The WTO won't be killed by all these regional trade deals

The United States, the European Union and other likeminded countries have been turning their attention towards negotiating preferential trade agreements (PTAs), and not least ‘mega-regional’ deals. There’s the EU-U.S. Transatlantic Trade and Investment Partnership (TTIP) and also the Trans-Pacific Partnership (TPP), which groups the U.S., Canada and Mexico with Australia, New Zealand, Brunei, Chile, Japan, Malaysia, Peru, Singapore and Vietnam.

PTAs have long been a central plank of the EU’s trade policy, and now are also a key feature not just of U.S. trade policy but of all OECD countries, with the trend towards negotiating regional trade agreements extending to non-OECD economies too. Major examples include the Regional Comprehensive Economic Partnership (RCEP), an initiative involving 16 countries that are either ASEAN members or have free trade agreements with ASEAN, and there are also negotiations on a Trade in Services Agreement (TISA), which along with the U.S and the EU includes many TPP and RCEP partners.

A distinguishing feature of the TTIP, TPP, and TISA talks is that none of them include China or the other large emerging economies like Brazil and India. Conversely, RCEP doesn’t include the EU or the U.S. In fact there is no serious trade and investment agreement that spans either the EU or the U.S. and one or more of the large emerging economies – although the EU is negotiating with Brazil and India. This parallels the inability of these countries to conclude a deal in the long-running negotiations on the WTO’s Doha Round.

The WTO has been one of the most successful instances of post-World War II multi-lateral cooperation. Since its establishment in 1995 as successor to the GATT, the WTO has grown from 128 to 160 members (once Yemen ratifies its accession). China joined in 2001, Saudi Arabia in 2005, and Russia in 2012. The WTO’s transparency and dispute settlement mechanisms have helped maintain negotiated levels of market openness, with 475 disputes so far brought to it, and with most rulings implemented by the losing party. Specialised committees provide focal points for governments to raise specific concerns and discuss national trade policies. The main problem confronting the WTO is not the operation of the organisation but the difficulty in reaching an agreement in the Doha Round on new market access liberalisation and rule-making.

The recent moves by the EU and the U.S. to mega-regional initiatives are in part a reflection of the lack of progress in the Doha Round, and a desire by the U.S. and the EU to establish new rules of the game in areas that aren’t on the Doha Round’s agenda. The international production networks that drive world trade have made product market regulation and competition-related policies more important determinants of investment decisions and supply chain trade growth potential.

Both the TPP and TTIP will go well beyond the WTO in terms of coverage, addressing such matters as foreign direct investment policies, protection of intellectual property, trade in services, behaviour of state-owned enterprises, opening up of government procurement, and reducing the trade-impeding effects of different product standards.

The burning question is whether the pursuit of these regional blocs poses a danger for the rules-based multi-lateral trading system. Is it threatening to split the world economy into sets of trade blocs that exclude developing countries that constitute the majority of WTO members? My own answer is no. While there is clearly some disconnect between the PTAs and the WTO-based trading regime, the TTP and TTIP will not doom the WTO.

First, average tariffs are today relatively low, and countries have incentives to further reduce tariffs and barriers to FDI to expand the supply chain-based trade that allows companies to specialise in the activities they do best. Second, PTAs deal increasingly with differences in regulatory policies that push up costs for companies competing internationally. Often the relevant regulatory measures apply on a non-discriminatory basis, so if a government agrees to actions that reduce the trade-impeding effects of regulatory policies as part of a regional deal on a non-discriminatory basis, this benefits non-participants too.

Third, reducing the trade impacts of regulatory policies is complex. It may mean that governments have to harmonise policies or accept trading partners’ rules as equivalent to their own. Lowering the trade-impeding, and therefore cost-raising, effects regulatory differences requires mutual trust, information sharing and the enforcement of regulatory standards. This can be very difficult to achieve when 159 countries are involved. Using PTAs as mechanisms to lower the trade-impeding effects of domestic measures, even when they only apply to participating countries, can generate useful information on what works and what doesn’t for non-parties.

Fourth, PTAs among the willing are no substitute for negotiations between the EU, the U.S. and other OECD member states with emerging economies to reduce market access barriers. While this could be done on a bilateral basis – as the EU has been seeking to do with Brazil and India – it seems more likely that this will end up being pursued at WTO level in Geneva. If China were to join the TPP, or the EU were to negotiate a free trade agreement with China, other large countries would want to ensure that they are not disadvantaged, and this would most efficiently be done on a multi-lateral basis in the WTO.

Fifth, this is also true of “sensitive” policy areas in the EU and the U.S. that are not addressed in the PTAs. Examples span agricultural support policies, fishery subsidies, antidumping and countervailing measures, biofuel and “green” industrial policies, protection of audio-visual and cultural services, air transport and broadcasting. Some of these areas are of great importance for emerging economies, such as agriculture for Brazil or services for India, and these will need to be pursued at the WTO for countries to get what they want.

Finally, the steady expansion of WTO membership since 1995 and the very active use of the WTO’s transparency and dispute resolution mechanisms show how the WTO fulfils functions that the PTAs do not. Outside the EU, which is by far the deepest and most far-reaching PTA in existence, most PTAs don’t come close to the WTO’s effectiveness in enforcing market access commitments. That’s why PTA members often take their disputes to the WTO.

In the short term, much will depend on the outcome of the present mega-regional negotiations. If they end up achieving relatively little because of domestic resistance in both the EU and the U.S. to further liberalisation in sensitive areas, and because of the complexity of reducing the trade-impeding effects of different regulatory regimes, there will be less of an incentive for emerging economies to go back to the negotiating table to counter possible adverse effects.

Whatever the outcome of the PTA initiatives, they reflect a desire by the governments involved to address the trade effects of regulatory differences. It is important to recognise that discriminatory, PTA-based approaches are not the only way to do this. The WTO has mechanisms that can be used by groups of like-minded members to cooperate on new policy areas. These include critical mass agreements where a subset of WTO members takes action with benefits extended to all countries, and plurilateral agreements, where benefits and obligations are limited to signatories. Examples of the former include the Agreement on Basic Telecommunication services, while the Agreement on Government Procurement is an example of the second. The new WTO Agreement on Trade Facilitation, which was the main outcome of the Bali ministerial conference in 2013, offers a third approach, with all WTO members agreeing to improved trade facilitation practices and to mechanisms that over time will help developing countries to implement them.

There is much more that can be done through the WTO to pursue cooperation in areas that currently are not subject to multilateral disciplines. Dealing with regulatory trade barriers is complex, with much to be learned from the way different PTAs have reduced regulatory trade costs. We need to identify areas where multilateralisation of a PTA-based initiative is appropriate (as was done for trade facilitation, with agreement on a common set of good practices that were largely developed by the World Customs Organization), and to use the avenues where the WTO offers subsets and its members can cooperate on new policy areas.