Author Archives: jdingel

Overestimating liberalisation: GATT XXIV and “substantially all trade”

GATT Article XXIV (which is supposed to discipline preferential trade agreements) 8(b):

A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.

In practice:

Two views of how to interpret the ‘substantially all trade’ provision have crystallised. The quantitative approach favours a statistical benchmark on the proportion of trade covered – for example, 90 percent of all existing trade between the parties. The qualitative approach argues that no sector (or at least no major sector) should be excluded from RTA trade liberalisation…

[I]n the Trade and Development Cooperation Agreement concluded between the EC and South Africa… ‘substantially all trade’ was interpreted to mean an average of 90 percent of all items currently traded between the two countries. The inclusion of the word ‘average’ permits the use of an asymmetrical interpretation… approximately 94 percent of South African exports were covered versus 86 percent of EC exports.

But of course, that’s a perverse method of calculation. It overestimates liberalisation in the same way that the trade-weighted average tariff measure underestimates protection. Measuring “substantially all” by existing trade volumes stacks the deck against meaningful liberalisation:

A basic dilemma facing EU negotiators of these FTAs is that, according to their negotiating mandate, they must not undermine the finely tuned border protection of the CAP and the Common Fisheries Policy. At the same time, they must ensure that the agreement is compatible with Article XXIV… The European Union seeks to resolve this dilemma by interpreting WTO rules as requiring free trade to be established on 90% of the total bilateral trade flows. Since EU tariffs on most industrial products are zero or very low (exceptions are, for example, clothing and motor vehicles) the European Union has little difficulty in liberalizing imports of all, or practically all, industrial products. Also, since imports of agricultural products and fisheries are limited by (sometimes prohibitive) border protection they account for only a small proportion of existing total imports from the partner country. As a result, the European Union is able to make a sufficient contribution to the fulfillment of the 90% criteria by fully liberalizing imports of manufactured goods but, as shown in Table 6, only around 60% of its imports of agricultural products. Similar calculations, it is argued by the European Union, also enables the partner country to protect sensitive industrial and agricultural sectors of its economy while remaining within the EU’s interpretation of requirements of Article XXIV.

Australia has been pushing for WTO members to agree to a definition of “substantially all trade” at the Doha round, though I suspect they’re not making much progress.

Overestimating liberalisation: GATT XXIV and "substantially all trade"

GATT Article XXIV (which is supposed to discipline preferential trade agreements) 8(b):

A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.

In practice:

Two views of how to interpret the ‘substantially all trade’ provision have crystallised. The quantitative approach favours a statistical benchmark on the proportion of trade covered – for example, 90 percent of all existing trade between the parties. The qualitative approach argues that no sector (or at least no major sector) should be excluded from RTA trade liberalisation…

[I]n the Trade and Development Cooperation Agreement concluded between the EC and South Africa… ‘substantially all trade’ was interpreted to mean an average of 90 percent of all items currently traded between the two countries. The inclusion of the word ‘average’ permits the use of an asymmetrical interpretation… approximately 94 percent of South African exports were covered versus 86 percent of EC exports.

But of course, that’s a perverse method of calculation. It overestimates liberalisation in the same way that the trade-weighted average tariff measure underestimates protection. Measuring “substantially all” by existing trade volumes stacks the deck against meaningful liberalisation:

A basic dilemma facing EU negotiators of these FTAs is that, according to their negotiating mandate, they must not undermine the finely tuned border protection of the CAP and the Common Fisheries Policy. At the same time, they must ensure that the agreement is compatible with Article XXIV… The European Union seeks to resolve this dilemma by interpreting WTO rules as requiring free trade to be established on 90% of the total bilateral trade flows. Since EU tariffs on most industrial products are zero or very low (exceptions are, for example, clothing and motor vehicles) the European Union has little difficulty in liberalizing imports of all, or practically all, industrial products. Also, since imports of agricultural products and fisheries are limited by (sometimes prohibitive) border protection they account for only a small proportion of existing total imports from the partner country. As a result, the European Union is able to make a sufficient contribution to the fulfillment of the 90% criteria by fully liberalizing imports of manufactured goods but, as shown in Table 6, only around 60% of its imports of agricultural products. Similar calculations, it is argued by the European Union, also enables the partner country to protect sensitive industrial and agricultural sectors of its economy while remaining within the EU’s interpretation of requirements of Article XXIV.

Australia has been pushing for WTO members to agree to a definition of “substantially all trade” at the Doha round, though I suspect they’re not making much progress.

Variable geometry

Robert Z. Lawrence argues that the WTO should serve as an umbrella organisation for plurilateral agreements on behind-the-border measures — the so-called “variable geometry” approach.

Doha and the food crisis

Agricultural liberalisation in the European Union and the US is good for several reasons, but it will not help moderate the food crisis. A key component of the proposed Doha agreement is a substantial reduction in agricultural subsidies. This would reduce the supply of grains from some countries that subsidise them and increase it from other countries, especially in the Cairns group. The net effect on supply would be negative.

— Jagdish Bhagwati and Arvind Panagariya in the FT.

