1 Lesson 2 – The WTO and regional/bilateral trade agreements

PROGRAM OUTCOMES
2 Lesson 2 – The WTO and regional/bilateral trade agreements

UTCOME

SPECIFIC LEARNING OUTCOMES

In this lesson, you should be able to:

1. describe the Non-discrimination and multilateralism in the post-war trading system;
2. explain Trend in regionalism;
3. explain WTO responses to the proliferation in RTAs;
4. demonstrate Implications of regionalism and ;
5. explain Whither trade policy;

PRE-ASSESSMENT
True or False
_______1. For most of the 20th century, following the Second World War, non-discrimination and
multilateralism were core pillars of the international, rules-based trading system.
_______2. The take-off in regionalism coincided with the launch of the World Trade Organization (WTO),
which was designed to institutionalize and more effectively enforce the rules and negotiating
processes of the General Agreement on Tariffs and Trade (GATT).
_______3. The USA and the United Kingdom began negotiating the rules and institutions they hoped
would prevent another Great Depression and promote post-war reconstruction and economic
prosperity well before the end of the Second World War.
_______4. US secretary of State Cordell Hull had used this principle in bilateral negotiations to help to
unwind the 1930s protectionist binge that deepened and lengthened the Great Depression.
_______5. From the beginning there were exceptions, however. While the USA was a strong proponent
of non-discrimination, the UK wanted to retain preferential trade arrangements with the
Commonwealth.
_______6. Anticipating post-war efforts to promote integration in Europe, the GATT also included a
broader exception, embodied in Article XXIV, permitting the negotiation of customs unions and free
trade agreements (FT'As) under certain conditions.
_______7. Jagdish Bhagwati (op. cit.) reports that supporters of multilateralism and non-discrimination
were willing to accept the exception for FTAs and customs unions because they believed that the
conditions contained in Article XXIV would make these arrangements relatively rare.
_______8. Writing two decades after the GATT's creation, legal scholar Kenneth Dam concluded that
only one of the dozen or so regional arrangements notified to the GATT met the requirements of
Article XXIV (e.g. UK-Ireland).
_______9. It remains unclear whether such an agreement could be brought under the WTO umbrella
because that would require consensus from all members, whether they are parties to the agreement
or not.
_______10. Another type of plurilaterals agreement that is easier to incorporate under the WTO's
rules is illustrated by the Information Technology Agreement.
3 Lesson 2 – The WTO and regional/bilateral trade agreements

LESSON MAP

The WTO and regional/bilateral trade agreement

Non-discrination and multilateralism in the post-war

trading system

Trends in regionalism

WTO responses to the proliferation in RTAs

Whiter trade policy?

Figure 1 The WTO and regional/bilateral trade agreements

CONTENT

ENGAGE

What Is a Free Trade Agreement (FTA)?

A free trade agreement is a pact between two or more nations to reduce barriers to imports and
exports among them. Under a free trade policy, goods and services can be bought and sold
across international borders with little or no government tariffs, quotas, subsidies, or prohibitions
to inhibit their exchange.

Free Trade

How a Free Trade Agreement Works

In the modern world, free trade policy is often implemented by means of a formal and mutual
agreement of the nations involved. However, a free-trade policy may simply be the absence of
any trade restrictions.

A government doesn't need to take specific action to promote free trade. This hands-off stance is
referred to as “laissez-faire trade” or trade liberalization.
4 Lesson 2 – The WTO and regional/bilateral trade agreements

Governments with free-trade policies or agreements in place do not necessarily abandon all
control of imports and exports or eliminate all protectionist policies. In modern international trade,
few free trade agreements (FTAs) result in completely free trade.

KEY TAKEAWAYS

Free trade agreements reduce or eliminate barriers to trade across international borders.
Free trade is the opposite of trade protectionism.
In the U.S. and the E.U., free trade agreements do not come without regulations and oversight.
For example, a nation might allow free trade with another nation, with exceptions that forbid the
import of specific drugs not approved by its regulators, or animals that have not been vaccinated,
or processed foods that do not meet its standards.

IMPORTANT: The benefits of free trade were outlined in On the Principles of Political Economy
and Taxation, published by economist David Ricardo in 1817.
Or, it might have policies in place that exempt specific products from tariff-free status in order to
protect home producers from foreign competition in their industries.

The Economics of Free Trade

In principle, free trade on the international level is no different from trade between neighbours,
towns, or states. However, it allows businesses in each country to focus on producing and selling
the goods that best use their resources while other businesses import goods that are scarce or
unavailable domestically. That mix of local production and foreign trade allows economies to
experience faster growth while better meeting the needs of its consumers.

This view was first popularized in 1817 by economist David Ricardo in his book, On the Principles
of Political Economy and Taxation. He argued that free trade expands the diversity and lowers the
prices of goods available in a nation while better exploiting its home-grown resources, knowledge,
and specialized skills.

