Regional trade agreements in the modern multilateral trading system: advantages and disadvantages

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V. N. Karazin Kharkiv National University

Regional trade agreements in the modern multilateral trading system: advantages and disadvantages

Dovgal O., Dovgal G., Serdiuk H.

Introduction

In the 21st century in different parts of the world, on different continents, countries increasingly began to conclude regional trade agreements (RTAs), providing for the mutual granting of preferences to their members, and today they have become an important part of international trade. The reason for this phenomenon lies in the desire of most countries to obtain a preferential trade regime, which is provided by the RTS.

Non-discrimination among trading partners is one of the key principles of the GATT/WTO system. At first glance, RTAs seem to conflict with this principle. Nevertheless, their creation takes place with the consent and under the auspices of the World Trade Organization (WTO). This is because they operate in accordance with GATT/WTO rules and aim to facilitate trade relations between their signatories without causing trade barriers for third parties. Members, as former contracting parties to the General Agreement on Tariffs and Trade (GATT), are required to notify the RTAs to which they participate.

The last country that did not participate in any RTA was Mongolia, after the notification of the RTA between it and Japan in June 2016, all WTO members are involved in the RTA. Some member countries participate in 20 or more RTAs.

The main results of the research. As of 2021, 568 such trade agreements have been notified and entered into force, according to the WTO. Moreover, a significant increase in the number of regional trade agreements falls on the period after 1992, when 54 regional trade agreements were notified and entered into force in the last 2021 alone (Figure 1).

Figure 1. Notifications of RTAs in force and inactive RTAs, 1948-2021, number per year [1]

For comparison, for the period 1948-1992 only 61 regional trade agreements were notified and entered into force, as evidenced by the data in Figure 2.

Figure 2. Evolution of RTAs, 1948-2021 [1]

To date, virtually all WTO member states are party to at least one RTA. Most of them participate in two or more preferential trade agreements.

However, experts' opinions about the effectiveness of such agreements are diametrically opposed. Some experts consider them useful, others, on the contrary, distort trade.

In particular, the opinion is most often heard about the erosion of preferences, expressed in the fall in the level of tariff protection between RTS participants, which leads to a decrease in the competitive advantages of other countries that do not participate in such agreements. However, this is practically leveled out when the level of tariff protection used by RTAs members in relation to third countries is low and, in fact, does not fulfill the function of protecting the market.

Currently, the weighted average level of tariff protection used by economically developed countries does not exceed 5%.

Therefore, the conclusion of the RTA by these countries can create an erosion of preferences only in those sectors of the economy where there are tariff peaks (for example, this applies to agricultural products and light industry).

However, the main trends in the development of the multilateral trading system are not associated with the use of tariff measures, but with the growth of non-tariff restrictions on trade and the desire of many countries to join value chains.

Many WTO members are currently involved in negotiations for new RTAs. At the same time, most new potential agreements are bilateral, although new plurilateral agreements are being concluded between several WTO members.

We are talking, for example, about the signing and entry into force of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) Agreement in the Asia-Pacific region with the participation of 11 participating countries; the signing of the Comprehensive Regional Partnership (RCEP) Agreement between members of the Association of Southeast Asian Nations (ASEAN) and six other WTO members in the Asian region; on the creation of a Pacific Alliance between Chile, Colombia, Mexico and Peru in the region of Latin America; on the entry into force of the African Continental Free Trade Area (AfCFTA) and the negotiation of a Tripartite Agreement linking the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC) and the South African Development Community (SADC) in Africa [1].

It should be noted, however, that the vast majority of new plurilateral agreements complement rather than replace existing bilateral agreements.

Of course, with the increase in the number of RTSs, their coverage of participants also changed.

While RTAs concluded in the 20th century were mainly aimed at improving the conditions for access to the market for goods by reducing the level of tariff protection, the goal of such trade agreements now being concluded was to reduce trade costs by eliminating non-tariff restrictions, for example, such as customs formalities, harmonization of technical regulations, sanitary and phytosanitary measures in trade in goods, while liberalizing trade in services, as well as the settlement of issues in the field of investment, intellectual property, competition, e-commerce, environmental protection and labor standards.

Thus, out of all RTAs notified to the WTO, more than 50% of them provide not only for the reduction of customs duties, but also for the settlement of many other issues [2, p. 7], which is clearly seen in Figure 3.

Figure 3. Percentage of regional trade agreements with broad coverage of international trade regulation instruments, % [2]

The inclusion in the scope of the RTAs of issues that are not regulated by the WTO rules or more stringent rules compared to the WTO rules, as well as the changed structure of the agreements themselves, create prerequisites for splitting the single market into many local markets. In addition, under these conditions, it is necessary to analyze the impact of the new trade regulation rules on third countries that are not parties to these agreements.

