Whose Club Is It Anyway? PTAs 2.0 and the Creeping Non-Trade Rules

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.

Bernard Hoekman and Petros Mavroidis’s article comes at an important time for the WTO. Alternatives to the multilateral trade talks have always existed, both outside the WTO (PTAs) and within it (PAs). However, the repeated failure of Doha talks to deliver meaningful results is leading PTAs to take an ever more important role. Their capacity to displace WTO rules has so far been limited, in no small part because they do not cover trade between the largest WTO Members. This is about to change, however, if TTIP and TPP really get off the ground – one could add to the list the China-led Regional Comprehensive Economic Partnership (RCEP). We may call these agreements PTAs 2.0. Both the US and the EU have been signing similar deals with third parties over the past two decades. A PTA 2.0 between the two would amount to a fait accompli to everyone else regarding a number of issues. To avoid a fragmentation of global rules, Hoekman and Mavroidis propose to expand the scope of intra-WTO plurilateral agreements, and incorporate the rules conveyed in PTAs 2.0 into WTO law, as PAs if necessary.

I should begin by saying that I am generally suspicious of the argument that the WTO has somehow become too big for consensus decision-making. It is not the world’s Cubas, Venezuelas and Nicaraguas that are halting trade talks (even if they can delay results for a few hours). If we are to go beyond consensus, it seems reasonable to state whose veto it is we expect to overcome. In this case, it seems that it is mainly large developing countries – in particular India, who has repeatedly been playing spoilsport in trade talks, but perhaps China and Brazil as well – who will be given an option between accepting the incorporation of PTAs 2.0 into the WTO or being left out of trade rules 2.0.

It is difficult to consider these agreements en bloc, without unpacking what they really contain. As Hoekman and Mavroidis note, the most significant aspect of PTAs 2.0 is not the negotiation of reciprocal tariff liberalization but the establishment of new rules. Some of these rules, in particular the harmonization or mutual recognition of technical, sanitary and phytosanitary rules and standards, are meant to facilitate trade. Intra-WTO plurilateral agreements on these matters, eliminating restrictions regarding certain goods or services, could certainly be useful.

However, many of the rules in PTAs 2.0 can no longer be called ‘trade’ rules in any meaningful sense – they lead neither to trade creation nor to trade diversion. They have nothing to do with the Ricardian economics of comparative advantages, in which lowered barriers to trade lead to mutual (if not necessarily symmetrical) gains from trade. Instead, many provisions in PTAs 2.0 are essentially attempts to ‘lock in’, at the international level, a number of policies in a number of ‘trade-related’ areas.

Of course, one of the advantages of international agreements is that they usefully tie politicians’ hands, preventing them from catering to rent-seeking interest groups, who seek monopoly rents at the expense of both foreign producers and domestic consumers. By the same token, however, PTAs 2.0 may serve as means for these groups to enshrine in these agreements their own policy preferences. Thus, rather than preventing rent-seeking, PTAs 2.0 could be providing interest groups precisely with the sort of unwarranted extra income, diverted from powerless foreigners and unwitting fellow countrymen, that classical trade agreements are supposed to deny them.

Thus, many non-trade rules in PTAs 2.0 enshrine policy preferences whose effect on aggregate welfare is dubious. The clearest example may be rules on investment protection that allow investors access to investor-state dispute settlement (ISDS). Leaving aside the very inconclusive evidence regarding the effect of investment treaties over the amount of foreign investment received, there is an argument to be made that the protection of property rights across the board ensures the previsibility required for long-term investment projects, which in turn lead to economic growth. But there is little reason to believe that the creation of a separate track for foreign investors to recover their losses, and sometimes obtain their expected profits, leads to economically more responsible governments.

More to the point perhaps, international investment law as it has developed over the past decades offers foreign investors possibilities that most developed countries would be unwilling to offer to their own citizens. Even assuming that tribunals will refrain from awarding compensation for impartially implemented good-faith regulation, the concentration on monetary remedies, which evolved as a means to reconcile the rights of investors with national sovereignty, in fact means that unreasonable decisions of national authorities are not reversed but lead to payment of damages to the investors. If every unreasonable governmental decision led to multiple damages awards corresponding to the loss suffered by every private party adversely affected, there would be little money left in the public purse anywhere in the world. No wonder the prospect that they may appear as respondents in ISDS has been leading governments in developed countries to consider the wisdom of having ISDS in treaties between them.

A second case is that of intellectual property rights (IPRs). The logic behind IPRs is persuasive: they create artificial scarcity and ensure monopoly rents to their holders for a time, allowing them to profitably invest in the new technologies that make modern life longer, more agreeable, and more productive. However, it has been suggested that extending IPRs does not lead to increased research, and may in fact hinder new research, putting beyond the reach of competitors what are sometimes obvious inventions or combinations of inventions. While this claim remains contentious, it should at least be considered whether expanded IPR protection in PTAs 2.0 is the fruit of sound policy decisions or of lobbying on the part of highly concentrated industries, with the aim of increasing their monopoly profits without any added benefit to societies.

Other non-trade rules, in particular in the fields of labour and environmental protection, may be perceived as positive by audiences in the West generally suspicious of trade agreements. While some may be disturbed by the fact that these rules are conveyed in trade agreements, they do aim to offset the risk that lowered barriers to trade lead to a regulatory race to the bottom, with the effect of decreasing standards of living (either because they empower capital over labour or because they lead to disastrous consequences in the long run). One should nonetheless note that many in the developing world worry that these ostensibly well-meaning rules in practice nullify – and are in fact designed to nullify – the few comparative advantages that developing countries have to compete with uber-productive industrialized economies. While these rules may be included in PAs, presumably WTO members potentially affected will want something in return for their agreement to give up on their comparative advantages.

Finally, one must look at what is not included in PTAs 2.0. The most noteworthy absence is that of limitations on subsidies, and in particular on agricultural subsidies. It is widely known that these subsidies hurt, and sometimes render unviable, otherwise competitive agriculture in developing countries. In the WTO, Brazil managed to challenge a number of these subsidies. That the US was willing to pay the Brazilian cotton industry to keep its own subsidies demonstrates the strength of the agricultural lobby. Whereas it has been suggested that Cairns Group countries start a PTA or PA for agriculture, it seems difficult to conceive that the US or the EU (or India for that matter) will join merely for the symbolic force of the act.

From the strategic perspective, of course, once TPP and TTIP are agreed on, these rules will be ‘out there’. Countries that have been resisting them will be faced with the same dilemma they faced as regards their rights under the old GATT, once the Quad agreed to the current WTO rules; giving in or seeing the WTO fade into irrelevance. In this regard, they may well conclude that is better to have new if non-ideal rules negotiated and adjudicated under the umbrella of the WTO than to have PTAs 2.0 sideline the WTO as the main forum for global trade talks.

From a more principled perspective, however, one may wonder whether this would be a successful case of PTAs serving to overcome the collective action problem of the WTO, establishing rules that lead to freer trade and higher standards of living, or whether PTAs will have been used as a (very credible) threat by those wishing to harness the power of the multilateral trading system to protect specific interests without any positive (and possibly with a number of negative) spillovers. In the latter case, there would be little reason for anyone who supports free trade to celebrate the creeping in of these non-trade rules into the WTO Agreements, without any concessions on the part of their proponents, simply to maintain the appearance of a relevant organization.