An anti-MFN clause

Ever seen Article 14 of the Panama-Costa Rica 1973 preferential trade agreement? It’s an anti-MFN clause:

The Contracting Parties agree not to grant, through a most favored nation clause, the concessions they grant to each other through this Treaty now or in the future to third countries from outside Central America with whom they may sign trade treaties or conventions.

The two countries signed a PTA in 2007, which probably didn’t include such nonsense, though I can’t find the text.

[Hat tip: Lorand Bartels]

Obama mellows on trade

Reacting to a story that Barack Obama doesn’t think NAFTA is so bad after all, Juan Carlos Hidalgo says “he’s a politician after all,” as I noted (twice) back in March. Here’s Obama coming clean in Fortune:

Barack Obama is toning down his populist rhetoric – at least when it comes to free trade.

In an interview with Fortune to be featured in the magazine’s upcoming issue, the presumptive Democratic nominee backed off his harshest attacks on the free trade agreement and indicated he didn’t want to unilaterally reopen negotiations on NAFTA.

“Sometimes during campaigns the rhetoric gets overheated and amplified,” he conceded, after I reminded him that he had called NAFTA “devastating” and “a big mistake,” despite nonpartisan studies concluding that the trade zone has had a mild, positive effect on the U.S. economy.

Does that mean his rhetoric was overheated and amplified? “Politicians are always guilty of that, and I don’t exempt myself,” he answered.

Is China the trade troublemaker?

Fred Bergsten on Chinese global economic engagement in Foreign Affairs:

On trade, China has been playing at best a passive and at worst a disruptive role. It makes no effort to hide its current preference for low-quality, politically motivated bilateral and regional trade arrangements rather than economically meaningful (and demanding) multilateral trade liberalization through the WTO. Since China is the world’s largest surplus country and second-largest exporter, this poses two important challenges to the existing global regime.

First, China’s refusal to contribute positively to the Doha Round of international trade negotiations has all but ensured the talks’ failure. Beijing has declared that it should have no liberalization obligations whatsoever and has invented a new category of WTO membership (“recently acceded members”) to justify its recalcitrance. Such a stance by a major trading power is akin to abstention and has practically guaranteed that the Doha negotiations will go nowhere. And since the global trading system does not stay in place, but is always moving either forward or backward, a collapse of the Doha Round would be quite serious: it would represent the first failure of a major multilateral trade negotiation in the postwar period and place the entire WTO system in jeopardy. China is not the only culprit in the Doha drama, of course. The United States and the EU have been unwilling to abandon their agricultural protectionism, other important emerging economies have been unwilling to meaningfully open their markets, and several poor countries have resisted contributing to a global package of reforms. But China, with its major stake in open trade, exhibits the sharpest contrast of all the major players between its objective interests and its revealed policy.

Second, China’s pursuit of bilateral and regional trade agreements with neighboring countries is more about politics than economics. Its “free-trade agreement” with the Association of Southeast Asian Nations (ASEAN), for example, covers only a small share of its commerce with the countries in question; it is simply an effort to calm their fears of being swamped by their huge neighbor. Again, it is true that the United States and other major trading powers also factor foreign policy considerations into their selections of partners for regional and bilateral trade agreements. But they also insist on economic standards that largely conform to the WTO’s rules. China is able to escape legal application of those rules by continuing to declare itself a “developing country” and by taking advantage of “special and differential treatment.” But for a major global trading power to hide behind such loopholes provokes substantial international strains.

China is also hurting the global trading system by supporting the creation of a loose but potent Asian trading bloc. The network of regional agreements that started with one between China and ASEAN has steadily expanded to include virtually all other possible Asian permutations: parallel Japanese-ASEAN and South Korean-ASEAN deals; various bilateral partnerships, including perhaps a Chinese-Indian one; a “10 + 3” arrangement that brings together the ten ASEAN countries and all three Northeast Asian countries, and possibly even a “10 + 6” agreement that would broaden the group to include Australia, India, and New Zealand. All this activity is likely to produce, within the next decade, an East Asian free-trade area led by China.

Such a regional grouping would almost certainly trigger a sharp backlash from the United States and the EU, as well as from numerous developing countries, because of its new discrimination against them. Even more important, it would create a tripolar global economic regime — a configuration that could threaten existing global arrangements and multilateral cooperation.

China’s challenges to the global trading system are most visible in its opposition to the U.S. proposal, launched at the Asia-Pacific Economic Cooperation forum in 2006, for a free-trade area of the Asia-Pacific. The APEC initiative, immediately endorsed by a number of those smaller member economies that fervently want to prevent trade conflict between the group’s two superpowers, seeks to head off the looming confrontation between an Asia-only trading bloc and the United States, which could draw a line down the middle of the Pacific. The initiative would eventually consolidate the many preferential pacts in the Asia-Pacific region and offer an economically meaningful Plan B for widespread trade liberalization if the Doha Round definitively fails. China has led the opposition to the idea, demonstrating its preference for bilateral deals with minimal economic content and its lack of interest in trying to defend the broader trading order.

