International trade occurs when countries buy products and services from each other. Countries trade for the very same reasons as individuals that engage in market activities:  to garner the benefits of specialisation, to benefit from the effects of competition, and to expand their range of choice. Just as it does not make sense for every individual to try to grow all of his or her nutritional requirements in his or her own back yard, it is not desirable for each country to produce the entire range of goods demanded by consumers at home. Just as individuals do better by concentrating their skills and specialising in some activity -- working as a baker, a teacher, a lawyer, a truck driver—and using the salaries gained from this activity to buy food, clothing, shelter and other goods and services, countries gain by specialising in the production of that range of goods and services that they are best at producing or providing. By specialising in the production of particular goods and services, firms within a country can produce efficiently, and trade their surplus for goods and services from other countries. Countries engage in international trade because there are gains to be realised. These gains take the form of greater product variety, lower prices, higher quality, increased spread of technology and increased consumption by the country as a whole. Increased trade openness has been linked to increased GDP growth. Several studies have supported the assertion that more open economies grow more and that an increase in openness accompanies an increase in GDP/per capita.

Everyone is affected by international trade—as consumers, as workers, and through the impact international trade has on the country as a whole.  International trade increases the quality and abundance of consumer goods, lowers prices and creates new jobs.  Any trade liberalisation will result in winners and losers.  Increased international trade will benefit producers of exportable goods and the workers employed in those industries, as well as consumers who are able to purchase goods and services at lower prices.  Opening to trade will negatively affect domestic producers and workers engaged in the production of goods that are displaced by imports, particularly those that had previously benefited from trade protection. The challenge of policymakers is to assist those who lose from trade liberalisation to adjust to the new realities, while assisting businesses and workers to take advantage of the opportunities of international trade.
 

In a 2003 essay titled Trade, Growth and Poverty: A Selective Survey, Anne Krueger and Andrew Berg conducted a selective literature review that surveyed recent contributions to the debate and concluded that:

"Evidence from a variety of sources... supports the view that trade openness contributes greatly to growth. Moreover, trade openness does not have systematic effects on the poor beyond its effect on overall growth. Trade policy is only one of many determinants of growth and poverty reduction."

In The LDC Report 2004: Linking International Trade with Poverty Reduction, UNCTAD argues that indeed trade can play a powerful role in reducing poverty in LDCs and other developing countries. But  the report also stressed that the national and international policies that can facilitate this must be rooted in a "development-driven approach" to trade rather than a "trade-driven approach" to development. A similar approach is followed in the UNDP sponsored publication by Making Global Trade Work for People.

Other researchers have tried to assess the potential impact on poverty of further trade liberalisation at the multilateral and regional level. William Cline presented his findings in Trade, Growth, and Poverty Reduction. Maurizio Bussolo, Dominque van der Mensbrugghe, and Jann Lay, approached the same topic from a Hemispheric perspective in A Preliminary Assessment of the Economic and Poverty Impacts of the Doha and FTAA Agenda for Latin America.

The relationship between trade, growth and poverty reduction has also been analysed within the context of the Caribbean. Janet Stotsky, Esther Suss, and Stephen Tokarick approach the topic at regional level in Trade Liberalisation in the Caribbean. Jamaica's experience with trade liberalisation is covered by Michael Witter in Trade Liberalisation: The Jamaican Experience, and the UNCTAD/UNDP's study Jamaica: Globalisation, Liberalisation and Sustainable Human Development.

Figures on growth and poverty in the OECS countries can be found in the 2002 OECS Human Development Report.

Trade policy encompasses all the tools that governments may use to encourage or restrict imports and exports. These can take the form of tariffs (taxes collected on imported goods), quotas (limitations on the quantity of goods allowed to be imported), and voluntary export restraints (restrictions set by the exporting government on the quantity to be sold to a foreign country).  Domestic regulations, such as mandatory health and safety standards, can also serve as trade policy tools, if they are utilised to prevent or encourage goods or services to be brought into the domestic economy.  Subsidies, payments by the government to encourage the production of certain products, can be considered trade policy tools, particularly if directed at encouraging exports.

Trade policy also includes the approach taken in trade negotiations.   In participating in the multilateral trading system and/or negotiating bilateral trade agreements, countries assume obligations that will become part of and shape their national trade policies. 

