1) INTRODUCTION
As the GATT´47 turns 60, current affairs in international trade bring new challenging questions regarding the multilateral trading system. Two major issues arise. The first one is the proliferation of free trade areas (FTAs)[1], which might threaten the principle of non discrimination.The second issue, which is not unrelated to the first, is the inability of WTO members to conclude the Doha Round.
In this new international scenario of regionalism and proliferation of FTAs between countries with no geographical or cultural ties, GATT provisions on such agreements have gained importance. This is so, due to their close legal relationship to the general principle of most favoured nation (MFN) in Article I GATT.
The issue of FTAs is a major one today. Preferential agreements are seen as means of survival for developing countries, as well as a commercial oportunity for the industrialized ones. As stated before, these agreements challenge the principle of most favored nation and non discrimination, if applied in a descentralized way.
United States and South Korea have recently concluded a Free Trade Agreement[2]; this has brought new strength to the debates on the dangers of a “spaghetti bowl”, as elaborated by Prof. Jagdish Bhagwati[3]. This is not just an academic debate. It has a series of practical implications, not only in the political arena, but also in the area of international commerce.
This multiplication of these FTAs and other preferential agreements that discriminate on goods, services and investments might not alone pose a serious threat, but might become dangerous when combined with the current weakening of the multilateral trade structure of the World Trade Organization (WTO)[4].
The failures at the Doha Round have contributed to this. The fact that WTO members have been unable to agree on major issues (such as agriculture) might eventually lead to other means of negotiation or pressure. If the multilateral system does not find an answer to these problems, States might find it easier to group up and discriminate through FTAs in order to gain negotiating power and push through their agendas.
The core of the debate on FTAs and the “spaghetti bowl” theory is this: whether FTAs will lead to strengthening or weakening the multilateral trade system.
2) WTO REGULATION ON FTAs
GATT Article XXIV[5] defines the conditions for the creation of FTAs or customs unions, thus entertaining an exception to the MFN general principle; this provision must be understood in contrast of the principle of non discrimination[6]. The importance of art. XXIV resides in the fact that the relative ease or difficulty of forming a regional trade agreement between subsets of WTO Members defines how broadly MFN will be applied in practice.[7]
Article XXIV first defines which types of preferential entities can be created: free trade areas, customs unions, and any interim agreements leading to either[8]. Secondly, it sets forth the requirements that allow the creation of FTAs and customs unions, as a sort of self-standing regime. Its character is inherently exceptional to the general MFN rule. It may be invoked by a regional member as a defence to a violation of MFN. [9] The aim of this exception is to maximise the trade-liberalising effects of an FTA while minimising its external trade-restricting effects. It can be used to justify a departure from other provisions of GATT 1994, including MFN treatment.[10]
There are internal and external requirements for a regional formation; both aspects are captured in Article XXIV:4’s ‘purposive’ expression[11]. The article recognizes that it is the purpose of GATT to increase trade by voluntary agreements between regional members. The external requirement is that ‘the purpose of a customs union or a free trade area should be to facilitate trade between the constituent territories’[12]; the internal requirement is that they ‘not to raise barriers to the trade of other Contracting Parties with such territories’ [13]
Regardless of the internal issues that may arise, the main problem with the external requirement is that it is quite hard to verify. The purpose of facilitating trade seems very broad, and often hard to prove. In fact, although 149 Regional Trade Agreements have been notified to the WTO since it was established in 1995,4 none has completed the examination process to determine its WTO consistency. [14]
This has led to the proliferation of these types of preferential agreements, situation which is bringing concern to the international community and the defenders of the multilateral trading system. The global trading system is now comprised of an inter-locking, evergrowing,network of regional and multilateral trade agreements[15].
It could be easily assumed in this context that trade agreements, whether multilateral or regional, are beneficial for trade. However, the loophole in this assumption is that multilateral and regional agreements pursue liberalization of trade in different and often conflicting ways. A core objective of the multilateral trading system is ‘the elimination of discriminatory treatment in international trade relations’.1 In contrast, FTAs pursue trade liberalisation through discrimination, by creating a network of special preferences within the FTA that are not available to other WTO Members. [16]
3) THE SPAGHETTI BOWL AND DEVELOPING COUNTRIES
The “spaghetti bowl”[17], as explained by Prof. Jagdish Bhagwati, is represented by a random set of crossed preferential rules without any common multilateral effective discipline, and presents a serious threat to multilateral trade[18]. As it has happened in the past, a race towards trade related discrimination might open the door to fragmentation and conflict. In such a scenario, international trade woud cease to function as a mechanism of cooperation.
