Challenges of proliferating trade pacts

The WTO in a report released in mid July on world trade 2011 has noted that the proliferation of Preferential Trade Pacts (PTAs) in the last two decades is posing a challenge to the global trading system.

At present, around 300 PTAs are in existence with some more in the pipeline and it was said that the rapid increase in the PTAs was seen since 1990.The numerous PTAs signed by countries with various partners has resulted in what is termed as ‘spaghetti bowl ‘or ‘Asian noodles’ effect. Many of these agreements go beyond tariff concessions.

PTAs allow signatories to depart from the WTO principle of Most Favoured Nation (MFN), which in effect means non-discrimination. However, Article XXIV of the General Agreement on Tariff and Trade (GATT) permits departure from this principle.

Additionally, under the ‘Enabling Clause,’ developing countries can be afforded special and differential treatment and Article V of the General Agreement on Trade in Services (GATS) outlines provisions for trade pacts in the services sector.

The report analyses the change in thinking of the effects of such PTAs and considers them as no longer being complements or substitutes for multilateral tariff liberalisation, as statistics indicate that world trade has not expanded so much due to preferential tariffs granted under such pacts.

Over the years, due to tariff liberalisation all over the world, tariff rates have reduced substantially. The report notes that “only 16 % of global merchandise trade receives preferential treatment if trade within the EU is excluded” and attributes it to the low non preferential tariff rates all over.

The purpose served by PTAs today is different according to the WTO. They are considered to be mechanisms required by the development of global production networks. At the release of the report, the WTO Director General stated that the global production networks required “an enabling regulatory environment that provides stronger investor protection, better infrastructure services, freedom of movement of corporate personnel, protection to intellectual property rights and facilitation of trade.”

This appears to be the reason that such trade pacts today are not merely Free Trade Agreements dealing with tariffs, but encompass investment, services, competition policy, intellectual property, etc. The deeper integration beyond tariffs is because trade and investment links among countries have been growing to an extent where existing multilateral rules are insufficient to manage these developments and the steady reduction of tariff barriers have compelled countries to align themselves to divergent national non tariff policies.

However, as the DG rightly points out, such agreements also have their drawbacks. While cautioning that this ‘new face of PTAs’ could threaten the multilateral trading system, he stated that they “may lock in their members to a particular regulatory regime, reducing the potential for trade to prosper with countries outside the arrangement”.

The conclusion of the report is that governments need to find a coherent way for PTAs and the multilateral trading system to complement each other while ensuring that multilateral disciplines minimise any negative effects from PTAs and identifies a number of ideas relevant to achieving a coherent trade policy “in a world of deep PTAs,” among which are the acceleration of multilateral trade openings, addressing deficiencies in WTO agreements and multilateralising regionalism (i.e. extension of existing preferential arrangements in a non discriminatory manner to additional parties)

Preferential Trade Agreements and the WTO are both here to stay permanently and WTO members would have to find ways and means for both to complement each other.

(Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)