i

Regional Trade Agreements and U.S. Agriculture. Mary E. Burfisher and

Elizabeth A. Jones, editors. Market and Trade Economics Division, Economic Research

Service, U.S. Department of Agriculture. Agriculture Information Bulletin No. 745.

Abstract

Regional trade agreements (RTAs) have become a fixture in the global trade arena.

Their advocates contend that RTAs can serve as building blocks for multilateral trade

liberalization. Their opponents argue that these trade pacts will divert trade from more

efficient nonmember producing countries. This analysis of RTAs finds that U.S. agriculture can benefit from participating in RTAs and may lose when it does not. Agriculture

is an important source of potential U.S. gains from RTAs. Regionalism and multilateralism are likely to be mutually reinforcing in agriculture. While the United States, as a

global trader with diverse trade partners, potentially can gain more from global free

trade than from RTAs, many recent RTAs have been more comprehensive in their liberalization of agricultural trade liberalization than the Uruguay Round. A strong multilateral process can help ensure that RTAs are trade creating, rather than protectionist. 

Technical Assistance

Sophia Huang, economics editor

Deanna Kussman, Thomas McDonald, and Dale Simms, technical editors

Wynnice Napper, graphics and layout editor

Acknowledgments

Appreciation is extended to Cheryl Christensen, Steven Haley, and David Skully for

their role in the oversight and review of the projects development. Verna Blake and

Lilia George provided technical support. The authors gratefully acknowledge the

reviews of Abraham Avidor, Mary Bohman, Britta Bjornland, Jaime Casteneda, Larry

Deaton, Praveen Dixit, Carol Goodloe, Munisamy Gopinath, David Harrington,

Timothy Josling, Maureen Kilkenny, William Kost, Jeffrey D. Lewis, Wolfgang

Muench, Robert Paarlberg, Emilio Pagoulatos, Sherman Robinson, Terry Roe, G.

Edward Schuh, Renee Schwartz, Robert Spitzer, Ron Trostle, Silvia Weyerbrock, Alan

Winters, and Fumiko Yamazaki. 

Washington, DC 20036-5831 October 1998
Contents for 

Regional Trade Agreements and U.S. Agriculture

This overview report summarizes a more comprehensive discussion on the effects of

regional trade agreements on U.S. agriculture. The contents of that companion report are

shown below. To purchase a copy, call toll-free: 1-800-999-6779. Ask for Regional

Trade Agreements and U.S. Agriculture, AER-771. Electronic versions of both the

overview and the comprehensive report are on the ERS Web site at

http://www.econ.ag.gov. 

I. Introduction

Introduction and Overview

by Mary E. Burfisher and Elizabeth A. Jones

Appendix 1: Economics of Regional Integration by Mary E. Burfisher

Appendix 2: Regional Integration and Farm Household Adjustment by David Skully

II. Regional Trade Agreements: The Global Perspective

RTAs and Agricultural Trade: A Retrospective Assessment

by Thomas L. Vollrath

Multilateral and Regional Trade Reforms: A Global Assessment from a U.S. 

Perspective by Mark Gehlhar

III. Regional Trade Agreements and Domestic Policies 

A Dynamic Evaluation of the Effects of Western Hemisphere Integration on the U.S.

Economy by Diao Xinshen, Agapi Somwaru, and Terri Raney

CEEC Accession to the EU: A General Equilibrium Analysis

by Peter S. Liapis and Marinos E. Tsigas

Farm Policy Reforms and Harmonization in the NAFTA

by Mary E. Burfisher, Sherman Robinson, and Karen Thierfelder

Appendix: Chile Entering NAFTA: Implications for U.S. Horticultural Trade 

by Susan Pollack and Agnes Perez

Regional Trade Agreements and Foreign Direct Investment by Thomas Worth

Appendix: U.S. Foreign Direct Investment in the Global Processed Food Industries 

by H. Christine Bolling

IV. Regional Trade Agreements: Building Blocks, Stumbling Blocks, or

Complements to Multilateralism?

Agriculture, GATT, and Regional Trade Agreements

by Sharon Sheffield

Appendix: U.S.-Israel Free Trade Area Agreement by Michael Kurtzig and Daniel Pick

U.S.-Japan Agreements on Beef Imports: A Case Study of Successful Bilateral 

Negotiations by John Dyck

Economic Integration and Open Regionalism in APEC: The Gains for U.S. Agriculture

by William Coyle and Zhi Wang

Enlargement of the European Union to Central and Eastern Europe: Obstacles and 

Possible Consequences of Policy Harmonization

by Susan E. Leetmaa, Elizabeth A. Jones, and Ralph Seeley

Western Hemisphere Trading Blocs and Tariff Barriers for U.S. Agricultural Exports

by James V. Stout and Julieta Ugaz-Pereda

Appendix: Model Documentation 

ii
iii

Executive Summary

Regional trade agreements (RTAs) have become an increasingly important part

of the global trading system. The United States has become an active participant

in RTAs, with memberships in the North American Free Trade Agreement

(NAFTA), the Asia Pacific Economic Cooperation (APEC) forum, and the U.S.-

Israel Free Trade Agreement. The United States also has trade initiatives in the

Caribbean Basin. An important new regional trade agreement is the proposed

Free Trade Area of the Americas (FTAA), which would encompass most countries of the Western Hemisphere and help reconcile the proliferation of trade

agreements in the Hemisphere into one comprehensive trade pact. 

Regional trade agreements have generated intense debate. Advocates for RTAs

emphasize their trade-creating effects. By providing for freer trade among members, RTAs can increase welfare by shifting regional production toward the most

efficient producers, enabling consumers to purchase goods at lower prices.

Opponents of RTAs argue that because most agreements introduce some degree

of trade discrimination, they are likely to divert trade from more efficient producers in the rest of the world. A second issue raised by RTAs is their effect on

multilateral trade negotiations. Whether RTAs will reinforce or accelerate global

trade talks, or act to slow down or derail them is under debate.

This report analyzes the implications of regional trade agreements for U.S. agriculture. Key findings include:

U.S. agriculture can gain from participating in RTAs. By lowering trade barriers among members, the major RTAs in which the United States participates 

NAFTA, APEC and, potentially, the FTAA  are expected to benefit U.S. agriculture. In the long term, their trade-creating effects  increased agricultural

trade and specialization among RTA partners  will increase the efficiency of

U.S. agricultural producers and reduce prices for consumers. These RTAs are

expected to improve the U.S. international terms of trade in agriculture, with an

increase in U.S. farm export prices relative to import prices. 

U.S. agriculture can lose when not a member of RTAs. Expansion of the

European Union (EU) is likely to divert agricultural trade and reduce U.S. agricultural exports to the EU and to third markets. But, the current CAP program is

probably unsustainable with EU expansion, and potential EU farm program

reforms would reduce these negative impacts on the United States. A U.S. decision to remain outside the FTAA would divert trade from U.S. agriculture.

However, many expect RTAs to induce economic growth in the Western

Hemisphere. If this trade-linked growth occurs, the United States is expected to

benefit from the FTAA, even as a nonmember. 

Agriculture is an important source of U.S. gains from RTAs. Gains from trade

liberalization are roughly proportional to the size of the trade barrier. Because
U.S. agricultural exports still face relatively high trade barriers in world markets, the

inclusion of agriculture in trade agreements accounts for much of the U.S. gains from

RTAs. Over the past decade, RTAs have become more comprehensive in their treatment of agriculture, in contrast to earlier RTAs, many of which excluded agriculture. 

RTAs interact with domestic farm programs. RTAs limit the ability of member countries to maintain independent farm programs. Market arbitrage within a free trade area

will tend to unify prices, making members efforts to use farm support programs to

maintain different price levels either ineffective or costly. The conversion of most U.S.

farm support into decoupled contract payments is compatible with free trade pacts. At

the same time, the reduction in farm support and greater market orientation of many

countries farm sectors over the past decade has made RTAs more likely to include agriculture, increasing the gains from RTAs. 

In agriculture, RTAs have both trade-creating and trade-diverting impacts, but trade

creation dominates in most RTAs. To date, the empirical evidence shows that the

Australia-New Zealand Closer Economic Relations, the Canada-U.S. Trade Agreement,

and MERCOSUR (the Common Market of the South, among South American countries)

have led to increased agricultural trade with both partners and nonmembers, supporting

the view that RTAs can unleash growth in trade that benefits members and nonmembers

alike. When fully implemented, NAFTA, APEC, and the FTAA are expected to be net

trade creating in agriculture. Only the EU has resulted so far in net agricultural trade

diversion. Its expansion to include Central and East European countries is also expected

to be trade diverting. 

Regionalism and multilateralism are likely to be mutually reinforcing in agriculture.

A strong multilateral process can help minimize the negative aspects of RTAs, and

make it more likely that RTAs will take shape as trade-creating, rather than protectionist

agreements. In turn, the freer agricultural trade already achieved in the Western

Hemisphere and committed to in APEC is likely to strengthen efforts to achieve freer

trade at the upcoming mini-round. 

The United States can potentially gain more from multilateralism than from RTAs.

Because the United States is a global trader with diverse trade partners, it can potentially

gain more from global free trade than from regional trade agreements. But so far, multilateral talks have fallen far short of achieving free trade, and the gains to the United

States from the deeper commitments made by RTAs are expected to exceed those from

the Uruguay Round. But the influence of RTAs on the multilateral process is still uncertain, and they hold the potential to harm nonmembers. Because the two processes can

provide important, mutually reinforcing influences, their joint pursuit can benefit U.S.

agriculture.

iv
Introduction

The United States has been a strong proponent of a

multilateral approach to global trade liberalization.