Public Opinion on Free Trade

Few issues divide economists and the general public as much as free trade. Research suggests
that faculty economists at American universities are seven times more likely to support free-trade
policies than the general public. In fact, the American economist Milton Friedman said: “The
economics profession has been almost unanimous on the subject of the desirability of free trade.”

Free-trade policies have not been as popular with the general public. The key issues include
unfair competition from countries where lower labour costs allow price-cutting and a loss of good-
paying jobs to manufacturers abroad.
5 Lesson 2 – The WTO and regional/bilateral trade agreements

The call on the public to Buy American may get louder or quieter with the political winds, but it
never goes silent.

The View from Financial Markets

Not surprisingly, the financial markets see the other side of the coin. Free trade is an opportunity
to open another part of the world to domestic producers.

Moreover, free trade is now an integral part of the financial system and the investing world.
American investors now have access to most foreign financial markets and to a wider range of
securities, currencies, and other financial products.

However, completely free trade in the financial markets is unlikely in our times. There are many
supranational regulatory organizations for world financial markets, including the Basel Committee
on Banking Supervision, the International Organization of Securities Commission (IOSCO), and
the Committee on Capital Movements and Invisible Transactions.

Real-World Examples of Free Trade Agreements

The European Union is a notable example of free trade today. The member nations form an
essentially borderless single entity for the purposes of trade, and the adoption of the euro by most
of those nations smooth the way further. It should be noted that this system is regulated by a
bureaucracy based in Brussels that must manage the many trade-related issues that come up
between representatives of member nations.

U.S. Free Trade Agreements

The United States currently has a number of free trade agreements in place. These include multi-
nation agreements such as the North American Free Trade Agreement (NAFTA), which covers
the U.S., Canada, and Mexico, and the Central American Free Trade Agreement (CAFTA), which
includes most of the nations of Central America. There are also separate trade agreements with
nations from Australia to Peru.

Collectively, these agreements mean that about half of all goods entering the U.S. come in free of
tariffs, according to government figures. The average import tariff on industrial goods is 2%.

All these agreements collectively still do not add up to free trade in its most laissez-faire form.
American special interest groups have successfully lobbied to impose trade restrictions on
hundreds of imports including steel, sugar, automobiles, milk, tuna, beef, and denim.
6 Lesson 2 – The WTO and regional/bilateral trade agreements

Base on the reading above, answers the following questions.

1. Why it is free trade agreement necessary from one country to the other?
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
2. How does this free trade agreement contribute to our economy?
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________

EXPLORE

Non-discrimination and multilateralism in the post-war trading system

For most of the 20th century, following the Second World War, non-discrimination and multilateralism were
core pillars of the international, rules-based trading system. From in the early 1990s onwards, however, the
number of regional and bilateral trade agreements in force increased more than ten-fold, from the low 20s to
279 in 2017. Moreover , qualitative nature of these agreements changes, beginning with the US dropping its
staunch support for multilateralism and joining the trend. Later, the revolution in information and
communications technology (ITC) allowed increased fragmentation in trade and the further globalization of
supply chains, which raised a host of new issues that trade negotiation struggle to address.

The take-off in regionalism coincided with the launch of the World Trade Organization (WTO), which
was designed to institutionalize and more effectively enforce the rules and negotiating processes of the
General Agreement on Tariffs and Trade (GATT). The concerns about the impact of regional trade
agreements (RTAs) on the multilateral trading system include the potential for excluded parties to suffer trade
losses, as well as broader questions about the systemic impact. The GATT/WTO rules aim to mitigate
potential negative effects, but the core question remains - can multilateralism and regionalism coexist
peacefully?

Non-discrimination and multilateralism in the post-war trading system

The USA and the United Kingdom began negotiating the rules and institutions they hoped would
prevent another Great Depression and promote post-war reconstruction and economic prosperity well before
the end of the Second World War. Along with the International Monetary Fund and the World Bank which
were tasked with governing international financial markets and providing finance, they created the GATT to
govern trade. The very first GATT article codified the so-called most-favoured-nation (MFN) principle as a
core pillar of the rules based trading system. Contrary to what the phrase might seem to suggest, the
MFN principle promotes non-discrimination by requiring that each GATT signatory treat all other GATT
parties in the same way as its most favoured trade partner. US secretary of State Cordell Hull had used this
principle in bilateral negotiations to help to unwind the 1930s protectionist binge that deepened and
7 Lesson 2 – The WTO and regional/bilateral trade agreements

lengthened the Great Depression. Under MFN any tariff cuts negotiated among two or more GATT parties
are automatically extended to all other GATT members.

Along with Article III's national treatment principle, which requires that imports be treated similarly as
domestically produced goods once past the border, MFN cemented non-discrimination's place at the centre
of the multilateral trading system.

