Preferential Trade Agreements

The relationship between the WTO and preferential and regional trade agreements is a complex and rapidly evolving one. While the WTO has traditionally approached eventual evaluation of such deals following the prescriptions of GATT Article XXIV, the Enabling Clause, and more recently, the enhanced transparency mechanism, this approach might not be enough in the current reality.

Both economic analysis and evidence from performance through the years show that many of today’s bilateral and regional pacts create rather than divert trade and are as complex and sophisticated as the WTO itself, offering indeed a body of rules and practices at the regional level that the multilateral trading system could benefit from. Furthermore, the expansion and consolidation of regional trade pacts through “mega-regionals” poses a set of distinct challenges to the WTO. In this context, how should the WTO deal with these new challenges while preserving the integrity and efficiency of the multilateral trading system?

Roberto Azevêdo

As regards the relationship between the WTO and regional trade agreements, the usual arguments are known: some regard the regional deals as “stumbling blocks” that, owing to their discriminatory nature, tend to impede rather than facilitate multilateral trade liberalisation; others view regional agreements, more optimistically, as “building blocks” - “islands” of trade liberalisation that might eventually coalesce into a global trade regime.

From a systemic viewpoint, I have no doubt that it is preferable to advance as much as possible on the multilateral front, so that regional or preferential arrangements work as a sort of “residual” category in the process of world trade liberalisation. In terms of market access, for example, a result achieved in the round will be much more significant, for all countries involved, than a result obtained with the conclusion of a regional or plurilateral agreement which benefits only its participants. Moreover, regional arrangements tend to be less efficient economically, not only because of trade discrimination, but also because of the costs incurred by economic operators in face of the need to cope with the multitude of different regulations created under each agreement. These costs may be particularly severe where businesses want to benefit from operating in supply chains connected across the globe, to the point of offsetting the gains originally conceded in terms of market access.

Besides the costs associated with the regulatory complexity and the possible reduction in economic welfare that result when the trade diverting effect of regional agreements exceed their trade creating effect, regional or preferential deals tend to be less balanced as regards the demands of smaller countries. Moreover, such agreements are usually less suitable for the negotiation and adoption of several types of rules and disciplines which are horizontal in nature or which a player will be willing to endorse only if all other relevant players also agree to abide by them.

This does not mean that regional agreements are harmful to the world trading system. These agreements tend to bring material benefits to their participants. Otherwise their number would not have grown so dramatically in the last two decades. Today, I think it is fair to say that practically all WTO Members are somehow involved in the negotiation and implementation of such deals.

However, for the reasons that I mentioned, in comparison with multilateral agreements, preferential and regional arrangements are only a second best option. So how should the WTO deal with this challenge?

As I said in my response to question two regarding plurilateral agreements, I believe the number one priority for the WTO should be to deliver results, however modest the first results may be. This would restore a currency of which we have been very much in need - the Members’ ability to trust each other and thereby conclude multilateral negotiations.

Additionally, Members might also consider reinforcing the roles of the Committee on Regional Trade Agreements and the Committee on Trade and Development, so as to, as a first step, allow for more transparency and information to the WTO membership. On the basis of such information, areas of convergence among the numerous regional agreements might be identified with a view to a possible harmonisation of commitments where commonality is the greatest.

I reiterate what I said to the WTO General Council in my presentation last January: whatever the reasons behind regional trade agreements, I firmly believe that the countries entering those initiatives would gladly negotiate a much broader and more encompassing multilateral deal. What we must do is ensure that the multilateral trading system remains a viable option for trade liberalisation.

Taeho Bark

Preferential Trade Agreements (PTAs) represent both challenges and opportunities. In its early years, the WTO did not feel pressure to prove its relevancy, whereas now it must take more proactive approaches to demonstrate its advantages and added value. In reshaping the world trading system, while multilateralism and the MFN remain the core principles, the proliferation of regional agreements has become a reality that we must address. Many experts have argued that PTAs do not undermine, but rather complement, the WTO.  That is not an automatic outcome, however, if we ignore or do not pay adequate attention to them. The relevant question, therefore, is how the WTO should best adapt itself to the new landscape. There are things that the WTO can learn from, such as certain elements or techniques of regional deals. In turn, through close monitoring and analysis, the WTO can and should do its part to help regional deals become more compatible both with each other and with the WTO framework as a whole.

