Mega-regional trade agreements erode WTO centricity and carry significant risks for countries excluded from the negotiations. The international community must identify ways to minimise these risks and find ways to ensure these trade deals can instead be a source of new opportunities, even for countries outsides these deals.

The key challenge for policymakers in international trade over the coming years will be to ensure that mega-regional and plurilateral agreements complement rather than undermine the multilateral trading system. The rise in selective associations between WTO members, aimed at a deeper integration of their economies, has fundamentally changed the dynamics of trade negotiations at the global level. The 10th WTO Ministerial Conference, held in Nairobi in December 2015, yielded only limited results. While the United States and the European Union called for the conclusion of the Doha Round, developing and emerging countries expressed a desire to keep the agenda alive. Expectations now are that global trade policy will be increasingly negotiated in smaller groups.

As the new “main loci of global trade governance for beyond-WTO issues,”[1] mega-regionals have caused widespread concerns. The Transatlantic Trade and Investment Partnership (TTIP), the Trans-Pacific Partnership (TPP), and the plurilateral Trade in Services Agreement (TiSA), have been subject to intense debate. These accords have proven much more legitimacy-sensitive than past agreements because they increasingly aim at harmonising risk management, instead of focusing exclusively on eliminating traditional protectionist policies. While their implications for participating economies have been widely and publicly discussed, the effects on excluded countries have received far less attention. The risks these agreements carry for those left out can, however, be significant and potentially contrary to global multilateral trade objectives.

Developing countries are especially likely to be negatively affected by the increasing regionalisation of trade relations and ever broader market liberalisation outside the WTO. With member states divided over the future of the Doha Round and negotiators still struggling to find their bearings in the post-Nairobi negotiating landscape, countries should prioritise discussing and identifying ways to minimise the risks of these agreements for third countries as much as possible. Reducing negative effects on third parties is absolutely crucial to alleviate fears of marginalisation and forestall the creation of competing trade blocs by excluded parties. It will also be critical to ensure the compatibility of mega-regionals with the multilateral trade system.

To respond to this challenge, the international community must discuss new strategies and trade models. By outlining ways to open mega-regionals and reduce risks for developing countries, this article hopes to contribute to a more fruitful debate in upcoming trade talks.

The risks for developing countries

The creation of mega-regionals implies that countries will be treated less equally in the future. The effects depend on the degree of product and export market diversification, as well as the ability of these countries to enter the competition for regional trade partnerships with their own initiatives. Poor developing countries excluded from mega-regionals are likely to suffer losses in trade and competitiveness, not least because of preference erosion. Should mega-regionals redirect trade flows, these countries could also have a harder time accessing capital and technology.

More­over, mega-regional initiatives outside the WTO could further reduce the influence of developing countries in trade negotiations. In the past, developing countries joined forces in the WTO to pursue market liberalisation that corresponded to their national development levels. Negotiations in sub-groups limit this kind of coalition-building, which allows advanced economies to play competing trade partners off against one another. The result is similar to what developing countries experienced at the time preceding the rise of emerging powers, when they were not able to defend their interests in a multilateral trade forum against the major economies.

Developing countries that do not want to be left behind their export competitors feel increasing pressure to agree to liberalisation in more and more areas covered in mega-regional agreements. TPP confronts developing countries with issues that, so far, do not figure prominently at the multilateral level. This includes commitments on intellectual property rights, state-owned enterprises, and e-commerce. For example, some of the developing countries affected by Vietnam’s improved market access to the US, such as Pakistan or Bangladesh, could decide to join the TPP to protect their export competitive industries, despite not really being ready to adopt many of the agreement’s provisions and having had no opportunity to help shape it.

Risks are lower for emerging trade powers like Brazil, India, and China. Because of their economic and political clout, these countries can enter the competition for regional trade partnerships. China is already pursuing a mega-regional in the Pacific, the Regional Comprehensive Economic Partnership (RCEP). In this situation, it is important that TTIP and TPP are not perceived as an attempt to counterbalance the increasing influence of emerging economies. Heightened competition for political and economic spheres of influence which results in an ever more complex system of trade rules and regulatory standards would not only hurt developing countries but also raise the costs for EU and US exporters.

Ways to alleviate the risks

Actions to create open, benign mega-regionals can be divided into three categories. First, those changes that can be implemented unilaterally by the negotiating parties to ensure openness. Second, provisions that allow for full or partial accession by third countries. Third, actions at the multilateral level that reaffirm the centrality of the WTO.

