1050x300 Harbinson Trade 0920

Trade Negotiations: Is the Bicycle Tipping Over?

Author(s): Stuart Harbinson

Date: Sep 20, 2016

Theme(s): Trade & Investment

Publications: Project Documents

Fellow Stuart Harbinson explains why he thinks the WTO–and the multilateral trading system–is far from obsolete

An old saying has it that trade negotiations are like riding a bicycle. You have to keep moving forward or the bicycle will tip over and you will fall off. Are we now reaching that tipping point or can we find renewed energy to keep pedalling? If the latter, what is the direction we should be heading in?

Trade has the potential to be a powerful catalyst for growth, improved living standards and job creation. The G20 Brisbane Action Plan (2014) saw increased trade as a key element in meeting its ambitious goal of lifting GDP by an additional 2 per cent by 2018.[1]

Nearly two years later, trade has not responded. The world’s merchandise trade grew by only 2.8 per cent in volume terms last year. Against the background of a challenging global economic environment, the World Trade Organization predicts a similar outcome for 2016. This would be the fifth consecutive year of sub-3 per cent expansion. Except for the immediate rebound after the financial crisis, this is the weakest level of trade growth for thirty years.[2]

Furthermore, the WTO’s most recent trade monitoring report (October 2015 to May 2016) noted an uptick in trade-restrictive measures to an average of 22 per month – the highest monthly average since 2011. The inventory of trade-restrictive measures continues to rise; of 2,800 measures recorded since 2008, only 25 percent have been removed.[3]

International trade negotiations do not of themselves have the power to increase trade. But through progressive trade liberalization and judicious rule-making, they can facilitate a context within which global trade can develop and increase. Where do we stand in terms of these negotiations?

Some recent history

The WTO is the prime forum for further negotiations on multilateral trade relations.[4] It has however been the conventional wisdom in trade policy circles for some years now that this body, responsible for global negotiations on trade liberalization and rule-making, is too unwieldy and cumbersome to produce meaningful results.

The Doha Round of negotiations was launched 15 years ago, in 2001. The driving force behind the launch was trade in agricultural products. This was, and remains, the most highly protected sector of trade in goods. There was a widespread feeling among many governments that the time had at last come to tackle the problems of inadequate market access, trade-distorting domestic subsidies and questionable export competition practices. A successful result would be a win-win outcome for both developed and developing countries.

After an initial period of frenetic activity, the negotiations came to a head in 2008 but ultimately ground to a halt. The reasons for the breakdown were complex but the bottom line was that some major players did not want to grasp the nettle of meaningful reform of trade in agriculture – the process which was at the heart of the Round.

Some of the participants, and many commentators, sought to deflect the blame by pointing to institutional failings at the WTO. There were simply too many countries involved, leading to overwhelming complexity. But this ignored the fact that the great mass of WTO member governments never stood in the way of a deal. The Round’s “single undertaking” approach, under which nothing was agreed until everything was agreed, was also stigmatized. But this ignored the provision in the Round’s original design which foresaw the possibility of results being delivered in stages.

This is not to say that there is some validity in the arguments about the complexity of global negotiations at the WTO level. However the overall conclusion must be that, in 2008, a number of the major participants simply felt that the deal on the table was not doable in terms of their domestic politics.

Meanwhile, the real world had changed. Trade in agriculture was seen as a sideshow in the technology-driven modern business world. It is perhaps one of the tragedies of the Doha Round that although trade in services was included as a major field for negotiations, talks in this sphere never emerged from the shadow of agriculture in the WTO. Frustration was building up. Why could the WTO not address calls for new global rules and a more level playing field not only in services, but also in areas such as digital trade and investment?

The solution identified by many governments post-2008 was to put the WTO on the back burner and to turn instead to new forms of trade agreements, negotiated amongst groups of countries, which would go far deeper than the WTO was equipped to handle, in areas such as services, regulatory cooperation, digital trade and investment. These would be pioneering agreements which would set the template for possible global rules in the future and provide a breakthrough in delivering increased trade and prosperity. The era of the so-called “mega-regional” trade agreements was launched.

