Module 4: Negotiating a Regional Trade Agreement:

Key issues and features

Introduction

All negotiations are a process of bargaining between two or more parties. In trade negotia-
tions, the talks are aimed at shaping the rules which will determine the rights and obligations
of trading, and who will receive the most benefits from them. As developing and least devel-
oped economies operate increasingly on global markets, they need to become more active in
the negotiating process in both regional and multilateral fora if they are to achieve outcomes
more favorable to their interests.

A country’s level of economic development need not prevent active participation in trade ne-
gotiations. Bangladesh, for example, ranks 146th out of 182 in the 2009 United Nations Devel-
opment Programme's Human Development Index, yet is one of the leaders of the LDC negoti-
ating group at the WTO. Bangladesh is negotiating bilateral FTAs and has recently finalized a
Trade and Investment Framework Agreement (TIFA) with the United States. At the regional
level, Bangladesh has negotiated the details of a South Asian Free Trade Area (SAFTA)
which incorporates a tariff reduction schedule, rules of origin and a dispute settlement mecha-
nism. Bangladesh has also joined the Bay of Bengal Initiative for Multi Sectoral Technical
and Economic Cooperation (BIMSTEC) and is in the process of forming an FTA with Nepal,
Bhutan, Thailand, Myanmar and India.

Trade negotiations should receive increased attention by developing country governments be-
cause trade policy is an important instrument available to promote development and provide
new opportunities to enhance production and competitiveness. Unfortunately there is fre-
quently an underlying asymmetry between the partners negotiating an RTA, in size, condi-
tions and capacity. Ideally, the final outcome of the negotiations will reflect a corresponding
asymmetry in the agreement’s obligations and commitments and ultimately ensure that there
is equal treatment among unequal partners. Promoting equal treatment among unequal part-
ners requires trade agreements that ensure adequate technical assistance and resources are
transferred to increase infrastructural, institutional and human capacity in the participating de-
veloping countries. It also involves negotiating favorable terms of market access and entry for
exports of developing countries. It should simultaneously guarantee that the scope of the
agreement is not too onerous on the developing partners by underpinning the agreement with
constructive Special and Differential Treatment and a reliable compensation fund to prevent
unacceptable social costs during economic transition.

This module therefore focuses first on outlining the main features of Regional Trade Agree-
ment negotiations and examining how a developing country government can best prepare for
regional trade negotiations. The module then sets out the key substantive issues for considera-
tion when negotiating a Regional Trade Agreement from a developing country perspective.
Sadly, there are no simple answers to questions such as whether a developing country should
or should not negotiate an RTA, who it should negotiate with or even which provisions should
be included and excluded from the final agreement. A list for further reading is included at the
end of the module which can offer more in-depth discussions on some of the topics intro-
duced here.
Handbook

1 Negotiating Regional Trade Agreements (North-South versus South-South

agreements)

How regional negotiations differ from multilateral trade negotiations

The structure of multilateral trade negotiations has changed over time. Prior to the Kennedy
Round in the 1960s, multilateral tariff concessions were negotiated in the GATT on a product
by product basis. The benefits of these negotiations were largely confined to the parties offer-
ing countervailing trade concessions. Those exporters that were not offering reciprocal con-
cessions were not able to free-ride on those of others. In fact, non-reciprocating parties who
were seen to be likely to gain from any spillover effects from the tariff concessions were often
pressurized to offer concessions as well. The negotiations marginalized those countries that
were too small to export anything of significance, and developing countries were effectively
locked out of the process. Furthermore, domestic producers from developed economies were
easier to organize and mobilize when negotiating on a product by product basis, which re-
sulted in a politically intensive negotiating process. The Kennedy and Tokyo Rounds moved
to a linear cutting formula with a provision for exceptions that could be negotiated on an item
by item basis. This allowed for greater coverage of products for tariff reductions, although the
negotiations themselves became more problematic. The ability for negotiators to place sensi-
tive products on the exceptions list was also often abused, despite the reduced influence of do-
mestic producers and politics in the negotiating process.

During multilateral negotiations within the WTO, decision-making is formally on the basis of
one member one vote. However, voting rarely takes place and in practice decisions are taken
by consensus. Consensus exists when no member present at the meeting formally opposes the
proposal. Multilateral negotiations also take place under the "single undertaking" where noth-
ing is agreed to until everything is agreed. Multilateral negotiations among over one hundred
members are therefore very fragile and time-consuming, and the need to keep parties on board
also leads to a lack of clarity and precision in drafting. Consensus decision-making is thought
to be an effective safeguard against hegemonic intentions, particularly when developing coun-
try members form the majority of the members of the WTO. However, this can have other
drawbacks for developing country negotiators. For example, a country wishing to oppose a
proposal can be effective only when it formally opposes the proposal at the end of the negoti-
ations when consensus is sought. It is much more difficult for developing country members to
form a positive agenda and put forward amendments and proposals for agreements as individ-
ual members, because of the resources needed to put forward a substantive proposal and to
mobilize and consolidate the support necessary for its success. Many developing country
members and development agencies have been highly critical of the negotiation process under
the Uruguay Round due to the asymmetry in negotiating power, which consequently resulted
in obligations that were not in their development interests.

During current multilateral trade negotiations, many of the important items on the agenda of
the negotiations have already been made public. Key elements will have been pre-determined
in what is referred to as the built-in agenda because the negotiators have a pre-existing
mandate to discuss them. For example, within the WTO negotiations, the built-in agenda
includes assessment of the implementation of existing Uruguay Round Agreements and
specific reviews of particular agreements that were mandated by the UR and stipulated in
each of the affected agreements. These provisions call for mandatory evaluations and
appraisals, which may lead in turn to changes that will then have to be negotiated. In addition
to this, however, the built-in agenda includes offers and proposals put forward by interested
members, as well as items that more specifically mandate further negotiations. This is the case
with agriculture, GATS, and TRIPS, for example. The mandate to further negotiations is
commonly regarded as the core of a new trade round. These core multilateral negotiations will
tend to be dominated by the parties most actively involved in the initial framing of the
negotiating agenda.

Governments negotiating RTAs, on the other hand, tend to have much more freedom in what
to include and leave out of the agenda, as well as how they frame their interests. There is less
of a built-in agenda within regional negotiations and governments may well consider them to
be an easier strategy than the multilateral route when it comes to achieving specific objec-
tives. It might be that the WTO cannot at that time provide a forum to negotiate a particular
trade rule. Or alternatively, a government may choose to negotiate an RTA if it considers that
the benefits it wishes to gain through making an agreement can be obtained earlier in an RTA
than under the multilateral system. This may be simply because multilateral negotiations will
take longer or because there are many more members to achieve consensus among than at a
regional level. It could alternatively be because the decision-making process in the regional
negotiations may be based on a voting system rather than consensus and thus allows for faster
and more effective agreements.

Regional negotiations also differ from multilateral in their ability to frame non-trade as well
as trade-related concerns within the agenda, such as environmental protection, core labor stan-
dards or security considerations. For example, the preamble to the 1951 treaty establishing the
European Coal and Steel Community, which subsequently grew into the European Union,
stated its aim as follows: "To create, by establishing an economic community, the basis for
broader and deeper community among peoples long divided by bloody conflicts". While
RTAs should not defeat the primary objectives of the GATT’s most-favored nation principle,
an RTA can clearly contain provisions that are deeper and broader than those contained under
the GATT or GATS, or TRIPS, which is why they are sometimes known as WTO plus agree-
ments.

Nevertheless, RTA negotiations require significant levels of human, intellectual and financial
resources, especially when several economies are involved and the negotiations cover both
border and "behind the border" provisions. Governments must clearly identify the cost and
benefits attached to negotiating a regional agreement because some of the benefits developing
countries are seeking from international trade may only be obtainable through multilateral ac-
tion. The clearest example of this is the abolition of agricultural export subsidies. No signifi-
cant progress can be made on a regional level and it would be misguided for a government to
view negotiating an RTA as an easy solution to overcome this particular multilateral chal-
lenge.

As the trade-related value of preferential trade agreements is eroded over time, developing
country governments may benefit more from negotiating a more comprehensive RTA that can
reach beyond tariff reduction and elimination to incorporate strategy objectives beyond the
traditional emphasis on market access. As discussed further below, developing country gov-
ernments can use RTA negotiations to both expand upon the agenda of multilateral trade ne-
gotiations and to provide opportunities to attempt to do things differently from existing WTO
provisions, with a view to enhancing their development opportunities.
How North-South agreements differ from South-South agreements

The difference between negotiating a North-South and a South-South agreement is first and
foremost one of legality. This means that they must conform to the terms of the provisions set
out in GATT Article XXIV, which govern regional trading arrangements. According to these
provisions, no formal SDT provisions can be made available within a North-South agreement.
This means that instead of demanding less onerous obligations for the southern partners, the
developing countries’ negotiating strategy will be constrained by the theoretical need to en-
sure reciprocity in any commitment; developing countries are unable to include a formal de-
mand for substantive SDT provisions. However, the ambiguity that surrounds the concept of
flexibility under GATT Article XXIV has enabled some developing countries to negotiate
successfully for full reciprocity to be both limited and even curtailed in certain situations.

It is important for negotiators to know that deviations to the requirements of GATT Article
XXIV have been negotiated under both the "reasonable length of time" and "substantially all
the trade" conditions applied to North-South RTAs. For example, in the EU-South Africa
Agreement, a grace period of twelve years was included. In the EU-Tunisia and the Canada-
Chile FTAs, a ten-year transitional period was negotiated for implementing full liberalization
commitments in the developing country members, alongside the creation of a safe haven pro-
vision for products considered to be sensitive to the economy or the security of the developing
country.

These cases are relevant but for negotiating purposes they should be seen as a de facto rather
than de jure acceptance of SDT in GATT Article XXIV. There is a monitoring system in
place due to the stipulation of GATT Article XXIV that North-South RTAs are examined by
the WTO Committee on Regional Trade Agreements. Both developed and developing country
partners are required to show that their agreements meet the standards set out by Article
XXIV. Nevertheless, there is widespread consensus that ambiguity exists regarding the degree
of flexibility available under Article XXIV. Indeed, the two conditions have both been under
review in the multilateral trade negotiations of the Doha Round.

In addition to the different legal requirements attached to North-South Agreements, there are
also divergences in terms of scope and content. North-South Agreements have so far tended
to be more comprehensive than South-South RTAs. The northern or developed economy part-
ners have used RTAs to negotiate policy objectives with southern or developing economy
partners that would be either difficult or impossible to achieve consensus over at the multilat-
eral level. For their part, developing countries have been attracted to the preferential access
they gain to the northern partners’ markets.

The developed economies’ North-South RTA negotiation strategy has generally sought to in-
clude "behind the border" measures such as investment rules, intellectual property rights, and
labor and environmental standards, in addition to border measures applying to goods and ser-
vices. Developed economies' negotiating strategies have tended to prioritize greater security
and stability for their investors and inventions in the southern economies, while requiring
higher social standards. The RTA strategy for northern partners has been to obtain a faster
route for deeper market access for their goods and services than the multilateral route, while
gaining support from the southern partners on non-trade objectives such as social and foreign
policy. All United States RTAs include a chapter on both the environment and labor condi-
tions to be met by partners. These provisions are non-negotiable. In more recent United States
FTAs, such as the United States-Peru, the United States-Central America-Dominican Repub-
lic Free Trade Agreement (United States-CAFTA-DR) and the United States-Morocco agree-
ments, the labor provisions include the right of association, the prohibition of child labor and
minimum working conditions that must be met, along with institutional and dispute settlement
mechanisms to strengthen the obligations.

The southern parties' negotiating strategies focus on the potential for the northern partner to
generate economic growth, employment, foreign direct investment and research and develop-
ment, in addition to furthering non-trade objectives such as security, good governance and so-
cial welfare. Nevertheless, as with multilateral negotiations, the southern partner still tends to
be in a disadvantaged negotiating position, particularly when faced with the social or non-
trade demands of the United States negotiators for example. Not only can the asymmetry in
negotiating power lead to inappropriate outcomes for the development needs of the southern
partner, but as preferential access is eroded due to the proliferation of RTAs, the reciprocal
concessions they grant to developed partners in North-South arrangements will become rela-
tively more costly.

South-South RTAs fall under the provisions of the "Decision on Differential and More
Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries", which
is commonly known as the Enabling Clause. This clause allows developing countries to nego-
tiate more favorable treatment within preferential trading agreements, contrary to the most-fa-
vored nation obligations under GATT Article I. Developing countries can demand more flexi-
bility both in the scope of the sectors covered by the agreement and the extent of tariff reduc-
tion or elimination. Nevertheless, the ultimate objective of such negotiations is still seen as
the eventual elimination of tariffs; the negotiation process therefore aims at determining how
and in what stages this objective is fulfilled. Once negotiated, South-South RTAs will be ex-
amined by the Committee on Trade and Development.

The current trading system also has both non-generalized and non-reciprocal preferential trad-
ing agreements that are not considered to be justified neither as RTAs negotiated within the
framework of GATT Article XXIV, nor as generalized preferential systems negotiated within
the framework of the Enabling Clause. Waivers have been negotiated within the WTO to al-
low, albeit temporarily, for these agreements. Two well-known examples are the Cotonou
Agreement signed by the European Community and ACP countries and the African Growth
and Opportunity Act (AGOA) between the United States and African countries. These
waivers have been granted primarily on the understanding that it is difficult to apply equiva-
lent and symmetrical obligations when eliminating tariffs among members at very different
stages of economic development. The inevitable expiration of the Cotonou Agreement’s
waiver has opened up a new wave of North-South RTA negotiations under the EU Economic
Partnership Agreements scheme. And this in turn has encouraged South-South RTA negotia-
tions between countries that must prepare to negotiate with the EU as a region.
Practical questions

1.1.1 With whom to negotiate?

The recent surge in regionalism has confronted many developing countries with the initial de-
cision on which countries, if any, to negotiate an RTA with. The range of choice of partners
includes another developing country, a developed economy or bloc of developed countries, or
a large regional grouping such as APEC or the EU. In the case of the ACP countries the pro-
visions of the Cotonou Agreement require that ACP countries negotiate an RTA (an EPA)
with the EU, and that smaller South-South arrangement, such as ECOWAS, must negotiate as
a region.

Box 13: The Cotonou EPA provisions

The Cotonou Agreement provides for negotiations of new WTO compatible arrangements
which progressively remove barriers to trade between the parties and enhance cooperation in
all trade-related areas. These Economic Partnership Agreements were scheduled to be brought
into force by 1 January 2008.

The EU would maintain the non-reciprocal trade preferences applied under the 4th Lomé Con-
vention until the end of 2007. Under Lomé, ACP exporters were entitled to duty-free access
for all industrial and a large part of agricultural products. The Enabling Clause adopted during
the GATT Tokyo Round permits developed countries to give developing countries one-way
trade preferences, on the condition that there is no discrimination between developing coun-
tries unless it is in favor of the least developed countries. The Cotonou Agreement does not
comply with the Enabling Clause because it discriminates between developing countries in its
application to specific regions only. That is, the Cotonou trade preferences are neither avail-
able to all developing countries nor restricted to just least developed countries. At the WTO
Doha Ministerial Conference in 2001, the EU obtained a temporary waiver to renew the ACP
preference system.

Within the 2000 Cotonou Agreement, the ACP States and the European Community agreed to
conclude new WTO compatible trading arrangements. This was based on the mutual recogni-
tion that existing non-reciprocal trade preferences have not promoted the sustainable develop-
ment or integration into the world economy of ACP countries, as set out in the Cotonou
Agreement objectives. The trade arrangements in place (Annex V of the Cotonou Agreement
"trade regime applicable during the preparatory period referred to in Article 37(1)") were cov-
ered by a WTO waiver that was due to expire at the end of 2007. The ACP and the EC agreed
that EPAs must be compatible with WTO rules in order to ensure the necessary stability and
predictability of trading.

