- Created on Monday, 10 November 2014 19:17
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(Image Courtesy: WTO)
A few multilateral organizations have lately voiced their concerns over the unfavourable impact of mushrooming preferential trade agreements (PTAs) on global value chains (GVCs).
Such concerns, coupled with independent studies on dubious impact of free trade agreements (FTAs)/regional trade agreements (RTAs), should lead to a decisive study on cumulative effect of 330 such pacts on the global trade. The suggested study should be undertaken by World Trade Organization (WTO) and later transformed into an important agenda for rebirth of free and fair global trade.
Any analysts of trade distortions would wonder why WTO has been muted and ambivalent in raising relevant issues about the adverse effects of all restrictive types of trade that can be collectively referred to as PTAs, for the sake of simplicity.
Before posing issues that need to be answered in the PTAs versus multilateral trade discourse, hear the latest concerns raised by two multilateral institutions.
Addressing WTO Seminar on Cross-Cutting Issues in Regional Trade Agreements held on 25th September, WTO Director General Roberto Azevêdo observed: “there are many big issues which can only be tackled in an efficient manner in the multilateral context through the WTO. Trade Facilitation was negotiated successfully in the WTO because it makes no economic sense to cut red tape or simplify trade procedures at the border for one or two countries — if do it for one country, in practical terms you do it for everyone.”
He stated: “RTAs do not — and probably cannot — fully address the gains from trade that can be obtained through global value chains. Indeed, the strict, product specific rules of origin that often accompany RTAs may actually be detrimental to value chains and therefore exclusionary for some. The smaller the country, the smaller the company, the smaller the trader, the bigger the likelihood is that they will be excluded.”
This concern has reverberated in ‘Asian Development Outlook 2014 Update-Asia in Global Value Chains’ that was released by Asian Development Bank (ADB) on 25th September 2014.
As put by the report, “it is more likely that GVCs have prospered despite the noodle bowl of overlapping FTAs in Factory Asia, not because of them. FTAs are designed to promote trade in final goods, not GVC trade. Most Asian FTAs are shallow, focusing on tariff reduction rather than addressing other NTBs (non tariff barriers) and facilitating trade in a way that could better promote production networks. Even if they were to deepen over time, NTBs are difficult or costly to remove in a preferential manner. Therefore, a non discriminatory modality building on the WTO’s multilateral agreement on trade facilitation could more effectively reduce the kinds of logistical costs that affect GVC trade. That is, making preferences multilateral while instituting national action on regulatory reform to address incumbency issues may be the best way to support the growth of GVCs, benefitting current participants and new ones.”
The report notes: “the global nature of supply chains suggests that regional approaches to liberalization are bound to be of only limited value, as most of what Factory Asia produces continues to be consumed outside the region.”
It continues: “On the supply side, selective or geographically constrained liberalization can choke off the natural spread of such networks. Comparing the experience of Viet Nam and India confirms the point: While Viet Nam has emerged as a major player in production networks through a host of production arrangements, India’s aggressive pursuit of FTAs has left it a laggard because of insufficient domestic reform.”
The World Bank’s Global Preferential Trade Agreements Database (GPTAD) shows that there are 330 PTAs, some of which are obviously not registered with WTO.
As put by Mr. Azevêdo at the WTO seminar, “RTAs have grown much more rapidly since the WTO came into being compared to the days of the GATT. The WTO has been notified of 253 RTAs that are in force today. On average this has meant 24 notifications per year since the formation of the WTO, compared to 3 on average during the GATT years. This is a considerable increase. And these agreements are not only more numerous, they are becoming increasingly complex.”
He stated: “While over 80% of RTAs notified are bilateral agreements, we are seeing more and more large regional agreements. And we are seeing more agreements between countries in different regions, rather than between neighbours. This is very different from the pattern we saw during the GATT years.”
This observation should lead us to a few questions: What is the cost of negotiation, enforcement and compliance of these PTAs? To what extent, they complement multilateralism? And to what degree they harm global competition?
It is here pertinent to quote a forthright observation made by IHS Global Insight in a study completed in 2009 for European Commission.
The study titled ‘Impact on the Competitiveness of the European Automotive Industry of Potential Free Trade Agreements with India and the ASEAN’, says: “RTAs are discriminatory. They depart from the MFN (most favoured nation) principle, a cornerstone of the WTO agreements. Their effect on global trade liberalization and economic growth are not clear. Though RTAs are designed to the advantage of signatory countries, expected benefits may be undercut if they distort resource allocation.”
