Regional Trade Agreements: An Analysis of Trade-Related Impacts

CRS Report for Congress
Regional Trade Agreements: An Analysis of Trade-
Related Impacts
August 3, 2001
Gary J. Wells
Visiting Fellow
Foreign Affairs, Defense, and Trade Division

Congressional Research Service The Library of Congress

Regional Trade Agreements: An Analysis of Trade-
Related Impacts
The 107th Congress is currently debating regional trade agreements (RTAs) from two
important perspectives—directly and in connection with granting the Administration trade
negotiating authority. The Congress is directly addressing RTAs via the U.S.-Jordan Free
Trade agreement, which has been approved in the House and is under consideration in the
Senate. Also, the Bush Administration is negotiating agreements with Chile and Singapore
that may be sent to Congress for consideration. In addition, Congress is weighing whether
to grant the Administration trade promotion authority (TPA), also know as fast-track
authority. The Administration has indicated it would use TPA to negotiate trade
agreements at the multilateral level through the World Trade Organization and RTAs at the
regional and bilateral level.
While economic analysts are in general agreement that multilateral trade agreements
yield improved social welfare, the picture is more clouded for RTAs. This report considers
numerous factors employed in judging RTAs. These factors include: distinctions between
multilateral and regional trade agreements, the gains the United States can expect from
entering regional trade agreements, and the impact of the recent flurry of RTA activity on
U.S. interests.
By allowing production to shift from domestic producers to lower cost foreign
producers, RTAs and multilateral agreements may result in trade creation, but RTAs may
also cause trade diversion as trade shifts from lower cost non-RTA members to higher cost
members because of the tariff preference extended to members. The potential for trade
diversion is greater when the trade barriers facing non-RTA members are high. RTA
opponents also argue that RTAs tend to exclude poor nations and distract attention from
multilateral negotiations.
Empirical analyses of RTA formation generally find the immediate economic impact
on the United States to be small whether the United States is in the RTA or not. At the
same time, the gains for U.S. RTA partners are considerably larger. However, numerous
analysts believe that the United States solidifies foreign relationships and extends its
influence over the trade agenda by forming RTAs, and the gains over an extended period
are potentially much larger as the trade-restraining impacts of national borders are reduced.
Separate sets of RTAs involving the EU and Mexico appear to be causing the most
concern for the United States. EU trade with its RTA members (including intra-EU trade)
is over three times U.S. trade with its RTA members, opening the possibility that it will
become dominant in setting the trade agenda. Mexico’s trade agreements with the EU and
numerous Latin American countries raise a different concern. Mexico may be positioning
itself as a trade hub with agreement members as spokes. This hub-and-spoke setup may
encourage firms to locate in Mexico in order to have tariff-free access to member
countries. Additionally, U.S. firms have to compete with firms from the other Mexican
RTA countries for a share of the Mexican market.

Introduction ..................................................... 1
Multilateral versus Regional Trade Agreements–
Strengths and Weaknesses.................................2
Trade Creation..........................................3
Trade diversion..........................................4
Beyond trade diversion...................................5
The United States and RTAs...................................6
Is The United States Being Left Behind?.............................9
Conclusion .................................................... 12
Appendix ...................................................... 15
List of Tables
Table A1. European Union Trade With Selected Trading Partners–1999..11
Table A2. Regional Trade Agreements not listed by the WTO...........20
List of Figures
Figure 1. U.S. Share of Mexican Imports.............................8

Regional Trade Agreements: An Analysis
of Trade-Related Impacts
Since the end of World War II, the United States has championed multilateral trade
agreements. However, as witnessed by the failure of the November 1999 World Trade
Organization (WTO) Ministerial in Seattle, multilateral trade negotiations have become
extremely difficult to start, and if started, they likely will be increasingly difficult to complete
due to the expanded scope and complexity of the issues under negotiation.
In the face of these difficulties, numerous countries have turned to regional trade
agreements (RTAs) as substitutes for or as prods to encourage multilateral trade talks.1
Typically, regional trade agreements may come before the Congress in two basic
fashions—directly or through a request for trade promotion authority. Individual RTAs
may be brought before the Congress for approval consideration. For example, the U.S.-
Jordan Free Trade Agreement negotiated during the Clinton Administration is currently
before the Congress. The House voted to approve the agreement. In the Senate, it was
approved by the Finance Committee, but a floor vote has not yet been taken. In addition,
the Bush Administration is currently negotiating bilateral free trade agreements with Chile
and Singapore and a multilateral Free Trade Area of the Americas (FTAA).2 Depending
on the progress of negotiations, proposed agreements may be presented to the 107th
Congress for consideration. Regarding trade promotion authority (TPA)–or, as it has
historically been called, fast-track legislative authority–the Bush Administration has asked
that the Congress grant this authority. By extending TPA to the Administration, Congress
agrees to limit debate on qualifying trade agreements and to vote on the pending legislation
within a given time frame without amendments. Fast track or TPA expired in 1994 and
attempts to renew the authority have not been successful. The Bush Administration
reportedly desires to use TPA to negotiate a wide range of RTAs as well as a possible
multilateral trade agreement via the World Trade Organization (WTO). Opponents of

1 The terms free trade area/agreement and regional trade agreement are oftentimes used
interchangeably. However, there are two basic types of RTAs–free trade agreements and
customs unions. These agreement types will be discussed below.
2For information on these negotiations see Singapore-U.S. Free Trade Agreement by Dick
K. Nanto. CRS Report RS20755.
U.S.-Jordan Free Trade Agreement by Mary Jane Bolle. CRS Report RL30652.
A Free Trade Area of the Americas: Status of Negotiations and Major Policy Issues by
J. F. Hornbeck. CRS Report RS20864.