There is a framework for this purpose. The RTA transparency mechanism adopted in 2006 is likely the sole early harvest item thus far to be drawn from the DDA.  As further agreement was not made on more detailed substantive criteria of GATT Article XXIV, such as that related to the concepts of ‘substantially all the trade’ and ‘interim agreement’, the mechanism does not have real teeth to check those regional deals which are inconsistent with the WTO.  One way forward for the mechanism could be a more systemic analysis of PTAs, which would represent a moving forward from the current isolated discussion on an individual agreement.  This is all the more important, given the fact that the most problematic element of PTAs is not their proliferation itself but their complexity.

The WTO is not only the most appropriate but also the competent forum to discuss how we should go about addressing different rules of origin and other fragmented rules related to PTAs.  One of the ideas recently put forward to ensure the consistent interpretation of rules was that the WTO could function as the central dispute settlement entity for regional deals. The idea must be carefully considered given the limited resources of the WTO, and further refined due to the fact that many rules in PTAs are non-existent in the WTO.  Nevertheless, the idea could expand to other possible contributions by the WTO for a more orderly global trading system.

Lastly, regarding the large scale regional deals that are in the process of being carried out, there are concerns that they may draw critical resources, energy, and attention away from the WTO negotiations that are currently at a very vulnerable point. It is important that those members reconfirm their commitments to the multilateral trading system and put forward strong, demonstrated efforts towards progress on the current WTO agenda. Within this context, the size of the PTAs is not a matter of high concern.  We already have large economic blocs such as the EU, NAFTA, and MERCOSUR. Trouble would only stem, however, from a large deal being negotiated and finalised among all the major countries, for example one that can include the US, China, the EU, India, and Brazil, and leave out many small countries.  In this hypothetical situation though, there would be no reason that they would not conduct such an agreement in the multilateral setting.

Specifically, large PTAs are more efficient than small ones and can be further expanded or merged with other agreements.  The Pacific-based P4 FTA for example has been expanding into the TPP (Trans-Pacific Partnership), and it is possible that this could merge with the Asian-based RCEP (Regional Comprehensive Economic Partnership) to form an APFTA (Asia-Pacific FTA), the long-term objective of APEC. If it could combine with other continents, their ultimate orientation would therefore not be different from that of the WTO.  Although all of these potential agreements are far-off and optimistic projections, the guiding objective is clear. In this regard, the WTO-consistent approach in the relevant PTAs would help achieve those ultimate goals.

Anabel Gonzalez

In discussing trade in different formats, a diversified portfolio of trade partnerships is useful in preventing protectionism, exploiting neighborhood effects, and boosting growth. Preferential trade agreements (PTAs) can play a role in promoting further market opening. They may allow for useful experimentation with new rules in novel trade-related areas. Moreover, in some instances, they may simply be the proper locus of trade governance as not everything needs to be defined at the global level. “Mega-regionals,” in particular, may serve the purpose of reinvigorating the trading system by bringing new political energy to significant trade liberalisation initiatives.

The fact that each WTO member is, on average, party to 13 PTAs reflects members’ willingness to integrate with the aim of promoting trade and investment and to explore all useful means to do so. The downside lies in the dangers posed by the discrimination that is inherent in these agreements and in their potential to exclude others. The trade marginalisation of countries, particularly lesser developed ones, does not bode well for the system and may exacerbate frictions among nations.

To avoid the pitfalls of plurilateral negotiations we must keep improving multilateral monitoring, we must be prepared to consider strengthened mutilateral disciplines if needed - and desired. Overall, however, we must see them in a more dynamic, complementary manner to the multilateral system. In this context, again, negotiations of plurilateral or critical mass agreements may also serve a purpose in facilitating negotiations “inside” the WTO.

