Free trade agreements are popping up everywhere. In its first term the Bush administration pushed four through Congress and started another three. China is negotiating FTAs with Chile and New Zealand. And Australia has negotiated three with Washington, Singapore and Thailand, and is in the process of dealing with Beijing.
Not everyone thinks they are good. Peter Sutherland, chairman of BP Amoco, has just told the director-general of the World Trade Organisation that they threaten the organisation. The WTO is in trouble, but not because of that. The core value in the WTO - everybody liberalises for the common good - is under threat. At least half of the membership of the WTO no longer thinks this is what the WTO is for.
Sutherland, a former head of the WTO, was commissioned by WTO director-general Supachai Panitchpakdi to lead a panel of blue-chip trade experts to assess the WTO on its 10th anniversary. It included Jagdish Bhagwati from Columbia University and John Jackson at Georgetown University.
Bhagwati has a gripe about FTAs that is well grounded in the lore of trade liberalisation. They are a second-class form of trade liberalisation. The global model of liberalisation fostered by the WTO produces superior results. It moves economies more quickly into open world markets and at less cost and with higher returns. FTAs are patchworks and can even be counterproductive and retard growth.
Sutherland's report could lead us to think it is the FTAs that have undermined this core value. The cause is different. It is a bigger problem. The fact the WTO has done nothing for six years should be alerting us to that.
From the time the General Agreement on Tariffs and Trade entered into force, there has always been someone who wanted to exempt some industry from the obligation to liberalise. The GATT always allowed some exceptions. Any system of law has to provide for exceptions. The key to maintaining the integrity of any system is to ensure exceptions to them are clearly just that - exceptions.
Very early in the history of the GATT, the US sought special exemptions for some agricultural industries. When the economic integration began in Europe with the Treaty of Rome in 1957, it sought exemption as well for its farm sector. A few years later, the US and some Europeans sought exemption from the obligation to liberalise from trade on textiles. About the same time, developing countries started mounting a case that they be exempted from the application of the core value. They wanted preferential access to the markets of rich countries, but did not want to liberalise themselves.
In the 1960s Europe and the US liberalised and trade expanded. Manufactures was the high-growth area of trade. The exceptions, particularly for agriculture, did not threaten the dominant core value, although they were always hotly contested.
Rich countries began to give poor countries preferential access to their markets (although usually not on products where they were serious competitors) without demanding they liberalise as well. It was seen as a form of trade charity.
When the reformist Uruguay Round of trade negotiations concluded in 1994, there was general satisfaction that the tide against exceptions was turning. There was historic agreement to begin to reduce protection of agriculture and to phase out exceptions in garments and textiles. There was also another development of historical significance. Exempting developing countries from the obligation to liberalise at the same speed as everyone was enshrined for the first time in binding legal obligations in the Agreement on Agriculture.
The WTO membership in this period also expanded rapidly by about 50 per cent. Most newcomers were developing countries, mostly African. The result was that calls to give developing countries special terms in WTO trade agreements started to gain greater weight in the WTO. The rich countries gave credence to the idea of exemptions for developing countries. Calling the round of trade negotiations launched at Doha in 2001 the Development Round did not help. This concept signalled the idea that the WTO was about development, not trade liberalisation.
The European Union announced an “Anything But Arms” initiative. It would remove barriers to trade from the poorest developing economies on everything but arms. The US did its bit. In the African Governance and Opportunity Act, it offered special access to US markets on a wide set of terms ranging from human rights to using US textiles. Non-government organisations, Oxfam in particular, took up the call. "The WTO should be about preferences for developing countries," Oxfam declared. The subtext was clear. The WTO should deliver preferential access, not free trade.
The economic impact is clear. The World Bank and the WTO have produced studies that show protection in developing economies is a bigger threat to growth than trade barriers in rich countries, even in agriculture. The effect of the failure of developing countries to liberalise, no matter what rich countries do, is obvious.
Developing countries have insisted that the principle that they do not have to liberalise be given wider recognition. The EU and the US have concurred.
The core value of the WTO is in trouble. The aberrant value is challenging the dominance of the core value. When the WTO no longer aims to liberalise everyone, it has lost its core mission. It is time for corrective action.