R T A

BILATERAL AND REGIONAL TRADE
AGREEMENTS
Liz Brownsell
Allen & Overy
Type: Legal guide
Published:
Last Updated:
Keywords: Trade; WTO; Doha;
finance.
This document provides general information and comments on the subject matter
covered and is not a comprehensive treatment of the subject. It is not intended to
provide legal advice. With respect to the subject matter, viewers should not rely on
this information, but seek specific legal advice before taking any legal action
Any opinions expressed in this document are those of the author and do not
necessarily reflect the position and/or opinions of A4ID
© Advocates for International Development 2012
Introduction
What are bilateral and regional trade agreements?
A bilateral or regional trade agreement is an agreement entered into between two or more
countries under which the participants agree to reduce tariffs, quotas and other restrictions on
trade between them. Bilateral trade agreements are, as the name suggests, bilateral in
character; whereas regional trade agreements are generally entered into between a number of
countries in a particular region. The agreements cover both trade in goods and trade in
services and also deal with issues such as the protection of intellectual property. They also
frequently contain provisions or whole chapters dealing with protection for foreign
investments.
Bilateral and regional trade agreements are sometimes referred to as preferential trade
agreements because they are only beneficial to the particular states or countries to which they
relate. They can also be divided into two categories:
• "customs unions" – where two or more countries enter into an agreement to remove
tariffs and other restrictions on trade among themselves, but apply a common
external tariff to trade with any other countries (for example, the Southern African
Customs Union1); and
• "free trade areas" – where two or more countries enter into an agreement to remove
tariffs and other restrictions on trade among themselves, but each continues to
determine the tariffs that apply to trade with any other countries (for example, the
North American Free Trade Agreement2).
How do bilateral and regional trade agreements work within global
international trade?
Bilateral and regional trade agreements are a feature of a global trading system alongside
multilateral trade agreements, the first of which was the General Agreement on Trade and
Tariffs (known as GATT). The GATT created a multilateral trading system, which is now
promoted by the World Trade Organisation (the WTO), and which has resulted in the
removal of trade barriers around the world and the creation of a global marketplace.
Bilateral and regional trade agreements have become an increasingly prominent feature of
international trade over the last two decades. Statistics available on the WTO website show
that 205 bilateral and regional trade agreements were in force in July 2007 and by 2010 it is
estimated that this number will increase to approximately 4003.
The proliferation of bilateral and regional trade agreements in recent years has resulted in
significant debate as to the effect that "regionalism" will have on the multilateral trading
1
The Southern African Customs Union was originally established in 1910 between the then Union of South Africa and the High
Commission Territories of
Bechuanaland, Basutoland and Swaziland. In December 1969, after these nations became independent, it was replaced by an
agreement entered into between the
Republic of South Africa, Botswana, Lesotho and Swaziland. In 1990 Namibia joined the agreement as a fifth member
(following its independence from South
Africa).
2
The North American Free Trade Agreement was entered into between Canada, Mexico, and the United States of America and
came into effect on 1 January 1994.
3
http://www.wto.org/english/tratop_e/region_e/region_e.htm.
system. There are valid arguments on both sides of the debate but there is also a school of
thought that we should not be debating whether or not regionalism is a good or bad thing but
instead should be looking at the way that bilateral and regional trade agreements operate and
the new economic opportunities arising as a result4
Main Features
The concept of international free trade
In 1776 Adam Smith published The Wealth of Nations, in which he included the proposition
that free trade among nations improves overall economic welfare5. The concept of "free trade"
has since become a generally accepted principle and is the concept that underlies the
multilateral trading system. Free trade involves the removal of tariffs, quotas or other
restrictions on international trade, enabling global production of goods and services in the
most effective and efficient way possible.
Whilst it is generally accepted that free trade does provide overall benefits in the "big
picture", the benefits are not necessarily seen at a more local level. If imported products and
services can be produced and sold more cheaply than local produce, then local producers may
lose out. In such a situation, if those local producers hold enough political power, the result is
the implementation of trade restrictions to protect local producers from foreign competition.