Throughout the twentieth century, the trade policy debate has been characterised by the opposition between proponents of protectionist and liberal approaches. While the former argued that a country would be better off if the government erected high cost barriers to foreign products seeking to compete in the domestic market in order to increase or maintain domestic production; the latter camp countered that government intervention would lead to higher prices for consumers, rent-seeking by domestic producers, and high inefficiencies due to low competition - particularly in smaller economies.

Most economists agree that, given the constraints of the political process, working towards free trade remains the best “rule of thumb” approach to trade policy. Much research has supported the assertion that more open economies experience a higher rate of growth.  It is recognised that open trade policy is not sufficient to foster or sustain growth, ensure a welfare-enhancing distribution of the benefits of growth, however, it must work in tandem with other economic policies in order to accomplish these goals.

Throughout the latter years of the twentieth century and into the twenty-first century, most countries in the Americas have followed trade liberalising policies.  For example, tariffs in Latin America have fallen from an average of 40 percent in the mid-1980s to about 12 percent in the mid-1990s. Unilateral tariff reductions have been complemented by participation in regional integration initiatives, including the establishment of free trade agreements and customs unions and the revamping of existing agreements, such as, for example, the revision of the CARICOM Treaty of Chaguaramas.

For more information see Government Reports to the WTO,  WTO Trade Policy Reviews, and other key trade policy documents for:

Antigua and Barbuda
Bahamas
Barbados
Belize
Dominica
Grenada
Guyana
Jamaica
Saint Kitts and Nevis
Saint Vincent and the Grenadines
Saint Lucia
Suriname
Trinidad and Tobago
 

• tariffs
• quotas
• voluntary export restraints
• export taxes
• export subsidies

 Trade liberalisation, through unilateral policy measures as well as through negotiated reductions in trade distortions through the WTO and in regional free trade agreements, has diminished the importance of some of these tools.  For example, developing country tariffs are currently at an average of about 4-5 percent, although tariff peaks -- high tariff rates (generally 15% or more) on particular items -- still exist.  Trade policy is focusing more and more on the direct and indirect impacts of domestic regulatory regimes on international trade and investment flows. Some of these new policy tools are also described below.

ad valorem tariff: this is the simplest and most frequently used tariff type, under which the rate is expressed as a percentage of the value of the goods. For example, a tariff of 6% of the value of milk is an ad valorem tariff of 6 per cent of milk imports.

specific tariff:  a tariff that has a fixed per-unit value—for example, $OECS 2.00 per pound. This type of tariff is often used for agricultural goods.

variable tariff: a duty typically fixed to bring the price of an imported commodity up to a domestic support price for the commodity.

The effect of a tariff is to raise the price of imported goods, thus making them generally less competitive within the market of the importing country.

Tariffs also have the effect of raising the price of domestically produced goods. This is due to the fact that when a tariff is imposed, the foreign-produced good is more expensive, so consumers will buy the domestically-produced good (assuming that the goods are the same, or homogeneous). The extra demand for the domestically-produced good will allow domestic producers to raise their output and prices to the market-clearing price (the price at which consumers are willing to buy and producers are willing to sell).

Tariffs can be used to accomplish various trade policy goals. The main goals are

• to raise revenue for the government and
• to protect a domestic import-competing industry.

If the goal is the latter, a tariff can be set so high that no imports will enter. This is called a "prohibitive tariff". Tariffs can also be set much higher than needed to protect the import-competing industry. If imports would be eliminated with a 100% tariff, but the applied tariff is set at 150%, it is said that there is "water in the tariff" -- that is, that the tariff is set at a level higher than is needed to inhibit trade.

The imposition or removal of a tariff has an impact on consumers, producers, the government and the country as a whole. For a simplified analysis of the impact of a tariff, we will look only at the importing country and assume that it is a small country (that is, that it cannot affect the price of a good by buying or selling that good on the world market). The supply and demand curves for the importing country are shown in the diagram below. The diagram illustrates the impact of imposing a tariff.
 