This is clearly not a positive scenario for smaller countries with little influence in international trade. However, this would also become a problem for commercial superpowers and multinational corporations that have expanded globally. States´ public policies and companies´ investments have also been based on the principles of open markets, levelled playfield and fair and equitable treatment to investments. Hence, everyone would suffer from the impact of this preferential discrimination, paradoxically established in benefit of free trade.
In economic terms, it is still not clear whether maintaining an ever-growing network of FTAs alongside multilateral rules produces an overall increase or decrease in economic welfare. In legal terms, the coexistence of the WTO and FTAs among WTO Members creates a complex system of competing international rights and obligations.
In practical terms, it should be acknowledged that there is a steady tendency towards the increase of the number of these types of preferential agreements, and nothing shows that this tendency will be reverted. In such case, the ones that might benefit in the short term are the States that have the bigger negotiating power, in detriment of smaller States; that is, developing countries and least developed countries (LDCs).
There are three advisable roads for developing countries and LDCs[19]. The first is to increase their relative competitivity in goods and services originated in their countries. This would have to be a constant expercise of updating and enhancing their productive processes, and find eventual movements in competitive advantages, that may result from the new preferential agreements. It should be born in mind that these movements in competitive advantages will sometimes take place very slowly, as the respective liberalization programmes reflect in the market.
The second possibility for developing countries and LDCs is to articulate a offensive strategy of trade negotiations, dealing not only defensively, but also taking an agressive stand in relation to their goods and services. This presuposes that there will be a significant amount of companies that will carry out offensive strategies in third country markets.
The third course of action would be to articulate a common strategy of trade negotiations with their regional partners, establish common external tariffs; this will lead to a common foreign policy on trade, and a better power of negotiation. Success in this course of action might not be easy to accomplish. A highly creative approach might be neccesary as past experience has shown that block or offensive negotiation with United States and the European Union are not an easy task.
But foremost, it is essential that these strategies take place with respect and in accordance with WTO rules, and tends to the strengthening of the system, and not its weakening. The WTO is an advantageous forum for commercial negotiations, leveling the playfield and dispute settlement.
4) REASONS FOR CONCERN: THE US – SOUTH KOREA FTA
There has been an important development on the issue of FTAs. On april 2007, United States and South Korea concluded a Free Trade Agreement[20]. The negotiations had been launched on february 2006, and after eight formal rounds of negotiations, an agreement was reached. The speed with wich this agreement was concluded was not casual, as the US Trade Promotion Act expired on July 1st 2007[21].
As a result of this Free Trade Agreement, close to 95% of the tariffs between US and South Korea on industrial and consumer goods will be eliminated in a period of three years, and liberalization will steadily increase until 100% in a final period of 10 years. Tariffs on small automobiles will be immediately removed, and tariffs on big cars and trucks will go through a phase-out period, and will be gradually eliminated over a period of ten years. The US will immediately eliminate 61% of the tariffs on textiles (save certain sensitive products). Tariffs on meat will be gradually eliminated over a period of 15 years, and Korea will maintain certain restrictions on chicken and turkey; rice is excluded from the agreement. The FTA establishes commitments on services, investment, intelectual property and sets a separate dispute settlement mechanism.
Commerce between both countries amounts to 78 billion US dollars. South Korea is the 7th commercial partner of the US, wich in turn is the 3rd market for Korean exports. What has been stated so far is of paramount importance, although it should be borne in mind that the FTA still has to be approved by the US Congress and the Korean Nationa Assembly. Observers believe that in both cases there will be serious oppositions. Approval of the FTA is not assured.
This is not just another FTA. It´s relevance can be summarized in these two considerations[22]. The first has to do with the size and relevance of both countries to international trade of goods and services. It involves the 1st and 7th importing countries in the WTO[23] . In 2006, both countries had imports for the net value of 2.229 billion US dollars, which represented a 23.9% of all global imports. Together with NAFTA and the US-Australia FTA, this is one of the main preferential agreements of the US. It is still an agreement of a different nature that NAFTA, as the latter involves geographical neighbourhood, which introduces political and security elements as well.
