The main idea of this paper (1) is to provide some background elements for the analysis of three issues related with a comparative perspective of regional and multilateral dispute settlement disputes:

• Preferential regionalism and the WTO legal system: the option between a creative or a disruptive tension;
  
  
• Rule oriented preferential regionalism: a guarantee for both member countries and the WTO system, and
  
  
• The dispute settlement mechanisms at the RPA's level: a crucial element for an effective rule oriented process.

Regional preferential agreements and their rules

The proliferation of regional preferential agreements (RPA's) is one of the more notorious changes in the international trade scenario of the last two decades. It is not a new phenomenon. On the contrary, in historic terms, the real new event is the existence of a global framework of multilateral trade disciplines, initiated in 1947 with GATT and further developed in 1994 with WTO creation. Before the Havana Conference, there had been various precedents of RPA's, usually associated to the creation of a new sovereign State. The Zollverein is the most known, but not the only one. The contemporary RPA's are the result of consensual alliances among sovereign states. They do not involve necessarily the creation of a new sovereign state.

Through history, we can observe in the genesis and development --including the eventual failure-- of RPA's, the constant interaction among political, economic and legal factors. Capturing the whole essence and dynamics of each RPA --and of RPA's as an historic and contemporaneous international phenomenon-- requires understanding the interaction of the three logics of power, welfare and legality. Understanding and assuming this interaction is relevant to any academic reflection trying to comprehend the phenomenon of RPA's and, particularly, to any attempt of comparison among concrete agreements.

RPA's usually adopt different modalities. There are not pre-established models with universal validity. For members of WTO the only legal restrictions are those related with article XXIV of GATT-1994, article V of GATS and, eventually, the Enabling Clause.

RPA's could be classified using different criteria. The following four seems to be the most relevant:

• the existence or lack of physical contiguity among partners;
  
  
• its bilateral or multilateral scope according to the number of participant countries;
  
  
• the market integration techniques utilized within those defined by Article XXIV of GATT-1994 - a free trade area or a custom union -, or within those permitted by the Enabling Clause, negotiated and approved during the Tokyo Round, and
  
  
• the distribution of economic and political power among partners and the extent of differences on their respective degrees of economic development.

It would be difficult to understand how a voluntary association among sovereign nations that intend to remain sovereign, would operate without game rules . Rules are an essential part of all RPAs, regardless of their modality. They may be formal or even informal. Sometimes they are implicit. Only the absence of rules is unimaginable, if the members of a RPA wish to preserve their working together idea, their associative link and their common objectives over time.

Each agreement develops its own system of rules. In certain way, some authors consider that each of them is a kind of "private club" within the frame of the "global club" of the WTO. From the global trade system's point of view, RPA's are differentiated subsystems -even legal subsystems - of a geographic regional character in certain cases.

From an economic point of view, the RPAs' rules are a code of signals to markets -and third countries- as to which will be the future conditions governing trade and investment flows within the economic area integrated by the partner countries.

In contemporary global economic competition, these signals fundamentally attempt to attract productive investments and to influence the strategic decisions of firms --big companies and SME's--, both of those already operating within an economic area that involves a concrete RPA and of those competing in the global market. In that perspective, quality rules and institutions are key elements for predictable conditions for doing business within the economic space of the member countries.

As a result, the perception of the institutional and legal quality of an RPA - measured in terms of the potential of effectiveness, efficacy, sustainability and legitimacy of its rules - is an important factor for the "decoding" carried out in their respective strategies by firms competing, or attempting to compete, at the global or regional markets of goods and services. That explains also the importance for firms and investors of the fluent dissemination of information about rules, including those at the stage of preparation . From this perspective, the transparency in the RPA's rule creation process is something valuable for the competitive intelligence of firms.

Those who operate in global and regional firms have developed a clinical eye prepared to distinguish, in the perspective of their competitive intelligence management, solid and credible signals from those being predominantly exercises of "diplomacia mediática" or "policies of special effects". In particular, the sustainability of the political systems of the partner countries, as well as the quality and stability of their respective macroeconomic, industrial and foreign trade policies, are relevant factors in the judgment carried out on credibility of signals arisen explicitly or implicitly from an RPA's rules.

