M.A. (D.L.B.), Jindal School of International affairs, O.P. Jindal Global Univeristy
Preferential trading agreements have grown at an unprecedented rate in the last few decades along with growth in services, trade, offshoring, global value chains etc. An important reason for this growth is globalization, as globalization increasingly transformed the economic scenario from tariffs to standards and regulation. Globalization and regionalism are coherent and complimentary as can be traced in the increasing importance of PTAs for countries. This research also throws light on the compatible and non-exclusive nature of regionalism and multilateralism with neither being a threat or a challenge to the other. The research draws evidence from UNCTAD and WTO to present complementarities and coherence between globalization and regionalism, and compatibility and coexistence between regionalism and multilateralism settling the old long debates of regionalism challenging globalization and regionalism challenging multilateralism.
Keywords – multilateralism, regionalism, globalization, PTAs, GATT, WTO
In academic and policy circles, regionalism is often conceived as a threat to multilateralism. A lot of discussions in the 1990s and 2000s talked about the future of multilateralism, and threats to multilateralism from regionalism. However, if one carefully follows history, the trade pattern before 1945 was not multilateral but regional. Countries used to trade as blocs with countries and reap benefits of the same. Multilateralism was thus, not the reality of international trade, rather a mechanism dealing with the destruction of world wars and to challenges posed by the cold war. Multilateralism, therefore, was more of an ideal than an established practice, balancing the odds of the situation, by facilitating the development of institutions and norms of international trade helping economies recover from the turmoil of world wars. As institutions and norms developed, and as states started to emerge from the turmoil of world wars, states started to reestablish regional arrangements and participate in PTAs as they did before 1945. International trade, therefore, had always been modelled on regional lines with the recent boom of regional arrangements, not a threat to multilateralism but only a return of regionalism to the international scenario.
It is important to understand the development of multilateralism and regionalism in the structural and historical contexts in which they developed. While multilateralism developed in a time when protectionist policies dominated the world with a reduction in tariffs being an important concern. Regionalism, on the other hand, flourished in a time when non-tariff barriers, offshoring and global supply chains characterized the concerns of international trade. Therefore, while regionalism reflects the dynamics of today, multilateralism, on the other hand, reflects the dynamics of the past. However, our present is never detached from its past so both regionalism and multilateralism together form the reality of today.
Moreover, multilateralism was never as benign as it was thought. Multilateral institutions were hijacked by the European and western powers exercising their influence over others because of their size (economy) and expertise in international trade. Developing, underdeveloped and least developed nations were excluded from the decision-making process of General Agreement on Trade and Tariffs (GATT) through Most Favored Nation (MFN) exemptions which made them insignificant others resulting in the “don’t obey, don’t object” notion (Baldwin, 2016). In the words of Söderbaum, while multilateralism was strong as a theory and not as a practice, regionalism on the other hand was strong as a practice and not a theory (2008).
This paper argues in favor of complementarities and coherence, between regionalism and globalization, making regionalism and globalization mutually compatible and reinforcing. The objective of this paper is also to articulate the coexistence of multilateralism and regionalism, with none posing a threat or a challenge to the other. Multilateralism and regionalism according to this research do not just coexist but are also consistent with each other; representing the contemporary realities of supply chains, globalization and the Doha Failure.
This paper has been written with help of secondary sources available on the internet, such as but not limited to, research papers, reports, lectures, and articles published in reputed journals. Scholars like Bhagwati, Baldwin, Pascal and others have been picked because of their expertise in the field and the long-drawn experience. Moreover, the reviewed literature is carefully chosen to include different periods and the latest trends to make research inclusive and representative of the realities of today. The data for discussions and graphical presentation has been taken from the World Trade Organization (WTO), World Bank Database and United Nations Conference on Trade and Development (UNCTAD) datasets for different periods ranging from the 1950s to 2018. The question has been approached from a global perspective instead of a regional or country perspective to prevent generalizations from the country and the regional level to the global level. Descriptive analysis has been used to argue the case complementarities and coherence of regional trading agreements with globalization and consistency of regionalism with multilateralism.
