Multilateralising 21st-century regionalism

Richard Baldwin 20 January 2014

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Trade and trade agreements used to be relatively simple. Trade primarily meant trade in ‘made-here-sold-there’ goods, so 20th-century regional and multilateral trade agreements dealt primarily with barriers to goods crossing borders – especially tariffs. For governments, the key purpose of trade and trade agreements was to help their firms sell things.

The internationalisation of production networks from high-wage to low-wage nations – call it the Global Value Chain (GVC) revolution – changed all this (OECD WTO UNCTAD 2013). The trade system is being used to make goods, rather than simply sell them. The resulting transformation of international commerce and commercial policy triggered a paradigm shift.

  • First, the definition of trade has been stretched.

International commerce involves richer, more complex, and more interconnected exchanges. Put simply, the goods, services, ideas, people, knowhow, and capital that used to move only within rich-nation factories are now crossing borders. This made GVC-linked trade into a nexus of trade, services, investment, and intellectual property.

  • Second, more complex commerce required more complex trade agreements.

Deals that promote trade in ‘made-everywhere-sold-there’ goods must address disciplines related to the making of goods as well as the selling of them. Trade agreements must provide assurances that: (i) GVC-linked flows of goods, services, and capital can easily cross borders; and (ii) that GVC-linked tangible and intangible property rights are respected.

  • Third, governments’ motives shifted.

For rich nations, 21st-century agreements underpin international supply chains that are critical to their firms’ competitiveness. The motives for most developing nations are quite different. As GVC-participation is the 21st century’s fast-lane to industrial development, 21st-century trade agreements are keystones in many nations’ development strategies. Oversimplifying to make the point, the bargain behind 21st-century trade agreements is Northern factories for Southern reform. For 20th-century agreements, the bargain was ‘my-market-for-yours’.

  • Fourth, the GVC revolution transformed trade governance.

The complex and fundamentally bilateral nature of the factory-for-reform bargain swung the centre-of-gravity decisively away from multilateral governance. Ad hoc governance structures have materialised to undergird international production networks. GVC networks are mostly regional, so the governance responses have mostly been regional. The main elements are bilateral investment treaties, deep regional trade agreements between advanced-technology ‘offshorers’ and low-wage ‘offshorees’, and massive unilateral policy reform by developing nations.

The rise of megaregional arrangements threatens to cement this new structure into place and further erode WTO centricity. The WTO remains relevant to 20th-century trade, but global rules for 21st-century trade are being written in the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership, the Trade In Services Agreement, and the like.

1.1. The real threat to multilateralism

The rise of 21st-century regionalism has been good for world trade (WTO 2013). Trade and trade-opening have boomed despite the WTO’s slow progress. Thinking ahead, however, it is clear that global trade governance faces an historical turning point. The current trajectory seems certain to undermine the WTO’s centricity, with the megaregionals taking over as the main loci of global trade governance. Without reforms that bring existing deep regional trade agreement disciplines under the WTO’s aegis and facilitate development of new disciplines inside the WTO, the trend will continue. At best, the WTO would continue to thrive as the institution that underpins 20th-century trade flows.

This is not the only scenario. WTO centricity could erode beyond the tipping point where nations ignore WTO rules since everyone else does. The WTO’s inability to update its rules undermines the authority of the Dispute Settlement Mechanism. Judges are increasingly forced to make rulings based on previous judges’ rulings, instead of on agreements negotiated by consensus. Danger lies down this road. A WTO that cannot finish negotiations and cannot effectively adjudicate would be moribund. The GATT/WTO would go down in history as a 70-year experiment where world trade was rules-based instead of power-based.

This darker scenario runs the risk of throwing global trade governance back towards a 19th-century Great Powers arrangement. Back then, dispute settlements and trade agreements arose from reciprocal negotiation when two Great Powers were involved, but from exercises in pure economic muscle when Great-Power nations dealt with other nations. This should worry all world leaders. In the first half of the 19th century, attempts by incumbent Great Powers to impose rules on emerging powers paved the road to humanity’s greatest follies – the two world wars.

1.2. Multilateralising 21st-century regionalism: A better way forward

In a recent paper, I argue that one programme of preventive action would be to work towards multilateralising the deeper disciplines in today’s deep regional trade agreements and bilateral investment treaties (Baldwin 2013).