The second consideration has to do with a possible chain reaction that might be triggered by an agreement of such magnitude. This might lea the European Union to fast track its own FTA with Korea – among other emerging economies - in the framework of its new global strategy. The same might occur with China, which is negotiating severtal FTAs, including one with Australia, and Japan. It could eventually lead to an FTA between China and US.
These considerations may explain why the FTA between US and South Korea has brought new grounds for the debate on the relationship between FTAs and the multilateral trade system established by the WTO, as well as new concerns for developing countries and even to other major commercial superpowers in order not to be left behind.
5) THE DEBATE: FTAs V. MULTILATERAL TRADE
The debate on FTAs and global trade was reintroduced on an article by Martin Wolf[24], “A Korean-American strand enters trade´s spaghetti bowl”. Another suggestive event on this debate was the Conference by Pascal Lamy, General Director of the WTO “Regional Agreements: the “pepper” in the multilateral “curry”[25]. Wolf´s article is a recent analysis on preferential agreements and their influence on the perspectives to expand the liberalization of trade through the Doha Rounds.
In such trend, Wolf stresses that the FTAs – or as he calls them, preferential or discriminatory trade agreements – were created as an exception to the principles on which the GATT´47 was created; precisely, non discrimination. Wolf points out the potential economic costs that might arise from preferential trade agreements, following the line of Jacob Viner[26], in his view that distinguished between the effects of “deviation from trade” as opposed to “creation of trade”.
Wolf focuses his analysis om the potential systemic costs. He points out specially two: the booming of administrative complexities in world trade as a consequence of the spaghetti bowl sets of rules, specially in rules of origin; en de boom of uncertainty in commerce and business, due to the fact that each new agreement might might have the effect of dilluding certain prefferences previously acquired or that existed before the new agreement.
The shifts in competitive advantages might then become very volatile and non transparent. They migh even become arbitrary or very discretional, and might lead to subsidies to production or other measures to substitute the practical effects of the shifts in prefferences. These are the principal practical consequences of the “spaghetti bowl”[27].
This might also carry political effects. Wolf points out two: corporations from a given country will depend on the growing ability of such country to obtain preferential treatment from other countries and, on the other hand, the great commercial powers will compete with each other in order to obtain for their companies, access to foreign markets. This is already happening. International trade will be then strongy exposed to factors of relative power and even to security considerations. As Wolf suggests, this could lead to an international trade system of non cooperation, very distant from the original idea of the creators of GATT and WTO. There would be a scenario where power would overcome rules, and lead to a power-oriented instead of rule-oriented market. This scenario would be closer to international trade anarchy than to international trade order[28].
Moreover, Prof. Bhagwati, in his article “America’s bipartisan battle against free trade”[29], alerts on the risks FTAs and preferential agreements pose on the global multilateral trading system. He does so on occasion of the US Congressional debate on the possible extension of the Trade Promotion Act powers. He takes into account two major issues. The first issue is the possible labor an environment related clauses that might be added by the opposition. The second issue is the commercial threat of China´s economic growth and role in international trade. Bhagwati holds that the US Government has abandoned its defense to the multilateral global trading system, and has tilted towards discriminatory promotion on commerce, highly motivated by a protectionist drive.
This comment by Bhagwati gave place to a strong reply by Robert Zoellick, former US Commerce Representative. In a comment published in the Financial Times[30], Zoellick holds that the combination of global, regional and bilateral negotiations are and advantage, not a diversion. He considered Bhagwati´s article as a means of obstructing the construction of a coalition in the US Congress in favor of free trade. Zoellick is of the strong idea that promoting preferential trade agreements as a way of stimulating other countries, specially the EU, to grant concessions that could allow the WTO to move forward. This is not a minor issue, specially in light of the paralysis caused by the disagreements in the Doha Rounds.
6) MULTILATERALISM AND THE DOHA ROUNDS
It has been precisely the doubts surrounding the Doha Rounds what make the debate necessary (not just academic, but also political), about the effects that preferential or free trade agreements might have on the international trading system, and a possible weakening of the WTO.
Pascal Lamy believes that if the current situation on commercial negotiation does not change in the near future, governments will be forced to face the harsh reality of failure. He called governments to place their energy in concluding successfully the Doha Rounds.[31]
Professor Jean-Pierre Lehmann[32], a strong influence in favor of the WTO multilateral system and an ambitious Doha Round, pointed out in his article “World will be on track only when US champions multilateralism”[33] that it is the US ambiguety in relation to the global multilateral trading system that that is generating a sensible erosion of such system. He concludes that only when the US becomes again the champion and leader of global multilateralism and adheres to the original principles of GATT 47 and WTO, will the world feel that the right path has been retaken.
