CHAPTER-1 INTRODUCTION

There has been a rapid growth in the number of regional trade agreements (RTAs) in recent years. In Europe, these are mainly centered on the European Union, spreading to the Central and Eastern European countries, the Baltic States, the Mediterranean and beyond. In the Americas, two agreements NAFTA and MERCOSUR have had a significant impact, but these may be overtaken by the Free Trade Area for the Americas. There has also been an increase in the extent to which RTAs overlap, although there are significant variations in the product coverage and the rules of origin. On the whole, the newer agreements tend to have deeper coverage, extending into areas of domestic disciplines beyond the exchange of tariff concessions, and a number of agreements now also cover the services sector.

The number of RTAs in force has varied considerably over the years. WTO (1999a) provides various statistics about agreements which have been notified to the GATT or the WTO, agreements which have not (yet) been notified, and those which remain in force. According to the WTO Secretariat, 102 of the agreements which have been notified to the GATT/WTO were in force at the end of 1998. This includes 78 agreements covering trade in goods notified under Article XXIV of the GATT 1994, 13 goods agreements concluded between developing countries notified under the Enabling Clause, and 11 agreements covering trade in services notified under the GATS. More than half of these agreements have entered into force since 1990, when there were only about 40 agreements in force. In other words there were some 250 per cent more agreements in force in 1998 than eight years earlier, and we know that new agreements continue to be signed.

The longer term growth in the number of RTAs in recent years, which shows the cumulation of RTAs notified to the WTO Secretariat, as well as the net increase. It demonstrates the rapid growth which has taken place in the 1990s. It should be noted that these figures show only notified agreements and do not include the many non-notified agreements that are in existence today. Such agreements occur when there is a time lag before official notification is made to the

WTO, or when RTA participants simply fail to notify agreements. There is no provision for counter-notification of agreements under current WTO rules. Apart from the growth in the number of agreements, modern RTAs have a much wider network of participants and stretch across countries at different levels of economic development. APEC, which does not (yet) allow for the mutual exchange of trade preferences, will cover some 40 per cent of the world's population. The Free Trade Area of the Americas and the European Union's agreements with Central and Eastern Europe and the Mediterranean each encompass more than 500 million people. In mid-1998, 100 of the (then) 132 or 76 per cent of all WTO Members were participants in one or more notified regional trade agreements. If participation in both notified and non-notified agreements is taken into account, then the share of participating WTO Members rises to 97 per cent.

Chapter-2 Evolution
In the evolution of regionalism since the end of World War II, three phases can be distinguished.

2.1 The European Era of Regionalism:

The first phase is the European era of regionalism. It started with the Treaty of Romes entry into force in 1958, which established the European Economic Community (EEC). As a customs union with a common commercial policy, the EEC quickly became a leading player in international trade relations. The western and northern European countries that were not part of the EEC came together in the European Free Trade Agreement (EFTA). During the 1970s, the EEC expanded its influence through an impressive set of bilateral preferential trade areas with the neighboring EFTA countries, the Mediterranean countries, and the former colonies in Africa, the Caribbean and the Pacific (ACP). Since then, the EEC has continued to be actively engaged in the negotiation of new preferential trade agreements.

2.2 The American Era of Regionalism:

The second phase is the American era of regionalism. While the United States had traditionally been wary of RTAs, its attitude changed in the late 1980s. The conclusion of the bilateral free trade deal between Canada and the United States in 1988 opened the door for the North American Free Trade Agreement (NAFTA) in 1992. The United States has also propagated such RTA initiatives as the Free Trade Area of the Americas (FTAA) and the development of free trade within the Asia Pacific Economic Cooperation (APEC) framework. More significantly, in1991, Argentina, Brazil, Uruguay and Paraguay created their own customs union, named MERCOSUR. In subsequent years, Bolivia, Chile, Columbia, Ecuador, Peru and Venezuela have become associate partners of MERCOSUR. The Accession Protocol with Venezuela was signed in 2006.

2.3 The Global Era of Regionalism: The third phase, characterizing the first decade of the 21st century, has been labeled the noodle bowl, referring to the multiplicity of Asian RTAs. More accurately, it should be labeled the global era of regionalism. The third phase has three characteristics. 1. The Boom in Asian RTAs. Asia is a late-comer in the politics of regionalism. In the early 1990s, the limited results of ASEAN led to the launching of more ambitious plans for an ASEAN Free Trade Area (AFTA). AFTA became effective in 1994 and is aiming at reducing tariffs and non-tariff barriers among ASEAN members on a large range of products. However, the real spark that set off the current surge of RTAs in Asia was Chinas initiative in 2000 for a free trade agreement with ASEAN. The ASEAN-China framework agreement laying out the free trade plan was concluded in 2003, and it is scheduled to eliminate tariffs by 2010. The Chinese initiative resulted in an East Asian domino effect. In response to Chinas project, India also signed a framework agreement with ASEAN in 2003. However, progress towards its implementation has been stalled. The Asian RTA wave has been labeled an example of competitive liberalisation. 2. The Creation of Interregional RTAs. The negotiation of interregional RTAs has received a particular push from the European Community. Negotiations for a free trade agreement between the EC and Mercosur are well underway. Similarly, the EC has opened negotiations for the conclusion of a free trade deal with the Gulf Cooperation Council. 3. Preferential Trade Arrangements Among Geographically Distant Partners. As the interregional negotiations indicate, preferential arrangements are no longer confined to a particular geographical region. Trade relations in the 21st century are characterized by a proliferation of RTAs concluded between countries that are geographically far apart. In addition to its intraregional deals, the European Community has concluded bilateral free trade deals with geographically distant countries such as South Africa (1999), Mexico (2000) and Chile (2002) and has announced its intention to start negotiations with India. Likewise, Japan has successfully negotiated intercontinental free trade agreements with Mexico (2004) and Chile (2006). The United States has recently concluded free trade agreements with geographically distant countries such as South Asian countries.

