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RIETI Report No.139 February 2012

The World Trade Organization in the Era of the Trans-Pacific Partnership Agreement: A view on the outcome of the eighth ministerial conference

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RIETI Report

The Doha Round of trade negotiations under the World Trade Organization (WTO) recently marked its 10th year. After overcoming a series of difficulties over the years, the WTO members have found themselves with no choice but to admit officially that the negotiations aimed at achieving a "single undertaking" has come to a deadlock. Going forward, WTO member countries will shift their focus toward regional economic integration in the form of regional trade agreements (RTA), and Japan is headed for a series of economic partnership agreements (EPA) as well. Some have called for shifting the focus of the WTO onto the functions of the existing system, namely, implementation and monitoring. But will this signify a decline in the prestige of the WTO as well as undermining its authority or legitimacy of its rules and system?

In the February issue of the RIETI Report, Faculty Fellow Tsuyoshi Kawase emphatically rejects this possibility and lays out his reasons including: regional trade agreements (RTA) among the Big Three countries and BRICS economies are unlikely to occur in the foreseeable future; WTO is one of the few tools for developing economies to protect interests; RTAs lack powerful mechanisms for trade dispute settlement and rule enforcement; and certain areas are beyond the reach of substantive RTA discipline. Furthermore, Kawase stresses the importance of strengthening the multilateral trade system and re-acknowledging the significance of the WTO rather than trumpeting its decline in prestige or raison d'etre as a result of the political deal. Mega-regional initiatives such as the Trans-Pacific Partnership (TPP) should serve as a building block for the WTO in areas that are insufficiently addressed such as investment, services, and intellectual property rights, instead of being exclusive and competitive to the WTO.

This month's featured article

The World Trade Organization in the Era of the Trans-Pacific Partnership Agreement: A view on the outcome of the eighth ministerial conference

The Doha Round of trade negotiations under the World Trade Organization (WTO) marked its 10th year since inception in 2001, as the ministerial meeting was held in December 2011. After overcoming a series of difficulties over the years, the WTO members found themselves with no choice but to admit officially that the negotiations aimed at achieving a "single undertaking," i.e., the acceptance by each and every WTO member of all of the agreements as a single package, came to a deadlock. To illustrate, the following is an excerpt from the chairman's concluding remarks at the WTO ministerial conference in Geneva (* 1).

1. Ministers deeply regret that, despite full engagement and intensified efforts to conclude the Doha Development Agenda single undertaking since the last Ministerial Conference, the negotiations are at an impasse.

2. Ministers acknowledge that there are significantly different perspectives on the possible results that Members can achieve in certain areas of the single undertaking. In this context, it is unlikely that all elements of the Doha Development Round could be concluded simultaneously in the near future.

As we can see, what has been abandoned is the "single undertaking ... in the near future," and the paragraphs that follow those quoted above call for the continuation of the negotiations. However, the true sentiment of some major member countries is: "Although no one wants to say it, we must call a cat a cat (failure is failure)," as Pierre Lellouche, French secretary of state for foreign trade, puts it (* 2). Going forward, WTO member countries will definitely shift their focus of attention toward regional economic integration (regional trade agreement (RTA) in WTO terminology). Japan, for its part, is heading into a series of negotiations for economic partnership agreements (EPAs). Needless to say about the Trans-Pacific Partnership Agreement (TPP), others include the forthcoming round of talks with Australia as a prelude for Japan's entry into the TPP negotiations, trilateral negotiations for a proposed Japan-China-South Korea Free Trade Agreement (FTA), the study phase for which has just ended, as well as bilateral negotiations with the EU.

In reaction to the impasse of the Doha Round, Hamid Mamdouh, director of trade in services of the WTO, said that WTO member economies have been "completely obsessed" with the idea of concluding the round to achieve the current WTO agreements plus alpha. He called for shifting the focus onto the functions of the existing system, namely, implementation and monitoring. Reportedly, the same view is now being built in the United States (* 3). Some people say that these developments signify the WTO's decline in prestige (* 4). However, has the authority or legitimacy of the WTO rules and system really been undermined?

Raison d'etre of the WTO not undermined by Doha Round impasse and TPP negotiations

The answer is no. As I have discussed in a book I co-authored, political deadlock in rulemaking does not—and must not—have a negative impact on the judicial and administrative functions of the WTO (* 5). Insofar as no WTO members entering into an RTA that can be a substitute for the WTO in terms of functions and the scope of coverage (areas of negotiation and signatory countries), impairing the liberalization benefits that have been achieved under the existing WTO rules is in no one's interest.