In a free trade situation, the country is consuming QD₀ units at a price of P₀, the world free-trade price (represented by the blue price line, P_FT.  At this price, domestic producers sell QS₀ worth of the good, and QD₀ -QS₀ is purchased from the other country, or imported.  The large blue bracket underneath the graph represents the amount of imports in free trade. When a tariff of t is imposed, the price goes up by the amount of the tariff. At the new price, P₁-- the free-trade price plus the amount of the tariff, represented in red, consumers will reduce their consumption of the good to QD₁. Domestic producers see a higher profit level, and increase their production to QS₁. Imports fall to the level represented by the red bracket, which is the difference between QD₁ and QS₁.

The impacts of the tariff: As seen in the graph, the tariff will change the consumption patterns on consumers and the production patterns of firms. The overall effects of this tariff are:

Consumers: Consumers of the product in the importing country suffer a reduction in well-being as a result of the tariff, which increases the price of the good they previously purchased at price line P₀. The increase in the domestic price of both imported goods and the domestic substitutes reduces the amount of consumer surplus in the market. Consumer surplus basically means the difference between what the consumer is willing to pay for a commodity and the amount he/she actually is required to pay.  In this case, looking at the graph, consumers lose the entire area (a+b+c+d)

Producers: Producers in the importing country experience an increase in well-being as a result of the tariff. The price increase of their product on the domestic market increases producer surplus in the industry. Producer surplus is the difference between the price for which producers are willing and able to supply a good and the price they actually receive. The price increase also induces an increase in the output of existing firms  --- and perhaps the addition of new firms that enter the industry in order to take advantage of the new high profits -- , an increase in employment in the industry,  and an increase in profit and/or payments to fixed costs. Looking at the graph, producers gain the area in which they would otherwise not sell: the area.

Government: The government receives tariff revenue as a result of the tariff. Who benefits from the revenue depends on how the government spends it. Revenue from import taxes help support government spending programs which either will benefit the general populace in the country, as is the case with public goods, or is targeted at certain  groups. Government revenue is represented in the graph by rectangle c.

Country as a whole: The aggregate welfare effect for the country is found by summing the gains and losses to consumers, producers and the government:

consumer loss + producer gain + government revenue gain
   - (a+b+c+d)  +   a   + c  --->  the net effect is -(b+d). 
This represents the loss of producer efficiency resulting from domestic firms producing in an industry in which they are not the most efficient producers as a result of the higher price, and the loss of consumer efficiency, as consumers pay a higher than the free market price.  The area (b+d) is called the deadweight loss.

Another phenomenon of note, one that particularly impacts developing countries, is that of tariff escalation.  Tariff escalation occurs when a tariff on a product increases as that product moves through the value-added chain. Low tariffs are set on primary goods with higher tariffs on finished products. An example would be a five percent tariff on soybeans and a ten percent tariff on soy oil. This type of a tariff structure serves to protect domestic industry by allowing the import of basic raw materials tariff-free or at low rates, but with higher rates of protection on the results of value-adding processes.
 

Absolute quotas limit the quantity of imports to a specified level during a specified period of time. Sometimes these quotas are set globally and thus affect all imports while sometimes they are set only against specified countries. Absolute quotas are generally administered on a first-come first-served basis.

Tariff-rate quotas (TRQs) allow a specific quantity of a good to be imported at a reduced tariff rate during the specified quota period. Any quantity higher than that amount is subject to a higher tariff rate

The impact of a quota:
The welfare effects of quotas are similar to that of tariffs: if a quota is set below free trade level, the amount of imports will be reduced. A reduction in imports will lower the supply of the good on the domestic market and raise the domestic price. Domestic price will rise to the level where import demand meets the value of the quota.

Consumers - Consumers of the product in the importing country will be worse-off as a result of the quota, as they were with the tariff. The increase in the domestic price of both imported goods and the domestic substitutes reduces consumer surplus in the market.

Producers - Producers in the importing country are better-off as a result of the quota. The increase in the price of their product increases producer surplus in the industry. The price increase also induces an increase in output of existing firms (and perhaps the addition of new firms), an increase in employment, and an increase in profit and/or payments to fixed costs.

The quota case differs from the tariff case, in that box C does not automatically go to the government. It goes to the holder of the quota. The distribution of the quota rents depends on how the quota is administered.