Clearly the quickest method of introducing a system of free trade would be for all countries to
unilaterally decide to remove all tariffs, quotas and other restrictions on international trade.
There are various studies that illustrate the economic benefits of making independent tariff
reductions without requiring any reciprocal action from other countries6.
However, for the reasons given above, many countries find it difficult to make such a
complete transition on their own. This is a key reason for the establishment of the WTO and a
multilateral trading system, under which all major trading countries negotiate agreements for
the removal of barriers to international trade.
The history of the WTO and the multilateral trading system
The origins of the multilateral trading system and the WTO can be traced back to the Bretton
Woods Agreement in 19447 and the subsequent creation of the United Nations (UN)8. Article
13 of the UN Charter9 states that the UN General Assembly shall:
4
Director-General Pascal Lamy speaking at the Conference on “Multilateralising Regionalism” on 10 September 2007 in
Geneva – information sourced from the WTO website (http://www.wto.org/english/news_e/sppl_e/sppl67_e.htm).
5
6
A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776).
See for example: Julio Nogues, The Choice Between Unilateral and Multilateral Trade Liberalization Strategies (1989).
7
The Bretton Woods Agreement was signed in July 1944 by delegates from 44 nations. The delegates met for a conference in
Bretton Woods, New Hampshire to discuss how to rebuild world economy following World War II. The result was the creation
of the Bretton Woods system to govern monetary relations between nations. Two institutions were also established: the
International Monetary Fund (the IMF) and the International Bank for Reconstruction and Development (the World Bank).
Although it was not within the remit of negotiations at Bretton Woods, the delegates identified the need for an institution to
facilitate free trade among nations, which would complement the IMF and the World Bank.
8
The United Nations was established in the wake of World War II with the aim of facilitating co-operation between nations in
the hope of saving "succeeding generations from the scourge of war". Today there are 192 member states.
[…] initiate studies and make recommendations for the purpose of promoting
international co-operation in the political field and encouraging the progressive
development of international law and its codification.
Within months of the UN Charter coming into force, negotiations began between UN member
states to enter into an international trade agreement for the reciprocal reduction of tariffs on
trade in goods. Negotiations continued for 2 years and agreement was finally reached on 30
October 1947 when the GATT10 was concluded and signed in Geneva by 23 of the original 50
UN member states11.
At the time that the GATT was signed, the intention was that it would be a provisional
arrangement until the establishment of an International Trade Organisation12 as a specialised
agency of the United Nations. The ITO Charter was agreed in Havana in March 1948, but was
never fully ratified and so the International Trade Organisation never became operational.
GATT was therefore the only existing multilateral trade agreement to govern international
trade between 1948 and 1995 (when the WTO was established).
From 1948 onwards, under the auspices of GATT, the UN continued in its efforts to reduce
tariffs through a series of multilateral negotiations (known as "trade rounds") and it is a
widely held view that these trade rounds have been a significant cause of progress in
international trade liberalisation.
For the first few years of GATT, the focus of each trade round was on reducing tariffs. Then
between 1964-67 (in the "Kennedy" round) a broader and more liberal approach was taken
and this approach was further progressed in the "Tokyo" round between 1973-79. The most
recent round (the "Uruguay" round between 1986-94) was the most progressive round and
resulted in the creation of the WTO and several new multilateral trade agreements.
Year
1947
1949
1951
1956
Round
Geneva
Annecy
Torquay
Geneva
1960-62
1964-67
Dillon
Kennedy
1973-79
Tokyo
Achieved
GATT
Tariff reductions
Tariff reductions
Tariff reductions and policy
on developing countries
Tariff reductions
Tariff reductions and
customs valuation rules
Rules on anti-dumping
9
The UN Charter established the United Nations and was signed on 26 June 1945 in San Francisco at the conclusion of the
United Nations Conference on International Organisation. It came into force on 24 October 1945.