On a political level, various negotiating groups have expressed their will to conclude the Doha Rounds negotiations in 2007. This political will took place at the Ministerial meeting of the G4 (US, EU, India, Brazil), G6 (same countries plus Japan and Australia. This was probably an attempt to influence the US Congress to grant an extension of the TPA powers and maintain the “window of oportunity” open and avoid failure. Key to concluding the Doha Rounds will be a substantial agreement on subsidies on agriculture [34]
Leaders of the Group of Eight are hopeful that the stalled Doha round of global trade talks could be wrapped up by the end of the year, according to the United States delegation and a final communique[35]. However, even is a partial agreemet is reached, the main problem will still be how to translate political will into concrete agreements.
As previously stated, if the multilateral trading system cannot move forward and if the WTO members are unable to agree on new multilateral liberalisation, then regionalism might take over. The question is whether this regionalism that jeopardizes the non discrimination principle will push countries back into multilateralism, or will evetually lead to competing regionalism.
7) CONCLUSION
In a global trading system, where FTAs have become a central tool of trade policy, and where they are growing rapidly in number and complexity, the exception in Article XXIV:5 of GATT 1994 could play a crucial role in ensuring coherence between multilateral and regional trade policy.
However, so far this has not taken place. The lack of recommendations on FTAs by WTO Members, and their fast proliferation, feed the theory of the “spaghetti bowl”. This leads to regionalism in detriment of multilateralism, and brings back fears of discrimination and non cooperation in the trading system. It also generates a mild discrimination between countries inside or outside the agreements, forcing an uneven playfield, and eventually leading to lack of marker predictability.
Attempting to overcome the burdens of multilateral negotiation by facing them regionally cannot be a solution. It is clear that, if this threat of regionalism does not push the commercial powers into concluding the Doha Rounds, the WTO system will soon become illusory.
The FTA between US and South Korea is a clear example of two nations that prefer to advance bilaterally instead of sitting with all WTO members to negotiate. The fear of non conclusion of the Doha Rounds, plus the threat of China as a commercial superpower has taken the “champion of multilateral trade” to abandon its path in order to follow more rapidly its domestic agenda.
Developing countries and LDCs will probably suffer the consequences of deviating from the multilateral into a regional trading system. They might have to join forces or drastically improve their production precesses in order to overcome such a scenario. In the long run, however, this would end up affecting the industrialized countries as well.
The question remains, and is still the core of the debate, whether regionalism could eventually push superpowers to grant enough concessions and push through the Doha Round agenda. So far, the risks of FTA proliferation greatly overcome a possible stagnation of the multilateral system. I believe it is better to have higher tariffs with no discrimination, rather than lower tariffs in a system that discriminates.
The “spaghetti bowl” can never lead by itself to even elimination of tariffs. These will only be accomplished by multilateral negotiation. Proliferation of FTAs will only lead to regional competition and lack of cooperation.
As the GATT´47 turns 60, current affairs in international trade bring new challenging questions regarding the multilateral trading system. Two major issues arise. The first one is the proliferation of free trade areas (FTAs)[1], which might threaten the principle of non discrimination.The second issue, which is not unrelated to the first, is the inability of WTO members to conclude the Doha Round.
In this new international scenario of regionalism and proliferation of FTAs between countries with no geographical or cultural ties, GATT provisions on such agreements have gained importance. This is so, due to their close legal relationship to the general principle of most favoured nation (MFN) in Article I GATT.
The issue of FTAs is a major one today. Preferential agreements are seen as means of survival for developing countries, as well as a commercial oportunity for the industrialized ones. As stated before, these agreements challenge the principle of most favored nation and non discrimination, if applied in a descentralized way.
United States and South Korea have recently concluded a Free Trade Agreement[2]; this has brought new strength to the debates on the dangers of a “spaghetti bowl”, as elaborated by Prof. Jagdish Bhagwati[3]. This is not just an academic debate. It has a series of practical implications, not only in the political arena, but also in the area of international commerce.
This multiplication of these FTAs and other preferential agreements that discriminate on goods, services and investments might not alone pose a serious threat, but might become dangerous when combined with the current weakening of the multilateral trade structure of the World Trade Organization (WTO)[4].
