The WTO at a Crossroad? FTAs and the Future of International Trade.

By Steven Paille

Staff Writer

Introduction

With the US Congress finally ready to vote on three bilateral trade deals, it seems a good time to look at the Canada-United States trade relationship and its impact on the WTO.  In particular, should proponents of liberalized trade welcome or read the ongoing negotiations between Canada and the EU for a Comprehensive Economic and Trade Agreement (CETA)—and, perhaps, its push for America to conclude its own free trade agreement (FTA) with the EU?  

Answer:  It is possible that nations pursuing ‘free-er’ trade could actually end the era of free trade as we know it—and gut the WTO.

The United States (US), Canada, and the European Union (EU) are all members of the World Trade Organization (WTO).  Since the US and the EU make up approximately half of the world’s GDP, their inclusion in the WTO is vital to the continuance of international trade norms, dedicated to non-discrimination, transparency, and low trade barriers.  However, the current economic downturn could signal a change in international trade norms and individual countries’ trade policies.  The blogosphere has already questioned whether the world is “moving back towards the protectionist system of the 1930s.”  In contemplating whether the US and EU will ever enter into a Free Trade Agreement (FTA) or whether the EU and Canada will successfully conclude the Comprehensive Economic and Trade Agreement (CETA), one must ask whether the world will return to the “spaghetti ball of bilateral trade agreements” dueling with one another, and whether the WTO can endure such a change in international trade norms.

Most-Favored-Nation and GATT Article XXIV

One of the fundamental trading principles of the WTO is “Most-favored-nation” (MFN), or non-discrimination.  In fact, this principle is the first article of the General Agreement on Tariffs and Trade (GATT), the second article of the General Agreement on Trade in Services, and the fourth article of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).  The MFN principle articulates that an individual country should keep trade barriers low, transparent, and equal for all WTO trading partners.  Further, an individual country should not discriminate between local products/services and foreign products/services.  Moreover, the WTO provides for an international trade arena, whereby bilateral agreements are not needed.  In fact, the WTO states, “[Regional Trade Agreements] (RTAs) can complement the multilateral trading system, help to build and strengthen it. But by their very nature RTAs are discriminatory: they are a departure from the MFN principle, a cornerstone of the multilateral trading system.” 

Like most agreements, there are always exceptions.  Here, a big one is that countries can still discriminate against one another by liberalizing their trade restrictions more with other countries through regional trade agreements of RTAs. (Other exceptions include more favorable trade policies for developing countries and restrictions to trade from countries that are “trad[ing] unfairly.”)

The Concern of RTAs

RTAs, while seemingly an excellent inducement for all countries to lower trade barriers, could obliterate MFN—and with it the WTO itself— if it is used by Canada and the United States to obtain preferential trade deals with the EU.

The WTO reports a “surge in RTAs [that] has continued unabated since the early 1990s.  As of 15 May 2011, some 489 RTAs, counting goods and services notifications separately, have been notified to the GATT/WTO.  Of these, 358 RTAs were notified under Article XXIV…”  As a result, while the exception for RTAs may have been needed to attain the support 153 WTO member states, the increase in RTAs and an eventual EU-US FTA and Canada-EU FTA may make MFN the exception, rather than the rule.  Clyde Prestowitz, President of the Economic Strategy Institute, explains that a “US-EU free trade agreement…would probably destroy the WTO because the US and the EU together represent somewhere between two-thirds to half of the world economy.  If half of the global economy entered into an FTA and excluded the other half – where would that leave the WTO?”  Mr. Prestowitz calls FTAs “preferential trade agreements,” which, according to the MFN doctrine, are disfavored by the WTO.

And a FTA between the EU and the US may solidify an international trade regime defined by competing blocs of FTAs.  If approximately half of the world’s economy had a preferential trade agreement, the other half of the world’s economy, spread across a number of countries, may lose out.  Although current tariffs between the EU and the US are low, “economic gains are higher when you do trade deals between bigger economies.”  Therefore, the aggregate effects of an EU-US FTA could be quite large.  This could result in disincentives for the EU and the US to engage in trade with outside countries.

As a result, an EU-US FTA could start an interesting cycle across the world.  If outside countries are left out because of an EU-US relationship, each outside country would be incentivized to quickly develop their own FTAs with the EU and the US.  This could create another “spaghetti bowl” effect. 

On the other hand, the dramatic increase in FTAs could create a reinforcing web of county-to-country trade deals that, in time, would allow the WTO to set even more liberal trade rules. The result could then be that the international trade norm of low trade barriers is strengthened.  In fact, as Fredrik Erixon, director of the European Centre for International Political Economy, points out, the EU and the US “will inspire others to follow their lead.”

Conclusion:  Will the WTO Step In?

The impact of FTAs on the WTO will depend on these agreements specifics.  Hence, the critical question becomes if the WTO will step in either to block these agreements (unlikely) or influence their terms (more likely). 

The FTA-exception, drafted into the WTO’s governing documents with critical qualifiers, could permit the WTO’s judicial arm to step in and ensure FTAs will not harm—but only reinforce—a global norm for liberalized trade among all countries.  I’ll be exploring this topic in my next post.