From the perspective of economic theory, this is unambiguously a first best strategy. The global reduction

of trade barriers raises global welfare as world production shifts toward the most efficient producers, and

consumers are able to purchase goods at lower prices.

Regional trade agreements (RTAs), in contrast, can

have both positive and negative impacts. By providing

for freer trade among members, they can improve

resource allocation within the region and generate welfare gains for member countries. But because they

introduce some degree of trade discrimination, they

can divert trade from more efficient producers in the

rest of the world. In general, if trade diversion

exceeds trade creation, an RTA reduces global welfare.

Concern over the potential for trade diversion is at the

root of pessimism regarding RTAs.

A second issue raised by RTAs is their relationship to

multilateralism. The current proliferation of RTAs has

occurred simultaneously with successful global trade

negotiations, which were concluded in 1993 under the

Uruguay Round of the General Agreement on Tariffs

and Trade (GATT), and have continued in a series of

mini-rounds for specific sectors, including telecommunications and services. In agriculture, a mini-round

of trade liberalization talks is scheduled to begin in

1999 at the World Trade Organization (WTO), the successor organization to the GATT. The current proliferation of RTAs has generated debate about the dynamics of the relationship between them and the multilateral process of global trade liberalization under the

WTO. Will regional trade agreements serve as building blocks for multilateral trade liberalization in the

WTO? Will RTAs have a tendency to expand their

membership as they adopt more open economic policies  and will this tendency eventually converge on

global free trade? Could these smaller, regional negotiating groups reinforce or even accelerate the multilateral process by making more progress on difficult

issues  going narrow and deep instead of wide and

shallow? Or will regional trade agreements tend to do

the opposite, and act as stumbling blocks to multilateral trade liberalization? Will they entrench protectionist

interests that benefit from trade diversion? Will they

create fortresses that slow or derail multilateral trade

negotiations? Uncertainty regarding the effects of

regional trade agreements on the multilateral process is

a second reason why some argue that regionalism

could be detrimental to the global trading system. 

Over the past decade, regional integration has gained

momentum, with active U.S. participation. The pursuit

of regionalism by the United States rests on a view

that the trade-creating effects of the current regional

agreements are likely to predominate, for a number of

reasons. One is that the characteristics of the current

Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture/AIB-745 ✵ 1

REGIONAL TRADE AGREEMENTS

AND U.S. AGRICULTURE

AN OVERVIEW
wave of regional agreements tend to reinforce the

globalism to which the United States remains committed. Many recent agreements have locked in domestic

reforms and the opening of economies, reinforcing the

goals of globalism for freer trade, greater market

access, and global efficiency gains. Recent agreements stand in contrast to those that proliferated in the

1930s, and again in the 1950s and 1960s, many of

which were inward looking, and motivated by protectionism. 

Second, the U.S. pursuit of regionalism, particularly in

the North American Free Trade Agreement (NAFTA)

and in the Asia Pacific Economic Cooperation (APEC)

forum has been in part a response to some faltering in

the GATT/WTO process. Regionalism represented a

second best alternative when prospects for multilateral

trade liberalization under the GATT became uncertain

in the early 1990s. The U.S. pursuit of regionalism

and the prospect of fortresses developing on both

sides of the Atlantic were credited with helping to

bring the Uruguay Round to a successful conclusion.

Now, regionalism and multilateralism under the WTO

process are both being pursued, consistent with the

U.S. view that the two processes are mutually reinforcing. Finally, U.S. participation in regional trade pacts

assures the United States of a continued role in regional agreements, which appear likely to move forward

with or without U.S. participation. 

This report analyzes the implications of regionalism

for the United States, focusing on the effects of major

RTAs on U.S. agriculture. These are the key questions and findings of this report:

How Will Regional Trade Agreements

Affect U.S. Agriculture?

U.S. agriculture can gain from participating in

RTAs. By lowering trade barriers among members,

the major RTAs in which the United States participates  NAFTA, APEC and, potentially, the Free

Trade Area of the Americas (FTAA)  are expected to

be trade creating. Increased U.S. agricultural trade

and specialization among RTA partners will generate

efficiency gains for U.S. farm producers and consumers, although this will lead to some adjustment and

change in U.S. agriculture. The U.S. international

terms of trade in agriculture are expected to improve,

with an increase in farm export prices relative to

import prices. 

U.S. agriculture can lose when not a member of

RTAs. RTAs divert trade by lowering imports from

the rest of the world as trade with partners increases.

European Union (EU) expansion is likely to divert

agricultural trade and reduce U.S. agricultural exports

to the EU and to third markets. But, the current

Common Agricultural Policy (CAP) program is probably unsustainable with EU expansion, and potential

EU farm program reforms would reduce these negative

impacts on the United States. A U.S. decision to

remain outside the FTAA would divert trade from U.S.

agriculture. However, RTAs are expected to induce

economic growth in the Western Hemisphere. If this

trade-linked growth occurs, the United States will benefit from the FTAA, even as a nonmember. Economic

growth in the region will stimulate Latin American

agricultural trade with the United States and raise farm

incomes, although these effects would be larger if the

United States were party to the FTAA. 

Agriculture is an important source of U.S. gains

from RTAs. Gains from trade liberalization are

roughly proportional to the size of the trade barrier.

Because agriculture still faces relatively high trade

barriers in world markets, its inclusion in trade agreements accounts for much of the U.S. gains from

RTAs. Recent RTAs have been more comprehensive

in their treatment of agriculture, in contrast to earlier

RTAs, many of which excluded agriculture. In APEC,

agriculture accounts for 75 percent of total expected

U.S. welfare gains from the RTA. With or without

U.S. participation in the FTAA, U.S. agricultural trade

will increase by more than other sectors due to the

hemisphere-wide RTA. In the case of EU expansion,

U.S. agriculture will be affected more than other sectors, but these effects will be negative, while effects on

U.S. manufacturing will be positive.

RTAs interact with domestic farm programs.

RTAs limit the ability of member countries to maintain independent farm programs. Market arbitrage

within a free trade area will tend to unify prices, making members efforts to use farm support programs to

maintain different price levels either ineffective or

costly. The conversion of most U.S. farm support into

decoupled contract payments is compatible with free

trade pacts. At the same time, the past decades reduction in farm support and greater market orientation of

many countries farm sectors have eliminated the

inherent conflict between free trade and farm programs, making RTAs more likely to include agriculture, and increasing the gains from RTAs.

2 ✵ Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture: Overview/AIB-745 
Are Regional Trade Agreements 

Building Blocks or Stumbling Blocks 

to Multilateralism?

Economywide trade creation effects dominate in

major RTAs, raising world welfare. Concern over

the size of the trade-diverting impacts of RTAs has

been an important argument against regionalism. Case

studies of the longrun impacts of four major RTAs

(NAFTA, APEC, FTAA, and expanded EU) show that

trade-diversion effects are likely to be smaller than

trade-creation effects. Because they are expected, on

net, to create trade, these RTAs will improve global

welfare. These findings suggest that these RTAs will

fulfill the intent of the GATT/WTO rules that permit

RTAs: their gains from liberalizing internal trade at a

pace faster than committed to in the Uruguay Round

will outweigh the negative impacts that result from

their discrimination against nonmembers.

In agriculture, RTAs have both trade-creating and

trade-diverting impacts, but trade creation dominates in most RTAs. The Australia-New Zealand

Closer Economic Relations (CER), the Canada-U.S.

Free Trade Agreement (CUSTA), and MERCOSUR

have led to increased agricultural trade with both partners and nonmembers, supporting the view that RTAs

can unleash growth in trade to benefit members and

nonmembers alike. When fully implemented, NAFTA,

APEC, and the FTAA are expected, on net, to create

trade in agriculture. Only the EU has resulted so far in

net agricultural trade diversion. Its expansion to include

Central and Eastern European countries is also expected to be trade diverting. While trade-creating RTAs

are likely to pursue more open markets at multilateral

talks, trade-diverting RTAs are less likely to do so. 

Recent RTAs have committed to deeper agricultural trade liberalization than agreed to in the Uruguay Round. Smaller regional negotiating groups, the

reduction and decoupling of domestic farm support in

some RTAs, and a policy paradigm shift in many

countries toward more open markets may account for

commitments by recent RTAs, particularly in the

Western Hemisphere, to a comprehensive liberalization

of agricultural trade. This trend is likely to create a

stronger constituency for meaningful trade reforms in

the upcoming WTO mini-round on agriculture. 

Regionalism and multilateralism are likely to be

mutually reinforcing in agriculture. A credible multilateral process has already proven to be an important

element in the agricultural trade liberalization achieved

in some agreements. In the future, multilateral commitments to reduce protection and support in agriculture could be pivotal in influencing the directions to be

taken by APEC and an expanded EU on farm policy

reforms and the pace of regional agricultural trade liberalization. In turn, the freer agricultural trade already

achieved in the Western Hemisphere and committed to

in principle in APEC is likely to strengthen efforts to

achieve freer trade at the upcoming mini-round. 

What Are the Policy Implications 

for U.S. Agriculture? 

It is important that RTAs achieve their commitments to liberalize agricultural trade. While some

recent RTAs have defined a time frame for liberalizing

substantially all agricultural trade (NAFTA, MERCOSUR), specific reduction commitments have not been

defined in APEC, and the treatment of agriculture in

the FTAA is still to be negotiated. Progress in the multilateral talks on reducing barriers to agricultural trade

could influence these undefined aspects of RTAs.

