Consolidation and Harmonization of Regional Trade Agreements (RTAs): A Path Toward Global Free Trade

Abstract

Some economists worry about the ‘spaghetti bowl phenomenon’ expected from proliferating regional trade agreements (RTAs). In particular, the complicated web of hub-and-spoke type of overlapping free trade agreements (FTAs) can result in high costs for verifying rules of origin (RoO) and trade diversion or suppression effects. This explains why almost half of the RTAs notified to the General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO) are currently inactive. This research attempts to provide best practices for RTAs to enhance global free trade by mitigating these negative effects. More specifically, we quantitatively estimate the trade creation and diversion effects of harmonized and cumulated RoO (bilateral, diagonal, and full cumulation) for RTAs established under GATT Article XXIV and under the Enabling Clause by adopting a Gravity regression analysis. We find that (i) RTAs in general create trade among members and divert trade from nonmembers; (ii) RTAs should be established under the comprehensive GATT Article XXIV, rather than the piecemeal Enabling Clause; and (iii) full cumulation is the most optimal provision in terms of creating the most intra-bloc trade and diverting the least extra-bloc trade. Overall, we strongly recommend that RTAs should employ full cumulation of RoO under GATT Article XXIV. This strategy will enable regionalism to be compatible with multilateralism, to be sustainable in the long run, and finally to lead us to global free trade.regional trade agreements, rules of origin, cumulation, gravity, GATT Article XXIV, Enabling Clause