ANALYSIS: Changing Structures in the World Trade: Increasing Regionalisation and Its Implications

Photo: Wikimedia Commons

 

 

Author: Julian Grinschgl

 

This analysis will briefly dive into the ongoing transformation of the world's trading system. The undergoing shift of power from west to east, manifested in a relative decline of share in world trade, global GDP and bargaining power of the west, has contributed to a stalemate in multilateral trade negotiations and increasing regionalisation instead. In realist international relations theory it is argued that institutions just mirror the underlying power relations and there is also a debate in neorealism if multiple poles in the world could lead to a more unstable and fragmented system and thus also to less multilateralism (Dunne, 2016, pp. 77-94). Therefore, the question arises: How is the current trend of regionalism affecting multilateralism? And how does the European Union (EU) respond to the changing environment for international trade? This analysis will look into the growing popularity of Regional Trade Agreements (RTAs) and analyse its implications. Further, it takes a look at the 2014 EU trade strategy. It will be argued that indeed multilateralism in trade is under severe stress due to the sharp increase of RTAs. Deeper regional integration outside the multilateral framework, contradictions with central WTO principles and geo-economic shifts in power challenge the centrality of the World Trade Organization (WTO) and could eventually disrupt the global economy. The EU suggests a strategy of “open regionalism” to link increasing regionalism to multilateralism and thus counter the possible negative implication.  This analysis will start by showing supporting evidence of the arguments made. Afterwards, counterarguments will be discussed and where possible refuted. Lastly, a conclusion will sum up the main findings and re-engage with the initial questions.

 

 

The trend of regionalisation

 

RTAs are agreements between two states or more who do not necessarily have to be in the same region but aim to reduce tariffs among trade sectors already included in the WTO, or even extend the WTO covered scope of issues. So far, 440 RTAs are in action, and each WTO member is part of at least one such agreement, while their number is still growing (WTO, RTA). Several empirical studies show that multilateralism is weakening and that RTAs are contributing to a fragmentation of the trading system. MacMillan (2014) demonstrates that the increase in membership and the logic of single undertaking and consensus-based voting has led to a breakdown of multilateral trade negotiations. Trading states who have little to gain are blocking further progress to reach a better bargain and thus raise incentives to pursue RTAs (MacMillan 2014, pp. 615-616). Hartman (2013) supports this claim and argues that the increase in RTAs is due to the stalemate in the so-called Doha round, which is the first and so far biggest trade round initiated under the 1995 established framework of the WTO, and that RTAs become more attractive since they are easier, faster and cheaper to conclude (Hartman, 2013, p. 426). So while the expansion of RTAs is undeniable, one also has to look at another important feature of those agreements. They extend beyond the WTO mandate and include issues such as competition policy and investment, or aim at the convergence of regulations and thus do challenge the WTO as the central regulatory authority in trade.

 

In recent years we also see the spread of mega-RTAs which are plurilateral and involve the largest economic powers in the system. The EU, for example, started negotiations with the US over TTIP, came to an agreement with Canada in the CETA talks and plans to finish an RTA with Japan this year. Also, the US pushed for more regionalisation by starting, although now on hold, negotiations over a Trans-Pacific-Partnership (TPP) and China does so with its Regional Comprehensive Partnership (RCEP) as well. Geo-economic strategies do lie behind both. As Ghibutiu (2015) demonstrates those states involved in before mentioned RTAs account for most of global trade, Intra-TTIP trade alone would share roughly 44% of world trade in goods and services. Hence, mega-RTAs have the potential to transform and reshape the global trading system (Ghibutiu, 2015, pp. 428-429). The emergence of world supply-chain-trade further pushes this development because the current WTO rules are not equipped with such new forms of trade, despite that the WTO would be the best institution to do so on a global scale. Such supply-chain trade accounts according to the United Nations (UNCTAD, 2013) for up to 80% of global trade but takes place in regional factories with inter-regional interdependence such as the US, China, Germany, and Japan. Such increasing interregional trends and interdependencies can also act as a catalyst for power rivalries and conflicts. Rulemaking initiative to creating future standards for global trade without having to negotiate with other emerging powers and having the possibility to multilateralise those standards later is a desirable goal for rational and egoistic players. Thus, RTAs are a tool used for geo-economic motives as we have seen by efforts of the US government to contain China with TPP and to later include China on the condition of accepting the US created norms and regulations (Braz, 2014, pp. 124-126, 133-135).

