Members only: Embracing diversity in the WTO

Bernard Hoekman, Petros Mavroidis

The proliferation of trade ‘clubs’ indicates that governments are keen on engaging in trade liberalisation. This column argues that the creation of new trade clubs under the umbrella of the WTO is inevitable. Such issue-specific (plurilateral) agreements keep the cord with the WTO tight, while allowing countries to cooperate on issues outside of WTO’s grounds.

WTO and … ‘clubs’

On 8 July, 2014 negotiations were launched in Geneva to liberalise trade in environmental goods (Donnan 2014). The talks span a limited number of countries, including the world’s three largest trading powers: The EU, China, and the US. Similar to previous sectoral initiatives to liberalise trade under WTO auspices, such as the 1997 Information Technology Agreement (ITA) and the ongoing talks to conclude an ITA-2 with broader product coverage, the aim is to get a critical mass of countries to agree to liberalise trade in the chosen products. A key feature of critical mass deals is that the benefits are extended on a non-discriminatory, most-favoured-nation basis. Critical mass agreements have always been an important mechanism to allow mutual disarmament to occur: If enough of the large players participate in the liberalisation exercise, they need not worry about free riding by other countries that do not want to participate. These initiatives illustrate that despite the Doha Round deadlock there is continuing appetite among WTO Members to use trade agreements to liberalise international commerce.

The proliferation of preferential trade agreements (PTAs) similarly indicates that governments are keen to engage in liberalisation and commit to stronger trade policy disciplines ‘if the price is right’. There are many more extant PTAs and ongoing PTA negotiations than there are efforts to conclude critical mass-based liberalisation agreements. One reason is that when it comes to regulatory measures, deals are easier to agree if they are limited to a sub-set of the WTO Membership, and benefits need not be extended to non-signatories.

PTAs are not the only game in town when it comes to negotiating policy commitments among a ‘club’. The WTO offers another mechanism for Members to do so: Conclusion of a Plurilateral Agreement (PA) under Art. II.3 of the Agreement Establishing the WTO. This provision permits sub-sets of the WTO Membership to agree to new disciplines applying to signatories only. In contrast to a PTA, which must cover substantially all trade in goods (Art. XXIV GATT), and/or have substantial sectoral coverage of services (Art. V GATS), PAs can be issue-specific. At present, there are two PAs in force in the WTO, the Agreement on Government Procurement, and the Agreement on Civil Aviation.

Some analysts have long called for greater use of PAs as a way of allowing sub-sets of countries to move forward on an issue (e.g., Lawrence 2006). Recent developments in the world economy – such as the ever greater prevalence of international value chains and production (Hoekman 2014) and the much greater intensity with which governments are turning to PTAs – suggest to us that greater use of PAs should be considered. PTAs and PAs both permit discrimination and both can involve binding commitments: They liberalise trade or define rules of the game only for a sub-set of the WTO Membership that shares similar views. PTAs in practice often go beyond the current WTO mandate. In principle, PAs that cover areas not falling under the current WTO mandate could be used as a substitute for PTAs, thus offering a mechanism for countries to pursue greater cooperation under the umbrella of the WTO as opposed to outside it.

More clubs are inevitable

It is beyond the scope of this column to discuss the rationales for why countries opt for PTAs. One thing we would highlight is that as tariffs become gradually irrelevant, the focus of trade integration efforts shifts to regulatory barriers. Non-discrimination works wonderfully when tariffs are reduced, but its main utility with respect to regulatory barriers is to help avoid erosion of … tariff concessions. The demise of tariffs greatly reduces the usefulness of non-discrimination with respect to regulatory barriers. In fact, in instances where countries are asymmetric in their regulation levels, non-discrimination is an insurance policy that trade (market access concerns) will not trump social preferences.

What then? Recognition and harmonisation emerge as the instruments to integrate markets. Harmonisation can be very costly if existing regulations differ, while recognition pre-supposes ‘trust’ since it is forward looking. Minimum harmonisation, if operated at a low level, does not mean much either, since countries with high levels of regulation will deviate from it routinely. Recognition happens across like-minded players, bilaterally, or in clubs.

Agreement on cooperation on regulatory matters among 160 WTO Members will in most cases be difficult, if not impossible. Even the EU -- a regime with arguably substantial homogeneity -- allows for the establishment of PAs across a sub-set of its membership, the most notorious being the European Monetary Union. Besides the Monetary Union, so-called Enhanced Cooperation Agreements are possible for a sub-set of the EU Membership (Art. 20 TEU). Although so far practice is scarce, arguments have been made that these could be an instrument that could propel further European integration among countries that are interested in doing so (see, e.g., Baldwin et al. 2001).

