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State of multilateralism: Rise of regional and plurilateral trade agreements

Shamsul Alam | Published: June 16, 2019 20:51:23 | Updated: July 11, 2019 15:54:09


International trade has been the primary engine of facilitating income and accumulating wealth around the world in the post-WWII period. The goal of progressive trade liberalisation has been universally accepted and pursued under the singular body of the multilateral trade regime (General Agreement on Tariffs and Trade [GATT] since 1948, which became World Trade Organisation [WTO] in 1994) for nearly seven decades. During this period, trade restrictions were significantly reduced, non-tariff barriers were cut drastically and applicable tariff rates were slashed down to record low levels worldwide. Nonetheless, nearly twenty years after the WTO's establishment, trade multilateralism has reached a crossroads. With Doha Development Agenda (DDA) negotiations going on since 2001, WTO's role, relevance or competency in greater trade liberalisation and providing relevant governance are under increased scrutiny. At the same time, with proliferation and deepening of regional trading arrangements (RTAs), control over new or broader horizon of international trade rules are leaning towards individual economies. Therefore, the organisation is being sidelined and its members are showing increasingly greater reluctance in multilateral trade discussions. As LDC (Least Developed Countries) graduation approaches alongside a stalled multilateral trade regime, Bangladesh is also confronted with a challenge of expanding exports through outside multilateralism - through bilateral and regional trade negotiations.

Under the current structure of global trade governance, most countries including Bangladesh are involved in two broad types of trading arrangements. The first one is multilateral trading arrangements and processes led by WTO while the rest fall under the broad definition of preferential or regional trading agreements (PTAs or RTAs). When RTAs contain several signatories across continents, they become mega-RTAs (such as proposed Transatlantic Trade and Investment Partnership). Another type of arrangement, like the plurilateral agreements, is negotiated under facilities of multilateral system, but they do not include all members of that system. When WTO members are given choices to agree or decline a new set of rules on a voluntary basis, it becomes a plurilateral trade agreement. Besides, there exist many other forms of trade cooperation arrangements that are often reflected in motion of unions and agreements between countries. These instruments could include expression of intent for increased trade and investment flows, initiating trade negotiations, greater cooperation involving the private sectors, etc. with many of the provisions being non-committal in nature. However, any legally binding trading arrangements must be consistent with WTO rules.

Although, WTO is based upon a key principle of non-discrimination between signatories (i.e. not favouring one trading partner over another), one major exception allows enabling members to sign RTAs. Three sets of WTO rules will have to be observed before entering any bilateral or regional trading arrangements. These rules relate to the formation and operation of RTAs  (including  customs  union  and  free  trade  areas) covering  trade  in  goods  (Article  XXIV  of  the  General Agreement on Tariffs and Trade 1994), regional or global arrangements for trade in goods between developing country members (the Enabling Clause), as well as agreements covering trade in services (Article V of the General Agreement on Trade in Services). The WTO requires that, RTAs must cover substantially all trade unless they are under the Enabling Clause. However, there is no quantitatively specified definition for 'substantially all trade'. 

When WTO was established after the Uruguay round (1986-1994) negotiation of GATT, at one hand, it was meant to be the parliament of international trade, dictating terms through an all-encompassing system of multilateralism, and achieving a freer world for global economy that pushes for globalisation agendas through negotiation and progressive liberalisation of trade barriers. On the other hand, it was also meant to be the enforcer of the regime by using revolutionary mechanisms such as even-handed dispute settlement, and making sure members abide by the binding agreements. WTO managed to bring countries from both developed and developing economies to the same table and provided them with equal footing in the negotiation process. WTO also managed to acknowledge the supply side constraints of LDCs and necessity of special & differential treatment (S&DT) for most vulnerable countries of the world, through necessary provisions in binding agreements. In order to streamline the system of global trade, WTO provided a singular stage where the weakest countries can represent their stakes in global trade as the strongest one.

In the earlier stages of global trade negotiations, regionalism was thought to be a faster way of reaching multilateralism. Many protectionist and small economies preferred taking smaller steps towards trade liberalisation by opening domestic markets to regional or prominent trade partners first. The WTO also encouraged members in RTA, by setting up basic frameworks or laying down groundwork for agreements with binding agreements like GATT, General Agreement on Trade Services (GATS) and Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). This trend of trade liberalisation in early 1990s saw a boom in regionalism. And global trade started picking up pace, which continued an average growth of 6 per cent till 2008. (Figure 4.7 shows how RTAs proliferated over the years.) In many cases, countries aggressively signed a number of RTAs with their trading partners, which resulted in some redundant agreements. Till April 2019, there were 289 physical RTAs in force, while the WTO has been directly notified about 686 RTAs (active and dormant). Currently, G20 country members of the WTO often interpret it as covering 80 per cent of all trade between the RTA partners (South Centre, 2008).

RTAS EMERGE AS A STUMBLING BLOCK TO MULTILATERALISM: This seemingly innocuous proliferation of RTAs soon emerged as a stumbling block to multilateralism itself. One of the biggest problems with regional, preferential and bilateral trade deals is that they discriminate against excluded members. As a result, every time an RTA is signed, excluded members face substantial preference erosion. For example, when USA signed African Growth and Opportunity Act (AGOA) and offered Duty-Free Quota-Free (DFQF) access for numerous products originating from Sub-Saharan Africa, it caused an erosion of preference for non-African LDCs, including Bangladesh. It made African products more competitive in the US market, at the expense of products from excluded parties. These DFQF access from African Growth and Opportunity Act (AGOA) resulted in a boom of apparel industry in southern African countries while a more competitive readymade garments (RMG) exporters from Bangladesh pay more than 15 per cent tariff on exported value. As we can see, discrimination caused by RTAs are distortionary in nature, as more competitive producers are forced to pay a high most-favoured nation (MFN) tariff, while uncompetitive actors are made competitive artificially and get access to greater markets.   

