Multilateralising regionalism: The WTO’s next challenge

Richard Baldwin 29 February 2008

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The world’s most important trade talks – the Doha Round – appear to be slipping into a coma while key nations play a waiting game. What are they waiting for? Some are waiting to see if Europe commits to unilaterally dismantling the EU’s massively distortionary agricultural policies during its 2008/2009 review. Others are waiting to see if the next US president is more protectionist or more accommodating. And the major developing nations see their exports growing at double-digit rates despite the stalemate, so what’s the rush?

But trade liberalisation is not standing still. Nations around the global are falling over themselves to liberalise trade regionally, bilaterally and unilaterally. The world trade system is labouring under a massive proliferation of regional trade agreements and the problem gets worse month by month. The resulting tangle of trade deals conspires to inject both inefficiency and discrimination against poor countries into the multilateral system.

Most amazingly, the WTO has had next to no involvement in this important development. The WTO – and this means the WTO membership since the institution only does what its members want – has adopted the role of “innocent bystander”. Key figures in world trade – negotiators, ministers, the WTO secretariat, academics, civil society and the media – need to look beyond the Doha Round. Doha or not, countries will continue to strike bilateral and regional deals. Doha will do little or nothing to ‘tame the tangle’. What is needed is a WTO Action Plan on Regionalism.

Regionalism is here to stay

The argument for action is simple. It is based on four facts:

Fact #1. The world trade system is marked by a motley assortment of discriminatory trade agreements known as the ‘spaghetti bowl’ for reasons that the diagram of trade relations in the Western Hemisphere makes clear.

Figure 1. ‘Spaghetti bowl’ RTAs in the Western Hemisphere

Fact #2. Regionalism is here to stay. Even if the Doha Round finishes tomorrow, free trade agreements will continue to proliferate and the motley assortment will continue to get ‘motley-er’.

Fact #3. This tangle of trade deals is a bad way to organise world trade. The discrimination inherent in regionalism is already economically inefficient but its costs are rising rapidly as manufacturing becomes ever more internationalised. Stages of manufacturing that used to be performed in a single nation are now often geographically unbundled in an effort to boost efficiency. Supply chains spread across many borders. Unbundling, which accelerated since the 1990s, is the most important new element in the regionalism debate. It is the reason why business is pushing so many nations to ‘tame the tangle.’

Fact #4. While the spaghetti bowl is a problem for firms in big nations, it is much more so for firms in poor nations. Rich nations have the resources and negotiating leverage to navigate the tangle’s worse effects. The governments of small and poor nations do not. The spaghetti bowl falls much harder on the heads of the world’s small and poor nations.

Implication. Since the spaghetti bowl’s inefficiencies are increasingly magnified by unbundling and the rich/poor asymmetry, the world must find a solution. Since regionalism is here to stay, the solution must work with existing regionalism, not against it. The solution must multilateralise regionalism.

The WTO must choose innocence or engagement

The WTO faces a choice. What that means is that the WTO membership faces a choice. Should the WTO remain as an innocent bystander, or should it engage constructively and creatively in making regionalism as multilateral-friendly as possible? Innocence or engagement is the choice. The problem will not go away on its own.

The innocence option poses many difficulties and pitfalls. Regionalism is so pervasive that some political leaders view it as an alternative to multilateralism – Plan B for the world trading system. Starting from this situation, the continued and uncoordinated proliferation of regionalism might kill the proverbial gold-laying goose – the multilateral trade system that brought post-war prosperity to today’s rich nations and helped lift billions out of subsistence agriculture.

Engagement is also difficult. WTO members have shown little appetite for cooperating on regionalism. Recent progress on the Transparency Mechanism shows that they recognise the problem, but negotiating a WTO Action Plan on Regionalism would be difficult.

In a new book published this week, a co-author and I argue that engagement is the right option. Developing a WTO Action Plan on Regionalism is both necessary and feasible. The book discusses more than a dozen ideas for the Action Plan. Some ideas require WTO sponsorship, negotiations and actions while others would mainly engage the parties to RTAs with the WTO playing more of a coordinating and fair broker role.

Most of the proposals turn on critical details and intricacies that can give headaches to even the most dedicated trade specialist – not the sort of thing that works well in an essay. The one proposal that is easy to understand concerns help for the developing nations. To make regionalism more development friendly and help poor nations with their free trade agreements, we should establish a WTO advisory services and/or a Centre on RTAs for poor nations – something along the lines of the Advisory Centre on WTO Law that helps them with WTO legal issues.

