Relationship Between The Wto And Regional Trade Agreements Economics Essay

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Introduction

The end of Cold War and the beginning of a process of integrating former communist countries in the western economic system, created an environment of strengthening neo liberalism by highlighting it as the only proper policy for economic development.

Furthermore, the successful completion of the round of trade negotiations in the mid-1990s i.e. the Uruguay Round, brought a new dynamic in the process of reducing trade barriers worldwide by the transition from GATT in the contemporary status of World Trade Organization (WTO). Thus, the world was scanned by a universal tendency of adhering to the basic principles of neo liberalism (Deacon 2001). Further technological developments led to the strengthening of telecommunications systems and of the possibilities of direct communication (satellite links, fast internet, mobile telephony, etc.) in conjunction with the policies of international organizations like the WTO, the World Bank and the International Monetary Fund towards a rapid and complete liberalization of the most sectors of economic activity, these developments facilitated and exacerbated the global trend of economic liberalization.

In light of the undisputed primacy of the neo liberal model of development, most countries in the world (developed or not) started (or continued) to implement policies of trade liberalization, privatizations and generally strategies of opening their economies in the global environment while at the same time they reduced the involvement of State (Breslin and Higgott 2000:335).

A series of agreements within the WTO framework (TRIMS, TRIPS, etc.) were further promoted by the lending terms of the IMF and the World Bank programs. This way, funds and investments could be moved around the world easier than ever (Yeats and Deacon 2006).

The drastic liberalization of the global economic environment has led to a significant movement of goods and capital.

WTO and GATT - brief history

The World Trade Organization (WTO) was established in 1995, after a marathon of negotiations that took place among various countries over the period 1986-1994. The WTO is a continuation and development of the former General Agreement on Tariffs and Trade (GATT) which was a set of global rules and, which establishes the framework of trading goods. During the negotiations period for the creation of the WTO, GATT had already counted 50 years of life. The WTO is essentially another name for what it is known as "multilateral trading system" because it sets the legal framework that governs trade among nations (English et al. 2002:132).Currently, the WTO counts 146 member states.

WTO is based on a series of agreements. It incorporates the old GATT, while it covers a much wider scope. While GATT was focusing exclusively on the trade of goods, WTO sets the rules for many other sectors such as market services, agriculture and textiles. WTO has become very powerful because it has a system of arbitration settlements that are legally binding and allow a country to impose huge financial penalties on another if it is proven that the second one has violated WTO rules.

The main objective of GATT since its foundation (1947) was and is the

progressive liberalization of world trade. The creation of regional

patterns of economic integration, i.e. the regional and therefore, geographically

limited liberalization of trade is permitted under certain conditions in the

multilateral cooperation as a second best solution and as an exception to the basic principle of MFN (Rorden 2006: 120). This means that the release of trade at the regional level applies only to the member countries of the regional shape and not all member countries of GATT.

The terms and conditions for establishing a compliant regional agreement with the law of GATT are referred in Article XXIV of the original agreement. According to paragraph 4 of the Article XXIV of GATT the regional integration is desirable because it may lead to freer trade as soon as it does not create new barriers to other member countries of GATT (Rorden 2006:140).

In case of creation of a customs union agreement according to paragraph 5 of the article XXIV the new common tariffs should be the same or less in comparison to the status that prevailed before its foundation.

Any country that decides to participate in a regional agreement must

immediately notify all the other Member States of GATT and provide any

possible information (§ 7 Art. XXIV). In the Final Act embodying the

effects of multilateral trade negotiations under Uruguay Round (1994) a Memorandum of Agreement was embodied on the interpretation of Article XXIV of GATT in order to avoid many of the ambiguities and shortcomings of this article (Finger and Schuler 2000:515).

Regional Trade Agreements

At the same time, with the prevalence of neo-liberalism and the process of further opening the world economy as a whole, a trend of uniting neighbour countries in regional trade agreements became dominant.

The initial difficulties that were created to promote free trade globally through the Uruguay Round, had created a climate of pessimism regarding the promotion of neo liberalism principles (Finger and Schuler 2000:520).

Additionally, the end of the Cold War had created the conditions that allow the cooperation among states that were by then ideological enemies. These two elements have turned many countries to examine regional cooperation with other countries, creating, therefore, a wave of regional cooperation (Baldwin 1997:870).

This wave, which is historically the second, was not merely restricted to the creation or the attempt to create some regional organizations, but brought this phenomenon to the forefront of the global political and economic scene of 90s.

With principles in favour of promoting free trade and covering the whole world and especially the famous triad (North America, Europe, East Asia) which dominates the global economic and political arena, this new trend to create regional agreements was one of the important parameters of the political scene of the 90s and of the beginning of the 21st century (Breslin and Higgott, 2000: 337).

