FTA partners also often discriminate against outsiders by manipulating the rules of origin. These agreements need rules of origin to prevent goods manufactured elsewhere from being exported to the lowest tariff part of the free trade agreement and then re-exported duty-free to a party with a higher external tariff for those goods. FTA partners often develop rules of origin to protect sensitive industries. U.S. agreements, for example, generally stipulate that apparel exporters from partner countries use U.S. yarn and fabric (or other regional products) before the final product is processed duty-free. EU trade agreements often use a slightly less restrictive “double transformation” rule for clothing, which means that fabric (but not yarn) must be used in the EU or regionally. 20 Protectionist rules of origin increase production costs for contracting parties and move trade to other parties. Although not protectionist, different rules, in often overlapping agreements, contribute to the “spaghetti bowl” problems discussed below. The General Agreement on Tariffs and Trade was a free trade agreement that eliminated tariffs and increased international trade. As the first multilateral free trade agreement, GATT governed an important part of international trade between January 1, 1948 and January 1, 1995. The agreement ended when it was replaced by the more robust World Trade Organization (WTO).
Following the notification of the Japan-Mongolia Free Trade Agreement in 2016, the WTO says that each member now participates in at least one regional or bilateral trade agreement. 13 The EU is the most active RTA negotiator with nearly 100 agreements in force, followed by East Asia with 80 ATRs. Other regions, with the exception of South America (57), are all less than 50 for the number of RTAs in force (Figure 3.2). Governments take some control over an international WTO agreement (2011) “Some figures on regional trade agreements notified and in force at the GATT/WTO,” summary tables from the regional trade agreements database. Available under www.coursehero.com/file/p6afvl2/Some-Figures-on-Regional-Trade-Agreements-notified-to-the-GATTWTO-and-in-force/ (available January 4, 2018). In December 2006, the WTO General Council provisionally adopted a new mechanism to improve the transparency of the ATR, to be set up by the new Committee on Regional Trade Agreements. Under the mechanism, members should promptly inform the WTO secretariat of the new ATR negotiations and provide information on the date and scope of the agreement, including the text of the agreement and possible annexes, once they have been finalized. Parties to the ESTV are also required to provide detailed data on tariff changes as part of the agreement that the committee can use to assess the impact on third parties. The WTO has also set up a special website on which texts and other information on ATRs are made available. The potential costs and opportunities of RTA from the WTO perspective have two aspects: the net impact on world trade and well-being and the political consequences on the strength and credibility of the multilateral system itself.
The main task of the WTO (and the previous GATT) is to promote freer world trade. But its role in establishing a multilateral system based on non-discrimination is at least equally important for smaller, mostly poorer developing countries, which would otherwise be exposed to the protectionist whims of larger, more powerful trading partners. In addition, the poorest countries are rarely invited to join economically important RTAs and may be at a disadvantage in important markets. The beginning of regionalism coincided with the creation of the World Trade Organization (WTO), which aimed to institutionalize and enforce more effectively the rules and processes for negotiating the General Agreement on Tariffs and Trade