Disallowed
RTAs Australia–Singapore Canada–Chile Canada–Israel CER China–Hong Kong China–Macao EU EEA EFTA EFTA–Chile EFTA–Singapore MERCOSUR New Zealand– Singapore Group average Average of other RTAs
Development level Mixed Mixed Mixed Developed Developing Developing Developed Developed Developed Mixed Mixed Developing Mixed
AD
CVD
Intra-RTA imports
Safeguard X
X X X X X X X X X X
X X X X X
X
X X
Value (US$ billion)
Share (per cent)
9.9 4.7 3.9 10.1 202.4 55.4 2,419.0 301.4 1.4 0.3 3.1 22.1 1.3
3.1 1.4 1.1 6.9 21.1 8.4 61.1 7.3 0.8 0.2 0.8 20.1 0.6
233.5 28.9
10.2 3.1
Common external tariff 0 0 0 0 0 0 1 0 0 0 0 1 0 15.4% 13.1%
Competition chapter Integration 1 1 1 1 0 0 1 1 1 1 1 1 1 84.6% 70.5%
0 0 0 1 1 1 1 1 1 0 0 0 0 46.2% 6.6%
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form of deeper integration. These would cover such RTAs as the EU, the EEA, EFTA and the CER. For example, the CER has harmonized business regulations, including competition policy, standards, customs and quarantine. Another form of deeper integration would be arrangements that allow for free or freer movement of capital and labour. This characterizes the EU, the EEA and to a certain extent EFTA. The EEA has abolished restrictions on the movement of goods, people, services and capital. EFTA has opened the labour markets of its Member States. Workers, the selfemployed, and persons with no gainful employment who otherwise have sufficient financial means, have the right of access to work, entry/exit and establishment (residence), the right to provide services for a period of up to ninety days per year and the right of equal treatment. Straddling all these RTAs is of course the EU with its single market, an acquis communautaire and a range of supranational institutions. Another form of economic integration would be monetary union or the adoption of a single currency. Two RTAs in the sample have some form of monetary union, the EU and CEMAC. Although the euro has been adopted by only fifteen countries of the EU, the euro zone countries account for more than half of EU GDP and trade. CEMAC brings together six central African countries which have adopted the franc as the common currency. Yet a further form of integration would be political. Although the economic policies and political cultures of Hong Kong and Macao differ markedly from those of China, they are still governed by the political framework of China’s ‘one country, two systems’. Thus, it could be argued that they are integrated politically with the mainland. Following this approach, we have also considered Andorra, the Faroe Islands and the Overseas Countries and Territories (OCTs) as politically integrated with the EU.32 We have incorporated all of these different dimensions into the integration variable we employ in the probit model. The probit model we use is given by equation (1) below: Prðy ¼ 1Þ ¼ Uðb 0 þ b1 share þ b2 cet þ b 3 comp þ b 4 int þ b5 dev þ b6 yearÞ
ð1Þ
where: 32
Andorra is a co-principality with the President of France and the Bishop of Urgell, Spain, as co-princes. The Faroe Islands are part of the Kingdom of Denmark. Denmark, France and Spain are all Member States of the European Union.
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y is a dummy variable that takes on a value of 1 if the RTA has abolished a trade remedy instrument and 0 otherwise; Pr(y = 1) is the probability that y takes on the value 1, i.e. the RTA has abolished a particular trade remedy; U() stands for the cumulative normal distribution function; share is the average value or share of intra-RTA imports during the fiveyear period before the implementation of the RTA; cet is a dummy to indicate whether the members have a common external tariff; comp is a dummy variable that takes on a value of 1 if the RTA has a competition policy chapter and 0 otherwise; int is a dummy variable that takes on a value of 1 if the members have a common political system, or have established a monetary union or have liberalized the movement of capital and persons or have harmonized or common behind-the-border measures; dev is an index to indicate the development level of RTA members (1 for RTAs whose members are all developing countries; 2 for RTAs whose members are a mixture of developed and developing countries and 3 for RTAs whose members are all developed countries); and year is the year in which the RTA came into force. We present the results of the probit estimation for the seventy-four RTAs in the sample in Table 4.9a, separately for each trade remedy instrument. For anti-dumping and countervailing duties, the best result is obtained with the use of degree of integration as the explanatory variable. It best explains the pattern of anti-dumping and CVD abolition in RTAs. The existence of a common political system, or monetary union, or free movement in capital and people, or harmonized or common behind-the-border measures creates a higher likelihood of RTAs abolishing anti-dumping and countervailing duties. The dummy variable on competition provisions in the RTA was not statistically significant. In the case of safeguards, none of the variables that we used were statistically significant, although the common external tariff was on the cusp of being significant at the 10 per cent level. In all three trade remedy instruments, the development status of RTA members and the vintage of the RTA were not statistically significant explanatory variables. Finally, we ran a multinomial logit regression to take advantage of the distinct categories of RTAs that have emerged from the mapping. We observe five distinct RTA categories in trade remedy abolition. First, some RTAs (Canada–Chile, the CER and EFTA–Singapore) have
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Table 4.9a Probit estimation results Explanatory variables int cet constant
Anti-dumping
Countervailing
1.93*
2.15*
–1.68* Prob v2 ¼ 0.00
–2.15* Prob v2 ¼ 0.00
Safeguards 0.83 –1.68 Prob v2 ¼ 0.12
Number of observations ¼ 71 Note: The three columns represent the results of using separate probit models to test what variables statistically explain the abolition of anti-dumping, countervailing duties and safeguard measures in RTAs. * indicates significance at the 1% level.
abolished only anti-dumping. Secondly, some RTAs (Australia– Singapore, Canada–Israel, MERCOSUR and New Zealand–Singapore) have abolished only safeguards. Thirdly, still some others (China–Hong Kong, China–Macao, the EEA, EFTA and EFTA–Chile) have done away with both anti-dumping and countervailing duties. Fourthly, one RTA (EU) has abolished all forms of trade remedies. Finally, the RTAs which have retained all three forms of trade remedies fall into the last category. This last group of RTAs is chosen as the baseline or comparison category. Multinomial logit estimation allows us to estimate the likelihood, and the effect of the explanatory variables on that probability, of an RTA falling into any one of these categories. Formally, the likelihood of an RTA falling into category j is given by: j
Prðyi ¼ jÞ ¼
j
j
j
j
j
j
expðb0 þ b1 share þ b2 cet þ b3 comp þ b 4 int þ b5 dev þ b 6 yearÞ P j j j j j j j 1 þ expðb0 þ b1 share þ b2 cet þ b3 comp þ b4 int þ b5 dev þ b 6 yearÞ j
ð2Þ The baseline or comparison category is given by j=0 with probability given by: Prðyi ¼ 0Þ ¼
1þ
P j
1 j expðb0
þ
j b1 share
þ
j b 2 cet
j
j
j
j
þ b3 comp þ b 4 int þ b5 dev þ b6 yearÞ
ð3Þ
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Table 4.9b Multinomial logit estimation results Independent variables
year cet dev share int constant
Trade remedy abolished
Safeguards
Anti-dumping
Anti-dumping, Anti-dumping, countervailing, countervailing safeguards
0.04 2.95 1.21 –3.50 –43.69 –74.01
–0.04 –41.92 2.83 –51.07 3.92* 80.38
0.13 –59.99 0.99 16.03* 5.83** –256.46
–0.21 90.67 41.89 –34.29 4.60 232.04
Number of observations ¼ 71 Prob > v2 ¼ 0.00 * / ** indicate significance at the 10% and 5% level respectively.
The results of the multinomial estimation are shown in Table 4.9b. In general, the multinomial estimates confirm the results of the probit estimations that the level of regional integration provides the best explanation for the abolition of trade remedy instruments. The degree of integration and the share of intra-RTA trade are significant in the case of RTAs that have abolished both anti-dumping and countervailing duties; the degree of integration is also statistically significant at the 10 per cent level in the case of RTAs that have abolished only anti-dumping. However, none of the variables included in the regressions are statistically significant in the case of RTAs which have abolished only safeguards or those that have done away with all forms of trade remedies.
6
Conclusions
Trade remedies appear to be permanent fixtures in international trade agreements. One explanation for this is that they provide governments entering into a trade agreement with a useful policy tool to manage trade adjustment and the political pressure for protection that is created. They make it easier to obtain political support for the agreement. The trade agreement, in turn, makes possible a more liberal trade regime, although this will be at the cost of episodic recourse to protection during economic downturns.
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There is an added layer of complexity to the role of trade remedies introduced by preferential trade agreement, which by nature discriminates between members and non-members. Even without modifications to the rules governing trade remedies, their elastic and selective nature may lead to more discrimination against non-members through greater frequency of trade remedy actions against them. The adoption of RTA-specific trade remedy rules can increase this risk of discrimination, with trade remedies against RTA members being abolished outright or being subjected to greater discipline. As in much of the theory of customs unions, the welfare effects of this increased discrimination are unclear. Any increase in intra-regional trade brought about by greater discipline on trade remedy action against RTA members may simply be substituting for cheaper sources of imports from non-members. Based on the result of this mapping, about one-sixth of the RTAs surveyed have dispensed with at least one type of trade remedy. What these RTAs seem to share in common is a greater level of integration (‘deep’ integration) as evidenced either by the adoption of common or harmonized behind-the-border policies and high shares of intraregional trade. In addition, a number of RTAs have adopted RTAspecific rules that have tightened discipline on the application of these remedies on RTA members. In the case of anti-dumping for example, some specific provisions tightened discipline by increasing de minimis volume and dumping margin requirements, adopting a lesser duty rule and shortening the duration for applying anti-dumping duties. The possible contribution by regional bodies to reducing action against RTA members has also been highlighted. In the EU-centred and EFTA-centred RTAs, members acting through a regional body notify and consult one another to arrive at a mutually acceptable outcome short of applying the measure. In the Andean Community, CACM, CARICOM, NAFTA and UEMOA, regional bodies have the authority to conduct their own investigations or to review conclusions reached by national bodies. In the case of safeguards, a great concern is the exclusion of RTA partners in safeguard actions triggered by GATT Article XIX and the Agreement on Safeguards. This puts RTA rules on safeguards in conflict with the non-discriminatory principle that underlies multilateral rules on safeguard action and squarely raises the problem of trade diversion. Although WTO panels have ruled against such exclusions so far, it is not clear that future panels will do so consistently given the particular ground of parallelism on which previous decisions have been made.
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In the case of CVDs, one is unable to find major innovations in CVD rules and practice by past and present RTAs. One suspects that a major reason for this is due to the absence of agreements in the RTA on meaningful or significant curbs on subsidies or state aid. Only four RTAs provide a role for regional institutions as investigating bodies or give it the power to review determinations of national authorities. The results of the mappings suggest the need to be vigilant about increased discrimination arising from trade remedy rules in RTAs. Discrimination against non-RTA partners through more frequent trade remedy actions can arise from the elastic and selective nature of rules on trade remedies. Designing specific trade remedy rules that apply only to RTA partners increases the likelihood of discrimination. This takes place when an RTA abolishes trade remedy actions against the trade of RTA members but not against non-members’ trade. It can take place when RTA members adopt rules that strengthen disciplines on trade remedy actions against the trade of RTA members but not against the trade of non-members. Finally, it can take place when RTA members are excluded from what are intended to be global trade remedy actions. References Andriamananjara, Soamiely, and Schiff, Maurice, 1999. ‘Regional Groupings Among Microstates’, World Bank Policy Research Working Paper Series No. 1922 Washington DC: The World Bank. Bhagwati, Jagdish, 1993. ‘Regionalism and Multilateralism: An Overview’, in Jaime de Melo and Arvind Panagariya (eds.), New Dimensions in Regional Integration, Cambridge: Cambridge University Press. Bhagwati, Jagdish, and Panagariya, Arvind (eds.), 1996. The Economics of Preferential Trade Agreements, Washington DC: AEI Press. Blonigen, Bruce A., 2002. ‘The Effects of CUSFTA and NAFTA on Anti-Dumping and Countervailing Duty Activity’, unpublished manuscript. 2003. ‘Evolving Discretionary Practices of US Anti-dumping Activity’, NBER Working Paper No. 9625. Blonigen, Bruce A., and Prusa, Thomas J., 2003. ‘Antidumping’, in E. Kwan Choi and James Harrigan (eds.), Handbook of International Economics, Malden, MA: Blackwell Publishing, pp. 251–84. Bown, Chad P., 2004. ‘How Different Are Safeguards from Antidumping? Evidence from US Trade Policies Toward Steel’, Brandies University Working Paper. 2007. ‘Canada’s Antidumping and Safeguard Policies: Overt and Subtle Forms of Discrimination’, The World Economy 30: 1457–76.
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2008. ‘The WTO and Antidumping in Developing Countries’, Economics and Politics 20: 255–88. Bown, Chad P., and Crowley, Patricia, 2007. ‘China’s Export Growth and the China Safeguard Threats to the World Trading System’, Brandies University Working Paper. Bown, Chad P., and Tovar, Patricia, 2008. ‘Trade Liberalization, Antidumping, and Safeguards: Evidence from India’s Tariff Reform’, Brandies University Working Paper. Crawford, Jo-Ann, and Fiorentino, Roberto V., 2005. ‘The Changing Landscape of Regional Trade Agreements’, WTO Discussion Paper No. 8, Geneva: WTO. De Araujo, Jose Tavares Jr, Macario, Carla, and Steinfatt, Karsten, 2001. ‘AntiDumping in the Americas’, Journal of World Trade 35: 555–74. Fiorentino, Roberto V., Verdeja, Luis, and Toqueboeuf, Christelle, 2007. ‘The Changing Landscape of RTAs: 2006 Update’, WTO Discussion Paper No. 12, Geneva: WTO. Finger, J. M., Hall, Keith H., and Nelson, Douglas R., 1982. ‘The Political Economy of Administered Protection’, American Economic Review 72: 452–66. Gagne´, Gilbert, 2000. ‘North American Free Trade, Canada and US Trade Remedies: An Assessment after Ten Years’, The World Economy 23: 77–91. Goldstein, Judith, 1996. ‘International Law and Domestic Institutions: Reconciling North American “Unfair” Trade Laws’, International Organization 50: 541–64. Hoekman, Bernard, 1998. ‘Free Trade and Deep Integration: Anti-Dumping and Antitrust in RTAs’, World Bank Policy Research Working Paper No. 1950, Washington DC: World Bank. Horlick, Gary, and Vermulst, Edwin, 2005. ‘The 10 Major Problems with the Anti-Dumping Instrument: An Attempt at Synthesis’, Journal of World Trade 39: 67–73. Jackson, John H., 1997. The World Trading System: Law and Policy of International Economic Relations, Cambridge MA: MIT Press. Jones, Kent, 2000. ‘Does NAFTA Chapter 19 Make a Difference? Dispute Settlement and the Incentive Structure of US/Canada Unfair Trade Petitions’, Contemporary Economic Policy 18: 145–58. Marceau, Gabrielle (ed.), 1994. Anti-Dumping and Anti-Trust Issues in Free-Trade Areas, Oxford: Clarendon Press. Miranda, Jorge, Torres, Raul A., and Ruiz, Mario, 1998. ‘The International Use of Anti-Dumping: 1987–1997’, Journal of World Trade 32: 5–71. Moore, Michael O., 2002. ‘Commerce Department Anti-Dumping Sunset Reviews: A First Assessment’, Journal of World Trade 36: 675–98. 2006. ‘An Econometric Analysis of US Anti-dumping Sunset Review Decisions’, Review of World Economics 142: 122–50.
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Moore, Michael, and Zanardi, Maurizio, 2007. ‘Does Anti-dumping Use Contribute to Trade Liberalization in Developing Countries?’, unpublished manuscript. Pauwelyn, Joost, 2004. ‘The Puzzle of WTO Safeguards and Regional Trade Agreements’, Journal of International Economic Law 7: 109–42. Prusa, Thomas, 2005. ‘Anti-dumping: A Growing Problem in International Trade’, The World Economy 28: 683–700. Rugman, Alan M., and Anderson, Andrew D. M., 1997. ‘NAFTA and the Dispute Settlement Mechanisms: A Transaction Costs Approach’, The World Economy 20: 935–50. Tharakan, P. K. M., 1995. ‘Political Economy and Contingent Protection’, Economic Journal 105: 1550–64. Viner, Jacob, 1950. The Theory of Customs Union Issue, New York: Carnegie Endowment for International Peace. Wooton, Ian, and Zanardi, Maurizio, 2002. ‘Trade and Competition Policy: AntiDumping versus Anti-Trust’, Discussion Paper in Economics No. 02–06, University of Glasgow. WTO, 2001. ‘Accession of the People’s Republic of China: Decision of 10 November 2001’, WT/L/432. Yano, Hiromi, 2006. ‘Recent Trends and Developments in the Use of Safeguard Measures – With Brief Comparisons with Other Trade Remedy Instruments’, in Matsushita, M., Ahn, D., and Chen, T. (eds.), The WTO Trade Remedy System: East Asian Perspectives. London: Cameron May. Zanardi, Maurizio, 2004. ‘Anti-Dumping: What Are the Numbers to Discuss at Doha?’, The World Economy 27: 403–33.
5 A mapping of regional rules on technical barriers to trade roberta piermartini and michele budetta* 1
Introduction
The progressive elimination of tariff barriers has shifted the attention to other forms of barriers to trade. In particular, the recent debate on market access issues highlighted technical barriers to trade (TBTs). These consist of standards, technical regulations and conformity assessment procedures. Standards and technical regulations specify the technical characteristics of a product or the conditions under which it is made. Product standards define the requirements of the characteristics of products (such as the level of safety of an electronic device), while production standards are the conditions under which a product must be made (such as the requirement of limited gas emissions). Conformity assessment procedures define the testing procedures necessary to assess the conformity of products to the norms.1 *
1
For enquiries about the paper, please contact Roberta Piermartini, Economic Research and Statistics Division, World Trade Organization, 154 Rue de Lausanne, CH-1211 Geneva, Switzerland, [email protected]. The authors would like to thank Richard Baldwin, Stefania Bernabe´, Jo-Ann Crawford, Seema Dargar, Philippa Dee, Simon Evenett, Robert Teh and John Wilson for their comments on previous drafts of this paper. Any remaining errors or omissions are the responsibility of the authors. The Agreement on Technical Barriers to Trade, Annex 1, defines a standard as a ‘document approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for products or related processes and production methods, with which compliance is not mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method.’ The major difference between standards and technical regulations, according to the WTO definition, is that compliance with a technical regulation is mandatory. A conformity assessment procedure is ‘any procedure used, directly or indirectly, to determine that relevant requirements in technical regulations or standards are fulfilled’. The TBT Agreement does not deal with production standards.
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Standards, technical regulations and conformity assessment procedures are not openly discriminatory against imports. The same standard may apply to domestically produced and imported goods. Yet they can act as a disguised form of protection. National standards may impose disproportionate costs on foreign producers. They may generate fixed costs from having to interpret the regulation and bring the product into conformity and might also raise marginal cost if the standard results in a decreased scale of operation. Similarly, conformity assessment procedures can also constitute a barrier to trade. Often exporters are requested to test and certify their products in each of the countries to which they export. These tests and certifications are costly, and duplication of tests exponentially increases costs. Overall costs of conformity assessment also include the risk that goods are rejected by the importing country after shipment so that they have to be transported back, as well as a cost in terms of time required for complying with administrative requirements and inspections by the importing country’s authorities. All these costs may be higher for foreign firms. To the extent that standards, technical regulations and conformity assessment procedures increase costs for foreign companies relatively more than for domestic firms, they act as a protectionist measure; that is, they reduce the ability of a producer to enter a foreign market. It is clear that governments and industries may even define technical regulations, standards and conformity assessment procedures with the strategic aim of creating a disadvantage for foreign competitors. An illustrative example is the US requirement of a larger minimum size on vine-ripened tomatoes (mainly imported from Mexico) than on green tomatoes (mainly grown in Florida). Another example is the Chilean system for grading meat quality which is incompatible with that used in Argentina and the US (big meat exporters). The cost of setting up a special system just to export to Chile effectively limits the market access of small Argentinean and American beef producers. An important difference between technical barriers to trade and conventional barriers – quotas, tariffs, voluntary export restraints (VERs) – is that, although they may inhibit trade, technical regulations and conformity assessment procedures in general are not introduced for the purpose of trade protection. The primary role of governmentimposed standards (or technical regulations) is to enhance welfare by remedying market failures arising from an asymmetry of information between consumers and producers about the quality of a product, negative environmental externalities or failure of producers to
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co-operate and produce compatible products because of network externalities. Technical regulations may be set, for example, to protect public health and safety as well as animal and plant life. Alternatively, firms can voluntarily set standards for efficiency reasons. They can set compatibility standards in order to be able to mix and match alternative inputs, thus reducing inventory costs and increasing production flexibility. Firms can also set standards in order to make it possible for them to exploit economies of scale or they can set standards to signal to consumers the quality of their products. In all of the above cases, standards fulfil a legitimate objective and are aimed to help markets operate more efficiently. Conformity assessment is needed to evaluate a product, a process or a service against specified requirements. Agreements between countries on technical barriers to trade are challenging because they have to strike a balance between the legitimate right of a country to use standards to remedy market failures and set appropriate procedures to assess conformity to these standards, and the realization of gains from integrated markets. On the one hand, since countries differ in terms of levels of development, technology, environmental requirements and preferences, it is natural that the optimal national standard (that is, the specific type of standard that solves a market failure) differs across countries. On the other hand, these differences may constitute an obstacle to trade. There are circumstances in which the solution to this trade-off is relatively simple. Suppose, for example, that two similar countries have the same policy objective of ensuring a certain level of car safety, but that for some reason they have chosen different standard specifications. One country requires the car to be equipped with seat-belts and a fire extinguisher. The other country requires the presence of airbags and fireproof materials. Without an agreement between the two countries, car manufacturers that want to export will have to face higher costs in order to adapt their production to the requirements of each destination country or produce cars that simultaneously satisfy both standards (again, probably at a higher cost than using only one standard). Since the desired level of safety is equally ensured by the two types of standard specifications, both countries would be better off if they chose a common standard or accept each other’s standard. The policy option in which each country chooses one common standard is known as ‘harmonization’, while the policy whereby a country grants unrestricted access to products that meet the standard of another country and vice versa is known as ‘mutual recognition’ of standards.
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There are other circumstances in which countries’ policy objectives are significantly different. In these cases, neither harmonization nor mutual recognition is likely to be a viable solution as they may undermine national policy objectives. What can countries do in these cases to ensure that differences in standards, technical regulations or conformity assessment procedures do not constitute an unnecessary obstacle to trade? The WTO Agreement on technical barriers to trade and various regional trade agreements try to provide an answer to this question. The agreement in the WTO that deals with technical barriers to trade in goods is the TBT Agreement.2 The TBT Agreement recognizes the right of each country to take measures necessary to pursue national security, to prevent deceptive practices or to protect human health or safety, animal or plant life, or health or the environment. But it requires that these measures be as least disruptive as possible for trade. To this end, the TBT Agreement establishes a set of commitments among WTO Members that may be summarized as follows. First, the TBT Agreement recognizes that one way to remove technical barriers to trade is harmonization. Therefore, it prescribes that WTO Members use existing international standards as a basis for their technical regulations. In addition, with the view of harmonizing technical standards, it states that Members shall play a full part in the preparation of international standards by international standardization bodies. At the same time, the TBT Agreement recognizes that countries may have different policy objectives. Therefore, it allows for exceptions when these international standards would be ineffective or inappropriate to fulfil their objectives, for instance ‘because of fundamental climatic or geographical factors or fundamental technological problems’ (TBT Agreement, Article 2.4). The TBT Agreement also encourages countries to accept as equivalent the technical regulations of other Members if these regulations adequately fulfil the objectives of their own domestic regulations (TBT Agreement, Article 2.7). Secondly, with regard to conformity assessment procedures, the TBT Agreement recognizes that one way to avoid duplicative tests and to 2
Other agreements containing standards-related provisions are the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) and the General Agreement on Trade in Services (GATS). The SPS Agreement applies to sanitary and phytosanitary measures, that is any measure that is applied to protect human or animal or plant life or health. The GATS contains standards-related provisions on services, specifically in Article VI, paras. 4 and 5.
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reduce trade costs is through conformity assessment recognition agreements. These imply that a country recognizes the tests and certifications of another country independently of whether their standards are harmonized or are mutually recognized. Therefore, the TBT Agreement (Article 6) encourages Members to enter into mutual recognition agreements (MRAs). But MRAs for testing and certification procedures require confidence in the competence of each other’s conformity assessment bodies and in the methods employed to assess conformity. For this reason, the TBT Agreement recognizes that prior consultations may be necessary to arrive at a mutually satisfactory understanding regarding the competences of conformity assessment bodies. Thirdly, the TBT Agreement acknowledges the importance of transparency of technical regulations for trade liberalization. Indeed, transparency reduces the costs associated with having to learn about the regulations of other countries and makes it more difficult for countries to introduce a discriminatory regulation. Therefore, the TBT Agreement requires that, before the adoption of a new technical regulation, Members publish and notify the WTO Secretariat (Article 2.9) and that an enquiry point exist in each country to satisfy reasonable enquiries and provide documents (Article 10). Fourthly, in the attempt to create a level playing field in the area of technical barriers to trade and avoid the result that some countries, especially developing countries, are excluded from the trade business because of lack of capability for setting standards and assessing conformity, the TBT Agreement establishes that countries shall provide technical assistance to other WTO Members (Article 11). Finally, in order to resolve concerns between countries on TBT matters, the TBT Agreement explicitly refers to the Dispute Settlement Body for consultations on TBT matters and resolutions of disputes (Article 14). In addition, the TBT Agreement establishes the Committee on TBT (Article 13) to deal with the administration of the Agreement.3 WTO rules are not the only international norms governing standardsrelated measures. Many regional trade agreements (RTAs) also include norms for technical barriers to trade. It is clear that, to the extent that RTAs are signed among ‘similar’ countries or countries that trust each
3
For a comprehensive overview on the economics of standards and WTO-related rules see WTO (2005).
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other, they could provide rules that ensure that standards and technical regulations are even less disruptive for trade within the region than the rules established at the WTO. One illustrative example is that of the European Union. The EU also recognizes the importance of removing technical barriers to trade in order to achieve a single market, but commitments to remove technical barriers to trade among EU countries go beyond WTO rules. For example, the EU has adopted the principle of mutual recognition of both product standards and conformity assessments and actively pursues harmonization of product standards. The process of harmonization of standards and regulations takes place in national and European standardization bodies mutually co-operating in drafting and including amendments to the text. Where technical standards are not harmonized, the principle of mutual recognition applies: that is, if products are produced in accordance with one country’s regulations, they are granted access to any other member country.4 In addition, EU countries mutually recognize each other’s conformity assessments. Mutual recognition of conformity assessment is not only limited to accepting conformity assessment results from bodies that are recognized by the parties concerned, but extends to selfcertification arrangements such as suppliers’ declarations of conformity. Although most RTAs encourage or mandate their members to coordinate their standards-related measures, the approach chosen for liberalizing technical barriers to trade varies across RTAs. To our knowledge, there is no comprehensive collection of information concerning regional rules on technical barriers. This paper fills this gap. The paper aims to enhance the understanding of preferential rules and their implications for the global trading system. This is done by mapping various provisions on technical barriers to trade in RTAs into a template and evaluating empirically whether there is any emerging pattern as to the way RTAs address the issue of removing technical barriers to trade. In particular, the analysis in the paper focuses on three questions: (1) To what extent do regional commitments in the area of TBTs go beyond WTO rules? (2) Are there families of RTAs characterized by common features? (3) What are the factors determining the policy option chosen
4
The principle of mutual recognition was introduced formally in 1985. It followed the ruling of the European Court of Justice in the Cassis de Dijon case, according to which ‘any product lawfully produced and marketed in one Member State must, in principle, be admitted to the market of any other Member State’.
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to remove technical barriers to trade in a regional agreement? For example, can similarity in the level of income explain the existence of some provisions? The paper is divided into four parts. Section 2 provides a review of the theoretical and empirical literature on the impact of standards on trade. Section 3 describes the RTAs surveyed in this paper and the methodology used to map the information contained in the text of RTAs into a template. Section 4 provides descriptive statistics about the different approaches used across RTAs to remove TBTs as they emerge from the template. The overview is provided by provision and by RTA. In addition, in this section we attempt to assess whether there are families of RTAs that share common characteristics. Section 5 looks at a number of explanations of why we observe the inclusion of specific provisions in preferential trade agreements. In this section, an attempt is made to single out the factors that determine which specific provisions are included in an RTA using probit analysis. Both geographical and income-related factors (the level of development and the similarity in income levels among members of RTAs) are considered. Section 6 concludes.
2
Policy options to remove technical barriers to trade
The primary purpose of the mapping of regional rules on technical barriers to trade is to gain insights into the legal framework in which global trade takes place on TBT matters. But, apart from an overview of the range of policy options that have been adopted by the various regional trade agreements to remove technical barriers to trade, it is hoped that one could get an understanding of the extent of liberalization that countries have achieved on TBT matters through regional integration. For this, one needs to understand what policy options might be more effective in liberalizing trade. This section explores the various policy options to remove TBTs and describes their likely effect on intraregional trade and trade costs.5 Then, it reviews the empirical evidence on their impact on trade.
5
As with any other form of liberalization at the regional level, the removal of TBTs may have detrimental effects on trade with countries outside the preferential area. For a discussion on trade-diverting effects of RTAs and the issue of RTAs as stumbling blocs or building blocs for multilateral liberalization, see Chapter 2 above.
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Taxonomy
Different standards, although optimal from a national point of view to pursue a national objective, may hinder trade through various channels: First, they may generate fixed costs of exporting from having to interpret the regulation and bring the product into conformity. Secondly, they might also increase the marginal cost of production if the standard results in a decreased scale of operation. In addition, national standards may reduce the scope for international arbitrage. In the automobile industry, for example, country-specific emissions and safety standards can prevent consumers from importing cheaper cars produced abroad. When a country opens up to trade, previous country-specific standards may no longer be optimal because they entail a cost in terms of foregone trade. Policy-makers have various ways in which they can tackle technical barriers to trade. These include: recognition or harmonization of product standards, increased transparency and recognition of conformity assessments.
2.1.1
Equivalence and mutual recognition of standards and technical regulations Recognition of product standards can be unilateral (equivalence) or reciprocal (mutual recognition). Equivalence implies that a country recognizes that the exporting country’s product standard, although characterized by a different technical specification, is effective in pursuing the same objective (e.g. the same level of health protection) as is achieved by the importing country’s technical requirements, and it can therefore enter the domestic market. Mutual recognition implies that countries agree to mutually recognize each other’s standards as equivalent, thus granting products that meet any of the two countries’ standards unrestricted access to their markets. Equivalence and mutual recognition are commonly considered as a step towards freer trade because they allow firms to pick any one standard and to sell it in the whole regional market. So, unless consumer preferences are biased toward their domestic specification, a firm located in the region can freely access the whole regional market without additional costs to comply with a specific standard. Yet, there is a risk associated with equivalence and mutual recognition – that of a race to the bottom. When countries with different optimal standards trade and recognize as equivalent each other’s standards,
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there might be an incentive for countries (firms) to set lower standards to provide national firms with a competitive advantage relative to foreign firms, thus compromizing quality or safety and triggering a race to the bottom. To avoid the risk of a race to the bottom, policy-makers may opt for the harmonization of (minimum) standards as a way to remove TBTs.
2.1.2 Harmonization There are circumstances in which differences in standards are too large and mutual recognition is neither desirable nor viable. In these circumstances, countries may require a certain degree of harmonization of product standards as a precondition to allow entry into their markets. Harmonization can be full or limited to essential requirements. Full harmonization requires that countries define on a product-by-product basis a common standard, including the design of detailed characteristics of the product. An example of this type of harmonization is the EU ‘old approach’. This approach entails long and tedious negotiations among countries about the specific contents of a product standard (see Box 5.1). Harmonization of minimal standards consists of defining common essential requirements among countries that liberalize their trade, while leaving each country (or firm) free to design the specific characteristics of the product in the way they most like. The ‘new approach’ of the European Community is an example of this type of harmonization. Like mutual recognition of product standards, harmonization of product standards is commonly believed to be a step towards freer trade. The advantage of harmonization relative to mutual recognition in terms of its effects on trade is that, with harmonization, products produced in different countries are more similar (more homogeneous) and therefore better substitutes from the point of view of producers and consumers. This, in turn, may facilitate trade by improving consumers’ confidence in the importing country about the quality of the imported good. Also, harmonization will enhance compatibility between imported and domestically produced goods. This would make it easier for consumers to match components, would increase competition, reduce prices and increase trade. However, harmonization of product standards may also have a negative effect on trade. With regard to this, there are two important differences between the effects of full harmonization and harmonization
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box 5.1 the eu approach to remove tbts The EU has developed probably the most advanced system to reduce the traderestrictive impact of technical regulations. This approach is a combination of harmonization and mutual recognition of standards, technical regulation and conformity assessment. National technical regulations are subject to Articles 28 and 30 of the Treaty. Products manufactured in one country should in principle move freely throughout the EU. Barriers to trade arising from differences across countries can only be accepted if national measures are necessary to satisfy health, safety, consumer protection and environmental protection. In order to remove these types of barriers, the so-called ‘old approach’ required that technical regulations be harmonized by means of detailed directives, the content of which is determined by negotiations among EU countries. Once adopted, such directives replace national standards. However, harmonizing all specific characteristics of products proved difficult. The Council Resolution of 1985 on the ‘new approach’ to technical barriers to trade laid down the new regulatory approach. According to the ‘new approach’, the legislative harmonization is limited to essential safety and health requirements. The process of specification of these essential requirements in technical standards is left to European standardization bodies (the Committee for Standardisation or CEN, the European Committee for Electrotechnical Standardisation or CENELEC, and the European Telecommunications Standards Institute or ETSI). The application of these harmonized technical specifications remains voluntary, as the producer remains free to adopt its own technical specifications to meet the (mandatory) essential requirements. The advantage of using harmonized European standards is that they benefit from a presumption of conformity. Since 1987, some twenty-five directives based on the principles of the new approach and the global approach have come into force.6 When standards are not harmonized, the principle of mutual recognition of standards applies – that is, if products are produced and tested in accordance with one country’s regulations, they are granted access to any other member country (the key elements for mutual recognition are provided by the Cassis de Dijon case law of the European Court of Justice). Since 1993, a new integrated approach has been implemented. The new scheme, known as the ‘global approach’, provides general guidelines and detailed procedures for conformity assessment that are to be used in new approach directives. In addition, it includes rules on labelling.7
6 7
See http://ec.europa.eu/enterprise/newapproach/standardization/harmstds/reflist.html. For detailed information on the European standardization policy, see http://ec.europa. eu/enterprise/standards_policy/index_en.htm.
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of essential requirements on trade. Full harmonization of product standards imposes a higher cost in terms of reduced variety than harmonization of essential requirements. Insofar as demand for foreign goods is driven by love for variety, full harmonization may hamper trade by reducing the degree of product differentiation. In addition, full harmonization to a specific standard may imply a higher cost of compliance for firms in certain countries than harmonization of essential requirements, thus effectively erecting a barrier to trade. This is a particular concern for developing countries whose level of technology may not be sufficient to meet certain standards.8
2.1.3 Transparency There are cases when neither recognition nor harmonization is feasible or desirable. Such a scenario occurs, for example, when countries’ optimal standards are very different. In these cases, countries can still minimize the trade-reducing effect of different standards by increasing the transparency of their national standards and technical regulations. Notification of standards and technical regulations and the setting up of enquiry points for standards may in fact facilitate trade by reducing the searching costs required for acquiring information about the standards adopted in another country. The theoretical argument is that different national standards may not be detrimental to trade if they provide easy access to information about the preferences of consumers in a country.9 In addition, transparency at the stage of preparation of standards may provide an effective mechanism to avoid unintentional protectionist outcomes. 2.1.4 Mutual recognition of conformity assessments Another way to partially remove technical barriers to trade is through the recognition of each other’s tests of conformity assessment. This 8
9
Systematic evidence on the incidence of compliance costs is scarce. Evidence based on survey data suggest that costs of compliance are not trivial. A survey by the OECD (1999) on fifty-five firms estimated that the additional costs incurred to meet technical requirements in four export markets – the US, the UK, Germany and Japan – ranged between zero and 30 per cent. Another study by Maskus, Otsuki and Wilson (2005) based on company survey data covering some hundreds of firms in about twenty-five industries in seventeen developing countries found that fixed costs of compliance are on average 4.7 per cent of value-added. See Rauch and Trindade (2002) for an assessment of the importance of information costs for trade.
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implies that the importing country recognizes the competence of the exporting country’s conformity assessment bodies to test and certify that a product complies with the laws of the country where it is sold. Mutual recognition of conformity assessment requires a certain degree of trust between countries and confidence in the quality of the methodologies employed in their conformity tests. But it requires neither recognition nor harmonization of product standards. The impact of mutual recognition agreements (MRAs) of conformity assessment on the trade of participating countries is clearly positive. MRAs will help reduce exporting firms’ overall costs of testing and certification of conformity. They will eliminate the need for duplicative tests in each destination market and they will help reduce handling time and uncertainty of delivery. To sum up, harmonization, mutual recognition of standards and of conformity assessment and enhanced transparency may all represent viable options to help reduce trade costs generated by different national standards. But economic theory is unable to tell us which approach is more trade enhancing. Can empirical evidence help us on this?
2.2 Empirical evidence on the impact of harmonization and mutual recognition Empirical literature on the impact of removing TBTs on trade is limited. One approach to quantifying the impact of standards on trade has been to test whether country-specific standards and internationally harmonized standards have a different impact on trade. Two relevant studies in this regard are those by Swann et al. (1996) and Moenius (2004). Both studies use the count of shared international standards as a proxy for the degree of harmonization of standards, and they found a positive and significant effect of shared standards on trade. In particular, Moenius, using a gravity model on sectoral bilateral trade volumes (4-digit SITC) for twelve European countries, estimates that a 10 per cent increase in the number of shared standards enhances bilateral trade by nearly one-third. Interestingly, when the count of country-specific standards is also introduced in the regression, he finds that importer-specific standards have a negative impact on imports in the non-manufacturing sectors, but have a positive impact on imports in the manufacturing sector. The theoretical argument is that national standards can facilitate or deter trade depending on whether they
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decrease information costs more than they increase adaptation costs of foreign suppliers. The information effects dominate in manufacturing sectors, where products are more differentiated and information about market preferences is, therefore, more valuable. However, the count of shared standards is not a good measure of the extent of TBT liberalization because some sectors have a higher propensity to harmonize than others. In general, the number of harmonized standards is higher in sectors where network effects or compatibility requirements are important. For example, nearly 70 per cent of standards in the electronic equipment and telecommunication sector are harmonized (WTO 2005 pp. 61–2). Another approach to quantifying the impact of the removal of technical barriers to trade has been to compare the effects of harmonization as opposed to mutual recognition of product standards on trade. A paper by Vancauteren and Weiserbs (2003) provides a somewhat indirect estimate of the impact of harmonization versus mutual recognition on trade by looking at whether those sectors where the EU has sought to remove technical barriers to trade by harmonizing technical regulations or by applying mutual recognition present a lower ‘home bias’10 than the average. The study relies on the hypothesis that the large home bias in Europe is induced by technical barriers to trade, such as different technical regulations. Hence, to the extent that harmonization and mutual recognition of product standards remove trade distortions, they should reduce the home bias. Using a gravity model for intra-EU bilateral trade for the period 1990–8, the authors of this study estimate the home bias effect for five groups of sectors, defined according to whether the new approach, old approach, mutual recognition principle, or a combination of these three approaches, applies, and whether technical regulations are significant barriers to trade. Their results show that the home bias remains substantial both for sectors where standards have been harmonized and for those where mutual recognition holds according to national laws. Moreover, a significant home bias is also found for products where no significant barriers were deemed to exist.
10
The term ‘home bias’ refers to the preference for consuming domestically produced goods rather than imported goods. In Europe, consumption of domestically produced goods has been estimated to be larger than trade with other EU partners by a factor of ten (Nitsch 2000).
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In other words, the study by Vancauteren and Weiserbs did not find that measures taken to remove technical barriers to trade had a significant impact on the home bias. Although the smallest home bias is found for those sectors characterized by mutual recognition (the coefficient of the home bias is equal to 2.72 for products where mutual recognition applies, while it is above 3 for sectors whose standards have been harmonized), the analysis does not allow us to say whether this is significantly smaller than for those sectors characterized by harmonization. A number of reasons can explain the failure of Vancauteren and Weiserbs to find a significant impact of European measures to remove technical barriers to trade on the home bias. First, factors other than technical barriers to trade can explain the home bias. Secondly, the study groups sectors on the basis of a sectoral classification set up in a study by Atkins for the Single Market Review in 1998 (European Communities 1998). This study reflected the situation in 1998, while the study by Vancauteren and Weiserbs used data for the period 1990–8. In their study, there will be sectors that have been harmonized in the later years of the period 1990–8 that will fall within the group of harmonized sectors, while trade flows for most of the period will not reflect conditions of trade under harmonization. Finally, since the establishment of the ‘new approach’ in 1985, any good that circulates in one country of the EU can ‘freely’ circulate in another EU country (the burden of proving that a standard is not equivalent to that of the importing country falls on the importing country). Therefore, since mutual recognition holds on all products in their sample period (1990–8), it is understandable why they find it hard to capture the trade-enhancing impact of mutual recognition. Another recent study (Piermartini 2005) attempts to overcome the limitations of Vancautereen and Weiserbs’ study, by estimating a standard gravity model11 for intra-EU sectoral trade12 over the period 1978–2002. The impact of harmonization on trade is estimated by introducing dummy variables indicating whether, at a certain point in
11
12
Standard explanatory variables include the GDP values of the trading partners and dummy variables that denote whether countries share a border, a common language or the same currency, and whether one of the trading partners is an island or a landlocked country. Trade data in ISIC Rev.2 at four-digit classification from the UN Comtrade database are used for the estimation.
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time, the sector was harmonized according to the ‘old approach’ or ‘new approach’. A distinction between horizontal harmonization (including, for example, compatibility standards) and vertical harmonization (covering health, safety and quality) of standards was also made. Moreover, a mutual recognition dummy was introduced, allowing estimation of the impact of the mutual recognition principle in 1985 for those sectors that have not been harmonized. Mutual recognition of product standards was found to have a positive and significant effect on intra-EU trade. The results regarding the impact of harmonization on trade appeared less robust. Overall, harmonization according to the ‘old approach’ results in enhanced trade more than the ‘new approach’, especially when it concerned horizontal standards. The literature looking at the impact of mutual recognition of conformity assessments on trade is even more limited than the literature on standards. One notable exception is the recent paper by Chen and Mattoo (2008). This study finds that MRAs of conformity assessment are in general trade-promoting for the countries participating in the agreement, while they may hurt third countries if the extent of the application of mutual recognition of conformity assessment is limited by rules of origin. To sum up, while it may be too early to draw strong conclusions regarding the relative merits of mutual recognition and harmonization in enhancing trade, given the limited number of studies and their focus on European countries, we can probably say that more robust and significant trade enhancing effects are found in the case of mutual recognition.
3
The methodology used to build the template
The basic approach we have adopted to build the template on regional TBT agreements is to rely on the legal text of the agreements. While legal provisions provide important information, they may not be sufficient to understand the degree of stringency these rules imply. The effectiveness of the rules is likely to depend on the institutional setting and administrative procedures and practice. In this paper, we are unable to take these factors into account. In particular, we cannot ascertain from the legal text to what extent regional provisions are implemented and bypass WTO rules. However, there appears to be some evidence that regional legal provisions tend to be implemented. In fact, there were sixteen country pairs involved in disputes related to provisions of the TBT Agreement in
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2005.13 Of these, only two country pairs were parties to the same RTA. These disputes are those between Mexico–US (relative to measures affecting trade in live swine) and US–Canada (relative to measures affecting imports of cattle, swine and grain from Canada). Interestingly, these cases are perfectly in line with the relevant regional agreement. Indeed, the NAFTA agreement establishes the possibility of referring to both the WTO and the NAFTA dispute settlement mechanism for the resolution of disputes. Similarly, there were about fifty pairs of countries involved in TBTrelated trade concerns raised at the WTO’s TBT Committee in the same year. Of these, only six were among countries that were members of the same RTA. This represents less than 15 per cent of the total number of TBT-related concerns. Since trade within RTAs is estimated to represent approximately 50 per cent of total trade,14 these figures seem to suggest that there is on average a lower propensity for countries parties to an RTA to open disputes and raise TBT-related concerns at the WTO than the global average for a given amount of trade. In particular, TBTrelated trade concerns among EEA member countries are extremely rare. One noticeable exception is the case raised by Norway in 2003 in relation to the EU regulation for sardines. Again, this case is compatible with the EEA rules. Indeed, although the agreement establishes clear procedures to deal with the resolution of disputes at the regional level, the sector of fisheries is explicitly excluded from the agreement.
3.1
The regional trade agreements surveyed
Two criteria have been followed to select the RTAs to survey in this study. First, since one of the aims of this paper is to enhance the understanding of the range of policy options adopted within RTAs to remove TBTs, we have surveyed a relatively large sample of RTAs and we have selected RTAs for regions that were different in terms of geographical characteristics, level of development and extent of intraregional trade. Over seventy RTAs were surveyed for this study, covering about half of all the RTAs in force notified to the WTO. The RTAs surveyed cover the full range of geographical areas: America, Europe, Africa, Asia and Oceania. They include RTAs among countries at different levels of development – RTAs among developed countries, 13 14
WTO (2006). See WTO (2003).
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between developed and developing countries, and among developing countries. In addition, RTAs are differentiated in terms of the levels of the concentration of trade among members. The share of intra-regional trade across RTAs surveyed varies from 60 per cent among EU countries to less than 1 per cent for some bilateral agreements, such as US–Bahrain. A secondary aim of this paper is to establish whether there are families of RTAs that present similar characteristics in terms of TBTrelated provisions. For this purpose, we have included most RTAs signed by the most active RTA signatories: the EU, EFTA, the US and Mexico. The complete list of RTAs surveyed in this paper as well as information about whether they include a chapter on TBTs or not is reported in Annex 1 below.
3.2
The structure of the template
The template used for the comparative analysis of TBT-related provisions in regional agreements is structured after the TBT Agreement. The advantage of this approach is that it facilitates comparison between provisions in RTAs and those in the TBT Agreement. Therefore, it helps in examining the extent to which the removal of technical barriers within regional preferential areas has progressed beyond the WTO rules in terms of the specific language of the agreement. The template is divided into five sections (see Table 5.1) containing the following elements: Section I reports whether there are references to the TBT Agreement. One may assume that the intention of the specific TBT-related provisions in an RTA is to loosen or tighten the multilateral rules that otherwise would apply. Therefore, gaining an understanding of the parties’ intended relationship between the WTO and the RTA rules is a priority. The information we collected concerns the following questions: Are the definitions of standards and technical regulations in RTAs the
same as those of the WTO? For the purpose of the TBT Agreement, technical regulations are mandatory documents, while standards are voluntary documents that may or may not be based on consensus. Some RTAs, however, may refer to the ISO/IEC Guide 2 definition. According to this definition, standards may be mandatory or not, and are based on international consensus. Is there a general reference to the rights and obligations of the TBT Agreement?
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Does the reference to the TBT Agreement cover specific provisions of
the Agreement, such as transparency rules or a dispute settlement mechanism for the resolution of disputes? Section II describes the type of approach – equivalence/mutual recognition or harmonization – to remove TBTs that has been adopted or is being encouraged in RTAs. An essential issue in this regard is whether the commitment to recognize as equivalent, negotiate mutual recognition agreement or harmonize standards, technical regulations or conformity assessment procedures of RTA member countries is ‘hard’ or ‘soft’. This is very difficult to assess on the basis of the legal text of the agreement. However, legal practice suggests some elements may play an important role in determining whether a law is hard or soft. These refer in general to the specification of a timeline within which a certain commitment needs to be implemented, a description of the target of the commitment (e.g. what is the standard to which countries commit to harmonize), and an explanation of how a certain commitment will be implemented. To this end, we have adopted the following approaches for equivalence/mutual recognition and harmonization, respectively: (1) In the case of a commitment to (mutually) recognize as equivalent the standard, technical regulation or conformity assessment of a regional partner, the template contains information on the following key issues: (a) Whether the importing country needs to provide reasons for not accepting a standard as equivalent. For example, the Australia– US FTA (Article 8.5) states that, ‘where a Party does not accept a technical regulation of the other Party as equivalent to its own, it shall, at the request of the other Party, explain its reasons. The Parties will, if they so agree, give further consideration to whether a Party should accept a particular regulation as equivalent to its own and consider establishing an ad hoc working group.’ This is clearly a much stronger commitment to recognize each other’s standard than in Article 2.7 of the TBT Agreement, which states that countries ‘shall give positive consideration to accepting as equivalent’ technical regulations of another country ‘provided that they are satisfied that these regulations adequately fulfil the objectives of their own regulation’. (b) Whether mutual recognition is in force. In this case we include information beyond the mere text of the agreement on preferential trade.
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(c) Whether countries commit to negotiate mutual recognition within a certain time. (d) Whether RTA member countries participate in international accreditation agencies. (2) In the case of harmonization, the template includes information about whether: (a) the agreement defines the standard to which parties shall harmonize; (b) the agreement promotes the use of regional standards (for example, many agreements between the EU and developing countries encourage developing countries to use EU standards); (c) the agreement promotes the use of international standards. In general, we consider that the policy adopted is harmonization also in all those cases in which the text of the agreement states that parties should ‘bridge the gap’, ‘reduce divergence’ or ‘make compatible’ their standards, technical regulations or conformity assessment procedures. Section III of the template focuses on transparency requirements. These include provisions related to notification requirements as well as provisions establishing whether the regional agreement requires enquiry points for this purpose or establishes regional consultations for the dissemination of information. With regard to notification requirements, since we structure the template on TBT rules taking the WTO rules and practices as benchmarks, the template will not only indicate whether the regional rules on TBTs include notification requirements, but it will also focus in particular on whether regional rules specify the time period allowed for notification and whether this period is longer than sixty days. In fact, WTO rules require notification before the adoption of a new technical regulation if an international standard does not exist or the content of the proposed regulation is not in accordance (‘substantially the same’, in the SPS Agreement) with the international standard and if the technical regulation may have a significant effect on their trade. In particular, Members must publish and notify to the WTO Secretariat at an early stage (when amendments can still be introduced) and discuss with other Members their comments upon request whenever a technical regulation is proposed. In addition, all technical regulations which have been adopted should be promptly published or made available. A reasonable time interval between the publication of technical regulations and their entry into force should be allowed. The WTO agreements do not set a specific time period. However, the
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TBT Committee ‘has recommended that the normal time limit for presentation of comments on notified technical regulations and conformity assessment procedures should be sixty days. Moreover, it was recommended that any Member able to provide a time limit beyond sixty days, such as ninety days, was encouraged to do so.’15 In 2005, Members allowed an average of 60.5 days for comments (see WTO 2006). WTO rules also require that countries set up enquiry points to facilitate the flow of information among Members. Relying on the WTO rules as a benchmark, the template on regional rules on TBTs contains information on whether the regional agreements include provisions for the dissemination of information. This may consist of requirements for setting up contact points but also simply regional arrangements for exchanging information. Section IV concerns the institutional and administrative structure set up by the RTA to deal with TBTs. In order to establish the degree of liberalization of technical barriers to trade, one would need to know to what extent legal provisions on TBT-related matters in the RTAs coincide with actual practice. There may be a considerable difference between the text of the agreement and the extent to which commitments are implemented; hence, similar provisions in two different RTAs may correspond to extremely different practices. In general, the gap between the law and the practice is likely to depend on the institutional setting and administrative procedures. Acknowledging the importance of these factors, the template includes information about whether RTAs establish regional committees or bodies or regional consultations for the administration of the agreement. In addition, the template includes information about how TBT-related disputes are resolved within RTAs. Five elements are contained in the template: (1) Is there a dispute settlement body? (2) Do RTAs foresee consultations among conflicting parties to resolve disputes? (3) Is there a mechanism to issue recommendations? (4) Are recommendations mandatory decisions? (5) And, finally, Is the recourse to dispute settlement in the context of TBT-related matters denied? Section V of the template contains information on those provisions that envisage a form of common policy-making in the field of standards beyond trade-related objectives. In addition, it covers provisions related to metrology, and contains information on specific commitments for technical assistance. Technical assistance may cover assistance for the 15
‘Decisions and Recommendations Adopted by the Committee Since 1 January 1995’, Note by the WTO Secretariat, 23 May 2002, G/TBT/1/Rev.8: 17.
