Introduction

Trade is the foundation of modern diplomacy. As such, it is ever more important to understand developments in the global trading system. This article explores why states have turned to Preferential Trade Agreements (PTAs), looking specifically at behind-the-border regulator issues. It analyzes the possibility of multilateral convergence, as well as the impact of PTAs on international power dynamics and on the future of the Multilateral Trading System (MTS).

The World Trade Organisation (WTO), formed in 1995 as successor to the General Agreement on Tariffs and Trade (GATT), is the body establishing the norms and rules of MTS. It is premised on the belief that liberalizing trade and reducing barriers benefit all, and takes non-discrimination as a core principal. However, PTAs have proliferated significantly since the 1990s, raising questions about the role and relevance of the WTO’s multilateral trade agenda.

PTAs are treaties that advance trade liberalization and economic integration between countries, granting preferential market access to its members. Free Trade Agreements (FTAs) are the most common type of PTA, but the term also includes bilateral agreements, customs unions, and common markets. Although they are often termed Regional Trade Agreements (RTAs), the term PTA is more suitable, as agreements increasingly involve countries across different regions. There are now over 300 PTAs in force, each with an average number of 12 WTO members, and around half of them are cross-regional (WTO, 2011).

Many argue that PTAs are discriminatory by nature, contradicting the WTO’s efforts towards free trade and undermining the aims of the MTS. Others see PTAs as a way to continue liberalizing trade while multilateral efforts have stalled (Srinivasan, 2010). This article accepts that, for better or for worse, PTAs are now a part of the global trading system. The real challenge is discerning which aspects can positively contribute to the MTS and the WTO’s aim to liberalize global trade, and which elements pose a threat to it.

Downfalls of the GATT/WTO

The GATT/WTO has been successful in liberalizing trade, primarily through the reduction of tariffs and quotas. Tariffs today are below five percent on most trade transactions, and zero on a large proportion of imports (Baldwin, 2016). However, the Doha Round of WTO negotiations that began in 2001 has reached an impasse, and after 16 years seems unlikely to reach an agreement any time soon—if at all. Of the numerous factors impeding its progress, two appear to be particularly important in driving the proliferation of PTAs.

Firstly, the GATT/WTO works on a consensus basis, and the single undertakings principle—meaning, ‘nothing is agreed until everything is agreed’—was adopted in the initial formation of the WTO. Secondly, while the GATT/WTO proved effective in addressing barriers to trade such as tariffs, it has had less success in reaching agreement on behind-the-border regulatory issues. While GATT was signed in 1947 by 23 countries, there are now over 150 contracting members from countries and regions with vastly different social, political, and economic values. These factors have made it increasingly difficult to reach consensus and achieve free trade multilaterally.

Behind-the-Border Regulatory Issues

The 2011 World Trade Report shows that, despite the spread of PTAs, only around 15 percent of global merchandise trade receives tariff preference, with the majority of trade taking place under WTO and Most Favoured Nation (MFN) rules. This implies that in an environment already characterized by low-tariff protections, preferential market access plays a smaller role in PTAs than their name would suggest. We must therefore look beyond tariffs to understand PTAs, as non-tariff regulatory issues take an increasingly central role in determining trade outcomes.

As globalization has accelerated, production chains have become increasingly complex. The trade agenda has grown to include trade in services, competition and intellectual property rights, investment policy, and environment and labor standards (Trebilcock et al., 2013). What has been termed the ‘new’ or ‘deep’ trade agenda deals with regulatory issues such as these, which often stem from policies and infrastructure behind the border.

Lacking a functional multilateral body to govern the increasingly complex set of trade norms and rules, governments have turned to bilateral and plurilateral agreements, which have the scope to go broader and deeper. The 2011 World Trade Report defines elements of deep integration found in PTAs as WTO+ and WTO-X areas. WTO+ refers to deeper integration in areas covered by the WTO, and WTO-X to those not contained at all in WTO agreements (WTO, 2011). As behind-the-border regulatory issues begin to result more from potential trade barriers and sources of discrimination than from tariff levels, governments are going to look to include WTO+ and WTO-X areas in their PTAs.

Convergence Towards Multilateralism

One of the dominant arguments in support of PTAs is predicated on the juggernaut logic, which suggests that liberalization begets liberalization (Baldwin & Freund, 2011). This suggests that any liberalization, whether it is unilateral, bilateral, or multilateral, is ultimately beneficial. The GATT/WTO, which has been the main driver of trade liberalization for decades, has reached an impasse. With economists, scholars, and politicians widely agreeing that free trade, in theory, leads to the best overall outcome, it is unsurprising that governments have pursued liberalization through other means.

