Enforcement in free trade agreements

But once a deal is done, signed and enters into force, what happens? 

The agreement is available for savvy companies in member countries to use.  They can follow the rules and usually gain lowered or zero tariffs, have improved access for their services and more clarity on the conditions for investment.  Depending on the deal, it may provide other benefits like better protection for intellectual property rights or facilitate faster, smoother trade at customs at the border.

However, actual implementation of the FTA by governments is often less robust than might be imagined.  Governments tend to negotiate trade agreements and move on to the next big thing.  Implementation is meant to be managed domestically by member governments and is always the weakest link for any trade deal. 

Sometimes, this is less of a concern, as an FTA could provide relatively minimal adjustments to existing practices. Instead, it mostly binds them into place to prevent what is termed “backsliding” on commitments.  Or the FTA might need to limit gaps between FTA commitments and existing practices, with the hardest, most sensitive areas in an FTA often including long timelines for complete implementation.

Why is effective FTA implementation so difficult to achieve?  At least five reasons seem to apply.  First, governments are all resource constrained.  There are never enough staff to really focus on implementation.  Officials are stretched and most have to cover multiple agreements or trade arrangements. 

Second, the government ministries or agencies responsible for negotiating trade agreements are often not the same entities that should manage implementation.  For example, trade officials, working with customs, may design rules for trade facilitation, but border matters are handled by customs and immigration.  Similarly, trade officials are often not tasked with communication to businesses or providing any required training or capacity building.

Third, government attention spans can be limited.  Hence, once a deal is done and dusted, it often falls into the “pending” file box on someone’s desk.  As most people can appreciate, stuff in that box tends to remain unexamined unless the workload is really, really slow. 

Fourth, particularly for complex negotiations, the process of getting an agreement in place can take years.  Often the staff members working on a specific FTA are rotated after conclusion or leave government service entirely.  It is extremely rare to have the officials in charge of negotiations be responsible for implementation, even if they are best placed to monitor the agreement as it comes into force.

Finally, the enforcement provisions of FTAs are a serious problem.  Most comprehensive FTAs have a dispute settlement chapter.  These are typically negotiated by excellent legal staff and the rules, policies and procedures in the chapter can be very solid.[1] 

The problem is that governments are very reluctant to actually take advantage of the dispute settlement procedures in an FTA. 

Instead, most disagreements over a presumed failure to fully or properly implement a trade agreement provision tend to be handled informally.  All FTAs come with a built-in institutional structure, typically managed through a series of committees that often have regularly scheduled review meetings.  Hence, these ongoing review consultations provide a convenient backdrop for discussions over implementation challenges. 

More complicated or sensitive issues could be taken up by ministers or leaders at some other opportunity, such as on the sidelines of a regional meeting or as part of the normal diplomatic processes attached to state visits. 

Some issues of concern could be tossed over to the WTO for adjudication.  The WTO cannot, of course, look into the specifics of an FTA dispute based on FTA commitments.  But some issues that flare up during an FTA implementation are also covered by WTO rules.  In these circumstances, as long as it is possible to argue a case based on WTO provisions, governments could opt to take the argument to the WTO for resolution.

As Talking Trade readers undoubtedly know, the WTO dispute mechanism (the so-called “crown jewel” of the organization) has not been functioning properly for several years.  Parties can have the dispute heard before a panel, but if not resolved at the conclusion of the panel review, there is no appellate body review.

The point here is not to reflect on the sad state of the WTO dispute system, but simply to note that some governments have opted to manage what might otherwise be seen as FTA-related disputes by turning to the global body.

In general, FTA dispute provisions are almost never used.  As Amy Porges notes in her excellent database of FTA disputes, there are exceptions, especially within North America under NAFTA and USMCA and a recent spate of enforcement actions taken by the European Union.  But Asian governments, certainly, have a surprisingly poor track record of turning to FTA dispute procedures.  In all the decades that ASEAN has been building greater economic integration through FTAs, not a single dispute case has been taken up in any of the ASEAN agreements.

Which makes the use of the dispute system in the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) all the more surprising.  Last year, New Zealand challenged Canada over the proper implementation and allocation of tariff rate quotas for dairy products.  CPTPP members established the first-ever panel to review the case in March 2023. 

The public hearing for the case is taking place this week in Ottawa, with a decision expected in a matter of weeks afterward.  The case is expected to be publicly released in September. 

This will give observers a first glimpse into how well or poorly the dispute system embedded in the CPTPP works.  It could also provide an important impetus to future use of the dispute mechanism as a tool to prod members towards improved enforcement of various provisions.

Frankly, none of the current CPTPP members is likely to have fully implemented all their commitments.  As a simple example, the agreement requires all members to update their government procurement thresholds at least every two years.  This is necessary because the limits were written as Special Drawing Rights (SDRs) which are not typically top of mind for firms looking to compete for construction contracts.  The SDR conversion rates and the adjustments to procurement are supposed to be published regularly but (as far as I know) not a single government has done so. 

These sorts of implementation gaps appear across the agreement.  Some may be relevant to businesses and others may be less so.  But the basic point here is that, by relying on a dispute settlement mechanism built into an FTA to manage effective implementation, it requires such a mechanism to actually be used by participants.  Otherwise, enforcement and compliance will always be weak.

The use of the dispute settlement provisions for the first time in the CPTPP, then, represents a potentially significant boost to the overall implementation incentives for this agreement.  For companies that may be waiting for improved delivery of various CPTPP promises, stepped up attention to implementation cannot come soon enough.