granting TPA assert that the Administration can negotiate trade agreements without fast
track. They cite the U.S.-Jordan Free Trade Agreement as an example.3
This report examines economic factors employed in assessing whether the United
States is falling behind by not negotiating multilateral and/or regional trade agreements.
First, trade-related strengths and weaknesses of multilateral and regional agreements will
be presented. Second, potential gains from the United States negotiating trade agreements
will be addressed. Finally, the significance of the United States not being involved in the
current flurry of trade agreements will be assessed. This report will concentrate on the
trade aspects of RTAs. As a consequence, two important aspects of the current regional
trade agreement and TPA debates—inclusion of environmental and labor standards—will
not be explored.4
Multilateral versus Regional Trade Agreements–Strengths
and Weaknesses
In the context of this discussion, a multilateral agreement would be negotiated within
the framework of the World Trade Organization (WTO) and involve all WTO members
(currently 142), whereas regional trade agreements (RTAs) would involve a limited number
of countries (two or more).5
RTA requirements are spelled out in Article XXIV of the updated General
Agreement on Tariffs and Trade (GATT) (now a part of the World Trade Organization
(WTO)), or Article V of GATT’s sister agreement which covers services (the WTO's
General Agreement on Trade in Services (GATS)). The essential requirement of Articles

3 For information see Trade Promotion Authority (Fast-Track Authority for Trade
Agreements): Background and Developments in the 107th Congress by Lenore Sek
(CRS Issue Brief IB10084). This report also discusses H.R. 2149 and S. 1104, TPA
proposals before the House and Senate.
4For information on these issues see Jordan-U.S. Free Trade Agreement: Labor Issues
by Mary Jane Bolle. CRS Report RS20968.
Trade Agreements: A Pro/Con Analysis of Including Core Labor Standards by Gary J.
Wells. CRS Report RS20909.
Environment in the WTO, by Susan R. Fletcher. CRS Briefing Book on Trade
[]. Updated periodically.
Environment in Fast Track, by Jeanne J. Grimmett. CRS Briefing Book on Trade
[]. Updated periodically.
Environment Issues in Trade Disputes, by Jeanne J. Grimmett. CRS Briefing Book on
Trade []. Updated periodically.
5The upcoming WTO Ministerial meeting this November in Doha, Qatar will be aimed at
starting a new round of multilateral trade negotiations.

XXIV and V is that RTAs drop substantially all trade barriers between the negotiating
There are two basic types of agreements that qualify for notification under these
articles. They are free trade areas (FTA) and customs unions. Members of FTAs
eliminate trade barriers on substantially all trade among members, but the members are free
to maintain their existing trade policies against non-members. However, the articles require
that the trade restrictions against non-members not become more restrictive. Members of
customs unions must also substantially reduce barriers among members, but they adopt a
common trade policy regarding non-members.7 NAFTA is an example of an FTA, while
the European Union (EU) and MERCOSUR (Argentina, Brazil, Paraguay, and Uruguay)
are customs unions. The U.S.-Jordan Free Trade Agreement negotiated by the Clinton
Administration that is pending before Congress is also an FTA as are the Chile, Singapore,
and FTAA agreements currently being negotiated by the Bush Administration. The U.S.-
Jordan agreement was negotiated without the benefit of TPA, and thus far the Chile,
Singapore, and FTAA agreements are also being negotiated without TPA.8
Trade Creation. Both multilateral and regional trade agreements may improve the
overall economic welfare of society through trade creation. Upon implementation of a
trade agreement, productive activities begin to realign themselves around the most efficient
pattern the new agreement allows. For example, if a trade agreement lowers trade barriers
on an item, then production may shift from domestic producers to lower cost foreign

6 There is a third type of trade agreement authorized under WTO rules. It is described in
the GATT’s Enabling Clause and typically involves developed countries extending special,
favorable treatment to developing countries. The General System of Preferences (GSP) is
an example. While the developing countries are not asked to reciprocate by lowering their
trade barriers, qualifying requirements such as meeting internationally accepted core labor
standards might be required. The Enabling Clause may also be used between developing
countries. The United States’ participation in the GSP program is set to expire this
September. As a result, this issue will be before the 107th Congress. (For details of the U.S.
program see Generalized System of Preferences by William H. Cooper (CRS Report 97-


7 The exception to this occurs when a customs union forms a trade agreement with a third
party. The European Union-Mexico free trade area which became effective July 1, 2000
is an example.
8The proposed U.S.-Vietnam Bilateral Trade Agreement is an example of a trade agreement
that does not qualify under either GATT’s Article XXIV or GATS’ Article V. It is not an
FTA or customs union. It is authorized under GATT’s Enabling Clause. With this
agreement the United States and Vietnam would agree, among other things, to extend
temporary most favored nation status (MFN also known as normal trade relations) to each
other. MFN reduces tariffs to the current applicable WTO levels. In this respect, the United
States is extending to Vietnam, a non-WTO member, the benefits of WTO membership, but
tariffs between the United States and Vietnam are not substantially eliminated as is required
of regional trade agreements in GATT’s Article XXIV. For a description of the Vietnam-
U.S. Bilateral Trade Agreement and the procedures under which it is being considered in
Congress (similar to TPA) see The Vietnam-U.S. Bilateral Trade Agreement by Mark E.
Manyin (CRS Report RL30416).

producers resulting in substituting the traded item for domestic production. This is termed
trade creation. Through this move, domestic consumers benefit by being able to acquire
the item at a lower price, or by wider choice, or enhanced quality, or a combination of
these. At the same time, domestic resources are freed for use in other endeavors. That
latter process often draws opposition from displaced workers and the owners of displaced
resources. Balancing those issues in ways that enhance public welfare is an ongoing
challenge to policymakers.
The full impact of trade creation may take an extended period of time to be realized
because the increased trade that accompanies trade liberalization is correlated with income
growth over time. Empirical estimates of the relationship predict that a one percent
increase in trade relative to gross domestic product (i.e., trade divided by GDP) results in
national income growing an additional one-half to 2 percent per year.9
Trade diversion. In addition to trade creation, RTAs have a potential drawback.
Because RTAs are not fully inclusive they may result in trade diversion. Trade diversion
is best described by an example. If prior to formation of NAFTA the United States
purchased a product from China but subsequently shifted purchases to Mexico solely as
the result of NAFTA even though China remained the lower-cost producer, then the
regional trade agreement would be responsible for trade diversion. In this case, the United
States shifted product sources not because Mexico improved its ability to produce or
China lost some of its ability, but instead because the United States began giving Mexico
preferential treatment over China.
Over time the growth factors involved in trade creation may help to offset the adverse
impacts of trade diversion. Additionally, the prospect for trade diversion declines as the
size of an RTA grows and as the trade barriers applied against non-members decline.
Extreme situations illustrate these points. First, if an RTA grows to encompass all
countries, then no country is excluded. Hence, there is no chance of diverting trade.
Second, if trade barriers against non-members are eliminated, then being an RTA member
may be little different from being a non-member.
Additionally, most proponents of RTAs argue that the gains from trade creation are
very likely to exceed the costs of trade diversion.10 Hence, proponents conclude RTAs
should be undertaken based on simple benefit-cost analysis. However, a recent IMF Staff
Paper compared the impact on the growth of nations that either entered into RTAs or
liberalized trade in a nondiscriminatory manner (e.g., within the GATT/WTO framework

