Handbook on International Trade Policy
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Handbook on International Trade Policy

Edited by William A. Kerr and James D. Gaisford

The Handbook on International Trade Policy is an insightful and comprehensive reference tool focusing on trade policy issues in the era of globalization. Each specially commissioned chapter deals with important international trade issues, discusses the current literature on the subject, and explores major controversies. The Handbook also directs the interested reader to further sources of information.
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Chapter 11: Trade Creation and Trade Diversion: Analyzing the Impact of Regional Trade Agreements

Linsday Kendall and James Gaisford


Lindsay Kendall and James Gaisford Introduction There has been a proliferation of regional trade agreements (RTAs) in recent years. As of the end of November 2005, the World Trade Organization (WTO) was notified of 186 regional trade agreements (RTA) and it was estimated that by the end of 2006 almost 300 RTAs may be notified (WTO 2006). An RTA is a group of two or more countries or other territories that reduce or eliminate trade barriers for each other but leave higher barriers in place for outsiders. In the case of a free trade area, each member country removes trade barriers on internal trade, but maintains its own external trade barriers. Common external trade barriers are added with customs unions and other arrangements involving closer regional economic integration such as common markets and economic unions.1 Since each participant grants other member countries preferential access to its own markets, any RTA inherently discriminates against outside countries. Non-discrimination, however, has been a central tenet of the multilateral trading system since the inception of General Agreement on Tariffs and Trade (GATT) in 1947. With respect to tariffs, for example, each member of the GATT is usually required to grant ‘most-favoured nation’ (MFN) status to each other GATT member, such that the lowest tariff rate available to any country is extended to all. While clearly in violation of the MFN principle, RTAs have always been explicitly permitted by the GATT subject to certain conditions. External barriers are not permitted to...

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