Present and Describe the Five Types of Regional Trading Agreements

Regional Trade Agreements (RTA’s) are defined as groupings of countries which are formed with the objective of reducing barriers to trade between member countries. According to their level of integration amongst participating nations, regional trade agreements are divided into five categories: Preferential trade arrangements, Free Trade Agreements, Customs Unions, Common Markets and Economic Unions.

Defined as, “a trading arrangement in which a nation grants partial trader preferences to one or more trading partner,” Preferential Trade Arrangements (PTA’s) are categorized as the least restrictive type of regional trade agreements as they are the first stage of economic integration (Daniels & VanHoose, p. 126). Essentially, Preferential Trade Arrangements give preferential access to certain products from participating nations, relative to the rest of the world. This is done by establishing lower trade barriers with participating nations. Preferential Trade Arrangements do not necessarily apply to all trade between participating nations as they can be exclusive to certain goods/services. While typically speaking, PTA’s are one-sided, reciprocal arrangements can be established. Reciprocal arrangements establish equal trade preferences between two or more nations by granting reciprocal partial trade concessions to the nation(s).

Free Trade Area’s (FTA’s) are the second type of regional trade agreements. Defined as, “a trading arrangement that removes all barriers to trade among participating nations but that allows each nation to retain its own restrictions on trade with countries outside the free trade area,” free trade areas are reciprocal trade arrangements (Daniels & VanHoose, p. 126). Free Trade Area’s are essentially a more integrated Preferential Trade Arrangement s that completely abolishes trade barriers for goods between participating nations. The reciprocal trade preferences established through FTA’s provides nations with the opportunity to jumpstart trade flows that are mutually beneficial and stand to provide significant gains to both parties.

Free Trade Area’s allow nations the flexibility to establish a relationship that is mutually beneficial while avoiding commitment to broader forms of trade liberalization inherent of entering into a formal union (Daniels & VanHoose, p. 132).

The South Asian Free Trade Area (SAFTA) is an example of a free trade area. Established on January 6, 2004, the SAFTA created a free trade area between member nations, Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka (Akbar et al.). The objective of the SAFTA was to create and sustain mutual trade and economic cooperation through exchange of concessions. Under this agreement, member nations are to reduce customs duties on all traded goods to zero by 2016. To reach this goal, the SAFTA required that the developing nations (India, Pakistan and Sri Lanka) reduce their duties down to 20 percent in phase one, spanning from 2005-2007. Then during the final phase, spanning five years, the 20 percent duty is reduced to zero via annual cuts. The least developed nations (Nepal, Bhutan, Bangladesh, Afghanistan and the Maldives) were granted an additional three years to reduce duties to zero (Akbar et al.). It is important to note that every nation in the SAFTA have a sensitive list which lists products that do not include tariff concessions.

The mere creation and implementation of the SAFTA could prove to be incredibly beneficial in increasing international trade for member nations. Historically, trade comprises a relatively low share of the South Asian regions GDP, so the implementation of the free trade agreement should be beneficial in stimulating intra-regional trade (Akbar et al.). Also history shows that successful RTA’s are known going beyond integrating economies and often help in easing political tensions. Therefore the SAFTA could lift this burden that lies within this region.

In assessing the SAFTA, there are some apparent weaknesses that could hinder the success of the free trade agreement. One significant shortcoming of the agreement is the inclusion of extensive sensitive lists. The inclusion of extensive sensitive lists could be detrimental to effectiveness of the SAFTA tariff concessions are not applicable to these items. Another weakness of the SAFTA is it does not address or outline any mechanism for compensating the less developed nations for revenue loss that they will likely experience once SAFTA is fully implemented, nor does it provide any technical assistance to its member nations which is likely needed in the less developed nations.

Full implementation of the SAFTA has yet to be seen, however successful implementation could result in significant economic, political and social implications within the next decade. Increased participation in global trade leads to the possibility of significant economic growth in the developing countries of the SAFTA within the coming decade. Additionally if successfully implemented, the SAFTA would also result in a decrease in political tension within the South Asian region which could potentially lead to more liberalized and less conservative international trade.

The next level of economic integration is the Custom Union (CU’s). Defined as, “a trading arrangement that entails eliminating barriers to trade among participating nation