The failures at the Doha Round have contributed to this. The fact that WTO members have been unable to agree on major issues (such as agriculture) might eventually lead to other means of negotiation or pressure. If the multilateral system does not find an answer to these problems, States might find it easier to group up and discriminate through FTAs in order to gain negotiating power and push through their agendas.
The core of the debate on FTAs and the “spaghetti bowl” theory is this: whether FTAs will lead to strengthening or weakening the multilateral trade system.
2) WTO REGULATION ON FTAs
GATT Article XXIV[5] defines the conditions for the creation of FTAs or customs unions, thus entertaining an exception to the MFN general principle; this provision must be understood in contrast of the principle of non discrimination[6]. The importance of art. XXIV resides in the fact that the relative ease or difficulty of forming a regional trade agreement between subsets of WTO Members defines how broadly MFN will be applied in practice.[7]
Article XXIV first defines which types of preferential entities can be created: free trade areas, customs unions, and any interim agreements leading to either[8]. Secondly, it sets forth the requirements that allow the creation of FTAs and customs unions, as a sort of self-standing regime. Its character is inherently exceptional to the general MFN rule. It may be invoked by a regional member as a defence to a violation of MFN. [9] The aim of this exception is to maximise the trade-liberalising effects of an FTA while minimising its external trade-restricting effects. It can be used to justify a departure from other provisions of GATT 1994, including MFN treatment.[10]
There are internal and external requirements for a regional formation; both aspects are captured in Article XXIV:4’s ‘purposive’ expression[11]. The article recognizes that it is the purpose of GATT to increase trade by voluntary agreements between regional members. The external requirement is that ‘the purpose of a customs union or a free trade area should be to facilitate trade between the constituent territories’[12]; the internal requirement is that they ‘not to raise barriers to the trade of other Contracting Parties with such territories’ [13]
Regardless of the internal issues that may arise, the main problem with the external requirement is that it is quite hard to verify. The purpose of facilitating trade seems very broad, and often hard to prove. In fact, although 149 Regional Trade Agreements have been notified to the WTO since it was established in 1995,4 none has completed the examination process to determine its WTO consistency. [14]
This has led to the proliferation of these types of preferential agreements, situation which is bringing concern to the international community and the defenders of the multilateral trading system. The global trading system is now comprised of an inter-locking, evergrowing,network of regional and multilateral trade agreements[15].
It could be easily assumed in this context that trade agreements, whether multilateral or regional, are beneficial for trade. However, the loophole in this assumption is that multilateral and regional agreements pursue liberalization of trade in different and often conflicting ways. A core objective of the multilateral trading system is ‘the elimination of discriminatory treatment in international trade relations’.1 In contrast, FTAs pursue trade liberalisation through discrimination, by creating a network of special preferences within the FTA that are not available to other WTO Members. [16]
3) THE SPAGHETTI BOWL AND DEVELOPING COUNTRIES
The “spaghetti bowl”[17], as explained by Prof. Jagdish Bhagwati, is represented by a random set of crossed preferential rules without any common multilateral effective discipline, and presents a serious threat to multilateral trade[18]. As it has happened in the past, a race towards trade related discrimination might open the door to fragmentation and conflict. In such a scenario, international trade woud cease to function as a mechanism of cooperation.
This is clearly not a positive scenario for smaller countries with little influence in international trade. However, this would also become a problem for commercial superpowers and multinational corporations that have expanded globally. States´ public policies and companies´ investments have also been based on the principles of open markets, levelled playfield and fair and equitable treatment to investments. Hence, everyone would suffer from the impact of this preferential discrimination, paradoxically established in benefit of free trade.
In economic terms, it is still not clear whether maintaining an ever-growing network of FTAs alongside multilateral rules produces an overall increase or decrease in economic welfare. In legal terms, the coexistence of the WTO and FTAs among WTO Members creates a complex system of competing international rights and obligations.
In practical terms, it should be acknowledged that there is a steady tendency towards the increase of the number of these types of preferential agreements, and nothing shows that this tendency will be reverted. In such case, the ones that might benefit in the short term are the States that have the bigger negotiating power, in detriment of smaller States; that is, developing countries and least developed countries (LDCs).
There are three advisable roads for developing countries and LDCs[19]. The first is to increase their relative competitivity in goods and services originated in their countries. This would have to be a constant expercise of updating and enhancing their productive processes, and find eventual movements in competitive advantages, that may result from the new preferential agreements. It should be born in mind that these movements in competitive advantages will sometimes take place very slowly, as the respective liberalization programmes reflect in the market.
