Effective trade agreements: Why and how?

The India Sri Lanka FTA that has been in effect since 2000 lacked an effective dispute resolution mechanism. It relied on action by the trade ministries of the two countries, which were influenced by factors other than trade. But modern trade agreements include arbitration and appeal clauses and, in the aftermath of US sabotage of the WTO procedures, provisions for overcoming the refusal of one party to nominate panel members

The most powerful trading nation is flouting the core principles of the multilateral trade arrangement that has been in place under the GATT and now under the World Trade Organisation (WTO) for decades. The arbitrary and capricious tariff actions of the Trump Administration violate the core principle of Most Favored Nation (MFN). 

This core principle does not allow a member to discriminate among its trading partners who are members of the WTO. If a tariff rate on a particular Harmonised System (HS) code is offered to one trading partner, it is automatically extended to other WTO members. President Trump’s variable and ever-changing tariff rates violate this core principle. Trading partners have been frustrated in finding a remedy through the WTO. For several years, the United States has refused to allow appointments to be made to the appellate panels of the WTO, rendering the dispute resolution procedure impotent.

Countries need alternatives to the ineffective WTO-centered set of trade rules. 

Effective plurilateral and bilateral agreements

The term plurilateral is used for international legal arrangements that apply to more than two countries (bilateral), but not to all or almost all (multilateral). The WTO is multilateral. The Regional Comprehensive Economic Partnership (RCEP) is an example of a large plurilateral agreement, as is the United States Mexico Canada Agreement (USMCA) which binds three large economies. The India Sri Lanka Free Trade Agreement (ISLFTA) is an example of a bilateral agreement.

While the WTO arrangements did not bar President Trump’s April 2025 tariffs (ruled illegal by the US Supreme Court), the USMCA proved an effective barrier, causing the tariffs imposed on HS codes that fell under the USMCA to be exempted after being announced. Ironically, the USMCA was negotiated during the first Trump Administration because he was unhappy with its predecessor, the North American Free Trade Agreement (NAFTA).

One of the USMCA’s most consequential differences is its state-to-state dispute settlement system. Under NAFTA, disputes often stalled because one party could block the formation of a panel by refusing to appoint panelists or agree on a roster. The USMCA addresses this flaw through Article 31.8, which creates a standing list of preapproved independent trade experts, ensuring that dispute resolution panels could be formed even when one party is seeking to block the process, as the US continues to do in the WTO.

The ability of the USMCA to block willful violation by one party provides a lesson for all countries looking for pragmatic solutions. Multilateral agreements anchored on the non-discriminatory principles of MFN and National Treatment (no discrimination against foreign suppliers) are optimal. But theoretical optima are irrelevant when a major trading nation is hell bent on violating the rules. Interestingly, the US has taken the first step to revise the USMCA or pull out from it by blocking its routine renewal scheduled for 2027.

In this context, countries should focus on bilateral and plurilateral agreement that include effective dispute resolution mechanisms such as the USMCA’s Article 31.8. Such agreements will give them a degree of stability amidst the chaos unleashed by the Trump Administration. Companies that wish to ride the roller coaster of the everchanging US tariff regime can continue to do business in that large market. But the countries that they are based in need to be insulated from the vagaries of US policy. 

Entering into agreements such as the India Sri Lanka Economic and Technology Cooperation Agreement (ETCA) or the RCEP is the pragmatic path open to Sri Lanka in the face of volatile trade relations with its largest export market. Whatever concerns that stakeholders and the Government had less than optimal agreements in the “good old days” of the WTO are no longer relevant. 

The nuances of dispute resolution illustrate the need for competent negotiators when Sri Lanka embarks on the now unavoidable task of negotiating complex bilateral and plurilateral agreements

Effective dispute resolution

The ISLFTA that has been in effect since 2000 lacked an effective dispute resolution mechanism. It relied on action by the trade ministries of the two countries, which were influenced by factors other than trade. But modern trade agreements include arbitration and appeal clauses and, in the aftermath of US sabotage of the WTO procedures, provisions for overcoming the refusal of one party to nominate panel members. While not as clearcut as Article 31.8 of the USMCA, the RCEP includes provisions to break deadlocks. 

Unlike some of the newer trade agreements, the RCEP does not permit private investors or trading firms to seek remedies directly. The USMCA significantly narrowed the scope of the investor-state dispute settlement (ISDS) mechanism. It was eliminated between the United States and Canada. Between the United States and Mexico, it now applies only in limited cases involving sectors such as oil and gas, power generation, telecommunications, transportation, and infrastructure.

According to a comprehensive study of the USMCA by the Centre for Strategic and International Studies, “Canadian investors in Mexico and Mexican investors in Canada can still pursue ISDS claims under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which offers an alternative avenue for covered investments and alleged breaches of investment protections.”

The Government needs a specialised agency that can supervise the work of consultants with experience in advising trade negotiators who will be essential given the current state of Government capacity. This should be seen as a modality like the use of consultants for the complex sovereign debt restructuring from 2022 onward

Negotiating capacity

The nuances of dispute resolution illustrate the need for competent negotiators when Sri Lanka embarks on the now unavoidable task of negotiating complex bilateral and plurilateral agreements. Countries such as Viet Nam and India have experience in negotiating multiple, complex trade agreements. While the ISLFTA was Sri Lanka’s and India’s first agreement, Sri Lanka basically stopped work during the first Mahinda Rajapaksa Government. It stopped learning. 

By section 99 of the Economic Transformation Act, No. 45 of 2024, the then Government sought to address this weakness by creating an Office of International Trade (OIT). The current Government has not acted to implement this legislation or to even to amend it. But it now appears that the realisation of the necessity of trade agreements is beginning to dawn on at least some members of the Government.

The Government needs a specialised agency that can supervise the work of consultants with experience in advising trade negotiators who will be essential given the current state of Government capacity. This should be seen as a modality like the use of consultants for the complex sovereign debt restructuring from 2022 onward. If the OIT is staffed by competent Sri Lankans, they can gradually take over all responsibilities.