The Challenge for the Multilateral Trade System

One year after ministers from more than 140 countries launched a world trade round in Doha, the threads binding together the world trading system are under strain. Despite the ministers' pledges then to create a more seamless global economy, many are now rushing ahead with plans that could instead turn it into a patchwork quilt.

In capitals as far apart as Washington, Canberra, Singapore and Tokyo, a race is on to forge separate free trade agreements (FTAs) with countries sometimes thousands of miles away. More than 20 sets of talks have been proposed or initiated since the summer - and more are on the way.

The trend has sparked heated controversy. Countries involved in FTAs insist that removing barriers to trade and investment between them will benefit their own economies and promote broader liberalisation, strengthening the underpinnings of the World Trade Organisation and its multilateral rules.

Robert Zoellick, US trade representative, who aims to conclude FTAs with countries in Africa, Asia and the Americas, says they will trigger a beneficial process of "competitive liberalisation", as nations vie to open their markets to each other.

Many economists and some policymakers strongly disagree. They say bilateral deals are dangerous distractions from multilateral negotiations and a less effective route to liberalisation. Bilateralism, they claim, threatens to distort markets, create bureaucracy and business costs and divide the world into rival economic blocs.

This month, Supachai Panitchpakdi, WTO director-general, sounded the alarm. Saying "à la carte regionalism" was becoming a bandwagon, he warned WTO members that "by discriminating against third countries and creating a complex network of trade regimes, such agreements pose systemic risk to the global trading system".

In reality, a desire to expand trade and investment is only one reason for the stampede - and often not the most important. In many cases, governments are using trade agreements to cement diplomatic ties, forge new alliances and achieve other geopolitical objectives.

Many observers agree that another powerful factor is at work: the jobs and ambitions of trade policymakers. "Since the Uruguay round trade talks ended in 1994, whole bureaucracies have grown up around the world to deal with trade negotiations," says Alan Winters of Sussex University, formerly a trade economist with the World Bank. "It is a case of the devil making work for idle hands."

The explosion of activity has begun to feed off itself. Because trade within bilateral agreements is conducted on preferential terms, the pacts discriminate against third countries. Some are doing deals for defensive reasons, to prevent their exporters losing market share to competitors which benefit from lower tariffs in FTAs.

Bilateral and regional trade arrangements are not new: the European Union, the biggest, dates back to 1957. The WTO, which lacks effective powers to police FTAs, estimates almost half of world trade now occurs between countries belonging to them. That proportion looks set to rise further as the fashion sweeps across the world.

Nowhere has interest developed faster than in East Asia, where most countries until recently spurned FTAs in favour of the WTO. The pace has been set by Singapore, which has done deals with countries including Japan, New Zealand and Switzerland - and will soon conclude one with the US.

As one of the world's most open markets, Singapore has few trade barriers left to remove. Its main concern is to forge stronger links with partners worldwide, in an effort to bolster its security. George Yeo, its trade minister, says fear and insecurity are the driving force behind FTAs.

A senior Japanese trade official says his country chose to do a deal with Singapore mainly to test whether Japan could be "politically acceptable" in south-east Asia, where its second world war record has left a legacy of mistrust. Tokyo is now pursuing talks with countries including South Korea, Mexico and the Philippines.

Other factors have played a role. One is the sense of vulnerability created by Asia's 1997 financial crisis, which prompted countries to seek closer regional ties. Others include frustration at slow progress in the WTO and at being left outside groupings such as the European Union and North American Free Trade Agreement.

But the most powerful stimulus today is the economic ascendancy of China. The country's surging success as a manufacturing centre and one of the world's top destinations for foreign investment has sent tremors through its neighbours, which fear it will drain away their jobs and exports.

This month, China and the 10 members of the beleaguered Association of South East Asian Nations (Asean) agreed to try to create a free trade area by 2010. For Beijing, the project is an opportunity to strengthen its regional influence; for its partners, it offers a new channel for diplomatic dialogue with China and the prospect of preferential access to its vast market.

By proposing the negotiations, Beijing has trumped Japan's overtures to other countries in the region. In addition, it has jolted India, which sees itself as China's rival for Asian leadership but until now has eschewed bilateral deals, into proposing its own FTA with Asean. The US has also joined the fray by holding out the prospect of trade talks with Asean members.

Washington's enthusiasm for bilateral deals is almost as recent as Beijing's - and even more vigorous. Since the US Congress granted President George W. Bush legal authority to conclude trade agreements in August, Mr Zoellick has been reaching out to prospective partners all over the world. They include about 10 Latin American countries, several sub-Saharan African states, Morocco and Australia.

Mr Zoellick says he remains committed to the Doha round and to US-led plans to create by 2005 a Free Trade Area of the Americas, embracing all western hemisphere countries except Cuba. Indeed, he insists that moving forward in one set of negotiations stimulates progress in the others.

Mr Zoellick's thinking is influenced by the US strategy towards the 21-member Asia-Pacific Economic Co-operation forum (Apec), of which he was an architect while a senior state department official in the late 1980s.

