Date: 17/01/2007
Source: World Trade Organisation
Title: Lamy: Regional agreements: the ‘pepper’ in the multilateral ‘curry’
The world faces the prospect of 400 preferential trade agreements by 2010 and the challenge of ensuring they contribute to the health of world trade, Director-General Pascal Lamy told the Confederation of Indian Industries in Bangalore on 17 January 2007. This is what he said:
Multilateral or bilateral trade agreements: which way to go?
Confederation of Indian Industries Partnership Summit 2007 Emergent India: New Roles and Responsibilities
I am very happy to join you all today in Bangalore under the theme “Emergent India: New roles and new responsibilities”. And doing this in Bangalore is no coincidence. India's third largest city, accounting for 35% of India's software exports and home to prestigious college and research institutions in areas such as IT or biotech, Bangalore is today an example of how globalisation and openness can bring huge opportunities and benefits to our citizens.
But with success also comes challenges: air pollution, traffic congestion or infrastructure needs are just a few. These are also the results of globalisation and if we want it to be acceptable to all of us, we must also address those challenges head-on, as the title of this conference suggests.
Trade is one of the manifestations of globalisation, with its positive effects but also its downsides. Today it is clear that the sole work of market forces will not be enough to spread the benefits of globalisation to all and that we have to develop instruments to harness globalisation, ensuring that both developed and developing countries benefit alike from it and that those in our societies who suffer from the transformations that globalisation bring about are adequately taken care of.
One of the tools at our hands to harness globalisation is the multilateral trading system, the WTO, hence the Round of negotiations launched in 2001 in Doha under the banner “Doha development Agenda”. It is intended to rebalance the world trading system in favour of developing countries, through greater market opening and new trade rules adapted to the new changing trading realities of the XXI century.
But as the WTO and it predecessor, the GATT, have evolved, a myriad of preferential trade agreements have been concluded by WTO members. By 2010 around 400 of such agreements could be active.
These preferential agreements contradict the non discrimination principle which is one of the cornerstones of the WTO. If this is so, why are so many countries ready to accept rules and disciplines at the bilateral level that they are not prepared to accept at the multilateral level?
Attractiveness of regional trade agreements
In my view, there are several reasons for the attractiveness of bilateral agreements as compared to multilateral negotiations.
First, they seem quicker to conclude. Fewer parties means that preferential trade agreements can be wrapped-up within a shorter period of time. This is usually very attractive to both politicians and business communities who are looking for quick results.
Secondly, they can enter into new territories. Because of similarities in interests and often more common values, bilateral trade agreements can go into new areas such as investment, competition, technical standards, labour standards or environment provisions, where there is no consensus among WTO Members.
Thirdly, many of the recent FTAs contain political or geopolitical considerations. For developing countries negotiating with more powerful developed countries, there is usually the expectation of exclusive preferential benefits, as well as expectations of development assistance and other non-trade rewards. They are also viewed as an instrument to get ‘brownie points’ and gain an advantage over other WTO Members.
Bilateral trade agreements are also useful for negotiators to learn how to negotiate thus contributing to reinforcing a country's trade institutions. Many regional trade agreements have been the bedrock for peace and greater political stability. Finally, they are often used as instruments for domestic reform in areas where the multilateral system offers a weaker leverage.
Why bilateral trade agreements cannot replace multilateral rules
But in my view bilateral agreements cannot replace the multilateral trade rules. Putting aside what we were told by trade theory textbooks: for instance that they create trade diversion and shift imports from most efficient global suppliers, I would like to emphasize four crucial limitations of bilateral agreements.
First, the conclusion of preferential trade agreements can create an incentive for even further discrimination, which eventually will hurt all trading partners. Countries outside an agreement will try to conclude agreements with one of those that are inside to avoid exclusion. This has been called the “domino” or “bandwagon effect” and is the reason for much of the regional trade agreement activity seen in Asia recently. In other words, the consequence is that the preferences obtained through forming a preferential agreement against competitors tend to be short-lived. The more agreements you have, the less meaningful the preferences would be.
Secondly, bilateral agreements cannot solve systemic issues such as rules of origin, antidumping, agricultural and fisheries subsidies. These issues simply cannot be handled at the bilateral level. Take for instance, negotiations to eliminate or reduce trade distorting agricultural subsidies, or fisheries subsidies. There is no such thing as a “bilateral” farmer or fisherman, or a “bilateral” chicken and a “multilateral” farmer or chicken or fish. Subsidies are given to farmers for all their poultry production. The same is true for rules on anti-dumping.
Thirdly, the proliferation of regional trade agreements can greatly complicate the trading environment, creating a web of incoherent rules. Take rules of origin: an increasing number of WTO Members are party to ten or more regional trade agreements, most of which for a given Member, contain agreement-specific rules of origin which are necessary to ensure that the preferences go to your partner and not to others. This complicates the production processes of business who may be obliged to tailor their products for different preferential markets in order to satisfy rules of origin. It also complicates life for customs officials who are obliged to assess the same product differently depending on its origin, thus compromising the transparency of the trading regime. Borrowing the expression used by Professor Bhagwati — this is where we begin to have a real “spaghetti bowl” of twisted rules of origin.
Finally, to many small and weak developing countries, entering into a bilateral agreement with a powerful big country means less leverage and a weaker negotiating position as compared that in the multilateral talks. It might not be the case for India, China, Brazil, the US and the EC, it will be true for Mauritius, Sri Lanka, Cambodia or Ghana.
