Regionalism and multilateralism.pdf

Amelio Porfilio

Regionalism and multilateralism, from coexistence to collision?

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DEFINITION OF REGIONALISM

There is no common definition for regionalism because, on a theoretical

level, there is no widely accepted idea of the fundamental features of a region.

In several studies, it is assumed that a region is made of states that are placed

in the same geographical area but it’s controversial how homogeneous an area

must be in order to be considered a region. Other scholars prefer to base the

notion of region purely on community of language and cultural identity. Yet,

there are uncertainties over the meaning of cultural identity.

Some authors base the region-building-process on economic forces, so

that trade and commercial relations between some states are more intense than

those between other states, in such a way that the former are part of the same

region while the latter are not. On the other hand, other authors believe that a

region can be formed only by means of political decisions that are expressed

through preferential agreements between the states. There is also a school of

thought that bases or establishes the origin of a region to the presence of an

hegemonic power capable of making other states gathering together in a given

area.

Finally, there are theoretical explanations that seek to combine both

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economic and political factors in order to explain the emergence of a region.

According to the interdependence theory, the growing intensity of

international trade diminishes the effectiveness of the states authority and

prompt them to cooperate through regional agreements, whereas the

functionalist theory provides that the more economic interdependence has

been established, the higher is the interest of the states to cooperate by means

of institutional agreements.

A more pragmatic approach based on empirical elements would suggest

to conceive a region as the expression of economic cooperation between (often,

but not always) neighbouring states, which is mainly the result of preferential

agreements between them.

REGIONALISM IN THE COURSE OF THE LAST TWO CENTURIES

Regionalism is not a recent phenomenon: it has taken place at different

times, during the last two centuries in the international scenario and its

structure and features have been shaped either by protectionist or by free-

trade forces. In the nineteenth century, regionalism is almost exclusively a

European phenomenon and is the immediate step before the nation-state

building. The Zollverein in Germany, other customs unions in Italy (1860),

Austria (1850), Switzerland (1848) are the most relevant preferential

agreements of a wider network. The contribution of new technologies and

preferential agreements increases the amount of intra-regional trade in such a

way that Europe in literature is described to be functioning as a common

market (Kindleberger, 1975).

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After the First World War, there was a second wave of regionalism:

European countries signed agreements as sovereign states

and (especially France and Great Britain) looked also

beyond European borders in order to strengthen their

economic relations with overseas colonies. Basically,

regional agreements, during this period, reflected rivalries

among the main economic powers and were led by

mercantilist purposes (Mansfield, 1999, p.590).

After the end of the Second World War, the European Economic

Community, followed by the European Free Trade Area in central Europe and

by the Council for Mutual Economic Assistance (CMEA) in the former

communist countries, began a new phase of regionalism. Many developing

countries, as independence is gained, establish agreements among them. Yet,

European regional agreements, founded on the ideas of trade creation and

political cooperation, have survived and succeeded, whereas CMEA and the

other preferential agreements in the former colonies, which are aimed at

creating import substitution and limiting economic dependency from western

countries, have failed (Eichengreen B. and Frankel J., 1995).

The last wave of regionalism took place in the late 80s and 90s, in a

different international context compared to the previous one. This last version

of regionalism developed in a interdependent world economy where the major

actors tried to solve their disputes peacefully, benefiting from an organization,

at present called World Trade Organization, assisting its members in setting

up a stable commercial environment (Perroni C. ans Whalley J., 1996).

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After the First World War, there was a second wave

of regionalism

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Differently from regionalism of the 30s, this one, often being defined as open

regionalism, did not tend to exclusiveness and tried to open itself to other

countries. It is also distinct from regionalism of the sixties to the extent that

developing countries are part of a western countries’ strategy that is intended

to open up their markets (Lawrence R., 1996). Present regionalism in not only

facing the old issue of quotas and tariff barriers to trade, but also other

obstacles to trade and extends its scope to services, investments and ideas.

Commercial agreements increasingly flourish during the 90s, so that almost

half of the 220 regional agreements notified to the WTO until 2000, are

initiated during the nineties (World Bank, 2000, pag.1).

The Euro-Mediterranean area is the one where the concentration is higher

(half of the existing regional agreements) and Latin America is following at

close distance. Even United States, the world hegemonic power and promoter

of the multilateral system for forty years, begin a new strategy in 1985, by

taking part to a free trade agreement with Israel. Most of existing preferential

agreements (around 90 per cent) take the form of free trade areas, where

member states decide to abolish custom duties between them, leaving their

own tariffs to imports from third countries. In some cases, states set up

customs unions, areas where elimination of tariffs between member states is

coupled with a common custom duty towards third countries. A more

advanced stage of integration is that of common market, an area where

member states agree on free circulation of factors of production and end-

products. Since the recent establishment of a monetary union, EU has become

a unique case.

