Making the global market work

Trade Directorate
Page 27 

Regional trading blocs may have their advantages, including helping to open up markets, but they can cause complications in the long run which multilateral talks then have to resolve. Though perhaps slow to start with, multilateral agreements can deliver a more effective, coherent, global marketplace. 

As Doha approaches, it is worth reminding ourselves that liberalisation of trade multilaterally, through the WTO, is not the only game in town. Multilateral efforts co-exist with unilateral, bilateral and regional initiatives. Unilateral market opening by developing countries in services has, for example, been widespread as a way to draw in skills and investment and to strengthen the synergies between the service sector and the rest of the economy. But unilateralism can also have a darker side–where it involves the extra-territorial application of domestic laws or the imposition of the will of the stronger over the weaker members of the international trading community. Unilateral pressure can also influence regional and, particularly, bilateral preferential trade agreements. But as this year’s OECD ministerial communiqué points out, while WTO-consistent preferential trade agreements can complement coherent multilateral rules and progressive multilateral liberalisation, they cannot replace them.

Much recent interest surrounds regionalism, which broadly speaking includes bilateral as well as wider trade agreements. Regionalism commands attention first because of its scale. The percentage of world trade accounted for by preferential regional trade agreements (RTAs) is expected to grow from 43% at present to 55% by 2005 if all expected RTAs are realised. The thickening web of RTAs is bringing greater diversity and complexity to international trade relations. This includes APEC, which is a non-preferential arrangement; free trade areas where individual members retain their own, differing, tariff regimes, requiring complex rules of origin; or customs unions with a common external tariff. Some agreements, such as the European Union, go further and entail a process of deep integration, including – as we are about to witness – the adoption of a common currency.

But the key reason for the sharpened focus on regionalism has to do with motivation. Traditionally RTAs have predominantly been between adjacent countries seeking to maximise the benefits of proximity, often with a strong underlying political or strategic rationale. More recently, the growth of RTAs has reflected an additional element: a belief on the part of government that regional or bilateral arrangements are both speedier to negotiate and more far-reaching than multilateral agreements through the WTO. This creates pressure for more RTAs, as countries seek to avoid being left out. This pressure may help explain why Japan and Korea are now actively discussing RTAs, not only with one another but with Singapore in the case of Japan and as far away as Chile in the case of Korea. This is a sea change for these major traders who until now had eschewed preferential regional agreements. A similar shift away from geographic considerations – if not from traditional political ones – is also seen in free trade agreements signed recently between South Africa and the EU, between Mexico and the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland), between the United States and Jordan and between the EU and Egypt.

Business too may have played a role in sparking these shifts. As product cycles get shorter and multilateral negotiating cycles get longer – the Uruguay Round took seven years – regional and bilateral arrangements may appear to bring speedier results in terms of opening markets. Indeed, as policymakers prepare for the WTO ministerial meeting in Doha in November, there is a perception that the business community is less engaged in supporting multilateral negotiations than it was in the lead-up to the Uruguay Round.

Building blocks or stumbling blocks?

But do RTAs actually help or hinder multilateral trade liberalisation? In fact they can do both and it is perhaps this dual characteristic which helps explain why it is so difficult for the WTO’s Committee on Regional Trade Agreements to establish whether particular RTAs conform to WTO rules and obligations. In many ways RTAs complement the multilateral trading system, by helping to foster a culture of market opening and structural reform. They promote “trade creation”, to the extent that high-cost domestic production is replaced by lower cost imports from partners. They foster growth, as market enlargement allows firms to exploit economies of scale more fully. And, as widely remarked, they can act as laboratories for deeper integration. In services, for example, the Canada-US free trade agreement provided an opportunity to test the principles of national treatment and non-discrimination in a way that helped structure negotiation of the General Agreement on Trade in Services (GATS) in the Uruguay Round, which in turn fed back into the treatment of services in the North American Free Trade Agreement (NAFTA), initially grouping the US, Canada and Mexico. But there are also potential downsides to preferential regional and bilateral agreements. They can detract from multilateral efforts by stretching scarce negotiating resources and political capital. They can distort trade through “trade diversion” to the extent that imports from low cost producers outside the agreement are replaced by higher cost production from partners within it. And, as a counterpart to breaking new ground, RTAs can cause friction between systems by generating potentially incompatible rules and standards between different RTAs and the rules and disciplines of the WTO. The most stark example of this is the proliferation of different rules of origin, which are needed to prevent third countries accessing an entire trade agreement area via the member with the lowest tariff.

RTAs are hardly a coherent way of setting the rules and standards for an expanding global marketplace. Nor does their complexity help to reduce transaction costs for business. Some countries belonging to many agreements now have 20 or more different tariff rates for the same product. Multiple dispute settlement fora can encourage forum shopping, with plaintiff countries going from one body to another in a bid to obtain satisfaction, thereby prolonging disputes and adding further uncertainty to the conduct of business. And different arrangements for contingency protection, such as anti-dumping, in different RTAs can lead to grey areas and an increased risk of trade harassment and rent seeking.

All of this can leave the global marketplace in quite a muddle. So while RTAs may break new ground, they may also leave some of the more intractable market access problems to be sorted out multilaterally.

Questions to answer

Several questions have to be asked. To what extent do RTAs really complement the WTO, even symbiotically as regionalism and the multilateral trading system give and take ideas from each other? Are RTAs more, a WTO-plus? Do particular agreements – including in sensitive areas like agriculture and textiles – go beyond or fall short of WTO commitments? How far do rules or provisions – in areas like the environment, competition policy, labour, and special and differential treatment – go beyond what might be possible, or desired, in the WTO? The OECD’s answers on these are likely to be nuanced. But they will not challenge the proposition clearly stated at this year’s OECD ministerial meeting: regionalism, though often stemming from deeply-rooted political or strategic objectives, cannot substitute for the multilateral trading system. Importantly, the predictability afforded by multilateral rules helps smaller players, whether countries or businesses. And the bigger the numbers of players, the bigger are likely to be the gains. As Jean-Jacques Rousseau, the French philosopher, put it in Du Contrat Social:

“Enfin chacun se donnant à tous ne se donne à personne, et comme il n’y a pas un associé sur lequel on n’acquière le même droit qu’on lui cède sur soi, on gagne l’équivalent de tout ce qu’on perd, et plus de force pour conserver ce qu’on a.”

(“Finally, each man, in giving himself to all, gives himself to nobody; and as there is no associate over whom he does not acquire the same right as he yields others over himself, he gains an equivalent for everything he loses, and an increase of force for the preservation of what he has.”)

Note: the English version is from a published translation of the whole work by GDH Cole, an English historian and social theoretician who died in 1959. It is available at http://www.constitution.org/jjr/socon.txt.

References

• Moore, M., “Why the world needs a new round of trade talks”; Metzger, J.-M., “Can Qatar pick up where Seattle left off?”; and Camdessus, M., “A trade round for development”, in OECD Observer, No. 226/227, Summer 2001. Read them at www.oecdobserver.org

• Environmental Goods and Services: The Benefits of Further Global Trade Liberalisation, OECD, 2001.

• Trade and Regulatory Reform: Insights from Country Experience, OECD, 2001.

• For more information on UCTAD X, see http://www.unctad-10.org/index_en.htm

• Visit the OECD Trade website at www.oecd.org/ech/

©OECD Observer No 228, September 2001 




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