RTAs that selectively liberalize trade make the tradediverting effects of RTAs more likely to dominate. 

A strong multilateral process can help minimize the

negative aspects of RTAs. Studies in this report find

that most RTAs have trade-diverting impacts in agriculture, although they are smaller than their trade-creating effects. Protectionist aspects of RTAs include:

closed memberships and the adoption by members of

common, distorting internal policies, as in the EU; the

exclusion of some sensitive agricultural commodities,

as in NAFTA; and the adoption of common external

tariffs with agricultural tariff escalation, as in the

Andean Pact and Central America Common Market

(CACM). A strong multilateral process that effectively

disciplines the negative aspects of RTAs makes it

more likely that RTAs will take shape as trade creating, rather than protectionist agreements. 

The United States can potentially gain more from

multilateralism than from RTAs. However, multilateral talks have fallen far short of achieving global

free trade. Economywide U.S. welfare gains from the

Uruguay Round are less than those expected from all

RTAs combined. Although the regional initiatives

have made significant commitments for opening trade

with key U.S. partners, the potential remains for large,

additional U.S. welfare gains from achieving global

free trade. Agriculture accounts for much of these

Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture/AIB-745 ✵ 3
gains from free trade, indicating the importance to the

United States of pursuing both regional and multilateral agricultural trade initiatives. 

Regionalism and Multilateralism:

What Do They Mean?

Regionalism

Regionalism, regional trade agreement, and

regional trade area are general terms that refer to a

commitment among a group of countries to achieve

some degree of economic integration. The terms refer

to the whole spectrum of levels of economic integration (table 1). The most common type of regional integration is a free trade area, in which internal trade barriers are removed but members maintain independent

trade policies toward nonmembers. The free trade

agreement among the United States, Canada, and

Mexico is an example of a free trade area. The most

comprehensive RTA is an economic union, in which

members remove all internal trade barriers, permit the

free movement of capital and labor, erect common

external trade barriers, and unify their fiscal and monetary policies. The EU, as it moves toward the adoption of a common currency, is an example of an economic union. 

Two agreements analyzed in this report are not included in table 1. APEC is a regional trade initiative, but

not a formal RTA. Likewise, formal negotiation of the

FTAA has just begun. The level of economic integration it will achieve is unknown, although it is not

expected to become an economic union. APEC and

the FTAA differ from RTAs in some important

respects. A key characteristic of both is their inclusion

of countries as well as existing trade agreements as

components. APEC includes the AFTA and NAFTA

agreements, among others; while the FTAA includes

NAFTA and MERCOSUR, among others. One role for

these initiatives is to reconcile, and possibly to build

on, the proliferation of RTAs. While these supranational negotiating initiatives might better be termed

free trade networks (Josling, 1998), for convenience

they will be referred to as RTAs in this report. 

Regional trade agreements have become a significant

part of the global trading system. Between 1947 and

1994, 109 regional trade agreements were reported to

the GATT, nearly equal to the number of countries that

are GATT members (see article by Sheffield, in the

companion report). Since 1995, at least 16 new RTAs

have been reported to the WTO. RTAs have been established in every region of the world. In the Western

Hemisphere, for example, about 40 trade agreements

are currently operating, and at least a dozen others are

under negotiation (see articles in the companion report

by Diao/Somwaru/Raney; and Stout/Ugaz-Pereda).

Nearly all WTO members are party to at least one RTA.

RTAs have taken different approaches to reducing barriers to agricultural trade. Most of the recent major

RTAs have included agriculture in the removal of

internal trade barriers, particularly in the Western

Hemisphere (table 2). However, some of the European

agreements have only partially liberalized internal

agricultural trade. In most recent agreements, most

4 ✵ Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture: Overview/AIB-745 

Table 1 — Selected RTA’s and levels of economic integration 

Type Regional trade area Level of integration

Free trade area NAFTA, US-Israel FTA, Members eliminate tariffs among themselves but 

CEFTA, EU-CEE keep their original tariffs against the rest of the 

Association Agreements, world

Australia-New Zealand CER

Customs union MERCOSUR, Andean Pact, Members eliminate tariffs among themselves and

CACM adopt a common tariff against the rest of the world

Common market European Economic Members eliminate tariffs among themselves, 

Community adopt a common external tariff, and remove 

impediments to movements of factors of 

production across member countries.

Economic union European Union Members move beyond the common market to

unify their fiscal and monetary policies.
Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture/AIB-745 ✵ 5

Table 2--Summary of selected RTA’s and their agricultural provisions

RTA Created Current members Agricultural provisions

European 1958 Austria, Belgium, Denmark, Finland No internal trade barriers

Union (EU) (EEC-6) France, Germany, Greece, Ireland, Common Agricultural Policy (unified trade

Italy, Luxembourg, Netherlands, policy and support)

Portugal, Spain, Sweden, United 

Kingdom

Closer Econ- 1983 Australia and New Zealand Free trade in agricultural products

omic Relations 

(CER) Agreement

U.S.-Israel FTA 1985 U.S., Israel Agriculture is covered, but Israel was granted the

right to protect infant industries, particularly in 

agriculture. 1996 Agreement designed to further 

liberalize agriculture trade particularly U.S.

products facing nontariff barriers.

Asia-Pacific 1989 Australia, Brunei, Canada, Chile, Goal of free trade in agricultural products by 2010

Economic China, Hong Kong, Indonesia, for developed economies and by 2020 for developing

Cooperation Japan, Malaysia, Mexico, New economies.

Forum (APEC) Zealand, Papua New Guinea, 

Philippines, Singapore, South

Korea, Taiwan, Thailand, United 

States. Peru, Russia, and Vietnam 

became members in 1998.

Southern 1991 Argentina, Brazil, Uruguay, Nearly all intra-regional tariffs removed, only exempt

Common Paraguay agricultural product is sugar. Established Common

Market External Tariff, ranging from 0-20 percent for 

(MERCOSUR) agricultural products (avg. 10 percent)—generally 

lower than previous tariff levels.

Association of 1991 Indonesia, Malaysia, Philippines, Transition to FTA with CET planned by 2003.

Southeast Asian Singapore, Thailand, Brunei, All agricultural products are included.

Nations Free Vietnam, Laos, Myanmar

Trade Area 

(AFTA)

Central Euro- 1992 Hungary, Poland, Czech Republic, Scheduled to fully liberalize agricultural trade in

pean Free Trade Slovakia, Slovenia, Romania 1998, postponed until 2000

Association 

(CEFTA)

EU-CEE 1992 EU and Estonia, Hungary, Latvia, Separate protocol for agriculture: 5-year phase-in 

Association Lithuania, Poland, Romania, for most concessions, limited to tariff decreases

(“Europe”) Bulgaria, Czech Republic, and quota increases. Trade in some products, 

Agreements Slovenia such as grains, not liberalized.

North Ameri- 1994 Canada, Mexico, United States Most agricultural tariffs between Canada and U.S.

can Free (CUSTA, eliminated by Jan. 1, 1998; restrictions on 

Trade Agree- 1988) sensitive products remain (dairy, poultry, eggs, sugar 

ment (NAFTA) containing products). Agreement not to use export

subsidies in bilateral trade and not to increase or 

introduce new tariffs. 15-year phase-out of all tariffs, 

quotas, and licenses that are barriers to U.S.-

Mexican agricultural trade. 15-year phase-out of

tariffs, quotas, and licenses for most CanadianMexican agricultural trade.

Source: Sharon Sheffield, “Agriculture, the GATT and Regional Trade Agreements,” in the companion report, AER-771.
farm products are included, although sensitive agricultural products are either given long transition periods

or excluded (notably, dairy, poultry, and eggs in

NAFTA; sugar in MERCOSUR). 

Global agricultural trade has become increasingly regionalized, in some cases in advance of formal regional trade agreements. Thomas Vollrath (see article in

the companion report) analyzed the agricultural trade

patterns of the 34 member countries of six RTAs.

Collectively, these countries accounted for 62 percent

of global trade from 1970 to 1995. While their share

of global trade is stable, the share of trade within these

regions relative to their trade outside the region

increased from 30 percent in 1970 to 40 percent by

1995.

Multilateralism

Like regionalism, multilateralism is a general term

that has several meanings. In this report, we define

multilateralism as the multilateral negotiation of global

trade liberalization. While multilateralism was

strengthened by the completion of the Uruguay Round,

full liberalization of global trade has not yet been

achieved, and some trade barriers will likely remain

for some time. The definition of multilateralism is

important when the question is: How does regionalism relate to multilateralism? In theory, global free

trade is optimal, but this has less policy relevance than

a comparison of RTAs, many of which have achieved

substantially free trade, with a multilateral process that

still contains many remaining trade barriers. 

Multilateralism also refers to the lowering of trade barriers on a nondiscriminatory, Most-Favored-Nation

(MFN) basis, in which any tariff concessions granted

to a partner are also extended to the rest of the world.

An example of this is the open regionalism approach

of APEC. Under open regionalism, members of APEC

reduce their import barriers against both other members and the rest of the world. This MFN-based

approach by an RTA can benefit all countries, but there

is the danger that nonmembers will free ride and

accept an RTAs tariff reductions without lowering

their own barriers.

The Welfare Effects of RTA’s

Trade creation, trade diversion, and terms of trade

effects constitute the welfare impacts of an RTA (see

appendix on the Economics of Regionalism). Trade

creation refers to the increased trade within an RTA

when internal tariffs are lowered or removed.

