VoxEU Column

Global value chain governance in the era of mega FTAs and a proposal of an international supply-chain agreement

NAKATOMI Michitaka
Consulting Fellow, RIETI

As the Doha Round continues to stagnate, mega FTAs such as the Trans-Pacific Partnership will likely play the leading role in trade rulemaking for some time to come, creating a 'spaghetti bowl' of trade rules. This column argues that we should multilateralise the results of mega FTAs on an issue-by-issue basis, starting with an International Supply Chain Agreement.

As the Doha Round of trade negotiations under the WTO continues to stagnate, mega FTAs - such as the Trans-Pacific Partnership (TPP), the economic partnership agreement between Japan and the EU, and the Transatlantic Trade and Investment Partnership between the US and the EU - will likely play the leading role in trade rulemaking for some time to come. At the same time, however, mega FTAs are meant to set rules for and enhance value chains within specific geographic regions, and they will not directly lead to the creation of global trade rules. They even pose a significant risk of creating a 'spaghetti bowl' of conflicting trade rules.

Possible scenarios for mega FTAs governance

We can consider four possible scenarios for the relationship between the development and governance of global value chains and mega FTAs.

Scenario 1: Euphoric scenario

This is the scenario favoured by mega FTA advocates. Their argument is inferred to be based on the following premises:

1) Mega FTAs will be concluded before long
2) There will be no or only a modest spaghetti bowl of rules
3) Entangling rules can and will be harmonised
4) Harmonisation will not take much time
5) Rules resulting from harmonisation will serve as the basis for rulemaking at the WTO
6) Differences in rules applicable inside and outside mega FTAs (members versus non-members) will not pose any major problems

These premises point to an ideal scenario (Figure 1). Mega FTAs will be concluded soon, spaghetti bowl problems will be solved in due time (ICSTD 2012), and a new set of trade rules - particularly for areas not covered by the existing rules - will emerge to serve as the basis for future rulemaking at the WTO. However, in order for this to be realised, all of the above premises must be correct.

Figure 1: Euphoric ScenarioFigure 1: Euphoric scenario

Scenario 2: WTO 2.0

The second scenario is that of 'WTO 2.0' (Baldwin 2011, 2012). Baldwin has been arguing that mega FTAs will create a "WTO 2.0," a new governing body for 21st century trade rules as compared to the existing WTO which governs 20th century trade rules (Figure 2).

Figure 2: WTO 2.0Figure 2: WTO 2.0

Scenario 3: Spaghetti bowl of rules (Fragmentation Scenario)

Taking an excessively optimistic view of mega FTAs is dangerous. Let's examine each premise underlying Scenario 1.

Regarding premise 1), given the level of ambition and the diversity of countries involved, it is generally reasonable to assume that it takes quite some time to conclude a mega FTA. Regarding premises 2) through 4), the harmonisation of rules across mega FTAs, which tends to involve adjusting differences in economic systems, are prone to hitting a wall. In concluding its FTAs with the EU and the US, South Korea had to apply different definitions with respect to international standards in the areas of automobiles and electronics and electrical products. As such, it seems unavoidable that the emergence of mega FTAs will result in conflicting rules in various areas of trade in the coming years (Note 1). Areas prone to conflicting rules include intellectual property (e.g. treatment of right infringement on the internet), information (e.g., relationship between the cross-border transfer of information and privacy), and competition (e.g. definition of "state-owned enterprises" and discipline on their behaviour). There is no guarantee for harmonisation to be completed in a short period of time as stated in premise 4), and if no harmonisation takes place, premise 5) fails, and there will be no basis for rulemaking at the WTO. As to premise 6), differences in rules applicable inside and outside mega FTAs could pose a major problem as value chains are changing constantly in all aspects - i.e., procurement, production, and distribution - and in terms of countries concerned (IDE-JETRO and WTO 2011).

Figure 3: Fragmentation ScenarioHighslide JS[Click to enlarge]

Scenario 4: Towards the development of harmonised trade policy

In order for mega FTAs to be able to become the basis for truly global value chains and trade system, what perspectives are needed?

First, it is necessary to have a clear vision of the future trade system we intend to build and design a global solution - not a regional solution - to achieve that end. Indeed, what the business community is looking for is not a regional solution by means of FTAs but a global solution. In this regard, drawing a strategy with an eye set on future WTO rules is essential.

Second, ensuring transparency, disclosure, information sharing is critically important. Today, there is a compelling need to promote the multilateralisation of FTAs and the localisation of WTO rules. Transparency and the distribution of accurate information are what constitute the foundation of this endeavour.

Third, the concept of global value chains and the viewpoint of the business community must be fully taken into consideration. The necessity of global value chains is now becoming a common view of business communities across the world.