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Table 5.1 The structure of the template for mapping regional rules on standards, technical regulations and conformity assessment procedures I. Reference to WTO-TBT Agreement definitions rules specific provisions (notifications, consultations, dispute settlement mechanism) II. Integration approach (A) Standards, (B) Technical Regulations, (C) Conformity Assessment (i) (Mutual) recognition Is the burden of explaining reasons for non-equivalence on the importing country? Is mutual recognition in force? Is there a time schedule for the achievement of mutual recognition? Do parties participate in international/regional accreditation agencies? (ii) Harmonization Are there specified existing standards/rules to which countries shall harmonize? Is the use/creation of regional standards/rules promoted? Is the use of international standards/rules promoted? III. Transparency requirements (i) Notification Is the time period allowed for comments specified? Is the time period allowed for comments longer than 60 days? (ii) Contact points/consultations for the exchange of information IV. Institution (i) Administrative bodies Is a regional body established? (ii) Dispute settlement mechanisms Is there a regional dispute settlement body? Are there regional consultations foreseen to solve disputes? Is there a mechanism to issue recommendations? Are recommendations mandatory? Is the recourse to the dispute settlement disallowed? V. Further co-operation among members (i) Common policy/standardization programme (beyond trade-related objectives) (ii) Technical assistance (iii) Metrology
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preparation of technical regulations and the establishment of the relevant bodies or institutions. Technical assistance also covers the areas of processing technologies, search for expertise, training and equipment, including adequate laboratory capabilities for testing and certification to allow assisted countries to adjust to achieve the appropriate level of standard required in their exporting countries.
4
Overview of the results
The results of the complete mapping of regional rules into the template described above are reported in Annex 2 below.16 This section characterizes the results. It is divided into three sub-sections. The first subsection aims at providing insights into what are the most common types of TBT provisions in regional agreements. The second sub-section highlights whether there are some common features characterizing RTAs subscribed by the US, the EU, EFTA and Mexico, respectively. The idea is to assess whether it is possible to recognize a type of hub-andspoke pattern across the various RTAs. The third sub-section attempts to provide an indication of the extent to which RTAs have gone beyond the TBT Agreement in removing technical barriers to trade.
4.1
What are the most common provisions?
Table 5.2 shows the number of RTAs by provision. The table refers to a total of fifty-eight RTAs that include provisions on TBTs out of the over seventy RTAs surveyed. These figures include two RTAs – Canada–Chile and AFTA – that only contain standards-related provisions for specific sectors, telecommunication and road vehicles, respectively. Figures show that RTAs tend to develop TBT disciplines in conformity with WTO rules. Out of fifty-eight RTAs with TBT provisions, thirty refer to the TBT Agreement and, in particular, twenty-one reaffirm their rights and obligations with respect to each other under the TBT Agreement. Overall, there appears to be a tendency for regional agreements to favour harmonization of standards and technical regulations over mutual recognition. In fact, the option of mutual recognition in general does not apply to standards and technical regulations, but to conformity 16
Annex 2 reports mapped information in a 0–1 format, where 0 denotes absence of a certain provision, while 1 denotes its presence. Qualitative information reporting the wording of the agreement is available on request to the authors.
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Table 5.2 An overview of TBT provisions in RTAs Number of RTAs (out of a total of 58 surveyed RTAs with TBT provisions) I. Reference to WTO TBT Agreement definitions rules specific provisions
30 11 21 6
II. Integration approach
As applied to: Standards
(i) Mutual recognition Is the burden of explaining reasons for non-equivalence on the importing country? Is mutual recognition in force? Is there a time schedule for the achievement of mutual recognition? Do parties participate in international/regional accreditation agencies? (ii) Harmonization Are there specified existing standards/rules to which countries shall harmonize? Is the use/creation of regional standards/rules promoted? Is the use of international standards/rules promoted? III. Transparency requirements (i) Notification Is the time period allowed for comments specified? Is the time period allowed for comments longer than 60 days?
Technical Conformity regulations assessment
5 2
15 7
39 6
– –
1
1
6
–
1
1
2
–
–
–
17
–
25 2
29 3
25 2
– –
12
14
12
–
10
13
8
– 30 21 10 9
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Table 5.2 (cont.) Number of RTAs (out of a total of 58 surveyed RTAs with TBT provisions) (ii) Contact points/consultations for the exchange of information
20
IV. Institution (i) Administrative bodies Is a regional body established? (ii) Dispute settlement mechanisms Is there a regional dispute settlement body? Are there regional consultations foreseen to solve disputes? Is there a mechanism to issue recommendations? Are recommendations mandatory? Is the recourse to the dispute settlement disallowed?
36 34 32
V. Further co-operation among Members (i) Common policy (beyond trade-related objectives) (ii) Technical assistance (iii) Metrology
31
24 22 24
8 2 1
8 22 17
assessment procedures. The cases in which the commitment to harmonize appears to be ‘hard law’ seem to be very limited, namely, the EU, EU–Turkey and AFTA (for road vehicles only). There are a number of cases in which the RTA includes some elements (such as a time schedule for harmonization, regional standards to use for the harmonization, or a body with the aim of looking into the possibility of harmonization) that extend the commitment to harmonize beyond that established in WTO rules. For example, MERCOSUR constitutes a
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‘working group’ (Resolution GMC 61/97: Negotiating Parties of Working Sub-group 3) aiming at harmonizing the technical regulations identified as barriers to trade within MERCOSUR. It is interesting to notice that to a large extent the RTAs that favour harmonization on the basis of regional standards as opposed to international standards are the agreements signed by the EU. Equivalence and mutual recognition appear to be the preferred options to deal with TBT of conformity assessment procedures for testing, certification and accreditation. In thirty-nine cases, countries have included provisions encouraging mutual recognition. Six have signed MRAs. Six other agreements appear to require a commitment to recognize as equivalent the conformity assessment of another party more strictly than the WTO. These include NAFTA and the agreements signed by the US with Australia, Bahrain, the Dominican Republic plus CAFTA, Chile and Morocco. Turning to transparency provisions in RTAs, summary statistics reported in Table 5.2 show that transparency is also recognized to be important at the regional level. Overall, there are thirty RTAs that include transparency provisions. In particular, twenty agreements require the establishment of a system for the exchange of information within the RTA. In addition, twenty-one RTAs urge members to notify each other about new standards-related measures or a modification of existing measures. But only nine have a rule more stringent than the WTO’s, in the sense that they specify that countries shall give at least sixty days notification prior to the adoption or modification of a technical regulation. For example, notification procedures for countries members of the EEA require a three-month standstill before the new regulation is brought into force. As far as the institutional arrangement established by RTAs is concerned, it is important to note that most of the RTAs that contain a chapter on TBTs include provisions that establish a committee, body or network for standards-related matters. In addition, in some cases where a committee for standards-related matters is not established, the agreement provides for co-operation between the parties in order to ‘provide organizational support to foster the establishment of regional networks and bodies’ (this is the case, for example, of Article 18.3 of the EU–Chile FTA). The template, however, reports the count of RTAs that establish committees and bodies whose scope of activity (although it varies across agreements) tends to include: (1) monitoring the implementation and administration of the agreement; (2) providing a forum to consult on and discuss issues relating to standards, technical regulations and conformity assessment procedures, or also organize a working
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party; (3) coordinating initiatives among members, or providing advice, or promoting actions towards development, application and enforcement of standards, technical regulations and conformity assessment procedures; (4) assisting in the provision of technical assistance.17 Furthermore, twenty-four RTAs among those surveyed contain provisions for the resolution of disputes among members. In all of these cases, regional agreements foresee consultations. Some agreements (e.g. NAFTA and ALADI) also envisage recourse to technical groups that can provide non-binding recommendations. The Andean Community, the EU, EFTA, the EEA and the Group of Three set up a formal system of resolution of standards-related disputes (Box 5.2 provides some details of the EU and the EEA’s system). In the case of the Andean Community, for example, if a country considers that the national standards or technical regulations or the conformity assessment procedures of another country constitute technical barriers to trade, ‘it may hold consultations with the Member Country that adopts the measure, solicit the technical intervention of the Committee or approach the Board . . . and if the Board finds that a barrier exists may order the revocation of the measure’. This process, it is also agreed, must take place within thirty calendar days. Finally, some agreements relate their commitments on standards not only to the removal of technical barriers to trade to facilitate the exchange of goods, but also to other objectives. For example, the Australia–Singapore and Australia–Thailand agreements state that the purpose of the chapter on standards-related measures is to facilitate trade and ‘investment between the Parties’. In COMESA, the programme on standards-related measures is also explicitly aimed at ensuring ‘quality’, and in CARICOM it is targeted at both the quality and efficiency of production. Twenty-two agreements provide for technical assistance (TA). Commitments to TA vary across agreements. Technical assistance provisions in the agreements between the EU and a developing country clearly states that TA is provided by the EU. In general, TA is to be provided on terms and conditions that countries mutually agree upon. In some cases, TA is defined in terms of training. For example, the Andean Community establishes the ‘Andean Training Program’. In COMESA, countries agree to consultation 17
In some cases, standards-related committees established by RTAs also have a substantial coordination role. For example, in ALADI, the Administrative Commission has a responsibility ‘to promote the actions that are needed to make mutual recognition of conformity assessment systems viable’; and ‘to promote, to the extent possible, joint positions of signatory countries at international forums concerned with technical regulations, technical standards, and conformity assessment’.
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box 5.2 the system to settle disputes on tbt matters in the eu and the eea The EU Disputes concerning TBT-related issues in the EU may involve Member States and individuals. As far as Member States are concerned, disputes related to TBT issues are administered according to the EU Treaty of Rome. First, Article 220 provides that the European Court of Justice (ECJ) and the Court of First Instance ‘shall ensure that in the interpretation and application’ of the Treaty and European Community legislation (treaties, regulations, directives, etc.) the law is observed. Secondly, as laid down in Article 227 of the EU Treaty, a Member State ‘which considers that another Member State has failed to fulfil an obligation’ deriving from the TBTrelated corpus of legislation may bring the matter before the ECJ. Nonetheless, before a Member State brings an action against another Member State for an alleged infringement, ‘it shall bring the matter before the Commission’. The same Article provides that, ‘if the Commission has not delivered an opinion within three months of the date on which the matter was brought before it, the absence of such opinion shall not prevent the matter from being brought before the European Court of Justice’. In other words, EU legislation allows both the possibility of finding a diplomatic solution to the disputes and of resolving them through the ECJ. As far as disputes arising between individuals are concerned, there are two ways in which an individual can bring a case before the ECJ or the Court of First Instance. It is possible to bring a case indirectly where the case is being dealt with by the national courts. If the national court is faced with a legal problem which concerns TBTs, it may, and sometimes must, suspend the proceedings and make a reference to the ECJ for a preliminary ruling asking the ECJ to give an interpretation or to review the legality of a Community law. Individuals will then be able to bring a case to the ECJ by means of that procedure. An individual may also directly contest a decision taken by a Community institution before the Court of First Instance. In order to do so, he or she must be the addressee of the decision or directly and individually concerned by the act in question. On the other hand, an individual cannot bring an action against another person (natural or legal) or against a Member State before the Community courts. Such a possibility derives from the ‘direct effect’ principle. 18 18
The direct effect is a principle of European Community law, according to which certain pieces of European legislation are enforceable by citizens of the member States. Direct effect is not mentioned in any of the EU Treaties, and was established by the ECJ in Van Gend en Loos v. Nederlandse Administratie der Belastingen, in which the Court held that rights conferred on individuals by European Community legislation should be enforceable by those individuals in national courts.
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Box 5.2 (cont.) The EEA As in the EU, TBT-related issues in the EEA may also involve Member States and individuals. If the dispute is only between two Member States, there is no tribunal/court that would deal with such a dispute. The dispute settlement procedure in Article 111 of the EEA Agreement would therefore apply, and the EEA Joint Committee may settle the dispute. Accordingly, if a dispute concerns the interpretation of TBT-related provisions of the EEA Agreement (which are identical in substance to corresponding rules of the EU Treaty) and if the dispute has not been settled within three months after it has been brought before the EEA Joint Committee, the Member States parties to the dispute may agree to request the ECJ to give a ruling on the interpretation of the relevant rules. If the dispute involves an individual against one of the contracting parties, two ways of dealing with the matter are possible: 1. An individual could inform one of the surveillance authorities of the EEA Agreement (i.e. the EFTA Surveillance Authority (ESA) for the EEA/EFTA Member States and the European Commission for the EU Member States). If the surveillance authority decided to act (although, they are under no obligation to do so) and the ruling is unfavourable, the individual could, under very strict conditions, challenge the validity of the ruling before the EFTA Court (if it is an ESA decision) or the ECJ (if it is a Commission decision). 2. A private operator could also bring an action to the competent court of the State concerned and maintain that the legislation, on which the action of the State is based, is in violation of its obligations under the EEA Agreement. The competent court could (and most likely would) ask the EFTA Court (if it is an EEA/EFTA Member State) or the ECJ (if it is an EU Member State) for an advisory opinion/preliminary ruling on the matter.
on training needs and establish, in conjunction with the African Regional Organization for Standardization, training programmes designed to meet the specific needs of the common market. In the EU–Tunisia and EU– Lebanon agreements, the assistance activity is targeted towards the upgrading of Tunisian and Lebanese laboratories for testing in order to set the conditions for achieving MRAs. Seventeen agreements contain a specific provision on ‘metrology’. The extent to which these provisions establish a common unit of measure is, however, very different. On the one hand, for example, the
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agreement establishing the Andean Community states that countries shall adopt the International System of Units as the official units of measurement for the Andean sub-region (similarly in ALADI, COMESA and CEFTA). On the other hand, the agreement of the Group of Three states that ‘Parties shall make compatible, to the greatest extent possible, their national metrological patterns using existing international metrological patterns as a guide, whenever the national patterns comprise or appear to create unnecessary obstacles to trade’; EU–South Africa (as well as EU–Tunisia and EU–Morocco) calls for co-operation on the issue of metrology; EU–Tunisia calls for co-operating towards the use of EU measures; and CARICOM only establishes that countries should aim at facilitating the development of a metrology infrastructure. In conclusion, RTAs recognize the importance of removing TBTs for trade. In fact, over two-thirds of RTAs surveyed in this paper include TBTrelated provisions. The results of the analysis of this section suggest that there is a tendency for countries to favour harmonization of standards and technical regulations, and mutual recognition of conformity assessment as approaches to remove TBTs. Moreover, the majority of the agreements recognize the importance of transparency as a way to remove TBTs, but very few agreements define at the regional level more stringent commitments than at the multilateral level. However, a relatively high number of RTAs establish regional bodies to deal with standards. And, interestingly, some RTAs envisage the possibility of co-operating in standards-related matters to further their integration beyond trade-related objectives.
4.2
Are there families of RTAs?
Recent studies on the proliferation of regional trade agreements have highlighted the risk of polarization of trade around a few hubs (Crowford and Fiorentino 2005). In particular, the EU, EFTA, Mexico and the US appear to be driving the process through a progressive expansion of their network of preferential agreements, having entered into the highest number of RTAs. In this sub-section, we examine whether TBT-related provisions in the network of RTAs signed by the EU, EFTA, the US and Mexico present common characteristics.19 Table 5.3 provides summary statistics for each of these four families of RTAs. 19
The existence of families of RTAs is also investigated for trade remedies (in Chapter 4 above) and for competition provisions (in Chapter 8 below).
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Table 5.3 Characteristics of RTAs by hub EU EFTA US Mexico Total Number of RTAs Of which with TBT provisions I. Reference to WTO TBT Agreement Definitions Rules Specific provisions II. Integration approach (i) (Mutual) recognition (for conformity assessment) Is the burden of explaining reasons for nonequivalence on the importing country? Is mutual recognition in force? Is there a time schedule for the achievement of mutual recognition? Do parties participate in international/ regional accreditation agencies? (ii) Harmonization (of technical regulations) Are there specified existing standards to which countries shall harmonize? Is the use/creation of regional standards promoted? Is the use of international standards promoted? III. Transparency requirements (i) Notification Is the time period allowed for comments specified? Is the time period allowed for comments longer than 60 days? (ii) Contact points/consultations for the exchange of information IV. Institution (i) Administrative bodies Is a regional body established? (ii) Dispute settlement mechanisms Is there a regional dispute settlement body? Are there regional consultations foreseen to solve disputes? Is there a mechanism to issue recommendations?
19 9 16 9
9 7
10 10
7 0 3 5
7 6 6 0
9 3 6 0
11 2
7
7
0 0
6
1
2 1 1 0
0 1
0 0
9 0
3
3
12 0 2 0
1 0
6 0
9 0
0
1
3 0
1
6
3 5 2 5 1 1
7 2 2
8 6 5
1 0
2
5
2 0
7
7
5 5 5 3 3 3
8 7 7 8 7 8
7 7 7 4 4 4
8 7 7 7 6 7
2 0
1
4
2 2 0 2
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Table 5.3 (cont.) EU EFTA US Mexico Are recommendations mandatory? Is the recourse to the dispute settlement
1 0 0 0
0 1
0 0
13 0 3 0
1 0
8 0
9 0 7 0
1 0
7 3
disallowed? V. Further co-operation among members (i) Common policy/standardization programme (beyond trade-related objectives) (ii) Technical assistance (iii) Metrology
4.2.1 US agreements Table 5.3 shows that, out of the nine RTAs signed by the US and surveyed in this paper, two do not include TBT provisions. These are the US–Jordan and US–Israel FTAs. The results also highlight some distinguishing features of this family of RTAs. First, a minority of agreements specify the type of approach to adopt to remove TBTs created by different standards and technical regulations. More generally, these agreements establish co-operation in the field of standards, technical regulations and conformity assessment. But in most of the cases, they do not specify whether this co-operation should take the form of (mutual) recognition or harmonization. In particular, none of the bilateral agreements suggest the option of harmonization. The one agreement appearing in the table as favouring harmonization is the NAFTA agreement. This agreement (Article 906.2) establishes that ‘Parties shall, to the greatest extent practicable, make compatible their respective standards-related measures.’ This has been interpreted for the purpose of the template as pointing to harmonization, but the agreement does not explicitly refer to harmonization. Secondly, the focus of the US network of RTAs appears to be the recognition of conformity assessments. All these agreements foster initiatives to develop mutual recognition. In particular, six out of the seven agreements involving the US (NAFTA and bilateral agreements with Australia, Bahrain, the Dominican Republic plus CAFTA, Chile and Morocco) establish that ‘where a Party does not accept the results of a conformity assessment procedure conducted in the territory of the other Party, it shall, on request of the other Party, explain the reasons’, and/or
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that each Party shall recognize conformity assessment bodies in the territory of the other Party ‘on terms no less favourable than those it accords to conformity assessment bodies in its territory’ (e.g. Article 7.5 of the US–Bahrain FTA). The US–Singapore agreement states that each Party shall take steps to implement the APEC Mutual Recognition Arrangement for Conformity Assessment of Telecommunications Equipment with respect to the other party. Finally, all RTAs that contain a chapter on TBT signed by the US include provisions that establish a responsibility to administer the agreement (either in the form of a committee, as in the case of the US–Chile and NAFTA, or in the form of a coordinator) and the commitment to facilitate the exchange of information among RTA members.
4.2.2 EU agreements There are as many as sixteen RTAs signed by the EU with developing countries and surveyed in this study. A certain degree of harmonization of standards appears to be the preferred option in these agreements. Two types of agreements in the family of EU agreements can be distinguished, depending on whether harmonization should occur on the basis of EU standards or international standards. One group of agreements are represented by those signed by the EU with developing countries geographically close to the EU (that is, in the Mediterranean area). The other group of agreements are those with geographically distant countries, such as Chile and Mexico. These latter agreements do not include a provision calling solely for harmonization to European standards, while the former do. In the case of the EU–Chile FTA, parties agree ‘to bridge the gap’ between their standards and technical regulations, and to promote the use of both EU and international standards. In the case of EU–Mexico, the chapter on TBTs does not go much further than WTO rules, as parties reaffirm their commitment to international standards. There may be a variety of reasons explaining this difference between these two groups of EU-driven RTAs and between the EU–Chile and the EU–Mexico FTA. A possible reason may be that both Chile and Mexico have also signed RTAs with the US. In particular, Mexico has a commitment to make compatible its standards within NAFTA. Therefore, the requirement to harmonize to European standards may in this case be incompatible with pre-existing commitments. A common feature of all agreements between the EU and developing countries is that they generally require the latter to co-operate in enhancing the quality of their laboratories through harmonizing their standards to those of the EU.
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4.2.3 EFTA agreements We surveyed eight of the FTA agreements EFTA countries signed with developing countries (those with Israel, Mexico, Morocco, the Palestinian Authority, Bulgaria, Romania, Singapore and Turkey). All these agreements promote co-operation in the field of standards, technical regulations or conformity assessment. But one, the EFTA–Singapore FTA, promotes mutual recognition of conformity assessments. In general, the family of RTAs signed by EFTA does not include provisions on harmonization of standards and mutual recognition. One reason may be that EFTA’s scope for negotiating in this field is limited by the extent of the competence of the Commission. For example, mutual recognition agreements with third countries concerning conformity assessment for products where the use of a mark is provided for in the EU legislation are to be negotiated on the initiative of the Community. A second feature common to the majority of EFTA agreements (aside from EFTA–Mexico and EFTA–Palestinian Authority) with developing countries is that they envisage holding consultations, in the framework of the Joint Committee, any time a Party has taken a measure that may create an obstacle to trade. 4.2.4 Mexico agreements Common features also emerge for the agreements to which Mexico is a party. There appears to be a tendency in these agreements to include provisions for transparency and for establishing institutions to deal with disputes and the administration of the agreements, while there is no commitment to liberalize TBTs beyond the WTO rule. As in the TBT Agreement, parties commit to foster harmonization of their technical regulations on the basis of international standards (ALADI is the only exception to this as it also encourages the development of regional standards) and to foster mutual recognition. 4.3
Do regional rules on TBTs go beyond the WTO rules?
What are the RTAs that have committed to removing technical barriers to trade to the largest extent? And, can we claim that the degree to which regional arrangements have succeeded in removing technical barriers to trade is higher for the RTAs among developed countries and lower for the RTAs between developed and developing countries? The template reported in Annex 2 below allows us to build a number of alternative indexes of depth of integration in terms of TBTs to
Table 5.4 The extent of regional TBT liberalization
No TBT chapter (1) CEMAC China–Hong Kong China–Macao EU–Croatia EU–Israel EU–Syria GCC
No provision stronger than WTO (2) Canada–Israel New Zealand–Singapore SAFTA Turkey–Israel EFTA–Palestinian Authority Mexico–EFTA
Provisions stronger than WTO under three categories: integration, transparency,a Only provisions on Top 10 most integrated further co-operation (3) institutions (4) RTAsb (5) Australia–Thailand Canada–Costa Rica CER EU–Egypt EU–Lebanon
Andean Community Australia–US EU EEA Group of Three
EU NAFTA Andean Community Group of Three ALADI
EU–Mexico EU–South Africa
Mexico–Nicaragua Mexico–Northern Triangle NAFTA
EEA Mexico–Nicaragua
Mexico–Israel
Mexico–Chile
SPARTECA US–Israel US–Jordan WAEMU
Mexico–Uraguay SADC
a b
For the purpose of this table, if RTAs allow a period for comments longer than 60 days. Obtained by counting the number of provisions stronger than WTO.
Mexico–Northern Triangle CARICOM Australia–Singapore
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attempt to answer these questions. However, the definition of alternative indexes is likely to depend on the specific question one wants to answer, and it is subject to a certain degree of subjectivity as to the importance of specific provisions in realizing the liberalization of technical barriers to trade. We therefore do not engage in this exercise. In order to provide an overall understanding of the extent of regional integration, Table 5.4, in Columns 1 to 4, simply classifies the RTAs surveyed in this paper on the basis of whether they include a TBT chapter or not, whether they have at least one provision stronger than the WTO’s, whether they simply establish co-operation on TBT-related matters, and whether they foresee deeper integration than WTO in terms of the integration approach, transparency and institutions. Finally, Column 5 shows the ten most integrated RTAs in terms of TBTs. The table shows that, out of the over seventy agreements in our sample, there are twelve that do not include a TBT chapter, six that define rules that do not go any further than the WTO’s in liberalizing TBTs, and ten more that establish forms of co-operation on TBT matters limited to metrology or technical assistance but do not include any provision on how to liberalize TBTs. In contrast, only eight RTAs progress beyond WTO rules in terms of the approach to integration and rules of transparency as well as provide for regional institutions/ mechanisms to deal with TBT matters. The latter element may be important in signalling the actual implementation of the agreement. On the basis of Table 5.4, it is difficult to assess a relationship between the level of development of member states and the extent of integration. In fact, both North–North RTAs and North–South RTAs appear among the ten most integrated RTA. In order to understand the factors that determine the extent and the type of integration, we turn to the next sub-section where we attempt to use a more systematic analysis.
5
Alternative explanations for the inclusion of specific provisions
Economic theory suggests that the method and the extent to which TBTs are removed within an RTA is likely to depend on the level of development of countries in the agreement (Baldwin 2000). When liberalization of technical barriers to trade takes the form of mutual recognition of testing rules and product standards, one country must have a certain degree of trust in another country’s ability to perform
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tests and adequately safeguard health and safety. This is more likely to occur in regional agreements among developed countries than in regional agreements between developed and developing countries.20 Similarly, as far as harmonization of standards and technical regulations is concerned, although a certain degree of coordination of standards is desirable, there are natural limits to the extent of international harmonization due to countries’ different levels of development, technological advancement, endowments and preferences. Therefore, harmonization is more easily and efficiently achieved among similar countries, rather than at the multilateral level. This section attempts to provide some econometric evidence on the factors that may affect whether specific TBT-related provisions are included in regional agreements. In particular, we focus on four classes of provisions: those that encourage (1) harmonization of technical regulations, (2) mutual recognition of product standards, (3) transparency and (4) establishment of a dispute settlement body for the solution of controversies related to standards-related matters. For each of these four classes of provisions, we estimate a probit model to determine what are the factors that affect the probability that the agreement includes such provisions. In particular, we test four hypotheses: 1. whether the likelihood of the inclusion of the provision depends on the level of development of country members of the RTA; 2. whether the likelihood of the inclusion of a certain provision is determined by the extent of prior integration among the partner countries; 3. whether the inclusion of a provision is determined by the characteristics of the family of RTAs to which partner countries belong; and 4. whether the characteristics of the provisions are affected by the existence of overlapping RTAs. The variables we used as explanatory variables to test each of these hypotheses are the following: 1. Variables measuring the level of development and similarity GDPpcAV is the average per capita GDP at PPP among RTA partner countries GDPpcGAP is the difference between the highest and the lowest per capita GDP among the countries in the RTA 20
Baldwin (2000) highlights the possible emergence of a two-tier world when liberalization takes place through regional agreements.
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GDPpcSimil is the ratio between GDPpcGAP and GDPpcAV GDPpcCV is the coefficient of variation of GDP per capita in the region d_similar is a dummy variable that takes the value 1 if RTAs are among developed countries (North–North RTAs) or among developing countries (South–South RTAs) and 0 if RTAs are between developed and developing countries (North–South). Developed countries (the North) include: the US, the EU, EFTA countries, Canada, Japan, Australia, New Zealand, Hong Kong and Singapore. d_northnorth, d_southsouth, d_northsouth are three dummies that denote whether the RTA is North–North (between developed countries), South–South (between developing countries) or North–South (between developed and developing countries). 2. Variables measuring the level of integration: sharerta is the average share of intra-regional trade during the fiveyear period preceding implementation sharerta04 is the share of intra-regional trade in 2004 cet is a dummy variable used to indicate the presence of a common external tariff integpol is a dummy variable used to indicate a common political system integmon is a dummy variable used to indicate monetary union integfac is a dummy variable used to indicate freedom of movement of capital and labour integ is a dummy variable that takes on a value of 1 if integpol ¼ 1 or integmon ¼ 1 or integfac ¼ 1 intrarta04 is the value of intra-regional trade in 2004 intrarta is the average value of intra-RTA trade during the five-year period preceding implementation geo is a dummy variable that takes the value 1 if countries belong to the same geographical area. The variable distinguishes four geographical areas: South, Central and North America; Europe, the Mediterranean Sea and Africa; the Middle East and Central Asia; and South Asia and Oceania. 3. Family characteristics: d_EU, d_US, d_EFTA and d_Mexico are four dummy variables that denote whether the RTA belongs to the EU, the US, the EFTA or the Mexico family of RTAs, respectively.
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4. Overlapping RTAs: rtaoverlap is the count of the total number of RTAs that parties to a regional agreement have signed with third countries d_rtaoverlap is a dummy that denotes whether any party to an RTA is also party to other RTAs. The results of the analysis carried out using a probit model are reported in Tables 5.5 to 5.8. Each table shows the results for one of the four classes of provisions analyzed: harmonization of technical regulations, mutual recognition of conformity assessment, notification of standards and procedures, dispute settlement body. For each class of provisions, only estimations where explanatory variables are significant have been reported. When, for a certain hypothesis, all variables were insignificant, one of them (randomly chosen) was reported. The tables report the results for each of the four hypotheses tested introducing one explanatory variable at a time, as listed in columns 1 to 4. Column 5 reports the results when all variables are considered simultaneously. The results reported in Table 5.5 show that the likelihood that provisions encouraging harmonization in technical regulations are introduced in a regional agreement is higher the more similar the member countries are in terms of the level of development, the deeper their degree of integration as measured by the share of trade within the region (columns 2.a and 2.b), and if RTAs belong to the family of RTAs to which the EU is a partner. By contrast, partnerships including the US are less likely to include provisions for the harmonization of technical regulations. The results are not surprising if we note that a major difference between the EU and the US standardization system is that the EU has a European standard-setting body whose standards are presumed to be in line with EU regulations, whereas the US has no single standard-setting body. Partnership with the EU appears to be a strongly significant factor in explaining harmonization to regional standards. The estimations do not appear to detect a lower propensity of countries belonging to multiple RTAs to introduce provisions of harmonization in their regional agreements. However, when regressions are run on the requirement to harmonize to a regional standard, the participation in multiple RTAs presents a negative and significant coefficient. This is also quite an intuitive result as it would be hard for a country to ensure compatibility across different agreements when committing to harmonize standards in one of them.
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Table 5.5 The likelihood of provisions encouraging the harmonization of technical regulation 1 GDPpcSimil sharerta sharerta04 geo d_EU d_US d_EFTA d_Mexico rtaoverlap
2.a
2.b
2.c
3
4
0.25*
5 0.10 4.16*
2.39** 2.27*** 0.89*** 0.58* 1.01** drops out 0.38 0.05
0.53 0.46 1.17*** drops out 0.76 0.06
Note: *, **, *** significant at 15, 10, 5% significance level, respectively.
Table 5.6 The likelihood of provisions encouraging mutual recognition of conformity assessment 1.a d_similar d_northnorth d_northsouth cet d_EU d_US d_EFTA d_Mexico rtaoverlap
1.b
1.c
2
3
4
0.66***
5 1.85***
1.48*** 0.66*** 0.86 0.46 0.91** 0.44 0.20
1.68*** 2.23*** 0.44 0.58 0.05 0.07
Note: *, **, *** significant at 15, 10, 5% significance level, respectively.
Turning to the results for mutual recognition of conformity assessment, Table 5.6 shows that, in this case, the similarity of countries in terms of their levels of development is very important (Columns 1.a, 1.b, 1.c). In particular, provisions of mutual recognition are more likely to be introduced in agreements among developed countries. In contrast, there does not appear to be strong evidence that the level of integration of countries or the participation in multiple RTAs has a significant effect
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Table 5.7 The likelihood of provisions encouraging notification of standards and procedures 1 d_similar sharerta sharerta04 geo cet d_EU d_US d_EFTA d_Mexico rtaoverlap
2.a
2.b
2.c
2.d
3
4
5
0.28 5.57***
5.22** 3.21** 0.93*** 1.21**
1.25** 0.55 0.10 1.27*** 1.37** 0.05
0.41 0.31 0.63 0.88** 0.06§
Note: *, **, *** significant at 15, 10, 5% significance level, respectively. § denotes 25% significance level.
Table 5.8 The likelihood of provisions establishing a dispute settlement body 1.a
1.b
1.c
1.d
2
3
4
5
GDPpcSimil 0.58*** 0.57 d_similar 0.54*** 4.79*** d_northnorth 1.32*** d_northsouth 0.54*** sharerta 4.5** 17.9* d_EU 0.08 1.46** d_US 0.74* 6.20*** d_EFTA 1.59*** 10.6*** d_Mexico 0.86** 7.89*** rtaoverlap 0.05 Note: *, **, *** significant at 15, 10, 5% significance level, respectively.
on the likelihood of provisions encouraging the mutual recognition of conformity assessment. The fact that participation in multiple RTAs is not a significant determinant of mutual recognition of conformity assessment is not surprising since, unlike harmonization provisions,
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mutual recognition agreements are clearly compatible across different trade agreements. The results also clearly show that mutual recognition of conformity assessment characterize the agreements signed by the US (column 3). The results of our estimations for transparency provisions are reported in Table 5.7. A first result is that the relationship between the level of development of partner countries and the likelihood of including transparency provisions does not appear significant. The most important factor in determining the probability of including transparency provision is the extent of integration (columns 2.a to 2.d), but there also appears to be some evidence (see column 4) that the greater the number of RTAs that countries sign, the more likely is the inclusion of transparency provisions in these agreements. Partnership with EFTA and Mexico appears to increase the likelihood of transparency provisions too. Finally, the results of the probit estimations reported in Table 5.8 suggest that the likelihood of the establishment of a body to settle disputes increases if the regional agreement is between developed countries (column 1.c and 1.d) and the more regional partners are integrated (column 2). Regional agreements with one of the hub countries are also more likely to contain provisions to settle disputes (column 5).
6
Conclusions
In this paper, we have mapped regional rules on technical barriers to trade into a template. The template distinguishes five types of provisions: (1) provisions that refer to WTO rules; (2) provisions that define the type of integration approach (harmonization or mutual recognition) chosen for standards, technical regulations and conformity assessment procedures; (3) provisions that increase transparency; (4) provisions that establish institutions or mechanisms to administer the agreement and solve disputes; and (5) provisions that foresee co-operation among regional partners on standards-related issues beyond trade-related targets and technical assistance. The data reported in the template primarily rely on the legal texts of the agreements. Therefore, we are in general unable to evaluate the extent to which these rules are implemented. Additional information has been collected only to single out the agreements that have also concluded MRAs and RTAs among countries that are all members of international accreditation bodies (the International Accreditation
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Forum or IAF, and the International Laboratory Accreditation Cooperation or ILAC). Despite these limitations, the mapping of regional rules on technical barriers to trade allows us to gain some insight into the range of policy options to remove technical barriers to trade that have been adopted within regional trade agreements. It also allows us to examine the extent of liberalization that countries have achieved on TBT-related matters through regional integration. In addition, we are able to identify some of the major factors that affect the probability of choosing one approach relative to another one. The main findings of the paper are the following: The inclusion of provisions on standards, technical regulations and
conformity assessment procedures is widely spread across RTAs. Overall, there appears to be a tendency for regional agreements to
favour harmonization of standards and technical regulations over mutual recognition of product standards. Equivalence and mutual recognition appear to be the preferred options to deal with TBTs of conformity assessment procedures for testing, certification and accreditation. But, harmonization of certification standards is often a precondition for considering mutual recognition of conformity assessments. A common feature of RTAs signed by the US and Mexico seems to be the tendency to include provisions on transparency and the establishment of institutions to deal with the administration of the agreement and with the resolution of disputes. A major difference between the agreements signed by the US and the EU appears to be that, while the family of RTAs signed by the US tends to simply encourage mutual recognition of conformity assessment, the family of RTAs signed by the EU also includes provisions in favour of harmonization of technical regulations. In particular, EU agreements with developing countries tend to promote harmonization to European standards. The degree of integration of trade is an important factor in determining the likelihood of harmonization and transparency provisions. Mutual recognition provisions are more likely to be introduced among similar countries. Dispute settlement mechanisms are most likely among developed countries. The existence of overlapping RTAs might play an important role in designing the rules for TBTs.
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A question that clearly emerges here is whether, because of a ‘cloning’ tendency on the part of the hubs, standards threaten to become a barrier to trade between major regional groupings. This study has shown a clear tendency of free trade agreements signed by the EU to include provisions to harmonize the standards of the spoke partner country to the European standards. To the extent that the adjustment to the European standards requires making investments, these provisions may lock a country into the regional agreement, thus working as a stumbling bloc in the process of multilateral liberalization. This paper can provide an important contribution to future research on the impact of removing TBTs on trade. Existing empirical literature mainly focuses on the number of harmonized standards between country pairs as a measure for the degree of TBT-related integration across countries. However, this measure is available only for a very limited number of countries, and it is unreliable. It is based on the number of harmonized standards declared by countries, but some countries have a higher propensity to declare than others, so large gaps exist among countries that do not in any way reflect the actual situation. In addition, the number of harmonized standards is not necessarily correlated with the extent of the removal of TBTs, as the propensity to standardize varies across countries and sectors. Finally, harmonization is only one way to remove technical barriers to trade. The data available from the template constructed in this paper will allow us to exploit differences in the types of approach to removing TBTs adopted across RTAs to test for their impact on trade.
Annex 1 List of surveyed RTAs List of surveyed RTAs including TBT provisions in the regional agreement AFTA ALADI Andean Community Australia–Singapore Australia–Thailand Australia–US CACM Canada–Chile Canada–Costa Rica
Canada–Israel CARICOM CEFTA CER COMESA EEA EFTA EFTA–Bulgaria EFTA–Israel
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EFTA–Morocco EFTA–Palestinian Authority EFTA–Romania EFTA–Singapore EFTA–Turkey EU EU–Algeria EU–Bulgaria EU–Chile EU–Egypt EU–Jordan EU–Lebanon EU–Mexico EU–Morocco EU–PLO EU–Romania EU–South Africa EU–Switzerland and Liechtenstein EU–Tunisia EU–Turkey
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Group of Three Japan–Singapore Korea–Chile MERCOSUR Mexico–Chile Mexico–EFTA Mexico–Japan Mexico–Nicaragua Mexico–Northern Triangle Mexico–Uruguay NAFTA New Zealand–Singapore SADC SAFTA Turkey–Israel US–Bahrain US–CAFTA–Dominican Republic US–Chile US–Morocco US–Singapore
List of surveyed RTAs that did not include TBT provisions in the regional agreement
CEMAC China–Hong Kong China–Macao EU–Andorra EU–Croatia EU–Faroe Islands EU–FYROM EU–Israel
EU–Syria GCC Mexico–Israel SPARTECA US–Israel US–Jordan WAEMU/UEMOA
The Appendix to this volume provides information on RTA member countries, date of entry into force and intra-regional trade.
ALADI
Andean Community
Australia–Singapore
Australia–Thailand
Australia–US
CACM
Canada–Chile (telecommunication)
Canada–Costa Rica
Canada–Israel
CARICOM
CEFTA
CER
I. Reference to TBT Agreement definitions rules specific provisions II. Integration approach A. Standards: (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Is the burden of justifying non-equivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize?
AFTA (road vehicles)
Annex 2 Mapping of the regional rules by RTA
0 0 0 0
1 1 0 0
0 0 0 0
1 1 0 0
1 1 1 0
1 1 1 0
0 0 0 0
0 0 0 0
1 0 1 1
1 0 1 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0 0
1 0
1 0
0 0
0 0
0 0
0 0
1 0
0 0
0 0
1 0
0 0
1 0
Is the use or creation of regional
standards promoted? Is the use of international standards promoted? B. Technical regulations (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Is the burden of justifying non-equivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize? Is the use or creation of regional standards promoted? Is the use of international standards promoted? C. Conformity assessment (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition?
0
1
1
0
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
1
0
0
1
0
0
0 0
0 0
0 0
1 0
1 0
1 0
1 0
0 0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
1 1
1 0
1 0
1 0
1 0
0 0
1 0
1 0
0 0
0 0
1 0
0 0
1 0
0
1
1
0
0
0
0
0
0
0
0
0
0
0
1
0
1
1
0
1
0
0
0
1
0
0
1 1
1 0
0 0
1 1
1 0
1 0
1 0
0 0
0 0
1 0
1 0
0 0
0 0
0
0
0
0
0
0
0
0
0
0
0
0
0
Andean Community
Australia–Singapore
Australia–Thailand
Australia–US
CACM
Canada–Chile (telecommunication)
Canada–Costa Rica
Canada–Israel
CARICOM
CEFTA
CER
international or regional accreditation agencies? Is the burden of justifying non-equivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize? Is the use or creation of regional standards promoted? Is the use of international standards promoted? III. Transparency requirements (i) Notification Is the time period allowed for comments specified?
ALADI
Do parties participate in
AFTA (road vehicles)
(cont.)
0
0
0
1
1
1
0
0
0
0
0
0
1
0
0
0
0
0
1
0
0
0
0
0
0
0
0 0
1 0
1 0
0 0
1 0
0 0
1 0
1 0
0 0
0 0
0 0
0 0
1 0
0
0
1
0
1
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
1 1 0
1 1 0
1 1 1
1 1 0
1 0 0
1 1 1
1 1 0
0 0 0
0 0 0
0 0 0
1 0 0
1 1 0
0 0 0
Is the time period allowed for
comments longer than 60 days? (ii) Contact points/consultations for exchange of information IV. Institutions (i) Administrative bodies Is a regional body established? (ii) Dispute settlement mechanism Is there a regional dispute settlement body? Are there regional consultations foreseen to resolve disputes? Is there a mechanism to issue recommendations? Are recommendations mandatory? Is the recourse to the DS for technical regulations disallowed? V. Further cooperation among Members (i) Common policy/standardization programme (beyond trade-related objectives) (ii) Technical assistance (iii) Metrology
0
0
1
0
0
1
0
0
0
0
0
0
0
0
1
1
1
1
1
0
0
0
0
1
0
0
0 0 0 0 0
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
0 0 0 0 0
1 1 1 1 1
1 1 1 0 0
1 1 1 0 0
0 0 0 0 0
0 0 0 0 0
1 1 1 1 1
1 1 1 0 0
1 0 0 1 0
0
1
1
1
0
1
0
0
0
0
1
0
1
0
1
1
0
0
0
0
0
0
0
1
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0 0
1 0
1 0
1 1
1 1
0 0
1 0
0 0
1 0
0 0
1 1
1 0
0 0
0 0
1 1
1 1
0 0
1 0
0 0
1 1
0 0
1 1
0 0
1 1
0 1
0 0
I. Reference to TBT Agreement definitions rules specific provisions II. Integration approach A. Standards: (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Is the burden of justifying nonequivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize?
EC– Bulgaria
EC– Chile
EC– Egypt
EC– Jordan
EC– EC– EC– EC– EC– EC– South Lebanon Mexico Morocco PLO Romania Africa
COMESA
EC
EC– Algeria
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
1 0 1 0
0 0 0 0
0 0 0 0
0 0 0 0
1 0 1 0
0 0
1 1
0 0
1 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1 0
1 1
1 0
1 0
1 0
1 0
1 0
1 0
1 0
1 0
1 0
1 0
1 0
Is the use or creation 1 of regional standards promoted? Is the use of international standards promoted? B. Technical regulations (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Is the burden of justifying nonequivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize?
1
1
1
0
0
1
0
0
1
1
1
0
1
0
0
0
0
0
0
0
1
0
0
0
1
0 0
1 1
0 0
1 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1 0
1 1
1 0
1 0
1 0
0 0
1 0
1 0
1 0
1 0
1 0
1 0
1 0
(cont.)
Is the use or creation of regional standards promoted? Is the use of international standards promoted? C. Conformity assessment (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Do parties participate in international or regional accreditation agencies?
EC– Bulgaria
EC– Chile
EC– Egypt
EC– Jordan
EC– EC– EC– EC– EC– EC– South Lebanon Mexico Morocco PLO Romania Africa
COMESA
EC
EC– Algeria
1
1
1
1
1
0
1
0
0
1
1
1
0
1
0
0
0
1
0
0
0
1
0
0
0
1
1 0
1 1
1 0
1 0
1 0
1 0
0 0
1 0
0 0
1 0
0 0
0 0
1 0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
1
1
1
1
0
1
1
Is the burden of justifying nonequivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize? Is the use or creation of regional standards promoted? Is the use of international standards promoted? III. Transparency requirements (i) Notification Is the time period allowed for comments specified? Is the time period allowed for comments longer than 60 days?
0
0
0
0
0
0
0
0
0
0
0
0
0
1 0
1 1
1 0
1 0
1 0
1 0
1 0
1 0
1 0
1 0
1 0
1 0
1 0
1
1
1
1
0
0
1
0
0
1
1
1
0
1
0
0
0
0
0
0
0
1
0
0
0
1
0 0 0
1 1 1
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
1 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0
1
0
0
0
0
0
0
0
0
0
0
0
(cont.)
(ii) Contact points/ consultations for exchange of information IV. Institutions (i) Administrative bodies Is a regional body established? (ii) Dispute settlement mechanism Is there a regional dispute settlement body? Are there regional consultations foreseen to resolve disputes? Is there a mechanism to issue recommendations? Are recommendations mandatory?
EC– Bulgaria
EC– Chile
EC– Egypt
EC– Jordan
EC– EC– EC– EC– EC– EC– South Lebanon Mexico Morocco PLO Romania Africa
COMESA
EC
EC– Algeria
0
0
0
0
0
0
0
0
1
0
0
0
0
1 1 1
1 1 1
0 0 0
0 0 0
1 1 0
0 0 0
1 1 0
0 0 0
1 1 1
0 0 0
0 0 0
0 0 0
0 0 0
0
1
0
0
0
0
0
0
1
0
0
0
0
0
1
0
0
0
0
0
0
1
0
0
0
0
0
1
0
0
0
0
0
0
1
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
Is the recourse to the DS 0 for technical regulations disallowed? V. Further cooperation among Members (i) Common policy/ standardization programme (beyond trade-related objectives) (ii) Technical assistance (iii) Metrology
0
0
0
0
0
0
0
0
0
0
0
0
1
0
1
1
1
1
1
1
1
1
0
1
1
1
0
0
1
0
0
0
0
0
0
0
1
0
1 1
0 0
0 1
1 0
1 0
0 1
1 0
1 1
1 0
1 1
0 0
1 0
1 1
EC–Switzerland and Liechtenstein
EC–Tunisia
EC–Turkey
EEA
EFTA
EFTA–Bulgaria
EFTA–Israel
EFTA–Morocco
EFTA–PLO
EFTA–Romania
EFTA–Singapore
EFTA–Turkey
Group of 3
I. Reference to TBT Agreement definitions rules specific provisions II. Integration approach A. Standards: (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Is the burden of justifying nonequivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize? Is the use or creation of regional standards promoted?
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
1 0 0 1
1 0 1 0
1 0 0 1
0 0 0 0
1 0 0 1
1 0 1 1
1 0 0 1
1 0 1 0
0 0 0
0 0 0
0 0 0
1 0 1
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0
0
0
0
0
0
0
0
0
0
0
0
0
0 0
1 0
1 1
0 0
0 0
0 0
1 0
0 0
0 0
0 0
1 0
0 0
1 0
0
1
1
0
0
0
0
0
0
0
0
0
0
Is the use of international standards 0
promoted? B. Technical regulations (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Is the burden of justifying non-equivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize? Is the use or creation of regional standards promoted? Is the use of international standards promoted? C. Conformity assessment (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Do parties participate in international or regional accreditation agencies?
0
0
0
0
0
1
0
0
0
1
0
1
0 0
0 0
0 0
1 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1 0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
0 0
1 0
1 1
0 0
0 0
0 0
1 0
0 0
0 0
0 0
1 0
0 0
1 0
0
1
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
0
0
0
1
0
1
1 1
1 0
0 0
1 0
1 1
0 0
0 0
0 0
0 0
0 0
1 0
0 0
1 0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
1
1
0
0
0
0
0
0
0
0
0
0
EC–Turkey
EEA
EFTA
EFTA–Bulgaria
EFTA–Israel
EFTA–Morocco
EFTA–PLO
EFTA–Romania
EFTA–Singapore
EFTA–Turkey
Group of 3
justifying non-equivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize? Is the use or creation of regional standards promoted? Is the use of international standards promoted? III. Transparency requirements (i) Notification Is the time period allowed for comments specified? Is the time period allowed for comments longer than 60 days? (ii) Contact points/consultations for exchange of information
EC–Tunisia
Is the burden of
EC–Switzerland and Liechtenstein
(cont.)
0
0
0
0
0
0
0
0
0
0
0
0
0
0 0
1 0
1 1
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1 0
0 0
1 0
0
1
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
0
1
0 0 0
0 0 0
0 0 0
1 1 1
1 1 1
1 1 0
0 0 0
1 1 0
0 0 0
1 1 0
0 0 0
1 1 0
1 1 1
0
0
0
1
0
0
0
0
0
0
0
0
1
0
0
0
1
0
0
0
0
0
0
0
0
1
IV. Institutions (i) Administrative bodies Is a regional body established? (ii) Dispute settlement mechanism Is there a regional dispute settlement body? Are there regional consultations foreseen to resolve disputes? Is there a mechanism to issue recommendations? Are recommendations mandatory? Is the recourse to the DS for technical regulations disallowed? V. Further cooperation among Members (i) Common policy/standardization programme (beyond trade-related objectives) (ii) Technical assistance (iii) Metrology
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
0 0 0 0 0
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
0
0
0
1
1
1
1
1
0
1
1
1
1
0
0
0
1
1
0
0
0
0
0
0
0
1
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1 0
1 1
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1 0
0 0
0 1
0 1
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 1
Japan–Singapore
Korea–Chile
MERCOSUR
Mexico–Chile
Mexico–EFTA
Mexico–Japan
Mexico–Nicaragua
Mexico–Northern Triangle
Mexico–Uruguay
NAFTA
New Zealand– Singapore
SADC
SAFTA
I. Reference to TBT Agreement definitions rules specific provisions II. Integration approach A. Standards: (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Is the burden of justifying non-equivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize? Is the use or creation of regional standards promoted?