Some in Washington claim the strategy helped break a deadlock in the Uruguay round after the EU balked at opening its protected agricultural market. They say by threatening to turn Apec from a loose grouping of Pacific Rim economies into a rival trade bloc, the US forced the EU back to the bargaining table.

Others, however, think such claims exaggerated. Not only have Apec's efforts to free regional trade achieved little but, they argue, the EU softened its position on farm trade in the Uruguay round only because mounting costs made reform of its common agricultural policy unavoidable.

Some observers think the politically ambitious Mr Zoellick is also motivated by a desire for quick results. With the fate of the Doha round uncertain and FTAA talks off to a slow start, bilateral deals look like the easiest option. "US trade representatives are judged, ultimately, by how many deals they do. It is also the way their agency acquires stature inside the government," says Daniel Tarullo of Georgetown University, who served as a senior economic advisor to President Bill Clinton.

But will bilateral deals deliver the goods? Enthusiasts say they can remove barriers and develop policy innovations - in areas such as investment rules and market regulation - faster than can cumbersome negotiations in the WTO. They point as proof to Nafta. Since it took effect in 1994, it has led to the rapid dismantling of trade barriers between its three members and brought particularly big benefits to Mexico, which has enjoyed sharp increases in exports to and investments from the US.

But many US businesses are ambivalent about how much is to be gained from further deals, particularly with relatively small and geographically remote countries. Few exporters are ready to turn down the chance of besting foreign competitors by gaining preferential access to foreign markets. Yet they also worry that a worldwide network of separate agreements could work against them.

"Bilateral FTAs are a two-edged weapon," says Calman Cohen, head of the Emergency Committee for American Trade, a free-trade business group. "They offer the prospect of expanded trade and investment. But if their provisions are mutually inconsistent, they create a more difficult trading environment."

One of the biggest challenges facing future FTAs is how to deal with agriculture, the last great bastion of protectionism. Many exporters believe it is much more likely to be cracked through multilateral negotiations, in which countries can trade off concessions for bigger gains, than at the bilateral level.

Indeed, US farm lobbies are supporting Washington's recent negotiations on an FTA with Australia only on condition that progress on the issue is also made in the Doha round. Other farm groups in the US and some in Australia oppose the FTA, saying it will detract from efforts to achieve global liberalisation. Agriculture is an even bigger stumbling block for countries with more highly protected markets, as Japan has discovered. In an effort to make itself a more attractive partner, Tokyo has recently said it will include the sector in bilateral trade talks.

Few people, even in Japan, believe it. "Whatever Japanese governments say about agriculture can basically be treated as an unintended joke," says Noriko Hama of Doshisha University business school in Kyoto.

Even when bilateral agreements do dismantle import barriers, they almost invariably create other obstacles to trade. For companies shipping products between countries belonging to different FTAs, complying with their divergent standards, duties and rules of origin - regulations used to determine where the products were made - can be an administrative nightmare. "It is logical to conclude that the rapid proliferation of FTAs is adding to the costs of doing business. It is hard just working out which regulations and tariffs apply," says Mary Irace of the National Foreign Trade Council, which represents 400 large US exporters.

Indeed, the sheer complexity of bilateral deals is one reason why the EU, which has long practised them as a surrogate foreign policy, has recently had second thoughts. It plans to launch no new negotiations until after the Doha round ends, though some member governments want it to relent.

The US aims to ensure the provisions of its future FTAs are uniform by measuring them against a standard "template". But that could create other problems. Some trade officials say that if groups of countries agree among themselves on the same standards and regulations, they may resist re-negotiating them in the WTO.

"That is why the EU is such an obstacle to liberalising farm trade," says one. "It can only negotiate multilaterally once its members have settled their internal differences, and that takes a long time."

Some trade officials say the temptation to negotiate regional and bilateral agreements would be smaller if WTO members agreed sweeping global action to remove their trade barriers. New Zealand and the US National Foreign Trade Council have called for tariffs on non-agricultural goods to be scrapped, saying that would narrow differences between FTAs.

The proposals face stiff opposition. Among industrialised countries, the US imposes steep duties on imports such as clothing and footwear, which are fiercely defended by powerful producer lobbies. In many developing countries, such as India, tariffs are even higher. Some observers fear the growth of FTAs will make it even harder to remove such barriers in the Doha round by distracting political attention and straining negotiating capacity.

Some developing countries lack even permanent representation in the WTO, while Latin American states planning deals with the US face the prospect of also negotiating simultaneously on the FTAA and the Doha round. Even some officials in the US, which has more trade negotiators than any other country, say Mr Zoellick's ambitious agenda will stretch their resources to the limit.

That may force governments to make hard choices. With the Doha round already facing tough challenges - and its end-2004 deadline looking increasingly hard to attain - some countries may decide to concentrate their energy on smaller deals that offer the prospect of more immediate results.

Even staunch supporters of the round admit that it may be a struggle to keep up its momentum in the face of so many alternative attractions. As Ms Irace of the National Foreign Trade Council puts it: "The challenge for the multilateral trade system is to prove its relevance."