Regional Trade Agreements within the World Trade Organization: Envisioning a Future Beyond a Stagnant Present

Ajay Kumar Mishra[1]

Shraddha Rishi[2]

Abstract

This article examines whether the accelerated formation of bilateral and regional trade agreements (RTAs) has become more dynamic than the World Trade Organization (WTO). RTAs' restrictive nature contradicts the global trade standards and ethics upheld by the WTO. Nevertheless, in the era of Cold War 2.0 and multi-alignment, RTAs bring considerable dynamism to promote trade flows and settle disputes over agriculture, labour, and environmental laws. The liberty to establish trade relations through friend-shoring appears to encourage trade diversion. Yet, the importance of seeking efficiency and redefining it in terms of ease of de-risking and diversifying supply chains for uninterrupted supply has prompted the creation of RTAs among like-minded nations. The effectiveness of RTAs in the era of Cold War 2.0, multi-alignment, and minilateralism, is truly gauged by the viability and sustainability of trade flows, beyond just the trade flows determined by efficiency in production.

Introduction

The 13th World Trade Organization (WTO) ministerial conference, held this year in Abu Dhabi, concluded with unresolved significant issues, raising critical questions regarding the future of the global trade organization. WTO members are currently engaged in negotiations aimed at reforming agricultural trade policies to establish more equitable and competitive markets. Additionally, discussions are taking place concerning vital matters such as food security and the environmental implications of trade practices. Additionally, the Appellate Body has become inoperative, compromising the effectiveness of the dispute settlement system (DSS).  Consequently, the suboptimal performance of the WTO has led member countries to enthusiastically pursue alternative trade arrangements through bilateral and regional trade agreements. Nevertheless, the restrictive trade practices associated with these agreements appear to violate the principles and ethics of trade practices established by the WTO.

This article delves into the significance of the World Trade Organization (WTO) amidst the rise of regional trade negotiations that are increasingly shaping the global economic landscape. Regional Trade Agreements (RTAs) have surged in popularity and are now playing a crucial role within the WTO’s overarching framework. These agreements, characterized by reciprocal preferential trade terms between member nations, stand in contrast to the WTO’s core principle of non-discrimination, which promotes equal treatment among all trading partners.

As of January 1, 2024, a remarkable total of 361 RTAs are currently in effect and have been formally notified to the WTO. This considerable number underscores the growing importance and influence that these agreements wield over international trade dynamics. The emergence and proliferation of RTAs not only highlight a shift in trade policy but also reflect the evolving needs of nations seeking to enhance economic cooperation and trade facilitation in an increasingly interconnected world.

The concept of free trade has often been challenged as not being entirely free or fair. Historically, Britain in 1839 and France in 1856 waged wars against China, known as the Opium Wars, under the guise of free trade. In the modern context, the rise of trade wars is based on the idea of economic dependency as a weapon. This reflects an underlying principle of international trade where power dictates terms, essentially viewing trade as an extension of war politics through economic means. These shifts are evident in trade policies that have become more closed, protectionist, self-sufficient, and state-controlled. The conventional notion of efficiency is no longer the only foundation for trade. In the current global context, characterized by a new Cold War, multi-alignment, and minilateralism, diplomatic efficiency, more so than technical and economic efficiency, has become the raison d'être for increased trade flows. As a result, nations are striving to mitigate risks and diversify their supply chains, leading to a pervasive sense of fear and instability within the global supply network.

However, the concept of free and fair trade has become institutionalized with the evolution of the World Trade Organization (WTO) which is committed to “raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development”. It further recognizes the “need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development”. Any discrepancies between trade negotiations and domestic economic priorities are directed to the WTO’s dispute settlement process. This process concentrates on interpreting agreements and commitments to ensure that members’ trade policies comply with them. The main function is to ensure that trade flows as smoothly, predictably and freely as possible. The divergent and competing interests within the advocacy for the WTO’s universal values have resulted in an alternative framework, established on rules agreed upon by like-minded nations.

RTAs in the WTO

The article XXIV of the General Agreement on Tariffs and Trade (GATT 1947) includes provisions for regional trade agreements, facilitating more flexible trading terms and conditions among regional countries. Regional Trade Agreements (RTAs) represent a strong commitment to trade liberalisation during a period of increasing protectionism in both developed and developing nations. Furthermore, it allows member countries considerable flexibility for dynamic navigation. For example, the recently finalized India-EFTA Trade and Economic Partnership Agreement (TEPA) aims for a $100 billion investment from EFTA countries into India, potentially creating one million jobs over 15 years. It also allows India to retract its tariff concessions if the anticipated investment is not met. The investment chapter, not being subject to dispute resolution, is essentially a declaration of good intentions, with its advantages hinging on the private sector’s reaction to TEPA. Therefore, the TEPA experiment seems to be a more effective approach for balancing the conflicting interests of the state and investors.

