Limitations of RTAs.

 Efficiency and Limitations of Regional Trade Agreements (Trade Blocs)

Trade blocs, free trade areas, and bilateral agreements are emerging fare and wide in international trade. In 2001, regional trade agreements (RTAs) accounted for 43 per cent of world trade. The emergence of RTAs has added diversity and complexity thereby creating a web in international trade relation.

Growth in trade is observed as a result of these negotiation but are they really the best method of liberalising trade on a global level? The rapid surfacing of RTAs evokes concerns for the future of free trade, and in general the welfare of the world economy in the long run. There are six dominant concerns involving the efficiency and limitations of RTAs.

Trade Diversion:

Efficiency is great concern surrounding the creation of trade blocs. Trade diversions can be the unfortunate effect of these preferential trade agreements. Trade diversions are created when trade barriers are lowered in a bloc or region, thus making prices on imports from outsiders comparatively higher, even if they are the low-cost supplier. Trade is then diverted away from the low-cost supplier, to the less efficient incumbent. These breaches in efficiency have welfare effects.

“Competitive Regionalism”, Costly Negotiation Process and Overlapping Agreements Establishment of regional trade agreements has gained momentum. Small countries in particular are vulnerable to pressures to join trade blocs in order not to be left out of benefits from increased trade volume. This tendency is referred to as “competitive regionalism”. The pressure to quickly regionalise may also distract efforts from the greater goal of multilateral liberalisation of trade.

Since the pace of multilateral talks is generally slow (the Uruguay Round took seven years) requiring extensive negotiations; countries that would prefer liberalisation of trade on a multilateral level are, in the mean time, scrambling to regionalise.

Furthermore, the negotiation process is costly,” particularly to smaller countries, and given the “cost of non-participation” in RTAs efforts are concentrated on quick regional agreements. Given the pressures to regionalise, and limited negotiation resources, countries may hastily create trade blocs. This “competitive regionalism” can ultimately divert efforts away from greater free trade, and rather create complex barriers among blocs.away from greater free trade, and rather create complex barriers among blocs.

The rapid creation of regional agreements may also hinder the greater goal of free trade by creating a complex web of agreements, thus posing a challenge to and complicating multilateral solutions through the WTO. Agreements with too much red tape can initially look attractive, but if not in harmony with greater global negotiations; the participants can find themselves at a disadvantage in the future.

In this light, it is warned that the benefits given by the preferential treatment through regionalisation, may be short lived, and unable to exceed the costs of continuous administration of the bloc.

Preferential Liberalisation Can Potentially Increase Vulnerability Entering into a trade bloc makes all parties vulnerable to the decisions and practices of all countries involved. For political or other reasons an incumbent of the region may revoke or modify the preferential treatment granted by the agreement.

This situation is particularly dangerous when there is a dominant trade partner in the bloc that may shift its weight around for political gains. Furthermore, the preferential agreement may shelter industries and hamper inefficiencies within the bloc.

In the case that the bloc should expand, or the terms of the agreement change, the margins of preference are eroded, and the countries are worse off. A more stable system would be multilateral reduction of barriers within a common set of rules.

Inclusion of Additional Elements in RTAs:

It is common for RTAs to include elements unrelated to trade, that may in fact serve to restrict trade rather than promote trade in the long run. RTAs, especially many involving the US, oftentimes contain parameters on labour standards, environmental issues; intellectual property rights, and capital movements.

In some cases non-compliance with the agreed parameters results in trade sanction or other forms of punishment. These types of standards could be detrimental to trade growth especially for countries in which institutions are weak.

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