Are ‘Regional Trade Agreements’ a stepping stone to global free trade or an alternative?

Since the end of the Second World War there has been a wide spread determination to engage in multilateral negotiations to boost world trade starting with the introduction of the ‘General Agreement on Tariffs and Trade’ (GATT) in 1947. This agreement between 23 countries aimed to encourage freer and more predictable trade with one eye on helping less economically developed countries. For the next 25 years the global economy experienced a huge reduction in nominal tariff rates, growth in production and trade with the US taking the lead on tariff reductions. All countries who partook in this trade liberalization saw considerable benefits with developing countries that aligned themselves with free trade growing three times fasters than developing nations that shied away from free trade policies. From the mid 1970s advancements in global free trade policies slowed down until the creation of the World Trade Organisation (WTO) in 1994. However further stumbling blocks occurred with the commencement of the Doha round in 2001. The Doha round was set to focus on economic growth through further trade liberalization concentrating particularly on developing nations but 12 years later a consensus has yet to be reached and negations remain uncompleted. Dialogue between nations broke down in 2005 and little progress has been made since; the main sticking point of the Doha round has been failure to agree on agricultural policy. In view of the fact that global negotiations have broken down countries have turned to ‘Regional Trade Agreements’ (RTA) and their popularity has created legitimate concerns that the WTO is becoming increasingly irrelevant and we are moving further away from the initial aims of the GATT. However they are opposing views on what effect RTAs will have on the future of the WTO and the completion of the Doha round.

‘Regional Trade Agreements’ have been a marked feature of the post 1945 global economy; the WTO currently recognises 354 RTA’s in force. A primary example of an RTA would be the European Union, as well as political integration the initial basis of a European pact was to create economic amalgamation. This has evolved to encompass free movement on capital, goods, labour and services, no internal tariffs between member states and adopting common external tariffs. Other significant regional trade agreements include NAFTA, a basic free trade agreement between the USA, Canada and Mexico, and MERCOSUR, an agreement between a handful of Latin American countries that is similar in nature to the European Union.

Many observers feel the emergence of these RTAs damages the aims of the WTO and hinders efforts for increased global trade. These claims centre on several arguments, the main one being that countries who belong to a successful RTA have less incentive to go back to the WTO negotiating table and finish the Doha round. If nations are prospering within their RTA there is little to no motivation to go back to difficult global negotiations. Further worry stems from the re-introduction of protectionism, instead of individual countries ‘protecting’ themselves there could be a whole block of countries ‘protecting’ themselves from the outside world. Protectionism is in direct contradiction to the aims of global free trade and if RTAs begin to adopt policies of this ilk global trade would suffer.

Whilst acknowledging the possible negative issues of RTAs there are those that claim RTAs are in fact a stepping stone towards global free trade. WTO membership is at an all time high and it is pointed out that it is easier to reach an agreement between several trade blocs as opposed to 100s of countries. Various analysts believe that successful RTAs lead by example and encourage multilateral progress, if countries experience benefits from trading with each other they will want to trade with other countries and will therefore be enticed to go back to the WTO negotiating table. Another valid point is that RTAs bring political stability, if countries are trading with each other they are very unlikely to go to war with each other and political stability is essential in increasing global free trade.

With these juxtaposed views both offering legitimate beliefs on the effects of RTAs on global free trade and the relevance of the WTO can history offer any insight into the debate. In the late 80s multilateral negotiations were flagging but the creation of NAFTA and the preceding discussion reignited interest in global free trade and the WTO came into force not long after. In 1990 the Uruguay round of negotiations collapsed but the following year preliminary talks to launch NAFTA were under way. Its creation produced a trade bloc of over 400 million people and the rest of the world’s reaction to this was decisive and cohesive. Within months countries had returned to the negotiating table and the Uruguay round was completed and the WTO was formed as a result. This saga indicates that the reality may lean on the side of those who believe RTAs are a stepping stone to global free trade.

If in the past the establishment of a major RTA has brought countries back to the global negotiating table then could it happen again in the future and are there any agreements of such magnitude in the wings? On David Cameron’s recent trip to the US the concept of an ‘Atlantic’ trade agreement had been discussed between him and Barack Obama. The creation of a RTA between Europe and America could provide the same spark as NAFTA did back in the early 90s, governments will see trade and economic stimulus being created and will want to get back to the WTO negotiating table. An ‘Atlantic’ trade agreement could prove to be a powerful catalyst in reigniting support for multilateral negotiations and the completion of the Doha round.

Credible points lie on both sides of the argument but history would suggest that perhaps the creation of a significant RTA could bring people back to the WTO negotiating table. If a deal can be struck between Europe and America to construct an ‘Atlantic’ trade agreement then there is a chance this could reinvigorate global free trade talks and lead to the completion of the Doha round. Nevertheless eight years without progress is a long time and countries have fashioned new avenues to create trade without the WTO. Only time will tell if RTAs are a skipping stone to increased global free trade or if it will lead to ostracised trading blocs, the only certainty is RTA’s are here to stay.