The World Trade Organization (WTO) estimates that, as of January 15, 2012, it has been notified of the existence of approximately 511 Regional Trade Agreements (RTAs), 319 of which are in force. A number of these agreements have been formed among the developing and emerging countries, which view regionalization as a tool with which to more effectively engage in the world economy in today’s trading environment.
Traditionally, African, Caribbean, Pacific, and Latin American countries have benefitted from preferential programs which have allowed them to export their goods to the markets of their industrialized trade partners on a duty-free basis. These preference programs provided a real benefit when the products of other countries were being subjected to high tariff rates. Today, these preferences are being eroded by WTO negotiating rounds and free trade agreements (FTAs) as a result of which their industrialized trade partners have lowered the tariffs on goods entering from other countries.
More and more of these trade preference programs are also being permanently eliminated. For example, the European Union is in the process of negotiating the transition from preferential access programs to reciprocal Economic Partnership Agreements with the African Caribbean and Pacific (ACP) countries. The United States has negotiated free trade agreements with most of the former beneficiaries of its preference programs; these include the US-Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) and FTAs with Colombia, Panama, Peru. In this climate, regional arrangements among developing and emerging countries seek to create alternative markets closer to home and to enhance members’ ability to negotiate the terms of their integration into the liberalized world economy.
Regionalization encompasses more than trade cooperation and liberalization; it extends to other areas of economic integration, and even to the political arena. The process can include any or all of the following four stages:
1. A Free Trade Area (FTA) in which the barriers against the movement of goods and services of member states are removed. The FTA is the easiest type of regional arrangement to create and to administer. Once goods enter an FTA member, they move within the entire FTA on a tariff-free basis.
2. A Customs Union, in which a common external tariff (CET) is imposed on the goods of non-members entering the free trade area. The goal of the customs union is to permit the free movement only of those goods produced by the members, imposing a cost on other goods entering the region. This level requires the harmonization of customs and other trade policies and regulations.
3. A common market, in which the free movement of capital and labor is introduced into a customs union. At this level, the goal is to create one regional market for a broad array of goods and services.
4. An Economic Union, where the members introduce one currency and harmonize their monetary and fiscal policy. This is the most advanced form of regional integration. The European Union is the most developed example of an economic union and its successes have served as a model for many of the regional efforts in developing and emerging countries.
RTAs can offer several advantages to companies interested in doing business in a particular region. In addition to removing tariff barriers, they can lead to harmonization of the regulations and procedures which affect the movement of goods and services across borders and within the regional economic space. Harmonization reduces the cost of compliance and generates a level of comfort that the rules, standards, and protections will remain consistent within the region. A region that shares a common currency further diminishes the costs of foreign exchange transactions across borders.
At the same time, implementation of these agreements is uneven and at times inconsistent. Nevertheless, all four forms of regional integration can be found among African, Caribbean, Latin American, and Pacific countries.
Future postings on this blog will periodically examine these RTAs, their operation and their potential benefit for businesses.
