Do FTAs threaten the existence of the WTO?

One of the modern day debates in international trade law revolves around whether regional trade agreements (RTAs) like the TPP threaten the existence of the WTO, or to put it in economist, Jagdish Bhagwati’s words, whether RTAs are “building blocks or stumbling blocks“ towards multilateralism.

The WTO was established to facilitate international trade between member states by means of multilateral agreements. The popularity of Regional Trade Agreements (RTAs) rose in the mid-1990s which marked a shift towards regionalism.

While both multilateral trade agreements and regional trade agreements such as the TPP are geared towards removing trade barriers between nations, economists are divided on whether the RTAs are instead creating anti-liberalization forces through discrimination.

One of the principles underlying the WTO is non-discrimination or the ‘most favoured nation‘ (MFN) principle wherein a country is not permitted to discriminate between its trading partners. RTAs form an exception to the MFN clause to the extent that countries which enter into RTAs are permitted to impose preferential tariffs and other favourable conditions when trading with each other than is applicable to the countries which are not parties to the RTAs.

In my opinion, however, the increasing regionalism does not undermine the WTO, rather it seeks to complement it. Regionalism evolved as a means to facilitate trade because it was easier for countries to negotiate agreements at a regional level as compared to a multilateral forum. Given the lengthy negotiation process of multilateral agreements, RTAs emerged as a viable alternative to multilateralism.

Scholars like Richard Baldwin do not believe that RTAs threaten the existence of the WTO. According to Baldwin, few RTAs can have an anti-liberalization effect because trade is already quite free in major trading nations”. It has also been observed that the effect of RTAs violating the MFN clause is insignificant compared with the development of multilateral trade law based on non-discrimination. While Bhagwati views RTAs as promoting discrimination economist, Larry Summers, perceives regionalism as encouraging liberalization. Summers is of the opinion that RTAs have majorly had a benign impact on the multilateral trade system.

Under Fred Bergsten’s “competitive liberalization“ theory, the establishment of RTAs by states especially with an economic superpower like the US provides incentives to other states to enter into similar RTAs including with the US either by entering into fresh RTAs or joining the membership of existing RTAs in order to defend their markets in the major economies from trade discrimination. Summers‘ arguments confirm the view that efforts at regional integration infact contribute to multilateralism and do not undermine WTO.

(written by Devika Agarwal)

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