1) RTA encompassing the Big Three and BRICS economies unlikely in the foreseeable future

An RTA among the Big Three member economies of the WTO—the United States, the EU, and China—is unlikely to occur anytime in the near future. Particularly, given the increasingly intense trade friction between the United States and China, the WTO will likely remain, at least for the foreseeable future, the only available form of governance mechanism they can turn to in resolving their disputes. The United States faces the same situation in its relationships with the rest of the BRICS economies. For instance, in contrast to the EU-Brazil relationship in which the two economies are seeking to establish a FTA, the U.S.-Brazil relationship has been fraught with conflicts, exemplified by the cotton dispute. Following the suspension of negotiations for the Free Trade Area of Americas (FTAA), there is no regime other than the WTO to govern the bilateral relationship between the two countries. In this regard, the significance of the WTO has further increased with Russia formally joining this multilateral framework. All of these big players have no choice but to continue to acknowledge the significance and legitimacy of the WTO.

2) WTO is one of the few tools available for developing economies to protect interests

Lacking in appeal as a market, small developing economies receive few offers for concluding an RTA. In response to the outcome of the latest WTO ministerial conference, a series of Japanese newspapers carried articles voicing concern over the prospect of these economies being left behind in the wave of globalization (* 6). It surely is a matter of grave concern that they may be left out of the emerging scheme for trade and investment liberalization, but it is not the end of the story. For these small developing economies, a decline in the legitimacy of the existing WTO rules and in the rule enforcement function of the WTO could even mean the loss of their vested interests. Therefore, developing economies also should be concerned about the WTO's decline in prestige.

3) RTAs lack powerful mechanisms for trade dispute settlement and rule enforcement

Dispute settlement procedures provided for in most RTAs do not have automatic and binding nature comparable to that of the WTO dispute settlement process, and even today, most trade dispute cases are brought before the WTO instead of RTAs. It is unlikely that the TPP will bring any significant change to this situation. According to the current status of the TPP negotiations, no dispute settlement procedures that go beyond those provided for in the existing P4 Agreement or FTAs concluded by the United States are on the negotiation table, and Japan is not showing any strong interest, either (* 7). James Bacchus, a former chairman of the WTO Appellate Body, even calls for concluding the TPP as a plurilateral agreement within the framework of the WTO just for the sake of availing the TPP of the enforcement power of the WTO (* 8). But this argument is a little bit too extreme. In reality, the assumption would be that any dispute concerning overlapping disciplines under the TPP and the WTO will be referred to the latter.

It is still fresh in our memory that multilateral surveillance based on an accumulation of monitoring results at the Trade Policy Review Mechanism (TPRM) effectively prevented the rise of protectionism following the outbreak of the 2008 financial crisis. Also at the latest WTO ministerial conference, 23 leading member economies (including the entire EU) issued a joint statement against protectionism (* 9). To be sure, the second half of 2011 witnessed a resurgence of concern over the rise of protectionism, and we must not ignore the significance of the fact that more than 100 members, including emerging economies such as China and India, did not join the statement (* 10). However, the WTO ministerial conference as a whole appreciated the aforementioned monitoring work undertaken by the Trade Policy Review Body (TPRB) following the financial crisis and decided to "direct it to be continued and strengthened." (* 11) It is thus unlikely that the overall momentum for anti-protectionism commitment has declined. Furthermore, the WTO secretariat announced its intention to launch, and make available to the public at large, a new application called the Integrated Trade Intelligence Portal (I-TIP) that allows access and search of trade barriers and other trade policy information stored in the WTO database via one portal (* 12). This will likely enhance transparency of trade barriers.

With the EU as an exception, RTAs normally do not have an executive branch and thus cannot be counted on to operate as an information collecting and monitoring mechanism. The same holds true for the TPP. With both Japan and the United States in dire fiscal straits, it is unrealistic to expect them to contribute funds to set up a new international organ for that purpose, and there are not even talks about it.

Even after witnessing how the WTO's eighth ministerial conference turned out, Alan Beattie, the international economy editor at the Financial Times, recognizes the significance of the existing rules and dispute settlement process of the WTO, just like I do. At the same, however, he warned about the rise of "murky protectionism" subsequent to the financial crisis, voicing concern that WTO disciplines are hard to reach such less obvious actions, as compared to outright protectionist measures like quantitative restrictions (* 13). However, the trade policy review reports filed with the TPRB following the financial crisis pays close attention to such murky protectionist measures. Furthermore, China's restraints on the export of raw materials such as bauxite, a measure cited by Beattie as an example of murky protectionism, have been found to be WTO inconsistent in a panel ruling (* 14). These indicate that the WTO is serving as a crucial—though not perfect—bulwark against protectionism.