Bilateral and plurilateral PTAs are much easier to negotiate than multilateral agreements, presenting countries the opportunity to address issues on which the WTO cannot reach consensus. Under the juggernaut logic, PTAs can therefore provide a new platform for trade liberalization, which will make further liberalization at the multilateral level more attainable. One way PTAs can contribute to multilateral liberalization is through experimentation and learning. Experimenting with cooperation between members of a PTA could provide useful examples that other PTAs and the WTO itself can follow or adapt (Hoekman & Kostecki, 2009).

Another argument behind the idea that PTAs can enhance the MTS is that PTAs promote convergence in WTO+ and WTO-X areas, making it easier to negotiate these complex issues at the multilateral level. A major struggle for advocates of free trade has been the realization that it can create a ‘race to the bottom,’ where countries attract foreign investment by creating a financially beneficial location for corporations to offshore their production. The social and environmental consequence of this can be—and has been— devastating, resulting in low wages, poor working conditions, and lax environmental standards. Although these concerns have become increasingly salient and consumers and interest groups are more aware and involved, it is not within the WTO’s scope to address them. PTAs, on the other hand, can.

Developed countries and trading blocks, most notably the US and the EU, are increasingly using PTAs to export their value-related standards, such as labor and environmental norms (Chauffour & Maur, 2011). Developing countries and smaller economies have incentive to adopt these standards at the risk of being excluded from large markets. Harmonization of standards, particularly value-related standards, is generally seen to have had positive effects, in some respects creating a ‘race to the top.’ As more countries adopt the US or EU’s approach over their own, negotiations at the multilateral level will become easier, as a degree of convergence will already be achieved (Hoekman & Kostecki, 2009).

Developed countries also spread technical standards through PTAs, such as food security, product standards, and IP protection (Chauffour & Maur, 2011). With international production chains becoming ever more prevalent, involving multiple firms in different industries across many countries, it is behind-the-border regulations, much more than tariffs, that constrain trade and productivity growth. Convergence of infrastructure and policies therefore enables international trade to operate more seamlessly and cost effectively, facilitating and supporting the MTS.

However, it is questionable whether convergence on standards will translate into the WTO’s multilateral system. While the theory is attractive, the reality is that standards still vary considerably between countries. It also relies on the political will of all WTO members, likely unattainable.

An Unlikely Harmony

International harmonization on standards—both technical standards and value-related standards,—is far from being realized. The EU and US are two of the largest and most influential markets in the world, and both have avidly pursued PTAs in recent years. Although both tend to have similar social and political values, there are many WTO+ and WTO-X areas on which they differ (Young, 2016). The list of WTO-X areas is expanding rapidly, and with EU and US PTAs now including agreements on areas such as visa and asylum, terrorism, and human rights, the possibility of harmonization becomes doubtful (Horn et al., 2010).

Another factor hampering the theory of convergence is the sheer multitude of PTAs now in force. As countries enter into PTAs, the incentive for other countries to do the same looms larger, so they can avoid losing out on a market to competitors with preferential agreements and causing an unfortunate domino effect. As the number of PTAs continues to snowball, and as they become increasingly deep, the ‘spaghetti bowl’—a term coined by Jagdish Bhagwati (1995) to explain their complexity—becomes ever more relevant.

An aim of the GATT/WTO is to simplify global trade rules and norms, making trade easier, cheaper, and more productive. However, while there are similarities across many PTAs, they continue to be produced in all different shapes and sizes, with varying coverage and depth. Different tariff schedules, product and sectoral coverage, implementation timeframes, rules of origin, customs procedures, and many more arrangements are negotiated uniquely for each PTA (Chauffour et al., 2017). As countries sign up to more and more PTAs, the chance of overlap and contradiction increases between any number of agreements that must be simultaneously adhered to.

As the spaghetti bowl grows, unifying all of these factors becomes more challenging, and convergence at the multilateral level becomes less likely. In this sense, without a functional body to oversee the growth and development of PTAs, they pose a threat to the MTS.

Beyond Trade

Trade is no longer just about trade. Countries do not enter into PTAs purely for economic reasons, but are motivated by reasons of peace, security, and political influence. Trade agreements can be extremely powerful tools for building productive and mutually beneficial relationships between countries. But if they are misused, powerful nations may use them as channels to exert manipulative influence over developing nations—even outside the auspices of the WTO.