From the beginning there were exceptions, however. While the USA was a strong proponent of non-
discrimination, the UK wanted to retain preferential trade arrangements with the Commonwealth. British
negotiators eventually agreed to include non-discrimination as a core principle in what became the GATT, but
they also insisted on an exception for imperial preferences. In explaining the shift, John Maynard Keynes, a
prominent economist and member of the UK delegation negotiating the Bretton Woods arrangements for the
post-war global economy, argued before the House of Lords:

(The proposed policies] aim, above all, at the restoration of multilateral trade ... The basis of the
policies before you is against bilateral barter and every kind of discriminatory practice. The separate
blocs and all the friction and loss of friendship they must bring with them are expedients to which one
may be driven in a hostile world where trade has ceased over wide areas to be cooperative and
peaceful and where are forgotten the healthy rules of mutual advantage and equal treatment. But it is
surely crazy to prefer that."

Anticipating post-war efforts to promote integration in Europe, the GATT also included a broader
exception, embodied in Article XXIV, permitting the negotiation of customs unions and free trade agreements
(FT'As) under certain conditions. The exception was initially limited to customs unions, which are relatively
harder to negotiate than FTAs because the parties must agree on a common external tariff, as well as
eliminating tariffs on trade among themselves. US negotiators agreed to expand Article XXIV to allow FTAs,
reportedly because they were involved in FTA negotiations with Canada, something that would not come to
fruition for four decades. As of 2010, only a quarter of the regional agreements reported to the WTO were
customs unions.

Jagdish Bhagwati (op. cit.) reports that supporters of multilateralism and non-discrimination were
willing to accept the exception for FTAs and customs unions because they believed that the conditions
contained in Article XXIV would make these arrangements relatively rare. The aim of the conditions was to
steer such agreements in the direction of maximizing trade creation among the parties to them and
minimizing trade diversion at the expense of outsiders. The key conditions are that 'substantially all trade'
should be covered, and that implementation of liberalization should occur over a relatively short period. With
respect to customs unions, the new common external tariffs applying to third parties should not 'on the whole'
be more restrictive than that which the parties had in place prior to the customs union:' Article XXIV also
permits "interim agreements' as long as they result in a customs unions or FTA within a 'reasonable time'.
8 Lesson 2 – The WTO and regional/bilateral trade agreements

However, the GATT did not clearly define these conditions and, in practice, they have been only
loosely enforced. This was partly due to the USA prioritizing European integration for foreign policy reasons
over the legal niceties of the GATT. Writing two decades after the GATT's creation, legal scholar Kenneth
Dam concluded that only one of the dozen or so regional arrangements notified to the GATT met the
requirements of Article XXIV (e.g. UK-Ireland). Yet neither the GATT nor the WTO has ever rejected an RTA
for inconsistency with Article XXIV.

Although not the major focus of this chapter, it is worth considering two other types of 'plurilateral'
agreements that are attracting attention. They are potential alternatives to multilateral negotiations that are
subject to the WTO's consensus rule, by which any member can block agreement, or to bilateral and regional
agreements that are outside the WTO. Exploration of these options has intensified since the Doha Round of
WTO negotiations, launched in 2001, fell into its current zombie-like state - not alive but also not fully dead
and buried.

One type plurilateral involves a weakening of the norm of unconditional MFN. For the first three
decades, GATT negotiations focused on cutting tariffs and they took place primarily among the so-called
Quad: Canada, the European Economic Community (EEC), Japan and the USA. Less develop quad via the
(unconditional) MFN principle. As certain developing countries became more important actors in international
trade in the 1960s and 1070s, and as GATT members turned their attention to non-tariff barriers. American
negotiators (in particular) were increasingly frustrated by what they perceived as free riding. They sought a
way to restrict the benefits of certain agreements to countries that were willing to accept the obligations of
those agreements.

This led to what legal scholar John Jackson calls 'code-conditional" MFN during the Tokyo Round of
multilateral trade negotiations (1973-79).10) Under the Government Procurement Agreement, for example,
signatories agreed to open procurement by designated public agencies to import competition, but only from
signatories to the agreement that also agreed to open their procurement markets. As Jackson (op cit.) notes,
these codes do not explicitly limit MFN to signatories but they allow countries to impose conditionality on the
benefits. Key WTO members are currently trying to negotiate further liberalization of trade in services using a
similar plurilateral approach, with the expectation that any resulting market access benefits would be
restricted to signatories. It remains unclear whether such an agreement could be brought under the WTO
umbrella because that would require consensus from all members, whether they are parties to the agreement
or not.