Fourth, we should embrace the concept of issue-based international rulemaking (Nakatomi 2012b, 2013). It is important to multilateralise the results of mega FTAs on an issue-by-issue basis and utilise issue-based plurilateral agreements such as an International Supply Chain Agreement.

Figure 4: Issue-based Plurilateral AgreementsHighslide JS[Click to enlarge]

What is the International Supply Chain Agreement?

The International Supply Chain Agreement is a concept of a comprehensive plurilateral agreement on global supply chains, which I proposed in November 2012 (Note 2). Readers are advised to refer to the proposal (Nakatomi 2012a) for details, but I would like to provide a general overview and idea of the concept.

Basic principles

In proposing the International Supply Chain Agreement, I defined some basic principles which, inter alia, include:

1) Creating the basis for future WTO rules
2) Not undermining the Doha Round
3) Extending resulting benefits to non-participants on a most-favoured-nation basis in general
4) Contributing to the elimination of the spaghetti bowl phenomenon in the rules of origin and in the rules
5) Aiming to achieve an early conclusion; and
6) Cooperating and consulting closely with the business community

Among those, 1) and 4) are the two sides of the same coin, representing the perception that the goal of global value chains is to create an efficient global trade environment which is incompatible with the presence of multiple conflicting rules. There are pros and cons regarding 3), i.e. the most-favoured-nation extension of benefits resulting from the International Supply Chain Agreement. However, successful plurilateral agreements- the Information Technology Agreement, the Basic Telecommunication Services Agreement, and the Financial Services Agreement - extend their benefits to non-participants on a most-favoured-nation basis and following those examples would definitely increase the probability of success significantly. Regarding 5), a sense of speediness is important in negotiating the International Supply Chain Agreement, and it must be concluded before too much harm is done by mega FTAs. It may be necessary to set a clear timeframe for negotiations, for instance, to achieve a conclusion within three years.

Areas to be covered by the International Supply Chain Agreement

Specific areas that may be covered are as detailed in the proposal. Here, I would like to remind that the goal of the Agreement is to improve global value chains, and the key to achieving that end lies in close cooperation and coordination between governments and business communities. It is essential to select areas subject to negotiation in such a way as not to end up with an agenda that is too heavy to digest (Nakatomi 2012b).

This article first appeared on www.VoxEU.org on August 15, 2013. Reproduced with permission.

  1. ^ As a hub of mega FTAs and a forerunner in the area of rulemaking, Japan is positioned to prevent a tangle of rules, and it can and should play a leading role in doing so. See Nakatomi (2012b). Keidanren (2013) also emphasises the need to set a "unified axis" (coherent approach) in negotiating multiple FTAs.
  2. ^ In 2013, Hoekman and Jackson (2013) introduced the International Supply Chain Agreement as a specific option for a holistic approach to deal with challenges related to global value chains. The International Supply Chain Agreement was also introduced as such in the World Economic Forum (2013), as well as in the National Board of Trade (2013).
  • Baldwin, R (2012), "WTO 2.0: Global governance of supply-chain trade", CEPR Policy Insight 64, December.
  • Baldwin, R (2011), "Trade and Industrialization after Globalization’s 2nd Unbundling: How Building and Joining a Supply Chain are Different and Why it Matters," NBER
  • Hoeckman, Bernard and Selina Jackson (2013), "Shifting Focus in Trade Agreements-From Market Access to Value Chain Barriers," http://blogs.worldbank.org/trade
  • ICTSD (2012) "Strengthening the multilateral trading system", online publication.
  • IDE-JETRO and WTO (2011), "Trade Patterns and Global Value Chains in East Asia: From Trade in Goods to Trade in Tasks"
  • Keidanren (April 16, 2013), "Proposals for Redefining of Trade Strategy"
  • Nakatomi, M (2012b), "Exploring Future Application of Plurilateral Trade Rules: Lessons from the ITA and the ACTA," RIETI
  • Nakatomi, M (2013), "Plurilateral Agreements: A viable alternative to the WTO?" in , Baldwin R, M Kawai and Ganeshan Wignaraja (eds), The Future of the World Trading System: Asian Perspectives, VoxEU.org eBook (June 11, 2013)
  • Nakatomi, Michitaka (2012a), "Concept Paper for an International Supply Chain Agreement (ISCA): Improving global supply chains by an issues-based plurilateral approach," RIETI.
  • National Board of Trade, Sweden (2013), Global Value Chains and the Transatlantic Trade and Investment Partnership
  • World Economic Forum (2013), Enabling Trade: Valuing Growth Opportunities.

August 15, 2013