The second possibility for developing countries and LDCs is to articulate a offensive strategy of trade negotiations, dealing not only defensively, but also taking an agressive stand in relation to their goods and services. This presuposes that there will be a significant amount of companies that will carry out offensive strategies in third country markets.
The third course of action would be to articulate a common strategy of trade negotiations with their regional partners, establish common external tariffs; this will lead to a common foreign policy on trade, and a better power of negotiation. Success in this course of action might not be easy to accomplish. A highly creative approach might be neccesary as past experience has shown that block or offensive negotiation with United States and the European Union are not an easy task.
But foremost, it is essential that these strategies take place with respect and in accordance with WTO rules, and tends to the strengthening of the system, and not its weakening. The WTO is an advantageous forum for commercial negotiations, leveling the playfield and dispute settlement.
4) REASONS FOR CONCERN: THE US – SOUTH KOREA FTA
There has been an important development on the issue of FTAs. On april 2007, United States and South Korea concluded a Free Trade Agreement[20]. The negotiations had been launched on february 2006, and after eight formal rounds of negotiations, an agreement was reached. The speed with wich this agreement was concluded was not casual, as the US Trade Promotion Act expired on July 1st 2007[21].
As a result of this Free Trade Agreement, close to 95% of the tariffs between US and South Korea on industrial and consumer goods will be eliminated in a period of three years, and liberalization will steadily increase until 100% in a final period of 10 years. Tariffs on small automobiles will be immediately removed, and tariffs on big cars and trucks will go through a phase-out period, and will be gradually eliminated over a period of ten years. The US will immediately eliminate 61% of the tariffs on textiles (save certain sensitive products). Tariffs on meat will be gradually eliminated over a period of 15 years, and Korea will maintain certain restrictions on chicken and turkey; rice is excluded from the agreement. The FTA establishes commitments on services, investment, intelectual property and sets a separate dispute settlement mechanism.
Commerce between both countries amounts to 78 billion US dollars. South Korea is the 7th commercial partner of the US, wich in turn is the 3rd market for Korean exports. What has been stated so far is of paramount importance, although it should be borne in mind that the FTA still has to be approved by the US Congress and the Korean Nationa Assembly. Observers believe that in both cases there will be serious oppositions. Approval of the FTA is not assured.
This is not just another FTA. It´s relevance can be summarized in these two considerations[22]. The first has to do with the size and relevance of both countries to international trade of goods and services. It involves the 1st and 7th importing countries in the WTO[23] . In 2006, both countries had imports for the net value of 2.229 billion US dollars, which represented a 23.9% of all global imports. Together with NAFTA and the US-Australia FTA, this is one of the main preferential agreements of the US. It is still an agreement of a different nature that NAFTA, as the latter involves geographical neighbourhood, which introduces political and security elements as well.
The second consideration has to do with a possible chain reaction that might be triggered by an agreement of such magnitude. This might lea the European Union to fast track its own FTA with Korea – among other emerging economies - in the framework of its new global strategy. The same might occur with China, which is negotiating severtal FTAs, including one with Australia, and Japan. It could eventually lead to an FTA between China and US.
These considerations may explain why the FTA between US and South Korea has brought new grounds for the debate on the relationship between FTAs and the multilateral trade system established by the WTO, as well as new concerns for developing countries and even to other major commercial superpowers in order not to be left behind.
5) THE DEBATE: FTAs V. MULTILATERAL TRADE
The debate on FTAs and global trade was reintroduced on an article by Martin Wolf[24], “A Korean-American strand enters trade´s spaghetti bowl”. Another suggestive event on this debate was the Conference by Pascal Lamy, General Director of the WTO “Regional Agreements: the “pepper” in the multilateral “curry”[25]. Wolf´s article is a recent analysis on preferential agreements and their influence on the perspectives to expand the liberalization of trade through the Doha Rounds.
In such trend, Wolf stresses that the FTAs – or as he calls them, preferential or discriminatory trade agreements – were created as an exception to the principles on which the GATT´47 was created; precisely, non discrimination. Wolf points out the potential economic costs that might arise from preferential trade agreements, following the line of Jacob Viner[26], in his view that distinguished between the effects of “deviation from trade” as opposed to “creation of trade”.