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MULTILATERALISM AND REGIONALISM: AN INTRICATE DEBATE

Regional agreements have been reached without formally conflicting

against the WTO which indeed allows them to enter into force, provided that

they meet certain requirements to be verified through a

notification procedure. Between May 1996 and October

1999, the Committee on Regional Trade Agreements

which is in charge of the examination of the compatibility

of the draft of regional agreements with WTO, has taken

into examination 72 regional agreements but it has not

been able to bring into conclusion any of these evaluations

because, as admitted in its final report, “there was

disagreement between the Members with regards to the interpretation of

certain parts of the regional agreements clause, as well as of certain procedural

issues”(WTO, 1999(a)). Indeed, such agnosticism is the direct result of

consensus decision-making procedure of the World Trade Organization. In

addition, there is a valuable precedent, that of the European Economic

Community foundation, when the conditions enabling regional agreements

ere clearly disregarded (WTO, 1994, p. 750). After such macroscopic violation,

it is hard to oppose any new regional being notified.

Proliferation of preferential agreements has opened a large debate with

regards to the extent that regional agreements and multilateral system can

really coexist. A WTO study dated 1995, has found that the relationship

between the multilateral system and regional agreements has been “at least

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Regional agreements have been reached without formally

conflicting against the WTO which indeed allows them to enter

into force

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satisfactory if not totally positive”(WTO, 1995).

In literature, it has been argued that regionalism is naturally open

because it increases the costs of being out, so that always more countries

become eager to join (Baldwin R., 865-888.) and in particular small countries

try to enter regional agreements in order to get foreign investments (Ethier W.,

1149-1161). It has also been maintained that regional agreements don’t conflict

with the multilateral system, because they are aimed at getting economies of

scale and larger markets (Lawrence, 1999).

On the contrary, other studies express their concern about the negative

effects that regionalism could have on WTO. Bhagwaty, says that regionalism

is a second-best solution and opposes previous arguments saying that regional

blocks tend to be closed, by giving access only to certain states (Bhagwaty,

1993). For instance, European Union has been selective in its enlargement

policy and NAFTA has recently refused to give access to Chile. It has also been

argued that, as the states get higher market power through regional

agreements, they are less inclined to liberalization and more capable to resort

to protectionist measures (Mansfield, 1998, p. 523-543). As a matter of fact,

European states, after the creation of the EEC, have been able to keep their

protectionist measures in agriculture.

Other scholars have focused on the effects that regional blocks have on

multilateral negotiations. Summers points out that blocks reduce the numbers

of the parties involved and simplify the dealings. Yet, at present, European

Union is the only regional organization that has been vested with the power to

negotiate for the members States; despite this, political divisions between its

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Member States have jeopardized the smooth proceeding of the Uruguay

Round. Moreover, the process of regional integration

might divert the attention of member states from the

multilateral debate, as it occurred during the stalemate of

the Uruguay Round, when Europe and the US were

concentrating their efforts respectively in the Maastricht

negotiations and the NAFTA discussions (Woocock S.,

1996, p.119). The imminent enlargement of the EU to

Eastern European countries could seriously endanger the delicate existing

equilibria between the member states (since the Nice Treaty would change

the distribution of votes in the Council), making it extremely difficult to reach

decisions at European level (Rollo, 1998, p.264).

Some authors put forward the idea that regionalism can develop

solutions to be transferred to the multilateral system: for instance, the dispute

settlement system of WTO was taken out from CUSFTA model and the WTO

approach to technical barriers was inspired by the EU (Woocock S., 1996,

p.120). Yet, sometimes, regional solutions do not suit the other parties needs at

multilateral level: the OECD proposal on investment liberalization has not

been accepted by developing countries in 1998.

Regional agreements certainly strengthen the bargaining power of the

participating states: Caribbean countries have been able to negotiate the Lomè

Convention with the European community by virtue of CARICOM. Following

this line of reasoning, it has also been asserted that one of the reasons

underlying the institution of the European Community was the strengthening

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Moreover, the process of regional

integration might divert the attention of

the member states from the multilateral

debate

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of its bargaining power with respect to the US (Milward, 1996).

REGIONALISM AS A RESULT OF WTO WEAKNESS?