10
The General Agreement on Tariffs and Trade became effective on 1 January 1948.
11
The Commonwealth of Australia, the Kingdom of Belgium, the United States of Brazil, Burma, Canada, Ceylon, the Republic
of Chile, the Republic of China, the Republic of Cuba, the Czechoslovakia Republic, the French Republic, India, Lebanon, the
Grand-Duchy of Luxemburg, the Kingdom of the Netherlands, New Zealand, the Kingdom of Norway, Pakistan, Southern
Rhodesia, Syria, the Union of South Africa, the United Kingdom of Great Britain and Northern Ireland and the United States of
America.
12
The International Trade Organisation was intended to be an institution to complement the existing Bretton Woods institutions
(the World Bank and the IMF)(see footnote 7 above), which would deal with trade aspects of international economic cooperation.
1986-94
Uruguay
duties, agreement on import
licensing and tariff
reductions
Intellectual property rights
and services included,
establishment of the WTO
Upon its creation the WTO adopted the GATT principles and agreements and has since
continued to administer and develop them further. The aim of the WTO is to reduce barriers
to international trade through a multilateral trading system.
Most favoured nation status
If a country has "most favoured nation" (or MFN) status with another country, it means that it
has been granted the same trade advantages extended by that country to any other country.
One of the key principles of the WTO is that all member countries must extend MFN status to
each other. The idea being that this prevents any preferential treatment or discrimination
between member countries.
Despite incorporating a general principle of MFN between member countries, the WTO does
allow certain exceptions. Together with preferential treatment for developing countries, the
establishment of bilateral and regional trade agreements is one such exception. As explained
in the introduction, bilateral and regional trade agreements are agreements between two or
more countries under which the participants agree to reduce tariffs, quotas and other
restrictions on trade between them. These agreements are an exception to the general MFN
principle within the WTO because they allow member countries to extend preferential
treatment to a select number of other member countries.
The development of bilateral and regional trade agreements
The increase in the number of bilateral and regional trade agreements in recent years has
occurred despite the existence of the WTO and the multilateral trading system. One
explanation for this is that the WTO has become increasingly slow and comparatively
ineffective as a means of establishing a system of free trade between countries. As the trade
rounds of the WTO have become more liberal and sought to address wider issues, they have
also become more lengthy and difficult to conclude, with the last round (the "Uruguay"
round) lasting for 8 years.
It is perhaps not surprising that decisions required to be made unanimously on numerous
issues relating to trade liberalisation often move slowly. It is also not surprising that the
requirement for absolute consensus limits how far any trade reform agreements are able to go.
There are also many external factors to consider, such as politics and economic growth, all of
which have an impact on negotiations. The current difficulties in bringing the "Doha" round
to a conclusion are a good illustration of the slow nature of negotiations under the WTO trade
rounds. It is possibly as a result of these limitations on the WTO that bilateral and regional
trade agreements have become such a prominent feature in world trade in recent years.
The impact of bilateral and regional trade agreements on global trade
As bilateral and regional trade agreements have become an increasingly prominent and
important trade policy tool there has been a corresponding increase in the amount of literature
discussing the impact that these agreements may have on global trade. There has been much
discussion about the fact that bilateral and regional trade agreements could have a
significantly detrimental impact on the progress of trade liberalisation and that, whilst certain
benefits can be seen in the short term, unless care is taken, the long term result could be a
complex system of preferential trade moving further away from the concept of
multilateralism. Roberto V. Fiorentino, Luis Verdeja and Christelle Toqueboeuf express this
view succinctly in the abstract to their paper The Changing Landscape of Regional Trade
Agreements: 2006 Update where they state that:
[…] the promotion of free trade through preferential agreements can foster trade
liberalisation and benefit the economic development by integrating developing
countries into the world economy; yet the development of complex networks of nonMFN trade relations will increase discrimination and may well undermine
transparency and predictability in international trade relations.13
Of particular concern is the complex nature of interlacing bilateral and regional trade
agreements and the impact that this structure may have on the developing world. In recent
years, bilateral and regional trade agreements have become increasingly sophisticated and
they now cover a far wider remit than the multilateral trading system: for example, most
bilateral and regional trade agreements address issues relating to competition and intellectual
property, which are contentious issues within multilateral trade negotiations. In addition, they
are becoming geographically more far reaching; many regional trade agreements are now
entered into between several countries from different regions with consistent trade policy
aspirations. This suggests that regional trade agreements are increasingly being used to
strengthen political and economic partnerships rather than to simply enhance regional
integration.