Wolf focuses his analysis om the potential systemic costs. He points out specially two: the booming of administrative complexities in world trade as a consequence of the spaghetti bowl sets of rules, specially in rules of origin; en de boom of uncertainty in commerce and business, due to the fact that each new agreement might might have the effect of dilluding certain prefferences previously acquired or that existed before the new agreement.
The shifts in competitive advantages might then become very volatile and non transparent. They migh even become arbitrary or very discretional, and might lead to subsidies to production or other measures to substitute the practical effects of the shifts in prefferences. These are the principal practical consequences of the “spaghetti bowl”[27].
This might also carry political effects. Wolf points out two: corporations from a given country will depend on the growing ability of such country to obtain preferential treatment from other countries and, on the other hand, the great commercial powers will compete with each other in order to obtain for their companies, access to foreign markets. This is already happening. International trade will be then strongy exposed to factors of relative power and even to security considerations. As Wolf suggests, this could lead to an international trade system of non cooperation, very distant from the original idea of the creators of GATT and WTO. There would be a scenario where power would overcome rules, and lead to a power-oriented instead of rule-oriented market. This scenario would be closer to international trade anarchy than to international trade order[28].
Moreover, Prof. Bhagwati, in his article “America’s bipartisan battle against free trade”[29], alerts on the risks FTAs and preferential agreements pose on the global multilateral trading system. He does so on occasion of the US Congressional debate on the possible extension of the Trade Promotion Act powers. He takes into account two major issues. The first issue is the possible labor an environment related clauses that might be added by the opposition. The second issue is the commercial threat of China´s economic growth and role in international trade. Bhagwati holds that the US Government has abandoned its defense to the multilateral global trading system, and has tilted towards discriminatory promotion on commerce, highly motivated by a protectionist drive.
This comment by Bhagwati gave place to a strong reply by Robert Zoellick, former US Commerce Representative. In a comment published in the Financial Times[30], Zoellick holds that the combination of global, regional and bilateral negotiations are and advantage, not a diversion. He considered Bhagwati´s article as a means of obstructing the construction of a coalition in the US Congress in favor of free trade. Zoellick is of the strong idea that promoting preferential trade agreements as a way of stimulating other countries, specially the EU, to grant concessions that could allow the WTO to move forward. This is not a minor issue, specially in light of the paralysis caused by the disagreements in the Doha Rounds.
6) MULTILATERALISM AND THE DOHA ROUNDS
It has been precisely the doubts surrounding the Doha Rounds what make the debate necessary (not just academic, but also political), about the effects that preferential or free trade agreements might have on the international trading system, and a possible weakening of the WTO.
Pascal Lamy believes that if the current situation on commercial negotiation does not change in the near future, governments will be forced to face the harsh reality of failure. He called governments to place their energy in concluding successfully the Doha Rounds.[31]
Professor Jean-Pierre Lehmann[32], a strong influence in favor of the WTO multilateral system and an ambitious Doha Round, pointed out in his article “World will be on track only when US champions multilateralism”[33] that it is the US ambiguety in relation to the global multilateral trading system that that is generating a sensible erosion of such system. He concludes that only when the US becomes again the champion and leader of global multilateralism and adheres to the original principles of GATT 47 and WTO, will the world feel that the right path has been retaken.
On a political level, various negotiating groups have expressed their will to conclude the Doha Rounds negotiations in 2007. This political will took place at the Ministerial meeting of the G4 (US, EU, India, Brazil), G6 (same countries plus Japan and Australia. This was probably an attempt to influence the US Congress to grant an extension of the TPA powers and maintain the “window of oportunity” open and avoid failure. Key to concluding the Doha Rounds will be a substantial agreement on subsidies on agriculture [34]
Leaders of the Group of Eight are hopeful that the stalled Doha round of global trade talks could be wrapped up by the end of the year, according to the United States delegation and a final communique[35]. However, even is a partial agreemet is reached, the main problem will still be how to translate political will into concrete agreements.
As previously stated, if the multilateral trading system cannot move forward and if the WTO members are unable to agree on new multilateral liberalisation, then regionalism might take over. The question is whether this regionalism that jeopardizes the non discrimination principle will push countries back into multilateralism, or will evetually lead to competing regionalism.
7) CONCLUSION
In a global trading system, where FTAs have become a central tool of trade policy, and where they are growing rapidly in number and complexity, the exception in Article XXIV:5 of GATT 1994 could play a crucial role in ensuring coherence between multilateral and regional trade policy.
