Prospects for Transatlantic Cooperation and the Global Trade System
Research paper
Published 11 September 2020
Updated 14 September 2022
ISBN: 978 1 78413 419 8
With trade tensions increasingly politicized, a key appeals process suspended and COVID-19 creating huge economic challenges, a modernized and fully functioning WTO is more essential than ever. This paper makes the case for transatlantic cooperation as a necessary, though insufficient alone, condition for WTO reform.
Trade rules need to be updated to reflect shifts in global economic power and technological change. ‘Plurilateral’ agreements can help move past the negotiation gridlock.
As outlined above, the troubles affecting the WTO’s dispute settlement function are closely linked to the impasse around the WTO’s negotiation function. The last successful round of multilateral trade talks was the Uruguay Round (1986–94), which led to the creation of the WTO in 1995. Since then, however, WTO members have been unable to achieve a comprehensive multilateral agreement.
To truly reform the WTO, its trade rules need to be modernized to reflect shifts in global economic power and technological transformations. Moreover, new rules are needed because trade barriers are no longer primarily about tariffs but increasingly concern regulations and standards.
To update the rules-based architecture, countries have a variety of negotiation approaches – both inside and outside the WTO – available to them. These consist of multilateral negotiations, bilateral/regional negotiations and plurilateral negotiations.
The Doha Round was the ninth round of multilateral trade negotiations since 1947, and the first under the auspices of the WTO. Launched in November 2001, the Doha Development Agenda stalled over differences between developed and developing countries – particularly in respect of their positions on agricultural subsidies. By 2008, the negotiations had collapsed. Repeated attempts to revive the negotiations failed. However, small parts of the broader Doha agenda have subsequently been addressed. At the WTO Ministerial Conference in Bali in 2013, WTO members concluded negotiations on the Trade Facilitation Agreement (TFA), which included provisions to expedite the movement, release and clearance of goods across borders. Even though narrow in scope, the TFA marked a milestone as the first multilateral agreement since the creation of the WTO. The TFA entered into force in 2017, following ratification by two-thirds of the WTO’s membership. Its creation shows that achieving results, albeit limited, in a multilateral setting is still feasible.
Multilateral trade negotiations are very complex and take years to complete. This is not least because the WTO operates on the ‘single undertaking’ principle (whereby nothing is agreed until everything is agreed) and because decisions are taken by consensus.58 While reaching agreements in this way can be difficult, the main advantage is that decisions are more likely to be acceptable to all members, with the single-undertaking principle potentially allowing greater scope for trade-offs between parties on different issues. Seen in this light, the failure to conclude the Doha Round could indicate that the WTO is falling victim to its own success.
The historical context is also instructive. Multilateral trade negotiations under the GATT were also lengthy. Each successive round of negotiations took longer to complete, as the conclusion of agreements on relatively straightforward areas left more contentious issues to be addressed each time, and as the increasing number of negotiating parties rendered negotiations more complex. From 23 original contracting parties in 1948, the number of GATT signatories had risen to 128 by end-1994 (with the number of WTO members standing at 164 today).
Arguments that the WTO should revisit some of its negotiating methods such as consensus decision-making and the single-undertaking principle have been raised over the past two decades.59
Nonetheless, several issues are still the focus of multilateral negotiations, reflecting hope that agreement can be reached by the time of the next WTO Ministerial Conference. WTO members continue to negotiate over agricultural trade reforms and are also committed to negotiating disciplines for fisheries subsidies (see Chapter 8).
Because of the challenges of concluding multilateral negotiations, countries have increasingly turned to bilateral or regional free-trade agreements. More than 300 bilateral and regional free-trade agreements are currently in force, compared with fewer than 60 in 1995.60 All WTO members have a least one bilateral or regional free-trade agreement.
The US and the EU have been driving the proliferation of these agreements outside the WTO, even though both have historically played a key role in advancing multilateral trade liberalization.
The US currently has 14 trade agreements with 20 countries.61 Most of these agreements, which build on the WTO agreements, were concluded in the 1990s and early 2000s. One exception is the recent United States–Mexico–Canada Agreement (USMCA), which entered into force in 2020 and replaced the North American Free Trade Agreement (NAFTA) of 1994.
Compared to the US, the EU has been much more active in recent years in striking free-trade agreements.
Nonetheless, the US still trades on WTO terms with the majority of its trading partners. Approximately 65 per cent of US trade is with countries/regions with which it does not have free-trade agreements62 – these include some of the US’s most important trading partners, such as the EU, China and Japan (though the latter two have recently concluded limited deals with the US).
