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Section 4. World economy
Varun Eknath, Ereshchenko Viktoriya E-mail: [email protected]
THE MULTILATERALISATION OF PREFERENTIALISM: FROM COEXISTENCE TO COOPERATION
Abstract: This paper highlights the reasons behind the proliferation of preferential trade agreements (PTAs) and its consequent impact on the multilateral trading system. The paper addresses the current debates revolving around PTAs as building blocks or barriers towards the multilateral trading system and argues that the inefficiencies in the existing multilateral framework have greatly expanded the scope and importance of the World Trade Organization (WTO) as a key player in the movement towards Multilateralisation of Preferentialism.
Keywords: Preferentialism, Multilateralisation, Regulatory coherence, International Trade, World Trade Organisation, World economy.
Introduction
The history of international trade regulations highlights that bilateral/preferential and multilateral trade arrangements have always been a part of the trade policy environment, and have coexisted. [1, 27] However, historical developments have seen a cyclical change in the importance and preference that has been accorded to each of these two systems. One important trend in recent years in the field of trade policy has been the proliferation of Preferential Trade Agreements (PTAs) as countries seek to achieve levels of liberalization greater than those possible under multilateral framework.
The economic drawbacks of the inter world war period marked by extreme protectionism and unilateralism paved the way for multilateral liberalism emerging as the appropriate approach for the world trading system. [2, 19-23] In the aftermath of the Second World War, the General Agreement on Tariffs and Trade (GATT) provided a consensual legal framework of rules, regulations and procedures for
the proficient management of international trade based on the touchstones of non-discrimination and reciprocity. This period also saw the rise of regional trading blocs and preferential trade agreements, led by the European Union (EU) and the North American Free Trade Agreement (NAFTA), which raised a new threat to the existing world trading system. The presumption was that such arrangements might be welfare enhancing provided certain criteria were met [3].
The last two decades have seen a four-fold rise in the number of PTAs transcending regional boundaries and the levels of economic development. From 1948 to 1994, 124 Regional Trade Agreements (RTAs) covering trade in goods were notified with the GATT, whereas since the creation of the WTO in 1995, over 400 additional agreements covering trade in goods or services have been notified [4]. Since June 2016, after the notification of the RTA between Japan and Mongolia, all WTO members now have a Regional Trade Agreement in force. The reasons for such proliferation of RTAs are manifold
and are not limited to the advantages sought in terms of tariff concessions and tariff binding.
The new generation PTAs tend to contain disciplines, which go beyond relevant WTO disciplines, or regulate issues in respect of which there are no WTO disciplines. The regulatory nature of recent PTAs has resulted in an increase in an inclusion of WTO-Plus disciplines, which stipulate deeper levels of liberalization in the areas covered by WTO Agreements, such as industrial and agricultural tariffs, Technical Barriers to Trade (TBT), trade in services, Intellectual Property IP and Trade-Related Investment Measures (TRIMs). Moreover, WTO-Extra provisions, disciplines not covered under the WTO Agreements, such as competition policy, investment, movement of capital, environmental laws, labor market regulations and measures on visa and asylum, have also been included in a majority of PTAs.
The recent PTAs concluded by the largest trading blocs, the US and the EU contain a significant number ofWTO-Plus and WTO- Extra obligations and provisions, which are primarily regulatory in character. Empirical studies conducted by Horn et all (2009) show that provisions that can be regarded as really breaking new ground compared to existing WTO agreements are few and far between: environment and labor standards for US agreements and competition policy for EC agreements [5, 41]. Moreover, the recently concluded CECA (Canada-EU) and the Trans-Pacific Partnership (12 countries), along with Transatlantic Trade and Investment Partnership (EU-USA) agreement that are being presently negotiated have chapters that are WTO-Extra.
Stumbling blocks v. Building Blocks: The debate
Preferential grant of tariffs, inclusion of WTO-Plus and WTO-Extra disciplines have brought the PTA framework under severe criticisms. Ex-WTO Director General Pascal Lamy has stated that "it would be fair to say that proliferation of PTAs is breeding concern - concern about incoherence, confusion, exponential increase of cost of business,
unpredictability and even unfairness in trade relations" [6, 4]. According to Jagdish Bahgwati, "numerous and crisscrossing PTAs and innumerable arbitrarily determined applicable tariff rates" have resulted in a "spaghetti bowl" phenomenon [7, 1139], one which may undermine transparency in the international trading system. PTAs are also being viewed as agreements, which could divert trade, erode the fundamental principle of non-discrimination of the WTO and reduce the potential for future multilateral liberalization [8, 121]. In the light of this threat that the PTA system poses to the multilateral trading system, it is argued by a few that PTAs are stumbling blocks, and these must be eliminated as a whole and countries must be forced to agree to negotiate in a multilateral framework.