9 See the World Bank Briefing Paper entitled "Assessing Globalization: Does More
International Trade Openness Increase World Poverty?"
[ 2000]. Also see, the
WTO. Annual Report: 1998 World Trade Organization. P. 42-46. “One such study found
that open economies grow 2 to 2.5 percentage points a year faster than closed economies,
after controlling for other factors.” (P. 45) Other similar studies found a more modest
10 See Bergsten, C. Fred. “Open Regionalism.” in Whither APEC? The Progress to Date
and Agenda for the Future. Ed. C. Fred Bergsten. Special Report 9, Institute for
International Economics. October 1997. Pp 83-105.

of reciprocal trade liberalization or unilaterally) between 1960 and 1980. Broad,
nondiscriminatory trade liberalization was found to enhance growth in both the short- and
long-term. On the other hand, according to the study, participation in RTAs resulted in
slowed growth.11 The author was not able to determine if the poor results for regional
trade agreement formation was due to trade diversion, and the results do not directly apply
to many of the type of agreements that are being considered today because the RTAs the
IMF study considered did not include a mixture of developed and developing countries.
Nonetheless, the issue remains open until stronger evidence one way or the other can be
Beyond trade diversion. Numerous economists believe developing countries
are ill-equipped to navigate the maze of rules that accompany many RTAs, putting these
nations at a disadvantage that may perpetuate poverty. Other concerns regarding RTAs
center on the treatment of non-members. Of course, trade diversion is one concern, but
there is a potential that the problem will go beyond trade diversion. As an RTA becomes
larger, membership becomes more desirable. To gain a competitive edge, firms in non-
member countries lobby their governments to seek membership. However, at the same
time, competing firms already in the RTA may have an incentive to lobby their governments
to bar new members in order to keep competition out. This raises the concern that
regional trade agreements may be "prone to capture by protectionist lobbying."12
Furthermore, many contend that the countries that are easiest to keep out are those with
a high percentage of poor residents, thereby slowing their chances of escaping poverty.
Also, RTAs tend to raise regulatory requirements that may otherwise be unnecessary.
Rules of origin serve as an example. To prevent an item produced by a firm located in a
non-member country from receiving the preference accorded to products produced within
the RTA, a system of determining product origin may need to be formulated. In NAFTA,
for example, if a product is imported into Mexico and then transshipped to the United
States it would not be eligible for preferential tariff treatment as it crossed into the United
States; but without a system to track its origin this would not be known.13
Proponents of regional trade agreements generally concede that a multilateral trade
agreement is superior to a comparable RTA because of the concerns raised above.

11 See Vamvakidis, Athanasios. “Regional Trade Agreements or Broad Liberalization:
Which Path Leads to Faster Growth?” IMF Staff Papers, Vol. 46, No. 1 (March 1999), pp.


12 See "A question of preference." The Economist. August 20, 1998, pp. 1-2.
[] p. 2. This aspect can be seen in the debate regarding EU
expansion. Some member countries are not anxious for new members to join the EU. Some
analysts also believe Mexico is less than enthusiastic regarding formation of FTAA because
of its special relationship with the United States and Canada.
13 Typically, the entire product does not have to originate from within the RTA. For
example, 50 percent RTA content is a typical requirement. Rules of origin, and all the
complexities and costs of their implementation, are necessary for free trade agreements, but
customs unions with their common external tariff can avoid this problem.

Hence, their line of argument tends to follow two tracks. First, they argue that RTAs
should be pursued because the benefits exceed the costs since RTAs can go beyond what
is feasible with a multilateral agreement, and/or RTAs will make multilateral agreements
more feasible in the future. Second, proponents provide a set of characteristics which will
allow an RTA to avoid some of its inherent pitfalls.
To overcome the problems inherent with RTAs, proponents typically recommend
they have certain characteristics. These include leaving the door open for new members.
This reduces the chance of trade diversion. With open RTA membership, if a nation falls
victim to trade diversion, it can avoid this problem by joining, provided, of course, that the
RTAs open door commitment does not meet internal road blocks.
Many economic researchers also suggest that steps need to be taken to avoid
building an inefficient regulatory environment into an RTA agreement. The Common
Agricultural Policy (CAP) of the European Union is oftentimes cited as an example of
regulatory failure. The CAP protects European farmers through a system of policy
measures that requires a significant percentage of the EU budget to administer. Some RTA
proponents believe the regulatory environment is the most important aspect that RTA
framers should keep in mind. According to that view, the regulatory environment sets the
stage and ultimately determines the success or failure of an agreement. Additionally, some
proponents of regional trade agreements suggest that they contribute to enhancing
economic liberty.14
Another argument in favor of regional trade agreements is that they can go further in
reducing non-tariff barriers than WTO-negotiated multilateral agreements. This is the case
because the limited membership focuses attention on the discriminatory actions of fellow
Politically, RTAs are also seen as a way to prod countries to liberalize trade in a
multilateral setting. Proponents see two avenues to reach multilateral trade liberalization.
The first is a direct route via the World Trade Organization, the second, an indirect route,
is via expansion of the influence of RTAs. The RTA route is sometimes viewed as a way
to pressure reluctant participants to join in multilateral trade talks. In particular, developing
countries, via the implied threat of being left out of RTA agreements, may be influenced to
view multilateral trade agreements in a more favorable light. Pascal Lamy, EU
commissioner for trade, and U.S. Trade Representative Robert Zoellick in a jointly written
Washington Post editorial explained this view by stating, “Developing countries cannot
expect to fare as well as the United States and the EU in a system of unbridled bilateralism.
They would do much better under a multilateral trade round.”15

14 For example, see Hudgins, Edward L. Regional and Multilateral Trade Agreements:
Complementary Means to Open Markets (The Cato Journal. Vol. 15 No. 2-3
(Fall/Winter 1995/96) ( He further suggests that enhancing economic liberty
should be a priority in judging RTAs.
15 See In the Next Round by Pascal Lamy and Robert B. Zoellick (Washington Post. July