There are several possibilities:

1) If the government auctions the quota rights for their full price, then the government receives the quota rents.

2) If the government gives away the quota rights then the quota rents accrue to whomever receives these rights. Typically they would be given to someone in the importing economy which means that the benefits would remain in the domestic economy.

3) If the government gives the quota rights away to foreigners then people in the foreign country receive the quota rents. In this case the rents would not be a part of the importing country effects.

The country as a whole- The aggregate welfare effect for the country is found by summing the gains and losses to consumers, producers and the domestic recipients of the quota rents. The net effect consists of two components: a negative production efficiency loss (B), and a negative consumption efficiency loss (D). The two losses together are referred to as "deadweight losses." The difference in the overall welfare impact of the quota and the tariff will depend on the manner of quota administration.
 

Government Procurement Policies
Government procurement policies may have an impact on trade if they require that a specified percentage of purchases (which could be up to 100%) by  federal or state governments must be made from domestic firms rather than foreign firms.

Standards and Technical Regulations
A standard is defined as a “document approved by a recogni sed body, that provides, for common and repeated use, rules, guidelines or characteristics for products or related processes and production methods, with which compliance is not mandatory.” A technical regulation is a mandatory standard.  Standards and technical regulations and their associated conformity assessment procedures are essential to protecting the life, health and well-being of the populace and the environment.  They can also be used to manage trade and can serve as obstacles to imports from foreign countries when applied in a manner that favours domestic products over imports. 

Administrative Procedures
Another potential barrier to trade is if costly administrative procedures are required for the importation of foreign goods. Subjecting imports to costly and often time-consuming procedures that do not apply to domestic goods give the domestic import-competing good a clear advantage in the domestic market. Red-tape barriers can take many forms, from specifying particular procedures to requiring licenses or forms from various government bureaucracies, etc.
 

Elbehri, Aziz. Welfare Implications of Liberalising Preferential Quotas. May 2001. USDA Economic Research Service.

Skully, David. Liberalising Tariff-Rate Quotas, Agricultural Policy Reform in the WTO—The Road Ahead, May 2001.

USDA Economic Research Service. Auctioning Tariff Quotas for U.S. Sugar Imports, Sugar and Sweetener Situation and Outlook Report, May 1998.

World Trade Organisation.  Backgrounder on Agricultural Negotiations. Includes information on tariffs, quotas, domestic support and more.

Sam Laird, Multilateral Approaches to Market Access Negotiations. Chapter Eight in Miguel Rodriguez Mendoza, Patrick Low and Barbara Kotschwar, Trade Rules in the Making, Brookings Institution/GSOAS, 1999.
 

Trade agreements are binding legal instruments among countries that regulate specific aspects of their trading relations. Agreements may be between two partners (bilateral agreements), or among several countries (multilateral agreements). The term "multilateral trade agreement" generally refers to the legal architecture of the world trading system (the GATT and its successor, the WTO agreement), which encompass nearly all countries in the world. This framework also contains a few so-called "plurilateral" agreements, such as the Agreement on Government Procurement, in which not all members participate.  Regional trade agreements are those whose members belong to a particular geographic region, such as the European Union, the Southern African Customs Union (SACU), the Andean Community, or the Caribbean Community (CARICOM).

Trade agreements are negotiated and then signed by the parties.  To be legally binding, trade agreements, protocols and - sometimes - resolutions must be incorporated into domestic law through each country's domestic procedures.  In most countries with presidential political regimes, the executive negotiates and signs agreements which are then approved by a vote in Congress.

In addition to differing in terms of the membership, trade agreements also differ in scope. Partial preferential agreements aim to liberalise trade in a limited number of goods, often reducing tariffs in specific sectors or eliminating tariffs on an agreed-upon list of goods. Unlike free trade agreements, the aim is not to eliminate tariffs on the entire universe of goods. Free Trade Agreements aim for the elimination of tariffs (although they may have specifically-negotiated exceptions) and other barriers to trade and investment. Custom Unions aim for a deeper level of integration, adding the establishment of a common external tariff (CET) to the free trade area and harmonising members' trade policy.  In other words not only are internal tariffs removed, but countries also adopt the same tariff rates for products originating in non-member countries.  Customs Unions, such as CARICOM and MERCOSUR negotiate external trade agreements jointly.  Common markets take integration a further step, adding the liberalisation of  the movement of people and capital across borders. Both custom unions and common market agreements involve a greater degree of legislative complexity than do free trade agreements, including some sort of Secretariat, promulgation and implementation of common legislation (protocols and resolutions of technical bodies) and a large degree of policy harmonisation among parties.