The agreement within the framework of the RTA of new rules for regulating international trade is often the main risk of losing the functions of the WTO in regulating the multilateral trading system and is one of the arguments for including countries in regional economic integration.

At the same time, it should be noted that in most cases, RTAs are based on WTO rules, and the harmonization of new rules in certain areas of international trade regulation, as a rule, is beneficial to all participants in the multilateral trading system.

For example, out of 238 RTAs, only 171 contain provisions governing the application of technical barriers to trade. At the same time, in 85% of cases, RTAs refer to the provisions of the WTO Agreement on Technical Barriers to Trade [3, p. 377]. trade agreement international preferential

With regard to sanitary and phytosanitary measures, it should be noted here that in most cases such agreements either do not cover substantive issues at all, or contain clauses corresponding to the provisions of the WTO Agreement on Sanitary and Phytosanitary Measures.

This fact is confirmed by the data given in Table 1.

Despite the presence in the RTAs of provisions that go beyond the norms of the WTO, certain obligations of the members of these agreements are beneficial to all participants in the multilateral trading system.

Table 1 Coverage of regional trade agreements for sanitary and phytosanitary measures

Source: [3]

For example, transparency obligations, which consist in publishing draft regulations or changing legislation to prevent violations of competitive behavior in the market, or obligations for countries to accede to various conventions on the protection / protection of intellectual property rights, contribute to improving the terms of trade for all participants in foreign economic activity, insofar as:

such obligations cannot be fulfilled solely within the framework of the RTAs. For example, if one RTAs participant assumes obligations to privatize a separate service sector, such obligations de facto cannot be fulfilled only in relation to the partner under the agreement, and this leads to trade liberalization in relation to all participants in the multilateral trading system;

even in the Trans-Pacific Trade Partnership, adherence to WTO norms is confirmed in one form or another, and provisions that go beyond the norms of the WTO system are somehow aimed at strengthening the WTO system, for example, by making decisions of its working bodies binding. Other provisions, such as the entry into force of technical regulations no less than six months after their adoption, also create a more predictable environment for trade by all participants in foreign economic activity.

Therefore, these obligations, although technically aimed at creating advantages for the contracting parties under the RTA, in practice improve the terms of trade for all countries.

At the same time, individual regional trade agreements, at first glance, contain advantages only for the participants in such agreements. For example, as in the case of sanitary and phytosanitary measures, technical regulation measures, such advantages can be expressed in mutual recognition or equivalence of standards.

On the one hand, such benefits really apply only to the parties to the agreement, and on the other hand, the WTO Agreement on Sanitary and Phytosanitary Measures, like the WTO Agreement on Technical Barriers to Trade, contains provisions on mutual recognition, or equivalence.

In this regard, nothing prevents third countries, based on these provisions, from negotiating the mutual recognition of standards outside the framework of regional economic integration.

In addition, the provisions of the WTO agreement provide for the unconditional granting of the most favored nation treatment in trade in goods, services and the protection of intellectual property rights.

Unlike the rules of GATT and the General Agreement on Trade in Services (GATS), agreements on trade-related aspects of intellectual property rights do not contain exceptions to this regime when signing RTAs. In this regard, any provisions that go beyond the rules of the WTO, included in the RTS, should be automatically extended to all WTO members.

Therefore, discrimination against third countries or trade distortions can hardly be considered the main factors in the impact of RTAs on the multilateral trading system, since even countries outside of these agreements can benefit from them.

At the same time, the development of regional economic integration creates prerequisites for the hybridization of the multilateral trading system.

It is logical that RTAs are based on the principles of the WTO and are closely related to its norms. They can be considered as agreements containing additional obligations to WTO norms. Therefore, the structure of agreements concluded at the regional level turns out to be hybrid, since, on the one hand, they repeat the WTO agreements, and, on the other hand, they supplement the rules of the multilateral trading system [4, p. 11].

The hybrid structure of the RTA requires transparency in the development of new rules for regulating international trade in order to ensure its consistency with the already existing WTO rules.

One of the areas where the consequences of the hybrid structure of the RTS are particularly noticeable is the resolution of trade disputes.

Trade dispute resolution mechanisms in the WTO and RTAs generally follow the general principles of dispute resolution in international law, i.e. are a decentralized system. Therefore, any of these mechanisms can serve to apply, interpret and comply with the rules of an agreement to which countries have acceded.

At the same time, RTAs often offer the possibility of resolving disputes both under these agreements and within the WTO, which again creates a hybrid environment in which trade relations between countries are governed by both the WTO and RTAs, which should ensure compliance with only general obligations, but also obligations outside the WTO.

