Regionalism Versus Multilateralism
A Statement by
Timothy E. Deal
Senior Vice President
United States Council for International Business
To the Conference
"EU Enlargement and World Trade: Implications for Business in Poland and OECD Countries"
Warsaw, Poland
April 1, 2004
It is a distinct honor for me to address this conference on EU Enlargement and World Trade on the eve of Poland's entry into the European Union. Congratulations to the Polish Confederation of Private Employers for organizing this meeting.
For me personally, this is something of a homecoming. As a United States Foreign Service Officer, I served in the American Embassy in Warsaw from 1969 to 1972 as an Economic Affairs Officer. Later, I was the Officer in Charge of Polish Affairs in the Department of State in Washington from 1975 to 1976. And in November 1988 I returned to Warsaw on an official visit as Director of the Office of Eastern European and Yugoslav Affairs in the Department of State. That visit was memorable in that the Polish Government was at that very moment on the verge of launching the Roundtable Talks with Solidarity, which proved so critical to Poland's future. Finally, as a Senior Director of the National Security Council in the White House in 1989, I helped formulate the U.S. response to the democratic change of government in Poland, which, among other things, included the establishment of the Polish-American Enterprise Fund. So I have a strong appreciation of your recent history from the turmoil in Gdansk in 1970 to the present day.
The Rapid Spread of Regional Trade Agreements
I was invited today to speak on the subject of Regionalism versus Multilateralism. This is an important and timely topic as Poland takes on the obligations as a member of the world's largest and most successful customs union - although the EU is, of course, much more than a customs union. This debate has taken on new meaning as more and more countries join preferential arrangements at the same time as the pace of multilateral trade negotiations has slowed markedly.
By recent count, there are about 250 regional or bilateral free trade agreements either in force or under negotiation. For ease of reference throughout the remainder of this talk I am going to refer primarily to regional trade agreements or RTAs, knowing that the universe is larger and includes bilateral, plurilateral, and regional free trade agreements. The number of RTAs is expected to rise substantially in the next two years. By one estimate, 55% of world trade will be covered by such preferential arrangements by the year 2005. And everyone is in on the act. Asian countries such as Japan and China, which have traditionally shunned RTAs, are actively negotiating such agreements with their neighbors - and even more distant trading partners. The EU has been active in this area for years, as have countries in South America.
The U.S. has now joined the parade. Until 2001, the U.S. had only three RTAs: Israel, Canada, and NAFTA. Since then, the U.S. has concluded and put into effect RTAs with
Jordan, Chile, and Singapore. It has concluded negotiations on other agreements with Australia, the five Central American countries plus the Dominican Republic, and Morocco. Talks are also underway - or about to start - with the South African Customs Union, Bahrain, and Thailand. Andean countries such as Colombia and Peru are also in the queue.
This activity has not gone unnoticed. WTO Director General Supachai has openly voiced concern about the emerging "spaghetti bowl" of trade liberalization measures, which, he contends, poses a threat to the global trading system. He has warned about the bandwagon effect of such agreements. Prominent academic economists, such as Professor Bhagwati of Columbia University have also spoken out on the issue. In testimony before the U.S. Congress, he said:
"The great economists who warned us against preferences during the 1930s, when competitive tariff-raising was creating fragmented markets worldwide, would have been horrified to see that, in the name of free trade, we are now reenacting such fragmented markets on a parallel scale, and feeling virtuous about it."
WTO Rules and RTAs
Before discussing the pros and cons of RTAs, I should say something about WTO rules in this area. WTO rules require that each member accord Most Favored Nation (MFN) status to other WTO members. However, GATT Article XXIV allows exceptions to the MFN principle for RTAs so long as they meet certain conditions. First, the agreement must lower trade barriers within the regional group. Second, the agreement cannot raise trade barriers against non-participating members. Third, the agreement is supposed to cover substantially all trade among the RTA partners. In reality, RTA participants seldom meet all these conditions. Moreover, the trade coverage of many RTAs is incomplete with many "sensitive" sectors exempted from trade liberalization. That situation is especially true with respect to agriculture.
Still, there have been few challenges within the WTO to RTAs, probably in recognition of the strong political considerations behind their formation. And, since almost everyone is a sinner in this area in one way or another, there appears to be a "live and let live" attitude on the part of most WTO members.
The Doha Declaration did call for negotiations to clarify and improve disciplines and procedures under the existing WTO provisions relating to RTAs. However, there has been virtually no progress in those negotiations.
RTAs: Their Rationale and Benefits
There are differing views about the benefits and costs of RTAs. What I would like to do then discuss the rationale behind RTAs and then review the pros and cons of such arrangements.
First, like it or not, RTAs are here to stay. Clearly, most knowledgeable observers would argue that multilateral agreements are the preferred instrument for liberalizing international trade. Such agreements ensure a non-discriminatory approach, which provides political and economic benefits for all. But the current political environment, as demonstrated by the failure of the Cancun Ministerial, is not particularly favorable for multilateral trade negotiations. There are numerous important and unresolved issues in the WTO negotiations. 2004 is a critical year for the WTO, and agreement must be reached soon on the modalities for these negotiations or they are likely to drift on indefinitely.
It is against that background that more and more countries have turned their attention to RTAs. Countries are taking that route because such agreements are often a more practical and feasible way to liberalize trade. RTAs can bring faster results than the multilateral process. They may enable the parties to make commitments that are more meaningful and more trade liberalizing than a multilateral undertaking. And frequently they address issues that are not even on the multilateral agenda. RTAs can be valuable in dealing with tough issues, which often cause deadlocks on the multilateral front in such areas as services and government procurement. Let me give you some examples from recent U.S. experience.
