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Focused trade agreements can sustain the WTO in time of economic nationalism

Summary:
Despite the slowdown of growth in trade worldwide, the United States has been holding unpublicized discussions with the European Union, Japan, China, Canada, and other countries on specialized trade agreements on single issues like ecommerce. These negotiations are conducted in the World Trade Organization (WTO), which has hosted single-subject accords among a subset of members, known as plurilateral agreements, since the Tokyo Round of Multilateral Trade Negotiations (1974–79).[1] Plurilateral negotiations are an excellent way to sustain the world trading system at a time of rising economic nationalism. Four are underway not only on ecommerce but also on environmental goods, investment facilitation, and trade in services. The new WTO director-general, Ngozi Okonjo-Iweala, has called for

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Despite the slowdown of growth in trade worldwide, the United States has been holding unpublicized discussions with the European Union, Japan, China, Canada, and other countries on specialized trade agreements on single issues like ecommerce. These negotiations are conducted in the World Trade Organization (WTO), which has hosted single-subject accords among a subset of members, known as plurilateral agreements, since the Tokyo Round of Multilateral Trade Negotiations (1974–79).[1]

Plurilateral negotiations are an excellent way to sustain the world trading system at a time of rising economic nationalism. Four are underway not only on ecommerce but also on environmental goods, investment facilitation, and trade in services. The new WTO director-general, Ngozi Okonjo-Iweala, has called for their successful conclusion before the 12th Ministerial Conference, to be held in November 2021.

India and South Africa are using spurious legal arguments against current plurilateral negotiations

But there is a snag. India and South Africa filed a communication (WT/GC/W/819) with the WTO in February 2021, objecting that these four plurilateral agreements, if reached, would be “legally inconsistent” with WTO rules and principles. Behind this legal objection, India and South Africa do not want to make the concessions necessary to join the new accords and instead are trying to hold them hostage for concessions on subjects dear to their own commercial interests, such as waivers on intellectual property rights.

The legal arguments buttressing the Indian–South African objections are flawed. Their objections are more than parochial. They imperil the future of the WTO as a negotiating forum for all plurilateral talks. These talks need to be sustained in order to revive the much-maligned WTO as an institution, to the benefit of all WTO members—but especially those without strong commercial links to the big economic powers. In addition, these negotiations can provide vital platforms for cooperation on other issues on the frontier of technology changes in the world trading system.

India and South Africa (ISA) contend that the only permitted plurilateral agreements are those authorized by Annex 4 of the Marrakesh Agreement. Only four were authorized when the Marrakesh Agreement was signed in April 1994, and only two of those are still in existence (government procurement and civil aviation). Apart from Annex 4 plurilaterals, in the ISA view, every trade agreement in the WTO must be a multilateral accord—in other words, agreed by all members.

Underpinning this contention, ISA cite Article X.9 of the Marrakesh Agreement. They insist that Article X.9 requires all new plurilateral agreements to be reached “exclusively by consensus” of WTO members. To permit plurilateral agreements outside of Annex 4 would, in the ISA view, require amending the Marrakesh Agreement, a process that requires a majority vote of two-thirds of the members (Article X.1), and a process that, so far, has not been used.

The ISA argument suffers from three flaws. First, “exclusively by consensus” in Article X.9 applies only to agreements added to Annex 4. Other members are not proposing that their plurilateral agreements, called Joint Statement Initiatives (JSIs), be added to Annex 4. Second, the multilateral character of the WTO does not imply uniform rights and obligations among WTO members. Indeed, at its inception, the General Agreement on Tariffs and Trade 1947 (GATT) contained special provisions for pre-GATT preferential arrangements between members. As the GATT evolved and was later replaced by the WTO, special and differential terms were added to accommodate developing countries. Third, Article IX.2 of the Marrakesh Agreement states in part:

The Ministerial Conference and the General Council shall have the exclusive authority to adopt interpretations of this Agreement and of the Multilateral Trade Agreement…. The decision to adopt an interpretation shall be taken by a three-fourths majority of the Members….