Tim Groser

We have just survived the worst economic downturn in 70 years - and we are by no means yet out of the woods, with unemployment in some important developed countries at or beyond levels experienced in the Great Depression. Understandably, this has led certain commentators to say this is the underlying reason why it has proved to be so difficult to agree in the WTO on opening markets - i.e. the difficult economic conditions have reinforced protectionist thinking.

This is a manifestly inadequate argument. First, and this is to the great credit of earlier generations of GATT negotiators, the acquis of the multilateral system has held up remarkably well. Yes, there have been some failures. But as the great legal theorist Robert Hudec argued, it is impossible to design a legal system that is free of what he called ‘legal failure’.

Second, the impulse to integrate economies is as strong as ever, but it is taking the form almost exclusively of regional preferential trade agreements. This gives lie to the theory that governments have lost interest in expanding the frontier of trade and investment integration.

It is time to move beyond the debates of the 1990s - the old arguments about whether RTAs were ‘building blocks’ or ‘stumbling blocks’ for the multilateral trading system. It is also time to recognise the emergence of two important trends that demand a recasting of the 1990s debates over RTAs.

The first of these is a general tendency towards higher quality, not lower quality, RTAs. There are important exceptions from the past and we will certainly see further low quality bilateral FTAs being negotiated so they can be hung up on the trade policy wall as political trophies. I have likened this taste in acquiring low quality FTAs as akin to ‘hotel art’: yes, the look of my hotel bedroom may be somewhat improved by the so-called ‘Monet’ or ‘Van Gogh’ on the wall, but we know it is not real art. We are talking about a trend here, not a rule. Against this, is an unmistakable increase in the quality of many recent FTAs - certainly the comprehensive FTAs in which my country is involved in from Australia (CER) to our FTA with China are extremely high quality.

Second, there is a marked tendency towards what I call ‘convergent FTAs’ - FTAs that collapse bilateral FTAs into larger concentric rings of trade and investment liberalisation. North America and Europe are the leading exemplars. As the EU has expanded, many other European countries, some of them members of alternative regional agreements such as EFTA, have enlarged the boundary of integration. The earlier bilateral FTA between Canada and the United States did not last long in practice - it was collapsed into a broader NAFTA, embracing the three large North American economies in a single zone.

We have caught this wave in the Asia-Pacific: the two geographically contiguous FTAs in the centre of the Asia-Pacific (the AFTA, or ASEAN FTA and the CER between Australia and NZ) are slowly being merged into a broader 12-country FTA known as AANZFTA). This is extremely high quality. Its region-wide Rules of Origin, which are completely consistent with the emergence of supply chain linkages emerging in these Asia-Pacific countries, will slowly clean up the over-hyped problem of the ‘spaghetti in the bowl’, at least for the twelve countries concerned.

Three new, and potentially momentous, convergent FTAs are under negotiation. The first is the Regional Comprehensive Economic Partnership (RCEP) - a hugely ambitious negotiation in the Asia-Pacific only just launched in Cambodia by Heads of Government. It includes all the countries that have FTAs with ASEAN - China, Japan, Korea, Australia, New Zealand, and India.

Far more advanced is the TPP, or Trans-Pacific Partnership Agreement. Building on an earlier ‘convergent’ FTA involving four Asia Pacific economies (Brunei, Chile, New Zealand, and Singapore), it involves now eleven economies, including all the three giant NAFTA economies.

A similar process is underway in Latin America. Mercosul (Mercosur, in Spanish) now has a regional rival: the Pacific Alliance, which is a deep integration model aiming again to collapse bilateral FTAs amongst a group of Latin economies into a single agreement. Russia is at the early stages of forming a customs union with some traditional partners. The Arab countries are exploring ways of re-energising discussion about a customs union.