The U.S. Free Trade Agreement with Australia calls for the elimination of tariffs on 99% of U.S. exports of manufactured goods immediately upon the agreement's entry into force. Manufactured goods account for 93% of all U.S. exports to Australia. All U.S. agricultural exports to Australia will also receive immediate duty free treatment. In the case of services, the U.S. and Australia agreed to the "negative list" approach to the services sector in contrast to the "positive list" method of the WTO. That is important because it means all service sectors are liberalized unless specifically listed as an exception. So there is broader coverage and some protection against backsliding by locking in the regulatory status quo. The agreement with Australia also provides state-of-the-art protection for U.S. trademarks, copyrights, patents, and trade secrets.
The investment provisions in all recent U.S. FTAs go beyond the WTO by allowing parties the right to establish a presence in the other country, a commitment that does not exist in any WTO agreement. Many RTAs go further by building on the treatment and protection principles of bilateral investment treaties. And, even though we in the American business community opposed the inclusion of environmental and labor provisions in the text of any new trade agreement, those recently negotiated by the U.S. include those issues. Thus, the failure to enforce labor or environmental standards can be subject to sanctions in the form of monetary fines, although the preferred course for dealing with such matters is through consultations.
U.S. Trade Representative Zoellick has called this process "Competitive Liberalization." Under this policy, the U.S. will negotiate reductions in trade barriers simultaneously in a variety of forums - bilateral, plurilateral, regional, and multilateral. The objective is to create incentives for those who are not party to such agreements with the U.S. because of the costs of being excluded. Ideally, such agreements would encompass all U.S. trading partners at some future date.
RTAs: Their Costs and Consequences
At the same time, RTAs can have negative effects as well by diverting trade away from lower cost producers outside the bloc. They also can undermine the multilateral system because of their inherently discriminatory nature.
Each RTA establishes its own rules of origin, which can have important adverse effects. Preferential rules of origin can stifle innovation, impede the creation of networks and joint manufacturing, and unduly restrict third country sourcing leading to trade diversion. This proliferation of divergent rules of origin increases the transaction costs for business and slows processing times at borders. As the OECD has pointed out:
"It is not uncommon for a single country to have to apply different sets of rules when determining how to classify the origin of goods being traded, depending on the RTAs to which it belongs. This complicates both the production and sourcing decisions of companies established, or considering establishment, in that country."
Let me give you a concrete example of this problem, as cited by Sidney Weintraub of the Center for Strategic and International Studies. He reports that U.S. corporations took advantage of the rules set up for textile trade with Central America by shipping U.S. fabric to
Honduras in hopes of penetrating both the U.S. and Mexican markets. They subsequently discovered that the resulting product, while meeting the rule of origin requirement for shipment to the U.S., could not enter duty-free into NAFTA partner Mexico under the rules of origin in the Honduras-Mexico agreement.
An OECD study found that countries belonging to RTAS might now have 20 or more different tariff rates for the same product.
Turning more specifically to RTAs the U.S. has negotiated recently, one thing stands out most clearly: the volume of trade affected is small. Aside from Australia, Chile, and Singapore, which are medium-sized trading partners, the other RTA participants have fairly insignificant volumes of trade with the U.S. All this points to the inherently political nature of some RTAs, which apparently were concluded primarily to cement diplomatic ties, forge new alliances, or
achieve other geopolitical objectives. Trade deals of this magnitude are not likely to create much momentum for RTAs with more significant economic players, such as the EU or Japan, or do much to stimulate WTO negotiations.
The selective nature of the product coverage of RTAs can be a problem too. I mentioned some of the benefits from the U.S.-Australia FTA. But domestic political pressures kept the U.S. from allowing any increase in sugar shipments from Australia and only minor increases in market access for Australian beef and dairy products. We cannot say with any certainty what the U.S. had to "pay" to take these sensitive commodities off the bargaining table, but we do know that Australia made fewer concessions in their internal investment and pharmaceutical schemes than might have been the case in a truly comprehensive negotiation. So to some extent U.S. business provided compensation to Australia in terms of lost concessions to protect our agricultural markets from imports.
Conclusion and the Way Forward
Let me sum up. I have described the recent spread of RTAs, which are accounting for an increasing volume of world trade. I also noted that RTAs can be consistent with WTO rules, but in the real world they do not always measure up to WTO criteria. The Doha Declaration mandated negotiations in this area, but little has happened in those talks to date. I then noted the pros and cons of RTAs. While they have many benefits, they also have costs. Left unchecked, they could lead to a fragmented trading system, a concern of the current WTO Director General.
There is a dilemma here. The slow pace of multilateral negotiations has given a greater impetus to bilateral and regional trade negotiations. But the very success of those negotiations can make liberalization on a multilateral scale that much more difficult as governments devote greater time and attention to deals that can be consummated quickly. They further detract from multilateral efforts by stretching already scarce negotiating resources, especially in developing
countries. Unless governments take care to balance their regional aspirations with global commitments, the end result could be Competitive Discrimination, as one economist has written, instead of the Competitive Liberalization espoused by Ambassador Zoellick.
At the end of the day, I believe we must keep in mind what OECD Ministers agreed to at their annual meeting in 2001. They concluded that RTAs can complement, but not substitute for, coherent multilateral rules and progressive multilateral liberalization.
That said, RTAs are a reality and will not go away. What is important then is to ensure that RTAs conform to WTO rules insofar as possible. That is why the negotiations to clarify and improve WTO existing rules and procedures with respect to RTAs are so critical. These negotiations deserve greater attention by WTO members so that the remarkable trend in trade liberalization begun after the end of World War II can continue unabated. That means that countries like the U.S. and Poland, with its new EU partners, must demonstrate the political will to make these discussions succeed and therefore pave the way for renewed trade negotiations in 2004 and beyond multilaterally as well as regionally and bilaterally.
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