UNIVERSITY OF NAIROBI

REGIONAL INTEGRATION ASSIGNMENT

THE CONTEMPORARY ISSUES DRIVING THE INITIATION AND CONCLUSION

OF MEGA-REGIONAL TRADE AGREEMENTS

BY:

EDWIN ONYANGO OPONDO

[G34/39498/2016]

LECTURER:
MADAM NASERIAN SITELU
Scope of work

“Unity is strength.”

This paper seeks to find out whether bigger is always better and will discuss at great length the
contemporary issues driving the initiation and conclusion of mega-regional trade agreements. This
will be through a holistic approach of trying to determine whether this upsurge is in essence an
easier alternative, out of fear of the stringent rules or whether they are politically motivated and
finally, whether there is real leverage within multi-regionalism. The preamble of the African Free
Trade Agreement will be awoken in this paper, to ascertain the spirit and intent of these mega-
regionals.

Against that backdrop and to further put the paper into context, the work will examine the impact
and potential impact of the Trans-Pacific Partnership Agreement (TPP). Additionally, the paper
will compare TPP with Regional Comprehensive Economic Partnership (RCEP) to partly answer
the question why almost identical agreements are coming up within the same regions.

The paper will also look at the possible effects, negative or otherwise of these mega-regionals,
seeing as they are at their inceptions and how they turn out is largely speculative at the moment.
Finally, the paper will give recommendations on whether the existing regional agreements can
balance with the forward-looking mega-regionals, to what extent and for how long.

Definition

The term mega regionals are used in a lose manner. However, by adopting a restrictive definition,
mega-regionals can be considered as a trade agreement that:

1. Is negotiated by three or more countries or regional groupings;

2. Whose members collectively account for twenty five percent or more of world trade; and

3. The substance of which goes well beyond current WTO disciplines. 1

This definition, however, is without shortage of challenges. The 3rd criteria for example may
complicate whether an agreement such as the RCEP which is WTO-disciplines based, qualifies as a
mega-regional, especially seeing as negotiations around it have been at a minimum.

Is there a need for development of Trade Agreements?

It is clear that a paradigm shift is being felt because states do not feel that trade policies within the
established organizations are reasonably accommodative of their immediate and future needs. By

1
Draper, Peter; Lacey, Simon; Ramkolowan, Yash (2014) : Mega-regional trade agreements: Implications for the
African, Caribbean and Pacific countries, ECIPE Occasional Paper, No. 2/2014, European Centre for International
Political Economy (ECIPE), Brussels https://www.econstor.eu/handle/10419/174725 accessed on 26 February 2019
moving towards and exploring new paradigms, largely unknown, it may be arguable and rightly so,
that the new and more favorable policies should be instead, incorporated into the already stable and
existent organizations like WTO.

The world trade has seen the migration of organizations based on the needs at that particular time.
Factors that promote regional integration may be looked on as both domestic and external matters
that affect the region, prominent among them are globalization and trade liberalization.

The preamble of the agreement creating the AFFTA2 provides as follows, that:

CONSCIOUS of the need to create an expanded and secure market for the goods and
services of State Parties through adequate infrastructure and the reduction or
progressive elimination of tariffs and elimination of non-tariff barriers to trade and
investment;

ALSO CONSCIOUS of the need to establish clear, transparent, predictable and

mutually-advantageous rules to govern Trade in Goods and Services, Competition
Policy, Investment and Intellectual Property among State Parties, by resolving the
challenges of multiple and overlapping trade regimes to achieve policy coherence,
including relations with third parties

To understand how states have become more conscious of this need, the paper ventures into the
genesis:

From GATT to WTO

The factors initiating the negotiation and formation3 of GATT included the fact that the world war
had ended and the world needed to eradicate discrimination, owing to the magnitude of the war. It
was touted to liberate the services sector. 4