The United States and RTAs
Typically, empirical studies of U.S. participation in RTAs find only modest immediate
or up front economic gains for the United States from trade in goods. At the same time,
the gains for our agreement partners are typically found to be considerably larger. For
example, an Institute of International Economics (IIE) study estimated the static welfare
impact of formation of the proposed FTAA to be over four times greater for Mexico and
Argentina than the gain estimated for the United States, and for Brazil the gain was
estimated to be two and a half times greater than for the United States.16 The United
States’ dominance as a trading power going into the agreement is probably responsible for
this result.
The impact of NAFTA on U.S.-Mexico trade to date illustrates the modest impact
on the United States resulting from RTA formation. Between the 1994 beginning of
NAFTA and 2000 U.S. exports to Mexico increased almost 124 percent. However, at
the same time, Mexican imports from non-U.S. sources increased almost 109 percent, and
the lower growth from non-U.S. trade sources can be attributed to the first years of
NAFTA when Mexico had an economic crisis. Figure 1 presents the U.S. share of
Mexican imports from 1985 through 2000. From 1994 until 1996 the share grew from
just under 72 percent to just over 75 percent, but from 1996 onward the U.S. share
steadily fell to about 73 percent in 2000. That is to say, since the inception of NAFTA the
United States’ share of the Mexican market has grown only about 1 percent, and this
growth resulted because of rapid U.S. market share growth during Mexico’s economic
crisis. This suggests that much of the increased exports the United States experienced may
be the result of increased international economic activity by Mexico and not NAFTA.17


17, 2001, Page A17).

16See New Regional Trading Arrangements in the Asia Pacific? By Robert Scollay and
John P. Gilbert (Institute for International Economics, Policy Analyses in International
Economics Number 63, May, 2001.) Welfare was measured as a percent of gross domestic
product for each of the countries involved. With regards to the impact of RTA formation
on the United States, empirical studies potentially suffer several modeling shortcomings that
may make estimates of the gains experienced by the United States lower bounds. That is
to say, the actual levels are likely to be equal to or greater than the estimates. First, adequate
incorporation of the services sector in trade models is difficult. For example, the authors of
the IIE study point out that their study was unable “to satisfactorily model services trade
liberalization.” As a result, the modest welfare gains found for the United States are likely
to be augmented by gains in the service sector. Given the growing importance of the service
sector to U.S. trade, these gains may be substantial.
17Figure 1 also shows that U.S. market share grew fastest prior to NAFTA formation (from
just over 65 percent in 1987 to about 71 percent in 1993). This growth is likely a result of
Mexico’s unilateral reduction in trade barriers. Mexico’s Maquiladora program is an
example. Under this program, Mexico provided tariff preference to imported parts which
were either further manufactured or assembled and then exported. Under the Maquiladora
program, the Mexican government did not place tariffs on imported parts and the United

Figure 1 U.S. Share of Mexican Imports
On the other hand, looking beyond the short-term trade impacts of RTAs, some
analysts believe that the closer trade ties that result from participation in trade agreements
(particularly RTAs) will provide a spirit of cooperation among members that may foster
closer bilateral ties and cooperation on a range of issues. It is also felt that U.S.
participation in trade negotiations will enhance U.S. ability to set or influence the
international trade agenda.
The immediate gains discussed above do not allow for adjustments in the underlying
economic structures that are likely to be encouraged by formation of an RTA. Models that
have attempted to incorporate these dyanmic aspects of trade by allowing for capital
investment and changes in productivity tend to predict larger, ongoing gains than estimates
from static models.
One consequence of RTA formation is reducing the impact of members’ borders.
For example, the tariff-free access that NAFTA affords its members reduces the economic
impact of the borders that separate Mexico, the United States, and Canada. Part of this
impact is captured in the up-front gains, but an extended amount of time may be required
to take full advantage of the reduced trade barriers. The ultimate impact an RTA could be
expected to have is complete elimination of the border’s economic impact. While it is

States, via our harmonized tariff schedule, levied tariffs only on the value added in Mexico.
For U.S.-Mexican trade, NAFTA provisions have replaced this program. For information
on the Maquiladora program see Maquiladoras and NAFTA: The Economics of U.S.-
Mexico Production Sharing and Trade by J.F. Hornbeck (CRS Report 98-66 E, January
27, 1998). A result of the Maquiladora program was an increase in the within-industry trade
between the United States and Mexico. Between 1990 and 1994 a measure of the within-
industry trade between the two countries almost doubled.

unlikely that any RTA will achieve this ultimate level of economic integration, one would
expect RTA formation to move in this direction. However, the change may take decades
to reach its full potential. One reason for this is that infrastructure systems have to adjust
from the pre-RTA to post-RTA environment. For example, prior to NAFTA (and its
forerunner the Canada-U.S. Free Trade Agreement) much of Canada’s distribution system
(e.g., roads, distribution centers, and communication systems) was geared toward east-
west trade within Canada. As time passes and infrastructure changes are made, it is
reasonable to expect that the impact of U.S-Canadian trade resulting from NAFTA will
Is The United States Being Left Behind?
Recently, concern has been expressed that the United States is being left behind
because of the proliferation of RTAs that do not include the United States. Some have
argued that United States non-participation in trade agreements places U.S. exporters at
a competitive disadvantage. These proponents point out that there are over 130 regional
trade agreements in force around the world today, and the United States is party to only
two—the U.S.-Israel Free Trade Agreement and the North American Free Trade
Agreement (NAFTA). They further point out that there has been a recent flurry of regional
trade agreement formation. Since 1990, more than 100 agreements have entered into
force. NAFTA falls into this group having entered into force in 1994, but the Israel
agreement dates to 1985.19 Others point out that many of these agreements involve small,
perhaps inconsequential, amounts of trade, and therefore their numbers alone do not
measure their impact.
Economic analyses generally find that the aggregate lost U.S. welfare that results from
the formation of RTAs not involving the United States is very small. In many individual
cases the welfare change is estimated to be lower than one hundredth of one percent of
GDP. Nonetheless, in selected instances, the cost to individual U.S. firms from the
discrimination that results when the United States is excluded from trade agreements can
be significant. The nature of an RTA is that firms from non-member countries face trade

