Regionalism

Regionalism

Introduction
What is the most beneficial trading method a country can use? This is a question that politicians and economists have been trying to answer for decades. The debate is a very intensive and complicated matter that has essentially the whole world involved, trying to configure a method of trade that is beneficial for everyone. Regionalism and multilateralism, typically the two main methods for trading with fellow countries, will be discussed at length. In addition, the General Agreement on Tariffs and Trade, the World Trade Organization, and the North American Free Trade Agreement will be analyzed to determine the efficiency each has to offer, and the side effects each has a tendency to cause.

Regionalism
Regionalism is a trading practice that consists of countries within the same region banding together to form regional trade agreements with each other (RTA’s). Typically, the countries involved are close in geographic region, and work together to accomplish certain objectives. Formally, a main objective is to enhance economic growth with secondary objectives being to attract foreign investors, create and allow specialization, allow economies of scale, and may even include noneconomic objectives. These noneconomic objectives may include things such as managing immigration, promoting regional security, and enhancing domestic economic reforms (Carbaugh, 2004).

Regional Trade Agreements
When countries decide to enter into regionalism, they form regional trade arrangements with their neighbors. These agreements are usually beneficial to all countries involved, and often times help to create non-tariff barriers between the said countries. These trade arrangements have shown to have tremendous effects on importing and exporting of goods between member nations (Carbaugh, 2004). Most of the regional trade agreements that involve the United States have been successful in liberalizing agricultural trade. By 2008 the North American Free Trade Agreement will have nearly eliminated all tariffs on certain agricultural and other nonagricultural goods between the three neighboring countries, the United States, Canada, and Mexico. And although the U.S. free trade agreement with Israel largely left agriculture as a matter to be negotiated later, the yet-to-be ratified agreements with Chile and Singapore contain extensive agricultural provisions. Furthermore, in the Free Trade Area of the Americas (FTAA) now under negotiations, the United States has made an aggressive proposal for mutual agricultural trade liberalization (Burfisher and Zahniser, 2003). Burfisher and Zahniser state: “Every agricultural commodity would be included in trade reform, with tariffs to be eliminated immediately or within a specified transition period, depending on the state of development of the exporter” (2003, p.22).

Regional Trade Agreements have been liked to increased investment and productivity gains in developing economies. These favorable developments contribute over the long term to the economic growth and stability of our trade partners and directly support growth and demand for U.S. exports. In particular, RTA’s help trade flow more freely between members in the group, without barriers being raised on trade with the outside world. The World Trade Organization recognizes that these regional arrangements and closer economic integration can benefit countries (Burfisher and Zahniser, 2003). NAFTA is a prime example of how this theory works. The United States and Canada both agree that Mexico will benefit the most from this RTA, but further recognize that all three countries will gain from having non-tariff barriers (Burfisher and Zahniser, 2003).

Regionalism is also a strategy to achieve comprehensive reforms with key trade partners. In RTA’s of the past decade, members have sought to implement deep economic and institutional integration by crafting agreements that address more than tariff reform. Many RTAs now deal with the reform or harmonization of regulatory practices, investment protection, labor issues, trade disputes, and the development of common positions in other trade negotiation venues. Increasingly, RTAs are also viewed as a way to link developing and developed countries in a common project of economic development. By encouraging investment and locking in unilateral economic reforms, RTAs can facilitate productivity gains in participating developing countries and accelerate their economic growth (Burfisher and Zahniser, 2003).

Customs Unions
Carbaugh defines customs Unions as: “An agreement among two or more trading partners to remove all tariff and nontariff barriers among themselves” (2004, p. 266). In addition, he states that customs unions members impose identical trade restrictions against nations that are not included in their customs unions (Carbaugh, 2004). This in some ways could be construed as favoritism and or discrimination. However, this also seems to be very influential in deciding whether or not to join a customs union.

European Union
In 1957, the Treaty of Rome helped form the European Economic Community (EEC). This was the beginning of the European Union (EU) as we know it. In 1993, the EEC agreement was ratified by establishing formal guidelines, and allowing trade barriers to fall, a group of European countries were slowly evolving their trade practices into a beneficial agreement between member nations. This agreement allowed for goods and services to move across borders without quotas or customs duties being levied (Kincaid, 2003). To date, the fifteen nations that are currently members of the EU are Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and Sweden. There are an additional ten countries due to join the European Union in May 2004. Nonmember nations pay an external tariff on goods exported into one of the member nations (Kincaid, 2003). Carbaugh adds to this by saying: “The ultimate degree of economic union would be the unification of national monetary policies and the acceptance of a common currency administered by a supranational monetary authority” (pg. 266). The European Union achieved this common monetary policy in 1993, when the Maastricht Treaty provided for a central banking system and a common currency that would replace the national currencies. The fifteen members of the European Union agreed to call this new common currency, the Euro (Columbia Encyclopedia, 2000).