Relevant Legislation
Article 13, UN Charter
The United Nations was established in the wake of World War II with the aim of facilitating
co-operation between nations in the hope of saving "succeeding generations from the scourge
of war"14. The UN Charter established the United Nations and Article 13(a) relates to the
liberalisation of world trade. It states that:
The General Assembly shall initiate studies and make recommendations for the
purpose of:
a) promoting international co-operation in the political field and encouraging the
progressive development of international law and its codification.15
13
The Changing Landscape of Regional Trade Agreements: 2006, by Roberto V. Fiorentino, Luis Verdeja and Christelle
Toqueboeuf, respectively Economic Affairs Officer, Junior Economic Affairs Officer and Administrative Assistant with the
Regional Trade Agreements Section of the Trade Policies Review Division of the WTO Secretariat.
14
15
Preamble to the Charter of the United Nations 1945.
Article 13 Charter of the United Nations 1945. The full text of the UN Charter can be found at
http://www.un.org/aboutun/charter/.
Article 24 GATT
Article 24 of GATT recognises
[…] the desirability of increasing freedom of trade by the development, through
voluntary agreements, of closer integration between the economies of the countries
parties to such agreements.
It therefore expressly permits the formation of customs unions and free trade areas between
member states despite the fact that this is contrary to the general principle of MFN status.
Article 24 states that:
[…] the provisions of this Agreement shall not prevent, as between the territories of
contracting parties, the formation of a customs union or of a free-trade area or the
adoption of an interim agreement necessary for the formation of a customs union or
of a free-trade area; Provided that:
(a) with respect to a customs union, or an interim agreement leading to a formation
of a customs union, the duties and other regulations of commerce imposed at the
institution of any such union or interim agreement in respect of trade with
contracting parties not parties to such union or agreement shall not on the whole
be higher or more restrictive than the general incidence of the duties and
regulations of commerce applicable in the constituent territories prior to the
formation of such union or the adoption of such interim agreement, as the case
may be;
(b) with respect to a free-trade area, or an interim agreement leading to the formation
of a free-trade area, the duties and other regulations of commerce maintained in
each of the constituent territories and applicable at the formation of such free–
trade area or the adoption of such interim agreement to the trade of contracting
parties not included in such area or not parties to such agreement shall not be
higher or more restrictive than the corresponding duties and other regulations of
commerce existing in the same constituent territories prior to the formation of the
free-trade area, or interim agreement as the case may be; and
(c) any interim agreement referred to in subparagraphs (a) and (b) shall include a
plan and schedule for the formation of such a customs union or of such a freetrade area within a reasonable length of time."16
Case Study
The North American Free Trade Agreement
What is NAFTA?
In June 1990 President Bush (the then President of the United States) and President Salinas
(the then President of Mexico) announced their intention to begin discussions aimed at
liberalising trade between the U.S. and Mexico. Shortly afterwards, in August 1990, President
Salinas officially proposed to President Bush the negotiation of a free trade agreement. In
February 1991 Canada joined the negotiations and the result was the North American Free
16
Article XXIV(5) General Agreement on Tariffs and Trade 1947. The full text of the GATT can be found at
http://www.wto.org/english/docs_e/legal_e/gatt47_e.pdf.
