chapter 15 regional integration 1 overview of rules 1 regional integration in addition to the global economic regime based on the gatt and imf systems which has sustained the world ...
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CHAPTER 15 REGIONAL INTEGRATION
1. OVERVIEW OF RULES
(1) Regional Integration
In addition to the global economic regime based on the GATT and IMF systems, which
has sustained the world economy since World War II, regionalism, through which
neighbouring countries seek to strengthen their economies by entering into some form of
“regional integration” has become a major trend. This trend was triggered by the EU market
integration. In both developed and developing countries, customs unions and free trade areas
(FTAs) continue to increase and expand. Today, they account for a considerable amount of
world trade (Figure15-1, 15-2). In the WTO, regional trade agreement (RTAs) is referred to as
customs unions, FTAs, and interim agreements. In this chapter, we use the term “regional
integration” to signify both RTAs and other forms of regional cooperation. Almost 90 percent
of the WTO Members are parties to such RTAs. Japan, Korea and Hong Kong are among the
few exceptions.
Article XXIV of the GATT allows RTAs to be exempted from the most-favoured-nation
principle under certain conditions; RTAs must not raise barriers to trade with countries outside
of the region. This is because while RTAs promote trade liberalization within the respective
regions, if they raise barriers to trade with countries outside the regions, they would impede
trade liberalization as a whole. From this standpoint, the adequate application of Article
XXIV should be needed lest the WTO is turned into an empty shell.
Moves towards “Regional Integration”
In recent years, moves towards regional integration have been more and more active,
with countries seeking to strengthen their ties with other countries. In Europe, when the
Treaty on the European Union (the Maastricht Treaty) took effect in November, 1993, the
European Union (EU) was created, which enlarged and built upon the European Community
(EC). The enlargement of the EU took place on January 1, 1995 by accession of three new
countries, Austria, Sweden and Finland, which were former members of the European Free
Trade Association (EFTA). Meanwhile, the September, 1993 signing of the side agreements to
the North American Free Trade Agreement (NAFTA) launched the free trade arrangement in
North America in January, 1994. Elsewhere, AFTA (the ASEAN Tree Trade Area) began
reducing tariffs among its members in January, 1993. It has continued to expand its range of
items covered, and has agreed to make efforts toward the acceleration of the integration
process with a view to implementing the AFTA free trade agreement by 2003, and to begin
negotiations on access to services area. On the other hand, in the Americas, certain countries
in Latin America initiated the Southern Common Market Treaty (MERCOSUR) in January,
1995.
One of the trends that have recently been observed is to create mechanisms for broader
regional co-operation. This includes: 1) enlargement of existing regional integration,
including the FTAs between the EU and the Central and Eastern European countries (CEECs),
the FTA to be set up between the EU and the Mediterranean countries, and the creation of a
Free Trade Area of the Americas (FTAA); 2) linkage between regional integration
organizations, such as economic co-operation, including the creation of a future FTA between
the EU and MERCOSUR; and 3) continent-based regional co-operation that may not
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necessarily be seeking to create a FTA or customs union, such as Asia-Pacific Economic Co-
operation (APEC) and the Asia-Europe Meeting (ASEM).
The APEC is some form of regional co-operation that does not immediately seek to
establish customs unions or FTAs. The APEC is founded on an open regionalism that seeks
not only to reduce the barriers to trade among its member economies but to make the result of
these efforts available to other non-region economies as well. In November, 1994, an
unofficial summit of the leaders of the APEC economies was held, and a joint declaration was
issued “setting a goal of free and more open trade and investment by the year 2010 in the
developed countries, and 2020 in the developing countries” (the Bogor Declaration). At the
Manila meetings in November, 1996, all members submitted specific Individual Action Plans
(IAP). All members (including new participating members in 1998, i.e. the Russian
Federation, Vietnam and Peru) submitted revisions of the Plans at the Vancouver meetings
held in November, 1997 and at the Kuala Lumpur Meeting in November, 1998. Thus, steps
toward liberalization and facilitation have been taken.
Japan, like Korea, Hong Kong, and Taiwan, is a WTO member that does not belong to
any regional trade agreement. Japanese basic trade policy is to create an environment for free
and transparent international economic activities by strengthening common international rules
through active participation in the next round of WTO negotiations. At the same time, we also
consider that we need to strengthen regional and bilateral ties while they complement
international rules. Such efforts will promote multilateral liberalization in the future and will
expand the range of economic activities in which Japan enjoys a close economic partnership
with Asian countries. From this standpoint, private-sector groups between Japan and Korea
are jointly studying the potential for a free trade agreement, and the governments of the two
countries are negotiating earnestly with a view to consulting an investment agreement. Last
December, Japan reached an agreement with Singapore for a study group composed of
industries, governments, and academics to study a free trade agreement as well.