Free Trade Agreements - FTAs*
Countries in the Americas have varied in their approach to trade integration. During the second half of the twentieth century, the United States traditionally took a multilateralist stance, eschewing bilateral and regional trade agreements in favour of liberalising through the GATT/WTO.  The few exceptions to this were the 1965 Auto Pact with Canada; the 1985 US-Israel FTA and, in the early 1990s, the Canada-US FTA and the subsequent 1994 North American Free Trade Agreement. This stance has changed, and in the first few years of the twenty first century, the United States has signed free trade agreements with various trading partners including, within the Americas, Chile, the Central American countries and the Dominican Republic.  Latin American and Caribbean countries were early participants in regional integration arrangements, with several customs unions (the Andean Pact, CARICOM, the Central American Common Market) in existence since the 1960s and early 1970s, as well as a regional Latin American initiative towards a Latin American Free Trade Area (LAFTA). These early trade agreements tended to follow the principles of import substitution industrialisation (ISI), eliminating trade barriers among the members, but erecting high barriers to trade with the rest of the world.

In the 1980s, policies towards trade began to change as countries unilaterally liberalised their trade regimes.  They also began to engage in more -- and more complex-- trade liberalising agreements with their trading partners. The LAFTA evolved into the Latin American Integration Association, or ALADI, an umbrella framework for conducting trade agreements among members. These ALADI economic complementation agreements  (Acuerdos de Complementación Económica), which differ dramatically from the traditional protectionist trade agreements of the 1960s and 1970s, are often comprehensive free trade agreements.  A new customs union, the MERCOSUR, was formed in 1995, and already existing customs unions reformed their approach:  in 1997 the Andean Pact evolved into the Andean Community and the CARICOM underwent a rejuvenation with the revised treaty of Chaguaramas. 

Starting in the early 1990s, Latin American countries signed  a record number of trade agreements, most of the free trade agreements that complemented their unilateral trade opening measures by creating legal obligations to eliminate tariffs vis-à-vis their trading partners.  Up to the late 1980s, free trade agreements aimed mostly at the elimination of  tariffs and other at-the-border measures.  One example of an early FTAs is the US-Israel FTA which contains a short main body, the tariff schedules of each country, and a side declaration on trade in services.  With the completion of the Uruguay Round and the launching of a much more comprehensive multilateral trade agreement, and as countries in the Americas began to adopt trade liberalisation as part of their economic development strategy, the scope of trade agreements became more far-reaching. The Canada-US FTA and the North American Free Trade Agreement (NAFTA) revolutionised the scope of free trade agreements, including, in addition to the market access component, provisions that cover trade in services, regulate trade remedies, and cover traditional "domestic policy areas" such as investment, intellectual property rights, government procurement, labour, and the environment. Recent free  trade agreements, such as the US-Dominican Republic-Central America Free Trade Agreement (CAFTA), for example, sometimes even include language on corruption, transparency and gender issues.

In a further step towards hemispheric trade liberalisation, thirty-four countries in the Americas undertook, at the Summit of the Americas in 1994, steps to negotiate a Free Trade Area of the Americas (FTAA).  The FTAA would aim to  eliminate barriers to trade and investment within the Americas.

More information:
SICE's database of trade agreements. List and text of all trade agreements involving countries in the Western Hemisphere.
 

The first modern bilateral investment treaty (BIT) was entered into nearly forty years ago between Germany and Pakistan. Over the decades that followed, an increasing number of European countries concluded such treaties with developing countries. It is, however, only since the late 1980s that BITs have come to be universally accepted instruments for the promotion and legal protection of foreign investments.

