The Rise of Regional Trade Agreements: Key Trends and Policy Implications
Kati Suominen, Inter-American Development Bank

Regional trade agreements (RTAs) have proliferated spectacularly around the world over the past two decades. Indeed, along with the rise of the multilateral trading system, the rise of RTAs is one of the most important phenomena in the post-war international political economy. The number of RTAs in force soared from 50 in 1990 to some 230 by the end of 2004; the dozens of recent RTAs and on-going RTA negotiations could raise the number of agreements to well above 300.

The RTA wave is not unprecedented. Indeed, there have been two prior waves of RTAs-the first between the early 19th century and the beginning of World War I, and the second in the inter-war era. However, today's RTAs differ from their predecessors in three ways.

• While the first two waves carried RTAs of relatively limited issue coverage, with agreements generally centering on "commerce" and "navigation", today's RTAs are highly complex and comprehensive, regulating member states' behavior in such issue areas as services, investment, government procurement, and competition policy.

• Whereas the inter-war RTAs were often highly discriminatory vis-à-vis third parties, today's RTAs are formed in the context of "open regionalism", or against he backdrop of reduction of most-favored nation duties by the RTA members.

• And third, today's RTA wave is truly global: not only has it swept over each world region, but also become increasingly transcontinental, with such distant partners as the United States and Morocco, Mexico and Japan, and Chile and European Union having recently entered into agreements.

RTAs are hardly inconsequential: they regulate some one-half of global trade, and all countries but one-Mongolia-belong to at least one RTA. A growing number of countries are today member to several RTAs simultaneously, and for some prolific integrator countries such as Chile and Mexico that have formed agreements with all of their main trading partners, the bulk of foreign trade flows under RTA rules. It is not surprising, then, that RTAs have sparked intense political contention and policy interest in countries around the world. They have also gained growing multilateral attention, becoming one of the key priorities in the on-going Doha Development Round negotiations.

What are the implications of the spread of RTAs? While studies generally find that RTAs boost trade among the member states, literature remains divided as to whether RTAs are ultimately trade-creating or trade-diverting-and whether RTAs are a stepping stone or a stumbling bloc to world-wide free trade. However, besides their immediate trade effects, the RTAs mosaic continues surrounded by a number of unanswered-and thus far largely unexplored-questions that are crucial for understanding its long-term implications to the international economy and politics.

First, what are RTAs' implications to the world trading system, which today encompasses no fewer than 150 countries? Are RTAs friends or foes of multilateral negotiations and liberalization? Could, as feared by many pundits, the problems facing the Doha Round induce countries to explore further RTAs-and might RTA membership dampen the members' enthusiasm for multilateral negotiations? Second, what will the RTA universe look like in a few years? Might it, for example, metamorphose into exclusive, trade-diverting continental "mega-blocs" in Asia, Americas, and Europe that trade little with each other? Or could it balkanize into a hundreds of overlapping bilateral agreements that potentially apply distinct rules? Third, what do the elaborate RTA rules entail to the body of global trade rules? Are they complementary or dissonant with multilateral trade law? Fourth, what, if anything, do RTAs imply to other, non-trade forms of international cooperation that have burgeoned since the establishment of the United Nations and the Bretton Woods system? Are RTAs substitutes or complements to other forms of international cooperation-and if the latter, might they even help catalyze other forms of cooperation?

Recent research we have carried out at the IDB targets these sweeping questions and provides some preliminary answers:

• RTAs and multilateral liberalization have a complements. In an analysis of the past 130 years of international trade integration, we find that the most potent waves of RTAs have taken place against the backdrop of multilateral liberalization. RTAs particularly in the post-war era have proliferated against the backdrop of surges of multilateral trade agreements, and, indeed, during multilateral trade rounds. This suggests that multilateral trade agreements are unlikely to abate interest in RTAs: indeed, should the historical record particularly of the past 50 years be a guide, it could be argued that RTAs would proliferate even more if meaningful multilateral agreements materialize. Conversely, there is little evidence that the spread of RTAs would be inimical to the rise or odds of concluding multilateral trade negotiations. Rather, RTAs can further multilateralism by training a body of negotiators to accomplish more, undercutting protectionist interests, galvanizing export lobbies, and placing pressure on outsider countries to advance at the multilateral level.

For instance, the specter of strong Asian-Pacific Economic Cooperation (APEC) forum and the establishment of the North American Free Trade Agreement (NAFTA) in the early 1990s arguably induced outsiders to these schemes to conclude the Uruguay Round. But it is also not clear that a deceleration in multilateral liberalization would reduce the propensity for RTAs to spread. Regionalism has thrived during and after multilateral liberalization, but it has also survived challenges to multilateralism.