Production efficiency increases when a member

imports more from a lower cost RTA partner, and its

own high-cost domestic production falls. Trade diversion occurs when a member shifts its imports from

more efficient, nonmember producers to less efficient

partner countries within the RTA. Regional trade

agreements are likely to have both trade-creating and

trade-diverting impacts, and which effect will dominate depends on many factors. 

The effect of RTAs on consumers is also important to

consider. Trade creation benefits consumers because

they can buy imported goods that are produced at

lower cost than the domestic variety. Lower prices, in

effect, raise consumer income. Increased income and

consumption may cause consumers to import more

goods, and through this trade expansion the RTA could

even benefit nonmembers.

RTAs also have terms of trade impacts: changes in the

supply of and demand for traded goods will lead to

changes in export and import prices for both members

and nonmembers. An improvement in terms of trade

is good for a country; it means a given level of exports

buys more imports, which increases consumption and

welfare. 

Welfare is the sum of trade creation, trade diversion,

and terms of trade impacts. In most analyses discussed here, welfare is measured in terms of equivalent variation, which measures the cost to consumers

of the same bundle of goods, before and after entering

an RTA. Welfare improves if the bundle of goods costs

less as a result of the RTA, but deteriorates if the bundle of goods costs more. 

There are other sources of welfare gains from an RTA

in addition to the static gains described here. RTAs

can lead to dynamic gains if they stimulate investment, or if trade leads to productivity growth through

technology transfers or learning by doing. RTAs can

also lead to a rationalization within industries, with

fewer companies specializing in production for a larger market, while less efficient producers close down.

Studies in this report focus on the static welfare

impacts of RTAs, except for the analysis of the FTAA,

which links trade with increased investment and productivity growth.

6 ✵ Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture: Overview/AIB-745 
How Major RTA’s are Analyzed

The studies in the companion report include two global assessments of RTAs: a historical analysis of the

impacts of six RTAs on world agricultural trade during 1970-95, by Thomas Vollrath, and an analysis of

the expected impacts of five RTAs on U.S. and global

trade and welfare by Mark Gehlhar. There are regional case studies of four RTAs  an expanded EU,

APEC, FTAA, and NAFTA. The first three case studies analyze RTAs under alternative assumptions about

membership or internal policies, reflecting the current

uncertainty about the conditions of their implementation. EU enlargement is analyzed under the assumptions that the support presently provided under its CAP

is extended to the Central and Eastern European

Countries (CEEC), and alternatively, that significant

CAP reforms are implemented simultaneously with

enlargement. APEC is analyzed as both a preferential

free trade area, and as an MFN-based RTA, in which

members adopt open regionalism and extend their

trade liberalization to both members and nonmembers

of APEC. Regional integration in the Western

Hemisphere is analyzed under the two assumptions

that the United States does and does not join the

FTAA. This construction of model experiments provides a measure of potential U.S. gains from the

FTAA. In the case of NAFTA, the interactions of the

RTA and recent domestic farm program reforms are

analyzed. 

The global analysis by Mark Gehlhar and most regional analyses use multi-country, computable general

equilibrium (CGE) models, which are described in an

appendix in the companion report. CGE models are

economy-wide and take into account linkages between

agriculture and other sectors through intermediate

demand and factor markets. These models focus on

sectoral resource allocation, production, and trade.

They solve for prices, wages, and the real exchange

rates that equilibrate product markets, factor markets,

and the balance of trade between countries. The

analysis of EU expansion by Leetmaa, Jones, and

Seeley uses ESIM, a partial equilibrium model of the

European agricultural sector. This model has more

disaggregation of EU agriculture than is now available in a CGE model, and includes detailed modeling

of EU farm programs. Both the CGE models and

ESIM provide controlled simulations of the impacts of

RTAs only, and do not provide actual long-term projections of the U.S. or world economies. 

A Global Assessment of RTA’s

In the global analysis, Gehlhar finds that all RTAs

combined, including those already being implemented

(NAFTA and MERCOSUR) and proposed RTAs (an

FTAA that includes the United States, APEC under

open regionalism, and EU expansion), will raise world

welfare by $49.6 billion (table 3). Of this total welfare

gain, $47.6 billion is due to APEC (assuming open

regionalism), reflecting the large role of APECs

members in the world economy, and the relatively high

trade barriers in Asia. RTAs contribute more to world

welfare than did the Uruguay Round (UR) of the

GATT. This is because RTAs are assumed to achieve

full trade liberalization in all sectors, compared with

the partial trade liberalization achieved in the Uruguay

Round. Yet, even these comprehensive RTAs leave

considerable scope for further gains from multilateral

trade liberalization. World welfare could increase by

an additional $62 billion under global free trade. 

The global analysis identifies some important interactions among RTAs. One example is the conclusion

that NAFTA could result in a small reduction in world

welfare, although the United States is expected to gain

from its membership. Most of the welfare loss would

Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture/AIB-745 ✵ 7

Table 3—Global and U.S. welfare impacts of

regional and multilateral trade liberalization 

Trade agreement Global U.S.

impact impact 

Billion dollars 

Uruguay Round 33.7 4.6 

NAFTA -.58 2.32 

MERCOSUR .80 -0.36 

FTAA-USA .34 -.34 

FTAA+USA 1.32 3.28 

EU Expansion 

(no CAP reform after 1992) .48 -.6 

APEC (preferential trade area) 36.47 11.3 

APEC (open regionalism) 16.95 -8.92 

Total RTA’s 49.62 6.68 

Global free trade (after RTA’s) 62.0 7.51 

Notes: Experiments are conducted sequentially.

Results show the incremental welfare impact of individual

trade reforms. The net effect of APEC on the U.S. is a $2.4

billion welfare gain.

Source: Mark Gehlhar, “Multilateral and Regional Trade

Reforms: A Global Assessment from a U.S. Perspective,” in

the companion report.
occur in Asia and stems from policy distortions in

Asian agriculture, including high import protection

and other farm support. NAFTA slightly increases

farm production in Asia, and this movement of additional resources into a highly distorted sector could

lower Asian welfare. If Asian countries remove their

trade distortions, as committed to under the APEC

agreement, global welfare losses due to NAFTA will

be eliminated. A second example is the effect that EU

enlargement and farm program reforms may have on

U.S. gains from APEC. If APEC adopts open regionalism rather than trade preferences, U.S. agriculture

would face greater competition in Asian markets from

subsidized EU agricultural producers and from other

countries. If EU enlargement is accompanied by

reduced farm support, as expected, then U.S. benefits

from APEC under open regionalism will increase. 

Major RTA’s Increase World 

and U.S. Welfare

In table 4, we report the global and U.S. welfare

impacts from the regional case studies. An important

difference between the regional and the global analyses is that the global analysis, which is sequential,

incorporates additional trade liberalization into each

base. Regional case studies isolate the impact of a single RTA, and enrich the analysis by incorporating

additional sectoral or policy detail in agriculture, or by

including the dynamic gains from RTAs. All regional

case studies of the prospective effects of RTAs find

that in aggregate (but not necessarily in agriculture)

their trade-creation effects dominate trade diversion.

The size of the trade-diverting impacts of RTAs has

been an important element in the debate over RTAs.

We find that their trade-diversion effects are smaller

than their trade-creation effects. Because they are net

trade creating, these RTAs improve global welfare.

While the global welfare impact of an RTA is important, much of the concern about RTAs relates to the

distribution of welfare effects between members and

nonmembers. Although all RTAs are net trade creating, most have some trade diversion effects that hurt

nonmembers. In this report, we find that the United

States benefits from the RTAs in which it is a member

(NAFTA, APEC, FTAA). Increased trade and low

trade diversion generate efficiency gains and raise U.S.

welfare. We also find that U.S. welfare may increase

even when it is not an RTA member. In the two such

cases examined in this report (FTAA without U.S. participation, EU expansion), two different factors are

important: the economic growth associated with

RTAs, and the interaction of trade liberalization with

other domestic policy distortions. 

RTAs can stimulate foreign investment, capital stock

growth, and productivity gains, and this economic

growth increases the benefits from free trade. These

potential dynamic gains from an RTA are captured in

the regional case study of the FTAA by Diao,

Somwaru, and Raney. The starting point of the

dynamic FTAA analysis is the observation that as a

result of market-oriented policy reforms in many Latin

American countries in the 1980s, trade has increased

and economic growth has accelerated. Assuming that

trade and productivity growth are linked, the increased

trade under Western Hemisphere RTAs is likely to

lead to strong economic growth in the Hemisphere.

Economic growth will lead to an expansion of trade

that benefits the United States. Western Hemisphere

integration (including the Uruguay Round, NAFTA,

and MERCOSUR) could lead to a $5.7-billion

increase in U.S. welfare in the short run. U.S. participation in the FTAA could generate additional welfare

gains of $7 billion. The global analysis by Gehlhar

concurs that there are costs to the United States from

not participating in the FTAA. The static, global

analysis does not take into account dynamic productivity increases related to trade, and concludes that U.S.

welfare declines if the United States does not participate in the FTAA. 

EU expansion provides an example of how domestic

policy distortions interact with trade liberalization.

(Domestic farm policies and RTAs are discussed in

more detail below). In Liapis and Tsigas analysis of

EU expansion, the CEEC is assumed to adopt internal

EU policies, including 1992 farm price supports. This

would reverse a policy structure within the CEEC

countries that previously subsidized manufacturing and

taxed agriculture. As the policy incentives are

reversed with EU accession, and CEEC manufacturing

output declines, U.S. manufacturing will likely gain.