The origin of an RPA's rules is, in general, an international multilateral legal instrument, a treaty as defined under the Vienna Convention, whatever its formal denomination may be. From the original constitutive pact derives a rule's system of the association of States, applicable only between partners, notwithstanding the economic effects that it may produce beyond the limits of the respective economic area.

The constitutive pact is the result of a perception by member countries of a satisfactory balance of national interests between partners. Nobody can force a sovereign State to be part of any RPA. If a country decides to do so is because the RPA is consider as convenient to its national interest, at least in the perception of its government.

The perception of expecting mutual benefits by all the partners, also explains the vocation of permanency of the consensual alliance through time. This perception allows an RPA to acquire legitimacy with the respective citizens. The social legitimacy at the national level of each member country is a key factor for the sustainability of an RPA on the long run.

We can observe at least three common denominators on the objectives of a RPA's system of rules, whatever their modalities may be. They are:

• the guarantee of stable market access in a member country, of goods and eventually services and persons originating from each of the partners;
  
  
• the degree of discrimination in favor of the partners in relation to market access - for example, through a common tariff in case of a customs union, or through specific rules of origin and in relation to investment and public procurement regulations in the case of a comprehensive free trade area - and, eventually, to the modalities for the operation of firms within each of their markets, and
  
  
• the development of explicit or implicit collective disciplines between partners, with the practical effect of conditioning the degree of autonomy on the shaping and implementation of public policies, especially in the fields of macroeconomics, foreign trade and investments.

Generally, a mechanism for producing rules is also included in the original pact, from which may result secondary or complementary rules with respect to those included in the constitutive agreement. It is logic to suppose that while producing these rules -- as happened with the original agreement -- the partners wish them to penetrate into reality, being effective and, therefore, to produce the expected economic and eventually political results.

Also is possible to observe that there is not a unique model deriving from international rules, about how a concrete RPA should organize the institutions and the decision-making process. However, through the analysis of concrete cases we can recognize certain functions that institutions should normally comply. The principal ones are:

• the dynamic preservation through time of the reciprocity of national interests that explains the original pact and that is of the essence of a consensual alliance among sovereign States;
  
  
• the production of complementary and secondary rules derived from the constitutive pact, which permits its implementation, its adaptation to changing circumstances or -- particularly in the case of a common market or economic union -- the further development of a common project;
  
  
• the management of different types of conflicts that may arise between partners as a result of the implementation of the rules of a RPA, and the dispute resolution through common jurisdictional mechanisms, arbitral or judicial;
  
  
• the modalities for the dissemination of public information about rules and their implementation - normally through a high quality Web page -, and
  
  
• the representation of the main social interests - i.e. business, labor sector and ONG's - related with the implementation of the RPA.

These functions will be broader if RPA's objectives are deeper and more complex. For instance, a monetary union and an economic union between a large number of contiguous sovereign States, having developed or attempting to develop explicit political objectives (including the field of security), may require more complex institutions than a simple free trade area between countries lacking physical proximity. It is the case of the European Union and eventually, of Mercosur.

Finally, two factors have a strong influence on the characteristics and modalities of RPA's institutions. It is very difficult to make any comparative exercise among different RPA's without having them in mind:

• the degree of interdependence and connectivity existing among the economies of the partner countries, weighed in particular by the intensity of the trade, investment and financial flows, and
  
  
• the distribution of relative power - economic and political - between partners, in particular with respect to asymmetries in the interdependence and connectivity of their respective economies.

The relation between RPA's and the WTO legal system

The issue of linking the multilateral global trade system with the regional preferential subsystems has today and will continue having in the near future a significant place, both in the academic consideration and the practice of the international economic relations. The tension between multilateralism and preferential regionalism is one of the principal issues of the international trade agenda - including the alternative between a creative or disruptive tension between both dimensions -.