GATT’s failure is attributed mostly to the fact that there were many side-agreements and
negotiations over and above those provided for under the agreement. The first forty-five years of
the GATT 9 (the period between 1948 and the conclusion of the Uruguay Round in 1994) saw a
total of 124 notifications to the GATT of RTAs.5

On the other hand, WTO at its inception was inclusive and encompassed principles on non-
discrimination, reciprocity, the binding and enforceable nature of the commitments, and

2
https://au.int/sites/default/files/treaties/34270-treaty-consolidated_text_on_cfta_-_en.pdf
3 Thornberg, Christopher F. Ph D and Edwards, Frances L. J.D. (2011) "Failure of Trade Liberalization: A Study of the
GATS Negotiation," Journal of International Business and Law: Vol. 10
4
Ibid
5
WTO, Regional Trade Agreements-Facts and Figures: How Many Regional Trade Agreements Have Been Notified
to the WTO?, http://www.wto.org/english/tratop.e/regione/regfac-e.htm accessed on 9th April, 2019
transparency. Despite still operating effectively and in deed indispensable, states do not consider it
as being progressive enough.

GATT was a rather flexible institution; bargaining and deal-making lay at its core, with significant
opportunities for countries to “opt out” of specific disciplines. In contrast, WTO rules apply to all
members, who are subject to binding dispute settlement procedures. States therefore opine that the
WTO is more compelling, and although obligations under international law are binding by virtue of
the principle of pacta sunt servanda, it feels prison-like and conservative yet the requirement for
reforms is ever-glaring, if it is to evolve with the contemporary needs. However, the reforms may
not necessarily mean an overhaul and this is the critique levied towards the formation of new mega-
regionals altogether.

Case study

Comparing the Dispute mechanisms in TPP and WTO

TPP establishes a State-to-State Dispute Settlement Mechanism (DSM) for settling disputes among
the 12 TPP Parties. The TPP DSM may provide an expedient and more transparent forum to
resolve State-to-State disputes than that of the World Trade Organization (WTO). Additionally,
unlike the WTO, the TPP expressly provides for monetary compensation as a remedy. On the
flipside, the TPP does not provide for appellate review.6 This exclusion may be a deliberate
exclusion to avoid the legal overlaps that occur at the DSU level of the WTO. In a case between
Mexico and U.S.A7 the two states were entangled in a war with the later state imposing taxes on
imports from the U.S.A which were not sweetened by cane sugar. Mexico tried initiating a claim at
NAFTA but U.S.A could not agree on the panelists. Subsequently, U.S.A took the dispute to
WTO. WTO held that it had jurisdiction over the matter and declined to determine whether USA
acted inconsistently with its obligations under NAFTA. As such, it is arguable that mega-regionals
want to steer clear of the WTO to avoid these legal overlaps. This is clear in the definition of mega-
regionals herein that, “their substance has to go well beyond the current WTO disciplines.”

Further a reading of Article 23 of the WTO dispute settlement understanding reveals that it can be
constructed to mean that the DSU has exclusive jurisdiction for all WTO members. This therefore
renders the dispute settlement procedures under the mega-regionals obsolete. However, if a mega-
regional provides for dispute settlement mechanisms, it is difficult to understand the WTO will
view a state that surpasses that channel, which is a breach in itself, to seek for redress for a further
breach of obligations.

6
<https://www.sidley.com/en/insights/newsupdates/2016/01/the-trans-pacific-parternership-agreement>
accessed on 20th March, 2019
7
“Sugar-wars” between Mexico and USA
Paradigm Shift

The mega-regionals idea is being received with aplomb. It is however important to ensure that a
strike is found to ensure that governments retain their sovereignty to make laws that can regulate
the engagements effectively while being in the interests of their citizens.8 In case of international
breach or disputes, there should be effective and ascertainable ways of dispute settlement and
professional and effective enforcement mechanisms.

