I once attended a talk by a Canadian trade negotiator who made the following potent statement: “When multilateralism falters, regionalism picks up the pace.” His use of the term multilateralism referred to the GATT/WTO system described in Chapter 7 and its multilateral trade negotiations. His use of the term regionalism referred informally to the possibility of pursuing what are formally known as preferential trade agreements (PTAs). Recall that one of the founding principles of the GATT/WTO system is nondiscrimination, and that nondiscrimination, in turn, involves the most favored nation (MFN) and national treatment (NT) sub-principles. Under MFN, each WTO member must grant to each other member treatment as favorable as they extend to any other member country. PTAs are a violation of the nondiscrimination principle in which one member of a PTA discriminates in its trade policies in favor of another member of the PTA and against nonmembers. This discrimination has been allowed by the GATT/WTO under certain circumstances. These circumstances include the well-known cases of free trade areas (FTAs), customs unions (CUs), and interim agreements leading to a FTA or CU “within a reasonable length of time.”

Before we begin, we need to clarify an issue of terminology. Originally, FTAs and CUs were collectively known as regional trade agreements (RTAs), and this is the term commonly employed by the WTO. However, since the 1990s, an increasing number of FTAs have been between or among countries that are not geographically contiguous, such as the Canada-Chile and Japan-Mexico FTAs. Consequently, a number of leading economists and trade lawyers have recommended that the RTA nomenclature be replaced with that of PTAs. In the spirit of greater accuracy, we use this term here, but it is likely that you will encounter both terms and their acronyms.