It adds: “Furthermore, because each RTA tends to develop its own mini-trade regime, the coexistence in a single country of differing trade rules to different RTA partners can hamper trade flows merely by the cost involved to traders in meeting multiple sets of trade rules. The overlapping RTAs in a country cause inconsistencies in the rules and procedures among the RTAs themselves, cause confusion and distortion of regional markets, and has implementation problems.”
One can here contend that 330 PTAs are throttling the emergence of truly free, fair and competitive development and trading of goods and services at the global level.
This contention would get rationalized if we consider certain studies.
A working paper issued by India’s Finance Ministry in August 2014, for instance, noted that “some FTAs/RTAs/CECAs of India have led to an inverted duty structure (IDS)-like situation with import duty on some finished goods being nil or lower than the duty on raw materials imported from other countries. Besides, the domestic sector involving livelihood concerns has also been affected by some of them.”
The paper captioned ‘India’s Merchandise Exports: Some Important Issues and Policy Suggestions’ notes: “India's push towards regional and bilateral agreements should result in meaningful and result oriented FTAs /RTAs/ CECAs. So a reality check of existing RTAs/FTAs/CECAs (comprehensive economic cooperation agreements) is needed.”
It says: “Under IDS, finished goods are taxed at lower rates than raw materials or intermediate products which discourage domestic value addition.”
RTAs predate GATT. They served as building blocks of GATT and WTO. They hold the potential of bringing down WTO or at least making it redundant if WTO member countries pay more attention to bilateralism and regionalism at the cost of multilateralism.
A working paper published by Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UN Economic and Social Commission for Asia and the Pacific, in April 2011 is much more forthright.
The paper captioned ‘Utility of Regional Trade Agreements: Experience from India’s Regionalism’ found that preferential imports were the driving force behind the substantial increase in total imports (by India) from RTA partners, whereas preferential exports, although increasing in value, did not explain the amount of increase in total exports to RTA partners. This indicated that much of the increase in post-RTA exports was in non-preferential items and that the RTAs per se were not of any great benefit to Indian exporters.”
The paper observed that “when more than one RTA is available, exporters choose the RTAs that have lower value-added norms in the RoO (Rules of origin).”
It thus suggests: “Given the skewed preference exchange and the low use of preferences found from the analysis in this study, what is now clear is the need to first pause and reflect on the decade-long experience with the various RTAs, their effects on trade and their usefulness to Indian traders before deciding on the direction of future negotiations.”
Each country should not only reflect on RTAs but should also jointly with others ponder over issues appositely posed by WTO in its World Trade Report 2011. The report, with ‘The WTO and preferential trade agreements: From co-existence to coherence’ posed a non-exhaustive list of possible questions that WTO members may see fit to address as they deal with the problem of creating greater coherence between PTAs and the WTO.
The questions:
If some policy areas are to be subject to multilateral review and rule-making while others are left to the regional level, what are the criteria for determining the boundaries?
Many non-tariff policy commitments in PTAs are largely non-discriminatory, at least in intent, and pose no threat to the multilateral trading system. However, are there other risks (e.g. regulatory lock-in) associated with these policy areas that are not readily apparent but deserve attention?
Are the various families of deep PTAs compatible? Or are these competing systems that make the task of creating coherence between PTAs and the multilateral trading system more difficult?
Given the large number of PTAs between developed and developing countries (North-South agreements), what role do differences in power between these partners play in shaping the design and content of PTAs? Is there a role for the WTO in considering the impact of such differences?
Will the co-existence of different dispute settlement systems lead to conflicts between PTAs and the WTO? To what extent can potential conflict be addressed either at the level of PTAs or at the WTO?
These are not questions that have easy answers, but the sooner WTO members reflect upon them, the greater the prospects for achieving coherence between PTAs and the WTO.
As three years have passed by since then, one would be curious to know as to why WTO Secretariat has not transformed these questions into terms of reference for a study on PTAs and whether they would ultimately sound the death knell for multilateralism.
Lastly, WTO must itself reflect whether the mushrooming of PTAs is not a reflection on the working of WTO Secretariat?
Published by taxindiainternational.com on 4th November 2014
