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Lamy: Trade Pacts Pose New Challenge to the Multilateral Trading System

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In this speech, WTO Director General Pascal Lamy expresses his concerns about the effects of Preferential Trade Agreements (PTAs) on the global multilateral trading system. According to Lamy, the greatest threat that PTAs pose is not the lower tariff exclusivity that they provide for subsets of WTO members. Rather, it is the fact that PTAs increasingly involve the harmonization of very specific regulatory regimes, making multilateral negotiations on a global level less relevant. Lamy wants to counter this trend by including the topic of regulatory harmonization in multilateral negotiations (WTO-level). Lamy’s proposal is perfectly in line with his mandate of liberalizing world trade, but steps over the real issue: PTAs have gained popularity precisely because they allow developed countries to force developing countries into deals that the latter could more easily refuse at the WTO-level.

By Pascal Lamy



Good morning, ladies and gentlemen.

I would like to welcome all of you to today’s launch of the World Trade Report 2011.  Let me express my thanks in particular to the heads of regional economic communities, presenters and discussants, for joining us today and agreeing to give so freely of their ideas and time.

Interest in negotiating and concluding preferential trade agreements seems not to have waned despite the global economic crisis.  Based on the latest figures that the report has compiled, there are around 300 agreements (notified and non-notified) currently in force.  There are dozens more currently under negotiation.  We know of only one WTO member who has not concluded a PTA, so far.  Many believe that the current impasse in global trade talks may provide fuel for more agreements to be negotiated in the future.

Yet, these figures may obscure developments in preferential trade agreements (PTAs) that deserve to be better understood.  Despite the enormous growth of PTAs, only a small fraction — around 15% — of global merchandise trade actually receives preferences.  A major reason for this is that MFN tariffs are already quite low with more than half of global merchandise trade having applied MFN rates of zero. In fact less than 2% of world trade is eligible for preference margins above 10 percentage points.

Preferential margins may also give a misleading indicator of how advantageous a PTA is.  The unvarnished truth is that one’s PTA partner is often promiscuous, involved in multiple agreements.  Consequently, the preferential access that an exporter enjoys in its partner’s market is soon eroded by the presence of other preferential exporters.

Furthermore, PTAs sometimes do not do a good job of liberalizing trade.  Products which are sensitive and difficult to liberalize in the WTO also end up being difficult to liberalize in PTAs.  66% of tariff rates with MFN rates above 15 percentage points have not been reduced in PTAs.

 

In fact PTAs of today are less about tariff preferences and more about regulatory measures that were once considered the domain of national rather than international economic policy.  This change is occurring partly because of changes in the way production is being organized internationally with the rise of global production networks.  To prosper, these production networks require an enabling regulatory environment that provides stronger investor protection, better infrastructural services, freedom of movement of corporate personnel, protection to intellectual property rights, and facilitation of trade.   The demand for governance in these policy areas is being met by the supply of deep PTAs.

Of course, global production networks are not the only possible explanation for the growth of deep PTAs.  Deep arrangements may be necessary to promote trade in certain sectors or across economies more broadly. For instance, common competition policy rules may be required to allow comparative advantage to materialize or harmonization of product standards may be a precondition for economies of scale to fully develop.

Be that as it  may be, the reality is that we can see a slow convergence of tariffs in preferential trade agreements — towards a de facto multilateral reduction of applied tariffs —, while we see the risk of a growing divergence in the regulations covered by these agreements.

So what do we do about this?

Deep integration changes the nature of the relationship between the multilateral trading system and preferential trade agreements. For far too long, this relationship has been understood using the building bloc-stumbling bloc paradigm.   In its strictest sense, this framework says that bilateral or regional integration either complements or substitutes for multilateral liberalization.  One can either lower global tariffs through periodic rounds of multilateral trade negotiations or lower then circuitously through a web of PTAs.   However, if PTAs are less and less about tariffs, this paradigm is becoming less relevant and one will need to fashion a new framework more applicable to deep PTAs.

Let me suggest some ideas that could be part of this new way of thinking about PTAs and the WTO.

One idea would be that there is little to be concerned about with deep PTAs on the tariffs side, since the limited role of preferential tariffs implies little danger of trade diversion.

Another idea would be that we should not ignore the potential difficulties that deep PTAs can give rise to on the regulatory side.  One can observe in the sprawl of agreements what can only be called “families” of PTAs, with each family adopting a particular approach to important policy areas such as technical barriers to trade or competition policy.  The peril here is that PTAs may lock-in their members to a particular regulatory regime reducing the potential for trade to prosper with countries outside the arrangement.

In a nutshell, the new challenge posed by deep PTAs to the multilateral trading system is one of market segmentation because regulatory systems, which can become divergent, have now more importance on trade flows than tariffs. This is not a statement about the legitimacy of these regulatory systems. It is a factual assessment of their impact on economies of scale, which is what the WTO should care about.

We have a number of options before us to reduce this risk and increase coherence between PTAs and the multilateral trading system.

- We could fix deficiencies in the WTO legal framework;

- We could develop a set of non-binding good PTA practices that members could follow;

- We could extend existing preferential arrangements in a non-discriminatory manner to additional parties;

- Finally, we could accelerate multilateral trade opening through a more ambitious regulatory agenda; this would surely prove a very effective means of reducing the scope for divergence between the multilateral and preferential trade opening.

We can also think of other options for creating coherence, that would build on our existing mechanism of transparency and information exchange, which if you recall is one of the earliest harvests from the Doha Development Agenda.  The mechanism reflects the collective knowledge and experience that members have acquired from negotiating, concluding and implementing preferential trade agreements.  Nevertheless, I believe that members have not yet taken full advantage of the mechanism to obtain a greater understanding of PTAs and their systemic effects on the global trading system.  There is ample scope for members to make better use of the mechanism, including by gaining a better understanding of the individual regulatory areas across PTAs. 

         

I would like to take this opportunity to thank Patrick Low and his excellent team, in particular Robert Teh and Nadia Rocha, who have provided all of us with this excellent food for thought.

We shall have our first opportunity to consider these questions in depth later today.  I look forward to hearing your deliberations.  Given that we are unlikely to exhaust all the topics related to PTAs, I also look ahead to the Eighth Ministerial Conference when Ministers will have the occasion to further reflect on the issues raised in this report.   I wish you all a very productive day and thank you for your attention.

This speech was held at the launch of the WTO’s annual World Trade Report. Find it here .

 

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