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.

Order Code RL31072 CRS Report for Congress Received through the CRS Web Regional Trade Agreements: An Analysis of TradeRelated 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 TradeRelated Impacts Summary 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. Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multilateral versus Regional Trade Agreements– Strengths and Weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade diversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beyond trade diversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The United States and RTAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 4 5 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 Introduction 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. 2 For information on these negotiations see Singapore-U.S. Free Trade Agreement by (nam e redacted). CRS Report RS20755. U.S.-Jordan Free Trade Agreement by (name redacted). CRS Report RL30652. A Free Trade Area of the Americas: Status of Negotiations and Major Policy Issues by (name redacted). CRS Report RS20864. CRS-2 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 107 th Congress by (name r edacted) (CRS Issue Brief IB10084). This report also discusses H.R. 2149 and S. 1104, TPA proposals before the House and Senate. 4 For information on these issues see Jordan-U.S. Free Trade Agreement: Labor Issues by (name redacted). 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 (na me redacted). CRS Briefing Book on Trade [http://www.congress.gov/brbk/html/ebtra20.html]. Updated periodically. Environment in Fast Track, by (name redacted). CRS Briefing Book on Trade [http://www.congress.gov/brbk/html/ebtra23.html]. Updated periodically. Environment Issues in Trade Disputes, by (name r edacted). CRS Briefing Book on Trade [http://www.congress.gov/brbk/html/ebtra22.html]. Updated periodically. 5 The upcoming WTO Ministerial meeting this November in Doha, Qatar will be aimed at starting a new round of multilateral trade negotiations. CRS-3 XXIV and V is that RTAs drop substantially all trade barriers between the negotiating partners.6 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 throughtrade 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 (name r edacted) (CRS Report 97389.) 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. 8 The 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 VietnamU.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 (nam e r edacted) (CRS Report RL30416). CRS-4 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 ove r 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 intrade 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?" [http://www.worldbank.org/html/extdr/pb/globalization/paper2.htm 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 impact. 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. CRS-5 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 presented. 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 nonmember 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. 42-68. 12 See "A question of preference." The Economist. August 20, 1998, pp. 1-2. [http://www.economist.com] 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. CRS-6 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 members. 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) (www.cato.org)). 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 (continued...) CRS-7 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 15 (...continued) 17, 2001, Page A17). 16 See 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. 17 Figure 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 (continued...) CRS-8 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 17 (...continued) 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 (nam e redacted) (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 withinindustry trade between the two countries almost doubled. CRS-9 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 eastwest 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 increase.18 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 18 For 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. 