At the all ACP level, negotiations were concluded at an ACP-EC ministerial meeting on 2 Oc-
tober 2003 with the issue of a joint report to serve as a point of reference for negotiations with
six regional groupings of ACP states, as well as noted areas of convergence and divergence.
Both sides agreed that:
 The overall objectives of EPAs shall be the sustainable development of ACP coun-
tries, their smooth and gradual integration into the global economy, with due regard
for their political choices and development priorities, thereby promoting their sustain-
able development and contributing to poverty eradication in the ACP countries.
  The specific objectives of EPAs shall be to promote sustained growth; increase the
production and supply capacity of the ACP countries; foster the structural transforma-
tion of the ACP economies and their diversification; and support regional integration.
 EPAs must support regional integration initiatives existing within the ACP and need to
be based on the integration objectives of the regions concerned. EPAs should contrib-
ute to the regional harmonization of rules. In this perspective, EPAs’ first emphasis
should be to consolidate ACP markets, before fostering trade integration with the EC.
 EPAs will maintain and improve the current level of preferential market access to the
EC for ACP exports. In conformity with Article 36(4) of the Cotonou Agreement, they
would review the relevant provisions in the context of the new trading arrangements
particularly as regards their compatibility with WTO rules.
 Article 37(6) of the Cotonou Agreement states that for non-LDC ACP countries,
which would not be in a position to enter into EPAs, the EC will assess their situation
and will examine all alternative possibilities in order to provide a new framework for
trade which is equivalent to their existing situation and in conformity with WTO rules.
Both the ACP and EC agreed that the principles enshrined in the Cotonou Agreement, notably
those of flexibility, asymmetry, and preservation and improvement of the Cotonou acquis,
will guide the market access negotiations. Flexibility would be provided in the EPAs, and
asymmetry in favor of the ACP would be granted both in terms of product coverage and tran-
sition periods. Concerning the application of the principle of asymmetry to rules of origin,
both sides concurred that further examination at expert level was required.

Regarding market access to ACP economies, both sides agreed that the issues of EPA product
coverage and the length of transitional periods both needed to be defined in detail at regional
level. With regard to the length of the transition periods, the EC referred to the general WTO
parameters which would be pursued with flexibility and could be adapted in the light of spe-
cific economic, social and environmental needs and constraints of the countries and regions
concerned, as well as of their capacity to adapt their economies to the liberalization process.
Both sides agreed that this issue needed further discussion.

Concerning the product coverage, the EC referred to the WTO criterion of "90 per cent plus"
of trade as an expression of its general ambition for long-term coverage of reciprocal trade
liberalization. A recent examination conducted by the WTO’s Committee on Regional Trade
Agreements suggests that at present, FTAs typically cover between 80 and 95 per cent of the
trade between FTA members (WTO 2002). Both sides agreed that this issue needed further
discussion.

It was agreed that appropriate safeguard measures should be developed at the regional level in
the context of EPAs for both industrial and agricultural products. Both sides also accepted the
principle of a continuous evaluation of the adjustment process, which EPAs would require
with a view to adjusting the liberalization programme, should any serious problems occur in
the ACP States.

Under the likely terms of the EPA, tariffs would be eliminated within a period of up to twelve
years for the most part, although a few import-sensitive goods were likely to be excluded
from the agreement.

There was broad convergence on the overall objectives and structures of the EPA and issues
such as WTO compatibility, services trade and market access. The main divergence was over
requests for additional financial resources over and above the European Development Fund
(EDF) provisions and the sequencing of support to build capacity for the regional trade ar-
rangements envisaged by an EPA.

In line with the provisions in Article 37(3) of the Cotonou Agreement, both sides agreed that
EPAs needed to be accompanied by appropriate development support measures in order to al-
low ACP countries and regions to maximize the benefits they should be deriving from EPAs.
Joint ACP-EC Regional Preparatory Task Forces (RPTFs) have been set up in four of the six
regions. Their role was to promote links between development support, economic and trade
policy so as to make them both complementary and mutually reinforcing.

The next phase of regional negotiation history was the ACP region and the Commission
agreeing a joint road map for negotiations. The road maps set out the regionally specific struc-
tures, priorities and phasing of negotiations within a common framework. The road maps took
forward the issues raised in the 2003 joint paper, reflecting ACP regional priorities. That is,
by the end of 2006, the outline of the EPAs should have been agreed. In the second half of
2006, the Commission was meant to contribute to the comprehensive review of the arrange-
ments planned, in accordance with Article 37(4) of the Cotonou Agreement.

However, it became clear by late 2007 that EPA negotiations would not conclude in time for
the expiration of the special waiver from WTO rules. The EU and ACP therefore decided to
conclude interim agreements that complied with WTO rules covering trade in goods. Several
interim agreements were thus initialed with individual countries or regions while negotiations
pursue for full EPAs agreements. To date, only one full EPA with CARIFORUM states is in
force, after being signed in October 2008.
OECD (2001) research on regional integration agreements has argued that in theory, all things
being equal, poorer countries will benefit more from a North-South agreement than from a
South-South RTA. In practice, however, developing countries’ interests have tended to be
downplayed in negotiations with northern parties. Developing country governments have
fewer resources to research policy options and outcomes and should always be wary of nego-
tiating comprehensive agreements with developed countries without adequate preparation. It
is not simply that development considerations may not be given inadequate attention, but de-
veloping country parties should not negotiate with the expectation that any economy benefits
will be captured automatically, particularly if domestic economic reform is not undertaken si-
multaneously.

A World Bank research report on regional integration and development argues that larger and
more developed members of an RTA typically gain more from it relative to smaller and
poorer members (Schiff 2002). One reason is that the former usually have a trade surplus with
the latter because they tend to produce protected manufactures which compete with imports
globally and are exported to the smaller, poorer neighboring countries. Once the RTA is
formed, these manufactures are imported free of tariffs, resulting in a transfer of tariff rev-
enues from the poorer to the more developed countries (without benefit for the consumers in
the poorer countries since prices do not fall due to the unchanged tariffs on imports from the
rest of the world). Consequently, not only is it likely that the trade bloc as a whole will lose
from forming an RTA, but the smaller and poorer member countries will lose even more,
while the more developed members are more likely to gain. Asymmetric gains and losses are
also related to agglomeration effects, whereby industry tends to leave the smaller and poorer
members and agglomerate in the more developed ones once trade barriers between them are
removed. The World Bank's World Development Report 1999/2000 (World Bank 2000) ar-
gued that South-South RTAs tend to generate dynamic divergence, with the poorer members
losing relative to the more developed ones. This can result in tensions and even conflict be-
tween member countries such as in the 1960s when the East African Community broke down
because of Tanzania's and Uganda's dissatisfaction with what they perceived to be an unfair
distribution of revenues in favor of the more developed member – Kenya.

Some of these problems can be mitigated if an effective compensatory mechanism is negoti-

ated as part of the customs union agreement. This is the case for WAEMU, where compensa-
tion is based on intra-bloc trade flows prevailing before the agreement was signed. This does
not fully resolve the problem because intra-bloc trade tends to increase following the forma-
tion of the customs union, and the related increase in the level of transfers is not compensated
for. Another way to mitigate the problem is to lower the common external tariff because this
reduces the size of intra-bloc transfers, whether positive or negative. The member country that
obtains positive transfers from the customs union may be unwilling to go along and lower the
CET. Here an FTA has a clear advantage because it enables each member country to liberal-
ize its trade policy unilaterally and thus reduce the size of the transfers it may be providing its
partners.

1.1.2 What to negotiate?

Once the initial choice of who to form an RTA with is made, it will first and foremost be con-
ditioned by the legal framework governing the RTA in question: The Enabling Clause will ap-
ply to South-South RTA negotiations, while the provisions of Article XXIV GATT will con-
dition the final outcome of North-South agreements.
The main forms of regional trade arrangements currently in use are described in Module 1 and
include preferential trade agreements, free trade agreements, customs unions, common mar-
ket, monetary union, and economic and monetary union.

While in a North-North and North-South RTA the parties can negotiate anything from shal-
low integration provisions in a free trade area to deep integration provisions in an economic
union, the formation of a South-South RTA does not need to require that parties negotiate
more than non-binding declarations for cooperation or harmonization. However, the trend is
towards negotiating more comprehensive RTAs covering non-trade issues, alongside more
ambitious estimates of the amount of trade to be covered.

The EU has sought both economic integration and the development of shared political institu-
tions. The EU Member States also negotiated a wide agreement, moving progressively from
the trade in goods to services and factor mobility. This policy was agreed to because the
Member States believe that this type of deep integration and convergence would bring benefi-
cial results in many spheres, including economic growth, political bargaining, security, and
social welfare. They were also prepared to accept the loss of national sovereignty that such a
deep and wide integration strategy entailed.

In ECOWAS, on the other hand, intra-community trade accounts for only 11 per cent of
members’ total trade. ECOWAS aimed to establish a free trade area by removing all barriers
on all goods traded between Member States and finalize the establishment of a customs union
by January 2008. A compensation mechanism was negotiated to underwrite the loss of cus-
toms revenue resulting from the implementation of the intra-ECOWAS preferential regime.
However more than half the ECOWAS members have not been able to contribute in full, and
the free trade area component of ECOWAS has been implemented by only seven of the fif-
teen members. This comparison indicates the differing policy priorities and objectives held by
RTA members in developing and developed economy contexts.

Box 14: EPA negotiations between the EU and West African countries

West Africa was the first region, along with Central Africa, to start the EPA negotiations in
October 2003. The road map adopted in August 2004 set out the priorities, the structures and
the negotiation calendar.

The Regional Indicative Programme was the main instrument to support the negotiation of the
EPA in the West Africa Region, covering the 15 Member States of ECOWAS and Mauritania.
Two regional organizations have been mandated by the Member States in the region,
ECOWAS and WAEMU.

The two parties agreed, in accordance with the road map, that the work on West African re-
gional integration should lead to the establishment of an EPA reference framework covering
the entirety of the negotiation issues. Regional integration was agreed mainly for the areas di-
rectly regarding the exchange of goods: free trade area, customs union, trade facilitation, tech-
nical standards and quality control, sanitary and Phytosanitary standards.

While the benefits of reforms are expected to outweigh short-term costs, transitional costs
must be taken into account. These include, for instance, losses in tariff revenue as well as in-
frastructure and private investments needed to help promote competitiveness. Nevertheless, as
the EPA negotiations proceed it should become possible to estimate with increasing accuracy
costs and benefits and the implications for development assistance flows. The Cotonou
Agreement itself is clear that financial cooperation is regulated by other aspects of the agree-
ment than EPA provisions. The Regional Preparatory Task Forces (RPTFs) ensure the link at
regional level between the EPA negotiations and development support.

The road map was a key step in the EPA preparation. It stated that in accordance with the rel-
evant provisions of the Cotonou Agreement, the EPA should enter into force no later than 1
January 2008 and be based on the three themes of:

 Promoting the West African integration process;

 Capacity building to improve competitiveness;
 The preparation and conduct of EPA negotiations.

The 2003 Joint Report51 on the first phase of the EPA negotiations served as a point of refer-
ence and guide for the conduct of the negotiations between West Africa and the European
Community.

The second phase of the negotiations, following the adoption of a mandate for the negotiation
of the EPA between West Africa (ECOWAS and Mauritania) and the European Community
was launched in Cotonou on 6 October 2003. The objectives of the mandate included:

 The progressive establishment, in accordance with WTO rules, of a free trade zone be-
tween ECOWAS and the European Community during a period of twelve years, start-
ing from 1 January 2008;
 The need to accord priority to development and poverty reduction;
 Cooperation in trade-related matters;
 Deepening of the integration process in West Africa;
 Enhancement of competitiveness: capacity building and upgrading;
 Improved access for West African exports to the EU market.

The common external tariff commenced on 1 January 2005, allowing for a transition period of
three years enabling Member States to make the necessary adjustments. The customs union
was scheduled to come into existence on 1 January 2008, with a uniform application of the
CET by all Member States. The following actions needed to be undertaken:

 Harmonization of clearing and other customs formalities in ECOWAS;

 Circulation of a single customs declaration;
 Interconnection of customs computer systems, with the aim of rationalizing proce-
dures;
 Harmonization of regulations relating to the axle load;
 Drawing up of a regional road control plan defining group checks at the point of de-
parture, destination and at border posts;
 Building of adjacent border posts at the land borders.

In parallel to the activities designed to deepen the regional integration process, the formula-
tion and implementation of programmes to enhance competitiveness and upgrading started in
October 2004 and should continue until 2020.

Preparatory activities ahead of the EPA negotiations included:

51
ACP/00/118/03 rev 1-ACP-EC/NG/NP/43.
  Definition of the EPA reference framework with regard to the technical barriers to
trade and SPS measures, customs procedures and trade facilitation, with a view to en-
suring free movement of goods within the region and between the region and the Eu-
ropean Union;
 Harmonization of the policies on standardization, certification and SPS measures;
 Definition of a reference framework for border protection measures (customs tariffs
and other measures);
 Definition, at the appropriate time, of objectives and procedures for investment, com-
petition and intellectual property;
 Definition of the general structure of the EPA (areas to be covered by the EPA);
 Conduct of analyses on different liberalization options for trade in goods and services;
 Formulation of proposals for capacity building and other support measures in the vari-
ous areas open to negotiation: border protection measures, technical barriers to trade
and SPS measures, investment, competition and intellectual property policies. The
proposals should be taken into account in the programming of assistance;
 Negotiation of the time frame for liberalization and the conclusion of the EPA.

Due to the expiration of the waiver from WTO rules, Ivory Coast and Ghana signed interim
EPAs with the EU in December 2007. At the same time, negotiations continued at the re-
gional level and a timetable to this effect was agreed at a ministerial meeting in June 2009.
This timetable proposed a two-phase approach: first, to reach an agreement, by October 2009,
with the whole West African region on trade in goods, some trade rules and development co-
operation; and then continue to negotiate trade in services and the remaining trade-related is-
sues in a second phase to be initiated in January 2010.

1.1.3 How to prepare for negotiations

1.1.3.1 Financing the negotiations

Depending on the number of parties involved, the negotiations of an RTA can typically take
one to two years to complete. It is vital to ensure that the financial resources for the negotia-
tions are available for the duration of the talks, even if this requires re-bidding for the relevant
government funding during the course of the negotiations. At a minimum, resources must be
found for the negotiating teams to travel to meetings, translate papers and interpret discus-
sions.

1.1.3.2 Creating a negotiating team

All negotiating governments need to be represented by a stable negotiating team, headed by a

permanent chief negotiator. The size of this team will depend on the size of the negotiations
and resources available. The permanent chief negotiator should have extensive diplomatic and
trade experience and will be responsible for appointing the negotiating team, finalizing the ne-
gotiating strategy and ensuring effective internal and public communications. Where possible,
the chief negotiator will appoint a deputy to support the leadership, along with lead negotia-
tors who will be responsible for the specific experts negotiating the various chapters of the
proposed agreement. Ideally these teams will remain in place throughout the negotiations and
will be able to build on their experiences of the discussion as the negotiations proceed.

Box 15: On Thailand's negotiation team for the 2006 Thai-United States FTA negotia-
tions
During the 2006 Thai-United States FTA negotiations, Thailand’s Deputy Prime Minister and
Commerce Minister Somkid Jatusripitak, placed the Commerce Vice-Minister Uttama Sa-
vanayana to work alongside the incumbent head of the Thai trade negotiating team, Nitya
Pibulsonggram, who represents the Foreign Ministry and has been leading the talks with the
United States during the past five rounds. Uttama represented Somkid at the World Trade Or-
ganization’s Doha Round of trade liberalization talks in Hong Kong, China. Vice-Minister
Virachai Virameteekul of the Ministry of Foreign Affairs will also join the Thai team, while
the Deputy Public Health Minister Anuthin Charnveerakun makes key decisions about the ne-
gotiations on drug patent issues.

The Director General of the Fiscal Policy Office, Naris Chaiyasoot, head of the team negotiat-
ing the financial services sector, met regularly with Finance Minister Thanong Bidaya who in
turn met with representatives from the Bank of Thailand, Securities and Exchange Commis-
sion (SEC) and Insurance Department, to discuss their views on the financial sector. Local
bankers and financial executives called for a transition period to liberalizing the financial sec-
tor while officials stressed that the outcome of the financial services negotiations depended on
the whole package of talks. The officials stated clearly that the negotiations where about de-
termining whether Thailand could benefit from the package ranging from trade in goods, ser-
vices, investment, intellectual property, environment, labor and dispute settlement mecha-
nisms.

Source: The Nation Newspaper, Bangkok 10.01.2006

Whatever the state of internal discussions, a negotiating team must reflect a unified position at
all times. Any expression of discord, disunity or dissatisfaction will be picked up by a coun-
terpart negotiator who can use this as an opportunity to undermine the team. The team needs
to create strong channels of coherent and effective communication with the other negotiating
teams, key domestic stakeholders affected by the proposed outcomes and the wider public.
The chief negotiator should also be responsible for building up ongoing consultation and
communication channels with the private sector and public interest organizations. These
stakeholders should be viewed as a source of support and additional resources during the en-
tire negotiation process.