Chapter-3 India and Regional Trading Agreements: The importance of increasing regional trade within Asia cannot be emphasised enough. At a time when regional trading agreements, such as the EU and NAFTA have led to higher trade and investment, Asia lags behind. Trade within Asia is a miniscule proportion of world trade, even though the Association of South East Asian Nations (ASEAN) countries (Singapore, Phillipines, Thailand, Indonesia, Malaysia, Cambodia, Laos, Vietnam, Myanmar and Brunei), along with China, Japan, Korea and India are among the fastest growing exporters in the world today. China is expected to enter into an agreement with the ASEAN countries to promote trade by cutting tariffs on a large number of commodities with the region. This will lead to greater economic integration, in a region in which members have, until now, seen themselves largely as competitors, than as potential partners. 3.1 India's involvement with FTAs: Over the last few years a number of FTAs have been signed with Asian neighbours like Sri Lanka and Singapore. Steps are being taken for the creation of free trading areas within South Asia and among the members of the ASEAN. The benefit to India from entering an FTA is limited when India is dealing with a free-trading country. Since India is a high tariff economy, an FTA gives the partner a clear benefit, but if the partner already has zero or near zero tariffs, (as is the case with Singapore) Indian exporters do not stand to gain much. The FTA does not give Indian exporters additional market access. While India has an average custom to total import ratio of around 20 percent, Singapore is a zero tariff zone, Srilanka's is much lower at 5 percent and Thailand, with whom the next FTA is proposed to be signed has custom collections at 3.8 percent of total imports. Indian exporters gain little by getting preferential tariffs in these countries. It is their exporters who stand to gain. India loses the custom duties that would have been collected on their exports.

3.1.1 Agreement on South Asia Free Trade Area (SAFTA): The Agreement on South Asian Free Trade Area (SAFTA) was signed by all the member States of the South Asian Association for Regional Cooperation (SAARC) during the twelfth 'SAARC Summit' held in Islamabad on 4-6th January, 2004. As a result, SAFTA came into force from 1st January, 2006. The objectives of SAFTA are to promote and enhance mutual trade and economic cooperation among the 'Contracting States' by inter-alia:Eliminating barriers to trade in, and facilitating the cross-border movement of goods between the territories of the Contracting States; Promoting conditions of fair competition in the free trade area, and ensuring equitable benefits to all Contracting States, taking into account their respective levels and pattern of economic development; Creating effective mechanism for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and Establishing a framework for further regional cooperation to expand and enhance the mutual benefits of this Agreement.

3.1.2 Asia-Pacific Trade Agreement (APTA): The Asia-Pacific Trade Agreement (APTA), formerly known as the Bangkok Agreement, was signed on 31st of July 1975 as an initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). The objectives of the agreement is to promote economic development through a continuous process of trade expansion among the developing member countries of ESCAP and to further international economic cooperation through the adoption of mutually beneficial trade liberalization measures consistent with their respective present and future development and trade needs, and taking into account the trading interest of third countries, particularly those of other developing counties. The agreement is governed in accordance with the following general principles:The Agreement shall be based on overall reciprocity and mutuality of advantages in such a way as to benefit equitably all participating States;
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The principles of Transparency, National Treatment and Most-Favoured-Nation Treatment shall apply to the trade relations among the Participating States; The special needs of least developed country Participating States shall be clearly recognized and concrete preferential measures in their favour shall be agreed upon.

3.1.3 BIMSTEC ( Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation): BIMSTEC (Bangladesh India Myanmar Sri Lanka and Thailand Technical and Economic Cooperation), a sub-regional economic cooperation grouping was formed in Bangkok in June 1997. Its membership involves 5 members of SAARC (India, Bangladesh , Bhutan, Nepal & Sri Lanka) and 2 members of ASEAN (Thailand, Myanmar). Thus, it is visualized as a bridging link' between the two major regional groupings i.e. ASEAN and SAARC. Its chairmanship of BIMSTEC rotates among the member countries in alphabetical order. The immediate priority of the grouping is consolidation of its activities and making it attractive for economic cooperation. BIMSTEC member countries agreed to establish the BIMSTEC Free Trade Area Framework Agreement in order to stimulate trade and investment in the parties, and attract outsiders to trade with and invest in BIMSTEC at a higher level.