The EU currently has 41 agreements in place involving more than 70 countries, and is in the process of negotiating many more.63 While most of these are what are known as ‘first generation’ agreements that were negotiated before 2006, a number of the key EU agreements (including those with Canada and Japan) have been negotiated more recently. Compared to the US, the EU has been much more active in recent years in striking free-trade agreements. Yet about 69 per cent of EU trade continues to be with partners with which the EU has no existing free-trade agreement, and thus relies on WTO terms – though the share is expected to fall to 61 per cent as pending free-trade agreements come into effect.64
Bilateral and regional free-trade agreements are – on the face of it – incompatible with the WTO’s most-favoured-nation (MFN) principle65 because the parties involved grant each other preferential benefits compared to the terms available to other trading partners. In fact, free-trade agreements between two or more parties are consistent with WTO rules so long as they follow certain requirements, such as covering ‘substantially all trade’66 and being notified to the WTO.
In this context, there has been a long-standing debate as to whether bilateral and regional agreements are ‘building blocks’ or ‘stumbling blocks’ for the multilateral trading system. On the plus side, bilateral and regional agreements allow for swifter talks and greater negotiating flexibility to liberalize trade or to create new rules that build on WTO agreements. Such deals can be ‘open’ agreements, meaning that third parties that meet the new rules could join. Negotiating bilateral or regional free-trade agreements can also motivate other parties to come to the multilateral negotiation table.
On the downside, the expansion of bilateral and regional free-trade agreements into new areas not covered by multilateral rules increases the risk of regulatory inconsistency. The proliferation of bilateral and regional free-trade agreements has led to the so-called ‘spaghetti bowl effect’,67 whereby a multiplicity of criss-crossing and/or conflicting agreements has the counterproductive effect of hampering trade. For instance, firms struggle to comply with multiple sets of trade rules, or to meet rules of origin that vary from one trade partner to another. Therefore even where free-trade agreements exist between countries, they are not always used in practice.68 Bilateral and regional free-trade agreements can also lead to trade ‘diversion’, whereby trade between the parties involved surges while trade with third parties declines. Furthermore, bilateral or regional free-trade agreements can act as disincentives to participate in multilateral negotiations. Securing bilateral and regional free-trade agreements takes up significant negotiating resources and political will, often at the expense of multilateral negotiations. Finally, free-trade agreements often contain their own dispute settlement mechanisms, which creates the risk of competing with the WTO dispute settlement system. That said, countries have often brought their disputes to the WTO instead of using the mechanisms associated with bilateral or regional arrangements.69
Countries have varying preferences for bilateral, regional or multilateral trade negotiations because their bargaining power can differ significantly depending on the constellation of parties involved. For smaller and medium-sized traders, the formation of coalitions can help to blunt power imbalances. Canada – despite having entered into bilateral and regional free-trade agreements – is a keen proponent of multilateral trade negotiations for this reason.
The US, under President Trump, has expressed a strong preference for bilateral negotiations where the world’s largest economy can better leverage its negotiation power.70 The current administration withdrew the US from the Trans-Pacific Partnership (TPP), renegotiated the US’s agreement with South Korea and revamped the USMCA. Negotiations for the Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU have been suspended. Instead, the US Trade Representative has put forward negotiating objectives for an agreement with the EU and the UK post-Brexit, and has launched negotiations. The US has also recently agreed phase one of a deal with China. Although this is not a bilateral free-trade agreement per se because of its limited scope and the inclusion of purchasing obligations, it highlights the preference of the Trump administration for seeking a bilateral arrangement with China rather than using a multilateral approach.
The US also reached an agreement with Japan in 2019. This represents a significant break from past US approaches. Instead of pursuing a comprehensive free-trade agreement in a single package, the two sides concluded limited agreements – one on market access for certain agricultural and industrial goods, and one on digital trade. Future negotiations will address other issues – though the timeline and scope of such a process are unclear. Because the US–Japan agreement is so limited in nature, and notably does not cover the automotive sector, it is likely to be inconsistent with the above-mentioned stipulation that free-trade agreements cover ‘substantially all trade’.
So far, no other WTO member has challenged the agreement. But Japan’s willingness to enter into an agreement that violates at least the spirit (if not also the letter) of WTO rules shows that even the supposed champions of global trade are taking steps that undermine the WTO in order to prioritize trade relations with the US. This arguably poses a greater risk to the rules-based international order than do the recent US attacks on the multilateral trade system.71
In short, rather than settling the debate about whether free-trade agreements are building blocks or stumbling blocks for the multilateral system, recent developments driven by the US have complicated the issue and raised additional challenges for the future of the WTO.