A particularly strong argument on the side that views PTAs as a threat to the MTS is the suggestion that countries pursue PTAs not because the WTO cannot deal with behind-the-border issues, but because they prefer to do trade through bilateral and plurilateral avenues. This is particularly the case for large affluent countries that enjoy significant power in PTA negotiations, enabling them to trade on their own terms.

The WTO works on a system of “one country, one vote,” so countries such as Uruguay and Myanmar have as much say as the US. Developing countries have formed voting blocks, obstructing agreements they do not deem beneficial to themselves. While this has stalled the Doha Round, it has also allowed developing countries equal rights at the negotiation table and kept the desires of powerful nations at bay.

PTAs, on the other hand, create an imbalance of power between negotiating countries that can be abused. While developing countries can pool resources in the multilateral arena, many lack the ability and expertise to effectively negotiate PTAs. They also simply lack the bargaining power of developed nations. The bigger and more important the trading partner, the more power they have to impose standards and conditions beneficial to themselves. States such as the US, Canada, as well as the EU Common Market, have considerable bargaining power, and can place significant pressure on their trading partners to adopt specific conditions. While this can lead to some positive convergence of standards, it may also result in the inclusion of provisions not appropriate for that country or their level of development (Trebilock et al., 2013).

Developing countries may have to undergo major institutional changes to comply to PTAs, including the reorganization of administrative institutions, the drafting of new laws to strengthen domestic regulatory framework, and the creation of new specialised courts (Chauffour et al., 2017). Not only can the process of implementing and managing compliance to PTAs be complex, but it can also be timely and costly. Countries that lack the resources or expertise to do so may be excluded from entering into PTAs with dominant economies. Furthermore, locking into particular regulatory regimes can ultimately put the country at a disadvantage, limiting their potential to pursue trade with countries outside of that agreement (Lamy, 2011).

This contradicts the fundamental principles of the WTO’s multilateral system, which aims to liberalize trade across all countries by facilitating development and inclusion. Countries that benefit from the PTA agenda—or, those able to impose their dominance outside of the WTO’s consensus structure—have growing incentives to block multilateral progress. Under this analysis, even if convergence on standards can be broadly achieved, key governments are unlikely to support multilateral over bilateral and plurilateral progress, as it could limit their bargaining power and ability to exert control over international trade and politics.

Conclusion: The Future of the MTS and PTAs

The emergence of mega-regional agreements, such as the Trans-Pacific Partnership Agreement (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), suggested to many that PTAs were beginning to facilitate the convergence of trade policy and standards at a more multilateral level. However, events of the last year have raised significant doubts. US President Trump pulled out of the TPP and is likely to do the same with the TTIP, with his administration’s 2017 Trade Policy Agenda declaring that the US would be “focusing on bilateral negotiations rather than multilateral negotiations.” The success of the Brexit campaign to pull Britain out of the EU’s common market also signalled a turn away from multilateralism.

What these events mean for the MTS is currently speculative. What is certain, though, is that the global trading system has recently undergone significant changes, and it has become increasingly complex. The Doha Round impasse has achieved little progress on the multilateral front, but trade liberalization has continued at impressive rates as countries turn to PTAs. PTAs have the potential to tackle behind-the-border regulatory issues, which, as globalization accelerates and international value chains rise in numbers, have become more important on trade flows than tariffs. Convergence on technical standards can increase trade, and convergence on value-related standards have had positive consequences. However, as the spaghetti bowl of PTAs continues to grow, the complexity of the system will reduce the likeliness of PTAs being subsumed into the WTO’s multilateral system. Furthermore, powerful countries can use PTAs to advance their interests on multiple fronts and are unlikely to give up this advantage.

The momentum driving PTAs is showing no signs of slowing. They are here to stay. As discussed in this article, there are aspects of PTAs that are complementary to the MTS, and others which completely contradict it. The challenge of the next decade will be to analyze which aspects of PTAs create a net benefit for economic, social, and environmental wellbeings, to replicate successes, and to develop strategies of unification and oversight at the multilateral level.

Mairi Robertson completed her Masters of International Relations at the University of Melbourne, where she focussed on international trade and development. She has been an active member of her university community since 2015, helping the student committee run events and host speakers. She holds a Bachelor of Arts from Monash University, having majored in French language and literature studies. Mairi is currently collaborating with Business for Development, a Melbourne based NGO, to research and profile potential future partners.

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