Is one type of club preferable to the other?

If clubs are bound to proliferate when it comes to regulatory matters and related rule-making, should the WTO membership simply accept that such clubs will have to comprise PTAs? Or should consideration be given to fostering more club formation under the umbrella of the WTO in the shape of PAs? As argued at greater length in Hoekman and Mavroidis (2013), there are good reasons for privileging PAs over PTAs.

PAs are Pareto-sanctioned because their content is approved by the WTO Membership. PTAs are reviewed by the WTO, but there is no sanctioning of their content. Since the advent of the Transparency Mechanism in 2006 (see Mavroidis 2013), there is no assessment of whether they comply with WTO rules. The review is limited to supply of information.

Information provision stops at the moment a PTA has been reviewed. There is no obligation to continue to supply information to WTO after that. In contrast, PAs involve regular reporting on activities to the WTO Membership as a whole.

The plethora of PTAs results in significant dispersion in rules and approaches and thus transactions costs and trade diversion – Jagdish Bhagwati’s famous spaghetti bowl analogy. Multiple PTAs deal with the same subject-matter, so that rules of the game for firms from a country often differ for the same issue depending on the PTA that applies for a given trade flow. In the case of a PA there will only be one regime regulating a given subject-matter.

PTAs are mostly closed to accession by new members. PAs in contrast are required to be open.

PTAs often have their own dispute settlement procedures. Dispute settlement is the most frequent form of ‘contract completion’, and as a result the WTO misses out on important information. In contrast, PAs use WTO dispute settlement mechanisms.

Bridges to new clubs

The overall conclusion we draw is that a major advantage of PAs is that they keep the umbilical cord with the WTO tight, while offering a vehicle for countries to cooperate on new issue areas that are not subject to WTO rules. There are many possible areas where PAs can help governments experiment and learn without implicating the whole WTO membership. For example, some governments may want to create a mechanism to harmonise approaches to product classification and to share data on advance rulings by customs agencies. Other policy areas where PAs may offer a vehicle for club-based cooperation include digital trade and data flows, competition policy, regulatory cooperation, and private standards (Hoekman 2014).

An important impediment to negotiating new PAs is the requirement that proposed agreements be approved by the whole WTO membership: PAs require consensus. This means that countries that have no interest in joining can nonetheless block approval of a new proposed PA. The prospects of achieving the required consensus can be enhanced through a process of agreeing on a code of conduct for PAs (WEF 2010). This could include:

Membership in PAs is voluntary.

The subject is a core trade-related issue.

Those participating in negotiations should have the means, or be provided with the means as part of the agreement, to implement the outcomes.

The issue should enjoy substantial support from the WTO’s Membership; and

The ‘subsidiarity’ principle should apply in order to minimise the intrusion of club rules on national autonomy.

Bridges are a two-way street

Clubs are the hothouse of future trade regulation. The WTO does not lose its relevance because of their advent. It is the guardian of past liberalisation that paved the way to ‘deeper integration’ initiatives that are easier to pursue in a club context. Such clubs need not be limited to PTAs that do their business independently of the WTO. Supporting more club formation under the umbrella of the WTO can help ensure the continued relevance of the multilateral trade regime in the 21st century.

References

Baldwin, R, E Berglof, F Giavazzi, M Widgren (2001), Nice Try: Should the Treaty of Nice be Ratified?, CEPR: London, UK.

Donnan, S (2014), “Green goods trade talks set to start,” Financial Times, July 7.

Hoekman, B (2014), Supply Chains, Mega-Regionals and Multilateralism: A Road Map for the WTO, London: CEPR Press.

Hoekman, B and P C Mavroidis (2013), “WTO ‘à la carte’ or WTO ‘menu du jour’? Assessing the case for plurilateral agreements”, Robert Schuman Centre for Advanced Studies Working Paper 2013/58.

Lawrence, R (2006), “Rulemaking Amidst Growing Diversity: A ‘club of clubs’ approach to WTO reform and new issue selection”, Journal of International Economic Law, 9(4): 823-35.

Mavroidis, P C (2013), Trade in Goods, Oxford University Press.

World Economic Forum (2010), “A Plurilateral ‘Club-of-Clubs’ Approach to World Trade Organization Reform and New Issues”, Global Agenda Council on the Global Trade System and FDI, Geneva: WEF.