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Supply chains, mega regionals and WTO

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Bernard Hoekman, VOXEU, 19 May 2014

In December 2013, WTO members struck a multilateral agreement at their ministerial meeting in Bali as part of the long-running Doha Round. The Bali Trade Facilitation Agreement – the first such agreements since the WTO was founded in 1995 – is important in demonstrating WTO members can ‘get to yes’ despite their differences. While trade facilitation will benefit traders around the globe, the basic challenge confronting WTO negotiators remains. The Bali Package is only part of the Doha Round and negotiators have yet found a way to break the deadlock on key elements – such as the market access (tariffs) and rule-making dimensions – that have been on the Doha Round agenda since 2001.

Regional trade agreements

The US and the EU have turned their attention towards the negotiation of preferential trade agreements (PTAs), including so-called ‘mega-regional’ initiatives such as the EU-US Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership.(1) Long a central plank of the EU’s trade policy, PTAs are now a key feature of US trade policy as well. The trend to negotiate mega-regional trade agreements extends to developing countries and emerging economies. Examples include the Regional Comprehensive Economic Partnership, an initiative involving 16 Asian countries.(2)

A distinguishing feature of the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership talks are that they do not include China or other large emerging economies such as Brazil and India. Conversely, the Regional Comprehensive Economic Partnership does not include the EU or the US. So far there are no regional initiatives to liberalise trade and investment that include all of the major players, and there is a danger of the world economy splitting into separate blocs. The shift towards regional approaches by large trading countries is not in the interest of the majority of nations that are not part of them. From a world welfare perspective, deals to further integrate markets need to be multilateral. The challenge is how to get there.

The WTO is one of the most successful instances of multilateral cooperation in the post-Second World War period. Since its establishment in 1995 the WTO has grown from 128 to 160 members (once Yemen ratifies its accession). The WTO’s transparency and dispute settlement mechanisms have helped maintain negotiated levels of market openness. To date, 475 disputes have been brought to the WTO, with most rulings implemented by the losing party. Specialised committees provide focal points for governments to raise specific trade concerns and discuss national trade policies. The main problem confronting the WTO is not the operation of the organisation but the difficulty in getting to yes in the Doha Round on new market access liberalisation and rule-making (Evenett and Jara, 2013).

Goods and services are increasingly produced in international supply chains and networks, with firms supplying inputs that are processed in another country and then shipped to one or more other countries (Baldwin and Lopez-Gonzalez, 2013). Each stage of the supply chain requires efficient logistics and other services to move products across borders. To be relevant to the needs of companies that are engaged in supply chain production, trade negotiations need to focus on a broad range of policies. Issues such as differences in domestic regulation of goods and services and investment policies have become more important to manufacturers, farmers and service providers around the world (Baldwin, 2012).

The international nature of production today raises new challenges but also offers new opportunities for international trade policy cooperation. The WTO, as do other trade agreements, tends to take a “silo approach”, addressing policy areas in isolation. For businesses this policy-specific approach may reduce the relevance of WTO agreements. From the perspective of international supply chains and production networks a variety of policies will matter. The marginal effect of disciplining or changing one policy instrument may be reduced if the cost-raising effects of others are not addressed in parallel.

Concluding Doha: Call for a roadmap

Ministers in Bali called for their officials to develop a road map for concluding the Doha Round. Any such road map should recognise that trade today involves supply chains and that these are impacted by many policies. Some of these are on the table in the Doha Round negotiations; others are not. Adoption of a ‘supply chain framework’ could help identify how an overall package can be constructed that spans the different policy areas that are already on the table, including not just tariffs but also services policies that affect the operation of supply chains.

In my new CEPR Press book, I discuss how a supply chain approach could help to:

- Mobilise greater support for concluding the Doha Round market access and rules negotiations;

- Provide a basis to use the WTO as a forum for deliberation and learning from regional initiatives;

- Provide an umbrella for subsets of WTO Members to cooperate in new policy areas that are not on the WTO table at present; and

- Inform new, more effective, mechanisms to address development concerns, building on the precedent set by the Bali Agreement on Trade Facilitation.