“Mega-regional” trade agreements

WTO rules allow groups of countries, subject to certain conditions, to reach agreements among themselves to liberalize trade and integrate markets. There has been an explosion of these regional trade agreements (RTAs), sometimes called preferential trade agreements, in recent years. 460 RTAs have been notified to the WTO as of July 2016, of which 267 are currently in force.[5] The quality of such agreements varies enormously. Some exist on paper but not in reality. Others exhibit facets of deep integration.

There is no definition of what constitutes a “mega-regional” trade agreement. However the four most commonly identified such agreements are:

  • The Trans Pacific Partnership (TPP)
  • The Transatlantic Trade and Investment Partnership (TTIP)
  • The Trade in Services Agreement (TiSA)
  • The Regional Comprehensive Economic Partnership (RCEP)

These agreements are informally distinguished from other RTAs by features such as their geographical scope, the importance of the participants in global trade terms, and the depth of integration aimed at.

The TPP is by far the most advanced in terms of process. Negotiations among the twelve Pacific Rim participating countries concluded in February 2016. According to the White House, “With the TPP, we can rewrite the rules of trade to benefit America’s middle class. Because if we don’t, competitors who don’t share our values, like China, will step in to fill that void.”[6] The TPP is seen as a “litmus test” for U.S. leadership in the region.[7] The Administration recently sent Congress a draft Statement of Administrative Action describing the actions which it proposes in order to implement the 25 chapters of the agreement. This is the first step required in the Trade Promotion Authority (“fast track”) process before the agreement can be submitted to Congress.

The prospects for early TPP ratification by the U.S. remain highly uncertain. Congressional leaders have expressed reservations. The public mood has shifted against big trade deals and, in response, Presidential candidates in the forthcoming elections have said that they will not implement the agreement. There is a possibility of congressional action in the “lame duck” session after the elections but this is far from a foregone conclusion. There is a real possibility that TPP will not be passed, at least for a very considerable time to come. Without U.S. participation, the other countries involved may put on a brave face and implement among themselves but, absent the U.S., the deal would essentially be gutted.

Less is known about the other potential “mega-regional” deals, which are still under negotiation. The TTIP is proving to be highly controversial, particularly in Europe. Again, the public mood has shifted against globalization. The deal is seen in some quarters as favouring corporate elites. The French trade minister has recently said that “there is no political support from France for those negotiations…the Americans give nothing, or just crumbs … we need a clear and definitive stop to these negotiations to start again on good bases.” Germany’s Deputy Chancellor has also said that in his view the negotiations have failed.[8] The recent action by the European Commission in relation to Apple’s tax affairs may also have soured the relationship. All of this does not mean that the negotiations will come to an immediate halt, since the European Commission still has a valid mandate to negotiate, but the prospects for success in the immediate future seem remote.

The TiSA talks formally started in 2013 and currently include 23 participants. The original impetus arose from understandable frustration over the lack of progress in services negotiations in the WTO. The putative agreement aims for a high standard both in terms of market access and updated rules. Significant progress has been made but negotiators now face both time pressure and political opposition. With the U.S. Presidential elections looming and candidates having to respond to increasing anti-trade sentiment, the race is on to try to reach an agreement before the end of 2016. If this target is attained, it is likely that it would be at the cost of a trade-off in terms of level of ambition.  Another possible outcome is that the talks would be prolonged indefinitely, pending reassessment by the incoming U.S. Administration and new governments in the EU, with an inevitable loss of momentum.

The RCEP talks were launched in 2012.  RCEP is an ASEAN-centred proposal for a regional free trade area, which would initially include the ten ASEAN member states and those countries which have existing free trade agreements with ASEAN – Australia, China, India, Japan, Republic of Korea and New Zealand. The project is vast in terms of geographical and demographic scope. The 16 participating countries account for almost half of the world’s population, almost 30 per cent of global GDP and over a quarter of world exports. Perhaps in response to the completion of negotiations on the TPP, RCEP trade ministers have called for their negotiations to be concluded this year. RCEP could receive an additional boost if the TPP grinds to a halt. However, given the time pressures and the diversity of the economies involved, expectations in terms of the level of ambition achievable are very moderate. For all its potential, RCEP does not look like a game changer.

