It's time to return to the WTO

Desker, Barry, "It's time to return to the WTO", East Asia Forum, April 12th. 2013

The recent proliferation of regional FTAs is good news for the parties involved.

But FTAs cannot be substitutes for a global solution in world trade. There remains a need for global rules to provide stability — the WTO needs to get back on track with ministerial conferences.

 Since the global financial crisis in 2008, protectionism has increased and global trade negotiations have stalled. The East Asian economies have retreated to accepting second-best choices in trade deals — the bilateral and plurilateral preferential trading arrangements usually known as FTAs — even though they were the foremost advocates of global trade negotiations until the WTO ministerial conference in Seattle collapsed in 1999.

The irony is that as global trade increased, countries which benefited from existing conditions took positions that suggested they had no stake in the outcome of the WTO negotiations. The political will to trade concessions declined and posturing by marginal players in global trade increased the difficulty of reaching accords on contentious issues.

The drift in global negotiations has led to a frenzy of bilateral and regional talks involving the major trading states, regional groupings and even cross-regional arrangements in the past decade.

Major cross-regional agreements being negotiated right now include the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP).

One advantage of these broad groupings is that the benefits are likely to be greater than those of bilateral FTAs.
But the new regimes reflect current big power preoccupations. The TPP will ensure export opportunities for the United States, protect US domestic industries and focus on issues that may be beyond the interests of participating states such as Vietnam.

While the United States underwrote global prosperity after World War II, its approach today is mercantilist — its trade policies promote its exports and discriminate against imports. The United States has focused on ensuring ‘competitive neutrality’ for state-owned enterprises of its negotiating partners so that US businesses can offer goods and services in foreign markets without being disadvantaged by subsidised foreign competitors. Yet excluded from these trade talks are US federal government enterprises, which still subsidise agricultural exports.

Strict US rules of origin for textile and apparel manufacturers in East Asia undermine efficient regional supply chains as they prevent manufacturers from sourcing components from other countries in the region. The United States requires that clothing be wholly or substantially produced in the exporting country, whereas liberal rules of origin would allow East Asian economies exporting clothing to the United States to include components from different countries in the region.

Relaxing these rules of origin would improve the integration of supply chains in industries such as clothing and apparel manufacturing. Some bilateral and plurilateral trading agreements suffer from the noodle or spaghetti bowl phenomenon, where there are overlapping rules and difficulties in exercising the benefits from successful negotiations. Small and medium enterprises do not have the capacity to monitor the different rules of origin in each FTA and cannot take advantage of the negotiated benefits.

Singapore and other countries that straddle both the RCEP and TPP could play a positive role in working towards greater conformity between the two while negotiations are still taking place. This would improve the prospects of harmonisation later. But the current negotiating structures offered by bilateral and plurilateral trading agreements do not deal with the fundamental change in global trade — the emergence of global supply chains and the need to enable governance of such logistics networks.

In the fashion and apparel sector, for every dollar earned in manufacturing, four dollars are made in distribution, logistics and retail sales. There is also a shift towards distributed manufacturing, with parts and components being manufactured in different locations. While the final assembly of an iPad may take place in China, the components come from around East Asia. China may have added as little as 10 per cent to the value of the final product.

Since the problem has global dimensions, global solutions are necessary. It is time to return to the WTO and global trade negotiations — but with a different approach. The focus should be on reaching agreements at WTO ministerial conferences held every 18 to 24 months, which would conclude agreements on issues such as government procurement as well as new issues such as facilitating global supply chains.

Instead of grand bargains, which are unlikely to be concluded with universal membership, the WTO should focus on a built-in agenda to which new items could be added as agreements are reached on current areas of negotiation. Where issues may not be of interest to the entire membership, interested parties could agree where there is a critical mass. Such an approach has led to some of the WTO’s most noteworthy agreements.

As a global slowdown occurs, protectionism can only be combated by a willingness to address the issues facing the multilateral trading system. Even as countries pursue the second-best option of FTAs, policymakers must still be focused on global risks and global solutions.

Barry Desker is Dean of the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University. This is a version of an article first published in The Straits Times.