Regional trade integration is neither a substitute for, nor necessarily a hindrance to, multilateral trade liberalization. With regional agreements continuing to be a prominent part of many countries’ trade policy agendas, it is likely that regional integration and multilateral trade reform will continue to coexist. A new IMF paper explores the appropriate sequencing of joining a regional customs union and the World Trade Organization (WTO). It looks specifically at whether joining the Eurasian Economic Community (EAEC) customs union—a regional arrangement that includes five members of the Commonwealth of Independent States (CIS)—facilitates or delays WTO accession for some of these countries. It finds good reasons for smaller economies with relatively liberal trade regimes to join the WTO first.
Although economically inferior—from a global perspective—to nondiscriminatory trade liberalization on a most-favored-nation (MFN) basis, regional trade agreements continue to proliferate. Regional trade integration can serve as a vehicle for dialogue and coordination on regional issues that are not part of the multilateral agenda. Also, regional agreements are not inconsistent with membership in the WTO. The WTO allows members to participate in preferential trade agreements as long as trade barriers are eliminated on “substantially all trade” among the members. The appropriate sequencing between WTO accession and regional trade integration—in particular, customs unions—remains an important consideration, however.
The sequencing of WTO accession and membership in a customs union should be evaluated carefully by any country considering a customs union. The welfare implications of joining the WTO before joining a customs union, or vice versa, may vary considerably across member countries, depending on the individual country’s trade preferences and bargaining power. There are two key considerations in evaluating the appropriate sequencing: how it may affect a country’s leverage in regional trade negotiations and, thus, the resulting structure of protection; and whether first pursuing regional integration might lead to delays in the WTO accession process.
By joining the WTO early, small open economies can obtain leverage over the trade policies of larger and possibly less open economies that are still in the process of accession. In fact, by acceding earlier, small countries may be able to extract concessions from regional members within the WTO framework that would be impossible to obtain bilaterally or in a regional trade agreement, given disparities in economic influence among the members. Such leverage could be especially valuable when forming a customs union where the common external tariff represents a negotiated compromise between producer and consumer preferences in the member countries.
Delays in the accession process can result when customs unions are negotiated before WTO accession, because members of a customs union need to coordinate positions and reconcile future commitments with “common terms of accession” for WTO membership. This delay will tend to be particularly costly to small open economies, which have proportionately more to gain from trade integration. Larger economies might be more concerned with the terms than with the speed of accession. Furthermore, while it might be argued that joint negotiation over accession increases the collective bargaining power, it is not obvious, a priori, that the outcome would reflect the preferences of a customs union’s smaller members.
Moreover, if one of the members of the customs union is already a WTO member, this may create incompatibility between WTO and customs union commitments. In this case, the common external tariff should be set to the lowest rate among members. This also minimizes the risk of trade diversion and of an overall increase in protection.
|CIS members||WTO application||Current status|
|Belarus||September 1993||Ongoing negotiations|
|Kazakhstan||January 1996||Ongoing negotiations|
|Kyrgyz Republic||February 1996||Joined in 1998|
|Russia||June 1993||Ongoing negotiations|
|Tajikistan||May 2001||Ongoing negotiations|
|Armenia||November 1993||Joined in 2003|
|Moldova||November 1993||Joined in 2001|
|Ukraine||November 1993||Ongoing negotiations|
|Azerbaijan||July 1997||Ongoing negotiations|
|Georgia||July 1996||Joined in 2000|
|Turkmenistan||Not yet applied|
|Uzbekistan||December 1994||Ongoing negotiations|
The Eurasian Economic Community
In October 2000, Belarus, Kazakhstan, the Kyrgyz Republic, the Russian Federation, and Tajikistan signed the EAEC agreement, which came into force in May 2001. The agreement, which supersedes the CIS customs union of the 1990s, envisages the implementation of a customs union and, eventually, a common economic area, implying a deeper economic integration and cooperation beyond the harmonization of external tariff rates. An agreement on the common external tariff, signed in February 2000, envisaged finalizing and implementing the common tariff in stages over a period of five years from the time it came into force, to be prolonged, if necessary, by mutual agreement. In fact, the common external tariff still has not been implemented.
In the mid-1990s, when most of the CIS countries applied to join the WTO, each country approached accession independently. A coordinated approach to pursuing WTO membership in accordance with EAEC commitments was, however, explicitly endorsed in May 2003 by the non-WTO members of the EAEC and was reiterated in Almaty, Kazakhstan, in June 2004. This coordinated approach may further complicate the WTO accession process; it can lead to considerable delays that can be detrimental for small open economies, which would benefit from more rapid accession. This is because the EAEC countries must harmonize their common external tariff commitments with, de facto, common terms of accession under the WTO by reconciling very different interests in the region. These delays may also impose costs on the more open economies in terms of missed opportunities to extract concessions from the customs union’s more protectionist members. The prospect of fully implementing the EAEC has already increased the region’s overall rate of protection as it complies with the customs union commitments.
An analysis of the EAEC tariff structure suggests that the level of trade protection of Kazakhstan, the Kyrgyz Republic, and Tajikistan will increase once the customs union is fully implemented because its members will need to harmonize their current tariff structures to that of the EAEC. In particular, consumers in Kazakhstan, the Kyrgyz Republic, and Tajikistan would bear the costs of joining the EAEC customs union, because these countries may have to increase their tariff rates to meet EAEC commitments.
Simulation of the two sequencing paths shows that joining the WTO before implementing the EAEC customs union (in contrast to delaying WTO accession) is welfare-improving from the standpoint of consumer welfare in member countries whose tariff rates were initially low. Moreover, net trade diversion differs across members because of the difference in their current levels of trade protection.
There are reasons to be cautious about the implementation of the customs union envisaged by the EAEC. First, there could be welfare losses for some countries as a result of trade diversion owing to an increase in the rate of protection. Second, the harmonization process could benefit certain countries more than others. And, finally, even though a customs union does not, in principle, limit the scope for future multilateral liberalization, it can delay decision making because of the need to coordinate positions. This extended timetable gives protectionist lobbies in some countries leverage over the trade policies of other more liberal countries, and it may indeed slow the WTO accession process.
This article is based on IMF Working Paper No. 05/94, “Regional Trade Integration and WTO Accession: Which Is the Right Sequencing? An Application to the CIS.” Copies are available for $15.00 each from IMF Publication Services. Please see page 280 for ordering details. The full text is also available on the IMF’s website (www.imf.org).