“Critical Mass” on US business agenda

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.

2 Comments

  • John Hannoush wrote:

    Thanks for that concise critique of the proposal to have agreements without all in. The FTC proposal is essentially the same as the one that Craig Emerson has been advocating?

  • Hi John,

    Yes… as I understand the Emerson proposal (I have never seen specifics) it is for negotiations on a CM, or “plurilateral” for services. I’m not sure how the proposal deals with the problem of consistency with the universal obligation in the GATS to comply with MFN in any scheduled services sector (except in the context of an Article V agreement).

    I’ll see if I can find out.

    Peter

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