The Rise of Bilateral Trade Agreements is a Threat to Free Trade

The Doha Round of global trade talks appears to have died this year, almost without a whimper. While a small portion of the project may be saved, the essential reality is that this is a unique failure in the history of multilateral trade negotiations, which have transformed the global economy since World War II.

Many of the seven previous rounds of negotiations – including the Uruguay Round, which in 1994 created the World Trade Organization as the successor to the General Agreement on Trade and Tariffs – took years to complete, but none died of neglect or disinterest. Today’s indifference is particularly, though not exclusively, evident in the United States. President Barack Obama was silent on the issue in his re-election campaign, and breathed scarcely a word about it in his first campaign, too. One wonders whether what is at stake is even fully understood in some capitals.

Successful multilateral trade negotiations have significantly shaped the world in which we live and have dramatically enhanced the lives of millions of people. Between 1960 and 1990, only one person in five lived in economically open societies; today, nine in ten do.

The rule-based trading system developed by the GATT and the WTO has been embraced by virtually the entire global community. It has provided an effective road map for the former planned and import-substituting economies, facilitating their integration into the global market.

Initially, “globalization” was a dirty word to some. But, even among its opponents, its value for poorer countries came to be recognized, as it helped to lift more than a billion people in Asia out of abject poverty. While much more needs to be done for Africa and parts of Latin America, the Doha Round was intended to assist in providing market access (and therefore opportunity) to many more in the developing world.

The essence of the multilateral system is to be found in two principles: non-discrimination and national treatment. The former is described in trade negotiators’ lexicon as the “most favored nation” principle, which essentially seeks to ensure that trade benefits provided to one country are provided to all. The latter requires member states to provide the same treatment within national borders to trading partners as that provided to nationals.

The non-discrimination principle ensured that global trade did not become a “spaghetti bowl” of preferential bilateral trade agreements. Moreover, a multilateral framework for trade negotiations gave weaker states far more balanced conditions than they would face were they forced to negotiate bilaterally with the likes of China, the United States, or the European Union.

In fact, what we have seen in recent years is an increasing rush to bilateral agreements by the major trading countries and blocs. This has apparently consumed virtually all of their attention. The World Trade Organization has been marginalized, and even what has already been achieved in the incomplete Doha Round appears unlikely to be delivered in a final agreement in the foreseeable future.

The damage to the credibility of the World Trade Organizaion – once lauded as the greatest advance in global governance since the inspired institution-building of the immediate postwar period – may yet prove lasting. Worse, it could have a serious impact not merely on trade, but on political relationships more generally.

One of the World Trade Organization’s great achievements has been the adjudication system that it provided – the so-called Dispute Settlement Mechanism. This independent body has been a resounding success, giving the world an effective quasi-judicial system to resolve disputes between trading partners. But its continued success depends ultimately on the credibility of the WTO itself; it will inevitably suffer collateral damage from a failure of multilateral negotiations.

Indeed, the current rush to bilateral trade agreements has been accompanied by a rise in protectionism. For example, there have been 424 new measures of this kind in the EU since 2008. Furthermore, the EU’s non-discriminatory tariffs are fully applicable to only nine trading partners. Everyone else has “exceptional” treatment.

Next, no doubt, we will have the prospect of a bilateral free-trade agreement between the EU and the US. An EU-Japan treaty is already in the wind, as is a “Trans-Pacific Partnership” to liberalize trade among the US and major Asian and Latin American economies. If either ever comes to pass, which I doubt, a huge share of world trade would be conducted within a discriminatory framework.

Some recognize the risks. In May 2011, Jagdish Bhagwati of Columbia University and I co-chaired a High Level Group convened by the prime ministers of the United Kingdom, Germany, Turkey, and Indonesia to attempt to move the multilateral process ahead. Our sponsors welcomed our recommendations, but that and similar efforts have gained little traction, leaving all countries rushing headlong toward a world full of uncertainty and risk.

It is not too late to reverse the apparently inexorable tide of bilateralism. But the only way to do so is by proceeding with WTO negotiations. Even if the Doha Round cannot be concluded, there may be other routes, such as implementing what has already been agreed. Another alternative might be to advance multilateral negotiations among willing countries in specific areas, such as services, with other WTO members joining later.

But if we are to move forward rather than revert to earlier, more dangerous times, the US, in particular, must reassert a constructive role in multilateralism. The US must lead again, as it did in the past. And now it must do so with China at it side.

This article was first published on Project Syndicate in December 2012.