 

We do not only observe a rapid increase in RTAs, but we also can observe that they contradict with the central principal of non-discrimination. Deeper integration and extended scope of issues challenge the WTO as the primary regulating institution in trade. Because they can also act as a tool for geo-economic purposes RTAs will, also according to the neorealist assumption that states are rational egoistic units, likely be used in the future to ones favour at the cost of others. But does that mean the end for multilateralism or is this scenario overvalued?

 

               

Competitive liberalism and open regionalism

 

Several arguments can hold against the claim that regionalism is threatening multilateral trade cooperation at the WTO level. Today the WTO remains the most important institution for dispute settlement, and 84% of global trade is still done under the most-favoured nations and thus non-discrimination provision. Many RTAs also often litigate in front of the WTO if a struggle arises in a sector which the WTO agreements cover (Lamy, 2014, pp. 64-66). Other arguments for example are that the increase in RTAs was due to the collapse of the Soviet Union and not because of declining multilateralism. Further, increasing regionalisation could lead to a situation of “competitive liberalism” which could bring a new dynamism into WTO and thus progress in the Doha round. But data shows that between 1990 and 2010 there was an increase by 233%, from 90 to 300 in total respectively, in RTAs worldwide and this trend accelerated since the blockade of the Doha round in 2008 (Hartman, 2013, p. 422). The approach of competitive liberalism was first adopted by the US to pressure the EU for concessions in the Doha round, but since then more, not less, RTAs were concluded and negotiated. Further, it seems that increasing democratisation also seems to contribute to a spread of such agreements (Irving 2015: 287, 289).

 

Moreover, one could stress that RTAs can act as templates for later multi-lateralisation under the non-discrimination provisions and enable progress in areas in which there is a possible consensus (Irving, 2015, pp. 287). Pascal Lamy, former WTO General Director and EU Commissioner for Trade, concludes that so far regionalisation has not challenged multi-lateralisation but that the future remains uncertain and that the big question is how to link regionalism to multilateralism (Lamy, 2014, pp. 76-77). And if one looks at the EU as a prototype of regionalisation and its trade strategy (EUTS, 2014) published in 2014, it seems that also the EU is aiming for continuing multilateralism but through regionalism. During the WTO negotiations, the EU came to acknowledge new realities and this has led to a role shift of the EU. During the Doha round, the EU played multiple roles but showed a clear trend towards moving away from a proactive, reformist and development friendly leader to a more reactive, competitiveness driven and pragmatic player (Dee, 2015, pp. 87-88). The EUTS states that “The EU should do everything possible to restore the centrality of the WTO as a trade negotiation forum” (EUTS, 2014, p. 27) because “the emergence of global value chains (…) make a truly global set of rules more important than ever” (EUTS, 2014, p. 28). But EUTS further argues that RTAs allow members to advance on a given issue and could act as a “laboratory” for later trade liberalisation. To avoid fragmentation of the world’s economy and to avoid competing regional blocs the EUTS proposes that it is crucial that such RTAs remain open towards new members to join and to suggest something which is in literature often called “open regionalism.” This openness towards new members says the EUTS could bring a new dynamism into the WTO and open the possibility for later multi-lateralisation under the umbrella of the WTO (EUTS, 2014, pp. 28-29). This might me a possible answer of how to link regional to multilateralism, but so far this has not been the case.

 

Further, it could be stressed that the recent failures of TTIP and TPP might be a sign that the trend of mega-RTAs and fragmentation is declining or that such RTAs face too much resistance within the population and domestic interest groups. But it seems questionable if the election of Donald Trump, a clear opponent of multilateralism, will despite his closure of TPP talks put an end to the trend of declining multilateralism. Rather the opposite could be the case as his questioning of NAFTA and TTIP shows. Counterarguments do have a point when they highlight that the WTO still is the centrepiece of world trade. But structural conditions are rapidly changing. It does not seem very likely that the current trend of regionalism comes to an end, also because hope in concepts like competitive liberalism failed and open regionalism is just a vague scenario for the future.