At the same time, the RTAs and the WTO agreements are equal treaties from the point of view of international law. In this regard, they are in a horizontal relationship with each other, including because the WTO rules do not provide for the rule of law of the WTO in resolving disputes within the framework of the RTA [5, p. 116].

An additional factor in the hybridization of the multilateral trading system is that the competence of the Dispute Settlement Body (DSB) of the WTO is limited solely to the interpretation of the provisions of the WTO agreements.

Therefore, many trade disputes have already emerged, demonstrating the consequences of the hybridization of the multilateral trading system. For example, the dispute in the WTO on softwood, initiated by the United States against Canada in connection with its subsidization of timber production. This dispute has been repeatedly considered in both USMCA (United States- Mexico-Canada Agreement) and the WTO, resulting in conflicting decisions, since USMCA's provisions for the use of subsidies are similar to WTO rules.

The most telling example of controversial dispute resolution is the Brazil-Retread Tire Import Measures dispute. In this dispute, the EU initiated WTO litigation due to the fact that Brazil imposed a ban on the import of tires originating from all countries, with the exception of tires whose country of origin is a MERCOSUR member country. From the point of view of the European Union, Brazil's actions were contrary to Art. XI:1 of the GATT. However, her actions could not be justified by Art. XX GATT.

It should be noted here that initially Brazil introduced this measure in relation to all countries. But Uruguay initiated legal proceedings within the framework of MERCOSUR, which resulted in the recognition by the court of this integration association of Uruguay's claims as fair, since the RTA provides for a ban on the introduction of quantitative restrictions in mutual trade between MERCOSUR member states.

In the course of litigation within the framework of the WTO, the Arbitration Panel recognized the introduction by Brazil of a ban on the import of tires as contrary to the provisions of Art. XI: 1 GATT. At the same time, the Arbitration Panel noted the legitimacy of such a ban in accordance with the provisions of Art. XX GATT, since it has been proven that retreaded tires pose a threat to the health and life of people, animals and plants, given that there are no alternative measures to prohibit imports in this situation [6, p. 245].

At the same time, the Panel did not consider the obligations of Brazil under MERCOSUR. Therefore, when a WTO member state initiates litigation in the Dispute Settlement Body (DRB) of the WTO, the Arbitration Group ascertains the absence of violations of the rules of the organization, since its competence is limited by WTO agreements, and RTAs are concluded in order to liberalize mutual trade, including by adopting countries with obligations that go beyond WTO norms.

Based on the foregoing, it should be noted that currently the problems associated with the inability of the WTO to regulate trade relations between its members, which are also participants in regional economic agreements, have become urgent.

Consequently, the competence of the DSB of the WTO should be expanded in order to create a single platform for resolving trade disputes. Along with the hybridization of the multilateral trading system, it is necessary to consider the fact that certain rules for regulating trade developed within the framework of the RTA may subsequently become world standards.

This is related to the following points. Rules in such new areas of regulation of international trade as competition, the environment, labor standards primarily affect the RTA member countries, forcing them to make changes to national laws, and provisions that go beyond WTO rules regarding, for example, the protection of intellectual property rights ownership should be automatically extended to all WTO member states that are RTA members, which, as a rule, subsequently adhere to similar obligations when concluding other agreements and developing their position on the multilateral trading platform, seeking to align their obligations with the obligations of other participants in the multilateral trading systems.

In this regard, the issue of transparency in the development and application of new rules for regulating international trade within the framework of newly concluded RTAs is of particular relevance today.

Conclusions

Summing up the above, it should be noted that RTAs simultaneously have a positive impact on the further development of the multilateral trading system and create risks of its hybridization, including due to different interpretation and application of the same rules for regulating international trade. At the same time, RTAs cannot replace the multilateral trading system, since they are based on WTO rules.

References

1. Regional trade agreements. WTO.

2. Regional trade agreements and the multilateral trading system. WTO.

3. Acharya, R. (Ed.). (2016). Regional Trade Agreements and the Multilateral Trading System (WTO Internal Only). Cambridge: Cambridge University Press.

4. Rensmann T. (2017). Mega-Regional Trade Agreements. Switzerland: Springer International Publishing AG.

5. Malebakeng A. Forere. (2015). The Relationship of WTO Law and Regional Trade Agreements in Dispute Settlement. From Fragmentation to Coherence. (Global Trade Law). Kluwer Law International.

6. Report of the Panel, Brazil -- Measures Affecting Imports of Retreaded Tyres, WT/DS332/R, 12 June 2007.

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