1 0 1 0
1 0 1 0
1 0 1 0
1 1 0 0
1 0 1 0
1 0 1 0
0 0 0 0
1 0 1 0
1 1 0 0
1 0 1 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0
1 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1 0
0 0
0 0
0 0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
1
0
0
0
0 0
1 0
0 0
1 0
0 0
0 0
0 0
0 0
0 0
1 0
0 0
0 0
1 0
0
0
0
0
0
0
0
0
0
0
0
0
0
Is the use of international
standards promoted? B. Technical regulations (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Is the burden of justifying non-equivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize? Is the use or creation of regional standards promoted? Is the use of international standards promoted? C. Conformity assessment (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Do parties participate in international or regional accreditation agencies?
0
1
0
1
0
0
0
0
0
1
0
0
0
0 0 0
0 0 0
0 0 0
1 0 0
0 0 0
0 0 0
1 0 0
1 0 0
1 0 0
1 0 0
1 0 0
0 0 0
0 0 0
0
0
0
1
0
0
1
1
0
1
0
0
0
0 0
0 0
1 0
1 0
0 0
0 0
0 0
0 0
1 0
1 0
1 0
0 0
0 0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
1
1
0
0
0
0
1
1
0
0
0
1 0 0
1 0 0
1 0 0
1 0 0
0 0 0
0 0 0
1 0 0
1 0 0
1 0 0
1 0 0
1 1 0
0 0 0
1 0 0
1
0
0
0
0
1
0
0
0
1
0
0
0
MERCOSUR
Mexico–Chile
Mexico–EFTA
Mexico–Japan
Mexico–Nicaragua
Mexico–Northern Triangle
Mexico–Uruguay
NAFTA
New Zealand– Singapore
SADC
SAFTA
non-equivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize? Is the use or creation of regional standards promoted? Is the use of international standards promoted? III. Transparency requirements (i) Notification Is the time period allowed for comments specified? Is the time period allowed for comments longer than 60 days?
Korea–Chile
Is the burden of justifying
Japan–Singapore
(cont.)
0
0
0
0
0
0
0
0
0
1
0
0
0
0 0
0 0
1 0
0 0
0 0
0 0
0 0
0 0
1 0
1 0
0 0
0 0
0 0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
1
0
0
0
1 1 0
0 0 0
1 1 0
1 1 1
0 0 0
1 0 0
1 1 1
1 1 1
0 0 0
1 1 1
0 0 0
0 0 0
0 0 0
0
0
0
1
0
0
1
1
0
1
0
0
0
(ii) Contact points/consultations for exchange of information IV. Institutions (i) Administrative bodies Is a regional body established? (ii) Dispute settlement mechanism Is there a regional dispute settlement body? Are there regional consultations foreseen to resolve disputes? Is there a mechanism to issue recommendations? Are recommendations mandatory? Is the recourse to the DS for technical regulations disallowed? V. Further cooperation among Members (i) Common policy/standardization programme (beyond trade-related objectives) (ii) Technical assistance (iii) Metrology
1
0
1
0
0
1
1
1
0
1
0
0
0
1 1 1 1 1
1 1 1 0 0
1 1 1 0 0
0 0 0 0 0
1 0 0 1 0
1 1 1 0 0
1 1 1 1 1
1 1 1 1 1
0 0 0 0 0
1 1 1 1 1
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
1
0
0
0
1
0
1
1
0
1
0
0
0
0
0
0
0
0
0
1
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0 0
1 0
1 0
1 0
0 0
0 0
1 0
1 0
1 0
1 0
0 0
1 1
0 0
0 0
1 0
0 1
1 0
0 0
0 0
1 1
1 0
1 0
1 0
0 0
0 0
0 0
I. Reference to TBT Agreement definitions rules specific provisions II. Integration approach A. Standards: (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Is the burden of justifying nonequivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize? Is the use or creation of regional standards promoted? Is the use of international standards promoted? B. Technical regulations (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition?
Turkey– Israel
US– Bahrain
US–CAFTA Dominican Republic
US–Chile
US– US–Morocco Singapore
1 0 1 0
1 1 1 0
1 1 1 0
1 1 1 0
1 1 1 0
1 1 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0
0
0
0
0
0
0 0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0
0
0
0
0
0
0 0 0
0 0 0
0 0 0
1 0 0
0 0 0
0 0 0
Is the burden of justifying non-
equivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize? Is the use or creation of regional standards promoted? Is the use of international standards promoted? C. Conformity assessment (i) Mutual recognition Is mutual recognition in force? Is there a time schedule for achieving mutual recognition? Do parties participate in international or regional accreditation agencies? Is the burden of justifying nonequivalence on the importing country? (ii) Harmonization Are there specified existing standards to which countries shall harmonize? Is the use or creation of regional standards promoted? Is the use of international standards promoted? III. Transparency requirements (i) Notification Is the time period allowed for comments specified?
0
0
0
1
0
0
0 0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0
0
0
0
0
0
1 0 0
1 0 0
1 0 0
1 0 0
1 0 0
1 0 1
0
0
0
0
0
1
0
1
1
1
1
0
0 0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0
0
0
0
0
0
0 0 0
1 0 0
1 0 0
1 0 0
1 0 0
1 0 0
(cont.)
Is the time period allowed for
comments longer than 60 days? (ii) Contact points/consultations for exchange of information IV. Institutions (i) Administrative bodies Is a regional body established? (ii) Dispute settlement mechanism Is there a regional dispute settlement body? Are there regional consultations foreseen to resolve disputes? Is there a mechanism to issue recommendations? Are recommendations mandatory? Is the recourse to the DS for technical regulations disallowed? V. Further cooperation among Members (i) Common policy/standardization programme (beyond trade-related objectives) (ii) Technical assistance (iii) Metrology
Turkey– Israel
US– Bahrain
US–CAFTA Dominican Republic
US–Chile
US– US–Morocco Singapore
0
0
0
0
0
0
0
1
1
1
1
1
0 0 0 0 0
1 1 1 0 0
1 1 1 0 0
1 1 1 1 1
1 1 1 0 0
1 1 1 1 1
0
0
0
1
0
1
0
0
0
0
0
0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
a mapping of regional rules on tbts
315
References Baldwin, Richard, 2000. ‘Regulatory Protectionism, Developing Nations and Two-Tier World System’, Centre for Economic Policy Research Discussion Paper Series 2574. Chen, Maggie Xiaoyang, and Mattoo, Aaditya, 2008. ‘Regionalism in Standards: Good or Bad for Trade?’, Canadian Journal of Economics, forthcoming. Crawford, Jo-Ann, and Fiorentino, Roberto, 2005. ‘The Changing Landscape of Regional Trade Agreements’, WTO Discussion Paper 8. European Commission, 1998. ‘Technical Barriers to Trade’, in The Single Market Review: Dismantling of Barriers, Sub-series 3(1) prepared by J. Atkins for the European Commission. Maskus, Keith, Otsuki, Tsunehiro, and Wilson, John, 2005. ‘The Cost of Compliance with Product Standards for Firms in Developing Countries: An Econometric Study’, World Bank Policy Research Working Paper 3590. Moenius, Johannes, 2004. ‘Information versus Product Adaptation: The Role of Standards in Trade’, available at http://search.ssrn.com/sol3/papers.cfm? abstract_id ¼ 608022. Nitsch, Volker, 2000. ‘National Borders and International Trade: Evidence from the European Union’, Canadian Journal of Economics, 33(4): 1091–105. Organization for Economic Co-operation and Development (OECD), 1999. ‘An Assessment of the Costs for International Trade in Meeting Regulatory Requirements’, TD/TC/WP(99)8/FINAL Paris: OECD. Piermartini, Roberta, 2005. ‘Harmonisation and Mutual Recognition of Product Standards: The Effect on Intra-EU Trade’, mimeo, World Trade Organization. Rauch, James, and Trindade, Vitor, 2002. ‘Ethnic Chinese Networks in International Trade’, Review of Economics and Statistics 84: 116–30. Swann, Peter, Temple, Paul, and Shurmer, Mark, 1996. ‘Standards and Trade Performance: The UK Experience’, Economic Journal 106: 1297–313. Vancauteren, Mark, and Weiserbs, Daniel, 2003. ‘The Impact of the Removal of Technical Barriers to Trade on Border Effects and Intra-Trade in the European Union’, mimeo, Universite´ Catholique de Louvain. World Trade Organization (WTO), 2003. World Trade Report 2003, Geneva: WTO. 2005. World Trade Report 2005: Exploring the Links Between Trade, Standards and the WTO, Geneva: WTO. 2006. ‘Eleventh Annual Review of the Implementation and Operation of the TBT Agreement’, Note by the Secretariat G/TBT/18, Geneva: WTO.
6 Services liberalization in the new generation of preferential trade agreements: how much further than the GATS? martin roy, juan marchetti and hoe lim* In the context of stalled multilateral trade negotiations, preferential trade agreements (PTAs) have continued to proliferate, raising important trade and policy issues. Unlike in any other period since the establishment of the multilateral trading system, all important trading nations are now involved in PTA discussions of one form or another. In the midst of the recent flurry of PTA activity, this paper attempts to fill a gap in the literature by providing a comprehensive evaluation of the liberalization commitments contained in the recent wave of preferential trade agreements on services. Indeed, the trade literature has tended to limit its examination of services components of PTAs to the type of rules they contain and to such other characteristics as whether a GATStype positive listing or NAFTA-type negative listing was used in undertaking commitments. The paper hopes to make a contribution at the empirical level by comparing the commitments undertaken in PTAs with prevailing GATS commitments, as well as offers in the ongoing Doha Round negotiations so as to assess how much further access is granted under PTAs. The review of recent services PTAs should help shed light on some basic *
The editors acknowledge with thanks Martin Roy, Juan Marchetti and Hoe Lim for the use of their article ‘Services Liberalization in the New Generation of Preferential Trade Agreements (PTAs): How Much Further Than the GATS?’, originally published in World Trade Review Volume 6, 2007, copyright Martin Roy, Juan Marchetti and Hoe Lim, published by Cambridge University Press. Reproduced with permission. The authors are grateful for Delphine Naville’s assistance, as well as for comments from Rolf Adlung, an anonymous referee, and participants at the World Trade Forum 2006 in Bern, in particular Americo Beviglia-Zampetti. This paper derives from a larger project on services PTAs, of which some results were presented at the World Trade Forum 2006 and published in the conference proceedings. The views expressed are those of the authors alone. They do not necessarily represent the views of the WTO Secretariat and cannot be attributed to it.
316
services liberalization in new generation ptas 317
questions: do PTA commitments go further than existing GATS commitments and GATS offers and, if so, to what extent? What types of PTAs appear to encourage more liberalization (in terms of scheduling approaches, countries involved, etc.)? Do PTAs encourage actual liberalization, i.e. going beyond the status quo? Providing elements of answers to these questions should, in addition, allow for informed reflections on the policy implications of these PTAs, including for the Doha services negotiations and the multilateral system more generally.1 The paper is structured as follows. Section 1 sets the stage by discussing the evolution of services PTAs in recent years as well as these agreements’ approaches to services liberalization and their key features. Section 2 presents the results of our research to provide an overall picture of GATSþ commitments undertaken in the recent wave of PTAs. The paper reviews the commitments undertaken by thirty-six countries2 under mode 1 (cross-border supply) and mode 3 (commercial presence) in thirty-two PTAs with services commitments that have been concluded since 2000. The ‘value-added’ of PTAs is highlighted by, among other things, examining, for each country, the proportion of all services activities that are the subject of improved and new commitments in PTAs compared to what GATS offers. We also make some observations about the content of the new and improved commitments in PTAs in a number of sectors and present concrete examples of actual liberalization arising from these arrangements. Section 3 concludes by summarizing the main findings and making certain observations on the economic consequences and on the possible impact of preferential arrangements on the Doha services negotiations. We also suggest, in conclusion, some avenues to limit the downsides of this phenomenon and reinforce multilateralism.
1. 1.1
The context
Proliferation of services PTAs
As often pointed out, the number of preferential trade agreements has increased at a great and steady pace since the establishment of the WTO in 1995. Apart from Mongolia, all Members are party to a PTA of one form or another. As of 15 September 2006, 211 notifications to the 1
2
The paper does not seek to provide a legal evaluation of PTA commitments or to assess whether GATS Article V criteria for preferential trade agreements have been met. Counting the European Communities (fifteen) as one.
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GATT/WTO have been registered under GATT Article XXIV, the Enabling Clause and GATS Article V. One hundred and eighteen (118) notifications have been received since 2000, including eighty-eight since 2002, i.e. concurrently with the Doha Round negotiations (see Crawford and Fiorentino 2005).3 PTAs encompassing services are more novel. Since trade rules on services are a more recent phenomenon (the Canada–US Free Trade Agreement in 1989 and the GATS in 1995 were key precursors), it is understandable that only forty-four new PTAs have been notified under GATS Article V. However, notifications for services agreements have grown at a faster pace than others: thirty-seven of these agreements have been notified since the start of the WTO services negotiations in 2000, of which eighteen in 2005–6 and eleven in 2003–4, during key phases of the Doha Round. Various other agreements have been recently concluded, but are awaiting ratification (e.g. the US agreements with Peru and Colombia). Others are currently under negotiation or consideration, with varying prospects for completion, e.g. US–Malaysia or ASEAN– Australia–New Zealand. Since 2000, key traditional demandeurs in the services negotiations, such as the United States, the EC and Japan, have, for the first time, engaged in (services) PTAs beyond their most immediate neighbours (i.e. Mexico and Canada for the US, other European countries for the EC). Other key players – including many developing countries – have followed suit, e.g. India, China, Australia, New Zealand, Chile, Mexico, Hong Kong, Switzerland, Norway, Thailand, Malaysia, Korea, and Singapore.4 As a result, so far, many of the most important advocates of liberalization in the multilateral services negotiations are involved in services PTAs. Governments that are parties to these agreements account for more than 80 per cent of world services trade.5 Key absentees in this group include Pakistan and such larger African countries as South Africa and Egypt (Morocco is the only African country involved in this web of agreements). In addition, the involvement of Argentina and Brazil remains limited to MERCOSUR. Of course, the countries involved in these PTAs do not all have agreements amongst themselves. 3
4
5
See also information on PTA notifications on the WTO website: www.wto.org/english/ tratop_e/region_e/region_e.htm. Canada had, also, engaged in services PTAs before 2000 (if not since then) with the US and Mexico, and with Chile. With BOP commercial services trade statistics and taking into account solely extra-EU (twenty-five) trade.
services liberalization in new generation ptas 319
Services trade relations among larger players still tend to be governed by WTO commitments: the US, China, India, Japan, Brazil and the EC have no PTA ties amongst themselves. Another apparent feature of the recent wave of services agreements is that they most often bring together developing and developed countries, the US–Australia PTA being the only agreement between developed countries since 2000. Agreements between developing economies are more common, e.g. the agreements signed by Mexico and Chile with Central American countries. In general, trade agreements involving at least one developed country tend to include services components (exceptions include agreements notified by the EC with African and Middle Eastern countries), while the majority of trade agreements between developing countries include no services commitments, although that trend now seems to be changing. It can also be observed that certain countries seem to have played a particularly important role in the spreading of services PTAs, if only by the number of agreements that they have signed: the US, Singapore and Chile are party to more than five services PTAs.
1.2
Differing approaches to trade rules for services in PTAs
In assessing and comparing liberalization commitments undertaken in the recent wave of PTAs, this paper goes through agreements that are based on varying approaches to regulating services trade. While the liberalization commitments of services PTAs have not in the past been the subject of comprehensive assessments, other characteristics of services obligations contained in PTAs have in contrast been discussed extensively. A key element that distinguishes many services PTAs is the approach to liberalization: traditionally, distinctions have been drawn on the basis of whether they follow a GATS-type or a NAFTA-type approach. The main difference between the two is that the NAFTA is based on a negative-list scheduling modality: everything is liberalized, unless otherwise indicated through lists of reservations. Reservations are typically for existing non-conforming measures (Annex 1) and for future measures (Annex 2). These agreements provide a high degree of transparency since, save for the normally limited number of Annex 2 reservations, the actual level of openness is spelled out, along with an indication of the legal/regulatory framework in place. This is in contrast to the GATS, which adopts a positive-list modality whereby the
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liberalization obligations only apply to the sectors listed, which themselves are subject to the limitations or conditions inscribed. Nothing specifies whether these limitations are for existing non-conforming measures or for future measures. Moreover, since only ‘measures’ are bound, no indication is given of the relevant laws/regulations, which accentuates the lack of transparency. Unlike the GATS, agreements using a negative-list approach typically include a ratchet mechanism whereby any future liberalization of Annex 1-type reservations is automatically locked in (see OECD 2002b; Stephenson 2002). The NAFTA-type and GATS-type agreements also differ in that, in the former, different modes of supply are dealt with in different chapters: disciplines for modes 1, 2 and 4 in a chapter on cross-border trade in services and disciplines relating to mode 3 as part of a chapter on investment for services and non-services activities. Further provisions on temporary movement of natural persons are also sometimes found in an additional chapter. That modes of supply be covered by different chapters makes no meaningful difference if obligations in these chapters are the same. However, that is not always the case. While both NAFTA’s cross-border services and investment chapters each contain a national treatment obligation, neither contains a market access obligation as found in GATS Article XVI for certain non-discriminatory quantitative restrictions. NAFTA’s cross-border services chapter contains a provision on non-discriminatory quantitative restrictions that is merely of a ‘best endeavours’ basis. Investment chapters, which cover commercial presence in services, also do not include disciplines on non-discriminatory quantitative restrictions. In that regard, the GATS therefore goes further (see OECD 2002b; Roy 2003). Apart from liberalization provisions, it also goes beyond GATS by subjecting mode 3 to services-wide disciplines such as domestic regulation, but NAFTA-type agreements exceed GATS-type agreements by subjecting investment in services (including mode 3) to extensive investment provisions, such as on expropriation, minimum standard of treatment, and investor–state dispute settlements procedures. While various PTAs still follow either the NAFTA or GATS structure (e.g. the agreements involving the European Communities and EFTA follow a GATS model), a number of the PTAs reviewed in this paper have evolved into a combination of the two approaches, the aim being to achieve greater coherence between services and investment disciplines so as to avoid discrepancies in the treatment of investment in goods and services or in the treatment of trade in services under different modes of
services liberalization in new generation ptas 321
supply. Combined approaches therefore seek to ensure that services trade under all modes of supply are subject to the same core disciplines and that mode 3 is covered by generic investment disciplines (see Roy 2003). In such cases, mode 3 is typically subject to some obligations in both the investment chapter and the services chapter. Unlike in NAFTA, mode 3 is subject to the services chapter’s disciplines on non-discriminatory quantitative restrictions, as in GATS (i.e. Article XVI). However, in addition to GATS, and as in NAFTA, generic investment disciplines apply to mode 3. A number of the services PTAs reviewed in this paper have adopted variants of such a combined approach, for example all the recent PTAs involving the United States, the Australia–Singapore and, to some extent, the Japan–Singapore PTAs.6 Further details are found in Table 6.1, which provides information on the characteristics of the agreements reviewed in this paper. In the table, the so-called combined models are those that use a negative-list scheduling modality (like NAFTA-type agreements) and include a GATS-type market access obligation for mode 3.7 Another notable difference in terms of liberalization modalities between GATS-type and NAFTA-type or combined models relates to air transport. While services chapters of the PTAs reviewed typically carve out key air transport services (at times along similar lines as GATS and sometimes providing for even less coverage), the investment chapters of relevant PTAs, where national treatment applies to mode 3, do not exclude any particular service sector from the outset and therefore apply to all air transport services as to any other sector, subject of course to specific reservations listed in relevant annexes.8 Overall, PTAs appear to offer limited value-added over GATS disciplines with respect to the rules areas, e.g. safeguard mechanism, 6
7
8
In US agreements, the services chapter’s obligations on market access, domestic regulations and transparency are typically made to apply to mode 3. However, the US always lodges a broad exception for the market access obligation whose purpose is to ensure that the PTAs do not go beyond its GATS Article XVI obligations. It should be noted that some agreements use different liberalization modalities for financial services than for the rest of sectors. Moreover, the Japan–Philippines agreement also innovates in that Philippines’ schedule of commitments, which follows a positive-list approach, incorporates a feature typically found in agreements using a negative-list approach: a provision of the services chapter specifies that limitations attached to commitments in identified sub-sectors of the schedule will be limited to existing nonconforming measures. A few negative-list-type agreements exclude certain activities exclusively reserved to the state, which are listed in a separate annex (e.g. Mexico in its agreement with Japan).
Table 6.1 Preferential trade agreements reviewed
PTA New Zealand– Singapore EFTA–Mexicob
EC–Mexicob Chile–Costa Rica Japan–Singapore
Singapore– Australia US–Chile
Entry into force
Date of signature
WTO notification
Negative or positive list?a
January 2001
November 2000 September 2001 Positive list
GATS-type market access obligation for M3?a Yes
Date of latest offer in GATS negotiations
NZ: June 2005 (r) SING: May 2005 (r) July 2001 November 2000 August 2001 Positive list Yes SWI: June 2005 (r) ICE: May 2005 (r) NOR: June 2005 (r) LIE: May 2005 (r) MEX: June 2005 (r) March 2001 October 2000c June 2002 Positive list Yes EC: June 2005 (r) MEX: June 2005 (r) Negative list No (neither CHL: June 2005 (r) February 2002 October 1999c May 2002 for mode 1) CR: April 2004 (i) November 2002 January 2002 November 2002 Positive list, Yes JAP: June 2005 (r) except that SING: May 2005 (r) Japan uses a negative list for NT for mode 3 July 2003 February 2003 October 2003 Negative list Yes SING: May 2005 (r) AUS: May 2005 (r) January 2004 June 2003 December 2003 Negative list Yes US: May 2005 (r) CHL: June 2005 (r)
US–Singapore
May 2003
December 2003 Negative list
Chile–El Salvador June 2002
October 1999c
March 2004
Negative list
Republic of Korea–Chile EC–Chile
April 2004
February 2003
April 2004
Negative list
March 2005
November 2002 November 2005 Positive list
EFTA–Singapore
January 2003
June 2002
China–Hong Kong
January 2004
China–Macao
EFTA–Chile
January 2004
January 2003
Positive list
Yes
US: May 2005 (r) SING: May 2005 (r) No (neither CHL: June 2005 (r) for mode 1) SAL: November 2004 (i) No (neither KOR: May 2005 (r) for mode 1) CHL: June 2005 (r) Yes EC: June 2005 (r) CHL: June 2005 (r) Yes SWI: June 2005 (r) ICE: May 2005 (r) NOR: June 2005 (r) LIE: May 2005 (r) SING: May 2005 (r) Yes CHN: July 2005 (r)
September January 2004 Positive list 2003, with (for China) supplements in August 2004 and October 2005 January 2004 October 2003, January 2004 Positive list Yes with (for China) supplements in October 2004 and October 2005 December 2004 June 2003 December 2004 Positive list Yes
CHN: July 2005 (r)
SWI: June 2005 (r) ICE: May 2005 (r) NOR: June 2005 (r)
Table 6.1 (cont.)
PTA
Entry into force
Date of signature
WTO notification
Negative or positive list?a
US–Australia
January 2005
August 2004
December 2004 Negative list
Thailand– Australia Panama–El Salvador Japan–Mexico
January 2005
July 2004
January 2005
Positive list
April 2003
March 2002
April 2005
Negative list
April 2005
September 2004 April 2005
Negative list
US–Bahrain
August 2006
September 2004 September 2006 Negative list
US–Oman
–
January 2006
–
Negative list
US–CAFTAþDR
March 2006
August 2005
March 2006
Negative list
US–Morocco
January 2006
June 2004
January 2006
Negative list
GATS-type market access obligation for M3?a
Date of latest offer in GATS negotiations
LIE: May 2005 (r) CHL: June 2005 (r) Yes US: May 2005 (r) AUS: May 2005 (r) Yes THA: October 2005 (r) AUS: May 2005 (r) No (neither PAN: April 2003 (i) for mode 1) SAL: November 2004 (i) No (neither JAP: June 2005 (r) for mode 1) MEX: June 2005 (r) Yes US: May 2005 (r) BAH: May 2005 (r) Yes US: May 2005 (r) OMN: January 2006 (i) Yes US: May 2005 (r) GUA: August 2003 (i) DR: October 2004 (i) NIC: June 2005 (i) HND: September 2005 (r) Yes US: May 2005 (r) MOR: June 2005 (i)
US–Peru
–
April 2006
Japan–Malaysia
July 2006
Korea–Singapore
Negative list
Yes
December 2005 July 2006
Positive list
Yes
March 2006
August 2005
Negative list
No
US–Colombia
–
Negative list
Yes
Singapore–India
August 2005
February 2006 – (conclusion of negotiations) June 2005 May 2007
Positive list
Yes
Singapore–Jordan August 2005
May 2004
Positive list
Yes
Japan–Philippines –
September 2006 –
MERCOSUR (6th Round)
December 2005 December 1997 c
–
February 2006
July 2006
Positive list, Yes except that Japan also uses a negative list for NT for investment in services December 2006 Positive list Yes
US: May 2005 (r) PER: June 2005 (r) JAP: June 2005 (r) MAL: December 2005 (r) KOR: May 2005 (r) SING: May 2005 (r) US: May 2005 (r) COL: June 2005 (r)
SING: May 2005 (r) IND: August 2005 (r) SING: May 2005 (r) JOR: September 2004 JAP: June 2005 (r) PHI: May 2005
BRA: June 2005 (r) ARG: April 2003 URY: June 2005 (r) PRY: March 2003
Table 6.1 (cont.)
PTA ASEAN Framework Agreement on Services (5th Package) a
Entry into force
Date of signature
WTO notification
–
December 2006 –
Negative or positive list?a
GATS-type market access obligation for M3?a
Positive list
Yes
Date of latest offer in GATS negotiations PHI: May 2005 SING: May 2005 (r) THA: October 2005 (r) IDN: February 2005 MAL: December 2005 (r)
This describes the general approach taken in the agreements, although some agreements take a different approach for financial services than for other sectors (see section 2.1 of the paper). b These agreements only contain commitments on financial services at this time. c This represents the date of signature of the agreement (including services obligations), but the services commitments were negotiated afterwards. (r) ¼ revised offer; (i) ¼ initial offer. Information as of 1 January 2007. Abbreviations: ARG, Argentina; AUS, Australia; BHR, Bahrain; BRA, Brazil; CHL, Chile; CHN, China; COL, Colombia; CR, Costa Rica; DR, Dominican Republic; EC, European Communities (15); ELS, El Salvador; GUA, Guatemala; HND, Honduras; ICE, Iceland; IDN, Indonesia; IND, India; JAP, Japan; JOR, Jordan; KOR, Republic of Korea; LIE, Liechtenstein; MAL, Malaysia; MEX, Mexico; MOR, Morocco; NIC, Nicaragua; NOR, Norway; NZ, New Zealand; OMN, Oman; PAN, Panama; PER, Peru; PHI, Philippines; PRY, Paraguay; SGP, Singapore; SWI, Switzerland; THA, Thailand; URY, Uruguay; US, United States.
services liberalization in new generation ptas 327
disciplines on subsidies or domestic regulation.9 Exceptions include rules found in separate chapters on telecoms and financial services, additional transparency provisions, as well as some sector-specific provisions relating to recognition in certain agreements, an issue that might merit further study. Most PTAs reviewed also include comprehensive sets of disciplines on government procurement, but these are not specific to services and are self-contained in their own chapter.10 Accordingly, the most significant variance between PTAs and the GATS, as well as among PTAs, may well rest on the liberalization commitments that are undertaken, which may of course be influenced by the structure or modalities of market opening provisions, as discussed above. Oddly, this is, however, the aspect that has been less extensively explored so far.
2.
Overview of the value-added of PTAs over existing GATS schedules and offers 2.1
The project and the methodology
In attempting to provide a comprehensive overview of the liberalization commitments of the recent wave of PTAs, this paper has reviewed schedules and lists of reservations on services contained in thirty-two preferential trade agreements. It reviews all those PTAs with services commitments that have entered into force and been notified to the WTO under GATS Article V since the start of the services negotiations in 2000.11 In addition, in order to provide more information on the ongoing flurry of services PTAs, the paper has also added some of the 9
10
11
See WTO document S/WPGR/W/46 for information on rules on subsidies in RTAs. See WTO document S/WPGR/W/4 and addendum 1 for similar information in relation to emergency safeguard measures. For information on disciplines in RTAs on government procurement in services, see WTO documents S/WPGR/W/49 and S/WPGR/51. As of 1 May 2006. Some of these recent agreements have not been reviewed here because they do not include services liberalization commitments, but provide for future negotiations, e.g. US–Jordan, New Zealand–Thailand, CARICOM (which as of 1 May 2006 had not completed its proposed liberalization programme regarding trade in services). China’s commitments in its PTAs with Macao and Hong Kong have been reviewed, although not those of the latter two WTO Members since the agreements bind them not to introduce any new discriminatory measures in various sectors, but do not include a schedule of commitments or lists of reservations as such. Commitments in the EFTA– Mexico and EC–Mexico PTAs are limited at this time to financial services. We have not reviewed the EU enlargements or Europe Agreements since these are integration arrangements more than typical trade agreements.
Table 6.2 Cross-tabulation of countries and PTAs
Australia Bahrain Chile China Colombia Costa Rica Dominican Rep. EFTA (Iceland, Liechtenstein, Norway, Switzerland) El Salvador European Communities Guatemala Honduras India Indonesia Japan Jordan Korea, Rep. of Malaysia MERCOSUR (Brazil, Argentina, Uruguay, Paraguay) Mexico Morocco New Zealand Nicaragua Oman Panama Peru Philippines Singapore Thailand United States
ß
ß ß ß
ß
ß
Singapore Thailand United States
Oman Panama Peru Philippines
Jordan Korea, Rep. of Macao, China Malaysia MERCOSUR Mexico Morocco New Zealand Nicaragua
Hong Kong, China India Indonesia Japan
EFTA El Salvador European Communities Guatemala Honduras
Chile Colombia Costa Rica Dominican Rep.
Australia Bahrain
Other Parties to PTAs Reviewed
ß ß ß ß ß
ß
ß ß
ß
ß ß
ß
ß ß ß
ß ß
ß
ß
ß
ß
ß ß ß ß ß ß ß ß ß ß ß
ß
ß
ß
ß
ß ß ß ß ß ß ß ß ß ß ß ß
ß ß
ß ß ß ß ß ß ß ß
ß ß ß
ß ß
ß ß
ß ß ß
ß ß
ß ß ß
ß ß ß ß ß ß ß ß ß ß
330
martin roy, juan marchetti and hoe lim
recent PTAs that, even if not notified, have been signed and/or ratified.12 The agreements reviewed, along with some relevant information such as date of notification, are listed in Table 6.1. As highlighted in Table 6.2, the paper therefore reviews the PTA commitments undertaken by thirty-six WTO Members (counting the EC-15 as one). Given the relative complexity of services agreements (different modes of supply, types of barriers, and liberalization modalities), it is not an easy task to provide an overview of the state of commitments and to capture the overall extent of improvements. To assess PTA commitments, we have focused, in the first instance, on sector coverage. This captures the breadth of commitments across all services sectors, highlighting for example how many sectors have been left without any binding whatsoever. However, while improvements in the sectoral breadth of commitments represents one important way in which PTAs can go beyond GATS, another key aspect relates to the depth of commitments, i.e. the actual level of access bound for the sectors committed. In order to provide an overview of the depth of PTA commitments, we have, as a second step, identified each sector where improvements to the depth of commitments were provided, but without trying to rank or quantify the quality of each particular improvement. This allows us to provide an aggregate picture of the extent to which, out of the universe of services sectors, countries have undertaken new commitments (expansion of sectoral coverage) and improved the level of bindings for already committed sectors (depth of commitments). Additional details on the depth of commitments is best provided through a country-bycountry or sector-by-sector qualitative analysis. Given the size of the task involved – matching more than a thousand pages of GATS schedules and offers and a similar amount of not readily comparable pages of PTA commitments – the paper solely looks at modes 1 (cross-border trade) and 3 (commercial presence). Mode 2 commitments are typically liberal, and comparing PTA commitments under this mode might provide little additional insights. While mode 4 liberalization commitments represent high stakes for many countries, they are typically crafted along somewhat different parameters than modes 1 and 3 and are also subject to specific disciplines. This aspect was therefore left for another day as it merits a paper of its own (see
12
While the paper aimed to be as comprehensive as possible, new PTAs keep springing up almost every month.
services liberalization in new generation ptas 331
OECD 2002a). Nevertheless, modes 1 and 3 are estimated to amount to more than 80 per cent of world services trade (see WTO 2005). In capturing the value-added of the recent wave of services PTAs, we felt it important to compare their liberalization commitments not only to WTO Members’ existing GATS commitments, which, for the most part, were negotiated more than ten years ago, but also to services offers submitted in the Doha negotiations so far (for an overview of GATS offers, see Adlung and Roy 2005). Do PTA commitments go beyond not only GATS existing commitments, as they would naturally be expected to do, but also beyond GATS offers, and to what extent? So as to provide the most accurate and relevant picture overall, the approach chosen was to look at each of the more than 150 sub-sectors comprizing the universe of services activities to see whether, for each particular sub-sector and mode, the PTA commitments improved upon the GATS offer, either by binding a new service sub-sector (i.e. the sector was not included in the GATS schedule nor the offer or was ‘unbound’ for the relevant modes of supply) or by improving upon the GATS binding for that sub-sector (e.g. removing a limitation and therefore providing for binding at a higher level of liberalization). The research undertaken thus permits us to indicate, for each Member, the proportion of total services sub-sectors improved (through either new bindings or better ones) in comparison with the GATS offer. The same exercise is done to assess the value-added of GATS offers over GATS commitments currently in force, so as to have a point of comparison in assessing the extent to which PTAs make advances. Of course, although such type of indicators provide useful information and allow for an overall snapshot for analytical purposes, they should not be used to assess, in isolation, the value of any individual country’s PTA or GATS commitments. While the methodology proposed aims at providing the most accurate and comprehensive global picture, the overall quality – or value-added of commitments for the two modes of supply reviewed – also depends on the precise content of each particular commitment. These aspects, which cannot easily be summarized across agreements, are explored in the following section. More details about the methodology are found in Annex 1 below.
2.2
Presentation of the results
Figure 6.1 presents the results for each country reviewed for mode 3 while Figure 6.2 (in Annex 2 below) does the same for mode 1. By
100%
80%
60%
40%
20%
Proportion of sub-sectors already committed that are not further improved Proportion of sub-sectors that are the subject of new commitments
JOR:GATS JOR: PTA
JAP: GATS JAP: PTA
IDN: GATS IDN: PTA
IND: GATS IND: PTA
ICE: GATS ICE: PTA
HND: GATS HND: PTA
GUA: GATS GUA: PTA
ELS: GATS ELS: PTA
EC: GATS EC: PTA
DR: GATS DR: PTA
CR: GATS CR: PTA
COL: GATS COL: PTA
CHN: GATS CHN: PTA
CHL: GATS CHL: PTA
BRA: GATS BRA: PTA
BHR: GATS BHR: PTA
AUS: GATS AUS: PTA
ARG: GATS ARG: PTA
0%
Proportion of sub-sectors already committed that are further improved Proportion of sub-sectors that remain uncommitted
Figure 6.1 Proportion of sub-sectors with new and improved commitments under mode 3, per WTO Member (when comparing the GATS offer to the GATS schedule (‘GATS’) and the PTA commitments to the GATS offer (‘PTA’))
Figure 6.1 (cont.) Proportion of sub-sectors already committed that are not further improved Proportion of sub-sectors that are the subject of new commitments Proportion of sub-sectors already committed that are further improved Proportion of sub-sectors that remain uncommitted
URY: GATS URY: PTA
US: GATS US: PTA
THA: GATS THA: PTA
SWI: GATS SWI: PTA
SGP: GATS SGP: PTA
PHI: PTA
PHI: GATS
PER: PTA
PER: GATS
PRY: PTA
PRY: GATS
PAN: PTA
PAN: GATS
OMN: PTA
OMN: GATS
NOR: PTA
NOR: GATS
NIC: PTA
NIC: GATS
NZ: PTA
NZ: GATS
MOR: GATS MOR: PTA
MEX: GATS MEX: PTA
MAL: GATS MAL: PTA
LIE: GATS LIE: PTA
KOR: GATS KOR: PTA
100%
80%
60%
40%
20%
0%
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looking at the proportion of new and improved commitments for each country, the figures illustrate the value-added of each country’s PTA commitments over their latest GATS offer. So as to give a point of comparison, the figures illustrate (through the bars labelled ‘GATS’) the value-added of each country’s latest GATS offer over their existing GATS schedules. The bottom parts of the bars show the proportion of sub-sectors in the GATS schedule that is not improved upon by the offer. The lighter parts above represent the proportion of sub-sectors already bound in the GATS schedule that have been improved upon by the GATS offer. The striped parts further above show the proportion of sub-sectors where new commitments are proposed in the GATS offer. The upper parts of the bars represent the proportion of sub-sectors that remain uncommitted in both GATS schedules and GATS offers. Along similar lines, the bars labelled ‘PTA’ provide an overview of how much PTA commitments add to GATS offers. The bottom parts of the bars show the sub-sectors committed in GATS schedules/offers that have not been improved through PTAs. The lighter parts above represent the sub-sectors in the GATS schedule/offer that are further improved upon by the PTA (i.e. the PTA provides a more liberal binding than in the GATS offer by, for example, not including an economic needs test or a foreign equity limitation). The striped parts further above show the sub-sectors where the PTA provides for new bindings for the relevant mode, i.e. a level of liberalization is bound where there were no commitments whatsoever in the GATS schedules/ offers. The upper parts of the bars represent the proportion of subsectors that remain uncommitted in both GATS schedules/offers and PTAs. In other words, the ‘value-added’ of the PTAs over the GATS offers is captured in the lighter and striped parts of the bars. The bars labelled ‘GATS’ represent the ‘value-added’ of the GATS offer over the current GATS commitments in the same manner. The results show that, overall, PTA commitments tend to go significantly beyond GATS offers in terms of improved and new bindings. The proportion of new/improved commitments is generally much greater in PTAs (compared to GATS offers) than in GATS offers (when compared to existing GATS commitments). There is, however, much diversity among the countries reviewed. Some countries exhibit spectacular improvements in their PTA commitments. Among them are countries that have signed a PTA with the United States, i.e. Bahrain, Central American countries, Chile, Colombia, the Dominican Republic,
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Morocco, Oman, Peru and Singapore. Most of these generally had mode 1/mode 3 bindings in their GATS schedules/offers in less than half of all services sub-sectors and have experienced giant leaps in terms of sector coverage: on average, they have PTA commitments for both modes of supply in more than 80 per cent of all services sub-sectors. Those with a higher number of sectors already bound in their GATS schedules/offers have improved the level of binding for a good proportion of them. For example: Morocco has undertaken new bindings under mode 1 in ninety-four
sub-sectors (66 per cent of the total) and under mode 3 in eighty subsectors (53 per cent). In addition, it improved a number of sectorspecific commitments contained in its GATS offer: twenty-three under mode 3 (15 per cent) and twelve under mode 1 (8 per cent). Singapore, under mode 3, went beyond its GATS offer by improving the level of commitment in forty-five sub-sectors (30 per cent) and making new commitments in sixty-three sub-sectors (41 per cent). The Dominican Republic, which had mode 1 commitments in its GATS schedule/offer in 26 per cent of sub-sectors has increased this proportion to 89 per cent in its PTA. Even if starting from a higher level of commitments in its GATS schedule/offer, Australia, regarding mode 3, improved the level of commitment in twenty-seven sub-sectors included in its GATS schedule/offer (18 per cent) and undertook new commitments in thirty-three sub-sectors (22 per cent). Examples of the types of new/improved PTAs commitments for some of these countries include: Australia: bindings going beyond GATS span a wide array of sectors:
for example, the scope of the investment review provisions are reduced and spelled out; improved commitments on legal services, on retailing (no limitation with regard to the dispensing of pharmaceuticals), on tourism (through the removal of a commercial presence requirement for travel agencies/tour operators services), and on financial services (in particular through permitting branching for life insurance); new commitments on courier services and audiovisual services; and improved and new commitments in relation to rail transport services. Various of these improvements over GATS were contracted in Australia’s PTA with the US, but not in others. Australia’s PTA with Singapore also includes a number of commitments that
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go beyond the GATS offer, but the one with Thailand tends to simply reflect existing GATS commitments and not to include improvements that Australia has proposed in its GATS offer. Singapore: one of the leaders in propagating services PTAs, Singapore has followed a positive-list approach with India, EFTA, New Zealand, Japan, Jordan and ASEAN, and a negative-list approach in its PTAs with the US, Korea and Australia. The commitments it has taken in the latter three agreements tend to go further than the others, especially the PTA with the US and, to a lesser extent, that with Australia. There is, overall, much diversity in the commitments undertaken by Singapore in its various PTAs. Examples of PTA commitments going beyond the GATS schedule/offer include: new commitments, although with various limitations, on legal services (only for the US and Australia), including with additional explicit phase-in liberalization in the PTA with the US; new and improved commitments for various sub-sectors under ‘Business Services’; new commitments on courier services (except in the PTAs with India, Korea, Jordan and ASEAN) and on maritime freight transport, as well as some other services relating to maritime transport; improvements to commitments on basic telecoms (no ownership restriction for facilities-based services) in most PTAs; new commitments on retailing services in all PTAs, although limits attached vary; new commitments on a number of air transport services, depending on the PTA; and a number of improved commitments in financial services (e.g. removal of foreign equity limits on insurance), including explicit phase-in liberalization in PTA with the US (for Singapore’s PTA strategy, see Thangavelu and Tho 2005). Chile: Another heavy user of PTAs, Chile has followed a positive-list approach with the EC and EFTA, and a negative-list approach with Costa Rica, El Salvador, Korea and the US. In general, Chile’s commitments in PTAs improve on the country’s GATS commitments in sectors such as professional services, courier services, telecommunications, construction services, financial services, maritime services, and services auxiliary to all modes of transport. Chile’s PTA commitments go even further than the offer submitted to the WTO in some professions and business services (particularly with regard to mode 1). The commitments undertaken by Chile in its PTA with the US go further than the others in key sectors such as professional services; telecommunications, by allowing access to its local market; and financial services, by allowing more services to be supplied on a
services liberalization in new generation ptas 337
cross-border basis, and by allowing US insurance companies to establish as branches. Even if not engaged in a PTA with the US, other countries, such as Mexico,13 Panama, Japan and Korea, exhibit significant proportions of improved/new commitments in PTAs in both modes of supply, although the extent of the improvements vary and are not as consistently spectacular. Nevertheless, for example, Mexico increased the proportion of sectors covered by mode 3 commitments from 65 per cent in the GATS offer to 91 per cent in PTA commitments; while Panama had less than half of sectors (42 per cent) covered by mode 1 commitments in its GATS offer, it had committed almost all (91 per cent) in PTAs. Of course, even if NAFTA was not reviewed in this paper, Mexico’s commitments in the subsequent PTAs reviewed here might reflect in good part what had been done with the US and Canada in the 1990s. China and India also provide improvements in a notable number of sectors, although these tend to take the form of improvements to sectors already committed under GATS schedules/offers rather than new bindings, and are mostly limited to mode 3. PTA commitments of MERCOSUR countries, Brazil and Argentina in particular, which had relatively few GATS commitments, provide for a high proportion of new sector bindings in both modes of supply, although these new commitments at times contain a number of restrictions (e.g. audiovisual services). In contrast, Figures 6.1 and 6.2 also show that some other countries seem to have provided for more limited proportions of new/improved bindings on modes 1 and 3 compared to GATS offers, such as Malaysia, Thailand, Indonesia and the Philippines, or EFTA countries. Malaysia, for example, had, pursuant to its GATS schedule/offer, no mode 1 commitments in 58 per cent of all services sub-sectors. That proportion decreased by less than 5 per cent in its PTA commitments. Of course, it needs to be recalled that this is only one indicator of the value-added of PTA commitments that serves to highlight general trends in these two modes of supply but not to define or rank the specific quality and value of a given country’s commitments. The value of PTAs as a whole may also hinge on the types of mode 4 commitments obtained from the counterparts, as well as, obviously, the overall benefits stemming from non-services aspects of the agreement. 13
Mexico’s commitments in NAFTA entered into force well before the period reviewed here.
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Examples of the types of new/improved PTA commitments for these other countries include: Japan: Improvements in the PTAs mostly take the form of new
bindings in a number of sub-sectors, principally within ‘Transport Services’ and ‘Business Services’. Improvements to sub-sectors contained in the GATS offer include the expansion of product coverage in distribution services. The PTA with Singapore tends to have less commitments than Japan’s agreements with Malaysia, the Philippines and Mexico; the latter contained improvements that were included in the GATS offer, while the PTA with Singapore more often tends simply to reflect commitments in the GATS schedule. This may be explained by the fact that the PTA with Singapore was concluded in 2002, while those with Mexico, Malaysia and the Philippines were signed between 2004 and 2006. European Communities: the PTA with Chile, which was signed in 2002, tends to include, in many cases, commitments at a lower level than had been offered in the GATS negotiations afterwards. Areas where the PTA goes further pertain to certain improvements – often limited to certain Member States – in relation to research and development services, legal services, distribution, maritime transport, and telecommunications. India: Starting from a low level of bindings in its existing GATS schedule for these two modes (less than a quarter of sectors bound under mode 3 and less than 10 per cent for mode 1), various new sectoral bindings were proposed in GATS offers. GATSþ commitments in the PTA with Singapore essentially take the form of improvements in relation to mode 3 for sectors already committed in the GATS schedule/offer. Many of these improvements took the form of the removal of the requirement for foreign investors with prior collaboration in the sector to obtain approval from the Foreign Investment Promotion Board. This requirement, which was included in virtually all the sub-sectors offered by India, has, except for construction and distribution, been removed from the PTA. In addition, very specific improvements are also made in financial services: for example, three Singapore banks are allocated a separate quota of fifteen branches over four years, over and above the quota for all foreign banks. On the other hand, it can be noted that some commitments in the PTA are worse than the offer. In telecommunications,
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for instance, the foreign equity limitation for voicemail, online information and database retrieval, and enhanced/value-added services is 51 per cent, even if a higher percentage had been offered in the Doha services negotiations. United States: While they do not provide for spectacular deviations, PTA commitments go beyond the GATS schedule/offer in a number of sectors. In financial services, new commitments are undertaken under mode 1 for insurance intermediation and with respect to certain portfolio management services. Other GATSþ commitments include new commitments on repair and maintenance of vessels, on certain port-related activities, as well as certain improvements in relation to air, road, rail and auxiliary transport services. PTAs also provide, among other things, for new commitments on R&D services. However, the US reserves the right to adopt or maintain any measure that is not inconsistent with its obligation of market access under GATS (Article XVI). Such a carve-out, which however does not apply to financial services, may significantly reduce the value of some of the US’s GATSþ commitments, especially in mode 1. The US essentially uses the same list of reservations (Annexes 1 and 2) in all its PTAs, except in relation to cable television and maritime-related services, where some PTA partners get better treatment than others. Like the GATS offer, PTAs have not made headway in some of the most difficult areas for the US, in particular key maritime transport services. Overall, while much diversity was found, the overview suggests that many PTAs go well beyond GATS offers in terms of sector coverage (i.e. commitments in new sub-sectors), but also levels of commitments, as suggested by the proportion of sub-sectors where commitments in GATS schedules/offers were improved. Many PTAs have gone a long way to correct the generally low level of sector coverage in Members’ existing GATS commitments and the modest quality of offers in the Doha Round. In the case of mode 3, the average proportion of all subsectors subject to market access and national treatment commitments for the countries reviewed went from 50 per cent in the GATS offers to 81 per cent in PTAs. For mode 1, sector coverage similarly jumped from 35 per cent to 68 per cent. Furthermore, the occurrence of significant GATSþ commitments in PTAs is not limited solely to countries of a certain level of development or those of a certain size, or even to countries that are parties to PTAs involving developed countries.
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From Figures 6.1 and 6.2, we see that the general trend of PTA commitments going significantly beyond GATS offers is relevant for both modes of supply. The only exceptions are India and China, which have tended to concentrate their PTA efforts on mode 3 more than cross-border supply. From this overview, it also appears that negative-list agreements have yielded greater proportions of new/improved liberalization bindings, although this is due in good part to the fact that the US, which consistently uses this approach, has been involved in PTAs with countries that have exhibited strong results. Those countries – mentioned above – that have on average shown a lesser proportion of new/improved commitments in PTAs have all used a positive-list scheduling approach. This is not to say, however, that all positive-list agreements have led to lesser commitments than negative-list ones. For example, China’s commitments in its agreements with Hong Kong and Macao, based on a positive-list, provides for many improvements that appear to provide for concrete new commercial opportunities, in particular in professional services, audiovisual, construction, distribution, and in maritime, air, road and auxiliary transport services (see also Antkiewicz and Whalley 2005). One can nevertheless note that some countries that have concluded agreements of both types, such as Singapore and Australia, have undertaken greater commitments in the negativelist ones. In terms of sector focus, the review of commitments suggests that value-added of PTAs is fairly widespread across sector groupings. In sectors such as audiovisual, postal-courier, distribution, maritime transport and auxiliary transport, a good number of the countries reviewed undertook commitments for the first time through PTAs. In other sectors, such as financial services and telecommunications, where most countries reviewed had at least some commitments in their GATS schedules/offers, the PTA advances naturally took the form of improvements to existing commitments (more than half of countries reviewed went further than their GATS offers in these sectors). PTAs provide for advances both for sectors that had tended to attract less offers in the GATS (e.g. audiovisual, road, rail, postal-courier) as well as for sectors that already had been more popular targets in GATS offers (e.g. professional, and financial services). One exception is health services, where PTA commitments do not appear to go very significantly beyond what is contained in GATS offers.
