Published 26 November 2024
Regional Trade Agreements hold significant potential to enhance productivity, welfare, trade, and employment. These agreements, though complex to negotiate due to divergent economic interests, ultimately aim to unlock the benefits of economic cooperation. While empirical evidence suggests that the majority of RTAs lead to net positive gains, the extent of their effectiveness depends on various factors, including the depth of integration achieved.
Since the stalemate of the Doha Development Agenda negotiations in 2015 and the WTO’s failure to bring forward a new "single undertaking", regional trade agreements (RTAs) have emerged as a dynamic source of concerted trade liberalization, particularly in the Global South. As of August 2024, 369 RTAs were in force – a substantial increase from 83 in 2000 and 28 in 1990.
While the majority of empirical studies on RTAs suggest that most agreements tend to generate net positive gains, their overall impact on economic efficiency remains ambiguous as some may lead to negative outcomes. The positive effects of RTAs arise from the typical gains from trade, characterized by the contraction of less efficient domestic production in favor of more efficient partner-country production, a process known as "trade creation." In contrast, negative effects may occur when preferential treatment is given to partner countries that may be less efficient than non-partners, leading to "trade diversion."
A 2015 report by the Organisation for Economic Co-operation and Development offers a useful survey of the effects of RTAs on agriculture. Analyzing 53 agreements, it reveals that RTAs among developing countries are the most effective at liberalizing tariffs, with the share of duty-free tariff lines in these agreements rising from on average 28% to 92%, compared to 68% to 87% for agreements between developed and developing countries. Nevertheless, the RTAs surveyed continue to be characterized by product exemptions and non-tariff barriers, such as tariff-rate quotas, with scant attention paid to sanitary and phytosanitary measures.
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The large increase in the number of RTAs in recent years tends to include agreements that are relatively small in terms of membership. As such, they can produce what has been referred to as a "spaghetti bowl" effect – a bureaucratically cumbersome set of overlapping bilateral free trade agreements that may be under-utilized because of their small number of participants and, often, limited scope. The solution to this problem has been the creation of modern "mega-regional" agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP), and the African Continental Free Trade Area (AfCFTA).
As countries navigate the evolving landscape of global trade, free trade agreements are essential tools for driving resilient growth. They could also play a pivotal role in addressing critical issues, such as digital trade, labor standards, and environmental protection. By focusing on collaboration and inclusivity, stakeholders can maximize the benefits of RTAs, ensuring that economic cooperation translates into tangible gains for all member nations, writes Michael Plummer in this primer, extracted from his detailed study on Trade, agriculture, and development: Meeting global challenges to Commonwealth countries.
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Author
Michael Plummer
Michael Plummer is the Eni Professor of International Economics as well as Professor of International Economics at SAIS Europe, a position he has held since 2001.
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