In recent years, the use of the mode of regional trade liberalisation has proliferated, while the multilateral talks through the WTO have proceeded slowly, resulting in a debate on the role of bilateral and multilateral trade liberalisation. This thesis aims to provide new insights to this debate by studying the welfare effects of different types of trade agreements and the equilibrium outcome(s) of trade negotiation. We apply the three-country and three-good “competing-exporters model" developed by Bagwell and Staiger (1999) as our basic trade framework. By comparing the equilibrium welfare of each country under different structures of trading blocs, we clarify the welfare impacts of each trade agreement. Then we model the process of trade negotiation as a trade negotiation game, in which each country endogenously decides whether to negotiate through multilateral or bilateral trade liberalisation. By solving the equilibrium of the game, the stable structure of trading blocs and the path(s) to reach it can be found. We start with a framework in which all countries are welfare maximising. We find that at the early stage of trade negotiation, a free trade agreement (FTA) is Pareto welfare improving, despite the fact that member countries benefit more than any non-member. Although being the hub is the best position, a spoke is in a worse position than being outside a single FTA. Thus, a “hub-and-spoke" structure cannot be achieved and the unique equilibrium outcome of trade negotiation is given by multilateral free trade (MFT) through a multilateral trade agreement (MTA). The welfare-maximising analysis is followed by the examination of cases in which each government is politically motivated. The political structure we use is similar to Ornelas (2005), which follows the basic framework developed by Grossman and Helpman (1995), emphasising the interaction between lobby groups representing the special interest of one industry and the government in their home country. We first consider a circumstance where the political pressures are only from the import- competing sector. It is then generalised to a case in which all sectors are allowed to lobby the local government. Furthermore, the analysis is extended into an asymmetric world that includes two big countries and one small country. Our results show that political economy forces usually reduce the likelihood of forming trade agreements and that when the political concerns are sufficiently large, all trade agreements can be prevented by political pressures. Also, our findings suggest that the option of bilateral FTAs does not cause an initially infeasible MFT to become feasible, while a previously feasible MFT is likely to be blocked by the option of FTAs. Thus, our thesis provides some evidence to support the argument that the formation of FTAs can be a “stumbling block" for global trade liberalisation. / Thesis (Ph.D.) - University of Adelaide, School of Economics, 2009

The General Agreement on Tariffs and Trade (GATT) 1994 has resulted in the GATT Contracting States making a renewed commitment to freer global trade and trade liberalisation. These Contracting States signalled their commitment to GATT policies and principles by undertaking to abolish all those non-tariff barriers which were not converted to tariffs and to decrease all tariffs applied by their domestic economies. The movement away from protectionism is intended to bring contracting states in line with the GATT most-favoured-nation and national treatment principles. The only exceptions to these principles are the regional trade arrangements which can be implemented in accordance with Article XXIV of GATT 1947 and the Understanding on the Implementation of Article XXIV of GATT 1947. Regional trade arrangements such as customs unions and free-trade areas have been allowed by the GATT as they are deemed to promote trade liberalisation through the removal of substantially all trade restrictions between countries party to these trade arrangements. In practice this has not been the case, however, as these regional trade arrangements have been known to apply very protectionist trade policies. This research determines whether regional trade arrangements are inherently protective ie does the nature of these regional trade arrangements encourage protectionism? The external trade policies of the European Union (EU), Association of Southeast Asian Nations (ASEAN), Southern African Development Community (SADC) and the Southern African Customs Union (SACU) are analysed to determine whether the contracting parties to regional trade arrangements have corrupted the GATT provisions and so contributed towards the protectionist nature of these regional trade arrangements. The internal trade provisions relating to the implementation of these regional trade arrangements have also been discussed to determine their compliance with Article XXIV of GATT 1947. As all the selected regional trade arrangements have direct or indirect links to South Africa, the implications of the policies chosen by these parties for South Africa have also been discussed. Analysis of the EU, SADC, SACU and ASEAN has shown that prior to the adoption of the GATT 1994, the free-trade areas and customs unions were not implemented in accordance with Article XXIV provisions. These regional trade arrangements have been moulded to fit the economic aspirations of the relevant contracting states. Of the regional trade arrangements accepted by the GATT, free-trade areas have been found to be the least protectionist and are the least likely to be perverted by contracting parties. Customs unions, on the other hand, may encourage contracting parties to protect their economies as they rely on group participation rather than individual participation. Individual Member States become responsible to the group which provides these states with greater economic power. As a result Member States are motivated to protect the new group entity from outside competition. In this way, they are inherently protective. Safeguards are therefore necessary to protect individual non-Member States from such behaviour. The implications of protectionism for South Africa, SADC and SACU have also been discussed.

Wage rate disparities between industrialized and underdeveloped countries have increased competition in labor intensive industries. To remain cost competitive, U.S. firms have developed alternative production strategies such as relocating labor intensive processes in countries with lower wages and labor costs. This type of manufacturing is known as production sharing. Item 807.0 of the United States Tariff Schedule provides an incentive for U.S. firms to utilize the coproduction process because it offers reduced tariff costs on imported products assembled with U.S. components. The duty paid is lower because it applies only to the value added in the foreign country. Highly labor intensive products, such as apparel, are ideally suited to take advantage of the savings offered under Item 807.0. The U.S. textile and apparel industry faces stiff import competition from low wage countries, and over the last fifteen years the volume of Item 807.0 apparel imports from the Caribbean has increased substantially. examines Item 807.0 and its effect of reducing This thesis the tariff base on an imported article such as apparel. Costa Rica, one of the leading Item 807.0 apparel suppliers, is used to study the relationship between Item 807.0 and the increased level of Caribbean sourcing of apparel production. The conclusion is that the tariff reductions of Item 807.0 should increase U.S. imports of Costa Rican apparel products made with U.S. components. However, Item 807.0 must be combined with low cost labor and competitive U.S. fabrics to be economically feasible. / M.A.