18For a discussion see The Future Course of Trade Liberalization by Gary C. Hufbauer
(Institute for International Economics, 1998). Studies of U.S.-Canadian trade patterns
suggest that if all economic border impacts were eliminated, trade between the two countries
could hypothetically increase by a factor of about 18. Of course, this is an upper bound of
the potential trade impact between Canada and the United States resulting from NAFTA
formation, and analysts do not predict this extreme will be realized.
19Appendix table A1 lists the trade agreements that are still in force and have been notified
to the WTO under GATT Article XXIV and/or GATS Article V. One hundred and thirty
three agreements are listed. In a general sense, some of the agreements are duplicated in
that they are listed as both GATT and GATS agreements. NAFTA is an example.
Appendix table A2 lists additional trade agreements that are not on the WTO list. It is
unlikely that these lists are exhaustive.

barriers that member firms do not. The end result may be reduced or eliminated sales for
individual U.S. firms in countries with an RTA to which the United States is not a party.20
RTA activity by our major trading partners is of concern to analysts. In particular,
the trade agreement activities of the European Union (EU) and Mexico (and to a lesser
extent Canada) have received scrutiny. The EU has reported 30 RTAs to the WTO (most
of them since 1990), Mexico 4 (with many more not reported), and Canada 3.
Additionally, in a continuing push to negotiate RTAs, these trading partners are reaching
out to other countries. The EU, for example, is negotiating a trade agreement with
MERCOSUR (although the pace of negotiation is quite slow), and Mexico and Japan have
explored the possibility of beginning talks aiming at a bilateral agreement.
To give some sense of the size of agreements involving the European Union, trade
flows for 1999 are presented in Table 1. The total intra-EU exports are also provided.21
It can be argued that consideration of intra-EU trade is appropriate if the concern is that
the United States is being left behind by the accelerating trend toward RTA formation. The
EU is an RTA with an agenda of expansion. While many EU agreements cover relatively
small amounts of trade, several encompass multi-billions of dollars worth of trade, and
intra-EU trade (exports) is approximately $1.4 trillion. Total trade between countries with
which the EU has RTAs (including intra-EU trade) was over three times U.S. trade with
its RTA partners (i.e., within NAFTA and the U.S.-Israel Free Trade Agreement). These
numbers tend to support the argument some analysts make that the EU’s growing
participation in RTAs is allowing it to gain more control over the international trade agenda.

20For further information see Jeffrey J. Schott’s testimony before the Subcommittee on
Trade of the House Committee on Ways and Means, March 29, 2001.
21Only exports are provided to avoid double counting (i.e., one EU country’s exports to
another EU country is that country’s imports). In this case, exports are a measure of total
intra-EU trade.

Table 1. European Union Trade With Selected Trading
Partners–1999 (Billions of U.S. Dollars or percent)
AgreementTotal Trade
1Intra-EC Exports$1,399.3
2EC — OCTs (Defined in the Appendix)N/A
3EC — Malta$3.0
4EC — Switzerland and Liechtenstein$120.0
5EC — Iceland$2.6
6EC — Cyprus$2.8
7EC — Norway$58.2
8EC — Algeria$13.9
9EC — Egypt$10.4
10EC — Jordan$1.3
11EC — Lebanon$2.8
12EC — Syria$3.9
13EC — Andorra$1.0
14EC — Czech Republic$37.7
15EC — Hungary$38.9
16EC — Poland$50.2
17EC — Slovak Republic$12.0
18EC — Romania$12.5
19EC — Bulgaria$5.0
20EC — Estonia$4.6
21EC — Latvia$3.2
22EC — Lithuania$3.8
23EC — Turkey$37.7
24EC — Faroe Islands$0.6
25EC — Slovenia$12.7
26EC — Palestinian Authority$0.0
27EC — Tunisia$11.2
28EC — South Africa$21.9
29EC — Morocco$11.9
30EC — Israel$22.3
31EC — Mexico$15.3
32Total of Rows 2-31$521.5
%of Intra-EU Trade37.3
% of U.S. Trade30.3
33Rows 1-31 as a % of U.S. Trade111.7
34Rows 1-31 as a % of U.S. intra-RTA trade331.5
Source: OECD
That is to say, some analysts see the EU, via its RTA activity, as extending its sphere
of influence over trade policy and trading rules/standards. This would give it more control
over key international trade agenda items. For example, some analysts argue that the EU
is becoming more dominant in setting international standards. As a result, U.S. firms may

be placed at a competitive disadvantage if international standards differ from U.S.
standards. By blocking the proposed merger of two American companies, General
Electric and Honeywell, after U.S. approval the EU has also exerted its influence over
another portion of the international trade agenda–competition policy.
Because Mexico is a member of NAFTA its RTA activity raises another potentially
serious concern–the hub-and-spoke trading bloc. In a New York Times editorial,
economist Robert M. Dunn, Jr. describes Mexico as our biggest trading problem. He
states, “It has aggressively pursued agreements with three big markets–North America, the
European Union and Latin America (through individual agreements with many countries,
including Chile, Colombia, Venezuela, Bolivia, Costa Rica, Uruguay and Nicaragua).
These agreements have allowed Mexico to construct a unique hub-and-spoke trading bloc,
with itself as the hub and its partners as spokes.”22 The RTAs Mexico has signed give it
preferential access to numerous markets that do not have the same level of access with
each other. For example, most Mexican products have tariff-free access to the U.S.
market and they will have similar access to the EU market as the EU-Mexico FTA is
phased in, but U.S. products do not have tariff-free access to the EU market and likewise
EU products do not have tariff-free access to the U.S. market. This creates an incentive
to locate production facilities in Mexico in order to take advantage of Mexico’s special
position as a trading hub. In addition to this incentive to divert investment to Mexico, the
hub-and-spoke phenomenon creates an even more direct problem for U.S. producers,
according to Dunn. When U.S. firms try to ship products to Mexico they face added
competition from the EU and Latin American countries that have the same tariff-free
access to the Mexican market accorded U.S. firms. To a lesser extent Canada is creating
the same problem with its FTA with Chile.
Economists generally believe that multilateral trade agreements yield a net contribution
to social welfare, but experience has shown that multilateral trade negotiation within the
context of the World Trade Organization is difficult. As a result, many countries have
turned to regional trade agreements. Because RTAs involve fewer countries, presumably
with similar interests, completing an agreement seems more plausible.
Multilateral and regional trade agreements may have one aspect in common. They
may increase society’s overall welfare via trade creation. With trade creation domestic
production is replaced by lower cost foreign production. This frees up domestic resources
to be utilized for other activities. Economically, the end result is a more cost effective
utilization of resources, and consumers reap the benefits via reduced prices, wider choice,
increased quality, or a combination of all these.

