Amelio Porfilio

Regionalism and multilateralism, from coexistence to collision?

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 its 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 freetrade 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).

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 endproducts. 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 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 dont 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 Lom 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 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 Access to regional agreements could ensure to any government institutional bindings strong enough to accomplish reforms

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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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.

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