Of the over 1,100 treaties listed on the ICSID website, more than 800 have been concluded since 1987, by a growing number of countries. The rapid growth in the number of treaties witnessed to date appears to continue. Most countries that have an established BIT program continue to pursue opportunities to enter into new treaties. In addition, a number of countries that have hitherto refrained from concluding BITs have in recent years begun to negotiate and sign such treaties. It may also be recalled that over the last ten years several multilateral agreements with provisions on investment have also been concluded. 1

Modern BITs have retained broad uniformity in their provisions. In addition to determining the scope of application of the treaty, that is, the investments and investors covered by it, virtually all bilateral investment treaties cover four substantive areas: admission, treatment, expropriation and the settlement of disputes. Almost all modern BITs include provisions dealing with disputes between one of the parties and investors having the nationality of the other party. In this respect most provide for arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) which entered into force in 1966.2

ICSID has since the early 1970s collected the texts of bilateral investment treaties. Most of these have been included in a multivolume collection of Investment Treaties published by the Centre. Lists of bilateral investment treaties were published in 1989 and 1992 in the ICSID Review-Foreign Investment Law Journal. The Centre also published in 1995 a book on Bilateral Investment Treaties.3

More Information:
-Listing of Bilateral Investment Treaties for each country in the Americas

¹ These include the North American Fee Trade Agreement, reprinted in 32 ILM 289 (1993); the Colonia Protocol on the Reciprocal Promotion and Protection of Investments within Mercosur, signed on January 17, 1994 and the Buenos Aires Protocol on the Promotion and Protection of Investments Made by Countries That are not Parties to Mercosur, signed on August 8, 1994 (both protocols concluded under the Asunción Treaty Establishing a Common Market Between Argentina, Brazil, Paraguay and Uruguay (Mercosur), signed on March 26, 1991); the Treaty on Free Trade Between Colombia, Mexico and Venezuela, signed on June 13, 1994; and the Energy Charter Treaty, reprinted in 34 ILM 381 (1995).

2 The large number of consents given in this manner (in over 900 treaties) has been reflected in ICSID's caseload. Over half of the cases pending before ICSID at present (including two conducted under its Additional Facility Rules) have been initiated in reliance on consents given in treaty provision. For a list of cases submitted to the Centre, see ICSID Cases, Doc. ICSID/16/Rev. 5. For a list of other ICSID publications, see infra, at 104.

³ Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (1995).

Regionalism

Regionalism is defined by the WTO as “actions by governments to liberalise or facilitate trade on a regional basis, sometimes through free trade areas or customs unions.” This broad definition encompasses a number of trade liberalisation initiatives that differ in scope and objective.  The following is a list of "ideal types" by increasing order of market integration:

Preferential Trade Area (PTA): While the term "preferential" strictly speaking applies to all types of trade agreements -- as members give preference to other members --  these PTAs refer to agreements that entail a partial reduction in trade barriers among member countries. This could include a reduction across the board or full elimination in particular sectors.

Free Trade Area (FTA): Entails a complete elimination of trade barriers among member countries.

Custom Unions: FTA plus establishment of common external tariff among member countries.

Common Market:  Customs union plus free movement of capital and labour and adoption of common standards among member countries.

Economic Union: Single Market plus common currency and deeper policy coordination among member countries.

In practice, the categorisation of integration initiatives tends to be a complex endeavor, as initiatives often include elements of more than one category. For example, MERCOSUR is neither a perfect free trade area nor a complete customs union, but has elements of both; the Andean Community is not a full free trade area - as Peru has not yet fully eliminated tariffs against other members - yet it has elements of additional integration in that policy harmonisation is quite advanced. The CACM has achieved a free trade area but it is not yet a full customs union. CARICOM has proposed an agenda to work towards the establishment of a Single Market, yet it still lacks many key elements typical of customs unions and there remain disputes over the application of taxes to products originating within the region. The OECS countries have made substantial progress in their economic union without, for many years, equal progress in the coordination of trade policy.