19 Appendix 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. CRS-10 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. 20 For further information see Jeffrey J. Schott’s testimony before the Subcommittee on Trade of the House Committee on Ways and Means, March 29, 2001. 21 Only 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. CRS-11 Table 1. European Union Trade With Selected Trading Partners–1999 (Billions of U.S. Dollars or percent) 1 2 3 4 5 6 Agreement Intra-EC Exports EC — OCTs (Defined in the Appendix) EC — Malta EC — Switzerland and Liechtenstein EC — Iceland EC — Cyprus 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 EC — Norway EC — Algeria EC — Egypt EC — Jordan EC — Lebanon EC — Syria EC — Andorra EC — Czech Republic EC — Hungary EC — Poland EC — Slovak Republic EC — Romania EC — Bulgaria EC — Estonia EC — Latvia 22 EC — Lithuania 23 24 25 26 27 28 29 30 31 32 EC — Turkey EC — Faroe Islands EC — Slovenia EC — Palestinian Authority EC — Tunisia EC — South Africa EC — Morocco EC — Israel EC — Mexico Total of Rows 2-31 %of Intra-EU Trade % of U.S. Trade 33 Rows 1-31 as a % of U.S. Trade 34 Rows 1-31 as a % of U.S. intra-RTA trade Source: OECD Total Trade $1,399.3 N/A $3.0 $120.0 $2.6 $2.8 $58.2 $13.9 $10.4 $1.3 $2.8 $3.9 $1.0 $37.7 $38.9 $50.2 $12.0 $12.5 $5.0 $4.6 $3.2 $3.8 $37.7 $0.6 $12.7 $0.0 $11.2 $21.9 $11.9 $22.3 $15.3 $521.5 37.3 30.3 111.7 331.5 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 CRS-12 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. Conclusion 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. 22 See Mexico’s Growing Trade Advantage by Robert M. Dunn Jr. (The New York Times, Thursday, July 5, 2001) CRS-13 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 non-members. 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 CRS-14 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 theEconomist 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 introduce. 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, www.economist.com. CRS-15 Appendix Table A1. Regional Trade Agreements Notified to the GATT/WTO and in Force (As of March 2001) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Agreement EC (Treaty of Rome) EC (Treaty of Rome) EFTA (Stockholm Convention) CACM EFTA accession of Iceland EC — OCTs EC — Malta EC — Switzerland and Liechtenstein EC accession of Denmark, Ireland and United Kingdom EC — Iceland EC — Cyprus EC — Norway CARICOM EC — Algeria PATCRA EC — Egypt EC — Jordan EC — Lebanon EC — Syria EC accession of Greece CER United States — Israel EC accession of Portugal and Spain CER EC — Andorra EC — Czech Republic EC — Hungary EC — Poland EC — Slovak Republic EFTA — Turkey EFTA — Czech Republic EFTA — Slovak Republic Czech Republic — Slovak Republic EFTA — Israel Date of entry into force 01-Jan-58 Related provisions Type of agreement Services agreement 01-Jan-58 03-May-60 GATS Art V GATTArt. XXIV GATTArt. XXIV Customs union Free trade agreement 12-Oct-61 01-Mar-70 GATTArt. XXIV GATTArt. XXIV Customs union Accession to free trade agreement 01-Jan-71 01-Apr-71 01-Jan-73 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Free trade agreement Customs union Free trade agreement 01-Jan-73 GATTArt. XXIV Accession to customs union 01-Apr-73 01-Jun-73 01-Jul-73 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Free trade agreement Customs union Free trade agreement 01-Aug-73 01-Jul-76 01-Feb-77 01-Jul-77 01-Jul-77 01-Jul-77 01-Jul-77 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Customs union Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement 01-Jan-81 01-Jan-83 19-Aug-85 01-Jan-86 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Accession to customs union Free trade agreement Free trade agreement Accession to customs union 01-Jan-89 Services agreement 01-Jul-91 01-Mar-92 01-Mar-92 01-Mar-92 01-Mar-92 01-Apr-92 01-Jul-92 01-Jul-92 01-Jan-93 GATS Art V GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Customs union Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Customs