They are turning their attention to the more significant costs and risks to international commerce resulting from unnecessary differences in regulation and problems of trade logistics.
The WTO is currently bogged down dealing with residual border barriers to a few sensitive products, so the action is shifting to bilateral and regional integration: this does not have to rely on proliferating preferential trade deals. FTAs (or PTAs) are policy instruments designed to deal with international commerce as it was practiced in the 1950s. Recent evidence indicates that they are not even leading to much preferential trade, let alone facilitating trade creation. Nevertheless, these agreements are still expected to deal with an ever-widening range of issues by negotiating increasingly complex single undertakings.
Fortunately, there is no need to hold hostage any progress on new areas of trade liberalisation to marginal gains in discriminatory trade liberalisation. It is more efficient to devise and use new instruments to achieve these policy objectives. The pattern of production has been unbundled with production occurring in networks across economies, leading to much greater efficiency. Unbundling the now more strategic dimensions of economic integration from mercantilist trade negotiations can also revolutionise the efficiency of international cooperation to promote mutually beneficial economic integration.
Richard Baldwin has published a valuable reassessment of regionalism in the 21st century. He describes two ‘great unbundlings’ of production. The first occurred when falling transport costs allowed geographical dispersion of production and international specialisation along lines of comparative advantage — although international transactions remained dominated by commodities and goods produced in one location.
The second unbundling was sparked by information and communications technology which made it possible to coordinate complex activities at a distance. Business has moved quickly to take advantage of these new opportunities. This has led to what Baldwin describes as 21st century trade: an intertwining of trade in goods, international investment in production facilities, training, technology and long-term business relationships; and the use of infrastructure services to coordinate dispersed production.
International investment in production facilities has accelerated, and a more sophisticated pattern of international commerce draws attention to new issues including policies on international investment, competition policy, rights of establishment and greater concern with intellectual and other property rights.
During this second unbundling, the WTO’s Doha Round has been held hostage by liberalising border barriers to trade in goods. Most of the new issues are not even on the Doha Round agenda, so governments and business are turning attention to bilateral and regional trading arrangements. These trade deals have usually been justified by a desire to accelerate trade liberalisation for some time. But as many observers have noted they are not making much difference since they dodge the hard issues. Even if many tariff rates are reduced, sensitive products are either exempted or protected by using rules of origin or other non-tariff barriers to trade.
Bilateral or regional negotiations have not led to much additional trade liberalisation. Only 16.7 per cent of world trade is preferential and margins of preference are quite low: less than 2 per cent of world imports of goods enjoy preferences over 10 percentage points.
Serious liberalisation has been happening outside these preferential deals. Once governments understood what needed to be done in order to participate in global production networks, tariffs on products moving along supply chains were reduced unilaterally. So why are governments persisting with bilateral and regional arrangements when they are not delivering the kind of liberalisation that matters?
Baldwin’s answer is that these so-called FTAs are now addressing other, new issues. Moreover, the way these bilateral and regional arrangements deal with new issues is not always discriminatory. Baldwin explains that it is very hard to apply rules of origin to disciplines on new issues, due to the difficulty of establishing the nationality of modern corporations and services and because better infrastructure services and improved regulations are public goods.
Accordingly, Baldwin believes that the risks to the WTO system posed by bilateral or regional arrangements are not due to their discriminatory nature but because the rules are being made elsewhere. Unless the WTO is brought up to date and begins to deal with new issues, the opportunity for consensus-based rules for modern international commerce will be lost. The rules of the game will be set, instead, by the most powerful.
Our political leaders lack the courage either to conclude or to abandon the Doha Round, so it will be some time before the WTO can achieve this. Thankfully, a world shaped by trade deals reflecting the wishes of the dominant economies can be avoided by using new instruments for realising policy objectives. There is no need to rely on mercantilist trade negotiations to deal with investment, competition policy, logistics and regulatory matters. Negotiating binding international rules is not the only way, and seldom the most effective way, to deal with all dimensions of integration.
The urgent need to engage in global production networks has driven unilateral liberalisation of border barriers. For similar reasons governments are moving unilaterally to complement an environment of low border barriers with less restricted movement of business people and capital, adequate respect for intellectual property rights, better regulations and modern trade logistics.
Governments are also aware that coordinated reforms of logistics and regulations, and concerted reform of national standards to harmonise with international standards, are more efficient than acting alone. In other words, cooperation on many new issues is seen as a positive-sum game.
Where cooperation is seen to deliver benefit, issues can be dealt with on their own merits. Where there are positive network effects, cooperative arrangements should be designed as open clubs: any other economy should be able to sign on to individual arrangements as soon as they perceive the benefit of doing so.
Deep integration can be pursued by policies aimed directly at new issues. APEC has been reducing the cost and risks of international commerce effectively by dealing with them on their own merits rather than waiting for a grand package deal. Southeast Asian governments have realised that their FTAs were nowhere near enough for genuine economic integration. They are now creating an ASEAN Economic Community by focusing on facilitating investment, reducing needless differences in regulation and improving transport and communications links. The capacity building needed to implement ASEAN’s Master Plan on Connectivity is not being delayed by negotiations on unrelated matters.
Just as there was never any reason to delay the benefits of progress on new issues by linking them to politically divisive old issues, there is no reason for restricting cooperation on new issues to economies which are part of preferential trade deals.
Dr Andrew Elek is a Research Associate at the Crawford School of Economics and Government, the Australian National University. He was the inaugural Chair of APEC Senior Officials in 1989.