This advisory centre would provide subsidised economic, legal and negotiation services and training to developing nations. The proposed Centre’s role and practical details could take inspiration from the Advisory Centre on WTO Law. To avoid waste, it should link up with the efforts of regional banks (Inter-American Development Bank, Asian Development Bank, etc.).

Action is needed

The ideas in the book – which stem from a three day conference of the world’s leading trade experts held at the WTO in September 2007 – need more work. They may not be the right answer as to what the WTO should do, but “Do nothing” is surely the wrong answer. If the WTO does not adjust to the new realities of regionalism, it risks an erosion of its relevance.

The GATT/WTO survived and flourished during its half-century’s existence by adapting to new realities. When the colonies became countries, the GATT expanded from a cosy club of two dozen members to a global organisation. When the distinct trade needs of developing nations were recognised, the GATT responded with the Enabling Clause. When non-tariff barriers began to replace tariff barriers, the GATT expanded its negotiating agenda. And when the need for greater institutional stability became clear, the GATT was embedded in the WTO.

Today’s new reality is regionalism. If the WTO is to survive and flourish, it must adapt because regionalism is here to stay. Embarking on a WTO Action Plan on Regionalism would be a strong step towards adapting to the new reality.

References

Baldwin, Richard and Philip Thornton (2008). Multilateralising Regionalism. CEPR Policy Report.

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Topics:  International trade

Tags:  WTO, trade liberalisation, trade, regionalism, trade agreements

Comments

From:
Fredrik Söderbaum, Associate Professor at the School of Global Studies,niversity of Gothenburg (Sweden), and Senior Associate Research Fellow at the United Nations University-Comparative Regional Integration Studies (UNU-CRIS) in Belgium.

 

Richard Baldwin argues: “If the WTO is to survive and flourish, it must adapt because regionalism is here to stay. Embarking on a WTO Action Plan on Regionalism would be a strong step towards adapting to the new reality”. The viFredrik Söderbaum, Associate Professor at the School of Global Studies, University of Gothenburg (Sweden), and Senior Associate Research Fellow at the United Nations University-Comparative Regional Integration Studies (UNU-CRIS) in Belgium. ew advanced in this comment is that elevating multilateralism prevents regionalism from reaching its full potential. Achieving the gains from international trade requires a more equal balance between multilateralism and regionalism, even a “regionalising multilateralism”.

The comparative advantage of regionalism

Although the multilateral trading system is often claimed to be rather successful in a historical perspective, the GATT/WTO has proved to be not only unfair but also ineffective in dealing with the economic and political challenges since the 1990s. Even if multilateralism is seen as a first-best strategy for enhancing the gains from trade from the point of view of economic theory, regionalism is the first-best policy option in practice, and the best risk-management and coping strategy in the context of frustrated multilateralism. Regional arrangements provide an opportunity of the market access they always wished for but never really extracted from multilateral negotiations. Furthermore, many countries have been helped by the unilateral liberalization of neighbours and the commitments undertaken in the context of regional trade agreements.

There is a comparative political advantage of regionalism compared to conventional multilateralism as it is presently being practiced. Regionalism is here to stay and likely to become a stronger force over the coming decades, particularly if not the multilateral trading system is fundamentally transformed. Regionalism will often work more easily and effectively compared to a multilateralism which is dependent on 200 or more unequal nation-states and dominated by the G8 and the OECD countries. Regions may also be good vehicles for smaller countries to increase their bargaining power and voice in multilateral trade. The most pragmatic and effective solution is a “regional multilateralism”. Regionalism will cede to multilateralism only when multilateralism is rebuilt on foundations of successful regionalism.

The EU model versus the WTO model

The benefits from trade liberalization are much less significant than what they used to be, which is somewhat paradoxically a consequence from the “success” of GATT/WTO. This results in the need for a broader approach, which goes beyond trade liberalisation per se.

A broader and more comprehensive approach requires that regional trade integration is coupled with other forms of economic and factor market integration (e.g. investment, payments, monetary integration and harmonization) as well as various types of economic cooperation in specified sectors (such as transport and communications etc.). From a political standpoint, it is easier to liberalize towards neighbours than on a multilateral basis, and also easier to deal with distribution issues. Regional trade clubs can respond and deal more effectively with non-trade economic and political challenges such as environmental protection and migration.

This line of thinking can be said to be part of the EU model. It has started to have effect in different versions in other parts of the world, The strategy is only possible to manage through multidimensional and comprehensive regional organizations, such as EU, SADC, ASEAN and increasingly Mercosur, since these can exploit spillover effects and linkages between trade and economic and political sectors/benefits, which is much more difficult or even impossible to do within frameworks restricted to trade matters, such as WTO or NAFTA.