4) Certain areas are beyond the reach of substantive RTA disciplines

The coverage of substantive disciplines under RTAs—which typically includes investment, the environment, and business environments—is generally greater than those under the WTO. However, there are certain areas that are covered by WTO disciplines but often left outside the scope of RTA disciplines. Typical examples of such areas are trade remedies and subsidies. Regarding trade remedies, the WTO provides for certain measures to protect domestic industries such as anti-dumping duties and safeguard measures, although the promotion of trade and investment liberalization and its negative impacts—the decline of agriculture and the hollowing out of industries—tend to hog all the attention in trade negotiations. Such measures are trade-restrictive in nature. Therefore, an RTA to which a WTO member is a party may not include provisions regarding these measures if it tends to allow for greater protection to domestic industries than those under the WTO (* 15). Rather, disciplines that can be possibly imposed under an RTA would be those that would place greater constraints on the invocation of trade remedies.

In the TPP negotiations, discussions regarding trade remedies appear to be limited so far; some discussions have been made on the requirement of prior notice of anti-dumping investigation but no more than that (* 16). It has been reported that the United States is wary of Japan's attempt to call for stricter disciplines on the use of anti-dumping duties in the course of the TPP negotiations. Given this, and considering the U.S.-Japan zeroing dispute and their confrontation in the Doha Round negotiations on WTO rules, bringing up the issue of anti-dumping discipline inadvertently could derail the TPP negotiations (* 17).

Regarding subsidies, the massive fiscal stimulus pumped in by governments around the world to buoy the economy after the collapse of Lehman Brothers has drawn renewed attention to the importance of subsidy discipline. However, there seems to be little discussion about this issue in RTA negotiations. This is probably because RTA provisions calling for subsidy rules that are stricter than those under the WTO—whether in the areas of agricultural produce or industrial products—would just not work, being tantamount to inviting non-party countries to take a free ride. For instance, even if TPP members agree to restrict aircraft subsidies, it is only to please Brazil in the case of regional jets and the EU in the case of large airplanes, with Japan, the United States, and also Canada if it actually participates in the negotiation as it declared last November, ending up getting the short end of the stick. Therefore, even though the United States has been showing some interest in subsidy disciplines in certain specific areas such as state-owned enterprises and fisheries (* 18), no further discussion has been made on the issue of subsidies under the framework of the TPP.

This is not the case of the WTO avoiding or incapable of making new rules

Needless to say, what has been discussed above is not to suggest that the WTO can retreat from rulemaking activities. Indeed, the chairman's concluding statement at the eighth WTO ministerial conference explicitly refers to the need to "explore different negotiating approaches" as a replacement of the current single undertaking approach, suggesting that WTO members should now shift to an "early harvest" approach, which is to seek to agree on issues in specific areas where such agreement is possible.

Furthermore, the fact that the parties to the Government Procurement Agreement managed to strike a deal to revise the agreement outside the scope of the single undertaking has demonstrated that there is a fairly good chance to form a consensus among like-minded developed economies in certain areas. The United States has already proposed, albeit on an informal basis, to conclude a plurilateral agreement in the area of trade in services, which will be outside the scope of the single undertaking. The idea is supported by Japan, Australia, and the EU. Regarding the possibility of such plurilateral agreements, I would like to leave more detailed discussion to a relevant policy proposal that has been published as a RIETI research outcome (* 19).

At the same time, however, it should be noted that many challenges need to be overcome to realize the proposed plurilateral services agreement. To begin with, the significance of concluding an agreement that does not include China, India, and other opposing emerging economies as its parties is questionable, because it would not contribute much to the sufficient liberalization of markets. Furthermore, opinions are divided even among the supporting economies over whether the outcome should be made indiscriminately applicable to all WTO members that are not party to the services agreement as in the case with the Information Technology Agreement (ITA) or any resulting benefits should be reaped and shared equally only among those party to the services agreement as in the case of the former Tokyo Round Codes (* 20). In the case where some WTO members conclude a Tokyo Round-type agreement without obtaining specific consent from other WTO members, giving preferential treatment to each other under the agreement would run counter to the most favored nation principle of the WTO unless it is a WTO-compatible RTA.

