Can the WTO Embrace Regional Trade Agreements?

June 1, 2016

One of the reasons – certainly not the only one - why countries have moved to regional negotiations is the long-lasting deadlock in the Doha negotiations. Yet, the WTO continues to play a critical role in today’s global economy. It ensures the transparency of the trade practices of its members, enforces existing multilateral rules and disciplines, and adjudicates trade disputes in case of breach of WTO obligations by any of its member countries. And it is precisely because of these important functions that delays in completing the Doha negotiations and the focus on preferential trade initiatives are challenges that the WTO cannot ignore or underestimate.

 

The relationship between regional trade agreements and the WTO is not a new issue. It has been discussed by policymakers, academics and practitioners, both inside and outside the WTO, for a long time already. The suggestions to deal in a more rational manner with this relationship are also well known by most trade practitioners and, to varying degrees, could be accepted by most of them. However, no action has been taken so far other than the establishment of the “transparency” mechanism that encourages – but does not require – WTO members to notify the WTO Secretariat if they enter into RTA negotiations. 

 

Yet, regional pacts have become a permanent and increasingly important feature of the world trading environment. Currently, more than half of world commerce takes place among countries linked by such pacts. Furthermore, these trade agreements have grown not just in number, but also in depth. For some WTO members, regional and bilateral pacts have become the preferred way to interact with each other, and as indicated the deadlock of the Doha negotiations may exacerbate these tendencies. It cannot be mere coincidence that more than 200 – 219 to be precise - regional trade agreements covering goods and/or services have been notified to the WTO since the beginning of the Doha negotiations in 2002.[1]

 

The relationship between the WTO – and previously the General Agreement on Tariffs and Trade (GATT) – and regional trade agreements has been limited to evaluate them in light of the obligations of GATT Article XXIV and the Enabling Clause, as well as the enhanced notification procedures of the more recent transparency mechanism. While these obligations have led to an improved understanding of these trade pacts by making more information available, they have achieved little else. Under the current circumstances, this is not sufficient.

 

I would argue that one needs to look into the possibility of establishing a more organic link between the WTO and regional trade pacts, moving away from the perception that regional pacts are little more than second-best options, and instead recognizing them as valuable agreements in their own right. Many of today’s regional pacts are as complex and sophisticated as the WTO, and there is a body of rules and practices at the regional level from which the multilateral trading system could benefit.

 

Thus, rather than ignoring regional pacts or regarding them with suspicion, the WTO should embrace them by providing, at least initially, a dedicated place or forum for them inside the WTO. There, all matters relating to regional trade pacts, their rules and practices could be subject to informed discussions among all WTO members, including those that actively participate in regional agreements and negotiations. As Harvard Professor Robert Lawrence has pointed out, if the Doha Round ends in failure, “the contrasting states of the multilateral and regional parts of the system could become even greater, with regional initiatives flourishing while the multilateral system becomes increasingly less relevant”.

 

Plurilateral agreements within the WTO are seen by some as a possible alternative to the proliferation of regional pacts, the argument being that by allowing or even encouraging groups of WTO members to negotiate plurilateral agreements on a variety of market access and regulatory issues, with clearly defined rules on the way these agreements should operate and how their benefits are extended to non-participating countries, the need for regional pacts would be moderated.

 

Through the history of the multilateral trading system there has always been a gap between how its members treat discrimination in principle and in practice. The elimination of discrimination is supposed to be one of the core objectives of the multilateral system. That is evident from the preambles of both the GATT and the WTO, each of which called for “the substantial reduction of tariffs and other barriers to trade and … the elimination of discriminatory treatment.” The original GATT negotiators followed up by making universal and unconditional MFN treatment the core principle of the GATT, enshrining it in Article I.

 

From the very start, however, trade negotiators have also provided for the negotiation of discriminatory agreements that ran counter to the MFN principle. GATT Article XXIV allows for the negotiation of FTAs and customs unions, and in 1979 this was supplemented by the Decision on Differential and More Favorable Treatment Reciprocity and Fuller Participation of Developing Countries—better known as the Enabling Clause—intended to facilitate the negotiation of RTAs among developing countries. Later developments include Article V of the General Agreement on Trade in Services (GATS), which is essentially a repeat of GATT Article XXIV, and the inauguration in 2006 of the WTO’s “transparency” mechanism for RTAs.

