## THE RISE OF DISCRIMINATORY REGIONALISM

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### Overview
- For 30 years the number of regional trade agreements (RTAs) has been on the rise, from fewer than 50 in 1990 to more than 350 today.
- Major RTAs include the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the 2018 African Continental Free Trade Agreement (AfCFTA), which spans an entire continent and is the world’s largest RTA, covering more than 1.3 billion people.
- RTAs over the past three decades have rewritten trade rules and reshaped trade and nontrade outcomes, affecting foreign investment, technological innovation, migration, labor, and environmental issues.
- In a context of rising protectionism and nationalism, regionalism may shift from integration toward more discriminatory forms that increase barriers to nonmembers.

### Deep, dynamic agreements
- Since the 1990s RTAs have become not only more numerous but also “deeper,” moving beyond tariffs and customs to address nontariff measures and domestic regulatory areas.
- Recent RTAs broadly regulate three overlapping policy areas:
  - Integration of goods, services, and factor markets and rules on tariffs, services, investment, and intellectual property rights.
  - Restrictions on governments’ ability to reverse economic integration, including regulatory barriers, sanitary measures, subsidies, and competition rules.
  - Protection of rights potentially diminished by market integration, such as labor or environmental standards.

### Deepening integration: empirical findings
- Deep RTAs provided institutional frameworks for market integration, helping cut trading costs and accelerate growth opportunities, particularly in developing economies.
- One study found that deep RTAs increased trade between members by 40 percent on average.
- Many recent RTA provisions are nondiscriminatory and have reduced costs for members and nonmembers alike; rules increasing competition, regulating domestic subsidies, or supporting adoption of international regulatory standards have been found to boost exports by nonmembers.
- Nontrade effects documented:
  - Provisions on investment, visa and asylum issues, and intellectual property rights reduce costs and legal uncertainty, stimulating foreign direct investment, migration, and technology flows.
  - One study found environmental provisions in RTAs prevented about 7,500 square kilometers of deforestation during 2003–14.
- Unintended consequences:
  - RTAs without child labor provisions can reduce child employment and increase school enrollment.
  - RTAs with child labor bans can shrink children’s wages and sometimes lead poorer households to send more children into the labor market.

### Unseen complementarities between regionalism and multilateralism
- Complementarities underpinned RTAs’ success:
  - The societal segments that favor multilateral integration (for example, exporting firms) also support regional integration.
  - WTO laws and dispute mechanisms are the foundation of RTA law; many RTAs restate WTO commitments and rely on WTO adjudication for enforcement.
  - Many RTA commitments are nondiscriminatory and thus promote both regional and multilateral integration.
- In times of conflict, these complementarities weaken:
  - RTA law built on shakier WTO foundations.
  - Anti-integration domestic forces (such as import-competing sectors) are likely to oppose both regional and multilateral integration.

### The rise and risks of discriminatory regionalism
- Discriminatory regionalism is the tendency for RTAs in times of conflict to raise barriers against nonmembers rather than lower barriers among members.
- Historical parallel: in the 1930s, as multilateral trade collapsed, protectionist measures within regional blocs reshaped trade patterns; for the UK, imports from the British Empire accounted for less than 30 percent at the beginning of the period and more than 40 percent at the end.
- Contemporary indicators of discriminatory regionalism include:
  - Local content requirements in subsidy programs.
  - Export restrictions targeting countries that are not regional trade partners.
  - Stringent rules of origin designed to increase regional value content at the expense of extraregional value content.
- Discriminatory RTAs may be used to achieve nontrade objectives:
  - Ensuring higher labor and environmental standards or adoption of domestic rather than global standards.
  - Redirecting supply chains for national security reasons.
- Example cited: an agreement signed at the end of March between Japan and the United States on certain critical minerals, described as different from the deep RTAs of the previous three decades and of limited scope.

### An uncertain future: implications and policy stance
- RTAs in times of conflict may still preserve integration among members and experiment with new forms of integration; deep trade agreements that reduce market fragmentation should be welcomed—especially in regions such as Africa that could gain from a true continental market.
- However, regionalism without the anchor of multilateralism risks exposure to disintegration forces:
  - RTAs could weaken and grow more discriminatory, placing less emphasis on integration and more on erecting protectionist walls against nonmembers.
- The author’s conclusion: there is no choice between regionalism and multilateralism; there is only a choice between integration and disintegration. A revival of multilateralism is necessary to complement RTAs in an age of conflict.

*MICHELE RUTA, deputy division chief in the External Policy Division of the IMF’s Strategy, Policy, and Review Department.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/june/ruta.pdf_