22See Mexico’s Growing Trade Advantage by Robert M. Dunn Jr. (The New York Times,
Thursday, July 5, 2001)

However, regional trade agreements differ from their multilateral counterparts. The
differences hinge on the fact that some nations, by definition, are excluded from RTAs.
Hence, RTA members may conclude that they gain by the arrangement, but non-members
may not fare as well. The end result may be that, while RTAs may introduce trade
creation, they may also cause trade diversion. In this case, production is switched from
a non-RTA member to a member not because of a change in ability by the member or
non-member to produce the item but because of the preference accorded members over
Because of the possibility of welfare reducing trade diversion, many analysts
recommend that RTAs have certain characteristics. The possibility of trade diversion is
reduced when an RTA is large (not as many non-members to discriminate against) or the
trade barriers against non-members are low (a lower level of discrimination). As a result,
proponents of RTA formation oftentimes recommend that RTAs remain open to new
members. This reduces the chance of trade diversion because if it exists, the non-members
facing significant discrimination will seek to join to avoid the economic pain of trade
diversion. Of course, openness of this sort is a political decision and there is no guarantee
that it will occur.
RTAs also differ from multilateral agreements in that they sometimes require intricate
rules to differentiate member country products from non-member country products. These
rules are necessary to determine if a product is eligible for the preferential treatment an
RTA affords. If the United States is not a party to an RTA, then it not only faces these
rules, but it also has no say in their formulation. RTA rules may also cover topics such as
the application of anti-dumping and countervailing duties. Again, if the United States is not
a party to the negotiations, then the resulting rules may be inconsistent with current U.S.
policy. This is a particular concern resulting from the EU’s RTA activity. It is also a
concern in that it often runs counter to free trade principles governing organizations such
as WTO.
Despite a long list of potential costs for not participating in RTAs, the up-front
economic benefits to the United States of participating appear to be quite small. However,
the potential for longer term substantial benefits is present. If RTA formation encourages
international, cross-border activity to approach domestic activity (i.e., reduce the economic
importance of the international border), then the increase in U.S. international activity could
exceed ten fold. While this ambitious level may never be attained, empirical estimates
typically suggest that the impact of RTA formation grows with time.
A less than tangible potential benefit for the United States of RTA formation is the
possible increased economic stability of members, and this benefit exists whether or not
the United States is a party to the agreements although it may be enhanced by U.S.
participation. On the other hand, RTAs also have the potential for promoting friction by
creating competitive trading blocs. For example, as Mexico forms trade agreements with
numerous of our largest trading partners the incentive exists for investment to shift from the
United States to Mexico where exported products have tariff-free access to a growing
number of markets. Additionally, U.S. firms are losing the benefit of zero tariffs in the

Mexican market as our major competitors gain this same preference. Friction can be
reduced by the United States joining the agreement, but again, there is no guarantee.
With the complexity of assessing the benefits and costs of regional trade agreements,
the success of their implementation may hinge on the political determination of participating
nations. An article from the Economist sums it up as follows, “So the success of global
efforts to liberalise trade depends mainly on whether governments wish to move in that
direction, not on whether they eschew regional deals or seek them.”23 Hence, RTA
formation requires a commitment by policy makers to find ways to enhance the benefits of
participation while at the same time seeking ways to avoid the pitfalls RTA formation may
Because of the potential problems associated with regional trade agreements, many
analysts believe they should be viewed as second best alternatives to multilateral
agreements. According to this view, RTA use should be restricted to situations where they
accomplish more trade liberalization than is feasible with a multilateral agreement, and if
used, RTAs should be formulated to minimize possible adverse effects. In particular, trade
barriers facing non-members should be low, and non-members should have the
opportunity to join an existing RTA to avoid the adverse impact of non-membership.

23 See “A question of preference.” The Economist. August 20, 1998,

Table A1. Regional Trade Agreements Notified to the GATT/WTO
and in Force
(As of March 2001)
Date of entryRelated provisionsType of agreement
Agreementinto force
1EC (Treaty of Rome)01-Jan-58GATSArt VServices agreement
2EC (Treaty of Rome)01-Jan-58GATTArt. XXIV Customs union
3EFTA (Stockholm03-May-60GATTArt. XXIV Free trade agreement
4CACM12-Oct-61GATTArt. XXIV Customs union
5EFTA accession of01-Mar-70GATTArt. XXIV Accession to free trade agreement
6EC — OCTs01-Jan-71GATTArt. XXIV Free trade agreement
7EC — Malta01-Apr-71GATTArt. XXIV Customs union
8EC — Switzerland and01-Jan-73GATTArt. XXIV Free trade agreement
9EC accession of01-Jan-73GATTArt. XXIV Accession to customs union
Denmark, Ireland and
United Kingdom
10EC — Iceland01-Apr-73GATTArt. XXIV Free trade agreement
11EC — Cyprus01-Jun-73GATTArt. XXIV Customs union
12EC — Norway01-Jul-73GATTArt. XXIV Free trade agreement
13CARICOM01-Aug-73GATTArt. XXIV Customs union
14EC — Algeria01-Jul-76GATTArt. XXIV Free trade agreement
15PATCRA01-Feb-77GATTArt. XXIV Free trade agreement
16EC — Egypt01-Jul-77GATTArt. XXIV Free trade agreement
17EC — Jordan01-Jul-77GATTArt. XXIV Free trade agreement
18EC — Lebanon01-Jul-77GATTArt. XXIV Free trade agreement
19EC — Syria01-Jul-77GATTArt. XXIV Free trade agreement
20EC accession of Greece01-Jan-81GATTArt. XXIV Accession to customs union
21CER01-Jan-83GATTArt. XXIV Free trade agreement
22United States — Israel19-Aug-85GATTArt. XXIV Free trade agreement
23EC accession of01-Jan-86GATTArt. XXIV Accession to customs union
Portugal and Spain
24CER01-Jan-89GATSArt VServices agreement
25EC — Andorra01-Jul-91GATTArt. XXIV Customs union
26EC — Czech Republic01-Mar-92GATTArt. XXIV Free trade agreement
27EC — Hungary01-Mar-92GATTArt. XXIV Free trade agreement
28EC — Poland01-Mar-92GATTArt. XXIV Free trade agreement
29EC — Slovak Republic01-Mar-92GATTArt. XXIV Free trade agreement
30EFTA — Turkey01-Apr-92GATTArt. XXIV Free trade agreement
31EFTA — Czech Republic01-Jul-92GATTArt. XXIV Free trade agreement
32EFTA — Slovak Republic01-Jul-92GATTArt. XXIV Free trade agreement
33Czech Republic —01-Jan-93GATTArt. XXIV Customs union
Slovak Republic
34EFTA — Israel01-Jan-93GATTArt. XXIV Free trade agreement

