Free trade agreements
Can regional trade agreements like the CPTPP fortify the international trading system?
Published 28 January 2016 | 4 minute read
With more questions being raised about the relevancy of the WTO, can regional trade agreements like the CPTPP fortify a troubled international trading system?
This article was originally published in The Diplomat.
With the death-knell of the Doha Round seemingly signaled at the recent Nairobi Ministerial, and questions about the relevancy of the WTO intensifying, anyone reflecting on the current state of the global trade system could be forgiven for feeling less than optimistic. How did we arrive at such a dour state of affairs, and what’s the path forward?
Ironically, the trade system, born in Bretton Woods with the founding of the General Agreement on Tariffs and Trade (GATT) in 1948, can be regarded as one of the great success stories of the post-WWII era. Through a series of successive “rounds” of global trade negotiations, the GATT was immensely successful in clearing out the primary underbrush stifling trade, namely tariffs. Average worldwide tariffs were reduced from 35 percent in 1948 to 6 percent in 1986, and global trade surged.
By the 1980s though, most of the “heavy lifting” in tariff cutting had been accomplished, and a new slate of more complicated issues presented themselves. Among them: barriers to trade in services, protection of intellectual property rights, and discrimination in regulatory regimes. The Uruguay Round of negotiations, concluded in 1994, subsumed the GATT into a more ambitious successor organization, the World Trade Organization, which was designed to more effectively deal with this host of new issues.
The WTO was launched in 1995 with much fanfare and great expectations. Unfortunately, few could have predicted how quickly it would be swamped by a wave of fast-moving developments that would undercut much of its efficacy before the new organization could barely get out of the starting blocks.
Not only did the trade agenda grow substantially more complex than could have been anticipated (Internet? What’s the Internet?), so did the number of countries around the negotiating table. And large developing countries that were previously more inclined to follow the lead of the U.S. and Europe now grew more assertive in pressing their agenda. The success of countries like China in pursuing trade policies which sometimes seemed closer to mercantilism than free trade also caused other developing countries to question the wisdom of fully buying into the traditional free trade system – especially given developed world reluctance to open markets in crucial sectors such as agriculture.
All of these threads came together in the Doha Round. The complexity of the issues under negotiation, the empowerment of developing countries to stand firm, and the inability of developed countries to overcome entrenched protectionist forces domestically, all added-up to a slow-motion train wreck. Surveying the Doha debacle, it’s hard to see any credible basis for expecting another large, global round of negotiations to succeed anytime in the foreseeable future – and the appetite to even attempt it seems distinctly lacking.
To be clear, the WTO itself is far from obsolete, and in fact has a number of useful roles to play. What is obsolete however is the notion of large WTO negotiating rounds a la Doha.
So, if traditional global rounds are likely DOA, what’s the path forward? One possibility worth considering would be to use regional agreements as “building blocks” that could gradually be deepened and expanded, and ultimately knitted together with other regional deals. In this way, a progressively larger portion of global trade would be liberalized, and trade rules and disciplines would be extended beyond what the WTO has been able to deliver.
The Trans-Pacific Partnership (TPP) is the most likely candidate to form the initial cornerstone of such an approach. Although the TPP fell short of its original goal to be a “gold standard” free trade agreement (a remarkable number of barriers remain, as do a boatload of exceptions and loopholes), it nonetheless represents the first effort to address some of the most nettlesome trade issues that have defied resolution elsewhere – things like state-owned enterprises, digital commerce, and (at least nominally) currency manipulation. Viewed as a finished product, the TPP leaves much to be desired, and does not “resolve” any of these issues in a meaningful sense. But viewing the TPP as a starting point rather than an endpoint provides a potential path forward. The TPP’s architecture allows for other countries to join (and several have already indicated an interest), and for amendments and greater disciplines to be negotiated.
There has been talk that APEC might consider a similar approach in order to achieve its vision of a Free Trade Area of the Asia Pacific. The idea would be to allow the primary three sub-regionals underway (TPP, RCEP, and the Pacific Alliance) to continue on their separate tracks, and then at some point down the line, to weave them together as the basis for an Asia Pacific FTA.
Shifting the focus to establishing, expanding, and ultimately merging regional agreements would bring downside risks that shouldn’t be understated. Trade blocs always run the risk of becoming more trade-diversionary than trade-creating, and can spawn unhelpful “us versus them” mentalities. Business is already struggling with the proverbial noodle bowl of overlapping trade regulations, and the situation could get worse before it gets better. Moreover, stitching together regional agreements will be extremely complicated, and in order to be useful, will have to tend towards a highest-common-denominator approach – something that may or may not be possible.
These are serious issues. But it’s time to face the fact that the large global trade rounds that served us so well from the 1940s to the 1980s no longer work, and will be unable to deliver on the promises of the GATT and WTO. We need another way forward. The TPP, used as a building block, has at least the potential to serve as an imperfect bridge between the old world and whatever may be next.
The ball, however, is in the court of the U.S. Congress, where it faces an uncertain fate. The legitimate criticisms of TPP opponents and the self-evident shortcomings of the agreement are not to be lightly dismissed and should be carefully weighed. But thoughtful consideration also needs to be given to the value – and urgency – of fortifying a badly sputtering global trade system.