The European Union is divided into four main branches, the European Commission, the Council of the European Union, the European Parliament, and the European Court of Justice. There are also sub committees to the European Union; they are the Court of Auditors, the Economic and Social Committee, and the European Council. Although the European Union has no official seat in government, the European Commission, and the Council of the European Union have some legislative functions. The European Union is headquartered in Brussels, Belgium. There are also various committees of the European Parliament that meet for monthly sessions in Strasbourg, France (Columbia Encyclopedia, 2000).

NAFTA
The North American Free Trade Agreement (NAFTA) is an agreement between Mexico, Canada, and the United States, that was implemented on January 1st 1994. The purpose of this agreement, according to United States Department of Agriculture, is to remove most barriers to trade and investment between member nations (USDA, 2001). Under the North American Free Trade Agreement, all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. In addition, many tariffs were eliminated immediately with other being phased out over periods of 5 to 15 years (USDA, 2004).
This regional approach to trade by the United States, Mexico, and Canada, has had many benefits. Starting with the United States’ agriculture, Canada and Mexico are the two largest export markets for U.S. agricultural products. According to the United States Department of Agriculture (USDA), the United States exports more to these two markets combined than to Japan or the 15-member European Union (2004).

From an economic standpoint, NAFTA seems to be working. In the period of 1992-2000, the worldwide value of agricultural exports climbed 19 percent. And over that same period, U.S. farm and food exports to our NAFTA partners grew by 62 percent. In addition, in the years immediately prior to NAFTA, U.S. agricultural products lost market share in Mexico as competition for The Mexican market increased. NAFTA can be credited with the reversal of this trend. The United States now supplies more than 75 percent of Mexico’s agricultural imports (Koopmann, 2003).

Mexico and the U.S. were not the only two countries to benefit from NAFTA. Canada is also reaping the rewards of these lower tariffs, as proven by their 81 percent increase of U.S. imports on agricultural products since 1990 (USDA, 2004).
The North American Free Trade Agreement contains other provisions that deal with more specific economic standards, which allow member countries to set their own standards for certain levels of protection. For example, the Sanitary and Phytosanitay Measure, imposes guidelines on the development, adoption, and enforcement of sanitary measures. In essence, these are measures taken to protect human, animal, and plant life from diseases, and contaminants. NAFTA allows each country to determine its level of protection required, and to set standards accordingly. Furthermore, other provisions such as the Export Subsidies provision, calls for the elimination of export subsidies by the three members, and the Grade and Quality Standards provision, calls for the U.S. and Mexico to apply an equal level of measure when classifying, grading, or marketing a domestic product in the same way an import product would by classified, graded, or marketed (USDA, 2004).
The North American Free Trade Agreement uses rules of origin, which give benefits to North American producers on newly established tariff preferences. Basically, these rules of origin state that any good must be significantly transformed or processed in a member country, before it may be entitled to NAFTA’s lower duties on shipping to one of the two other countries. These rules cover specific import sensitive commodities such as: bulk commodities, citrus, diary products, peanuts, sugar, and vegetable oils. These rules of origin were originally created to prevent Mexico from becoming an export dumping ground for products not originating in one of the member countries of NAFTA (USDA, 2004).
Regulations of NAFTA’s policies are done by several regulatory agencies. They are the NAFTA Committee on Agricultural Trade, the NAFTA Committee on Sanitary and Phytosanitary Measures, and the NAFTA Advisory Committee on Private Commercial Disputes Regarding Agricultural Goods. These different committees provide guidance and consultation to NAFTA members on a number of different issues, including disputes involving trade, matters relating to the implementation of agreements, and resolves disputes regarding agricultural products (USDA, 2004).

Despite regionalisms many benefits, it is criticized heavily for its discriminatory practices. By offering trade preferences to its selected partners, they undermine a key principle of the World Trade Organization. Under the WTO’s most favored nation principle, a country may not offer trade advantages to one country that it does not offer to all countries. Global trade rules grant an exception for the discriminatory preferences of RTAs, but only for those agreements that are trade liberalizing (WTO, 2004). Additionally, regionalism has a more limited geographical reach that its counterpart, multilateralism. For countries like the United States, with widespread export markets, relatively modest reforms on a global basis can have larger trade impacts than deep reforms with a few trade partners. For example, the WTO signatories accounted for ninety six percent of U.S. agricultural exports in 2002, while the countries that have either a current or proposed RTA with the U.S. accounted for just thirty nine percent (WTO, 2004). And lastly, regionalism may in a significant way, affect the incentives of major countries in the international arena to take the multilateral route (WTO, 2004).