 

 

A structural shift in the international system

 

A structural transformation of the international trading system is underway and changes the pattern of global trade. The end of the cold war led for the first time in history to real world markets, global supply chains and also to the end of bipolarity in the international system. The emergence of different regional economic centers in the world like China, India and Brazil, as well as collaborations of emerging and developing economies like the G-20 group (not to be confused with the G-20 summit) or G-33 group (WTO, Negotiating groups) heightens the tensions and competition between new geo-economic powers and the old western powers which created the former structure of the multilateral trade system. Under the old and very loosely legalised GATT (General Agreement on Tariffs and Trade) system, the western powers dominated agenda setting and could use their relative strength of relative market size and their ability to create issue linkages to other policy fields like development aid to pressure small states to accept their terms (Steinberg 2002). But new upcoming powers like Brazil also act on behalf of small states and are now powerful enough to resist pressure and the new more legalised WTO system grants developing countries special treatment and more bargaining power due to increased legalisation. But the world economy slowly drives into the direction of fragmentation due to an increase in RTAs and the deepening of trade rules outside the WTO framework. This trend is likely to be continued since there is no near end in the Doha round which collapsed in 2008 and countries won’t be willing to wait for an end of the multilateral trade round to pursue new trade deals.

 

The impasse in the WTO since 2008 will also not disappear because the WTO’s follows the logic of a “single undertaking”. Single undertaking means that there is no agreement until everything is agreed and also rests on consensual voting by all member-states to create new rules or change negotiation modalities. In most sectors negotiated under the WTO tariffs already are very low, which means that the remaining unresolved bargaining issues on the WTO agenda were services and particularly agriculture. The latter is among the developed countries and especially the EU highly protected due to the domestic pressure and strategic interests. The G-20 and the G-33 group, including China, Brazil and India, on the other hand are pressing for ambitious liberalisation reforms in the agricultural sector by developed countries without providing reciprocal market access in non-agricultural market sectors (NAMA) in return. Thus, agriculture and reciprocity seems to be key for progress at the WTO but is unlikely to be resolved under the current setting and interests of the negotiating parties.

 

Competitive liberalism did not fuel more cooperation on the multilateral level; rather it fostered the trend of fragmentation. And since the US as the world’s most powerful state currently seems at odds with multilateralism and its institutions, there should be few hopes in a reversal of this trend. The ambitions of the EU for open regionalism to ensure interoperability with WTO agreements and prospects for multilateralisation might be a way to go, but it remains open if such approach will succeed. While the WTO remains central to world trade, it is clearly challenged and progress is not insight. Issues not covered by WTO agreements question the centrality of the WTO as the governing institution for trade rules and relations. The transformation of the current system is of such importance for the world’s economy because it contains the possibility of the emergence of regional regulatory blocks. Those would benefit insiders and exclude and discriminate non-participants and lead to a disruption of global supply chains and thus trade diversion and exclusion of small and weak states (Kent, 2010, pp. 3-5; Lamy, 2014, p. 71).

 

 

Conclusion

 

In sum, there is empirical evidence which supports the argument made that regionalisation is increasingly threatening multilateralism. Since the end of the cold war, and especially since the stalemate in the Doha round, RTAs spread with enormous speed (Hartman, 2013) and now involve negotiated RTAs of such scale that it could change the structure of international trade (Ghibutiu, 2015). Further, democracy seems to correlate positively with RTAs and patience among the world’s trading states for multilateral progress is not endless if not already over (Irving, 2015). Moreover, deeper integration and inclusion of non-WTO covered issues challenge central multilateral principles of non-discrimination and are not under the umbrella of WTO dispute settlement body (Hartman, 2013, p. 425). The combination of new geo-economic realities which led to an end of the former nexus of geopolitical and geo-economic power and the new framework of the WTO resulted in a blockade in multilateral negotiations and to new incentives to use RTAs as a tool in big power politics (Braz, 2014). Therefore, we can conclude that changing structures in the international system do matter. Neo-realism provides a useful concept for analysing such transformation by giving attention not to individual behaviours but to structures which affect behaviour independently of a countries intention. There is no consensus in neorealist international relations theory, but this analysis tends to support the claim of increasing instability and fragmentation due to an emerging polycentric or multipolar world raised by various authors of neo-realism. The WTO today remains the central institution governing world trade and it should be clear that the WTO is central for promoting fair, inclusive and rule-based trade. One of the major achievements of the WTO is that it reduces power asymmetries among trading states by granting formally equal rights. It acts inclusively towards small developing countries by granting special treatment, having the possibility of outsourcing legal expertise and it provides a highly legalised independent third party dispute settlement procedure. The trend of regionalisation will further rise and probably dismantle prospects for continued multilateralism under the current framework.