U.S. manufacturing gains are likely to be sufficient to

outweigh losses to U.S. agriculture, and result in a

small, net welfare gain for the United States. The

regional analysis finds a small net welfare gain ($240

million) for the United States from EU expansion

while the global analysis finds a small welfare decline

($600 million). The regional analysis probably overstates the welfare gain to the United States because it

assumes that U.S. farm programs are coupled to pro8 ✵ Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture: Overview/AIB-745 
duction, so that a declining agricultural sector reduces

U.S. subsidy expenditure and contributes to the U.S.

welfare gains. Both the global analysis and the

regional case study share a key conclusion regarding

EU expansion to central and eastern Europe: the

aggregate economic impacts on the United States are

likely to be small. 

U.S. welfare could improve due to its membership in

APEC, whether as a preferential trade agreement or

under an open regionalism agreement. However,

U.S. welfare gains are smaller under open regionalism.

This is because nonmembers can free ride and

accept APEC tariff reductions without an obligation to

reciprocate. Some of the loss to the United States

from free riding occurs in agriculture, which faces

greater competition and downward pressures on export

prices in the APEC market, compared with a preferential RTA. These terms-of-trade losses account for the

relatively smaller gains to the United States from open

regionalism. Free riding may not, however, be a stable

equilibrium. Coyle and Wang find that free riders balance of trade worsens under open regionalism because

they become uncompetitive in global markets if they

maintain their own tariffs on imported intermediate

inputs into consumer or capital goods. This gives nonAPEC countries an incentive to undertake similar trade

liberalization. The uncertainty about whether free riding is likely to occur has raised concerns about open

regionalism in the APEC framework. Nevertheless,

open regionalism is considered to be an ideal form of

RTA because it eliminates the possibility of trade

diversion. 

U.S. Agriculture and 

Regionalism

We consider the effects of regional trade agreements

on U.S. agriculture from two perspectives. First, from

a sectoral perspective, we can ask the same questions

about the U.S. agricultural sector as we do for the U.S.

and the global economies: Is the RTA, on net, tradecreating or trade-diverting? Do terms of trade improve

for U.S. agriculture? But, welfare cannot be addressed

at the sectoral level because it is an aggregate measure; it represents the sum of RTA impacts that are

likely to differ by sector.

Second, we consider the more complex question of the

relationship between regionalism and domestic policy,

particularly farm support programs. Many countries

provide their farmers with price or income support,

Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture/AIB-745 ✵ 9

Table 4 — Regional case studies: Global and U.S. welfare impacts of selected RTA’s 

Trade agreement Model type Global impact U.S. impact 

Billion dollars 

EU Expansion (no CAP reform CGE (Liapis & Tsigas) 1.6 0.24

after 1992)

EU Expansion + CAP reform CGE (Liapis & Tsigas) 6.8 0.30 

Western Hemisphere Intertemporal dynamic CGE 18.5-174.61 5.76-42.821

integration (FTAA - USA) (Diao, Somwaru, Raney)

Western Hemisphere Intertemporal dynamic CGE 26.6-263.21 12.76-83.861

integration (FTAA + USA) (Diao, Somwaru, Raney)

Net FTAA effect on U.S. Intertemporal dynamic CGE 8.1-88.6 7.0-41.04

(Diao, Somwaru, Raney)

APEC (Open Regionalism) Recursive dynamic CGE (Coyle and Wang) 3102 38.52

APEC (Preferential Trade Area) Recursive dynamic CGE (Coyle and Wang) 2332 57.12

NAFTA CGE (Burfisher, Robinson, Thierfelder) N.A. 0.46

N.A. means scenario was not run by that model, or not able to be calculated given the model structure.

1 Range of results of the regional case study are from an intertemporal dynamic CGE model. The first numbers are obtained

for the short term and the second numbers are for long-term equilibrium. The effects of NAFTA, MERCOSUR, and the

Uruguay Round of the GATT are included in both scenarios. The differences between the two scenarios are caused by

whether the United States joins the FTAA.

2 Results of the regional case study are from a recursive dynamic CGE model. Results reported are for 2020, and take into

account the exogenous capital, labor, and productivity growth that occur between 1992 and 2020.
and import protection or export subsidies. How does

free trade within a region affect members domestic

farm programs? Conversely, how have RTAs been

affected by the unilateral, domestic policy reforms

adopted by many countries in the 1990s, particularly

in agriculture?

Most Existing RTA’s Have Created 

Trade in Agriculture

Vollraths historical analysis of agricultural trade during 1970-95 finds that three RTAs  the AustraliaNew Zealand CER, the CUSTA, and MERCOSUR 

have been net trade-creating in agriculture. The

ASEAN Free Trade Area (AFTA), whose members are

competitive rather than complementary in agricultural

production, displays no evidence of having influenced

agricultural trade flows. Of the major RTAs analyzed,

only the EU has resulted in agricultural trade diversion. Because the NAFTA and APEC RTAs are not

yet fully implemented, it is too soon to assess their

impacts on agricultural trade. 

U.S. Agriculture Mostly Benefits from

Prospective RTA’s

U.S. agriculture is expected to gain from its membership in RTAs (NAFTA, APEC, FTAA). Regional case

studies found that increased agricultural exports and

imports will generate efficiency gains, contributing to

welfare gains. Agricultural trade creation is expected

to exceed trade diversion and, in NAFTA and APEC,

10 ✵ Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture: Overview/AIB-745 

Table 5--How regional trade agreements affect U.S. agricultural trade

Regional trade agreements Regional trade agreements

excluding the United States including the United States 

EU expansion EU expansion Western Western APEC APEC NAFTA

+ CAP (no CAP Hemisphere Hemisphere (Open (preferential

reform reform after integration integration regionalism) trade area)

1992) (FTAA-USA) (FTAA+USA)

ESIM partial CGE Intertemporal Intemporal Recursive dynamic CGE

equilibrium (Liapis & dynamic dynamic CGE (Coyle and (Burfisher,

(Leetmaa, Tsigas) CGE CGE Wang)3 Robinson,

Jones and (Diao, (Diao, Thierfelder)

Model Seeley)1 Somwaru, Somwaru,

Raney)2 Raney)2

Million dollars 

Change in total — -15 980 1,810 19,800 14,200 258

U.S. ag. imports

Change in total — -834 2,530 3,300 75,700 90,500 248

U.S. ag. exports

Change in U.S. ag. — 44 980 2,080 8,000 12,100 270 

imports from RTA

Change in U.S. ag. — -400 1,660 2,800 79,000 101,000 582

exports to RTA

Net impact Likely Diverting Creating Creating Creating Creating Creating

diverting 

Change in intl. ag. Likely Shortrun Shortrun

terms of trade deteriorates Improves improvement/ improvement/ Improves Improves Improves

longrun longrun

decline decline

1The partial equilibrium model does not capture bilateral trade flows. A reduction in EU agricultural imports implies lower

U.S. agricultural exports, so the impact on the U.S. is concluded to be “likely trade diverting.”

2Results are from an intertemporal dynamic CGE model. The numbers are obtained for the short-term equilibrium. The

effects of NAFTA, MERCOSUR, and the Uruguay Round of the GATT are included in both scenarios. The differences

between the two scenarios are caused by whether the U.S. joins the FTAA.

3Results of the regional case study are from a recursive dynamic CGE model. Results reported are for 2020, and take into

account the exogenous capital, labor, and productivity growth that occur between 1992 and 2020.
U.S. terms of trade in agriculture are likely to improve

(table 5). In the FTAA, U.S. agricultural terms of

trade may decline in the long run as agricultural productivity gains in Latin American countries increase

their competitiveness in third markets  and assuming

U.S. trade-linked productivity gains are relatively

small  but this economic growth also further stimulates their agricultural trade with the United States. 

RTAs in which the United States does not participate

have mixed effects on U.S. agriculture. Liapis and

Tsigas find that U.S. agriculture is hurt by the trade

diversion that results from EU expansion, and U.S.

farm exports decline. U.S. agricultural terms of trade

improve because increased subsidized production in

new EU members causes U.S. agricultural import

prices to fall by more than export prices. Leetmaa,

Jones, and Seeley find that declining EU agricultural

import demand is likely to reduce U.S. farm exports.

In the case of the FTAA, economic growth will benefit

U.S. agriculture even if the United States does not participate in the FTAA, but it gains more by participating. Diao, Somwaru, and Raney find that U.S. agricultural exports and imports would increase by 6 and

3.2 percent, respectively, if it does not participate,

compared with 7.9 and 6.4 percent, respectively, if the

United States joins the FTAA. That is, if the United

States joins the FTAA, U.S. farmers can achieve an

additional 2-percent increase in agricultural exports,

and U.S. consumers benefit from an additional 3-percent increase in agricultural imports in the short run.

EU expansion and the FTAA, with and without the

United States, both have important effects on increased

export competition for the United States in third markets. The expansion of the EU to include the CEEC

countries results in lower U.S. agricultural exports to

both the EU and third countries. In the case of the

FTAA, this competition is likely to become keener if

the United States participates in the regional free trade

area. This is because the technological advances in

our FTAA partners that are linked to trade are likely to

be larger if they have greater opportunities to integrate

their economies with the U.S. economy through trade

and capital investment. (It is assumed that U.S. tradelinked productivity growth is lower than in its less

developed partners in the FTAA. Sources of U.S. productivity growth that are not trade-linked are not taken

into account in this model.) In the FTAA analysis, the

gains in U.S. exports are greater in the short and medium run, compared with the long run, when sustained

technological change in our FTAA partners increases

their export supply. While this analysis highlights the

effects of an FTAA on increased competition for the

United States, it also shows the importance of economic growth and development in these countries for stimulating their demand for U.S. farm exports.