1.1.3.3 Involving domestic stakeholders

A first step for the negotiating team preparing for the regional trade negotiations is to identify
and organize domestic groups who are potentially affected by the negotiations, have a stake in
their outcome and an interest in influencing the process. Domestic stakeholders consist of
both the relevant or affected government departments, public interest groups such as trade
unions, environmental groups and consumer organizations, as well as private enterprises.
These diverse stakeholders can offer invaluable research and information on how the various
policy options available will affect them. Incorporating their views therefore not only ensures
that the country's negotiating position takes account of their democratic interests but also en-
ables governments to make best use of the information and experiences more readily available
to these stakeholders. By harnessing the resources available to domestic interest groups, nego-
tiating teams are able to keep channels of communication open with these stakeholders and to
create a sense of inclusion in the decision-making process. This allows interest groups to un-
derstand the issues at stake more fully and enhances the possibility of more widespread re-
spect for the eventual outcome of the negotiations.
Box 16: Types of stakeholder consultations held during the negotiation process

The different types of consultations held during the negotiation process may include:
 Joint study groups – prior to negotiations: feasibility discussions with academics and pri-
vate sector;
 Interdepartmental consultation – to develop and assess the analytical basis for the negotia-
tion and to pool all relevant information available from government officials;
 High-level political consultation – to assess the political basis for negotiation and to se-
cure strong political commitment to trade negotiations from top decision-makers and main
political actors;
 Ongoing domestic consultations with central, provincial/state governments, private sector,
and other interest groups as required – building broad-based support for the negotiation.
This may require establishment of an institutional machinery to facilitate consultations
among all affected interests.

While all these stakeholders can inform the negotiation strategy, a successful consultation
strategy will prioritize the domestic stakeholders, with the key government departments being
more closely consulted than non-governmental organizations. These key stakeholder figures
and groups can be identified in the local media and by consulting experts from academia and
industry. Representatives from competitive industries should always be included in the con-
sultations and the negotiation process as far as possible. As RTA negotiations aim to remove
barriers to trade and create competitive pressures, it is likely that these representatives of the
most competitive industries will have the greatest interest in successful market access negotia-
tions. Nevertheless, it is also a prudent consultation strategy to include those groups opposed
to the negotiations. The wider civil society group should be kept informed of events and nego-
tiation developments, either through press conferences or side events at the main negotiation
or at meetings and briefings at the national level. News can also be updated regularly and dis-
seminated widely via the internet.

The internal consultation processes for setting the negotiating mandate tend to begin with the
relevant government departments setting out policy options and recommendations to submit
to a cabinet to consider and prioritize. The dialogue with government ministries and depart-
ments will be ongoing as the negotiating objectives are refined and redefined in response to
the reactions of the other negotiating parties as the process gets underway for each negotiating
issue. The outlook of a negotiation can change rapidly. Issues that may appear to cause dis-
unity at the outset of a negotiation may become of little consequence, while an unforeseen
item may become the bone of contention. It may be necessary to redefine the negotiating is-
sues as new information alters understanding of the problem and the potential sources of
coalition support.

Box 17: Methods for identifying, consulting and organizing stakeholders

 Draft letters from the Trade Minister to other government departments responsible for the
regulations under negotiation, outlining the main points of relevance and inviting written
and oral comments on how the proposed regulations may affect the various constituencies
and social groups.
 Invite the relevant senior policy officials to attend the committee meetings reviewing the
negotiating proposals. This should begin with an introductory meeting, in which members
 of the committee are given all available information on the schedule for the negotiations
and the current state of preparations for the negotiations.
 Identify appropriate local and regional officials and invite them to participate in advisory
committees at the sub-central level which will advise the trade negotiators on regulatory
issues within their jurisdiction. These committees should gather on a regular basis after an
initial briefing on the negotiating schedules.
 Identify key private sector stakeholders and invite them to explain and discuss the nature
of the upcoming negotiations. Their oral participation and submission of written informa-
tion to formal discussions on the negotiations should be actively encouraged. Where ma-
jor conflicts of interest arise, a transparent discussion of the issues and interests at stake
should be encouraged in order to make progress on achieving compromise and overall
agreement or understanding of policy choices.
 Issue press releases on any briefing session or conference. The press can be used to publi-
cize the conference, and help to ensure that any interested organizations are invited to
send a representative.
 Identify key members of the private sector and invite them to make up an advisory body
to the negotiating team. This will ensure all relevant groups are represented and heard,
which will facilitate any eventual compromise among conflicting interests.

1.1.3.4 Gathering information

The task of preparing and compiling background information is the foundation of successful
negotiations. This implies that a negotiator must always be fully prepared; otherwise s/he may
put the country in a compromising position. Furthermore, according to the Vienna Convention
on the Law of Treaties, the effect of a treaty on a particular State cannot be considered invalid
because of the lack of authority of the representative (Article 47). Error by the representative
can be accepted as a way to render a specific treaty invalid in relation to the specific State, but
only if "the error relates to a fact or situation which was assumed by that State to exist at the
time when the treaty was concluded and formed an essential basis of its consent to be bound
by the treaty" (Article 48(1)) except when "the State in question contributed by its own con-
duct to the error or if the circumstances were such as to put that State on notice of a possible
error" (Article 48(2)).

In addition to gathering comprehensive trade statistics from official sources, relevant informa-
tion will include unofficial data and specialist knowledge about:
 Domestic exports and imports;
 The different strengths and weaknesses of domestic industries;
 Foreign regulations inhibiting national exports.

Negotiators should canvas major exporters and sectoral industry associations both domesti-
cally and in third countries, for product-level information and knowledge of foreign trade bar-
riers. Asking stakeholders to supplement official data is particularly necessary to gain insight
into commercial activities which are either too recent or too dispersed to be included in offi-
cial statistics. International and regional economic institutions, such as UNCTAD, the World
Bank, APEC or NAFTA can also provide studies and information on relevant trade, economic
and regulatory issues.
Box 18: Preparing relevant negotiating information

 Information drawn from the export data, economic studies, industry surveys and studies of
other economies should lead to analytical conclusions regarding the services in which the
country already has or could easily develop competitive exports.
 Information about foreign regulatory barriers and industry assessments of their relative
importance, when combined with the analytical conclusions regarding potential export in-
dustries, can lead to conclusions regarding the foreign regulatory barriers that should be
targeted in the requests submitted to other countries in the first stage of the negotiations.
 Import data, economic studies, industry surveys, studies of other economies and inputs
provided by domestic ministries or departments should lead to analytical conclusions re-
garding the services in which the country has weaknesses, and in which liberalization
commitments should only be made on the basis of long phase-in periods, or precluded al-
together.
 Information on regulatory issues can lead to analytical conclusions on how requests and
offers in particular sectors or with respect to particular horizontal measures should be
framed.
 Information on the positions and interests of both domestic and foreign stakeholders are
needed. Interests are the commercial interests, policy objectives, bureaucratic imperatives,
or legal requirements that a negotiator must satisfy in a negotiation in order to obtain the
approval of the home constituencies. Interests need to be distinguished from the negotiat-
ing position, which is what a negotiator is instructed to ask for at any particular phase of
the negotiation. The negotiating position is dictated not only by the organization's inter-
ests, but also by the negotiating strategies and tactics of the parties.
In addition to gathering information on national interests, a successful negotiating strategy
must also include a solid analysis of the interests and problems of the other negotiating par-
ties. This will incorporate an assessment of the strengths and weaknesses of their industries,
their stakeholders and their respective interests, any potential negotiating difficulties and
likely negotiating demands.

1.1.3.5 Forming negotiation strategies

It is important that developing country negotiators take a more active and enterprising role in
integrative bargaining. Merely reacting to developed economy bargaining strategies will not
be able to produce positive outcomes for their governments.

According to Saner (2001), there are essentially two types of negotiating strategy: The first is
"distributive bargaining" which is essentially a zero-sum process because one party wins at
the cost of the other. In distributive negotiations, each party will have an "aspiration position",
which is that party’s desired outcome as well as a reserve position, which will be the lowest
acceptable outcome. The outcome of the negotiations will normally produce an agreement
which falls between the two reserve positions of the two parties, the more overall between the
positions the more both parties will obtain satisfaction. Conversely, when there is no overlap,
there is no point in continuing negotiations because it is likely that one party will gain satis-
faction only at great cost to the other.

The other negotiating strategy discussed by Saner is known as "integrative bargaining". Here
a proposed package of negotiating elements is developed which involves each party making a
concession in different issue areas to produce relative satisfaction to all parties. The gap be-
tween the interests of the parties is bridged when each side gives something to the other side
and vice versa. This is possible through issue-linkages to other issue areas; each party makes
some concessions in different issue areas so that together they reach relative satisfaction.

In integrative bargaining, parties must be ready to seek potential options for developing such
issue-linkages and need to have something to offer to each other. Negotiators can enlarge the
space of agreement by identifying and discussing a range of alternatives, by improving the
quality and quantity of information that is made available to the other parties and by trying to
influence the perception of the other party (Saner 2000). Much of trade negotiation can be
viewed as integrative bargaining because parties can enlarge the area where their interests
overlap by identifying and discussing a range of alternative options and opinions. However,
integrative bargaining breaks down without active participation of all the negotiating parties.
Passive negotiating parties will find that the negotiations outcomes will not reflect their inter-
ests.

Developing country negotiators can work out integrative bargaining strategies by setting out a
statement of their negotiating objectives. This need not cover technical details, but rather
should set out some broad strategic objectives, and a set of negotiating priorities. It may also
set out an accompanying domestic policy agenda. Try to identify areas in which you can pro-
vide concessions to the other party during the negotiations in return for issues on which your
concerns are met. It is important to be transparent about why the proposed text is not accept-
able, and to develop linkages to other issues of concern to your country and reasons why these
should be related to the negotiations.

To prepare a negotiating mandate, the negotiator needs to have identified an "aspiration posi-
tion" that reflects what the party would ideally like. This will set the standard for complete
satisfaction. A negotiating team also needs to identify a "reserve position", which establishes
the minimum that the negotiator would accept. Anything below this position should be re-
fused, and alternative solutions must be located away from the negotiating table. In order to
identify aspirational and reserve positions for use in negotiations, a draft proposal should be
prepared, which lists as many alternative ways to express the same concepts for discussion,
alongside a list of what can be feasibly conceded during the negotiation. A list of multiple op-
tions or solutions to satisfy party interests should also be compiled. It is always advantageous
for negotiators to maintain a flexible and adaptable position. If negotiators become fixated on
inflexible positions and outcomes, it can prevent the parties identifying new and possibly
more attractive options for those involved.

A negotiating strategy should always include a comparison of the potential advantages of a

negotiated solution with alternatives available away from the negotiating table. The alterna-
tive strategy of walking away from the negotiations should be based on sound analysis of the
likelihood of securing a better or more acceptable outcome through negotiations. A negotiat-
ing party can develop the strength and availability of what is often called a BATNA (Best Al-
ternative to a Negotiated Agreement) while conversely introducing evidence into the negotiat-
ing process that threatens the attractiveness of other negotiating parties’ BATNAs. Clear
analyses of BATNAs are important factors in a successful negotiating strategy because they
allow for wise decisions on whether to accept a negotiated agreement. As such, BATNAs pro-
vide a standard that will prevent a party from accepting terms that are too unfavorable and
from rejecting terms it would be better off accepting. Furthermore, having a good BATNA in-
creases a party’s negotiating power and a well prepared negotiating team will be aware of
how desperate their opponent is for an agreement. This will allow for the most effective use
of pressure and the most appropriate demands being placed upon the opposing negotiating
team.

If a negotiating team perceives the opposing partner to have an unrealistic BATNA, it could
try to educate them as to their true position by posing what Spangler (2003) has termed "real-
ity test" questions, such as:
 What do you see as the strengths of your case?
 What do you see as the weaknesses of your case?
 What do you see as the strengths of the other's case?
 What do you see as the weaknesses of the other's case?
 What is your best-case scenario if you don't resolve this with negotiation?
 What is your worst-case scenario if you don't resolve this with negotiation?
 What is the most likely scenario if you don't resolve this with negotiation?
 Is that better than the most likely negotiated settlement?

If a negotiating team has not been able to identify a negotiating mandate, the position of na-
tional and/or regional non-governmental organizations should be considered as possible stan-
dards for an aspirational position. The reserve position could be set at the conventional posi-
tion taken by the foreign office. However, a negotiator needs to base the mandate on credible
sources of domestic support.

1.1.3.6 Creating coalitions of support

Negotiating teams should try to identify potential coalition partners to discuss the negotiations
and possible strategies. These partners could provide negotiation support, information and ad-
vocacy. Developing country negotiating strategies should try to identify and incorporate the
support of allies in relation to specific issues, rather than in relation to power blocs. Coalitions
and alliances with other parties will ideally be with those countries that have similar, or at
least, compatible interests. This will build negotiating strength and use scarce resources more
effectively. If negotiators rely on ideological arguments or rhetoric, it is more difficult to de-
velop stable coalitions or viable regional negotiating positions. The different levels of theoret-
ical and ideological awareness about the goals of sustainable development will tend to wipe
out rather than create political synergy between countries. Developing countries should in-
stead group together to try to define what can be considered reasonable goals, achievable bud-
get periods, or appropriate technical assistance. In the past it has been the developed country
negotiators who tended to be prepared with policy options. Developing countries have gener-
ally found it difficult to respond collectively to these negotiating techniques because of the
lack of consensus among them beyond rhetoric. This lack of unity among developing coun-
tries negotiating strategies results in vulnerability towards developed negotiating parties' di-
vide-and-rule tactics.

Instead, developing countries should try to view trade negotiations more positively – as a
process of progressively building consensus among an increasing number of stakeholder
groups with diverse interests. The initial building of coalitions among like-minded groups in
support of particular negotiating proposals and agreements is a critical aspect of this process.
Once potential coalition partners have been identified, the next step is to discuss the negotia-
tions, coordinate positions where possible or ideally draft a joint negotiating proposal.

1.1.3.7 Framing the negotiation mandate

Having drawn up a negotiating strategy and identified potential allies, the parties need to
frame the negotiating mandate. The negotiating mandate sets out the issues to be included in
the negotiations, such as whether the negotiators are able to discuss intellectual property
rights, as well as services and investment for example. In a comprehensive RTA, parties will
initially try to include a broad range of objectives, which have been defined by the relevant
government departments, in a negotiating mandate.

Research suggests that when there is uncertainty about the other party’s interests, the opening
negotiation will tend to frame the counterpart’s belief about the likely outcome (Odell 2006 p.
20). How a party frames a negotiating agenda has a strong influence on their ability to achieve
their overall goals, and a successful negotiating strategy will have framed the party’s interests
effectively before negotiations begin in order to influence general expectations in a beneficial
manner.

1.1.3.8 Setting out an indicative timetable

Agreeing upon an indicative timetable for the negotiations is useful to manage the negotia-
tions as efficiently as possible. The uncertainty of negotiations requires a negotiating
timetable that is flexible enough to be able to accommodate changes in the negotiating envi-
ronment, yet continue to offer direction and guidance to the proceedings.

The negotiating sessions need to be spaced at sufficiently long intervals to allow negotiators
to obtain ministerial guidance, conduct adequate consultations with key interest groups and
prepare for subsequent negotiations. If the negotiations are made up of several parties, non-
negotiating periods of two to three months may be necessary. Although clearly, the shorter the
intervals the greater the level of momentum to the negotiations. Adjustments can be made to
the timetable as the negotiations proceed, such as increasing the number of informal meetings
between the parties or bringing together key figures for the final decision-making.

1.1.4 How to negotiate?

The negotiation process can be used to identify the problems or opportunities presented by a
proposal. By understanding the nature of a problem or conflict, a negotiator is better able to
anticipate the interests of counterparts and to advance proposals and options that may take
into account the history of the problem between the parties, which may include past practices,
tariffs, quotas, anti-dumping, or other trade-related practices that have defined a trading rela-
tionship. It is also important for the negotiator to identify what has changed since the original
conflict began, such as the political environment or key lobby groups. The negotiations will
also allow for the progress by breaking the problem into multiple parts, with various solutions
being applied to different aspects of the problem. Solving part of the problem generally gives
confidence that progress can be made on other outstanding issues.

Most negotiating processes consist of plenary meetings to promote transparency and dissemi-
nate general information, and informal meetings which facilitate the resolution of specific ne-
gotiating issues among smaller numbers of experts. In order to keep the negotiations dynamic,
an early harvest is sometimes agreed to. However, caution is needed to ensure that this early
decision does not reduce the number of options open to negotiators later in the discussions.
Another option is to finish negotiating a chapter quite early in the negotiations, subject to any
necessary subsequent changes.

Negotiators should use silence and active listening techniques to further their understanding
of their counterparts' interests. This involves clarifying and confirming the positions of the
other negotiating parties and asking many questions to learn more about these positions. Ask-
ing for information or clarification conveys interest and a willingness to understand the other
party's interests. Remaining calm and patient is also an advantage. If a negotiator can find out
what is important to the other parties, s/he is more likely to determine areas where compro-
mise or trade-offs are possible.