3.1.4 Framework Agreement on Comprehensive Economic Cooperation between India and the Association of South East Asian Nations (ASEAN): India's engagement with the Association of South East Asian Nations (ASEAN) started with its "Look East Policy" in the year 1991. Indias focus on a strengthened and multi-faceted relationship with it is an outcome of ASEANs economic, political and strategic importance in the larger Asia-Pacific Region and its potential to become a major partner of India in trade and investment. Also, it now provides a land bridge for India to connect with the Asia-Pacificcentred economic crosscurrents shaping the 21st century market place. While, ASEAN seeks access to Indias professional and technical strengths. India and ASEAN have convergence in their security perspectives. ASEAN was established on 8 August 1967 in Bangkok by the five original member countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Now, it has a membership of 10 countries namely Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar,
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Philippines, Singapore, Thailand and Vietnam. India is one of the four 'Summit level Dialogue Partners' of ASEAN. The objectives of this Agreement are :Strengthen and enhance economic, trade and investment co-operation between the Parties; Progressively liberalise and promote trade in goods and services as well as create a transparent, liberal and facilitative investment regime; Explore new areas and develop appropriate measures for closer economic co-operation between the Parties; and Facilitate the more effective economic integration of the new ASEAN Member States and bridge the development gap among the Parties.

3.1.5 Other agreements include: India And Singapore Comprehensive Economic Cooperation Agreement (CECA) India-Sri Lanka Free Trade Agreement (ISFTA) India-Chile Prefrential Trade Agreement (PTA) India-Afghanistan Preferential Trade Agreement (PTA) India-Bhutan Trade Agreement India-Nepal Trade Treaty Framework Agreement For Establishing Free Trade Between India And Thailand Free Trade Agreement (FTA) Between India And Gulf Cooperation Council (GCC) India- Japan Trade Agreement Joint Study Group Between India And Korea Trade Agreement Between India And Bangladesh Comprehensive Economic Cooperation And Partnership Agreement (CECPA) Between India And Mauritius

3.2 Implications of Rules of Origin for India: There is a big cost in terms of creating a whole bureaucracy which sits at custom points and checks whether goods coming from FTA partners satify "Rules of origin". Documentation would be provided to them which would need to show the percentage of value addition in Thailand for a good being imported from Thailand. This creates scope for corruption. 3.3 Then why does India try to enter RTAs: First, there are political gains of belonging to a group. Second, it is a way to reduce barriers to trade and reduce custom duties which may not be as easy to do in a unilateral manner. Yashwant Sinha, when he was Finance Minister, had announced that Indian tariffs would be brought down to ASEAN levels. If India is part of a deal to cut custom duties, it becomes easier to do so. While domestic producers may protest, consumers stand to gain when duties are cut. In addition, these agreements can lead to an increase in service exports an area in which there is slower progress in multilateral arrangements like WTO.

CHAPTER-4 REGIONALISM VERSUS MULTILATERALISM

The trend in the growth of RTAs is difficult to interpret. On the one hand, this scale of trading within regional agreements would have been difficult to imagine by the founders of the GATT. On the other hand, the trend has to be set in the context of two other recent phenomena. First, the 1990s were also a period of rapid growth of accessions to the GATT and the WTO, from some 80 GATT Contracting Parties in 1990 to over 153 WTO Members today. In the accession process, new GATT/WTO Members committed themselves to reduced protection and the implementation of WTO rules, which include the notification of RTAs to which they are party. Second, this was also a period of unilateral liberalization, particularly among developing countries and economies in transition, and this liberalization was largely consolidated in the Uruguay Round. Thus, we have also seen a decline in the use of non-tariff measures as well as considerable rationalization of tariff structures, tariff reductions to moderate average levels and a major expansion in binding coverage. This background of unilateral and multilateral liberalization considerably reduces the scope for trade diversion, and in practice, as Baldwin (1997) points out "almost all empirical studies of European and North American arrangements find positive impacts on member's living standards". Thus, the context of the new RTAs and their product coverage are rather different from the unsuccessful regional trade agreements of the 1950s and 1960s, which were in many respects designed deliberately to achieve trade diversion. Nevertheless, the fact is that trade within RTAs has been generally growing much faster than trade from non-members. An analysis of seven regional integration agreements (APEC, the European Union, NAFTA, ASEAN, CEFTA, MERCOSUR and the Andean Community) shows that, on average, imports from other members of these arrangements increased on (import weighted) average at some 7 per cent a year in the period 1990-98, while imports from nonmembers increased at 5.5 per cent. However, while the growth in imports from non-members was on average lower than from members (the exception is the EU whose imports from nonmembers grew at the same rate as from members), this is similar to the average rate of growth of 6 per cent in world imports, including those by the selected integration arrangements, in the same period. Also, it has to be noted that in the cases of NAFTA, MERCOSUR and the Andean

