Peter Gallagher

The US National For­eign Trade Coun­cil has released a short paper (PDF file) endors­ing a “crit­i­cal mass” (CM) approach to new WTO-associated trade agree­ments, with­out, how­ever, pro­duc­ing any new ideas on how to accom­plish this in the cur­rent mul­ti­lat­eral trade framework.

A top U.S. busi­ness group, frus­trated with years of stale­mate in world trade talks, on Wednes­day urged the Obama admin­is­tra­tion to pur­sue a new agenda with fewer coun­tries cen­tered on ser­vices trade, health care and cross-border dig­i­tal data flows. Extract from U.S. busi­nesses urge new agenda at World Trade Orga­ni­za­tion | Reuters

The grandly titled 21st Cen­tury Work Pro­gram for the Mul­ti­lat­eral Trad­ing Sys­tem com­prises, mostly, an awk­wardly phrased legal advice from the Geneva/Washington law firm Sid­ley Austin (one of the paper’s authors, Stu­art Harbin­son wrote well when he was Hong Kong’s Per­ma­nent Rep. at WTO). But expres­sion is not the main problem.

The paper fails to con­vince on CM because it offers no new ideas on how to man­age the dero­ga­tion from MFN that will be nec­es­sary if some major trad­ing coun­tries (China, India, Indone­sia for exam­ple) decline to join the pluri­lat­eral agree­ment. If the CM agree­ment is a new WTO agree­ment in the ordi­nary sense (i.e. the MFN oblig­a­tion applies to all Mem­bers of the CM) then any stay-aways will free-ride on the ben­e­fits. For exam­ple, they’ll enjoy improved access to mar­kets cov­ered by the CM oblig­a­tions with­out hav­ing to offer com­men­su­rate ben­e­fits in their own mar­kets. This will dis­suade oth­ers (the USA, the EU, Japan etc) from join­ing the CM agree­ment and the “crit­i­cal mass” will evap­o­rate (like other “coali­tions of the willing”).

My 2010 mono­graph with Andrew Stoler on “The Via­bil­ity of A Crit­i­cal Mass Frame­work for Agri­cul­tural Trade Nego­ti­a­tions” looked at this prob­lem in greater depth, eval­u­at­ing (and mod­el­ling the impact of) dif­fer­ent struc­tures for a CM agree­ment in food trade.

The idea of a non-MFN agree­ment, that offered only rec­i­p­ro­cal rights to par­tic­i­pants, in return for oblig­a­tions, seems much more attrac­tive and even con­sis­tent with the GATT’s his­tory of rec­i­p­ro­cal trade agree­ment. But when the WTO was cre­ated in 1994, it elim­i­nated options for sector-specific, non-MFN agree­ments. Often-cited exam­ples of CM Agree­ments in the WTO, such as the Infor­ma­tion Tech­nol­ogy Agree­ment (goods) and the Under­stand­ing on Com­mit­ments in Finan­cial Ser­vices, are MFN agree­ments that offer the ben­e­fits to all WTO mem­bers, whether or not they par­tic­i­pate in the agree­ment. In each of those cases, for dif­fer­ent rea­sons, a “crit­i­cal mass” of all Mem­bers did, in fact, agree to join the agree­ments. There are no sig­nif­i­cant “free-riders” in either case.

Two non-MFN “pluri­lat­eral” agree­ments remain attached to the WTO as his­tor­i­cal anom­alies. The Gov­ern­ment Pro­cure­ment Agree­ment and the Agree­ment on Trade in Civil Air­craft are for­mer Tokyo Round non-MFN “Codes” that have lit­tle impact on non-Members and were appended to WTO in 1994 but left out­side the famous “Sin­gle Under­tak­ing”. But there is no rea­son to think that such agree­ments could be nego­ti­ated today, because the Agree­ment Estab­lish­ing the WTO requires a con­sen­sus deci­sion of (all) Mem­bers approv­ing adop­tion. Highly improbable.

The Sid­ley Austin paper, in the face of this prob­lem, is incon­clu­sive. It come down, rather weakly, on the side of using Arti­cle XXIV of GATT (the “Regional Trade Agree­ments” excep­tion to MFN) and Arti­cle V of GATS (the anal­o­gous pro­vi­sion for “free trade” in ser­vices). This idea rather stretches credulity (not to men­tion the mean­ing of “region”) because the use of either of these pro­vi­sions is con­di­tional on the appli­ca­tion to “sub­stan­tially all trade” (Arti­cle XXIV) or “sub­stan­tial sec­toral cov­er­age” (Arti­cle V); which seems to exclude their poten­tial for sector-specific free-trade that a “crit­i­cal mass” of coun­tries might ageee.

So what are the options? One would be to ignore the WTO and its incon­ve­nient MFN pro­vi­sions, as the nego­tia­tors of the ACTA treaty did. But in the core areas of trade in goods and ser­vices, that would be a reck­less act. Sooner, rather than later, it would pro­voke a fun­da­men­tal rift in the WTO dis­putes sys­tem and no-one wants (or could afford?) that. A less bru­tal approach would be to accept the threat of “free rid­ing” by non-participants. Although this strat­egy makes pretty good sense from an eco­nomic point of view (in large economies, it may mean fore­go­ing some terms-of-trade lever­age), the poltiical-economy bar­ri­ers are for­mi­da­ble; just as they are in the case of the puta­tive “stay-aways” (China, India etc). It’s dif­fi­cult to imag­ine any Pres­i­dent (or Prime Min­is­ter) get­ting that idea past a Par­lia­ment or Congress.

I don’t have a ready solu­tion to this prob­lem. Cer­tainly not one that I want to pre­tend (like NFTC) is an agenda for mul­ti­lat­eral trade nego­ti­a­tions. I sus­pect that it’s a conun­drum that can­not be directly solved but can only erode with time as the eco­nomic and polit­i­cal matu­rity of the emerg­ing economies — not to men­tion their dom­i­nant share of world trade — leads them to pur­sue closer eco­nomic inte­gra­tion with the rest of the world. At present, the idea of more open com­pe­ti­tion in, say, agri­cul­ture or ser­vices mar­kets (and freer access to infor­ma­tion) threat­ens polit­i­cal estab­lish­ments and the crony-capitalists (and SOEs) that profit from mar­ket con­trols. But demo­graphic change, grow­ing wealth and unequal shares in that wealth could intro­duce forces for lib­er­al­i­sa­tion that in the long-run prove irre­sistible. At least, I hope so.