Another type of plurilateral agreement that is easier to incorporate under the WTO's rules is illustrated
by the Information Technology Agreement. This is basically a sectoral version of the original GATT
negotiating mode whereby a critical mass of countries - those accounting for the vast majority of trade in the
relevant products - negotiate tariff cuts that are then extended to all WTO members on an unconditional MEN
basis. WTO members have been working on a similar agreement on environmental goods for several years,
but, as of early 2018, had been unable to agree on the scope of products to be included.
9 Lesson 2 – The WTO and regional/bilateral trade agreements

Trends in regionalism

For several decades, the major exception to trade multilateralism was the entity that began as the
EEC. This six-member customs union expanded its geographic and functional scope to eventually become
the 28-member single market now known as the European Union (EU). Over the years, the EU also
negotiated RTAs with neighbours, such as Switzerland, Norway, and Iceland in the north, and Turkey in the
south. It also negotiated RTAs with former colonies and members of the British Commonwealth, including in
Africa, the Middle East, and most recently, Canada. The EU has a range of other RTA negotiations in
progress.

From 1990 onwards regional and bilateral trade agreements proliferated rapidly, with the USA finally
participating. According to the WTO, there were 279 RTAs in force as of 20 June 2017 (combining goods,
services, and accessions). The WTO also reports that notifications about all bilateral and regional
arrangements increased from 124 during the period 1948-94. Applying to goods only, to over 400
arrangements covering trade in goods or services (counted separately) just since 1995. The degree to which
the expansion of Article XXIV to include FTAs became a major loophole is demonstrated by the fact that of
the 242 agreements (excluding accessions) notified to the GATT/WTO, only ten are customs unions. And of
those, only the EU is economically significant. " Figure 3.1 illustrates the sharp upward trend in KTAs
beginning in the early 1990s and accelerating in the early 2000s.

For much of the post-war period, the USA acquiesced in European integration efforts for foreign policy
reasons, but itself eschewed bilateral and regional trade agreements. In the early 1980s US frustration built
up over the failure to launch new GATT negotiations to address issues not resolved in the Tokyo Round
(1973-79). American negotiators concluded the first bilateral FTA with Israel in 1984 and then launched
negotiations that culminated in a more economically significant FTA with Canada in 1988.12 The latter was
expanded a few years later to include Mexico and become the North America Free Trade Agreement
10 Lesson 2 – The WTO and regional/bilateral trade agreements

(NAFTA). The USA is now party to 14 FTAs with 20 countries. All but the agreements with Israel and Canada
were concluded after 1990 and 12 of them are with neighbours in North and South America (Canada and
Mexico; five Central American countries plus the Dominican Republic; Chile, Colombia, Panama and Peru).
There is a cluster in North Africa and the Middle East, negotiated after the 11 September 2001 terrorist
attacks perpetrated on the US mainland (Bahrain, Jordan, Morocco and Oman), plus Australia, the Republic
of Korea and Singapore. Had President Donald Trump not rejected the Trans-Pacific Partnership (TPP) when
he entered office in 2017, the number would have expanded to 25 (Brunei, Japan, Malaysia, New Zealand
and Viet Nam, plus six others with whom the USA already had FTAs). President Trump also abandoned
negotiations towards a Transatlantic Trade and Investment Partnership (TTIP) that his predecessor, Barack
Obama, had launched.

Following notification of the Japan-Mongolia FTA in 2016, the WTO reports that every member is now
party to at least one regional or bilateral trade agreement.15 The EU is the most active RTA negotiator, with
nearly 100 agreements in force, followed by East Asia with 80 RTAs. Other regions, with the exception of
South America (57), are all below 50 in the number of RTAs in force (Figure 3.2).

It is important to note, however, that these agreements vary widely in terms of breadth and depth, and
in the impact they have on trade and their potential effect on the multilateral trading system.

WTO responses to the proliferation in RTAs

Although members have challenged specific RTA provisions, neither the GATT nor the WTO has ever
rejected one of these arrangements. Under the GATT, members appointed ad hoc working parties to review
and debate the consistency of RTAs with Article XXIV conditions, but there was no standing body for on-
going monitoring and assessment. In response to growing concerns about the impact of proliferating RTAs
on the multilateral system in the 1980s and early 1990s, GATT members adopted an understanding to clarify
'the criteria and procedures for the assessment of new or enlarged agreements' as part of the Uruguay
Round agreement (1986-93). WTO members have continued since then to work to improve the transparency
11 Lesson 2 – The WTO and regional/bilateral trade agreements

and beef up the monitoring of these agreements, including potential impacts on the multilateral system as a
whole.

Moreover, the understanding specified that the 'reasonable time' before agreements are fully
implemented should not be more than 10 years, unless there are exceptional circumstances. The
understanding does not attempt to define a minimum standard for 'substantially all trade', but it does reiterate
the importance of that criterion and notes that the exclusion of 'any major sector' reduces the trade-creating
benefits of preferential arrangements.