Stop sending wrong signals and make an appeal for the importance of the WTO

Calling the deadlock of the Doha Round a "paradigm shift," one newspaper editorial called for directing all efforts toward the realization of the TPP now that the global economy is leaving the age of the battle for competitive advantage under the free-trade environment and entering a new era of turf war in which countries compete to develop and strengthen reciprocal trade relationships with a small number of countries (* 21). I cannot help but find the view perplexing except for the point of being in favor of the TPP. As pointed out by senior officials of the Ministry of Economy, Trade and Industry (METI), given the reality that a number of Japanese companies have moved into overseas markets and built multinational supply chains, Japan is one of the countries that most need a multilateral regime (* 22).

Furthermore, Japan's negotiations for RTAs have a long, rocky road ahead in all fronts. The liberalization of agricultural trade remains a big obstacle in negotiations with Australia. It has been pointed out that South Korea is not as forthcoming as Japan and China in their trilateral initiatives. Japan has a long way to go before entering into full-fledged TPP negotiations, as it needs to complete preparatory negotiations with each TPP partner and overcome political inertia at home (* 23). We surely have no choice but to accept limitations stemming from resource constraints. However, focusing entire efforts on regionalism as general policy amid the situation I have just described is extremely dangerous.

In this regard, Economy, Trade and Industry Minister Yukio Edano was quite right to say that strengthening the multilateral trade system is all the more important today as the global economy is facing extreme difficulties (* 24), Not only the members of the government and the ruling party but also the Japanese mass media now must re-acknowledge the significance of the WTO instead of unnecessarily trumpeting the WTO's decline in prestige or raison d'etre as a result of the filed political deal.

In the first place, mega-regional initiatives such as the TPP are not intended to build a system that is both exclusive and competitive. The purpose of such initiatives is to move ahead of the WTO in terms of incorporating next-generation trade rules particularly in areas not sufficiently addressed by the WTO—such as investment, services, and intellectual property rights—and eventually converge them into WTO rules through inter-regional cooperation (* 25). This is how an RTA as a building block, and not as a stumbling block, is supposed to be. Disrespecting the WTO, which is the mother ship for RTAs, is like putting the cart before the horse.

>> The original column was published in Japanese on January 23, 2012.

