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I am very happy to join you all today in
Bangalore under the theme “Emergent India: New roles and new
responsibilities”. And doing this in Bangalore is no coincidence.
India's third largest city, accounting for 35% of India's software
exports and home to prestigious college and research institutions in
areas such as IT or biotech, Bangalore is today an example of how
globalisation and openness can bring huge opportunities and benefits to
But with success also comes challenges: air pollution, traffic
congestion or infrastructure needs are just a few. These are also the
results of globalisation and if we want it to be acceptable to all of
us, we must also address those challenges head-on, as the title of this
Trade is one of the manifestations of globalisation, with its positive
effects but also its downsides. Today it is clear that the sole work of
market forces will not be enough to spread the benefits of globalisation
to all and that we have to develop instruments to harness globalisation,
ensuring that both developed and developing countries benefit alike from
it and that those in our societies who suffer from the transformations
that globalisation bring about are adequately taken care of.
One of the tools at our hands to harness globalisation is the
multilateral trading system, the WTO, hence the Round of negotiations
launched in 2001 in Doha under the banner “Doha development Agenda”. It
is intended to rebalance the world trading system in favour of
developing countries, through greater market opening and new trade rules
adapted to the new changing trading realities of the XXI century.
But as the WTO and it predecessor, the GATT, have evolved, a myriad of
preferential trade agreements have been concluded by WTO members. By
2010 around 400 of such agreements could be active.
These preferential agreements contradict the non discrimination
principle which is one of the cornerstones of the WTO. If this is so,
why are so many countries ready to accept rules and disciplines at the
bilateral level that they are not prepared to accept at the multilateral
Attractiveness of regional trade agreements
In my view, there are several reasons for the attractiveness of
bilateral agreements as compared to multilateral negotiations.
First, they seem quicker to conclude. Fewer parties means that
preferential trade agreements can be wrapped-up within a shorter period
of time. This is usually very attractive to both politicians and
business communities who are looking for quick results.
Secondly, they can enter into new territories. Because of similarities
in interests and often more common values, bilateral trade agreements
can go into new areas such as investment, competition, technical
standards, labour standards or environment provisions, where there is no
consensus among WTO Members.
Thirdly, many of the recent FTAs contain political or geopolitical
considerations. For developing countries negotiating with more powerful
developed countries, there is usually the expectation of exclusive
preferential benefits, as well as expectations of development assistance
and other non-trade rewards. They are also viewed as an instrument to
get ‘brownie points’ and gain an advantage over other WTO Members.
Bilateral trade agreements are also useful for negotiators to learn how
to negotiate thus contributing to reinforcing a country's trade
institutions. Many regional trade agreements have been the bedrock for
peace and greater political stability. Finally, they are often used as
instruments for domestic reform in areas where the multilateral system
offers a weaker leverage.
Why bilateral trade agreements cannot
replace multilateral rules
But in my view bilateral agreements cannot replace the multilateral
trade rules. Putting aside what we were told by trade theory textbooks:
for instance that they create trade diversion and shift imports from
most efficient global suppliers, I would like to emphasize four crucial
limitations of bilateral agreements.
First, the conclusion of preferential trade agreements can create an
incentive for even further discrimination, which eventually will hurt
all trading partners. Countries outside an agreement will try to
conclude agreements with one of those that are inside to avoid
exclusion. This has been called the “domino” or “bandwagon effect” and
is the reason for much of the regional trade agreement activity seen in
Asia recently. In other words, the consequence is that the preferences
obtained through forming a preferential agreement against competitors
tend to be short-lived. The more agreements you have, the less
meaningful the preferences would be.
Secondly, bilateral agreements cannot solve systemic issues such as
rules of origin, antidumping, agricultural and fisheries subsidies.
These issues simply cannot be handled at the bilateral level. Take for
instance, negotiations to eliminate or reduce trade distorting
agricultural subsidies, or fisheries subsidies. There is no such thing
as a “bilateral” farmer or fisherman, or a “bilateral” chicken and a
“multilateral” farmer or chicken or fish. Subsidies are given to farmers
for all their poultry production. The same is true for rules on
Thirdly, the proliferation of regional trade agreements can greatly
complicate the trading environment, creating a web of incoherent rules.
Take rules of origin: an increasing number of WTO Members are party to
ten or more regional trade agreements, most of which for a given Member,
contain agreement-specific rules of origin which are necessary to ensure
that the preferences go to your partner and not to others. This
complicates the production processes of business who may be obliged to
tailor their products for different preferential markets in order to
satisfy rules of origin. It also complicates life for customs officials
who are obliged to assess the same product differently depending on its
origin, thus compromising the transparency of the trading regime.
Borrowing the expression used by Professor Bhagwati — this is where we
begin to have a real “spaghetti bowl” of twisted rules of origin.