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Community imports from non-members grew at 7, 15 and 12 per cent, respectively, somewhat above the growth rate for world imports. It is, therefore, important to look carefully at the dynamics of particular agreements. On a simple comparative static analysis, third parties may be adversely affected by trade diversion and a reduction in their terms of trade, but this is less obvious on the basis of a crude dynamic analysis, especially in the case of the faster growing RTAs. In any event, the overall numbers do not point to serious diversion away from imports from nonmembers of RTAs. On the other hand, there have certainly been concerns expressed in the Caribbean about the negative effects of NAFTA on their trade. Yeats (1997) claims evidence of trade diversion in MERCOSUR. While protection of certain sectors such as automobiles certainly limits market opportunities in MERCOSUR, overall these countries are now much more open than they were in the 1980s, and, as noted earlier, imports from third countries have also been growing rapidly (Laird, 1998). Bhagwati (1992) and Krueger (1995) express strong concerns about the negative effects of growing regionalism and they worry that RTAs divert attention from the multilateral trading system. Bhagwati, in particular, stresses the benefits of free trade and rejects arguments about the need for an alternative to the GATT for countries which wish to liberalize faster, regionalism as a supplement to GATT, regionalism to accelerate the GATT processes, balance-of-payments pressures for a quick result on trade, recent experiences in Europe and the Americas, changed attitudes to liberalization in developing countries, and so on. On the other hand, Baldwin (1997), Ethier (1998) and Lawrence (1999) tend to regard regionalism much more as a complement to multilateralism (building blocks rather than stumbling blocks). Baldwin argues that NAFTA triggered off pressures for such agreements as a kind of domino effect. He and Lawrence both argue that such liberalization strengthens the hand of exporters and pro-trade forces. Ethier (1998) emphasises that "the new regionalism is in good part a direct result of the success of multilateral liberalization, as well as being the means by which new countries trying to enter the multilateral system (and small countries already in it) compete among themselves for direct investment". Lawrence also makes an important point that the correct comparison is not between a preferential arrangement and complete multilateral liberalization, but between two second-best situations of multilateral liberalization that is only partial with preferential trade liberalization which could be much more complete.
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Alan Winters has argued that RTAs are like street gangs: "you may not like them, but if they are in your neighbourhood, it is safer to be in one". However, in Winters (1996) he argues that, on the basis of various models, it is not yet possible to determine whether regionalism encourages or discourages evolution towards globally freer trade, and in Winters (1998), he says that there is no reason to expect a single, simple answer. However, he is worried that regionalism probably increases the risks of catastrophe in the trading system, a comment that might seem particularly apt in the wake of the Seattle WTO Ministerial meeting of late 1999. In a look at the issue of the tendency towards large blocs of RTAs, Winters (1998) also discusses whether reducing the number of players in multilateral negotiations could simplify the process of reaching agreement at the multilateral level. Citing the difficulties that the European Union had in formulating a common position in the Uruguay Round, he argues that such powerful coalitions could make negotiations more difficult.

4.1 The impact of regionalism on multilateralism: Does regionalism complement or hamper broad based multilateral liberalization? The standard approach to this question is to examine whether RTAs help or hinder the viability of multilateral free trade. Some authors take a political-economy perspective. Levy shows that a bilateral agreement may provide disproportionate gains to the countries median voters, thus undermining support for an otherwise feasible multilateral trade agreement. Krishna , employs an entirely different structure, where national markets are segmented and oligopolistic firms are pivotal to determine trade regimes. Yet he finds a surprisingly similar result: RTAs can turn producers against a multilateral agreement that they would otherwise support, because free trade would destroy the rents created by the RTAs. Since in his setting the most trade-diverting arrangements gather the most political support, Krishnas analysis casts a gloomy view on the desirability of RTAs. A regional trade agreement can bring such large gains to some groups that they lose from further liberalization. If these groups are powerful enough, then free trade becomes politically infeasible. RTAs can be harmful a simple example, consider that car producers in one member country and steel producers in another member gain from a bilateral agreement, because their market base grows and they are still relatively shielded from international competition. Without the RTA, these groups may have benefited from multilateral liberalization, but not as much as they do
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under the bilateral agreement. As a result, both steel and car producers oppose free trade once the RTA is in place. All other trade policies beyond the decision to form trade agreements or not are given exogenously. Assuming away the choice of how much to restrict trade in the absence of multilateral free trade helps to streamline but otherwise has no bearing in the argument developed. However, that assumption is critical in the political economy analyses. FTAs weaken the role of politics in the determination of trade policies. The role of special interests in the decisions of governments diminishes, governments become less inclined to hinder free trade. Thus, whereas politicaleconomy motivations may induce a government to obstruct a welfare-improving multilateral free trade agreement, membership in an FTA makes such possibility less likely to happen. But the possibility of forming RTAs can also make free trade easier to achieve by inducing otherwise uncooperative countries to cooperate. This is more likely to be the case with customs unions, because they tend to be more harmful to outsiders. The rules of the multilateral system also matters. Specifically, the provision of nondiscrimination in the GATT/WTO requires that tariff concessions must be extended to all members. This allows a country to free ride on the liberalization efforts of others, and could ultimately reduce the extent of feasible liberalization by those countries. This may explain the inclusion of RTAs in the original GATT charter, despite the GATTs overwhelming focus on nondiscrimination. FTAs are not permitted, a country may oppose a multilateral free trade agreement because it can free ride on the liberalization efforts of others. The threat of FTAs can reverse that situation by offering the liberalizing countries a way to stop the outsider from free riding. This discussion underscores two central elements in this debate: (i) whether the gains from RTAs are so large for their members that a multilateral agreement becomes undesirable for them; and (ii) whether outsiders benefit or lose when an RTA is formed.