However, preferentialism must not be seen as a complete threat. In fact, PTAs have been credited with being responsible for maintaining the multilateral club [9, 273-291], and for giving governments a way to maintain progress towards liberalization [10, 295-302]. PTAs can reinforce multilateralism and need not necessarily challenge its integrity and stability. The European experience is a stark example of how regional integration has been able to complement the multilateral trading system by promoting peace within the region and becoming one of the largest trading partners in the global multilateral trading system [11, 30]. Similarly, Switzerland is highly involved in European regional trade and continues to have extensive trade relations with the rest of the world at the same time.
RTAs, especially mega-regional agreements, such as the TPP, Regional Comprehensive Economic Partnership (RCEP), TTIP and The Trade in Services Agreement (TISA) can serve as a template for further negotiations on the multilateral level. If these agreements were to materialize into coherent results, they would be the stepping stones for dealing with these issues multilaterally. For example, regulatory cooperation between the EU and the US, one of the key major areas covered by TTIP, has played
an important role in establishment of international regulatory norms and disciplines [12, 9]. Setting aside current political inclinations, the negotiating parties to the TTIP believe that as a result of the agreement, intensified trade and investment will spur global economic growth and job creation and strengthen global trading system [13, 1]. That is to say, achieved regulatory convergence between the two key players in the international trade could foster achievement of regulatory convergence in the context of the multilateral trading system.
Furthermore, there is strong evidence that preferences induce a more rapid decline in external tariffs in free trade areas [14, 135]. Empirical studies find evidence that PTAs have a complementary effect on the multilateral trading system and are responsible for unilateral tariff reduction [15, 1531-1575]. Moreover, this proliferation of PTAs has not been accompanied by an actual boost of preferential trade flows [16], that may undermine the multilateral trading system. Despite this significant proliferation, 85% of world trade in merchandise continues to take place on a non-discriminatory, MFN basis [17].
The building-block stumbling-block debate has been raging for over a decade without any successful solution. The debate erroneously considers the two systems as mutually exclusive and distinct. It is in this light that it is argued that preferentialism must be accepted as a norm and the focus must be diverted towards the multilateralisation of preferentialism in order to eliminate the negative aspects that are associated with preferentialism [18]. There is an immediate need to ensure and maintain greater coherence and cooperation between PTA provisions and the multilateral trading system. The discriminatory aspects of PTA's that threaten the multilateral framework must be amended and the provisions of PTA's must refer to the existing WTO texts and provisions while negotiating PTAs. Members of PTAs must be prevented from engaging in forum shopping, using alternative dispute settlement mechanisms under the PTA as opposed to the WTO Dispute Settle-
ment Body. Furthermore, the flaws in the current WTO framework relating to PTA's are required to be re-modified and amended. Therefore, the inefficiencies in the current multilateral trading system and the threat posed by the PTA framework can be substantially addressed by a pro-active and constructive role played by the WTO.
Multilateralising PTAs: The role of the WTO
With its primary purpose to open trade for the benefit of all, the WTO is eminently suited to multi-lateralise PTAs. At the outset, the issues surrounding the inconsistency of obligations under PTAs with those under the WTO agreements are brought into the limelight. This inconsistency may stem from the process of scheduling commitments under the PTAs, which is considerably aggravated in the case of developing and least developed countries, with less or no of technical expertise and experience. In this regard, Jim Rollo's proposal of establishing an Advisory Centre on PTA that would provide developing country Members with advisory services regarding the negotiation of the regional trade agreement, finds favor [19]. This Centre could work within the contours of the Development division of the WTO and complement its Aid for trade initiative.
PTAs can also be multilateralised by ensuring a high degree of coherence between the provisions of the RTAs and the WTO law. As proposed by Rudolf Adlung, incorporating an MFN clause into PTAs could be considered. An MFN clause in a PTA could set forth the rules in the event of any incompatibility between a PTA and a WTO Agreement, stipulating the prevalence of the WTO Agreement to the extent of the inconsistency, thereby ensuring regulatory coherence between the two [20; 24].
An alternate approach to ensure such coherence, proposed by Joost Pauwelyn, involves the adoption of a 'dynamic approach', wherein PTAs automatically include the amended rules under the WTO framework. This would primarily avoid the necessity to constantly update the provision of PTAs after every amendment in the WTO law, and at the same
time ensure the compliance of PTA provisions with WTO law [21].
Conclusion
In conclusion, it is stated that historical developments have shown that inefficiencies in the multilateral trading system, followed by an economic downturn have led to a trend towards a temporary phase of pref-erentialism. However, it must be remembered that the WTO has been able to play an important constructive role in addressing the inefficiencies in the past (the Uruguay Rounds) and will continue to do so even in the aftermath of the collapse of the Doha Develop-
ment Agenda [22, 39]. The WTO is equipped with powerful, adequate tools, particularly the Dispute Settlement Undertaking that is superior to bilateral settlements [23, 239], which will ensure that the role of the WTO is not compromised and the WTO remains an important international organization promoting multilateral liberalization. However, to improve the coherence between the systems and promote their cooperation, it is suggested that the WTO plays a significant pro-active role and the deficiencies in the WTO framework be plugged to ensure that the global trading system moves towards mulilateralising regionalism.
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