Which Way Forward for World Trade?

2 October 2008

With the failure of world trade talks in July, and no conclusion to the seven-year-old Doha Round in sight, some have begun to question whether the WTO is in fact a useful forum for negotiating greater trade opening. Why have the negotiations continued for so long without success? Could the existing system be tweaked, or should trade leaders look elsewhere - perhaps closer to home - for real progress toward more liberal trade?

Re-examining the Doha agenda

In the aftermath of the collapse of world trade talks in July, several Members - including the US - indicated that they were interested in moving away from the 'single undertaking' approach, under which 'nothing is agreed until everything is agreed', that has served as the governing principle of the Doha Round since its launch in 2001.

The alternative would be to move forward on issues that have already been agreed - some suggested duty-free and quota-free access for least developed countries as a possibility.

But others argue that this would be unfair because it would give preference to certain issues - and thus some countries' interests - above others, and that would make progress on the thorniest issues that much harder to achieve.

Others suggest that, instead of operating on the basis of consensus, the WTO should adopt a more targeted 'critical mass approach' to decision-making. Under such a principle, which was suggested as a potential way forward by the Warwick Commission, a group of world trade specialists tasked with analysing the future shape of the world trade regime, not all Members would be obliged to make commitments on the topic in question. Indeed, only those nations that had a vested interest in the sector would be a party to the agreement, but the trade benefits the deal generated could be extended to all other Members in accordance with the WTO's most favoured nation principle. Some argue that, given the difficulty of managing the interests of the WTO's 153 Members in a single multilateral round, the critical mass approach could prove quite useful.

But successfully moving forward on such a selective would still be a delicate process, one that would no doubt need to strike a careful balance between ambition and inclusiveness. Moreover, some argue that a plethora of such plurilateral agreements might ultimately sap the political momentum needed to reach an over-arching multilateral deal.

Yet others still point out that the agenda for the seven-year-old Doha Round does not address critical issues - including the global food crisis, rising costs of energy and climate change, to name a few - and that the slate of issues covered in the negotiations is in need of an update. Not only have negotiating positions changed, but new crises have come to the fore.

But senior trade officials from Brazil, the EU, India and the US all indicated in a panel session at the WTO Public Forum last week that they strongly believed that Members must resolve the issues now on the table before they think about amending the negotiating agenda. The chair of the WTO farm talks, Ambassador Crawford Falconer of New Zealand, concurred, stressing that Members had to finish what is now on their plates before adding to the agenda.

Lamy agreed. "I personally do not believe that it is the time to launch a parallel negotiation on how to negotiate - that's for later," the Director-General said in his opening address at the public forum. "The Doha Round must simply make do."

PTAs: a building block to freer trade worldwide?

But just as the Doha talks have been stumbling over the past few years, the number of bilateral and regional trade agreements worldwide has mushroomed. Now numbering more than 300, such preferential trade agreements, or PTAs - so named because they lower trade barriers between the parties involved, but not for anyone else - seem to be sprouting up all over.

What does this trend mean for the future of global economic governance? Is the multilateral trading system stumbling its way toward obsolescence?

Proponents of PTAs argue that, far from detracting from the multilateral system, regional deals offer an easier-to-negotiate and more politically palatable complement to it. Indeed, after four years of negotiations, India will soon sign a free trade agreement with the 10-country Association of South East Asian Nations (ASEAN) - a deal which will open a market of comprising a population of over 1.7 billion and a gross domestic product of almost US$2.4 trillion.

Regionalism is a building block to free trade, advocates argue, insofar as PTAs help consolidate the political support of manufacturers, farmers and other exporters, making those key domestic lobbies more likely to fight for lower trade barriers at all levels.

"Multilateralists do not seem to have much to worry about," Antoni Estevadeordal of the Inter-American Development Bank, Caroline Freund of the World Bank and Emanuel Ornelas of the London School of Economics argued in a recent study. The experts looked at how regionalism affected unilateral trade liberalisation in ten Latin American countries over the course of the 1990s, and found that regional deals in fact caused deeper tariff cuts at the multilateral level.

"Complementarity effects" between the regionalist and multilateralist approaches to trade opening can be at least partially explained by a shift in domestic politics that comes with greater liberalisation. All trade deals, including discriminatory PTAs, ultimately increase exports and weaken those industries that cannot compete with outside markets. Thus, a shrinking import-competing sector shrinks domestic constituencies that would fight for protectionist measures and builds the economic clout of players who would have a vested interest in even deeper trade liberalisation.

Multilateralism: still the best approach?

Yet critics of the piece-meal approach, like the prominent trade economist Jagdish Bhagwati, argue that because PTAs grant trade preferences to the countries involved, they violate the principle of non-discriminatory trade liberalisation, known as the Most-Favoured Nation (MFN) principle, that has underpinned the world trading system since the end of World War II. Thus, instead of operating under an over-arching multilateral world trading system, countries must now navigate a convoluted system of overlapping (and sometimes contradictory) PTAs - what Bhagwati calls a 'spaghetti bowl' of different restrictions and regulations.

The shift away from multilateralism is not just creating unnecessary inefficiencies in the world trading system, it is also making it that much harder for the international community to work toward consensus on a multilateral agreement to liberalise world trade. Indeed, sceptics of regionalism argue that signatories to PTAs tend to shy away from agreeing to global tariff cuts, since freer trade worldwide would shrink the preferences they have gained through their discriminatory bilateral and regional deals. "Acting like termites," Bhagwati writes, "PTAs are eating away at the multilateral trading system relentlessly and progressively."

The Warwick Commission came to a similar conclusion. The recent proliferation of PTAs "has unnecessarily raised trade costs and carries worrying implications for the world trade regime in terms of stability, fairness, opportunity and coherence," the experts concluded. The Commission recommended that major industrialised countries "refrain from establishing PTAs among themselves" as an expression of their commitment to the multilateral trading system.

Large firms in rich nations can usually learn to manage the complex trade world, but trade players with fewer resources face serious challenges to engaging in the complex system. Moreover, rich countries often use PTAs to strong-arm developing nations into making concessions in other areas, such as openness to capital inflows or environmental and labour standards. In one-on-one negotiations, Bhagwati argues, weaker nations are coerced into making offers that might ultimately damage their economies.

But even beyond the equity questions, sceptics of regionalism hold that regional and bilateral deals can never take the place of a global trade agreement since PTAs do not produce reductions in highly trade-distorting subsidies. "Where is the FTA that has delivered subsidy reductions?" Lamy asked in his opening address at the forum. "Isn't the reduction of subsidies that distort trade vital to truly levelling the playing field in international trade relations?"

"I do not quite frankly see many alternatives to the WTO - as imperfect as the WTO system may be today," Lamy said.

ICTSD reporting.

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