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2.3
Significance of new and improved commitments in selected sectors
A closer look at a number of sectors (i.e. financial services, distribution, audiovisual, telecommunications, education and professional services) highlights that, even if there is diversity in terms of the commitments taken by different Members within each sector, overall the new and improved sectoral bindings in PTAs provide for significant levels of openness and well exceed the offers made in the context of the Doha Round in terms of the depth of commitments. This is illustrated by the fact that commitments secured in PTAs generally match or even exceed the objectives sought by WTO Members in their plurilateral requests for these sectors14 and that PTAs often induce, as explored in the next section, ‘real’ liberalization. These trends hold both for the selected sectors that are the subject of a high number of multilateral commitments (e.g. financial services and telecommunications) as well as for those that have tended to attract less WTO commitments, such as audiovisual, distribution and education.15 The assessment of the level of access provided through the GATSþ commitments also underscores the stark difference between the commitments adopted by countries that signed agreements with the US – where the depth of commitments secured seems greater – and those that did not. In the case of financial services, some PTAs have excluded the sector from its coverage (e.g. Chile–El Salvador, Chile–Costa Rica and Chile– Korea), while others have promised to review the situation after the entry into force of the PTA (e.g. Chile–EFTA). Other PTAs include the sector within the scope of the agreement, but have nevertheless avoided making liberalization commitments for the time being (e.g. AFAS), or have promised to include the sector in the schedules of commitments in future rounds of negotiation (e.g. Thailand–Australia). Commitments 14
15
Plurilateral negotiations is a process envisaged in the Hong Kong Ministerial Declaration. While plurilateral requests have not been notified to the WTO Secretariat nor circulated to the whole WTO membership, various internet sites, e.g. from NGOs and business associations, provide copies of such requests. See, for example, www.uscsi.org/ wto/crequests.htm. In discussing, further below, PTA advances in selected sectors, we focus on the countries that have made relevant GATSþ commitments. It should nevertheless be recalled that, in some sectors, certain countries have remained without commitments in their PTAs, e.g. EC or EFTA in audiovisual services or Malaysia in distribution services.
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under PTAs have prioritized the liberalization of supply through commercial presence. Foreign equity limitations have been generally barred from these agreements, with the exceptions of India, Malaysia, Morocco and Thailand.16 Some progress has been made with regard to the elimination of restrictions on the form of legal entity through which foreign financial institutions can access local markets, although subsidiaries continued to be preferred over branches by some developing countries participating in these PTAs. On the other hand, with only a few exceptions (basically, the US PTAs and the Panama–El Salvador PTA), the agreements reviewed have not led to very significant improvements in bindings for cross-border trade in financial services. The US is the only trading partner that has made significant progress in eliminating restrictions on the juridical form of financial services suppliers, by prompting important commitments to allow branching in Chile (life and non-life insurance), Australia (non-life insurance), El Salvador (all insurance services), Honduras (all insurance services), Colombia (insurance and banking), Costa Rica (insurance), the Dominican Republic (direct insurance and reinsurance), Guatemala (insurance and banking), Morocco (life and non-life insurance) and Nicaragua (insurance). The same goes for cross-border supply of financial services, where countries signing agreements with the US have all gone beyond the requirements of the WTO Understanding on Commitments in Financial Services in this area by adding commitments on the cross-border supply of insurance intermediation (broking and agency) and of portfolio management services by asset management firms to mutual funds. Overall, PTA commitments largely match the commitments sought at the WTO in the plurilateral request for the sector, both for commercial presence and cross-border supply. Although benefiting from the sound basis provided by the farreaching commitments already made at the WTO, which were the result of the most successful sectoral negotiation so far, PTA negotiations on telecommunications have certainly allowed the gap between the commitments and the actual practice to close, which had continued to evolve towards further liberalization after the 1997 multilateral negotiations. Most of the countries examined made commitments in their respective PTAs, covering all telecommunications services (both basic and value-added services), and with fewer limitations than those listed at the WTO. For example, the cross-border supply of basic telecommunication 16
Thailand has no commitments on financial services in its agreements with Australia.
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services has been generally bound with no limitations in the PTAs examined, with only a few exceptions (e.g. China, Costa Rica, India). In some of these cases, improvements on the multilateral commitments appear quite significant: for example, Chile allowed US suppliers access to its market for local basic services; in Colombia, resale of international telecommunication traffic will be permitted as of 2007; Nicaragua and Honduras will completely eliminate the exclusivity for their respective incumbents by the end of 2005; Bahrain will eliminate the two-operator limit on the number of mobile telecommunication suppliers by the end of 2005; Panama had committed to eliminate its monopoly on basic telecommunication services by January 2003. In the case of the sectors with fewest multilateral commitments (audiovisual, distribution and education), PTAs have brought a number of significant advances in terms of new commitments, which are also in contrast with the limited results achieved so far through Doha Round offers. Most of those advances take the form of commitments taken by some developing countries that had no – or only limited – commitments at the WTO. In distribution, a number of countries which had no GATS commitments in the sector (nor had made offers, except for one) such as Bahrain, Chile, Colombia, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Morocco, Nicaragua, Paraguay and Uruguay undertook PTA commitments across all aspects of distribution services (retailing, wholesale trade, franchizing, commission agents’ services). Except for the two MERCOSUR countries, these new commitments provide either for full openness (Guatemala, Chile, Nicaragua) or for a few circumscribed limitations. They are exempt from the barriers felt to be most important for this sector, such as limitations to foreign equity participation, economic needs tests, and broad and numerous product exclusions. In addition, a number of developing countries, which already had some GATS commitments in the sector, made significant improvements to their bindings in the sector, including China, Singapore, Brazil and Thailand. In the case of audiovisual services, traditionally a difficult sector in multilateral negotiations, PTAs have provided for significant advances. Not surprisingly, most advances are found in the agreements signed with the US, which is the main demandeur and home to leading international suppliers. Each of the US’s PTA partners, all of which had no audiovisual commitments at the WTO (nor offers for all except one), have undertaken commitments in the various areas of audiovisual
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services, i.e. movie-related, TV and radio-related, and sound recording, although often with many limitations. In general, the commitments undertaken by the US’s PTA partners tend to have less restrictions attached to their commitments in movie-related services (production, distribution, projection) and sound recording than in services related to TV and radio. While a few of the US PTA partners have maintained market access restrictions in relation to movie-related services (apart from discriminatory subsidies, which are typically permitted in US-type agreements), none of these PTAs allows the imposition of restrictions on the number of cinema theatres or their level of foreign equity participation. More restrictions, including content quotas, are maintained in relation to services relating to television and radio, although more liberal access is often granted where the US likely has more interests, for example satellite TV, foreign programming for cable TV and interactive audio/video services. Overall, PTA commitments secured through US PTAs generally exceed the objectives sought by the group of WTO demandeurs on audiovisual services in their plurilateral request, which does not even touch upon TV- and radio-related services. Certain commitments undertaken by Members not party to PTAs with the US also include notable improvements over those undertaken or offered in the GATS (e.g. China, Korea, Mexico and Panama). Not surprisingly, in agreements having the European Communities as partner, the sector has even been excluded from the scope of the services chapter. Some significant improvements have been recorded in education services, another sensitive sector that has attracted a relatively low number of GATS commitments and offers. Most GATSþ commitments in the sector have been undertaken by countries that have contracted a PTA with the US. All of these countries, many of which had no or only very limited GATS bindings on education, undertook better education commitments in their PTAs than in their GATS schedules/offer. For example, a few (El Salvador, Guatemala and Oman) took PTA commitments across all five education sub-sectors without limitations.17 Others also took PTA commitments across all education sub-sectors without restriction other than a reservation allowing to maintain existing or to undertake new restrictions in relation to public education.18 17
18
Services chapters of US-type agreements also include an exclusion for ‘services provided in the exercise of governmental authority’. Such Annex II-type reservation typically covers public education services to the extent that these are social services maintained or established for a public purpose/interest.
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Countries falling within this group include Bahrain, Colombia, the Dominican Republic, Morocco, Nicaragua and Peru. PTA commitments undertaken by some countries that have not negotiated with the US also provide for improvements (e.g. Argentina, Brazil, Paraguay, Thailand and Panama), although of a more modest nature overall. PTA commitments for a good number of the countries reviewed tend to meet the objectives of the WTO plurilateral request, namely, full commitments in private ‘higher education’ and private ‘other education services’ both for mode 1 and 3. With respect to professional services, developing countries that have signed PTAs with the US often took new/improved commitments in architecture, engineering and accountancy services with no or few limitations, although there are exceptions (e.g. Morocco which has nationality requirements; El Salvador and Costa Rica have residency requirements; Nicaragua requires to supply accounting services through a local firm). Commitments on legal services (e.g. host country law), as well as on medical and dental services, tend to provide for less openness. With few exceptions, commitments on medical and dental services are often qualified by a reservation allowing future restrictions on health to the extent that these are social services maintained or established for a public purpose/interest. GATSþ commitments for other developing countries tend to be more limited overall, although they still improve over GATS offers. For example, India improved upon its GATS schedule/offer in various sub-sectors, although it left legal services uncommitted; Panama took new and improved commitments under mode 3 across all professions, but left mode 1 uncommitted; China relaxed various limitations under mode 3, including for legal, and medical, and dental services; Argentina and Uruguay undertook a number of new bindings without limitations for either modes, in a wide array of professional services; Brazil also made a number of improvements, in particular through new bindings without limitations under mode 1. For developed countries, there are fewer improvements overall as they often start from a higher level of bindings in the GATS.
2.4
Actual services liberalization across sectors
It is very difficult to identify with exactitude the extent to which all the trade agreements reviewed lead to real liberalization, i.e. to the removal of applied restrictions. In their PTAs, some countries might have bound the status quo, i.e. the applied regime, or less. Others might have
Table 6.3 Examples of commitments providing for the phasing-in of liberalization Sectors
PTA commitments providing for phasing-out of restrictions in place
In PTAs with
Australia
Financial services
Foreign life insurers will be allowed to operate branches.
Bahrain
Business services
Local presence requirements to be phased-out within three years from the date of entry into force of the agreement for advertising; car rental; consultancy and management; and debt collection. For accounting, financial auditing and bookkeeping, architectural and engineering, and services incidental to mining, it will be within seven years of the date of signature. Branching and entity restrictions in advertising and publishing to be phased out within five years of date of entry into force. The existing two-operator limit on the number of mobile telecommunication suppliers to expire by 31 December 2005. Local presence requirements to be phased out within three years from the date of entry into force of the agreement. Foreign insurers will be able to acquire new non-life insurance licences, with no restrictions, beginning six months after the date of entry into force of the agreement. Local presence requirements for travel agencies and tour operators, and travel guide services to be phased out within three years from the date of entry into force of the agreement. Local presence requirements, including for maritime, road and rail transport services, to be phased out within three years from the date of entry into force of the agreement.
US and Singapore US
Telecommunications Construction Financial services
Tourism
Transportation
US US US
US
US
Chile
Financial services
China
Professional services
Colombia
Telecommunications Financial services
Audiovisual services
Costa Rica
Telecommunications
Foreign insurance companies to be allowed to supply marine, aviation and transport insurance one year after entry into force of the agreement on a cross-border basis. Foreign insurance companies to be allowed to establish branches in Chile no later than four years after the date of entry into force of the agreement. Asset management by mutual funds, investment funds, and foreign capital investment funds, to be allowed as of entry into force of the agreement, while management of voluntary savings plans will be allowed as of 1 March 2005. Wholly owned operations in architectural, engineering, integrated engineering, and urban planning and landscape architectural services to be permitted as from December 2006. Resale of international telecommunications traffic to be permitted as from 2007. Financial companies to be allowed to establish branches no later than four years after entry into force of the agreement. Companies will also be allowed to provide cross-border supply of portfolio management services to collective investment schemes no later than four years after entry into force of the agreement. There will be no restrictions on the number of subscription television concessions at the zonal, municipal and district level once the current concessions at those levels expire and in no case beyond 31 October 2011. Quotas for broadcasting of locally produced programming on free-to-air national television services on weekends/holidays to be reduced from 50 per cent to 30 per cent from 1 February 2009. Will allow the following telecommunications services to be supplied directly to the customer: (i) private network services, no later than 1 January 2006; (ii) internet services, no later than 1 January 2006; and (iii) mobile wireless services, no later than 1 January 2007.
US and EC
US US
Hong Kong and Macao US US
US
US
Table 6.3 (cont.) Sectors
PTA commitments providing for phasing-out of restrictions in place
In PTAs with
Financial services
Will fully liberalize the insurance sector and eliminate the existing monopoly in several phases. Upon entry into force of the agreement foreign insurance companies will have access to the insurance sector on a cross-border basis. After 2008, establishment in Costa Rica, including through branching, will be permitted but restrictions on third party auto liability and on workers compensation will continue until 2011, after which the sector will be fully liberalized. Foreign life and non-life insurance companies to be allowed to establish branches no later than four years after entry into force of the agreement. Currently, collective investment schemes are not regulated in the Dominican Republic. Non-established financial institutions (other than a trust company) will be allowed to provide investment advice and portfolio management services to collective investment schemes located in its territory, as soon as these schemes are regulated. Foreign insurance companies to be allowed to establish branches no later than three years after entry into force of the agreement. Foreign life and non-life insurance companies, as well as brokers and agents, to be allowed to establish branches no later than four years after entry into force of the agreement. Currently, collective investment schemes are not regulated in Guatemala. Non-established financial institutions (other than a trust company) will be allowed to provide investment advice and portfolio management services to collective investment schemes located in its territory, as soon as these schemes are regulated.
US
Dominican Republic
Financial services
El Salvador
Financial services
Guatemala
Financial services
US
US US
Honduras
Telecommunications
Morocco
Financial services
Nicaragua
Telecommunications Financial services
Oman
Distribution
Panama Singapore
Telecommunications Business services
Basic telecoms services to be fully liberalized by 24 December 2005. Additional mobile operators may also be authorized as from December 2005. Foreign life and non-life insurance companies to be allowed to establish branches not later than four years after entry into force of the agreement. Apart from reinsurance brokerage, foreign insurance companies will be permitted to supply marine, aviation and transport insurance two years after entry into force of the agreement on a cross-border basis. Monopoly on basic telecommunication services to be eliminated as of 13 April 2005. Foreign insurance companies to be allowed to establish branches four years after entry into force of the agreement. However, members of the board of directors must be resident in Nicaragua. Full foreign ownership of retail enterprises worth more than US$1 million to be permitted as from 2011. Monopoly on basic telecoms services to be eliminated by January 2003. Existing Singaporean laws to be modified so as to relax conditions under which US law firms are permitted to provide legal services. Foreign power companies will be allowed to supply electricity to nonhousehold consumers in two phases: phase 1 will be two months after the electricity market opens in the second half of 2002; and phase II will be six months after phase I. In the final phase, scheduled for implementation by 2003, retail sale to the remaining consumers (mainly household consumers) will be fully opened. For architectural services, the requirement of ‘residency’ in Singapore shall be phased out by April 2005. The requirement that not less than two-thirds
US
US
US US
US El Salvador US
Korea
Table 6.3 (cont.) Sectors
Financial services
Thailand
Tourism, education and maritime transport
Peru
Financial services
PTA commitments providing for phasing-out of restrictions in place
In PTAs with
of the directors of a corporation be Singapore-registered or allied professionals shall be reduced to 51 per cent by April 2005. Current ban on new licences for full-service banks will be lifted within US eighteen months, and within three years for ‘wholesale’ banks that serve only large transactions. Licensed full-service banks will be able to offer all their services at up to thirty locations in the first year, and at an unlimited number of locations within two years. Locally incorporated subsidiaries of US banks can apply for access to the local ATM network within two-and-ahalf years. Branches of US banks get access to the ATM network in four years. Australia As from January 2005, equity participation of up to 60 per cent (subject to certain criteria) by Australian investors/service suppliers is allowed in major restaurants or hotels, tertiary education institution specializing in science and technology and located outside Bangkok, and certain maritime cargo services. Foreign non-life insurance companies are allowed to supply marine, aviation US and transport insurance two years after the entry into force of the agreement. Services auxiliary to insurance, such as consultancy, actuarial, risk assessment and claim settlement services may also be provided on a cross-border basis two years after the entry into force of the agreement.
services liberalization in new generation ptas 351
decided, in some instances, to withdraw certain restrictions and, accordingly, not to list them as reservations or limitations in the agreement. Agreements do not indicate whether the level of openness guaranteed was already applied, or not, before the agreement came about, and since when. One could only ascertain the level of actual liberalization induced by trade agreements by going through the laws and regulations of each country so as to compare the applied regime before and after the conclusion of the agreements. Having said that, trade agreements will sometimes specifically provide for the phasing-out of applied restrictions over time. Although it is possible that, in some cases, the trade agreement itself might not be directly responsible for such liberalization – since governments might have decided on a liberalization timetable prior to the bilateral negotiations and simply used the PTA to lock in such a timetable – in a way such commitments may be considered as ‘evidence’ of actual liberalization. Indeed, whether prompted or not by the agreement itself, the country will now have to stick to that liberalization timetable and, therefore, liberalization will ensue. The PTAs reviewed contain a number of such phase-out commitments. Table 6.3 lists a number of examples. One notes that the group of countries assuming such commitments is fairly widespread. Most phase-out commitments have been contracted by countries as part of a PTA with the United States, although not exclusively. Financial services and telecommunications are the sectors that seem to have attracted most of these cases, although other sectors are also represented. Finally, for those countries that are party to more than one of the reviewed PTAs, it appears that the phasing-out commitments had sometimes not been undertaken with all negotiating partners.
3.
Conclusion: implications and what to do about multilateralism? 3.1
How much further than the GATS?
This paper assessed the extent to which liberalization commitments in the recent wave of PTAs go further than the GATS. Overall, preferential agreements have provided important advances when compared to GATS schedules and, more surprisingly, GATS offers. Many PTAs provide for a high proportion of new bindings in sectors that had remained uncommitted and improved bindings in sectors that were
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already committed in the GATS schedules/offers. These advances are further underscored by what would appear to be deeper and more meaningful commitments. First, countries that have used negative-list approaches have bound at least the existing level of openness/restrictions for the large majority of sectors. Such predictability is key in attracting investment, but is also important for cross-border trade: it locks in existing openness and preempts protectionism in this fast-expanding area (see Mattoo and Wunsch-Vincent 2004). Binding the status quo also has the advantage of putting the negotiations directly on a better footing to achieve some real liberalization, instead of losing time negotiating away the margin between commitments and the applied regime. In addition, the comparison of GATS and PTA commitments has also highlighted that PTAs using a negative-list approach tend to yield a bigger proportion of GATSþ commitments. This is due in good part to the fact that the US always uses such an approach. All those PTAs that tended to show lesser proportions of new/improved commitments used a positive-list approach. Secondly, a closer look at the PTA commitments suggests that key advances have been made regarding the depth of commitments, as illustrated by the number of pre-liberalization commitments and the fact that in many cases the GATSþ commitments secured in PTAs roughly match or exceed the objectives of plurilateral requests for relevant sectors. In addition, the high number of PTA improvements on existing GATS bindings suggest either that the commitments in the schedule/offer did not reflect the applied regime or, if they did, that the improved PTA commitments induced actual liberalization and new commercial opportunities. The review of agreements also suggests that the US is getting very important services commitments from its PTA partners and that it consistently obtained better commitments than others from the same countries. The US has obtained very significant access in various services where its industry sees particular interest, for example financial services, express delivery, distribution and audiovisual. The general picture of improvement tends to confirm the relatively limited breadth and depth of commitments in the GATS and in offers, but also goes against some expectations that PTAs offered little more than the GATS. The picture is nevertheless nuanced, as there are areas where the value-added of PTAs is more limited. For one, a number of
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the countries that are not involved in PTAs with the US – although not all – appear to provide for a more limited set of GATSþ commitments. Secondly, a number of the larger countries – especially the developed ones – tend not to go as far beyond GATS as many of the smaller economies, especially developing ones. This might be explained by the imbalance between negotiating partners and by the fact that at least some of the larger countries, particularly developed ones, have less room to improve their GATS schedule/offer than others, at least for the two modes of supply reviewed here. This can also suggest that smaller and developing countries, when negotiating with larger and/or developed countries, perceive their gains as lying in other areas, likely preferential access in goods trade. Thirdly, as a result, the most protected services activities in larger, especially developed countries, remain, despite some improvements on the fringes, largely unaffected by PTAs, e.g. audiovisual for EFTA and the EC, maritime transport and certain professional services for the US, and cross-border trade in a number of financial services for a variety of countries. Fourthly, as noted at the outset, while most of the largest countries have become involved in services PTAs, they do not have PTAs amongst themselves (i.e. China, the US, Japan, the EC, India and Brazil). To this day, the multilateral system still remains the main avenue for these countries for resolving services trade issues and negotiating future disciplines.
3.2
Costs of PTAs and implications for the multilateral trading system
These findings lead us to make a number of observations in relation to possible implications of this phenomenon, in particular for the multilateral trading system. There are a number of reasons why preferential arrangements in services could potentially be less harmful than in goods trade. One reason is that reducing barriers to trade does not lead to a loss of revenue as is the case for tariff reductions (Jansen 2006). Another one is that the nature of services regulations is such that, once removed for one country, many services restrictions will not continue to be applied to others, at least beyond the short term. Indeed, many services restrictions are embedded in regulatory regimes and governments will often not put in place different regulatory regimes for different supplier countries.
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While the propensity to extend de facto the preferences granted in PTAs to others is likely greater, a number of measures – especially the more restrictive ones and in particular for mode 3 – can nevertheless easily be applied on a preferential basis: foreign equity limits and restrictions on establishment (e.g. limits on the number of suppliers through economic needs tests on the granting of licenses). Preferential deals can bring benefits to participants by allowing them to undertake important reforms leading to the removal of costly domestic restrictions. Those countries that have negotiated with the United States may have used domestic support flowing from preferential goods access to the US market to overcome resistance to reforming protective policies in some services areas. Nevertheless, the findings of this paper beg the question as to why countries undertook such commitments in PTAs and not in the GATS? First, the political impetus often driving bilateral trade agreements might have helped in overcoming important impediments to multilateral services liberalization, i.e. the resource implications for smaller countries of negotiating disciplines in such a complex and far-reaching area (four different modes, many different types of trade barriers, etc.) and the institutional resistance and/or disengagement from those many non-trade ministries responsible for services trade policy-making (see Adlung and Roy 2005; Jara and Dominguez 2006). Secondly, services exporters might perceive their commercial gains more clearly in the relatively more simple bilateral deals in comparison with multilateral negotiations with more than a hundred countries, especially if they get preferential access over their competitors from other service-exporting countries. This added simplicity in terms of the identification of export interests is also likely to be attractive to political representatives. Thirdly, disappointment with the Doha services negotiations, as well as concerns about freeriding, might have encouraged some countries to use PTAs to meet their desire to bind an applied regime of openness or encourage some further reforms. Preferential trade agreements are sometimes depicted as having no significant downsides since, for parties to these, some liberalization is better than none. However, services PTAs can also have significant costs: Preferential access in services can engender important costs for non-
parties because it may provide lasting advantages to first-movers that
services liberalization in new generation ptas 355
might be hard to reverse through subsequent extension of access to other countries. This results from the limited number of suppliers that can naturally operate in certain services markets (e.g. financial services, telecoms); location-specific sunk costs of production are important in many sectors (see Fink and Mattoo 2004). Unlike for goods, subsequent extension of the preferences to other countries with more efficient producers might not necessarily be sufficient for these to enter the market occupied by the suppliers benefiting from first-mover advantages. Preferential access in services as a result of PTAs likely occurs more often than might be expected or detected: the amount of discretion sometimes involved in the granting of licences makes it difficult to assess whether decisions directly result, or not, from PTA commitments, especially for activities where there are no GATS commitments whatsoever. Such advantages can be a factor that makes PTAs more interesting for participants and that helps explain why the proliferation of PTAs sometimes appears like a competitive race. Concerns in the goods area about a spaghetti (or noodle) bowl of multiple and differing rules of origin do not arise to the same extent in services. Rules of origin in services PTAs are often liberal: anyone established in a party’s territory – even if owned by foreigners – benefits from the PTA, except in special circumstances.19 A notable exception relates to the agreements signed by China where the rules of origin are more stringent, e.g. the need to have had substantive business operations in the country for at least three years. In services, the costs associated with the complexity arising from differing regulations might relate not so much to rules of origin but rather to the levels of market access granted. Not only are market access commitments in services much more complex than tariff lines, but the review of PTAs has highlighted that certain countries take different commitments in different PTAs. The review also revealed that some countries had, in some instances, listed restrictions in their PTAs that they had not scheduled in their GATS schedules.
19
For example, the established foreign enterprise has no substantial business activities in the party’s territory. This is to avoid that non-parties benefit from PTA commitments by setting up mailbox operations.
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Another possibly important – although more difficult to assess –
consequence of the proliferation of PTAs relates to its implications for future liberalization at the multilateral level, where, it is generally agreed, gains would be greater than through preferential deals. Gains from multilateralism flow from, among other things, multilateralizing the liberalization undertaken bilaterally, but also from addressing restrictions that cannot be (agricultural subsidies) or at least have not yet been (the remaining restrictions of the largest economies) dealt with at the bilateral or plurilateral levels. In many ways, the extent of PTA advances over GATS offers raises questions about the role and relevance foreseen for the GATS. For one, it may well be that the negotiations of PTAs, which are human-resource-intensive, have to some extent diverted resources and attention away from the Doha services negotiations (see US General Accounting Office 2004). Many of those countries that have made the most new and improved commitments in their PTAs appear to be countries that have, in comparison, made rather modest offers, often to supplement already modest GATS commitments. In that respect at least, this seems to contradict the so-called domino theory (whereby freer trade in PTAs would eventually lead to further liberalization at the multilateral level). One can hope that this gap results from diverted attention/resources that are temporary and that the ‘domino’ effect will have an impact with some delay, but there are also risks that this does not materialize as smaller countries wish to preserve the preferred access that they obtained to larger markets, such as the US’s. However, PTAs, once implemented, also generate vested interests that want to maintain their preferential access, although possibly more so in the goods area (see Crawford and Fiorentino 2005). Furthermore, some of those that have made impressive qualitative jumps in their PTA commitments continue to take defensive positions in the multilateral setting, e.g. invoking limited resources or other difficulties to justify limited offers or engagement in the services negotiations. There is a clear disconnect between practice and discourse. In addition, given the large gap between PTA commitments and GATS offers for a number of countries, one wonders whether the ongoing PTA hyperactivity has not incited some Members to make
services liberalization in new generation ptas 357
minimal offers so as to have further negotiating chips (i.e. bindings) to offer in various PTA negotiations. Some may have thought that they would have been pressured to go beyond an ambitious offer because a PTA partner would expect to get more than would be given to non-parties. One can therefore wonder whether those services offers in the Doha Round that are far from matching PTA services commitments result not only from tactical considerations across Doha negotiating areas, but also from attention/resources diverted to PTAs, tactical considerations leading countries not wanting to lose negotiating chips, and/or the strength of vested interests wanting to prevent an erosion of preferences. There is a risk that the success of certain big demandeurs in obtaining significant commitments in PTAs reduce somewhat their appetite for multilateral negotiations on services. While the services market access package that they can hope to get through the WTO is still large because there are many important WTO economies with which it does not have PTAs, the size of these potential ‘gains’ naturally diminishes with each PTA that is concluded. This may be accentuated if the success of certain big demandeurs incites other key trading powers to join or intensify the PTA race out of concerns that competitors are gaining important market access at their expense. Further, the more countries offer services commitments in PTAs, the less they might use these as bargaining chips in the WTO so as to convince services exporter countries to address agricultural subsidies. In other words, by offering at the WTO what they have offered in PTAs, wouldn’t developing countries get much more in return?
3.3
How to reinforce multilateralism?
What might be the solutions to try to ensure that the downsides of PTAs are minimized and that multilateralism is reinforced? It goes without saying that the possible distortion and complexity arising from the diversity of different liberalization schedules would be reduced if levels of bindings were improved at the multilateral level. There is ample room to manoeuvre across the WTO membership. So as to provide impetus to the negotiations, those involved in PTAs could conditionally offer a level of services commitments closer to the one they agreed to in PTAs. For the WTO membership as a whole, including those Members that have
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not been so involved yet in preferential services arrangements, the extent of GATSþ commitments in PTAs provides a glimpse of positive outcomes that could emerge from the Doha Round, in contrast with the gloomy picture transpiring from offers on the table so far. Furthermore, much more transparency should be sought through the WTO.20 First, with a view to providing an impetus to ongoing GATS negotiations, more could be done, in line with this paper (but also for other modes of supply), to look into the content of the GATSþ commitments of PTAs in relevant sectors. Secondly, a more ambitious proposal would focus on providing better surveillance of the implementation of the preferential agreements. A proper transparency mechanism regarding implementation would aim to provide a clearer picture as to whether the access granted was being implemented on a non-preferential basis or not, de jure and de facto. More than a general notification exercise, a more appropriate model might rather be along the lines of China’s transitional review mechanism, according to which China has an obligation to provide information on policies affecting trade in services (e.g. changes to laws and regulations, state of play of licensing applications), information which is subsequently reviewed by Members in the specialized WTO bodies overseeing the issues at hand.21 The same obligation could be imposed on WTO Members having signed PTAs including services obligations and commitments. Only with such kind of information would it be possible to better assess any possible trade diversion since disaggregated 20
21
It can be noted that the WTO Negotiating Group on Rules has adopted a new transparency mechanism for all regional trade agreements, which would be implemented on a provisional basis. Under the Decision, the WTO Secretariat, on its own responsibility and in full consultation with the parties, shall prepare a factual presentation of the RTA. According to Annex 1A of its Protocol of Accession to the WTO, China has been requested to provide annual information on such matters as: (a) regularly updated lists of all laws, regulations, administrative guidelines and other measures affecting trade in each service sector or sub-sector indicating, in each case, the service sector(s) or subsector(s) they apply to, the date of publication and the date of entry into force; (b) China’s licensing procedures and conditions, if any, between domestic and foreign service suppliers, measures implementing the free choice of partner and list of transport agreements covered by MFN exceptions; and (c) foreign and domestic suppliers in sectors where specific commitments have been undertaken indicating the state of play of licensing applications on sector and sub-sector levels (accepted, pending, rejected). See the Protocol on the Accession of the People’s Republic of China (WTO document WT/ L/432).
services liberalization in new generation ptas 359
trade statistics, by sub-sector, mode of supply and trading partner, are hard to come by in services. For example, information could be provided on the number of licences – and the nationality of the suppliers that have applied for them – that had been accepted or rejected in a given sector. After all, if PTAs are to reinforce the multilateral system through ‘competitive liberalization’ and WTO Members are committed to multilateral rules, greater transparency can only be beneficial
Annex 1 Details of the methodology In producing estimates for each country, we have compared the
commitments undertaken in all services sub-sectors, in light of the Services Sectoral Classification List (MTN.GNS/W/120), as well as the GATS Annex on Financial Services, the maritime model schedule for maritime auxiliary services, and the GATS Annex on Air Transport Services. The universe of services sectors has been split up so as to permit the most precise assessment: 152 sub-sectors for mode 3 and 142 for mode 1. Some sub-sectors were excluded from our comparison of commitments under mode 1 because they appear of quite limited relevance or simply not technically feasible, e.g. building cleaning, storage warehousing. This aimed to ensure that results did not overestimate the improvements made in negative-list agreements, where all sectors are liberalized unless provided otherwise. Overall, reviewing each country’s existing GATS commitments, GATS offer, and PTA commitments for each sub-sector for these two modes of supply amounts to more than 30,000 observations. When presenting country-specific data summarizing advances made through PTAs (see Figures 6.1 and 6.2), we have compared, for each particular sector, the commitments included in the latest GATS offer with the best commitments undertaken in any of the PTAs to which the country was party. In compiling data on the proportion of new/ improved commitments in PTAs, we did not factor in situations where PTA commitments fall short of GATS schedules/offers. The paper only reviews improvements over GATS schedules/offers in relation to liberalization obligations (i.e. market access and national treatment) and not improvements with regard to additional
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commitments (Article XVIII of the GATS).22 MFN provisions and exceptions were similarly not reviewed. Improvements to horizontal commitments (limitations applying to all scheduled sectors) were also assessed. However, in the Figures, we did not automatically reflect such improvements in all sub-sectors so as not to over-estimate the number of sectors whose levels of bindings were improved. We nevertheless did take horizontal limitations into account in order to ensure that differences between bindings in GATS and in PTAs were not simply a matter of whether a restriction was listed in horizontal or sectoral sections. The large majority of PTA commitments reviewed did not provide for improvements to horizontal commitments. Those that did – notably, Australia, Chile, Honduras and New Zealand – only provided ‘horizontal’ improvements in relation to mode 3. This overview only assesses whether new bindings have been included in PTAs or existing ones improved. A new commitment/binding occurs when a bound level of access is given for a sub-sector that had not previously been subject to the liberalization obligations (e.g. it was not included in the schedule/offer) or for a particular mode of supply that had been left ‘unbound’. An improved commitment is when the level of binding/commitment for a particular sub-sector and mode is made more liberal: either one goes from a partial commitment (i.e. a commitment with some market access limitation) to a full commitment (i.e. a commitment without any market access limitation) or from a partial commitment to a better partial commitment (i.e. with lesser limitations). The overview does not attempt to rank or quantify the value of the specific commitments undertaken. Assessing the extent to which PTAs provide for new and improved bindings necessarily involves a degree of value judgment, especially when comparing commitments framed under a positive-list approach and others under a negative-list one. Therefore, the overview does not in any way amount to a legal evaluation of commitments.
22
Article XVIII provides that countries can use the last column of their schedules to undertake commitments on measures not falling within the scope of the liberalization obligations, e.g. additional regulatory disciplines for telecommunications.
Annex 2 100%
80%
60%
40%
20%
Proportion of sub-sectors already committed that are not further improved Proportion of sub-sectors that are the subject of new commitments
JOR:GATS JOR: PTA
JPN: GATS JPN: PTA
IDN: GATS IDN: PTA
IND: GATS IND: PTA
ICE: GATS ICE: PTA
HND: GATS HND: PTA
GUA: GATS GUA: PTA
ELS: GATS ELS: PTA
EC: GATS EC: PTA
DR: GATS DR: PTA
CR: GATS CR: PTA
COL: GATS COL: PTA
CHN: GATS CHN: PTA
CHL: GATS CHL: PTA
BRA: GATS BRA: PTA
BAH: GATS BAH: PTA
AUS - GATS AUS - PTA
ARG: GATS ARG: PTA
0%
Proportion of sub-sectors already committed that are further improved Proportion of sub-sectors that remain uncommitted
Figure 6.2 Proportion of sub-sectors with new and improved commitments under mode 1, per WTO Member (when comparing the GATS offer to the GATS schedule (‘GATS’) and the PTA commitments to the GATS offer (‘PTA’))
Figure 6.2 (cont.) Proportion of sub-sectors already committed that are not further improved Proportion of sub-sectors already committed that are further improved
Proportion of sub-sectors that are the subject of new commitments Proportion of sub-sectors that remain uncommitted
URY: GATS URY: PTA
US: GATS US: PTA
THA: GATS THA: PTA
SWI: GATS SWI: PTA
SGP: GATS SGP: PTA
PHI: GATS PHI: PTA
PER: GATS PER: PTA
PRY: GATS PRY: PTA
PAN: GATS PAN: PTA
OMN: GATS OMN: PTA
NOR: GATS NOR: PTA
NIC: GATS NIC: PTA
NZ: GATS NZ: PTA
MOR: GATS MOR: PTA
MEX: GATS MEX: PTA
MAL: GATS MAL: PTA
LIE: GATS LIE: PTA
KOR: GATS KOR: PTA
100%
80%
60%
40%
20%
0%
services liberalization in new generation ptas 363 References Adlung, Rolf, and Roy, Martin, 2005. ‘Turning Hills into Mountains? Current Commitments under the GATS and Prospects for Change’, Journal of World Trade 39: 1161–94. Antkiewicz, Agata, and Whalley, John, 2005. ‘China’s New Regional Trade Agreements’, World Economy 28: 1539–57. Crawford, Jo-Ann, and Fiorentino, Roberto V., 2005. ‘The Changing Landscape of Regional Trade Agreements’, WTO Discussion Paper No. 8, Geneva: WTO. Evenett, Simon, and Meier, Michael, 2006. ‘An Interim Assessment of the US Trade Policy of “Competitive Liberalization”’, mimeo, 24 July 2006 (revised in February 2007; forthcoming in The World Economy). Fink, Carsten, and Mattoo, Aaditya, 2004. ‘Regional Agreements and Trade in Services: Policy Issues’, Journal of Economic Integration 19: 742–79. Jansen, Marion, 2006. ‘Services Trade Liberalization at the Regional Level: Does Southern and Eastern Africa Stand to Gain from EPA Negotiations?’, WTO Staff Working Paper No. ERSD-2006–06. Jara, Alejandro, and Domı´nguez, Carmen, 2006. ‘Liberalization of Trade in Services and Trade Negotiations’, Journal of World Trade 40: 113–27. Marchetti, Juan, 2004. ‘Developing Countries in the WTO Services Negotiations’, WTO Staff Working Paper No. ERSD-2004–06. Mattoo, Aaditya, and Wunsch-Vincent, Sacha, 2004. ‘Pre-Empting Protectionism in Services: The WTO and Outsourcing’, Journal of International Economic Law 7: 765–800. Oecd, 2002a. Labour Mobility in Regional Trade Agreements, Paris: OECD. 2002b. The Relationship Between Regional Trade Agreements and the Multilateral Trading System: Services, Paris: OECD. Roy, Martin, 2003. ‘Implications for the GATS of Negotiations on a Multilateral Investment Framework: Potential Synergies and Pitfalls’, Journal of World Investment 4: 963–86. 2005. ‘Audiovisual Services in the Doha Round: “Dialogue de Sourds, the Sequel?”’, Journal of World Investment and Trade 6: 923–52. Sen, Rahul, 2006. ‘“New Regionalism” in Asia: A Comparative Analysis of Emerging Regional and Bilateral Trading Arrangements Involving ASEAN, China and India’, Journal of World Trade 40: 553–96. Stephenson, Sherry, 2002. ‘Regional Versus Multilateral Liberalisation of Services’, World Trade Review 1: 187–209. Thangavelu, S. M., and Toh, Mun-Heng, 2005. ‘Bilateral “WTO-Plus” Free Trade Agreements: The WTO Trade Policy Review of Singapore 2004’, World Economy 28: 1211–28.
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United States General Accounting Office, 2004. ‘International Trade – Intensifying Free Trade Negotiating Agenda Calls for Better Allocation of Staff and Resources’, Report to Congressional Requesters, GAO-04–233, January 2004. WTO, 2005. International Trade Statistics 2005, Geneva: WTO.
7 Mapping investment provisions in regional trade agreements: towards an international investment regime? barbara kotschwar*
1
Introduction
As stated in the introduction to this volume, regional trade agreements (RTAs) have been essential not simply in connecting countries through increased trade and investment flows but also in terms of shaping and pushing forward the architecture for conducting international trade. This is certainly true in the area of investment, an area in which the multilateral regime is still rather rudimentary, and where incipient international disciplines have rather been forged de facto at the bilateral and regional level. Although largely absent from the international trade regime after the failure of the 1948 Havana Charter, international foreign direct investment (FDI) emerged as a main topic of interest in international trade arrangements, gaining momentum in the late 1980s with the inclusion of trade-related investment measures in the Uruguay Round negotiations and an investment chapter in the Canada–US Free Trade Agreement (CUSFTA). This interest may be attributed to two main trends. First is the changing domestic attitudes towards international investment, particularly by previously sceptical developing countries that unilaterally opened their economies to trade and investment starting in the 1980s. Investment provisions encapsulated within trade agreements could be seen as signalling their will and ability to ‘lock in’ that liberalization. The
*
Associate, Peterson Institute for International Economics and Adjunct Professor, Georgetown University Center for Latin American Studies. The author would like to thank Kati Suominen and an anonymous referee for helpful comments and Sara Marzal Yetano for her invaluable research assistance. Any errors are solely the author’s responsibility.
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second and related trend is the increased role investment has played in the international economy: since the 1980s, flows of investment have grown faster than both trade flows and GDP. International investment protection and liberalization issues are currently regulated by a multilayered set of bilateral, plurilateral, regional and multilateral agreements spanning the globe. As such, investment provisions have evolved along two different paths: at the multilateral level, where investment has only recently been formally addressed as part of the international trade regime, and the bilateral/regional path, which was in the early days, starting from the 1950s, dominated by bilateral investment treaties (BITs) which in the mid-1990s gave way to investment provisions in RTAs. The years 1994–5 marked a sea-change in the evolution of an international investment regime. Largely kept out of the General Agreement on Tariffs and Trade (GATT) text, aspects of investment have, since the 1995 founding of the World Trade Organization (WTO), been addressed through a number of WTO agreements, which will be discussed in the following section. However, these provisions do not add up to an overarching comprehensive international investment agreement. At the bilateral/regional level, the 1994 North American Free Trade Agreement (NAFTA) was the first RTA to include comprehensive services provisions with a chapter on investment that included investment protection language similar to that included in BITs and went beyond most BITs in terms of investment liberalization. NAFTA also paved the way institutionally, including a separate forum for disputes between investors and the state. These two trends have continued to evolve since the mid-1990s, with significant results for the international approach to investment. As a result, different investment provisions coexist and to some degree overlap. This multilayered approach can be interpreted as an effort by countries, particularly developing countries, to gain additional credibility – through commitments to protection, stability, predictability and transparency – in the eyes of investors, in the absence of an international investment regime by incorporating such provisions in the RTAs into which they enter. At the systemic level, this phenomenon has generated a complex and somewhat atomized web of agreements without regular coordination. While most agreements share a set of core disciplines (such as national and MFN treatment), many differences exist. This paper explores the variation in coverage of some issues and marked differences in substantive approaches and the growing convergence in terms of key issues resulting from the overlap in RTAs.
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Multilateral policy developments on investment
Before entering into an evaluation of the variation in investment provisions, it is important to understand the efforts that have been made to craft a multilateral regime. Numerous attempts have been made to forge a consensus set of multilateral principles and create some form of overarching coordination tool on investment. These initiatives include the efforts to incorporate investment in the 1948 Havana Charter, the OECD Draft Convention on the Protection of Foreign Property (drafted in 1962, revised in 1967), the United Nations Code of Conduct on Transnational Corporations in the late 1970s and 1980s and, more recently, the initiative to forge a Multilateral Agreement on Investment (MAI) by the Organization for Economic Cooperation and Development (OECD) in the mid-1990s. The lack of success at institutionalizing multilateral investment provisions is attributed to divisions among countries over the extent of protection, the depth of liberalization, and whether and how to address the development dimensions of investment.1 Early discussions towards the establishment of an International Trade Organization (ITO) sought to include an integrated package on trade and investment. The Charter was never ratified and the investment provisions in draft Articles 11 and 12, which included proposals on protection of foreign investors, were not incorporated into the eventual GATT.2 The main opponents to including investment were developing countries, particularly Latin American countries who upheld the Calvo Clause, which asserted the rights of sovereign states to maintain control over their jurisdictions and gave exclusive jurisdiction over foreign investment disputes to national courts.3 While the early GATT did not include provisions on investment, the issue remained on the table. In 1955, contracting parties adopted the ‘Resolution on International Investment for Economic Development’, exhorting countries to adopt policies providing protection and security 1 2
3
See Drabek (1998) for an expanded summary of these issues. For a detailed recounting of the history of investment at the international level, see Graham (1997). The Calvo Clause is an offshoot of the Calvo doctrine, adopted in 1933 at the Conference of American States. Calvo Clauses in contracts effectively required foreign investors to waive all rights to diplomatic protection afforded by the home country under international law. This was seen by many investors as subjecting foreign investment to national control and was seen as a disincentive to foreign direct investment and an obstacle to the internationalization of norms on investment. See Sornarajah (2004), Lipstein (1955) and Baker (1999).
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for foreign investment. In the 1980s, a GATT dispute between the United States and Canada again raised the issue of the relationship between international trade and investment. In Canada – Administration of the Foreign Investment Review Act (FIRA),4 a GATT dispute settlement panel concluded that local content requirements set out under Canada’s Foreign Investment Review Act regarding local subsidiaries of foreign firms were inconsistent with the national treatment principle.5 The panel upheld Canada’s right to regulate foreign investment but ruled that performance requirements on foreign investment served as tradedistorting measures.6 The case brought to light the limited scope of the multilateral trading rules with respect to investment. The 1986 Punta del Este declaration, which launched the Uruguay Round, included language again urging consideration of investment.7 The Uruguay Round concluded with a set of multilateral provisions on investment – principally through the Agreement on Trade-Related Investment Measures (TRIMs) and the General Agreement on Trade in Services (GATS) that, although limited, are seen as going further than any other initiative in terms of forging multilateral provisions on investment (OECD 2002).
2.1
Multilateral investment provisions
As a result of the Uruguay Round, investment is addressed more thoroughly at the multilateral level than ever before, although the coverage is far from comprehensive. Investment is covered in the Agreement on Trade-Related Investment Measures (TRIMs) and in the General Agreement on Trade in Services (GATS), and, less directly, in the
4 5
6
7
BISD 30S/140, 1984. Article III:4 of the GATT states that ‘the products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use’. The panel did not find the export requirements to be inconsistent with Article XVII, which prevents parties from preventing enterprises from acting in a non-discriminatory manner (see Graham and Krugman 1990). ‘Following an examination of the operation of GATT Articles related to the traderestrictive and trade-distorting effects of investment measures, negotiations should elaborate, as appropriate, further provisions that may be necessary to avoid such adverse effects on trade.’
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Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the Agreement on Subsidies and Countervailing Measures.8 The TRIMs Agreement is limited in scope as it applies only to measures that affect investment-related aspects of trade in goods. It is essentially limited to interpreting and clarifying the GATT provisions as they relate to investment measures, particularly on national treatment for imported goods and quantitative restrictions. The objective of the TRIMs is to prevent the use of trade-related investment measures that are inconsistent with the basic provisions of the GATT, such as discrimination against foreign goods or foreign investors (violation of national treatment), the use of investment measures that lead to quantitative restrictions or the use of measures that require particular amounts of local content or procurement, such as local content requirements.9 The Agreement holds that no Member shall apply a measure that is prohibited by the provisions of GATT Article III (national treatment) or Article XI (on the elimination of quantitative restrictions). The Agreement includes an illustrative list that identifies local content and trade-balancing requirements as provisions that are not consistent with these GATT Articles and that ‘include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage’. In the Agreement’s Annex’s illustrative list of TRIMs that are inconsistent with the obligations of national treatment and of eliminating quantitative restrictions, the TRIMs spells out examples of inconsistent measures, including local content or trade-balancing requirements. A Committee on TRIMs was set up to monitor the operation and implementation of the commitments. The GATS represents the broadest investment provisions at the multilateral level, covering measures affecting trade in services, including any service in any sector delivered by any of the four modes defined
8
9
Investment can also be considered covered under the Agreement on Government Procurement (GPA Agreement), although this agreement, unlike the others, is a plurilateral agreement, and, as such, does not apply to all Members. The GPA Agreement requires that foreign suppliers may not be discriminated against and that there be no discrimination against locally established suppliers on the basis of foreign affiliation or ownership. The preamble to the Agreement states an objective as ‘the expansion and progressive liberalization of world trade and to facilitate investment across international frontiers so as to increase the economic growth of all trading partners, particularly developing country members, while ensuring free competition’.
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in GATS, with the exception of services provided by government entities or measures affecting air traffic rights and associated services.10 GATS covers services that are provided through a ‘commercial presence in the territory of any other member’ (mode 3) – i.e. an investment – in a foreign territory (GATS Article I:2(c)). In the GATS, ‘commercial presence’ means any type of business or professional establishment, including through (1) the constitution, acquisition or maintenance of a juridical person, or (2) the creation or maintenance of a branch or a representative office, within the territory of a Member for the purpose of supplying a service. The Agreement requires most-favoured-nation treatment through its Article I (although MFN exemptions can be made if listed in a country annex) as well as national treatment, but limits this to services sectors in which commitments have been scheduled by the Member. The scheduling of sectors in which commitments are made, as done in GATS, is known as the ‘positive list’ approach. The GATS also provides for preferential treatment of suppliers in the case of an economic integration agreement (Article V). The GATS includes a commitment to continue liberalizing trade in services through a ‘built in agenda’. Given the increasing importance of intangible assets to corporations, intellectual property rights is increasingly an important component of an investment framework. The WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) contains no explicit provisions addressing investment, but aims at securing and enforcing the protection of intellectual property rights, increasingly considered an important component of investment protection. Most modern investment agreements include intellectual property within the definition of investment. The Agreement on Subsidies and Countervailing Measures establishes disciplines on the provision of subsidies, including investment incentives that may fall under the definition of subsidy and are prohibited or limited if found to cause ‘adverse effects’.
10
The four modes of supply are: cross-border supply (services flows from one Member into another); consumption abroad (services consumed by a consumer who has moved into another Member’s territory to consume a service); commercial presence (in which a service supplier from one Member establishes a territorial presence, including through ownership or lease of premises, in another Member’s territory to provide a service); presence of natural persons (persons from one Member enter the territory of another Member for the purposes of providing a service).
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Post-Uruguay Round negotiations
Investment continued to be discussed at the multilateral level, slated as one of the principal issues for discussion at the first WTO ministerial meeting held in Singapore in December 1996. Here, a Working Group on the Relationship between Trade and Investment was set up, to clarify the scope and definition of investment issues including transparency, non-discrimination, ways of preparing negotiated commitments, development provisions, exceptions and balance-of-payments safeguards, consultation and dispute settlement.11 Investment was thus included as a ‘Singapore Issue’ and slated for subsequent negotiation.12 At the fourth ministerial meeting, in Doha, Qatar, in November 2001, Members reiterated the mandate to further work towards a multilateral framework for investment. The Doha Declaration, in paragraphs 20–2, recognized the importance of ‘transparent, stable and predictable 11
12
The checklist of issues suggested for study by the group, as set out in Annex I to the Group’s first report (WT/WGTI/1/Rev.1, 9 December 1997), listed the following as topics for study: I. Implications of the relationship between trade and investment for development and economic growth, including: economic parameters relating to macroeconomic stability, such as domestic savings, fiscal position and the balance of payments; industrialization, privatization, employment, income and wealth distribution, competitiveness, transfer of technology and managerial skills; domestic conditions of competition and market structures. II. The economic relationship between trade and investment: the degree of correlation between trade and investment flows; the determinants of the relationship between trade and investment; the impact of business strategies, practices and decision-making on trade and investment, including through case studies; the relationship between the mobility of capital and the mobility of labour; the impact of trade policies and measures on investment flows, including the effect of the growing number of bilateral and regional arrangements; the impact of investment policies and measures on trade; country experiences regarding national investment policies, including investment incentives and disincentives; the relationship between foreign investment and competition policy. III. Stocktaking and analysis of existing international instruments and activities regarding trade and investment: existing WTO provisions; bilateral, regional, plurilateral and multilateral agreements and initiatives; implications for trade and investment flows of existing international instruments. IV. On the basis of the work above: identification of common features and differences, including overlaps and possible conflicts, as well as possible gaps in existing international instruments; advantages and disadvantages of entering into bilateral, regional and multilateral rules on investment, including from a development perspective; the rights and obligations of home and host countries and of investors and host countries; the relationship between existing and possible future international co-operation on investment policy and existing and possible future international co-operation on competition policy. The other Singapore Issues are competition policy, transparency in government procurement and trade facilitation.