Signatories’ choices

The responsibility to craft mega-regionals while bearing in mind the broader implications for the international trade system lies primarily with the negotiating parties. Scope and design of the trade agreements will be crucial in determining their effects on third countries and the international system. This includes open rules of origin (RoO), the liberalisation of market access on a most-favoured nation (MFN) basis, and the extension of regulatory cooperation to third parties.

Mega-regionals provide a basis for harmonising the RoO frameworks between trade partners. TTIP’s potential to shape the EU and US approaches to rules of origin has been repeatedly recognised. Producers everywhere would benefit from a simplification and standardisation based on a liberal definition of RoO. In order to ensure that developing countries can maintain or enhance their position in value chains, the threshold at which inputs are considered of domestic origin should be set as low as possible. Options for cumulation could also protect existing production networks and supply chains.

Liberalisation of market access on a MFN basis should be considered in services trade and public procurement. While full integration of markets might require a deeper convergence of regulatory regimes feasible only among a subset of countries, the literature suggests that countries could reap more benefits if agreements are not exclusive, but rather open to all parties able to satisfy the regulatory requirements within the integrating area. For procurement regimes that already benefit from considerable foreign competition, such as in Europe, the benefits of preferential reform may also be ambiguous and even adverse because of the traditional concerns about trade creation and diversion.

Regulatory cooperation will account for most of the benefits in mega-regional agreements like TTIP and is of particular concern for third parties. The extension of mutual recognition of norms and technical standards to non-member country producers should therefore be discussed as a strategy for alleviating potential negative effects: this would occur if companies from third countries were allowed to sell throughout the mega-regional provided they meet the standard of any one of the members in the agreement. This type of regulatory cooperation can already provide one step towards accession.

Accession options

Negotiating parties will also need to determine accession rules for future participants. South Korea and the Philippines have, for example, already expressed their interest in joining TPP. Negotiating separate agreements with all participants of the mega-regional, or, alternatively, upgrading existing agreements to the mega-regional’s standard might not be feasible for outsiders. While the planned upgrade of the EU-Mexico trade relationship could align their bilateral agreement with TTIP, the same might be more difficult with regard to TPP, where countries would need to negotiate or update multiple agreements. This strategy would also represent an isolated response that does not decrease the risks for developing countries in an asymmetric bargaining position. Apart from full accession, membership requirements for developing countries could vary depending on their levels of development.

An explicit accession clause would be the most comprehensive way to open mega-regionals to interested parties and to acknowledge their stake in preferential access to the involved markets. Accession, however, comes at a price: candidates would have relatively little influence on the agreement’s substantive provisions. Comparable to WTO access, the scope of renegotiations will be limited mainly to market access issues – an offer that is unattractive to many countries, especially those with political or economic clout. For developing countries benefiting from unilateral preference schemes, the demands for liberalisation would simply be too high. The role of “rule-taker” would only be acceptable to a small group of countries that have already negotiated their own bilateral trade agreements with one or all parties in the mega-regional and remain deeply interdependent with these markets – for example, countries of the European periphery to TTIP. In this regard, accession is clearly inferior to multilateral negotiations.

Developing countries which consider one or more of the mega-regional’s members an important trade partner may, however, be interested in partial accession. Similar to the WTO and North-South agreements, asymmetric liberalisation should mean that fewer and less demanding obligations would apply to developing countries in areas like services, competition, and investment. This could also include regulatory cooperation, which would increase transparency and allow third country producers to participate in the standard-setting process. In the case of TTIP, for example, third parties could negotiate an accord that is confined to the implementation of a narrower set of rules and regulations – comparable to multilateral sector-specific agreements negotiated in the 1990s. Below this threshold, some authors suggest that third parties might also react unilaterally by adopting regulatory standards equivalent to those in TTIP.[2] This could represent a first step to prepare their economy for a mutual recognition agreement with the EU and the US. Because it would only pertain to “some” and not all rules in the agreement, this strategy would allow third parties to secure a core area for autonomous decision-making.[3] Again, this process will only be attractive to countries satisfied with rule-taking.