Notes

  1. ^ Eighth Ministerial Conference: Chairman's Concluding Remarks, WT/MIN(11)/11 (Dec. 11, 2011).
  2. ^ Asahi Shimbun (morning edition), Dec. 19, 2011, p1.
  3. ^ Inside U.S. Trade, Dec. 23, 2011, pp.26-27.
  4. ^ Mainichi Shimbun (morning edition), Dec. 18, 2011, p4.
  5. ^ Kawase, Tsuyoshi (2011). Ruru Shikko Kikan toshiteno WTO: Funso Kaiketsu Tetsuzuki oyobi Takokukan Kanshi no Genzai [WTO functioning as a rules-enforcement agency: Current state of dispute settlement procedures and multilateral surveillance]. In: Masahisa Fujita & Ryuhei Wakasugi (Ed.), Gurobaruka to Kokusai Keizai Senryaku [Globalization and International Economic Strategies], Keizai Seisaku Bunseki no Furontia [The Frontiers of Economic Policy Analysis] Vol. 3.
  6. ^ Shizuoka Shimbun (morning edition), Dec. 18, 2011, p18; Nihon Keizai Shimbun (morning edition) Dec. 18, 2011, p5; Asahi Shimbun (morning edition) Dec., 19, 2011, p3; Kobe Shimbun Dec. 22, 2011, p5.
  7. ^ TPP Kyotei Kosho no Bunya-betsu Genjo [Current Status of the TPP Negotiations by Negotiation Area], Cabinet Office, et al., October 2011, pp75-76. http://www.npu.go.jp/policy/policy08/pdf/20111014/20111021_1.pdfB
  8. ^ James Bacchus, "Marry the TPP to the WTO: The World's Most Important Trade Initiative Can Take Advantage of the WTO's Openness and Enforcement," Wall Street Journal (Online), Nov. 13, 2011.
  9. ^ Inside U.S. Trade, Dec. 16, 2011, p.12.
  10. ^ Nihon Keizai Shimbun (morning edition), Dec. 18, 2011, p5.
  11. ^ Trade Policy Review Mechanism: Decision of 17 December 2011, WT/L/848 (Dec. 19, 2011).
  12. ^ "WTO Launches New Tool for Accessing Trade Policy Information," Dec. 15, 2011 http://www.wto.org/english/news_e/news11_e/anti_14dec11_e.htm.
  13. ^ Alan Beattie, "Miserly Progress Made; World Trade Negotiations; With the WTO's Decade-Old Doha Round of Talks Stuck in a Standoff Between Rich and Poor Countries, Ways Are Being Sought to Ensure at Least Some Can Agree on Further Measures to Open Their Markets," Financial Times, Dec. 13, 2011.
  14. ^ Panel Report, China—Exportation of Raw Materials, WT/DS394/R, WT/DS395/R, WT/DS398/R (July 05, 2011). Case was pending appeal as of the publication of the original version in Japanese. The Appellate Body eventually upheld the panel's findings. Appellate Body Report, China—Exportation of Raw Materials, WT/DS394/AB/R, WT/DS395/AB/R, WT/DS398/AB/R (Jan. 30, 2012).
  15. ^ Regarding this point, there is controversy over whether any trade remedy system may be maintained under an RTA, which is required to liberalize "substantially all the trade" (GATT Article XXIV, paragraph 8). Angela T. Gobbi Estrella & Gary N. Horlick, "Mandatory Abolition of Anti-dumping, Countervailing Duties and Safeguards in Customs Unions and Free Trade Areas Constituted between WTO Members," in Lorand Bartels & Federico Ortino eds., Regional Trade Agreements and the WTO Legal System (2006).
  16. ^ Current Status of the TPP Negotiations by Negotiation Area, supra note 7, pp.22-24.
  17. ^ Inside U.S. Trade, Dec. 23, 2011, p.1. It is open for debate whether Japan should seek to strengthen antidumping discipline under the framework of an RTA. In view of the severe economic conditions in the recent years, Japan may as well shift its stance to more actively use antidumping duties and other trade remedy measures, which are its legitimate rights under the WTO.
  18. ^ Inside U.S. Trade, Nov. 18, 2011, pp.9-10; Inside U.S. Trade, Sept. 30, 2011, p.16.
  19. ^ Nakatomi, Michichitaka (2011), Toward the Reform of the WTO and the Early Conclusion of the Doha Round, RIETI. http://www.rieti.go.jp/users/nakatomi-michitaka/policy-recommendation.pdf
  20. ^ Inside U.S. Trade, Dec. 23, 2011, pp.3-4.
  21. ^ Nikkan Kogyo Shimbun, Dec. 19, 2011, p2.
  22. ^ Mainichi Shimbun (morning edition), Dec. 18, 2011, p4.
  23. ^ Hokkaido Shimbun (All Hokkaido; morning edition), Dec. 13, 2011, p10; Yomiuri Shimbun (Tokyo; morning edition), Dec. 19, 2011, p7; Nihon Keizai Shimbun (morning edition), Jan. 1, 2012, p19.
  24. ^ Yomiuri Shimbun (Tokyo; morning edition), Dec. 16, 2011, p10.
  25. ^ Watanabe, Yorizumi, TPP towa Nanika: Boeki Jiyuka no Chiriteki/Rekishiteki Tenkai no nakadeno Kosatsu [What is the TPP?: A study against the background of geographical and historical development of trade liberalization], Kinyu Zaisei Jijo, January 12, 2012; Bacchus, supra note 8.

Event Information

RIETI Symposium

No events are scheduled at the present time.

Brown Bag Lunch Seminars

(All BBLs run 12:15 - 13:45, unless otherwise stated.)

February 28, 2012
Speaker:YAMASHITA Kazuhito (Senior Fellow, RIETI / Research Director, the Canon Institute for Global Studies)
"Topic: TBA" (in Japanese)

March 7, 2012
Speaker:KANNO Masaaki (Chief Economist, JPMorgan Securities Japan Co., Ltd.)
"Topic: TBA" (in Japanese)

March 13, 2012
Speaker:TAKAKURA Shigeo (Senior Fellow, RIETI / Professor, Meiji University Law School / Patent Attorney, Suzuye & Suzuye (Patent Law Firm))
"[Policy History Series] Constructing the Intellectual Property System under the WTO and Subsequent Development" (in Japanese)

March 14, 2012
Speaker:MENG Jianjun (Visiting Fellow, RIETI / Senior Fellow, Center for Industry Development and Environment Governance (CIDEG), Tsinghua University)
Commentator:KWAN Chi Hung (Consulting Fellow, RIETI / Senior Fellow, Nomura Institute of Capital Markets Research)
Moderator:TAKAGI Seiji (Director, Northeast Asia Division, Trade Policy Bureau, METI)
"Topic: TBA" (in Japanese)

For a complete list of past and upcoming BBL Seminars, http://www.rieti.go.jp/en/events/bbl/index.html


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