sectoral agreements and whether MFN treatment is desirable

Revisiting the need for MFN treatment for sectoral agreements among the willing

While most-favored-nation treatment is a cornerstone of the WTO, there is little doubt that trade liberalization is impeded in many situations because of the inability to get important trading nations to participate in liberalizing when those nations do not have an interest in liberalizing trade in a particular sector. MFN treatment to nonparticipants has long been viewed as a free-rider problem. Permitting non-MFN application of sectoral agreements but having agreements open to all who wish to join has been a topic of growing interest to some Members of the WTO as it would free Members to engage in tariff liberalization, subject to others joining when they were willing to assume comparable obligations, without being restrained by concerns over free riders. The change could help in many areas, including the currently being pursued Joint Statement Initiatives but also other areas that have been stalled for a period of years, such as the Environmental Goods Agreement talks.

I came across a piece I had posted on my firm website back in 2015 that dealt with this issue at a time that both the Information Technology Agreement II and the Environmental Goods Agreement were being negotiated. The ITA II concluded while the EGA did not. The number of FTAs has increased since my post and the problems of liberalization within the WTO continues to be bogged down by the lack of common interests among large parts of the Membership. Hence a new approach to encourage liberalization is needed. I copy my prior post from 2015 below.

Should WTO Members Consider Permitting Sectoral FTAs That Are Open to Membership?
April 16, 2015
Terence P. Stewart

One of the cornerstone principles of the World Trade Organization (“WTO”) (and the General Agreement on Tariffs and Trade (“GATT”) before it) is application of tariff bindings on a most-favored nation (“MFN”) basis. Indeed, while the WTO permits modifications to most provisions of the WTO agreements by three-fourths of the membership,[1] to change national treatment requires the consent of all Members.[2]

While MFN is an important rule (as is national treatment), the reality is that in 2015 the vast majority of trade for many nations is handled through bilateral or plurilateral free trade agreements or through preferential trade agreements. While there were only a relatively small number of regional trade agreements (“RTAs”) during most of the GATT years, the number of agreements has exploded in the last twenty years. The WTO’s page on RTAs states that “Regional trade agreements (RTAs) have become increasingly prevalent since the early 1990s. As of 7 April 2015, some 612 notifications of RTAs (counting goods, services and accessions separately) had been received by the GATT/WTO. Of these, 406 were in force. These WTO figures correspond to 449 physical RTAs (counting goods, services and accessions together), of which 262 are currently in force.”[3]

A WTO staff working paper from 31 October 2012, “Market Access Provisions on Trade in Goods in Regional Trade Agreements,” by Jo-Ann Crawford, reviews data for the year 2008 and finds rates of trade with RTA partners for many countries and regions running between 20% and 70% of imports or exports (for some countries as high as the low 90s%).[4] The EU (27) showed 23.2% of imports and 27.1% of exports; Canada was 60% of imports and 80.1% of exports; Mexico was 72.4% of imports and 91.5% of exports; the United States was 29.8% of imports and 40.5% of exports; and China was 24.8% of imports and 30.5% of exports.[5] Those percentages are likely much higher in 2015 and will only grow as some of the recently concluded agreements (e.g., Canada-EU) and ongoing negotiations (e.g., TPP and T-TIP) conclude and go into effect.

So the question isn’t really whether the WTO functions with a large portion of trade done on some sort of preferential basis in fact (obviously large parts of global trade are so conducted today), but whether a change to the rules to provide for an additional exception to MFN could help global economic growth by permitting trade liberalizing agreements that deal with a particular segment of production (or services) even if the current rules and conditions of GATT 1994 Article XXIV or GATS Article V are not satisfied.

At present, there are two sectoral negotiations that are ongoing – the second Information Technology Agreement (“ITA II”) negotiations and negotiations for an Environmental Goods Agreement (“EGA”). Both of these agreements are intended to comply with existing MFN rules by applying to all countries, but require buy-in from nearly all producers/trading nations for the products in question (typically a 90% coverage). ITA II holds the promise to liberalize trade in technology goods that are of a value equal to the fully implemented Trade Facilitation Agreement, which is in the process of undergoing adoption by the WTO membership.

However, ITA II has drifted now for more than a year and a half, first awaiting an improved offer position from China and now because of lack of agreement between Korea and China. Obviously having both China and Korea in ITA II is the desired result and would permit agreement on the package and application of the agreement’s duty reductions to all WTO Members. But if a sectoral agreement that doesn’t have 90% coverage of trade in the products could be adopted by those willing to adopt it, with the benefits flowing only to
signatories, with an open admission policy for other countries at such time as they are willing to accept the full package, with special consideration for least-developed countries (“LDCs”) (i.e., application to them even ahead of 90% coverage), and with an automatic conversion to all WTO Members at such time as 90% coverage is attained, wouldn’t the world trading system be benefitted? The answer would seem to be necessarily “yes”. So too, with the challenges the world faces environmentally, cooperation amongst the willing to liberalize trade in goods (and possibly services) sooner rather than later has enormous potential upsides. While there is agreement among the participants on a group of 54 product categories, a significantly larger group of products is being considered. It may be that the EGA is adopted and implemented in the next year or so. However, if ITA II is any indicator of things to come, significant delays may be the actual outcome before we
achieve progress. A simpler approach to achieve meaningful liberalization in real time (not over decades) seems to be a potential answer for these and other product sectors that may be of interest to significant trading countries or groups.

While the WTO membership is working to see if they can develop a work program by the end of July to complete the Doha Development Agenda (“DDA”), if such a work program and final package cannot be accomplished quickly, the WTO will once again be adrift in terms of its core negotiating function. Even if there is success on the DDA, deeper liberalization may be possible in particular sectors by the willing.

At a time when the WTO has just downgraded growth projections for 2015 and 2016, the WTO needs tools that will permit it to continue to contribute to expanded global trade and prosperity regardless of the internal challenges due to its growing membership and changing power structure. Adopting a provision to the GATT 1994 that would provide an exception (temporary in design and intent) to encourage sectoral liberalization could be an important tool for achieving improved results for the WTO membership.

[1] Marrakesh Agreement Establishing the World Trade Organization, Art. X:1.

[2] Id. at Art. X:2.

[3] World Trade Organization, Regional trade agreements, https://www.wto.org/english/tratop_e/region_e/region_e.htm (last visited April 15, 2015).

[4] Jo-Ann Crawford, World Trade Organization, Economic Research and Statistics Division, Market Access Provisions on Trade in Goods in Regional Trade Agreements, at 8, Chart 2 and Table 1, and 31-33, Annex Table A1, available at https://www.wto.org/english/res_e/reser_e/ersd201220_e.pdf.

[5] Id. at 31-33.

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As WTO Members consider needed reforms to the organization, finding ways to permit liberalization to proceed among the willing on products or service sectors without the impediment of MFN benefits flowing to those unwilling to participate in the liberalization should be an important priority.