Another element that complicates the analysis of regionalism is that with the rising number of regional integration agreements many countries are now members of several initiatives at the same time. Just to cite an example in the Americas, Colombia is a member of the Andean Community, but also has free trade agreements with Mexico and Venezuela (in the form of the Group of Three. Colombia also is a party to several partial preferential agreements, including an  agreement on trade, economic and technical cooperation with CARICOM.  Another country with a large network of trade agreements, in this case FTAs, is Mexico, which is a member of NAFTA and ALADI, and has concluded FTAs with Bolivia, Chile, Colombia, Costa Rica, EFTA, EU, Israel, Nicaragua, Northern Triangle, Japan, Uruguay, and Venezuela. Most of these agreement involve different sets of rules and regulations in terms of Antidumping, Competition Policy, Dispute Settlement, Intellectual Property Rights, Investment, Technical Barriers to Trade, and other trade disciplines. The increasing regulatory complexity of trade relations where one set of rules applies for each bilateral or regional initiative has worried many experts, one has made the analogy to a "spaghetti bowl". These experts often call for a simplification of the trading system by focusing on progress at multilateral level.

Thus, much of the debate on regionalism has centered on the interaction of regionalism and multilateralism- where multilateralism is understood as liberalisation among all WTO Members. Normally, setting up a customs union or free trade area would violate the WTO’s principle of equal treatment for all trading partners, since partners grant to each other preferential treatment which excludes other countries. But GATT’s Article 24 allows regional trading arrangements to be set up as a special exception, provided certain strict criteria are met. In particular, the arrangements should help trade flow more freely among the countries in the group without barriers being raised on trade with the outside world, and this should be done within a reasonable amount of time. In other words, regional integration should complement the multilateral trading system and not threaten it. There is an extensive literature on whether regionalism and multilateralism are friends or foes. Many specialists, and the WTO itself, conclude that it is hard to come up with a definitive answer to this question and that it has to be analysed case by case.

Two tendencies are worth noting: Regional arrangements are on the rise and the character of regional integration is also changing. In the Western Hemisphere, different developmental paradigms have established their own approach to regionalism. Regionalism flourished in the days of the import substitution industrialisation (ISI) paradigm of the1950s and 1960s,  when countries embraced regionalism as a natural response to escape the crippling effects of production for small-scale domestic markets. Under "old regionalism" partners aimed to apply high tariffs to third parties while eliminating internal barriers to trade. The objective was to develop markets for nascent industries. More recently, most Latin American and Caribbean countries have abandoned the prescriptions of ISI and have chosen instead to actively engage in the world economy. Experts began sketching a new vision of regionalism. The "new regionalism" paradigm no longer views the pooling of domestic markets as an end in itself. It rather sees it as an asset to increase the attraction of foreign investment as well as the bargaining power in regional and multilateral negotiations.  Thus, new regionalism is based on fostering efficiency and competition by lowering the level of external tariffs to allow for an active engagement in the world economy, while aiming to reap the benefits of achieving "deep" integration (integration that goes beyond multilateral commitments) and fostering better relations among partners.

Multilateralists often point out that basic economics maintains that lowering tariff barriers on a discriminatory basis causes distortions in the home economy and that it imposes costs on third parties that do not participate in the regional agreement.  They argue that though it is difficult to accurately evaluate the benefits of PTAs, economic theory suggests that the net benefits of regionalism are not very large. Finally, they maintain that regionalism diminishes the incentives to participate in multilateral trade negotiations and might lead to a divided world where trade conflicts among regions will increase. 

Regionalists point out that the days in which regionalism meant ISI and high tariffs are gone, and that "new regionalism" tends to minimise trade diversion. Moreover, they stress that "deep" regional integration arrangements can bring benefits to the participating countries that extend beyond those that they might reap by sole participation the WTO. Also, they clarify that regionalism can be a platform for improving the insertion in the world economy.

More information:

TRC section on Regionalism

SICE's sections on

Andean Community CACM MERCOSUR NAFTA ALADI CARICOM OECS

Speeches:
Address to Trade Forum of Jamaica.
Rt. Hon. Owen Arthur, Prime Minister of Barbados

Articles:

The FTAA and Development Strategies in Latin America and the Caribbean.
Salazar-Xirinachs,  José M. (rev. April 2004).

Proliferation of Sub-Regional Trade Agreements in the Americas: An Assessment of Key Analytical and Policy Issues.
Salazar-Xirinachs, José M. (October 2002)

The Caribbean Community: Facing the Challenges of Regional and Global Integration.
Jessen, Anneke and Ennio Rodriguez. (1999)