Feasibility and desirability of ‘clubs’ within the WTO: A critical comment on Hoekman/Mavroidis’ case for plurilateral agreements (PAs)

Editor’s Note: This post responds to Bernard Hoekman and Petros Mavroidis’ article in the current issue of EJIL Vol. 26 (2015), No. 2, titled “WTO ‘à la carte’ or ‘menu du jour’? Assessing the case for more Plurilateral Agreements”. For a post by the authors of the article, introducing their piece, see here. For other comments see here and here. For the authors’ concluding response, see here.

Two phenomena characterize the contemporary world trading system, namely, the deadlock of the Doha Development Agenda (DDA) and the proliferation of preferential trade agreements (PTAs), in particular, mega-FTAs such as Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP). The former illustrates the difficulty of the 161-member WTO in reaching consensus in trade negotiations, and this may have been one of the driving forces for the latter. Proliferation of PTAs has both pros and cons for the world trading system. On the one hand, PTAs facilitate trade liberalization between the parties, and they may be an incubator of new rules governing global trade and investment. On the other hand, PTAs may have trade diverting effects for non-parties. Their proliferation may result in the fragmentation of rules for global trade and investment. To sum up, the contemporary world trading system is suffering from the decay of the multilateral trading system and the disorderly proliferation of PTAs. Hoekman and Mavroidis’ recent article, titled “WTO ‘à la carte’ or ‘menu du jour’?”, published in the latest issue of the EJIL (Vol.26, No.2), tries to find a breakthrough in the world trading system by advocating the use of plurilateral agreements (PAs).

They are not the pioneers of advocating PAs. For instance, Richard Baldwin, in his article in 2012 (Richard Baldwin, “WTO 2.0: Global governance of supply chain trade”, Centre for Economic Policy Research Policy Insight No.64, December 2012), advocated a ‘WTO2.0’, which is practically a PA with limited membership, consisting of those WTO members who accept high-level rules that secure the well-functioning of global supply chains, without the special and differential treatment (S&D) to developing countries which is incorporated in the current WTO Agreements, or WTO1.0. A similar proposal was made by Michitaka Nakatomi in his article in 2012 [Michitaka Nakatomi, “Exploring Future Application of Plurilateral Trade Rules: Lessons from the ITA and the ACTA”, RIETI (Research Institute for Economy, Trade and Industry) Policy Discussion Paper 12-P-009, May 2012]. These proponents of PAs and Hoekman/Mavroidis share the common view of the contemporary world trading system. First, they regard the stalemate of the DDA as a result of the incapacity of the WTO in meeting the needs of the 21^st century global trade, characterized by the globalization of value chains. Secondly, they regard the proliferation of recent RTAs, in particular mega-FTAs, as attempts by major trading countries to meet such needs. Thirdly, however, they don’t think of the proliferation of RTAs as an optimal solution to the challenges of the 21^st century global trade, mainly because it might result in the fragmentation of rules for global trade and investment.

The present author shares many of the views, or the diagnosis, of the contemporary world trading system presented by the proponents of PAs, but has a different idea, or a prescription, as to how to rescue the world trading system from the current situation. The author agrees with them in that the DDA stalemate and the proliferation of RTAs, in particular mega-FTAs, result from the globalization of value chains, which requires ‘deep integration’ throughout the whole value chains. As ‘deep integration’ cannot be achieved through the DDA, major trading countries shifted their trade policy priority to the negotiation of RTAs, in particular the mega-FTAs. However, the author asserts that the best prescription should not be to establish ‘clubs’ among the WTO members, as is suggested by Hoekman/Mavroidis and the other proponents of PAs. Instead, the author argues that reinvigorating the WTO by the 21^st century trade and investment rules should be the best prescription. Following are the reasons.