With respect to customs unions, the understanding charged the WTO Secretariat with assessing the
potential impact of the common external tariff on outsiders. Importantly, members agreed that the calculation
should use applied rather than bound tariffs, which gives a more realistic picture of potential impact in the
case of developing country parties that have bound tariffs at levels well above those they normally apply. The
understanding also clarified the procedures that countries should follow in negotiating compensation for third
parties whose exports face increased tariffs as a result of the new customs union. And it affirms that
members can have recourse to dispute settlement procedures in cases that cannot be resolved through
negotiation.

In February 2006 WTO members created a Committee on Regional Trade Agreements to examine
agreements notified under Article XXIV, to develop procedures for doing so more effectively, and to
'consider the systemic implications of such agreements ... for the multilateral trading system and the
relationship between them. But continued disagreements over the interpretation of Article XXIV, inadequate
information from FTA parties, and the fact that Committee reports had to be approved by all WTO members
(including those party to FTAs under review), meant that no reports were formally adopted.

In December 2006 the WTO General Council adopted, on a provisional basis, a new mechanism to
enhance the transparency of RTAs that the new Committee on Regional Trade Agreements would oversee.
Under the mechanism, member are to expeditiously notify the WTO Secretariat about new RTA negotiations
and provide information about the timing and scope of the agreement including the text of the agreement and
any annexes once they are completed FTA parties are also required to provide detailed data on tariff
changes under the agreement that the Committee can use to assess the impact on third parties. The WTO
also created a special website to make available the texts and other information about FTAs.

Implications of regionalism

There are two aspects to the potential costs and opportunities of RTAs from WTO perspective: the
net impact on global trade and welfare, and the political impact on the strength and credibility of the
multilateral system itself. The WTOs primary role (and that of the GATT before it) is to promote freer global
trade. But its role is establishing a multilateral rules-based system founded on non-discrimination is of at least
equal importance for smaller, usually poorer, developing countries that would otherwise be subject to the
12 Lesson 2 – The WTO and regional/bilateral trade agreements

protectionist whims of larger, more powerful trade partners. Moreover, the poorest countries are seldom
invited to join economically significant RTAs and could find themselves disadvantage in major markets
Two key question about regionalism are, therefore it is leading toward freer global trade (on net), and
whether it is complementing or competing with the WTO. The answers depend to a large degree on why it is
occurring. Are RTAs laboratories for experimenting with rules in new areas that facilitate deeper economic
integration and lay the foundation for multilateral agreement in the future? Or is the trend primarily driven by
frustration with the stagnation of negotiation at the WTO and are regional negotiation seen as an alternative
to the multilateral system?

Economic welfare and trade effects of regionalism

The net welfare effects of RTAs are only positive if the trade created among the parties is not primarily
diverted from more efficient external producers. And even when the trade creation effects are positive for the
parties, there will still be negative effects for third party exporters facing increased discrimination. As RTAs
proliferate, the economic effects also depend on the balance between the reductions in tariffs and other
trade barriers, and the transactions costs associated with increased complexity - a phenomenon frequently
called the 'spaghetti bowl' effect. Richard Baldwin and Phil Thornton note that this 'spaghetti bowl' can be a
significant problem in a world of global supply chains where trade is increasingly fragmented. Since both the
economic and spaghetti bowl' effects of RTAs are addressed in detail in Chapter 5 in this volume 1 discuss
them only briefly here.

As noted, the conditions imposed by Article XXIV are designed to promote customs unions and FTAs
which create more trade than they divert. When such objectives are achieved economists generally conclude
that these arrangements will improve the welfare of the countries participating with limited damage for third
parties and could, therefore, contribute positively to the goal of freer global trade. Although it is difficult to
isolate the effect of trade agreements, it is also possible that RTAs increase growth and thereby increase
trade and confer benefits on outsider as well. A detailed analysis of 76 RTAs in the mid-200s found that
most were meeting the Article XXIV conditions of eliminating barriers on substantially all trade (defined in this
case as at least 90 percent of tariff lines), and were doing so in ten years or less. This and other studies also
find, however, that the agriculture sector frequently is an exception.
When it comes to the third core requirement, that generally barriers to third parties should not go up
things become more complicated. Given that FTAs are far more common than customs unions, at might not
seem that this should be the case. With FTAs, there is no need to negotiate a common external tariff applied
to non-parties generally should not change. But there are other channels through which discrimination
against outsiders can increase under FTAs. The first potential problem arises when developing countries
apply tariffs below the maximum levels they are committed not to exceed under WTO rules. That gives them
flexibility to raise barriers against third parties while implementing or maintaining preferential tariffs for FTA
partners. A prominent example is Mexico’s trade policy response to the peso crisis in 1994 when it did
exactly that in the wake of implementing NAFTA. Other studies have found that FTA partners use remedies
against allegedly unfair trade (anti-dumping and countervailing duties) more often against outsiders than one
another.
13 Lesson 2 – The WTO and regional/bilateral trade agreements

