Impact on Multilateralism and the World Trading System

We began Section 3 by examining a number of general factors that were driving the proliferation of BTAs. We begin this Section by examining the general impact that the overall growth in the number of BTAs is having on multilateralism and the world trading system, before turning to the effects that different types of BTAs are having.

Impact of General Factors

A general concern relating to the explosion of BTAs is the distractive effect it is having on multilateralism. As countries devote more and more of their resources towards discussing, designing, negotiating and implementing BTAs, less are available to be directed towards multilateralism. This would be particularly true for the smaller and poorer developing countries, where such resources are particularly scarce. Apart from detracting from the multilateral effort, interest in unilateral trade liberalization, an important but often overlooked modality in the overall liberalization effort of the past few decades, is also likely to wane in the light of the obsession with BTAs.

A related concern is that the appeal of reviving the stalled Doha round of the WTO will fade as more and more BTAs are negotiated. To the extent that BTAs are being pursued to compensate for the perceived inadequacies, or subsequent collapse, of the Doha round, the apparent need to revive it will presumably diminish with each successive BTA. But can BTAs, if there are enough of them, substitute for a multilateral deal? In other words, does a BTA with every member of the WTO sum to equal a multilateral deal, for instance? Although this could be true in theory, it is unlikely to be so in practice, for at least two reasons: (i) the products covered in each BTA are unlikely to be the same; i.e., the set of exclusions are likely to vary depending on the partner country; and (ii) the assortment of implementing rules are likely to vary across BTAs. This being the case, the sheer number of BTAs cannot substitute for a multilateral deal and, to the extent that it reduces the likelihood of reaching such a deal, it is detrimental to the world trading system.

The fact that most BTAs and PTAs are WTO-consistent does not do much to allay concerns relating to their potentially detrimental effects on the world trading system either. This is because the requirements of Article XXIV and the Enabling Clause and the General Agreement on Trade and Services (GATS) are very weak and have never really been enforced. For instance, as Lloyd (2002) points out, the meaning of "substantially all tradeâ€� has never been defined and has been interpreted in many ways. The only effective restraint that GATT/WTO rules have imposed on BTAs and PTAs is that they have generally prevented trade barriers from being raised against third countries. ⁸ Furthermore, almost all of the deep integration features of recent BTAs are altogether outside the WTO rules.

Impact of Specific Factors

Impact of Economically Motivated BTAs

Sector Expanding BTAs

Whether sector expanding BTAs can support multilateralism will depend on whether the accords, which apparently can be achieved at the bilateral but not multilateral level, are eventually offered on a multilateral MFN basis to non-members. So far, there is limited evidence of this happening, but then it might still be too soon to pass judgment.

There is also concern that if the major trading nations achieve liberalization in new sectors through bilateral or plurilateral agreements amongst each other, then the perceived returns from, or motivation for, a WTO-wide agreement will diminish. A WTO agreement would allow smaller, developing countries to free-ride on achievements made at the multilateral level. Without such a deal, and with limited multilateralization of BTA accords, the smaller, developing countries may be locked out and will not be able to participate in the benefits of liberalized markets.

Sometimes BTAs can set positive precedents and develop negotiation modalities that can be adopted later in multilateral negotiations. The Canada-US FTA is an example of this. This BTA developed concepts and modalities in the service trade area that was important in the development of GATS. This can serve the objectives of multilateralism by advancing the agenda in a demonstrably attainable way.

Sector Excluding BTAs

Although sector excluding BTAs may provide a vehicle to overcome obstacles preventing progress with liberalization in other areas, are they working to further compromise liberalization of these sectors at the multilateral level? It would seem that they are. Basically, they set a negative precedent that can be exploited. Once a country succeeds in securing exclusion, it can use the precedent set in negotiations with other countries. For example, once Japan was able to secure exclusions for certain agricultural products in the JSEPA with Singapore, the same exclusions were insisted upon in negotiations with Mexico and Korea. But other countries can also refer to these precedents in their own negotiations. Korea, for instance, was reported to have cited the Japanese exclusions in agriculture to strengthen its negotiating position in pressing for the same with Mexico (Min 2006).

The multilateral approach is arguably the best forum to deal with liberalization of these excluded sectors because it has one key advantage over the bilateral (or regional) approach in this respect. This is the ability to trade concessions across disparate interests; that is, to weigh up the costs to countries of conceding protection in sensitive sectors (such as agriculture) against the benefits from increased market access in areas in which they have a comparative advantage (eg. through changes to rules relating to investment, intellectual property or services).9 Every time a BTA allows a country to bypass this trade-off simply through its choice of partner, and secure benefits without incurring costs, the task of liberalizing such sensitive sectors is made more difficult.