In the event of the use of dirty negotiating tactics, these need to be identified and addressed
immediately. A negotiator can choose to point out the unacceptability of a strategy that in-
volves bullying or abusive behavior. This may be met with denial; however, there will usually
be change in the party’s strategy nevertheless. Counter-tactics can also be employed to coun-
teract the behavior. Ultimately a party can refuse to continue in such a negotiating environ-
ment. If another negotiating party uses strong ultimatums, it is always permissible to request
an intermission with the aim of returning to the table to draw the party back into negotiation
through the use of questions on how the final offer was decided upon.

Exercises and questions for discussion

1. Which issues can be negotiated in an RTA but not in a multilateral agreement?

2. How did negotiating parties "free-ride" in tariff negotiations?

3. How best can market access and entry barriers be addressed in sectors of export interest to
developing countries, given the asymmetry in negotiating leverage?

4. What flexibility exists for developing country negotiators under GATT Article XXIV?

5. What can northern partners gain from North-South RTA negotiations?

6. What can southern partners gain from North-South RTA negotiations?

7. What can southern partners gain from South-South RTA negotiations?

8. Can a BATNA be identified within an RTA partner’s negotiating strategy?

9. What is a BATNA "reality test"?

10. Are all negotiating strategies "zero sum"? What is integrative bargaining?

11. Are stakeholder consultations always important for successful negotiations?

12. Are coalitions of support always necessary for successful negotiations?

13. What is the best way of dealing with dirty tricks during negotiations?

2 Negotiating trade in goods

Positive versus negative list approaches

Before negotiators can exchange tariff concessions they must come to an agreement on the
fundamental rules and parameters for tariff reduction or elimination, as well as certain negoti-
ating methods and modalities. They should include:
 The base rate or starting point from which tariffs will be reduced;
 The timetable and pace of tariff elimination;
 The method for determining concessions;
 Product classification;
 The reference period for trade data.

As discussed above, the process of negotiating trade agreements on a sector by sector or item
by item basis is not only cumbersome but also susceptible to being captured by domestic in-
terests because they are better able to organize and mobilize around the relevant negotiation
process. To counteract these disadvantages, a distinction is made between negotiations which
agree to reduce duties on products specified in what is called a positive list and those which
liberalize on a broader scope and are implemented on the basis of a negative list of products
excluded from tariff reduction.

Positive lists identify sectors on which commitments are made rather than those on which
they are not. This approach is most commonly associated with the outcome of the WTO Gen-
eral Agreement on the Trade in Services negotiations (see below). However, developing
countries may wish to consider negotiating trade under the positive list approach because it al-
lows economies to liberalize more gradually and can prevent the inclusion of sensitive sectors
into a list unknowingly or without understanding the full implications of opening the market
in a particular sector. While caution is always advisable, negotiators need to be aware of the
drawbacks to the positive list approach. For example, it requires more resources to actually
identify new sectors for negotiation under this system, and potentially significant sectors will
not be included until new obligations are explicitly negotiated.

The negative list approach was employed during the NAFTA negotiations and it commits the
parties to the agreement to full liberalization unless specific exclusions are negotiated. While
this approach incorporates emerging sectors without undertaking cumbersome negotiations,
developing country negotiators should be cautious with the negative list approach because
opening and market access are the central objectives. The negative list approach does not al-
low for nuances in classifying dual-use goods for example. Dual-use items are goods, soft-
ware or technology (including documents or diagrams) which can be used for both civil and
military applications. These goods can range from raw materials to components to complete
systems, or may be items used in the production or development of military goods, such as
machine tools, chemical manufacturing equipment or computers.

Developing countries should consider negotiating provisions to allow for lists to be renegoti-
ated without undue burdens if necessary. It is also possible for an exclusion list to be drawn
up. This could include those products justified under the general exception provisions of
GATT Article XX. However, it is also possible for negotiators to include any other products
for domestic industry protection or other purposes – as long as they are agreed by all the trad-
ing partners involved in the negotiations.

Tariff dismantling modalities and transitional periods

2.1.1 Dismantling modalities

Article XXIV of the GATT requires the elimination of tariffs on substantially all the trade on
products originating in the RTA partner countries. Finding acceptable procedures for achiev-
ing this can pose a challenge to negotiators. Negotiators must always take into consideration
that it is not enough to decide the base rate for tariff reductions but to be able to implement
the final obligations of the treaty. Stakeholders should therefore be consulted during every
stage of the negotiations, in order to ensure their buy-in to the eventual decision and increase
the chances of successfully implementing the treaty.

The usual basis for the negotiation of tariff elimination is the Harmonized Commodity De-
scription and Coding System developed and maintained under the auspices of the World Cus-
toms Organization. However, there is no single approach to tariff reduction or elimination.
The main factor determining the approach is the sector in which the tariffs are to be elimi-
nated. Often the higher tariffs will be concentrated in one or two sectors, such as textiles,
clothing and footwear (TCF) and agriculture.

Negotiators have to decide whether to use either the bound tariffs, which are the tariff rates in-
scribed in the tariff schedule lodged with the WTO as being subject to a contractual ceiling, or
the applied tariffs, which are the tariff rates actually levied by the customs authorities when
the goods are imported. The difference between bound and applied rates can be considerable
and many negotiators settle for using the applied rate used on a particular date because they
offer a better indication of the adjustment policies that will be required because of the agree-
ment.
The NAFTA model provides for the elimination of tariffs on almost all products according to
a phase-out schedule rarely exceeding 10 years. Only a few dairy and poultry products sensi-
tive to Canada (because of domestic supply management programmes) were excluded from
the tariff phase-out schedule with its NAFTA partners. Also sugar, peanuts and cotton be-
tween the United States and Canada are exempt. In addition, a few sensitive products – such
as corn in Mexico and orange juice in the United States – will be eliminated over 15 years.
The NAFTA also specifies that member countries can negotiate the acceleration of their origi-
nal tariff elimination schedule. Two rounds of accelerated tariff reductions were completed by
the end of 2000 which have practically removed the low tariffs on a range of goods that were
considered "nuisance" tariffs.

The approach favored by many developing country negotiators in the FTAA 52 is the "basket
system". In this system, all countries put the goods that have zero tariffs in the first basket.
This might be considered their first offer in the negotiations. Countries can then put goods in
different baskets with different tariff levels and timetables for tariff reductions. Using the bas-
kets framework, tariff ranges can be categorized as follows: zero; up to 5 per cent; 5-10 per
cent; 10-20 per cent; 20-25 per cent; 25-40 per cent. Tariff reduction can also have the follow-
ing staging categories: immediate; 5 years; 7 years; 10 years; 15 years. The last basket can be
for sensitive products that require a 15-year tariff elimination period. Under this approach, de-
veloping country negotiators can present arguments advanced in the context of the smaller
economies size and level of development, in order to obtain special transition mechanisms.
The negotiations can therefore consist of concession trading between countries that have an
interest in different products.

Within the FTAA, this method uses bound tariffs as a basis for tariff reduction or elimination
and because most products already enter the United States market without duty, the negotia-
tors focused on the remaining high tariffs. For these remaining tariffs, a negative list was de-
veloped on the basis of protecting sensitive sectors of the economy, while ensuring that the
loss of revenue from the reduction and removal of tariffs was covered by the necessary fiscal
policy. A developing country negotiator should ensure that where tariff elimination will cause
unacceptable hardship in an industry or occupation, a structural adjustment plan can be drawn
up, which will be phased out at the same time as the tariffs are eliminated.

Box 19: Nicaragua's submission to the FTAA tariff negotiations

I. Market Access
I.1. Tariffs and Non-Tariff Measures

I.1.1. Countries will give immediate access to countries such as Nicaragua for their exports,
and longer periods for their domestic industry. They will also grant a grace period to begin the
process of reduction of tariffs on their imports.
Reduction baskets:
- Immediate
- Short Term
- Medium Term
- A special basket for a reduced list of sensitive merchandise.
- A grace period of "X" years will be considered for countries such as Nicaragua to be-
gin their reduction of tariffs on sensitive goods.

52
After the failure of the Mar del Plata summit in 2005, there seems to be little chance for a comprehensive trade agreement in
the framework of the Free Trade Area of the Americas in the foreseeable future.
I.1.2 As a normal rule, the timetable for the reduction of tariffs will reflect that each country
shall have two lists of reduction offers, the first would apply to countries such as Nicaragua or
like countries, and the second for other countries. Each country will include in its reduction
offer the tariff items in the same "basket", but will have time periods for elimination differen-
tiated between countries such as Nicaragua and other countries.

I.1.3 Countries such as Nicaragua shall apply as their base rate the lowest MFN tariff, result-
ing from the comparison of the tariff in force on the 1 January 2002, with the one in force the
year when they acceded to the FTAA.
The base rate applicable by the other parties to countries such as Nicaragua would be the low-
est tariff resulting from the comparison between:
a) The lowest base rate corresponding to the lowest MFN, resulting from the
one applied on January 1, 2001 and the MFN in force in the year they accede
to the FTAA, reduced by "X" per cent, or
b) The lowest preferential tariff concluded within the framework of a Free
Trade Agreement with any trade partner; or
c) The preferential tariff granted to any country in the hemisphere within the
system of trade preferences, such as the GSP and the Caribbean Basin
Initiative (CBI), preferential agreements in the framework of the Latin American Inte-
gration Association (ALADI), etc.
d) The lowest MFN tariff applied by a Smaller Economy in relation to the tariffs
of other countries. When the base rate from which countries such as
Nicaragua begin the reduction is lower than that of the other countries,
Nicaragua will not initiate its reduction process until the residual tariff of the
other countries is lower than or the same as their base rate.

I.1.4. Customs handling fees will not be increased or established, and such fees will be elimi-
nated upon entry into force of the Agreement, except in countries such as Nicaragua, which
shall be granted a transition period of 15 years. Upon entry into force of the Agreement, con-
sular transactions will be eliminated, including duties and charges relating to imports of any
goods from another Party, except in such countries as Nicaragua, which will reduce such du-
ties no later than 15 years thereafter.

Source: Chaitoo (2002)

2.1.2 Transitional periods

GATT Article XXIV implicitly recognizes that in some cases tariffs can only be eliminated
through a phased reduction of tariff rates within a "reasonable length of time". The Under-
standing on the Interpretation of Article XXIV (see Annex 5 for the full text) explains that the
reasonable length of time should only exceed ten years in exceptional cases.

When negotiating the transition period, the parties must first agree that the tariff applied on a
certain date is their starting point - this is often the date on which the governments agree to
launch negotiations. Parties must also negotiate the number of steps the tariff will go through
to reach zero. Whatever time frame adopted, it must be specified clearly in the agreement or
the schedules to the agreement. It is also considered good practice to negotiate a provision
that allows for accelerated phase-outs, either as a unilateral action or because of a request
from the other party.
The FTAA provided that tariffs should be eliminated in phases: immediate, up to 5 years, up
to 10 years, and longer:
 Tariff elimination to take place from applied levels;
 CARICOM negotiated a facility to start from bound levels for a limited list of agricultural
products;
 CARICOM’s negotiating position indicated that all its sensitive products should be ex-
cluded from reduction or elimination;
 CARICOM agreed to make a two-tier improved offer – LDCs as a group and more devel-
oped countries (MDCs) as a group, the understanding being that LDCs need not improve
their current offer.

Box 20: Transitional periods in the EU-Egypt FTA

The results of the 2001 EU-Egypt negotiations produced an agreement that an FTA would be
established during a 12-year transitional period from the date of entry into force of the agree-
ment. In the third year of the implementation of the agreement, the two parties shall determine
further trade liberalization measures to be applied from the fourth year to their trade in agri-
cultural, fisheries and processed agricultural products.

Egypt negotiated certain exceptional measures for specific periods during the transitional
stage, if and when certain domestic industries face a threat as a result of liberalization of im-
ports of similar goods from the EU. The outcome aims to increase the flow of foreign capital,
expertise and technology to Egypt, while exempting Egyptian exports of manufactured goods
to the EU from tariffs. EU exports of manufactured goods to Egypt are tariff-exempted ac-
cording to the lists and time frame specified in the agreement. Agricultural products and agri-
cultural processed products are treated according to the provisions stipulated in the agreement
which defines certain quotas for specific goods with tariff privileges.

Treatment of sensitive products and sectors

Sensitive products encompass any product that a government seeks to lower disciplines for
than those generally agreed to in the negotiations. They are products which governments be-
lieve would not be able to conform to the general disciplines agreed in the RTA negotiations,
without undermining the ability to achieve important policy objectives such as ensuring food
security, improving livelihood security or advancing rural development. Agricultural products
such as cereals, sugar, milk and root crops have therefore often been identified as sensitive
products or special products.

However, there are no agreed guidelines to identify sensitive products and sectors. Therefore,
negotiating parties do not have to defend the reasons for seeking lower disciplines against a
known standard. In developed country negotiating strategies, sensitive products tend to be re-
lated to environmental protection or food safety. Basic food products and products generating
high tariff revenue are often listed as sensitive in developing country negotiating strategies.

The challenge is to identify a consistent range of sensitive products because negotiators may
have to justify the reasons for requesting exemptions from the other negotiating partners. It
has been noted that an examination of the list of products that are subject to special treatment
in recent trade agreements with the Dominican Republic and Cuba indicates that the only con-
sistent examples are some agricultural products and processed foods (Chaitoo 2002, p. 36).
The reasons given by negotiators for the special treatment granted to these products will in-
clude the need to cushion negative impacts on domestic industry, levels of unemployment, or
government revenue, for example.

Developing country negotiators have generally temporarily excluded specific agricultural

products, such as the special status negotiated for sugar within the MERCOSUR Agreement.
Indeed, a primary feature of North-South RTA negotiations is that agricultural products are
either left out of the agreement or subject to long transition periods while in the negotiations
of non-reciprocal agreements, most sensitive products are either excluded or subject to
lengthy transition periods. Within the NAFTA, there are no SDT provisions, but sensitive
products have a longer time line for liberalization of tariffs (15 years instead of 10). It should
be noted that this applies to all three members, however.

Rules of origin

Rules of origin are used by the customs authorities to determine whether a good can be im-
ported under the preferential tariff. They condition how restrictive a free trade agreement will
be. They are therefore highly technical and negotiating ROOs requires substantial expertise
and preparation from the negotiating team.

RTA negotiations involve agreeing to preferential rules of origin to allow partner economies
to decide whether a good is originating or non-originating, that is, whether or not it is im-
ported from the other partner and qualifies for preferential market access. If a good is held to
be non-originating, it does not qualify for the preferential rules of origin and lower tariff rates.

Negotiators should be wary of agreeing to ROOs which are either very complex or have a lot
of conditions that a good must conform to before it can qualify for preferential market access.
This will reduce the quantity of goods able to benefit from the preferential agreement and cre-
ate conflicts over interpretation of the rules.

Negotiators should be aware of potential conflicts between different ROO systems used by
overlapping RTA members. Importers and exporters are less likely to benefit from the RTA if
large transaction costs are incurred by membership of multiple RTAs with different ROOs.
This is particularly relevant for developing economies with a high proportion of small and
medium-sized firms. All firms will be expected to understand the ROOs and where necessary
adapt their production processes in order to conform to them. If the transaction cost of com-
plying with a ROO is higher than the preferential advantage being accorded by the trade
agreement, then producers will export on the applied conventional rate. The inclination is to
simply disregard the free trade provision as it applies to their goods.

No two agreements have the same rules. Negotiators can agree to use more than one method
in order to ensure that the provisions on originating goods are not circumvented by negotiat-
ing provisions on the prohibition of transshipment for example. Developing country negotia-
tors must also ensure the criteria determining "last substantial transformation" conform to the
methodologies listed in the International Convention on the Simplification and Harmonization
of Customs Procedures (the Kyoto Convention).
Box 21: Comparing methods of rules of origin

1. The change-in-tariff classification method

Advantages:
 More predictable in terms of origin outcomes ("once qualify, always qualify") and there-
fore permits more effective planning;
 Permits precise formulation of conditions determining origin and therefore easier for gov-
ernment to administer;
 Economically efficient because it allows importing from the cheapest source;
 Advantageous for small and medium-sized enterprises because there is less need to main-
tain costly records systems;
 Should assist eventual work in the WTO on multilateral preferential rules of origin.
Disadvantages:
 Possibility of disputes during the phase-out period over the classification of a good;
 Negotiating the specific rules can be an onerous task;
 Difficulties can arise when the free trade partners use many split-subheadings;
 The Harmonized System was developed for the use of customs officials at entry and exit
ports; it does not necessarily reflect production processes;
 The drafting of the rules may become captive to protectionist interests because they can be
tailored to individual requirements;
 As the Harmonized System is normally revised about every five years, it may be neces-
sary to revise the schedule of rules origin from time to time.