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A basic parameter of the new wave of regional cooperation is the fact that the U.S., which until recently pursued the trade liberalization of the global economy through multilateral agreements, decided to form such a regional cooperation with Canada and Mexico by unifying commercially North America. So, in 1994 NAFTA (North American Free Trade) would be created, which included two of the richest countries in the world (Mansfield and Milner 1999:621).

Furthermore, in various parts of the world, other regional agreements were formed, such as Latin America, Africa and elsewhere and there was noticed a reactivation of member - states aiming at transforming, expanding and / or deepening them. A good example is South America which, after several earlier attempts to create regional alliances with protectionist trade status, would enter this game of regional cooperation that tends to be compatible with the process of world trade liberalization. More specifically, Brazil, Argentina, Paraguay and Uruguay will create the Mercosur, a regional association that includes two of the strongest developing countries (Preusse 2001: 921).

This second wave continues until today. In particular, there are over 200 documented regional agreements in the world, most of them form free trade areas and several of them still do not have fully implemented the initial declarations of their Member States (Christensen 2007:147).

A unique example of a more complex form of a regional cooperation is the European Union. Undeniably, however, both the number and the geographical distribution of regional agreements, especially since 1990, have increased significantly.

The phenomenon of creating regional partnerships has been geographically expanded area is now a global phenomenon. Indeed, regional agreements form, especially after their second "wave" of the previous decade, a level of political governance with growing importance (Smith 2001:72).

The fact that the strongest countries in the world have joined into a regional cooperation and promote part of their agenda through this shows how important this phenomenon is worldwide. In particular, the European Union, NAFTA and Mercosur are only some of the many regional agreements around the world whose importance in the global political scene is historically in its peak.

The arrival of this wave of creating regional agreements offered a respite from the long dispute among scholars as to whether regional cooperation is ancillary and supplementary to the phenomenon of globalization. The basic argument is that many initial regional partnerships were created with an emphasis on import substitution and trade diversion, while there were important distinctions among members and non-members (Baldwin and Venables 1995:84). Especially on the latter there was the widespread belief in the early 1990s that the proposed treaty of Maastricht (1992) would lead to a closed Europe, the famous "Castle of Europe." The new wave of regional agreements was based, as noted above, on the additional function in the process of restructuring the global economy, favouring the creation of trade, the adoption of policies for export growth and generally promoting the regional economic liberalization of the member-states.

Of course, the various regional agreements have been accused in the past that they create resistance to the further liberalization of the world economy i.e. the European Union with its attitude towards the abolition of tariffs and subsidies for agricultural products or the ASEAN (Association of Southeast Asian Nations) (Webber 2001:345). In general, however, level the trend, at least until the late 90s, was to have more regional agreements to help the liberalization process of the global economic environment.

Evaluation of the policy of regional economic integration

The efforts of the countries of the world society for the creation

of regional economic integration patterns are associated with a number of

questions:

• Whether the patterns already described were implemented in practice.

• How did they affect the welfare of participating countries or the welfare of countries that are not involved?

• Did they harm or benefit the global trading system and the multilateral

trade liberalization under the GATT / WTO?

• What are the prospects of "regionalization" in an increasingly globalized economy?

On these questions, there are no easy, clear answers.

Regarding the first question, it may be said that the EU presents the most advanced economic integration. Ακρόαση

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The establishment of EMU created all those conditions necessary to achieve the goal of creating a single economic space. The economic integration in Europe is promoted in practice through the EEA agreement with the other EFTA countries. Moreover, various agreements (e.g. customs union, free trade zone, preferential) among the EU and other Mediterranean and developing countries have promoted the regional trade integration (De Mel and Panagariya 1993:93).

Most of the other agreements on regional integration, including NAFTA, Mercosur, APEC, FTAA, etc. are in the implementation phase, i.e. not all

measures necessary for regional trade liberalization are applied.

Particularly problematic are the regional agreements among developing countries.

A small external sector, small percentages of foreign trade as to GDP, acute problems (deficits) in the external balance of trade, dependence on few export goods, small production capacity and low degree of diversification of production, small opportunities of intra industrial trade opportunities, high government interference in economy, high inflation, different economic systems and different socio-economic and political philosophies and concepts, strong economic orientation in the markets of industrialized countries, regional, local and internal armed conflicts and tensions are some of the obstacles to regional integration among southern countries, which have resulted in failure to achieve the agreements or the constant change in the objectives or the composition of states of regional clusters (Christensen 2007: 151).

Regarding the second question, it is stressed that with few exceptions all commercial researches to European and North American integration conclude that regional integration has had a positive effect to the prosperity and development of the countries involved, while the negative effects to third countries were insignificant ( Baldwin and Venables, 1995). In other words, the creation of commerce and the other dynamic benefits of regional integration prevailed on the diversion of trade and the discrimination of third countries. This is because regional partnerships among developed countries not only led to increased trade barriers against third countries, but contrary to the multilateral negotiations and agreements of GATT / WTO a further reduction of foreign trade protectionism was reached. Furthermore, the expansion of regional schemes to include new countries or with similar agreements with other countries has increased the size of the regional patterns, and consequently, they have reduced the number of affected third countries.

