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Symposium 2014

Proposal - Shaping a Free and Fair World Trade Order – A solution to a mis-specified challenge.

The Challenge

Regional trade agreements have increased dramatically over the last twenty years. Since 1995, the founding year of the World Trade Organization (WTO), more than 400 regional trade agreements have be ...

Regional trade agreements have increased dramatically over the last twenty years. Since 1995, the founding year of the World Trade Organization (WTO), more than 400 regional trade agreements have been registered under the General Agreement on Tariffs and Trade (GATT). In the previous 45 years, only 124 regional trade agreements were registered. Moreover, recent initiatives like the Trans-Pacific Partnership (TPP) or the Transatlantic Trade and Investment Partnership (TTIP) aim to go far beyond the size and depth of traditional trade agreements. By taking on contested issues such as government procurement and private litigation, they form a new generation of trade agreements. As a result, a patchwork of regional free trade zones has emerged, which calls into question the multilateral trade regime under the auspice of the WTO and its languishing Doha Development Round (DDR) This trend has important distributional and political ramifications. Due to their comprehensiveness, the planned regional free trade agreements potentially offer immense benefits for the participating economies. However, the resulting trade diversion effects are detrimental to non-participating countries. As rich economies are more likely to profit from trade than developing ones, the divide between the two will probably grow. Consequently, there may be a potential shift in the balance of power in the global economy that could systematically discriminate against mostly southern, developing nations.

The challenge for this session is based on a mis-reading of today’s regionalism realities. The challenge posed asserts:

“Due to their comprehensiveness, the planned regional free trade agreements potentially offer immense benefits for the participating economies. However, the resulting trade diversion effects are detrimental to non-participating countries. As rich economies are more likely to profit from trade than developing ones, the divide between the two will probably grow. Consequently, there may be a potential shift in the balance of power in the global economy that could systematically discriminate against mostly southern, developing nations.”

Rethinking regionalism: Impulsion to conform

There are things global leaders can do now to reduce the likelihood today’s trend toward mega-regionalism will be divisive. To understand what should be done, however, requires avoiding the trap of using 20th century paradigms to think about 21st century regionalism – a trap that the challenge fell straight into.

20th century RTAs were mostly about tariff preferences. As one nation’s preference is another’s discrimination, 20th century thinking viewed RTAs as creating ‘mercantilist allies’ – who enjoyed trade creation – and ‘mercantilist enemies’ – who suffered trade diversion. Yet tariffs today are low worldwide on high-volume items and where goods where tariffs are still high are routinely omitted from the RTAs. As a consequence, deep RTA provisions often resemble unilateral liberalisations that just happen to be bound via an RTA; the whole trade creation/diversion thinking is misleading or moot. Rather what arises is what I’ve called ‘soft preferences’ (Baldwin 2013).

This lack of discrimination is intrinsic. Many 21st century RTA provisions impinge upon firms, services, capital, and intellectual property (IP); see Figure 2. Discrimination is technically difficult for such provisions since it is hard to define the nationality of firms, services, capital, and IP in today’s world – at least in a way that precludes low-cost circumvention. In other words, the ‘rules of origin’ for deep provisions are leaky. As a result, we should not think of 21st century regionalism as being is not fundamentally about discrimination.

The lack of old-fashion discrimination, however, does not mean 21st regionalism has no implications for non-members. Deep RTAs and BITs create what might be called ‘soft discrimination’, or an ‘impulsion to conform’. Consider this illustrative example. When the EU signed the deepest RTA in history – the 1986 Single European Act – 20th century thinkers predicted a ‘Fortress Europe’. What actually happened was quite different. There was little ‘hard discrimination’ (except in a few products with high tariffs), but non-members dependent on the EU market were induced to embrace the EU’s common rules. Their firms wanted only one set of rules to follow and so induced their governments to mimic the EU’s Single Market disciplines explicitly (European Economic Area agreement) or implicitly as in the case of Switzerland.

The systemic question then is not so much as “who is in or out?”, but rather “Whose rules become the norm?”, “What are the costs and benefits of multilateralising the rules?”, “What can be done to help developing nations for whom some of the rules may be inappropriate?”

The second misunderstanding in the challenge is that today’s RTAs will help the rich nations more. Today’s megaregionals, like TPP and TTIP, are really ‘offshoring agreements’ not trade agreements. They put in place rules that facilitate the international fractionalisation of production via international production networks. This international production networks facilitate the combination of high-tech from rich nations with low-wages from emerging nations. This has led to very rapid growth of those developing nations that have managed to join the global value chains. In short, firms from advanced technology nations are taking place of their nation’s comparative advantage and combining it with foreign labour rather than domestic labour. In principle all can gain from this, but is clearly the emerging market labour that is the first order winner.

This challenge, better phrased, is that the GVC revolution has helped the industrial competitiveness of a handful of developing nations – above all China – to the point where it has harmed the industrialisation strategies of developing nations outside of the GVC net. The main examples are in Africa and South America.

My proposed solution, in Baldwin (2013), is to launch a major legal research project that documents how similar or dissimilar the sets of deep RTA provisions really are in practice. There is good analogy here. From 1970s, the OECD documented the distortionary impact of radically different agriculture in a harmonised way (with Producer Subsidy Equivalents, etc.). This laid the ground work for negotiations in the Uruguay that otherwise would have had diplomats arguing for years over the basic terms and effects of diversion agriculture policies.

 


 

References

Baldwin, Richard (2013), “Multilateralising 21st century regionalism”, http://www.oecd.org/tad/events/OECD-gft-2014-multilateralising-21st-century-regionalism-baldwin-paper.pdf

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