A number of steps could be taken to address those challenges. The first would be to strengthen the WTO’s notification process for bilateral and regional free-trade agreements and improve the database in which they are recorded, for increased transparency. The second would involve using negotiations for bilateral or regional free-trade agreements to advance talks on topics not currently on the WTO agenda. Such an approach would be based on an open architecture allowing any agreement to be brought to more countries – and the rules to be applied multilaterally – later on. The third step would be to reform the WTO dispute settlement mechanism and to end the Appellate Body crisis (see Chapter 4), as this would help to maintain the pre-eminence of the WTO’s dispute settlement mechanism over the plethora of other dispute settlement mechanisms that operate under free-trade agreements.
As a result of the failure to drive forward comprehensive multilateral negotiations, plurilateral negotiations – which involve subsets of WTO members and often focus on a particular sector – have become popular. But this approach is not new. Indeed, two of the plurilateral agreements currently in force go back to the early 1980s (see Box 1).
By negotiating only on specific issues with a limited number of willing participants, plurilateral negotiations can produce agreements more quickly than the multilateral process. They reduce the risk of ‘hostage-taking’ by countries seeking to press particular agendas. And like free-trade agreements, plurilateral agreements can pave the way for the expansion of rules into new areas.
Plurilateral agreements, however, are no panacea. They require forming and maintaining coalitions among like-minded countries. They still require divisions to be overcome – particularly between developed and developing countries – and trade-offs to be made.
Issues also arise from the relationship between participants and non-participants, depending on the design of a given plurilateral agreement. There are two ways to negotiate plurilateral agreements among WTO members. First, there are open plurilateral agreements that grant unconditional MFN treatment – meaning that the benefits of an agreement are extended to all other WTO members on an MFN basis. However, this can create a ‘free-riding’ problem as non-participants receive benefits even though they do not commit to the trade liberalization measures in question. To prevent free-riding, the number of participants needs to reach a critical mass, generally understood to correspond to 90 per cent of world trade in the sector or product being covered by the plurilateral agreement.72
For instance, in the negotiations for a proposed Environmental Goods Agreement (EGA), 46 WTO members sought to eliminate tariffs on a number of environment-related products and would have extended the benefits of the agreement to the entire WTO membership (see Box 1). While this would have been welcome from an environmental perspective, the open nature of the agreement contributed to the demise of the negotiations. In particular, China raised concerns both over the full liberalization of trade in certain sensitive goods and over the issue of free-riding – ultimately, these factors contributed to the failure of the EGA negotiations.73
In the recently launched e-commerce negotiations (Box 1), the fact that India is choosing not to participate in the talks raises questions about the legitimacy of trade agreements that do not include large emerging economies.
The second way to negotiate plurilateral agreements is via a ‘club approach’, whereby the participants extend the benefits only to other participants rather than to all WTO members. This type of agreement is known as a ‘conditional MFN’ plurilateral.74 Conditional MFN plurilaterals create the risk of policy fragmentation, as different arrangements between signatories and non-signatories can lead to divergence in the trading rules that apply.
To complicate matters further, some plurilateral initiatives among WTO members take place outside the WTO framework. For instance, negotiations for the Trade in Services Agreement (TiSA) were launched in 2013 between 23 WTO members, including the EU and the US. Together, these parties account for 70 per cent of global trade in services.
The TiSA talks are based on the WTO’s General Agreement on Trade in Services (GATS), and in theory are open to other WTO members. But in practice, participation is more complex. While China has asked to join the negotiations, its request has not been accepted because the negotiating parties have lacked political unanimity on the issue. Brazil, India and South Africa are also notably absent from the negotiations. The TiSA had been intended to become multilateral in the future, and to be turned into a broader WTO agreement. However, negotiations have been on hold since November 2016.
The current US administration has not adopted an official position on the future of the EGA and TiSA negotiations. The fact that the US has not withdrawn from either project leaves open the prospect that the US will re-engage – though it is unlikely to do so in the current environment. A more hopeful sign is that the US is actively supporting the recently launched e-commerce negotiations.
The EU has called for ‘flexible multilateralism’ in the WTO – supporting full multilateral negotiations where possible, while actively supporting and pursuing negotiations for open plurilateral agreements in areas where multilateral consensus is not possible.75 The European Commission under President Ursula von der Leyen hopes to ‘give further impetus to WTO negotiations on e-commerce’.76 Phil Hogan, the former EU trade commissioner, has also called for ‘mechanisms to facilitate the integration of plurilateral approaches in the WTO framework’.77
In sum, it seems that the way forward will be with plurilateral agreements. The current e-commerce negotiations demonstrate that the WTO increasingly provides a forum capable of covering limited sectors and – at least initially – of accommodating coalitions of countries that share similar goals and a desire to expand trading rules into new areas. Creating such rules is particularly important for areas where WTO disciplines do not exist – for instance, investment (see Chapter 8). As long as plurilateral agreements are structured in an open way that allows for expanded membership later on, they will not replace multilateral agreements, but rather can complement them and support global trade governance overall.