Multilateralism, understood as the system of principles, rules and institutions aimed to develop at a global scale, collective disciplines related with international trade of goods and services, including the investment flows. The WTO is today the institutional framework of the multilateral global trade system, especially through its main contractual instruments, the GATT-1994 and the GATS.

Regionalism, understood as international subsystems - specially on the same geographic region - resulting from preferential agreements - therefore discriminatory - concluded by a group of two or more countries, whether contiguous or not, whatever their modalities and objectives additional to the economic and trade ones may be. As such, they are exceptions to the principle of non-discrimination and the most-favored-nation treatment, cornerstones of the multilateral global trade system of the WTO. From the latter's perspective, they represent subsystems with their own objectives, rules and institutions.

The relevance of this link is more notorious having in mind:

• the conclusion of the Uruguay Round and the creation of WTO;
  
  
• the creation of NAFTA;
  
  
• the expanding process at the European Union through its enlargement to new members and its network of preferential agreements;
  
  
• the conclusion of several North/South free trade agreements and the negotiations that have been developed in recent years for the conclusion of new agreements (for example, FTAA; APEC; free trade agreements and economic partnership concluded by the European Union with several developing countries; free trade agreements concluded by USA, among others, with Mexico and Chile in the Latin-American area - and more recently with Central American countries and Dominican Republic, CAFTA-DR -, and the negotiating processes of the EU with Mercosur and the Andean Nations Community), and
  
  
• the multiplication of South-South free trade, economic integration and preferential agreements between developing countries, for example within LAIA's - among which one of the most significant is Mercosur due to its economic dimension - or more recently between Mercosur and India.

The link between regional preferences, bilateral or multilateral, and the multilateral global trade system is also one of the most relevant issues in the agenda of the negotiating round initiated at Doha within the frame of WTO.

The experience of recent years allows making some proposals about the interaction between the multilateral global trade system and RPA's:

• from the perspective of contemporary international trade relations, both the multilateral global system and preferential regionalism subsystems, are political, economic and legal-institutional realities with deep roots and will continue forming part of the world scenario in the near future. Both have their own logic and dynamics. Only in theoretical terms, anyone could imagine the suppression of one of these dimensions of international realities;
  
  
• multilateralism and preferential regionalism are not necessarily contradictory dimensions to the efforts of building a global system of international trade and economic relations, based on principles of free trade and a reasonable balance between the interests of different nations. Even they could have a positive effect in the expansion of free trade and economic cooperation among nations, and
  
  
• principles and rules, multilateral and regional, interact at the multilateral, regional or interregional, and domestic level. A pacific coexistence as well as the constructive complementation between multilateralism and preferential regionalism - a creative tension - can be reinforced in each of those three levels.

It is in this context that we should approach and reinforce the arguments aimed to achieve within the WTO framework a development of necessary collective disciplines regarding RPA's, and especially, regarding those that do not reflect the trade dimension of natural geographic regionalisms.

These collective disciplines may be a key factor to assure the preservation of the "rule-oriented" character, as opposed to the "power-oriented" one, not only of the multilateral global trade system but of each RPA as well. Within a "rule-oriented" approach - in the Professor John Jackson sense -, we could finally find the answer to Professor Jagdish Bhagwati and many others' legitimate concern towards the negative effects potentially caused by a proliferation -- or epidemic -- of RPA's. Particularly of those conceived as instruments - strategic or tactical - of international power and not necessarily as a way to advance the expansion and freedom of global trade.

Some considerations about dispute settlement mechanisms at the RPA's

Dispute settlement mechanisms and relevant experiences with their implementation have been developing actively in recent years, both at the global and at the preferential regional level.

At the level of the global trade system, the creation of the World Trade Organization (WTO) introduced a substantial improvement with respect to the previous GATT period. The WTO has developed a multilateral systemic approach to solving differences among its member countries. At WTO, both rules and dispute settlement mechanisms are part of the same system. They reinforce each other.