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conditions for long-term cross-border investment’. The Declaration further recognized that developing countries required ‘enhanced support’ in this area and that developing and least-developed countries would need some flexibility. The declaration also recognized the existence of bilateral and multilateral commitments on investment and held that these be taken into account. Investment continues to be a controversial issue at the multilateral level. Negotiations in this area within the context of the Doha Development Agenda met resistance by several developing countries and groups of developing countries.13 On 1 August 2004, as part of the socalled ‘July package’ framework for advancing the Doha Development Agenda, investment, along with competition policy and government procurement, was dropped from the Doha negotiating agenda. There are currently no further negotiations towards a multilateral investment framework ongoing at the WTO. In parallel to the efforts at the WTO, OECD members also attempted, in the mid-1990s, to forge an international investment framework. The negotiations towards a Multilateral Agreement on Investment (MAI) were launched at the OECD Council annual meeting in May 1995.14 The MAI was to be a ‘free standing international treaty, open to all OECD Members and the EU, and to accession by non-OECD Member Countries’ (OECD 1995).15 Its proposed objective was to ‘provide a broad multilateral framework for international investment with high standards for the liberalization of investment regimes and investment protection and with effective dispute settlement procedures’ (OECD 1995). Negotiations ended without fruition in December 1998. While the failure of the MAI negotiations is better known for the way in which 13 14
15
See, for example, ICTSD (2003). Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States, as well as the European Communities. Argentina, Brazil, Chile and Hong-Kong participated as observers from an early stage. Estonia, Latvia, Lithuania and the Slovak Republic were later also invited as observers. OECD investment instruments include the 1961 Code of Liberalization on Capital Movements and the Code of Liberalization of Current Invisible Operations. These are open to non-OECD members and are legally binding rules, moving towards the liberalization of capital movements, the right of establishment and current invisible transactions. The 1976 OECD Declaration on International Investment and Multinational Enterprises is a policy commitment to improve the investment climate, subscribed to by thirty OECD members and ten non-member countries as of July 2007.
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opposition from anti-investment NGOs galvanized against the talks, the ultimate failure to achieve an investment framework was due to the inability of governments to come to a consensus.16 As at the WTO, divisions were generally along country groupings, with developed countries supporting the MAI and developing countries opposing it. Currently no negotiations on investment rules are taking place at the multilateral level. At the regional and bilateral level, however, provisions on investment proliferated during the 1990s and have continued to proliferate. Bilateral investment instruments and investment provisions contained in RTAs (many of which are largely based on BITs) have evolved, creating a web of emerging international norms regarding investment. As such, the international policy framework for investment has evolved on two tracks: more hesitantly and with starts and stops at the multilateral level and more quickly, but with variations, at the regional level.
3
Evolving bilateral and regional investment provisions
Given the lack of multilateral-level rules, investment protection and liberalization have been addressed principally on a bilateral and regional basis. Evidence of this is the number of bilateral investment treaties (BITs) in force: at the end of 2006, there were over 2,500 BITs in existence (UNCTAD 2006 p. 2). A majority of those in force have been signed since the 1990s. Since European countries inked the first bilateral investment treaties in the 1950s, BITs have been the main international legal instrument used to protect and facilitate foreign investment. BITs assured predictability and stability in otherwise often uncertain environments, as both parties agreed to accept certain standards of treatment and to have these enforced by an international dispute settlement mechanism. Initially principally instruments of protection, BITs have evolved substantially over the years and are more and more oriented towards integration and liberalization. Since the 1980s and 1990s, more countries, particularly developing countries, have signed up to BITs, often as a means of signalling their attractiveness as a location for foreign investment. As a result, BITs began to incorporate elements of investment liberalization as well as protection.
16
For an in-depth analysis of the MAI negotiations see Graham (2000).
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The contents of BITs have increasingly become standardized over the past decade and a half – in part because two of the main parties, the United States and the EU use templates for their BITs – and have been influential in shaping the regional investment regime.17 Since the 1980s, there has been a significant increase in North–South BITs, and, more recently, South–South BITs have also begun to increase in number. In the countries of the Americas, which have been recent enthusiastic participants in signing BITs, economic reforms after the 1980s debt crisis ushered in a very different attitude towards foreign investment than was seen during the Calvo Clause days. This has brought about an unprecedented growth in investment provisions signed onto by countries in the Americas since the US–Panama BIT, the first in the Americas, was signed in 1982. Along with a growing body of BITs, there is a rapidly growing body of investment provisions contained within bilateral and regional trade agreements. Since the 1990s, and particularly after the signing of the NAFTA, regional and bilateral free trade agreements have increasingly included provisions on investment – provisions that were previously addressed bilaterally through BITs. The ‘second wave’ agreements (Pomfret 2007 p. 924), also known as agreements that aim towards deeper integration (Lawrence 1996), are generally among countries with fewer trade barriers among them and go beyond the more marketaccess-focused free trade agreements, incorporating areas such as policies related to increasing returns, policy harmonization and services. The NAFTA, which incorporated and built upon its predecessor agreement, the Canada–US Free Trade Agreement, marks a point of departure in the area of international investment rules, being the first RTA to include BIT-like provisions as part of a trade agreement (OECD 2006 p. 6). Although investment protection provisions in RTAs are often similar to those found in BITs – with some agreements in fact incorporating by reference a pre-existing BIT among the partners as the regulatory apparatus applicable to investment within the RTA – there is greater substantive variance in the content of provisions in RTAs than in BITs. Countries have been able to tailor their investment provisions depending
17
For example, the United State’s model BIT was updated in 2004 (this can be found at www.ustr.gov/assets/Trade_Sectors/Investment/Model_BIT/asset_upload_file847_6897. pdf). The first BIT using the new model is the US–Uruguay BIT of 2006.
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on their trading partners, adapting their approach according to whether they are negotiating with countries that are at similar or different levels of development or have similar or different approaches to investment. In some cases, chapters in RTAs in large measure replicate what is contained in pre-existing BITs with respect to investment protection, although many RTA provisions have been used to expand and to correct perceived deficiencies in BITs, often aiming for greater liberalization. The new US model BIT, for example, is substantively similar to the investment provisions in RTAs negotiated by the United States since 2002 (such as the CAFTA) and can be seen to have been inspired by US RTAs. As such, the line between BITs and RTA provisions in investment is blurred. In other cases, RTA investment provisions go beyond what is found in BITs. With more variation in their scope and content than bilateral investment treaties (BITs), which generally are constructed following a template, this surge in RTA investment provisions has given way to overlapping commitments – a ‘spaghetti bowl’ of investment provisions at the regional level. In the same vein, RTAs can be seen as ways of advancing the rulemaking on investment that failed to emerge at the multilateral system – such as for example under the proposed MAI. The remainder of this paper explores the investment provisions in RTAs, with a view to comparing these to current international norms on investment and to assessing the influence of these provisions on the international investment regime.
4
Mapping of RTAs and RTAs as compared to the multilateral system
This study forms part of a broader study on provisions in RTAs. For the sake of consistency, the data in this paper is based on the investment provisions contained in the sample of fifty-two RTAs that is used in IADB (2006). This data set includes countries from Africa, America, Asia and Europe; it includes RTAs among developed countries, among developing countries and between developed and developing countries. Table 7.1 lists the RTAs examined in this paper. The table includes the partner countries or, in cases such as NAFTA and CAFTA, the name of the agreement; the date of entry into force of the agreement (the RTAs are ordered by date from the oldest to the most recent); the geographic
Table 7.1 Agreements used in sample and date of entry into force Agreement
Date of entry into force
Geographic composition
Income classification
GATS and TRIMs Australia–New Zealand United States–Israel NAFTA COMESA Mexico–Colombia–Venezuela (G3) Mexico–Bolivia EC–Lithuania EU–Romania MERCOSUR–Chile Canada–Israel MERCOSUR–Bolivia Canada–Chile Mexico–Nicaragua Chile–Peru Chile–Mexico EC–South Africa EC–Morocco Mexico–Israel New Zealand–Singapore Mexico–Northern Triangle
01/01/1995 03/28/1983 09/01/1985 01/04/1994 12/08/1994 01/01/1995 01/01/1995 01/01/1995 02/01/1995 10/01/1996 01/01/1997 02/28/1997 07/05/1997 07/01/1998 07/01/1998 08/01/1999 01/01/2000 03/01/2000 07/01/2000 01/01/2001 03/15/2001 (SV, GU), 06/01/2001 (HO), 03/14/2001 (MX) 07/01/2001
Multilateral Asia–Asia Americas–Middle East Americas–Americas Africa–Africa Americas–Americas Americas–Americas Europe–Europe Europe–Europe Americas–Americas Americas–Middle East Americas–Americas Americas–Americas Americas–Americas Americas–Americas Americas–Americas Europe–Africa Europe–Middle East Americas–Middle East Asia–Asia Americas–Americas
Advanced–Advanced Advanced–Advanced Advanced–Developing Developing–Developing Developing–Developing Developing–Developing Advanced–Developing Advanced–Developing Developing–Developing Advanced–Advanced Developing–Developing Advanced–Developing Developing–Developing Developing–Developing Developing–Developing Advanced–Developing Advanced–Developing Advanced–Developing Advanced–Advanced Developing–Developing
Americas–Europe
Advanced–Developing
EFTA–Mexico
EC–Mexico United States–Jordan Central America–Dominican Republic
Central America–Chile Canada–Costa Rica Japan–Singapore EFTA–Singapore Chile–EC Singapore–Australia United States–Chile United States–Singapore China–Hong Kong, China Chile–Korea Mexico–Uruguay Mexico–Costa Rica US–Australia Australia–Thailand MERCOSUR–CAN
Mexico–Japan
07/01/2001 12/17/2001 03/07/2002 (CR), 10/04/2001 (SV), 10/03/2001(GU), 12/19/2001 (HO) 02/15/2002 (CR), 06/03/2002 (SV) 11/01/2002 11/30/2002 01/01/2003 02/01/2003 07/28/2003 01/01/2004 01/01/2004 01/01/2004 04/01/2004 07/15/2004 01/01/2005 01/01/2005 01/01/2005 01/05/2005 (AR, UY–VE), 02/01/2005 (AR, BR, UY–CO; BR–VE), 04/01/2005 (AR, BR, UY–EC), 04/19/2005 (PY–CO, EC, VE) 04/01/2005
Americas–Europe Americas–Middle East Americas–Americas
Advanced–Developing Advanced–Developing Developing–Developing
Americas–Americas
Developing–Developing
Americas–Americas Asia–Asia Europe–Asia Americas–Europe Asia–Asia Americas–Americas Americas–Asia Asia–Asia Americas–Asia Americas–Americas Americas–Americas Americas–Asia Asia–Asia Americas–Americas
Advanced–Developing Advanced–Advanced Advanced–Advanced Advanced–Developing Advanced–Advanced Advanced–Developing Advanced–Advanced Advanced–Developing Advanced–Developing Developing–Developing Developing–Developing Advanced–Advanced Advanced–Developing Developing–Developing
Americas–Asia
Advanced–Developing
Table 7.1 (cont.) Agreement
Date of entry into force
Geographic composition
Income classification
Chile–New Zealand–Singapore–Brunei New Zealand–Thailand MERCOSUR–Peru
06/03/2005 07/01/2005 02/06/2006 (PAR), 12/29/2005 (BR), 12/16/2005 (UY), 12/13/2005 (AR), 12/12/2005 (PE) 01/01/2006 01/01/2006 03/01/2006 (SV), 04/01/2006 (HO), 07/01/2006 (GU), 04/01/2006 (NI), 03/01/2007 (DR) 07/24/2006 10/01/2006 Not yet in force as of 01/2008 Not yet in force as of 01/2008 Not yet in force as of 01/2008 Not yet in force as of 01/2008
Americas–Asia Asia–Asia Americas–Americas
Advanced–Developing Advanced–Developing Developing–Developing
Americas–Middle East Americas–Middle East Americas–Americas
Advanced–Developing Advanced–Developing Advanced–Developing
Americas–Asia Americas–Asia Americas–Americas
Advanced–Developing Developing–Developing Advanced–Developing
Americas–Americas
Advanced–Developing
Americas–Americas
Advanced–Developing
Americas–Asia
Advanced–Advanced
United States–Morocco United States–Bahrain CAFTA
Panama–Singapore Chile–China United States–Peru United States–Panama United States–Colombia United States–Korea
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area of origin of the partner countries; and the level of development of the partner countries. This latter category uses the IMF’s categorization of ‘Advanced Economy’ and ‘Developing Country’.18 Table 7.1 demonstrates that the number of regional trade agreements incorporating investment provisions is large and growing more rapidly every year. The sample includes only agreements that can be considered free trade agreements. Customs unions are not included except in cases such as MERCOSUR agreements with third parties in which the customs union is a party to a free trade agreement. The sample includes twenty-two free trade agreements among countries of the Americas, ranging from the 1994 NAFTA to the CAFTA agreement implemented in 2006 and 2007 and including three agreements (US–Colombia, US– Panama and US–Peru) that have been signed but are not yet in force.19 Seventeen agreements are included that pair countries of the Americas with countries outside the Americas, including eight with Asian countries, six with countries in the Middle East and three with European partners. Eight agreements are between Asian countries, two agreements among European countries or groups (European transition agreements), and one each of Europe–Africa, Europe–Asia, Europe–Middle East and Africa–Africa. Two agreements are from the 1980s, thirteen from the 1990s and thirty-three from the 2000s. Four agreements have not yet entered into force. Ten RTAs are among advanced economies, twenty-six are between advanced economies and developing countries, and the remaining sixteen are between developed countries. The divisions among geographic area and by level of development were to answer the question of whether geographic area and level of development impact the choices countries make in incorporating investment into the RTAs into which they enter. The most active countries in terms of incorporating investment provisions in RTAs have been the countries of the Americas, largely as a result of changing attitudes towards investment following the debt crisis of the 1980s and subsequent reforms oriented towards openness and attracting 18
19
According to the IMF, the Advanced Economies are: Australia, Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Singapore, Slovenia, Spain, Sweden, Switzerland, Taiwan, the United Kingdom and the United States. This information can be found in the World Economic Outlook’s Database – WEO Groups and Aggregates Information, at www.imf.org. The CAFTA has been implemented by six of the seven signatory countries; Costa Rica has been granted until 1 October 2008 to pass implementing legislation.
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investment into their relatively capital-poor countries. Of the RTAs with investment provisions, the United States and the EU (mostly through BITs), early on tended to act as hubs, but recently Asian countries have increasingly participated in this trend, both in agreements among themselves and with countries in the Americas.20 In terms of levels of development, developing countries have been seen as tending to utilize investment provisions as signals to foreign investors. This paper does not aim to draw correlations between investment provisions and actual investment flows.21 Rather, its objective is to explore the policies adopted to address investment within RTAs. As such, the paper relies on the texts of the agreements as they relate to the discipline of investment. The template utilized for comparing investment provisions within RTAs is structured using sub-categories found in BITs, in NAFTA-type agreements and in the GATS. This covers the scope of coverage of the agreement; the approach (GATS-type ‘positive list’ versus NAFTA-type ‘negative list’); the types of restrictions on nationality of directors and management allowed; provisions on performance requirements; transparency; whether denial of benefits is included; coverage in case of expropriation; treatment of transfers and payments; and the inclusion or not of an investor–state dispute settlement mechanism. RTA provisions are compared against the GATS 20
21
Several agreements have been signed between countries of the Americas and countries in Asia: the United States implemented an FTA with Singapore in 2004 and with Australia in 2005; Chile implemented an RTA with Korea in 2004, with its P-4 partners (New Zealand, Singapore and Brunei) in 2005 and with China in 2006; Mexico was the first developing country to enter into a regional trade agreement with Japan in 2005, and Panama and Singapore entered into an RTA in 2006. On the European side, there is the EFTA–Singapore RTA of 2003. Among Asian countries, RTAs include Australia–New Zealand (1983), New Zealand–Singapore (2001), Japan–Singapore (2002), Singapore– Australia (2003), China–Hong Kong (2004) and Australia–Thailand (2005). A significant body of literature exists that addresses this question. It should be noted that evidence establishing a clear link between changes in the levels of foreign direct investment (FDI) and the existence of investment provisions is difficult to find. Various studies on whether bilateral investment treaties, whose stated objective is to increase investment, have found little robust evidence that such provisions increase foreign investment. Hallward-Driemier (2003) and Rose-Ackerman and Tobin (2005) tested this relationship over the period 1980–2000 and found, first, no statistically significant relationship and in a second study a negative effect at high levels of risk and a positive effect at low levels of risk. A study by Salacuse and Sullivan (2005) finds positive effects for US BITs. Neumayer and Spess (2005) use a longer time period than in previous models, 1970–2001, and find a positive effect of BITs on investment flows. Dee et al. (2006) find that economic fundamentals are more important in attracting investment than investment agreements.
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and TRIMs provisions of the WTO in order to assess how the international investment provisions, as they evolve at the bilateral and regional level compare with multilateral commitments and to provisions adopted by other RTAs. RTAs are assigned a score of 1 if the provision is present; a 0 if it is not. For example, if an RTA includes an investor–state dispute settlement mechanism, it receives a score of 1. If it does not, it receives a 0. The data are set out in the Annex to this chapter.
5
Overview of the results
Tables 7.2 and 7.3 provide a summary of the results of the evaluation of investment provisions in the sample of agreements. The section below evaluates by topic coverage in the RTAs evaluated.
5.1 Scope and coverage 5.1.1 Definition of investment Investment is traditionally defined in either a broad, asset-based way (including both FDI and portfolio investment) or by using a narrow, enterprise-based definition (comprising the establishment or acquisition of a business enterprise). The vast majority of BITs and FTA provisions in this study have adopted the broad definition. Those agreements that use the GATS-type services-based approach often utilize the narrower (enterprise-based) definitions. 5.1.2 Sectoral coverage The OECD classifies RTAs into two broad categories: GATS-type and NAFTA-type agreements (OECD 2006). In GATS-type agreements, investment disciplines are contained in the services chapter as well as a limited investment chapter and interactions between these chapters are governed as stated in one of these chapters. In the NAFTA-type agreements, investment disciplines are contained in the investment chapter and there is limited interaction with the services chapter. Most NAFTA-type agreements tend to be between or among countries that have already liberalized their investment regimes and are willing to lock that liberalization in with a trade treaty. RTAs negotiated by these countries tend to include a separate investment chapter, in the model of the NAFTA, that goes beyond the disciplines of a GATS-type agreement. Agreements negotiated by the NAFTA member countries tend to include provisions that resemble those of NAFTA Chapter 11.
Table 7.2 Mapping of investment provisions: results by geographic pairing Total and score (per cent of total)
Category
Sectoral coverage
Scope of nondiscrimination provisions
MFN
IntraAmericas Total: 22
Americas– Asia Total: 8
America– Europe Total: 3
Americas– Middle East Total: 6
Intra-Asia Others Total: 7 Total: 6
Beyond services (in separate chapter) Services only (mode 3 in services chapter) Based on bilateral treaties Endeavours without specified scope
15 (.68)
6 (.75)
2 (.67)
1 (.17)
5 (.71)
2 (.33)
0 (.00)
1 (.13)
1 (.33)
1 (.17)
1 (.14)
0 (.00)
4 (.18) 4 (.18)
0 (.00) 1 (.13)
0 (.00) 0 (.00)
1 (.17) 1 (.17)
0 (.00) 0 (.00)
0 (.00) 2 (.33)
Establishment (i.e. greenfield)
18 (.82)
7 (.88)
2 (.67)
4 (.67)
5 (.71)
2 (.33)
Acquisition (i.e. merger) Post-establishment operation Resale (i.e. free movement of capital)
18 (.82) 18 (.82)
7 (.88) 7 (.88)
2 (.67) 2 (.67)
4 (.67) 4 (.67)
5 (.71) 4 (.57)
1 (.17) 2 (.33)
18 (.82)
7 (.88)
2 (.67)
3 (.50)
4 (.57)
1 (.17)
Negative-list bindings Positive-list bindings
18 (.82) 0 (.00)
7 (.88) 0 (.00)
0 (.00) 0 (.00)
0 (.00) 0 (.00)
3 (.43) 0 (.00)
1 (.17) 0 (.00)
National treatment
Standard of treatment
Transfers and payments
Performance requirements
Negative-list bindings – all sectors Positive-list bindings – all sectors
18 (.82)
7 (.88)
0 (.00)
0 (.00)
4 (.57)
2 (.33)
0 (.00)
0 (.00)
1 (.33)
0 (.00)
1 (.14)
0 (.00)
Minimum standard of treatment Treatment in case of strife Expropriation and compensation
13 (.59)
6 (.75)
0 (.00)
2 (.33)
2 (.29)
1 (.17)
15 (.68) 17 (.77)
6 (.75) 6 (.75)
0 (.00) 0 (.00)
2 (.33) 2 (.33)
4 (.57) 4 (.57)
1 (.17) 1 (.17)
No restrictions except to safeguard balance of payments Restrictions in other prescribed circumstances
1 (.05)
0 (.00)
2 (.67)
1 (.17)
0 (.00)
2 (.33)
14 (.64)
7 (.88)
1 (.33)
2 (.33)
5 (.71)
1 (.17)
13 (.59)
6 (.75)
0 (.00)
2 (.33)
1 (.14)
0 (.00)
3 (.14)
0 (.00)
0 (.00)
1 (.17)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
No local content, trade or other specified requirements (e.g. on tech transfer, or where to sell) No local content or trade requirements i.e. as in TRIMs Provisions more limited than TRIMs
Table 7.2 (cont.) Total and score (per cent of total)
Category IntraAmericas Total: 22 Senior management and board of directors (including exceptions in Annex)
Americas– Asia Total: 8
America– Europe Total: 3
Americas– Middle East Total: 6
Intra-Asia Others Total: 7 Total: 6
Cannot restrict either
1 (.05)
0 (.00)
0 (.00)
1 (.17)
0 (.00)
0 (.00)
Cannot restrict either, with sectoral exceptions Can partially restrict board of directors Can partially restrict management or both. Alternatively, sectoral promises to liberalize, but no general promise.
0 (.00)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
13 (.59)
6 (.75)
0 (.00)
1 (.17)
0 (.00)
0 (.00)
2 (.09)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
Denial of benefits (i.e. rules of origin)
Transparency (in any part of the agreement)
Investor–state dispute settlement
7 (.32)
3 (.38)
1 (.33)
0 (.00)
3 (.43)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
0 (.00)
9 (.41)
4 (.50)
0 (.00)
2 (.33)
0 (.00)
0 (.00)
Prior comment
15 (.68)
5 (.63)
0 (.00)
1 (.17)
3 (.43)
0 (.00)
Publish (as in GATS) National inquiry point (as in GATS)
17 (.77) 16 (.73)
7 (.88) 4 (.50)
1 (.33) 1 (.33)
2 (.33) 0 (.00)
4 (.57) 4 (.57)
1 (.17) 0 (.00)
18 (.82)
5 (.63)
0 (.00)
2 (.33)
5 (.71)
1 (.17)
Denial only to persons that do not conduct substantial (or any) business operations in other party Tougher treatment to specific sectors Tougher treatment to all sectors
Table 7.3 Mapping of investment provisions: results by levels of development Total and Score (per cent of total)
Category
AdvancedAdvanced Total: 10
AdvancedDeveloping Total: 26
DevelopingDeveloping Total: 16
Sectoral coverage
Beyond services (in separate chapter) Services only (mode 3 in services chapter) Based on bilateral treaties Endeavours without specified scope
7 0 0 1
(.70) (.00) (.00) (.10)
16 4 2 2
(.62) (.15) (.08) (.08)
8 0 2 5
(.50) (.00) (.13) (.31)
Scope of MFN, NT etc provisions
Establishment (i.e. greenfield) Acquisition (i.e. merger) Post-establishment operation Resale (i.e. free movement of capital)
8 8 8 7
(.80) (.80) (.80) (.70)
20 19 19 18
(.77) (.73) (.73) (.69)
10 10 10 10
(.63) (.63) (.63) (.63)
MFN
Negative-list bindings Positive-list bindings
5 (.50) 0 (.00)
16 (.62) 0 (.00)
10 (.63) 0 (.00)
National treatment
Negative-list bindings – all sectors Positive-list bindings – all sectors
7 (.70) 0 (.00)
16 (.62) 3 (.12)
10 (.63) 0 (.00)
Standard of treatment
Minimum standard of treatment Treatment in case of strife Expropriation and compensation No restrictions except to safeguard balance of payments Restrictions in other prescribed circumstances
5 6 6 1
14 15 15 4
Transfers and payments
(.50) (.60) (.60) (.10)
7 (.70)
(.54) (.58) (.58) (.15)
16 (.62)
5 7 9 1
(.31) (.44) (.56) (.06)
7 (.44)
Performance requirements
Nationality (residency) of management and board of directors (including exceptions in Annex)
Denial of benefits (i.e. rules of origin)
Transparency (in any part of the agreement)
Investor–state dispute settlement
No local content, trade or other specified requirements (e.g. on tech transfer, or where to sell) No local content or trade requirements, i.e. as in TRIMs Provisions more limited than TRIMs
4 (.40)
12 (.46)
6 (.38)
1 (.10)
1 (.04)
2 (.13)
0 (.00)
0 (.00)
0 (.00)
Cannot restrict either
0 (.00)
1 (.04)
1 (.06)
Cannot restrict either, with sectoral exceptions Can partially restrict board of directors Can partially restrict management or both. Alternatively, sectoral promises to liberalize, but no general promise
0 (.00) 3 (.30) 0 (.00)
0 (.00) 12 (.46) 0 (.00)
0 (.00) 5 (.31) 2 (.13)
Denial only to persons that do not conduct substantial (or any) business operations in other party Tougher treatment to specific sectors Tougher treatment to all sectors
2 (.20)
5 (.19)
7 (.44)
0 (.00) 2 (.20)
0 (.00) 11 (.42)
0 (.00) 2 (.13)
Prior comment
4 (.40)
12 (.46)
8 (.50)
Publish (as in GATS) National inquiry point (as in GATS)
7 (.70) 4 (.40)
16 (.62) 12 (.46)
9 (.56) 9 (.56)
6 (.60)
15 (.58)
10 (.63)
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Countries that have undertaken less unilateral liberalization tend to enter into agreements with a narrower scope on investment. Such RTAs cover investment provisions mainly as part of the provisions on services. Some other agreements, particularly those among developing countries, aim less at investment liberalization than at investment promotion, including developing and promoting local and/or regional firms. These may take on endeavour proclamations without committing to investment provisions. There are also a number of agreements for which the depth of investment liberalization remains to be seen: these RTAs have been implemented on the basis of market access and other traderelated commitments, with the investment provisions held for future negotiation. Of the fifty-two agreements surveyed, thirty-one included investment provisions in a separate investment chapter that went beyond services – nearly 70 per cent of the agreements among countries in the Americas; 75 per cent of Americas–Asia agreements and 71 per cent of intra-Asia agreements. In terms of the level of development, the highest incidence of countries with a separate investment chapter going beyond services was among advanced economies (70 per cent) with the agreements that did not incorporate such provisions being the older agreements: US– Israel, Australia–New Zealand and the slightly more recent Canada– Israel. Seventy per cent of advanced–developing agreements included a separate investment chapter or incorporated a recent BIT. Three RTAs included investment provisions only in a services chapter: these agreements are relatively spread out geographically, including EC–Chile, China–Hong Kong, and the Trans-Pacific Strategic Economic Partnership (Trans-Pacific SEP) Agreement among Brunei Darussalam, Chile, New Zealand and Singapore (the ‘P-4’) – although in the latter case, negotiations towards an investment agreement are incipient. Four other agreements base the legally binding commitments on investment on existing BITs. Three of these are in the Americas and one is an Americas–Middle East agreements – Canada–Costa Rica FTA, Chile’s agreement with Central America; Chile–MERCOSUR and the US– Bahrain FTA.22 The US–Jordan FTA does not include an investment 22
The Canada–Costa Rica references the Agreement between the Government of Canada and the Government of Costa Rica for the Promotion and Protection of Investments, signed in 1998. Annex 10.01 to the Central America–Chile free trade agreement references the following bilateral investment treaties for incorporation: Acuerdo entre la Repu´blica de Chile y la Repu´blica de Costa Rica para la Promocio´n y Proteccio´n Recı´proca de las Inversiones (1996); Acuerdo entre la Repu´blica de Chile y la Repu´blica de
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provision; while it is not referenced in the FTA, the 1997 US–Jordan BIT is the principal investment instrument between the two countries. MERCOSUR’s other agreements invoke bilateral investment treaties among parties, but no third party other than Chile has yet signed bilateral investment treaties with all MERCOSUR members so only MERCOSUR–Chile was counted. A number of others incorporate investment as endeavours but without a specified scope. Half of these are intra-Americas, all agreements signed by the MERCOSUR customs union.23 The other agreements that contain endeavours are also more limited in their liberalization scope: US– Israel (1985), the EC agreements with South Africa (2000) and Morocco (2000); and Chile–China (2006). Others, while including investment as part of their objectives contain no investment provisions. Canada–Israel (1997), for example, states as one of its objectives: ‘Wishing to create a framework for promoting investment and cooperation . . .’ (Preamble) but contains no provisions on investment or services. The Mexico–Israel agreement includes as an objective to substantially increase investment opportunities in the territories of the parties (Article 1.03). The Australia–New Zealand Closer Economic Relations Trade Agreement (ANZCERTA) contains as an objective ‘co-operation in such fields as investment, marketing, movement of people, tourism and transport’, but does not include specific investment provisions. This is largely due to similar economic structures and practices as well as the close economic relationship between the two countries. The COMESA effort towards a free trade agreement includes ‘to co-operate in the creation of an enabling environment for foreign, cross border and domestic investment including the joint promotion of research and adaptation of science and technology for development’ and also provisions urging regional co-operation on investment incentives to spur investment in the region, but no traditional investment provisions.
23
El Salvador para la Promocio´n y Proteccio´n Recı´proca de las Inversiones, suscrito entre El Salvador y Chile (1996); Acuerdo entre la Repu´blica de Chile y la Repu´blica de Guatemala para la Promocio´n y Proteccio´n Recı´proca de las Inversiones (1996); Acuerdo entre la Repu´blica de Chile y la Repu´blica de Honduras para la Promocio´n y Proteccio´n Recı´proca de las Inversiones (1996); and Acuerdo entre la Repu´blica de Chile y la Repu´blica de Nicaragua para la Promocio´n y Proteccio´n Recı´proca de las Inversiones (1996). The US–Bahrain agreement references the Treaty between the Government of the United States of America and the Government of the State of Bahrain Concerning the Encouragement and Reciprocal Protection of Investment. MERCOSUR agreements with Chile (1996) and Bolivia (1997) as well as later agreements with the Andean Community (2005) and Peru (2005/6).
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A few agreements have yet to determine the shape that the investment provisions will take. The Chile–Central America agreement (2002) includes investment as part of a future work programme. In the Chile– China agreement, investment, as well as services, is included as part of a future work programme. The P-4 group signed a wide-ranging free trade agreement in 2006, but this did not include financial and investment services, and talks are set to begin to include them in the agreement. The COMESA passed a COMESA Investment Agreement in May 2007, which provides a framework for intra-COMESA investment and a draft text for an agreement on services is under discussion. Investment chapters in the RTAs signed by Canada, Chile, the United States and Mexico, as well as those signed by Asian partners, Australia, Japan and Singapore, tend to cover both investment protection and liberalization issues, and go beyond the multilateral provisions of the GATS and TRIMs, incorporating investment provisions that go beyond services in a separate investment chapter (or by incorporating by reference comprehensive investment provisions already contained in a BIT).
5.2
Non-discrimination
The principle of non-discrimination is achieved through the application of national treatment and most-favoured-nation (MFN) standards. National treatment requires the host country to provide that investments and investors of the parties be treated as well as local investors and MFN treatment requires the host country to accord treatment as favourable as the best treatment accorded to any other foreign investor. The extent to which non-discrimination is applied depends upon how investment is defined in the agreement; the range of assets to which non-discrimination applies; upon whether the MFN standard is applied to the entire lifetime of the investment (pre- and post-establishment) or to part of its lifetime; and the number of exceptions. Of the RTAs among countries in the Americas, all but the agreements forged by the MERCOSUR expressly provide national and MFN treatment in the establishment, acquisition, post-establishment and resale phases of the investment. Some agreements, for example those based on NAFTA, require that the investor and investment of one party be granted ‘the better of’ MFN or national treatment. These agreements also include a list of reservations – often including non-conforming measures at the federal and sub-federal level. RTAs between countries in
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the Americas and Asian countries have an even higher incidence of this coverage, at 88 per cent (if Chile–China is excluded (as investment is on the agenda for future negotiations), this increased to 100 per cent). With the exception of the Australia–Thailand FTA (which covers neither post-establishment nor resale), the Australia–New Zealand CERTA and the Hong Kong–China agreements (both of which do not include a chapter on investment), agreements among Asian countries cover all phases of investment. EFTA–Singapore follows the other Singapore agreements, covering all four aspects. EU agreements with third countries typically do not include national or MFN treatment for investment, as this is the purview of national Member States and is generally incorporated in bilateral investment treaties. Some RTAs include a development aspect to their investment chapter. Particularly RTAs among developing countries, such as the COMESA, differentiate between domestic and foreign investors, and provide for the freedom to control FDI according to national policies. Such elements could lead to approaches for flexibility at the multilateral level should an international investment regime be set up in the future. International investment liberalization is effected by two basic approaches. At the multilateral level, the GATS provisions regarding national treatment (Article XVII) are conditional, and applied to specific commitments listed in the Members’ schedules. GATS uses what is known as the positive-list approach, in which Members identify the sectors that will be liberalized in the agreement. The alternative approach is the negative-list approach, in which signatories agree on a set of general obligations applicable to all industries and sectors, and list industries and sectors that will be exempted. This is also sometimes known as the NAFTA approach.24 The GATS (positive-list) approach is often seen as less liberalizing: only sectors specifically listed are subject to liberalization. Under the ‘negative-list’ approach, favoured in postNAFTA RTAs, all sectors are liberalized except those that are listed as exceptions. GATS-inspired agreements are often favoured by countries that want to preserve a certain flexibility and progressiveness in their liberalization, while they reform and establish new regulatory frameworks. NAFTA-inspired agreements tend to be seen as more liberalizing, 24
Note that the positive-list and negative-list approaches are not mutually exclusive: Investment agreements can be structured so as to incorporate both methods; for example, obligations could be applied in a positive-list style on pre-establishment commitments, while using the negative-list method for post-establishment commitments.
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and more transparent due to the ‘one-shot’ liberalization that encompasses all sectors but those listed and locks in future reforms. RTAs among countries of the Americas, with the exception of those in which MERCOSUR is a party, take a negative-list approach to both MFN and national treatment. All agreements between countries in the Americas and Asian countries take this approach. The New Zealand–Thailand agreement takes a positive-list approach to national treatment.
5.3
Standard of treatment
Absolute standards of treatment – as opposed to the relative standards of treatment provided by national and MFN treatment, which are defined by treatment accorded to another investment – provide a floor, or minimum level of protection, for investors. These include standards such as fair and equitable treatment under international law, compensation for expropriation and, for example, free transfer of payments. The minimum standard of treatment ensures that investors of a party will be accorded treatment in accordance with international law, including ‘fair and equitable treatment’ and ‘full protection and security’. This standard has received growing attention, commensurate with the growing number of arbitral awards addressing claims of denial of fair and equitable treatment. All US agreements that address investment within the body of the text contain this provision, as do Chile’s agreements with Mexico and Peru; Mexico–Uruguay and Mexico–Northern Triangle; the agreements between Australia and Thailand; and Singapore’s agreements (with the exception of Singapore–Australia). Recently concluded agreements, such as the AUSFTA, CAFTA and US agreements with Chile, Morocco and Singapore provide that each party must ‘accord to the covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security’. Many RTAs also include language ensuring non-discriminatory treatment with respect to measures adopted relating to losses suffered by investments due to armed conflict or civil strife.
5.4
Expropriation and compensation
Most RTAs contain in their investment chapters provisions to ensure that their investment is protected in the event that the host country
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nationalizes or expropriates their investment. Not surprisingly, such provisions are most popular in RTAs in the Americas, particularly those to which the more developed countries are party. Over three-quarters of the agreements among countries in the Americas and between countries in the Americas and Asian countries include these provisions.
5.5
Transfers and payments
Another goal of investment agreements is to ensure that investors are able to transfer their profits back to the home country. At the multilateral level, the GATS contains provisions allowing limited restrictions in the event of balance-of-payments difficulties. RTAs have gone a step further, adding a number of additional restrictions in other prescribed circumstances. These agreements hold that a party may prevent a transfer through the application of its laws relating to bankruptcy, securities trading, criminal or penal offences, adjudicatory judgments and related matters. Such provisions are found predominantly in texts of RTAs among the Americas and between the Americas and Asian countries.
5.6 Performance requirements Performance requirements include obligations to export a particular percentage of goods and services; to use a particular level or percentage of local content; to give preference to local goods or services; to observe trade and foreign exchange balancing requirements; to transfer technology; or to act as the exclusive supplier of goods or services. NAFTA-type agreements prohibit performance requirements for both goods and services, with some exceptions to this prohibition.25 Nearly three-quarters of the agreements among countries of the Americas and half of agreements between countries of the Americas and third states contained provisions restricting the ability to mandate local content, trade or other specified requirements (e.g. on technology transfer, or where to sell). Less than 20 per cent of the intra-Asia RTAs contained such a provision. With regard to the RTAs among countries of the Americas, performance requirements are not banned in the agreements by the MERCOSUR or in Chile’s FTAs with Central America and Peru.
25
NAFTA Article 1106.6, for example.
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5.7
Senior management and board of directors
Most RTAs provide for the temporary entry of managers and key personnel related to an investment. Some agreements allow the hiring of top managerial personnel regardless of nationality, while other agreements hold that the investment may not stipulate the nationality of a majority of the board of directors. Of the sample, agreements among countries in the Americas had a greater incidence of restricting the ability of the investor to determine the nationality (residency) of management and board of directors. Only one RTA, that between Central American countries and the Dominican Republic, allows restrictions on specifying nationality, and in this case this applies only when such provisions are stipulated in one of the parties’ legislation. Various agreements (the NAFTA-type agreements, slightly more than half of the RTAs among countries of the Americas and three-quarters of the agreements between Asian and American countries) allow some restrictions on the nationality or residency of boards of directors, provided such restrictions do not interfere with the investor’s ability to exercise control over the investment.
5.8
Denial of benefits
Third-party investors often enjoy the same rights as investors of a party to the RTA when they have a substantial presence in one member and invest in the other party’s territory through this presence. This implies a de facto transfer of investment rules to non-party actors. Some RTAs include provisions that are akin to rules-of-origin provisions for goods that allow a party to deny benefits to a party’s investors or investments if investors of a non-party controls the investments under certain conditions such as if the non-party does not conduct substantial business operations in the other party; if the denying party does not maintain diplomatic relations with that non-party; or if the denying party prohibits transactions with that non-party or its enterprises. In our sample, one-third of the agreements among countries of the Americas and close to 40 per cent of the agreements between countries in the Americas and countries in Asia, follow the WTO (GATS and TRIMs) model of including provisions of denial only to persons that do not conduct substantial business operations in other party. Forty per cent included tougher treatment to all sectors. NAFTA and subsequent
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RTAs signed by the United States, Mexico’s agreements with Chile, with Japan and with the Northern Triangle and Chile’s agreements with Canada and Korea include stronger language, allowing the denial of benefits if the denying party does not maintain diplomatic relations with the non-party or adopts or maintains measures with that non-party that prohibit transactions with the enterprise.
5.9
Transparency requirements
The GATS includes the obligation to publish all relevant laws and to set up enquiry points that companies can use to obtain information about regulations in the service sector. Member must also notify the WTO of changes in regulations that would affect their services commitments. Many of the RTA investment provisions contain similar, or furtherreaching, transparency commitments. NAFTA and NAFTA-like agreements provide for the setting up of national contact points, publication of relevant laws and regulations, and provide that parties must notify each other with regard to any proposed or actual matter that may be adopted that might affect the other party. In our sample, the majority of agreements among countries in the Americas (around 70 per cent) contain the three transparency provisions: prior comment; publish and set up a national inquiry point. A number of agreements followed the GATS, in requiring a contact point and publication of laws but not including prior comment provisions.26 The Mexico–Japan partnership agreement includes provisions to publish and prior comment but does not include contact points. A number of others require only publication.27
5.10
Dispute settlement
Investment disputes have increased as investment has grown and as more countries are signing on to agreements containing investment provisions. To illustrate, between 1972 and 1999, sixty-nine disputes were registered with ICSID, an average of just over two disputes per year. Between January 2000 and February 2002, twenty-nine disputes have been registered, an average of about thirteen per year. The increasing 26
27
Mexico–Northern Triangle (2001); Chile–EC (2003); Singapore–Australia (2003); the P-4 (2005); Panama–Singapore (2006). Canada–Costa Rica (2002); Japan–Singapore (2002); EFTA–Singapore (2003); the P-4 (2005); and US–Bahrain (2006).
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number of disputes may be a reflection of increasing investment, or may reflect the fact that the international mechanisms for the settlement of disputes are gaining credibility among economic operators by providing a set of clear and predictable rules (OECD 2002 p. 5). Both BITs and investment provisions in RTAs contain dispute settlement provisions. Some RTAs provide for the settlement of disputes through coordination and negotiation. Some contain provisions only for the settlement of disputes between parties. The NAFTA introduced an innovation in RTAs, by including an investor–state dispute settlement provision. Under investor–state dispute settlement rules, an investor of a party may submit to international arbitration a claim that a party has breached the obligations under the investment provisions of the RTA. Since the signing of the NAFTA, all NAFTA members’ subsequent agreements, with the exception of US–Australia, Canada–Israel and the Mexico agreements with European countries, have included investor– state dispute settlement mechanisms.28 In our sample, the majority of agreements between developing countries and between developed and developing countries include such a provision. All US RTAs subsequent to the NAFTA include an investor–state provision, with the exception of the US–Jordan and the US–Australia FTA. EC agreements, agreements with Israel, and MERCOSUR agreements do not provide for an investor–state dispute settlement provision. By far the highest percentage of RTAs with an investor–state dispute settlement mechanism is among countries of the Americas, at 80 per cent, compared with RTAs among Asian countries, of which about 70 per cent contained such a provision and agreements among countries of the Americas and Asian countries, of which just under half contained such a provision.
6
Variations among agreements
Figure 7.1 provides a snapshot of the coverage of the selected RTAs: RTAs showing greater coverage are those that ‘go beyond’ the GATS/ TRIMs provisions of the WTO. They include separate investment chapters that cover more than services; they extend national and mostfavoured-nation treatment, and often the best of such treatment, to preand post-establishment phases of the investment and to resale; they adopt a negative-list approach; they allow little restrictions in terms 28
The US–Jordan FTA also does not include this provision, but it is included in the BIT.
Canada-Chile EU - Morocco EU-South Africa
1
Canada-Costa Rica Mexico-Costa Rica
0.9
China-Hong Kong
Uruguay-Mexico
0.8 NZ-Singapore
Central America- Republic of Chile
0.7 0.6
Japan-Singapore
Mexico-Northern Triangle
0.5 Australia-Thailand
Mexico-Nicaragua
0.4 0.3
Singapore-Australia
Mexico-Bolivia 0.2 0.1
Panama - Singapore
Chile-Mexico 0
Chile - China
Chile - Peru
Chile - New Zealand - Singapore - Brunei
NAFTA
Mexico - Japan
US-Chile
Mexico-EU
US - Peru
Chile-Korea
US - Colombia
EC-Chile: only for mode 3
CAFTA
USA-Jordan US - Morocco
Figure 7.1
AUSFTA
Coverage by country
US-Singapore
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of nationality of management or boards of directors, and do not allow performance requirements; they incorporate GATS-plus transparency measures; they include compensation measures in case of expropriation; and they include a separate dispute settlement mechanism. As seen in Figure 7.1, the RTAs with most coverage tend to be RTAs signed by the United States, Canada, Mexico, Chile and Singapore.
6.1
Agreements by geography
Table 7.2, along with Figure 7.1, shows that there are geographical trends in the treatments of investment. RTAs are grouped roughly into two hubs: a NAFTA-type hub, which includes agreements by countries in the Americas, except for the MERCOSUR, and increasingly in Asia, and the European-style hub. All RTAs forged by the three NAFTA members with their respective partners in the Americas are encompassing, applying the four modalities of investment – establishment, acquisition, post-establishment operations and resale – and also cover such disciplines as MFN treatment, national treatment and dispute settlement. Eighty per cent or more also cover transparency, denial of benefits and restriction of transfers, nationality of management and board of directors, performance requirements and expropriation. US PTAs again lead the way in being particularly comprehensive. In Asia, Singapore’s and Australia’s agreements are more encompassing, but other agreements have scant coverage. In inter-regional agreements, the coverage is somewhat lower due to the limited coverage of disciplines in the EU–Mexico and EU–Chile agreements, as well as in Chile– China FTA, P-4, and US–Jordan FTA.
6.2
Agreements by levels of development
The agreements signed among advanced economies tend to go beyond the provisions at the multilateral level. They tend to include separate investment chapters that go beyond services; cover all investment phases; employ a negative-list approach; and restrict limitations on nationality of board members and management. There is a geographic divide with respect to limitations on performance requirements: US agreements (except for US–Israel) do restrict performance requirements; Singapore agreements (except for US–Singapore and Japan–Singapore) do not. A similar division is seen in terms of transparency requirements: Americas agreements tend to add prior comment to the GATS obligations to
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publish and establish a national enquiry point; Asian agreements, by and large, do not. Australian agreements (with the United States and with Singapore) incorporate GATS-style denial of benefits. Of agreements that include members from Asia, only a handful, all with countries in the Americas (Chile–Korea, Mexico–Japan, US–Korea and US–Singapore) adopt tougher-than-GATS treatment. Finally, agreements with Australia or Israel do not contain investor–state dispute settlement mechanisms except for the Singapore–Australia agreement – all Singapore agreements incorporate this element. The agreements between advanced economies and developing countries display some heterogeneity. Americas agreements all contain a separate investment chapter or incorporate a BIT; EU agreements with developing countries generally do not. This category tends to track the agreements among advanced countries with the main hubs being the United States and Europe. It was in the developing–developing group that there was the most variation. Here, agreements signed by Chile and Mexico with other developing countries looked much more like the agreements signed among advanced countries than similar agreements signed among other developing countries such as the MERCOSUR. These agreements tended to coincide more with RTAs such as the EU–developing countries RTAs, which tend to liberalize more gently and to incorporate more of a development dimension.
7
Conclusions
The exercise carried out in this paper, of mapping investment provisions from fifty-two RTAs to which countries of different geographic regions and different levels of development are party, has demonstrated two main phenomena: the increasing commonalities in investment provisions at the sub-multilateral level; and the importance of flexibility in the forging of investment provisions. While the former observation could be seen as a positive harbinger for an eventual multilateral investment regime, the latter may ensure that investment provisions at the bilateral and RTA level are driving the evolution of the international investment regime – but that a single, comprehensive and coordinated regime is unlikely in the near future. At the regional and bilateral level, common approaches have emerged with respect to the scope of application, treatment, transfers, expropriation and mechanisms for the settlement of disputes. At the same
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time as there is increasing convergence, the bilateral/regional approach allows countries to customize their investment relations and to express their national interests in terms of the depth of liberalization, the extent of protection, and demands by developing countries to address the development dimensions of FDI. As such, agreements among developing countries can differ from provisions found in agreements between developed and liberalizing developing countries or among developed countries. A case in point is the differences in US agreements, despite the US having a model BIT to draw upon. The US has been able to customize to serve its needs. A prime example is the difference between the AUSFTA and the CAFTA. While an investor–state dispute settlement mechanism is seen as important to guaranteeing due process for investors in the Central American trading partners, this was not seen as a compelling need in the negotiations with Australia. Through bilateral and regional trade agreements, countries can customize their investment provisions according to their comfort level, which is much more difficult to do at the multilateral level.