I also argue that the distinctions between 20th- and 21st-century trade and regionalism require a new mind-set. The old thought-paradigms are inadequate for thinking through the new challenges. Twentieth-century concepts like ‘trade creation and diversion’, ‘spaghetti bowls’, and ‘building and stumbling blocks’ were relevant when regionalism was mostly about discrimination. Now that regionalism is largely about underpinning international production networks, the old concepts are unhelpful in most cases and harmful in others.

Twentieth- and 21st-century regionalisms are fundamentally different. Twentieth-century regional trade agreements concern made-here-sold-there goods, while 21st-century regionalism concerns made-everywhere-sold-there goods. The difference means that 21st-century regional trade agreements include rules on making goods as well as selling them. These rules impinge upon firms, services, capital, regulations, and intellectual property. My paper argues that discrimination is technically difficult for such rules since it is hard to define the nationality of firms, services, capital, and intellectual property in ways that cannot be easily circumvented. For this reason and others, 21st-century regionalism is not fundamentally about discrimination. It is about undergirding the internationalisation of production processes.

I suggest we think of the benefits from 21st-century multilateralisation as stemming from the extra ‘network externalities’ that come from knitting together diverse sets of disciplines. Here ‘network externalities’ means that each individual’s gain from participating in a network increases with the network’s size. I suggest that we think of the costs of multilateralisation in terms of the cost of harmonisation, i.e. in terms of systems competition. For example, if all bilateral investment treaties were harmonised, and all property rights assured by the same rules, network externalities would be maximised. But which set of investment rules would be adopted? US firms would surely prefer the US template, while European firms would prefer the European template. This suggests that the costs of harmonisation can be thought of as those of a ‘systems competition’, meaning the sort of problems that would arise if one had to choose which computer operating system would become the global standard.

As part of this fresh perspective, a new question must be answered – the level-of-governance question. As 20th-century multilateralisation aimed to limit tariff discrimination, the logic of non-discrimination meant that the multilateral level was the best place to do it. Twenty-first-century regionalism, however, involves harmonisations on a far broader range of policies. Key questions are: Which deep regional trade agreement provisions should be harmonised at the global level, and which at the regional level? Which disciplines are best left un-harmonised?

More research needed

Distinguishing the various categories of disciplines is an important task for trade scholars and governments. The WTO’s centricity is not in peril if the various deep regional trade agreements turn out to have implemented reforms that are consistent with each other. Such disciplines might easily be multilateralised with WTO agreements (like the General Agreement on Trade in Services), or plurilateral agreements like the Government Procurement Agreement. The disciplines that are creating mutually inconsistent rules are more of a problem and need to be identified.

Part of this exercise will be to identify which deeper disciplines are more efficiently organised at the global level and which are best set at the regional or national levels. As discussed above, economic theory on the allocation of tasks to various levels of government (fiscal federalism) could be used to think about which of the deeper measures belong in the WTO and which are more appropriately dealt with in regional trade agreements and/or national legislation. Again, this is an open question for trade scholars, governments, and practitioners.

More modest versions of 21st-century multilateralisation can also be envisioned. The WTO could develop some basic guidelines for deeper provisions in regional trade agreements, akin to those on tariffs and services in the General Agreement on Tariffs and Trade and the General Agreement on Trade in Services. For example, the latter provides a few basic guidelines for services free trade agreements, but the agreements fill in the details of market-opening. Even these very basic guidelines are completely absent when it comes to GVC-linked provisions such as competition policy, rights of establishment, FDI-linked capital flows, intellectual property rights, and the like.

References

Baldwin, Richard (2013), “Multilateralising 21st century regionalism”, Paper written for OECD, available upon request.

OECD WTO UNCTAD (2013), “Implications of global value chains for trade, investment, development and jobs”, Joint report of the OECD, WTO, UNCTAD for G20 Leaders’ Summit, 6 August.

WTO (2013), “The Future of Trade: The Challenges of Convergence”, Report of the Panel on Defining the Future of Trade convened by WTO Director-General Pascal Lamy, 24 April.

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Topics:  Global governance International trade

Tags:  WTO, trade, regional trade agreements, supply chains, harmonisation, global value chain, megaregionals, network effects