First of all, we actually don’t know exactly what ‘deep integration’ means, or how deep it should be, so as to meet the requirements of the globalization of value chains. Globalization of value chains is here to stay. This means the globalization of value chains is possible even without ‘deep integration’. Firms engaging in the globalization of value chains cannot wait until ‘deep integration’ is achieved. They simply set out their business plan according to the present business environment that is optimal, consisting of the present best mix of global tariff- and non-tariff barriers of trade in goods and services and the regulatory environment for their foreign direct investment that enables them to conduct their business in the most cost-efficient manner. They will change their global business plan according to the changes in the global business environment. In this sense, ‘deep integration’ for globalization of value chains is a flexible concept, which allows for regional variation (that might be provided by RTAs), temporal variation (that might be provided by RTAs, PAs or multilaterally), and even country-specific variation (that might be provided by unilateral policy reforms of individual countries).

Secondly, the term ‘globalization of value chains’ is misleading, as globalization of value chains is a much selective exercise. Firms engaging in globalization of value chains strictly select their trade/investment destinations according to the calculation of costs and benefits. Tariff and non-tariff barriers and regulatory environment for foreign direct investment are among the factors to be taken into consideration in the calculation of their business costs. This means that only a handful of countries may be selected as components of ‘global’ value chains. Currently, ‘global’ value chains exist only in three regions of the world, namely, North America, Central and Eastern Europe, and East Asia and the Pacific. It is, therefore, not accidental that the mega-FTAs are under negotiation among the countries in these three regions: TPP among 12 countries in the East Asia and the Pacific, TTIP between the US and EU, East Asian Regional Comprehensive Economic Partnership (RCEP) among the ASEAN plus six countries, an Economic Partnership Agreement (EPA) between Japan and EU, and the Trilateral FTA among Japan, China and Korea. These mega-FTAs will, therefore, reinforce, rather than establish, the existing ‘global’ value chains in the regions. The split between those countries which form the present ‘global’ value chains and those who don’t is most likely to persist.

Thirdly, the flexibility of the concept of ‘deep integration’ and the selectivity of ‘global’ value chains, taken together, will lead the world trading system in a suboptimal direction, namely, the split of the world between those member countries of ‘clubs’, whether they be members of the mega-FTAs or PAs, and those who are not. Most of the latter will be developing countries, in particular LDCs. Except a few countries which have abundant tradeable natural resources such as petroleum or iron ores, they will have little chance to join the ‘global’ value chains. Poverty and social instability will persist in these countries, leading to a global insecurity and instability to the detriment of the world trading system including ‘global’ value chains.

So as to avoid this suboptimal situation, the world trading system should be equipped with a multilateral institutional framework that enables all countries in the world to achieve ‘deep integration’, so that even LDCs may have a chance to join the ‘global’ value chains. That is, the WTO should be reinvigorated with the 21^st century trade and investment rules that are applicable to all the members. We may call it as WT2.0. However, it should not be a club, as is advocated by Hoekman/Mavroidis and the other proponents of PAs. The challenge is, then, how can this be achieved? Given the stalemate of the DDA, one may not be optimistic about the feasibility of this scenario. As the 161-member organization has not been able to reach agreement on a relatively modest agenda of the DDA, it has still less chance to agree on a far more ambitious negotiating agenda for ‘deep integration’. The members of the WTO should, however, learn from the successful conclusion of the Agreement on Trade Facilitation. Even the least developed countries can join this Agreement, with a selective and staged application of its articles and a substantive amount of Aid-for-Trade provided by developed country members and international organizations during the transition period. This approach of the Agreement on Trade Facilitation in securing its universal membership should be the model for the WTO2.0, so that the whole WTO membership may achieve ‘deep integration’ according to their capacity and willingness to provide regulatory environment for the globalization of value chains.

The world trading system stands at a critical juncture. If the WTO is not reincarnated as the WTO2.0, its relevance in the governance of global trade and investment will be waned, and ‘clubs of deep integrators’ will persist, whether they be mega-FTAs or PAs. This will end up with a net suboptimal outcome for global welfare. The institutional infrastructure of the WTO is too good to be waned away. What is needed for the whole WTO membership is to face the reality and to agree on the ways and means to reincarnate the WTO.