Jagdish Bhagwati (1992) in his essay “Multilateralism vs regionalism” argued that the proposition that geographically close countries should form Preferential Trading Agreements (FTAs) or Custom Unions (CU) is misplaced as such assertions are oblivious of historical evidence of hostility along the border. Moreover, Bhagwati also rejects the idea of regionalism being quicker, efficient and certain to prevent policymakers from making regional choices over multilateral ones. The idea of regionalism being quicker is challenged by him by the example of the European community which almost took four decades to come into existence. The idea of regionalism being efficient is countered by Bhagwati by the example of the North American Free Trade Agreement (NAFTA) wherein Mexico acceded to almost every demand of the United States of America (USA). Last but not least the idea that regionalism being certain also seems weak to him with the example of the failed Latin American Free Trade Agreement (LAFTA) and a stagnated Association of South-East Asian Nations (ASEAN) in 1992.
Michalak and Gibb (1997) in their article “Trading blocs and Multilateralism in World Economy” attempted to understand regionalism beyond economic terms. They argue that it is not just globalization that is restructuring the global economy but also regionalism that is responsible for it. According to Gibb and Michalak, the Uruguay round despite its long list of achievements like agreement on services, intellectual property rights and others was still a failure as it failed to address the core issue of agriculture. Moreover, as ironic it may sound, nearly all members of WTO were a part of at least one regional trade bloc when Uruguay negotiations were held. GATT during the period 1990 – 1994 received almost 33 new notifications of preferential trading agreements with many others being converted into deep trade agreements. They saw regionalism and multilateralism as competing principles of economic organization and argued that regionalism presents the second-best alternative to the situation given the unfavorable political circumstances in multilateralism.
Diana Tussie (1998) in her article “Globalization and World Trade: From Multilateralism to Regionalism” articulates the idea of globalization and multilateralism as diverging rather than a converging phenomenon. She develops her argument from the view that the post-war trading system favored developed nations over developing ones bringing developing nations to a disadvantage. Trade in the post-war period was centered more around capital intensive goods resulting in the diversion of 3/4th of investment to developed countries. She identifies globalization as the breakthrough which allowed companies to shift from the logic of market segmentation to the logic of market integration bringing considerable investments to developing countries. She articulates that WTO despite being influential would not be the center of trade relations in the globalization era, as globalization being an involuntary phenomenon is concerned with market access, while multilateralism being a voluntary phenomenon is concerned with governance. Tussie concludes by saying regionalism needs to be understood as a process bridging the gap between developed and developing countries by giving developing countries the bargaining power because of their market size.
Jagdish Bhagwati (2001) in his article, “After Seattle: free trade and the WTO” critically evaluates the multilateral system of governance at the onset of the 21st century, its associated successes and failures. The successes of multilateralism according to Bhagwati can be traced through 1) the growth of trade in the last decade despite the financial crisis in Asia and Russia, and 2) the constant reduction of barriers in countries, both unilaterally and through the Uruguay round of discussions. Despite the successes, Bhagwati remains skeptical about the future of multilateral trade because of threats like trade being a threat to culture, trade being a harm to the environment and trade overriding human rights and labour rights. Bhagwati’s believes that these threats are nothing, but complaints based on misplaced notions and non-empirical observations.
Mansfield and Reinhardt (2003) in their essay “Multilateral determinants of regionalism: the effects of GATT/WTO on the formation of preferential trading arrangements” argues that the PTAs help member states improve their bargaining leverage over third parties within multilateral institutions and other agreements (2003). The lop side to the increasing participation in the WTO is the reduction of leverage of member states over other member states resulting in more disruptions and long discussions. Other reasons identified by Mansfield and Reinhardt for states preferring PTA’s over multilateralism is 1) pending / unfavourable judgement against member states in the Dispute settlement body, 2) uncertainties of the ongoing round of discussion in GATT/WTO and 3) increasing participation of states in multilateral arrangements. PTAs according to Mansfield and Reinhardt work more as insurances against the indecision of GATT and not as diverting or discriminatory mechanism of trade. However, in their analysis, they do not advocate preference of PTAs over WTO or of WTO over PTAs. Instead, they argue on the non-exclusionary nature of PTAs and WTO, wherein nation-states employ both (multilateral and regional) means simultaneously to survive the uncertainties of the international trade scenario.
