An alternative free trade agreement scheme to developing countries: the micro-free trade territory (MFTT)

“Multilateralism is considered a basic principle of globalization (Garnaut 1994; Held and McGrew 2000; Hettne 1999). This principle tries to promote the free market through trade and non-trade barriers measures among nations without discrimination or some preferences under the control of the general agreement trade and tariffs (GATT). From 1947 until today, GATT is considered by many experts in the international trade field as an organization that plays the role of mediator and moderator in the international trade legal framework among all members of GATT that have trade differences. The GATT base is supported by the application of the unconditional and voluntary principles of non-discrimination and reciprocity based on the GATT Art. 1: General most-favored-nation (MFN) treatment clause. The MFN complies with the modus operandi of the GATT, and it is given the basic elements to bilateralism in all GATT negotiations among its members. Usually, when we refer to GATT, some confusion may arise especially when the GATT focus its attention on multilateralism, and we forget that the importance of bilateralism which is a vital complementary part of multilateralism. After this clause was implemented, it gave rise to article XXIV. Article XXIV refers to regional agreements based on custom union and free trade agreements.” (see Deardorff and Stern 1994).

“GATT Article 1: Most-favored-Nation (MFN): “1. With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III,* any advantage, favor, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties. 2. The provisions of paragraph 1 of this Article shall not require the elimination of any preferences in respect of import duties or charges which do not exceed the levels provided for in paragraph 4 of this Article and which fall within the following descriptions (see: http://​www.​wto.​org/​english/​docs_​e/​legal_​e/​gatt47_​02_​e.​htm).

“GATT Article XXIV: Territorial Application—Frontier Traffic—Customs Unions and Free-trade Agreements: 1. The provisions of this Agreement shall apply to the metropolitan customs territories of the contracting parties and to any other customs territories in respect of which this Agreement has been accepted under Article XXVI or is being applied under Article XXXIII or pursuant to the Protocol of Provisional Application. Each such customs territory shall, exclusively for the purposes of the territorial application of this Agreement, be treated as though it were a contracting party; Provided that the provisions of this paragraph shall not be construed to create any rights or obligations as between two or more customs territories in respect of which this Agreement has been accepted under Article XXVI or is being applied under Article XXXIII or pursuant to the Protocol of Provisional Application by a single contracting party. For the purposes of this Agreement a customs territory shall be understood to mean any territory with respect to which separate tariffs or other regulations of commerce are maintained for a substantial part of the trade of such territory with other territories” (see: http://​www.​wto.​org/​english/​docs_​e/​legal_​e/​gatt47_​02_​e.​htm).

Regionalism is often given different names, shapes and forms, each with different implications and nuances. In this paper, regionalism from a trade point of view is defined broadly: as the deepening of intra-regional economic interdependence in a given region through intra-regional trade, foreign direct investment and commercial regulations, standards and practices (Baldwin et al. 1999).

RIA’s can be defined as agreements of mutual support between interested parties to remove total or partial tariff barriers and non-tariff barriers among all members in order integrate into a single trading bloc.

“GATT Article V: Freedom of Transit: 1. Goods (including baggage), and also vessels and other means of transport, shall be deemed to be in transit across the territory of a contracting party when the passage across such territory, with or without trans-shipment, warehousing, breaking bulk, or change in the mode of transport, is only a portion of a complete journey beginning and terminating beyond the frontier of the contracting party across whose territory the traffic passes. Traffic of this nature is termed in this article “traffic in transit”. 2. There shall be freedom of transit through the territory of each contracting party, via the routes most convenient for international transit, for traffic in transit to or from the territory of other contracting parties. No distinction shall be made which is based on the flag of vessels, the place of origin, departure, entry, exit or destination, or on any circumstances relating to the ownership of goods, of vessels or of other means of transport. 3. Any contracting party may require that traffic in transit through its territory be entered at the proper custom house, but, except in cases of failure to comply with applicable customs laws and regulations, such traffic coming from or going to the territory of other contracting parties shall not be subject to any unnecessary delays or restrictions and shall be exempt from customs duties and from all transit duties or other charges imposed in respect of transit, except charges for transportation or those commensurate with administrative expenses entailed by transit or with the cost of services rendered. (see: http://​www.​wto.​org/​english/​docs_​e/​legal_​e/​gatt47_​02_​e.​htm).