4.2 The impact of multilateralism on regionalism: Studying how regionalism affects multilateralism is not the only way to look at this relationship. The incentives for and the sustainability of preferential liberalization when multilateral tariffs are lower. Deeper multilateralism provides greater incentives to form RTAs. The intuition draws from the complementarity effect between internal and external tariffs. When external tariffs are low, the loss from trade diversion is small but the gains to producers from preferential access and
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to consumers from lower prices remain. There are other forces that can make regional and multilateral tariff reduction complement each other to generate broader trade liberalization. Reciprocal liberalization lowers tariffs, which leads to an expansion of the export sector and a decline in the import-competing sector. Following this transition, the political-economy support for protection is reduced, and further reciprocal liberalization becomes optimal. This process changes the structure of production, which in turn facilitates future liberalization. The type of liberalization can be regional or multilateral but spillovers from one to the other are likely. Identification strategy relies on the timing of the agreements. Since the ten agreements considered were negotiated after the conclusion of the Uruguay Round and are very small from the US perspective, they are unlikely to have affected the multilateral talks in any meaningful way. Hence, The juggernaut idea that tariff complementarity may work both ways. In contrast with the common view that regionalism and multilateralism are substitute trade strategies, their evidence indicates that the two are close complements.

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CHAPTER-5 THE WTOS PROVISIONS ON RTA

For a proper understanding of the relationship between the increasing number of RTAs and todays multilateral trade regime, a brief historical introduction to the WTOs provisions on RTAs is necessary. GATT started functioning on January 1, 1948, on the basis of Havana Charter of 1948 establishing the International Trade Organization (ITO). GATT included relatively few clauses, mainly relating to tariff obligations. Their main function was to enable the swift implementation of tariff reductions while awaiting the coming into existence of the ITO. However, because the ITO was never ratified, GATT gradually assumed the role of the major multilateral trade forum. GATT contains two general concepts that are essential to understanding the discussion on regionalism in international trade: schedules of tariff concessions and unconditional most-favored-nation (MFN) treatment The WTOs GATS contains a similar provision. Each WTO member is required to have a schedule of specific commitments which identifies the services for which members guarantee market access and national treatment and any limitations that may be attached. Schedules must specify: (1) the terms, limitations and conditions on market access; (2) the conditions and qualifications on national treatment; (3) the undertakings relating to additional commitments and, where appropriate, the time-frame for implementation of such commitments; and (4) the date of entry into force of such commitments. GATS Article XVI stipulates that each Member [must] accord services and service suppliers of any other Member treatment no less favourable than that provided for under the terms, limitations and conditions agreed and specified in its [commitments]chedule. GATT Article I contains the most-favored nation (MFN) obligation. It holds that, with respect to customs duties and all other rules in connection with importation and exportation, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties. GATT has stated explicitly that the contracting parties recognize the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration
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between the economies of the countries parties to such agreements. At the same time, the multilateral trade regime also imposes certain conditions on such RTAs. Those conditions can be found in three different WTO sources: (1) In the area of trade in goods, RTAs are subject to GATT Article XXIV, complemented by an Understanding on its interpretation that was negotiated during the Uruguay Round; (2) in the area of trade in services, the legal foundation for RTAs is found in Article V of the General Agreement on Trade in Services (GATS); (3) RTAs concluded among developing countries benefit from particular rules contained in paragraph 2(c) of the Decision on Differential and more Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries, also called the Enabling Clause.

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CHAPTER-6 WTOS STANDARDS FOR RTAS

While the new Transparency Mechanism is an essential component for the restoration of the WTOs supervisory role on the trade policies pursued by RTAs, the impact of the Mechanism is necessarily limited by a number of non-procedural factors. One of the current stumbling blocks to the WTOs effectiveness in dealing with RTAs is the lack of agreement on the interpretation of the substantive WTO criteria. Under GATT 1947, the Working Groups in charge of the examination of RTAs were generally unable to resolve basic methodological issues. As a consequence, the reports submitted by the Working Groups to the GATT Council did, in most cases, merely list the divergent views expressed by the contracting parties. In fact, the WTO Committee on Regional Trade Agreements (CRTA) has not been more productive than the old GATT Working Parties.