2. The process-based method

Advantages:
 Permits precise and objective formulation of conditions determining origin;
 Gives complete scope to reflect the production process.
Disadvantages:
 Negotiating the specific rules will be an onerous task;
 Major changes in production processes will require renegotiation of the rules;
 The drafting of the rules may become captive to protectionist interests because they can be
tailored to individual requirements.

3. The value-added method

Advantages:
 The rule is simple and precise;
 Much of the evidence can be established from commercial records or documents;
 If there is only one value-added threshold covering all products, classification disputes
cannot occur;
 Sectoral pressures are harder to accommodate.
Disadvantages:
 Regardless of the value-added threshold, some goods will always miss out by a small
amount, and this creates frustration;
 Such systems can only be made to work properly through the use of tolerance rules or de
minimis rules;
 Changes in the exchange rate and commodity prices can have an influence on the value of
inputs, which places exporters in a vulnerable position;
 Goods with low overheads, labor and locally-obtained materials compared to the cost of
imported materials may have greater difficulty in satisfying the regional value content;
 Small firms may have difficulty calculating and allocating the relevant costs without ob-
taining additional expertise;
 Differing accounting conventions will lead to disputes over allowable costs.

Source: Goode (2005)

Safeguards and other trade remedies

Safeguards are measures that an importing country can impose in the event that a surge in im-
ports threatens to seriously damage the domestic industry. RTAs negotiators have agreed to
incorporate different systems of safeguards into these agreements, including global safeguards
available under GATT Article XIX and the WTO Agreement on Safeguards. However, gov-
ernments imposing safeguards must satisfy certain conditions and apply them non-discrimi-
nately, or irrespective of the good’s source.

Several safeguard options are also open to negotiators. They may consider the use of transi-
tional safeguards, which tend to be about two years long and are generally limited to the
phase-in periods for tariff elimination under the agreement. Special safeguards are also avail-
able in some agreements for limited product categories, mainly agricultural or textile prod-
ucts. These are usually imposed for about 200 days in critical situations, and are subsequently
subject to investigation.

Some RTA negotiators have found it easier to gain support from key industry when they have
included safeguard provisions in their negotiation position, while other RTAs do not permit
safeguard measures at all, such as the New Zealand-Singapore and the Australia-Singapore
free trade agreements, while in NAFTA and the Canada–Chile free trade agreement, safe-
guards can be imposed only if the surge in imports from another party accounts for a substan-
tial share of total imports.

Negotiators should ensure that they agree to a credible safeguard system which is not open to
abuse. This could be achieved by the inclusion of a provision requiring that the safeguard
mechanism will only be triggered through a petition.

It is also possible to consider SDT on RTA safeguard provisions. This would place the devel-
oped country under a stricter safeguard test than that used by the developing partner. Related,
it could also be advised that a "first threshold" safeguard as applied against a developing
country could be to return to the MFN applied rate. This would insure that safeguards are not
applied in an RTA in a manner that might risk eliminating trade that would otherwise flow
under normal WTO rules.

To date, Asian trade agreements have tended to negotiate less detailed safeguard provisions
than United States agreements. NAFTA and other bilateral agreements in the Americas, such
as Chile-Canada and Chile-United States, explicitly give members the right to impose safe-
guards when an increase in imports damages domestic economies. Alternatively, Australia-
New Zealand, Singapore-New Zealand, and Singapore-Australia agreements state that no
safeguard mechanisms are to be applied by either country, while the ASEAN Free Trade Area
(AFTA) does not even mention safeguards. Singapore-Japan, Singapore-United States, and
the ASEAN-China agreements, however, mention the possibility of applying temporary safe-
guards during the transitional period.

Box 22: Safeguards in the Canada-Chile agreement

The Canada-Chile agreement provides for two types of safeguard action: bilateral and global.
In the case of a bilateral safeguard action, there would need to be a determination that the in-
jury was due to the reduction of duties contemplated in the agreement. In the case of a global
action, the serious injury must have come from all imports. If a global action were under-
taken, the agreement would provide for the exclusion, in certain circumstances, of the imports
from the other party, if it was ruled that such imports did not constitute a substantial share of
total imports and did not contribute significantly to the injury determination. If on both counts
the determination was negative, the safeguard action would not be applied to the partner. If
the determination was affirmative, the global safeguard action would be applied on an MFN
basis to the FTA partner.

Standards, including mutual recognition

The GATT Article XXIV (4) recognizes that the purpose of a customs union or a free trade
area is to facilitate trade between the constituent territories and not to raise barriers to the
trade of other contracting parties with such territories. RTAs therefore often involve mutual
recognition of each other’s certification agencies, standardizing bodies and in some cases mu-
tual recognition of standards through mutual recognition agreements (MRA) because this fa-
cilitates trade amongst the RTA members. RTA chapters on standards, often known as non-
tariff barriers, usually deal with the recognition of standards, the harmonization of standards
and the recognition of conformity assessment procedures to determine whether products or
processes meet the applicable technical requirements in the importing economy.

 Recognition means that while each party to the agreement is free to retain its own
standard, one party agrees to accept that a standard used by another party to the
agreement is sufficiently high to meet its own requirements;
 Harmonization is the agreement that a common standard may apply to all of them, ei-
ther through adoption of an existing national or international standard or through ne-
gotiating a new standard;
 Equivalence means that the parties agree that the mandatory requirements of one party
will meet another’s objectives although the requirements of the other party are differ-
ent.

Many negotiating parties simply want the RTA to affirm their rights and obligations under the
WTO standards agreements. Indeed, negotiating an RTA does not alter the rights and obliga-
tions of economies, unless the parties agree that in their trade relations under the free trade
agreement different rules should apply. Furthermore some RTAs do not even have provisions
concerning standards.

However, RTAs can also contain standards chapters with provisions setting out the core obli-
gations established by multilateral obligations as well as bilateral supplementary mechanisms.
Some RTA negotiators demand a transparency provision in the standards chapters that re-
quires that the economy rejecting the other party’s standards or conformity assessment results
must explain its reasons for doing so.

In some cases, RTA negotiators agree to establish frameworks for the negotiation of mutual
recognition arrangements both for standards and for conformity assessment procedures. Those
negotiating teams which suffer from lack of resources may find that this should be drafted
very broadly to allow for as much flexibility in the future as possible.

Since the GATT/WTO Technical Barriers to Trade and Sanitary and Phytosanitary Agree-
ments carry obligations for members to apply international standards, developing countries
entering into RTAs can also be advised to seek to retain this level of legal protection in ex-
porting into the standard regimes of developed country partners. The GATT/WTO TBT and
SPS Agreements also provide flexibility for developing country members to not adopt inter-
national standards where these are not appropriate for the trade, financial or developmental
needs. Retaining this type of flexibility in an RTA may also be a priority for negotiators from
developing countries. In addition to this, negotiators may also wish to focus on including soft
provisions to facilitate the development of standards and mutual recognition provisions. This
could include measures to provide technical assistance to the developing country parties, co-
operation mechanisms and best endeavor provisions.

Trade facilitation measures

According to the United Nations Economic Commission for Europe (UNECE 2002), trade fa-
cilitation provisions cover:

 The agreement of sale between the buyer and seller;

 The processing of the agreed commercial documentation;
 Compliance with health, safety and other regulations and standards;
 Fulfillment of the required customs and other documents and procedures at the time of
border crossing;
 The efficient movement of the goods from the seller’s to the buyer’s premises;
 Compliance of the goods with the buyer’s requirements;
 Payment for the goods;
 Disposal of goods and end products.

Trade facilitation provisions usually have their own chapter in an RTA, but are occasionally
included in the chapter on trade in goods. The UNECE considers trade facilitation to encom-
pass "the systematic rationalization of procedures and documentation for international trade".
It further defines trade procedures to be the "activities, practices and formalities involved in
collecting, presenting, communicating and processing data required for the movement of
goods in international trade". In APEC, in addition to covering customs procedures and stan-
dards, negotiators included e-commerce and business mobility within trade facilitation.

The aim of negotiating trade facilitation measures in an RTA is to bring down the cost of do-
ing business while simultaneously ensuring the integrity of border controls. Negotiating effec-
tive trade facilitation provisions will considerably enhance an economy’s competitiveness.
Negotiators must therefore ensure that any measures that are introduced to secure or benefit
trade do not complicate efforts to simplify procedures. Trade facilitation provisions should
never be used to support either protectionism or the status quo.
Box 23: The result of cumbersome procedures: Long processing times

It takes 116 days to move an export container from the factory in Bangui (Central African Re-
public) to the nearest port and fulfill all the customs, administrative, and port requirements to
load the cargo onto a ship. It takes 71 days to do so from Ouagadougou (Burkina Faso), 87
days from N’djamena (Chad), 93 from Almaty (Kazakhstan), and 105 from Baghdad. In con-
trast, it takes only 5 days from Copenhagen, 6 from Berlin, 16 from Port Louis (Mauritius), 20
days from Shanghai, Kuala Lumpur or Santiago de Chile. Each additional day that a product
is delayed prior to being shipped reduces trade by at least 1 per cent. Each day is equivalent to
a country distancing itself from its trade partners by 70 km on average. Delays have an even
greater impact on developing country exports and exports of time-sensitive goods, such as
perishable agricultural products.

Source: Djankov et al. (2006)

The objective of the trade facilitation negotiations is to harmonize and simplify customs pro-
cedures around the world as a cost-effective way of reducing non-tariff barriers associated
with trade. High administrative and compliance costs (estimated at 7 to 10 per cent of global
trade) imposed by customs procedures can be traced to excessive documentation require-
ments, lack of automation, lack of transparency in import and export requirements, and cor-
ruption among customs officials, caused partly by overregulation.

Developing country negotiators may find the work of the World Customs Organization a use-
ful resource. The WCO’s mandate is to harmonize and simplify customs procedures world-
wide. The WCO's Kyoto Convention provides a comprehensive articulation of trade facilita-
tion objectives, mechanisms and best practice. While low-income countries will find compli-
ance with the WCO's guidelines difficult due to inadequate infrastructure, negotiators can use
the Convention as both a guideline and benchmark for obtaining human and institutional ca-
pacity building, including valuation and enforcement training and the establishment of the
necessary infrastructure.

Special & Differential Treatment for developing countries

SDT is based on the recognition that the developing countries are placed differently in inter-
national trade and that their difficulties as well as the imperative of promoting social and eco-
nomic development require that they be treated differently.

The basic content of SDT provisions includes:

 Provisions aimed at increasing trade opportunities;
 Provisions that require WTO members to safeguard the interests of developing
country members;
 Flexibility of commitments;
 Transitional time periods;
 Technical assistance;
 Provisions relating to measures to assist least developed country members.

However, the only SDT provision with legal weight attached to it is that which covers transi-
tion periods. Furthermore, as noted earlier in this module, GATT Article XXIV provides very
little flexibilities and does not contain SDT provisions for developing countries. Developing
country members of the ACP have requested that the other members of the WTO include
strong SDT provisions in the revised version of Article XXIV, however, this has not as yet
happened.

South-South agreements covered by the Enabling Clause can include SDT provisions, being
exempt from the requirements of GATT Article XXIV. If SDT were to be really meaningful,
it should involve undertakings by more advanced countries to eliminate exemptions and
deregulate sectors before their developing country counterparts. Developed countries should
set an example in liberalizing sectors before developing countries, and without expecting im-
mediate reciprocity.

An OECD analysis of the SDT provisions of RTAs (OECD 2005) highlighted that there are,
at least on paper, fairly elaborate SDT provisions in RTAs between developing countries (the
so-called South-South RTAs) and examples were given from Africa, Asia and Latin America.
For instance, Annex XVIII of the treaty establishing the Economic Community of Central
African States (ECCAS) sets out five categories to which its 18 members can be signatories.
Extensive SDT provisions were also found in SAFTA, the Pacific Islands Countries Trade
Agreement (PICTA), and the Andean Community (AC). Numerous SDT provisions are also
included in North-South RTAs. The dominant form of SDT in RTAs is trade-related technical
assistance and capacity building (TRTA/CB), while in WTO agreements SDT tends to be
where provisions to safeguard, exempt, or delay the implementation of developing countries'
obligations are more prevalent. Nevertheless, as with WTO agreements, most SDT provisions
in RTAs are of a "best endeavor" nature rather than having a binding impact on signatories.

Box 24: Special & Differential Treatment in CARICOM

The CARICOM RTA includes numerous provisions on SDT and employs a number of non-
economic criteria, such as resource endowments and vulnerability, to identify signatories that
were in a disadvantageous position. CARICOM RTA provisions on SDT include the provi-
sion of financial and technical assistance to governments, special measures to attract invest-
ment and industries, temporary derogations from treaty obligations, measures to assist indus-
tries to become competitive and to promote infrastructure development and the diversification
of economies. To date, the SDT actually enjoyed by eligible CARICOM members has con-
cerned extended implementation periods and greater exemptions from regional obligations.

Exercises and questions for discussion

1. What are the advantages and disadvantages of the positive list system?

2. What sort of mechanisms can be created to offset the loss of revenue caused by tariff re-
duction and elimination?

3. Can GATT Article XXIV provide SDT for developing country RTA partners?

4. What does GATT Article XXIV consider to be a "reasonable length of time" to eliminate
tariffs?

5. Do negotiators have to defend their list of sensitive products under the Enabling Clause?
6. Can SDT be applied to safeguard provisions?

7. Do developing countries have flexibility in applying international standards?

8. Why is it advisable for developing countries to negotiate trade facilitation measures?

9. What kind of SDT and development cooperation is necessary in addressing adjustment

and social costs, as well as trade, financial and development needs of developing coun-
tries?

10. How can such SDT be designed for developing countries under RTAs while existing
WTO rules may constrain the ability of RTA partners to do so?

3 Negotiating trade in services

Market access negotiations modalities

International trade in services differs considerably from international trade in goods, primarily
because services are intangible and can be traded internationally in diverse ways, including
via the internet, through educational institutions, or by individuals taking a holiday overseas.
There is a growing trend towards including liberalization of trade in services within North-
South RTAs. Services are becoming more important to developing country negotiators be-
cause of their potential to complement and strengthen modern domestic economic infrastruc-
ture for economic and social welfare. A strong service sector can add value to and enhance
competitiveness of manufactured, agricultural and mining products and facilitate the transfer
of technology and knowledge to developing economies, which could attract further invest-
ment.

The negotiations of the services chapters generally follow the provisions set out in GATS Ar-
ticle V(1) relating to further liberalization of trade in services within FTAs (see Box 26).
However, negotiators of RTAs have two approaches to choose from when making agreements
on trade in services.

The first is the elimination of discrimination approach governed by Article V of the GATS.
This article requires that parties to an RTA eliminate discrimination in terms of national treat-
ment so that all services and suppliers are treated identically regardless of whether they are
domestic or foreign. However, no obligations are placed on domestic regulatory frameworks
for services. Liberalization and competition are introduced through domestic service suppliers
sharing the market with foreign providers in a competitive environment.

Box 25: Overview of WTO rules on services

Four modes of delivery:

Mode 1: Cross-border supply (e.g. international telephone calls);
Mode 2: Consumption abroad (e.g. tourism);
Mode 3: Commercial presence (e.g. foreign bank branches);
Mode 4: Presence of natural persons (e.g. individuals traveling abroad to supply services).
12 service sectors:
 Professional & Computer;
 Communications;
 Construction & Engineering;
 Distribution;
 Education;
 Environmental;
 Financial;
 Health;
 Tourism & Travel;
 Transport;
 Recreational, Cultural & Sporting;
 Other.

