Benefits and Drawbacks of Rta Essay

Custom Student Mr. Teacher ENG 1001-04 24 December 2016

Benefits and Drawbacks of Rta

Under the current legal system of the World Trade Organisation (WTO), there are two categories of rules on the RTAs in the area of trade in goods: the first is based on the Article XXIV of the General Agreement on Tariffs and Trade, which generally applies to all RTAs; the second is based on the so-called Enabling Clause, which in exceptional circumstances, provide special and differential treatment (SDT) for RTAs among developing countries.

3.4.1. Advantages of Regional Initiatives

Regional initiatives have a number of advantages which explain why so many countries are members of such agreements:

•Region Specific Issues

Firstly, a regional agreement can help in dealing with region-specific issues, such as border controls, transit, migration, or movement of labour. Countries recognize that other more opaque barriers than tariffs can hinder trade. These include border controls, phytosanitary restrictions, weak transport systems, and regulatory differences. RTAs therefore increasingly cover some of these issues, which are more suitably addressed at the regional level. Some RTAs have also included dispute resolution mechanisms, which, in the implementation phase of the arrangement, have proven to be extremely useful.

•Reinforcement Of Internal Regulatory Or Structural Reforms Secondly, RTAs can reinforce internal regulatory or structural reforms. This can be done through external treaty obligations and visible political commitments. Often, small countries participating in a RTA have just made, or are trying to push ahead, major reforms.

•Liberalization Of Services

Turning to large industrial countries, trade in goods as such no longer appears to be the dominant factor for participating in RTAs. A growing number of RTAs includes provisions on liberalizing services (including financial), investment, protecting intellectual property rights, labour and environmental standards, and dispute resolution. Industrial countries are keen to include such issues to counter what they regard as unfair competition due to, for example, piracy or poor labour standards. They also desire to open up markets for their services sectors, where they have a comparative advantage.

•Political Objectives

Leaving aside economic goals for a moment, for some countries, political objectives are another important reason to enter into a RTA. Countries that may have far-reaching integration as a goal typically start out with trade agreements as a first step toward a deepening of political relationship. For e.g. initial agreements can cover trade and investment, then member countries later form an economic and monetary union, and then enhance the process towards a fully-fledged political union with a common constitution. Similarly, forging bilateral and regional trade ties is often linked to geopolitical and security considerations. Trade policy is a key instrument of foreign policy to secure regional stability by promoting the development of participating countries. In addition, political cooperation can reduce the potential for military conflicts among member nations.

•Defensive Motive

A last reason to enter into regional agreements may be defensive. As more and more countries enter into regional agreements, the cost of non participation rises. While some countries may prefer the multilateral route, they may also feel that not entering into regional agreements can lead to a competitive disadvantage relative to countries that have entered into RTAs.

•Greater Consensus

The benefits of trying to eliminate trade barriers in smaller groups of countries is facilitated through RTAs i.e. it can be easier to gain consensus among the relatively few members of a regional agreement as opposed to among all the member countries in the WTO.

While RTAs are signed for a variety of reasons, the impact on trade, growth, and employment seems crucial in determining the extent to which broader objectives are achieved. It is difficult to identify arrangements that have advanced wider political objectives, without having first achieved progress in enhancing trade, and having this seen reflected in higher rates of sustainable growth and employment creation. Thus, it appears that the willingness to accept trade liberalization and the accompanying economic adjustments is a first step that may be indicative of progress than can be made in other areas.

•Economies of scale

Economies of scale are one of the most important aspects of regional integration in regards to development. In economic theory, economy of scale gains can be achieved when cost of producing one unit declines as the number of units increases. Economies of scale gains can be realized in regional integration agreements between developing nations because of the size of their combined markets and lower capital costs. Before regional integration, both country A and B will produce a certain good. Because of economies of scale, the country with the cheapest production costs will be able to provide the good for the entire region at a lower cost and to the benefit of entire region.

•Trade Creation

Trade creation is another aspect of regional integration that can also be achieved through RTAs. A RTA effectively expands the market in which a producer can sell a good by making goods both available and at a cheaper price to new markets. Under a RTA, countries will turn to partner nations for cheaper products. Thus, production can shift to nations with the greatest comparative advantage, resulting in greater exports and imports within the region under the agreement along with greater efficiency in the allocation of resources.

•Bargaining Power

Increased bargaining power is another major reason for developing nations to pursue RTAs. Economies within developing nations are in almost all cases small in comparison to developed nations, and are often in danger of being left out of global economy as a result of size. Under RTA, a group of nations can in effect gain greater visibility and influence within the international community. Increased bargaining power within the International community can have effects on a number of different aspects; cooperating members are able to share in the high fixed of negotiation. This power of integration has been seen in various RTAs, including CARICOM’s success in international policymaking, and perhaps even more clearly with ‘Group 20’ in the Doha round of WTO trade talks. As confirmed by several conversations with experts in the international community, increased bargaining power is a political goal sought after RTAs.

