President of the University of International Business and Economics, Dr Shi,
Faculty and students,
Ladies and gentlemen,
I should like to thank Dr Shi for the kind invitation to come and speak at UIBE, a distinguished institution of higher learning that has been in existence since 1951. It is indeed an honour for me to be here today and to have an opportunity to talk to you and discuss with you some contemporary trade issues. It is my experience that on occasions like this it is not a matter of “those that teach” and “those that learn”. We all learn.
It is also an honour for me to be here on the occasion of the inauguration of the International Centre for Research Networking and Collaboration. The research priorities of the new Centre sound particularly relevant, focusing as they do on investment and upgrading exports.
Multilateralism and regionalism
This morning I will address the multilateral trading system and regional economic cooperation. The title is well chosen in the sense that the multilateral reference is to trade, while at the regional level the title refers to economic cooperation. What this conveys is that we are not exactly comparing alternative approaches that have identical objectives. Regional initiatives are often broader and more encompassing than the more focused concerns of the WTO. This is entirely natural, as regional neighbours may share concerns and interests that do not necessarily so directly concern those that are further away. More than one venue for cooperation in similar and sometimes overlapping areas of policy or economic activity may therefore be desirable.
This is not to say that multilateral and regional cooperation are always perfectly synchronized and complementary. They are not. Moreover, quite a number of so-called regional cooperation agreements are not regional at all — they extend across regions. In fact, about half of all preferential trade agreements in existence are not strictly regional. To a degree then, there can be no question that these agreements are sometimes treated as a substitute for a multilateral approach, and that is a part of what we shall discuss.
But just as the WTO cannot address all the needs that receive regional attention, so regional agreements cannot do certain things for which the WTO is indispensable. This is true for key aspects of coordination in the absence of which we could be threatened with divisive policy divergence. It is also true for certain areas of policy, such as subsidies.
The rise of regionalism
When the GATT first came into being in 1948, regional arrangements were considered exceptional. Indeed, it was not until the beginnings of the European integration process in the 1950s that a significant part of international trade was to become preferential. In the ensuing years, several other preferential agreements were established, but it was not until the 1980s that they started to become the significant component of world trade that it is today. The major increment in the number of agreements came in the 1990s. We can count almost 400 preferential trade agreements currently in existence, and each member of the WTO on average belongs to 13 separate agreements.
A number of reasons can be adduced to explain their rising and continuing. They may serve political or strategic ends. Countries may wish to go further and faster in the direction of economic integration than they have been able to do in the WTO. They may be motivated by a fear of exclusion as competing countries secure better access to markets of interest. They may be an insurance policy against future protectionism. They may act as a signalling device to attract foreign investment. They may also serve as a vehicle for policy consolidation nationally, using an international obligation to make it harder for domestic interests to exert an influence over trade policy.
Tariffs and preferential trade agreements
Recent evidence would suggest that preferential trade agreements cannot be predominantly about securing tariff preferences. This is partly because over half of world trade is already duty-free on a most-favoured-nation (MFN) basis. The WTO’s World Trade Report 2011 calculated that only about 15 per cent of global merchandise trade flows in 2008 enjoyed preferential tariff treatment. This somewhat surprising figure was not only accounted for by the extent of MFN duty-free trade, but also by the fact that preferential agreements have often not departed from MFN tariff rates where those rates are above average. Some two-thirds of tariff lines with MFN tariffs exceeding 15 per cent have not been preferentially reduced in PTAs. In effect, less than 2 per cent of world trade is eligible for preference margins in excess of 10 percentage points.
It is also noteworthy that non-preferential MFN tariffs are low. On average, they were equal to 4 per cent in 2009. These numbers lead us to the conclusion, then, that tariffs have diminished in significance as a trade policy instrument over the years, and that tariffs do not motivate preferential trade agreements in any significant measure. This does not mean that tariffs no longer matter. High rates in some sectors — what we call tariff peaks in our jargon — and nuisance tariffs in others still deserve policy attention.
