Post-Potsdam: Open Season for FTAs

This commentary is the first in a two-part series on international trade policy written by East-West Center President and International Chair of the Pacific Economic Cooperation Council Charles E. Morrison and Vinod K. Aggarwal, professor at the University of California, Berkeley and director of the Berkeley APEC Study Center.

The 1945 Potsdam conference in the famous Tudor-style Cecilienhof may have been the last successful allied conference before the onset of the Cold War, but last month’s meeting in the same venue of trade ministers to fashion a Doha Development Round compromise was clearly an abject failure. Trade negotiators have been long used to brinkmanship, but increasingly they fail either to recognize where the brink is or to lock themselves into positions that take them over the brink even when they try to stop. The best that can be said for Potsdam 2 is that the United States and the European Union had finally come together with more flexible offers on trade. But India and Brazil, representing developing countries, thought they could still win more through intransigence and drove the negotiations over the edge. Lamentably China and Japan, two other great trading nations that should have made a difference, have been notable laggards in the Doha Round and were not even in Potsdam.

The post-Potsdam questions: What next for trade policy and for the international trade regime?

For most trading nations, the answer on trade policy is “more of the same.” The big players – the European Union, China, Japan, and the United States -- have been busy making “free trade agreements” among themselves. In fact, many of the agreements have little to do with free trade as they are preferential with respect to outsiders or, like China’s, cover only small segments of trade. In the absence of global negotiations, the momentum toward bilateral agreements can be expected to continue.

China, for example, is continuing to deepen its arrangements with the important ASEAN group and is simultaneously negotiating agreements with New Zealand and Australia, its first FTAs with developed countries. Japan has negotiated free trade agreements with Singapore, Mexico, and the Philippines, and is studying agreements with Korea, China, and the ASEAN group. The European Union has recently started negotiations with India, South Korea, and ASEAN, and is likely to accelerate its efforts to pursue bilateral accords.

The United States is in a different position. It has concluded its largest FTA since NAFTA in its KORUS agreement with South Korea. Although a comprehensive FTA with significant prospective benefits for both parties, the KORUS will be challenged in both legislatures. Nonetheless, there is at least a prospect of approval in the United States since the KORUS is the last FTA qualifying for the Trade Promotion Authority (TPA) treatment in Congress before TPA expired on July 1.

The TPA is the vehicle through which the Congress delegates negotiating authority to the Executive branch (as is normal in other countries), while retaining its ultimate approval. It also provides a self-disciplining accelerated, up or down legislative track for Congressional approval to ensure that agreements will not be bogged down by special interests or attempts for micro-managed renegotiations. Since any other method of negotiating with the U.S. would be impossible, no other nation will negotiate with Washington in the absence of TPA. For this reason, expiration of TPA authority will relegate the United States to the sidelines to watch its relative position erode as other nations continue to conclude to develop preferential arrangements.

As for the international trade regime, the original intent of the World Trade Organization (WTO) process was to provide for an orderly, rules-based, fair system for the business interests of all nations. This, of course, has been a work-in-progress, but it has been reversed by the rush to bilateralism as well as sectoral agreements in such areas as IT, financial services, and telecom. The latter are analogous to the infamous process of “coring” in the minerals industry – by carving out the high value, easily extracted core first, it renders much less economical the later extraction of the surrounding lower value ore.

Bilateralism has introduced a complexity of special trade arrangements that Columbia University economist Jadish Bhagwati calls a “spaghetti bowl” because of their preferential character and different rules of origin and coverage and that Asians refer to as a noodle bowl.

The political benefits of bilateralism are so great that the process probably cannot be stopped. Can it be contained? One promising effort in the Asia-Pacific region is occurring through the APEC forum – developing “model measures” for FTAs to ensure that they are more compatible with each other and conform to higher quality standards, such as more comprehensive coverage of goods and services. Unfortunately, the European Union is not part of APEC and has little knowledge of this effort. The APEC work should be globalized.

Another less promising concept is bigger and better forms of “bilateralism,” that is, large geographically-based trans-regional FTAs among, for example, the trans-Atlantic countries, the Asia-Pacific countries, the Americas, or East Asia. These are usually presented as ends in themselves, but sometimes as negotiating tools to get the global process going again. Conceptually, none of these “Plan Bs” matches the benefits of “Plan A,” that is, global negotiations. And, as a practical matter, none of them seems to have the political leadership behind it to carry such large negotiations to fruition.

“Plan A” requires solid and sustained leadership, and this can only really come from the world’s largest trading nation, the United States. Just as Potsdam waited on the French elections, any resuscitation of Doha probably now has to wait until after the American elections. In the meantime, trade negotiators should do what they can to contain bilateralism, educate politicians and publics, and reflect on how to improve the WTO negotiating process to ensure that the perfect does not become the enemy of the do-able.

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This release was published on openPR.