At present, there are two major trade-blocks: European Union and

NAFTA. European Union is the result of a process of deep political integration

started around fifty years ago, whereas NAFTA is around 10 years old and still

is a free trade area. Other regional arrangements have been emerging in Asia

in the last decade that might give rise to a third block. On one hand, the APEC

agreement between some Asian countries and the US that surprisingly marks

the exclusion of Europe at the end of the eighties. On the other hand, the

ASEAN agreement putting together the southern-east Asian countries,

represents the most promising challenge to euro-american hegemony: in this

context, member states have given rise to a free trade area called AFTA.

Although it is not proper to say that a sense of common Asian identity has

already arisen, many authors advance the hypothesis that an Asian approach

to problem-solving has been emerging (Higgott, 1998). Recently in Seattle, for

instance, the Asian block opposed a strong veto to the American and European

proposal to adopt uniform labour standards and has not accepted the “western

conceptions” of human rights.

Regional blocks have been expanding in such a way that developing

countries and economies in transition are centered around the economies of

industrialized countries: the treaties that have linked Mediterranean, African

and Eastern European countries to European Union and the ones that have

bound Mexico and potentially all the countries of the American continent to

US and Canada. There are several reasons why states resort to regional policy.

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Many of these are related to WTO deficiencies that regional agreements are

deemed to offset. There is a belief that the stronger the regional agreements

become, the more the weakness of WTO functioning mechanisms might

emerge.

a) Reforms lock-in. Access to regional agreements could ensure to any

government institutional bindings strong enough to

accomplish reforms, in case public authorities were

missing the necessary internal support. To this purpose,

regional agreements turn out to be more effective than

WTO, since they often require more significant political

commitments. Regional agreements, especially those

having the form of treaties, have the legal power required

to bind the states among themselves in their commitments of internal reform.

Some regional arrangements explicitly include the choice of democratic

institutions as a requirement for the access and permanence in the agreements.

The signature of MERCOSUR between Argentina and Brazil follows the

return of the two countries to democracy and its founding chart has been

emended in 1996 in such a way that now it “excludes any nation that

abandons the full exercise of republican institutions.” Spain, Greece and

Portugal, formerly dictatorships, undertook democracy maintenance in order

to join the European Community. Similar conditions have been placed upon

the Eastern European countries (Title 1, article 2, Accession Treaty). Human

rights, democratic principles and economic freedom compliance were required

to Mediterranean countries in order to join association agreements with the

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Access to regional agreements could

ensure to any government

institutional bindings strong enough to

accomplish reforms

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EU. The capacity of regional agreements to guarantee a positive outcome to

the ongoing reform process is also based on the extent of economic losses that

the country could face in case of non-compliance with regional undertakings.

Vulnerability obviously increases when small economies are bound to

medium-large economies: NAFTA, EU and MERCOSUR have established

strong links between their partners also because of the economic power

respectively of the US, Germany and France, Brazil and Argentina.

b) Market access. Regional agreements, according to some scholars, are a

convenient way through which developing countries secure their access to

foreign markets, especially those of western countries. Regional areas provide

more stable environments than the system established under WTO to

developing countries (Perroni and Whalley, 1994). The expansion of European

common commercial policy is mainly due to certainty and stability that a

strong relation with the EU, in the form of a treaty, can assure. In addition, EU

can provide a system of codified norms, the so-called acquis communautaire,

that guarantees predictability of any European behavior.

As a matter of fact, WTO seems to be still unable to provide sufficient

protection and remedies to developing countries and small economies against

trade wars. Economic weakness makes them extremely vulnerable especially

in case of adoption of antidumping measures by other countries. Nowadays,

WTO regulatory framework is not sufficient to prevent antidumping abuses

and the Japanese proposal advanced before the Seattle summit, aimed at

curbing the arbitrary use of antidumping, was strongly backed by developing

countries and had a timid support by European Union, but was rejected

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because of the strong opposition of the US. This is not by chance: in 1999 the

US, whose share is around 26 per cent of total cases, are found to be the

greatest users of antidumping measures (Koley D. and Prusa T., 1999). The

preferred targets of antidumping are the states that not take part to regional

agreements, in particular East Asian countries. Accordingly, some authors

argue that some countries enter a regional agreement withthe US and the EU

in order to be less exposed to antidumping action or other protectionist

measures by respectively (Messerlin and Hindley, 1993).

c) New issues coverage. Regional agreements are becoming deeper as

the level of integration is concerned and some of them, especially EU and

MERCOSUR, cover areas that have not been dealt with at the world level.

Even NAFTA, which is not as developed as the others, in some respect goes

beyond WTO rules by covering environmental and labor issues.