35CEFTA01-Mar-93GATTArt. XXIV Free trade agreement
36Kyrgyz Republic —24-Apr-93GATTArt. XXIV Free trade agreement
Russian Federation
37EC — Romania01-May-93GATTArt. XXIV Free trade agreement
38EFTA — Romania01-May-93GATTArt. XXIV Free trade agreement
39EFTA — Bulgaria01-Jul-93GATTArt. XXIV Free trade agreement
40Faroe Islands — Iceland01-Jul-93GATTArt. XXIV Free trade agreement
41Faroe Islands — Norway01-Jul-93GATTArt. XXIV Free trade agreement
42EFTA — Hungary01-Oct-93GATTArt. XXIV Free trade agreement
43EFTA — Poland15-Nov-93GATTArt. XXIV Free trade agreement
44EC — Bulgaria31-Dec-93GATTArt. XXIV Free trade agreement
45EEA01-Jan-94GATSArt VServices agreement
46NAFTA01-Jan-94GATTArt. XXIV Free trade agreement
47EC — Hungary01-Feb-94GATSArt VServices agreement
48EC — Poland01-Feb-94GATSArt VServices agreement
49BAFTA01-Apr-94GATTArt. XXIV Free trade agreement
50NAFTA01-Apr-94GATSArt VServices agreement
51Georgia — Russian10-May-94GATTArt. XXIV Free trade agreement
52CIS30-Dec-94GATTArt. XXIV Free trade agreement
53EC — Estonia01-Jan-95GATTArt. XXIV Free trade agreement
54EC — Latvia01-Jan-95GATTArt. XXIV Free trade agreement
55EC — Lithuania01-Jan-95GATTArt. XXIV Free trade agreement
56EC accession of Austria,01-Jan-95GATTArt. XXIV Accession to customs union
Finland and Sweden
57EC accession of Austria,01-Jan-95GATSArt VAccession to services agreement
Finland and Sweden
58Romania — Moldova01-Jan-95GATTArt. XXIV Free trade agreement
59EC — Bulgaria01-Feb-95GATSArt VServices agreement
60EC — Czech Republic01-Feb-95GATSArt VServices agreement
61EC — Romania01-Feb-95GATSArt VServices agreement
62EC — Slovak Republic01-Feb-95GATSArt VServices agreement
63Faroe Islands —01-Mar-95GATTArt. XXIV Free trade agreement
64EFTA — Slovenia01-Jul-95GATTArt. XXIV Free trade agreement
65Kyrgyz Republic —27-Oct-95GATTArt. XXIV Free trade agreement
66CEFTA accession of01-Jan-96GATTArt. XXIV Accession to free trade agreement
67EC — Turkey01-Jan-96GATTArt. XXIV Customs union
68Estonia — Ukraine14-Mar-96GATTArt. XXIV Free trade agreement
69EFTA — Estonia01-Jun-96GATTArt. XXIV Free trade agreement
70EFTA — Latvia01-Jun-96GATTArt. XXIV Free trade agreement
71Georgia — Ukraine 04-Jun-96GATTArt. XXIV Free trade agreement
72Georgia — Azerbaijan 10-Jul-96GATTArt. XXIV Free trade agreement
73EFTA — Lithuania01-Aug-96GATTArt. XXIV Free trade agreement
74Slovenia — Latvia01-Aug-96GATTArt. XXIV Free trade agreement

75Slovenia — Former01-Sep-96GATTArt. XXIV Free trade agreement
Yugoslav Republic of
76Kyrgyz Republic —21-Nov-96GATTArt. XXIV Free trade agreement
77Canada — Israel01-Jan-97GATTArt. XXIV Free trade agreement
78EC — Faroe Islands01-Jan-97GATTArt. XXIV Free trade agreement
79EC — Slovenia01-Jan-97GATTArt. XXIV Free trade agreement
80Poland — Lithuania01-Jan-97GATTArt. XXIV Free trade agreement
81Slovak Republic — Israel01-Jan-97GATTArt. XXIV Free trade agreement
82Slovenia — Estonia01-Jan-97GATTArt. XXIV Free trade agreement
83Slovenia — Lithuania 01-Mar-97GATTArt. XXIV Free trade agreement
84Israel — Turkey01-May-97GATTArt. XXIV Free trade agreement
85CEFTA accession of01-Jul-97GATTArt. XXIV Accession to free trade agreement
86Czech Republic — Latvia01-Jul-97GATTArt. XXIV Free trade agreement
87EC — Palestinian01-Jul-97GATTArt. XXIV Free trade agreement
88Slovak Republic —01-Jul-97GATTArt. XXIV Free trade agreement
89Slovak Republic —01-Jul-97GATTArt. XXIV Free trade agreement
90Canada — Chile05-Jul-97GATSArt VServices agreement
91Canada — Chile05-Jul-97GATTArt. XXIV Free trade agreement
92Czech Republic —01-Sep-97GATTArt. XXIV Free trade agreement
93EAEC08-Oct-97GATTArt. XXIV Customs union
94Czech Republic — Israel01-Dec-97GATTArt. XXIV Free trade agreement
95Slovenia — Croatia01-Jan-98GATTArt. XXIV Free trade agreement
96Kyrgyz Republic —19-Jan-98GATTArt. XXIV Free trade agreement
97Hungary — Israel01-Feb-98GATTArt. XXIV Free trade agreement
98Romania — Turkey 01-Feb-98GATTArt. XXIV Free trade agreement
99Czech Republic —12-Feb-98GATTArt. XXIV Free trade agreement
100Slovak Republic —12-Feb-98GATTArt. XXIV Free trade agreement
101EC — Tunisia01-Mar-98GATTArt. XXIV Free trade agreement
102Lithuania — Turkey 01-Mar-98GATTArt. XXIV Free trade agreement
103Poland — Israel01-Mar-98GATTArt. XXIV Free trade agreement
104Kyrgyz Republic —20-Mar-98GATTArt. XXIV Free trade agreement
105Hungary — Turkey 01-Apr-98GATTArt. XXIV Free trade agreement
106Estonia — Turkey 01-Jun-98GATTArt. XXIV Free trade agreement
107Czech Republic —01-Sep-98GATTArt. XXIV Free trade agreement
108Slovak Republic —01-Sep-98GATTArt. XXIV Free trade agreement
109Slovenia — Israel01-Sep-98GATTArt. XXIV Free trade agreement
110Georgia — Armenia 11-Nov-98GATTArt. XXIV Free trade agreement
111Estonia — Faroe Islands01-Dec-98GATTArt. XXIV Free trade agreement
112Bulgaria — Turkey01-Jan-99GATTArt. XXIV Free trade agreement

