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The Evolution of Trade Treaties and Trade Creation: Lessons for Latin America

Listed author(s):
  • Sarath Rajapatirana

This paper examines the main distinctions between the General Agreement on Tariffs and Trade (GATT) and regional trading arrangements (RTAs), noting that under the former, liberalization of trade is based on the most favored nation (MFN) principle, while under the latter, there is a departure from that principle leading to preferential trade liberalization. Properly instituted RTAs must confirm to Article XXIV of the GATT. But the article has not been followed by nearly all the countries that have created regional integration schemes. This has meant that while the integration schemes for the 1980s and 1990s have not lead to increased protection against third countries, there has not been across the board trade liberalization among the groups forming RTAs. Developing countries have sought and received formal exemption from Article XXIV through the enabling clause at the Tokyo round. Departures from the MFN principle and Article XXIV have meant that there is potential for greater trade diversion with the proliferation of RTAs. The paper finds that there is no general tendency for RTAs to become increasingly integrated entities. The European Economic Community has been an exception, where greater integration has taken place with trade within the region growing steadily. In contrast, the Association of South East Asian nations (ASEAN) has been a loose agreement. Nevertheless, trade among the group has increased rapidly on the basis of multilateral trade liberalization undertaken by the countries in the group. Latin American countries also attempted to create RTAs in the 1960s based on their national protectionist policies which led to reduced trade within the regional as well as the rest of the world. RTAs carry with them the danger of trade diversion and that there is no inexorable logic that RTAs would lead to increased integration with lower protection. Countries venturing into RTAs must attempt to achieve GATT-plus trade liberalization, implying that RTAs are used to have greater trade liberalization than what could be achieved through GATT based trade. The lessons for Latin America to avoid unnecessary costs of these RTAs arising from trade diversion are to have low protection in the first place, to have open RTAs so that there is easy accession of new partners, to continue with the trade liberalization on a MFN basis, to avoid free trade areas (in preference for common markets) which could lead to new barriers through rules of origin and to coordinate regulatory and competition policies as well as to remove barriers arising from transport, ports and communications.

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Paper provided by World Bank Latin America and the Caribean Region Department in its series Reports with number _005.

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Date of creation: 1995
Handle: RePEc:wop:bawlad:_005
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  1. Sebastian Edwards, 1994. "Trade and Industrial Policy Reform in Latin America," NBER Working Papers 4772, National Bureau of Economic Research, Inc.
  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. Sapir, Andre, 1992. "Regional Integration in Europe," Economic Journal, Royal Economic Society, vol. 102(415), pages 1491-1506, November.
  4. de Melo, Jaime & Montenegro, Claudio & Panagariya, Arvind, 1992. "Regional integration, old and new," Policy Research Working Paper Series 985, The World Bank.
  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. 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 1318-1328, December.
  7. Diana Brand, 1992. "Regional bloc formation and world trade," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 27(6), pages 274-281, November.
  8. 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.
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