The WTO: between multilateral and regional trade initiatives

June 1, 2016

The WTO is at a critical juncture. For almost 70 years, the multilateral trading system embodied first by the GATT and now by the WTO has provided an unprecedented level of stability and predictability in the way most countries conduct their trade operations. But the world economy has changed significantly since the WTO was created back in the mid-1990s, and new challenges are quickly piling up on top of the old ones. The rise of emerging countries and the relative decline of traditional economic powers; the negotiating requests, demands and approaches from different countries; the proliferation of regional trade pacts and the need to deal with complex new issues, such as climate change and food security, are – in different ways and intensity – shaking the foundations on which the WTO was built some 20 years ago.

 

A key question currently is whether the WTO is capable of facing these new and complex issues or whether there is instead a need to reform it in some fundamental ways. Should the WTO’s current negotiating mandate – the Doha negotiations - be expanded? Would it be necessary to complete Doha before taking up new negotiating initiatives? What should be done, in particular, to deal appropriately with the growing number and complexity of regional trade agreements?

 

Enter the “mega-regionals”

In early April 2016, WTO member countries renewed attempts to deepen scrutiny of regional trade agreements (RTAs). In line with instructions laid out by their ministers at the Nairobi Ministerial meeting last December, the Committee on Regional Trade Agreements (CRTA) met to discuss the systemic implications of the growing number of RTAs for the multilateral trading system, and the impact of those agreements on WTO rules. The ministers specifically asked the CRTA to work towards the transformation of the provisional Transparency Mechanism, which is used to review RTAs, into a permanent one.[1]

 

But this apparently simple and clearly stated objective of WTO ministers – overseeing regional agreements - is not without objections from some countries, and there is no indication that this time they will be more successful than in the past. This would be regrettable, as affecting the daily work of the WTO and hindering its negotiating outcomes is the fact that many WTO members, big and small, have tended in recent years to focus on regional initiatives rather than fulfilling their multilateral commitments.

 

Indeed, most industrialized countries and also some emerging economies have tended recently to focus on the negotiation of a number of ambitious multi-country trade agreements. These include the Trans Pacific Partnership Agreement (TPP) – involving a number of countries from Asia Pacific and the Americas, most of which are already linked by bilateral free-trade agreements – and the relatively more recent initiative to negotiate a Transatlantic Trade and Investment Partnership (TTIP) between the Unites States and the European Union. Although these trade initiatives could theoretically work as stepping stones to a robust multilateral agreement, this is not an inevitable outcome under the current circumstances.

 

The “mega-regional” represent a big change in the way WTO members interact with each other. During the first “wave” of regional trade agreements (RTAs), bilateral agreements were the norm – most of the 300-plus agreements notified to the WTO are bilateral agreements. Although there are some exceptions, this is no longer the case. We are now in presence of a new “wave” of RTAs characterized by the negotiation of mega-regional agreements. In some cases, these agreements are designed to foster convergence among existing RTAs and/or involve countries representing a large share of global trade, GDP and population.[2]

 

The recently concluded TPP agreement and the TTIP (currently under negotiation) have had their deadlines systematically postponed. The TPP was supposed to be finalized by November 2011, but it was not until October 2015 that the negotiations ended. The TTIP negotiations are still on going and are being conducted in confidentiality, not to say secrecy, as most trade negotiations are. Thus, the precise content of these agreements or the depth of the commitments to be made are only known when the negotiations are completed. Therefore, when trying to visualize the impact of these agreements on the Doha negotiations, a series of assumptions regarding their content and the likelihood of their completion need to be made.

 

However, two key facts are known: the economic weight of the participants and the list of subjects under negotiation. The more important (economically speaking) the partners to these agreements, the more significant would be their impact on the WTO and the multilateral trading system in general. By the same token, the wider the subjects under negotiation – including a number of “WTO plus” issues or issues not currently within the WTO purview – the more complex the analysis will become.

 

Both the TPP and the TTIP involve countries representing a very large share of the world’s population, economic activity and trade. The TPP countries are both economically and demographically diverse, as they include developed and developing countries, big countries such as the United States and small ones such as Singapore. Roughly speaking, the TPP countries include 40% of the world’s population and are responsible for some 60% of global GDP, and trade among TPP partners was more than US$2 trillion in 2012. The TTIP, for its part, involves 29 developed countries (the United States and 28 EU member countries) that represent the world’s largest economic relationship, with reciprocal trade (goods and services) and investment flows that amounted to more than US$1 trillion in 2012.