The core market access and rule-making elements of Doha Development Agenda in the areas of trade in agriculture, industrial goods and services remain very important. However, the approach that has been taken so far by WTO members has been to pursue negotiations on specific trade policies such as tariffs on imports of goods, subsidies for agriculture, and market access for specific services. Explicitly considering how these various policies impact on the operation of different types of supply chains may offer a complementary mechanism to help move negotiations forward.

The adoption of a supply chain framework can help to better understand how different policies that are the subject of negotiation in separate groups jointly impact on the value chains that are used to trade agricultural products, industrial goods or services. The idea is not that negotiations should focus on specific value chains, but that a supply chain framework can help identify how an overall package can be constructed that spans the different policy areas that are on the table, including not just tariffs but also services policies that affect the operation of supply chains.

Deliberation on new issues and learning from PTAs

A second set of proposals are forward-looking and revolve around greater use of the WTO for deliberation on trade policy matters and for providing greater space for plurilateral agreements among groups of WTO Members on new issues. Figuring out what policies have the greatest impact on trade and investment, and which policy areas are ripe for discussions to agree on a set of disciplines requires substantial preparatory work. There is much that can be learned in this regard from what is being done in regional agreements and the WTO offers a potential forum through which to do so.

Plurilateral forms of cooperation in the WTO

The rapid increase in the number and depth of PTAs suggests that greater focus is needed in the WTO on approaches that allow groups of like-minded nations to agree amongst themselves to address the trade effects of differences in regulatory policies. The WTO offers the flexibility for groups of like-minded nations to do this without implicating all members. Numerous subjects may lend themselves to ‘plurilateral’ cooperation, ranging from investment policies to “green” industrial policies. Small-group cooperation might also be sector-specific, with countries that are interested in doing so agreeing to new rules of the game for policies that are not the subject of WTO disciplines. Depending on the coverage of the policy commitments, such cooperation could be pursued on a critical mass basis (an agreement that is applied on a non-discriminatory basis by a subset of WTO members) or on the basis of a so-called plurilateral WTO agreement, where benefits and obligations are limited to signatories. In contrast to PTAs, plurilateral agreements under the WTO must be open to all WTO members and are subject to WTO transparency obligations, ensuring that non-signatories have full information on what parties do.

New approaches to address development concerns

The recent changes in the structure of global trade also have implications for the approaches that have been used in the WTO to address development concerns. The new Agreement on Trade Facilitation concluded at the Bali Ministerial illustrates both that the WTO processes can generate concrete outcomes but do so in a way that recognise the resource constraints that affect the ability of many developing countries to implement new agreements. Looking forward efforts should build on this approach to address capacity constraints in a more effective and meaningful way than the one that has historically been pursued, i.e. giving developing countries greater freedom to continue to use trade-distorting policies.

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- Baldwin, Richard (2012), “WTO 2.0: Global governance of supply-chain trade”, CEPR Policy Insight 64, December.

- Baldwin, Richard and Javier Lopez-Gonzalez (2013), “Supply-chain trade: A portrait of global patterns and several testable hypotheses,” CEPR Discussion Paper 9421.

- Evenett, Simon and Alejandra Jara (eds.) (2013), Building on Bali: A Work Programme for the WTO, CEPR eBook, VoxEU.org, December 18.

- Hoekman, Bernard (2014), Supply Chains, Mega-Regionals and Multilateralism: A Road Map for the WTO, London: CEPR, May 19.

(1) The Trans-Pacific Partnership includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam.

(2) The Regional Comprehensive Economic Partnership spans 16 countries: the 10 members of the Association of South-East Asian nations (ASEAN) – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam; and six states that have free trade agreements with ASEAN – Australia, China, India, Japan, Korea, and New Zealand.

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