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Annex Table 7.4 Scope and coverage Sectoral coverage
GATS and TRIMs Canada–Chile Canada–Costa Rica Mexico–Costa Rica Uruguay–Mexico Central America– Dominican Republic Central America–Chile MERCOSUR–Bolivia MERCOSUR–Peru MERCOSUR–CAN MERCOSUR–Chile Mexico–Northern Triangle Mexico–Nicaragua Mexico–Colombia– Venezuela Mexico–Bolivia Chile–Mexico Chile–Peru NAFTA US–Chile US–Peru US–Colombia US–Panama CAFTA US–Singapore AUSFTA US–Korea Chile–Korea Mexico–Japan Chile–New Zealand– Singapore–Brunei
Beyond services (in separate chapter)
Services only Based on (mode 3 in services bilateral chapter) treaties
Endeavours without specified scope
0 1 0 1 1 1
1 0 0 0 0 0
0 0 1 0 0 0
0 0 0 0 0 0
0 0 0 0 0 1 1 1
0 0 0 0 0 0 0 0
1 0 0 0 1 0 0 0
0 1 1 1 1 0 0 0
1 1 0 1 1 1 1 1 1 1 1 1 1 1 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 1
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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Table 7.4 (cont.) Sectoral coverage
Chile–China Panama–Singapore EC–Chile Mexico–EU Mexico–EFTA US–Morocco US–Jordan US–Israel US–Bahrain Mexico–Israel Canada–Israel Singapore–Australia Australia–Thailand Australia–New Zealand Japan–Singapore NZ–Singapore NZ–Thailand China–Hong Kong EFTA–Singapore EU–Lithuania EU–Romania EU–South Africa EU–Morocco COMESA
Beyond services (in separate chapter)
Services only (mode 3 in Based on services bilateral chapter) treaties
Endeavours without specified scope
0 1 0 1 1 1 0 0 0 0 0 1 1 0 1 1 1 0 1 0 1 0 0 0
0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0
1 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0
0 0 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Table 7.5 Non-discrimination: most-favoured-nation and national treatment standards MFN
National Treatment
Scope of MFN and National Treatment
Negative-list Positive-list bindings bindings
Negative-list Positive-list bindings bindings
Establishment
Acquisition
Postestablishment
Resale
GATS and TRIMs
1
0
0
1
1
1
1
1
Canada–Chile Canada–Costa Rica Mexico–Costa Rica Uruguay–Mexico Central America– Dominican Republic Central America– Chile MERCOSUR– Bolivia MERCOSUR–Peru MERCOSUR–CAN MERCOSUR–Chile Mexico–Northern Triangle Mexico–Nicaragua
1 1 1 1 1
0 0 0 0 0
1 1 1 1 1
0 0 0 0 0
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
1 1 1 1 1
1
0
1
0
1
1
1
1
0
0
0
0
0
0
0
0
0 0 0 1
0 0 0 0
0 0 0 1
0 0 0 0
0 0 0 1
0 0 0 1
0 0 0 1
0 0 0 1
1
0
1
0
1
1
1
1
Table 7.5 (cont.) MFN
Mexico–Colombia– Venezuela Mexico–Bolivia Chile–Mexico Chile–Peru NAFTA US–Chile US–Peru US–Colombia US–Panama CAFTA US–Singapore AUSFTA US–Korea Chile–Korea Mexico–Japan Chile–New Zealand– Singapore–Brunei Chile–China Panama–Singapore
National Treatment
Scope of MFN and National Treatment
Negative-list Positive-list bindings bindings
Negative-list Positive-list bindings bindings
Establishment
Acquisition
Postestablishment
Resale
1
0
1
0
1
1
1
1
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
0 1
0 0
0 1
0 0
0 1
0 1
0 1
0 1
EC–Chile Mexico–EU Mexico–EFTA US–Morocco US–Jordan US–Israel US– Bahrain Mexico–Israel Canada–Israel Singapore–Australia Australia–Thailand Australia–New Zealand Japan–Singapore NZ–Singapore NZ–Thailand China–Hong Kong EFTA–Singapore EU–Lithuania EU–Romania EU–South Africa EU–Morocco COMESA
0 0 0 1 0 0 1 0 0 0 1 0
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 1 0 0 1 0 0 1 1 0
1 0 0 0 1 0 0 0 0 0 0 0
1 1 0 1 1 1 1 0 0 1 1 0
1 1 0 1 1 1 1 0 0 1 1 0
1 1 0 1 1 1 1 0 0 1 0 0
1 1 0 1 1 0 1 0 0 1 0 0
0 1 1 0 1 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0
1 1 0 0 1 0 1 0 0 0
0 0 1 0 0 0 0 0 0 0
1 1 1 0 1 0 1 0 0 0
1 1 1 0 1 0 0 0 0 0
1 1 1 0 1 0 1 0 0 0
1 1 1 0 1 0 0 0 0 0
Table 7.6 Standards of treatment Transfers and payments
GATS and TRIMs Canada–Chile Canada–Costa Rica Mexico–Costa Rica Uruguay–Mexico Central America–Dominican Republic Central America–Chile MERCOSUR–Bolivia MERCOSUR–Peru MERCOSUR–CAN MERCOSUR–Chile Mexico–Northern Triangle Mexico–Nicaragua Mexico–Colombia–Venezuela Mexico–Bolivia Chile–Mexico Chile–Peru
Minimum standard of treatment
Treatment in case of strife
Expropriation and compensation
BOP restrictions only
Restrictions in other prescribed circumstances
0 1 1 0 1 1
0 1 1 1 1 1
0 1 1 1 1 1
1 0 0 0 0 1
0 1 0 1 1 0
0 0 0 0 0 1 0 0 0 1 1
0 0 0 0 0 1 0 0 1 1 1
0 0 0 0 0 1 1 1 1 1 1
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 1 1 1 1 1 0
NAFTA US–Chile US–Peru US–Colombia US–Panama CAFTA US–Singapore AUSFTA US–Korea Chile–Korea Mexico–Japan Chile–New Zealand–Singapore– Brunei Chile–China Panama–Singapore EC–Chile Mexico–EU Mexico–EFTA US–Morocco US–Jordan US–Israel US–Bahrain Mexico–Israel Canada–Israel Singapore–Australia
1 1 1 1 1 1 1 1 1 1 1 0
1 1 1 1 1 1 1 1 1 1 1 0
1 1 1 1 1 1 1 1 1 1 1 0
0 0 0 0 0 0 0 0 0 0 0 0
1 1 1 1 1 1 1 1 1 1 1 1
0 1 0 0 0 1 0 0 1 0 0 0
0 1 0 0 0 1 0 0 1 0 0 1
0 1 0 0 0 1 0 0 1 0 0 1
0 0 1 0 1 0 0 1 0 0 0 0
0 1 0 1 0 1 0 0 1 0 0 1
Table 7.6 (cont.) Transfers and payments
Australia–Thailand Australia–New Zealand Japan–Singapore NZ–Singapore NZ–Thailand China–Hong Kong EFTA–Singapore EU–Lithuania EU–Romania EU–South Africa EU–Morocco COMESA
Minimum standard of treatment
Treatment in case of strife
Expropriation and compensation
BOP restrictions only
Restrictions in other prescribed circumstances
0 0 1 0 1 0 1 0 0 0 0 0
1 0 1 0 1 0 1 0 0 0 0 0
1 0 1 0 1 0 1 0 0 0 0 0
0 0 0 0 0 0 0 0 0 1 1 0
1 0 1 1 1 0 1 0 0 0 0 0
Table 7.7 Performance requirements and restrictions on nationality Performance requirements
GATS and TRIMs Canada–Chile Canada–Costa Rica Mexico–Costa Rica Uruguay–Mexico Central America–Dominican Republic Central America–Chile MERCOSUR–Bolivia MERCOSUR–Peru MERCOSUR–CAN MERCOSUR–Chile Mexico–Northern Triangle Mexico–Nicaragua Mexico–Colombia–Venezuela Mexico–Bolivia Chile–Mexico
Senior management and Board of Directors
No local content, trade or other No local content Provisions more limited than specified or trade requirements requirements TRIMs
Cannot restrict either
Can partially restrict board of directors
Can partially restrict management or both
0 1 0 0 1 0
1 0 1 1 0 1
0 0 0 0 0 0
0 0 0 0 0 1
0 1 1 1 1 0
0 0 0 0 0 0
0 0 0 0 0 1 1 1 1 1
0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 1 0 0 1 1
0 0 0 0 0 0 1 1 0 0
Table 7.7 (cont.) Performance requirements
Chile–Peru NAFTA US–Chile US–Peru US–Colombia US–Panama CAFTA US–Singapore AUSFTA US–Korea Chile–Korea Mexico–Japan Chile–New Zealand– Singapore–Brunei Chile–China Panama–Singapore EC–Chile
Senior management and Board of Directors
No local content, trade or other No local content Provisions more specified or trade limited than TRIMs requirements requirements
Cannot restrict either
Can partially restrict board of directors
Can partially restrict management or both
0 1 1 1 1 1 1 1 1 1 1 1 0
0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0
0 1 1 1 1 1 1 1 1 1 1 1 0
0 0 0 0 0 0 0 0 0 0 0 0 0
0 1 0
0 0 0
0 0 0
0 0 0
0 1 0
0 0 0
Mexico–EU Mexico–EFTA US–Morocco US–Jordan US–Israel US–Bahrain Mexico–Israel Canada–Israel Singapore–Australia Australia–Thailand Australia–New Zealand Japan–Singapore NZ–Singapore NZ–Thailand China–Hong Kong EFTA–Singapore EU–Lithuania EU–Romania EU–South Africa EU–Morocco COMESA
0 0 1 0 0 1 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0
0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 1 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Table 7.8 Denial of benefits, transparency and dispute settlement Denial of benefits
GATS and TRIMs Canada–Chile Canada–Costa Rica Mexico–Costa Rica Uruguay–Mexico Central America– Dominican Republic Central America–Chile MERCOSUR–Bolivia MERCOSUR–Peru MERCOSUR–CAN MERCOSUR–Chile Mexico–Northern Triangle Mexico–Nicaragua Mexico–Colombia– Venezuela Mexico–Bolivia
Transparency
Only to persons w/no substantial business operations in other party
Tougher treatment Tougher to specific treatment to sectors all sectors
Prior comment
National Investor–state Publish (as inquiry point Dispute in GATS) (as in GATS) Settlement
1 0 0 1 1 1
0 0 0 0 0 0
0 1 0 0 0 0
0 1 0 1 1 1
1 1 1 1 1 1
1 1 0 1 1 1
0 1 1 1 1 1
1 0 0 0 0 0 1 1
0 0 0 0 0 0 0 0
0 0 0 0 0 1 0 0
1 0 0 0 0 0 1 1
1 0 0 0 0 1 1 1
1 0 0 0 0 1 1 1
1 0 0 0 0 1 1 1
1
0
0
1
1
1
1
Chile–Mexico Chile–Peru NAFTA US–Chile US–Peru US–Colombia US–Panama CAFTA US–Singapore AUSFTA US–Korea Chile–Korea Mexico–Japan Chile–New Zealand– Singapore–Brunei Chile–China Panama–Singapore EC–Chile Mexico–EU Mexico–EFTA US–Morocco US–Jordan US–Israel US–Bahrain Mexico–Israel
0 0 0 0 0 0 0 0 0 1 0 0 0 1
0 0 0 0 0 0 0 0 0 0 0 0 0 0
1 0 1 1 1 1 1 1 1 0 1 1 1 0
1 0 1 1 1 1 1 1 1 1 1 1 1 0
1 0 1 1 1 1 1 1 1 1 1 1 1 1
1 0 1 1 1 1 1 1 1 1 0 1 0 0
1 1 1 1 1 1 1 1 1 0 1 1 1 0
0 1 0 1 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 1 0 0 1 0
0 0 0 0 0 1 0 0 0 0
0 1 1 0 0 1 0 0 1 0
0 1 1 0 0 0 0 0 0 0
0 1 0 0 0 1 0 0 1 0
Table 7.8 (cont.) Denial of benefits
Canada–Israel Singapore–Australia Australia–Thailand Australia–New Zealand Japan–Singapore NZ–Singapore NZ–Thailand China–Hong Kong EFTA–Singapore EU–Lithuania EU–Romania EU–South Africa EU–Morocco COMESA
Transparency
Only to persons w/no substantial business operations in other party
Tougher treatment Tougher to specific treatment to all sectors sectors
Prior comment
National Investor–state Publish (as inquiry point Dispute in GATS) (as in GATS) Settlement
0 1 1 0 0 0 1 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 1 0 0 1 1 0 0 0 0 0 0 0
0 1 1 0 1 1 0 0 1 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 1 1 0 0 1 1 0 0 0 0 0 0 0
0 1 1 0 1 1 1 0 1 0 0 0 0 0
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References Baker, James Calvin, 1999. Foreign Direct Investment in Less Developed Countries: The Role of ICSID, Quorum/Greenwood. Charve´riat, C., 2003. ‘The Emperor’s New Clothes: Why Rich Countries Want a WTO Investment Agreement’, Oxfam Briefing Paper 46, Washington DC: Oxfam International. Cremades, Bernardo M., 2004. ‘Disputes Arising Out of Foreign Direct Investment in Latin America: A New Look at the Calvo Doctrine and Other Jurisdictional Issues’, Dispute Resolution Journal, May–July. Dee, Philippa, Ochiai, Ryo, and Okamoto, Jiro, 2006. ‘Measuring the Economic Effects of the Investment Provisions of Preferential Trade Agreements’, paper prepared for the Expert Meeting ‘Regional Rules in the Global Trading System’, IDB-WTO Joint Research Program, 26–27 July 2006, Inter-American Development Bank, Washington DC. Dodge, William S., 2006. ‘Investor–State Dispute Settlement between Developed Countries: Reflections on the Australia–United States Free Trade Agreement’, Vanderbilt Journal of Transnational Law 39(1), January. Dra´bek, Zdenek, 1998. A Multilateral Agreement on Investment: Convincing the Sceptics, Geneva: World Trade Organization. Dunning, John H. (ed.), 1997. Governments, Globalization and International Business, Oxford: Oxford University Press. Graham, E. M., 1996a. Global Corporations and National Governments, Washington DC: Institute for International Economics. 1996b. Direct Investment and the Future Agenda of the World Trade Organization, Conference Draft. Washington DC: Institute for International Economics. 24 June 1996. 1997. ‘Should There Be Multilateral Rules on Foreign Direct Investment?’, in John Dunning (ed.), Governments, Globalization and International Business, Oxford: Oxford University Press, Chapter 17. 2000. Fighting the Wrong Enemy, Washington DC: Institute for International Economics. Graham, E. M., and Krugman, P. R., 1990. ‘Trade-Related Investment Measures’, in Jeffrey J. Schott (ed.). Completing the Uruguay Round: A Results-Oriented Approach to the GATT Trade Negotiations. Washington DC: Institute for International Economics. Hallward-Driemeier, Mary, 2003. ‘Do Bilateral Investment Treaties Attract Foreign Direct Investment? Only a Bit . . . And They Could Bite’, Policy Research Working Paper, Washington DC: World Bank. IADB, 2006. ‘Market Access Provisions in Regional Trade Agreements’, paper prepared for the Expert Meeting, ‘Regional Rules in the Global Trading
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System’, IDB-WTO Joint Research Program, 26–27 July 2006, InterAmerican Development Bank, Washington DC. ICTSD, 2003. ‘Singapore Issues: Staunch Opposition, New African Proposal’, BRIDGES Weekly Trade News Digest 7(28): 21 August 2003. Lawrence, Robert Z., 1996. Regionalism, Multilateralism, and Deeper Integration Washington DC: Brookings Institution Press. Lipstein, K., 1955. ‘The Place of the Calvo Clause in International Law’, British Yearbook of International Law 22: 130. Neumayer, Eric, and Spess, Laura, 2005. Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?’, World Development 33(10): 1567–85. OECD, 1995. ‘A Multilateral Agreement on Investment: Report by the Committee on International Investment and Multinational Enterprises (CIME) and the Committee on Capital Movements and Invisible Transactions’, (CMIT) DAFFE/CMIT/CIME(95)13/FINAL, Paris: OECD, 5 May 1995. 2002. ‘The Relationship between Regional Trade Agreements and the Multilateral Trading System: Investment’, TD/TC/WP(2002)18/FINAL, Paris: OECD. 2004. ‘Relationships between International Investment Agreements’, Working Papers on International Investment No. 2004/1, May 2004. 2006. ‘The Interaction between Investment and Services Chapters in Selected Regional Trade Agreements’, COM/DAF/INV/TD(2006)40/FINAL, Paris: OECD. 19 June 2006. Pomfret, Richard, 2007. ‘Is Regionalism an Increasing Feature of the World Economy?’, The World Economy 923–44. Robert, Maryse, 1999. ‘Investment’, in Jose M. Salazar-Xirinaths and Maryse Robert (eds.). Toward Free Trade in the Americas, Washington DC: Brookings Institution Press, Chapter 9. Rose-Ackerman, Susan, and Tobin, Jennifer, 2005. ‘Foreign Direct Investment and the Business Environment in Developing Countries: The Impact of Bilateral Investment Treaties’, Yale Law and Economics Research Paper No. 293, 2 May 2005. Salacuse, Jeswald W., and Sullivan, Nicholas P., 2005. ‘Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain’, Harvard International Law Journal 46: 67–129. Sauve, Pierre, 2006. Trade and Investment Rules: Latin American Perspectives, Comercio Internacional, Santiago, Chile, April 2006. Sornarajah, M., 2004. The International Law On Foreign Investment, Cambridge: Cambridge University Press. UNCTAD, 1996, World Investment Report, UNCTAD, Geneva. 2006. ‘The Entry into Force of Bilateral Investment Treaties (BITs) UNCTAD/ WEB/ITE/IIA/2006/9’, IIA Monitor No. 3 International Investment Agreements, New York and Geneva: United Nations.
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2007a. ‘Development Implications of International Investment Agreements’, UNCTAD/WEB/ITE/IIA/2007/2. IIA Monitor No. 2. 2007b. Bilateral Investment Treaties, 1995–2006: Trends in Investment Rulemaking. New York and Geneva: United Nations, May 2007. WTO, 1997. ‘Report (1997) of the Working Group on the Relationship between Trade and Investment to the General Council’, WT/WGTI/1/Rev.1, 9 December 1997. 1998. ‘Report (1998) of the Working Group on the Relationship between Trade and Investment to the General Council’, WT/WGTI/2, 8 December 1998.
8 Competition provisions in regional trade agreements robert teh*
1
Introduction
This paper maps and examines competition-related provisions in seventy-four regional trade agreements (RTAs). The template used for the mapping is based on previous work done to map competitionrelated provisions in RTAs and on recent thoughtful critiques of those approaches. The mapping undertaken in this paper applies to all competition-related provisions of the RTAs and not just to the competition policy chapter. This distinction is important because there are salient competition provisions in the other chapters of regional trade agreements which affect the conditions of competition among suppliers, undertakings and enterprises that operate in the markets of RTA members. There has been a recent flurry of research on competition provisions in RTAs. In the past few years, the United Nations Economic Commission for Latin America and the Caribbean (Silva 2004), UNCTAD (Brusick, Alvarez and Cernat 2005) and the OECD (Solano and Sennekamp 2006) have analyzed competition policy provisions in RTAs. Of particular interest is the OECD study which conducts a mapping of the competition policy chapters in eighty-six RTAs. While acknowledging the contribution of the OECD study in bringing to light many salient features of competition provisions in these trade agreements, *
The author would like to thank Robert Anderson, Simon Evenett, Eduardo Perez Motta, Andreas Sennekamp and participants in the Inter-American Development Bank–WTO conference on ‘Regional Rules in the Global Trading System’, held in July 2006 in Washington DC, for their many helpful comments. They are absolved of any remaining errors and omissions in the paper. The author would also like to acknowledge valuable research assistance from Scott Reid and Sylvie Maalouf. The views expressed in this paper are not meant to represent the positions or opinions of the WTO Secretariat nor of its Members and are without prejudice to Members’ rights and obligations under the WTO.
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Anderson and Evenett (2006) have also critiqued the approach taken in the OECD mapping of focusing solely on the competition policy chapters of the agreements and neglecting the sector-specific provisions and horizontal competition principles which are, in their view, equally important. The sector-specific competition provisions they identify are those in the services, intellectual property and government procurement chapters of the trade agreements while the horizontal competition principles include non-discrimination, procedural fairness and transparency. The mapping produced in this paper builds on this assessment by Anderson and Evenett and constructs an alternative mapping that incorporate these sector-specific elements and horizontal provisions. In a number of instances, this alternative approach produces new and interesting insights about the role of competition provisions in RTAs. Whereas the OECD study suggests that competition policy provisions in RTAs are all about trade, the mapping suggests a much more nuanced relationship between trade and competition. While the competition principles are embedded in trade agreements, they are not necessarily subordinated to trade tests or concerns. This paper should be seen as complementing or extending previous mappings by teasing out additional insights on the role of competition in trade agreements from a more comprehensive review of all competition-related provisions. The plan for the rest of the paper is as follows. The next section describes the RTAs that were included in the analysis. Following that is a review of the available literature on the role of competition in trade agreements. Based on this review, a number of elements are identified which need to be reflected in the mapping. The most important shortcoming of previous mapping exercises is the neglect of sectoral provisions and horizontal competition principles. A template for mapping competition provisions in RTAs is then presented which seeks to address this lacuna. This template is then used as the basis for the mapping exercise. The results of the mapping are analyzed with the salient features found in the sectoral chapters, the horizontal principles and competition policy chapter being discussed in detail. Given the pronounced hub-and-spoke pattern of the RTAs in the sample, differences in the competition policy provisions negotiated by several major hubs – the US, the EU, EFTA and Mexico – are examined. While it may not be possible to speak of distinct families of RTAs, there are certain family resemblances in the competition provisions negotiated by some of the major hubs. The penultimate section emphasizes the non-preferential
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nature of a significant number of competition rules that are included in regional trade agreements, a feature that sharply distinguishes them for example from traditional RTA provisions in market access. In other words, because of their nature the application of the competition provisions in RTAs generate benefits that cannot be denied to non-RTA members. The final part of the paper provides a summary and concluding comments.
2 RTAs included in the mapping Seventy-four RTAs were surveyed for this paper (the list of the RTAs appears in the Appendix to this volume). The RTAs were selected based on a number of criteria. As much as possible, they should be RTAs notified to the WTO. The sample of RTAs should be geographically diverse, involving arrangements from all major regions and should include North–North, South–South and North–South RTAs. The sample should also include the most economically important RTAs, and there should be a greater representation of the more recent generation of RTAs.
2.1
Key economic characteristics of the RTAs
The bulk of the seventy-four RTAs included in the survey have been notified to the WTO.1 Collectively, the notified RTAs represented about 47 per cent of the total number of RTAs notified to the WTO under GATT Article XXIV and the Enabling Clause.2 The RTAs surveyed accounted for about half of global merchandise import flows in 2005, although not all of that trade receives preferential treatment. Intra-RTA imports in 2005 for the surveyed RTAs ranged from a high of US$2.4 trillion (for the EU) to a low of US$73 million for the arrangement involving EFTA and the Former Yugoslav Republic of Macedonia. The share of intra-RTA trade was largest (61 per cent) for the EU and NAFTA (34.5 per cent), while the smallest share was for the RTA involving the EU with the Faroe Islands.
1
2
Of the seventy-four RTAs included in this survey, only four have not yet been notified to the WTO as of 18 July 2007. They are the Andean Community, the Group of Three, Mexico–Northern Triangle and Mexico–Uruguay. As of 15 April 2008, 150 RTAs in force have been notified to the WTO under either GATT Article XXIV or the Enabling Clause of 1979. A further fifty-one RTAs in force have been notified under GATS Article V.
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2.2 Other stylized facts Crawford and Fiorentino (2005) and Fiorentino, Verdeja and Toqueboeuf (2007) have provided a comprehensive picture of the current RTA landscape. They document the continuing increase in the number of RTAs being formed. Even countries in East Asia that have traditionally eschewed preferential trade arrangements have now become active players in regional trade negotiations. RTAs between developed and developing countries and cross-regional agreements are on the increase. Many of the patterns they have documented are apparent in the list of RTAs included in the survey. A large number of the RTAs in the sample were formed just recently. Forty came into force at the beginning of the current decade and twenty-two in the 1990s. Only four came into force in the 1980s; four in the 1970s; and four before 1970. The list is also geographically diverse with RTAs from Europe, North America, the Caribbean, Latin America, Asia–Pacific, Africa and the Middle East. A large majority (forty-six) of the RTAs involve members who are a mix of developed and developing countries.3 Twenty-two RTAs involve only developing countries as members while six are RTAs with developed members only. Finally, there is a pronounced hub-and-spoke and cross-regional pattern in the RTAs in the sample. The largest constellations are grouped around the EU (future accession countries, Euromed and others), EFTA and the US. But there are other active RTA players, which includes Mexico (with ten RTAs), Singapore (with six RTAs), Australia (with five RTAs), Chile (with five RTAs) and Canada (with four RTAs). The sample is dominated by free trade agreements with just a few preferential agreements of partial scope (EU–OCT, SAPTA and SPARTECA), although there is a sizeable number of customs unions (Andean Community, CACM, CARICOM, CEMAC, EU, EU–Andorra, EU–Turkey, GCC, MERCOSUR and UEMOA). The prominent hub-and-spoke and cross-regional pattern of the RTAs in the sample accentuates features of the competition provisions negotiated by the major hubs – the EU, the US and the EFTA countries – and to a certain extent the other major players. It would appear that each hub was negotiating according to a certain competition template in mind. Thus, while there could be regional (Asia–Pacific v. Latin 3
‘Developed countries’ refers to Australia, Canada, the EU, EFTA, Japan, New Zealand and the US. All other countries are classified as developing countries.
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American) and temporal (earlier as opposed to later RTAs) differences in competition provisions, the more pronounced differences that are highlighted in this paper are those that arise from the identity of the hub country.
3
Methodological approach to the mapping
As noted in the introduction, there has been a recent spate of papers and books on competition provisions in RTAs. But many of these recent publications focused primarily on the competition policy chapter of the RTA. The OECD study, for example, contains a taxonomy of the provisions contained in the competition policy chapters or articles of about eighty-six RTAs. The taxonomy distinguishes different types of provisions addressing co-operation and coordination among competition agencies, types of anti-competitive behaviour addressed by the agreement, dispute settlement, special and differential treatment and clauses regarding non-discrimination, transparency and due process in the competition policy chapter. Anderson and Evenett (2006) have emphasized the importance of not neglecting competition-related provisions that very often appear in other chapters of the trade agreement, mostly in services, government procurement and intellectual property. In their view, the sector-specific competition provisions in a regional trade agreement may have stronger pro-competitive effects than the provisions in the competition policy chapter itself, assuming that the trade agreement even has one.4 Secondly, they point out that competition principles are found in the provisions dealing with monopolies, whether public or private and state aid. State aid provisions are almost universally found in the free trade agreements involving the EU or EFTA. Some trade agreements bundle these provisions on monopolies and state aid in the competition policy chapter, but a large number do not. Focusing only on the competition policy chapter of a trade agreement would underestimate the extent to which competition principles discipline monopolies and state aid.
4
They contend that one way of appreciating the importance of sector-specific competition principles is to consider how they appear in WTO agreements dealing with services (GATS) and intellectual property (TRIPS). GATS Article VIII deals with monopolies and exclusive services suppliers, while GATS Article IX deals with restrictive business practices. TRIPS Article 40 refers to licensing practices or conditions pertaining to intellectual property rights which restrain competition.
competition provisions in rtas
423
Thirdly, mappings that focus only on the competition policy chapter of an RTA will miss the significance of what they refer to as ‘horizontal principles’ relating to non-discrimination, procedural fairness and transparency that are not specific to the competition policy chapter. They argue that these horizontal principles may nevertheless be applicable or have a bearing on competition law and policy. Now it may not often be clear from the wording of these horizontal principles in regional trade agreements whether they apply to competition policy or not. The answer would appear to depend on the specifics of each agreement or to the facts of the case. The safer course of action would be to make every effort to reflect the presence of these horizontal principles in the agreements. Finally, they take issue with one of the conclusions reached in the OECD study that ‘trade is the over-riding principle’ of the competition policy chapter in regional trade agreements. They argue that incorporation of competition principles in trade agreements does not necessarily risk subordinating the objectives of competition policy (i.e. even-handed adjudication of business practices based on their contribution to economic efficiency and/or consumer welfare) to narrow mercantilist interests. To substantiate this point, they point to a number of the agreements that refer explicitly to the objectives of competition-related provisions as being to advance competition, consumer welfare and economic efficiency. Their critique suggests several ways in which competition provisions in RTAs can be mapped in a way that improves on the earlier literature. First, one must include those competition provisions that appear in sectoral chapters of the agreement dealing with services (in particular, telecommunications and financial services), government procurement and intellectual property. Secondly, one needs to reflect general principles regarding non-discrimination, transparency and procedural fairness which have potential application to competition policy and law. Thirdly, anti-competitive provisions applying to monopolies and state aid, whether they are in or outside the competition policy chapter, needs to be captured. Finally, it will be necessary to examine to what extent broader competition goals are reflected in the objectives of the RTA. The competition template proposed in this paper attempts to remedy these points. It is divided into four broad parts, reflecting the discussion by Anderson and Evenett. The first part examines the overall objectives of the RTA. The second pertains to the horizontal principles of nondiscrimination, transparency and procedural fairness in the agreement.
424
robert teh
Table 8.1 Competition template Elements 1
General objectives of RTA Promote and advance conditions of fair competition between parties Establish co-operation in the field of competition 2 Horizontal principles Transparency Non-discrimination Procedural fairness 3 Sectoral competition provisions a. Investment Performance requirements Information requirements b. Services National treatment Monopolies and exclusive service providers i) Financial services ii) Telecommunications Major suppliers/competitive safeguards Universal service Value-added services iii) Maritime transport c. Government procurement Tendering principles (including non-disclosure of confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts d. Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights 4 Competition policy a. Objectives Fulfil objectives of agreement by promoting fair competition and curbing anti-competitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition
competition provisions in rtas
Table 8.1 (cont.) Elements b.
Treaties regulating competition Other bilateral/plurilateral agreement Existing multilateral agreement (e.g. GATT)
c.
National competition requirements Competition law/measures Competition authority
d.
Regulated anti-competitive behaviour Concerted practices, unfair business practices Abuse of market dominance Undertakings with special or exclusive rights/state enterprises Monopoly State aid Mergers and acquisitions Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical co-operation) Dispute settlement Complete exclusion of competition provisions Partial exclusion of competition provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
e.
f. g.
h. i.
425
Table 8.2 Competition mapping
Elements General objectives of RTA Promote and advance conditions of fair competition between parties Establish co-operation in the field of competition 2 Horizontal principles Transparency Non-discrimination Procedural fairness 3 Sectoral competition provisions a. Investment Performance requirements Information requirements b. Services National treatment Monopolies and exclusive service providers i) Financial services ii) Telecommunications Major suppliers/competitive safeguards Universal service Value-added services iii) Maritime transport
AFTA
ALADI
Andean Community
Australia– Singapore
Australia– Thailand
0
0
0
0
0
0
0
0
0
0
0 0 0
0 0 0
0 0 0
1 0 0
1 0 1
0 0
0 0
0 0
0 0
0 0
0 0 0
0 0 0
1 0 0
1 1 0
1 0 0
0 0 0 0
0 0 0 0
0 0 0 0
1 0 0 0
0 0 0 0
1
c.
Government procurement Tendering principles (including non-disclosure of
d.
4 a.
b.
c.
d.
confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights Competition policy Objectives Fulfil objectives of agreement by promoting fair competition and curbing anti-competitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition Treaties regulating competition Other bilateral/plurilateral agreement Existing multilateral agreement (e.g. GATT) National competition requirements Competition law/measures Competition authority Regulated anti-competitive behaviour Concerted practices, unfair business practices Abuse of market dominance
0
0
0
1
0
0
0
0
0
0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
1 0
0 0
0 1
0 1
0 1
0
0
0
1
1
0 0
0 0
1 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1 0
1 0
0 0
0 0
1 1
1 1
1 1
Table 8.2 (cont.) Elements Undertakings with special or exclusive rights/state
e.
f. g.
h. i.
enterprises Monopoly State aid Mergers and acquisitions Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical co-operation) Dispute settlement Complete exclusion of competition provisions Partial exclusion of competition provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
AFTA
ALADI
Andean Community
Australia– Singapore
Australia– Thailand
0
0
0
1
0
0 0 0
0 0 0
0 0 0
0 0 1
0 0 1
0 0 0 0 0
0 0 0 0 0
1 1 0 1 0
1 1 1 0 0
1 1 1 0 0
0 0 0
0 0 0
0 0 0
1 0 0
1 0 0
0 0 0
0 0 0
1 1 1
1 1 1
1 1 1
Table 8.2 (cont.)
Elements 1
3 a.
b.
i) ii)
CACM
Canada– Chile
Canada– Costa Rica
Canada– Israel
CARICOM
0
0
1
1
1
0
0
0
0
0
0
0
1 0 1
0 0 0
1 0 1
1 0 1
1 0 0
0 1 0
1 1
0 0
1 1
0 0
0 0
0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
1 1 1
0 0 0
0 0 1
0 0 0
0 0 0
0 0 0
General objectives of RTA Promote and advance conditions of fair
2
Australia– US
competition between parties Establish co-operation in the field of competition Horizontal principles Transparency Non-discrimination Procedural fairness Sectoral competition provisions Investment Performance requirements Information requirements Services National treatment Monopolies and exclusive service providers Financial services Telecommunications Major suppliers/competitive safeguards Universal service Value-added services
Table 8.2 (cont.) Elements iii) Maritime transport c. Government procurement Tendering principles (including nondisclosure of confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts d. Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights 4 Competition policy a. Objectives Fulfil objectives of agreement by promoting fair competition and curbing anti-competitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition b. Treaties regulating competition Other bilateral/plurilateral agreement
Australia– US
CACM
Canada– Chile
Canada– Costa Rica
Canada– Israel
CARICOM
0
0
0
0
0
0
1
0
1
0
0
0
1
0
1
0
0
0
1 1
0 0
0 0
0 0
0 0
0 0
1
0
0
0
0
0
0 1
0 0
0 1
0 1
0 1
0 1
1
0
1
1
1
1
1 0
0 0
0 1
0 1
0 1
1 0
1
0
0
0
0
0
Existing multilateral agreement (e.g. GATT)
c.
d.
e.
f. g.
h. i.
National competition requirements Competition law/measures Competition authority Regulated anti-competitive behaviour Concerted practices, unfair business practices Abuse of market dominance Undertakings with special or exclusive rights/state enterprises Monopoly State aid Mergers and acquisitions Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical co-operation) Dispute settlement Complete exclusion of competition provisions Partial exclusion of competition provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
1
0
0
0
0
0
1 1
0 0
1 0
1 1
1 0
1 1
0
0
0
1
0
1
0 1
0 0
0 1
1 0
0 1
1 0
1 0 0
0 0 0
1 0 0
0 0 1
1 0 0
1 0 0
1 1 1 0 0
0 0 0 0 0
1 1 1 0 0
1 1 1 0 1
1 1 1 0 0
1 0 1 1 0
0
0
1
0
1
0
1 1
0 0
0 0
1 0
0 0
0 0
1 1 1
0 0 0
0 0 0
1 1 1
0 0 0
1 1 1
Table 8.2 (cont.) Elements 1
3 a.
b.
i) ii)
CER
China–Hong Kong
China– Macao
COMESA
European Union
0
1
0
0
0
0
0
0
0
0
0
0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 1 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0 0
0 1 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
General objectives of RTA Promote and advance conditions of fair
2
CEMAC
competition between parties Establish co-operation in the field of competition Horizontal principles Transparency Non-discrimination Procedural fairness Sectoral competition provisions Investment Performance requirements Information requirements Services National treatment Monopolies and exclusive service providers Financial services Telecommunications Major suppliers/competitive safeguards Universal service Value-added services
iii) Maritime transport c. Government procurement Tendering principles (including nondisclosure of confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts d. Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights 4 Competition policy a. Objectives Fulfil objectives of agreement by promoting fair competition and curbing anticompetitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition b. Treaties regulating competition Other bilateral/plurilateral agreement Existing multilateral agreement (e.g. GATT) c. National competition requirements Competition law/measures Competition authority
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
0 0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0 1
0 1
0 0
0 0
0 1
0 1
0
0
0
0
1
0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1 0
0 0
0 0
0 0
0 0
0 0
1 0
0 0
0 0
0 0
0 0
Table 8.2 (cont.) Elements d.
f. g.
h. i.
CER
China–Hong Kong
China– Macao
COMESA
European Union
1
1
0
0
1
1
1 0
0 0
0 0
0 0
0 0
1 1
0 1 0
0 1 1
0 0 0
0 0 0
0 0 0
1 1 1
0 0 0 1 0
0 1 1 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 1 0
0
0
0
0
0
0
0 0
0 0
0 0
0 0
0 0
0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
Regulated anti-competitive behaviour Concerted practices, unfair business
e.
CEMAC
practices Abuse of market dominance Undertakings with special or exclusive rights/state enterprises Monopoly State aid Mergers and acquisitions Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical co-operation) Dispute settlement Complete exclusion of competition provisions Partial exclusion of competition provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
Table 8.2 (cont.)
Elements General objectives of RTA Promote and advance conditions of fair competition between parties Establish co-operation in the field of competition 2 Horizontal principles Transparency Non-discrimination Procedural fairness 3 Sectoral competition provisions a. Investment Performance requirements Information requirements b. Services National treatment Monopolies and exclusive service providers i) Financial services ii) Telecommunications Major suppliers/competitive safeguards Universal service Value-added services iii) Maritime transport
EU–Algeria EU–Andorra
EU–Chile EU–Croatia
EU–Egypt
EU–Faroe Islands
0
0
0
0
0
1
0
0
1
0
0
0
0 0 0
0 0 0
1 0 0
0 0 0
0 0 0
0 1 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0 0
0 0 0
1 0 1
0 0 0
0 0 0
0 0 0
0 0 0 1
0 0 0 0
1 1 0 0
0 0 0 0
0 0 0 0
0 0 0 0
1
Table 8.2 (cont.) Elements c.
d.
4 a.
b.
Government procurement Tendering principles (including nondisclosure of confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights Competition policy Objectives Fulfil objectives of agreement by promoting fair competition and curbing anti-competitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition Treaties regulating competition Other bilateral/plurilateral agreement Existing multilateral agreement (e.g. GATT)
EU–Algeria EU–Andorra
EU–Chile EU–Croatia
EU–Egypt
EU–Faroe Islands
0
0
1
0
0
0
0
0
1
0
0
0
0 0
0 0
1 1
0 0
0 0
0 0
0
0
0
0
0
0
0 1
0 0
0 1
0 1
0 1
0 1
0
0
1
0
0
0
0 0
0 0
0 1
0 0
0 0
0 0
0 0
0 0
0 0
1 0
0 1
0 0
c.
d.
e.
f. g.
h. i.
National competition requirements Competition law/measures Competition authority Regulated anti-competitive behaviour Concerted practices, unfair business practices Abuse of market dominance Undertakings with special or exclusive rights/state enterprises Monopoly State aid Mergers and acquisitions Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical co-operation) Dispute settlement Complete exclusion of competition provisions Partial exclusion of competition provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
0 0
0 0
0 0
0 1
0 0
0 0
1
0
1
1
1
1
1 1
0 0
1 1
1 1
1 1
1 0
1 0 0
0 0 0
0 0 0
1 1 0
1 1 0
0 1 0
1 1 1 0 1
0 0 0 0 0
1 1 1 0 1
0 0 1 0 0
1 0 1 0 0
0 0 0 0 0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0 0 0
0 0 0
1 0 0
1 0 0
1 0 0
0 0 0
Table 8.2 (cont.)
Elements 1
EU– FYROM
EU– Israel
EU– Jordan
EU– Lebanon
EU– Mexico
EU– Morocco
0
0
0
0
0
0
0
0
0
0
0
0
0 0 1
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0 0
0 0 0
0 0 0
0 0 0
1 1 0
0 0 0
0 0 0 0
0 0 0 0
0 0 0 1
0 0 0 0
0 0 0 0
0 0 0 0
General objectives of RTA Promote and advance conditions of fair
competition between parties Establish co-operation in the field of competition 2 Horizontal principles Transparency Non-discrimination Procedural fairness 3 Sectoral competition provisions a. Investment Performance requirements Information requirements b. Services National treatment Monopolies and exclusive service providers i) Financial services ii) Telecommunications Major suppliers/competitive safeguards Universal service Value-added services iii) Maritime transport
c.
Government procurement Tendering principles (including non-disclosure
d.
4 a.
b.
c.
d.
of confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights Competition policy Objectives Fulfil objectives of agreement by promoting fair competition and curbing anti-competitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition Treaties regulating competition Other bilateral/plurilateral agreement Existing multilateral agreement (e.g. GATT) National competition requirements Competition law/measures Competition authority Regulated anti-competitive behaviour Concerted practices, unfair business practices
0
0
0
0
0
0
0
0
0
0
0
0
0 0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0 1
0 1
0 1
0 1
0 1
0 1
0
0
0
0
1
0
0 0
0 0
0 0
0 0
0 1
0 0
1 0
0 1
1 1
0 0
0 0
1 1
0 0
0 0
0 0
0 0
1 0
0 0
1
1
1
1
1
1
Table 8.2 (cont.) Elements Abuse of market dominance Undertakings with special or exclusive rights/state
EU– FYROM
EU– Israel
EU– Jordan
EU– Lebanon
EU– Mexico
EU– Morocco
1 1
1 1
1 1
1 1
1 1
1 1
1 0 0
1 1 0
1 1 0
1 0 0
1 0 1
1 1 0
1 0 1 0 0
1 0 1 0 0
1 1 0 0 1
1 0 1 0 0
1 1 1 0 1
1 0 1 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 1
0 0 0
1 0 0
1 0 0
1 0 0
0 0 0
1 0 0
1 0 0
enterprises Monopoly State aid Mergers and acquisitions
e.
f. g.
h. i.
Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical co-operation) Dispute settlement Complete exclusion of competition provisions Partial exclusion of competition provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
Table 8.2 (cont.)
Elements 1
2
3 a.
b.
i) ii)
iii)
General objectives of RTA Promote and advance conditions of fair competition between parties Establish co-operation in the field of competition Horizontal principles Transparency Non-discrimination Procedural fairness Sectoral competition provisions Investment Performance requirements Information requirements Services National treatment Monopolies and exclusive service providers Financial services Telecommunications Major suppliers/competitive safeguards Universal service Value-added services Maritime transport
EU– OCT
EU–Palestinian Authority
EU–South Africa
EU–Switzerland and Liechtenstein
EU– Syria
EU– Tunisia
0
0
0
1
0
0
0
0
0
0
0
0
1 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0 0 0 1
0 0 0 0
0 0 0 1
0 0 0 0
0 0 0 0
0 0 0 0
Table 8.2 (cont.) Elements c.
d.
4 a.
Government procurement Tendering principles (including nondisclosure of confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights Competition policy Objectives Fulfil objectives of agreement by promoting fair competition and curbing anti-competitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition
EU– OCT
EU–Palestinian Authority
EU–South Africa
EU–Switzerland and Liechtenstein
EU– Syria
EU– Tunisia
0
0
0
0
0
0
0
0
0
0
0
0
0 0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0 1
0 1
0 1
0 1
0 0
0 1
0
0
0
0
0
0
0 0
0 0
0 0
0 0
0 0
0 0
b.
Treaties regulating competition Other bilateral/plurilateral agreement Existing multilateral agreement (e.g.
c.
d.
e.
f. g.
GATT) National competition requirements Competition law/measures Competition authority Regulated anti-competitive behaviour Concerted practices, unfair business practices Abuse of market dominance Undertakings with special or exclusive rights/state enterprises Monopoly State aid Mergers and acquisitions Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical cooperation) Dispute settlement Complete exclusion of competition provisions
0 0
1 1
1 0
0 0
0 0
1 1
1 0
0 0
1 0
0 0
0 0
0 0
1
1
1
1
0
1
1 0
1 1
1 0
1 0
0 0
1 1
0 0 0
1 1 0
0 1 0
0 1 0
0 0 0
1 1 0
0 0 0 0 1
1 0 1 0 0
1 0 1 0 1
1 0 0 0 0
0 0 0 0 0
1 0 1 0 0
0
0
0
0
0
0
Table 8.2 (cont.) Elements Partial exclusion of competition
h. i.
provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
EU– OCT
EU–Palestinian Authority
EU–South Africa
EU–Switzerland and Liechtenstein
EU– Syria
EU– Tunisia
0
0
0
0
0
0
0
0
0
0
0
0
0 0 0
1 0 0
0 0 0
0 0 0
0 0 0
1 0 0
Table 8.2 (cont.) Elements General objectives of RTA Promote and advance conditions of fair competition between parties Establish co-operation in the field of competition 2 Horizontal principles Transparency Non-discrimination Procedural fairness 3 Sectoral competition provisions a. Investment Performance requirements Information requirements b. Services National treatment Monopolies and exclusive service providers i) Financial services ii) Telecommunications Major suppliers/competitive safeguards Universal service Value-added services iii) Maritime transport
EU–Turkey
EEA
EFTA
EFTA–Chile
EFTA– Croatia
EFTA– FYROM
0
1
1
1
1
1
0
0
0
0
0
0
0 0 0
0 1 0
1 0 0
1 0 0
0 0 0
0 0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0 0
0 0 0
0 0 0
1 0 0
0 0 0
0 0 0
0 0 0 0
0 0 0 1
0 0 0 0
1 1 0 0
0 0 0 0
0 0 0 0
1
Table 8.2 (cont.) Elements c.
d.
4 a.
b.
Government procurement Tendering principles (including non-disclosure of confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights Competition policy Objectives Fulfil objectives of agreement by promoting fair competition and curbing anti-competitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition Treaties regulating competition Other bilateral/plurilateral agreement Existing multilateral agreement (e.g. GATT)
EU–Turkey
EEA
EFTA
EFTA–Chile
EFTA– Croatia
EFTA– FYROM
0
0
0
0
0
0
0
0
0
1
0
0
0 0
0 0
0 0
1 1
0 0
0 0
0
0
0
0
0
0
0 1
0 1
0 1
0 1
0 1
0 1
0
1
0
1
0
0
0 0
0 0
0 0
0 1
0 0
0 0
1 1
0 0
0 0
0 0
0 0
0 0
c.
National competition requirements Competition law/measures Competition authority
d.
e.
f. g.
h. i.
Regulated anti-competitive behaviour Concerted practices, unfair business practices Abuse of market dominance Undertakings with special or exclusive rights/state enterprises Monopoly State aid Mergers and acquisitions Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical co-operation) Dispute settlement Complete exclusion of competition provisions Partial exclusion of competition provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
1 1
0 0
0 0
0 0
0 0
0 0
1 1 1
1 1 1
1 1 1
1 1 1
1 1 1
1 1 1
1 1 0
1 1 1
1 1 0
0 1 1
0 0 0
1 0 0
1 1 1 0 0
1 1 1 1 0
0 0 1 0 0
1 1 1 0 0
0 0 1 0 0
0 0 0 0 0
0
0
0
1
0
0
0 0
0 0
0 0
0 0
0 0
0 0
0 0 0
0 0 0
0 0 0
1 1 1
0 0 0
0 0 0
Table 8.2 (cont.)
Elements 1
EFTA– Israel
EFTA– Jordan
EFTA– Morocco
EFTA–Palestinian Authority
EFTA– Singapore
EFTA– Tunisia
1
1
1
1
1
1
0
0
0
0
0
0
0 1 0
0 0 0
0 0 0
0 0 0
1 0 0
0 0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0 0
0 0 0
0 0 0
0 0 0
1 1 0
0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
1 1 0 0
0 0 0 0
General objectives of RTA Promote and advance conditions of fair
competition between parties Establish co-operation in the field of competition 2 Horizontal principles Transparency Non-discrimination Procedural fairness 3 Sectoral competition provisions a. Investment Performance requirements Information requirements b. Services National treatment Monopolies and exclusive service providers i) Financial services ii) Telecommunications Major suppliers/competitive safeguards Universal service Value-added services iii) Maritime transport
c.
Government procurement Tendering principles (including non-
d.
4 a.
b.
c.
disclosure of confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights Competition policy Objectives Fulfil objectives of agreement by promoting fair competition and curbing anticompetitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition Treaties regulating competition Other bilateral/plurilateral agreement Existing multilateral agreement (e.g. GATT) National competition requirements Competition law/measures Competition authority
0
0
0
0
0
0
0
0
0
0
0
0
0 0
0 0
0 0
0 0
0 0
0 0
0
0
0
0
0
0
0 1
0 1
0 1
0 1
0 1
0 1
0
0
0
0
0
0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
Table 8.2 (cont.) Elements d.
f. g.
h. i.
EFTA– Jordan
EFTA– Morocco
EFTA–Palestinian Authority
EFTA– Singapore
EFTA– Tunisia
1
1
1
1
1
1
1 1
1 1
1 1
1 1
1 0
1 1
1 1 0
1 0 0
1 1 0
1 1 0
0 0 0
1 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
1 0 1 0 0
0 0 1 0 0
0
0
0
0
1
0
0 0
0 0
0 0
0 0
0 0
0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
Regulated anti-competitive behaviour Concerted practices, unfair business
e.
EFTA– Israel
practices Abuse of market dominance Undertakings with special or exclusive rights/state enterprises Monopoly State aid Mergers and acquisitions Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical co-operation) Dispute settlement Complete exclusion of competition provisions Partial exclusion of competition provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
Table 8.2 (cont.)
Elements 1
EFTA– Turkey
GCC
Group of Three
Japan– Singapore
Korea– Chile MERCOSUR
1
0
1
0
1
0
0
0
0
1
0
0
0 0 0
0 0 0
1 0 0
1 0 0
1 0 1
0 0 0
0 0
0 0
0 1
1 0
1 1
0 0
0 0 0
0 0 0
0 0 0
1 1 0
0 0 0
1 0 0
0 0 0 0
0 0 0 0
1 0 1 0
1 1 0 0
1 0 1 0
0 0 0 0
General objectives of RTA Promote and advance conditions of fair
competition between parties Establish co-operation in the field of competition 2 Horizontal principles Transparency Non-discrimination Procedural fairness 3 Sectoral competition provisions a. Investment Performance requirements Information requirements b. Services National treatment Monopolies and exclusive service providers i) Financial services ii) Telecommunications Major suppliers/competitive safeguards Universal service Value-added services iii) Maritime transport
Table 8.2 (cont.) Elements c.
4 a.
b.
c.
GCC
Group of Three
Japan– Singapore
Korea– Chile MERCOSUR
0
0
1
0
1
0
0
0
1
0
0
0
0 0
0 0
1 1
0 0
1 0
0 0
0
0
0
0
0
0
0 1
0 0
1 0
0 1
0 1
0 1
0
0
0
0
1
1
0 0
0 0
0 0
0 0
0 1
0 0
0 0
0 0
0 0
0 0
0 1
0 1
0
0
0
1
0
1
Government procurement Tendering principles (including non-disclosure
d.
EFTA– Turkey
of confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights Competition policy Objectives Fulfil objectives of agreement by promoting fair competition and curbing anti-competitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition Treaties regulating competition Other bilateral/plurilateral agreement Existing multilateral agreement (e.g. GATT) National competition requirements Competition law/measures
d.
e.
f. g.
h. i.
Competition authority Regulated anti-competitive behaviour Concerted practices, unfair business practices Abuse of market dominance Undertakings with special or exclusive rights/state enterprises Monopoly State aid Mergers and acquisitions Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical co-operation) Dispute settlement Complete exclusion of competition provisions Partial exclusion of competition provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
0
0
0
0
0
0
1 1 1
0 0 0
0 0 1
0 0 0
1 1 1
1 1 0
0 1 0
0 0 0
1 0 0
0 0 0
0 0 0
0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
1 1 1 0 1
1 1 1 0 1
1 0 0 1 1
0 0 0
0 0 0
0 0 1
1 0 0
1 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
Table 8.2 (cont.)
Elements 1
Mexico– Mexico– Mexico– Mexico– Mexico– Mexico– Northern Chile EFTA Israel Japan Nicaragua Triangle
Mexico– Uruguay
1
1
1
0
1
1
1
0
0
0
1
0
0
0
1 0 1
1 0 0
1 0 1
1 0 1
1 0 0
1 0 0
1 0 0
1 1
0 0
0 0
1 1
1 1
0 1
0 1
1 0 0
1 0 1
0 0 0
0 0 0
0 0 1
1 0 1
0 0 0
1 0 1 0
0 0 0 0
0 0 0 0
0 0 0 0
1 0 1 0
1 0 1 0
1 0 1 0
General objectives of RTA Promote and advance conditions of fair
competition between parties Establish co-operation in the field of competition 2 Horizontal principles Transparency Non-discrimination Procedural fairness 3 Sectoral competition provisions a. Investment Performance requirements Information requirements b. Services National treatment Monopolies and exclusive service providers i) Financial services ii) Telecommunications Major suppliers/competitive safeguards Universal service Value-added services iii) Maritime transport
c.
d.
4 a.
b.
c.
d.
Government procurement Tendering principles (including non-disclosure of confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights Competition policy Objectives Fulfil objectives of agreement by promoting fair competition and curbing anti-competitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition Treaties regulating competition Other bilateral/plurilateral agreement Existing multilateral agreement (e.g. GATT) National competition requirements Competition law/measures Competition authority Regulated anti-competitive behaviour Concerted practices, unfair business practices Abuse of market dominance
0
1
1
1
1
0
0
0
0
1
0
1
0
0
0 0
0 1
1 1
0 1
1 1
0 0
0 0
0
0
0
0
0
0
0
1 1
0 1
0 1
0 1
1 0
1 0
1 1
1
1
1
0
0
0
1
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1 0
1 0
1 0
1 0
0 0
0 0
1 0
0 0
1 1
0 0
0 0
0 0
0 0
0 0
Table 8.2 (cont.)