 

The essential problem or dilemma is that WTO members look with suspicion to other countries’ RTAs, but are at the same time more strongly committed than ever to protecting the RTAs that they have negotiated. The result has been the creation of a system that requires the notification and examination of these agreements, and also imposes certain standards that these agreements are required to meet, but there has hardly been any serious effort made in the GATT or the WTO systems to ensure that these standards are enforced. An RTA is required to cover “substantially all of the trade” between the countries that conclude it, for example, but there is no consensus on what constitutes “substantially all.” Thus, agreements are (usually) notified, and (slowly) examined, but never with any credible threat that they might be found not to meet the legal obligations established in GATT Article XXIV and/or GATS Article V.

 

The issue therefore, is not so much whether the WTO can or should discipline RTAs, but rather how the WTO could embrace RTAs and build upon them. How can we mitigate the real challenges posed by RTAs, while at the same time harness the many opportunities that RTAs create for sustainable development? The WTO has much to learn from RTAs and much to offer them as well, and the same can be said of RTAs vis-à-vis the WTO, and exploring these interactions goes beyond the simple requirements of GATT Article XXIV or GATS Article V.

 

We need to start from the premise that RTAs are here to stay and will continue to proliferate in the near future. How then might we make RTAs and the WTO more responsive to each other? What should be developed is a more organic relationship between the WTO and RTAs. There is a need to move away from seeing the latter as second-best options, and instead start recognizing them as valuable agreements in their own right. Indeed, today’s RTAs have the potential to be as complex and sophisticated as the WTO, and there is a body of rules and practices that have been developed at the regional level that the multilateral trading system could benefit from. In essence, a new approach to the relationship between the WTO and RTAs should be put in practice to allow the multilateral and regional frameworks to mutually reinforce one another.

 

One possible approach would be to help countries “multilateralise” their RTAs under the auspices of the WTO. That is, however, much easier said than done. Multilateral trade talks now tackle multiple issues and involve an ever-growing number of countries. In this context, the multilateralization of RTA regulations would most likely require changes to the WTO’s negotiating modalities, including a shift away from the unanimity rule and the “single undertaking” principle to enable deals to be struck more quickly among a critical mass of members. Such a coalition would need to encompass at least some of the largest trading nations to have a meaningful impact.

 

The multilateralization process could start as a plurilateral agreement, whereby a subset of WTO members commit to a binding set of rules that applies only to them and that can be enforced in WTO dispute settlement system. The members that chose not to join the deal would not be bound by its requirements, although they may benefit from it. This process would be fully voluntary, but discussions about multilateralization could be encouraged through various fora.[2]

 

Summing up, I would argue that the net value of RTAs depends on whether countries have the wisdom and the will to incorporate them more fully into the multilateral trading system. While it is important to acknowledge the challenges that RTAs pose, insofar as they not only compete with the WTO but may indeed act to undermine it, one must also recognize that they have the capacity to buttress the global trading system. We should help move both the WTO and RTAs towards a more organic relationship, reinforcing and embracing each other and helping to multilateralise existing RTAs rules and practices, thus enhancing the positive contribution each can make to a more solid and stable multilateral trading system.

 

Something needs to be done, and done quickly, to keep a vigorous multilateral trading system from stagnation. And if governments are too busy to engage collectively in a reform process, perhaps the WTO leadership or a group of like-minded governments could take the initiative and, with the help and support of interested institutions from civil society and the business world, engage in a collective, open and effective discussion on the kind of multilateral trading system that would be best suited to the trade and economic challenges of the 21st century.

 

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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] See in the WTO website (www.wto.org), the RTAs Information System Data Base (http://rtais.wto.org/UI/PublicAllRTAList.aspx)

 

[2] Among the fora that might foster such a process is an initiative put forward by ICTSD and the Inter-American Development Bank to establish an RTA Exchange, a dedicated clearinghouse of information on regional and bilateral deals and a place to discuss all matters related to regional trade pacts, their rules and practices (see Annex to this paper).  Such an RTA Exchange could feature inter alia an annual forum in which countries share their best practices and discuss challenges they may have faced in negotiating and implementing their RTAs. The RTA Exchange could also include an informative and interactive website that would be filled with RTA-related data, information, and fresh ideas for policymakers, companies, and analysts to employ.

 

Topics: DOHA ROUND WORLD TRADE ORGANIZATION (WTO) GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

Authors: MIGUEL RODRIGUEZ MENDOZA

RTA

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