 

The economic weight of countries participating in mega-regional negotiations will certainly influence the capacity of these agreements to impact the multilateral trading system. The elimination of tariffs among mega-regional partners will have an undeniable effect on tariff preferences through preference erosion, as they are the source of most trade preferences in favor of developing countries. These agreements may also have, as do most preferential trade agreements, trade diversion effects, although these are difficult to quantify. It is in the area of trade regulation, however, that mega-regionals may have a more lasting effect, and it is in this area that their impact on the multilateral trading system will be felt more dramatically, especially if mega-regionals are completed relatively soon and the Doha negotiations continue deadlocked.

 

Indeed, what distinguishes mega-regionals from other free-trade or preferential agreements is the inclusion in the negotiations of a number of regulatory issues, many of which are currently outside the scope of the WTO and subject to domestic regulations, but which are nevertheless considered essential for today’s global commercial relations. These regulatory issues include, but are not limited to, regulatory coherence – for example, on the safety of products and the methods of production – state-owned enterprises, professional services, customs, e-commerce, labor and environment issues, government procurement, investment issues, currency issues, temporary entry of business people as well as standards related to sanitary and phytosanitary measures and technical barriers to trade.

 

In other words, the mega-regionals have the potential – due to the sheer size of the countries negotiating these agreements, and the “regulatory” nature of some of the issues included in the negotiations – to significantly expand the scope of the international trading system by setting up standards that would apply initially only among those countries, but that could eventually become global standards. Once the mega-regionals are completed and new regulatory issues agreed upon by the participant countries, the newly agreed standards will not be easy to modify in WTO negotiations or elsewhere; they will fix TPP and/or TTIP countries’ positions in future negotiations and form the basis for their negotiating positions.

 

Therefore, there is the risk of a “fragmentation” of the multilateral trading system with different standards adopted by different sets of countries, a situation not too dissimilar to that experienced after the Tokyo Round of negotiations and the adoption of “codes” on a number of non-tariff barriers by a group of (mainly developed) GATT members. Thus, the impact of mega-regionals on Doha and the WTO should be analyzed in terms of their “regulatory” impact, that is, in terms of the implications for the multilateral trading system of such a large group of countries, involving both developed and developing countries and representing such a large share of global trade, setting up new standards in areas either not yet covered or insufficiently covered by the WTO.

 

 

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Miguel Rodríguez Mendoza is currently a Senior Fellow at the Geneva-based WTI Advisors and works as a consultant on international trade issues, including regionalism and trade policy with institutions such as the Inter-American Development Bank (IADB), the International Centre on Trade and Sustainable Development (ICTSD), and the UN Conference on Trade and Development (UNCTAD). From 1999 to 2002, he served as Deputy Director-General of the WTO, after which he led Geneva office of Van Bael & Bellis, a Brussels-based international law firm that specializes in EU and international trade law. Before establishing in Geneva he was, between 1991 and 1994, Venezuela’s Minister of State and President of the Institute of Foreign Trade, his country’s governmental body responsible for its trade policies.

 

[1] The Transparency Mechanism for RTAs was established by the WTO General Council in December 2006 on a “provisional” basis. It provides for early announcement by WTO members of negotiations intended to conclude RTAs, notification of existing RTAs and the preparation of factual presentations on these agreements by the WTO Secretariat. Work in this regard is, however, lagging behind. According to a paper presented by the United States to a recent meeting of the CRTA more than 70 existing trade agreements are pending for notification, while reports on implementation of a great number of regional trade agreements are according to the WTO Secretariat still pending.

[2] Other “mega-regional” agreements are the Regional Comprehensive Economic Partnership (RCEP) and, to some extent, the African Continental Free Trade Agreement (CFTA). The RCEP include the ten member states of the Association of Southeast Asian Nations (ASEAN), which are Brunei, Myanmar, CambodiaIndonesiaLaosMalaysia, the PhilippinesSingaporeThailand, and Vietnam plus the six states with which ASEAN has FTAs: AustraliaChinaIndiaJapanSouth Korea and New Zealand. RCEP negotiations were formally launched in November 2012 at the ASEAN Summit in Cambodia. African countries are equally active in crafting regional rules and entering regional pacts: there is the Tripartite Free Trade Agreement linking together three existing agreements, the Southern African Development Community (SADC), the Common Market for Eastern and Sothern Africa (COMESA), and the East African Community (EAC) is being complemented by the CFTA, an initiative led by the Organization of the African Union.

 

Topics: ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN) WORLD TRADE ORGANIZATION (WTO) MEGA-REGIONAL AGREEMENT MULTILATERAL TRADING SYSTEM

Agreements: REGIONAL COMPREHENSIVE ECONOMIC PARTNERSHIP (RCEP) TRANS-PACIFIC PARTNERSHIP (TPP) TRANSATLANTIC TRADE AND INVESTMENT PARTNERSHIP (TTIP)

Authors: MIGUEL RODRIGUEZ MENDOZA

RTA

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