Reasons behind country’s forming RTAS
Reasons behind country’s forming Regional Trade Agreements are several reasons behind formation of regional trade agreement by a country. As the first wave of regional trade agreement was occurred after the successful formation of European Union in 1957. And the second wave of regionalism was occurred during 1990’s, there has been several reasons can be defined for these striking developments in formation of RTAS. The slow progress of WTO and difficulty in taking decisions under multilateralism are the key reasons behind the prominent development in number of regional trade agreements in world. The primary reasons behind the rising number of regional trade agreements has been given below –
1. To increase market access: ‘Greater access to the foreign markets is perhaps the most typical reason for entering into an RTA. Because of lower tariff barriers the countries easily get market access in member countries’ (Lynch, 2010). The margin of preference in trade by a country. depends upon the preferential access granted by an RTA. Example: the US impose a 25 percent tariff on imported light trucks, but succeeding light trucks made in corresponding NAFTA countries Canada and Mexico face no tariff..
2. To promote investment: When market access increases among countries, it also promotes investment. “As better access to foreign markets also makes a country more attractive investment site’ (Lynch, 2010). In many cases, RTAs have induced investment, as investment in Spain and Portugal has increased after they joined the European Union (EU), RTAS can increase investment by including specific investment designs, so that foreign investors feel secure, as RTAs can increase investment by applying equal treatment between foreign and domestic investors, and by simplifying the process regarding investment disputes, and by reducing bureaucratic hurdles.
3. To increase competitiveness in world markets: Regional production rategies can increase competitiveness in world market. The regional production strategy is a good way to use high skill portion of production in developed countries and lower skill portion of production in less developed countries, where wages are less expensive. In other words RTAs may enhance companies, ability to “source globally, produce regionally and sell locally” (Lynch, 2010). As example China is highly interested in achieving committed sources of inputs for its large industrial production boom, and regional trade agreements of China are supporting this goal..
4. To protect against unfair use of trade remedies: ‘One reason for forming RTAs is to shield against unfair use of trade remedies such as anti dumping measures, countervailing duties and safeguards’ (Lynch, 2010). For example, when President George W. Bush announced safeguard tariffs of up to 30 percent against steel imports in 2002, he exempted 80 developing countries and Canada and Mexico also exempted from this, who were partners with US in NAFTA. So that Brazilian steel, for example faced US safeguards while Mexican and Canadian steel did not faced this US safeguard. This shows that RTAs can shield against questionable use of trade remedies.
5. To guard against slowed multilateral liberalization: Another reason for forming RTAs is to promote liberalization, especially when multilateral trade negotiations are slowed down. As the candidate Bill Clinton said of NAFTA in 1992, “while we don’t know what will happen to these other regional trading blocs (the EU bloc). we know enough to these other regional trading blocs to our neighbor’s, both for the positive opportunity and to protect us in the event that other countries become more protectionist.” He is not alone in this thinking, while Australian Prime Minister John Howard quoted the ‘Glacial pace’ of liberalization in the WTO as one underlying principle for Australia pursuing bilateral free trade agreements.
6. To solidify domestic reforms: Sometimes a country’s leaders know the need to liberalize their economy but they cannot successfully create the political support needed to convey these reforms. ‘Regional trade agreements propose a way to change the political support for reform within a country’ (Lynch, 2010). For example, Mexican president Carlos Salinas de Gortari – who proposed NAFTA, had already taken significant steps to liberalize the Mexican economy. He met with much success in his steps to reform the Mexican economy, but full liberalization in some industries like textile and apparel was dragged because of domestic opposition. The president Salinas used NAFTA to change the political equation. NAFTA linked further liberalization of the Mexican textile and apparel industry with greater access to the US textile and apparel market. In this way the domestic reform in Mexico was solidify by the help of NAFTA (regional trade agreement).
7. To intensify power in international negotiations- The countries can increase their power in international level by forming regional trade agreements with other countries.. when the RTA is sufficiently integrated and solid, the member countries in a ‘RTA can have more power in international negotiations than the countries would have separately (Lynch, 2010). However, the poorer countries cannot send permanent representatives to the secretariats of important multilateral organizations such as the WTO or the some other important negotiations, an RTA can help countries’ power by creating institutions or in other negotiations. The importance of bonding together for greater international power is particularly true for smaller and poorer states. They often see such co ordination as a necessity. We can give example of the 15 CARICOM states in the Caribbean. Sometimes the need of integration is proposed to increase the country’s power in another way, as example Africa is divided by 165 borders into 53 countries. Even the voice of large country like Nigeria may be inaudible in international negotiations in world trade or climate change. But collectively it is impossible to ignore 53 countries with almost one billion inhabitants.
8. To attain economic stability – The unstable economies hope to gain economic stability by forming RTAS; it has been an increasing trend to see developing countries forming RTAs with other developing countries. Some countries found the stability after forming an RTA came from increased market access and investment. For example the EU’s newer entrants have seen greater levels of economic stability after membership.
9. To meet other strategic goals: Despite these given reasons the countries enter into RTAs for many other reasons like the US has formed bilateral RTAs across the Middle East, and the Middle East Free Trade Agreement was formed in 2013. This agreement is the part of the border initiative. The George W. Bush administration proposed the US Middle East Initiative (MEPI) in 2002, the Bush administration hoped to spread economic liberalization and democracy to the Middle East. The European Union formed trade agreements with North African and Middle Eastern countries for many reasons other than economic reason.
