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The evolution of trade treaties and trade creation : lessons for Latin America


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  • Rajapatirana, Sarath


The author examines the main distinction between trade liberalization under the General Agreement on Tariffs andTrade (GATT) and under regional trading agreements. Under the GATT, trade liberalization is based on the most-favored-nation principle. Under regional trade agreements, it is based on preferential trade. Establishing regional trade agreements does not necessarily lead to greater regional integration. The European Economic Community has been an exception, and with greater integration, regional trade has grown steadily. The Association of South East Asian Nations (ASEAN) has been a weak association, but trade among ASEAN members has increased rapidly because member countries have undertaken multilateral trade liberalization. The efforts of Latin American countries to create regional trade associations in the 1960s, based on protectionist policies, reduced trade not only regionally, but with the rest of the world. In contrast, the Latin American regional trading agreements of the 1980s and 1990s have liberalized trade among the groups. Proper regional trading agreements must conform to Article XXIV of the GATT, but nearly all the countries that have created regional integration schemes have not followed it. These regional trading agreements have not increased protection, but neither has there been across-the-board trade liberalization. Regional trading agreements carry with them the danger of trade diversion (when imports that used to come from third countries at lower prices become costlier because of preferential access granted to a higher-cost regional source). How can Latin American countries reduce trade diversion in their regional trading agreements? : 1) keep protection low in the first place; 2) have open regional trade associations (so that it is easy for new partners to join); 3) continue liberalizing trade with the rest of the world, following the most-favored-nation principle; 4) establish common markets rather than free trade areas (because rules of origin create new barriers, including bureaucracies); 5) coordinate regulatory and competition policies (eliminate laws that limit competition and adopt common external tariffs); and 6) improve roads, ports, and means of communications.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1371.

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Date of creation: 31 Oct 1994
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Handle: RePEc:wbk:wbrwps:1371

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Keywords: TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Trade and Regional Integration; Trade Policy; Economic Theory&Research; Environmental Economics&Policies;

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  1. Whalley, John, 1990. "Non-discriminatory Discrimination: Special and Differential Treatment under the GATT for Developing Countries," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 100(403), pages 1318-28, December.
  2. Anderson Kym & Snape Richard H., 1994. "European and American Regionalism: Effects on and Options for Asia," Journal of the Japanese and International Economies, Elsevier, vol. 8(4), pages 454-477, December.
  3. Steinberg, Richard H., 1993. "Antidotes To Regionalism: Responses to Trade Diversion Effects of the North American Free Trade Agreement," UCAIS Berkeley Roundtable on the International Economy, Working Paper Series, UCAIS Berkeley Roundtable on the International Economy, UC Berkeley qt6tj728h5, UCAIS Berkeley Roundtable on the International Economy, UC Berkeley.
  4. André Sapir, 1992. "Regional integration in Europe," ULB Institutional Repository 2013/8200, ULB -- Universite Libre de Bruxelles.
  5. Diana Brand, 1992. "Regional bloc formation and world trade," Intereconomics: Review of European Economic Policy, Springer, Springer, vol. 27(6), pages 274-281, November.
  6. Sebastian Edwards, 1994. "Trade and Industrial Policy Reform in Latin America," NBER Working Papers 4772, National Bureau of Economic Research, Inc.
  7. repec:fth:eeccco:94 is not listed on IDEAS
  8. Susan Hickok & James Orr & M.A. Akhtar & K. Wulfekuhler, 1991. "The Uruguay Round of GATT trade negotiations," Research Paper, Federal Reserve Bank of New York 9119, Federal Reserve Bank of New York.
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Cited by:
  1. Innwon Park & Soonchan Park, 2011. "Best practices for regional trade agreements," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 147(2), pages 249-268, June.
  2. Innwon Park & Soonchan Park, 2009. "Free Trade Agreements versus Customs Unions: An Examination of East Asia," Asian Economic Papers, MIT Press, MIT Press, vol. 8(2), pages 119-139, June.
  3. Valdes, Alberto, 1995. "Joining an Existing Regional Trade Agreement: Issues and Policies from the Perspective of a Small Open Economy in Latin America," 1995: Economic Integration in the Western Hemisphere Symposium, June 7-9, 1995, San Jose, Costa Rica, International Agricultural Trade Research Consortium 50807, International Agricultural Trade Research Consortium.
  4. Hamanaka, Shintaro, 2012. "Evolutionary paths toward a region-wide economic agreement in Asia," Journal of Asian Economics, Elsevier, Elsevier, vol. 23(4), pages 383-394.
  5. Rajapatirana, Sarath, 1996. "Evaluating Bolivia's choices for trade integration," Policy Research Working Paper Series 1632, The World Bank.
  6. Nigel Nagarajan, 1998. "MERCOSUR and Trade Diversion: What Do The Import Figures Tell Us?," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 129, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  7. Park, Innwon & Park, Soonchan, 2009. "Consolidation and Harmonization of Regional Trade Agreements (RTAs): A Path Toward Global Free Trade," MPRA Paper 14217, University Library of Munich, Germany, revised 23 Mar 2009.


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