FTA partners also often discriminate against outsiders by manipulating rules of origin. These
agreements need rules of origin to prevent goods produced elsewhere from being exported to the lowest-
tariff FTA party and then being re-exported duty-free to a party with a higher external tariff on those goods.
FTA partners often crave rule of origin to protect sensitive industries. US agreements, for example, typically
require that apparel exporters in partner countries use America (or other regional) yarn and fabric before the
final product is considered eligible for duty-free treatment. EU trade arrangement often use a slightly less
restrictive double transformation rule for apparel, meaning that the fabric (but not the yarn) must be sourced
in the EU or regionally. Protectionist rules of origin raise production costs for parties to the agreement and
divert trade from others. Even when not protectionist differing rules across often overlapping agreements
contribution to the spaghetti bowl problems discussed below.
Writing two decades ago, Jeffrey Frankel concluded that the weight of the evidence suggested that
RTAs were generally consistent with freer global trade because RTA members have tended to increase trade
with non-members even as they intensify trade (even more) with one another. Q decade and a half later, and
with many more RTAs in place, WTO economist Jo-Ann Crawford concluded there was little evidence to
suggest that increased market access in merchandise goods [among RTA partners] leads to a more
favourable trading environment for third partners.
Praven Krishna concluded that, while there was evidence in a number of studies showing trade
diversion fro RTAs, they might not have important effects on trade overall. He noted that, while the WTOs
2011 World Trade Report showed that intra-PTA trade had roughly double between 1990 and 2007 to 35
percent (excluding intra=EU trade), that was not a good measure of preferential trade. The WTO report noted
that a significant portion of global trade already takes place on an MFN-zero basis, thanks to past
liberalization. As a result of that, and the fact that there are often exception for sensitive products, the amount
of trade RTAs that is potentially preferential is only 16 percent and the share that benefits from preference
margins greater than 10 percent was less than 2 percent (4 percent if intra-EU trade is included). The report
also found that two-thirds of tariff over 15 percent are not lowered under PTAs.
As RTAs have proliferation however, other questions have come to the fore.one important debate is
over the impacts of RTAs on increasing fragmented global chains. An argument in favour of RTAs is that they
are a more efficient way of making progress on deep integration issues that this modern supply need in order
to function well. That benefit is undercut, however, by the increased transaction costs associated with
overlapping and inconsistent RTAs with different tariff rates for the same product and different rules of origin.
According to Baldwin and Thoronto (summarizing a conference on regionalism co-organized by the WTO),
the spaghetti bowl effect has become a major concern for the international business community
Since Frankel’s relatively positive analysis in the mid-1990s, RTAs proliferated while WTO negotiation
have been largely moribund. This gives increased salience to the political economy concerns that RTAs are
more likely to be stumbling blocks than building blocks for the non-discriminatory, rules based multilateral
trading system..

Systemic implications of regionalism

As with the net economic effects of trade creation and diversion, the effects of regionalism on the
multilateral trading system depend in part on the particular features of each RTA and the economic and
14 Lesson 2 – The WTO and regional/bilateral trade agreements

political effects of the resulting changes in trade policy within the area. Beyond that, there are two other
arguments for why RTAs are seen as supportive of the multilateral system, or at least of global trade
integration. The first is that regional negotiations have in important instances triggered 'competitive
liberalization' episodes whereby excluded parties pursue multilateral negotiations to offset the discriminatory
effects of RTAs. The more recent argument in favour of RTAs, particularly the 'mega-regional' agreements
that President Barack Obama was negotiating with partners throughout the Pacific and across the Atlantic, is
that they are more likely than the WTO to make progress on 'deep integration' issues that should be at the
centre of 21st-century trade policy.

At country level, the political economy arguments about the effects of RTAs on support for multilateral
liberalization tend to centre around the effects of preference erosion and the potential for diversion of
negotiating resources. If special interests are powerful enough to influence negotiations so as to protect
themselves, for example with restrictive rules of origin, they then have a strong incentive to avoid multilateral
liberalization that could undermine that advantage. In north-south RTAs, developing countries are often
negotiating to preserve their access to important developed country markets. Once inside that preferential
zone, their exporters will be leery of further liberalization - either multilaterally or regionally - that could erode
the advantage they have vis-a-vis third party competitors. Another practical concern is that negotiating
resources in most countries are limited and a shift to focusing on regional or bilateral negotiations will
inevitably distract from multilateral negotiations.

The Article XXIV conditions are designed to weaken the manipulation of RTAs for protectionist
purposes in ways that could weaken the incentives for also pursuing multilateral trade liberalization. And, if
those conditions are fully implemented, regional free trade could have the effect of weakening import-
competing sectors, which might reduce their political influence while strengthening that of exporters who gain
from regional liberalization and could gain even more from further multilateral liberalization.