6.1 The WTOs Internal Requirements for RTAs: 1. The Membership of RTAs. The internal requirements are found in paragraphs 5, 8 and 5(c) of Article XXIV. The first internal requirement concerns the membership of the RTAs. Paragraph 5 states that the provisions of the Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or a free trade area[.] The WTO members of such RTAs should (a) be required to provide the CRTA with a full explanation on the reasons for concluding the RTA with the nonmember; and (b) be required to take the responsibility of providing technical assistance to the non-member with a view of bringing that country towards WTO membership. 2. The Degree of Trade Liberalization: the Substantially All Requirement. The second internal requirement focuses on trade coverage. GATT Article XXIV:8(a)(i) provides that customs union shall be understood to mean the substitution of a single customs territory for two or more customs territories, so that duties and other restrictive regulations of commerce are eliminated with respect to substantially all the trade between the constituent territories of the union. 3. The Reciprocity of Trade Liberalization. The third criterion concerns the reciprocity of liberalization between the parties in free trade areas and customs unions. Under GATT 1947,
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several one-way free trade areas had been notified. Whether the Article XXIV: 8 requirement to liberalize substantially all the trade implied that such liberalization needed to be fully reciprocal was the subject of debate and disagreement. 4. The Specific Requirement for Customs Unions. The fourth internal requirement deals specifically with customs unions. GATT Article XXIV:8(a)(ii) contains the requirement that the parties to customs unions must apply substantially the same duties and other regulations of commerce in relation to third parties. According to the Appellate Body in the Turkey-Textiles case, this provision implies that the constituent members of a customs union are . . . required to apply a common external trade regime. The Appellate Body adds that the term substantially the same offers a certain degree of flexibility. 5. The Period of Implementation. The fifth internal requirement deals with the time period within which the RTA is to be formed. GATT Article XXIV:5(c) states that any interim agreement . . . shall include a plan and schedule for formation of . . . customs union or . . . free trade area within the reasonable period of time. The Understanding on the Interpretation of Article XXIV of GATT 1994 clarifies that the reasonable period of time referred to in paragraph 5(c) should be ten years and should only exceed this period of time in exceptional cases.

6.2 The WTOs External Requirements for RTAs: 1. The General Principle. While the parties to RTAs have generally held the view that paragraph 4 of Article XXIV can be seen as a purposive preamble without additional legal consequences, third countries have tended to interpret it as creating a separate obligation to be complied with by the RTA parties, independent of other Article XXIV provisions. The issue was first discussed in depth during the examination of the Treaty of Rome establishing the European Economic Community in 1957. The Communitys representatives held that the paragraph was merely laying down a general principle that was translated into legal requirements in paragraphs 5 to 9. 2. The External Trade Consequences of RTAs. In addition to its internal requirements that focus on the relationship between the parties to an RTA, GATT Article XXIV also contains external obligations that deal with the RTAs legal relationship with nonmembers. During the Uruguay Round, the European Community argued that the purpose of the examination under GATT Article XXIV:5 was to discuss the consequences of the customs union or free trade area by
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looking at the total trade of the member States with the other contracting parties taken collectively. 3. The Specific Requirement for Customs Unions: Compensatory Adjustment. The second external requirement on RTAs concerns the common customs duties that are adopted by the members of a customs union. If, in the creation of a customs union, a WTO member increases a rate of duty inconsistently with what is listed in its schedule of concessions, the customs union is obliged to enter into compensatory adjustment negotiations with the outside contracting parties. According to GATT Article XXIV:6, the members of a customs union must thus offer compensatory adjustment when bound tariffs have been raised following the formation or the enlargement of the union.

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CHAPTER-7 WTOS PROCEDURAL STANDARDS FOR ASSESSING RTAS

On July 10, 2006, negotiators of the World Trade Organizations (WTO) Doha Development Round approved a new WTO Transparency Mechanism (Mechanism) for Regional Trade Agreements (RTAs). Instead of awaiting the final results of the Doha Round, the WTO General Council formally established the Mechanism on a provisional basis on December 14, 2006. The decision on the provisional application of the new Mechanism is significant. It shows the urgency felt by the WTO members for more transparency in the creation and functioning of RTAs. By July 2007, no less than 380 RTAs had been notified to the General Agreement on Tariffs and Trade (GATT) and the WTO. An additional twenty RTAs were estimated to be operational, though not yet notified. From September 2005 to September 2006 alone, thirty-two RTAs were notified. According to the WTOs website, Mongolia is the only WTO member that is not party to any RTA. Transparency is an essential concept in the WTO: Members recognize the inherent value of domestic transparency of government decision-making on trade policy matters for both Members economies and the multilateral trading system, and agree to encourage and promote greater transparency . . . . Transparency is of particular importance with respect to RTAs as they are an exception to the key MFN-principle. In Article XXIV:7(a), GATT 1947 provides that contracting parties should promptly notify their Agreement to the contracting parties and shall make available to them such information regarding the proposed union or area as will enable them to make such reports and recommendations to contracting parties as they may deem appropriate. GATS Article V:7(a) stipulates that members which are parties to any RTA covering trade in services shall promptly notify such agreement, enlargement or modification of that agreement. Members that are parties to an RTA that is implemented on the basis of a timeframe shall report periodically on its implementation. Several delegations . . . stressed the need to improve the transparency of RTAs and the efficiency of the procedures related to the examination of RTAs, noting that the CRTA [Committee on Regional Trade Agreements] ha[s] been unable to adequately fulfill its mandate of reviewing RTAs and overseeing their implementation.

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7.1 The Competent Body for the Examination of RTAs: In the old days of GATT 1947, examination of RTAs was conducted by individual working parties. Often, several working parties co-existed, each assessing different RTAs. This fragmented approach neither contributed to coherence, nor to an orderly discussion of systemic issues which are common to RTAs. To remedy these problems, the WTO General Council established the Committee on Regional Trade Agreements (CRTA) in February 1996. The CRTAs role is to carry out the examination of RTAs; to consider and make appropriate recommendations on the requirement for biennial reporting on their operation; to develop procedures to facilitate and improve the examination process; and to consider the systemic implications of such agreements and regional initiatives for the multilateral trading system and the relationship between them.