Apart from being trade distortionary, regionalism can even become detrimental for trade liberalisation. Instead of expanding trade, large number of trade arrangements between different countries can even slow it down. Signing multiple FTAs across the nations creates complication in applying domestic rules of origin, a situation termed as the "spaghetti bowl effect". Such phenomenon leads to discriminatory trade policy, as the same commodity is subjected to different tariffs and tariff reduction trajectories for the purpose of domestic preferences. With the increase in FTAs throughout the international economy, the phenomenon has led to paradoxical and often contradictory outcomes amongst bilateral and multilateral trade partners. In addition to these issues, engaging in RTAs or FTAs require a combination of significant resources including skilled negotiators, trade experts, legal professionals, academics, unison of different private industries, time and money. These are scarce in most small and vulnerable countries. That being the case, LDCs rely more on successful negotiations from WTO as it is not possible for them to engage in many regional agreements,

It can also be noted that, the proposed mega-regional arrangements such as Transatlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP), flagrantly discriminate against every single excluded actors of global trade, especially emerging economies and all LDCs including Bangladesh. In many cases, mega-regional agreements are politicised, and uses trade as a weapon to enforce geopolitical hierarchy. Therefore, in several ways, the original multilateral dream of trade liberalisation is facing dire consequences from multiplication of RTAs. And WTO's agenda of economic integration is being thrown in the backseat, with countries showing reluctance in making meaningful multilateral progress and providing more efforts in RTA negotiations. Therefore, regionalism has eventually been turned into a stumbling block in the path of multilateralism and greater international integration, instead of helping the original cause.

TFA - A GLIMMER OF HOPE: Although WTO is going through virtually a stalemate, with both developed and developing countries being super-protective about their interests and repeatedly declining to make necessary concessions about individual demands, enforcement of the Trade Facilitation Agreement (TFA) came as a glimmer of hope. Despite being a plurilateral agreement, it has potentials to increase global merchandise export by $1.0 trillion per annum. This deal is considered as one of the most important achievements of WTO since establishment. After ratifying the TFA as the 94th country in 2016, Bangladesh is currently at the implementation stage of this agreement. Overall, Bangladesh has been tremendously benefited from WTO provisions. Supports through LDC specific enabling clause, S&DT preferences, TRIPS waiver, services waiver have been discussed earlier. The country also served twice as the coordinator of the LDCs in Geneva in 2007 and in 2011, leading negotiations on behalf of the group, championing their interests in various areas including greater market access, increased flexibility in the development of multilateral trade rules, and targeted assistance for improving trade infrastructure among others.

Despite the challenges, rules-based multilateralism is an indispensable global public good (The Commonwealth, 2015). Through its trade rules and binding dispute settlement system, the WTO-led multilateral trading system formally provides a level playing field to all its members. There is an urgent imperative for those who wish to promote a sustainable, inclusive, equitable and dynamic global rules-based multilateral agenda to rally forces. In absence of a strong and effective multilateral trade regime, LDCs and small actors of global economy are the biggest losers. The Istanbul Programme of Action (IPoA) of 2011-2020 for LDCs set a target to double the LDC share of global exports by 2020. This share was 1.05 per cent at the beginning of IPoA implementation, then declined to 0.96 per cent in 2015. And the average share of LDC export in global economy between 2009 and 2016 was only 0.91 percent (UNCTAD, 2018). Without a successful multilateral progressive trade liberalisation regime, global trade cannot recover post-recession flows, and objectives like export expansion from LDCs cannot be achieved. 

Against these backdrops, Bangladesh will now have to look for the practical options in securing valuable national interest. While the country cannot single-handedly control multilateral landscape, there are valid scopes for playing a proactive role in global leadership. Instead of traditional policies, medium- to long-term negotiation stances from the position of a developing country will have to be devised. Bangladesh may be required to actively engage in the negotiations by forming coalitions with other graduating LDCs or non-LDC developing countries in various areas of interests. On the contrary, Bangladesh will also have to catch up with the advanced and tactically strong emerging economies by actively engaging in regional or bilateral free trade agreements because in the best case scenario, it will take several years for the standstill of multilateralism to give meaningful outcomes. In the meantime, Bangladesh must ensure a strong footing in global market by strengthening exports and securing favourable terms of business with prominent partners.

The Government of Bangladesh has received proposals for potential bilateral trade arrangements from several countries including China, Malaysia and Thailand in recent years. Some analysts suggest that under current unorthodox protectionist approaches by US and some European governments to trade negotiations, Bangladesh would be an attractive country for a potential bilateral deal. Post-LDC Bangladesh may have to negotiate a trading arrangement with the European Union (EU) along with the possibility of an FTA with the post-Brexit United Kingdom. But as it stands today, Bangladesh neither has adequate capacities nor experience for strong trade negotiations and signing comprehensive FTAs.

Dr. Shamsul Alam is Member (Senior Secretary), General Economics Division, Bangladesh Planning Commission.

sambau23@gmail.com

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