The recent announcement by the United States and the EU of the Trans-Atlantic Trade and Investment Partnership Agreement is potentially a game-changer. These are the two traditional giants of the WTO system, accounting for almost 50 percent of world GDP. Up to the end of the Uruguay Round (recall that China was not even a full participating contracting party to the GATT and therefore was not involved), it has been the EU and the United States that have provided the essential leadership necessary to conclude the last successful multilateral trade round. Whatever happens here, this will deeply influence events in Geneva.

The evidence here is crystal clear: the world is not turning away from negotiating trade and economic integration agreements. Quite the contrary; there is an explosion of initiatives taking place. The problem is that it is all regional, not multilateral, and the problem is that Geneva risks becoming a backwater.

Events in the world of preferential trade agreements or RTAs are moving at such a pace and in ways that could not be anticipated in precise terms that we should pause before drawing any hard and fast conclusions as to what this means for the multilateral trading system. There are, however, certain realities that need to be taken into account.

First, forget any thought of trying to ‘leg-rope’ these RTAs through negotiating ‘stricter rules’ around GATT Article XXIV and GATS V. That would be the height of naïveté; consensus would be required from the very parties negotiating these agreements. We should always be open to any new proposal to improve the transparency of these agreements but it is a sobering fact that of all the scores of FTAs that have been notified to the GATT and WTO, only one - the Czech and Slovak FTA - has ever been held to be ‘consistent’ with the multilateral rules of the game. The rest, by definition, remain untested in a general sense. The way forward in Geneva is not a legal route.

Second, new approaches will be developed in these multiple negotiations that need to be taken into account in any new thinking we can develop about the best way forward multilaterally. As I observed earlier, the WTO does not enjoy trade policy monopoly rights.

Third, the only practical way to respond is for the WTO to find a way to restore momentum in its own negotiating function and that, we must admit, is a huge challenge. There is no clear single ‘solution’ sitting on the sidelines waiting to be applied. No new procedure, or elegant Green Room negotiating ‘mot du jour’, will suffice.

Fourth, while dogmatism is always to be avoided on such strategic matters, trade policy theorists and practitioners have generally (and I think correctly) held to the view that there will always remain some issues which no RTA can address, other than on peripheral matters. That is, only the WTO could address, say, subsidy peaks and contingency protection devices. The intersection of these new massive RTAs crisscrossing the Asia-Pacific and now the Atlantic with the WTO system needs careful reflection.

Finally, the logic of all this convergence should ultimately point to a long-term vision for the WTO itself, though it sounds insanely ambitious given the almost complete absence of traction in multilateral negotiations.

That is, just as bilateral and plurilateral RTAs are ‘collapsing’ into larger and larger ‘economic conurbations’ of trade and investment integration involving dozens of countries, could we not envisage a comparable long-term vision for the WTO itself here? Is not the ultimate ‘convergent’ zone of integration its global equivalent? It would of course require several negotiations, but there has been little or no discussion of a bigger long-term vision to drive our work.

Alan Kyerematen

Old debates about regionalism versus multilateralism are irrelevant, for example, when almost all WTO members are in or are actively pursuing bilateral or regional trade agreements.  The recent WTO Report on the “WTO and PTAs: From Co-Existence to Coherence” shows how widespread this phenomenon has become and the dangers associated with it.  With the exception of Mongolia, all WTO members are parties to one or more preferential trade agreements.  It is my understanding that Mongolia is even negotiating a free trade agreement with Japan and there could perhaps be agreements with other countries.

There is the risk that the MFN principle, which has been the bedrock of multilateralism, would become the exception rather than the norm in international trade relations.  While PTAs can be building blocks for the multilateral trading system, there is always the risk of trade diversion from competitive third countries, thereby diminishing global welfare.  PTAs can increase transaction costs associated with implementation and enforcement of different sets of trade rules and regulations, including rules of origin and other non-tariff measures. Regionalism can never be a perfect substitute for multilateralism.  In fact, there are certain issues, such as agricultural subsidies, which cannot be effectively negotiated at the regional level.  The WTO dispute settlement system has endured the test of time.  There are several countries that are parties to PTAs, but prefer to have recourse to the Dispute Settlement Understanding (DSU) instead of the dispute settlement systems established under their PTAs.  The two approaches to liberalisation can be complementary, but to ensure that the WTO needs to keep abreast of developments in the global economy.