Because they are inherently discriminatory, even when fully compliant with Article XXIV, RTAs might
also spur third party exporters to push for multilateral trade openings to reduce the degree of discrimination
they face. C. Fred Bergsten is one of the strongest proponents of regional negotiations as a positive global
force via 'competitive liberalization.' He argues that the NAFTA negotiations, along with the efforts by
President Bill Clinton to pursue regional trade liberalization through the Asia-Pacific Economic Cooperation
process, demonstrated that the USA had alternatives to GATT negotiations and thereby helped to bring the
struggling. Uruguay Round (1986-93) to a successful conclusion. Others note that European integration
efforts, though supported for foreign policy reasons, repeatedly spurred US negotiations to seek multilateral
liberalization under GATT auspices.
Another form of competitive liberalization can occur when outside seek to offer trade discrimination by
joining an RTA from which they were initially excluded. It has been argued that, in theory at least, this
process could ultimately lead to global free trade as new countries successively seek to join. Open
regionalism, which make it relatively easy for third parties to accede to RTAs, has also been proposed as a
means of promoting this form of competitive liberalization and turning the spaghetti bowl into a plate of
lasagne. Some economic models however, show this process topping well short of global free trade and
15 Lesson 2 – The WTO and regional/bilateral trade agreements

instead, ending in a handful; of competing blocs that , collectively, lower global welfare. In practice, outside of
the EU, accessions to existing RTAs or customs union have been relatively rare.
Another impetus for RTAs has been the desire to moderate trade agreement and develop discipline in
new areas that would hold global chains to operate more efficiently. The dramatic fall in the cost of ICT
permitted corporation to lengthen their supply chains, sourcing components and assembling them into final
products wherever it was most cost-effective to do so. But this fragmentation also puts a premium on
reducing trade costs beyond tariffs as it often involves cross border investment and access to financial and
other services, as well as the need to move physical inputs around the world. Richard Baldwin argues that
this 21st-century regionalism is fundamentally different from that of the 1990s and that it has quite different
implications for the global trading system.
These deep integration agreements strive to go beyond and strengthen WTO rules that open services
markets and protect intellectual property and foreign investment, as well as negotiating issues not yet
broached at the WTO, such as completion policy, digital trade, regulatory cooperation, labour standards, and
environmental protection. The WTO 2011 World Trade Report show that the former issues called WTO+, are
increasingly included in RTAs and are often enforceable. RTAs also increasingly include issues in the
beyond WTO categories, often called WTO-X, but they are more often hortatory and emphasis cooperation,
rather than bring legally enforceable.
The main argument for pursuing deep integration agreements regionally or bilaterally is that the Doha
Round of WTO negotiations is struck on less important 20 th-century issue, and that that members cannot
even reach agreement on those. Progress on emerging 21st –century issues, and should, therefore, be
pursue by plurilaterals groups of like-minded countries that can progress faster. Proponents also argue that
these deep integration agreements are unlikely to pose serious faster. Proponents also argue that these
deep integration agreements are unlikely to pose serious problems for outsiders, and could even have
benefits, because many of these provisions are of a, regulatory nature and are likely to be implemented on
an MFN, non-discriminatory basis. They also argue that if these rules are part of mega –regional trade
agreements, such as the proposed TPP and TTIP, that cover a large amount of global trade, then they can
serve as templates for global trade rules when other WTO members are ready to negotiate them.
In early 2018 this rosy scenario seemed less likely than it did in 2016mwhen the USA and 11 other
Pacific nations signed the TPP. One of the first actions the President Trump took on assuming office in
January 2017 was to withdraw the USA from the TPP and stop negotiating TTIP. The other 11 TPP parties
are trying to adapt and adopt the TPP among themselves. But even if they succeed, it will les global
significance without the USA. And, even if a future American president decides to re-join the TPP and bring
TTIP to a successful conclusion, the result is unlikely to provide a clear basis for global rules. The TTP and
bring TTIP to a successful conclusion, the result is unlikely to provide a clear basis for global rules. The TTP
largely reflects US preferences, while the differences between the USA and the EU on key issues are
significant. The likely result is a TTIP that diverge in important ways from t he TTP, thereby confusing rather
than clarifying what global rules could look like.

The relatively greater utility of RTAs, including the meg regionals, in addressing deep integration thus
remains to be seen. There is no question that RT As have pushed beyond the WTO in liberalizing traditional
trade barriers (at least outside of agriculture) and, to some degree, in opening services markets, reducing
16 Lesson 2 – The WTO and regional/bilateral trade agreements

harrier to foreign investment, and protecting intellectual property. It should be noted, however, that these
agreements often involve asymmetric bargaining power with smaller developing countries accepting
provisions that they had (collectively) resisted in multilateral negotiations. In some cases, developing
countries are willingly embracing provisions in RT As in the hope that they will reinforce domestic economic
reforms and send a positive signal to potential foreign investors. In other cases, such as stronger patent
protection for pharmaceuticals, the benefits for developing countries are questionable

Whither trade policy?