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And regarding the third question, the answer is that regional integration has never prevented the development of the international trade system of

multilateral cooperation (Summers, 1991). In other words, they did not prevent neither the further liberalization of international trade under GATT / WTO nor its institutional expansion by arranging a series of new sectors (e.g. subsidies, dumping, telecommunications and information technology, state intervention and supplies, technical configuration and services).

There is also the view that the functioning of regional integration benefited multilateral cooperation. On the one hand, the increase of competitiveness

within a regional agreement and the recognition of the benefits of free

competition have positively influenced the attitudes of the members of regional agreements in the multilateral negotiations for the liberalization of international trade. On the other hand, the establishment of a regional agreement and the risk of increased protectionism and discrimination of third countries led the latter to request the initiation of new negotiation cycles under GATT to liberalize international trade.

For example, the U.S. (and others), fearing a more difficult access in the market of the former EEC, they brought a new negotiation round under GATT (Kennedy Round, 1963-67). The Tokyo Round (1973 - 79) triggered the first major expansion of the Community (from 6 to 9 States), and the Uruguay Round (1986-1994) was influenced by the "Program 1992" of the Community for completing the Internal Market (1986) and establishing NAFTA (Finger and Schuler 2000:520).

Finally, the provisions of Article XXIV of GATT had set and set barriers to the increase of trade protectionism of a regional agreement.

What is certain is that until now the various forms of regional integration have not hindered the phenomenon of globalization. Rather, as mentioned above, the liberalization of the international economy has benefited greatly from

"regionalism".

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Globalization, however, is viewed critically today by some. In industrialized countries, due to increased competition and the new internationalised world class production system, the labour markets are tested. In Europe, the so-called structural unemployment has increased, and in the U.S. foreign pressure led to declining real wages of large sections of employers who have little training and productivity (Bergstern 1997:300).

The external competition puts further pressure on public finances and the welfare state. The economic policy at a national level has become less effective. In addition, many developing countries see the outside competition as an obstacle to their development. All the above are likely to lead to regional patterns with defensive external protectionism. In this case,neither a halt to the development of a multilateral system nor the emergence of a competing regional block are ruled out.

To avoid the latter, internal structural changes in all countries, more flexible organization of production, more emphasis on modern infrastructure, improvement of the education of human capital, the research and development are required. The aim is to adapt to globalization and not limit it through

regionalization.

As the WTO Director General Renato Ruggiero (1998) mentioned the challenge is to "globalise regionalization" and not vice versa (Elliott and Ikemoto 2004: 93).

Apart from the internal adaptation of the individual states, the strict application of the Article XXIV of GATT / WTO and the creation of open and not closed regional formations are required.Ακρόαση

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Conclusions

The end of the 1990s and the millennium brought significant changes to the popular desire for the continuation of neo liberal economic policies. The recurrent regional economic crises in 1994 and then in conjunction with the worldwide recession in the new millennium and the crisis of nowadays have rekindled the reactions for the course of the economic globalization in the whole world.

Surveys show the growing concerns about the benefits of economic liberalization in a dominant sense that while trade and investment flows increase, economic inequalities not only among different countries in the world but also within all countries increase (Dixon 2002:48).

Furthermore, the public opinion even in the countries of the Organisation for Economic Cooperation and Development (OECD) believes that economic liberalization leads to wage compression, and while a majority of the population benefits from the new economic realities, many are affected, especially the unskilled workers and the employees who are less ready to adapt in the changes that take place (Yeates and Deacon 2006:39).

Under these developments, two regional collaborations of the less developed world (Mercosur and ASEAN) show that an activation of states at a regional level in order to create alternative forms of economic development has begun to develop (Torelli 2003:75).

This does not mean that the global economic liberalization is likely to be reversed in the foreseeable future but there is a widespread feeling of intense dissatisfaction with the present development model and a flare (at present mainly at the level of society) to demand support of state protectionism.

In areas of the world where circumstances favour it (see South America) an alternative proposition of economic development has begun to emerge more clearly, the radical nature of which remains to be seen in the future.

In this evolution, the dominant activity in national and regional level (see Merkosur) is to increase the momentum of the new proposal. While in other regional agreements in the world, as in ASEAN, there are no significant changes but there is a growing activity towards the completion of plans that pre-existed the economic crises (Sharma and Chua 2000:170).

A key aspect of these developments is whether there are within the regional agreements the potential synergies for economic growth. In the case of Merkosur these synergies are met while in the case of ASEAN are not fully covered, although the attempt to establish the Community of East Asia will certainly cover the parameter in the future.

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Finally, it should be noted that the regional initiatives for the adoption of alternative development models (which they actually first appeared in a very mild nature in the European Union - Keynesian model of growth) is a relatively recent development, the dynamics of which may not be imminent but soon. Ακρόαση

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