• The geography of RTAs shows few signs of transforming into exclusive continental mega-blocs. There are various reasons for this, such as the record of difficulties in forming such blocs, the rise of important production linkages between the main world regions, and, notably, the growing body of transcontinental trade agreements. Indeed, rather than multi-member regional integration schemes formed among neighboring countries, today's RTAs are increasingly bilateral and transcontinental in nature. Regional economies are becoming connected to partners in other continents, and the future "RTA market" will likely take place among countries of across oceans. Indeed, it seems that formation of exclusive RTA blocs was a more pressing prospect a century ago than it is today; even if mega-blocs were to arise, partners within them would necessarily be much more connected to the rest of the world than they would have been just a decade ago. This should assuage concerns about a rise of a tripolar global trading system.

• While bilateralism is ascendant, concerns over the RTA universe's balkanization into distinct agreements are not necessarily warranted. Particularly the RTAs formed by some of the main traders, such as the United States, Mexico, and European Union, respectively, are often based on similar blueprints and share adherence to the General Agreement on Tariffs and Trade (GATT) and WTO rules. Furthermore and importantly, most countries are today party to both RTAs and the WTO system, which should mean that most countries have a stake in the success of both spheres of integration.

• A detailed analysis of sectoral provisions in some two dozen of the world's most important RTAs shows that RTAs are in general in line with global trade rules. GATT Article XXIV stipulates that RTAs must eliminate tariffs on "substantially all trade" between the members within a "reasonable length of time." Most RTAs meet the commonly used interpretation of these benchmarks-liberalization of 90 percent of products by the tenth year into agreement implementation. Although some outlier RTA members (in general developing countries) and product categories (particularly sensitive sectors-agriculture, textile and apparel, and footwear) trail the benchmark, RTAs' overall record of liberalization appears more positive than two decades ago.

• Most RTAs are also aligned with (and/or explicitly call for adherence to) GATT and WTO rules other than those related to tariff liberalization, such as non-tariff measures. Many RTAs also are "WTO plus", or incorporate a larger number and/or more specific rules than are currently applied at the multilateral level. Some examples include customs procedures, trade facilitation, and services-all incidentally areas where improvements will enhance a country's trade not only with its RTA partners, but with all of its trade partners. While some RTA disciplines, such as restrictive rules of origin, can hamper RTAs' liberalizing potential, the global system of RTAs seems more robust than just two decades ago. A further positive characteristic of today's RTAs is implementation: unlike the rather half-hearted implantation of the past eras, many of today's agreements are implemented as a standard operating procedure. In part this owes to the development of credible dispute settlement mechanisms at the regional and multilateral levels.

• There are theoretical reasons to believe that RTAs can serve as harbingers of further cooperation between the member states. For instance, the positive externalities generated by RTAs, such as lowered barriers to trade and expanded markets, can augment the pay-offs from further regional rules and regulations in such areas as trade facilitation. RTAs can also produce negative externalities, such as border congestion and air pollution, which, in turn, can give rise to demands for cooperation for, say, the establishment of regional transportation networks or cross-border environmental protection. Pioneering empirical data bears these hypotheses out. Our dataset on nearly 15,000 international agreements reached over the past century shows that RTAs and other types of cooperation agreements fluctuate together: the main surges of RTAs coincide-and often slightly precede-the main surges of cooperation agreements. What is more, countries that cooperate most extensively with each other in the area of trade are each other's most favored partners also in other areas of cooperation. To the extent that RTAs have indeed provided incentives for the members to forge further cooperation agreements, their continued spread around the world could in the future years be matched by an unprecedentedly sweeping wave of cooperation agreements.

Recent research provides for cautious optimism about the long-term implications of RTAs. RTAs can be symbiotic with, and additive to, the global trading system, and good for the member states' relations beyond the area of trade. Auguring well for the future of these complementarities is that most countries of the world are today part of RTAs, multilateral trade agreements, and cooperation agreements alike, and, as such, have a stake in the success of each form of international collaboration. While ascertaining the hypothetical causal relationships between RTAs and other major trends in today's global economy requires rigorous econometric analysis, perhaps the key lesson of our recent work is that RTAs can be a positive phenomenon, yet one whose potential can be accentuated through careful design and conscious policy measures.

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The main references for the findings are:

Estevadeordal, Antoni and Kati Suominen. 2006. "Regional Trade Agreements and Global Cooperation." Paper presented at ECLAC/IDB-INTAL/OBREAL Seminar "Los Procesos de la Integracion en la Encrucijada: Perspectivas para el Futuro", UN ECLAC, Santiago, Chile 21-22 November 2006.

________. 2006. "What are the Trade Effects of Rules of Origin?" Mimeograph.

________. 2006. "Sequencing Regional Integration." Article submitted to World Economy.

IDB, Integration and Regional Programs Department. 2006. "Market Access Provisions in Regional Trade Agreements." Paper presented at Expert Meeting "Regional Rules in the Global Trading System", IDB-WTO Joint Research Program, 26-27 July 2006, Washington DC.

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The author is International Trade Specialist at the Integration and Regional Programs Department, Inter-American Development Bank. The views expressed in this paper are strictly those of the author and do not necessarily represent the views of the IDB. The author can be reached at katis@iadb.org.

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