113CEFTA accession of01-Jan-99GATTArt. XXIV Accession to free trade agreement
114Poland — Faroe Islands01-Jun-99GATTArt. XXIV Free trade agreement
115Poland — Latvia01-Jun-99GATTArt. XXIV Free trade agreement
116EFTA — Palestinian01-Jul-99GATTArt. XXIV Free trade agreement
117Georgia — Kazakhstan 16-Jul-99GATTArt. XXIV Free trade agreement
118Chile — Mexico01-Aug-99GATTArt. XXIV Free trade agreement
119EFTA — Morocco01-Dec-99GATTArt. XXIV Free trade agreement
120Bulgaria — Former01-Jan-00GATTArt. XXIV Free trade agreement
Yugoslav Republic of
121EC — South Africa01-Jan-00GATTArt. XXIV Free trade agreement
122Georgia — Turkmenistan01-Jan-00GATTArt. XXIV Free trade agreement
123Hungary — Latvia01-Jan-00GATTArt. XXIV Free trade agreement
124EC — Morocco01-Mar-00GATTArt. XXIV Free trade agreement
125Hungary — Lithuania01-Mar-00GATTArt. XXIV Free trade agreement
126Poland — Turkey 01-May-00GATTArt. XXIV Free trade agreement
127EC — Israel01-Jun-00GATTArt. XXIV Free trade agreement
128EC — Mexico01-Jul-00GATTArt. XXIV Free trade agreement
129Latvia — Turkey 01-Jul-00GATTArt. XXIV Free trade agreement
130Mexico — Israel01-Jul-00GATTArt. XXIV Free trade agreement
131Turkey — Former01-Sep-00GATTArt. XXIV Free trade agreement
Yugoslav Republic of
132EFTA — Former01-Jan-01GATTArt. XXIV Free trade agreement
Yugoslav Republic of
133Kyrgyz Republic —not availableGATTArt. XXIV Free trade agreement
BAFTABaltic Free-Trade AreaEstonia Latvia Lithuania
CARICOMCaribbean Community andAntigua & Barbuda, Bahamas, Barbados,
Common MarketBelize, Dominica, Grenada, Guyana, Haiti,
Jamaica, Montserrat, Trinidad & Tobago,
St. Kitts & Nevis, St. Lucia, St. Vincent &
the Grenadines, Surinam
CACMCentral American CommonCosta Rica, El Salvador, Guatemala,
MarketHonduras, Nicaragua
CEFTACentral European Free TradeBulgaria, Czech Republic, Hungary, Poland,
AgreementRomania, Slovak Republic, Slovenia
CERCloser Trade Relations TradeAustralia, New Zealand
CISCommonwealth ofAzerbaijan, Armenia, Belarus, Georgia,
Independent StatesMoldova, Kazakhstan, Russian Federation,
Ukraine, Uzbekistan, Tajikistan, Kyrgyz
EAECEurasian EconomicBelarus, Kazakhstan, Kyrgyz Republic,
CommunityRussian Federation, Tajikistan
ECEuropean CommunitiesAustria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy,

Luxembourg, Netherlands, Portugal, Spain,
Sweden, United Kingdom
EEAEuropean Economic AreaEC, Iceland, Liechtenstein, Norway
EFTAEuropean Free TradeIceland, Liechtenstein, Norway, Switzerland
NAFTANorth American Free TradeCanada, Mexico, United States
OCTOverseas Countries andGreenland, New Caledonia, French
TerritoriesPolynesia, French Southern and Antarctic
Territories, Wallis and Futuna Islands,
Mayotte, Saint Pierre and Miquelon, Aruba,
Netherlands Antilles, Anguilla, Cayman
Islands, Falkland Islands, South Georgia and
South Sandwich Islands, Montserrat,
Pitcairn, Saint Helena, Ascension Island,
Tristan da Cunha, Turks and Caicos Islands,
British Antarctic Territory, British Indian
Ocean Territory, British Virgin Islands
PATCRAPapua New Guinea-AustraliaPapua New Guinea, Australia

Trade and Commercial
Relations Agreement

Table A2. Regional Trade Agreements not Listed by the WTO
AgreementDate of Entry intoType of Agreement
1Andean CommunityJun-98Customs Union
2Chile-VenezuelaJul-93Free trade agreement
3Chile-ColombiaJan-94Free trade agreement
4Costa Rica-MexicoJan-95Free trade agreement
5Bolivia-MexicoJan-95Free trade agreement
6Chile-EcuadorJan-95Free trade agreement
7Colombia, Mexico, Jan-95Free trade agreement
8MERCOSURJan-95Customs Union
9Chile-MERCOSUROct-96Free trade agreement
10Bolivia-MERCOSURMar-97Free trade agreement
11Mexico-NicaraguaJul-98Free trade agreement
12Central America-Jan-99Free trade agreement
Dominican Republic
13Chile-MexicoSep-99Free trade agreement
14El Salvador, Guatemala,Jan-01Free trade agreement
Honduras, Mexico
AndeanColombia, Bolivia, Ecuador, Peru, and
Community Venezuela
MERCOSURSouthern Common MarketArgentina, Brazil, Paraguay, Uruguay