Deep integration, global value chains and non-tariff measures
An analysis of the contents of the more far-reaching preferential trade agreements that have emerged in recent years would suggest a marked tendency for these agreements to go more deeply into policy areas that have been addressed less profoundly, or not addressed in the WTO. This relates both to a range of non-tariff measures (NTMs), such as product standards, and to other areas, such as investment and competition policy.
One reason for deep integration has been the emergence of global value chains. Until not long ago, we thought of products in terms of a single national origin, bearing a label saying “made in China” or “made in Germany”. The expansion over the last two decades or so of global value chains means that most products are assembled with inputs from many countries. In other words, today’s goods are increasingly “made in the world”. Trade in intermediate goods — a proxy for global value chain production — now comprises close to 60 per cent of total trade in goods, and continues to be a dynamic sector in international trade.
An important consequence of the evolution of production networks is that imports matter as much as exports and both contribute to job creation and to growth. These relationships reflect a new and more intense form of interdependency through trade.
The characteristics of NTMs and their motivations
If we understand preferential trade agreements, at least in some measure, as a desire to support and facilitate global value chains, and tariffs are not the real story behind them, we must then look towards non-tariff measures — NTMs — to analyse the significance of the relationship between multilateral and preferential approaches towards trade cooperation.
NTMs encompass a very broad range of policies — simply any measure that is not a tariff. A broad distinction for our purposes is between NTMs that could be tariffs and NTMs that serve specific public policy objectives, such as health, safety or the quality of the environment. NTMs that simply replace tariffs are largely frowned upon by the WTO rules because they will often be protectionist in intent and they can largely be treated as a market access issue.
Those NTMs intended to address public policy matters raise altogether different considerations. Governments are obviously not going to eliminate such measures in the name of promoting international competition. On the contrary, they will consider the attainment of public policy objectives of paramount importance. The question then is how these measures are designed and how they are implemented. In effect, the danger from a trade policy perspective is that they may be designed or implemented in ways that unjustifiably restrict trade. When NTMs become dual purpose instruments in this manner, we are forced back to classic trade policy concerns about interventions that influence the conditions of competition within a market.
The distinction between legitimate and less legitimate NTMs in trade policy discussions is highly complex and challenging. This is compounded by the reality that not all nations share the same priorities, either because of distinct social and cultural perspectives, or because different levels of income and development affect the capacity of countries to pursue particular objectives. Whichever the reason, we are living in a world where diversity is a reality and we have to walk a fine line between respecting that diversity and trying to eliminate it.
I do not think it is far-fetched to argue that the proper management of NTMs is among the greatest challenges we face in international cooperation. And levelling the playing field in this area raises challenges of a different nature to those related to tariffs. Let me add another element which can add to the complexity. There can be more than one road to the same destination. If public policy is pursued with one approach in one preferential trade agreement and another approach in a different preferential agreement, this can frustrate trade between the two agreements even if there is no intention to do so. This possibility of incidental divergence strengthens the case for multilateral coherence.
Multilateral approaches to achieving coherence among PTAs
It is therefore important that we look at how to manage the relationship between preferential trade agreements and the multilateral trading system in ways that support world trade. The starting assumption being that preferential trade agreements are not going to disappear any time soon.
One suggestion is to continue to negotiate and construct a multilateral framework that responds to those needs manifested in preferential agreements that can be met through a multilateral approach. This could include revisiting the existing rules on preferential trade arrangements such as those in Article XXIV of GATT.
Some have also argued for a process that builds gradually towards a better understanding among WTO members of preferential trade agreements, what motivates them, and how they are both similar and different. This would be not so much a negotiation as a conversation in the first instance, of the kind that could possibly be carried out under the Transparency Mechanism recently established as a forum for notifying and discussing PTAs. The ultimate objective of this exercise would be to build on those elements of commonality in preferential trade agreements that could be multilateralized on a non-discriminatory basis. As our publication “World Trade Report 2011” indicated, it is about “coherence” rather than just “coexistence”.
My concluding thought is this: as an international community, we must continue to fight protectionism, but in the WTO in particular, we must also fight policy fragmentation.
Thank you very much.