The increase in mega-regionals is attributed to many factors, majorly the frustration in the multi-
lateral trading systems, enhanced by the multiplicity of participants leading to non-co-operation and
creating rigidity in the system. There is also the general feeling, especially among the developed
countries, that this increase in numbers leads to a diminished ability to influence the content and
pace of MFN (Most favored nation) liberalization.9

To avert the possibility of a breakdown in effectiveness world trade, a possibility which always
lingers on, and ensure continuing international co-operation, the emergence of mega-regionals, can
be said to have been largely attributed to and necessitated by the following factors:

a) Improving Economies as a result of larger membership

An increase in membership within trade agreements is certainly more beneficial to the participants,
despite that being a reason of exiting some economic blocs, ironically suggesting that states may be
at cross-purposes. The increased bargaining power for the emerging economies has influenced
recent regional developments in trade as well, even though industrialized countries, particularly the
United States, and the EU, were prime movers in this domain.10

In crafting these agreements, countries will always give primacy to their interests inter alia
minimum wages, subsidies and protection of the citizens and the environment. The feeling that the
multiple multi-lateral agreements are moving slowly with regard to factors such as technological
advancement, or clarifications on dispute settlement mechanisms can therefore be said to be against
the best interests of states and their citizens. Further, there is an increased feeling that large
economies cannot be sustained within the trading policies (the existing blocs) in place at the
moment, most of which are not considered to be progressive enough. For instance, with regards to
dispute settlement aforesaid, there is the general feeling that the WTO should revamp their dispute
mechanisms to reduce the increasing overlaps and clarify the nature of the legal relationship
between the international organizations.

For peaceful co-existence and co-operation, it is argued that all sovereign states are equal at the
international level. A largely agreeable unwritten rule is that, this may not always be true.

8
https://itforchange.net/statement-against-the-RCEP <accessed on April 10, 2019>
9
Ibid
10
http://cfr.org/RegionalChallenges <accessed March 4, 2019>
However, strengthened economies increasingly feel that they need reciprocity in terms of trade at
the international level, reciprocity which has not always been guaranteed within the more stable
regimes of WTO and GATT. The new trade dispensations are therefore geared towards ensuring
that while negotiating, the following listed factors for consideration are real and not only apparent:

i) Checking possible abuse of power by states

ii) Ensuring that policies and laws of the country are not made to suit the interests of
multinational corporations
iii) Ensuring that there is no pursuit of short-term interests with long term and adverse
effects externally
iv) Supplying of international public goods
v) Limiting Government failures such as protectionism. 11

b) Non-Tariff reduction

The General Agreement on Tariffs and Trade (GATT) and WTO established a multilateral system
for trade that has remained largely unchanged since 1995.12 There has therefore been an increased
desire to write new rules to address potential non-tariff barriers to trade covering public health and
product safety standards, labor and the environment, international investment, digital trade and e-
commerce, and state-owned enterprises. These have been important drivers of both the TPP and
TTIP negotiations.13

Seeing as TPP and TTIP are not motivated by tariff reductions, it can be inferred that states have
the luxury of maintaining high border taxes. Arguably, this may therefore raise the possibility of
misusing tariffs to go against the intention of regional integration and thus being counter-
productive. However, counter-productivity may arise even from the non-tariff barriers themselves.
TPP provisions, for example, on regulatory coherence, which is build from the US model that has
established a federal-level office of information and regulatory affairs (OIRA) attempts to
rationalize the standards set by individual US regulatory agencies. To reduce the possibility of such
standards developing into unintended nontariff barriers to trade, while also encouraging
international co-operation, the provisions encourage regulators across TPP countries to conduct
cost-benefit analysis or regulatory impact assessments, and allow for public comment before
implementing policy changes.14