7.2 The Information to be provided: The examination of notified RTAs is conducted on the basis of information provided by the parties. GATT Article XXIV: 7(a) requires WTO members to provide information on a proposed free trade area or customs union as they deem appropriate. It does not lay down any specific notification format to be followed by countries wishing to form a regional trading arrangement. GATS Article V:7(a) provides without further instructions that any member entering into an agreement shall make relevant information available to the Council for Trade in Services as the latter may request it.

7.3 The Role of the WTO Secretariat: With respect to the concrete examination of RTAs by the CRTA and the CTD, the Doha Round Transparency Mechanism contains an important novelty. In the past, the WTO Secretariat played only a marginal role in the assessment of RTAs. Under the Transparency Mechanism, the WTO Secretariat, on its own responsibility and in full consultation with the parties, shall prepare a factual presentation of the RTA. This procedure seems comparable to what exists under the Trade Policy Review Mechanism (TPRM).

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7.4 The Timing of the Notification: 1. Early Announcement. As to the timing of the assessment exercise, some delegations expressed support for early notification. The first phase is called the early announcement. Without affecting the substance and the timing of the notification required under GATT Article XXIV, GATS Article V or the Enabling Clause, nor affecting members rights and obligations under the WTO agreements in any way, the Doha Round negotiators agreed on the usefulness of an early announcement of pending RTAs. This implies that members participating in negotiations aimed at the conclusion of an RTA 2. Notification in the Strict Sense. The second phase covers the notification in the strict sense. The Transparency Mechanism stipulates that notification shall take place as early as possible. As a rule, it will occur no later than directly following the parties ratification of the RTA or any partys decision on application of the relevant parts of an agreement, and before the application of preferential treatment between the parties. The Mechanism adds that the WTO consideration of a notified RTA shall be normally concluded in a period not exceeding one year after the date of notification. 3. The Subsequent Notification and Reporting of Changes to RTAs. GATS Article V:7(a) makes clear that parties to any RTA covering trade in services shall also notify the enlargement or modification of that agreement. Moreover, under GATS, parties to an RTA that is implemented on the basis of a time-frame are obliged to report periodically on its implementation.300 GATT Article XXIV does not include explicit provisions on the notification or reporting of modifications or extensions of existing customs unions or free trade areas.

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CHAPTER-8 ENFORCEMENT OF THE WTOS RTA DISCIPLINES

In addition to the discussions on the substantive and procedural requirements that must be met by RTAs, questions persist on two key topics related to the enforcement of WTO disciplines on RTAs. The first question concerns the legal consequences that should result from a WTO finding of incompatibility. The second question deals with the justiciability of WTO disciplines on RTAs. Both issues will be discussed below. A. The WTO as the Partial Constitutional Supervisor of RTAs B. The Limited Justiciability of the WTOs RTA Disciplines

GATT/WTO Dispute Settlement and RTAs: 1. The State-of- Play. In the days of the old GATT 1947, the relationship between the dispute settlement system and Article XXIV came up in two cases. The Panel held that the examination or re-examination of Article XXIV agreements was the responsibility of the contracting parties. The Panel added that it would not be appropriate to determine the conformity of an agreement with the requirements of Article XXIV on the basis of a complaint by a contracting party under Article XXIII:1(a). The Panels reasoning runs as follows: The Panel could not accept that tariff preferences inconsistent with Article I: 1 would, by notification of the preferential arrangement and invocation of Article XXIV against the objections of other contracting parties, escape any examination by a panel established under Article XXIII. If this view were endorsed a mere communication of a contracting party invoking Article XXIV could deprive all other contracting parties of their procedural rights under Article XXIII: 2 and therefore also of the effective protection of their substantive rights, in particular those under Article I. The Panel concluded therefore that a panel, faced with the invocation of Article XXIV, first had to examine whether or not this provision applied to the agreement in question. 2. The Justiciability of the WTOs RTA Disciplines. It is important to analyze whether the current state of the WTO case-law constitutes an appropriate answer to the credibility gap with regards to the monitoring of RTAs. In the highly political context surrounding the creation of regional agreements, the most pertinent question concerns the justiciability of the WTO
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disciplines on RTAs and the possible impact of an over-legalization of the enforcement of the rules. The issue will be looked at from three related angles: the rather vague nature of the WTO provisions on RTAs; the institutional balance on which the WTO rests; and the difference between judging concrete trade policy measures versus the overall legality of RTAs. a. The Nature of the WTOs RTA Provisions. b. Preserving the WTOs Institutional Balance. c. Judging Concrete Trade Policy Measures Versus the Overall Legality of RTAs.