Indeed, the multilateral system is founded upon the priority of free trade

over other issues, like environmental and labor standards. Except for article

XX(e) of GATT that allows restriction to imports of goods produced through

slavery, it does not cover all the hypothetical cases that freedom to trade

clashes against minimum standards of protection in the field of environment

and labor. This approach has been successful in trade liberalization, but might

represent a big limit for WTO development. As a matter of fact, there are

enormous differences between developing and developed countries with

regard to the level of protection on environmental and labor conditions. Strong

disagreements exist between western and Asian countries about the idea of

including standards under WTO jurisdiction. The Uruguay Round

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negotiations and the recent failure of the Seattle meeting show how difficult it

is to widen the WTO domain.

d) Regionalism as a reaction to the risk of WTO paralysis. Regional

agreements seem to be a feasible solution to face the fears that the multilateral

system under the WTO might not work in the future. Decisions in the WTO

are taken by consensus and, as membership keeps on increasing (at present

there are more than 140 members), it is getting harder to strike agreements

with regards to new issues. Moreover, given the higher number of members, it

has become more difficult to monitor the implementation of the existing rules.

The recent accession of China to WTO, given the lack of any tradition in the

rule of law in that country, might endanger the enforcement of WTO rules and

undermine the credibility of it as an international arbiter of trade disputes

(Mastel, 2000).

Notwithstanding the improvement of the dispute settlement procedure,

conflicts between the main economic powers are still fierce: bananas and

genetically modified organisms seem to be never ending fights between the US

and Europe; Asian countries have frequently expressed discontent about US

aggressive unlateralism. Lately, the Seattle failure has also shown the

enormous distance existing between developing and developed countries

approaches toward trade liberalization, especially in the fields of services,

intellectual property and investment. One of the most controversial issues

concerns the EU Common Agricultural Policy which is based on a system of

price support and control over imports and a mechanism providing subsidies

to exports. During the Uruguay Round a compromise was found aimed at

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gradually reducing agricultural protectionism. Yet, the results attained so far,

have not been encouraging for the EU competitors (Croome, 1996) and the

“peace clause” which has temporarily interrupted the disputes on agriculture

is going to expire in 2003.

It is not a coincidence that, as found by a WTO study, the wave of

regionalism during the first half of the nineties has overlapped with Uruguay

Round paralysis, culminated in the Bruxelles failed ministerial conference in

1990. More recently, the attempt of creation, expansion and strengthening of

regional agreements in Europe, America and Asia have occurred at the same

time when negotiates in Seattle were failing. Taking advantage from WTO

leniency, Europe perseveres in the enlargement process, United States

continue their way to Free Trade Area of the Americas. Even Japan and China

have shown relevant interest in bilateral agreements and put forward the idea

of an East Asian Monetary Union. Japan has begun to pursue bilateral trade

agreements with Singapore, Mexico and South Korea over the past two years.

Right in the context of ASEAN+3, at the end of 2000, China made an

astonishing proposal to ASEAN countries to establish a free trade area.

REGIONALISM AND WTO: AN INEVITABLE CLASH?

From a strict legal standpoint, it is apparent that the tendency to establish

preferential trade relations with some states excluding the others conflicts

against the principle of non-discrimination and violates the multilateral system

fundamentals.

There is a further concern: regional blocks might go counter the

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ambitions of WTO attempt to find universal solutions, pursuing approaches

non compatible one to the other. Indeed, states acting in compliance with

regional agreements might breach WTO rules; jurisprudence of regional

bodies could contravene the rulings of WTO panels. Such a propensity is

already found, especially by making a comparison between the European

method, as emerging from the acquis communautaire, and NAFTA approach

(Woocock S., 1996). In the European Union, approximation and harmonization

techniques have been adopted and mutual recognition principle has

complemented them. This method provides that local authorities accept the

regulatory jurisdiction of the other state members. Control over compliance

with the law, belongs to the state from where goods or services come,

according to the so-called home state control principle. Moreover, in the EU

there is the European Court of Justice, that promotes and oversees the

supremacy of Community law over national law.

North American approach differs from the European one to the extent

that differences between national jurisdictions are settled through the criteria

of national treatment. In other words, local and foreign producers have to

comply with the discipline of the state where the good or the service is

provided, according to the so-called host state control principle. Moreover,

national law has not been substituted by any supranational law.

In the last decade, these two approaches have been further consolidated

and have tried to extend to other countries. The acquis communautaire has been

accepted, through the European Economic Area, by the EFTA countries and

has gradually extended to Eastern Europe. American approach has been

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spreading into Mexico and could expand to the rest of the continent, through

the FTAA and even to the Asia-Pacific area thanks to APEC.

Coexistence between regionalism and multilateralism seems to be at the

end of the phase in which they have been mutually reinforcing. We could

possibly see a dawn of a new stage, where their role as alternatives to one

another, could mark the new millennium.

Amelio Porfilio

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