Such systemic approach can also be observed in some of the multiple trade preferential agreements concluded within the WTO global system. The North American Free Trade Area (NAFTA) and Mercosur are concrete example, among others. In both, rules and dispute settlement mechanisms regarding trade are part of the same system. In addition, some of the preferential agreements include rules and dispute settlement mechanisms related to foreign investment within the economic space covered by the agreement. This is the case of NAFTA and of several more recent free trade agreements (FTAs) concluded by the United States with individual or group of countries, such as the U.S.-Chile FTA and the U.S.-Central America countries FTA.

It is possible to draw some observations about the most recent RPA's concluded by countries of the Hemisphere:

• recent experiences confirms the value that governments attach to dispute settlement mechanisms in order to increase the credibility of the rules of the game, particularly among firms and investors, both local and international. This could be explain by the fact that the quality of a dispute settlement mechanism tends to be an increasingly key element in the assessment that citizens, investors and third countries will make of any specific RPA;
  
  
• while countries are free to define the kind of institutions -including dispute settlement mechanisms - they want to have in a concrete RPA -the principle of freedom of organization-, precedents that are considered successful, or at least potentially successful - i.e. those of the WTO or of other RPA's- are equally important;
  
  
• the most recent dispute settlement mechanisms generally tend to place emphasis on ensuring that their operations are as transparent as possible, including during the arbitrator selection process;
  
  
• further improvement on the quality of the legal system and the dispute settlement mechanisms at the regional preferential level is still possible. That improvement will mostly depend on establishing an appropriate linkage between the global multilateral trading system and the various RPA's. This linkage will improve to the extent that the rules of the game that prevail, will be those whose application is related to some sort of jurisdictional control, be it judicial - as is the case of the European Union and the Andean Community - or the various modalities of non judicial mechanisms as those included in NAFTA, Mercosur and several other RPA's;
  
  
• in a deep integration process, the rules will be more effective the greater the potential of the institutions to dynamically conciliate the different national interests, through their capacity to manage and resolve trade disputes between member countries. The legitimacy of the rules, perceived as an expression and guarantee of a "win-win" scenario for all the member countries, is what ultimately explains the implementation of collective disciplines that sustain the preferential treatment among them, as well as the internal and external credibility of the respective RPA;
  
  
• precarious market liberalization processes - those that have no jurisdictional protection against the natural propensity of countries to resort to unilateral discriminatory practices that eventually violate agreements - specially those among contiguous nations with different economic dimensions -, may act as an incentive for concentrating productive investment in the relatively larger markets. In this case, firms will prefer to operate within the region from the larger markets;
  
  
• the behavior of a RPA member country may be perceived by other members as being contrary to the agreement. This may give rise to a legal dispute. In some cases, the dispute may result of a domestic measure adopted or eventually, not adopted when that should be the case. In other cases, however, the dispute may arise from significant differences in the interpretation of the scope of the agreement. In those cases, such behavior or interpretation introduces or may introduce a marked change in the balance of reciprocal national interests that sustain the associative pact. The win-win scenario may be affected when any member considers the unilateral conduct of one or more members, as harmful and in violation of a rule within the legal system of the respective RPA;
  
  
• when a dispute occurs among member countries, based on the perception of a conduct that is contrary to the rules or that represent a difference in their interpretation, the goal of the established dispute settlement mechanisms is primarily to restore the affected reciprocity of interests, ultimately by a jurisdictional adjudication;
  
  
• in most cases, disputes can be solved at a non-jurisdictional level. Consultations, direct negotiations, good offices and mediation, for example, by a third independent party or a technical body that operates independently from the will of the members, are normally the best way to solve a concrete dispute. Mercosur has a large experience through its Trade Commission and eventually, through its Common Market Group;
  
  
• the jurisdictional level may have different modalities, including the mechanism of independent panels, appeal bodies and also judicial courts. In those modalities, there are several variations, such as the double-instance mechanism, or the ad hoc or permanent nature of the arbitration or even the appeal mechanism. What does appear to be fundamental is that the jurisdictional level should be conceived as a last resort, used only in exceptional cases where the possibilities of reestablishing the affected reciprocal interests through other means has been exhausted, and
  
  
• an abusive utilization of the dispute settlement mechanism may eventually contribute to the decline of it efficacy and finally, to the erosion of the legitimacy of the "rule-oriented" nature of a RPA.