Trade liberalization generally means that there are no artificial impediments (tariff) to the exchange of goods across national markets and that therefore the prices faced by domestic producer and consumers are the same as those determined by the world market (allowing for transportation and other transactions costs). These prices reflected the relative scarcity and abundance of goods around the world and constitute a relevant opportunity cost to domestic firms and households (and hence to the country as a whole) because the world market is always available for trades at those prices (Irwin 1998).

“Free trade is considered as an economic policy. In theoretical terms, free trade generally means that there are no artificial impediments (tariff) to the exchange of goods across national markets and that therefore the prices faced by domestic producer and consumers are the same as those determined by the world market (allowing for transportation and other transactions costs). These prices reflect the relative scarcity and abundance of goods around the world and constitute a relevant opportunity cost to domestic firms and households and hence to the country as a whole) because the world market is always available for trades at those prices). In reality, free trade describes a policy of the nation-state toward international commerce in which trade barriers (tariff barriers, quantitative restrictions, and other import barriers) are absent, implying no restrictions on the import of goods from other countries or restraints on the export of domestic goods to other markets. These trade interventions distort the prices faced by domestic producers and consumers away from those arising in the world market” (Irwin 1998).

The wealth of the nations presents that the application of free trade can generate wealth and welfare among nations. “According to Adam Smith, trade between two nations is based on absolute advantage. When one nation is more efficient than (or has an absolute advantage over) another in the production of one commodity but is less efficient than (or has an absolute disadvantage with respect to) the other nation in producing a second commodity, then both nations can gain by each specializing in the production of the commodity of its absolute advantage and exchanging part of its output with the other nation for the commodity of its absolute disadvantage (Salvatore 2001)”.

The comparative advantage has strong relation with opportunity cost theory (Haberler 1952). The opportunity cost theory can be illustrated with the production possibility frontier or transformation curve. It can show alternative combinations of the two commodities that a nation can produce by fully utilizing all of its resources with the best technology available to it (Salvatore 2001). In the analysis of the comparative advantage is based on a basic mathematics and graphs to explain the relationship between two nations and goods based on the absolute advantage that each one country present.

The opportunity cost theory can be illustrated with the production possibility frontier or transformation curve. It can show alternative combinations of the two commodities that a nation can produce by fully utilizing all of its resources with the best technology available to it. In the analysis of the comparative advantage is used a basic mathematics and graphs to explain the relationship between two nations and goods based on the absolute advantage that each one country present.

American Economic Review, Canadian Journal of Economics, Econometrica, Economic History Review, Economic Journal, International Economic Review, Journal of Economic History, Journal of Economic Literature, Journal of Political Economy, Journal of Policy Modeling, Economic Development Journal, Oxford Economic Papers, Quarterly Journal of Economics, Review of Economic Studies, Review of Economics and Statistics, Canadian Journal of Economics and Political Science, Journal of Economic Abstracts, Contributions to Canadian Economics, Journal of Labor Economics, Journal of Applied Econometrics, Journal of Economic Perspectives, Publications of the American Economic Association, Brookings Papers on Economic Activity, Microeconomics and American Economic Association Quarterly.

The DDI is the domestic capital formation in the local operations of domestic firms through acquisition of a local operation, establishment and expansion of operations in the same country.

The IDI consists of the mobility of investment from one member to another member in the same trade block.

The FDI is all investment in the foreign operations of a company through acquisition of a foreign operation, or establishment of a new site. It implies control and managerial and perhaps technical input and is generally preferred by the host country (Bannock 1998).

The soft technology is defined as all general knowledge, technical and theoretical learning, experiences, training, and adaptability to challenges. It includes cultural and environmental changes that the workers of a country present.