Policy Space and Modern Trade Agreements

In the paper, the author's then went ahead to examine the extent to which various regimes constraint policy space for member nations. They studied four US agreements 

1. North American, Dominican Republic-Central American, US-Chile, US-Singapore

2. EU Agreements (EU-Chile, EU-Mexico, EU-Tunisia  EU-South Africa)

3. South-South agreements, that is, agreements between developing countries (Southern cone Common Market-MERCOSUR, Andean community - CAN, China-Chile, South Asian FTA) 

and compared with WTO trade disciplines. They studied the four-trade related areas, that is, 

1. Goods

2. Services

3. Investment

4. Intellectual property

They studied the various developmental policy instruments available. These instruments are basically the expansion of the one's discussed above, which are used by the government to deal with different kinds of market failures in the economy. To re-iterate, the instruments discussed firstly are:

Tariff sequencing, Tax export incentives, Quantitative restrictions/Import licensing, Safeguards for injurious imports, Control over sensitive service sectors, Service quotas, Duty of establishment, Regulation of services, Movement of natural persons, Public education, Local labour requirements, Technology transfer, Domestic content, Foreign exchange restrictions, Infrastructure provision, administrative guidance, subsidized credits/entrepreneurship, Early-working permission, High disclosure requirements, Local production requirements, Parallel imports

Upon investigating which of the policy instruments are permitted under different agreements, it is found that the SS agreements provide great flexibility and policy space, while the US agreements occupying the other end is very restrictive. WTO and EU agreements occupy the middle ground.

1. Trade Coverage:

Each trade agreement remains unique because it is formed by bilateral negotiations. Trade agreements vary from basic nature regulating only goods trade to complex one's having jurisdiction over intellectual property, services trade, investment and other barriers.

- US agreements are by far the most comprehensive and uniform deals. Each was found to have set disciplines fro goods trade, rules for origin, customs regulation, technical barriers, trade remedies, government procurement, investment, cross border trade in services, financial services, telecommunications, intellectual property, transparency and dispute settlement. Most agreements also contain other disciplines like labour, environment etc as well

- EU-Chile, EU-Mexico were found to be similar to US agreements. EU-Africa and EU-Tunisia are similar to the WTO structure. None of these agreements covers telecommunications, financial services, temporary entry of business people, electronic commerce, environment or labour regulations

- SS agreements are very open relative to US agreements. Like China-Chile FTA and SAFTA contain commitments only of goods trade. MERCOSUR and CAN cover most of EU coverage but not necessarily meet those levels of commitments

2. Good trade policies

Goods trade is the oldest area of trade. Agreements in goods trade between NS (developed-developing) show convergence, in the sense that they impose similar and stricter disciplines, reducing policy space relative to its availability under WTO. However, to some extent, EU agreements are slightly less stringent and towards WTO disciplines. This section, therefore, further examines available tools under this set, that is,

a. Tariff sequencing: Tariff barriers have been used as a tool to check trade for a long time due to the simplistic understanding involved. Under WTO, the binding rates were set significantly higher than applied rates, giving policy space for altering tariffs as per requirement. Negotiations are generally held for discussing binding rates than applied rates.

    - US and EU agreements show convergence in tariff regulation. This means that both of these countries agreements commit to maintaining tariff rates below currently applied rates, thus giving almost no room for upward manoeuvre 

    - Tariffs bound under regional trade agreements generally are based on applied rates

b. Incentives for export: These consists of policies to encourage industries or firms to export a certain percentage of their products. It's done by setting up duty drawback or deferral system or setting export processing zones

    - US agreements prohibit or restrict such policies. NAFTA prohibits drawbacks and deferrals. The US-Chile and DR-CAFTA prohibit using custom duty waivers or continuing waivers based on performance requirements

    - EU agreements have a permissive stance similar to that adopted by GATT. EU-Chile and EU-Mexico, however, prohibit the use of tax-based incentives to protect domestic industry. EU-Tunisia and EU-S.Africa permit drawbacks but limit the amount to that of the original tax

c. Non-tariff barriers: NTBs include restrictions like quotas, import licensing, import-export price requirements. 

    - WTO prohibits quotas unless certain emergency situations arise. It also regulates import licensing on similar lines to quantitative regulations

    - US and EU diverge. EU agreements contain WTO equivalent language. EU-Chile, EU-Mexico agreements prohibit quotas, import licensing. EU-S.Africa and EU-Tunisia prohibits quotas only

    - US agreements contain similar to WTO language but also have import-export price requirements

d. Safeguards: They have been used by countries facing big imports, BOP difficulties and critical food shortages

    - GATT places certain restrictions subjected to detailed procedural requirements. Under WTO it may include quotas or raising tariff rates

    - Like WTO, EU agreements permit safeguard for injurious imports, BOP crisis and shortages. EU-Chile, EU-Tunisia and EU-Mexico allow for raising tariff rates and quotas provided that safeguard measures are the only solutions and taken in the appropriate way with least disturbance to the entire agreement. EU- Tunisia and EU-S.Africa allows for safeguards in a relaxed manner required to protect infant industry as well

    - US agreements allow for safeguards only for injurious levels of imports and BOP

e. Bilateral models and SS responses: 

    - WTO and its associated agreements preserve more policy space in goods trade for developing nations than have other bilateral and regional agreements especially with those of North.

    - US and EU agreements have formed two distinct models where the latter provides more flexibility

    - SAFTA and MERCOSUR provide a list of products which might bypass trade liberalization. They also contain provisions for safeguards in favour of developing nations. China-Chile agreements provide plenty of space for tax incentives for industrial development

Trade-in goods haven't remained dominant anymore in modern economies and are replaced by trade in services.

3. Trade in Services:

> Based on Rachel Denaie Thrasher and Kevin P. Gallagher paper, Boston University, September 2008, The Pardee Papers,-No.2

References: 

[1] - Paper