Unless and until India and South Africa can persuade three-fourths of WTO members to accept their narrow binary interpretation of Article X.9, other WTO members are free to join plurilateral agreements.

How bilateral and regional trade agreements became the norm

The rise of bilateral and regional trade agreements, by which two or more countries promote free trade and investment between themselves, partly stems from dissatisfaction with the WTO’s broken negotiating arm since the Uruguay Round was concluded in 1994. WTO negotiations have adopted the “single undertaking” approach: “virtually every item of the negotiation is part of a whole and indivisible package and cannot be agreed separately.” This approach has advantages that led to successful conclusion of the Uruguay Round: It prohibits free riding, and member states can offset concessions given on one issue by concessions received in another area.

When the last round of multilateral trade negotiations was launched in Doha in 2001, with the express aim of helping developing countries, the concept of a single undertaking was carried over from the previous negotiations known as the Uruguay Round. However, the Doha Round failed because of a refusal on all sides to make mutually agreed concessions. Developing countries did not want to lower their applied tariffs or eliminate the “water” between their bound (permitted) and applied (actual) tariffs. For their part, advanced countries did not want to zero out their applied tariffs or roll back intellectual property disciplines agreed in the Uruguay Round.

Today, the “single undertaking” approach of multilateral trade negotiations is no longer a feasible modality for WTO negotiations. WTO members are far apart on items that should be covered in the agenda, meaning that the multilateral big package that characterized the Uruguay Round is out of sight. Rising economic nationalism across the globe, heightened by the COVID-19 pandemic, further erodes the appetite for agreements that would encompass all 164 WTO members.

Plurilateral agreements provide needed flexibility for the WTO

Plurilateral agreements among subsets of members introduce essential flexibility for the WTO to continue its vital role as a negotiating forum. Each agreement reached under a plurilateral framework should be open to any WTO member that decides to join, both to accept the obligations and enjoy the rights. Over time, perhaps decades, each plurilateral agreement should evolve into a multilateral accord.

Given the current high level of geopolitical tensions, a bilateral US-China trade or investment agreement does not seem realistic. Within the next decade, China might join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Conceivably, China’s interest in the CPTPP could push President Joseph R. Biden Jr. to reconsider US membership, indirectly joining the United States and China in an agreement, but again that possibility seems remote.

Joint membership in WTO plurilateral agreements devoted to single subjects, however, provides a viable platform for the United States, the European Union, and China, to deepen their trade and investment ties without sparking political headlines. Moreover, through plurilateral agreements, all three economic giants can strengthen ties with WTO members with which they do not have bilateral or regional agreements. The United States, the European Union, and China should jointly lead negotiations in which they are participants, such as talks on ecommerce and environmental goods, and aim for early conclusion and ratification.

In addition to ongoing plurilateral talks, other topics seem ripe for the United States, the European Union, and China to take the lead. Climate change tops the agenda. In September 2020, President Xi Jinping announced that China will aim for carbon neutrality by 2060. With his election, President Biden rejoined the Paris Agreement and promised a green agenda. The European Union will soon announce its proposals for a carbon border adjustment mechanism. These commitments pave the way for plurilateral talks on carbon emissions related to international commerce. These talks might establish rules that avoid the proliferation of contradictory inspection and tax regimes.

Apart from climate change commitments, China accepted novel obligations in other areas in its Comprehensive Agreement on Investment (CAI) with the European Union. Some of the new obligations, such as commitments on state-owned enterprises, technology transfers, and transparency on subsidies covered by the CAI might also form the foundation for plurilateral WTO agreements. Productive work awaits the WTO under its new director-general.

Note

1. The Tokyo Round was conducted under the General Agreement on Tariffs and Trade (GATT), the predecessor of the WTO.

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