Söderbaum (2008) in “Unlocking the Relationship between the WTO & Regional Integration Arrangements” argues in favor of a balance between WTO and PTAs where regionalizing multilateralism gets the same importance as multilateralizing regionalism. He conceptualizes regionalism as a response to asymmetric multilateralism wherein the net benefit was skewed in favor of the industrialized nations. In a world characterized by new risks, regionalism to Söderbaum is the second-best risk management and coping strategy with PTAs giving developing nations the access that they long wanted. Regionalism in his opinion is there to stay as it gives small states a more say in decision making and a greater role in world politics. He also argues a need for change in attitude towards regionalism wherein we move from Westphalian and neo-patrimonial logic to a post-Westphalian and cooperative logic. According to the author, PTAs although second best, are the stepping stones to the world market. The global trading system according to Söderbaum does not need a vertical but a horizontal form of governance wherein both the WTO and PTAs do not compete rather reinforce and complement each other.
Pascal Lamy (2014) in the essay “Is trade multilateralism being threatened by regionalism?” argues that the relationship between multilateralism and regionalism depends on the organized convergence between multilateralism and regionalism. Lamy is of the view that international trade has moved beyond the reduction of trade barriers to questions of deeper integration with the claim of PTAs being discriminatory more complex than ever. The nature of trade according to Lamy is changing with the increasing substitution of ‘made at the home label’ with ‘made in the world label’, expanding the production chain through PTAs by negotiating WTO plus and WTO extra provisions. With the change in obstacles to trade, from tariffs to standards and regulations, the objective of nation-states has changed from eliminating differences to levelling differences. The future of multilateralism according to Lamy depends on how well the multilateral and regional arrangements remain connected.
Baldwin (2016) in the article “The World Trade Organization and the future of multilateralism” writes that the future of trade governance will be based on the twin pillars of WTO and FTAs, with WTO governing the traditional trade and FTAs governing the investment, intellectual property protection, intermediate goods and related issues. According to Baldwin, the only distinguishing factor between GATT and WTO is the success of the dispute mechanism of the latter. Baldwin, today no longer sees any merit in the Doha agenda as it is no longer presents a win-win situation for every nation. With the rising exports of China, increasing offshoring, and unilateralism by member states, the WTO now needs a new agenda representative of the anxieties and realities of today. Moreover, a lot of members left aside by offshoring do not allow the expansion of the WTO agenda because of the fear of a new agenda jeopardizing their demands of reduced trade barriers in agriculture and labour-intensive goods. The coexistence of multilateralism with regionalism seems the only likely outcome to Baldwin.
Findings and Analysis
Figure 1 – Cumulative number of PTA’s notified and non-notified from 1950 – 2010 (Source – WTO, 2011)
Figure 2 – Intra- and cross-regional PTAs in force, 2010, notified and non-notified PTAs, by region and time period (Source – WTO, 2011)
As we can observe from Figure 1 and 2, the 1990s witnessed a sharp increase in PTAs around the world. The sharp increase in the PTAs can be attributed to the end of the cold war and the onset of globalization in international society. The end of the cold war resulted in the liberalization of the world economy, with the onset of globalization hastening the whole process of integrating economies at an unprecedented scale. Whereas the number of PTAs between developing countries saw a steep rise, the growth of PTAs between developed and developing countries remained modest. However, no significant change was observed in PTAs constituted between developed countries, as developed countries already liberalized their economies way back and secured PTAs with each other so no such increase in developed-developed PTAs was seen. Moreover, the countries engaged more in cross-regional PTAs than the intra-regional ones due to the globalized nature of operations which made countries look beyond their regions and into other geographical regions.