The second negotiating approach is the liberalization of the service sector. This approach will
have more profound consequences because not only is national treatment introduced to the
service sector but domestic regulations must be changed or introduced to prevent legislation
and red tape inhibiting market forces in a particular sector.
Box 26: Provisions forming the basis of RTA service chapters

The following provisions usually form the basis of an RTA's service chapter:
 A broad description of the services to which the agreement applies; many agreements fol-
low the GATS and exempt bilateral air services and services bought by governments for
their own use (government procurement) as well as services supplied by governments nei-
ther on a commercial basis nor in competition with other service suppliers;
 The market access options available to the services providers from the other party; these
usually are all of the four modes of services delivery listed in the GATS;
 An undertaking of national treatment for services covered by the national schedules of
commitments; some agreements also include an obligation to give the other party most-fa-
vored nation treatment for services not yet covered by the schedules - this is not really
necessary because the GATS already contains this obligation;
 Since in many economies some services are supplied by a monopoly provider, the agree-
ment needs to specify what these services are, the extent to which competitors may supply
ancillary services and a guarantee that foreign services firms have access under non-dis-
criminatory conditions to the services provided by a monopoly; note that some free trade
agreements do this through the chapter on competition policy. Regarding the extent to
which, and under what conditions, the parties may impose quantitative restrictions or sup-
ply limitations on their services trade, many agreements simply follow the list of prohib-
ited limitations contained in Article XVI of the GATS where limitations are required to
safeguard the balance of payments. The parties also often use the provisions outlined in
GATS Article XII;
 A description of the extent to which the services regulated by sub-national levels of gov-
ernment (states and provinces) are covered by the agreement;
 Procedures for the recognition, either unilateral or mutual, of licenses and qualifications of
service suppliers of the other party;
 A description of the conditions under which a party may deny preferential treatment to a
service supplier from the other party;
 Arrangements for the inscription of commitments in the services schedules, procedures for
changes to these commitments and any mechanisms for their regular review.

Source: Goode (2005)

RTA’s services provisions need to be supplemented by schedules of commitments, which are

adopted either through the positive or negative listing system similar to that described above.
As noted above, the positive list approach is a cautious negotiating option because preferential
treatment will apply to those services explicitly set out in the schedule. Many negotiators are
familiar with it from multilateral services negotiations in the GATS and commonly use the
United Nations [Provisional] Central Products Classification (UNCPC) to identify a service
with a relevant product number, where available, while sectoral commitments are further di-
vided into four modes of services delivery. However, this approach is time-consuming both to
negotiate and amend because many services have to be negotiated from the perspective of
four modes of delivery. It can also be viewed as a reactive approach to liberalizing an econ-
omy.
Negotiators can take a simpler approach which lists sectoral commitments on a positive list-
ing system, but without specifying the mode of supply. This strategy was taken by the Thai-
land-Australia Free Trade Agreement (TAFTA) and offers an easier way for negotiators to
make progress without making commitments either without careful analysis or without being
fully aware of the market consequences of a particular commitment.

While the negative listings approach offers the advantage of automatically applying preferen-
tial treatment to new service activities unless explicitly excluded in the agreement, negotiating
negative schedules is not necessarily easier. This will depend on the level of discrimination in
the existing regulatory system. Inexperienced negotiators are often wary of the negative list-
ing system because they are opening up future services sectors without any knowledge of the
future. This concern must be balanced by the fact that all governments retain the right to regu-
late their economies.

Given the multiple tracks along which services trade is being liberalized, negotiators must in-
corporate methods to ensure policy coherence by identifying the commitments to make on
each track assessing all available implementation experiences to date. North-South agree-
ments, such as the Cotonou Agreement, tend to demand a wider coverage of services sectors
and deeper liberalization commitments than either multilateral or South-South agreements.
South-South agreements however, are often subject to implementation and compliance prob-
lems which can undermine their objectives.

Developing country negotiators could therefore address the issue of sequencing of sectors in
order to ensure development gains. Liberalizing producer services first improves competitive-
ness in other services and goods sectors, just as in the case of tariff reductions on intermediate
production inputs. Additionally, developing countries are often advised to undertake full lib-
eralization initially only among other developing countries before moving on to northern part-
ners/industrialized countries.

Once again, caution is required when negotiating areas where the GATS has not been able to
make progress on, such as government procurement of services. Formulating sector-specific
emergency safeguards would facilitate the liberalization of services in sectors where foreign
entry can be particularly disruptive for domestic industry, while the adoption of very liberal
rules of origin for services and investment would prevent third party investors from bending
the rules to their own ends.

Sector-specific issues

3.1.1 Financial services

There is a wide variation in the modalities adopted for liberalization of trade in financial ser-
vices. Financial services can be covered by a specialized text in a separate chapter or annex of
the agreement, designed to take account of the special sensitivities of the financial services
sector. Financial services may also be negotiated as sector-specific disciplines of a very gen-
eral nature within the chapters on services or investment, with a commitment to develop more
detailed disciplines in future. Finally, financial services are covered by the general provisions
on services without being specifically mentioned. In agreements such as MERCOSUR and
the Andean Community, moves have also been made toward the harmonization of financial
regulations.
The negotiations on financial services must describe:
 The categories of financial services that are permitted to operate under preferential condi-
tions;
 The services they are able to sell;
 The conditions under which they may sell them;
 The removal of unnecessary obstacles to financial flows, including certain excessive fees
earned and payable for the provision of financial services.

Developing country negotiators are dealing with a very sensitive sector of the economy and
the obligations agreed to will entail a significant reorientation of domestic policy towards fi-
nancial services. This must be carefully planned and discussed with key stakeholders to en-
sure the obligations are not too onerous or unrealistic. Developing country negotiators should
be wary of negotiating a financial services chapter such as that in the United States-Chile or
United States-Singapore FTAs.

Unilateral liberalization by Singapore in the wake of the East Asian crisis has gone well be-
yond its GATS commitments. The provisions apply to investors and investments as well as
cross-border trade. National treatment and MFN principles are included alongside a market
access clause. This provides that measures by a party shall not impose limitations on the num-
ber of financial institutions, the total value of financial service transactions, the total number
of financial service operations and the total number of natural persons employed; nor should
the parties restrict or require specific types of legal entity or joint venture. Each party must
also permit a financial institution of the other party to supply any new financial service that is
permitted to its own institution. There are also liberalization clauses for cross-border trade and
senior management and boards of directors. There are also annexes of non-conforming mea-
sures and general exceptions.

The United States-Chile and United States-Singapore FTAs exhibit the greatest degree of new
liberalization in the financial services sector. Compared to the other RTAs analyzed these two
FTAs exhibit:

 Deeper opening of investment, including provisions to allow branching and greater open-
ing of the insurance sector;
 Deeper opening of cross-border trade;
 Deeper disciplines on transparency;
 Deeper opening of financial services supplied by non-regulated financial institutions;
 Limitations on capital flow restrictions, to accompany the enhanced opening of cross-bor-
der trade.

At present developing economies are primarily importers of financial services and negotiating
these provisions with developed countries might seem a logical next step for those govern-
ments wishing to develop financial services markets. However, the market access priorities of
the developed partners will not necessarily complement development priorities. Negotiators
might find that regulatory cooperation and harmonization in the context of sub-regional inte-
gration initiatives among developing economies, such as MERCOSUR and the Andean Com-
munity, is a more appropriate strategy. This can be used to prepare the financial sectors of the
developing economies more gradually for the tougher competition they will face as a result of
greater RTA services liberalization. Such a "stepping stone" approach is also more likely to
create buy-in from those stakeholders most affected by any market opening.
3.1.2 Telecommunications

RTA negotiations on telecommunications can be complex and often require a separate chapter
in the agreement. Negotiators can choose to negotiate the rights of obligations of parties in re-
lation to this service in great detail, while other negotiating strategies have decided against a
separate set of provisions for telecommunication services and regard them as basic services
governed by the general services provision.

Telecommunications negotiations tend not to apply to broadcast or cable distribution of radio

and television stations because the telecommunication market has tended to be dominated by
a monopoly or is newly deregulated without strong competitive conditions operating.
Telecommunications negotiators need to create competition elements to these provisions that
ensure service suppliers have unrestrained access to the existing telecommunications infra-
structure and specifically prohibit dominant telecommunications providers from blocking en-
try to the market. This chapter normally has both services and competition elements. Another
reason is that some suppliers simply want to sell some specialized services using the available
communications network.

Box 27: Potential provisions of a chapter on telecommunications services

The chapter on trade in telecommunications services can include:

 Enterprises of the other party are guaranteed access to the use of any public telecommuni-
cations service offered by the other party in its territory or across its borders;
 Access conditions may be imposed only to the extent that they safeguard the responsibili-
ties of the providers of telecommunications services and protect the integrity of public net-
works;
 Any universal service obligation must be administered in a transparent, non-discrimina-
tory and competitively neutral manner to ensure that it is no more burdensome than neces-
sary for that type of service;
 Interconnection with the suppliers of public telecommunications services of the other
party must be guaranteed;
 Number portability must be available where a user changes to another supplier within the
same location;
 Scarce telecommunications resources must be allocated in a timely, transparent and non-
discriminatory manner;
 Each party must ensure that the other party has reasonable and non-discriminatory access
to submarine cable systems;
 Major suppliers in either party must give public telecommunications suppliers of the other
party the same treatment as their subsidiaries, affiliates and non-affiliates in similar cir-
cumstances;
 Measures must be in place to prevent major suppliers from engaging in anti-competitive
cross-subsidization, using information they have obtained from competitors with anti-
competitive results and not making available necessary technical information;
 Suppliers of public telecommunications services and value-added services must be al-
lowed to choose their preferred technologies, except where this would clash with legiti-
 mate public interests; and enterprises supplying value-added services cannot be compelled
to supply such services to the public generally, forced to justify their rates, file a tariff for
such services, and be required to interconnect their networks with any particular customer
or conform to any particular standard or technical regulation apart from that required for
connecting with a public telecommunications network;
 Procedures to be followed by regulating bodies, especially those relating to impartial deci-
sion-making, transparency and technical standards;
 Provisions covering the behavior of monopolies and dominant suppliers.

Source: Goode (2005)

A comprehensive telecommunications model can be seen in the chapter on telecommunica-

tions in the United States-Singapore FTA. There are provisions to ensure that enterprises of
the other party have access to the use of any public telecommunications transport networks
and services offered in the country. There are other provisions with obligations on parties to
ensure that suppliers of telecom services provide interconnection with facilities of suppliers of
public telecommunications services of the other party, and additional obligations regarding
treatment by major suppliers, competitive safeguards, unbundling of network elements, co-lo-
cation, resale, interconnection, pricing of leased circuit services etc. There are also provisions
relating to independent regulation and privatization, universal service, licensing process, allo-
cation and use of scarce resources, etc.

A more incremental "stepping stone" approach can be seen in the Andean Community which
decided to liberalize all telecommunications, with the exceptions of sound radio and TV
broadcasting, in 1999. By 2001, the Andean Committee of Telecommunication Authorities
(CAATEL) approved a Strategic Plan for the Development of Andean Telecommunications to
guide government decisions for promoting and developing this sector.

The Chile-Mexico FTA may be seen as a half-way approach with general requirement to
guarantee the other party may buy, rent and connect equipment that interfaces with public
telecommunications networks. Parties must also ensure that the prices of the provision of pub-
lic telecommunications services reflect the economic costs directly related to the benefit of the
services and that people of the other party can use the networks or public telecommunications
networks.

Rules on services

3.1.3 Domestic regulation and the "necessity test"

There has been an extensive discussion in the WTO regarding the need for a necessity test to
validate domestic policy measures as being the "least trade restrictive" to meet the stated pol-
icy objective. This goes under the auspices of GATS Article VI and the Working Group on
Domestic Regulation. The strictest version of this test proposed would be "not more burden-
some than necessary".

Developing countries are generally united in opposing the introduction of a necessity test
within the WTO because of the need to safeguard regulatory autonomy. To include a neces-
sity test within an RTA would therefore be signing up to a WTO plus obligation. Developing
country negotiators should be wary of agreeing to an outcome that imposes new obligations
that are unacceptable to developing countries within the WTO.
3.1.4 Safeguards, subsidies and government procurement

These regimes are not covered in the current GATS at all. There have been submissions in the
Doha negotiations for the possible inclusion of provisions covering these regimes. Developing
countries have already submitted some clear positions on these regimes. Any developing
country involved in an RTA negotiation where these regimes are being raised for considera-
tion should familiarize themselves with the submissions filed in the WTO Doha negotiations.
For example, developing countries are strongly favoring a safeguard provision in the GATS;
this could have implications for developing country positions taken when negotiating an
RTA.

4 Negotiating regulatory issues

Intellectual property rights

All RTA negotiations on intellectual property rights take the rights and obligations of the par-
ties under the WTO TRIPS agreement as a starting point. It is possible for negotiators to tailor
an agreement to the needs of the RTA by choosing to include provisions from a wide spec-
trum. Developing country negotiators may decide to simply cooperate in the implementation
of the TRIPS agreement, or they may expand this provision to include cooperation in the en-
forcement of their laws to protect intellectual property rights owned by the other party.

Some negotiating parties wish for additional obligations such as an agreement to accede to or
ratify within a given time period:
 The WIPO Copyright Treaty;
 The WIPO Performances and Phonograms Treaty;
 The Hague Agreement Concerning the International Registration of Industrial De-
signs.

The strongest type of agreement can require the parties also accede or give effect to:
 The Convention Relating to the Distribution of Programme-Carrying Signals Trans-
mitted by Satellite;
 The International Convention for the Protection of New Varieties of Plants;
 The Patent Cooperation Treaty;
 Articles 1 through 6 of the Joint Recommendation Concerning Provisions on the Pro-
tection of Well-Known Marks;
 The Protocol Relating to the Madrid Agreement Concerning the International Regis-
tration of Marks.

A number of the WIPO Conventions are not widely ratified by developing countries. Negotia-
tors should consider the cost of implementing these agreements and the likelihood that they
may be applied to all WTO members and not just the regional members selectively.

Investment

The rules on investment determine under what conditions an investment, or an application to

invest, from the other party to the free trade agreement receives preferential treatment. The
outcome of these negotiations can therefore influence investment decisions considerably be-
cause the investment chapter is concerned with the movement of capital from one party to the
agreement to another party and with creating a favorable climate for investment. Negotiators
may draft the provisions relating to investment promotion and protection separately from
those on investment liberalization, particularly if these governments have different depart-
ments for dealing with these policies.

Negotiators need to define investment with a high degree of precision, although there is some
convergence in the terminology of the various investment promotion and protection agree-
ments (IPPAs) and BITs that have already been negotiated. Developing country negotiators
may wish to use these as a starting point for negotiating their chapter on investment.
The content of the investment chapter typically covers:
 A description of the type of investments to which the chapter applies;
 A description of the treatment extended to investors and their investments under the
agreement, with national treatment being the basic rule;
 Prohibition of performance requirements;
 Provisions governing the treatment of intra-corporate transferees (this is often done in
a separate chapter on business mobility);
 In federal systems of government, a description of the extent to which an investment
may be subject to the jurisdiction of a state or province;
 A description of the conditions under which a party may deny preferential treatment to
an investor or an investment from the other party;
 A range of investment promotion and protection provisions, including an article on
payments and transfers;
 A provision governing the settlement of disputes over matters arising from the agree-
ment (both between governments and between investors and governments);
 Arrangements for the inscription of commitments in the investment schedules, proce-
dures for changes to these commitments and any mechanism for their regular review.

Negotiators may wish to distinguish between the nature of commitments before and after the
investment is made (or the pre-establishment and the post-establishment phase). The choice of
commitments can range from the investor and his investment receiving national treatment af-
ter establishment, to the application of national treatment for both phases. Such non-discrimi-
nation covers all investment activities including the establishment, acquisition, expansion,
management, operation, sale, etc. of an investment. Negotiators may also undertake a most-fa-
vored nation obligation.

The investment chapter can also contain provisions with an obligation to accord investments
from the other parties a minimum standard of treatment. This is described, for example, in the
Chile-United States FTA, as "treatment in accordance with customary international law, in-
cluding fair and equitable treatment and full protection and security". "Fair and equitable
treatment" is defined as including "the obligation not to deny justice in criminal, civil or ad-
ministrative adjudicatory proceedings in accordance with the principle of due process embod-
ied in the principal legal systems of the world". The obligation concerning "full protection and
security" requires the parties to provide the level of police protection required under custom-
ary international law.

Most investment chapters in free trade agreements, e.g. the Chile-United States FTA, prohibit
a range of performance requirements and often also the "receipt of an advantage" subject to
meeting certain performance requirements. The advantage need not be defined but will tend to
include actions such as the payment of governmental subsidies or according more favorable
treatment in government purchases, etc. Negotiators can also include provisions which require
the parties to permit all transfers relating to an investment covered by the agreement to be
made freely and without delay.

While there are existing provisions within international law governing the forcible acquisition
of an investment belonging to a private investor if certain conditions are satisfied, the chapter
on investment will also contain provisions to ensure that in the event of expropriation:
 It is for a public purpose related to the internal needs of the economy and under due
process of law;
 The expropriation is non-discriminatory;
 The expropriation is accompanied by the payment of prompt, adequate and effective com-
pensation.