The WTO's 2011 World Trade Report concluded that neither theory nor empirical evidence could
show definitively whether the proliferation of R'TAs had been good or bad for the multilateral system. The
weight of the evidence suggests that major R'TAs have been trade creating, and therefore positive for
participants, while trade diversion at the expense of outsiders has been relatively modest. But over the past
decade, RTAs have proliferated while the WTO's ability to negotiate anything more than narrow agreements
on relatively minor issues has seemingly unravelled. These parallel trends underscore the concerns that
regionalism could be an alternative, rather than a complement, to the WTO.
Richard Baldwin argues instead that the 21st-century trade regime will need to be a 'two-pillar' system
that relies on both multilateral and regional/plurilaterals approaches in order to work smoothly. The WTO
would stay focused on shallow integration - continuing to monitor, enforce and further liberalize rules on
traditional trade barriers - while mega-regionals or other plurilaterals (such as the negotiations on a new
Trade in Services Agreement) address deep integration issues that are important for global value chains. ?
The WTO would also still have a role in promoting transparency and assessing the impact of RTAs to ensure
that they minimize negative effects.
At the end of the second decade of the 21st-century, however, both trade negotiating pillars seem
shaky. The Doha Round is dead but not buried, and this is blocking a new set of more up-to-date
negotiations. The TPP is going ahead, but without the USA, and TTIP has disappeared for the moment.
Unlike in the Great Depression, the trading system largely held during and after the Great Recession of
2007-09, but not without strains that continue to undermine political support for trade in key countries. The
relevant question may not be whether regionalism or multilateralism offers the best path forward, but whether
conflict will replace cooperation as the dominant force in international

EXPLAIN: Review Questions

Intense comprehension of the context

1. Describe non- discrimination and multilateralism in the post-war trading system;
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2. Explain trends in regionalism
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17 Lesson 2 – The WTO and regional/bilateral trade agreements

3. Explain WTO responses to the proliferation in RTAs.

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TOPIC SUMMARY

In this lesson, you learned that:

➢ For most of the 20th century, following the Second World War, non-discrimination and multilateralism
were core pillars of the international, rules-based trading system. From in the early 1990s onwards,
however, the number of regional and bilateral trade agreements in force increased more than ten-fold,
from the low 20s to 279 in 2017.
➢ The USA and the United Kingdom began negotiating the rules and institutions they hoped would
prevent another Great Depression and promote post-war reconstruction and economic prosperity well
before the end of the Second World War.
➢ Along with Article III's national treatment principle, which requires that imports be treated similarly as
domestically produced goods once past the border, MFN cemented non-discrimination's place at the
centre of the multilateral trading system.
➢ Jagdish Bhagwati (op. cit.) reports that supporters of multilateralism and non-discrimination were
willing to accept the exception for FTAs and customs unions because they believed that the
conditions contained in Article XXIV would make these arrangements relatively rare.
➢ However, the GATT did not clearly define these conditions and, in practice, they have been only
loosely enforced. This was partly due to the USA prioritizing European integration for foreign policy
reasons over the legal niceties of the GATT.
➢ Another type of plurilateral agreement that is easier to incorporate under the WTO's rules is illustrated
by the Information Technology Agreement.
➢ From 1990 onwards regional and bilateral trade agreements proliferated rapidly, with the USA finally
participating. According to the WTO, there were 279 RTAs in force as of 20 June 2017 (combining
goods, services, and accessions).
➢ It is important to note, however, that these agreements vary widely in terms of breadth and depth, and
in the impact they have on trade and their potential effect on the multilateral trading system.
➢ Although members have challenged specific RTA provisions, neither the GATT nor the WTO has ever
rejected one of these arrangements. Under the GATT, members appointed ad hoc working parties to
review and debate the consistency of RTAs with Article XXIV conditions, but there was no standing
body for on-going monitoring and assessment.

REFERENCES

1. Author: Ian Nicolas Cigara June 6, 2018. Retrieve from: http://industry.gov.ph/philippines-

climbs-in-technological-readiness-ranking/ Retrieve on Aug. 13, 2020.
2. Findlay, Christopher., et. al. FREE TRADE AGREEMENTS IN THE ASIA PACIFIC.,
World Scientific Publishing Co. 2010.
18 Lesson 2 – The WTO and regional/bilateral trade agreements

3. Looney, Robert: Handbook of International Trade Agreements, country, regional and

global approaches. Routledge International. 2019.