•Market Attractiveness

Increased market attractiveness has played a major role in the RTAs especially in the case of Africa. Similar to the goal of increased bargaining power, RTAs provide increased market attractiveness for FDI and trade relations with the developed world because of the clarity of rules and the stability than an RTA brings to a region. As a region becomes unified under standard trade measures and investment law, it is easier for outside nations to invest in and do business with the developing nations under RTA. This in turn can bring increased financial and capital flows, infrastructure, and ultimately wealth to the region. Increased FDI after formation of the RTAs has been researched extensively by organizations such as World Bank, and various situations point to the effectiveness of regional integration as a positive for FDI.

The investment situation within European community and the NAFTA all showed significantly increases in FDI after negotiations were concluded. Another aspect of increased market attractiveness is the idea of conflict resolution within developing nations. Under some RTAs, conflict resolution boards have been put into place that have increased the legality of agreements and increased attractiveness for foreign investors and export purchasers. One of the boards includes the peer review system used by the New Partnership for African Development (NEPAD) that has been viewed favourably by various developed nations and groups including the US and EU.

•Cooperation in public goods

This also assists national economies in their development. By cooperating on infrastructure projects the whole region can benefit and money can be saved through economies of scale gains in regards to investment in public goods. This cooperation can also be beneficial for environmental reasons. Railroads, public utilities projects, and power plant initiatives (with the case of SADC power pooling project) are only a few examples of how regional integration can increase efficiently and save money for member nations.

3.5Drawbacks of RTAs

Disadvantages Of Regional Initiatives

While there are many obvious benefits for countries to join in RTA, as evidence by their popularity, there are some negative aspects associated with the RTAs. It is important to know these drawbacks in order to make RTA work as well as to formulate policy as regards to new RTAs.

•Trade Diversion

As mentioned above, Trade Creation is one of the benefits of RTA, but trade creation however is not the entire picture. A negative aspect, called trade diversion can occur when the partners divert away products that may be more cheaply produced in favour of products from the RTA partner, even if these products are produced at a higher cost, thus resulting in inefficiency. In the case of trade diversion, regional suppliers have an advantage as a result of preferential treatment rather than an actual comparative advantage. The latter stems from sales won at the expense of third country suppliers, which become less competitive purely because they face a tariff barrier that does not apply to suppliers within the new free trade area. Such increased trade actually reduces the economy’s overall efficiency. It results in lowered welfare for the importing nation as tariff revenues are lost and not replaced by gains from trade when trade creation cannot outweigh trade diversion.

•Delocalisation Of Labour Market

Another negative consequence of RTA is that it leads to shift in employment. Since the formation of trading blocs significantly reduces or eliminates barriers to trade, the producer of a particular good or service will more often be decided by relative productivity. With trade agreements, labour market is dislocated, i.e., there are some jobs that are loss while others are gained. An example will be the loss of between 32000 and 100000 of manufacturing jobs as a direct result of the NAFTA between Canada, Mexico and United States. But evidence also suggests that between 90,000 and 160,000 jobs tied to exports to Mexico were also created by NAFTA. Dislocation allows a nation to upgrade their economy toward higher-wage-paying industries.

•Increase In The Complexity Of International Trading System

FTAs also increase the complexity of the international trading system and can raise transaction costs for business. For example, complicated rules of origin are required to prevent third countries product entering via the other party. With different rules negotiated under different agreements, enforcement of these rules and compliance with them by business can be a complicated task. Businesses have to take into account the different dispute settlement mechanisms as well as different standards regimes and other harmonization arrangements.

•Unequal Bargaining Power

In a RTA between a developed country and a developing country or countries, the latter are usually in a weaker bargaining position due to the lack of capacity of their economies, their weaker political situation and their weaker negotiating resources. The result of such unequal bargaining power can be that significant trade restrictions by large countries remain in place instead of being eliminated under circumstances of more equal negotiating power.

•Distortion In Production

Additionally RTAs may negatively impact on global trade because regional preferences and rules of origin distort production by making location of production or source of raw materials the driving incentive.

•Prevents Complete Liberalisation In Multilateral Arena

RTA may also prevent complete liberalization in multilateral arena. Countries that benefit from regional trade agreements may be reluctant to expose themselves to the risks of opening their markets on a multilateral level, if they expect relatively insignificant returns.

•Loss Of Technology And R&D Transfer

One of the negative consequences of RTA is the loss of technology and R&D transfers from developed countries. Technology and ‘Know How’ transfers from developed countries are viewed as the major benefits from RTAs. Unfortunately, as intra-regional trade begins to dominate a trading bloc, these technology and R&D transfers can be lost.

•Loss Of National Sovereignty

Successive levels of integration require that nations surrender more of their national sovereignty. For this reason, the higher levels of integration are more difficult to achieve.

•While there are many obvious benefits for countries to join in RTA, as evidence by their popularity, there are some negative aspects associated with the RTAs. It is important to know these drawbacks in order to make RTA work as well as to formulate policy as regards to new RTAs. These include amongst others trade diversion, loss of national sovereignty and unequal bargaining power.

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