Global risk from trade wars: time to return to WTO.
Singapore recently played host to the 16th round of the Trans-Pacific Partnership (TPP) membership talks. Soon after, Japan announced plans to join the TPP. The 17th round of talks in May was held in Peru and optimistic negotiators say that member countries are on track to reach an accord by the end of the year.
The recent proliferation of regional free trade agreements (FTAs) spells good news for the parties involved. But it is important that they do not become substitutes for a global solution in world trade. There remains a need for global rules to provide stability in world trade, given that the World Trade Organization's (WTO) long-running Doha trade negotiations are deadlocked amid increasing global protectionism. A global problem needs a global solution, and the Doha Round needs to get back on track with ministerial conferences.
2. The Roots of Failure
Singapore is keen for a successful conclusion to plurilateral trading agreements such as the TPP because the island has lived by trade since its early history. Our global trade accounts for $1 trillion annually, or three times the gross domestic product. Singapore trades with developed countries such as the United States and Japan and advanced developing countries such as China, under international rules set by the WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT), which ensure open markets and fair and equitable terms. In retrospect, the first WTO ministerial conference in Singapore in 1996 marked the high water mark for multilateral trade negotiations.
The success of GATT was highlighted by the broad-ranging consensus, exclusion of opt-out clauses (known as the single undertaking) and effective dispute settlement mechanism in the 1994 Uruguay Round agreements. However, the breadth of coverage, the inclusion of contentious 'behind the border' issues in later negotiations, changes in the distribution of power among major trading states and the participation of many more states as the WTO sought universal membership ensured that future WTO negotiations would be more difficult to conclude successfully. The norm in WTO is for consensus decisions and trade negotiations live by the dictum that "nothing is agreed until everything is agreed." This meant that the negotiations were held to ransom by delegations which were unwilling to compromise and which had few stakes in the successful outcome of negotiations or which took a 'take it or leave it' approach. As each round took longer to negotiate, often a decade or more, policy makers were unable to see the conclusion of negotiations during their tenure in office. The political will to trade concessions declined and posturing by marginal players in global trade increased the difficulty of reaching accords on contentious issues.
These problems were papered over by the launch of the Doha Development Round in December 2001 amidst international solidarity in the aftermath of the Al Qaeda attacks on the United States in September 2001. But the roots of failure were already present: as the Doha Round was designated a 'Development' round, developing countries felt that the objective was to level the playing field through unilateral concessions by the industrialized world and the newly industrializing states. They did not appreciate that in the WTO context, the trading of reciprocal concessions ensured that a fundamentally mercantilist approach was taken to trade negotiations by the negotiating parties. More importantly, the inability of the leading powers in the closed door negotiations--the United States, European Union, China, India and Brazil--to reach agreement doomed the Doha Round. After eleven years, it is clear that the talks have deadlocked. Today, the WTO mood is one of drift and despair.
Nevertheless, in an interconnected world, there is a greater need for global rules as they provide predictability and stability in international trade. The breakdown of the Doha Round negotiations highlights the dilemmas of global governance as rising powers emerge to challenge the pre-eminence of the dominant powers of the twentieth century. In earlier negotiations, the United States and the European Union attempted to reach grand bargains. Today, there are more players in the mix and the established powers are perceived as attempting to use the global rules to buttress their dominant positions instead of accommodating rising powers.
Since the global financial crisis in 2008, protectionism has increased and global trade negotiations have stalled. The East Asian economies have retreated to accepting second-best choices in trade deals--the bilateral and plurilateral preferential trading arrangements usually known as FTAs. This is unlike in the past, when they were the foremost advocates of global trade negotiations, until the WTO ministerial conference in Seattle collapsed in 1999.
The irony is that, as global trade increased, countries which benefited from existing conditions took positions that suggested they had no stake in the outcome of the WTO negotiations. The political will to trade concessions declined and posturing by marginal players in global trade increased the difficulty of reaching accords on contentious issues.
3. Rival Trade Regimes
In an interconnected world, there is a greater need for global rules as they provide predictability and stability in international trade. The drift in global negotiations has led to a frenzied pace of bilateral and regional talks involving the major trading states, regional groupings and even cross-regional arrangements in the past decade.