Elements Undertakings with special or exclusive rights/state
e.
f. g.
h. i.
enterprises Monopoly State aid Mergers and acquisitions Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical co-operation) Dispute settlement Complete exclusion of competition provisions Partial exclusion of competition provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
Mexico– Mexico– Mexico– Mexico– Mexico– Mexico– Northern Chile EFTA Israel Japan Nicaragua Triangle
Mexico– Uruguay
1
0
1
0
0
0
1
1 0 0
0 0 1
1 0 0
0 0 0
0 0 0
0 0 0
1 0 0
1 0 1 0 0
1 1 1 0 0
1 1 1 0 0
0 1 1 0 1
0 0 0 0 0
0 0 0 0 0
1 0 1 0 0
1 0 1
0 0 1
1 0 0
1 0 0
0 0 0
0 0 0
1 0 1
0 0 0
0 0 0
0 1 0
1 1 1
0 0 0
0 0 0
0 0 0
Table 8.2 (cont.) Elements 1
NAFTA
New Zealand– Singapore
SADC
SAFTA
SPARTECA
Turkey– Israel
US– Bahrain
1
0
0
1
0
1
0
0
0
0
0
0
0
0
1 0 1
1 0 0
0 0 0
0 0 0
0 0 0
0 0 0
1 0 1
1 1
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1 0
0 0
0 0
0 0
0 0
0 0
1
0
0
0
0
0
0
1 0 1 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
1 1 1 0
General objectives of RTA Promote and advance conditions of fair
competition between parties Establish co-operation in the field of competition 2 Horizontal principles Transparency Non-discrimination Procedural fairness 3 Sectoral competition provisions a. Investment Performance requirements Information requirements b. Services National treatment Monopolies and exclusive service providers i) Financial services ii) Telecommunications Major suppliers/competitive safeguards Universal service Value-added services iii) Maritime transport
Table 8.2 (cont.) Elements c.
4 a.
b.
New Zealand– Singapore
SADC
SAFTA
SPARTECA
Turkey– Israel
US– Bahrain
0
0
0
0
0
0
1
1
0
0
0
0
0
1
0 0
0 1
0 0
0 0
0 0
0 0
1 0
1
0
0
0
0
0
0
1 1
0 1
0 1
0 0
0 0
0 1
0 0
1
1
0
0
0
0
0
0 1
0 0
0 0
0 0
0 0
0 0
0 0
0 0
1 0
0 0
0 0
0 0
0 1
0 0
Government procurement Tendering principles (including non-
d.
NAFTA
disclosure of confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights Competition policy Objectives Fulfil objectives of agreement by promoting fair competition and curbing anti-competitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition Treaties regulating competition Other bilateral/plurilateral agreement Existing multilateral agreement (e.g. GATT)
c.
National competition requirements Competition law/measures Competition authority
d.
f. g.
h. i.
1 0
0 0
0 0
0 0
0 0
0 0
0
0
1
0
0
1
0
0 1
0 0
0 0
0 0
0 0
1 0
0 0
1 0 0
0 0 0
0 0 0
0 0 0
0 0 0
1 1 0
0 0 0
1 1 1 0 0
1 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
1 0 1 0 0
0 0 0 0 0
1
0
0
0
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
Regulated anti-competitive behaviour Concerted practices, unfair business
e.
1 0
practices Abuse of market dominance Undertakings with special or exclusive rights/state enterprises Monopoly State aid Mergers and acquisitions Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical co-operation) Dispute settlement Complete exclusion of competition provisions Partial exclusion of competition provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
Table 8.2 (cont.)
Elements 1
3 a.
b.
i) ii)
US– Chile
US– Israel
US– Jordan
US– Morocco
US– Singapore
UEMOA
1
1
0
0
0
0
0
0
0
0
0
0
0
0
1 0 1
1 0 1
0 0 0
1 0 1
1 0 1
1 0 1
0 0 0
1 1
1 1
0 0
0 0
1 1
1 1
0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
1 1
1 1
0 0
1 1
1 1
1 1
0 0
General objectives of RTA Promote and advance conditions of fair
2
US–CAFTA– Dominican Republic
competition between parties Establish co-operation in the field of competition Horizontal principles Transparency Non-discrimination Procedural fairness Sectoral competition provisions Investment Performance requirements Information requirements Services National treatment Monopolies and exclusive service providers Financial services Telecommunications Major suppliers/competitive safeguards Universal service
Value-added services iii) Maritime transport c. Government procurement Tendering principles (including nondisclosure of confidential information) Information on intended procurements (including technical specifications) Limited tendering Treatment of tenders and awarding of contracts d. Intellectual property Permit use of patents, copyrights etc. to remedy anti-competitive practice Prevent abuse of IP rights 4 Competition policy a. Objectives Fulfil objectives of agreement by promoting fair competition and curbing anti-competitive practices Consumer welfare or economic efficiency Increase co-operation on issues of competition b. Treaties regulating competition Other bilateral/plurilateral agreement Existing multilateral agreement (e.g. GATT)
1 0
1 0
0 0
1 0
1 0
0 0
0 0
1
1
0
0
1
0
0
1
1
0
0
1
0
0
1 0
1 0
0 0
0 0
1 0
0 0
0 0
0
0
0
0
0
1
0
1 0
1 1
0 0
0 0
0 0
0 1
0 1
0
0
0
0
0
1
0
0 0
1 0
0 0
0 0
0 0
1 1
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
Table 8.2 (cont.)
Elements c.
f.
US– Israel
US– Jordan
US– Morocco
US– Singapore
UEMOA
0 0
1 1
0 0
0 0
0 0
1 1
0 0
0
0
0
0
0
0
1
0 0
0 1
0 0
0 0
0 0
0 1
1 0
0 0 0
1 0 0
0 0 0
0 0 0
0 0 0
1 0 0
0 1 0
0 0 0 0 0
1 1 1 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 1 0 0
0 0 0 1 0
Regulated anti-competitive behaviour Concerted practices, unfair business
e.
US– Chile
National competition requirements Competition law/measures Competition authority
d.
US–CAFTA– Dominican Republic
practices Abuse of market dominance Undertakings with special or exclusive rights/state enterprises Monopoly State aid Mergers and acquisitions Forms of co-operation Coordination/exchange of information Notification Consultation Regional competition authority Technical assistance (technical co-operation)
g.
h. i.
Dispute settlement Complete exclusion of competition provisions Partial exclusion of competition provisions Institutional arrangement Principles Transparency Non-discrimination Procedural fairness
0
0
0
0
0
0
0
0 0
1 0
0 0
0 0
0 0
1 0
0 0
0 0 0
1 1 1
0 0 0
0 0 0
0 0 0
1 1 1
0 0 0
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robert teh
The third part of the template relates to the sector-specific competition provisions involving investment, services, government procurement and intellectual property. Finally, the last part of the template applies to the competition policy chapter of the agreement, if it exists. This would include provisions on state aid, government enterprises and the like, even though these provisions may not appear in the competition policy chapter of the agreement. Table 8.1 presents the template while Table 8.2 shows the resulting mapping.
4
Analysis of the mapping 4.1
RTA objectives
It may be useful to begin by examining what RTA members see as the main objectives of their agreement. While one expects that removing obstacles to trade or expansion of trade would be universal, a surprisingly large proportion of the RTAs (42 per cent of the sample) see the promotion and advancement of ‘conditions of fair competition’ between the RTA partners as one of the principal objectives of the trade agreement. In a addition, a number of RTAs (EU–Chile, Mexico– Japan and Japan–Singapore) explicitly refer to the establishment of cooperation in the field of competition as an objective of the agreement. This appears to demonstrate that many RTAs place an intrinsic or independent value on the promotion of competition and do not consider it as necessarily subordinate to the trade goals of the agreement.
4.2
Horizontal principles
In the RTAs that were examined, the principles of transparency, nondiscrimination and procedural fairness were found either in the administrative and institutional or final provisions of the agreement or in the competition policy chapter, if the agreement has one. If they appear in the competition policy chapter, they clearly serve as the basis for a specific competition-related obligation. But, even when found in the administrative and institutional or final provisions of the agreement, these general horizontal principles may represent significant competition-related elements of RTAs. Not including them in the mapping may understate their relevance for competition purposes. The mapping has therefore reflected these horizontal principles but distinguished where they appeared in the agreement – in the administrative and institutional
competition provisions in rtas
465
or final provisions of the agreement, in the competition policy chapter or both.
4.2.1 Transparency Twenty-nine (39 per cent of the sample) RTAs require transparency as a horizontal principle that is applied to everything covered by the agreement with twenty RTAs including the principle in the competition policy chapter of the agreement. As a horizontal principle, transparency usually involves publication of laws and measures, notification, and establishment of contact points.5 An RTA member is required promptly to publish or make publicly available laws, regulations, procedures and administrative rulings of general application relating to any matter covered by the agreement. An RTA member is also required to notify other members of any proposed or actual measure that might materially affect the operation of the agreement. RTAs members are further required to designate a contact point to facilitate communications between the members on any matter covered by their agreement. Transparency provisions that are found in the competition policy chapter (twenty RTAs) typically have a narrower focus – the publication of laws promoting fair competition or laws addressing anti-competitive practices.6 4.2.2 Procedural fairness More than one-fifth of the RTAs have procedural fairness in the administrative and institutional or final provisions of the agreement. When found there, procedural fairness imposes two salient obligations on an RTA member. The first is to ensure that its administrative proceedings, involving any matters covered by the agreement, are consistent, impartial and reasonable. Specifically, this means that the citizens of an RTA member that are directly affected by a proceeding are provided reasonable notice of the proceedings; they are afforded a reasonable opportunity to present facts and arguments in support of their positions prior to any final administrative action; and proceedings are in accord with an RTA member’s domestic law. The second is to allow for the review or appeal of any decisions taken in administrative proceedings regarding matters covered by the regional trade agreement. Judicial or administrative tribunals in an RTA member 5 6
See, for example, Articles 16-02, 16-03 and 16-04 of the Chile–Mexico FTA. Article 1207 of the Australia–Thailand FTA.
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robert teh
have to provide the parties to a proceeding with the opportunity to support or defend their respective positions. And, subject to further review or appeal, any decisions reached will be implemented by the authorities with respect to the administrative action at issue.7 Where the provision on procedural fairness is found in the competition policy chapter of the agreement (ten RTAs), the requirement of fairness in an RTA member’s administrative and judicial proceedings applies specifically only to laws and regulations controlling anti-competitive activities.8
4.2.3 Non-discrimination Only rarely is non-discrimination explicitly mentioned as a general principle or found in the administrative and institutional or final provisions of the agreements. It is only found in five of the RTAs in the sample. One important exception is the Agreement on the European Economic Area in which Article 4 states that ‘any discrimination on grounds of nationality shall be prohibited’. The non-discrimination principle can be found more frequently (eleven RTAs) in the competition policy chapter. It requires that enforcement of competition laws by RTA members’ authorities should not discriminate on the basis of the nationality of the subjects of their proceedings.9 4.3
Sectoral provisions
The RTA chapters or sectors where one principally finds competitionconnected provisions include investment, services, government procurement and intellectual property. In services, they appear most frequently in telecommunications, financial services and maritime transport.
4.3.1 Investments Fifteen RTAs (more than one-fifth of the sample) have competitionconnected provisions in the investment chapter of the agreement. They are reflected in the articles related to performance requirements and special formalities and information requirements. 7 8
9
See Articles 1804 and 1805 of the NAFTA. As an example, see Article 134 of the Agreement between Japan and the United Mexican States for the Strengthening of the Economic Partnership. Article 16.1, para. 2, of the US–Chile FTA.
competition provisions in rtas
467
Most investment chapters in RTAs proscribe performance requirements, which are conditions imposed on foreign investors to, for example, export a given level or percentage of goods or services or achieve a given level of domestic content. But, in these RTAs, an exception is made if the performance requirement is to remedy a practice determined to be anti-competitive under the RTA member’s laws. In addition, the investment provisions in RTAs typically allow a member to require a foreign investor to provide information for informational or statistical purposes concerning his investments. The competition-connected provision places an obligation on the RTA member requiring the information to protect confidential information from any disclosure that would prejudice the competitive position of the investor or his investment.
4.3.2 Services In the area of services, there are competition-connected provisions that cut across all services sectors and competition-connected provisions that are specific to a sector. The cross-cutting provisions with competitionconnected elements are found in the articles on national treatment and monopoly or exclusive service suppliers. Thirteen of the RTAs in the sample have used the ‘conditions of competition’ as a benchmark in the definition of national treatment. Essentially, national treatment in the services sector is accorded when the conditions of competition are alike for service suppliers of the home country and suppliers of other RTA members.10 The provision involving monopoly or exclusive service suppliers appears only in five RTAs (Australia–Singapore, CER, EU–Mexico, EFTA–Singapore and Japan– Singapore). The provision requires an RTA member, which has exclusive service suppliers in its territory, not to take actions which substantially prevent competition among those suppliers. Sector-specific provisions are found in telecommunications, in financial services and in maritime transport. 10
The Australia–Thailand agreement, for example, states that a party may meet the requirement of national treatment by according to services and service suppliers of the other party, either formally identical treatment or formally different treatment to that which it accords to its own like services and service suppliers. Formally identical or formally different treatment is considered to be less favourable if it modifies the conditions of competition in favour of services or service suppliers of the party compared to like services or service suppliers of the other party. See Article 810, paras. 2 and 3, of the Australia–Thailand FTA.
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4.3.2.1 Financial services Five of the RTAs in the sample (EU–Chile, Mexico–EFTA, Mexico–Nicaragua, Mexico–Northern Triangle and NAFTA) have employed the conditions of competition as a benchmark in defining national treatment in financial services. 4.3.2.2 Telecommunications Twenty of the RTAs (27 per cent of the sample) have some competition-connected provision in telecommunications. This is the most of any service sector in the sample of RTAs and probably reflects the importance of network effects in telecommunications and the potential for major providers to hold a commercial stranglehold in this sector. The sections of the telecommunications chapter where competition issues are typically raised include the provisions on major suppliers and competitive safeguards, universal access and value-added services. 4.3.2.2.1 Major suppliers/competitive safeguards The requirement is for the RTA members to maintain measures for the purpose of preventing major suppliers from engaging in or continuing anticompetitive practices. The anti-competitive practices could include engaging in anti-competitive cross-subsidization; using information obtained from competitors with anti-competitive results; and not making available to other services suppliers on a timely basis technical information about essential facilities and commercially relevant information which are necessary for them to supply services.11 4.3.2.2.2 Universal service Many agreements explicitly recognize the right of an RTA member to create domestic regulation defining the kind of universal service obligation to be maintained by suppliers. However, in eleven RTAs in the sample, some form of discipline is applied to this right by requiring that the universal service obligation should be neutral with respect to competition.12 4.3.2.2.3 Enhanced or value-added services Given that the potential for revenue growth is probably greatest in value-added services, RTA provisions in this sector tend to favour less regulation. The example 11
12
See Article 112, para. 3, of the Agreement Establishing an Association between the European Community and its Member States, of the One Part, and the Republic of Chile, of the Other Part. See Article 7 of Annex IX to the EFTA–Chile FTA.
competition provisions in rtas
469
provided by the Australia–US agreement is probably typical. In that agreement, neither party may require a provider supplying enhanced or value-added services to: (a) supply such services to the public generally; (b) cost-justify its rates for such services; (c) file a tariff for such services; (d) interconnect its networks with any particular customer for the supply of such services; or (e) conform with any particular standard or technical regulation for interconnection other than for interconnection to a public telecommunications network. However, competition considerations can lead to these requirements being imposed. Thus, the article on enhanced or value-added services in the Australia–US agreement allow such conditions to be placed on the value-added provider if they are to remedy a practice of the provider that has been found to be anti-competitive, or to otherwise promote competition, or safeguard the interests of consumers.13 4.3.2.3 Maritime transport Six of the RTAs in the sample (EU, EU–Algeria, EU–Jordan, EU–OCT, EU–South Africa and EEA) have competition-connected provisions in maritime transport. There is considerable variation in the type and level of commitments and consequentially it was not particularly useful, as in the other services sectors, to further decompose the provisions. The range in the type, level and specificity of commitments can be gleaned in comparing commitments in the EU–Jordan, EU–OCT and EU–South Africa RTAs. In the EU–Jordan agreement, the parties commit to a freely competitive environment in the dry and bulk trade.14 In the EU–OCT agreement, the parties agree, among other things, to implement their competition rules to maritime transport.15 In the EU–South Africa RTA, the parties are to endeavour to apply effectively the principle of unrestricted access to the international maritime market and traffic based on fair competition on a commercial basis.16
13 14
15
16
See Article 12.16, para. 1, of the US–Australia FTA. See Article 39, para. 1(b), of the Euro-Mediterranean Agreement Establishing an Association between the European Communities and Their Member States, of the One Part, and the Hashemite Kingdom of Jordan, of the Other Part. See Article 13, para. 2(b), of the European Council Decision of 27 November 2001 on the Association of the Overseas Countries and Territories with the European Community. See Article 31, para. 1, of the Agreement on Trade, Development and Co-operation between the European Community and its Member States, of the One Part, and the Republic of South Africa, of the Other Part.
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4.3.3 Government procurement Seventeen of the RTAs (about one-quarter of the sample) have some form of competition discipline in the government procurement chapter or article of the agreement. They appear in several important stages of the tendering process affecting: tendering principles, information on intended procurement, limited tendering and awards of contracts. To a large extent, the discipline applies to how procuring entities ought to safeguard information, confidential or otherwise, so that no supplier provided with information or who otherwise provides information or advice to the procuring entity is able to tilt the balance of competition in its favour. 4.3.3.1 Tendering principles In quite a large number of the RTAs, a core principle of the tendering process is the non-disclosure of confidential information without the authorization of the supplier that has furnished the information because disclosure might prejudice fair competition between suppliers.17 4.3.3.2 Information on intended procurements The competition discipline extends to the kind of information that procuring entities could make available to suppliers about intended procurements. While procuring entities are to reply promptly to any request by a supplier for relevant information about a specific procurement, this information should not be disclosed to that supplier in a manner that would give it a competitive edge over other suppliers. This discipline applies also to technical advice that a procuring entity may solicit from a supplier who has a commercial interest in the intended procurement and which would be used in the preparation or adoption of the specifications of a particular procurement. The technical advice should not be such as to have the effect of precluding competition from other suppliers. 4.3.3.3 Limited tendering If open or selective tendering is not possible, the government procurement chapter of the agreement often allows for limited tendering. This involves the procuring entity contacting suppliers individually. Concerns about the favourable treatment of some suppliers can legitimately arise under these circumstances. The threat against competition is limited by specifying the circumstances 17
See Article 15.2, para. 7, of the Australia–US FTA.
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under which limited tendering is allowed. Some of these circumstances include:18 an absence of suitable tenders; the good or service can only be provided by a particular supplier
because of artistic or technical reasons; where a change of supplier would create problems of interchangeability with already existing equipment; for reasons of extreme urgency brought about by unforeseen events; and for quoted goods purchased on a commodity market etc. 4.3.3.4 Award of contract Finally, there is a requirement for procuring entities to respond to requests for information on contract awards or to requests from unsuccessful suppliers about pertinent information concerning reasons for the rejection of their tender. However, the procuring entity may withhold the information should the release of such information prejudice competition between suppliers.19
4.3.4 Intellectual property A fair number of RTAs in the sample (nine RTAs) have competitionconnected provisions in the chapter on intellectual property that guard against abuse by rights holders. The US–Chile agreement, for example, states that nothing in the intellectual property chapter prevents a party from adopting measures necessary to prevent anti-competitive practices that may result from the abuse of intellectual property rights. The RTAs with such provisions include two others where the US is a member – NAFTA and US–CAFTA–Dominican Republic – five involving Mexico (Group of Three, Mexico–Chile, Mexico–Nicaragua, Mexico–Northern Triangle and Mexico–Uruguay) and one involving the ASEAN countries. Although the RTA chapters on intellectual property rights do not permit use of the subject matter of a patent without the authorization of the right-holder, three RTAs (NAFTA, Australia–US and US–Singapore) make an exception if the action is to remedy a practice determined after judicial or administrative process to be anti-competitive. 18
19
See, for example, Article 145 of the Agreement Establishing an Association between the European Community and its Member States, of the One Part, and the Republic of Chile, of the Other Part. See, for example, Article 52 of the New Zealand–Singapore FTA, or Article 15-15, para. 8, of the Mexico–Nicaragua FTA.
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4.4
Competition policy chapter
More than three-quarters of the RTAs in the sample have a competition policy chapter or article in the regional trade agreement. All the RTAs involving only developed countries have included competition policy. Despite the reluctance of many developing countries to multilateral negotiations on competition policy, many of them have shown little reservation in agreeing to such provisions in RTAs. Of the sixty-eight RTAs which have some developing countries as members, fifty have included competition policy.
4.4.1 Objectives of competition policy chapter About 40 per cent of the RTAs with competition policy see its role as preventing the gains in market access from being eroded by anti-competitive behaviour which may be condoned or tolerated by RTA partners. The language often used is curtailing anti-competitive practices that ‘hinder the fulfilment of the objectives of this [trade] agreement’,20 which is of course the expansion of intra-regional trade and investments. While the primary focus is on anti-competitive behaviour by private agents, as one shall see later many of the agreements also recognize the potential anti-competitive effects of state enterprises and state aid. But these specific objectives in the competition policy chapter should be seen in light of the larger objectives of the regional agreement. As discussed earlier, a large proportion of the RTAs included in the survey have made promoting or advancing conditions of fair competition as one of the principal objectives of the RTA. It is necessary to keep this broader set of goals in mind when assessing how the competition policy chapter rules in the agreements should be seen. 4.4.2 Other agreements regulating competition One provision that did not merit attention in other mappings is the reference in the competition policy chapter to other international agreements. More than one-fifth of the RTAs with competition provisions cite provisions in other agreements as additional sources of the members’ bilateral competition policy agreement. Some of the competition policy commitments, such as the adoption or application of measures to regulate anti-competitive behaviour (see below), may refer 20
See Article 51, para. 1, of the EFTA–Mexico FTA.
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to actions that members will take in the future because, for example, legislation still needs to be drafted. Thus, these international agreements can play an important role as transitory sources of rules or disciplines on competition that apply while members of the RTA are in the process of implementing their competition policy commitments. Consideration of these other stand-alone agreements may shed better light on the interpretation of the competition policy provision in the RTA. 4.4.2.1 Competition-related provisions in other agreements All of the Euromed agreements refer to Articles 85 (antitrust), 86 (abuse of a dominant position) and 92 (state aid) of the Treaty Establishing the European Economic Community and for products covered by the Treaty Establishing the European Coal and Steel Community, by those contained in Articles 65 and 66 of that Treaty and the Community rules on state aid, including secondary legislation. The New Zealand–Singapore RTA refers to the non-binding ‘APEC Principles to Enhance Competition and Regulatory Reform’. The Australia–US RTA refers to a number of bilateral competition agreements between the two parties such as the 1982 Agreement Relating to Co-operation on Antitrust Matters and the 1999 Agreement on Mutual Antitrust Enforcement Assistance. 4.4.2.2 Reference to existing multilateral agreements The competition provisions in RTAs often cite multilateral agreements as interim regulating texts until members’ competition policies are enacted. The most common agreement referred to is the GATT, which some RTA members use as a source for state aid regulation. Specifically, GATT Articles VI (anti-dumping and countervailing duties), XVI (subsidies) and XXIII (nullification and impairment) are enlisted as temporary regulating measures of state aid. About one-fifth of the RTAs with competition provisions refer to the GATT as an interim agreement governing competition.
4.4.3 National competition requirements More than 40 per cent of the RTAs (twenty-three RTAs) with competition policy oblige members to adopt or apply laws/measures that regulate anti-competitive behaviour. A great number of these RTAs involve a mix of developed and developing countries. But such provisions are also found in RTAs involving developing countries only (CARICOM and Mexico–Uruguay). A far smaller number of RTAs
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(seven RTAs) require their members to establish national competition authorities. The adoption of competition laws and the creation of competition authorities are both such telling indicators of an agreement’s ability to encourage the regulation of anti-competitive behaviour. While the number of RTAs with requirements to adopt competition laws or establish competition authorities may not appear to be large, one should note that over the past decade or so many countries have succeeded in enacting competition legislation.21 Thus, there may be less need for the RTA to specify such an obligation for its members.
4.4.4 Regulated anti-competitive behaviour The main forms of anti-competitive behaviour which are proscribed or disciplined in the competition policy chapter of the RTAs are concerted practices, abuse of a dominant position, undertakings with special or exclusive rights, and state enterprises. Provisions on monopolies as well as state aid appear in many RTAs. Some of these provisions are in the competition policy chapter of the agreement, but others are not. For the purpose of achieving economy in the mapping, this distinction is not made in the mapping in Table 8.2. Finally, provisions on mergers and acquisitions figure in only a very small number of RTAs. It is clear from these provisions, then, that regional trade agreements are concerned not only with anti-competitive behaviour by private enterprises but also by the activities of public enterprises and the implications for competition of state support or subsidies. 4.4.4.1 Concerted practices About four-fifths (forty-four) of the RTAs with competition policy provisions proscribe any agreements, decisions and concerted practices between enterprises which have as their object or result the prevention, restriction or distortion of competition.22 Some RTAs provide a more detailed description of these concerted practices such as anti-competitive horizontal arrangements (‘collusion’), vertical restraints and predatory pricing.23
21
22 23
See the inventory of competition-related legislation in the Global Competition Forum’s website (www.globalcompetitionforum.org/gcfover.htm) which allows one to track over time the adoption of competition legislation across the world. For each country, the inventory provides information about all competition-related legislation, when these were enacted and other pertinent details, including implementing guidelines. See, for example, Article 18 of the Stockholm Convention (EFTA). Chapter 12, Article 1, of the US–Australia FTA. See also Article 81 of the EC Treaty.
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4.4.4.2 Abuse of a dominant position Provisions on abuse of a dominant position figure in about three-quarters of the RTAs with competition policy provisions. This conduct could take a variety of forms, including the improper manipulation of prices, limiting production or distribution, applying dissimilar conditions to equivalent transactions with other trading parties and making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which have no connection with the contracts.24 4.4.4.3 Undertakings with special or exclusive rights/State enterprises Nearly two-thirds of the RTAs (primarily those involving the EU and EFTA) with competition policy chapters apply competition rules or disciplines to state enterprises and undertakings which an RTA member has given special or exclusive rights. This is circumscribed by the stipulation that the competition rule will apply only in so far as it does not obstruct the performance of the particular tasks assigned to the state enterprise or undertaking with special or exclusive rights.25 4.4.4.4 Monopoly The effect of monopolies, whether private or public, on competition appears to be a widespread concern in these RTAs. Forty-five per cent of the RTAs in the sample have some form of restrictions on their behaviour. While the agreements recognize the right of governments to designate or maintain government monopolies, the RTA provisions require these monopolies to confine their activities to their mandates, to ensure non-discrimination and to act with commercial considerations in mind. For example, Article 12.3(1) of the RTA between the United States and Singapore requires of the monopoly that it ‘acts solely in accordance with commercial considerations in its purchase or sale of the monopoly good or service’ and that it ‘provides non-discriminatory treatment to covered investments, to goods of the other Party, and to service suppliers of the other Party in its purchase or sale of the monopoly good or service’. In another example, NAFTA Article 1502(3) prohibits controls on prices and marketability, transportation and purchase, discriminatory treatment for investments and investors of the other parties, and practices restrictive of free competition in markets other than the one for which the monopoly was designed. 24 25
Part IV, Chapter I, Article 54, of the Agreement on the European Economic Area. See, for example, Article 18, para. 2, of the EFTA–Jordan FTA.
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4.4.4.5 State aid More than 30 per cent of all the RTAs, primarily the EU and EFTA-centred RTAs, include disciplines on state aid. Typically the provision states that ‘public aid which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods’ is incompatible with the proper functioning of the agreement. In addition, the agreements have a transparency element requiring RTA members to notify both the volume and the type of state aid. 4.4.4.6 Mergers and acquisitions Only nine of the RTAs have provisions on mergers and acquisitions. As an example, the Canada–Costa Rica RTA includes mergers or acquisitions with substantial anticompetitive effects in its definition of anti-competitive activities which are proscribed by the agreement. In the case of the EU, mergers and acquisitions have been included in the range of activities regulated by competition policy although the Merger Regulation was not adopted until 1989 and the Treaty of Rome did not contain a provision on mergers and acquisitions.26
4.4.5 Forms of co-operation While the scope of anti-competitive behaviour that would be regulated by the agreement represents one important pillar of the competition policy provisions in RTAs, the other equally important pillar is the commitment on co-operation by the authorities. Given that the anticompetitive behaviour adversely affecting one member may emanate from the activities of a firm domiciled in another RTA partner, the degree of co-operation among competition authorities will have an important bearing on the efficacy of any investigation or enforcement action. The degree of co-operation envisaged in the RTAs varies considerably from information exchange, notification, consultation, coordination of enforcement to the establishment of a regional competition authority. It is important to note that some members of these RTAs have stand-alone co-operation agreements involving their competition 26
See Motta (2004). He notes, though, that Article 66 of the 1951 Treaty of Paris, which created the European Coal and Steel Community, deals with mergers and concentrations between firms in the coal and steel industry.
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authorities although it has not been possible to include these standalone agreements in the competition mapping. Co-operation between the Australian Competition and Consumer Commission (ACCC) and the New Zealand Commerce Commission (NZCC) is conducted under their 1994 Cooperation and Coordination Agreement and the 2006 Cooperation Protocol on Merger Reviews. Australian and US competition authorities have the 1982 Agreement Relating to Cooperation on Antitrust Matters and the 1999 Agreement on Mutual Antitrust Enforcement Assistance. The US also has separate agreements with its NAFTA partners. With Mexico, there is the 2000 US–Mexico Agreement Regarding the Application of Their Competition Laws. With Canada, there are two agreements – the 1995 US–Canada Agreement Regarding the Application of Their Competition and Deceptive Marketing Practices Laws and the 2004 US–Canada Agreement on the Application of Positive Comity Principles to the Enforcement of Their Competition Laws. Finally, in the case of those RTAs which establish regional competition authorities, directives, protocols and legislation have been adopted that go well beyond the provisions of the original trade agreement. In these cases, the RTA provisions will not fully portray the scope and level of co-operation on competition among the members. 4.4.5.1 Exchange of information Nearly two-thirds of the RTAs with competition policy chapters establish commitments regarding exchange of information to facilitate the effective application of competition laws. Many contain some details of the sort of suggested information, for example the application of measures and corrective sanctions. Many agreements stipulate that information is subject to national rules on confidentiality. Only in rare cases is there provision for the submission of confidential information to judicial bodies of the relevant country. 4.4.5.2 Notification A major form of co-operation envisioned in the RTAs is notification, which is found in about 40 per cent of the RTAs with competition policy chapters. While some RTAs refer to notification only as one form of co-operation among the RTA members, other RTAs are more precise about what are to be notified. The principal subjects which an RTA member should notify its partner include any enforcement activity by its competition authority that may affect the partner’s interests, any restrictions on competition which are liable to have a
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direct and substantial effect in the territory of the partner and anticompetitive acts taking place principally in the territory of the RTA partner.27 Some RTAs also explicitly require a member to notify the other members when it designates an undertaking as a monopoly.28 4.4.5.3 Consultations Together with exchange of information, provisions on consultation are the most numerous, and the two represent the most common forms of co-operation inscribed in the competition policy chapter. As pointed out by Silva (2004), consultations can serve as an alternative mechanism to dispute settlement, particularly when many competition policy chapters carve out the provisions, either partially or entirely, from dispute settlement. The subject of the consultations includes any matter under the competition policy chapter that may arise and be of concern to a member of the RTA. But some RTAs give a more precise definition of those matters that could spur a request for consultations. These include an investigation or proceeding being conducted by the competition authority of one RTA member that may adversely affect another member’s interests or the anti-competitive practices that are engaged in by enterprises situated in one member.29 But, whatever the underlying reason for the request for consultations, the RTA member receiving the request is to give sympathetic consideration to the concerns.30 4.4.5.4 Mutual assistance in enforcement (positive comity) Explicit commitments about co-operation or mutual assistance in enforcement activities are rare. Only the Australia–US, Japan–Mexico and EU–South 27
28
29
30
See Article 174, para. 1, of the Agreement Establishing an Association between the European Community and its Member States, of the One Part, and the Republic of Chile, of the Other Part. See Article J02, para. 2(a), of the Canada–Chile FTA, or Article 16.3, para. 1, of the US–Chile FTA. Article 176 of the Agreement Establishing an Association between the European Community and its Member States, of the One Part, and the Republic of Chile, of the Other Part. The US–Singapore FTA provides an example of the precise response required. If the (US) request for consultations is to arise because of the anti-competitive activities of (Singaporean) government enterprises, ‘Singapore shall inform the United States of the steps it has taken or plans to take to examine the conduct at issue, shall apprise the United States when Singapore’s responsible authorities decide to initiate or not to initiate enforcement proceedings regarding the conduct, and shall keep the United States regularly apprised of developments in, and the results of, any enforcement proceedings it initiates’. See Article 12.6, para. 2, of the US–Singapore FTA.
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Africa RTAs have such explicit language. For that reason this particular form of coordination or co-operation has not been included in the competition template. The Australia–US RTA allows the US Federal Trade Commission (FTC) and the Australian Competition and Consumer Commission (ACCC) to provide enforcement and investigative assistance to each other in cases involving fraudulent and deceptive commercial practices against consumers.31 The Japan–Mexico RTA allows for the competition authority of one RTA member to request the competition authority of another RTA member to initiate ‘appropriate enforcement activities’ if it believes that anti-competitive activities carried out in the territory of the latter adversely affect the interests of the former and that the competition authority of the latter may be in a position to conduct more effective enforcement activities.32 The EU–South Africa RTA make explicit reference to positive comity.33 If the competition authority of one RTA member has reason to believe that anti-competitive practices are taking place within the territory of the other member, it may request the competition authority of the latter member to take remedial action. The competition authority so addressed must in turn consider and give careful attention to the request and documentation provided. 4.4.5.5 Regional competition authority The ultimate form of cooperation in the area of competition policy would have to be when a supranational authority is established to enforce common competition policies. Only seven RTAs give a regional body the authority to enforce competition policy among the members: the Andean Community, CARICOM, CEMAC, the EU, the EEA, MERCOSUR and UEMOA. This degree of regional co-operation in competition policy requires a substantial degree of market integration among the members. It is probably no coincidence that all seven of the RTAs are either customs unions or economic integration areas.
31 32
33
Article 14.6, para. 3, of the US–Australia FTA. See Article 5 of the Implementing Agreement between the Government of Japan and the Government of the United Mexican States Pursuant to Article 132 of the Agreement between Japan and the United Mexican States for the Strengthening of the Economic Partnership. Article 38 of the Agreement on Trade, Development and Cooperation between the European Community and its Member States, of the One Part, and the Republic of South Africa, of the Other Part.
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In the EEA, two regional bodies are given the authority to enforce competition rules: the European Commission and the EFTA Surveillance Authority. There is an agreed separation of authority. With respect to antitrust, the EFTA Surveillance Authority deals with cases where only trade between EFTA Member States is affected and cases where the turnover of the undertakings in the territory of the EFTA Member States equals 33 per cent or more of their turnover in the EEA Member States taken as a whole. The Commission deals with all other antitrust cases. With respect to abuse of a dominant position, cases will be decided by the regional body in the territory of which a dominant position is found to exist. CARICOM establishes a competition commission whose powers include to ‘monitor, investigate, detect, make determinations or take action to inhibit and penalize enterprises whose business conduct prejudices trade or prevents, restricts or distorts competition within the CARICOM Single Market and Economy’.34 CARICOM member states are required to enact legislation to ensure that the determinations of the competition commission are enforceable in their jurisdictions. In the case of MERCOSUR, the Comite´ de Defensa de la Competencia (CDC) has the overall task of applying the competition policy provisions of MERCOSUR.35 The specific powers of the CDC include the conduct of antitrust investigations. In the Andean Community, the SecretaryGeneral is vested with the authority to initiate investigations relating to anti-competitive activities, to make determinations, to recommend corrective actions and to apply sanctions.36 CEMAC charges the executive secretary of the organization with determining the fines or penalties needed to punish violations of prohibited anti-competitive behaviour listed in Article 23 of the Convention.37 These behaviours include concerted actions, abuse of a dominant position and state aid which favours certain enterprises or sectors. An almost identical mandate is given by UEMOA to the (UEMOA) Commission to enforce Article 88 of the agreement which proscribes
34
35
36
37
Article 174, para. 1, of the Revised Treaty of Chaguaramas Establishing the Caribbean Community Including the CARICOM Single Market and Economy. This is in the form of a protocol (Protocol de Defensa de la Competencia del MERCOSUR) approved in December 1996. See Decision 608 (Normas para la proteccio´n y promocio´n de la libre competencia en la Comunidad Andina). Articles 24 and 25 of Convention Regissant l’Union Economique de l’Afrique Centrale.
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concerted action, abuse of a dominant position in the common market and state aid which favours certain enterprises or sectors.38
4.4.6 Technical co-operation Thirty-eight of the RTAs with competition provisions involve a mix of developed and developing country members. Because developing countries are likely neither to have a lot of experience in implementing competition laws nor competition authorities with the required competence, it is reasonable to expect that the competition policy chapter would include elements of technical assistance or co-operation. But only about one-fifth of the RTAs with a competition policy article or chapter have clauses on technical assistance or technical co-operation. Evenett (2005) provides a number of possible reasons for this. In the GATT/ WTO, technical assistance to developing countries is one form that special and differential treatment accorded to developing countries takes. Developing countries may not have been able to persuade developed RTA partners to accept special and differential treatment provisions on competition matters; or developing countries may not have demanded special and differential treatment provisions in competition because of extensive carve-outs of competition from the dispute settlement provisions of the RTA (see the discussion below). 4.4.7 Dispute settlement About one-third of the RTAs with competition policy contain language on dispute settlement. But these provisions are quite striking because they carve out the competition provisions from the dispute settlement mechanism of the RTAs. The carve-outs of these competition policy chapter provisions from dispute settlement are either total or partial. Out of the fifty-five RTAs with specific competition provisions, fourteen go on to exclude all of these provisions from dispute settlement while another two exclude parts of the competition provisions from dispute settlement.39 The RTAs which carve out all competition policy provisions from dispute settlement include Australia–Singapore, Australia– Thailand, Canada–Chile, Canada–Costa Rica, Canada–Israel, EU–Chile, 38
39
Article 89 of the Traite Modifie de l’Union Economique et Monetaire Ouest Africaine (UEMOA). The exclusion clauses usually eliminate all competition provisions from the dispute settlement protocol, but the creation and maintenance of competition law, co-operation provisions and enforcement of antitrust and abuse of dominance are also commonly excluded individually.
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EFTA–Singapore and Japan–Singapore, Korea–Chile, Mexico–Chile, Mexico–Israel, Mexico–Japan, Mexico–Uruguay and NAFTA. The RTAs with partial carve-outs are Australia–US and Singapore–US. The partial carve-outs are in the areas of anti-competitive business conduct, local authorities, consumer protection recognition of civil proceedings and enforcement of monetary judgments, co-operation and consultations. The carve-out of competition policy provisions is rather puzzling given that countries have spent negotiating effort and political capital to incorporate them in RTAs. While the RTAs themselves do not offer explanations for why certain competition provisions are excluded from dispute settlement, a number of conjectures can be made. Extraterritorial application of competition policies can be a huge source of sovereignty concerns. Countries entering into RTAs may want to minimize the extraterritorial application of competition laws within their own jurisdictions. States may much prefer engagement in these areas through discussion and political negotiation (Abbott et al. 2000). Another possible explanation is that competition provisions are new to the developing country members of the RTA. All fourteen RTAs with complete carveouts include at least one developing country member. While developing countries might be willing to make an undertaking along the lines specified in the provisions of the RTA (e.g. implement competition law, establish a competition authority, move on antitrust and abuse of dominant position, etc.), they may be uncertain about how quickly or how successfully they can fully implement these commitments. The existence of these carve-outs suggests that the provisions in the competition policy chapter may for the most part be on a ‘best endeavour’ basis only. They also underscore the importance of the horizontal principles and competition-related provisions outside of the competition policy chapter of the regional trade agreement. This paper has mapped where most of these competition-related provisions can be found – in chapters or articles dealing with investment, services, government procurement and intellectual property. In those RTAs with carve outs of competition policy from dispute settlement, these may be the only competition-related provisions which could be enforced through the RTA’s dispute settlement mechanism.
4.4.8 Institutional arrangement A number of the RTAs have created working groups or coordinating committees designed to promote interaction between the parties’ antitrust enforcement authorities. Seven of the RTAs in the sample mandate
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the establishment of such working groups.40 But the mandates of some of these working groups seem to be quite limited as they do not go beyond making recommendations on how best to enhance co-operation or improve the application of the competition policy provisions of the RTA.
5
Are there families of regional trade agreements?
Given the strong hub-and-spoke pattern of the RTAs included in the sample, can one find discernible differences in the kinds of competition provisions that are found in the agreements negotiated by the major hubs, principally the US and the EU? What about other countries or regional groupings who are not as large in economic terms but who are actively engaged in RTA negotiations such as EFTA, Chile, Mexico, Australia and Canada? The OECD study claimed to have detected differences in the pattern of competition policy provisions found in the EU and North-Americanstyle agreements (US, Canada and Mexico). Since that study focused only on the competition policy chapter of the agreements, the question is whether the study’s finding continues to hold if a broader view of competition provisions in RTAs is taken. The analysis undertaken in this paper suggests that the finding is sufficiently robust and that there are discernible differences between the European (EU and EFTA) agreements and the US agreements. Further, there is a great deal of similarity between the US, Canadian and Mexican competition provisions in RTAs. The competition provisions in the US-centred RTAs, on the one hand, and the EU- and EFTA-centred RTAs, on the other, were compared. There appears to be four salient differences. First, the horizontal principles are more pronounced in the US-centred RTAs. For example, the principle of transparency can be found in eight of the nine UScentred RTAs in the sample, with only the US–Israel RTA, which came 40
Outside of the RTAs, the EU and the US now have two working groups. The EU–US working group, created in the 1991 US–EU Agreement on the Application of Their Competition Laws, has a mandate similar to the NAFTA; and the US–Australia working group, whose purpose is to ‘avoid conflict in the enforcement of [the US and EU’s] antitrust laws’. A second working group between the EU and the US is the US–EU Merger Working Group, whose function is to help ensure that the EU and US antitrust authorities provide consistent decisions on proposed mergers evaluated by both parties’ authorities.
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into force in 1985, not having an explicit provision. Only 10 per cent of the EU-centred RTAs explicitly refer to transparency, although this rises to 25 per cent for the EFTA-centred arrangements. Secondly, one finds competition disciplines quite prominent in the sectoral chapters of the US-centred RTAs, particularly in telecommunications, government procurement and investment. Again with the exception of the agreement with Israel, all the other US-centred RTAs contain competition disciplines in the sectoral chapters. By way of comparison, only seven of the twenty RTAs that the EU is involved in contain competition disciplines in the sectoral chapters. In the case of EFTA, only four of its twelve agreements included in the sample contain competition disciplines in the sectoral chapters. Thirdly, compared with the EU or EFTA agreements, the likelihood of finding a specific competition policy chapter is much less in the US RTAs. Only four of the nine US RTAs in the sample have a specific competition policy chapter. In contrast, nearly all of the RTAs that the EU has concluded with its partners include competition policy. The only exceptions are the RTAs with Syria, which was concluded three decades ago, and with Andorra. All the RTAs in which the EFTA countries are involved include a chapter or article on competition policy. Finally, the US-centred RTAs carve out the competition policy chapter from the dispute settlement mechanism of the RTA. All of the four RTAs in which the US has negotiated a competition policy chapter carve out competition policy from dispute settlement, whether partially (three RTAs) or completely (one RTA). The carve-out of the competition policy chapter from dispute settlement only occurs in one of the RTAs that the EU has negotiated (EU–Chile) and in two of the RTAs that EFTA has concluded (EFTA– Chile and EFTA–Singapore). Next the competition provisions in the RTAs concluded by the other major hubs in the Americas – Canada, Chile and Mexico – are compared with those in the US RTAs. There are strong family resemblances. First, the provisions on horizontal principles appear more frequently in these RTAs. For example, the transparency provision appears in between 81 and 100 per cent of the RTAs that Canada, Chile and Mexico enter into. Secondly, like the US RTAs, competition disciplines in the sectoral chapters appear frequently in the agreements. In telecommunications for example, competition disciplines are present in all but two of the Chilean RTAs and in about half of the RTAs of Canada and Mexico. Unlike the US, though, Canada, Chile and Mexico tend to include a competition policy chapter in their agreements. The percentage of the
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RTAs with competition policy chapters is 100 per cent, 86 per cent and 64 per cent respectively for Canada, Chile and Mexico. Thirdly, like the US, a very high proportion (between 46 and 100 per cent) of the agreements that these hubs enter into carve out the chapter on competition policy, either partly or wholly, from dispute settlement. This paper also takes a second, more quantitative approach to determining whether the competition provisions of the hubs have family resemblances. First, the relative frequencies of the competitionrelated provisions in the RTAs entered into by the hubs were calculated. For each element of the competition template, the proportion of the RTAs that a particular hub has entered into with such a provision is calculated. Then, for each pair of hubs, the correlation coefficients of these relative frequencies were estimated. The caveat to this approach is that it weighs each element of the competition template equally, whereas it could be argued that some elements of the template are more important than others. Nevertheless, the use of correlation coefficients supplements the more descriptive analysis conducted above. The correlation coefficients are shown in Table 8.3. The resulting pattern provides support to the thesis that there are family similarities and differences in the competition provisions of the major hubs. The negative correlation coefficients between the US, on the one hand, and the EU and EFTA, on the other, support the view that competitionrelated provisions found in the US RTAs are different from those in the EU and EFTA RTAs. By contrast, one observes a high correlation between the EU and EFTA RTAs, implying significant similarities in the kind of competition provisions found in those agreements. The table provides some, although not overwhelming, support for the claim of a ‘North American’ (US, Canada and Mexico) family of competition provisions in RTAs. Large and positive correlations are found for the competition provisions in the RTAs where Canada, Mexico and Chile are the hubs. However, the correlation coefficients of the US RTAs, on the one hand, and the Canadian and Mexican RTAs, on the other, are not as large. One possible explanation for these family differences is the degree of integration envisioned by the hub. For example, the Euro-Mediterranean Association Agreements involve economic co-operation beyond trade, political dialogue and co-operation relating to social, cultural and migration issues. This greater degree of integration may require a strong competition pillar which in the case of the EU is conceivably met by, among others, the introduction of a competition policy chapter in the
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Table 8.3 Correlation of competition provisions in selected hubs EU EU – EFTA 0.73 US –0.21 Mexico 0.03 Australia 0.42 Canada 0.28 Chile 0.23
EFTA – – –0.12 0.22 0.36 0.36 0.30
US – – – 0.31 –0.08 0.21 0.44
Mexico
Australia
Canada
Chile
– – – – 0.39 0.66 0.69
– – – – – 0.51 0.52
– – – – – – 0.65
– – – – – – –
Notes: (i) The correlation coefficients are of the relative frequencies of competition provisions of the hubs. (ii) The number of RTAs included in the sample varies by hub. There are twenty related to the EU; twelve involving EFTA; nine involving the US; eleven involving Mexico; four involving Canada; five involving Australia; and seven involving Chile. (iii) The correlation for two hubs, which have a bilateral FTA together, does not include the observation for that FTA.
agreement and adherence to certain provisions of its various treaties and community rules involving competition and state aid. Other hubs, such as the United States, may have a less comprehensive form of integration with its partners in mind. The strong family resemblance between the competition provisions of the EU and EFTA RTAs may then in part be due to the strong economic links between the two through the European Economic Area (EEA) and in another part due to the similarity of their RTA partners. The EEA has abolished restrictions on movement of goods, people, services and capital. With the exception of Singapore, all the countries with which EFTA has an RTA also have RTAs with the EU.
6 Non-discriminatory elements of competition provisions in RTAs The standard theory of customs union is ambiguous about the welfare effects of preferential trade agreements. Provisions that liberalize intraRTA trade need not improve a member’s economic welfare and can
competition provisions in rtas
487
harm the welfare of non-members. The classic example is preferential tariffs which can have a harmful effect on economic welfare because the expansion in trade between regional partners may only be at the expense of diverting trade away from non-members who are cheaper sources of imports. Compared to such preferential provisions, competition rules, even in the context of a regional trade agreement, can have strong nondiscriminatory elements. By their nature, the application of certain competition provisions in RTAs implies that the benefits of these provisions cannot be denied to non-RTA members. The horizontal principles that were highlighted in the competition template, such as transparency, procedural fairness and non-discrimination, come immediately to mind. If a government in a regional trade bloc has set in motion changes to its institutions, rules and proceedings so as to implement these horizontal principles, it may not be possible to apply them to some firms but exclude others from their application. The transparency obligation usually involves establishment of contact points, notification and publication of laws and regulations. While the commitment to establish contact points and to notify benefit mainly or only other RTA members, the economic benefits from publication are likely to spill over even to non-RTA members. Procedural fairness involves a commitment to ensure the consistency and impartiality of administrative proceedings and to allow for review or appeal of any decisions taken in such proceedings. Again, improvements made to administrative proceedings, so that they become more impartial and consistent, will create benefits that are likely to extend beyond those whom the regional agreement may have intended to advantage. Beyond the horizontal principles, some of the commitments in the competition policy chapter will have benefits that extend beyond the members of the regional bloc. The requirements to adopt competition law or to establish a competition authority will level the conditions of competition faced by all firms. Enterprises operating in the country who may have suffered from anti-competitive practices in the past, whether they are domestic, established in an RTA member or in a country that is not a party to the RTA, will see improved economic opportunities as a result of the adoption of competition law. The same point can be made about the impact of curbs on state aid and public monopolies. The benefit from such curbs will accrue to firms who directly or indirectly compete with these monopolies or enterprises with access to public funds. It does not matter whether these firms,
488
robert teh
which have a market presence in the country, were established in a country which is a member of the RTA or in a country that is not a member of the RTA.