These criticisms seem a bit unfair, as the US and EU are equally guilty of every charge. Why would a two-bloc world divided between the EU and APEC be more appealing than a three-bloc world? What has China done to hamper the agricultural negotiations at Doha, which are the real stumbling block? What US bilateral trade deal was more about economics than politics? What economic standards is China avoiding in its trade deals, when the WTO has never really disciplined a PTA?

Bergsten is identifying all the problems correctly, but I think he’s a bit strained in trying to distinguish China from the United States and Europe.

Tovias on “cross-regionalism”

Alfred Tovias summarises good news and bad news about PTAs:

1. There is no danger of trading blocs emerging nor of a clash between them.

2. There are no new exclusive spheres of influence being created.

3. The new foreign policy goal of preferentialism is to neutralize the influence exerted by rival trading powers in a given zone; reverse trade diversion in favour of the distant trade power must be considered as positive, since it unravels previous trade diversion.

4. Economic opportunity is what drives the choice of preferred trade partners made by developing countries.

5. The proliferation of PTAs is taking place without any control whatsoever.

6. Large negotiating partners are favoured by the proliferation of preferential trading.

7. Least developed countries tend to be less favoured by emerging economies than other more developed ones (including other emerging economies).

Some highlights from #1 and #4:

The world is not evolving into three disparate, autarkic trading blocs. Countries are linked by a web of business ties across oceans that bind the world market together. If there are no trading blocs in sight, there is neither a danger of a clash nor trade wars between them. There is neither a perspective of a cartel-like arrangement emerging which would divide the world Yalta-like into trading blocs. On the contrary, there seems to be increasing competition of the leading trade blocs for influence. In fact the present trend is more likely to lead to anarchy, chaos and disorder, which are the real dangers the WTO should be aware of…

Setting aside the first best which is multilateral trade agreements based on MFN treatment, it can be argued that the present cross-regional trend although a second best is better than conventional regionalism. The reasoning is as follows: Small developing countries pick potential partners with which to negotiate preferential trade liberalization not because the latter are militarily powerful, ethnically similar or like-minded countries but simply because they are looking for markets, wherever they are. These multiple FTA dealings are driven by the private sectors of developing countries. If the market is in the US, so be it; if in China, so be it. Therefore there is less scope in developing countries for trade relations to be based on non-commercial considerations, which is what the introduction of MFN was trying to obtain as well.

But this comment baffles me: “There is increasing regulatory competition between the US and EU in bilateral negotiations, e.g. in the domain of Intellectual Protection. This is good per se.” The following discussion discuss tariff preferences (“giving a preference to everybody means not giving a preference to anybody”) and does not explore regulatory competition. I haven’t seen much enthusiasm for the intellectual property components of bilateral trade agreements, so what is Tovias arguing?

Tovias on "cross-regionalism"

Alfred Tovias summarises good news and bad news about PTAs:

1. There is no danger of trading blocs emerging nor of a clash between them.
2. There are no new exclusive spheres of influence being created.
3. The new foreign policy goal of preferentialism is to neutralize the influence exerted by rival trading powers in a given zone; reverse trade diversion in favour of the distant trade power must be considered as positive, since it unravels previous trade diversion.
4. Economic opportunity is what drives the choice of preferred trade partners made by developing countries.
5. The proliferation of PTAs is taking place without any control whatsoever.
6. Large negotiating partners are favoured by the proliferation of preferential trading.
7. Least developed countries tend to be less favoured by emerging economies than other more developed ones (including other emerging economies).

Some highlights from #1 and #4:

The world is not evolving into three disparate, autarkic trading blocs. Countries are linked by a web of business ties across oceans that bind the world market together. If there are no trading blocs in sight, there is neither a danger of a clash nor trade wars between them. There is neither a perspective of a cartel-like arrangement emerging which would divide the world Yalta-like into trading blocs. On the contrary, there seems to be increasing competition of the leading trade blocs for influence. In fact the present trend is more likely to lead to anarchy, chaos and disorder, which are the real dangers the WTO should be aware of…

Setting aside the first best which is multilateral trade agreements based on MFN treatment, it can be argued that the present cross-regional trend although a second best is better than conventional regionalism. The reasoning is as follows: Small developing countries pick potential partners with which to negotiate preferential trade liberalization not because the latter are militarily powerful, ethnically similar or like-minded countries but simply because they are looking for markets, wherever they are. These multiple FTA dealings are driven by the private sectors of developing countries. If the market is in the US, so be it; if in China, so be it. Therefore there is less scope in developing countries for trade relations to be based on non-commercial considerations, which is what the introduction of MFN was trying to obtain as well.

But this comment baffles me: “There is increasing regulatory competition between the US and EU in bilateral negotiations, e.g. in the domain of Intellectual Protection. This is good per se.” The following discussion discuss tariff preferences (“giving a preference to everybody means not giving a preference to anybody”) and does not explore regulatory competition. I haven’t seen much enthusiasm for the intellectual property components of bilateral trade agreements, so what is Tovias arguing?