However, it is unlikely that Investor-State Dispute Settlement (ISDS) can be included in the WTO’s dispute resolution mechanism as only states can file legal claims against other states. Additionally, RTAs protect the incorporation of environmental and labour issues within a Free Trade Agreement (FTA), addressing concerns of developing countries. FTAs can serve as laboratories for testing new approaches to trade agreements, even in areas such as labour and the environment. They can increase trade, enhance supply-chain resilience, and cement strong strategic relationships. These regional agreements depend on a balance of rights and obligations.

Moreover, although Article X.9 of the WTO Agreement specifies that adding an agreement to the plurilateral arrangements (PAs) listed in Annex 4 must be done ‘exclusively by consensus,’ the agreement does not mandate consensus for initiating negotiations for a PA. These PAs are binding only for the WTO member countries that consent to them and do not establish rights or obligations for others. Furthermore, trade arrangements foster investment by implementing facilitation and promotion measures. Vertical trade agreements lead to integrated promotional strategies for trade-induced investment, which is evident in the creation of a global value chain. The Organization for Economic Co-operation and Development reports that approximately 70% of international trade is conducted through global value chains, which are defined by both trade and investment, thereby demonstrating their interconnection. Additionally, a crucial role of the WTO is to revise current regulations and establish new ones to manage the growing complexities of global trade. Yet, the WTO’s decision-making process is at a standstill due to the immense challenges in reaching a consensus. Consequently, the importance of Regional Trade Agreements (RTAs) in the value chain has been amplified. For example, within the Regional Comprehensive Economic Partnership (RCEP) area, approximately 46% of the total trade is Global Value Chain (GVC) trade.

RTAs and Value Chains

It is considered economically practical for countries to obtain their inputs from regional value chains. The global or regional value chains (VCs) describe the international division of production, where production processes are fragmented into a vertically integrated network. They represent a large-scale specialisation and division of labour, concepts that date back to the era of Adam Smith. The increasing complexity of products necessitates technical specialisation, which in turn boosts value addition in the later stages of production. However, amid rising tensions and a trade war, the previously desirable extensive and dominant role of any single country in the global supply chains for different commodities is now viewed as less advantageous. The emerging weaponisation of economic dependency is leading countries to reconsider the role of efficiency as the foundation of global supply chain arrangements. Rather, they are redefining efficiency by focusing on the ease of de-risking and diversifying their supply chains. This shift has spurred the adoption of concepts such as re-shoring and friend-shoring. For instance, the US tends to impose a 60% tariff on China and a 10% uniform tariff on the rest of the world illustrates the tendency of friend-shoring. 

Conclusion

The ‘small yard and high fence’ approach presents certain challenges: firstly, the friend-shoring of supply chains leads to trade diversion, barring more efficient producers from engaging in trade agreements. The rigid global supply chain, confined within regional blocks, may pose a significant threat to free trade by causing trade diversion. This increases production costs and consequently, triggers inflation in the importing member states. Secondly, it risks erecting protectionist barriers worldwide, with each bloc building its fortress. The emerging Cold War 2.0 suggests a scenario where two trade blocs engage less in ideological battles and more in geopolitical and geoeconomic warfare. Trade could become a tool to gain leverage over rivals. Countries' protectionist stances may shield crucial industries, technologies, and minerals from competitors. This approach subjects trade policy and business regulation to a Cold War-style scrutiny. Consequently, geoeconomics may adopt a mercantilist and protectionist stance.

However, Regional Trade Agreements (RTAs) serve certain functions: they challenge the World Trade Organization’s (WTO) role in facilitating global trade, while also preserving trade itself amidst WTO impasses. Furthermore, the proliferation of RTAs and the surge in global trade flows suggest that regional or bilateral Free Trade Agreements (FTAs) have a promising future, as they will persist as guardians of trade flows. From a global perspective, they may appear parochial, yet from a regional perspective, they are instrumental to trade flows. Additionally, the non-aligned stance transforms into multiple alignment options as nations continuously make new decisions on each issue. In the multi-polar and mini-lateral arena, influential trade blocs aim to encourage commitment rather than enforce it.

Disclaimer: This paper is the author's individual scholastic contribution and does not necessarily reflect the organization's viewpoint.

[1] The author teaches Economics at Lalit Narayan Mithila University, Bihar, India. He has

earned a PhD from the Centre for South Asian Studies, JNU, New Delhi, India.

[2] The co- author teaches Political Science at Magadh University, Bodhgaya, Bihar. She has

earned a PhD from the Centre for South Asian Studies, JNU, New Delhi, India.