Until recently, agriculture has been excluded or given

special treatment in most RTAs. Yet, the comprehensive inclusion of agriculture is a source of much of the

expected gains from RTAs. This is because tariffs and

nontariff barriers are relatively high in agriculture, and

the gains from liberalization are more or less proportional to the size of the initial trade distortions. Coyle

and Wang find that agriculture accounts for more than

75 percent of total U.S. welfare gains from APEC

because of high initial rates of protection. ASEANs

trade-weighted agricultural import tariff was 43 percent in 1992, Chinas was 44 percent, and Japans was

76 percent. Gehlhar also finds that food and agriculture contribute significantly to U.S. terms of trade

gains under an APEC preferential agreement. When

the relatively high APEC tariff barriers are removed,

rising APEC demand for U.S. farm products raises the

U.S. agricultural export price and offsets the rising

price of manufacturing imports from Asian members

of APEC. However, U.S. agriculture contributes a

negative terms-of-trade impact if APEC adopts open

regionalism because of increased competition from

free riders. 

Agriculture is affected more than other sectors from

regional integration in the Western Hemisphere.

Diao, Somwaru, and Raney find that, with or without

U.S. participation in the FTAA, U.S. agricultural

imports and exports will increase more than trade in

other sectors, increasing the share of agriculture in

total U.S. trade. In their analysis of EU expansion,

Liapis and Tsigas find that its impact on third countries, including the United States, is proportionately

greatest in their agricultural sectors. In most cases,

agricultural production and exports decline, while nonagricultural exports are hardly affected. Burfisher,

Robinson, and Thierfelder find that the greater market

orientation of agriculture within NAFTA has increased

the allocative efficiency gains from regional free trade.

In Mexico, the domestic farm program reforms linked

to NAFTA are critical: agriculture can now generate

allocative efficiency gains that are large enough to offset terms-of-trade losses, enabling Mexico to achieve a

welfare gain, instead of a loss, from NAFTA. 

Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture/AIB-745 ✵ 11
RTA’s and Domestic 

Farm Policy Linkages

The studies in this report focus on four important linkages between RTAs and domestic policy. First, the

arbitrage that will occur under regional free trade will

create tremendous pressures on RTA members to

reduce, decouple, or harmonize their farm support. In

effect, RTAs limit the ability of members to maintain

independent farm programs that are coupled to, or

influence, farm production or trade.

Countries have commonly used policies such as input

subsidies, guaranteed government purchases or support

prices, consumer subsidies, import protection, and

export subsidies to achieve such objectives as higher

farm prices and rural incomes, and to maintain rural

employment. Often, in developing countries, farm

subsidies are also linked to overvalued exchange rates

and are an attempt to correct an urban bias in domestic

policies. Coupled policies become problematic in an

RTA: they rely on import controls to be effective or

affordable, they undermine the export market of the

partner, or they redistribute quota rents to trade partners (table 6). If, for example, a member of an RTA

tries to maintain a different price level from its partner

through guaranteed prices or government stocks, then

imports from the partner country with the lower price

will tend to enter its market. Increased imports will

drive down the members domestic price and drive up

the costs of its price support policies. If the member

country can afford the support program, it in effect

bears at least some of the cost of supporting its partners producers as well. Domestic production subsidies may be considered to be outside the scope of a

regional trade agreement, but by increasing domestic

supply, they can in effect reduce the demand for

imports from the RTA partner and create tensions

within the union.

NAFTA provides an example of the problems resulting

from incompatible farm programs because the agreement has both substantially freed regional agricultural

trade and allowed the domestic farm programs of its

individual members to remain in place. Since NAFTA

was signed in 1993, however, all three members have

autonomously moved to reduce or eliminate farm support, and most remaining support has been decoupled

from production or prices. Before NAFTA, Mexico

had a system of guaranteed producer prices for key

crops, and provided subsidies to millers that compensated them for the high cost of domestic corn and

wheat relative to imports. In the 1980s, Mexicos

imports were relatively cheap because of both fixed

domestic prices and its overvalued exchange rate. In

anticipation of the effects of free trade on its guaranteed price program for corn and beans, Mexico converted its price support programs into direct payments.

Burfisher, Robinson, and Thierfelder estimate that

Mexicos farm program costs would have increased

135 percent due to increased farm imports under

NAFTA if it had not restructured its farm programs.

NAFTA members remaining farm support programs

have predictably led to some trade disputes among

12 ✵ Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture: Overview/AIB-745 

Table 6 — Effects of free trade on farm support programs 

Support program Impact of free trade on farm policy 

Per unit production subsidy Subsidy increases domestic supply and lowers import demand from RTA 

partner.

Guaranteed producer price With fixed producer price, there is no change in domestic supply due to RTA,

and consumer subsidy but cheaper imports from RTA partner drive up cost of subsidizing consumers to

purchase domestic product.

Price support through High domestic price support induces imports from RTA partner and drives up

government stocks support costs.

Production or marketing Domestic producers have fixed output, but face lower prices if imports increase

quota under the RTA: quota rents are redistributed to foreigners.

Direct payments Decoupled policy has no effect on adjustments of production and trade due to RTA.

Source: Adapted from Sumner and Hallstrom (1997).
them. 

The EU provides an example of how countries can

choose to harmonize their domestic policies as they

allow free regional trade. Liapis and Tsigas analyze

the expansion of the EU to include the Central and

Eastern European countries. In addition to the elimination of internal trade barriers, EU enlargement

entails harmonization of trade barriers against third

countries, the harmonization of domestic farm policies

under the CAP (leading to common prices), and a

common budget to finance agricultural support. This

common sharing of support costs can lead to unequal

and unsustainable fiscal burdens. Liapis and Tsigas

find that extending the CAP to the CEEC countries

will cost current EU members $16.2 billion. This will

likely create pressures for reforming the CAP as it is

extended to new members, and this would reduce the

trade-diverting effects of EU expansion on U.S. agriculture. 

A second linkage is that the reduction in farm support

levels and the greater market orientation of many

countries farm sectors over the past decade have

reduced the inherent conflicts between farm support

and free trade. Since the mid-1980s, many countries

have adopted policy reforms intended to make their

farm sectors more market oriented and competitive in

global markets. In the Western Hemisphere, in particular, agricultural support has been dramatically

reduced, eliminated, or decoupled. On one hand, this

likely accounts for the more comprehensive treatment

of agriculture in recent RTAs. While earlier RTAs,

such as the European Free Trade Area (EFTA),1

excluded agricultural products, most RTAs formed in

the last 10 years treat agriculture more comprehensively, particularly in the Western Hemisphere. In a case

study of the U.S.-Israel Free Trade Area Agreement,

Michael Kurtzig and Daniel Pick analyze how the

treatment of agriculture has evolved over time in a single agreement, including its more comprehensive treatment of more difficult, nontariff trade barriers.

Conversely, by entering into free trade agreements that

include agriculture, countries are effectively locking in

the reforms that they have implemented in their farm

sectors. Market arbitrage within a free trade area acts

as a discipline on internal subsidies by making some

ineffective or too costly to restore. 

Third, domestic farm policy reforms can increase the

efficiency gains that can be achieved under RTAs.

Farm policies such as guaranteed prices, government

stock holding, and export subsidies tend to insulate

farmers from market price signals and prevent the reallocation of resources that is a source of gains from

free trade. Burfisher, Robinson, and Thierfelder analyze the separate and combined effects of NAFTA and

recent farm program reforms in the United States,

Canada, and Mexico. In all three countries, the

impacts of farm program reforms alone are greater

than the impacts of NAFTA on agricultural output and

trade. However, the shift toward decoupled farm programs has caused producers to become more responsive to changing market prices due to NAFTA, and

this has increased efficiency gains from the RTA.

Under decoupled farm programs, the greater magnitude of agricultural resource reallocation in response to

NAFTA leads to larger welfare gains for the United

States and Canada. In the case of Mexico, the new

farm programs enable Mexico to gain from NAFTA.

With a more market-oriented farm sector, Mexicos

allocative efficiency gains offset its terms of trade

losses from NAFTA. Without farm program reforms,

Mexican welfare would have declined under NAFTA.

It is the combined effects of NAFTA and farm program reforms that may account for the perception that

NAFTA has had large impacts on the regions farm

sectors. 

Fourth, trade liberalization within an RTA is, in many

cases, not the only policy reform being implemented,

making the effects of RTAs difficult to isolate. In

some countries, economy-wide reforms that include

removing or reducing domestic taxes and subsidies

and unilateral trade policy reforms pre-date the formation of an RTA. These reforms create the conditions

for rapid growth in some regions trade and economies

even before the RTA, and may themselves have built

up pressures to open up markets through RTAs.

Vollraths analysis of the effects of RTAs on agricultural trade finds that increased integration and regionalization of trade occurred in both MERCOSUR and

APEC prior to formal agreements. In other cases

(Australia-New Zealand CER and CUSTA) a sharp

rise in intraregional agricultural trade occurred after

the agreement. This suggests that those RTAs had an

important influence on trade and, according to

Vollrath, were net trade creating. 

Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture/AIB-745 ✵ 13

1The EFTA free trade agreement, established in 1960 and

which now includes Iceland, Norway, Switzerland and

Liechtenstein, excluded agriculture from the removal of

internal trade barriers.
Thomas Worth examines the effects of RTAs on foreign direct investment (FDI) and argues that domestic

policy reforms other than regional trade liberalization

have been more important in influencing investment in

some cases. For example, the enactment of NAFTA

did not represent a large policy change for the United

States, Canada, or Mexico. Canada and the United

States had liberal trade and investment policies before

NAFTA. Mexicos reduction in its trade and investment restrictions in 1989 had led to a tripling of U.S.

investment in Mexico from 1989 to 1993, but little

additional investment occurred after the enactment of

NAFTA, due in large part to the currency crisis. In the

MERCOSUR countries, the changes in FDI appear to

have correlated more with changes in macroeconomic

policies than with the formation of an RTA. The case

of AFTA is unique in that large increases in FDI and

trade in the region led to the trade agreement instead

of the other way around. H. Christine Bolling analyzes U.S. FDI in food processing industries in the

three major RTAs: EU, MERCOSUR, and NAFTA.

Her findings corroborate Worths argument that joining

an RTA does not necessarily bring new FDI: economic

growth, market size, and changing consumer tastes

have more direct effects on investment, although an

RTA can affect these key determinants. 

RTA’s and Agriculture:

Building Blocks or Stumbling

Blocks to Multilateralism?

The debate over the role of RTAs as building blocks

or stumbling blocks for multilateralism has an immediacy for global agriculture because of the commitment

to begin a WTO mini-round on agriculture in 1999.

An RTA acts as a building block by either prompting

an acceleration in multilateral negotiations, or adding

new members and converging on globalism.

Stumbling blocks do the opposite. We emphasize a

third relationship between RTAs and multilateralism:

their complementary and mutually reinforcing impacts

in liberalizing agricultural trade.

Sheffield describes the concurrent progress made on

agricultural trade liberalization in RTAs and under the

Uruguay Round. Until recently, RTAs largely exempted agriculture from regional trade liberalization, with

the notable exception of the European Union. But

over the past decade, many RTAs, particularly in the

Western Hemisphere, have been comprehensive in

their liberalization of agriculture, eliminating both tariff and nontariff barriers, and going substantially further than their WTO commitments. By opening their

agriculture to regional free trade, member countries

farm sectors are already making adjustments to open

markets. This reduces the remaining burden of adjustment posed by multilateral trade reforms, and promises to build a constituency for further agricultural trade

liberalization at the mini-round. 

The ability of RTAs to omit agriculture was also circumscribed by the Uruguay Round. The exclusion or

limited liberalization of agriculture by RTAs was possible in part because of the many other holes in the

GATT agreement regarding trade restrictions on agricultural products, such as waivers on quantitative

import restrictions if they interfered with domestic

supply control policies. A significant accomplishment

of the Uruguay Round was to close some of these

holes by imposing disciplines on agricultural trade barriers and trade-distorting domestic farm policies.

Leetmaa, Jones, and Seeley discuss the important role

that stronger multilateral disciplines are having in

influencing the direction of farm program reforms in

the EU. EU expansion and the prospect of extending

the CAP to new members from Central and Eastern

Europe has the potential to massively increase EU

farm program expenditures. Budget pressures are a

key factor in instigating a reduction in EU farm subsidies, but the direction of this reform is being defined

by the commitment in the Uruguay Round to decouple, and to reduce the trade-distorting effects of

domestic subsidies. 

In a second example, Michael Kurtzig and Daniel Pick

analyze the 1996 revision of the U.S.-Israel Free Trade

Area Agreement to provide for greater access for U.S.

agricultural products. The 1996 Agreement on Food

and Agriculture (AFA) was motivated partly by

Israels failure to fully implement the terms of the

1985 agreement. It was also an effort to bring the

1985 agreement into compliance with the new rules of

the Uruguay Round governing agricultural trade. The

AFA dealt mainly with removal of nontariff barriers,

which had been permitted by the 1985 agreement but

are no longer allowed under the WTO.

The U.S.-Japan beef negotiations offer an additional

example of the importance of a credible multilateral

process in influencing the successful outcome of a

bilateral trade agreement. John Dyck provides a case

study of U.S.-Japan beef negotiations: these were narrowly focused discussions that successfully dealt with

14 ✵ Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture: Overview/AIB-745 
nontariff barriers. In 1988, the United States and

Japan signed an agreement to phase out Japans quota

system for beef. The agreement is viewed as of major

consequence because of the size of Japans beef

imports and because of the length and intensity of the

negotiations, which took place sporadically over 20

years. The U.S.-Japan negotiations on beef and the

Tokyo Round were closely connected. While there

was no formal link between these bilateral talks and

the Uruguay Round of the GATT, Dyck argues that the

bilateral agreement could only have been achieved

with the credible threat of GATT actions against Japan.

In the early 1980s, U.S. complaints to the GATT

about Japanese trade practices not related to beef were

one form of leverage that influenced Japanese decisions on beef. Conversely, Dyck argues that the 1988

agreement may have influenced the outcome of the

Uruguay Round, since, for U.S. agriculture, the successful performance of U.S. exports to Japan provided

additional evidence that U.S. agriculture could gain

from freer world trade. 

The Uruguay Round also strengthened the multilateral

oversight of RTAs. RTAs represent a major derogation of the most favored nation principle of the GATT.

They are allowed under Article 24 of the GATT, which

places constraints on RTAs that are intended to foster

their trade-creating characteristics, while minimizing

their trade-diverting impacts. Article 24 allows RTAs

provided that (1) no external tariffs are raised, (2)

substantially all barriers to trade between partners are

removed, and (3) a reasonable time frame is established for the complete implementation of the agreement. GATT treatment of RTAs has been criticized

because of the ambiguity of these provisions. For

example, it was not clear what constituted substantially all trade, nor was it specified whether tariffs

referred to applied tariffs or to average or weighted

rates. Under a Memorandum of Understanding

(MOU) signed during the Uruguay Round, tariff rates

and adjustment periods were defined more specifically. 

RTAs now must be reported to the WTO Committee

on Regional Trade Agreements (CRTA), which was

formed in 1996. So far, the CRTA has devoted much

of its time to developing a systematic approach to RTA

notification and review, as well as identifying areas

where greater clarification is required. At the same

time, the CRTA has also had to examine the backlog of

new or existing RTAs reported since the formation of

the WTO. It is too early to say how well the CRTA

will be able to perform its surveillance role given the

amount of work and the difficulty in addressing these

issues. 

The more comprehensive treatment of agriculture in

recent RTAs, and their net trade-creating impacts, suggests that RTAs are playing a positive role in liberalizing global trade. Nevertheless, a strong multilateral

process is likely to remain important  both to minimize trade-diverting characteristics of RTAs, and to

define or constrain the unfinished agendas in some

RTAs. In Latin America, for example, RTAs are rapidly proliferating, and the effects of these criss-crossing preferential tariff rates is uncertain. Stout and

Ugaz-Pereda analyze agricultural tariffs in four Latin

American RTAs, and identify tariff-related issues. In

MERCOSUR, the RTA both lowered the agricultural

tariffs of Argentina and Brazil against nonmembers,

and eliminated tariff escalation, in which tariffs on

processed goods are higher than on bulk agricultural

products. But, the common external tariff of MERCOSUR was increased in late 1997, at least temporarily,

signaling the ability of the members to achieve consensus on raising trade barriers. In Chile, the overlapping tariffs that result from its network of bilateral

trade agreements require complicated rules of origin

(ROOs). ROOs are particularly difficult to enforce in

agriculture because of the homogeneity of bulk agricultural products, and can easily become a form of disguised protection. Both the Andean Pact and the

Central American Common Market (CACM) have

adopted common external tariffs that provide tariff

escalation, making it difficult to compete in their

processed food markets. One of the main objectives

of an FTAA would be to reconcile and simplify the

increasingly complex system of Latin American tariffs. 

What APEC will look like when fully implemented is

another important question for the global economy.

From the U.S. perspective, inclusion of agriculture in

APEC is critical because of the high protection rates in

East Asia. APEC has set a goal of free trade in agricultural products for developed members by 2010, and

for less developed members by 2020, but no interim or

staged reductions have been specified. Some members, including Mexico and Chile, already have low

agricultural trade barriers and are reducing or eliminating farm support. Other APEC members have continued to protect their agricultural sectors. It is difficult

to predict whether APEC will achieve its goals in agriculture. Some of APECs agricultural trade liberalization will probably coincide with the multilateral negotiations under the mini-round in agriculture. The two

Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture/AIB-745 ✵ 15
processes are likely to interact: multilateral talks may

help to make APECs agricultural trade liberalization

more concrete, while the APEC commitment to free

agricultural trade may help to define the goals of the

mini-round. 

This report (and its companionAER-771) provides

an economic evaluation of major RTAs, but the political economy of regional trade agreements is also

important in understanding how they may affect the

multilateral process. The political economy characteristics of RTAs are not yet well understood: there are

opposing views as to how some important characteristics influence the dynamic path of the RTA. These are

the key elements of the debate: Is the motivation for

an RTA to open markets, and to complement or lock in

other market-oriented policies, or is the RTA protectionist in character? Does an RTA create or strengthen

interest groups that benefit from trade diversion and

have incentives to lobby against free trade? Organized

producer groups can effectively capture the national

policy agenda, and divert it toward protecting producer

interests. As RTAs continue to expand, are large blocs

likely to exert market power to improve their terms of

trade, and thereby lose the incentive to move toward

global free trade? Or are large blocs better able to

negotiate global free trade? Is admission to the RTA

open, so that any nonmember who is negatively affected by the RTA can eliminate trade diversion impacts

by joining? Or, does open admission seduce members

into regional initiatives and divert their political energies from multilateral initiatives? Does free trade

within the RTA result in deeper integration of policies

and institutions, and is this deeper integration around

trade-creating or trade-diverting policies? 