The WTO rules relating to regional trade agreements - Article XXIV of the GATT 1994, Article V of the GATS, and the Enabling Clause need to be clarified and strengthened to remove the ambiguities which have contributed to the paralysis in the examination process.  The Committee on Regional Trade Agreements (CRTA) should be strengthened so as to enable it to come to decisions.  Apart from the Czech-Slovak Customs Union, the GATT/WTO has never been able to reach a definitive conclusion on the consistency of notified agreements with WTO disciplines.  Given that regional trade agreements evolve, their impacts should be reviewed periodically by the CRTA to determine whether they are having a positive impact on the multilateral trading system.

Mari Pangestu

International trade is a vehicle for boosting growth and development - the WTO should pursue this mandate directly and by supporting other compatible processes.

The WTO is at the centre of defining the global framework for international trade. The task that the international community has set for the WTO is to boost free and fair trade to promote growth and development. This goal must be our focus. We should avoid drawing judgments or being lost in the morass of jargon (plurilateral, variable geometry, critical mass etc.) that has come to characterise too much of international trade discussions.

It is more relevant to focus on how the multilateral system and other arrangements can play mutually supportive and complementary roles. The multilateral system should both secure the tremendous progress made in the international trading system through its monitoring and rule setting procedures and pursue further gains through multilateral understandings and agreements. In addition, as the voice of the international community on international trade, the WTO should accommodate and in fact encourage all approaches and agreements that meet clear and well-defined principles of the international trading system. These principles include:

  • Consistency with WTO - Agreements should be consistent with the WTO and build on existing WTO obligations where these exist.
  • Inclusion and open accession - Participants in any process should be as open and inclusive as possible and be encouraged to permit accession to other countries willing to fulfil the implied responsibilities of any agreement.
  • Special and differential treatment - Agreements should promoteeconomic and technical cooperation recognising the different stages of development of participants. Special and differential treatment can be justified in circumstances where participants face challenges in benefitting from an increase in trade.
  • Transparency and predictability - Recognising that the goal is to promote transformative private investment, agreements must provide clarity and predictability for investors.

These principles contribute to a framework that can guide trade reform and ensure that the WTO is appropriately at the centre of the global framework.[2] We need to recognise that the WTO should play this critical role.

The WTO has made considerable progress in pursuing its mandate. The WTO has been very successfully at widening the tent by bringing in new members. It is not by coincidence that so many countries have acceded to the WTO since its formation in 1995. It has been very successful at ensuring transparency through the notification and trade policy review mechanisms. It has also been broadly successful at ensuring everyone plays by the rules as evidenced by the rise in use of the dispute settlement function. The emerging work on aid for trade is also a very important part of the work the WTO.

All of these functions underscore that the WTO is much more than the DDA. Nonetheless, I continue to believe that the DDA is an important vehicle to deliver meaningful trade reform, economic growth, broad-based job creation and related development outcomes for its membership. The DDA challenge is not technical nor is it the single undertaking; the challenge is to explore new pathways. The recent work on trade in value added is an example of how we need to re-evaluate the premises on which our trade discussions are based. We must identify new approaches to securing our overarching goal of transformative free and fair trade. This is the challenge for the incoming Director-General working with the members and engaging their stakeholders to bring clarity to the payoffs from conclusion of the DDA.

In sum, the WTO can be an active partner in promoting a broader and deeper engagement between trading partners and provide the framework for addressing global trade-related issues. We must be open to securing mutually beneficial economic partnerships whether in a sequential manner, as a single undertaking, or through any other modality. By focusing on the substantive issues we can promote the shared objective of growth and development and not become lost in debates that label plurilateral approaches or regional arrangements as “good or bad.”