union 01-Jan-93 GATTArt. XXIV Free trade agreement CRS-16 01-Mar-93 24-Apr-93 GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement 37 38 39 40 41 42 43 44 45 CEFTA Kyrgyz Republic — Russian Federation EC — Romania EFTA — Romania EFTA — Bulgaria Faroe Islands — Iceland Faroe Islands — Norway EFTA — Hungary EFTA — Poland EC — Bulgaria EEA 01-May-93 01-May-93 01-Jul-93 01-Jul-93 01-Jul-93 01-Oct-93 15-Nov-93 31-Dec-93 01-Jan-94 Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Services agreement 46 47 NAFTA EC — Hungary 01-Jan-94 01-Feb-94 48 EC — Poland 01-Feb-94 49 50 BAFTA NAFTA 01-Apr-94 01-Apr-94 51 10-May-94 30-Dec-94 01-Jan-95 01-Jan-95 01-Jan-95 01-Jan-95 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement Free trade agreement Free trade agreement Accession to customs union 01-Jan-95 GATS Art V Accession to services agreement 58 59 Georgia — Russian Federation CIS EC — Estonia EC — Latvia EC — Lithuania EC accession of Austria, Finland and Sweden EC accession of Austria, Finland and Sweden Romania — Moldova EC — Bulgaria GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATS Art V GATTArt. XXIV GATS Art V GATS Art V GATTArt. XXIV GATS Art V GATTArt. XXIV 01-Jan-95 01-Feb-95 Free trade agreement Services agreement 60 EC — Czech Republic 01-Feb-95 61 EC — Romania 01-Feb-95 62 EC — Slovak Republic 01-Feb-95 63 Faroe Islands — Switzerland EFTA — Slovenia Kyrgyz Republic — Armenia CEFTA accession of Slovenia EC — Turkey Estonia — Ukraine EFTA — Estonia EFTA — Latvia Georgia — Ukraine Georgia — Azerbaijan EFTA — Lithuania Slovenia — Latvia 01-Mar-95 GATTArt. XXIV GATS Art V GATS Art V GATS Art V GATS Art V GATTArt. XXIV 01-Jul-95 27-Oct-95 GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement 01-Jan-96 GATTArt. XXIV Accession to free trade agreement 01-Jan-96 14-Mar-96 01-Jun-96 01-Jun-96 04-Jun-96 10-Jul-96 01-Aug-96 01-Aug-96 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Customs union Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement 35 36 52 53 54 55 56 57 64 65 66 67 68 69 70 71 72 73 74 Free trade agreement Services agreement Services agreement Free trade agreement Services agreement Free trade agreement Services agreement Services agreement Services agreement Free trade agreement CRS-17 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 Slovenia — Former Yugoslav Republic of Macedonia Kyrgyz Republic — Moldova Canada — Israel EC — Faroe Islands EC — Slovenia Poland — Lithuania Slovak Republic — Israel Slovenia — Estonia Slovenia — Lithuania Israel — Turkey CEFTA accession of Romania Czech Republic — Latvia EC — Palestinian Authority Slovak Republic — Latvia Slovak Republic — Lithuania Canada — Chile Canada — Chile Czech Republic — Lithuania EAEC Czech Republic — Israel Slovenia — Croatia Kyrgyz Republic — Ukraine Hungary — Israel Romania — Turkey Czech Republic — Estonia Slovak Republic — Estonia EC — Tunisia Lithuania — Turkey Poland — Israel Kyrgyz Republic — Uzbekistan Hungary — Turkey Estonia — Turkey Czech Republic — Turkey Slovak Republic — Turkey Slovenia — Israel Georgia — Armenia Estonia — Faroe Islands Bulgaria — Turkey 01-Sep-96 GATTArt. XXIV Free trade agreement 21-Nov-96 GATTArt. XXIV Free trade agreement 01-Jan-97 01-Jan-97 01-Jan-97 01-Jan-97 01-Jan-97 01-Jan-97 01-Mar-97 01-May-97 01-Jul-97 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Accession to free trade agreement 01-Jul-97 01-Jul-97 GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement 01-Jul-97 GATTArt. XXIV Free trade agreement 01-Jul-97 GATTArt. XXIV Free trade agreement 05-Jul-97 Services agreement 05-Jul-97 01-Sep-97 GATS Art V GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement 08-Oct-97 01-Dec-97 01-Jan-98 19-Jan-98 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Customs union Free trade agreement Free trade agreement Free trade agreement 01-Feb-98 01-Feb-98 12-Feb-98 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement Free trade agreement 12-Feb-98 GATTArt. XXIV Free trade agreement 01-Mar-98 01-Mar-98 01-Mar-98 20-Mar-98 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement