Bangalore, India

Multilateral or bilateral trade agreements: which way to go?
Confederation of Indian Industries Partnership Summit 2007
Emergent India: New Roles and Responsibilities

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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 our citizens.

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 conference suggests.

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 level?

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 anti-dumping.

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 implemented.

Future avenues

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 up.

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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