A fundament principle of the multilateral trade system established by the General Agreement of Tariffs and Trade (GATT) and its successor, the World Trade Organisation (WTO) is non-discrimination.
The principle has two aspects: 'national' and the 'most favoured nation' (MFN) treatment. The national treatment principle prohibits a member country from discriminating between domestically produced goods and those imported from another member with regard to the application of internal taxes.
The purpose is to provide a level playing field for both locally made products and those made abroad once they are in the customs territory of the importing country.
The principle of the MFN treatment deals with the way a member country deals with imports from two or more other members. Contrary to the popular view, the MFN does not mean giving special treatment to imports from another country.
Rather the actual meaning of the MFN is opposite to this. What MFN means is not discriminating among goods or services imported from other member countries. The principle enjoins upon members that any favourable treatment given to one member of the WTO, such as lower tariffs, shall be extended to import of similar products from all other member countries.
Take an example. The USA imports shirts from Pakistan, India and China. If the USA imposes 10 per cent duty on import of shirts from Pakistan, the MFN principle requires it to impose the same duty on shirts imported form India and China.
In other words, it cannot give favourable treatment to one country and less favourable treatment to others. Of course, the MFN treatment is not confined to tariffs. Rather it covers all internal taxes and regulations, such as quantitative trade restrictions, value added tax and rules governing import and export of products.
It is obvious that the MFN clause aims at providing a level playing field to products of the WTO members in export markets. Such a level-playing field lies at the heart of multilateralism as against bilateralism or regionalism where countries discriminate among their trade partners.
However, consistency is a rare virtue. The same can be applied to the WTO and the GATT, the latter being a part of the former. While giving non-discrimination from one hand, the WTO takes it back from the other, thus undermining its own creature - the multilateral trade system. The WTO allows more than one exception to the MFN principle. These are:
1. Under the Generalised System of Preferences (GSP), imports from developing countries to the markets of developed counties are given preferential tariff treatment not available to similar imports from other developed countries.
2. Imports from several developing and the least developed countries (LDCs) are given duty free access to the markets of the European Union (EU).
3. Under the multifiber arrangement, import of textile and clothing (T&C) products from a number of developing countries to the markets of developed countries are subject to quantitative restrictions on trade. However, no such restrictions are applied to exports from other developed countries. The quantitative restrictions will be completely lifted by the end of this year.
4. Article XXIV of the GATT allows Pakistan and India to depart from particular provisions of the Agreement in their bilateral relations pending the establishment of trade ties between them on a definitive basis. It is under this clause that Pakistan has not given MFN status to India, though the latter has extended such status to the former.
5. Under Article XXIV of the GATT, a member of a regional trade agreement can give discriminatory treatment to imports originating from other members as against imports originating from other WTO countries who are not a member of that RTA.
6. Under Article V of the General Agreement in Trade in Services, countries can open their economies to import of services from other countries on a bilateral or regional basis over and above their obligations to other countries under this agreement.
Of all these exceptions, the last two - those dealing with RTAs - are the most important and pose a serious challenge to the working of the multilateral trade system. In order to understand this challenge, we should first understand the concept of RTAs.
An RTA is an arrangement whereby members of a trade bloc minimize trade barriers against other members while maintaining those against non-members. Though most of the RTAs are region-specific, that is the signatories belong to the same region, countries located in different regions can also strike an RTA. Examples are free trade agreements between the USA and Israel, the USA and Jordan, EU and S. Africa, and Singapore and the USA.
There are different levels of RTAs ranging from preferential trade agreements (PTAs) to an Economic Union. In PTAs, the lowest form of regional integration, signatories give preferential treatment to one another's exports in selected areas.
The next level is Free Trade Area (FTA), which is the most common form of RTAs. The members of an FTA give duty free access to exports from co-members or maintain very low tariffs against them.
A higher level of regional integration is the customs union in which members not only provide duty free access to each other's products but also have a common tariff or external trade policy.
A customs union may develop into a common market in which in addition to elimination of trade barriers and adoption of a common external trade policy, there is free movement of factors of production.
The highest level of regional economic integration is the economic union in which members have a common currency and fiscal and monetary policies. At present, the EU is the only example of an economic or monetary union.
The principal reason that has been given for allowing preferential treatment under the umbrella of RTAs, despite its being a departure from the MFN principle, is the belief that regionalism will prove a catalyst for globalisation.
In other words, integration of economies within a region will presumably pave the way to effect trade liberalisation is to do that in stages. Once a country opens its market to goods and services of other members of a trade bloc, it will facilitate opening of markets to countries outside the bloc.
A related argument is that of trade creation, which takes place when less efficient or competitive domestic suppliers are replaced by more efficient or competitive suppliers within the RTA.
But do RTAs necessarily support multilateralism? The answer can be given by looking at the various factors that lie at the bottom of RTAs creation. To begin with, regional integration is an easier option to pursue than global integration.
Economies used to protectionism may find it more difficult to open themselves to the world than to a small group of regional partners. In case regional integration proves fruitful, integration on a wider basis is likely to appeal more and also appear less painful.
It is in this sense that regionalism can be a catalyst for multilateralism. Two, regionalism may yield a higher degree of integration than possibly multilateralism in a shorter span.
Third, geographical and cultural proximity with other countries of the region may give a country competitive edge, which regional integration can strengthen. Fourth, traditional rivalry may also be a catalyst for RTAs.
Suppose countries A and B are trade competitors. If country A becomes the member of an RTA and thus achieves greater market access, one way for country B to offset that advantage is also to sign an RTA.
Finally, regionalism can be a shield against having to compete in sectors where more competitive or efficient firms are located outside the region. This can be done by having a free trade within a region but imposing high tariffs on imports from outside the region. One result is that efficient suppliers outside an RTA are replaced by less efficient or inefficient suppliers within an RTA.
This is called trade diversion. Another outcome is that instead of non-discriminatory trade liberalisation as envisaged by multilateralism, discriminatory liberalisation gains currency.
For instance, Pakistan has not given MFN status to India but will be giving preferential treatment to Indian exports under SAFTA. It is here that regional blocks have an adverse effect on multilateralism and thus pose a challenge to it.
The strength of this challenge depends on MFN tariffs, that is, tariffs applicable to all the WTO countries on an across-the-board basis. The higher the MFN tariffs, the larger the gap between it and preferential or RTA tariffs and thus the more serious regionalism's challenge to multilateralism.
Last one decade has seen RTAs explosion. At present more than 300 RTAs are operational or under negotiations. There is hardly any WTO member which is not a signatory to an RTA.
In many instances countries are members of more than one RTA. The share of RTAs in global trade is on the increase. According to the World Trade Report released by the WTO, by the close of 2000, RTAs accounted for more than 43 per cent of global merchandise trade.
The share is projected to increase to more than 50 per cent by 2005. The share of RTAs in a region's trade is the highest in Western Europe, where they constitute about 65 per cent of the total regional trade. It is the lowest in Asia where it constitutes 6 per cent of total trade.
