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Author: Naoise McDonagh, University of Adelaide
The 2014 Trade Facilitation Agreement of the World Trade Organization (WTO) is the only significant multilateral agreement that has concluded since its inception in 1995. Against this success, significant failures stand out. The inability to complete the Doha Development Round launched in 2001 and the failure to curb fisheries subsidies despite the destruction of global fish stocks indicate that multilateralism is failing.
The growth of plurilateral agreements adds to that vision and raises questions about the future of the WTO. Plurilateralism refers to trade and investment negotiations between three or more countries, but less than all the members of the WTO. Plurilaterals can occur within the WTO, where non-signatories still receive the benefits through the most-favored-nation requirement. The 1996 Information Technology Agreement is one of the earliest examples. WTO plurilaterals on specific issues, such as e-commerce negotiations, are becoming a popular option. To reduce free use, these “open” WTO plurilaterals require a critical mass of members to have joined before they come into force.
Plurilaterals can also occur outside the WTO to form preferential trade agreements (PTAs) between countries where benefits flow only to the parties to the agreement. Preferential trade agreements include free trade agreements (FTAs), such as the China-Australia FTA, as well as regional and mega-regional trade agreements, such as the Regional Comprehensive Economic Association (RCEP). To be legal under WTO rules, PTAs must liberalize “substantially all trade.”
Multilateral stagnation means that trade progress is now taking place at the plurilateral level. This creates opportunities and dangers for the WTO. Opportunities arise through the prospect of urgently needed business progress; The danger lies in the possibility of a fragmentation of governance from external PTAs. In 2000 there were 83 PTAs in force and in 2020 there were 303. This trend runs the risk of the WTO becoming an institutional zombie struggling to manage a smorgasbord of incompatible rules.
The success of the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT), is a key reason for today’s multilateral difficulties. The GATT began in 1948 with 23 members who agreed to reduce trade tariffs. Tariff reductions were the main focus of negotiations until the 1986 Uruguay Round, when there were already 123 members. A reduction in tariffs from about 22 per cent of the value of goods traded in 1947 to 5 per cent after the Uruguay Round is indicative of the success of the GATT negotiations.
When the WTO came into operation in 1995, the GATT had largely completed a “negative” economic integration. This required very little “positive” integration, the latter referring to the convergence of rules in national regulatory standards. The GATT also provided the foundation for the current system, including non-discrimination rules, a dispute resolution forum, and the rule of reciprocity between nations regarding tariff concessions.
The WTO was born with a role that demanded greater regulatory convergence between nations on issues such as non-tariff measures, service standards, intellectual property, subsidies, and a variety of technical and legal standards. Furthermore, without provisions on e-commerce or digital commerce and the incomplete General Agreement on Trade in Services, the WTO was obsolete upon arrival. The need for greater convergence of rules to achieve greater progress has significant ramifications for national regulatory sovereignty. It also requires national capacity for implementation and oversight that developing countries often struggle to meet.
The WTO sought that convergence with a greater heterogeneity of members compared to the GATT. The WTO now has 164 member countries, with divergences in development status, political systems, and social preferences. However, an agreement must be reached on any WTO issue by consensus. Even between culturally and similarly developed countries, differences in social preferences create significant obstacles to securing a trade agreement when regulatory issues are at stake behind the border.
Two implications for preferential trade agreements are now evident. First, PTAs are a logical response to difficulties in reaching consensus among WTO members on issues that reduce national policy space. Second, the growth of ACPs indicates a constant desire by members to continue deepening trade integration. None of the implications suggest that the WTO is becoming redundant. Rather, the WTO is a fundamental foundation on which modern PTAs are built. The United States-Mexico-Canada Agreement (USMCA), for example, uses significant amounts of WTO text and requires that basic disputes over technical barriers to trade be heard within the framework of the WTO.
By building on the existing multilateral system, the USMCA parties could focus on issues that expand on the current rules. The RCEP was similarly negotiated to be WTO-compliant and its Chapter 12 on e-commerce is seen as providing the most likely path for WTO e-commerce negotiations. In contrast, South Korea’s separate FTAs with the European Union and the United States codified two mutually inconsistent sets of rules related to international standards, leading to a fragmentation of the rules.
Still, like-minded countries that continue to negotiate deeper trade integration are positive news. With multilateral stagnation, plurilaterals are the most realistic vehicle for trade progress. The risk for the multilateral system derived from external plurilateral PTAs is of differentiated integration and fragmentation of governance. Current geopolitical tensions amplify that risk. While this risk cannot be completely avoided, it can be mitigated.
The risk of fragmentation can be reduced by ensuring that PTAs are as WTO compliant as RCEP. As PTAs demonstrate the value of deeper integration, there should be opportunities to multilateralize PTA innovations, such as the RCEP chapter on e-commerce. APEC’s ability to produce cooperative results on transparency standards without formal negotiations provides another option for multilateral engagement. However, it should not be forgotten that the WTO continues to play crucial roles even as plurilaterals proliferate.
Naoise McDonagh is Professor of Political Economy at the University of Adelaide Institute for International Trade.
