Regional Trade Agreements: Friend or Foe? Term Paper Example

Much ado over the past two decades has been made about the impact of global organizations like the United Nations, the World Bank, and the World Trade Organization. Such widespread international actors allow participating governments of nation-states both large and small, to build coalitions and make agreements under the auspice of a regulated organization. Whereas the United Nations and the World Bank focus on humanitarian and financial rights respectively, the World Trade Organization (here on, the “WTO”) is the “only global international organization dealing with the rules of trade between nations” (Web 1). In a world where countries are increasingly interdependent on one another, an organization like the WTO that regulates trade becomes an incredibly powerful one. One of the main benefits for participating WTO members has been the ability to make multilateral agreements with neighboring or regional countries. The most common agreements, referred to as preferential trade agreements or regional trade agreements (RTAs), allow participating members to integrate their economies with preferential terms for economic growth. However, noble intent often causes detrimental results, and regional trade agreements are no exception. A closer look at the impact of RTAs reveals their negative impact, particularly on smaller countries.

Since the creation of WTO predecessor, the General Agreement on Tariffs and Trade (GATT) in 1948, members have been making an increasing number of RTAs. The following graph shows the extent to which agreements like the North American Free Trade Agreement (NAFTA), the ASEAN Free Trade Area Agreement (AFTA), and the Greater Arab Free Trade Area Agreement (GAFTA), have multiplied from 1948-2009 (Web 2).

Such a steady increase in RTAs reveals just how popular and powerful they are.  The immense power of RTAs combined with the fact that “practically all WTO members are now Parties to one or more of them,” means that negative implications can be especially taxing on the WTO as a whole (OECD 3). Some of the implicating pressures that have come up in recent times include trade tariffs and inequality amongst countries.

For smaller countries that enter into agreements with economically stronger countries, such pressures become more pronounced.  Given that “smaller countries [tend to] see trade agreements with larger partners as a way of obtaining more security for their access to larger country markets,” they put themselves at risk of being locked into policy reform agreements that are “more difficult to reverse.” For instance, within farm programs and reforms under NAFTA, “the greater magnitude of agricultural resource reallocation in response to NAFTA leads to larger welfare gains for the United States and Canada” (Burfisher 13). In contrast to its partners, Mexico bears the brunt of the production fees and must keep production costs low in order to break even and potentially profit from the agreement.

When a country has to cut production costs (leading to low pay or dangerous work environments for workers) to break even on an agreement with its more powerful partners, the argument in favor of RTAs begins to weaken.  Added to the fact that Mexico is now locked into an agreement that is “difficult to reverse,” the impact of the NAFTA RTA becomes such that Mexico must continue to cut production costs in order to profit alongside its partners (Whalley 63). The idea that Mexico’s farming sector would have made less money alone than it does under NAFTA undermines the premise of RTAs because of the failure to consider backend costs that undermined the Mexican (smaller) economy through “softer” aspects (i.e.: labor, etc.).

In addition to economic consequences, RTAs can have devastating environmental impacts on participating members. When economic and political gains are at stake, the environment (especially that belonging to developing countries) can often suffer. For smaller countries looking to expand their economies, lax environmental standards could become a basis “for exploitive, lower-cost exporting, or serve to attract foreign capital investment with the expectation of [increasingly law environmental standards] in the future (Hornbeck 4). Given that most, if not all of the resources involved from smaller countries are limited, environmental consequences can jeopardize a country’s economy and its people.

Smaller countries join RTAs because of the “political-economy forces, optimal bloc size and the related market power, and economic and geographical fundamentals” associated with larger economic WTO members (Egger 384-385).  However, in doing so they place themselves at a greater risk economically and environmentally in comparison to their larger partners. Because Article XXIV of the GATT provisions state only that agreements “must lower trade barriers” between participating members and “cannot raise trade barriers for non-participating members,” the WTO must regulate members and agreements under areas that are more vague (Web 3). These include labor and environmental regulation, as well “dispute settlement and retaliation measures” (Web 3).

The WTO can help mitigate the pressures felt on smaller countries by requiring opt-out clauses for smaller countries like Mexico in agreements like NAFTA, and requiring environmental threshold protection clauses. By allowing smaller countries the option of opting out of an agreement that puts them at a large long-term disadvantage with their partners, the WTO effectively incentivizes participating members. Larger members that want to take advantage of the resources of smaller countries will be motivated to enter less harsh agreements to encourage smaller countries to join. Smaller countries that want to take advantage of the market power and economic strength of larger countries will be motivated to enter agreements that allow them to utilize their resources with a minimized level of detrimental harm. Furthermore, by requiring environmental threshold levels for agreements, the WTO not only protects members large and small, it also safeguards the environment against abuse for the sake of economics. The result of the RTAs emerging from willing parties equally would be the relief of the resource strain placed on the WTO to mitigate and police the negative impact of unconscionable RTAs.

Works Cited

Whalley, John. “Why do countries seek regional trade agreements?,” in: J.A. Frankel (ed.) The Regionalization of the World Economy, Chicago University Press, Chicago, IL. 1996. Print.

Burfisher, Mary E., Jones, Elizabeth A. (eds). “Regional Trade Agreements and U.S. Agriculture.” Market and Trade Economics Division, Economic Research Service. U.S. Department of Agriculture. Agriculture Information Bulletin No. 745 (AER-771). October 1998.

Egger, P., Larch, M., 2008. “Interdependent Preferential Trade Agreement Memberships: An Empirical Analysis.” Journal of International Economics, vol. 76 (2), 384-399. 1 August 2006.

Hornbeck, John. “A Free Trade Area of the Americas: Status of Negotiations and MajorPolicy Issues.” Congressional Research Service Report for Congress. The Library of Congress. May 2001. Web Version.

Organization for Economic Co-operation and Development (OECD). “Environmental    and Regional Trade Agreements.” Environmental and Sustainable Development. OECD 2007, vol. 2007, no. 14, pp. 1 – 234.

Web 1: World Trade Organization, “What is the WTO?” 21 September 2010. < http://www.wto.org/english/thewto_e/whatis_e/whatis_e.htm>.

Web 2: World Trade Organization, “Regional Trade Agreements: Facts & Figures.” 21 September 2010. < http://www.wto.org/english/tratop_e/region_e/regfac_e.htm>.

Web 3: Global Trade Negotiations Home Page, “Regionalism Summary.” Harvard University. 21 September 2010. <http://www.cid.harvard.edu/cidtrade/issues/regionalism.html>