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CHAPTER-9 IMPACT OF RTAS

Does membership of an RTA weaken the interest in multilateral negotiations and liberalization? The background of unilateral reforms and increased membership of the strengthened multilateral system should mean that the recent strong trend towards regionalism is somewhat less dangerous to third countries and to the multilateral system than earlier experiences. This conclusion is reinforced by the nature of the new agreements, which have wider coverage of product and instruments than earlier agreements, enhancing the degree of integration. On the other hand, we have certainly heard in Geneva comments from negotiators to the effect "If we do not get what we want in the negotiating agenda, why should we worry? We have our own RTA. That is where the action is!" Was this a factor behind the failure of the WTO Ministerial meeting in Seattle in late 1999? On the whole, experience seems to confirm the equivocal view of Winters (1998) who says that there is no reason to expect a simple answer to whether regionalism encourages or discourages the evolution towards globally freer trade. Similarly, the jury remains out on whether the emerging mega-blocs of RTAs will facilitate or frustrate the making of multilateral agreements. It should be noted, however, that the emerging mega-blocks ignore, for the most part, the least-developed countries, particularly those in sub-Sahara Africa and South Asia.

Are these new blocs then a sign of frustration with the multilateral system? While many countries have embraced trade liberalization as part of a wider package of economic reforms, the pace of change varies widely and has certainly slowed in recent years, even before the Asian financial crisis. For the faster moving countries, finding like-minded countries may well have been a factor behind regional agreements. Moreover, locking in reforms through RTAs has also been a consideration, Mexico in NAFTA is a key example, and this may also be the most important result of the Europe Agreements. Thus, the new regionalism lays down a challenge to be bettered at the multilateral level. Do RTAs harm third countries and weaken the MFN principle? It is hard to find concrete evidence that RTAs have harmed third countries. RTAs are by their nature discriminatory and hence a derogation of the MFN principle. It is, therefore, not surprising that rade within such blocs is generally growing faster than trade from nonmembers (except in the EC where the numbers are the same in the 1990s). On the other hand,
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trade with non-members is growing at about the same rate as world trade in general, and in some of the smaller, more dynamic RTAs, trade with non-members is growing faster than world trade. It is argued in the literature that more comprehensive coverage ("going all the way") inclines countries to take a more positive view of general liberalization. Similarly it is argued that deeper integration is beneficial to third countries as domestic regulations allow greater competition even from non-members. These issues obviously need more rigorous research. The maintenance of a dual system (of antidumping duties for third parties and competition or anti-trust policy among RTA parties) can create distortions where different criteria and conditions apply to the invocation of such measures and thus have the potential for discrimination against third countries.

Differing ROOs among RTAs are likely to have negative effects on trade. Complex and varying methods of calculating regional content impose a significant burden on industry and this problem is magnified by the overlap of RTAs. Likewise, the network of diagonal cumulation schemes of preferential ROOs may have the effect of extending an RTA beyond its own membership, without any legal basis. This is discriminatory, since some of the RTA's trading partners those participating in the diagonal cumulation scheme benefit from preferential treatment, while other third parties those outside the diagonal What about the examination of RTAs in the WTO and the inconclusive debate on systemic issues? Does this matter? This certainly does the system little credit, but it is also a consequence of the fundamental consensus process of the WTO. It is frustrating to all WTO Members, participants or not in an RTA, and has effectively given carte blanche to participants to operate a range of discriminatory schemes. Given the divergences of view in the CRTA and the strength of entrenched positions, it is difficult to see any major breakthroughs in this area. It may be that the compatibility of individual RTAs with WTO rules is, in future, decided in the DSB of the WTO, in the absence of firm conclusions in the CRTA. WTO (1995) suggests the conversion of the examination process towards a transparency mechanism, which could be welfare-enhancing as suggested by the public choice literature. For example, the present legal examinations might be completed, reflecting the existing divergences of opinion (the current approach in the CRTA), and this might be followed with a periodic examination, looking at the implementation of each agreement and the evolution of trade among partners. A timetable for broad-based, economic
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review, keeping the RTAs under scrutiny, could go some way to satisfying the concern of third countries about the operation of RTAs. There can be little doubt that the main economic advantages to participants in regional trade agreements would be even greater if the liberalization were carried out on a wider, multilateral scale. RTAs are a second-best solution. Thus, on the basis of theory, Kemp and Wan (1976) note "...there is a big incentive to form and enlarge a customs union until the world is one big customs union, that is, until free trade prevails."

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CHAPTER-10 CONCLUSION & SUGGESTIONS

There are no clear cut answers to the debate on regionalism and multilateralism. Both are continuing to exercise a strong and powerful influence on world trade. Multilateralism in the form of the WTO has gained popularity in the recent years. The number of countries waiting to seek accession and become members of the WTO corroborates this. At the same time, regional economic groupings have proliferated at a rate and speed never seen before. However, for developing countries, the key to their success lies in reforming their domestic economies: good trade policy begins at home. Whether one follows the regional or the multilateral track, reforming the domestic economy is imperative in order to maximize the gains from trade liberalization. WTO meetings in Seattle, Cancun, and Hong Kong have all affirmed the same bottom line: countries should follow unilateral trade policies suited to their own domestic needs but within the framework of the changing international trade environment comprising both regionalism and multilateralism. RTAs are playing an important role in the development of the global markets and helping countries in providing the various resources to its people and also has an impact on development of the countries. Thus it is suggested that the RTA should be permitted as long as they are within the ambit of the WTO and the multilateral agreements like WTO should be treated as the charter or the constitution for the international trade.

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