There is no certainty that these “mega-regionals” will be able to provide the stimulus to global trade that was hoped for, at least for the foreseeable future. The policy options available to turn the trade slowdown around therefore appear to be narrowing.

Having said this, it would be wrong to write off these negotiations as failures. Even if they do not produce immediate ambitious results, a lot of groundwork has been laid. A pause would mean that, if and when they restarted, this would be from a much more advanced baseline, with respect to which the areas of agreement and disagreement would already have been scoped out.

Furthermore, the negotiators have banked a lot of knowledge. Even non-participants have, through following the progress of negotiations, been acclimatized at a general level to the issues. These factors, sometimes referred to as the “discursive effect” of trade negotiations, raise the likelihood that some facets of the “mega-regionals” will resurface in other fora, including possibly the WTO.

Back to the future?

In fact, back at the WTO, life has been stirring anew. The 2013 Bali Ministerial Conference produced a ground-breaking multilateral agreement on trade facilitation, which is now rapidly gathering the critical mass of ratifications to bring it into effect. Its innovative format enables developing countries to adopt trade facilitating measures in line with their capacity to do so, combined with a new facility to ensure that they receive necessary assistance.

This was followed up with another success at the Nairobi Ministerial Conference in 2015, when a historic commitment was made to abolish export subsidies for farm exports. This represents a significant step in agricultural trade reform.  New rules were agreed on export credits and some decisions were reached on international food aid and exporting state trading enterprises.

The outcomes at Bali and Nairobi showed that the Doha Round’s “single undertaking” approach was flexible after all, and that it could accommodate prior agreements on parts of the whole package. They also demonstrated that, where the political will exists, the WTO negotiating framework is fully capable of producing results.

WTO member governments still remain divided on the future of the Doha Round as a whole. Some developing countries continue to insist that the Round must be concluded before other subjects can be brought on to the agenda. Others, mainly developed countries, want to put the Round behind them and to start to discuss other subjects of relevance to modern business practice such as investment and digital trade.

At present an informal modus vivendi has emerged under which it is agreed that the core subjects of the Round – including notably agriculture, market access for industrial products and trade in services – should continue to be discussed while groups of members try to attract support to bring so-called “new” (meaning non-Doha) issues into the WTO.

To date, there has been little sign of further progress on the core Doha issues and there is continuing opposition to new issues. But, if the WTO is to consolidate its renaissance, it will have to find a pragmatic way forward and build on the results from Bali and Nairobi at its next Ministerial Conference in 2017.

There are three related arguments in favour of re-prioritizing WTO negotiations:

  1. The multilateral route through the WTO is more inclusive, more development-friendly and more sustainable. It may not be capable of producing big breakthroughs across the board but its incremental approach can add up to significant progress over time. Because all governments will have bought into an agreement, its outcomes are more sustainable and enjoy wider support. It can act in support of Sustainable Development Goals. The inclusive and incremental nature of WTO negotiations may also defuse some of the populist opposition to trade deals.
  1. Global business also tends to favour the multilateral route. Businesses want a level playing field across the board with predictable rules, rather than a piecemeal approach with different rules applying in different markets. They have only recently turned to regional or preferential agreements mainly because they felt that the WTO was paralyzed. The International Chamber of Commerce, a global body representing business interests, has articulated this position eloquently and consistently.[9]
  1. There are systemic concerns that some “deep integration” preferential trade agreements, going beyond border measures and addressing regulatory issues, may contribute towards a fragmentation of the global trading system. As the WTO has put it: “Competing PTAs with incompatible regulatory structures and standards may lock in members to a particular regulatory regime, undermining the principles of transparency and predictability of regulatory regimes and making movement towards multilateral trade opening costly.”[10]

Conclusion

Returning to the bicycle analogy at the beginning of this article, it’s clear that there are now a number of bicycles on the trade negotiations road – multilateral, plurilateral, regional, mega-regional and preferential. As in the Tour de France, the aim should be to ensure that they work together and head in the same direction. Individual bicycles should take the lead at different times in order to share the load and maximise speed.