Whether RTAs are more beneficial for the United

States than multilateralism is a fundamental policy

issue. Because the United States is a global trader

with diverse trade partners, it can potentially gain

more from global free trade than from regional trade

agreements. But so far, multilateral talks have fallen

far short of achieving free trade, and the gains to the

United States from the deeper commitments made by

RTAs are expected to exceed those from the Uruguay

Round. But the influence of RTAs on the multilateral

process is still uncertain, and they hold the potential to

harm nonmembers. Because the two processes can

provide important, mutually reinforcing influences,

their joint pursuit can benefit U.S. agriculture.

References

Baldwin, Richard E., and Anthony Venables (1995).

Regional Economic Integration, in Handbook of

International Economics. Vol. 3: 1597-1644. Elsevier

Science: Amsterdam.

Bhagwati, Jagdish (1991). The World Trading System

at Risk. Princeton, New Jersey: Princeton University

Press.

Josling, Timothy (1997). Implications of Regional

Trade Arrangements for Agriculture. FAO Economic

and Social Development Paper No. 133. Rome: FAO.

Josling, Timothy (1998). The Role of Regionalism in

Agricultural Trade Reform. Unpublished paper presented to INEA, Rome, March.

Sumner, Daniel, and Daniel Hallstrom (1977).

Commodity Policy Compatibility with Free Trade

Agreements, paper prepared for the Conference on

Policy Harmonization/Convergence/Compatibility,

Tucson, Arizona. 

Viner, Jacob (1950). The Customs Union Issue.

Carnegie Endowment for International Peace: New

York. 

Winters, L. Alan (1996). Regionalism versus

Multilateralism. Policy Research Working Paper No.

1687. World Bank: Washington, DC.

World Trade Organization (1995). Regionalism and

the World Trading System. Geneva, Switzerland. 

16 ✵ Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture: Overview/AIB-745 
Appendix: The Economics of

Regional Integration

The concepts of trade creation and trade diversion

form the core of economic analyses of RTAs. Trade

creation can occur within an RTA. Production efficiency improves when RTA members import more

from lower cost RTA partners, and less efficient

domestic production falls. Consumption efficiency

improves when consumers in an RTA can buy imports

at prices that are lower than those for domestic products. As a hypothetical example, assume an RTA is

formed between Guatemala, an efficient coffee producer that can produce wheat only with intensive and

costly irrigation, and Nicaragua, an efficient wheat

producer that can produce coffee only in greenhouses.

An RTA creates trade if it results in greater Nicaraguan

imports of relatively low-cost Guatemalan coffee, and

a shift in Nicaraguan farm production from hot-house

coffee into wheat. Guatemala gains if it imports more

relatively low-cost Nicaraguan wheat, and grows less

of its intensively irrigated domestic wheat. Nicaraguan

consumers gain because of the decline in the price of

coffee, while Guatemalan consumers gain from the

lower price of wheat. 

Trade diversion occurs when RTA members shift their

imports from more efficient, nonmember producers, to

less efficient partner countries within the RTA. This

reduces the worlds production efficiency, and hurts

consumers within the RTA, who now import from

high-cost members of the RTA. In the example of

Nicaragua and Guatemala, assume that prior to forming an RTA, Nicaragua had identical tariffs on its

imports of cocoa from all sources. Assume that at that

tariff, Nicaragua imported its cocoa from Mexico,

which produced it at lower cost than Guatemala. After

the RTA, trade diversion would occur if Nicaragua

shifts its cocoa imports from Mexico to Guatemala. In

this case, the removal of Nicaraguan tariffs gives

Guatemalas higher cost cocoa an advantage over

Mexican cocoa in the Nicaraguan market. Nicaraguan

consumers pay less for duty-free cocoa imports under

the RTA, but when lost tariff revenue is also accounted

for, Nicaragua has net losses from trade diversion. 

RTAs can either benefit or harm nonmembers.

Efficiency gains and increased real income within the

RTA may increase the RTAs demand for imports.

This is trade expansion, and it can benefit nonmembers. Conversely, both producers and consumers in

nonmember countries are hurt by trade diversion.

Production efficiency declines if nonmember countries

must now produce goods they formerly imported at

lower cost from RTA members. In the case of Mexico

and Nicaragua, the shift of Nicaraguan wheat exports

to Guatemala reduces export availability for Mexico,

and causes Mexico to shift to wheat production and

out of cocoa, the crop in which Mexico has an international comparative advantage. Mexicos consumption

efficiency declines because it must now pay for higher

cost domestic wheat. 

Most RTAs have both trade-creating and trade-diverting impacts. Whether the trade-creation or the tradediversion effect dominates depends on many factors,

including production cost differences, rates of initial

tariffs, and relative supply and demand responses (app.

table 1). For example, if an RTA is formed between

two countries with very different costs of production,

there would be large potential gains as production

shifted to lower cost producers. 

Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture/AIB-745 ✵ 17

Appendix table 1 —An RTA tends to be more trade creating than trade distorting...

the larger are unit production costs differences within the RTA 

the smaller are cost differences between members and nonmembers 

the higher the pre-RTA tariff 

the lower the post-RTA tariff that is set between the RTA and nonmembers

the greater the member country’s supply and demand responsiveness, in the case of trade creation 

the more competitive the pre-RTA structure of members’ economies due to tariffs 

the larger the initial trade flows between complementary or “natural” partners 
Terms-of-Trade Effects

If the RTA is large enough in world markets to affect

the prices of its imports and exports, or if the costs of

production increase as production expands, there can

also be terms-of-trade effects. Terms of trade refers

to the relative prices of imports and exports. An RTA

is likely to improve the terms of trade for members

and lower them for the rest of the world. This is one

of the primary concerns that nonmembers have about

RTAs. In the example of the RTA between Nicaragua

and Guatemala, decreased Nicaraguan demand for

Mexican cocoa might lower its price. Likewise, the

shift of Nicaraguan wheat exports to Guatemala could

reduce the availability, and raise the price, of Mexicos

wheat imports from Nicaragua. While Nicaragua loses

from the diversion of its imports from Mexico to

Guatemala, its full cost would be reduced by its

improved terms of trade with Mexico. That is, the

Nicaraguan wheat export price to Mexico has risen,

while its cocoa import price from Mexico has

declined. Conversely, the trade diversion causes

Mexicos terms of trade to worsen. Terms-of-trade

changes are key to understanding the distributional

impacts of an RTA: the costs of trade diversion can be

partially, or even fully, borne by nonmembers if their

terms of trade deteriorate. 

Trade creation, trade diversion, and terms-of-trade

effects constitute the welfare impacts of an RTA (app.

table 2). Welfare refers to the efficiency of resource

use in production, and the ability of consumers to satisfy their preferences. 

RTA’s as Building Blocks or Stumbling

Blocks to Multilateralism

The effects of RTAs on the multilateral trade liberalization process have generated intense debate. Just as

Viner (1950) influenced the debate over customs

unions by articulating the twin concepts of trade creation and trade diversion, Bhagwati (1991) has influenced the debate over regionalism by developing a

time path conceptualization of RTAs as building

blocks or stumbling blocks to the multilateral freeing

of trade. Building blocks contribute to multilateralism

by adding new members or by prompting an acceleration in multilateral trade negotiations. Stumbling

blocks do the opposite. Economic theory is still

engaged in identifying the characteristics of RTAs that

are likely to make them building blocks or stumbling

blocks to multilateralism (app. table 3). For many of

the characteristics considered relevant, there are

opposing views as to how they influence the dynamic

path of the RTA. 

18 ✵ Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture: Overview/AIB-745 

Appendix table 2 — Welfare impacts of regional trade agreements 

Trade creation Production shifts to lowest cost producer in RTA

Consumption shifts from domestic goods to imports from RTA partner

Trade diversion Production shifts to RTA member, as imports decline from lower cost, nonmember 

exporter; if an importer, nonmember’s production increases, as RTA exports shift to 

partner destination

Consumption by RTA members shifts to imports from higher cost RTA partner;

consumption by nonmembers shifts to higher cost domestic products 

Terms-of-trade effects Market size or nonconstant costs affect prices of imports relative to exports 
Economic Research Service/USDA Regional Trade Agreements and U.S. Agriculture/AIB-745 ✵ 19

Appendix table 3 — Are regional trade agreements stumbling blocks or 

building blocks to free trade?

RTA’s are building blocks when...

...they reinforce or lock in domestic policy reforms 

...they have open admission and outsiders are motivated to join

...they tackle issues that are too deep or complex for multilateral negotiations

...as large blocks, they influence negotiations toward free trade

...deeper integration of policies and institutions creates trade

...non-members receive unconditional MFN status.

RTA’s are stumbling blocks when...

...they create interest groups that benefit from trade diversion

...they divert political capital from multilateral initiatives

...as large blocks, they exert market power to improve terms of trade for members 

...they block additional members to preserve trade gains 

...they maintain external trade preferences

...deeper integration of protectionist policies diverts trade.