The relative effectiveness of a dispute settlement mechanism in RPA's depends on various factors, which includes the following:

• the density of trade and investment flows between the members;
  
  
• the perception by member countries of the advantages of the "rule-oriented" nature of their mutual relations in the context of the respective RPA. If, for various reasons, the paradigm of precarious rules predominates, it would be difficult to ensure that concrete actions of member countries conform to such rules. In those cases, the members are more likely to attempt to "compensate" violations to the agreement, as has often been observed in the LAFTA and even in the network of preferential trade agreements signed in the framework of LAIA;
  
  
• the clarity and quality of rules and particularly of those rules that are at the center of a dispute. The poor quality the rules are, the more difficult it is for a dispute settlement mechanism to be effective. Transparency of the legal system is also important, and
  
  
• the quality of the dispute settlement mechanism itself, including its procedures and provisions referring to compliance with its final decisions.

What are the most salient elements of recent trends in RPA's dispute settlement mechanisms in the Hemisphere?

In our opinion, the most important elements of some of the most recent agreements are the following:

• the inclusion of dispute settlement mechanisms in a special section of the agreement, that systematically addresses all aspects related to the administration and institutions of the RPA;
  
  
• the transparency regarding the implementation of the rules and of the dispute settlement mechanism;
  
  
• the identification of a "contact points" on each of the members in order to facilitate communications regarding any aspect of the agreement;
  
  
• a detailed identification of all the instances competent for the administration of the agreement, including those at the domestic level of each member;
  
  
• the emphasis placed on cooperation and consultations between the members regarding any aspect related with the application and interpretation of the agreement, through a fair effort to reach a mutually satisfactory solution in any matter that may affect the implementation of the RPA, and
  
  
• the inclusion of very detailed proceeding rules at the jurisdictional level, including provisions regarding compliance with the rulings of the arbitration mechanism and the code of conduct for the arbitrators;

(2) In this presentation we use the concept of regional preferential agreements (RPA's) to include all kind of trade preferential agreements (TPA's), both among contiguous and non-contiguous countries.

(3) Regarding this issue and its relationship with dispute settlement mechanisms, see report by PEÑA Félix, Los Métodos para la Solución de Conflictos y Para Asegurar la Vigencia del Derecho en Procesos de Integración o de Cooperación Comercial (Methods to Settle Disputes and to Ensure the Enforcement of the Law in Integration or Trade Cooperation Processes), in La Solución de Conflictos en la Integración Latinoamericana (Dispute Settlement in Latin America Integration), a study directed by the author in 1970 and published by INTAL-IBD, in its Study Series, Vol. 8, Buenos Aires 1972, pp. 3 to 24. The study includes an analysis of the methods actually used until that time in the Central American Common Market and in LAFTA, conducted by Professor Francisco Villagrán Kramer, and Felipe Paolillo and Carlos Ons-Indart, respectively. A previous study by the author about the relationship between the legal system of an integration process, its decision-making mechanisms, and those used to settle different types of conflicts was published under the title Proyecciones Institucionales del Grupo Andino (Institutional Projections of the Andean Group) in Revista de la Integración (Integration Review), INTAL-IDB, Vol./N° 2, May 1968, pp. 132 y ss.

(4) See PEÑA Félix, "Concertación de intereses, efectividad de las reglas de juego y calidad institucional en el Mercosur", Informe elaborado para el Programa Estado de Derecho de la Fundación Konrad Adenauer y la Red Mercosur, Mayo 2003.

(5) See PEÑA Félix, "Civil Society, Transparency and Legitimacy in Integration Processes and Trade Negotiations: Mercosur's experience and lessons for the negotiations with the European Union", paper prepared for the Chaire Mercosur -Sciences Po- Working Group on EU-Mercosur Negotiations Annual Seminar, September 2003.

(6) Cf. JACKSON John, "The World Trading System. Law and Policy of International Economic Relations", Second Edition, The MIT Press, Cambridge, Massachusetts 1997, ps. 109-111.