The law, economics and politics of preferential trading arrangements: an introduction.

• Author: Sykes, Alan O.

In 1947, twenty-three nations created the General Agreement on Tariffs and Trade (GATT) and thereby established the modern multilateral trading system. The GATT grew in size and scope until it was replaced by (and subsumed into) the World Trade Organization (WTO) in 1994, with a membership of 153 nations at this writing.

Article I of the GATT establishes the "most-favored nation" (MFN) obligation, which requires member nations to extend the benefits of any tariff or other commercial preferences that they afford to any country "immediately and unconditionally" to all members of the GATT (now the WTO). From the outset of the GATT, however, this general nondiscrimination obligation was subject to exceptions. Article I "grandfathered" various imperial preferences for colonial territories at the insistence of Great Britain. (1) In addition, Article XXIV of the GATT (2) affords authority for members to establish "customs unions," "free trade agreements," and "interim agreements" leading to the formation of customs unions and free trade areas. (3) Collectively, these arrangements may be termed "preferential trade agreements" (PTAs).

Some PTAs, such as the European Union and NAFTA, are no doubt familiar to most readers. Perhaps less known is the fact that PTAs have proliferated in enormous numbers during recent decades. WTO Director-General Pascal Lamy estimates that nearly 400 such agreements will be in place during 2010. (4) The proliferation of PTAs has eroded the most-favored nation obligation almost beyond recognition, to the point that Jagdish Bhagwati, a preeminent international trade economist, now jokingly characterizes it as the "least-favored nation" obligation. (5)

The modern explosion of PTAs raises a host of legal, economic and political questions. This symposium brings together the work of distinguished lawyers, economists and political scientists to address some of these issues.

LEGAL ISSUES

The genesis of GATT Article XXIV is somewhat murky, although it is clear from the negotiating history that the major players in the original GATT negotiations (the United States and Great Britain) accepted the wisdom of a "carve out" for customs unions from the outset. Their willingness to include free trade agreements came a few years later. (6)

The negotiators were aware, however, that PTAs could undermine the vitality of the MFN obligation. Accordingly, they sought to limit their incidence and impact in two ways. (7) First, Article XXIV(8) provides that both customs unions and free trade areas must eliminate "duties and other restrictive regulations of commerce ... on substantially all the trade between the constituent territories." (8) This so-called...