Trade Agreement (NAFTA), which was signed in December 1992 and came into force in
January 1994.
NAFTA forms the world's second largest free trade zone after the European Union17. Its aim
is to eliminate the majority of tariffs on products traded across its member states. It targets the
abolishment of export tariffs in particular industries, with textiles and automobiles a major
focus. However NAFTA also created a framework where labour and environmental concerns
could be addressed collectively, as well as serve as a platform for dispute resolution and
intellectual property protection.
In their book NAFTA Revisited: Achievements and Challenges, Hufbauer and Schott explain
the key reasons that spurred each of the participating countries to enter into NAFTA. In
relation to the US, they state that:
For the United States, NAFTA was an economic opportunity to capitalize on a
growing export market to the south and a political opportunity to repair the
sometimes troubled relationship with Mexico […] NAFTA reforms promised to open
new doors for US exporters – who faced Mexican industrial tariffs five times greater
on average than US tariffs – to a growing market of almost 100 million people. US
officials also recognized that imports from Mexico likely would include higher US
content than competing imports from Asia, providing an additional benefit. Increased
Mexican sales in the US market would in turn spur increased Mexican purchases
from US firms.18
They explain the reasons for Mexico's interest as follows:
For Mexico, NAFTA represented a way to lock in the reforms of the aperture, or
"market opening", that President Miguel de la Madrid inaugurated in the mid-1980s
to transform Mexico's formerly statist economy in the wake of the devastating debt
crisis of the 1980s. Mexico needed more rapid growth to provide new opportunities
for its young, expanding population. Given the legacy of the debt crisis of 1982, low
domestic savings, and an increasingly overvalued peso, the most practical way to
propel growth was to import goods and capital, creating more competition in the
Mexican market.19
Finally, in relation to Canada, they explain that:
For Canada, the latecomer to the NAFTA table, the objectives were less ambitious.
Initially, Canadian officials suspected that a new agreement with Mexico would erode
the hard-fought gains of the CUSFTA, which had come into force only in 1989.
Canadian unions felt that Mexico's low wages would undercut Canada's competitive
advantage in the US market, possibly diverting US FDI away from Canada Trade
between Canada and Mexico was small, the prospective deal seemed unlikely to
redress CUSFTA shortcomings on trade remedies, and Canadians were less worried
about migration flows than their US counterparts. However, as it became clear in
September 1990 that the United States and Mexico were going to move ahead with or
without Canada, the Canadian government decided that it had more to gain by joining
17
The European Union has more members and a larger population; however, it is a customs union whereas NAFTA is a free
trade agreement.
18
19
G. C. Hufbauer and J. J. Schott, NAFTA Revisited: Achievements and Challenges (2005), p2.
Ibid, p3.
the negotiations than by staying on the sideline. Involvement allowed the government
to minimize the risks to Canada of US-Mexico free trade and offered an opportunity
to extract new commercial concessions from the United States.20
NAFTA highlights
Article 102 of NAFTA sets out the key objectives of the agreement as follows:
The objectives of this Agreement, as elaborated more specifically through its
principles and rules, including national treatment, most-favored-nation treatment and
transparency, are to:
a) eliminate barriers to trade in, and facilitate the cross-border movement of, goods
and services between the territories of the Parties;
b) promote conditions of fair competition in the free trade area;
c) increase substantially investment opportunities in the territories of the Parties;
d) provide adequate and effective protection and enforcement of intellectual property
rights in each Party's territory;
e) create effective procedures for the implementation and application of this
Agreement, for its joint administration and for the resolution of disputes; and
f) establish a framework for further trilateral, regional and multilateral cooperation to
expand and enhance the benefits of this Agreement."21
According to data from the Office of the United States Trade Representative, between 1993
and 2007 "trade among the NAFTA nations more than tripled, from $297 billion to $930
billion"22. This increase in trade may not necessarily be entirely attributable to NAFTA and
this is something that is difficult to assess. However the consensus seems to be that
NAFTA has played a significant role in this increase in trade23.