Major cross-regional agreements being negotiated right now include the US-EU FTA and the TPP. Unlike bilateral FTAs, which often yield relatively small trade benefits, the TPP could bring significant benefits. But progress is slow in key areas such as electronic commerce, intellectual property rights, state-owned enterprises and textile market access.
ASEAN, along with Australia, China, India, Japan, New Zealand and South Korea, will begin negotiations on the Regional Comprehensive Economic Partnership (RCEP) in May. One advantage of such a broad grouping is that the benefits are likely to be greater than those of bilateral FTAs.
One problem is that the new regimes being negotiated reflect current big power preoccupations. The reality is that the TPP reflects current American preoccupations--ensuring export opportunities for the US, protecting its domestic industries and focusing on issues which may be beyond the interests of participating states such as Vietnam.
While the US underwrote global prosperity after World War II, its approach today is mercantilist--its trade policies promote its exports and discriminate against imports. The US has focused on ensuring "competitive neutrality" for state-owned enterprises of its negotiating partners, so that US businesses can offer goods and services in foreign markets without being disadvantaged by subsidized foreign competitors. Yet excluded from these trade talks are US federal enterprises still subsidizing its agricultural exports.
Strict US rules of origin for textile and apparel manufacturers in East Asia undermine efficient regional supply chains as they prevent manufacturers from sourcing components from other countries in the region. The US requires that clothing be wholly or substantially produced in the exporting country, whereas liberal rules of origin would allow East Asian economies exporting clothing to the US to include components from different countries in the region.
Instead of Vietnam or Malaysia creating a yarn manufacturing industry, US negotiating strategies privilege American yarn exports to the region. Relaxing these rules of origin would improve the integrated supply chains in industries such as clothing and apparel manufacturing. Some bilateral and plurilateral trading agreements suffer from the noodle or spaghetti bowl phenomenon, where there are overlapping rules and difficulties in exercising the benefits from successful negotiations. SMEs do not have the capacity to monitor the different rules of origin in each FTA, and cannot take advantage of the negotiated benefits.
Singapore and other countries that straddle both the RCEP and TPP could play a positive role in working towards greater conformity between the two while negotiations are still taking place. This would improve the prospects of harmonization later. But the current negotiating structures offered by bilateral and plurilateral trading agreements do not deal with the fundamental change in global trade--the emergence of global supply chains and the need to enable governance of such logistics networks.
In the fashion and apparel sector, for every dollar earned in manufacturing, four dollars are made in distribution, logistics and retail sales. There is also a shift towards distributed manufacturing, with parts and components being manufactured in different locations. While final assembly of an iPad may be in China, the components come from around East Asia and the value-added attributed to China may be as little as 10 per cent.
4. Time for a Different Approach
Since the problem has global dimensions, global solutions are necessary. It is time to return to the WTO and global trade negotiations. A different approach should be adopted. The focus should be on reaching agreements at WTO ministerial conferences held every 18 to 24 months, which would conclude agreements on issues such as government procurement as well as new issues such as facilitating global supply chains.
Instead of grand bargains unlikely to be concluded with universal membership, the focus should be on a built-in agenda to which new items could be added as agreements are reached on current areas of negotiation. Where issues may not be of interest to the entire membership, interested parties could agree where there is a critical mass.
Such an approach has led to some of the WTO's most noteworthy agreements. The Information Technology Agreement concluded in 1996 brought more significant tariff savings for East Asian economies than the raft of bilateral and regional FTAs since then while the sectoral agreements on telecommunications and financial services led to the global liberalization of these sectors in the 1990s.
Current quantitative easing policies and currency management strategies are harbingers of beggar thy neighbor policies. As a global slowdown occurs, populist pressures for protectionist policies need to be combated by a willingness to address the issues facing the multilateral trading system. While we pursue the second-best option of FTAs, it is critical that the attention of policymakers be focused once again on global risks and global solutions.
ISBDesker@ntu. edu. sg
S. Rajaratnam School of International Studies, Nanyang Technological University
[c] Barry Desker. An earlier version of this article was published as a RSIS Commentary.
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|Title Annotation:||World Trade Organization|
|Publication:||Geopolitics, History, and International Relations|
|Date:||Jun 1, 2013|
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