Looking to the immediate future, there is now a possibility that the WTO will return – some would say rightfully – to the lead. The recent G20 Leader’s Communique from Hangzhou, under China’s presidency, may have hinted at this in referring to the WTO “playing the central role in today’s global trade”.[11]

However this is by no means a foregone conclusion. Can the WTO build on the momentum of the Bali and Nairobi Ministerial Conferences and continue to produce meaningful results? Here are a few guidelines that the member governments of the WTO might usefully consider in their efforts to propel the bicycle forwards:

  • continue to suspend hostilities on the future of the Doha Round. Many of the Doha subjects remain highly relevant and must continue to be negotiated, whatever the context;
  • be amenable to constructive dialogue on priority non-Doha issues. This article does not aim to identify these priorities but they should surely include issues such as trade and investment, and digital trade at an absolute minimum;
  • search for common ground, identifying specific areas for work (which may mean segments of subjects) in which there is space for agreement without crossing red lines;
  • continue to countenance results being delivered incrementally, if necessary on a piecemeal basis, without waiting for major packages to be constructed. An overall balance will automatically be achieved over time through the WTO’s existing informal consultative mechanisms;
  • be open to selective feedback into the WTO of facets of subjects which have been advanced in recent negotiations outside the WTO. A prime example is trade in services which, contrary to much perception, is an area of enormous interest to developing as well as developed countries.
  • focus on the trade–related aspects of issues of global concern, such as those enshrined in the Sustainable Development Goals. Current examples are the ongoing talks on an Environmental Goods Agreement and Fisheries Subsidies. More use might be made of the WTO system as a whole to advance the Goals.

As regards the procedural approaches which may be applied in order to move forward, the WTO’s flexible architecture provides a wide range of options which can be adapted and adopted as necessary depending on the context:

  • Agreements may negotiated fully multilaterally amongst all members.
  • In some cases a “facilitation” approach, modelled on the Trade Facilitation Agreement, may be feasible. In this scenario, developing and least developed members may assume commitments progressively, in line with their improving capacity for action.
  • “Critical mass” agreements, along the lines of the Information Technology Agreement, are another possibility. These are negotiated initially among a subset of members but the benefits are ultimately granted to all members. A potential new agreement along these lines is currently being negotiated on Environmental Goods.
  • In the area of rule-making, groups of ,embers may develop new rules and then make additional commitments on them in the WTO, as was done with the “Telecoms Reference Paper” in the 1990s. A recently-launched initiative among a group of countries in the area of Fisheries Subsidies may be headed in this direction.

We cannot expect the WTO immediately to transform the outlook for global trade. It operates on longish time frames and is remote from everyday business.  History shows however that it provides a framework – even if sometimes underrated and unheralded – in which international trade can grow and thrive. In present circumstances, in which the policy options for increasing trade are limited, the WTO offers a viable and sustainable way forward. Governments must now seriously consider revitalising their efforts to advance the multilateral trading system.

 

Footnotes

[1] Brisbane G20 Action Plan, November 2014: A Blueprint for Growth”.

[2] WTO News Item 9 July 2016, “DG Azevedo calls on G20 trade ministers to boost trade growth”.

[3] WTO News Item 25 July 2016, “Report urges WTO Members to resist protectionism”.

[4] See Article III.2, Marrakesh Agreement Establishing the World Trade Organization.

[5] See https://www.wto.org/english/tratop_e/region_e/region_e.htm

[6] See https://www.whitehouse.gov/issues/economy/trade

[7] White House Deputy National Security Advisor, 29 August 2016.

[8] Financial Times, 30 August 2016.

[9] See, for example, “Mega-regional Trade Agreements and the Multilateral Trading System”, ICC Policy Statement, April 2016.

[10] World Trade Report 2011, p.14.

[11] G20 Leaders’ Communique, Hangzhou, para 26, 5 September 2016.

 

The views expressed in the reports featured are the author’s own and do not necessarily reflect Asia Global Institute’s editorial policy.