The Multilateral Trading System and Preferential Trade Agreements: Can the Negative Effects Be Minimized?

Article excerpt

  Preferential trade agreements pose a big challenge for the
  multilateral trading system. Throughout the first decade of the
  twenty-first century, their number has grown significantly. However,
  these agreements have a range of disadvantages compared with the
  multilateral regime, for example, in trade facilitation and in
  dispute settlement. Whereas it will be difficult to stop the further
  spreading of this wave of preferential agreements, attempts can be
  made to reduce the negative effects of trade agreements that do, by
  definition, discriminate against other countries. In this article, a
  range of potential remedies are discussed, from a moratorium to the
  better enforcement of World Trade Organization rules on preferential
  agreements as well as improved monitoring. KEYWORDS: world trade,
  preferential trade agreements, rules of origin, Article XXIV, World
  Trade Organization.

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One of the greatest challenges for the multilateral trading system in the twenty-first century is the rise of preferential trade agreements (PTAs). (1) Both the number and the scope of these agreements are rising rapidly. The collapse of yet another ministerial meeting of the Doha Round, in July 2008 in Geneva, will further fuel the trend toward preferential agreements. Moreover, the global economic and financial crisis has further reduced the willingness of policymakers to support trade liberalization. In many countries, the pendulum is swinging from trade liberalization to economic nationalism. The multilateral trading system is suffering from the economic crisis at the same time as the preferential agreements continue to thrive.

Today, no country or region is abstaining from this trend. Though the European Union (EU), which started with the implementation of a customs union in 1958, has been implementing preferential agreements for many years, countries in other regions (notably, East Asia) did not contribute to the rising number of preferential agreements before the year 2000. In recent years, however, Asian economies, including that of China, have contributed to this dangerous trend.

Due to the collapse of the July 2008 ministerial meeting in Geneva, there will be increased demand for PTAs. The arguments we have heard in recent years will be repeated. A lack of progress in the multilateral arena will be given as the prime reason for preferential agreements and, of course, this argument is now more powerful than before. With no agreement on the Doha Development Round in sight, the global economy is poised for a new round of preferential agreements.

The failure of the 2008 Geneva talks has some parallels with the London Economic Conference of June 1933. Although the purpose of the 1933 conference was not to achieve an agreement on trade, but rather on financial affairs, the willingness to sacrifice multilateral cooperation in favor of narrow national economic goals is a striking parallel. Both then and now, the United States has been suffering from self-inflicted economic turmoil and unwilling to make sufficient concessions to its economic partners. (2) Following the failed London conference, the global economy became less integrated and preferential agreements were concluded all over the world, leading to fragmentation rather than integration. The 1930s became a decade of noncooperation, where "multilateralism was replaced by bilateralism, non-discrimination by discrimination, free trade by comprehensive protection, freedom for capital flows by exchange controls and free movement of labour by rigorous restrictions." (3)

Of course, parallels with the 1930s should not be overdrawn. Nevertheless, policymakers should be aware of the risks that PTAs pose for international economic relations. (4) By definition, preferential agreements exclude countries. PTAs are liberalizing and countries do make concessions in them, but these are limited to the signatories and not extended to others. …