11
Petersmann, Emst Ulrich. The GATT/WTO dispute settlement system: International law, international
organizations, and dispute settlement. (London: Kluwer Law International, 1997)
12
Chad P. Bown, Mega-Regional Trade Agreements and the Future of the WTO (2017) 1 ‘ Global Policy’
https://doi.org/10.1111/1758-5899.12391 accessed 20 March 2019
13
Ibid
14
Ibid
It is evident, as stated above, that the reduction of non-tariff measures between members of mega-
regional agreements can be both beneficial and harmful to both member and non-member
countries. The extent to which changes in non-tariff measures is beneficial for non-member states is
largely dependent on both the level of stringency of the new measures under implementation by
the mega-regional agreement and the degree to which harmonization of these non-tariff measures
and regulatory standards across members of the mega-regional agreement occurs.15

c) Coverage of products and rules of origin

The much hyped paradigm shift to mega-regionals will not happen in a vacuum. Inevitably, there
will be a lack of flexibility, as is already. Exporters need to choose the best tariff schemes, with
wide coverage of products and not so stringent rules of origin, factors considered as being very
frustrating at the moment. 16 An EU summary of where things stood after the 11th negotiating
round of the TTIP, in October 2015 stated that the offers on the table would eliminate up to 97%
of tariffs on the agreement’s entry into force. Despite 3% being enough to protect important
products like agricultural products, if this is extensively implemented, there will be a wide
coverage of goods and increased market access. 17

The rule of origin is what can be said to be the “economic nationality” while coverage of products
implies that item coverage should be wide enough to increase both the medium and long-term
economic gains.

Rules of origin define the conditions under which a product is eligible for benefits under
preferential trade arrangements. These rules are necessary to prevent third parties from gaining
benefits simply by transshipping goods through a preference beneficiary with no or only minimal
value-added in the beneficiary country. But rules of origin are often more restrictive than necessary
to prevent such trade deflection. Consequently, they are likely to be manipulated by protectionist
interests to make them difficult to meet so that it is sometimes less costly for the exporter to forgo
trade agreement benefits and just continue paying the non-preferential tariff.18

To arrest this difficulty, the TPP has a single set of rules which permits “regional cumulation,”
meaning that inputs from any member used by any other member in a final product will count as
originating and the product will be eligible for preferential treatment in the importing country.19

15
Draper, Peter; Lacey, Simon; Ramkolowan, Yash (2014) : Mega-regional trade agreements: Implications for the
African, Caribbean and Pacific countries, ECIPE Occasional Paper, No. 2/2014, European Centre for International
Political Economy (ECIPE), Brussels https://www.econstor.eu/handle/10419/174725 accessed on 26 February 2019
16
<https://voxeu.org/article/designing-mega-regional-trade-agreements> accessed on 20 March 2019
17
Kimberly Elliot, “How Much “Mega” in the Mega-Regional TPP and TTIP: Implications for Developing Countries”
< http://www.cgdev.org/sites/default/files/CGD-Policy-Paper-79-Elliott-Mega-Regional-TPP-TTIP_0.pdf> accessed
9 April, 2019
18
Ibid
19
Ibid
Impact and Potential impact of TPP

The Trans-Pacific Partnership (TPP), concluded on October 5, 2015, on paper reflects inevitable
compromises but appears to have met its two key objectives: to establish new, market-oriented
rules in a host of rapidly changing areas of international commerce and to reduce trade
and investment barriers among TPP countries to yield considerable gains for the United States and
its 11 partners.20

According to Draper21, we are likely to see some definitions of the kinds of behavior by private
actors that parties to the TPP will be required to ban and prosecute, as well as some degree of
carve-out from the agreement’s dispute settlement chapter and/or possible scheduled exemptions
from competition rules provided such exemptions have a recognized public policy rationale, and
therefore moving away from a watch dog kind-of authority.