Market Restoring BTAs

As members of a PTA engage in more and more BTAs with non-members, the PTA becomes more porous. In this way, BTAs can work to reduce the restrictiveness of existing trading blocs, and open them up to external trade, albeit in a somewhat piece-meal fashion. If a high share of members of a PTA engage in a large number BTAs with non-members, then this has the potential to return trading patterns to a form that existed prior to the establishment of the PTA. In this way, such BTAs have the potential to dilute preference margins and thereby reduce the trade diversion induced by the PTA. If they do this, then Market Restoring BTAs would complement the multilateral trading system and work as building rather than stumbling blocks towards free and open trade.

Market Creating BTAs

The impact of Market Creating BTA on multilateralism and the world trading system depends on the type of trade that it generates. If the preferences provided by the BTA serve to divert trade that was previously being conducted with a country that was a lower-cost supplier, then this would be welfare-reducing. If, on the other hand, the BTA works to reduce or remove trade barriers or other restrictions that have previously constrained bilateral trade between the two countries, then the impact on multilateralism could be positive, even if second-best. Thus, a lot depends on why trade relations had been limited to begin with. If historically weak trade relations are due to resource endowments being competitive rather than complementary, then such BTAs, if they affect trade patters, will run counter to multilateralism. Even if they do not affect trade patters, their impact may still be negative because administering the BTA and implementing the rules associated with it will still be a drain on resources.

Impact of Strategically Motivated BTAs

Lobby Driven and Terror Driven BTAs

We discuss the impact that lobby driven and terror driven BTAs are likely to have on multilateralism jointly because they both involve the use of trade policy to pursue non-trade related objectives.

To the extent that BTAs, a trade policy instrument, are used to pursue non-trade related objectives, the likelihood that the BTA is distorting is increased. If terror driven BTAs are designed to reward allies for instance, it cannot do so unless it provides a margin of preference sufficiently high to divert a significant amount of trade. In fact, it may de designed to do so, if the objective is to reward, in a one-sided transfer, rather than to be mutually beneficial, from a gains from trade point of view.

The main concern relating to lobby driven BTAs is that they may be setting precedents that run counter to multilateral principles, and may be promoting protectionism.

Furthermore, as Lloyd (2002) points out, it is useful to adopt a global welfare point of view in evaluating such BTAs, and ask if they have a positive effect on world welfare. For lobby driven BTAs in particular, this approach also avoids having to make value judgments associated with the objectives being pursued and focuses attention on economic effects. Prima facie, both lobby driven and terror driven BTAs appear unlikely to raise global welfare for at least two reasons. First, the fact such BTAs are likely to be trade distorting suggest that global welfare will be reduced as a result. This negative welfare impact may be higher for terror driven BTAs because they may be trade diverting by design, where as lobby driven BTAs are trade distorting only as a consequence of using the wrong instrument to pursue a particular objective. Second, as various empirical studies have shown, BTAs and PTAs generally result in the welfare of some non-members being reduced, and the extent of the welfare reduction is usually related to the extent of which trade is distorted. ¹⁰ For highly-distorting BTAs, the extent of the global reduction in welfare is also likely to be high.

Apart from the effect on global welfare and the world trading system, others such as Bhagwati (2003) are also concerned about the impact that lobby driven BTAs are having on the WTO as an institution. The concern is that the WTO, a trade institution, is being turned into an institution where domestic lobbies, whether good or bad, can park their agendas and capture, and distort, the working of the institution itself.

Impact of Event Driven BTAs

PTA Facilitation BTAs

Whether or not PTA facilitation BTAs serve the interests of multilateralism depends on the PTA concerned. If the PTA is inward-looking, has complex rules of origin requirements and a high margin of preference, the BTA may hinder multilateralism and hamper the world trading system. If the PTA, on the other hand, is based on open regionalism, the BTA may assist the non-PTA member to hasten its liberalization and integration with the world trading system.

PTA Integration BTAs

A BTA between these countries suggests that, prima facie, they wish to pursue a level of integration that surpasses that possible with the PTA that they are members of. Often members of a PTA can only proceed as fast as its slowest or least ambitious member, especially if the decision making process is consensus based. A BTA may then allow some of its members to pursue more ambitious liberalization programs. This should lead to a positive outcome for the world trading system if it results in a deeper level of integration.

WTO Accession BTAs

By supporting the process of WTO accession, these BTAs serve to promote multilateralism. Sometimes, the bilateral agreements commit countries to rules on trade liberalization that exceed those of the WTO. For instance, Ecuador had to renounce its status as a "developing country", based on demands from the US, and thereby implement several WTO agreements within a much shorter timeframe. The PRC agreed to a range of "WTO-plus" measures pushed separately by the US and the EU, including anti-dumping measures and import restrictions to curtail the entry of Chinese goods into their markets, prior to WTO accession.

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