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

  • 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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  1. Sapir, Andre, 1992. "Regional Integration in Europe," Economic Journal, Royal Economic Society, vol. 102(415), pages 1491-506, November.
  2. Diana Brand, 1992. "Regional bloc formation and world trade," Intereconomics: Review of European Economic Policy, Springer, vol. 27(6), pages 274-281, November.
  3. Anderson, Kym & Snape, Richard H, 1994. "European and American Regionalism: Effects on and Options for Asia," CEPR Discussion Papers 983, C.E.P.R. Discussion Papers.
  4. Sebastian Edwards, 1994. "Trade and Industrial Policy Reform in Latin America," NBER Working Papers 4772, National Bureau of Economic Research, Inc.
  5. 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 qt6tj728h5, UCAIS Berkeley Roundtable on the International Economy, UC Berkeley.
  6. Susan Hickok & James Orr & M.A. Akhtar & K. Wulfekuhler, 1991. "The Uruguay Round of GATT trade negotiations," Research Paper 9119, Federal Reserve Bank of New York.
  7. Whalley, John, 1990. "Non-discriminatory Discrimination: Special and Differential Treatment under the GATT for Developing Countries," Economic Journal, Royal Economic Society, vol. 100(403), pages 1318-28, December.
  8. de Melo, Jaime & Montenegro, Claudio & Panagariya, Arvind, 1992. "Regional integration, old and new," Policy Research Working Paper Series 985, The World Bank.
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