The position of the WTO vis-
Source: World Trade Organisation
Title: Lamy: Regional agreements: the ‘pepper’ in the multilateral ‘curry’
The world faces the prospect of 400 preferential trade agreements by 2010 and the challenge of ensuring they contribute to the health of world trade, Director-General Pascal Lamy told the Confederation of Indian Industries in Bangalore on 17 January 2007. This is what he said:
Multilateral or bilateral trade agreements: which way to go?
Confederation of Indian Industries Partnership Summit 2007 Emergent India: New Roles and Responsibilities
I am very happy to join you all today in Bangalore under the theme “Emergent India: New roles and new responsibilities”. And doing this in Bangalore is no coincidence. India's third largest city, accounting for 35% of India's software exports and home to prestigious college and research institutions in areas such as IT or biotech, Bangalore is today an example of how globalisation and openness can bring huge opportunities and benefits to our citizens.
But with success also comes challenges: air pollution, traffic congestion or infrastructure needs are just a few. These are also the results of globalisation and if we want it to be acceptable to all of us, we must also address those challenges head-on, as the title of this conference suggests.
Trade is one of the manifestations of globalisation, with its positive effects but also its downsides. Today it is clear that the sole work of market forces will not be enough to spread the benefits of globalisation to all and that we have to develop instruments to harness globalisation, ensuring that both developed and developing countries benefit alike from it and that those in our societies who suffer from the transformations that globalisation bring about are adequately taken care of.
One of the tools at our hands to harness globalisation is the multilateral trading system, the WTO, hence the Round of negotiations launched in 2001 in Doha under the banner “Doha development Agenda”. It is intended to rebalance the world trading system in favour of developing countries, through greater market opening and new trade rules adapted to the new changing trading realities of the XXI century.
But as the WTO and it predecessor, the GATT, have evolved, a myriad of preferential trade agreements have been concluded by WTO members. By 2010 around 400 of such agreements could be active.
These preferential agreements contradict the non discrimination principle which is one of the cornerstones of the WTO. If this is so, why are so many countries ready to accept rules and disciplines at the bilateral level that they are not prepared to accept at the multilateral level?
Attractiveness of regional trade agreements
In my view, there are several reasons for the attractiveness of bilateral agreements as compared to multilateral negotiations.
First, they seem quicker to conclude. Fewer parties means that preferential trade agreements can be wrapped-up within a shorter period of time. This is usually very attractive to both politicians and business communities who are looking for quick results.
Secondly, they can enter into new territories. Because of similarities in interests and often more common values, bilateral trade agreements can go into new areas such as investment, competition, technical standards, labour standards or environment provisions, where there is no consensus among WTO Members.
Thirdly, many of the recent FTAs contain political or geopolitical considerations. For developing countries negotiating with more powerful developed countries, there is usually the expectation of exclusive preferential benefits, as well as expectations of development assistance and other non-trade rewards. They are also viewed as an instrument to get ‘brownie points’ and gain an advantage over other WTO Members.
Bilateral trade agreements are also useful for negotiators to learn how to negotiate thus contributing to reinforcing a country's trade institutions. Many regional trade agreements have been the bedrock for peace and greater political stability. Finally, they are often used as instruments for domestic reform in areas where the multilateral system offers a weaker leverage.
Why bilateral trade agreements cannot replace multilateral rules
But in my view bilateral agreements cannot replace the multilateral trade rules. Putting aside what we were told by trade theory textbooks: for instance that they create trade diversion and shift imports from most efficient global suppliers, I would like to emphasize four crucial limitations of bilateral agreements.
First, the conclusion of preferential trade agreements can create an incentive for even further discrimination, which eventually will hurt all trading partners. Countries outside an agreement will try to conclude agreements with one of those that are inside to avoid exclusion. This has been called the “domino” or “bandwagon effect” and is the reason for much of the regional trade agreement activity seen in Asia recently. In other words, the consequence is that the preferences obtained through forming a preferential agreement against competitors tend to be short-lived. The more agreements you have, the less meaningful the preferences would be.
Secondly, bilateral agreements cannot solve systemic issues such as rules of origin, antidumping, agricultural and fisheries subsidies. These issues simply cannot be handled at the bilateral level. Take for instance, negotiations to eliminate or reduce trade distorting agricultural subsidies, or fisheries subsidies. There is no such thing as a “bilateral” farmer or fisherman, or a “bilateral” chicken and a “multilateral” farmer or chicken or fish. Subsidies are given to farmers for all their poultry production. The same is true for rules on anti-dumping.
Thirdly, the proliferation of regional trade agreements can greatly complicate the trading environment, creating a web of incoherent rules. Take rules of origin: an increasing number of WTO Members are party to ten or more regional trade agreements, most of which for a given Member, contain agreement-specific rules of origin which are necessary to ensure that the preferences go to your partner and not to others. This complicates the production processes of business who may be obliged to tailor their products for different preferential markets in order to satisfy rules of origin. It also complicates life for customs officials who are obliged to assess the same product differently depending on its origin, thus compromising the transparency of the trading regime. Borrowing the expression used by Professor Bhagwati — this is where we begin to have a real “spaghetti bowl” of twisted rules of origin.
Finally, to many small and weak developing countries, entering into a bilateral agreement with a powerful big country means less leverage and a weaker negotiating position as compared that in the multilateral talks. It might not be the case for India, China, Brazil, the US and the EC, it will be true for Mauritius, Sri Lanka, Cambodia or Ghana.
The position of the WTO vis-
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