As with all bilateral and regional trade agreements, agriculture has been a controversial issue
for NAFTA. It is an incredibly sensitive issue politically and countries are often reluctant to
remove protectionist barriers in relation to farming. The U.S., Canada and Mexico were
unable to negotiate the terms on agriculture trilaterally so it is not covered by NAFTA;
instead three separate bilateral agreements were signed (i.e. one between the U.S. and
Canada, one between the U.S. and Mexico, and one between Canada and Mexico). This, of
course, adds a layer of complexity to the arrangements between the three countries.
NAFTA and world trade
It seems clear that NAFTA has played an important role in increasing trade between its
member countries. However, an important question in relation to world trade is whether this
increase is a global one or whether the increase actually represents trade diversion (i.e.
diversion of trade away from non-member countries, rather than a genuine increase in trade).
NAFTA contains restrictive rules of origin24, which are very protectionist in nature and
20
21
Ibid, p3.
Article 102, NAFTA (1992). The full text of NAFTA can be found at http://www.sice.oas.org/trade/nafta/naftatce.asp.
22
Office of the United States Trade Representative, NAFTA Facts (March 2008) (available at
http://www.ustr.gov/assets/Trade_Agreements/Regional/NAFTA/Fact_Sheets/asset_upload_file202_14592.pdf).
23
24
See for example G. C. Hufbauer and J. J. Schott, NAFTA Revisited: Achievements and Challenges (2005).
"Rules of origin" are important for free trade agreements because, unlike customs unions, under the terms of a free trade
agreement each participating country determines its own tariffs to apply to non-member countries. Therefore, those member
countries with higher external tariffs need to protect against other member countries with lower external tariffs importing
arguably exceed the measures necessary to prevent trade deflection. The rules of origin have
arguably resulted in trade diversion for certain industries. Hufbauer and Schott comment that
"in a few industries, most notably textiles and apparel where 'yarn forward' rules of origin
were imposed specifically to make US textile firms the preferred suppliers for Mexican
apparel manufacturers, NAFTA has indeed fostered trade diversion."25
The U.S. hopes to negotiate a regional trade agreement covering all of the Americas, but key
countries like Brazil are sceptical of its benefits. Instead certain countries (such as Chile) have
preferred to negotiate separate bilateral trade agreements with each of the three current
NAFTA members. These agreements all contain different standards of trade liberalisation and
are an example of how developing countries, by entering into a variety of bilateral and
regional trade agreements, can unwittingly create a complex system of overlapping
arrangements that may not be beneficial to them in the long run.
Conclusion
Many developing countries are signing up to bilateral and regional trade agreements because
the benefits of the reciprocal arrangements are attractive and offer a much faster solution to
trade liberalisation than the "Doha" round is currently able to offer. However, the result of the
proliferation of bilateral and regional trade agreements is a complex system of overlapping
arrangements, which many people fear will have a negative impact on the developing world
because it is not equipped to deal with such a high degree of complexity.
The case study on NAFTA is an example of the complexity that can arise even as between the
three countries involved. The arrangements between the US, Mexico and Canada are not all
encapsulated within NAFTA. There are a number of side agreements in place, setting out
different systems in respect of different products depending on the political and economic
factors in each case.
Bilateral and regional trade agreements are, by their very nature, discriminatory and there is a
concern that many developing countries are signing up to arrangements that may erode over
time. The worry, therefore, is that developing countries and small corporations, which are
unable to handle this chaotic structure, will lose out in the long run.
products from non-member countries with the intention of immediately exporting those products to other member countries that
have a higher external tariff. This is known as "trade deflection".
25
G. C. Hufbauer and J. J. Schott, NAFTA Revisited: Achievements and Challenges (2005), p23.
`