Figure 3 – Number of PTAs (Source UNCTAD, 2020)
Figure 4 – Importance of PTAs as measured by the percentage of the trade-in 2018 (Source UNCTAD, 2020)
The data in figure 3 and 4 further substantiates the point of complementarities and coherence between regionalism and globalization with more than one-fourth of trade in the majority of countries taking place through PTAs and the increasing number of agreements in goods and services since 2008. Figure 3 points out the fact that globalization and the boom of the services industry can be observed in the levelling of the number of PTAs dealing with goods and services with the number of PTAs dealing with goods only. Figure 4, on the other hand, depicts that a significant percentage of trade for countries comes from PTAs with the majority of countries developed and developing alike recognizing PTAs as important, very important and extremely important.
Figure 5 – MFN Tariffs percentage simple and weighted in 2008 and 2018 (Left) Preferential tariffs percentage simple and weighted in 2008 and 2018 (right) (Source – UNCTAD, 2020)
From the data presented in figure 5, one can successfully conclude that multilateral and preferential tariffs have continued to fall over the years. A major criticism to PTAs i.e., they are discriminating is not entirely true, except for agriculture wherein a considerable difference between the MFN and PTA tariffs exist. MFN tariffs and preferential tariffs in natural resources and the manufacturing sector are more or less the same signifying that PTAs are not inherently discriminating or unfair. Moreover, the exception of MFN tariffs being high in agriculture can be explained by the failure of the Doha summit in negotiating tariffs on the same, leaving member states with no other option than to join or forming PTAs
Figure 6 -Percentage share of MFN and Preferential tariffs in Duty-free trade (Source – UNCTAD, 2020)
Figure 6 further substantiates the point of PTAs not being a challenge to multilateral trade, as the same can be observed in the increasing share of MFN obligations in the trade of manufactured goods and natural resources as compared to preferential trade. For the agriculture sector, despite the preferential access being a larger share of trade than MFN obligations, the share over time has remained constant and not threatened or jeopardized trade under MFN obligations.
From the observations concluded above, one can certainly conclude that complementarities and coherence exist between globalization and regionalism as can be observed in the steep rise of PTAs from 1990 onwards and the rise in the number of cross-regional agreements from 1990 onwards. Furthermore, globalization being coherent with PTAs can also be observed in the increasing importance of PTAs across countries as evident in a large proportion of trade through PTAs and the levelling of the number of agreements in goods and services with goods only agreement. Moreover, the argument of regionalism and multilateralism being inconsistent is also proved false with the help of evidence from tariff percentages and trade share for duty-free trade. Tariff percentages as a whole have been decreasing under both preferential and multilateral arrangements with the increase in the MFN share of trade in the natural resources and manufacturing domains. From these observations, one can conclude that regionalism does not challenge multilateralism or globalization and instead reflects complementary and coherent tendencies.
To maintain complementarity and coherence between regionalism and multilateralism, we suggest the formulation of best practices for PTAs which nation-states can look up to prevent trade diversions. There should be more transparency to the WTO mandated review of RTAs so that meaningful analysis can be conducted, and better policies are enacted. Thus, the future of the international trading system depends on data and best practices constituted by nations. Regionalism in the words of Söderbaum is “here to stay” (2008) and any new research on regionalism/multilateralism must focus on connecting regionalism and multilateralism (Lamy, 2014) or balancing PTAs and multilateral arrangements (Söderbaum, 2008), as the contemporary reality of today cannot be based on or explained by anyone arrangement.
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WTO (2011). World Trade Report 2011: The WTO and Preferential Trade Agreements: From Co-Existence to Coherence. WTO, Geneva. https://doi.org/10.30875/b51b2f2c-en UNCTAD (2020). United Nations Conference on Trade and Development: Key trends in Trade Policy 2019: Retaliatory Tariffs between USA and China. United Nations, New York.
The opinions expressed in this article are those of the author (s). They do not purport to reflect the opinions or views of the Jindal Centre for the Global South or its members.