Multilateralism
Multilateralism is a concept of trade, world wide, with out trade barriers or discriminatory unions. Proponents of multilateralism argue that this mutual process of trade reform is beneficial to every country in the world, because it lacks discriminatory practices and is not exclusive, unlike its rival regionalism (Waves, 2003). The practice of multilateral trade really started to become accepted shortly after World War II, when several countries entered a round of trade negotiations, and formed the General Agreement on Tariffs and Trade (GATT)(WTO, 2004).
GATT, adopted in 1947, was designed to provide an international forum that encouraged free trade between member states by regulating and reducing tariffs on traded goods and by providing a common mediator for disputes with trade (WTO, 2004). Since GATT was founded in 1947, there have been eight rounds of trade negotiations held, resulting in lower tariffs on manufactured goods for major industrial nations by over 90 percent. Furthermore, GATT has been attributed with a trade growth worldwide by over 14 percent. Economists point out that the Uruguay trade negotiations alone, resulted in billions of dollars in tax cuts for citizens around the world (WTO, 2004). Another important service of GATT was to negotiate multilateral extensions of tariff reductions through the application of the most-favored-nations clause (MFN). The most-favored-nation clause, according to the Columbia Encyclopedia, is a treaty that binds signers to extend trading benefits equal to those accorded any third state. This clause also ensures equal commercial opportunities, especially concerning import duties, and freedom of investment (2004). The MFN clause has been apposed by regional trading groups such as the European Union, who have lowered or eliminated tariffs among its members, while maintaining tariff walls between member nations (Columbia Encyclopedia, 2004). Kincaid adds to this by saying, “A tariff rate levied on a given good by one country must be the same for every supplying county, and tariff concessions exchanged between two countries must be extended to members of the WTO” (p.2, 2003).

World Trade Organization
The World Trade Organization (WTO) is the successor to the General Agreement on Tariffs and Trade. In 1995, as part of the agreement that resulted from the eighth round of trade negotiations, the World Trade Organization was created. The WTO carries the responsibility of monitoring national trade policies, handling trade disputes, and enforcing GATT agreements, which by design, reduce tariffs and other barriers to international trade and eliminate discriminatory practices (WTO, 2004). Under this new World Trade Organization, subsidies and quotas are to be reduced on imported farm products, automobiles, and textiles, which were not covered, by GATT. Additionally, there is freer trade in banking and other services, and more protection over intellectual property (Columbia Encyclopedia, 2000). The World Trade Organization currently has 135 members, with more memberships awaiting approval. The headquarters of the WTO is in Geneva Switzerland.
According to the World Trade Organization (2004), there are ten main benefits of the WTO trading system. They are as follows.
1. The system helps promote peace.
2. Disputes are handled constructively.
3. Rules make life easier for all
4. Freer trade cuts the costs of living
5. It provides more choice of products and qualities.
6. Trade raises incomes.
7. Trade stimulates economic growth.
8. The basic principles make life more efficient.
9. Governments are shielded from lobbying.
10. The system encourages good government.


Conclusion
Contrary to the domino theory, which implicitly regards regionalism and multilateralism as processes that are largely independent of each other, the two phenomena in fact appear to be interdependent to a considerable degree. The question is whether they are friends or foes, or to put it differently, is regionalism a building block or a stumbling block on the road to multilateralism.
Bibliography
Burfisher, M.E. & Zahniser, S., (2003, September). Multilateralism and Regionalism: Dual Strategies for Trade Reform. Retrieved January 22, 2004 from
http://proquest.umi.com/pqdweb?index=3&sid=2srchmode=1&vinst=PROD&fmt=4&st…
Carbaugh, R.J., (2004). International Economics. Thomson: Mason, OH
Columbia Encyclopedia, (2000). Columbia University Press
Kincaid, B.L., (2003, February). An Overview of Multilateral and Regional Trade. Ortonville, MI
Koopmann, G., (2003, Sep/Oct). Growing Regionalism- A Major Challenge to the Multilateral Trading System. Retrieved January 22, 2004 from
http://proquest.umi.com
United States Department of Agriculture, (2004). North American Free Trade Agreement. Retrieved February 24, 2004 from
http://ffas.usda.gov
World Trade Organization, (2004). Regionalism: Friends or Rivals. Retrieved February 22, 2004 from
http://www.wto.org