Negotiators should also consider whether to include or not include a provision in the invest-
ment chapter covering expropriation by stealth, which happens when an investor experiences
such difficulties in operating that the investment loses its value and is only worth something
to the host government. Investment schedules are negotiated with the aim of offering potential
investors within the RTA a clear understanding of the investment climate in the partner econ-
omy. Schedules only set out how a foreign investor or investment will be treated differently
from domestic investors or investments.

Investment commitments are most commonly negotiated as negative listings. The schedules
are divided into horizontal and sectoral commitments, along with schedules of non-conform-
ing measures and schedules of reserved measures. Horizontal commitments apply to invest-
ment activities across the board and tend to focus on issues including foreign investment ap-
proval procedures, land purchases, foreign exchange regulations or eligibility for government
subsidies.

Developing country negotiators should use the schedule of non-conforming measures to list
those measures that are not fully in conformity with the liberalizing provisions of the agree-
ment, sometimes stating that a measure will be brought into conformity with relevant provi-
sions, possibly stating a certain time frame. The reserved sectors schedule lists sectors where
the parties can undertake unilateral changes without contravening the provisions of the agree-
ment. This will also be of use to developing country governments seeking flexibility within
the investment chapter. Although classifying a sector as reserved does not necessarily prohibit
foreign investment altogether, it may rather subject it to tight controls.

To increase clarity while conserving resources, negotiators often choose to list services and
investment measures in the same schedule. Negotiators can also choose to include investment
under the general dispute settlement provisions of the RTA. Some RTAs such as NAFTA
have negotiated provisions under the investment chapter which permit investors to launch a
claim against one of the parties in relation to the investment provisions generally.

One attempt to develop a quantitative measure of the degree of policy autonomy preserved
under an international investment agreement is a "Flexibility for Development" index
(Haslam 2007) based on the UNCTAD's concept of "flexibility for development". The index
assigns numerical scores to agreements based on four criteria:
 The objective of the treaty – is it pro-development?
 Special and differential treatment for developing countries;
 Substantive provisions (where flexibility is valued);
 Application (the force of the treaty).

With this index, statistical analytical methods can be applied to assess the development bene-
fits of different kinds of agreements in preparation for negotiations.

Competition policy

RTAs often include statements to the effect that both public and private anti-competitive acts
can obstruct the benefits of liberalization and that competition or antitrust provisions are nec-
essary to support the objective of removing unnecessary barriers to trade. However, the scope
of the competition chapter can vary greatly.

Shallow integration measures, such best endeavors in cooperation, are voluntary and may
have little operational impact. This may be the case if, for example, the parties to the agree-
ment do not have sufficient resources to cooperate, or if some have sophisticated competition
regimes while others have either no regime at all or have only just begun to introduce compe-
tition law and build the institutions and capacity needed to implement such laws. Agreements
may include negative or positive comity provisions. Negative (or traditional) comity means
that a national competition authority takes account of the interests of third parties in any in-
vestigation. Positive comity means that the relevant authority in country A can request the
competition authority in country B to investigate anti-competitive practices within its jurisdic-
tion that affect the market conditions in A. Cooperation on cases may also include provisions
concerning notification of any investigation and its outcome, and/or provisions on resolutions
of disputes. Deeper integration provisions require legally binding cooperation, positive and
negative comity and dispute resolution provisions.

Box 28: The scope of the competition chapter: Classifying competition provisions
(Evenett 2005)

1. Measures relating to the adoption, maintenance, and application of competition law;

2. Provisions relating to the cooperation and coordination of activities by competition law
enforcement bodies;
3. Provisions relating to anti-competitive acts and measures to be taken against them;
4. Provisions relating to non-discrimination, due process, and transparency in the statement
and application of competition law;
5. Provisions to exclude the use of anti-dumping measures against the commerce of signato-
ries;
6. Provisions concerning the circumstances and conditions under which recourse to trade
remedies (such as antidumping measures, countervailing duties, and safeguards) are per-
mitted;
7. Provisions relating to the application of dispute settlement procedures in competition pol-
icy-related matters;
8. Provisions relating to flexibility and progressivity sometimes referred to as special and
differential treatment provisions.

At the multilateral level, many developing country negotiators have argued against introduc-
ing any obligations relating to competition policy within the GATT until developing countries
reach a greater level of maturity, although some relevant provisions were negotiated for the
GATS. Those economies with a greater history of cooperation on competition issues find it
easier to negotiate more substantive obligations. This is reflected at the regional level, where
most agreements involving developing countries are confined to cooperation activities. While
the chapter on telecommunications services, for example, may include more detailed provi-
sions covering the obligations of the parties in respect of monopoly suppliers or dominant
suppliers, or in maintaining measures to combat anti-competitive activities. There is some
consistency on provisions in North-South RTAs depending upon the developed country part-
ner. Canada and United States RTAs emphasize cooperation of competition authorities. EU
RTAs emphasize harmonization of competition law including establishing a supranational
agency.
SDT provisions are relatively scarce in the competition chapter of RTAs. Where they are in-
cluded, they fall into four general categories:
 Provisions that safeguard the interests of less developed partners;
 Exceptions and exemptions from some obligations;
 Transitional time periods;
 Technical assistance.

If negotiators decide to negotiate a competition chapter, developing countries should insist

that SDT treatment is included. Where they do not yet have a domestic competition law or it
is still nascent, developing countries may need SDT treatment to ensure reasonable adjust-
ment for their industries. In developing economies, many anti-competitive practices are con-
ducted by foreign companies affecting the developing countries’ domestic market and the do-
mestic countries’ exports into foreign markets. Developing countries need extra cooperation
from the developed countries if they are to address these practices adequately in terms of im-
plementation, investigation and enforcement. Special measures such as transition periods and
unilateral technical assistance from the developed partner can also be included within the
RTA competition provisions.

Government procurement

Box 29: The United States-Chile FTA chapter on government procurement

The United States-Chile FTA has a comprehensive government procurement chapter with a
primary aim to "strive to provide comprehensive coverage of procurement markets by elimi-
nating market access barriers to the supply of goods and services, including construction ser-
vices". The scope and coverage apply to any measure relating to procurement "by any con-
tractual means, including purchase and rental or lease, with or without an option to buy, build-
operate-transfer contracts, and public works concession contracts". Excluded areas are non-
contractual agreements or assistance provided by government, such as grants, loans and subsi-
dies; purchases funded by international grants; hiring of government employees; and services
for regulated financial institutions. The agreement covers procurement carried out by entities
listed in an annex. For Chile, these include 20 federal ministries, many regional governments
and 341 municipalities. For the United States, they include 79 federal departments and many
offices of state governments. The same annex has also specified the same threshold levels for
both countries. The levels are $56,190 for procurement of goods and services, $6.48 million
for procurement of construction services for the central government level, and $460,000 and
$6.48 million respectively for the sub-central level.

Government procurement covers all expenditure spent on identifying, acquiring and disposing
of goods and services by a government and its agencies, although not state-trading enter-
prises. The RTA provisions on government procurement aim to reduce and remove govern-
ments’ preferential procurement policies in many areas of trade. The aim of such provisions is
to de-link government procurement policies from industrial development objectives and pro-
hibit "buy-local" policies which prevent the competitive purchase of goods or services, i.e. a
market open to foreign suppliers. The main general principles are therefore national treatment
and non-discrimination.
Given that developing countries’ government procurement level is approximately 15 per cent
of GDP, and for developed economies about 20 per cent, there will be some entrenched do-
mestic interests to address before negotiating a chapter on government procurement. Prepar-
ing the schedules of government procurement commitments is very time-consuming and com-
plicated. Negotiators must be careful to consult and involve all relevant stakeholders in this
process for the outcome to be broadly acceptable.

The provisions on government procurement will set out the list of government bodies covered
by the agreement and define the extent and minimum value of the coverage of government
purchases (see Box 29 for an example). It will also define the tender procedures, decision-
making processes and the avenues available to unsuccessful bidders who want to challenge a
bid. A plurilateral agreement on government procurement was also negotiated in the WTO
covering rules, procedures and requirements for government purchasing. However, only 28
governments have signed up for this. This is partly because in many countries, particularly de-
veloping countries, government procurement has had a significant economic, social and polit-
ical role. Governments have used expenditure levels as fiscal policy to control and direct do-
mestic economic growth. National policies have therefore given preference to local firms,
suppliers and contractors to increase the benefits of local development. Preferences may also
have been made for particular social groups or regions in order to prevent social exclusion and
increase societal cohesion. Most developing countries would have to undertake substantial re-
forms and introduce new procedures to implement WTO obligations. Developing country ne-
gotiators may feel the WTO provisions covering government procurement are not appropriate
for political or security issues.

It is possible to negotiate a framework for cooperation enabling inclusion of disciplines on

government procurement at a later stage. In this process, developing countries are able to fol-
low a more gradual and incremental process. This can reassure governments and key stake-
holders that certain purchases and sectors can be excluded – temporarily or otherwise – from
the agreement. For this process, negotiators may find the APEC Principles on Government
Procurement a more useful guide. These principles include transparency, value of money, ac-
countability and due process. Topics usually covered by a comprehensive chapter on govern-
ment procurement are listed in Box 30.

Box 30: Topics covered by a chapter on government procurement

A comprehensive chapter on government procurement usually covers:

 Agencies and their officers must ensure that any procurement process is open and trans-
parent, and that decisions are justified;
 Agreement on processes which support appropriate scrutiny of the procurement activities
of the parties;
 Preparation of a list of governments, agencies and authorities to whom the procurement
principles apply (this list may include central government entities, state, provincial or pre-
fectural government entities and local government entities);
 A listing of procurements which are exempt from the agreement, such as purchases under-
taken by defense departments for national security objectives;
 Usually the parties are required to accord the goods, services and suppliers of the other
parties national treatment, i.e. treatment no less favorable than they give their domestic
goods, services and suppliers;
 The minimum value of goods and services purchases covered by the provisions on gov-
ernment procurement; this may vary according to the level of government;
 A general requirement for each party to publish its government procurement rules and
principles, such as the tender process and tender conditions, publishing requirements, time
limits for the tendering process, etc.;
 Protection of intellectual property rights tenderers and suppliers; protection of confiden-
tial information;
 The manner in which a decision concerning a successful tenderer is made public; usually
through the publication at least of the name of the purchasing entity, a description of the
goods or services that have been purchased, the name of the successful supplier and the
value of the winning contract;
 The rights available to unsuccessful tenderers (i.e. the appeals provisions) if they wish to
challenge a tender decision and the procedures they must follow; these do not usually dif-
fer from those available to unsuccessful domestic tenderers;
 Agreements also tend to specify that a challenge by an unsuccessful bidder must be heard
by an independent administrative or judicial authority, including an outline of the proce-
dures to be followed to ensure fair treatment of the appellant.

Environment and labor standards

There is little consensus on the place of environmental and labor issues in RTAs. In some
cases they are not referred to while others, most notably RTAs involving the United States,
contain separate chapters on both labor and the environment. RTAs can be grouped according
to their scope and institutional characteristics along a spectrum ranging from a pure trade mo-
tivation to a full incorporation of trade with labor or environmental standards. Members of
ASEAN, for example, can be placed at the pure trade motivation end because they do not
want these issues to be viewed as trade-related within RTA negotiations. At the other end of
the spectrum, the EU negotiated a system of common standards and binding norms that can be
legally enforced by the European Court of Justice. NAFTA is a halfway point, because as
noted, it contains separate but significant agreements.

Any party negotiating an RTA with the United States will have to prepare for the mandatory
inclusion of environmental and labor standards. Two of the six policy objectives of the United
States Trade Promotion Authority Bill (2005) are: to negotiate trade and environmental poli-
cies that are mutually supportive and protect and preserve the environment and enhance the
international means of doing so while optimizing the use of the world’s resources; and to pro-
mote respect for workers' rights and the rights of children consistent with the core labor stan-
dards of the International Labour Organization.

Developing countries have tended to resist the inclusion of labor and environmental provi-
sions on sovereignty principles and concern that enforcing such standards will increase their
labor costs and drive down their comparative advantage. Latin America and the Caribbean ne-
gotiators have strongly rejected the imposition of trade sanctions for non compliance of envi-
ronmental or labor legislation. Nevertheless, most RTAs contain language recognizing the
need for environmental protection and the achievement of sustainable development objec-
tives. However, they differ significantly in the institutional structure through which these
principles are administered. In the NAFTA for example, a side protocol requires that the par-
ties create a dedicated institution to ensure respect of the agreement’s environment-related
obligations, through its secretariat and mandate to investigate and if necessary impose trade
sanctions on cases of lax compliance. This model has been replicated in the NAFTA mem-
bers’ bilateral agreements, such as the Canada-Chile or Canada-Costa Rica agreements. The
preamble to the MERCOSUR treaty on the other hand, recognized the need for environmental
protection and the achievement of economic growth in a sustainable way before an environ-
mental agreement could be negotiated later in 2001 but did not include rigorous environmen-
tal institutions. While environmental, labor, and other social standards advocated by northern
RTA partners are potentially beneficial to developing countries, negotiators must prepare
thoroughly for these negotiations because the outcomes can be costly and difficult to imple-
ment.

Exercises and questions for discussion

1. What are the advantages and disadvantages of using the negative list system when negoti-
ating a services agreement?

2. What would be the starting point for negotiating a TRIPS chapter in an RTA?

3. What is the reserved sector in an investment chapter?

4. What is the difference between a positive and a negative comity provision?

5. What SDT options can exist in an RTA’s competition chapter?

6. What advantages would a regional government procurement agreement have compared

with signing up to the existing WTO plurilateral agreement?

7. Which RTA has the most integrated environmental and labor laws?

8. Which RTA partner requires environmental and labor provisions and understandings?

9. What are collective preferences, and do developing countries have them?

5 Negotiating legal, institutional and other issues

Dispute settlement mechanism

Most RTA negotiations agree to include a separate chapter outlining mechanisms available to
resolve disputes that may occur related to the obligations and rights of the agreement. This
will be in addition to dispute settlement procedures available under specific trade areas, such
as in the investment chapter. At a multilateral and plurilateral level there tend to be formal
dispute settlement rules and mechanisms. This is not the case in RTAs, although in rare cases
such as the EC treaty private rights of action are permitted, unlike the WTO. In most RTA ne-
gotiations the approach is softer than this. Parties will tend to agree to provisions that attempt
to resolve disputes initially through consultation or mediation, before moving on to arbitration
if necessary. Alternatively, negotiators can chose to conclude agreements that are very de-
tailed in setting out the arbitration process, or conversely state that the proceeding should fol-
low an accepted existing framework such as the United Nations Commission on International
Trade Law (UNCITRAL) Arbitration Rules.

An innovation in the Australia-United States free trade agreement designed to deal with situa-
tions where a party considers that it cannot offer trade benefits is the option for it to pay a
monetary assessment instead. The monetary assessment will be set at 50 per cent of the value
of the suspended benefits determined by the parties unless they agree otherwise. A further in-
teresting point is that this monetary assessment can be used for initiatives to facilitate trade
between Australia and the United States. Such a provision might be particularly useful for
federal systems where the party to the agreement (i.e. the central government) may have lim-
ited ability to deal with the removal of an impediment in the short term.

Within the Andean Community, the Court of Justice is the jurisdictional arm of the Commu-
nity. When a dispute arises the general secretariat is charged with the administrative investi-
gation (also known as the pre-litigation phase) to determine whether parties are responsible
for non-compliance. It is also charged with monitoring the Andean juridical system to ensure
that it remains consistent. The court has jurisdiction over three kinds of action: nullification,
non-compliance and pre-trial interpretation. The court has the competence to settle, via arbi-
tration, any disputes which may arise as a result of the interpretation or application of con-
tracts, accords or agreements signed between bodies and institutions of the Andean integration
system. The court and the general secretariat may also settle via arbitration any disputes citi-
zens may submit concerning the application or interpretation of private contracts regulated by
the Andean juridical system.

It is prudent for negotiators to include a clause, sometimes known as the "forum exemption
clause", which outlines how the regional dispute settlement system relates to the WTO Dis-
pute Settlement Understanding in the event that a dispute can be brought before both mecha-
nisms. In order to enhance legal certainty, transparency, and reduce future costs, negotiators
may agree to avoid facilitating forum shopping by parties to the dispute, who may prefer the
interpretations, provisions or power of one body over the other, depending on the dispute at
hand. This strategy occurred in a dispute between the United States and Canada over publica-
tions. Despite both parties belonging to NAFTA, the United States preferred to take the dis-
pute to the WTO, where there are no provisions exempting cultural goods or services from the
members' general obligations under the agreement. This can be avoided, as in the Thailand-
Australia RTA, where Article 1601 requires that once a dispute settlement procedure has been
initiated between the parties with respect to a particular dispute under either the dispute settle-
ment chapter or under any other international agreement to which the countries are parties,
that procedure shall be used to the exclusion of any other procedure for that particular dispute.