Free trade agreement Free trade agreement 01-Apr-98 01-Jun-98 01-Sep-98 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement Free trade agreement 01-Sep-98 GATTArt. XXIV Free trade agreement 01-Sep-98 11-Nov-98 01-Dec-98 01-Jan-99 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement Free trade agreement Free trade agreement CRS-18 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 CEFTA accession of Bulgaria Poland — Faroe Islands Poland — Latvia EFTA — Palestinian Authority Georgia — Kazakhstan Chile — Mexico EFTA — Morocco Bulgaria — Former Yugoslav Republic of Macedonia EC — South Africa Georgia — Turkmenistan Hungary — Latvia EC — Morocco Hungary — Lithuania Poland — Turkey EC — Israel EC — Mexico Latvia — Turkey Mexico — Israel Turkey — Former Yugoslav Republic of Macedonia EFTA — Former Yugoslav Republic of Macedonia Kyrgyz Republic — Kazakhstan 01-Jan-99 GATTArt. XXIV Accession to free trade agreement 01-Jun-99 01-Jun-99 01-Jul-99 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement Free trade agreement 16-Jul-99 01-Aug-99 01-Dec-99 01-Jan-00 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement Free trade agreement Free trade agreement 01-Jan-00 01-Jan-00 GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement 01-Jan-00 01-Mar-00 01-Mar-00 01-May-00 01-Jun-00 01-Jul-00 01-Jul-00 01-Jul-00 01-Sep-00 GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV GATTArt. XXIV Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement 01-Jan-01 GATTArt. XXIV Free trade agreement not available GATTArt. XXIV Free trade agreement Abbreviations: BAFTA Baltic Free-Trade Area CARICOM Caribbean Community and Common Market CACM CEFTA CER CIS EAEC EC Central American Common Market Central European Free Trade Agreement Closer Trade Relations Trade Agreement Commonwealth of Independent States Eurasian Economic Community European Communities Estonia Latvia Lithuania Antigua & Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Trinidad & Tobago, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines, Surinam Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovak Republic, Slovenia Australia, New Zealand Azerbaijan, Armenia, Belarus, Georgia, Moldova, Kazakhstan, Russian Federation, Ukraine, Uzbekistan, Tajikistan, Kyrgyz Republic Belarus, Kazakhstan, Kyrgyz Republic, Russian Federation, Tajikistan Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, CRS-19 EEA EFTA NAFTA OCT PATCRA European Economic Area European Free Trade Association North American Free Trade Agreement Overseas Countries and Territories Papua New Guinea-Australia Trade and Commercial Relations Agreement Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom EC, Iceland, Liechtenstein, Norway Iceland, Liechtenstein, Norway, Switzerland Canada, Mexico, United States Greenland, New Caledonia, French Polynesia, 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 Papua New Guinea, Australia CRS-20 Table A2. Regional Trade Agreements not Listed by the WTO Agreement Date of Entry into force Jun-98 Type of Agreement Customs Union 1 Andean Community 2 3 4 5 6 7 Chile-Venezuela Chile-Colombia Costa Rica-Mexico Bolivia-Mexico Chile-Ecuador Colombia, Mexico, Venezuela MERCOSUR Jul-93 Jan-94 Jan-95 Jan-95 Jan-95 Jan-95 Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Free trade agreement Jan-95 Customs Union Chile-MERCOSUR Bolivia-MERCOSUR Mexico-Nicaragua Central AmericaDominican Republic Chile-Mexico El Salvador, Guatemala, Honduras, Mexico Oct-96 Mar-97 Jul-98 Jan-99 Free trade agreement Free trade agreement Free trade agreement Free trade agreement Sep-99 Jan-01 Free trade agreement Free trade agreement 8 9 10 11 12 13 14 Abbreviations: Andean Community MERCOSUR Southern Common Market Colombia, Bolivia, Ecuador, Peru, and Venezuela Argentina, Brazil, Paraguay, Uruguay EveryCRSReport.com The Congressional Research Service (CRS) is a federal legislative branch agency, housed inside the Library of Congress, charged with providing the United States Congress non-partisan advice on issues that may come before Congress. 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