Malcolm Turnbull, Australia’s prime minister, opines as follows on the conclusion of the TPP
agreement:

“It is the biggest multilateral trade outcome for decades, and we will see big markets opening up for
Australia whether it is in agriculture, or in services, or in manufacture, this is the foundation for
our future prosperity ... our children's jobs depend on us having access to these big and growing
markets and this opens so many doors simultaneously, and at the same time, we have preserved our
vital national interests.”22

A look at the objectives of TPP and the Australian prime minister’s statements reveals that he
acknowledges that the TPP as has been agreed upon is progressive by being cognizant that the
current market is dynamic.

Comparing TPP and RCEP

Both the RCEP and TPP are largely considered as mega-regionals, with the aim of having trade
freedom and achieving regional integration. Notably, TPP is more-driven by the USA while RCEP
is mainly propelled by Asian channels. Conspicuously, China is only represented in the RCEP and

20
Petri, Peter A. and Plummer, Michael G, ‘The Economic Effects of the Trans-Pacific Partnership: New Estimates’
(January 1, 2016). Peterson Institute for International Economics Working Paper No. 16-2; East-West Center
Workshop on Mega-Regionalism - New Challenges for Trade and Innovation.
https://ssrn.com/abstract=2723413 or http://dx.doi.org/10.2139/ssrn.2723413 accessed 20 March, 2015
21
Supra 1 at page 27
22
Mark Kenny, ‘Malcolm Turnbull welcomes TPP as gigantic foundation stone for economy’ The Sydney morning
herald (Sydney, 7 October 2015) https://www.smh.com.au/politics/federal/malcolm-turnbull-welcomes-tpp-as-
gigantic-foundation-stone-for-economy-20151006-gk2fko.html accessed 20 March, 2019
not in the TPP. 23 The implication of this may be that although there are mutual members within
the agreements, there may be further, deeper underlying agendas.

TPP’s composition is bound to cause division among ASEAN simply because not all RCEP-
members participate in TPP. Malaysia, Singapore and Vietnam are bound to support the TPP and
other ASEAN members will probably focus on the development of RCEP. This division and the
aforesaid USA–China rivalry may undermine ASEAN’s leadership in the regional trade architecture
as well as in the regional political landscape.24 As a self-preservation mechanism, ASEAN may
influence RCEP negotiations. This strengthens and re-ignites the notion that trade negotiations are
heavily clouded and influenced by geopolitical rivalry among the major economic powers.

Against that backdrop, an argument may arise that politically inferior countries in the mega-
regionals will suffer, and may never have meaningful gain when being treated equally, while
essentially they are not equal because that way, it’s easier to be knocked down.

Effects of the Mega-Regionals: Are they a threat to WTO and multi-laterals?

Mega-regionals embrace specific approach to tackling global trade issues, where there is a feeling
that multi-laterals are more general and yet regional. How grandiose, both in nature and purpose
the mega-regionals are can only mean that they want to be the gold-standard of trade. The threat
posed by mega-regionals to the multilateral trading system is plain and clear through the approaches
that it takes of discriminating and by displacing multilateral functions and activities with regional
ones.25

Conclusion and Recommendations

In conclusion, it is only a matter of time before we can ascertain whether these mega-regional blocs
are as effective as according to how they have been designed. If not, the predicted success, as by the
Australian Prime Minister, may be minimal at best; on the other hand, any fear of adverse effects
on the developing countries may not be as significant as feared.

That notwithstanding, it is my recommendation that these agreements are always negotiated behind
closed doors, it is imperative therefore to bring details of such negotiations within the public
domain for extensive and meaningful consultations, because the first duty is to the citizens.
Thereafter, they should be given a clean bill by the legislative who are the people’s representatives
before coming to force.

23
Gyorgi Csaki, ‘Is the WTO over? Mega-Regional or Plurilateral free trade negotiations: perspectives of multi-
lateralism in trade’ 2015(2) Studia-Munda-Economica http://real.mtak.hu/38885/ accessed 20 March, 2019
24
Ibid
25
Winters, L. Alan, “The WTO and Regional Trading Agreements: Is it All Over for
Multilateralism?” https://ssrn.com/abstract=2707104
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