The remedies that are available under RTAs can range from formal actions to rectify the
breach of obligations or rights, either immediately or within a reasonable time frame. If recti-
fication is unavailable parties can choose to negotiate compensation measures payable in the
form of trade measures, for example by offering better access in an area not related to the dis-
pute or by denying normally available benefits proportionate to those withheld in the dispute.
The level of compensation and the way it might be given to the other party usually requires
careful negotiation.

With respect to dispute settlement and WTO rules on RTAs, the negotiated outcome should
respect the provisions of WTO legislation on regionalism and preferences that limit regional
jurisprudence from overriding the operations and prerogatives of the CRTA. While this may
seem a low priority, negotiators may also wish to ensure that when a third party seeks com-
pensations against an RTA involving both developed and developing countries, only compen-
sations that minimize the costs at the expense of the developing party shall be authorized.

Developing country negotiators should propose that the dispute settlement chapter contains
the principle that parties pay special attention to the particular concerns and interests of devel-
oping countries. This could include the requirement to provide legal advice and assistance to
developing countries or longer time periods to comply with dispute settlement procedures.
Formal consideration to a party's level of development in dispute settlement may also be ne-
gotiated, with the requirement to establish special procedures to ensure effective access to dis-
pute settlement for developing countries.

Box 31: The proposed dispute settlement chapter of the Free Trade Agreement of the
Americas

Part One: General Provisions

1. Chapter-specific Definitions
2. Scope and Coverage, including relationship to provisions in sub-regional agreements
3. Principles
4. General Provisions
5. Choice of Forum

Part Two: Pre-Panel Process

1. Request for Consultations
2. Consultations
3. Cases Involving Perishable Goods
4. Good Offices, Conciliation and Mediation
5. Consolidation of Procedures
6. Amicable Settlement

Part Three: Neutral Panel Process

1. Request for the Establishment of the Neutral Panel
2. Establishment of a Neutral Panel
3. Roster of Panelists
4. Qualifications of Panelists
5. Terms of Reference of the Neutral Panel
6. Model Rules of Procedure
7. Procedures for Multiple Complainants
8. Multiple Parties Complained Against
9. Representatives of the Parties to the Dispute
10. Withdrawal or Settlement
11. Expert Advice
12. Expert Groups and Technical Advisors
13. Provisional Measures
14. Jurisdiction of the Neutral Panel
15. Initial Report
16. Final Report
17. Clarification or Interpretation of the Final Report
18. Implementation of the Final Report

Part Four: Appellate Process

1. Appellate Body
2. Constitution of the Appellate Body
3. Appeal Procedure
4. Adoption of Appellate Decision
5. Nature of Final Decision
Part Five: Remedies
1. Compliance with Rulings
2. Non-implementation of the Final Report - Suspension of Benefits or Other Remedies

Part Six: Other Rules

1. Transparency
2. Calculation of Time Periods
3. Special Procedures Taking into Account Members with Different Levels of Development
and Sizes of Economies
4. Effective Access
5. Interpretation of the FTAA Agreement in Judicial or Administrative Proceedings
6. Private Rights
7. Alternative Dispute Resolution between Private Parties

Annex: Rules of Procedure - Neutral Panel

Annex: Rules of Procedure - Appellate Body

Institutional issues

In an RTA, integration can be approached through a framework of inter-governmentalism or

supra-nationalism. If a supranational framework is agreed to, members are agreeing to exer-
cise some of their sovereignty jointly and grant the regional level the competence to pass any
relevant laws and policies which will then be binding on the individual members of the RTA,
or if they have direct effect, as in the case of the EU, these may also be binding on the citizens
of the member states.

Supra-nationalism is sometimes viewed as part of a negotiating strategy aiming at creating a

federal political structure or confederation, although the EU indicates that more complex and
diversified methods of power sharing are possible. Nevertheless, this is a deep integration
framework and the participation of stakeholders in the negotiation process, the transparency
of decision-making and the accountability of regional institutions will be important to ensure
a positive outcome. In their absence, the shift of power to the supranational bodies may have
detrimental consequences for domestic stability and security.

The 1994 Agreement for the West African Economic and Monetary Union establishes both a
customs union and a common market, and the creation of a monetary and economic union.
The institutional components of the WAEMU have been compared as being similar to the EC
(EU) model with provisions for a conference of Heads of State, a Council of Ministers, a
Commission, and a Court of Justice. The sequence of economic integration is often noted as
being different from the EC history where for the WAEMU the franc zone and monetary
union preceded functional regional economic integration in the trade and other regulatory ar-
eas. The institutional similarity is extended by the strong institutional powers held by the dif-
ferent institutions established which all appear to have legal authority to raise matters before
the Court and operate in many respects by majority voting procedure. One difference noted to
the EC institutional arrangements is the absence of weighted voting by the Council as each
state in the WAEMU holds a single vote. The Treaty clearly establishes an independent legal
personality for the Union (Article 9) and the Commission is granted the power to represent
the Union externally (Article 12). The Conference of Heads of State provides for the overall
direction for the Union, while the Council of Ministers is the functioning legislative body for
the WAEMU with the power to adopt legal acts as proposed by the Commission and to dele-
gate the execution of these legal acts also to the Commission for implementation and enforce-
ment. The Commission is the executive body of the WAEMU with the power to propose and
responsibility to implement. Article 32 provides for majority voting for the Commission with
the president acting as tie breaker.

Aside from WAEMU, developing country negotiators predominantly choose an intergovern-

mental framework that does not involve sharing of sovereignty and each party may effectively
veto the application of an agreement. The regional institution will have no independent pow-
ers, but will seek to monitor and coordinate national policies. Negotiators should however be
aware that while a weak intergovernmental body may be politically desirable this will result
in few enforcement mechanisms to ensure that states abide by the common rules. This can be
addressed by negotiating a strong dispute settlement procedure to resolve difficulties which
may arise.

Other types of regional institutions that can be created during RTA negotiations can include
bodies such as The Caribbean Regional Negotiating Machinery (CRNM). This is the principal
regional intergovernmental organization mediating the Caribbean’s encounter with the global
trading system. CARICOM governments tasked the CRNM with the primary responsibility
for coordinating and spearheading a cohesive, coherent regional trade policy, both strategi-
cally and on technical issues under negotiation. Developing country negotiators may wish to
establish a similar institution for developing and maintaining an effective framework for the
coordination and management of developing country partners’ negotiating resources and ex-
pertise, and for undertaking or leading negotiations where appropriate.

Technical and financial assistance

Technical and financial assistance is intended to enhance the ability of the recipient country to
formulate and implement an appropriate trade development strategy while creating an en-
abling environment for increasing export-led growth and encouraging foreign investment to
generate jobs and trade. However, it is also to ensure that all trade partners participate in and
benefit from the institutions, negotiations and processes that shape national trade policy and
the rules and practices of international commerce. Thus such assistance can include aiding ef-
fective participation in negotiations, the analysis and implementation of the agreements, trade
policy mainstreaming and technical standards, trade facilitation including tariff structures and
customs regimes, and support to human resources development in trade. It may also cover
business development and activities aimed at improving the business climate, access to trade
finance, and development of productive sectors.

Developing country negotiators may wish to ensure that RTAs complement the goals of the
multilateral trading system by formally including cooperation and technical assistance among
regional partners. For example, the United States initiated an FTA with the Southern African
Customs Union (comprising Botswana, Lesotho, Namibia, South Africa, and Swaziland) in
2002 and trade capacity building and technical assistance was a fundamental element of the
agreement. The United States provided initial funding for SACU countries to use to prepare
for and participate in the negotiations, implement commitments, and take advantage of trade
opportunities. The member countries of SACU had access to about $34 million in United
States trade capacity-building assistance in 2002, with $5.5 million channeled through spe-
cific bilateral trade-related technical assistance initiatives.
The Euro-Mediterranean Partnership had a formal technical assistance programme known as
MEDA53, which aimed to support the implementation of the EU-Mediterranean countries’ As-
sociation Agreements and the implementation of key social and economic reforms in the
Mediterranean countries. The EU provided funds of €8.8 billion for MEDA projects from
1995 to 2006. Bilateral programmes included structural economic reform and private sector
development, financial sector modernization, and trade facilitation. Regional programmes
supported the Agreements’ implementation including aligning sectoral economic policies, im-
plementing regional projects complementing bilateral measures, and supporting regional
South-South free trade agreements.

53
The MEDA programme was superseded by the European Neighbourhood and Partnership Instrument following the adoption
of the (EC) Regulation No 1638/2006 of the European Parliament and of the Council on 24 October 2006.
Exercises and questions for discussion

1. Is it necessary to negotiate a "forum exemption clause"?

2. What are the issues involved in negotiating remedies?

3. What remedies are not available to an RTA dispute settlement mechanism?

4. Is the CRNM an applicable institutional model for other southern regions?

5. What are the advantages and disadvantages of a supranational model of regionalism?

6. Who can define technical assistance – the donor or the recipient?

7. Is it a realistic option to allow third party request for compensation only to developed
countries in a North-South agreement?

6 Simulation exercise: RTA negotiation problem

The parties

Europia and Advantagia (both WTO members) are about to enter a bilateral free trade and
economic integration agreement. Europia is a large and developed economy with low bound
tariffs on industrial goods. While Europia uses quotas and other non-market measures to
restrict imports of agriculture and textile products, it is a signatory to the WTO agreements
regarding the conversion of these sectors to tariffs over time.

Advantagia borders Europia and directs the majority of its exports in mainly traditional
products to this largest neighbor. Advantagia is a populous and poor country. Although it is
not classified as a least developed country, it is in the process of a market transformation from
a predominantly state-owned and closed economy. Advantagia has taken steps in recent years
to open its economy by lowering duties in the GATT to an average of about 20 per cent
overall, although there are still many peak duties, for example, in automobiles, where
Advantagia charges a duty of 50 per cent. For service providers, the market is essentially
closed. While it has removed some restrictions to foreign investment participation, now
foreign-owned firms (over 50 per cent) are not permitted to engage in joint ventures with
local firms and are prohibited entirely from a number of economic activities, including
financial services (banking and insurance).

Atlantica (also a WTO member) is a large and well-developed economy that has a priority in
developing closer economic relations with Advantagia. Although this country is more distant
geographically, it also has world class suppliers in a number of important industrial and
technology sectors and in the financial services area. Atlantica has recently learned of the
impending trade deal between Europia and Advantagia and has determined that concessions
made by Advantagia to Europia are going to make things far more difficult for Atlantica’s
firms to compete on the Advantagia market. Therefore, Atlantica has decided to either seek to
obtain a trade deal as good as the one between Europia and Advantagia, or if that fails,
challenge the agreement in the WTO.
From the view of both Europia and Advantagia, the impending trade deal is a must. Europia
firms seek to generate trade and investment opportunities in Advantagia by taking advantage
of its geographic proximity and common historical/culture heritage. Advantagia's lower
overall costs of production arguably provide opportunity for Europia’s producers to lower
their costs for exports on the world market. For Advantagia, the agreement could certainly
stimulate inward investment and higher value production, thus providing a base for future
economic development and a transition to a more developed and diversified economy.
The agreement

 The trade agreement includes preferences for both services and goods;
 For all industrial goods, a free trade area would be established over fifteen years;
 Agriculture and textile products would remain subject to quantitative restrictions.
These would be gradually eliminated over fifteen years, resulting in free trade for
these products;
 For services, each party promises to remove all forms of discrimination against the
service providers of the other party, over a period of fifteen years. However, free
movement of labor is not provided for at all under the agreement;
 For investor protection, both parties agree to eliminate all forms of discrimination
against the investors of the other party over a period of fifteen years;
 The agreement permits the use of safeguards as necessary to eliminate disruptions
caused by increases in trade flows.

State of the negotiations

This agreement is about to be notified to the WTO, which will start the process of a review by
the Committee on Regional Trade Agreements. All three countries are represented in the
Committee. While Europia and Advantagia are committed to getting this deal through the
WTO, they are worried about certain aspects of the agreement which they believe may be
challenged by the other WTO parties. While they are capable of being flexible, they wish to
preserve the overall agreement as close as possible to that already initialed.

Prior to the Committee commencing its task of review, the ministers from Advantagia will be
also meeting with the ministers from Europia and Atlantica in order to finalize negotiations
with the first party, and determine a course of action as to the second. Needless to say,
Europia ministers are interested in forestalling an additional trade agreement with Atlantica.
Likewise, Atlantica is seeking a comparable trade agreement.

Other WTO parties, including Atlantica, are anxious to review the agreement in the WTO.
There is a new Article XXIV Understanding governing free trade agreements in the WTO and
the parties want this agreement to comply with the spirit of the Understanding. Likewise, the
Services aspect is new in WTO, and the GATS Article V contains provisions for qualifying a
regional economic integration agreement.

Group I: Europia
I-A Trade Ministers (3)
I-B Industrial producers (2)
I-C Agriculture/textile producers (2)
I-D Financial services producers (2)
I-E WTO representative (1)
I-F Labor union representative (1)

Group II: Advantagia

II-A Trade Ministers (3)
II-B Industrial producers (2)
II-C Agriculture/textile producers (2)
II-D Financial services producers (2)
II-E WTO representative (1)
II-F Labor union representative (1)
Group III: Atlantica
III-A Trade Ministers (3)
III-B Industrial producers (2)
III-C Agriculture/textile producers (2)
III-D Financial services producers (2)
III-E WTO representative (1)
III-F Labor union representative (1)
Assignment for negotiations

1. Identify your group and role.

2. Prepare a two page summary stating the position you intend to take on behalf of the
role you are assigned and as to the elements that are indicated in the problem facts.
3. Provide a brief statement of the arguments you will use to support your initial
position, and in the priority of their importance. Identify objective criteria to support
your positions/proposals.
4. Provide a brief fallback position stating the modifications you are willing to accept.
5. Provide a BATNA.
6. Provide a brief overview of other parties’ major negotiating interests and BATNAs.
7. Be prepared to review your summary in the group meeting and to negotiate your
terms.

7 Summary

As at the outset of this module, there are no easy answers to what or how to negotiate in an
RTA, particularly given the diversity of both the content of these agreements and the parties
undertaking them. This module has therefore provided an overview of the issues developing
country negotiators must expect to address in an RTA negotiation, as well as an indication of
the preparation that is required before the negotiations begin.

It is clear that any RTA negotiation will take place within the framework of the relevant pro-
visions of the GATT and GATS Agreements. Indeed, in paragraph 4 in the Doha Declaration
WTO members stressed their "commitment to the WTO as the unique forum for global trade
rulemaking and liberalization, while also recognizing that Regional Trade Agreements can
play an important role in promoting the liberalization and expansion of trade and in fostering
development". WTO members also agreed to negotiations aimed at clarifying and improving
existing WTO provisions applying to RTAs while taking into account their developmental as-
pects (paragraph 29). Such developmental aspects are a concrete expression of the wider em-
phasis on development issues, including implementation related issues and concerns, SDT
and technical assistance.

Unfortunately, this clarification has not yet happened. Developing country RTA partners must
therefore develop their own negotiating strategies, individually and in coalitions of the like-
minded, in order to ensure that underlying asymmetries are addressed within the provisions of
the agreements, and also include strong and appropriately targeted SDT and technical assis-
tance where applicable. The firmer the commitments on technical assistance and support for
adjustment policies in developing countries, the greater the chance that the necessary liberal-
ization measures are undertaken and the agreement are implemented.

Exercises and questions for discussion

Which RTAs should be considered best examples or models for developing country negotia-
tors?
Readings

References

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Ademola, O., (2000), "Interests and Options of Developing and Least Developed Countries in
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Bhattacharya, D., (2005), "Least Developed Countries in Trade Negotiations: Planning

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Department for International Development, (2002), Tools for Development: A Handbook for
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Hayashi, M., (2005), Weaving a New World: Realizing Development Gains in a Post-ATC
Trading System, UNCTAD/DITC/TNCD/2005/3, Geneva.

Pengelly, T., and George, M., (2001), Building trade policy capacity in developing countries
and transition economies: a practical guide to planning technical cooperation programmes,
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Scollay, R., (2001), Regional Trade Agreements and Developing Countries: The Case of The
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Shafaeddin, M., (2000), "Free Trade or Fair Trade? An enquiry into the causes of failure in re-
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UNCTAD, (2005), Multilateralism and Regionalism: The New Interface, UNCTAD/DITC/

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World Bank Institute, (2004), "A Practical Guide to Negotiations.", Macroeconomic and Pol-
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Yanai, A., (2006), Legal Frameworks for North-South RTAs under the WTO System, APEC
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