Finally, to many small and weak developing countries, entering into a
bilateral agreement with a powerful big country means less leverage and
a weaker negotiating position as compared that in the multilateral
talks. It might not be the case for India, China, Brazil, the US and the
EC, it will be true for Mauritius, Sri Lanka, Cambodia or Ghana.
The position of the WTO vis-à-vis regional trade agreements
The GATT and now the WTO recognize the conditional right of Members to
form regional trade agreements and to the extent necessary, to set aside
some WTO obligations.
The WTO imposes three types of substantive conditions for regional
agreements to be WTO consistent. First with respect to the overall
impact of the regional trade agreement vis-à-vis other Members: there is
the obligation not to raise barriers to trade with third parties. This
is quantifiable in terms of tariffs, but less easy to measure in terms
of other trade regulations such as standards or rules of origin. Second
with reference to what we call the “external requirement”. A free trade
agreement cannot lead to higher import duties for its members while a
customs union must harmonise the external trade policies of its members
and compensate affected non-members accordingly. Thirdly, on the
“internal dimension” of regional trade agreements, tariffs and other
restrictive regulations of commerce must be phased out on “substantially” all trade. Again the tariff component can be quantified,
but it is harder to determine in the case of other restrictive trade
regulations as there is no agreed definition of the term.
It is therefore clear that the WTO authorizes regional trade agreements,
the operation of which should not lead to situations where the non-party
would “pay the price” of internal preferences. In order to ensure
coherence, regional agreements are to be “promptly” notified to the WTO
and reviewed by its peers before the regional trade agreement is
Since regional trade agreements are here to stay, and bearing in mind
that the WTO allows them, under certain conditions, the challenge we
face today is how to ensure that they contribute to the health of the
world trading system by minimising the risks that they constrain global
welfare and limit economies of scale. This is why WTO Members decided to
include the issue of regional agreement in the agenda of the on-going
negotiations under the Doha Development Agenda. A first step has been
given in this direction with the adoption by WTO members last December
of a mechanism to enhance the transparency of bilateral agreements
concluded by WTO members. It calls for the notification of new bilateral
trade agreement before the application of preferential treatment. It
calls for an enhanced role for the WTO whereby the Secretariat, on its
own responsibility and in full consultation with the parties, shall
prepare a factual presentation of all regional trade agreements notified
to the WTO. At the moment the process is voluntary. The factual
presentation will provide a systematic view of the regional trade
agreements' trade liberalization and regulatory aspects.
What else can we do to improve the cohabitation of bilateral and
multilateral trade agreements? I believe we have to deal with the
spaghetti bowl of rules of origin. Harmonization of rules of origin that
are simple, easy to apply and non-restrictive across different regional
trade agreements would simplify trading conditions and contribute
greatly to transparency. Hard work is continuing on this issue but to be
frank, without serious results for the members.
Turning to the title of this event: should we go bilateral or
multilateral? The answer in my view is a strong and modern multilateral
trading system coupled with regional trade agreements which amplify
rather than undermine its benefits. A strong multilateral trading system
complemented — not substituted — by a new generation of regional trade
agreements. If you allow me an analogy with Indian cuisine, regional
trade agreements are the pepper in a good curry sauce which is the
multilateral agreements. Pepper adds taste and can improve a curry sauce
but pepper alone is not tasty, and good pepper in a poor sauce, will not
do the trick! Use the wrong recipe and it will be a disastrous dinner!!
Turning to India, India has signed free trade agreements with Sri Lanka,
Bhutan, Singapore and is involved in the South Asia Free Trade Agreement
(SAFTA). India is also negotiating with ASEAN countries, Chile,
Mauritius, MERCOSUR, SACU and Thailand. More recently, proposals for
free trade agreements with Korea, China, Malaysia and some other
countries have been tabled. Compared with US or the EC, India did not
have as many as FTAs, but it seems to me that India is quickly catching
In this context, I am very pleased to see that in its Recommendations to
the Indian Government, the Confederation of Indian Industry (CII) has
made its stand clear that bilateral negotiations for promoting free
trade should not be seen as a substitute for the efforts in multilateral
negotiations. I would like to take the opportunity to appreciate your
work and count on Indian business community and think-tanks support not
to divert its attention from the multilateral trading system and the
ongoing Doha Round negotiations.
We are at a defining moment in the on-going Doha Development Agenda
negotiations. The window of opportunity in front of us will close
sometime this year. A good deal of political energy has recently emerged
from leaders in Europe, the US or ASEAN just last weekend. African trade
ministers have stated very clearly yesterday in Addis Ababa their
worries at present situation of the negotiations and their will to
conclude. We must now seize the moment to translate this political
energy into changes in the negotiating positions. This is no time to
procrastinate or reflect: this is time for action. Next week as a number
of ministers meet in Davos we will have the opportunity to map out the
next steps in the negotiations in the next weeks. I am confident that
India will display its leadership and make a constructive contribution
to entering the last lapse of the WTO Round.
Thank you for your attention.
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