Politics, Business & Culture in the Americas

Reducing trade barriers makes sense at any level.

[i] Do regional trade agreements weaken the WTO and the global push for free trade? [b]No[/b][/i]

Bilateral and regional trade agreements like the Trans-Pacific Partnership (TPP) are not only consistent with the spirit and commitments of the World Trade Organization (WTO), they are the only things keeping the global push toward free trade alive. In fact, given the current paralysis in the WTO’s Doha Round of negotiations, agreements like the TPP may represent the future of free trade.

Foreign trade was not a prominent issue during much of President Barack Obama’s first year in office. That changed in November 2009, when he announced the U.S. would “engage” in an ambitious effort to establish a genuine free trade area in the Pacific region: the Trans-Pacific Partnership. The TPP grew out of a 2002 agreement among Chile, Singapore and New Zealand, became formalized in 2005 when Brunei joined and picked up speed in 2008 when Australia, Vietnam, Peru, and the U.S. all expressed interest in joining.

The TPP would encourage small-business participation in foreign trade, deal with such sensitive issues as government procurement policies and the products of state-owned enterprises, and deeply affect trade involving issues of copyright, patents, and intellectual property. The U.S.’ formal participation brought the TPP’s size to nine, and Washington has since taken the leading role in TPP negotiations—making it the central feature of U.S. trade policy. Inevitably, these developments led to questions about their meaning for the integrity and future of the WTO.

The recent prominence of the TPP makes those questions especially pertinent because the number of “regional” economic and trade arrangements, of which the TPP is one, has risen sharply during the past two decades. In contrast, the WTO is intended to be the single global body dedicated to setting the rules for international trade, generally by reducing trade barriers among nations.

Leading trade economists such as Anne O. Krueger and Jagdish Bhagwati have been outspoken in expressing concerns that this more focused activity on trade may portend a decline in America’s long-standing support for the WTO and its goals.

Article 24 of the WTO, drawn from its predecessor, the General Agreement on Trade and Tarriffs (GATT), allows exceptions for regional arrangements as long as their agreements apply to “substantially all the trade” among participants. Neither GATT nor the WTO has had any ability to enforce that provision. One result is that more than 500 such regional trade arrangements, called RTAs by the WTO, now exist; for many of those RTAs, their principal relationship to the WTO has been to simply notify the world body of their existence.

Although the WTO does not draw formal distinctions among the different kinds of RTAs, it is possible nevertheless to distinguish three distinct categories of regional trade bodies.

Type I includes the European Union and the North American Free Trade Agreement (NAFTA). Both have brought significant lowering of trade barriers among their members, and expanded their intra-regional trade. Specific sectors of some members’ economies have been negatively affected—for example, in NAFTA, U.S. exports to Mexico of less-expensive American corn and wheat caused problems for Mexican farmers. But since the key actors in both NAFTA and the EU continued to be supporters of the multilateral trade agenda, neither agreement has damaged the broad purposes of the WTO.

A different judgment applies to the much larger Type II category of regional trade agreements, often called “free trade areas.” They include Mercosur, the China-ASEAN FTA, and several “economic partnership” agreements. Mercosur in its early years did contribute to increases in intra-regional trade. But it has fallen on hard times and Venezuela’s recent admission, as an experienced analyst puts it, “effectively puts to rest the pretense of Mercosur as a serious economic integration arrangement.”1 Likewise, the large China-ASEAN FTA, with its dozens of exceptions, also makes a mockery of its “free trade area” label.

Critics cite three complaints. First, they argue all such FTAs should instead be called “preferential trade agreements” (PTAs), because by granting trade-opening measures only to their members, they detract from the goals of the WTO. Second, the sharp rise in regional arrangements has damaged the WTO’s centrality to the world trading system. If states can achieve their goals by virtue of regional FTAs, why bother with the WTO? Finally, because many RTAs allow for numerous exceptions—so members can exclude select goods and services from their trade agreements—they do not meet the “substantially all trade” standard of the WTO’s Article 24.

The same is not true for the TPP. What puts the TPP into a separate category, Type III, is both its plurilateral nature and its genuine free trade goals. Indeed, the TPP’s more than 20 chapters reach into every sector of a nation’s economy that is involved in foreign trade, including merchandise, agricultural goods, banking, insurance services, and trade-related activities on the Internet.

One indication of the significance of the TPP is that both Canada and Mexico just joined in October, meaning the bloc will encompass 658 million people and a combined GDP of $20.5 trillion. Another telling clue about the nature of the TPP is in its origins: the three small states that began negotiations—Chile, Singapore and New Zealand—have led the world with their open-trade policies. In sum, the TPP aims for a comprehensive trade-liberalizing agreement that will not only deepen traditional WTO reforms but add new obligations in “areas not yet subject to WTO disciplines.”

No one knows whether these aims will be fulfilled, but their purpose reflects deep and enduring U.S. goals fully consistent with the GATT’s original commitment to a world of open trade. The multilateral and global GATT/WTO approach had strong U.S. support for more than 50 years, and its successes helped the WTO grow to more than 150 members. In fact, it may be the WTO’s size that has contributed to its present stasis, partly explained by former USTR Robert Zoellick’s comment that the “won’t do” nations have prevailed over those who “can do.” In contrast, the TPP reflects that “can do” mission, and, rather than detracting from the WTO, is likely to sustain the genuinely open-trade goals shared by the U.S. and the WTO.

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Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.
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