The last time multilateral trade rules were updated, Bill Clinton was in his first term of office, data was shared by airmailing 1.4 megabyte HD floppy disks (few people had email), cellphones looked like bricks and calling costs were measured in dollars per minute. Trade mostly meant selling goods made in a factory in one nation to a customer in another. Simple trade needed simple rules – a fact reflected in both multilateral and regional trade agreements.
Today’s trade is radically more complex. The revolution in information and communication technologies fostered an internationalisation of supply chains which created a nexus between trade, investment, and services which is at the heart of so much of today’s international commerce.
This “21st century trade” is far more complex and complex trade needs complex rules – particularly as protectionism has more places to hide (Evenett 2010). As the WTO was otherwise occupied, the incipient governance gap was filled by uncoordinated developments elsewhere – primarily in deep regional trade agreements, bilateral investment treaties, and autonomous reforms in emerging economies. The resulting package of deeper disciplines – what could be called “21st century regionalism” – requires new thinking.
This column introduces a new CEPR Policy Insight that marshals several sets of facts into an argument that:
- today regionalism is qualitatively different to that of the 1990s;
- the traditional building-stumbling-block approach and Vinerian economics on which it is premised are not up to the job of analysing this new regionalism; and
- 21st century regionalism has quite different ramifications for the world trading system than 20th century regionalism did.
In a nutshell, 21st century regionalism is not primarily about preferential market access as was the case for 20th century regionalism; it is about disciplines that underpin the trade-investment-service nexus. This means that 21st century regionalism is driven by a different set of political economy forces; the basic bargain is “foreign factories for domestic reforms” – not “exchange of market access”. As 21st century regionalism is largely about regulation rather than tariffs, regulatory economics is needed rather than Vinerian tax economics. Finally, 21st century regionalism is a serious threat to the WTO’s centrality in global trade governance, but not for the reason suggested by the old building-stumbling-block thinking. 21st century regionalism is a threat to the WTO’s role as a rule writer, not as a tariff cutter.
Why the difference matters
The rise of 21st century regionalism is not yet a disaster for the world trade system. It has fostered unilateral tariff cutting and this has kept trade liberalisation booming despite the WTO’s slow progress. But the present course of events seems certain to undermine the WTO’s centricity – regional trade agreements (RTAs) will take over as the main loci of global trade governance. Over the past ten years, WTO members have “voted with their feet” for the RTA option. Without a reform that brings existing RTA disciplines under the WTO’s aegis and makes it easier to develop new disciplines inside the WTO system, the RTA trend will continue, further eroding WTO centricity and possibly taking it beyond the tipping point where nations ignore WTO rules since everyone else does (see Baldwin 2008 and Baldwin and Carpenter 2009).
This scenario runs the risk that global trade governance drifts back towards a 19th century Great Powers world. In the best of cases, the WTO would continue to thrive as the institution that underpins 20th century trade flows. The Marrakech agreements would form a “first pillar” of a multi-pillar trade governance system. All the new issues would be addressed outside the WTO in a setting where power asymmetries are far less constrained. This is what has happened with the bilateral investment treaties – they established a parallel system of disciplines without substantially undermining the WTO’s authority on Marrakech disciplines. But this is not the only scenario. It is also possible that the WTO’s inability to update its rules gradually undermines the authority of the Dispute Settlement Mechanism.
If the RTAs and their power asymmetries take over, there is a risk that the GATT/WTO goes down in future history books as a 70-year experiment where world trade was rules-based instead of power-based. It would, at least for a few more years, be a world where the world’s rich nations write the new rules of the road in settings marked by vast power asymmetries. This trend should worry all world leaders. In the first half of the 19th century, attempts by incumbent Great Powers to impose rules on emerging powers smoothed the path to humanity’s greatest follies – the two world wars.