However, so far this has not taken place. The lack of recommendations on FTAs by WTO Members, and their fast proliferation, feed the theory of the “spaghetti bowl”. This leads to regionalism in detriment of multilateralism, and brings back fears of discrimination and non cooperation in the trading system. It also generates a mild discrimination between countries inside or outside the agreements, forcing an uneven playfield, and eventually leading to lack of marker predictability.
Attempting to overcome the burdens of multilateral negotiation by facing them regionally cannot be a solution. It is clear that, if this threat of regionalism does not push the commercial powers into concluding the Doha Rounds, the WTO system will soon become illusory.
The FTA between US and South Korea is a clear example of two nations that prefer to advance bilaterally instead of sitting with all WTO members to negotiate. The fear of non conclusion of the Doha Rounds, plus the threat of China as a commercial superpower has taken the “champion of multilateral trade” to abandon its path in order to follow more rapidly its domestic agenda.
Developing countries and LDCs will probably suffer the consequences of deviating from the multilateral into a regional trading system. They might have to join forces or drastically improve their production precesses in order to overcome such a scenario. In the long run, however, this would end up affecting the industrialized countries as well.
The question remains, and is still the core of the debate, whether regionalism could eventually push superpowers to grant enough concessions and push through the Doha Round agenda. So far, the risks of FTA proliferation greatly overcome a possible stagnation of the multilateral system. I believe it is better to have higher tariffs with no discrimination, rather than lower tariffs in a system that discriminates.
The “spaghetti bowl” can never lead by itself to even elimination of tariffs. These will only be accomplished by multilateral negotiation. Proliferation of FTAs will only lead to regional competition and lack of cooperation.
[1] Special attention will be paid to the US-South Korea FTA. For practical reasons, this paper will only address FTAs. Nonetheless, most of what will be said can also be applied to customs unions, and to Regional Trade Agreements in general.
[2] Information available at: www.ustr.gov/Trade_Agreements/Bilateral/Republic_of_Korea_FTA
/Section_Index.html -
[3] Bhagwati, Jagdish “From Seattle to Hong Kong” From Foreign Affairs, December 2005 -- WTO Special Edition
[4] Felix Peña, ¿CUÁL ES EL VERDADERO PROBLEMA DEL “SPAGHETTI BOWL”?: Proliferación de acuerdos preferenciales en un sistema comercial global debilitado. April 2007
[5] GATT
[6] GATT preamble
[7] Mathis, James. Regional Trade Agreements and Domestic Regulation: What Reach for ‘Other Restrictive Regulationsof Commerce’? Pag 79. ORRC Chapter. Bartels
[8] GATT XXIV:4
[9] Ibid Mathis, pag 79
[10] Nicolas Lockhart, Andrew Mitchell. Regional Trade Agreements under GATT 1994: An exception and its limits. Pag 219. Cameron May Ltd 2005
[11] Ibid Mathis, pag 80
[12] GATT XXIV:5
[13] GATT XXIV:8
[14] Ibid Lockhart, pag 219
[15] Ibid Lockhart, pag 220
[16] Ibid Lockhart, pag 251
[17] Ibid Bhagwati
[18] Ibid Peña
[19] Ibid Peña
[20] Information available at: www.ustr.gov/Trade_Agreements/Bilateral/Republic_of_Korea_FTA
/Section_Index.html -
[21] And with it, the “fast track” by which the US President could negotiate freely, and the Congress could merely aprove or dissaprove.
[22] Ibid Peña
[23] See WTO ranking 2007, www.wto.org
[24] Financial Times, april 4th 2007, pag 11
[25] www.wto.org/english/news_e/sppl_e/sppl53_e.htm
[26] Based on the theory of Viner, Jacob (1892-1970), Studies in the Theroy of International Trade. Harper and Brothers, 1937
[27] Ibid Bhagwati
[28] see François Heisbourg, “L’Épaisseur du Monde”, Éditions Stock, Paris 2007.
[29] Financial Times, April 9th, 2007, pag 11
[30] Financial Times, april 12th 2007, pag 12
[31] Full text at www.wto.org
[32] IMD Lausanne and Founding Director of the Evian Group
[33] Financial Times, april 17th 2007, pag 12
[34] see, among others, www.cairnsgroup.org
[35] http://www.iht.com/articles/ap/2007/06/09/business/EU-FIN-Germany-G-8-Doha.php