7
Summary and conclusions
This paper has mapped competition provisions in seventy-four regional trade agreements which vary in size, degree of integration, geographic region and the level of economic development of their members. While a number of surveys of competition provisions in RTAs have been undertaken in recent years, the principal contribution of this paper has been to go beyond the competition policy chapter and to examine competition-related disciplines and principles that are found in other chapters of the agreement. More than 40 per cent of the RTAs in the sample stipulate promotion and advancement of the conditions of fair competition as an objective of the RTA suggesting that competition considerations are not necessarily subordinate to the goal of expanding trade and investments. A large number of the RTAs in this survey included competition disciplines in the chapters on investment, services (in telecommunications, maritime transport and financial services), government procurement and intellectual property. An RTA member that requires a foreign investor to provide information concerning a covered investment needs to protect confidential information since it may prejudice the competitive position of that investor. In telecommunications services, competitive safeguard provisions guard against major suppliers engaging in anti-competitive practices. Where universal service obligations are imposed on telecommunication providers, there is a requirement to maintain competitive neutrality. In financial services, competition is sometimes used as a benchmark for defining national treatment, i.e. a measure may be deemed inconsistent with national treatment if its application changes conditions of competition between foreign and domestic financial institutions. A long list of competition-related disciplines can be found in the chapter on government procurement. They include the nondisclosure of confidential information in the tendering process. Where disclosure of information about a tender is required, information is not to be disclosed in a manner that would give a supplier a competitive edge over others. Provisions spell out in precise detail those circumstances under which limited tendering will be allowed. RTA parties may not release information about the award of a contract if it affects
competition provisions in rtas
489
competition. The intellectual property chapter of the RTA frequently includes provisions against abuse by rights-holders. With respect to horizontal provisions, between one-third and one-half of the RTAs have explicit requirements about transparency, procedural fairness and nondiscrimination. These findings underline the importance of examining competition-related provisions beyond those contained in the competition policy chapter. Nearly three-quarters of the RTAs contain competition policy provisions. Despite the reluctance of many developing countries to enter multilateral negotiations on competition policy, fifty of the sixty-eight RTAs with developing countries as members have a competition policy provision or chapter. The principal objective of these provisions is to prevent the gains in market access arising from the RTA from being eroded by anti-competitive behaviour that is condoned or tolerated by RTA partners. The main obligations thus involve adoption or application of competition laws to curb anti-competitive behaviour and closer co-operation among competition authorities of RTA partners. The types of anti-competitive behaviour or issues that are of concern are concerted actions, abuse of a dominant position, monopoly, state enterprises or undertakings with special or exclusive rights, and state aid. For the most part, the scope of co-operation among national competition authorities is limited to exchange of information, notification and consultation. However, a small number of RTAs give a substantial role to regional bodies in carrying out surveillance, investigations and taking measures to curb anti-competitive behaviour. Finally, nearly one-third of the RTAs in the sample carve out, either partly or completely, competition policy from the dispute settlement mechanism. This further underscores the importance of the competition-related provisions in the sectoral chapters and the horizontal principles, since, for the RTAs with carve-outs, they are the only provisions on competition that could be enforced through dispute settlement. A number of differences as well as similarities can be detected in the approach of the major RTA players to competition in regional trade agreements. The differences are more pronounced between the European (EU and EFTA) and US RTAs, while there are family resemblances between the US, Canadian and Mexican competition provisions in RTAs. There are four salient differences between the European and the US (and by extension the Canadian and Latin American) agreements. First, the horizontal principles are more pronounced in the US-centred
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RTAs. Secondly, competition disciplines in the sectoral chapters of the RTA, particularly in telecommunications, government procurement and investment, are more likely to be found in the US-centred RTAs. Thirdly, only a few US RTAs have specific competition policy chapters. Finally, the US-centred RTAs carve out the competition policy chapter from the dispute settlement mechanism of the RTA. One possible explanation for these family differences is the degree of integration envisioned by the hub, which appears to be much more ambitious in the case of the EU and the EFTA countries. Finally, unlike traditional market-access provisions, many elements of competition rules in RTAs are characterized by non-discrimination. The application of competition rules means that their benefits cannot be denied to non-RTA members. This applies in great measure to the horizontal principles of transparency, procedural fairness and nondiscrimination. But, even within the competition policy chapter itself of the agreement, the requirement to apply competition law, or to set up a competition authority, or to subject state aid and public monopolies to disciplines, all improve the conditions of competition in the marketplace and should enhance economic opportunities to firms who already operate in the market, whether they are domestic, from an RTA member or from a country which is not a party to the regional agreement. References Abbott, Kenneth W., and Snidal, Duncan, 2000. ‘Hard and Soft Law in International Governance’, International Organization 54: 421–56. Anderson, Robert, and Evenett, Simon, 2006. ‘Incorporating Competition Elements in Regional Trade Agreements: Characterization and Empirical Analysis’, unpublished paper presented at the Seminar on Regional Rules in the Global Trading System, Washington DC, 26–27 July 2006. Brusick, Philippe, Alvarez, Ana Maria, and Cernat, Lucian (eds.), 2005. Competition Provisions in Regional Trade Agreements: How to Assure Development Gains, Geneva: United Nations Conference for Trade and Development. Crawford, Jo-Ann, and Fiorentino, Roberto V., 2005. ‘The Changing Landscape of Regional Trade Agreements’, WTO Discussion Paper No. 8, Geneva: World Trade Organization. Evenett, Simon, 2005. ‘What Can We Really Learn from the Competition Provisions of RTAs?’, in P. Brusick, A. M. Alvarez and L. Cernat (eds.), Competition Provisions in Regional Trade Agreements: How to Assure Development Gains, Geneva: UNCTAD pp. 37–63.
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Fiorentino, Roberto V., Verdeja, Luis, and Toqueboeuf, Christelle, 2007. ‘The Changing Landscape of RTAs: 2006 Update’, WTO Discussion Paper No. 12, Geneva: World Trade Organization. Motta, Massimo, 2004. Competition Policy: Theory and Practice, Cambridge: Cambridge University Press. Silva, Veronia, 2004. Cooperation on Competition Policy in Latin American and Caribbean Bilateral Trade Agreements, Santiago: United Nations Economic Commission for Latin America and the Caribbean. Solano, Oliver, and Sennekamp, Andreas, 2006. ‘Competition Provisions in Regional Trade Agreements’, OECD Trade Policy Working Papers, No. 31, Paris: OECD.
u
Appendix: List of RTAs included in the survey Date of entry into force
Agreement
Members
AFTA
Brunei Darussalam, 28 January 1992 Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam Argentina, Bolivia, 18 March 1981 Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay, Venezuela Bolivia Colombia 26 May 1969a Ecuador Peru Venezuela
ALADI (LAIA)
Andean Community
Relevant GATT provision
Type of agreement
Development status of members
Enabling Clause
FTA
Enabling Clause
–
2005 Intra-RTA imports Value (US$bn)
Share (%)
Developing
104.4
24.1
PS
Developing
68.4
16.8
CU
Developing
7.5
16.4
Australia– Singapore Australia– Thailand Australia–United States CACM Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua Canada–Chile Canada–Costa Rica Canada–Israel CARICOM
28 July 2003
GATT XXIV GATT XXIV GATT XXIV GATT XXIV
Art. FTA
Mixed
9.9
3.1
Art. FTA
Mixed
8.7
3.7
Art. FTA
Developed
24.6
1.3
Art. CU
Developing
2.6
9.7
GATT XXIV 1 November 2002 GATT XXIV 1 January 1997 GATT XXIV Antigua and Barbuda, 1 August 1973 GATT Bahamas, Barbados, XXIV Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Trinidad and Tobago, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, Surinam
Art. FTA
Mixed
4.7
1.4
Art. FTA
Mixed
3.3
1.0
Art. FTA
Mixed
3.9
1.1
Art. CU
Developing
1.9
13.1
1 January 2005 1 January 2005 12 October 1961
5 July 1997
Appendix (cont.)
Agreement
Members
CEMAC
Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea, Gabon Australia, New Zealand
CER China–Hong Kong China–Macao COMESA
Date of entry into force
Relevant GATT provision
24 June 1999
Enabling Clause
1 January 1983
GATT Art. XXIV 1 January 2004 GATT Art. XXIV 1 January 2004 GATT Art. XXIV Angola, Burundi, 8 December 1994 Enabling Comoros, Democratic Clause Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan,
2005 Intra-RTA imports
Type of agreement
Development status of members
CU
Developing
0.2
3.7
FTA
Developed
10.1
6.9
FTA
Developing
202.4
21.1
FTA
Developing
55.4
8.4
FTA
Developing
1.2
9.4
Value (US$bn)
Share (%)
EU
EU–Algeriab EU–Andorrab EU–Chile EU–Croatia
Swaziland, Uganda, Zambia, Zimbabwe Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United, Kingdom
1 January 1958
GATT Art. CU XXIV
1 September 2005 GATT XXIV 1 July 1991 GATT XXIV 1 February 2003 GATT XXIV 1 March 2002 GATT XXIV
Developed
2,419.0
61.1
Art. FTA
Mixed
24.5
0.7
Art. CU
Mixed
1.6
0.0
Art. FTA
Mixed
15.0
0.4
Art. FTA
Mixed
17.0
0.4
Appendix (cont.) Date of entry into force
Relevant GATT provision
EU–Egypt
1 June 2004
EU–Faroe Islands EU–FYROM
1 January 1997
EU–Israel
1 June 2000
EU–Jordan
1 May 2002
EU–Lebanonb
1 March 2003
EU–Mexico
1 July 2000
EU–Morocco
1 March 2000
GATT XXIV GATT XXIV GATT XXIV GATT XXIV GATT XXIV GATT XXIV GATT XXIV GATT XXIV GATT XXIV
Agreement
EU–OCTs
Members
1 June 2001
EU, Greenland, New Caledonia, French Polynesia, French Southern and
1 January 1971
Type of agreement
Development status of members
2005 Intra-RTA imports Value (US$bn)
Share (%)
Art. FTA
Mixed
10.8
0.3
Art. FTA
Mixed
0.9
0.0
Art. FTA
Mixed
2.7
0.1
Art. FTA
Mixed
29.8
0.7
Art. FTA
Mixed
2.8
0.1
Art. FTA
Mixed
4.0
0.1
Art. FTA
Mixed
37.7
0.9
Art. FTA
Mixed
20.0
0.5
Art. FTA
Mixed
4.5
0.1
Antarctic Territories, Wallis and Futuna Islands, Mayotte, Saint Pierre and Miquelon, Aruba, Netherlands Antilles, Anguilla, Cayman Islands, Falkland Islands, South Georgia and South Sandwich Islands, Montserrat, Pitcairn, Saint Helena, Ascension Island, Tristan da Cunha, Turks and Caicos Islands, British Antarctic Territory, British Indian Ocean Territory, British Virgin Islands EU–Palestinian Authority EU–South Africa
1 July 1997
EU–Switzerland and Liechtenstein
1 January 1973
1 January 2000
GATT Art. FTA XXIV GATT Art. FTA XXIV GATT Art. FTA XXIV
Mixed
–
Mixed
42.4
1.1
176.0
4.3
Developed
–
Appendix (cont.)
Agreement
Members
Date of entry into force
Relevant GATT provision
2005 Intra-RTA imports Value (US$bn)
Share (%)
EU–Syria
1 July 1977
FTA
Mixed
5.0
0.1
EU–Tunisia
1
FTA
Mixed
17.8
0.4
EU–Turkey
1
CU
Mixed
92.2
2.3
EIA
Developed
301.4
7.3
FTA
Developed
1.4
0.8
FTA
Mixed
0.3
0.2
FTA
Mixed
0.4
0.2
FTA
Mixed
0.1
0.0
FTA
Mixed
3.0
1.3
FTA
Mixed
0.1
0.1
EEA
EU, EFTA
1
EFTA
Iceland, Lichtenstein, Norway, Switzerland
3
EFTA–Chile
1
EFTA–Croatia
1
EFTA–FYROM
1
EFTA–Israel
1
EFTA–Jordan
1
GATT Art. XXIV March 1998 GATT Art. XXIV January 1996 GATT Art. XXIV January 1994 GATS Art. V May 1960 GATT Art. XXIV December 2004 GATT Art. XXIV January 2002 GATT Art. XXIV January 2001 GATT Art. XXIV January 1993 GATT Art. XXIV January 2002 GATT Art. XXIV
Type of agreement
Development status of members
EFTA–Morocco EFTA– Palestinian Authority EFTA–Singapore
1 December 1999 GATT Art. FTA XXIV 1 July 1999 GATT Art. FTA XXIV
Mixed
0.4
0.2
Mixed
–
–
1 January 2003
Art. FTA
Mixed
3.1
0.8
Art. FTA
Mixed
0.2
0.1
Art. FTA
Mixed
5.4
1.8
Art. CU
Developing
7.5
8.8
FTA
Developing
4.8
2.0
FTA
Mixed
25.9
3.6
FTA
Developing
3.4
1.2
CU
Developing
22.1
20.1
FTA
Developing
2.5
1.0
EFTA–Tunisia
1 June 2005
EFTA–Turkey
1 April 1992
GCC
Group of Three
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates Colombia, Mexico, Venezuela
Japan–Singapore Republic of Korea–Chile MERCOSUR Mexico–Chile
Argentina, Brazil, Paraguay, Uruguay
1 January 2003
13 June 1994a
GATT XXIV GATT XXIV GATT XXIV GATT XXIV
–
30 November 2002 GATT Art. XXIV 1 April 2004 GATT Art. XXIV 29 November 1991 Enabling Clause 1 August 1999 GATT Art. XXIV
Appendix (cont.) Date of entry into force
Relevant GATT provision
Mexico–EFTA
1 July 2001
Mexico–Israel
1 July 2000
Mexico–Japan
1 April 2005
GATT XXIV GATT XXIV GATT XXIV GATT XXIV –
Agreement
Members
Mexico– 1 July 1998 Nicaragua Mexico– El Salvador, 29 June 2000a Northern Guatemala, Honduras, Triangle Mexico Mexico–Uruguay 15 November 2003a NAFTA Canada, Mexico, 1 January 1994 United States New Zealand– 1 January 2001 Singapore SADC Angola, Botswana, 1 September 2000 Lesotho, Malawi, Mauritius,
–
Type of agreement
Development status of members
2005 Intra-RTA imports Value (US$bn)
Share (%)
Art. FTA
Mixed
1.4
0.4
Art. FTA
Developing
0.4
0.1
Art. FTA
Mixed
15.6
2.1
Art. FTA
Developing
0.4
0.2
FTA
Developing
1.6
0.7
FTA
Developing
0.3
0.1
Mixed
782.1
34.5
Mixed
1.3
0.6
Developing
7.7
11.1
GATT Art. FTA XXIV GATT Art. FTA XXIV GATT Art. FTA XXIV
SAPTA
SPARTECA
Turkey–Israel United States– Bahrain United States– CAFTA– Dominican Republic
Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia, Zimbabwe Bangladesh, Bhutan, 7 December 1995 India, Maldives, Nepal, Pakistan, Sri Lanka Australia, New 1 January 1981 Zealand, Cook Islands, Fiji, Kiribati, Marshall Islands, Micronesia, Nauru, Niue, Papua New Guinea, Solomon Islands, Tonga, Tuvalu, Vanuatu, Western Samoa 1 May 1997 1 August 2006 Costa Rica, 1 March 2006 Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, United States
Enabling Clause
PS
Developing
3.8
2.1
Enabling Clause
PS
Mixed
2.6
1.7
Developing
2.0
1.3
Mixed
0.7
0.0
Mixed
28.4
1.6
GATT Art. FTA XXIV GATT Art. FTA XXIV GATT Art. FTA XXIV
Appendix (cont.)
Agreement United States– Chile United States– Israel United States– Jordan United States– Morocco United States– Singapore WAEMU/ UEMOA
Members
Date of entry into force 1 January 2004
Relevant GATT provision
GATT Art. XXIV 19 August 1985 GATT Art. XXIV 17 December 2001 GATT Art. XXIV 1 January 2006 GATT Art. XXIV 1 January 2004 GATT Art. XXIV Benin, Burkina Faso, 1 January 2000 Enabling Clause Coˆte d’Ivoire, GuineaBissau, Mali, Niger, Senegal, Togo
Type of agreement
Development status of members
FTA
2005 Intra-RTA imports Value (US$bn)
Share (%)
Mixed
12.2
0.7
FTA
Mixed
23.2
1.3
FTA
Mixed
1.9
0.1
FTA
Mixed
1.2
0.1
FTA
Mixed
38.8
2.0
CU
Developing
0.5
4.4
CU ¼ customs union; FTA ¼ free trade agreement; PS ¼ partial scope; EIA ¼ economic integration agreement Date of signature (see Organization of American States, www.sice.oas.org/agreements_e.asp) b Year 2004 trade data Sources: WTO Secretariat, UN Comtrade and Organization of American States a
INDEX
abuse of a dominant position enforcement of rules 480, 481 provisions relating to 12, 473, 474, 489 carve out of 482 acquisitions and mergers, provisions on 474, 476 Agreement on Subsidies and Countervailing Measures (SCM Agreement) 11, 187, 188, 202 investment measures 369 purpose 370 agricultural tariffs see under tariffs air transport services 321, 336, 359 anti-competitive behaviour see under competition anti-dumping measures abolition by RTAs adoption of common competition policy as factor in 239–40 level of integration as factor in 239 application of 7–8 China-specific measures 186 de minimis requirements 8, 184 increase in 246 differences in rules of WTO and RTAs 184 disallowance by RTAs 194 duties duration of final 184 increased thresholds in RTAs 200 shortening of duration of 8 WTO and RTAs rules for terminating 185 frequency of use and countries using 168–70, 240
impact on non-RTA members 172–3 increasing margins 182–3 investigations under WTO rules 184–5 lack of provisions in RTAs 194 lesser duty rule 8, 184 preferred to other trade remedies 168 requirement for pre-action dispute resolution in RTAs 194, 200 role of regional bodies 200–1 specific rules for RTA partners 194 survey analysis 194–202 template 183–6, 201–2 trade remedy, as 7 variation in RTAs’ practice 182 Argentina anti-dumping, use of 169 exclusion of RTA partners from safeguard action 189, 236 GATS commitments 337 meat grading system 251 services, commitments on 334 services, negotiations on 318 WTO dispute cases, in 236 audiovisual services commitments 335, 337, 340, 341, 343, 344, 352, 353 effect of RTAs 9 Australia co-operation agreements 477 investment provisions 399 services, commitments on 335–6, 340
503
504
index
Australia-US FTA example of mutual recognition of TBTs 267 mutual assistance provisions 479 value-added services provisions 469 bargaining-model stumbling bloc 6, 18, 40, 63–8 basket approach to tariff liberalization 108 ‘behind the border’ measures 2, 13–14 bilateral emergency actions (BEAs) 101 bilateral investment treaties (BITs) see under investment bilateral safeguards see under safeguard measures bilateral trade agreements investment rules compared with RTAs 11 liberalization of services, role in 354 Brander-Krugman model 44–5 building bloc – stumbling bloc debate current debate on regionalism 36–40 history of 35–6 summary of research 6 usefulness of theoretical models 6 ‘building blocs’ theory 2, 3–4, 48–58 see also ‘stumbling blocs’ theory juggernaut effect see juggernaut effect building bloc Kemp-Wan effect 6, 23–4, 54 types of blocs 6 veto-avoidance mechanism 6, 54–8 Calvo Clause 367, 374 Canada see also North American Free Trade Agreement (NAFTA) abolition of trade remedies 243–4 Auto Pact with USA 62–3 bilateral safeguards 230 competition provisions compared with USA 484–5 CVD actions by 169–70 dispute with USA over Foreign Investment Review Act 368 duty-free access to markets 131–2 global safeguards 236 joins NAFTA 35
MFN tariffs 60 rules of origin 62–3 safeguard action on bicycles 192 TBTs disputes 265 provisions 271 Canada-US Free Trade Agreement (CUSFTA) investment chapter 365 review of trade remedy actions 179–81 categories of RTAs 381 Central American Free Trade Area (CAFTA) TRQs with USA 116–17 statistics on 118–23 cheating, costs and benefits of 64–8 cherry-picking stumbling bloc 6, 47–8, 54 Chile agreements 1, 109, 138, 141, 143, 144, 146, 179 anti-dumping restrictions 194, 243–4 competition provisions 421, 464, 468, 471, 481–2, 483, 484, 485 duty free access 132–3 exclusion of partners 236 investment provisions 388, 389, 390, 391, 392, 393, 395, 398, 399 safeguard actions 171, 207, 230 services, commitments on 318, 319, 334, 336–7, 338, 341, 342, 343, 360 tariff elimination 111, 131 TBTs 251, 271, 274, 280, 281 China anti-dumping measures specific to 186 ‘one country, two systems’ framework 242 services, commitments on 337, 340, 343, 345, 353, 355 safeguard measures specific to 193 transitional review mechanism for WTO membership 10, 183, 358 commercial presence GATS definition 370
index investment chapters, coverage in 320 requirement for, Australia removes 335 review of commitments 317, 330 Committee on TBTs 254 competition anti-competitive behaviour abuse of dominant position see abuse of a dominant position acquisitions and mergers 474, 476 competition policy chapter provisions 12, 472, 473, 489 concerted actions 12, 480, 480–1, 489 encouraging regulation of 474 monopoly 12, 158, 343, 422, 423, 467, 474, 475, 478, 487, 489, 490 OECD taxonomy 422 regulated behaviour 12, 474, 480 state aid see state aid state enterprises see state enterprises undertakings with special or exclusive rights see undertakings with special or exclusive rights co-operation between national authorities 12, 476–7 consultations 12, 478 exchange of information 477 mutual assistance 478–9 notification 477–8 regional competition authority 479–81 differences in provisions by ‘families’ of RTAs 483–5 dispute settlement provisions 481–2 horizontal principles 423, 464–5, 487 non-discrimination 466 procedural fairness 465–6 transparency 465 government procurement, provisions on 470–1 intellectual property, provisions on 471 investments, provisions on 466–7
505
location of provisions in RTAs investment chapter, in 466–7 services chapter, in 467–9 monopolies, principles as to 422 OECD study of RTAs’ provisions 418–19 differences amongst ‘families’ of RTAs 483 taxonomy 422 principles in RTAs’ chapters relating to monopolies and state aid 444 promotion of competition, aim of 464 provisions in competition chapter incidence of chapter 472 non-discrimination aspects 487 objectives of chapter 472 references to provisions in other agreements 472–3 research study conclusions 488 mapping of RTAs 418, 419 methodological approach 422 RTAs included in study 420 economic characteristics 420 other characteristics 421–2 summary 488 template 418, 423–5 RTAs’ rules extent to which nondiscriminatory 12–13, 13 surveys of 11–13 state aid, principles as to 422 ‘competitive liberalization’ 40, 58, 69, 359 concerted actions 12, 480, 480–1, 489 conformity assessment procedures commitment to MRAs under TBT 253–4 likelihood of RTA provisions for mutual recognition 288 for transparency 289–90 mutual recognition 253–4, 261 preference for equivalence and mutual recognition by RTAs 273 purpose 250 survey of 8
506
index
consultation by national competition authorities 12, 478 contingent protection see trade remedies in RTAs copying of RTA models 146 countervailing duties (CVD) measures abolition by RTAs 202 frequency of use and countries using 168, 169–71 provisions in RTAs 202 role of regional bodies 247 survey of 7, 8 analysis 202–7 template 187–8 WTO and RTAs rules compared 187, 202, 207 Cournot oligopoly 44–5 created trade 26 customs duties, waiver of 138, 141, 158 customs procedures adding value through RTAs 147–8 comparative survey 136, 138–44 definition 160–1 Kyoto Convention 147–8 RTAs as ‘WTOþ’ as to 147–8 SEP, in 144 survey of 6 customs unions (CUs) 6, 28, 57, 71, 72, 97, 118, 173, 179, 201, 379, 389, 421, 479 ‘customs union’ theory 30–5, 246, 486 Viner’s ambiguity and 20–3 de minimis requirements anti-dumping 7–8, 184 CVD rules on 202 dumping margins 200, 201, 246 ‘Facil’ index 150 market access 143 RoO 141, 150, 159 volume requirements 200, 201, 246 deep integration see integration developed countries agreements surveyed 265–6, 375, 379 dispute settlement provisions, likelihood of 290, 291 ‘GATSþ’ as 9, 339, 345
investment provisions 393, 399–400 mutual recognition of conformity assessment 288 removal of TBTs 282, 284–5 services agreements 319 services regulations, survey of 9 support for MAI 373 developing countries agreements surveyed 265–6, 375, 379 attainment of GATT Article XXIV benchmark 7 categorisation of 149 ‘enhanced support’ for investment in 372 ‘GATSþ’ as 9, 339 investment provisions 399–400 opposition to MAI 373 removal of TBTs 282, 284–5 services agreements 319 perceived gains from negotiations 353 services regulations, survey of 9 treatment of, survey of 190 use of trade remedies 240 discrimination in RTAs see also nondiscrimination in RTAs against non-members 7 trade remedies 13 dispute settlement bilateral safeguard, as 190 carve-out of competition policy from 12, 484–5, 489, 490 competition provisions, as to 481–2 consultation instead of 478 enforcement of RTA provisions through 148 investment 367, 371, 372, 373, 380, 394–5, 398 safeguard measures, rulings on 238 services, relating to 320 TBT matters 254, 265, 267, 269, 277, 285, 287, 291 US rules on TBTs 9 Dispute Settlement Body 254 distribution services, commitments as to 338, 343 diversion of trade resulting from safeguard actions 8
index diverted trade 26 Dixit-Stiglitz monopolistic competition 81 Doha Round commitment to multilateral framework for investment 371–2 effect of RTAs on talks on services 10 government procurement, talks on 372 rules on RTAs compared to RTAs 9 talks on RTAs 2, 147(n31) tariff-cutting negotiations 39 domestic politics and economic policies 2, 13–14 Dominican Republic, commitments on services 335 domino theory of regionalism 3, 73–6 duties additional 101, 230 anti-dumping see under antidumping measures countervailing see countervailing duties (CVD) measures customs, waiver of 138, 141, 158 deferred payment for express shipments 161 elimination of 61, 116, 173 export 158 import 48, 158 ‘nominal’ 22 duty-free treatment in RTAs 116–17, 124, 124–6 economic theories of RTAs see theories education services commitments on 344–5 effect of RTAs 10 emergency actions bilateral emergency actions (BEAs) 101 clearing house for information on 190 imports, on 173, 189 trade remedy, as 166 ‘WTOþ’ , as 146 Enabling Clause, Doha talks on 2 endogenous bloc formation 73–4
507
environment-related rules 2, 96, 252, 253, 259 equivalence see also mutual recognition standards, of 257–8 TBTs, of 8, 267, 274, 291 technical regulations, of 257–8 European Community (EC) abolition of trade remedies 238–9 audiovisual services, effect of RTAs 9 deeper integration 242 education services, effect of RTAs 10 trade in services commitments on 338 use of GATS model 320 European Economic Area (EEA) CVDs, abolition of 202 deeper integration 242 dispute resolution for TBTs 276 TBTs dispute resolution 265, 276 provisions 274–5 trade remedies, abolition of 244 European Economic Community (EEC) agricultural tariffs as stumbling bloc 53(n33) UK’s first application to join 33 European Free Trade Association (EFTA) anti-dumping policy 194 audiovisual services, effect of RTAs 9 competition provisions compared with US RTAs 483–4, 485–6 CVDs, abolition of 202 deeper integration 242 education services, effect of RTAs 10 TBT provisions 274–5, 281–2 trade remedies, abolition of 243–4 use of GATS model for trade in services 320 use of sector approach to tariff liberalization 109 European Union (EU) abolition of CVDs 202 anti-dumping policy 194 bilateral safeguards 207, 230 competition provisions compared with US RTAs 483–4, 485–6
508
index
European Union (EU) (cont.) CVD actions 169–70 dispute resolution for TBTs 275–6 global safeguards 236 ‘goodies bag’ approach to former colonies 46 promotion of European technical standards 9 services, agreements on 338 TBTs harmonization of technical regulations 287–8 provisions 281 use of sector approach to tariff liberalization 109 exchange of information competition authorities, amongst 12 competition policy, as to 477, 478, 489 market access, as to 160, 161 TBTs, as to 274, 281 exclusion partners in safeguard actions, of 8, 189, 236, 237, 238, 246 products, of 100, 129, 136, 343 sectors, of 57, 99, 100 express shipments, deferred payment of duties for 161
General Agreement on Tariffs and Trade (GATT) see under entries for specific trade measures General Agreement on Trade in Services (GATS) see under investment; see under services, trade in global free trade see under liberalization of trade global safeguards see under safeguard measures ‘global’ trade rules see multilateral trade rules goodies-bag stumbling bloc 6, 40, 46–7 government procurement agreements on 14, 78 commitments on 327 competition provisions 12, 419, 422, 423, 464, 466, 470–1, 482, 484, 488, 490 Doha Round negotiations on 372 GPA Agreement, investment provisions in 369(n8) RoO on 159 WTO initiatives on 77 growth of RTAs 176–7 domino theory 3 increasing number 1, 96
‘facil’ index 150 financial services commitments on 335, 336, 338, 339, 340, 341, 342, 351 competition provisions 12, 423, 466, 467, 468, 488 effect of agreements 10, 353, 355 GATS Annex on 359 provisions on 327 free trade agreements (FTAs) 6 economic effects of transition to (model) 28–30 unsustainability proposition 35, 61(n37)
Haberler’s spillover theory 6, 20, 28 in Brander-Krugman model 44 as to Johnson diagram 32 in multilateralism versus regionalism debate 39 as to preference rent 29–30 harmonization of trade rules product standards 8 RTAs’ role in 4 TBTs 13 hub-and-spoke RTAs ‘cloning’ tendency as stumbling bloc 9 negotiating competition provisions 421–2 TBTs 8–9 in trade remedies survey 177–9 veto-avoidance mechanism building bloc as to 55–7
game theory applied to Kemp-Wan 54 bargaining-model stumbling/ building bloc logics 63
index India, commitments on services 338–9 Inter-American Development Bank (IADB), surveys 102, 375 integration deep integration statistics on RTAs achieving 126–9 as topic for research 78–9 level of, as factor in abolishing trade remedies 240, 242–5, 246 shallow integration statistics on RTAs achieving 126–9 as topic for research 78–9 intellectual property (IP) agreements on 14, 78 competition rules 12, 419, 422, 423, 464, 466, 471, 482, 488, 489 regulation of 1, 96 regional bodies, by 201 TRIPS investment rules 11, 368–9, 370 WTO initiatives on 77 investment Agreement on Subsidies and Countervailing Measures (SCM), measures in 369, 370 bilateral treaties (BITs) 11, 373–5 compared to RTAs’ investment provisions 374 replacement by investment provisions in RTAs 366 Calvo Clause 367, 374 compensation provisions 392–3 competition rules in RTAs’ chapters on 12 current state of international talks 373 definition used by RTAs and BITs 381 denial of benefits, provisions as to 394–5 directors and managers, provisions as to 394 dispute settlement 395–6 Doha Round commitment to multilateral framework for 371–2
509 effect of RTAs 11 effect of tariffs 10–11 effect of trade liberalization 11 expropriation provisions 392–3 GATS, investment provisions in 369–70 ‘positive list’ approach 370, 379 GPA Agreement, investment provisions in 369(n8) in international trade agreements 365–6 level of specific provisions in RTAs 388–9 location of investment provisions within agreements 380–1, 388 managers and directors, provisions as to 394 multilateral initiatives 367–73 multilateral provisions 368–70 multilayered nature of regulation 11, 366 NAFTA ‘negative list’ approach 379 non-discrimination in RTAs 390–2 OECD agreement on 372–3 performance requirements 393 research study conclusions 398 list of surveyed RTAs 376–7 mapping of RTAs 375–9 overview of results 380–95 RTAs and bilateral rules compared 11, 374–5 RTAs and multilateral rules compared 11 Singapore Round discussions on 371 standards of treatment in RTAs 392 survey of provisions 375–81 trade policy’s effect on 10–11 transfer of profits, provisions on 393 transparency requirements of RTAs 395 TRIMS 368, 369 rules compared with RTAs 11 TRIPS, investment measures in 368–9, 370 variations in agreements geography, by 398
510
index
investment (cont.) levels of development, by 398–9 survey of conclusions 399–400 coverage 396–8 ‘Is bilateralism bad?’ debate 19, 37, 70–3 Japan agreements 46 competition provisions 464, 467, 482 investment provisions 390, 395, 398, 399 mutual assistance 478, 479 services, agreements on 318, 319, 321, 336, 337, 338, 353 tariffs 66, 67 unfair trade orders, ratio of 180 Johnson-Cooper-Massell (JCM) proposition 32 Johnson diagram 30–3 juggernaut effect building bloc 4, 6, 48–53, 83–5 definition of juggernaut 49(n30) Kemp-Wan effect building bloc 6, 23–4, 54 Kennedy Round 39 Kyoto Convention 147–8 labour labour-poor and labour-rich nations 72 rules relating to 2, 242 Walrasian model, in 42 welfare-organizing framework, in 80–2 large nation – small nation RTAs, goodies-bag stumbling bloc applied to 46 Latin America, regionalism in 36 lesser duty rule, anti-dumping 8 liberalization of trade see also reciprocal liberalization of trade; see also specific activities e.g. services, trade in ‘competitive liberalization’ 69
contribution by RTAs 7 debate on RTAs’ role 2–5 effect on investment 11 imported MFN liberalization 60–2 MFN treatment, GATT Article I rules 116(n15) preferential trade liberalization, economic effects 19–35 RTAs’ effect on national support for 13–14 theories of RTAs’ role 3–4 use of RTAs to further 4, 13 Line Pipe case (safeguard action) 236–8 maritime transport services competition rules as to 12, 473 effect of RTAs 9–10 market access measures in RTAs 6 see also ‘reasonable length of time’; ‘substantially all trade’ (SAT); see also specific measures e.g. rules of origin (RoO) alignment with GATT and WTO 146 analysis by aggregate provisions in RTAs 136–44 trade-weighted liberalization 129–36 definitions of measures 156–61 future research agenda 148–50 GATT Article XXIV as to 98–102 IADB survey of American RTAs commitments 102 literature on 102–4 main findings of survey 145–8 matrix for mapping 152–6 models for analyzing 108–10 preferential market access as characteristic of RTAs 98 statistics on 110–29 Meade’s primary, secondary and tertiary effects 26, 28 members of RTAs see under entries for specific aspects membership of RTAs 1, 96–7, 176–7, 443
index MERCOSUR (Mercado Comun del Sur) 36, 189 anti-dumping regulation 200 competition provisions 421, 479, 480 customs union, as 179 exclusion of partners from safeguard action by Argentina 189, 236 harmonization of technical regulations 273–4 investment provisions 379, 388, 389, 390, 392, 393, 396, 398, 399 negotiation of 36 safeguard measures, disallowance of 207, 244 services commitments on 337, 343 negotiations on 318 working group on TBTs 273 mergers see acquisitions and mergers, provisions on Mexico example of imported MFN liberalization 60–2 joins NAFTA 35–6 TBT provisions in RTAs signed by 282 trade remedy actions against 181 monopolies, regulation of 12, 158, 343, 422, 423, 467, 474, 475, 478, 487, 489, 490 Morocco, commitments on services 335 most favoured nation (MFN) liberalization see under liberalization of trade most favoured nation (MFN) tariffs see under tariffs multilateral trade negotiations 39 see also specific talks e.g. Doha Round multilateral trade organizations see also specific organizations e.g. World Trade Organization (WTO) surveillance of RTAs’ services rules 10
511
multilateral trade rules see also under entries for specific rules and sectors e.g. investment effect of regional talks on negotiations 10 extent to which RTAs go further than 7, 97 investment provisions 366 RTAs’ relationship to 2 under GATT Article XXIV 6 main findings of survey 145–8 multilateralism, pursued together with regionalism 13 multilateralism versus regionalism debate 37–40, 69–73, 97 see also building bloc – stumbling bloc debate mutual recognition conformity assessment 255, 259 product standards 8, 255, 257–8, 259 TBTs arising from testing and certification 8 US rules 9 technical standards 8, 252–3, 255, 257–8, 259 mutual recognition agreements (MRAs) see under conformity assessment procedures national politics and economic policies, effects of RTAs 2, 13–14 national regulatory authorities, co-operation on competition measures 12 negative-list approach 9, 110, 316, 319, 320, 321, 336, 340, 352, 359, 360, 380, 391, 392, 396, 398 non-discrimination in RTAs see also discrimination in RTAs competition rules 12–13, 13 non-members of RTAs see under entries for specific aspects non-tariff measures (NTMs) by RTAs 6 comparative survey 136, 138–44 definition 156–7
512
index
North American Free Trade Agreement (NAFTA) approach to liberalization of trade in services compared to GATS 319–27 bilateral safeguards 230 dispute resolution for TBTs 265 example of imported MFN liberalization 60–2 global safeguards 236 investment provisions 366, 374 ‘negative list’ approach 379 negotiation of 35–6 review of CVDs 202 trade remedy actions 179–81 rules of origin and imported MFN liberalization 62–3 survey of coverage of RTA provisions, in 137 North-North RTAs, tariff liberalization in 125–6 North-South RTAs example of imported MFN liberalization 60–2 tariff liberalization in 125–6 notification by national competition authorities 12, 477–8 number of RTAs 1, 176, 443 Olsen’s Asymmetry 68 openness of markets, juggernaut effect building bloc as to 50 Organization for Economic Co-operation and Development (OECD) investment measures 372(n15) Multilateral Agreement on Investment (MAI) 372–3 study of RTAs’ competition provisions 440–1 differences by ‘families’ of RTAs 483–5 taxonomy 444 ‘other measures’ by RTAs comparative survey 136, 138–44 definition 157–8
‘other restrictive regulations of commerce’ see also tariffs removal 6, 97, 101–2 types 7 Pakistan agreements on services 318 ‘goodies bag’ approach by USA 46(n27) policy on trade, effect on investment 10–11 political integration 242 positive list approach 109, 316, 319, 336, 340, 352, 360, 380, 391, 392 preference-erosion/exploitation stumbling bloc 6, 40–5 preference rent 28–30 preferential rules of origin see rules of origin (RoO) preferential tariff approach to tariff liberalization 109–10 preferential trade liberalization see under liberalization of trade literature on 20–6 RTAs’ reluctance to reduce 3 in services, benefits and costs of 10 tariffs see under tariffs product standards 8 effects of harmonization and mutual recognition compared 262–4 harmonization 8 effect of 13 likelihood of RTA provisions for transparency 289–90 mutual recognition 8 purpose 250 RTAs’ preference for harmonization over mutual recognition 271, 273 production standards, purpose of 250 professional services 10, 336, 340, 341, 345, 353 ‘reasonable length of time’ common interpretation by RTAs 6–7
index defining 7 removal of tariffs within 6, 97, 100–1 reciprocal liberalization of trade juggernaut effect building bloc as to 49–50 between RTAs and non-members, members’ reluctance for 3 regional trade agreements (RTAs) see specific aspects e.g. growth of RTAs types see customs unions (CUs); free trade agreements (FTAs) regionalism see also multilateralism versus regionalism debate big-think regionalism lines of enquiry 17–19 literature on 17–85 domino theory 3, 73–6 endogenous bloc formation 73–4 growth post-1960 35–6 pursued together with multilateralism 13 question whether raises or lowers world welfare 80–5 small-think regionalism, literature on 17 transition from small-think to big-think approach 36–8 regulation of trade, growing importance of RTAs in 1–2 reporting on RTAs, WTO transparency mechanism 2 research on RTAs see also under entries for specific aspects e.g. market access provisions in RTAs focus of previous research on rules of origin 4 future research topics 76–9 need for more 4–5, 14–15 in this volume content and main findings 6–13 objectives and approach 5–6 summary of main findings 13–15 ‘restaurant bill’ problem 68 rules of origin (RoO) comparative survey 136, 138–44 definition 159–60
513 facilitation by RTAs 151 focus of previous research on RTAs on 4 imported MFN liberalization, and 62–3 ‘other restrictive regulations of commerce’, as 7, 101–2 restrictiveness of 150, 151 RTAs as ‘WTOþ’ as to 146 Shibata’s small-FTA analysis as to 34 survey of 6 Uruguay Round agreement on 101(n2), 146–7(n30) WTO survey 102
safeguard measures Agreement on Safeguards, actions under 8, 236–7 bilateral and global safeguards distinguished 188–9 bilateral safeguards differential thresholds for certain sectors 230 European-based and other RTAs contrasted 207, 230 provisions in RTAs 207 role of regional bodies 190 special safeguards (SSGs) 190 Canadian bicycles safeguard action 192 China-specific measures 193 effect contrasted with anti-dumping and countervailing duties 189 frequency of use and countries using 168, 171–2, 240 global safeguards 190–2 exclusion of RTA partners from 8, 189, 230, 236, 246 potential for increased discrimination in 247 survey of 7 analysis bilateral safeguards 207–30 global safeguards 230–8 template 188–93 bilateral safeguards 190, 191 global safeguards 190–2
514
index
safeguard measures (cont.) as ‘WTOþ’ 146 WTO ruling on actions 8, 236–8 SCM see Agreement on Subsidies and Countervailing Measures (SCM) sector approach to tariff liberalization 109 sensitive economic sectors additional duties 230 attainment of GATT Article XXIV benchmark 7 SEP see Trans-Pacific Strategic Economic Partnership Agreement (SEP) services, trade in see also specific services e.g. financial services benefits and costs of preferential trade 10 commitments in RTAs 331–40 analysis by sector 340, 341–5 competition provisions on 467–9 differing approaches to rules by RTAs 319–27 Doha talks on GATS Article V 2 GATS see also under investment approach to liberalization compared with NAFTA 319–27 definition of ‘commercial presence’ 370 modes of supply 370(n10) combined GATS/NAFTA approach 320–1 differences with NAFTA-type agreements 320 RTAs with new or improved commitments under 331–40 rules compared with RTAs 9 growth 9 improved offers on services at multilateral level 357–8 liberalization by RTAs across sectors 345–51 costs 354–7 differences between GATS-type and NAFTA-type approach 319–27 multilateral rules, effect on 353–7
revenue, effect on 353–4 multilateral rules on, RTAs’ effect on 353–7 multilateral surveillance of RTA rules 10 negative-list approach 9, 319 new or improved RTA commitments under 340, 352 non-discrimination in RTAs 13 positive-list approach 319–20 new or improved RTA commitments under 340, 352 protected services, effect of RTAs 9–10 research study methodology 327, 330–1, 359–62 objectives 316–17 presentation of results 331–40 RTAs surveyed 322–6, 328–9 services RTAs growth in numbers and extent 318–19 membership 319 transparency in RTAs’ provisions 319, 341 ‘WTOþ’, extent to which RTAs’ provisions are 321, 327, 334–5, 351–3 shallow integration see integration Singapore, commitments on services 335, 336 Singapore Round, discussions on investment 371 small-FTA diagram (Shibata) 33–4 small-think regionalism see under regionalism Smith’s certitude theory 6, 20, 28 in Brander-Krugman model 44 as to goodies-bag stumbling bloc 46 as to Johnson diagram 32 in multilateralism versus regionalism debate 39 South-South RTAs tariff liberalization in 125–6 special regimes 6 comparative survey 136, 138–44 definition 158–9
index special safeguards (SSGs) 101 as ‘other restrictive regulations of commerce’ 7 spoke-spoke FTAs, veto-avoidance mechanism building bloc as to 57–8 standards see product standards state aid agreements on 8, 202, 207, 247, 486 anti-competitive behaviour, as 12, 489 competition provisions as to 422, 423, 464, 472, 473, 474, 476 regulation of 12, 187, 480–1, 487, 490 state enterprises anti-competitive behaviour, as 12, 489 competition provisions as to 472 regulation of 474, 475 ‘stumbling blocs’ theory2–3, 40–8 see also building bloc – stumbling bloc debate; ‘building blocs’ theory bargaining-model 6, 18, 40, 63–8 cherry-picking 6, 47–8, 54 ‘cloning’ hub-and-spoke RTAs as 9 EEC agricultural tariffs as example 53(n33) goodies bag 6, 40, 46–7 preference-erosion/exploitation 6, 40–5 regionalization of standards caused by TBT rules 9 types 6 ‘substantially all trade’ (SAT) 97, 99–100 common interpretation by RTAs 6 defining 7 removal of tariffs on 6 approaches for measuring by aggregate provisions in RTAs 136–44 trade-weighted liberalization 129–36 supply side and domino theory 75–6
515
tariff rate quotas (TRQs) 101 as ‘other restrictive regulations of commerce’ 7 statistics on 110–29 between USA and CAFTA 116–17 statistics on 118–23 USA’s approach 108 tariffs see also ‘other restrictive regulations of commerce’ agricultural tariffs statistics on extent of liberalization 126–7 as stumbling bloc 110–29 EEC tariffs 53(n33) cheating, RTAs impact on costs and benefits of 64–8 duty-free treatment, evolution in RTAs 116–17, 124, 124–6 effect on investment 10–11 GATT alignment of RTAs with (survey findings) 146 complementarity of RTAs’ customs and trade facilitation measures 148 GATT Article I, rules on MFN treatment 116(n15) GATT Article XXIV 6, 98 attainment by RTAs 6–7 at Doha Round 2 policy focus on 97 removal of tariffs under within ‘reasonable length of time’ 6 see ‘reasonable length of time’ on ‘substantially all trade’ (SAT) see ‘substantially all trade’ (SAT) research on 6 safeguard actions, as to 8 historical development 48–9 liberalization models of 108–10 statistics on 110–29 trade-weighted 129–36 MFN tariffs link with RTAs 58–63, 68–9 as measure of market access by RTAs 98
516
index
tariffs (cont.) multilateral talks on reductions 39 preferential and MFN tariffs as complements or substitutes 59–60 scrutiny of RTAs by GATT 2 tariff-line level survey of RTAs 104–36 TBT Agreement see under technical barriers to trade (TBTs) technical barriers to trade (TBTs) see also conformity assessment procedures; product standards; production standards; technical regulations arising from testing and certification, equivalence and mutual recognition 8 challenges for bilateral agreements on 252–3 Committee on TBTs 254 common provisions in RTAs 271–8 by families of RTAs 278–82 compared to TBT Agreement 8 definitions 250 similarity between RTAs and WTO 266 designed to be discriminatory 251 difference between content of provisions and application by RTAs 264–5 difference to other trade barriers 251–2 different impacts of country-specific and harmonized standards 261–2 dispute resolution 267, 274–6 Dispute Settlement Body 254 in EEA 276 in EU 275–6 likelihood of provisions in RTAs 289–90 effects of harmonization 13 equivalence 257–8, 267–8 harmonization 258–60, 267–8 commitment in RTA provisions 273
previous research on effect of 261–4 harmonization commitments in TBT 253 hub-and-spoke development 8–9 liberalization by RTAs 255–6 metrology, RTAs’ provisions on 277 mutual recognition 257–8, 267–8 Australia-US FTA as example 267 previous research on effect of 261–4 potential for discrimination 251 potential for hindering trade 257 removal EU’s approach 258–9 non-trade objectives for 277 options for 256–64 research study factors for inclusion of specific provisions in RTAs 284–90 list of surveyed RTAs 292–3 mapping of rules by RTA 294–314 overview of results 271–84 summary of main findings 290–2 template methodology for building 264–71 RTAs studied 265–6 structure 266–71 RTAs’ administrative structure for 269, 274 TBT Agreement 253–5 reference to, in RTAs 266–7, 271 survey of 8 technical assistance commitment under TBT Agreement 254, 269, 271, 277 transparency 260, 267, 267–8, 273–4 types 250 US rules 9 whether RTA rules are ‘WTOþ’ 254–5, 271, 282, 284 technical regulations EU’s promotion of own standards 9 likelihood of RTA provisions for harmonisation 287–8 purpose 250
index RTAs’ preference for harmonization over mutual recognition 271, 273 survey of 8 transparency commitment under TBT 254 telecommunications commitments on 342–3 competition rules as to 12 ‘WTOþ’, extent to which RTAs’ provisions are 327 testing, equivalence of TBTs arising from 8 theoretical models of effect of RTAs 6 theories Brander-Krugman model 44–5 ‘building blocs’ see ‘building blocs’ theory ‘customs union’ theory 30–5 Dixit-Stiglitz monopolistic competition 81 domino 3, 73–6 game theory see game theory Haberler see Haberler’s spillover theory Johnson-Cooper-Massell proposition 32 Johnson Diagram 30–3 Kemp-Wan 6, 23–4, 54 ‘second best’ theory 21 Smith’s certitude see Smith’s certitude theory ‘stumbling blocs’ see ‘stumbling blocs’ theory Viner see Viner’s ambiguity theory Walrasian see Walrasian economic theory Wei & Frankel momentum 53 ‘theory of the second best’ 21 Tokyo Round 39 initiation and acceptance 69 trade see specific aspects e.g. regulation of trade trade creation in Viner’s ambiguity theory 21–3 trade diversion in Viner’s ambiguity theory 21–3
517
trade facilitation adding value through RTAs 147–8 definition 160–1 RTAs as ‘WTOþ’, effect of 147–8 survey of 6 trade policy, effect on investment 10–11 Trade-Related Investment Measures (TRIMS) see under investment Trade-Related Property Rights (TRIPS) see under intellectual property (IP) trade remedies see also anti-dumping measures; countervailing duties (CVD) measures; safeguard measures abolition by RTAs 238–45, 246 application of 7–8 discrimination against nonmembers of RTAs 13, 174–5, 246 dispensing of 7 frequency of use 168–73 GATT rules as to 173 level of integration as factor in abolition of 240, 242–5, 246 previous research 179–81 purpose 166 reasons for 167–8 reasons for retaining 173–4 reduction in actions by RTAs 179–81 similarity of rules contrasted with variation in practice across RTAs 181–2 survey 7–8 economic characteristics of RTAs in 176 effectiveness of mapping 181–3 extent 175 usefulness of 245–6 trade-weighted tariff liberalization see under tariffs Trans-Pacific Strategic Economic Partnership Agreement (SEP), customs procedures 144 trans-regional nature of RTAs, growth of 1
518
index
transitional review mechanism, China’s WTO 10 transparency investment, measures relating to 394–5 mechanism for reporting on RTAs, WTO adopts 2 TRIMS see under investment undertakings with special or exclusive rights anti-competitive behaviour, as 12, 489 competition provisions relating to 475 regulation of 474 Uruguay Round 39 agreement on rules of origin 101(n2), 146–147(n30) failure of 37(n24) initiation and acceptance 69 trade-related investment measures 365, 368 USA’s approach 47 USA see also Canada-US Free Trade Agreement (CUSFTA); North American Free Trade Agreement (NAFTA) anti-dumping provisions 194 review of 200–1 approach to RTAs with small nations 46 approach to TRQs 108 audiovisual services, effect of RTAs 9–10 Auto Pact with Canada 62–3 dispute over Canadian Foreign Investment Review Act 368 education services, effect of RTAs 10 exclusion from Canadian bicycles safeguard action 192 exclusion of RTA partners from safeguard action 236–8 FTA with Australia as example of mutual recognition of TBTs 267
global safeguards 236 ‘goodies bag’ approach to Pakistan 46(n27) investment rules in RTAs 11 joins NAFTA 35–6 Line Pipe case (safeguard action) 236–8 market access disciplines, coverage in RTAs 138–43 professional services, effect of RTAs 10 services, commitments on 339, 352 audiovisual services 343–4 financial services 342 tariff ‘cheating’ 66–7 TBTs disputes 265, 267 likelihood of provisions to harmonize 287–8 provisions 9, 251, 273, 278, 280 provisions in RTAs signed by 278, 280 TRQs with CAFTA 116–17 statistics on 118–23 Uruguay Round, and 47 use of basket approach to tariff liberalization 108 veto-avoidance mechanism building bloc 6, 54–8 Viner’s ambiguity theory 6, 20–3, 24–6 in Brander-Krugman model 44 as to Johnson diagram 31 as to preference rent 29 as small-think regionalism issue 39 Walrasian economic theory hub-and-spoke FTAs 56–7 net welfare effects of tariff liberalization 24–6 preference-erosion/exploitation stumbling bloc 41–5 three-nation trade model 27–8 Wei and Frankel momentum 53 Wei and Frankel momentum 53 welfare
index derivation of framework for organizing 80–5 question whether regionalism raises or lowers 18 World Customs Organization (WCO), Kyoto Convention 147–8 World Trade Organization (WTO) alignment of RTAs with 146 effect of RTAs on services rules 10 investment provisions 366 rules on anti-dumping investigations 184–5 termination of duties 185 rules on countervailing duties 187 rules on RTAs
519 adoption of transparency mechanism for reporting on RTAs 2 Doha talks on 2 safeguard actions exclusion of RTA partners from 189 ruling on 8, 236–8, 246 survey of RTAs’ rules of origin 102 survey of RTAs’ tariff liberalization 102 transitional review mechanism for Chinese membership 10 ‘WTOþ’, extent to which RTAs are 7, 97, 146