 

The EU has undergone a shift - first a promoter of special treatment for developing countries and leader and pusher of multilateralism, and now it acquires a larger role set and adopts a more competitive driven, pragmatic and realistic approach. The Union simultaneously seeks to restore faith in the importance and centrality of the WTO as the primary platform for trade negotiations, but at the same time it realised that the path for new progress lies in RTAs. This allows the EU to pursue a dual-role strategy of the EU of restoring the role WTO and appear cooperative towards new emerging economies, and at the same time adopting a more competitive, growth promoting, strategy. The EU’s trade strategy might emphasise a way out of the dilemma and proposes a strategy to link regionalism to multilateralism. But it remains unclear if it will be successful or feasible. Thus, future scholarship and decision-makers should focus on either the question of which future purpose the WTO could fulfil if this trend continues. Alternatively, it could be assessed, how to reform the WTO in such way that it can became again the vehicle for trade negotiations reflecting new power realities and acknowledging the new nature of global supply chain trade.

 

If the EU would be successful in agreeing on regulations and achieving RTAs with the former Quad group (US, EU, Japan, Canada) and then attract other nations to join and achieve convergence or mutual recognition of regulations it could set new standards for trade, regain rule-making capacity and ensure its long term position as a central pole shaping globalisation in the 21st century.

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Julian is currently finishing his two Bachelor degrees in Political Science and History at the University of Vienna, and for a term, he stayed abroad at Trinity College Dublin. His primary fields of interest include international trade and international security, always with special attention to the role of the European Union. In fall 2017 he will start at University College London (UCL) his Master in International Public Policy.

 

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REFERENCES:

 

Braz, Baracuhy (2014) The evolving geo-economics of world trade. Adelphi Series Vol. 54, no.450, pp. 121-138.

 

Dee, Megan (2015) The European Union in a Multipolar World. Hampshire. Palgrave Macmillan.

 

Dunne, Tim (2016) International Relations Theories. Oxford. Oxford University Press.

 

EC (2014) Trade for all, [online] available at: http://trade.ec.europa.eu/doclib/html/153846.htm, Accessed: 23 June 2017.

 

Ghibutiu, Agnes (2015) The Variable Geometry in the World Trading System. Procedia Economics and Finance Vol. 22. pp. 432-431.

 

Hartmann, Stephen (2013) The WTO, the Doha Round Impasse, PTAs, and FTAs/RTAs.  The International Trade Journal Vol 27, no. 5, pp. 411-430.

 

Irwin, Dougal (2015) Free Trade Under Fire. Oxford. Oxford University Press.

 

Kent, Jones (2010) The Doha Blues. Oxford. Oxford University Press.

 

Lamy, Pascal (2014) Is trade multilateralism being threatened by regionalism? Adelphi Series, Vol. 54, no. 540, pp. 61-78.

 

MacMillan, Euan (2014) Explaining rising regionalism and failing multilateralism: Consensus decision-making and expanding WTO membership. International Economic Policy Vol.11, pp. 599-617.

 

Steinberg, Richard (2002) In the Shadow of Law or Power? Consensus-Based Bargaining and Outcomes in the GATT/WTO. International Organization Vol. 56, no. 2, pp. 339-374.

 

UNCTAD (2013) Global Value Chains and Development. United Nations.

 

WTO: Negotiation Groups, [online] available at: https://www.wto.org/english/tratop_e/dda_e/negotiating_groups_maps_e.htm, Accessed 10 July 2017.

 

WTO: RTAs, [online] available at: http://rtais.wto.org/UI/publicsummarytable.aspx, Accessed: 23 June 2017.