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Economic Integration: "New Regionalism" and its effects for the global economy

Essay 2011 8 Pages

Business economics - Economic Policy

Excerpt

Over the last twenty years, economic integration has become a keyword in the world economy. The world has witnessed a notable increase in economic cooperation and interdependence between nations. Different economies came together and reduced or eliminated trade barriers to the flow of goods, services, labour and capital (Piggott, 2006, p. 89). They formed so called "trading regions" which are regulated by special Economic Integration Agreements (EIAs). In particular, countries which are in geographical proximity decided to cooperate by forming "Regional Trade Agreements" (RTAs). The number of these agreements multiplied rapidly during the last two decades and defined "The New Regionalism" (Baier et al., 2006, p. 3). The formation and enlargement of the European Union (EU) is one noteworthy example of such integration agreements. In 2005 and 2007 the EU increased its membership by 12 new countries. One major reason for these mergers is to increase market size. The short distances for the exchange of goods, similar consumer tastes and an easy-to-establish distribution network might be some others (Daniels, 2008, p. 343). However, it is doubtful, despite these reasons, that the drastic rise of agreements and hence the reduction of trade barriers have had positive effects on the global economy. To determine whether the effects on the global economy are positive or negative, it is important to define the term "New Regionalism" more precisely and to compare between old and new regionalism to identify the main differences. The basic objective of this paper is to explain what is understood by "New Regionalism", and furthermore to evaluate if the economic efficiency of the global economy benefits from these changes.

What defines the "New Regionalism" is, as mentioned above, the increasing number of RTAs concluded over the last twenty years. They have become an outstanding feature of the Multilateral Trading System (MTS) since the early 1990s. As of May 2011, the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) have been notified about 489 RTAs. 297 agreements are currently in force (http://wto.org). Figure 1 shows the growth of RTAs sent to the GATT/WTO, including inactive RTAs. Almost every country in the world is already in one or more regional agreements. These have been concluded between high-income countries as well as between low-income countries. While the structure of RTAs varies, they all have as major purpose to reduce or eliminate trade barriers among member countries. One can distinguish between the liberalization of trade barriers to goods and to services. Some RTAs only remove tariffs on the trade in goods, while others go beyond that by covering non-tariff barriers to extend liberalization to trade and investment (Nataraj, 2007, p. 4).

The increasing number of concluded RTAs has created a wide network of interconnected trading nations over the years. To regulate such networks and to prevent discriminatory trade, there is a need to implement international trading rules. One of the oldest is the principle of non-discriminatory trade policies; it was established in the 19th century and is also known as the most-favoured nation (MFN)

Figure 1. RTAs in Force as of November 2011

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policy. A country needs to extend trade concessions to all partners when it extends them to one. Today the MFN principle forms the basis of Article I of the GATT. It states that all members of the WTO shall extend any advantage, favour, changes, etc. to all other members (Frankel, 1997, p. 2). The fact that the GATT was more of a treaty, to which countries have adhered since 1947, than an organisation, led to the creation of the WTO in 1995. The WTO is an institutional mechanism for applying GATT rules, maintaining GATT rights and enforcing GATT disciplines. It incorporates the Agreement on Trade in Goods (GATT) with all amendments, the Agreement on Services (GATS), the TRIPs Agreement and the mechanism for settling trade disputes (Grimwade, 2000, p. 335). According to Article I and the MFN principle there are some exceptions to GATT/WTO articles in forming RTAs. Basically, there are three ways by which WTO members can form RTAs. The first way is in the form of Article XXIV, through which the GATT incorporated the possibility of RTAs. Under this article a group of countries can form a free trade area (FTA) or customs unions (CU) covering trade in goods. There are several criteria for a CU or FTA which ignores the MFN obligations. For example, "substantially all" trade must be free and barriers must be removed among the members; and trade barriers against non-members should not be more restrictive than before. The second way is the Enabling Clause of the Tokyo Round Agreement from 1979. It permits preferential arrangements among developing countries in the trade in goods. These have exchanged partial tariff preferences within arrangements such as the South Asian Free Trading Area (SAFTA) and the ASEAN Free Trading Area (AFTA). The third way is Article V of the GATS, which governs the conclusion of RTAs in the area of trade in services for developed and developing countries (Nataraj, 2007, p. 5). Table 1 shows all RTAs in force, sorted by notification:

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Table 1. RTAs Notified to GATT/WTO and in Effect: Summary Statistics, as of November 2011

Source: http://www.wto.org

The most common category in the typology of RTAs is the free trade agreement, which accounts for 90% of all RTAs (including partial scope agreements) (http://wto.org). This significantly high quantity of FTAs is due to the fact that they are faster to conclude, require a lesser degree of integration and allow each party to maintain its own trade policy vis-à-vis third parties. Customs union agreements, on the other hand, only account for 10%; they have long implementation periods and take years to negotiate. Crawford and Fiorentino (2005, p. 4) also mention as a reason that CUs require the establishment of a common external tariff and the harmonization of external trade policies. One example for a CU is the EU, today’s largest and most successful regional trading group with free trade of goods and services. In the 1960s it established a common external tariff and removed the internal ones, negotiating as one region in the WTO instead of as individual countries. The EU is also a common market with a common currency, which allows free mobility of production factors such as labour and capital (Daniels, 2008, p. 343).

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Details

Pages
8
Year
2011
ISBN (eBook)
9783656400134
File size
581 KB
Language
English
Catalog Number
v210594
Institution / College
South Bank University London
Grade
1.7
Tags
New Regionalism Economics Global Economy Economic Integration WTO GATT

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Title: Economic Integration: "New Regionalism" and its effects for the global economy