Editor’s Note: This is the first in a series of posts discussing the article in the current issue of EJIL Vol. 26 (2015) No 2, by Bernard Hoekman and Petros Mavroidis. See also the posts discussing the article by Junji Nakagawa, Diane Desierto, and Geraldo Vidigal. For the authors’ concluding response, see here.
The WTO and … ‘clubs’
The long-running Doha Round deadlock illustrates how difficult it has become to get agreement on new rules of the game among 161 WTO Members. The Agreement on Trade Facilitation that was negotiated at the 2013 WTO Ministerial meeting in Bali demonstrated that this is possible, but the proliferation of preferential trade agreements (PTAs) illustrates that many countries have been moving away from using multilateral trade agreements to liberalize international commerce and agree to new policy disciplines. Recent examples of PTAs that involve major trading nations include the agreements signed by Korea with the EU and the US and the ongoing Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) negotiations. It may be that one of the consequences of the Doha deadlock has been to give countries greater incentives to engage in PTAs. But there may be a reverse causality effect as well: the existence of the PTA option may reduce the incentive to agree on rules on a multilateral basis. Whatever the case may be, the proliferation of PTAs results in fragmentation of the global trading system and generates substantial information and transactions costs for traders.
There has been some action in the WTO on market access issues. This has taken the form of so-called critical mass agreements, under which concessions negotiated among a subset of countries are extended to all WTO Members a nondiscriminatory, most-favoured-nation (MFN) basis. Examples include ongoing negotiations to liberalize trade in environmental goods and the effort to extend the coverage of sectoral initiatives to liberalize trade, most notably the 1997 Information Technology Agreement (ITA). Critical mass agreements have always been an important mechanism in the GATT/WTO setting: if enough large players participate in a liberalization exercise they need not worry about free riding by other countries that do not want to participate.
In practice there are many more extant preferential trade agreements (PTAs) and ongoing PTA negotiations than there are efforts to conclude critical mass-based liberalization agreements. Free riding concerns are one reason for this. But another reason is that as tariffs have become less relevant, the focus of trade integration efforts shifts to regulatory barriers. When it comes to regulatory policies, deals on new rules of the game are easier to agree if they are limited to a sub-set of the WTO Membership that have similar preferences or concerns and that have similar institutional capacities to implement whatever is agreed in a given policy area. Many countries are not interested in or unwilling to agree to disciplines that constrain their ability to pursue certain types of policy. Thus, to date it has not proven feasible to launch negotiations on investment or competition policy disciplines in the WTO, or to pursue far-reaching liberalization of trade in services. Many of the recent vintage PTAs cover these policy areas.
PTAs and critical mass agreements are not the only game in town when it comes to negotiating policy commitments among a ‘club’ of countries. The WTO offers another mechanism for Members to do so: conclusion of a Plurilateral Agreement (PA) under Art. II.3 of the Agreement Establishing the WTO. This provision permits sub-sets of the WTO Membership to agree to new disciplines applying to signatories only. In contrast to a PTA, which must cover substantially all trade in goods (Art. XXIV GATT), and/or have substantial sectoral coverage of services (Art. V GATS), PAs can be issue-specific. At present there are two PAs in force in the WTO, the Agreement on Government Procurement (GPA), and the Agreement on Civil Aviation.
PTAs and PAs both permit discrimination and both can involve binding commitments: they liberalize trade or define rules of the game only for a sub-set of the WTO Membership that shares similar views. While PTAs in practice often go beyond the current WTO mandate, in principle, PAs that cover areas not falling under the current WTO mandate could be used as substitute for PTAs, thus offering a mechanism for countries to pursue greater cooperation under the umbrella of the WTO as opposed to outside it.
Some analysts have long called for greater use of PAs as a way of allowing sub-sets of countries to move forward on an issue where it is clear that there is no consensus among the WTO membership as a whole. Recent developments in the world economy – such as the ever greater prevalence of international value chains and production, as well as the much greater intensity with which governments are turning to PTAs, most notably the US and EU, but also economies in the Asia-Pacific region – suggest to us that greater use of PAs should be considered. Agreement on cooperation on regulatory matters among 161 WTO Members will in most cases be difficult, if not impossible. Even the EU, a regime with arguably substantial homogeneity, allows for the establishment of PAs across a sub-set of its membership, the most notorious being the EMU, the European Monetary Union. Besides the EMU, so-called Enhanced Cooperation Agreements are possible for a sub-set of the EU Membership (Art. 20 TEU). Although so far practice is scarce, arguments have been made that these could be an instrument that could propel further European integration among countries that are interested in doing so.
Advantages of greater diversity in club formation
In our view clubs are bound to proliferate when it comes to regulatory matters and related rule-making, but there is no good reason why the WTO membership should simply accept that such clubs will have to be limited to PTAs. As argued at greater length in our EJIL article, there are good reasons for privileging PAs over PTAs.
- PAs are Pareto-sanctioned in that their content is approved by the WTO Membership. PTAs are reviewed by the WTO, but there is no sanctioning of their content. Since 2006 there is no longer an assessment by the relevant WTO body as to whether a new PTA complies with WTO rules. Post 2006, WTO review is simply limited to the supply of information.
- This information provision stops at the moment a PTA has been reviewed. There is no obligation to continue to supply information to WTO after that. In contrast, PAs involve regular reporting on activities to the WTO Membership as a whole.
- The plethora of PTAs results in significant dispersion in rules and approaches and thus transactions costs and trade diversion – Jagdish Bhagwati’s famous spaghetti bowl analogy. Multiple PTAs deal with the same subject-matter, so that rules of the game for firms from a country often differ for the same issue depending on the PTA that applies for a given trade flow. In the case of a PA there will only be one regime regulating a given subject-matter.
- PTAs are mostly closed to accession by new members in the sense that the PTAs make no provision for accession. PAs in contrast are required to be open.
- PTAs often have their own dispute settlement procedures. As dispute settlement is a frequently used form of ‘contract completion’, the result is that the WTO misses out on important information. In contrast, PAs must use WTO dispute settlement mechanisms.
The overall conclusion we draw is that a major advantage of PAs is that they keep the umbilical cord with the WTO tight, while offering a vehicle for countries to cooperate on new issue areas that are not subject to WTO rules. There are many possible areas where PAs can help governments experiment and learn without implicating the whole WTO membership. For example: some governments may want to create a mechanism to harmonize approaches to product classification and to share data on advance rulings by Customs agencies; develop a vehicle for cooperation on policies affecting digital trade and data flows; competition policy; regulatory cooperation; private standards, and so forth.
An important impediment to negotiating new PAs is the requirement that proposed agreements be approved by the whole WTO membership: PAs require consensus. This means that countries that have no interest in joining can nonetheless block approval of a new proposed PA. The prospects of achieving the required consensus could be enhanced by launching a process to agree on a code of conduct for new PAs. Provisions of such a code might include or address the following elements:
- membership in any PA is voluntary;
- that the subject must be a trade-related issue;
- those participating in negotiations should have the means, or be provided with the means as part of the agreement, to implement the outcomes;
- the issue should enjoy substantial support from the WTO’s Membership; and
- application of the ‘subsidiarity’ principle to minimize the intrusion of ‘club rules’ on national autonomy.
Clubs are the hothouse of future trade regulation. The WTO does not lose its relevance because of their advent. It is the guardian of past liberalization that paved the way to ‘deeper integration’ initiatives that are easier to pursue in a club context. Such clubs need not be limited to PTAs that do their business independently of the WTO. Supporting more club formation under the umbrella of the WTO can help ensure the continued relevance of the multilateral trade regime in the 21st century.