Growth in the Value of World Trade by Region, 1990-98 (Trade in Goods)
(Unit: Billion Dollars)
ɹɹɹEXPORT IMPORT
1998 ( % ) 1990-8 1998( % ) 1990-8
World 5270 ( 100) 6 5465 (100) 6
North America 897 (15.4) 7 1152 (21.1) 8
(America) 682(12.9) 7 944(17.3) 8
South America 276( 5.2) 8 340( 6.2) 14
Western Europe 2348(44.5) 5 2367(43.3) 4
Asia 1293(24.5) 7 1086(19.9) 5
(Japan) 388( 7.4) 4 280( 5.1) 2
(China) 184( 3.5) 15 140( 2.6) 13
EU(15) 2181(41.4) 5 2172(39.8) 4
NAFTA(3) 1014(19.2) 8 1280(23.4) 8
MERCOSUR(4) 80( 1.5) 7 99( 1.8) 16
ASEAN(10) 329( 6.2) 11 279( 5.1) 7
(Source) WTO Annual Report 1999(the WTO Secretariat)
(NOTE) 1990-8:rate of increase (%)
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Ratio of Internal to External Trade for Major Regions (Trade in Goods)
EXPORT 1998 IMPORT 1998
Total Internal External Total Internal External
(billion Exports Exports (billion Imports Imports
dollars) (%) (%) dollars) (%) (%)
EU(15) 2181 62.7 ( -) 37.3 ( -) 2172 63.1 ( -) 36.9 ( -)
NAFTA(3) 1014 51.3 (10) 48.7 ( 5) 1280 39.9 (11) 60.1 ( 7)
MERCOSUR(4) 80 24.9 (22) 75.1 ( 5) 99 21.2 (22) 78.8 (15)
ASEAN(107) 329 22.0 (12) 78.0 (11) 279 22.6 (12) 77.4 ( 6)
(Source) WTO Annual Report 1999 (the WTO Secretariat)
(NOTE)
1) Figures in parentheses ( ) for internal/external exports and internal/external imports show the 1990-1998
growth rate (%).
2) Numbers given here may not match those in Figure 15-1 because of the margin for error in the
calculations.
(2) Legal Framework
(i) Existing GATT/WTO Provisions on Regional Trade Agreements (RTAs)
Tariff reductions applying exclusively to specific countries are prohibited in principle
under Article I of the GATT, which requires most-favoured-nation treatment as a basic rule.
The WTO, however, under Article XXIV of the GATT, authorizes the establishment of
customs unions, FTAs and interim agreements, if their purpose is to facilitate trade within the
region, and not to raise barriers to trade with countries outside of the region. The WTO allows
these RTAs to be exempted from the most-favoured-nation principle as long as they conform
to the following conditions outlined in Figure 15-3.
So far, the question of whether most customs unions or FTAs conform to Article XXIV
of the GATT has been examined by working parties established separately for each RTA for
which notification has been given. However, there is almost always disagreement over how to
interpret Article XXIV since the wording is vague: “substantially all the trade between the
constituent territories”, “other restrictive regulations of commerce (ORRCs)”, “on the
whole....shall not be higher or more restrictive.” Because of this, in almost every case, the
claims of the parties to the FTAs and customs unions and those of third countries with
competing interests have been given equal weight.
Interpretation of Article XXIV became an issue in the review of the Treaty of Rome that
established the European Economic Community (EEC) in 1957. Indeed, only six of the 69
working parties that had completed reviews by the end of 1994 had been able to reach a
consensus on conformity questions. But while there have been conflicts of opinion on Article
XXIV interpretation in almost every review of a RTA, the legitimacy of most-favoured-nation
treatment for a RTA has only been contested in three panel cases. None of these panel reports
has been adopted by the GATT Council.
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Conditions of Customs Unions, FTAs and Interim Agreements
under Article XXIV of the GATT.
(Conditions under Article XXIV: 5, 8 of the GATT)
- ORCs :other regulations of commerce
- ORRCs :other restrictive regulations of commerce
Article XXIV:5 Article XXIV:8
Customs Unions (a) The duties and ORCs shall not on (a)(i) The duties and ORRCs (except,
the whole be higher or more where necessary, those permitted
restrictive than the general incidence under Articles XI, XII, XIII ,XIV,
of those previously applicable in the XV and XX) are eliminated with
constituent territories prior to the respect to "substantially all the trade"
formation. between the constituent territories of
the union.
(ii) Substantially the same duties and
ORCs are applied by each of the
members of the union to the trade of
territories not included in the union.
Free Trade Areas (b) The duties and ORCs shall not be (b) The duties and ORRCs (except,
(FTAs) higher or more restrictive than those where necessary, those permitted
previously existing in the same under Articles XI, XII, XIII, XIV,
constituent territories prior to the XV, and XX) are eliminated with
formation. respect to "substantially all the trade"
between the constituent territories .
Interim (a) (b) same condition as in the
Agreements customs unions or FTAs
(c) any interim agreement shall
include a plan and schedule for the
formation of such a custom union or
of such a FTA within a reasonable
length of time.
(Compensatory adjustment under Article XXIV:6)
– With respect to a Customs Union, in fulfilling the requirements of Article XXIV:5(a), when a
contracting party proposes to increase any rate of duty inconsistent with the Article II, the
procedures set forth in Article XXVIII shall apply for compensatory adjustment.
(Notification to the Contracting Parties, Considerations)
– Any contracting party deciding to enter into a customs union or FTAs or an interim agreement,
shall promptly notify the WTO. (Article XXIV:7(a))
– After notification, the contracting parties will discuss and review the plans and schedules in the
interim agreement with the parties to the agreement, the Contracting Parties shall make
recommendations where appropriate. (Article XXIV:7(b))
(ii) Treatment of RTAs Among Developing Countries
To address RTAs among developing countries, the GATT has issued the decision of the
contracting parties on November 28, 1979 (“Differential and More Favourable Treatment
Reciprocity and Fuller Participation of Developing Countries,” hereinafter “Enabling
Clause”), reached during the Tokyo Round negotiations, to serve as the basis for special
treatment accorded to developing countries in matters of trade. The Enabling Clause allows
RTAs entered into among less-developed contracting parties for the mutual reduction or
elimination of tariffs and non-tariff measures to be exempted from the most-favoured-nation
principle under Article I of GATT as long as the following conditions are met (paragraph 2(c),
see Figure 15-4).
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