Regional Trade Agreements: Effects on Trade

positive or negative effects on trade depending on their design and implementation. Analysis in this chapter confirms that gains from a preferential trade agreement cannot be taken for granted; moreover, even in agreements with positive impacts on average incomes, not all members are assured of increases. The interesting policy question then is not whether RTAs are categorically good or bad, but what determines their success? The broader policy context in which an RTA is designed and implemented is crucial. Agreements that have been designed to complement a general program of economic reform have been most effective in raising trade. When RTAs have tended to be fruitless, it is often because of the lack of a coherent program of reform. For an RTA itself, the most important ingredient for success is low trade barriers with all global partners. Most-favored-nation (MFN; i.e., nondiscriminatory) liberalization, which creates more trade, is the fastest and most efficient way to increase intraregional trade. In addition, agreements that minimize excluded products expand the scope for positive net benefits through competition and trade creation. Recent research has added nonrestrictive rules of origin to the list of successful factors; local firms must be able to effectively source materials at the lowest cost. Such rules of origin are an essential element of agreements that expand both regional exports and exports to the rest of the world.1 RTAs can be a springboard to global markets, but here too, low MFN trade barriers are necessary for success. RTAs can help countries integrate with global markets, but no agreement provides guarantees, so design and implementation matter.