Responses on the multilateral level

In the absence of options for active participation, excluded parties – heeding the not-so-subtle announcements of policymakers on both sides of the Atlantic, who argue that TTIP and TPP should set rules for global commerce – will be incentivised to pursue their own liberalisation projects. This can happen both within and outside the WTO; rather than creating competing mega-regionals, third countries could embrace a variable geometry approach in the WTO.

Plurilaterals would be especially desirable relative to mega-regionals as long as they are MFN-based and smaller developing countries, including least developed countries, also benefit from the agreements. However, in the absence of commitments to openness and inclusiveness by present-day mega-regionals, restraint by third parties seems unlikely. The members of TiSA remain unwilling to open up their agreement as long as there is no critical mass of countries backing the agreement. Including China in these negotiations, which has recently been supported by the European Parliament, would certainly bring the agreement closer towards multilateralisation and would probably incentivise more countries to join the negotiations.

In light of the “persistent and fundamental divisions on our negotiating agenda”[4] after the Nairobi ministerial, member states increasingly aim at delivering on parts of the Doha agenda in a piecemeal fashion based on a “critical-mass subset of countries willing to move faster and farther.”[5] This implies that the WTO’s consensus rule would be broken and members would thereby forego any potential compromise on the most contentious issues that hold up the negotiating process. On the other hand, there are good reasons to assume that the areas in which members would be able to bridge their differences would be the same with or without Doha. In fact, the increasing interest of developed countries to discuss new issues such as investment and digital trade at the WTO level suggests that it might not be possible to sustain the multilateral system the way it currently is. Given the reluctance of poorer countries to shift the focus away from development, selective agreements between interested members with or without MFN become increasingly likely.

Ideas on the WTO’s role in managing the rise of mega-regionals remain modest. The Nairobi Ministerial Declaration instructs the WTO’s Committee on Regional Trade Agreements to discuss the systemic implications of RTAs for the multilateral trading system. With regard to the WTO’s nature as a member-driven organisation, reform proposals are often limited to traditional conceptions of international organisations as forums for the collection and dissemination of information to member states. The goal of transforming the current provisional transparency mechanism for regional trade agreements into a permanent mechanism, reaffirmed in paragraph 28 of the Nairobi Declaration, can be seen as a step in this direction. A similar idea is the creation of a “Transparency Exchange Mechanism”, a database where trade liberalisation efforts at various levels will be stored which Mavroidis suggests as part of his vision of a WTO 2.0.[6] Previous work by other authors also supports the formation of an “RTA Exchange” – an annual forum and interactive website where information and research on trade agreements is pooled and accessible.

Few proposals go further and, for example, suggest a mechanism that supports third parties in voicing their interests and concerns. Mortensen proposes a “reform [of] the current mechanism of overseeing, scrutinising and permitting the formation and continued operation of FTAs.”[7] He acknowledges, however, that given the sensitivity regarding sovereignty among the WTO membership, “it is unlikely that the WTO will ever be equipped with an effective and autonomous capacity to conduct self-initiated reviews of the notified FTAs.” In this regard, the unilateral actions by negotiating parties outlined above become even more critical.

Conclusion

The future of the WTO hinges on its ability to come to terms with recent developments. Richard Baldwin recently issued this warning: 

“Without reform that brings existing RTA disciplines under the WTO’s aegis […], the trend towards eroding WTO centricity will continue and possibly take it beyond the tipping point where nations ignore WTO rules since everyone else does. There is the risk of drifting back towards a 19th century ‘Great Powers’ world.”[8]

Policymakers engaging in the next phase of international trade talks should heed this warning. If mega-regionals’ risks for third countries are not addressed in time, perceptions of competing bilateralism could spread further and the creation of rivalling trade blocs accelerates, Baldwin’s “tipping point” will be looming rather sooner than later.

At present, the WTO and individual members certainly cannot stop the frontrunners that strive for deeper integration with selected trade partners. However, what we need to do in a multi-speed system is to bridge and enlarge the clusters of deep integration with the slower-moving members. Most importantly, this involves minimising the risks for developing countries ensuing from mega-regional agreements.

Fabian Bohnenberger is a Master student in Public Policy at the Hertie School of Governance, and Research Assistant at the Global Public Policy Institute (GPPi), Berlin.

This article was selected as part of the TDS Bridges Writing Competition. For more information please see the following link: http://tds.ictsd.org/tds-bridges-writing-competition.

This article is published under Bridges Africa, Volume 5 - Number 4, by the ICTSD.

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