The Compatibility of Regional Economic Blocs and the GATT

Abstract

Regional economic blocs are compatible with the General Agreement on Tariffs and Trade (GATT) multilateral trading system through Article XXIV, which provides for customs unions and free trade agreements. However, both the European Community and the North American Free Trade Agreement (NAFTA) raise questions about the GATT criterion that the level of import restrictions to nonmembers is not higher than before the bloc formation. The actual trade impact of regional economic blocs is likely to be strongly trade-creating, while trade flows within the overall trading system are approaching parity between preferential and nonpreferential trade. NAFTA and the Enterprise for the Americas Initiative have unleashed a dynamic toward further bloc formation, especially for the Asian-Pacific region, which will have to be resolved during the 1990s. Questions on whether regional free trade arrangements will ultimately converge toward multilateral free trade, and in what form, cannot yet be answered and will depend on future political as well as economic relationships.

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References

1. A customs union involves elimination of internal barriers to trade and the establishment of a common external regime of tariffs and other restrictions; a free trade agreement does not include harmonization of external restrictions. The term “free trade arrangement” is used in the text to include both forms of free trade.

2. The U.S.-Canadian agreement was concluded just prior to the GATT ministerial-level meeting in Montreal in December 1990, which constituted the midterm review of the Uruguay Round. Speeches at the meeting generally referred favorably to the U.S.-Canadian agreement as supportive of a more open global economy.

3. Since a customs union, by definition, entails a common external tariff, a rule-of-origin test is not necessary to deter circumvention. The European Community thus does not need to apply rules of origin for this purpose, but the European Free Trade Association has long experience with them.

4. The principal U.S. target in the Uruguay Round was developing countries that have wide-ranging export and other performance requirements for foreign investment. The NAFTA value-added requirement is distinct in that it is limited to free trade within North America, but the impact is similar in that it distorts trade by obliging nonmember investors to undertake more procurement within North America than market forces alone would dictate.

5. For a summary of this experience, see Youri Devuyst , “GATT Customs Union Provisions and the Uruguay Round: The European Community Experience,” Journal of World Trade, Feb. 1992, pp. 15-34.

6. The figures are drawn from Ernest H. Preeg , “U.S. Leadership in World Trade: Past, Present, and Future,” Washington Quarterly, 15:2, 82 (Spring 1992).

7. The actual amount of trade on a most-favored-nation basis is even smaller since much of the trade not included in free trade arrangements is subject to generalized tariff preferences, quotas, or other country-specific restrictions.

8. This revised grouping is not precise with respect to Venezuela and Colombia, in particular, which bridge the North American/Caribbean and South American regions, although their northward polarization tends to be stronger.

9. The term “trade bloc” is subject to varying definitions, but in the broadest terms it can be considered as an arrangement between a limited number of countries that tends to stimulate trade between members, and in this sense the impact of Japanese official financial support would qualify. For extended discussion of the definitional question, see Ernest H. Preeg , Economic Blocs and U.S. Foreign Policy (Washington, DC: National Planning Association, 1974), esp. chaps. 3 and 4.

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10. Such a trade strategy, extended to three tracks to include multilateral, regional free trade, and selective bilateral objectives, is contained in Ernest H. Preeg , The American Challenge in World Trade: U.S. Interests in the GATT Multilateral Trading System (Washington, DC: Center for Strategic and International Studies, 1989), chaps. 4-7.

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11. New York: Free Press, 1992.